Option Investor
Newsletter

Daily Newsletter, Thursday, 10/11/2012

Table of Contents

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

Market Wrap

Resilient Market Bounces Back?

by Thomas Hughes

Click here to email Thomas Hughes
Today the major indexes began to bounce back from the early week sell-off but lost their impetus by early afternoon. Economic data, earnings and the ever unfolding saga of free-spending Greece and the Eurozone crisis have cushioned the drop and helped to give the markets a slight nudge to the upside. The market weakness, which started Monday, is not unexpected and its arrival has been predicted many times by all of us here on the Wrap. Nothing significant has change from last week or two weeks ago and now the economic data seems to be supporting an improving economy. The sell off is expected but whether this is a near term correction or the start of a major bear market is yet to be seen.

Futures were up this morning ahead of the release of today's economic data. The markets seem to be anticipating earnings although today there was not much of note happening on that front. Tomorrow JP Morgan and Wells Fargo both report and their results could drive market direction.

The positive spin on futures carried into the morning after the open of regular trading. The S&P opened strong and quickly put on +9 points or 0.65%. Market breadth was also surprising strong with advancing stocks outpacing declining stocks by 5 : 1 at the open. The Nasdaq led the charge with a ratio of 5.5 : 1. Even after the afternoon decline in stocks advancing stocks still led declining stocks by around 2 : 1.


Today's surprising drop in unemployment claims barely budged stock futures. Analysts has been expecting a small drop of about 1-2000 claims for the last week of data. The number dropped a surprising 30,000 to a four year low of 339,000. This is a huge drop and comes on the heels of last weeks surprise unemployment figure of 7.9%. If this is not a one time occurrence then the unemployment rate could continue to decline into the fourth quarter. The previous weeks figure was revised up by only 2,000 claims, barely affecting the net drop from last weeks report. Likewise, the 4 week moving average of claims fell as well to near a four month low of 364,000.



Continuing claims and total claims both fell in tandem with the initial claims data. Based on recent reports it looks like there is a renewal of the downward trend in unemployment we have seen over the last year or so. Continuing claims fell by 15,000 to 3.27 million, a five week low and near the years lowest levels. Total claims reached new lows in data that lagged the initial claims figures by two week. Total claims for the week ending September, 21 were around 5.0 million, 44,000 claims lower than the previous week and 1.8 million (26.4%) lower than last year at this time. The labor market is not strong but you have to admit that it is making progress.



In other economic news today the trade gap widened today as exports fell and import prices rose. The trade gap widened to $44.2 billion in August, a +4% jump from the previous month. US exports fell by 1% while at the same time the cost of imports climbed by 1.1%. Despite the gain in prices imports are still 0.6% cheaper than they were a year ago.

European shares closed higher, buoyed by the US markets, a downgrade of Spanish debt and a softening attitude toward Greece. Standard & Poors downgraded Spanish debt to just above junk status and inspired some hope that the move could force Spain into asking for bail-out money. Spanish bond yields have been slipping over the last week or so and fears of further downgrades loom for the country. This is the third downgrade of Spanish debt this year.

Christine Lagarde of the International Monetary Fund made some statements over night concerning Greece that may have started a new round of assistance for that country. In her comment she states that Greece needs more time to institute the changes and meets its budget goals. She went on to say that “front-loading” austerity measures to fast could hurt Greece in the long run. She and the IMF are advocating more time for Greece.

Stock news in Europe was positive with retailers and housewares leading today. Several merchants, including supermarket giant Carrefour, reported strengthening sales and other positive news. The positive earnings reports and the impending extension of Greece's debt obligations helped to send the European markets up by nearly 1%.

In Asian news China increased its public works spending, adding another 20 billion yuan to railway spending. The move is another effort to boost the economy and a good one. The increase in spending is expected to create new jobs and help the economy expand into more remote regions of the country. This move comes after a reported drop in lending by China's four largest banks. Asian shares ended the day lower amid mounting uncertainty over the economy.

Oil prices traded to the upside today. Rising tensions in the middle east are keeping trading active and the upper end of the two week range. Oil prices have been gaining volatility lately but have yet to show true direction. The Oil Index regained some of the ground it lost yesterday. The index is moving down from the down-sloping top of its range and fell below the short term moving average with conviction. Today the index traded around yesterday's mid-point but closed below it, a move with bearish implications.

Oil Index, Daily

Gold also traded to the upside today, breaking a four day losing streak. The metal has been near all-time highs and with all the stimulus is likely to retest those highs again at the least. The Gold Index has also been performing well, breaking out of a double bottom and now possibly preparing to make another leg up. A break to the upside could take the index another 25-35 points higher.

The Gold Index, daily

The yield on ten year US treasuries fell today and moved back below the short term moving average. Investors just can't get away from the safe haven of US debt.

Ten Year US Treasuries

There was a buzz on the floor of the NYSE today, I wasn't there but I could tell from watching CNBC. Perhaps it was the four IPO's scheduled for today. All were met with investor enthusiasm and traded 20% or more to the upside which would cause me to buzz if I was one of the fortunate early investors. The one of note is Realogy Holdings. They are the largest franchisor of real estate brokerages in the US and owner of Century 21 amongst other recognizable brands. The stock was initially priced at $27 and opened trading at $32. By the end of the day the stock had gained over 4.5% from the opening price to close +$34.

Realogy, daily

There isn't much happening today on that scene but tomorrow JP Morgan and Wells Fargo both report and the news could be market moving. JP Morgan is still being haunted by the Whale as it rocks the management structure of the firm and is not expected to have made much in the way of earnings growth. The banks stock has been trending up over the last few months but is at resistance now. The consensus estimates for earnings are inline with last quarters $1.21 per share.

JP Morgan, daily

Wells Fargo is expected to earn in the range of $0.86-0.87 per share, a 6% gain over the previous quarter. Wells Fargo is trading just below recent five year highs and still above of the short term moving average. Tomorrow's report and the outlook for the current quarter could have a major affect on stock price.

Wells Fargo, daily

The banks have been trending up all year and now the Bank Index is making an attempt at new highs. JP Morgan, which has a high surprise ratio, will probably deliver more than we are expecting. Today Citigroup upgraded US equities as a whole, citing some risks to earnings and the help of strong moves by the Fed. Citi analysts see the housing market improving and remaining stable apart from the stock market which they expect to outperform the global markets. Banking business should be improving along these lines, especially in homes loans and refinances. Tomorrow's reports are important for the sector and will set the tone for the rest of the banks and stocks in general.

Banking Index, daily

Sprint Nextel was another story stock today. Japan's Softbank made moves to buy the telecommunications giant and sent the shares up by more than 18% in pre-market trading. After the open shares climbed higher before eventually giving up much of the knee-jerk reaction to the news. Volume was incredibly high today, I expect to see more volatility come from this news.

Sprint, daily

Around mid-day stocks began to decline, led by a drop in Apple, and eventually went into the red for a brief time during the afternoon. Most of the indexes, including the S&P 500 crept back into the green by the end of the day. The S&P 500 is now sitting just above the critical support of 1433 and under the short term moving average. This marks the middle of the break out from the previous resistance range and the continuation signal I have pointed out in past wraps. I think it goes without saying that I will be watching this level closely. The S&P is still trending up though we may be in for some more neutral or downward action until the market returns to the long term trend. Market moving data is light in the next week despite a full roster of lesser reports so earnings and international events will be the big drivers.

S&P 500, daily

Crossing under the short term moving average is potentially bearish. If short term traders can build up momentum on bad news or earnings the index could come down to 1400 or 1380 in the near term. Momentum on the S&P 500 is bearish and increasing on the daily charts at this time. On the longer term weekly charts the MACD indicator is still bullish but divergent from the last 12 month up-trend. Momentum in the long term trend is declining, it is one of the factors that I and other Wrap writers have pointed out and cited for many weeks. At this time it is still bullish in the long term so we should expect the markets to snap back from the current weakness. The S&P really needs to hold this level to keep a bullish near-term outlook.

S&P 500, weekly

The Nasdaq has already made a textbook lower high and lower low. The index has entered what is at least a near term down-trend and is building momentum. Apple's wild ride down to the lower $600's has really put a hurting on the index and stocks as a whole. Without Apple's leadership the Nasdaq will have to find a new leader or keep following the old leader down. Apple will surely find a bottom but when and where is yet to be seen.

Nasdaq, daily

The VIX hardly made a move this week which goes to show that nothing happened that was not expected. In fact, like I said last week, the volatility in volatility seems to be subsiding. While the volatility index is still creeping along at such low levels the S&P should continue to move up.

Thinking about the low volatility just reminded me of Elmer Fudd as he quietly tip toes through the woods; “be very very quiet, I'm hunting rabbits” he says. Instead of a lovable cartoon character we have volatility quietly moving along hunting for the next bear market catalyst. I still say a spike in the VIX is coming, maybe sooner than later.

VIX, daily

Earnings are going to play a big role in what's to come for the US indexes. Yes, the European fear is still there but every time it seems to boil they relax a policy, buy some bonds or kick the can down the road with some other fiscal boot. The US economy, at this time, is showing signs of improvement. Unemployment is down and after today's claims data I expect it may come down some more. The housing market is showing signs of life and fiscal stimulus is in place. Now it comes down to earnings, are things going to be as bad as we feared or worse? Right bad is OK because that's what we expect but worse won't be good. Keep a close eye out for earnings, future guidance and economic data.

Economic Calendar

Remember the trend and do like Jim says, enter passively and exit aggressively!

Thomas Hughes


New Option Plays

Losing Flavor

by James Brown

Click here to email James Brown


NEW DIRECTIONAL PUT PLAYS

SodaStream - SODA - close: 36.12 change: -0.42

Stop Loss: 37.25
Target(s): 31.50
Current Option Gain/Loss: Unopened
Time Frame: 3 to 5 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
SODA has been trending lower with a bearish pattern of lower highs for weeks. Yet now the stock is poised to hit new relative lows. Last week's lows were near $35.75. I am suggesting a trigger to buy puts at $35.65. However, we will want to keep our position size small. The most recent data listed short interest at 55% of the very small 17.7 million-share float. That raises the risk of a short squeeze should SODA manage a rebound.

Our target is $31.50 but we will plan to exit prior to the early November earnings report. FYI: The Point & Figure chart for SODA is bearish with a $30 target.

Trigger @ 35.65

- Suggested Positions -

buy the Nov $35 PUT (SODA1217w35) current ask $2.45

Annotated Chart:

Entry on October xx at $ xx.xx
Average Daily Volume = 528 thousand
Listed on October 11, 2012



In Play Updates and Reviews

Updating A Few Stops

by James Brown

Click here to email James Brown

Editor's Note:

The S&P 500 trimmed its morning gains to close almost unchanged on the session. We are updating a few stop losses tonight.

Our new play on LO has been triggered.

Current Portfolio:


CALL Play Updates

Commvault Sys. - CVLT - close: 56.57 change: +0.03

Stop Loss: 54.90
Target(s): 62.00
Current Option Gain/Loss: -91.9%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
10/11/12: CVLT tried to rally this morning but pared its gains to settle almost unchanged on the session. I am not suggesting new positions at this time.

- 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: 60.84 change: +1.15

Stop Loss: 58.40
Target(s): 63.00
Current Option Gain/Loss: +113.1%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
10/11/12: EQT outperformed the market with a +1.9% gain. Shares hit new relative highs above $61. I am raising our stop loss to $58.40. Readers may want to take profits right now! I am not suggesting new positions at this time.

- Suggested Positions -

Long Oct $60 call (EQT1220j60) Entry $0.61

10/11/12 new stop loss @ 58.40, readers may want to take profits now with the bid on our option at $1.30 (+113%)
10/08/12 readers may want to take profits now
10/06/12 new stop loss @ 57.75
10/04/12 new stop loss @ 57.45
09/27/12 new stop loss @ 56.45

Entry on September 24 at $57.89
Average Daily Volume = 1.0 million
Listed on September 22, 2012


Noble Energy, Inc. - NBL - close: 93.29 change: -0.82

Stop Loss: 91.75
Target(s): 99.75
Current Option Gain/Loss: Oct95c: -51.7% & Nov95c: -24.1%
Time Frame: exit prior to earnings on Oct. 25th
New Positions: see below

Comments:
10/11/12: Shares of NBL were downgraded this morning and that helped the stock underperform the market and its peers in the energy sector. I would wait for a rally back above $94.00 before considering new positions.

Keep in mind that we do not want to hold over the late October earnings report.

Trigger @ 94.25

- Suggested Positions -

Long Oct $95 call (NBL1220j95) Entry $1.45

- or -

Long Nov $95 call (NBL1217k95) Entry $3.10

Entry on October 08 at $94.25
Average Daily Volume = 1.0 million
Listed on October 2, 2012


Sears Holding Corp. - SHLD - close: 60.92 change: +1.56

Stop Loss: 57.90
Target(s): 62.50
Current Option Gain/Loss: +125.7%
Time Frame: 3 to 5 weeks
New Positions: see below

Comments:
10/11/12: SHLD displayed relative strength with a bullish breakout above round-number resistance at $60.00. The stock is within striking distance of our exit target at $62.50 but readers may want to go ahead and take profits now with our option up +125%. I am raising our stop loss to $57.90.

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

10/11/12 new stop loss @ 57.90, readers may want to take profits now. Our option is up +125%.
10/06/12 new stop loss @ 54.75

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


Six Flags Entertainment - SIX - close: 61.72 change: -0.15

Stop Loss: 60.90
Target(s): 64.95
Current Option Gain/Loss: Unopened
Time Frame: exit prior to the Oct. 24th earnings report
New Positions: Yes, see below

Comments:
10/11/12: SIX managed to trade above resistance at $62 this morning but the stock's rally stopped at $62.22. Our trade is not yet open.

I am suggesting a trigger to buy calls at $62.25 with a stop loss at $60.90. Our target is $64.90 but more aggressive traders could definitely aim higher. We do not want to hold over the earnings report on Oct. 24th. FYI: The Point & Figure chart for SIX is bullish with a long-term $98 target.

NOTE: Readers may want to keep their position size small. The bid/ask spread on options for SIX are a little wide.

Trigger @ 62.25

- Suggested Positions -

buy the Nov $65 call (SIX1217k65)

Entry on October xx at $ xx.xx
Average Daily Volume = 334 thousand
Listed on October 10, 2012


PUT Play Updates

CACI Intl. - CACI - close: 49.10 change: -0.21

Stop Loss: 51.25
Target(s): 45.25
Current Option Gain/Loss: + 0.0%
Time Frame: 3 to 4 weeks
New Positions: , see below

Comments:
10/11/12: CACI's bounce attempt failed under the $50.00 level. Shares settled at a new relative low. I would still consider new positions at current levels. We will lower the stop loss to $51.25. FYI: The Point & Figure chart for CACI is bearish with a $20 target.

- Suggested Positions -

Long Nov $50 PUT (CACI1211w50) Entry $2.30

10/11/12 new stop loss @ 51.25

Entry on October 09 at $49.64
Average Daily Volume = 373 thousand
Listed on October 8, 2012


Deckers Outdoor - DECK - close: 36.63 change: +1.57

Stop Loss: 36.55
Target(s): 30.25
Current Option Gain/Loss: Unopened
Time Frame: exit prior to the late October earnings report
New Positions: Yes, see below

Comments:
10/11/12: DECK saw some short covering today and the stock surged to $37.37 before paring its gains to just +4.4%. If the rally continues tomorrow we will probably drop DECK as a candidate. Right now the plan is to wait for a breakdown.

Earlier Comments:
I want to caution readers that there are already a lot of bearish traders in DECK. The most recent data listed short interest at 33% of the small 30 million share float. That raises the risk of a short squeeze. Therefore we want to limit our position size to reduce our risk.

I am suggesting a trigger to buy puts at $34.45. Our target is $30.25. FYI: The Point & Figure chart for DECK is bearish with a long-term $20 target.

Trigger @ 34.45

- Suggested Positions -

buy the NOV $35 PUT (DECK1211w35)

Entry on October xx at $ xx.xx
Average Daily Volume = 2.5 million
Listed on October 9, 2012


ITT Educational Services - ESI - close: 31.59 change: +1.15

Stop Loss: 32.05
Target(s): 25.15
Current Option Gain/Loss: -30.9%
Time Frame: exit prior to earnings on Oct. 25th
New Positions: see below

Comments:
10/11/12: ESI produced a strong rebound today with a +3.7% gain. Shares are testing resistance near $32.00 and ESI looks poised to breakout past this level. More conservative traders may want to go ahead and abandon ship right now. Odds are good that if the market is positive tomorrow morning we'll see ESI rally and hit our stop loss at $32.05. I am not suggesting new positions.

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 3, 2012


Juniper Networks - JNPR - close: 16.35 change: -0.00

Stop Loss: 17.25
Target(s): 14.10
Current Option Gain/Loss: +12.5%
Time Frame: Exit prior the late October earnings report
New Positions: see below

Comments:
10/11/12: JNPR continues to coil sideways and closed unchanged on the session. If you look hard enough at the chart you can see that JNPR has a bearish trend of lower highs. JNPR seems to be coiling for a breakdown.

I am adjusting our stop loss down to $17.25.

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

10/11/12 new stop loss @ 17.25

Entry on October 04 at $16.74
Average Daily Volume = 6.6 million
Listed on October 3, 2012


Lorillard, Inc - LO - close: 113.76 change: -1.11

Stop Loss: 116.15
Target(s): 110.25
Current Option Gain/Loss: - 1.2%
Time Frame: exit ahead of the late October earnings report
New Positions: see below

Comments:
10/11/12: LO failed at the $116 level this morning and then broke down to new lows. Our trigger to buy puts was hit at $114.50. Our target is $110.25. More aggressive traders could aim lower but we do not want to hold over the late October earnings report (not yet confirmed).

- Suggested Positions -

Long NOV $110 PUT (LO1217w110) Entry $2.33

10/11/12 triggered @ 114.50

Entry on October 11 at $114.50
Average Daily Volume = 1.4 million
Listed on October 10, 2012


Starbucks Corp. - SBUX - close: 47.16 change: +0.21

Stop Loss: 50.05
Target(s): 44.00
Current Option Gain/Loss: +30.0%
Time Frame: exit prior to the early November earnings report
New Positions: see below

Comments:
10/11/12: SBUX managed a bounce after two days of declines. Broken support near $49.00 should be new resistance so readers might want to consider adjusting their stops closer to the $49.00 level.

Our target is $44.00. More aggressive traders could aim lower since SBUX appears to be in a new trend of lower highs and lower lows.

- Suggested Positions -

Long Nov $50 PUT (SBUX1211w50) Entry $2.73

Entry on October 08 at $48.40
Average Daily Volume = 8.1 million
Listed on October 6, 2012


Tech Data Corp. - TECD - close: 42.99 change: +0.19

Stop Loss: 44.65
Target(s): 42.00
Current Option Gain/Loss: + 2.5%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
10/11/12: A +0.4% bounce did not help our option position. The bid/ask spread has widened on us and reducing our potential gains significantly. I don't see any changes from my prior comments. Our target is $42.00. More aggressive traders could aim lower. I am not suggesting new positions at this time.

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

10/10/12 new stop loss at $44.65
10/09/12 new stop loss @ 45.15
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