Option Investor
Newsletter

Daily Newsletter, Wednesday, 11/16/2011

Table of Contents

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

Market Wrap

Europe: Worse Not Better

by Todd Shriber

Click here to email Todd Shriber
A day that started with equity futures pointing lower got far worse in the last hour and finished with big declines for U.S. stocks after Fitch Ratings said Europe's sovereign debt contagion represents ''serious risk'' to American banks. That was enough to punish financial shares and nearly every other sector under the sun and led all three major U.S. indexes to losses of over 1.5%.

Stats Table

Europe's sovereign debt fiasco continues to play a heavy hand in global equity markets and that makes for tough sledding for most investors. It is especially painful for those playing U.S. stocks, which have held up well compared to most global markets, because economic data points here in the States have been decent recently.

In economic news released today, U.S. industrial output rose 0.7% in October, according to the Federal Reserve. That is good for the biggest jump since July and easily beat the 0.4% increase economists expected.

Consumer prices dipped 0.1% last month, according to the Labor Department. Excluding food and energy prices, the consumer price index increased 0.1%, the same increase seen in September. Economists expected no change in the October CPI reading.

Despite all the consternation and negative headlines out of Europe, crude oil enjoyed a solid day, jumping over $100 a barrel to its highest levels in five months. News that Enbridge Inc. (ENB) will pay $2 billion for ConocoPhillips' (COP) stake in the Seaway pipeline was one bright spot in the energy sector today and oil moved higher despite the Energy Department saying inventories at Cushing rose 890,000 barrels to 32 million last week.

Analysts surveyed by Bloomberg were expecting a decline of 1.2 million barrels. Still, oil bulls should take heart that their commodity of choice put in such a bullish performance on a day when the opposite easily could have been the case.

Oil Chart

Getting back to Europe, it should be noted the Dow was down less than 40 points at around 3PM New York time. Then came the Fitch report regarding U.S. banks' exposure to the Europe debacle and the rest is history. While the ratings agency did say the dollar amount in terms of European exposure by U.S. banks is ''manageable,'' it added the top five U.S. banks have a total of $114 billion in loans, deposits and other assets tied to French banks, the Associated Press reported.

Indeed, $114 billion in French exposure is manageable. Hey, that is almost $6 billion LESS than the market cap of JPMorgan Chase (JPM). Still, the Fitch report provided a predictable result and that was intense late-day damage on the financial services sector. And for those keeping track of French bonds, the yield on French 10-years was 3.69% today, almost 50% increase from early October and various press reports are saying investors are starting to fret France might join in the U.S. in losing the prestigious AAA credit rating.

XLF Chart

I never like being Debbie Downer, but there is a fair chance that the situation across the Atlantic is going to get worse before it gets better. If you did not see the Bloomberg Television interview with Citigroup Willem Buiter, I encourage you to just put his name into your search engine of choice and watch it.

If you do not have the time, I will give you one of the more important lines from the interview: ''Time is running out fast.  I think we have maybe a few months -- it could be weeks, it could be days -- before there is a material risk of a fundamentally unnecessary default by a country like Spain or Italy which would be a financial catastrophe dragging the European banking system and North America with it. So they have to act now.''

As I've said here numerous times in the past, Italy and Spain are much different ballgames than Greece or Portugal for the simple reason that the first pair's economies are far larger than Greece and Portugal. I have been showing charts of the iShares MSCI Italy Index Fund (EWI) for a while now, so I thought it would be interesting to change things up a bit and a look at the iShares MSCI Spain Index (EWP). Sure, Wednesday's decline was of the light volume variety, as you can see, this is a nasty looking chart.

Spain ETF Chart

Speaking of ugly charts, there is Abercrombie & Fitch (ANF), a company I will admit to having been less than kind to in the past. I have been more opposed to the style or lack thereof in Abercrombie clothes, but it looks like the object of my discontent should have been the stock itself. Shares of Abercrombie plunged almost 14% today on volume that was more than seven times the daily average.

The culprit was a weak third-quarter earnings report and downbeat fourth-quarter guidance. Abercrombie said its third-quarter profit rose to $50.9 million, or 57 cents per share, from $50 million, or 56 cents per share, a year earlier. Revenue increased almost 22% to $1.08 billion. Analysts expected a profit of 72 cents on sales of $1.07 billion.

The company added gross margins fell 360 basis points to 60.1%. Maybe Abercrombie will be able to raise prices next year, but that is a big ''maybe.'' Or maybe the reason the company had to keep prices low in the third quarter is because consumers are realizing other stores sell the same stuff Abercrombie does at better prices.

ANF Chart

In after-hours news, data storage provider NetApp (NTAP) was getting walloped, down almost 7% as of this writing after the company reported a fiscal second-quarter profit of $165.6 million, or 44 cents a share, on revenue of $1.51 billion, compared with earnings of $175.4 million, or 45 cents a share, on $1.25 billion in revenue a year earlier. On an adjusted basis, NTAP earned $235.5 million, or 63 cents. Wall Street was expecting a profit of 60 cents a share on $1.55 billion in revenue.

NTAP, a name that has been tossed around more than a few times in the past as a potential takeover target, issued some dour guidance. The company forecast an adjusted third-quarter profit of 36-40 cents a share on sales of $1.52-$1.61 billion. Analysts were expecting a profit of 63 cents a share on $1.65 billion.

NetApp Chart

Looking at the charts, there is more bad news about today's decline, as if we needed more. Support for the S&P 500 was 1240 heading into the day, but the index closed a few points below that area. Next support is 1225 and from there we could go to 1200. If the market can bounce from here, the S&P 500 would need to take out 1255 and then 1275 to have buyers feeling happy again.

S&P 500 Chart

There is a similar situation with the Dow Jones Industrial Average. The 12,000 area was important support that was violated today as 29 of the 30 Dow stocks closed in the red. MMM was the best performer of the lot and that stock was merely unchanged. PG was the next best performer with a drop of 0.44%. A drop below 11,600 would be bearish. Upside resistance after 12,000 can be found at 12,175 and 12,285.

Dow Chart

Looking at the Nasdaq, GMCR had a very nice day, but aside from that name, few others did. AAPL, AMZN, GOOG and PCLN were all lower and that sent the Nasdaq well below its 200-day moving average. Now the 2687 area is resistance with support found at 2600. A drop below 2600 means accelerated selling a possible decline below 2575.

Nasdaq Chart

The combination of the looming Super Committee deadline and Europe's ongoing trials and tribulations makes this a tricky time to be long. Small-caps are not doing much to illicit confidence and correlations are a real pain in the neck. XLU, one of the main utilities ETFs, has lagged the S&P 500 over the past five trading days while GLD and XLP, the largest staples ETF, have barely outperformed the S&P 500. Greenbacks anyone?

Todd Shriber


New Option Plays

S&P 500 On the Verge

by James Brown

Click here to email James Brown

Editor's Note:

Stocks made a dramatic move lower today but it's not a breakdown yet. You can see from the chart below that the S&P 500 index is on the verge of breaking down from its sideways consolidation. Of course there is always the chance that traders buy this dip near the trendline of higher lows.

Sometimes the best trade is no trade. U.S. markets might churn sideways in a volatile range while we wait for news on the Super committee's plan (or lack thereof) for $1.5 trillion in spending cuts. Their deadline is November 23rd.

If you are looking or a trade then further weakness in the S&P 500 might be an entry point to buy puts (on the SPY) and aim for the 1200 level (120). Of you could buy puts on the Dow Industrials Diamonds ETF. Alternatively you could be ready to buy the dip in the NASDAQ composite as it nears support at the 2600 level. To play the NASDAQ you could buy calls on the QQQ or the TQQQ.

Chart of the S&P 500 index:

- James


In Play Updates and Reviews

Investors Still Nervous for Europe

by James Brown

Click here to email James Brown

Editor's Note:

It was a "risk off" sort of day on Wall Street with investors selling stocks as the euro currency fell.

Looking at our newsletter we had PXD hit our trigger to buy calls. I am removing TIF as a bullish candidate with the trade unopened.

-James

Current Portfolio:


CALL Play Updates

Anadarko Petroleum - APC - close: 78.95 change: -0.99

Stop Loss: 77.45
Target(s): 98.50
Current Option Gain/Loss: Dec$85c: -37.6% & Jan $90c: -33.6%
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
11/16 update: Crude oil surged past the $100 a barrel mark today. Yet energy stocks saw no benefit from this rally in oil. APC fell -1.2% and looks poised to breakdown under short-term support near the $78.50-78.00 zone. I am not suggesting new positions at this time.

Earlier Comments:
Shares of APC are on the verge of a major breakout past resistance near $85.00. This would produce a new all-time, record high for the stock. We want to be ready when that happens.

- Suggested Positions -

buy the DEC $85 call (APC1117L85) Entry $2.60

- or -

buy the JAN $90 call (APC1221A90) Entry $2.76

11/11 Triggered at $81.05
11/09 adjusting our trigger to buy calls down to $81.05 and stop loss to $77.45.

Entry on November 11 at $81.05
Earnings Date 01/31/12 (unconfirmed)
Average Daily Volume = 5.0 million
Listed on November 8, 2011


DaVita Inc. - DVA - close: 73.35 change: -0.31

Stop Loss: 72.25
Target(s): 79.50
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Comments:
11/16 update: DVA gapped open lower and dipped to $71.81 before surging back toward resistance near $75.00. The stock couldn't push through and rolled over under this resistance level again. There is no change from my prior comments.

Earlier Comments:
I am suggesting a trigger to buy calls at $75.25. If triggered we'll aim for the $79.50 mark. More aggressive traders could aim for the May-June lows near $82.50 instead. FYI: The Point & Figure chart for DVA is bullish with a $97 target.

Trigger @ $75.25

- Suggested Positions -

buy the DEC $75 call (DVA1117L75)

Entry on November xx at $ xx.xx
Earnings Date 02/09/12 (unconfirmed)
Average Daily Volume = 1.3 million
Listed on November 8, 2011


Flowserve Corp. - FLS - close: 97.96 change: -0.53

Stop Loss: 94.90
Target(s): 106.00
Current Option Gain/Loss: Dec$105c: -25.4% & Jan$105c: - 9.6%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
11/16 update: Traders bought the early morning dip, keeping the trend of higher lows alive. Yet FLS couldn't push through resistance near $100. Chart readers will note the MACD indicator on the daily chart is nearing a new sell signal.

I am not suggesting new positions at this time. We will raise our stop loss to $94.90.

Earlier Comments:
I do consider this a slightly more aggressive trade because FLS can be so volatile. We want to keep our position size small to limit our risk.

(small positions) - Suggested Positions -

Long DEC $105 call (FLS1117L105) Entry $2.95

- or -

Long JAN $105 call (FLS1221A105) Entry $4.65

11/12 adjusted exit target to $106.00
11/11 trade opened at $97.30
11/09 New strategy: trigger to buy calls at $97.30, stop loss $93.95. Small positions only

Entry on November 11 at $97.30
Earnings Date 02/23/12 (unconfirmed)
Average Daily Volume = 712 thousand
Listed on November 8, 2011


SPDR Gold Shares - GLD - close: 171.51 change: -1.85

Stop Loss: 168.45
Target(s): 182.50
Current Option Gain/Loss: - 2.5%
Time Frame: 8 to 10 weeks
New Positions: see below

Comments:
11/16 update: A rally in the U.S. dollar could have been putting pressure on gold prices today. The GLD recovered off its morning low but rolled over late in the session, following stocks lower. Nimble traders can look for a dip or a bounce near the $170.00 level as a new bullish entry point.

Please note our new stop loss at $168.45.

Earlier Comments:
Cautious traders might also want to consider an exit target near $179.00 instead. Our target is $182.50.

- Suggested Positions - (Small Positions)

Long 2012 Jan $175 call (GLD1221A175) Entry $6.00

11/16 new stop loss @ 168.45
11/15 new stop loss @ 166.40
11/07 new stop loss @ 164.95

Entry on November 2 at $168.59
Earnings Date --/--/--
Average Daily Volume = 15.3 million
Listed on November 1, 2011


McDonald's Corp. - MCD - close: 93.15 change: -1.32

Stop Loss: 91.95
Target(s): 99.75
Current Option Gain/Loss: Nov95c: -94.2% & Dec95c: -42.5%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
11/16 update: Hmm... after failing more than once to breakout past the $95.00 level the rally in MCD could be in jeopardy. MCD looks poised to drop toward the $92 area and if the $92 level breaks then we're looking at a drop toward $90.00 and the 50-dma.

Should we get stopped out at $91.95 I would consider buying calls again on a dip or a bounce near the 50-dma (near $90) or the 100-dma (near $88).

Unfortunately, with only two days left, it looks like our November calls may be dead.

Earlier Comments:
I am suggesting small positions to limit our risk. We will list both November calls and Decembers, but keep in mind that Novembers will expire soon. FYI: The Point & Figure chart for MCD is bullish with a $112 target.

(small positions)- Suggested Positions -

Long NOV $95 call (MCD1119K95) Entry $0.70

- or -

Long DEC $95 call (MCD1117L95) Entry $1.55

11/12 new stop loss @ 91.95
11/07 MCD hit our trigger at $94.05

Entry on November 7 at $94.05
Earnings Date 01/24/12 (unconfirmed)
Average Daily Volume = 6.0 million
Listed on November 5, 2011


Occidental Petroleum - OXY - close: 97.60 change: -1.21

Stop Loss: 95.75
Target(s): 104.50
Current Option Gain/Loss: Dec$100c: -34.5% & Jan105c: -31.1%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
11/16 update: Uh-oh! The trading action in OXY was not healthy today. The stock produced a bearish double top inside today's session under the $101 level. That doesn't bode well. More conservative traders may want to inch up their stop loss. Currently we have our stop just beneath the simple 200-dma. If that breaks down then we could see OXY correct toward stronger support near $90 and its 100-dma.

Earlier Comments:
We do want to keep our position size small because the oil stocks can be a volatile bunch. FYI: The Point & Figure chart for OXY is bullish with a $116 target.

(small positions) - Suggested Positions -

Long DEC $100 call (OXY1117L100) Entry $5.04

- or -

Long JAN $105 call (OXY1221A105) Entry $4.79

11/11 trade opened.

Entry on November 11 at $99.67
Earnings Date 01/26/12 (unconfirmed)
Average Daily Volume = 5.4 million
Listed on November 10, 2011


Parker Hannifin Corp. - PH - close: 83.18 change: -2.15

Stop Loss: 81.45
Target(s): 89.75
Current Option Gain/Loss: Dec$90c: -40.0% & Jan $90c: -27.7%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
11/16 update: The trading in PH today doesn't bode well either. The stock tried to rally midday but failed twice near the $85.30 level. Shares closed on their low for the session. Tomorrow could be challenging for the bulls. I wouldn't be surprised to see a dip toward the $82.00 level.

I am not suggesting new bullish positions at this time.

Earlier Comments:
More conservative traders will want to consider a higher stop loss. Our target is $89.75. More aggressive trades could aim higher (91.50 or the $97-99 zone). FYI: The Point & Figure chart for PH is currently bearish but a breakout past $85.00 would create a brand new quadruple-top breakout buy signal.

- Suggested Positions -

Long DEC $90 call (PH1117L90) Entry $1.75

- or -

Long JAN $90 call (PH1221A90) Entry $3.60

11/15 trade triggered at $85.25

Entry on November 15 at $85.25
Earnings Date 01/19/12 (unconfirmed)
Average Daily Volume = 2.6 million
Listed on November 12, 2011


Pioneer Nat. Res. - PXD - close: 94.27 change: +1.03

Stop Loss: 89.45
Target(s): 99.75
Current Option Gain/Loss: Dec$100c: +23.4% & Jan$100c: -20.0%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
11/16 update: Our new trade on PXD has been opened. Shares rallied past resistance near $95.00 and hit $97.10 before paring its gains. The close back under $95.00 is troubling but shares ended the day up +1.1%. Our trigger was hit at $95.05 but I am not suggesting new positions with the stock under $95.00 tonight.

Earlier Comments:
We want to keep our position size small because PXD can be a volatile stock and we're using a wide stop loss. Our target is $99.75 since the $100 level and the July highs will be resistance. More aggressive traders may want to aim higher (I'd use the $104-105 area). FYI: The Point & Figure chart for PXD is bullish with a $108 target.

(Small Positions Only) - Suggested Positions -

Long DEC $100 call (PXD1117L100) Entry $3.20

- or -

Long JAN $100 call (PXD1221A100) Entry $5.50

Entry on November 16 at $95.05
Earnings Date 02/06/12 (unconfirmed)
Average Daily Volume = 2.6 million
Listed on November 15, 2011


Stanley Black & Decker Inc. - SWK - close: 67.84 change: +0.45

Stop Loss: 65.49
Target(s): 74.00
Current Option Gain/Loss: Unopened
Time Frame: 3 to 6 weeks
New Positions: Yes , see below

Comments:
11/16 update: Ouch! It was an ugly day for SWK. The stock gapped open lower. Shares recovered but the bounce failed at resistance near $68.00. Then stocks accelerated lower to lose -3.6%. I would watch for potential support near $64.00 or its exponential 200-dma.

Currently our plan is unchanged with a trigger to buy calls at $68.50 but we'll make adjustments depending on how SWK trades tomorrow.

Trigger @ $68.50

- Suggested Positions -

buy the DEC $70 call (SWK1117L70)

- or -

buy the JAN $72.50 call (SWK1221A72.5)

Entry on November xx at $ xx.xx
Earnings Date 01/26/12 (unconfirmed)
Average Daily Volume = 1.8 million
Listed on November 15, 2011


Under Armour, Inc. - UA - close: 80.85 change: -2.43

Stop Loss: 79.35
Target(s): 92.50
Current Option Gain/Loss: -36.0%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
11/16 update: The widespread stock market weakness today is pulling UA back down towards prior resistance and what should be support near $80.00. Readers could use a bounce from $80.00 as a new bullish entry point.

Earlier Comments:
We do want to keep our position size small to limit risk since UA can be a volatile stock.

(small positions) - Suggested Positions -

Long DEC $85 call (UA1117L85) Entry $3.75

11/10 adjusted trigger to 82.55 and stop to 79.35
11/09 new strategy: use a trigger at $83.50 to buy calls, stop loss @ 79.90
11/08 adjusted entry trigger from $86.25 to 85.25 and moved stop loss from $81.90 to $80.90.

Entry on November xx at $ xx.xx
Earnings Date 01/26/12 (unconfirmed)
Average Daily Volume = 1.4 million
Listed on November 5, 2011


Visa, Inc. - V - close: 93.40 change: -2.01

Stop Loss: 91.25
Target(s): 99.75
Current Option Gain/Loss: Nov$95c: -31.8% & Dec$95c: -12.0%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
11/16 update: The market is not cooperating. It was our plan to exit our November $95 calls at the open this morning. Unfortunately, Visa gapped open down at $94.55, thanks to the market's widespread weakness.

The stock is back inside its previous trading range. I am not suggesting new positions at this time. Please note our new stop loss at $91.25.

We currently have an exit target at $99.75 but more aggressive traders may want to aim higher.

- Suggested Positions -

(exit November calls today at the open)
Nov. $95 call (V1119K95) Entry $1.10, exit $0.75 (-31.8%)

- or -

Long Dec. $95 call (V1117L95) Entry $2.75

11/16 new stop loss @ 91.25
11/16 scheduled exit for Nov.$95 calls. exit $0.75 (-31.8%)
11/15 plan to exit Nov.$95 calls at the open tomorrow morning.
11/08 new stop loss @ 89.75
11/01 new stop loss @ 88.75
11/01 Visa gapped lower at $91.16
10/31 adjusted trigger to $92.25

Entry on November 1 at $91.16
Earnings Date 10/26/11
Average Daily Volume = 5.0 million
Listed on October 29, 2011


VMware, Inc. - VMW - close: 101.11 change: -2.14

Stop Loss: 97.40
Target(s): 107.75
Current Option Gain/Loss: -11.9%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
11/16 update: Shares of VMW spent another day churning sideways in the $101-104 range. Look for a new bounce from $100 before considering new bullish positions.

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

(small positions) - Suggested Positions -

Long DEC $105 call (VMW1117L105) Entry $3.35

11/14 trade opened at $101.00
11/08 adjust stop loss to $97.40.
11/07 Adjust strategy. Instead of buy the dip at $97.00 we want to buy calls on a rally at $101.00. Stop loss at $96.75. Target 107.75.

Entry on November 14 at $101.00
Earnings Date 01/24/11 (unconfirmed)
Average Daily Volume = 2.2 million
Listed on November 3, 2011


Whole Foods Market, Inc. - WFM - close: 66.85 change: -1.48

Stop Loss: 67.40
Target(s): 74.00
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Comments:
11/16 update: Hmm... WFM continues to struggle with a trend of lower highs. Aggressive traders might want to consider buying a dip in the $66.00-65.60 zone with a very tight stop loss. We are leaving our trigger to buy calls at $69.65 for the moment.

Earlier Comments:
WFM can be a very volatile stock so trading options on it is a higher-risk trade. We want to keep our position size small. I am suggesting a trigger at $69.65 to open bullish positions with a stop loss at $67.40 (a tight stop for this stock). Our target is $74.00. More aggressive traders could aim higher.

Trigger @ $69.65

- Suggested Positions -

buy the DEC $70 call (WFM1117L70)

- or -

buy the JAN $75 call (WFM1221A75)

Entry on November xx at $ xx.xx
Earnings Date 02/09/12 (unconfirmed)
Average Daily Volume = 2.0 million
Listed on November 12, 2011


PUT Play Updates

Deutsche Bank - DB - close: 37.11 change: -1.00

Stop Loss: 41.55
Target(s): 30.50
Current Option Gain/Loss: Dec$35p: - 1.9% & Jan$30p: +10.0%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
11/16 update: Investors remain nervous about the situation in Europe. Bearish comments from Fitch ratings agency and news that Moody's rating agency had downgraded several banks in Germany did not fuel optimism. Shares of DB lost another -2.6%. The stock is nearing possible technical support at the 50-dma as well as price support near $36.00. I wouldn't be surprised to see a bounce.

Earlier Comments:
Keep position size small to limit risk. This is going to be a volatile trade. FYI: The Point & Figure chart for DB is bearish with a $30 target.

- Suggested Positions - (small positions)

Long DEC $35 PUT (DB1117x35) Entry $2.60

- or -

Long JAN $30 PUT (DB1221m30) Entry $2.09

11/12 new stop loss @ 41.55
11/11 DB gapped open higher at $39.00

Entry on November 11 at $39.00
Earnings Date 02/02/12 (unconfirmed)
Average Daily Volume = 4.3 million
Listed on November 10, 2011


CLOSED BULLISH PLAYS

Tiffany & Co - TIF - close: 75.79 change: -2.00

Stop Loss: 74.15
Target(s): 84.25
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
11/16 update: Our trade is still not open. TIF gapped open lower today negating our entry point strategy. The breakdown under support near $76.00 would suggest TIF could drop toward the next support level near $74.00.

We are giving up on TIF as a bullish candidate, at least this week. I am removing it from the newsletter with our trade unopened.

Trade Did Not Open

chart:

Entry on November xx at $ xx.xx
Earnings Date 11/29/11 (unconfirmed)
Average Daily Volume = 2.2 million
Listed on November 14, 2011