Option Investor
Newsletter

Daily Newsletter, Thursday, 10/4/2012

Table of Contents

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

Market Wrap

Data OK, Market OK

by Thomas Hughes

Click here to email Thomas Hughes
Today's releases of economic were OK, neither indicating a sudden decrease in jobs or an unexpected increase in hiring. With things continuing on as they have been the markets responded by climbing higher. Tomorrow's job's and unemployment data will likely come in as expected, neither hindering or helping market values.

Economic Calendar

Futures trading was positive throughout the early morning and the upward bias continued into the start of the official trading day. The S&P held onto its positive gains all morning and peaked to reach the day's high just after the release of factory orders data. The index pared some of its gains going into the lunch hour and then rebounded in the afternoon.

Advancing stocks were about even with declining stocks in the AM hours but the afternoon trading brought the ration closer to 2.5 : 1.

Market Stats


Initial jobless claims dropped a reported 4,000 claims from an upwardly revised 370,000 for the week ending 7/28. This is below the estimated 370,000 and well within the range we have been seeing all year. The pace of job losses has been somewhat stable over the last 12 months, not really climbing or falling significantly except for a two notable seasonable fluctuations, one around Easter and one over the summer centered around the auto industry. The revisions and new data have caused the 4 week moving average of claims to hold steady from last week at 375,000.


Continuing claims remained flat in this weeks release as well. This data has been trending near 12 months lows for four weeks now and has likely bottomed for now. In order for unemployment and joblessness to dissipate to more normal levels jobs creation has to pick up and so far there is no sign of that. In fact, Challenger warned just this morning of a rise in expected lay-offs for October, an ominous sign for jobless data and the economy that will likely lead to an increase in continuing claims and an increase in unemployment. Total claims for unemployment echoed the continuing claims data and was also unchanged. Total claims data is not revised and last weeks number of 3.28 million holds good for this week as well. Again, a rise in lay-offs and a stagnant job growth scenario will likely result in a rise in total unemployment claims.



Yesterday's ADP employment figures were better than expected, which is good, but still not great. The 162,000 new jobs that ADP estimates were created is still below what economists say is needed to lower the unemployment rate. The current consensus estimates for US private non-farm payrolls is for an addition of 113,000 jobs, also below the threshold for a strong economy. For a significant dip in unemployment we really need to see a couple of months of +200,000 in both ADP and US non-farm payrolls. The forecast for unemployment is somewhere between 8.1-8.2%, a slight uptick from last month but also nothing to instill large amounts of fear in the market. What all this means for us is that the jobs news is not likely to scare anyone or provide a catalyst for mass selling.


Factory orders, which dropped by more than -5% from last months 2.8% gain was actually taken very well by the markets. The drop, although the biggest since the recession, was less than expected and came with a silver lining. A huge dip in transportation equipment was offset by gains in non-transportation goods and equipment. This is being seen by traders and speculators as a sign of improvement in the manufacturing sector and a ray of hope for economic growth. Excluding transportation factory orders actually rose by 0.7%. Europe closed the day mixed. Initially higher on economic data the rate decision and statements from the ECB failed to inspire any new confidence. Draghi says that the outlook for 2013 is for continued slow growth and the potential for higher inflation. This is one reason the ECB decided to hold rates steady at historic lows. During the statements Draghi also stood tall in defense of the euro, saying once again that it is irreversible, following the comments the euro gained versus the dollar.

Spanish short-term debt costs are are stabilizing, helped by the renewed bond purchasing by the ECB. The purchases helped to “relieve tension” according to Draghi. This weeks auction was met by increased demand for Spanish debt and has helped stave off their need for immediate bail out funding. The ECB has made the funds available but still requires that Spain officially ask for them. This continuous beating around the bush, kick the can down the road attitude has grown old and because of this I don't think Spain really matters any more. The bail out is there-all they have to do is ask for it when they need it. If you think about it it is a win-win situation; Draghi has done what he can do and in the eyes of history may not be at fault if Spain's economy crumbles and at the same time Spain has a received a bail-out without actually receiving a bail-out.

Oil climbed above $90 today on fear of Turkish-Syrian aggressions. The hostilities between the two countries is escalating and Turkey now says it fears increased aggression from its neighbor. The price of oil climbed by more than 2.5% during today's trading but the oil index did not match the gain. The volatility in oil prices is expected to be short lived, global demand and inventory levels will help keep prices in check as well. The oil index gained 0.8% today and traded in line with the short-term moving average, just above support. The index has been trading down at this level for over a week and is approaching over-sold levels, it could retest the down-trending resistance line of its long term range again. A break above this level would be bullish for the index.

The Oil Index, daily

Gold put on another $14 today and flirted with new, nearly 12 month, highs. The metal is within $10 of $1800 an ounce, pushed higher by the renewed global stimulus'. The gold index gained 2.5% today on the increase in the underlying metal. The gold index has been consolidating since breaking out of a double-bottom formation. The index is supported at the short-term moving average and momentum looks good for another move up.

The Gold Index, daily

Retail sales were released today without much applause. The comparison has been losing its usefullness over the years and is now dwindling to just about nothing. Soon, only 18 companies will report sales on a monthly basis. This month a few companies posted good results but the general run was fairly lackluster. The results have put added wait on the holiday shopping season for retailers to get their sales figures up.

This month Costco reported better than expected comp store sales and the stock jumped from support and the short-term moving average to near recent highs. Costco's same store sales increase of 6% topped analysts expectations by 0.3%. Total sales for the month increased by 8% and are expected to continue at this rate into the fourth quarter. Costco is expected to report earnings next Tuesday, they could be a catalyst to get this stock to new highs.

Costco, daily

Limited Brands also beat expectations with a 5% gain in same store sales. Analysts had been expecting a much smaller gain of 4.3%. The bad news is that net sales on a year-over-year basis are down and will probably weigh heavy on stock price. The stock traded in positive territory today, moving up from the short-term moving average but without much commitment. The stock is near a resistance it failed to cross over two weeks ago and trading on weak volume. The indicators are indecisive and show a range bound stock at this time.

Limited Brands, daily

Kohl's posted a dissapointing month. Poor back-to-school shopping volume and massive discounts hit the retailer hard. The stand-alone department store saw a decline in same store sales of over 2%, more than the estimated 0.2% expected by analysts. The stock opened sharply lower, dropping below the short-term moving average, but found support near the mid line of its one year trading range. The stock rallied from there on high volume but was repelled by the SMA.

Kohl's, daily

Auto sales figures show that Toyota could oust Ford from the spot as world's second largest auto maker. Recent figures show that Ford's percent of market share has dipped to 14.7%, narrowing the margin between them to 0.2%. Auto sales have been on the rise since last summer and this month sales of cars and trucks both hit new highs. Toyota shares jumped on the news but did not manage to cross the moving average.

Toyota, daily

Ford shares traded up by 1% on light volume. The stock is confirming support around $10, following a break above a double-bottom. The move comes at the lower end of Ford's long-term trading range and could signal a move back up toward the upper end of the range around $12.50.

Ford, daily

The VIX moved down a little today. The volatility index dropped below the moving average and traded in a tight range. The index is still near long term low levels and now even the volatility in volatility is subsiding. This is where I want to mention the old cliché of “the calm before the storm”. The VIX is at very “calm” levels, levels that typically indicate a freely trending market. I expect the S&P will trend up to resistance and make a full retracement of the 2008 bear market. Until then the VIX will probably bob along inside its trading range. When the S&P gets near the highs set in 2008 it will be time to re-assess the situation.

The VIX, daily

The S&P is facing resistance in about 100 points, right around 1560-1570 and that is my target for the current leg of the rally. The fourth quarter was projected to pick up some and so far the data is ok enough to support that theory. I think the data plus the recent QE and possibilities of more QE around the world will keep stocks up at least long enough reach and retest the 2007 highs around 1565-1570.

S&P 500, weekly

The S&P is still due for a correction and it could prove me wrong. The global economy is delicate and the balance is slowly being restored but an unexpected shock could have far reaching effects. The FOMC minutes for the last meeting were released today at 2pm EDT and underscore the fragility of the economy. The committee was just about unanimous in the opinion that more QE was needed and that the labor market would not improve without it. The stock markets responded with a slight jump that carried pushed the indexes to the top of today's range.

S&P 500, daily

The daily charts look good for a continuation of the near term rally. There is no defined resistance that I can see, the index is supported by the short-term moving average and MACD is rolling over. In the longer term momentum, though divergent, is still bullish. When/if MACD does roll over on the daily charts it could add the weight of other technical traders and help carry the index to the target highs.

S&P 500, weekly with MACD

I thought the market top would be at 1420 for the S&P but I was wrong. The level did turn out to be significant and has since turned into to support. Now the index looks like it is going to go higher, even though I still think my initial analysis of impending market correction is correct. By remembering to trade with the trend I saved myself lots of headaches and losses. The markets never corrected or reversed and never gave one sign of it. Trading before those signs and confirmations has always proven costly for me and its a lesson I hope not to repeat again. Remember to wait for the signs and trade with confirmations, not just analysis.

The S&P is at a crucial juncture. Tomorrow's jobs data could do nothing to move the markets or it could surprise us all with a positive or negative spike. Either way the S&P needs to close above 1465 before my bull trend theory really takes on weight. If this fails the top could be at hand, otherwise I think the next possibility for a top is 1565.

Earnings are also looming, the few names that have already reported for the recently ended quarter gave us a hint of what to expect, which isn't looking good. There have also been a number of companies lowering guidance which adds a little gloom to the picture. Regardless, corporate profits are not expected to be very robust for the third quarter and have been that way for a while. On the bull side of the argument a slow third quarter could help to set us up for fourth quarter upside surprises. On the bear side poor results, or poorer than expected which may by much worse, could keep the market from rallying on.

Remember the trend when you do your own analysis and trade the way it tells you to go. Never try to catch a falling knife or block a raging bull.

Thomas Hughes


New Option Plays

Consumer Goods

by James Brown

Click here to email James Brown

Editor's Note:

Nimble traders may want to check out shares of Goldman Sachs (GS). The stock was showing relative strength today. I suspect GS will rally up into its earnings report, which is scheduled for October 16th. I would not hold over the announcement. That's not enough time to list GS as a play on the newsletter but readers may be able to get in, capture a few points, and get out.


NEW DIRECTIONAL CALL PLAYS

PVH Corp. - PVH - close: 95.83 change: +1.12

Stop Loss: 94.25
Target(s): 99.85
Current Option Gain/Loss: Unopened
Time Frame: exit prior to October expiration
New Positions: Yes, see below

Company Description

Why We Like It:
PVH manufacturers a wide array of clothing and consumer goods products. The stock has been consolidating sideways under resistance near $96.00 the last few weeks. A rally past $96 would be a new record high.

I am suggesting we open small bullish positions if PVH trades at $96.05. Our target is $99.85. This is a short-term trade because I am listing October options, which expire in just about two weeks. You could use November options but the bid/ask spread is a lot wider.

Trigger @ 96.05

- Suggested Positions -

buy the Oct $97.50 call (PVH1220j97.5) current ask $1.40

Annotated Chart:

Entry on October xx at $ xx.xx
Average Daily Volume = 842 thousand
Listed on October 4, 2012



In Play Updates and Reviews

ALXN Hit Our Target

by James Brown

Click here to email James Brown

Editor's Note:

Shares of Alexion (ALXN) hit our bullish exit target today. Elsewhere I have removed ROK as a candidate.

Current Portfolio:


CALL Play Updates

Commvault Sys. - CVLT - close: 58.10 change: -0.21

Stop Loss: 54.90
Target(s): 62.00
Current Option Gain/Loss: -35.4%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
10/04/12: Something happened this morning but I can't find the headlines to explain the gap down in CVLT at the open. Traders bought the dip and CVLT pared its losses.

I don't see any changes from my prior comments. Our exit target is $62.00. I am not suggesting new positions.

- Suggested Positions -

Long Oct $60 Call (CVLT1220j60) Entry $1.24

10/03/12 adjust exit target to $62.00
10/01/12 new stop loss @ 54.90
09/29/19 new stop loss @ 54.40

Entry on September 20 at $56.07
Average Daily Volume = 427 thousand
Listed on September 19, 2012


EQT Corp. - EQT - close: 59.87 change: +1.55

Stop Loss: 57.45
Target(s): 63.00
Current Option Gain/Loss: +63.9%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
10/04/12: EQT displayed relative strength today with a +2.6% gain. The stock has erased yesterday's losses and looks poised to breakout past the $60 level soon. I am raising our stop loss to $57.45.

- Suggested Positions -

Long Oct $60 call (EQT1220j60) Entry $0.61

10/04/12 new stop loss @ 57.45
09/27/12 new stop loss @ 56.45

Entry on September 24 at $ xx.xx
Average Daily Volume = 1.0 million
Listed on September 22, 2012


Infosys Ltd. - INFY - close: 49.65 change: +0.16

Stop Loss: 48.90
Target(s): 54.85
Current Option Gain/Loss: Unopened
Time Frame: about 2-to-3 weeks
New Positions: Yes, see below

Comments:
10/04/12: INFY is inching higher and looks like it's building up steam for a bullish breakout past $50.00 and its 300-dma.

I am suggesting a trigger to buy calls at $50.25. We'll start with a stop loss at $48.90. Our target is $54.85. FYI: The Point & Figure chart for INFY is bullish with a $72 target.

Trigger @ 50.25

- Suggested Positions -

buy the Oct $50 call (INFY1220j50)

Entry on October xx at $ xx.xx
Average Daily Volume = 1.9 million
Listed on October 1, 2012


NetSuite Inc. - N - close: 64.00 change: +1.40

Stop Loss: 59.75
Target(s): 67.50
Current Option Gain/Loss: Oct65: + 4.7% & Nov65c: +13.7%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
10/04/12: Traders bought the dip in N this morning and the stock is testing short-term resistance at the top of its $62-64 trading range.

Our multi-week target is $67.50. FYI: The Point & Figure chart for N is bullish with an $82 target.

- Suggested Positions -

Long Oct $65 call (N1220j65) Entry $1.05

- or -

Long Nov $65 call (N1217k65) Entry $2.90

10/01/12 triggered @ 62.50

Entry on October 01 at $62.50
Average Daily Volume = 565 thousand
Listed on September 29, 2012


Noble Energy, Inc. - NBL - close: 92.85 change: +0.06

Stop Loss: 91.75
Target(s): 99.75
Current Option Gain/Loss: Unopened
Time Frame: exit prior to earnings on Oct. 25th
New Positions: Yes, see below

Comments:
10/04/12: NBL is still churning inside the $92-94 range.

I am suggesting a trigger to buy calls at $94.25 with a stop loss at $91.75. Our target is $99.75. More aggressive traders could aim higher.

Trigger @ 94.25

- Suggested Positions -

buy the Oct $95 call (NBL1220j95)

- or -

buy the Nov $95 call (NBL1217k95)

Entry on October xx at $ xx.xx
Average Daily Volume = 1.0 million
Listed on October 2, 2012


Onyx Pharma. - ONXX - close: 85.87 change: -0.60

Stop Loss: 82.90
Target(s): 89.50
Current Option Gain/Loss: -26.6%
Time Frame: 2 to 3 weeks
New Positions: see below

Comments:
10/04/12: ONXX saw a little profit taking today with a -0.69% decline. Shares seemed to find some support near $85.00 midday. I warned readers yesterday to expect a pullback. I would use a new rally past $86.25 as a new entry point for bullish positions. More conservative traders may want to inch up their stops to they are closer to the $84 level.

Earlier Comments:
We started with an aggressive entry point and the plan was to keep our position size small to limit our risk.

- Suggested Positions - *Small Positions*

Long Oct $90 call (ONXX1220j90) Entry $1.50

Entry on October 02 at $85.08
Average Daily Volume = 1.4 million
Listed on October 1, 2012


Sears Holding Corp. - SHLD - close: 56.99 change: +0.53

Stop Loss: 53.95
Target(s): 62.50
Current Option Gain/Loss: + 6.8%
Time Frame: 3 to 5 weeks
New Positions: see below

Comments:
10/04/12: This morning brought September same-store sales data from a number of companies. SHLD was not one of them but the general trend seemed to be positive. Shares of SHLD popped higher this morning. It was interesting to note that Target (TGT) has announced they will stop providing same-store sales guidance beginning in their fiscal 2013.

SHLD briefing traded above some key moving averages only to see its gains fade into the close.

Earlier Comments:
SHLD could see some short covering. The most recent data listed short interest at 37% of the 31.3 million share float.

NOTE: There are two October $57.50 option strikes. Make sure you pick the normal one. Pay attention to the symbol.

- Suggested Positions -

Long Oct $57.50 call (SHLD1220j57.5) Entry $1.75

Entry on September 28 at $56.11
Average Daily Volume = 1.7 million
Listed on September 27, 2012


PUT Play Updates

ITT Educational Services - ESI - close: 30.13 change: +0.73

Stop Loss: 32.05
Target(s): 25.15
Current Option Gain/Loss: -11.2%
Time Frame: exit prior to earnings on Oct. 25th
New Positions: see below

Comments:
10/04/12: After yesterday's big drop a little bounce today is not a surprise. ESI opened at $29.47 and closed with a +2.4% gain. Yet it has not convincingly broken back through the $30.00 level. We remain bearish.

Earlier Comments:
I want to reiterate my caution about using small positions. ESI already has a high amount of short interest because so many investors think this stock is going lower.

- Suggested *SMALL* Positions -

Long 2013 Jan $27.50 PUT (ESI1319m27.5) Entry $3.10

Entry on October 04 at $29.47
Average Daily Volume = 408 thousand
Listed on October 2, 2012


Juniper Networks - JNPR - close: 16.70 change: +0.09

Stop Loss: 17.75
Target(s): 14.10
Current Option Gain/Loss: - 2.7%
Time Frame: Exit prior the late October earnings report
New Positions: see below

Comments:
10/04/12: JNPR opened higher before falling to a new relative low only to bounce again. Today's session actually looks like a potential one-day reversal pattern but it will need to see follow through. The $17.50 level should be overhead resistance. Readers may want to wait on launching positions and wait for a bounce into the $17.25-17.50 zone as their new entry point instead.

Earlier Comments:
The plan was to keep our position size small to reduce our risk. FYI: The Point & Figure chart for JNPR is bearish with a $13.50 target.

- Suggested *SMALL* Positions -

buy the Nov $16 PUT (JNPR1211W16) Entry $0.72

Entry on October 04 at $16.74
Average Daily Volume = 6.6 million
Listed on October 2, 2012


Tech Data Corp. - TECD - close: 44.23 change: -0.01

Stop Loss: 45.75
Target(s): 42.00
Current Option Gain/Loss: - 5.1%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
10/04/12: Hmm.... I suspect we will see TECD bounce tomorrow. Shares dipped to $43.82 intraday only to bounce back to virtually unchanged. I would not be surprised to see a bounce back into the $45-46 area.

Earlier Comments:
I would keep our position size small to limit our risk.

*Small Positions* - Suggested Positions -

Long Nov $45 PUT (TECD1211w45) Entry $1.95

10/03/12 new stop loss @ 45.75
10/01/12 triggered @ 44.90

Entry on October 01 at $44.90
Average Daily Volume = 333 thousand
Listed on September 29, 2012


CLOSED BULLISH PLAYS

Alexion Pharma. - ALXN - close: 117.72 change: -0.10

Stop Loss: 112.45
Target(s): 118.50
Current Option Gain/Loss: +94.3%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
10/04/12: ALXN open higher at $118.25 and quickly hit our exit target at $118.50 this morning.

- Suggested Positions -

Oct $115 call (ALXN1220j115) Entry $2.83 Exit $5.50 (+ 94.3%)

10/04/12 target hit @ 118.50
10/03/12 new stop loss @ 112.45
Readers may want to start taking profits now!
10/01/12 new stop loss @ 111.75
09/29/12 new stop loss @ 110.75
09/20/12 new stop loss @ 109.40
09/15/12 new stop loss @ 107.75

chart:

Entry on September 10 at $110.72
Average Daily Volume = 905 thousand
Listed on September 08, 2012


CLOSED BEARISH PLAYS

Rockwell Automation - ROK - close: 70.43 change: +1.21

Stop Loss: 70.10
Target(s): 63.00
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
10/04/12: We have been waiting for ROK to breakdown under support at $68.00 but the stock is not cooperating with us. I am removing ROK as an active candidate.

Trade did not open.

10/04/12 removed from the newsletter.

chart:

Entry on September xx at $ xx.xx
Average Daily Volume = 1.1 million
Listed on September 26, 2012