Option Investor
Newsletter

Daily Newsletter, Thursday, 12/13/2012

Table of Contents

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

Market Wrap

World Banks Grease Global Economy

by Thomas Hughes

Click here to email Thomas Hughes
Introduction

World banking leaders are in the process of re-greasing the wheels of global economy. Yesterday the FOMC announced plans to continue Operation Twist into the new year, the ECB has released funds to Greece and Japans expected new prime minister is set to continue easing. Despite all this the Fiscal Cliff still looms in everyone's minds. The stage is set for economic expansion but it is possible the financial leaders have done all they can. What else can they do, print more money?

What we really need is a catalyst to spur business investment and drive consumer demand. The Fed is maintaining the status quo as far as fiscal policy goes; their bazooka has run dry and we can't expect much more from that quarter. The economic data supports a stable and mildly growing economy, without signs of decline Ben and the FOMC are unlikely to act. Economic data released today shows an economy that, if not growing, is at least solidly stable. With things as they are the Fed is unlikely to act any further.


Headlines this mornings stated that Fiscal Cliff talks had started to turn negative. After looking through several reports I could find that little had changed even with new statements today. Rep. Boehner came out this morning and repeated what we already knew; He feels the republican plan is on track and the Presidents is not. The talks drag on and are still snagged on the issues of revenue and spending cuts. Even though nothing has changed the markets still decided it was reason enough to sell off.

I keep hearing and reading about cutting the mortgage interest deduction and all I have to say about that is please don't do it. Regardless, there is going to be some higher taxes and less spending, lets just get it done so the markets and our corporations can return their focus to actual business.

With all this to consider the futures were able to hold yesterday's close in overnight trading. The futures trade was just under flat line before the jobless data and turned slightly positive following the release. 1430 is proving to be resistance on the S&P, the index failed to maintain that level yesterday and fell from it today.

Around The World

Asian markets closed the day mixed. The Asian Indexes hovered around the break even point from the previous days trading except for two notable exceptions. Korea and Japan both moved up by more than 1.5%. Korea's move is linked to the announcement of holding key interest rates steady. Japans move higher is being driven by a weakening yen. The yen continued its slide versus the dollar today in anticipation of the elections being held on Sunday. The expected incoming prime minister Shinzo Abe and the Liberal Democratic Party are expected to hold good on their promises of “unlimited easing”. The LDP is also planning on implementing a new round of public works projects in its efforts of stimulating the economy. The Nikkei reached a new 8 month high and crossed technical resistance at 9,700.

Europe, the Eurozone and the ECB are making big moves to get their house in order. The most pressing issue, Greece, may have finally, once again, be put to rest. The country has finally been given its 34.3 billion euro bail out package. There was a little question in the air if it would come through after Greece's bond buyback missed its target. Never the less the deal was completed and now the ECB is turning to longer term measures to strengthen the EU and the euro.

The EU and the ECB announced plans today for a more centralized banking system that could be in place as soon as next year. The ECB would become the regions top banking supervisor and would have direct oversight of more than 150 of Europe's banks. This move should boost confidence in the EU and the euro over the long term and could be a sign of real recovery. The European markets had been trading to the downside and extended their losses following the remarks by Rep. Boehner this morning.

The Economic Data

Jobless claims have returned to pre Sandy levels as the northeast recovery continues. Initial claims for unemployment fell to the second lowest level seen this year and for the last several. Claims were reported as dropping more than 29,000 to an adjusted 343,000. This is the fifth week since the storm and the fourth week of data. The previous weeks data was revised up by 2,000. The four week moving average of claims also fell but held above the levels seen in the weeks preceding the storm. The average fell by 27,000 to 381,500.


Continuing claims also fell in this weeks data. The number of people filing for a second week of benefits dropped by 23,000 to 3.19 million, 25% lower than last year at this time. Continuing claims are also at their second lowest level this year, the lowest number was in the week preceding Hurricane Sandy.


Total claims posted a surprise jump this week, climbing by nearly 700k to hit 5.643 million. This is the highest level since July but is still about 25% lower than last year. This spike is probably Sandy related, I am expecting total claims to return to its low levels next week or the week after. Jobless claims and unemployment are trending down but as Jim mentioned earlier in the week the number of people in the workforce is in decline. If people keep dropping out total claims and unemployment figures could retreat to the FOMC's target without any improvement in the economy.


What I want to know is how many people that are so-called dropping out are actually not working. Can these people actually survive without jobs? Are these drop outs spouses of primary bread winners? How many are creating their own work or businesses? Small business is a pillar of our economy, if these drop outs are creating their own jobs won't that help the recovery? These questions and more are begging to be answered...I have been looking for some data on the subject but as of yet have not found any. I welcome any insights into the subject.

Other data released today also shows signs of improving conditions and a resurgence of the consumer. The PPI data for November shows that headline prices declined by -0.8%. This was slightly more than economists had been expecting and a good sign for profit margins and consumer level inflation. Ex-food and energy prices increased by a smaller than expected 0.1%. Energy prices led the decline in overall PPI, dropping by -4.6%, the largest decline since 2009. Lower prices are a good thing for business and consumers. Lower prices for raw materials and the energy that is needed to create them will help increase profit margins that we already saw expanding in third quarter earnings data.

Conversely, retail sales increased in November by 0.3%. This gain was slightly above expectations and were off set by a big decline in energy sales. The lower cost of gas and other fuels impacted the gain in retail sales by nearly a half percent. Ex-gas and autos retail sales increased by 0.7% led by consumer goods. Increasing sales and lower producer prices lead me once again to speculate on the possibility of fourth quarter earnings surprises. Low expectations and lowered guidance for corporate profits have the bar set pretty low to start with. Add to that the trend of improving margins we saw last quarter and the possibility of that trend continuing in the fourth quarter makes it very possible for businesses to beat those expectations.

Gold and Oil

Gold traded lower today, dropping below $1700 during the morning session. Gold has returned to lower end of its two month trading range, weighed down by Fiscal Cliff politics and global outlook. Gold found support last week around $1690, a break below this could be bearish for the metal long term. The Gold Index found support last week before reaching the 78% retracement of the most recent bull movement. The index has since regained the 61% level and is now retesting that support. On the daily charts momentum is still bearish but has now diverged from the recent low suggesting that the last low was at or very near the long term support. Low gold prices will probably not be a catalyst for gold stocks, based on that I am expecting the Gold Index to remain range bound. I will be watching $180 very closely as support and the lower end of the range.

The Gold Index, daily

Oil is also trading at the lower end of it's recent range between $85 and $90. Oil has been bouncing between these two levels driven by mid east tensions, Fiscal Cliff politics, global outlook, OPEC and current demands. A break above or below this range would be significant. At this time I see more chance of a downside break than one to the upside. The Oil Index has been trading toward the top of its range, opposite of the underlying commodity. The index has bounced from support but was capped at a long term resistance line around 1250. Momentum on the daily charts is converging with the upward price movement and suggests that the resistance could be broken. A move above 1250 would encounter new resistance at 1275 and 1300.

The Oil Index, daily

Story Stocks

Story stocks today encompass buyouts, earnings and dividends. Two companies have buyout offers on the table, one tech stock is set to run and one retailer is boosting shareholder value. Best Buy is expecting a buyout offer from its founder Richard Schultze worth $5-$6 billion. This is not unexpected and has been a possibility for several months. The stock gapped up strongly today with the conviction of more than 5 times average daily volume. The move has created an island and potential reversal in the stock but I don't know how far it will get with plans to take the company private.

Best Buy, daily

Sprint has announced plans to buy Clearwire pending approval. Sprint already owns the majority share in Clearwire and is seeking to purchase the remaining 49%. The offer currently stands at $2.90 a share, or about $2 billion dollars. This is a premium over yesterday's prices but the news sent the stock well over $3 in trading today.

Clearwire, daily

Adobe released earnings today. The company is expected to beat estimates of $0.46 a share based on strong sales during the quarter. The caveat is that another article I read cited they expected them to miss expectations of $0.56 per share. This shows how important it is to get more than one opinion. Trading in Adobe was volatile today with the stock making a very bearish candle signal should it be confirmed. The actual results reported by the company were profits of $0.44 per share on revenues of $1.153 billion. The results are a record for the company on a quarterly and annual basis. The stock traded to the upside in after hours trading following the release.

Adobe, daily

CVS made some very nice announcements today. The company is expecting next year to be a good one and it is returning some of the expected good fortune to its shareholders. The company is raising the its dividend by 38% to $0.225 per share and is moving forward with plans to buy back $4 billion in stock. CVS is expecting full year earnings in the range of $3.84-$3.98 versus the consensus median estimate of $3.79. The stock gapped up on heavy volume but the move faded throughout the day. The stock did remain above resistance and maintained a +1.5% gain on the day.

CVS, daily

The Indexes

The S&P fell today from resistance at 1430. This level marks the lower end of the range formed by the short term reversal we saw in September/October and could provide a substantial barrier to prices. Fiscal Cliff driven selling could return before the end of the year and 1430 is a good technical level to do that. Today's selling brought the index below the 1420 level where support began to kick in. Late day buying that began just above the short term moving average brought the S&P back above that line but failed to hold it into the close. On the chart of 30 minute closing you can the attempt and failure to cross back above 1420. I'll need to see a close above 1420 to regain short term bullishness.

S&P 500 30 minute closings

The anticipation of FOMC QE helped to inflate the indexes, bringing the S&P up to 1430. Worry over the Fiscal Cliff capped the move once the markets got what they wanted from the Fed. Political stumping and pot shots will continue to drive short term price fluctuations while the negotiations stall. In the long term potentials for corporate profits should regain the upper hand in the minds of traders and investors but this won't happen until the cliff is out of the way.

The long term charts of the S&P show a market in great indecision. The series of small bodied candles with long wicks is forming the pattern called spinning tops and marks a period of potential change. A drop from this level could bring the index back down to 1350, a move supported by indicators on the daily charts.

S&P 500 weekly closings

The convergence of MACD and price peaks in the S&P during the October/November sell off suggests that the market will return to retest the lowest levels. A move back down to 1350 over the next couple of weeks would bring the S&P to its long term trend line.

S&P 500 daily closings

As the Magic Eight Ball would say, things are hazy at this time. The market could go either way. The trend is still up and there is still no evidence of a reversal. However, if the market does move down from here to retest the previous lows a potential reversal would then be on the table. Important support at this time for the S&P 500 is at 1420,1410 and 1400. On the upside resistance is at 1430 and 1465. 1410-1430 may prove to be the range of trading over the next few days or until a new development in Fiscal Cliff negotiations.

There is not a whole lot on the economic front over the next week that I see as a market mover. Tomorrow CPI data is released and early next week new information from the housing sector. Thursday comes the next round of unemployment figures and Friday brings us the final revision for 3rd quarter GDP.

As I finish the wrap and get ready to publish I see that Boehner and Obama are about to meet in the White House. Maybe we'll get some new developments. Until then,

Thomas Hughes


New Option Plays

Showing Relative Strength

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) PPG, MD, BG, BEAV,

(bearish ideas) RL, XEC, THS, GOLD


NEW DIRECTIONAL CALL PLAYS

Netflix, Inc. - NFLX - close: 92.56 change: +1.83

Stop Loss: 89.45
Target(s): 99.75
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
NFLX has been showing some relative strength the last couple of days thanks to some bullish analyst comments. The stock's breakout above resistance at $90.00 is also bullish. The next level of resistance is the $100 level. Traders bought the dip intraday at $90.00. I suspect that short covering could fuel the rally toward $100.

I am suggesting new bullish positions at the open tomorrow morning. more conservative traders may want to use a trigger at $93.50 instead since the market's pullback may not be over yet. NFLX can be a volatile stock so I do consider this a more aggressive, higher-risk trade and we will want to keep our position size small.

Target is $99.75.

- Suggested Positions - *Small Positions*

buy 2013 Jan $100 call (NFLX1319a100) current ask $4.05

Annotated Chart:

Entry on December xx at $ xx.xx
Average Daily Volume = 1.1 million
Listed on December 13, 2012



In Play Updates and Reviews

Market Rally Slips

by James Brown

Click here to email James Brown

Editor's Note:

Yesterday's intraday reversal saw some follow through with a mostly mild but widespread pullback today.

NBL was stopped out. We want to exit our ORLY trade tomorrow.

Current Portfolio:


CALL Play Updates

Abercombie & Fitch - ANF - close: 46.90 change: +0.64

Stop Loss: 44.49
Target(s): 49.85
Current Option Gain/Loss: -27.8%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
12/13/12: ANF managed a bounce on Thursday with a +1.3% gain. That was enough to outperform most of the market. Seeing the 10-dma hold as technical support is a good sign for the bulls.

Our short-term target is $49.85 since the $50.00 mark could be resistance. More aggressive traders may want to aim for the $53-55 zone instead.

- Suggested Positions -

Long 2013 Jan $50 call (ANF1319a50) entry $1.58

Entry on December 10 at $47.48
Average Daily Volume = 5.4 million
Listed on December 08, 2012


Celgene Corp. - CELG - close: 79.84 change: -1.35

Stop Loss: 77.95
Target(s): 84.50 & 87.50
Current Option Gain/Loss: - 34.9%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
12/13/12: Biotech stocks as a group underperformed the major indices. Yet CELG underperformed its peers thanks to lackluster analyst comments. Shares gave up -1.6% and the close under $80.00 is bearish but it's not a convincing breakdown of support just yet. Our stop loss remains at $77.95 but more conservative traders may want to raise their stop.

Please note that I am setting two targets. We'll take money off the table at $84.50 and our final target will be $87.50.

- Suggested Positions -

Long 2013 Jan $82.50 call (CELG1319a82.5) entry $2.03

Entry on December 11 at $81.46
Average Daily Volume = 3.0 million
Listed on December 10, 2012


Dover Corp - DOV - close: 64.09 change: -0.08

Stop Loss: 62.75
Target(s): 67.50
Current Option Gain/Loss: +14.2%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
12/13/12: DOV continues to consolidate sideways while maintaining the trend of higher lows. I am not suggesting new positions at this time.

- Suggested Positions -

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

12/11/12 new stop loss @ 62.75
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


Energizer Holdings - ENR - close: 81.00 change: -0.74

Stop Loss: 78.40
Target(s): 84.50
Current Option Gain/Loss: -16.6%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
12/13/12: Technically today's decline confirms yesterday's bearish reversal candlestick pattern. Yet the $80.00 level should be support. I would wait for a bounce off $80.00 before considering new positions.

- Suggested Positions -

Long 2013 Jan $85 call (ENR1319a85) entry $0.90

Entry on December 07 at $80.76
Average Daily Volume = 784 thousand
Listed on December 06, 2012


Flowserve Corp. - FLS - close: 142.30 change: +0.43

Stop Loss: 138.90
Target(s): 148.50
Current Option Gain/Loss: -12.9%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
12/13/12: Traders bought the dip at short-term support on the 10-dma and FLS bounced to a +0.3% gain. The trend remains higher but I am not suggesting new positions at current levels. FYI: The Point & Figure chart for FLS is bullish with a $153 target.

- Suggested Positions -

Long 2013 Jan $145 call (FLS1319a145) Entry $2.70

Entry on December 05 at $141.50
Average Daily Volume = 518 thousand
Listed on December 04, 2012


iShares Russell 2000 - IWM - close: 82.94 change: -0.47

Stop Loss: 81.20
Target(s): 86.00
Current Option Gain/Loss: -31.6%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
12/13/12: I cautioned readers to expect another pullback today. Technically today's decline confirms yesterday's bearish reversal candlestick. Yet traders bought the dip in the IWM near $82 and its 10-dma. I wouldn't give up just yet but more conservative traders could move their stop loss closer to the $82 level.

- Suggested Positions -

buy the 2013 Jan $84 call (IWM1319a84) current ask $1.17

12/11/12 triggered on the gap open higher at $83.11 (trigger was 82.85)

Entry on December 11 at $83.11
Average Daily Volume = 38 million
Listed on December 10, 2012


Linkedin Corp. - LNKD - close: 111.99 change: -0.65

Stop Loss: 107.45
Target(s): 117.50
Current Option Gain/Loss: + 3.2%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
12/13/12: LNKD saw a mild pullback today. I would still expect a dip toward $110, which should be new support. Readers may want to start raising their stop losses.

If triggered our target is $117.50. More conservative traders may want to exit in the $114-115 zone instead since $115 might be resistance. LNKD can be volatile so I would use small positions to limit our risk.

*Small Positions* - Suggested Positions -

Long Jan $115 call (LNKD1319a115) Entry $3.10

Entry on December 10 at $110.25
Average Daily Volume = 1.8 million
Listed on December 08, 2012


Lululemon Athletica - LULU - close: 74.77 change: +0.52

Stop Loss: 71.70
Target(s): 79.00
Current Option Gain/Loss: + 4.5%
Time Frame: 3 to 5 weeks
New Positions: see below

Comments:
12/13/12: LULU bounced off the $74 level this morning and shares drifted sideways the rest of the session to close up with +0.7% gain. The relative strength today is encouraging. I would still be tempted to buy calls at current levels.

Earlier Comments:
LULU could see a short squeeze that lifts it toward $80.00. The most recent data listed short interest at 20% of the 101 million share float.

FYI: The Point & Figure chart for LULU is bullish with an $88 target.

- Suggested Positions -

Long 2013 Jan $75 call (LULU1319a75) entry $3.30

Entry on December 12 at $74.25
Average Daily Volume = 2.1 million
Listed on December 11, 2012


O'Reilly Automotive - ORLY - close: 90.79 change: -2.03

Stop Loss: 89.95
Target(s): 95.75
Current Option Gain/Loss: -86.8%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
12/13/12: ORLY clearly does not want to cooperate with us. The bounce from support near $90 quickly reversed at resistance near $95.00. Shares continued to retreat today with a -2.1% decline. The stock is once again testing support near its 200-dma and the $90 level.

We want to abandon ship. I am suggesting an early exit at the open tomorrow morning.

- Suggested Positions -

Long DEC $95 call (ORLY1222L95) entry $1.90

12/13/12 prepare to exit at the open tomorrow!

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


Precision Castparts - PCP - close: 183.04 change: -1.47

Stop Loss: 179.75
Target(s): 188.00
Current Option Gain/Loss: -40.5%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
12/13/12: Warning! We only have six trading days left on our December $185 PCP calls and the stock just broke short-term technical support at the 10-dma today. Readers may want to raise their stop loss. I am not suggesting new positions at this time.

- Suggested *Small* Positions -

Long DEC $185 call (PCP1222L185) Entry $1.85

12/05/12 new stop loss @ 179.75

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


Rockwell Automation - ROK - close: 82.01 change: -0.09

Stop Loss: 78.90
Target(s): 84.75
Current Option Gain/Loss: + 5.0%
Time Frame: 3 to 5 weeks
New Positions: see below

Comments:
12/13/12: Thursday proved to be a very quiet day for ROK with the stock closing almost unchanged on the session. If ROK sees any profit taking the $80 level should offer some support.

- Suggested Positions -

Long 2013 Jan $85 call (ROK1319a85) entry $1.00*

*option entry price is an estimate since the option did not trade at the time our play was closed.

Entry on December 10 at $80.60
Average Daily Volume = 1.0 million
Listed on December 05, 2012


PUT Play Updates

Tiffany & Co - TIF - close: 57.52 change: +0.13

Stop Loss: 60.05
Target(s): 52.50
Current Option Gain/Loss: - 4.3%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
12/13/12: Shares of TIF bounced and failed at the $58.00 resistance level for the third time in three days. More conservative traders might want to lower their stops.

Our target is $52.50. Although I want to caution you that the $55.00 level is potential support. The Point & Figure chart for TIF is bearish with a $51 target.

- Suggested Positions -

long Jan $55 PUT (TIF1319m55) entry $1.15

Entry on December 10 at $57.75
Average Daily Volume = 2.3 million
Listed on December 08, 2012


CLOSED BULLISH PLAYS

Noble Energy - NBL - close: 99.30 change: -2.52

Stop Loss: 99.95
Target(s): 104.85
Current Option Gain/Loss: - 25.0%
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Comments:
12/13/12: Energy stocks were some of the market's worst performers today. That didn't bode well for our NBL trade. Shares gapped open lower at $101.44 and plunged to a -2.4% decline. The stock broke down under what should have been round-number support at the $100.00 mark. Our stop loss was hit at $99.95. The plan was to keep our position size small to limit our risk.

- *Small Positions*

2013 Jan $105 call (NBL1319a105) entry $1.60 exit $1.20 (-25.0%)

12/13/12 trade opened on gap down at $101.44, stopped out at $99.95

Annotated Chart:

Entry on December xx at $ xx.xx
Average Daily Volume = 1.2 million
Listed on December 12, 2012