Option Investor
Newsletter

Daily Newsletter, Thursday, 1/10/2013

Table of Contents

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

Market Wrap

Markets Make New Highs

by Thomas Hughes

Click here to email Thomas Hughes
Intro

Earnings season is officially upon us. Alcoa is the official start but we cannot forget the reports we received in December from the likes of Oracle, Redhat and other semi important issues. Reports in December were fairly rosy with the bulk of those reporting beating estimates for revenue and EPS. Alcoa was not quite as good, it did beat on revenue but failed to beat on EPS. This is opposite the trend I have noted before during the third quarter's season where many companies were able to increase EPS without increasing revenue. Even with these hints at earnings it is still early to predict the outcome of the season but based on the low low level of the VIX traders are not too worried right now.

Today's run up during the final hours of trading is another sign that expectations are for good earnings, particularly from Wells Fargo, who reports tomorrow. This morning futures were elevated on the heels of trade data from China. Our own economic data helped to hold levels implying an open above the previous 5 year high.


The Economic Data

Today was fairly light on economic data. The beginning/end of the month is always heavy with data reported on a longer term basis. Jobless claims was the report of the day and had futures up to their highest levels in early trading. Initial claims were reported as gaining 4,000 but this was on top of a downward revision of 5,000 to last weeks claims so in the end what we got was a drop of 1,000 from last week. What we also got was a slight increase in the moving average of about 6,750 from mildly lower revision of last weeks number. Together the two data points are trending firmly sideways and well within the range, about the mid point discounting the Sandy spike in November, for the last 12 months and longer. So it still looks like things remain the same on the labor front, job creation is still just strong enough to keep the economy growing and initial claims below 400,000.


Continuing and total claims both declined this week. Continuing claims made a sharp drop, falling to 3.1 million, this years lowest level and the lowest level for multiple years. Data from the period is heavily adjusted due to the holidays so there may be some big revisions. That aside this drop may indicate renewed hiring; now that the cliff is past companies that were waiting for the outcome may have moved forward with plans for hiring. This will be a good number to watch over the next three weeks until next months official jobs and unemployment figures. Total claims for unemployment dropped by a smaller 50,000 to 5.35 million. This has been in decline for 5 weeks but still above the years lowest levels. It is important to remember that total claims lags initial claims by 2 weeks and is not revised or adjusted. Compared to last year total claims are more than 27% lower, a gap that has been widening but may soon reverse if total unemployment claims does not begin to decline again.



Wholesale inventories were also reported today. The figure rose by 0.6% in November, far better than the expected gain of 0.3%. Sales at this level also increased by 2.3% in November, climbing the most in over 18 months. These two figures are important factors of GDP and could help to inflate estimates. Currently the consensus is around 2.5-3% but I have seen estimates as low 0.5%.

Later in the day the Federal Reserve released information on its balance sheet. The nations bank stated earnings of over $88.5 billion from interest on notes held and sales of assets. This is a record earning by the Fed and driven by the purchase of securities intended to help support interest rates. This is up more than 17% from last year. This may not seem like such a big number when you factor in the $85 billion in bonds the Fed is buying each month.

China And Europe

Data from China was surprisingly good and is evidence of a rebounding economy. The Chinese trade surplus grew to 31.6 billion from the 19.6 billion reported in November. This was driven by a 14.1% jump in exports which beat expectations by more nearly 10%. The off-setting imports number climbed by a much lower 6% but also beat expectations. Asian shares climbed on the news with the major indexes closing in the green. The huge jump in exports could be a spike related to Christmas and holiday shopping so its long term value is still in question.

European shares began the day mixed and ended the day the same way. Today the ECB released its decision on interest rates and held its corresponding news conference were held steady in the Euro zone and also in the UK, which also made their decision today. In the news conference Draghi's statements were little changed; he is still calling for a return to growth at the end of the year. The euro responded to this by gaining strongly against the dollar, making a long white candle and moving up from long term support and the near term up trend line.

Euro/USD daily

Oil And Gold

Oil traded up today. Expectations for oil demand, bullish Chinese data, reduced Saudi production and an explosion in Yemen drove prices for light crude and Brent crude to four month highs. The price of light crude gained more than 2% in earlier trading but fell from resistance in intra-day trading. The Oil Index also traded up, gaining .67% today, but was also capped at resistance. The index has been halted at this same down trending line before, it connects three previous peaks from 2011 and 2012. This is a potential area of break out or reversal. The indicators on my weekly charts are bullish but on the daily charts are diverging from price. A break above could be a bull trap and should be taken with caution.

Oil Index, daily

Gold gained more than 1% in today's trading. The spot price of the metal has been bouncing off of the $1650 level and even made a nice hammer candle last week. Today the metal created a long white candle on the daily charts and that transferred into a similar white candle on the charts of the Gold Index. The index has retreated back to the $180 support zone set in December and is now bouncing off the long term up trend line for the 4th or 5th time since last spring, depending on which candles you count. A move up from here has resistance at $190, $195 and $200 on the upside and support at $180 and $170 on the downside.

Gold Index, daily

Earnings Season Heats Up

The banks are next up on the list of heavily watched earnings reports. More than a dozen large and regional banks will be reporting over the next 6 trading days. Wells Fargo leads them off tomorrow followed by a big Tuesday for regional banks and followed up by Bank Of America, Citigroup and Morgan Stanley on Thursday. I also should note that JP Morgan reports on Wednesday as well. The recently announced settlement with JP Morgan and ten other top mortgage lenders is reported to impact the company by $700 million in the fourth quarter, another big hit for the company following the London Whale. Wells Fargo is expected to release earnings before the bell, around 8 AM, and follow up with a conference call at 10 AM. The consensus estimates are right around $0.88 per share, in line with the previous quarter. The stock traded in a very tight range today, just under resistance with bullish but divergent indicators. The late afternoon rally was led by financials and helped take WFC to a three month high.

Wells Fargo, daily

American Express released a surprise early earnings statement due to a restructuring. The bank was scheduled to release next week. AXP reported adjusted earnings of $1.09 per share versus an expected $1.06. The gains come on an increase of cardholder spending of 8%. The stock traded up by close to 1% today and jumped another 1% in after hours trading.

The Banking Index broke out to new highs with the start of this year and appears to consolidating above the $52.50 level. At this point MACD and Stochastic are both diverging from price movement and indicating the need for caution. I will be looking into the Wells Fargo report for any signs of strengths and weaknesses going into the first quarter as well as for signs of support around $52.50 in the Bank Index. Any first quarter guidance, projections for business growth/prospects or hints of potential impacts from the Fiscal Cliff could set the tone of trading for tomorrow and going into the weekend.

Banking Index, daily

Story Stocks

Ford made headlines today with the announcement of a dividend hike. The auto maker doubled it's quarterly dividend to a dime from a nickel, raising the annual yield to $0.40 or about 2.8% at today's prices. Ford stock has been trending up since hitting the bottom of its range earlier this year. The move recently hit a peak and pulled back mildly but today's announcement has caused the stock to gap up and hit a new 18 month high. If the market follows through on this move there is a longer term up side target at $15 with nearer term target at $14.

Ford, daily

Nokia shares jumped in early trading on an early report of 4th quarter performance. The company said that sales exceeded their expectations, driven by their new Lumina smart phone. Shares of the stock jumped more than 18%, making a new high since gapping down last April. The news is good for Nokia, who has been struggling and still sees the 2013 outlook as “challenging”. However, it is not a silver bullet for the company; the stock still faces significant technical resistance at $4.50 and higher. The window opened with the gap mentioned before, between $5 and $4.50, accounts for roughly 10% of the pre-gap value of the business.

Nokia, daily

The Indexes

The S&P made a strong open following the release of Chinese and domestic economic data. The markets are also being buoyed by earnings hopes but the fear it may not be as good as hoped has capped trading at the five year highs in the early morning hours. On an intra-day basis the markets did make a new high shortly after the open but the optimism faded throughout the morning. The index traded in a tight range before falling back down through 1465 precisely at 10:30 AM.

S&P 500, 30 minutes

Looking at the charts of 30 minute closing we can see that after the market opening and pullback to the 30 bar ema and 1460 it found enough support to get it back up and over 1465. This held until the afternoon trading began around 2:30 which pushed the index up to new 5 year highs. Whether or not this level will hold is in question. The key will be how the earnings season plays out. If the markets are satisfied with the state of business and earnings prospects the S&P should continue to move higher.

I still have faith in my previous predictions for a season filled with EPS surprises and the late day rally makes me think the markets agree with me. However, one caveat that comes with the market making this new high is that it is driven on expectations and not reality: the reality comes tomorrow with Wells Fargo and later after we get quite a few more earnings reports to prove it.

The MACD and Stochastic on the daily charts are bullish and pointing up but would be divergent at this level if they peaked; the index is moving up but not with the conviction of a strongly trending one. This is not a worry yet as they are lagging indicators and not yet rolled over or even rolling over to the bear side. At this time, unless we get a truly surprising statement from Wells Fargo, the index is moving up. A confirmed break above the current level brings a near term projection of 66 points and could take the S&P 500 index as high as 1530.

S&P 500, daily

The Russell 2K broke out to new high last week and has carried through into this week. However, the candles are not overly bullish at the new highs and may be indicating a pullback.

Russell 2K, daily

The Dow has yet to reach its 5 year high. The blue chip index is still about 0.14% away and could easily reach and surpass the high in a single day. Perhaps the big banks will help to drive this index higher. Indicators on this chart are very similar to the S&P daily chart, they are bullish but diverging from price.

Dow, daily

Tomorrow the economic calendar is light, consisting solely of trade balance and import/export figures. The earnings calendar, save for Wells and one other, is relatively calm. The big storm starts next week and is dominated by the banking sector. Wells Fargo has been a bright spot amongst the big banks and is in the best position to perform well, in my opinion. I am looking for the Wells Fargo report to be a net positive.

Until then, be vigilant and remember the trend!

Thomas Hughes


New Option Plays

Energy, Small Caps, and Coffee

by James Brown

Click here to email James Brown


NEW DIRECTIONAL CALL PLAYS

EOG Resources - EOG - close: 126.10 change: +1.47

Stop Loss: 123.40
Target(s): 134.00
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
The energy sector has been trending higher and EOG is helping lead the way. This stock has rallied to new multi-year highs and looks poised to breakout past short-term resistance near $126.00.

I am suggesting we use a trigger to buy calls at $126.30. If triggered we will aim for $134.00. More aggressive traders could aim for the all-time highs in the $140 area but we do not want to hold positions over the earnings report in February.

Trigger @ 126.30

- Suggested Positions -

buy the Feb $130 call (EOG1316B130) current ask $2.44

Annotated Chart:

Entry on January xx at $ xx.xx
Average Daily Volume = 1.4 million
Listed on January 10, 2012


iShares Russell 2000 (ETF) - IWM - close: 87.47 change: +0.20

Stop Loss: 85.90
Target(s): 94.50
Current Option Gain/Loss: Unopened
Time Frame: 6 to 9 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
The small cap Russell 2000 index (and ETF) have been showing relative strength for weeks. The $RUT and the IWM have broken out to new all-time, record highs. If earnings season continues to deliver better than expected news we could see the small caps race higher.

Today's high was $87.69. I am suggesting a trigger to buy calls at $87.85. If triggered our multi-week target is $94.50.

Trigger @ 87.85

- Suggested Positions -

buy the Mar $90 call (IWM1316c90) current ask $1.37

Annotated Chart:

Entry on January xx at $ xx.xx
Average Daily Volume = 41.2 million
Listed on January 10, 2012


NEW DIRECTIONAL PUT PLAYS

Green Mtn Coffee Roasters - GMCR - close: 39.63 change: -0.17

Stop Loss: 41.20
Target(s): 35.25
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
It looks like the rally or more likely the short squeeze in shares of GMCR has run its course. The new high in early January looks like a bull trap. Shares have been underperforming the market. Now the stock looks ready to retrace its gains.

Today's low was $38.83. I am suggesting a trigger to buy puts at $38.45. If triggered our target is $35.25. More aggressive traders might want to aim for a drop near $31.00 instead.

NOTE: GMCR can be a volatile stock. We want to keep our position size small.

Trigger @ 38.45 *Small Positions*

- Suggested Positions -

buy the Feb $35 PUT (GMCR1316n35) current ask $2.14

Annotated Chart:

Entry on January xx at $ xx.xx
Average Daily Volume = 4.2 million
Listed on January 10, 2012



In Play Updates and Reviews

A Widespread Rally

by James Brown

Click here to email James Brown

Editor's Note:

Stocks reversed off their morning lows. The S&P 500 is now challenging its 2012 highs.

Our HUM trade was stopped out.


Current Portfolio:


CALL Play Updates

Concur Technologies - CNQR - close: 71.95 change: +0.23

Stop Loss: 68.40
Target(s): 74.50
Current Option Gain/Loss: +21.1%
Time Frame: exit prior to the late January earnings report
New Positions: see below

Comments:
01/10/13: CNQR spent Thursday consolidating sideways but closed near its highs for the day. The stock looks poised to breakout past the $72.00 level soon. Readers might want to start inching up their stop loss. Our short-term target is $74.50. We do not want to hold over the late January earnings report. FYI: The Point & Figure chart for CNQR is bullish with an $81 target.

- Suggested Positions -

Long Feb $70 call (CNQR1316B70) entry $3.30

Entry on January 07 at $70.25
Average Daily Volume = 462 thousand
Listed on January 05, 2012


Deere & Co - DE - close: 89.91 change: +0.85

Stop Loss: 88.25
Target(s): 99.00
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Comments:
01/10/13: DE continued to rally and added +0.9%. Shares are now challenging round-number resistance at the $90.00 level.

I am suggesting a trigger to buy calls at $90.25. If triggered our target is $99.00. However, we do not want to hold over its mid February earnings report (still unconfirmed). FYI: The Point & Figure chart for DE is bullish with a $104 target.

Trigger @ 90.25

- Suggested Positions -

buy the Feb $90 call (DE1316B90) current ask $2.23

Entry on January xx at $ xx.xx
Average Daily Volume = 2.3 million
Listed on January 09, 2012


Fiserv, Inc. - FISV - close: 83.20 change: +0.36

Stop Loss: 79.75
Target(s): 88.00
Current Option Gain/Loss: + 20.0%
Time Frame: exit prior to earnings on Feb. 5th
New Positions: see below

Comments:
01/10/13: FISV gapped open higher, reversed, and then recovered to close up +0.4%. I don't see any changes from my earlier comments.

Our target is $88.00 but we will plan on exiting positions prior to FISV's next earnings report on February 5th. FYI: The Point & Figure chart for FISV is bullish with a $93 target.

- Suggested Positions -

Long Feb $80 call (FISV1316B80) entry $3.00

01/10/13 do not hold over the earnings report on Feb. 5th

Entry on January 08 at $81.60
Average Daily Volume = 864 thousand
Listed on January 07, 2012


Mohawk Industries - MHK - close: 94.43 change: -0.10

Stop Loss: 91.25
Target(s): 99.00
Current Option Gain/Loss: - 18.1%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
01/10/13: MHK also gapped open higher (at $95.00), reversed, but then managed a rebound off its morning lows. MHK did underperform the rest of the market and failed to make it back into positive territory. More conservative traders may want to wait for a new rise past $95.00 before initiating new positions.

- Suggested Positions - *Small Positions*

buy the Feb $95 call (MHK1316B95) entry $3.30

Entry on January 10 at $95.00
Average Daily Volume = 787 thousand
Listed on January 09, 2012


OpenTable, Inc. - OPEN - close: 51.67 change: -0.20

Stop Loss: 49.40
Target(s): 58.00
Current Option Gain/Loss: -13.3%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
01/10/13: OPEN managed to outperform the NASDAQ with a +1.3% gain today. Traders bought the dip this morning and this afternoon. A new rally past today's high (53.05) could be used as a new entry point.

Earlier Comments:
OPEN could see a short squeeze. The most recent data listed short interest at 42% of the very small 19.4 million share float. FYI: The Point & Figure chart for OPEN is bullish with a $73 target.

- Suggested Positions -

Long Feb $55 call (OPEN1316B55) entry $2.54

Entry on January 04 at $52.23
Average Daily Volume = 361 thousand
Listed on January 03, 2012


Sherwin-Williams Company - SHW - close: 162.36 change: +0.19

Stop Loss: 154.65
Target(s): 169.00
Current Option Gain/Loss: + 6.4%
Time Frame: Exit prior to earnings on Jan. 31st!
New Positions: see below

Comments:
01/10/13: Traders bought the dip in SHW near $160 this morning. Unfortunately shares didn't make much progress with a +0.1% gain today. I don't see any changes from my prior comments.

Earlier Comments:
We keep our position size small to limit our risk. Plus, this is a shorter-term trade. We do not want to hold over the January 31st earnings report. FYI: The Point & Figure chart for SHW is bullish with a $196 target.

- Suggested Positions - *Small Positions*

Long Feb $165 call (SHW1316B165) entry $3.10

Entry on January 09 at $161.28
Average Daily Volume = 928 thousand
Listed on January 08, 2012


iShares Silver ETF - SLV - close: 29.78 change: +0.43

Stop Loss: 27.45
Target(s): 33.50
Current Option Gain/Loss: +14.7%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
01/10/13: A dip in the U.S. dollar today helped give silver prices a little boost. The SLV gained +1.4%. This ETF is testing potential resistance at the 200-dma and the $30.00 level.

Earlier Comments:
Readers might want to wait for a new close above $29.50 or even $30.00 before considering new bullish positions. More cautious traders might want to raise their stop loss.

- Suggested Positions -

Long March $30 call (SLV1316c30) entry $0.95

Entry on December 31 at $29.07
Average Daily Volume = 11.6 million
Listed on December 29, 2012


Sohu.com - SOHU - close: 47.94 change: +1.24

Stop Loss: 45.75
Target(s): 49.25
Current Option Gain/Loss: +31.7%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
01/10/13: After a multi-day consolidation shares of SOHU rebounded sharply with a +2.6% gain. Yet shares remain below round-number resistance at the $50.00 level. Our exit target is $49.25. More aggressive traders could aim higher.

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

01/05/13 new stop loss @ 45.75
01/02/13 adjust exit down to $49.25
SOHU almost hit our target at $49.75 but the high today was only $49.70. We don't want that to happen again.
12/29/12 new stop loss @ 43.45

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


Trimble Navigation - TRMB - close: 62.04 change: -0.83

Stop Loss: 59.75
Target(s): 64.75
Current Option Gain/Loss: - 6.6%
Time Frame: 2 to 3 weeks
New Positions: see below

Comments:
01/10/13: Hmm... I didn't see any specific headlines that might account for today's relative weakness in TRMB. The stock spiked to a new high this morning and then immediately reversed. That's not surprising since the market itself was initially higher but saw a morning reversal lower. Unfortunately for us TRMB did not follow the market when equities rebounded this afternoon.

Today's decline has painted a bearish engulfing candlestick reversal pattern. That's a warning signal. I still think the $60.00 level should be support but we have a problem. That problem is our January options expire in six trading days. More conservative traders may want to abandon ship now. I am not suggesting new positions at this time.

Earlier Comments:
We do want to keep our position size small to limit our risk.

- Suggested Positions - (Keep positions small)

Long Jan $60 call (TRMB1319a60) entry $2.25

01/10/13 we only have six trading days left for our January options. More conservative traders may want to exit early now

Entry on January 03 at $61.32
Average Daily Volume = 750 thousand
Listed on January 02, 2012


PUT Play Updates


Currently we do not have any active put trades.



CLOSED BEARISH PLAYS

Humana Inc. - HUM - close: 69.24 change: +2.33

Stop Loss: 69.01
Target(s): 62.00
Current Option Gain/Loss: -46.4%
Time Frame: Exit prior to earnings on Feb. 4th!
New Positions: see below

Comments:
01/10/13: Very bullish analyst comments on HUM, out before the opening bell, is what sparked today's big rally in the stock. The analyst has significant higher earnings forecasts than the company and they have a $95 price target (near the 2012 highs). Shorts were a little spooked and HUM surged all day to close up +3.4%. Our stop loss was hit at $69.01.

- Suggested Positions -

Feb $65 PUT (HUM1316N65) entry $1.40 exit $0.75 (-46.4%)

01/10/13 HUM reversed higher on bullish analyst comments.
Our stop loss was hit.

chart:

Entry on January 09 at $66.21
Average Daily Volume = 1.5 million
Listed on January 08, 2012