Option Investor
Newsletter

Daily Newsletter, Thursday, 5/24/2012

Table of Contents

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

Market Wrap

Markets Struggle With Data

by Thomas Hughes

Click here to email Thomas Hughes
Stocks traded in a tight range today as economic data, news from abroad, earnings and the developing 2012 outlook competed for dominance. Signs the global economy is slowing more than expected are in contrast to signs of economic life here at home.



Without a doubt the economy is still sluggish and on shaky ground but it is still growing and there are reasons to think we could see further strengthening by the end of the year. The jobless rate is trending lower and newly released unemployment data supports the trend. Initial claims for unemployment in the week ending May 18, 2012 dropped from an upwardly revised 372,000 to 370,000. The data from last week was revised upward by 2000 points, canceling out this weeks drop. On a week to week basis initial reported claims remain flat. The four week moving average of initial claims fell by 5,500 to a six week low 370,000. The four week moving average is currently inline with the initial claims number and could lead the number lower. Analysts had been expecting initial claims to rise by 1,000 to 373,000.



Continuing claims for unemployment, those people filing for a second week of unemployment benefits, fell by 29,000 claims to 3.26 million. This furthers the declining trend in continuing claims we have seen since the beginning of the year.


The total number of Americans on unemployment benefits also fell. The number lags initial claims by two weeks and is unrevised. Total claims declined by 105,004 to a new 2012 low. It is clear that fewer and fewer Americans are without jobs, the question that remains is “how many have actually found work”. The ADP private sector employment figures and the April jobs number both come out next week and will help to answer that question.


In other economic news US durable goods orders inched up, led by increased demand in automobiles. Durable goods orders increased by 0.2%, surprising economists who had been expecting a -0.4% drop. The increase April orders follows a -3.7 decline in March orders. In total, orders for US durable goods increased by a total of $215.5 billion. Excluding transportation orders fell in April by 0.6%. The data underscores the strengthening US automotive sector which has been experiencing growth since last year.

General Motors and Ford Motor Company traded mixed on the news. Shares of GM fell moderately while shares of Ford managed to make a gain in today's rocky trading.

GM, daily

Ford, daily

Headlines from Europe and Asia suggest that the global economy is weakening more than expected. Germany, who is the pillar of the European Union, suffered a decline in business confidence in April coincident with a sharp drop in manufacturing. The Markitt Flash PMI shows that German manufacturing is shrinking at an accelerated pace. The March manufacturing PMI number was 46.2, April declined to 45.0. Any reading below 50 shows contraction in the sector. The services portion of the PMI was 52.2, showing a modest increase in that sector but the composite figure of 49.6 shows that the German business spending is in decline. New and export orders for German goods are also in decline, primarily on weak domestic and Asian demand.

The pundits continue to speculate on whether or not Greece will exit the Eurozone. The failure of EU leaders to agree on bailout measures is leading to a further decline in the total EU economy. Their failure to act decisively and with one voice is one of the reasons why the crisis is spreading. Greek banks are expected to be re-capitalized soon and that should alleviate some of the stress in the near term.

The European markets closed higher today, rebounding from the recent weakness. The FTSE closed higher by 1.59%, followed by the CAC 40 with a 1.16% gain and the Xetra DAX with a 0.48% increase.

The HSBC China Flash PMI also declined in another sign the country is slowing more than anticipated. The May reading came in at 48.7, down from 49.3 in April and the sharpest decline in Chinese business this year. Analysts are expecting the Chinese government to intervene with some form of stimulus soon in order to help soften the economic decline.

Asian shares ended the day mixed. The slowing Chinese economy and growing concerns over Greece and the EU weighed on stocks. The Nikkei gained a modest 0.08% while the Hand Seng and China indexes lost about a half percent each.

Gold and Oil were both up today. Gold climbed about 1% on today's news and weakness in the dollar. Silver and copper were both strong as well. Silver gained about 2% and copper about 1%. The CBOE gold index crossed above the short term moving average yesterday and held its ground today.

Gold Index, daily

Crude oil climbed over 1% today. Iraq's issues over nuclear weapons has renewed fears of oil supply disruptions in the region. Fears of global slowdown tempered the outlook for demand and helped to moderate today's spike in price. Oil is still trading at an eight month low but prices at the pump have yet to reflect the full decline.

Facebook is still making more headlines than anything else in the financial news. The problems with the NASDAQ's handling of the IPO as well as irregularities with the pricing of the IPO are coming under intense scrutiny. CNBC reported that the Nasdaq is making some effort to curb the fall-out from the so-called disaster. There is growing speculation that Facebook will switch listing to the NYSE but I don't know what that would do for them now that the stock is trading actively. Facebook was one of the most active stocks on the Nasdaq today and volatility seems to be calming in the stock. Share price is settling around $32 while Nasdaq executives and regulators work the issue out. Any new developments could send stock price either way.

Facebook, One week chart

Earnings season is mostly over but there are still a few big names reporting today. HJ Heinz Company reported lower quarterly earnings today. The company's profits were hurt by one time charges related to the productivity improvements enacted by Heinz. Discounting the charges, the food distributor's earnings in the period increased significantly and beat the consensus estimate. The company stated its outlook for the rest of the year in the release and shares took a dive in pre-market trading. The outlook for the following quarter fell short of expectations. Shares of the stock found support at $53 and managed to trade up from there on higher than average volume.

HJ Heinz Company

Hewlett Packard and CEO Meg Whitman were in the spotlight today after the company released its earnings. The company beat expectations for revenue and profit. Total profits in the quarter totaled $1.6 billion or $0.98 per share. The consensus estimate was $0.91 per share. The company also announced a major round of layoffs as part of a restructuring plan that is intended to position the company for growth in 2013. In an interview today Ms. Whitman said that Hewlett Packard was “concerned” about Europe and its affect on business in 2012. The stock jumped in early trading gapping open nicely this morning. However, the bears were out and the stock sold off during the day but managed to maintain a gain over yesterday's close.

Hewlett Packard, daily

Costco is another company that reported today. The discount retailer posted an increase in net sales and profits in the quarter. The company's net income climbed 19% in the quarter on lower asset costs and increased member revenue. The company earned $0.88 per share, up from last years $0.73. The stock jumped today but met resistance at the short term moving average.

Costco, daily

Flowers foods bloomed today to the delight of investors. The stock gained over 7% today, crossing over the short term moving average on more than double the average daily volume. The move was sparked by a surprise increase in the company's business, evidenced by the rise in quarterly revenue. The income was hurt though by the rising costs of ingredients and energy. Earnings were only down 2 cents from last year, a decline easily overcome by increasing business and lower fuel costs.

Flowers Foods, daily

Tiffany and Co made a new low today after its earnings statement hit the street. The luxury retailer reported that earnings in the quarter rose slightly over last year and that the outlook for 2012 was weakening due to rapid deceleration. Shares of the stock lost about 7% today on heavy volume.

Tiffany and Co, daily

Patriot Coal received some downgrades today as the result of a negative credit rating adjustment by Standard & Poors. The company's credit rating was reduced to CCC based on a negative outlook and a perceived ability to meet near term debt obligations. The stock has been in a downward trend and is trading near recent lows. Deutsch Bank downgraded the stock to hold from buy.

Patriot Coal, daily

Bank Of America remains one of the most active stocks on the market with around 200 million shares traded daily. The stock has been under heavy pressure the last two months but bearish momentum seems to be running out. The stock gapped open with the general market but sold off during the day.

Bank of America, daily

The large cap financial sector is in decline. The global economic outlook and exposure to the European banking system have put the big banks at risk. The financial sector Spider (XLF) is in a near term bear market. The stock has made a new lower low and is now forming a potential bear flag. Momentum is bearish and consistent with a further decline.

Financial Sector Spider, daily

NetApp's shares hit a new low today. The data-storage company expects quarterly earnings to be weak due to seasonal slowness and the global economy. The company's estimates fell short of the consensus and sent shares tumbling in after hours trading yesterday. Today, the stock opened about 13% lower than yesterday's close and traded on high volume. The company has over $10 per share of cash on hand and is a potential take over target.

NetApp, daily

The Dow hovered around neutral today, trading in a tight range around 12,500 and the 200 day moving average. The index traded in negative territory for much of the day but a late afternoon rally put the Dow up by 0.27%. Despite the small gain the index is in a near term down-trend and is possibly forming a bear flag. The long term momentum is bearish and gaining strength. In the near-term, bearish momentum is subsiding but the last two peaks are consistent with a continuation of the current downward trend. The markets are very sensitive to news and economic data and some highly anticipated information is due out soon. The next few days to a week will be very important for how the Dow trades over the summer and into the fall.

Dow, daily

Dow, weekly

The S&P 500 is in the same shape as the Dow. The index traded in a tight range today, eking out late afternoon gains but closing off of the day's high's. The broader index is trending down and forming a potential bear flag.

S&P 500, daily

The VIX is trending higher as global worries weigh on stocks. The volatility indexes short term moving average has moved over the $20 resistance level.

The VIX, daily

The Nasdaq has had a rough week during the Facebook fiasco. The tech heavy index has made a steeper decline than the other two major indexes but is trending basically in tandem with them. The Nasdaq was not able to rally into the close and lost a little on the day. The index is sitting just above the 200 day moving average with bearish technical indicators.

Nasdaq, daily

The market has been struggling with the dichotomy of a possibly strengthening domestic economy and a weakening global economy. Signs at home point to declining joblessness, which, added to lower energy costs, are expected help spur the economy. However, the business outlook for the second and third quarters of calendar 2012 stated by some of the larger corporations do not concur. Sales figures and estimates have been guided lower, today's cautions from Hewlett Packard are only the most recent.

The ADP figures on private sector payrolls is out next week, followed by the April jobs data. The ADP report is expected to increase to 165 thousand from last months 119 thousand and supports the trend in declining joblessness. First quarter GDP revisions are also due out next week. The expectations are for first quarter GDP to revise down to 1.9% from the earlier estimates just over 2%. The effects from the drop in unemployment and decline in oil prices will be seen in the second quarter GDP data.

Tomorrow look out for consumer sentiment and news from Europe and Asia.

Thomas Hughes


New Option Plays

Retail, Organic Foods, & Biotech

by James Brown

Click here to email James Brown


NEW DIRECTIONAL CALL PLAYS

Bed Bath & Beyond Inc. - BBBY - close: 72.47 change: +1.46

Stop Loss: 69.75
Target(s): 79.00
Current Option Gain/Loss: Unopened
Time Frame: 3 to 6 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
BBBY is a home furnishing retailer. The stock has been resilient during the market's sell-off in May. Traders bought the dip at its rising 50-dma. Now BBBY is poised to breakout from its trading range.

I am suggesting a trigger to buy calls at $72.75 with a stop loss at $69.75. Our multi-week target is $79.00. FYI: The Point & Figure chart for BBBY is bullish with an $83 target.

Trigger @ 72.75

- Suggested Positions -

buy the JUN $75 call (BBBY1216F75) current ask $0.97

- or -

buy the JUL $75 call (BBBY1221G75) current ask $2.60

Annotated Chart:

Entry on May xx at $ xx.xx
Earnings Date 06/20/12 (unconfirmed)
Average Daily Volume = 2.6 million
Listed on May 24, 2012


The Hain Celestial Group - HAIN - close: 55.04 change: +0.70

Stop Loss: 52.90
Target(s): 59.00
Current Option Gain/Loss: Unopened
Time Frame: 3 to 6 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
HAIN manufactures and sells a variety of organic products. The stock has been showing relative strength for months. Shares held up very well during the market's decline in May. Now the stock is on the verge of hitting new highs.

I am suggesting a trigger to buy calls at $55.25 with a stop loss at $52.90. Our target is $59.00. FYI: The Point & Figure chart for HAIN is bullish with a $59 target.

Trigger @ 55.25

- Suggested Positions -

buy the JUN $55 call (HAIN1216F55) current ask $1.80

- or -

buy the JUL $60 call (HAIN1221G60) current ask $1.10

Annotated Chart:

Entry on May xx at $ xx.xx
Earnings Date 08/23/12 (unconfirmed)
Average Daily Volume = 742 thousand
Listed on May 24, 2012


Medivation, Inc. - MDVN - close: 88.92 change: +0.58

Stop Loss: 84.90
Target(s): 99.00
Current Option Gain/Loss: Unopened
Time Frame: 3 to 6 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
MDVN is a biotech firm. Shares have managed to rise toward new record highs in spite of the market's bearish performance in the month of May. Shares are poised to breakout past resistance at the $90.00 level, which should signal a run toward $100.

The option spreads are a little wide in MDVN so I am suggesting smaller positions to limit our risk. We will use a trigger at $90.25 to open positions with a stop loss at $84.90 to start. Our target is $99.00. FYI: The Point & Figure chart for MDVN is bullish with a $101 target.

Trigger @ 90.25 (small positions)

- Suggested Positions -

buy the JUN $95 call (MDVN1216F95) current ask $3.30

- or -

buy the JUL $100 call (MDVN1221G100) current ask $4.10

Annotated Chart:

Entry on May xx at $ xx.xx
Earnings Date 08/09/12 (unconfirmed)
Average Daily Volume = 755 thousand
Listed on May 24, 2012



In Play Updates and Reviews

No Real Follow Through

by James Brown

Click here to email James Brown

Editor's Note:

Many of our bearish trades did not see any follow through on yesterday's big bounce.

Current Portfolio:


CALL Play Updates

Cymer Inc. - CYMI - close: 53.38 change: -0.05

Stop Loss: 49.95
Target(s): 57.00
Current Option Gain/Loss: Jun55c: + 0.0% & Aug55c: + 1.6%
Time Frame: 4 to 8 weeks
New Positions: Yes, see below

Comments:
05/24 update: CYMI bounced off its afternoon lows and pared its losses to just 5 cents on the session. The overall trend remains bullish. I would still consider new positions here.

Our multi-week target is $57.00. FYI: The Point & Figure chart for CYMI is bullish with a long-term $80 target.

- Suggested Positions -

Long Jun $55 call (CYMI1216F55) Entry $0.90

- or -

Long Aug $55 call (CYMI1218H55) Entry $2.95

05/22/12 triggered at $52.60

Entry on May 22 at $52.60
Earnings Date 07/19/12 (unconfirmed)
Average Daily Volume = 476 thousand
Listed on May 21, 2012


Edwards Lifesciences - EW - close: 87.33 change: +2.28

Stop Loss: 82.45
Target(s): 89.50
Current Option Gain/Loss: Jun85c: +18.7% & Jun$90c: +34.7%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
05/24 update: Our new trade on EW is off to a strong start with shares up +2.6% today. This is a new ten-month closing high. Readers might want to already start adjusting their stop loss higher.

FYI: The Point & Figure chart for EW is bullish with a $126 target.

- Suggested Positions -

Long Jun $85 call (EW1216F85) Entry $3.20

- or -

Long Jun $90 call (EW1216F90) Entry $1.15

Entry on May 24 at $85.21
Earnings Date 07/19/12 (unconfirmed)
Average Daily Volume = 1.1 million
Listed on May 23, 2012


Sourcefire, Inc. - FIRE - close: 54.94 change: -0.62

Stop Loss: 52.75
Target(s): 59.35
Current Option Gain/Loss: Jun55c: + 3.4% Jun60c: -16.6%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
05/24 update: It was a bit of a volatile session for FIRE. The mid morning high reversed but traders bought the dip this afternoon. The overall trend is unchanged. I would still consider new positions here although readers may want to wait for a new rise past $55.25 before initiating positions.

Earlier Comments:
FIRE could see some short covering. The most recent data listed short interest at 14% of the very small 28 million share float.

- Suggested Positions -

Long Jun $55 call (FIRE1216F55) Entry $2.90

- or -

Long Jun $60 call (FIRE1216F60) Entry $1.50

Entry on May 24 at $55.50
Earnings Date 08/01/12 (unconfirmed)
Average Daily Volume = 857 thousand
Listed on May 23, 2012


Verizon Communication - VZ - close: 41.39 change: +0.11

Stop Loss: 39.95
Target(s): 45.75
Current Option Gain/Loss: Jun$42c: -43.3% & Jul$43c: -53.0%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
05/24 update: Thursday was another quiet session for VZ with traders buying the midday dip. Readers may want to wait for a rally past $41.65 before initiating new positions.

More conservative traders may want to use a stop closer to $40.50 instead. Keep in mind that VZ does not move super fast so we'll need to show some patience.

- Suggested Positions -

Long Jun $42 call (VZ1216F42) Entry $0.60

- or -

Long Jul $43 call (VZ1221G43) Entry $0.66

05/18/12 triggered on gap higher at $41.61 (trigger was 41.55)

Entry on May 18 at $41.61
Earnings Date 07/19/12 (unconfirmed)
Average Daily Volume = 13.8 million
Listed on May 17, 2012


PUT Play Updates

ITT Educational Services - ESI - close: 56.38 change: -1.73

Stop Loss: 60.55
Target(s): 51.50
Current Option Gain/Loss: + 5.0%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
05/24 update: The initial spike higher this morning quickly failed and ESI fell to new relative lows with a -2.9% decline on the day. We are adjusting our stop loss lower to $60.55.

- Suggested Positions -

Long Jun $55 PUT (ESI1216R55) Entry $2.55

05/24/12 new stop loss @ 60.55

Entry on May 23 at $57.71
Earnings Date 07/19/12 (unconfirmed)
Average Daily Volume = 410 thousand
Listed on May 22, 2012


Fiserv, Inc. - FISV - close: 66.96 change: +0.26

Stop Loss: 68.55
Target(s): 63.50
Current Option Gain/Loss:(May$70p: +12.5%) & Jun65P: - 38.8%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
05/24 update: FISV is still trying to bounce past short-term resistance near $67.00. If it does I am expecting a quick surge toward the next level of resistance near $68.00 and its 50-dma. I would wait for a failed rally near $68.00 before considering new positions.

- Suggested Positions -

- previously closed position -
May $70 put (FISV1219Q70) Entry $3.02 exit $3.40 (+12.5%)

- or -

Long Jun $65 put (FISV1216R65) Entry $0.90

05/23/12 Raising our RISK - new stop loss @ 68.55, above the 50-dma
More conservative traders will want to exit now instead.
05/19/12 new stop loss @ 67.25
05/17/12 new stop loss @ 68.25
05/15/12 closed May $70 puts at the open: bid @ 3.40 (+12.5%)
05/14/12 prepare to exit the May $70 puts at the open tomorrow
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


General Dynamic - GD - close: 63.34 change: -1.27

Stop Loss: 66.25
Target(s): 61.50
Current Option Gain/Loss: +50.0%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
05/24 update: There was no follow through on yesterday's bounce. GD actually fell to new relative lows this afternoon. Readers might want to inch down their stop loss. I am not suggesting new positions.

- Suggested Positions -

Long Jun $65 PUT (GD1216R65) Entry $1.50

05/23/12 tweaking our stop to $66.25
05/19/12 new stop loss @ 66.05
05/17/12 new stop loss @ 66.55
05/15/12 triggered @ 65.75

Entry on May 15 at $65.75
Earnings Date 07/25/12 (unconfirmed)
Average Daily Volume = 1.9 million
Listed on May 09, 2012


Informatica - INFA - close: 42.67 change: -1.05

Stop Loss: 45.25
Target(s): 40.25
Current Option Gain/Loss: +33.3%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
05/24 update: The bounce in INFA failed near $44.00 and shares created a bearish engulfing (reversal) pattern today. This is good news if you're bearish. More conservative traders may want to lower their stop closer to the $44 level.

- Suggested Positions -

Long Jun $45 PUT (INFA1216R45) Entry $2.40

05/19/12 readers may want to take profits now
05/16/12 new stop loss @ 45.25
05/14/12 triggered at $44.50

Entry on May 14 at $44.50
Earnings Date 07/26/12 (unconfirmed)
Average Daily Volume = 1.3 million
Listed on May 10, 2012


iShares Russell 2000 ETF - IWM - close: 76.64 change: +0.16

Stop Loss: 78.75
Target(s): 72.00-70.00 zone
Current Option Gain/Loss: -15.3%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
05/24 update: The IWM bounced between its 200-dma below and its 10-dma above. You could argue shares are building a neutral pennant formation of lower highs and higher lows. If shares breakout past its 10-dma I am expecting a rise toward $78.00, which should be the next resistance level.

- Suggested Positions -

Long Jul $75 PUT (IWM1221S75) Entry $3.20
05/22/12 triggered at $76.75
05/19/12 adjusted strategy: buy puts on a bounce at $76.75, stop 78.75
05/17/12 temporarily wait on buying puts. We will re-evaluate tomorrow.

Entry on May 22 at $76.75
Earnings Date --/--/--
Average Daily Volume = 53 million
Listed on May 12, 2012


L-3 Communications - LLL - close: 67.68 change: -0.30

Stop Loss: 68.75
Target(s): 62.75
Current Option Gain/Loss: -21.6%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
05/24 update: There was no follow through on yesterday afternoon's big bounce, which is good news if you're holding puts. Yet LLL has yet to really breakdown past support in the $67 area. Yesterday's low was $66.46. I'd wait for a new drop under $66.40 before initiating new positions.

- Suggested Positions -

Long Jul $65 PUT (LLL1221S65) Entry $1.85

05/23/12 triggered at $66.75

Entry on May 23 at $66.75
Earnings Date 07/26/12 (unconfirmed)
Average Daily Volume = 856 thousand
Listed on May 19, 2012


Reliance Steel - RS - close: 48.06 change: -1.19

Stop Loss: 50.55
Target(s): 42.50
Current Option Gain/Loss: -20.4%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
05/24 update: RS has a similar story with no follow through on yesterday's bounce. The stock is churning between $47 and $50. Readers can use a drop under $47.00 as a new bearish entry point.

FYI: The Point & Figure chart for RS is bearish with a $38 target.

- Suggested Positions -

Long JUN $48 PUT (RS1216R48) Entry $2.45

Entry on May 23 at $47.79
Earnings Date 07/26/12 (unconfirmed)
Average Daily Volume = 534 thousand
Listed on May 22, 2012


Siemens AG - SI - close: 84.34 change: -0.37

Stop Loss: 87.75
Target(s): 80.25
Current Option Gain/Loss: -33.3%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
05/24 update: SI delivered a quiet session on Thursday. More conservative traders may want to tighten their stop loss. I am not suggesting new positions at this time. FYI: The Point & Figure chart for SI is bearish with a $74 target.

- Suggested (SMALL) Positions -

Long Jun $80 PUT (SI1216R80) Entry $1.35

05/16/12 SI gapped open higher at $84.94

Entry on May 16 at $84.94
Earnings Date --/--/--
Average Daily Volume = 832 thousand
Listed on May 15, 2012