Option Investor
Newsletter

Daily Newsletter, Thursday, 10/18/2012

Table of Contents

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

Market Wrap

Third Quarter Earnings Trough?

by Thomas Hughes

Click here to email Thomas Hughes
Signs of economic stabilization are still percolating through the data. Speculation is rising that the third quarter will be an economic and earnings trough for the US and China. US stock futures traded flat to positive overnight before moving slightly to the negative following unemployment claims data. Newly released GDP data from China helped spur buying in Asian markets but this weeks jobless numbers put pressure on our own. The S&P futures trade held steady, just below the flat line going into to the open of trading. Other data, including a few earnings reports, kept the markets flirting with break even through the lunch hour.


The Economy

I was unsurprised by this mornings jump in unemployment claims. Last weeks number was too good to be true and there was speculation this morning about its validity. Last weeks number was revised up by 3,000 to 342,000, spring-boarding this weeks data another 46,000 claims up to an adjusted 388,000 claims for initial unemployment benefits. This number was more than 20,000 more than expected. Likewise, the four week moving average also climbed. The average of initial claims is still trending down and near 6 month lows.


Continuing claims and total claims for unemployment fell this week. Continuing claims fell by 29,000 to 3.25 million. Continuing claims has been in decline for several weeks and near long term lows for months. As an indicator it may be signaling that job creation is starting to out pace job losses. Total claims fell by 42,000, basically unchanged, to an even 5 million. Total claims has also been in decline for months and is at long term lows. The downward trend in total claims plus the recent drop in unemployment suggests that more people are finding jobs and not just quitting the hunt.



Other important data, released mid-morning, added a little volatility to trading but eventually helped the general markets climb firmly into positive territory. The Philadelphia Fed survey of manufacturing climbed a surprising 5.7% versus the expected 1%. This reversed last months -1.9% decline and ends a 5 month streak of declines in the survey results.

The Conference Boards index of leading indicators was released simultaneously to the Philly Fed and was equally surprising. The leading indicators, which is based on last months information and looks 3-6 months ahead, climbed 0.6%. This still shows only a modest expectation of growth but is much better than the predicted 0.1% and last months -0.4%. Taken individually and together, along with other data over the last two weeks seems to be confirming the possibility of a fourth quarter bounce. Data is not good, the economy is not accelerating, but a short term up swing in GDP is very probably in the works.


The data driving Asian markets overnight was the release of China's 3rd quarter GDP figures. The worlds second largest economy declined, as expected, to 7.4% growth in the 3rd quarter. Within the data are signs that China is stabilizing, at least in the short term. Retail and industrial production both rose during the third quarter and are expected remain steady. The data caused Cramer to take a China “hard-landing … off the table”. Asian markets gained 0.5-1.5%.

European shares traded into the green, barely, as more riots and protests erupted across the region. Striking workers in Greece are trying to bring the government to a halt in order to try and keep their benefits. The irony is that the loss of production will cost the government over a billion euros, exacerbating the underlying problem. The EU summit, which also met today, was another cause for protests. The Euro leaders are expected to be working on plans for a kind of “economic czar” for the region.

Oil trading was volatile today. The price of light crude was down as much as 1.25% this morning before climbing back into positive territory in the afternoon. Conflicting data over global stabilization and supply concerns were drivers of the movement. The Oil Index traded in a very narrow range today, around the mid-point of yesterday's candle. The index has gained more than 3.5% in the last 3 days and looks like it is going to retest the upper boundary of its trading range. On the long term charts the index still has bullish momentum and is supported by the 150 day moving average.

Oil Index, daily

Gold lost $10 early in trading, slipped a little more during the morning hours, and then bounced back some in the afternoon. Gold has been trading below $1750 all week and could be heading lower. The signs of economic stabilization will put pressure on gold prices in the near term. The Gold Index traded lower today as well, dropping down to the short term moving average. I have been watching a possible bull triangle formation on this chart that I now believe to be invalid. The index has moved beyond the point of the triangle and now has some downside risk. The index could fall to $200, if this happens watch for support to form or a break down to lower levels.

Gold Index, daily

The rate on the ten year treasury held steady from yesterday. The yield traded in a very narrow range, remaining above the short term moving average. If the yield continues to climb the next resistance is around 1.81%.

Ten Year Treasury Yields, daily

Earnings

Earnings reports added their own volatility to today's trading. I'll start with Google, which was scheduled to report after the bell. The companies reporting agency made a “fat finger” mistake and published the report prematurely. The results in the early release were well below expectations and caused the stock to sell off by close to 10%. The mistake was caught fairly quickly and trading was halted, pending a statement from Google. In the early report Google made $9.03 per share on a big decline in cost-per-click. The consensus estimate reported by CNBC was for Google to earn over $10.50 per share but the Zacks Research estimate was a more modest $8.88. Google said the report contained incorrect information and that they would amend the report as soon as possible. Trading resumed around 3:20 PM. Google trades remained depressed but regained some ground before the close.

Google, daily

Nokia reported a better than expected quarter, narrowing the predicted loss significantly. The company improved margins although sales slowed. The stock traded down from yesterday's close but remained above the short term moving average. The stock has been trading near the years lows for four months. MACD suggests a base has formed and today's volume may indicate growing support.

Nokia,daily

Goldman Sachs reported this morning before the bell too. The bank swung to a quarterly loss on debt valuations but ex-items beat Wall Street expectations. MS earned $0.28 per share versus the expected $0.24 on revenue that blew away projections by more than $1 billion. The stock opened trading in positive territory but quickly fell to bearish pressure. Today's candle signal, a divergence in MACD plus the volume spike, raises a red flag for this stock. Morgan Stanley could retreat to support around $16.25.

Goldman Sachs, daily

Ebay reported after the bell yesterday. The online marketplace posted double digit gains in revenue and per share profits. The stock climbed more than 4% on the news with a spike in volume. Momentum in the stock turned bullish today as well. The stocks move was halted at short term resistance so watch for a break above $50.65.

Ebay, daily

Travelers Companies also beat the Streets expectations. Their results and future expectations sent the stock gapping up by close to 4% to reach an all time high. This stock has been trending up for some time now and it looks like it will keep going. Today's jump cam with a spike in volume and momentum.

Travelers, daily

Microsoft reported after the bell today. Earnings were expected to be in a range around $0.50 per share, about 30% lower than last quarter. The stock traded down during today's session, below the short term moving average and above the long term support. The company actually reported earnings of $0.65 per share ex items, but GAAP earnings were below forecast.

Microsoft, daily

Chipotle Mexican Grill also reported after the bell. The fast-casual food chain was expected to earn $2.30 per share, a decline of 10% from last quarter. The stock traded down from a resistance level today ahead of the report which foreshadowed a slight miss. Chipotle posted earnings of $2.27 per share, an increase of nearly 20% from the same period last year. The gains, though substantial, was not enough to keep investors interested and caused the stock to drop sharply.

Chipotle Mexican Grill, daily

The Indexes

The major indexes opened slightly lower today following the jobless data. Stocks drifted in early morning trading, moving in a small range just below the break even line. By lunchtime earnings and economic data had pushed the S&P and other major indexes into positive territory until Google's earnings release error. Without Google's report blunder the markets could have drifted up a little higher in the range before the close. With the blunder the S&P and other indexes fell shell sharply to hit the days lowest levels. The markets regained some of their upward momentum once Google trading resumed but failed to cross back into the green.

The S&P and DOW are trading near 4 year highs and important short term resistance levels. For the S&P 500 the magic number is 1456; The S&P needs to surpass and close above this level. The index has been trading below this point now for weeks. The sideways action is good for building a base of support for the index but the longer it stays here the more chance of it breaking back down. The poor reports from tech may bring the broad markets down in the short term, the S&P could retreat to support at 1430.

S&P 500, daily

On the thirty minute charts of the S&P we can see a nice move up from support that begins on 10/15. This bounce starts to break down once it approaches resistance. Google's earnings can be blamed for the breakdown today.

Earnings in general are better than expected although clearly not good enough in some cases. Regardless, the data and underlying economic trend will determine market direction- not third quarter earnings. The S&P will likely trade within this range this week and into next week ahead of the FOMC meeting and advance GDP numbers.

S&P 500, 30 minute bars

The VIX moved down today in early trading before bouncing back up after the Google scare. The index is still near long term lows.

VIX, daily

The Nasdaq was hit hardest by the Google fiasco. The index has now made what looks at this time to be a second lower low in a short-term downtrend. The index has also made a second move lower from a resistance level/short term moving average; the first happened last Monday. So far the big earnings misses have only been in the tech sector. This weakness will be a drag on the broad markets but should not pull them down. The S&P and the DOW both remained above their short term moving averages and support.

Nasdaq, daily

Dow, daily

Things still look good as we progress into the fourth quarter. Economic indicators are pointing to a trough in world GDP centered on the third quarter. I would not be too surprised to see more signs of stability soon. Next week the FOMC meets on Wednesday and will make an interest rate decision. The rate should remain steady but the statement will be full of information for traders. On Friday we get the advance GDP numbers for the third quarter. From I have seen over the last few weeks there is a good chance that 3rd quarter GDP will be better than estimated.

Until the S&P falls below 1425 the underlying trend will remain bullish. Earnings season will provide volatility which will provide lots of trading opportunities but not long term direction. Tomorrow be on the look out for reports from the likes of McDonald's, Schlumberger and GE.

Be vigilant and remember the trend!

Thomas Hughes


New Option Plays

High-dividend REIT

by James Brown

Click here to email James Brown


NEW DIRECTIONAL CALL PLAYS

Health Care REIT, Inc. - HCN - close: 60.53 change: +1.22

Stop Loss: 58.80
Target(s): 63.50
Current Option Gain/Loss: Unopened
Time Frame: exit prior to earnings on Nov. 6th,
New Positions: Yes, see below

Company Description

Why We Like It:
HCN is a REIT that focuses on retirement homes and healthcare properties. Shares have a long-term bullish trend of higher lows and higher highs. Investors have been buying dips and that might be due to HCN's 4.9% dividend yield. Today saw HCN breakout past resistance at $60.00.

I am suggesting bullish positions at the open tomorrow. More nimble traders could try and open positions on a dip near $60.00, which should be new short-term support. Our multi-week target is $63.50 but we'll exit prior to the Nov. 6th earnings report. FYI: The Point & Figure chart for HCN is bullish with a $70 target.

- Suggested Positions -

buy the NOV $60 call (HCN1217k60) current ask $1.20

Annotated Chart:

Entry on October xx at $ xx.xx
Average Daily Volume = 2.8 million
Listed on October 18, 2012



In Play Updates and Reviews

SIX hits our Target

by James Brown

Click here to email James Brown

Editor's Note:

October options expire after tomorrow. Many stocks are churning sideways as they wait for expiration.

We closed CVLT and EQT this morning. We also closed the October position on NBL. SIX hit our target. CACI was stopped out.

Current Portfolio:


CALL Play Updates

Diageo Plc. - DEO - close: 113.09 change: -1.51

Stop Loss: 111.90
Target(s): 119.75
Current Option Gain/Loss: -34.2%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
10/18/12: It was a disappointing session for DEO. The stock gapped open lower below its rising 20-dma, which should have offered some support. Now DEO looks poised to test the 30-dma and the bottom of its bullish channel soon. If DEO sees an intraday dip below this level near $112.00 it could hit our stop loss at $111.90. I am not suggesting new positions at this time.

Earlier Comments:
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.

- Suggested *Small* Positions -

Long NOV $115 call (DEO1217k115) Entry $1.90

Entry on October 17 at $114.24
Average Daily Volume = 529 thousand
Listed on October 16, 2012


Medivation, Inc. - MDVN - close: 51.11 change: -0.42

Stop Loss: 49.95
Target(s): 57.00
Current Option Gain/Loss: -40.5%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
10/18/12: MDVN is still not cooperating and readers will want to seriously consider an early exit. Shares are down four days in a row and down eight out of the last nine sessions. The close under its 50-dma is bearish. Even though MDVN is short-term oversold and due for a bounce there is no guarantee it will see one. 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

10/17/12 MDVN is not cooperating and closed under the 50-dma, readers may want to exit immediately.
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: 96.50 change: +0.36

Stop Loss: 92.75
Target(s): 99.75
Current Option Gain/Loss:(Oct95c: - 6.8%) & Nov95c: + 6.4%
Time Frame: exit prior to earnings on Oct. 25th
New Positions: see below

Comments:
10/18/12: NBL continues to rise and posted a +0.3% gain, which was better than the major indices. We had decided to close our October option position at the open this morning. Unfortunately NBL gapped open lower at $95.82. We still have the November calls. 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.

- Suggested Positions -

(closed on Oct. 18th at the open)
Oct $95 call (NBL1220j95) Entry $1.45 exit $1.35 (- 6.8%)

- or -

Long Nov $95 call (NBL1217k95) Entry $3.10

10/18/12 closed the Oct. call at the open this morning
10/17/12 new stop loss @ 92.75
Prepare to exit the Oct. $95 call at the open tomorrow morning

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


SPX Corp. - SPW - close: 68.94 change: +0.09

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:
10/18/12: SPW continues to churn sideways between $68 and technical resistance at its 200-dma. I suspect SPW will be stuck in this range until after option expiration tomorrow. We are waiting for a breakout past $70.00.

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

ITT Educational Services - ESI - close: 27.28 change: -0.48

Stop Loss: 30.40
Target(s): 25.15
Current Option Gain/Loss: - 1.6%
Time Frame: exit prior to earnings on Oct. 25th
New Positions: see below

Comments:
10/18/12: ESI continues to underperform and set a new closing 52-week low today. There is no change from my prior comments. I am not suggesting new positions at this time.

NOTE: The option values are still acting weird. ESI declines but the option declined as well.

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

10/17/12 new stop loss @ 30.40

Entry on October 04 at $29.47
Average Daily Volume = 408 thousand
Listed on October 3, 2012


Garmin Ltd. - GRMN - close: 39.75 change: +0.15

Stop Loss: 40.60
Target(s): 36.00
Current Option Gain/Loss: + 0.0%
Time Frame: exit prior to the Oct. 31st earnings report
New Positions: see below

Comments:
10/18/12: GRMN sank to a new relative low and bounced sharply this afternoon. This is troubling and would suggest GRMN is about to see a stronger oversold bounce. If shares make it past $40.00 we are in trouble. Our stop is at $40.60. I am not suggesting new positions tonight.

Earlier Comments:
We want to limit our position size since the most recent data listed short interest at 16% of the 123 million share float. We will plan to exit prior to the October 31st earnings report.

- Suggested *Small* Positions -

Long NOV $40 PUT (GRMN1217w40) Entry $1.85

Entry on October 18 at $39.51
Average Daily Volume = 787 thousand
Listed on October 17, 2012


Starbucks Corp. - SBUX - close: 47.41 change: -0.98

Stop Loss: 49.51
Target(s): 44.00
Current Option Gain/Loss: +19.0%
Time Frame: exit prior to the early November earnings report
New Positions: see below

Comments:
10/18/12: It looks like the bounce in SBUX has run out of gas. The stock was underperforming the market today with a -2.0% decline. I am lowering our stop loss to $49.51.

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

10/18/12 new stop loss @ 49.51

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


CLOSED BULLISH PLAYS

Commvault Sys. - CVLT - close: 56.93 change: -0.91

Stop Loss: 54.90
Target(s): 62.00
Current Option Gain/Loss: -95.9%
Time Frame: exit prior to earnings on Oct. 30th
New Positions: see below

Comments:
10/18/12: We have been running out of time on our October option trade and the plan was to exit positions at the open this morning. CVLT opened at $57.60.

- Suggested Positions -

Oct $60 Call (CVLT1220j60) Entry $1.24 exit $0.05 (-95.9%)

10/18/12 closed at the open this morning
10/17/12 prepare to exit at the close tomorrow!
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

chart:

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


EQT Corp. - EQT - close: 61.23 change: +0.16

Stop Loss: 58.75
Target(s): 61.50
Current Option Gain/Loss: + 63.9%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
10/18/12: EQT managed another gain with a +0.2% advance today. Since we were running out of time I suggested we exit positions at the opening bell this morning. EQT gapped open lower at $60.88 before climbing to close up on the session.

- Suggested Positions -

Long Oct $60 call (EQT1220j60) Entry $0.61 exit $1.00*(+63.9)

10/18/12 closed at the open this morning
*option exit price is an estimate since the option did not trade at the time our play was closed.
10/17/12 prepare to exit at the open tomorrow
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

chart:

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


Six Flags Entertainment - SIX - close: 64.21 change: +0.72

Stop Loss: 60.90
Target(s): 64.75
Current Option Gain/Loss: +61.9%
Time Frame: exit prior to the Oct. 24th earnings report
New Positions: see below

Comments:
10/18/12: Target achieved.

SIX rallied to $64.95 before reversing under resistance at the $65.00 level. Our exit target was hit at $64.75. Unfortunately the option did not move very much in spite of SIX's new high.

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 exit $1.70 (+61.9%)

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

chart:

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


CLOSED BEARISH PLAYS

CACI Intl. - CACI - close: 50.72 change: +0.59

Stop Loss: 50.60
Target(s): 45.25
Current Option Gain/Loss: -41.3%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
10/18/12: The oversold bounce in CACI has now hit four days in a row. Shares pushed past resistance near $50 and hit our stop loss at $50.60 today.

- Suggested Positions -

Nov $50 PUT (CACI1211w50) Entry $2.30 exit $1.35 (-41.3%)

10/18/12 stopped out at $50.60
10/17/12 Readers may want to exit immediately. New stop loss @ 50.60
10/11/12 new stop loss @ 51.25

chart:

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