Option Investor
Newsletter

Daily Newsletter, Thursday, 12/27/2012

Table of Contents

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

Market Wrap

Reid Comments Help Set Stage

by Thomas Hughes

Click here to email Thomas Hughes
Futures trading was flat this morning ahead of the days economic data. The markets are still quiet due to the holidays and the fast approaching new year. Volumes are light and the markets are highly susceptible to fear and speculation. Rumors of an early Presidential return to Washington had traders hoping for a positive turn in the Fiscal Cliff drama we are all being forced to endure.


Economic data, though skewed by government closings this week, was roughly in line with the recent trends we have been seeing. Unemployment claims are down and housing is up. These releases put the markets in positive territory going into the open but kept them within a tight range. Advancing stocks led declining stocks by a small margin in early trading but that reversed after Sen. Reid took the podium around 10:30. In his remarks he made several stabbing comments aimed at Boehner, the republicans and the House. He spoke from the floor of the Senate, saying “we're here” and asking where the representatives were. He called Boehner a dictator, controlling the House and maneuvering to remain Speaker in 2013. He also reminded everyone that due to SOP and the “new” way things are handled in the House no solution could be passed before January. The markets seemed as if they would hold during all of this but soon after it became clear that nothing was happening the S&P took a dive and hit the days lowest levels.

Later in the day the President's return to the White House was followed by an announcement that the House of Representatives would reconvene Sunday. The return to eleventh hour negotiations was taken as a positive by the markets. The S&P regained all of today's sharp losses by the end of trading to close with only a very small loss.

The Data

Today's release of unemployment data came with a caveat. Many government offices on national, state and local levels were closed due to the holidays so data from as many as 17 states may have been estimated. Initial claims dropped by 12,000 to 350,000. This is below the estimates I saw which were in the range of 360,000. The four week moving average also fell and hit its lowest level since 2008.


Continuing claims for unemployment fell as well, dropping around 32,000 to hit 3.21 million. The effects from Hurricane Sandy are past but the data remains a little choppy. The holidays and the Fiscal Cliff will likely affect this data for another few weeks. Millions are expected to lose benefits after the first of the year and this would give us a drastic drop in our unemployment data.

Total claims climbed this week by nearly 75,000 to 5.475 million. This number is still is above the pre-Sandy level and could be a warning sign. Hiring may be in decline while employers keep their eye on how the Cliff resolves. The consumer confidence numbers reflect just how deep the uncertainty goes. The reading, 65.1, was well below estimates and last months 71.5.



New home sales was reported at 377,000. This is up 4.4% from last year and the highest level since 2010. While positive, this is still below the peak of 2008.

Around The World

Asian indexes ended their day higher on upbeat earnings and an eye on Cliff talks. China reported that industrial profits had risen over 22% since last year at this time. This was taken as another sign of a Chinese economy that is returning to expansion. The Nikkei was the real story from the region, reaching new 21 month highs. The Japanese index is being driven by the weakening yen and speculation is that this trend will continue. The new Prime Minister of Japan, Shinzo Abe, has set targets for the USD/JPY at 90 in hopes of further stimulating exports. The yen is currently trading around around 86 after another strong up day but leaves plenty of room for this trade to unfold.


European shares also moved higher on thin trading. The FTSE 100 brushed up against it's long term resistance before giving up some of today's ground. In European news the ECB is standing firm on requirements for sovereign debt purchases and Italy met its targets for 2013 debt sales but all other focus is on the Fiscal Cliff. The Euro continued to strengthen against the dollar and is making a move to retest the highs we saw last week.


Oil And Gold

Oil traded to the downside today but remains near the top of its 2 month trading range and recent highs. The oil index also traded to the downside, dropping briefly below the short term moving average. The index found support and bounced back, forming a possible hammer doji. MACD analysis suggests that the recent highs around 1265 will be retested. However, before that can happen the index will have to move back above 1250 resistance. Tomorrow could see choppy oil trading as Fiscal Cliff whispers compete with world macro economic data.


Gold traded mixed today, small declines early in the day were matched by equally small gains in afternoon trading. Gold is still down around $1650 and below support. The Gold Index is continuing its bounce from the long term trend line. Gold stocks performed strongly today compared to the general markets, moving the Gold Index back above the support of a retracement line. On the long term charts bearish momentum is in decline and convergent with a bottom forming in the index around $175. Long term targets for the Gold Index are around $225 and $250. Shorter term upside targets are around $200, provided we don't go over the cliff and take the world with us.


Story Stocks

Most of today's stock news, headlines, reporting and conjecture was firmly centered on the Fiscal Cliff. Some, at least, was focused on stocks and business. Marvell was one company that wished it wasn't in the news. Yesterday a jury ruled that the chip maker had indeed infringed on the patents of Carnegie Melon University and award the school over $1 billion in damages. A downgrade of the company came on the heels of the ruling and helped to drive shares of the stock down by more than 3%. The stock has been trending down all year, driven by declining sales and global outlook. The stock's drop today took it to a new intra-day low on high volume. Marvell has announced plans to fight the ruling but there will likely not be anything decided for some months or longer.

Marvell, daily

Domino's Pizza delivered good returns to its investors today. The pizza delivery chain has been trending up strongly since 2008 in the long term and since early this summer in the near term. The stock reached a new high today on comments from Oppenheimer, citing potential for revenue and earnings growth in the long term. The stock gained more than 1% today but fell before the end of trading to close below the recent all time high.

Domino's, daily

The Indexes

The Fiscal Cliff has thrown such a shadow over the markets that it is what is driving world stock prices at this time. Underlying trends, economic data and outlooks are all being thrown by the wayside while we all await the return to negotiations and eventual solution. Many institutional and hedge fund traders are out of the markets now with the end of the year so close and they may have it right. The wild ride the markets are taking us on at the moment are completely driven by knee-jerk reactions to whatever the latest whisper, rumor or political grand standing has told us. For example, this morning the rumor that the President's return to Washington was based on a new compromise offer had the markets up, if only mildly. Only an hour or so later statements from Sen. Reid, which did nothing but lay blame and point fingers, sent the markets crashing. Then later the wild ride to today's low levels was curbed by the Presidents arrival home and an announced recall of Congressmen for a reconvening of the negotiations.

Today's candle on the S&p is potentially very significant. The long legged doji and hammer signal is confirming that long term support remains above the long term ema in the 1400-1410 range. This candle would usually be a very telling sign for me but the combination of the holiday week and the Fiscal Cliff make judging near term and long term direction nerve wracking. The markets are moving on fear, conjecture, rumors and hearsay associated with the budget negotiations. There is no way to know what is going to come out next and which way the market is going to turn. Is the President going to slam the republicans, are the republicans going to slam the democrats, is there a new proposal, have the talks deteriorated again? The best thing that can happen for the stock markets in mind is for the Cliff issue to go away, and I don't mean disappear, I mean resolved. Even if tax hikes and spending cuts hurt Americans we need it resolved so that we can move forward.

S&P 500, daily

At this time it looks like the S&P 500 has entered a possible trading range with a bottom at 1400 and potential top around 1450. This really can't be confirmed until after the holiday and trading volumes return . Momentum has dipped into bearish territory on the daily charts but so far has remained weak. If bearish momentum builds and the index drops below 1400 than a retest of 1350 is likely. The MACD convergence with the indexes previous dip to 1350 in November adds some weight to this theory. On the other hand positive budget resolution could send the markets up to test the upper end of the range.

S&P 500 daily with MACD

Longer term the index is still in an uptrend. The index is still well above the uptrend line and the long term 150 day EMA. If this trend stays intact and the Cliff talks come to a satisfactory and quick conclusion this weeks selling pressure will be seen in hindsight as a great buying opportunity.

S&P 500 weekly

The VIX made a big move today as well. The index, which has been near the top of the sage range pushed up and broke through the 20 level. The early rise in fear was reversed in tandem with the S&P 500's climb back up from the day's low. A break above, and a close above, 20 will be a bearish signal longer term. It really is a wonder the VIX is not already at elevated levels. The lack of progress on the Cliff and it's expected repercussions to the US and world economy should have sent the VIX skyrocketing. Perhaps this means that the bulk of professional traders are not as worried about the Cliff as the media is. The OptionsXpress short put/call ratio climbed to .94 and made a new 3 month high. The last peak to this level was in October, just before the start of the October/November decline.

The VIX daily

The Dow Jones Index made a doji candle similar to the S&P today. This candle confirms that some support exists at the critical 13000 level. This could be the bottom of a range but with the Cliff at such a head I just can't be sure. A drop below could easily take the index down to 12,750 and then 12,500. Looking back at the Dow drop to 12,500 in November we can see a MACD convergence similar to the one I have noted in the S&P. This suggests to me that a retest, or at least a pullback, is in the cards.

Dow Jones Index daily

Without a doubt the Fiscal Cliff will be driving prices overnight, tomorrow and into the new year. Until a definitive plan is ratified the market is likely to remain range bound and volatile. Tomorrow be on the look out for more political posturing that could send the indexes down again. International markets should be active overnight tonight and into tomorrows trading. There is a new round of global macro economic data coming from China and the EU that could add even more volatility to trading in the US. At home we are expecting PMI data, pending home sales and energy inventories.

This is my last wrap of the year. It's been a great year and I am looking forward to another one whether the markets are moving up or down. The Fiscal Cliff has been a bur under the saddle for us all this year but it will soon be gone. We will be able to look back on it and say “I remember that, it seemed like such a big hurdle”. Until then...

Keep trading, keep trying and remember the trend!

Thomas Hughes


New Option Plays

Friday Could Be Bumpy

by James Brown

Click here to email James Brown

Editor's Note:

We only have a few days left in 2012 and even fewer trading days with just Friday and Monday left. Stocks are growing more volatile with the lack of progress on the fiscal cliff talks.

We are not adding any new plays tonight given the extremely high odds for more rhetoric and market-moving headlines out of Washington tomorrow.


In Play Updates and Reviews

A Volatile Session On Cliff Comments

by James Brown

Click here to email James Brown

Editor's Note:

Thursday produced a volatile market as traders reacted to every headline regarding the fiscal cliff. Comments from Senate Majority Leader Mr. Reid suggesting that the nation would go over the cliff fueled the market's sell-off. Then stocks reversed higher on news that congress would meet again this Sunday in a last minute effort to try and get a deal done before the year ends.

AMG, AMT, DDD, and WPI were stopped out. We closed ENR. SOHU hit our entry trigger.

Current Portfolio:


CALL Play Updates

Akamai Tech. - AKAM - close: 41.03 change: -0.22

Stop Loss: 39.95
Target(s): 44.90
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Comments:
12/27/12: I have been suggesting that nimble traders could buy calls on a dip near $40.00 since $40 should be support. Well you got your chance today with a dip to $40.27 before AKAM rebounded.

Currently I am suggesting we buy calls when AKAM hits $42.05. If triggered our target is $44.90. More aggressive traders could aim higher. FYI: The Point & Figure chart for AKAM is bullish with a $54 target.

Trigger @ 42.05

- Suggested Positions -

buy the 2013 Jan $45 call (AKAM1319a45)

Entry on December xx at $ xx.xx
Average Daily Volume = 3.1 million
Listed on December 22, 2012


Canadian Pacific Railway - CP - close: 101.66 change: +0.48

Stop Loss: 99.40
Target(s): 109.00
Current Option Gain/Loss: - 40.0%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
12/27/12: CP found support near $100 as expected and bounced back into positive territory. If both CP and the S&P 500 open positive tomorrow then readers could use this bounce as a new bullish entry point.

Our plan was to use small positions to limit our risk.

NOTE: CP will begin trading ex-dividend on Dec. 26, 2012. The quarterly cash dividend should be about 35.5 cents.

- Suggested *SMALL* Positions -

Long Jan $105 call (CP1319a105) entry $1.25

12/21/12 trade opened on gap down at $101.46

Entry on December 21 at $101.46
Average Daily Volume = 961 thousand
Listed on December 20, 2012


Flowserve Corp. - FLS - close: 145.10 change: +1.50

Stop Loss: 141.85
Target(s): 148.50
Current Option Gain/Loss: +11.1%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
12/27/12: It was a volatile day for FLS. The stock produced a two-dollar swing three times today. FLS did manage to show a little strength with a +1.0% gain on the session. I am not suggesting new positions at current levels. FYI: The Point & Figure chart for FLS is bullish with a $153 target.

NOTE: FLS should begin trading ex-dividend on Dec. 27th. The quarterly cash dividend should be about 36 cents.

- Suggested Positions -

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

12/20/12 new stop loss @ 141.85
12/18/12 new stop loss @ 139.95

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


Green Mountain Coffee Roasters - GMCR - close: 41.40 change: -0.28

Stop Loss: 39.20
Target(s): 47.50
Current Option Gain/Loss: -42.3%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
12/27/12: GMCR is still holding up reasonably well considering the market's weakness today. The stock remains above short-term support at its simple 10-dma.

Earlier Comments:
GMCR could see a short squeeze. The most recent data listed short interest at 43% of GMCR's 120 million share float. The $45.00 could be round-number resistance but we will target a move to $47.50. GMCR can be a very volatile stock. I do consider this a more aggressive, higher-risk trade. Let's keep our position size small to limit our risk.

(small positions) - Suggested Positions -

Long 2013 Jan $45 call (GMCR1319a45) entry $1.18

Entry on December 19 at $41.35
Average Daily Volume = 8.3 million
Listed on December 18, 2012


iShares Russell 2000 - IWM - close: 83.12 change: -0.06

Stop Loss: 81.95
Target(s): 86.00
Current Option Gain/Loss: - 5.9%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
12/27/12: The small cap index and ETF also turned in a volatile session. The IWM dipped to short-term support near $82 and its 100-dma before bouncing back to close almost unchanged on the session. I am not suggesting new positions at this time.

- Suggested Positions -

buy the 2013 Jan $84 call (IWM1319a84) entry $1.17

12/18/12 new stop loss @ 81.95
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: 114.03 change: -0.93

Stop Loss: 111.40
Target(s): 119.00
Current Option Gain/Loss: - 3.2%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
12/27/12: LNKD is pulling back toward recent support near $112.00. More conservative traders may want to adjust their stops so it's closer to the $112.00 level. I am not suggesting new positions at current levels.

Earlier Comments:
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

12/18/12 new stop loss @ 111.40
12/17/12 adjust exit target to $119.00
12/15/12 new stop loss @ $109.00

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


Monsanto Co. - MON - close: 93.99 change: -0.11

Stop Loss: 89.95
Target(s): 99.50
Current Option Gain/Loss: + 29.6%
Time Frame: exit prior to Jan 8th.
New Positions: see below

Comments:
12/27/12: Traders were in a buy-the-dip mood with MON. They bought the stock twice near the $92.75 level. MON almost made it back to unchanged on the session. If both MON and the S&P 500 index open positive tomorrow then readers could use today's afternoon bounce as a new entry point.

Our plan was to keep our position size small. NOTE: This is a short-term trade. We do not want to hold over the January 8th earnings report.

*Small Positions*

- Suggested Positions -

Long 2013 Jan $95 call (MON1319a95) entry $1.25

12/24/12 triggered @ 93.05

Entry on December 24 at $93.05
Average Daily Volume = 2.2 million
Listed on December 19, 2012


Sohu.com - SOHU - close: 45.16 change: +0.54

Stop Loss: 42.95
Target(s): 49.75
Current Option Gain/Loss: - 7.3%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
12/27/12: SOHU spent almost the entire day drifting sideways in a narrow range. Then in the last hour SOHU started to rally and closed with a +1.2% gain. This late day rally also hit our trigger to buy calls at $45.20.

Earlier Comments:
SOHU can be a volatile stock so we want to limit our position size to reduce our risk. If triggered our target is $49.75. More aggressive traders may want to aim higher since SOHU seems to have built a decent bottom over the last several months. With enough time you could aim for the $55-60 zone. FYI: The Point & Figure chart for SOHU is bullish with a $66 target.

- Suggested Positions -

Long Feb $47.50 call (SOHU1316b47.5) entry $2.05

Entry on December 27 at $45.20
Average Daily Volume = 606 thousand
Listed on December 26, 2012


Vulcan Materials - VMC - close: 51.70 change: -1.11

Stop Loss: 50.85
Target(s): 58.50
Current Option Gain/Loss: -78.2%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
12/27/12: The widespread market decline weighed heavily on shares of VMC and the stock posted a -2.1% drop. There should be short-term support at both the $51.00 level and the $50.00 level. We have a stop loss at $50.85. More aggressive traders may want to adjust their stop loss so it's under the $50.00 mark instead. I am not suggesting new positions at current levels.

Earlier Comments:
Our target is $58.50. The $60.00 level looks like resistance. FYI: The Point & Figure chart for VMC is bullish with a long-term $70 target.

- Suggested Positions -

Long 2013 Jan $55 call (VMC1319a55) entry $1.15

Entry on December 18 at $53.00
Average Daily Volume = 870 thousand
Listed on December 17, 2012


PUT Play Updates

Tiffany & Co - TIF - close: 57.03 change: +0.35

Stop Loss: 58.75
Target(s): 52.00
Current Option Gain/Loss: -12.9%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
12/27/12: The stock market's volatile session was evident in the retailers. TIF spiked lower, traded beneath the $56.00 level and then followed the market higher with an afternoon rebound. Wait for this bounce to rollover before initiating positions. There should be short-term resistance near $58.00.

- Suggested Positions -

Long 2013Jan $55 PUT (TIF1319m55) entry $1.08

Entry on December 27 at $56.67
Average Daily Volume = 2.4 million
Listed on December 26, 2012


CLOSED BULLISH PLAYS

Affiliated Managers Group - AMG - close: 128.83 change: -0.83

Stop Loss: 128.95
Target(s): 139.00
Current Option Gain/Loss: + 0.0%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
12/27/12: The stock market's widespread decline today pushed AMG to its simple 50-dma before bouncing. Our stop loss at $128.95 was hit along the way. Our trade closed with our position at unchanged (+0.0%).

- Suggested *SMALL* Positions -

March $135 call (AMG1316c135) entry $2.10 exit $2.10 (-00.0%)

12/27/12 stopped out
12/22/12 adjust stop loss to $128.95
12/21/12 trade opened on gap down at $130.54

chart:

Entry on December 21 at $13.54
Average Daily Volume = 271 thousand
Listed on December 20, 2012


American Tower Corp. - AMT - close: 76.29 change: -0.00

Stop Loss: 75.40
Target(s): 79.85 & 82.00
Current Option Gain/Loss: -71.5%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
12/27/12: AMT broke down under support near $76.00, dipped to $75.35, and then bounced back to close unchanged on the session. Our stop was hit at $75.40.

- Suggested Positions -

2013 Jan $77.50 call (AMT1319a77.5) entry $1.30* exit $0.37 (-71.5%)

12/27/12 stopped out
*option entry price is an estimate since the option did not trade at the time our play was closed.

chart:

Entry on December 18 at $77.05
Average Daily Volume = 1.7 million
Listed on December 15, 2012


3D Systems - DDD - close: 50.60 change: -1.25

Stop Loss: 48.95
Target(s): 58.50
Current Option Gain/Loss: -52.7%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
12/27/12: DDD displayed some relative weakness today. The market's widespread decline helped push DDD to a -6.4% plunge intraday. The stock reversed off the $48.50 level and bounce back to close above the $50 mark. Our stop loss was hit at $48.95.

The larger trend for DDD remains higher. I would keep an eye on it.

- Suggested Positions -

FEB $55 call (DDD1316b55) entry $2.75* exit $1.30 (-52.7%)

12/27/12 stopped out
12/24/12 triggered @ 52.25
*option entry price is an estimate since the option did not trade at the time our play was opened.

chart:

Entry on December xx at $ xx.xx
Average Daily Volume = 1.9 million
Listed on December 22, 2012


Energizer Holdings - ENR - close: 79.61 change: +0.03

Stop Loss: 79.40
Target(s): 84.50
Current Option Gain/Loss: -84.4%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
12/27/12: ENR has been acting weak. Last night we decided to close positions at the open today. ENR opened at $79.57.

- Suggested Positions -

2013 Jan $85 call (ENR1319a85) entry $0.90 exit $0.14 (-84.4%)

12/27/12 closed this morning
12/26/12 ENR is not working, prepare to exit tomorrow morning
12/15/12 new stop loss @ 79.40

chart:

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


Watson Pharma. - WPI - close: 89.21 change: -0.28

Stop Loss: 88.20
Target(s): 94.85
Current Option Gain/Loss: -62.5%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
12/27/12: The widespread market declines pushed WPI under short-term support and hit our stop loss at $88.20 before bouncing back.

- Suggested Positions -

Long 2013 Jan $90 call (WPI1319a90) entry $2.00* exit $0.75 (-62.5%)
*option entry price is an estimate since the option did not trade at the time our play was opened.

chart:

Entry on December 19 at $90.50
Average Daily Volume = 730 thousand
Listed on December 18, 2012