Option Investor
Newsletter

Daily Newsletter, Thursday, 9/6/2012

Table of Contents

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

Market Wrap

ECB Moves Markets

by Thomas Hughes

Click here to email Thomas Hughes
Economic data and Mario Draghi's statements moved the markets today. Economic data at home remained tepid, neither pointing one way or the other. ECB president Mario Draghi announced a new round of bond purchasing to help support lower interest rates in Spain and Italy. Some market participants took it as a good sign for stocks and rallied throughout the morning. By days end the broad US markets were taken to new multi-year highs.

Economic Calendar

Futures were up this morning ahead of the ECB presidents remarks and interest rate decision. During the speech US unemployment data was released, providing more evidence of a tepid economy, and had no effect on futures prices. Trading opened with the S&P's largest move in over a month; the index quickly gained more than 15 points following this mornings opening bell and quickly moved to new intra-day highs. The jump broke the upper end of the resistance range (1480-1420) that I have been following for the second time since entering the range early last month and closed above it for the first time in nearly five years. The market moved broadly higher with today's rally, all nine of the Spyder sectors were in the green, led by materials and financials.



Backing up for a minute, the trading day started off in Asia where markets finished in the green ahead of the ECB statements and bond buying announcement. This comes in the face of other news that highlights the weakness of the Asian economy. Investment banking giant Nomura announced that it would be making cuts to its brokerage and investment banking business, especially in Europe. The bank is expecting to make over $1 billion in cuts to lower its costs. At the same time South Korea has downgraded its third quarter estimates for GDP to 0.3%, reflecting a slowdown in world demand. Australia, an important part of the Asian and global economy, announced a drop in employment and a sluggish jobs market.

Next we move on to Europe and Mario Draghi, keeping in mind that China and the Eurozone are major trade partners and can affect each others economies on the macro-level. Mario Draghi and the ECB decided to keep its benchmark interest rate unchanged and start a new round of bond buying. The new purchases are going to be in 1-3 year notes with no limits set. This marks an end to the previous round of bond buying the ECB undertook, this new round has been dubbed “Monetary Outright Policy” or MOT. The bond purchases are meant to support the Euro but won't begin until the ECB makes a “full assessment” of the situation. During the remarks Mr. Draghi lowered expectations for 2012 Eurozone GDP growth to -0.6%-0.3% from an earlier -0.2%-+0.5% range. This new estimate puts the Eurozone fully in recessionary territory.

If the ECB still needs to make a full assessment of the situation what have they been doing all this time and how did they come up with the new GDP estimate? I thought we were waiting for them to make an assessment/decision but once again they have put it off while seemingly to have accomplished something. The ECB has also seemingly washed their hands of the Spanish debt issue saying that help is available but that Spain must first ask for help. The broad European markets were bullish ahead of Mr. Draghi's statements and continued to rally following them. The bullish activity here at home helped to further inflate the European markets. The FTSE 100 finished the day up by 1.94%, led by the German DAX 2.81% gain and the Spanish IBEX 4.96% increase.

Important jobs and jobless data was released today. Initial claims for unemployment fell from an upwardly revised 377,000 to a seasonally adjusted 365,000 claims. This was well below forecast and a new 6 week low following the summer volatility we saw in July. The four week average crept up a little but is poised to move down sharply should this weeks lower number hold steady into next week. Regardless of the drop the data is still way above the levels we need to see.


Continuing claims remained steady around 3.3 million. The continuing claims number has been fairly steady for about 14 weeks, ever since hitting this years low number early in the summer. This suggest that people are having trouble finding new work right away but the total claims number, which is still in decline, suggests they are finding work eventually. Continuing claims made another new low of 5.467 million claims, down more than 23% from last year at this time. US GDP hit a low in that quarter as well. The question at hand is whether the economy is at a bottom or still slowing down. Economists have been estimating a slight pick up for the third and fourth quarter but have lower expectations moving into next year.



Other jobs data is pointing to a possible upturn in the labor markets. Challenger reported the third straight month of declines in planned lay-offs. They reported an estimated 32,000 planned labor cuts for the month of September, down 12.5% from last month. ADP also announced is estimations for non-farm payroll expansion. Analysts had been expecting a decline but were surprised by a substantial gain in employment. The August ADP figures show that the US economy added 201,000 jobs. Within the data the services sector led with a gain of 185,000 jobs. Manufacturing and construction also added jobs in the month, led by small businesses. The ADP and Challenger data has lead to some speculation that the unemployment rate, announced tomorrow, may have come down or at least held steady.


The ISM gauge of non-manufacturing purchasing climbed to 53.7, above estimates and bullish for the economy. This data, plus stable unemployment and a possibly improving jobs market is a good sign for the US economy but does not support further Fed action. Last week I mentioned a possible “self fulfilling prophecy” scenario in which short term data prevent Fed action which leads to 2013 recession. This is still a long shot but also still a viable possibility. The rest of the world is looking at the FOMC and the FOMC is watching US data. We're OK right now but if the rest of the world can't get is act together US growth and corporate profits will remain weak.

The price of oil gained over 1.5% on increased expectations fueled by ECB bond buying pledges. The move took oil to near a five month high before the bears stepped in and drove prices lower for the day. The Oil Index made an similar move upward, stopping just short of long term resistance, and stayed there. I'm watching for a break above or failure to break above the 1250 level in this index.

The Oil Index, daily

Gold also moved up today after the ECB statements. QE of any kind is good for gold as well as other metals which are needed for industrial production. The gold index responded by moving up from the short term moving average and crossing above the down trend line and upper boundary of the potential bear triangle I have been following. Momentum is weak and fairly neutral right now, the gold market, like most of the other markets, is not quite sure which way it is heading.

The Gold Index, daily

Interest rates on long term US debt rose today in step with the global markets. The flight to safety may have reversed, a look at the daily charts shows a bottom has formed around the 2.5% level. Lows in June and August are supported by a divergence in momentum. This is followed by a rally and an possible extreme peak in bullish momentum that carried through the firs half of August. The subsequent fall from resistance near the 3% level found support near the short term moving average and has now bounced back up. The current short term trend in the bond rate is to the upside and could retest the 3.0% level again. Of course, this will be heavily influenced by economic data and everything the Fed or Ben Bernanke says. These rates may prove to be volatile in the coming weeks.

Thirty Year Bond Rates, daily

Amazon made the news today, unveiling two new devices. They did not release a telephone which was a widespread rumor. They did release a larger version of the Fire and a new mobile device which is thinner and lighter than the touch and has a battery life of up to 8 weeks. The stock responded favorably to the news and continued its rally. The stock hit a new high today but the rally's strength is suspect due to low volume and weak momentum.

Amazon, daily

Abbott Laboratories is making a breakout today. The stock has been heavily favored over the past year due to the companies good performance and the large number of new drugs in late stage trials. Several options reporting sites noted increased activity in the stock yesterday and today. Abbot has been consolidating above $65 for a few weeks and made a nice move up from the short term moving average today. Momentum is convergent with new highs in the stock and shows a healthy market with some room to move up. Abbott is expected to report earnings early next month.

Abbot Labs, daily

Verifone, leader in the international payments industry, reported earnings and profits below expectations today. Despite the record revenue, profits and margins the numbers just were not enough to please analysts and investors. The CEO says the company is doing “fantastic” and that he has “nothing to apologize for”. Regardless, the stock has been trending down for months and today gapped down to near the year lowest levels.

Verifone, daily

Men's Warehouse posted earnings that beat the streets view. The company reported strong sales and tuxedo rentals. This quarters performance led the companies executives to guide full year eps higher. The new guidance is only an improvement of a few cents and overlaps the previous range of $2.74-$2.78 per share. The stock made an impressive move today, gapping up and finishing near the days high of $38.50.

Men's Warehouse, daily

Today's rally was broad, all 30 Dow stocks and all ten S&P Spyder sectors were in the green. The leading sectors were materials and financials. The Materials Spyder (XLB) has been trending sideways for the last twelve months and is near the upper end of the range. The XLB is making a move up from support and the short term moving average with weak indicators. Global conditions could be a big drag on this sector going forward. With things as-is, growth is weak and slowing. With stimulus and QE growth is still weak but there is more money and credit in the system.

Materials Spyder, daily

The chart of the Financial Sector Spyder looks a little better than the materials. It is still range bound but at least has a more positive bias. The XLF looks like it is making a run for its long term resistance level of $16. The banking sector has made vast improvements and is ready for growth but with the economy still in question even the regional banks will have a hard time making significant gains. The long term charts show declining volume and declining indicators as the XLF approaches resistance.

Financial Spyder, daily

Financial Spyder, weekly

The Volatility Index fell today as the US market climbed. The VIX fell below the short term moving average and back down toward the low end of the “calm” range between 15 and 20. Fear has left the market so to speak but I think a look at the long term volume of the markets that maybe fear is actually in the market and it is the investors who have left. Weekly volume on the SPY is near one year lows and we saw the same thing earlier in the XLF. When I scroll through the list of other major indexes and their ETF's the same thing is apparent; volume is declining, market participation is low.

Volatility Index (VIX), daily

SPY S&P 500 ETF, daily

The S&P 500 moved upward throughout the day and made a new nearly five year closing high. Even so, advancing stocks only outnumbered decliners by about 4 : 1. The index is moving toward the all time highs set pre-financial crisis and a 100% retracement of the 2008 bear market. There is still significant resistance for the index between 1430 and the all-time highs near 1570.

S&P 500, daily

I think traders and investors are on the sidelines with all eyes are on the Fed and the election. Tonight the DNC will capture the attention of the nation and perhaps the world. Obama's speech could foreshadow tomorrows economic data releases and shed some light on the state of the economy. He could electrify the nation again and possibly spark a new rally.

Tomorrow we get new jobs and unemployment rate data, information that will sway the chances of QE one way or the other. I'm not expecting too much out of the non-farm payrolls number, it is rarely in-line with ADP and could easily surprise us all with a sharp decline.

Stay vigilant and keep trading!

Thomas Hughes


New Option Plays

Healthcare Services

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. Many of these need to see a break past key support or resistance:

(bullish ideas) WLK, TMK, CB, DIN, QCOM, CP, MON, GTLS, SINA, SIVB, FISV, TGT,

(bearish ideas) ORLY, BPL, CRR,


NEW DIRECTIONAL CALL PLAYS

AthenaHealth, Inc. - ATHN - close: 92.98 chagne: +2.45

Stop Loss: 89.45
Target(s): 97.00
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
ATHN is a services company in the healthcare industry. The stock has a long-term bullish trend of higher lows and higher highs. Shares have just spent the last couple of weeks consolidating between technical support at the 50-dma and resistance at $90.00. ATHN was in the process of breaking out past the $90 level prior to today. The stock shot higher on the market's widespread gains.

Aggressive traders might want to consider chasing it here because ATHN could see more short covering. The most recent data listed short interest at 32% of the relatively small 35 million share float. However, we do not want to chase it. We do not how the market is going to react to the jobs report due out tomorrow morning.

I am suggesting we wait and buy calls on a dip at $91.50. We'll use a stop loss at $89.45. Our target is $97.00. The option spreads are a little bit wider than I'd like so let's keep our position size small to limit our risk.

Buy-the-Dip Trigger @ $91.50 (stop 89.45)

- Suggested Positions -

buy the Oct $95 call (ATHN1220j95) current bid/ask $3.50/4.10

Annotated Chart:

Entry on September xx at $ xx.xx
Average Daily Volume = 345 thousand
Listed on September 06, 2012



In Play Updates and Reviews

Shorts Panic on ECB Bond-Buying Plans

by James Brown

Click here to email James Brown

Editor's Note:

The U.S. market saw plenty of short covering today, which powered a move to new relative highs for the major indices.

CNQR hit our target for the September calls.
BRCM was closed at the open.
VRTX was triggered.
FB was stopped out.

Current Portfolio:


CALL Play Updates

Amgen Inc. - AMGN - close: 84.81 change: +0.73

Stop Loss: 82.40
Target(s): 88.50
Current Option Gain/Loss: Sep85c: -19.2% & Oct85c: - 2.7%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
09/06/12: Considering the size of the rally in the major indices and the biotech index I am disappointed with AMGN's rally today. Shares only gained +0.8% an remain under resistance near $85.00. I am not suggesting new positions at this time.

- Suggested Positions -

Long Sep $85 call (AMGN1222i85) Entry $1.35

- or -

Long Oct $85 call (AMGN1220j85) Entry $2.15

09/01/12 new stop loss @ 82.40
08/27/12 new stop loss @ 81.95
08/15/12 triggered at $83.75

Entry on August 15 at $83.75
Average Daily Volume = 4.8 million
Listed on August 14, 2012


Concur Technologies - CNQR - close: 74.62 change: +0.44

Stop Loss: 71.70
Target(s): 74.75 (Sept calls), $77.50 (Nov calls)
Current Option Gain/Loss:(Sep75c: +40.0%) & Nov75c: +30.5%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
09/06/12: Our target for the September calls has been hit.

CNQR's performance today was also underwhelming. That may have been due to an analyst downgrade before the opening bell. Shares did spike toward $76.00 intraday.

Today's low was $71.80. I am raising our stop loss to $71.70.

Our plan was to exit the September $75 calls when CNQR hits $74.75. Our target to exit the November calls is at $77.50.

- Suggested Positions -

(target hit for Sept calls @ 74.75 on CNQR)
Sep $75 call (CNQR1222i75) Entry $1.25 exit $1.75 (+40.0%)

- or -

Long Nov $75 call (CNQR1217j75) Entry $3.60

09/06/12 target hit for the Sept. calls @ 74.75
09/06/12 new stop loss @ 71.70
09/04/12 adjust exit target for Sept. calls to $74.75
adjust exit target for Nov. calls to $77.50
+ new stop loss @ 71.25
08/21/12 new stop loss @ 69.75
08/16/12 new stop loss @ 68.75
08/15/12 triggered at $70.25

Entry on August 15 at $70.25
Average Daily Volume = 577 thousand
Listed on August 13, 2012


Carter's Inc. - CRI - close: 57.44 change: +0.87

Stop Loss: 54.65
Target(s): 59.85
Current Option Gain/Loss: +17.3%
Time Frame: 3 weeks
New Positions: see below

Comments:
09/06/12: CRI hit a new all-time high on an intraday basis today. Shares closed up +1.5% on the session. Readers can look for a new dip near $56.00 as another entry point to buy calls.

It looks like the spreads on the October calls has improved so I would consider buying the Octobers instead of Septembers.

- Suggested Positions -

Long Sep $55 call (CRI1222i55) Entry $2.30

09/04/12 triggered @ 56.25

Entry on September 04 at $56.25
Average Daily Volume = 441 thousand
Listed on September 01, 2012


Express Scripts - ESRX - close: 63.75 change: +0.90

Stop Loss: 61.00
Target(s): 67.50
Current Option Gain/Loss: Sep62.5c: +87.3% & Oct$62.5c: +54.4%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
09/06/12: The market's strength helped lift ESRX To a new record high. I am raising our stop loss to $61.00. Readers may want to start thinking about taking profits early on our September calls.

FYI: The Point & Figure chart for ESRX is bullish with a $76 target.

- Suggested Positions -

Long Sep $62.50 call (ESRX1222i62.5) Entry $0.95

- or -

Long Oct $62.50 call (ESRX1220j62.5) Entry $1.67

09/06/12 new stop loss @ 61.00

Entry on August 24 at $61.31
Average Daily Volume = 5.1 million
Listed on August 23, 2012


Vertex Pharma. - VRTX - close: 57.44 change: +2.45

Stop Loss: 54.25
Target(s): 59.75
Current Option Gain/Loss: + 2.6%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
09/06/12: Our new play on VRTX has been triggered. The plan was to buy calls when VRTX hit $55.75. Shares soared to a +4.4% gain today. I am raising our stop loss to $54.25.

Earlier Comments:
I am suggesting small bullish positions if VRTX can trade at $55.75. This is a higher-risk trade. You can see from the chart that VRTX has been very volatile over the last few months. We want to limit our position size to reduce our risk. We will aim for $59.75. More aggressive traders could aim higher.

- Suggested Positions -

Long Oct $57.50 call (VRTX1220j57.5) Entry $3.80

09/06/12 new stop loss @ 54.25
09/06/12 triggered @ 55.75

Entry on September 06 at $55.75
Average Daily Volume = 1.4 million
Listed on September 05, 2012


PUT Play Updates

CH Robinson Worldwide - CHRW - close: 57.06 change: +0.69

Stop Loss: 58.05
Target(s): 51.25
Current Option Gain/Loss: -42.0%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
09/06/12: The transportation index produced a pretty strong bounce today (+1.8%) but it looks like it was all short covering. CHRW spiked higher at the open but spent the rest of the day fading lower. Technically the close over $57.00 is a short-term bullish breakout and more conservative traders may want to exit early right now to limit any losses. Bigger picture CHRW still remains under a longer-term down trend so we're going to wait and see if there is any follow through tomorrow. Our stop is unchanged at $58.05.

- Suggested *Small* Positions -

Long Oct $55 PUT (CHRW1220v55) entry $1.38

09/06/12 after the market's surged to new highs, readers may want to consider an early exit here.

Entry on August 29 at $56.29
Average Daily Volume = 1.1 million
Listed on August 28, 2012


Clean Harbors - CLH - close: 53.34 change: +0.16

Stop Loss: 55.05
Target(s): 50.10
Current Option Gain/Loss: -14.7%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
09/06/12: CLH is our new play from last night. The stock did not truly participate in the market's widespread rally today. That's a good sign for the bears. Our trade opened this morning when CLH opened at $53.55. Readers may want to hesitate on launching new positions and wait to see if the major indices see any follow through higher tomorrow. We can look for CLH to find short-term resistance at its 10-dma near $54.50.

Our target is $50.10 but more aggressive traders may want to seriously consider aiming for the $48.00 area instead. FYI: The Point & Figure chart for CLH is bearish with a $46 target.

- Suggested Positions -

Long Oct $55 PUT (CLH1220v55) entry $3.40

Entry on September 06 at $53.55
Average Daily Volume = 620 thousand
Listed on September 05, 2012


Cummins Inc. - CMI - close: 98.43 change: +3.10

Stop Loss: 100.55
Target(s): 92.50
Current Option Gain/Loss: -38.2%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
09/06/12: It looks like our CMI trade is in trouble. The stock market's surge higher today fueled some short covering in CMI. The stock rallied toward round-number resistance at $100 before paring its gains. Cautious traders will want to seriously consider an early exit right now. The fact that shares did not tag resistance at $100 is somewhat encouraging for the bears and we're going to give CMI another day to see if there is any follow through tomorrow. I would not open new positions at this time.

Earlier Comments:
There is potential support at $95.00 and the 50-dma but we are aiming for $92.50.

- Suggested Positions -

Long Sep $95 PUT (CMI1222u95) Entry $1.70

08/28/12 new stop loss @ 100.55
08/28/12 trade opens with CMI gapping down at $98.28

Entry on August 28 at $98.28
Average Daily Volume = 2.3 million
Listed on August 27, 2012


PetroChina Co. Ltd. - PTR - close: 119.02 change: +1.91

Stop Loss: 121.25
Target(s): 111.00
Current Option Gain/Loss: Sep120p: -21.9% & Oct115p: -20.8%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
09/06/12: PTR reacted to the market's move with a sharp spike higher at the open but shares ran into new resistance near $119.25 and stayed near this level the rest of the session. Now the question is will shares of PTR move tomorrow on the price of oil or on the move in the Chinese markets?

Currently the price of crude oil is starting to see a significant pullback from its highs today and that should put pressure on the oil stocks tomorrow. Yet tonight(tomorrow) the Chinese markets will probably rally as Chinese investors react to the big move here in the U.S. If the Chinese market sees a widespread rally we could see PTR gap open higher in reaction tomorrow even though the U.S. shares have already moved.

I am not suggesting new positions at this time.

Earlier Comments:
I do consider this somewhat of an aggressive trade since PTR gaps open (up and down) quite often as its price adjusts to trading back home overnight in China.

- Suggested Positions -

Long Sep $120 PUT (PTR1222u120) Entry $3.65*

- or -

Long Oct $115 PUT (PTR1220v115) Entry $3.16

09/04/12 triggered @ 118.75
*entry price on the Sept. $120 put is an estimate as the option did not trade when our play was triggered.

Entry on September 04 at $118.75
Average Daily Volume = 125 thousand
Listed on September 01, 2012


Weight Watchers Intl. - WTW - close: 48.62 change: +1.61

Stop Loss: 50.10
Target(s): 42.50
Current Option Gain/Loss: Sep47.5p: -54.0% & Oct45p: -43.2%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
09/06/12: The ECB news today sent shorts running for cover. WTW definitely saw some short covering this morning. Yet if you look at the intraday chart WTW ran into resistance near $48.50 midday. Plus there remains potential resistance at the 50-dma. We are not giving up yet but I am not suggesting new positions.

- Suggested Positions -

Long Sep $47.50 PUT (WTW1222u47.5) Entry $1.85

- or -

Long Oct $45.00 PUT (WTW1220V45) Entry $1.85

08/28/12 new stop loss @ 50.10

Entry on August 24 at $48.21
Average Daily Volume = 929 thousand
Listed on August 23, 2012


CLOSED BULLISH PLAYS

BRCM - Broadcom - close: 36.12 change: +1.19

Stop Loss: 34.40
Target(s): 38.50
Current Option Gain/Loss: +17.7%
Time Frame: 4-6 weeks
New Positions: see below

Comments:
09/06/12: After days of going nowhere shares of BRCM finally moved with the market's widespread rally today. We had already decided last night to exit positions at the open this morning. BRCM opened at $35.31 and the option opened higher.

- Suggested Positions -

Nov $36.00 Call (BRCM1217K36) entry $1.80 exit $2.12 (+17.7%)

09/06/12 closed this morning
09/05/12 prepare to exit tomorrow morning
08/18/12 new stop loss @ 34.40
08/08/12 new stop loss @ 33.25
no follow through, turning cautious
08/07/12 triggered @ $34.75
08/06/12 adjust stop loss to $32.45

chart:

Entry on August 07 at $34.75
Average Daily Volume = 10 million
Earnings Oct-23rd
Listed on Aug 4, 2012


CLOSED BEARISH PLAYS

FB - Facebook - close: 18.96 change: +0.38

Stop Loss: 19.15
Target(s): 17.00
Time Frame: 2-4 weeks
Current Option Gain/Loss: -24.1%
New Positions: see below

Comments:
09/06/12: The one-two punch of the Zuckerberg no sales press release on Tuesday night and now the market's rally on the ECB news has lifted FB from its closing low of $17.73 to $19.00 (+7.1%). Shares actually spiked higher to $19.26 intraday and that was enough to hit our stop loss at $19.15 along the way. You'll notice that FB pulled back and churned along the $19.00 level the rest of the session after the initial rally faded. I am not convinced FB has found a bottom yet.

Suggested Positions

closed Sept $20 PUT (FB1222U20) entry $1.45 exit $1.10 (-24.1%)

09/06/12 stopped out at $19.15
09/01/12 new stop loss @ 19.15
08/18/12 new stop loss @ 20.35, readers may want to take profits now
08/07/12 triggered @ 20.95
08/06/12 adjust entry trigger to $20.95

chart:

Entry on August 07 at $20.95
Average Daily Volume = 80.0 million
Listed on August 5, 2012