Option Investor
Newsletter

Daily Newsletter, Wednesday, 11/24/2010

Table of Contents

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

Market Wrap

Breakout Imminent?

by Jim Brown

Click here to email Jim Brown
It would not be a normal market without a gap open and our daily change of character. Did Wednesday serve notice of a breakout ahead?

Market Statistics

After a week of negative news events we saw a flurry of positive news on Wednesday morning that helped propel the markets higher on the backs of the shorts. Starting the pre-market off on the right foot was the weekly jobless claims, which fell to 407,000 from 441,000 the prior week. This is the lowest level since the summer of 2008 and the 34,000-claim drop was the largest since July 17th. Continuing claims fell by -142,000 to 4.182 million.

This is a strongly watched number and the sharp decline was market positive. However, last week is when all the hiring peaks ahead of Black Friday. This might have been just a seasonal blip. Claims have been trending down but very slowly.

The Consumer Sentiment number took a sharp turn higher we I had been expecting. I have written about this before. Now that the elections are over I believe consumers are relieved and positive about the future of taxes and regulations. The headline number for November jumped to 71.6 and a +3.9 point spike. That is the highest level since June but still well below historical norms. The present conditions component jumped nearly 6 points from 76.6 to 82.1 while the expectations component rose to 64.8 from 61.9. Since the majority of the survey is down in the first half of the month this second half jump suggests sentiment improved significantly as the month progressed. I expect something in the 75.0 range for the first report in December.

Consumer Sentiment Chart

Personal income for October shot up unexpectedly by +0.5% compared to a -0.1% decline in the prior month. Spending also rose by +0.4%, up from +0.3% in September. Wage income posted the strongest growth since May. The saving rate rose to 5.7%. This bodes well for the holiday spending season.

The Kansas City Fed's Manufacturing Survey rallied for the third consecutive month. The headline number jumped from 10 to 21 and the highest level since April. New orders spiked to 25 from 16 and the highest level since March 2005 and employment surged to +10 from -1 and the highest level since January 2008.

This was a very good report and continued the recent trend of the regional reports suddenly showing some decent growth.

Kansas Fed Manufacturing Chart

On the negative side Durable Goods Orders declined -3.3% for October and partially offset a +5% in September. I believe this is more of a data issue than an actual material decline in orders. The biggest declines were in computer and electronics orders which fell -7.7%. There was also a -5.2% decline in transportation orders. (Aircraft)

New Home Sales declined by -8.1% to an annualized rate of 283,000. This was a decline from 307,000 in September and well below estimates of 337,000. Sales prices fell -9% over 2009 levels. The southern region was the only region to post a gain. Sales in the West and Midwest both declined over 20%. Months of supply jumped from 7.9 to 8.6. The average price of a new home declined to $198,100 from $225,900 in September. That was a -12.3% decline. Slow job growth and tight credit were still the reasons given.

New Home Sales

In stock news Amazon was reiterated with a buy rating by Citigroup and the analyst could not say enough good things about the company. He said Amazon was the only store with all 20 of the Toy Insiders Top 20 Hot Toys List. He also said Amazon offered the industry leading toy retail selection compared to Wal-Mart and Target. He said that not only did Amazon have all 20 toys but had them all at cheaper prices. Target had 75% of the list and Wal-Mart 65%. The analyst said the Kindle remained the hottest of the e-readers and e-book sales would probably be stronger than others expected. When my wife was in the hospital last week I read three books on my Kindle DX and every nurse, doctor or orderly that came in the room wanted to play with it. Amazon gained +9 on the recommendation to a new high at $177.89.

I tried to buy some of Amazon's door buster items online on Wednesday and they were selling out faster than the page would refresh. Of course they still had them at retail prices. Amazon just announced their shopping app online where you can take a picture of an item or scan its barcode and the app will show you the prices at Amazon plus the prices at all the local competitors. You can't beat that. I still expect Amazon to take a run at acquiring Netflix sometime next year.

Netflix announced a new "streaming only" plan in the U.S. in an effort to increase its 16.9 million subscriber base. Now subscribers can pay $7.99 per month and stream their movies rather than wait for the red envelope to show up in the mail. Of course that is the entry level plan. Netflix is also raising prices by a buck on the various by mail DVD plans. Coinstar's Redbox DVD service is also planning a streaming content program but they are going to partner with either Amazon or Wal-Mart on the digital platform. All of these retailers are gearing up to do battle with Comcast and the 20,000 titles that company already has online for streaming.

Research firm ComScore said e-commerce spending is likely to increase by 11% this season to $32.4 billion. I can remember when I reported the first time consumers spent more than $10 billion in online holiday shopping. Consumers have already spent $9 billion online in the first three weeks of November.

Boeing finally said they were going to announce a new delivery schedule for the 787 within a few weeks. Boeing said "foreign debris" likely caused the fire on a 787 Dreamliner and caused a halt to all flight-testing. Boeing says they don't yet know how to fix the problem but should have a fix and a new schedule in a "few weeks."

The markets recovered their losses from Tuesday but stalled once again at strong resistance. The S&P closed just under 1200 and the Dow was nipping at 11,200. However, the Nasdaq, Russell, Semiconductor Index and the Dow Transports all exceeded their resistance highs from last week and that suggests we could move higher from here.

Just because those indexes had the best day in the last two weeks does not mean the bulls are back. All were heavily shorted after the week of declines and the sudden outpouring of good news simply produced another monster short squeeze. The fact they exceeded recent resistance is a plus. I would have preferred the S&P was along for the ride but we don't always get what we wish for.

The S&P made its second round trip to support at 1175 in the last two weeks. The first drop to that level was on the 16th and the second one on Tuesday. However, Tuesday's dip had higher lows and support was solid. This makes me believe the next test will be to the upside and not back to 1175. That really depends on the news events ahead. Anything is possible.

S&P-500 Chart

The Dow came very close to 11,200 but there were still bears perched there to short the attempt even on the very low volume. A couple analysts are seeing a potential head and shoulders forming but I don't see it yet. Inside the U.S. the conditions are suddenly improving and corporate profits for Q3 were a record. Employment is starting to improve even if only marginally but it is improving. Outside the U.S. the Eurozone problems are making headlines but they really don't impact us other than demand for exports into those regions will slow. The news is pushing up our dollar and that has weighed on stocks and commodities. Korea is a non-event. This is the quarterly "in your face" provocation and it will go away. China issued some new rules and the market has accepted it.

This means the industrials in the Dow should begin to make some gains. "Should" being the operative word. I think the markets are about done looking for an excuse to sell off and should begin looking for an excuse to rally. Improving economics, rising employment and record profits are three good reasons.

If the Dow can more over 11,200 I think we would see an acceleration to the upside as the bears suddenly become converts and fund managers begin chasing performance again.

Dow Chart

The Nasdaq rallied back over the resistance at 2520-2530 and the internals were strong thanks to the corresponding rally in the semiconductors. If the traffic reports from places like Best Buy are positive for Black Friday sales then we could move higher. This is going to be an electronics Christmas and the ads for tablets, TVs, phones and computers are already blanketing the airwaves. This is positive for the Nasdaq. Let's hope it produces some follow on gains.

Nasdaq Chart

The SOX moved up very strong past the November resistance highs. It appears almost certain to break through the April highs at 400 on even a marginally positive market. Once over 400 it should trigger additional short covering and performance chasing.

Semiconductor Index Chart

The Russell turned in a terrific performance on Wednesday and appears ready to finally break through that strong resistance at 740 from April. If the Russell is successful we could begin a very nice rally through year-end.

Russell Chart

Dow Transports are on the verge of a breakout as well. The transports should energize the industrials and provide confirmation of a positive change in economic trends.

Dow Transport Chart

I was encouraged by Wednesday's rally even though it was powered by the shorts. A rebound all the way back to resistance and even higher on some indexes suggested there was also some retail buying helping to push the markets higher.

For the day before Thanksgiving the six billion shares of volume was higher than expected. Internals were 10:1 positive and there was no real evidence of any attempted selling. The bears may be on the edge of capitulation.

Asian markets are up strong on Wednesday night and our markets won’t be open on Thursday to contradict their rally. I remain bullish over 1175 and reenergized after questioning my thought process in Tuesday's decline.

Jim Brown

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New Option Plays

Happy Thanksgiving

by James Brown

Click here to email James Brown

Editor's Note:

The first Thanksgiving feast was held in 1621 in the Plymouth colony in Massachusetts. That was almost 390 years ago. Yet Thanksgiving was not an official U.S. holiday until 1941.

According to the National Turkey Federation this country eats approximately 46 million turkeys at Thanksgiving. I hope you like turkey leftover sandwiches since the average turkey you find at the store is about 15 pounds, which equates to 690 million pounds of turkey meat.

Don't forget to buckle your seat belt this holiday. According to AAA more than 38 million Americans will travel more than 50 miles from home over the Thanksgiving holiday.

Speaking of Thanksgiving, I am saying "thanks" to you, our readers! Without you we wouldn't have a newsletter. It doesn't matter if you live in the U.S. or not. We all have a lot to be thankful for!

I'm not adding any new plays tonight. Enjoy your friends and family tomorrow. Don't forget that the markets are only open half a day on Friday.

- James


In Play Updates and Reviews

Targets & Triggers

by James Brown

Click here to email James Brown

Editor's Note:

We had two of our bullish candidates get triggered today. Meanwhile NKE hit our first target to take profits. I'm also suggesting an early exit in the LZ put play.

-James

Current Portfolio:


CALL Play Updates

Ansys, Inc. - ANSS - close: 48.99 change: +1.28

Stop Loss: 47.25
Target(s): 52.45, 54.90
Current Option Gain/Loss: - 6.6%
Time Frame: 4 to 6 weeks
New Positions: Yes

Comments:
11/24 update: ANSS bounced back to the top of its trading range and hit our trigger to buy calls at $48.75 early this morning. Now that the play is open our stop loss is at $47.25 and our first target is $52.45. Don't be surprised if the $50.00 level offers some short-term resistance.

Current Position: Long the 2011 January $50.00 calls (ANSS1018L50) Entry @ $1.50

Chart:

Entry on November xxth at $ xx.xx
Earnings Date 02/24/11 (unconfirmed)
Average Daily Volume = 651 thousand
Listed on November 13th, 2010


Caterpillar - CAT - close: 84.69 change: +2.06

Stop Loss: 79.40
Target(s): 84.85, 89.50
Current Option Gain/Loss: +27.1% & +52.1%
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Comments:
11/24 update: CAT surged to new two-year highs and broke out past resistance near the $84.00 level. The high today was $84.79, not quite enough to tag our first target at $84.85. Odds are good that CAT will hit our target on Friday morning. Be prepared to take some money off the table. If you're looking for a new entry point I'd wait for another dip near $82.00.

Earlier Comments
Our first target is $84.85. We want to exit the majority of our position here. We'll set a secondary target at $89.50 but again I warn you the $85 level should be tough resistance.

Current Position: Long the December $85 calls (symbol: CAT1018L85)
Entry @ $1.40

Double Down
New Position: Buy the December $85 calls (CAT1018L85), current ask $1.17

Entry on November 9th at $ 81.75
Earnings Date 01/27/11
Average Daily Volume = 7.7 million
Listed on November 6th, 2010


CH Robinson Worldwide Inc. - CHRW - close: 74.22 change: +1.89

Stop Loss: 69.90
Target(s): 74.75, 79.00
Current Option Gain/Loss: +77.7%, and +43.4%
Time Frame: 4 to 6 weeks
New Positions: Yes, see below

Comments:
11/24 update: Transports were strong performers on Wednesday. The Dow Jones Transportation index rallied +2.7%. CHRW almost kept pace with a +2.6% gain. The stock has broken out past resistance to close at new all-time highs. If you're looking for a new entry point I would wait for a dip towards $73.00. Don't forget that our first target to take profits is at $74.75. The high today was only $74.58.

Current Position: Long the December $75.00 calls (CHRW1018L75) Entry @ $0.45

- or -

Current Position: Long the January $75.00 calls (CHRW1122A75) Entry @ $1.15

Entry on November 22nd at $72.44
Earnings Date 02/03/11
Average Daily Volume = 1.1 million
Listed on November 18th, 2010


Cliffs Natural Resources - CLF - close: 69.66 change: +1.77

Stop Loss: 64.75
Target(s): 71.50, 74.75
Current Option Gain/Loss: +11.5%
Time Frame: 4 to 6 weeks
New Positions: Yes, see below

Comments:
11/24 update: CLF managed to recoup most of yesterday's losses and shares closed the session hovering under the $70.00 level. I am not suggesting new positions at current levels. If you're looking for an entry point wait for a dip into the $66-65 zone. Our first target is $71.50.

Current Position: Long the 2010 December $70.00 CALL, Entry @ $2.42

Entry on November 12th @ 67.00
Earnings Date 02/17/11
Average Daily Volume = 4.3 million
Listed on November 1, 2010


Costco Wholesale - COST - close: 67.54 change: +0.64

Stop Loss: 63.90
Target(s): 69.50
Current Option Gain/Loss: +103.3%
Time Frame: 3 to 4 weeks
New Positions: No

Comments:
11/24 update: The market's widespread bounce helped power COST to a new 52-week high. Shares tagged 68.00 intraday. new bullish positions at current levels. Our target to exit is $69.50.

Earlier Comments
We want to keep our position size small to limit our risk.

Current Position: December $65.00 calls (symbol: COST1018L65)
Option Entry @ $1.50

Entry on November 8th at $64.50
Earnings Date 12/09/10
Average Daily Volume = 3.4 million
Listed on November 6th, 2010


CSX Corp. - CSX - close: 61.90 change: +1.71

Stop Loss: 55.75
Target(s): 60.00, 62.25
Current Option Gain/Loss: Unopened
Time Frame: 4 to 6 weeks
New Positions: Yes, see trigger

Comments:
11/24 update: CSX completely erased yesterday's losses with a strong +2.8% rally on Wednesday. CSX has a little trading range in the $60-62.50 zone. More aggressive traders may want to consider buying a breakout past $62.50. I'm not ready to chase it yet but you could look for a dip near $60.50 and just adjust your stop toward $60.00 to limit your risk. At the moment the newsletter is leaving our strategy unchanged. We already have a breakout trigger on UNP, another railroad stock.

Trigger to buy-the-dip @ $57.75

Suggested Position: Buy the 2011 January $60 calls (CSX1122A60)

Entry on November xxth at $ xx.xx
Earnings Date 01/18/11 (unconfirmed)
Average Daily Volume = 5.9 million
Listed on November 23rd, 2010


Express Scripts - ESRX - close: 52.94 change: +0.20

Stop Loss: 49.65
Target(s): 53.95, 57.25
Current Option Gain/Loss: +28.6%, and +17.6%
Time Frame: 5 to 6 weeks
New Positions: Yes, wait for a dip

Comments:
11/24 update: Aside from a little volatility this morning it turned out to be a very boring day for ESRX. Shares lost 20 cents on the session. I don't see any changes from my prior comments. I am suggesting readers look for a dip near $52 or lower before considering new bullish positions. Keep your position size small. Our first target to take profits is at $53.95. I'm setting a secondary target at $57.25.

We currently only have half a position open.

Current Position: Long the 2010 December $52.50 calls (ESRX1018L52.5) Entry @ $1.22
- or -
Current Position: Long the 2011 January $52.50 calls (ESRX1122A52.5) Entry @ $2.10

Entry on November 18th at $51.81
Earnings Date 02/24/11
Average Daily Volume = 4.3 million
Listed on November 17th, 2010


W.W. Grainger Inc. - GWW - close: 126.70 change: +2.64

Stop Loss: 122.95
Target(s): 129.90, 134.00
Current Option Gain/Loss: - 6.0%
Time Frame: 4 to 6 weeks
New Positions: Yes

Comments:
11/24 update: Our bullish play on GWW has been triggered. The stock gapped open higher and surged to a new short-term high at $127.03. Our trigger to buy calls was hit at $126.75. If you missed the entry point you can still launch positions now or wait for a dip towards $126-125.50.
FYI: The stock could see a little short squeeze since the most recent data listed short interest at more than 5% of the 58.5 million share float (which isn't very big as far as floats go). FYI: The Point & Figure chart is bullish with a $140 target.

Current Position: Long the 2011 January $130 calls (GWW1122A130) Entry @ $2.50

Chart:

Entry on November 24th at $126.75
Earnings Date 01/25/11 (unconfirmed)
Average Daily Volume = 567 thousand
Listed on November 22nd, 2010


Humana Inc. - HUM - close: 56.97 change: +0.08

Stop Loss: 53.75
Target(s): 59.75, 64.00
Current Option Gain/Loss: - 2.6%
Time Frame: 4 to 6 weeks
New Positions: Yes, look for another dip

Comments:
11/24 update: HUM failed to participate in the market's widespread rally on Wednesday. Shares continued to drift sideways in a narrow range. While the relative weakness today is a concern I'm still bullish on the stock. I would look for dips in the $56-55 zone as a new entry point. I am suggesting we sell half of our position at $59.75 and then plan on selling the rest with a target at $64.00. New stop loss at $53.75.

11/22/10 New stop @ 53.75
11/22/10 New (2nd) target at $64.00

Current Position: Long the 2011 January $55 calls (HUM1122A55) Entry @ $3.80

Entry on November 18th at $55.05
Earnings Date 11/01/10 (confirmed)
Average Daily Volume = 2.1 million
Listed on October 16th, 2010


McKesson Corp. - MCK - close: 64.80 change: +0.61

Stop Loss: 63.75
Target(s): 67.95, 70.75
Current Option Gain/Loss: -27.4%
Time Frame: 6 to 8 weeks
New Positions: Yes

Comments:
11/24 update: MCK managed a bounce from short-term support at $64.00 but it was not a very convincing bounce. Shares only gained +0.9% versus a +1.5% rise in the market. I'm not suggesting new positions at this time. We'll wait and see how MCK performs on Friday FYI: The P&F chart is bullish with an $85 target.

Current Position: Long the 2011 January $65 calls (MCK1122A65) Entry @ $3.10

Entry on November 22nd at $65.95
Earnings Date 01/26/11
Average Daily Volume = 2.7 million
Listed on November 20th, 2010


Nike Inc. - NKE - close: 86.53 change: +1.27

Stop Loss: 81.45
Target(s): 86.75, 89.50
Current Option Gain/Loss: +107.8%
Time Frame: 4 to 6 weeks
New Positions: Wait for a dip, see below

Comments:
11/24 update: Target achieved. NKE rallied to another all-time high and hit $86.97 intraday. Our first target to take profits was at $86.75. Our December option was trading around $2.60 (bid). I don't see any real changes from my prior comments but we are raising the stop loss to $81.45, just under the simple 50-dma. Wait for a dip or bounce near $84 before considering new positions. Our final target remains $89.50.

Current Position: Long the December $85.00 CALLS (symbol:NKE1018L85) Entry @ $1.15

11/24/10 Target hit @ 86.75, option @ $2.60 (+126%)

Chart:

Entry on November 11th at $83.00
Earnings Date 12/21/10
Average Daily Volume = 2.3 million
Listed on November 6th, 2010


Union Pacific - UNP - close: 90.75 change: +1.74

Stop Loss: 88.99
Target(s): 96.25, 99.75
Current Option Gain/Loss: Unopened
Time Frame: 4 to 6 weeks
New Positions: Yes, see trigger

Comments:
11/24 update: Transport stocks were very strong today. UNP's +1.9% gain managed to erase all of yesterday's losses. More aggressive traders may want to buy this bounce. I'm suggesting we wait for the breakout.

Trigger @ 92.85

Suggested Position: Buy the 2011 January $95 calls (UNP1122A95)

Entry on November xxth at $ xx.xx
Earnings Date 01/20/11
Average Daily Volume = 2.9 million
Listed on November 20th, 2010


VimpelCom Ltd - VIP - close 15.39 change +0.00

Stop Loss: 14.80
Target(s): 16.75, 17.75
Current Option Gain/Loss: -38.0%
Time Frame: 6 to 8 weeks
New Positions: Yes, on dips

Comments:
11/24 update: It was a relatively quiet session for VIP. Shares tagged yesterday's low and bounced but didn't make it very far. The stock closed unchanged on the session (although at least one quote service has VIP up 39 cents today). Readers can use today's bounce as a new entry point but I would keep your position size small to limit your risk. FYI: VIP is due to report earnings around Dec. 2nd.

Current Position: December $15.00 CALLS, Entry @ $1.05

Entry on November 8, 2010 @ 15.60
Earnings Date 11/24/2010 (unconfirmed)
Average Daily Volume: 3.5 million
Listed on November 3, 2010


CLOSED BEARISH PLAYS

Lubrizol Corp. - LZ - close: 107.72 change: +2.69

Stop Loss: 110.25
Target(s): 100.50
Current Option Gain/Loss: -39.6%
Time Frame: 3 to 4 weeks
New Positions: No

Comments:
11/24 update: It's time to go! LZ displayed way too much relative strength for me today. While you could argue that LZ still has resistance at its 50-dma and the $110 level I don't want to stick around. The market still wants to move higher and LZ hasn't seen enough follow through on its reversal lower.

I am suggesting an early exit now!

Exit early!

Closed Position: Long the December $105 puts (symbol:LZ1018X105)
Entry @ $2.90, Exit @ $1.75 (-39.6%)

Annotated Chart:

Entry on November 10th at $107.68
Earnings Date 02/03/11 (unconfirmed)
Average Daily Volume = 525 thousand
Listed on November 9th, 2010