Option Investor
Newsletter

Daily Newsletter, Thursday, 11/29/2012

Table of Contents

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

Market Wrap

Data Helps Lift Markets

by Thomas Hughes

Click here to email Thomas Hughes
Introduction

Futures were up in early trading. Yesterday's 100 point turn around on the Dow seemed to have lifted spirits. This mornings surprising GDP data also helped to lift US and world markets until further posturing from Rep Boehner and Reid sent stocks back down near yesterday's closing prices. They both claim neither side is serious. Reid continued to call on the same immediate compromise the President is asking for. Nothing new was revealed, leaving the situation exactly as it was before. Yesterday the S&P regained what to me is highly significant support level, 1400. Today, the Dow regained a similar level when it crossed over 13,000. Holding these levels will be important for bulls in the near term but longer term direction is murky. The indexes are certainly in a time of transition and market direction is highly questionable while they are still so sensitive to political rhetoric and sniping. The fiscal cliff is on everyone's mind. The potential for long term damage to the economy is feared above all else. Too much change could off set the delicate balance we have going on right now, or it could be the push we need to get things moving again.

Things seem to be quieting down around the world. China's transition of leadership has been fairly quiet and European issues are returning to a low simmer. According to today's headlines global attention is focused outward and on our fiscal cliff.

It seems to me that of the three major players involved in global economics, China, Europe and the US, the other two are taking care of business and now its our turn. Removing the fiscal cliff could be the next step in the chain of events leading to world GDP growth.


Today's Economic Releases

The big headline today was 3rd quarter GDP. The previous estimate was for a downward revision from 2% to 1.8%. I think everyone was surprised to see an upward revision to 2.7%. The gains were mostly on a rise in inventory and an increase in exports. In the revision estimates for spending income were reduced and inflation remained low. While not a large revision or even a robust number it does indicate that the economy is growing more and faster than was expected. I think that maybe in this sluggish market that could be enough to inspire some confidence, at least for the short term. It also leads me to bring up my earlier theories of a fourth quarter GDP bounce and the potential it brings for revenue and profit surprises in the next round of earnings releases.


The Sandy Effect on unemployment seems to be receding as fast as the storm waters themselves. Initial claims for unemployment fell this week to 393,000. This is 23,000 lower than last weeks upwardly revised 416K. Analysts had been expecting claims to fall to about 390K, basically in line with the reported results. The good news is that the number is back below the 400K level that economists believe reveals a net loss in jobs, the bad news is that the four week moving average rose above 400K. The average gained 7,500 to 405,250. We'll have to wait and see if initial claims continue to retreat and how holiday and post-holiday hiring/firing affect the overall trend.


Continuing and total claims for unemployment both fell this week as well. Both of these two data points are near the long term lows and appear to steady, if not trending slightly in the case of total claims. Continuing claims fell be 70K to an adjusted 3.29 and total claims fell nearly 60K to 5.18 million. Once again, it does not appear as if Sandy had any real long term damage on overall employment in the US.



Pending home sales were also released today. The pending sales data hit a five year high. Sales in October rose over 5% from Septembers upwardly revised number. On a year over year basis pending home sales have risen over 13%. This is yet another sign of returning strength in the housing market and supports the recently reported rise in home prices.

Global Eyes On US Cliff

Asian markets edged higher today on strengthening US data and potential Fiscal Cliff resolution. News from Asia was pretty quiet. China's governmental transition is not causing any waves and signs are good that the country will meet and probably exceed its target for fiscal growth in 2012. The most recent economic release for China is home sales, which jumped over 30%.

Japan is still struggling with growth and may be slipping back into recession. This could spur more a quicker call to action for the BOJ than is already expected. Elections in Japan, scheduled for mid December, are likely to put Shinzo Abe on the seat of power. He has already stated his plans for “unlimited easing” which sparked a slide in yen values.

European markets made new highs today. The resolution of Greek dealings and, of course, US data helped to calm fears and pave the way for the prospects of what to do next. Greece will be pushed aside for a time providing they stick to the plan. Even Spain is receding in the headlines but this is one that is more likely to reemerge. Spain has yet to enter into any actual deal and its financial standing is still on shaky ground.

Oil And Gold

All the data and political posturing combined to halt yesterday's sharp drop in gold prices. Today golds $10 gain the price in the mid point of a range that has been established over the last few weeks between $1700 and $1750. The Gold Index has been trending sideways now for over two weeks, ever since falling below support. So far the resistance of old support has been holding and now has the added weight of short and long term moving averages.

The index has retreated quite a bit since hitting its peak earlier this year. This is to be expected in any rally but this one has dropped below a crucial support/resistance pivot point. When applying Fibonacci retracements of the earlier move up and break above the resistance the 38% line is coincident with the same resistance line. This line should have been support and the stopping point for any pull back. Now, not only has the index fallen below the 38% line it has also broken the 50% retracement. At this point I the possibility of a 78% or even a 100% retracement is on the table.


Oil also posted some big numbers today. The price of crude rose nearly 2% with gas and Brent close behind. Tensions in the mid east were the cause of supply concerns which have been helping prices edge higher for the last few weeks. Also, the larger than expected GDP figure and the eminent Fiscal Cliff resolution helped to lift prices. The oil index tried to continue a jump it started yesterday. The move today is the second attempt this market has tried to surpass the 150 day EMA and is the second time it failed. Today's doji symbol indicates indecision so it will take another candle or more to confirm the EMA as resistance.


Story Stocks

Research In Motion is beginning to reemerge as a contender in mobile and wireless. We're getting closer and closer to the launch of Blackberry 10 and the responses from the investment community are promising. Today RIMM received another upgrade, this time from Goldman Sachs. The report states that Goldman believes the company will exceed revenue and profit expectations for the next four quarters and that they give the launch a 30% chance of success based on early reviews. The stock jumped close to 10% in premarket trading, putting price firmly above my previously drawn resistance line. The stock encountered heavy selling after the open and was forced back down below the line. I will be watching this line closely now, a solid move above would, especially with the recent gains in volume, would be very bullish in my view. The Goldman target price for RIMM is $16.


Tiffany's diamond isn't as sparkly as analysts had estimated. The jewelry store missed its 3rd quarter revenue and profit estimates, sending the stock down sharply. The miss impacted the bottom line enough to cause executives to lower company guidance to a range $0.30 below the previous. The news was released premarket and sent shares lower by more than 10% at the open. The low prices attracted some buyers who helped to drive the stock during the day but still failed to regain support levels. The stock is a dividend payer, yielding more than 2% at today's prices, which could be an extenuating factor in both the stocks sharp decline and the number of buyers who stepped in to bring the price up to the days highs. The support/resistance line at $60 will be important in the near term for this stock. I would watch for moves above or a confirmation of this line.


La-Z-Boy also missed targets, sending it's shares lower. The furniture manufacturer's 2nd quarter profits dropped more than 16% as rising costs cut into margins. The drop was expected but 16% was much more than expected. Shares of this stock also opened sharply lower but they were met by more sellers than buyers and continued to fall during the day.


Special dividends are emerging as a driver of stocks this year. Costco made headlines yesterday and today Disney became another of the more that 170 special dividends this year. If it they can be taken as an example any corporation wanting to boost share value should issue a special dividend before the end of the year. The tactic is returning value to shareholders, helping them to avoid higher taxes and now is attracting hordes of investors seeking to lock in some end of the year profits. Costco had its biggest day in more than 2 years yesterday and today Disney gained more than 1% and regained the upper side of its short term moving average for the first time in nearly two months.


The Indexes

The S&P continued its support bounce today despite the minor fluctuation caused by political rambling. The GDP data and hopes for resolution to the cliff helped yesterday's mega turn-around and retest of support continue rallying into today. Trading over the last four days, around the 1400-1410 level and the long term EMA, when taken together, has been a nice consolidation move above the psychological and technical level of 1400.

Trading on the S&P maintained a fairly tight range today, between yesterday's close near 1410 and the previously significant number of 1420. 1420 proved to be resistance today for short term traders on hourly charts. I think this resistance will be short lived in the mid term and give way under upward pressures. The more significant resistance will be found at 1430 on the daily charts. Depending on how politics develop the market may move through this level as well. If no solution is reached and things remain in “happy talk” mode the markets could drift higher on Santa Rally induced buying and special dividends.


The markets never go straight up and there are lots of potential causes for worry aside from the fiscal cliff. Hopes and dreams may carry the markets higher while the negotiations are still in the earliest phases but there will likely be another pullback soon. Politicians are still haggling on details of the fiscal solution and have yet to reveal what the plan will actually look like. Once we do get a look at a real solution, one that is likely to make to the Presidents desk, we could see that pullback.

At this time, on the daily charts, momentum is bullish and still on the rise so for this reason I am looking for the S&P to move up to resistance rather than move down to support. However, I am still expecting a test of the recent lows, or at least of recent support, based on my previous MACD analysis. The convergence of MACD with the decline from 1465 to 1350 suggests that there are still some selling yet to come.


Widening the focus to weekly closings it looks like the S&P could easily retest the highs around 1465. The uptrend is still intact and we've got a nice candle signal forming on the 150 day moving average. Looking back over the last couple of years similar set ups have yielded 150 to 200 point moves in the S&P 500. The caveats to any rally is that the longer term trend, as measured by momentum, is in decline and the top could be near if not at a hand. There is a lot of resistance moving forward and these levels are coincident with long term highs, all time highs and other important technical levels associated with the 2008-2009 bear market.


For now, it seems, politics is getting in the way of real business and market cycles. The economic recovery is being threatened by political grandstanding and sniping, two things that never help anything. Until the fiscal cliff (geez I am tired of writing that) is out of the way, at least kicked down the road into 2013, it will hard to tell which way the market really wants to go. Will fear of taxes keep more people out of the markets than the prospects of investment gains will attract in?

I know if they don't solve the fiscal cliff soon I know I would like to thrown something off it myself...

Until then, happy trading

Thomas Hughes


New Option Plays

Percolating Higher

by James Brown

Click here to email James Brown

Editor's Note:

In addition to tonight's new candidate(s), consider these stocks as possible trading ideas and watch list candidates. Many of these need to see a break past key support or resistance:

(bullish ideas) AYI, JLL, VMC, SNA, FDO, HP, CSL, YUM, N, HD, IBB, MDVN, AMGN, CTSH, FISV, EBAY, ACN


NEW DIRECTIONAL CALL PLAYS

Starbucks Corp. - SBUX - close: 51.80 change: +0.43

Stop Loss: 49.95
Target(s): 55.85
Current Option Gain/Loss: Unopened
Time Frame: 3 to 6 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
SBUX is once again testing resistance near $52.00-52.25. It's failed twice now but this time shares look ready to breakout higher. I am suggesting a trigger to buy calls at $52.50. We will aim for $55.85 since there was resistance near $56.00. More aggressive traders may want to aim for the $59-60 area instead.

Trigger @ 52.50

- Suggested Positions -

buy the 2013 Jan $55 call (SBUX1319a55) current ask $0.70

Annotated Chart:

Entry on November xx at $ xx.xx
Average Daily Volume = 8.1 million
Listed on November 29, 2012



In Play Updates and Reviews

Pushing Past Resistance

by James Brown

Click here to email James Brown

Editor's Note:

The major market indices continue to advance. The NASDAQ, the Dow Industrials and the Russell 2000 have all closed above round-number resistance levels.

CRS was closed this morning.

We want to exit our NFLX trade tomorrow morning.

Current Portfolio:


CALL Play Updates

Dillard's Inc. - DDS - close: 88.98 change: +1.26

Stop Loss: 84.95
Target(s): 89.75
Current Option Gain/Loss: +57.1%
Time Frame: exit before Dec. 7th.
New Positions: see below

Comments:
11/29/12: I was surprised that DDS didn't rally to $90 today given the market's widespread gains. The stock churned sideways in the $89.50-88.00 zone. We are still aiming to exit at $89.75 but readers may want to go ahead and exit early now. I am not suggesting new positions.

- Suggested Positions -

Long Dec $90 call (DDS1222L90) entry $1.05

11/28/12 new stop loss @ 84.95
11/27/12 new stop loss @ 84.25
11/26/12 after the close DDS announces a special $5.00 dividend

Entry on November 20 at $85.05
Average Daily Volume = 489 thousand
Listed on November 19, 2012


Dover Corp - DOV - close: 64.01 change: +0.72

Stop Loss: 61.75
Target(s): 67.50
Current Option Gain/Loss: +23.8%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
11/29/12: DOV has bounced back to resistance near $64.00. Shares look ready to make a run at $65.00 soon. I am not suggesting new positions at this time.

- Suggested Positions -

Long 2013 Mar $65 call (DOV1316c65) entry $2.10

11/28/12 new stop loss @ 61.75
11/19/12 triggered @ 62.30

Entry on November 19 at $62.30
Average Daily Volume = 1.7 million
Listed on November 17, 2012


FMC Corp - FMC - close: 55.50 change: +0.01

Stop Loss: 53.80
Target(s): 59.50
Current Option Gain/Loss: - 29.4%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
11/29/12: Thursday was definitely a forgettable session for FMC. The stock churned sideways and closed virtually unchanged on the session. This lack of participation in today's market rally is a bit concerning.

- Suggested *Small* Positions -

Long 2013 Jan $57.50 call (FMC1319a57.5) entry $0.85

Entry on November 27 at $55.31
Average Daily Volume = 642 thousand
Listed on November 26, 2012


Netflix, Inc. - NFLX - close: 81.38 change: -0.85

Stop Loss: 79.90
Target(s): 89.75
Current Option Gain/Loss: - 50.0%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
11/29/12: NFLX seems to be growing weaker. The stock remains inside the $80-84 trading range. It could bounce at $80.00 again but shares have not participated in the market's recent rally. I am suggesting we abandon ship and exit early tomorrow morning at the open.

- Suggested Positions -

Long DEC $85 call (NFLX1222L85) Entry $4.60

11/29/12 prepare to exit tomorrow at the open
11/28/12 new stop loss @ 79.90
11/20/12 new stop loss @ 79.25
11/16/12 triggered @ 82.25

Entry on November 16 at $82.25
Average Daily Volume = 6.5 million
Listed on November 15, 2012


O'Reilly Automotive - ORLY - close: 92.85 change: -0.16

Stop Loss: 89.95
Target(s): 95.75
Current Option Gain/Loss: -15.7%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
11/29/12: Hmm... looking at an intraday chart of ORLY would suggest our trade has been stopped out. Yet I checked multiple sources and the intraday low was only $90.39. That would suggest the chart is showing a bad tick. ORLY spent the day churning sideways. I am not suggesting new positions at this time.

Our target is $95.75 but more aggressive traders may want to aim for the $99-100 zone instead.

- Suggested Positions -

Long DEC $95 call (ORLY1222L95) entry $1.90

Entry on November 20 at $92.05
Average Daily Volume = 1.8 million
Listed on November 19, 2012


Precision Castparts - PCP - close: 183.11 change: +1.63

Stop Loss: 176.90
Target(s): 188.00
Current Option Gain/Loss: +18.9%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
11/29/12: PCP continues to show strength. The stock gapped open higher at $182.04 and rallied to a new high at $184.36 before trimming its gains.

I have listed the December calls but you might want to use the January calls instead.

- Suggested *Small* Positions -

Long DEC $185 call (PCP1222L185) Entry $1.85

Entry on November 29 at $182.04
Average Daily Volume = 762 thousand
Listed on November 28, 2012


Pharmacyclics Inc. - PCYC - close: 54.10 change: +0.70

Stop Loss: 49.65
Target(s): 56.50
Current Option Gain/Loss: - 22.2%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
11/29/12: PCYC outperformed the market with a +1.3% gain but shares did fail at round-number resistance at the $55.00 level.

More conservative traders may want to raise their stops. I am not suggesting new positions at this time.

Earlier Comments:
I do consider this a more aggressive, higher-risk trade. Anytime you trade a biotech stock it can be a high-risk trade since you never know when a negative headline could send the stock crashing. Our target is $56.50. More aggressive traders could aim for the $59-60 zone instead.

- Suggested *Small* Positions -

long Dec $55 call (PCYC1222L55) entry $3.60

11/20/12 new stop loss @ 49.65
11/19/12 trade opened with PCYC's gap open higher @ 52.21

Entry on November 19 at $52.21
Average Daily Volume = 1.0 million
Listed on November 17, 2012


Trimble Navigation - TRMB - close: 55.68 change: +0.36

Stop Loss: 53.40
Target(s): 59.75
Current Option Gain/Loss: Unopened
Time Frame: 3 to 6 weeks
New Positions: Yes, see below

Comments:
11/29/12: TRMB gapped open higher this morning but shares have failed to breakout past resistance at $56.00.

I am suggesting small bullish positions if TRMB can trade at $56.15 or higher. If triggered our short-term target is $59.75.

Trigger @ 56.15

- Suggested Positions -

buy the 2013 Jan $57.50 call (TRMB1319a57.5)

Entry on November xx at $ xx.xx
Average Daily Volume = 708 thousand
Listed on November 28, 2012


Whirlpool Corp. - WHR - close: 102.52 change: -0.07

Stop Loss: 99.40
Target(s): 108.50
Current Option Gain/Loss: - 6.6%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
11/29/12: WHR saw a little profit taking today after yesterday's rally higher. I don't see any changes from my prior comments on WHR.

Our multi-week target is $108.50.

- Suggested *Small* Positions -

Long 2013 Jan $105 call (WHR1319a105) entry $3.75

Entry on November 26 at $101.89
Average Daily Volume = 1.3 million
Listed on November 24, 2012


PUT Play Updates

Humana Inc. - HUM - close: 65.73 change: +0.59

Stop Loss: 66.51
Target(s): 60.25
Current Option Gain/Loss: -44.4%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
11/29/12: HUM has bounced back to what should be short-term resistance near $66.00 and its simple 10-dma. A failure here can be used as a new bearish entry point.

- Suggested Positions -

Long DEC $65 PUT (HUM1222x65) entry $1.98

Entry on November 28 at $64.20
Average Daily Volume = 3.0 million
Listed on November 27, 2012


InterOil Corp. - IOC - close: 55.13 change: -0.45

Stop Loss: 60.15
Target(s): 50.50
Current Option Gain/Loss: +14.8%
Time Frame: 3 to 5 weeks
New Positions: see below

Comments:
11/29/12: IOC continues to underperform the market. Shares lost another -0.8% today yet it's hugging the $55.00 level. I am not suggesting new positions at this time.

I want to remind readers that this is a more aggressive, higher risk trade. IOC is volatile and has a high amount of short interest.

*Small positions* - Suggested Positions -

Long DEC $55 PUT (IOC1222x55) entry $2.70

11/28/12 new stop loss @ 60.15

Entry on November 21 at $58.50
Average Daily Volume = 790 thousand
Listed on November 20, 2012


Sears Holding - SHLD - close: 43.10 change: -1.38

Stop Loss: 48.55
Target(s): 40.25
Current Option Gain/Loss: + 1.8%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
11/29/12: The sell-off in SHLD continues with another new multi-month low. Readers may want to start adjusting their stops lower.

- Suggested Positions -

Long 2013 Jan $45 PUT (SHLD1319m45) entry $2.15

11/28/12 triggered

Entry on November 28 at $45.75
Average Daily Volume = 1.2 million
Listed on November 26, 2012


CLOSED BEARISH PLAYS

Carpenter Tech. - CRS - close: 47.96 change: +1.46

Stop Loss: 48.05
Target(s): 42.50
Current Option Gain/Loss: -52.1%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
11/29/12: Yesterday looked like a bullish reversal in CRS so last night we decided it would be best to exit early. The plan was to close positions at the open this morning.

Earlier Comments:
CRS can be somewhat volatile so readers may want to limit their position size to reduce risk.

- Suggested Positions -

Dec $45 PUT (CRS1222x45) Entry $1.15 exit $0.55* (-52.1%)

11/29/12 closed this morning
*option exit price is an estimate since the option did not trade at the time our play was closed.
11/28/12 prepare to exit at the open tomorrow
11/19/12 sold half at the open. unfortunately CRS gapped open higher at $45.94
exit half @ 45.95, option @ $1.20 (+4.3%)
11/17/12 new stop loss @ 48.05, sell half of our position on Monday morning
11/14/12 new stop loss @ 49.05

chart:

Entry on November 12 at $48.23
Average Daily Volume = 460 thousand
Listed on November 10, 2012