Option Investor
Newsletter

Daily Newsletter, Tuesday, 5/8/2012

Table of Contents

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

Market Wrap

Dow Down For Fifth Day

by Thomas Hughes

Click here to email Thomas Hughes
Continued uncertainty over the state of European financial reform depressed stocks for the fifth day in a row. Potential new government stances in France and Greece are threatening the current bailout and traders are questioning whether or not the rest of the Union, especially Germany, will stand for further negotiating. The concerns are adding to fears brought on by mixed economic and earnings information here at home.


Declining stocks led by a wide margin today. In early trading losers led 3 to 1 over gainers. Late in the afternoon the margin had declined to around 2 to 1.


Aside from a string of earnings reports there was little in the way of US economic news today. Tomorrow look out for the mortgage index, wholesale inventories and crude oil inventory data. Oil inventory is at 20 year highs and is expected to increase again.

Futures were down about a half percent before the bell as traders were digesting the new developments out of Greece and the European Union. The possible emergence of new government in Greece has set the markets on edge. The elections have brought the recent austerity measures and Greek bailout into question. According to reports this morning Greece has about 5 weeks of money left and Germany is reluctant to assist any more. Some traders speculated on the possibility of Greece being removed from the European Union. Greek stocks closed near twenty year lows today.

France and Spain are also expected to go back on some of their own spending measures. Spain is reported to be in the process of bailing out another bank, after stating earlier that no more bailouts were needed.

Germany remains the bright spot in Europe. The country is expected to keep itself out of recession and the new data supports this. Industrial production rose in the country by 2.8%, hotter than the expected 0.8%. Factory orders also increased in the month of March on strong foreign demand, especially from Russia, the US and China.

The events in Europe have sent gold tumbling. The metal lost about $35 in today's trading to fall below the technical $1600 mark. Intra-day trading brought the commodity down to the low's of January 3. The move was been sparked by the dollar's gain against the euro and has been accelerated by technical trading and stop-losses. Analysts say that short sellers could be moving in and send gold prices even lower. The CBOE gold index moved down in tandem with the metal and made a fresh twelve month low.

CBOE gold index, daily

The yield on 30 year bonds dropped today.

30 year bond rates, daily

Oil continued it's slide today, losing close to 1%. This is the fifth day of declines for US crude oil prices and brings the price to just above $97. Growing US oil stockpiles, worries over world demand fueled by the European elections and OPEC's statements about supply have all helped to bring the price down. The US energy agency raised its forecast for global demand in 2012 by 70,000 barrels a day but lowered its estimates for 2013. Be on the lookout for oil inventories on Wednesday and natural gas supply on Thursday.

Earnings continue to drive the markets as well. Several big names released information today but the biggest headline was Fossil. The stock reported weak earnings, guided the year lower and lost more than 35% of it's share value. Fossil reported first quarter earnings in line with expectations but the revenue for the quarter missed. Sales were strong in America and Asia but Europe was weak and is impacting the company's future expectations. The news sent the entire retail sector down.

Fossil, daily

The retail sector Spider XRT traded down on the news. The exchange traded fund made a new two month intra-day low. The move came on high volume and bearish indicators.

Retail sector spider,daily

Coca Cola Bottling Company (COKE), not to be confused with Coca Cola (KO), is the US bottler of Coca Cola products. The stock traded quietly today just above its recent support in anticipation of its earnings release which came after the close of today's trading. The stock gained 1% today on a mild spike in volume.

Coca Cola Bottling Company, daily

Walt Disney Company was also quiet today ahead of an after market earnings announcement. The company has taken some hits on recent movies but this weekends release of “The Avengers” set US box office records. The stock gained in today's session to close at a new twelve month high. The move was accompanied by higher volume and bullish technicals. In the report, Disney beat analyst expectation by 3 cents. The company earned $0.58 cents a share on revenue of $9.63 billion.

Walt Disney, daily

DIRECTV went directly down after it released its earnings report. The company reported earnings increased by 26%, in line with expectations. DIRECTV made the gains on increased subscriptions in North and South America. Revenue in the quarter grew by 11% fueled by new subscribers in Latin America. The stock lost more than 3% in intra-day trading but may have found support in the $46 range.

DIRECTV, daily

OfficeMax pleased its shareholders today. The stock rose by 10% today following the announcement of first quarter earnings. On an adjusted basis the company improved results by more than 50% from last year at the same time. The adjusted results do not include one time charges related to store closures earlier in the year. The closings were part of strategic re-alignment of the company and have begun to pay off for OfficeMax. The reported results were below analysts estimates but the adjusted results were well above the consensus. The company is guiding revenue estimates for the year in-line to slightly higher than expected. The stock moved up from support today with high volume and bullish indicators.

OfficeMax, daily

SunOpta, manufacturer and distributor of organic, natural and specialty foods, has been on the rise in 2012 since hitting a low in January. The stock traded down today and is expected to release earnings after the bell. The specialty foods maker earned $.07 per share in the previous period and is expected to earn $.08 this quarter.

SunOpta, daily

Discovery Communications is down sharply today. The cable network operator increased revenue in the quarter by 16% and income by 9%. The increase in income is excluding a one time charge from the previous year. The company's results were impacted negatively by the Oprah Winfrey Network. The Oprah Winfrey Network did not perform as expected. The stock lost more than 6% today on high volume but did not break trend.

Discovery Communications, daily

HSBC Holdings moved down today. It released earnings before the market opened. Profits in the quarter were down from the previous period due to adverse credit spreads on its own debt. Excluding these write downs the bank increased profits by around 25%. The stock moved down and closed just above the short term moving average, in the middle of a three month trading range.

HSBC Holdings, daily

McDonald's also moved lower today. The fast food bench mark reported April sales figures that were weaker than expected. The stock continued its three month down trend from the all time highs set at the end of last year. Same store sales were expected to be in the 5% range but came in at 3.3%. Strength in the US and Europe offset weakness in China and Asia. First quarter strength was based on strong comparable store sales. This new weakness in comp store sales gives traders cause to question McDonald's full year outlook. The decline in share prices has brought McDonald's dividend yeild up to 3%.

McDonald's, daily

Cognizant Technologies received a couple of surprise nods today following yesterday's disappointing earnings announcement. The company lowered its growth forecast due to a “slow start” to the year. Today, analysts at firm Robert W. Baird and Citigroup think the stock's revision is OK and the sell off yesterday was over blown. They are expecting earnings to rise in the coming quarters. The stock regained about a third of yesterday's loss.

Cognizant, daily

This week is hot for IPO's. Not only has Facebook begun it's final push toward public sale but there are ten IPO's scheduled for the week. Be on the look out for NSE, LLGX, WAGE, CCFI, RIBX, ADNC, WMC, EVAC, IRG and CUBI.

The Dow was down today for the fifth day in a row. This marks the second biggest 5 day decline this year. Many of the stocks rebounded in the afternoon and hovered around neutral near the close of the day. All 30 were down at some point in today's trading. The Dow is in a trading range now, between 12,700 and 13,300. Concerns for global slowdown are counterbalancing hopes of expansion. Momentum has turn bearish and could bring the index lower in the near term. Long term momentum has turned bearish as well but overall volume in the index is weak.

Dow, daily

Dow, weekly

The stocks in the S&P were able to cut their losses in afternoon trading but all S&P sectors were down for the day. The move was weak, just like the Dow, and short term momentum indicators are divergent. The S&P has support around 1350 that could keep the index around 1400 in the short term.

S&P 500, daily

The VIX made another move up to resistance at 20. The fear gauge was stopped at the line and is now being squeezed by the short term moving average and resistance.

CBOE Volatility Index, daily

The Nasdaq experienced the steepest decline today. The tech heavy index dropped down to support at 2900 before bouncing back in the afternoon trading to regain some of the days lost ground.

Nasdaq, daily

The markets seem to be pulling back in fear of more European fall out. Our own economic data is mixed and makes it easy to question the stability of the recovery. Traders are waiting for a clear sign of US and world economic direction. Economic data, earnings and growth outlooks will drive the markets into the near future.

Thomas Hughes


New Option Plays

Bullish Biotech

by James Brown

Click here to email James Brown

Editor's Note:

In addition to tonight's new candidate, consider these stocks as possible trading ideas and watch list candidates:

(bullish ideas) SLG, KSU, CERN, BRK.B

(bearish ideas) BAP, ESV, DB, PLCE, ARLP, BHI


NEW DIRECTIONAL CALL PLAYS

Amgen Inc. - AMGN - close: 70.70 change: +1.09

Stop Loss: 68.95
Target(s): 74.90
Current Option Gain/Loss: Unopened
Time Frame: 3 to 6 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
Biotech giant AMGN was showing relative strength today. The stock has been consolidating in a bull-flag pattern. Shares look ready to breakout from this consolidation soon. I am suggesting small bullish positions if AMGN can trade at $71.25. We'll use a stop at $68.95. Our target is $74.90. More aggressive traders could aim higher.

Trigger @ $71.25 (small positions)

- Suggested Positions -

buy the Jun $70 call (AMGN1216F70) current ask $1.88

Annotated Chart:

Entry on May xx at $ xx.xx
Earnings Date 07/26/12 (unconfirmed)
Average Daily Volume = 3.9 million
Listed on May 08, 2012



In Play Updates and Reviews

Targets Achieved

by James Brown

Click here to email James Brown

Editor's Note:

JOY, SI, and ULTA all hit our bearish exit targets. NTES was stopped out on the market weakness. I have removed MMM as a candidate.

Current Portfolio:


CALL Play Updates

Airgas Inc. - ARG - close: 91.92 change: +0.39

Stop Loss: 89.65
Target(s): 97.50
Current Option Gain/Loss: Unopened
Time Frame: 3 to 6 weeks
New Positions: Yes, see below

Comments:
05/08 update: The widespread market weakness pushed ARG down toward support near $90.00 and the stock bounced all the way back to close in positive territory. I don't see any changes from my prior comments. I am suggesting a trigger to buy calls at $92.50 with a stop loss at $89.65. Our multi-week target is $97.50. FYI: The Point & Figure chart for ARG is bullish with a $119 target.

NOTE: We want to keep our position size small. You could argue that ARG is forming a wedge pattern, which could be considered bearish.

Trigger @ 92.50 (small positions)

- Suggested Positions -

buy the May $92.50 call (ARG1219E92.5)

- or -

buy the Jun $95.00 call (ARG1216F95)

Entry on May xx at $ xx.xx
Earnings Date 05/03/12
Average Daily Volume = 476 thousand
Listed on May 05, 2012


United Natural Foods - UNFI - close: 50.17 change: -0.24

Stop Loss: 48.25
Target(s): 54.50
Current Option Gain/Loss: -15.7%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
05/08 update: UNFI is still holding up pretty well. Shares traded below their 10-dma this morning but recovered to close back above the $50.00 level. I am not suggesting new positions at this time thanks to the market's recent weakness.

FYI: The Point & Figure chart for UNFI is bullish with a long-term $82 target.

- Suggested Positions -

Long May $50 call (UNFI1219E50) Entry $0.95

Entry on May 03 at $49.90
Earnings Date 05/31/12 (unconfirmed)
Average Daily Volume = 250 thousand
Listed on May 02, 2012


PUT Play Updates

Baidu, Inc. - BIDU - close: 127.31 change: -0.66

Stop Loss: 133.05
Target(s): 115.00
Current Option Gain/Loss: May125P: +00.0% & Jun120P: + 6.7%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
05/08 update: Shares of BIDU opened at $127.01 and dipped to $123.60 before bouncing back sharply. The big bounce is a bit disappointing and should be bears on the defensive. If the market opens positive tomorrow we could see BIDU rebound toward the $130 area. I'd wait for a failed rally near $130 before considering new positions. FYI: The Point & Figure chart for BIDU is bearish with a $106 target.

- Suggested Positions -

Long May $125 put (BIDU1219Q125) Entry $2.10

- or -

Long Jun $120 put (BIDU1216R120) Entry $2.95

05/08/12 BIDU gapped open lower at $127.01

Entry on May 08 at $127.01
Earnings Date 07/25/12 (unconfirmed)
Average Daily Volume = 5.0 million
Listed on May 07, 2012


Rockwell Collins - COL - close: 53.53 change: +0.06

Stop Loss: 55.25
Target(s): 51.50
Current Option Gain/Loss: May $55p: +56.0% & Jun$55p: +32.4%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
05/08 update: COL is sinking but it's not moving very fast. Shares managed to close above support near the $53.00 area. Readers may want to go ahead and take profits now. I am expecting a little oversold bounce higher soon. I am not suggesting new positions at this time.

- Suggested Positions -

Long May $55 PUT (COL1219Q55) Entry $1.25

- or -

Long Jun $55 PUT (COL1216R55) Entry $1.85

05/05/12 new stop loss @ 55.25
05/03/12 triggered at $54.75

Entry on May 03 at $54.75
Earnings Date 07/19/12 (unconfirmed)
Average Daily Volume = 1.3 million
Listed on April 25, 2012


Fiserv, Inc. - FISV - close: 66.54 change: -0.52

Stop Loss: 70.05
Target(s): 63.50
Current Option Gain/Loss: May$70p: + 9.2% & Jun65P: + 5.5%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
05/08 update: FISV dipped under the $66 level intraday and closed with a -0.7% decline. More conservative traders might want to start lowering their stop loss. Our target is $63.50 although I am expecting the $65.00 level to offer some support so expect a bounce near $65.

- Suggested Positions -

Long May $70 put (FISV1219Q70) Entry $3.02

- or -

Long Jun $65 put (FISV1216R65) Entry $0.90

05/07/12 triggered on gap down at $67.26 (our trigger was 67.40)

Entry on May 07 at $67.26
Earnings Date 05/01/12
Average Daily Volume = 693 thousand
Listed on May 05, 2012


Helmerich & Payne Inc. - HP - close: 47.61 change: -0.02

Stop Loss: 50.55
Target(s): 45.25
Current Option Gain/Loss: May50p: +12.0% & Jun45p: +12.5%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
05/08 update: HP dipped to $45.73 intraday and then bounced back to almost breakeven on the session. I see this as a potential bullish reversal. Readers need to be careful here. There is a good chance that HP will see an oversold bounce back toward the $49-50 zone. I am not suggesting new positions at this time.

- Suggested Positions -

Long May $50 PUT (HP1219Q50) Entry $2.50

- or -

Long Jun $45 PUT (HP1216R45) Entry $1.20

05/08/12 warning! HP has produced a big intraday bounce. This might be a short-term bullish reversal.
05/05/12 new stop loss @ 50.55
05/04/12 HP gapped down at $48.57

Entry on May 04 at $48.57
Earnings Date 07/27/12 (unconfirmed)
Average Daily Volume = 1.5 million
Listed on May 03, 2012


Jos. A Bank Clothiers - JOSB - close: 46.76 change: -0.21

Stop Loss: 49.25
Target(s): 45.25
Current Option Gain/Loss: May50p: + 3.3% or May$45p: -46.1%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
05/08 update: JOSB slipped to a new relative low before bouncing back and hovering under the $47 level the rest of the session. Given the big bounce back in the market today I am not suggesting new positions at this time.

Earlier Comments:
We want to limit our position size because JOSB has an elevated amount of short interest. The most recent data listed short interest at 18.7% of the very small 27.5 million share float and this raises the risk for a short squeeze. Our short-term target is $45.25. More aggressive traders may want to aim for the $42-41 area instead.

(small positions)

Long May $50 PUT (JOSB1219Q50) Entry $3.00

- or -

Long May $45 PUT (JOSB1219Q45) Entry $0.65

05/05/12 new stop loss @ 49.25

Entry on April 23 at $47.50
Earnings Date 05/30/12 (unconfirmed)
Average Daily Volume = 596 thousand
Listed on April 21, 2012


CLOSED BULLISH PLAYS

3M Co. - MMM - close: 87.56 change: -0.45

Stop Loss: 88.45
Target(s): 94.50
Current Option Gain/Loss: Unopened
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
05/08 update: MMM has continued to sink. Shares did find support at their 100-dma but the stock has closed under support near $88.00 and its 50-dma. It is unlikely that MMM will hit our trigger to open positions at $90.25 any time soon. I am removing the stock from the newsletter.

Trigger @ 90.25

Our trade did not open.

05/08/12 removed MMM as a candidate.

chart:

Entry on April xx at $ xx.xx
Earnings Date 07/24/12 (unconfirmed)
Average Daily Volume = 2.0 million
Listed on April 26, 2012


NetEase, Inc. - NTES - close: 57.59 change: -2.49

Stop Loss: 58.95
Target(s): 64.75
Current Option Gain/Loss: May60c: -32.0% & May65c: -35.7%
Time Frame: exit prior to the May 16th earnings report
New Positions: see below

Comments:
05/08 update: We've been struck by Murphy's Law again. If something will go wrong it will. We've been waiting for days for NTES to rally off the $60.00 level. Shares finally hit our trigger to buy calls at $60.75 yesterday. Of course today the market collapses and NTES breaks support at the bottom of its bullish channel and hit our stop loss at $58.95 in the process.

(small positions) - Suggested Positions -

May $60 call (NTES1219E60) Entry $2.65 exit $1.80 (-32.0%)

- or -

May $65 call (NTES1219E65) Entry $0.70 exit $0.45 (-35.7%)

05/08/12 stopped out at $58.95
05/07/12 triggered @ 60.75
05/05/12 new stop loss at $58.90, if triggered. Trade still not open yet. Do not hold over the May 16th earnings report

chart:

Entry on May 07 at $60.75
Earnings Date 05/16/12 (confirmed)
Average Daily Volume = 588 thousand
Listed on April 28, 2012


CLOSED BEARISH PLAYS

Joy Global, Inc. - JOY - close: 66.17 change: +0.16

Stop Loss: 70.25
Target(s): 65.25
Current Option Gain/Loss: +134.0%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
05/08 update: Target achieved.

JOY gapped open lower at $65.32 and then spiked down to $63.15 before bouncing all the way back to close in positive territory. Our exit target was hit at $65.25.

If you're still bearish I want to warn you that today looks like a one-day bullish reversal pattern. I would expect JOY to bounce from here, at least short-term.

(small positions)- Suggested Positions -

May $70 PUT (JOY1219Q70) Entry $2.50 exit $5.85 (+134.0%)

05/08/12 target hit
05/05/12 new stop loss @ 70.25.
05/02/12 triggered at $69.75

chart:

Entry on May 02 at $69.75
Earnings Date 05/31/12 (unconfirmed)
Average Daily Volume = 2.4 million
Listed on April 25, 2012


Siemens AG - SI - close: 87.23 change: -0.75

Stop Loss: 91.55
Target(s): 86.00
Current Option Gain/Loss: +69.9%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
05/08 update: Target achieved.

The European markets continue to sink. SI spiked down to $85.97 intraday. Our exit target was $86.00.

(small positions) - Suggested Positions -

May $90 PUT (SI1219Q90) Entry $2.06 exit $3.50*(+69.9%)

*exit price is an estimate. option did not trade at time of our exit
05/08/12 target hit
05/04/12 SI gapped open lower at $89.63, under our entry trigger of $89.75.

chart:

Entry on May 04 at $89.63
Earnings Date 04/25/12
Average Daily Volume = 839 thousand
Listed on May 02, 2012


Ulta Salon - ULTA - close: 85.00 change: -1.06

Stop Loss: 92.15
Target(s): 82.50
Current Option Gain/Loss: +148.1%
Time Frame: up to May option expiration
New Positions: see below

Comments:
05/08 update: Target hit.

It was a volatile day for ULTA. Shares gapped open lower at $85.28 and then plunged to $78.87 intraday, before bouncing back to the $85 area. Our exit target was hit at $82.50. FYI: The option hit an intraday high of $6.60.

- Suggested Positions -

May $85 PUT (ULTA1219Q85) Entry $1.35 exit $3.35 (+148.1%)

05/08/12 target hit at $82.50
05/02/12 Readers may want to exit early right now. ULTA is not cooperating. I am adjusting our stop loss to $92.15.

chart:

Entry on May 01 at $87.95
Earnings Date 06/07/12 (unconfirmed)
Average Daily Volume = 651 thousand
Listed on April 30, 2012