Option Investor
Newsletter

Daily Newsletter, Tuesday, 10/16/2012

Table of Contents

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

Market Wrap

Earnings Drive Market Higher

by Thomas Hughes

Click here to email Thomas Hughes
Earnings are looking like they are going to be better than expected and the global markets are moving higher. The global markets continued yesterday's rally overnight and into this morning. The surprising earnings from Goldman Sachs this morning, Citi yesterday and other banks last week are starting to give traders the idea that more upside surprises are in store. Expectations are so low right now that it is not surprising that corporate earnings are coming in better than expected. There are still some notable earnings misses and a few companies that have reported results in-line with estimates but so far the trend has been for companies to beat the street. The surprises are not limited to any one sector which is good for the general markets but means that stock picking is especially important for short term traders.


US stock futures were solidly positive going into the start of trading today. Economic data and another surprise earnings report out of the banking sector from Goldman Sachs barely moved the early morning markets, which were already elevated. Futures trading held steady into the open with all three major indexes opening in the green. The S&P, Dow and Nasdaq all moved solidly higher during the day and closed at the session highs.

The positive string of economic data we have gotten over the last few weeks and into today have helped to improve the expectations for third quarter earnings and GDP. Yesterday's retail sales figures and today's Industrial Production figures are already causing some analysts to increase their expectations for the third quarter GDP. We will get the first look at those figures next week with the Advance GDP report.

Today's data included the CPI data for September and Industrial Production data. The CPI came in a little hotter than expected at 0.6% versus the expected 0.5% but did not cause much reaction. The number is inflated on rising energy and food prices. The figure is still tame in the long run and was not cause for concern. Stripping out volatile food and energy the Core CPI figure was a gain of 0.1%. The new data is unchanged from the previous month on the headline and reverses a drop of -0.1% on the core number.


The rest of the week is full of data. Tomorrow housing starts and building permits and then on Thursday more jobless data. Also on Thursday look out for Philly Fed and Leading Indicators.


Asian shares ended their trading mixed. The Nikkei average gained 1.4% and is trading near the middle of its 6 month range. The Heng Seng index only added 0.28% but is trading at a 5 month high. Asian data continues to be mixed, showing signs of improvement in one area and slowing in others.

Europe was the real story today in overseas news. The European markets made a nice jump to the upside with some indexes climbing over 2%. Portugal's announced austerity based budget, Spain's impending request for bail out (again) and the relaxed attitude being taken about Greek and Spanish long term debt restructuring is adding to upside momentum. Portugal has the right idea though. It is better to go ahead and make the cuts and get the job done now rather than wait til the last minute like Spain and Greece. Portugal's budget plans, though good for the country, did not spark enthusiasm from the citizenship and caused some rioting. The FTSE and the DAX both gained a little more than +1% while Spain jumped more than 3%.

Gold traded to plus side today halting the drop that brought the metal to a new two month low. The signs of stabilization in the economy will put a hold on QE for a while which should keep a cap on gold prices for the short term at least. The gold index is bouncing from the short term moving average and confirming support in the $205-$209 level. The index is consolidating following its recent market reversal and break out and could continue to climb higher. The elevated priced for gold, though down over the last few days, should be seen in results from the mining companies.

Gold Index, daily

Oil climbed about 0.2% today. Global fears and economic worry have held the price of oil around $92 for several weeks now. Sanctions against Iran and turmoil in Syria are helping to support the price and keep it from falling below $90. The Oil Index jumped back from a fall below its short term moving average today to retest a long term support/resistance line but indicators are good for it to come back down soon. The index has been trending in a narrowing range for several years and is now in a move back down toward the lower end that began a few weeks ago. Exxon is scheduled to report earnings November 1st of $1.97 per share. This would be a small increase from last quarter but Exxon has missed estimates before.

Oil Index, daily

US treasury yields climbed today. The ten year treasury yields gained 0.057%, moving up from the short term moving average. The yeild looks like it is building resistance at the the 1.75% level.

Ten Year Treasury Yields, daily

Earnings are now the dominant factor in the market. The news so far has been good. The low low expectations have set the bar at a level that corporations should, and are, jumping over with ease. The banking sector has already had some good reports and this mornings release from Goldman was no different. The banking giant reversed its loss from a year ago and blew away the street's expectations. Even with reported weak mortgage growth Goldman was able to post a profit of $2.85 per share, $0.65 above the analysts estimates. The bank earned $1.51 billion dollars on a 49% increase in investment banking and a 28% increase in fixed income/forex/commodities. The stock has been trending up strongly for month and breached a resistance line today. The early morning pop fell by late afternoon and left the stock down by 1%. The stock looks good for long term gains but may trade sideways for a little while until it returns to the long term trend.

Goldman Sachs, daily

Citi stunned the markets this morning with the resignation of Vikram Pandit. Everything said about his leaving was positive but speculation ran wild all day. Everyone agreed that there was probably something up with the decision. I would not be surprised to see some other headlined about it in the near future. The stock responded by extending yesterday's gains on increased volume. Citi stock added 1.6%.

Citi, daily

The entire banking sector traded mixed today. One bank was up and another was down. The Banking Index traded to negative today but remained above the short term moving average. The index has been trending up and has now entered a possible bull triangle. If the upside surprises in the banking sector continue with the rest of the big banks and the big regional banks the index could break out to the upside. Tomorrow is a big day for the sector and the market. Earnings are being released by American Express, Bank of America and US Bancorp.

Bank Index, daily

Intel traded sharply up today ahead of its earnings report after the bell. Early on it seemed the stock seemingly reversed it downtrend in one session but by the days end the candle signal was a little more ominous. The results failed to satisfy traders who drove the price down in after hours trading. In the report the company says that growth remains slow but inline with expectations, customers remain cautious and that these trends are expected to extend into the fourth quarter. Intel beat the streets estimates of $0.49 per share by $0.09, or $0.58 per share.

Intel, daily

IBM also failed to satisfy investors and dropped in after hours trading. The stock companies earnings came in just shy of the expected $3.62 per share expected by analysts. IBM also cited sluggish markets and expects the fourth quarter to be the same. The street had been expecting a much better report and had the stock up nearly 1% in regular trading. Following the report IBM shares lost over 7%, dropping well below the short term moving average and making a lower low.

IBM, daily

Johnson & Johnson moved up on its earnings announcement. The company reported a dip in profits but an increase in sales. Regardless, the company beat estimates by a penny and guided the full year to a level just above the previous range. The stock traded up to a long term resistance level and 4 year intra-day high and then fell back before the close. JNJ stock has been consolidating in a range since jumping over 10% this summer. Today's news and guidance could help the stock move past resistance.

Johnson & Johnson

Today's the S&P's move up began at the short term moving average and helps to confirm support around the 1425-1435 level. This is the level coincident with the break-out and continuation pattern the index made a few weeks ago. The S&P is trading very near to it's multi-year high and will likely retest if not surpass it very soon. The markets had to climb a wall of worry to get hear and now the worry is subsiding. The economic indicators are improving, the unemployment rate is coming down, earnings seem to be OK and the fourth quarter estimates are starting to be revised up.

S&P 500, daily

Longer term the economy is still facing many headwinds, headwinds that will have their effect on corporate profits and growth. The world is still growing very slowly, Europe is still in recession and there is no real sign of acceleration anywhere, just some signs of stabilization. There are also long term expectations from economists for the global economy to dip again next year and bring the US very near to recession.

On the long term charts of the S&P momentum is currently bullish but weak when compared to past rallies. This weakness is divergent from the long term trend and one sign of the impending market correction I have been looking out for. Because of this I still think the markets are heading up but the end of the “most hated rally” is getting closer and closer. In the short term the next resistance is around 1465, if the markets can get above that level and maintain it then the next target is 1565.

S&P 500, weekly

The VIX is still creeping along at historic low levels. The index has been trading in an increasingly narrow range. The VIX dropped at open but then moved up during the day, nearly making it back to break even.

VIX, daily

The Dow chart is showing a textbook Dow theory feature, a lower low. The index moved down from resistance and made a lower low than the previous low. Should the index fail to make a new high soon this will add weight to the impending market correction argument.

Dow, daily

There is still a lot of earnings to sift through. Market direction will likely not be determined this week but the reports will help clarify the past and give a hint of the future. Data will drive the underlying trend long term, the economic calendar is full this week but next week is when it really heats up. The FOMC meeting and rate announcement is on Wednesday next week and the advance 3rd quarter GDP figure is released on Friday.

Until then remember the trend and trade with caution.

Thomas Hughes


New Option Plays

Bubbling Higher

by James Brown

Click here to email James Brown


NEW DIRECTIONAL CALL PLAYS

Diageo Plc. - DEO - close: 115.13 change: +1.19

Stop Loss: 111.90
Target(s): 119.75
Current Option Gain/Loss: Unopened
Time Frame: 3 to 6 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
DEO is the U.K.-based producer for a wide number of spirits, beer, and wine. Shares have been channeling higher for months. DEO hit new record highs just a week ago. Today's bullish breakout above its 10-dma and the $115 level looks like a short-term bullish entry point.

I am suggesting small bullish positions at the open tomorrow. The stock tends to gap open each morning as shares here in the U.S. react to trade that started in Europe. Thus we want to limit our position size due to the volatility.

We'll use a stop loss at $111.90, just under the 30-dma. Our target is $119.75.

- Suggested *Small* Positions -

buy the NOV $115 call (DEO1217k115) current ask $2.40

Annotated Chart:

Entry on October xx at $ xx.xx
Average Daily Volume = 529 thousand
Listed on October 16, 2012



In Play Updates and Reviews

SHLD Hits Our Target

by James Brown

Click here to email James Brown

Editor's Note:

The stock market's bounce continued on Tuesday in spite of some very mixed and somewhat bearish headlines out of Europe.

SHLD hit our bullish target.

JNPR and LO hit our stop loss.

Current Portfolio:


CALL Play Updates

Commvault Sys. - CVLT - close: 58.54 change: +1.50

Stop Loss: 54.90
Target(s): 62.00
Current Option Gain/Loss: -75.8%
Time Frame: exit prior to earnings on Oct. 30th
New Positions: see below

Comments:
10/16/12: I double checked a couple of different quote feeds. Both of them said today's intraday low in CVLT was only $55.74. If you look at an intraday chart it looks lower than that.

The stock did show some relative strength and add +2.6%. Unfortunately CVLT is still trading under resistance at $60.00.

We have three days left on our October call. Readers may want to exit now to minimize losses instead of betting the bounce continues.

- 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: 60.52 change: +0.63

Stop Loss: 58.75
Target(s): 61.50
Current Option Gain/Loss: + 22.9%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
10/16/12: The bounce resumes with traders buying the dip in EQT. Readers may want to exit now. However, we do still have three days left and now that our call is in the money every tick higher helps. Of course if there is any reversal the option is going to drop quickly. Right now our exit target is $61.50.

- Suggested Positions -

Long Oct $60 call (EQT1220j60) Entry $0.61

10/15/12 new stop loss @ 58.75, readers may want to exit now
10/13/12 adjust exit down to $61.50
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


Medivation, Inc. - MDVN - close: 51.86 change: -0.84

Stop Loss: 49.95
Target(s): 57.00
Current Option Gain/Loss: -21.0%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
10/16/12: Hmm... the trading action in MDVN today is very worrisome! The stock did not bounce with the rest of the market. Shares have technically closed underneath what was supposed to be technical support at the 50-dma. More conservative traders may want to abandon ship immediately. Or as an alternative, raise your stop toward today's low at $51.10. I am not suggesting new positions.

Earlier Comments:
We will plan to exit prior to the early November earnings report.

- Suggested Positions -

Long Nov $55 CALL (MDVN1217K55) Entry $2.00

10/15/12 triggered @ 52.50

Entry on October 15 at $52.50
Average Daily Volume = 780 thousand
Listed on October 12, 2012


Noble Energy, Inc. - NBL - close: 94.69 change: +0.92

Stop Loss: 91.75
Target(s): 99.75
Current Option Gain/Loss: Oct95c: -51.7% & Nov95c: -12.9%
Time Frame: exit prior to earnings on Oct. 25th
New Positions: see below

Comments:
10/16/12: Oil and energy stocks did participate in the market's rally today and NBL added +0.9%. Unfortunately the rally reversed at last week's high near $95.50. More conservative traders will want to exit early right now. Of course there is a chance this bounce continues and we do still have three days left but any declines in NBL and our October option is going to evaporate. I am not suggesting new positions at this time. 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


Six Flags Entertainment - SIX - close: 63.99 change: +1.75

Stop Loss: 60.90
Target(s): 64.75
Current Option Gain/Loss: +66.6%
Time Frame: exit prior to the Oct. 24th earnings report
New Positions: see below

Comments:
10/16/12: SIX delivered a strong performance with a +2.8% gain and a new all-time high.

I am not suggesting new positions at this time. Please note that we are adjusting our exit target down to $64.75. Don't forget that we do not want to hold over the October 24th earnings report.

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.

- Suggested Positions -

Long Nov $65 call (SIX1217k65) Entry $1.05

10/16/12 adjust exit target down to $64.75

Entry on October 12 at $62.25
Average Daily Volume = 334 thousand
Listed on October 10, 2012


SPX Corp. - SPW - close: 68.90 change: +0.00

Stop Loss: 68.40
Target(s): 74.00
Current Option Gain/Loss: Unopened
Time Frame: exit prior to earnings on Oct. 31st.
New Positions: Yes, see below

Comments:
10/16/12: SPW's performance today is disappointing. The market produced a widespread rally and SPW closed unchanged on the session. There is no change from my prior comments.

I am suggesting a trigger to buy calls at $70.25. If triggered our target is $74.00 but we'll plan on exiting prior to the Oct. 31st earnings report. FYI: The Point & Figure chart for SPW is bullish with an $85 target.

Trigger @ 70.25

- Suggested Positions -

buy the NOV $70 call (SPW1217k70)

Entry on October xx at $ xx.xx
Average Daily Volume = 594 thousand
Listed on October 15, 2012


PUT Play Updates

CACI Intl. - CACI - close: 49.47 change: +0.37

Stop Loss: 51.25
Target(s): 45.25
Current Option Gain/Loss: -13.0%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
10/16/12: Just as we expected shares of CACI bounced toward short-term resistance near $50 and the 10-dma. A failure here could be used as a new bearish entry point. More conservative traders may want to adjust their stop loss lower.

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: 36.43 change: +1.13

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:
10/16/12: DECK rallied with the market today. Shares remain above support at the $35 level. If DECK rallies again tomorrow we will likely drop it as a candidate.

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: 29.64 change: -0.06

Stop Loss: 32.05
Target(s): 25.15
Current Option Gain/Loss: +37.0%
Time Frame: exit prior to earnings on Oct. 25th
New Positions: see below

Comments:
10/16/12: ESI did not participate in the market's rally today, which is good news for bears. After the closing bell tonight rival APOL reported earnings and beat estimates but APOL guided lower. Now shares of APOL are down sharply after hours and that could weigh heavily on shares of ESI tomorrow morning.

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


Mosaic Co. - MOS - close: 54.49 change: +0.57

Stop Loss: 55.55
Target(s): 50.15
Current Option Gain/Loss: -24.8%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
10/16/12: MOS added +1.0% today. It looks like the bounce was struggling with technical resistance at the 10 and 200-dma midday. I would wait for a new drop under $54.00 before considering new bearish positions. Our initial target is $50.00 but more aggressive traders could aim lower.

- Suggested Positions -

Long Nov $52.50 PUT (MOS1217w52.5) Entry $1.25

10/15/12 trade opened

Entry on October 15 at $53.90
Average Daily Volume = 4.2 million
Listed on October 12, 2012


Starbucks Corp. - SBUX - close: 48.96 change: +1.29

Stop Loss: 50.05
Target(s): 44.00
Current Option Gain/Loss: -16.4%
Time Frame: exit prior to the early November earnings report
New Positions: see below

Comments:
10/16/12: The stock market's widespread gain today sparked some short covering and SBUX gapped open higher above short-term resistance at $48.00 and its 300-dma. The rally surged to $49.28 intraday and SBUX settled with a +2.7% gain. I am not suggesting new positions at this time.

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: 43.79 change: +0.94

Stop Loss: 44.25
Target(s): 42.00
Current Option Gain/Loss: - 5.1%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
10/16/12: TECD produced a +2.1% gain. Shares were oversold so a bounce isn't that surprising. The close over its simple 10-dma is short-term bullish but the rally stalled at short-term resistance near $44.00. Of course the bounce may not be over yet and readers may want to exit early now. We will leave our stop loss at $44.25 for now. 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

10/15/12 new stop loss @ 44.25
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


CLOSED BULLISH PLAYS

Sears Holding Corp. - SHLD - close: 62.17 change: +1.85

Stop Loss: 57.90
Target(s): 62.00
Current Option Gain/Loss: +160.0%
Time Frame: 3 to 5 weeks
New Positions: see below

Comments:
10/16/12: Target achieved.

SHLD displayed relative strength with a +3.0% gain. The stock hit our exit target at $62.00 midday. Our trade is closed but I would keep an eye on SHLD. Bigger picture the stock seems to have build a bottom over the last several months and a breakout past $63-64 could be a new bullish buy signal.

- Suggested Positions -

Oct $57.50 call (SHLD1220j57.5) Entry $1.75 exit $4.55 (+160.0%)

10/16/12 target hit
10/13/12 adjust exit down to $62.00
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

chart:

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


CLOSED BEARISH PLAYS

Juniper Networks - JNPR - close: 17.48 change: +0.69

Stop Loss: 17.05
Target(s): 14.10
Current Option Gain/Loss: -33.3%
Time Frame: Exit prior the October 23rd earnings report
New Positions: see below

Comments:
10/16/12: I warned readers yesterday that the breakout over the 10-dma was trouble. The rally continued today and JNPR surged +4.1%. Our stop was hit at $17.05.

Earlier Comments:
The plan was to keep our position size small to reduce our risk.

- Suggested *SMALL* Positions -

Nov $16 PUT (JNPR1211W16) Entry $0.72 exit $0.48 (-33.3%)

10/16/12 stopped out @ 17.05
10/13/12 new stop loss @ 17.05
10/11/12 new stop loss @ 17.25

chart:

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


Lorillard, Inc - LO - close: 117.37 change: +1.92

Stop Loss: 115.75
Target(s): 110.25
Current Option Gain/Loss: -41.6%
Time Frame: exit ahead of the Oct. 24th earnings report
New Positions: see below

Comments:
10/16/12: The bounce in LO continued as well. Unfortunately the stock gapped open higher at $117.38, which was way above our stop loss at $115.75. The larger trend in LO is still bearish but the bounce may not be over yet.

- Suggested Positions -

NOV $110 PUT (LO1217w110) Entry $2.33 exit $1.36 (-41.6%)

10/16/12 stopped out on the gap open higher @ 117.38
10/13/12 new stop loss @ 115.75
10/11/12 triggered @ 114.50

chart:

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