Option Investor
Newsletter

Daily Newsletter, Thursday, 5/9/2013

Table of Contents

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

Market Wrap

Indexes Fall From Highs

by Thomas Hughes

Click here to email Thomas Hughes
Introduction

Futures trading was mild ahead of the weekly claims data. Hotter than expected Chinese inflation data and a mixed response to the BoE's policy stance helped to put pressure on the markets. The consensus estimates ranged between 135,000-145,000, a small gain from last week. The surprising drop reported today did nothing to stimulate buyers and futures prices remained weak into the open. The first half hour of trading saw a small rise to just shy of break even before Wholesale Inventory data added some more downward pressure. By mid morning the S&P had retreated to -3 points, the Dow to -15.


Events began to take hold of the day when China reported a much larger than expected rise in consumer inflation. Consumer level inflation increased by 2.4% from the previous months 2.1%. At the same time producer level prices are falling. This is placing China's policy makers in a twist as they weigh the risks of rising consumer prices in the face of a slow or slowing economy. The one bright spot in the Asian arena was the KOSPI. Korean finance ministers lowered their key interest rate by a quarter percent, the Korean market rallied on the announcement.

The Bank of England did not follow in the foot steps of its fellow banks. The BoE held firm on its stance and did not make any changes to current policies or rates. This was met with mixed response from the European markets but did not seem to have a serious impact. Positive U.S. data may have helped soften the blow as the European indexes improved slightly going to the end of their trading day. Through it all earnings continued to roll in. Another 200+ reports were released today ranging from small regional banks to oil tankers, coffee roasters and retailers of the real and virtual varieties. The trend of improving EPS and weaker than expected revenue persists.

The Data

Today's data was dominated by the weekly jobless claims. Claims made a surprising drop and hit a five year low. For some reason this did not seem to make a big impact on trading. Initial claims fell by 4,000 from a mildly revised 327,000 to barely eek out a new five year low. The four week moving average also fell and reached 336,750, also a five year low. The continued declines in the initial claims data is a good sign for labor market stability and may be signaling a turn. Provided other factors remain stable we should be able to expect this number to keep trending down. There were widespread declines in claims, led once again by California. 10 states saw a drop of more than 1,000, out of those 5 had drops larger than 2,000. Only two states had increases of more than 1,000, Illinois and Oregon.


Continuing and total claims for unemployment also fell. Continuing claims matched its five year low, total claims set a new one. All in all, based on unemployment claims figures, there is improvement in the labor market. We are at least seeing a stabilization of employment conditions in which there is less turnover. Based on these tables and the downward trend in the overall unemployment figure it is very possible that we could reach the FOMC's target levels by the end of the year. If this data keeps moving lower I would expect to hear more and more chatter about the possibility of an end to QE in the coming months.



Better than expected Wholesale inventories added to the negative bias in today's trading. The expected 0.3% gain was beat by tenth and came in at 0.4%. The gain, which is normally good for the economy, came on a decrease in wholesale sales and could be sign of slowing in the auto and machinery sectors. Automobile sales have been a huge part of the rally to date, a decline in this sector would be an added headwind for the economy. Wholesale sales fell by -1.6%, the biggest drop since 2009.

This week was fairly light for data. Wholesale inventories was the last on the list this week. Next week is full with a total of 24 micro and macro U.S. data points. Early in the week retail sales, export/import prices, PPI, TIC flows, Industrial output/capacity utilization and mortgage index readings all happen before Thursday. After that there is the usual claims data, CPI, housing starts, building permits, Philly Fed, Michigan Sentiment and the Leading Indicators to wrap up the week.

The Dollar Pairs

The USD/JPY trade was apparently unaffected by the Chinese inflation data. This trade is still be driven by the aggressive easing policies enacted recently by the prime minister and new BOJ chairman. Their easing and stimulus plan is long term and aggressive with projections of 2% inflation in less than two years. There is a lot of skepticism over the BOJ's credibility and ability to meet those targets. This has raised the possibility of even more stimulus and yen printing. The USD/JPY pair traded flat for the morning then broke out to new highs in the afternoon. Long term indicators are bullish and near term are indicating the chance of higher prices. The break above 100 could take the pair to 110 or 120.

USD/JPY

The EUR/USD is caught in a tight range bound by Fibonacci retracement and long term support/resistance lines. The ECB's recent change to its key interest rate, strong U.S. data and weak Chinese data are at odds and have the euro caught in the cross fire. MACD and stochastic on the long term weekly charts are mixed and at odds with each other. This supports my thought that the euro is trapped in a range created by new lower ECB rates, yen printing in Japan and a strengthening U.S. economy. Upside limits appear to be around the 1.3250 level with a first lower limit around 1.3000.

EUR/USD

Oil And The Oil Index

Oil traded to the downside today but has moved up toward the top of its 6 month range since last week. Robust supply levels and no near term threat to production have traders easing off the recent rally. The rally may be losing steam as it approaches longer resistance in the $97-$98 range. The Oil Index got a nice boost from the rally in oil prices and broke out to a new high. The move has strong near term momentum and looks likely to move higher. In the long term momentum is crossing zero today and stochastic is indicating a buy. The closest resistance is 1400 and was tested today. A break above 1400 has upside targets of 1450 and 1500, downside support is 1350.

Oil Index

Gold And The Gold Index

Gold has been trading sideways for weeks now. Spot prices have yet to regain the $1500 level since the sharp drop in prices last month, in fact, prices have yet to climb above $1480. There are reports of increased physical purchases of gold but there are also reports of increased bearish activity in the form of ETF and mutual fund outflows. Regardless of long term outlook I think gold prices are going to be volatile over the next few months. The Gold Index was supported by the upward retracement of gold prices but have also been capped at resistance. Future earnings of gold companies is in serious danger of major declines, it is inevitable. If what you sell sells for less then you will make less. The index crept above the previous resistance of the 38.8% Fib retracement but fell back from the short term moving average to close below the retracement level as well. I still expect a retest of the previous low around $110. Today's candle may be confirming a double top at the 38.8% Fib resistance and the beginning of the move to make that retest.

Gold Index Daily

The hourly chart shows the Gold Index making its way above the $125 resistance level. At the same time a bearish MACD divergence is appearing. This divergence is confirming that $125 and the 38.8% retracement is resistance.

Gold Index Hourly

Story Stocks

Earnings were a large part of the corporate spotlight today but are waning in importance. The earnings season is about the come to an end except for the random reports we'll get until next round. One company of note was Costco. The discount retailer reported that comp store sales increased more than 4% for the month of April. At the same time even larger increases were reported for net sales on a monthly and period basis. The stock traded to the upside for a short time before falling from resistance. Longer term indicators are bullish and gaining strength while in the nearer term momentum is waning and the stock is overbought. If the economy and jobs pictures actually improves then Costco could continue to see an increase in sales. The company is planning to move forward with the construction of 9 new stores throughout its empire over the next year.

Costco

Green Mountain Coffee reported earnings yesterday after the bell. The report and accompanying statement put nay sayers, including myself, silent. The company reported a net profit ahead of expectations and announced a new deal with Starbucks for its Keurig coffee systems. The new deal plus unexpected strength of sales led company executives to raise full year guidance. This news was met with the expected excitement and sent the stock up close to 30%. This move puts share prices at near a two year high. I expect to see some volatility in this market as traders and investors adjust positions.

Green Mountain Coffee

Shoe Carnival reported earnings for the fiscal fourth quarter and full year ending February, 2013. The shoe discounter reported sales increase of 0.5% for the quarter and 4.5% for the year along with record full year earnings. Company guidance for the fiscal first quarter did not meet expectations and kept stock prices in check for today. Shoe Carnival has been in a range for the past 4-5 months and looks likely to remain contained in that range at this time. Any break above the $21 level should be met with skepticism. This could be a good play for covered calls. When I checked the June $20 calls were going for about $1.40 and the $21.50 calls for around $0.75.

Shoe Carnival

The Indexes

The S&P 500, DOW, Nasdaq and other major indexes snapped a five day winning streak today. It was unavoidable. The markets have been skyrocketing this year and need a period break from all the buying. The unemployment data, which was pretty good considering, may have helped buffer what could have been a much bigger down day. The S&P 500 traded in a tight range just to the negative for the early part of the day but even so close to break even MACD was signaling a peak in momentum. Later in the day the index managed to squeak out a very small new intra-day high before being pushed back into negative territory. As the day and the afternoon wore on the indexes succumbed to the negative pressure and fell to the day's lows. After that it was push and pull into the close.

SPX 1 hour bars

Today's candle is bearish and has downside implications. However, I do not think it is too strong, not yet anyhow. Tomorrow could see a continuation of a mild correction or it may see a mass sell off. The thing is there is no data or major earnings release or event to support the markets. The underlying fundamentals will have to do it on their own. In the longer term I think the fundamentals are supporting a rising market but it looks likely that a small correction or consolidation is in the offing, at least on the daily charts. Here we can see the bearish candle, the MACD peak and stochastic rolling over.

SPX daily

Longer term, on the weekly charts, MACD is bullish and rising. It is also divergent so caution is warranted but bullish and rising it is. As for stochastic, it is displaying a bullish crossover and potential long term buying signal.

SPX weekly

The VIX has been retreating back toward its recent long term lows. Today it moved up from the bottom of the six month range but was capped at the short term moving average. This could be a telling signal in the morning. Look for the VIX to move above the moving average if stocks continue to sell off or be reversed at this level if support is present. At this time it looks like the most recent causes of fear are ebbing. Be on the look out for new reasons to be wary and don't forget about the possibility of sequester damage, unwinding fiscal policy, unexpected economic weakness or flare ups in Europe or China.

The VIX

Tomorrow is a free day for economy watchers and another big day for small and mid cap earnings reports. I will be paying special attention to the report from Arcelor-Mittal. The steel giant could provide an important piece of the overall global economic picture. There is also more and more talk about no sell-in-May-go-away this year and to look out for a rotation into the cyclicals.

Until then, remember the trend!

Thomas Hughes


New Option Plays

Stalling At Resistance

by James Brown

Click here to email James Brown


NEW DIRECTIONAL PUT PLAYS

Ulta Salon - ULTA - close: 89.39 change: -2.09

Stop Loss: 92.05
Target(s): early target: $85.25, longer target: $81.00
Current Option Gain/Loss: Unopened
Time Frame: 3 to 6 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
ULTA is a specialty retailer selling cosmetics, fragrances, hair care, and skincare products. The company is labeled as part of the services sector. The stock had a rough time this spring. On Valentines day, Feb. 14th, the stock gapped down significantly on news that its President, CEO and director would be leaving the company a week later. Shares tried to bounce but then the stock plunged again just one month later on March 15th after report earnings. ULTA's earnings were better than expected but management issued a warning for the first quarter. That news sparked a sell-off down to $72.50 a share. Since then ULTA has clawed its way back.

Now the stock appears to be reversing under significant technical resistance. There is a small cloud of long-term moving averages that has kept ULTA from advancing higher in spite of the market's rally to new highs. Now ULTA is showing relative weakness with a -2.2% decline. This looks like a chance to launch bearish positions.

I am suggesting a trigger to buy puts tomorrow at the opening bell. More conservative traders may want to wait for ULTA to trade below its six-week trend line of higher lows (near the 10-dma) before initiating positions (see daily chart below). Our short-term target is $85.25. I am also setting a longer-term target of $81.00.

- Suggested Positions -

buy the Jun $85 PUT (ULTA1322R85) current ask $2.75

Annotated Chart:

Weekly Chart:

Entry on May 10 at $---.--
Average Daily Volume = 1.1 million
Listed on May 09 2013



In Play Updates and Reviews

Stocks End Five-Day Streak

by James Brown

Click here to email James Brown

Editor's Note:

The S&P 500 index snapped a five-day winning streak with a minor decline on Thursday.


Current Portfolio:


CALL Play Updates

The Boeing Co. - BA - close: 94.57 change: +0.57

Stop Loss: 92.40
Target(s): 99.00
Current Option Gain/Loss: +17.8%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
05/09/13: BA managed to outperform the major indices with a +0.6% gain. The stock started Thursday strong thanks to some positive analyst comments. Yet BA is still having trouble trying to get past round-number resistance near $95.00.

- Suggested Positions -

Long Jun $95 call (BA1322F95) entry $2.02

Entry on May 06 at $94.25
Average Daily Volume = 4.9 million
Listed on May 04 2013


HanesBrands Inc. - HBI - close: 49.96 change: -0.49

Stop Loss: 48.75
Target(s): 54.75
Current Option Gain/Loss: -35.0%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
05/09/13: HBI drifted lower toward round-number support at $50.00 and short-term technical support at its 10-dma. Depending on your risk tolerance traders could use this dip as a new entry point or wait for a bounce.

NOTE: HBI is scheduled to begin trading ex-dividend on May 16th. The quarterly cash dividend should be 20 cents.

- Suggested Positions -

Long Jun $50 call (HBI1322F50) entry $2.00

Entry on May 08 at $50.72
Average Daily Volume = 1.4 million
Listed on May 07 2013


Lumber Liquidators - LL - close: 85.22 change: +0.67

Stop Loss: 79.45
Target(s): 89.50
Current Option Gain/Loss: +0.0%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
05/09/13: LL continues to show relative strength and outperformed the major indices with a +0.79% gain today. More conservative traders may want to raise their stop loss closer to the rising 10-dma.

Earlier Comments:
LLL had a lot of short interest prior to the company's earnings report and the good news sparked a short squeeze. The most recent data listed short interest at 27% of the small 26.2 million share float but that number may be out of date. If triggered our short-term target is $89.50. I would keep our position size small to limit our risk.

*Small Positions* - Suggested Positions -

Long Jun $85 call (LL1322F85) entry $4.10

05/07/13 triggered on gap open higher

Entry on May 07 at $84.35
Average Daily Volume = 761 thousand
Listed on May 06 2013


L Brands, Inc. - LTD - close: 52.08 change: -1.13

Stop Loss: 50.40
Target(s): 54.50
Current Option Gain/Loss: +23.8%
Time Frame: Exit PRIOR to earnings in mid-May
New Positions: see below

Comments:
05/09/13: Hmm... LTD saw some profit taking today. Analysts were expecting LTD to report +4.8% April same-store sales growth. The company said growth only came in at +2%. Management did raise its Q1 earnings guidance from a range of $0.40-0.45 to $0.46 cents a share. The disappointing same-store sales news sparked LTD to gap open lower and end the session with a -2.1% decline. I am not suggesting new positions at this time.

Keep in mind we only have a couple of weeks, maybe less, before we need to exit prior to LTD's earnings report.

- Suggested Positions -

Long Jun $50 call (LTD1322F50) entry $2.26

05/07/13 new stop loss $ 50.40

Entry on May 03 at $50.85
Average Daily Volume = 2.7 million
Listed on April 27 2013


Ross Stores - ROST - close: 65.73 change: -0.40

Stop Loss: 64.70
Target(s): 69.00
Current Option Gain/Loss: - 9.6%
Time Frame: exit prior to earnings in late May
New Positions: see below

Comments:
05/09/13: It seems that investors were in a mood to sell no matter what the news was. ROST announced bullish news today but that didn't stop shares from sinking. Analysts were expecting April same-store sales growth of +5.8%. ROST delivered +7.0% same-store sales growth. Overall sales growth was +12% and management raised their Q1 earnings estimates from $1.00-1.04 range to $1.06-1.07 range. Normally, news that a company was raising earnings estimates would be met with buying pressure on the stock. Instead ROST drifted lower toward short-term technical support at its 10-dma and posted a -0.6% decline.

I am raising our stop loss to $64.70. I am not suggesting new positions.

- Suggested Positions -

Long Jun $67.50 call (ROST1322F67.5) entry $1.55

05/09/13 new stop loss @ 64.70
05/04/13 new stop loss @ 64.15
05/01/13 new stop loss @ 63.90

Entry on April 26 at $65.25
Average Daily Volume = 2.3 million
Listed on April 25 2013


WellPoint Inc. - WLP - close: 75.39 change: +0.34

Stop Loss: 73.35
Target(s): 79.75
Current Option Gain/Loss: +4.1%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
05/09/13: WLP continues to drift higher and managed to outperform the major market indices with a +0.45% gain. I don't see any changes from my prior comments.

- Suggested Positions -

Long Jun $75 call (WLP1322F75) entry $1.91

Entry on May 08 at $75.25
Average Daily Volume = 2.0 million
Listed on May 07 2013


PUT Play Updates

Amgen Inc. - AMGN - close: 104.56 change: -0.51

Stop Loss: 106.75
Target(s): 96.00
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Comments:
05/09/13: AMGN is still churning sideways between $104.00 and $105.50. If the market pulls back I am expecting AMGN to breakdown below support near $104.00.

Earlier Comments:
Last Tuesday's low was $103.85. More aggressive traders could buy puts now but I am suggesting a trigger to buy puts at $103.65. If triggered our target is $96.00. However, more conservative traders may want to exit near $100 since it's possible the $100 level could prove to be round-number support.

Trigger @ 103.65

- Suggested Positions -

buy the Jun $100 PUT (AMGN1322R100) current ask $1.62

Entry on May -- at $---.--
Average Daily Volume = 1.4 million
Listed on April 30 2013


Allergan Inc. - AGN - close: 103.15 change: -0.16

Stop Loss: 105.30
Target(s): 98.50
Current Option Gain/Loss: -2.7%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
05/09/13: Thursday was a rather quiet day for shares of AGN. I would still consider new bearish put positions at current levels.

Earlier Comments:
There is potential support at $100.00, at the 200-dma near $97.85, and at the May 1st low of $96.77. I am suggesting we aim for $98.50.

- Suggested Positions -

Long Jun $100 PUT (AGN1322R100) entry $1.85

Entry on May 09 at $103.46
Average Daily Volume = 2.4 million
Listed on May 08 2013


Expedia Inc. - EXPE - close: 55.97 change: -1.21

Stop Loss: 60.25
Target(s): 1st target: 55.10, 2nd target 53.00
Current Option Gain/Loss: +40.0%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
05/09/13: EXPE continues to sink and shares gave back -2.1% today. The stock is nearing potential support at $55.00. It will be interesting to see how the stock performs tomorrow. After the closing bell tonight EXPE's rival Priceline.com (PCLN) reported earnings of $5.76 a share on revenues of $1.3 billion. Wall Street was only expecting a profit of $5.29 on revenues of $1.28 billion. That was a solid report. Yet PCLN management lowered their Q2 profit and sales guidance below Wall Street estimates. Shares of PCLN are down about -$20.00 after hours and trading near $715 a share. That should put pressure on EXPE tomorrow.

Don't forget we have two exit targets for you to choose from with EXPE.

Earlier Comments:
Please note I am listing two targets. Our conservative target is $55.10 since the $55 level has been support in the past. Our more aggressive target is $53.00. You choose which target you want to exit at. FYI: The Point & Figure chart for EXPE is bearish with a $55 target.

- Suggested Positions -

Long Jun $55 PUT (EXPE1322R55) entry $1.50

Entry on May 07 at $58.48
Average Daily Volume = 2.9 million
Listed on May 06 2013


Vertex Pharma. - VRTX - close: 76.78 change: +1.35

Stop Loss: 80.50
Target(s): 66.00
Current Option Gain/Loss: - 2.7%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
05/09/13: VRTX is not cooperating with us. Shares bucked the market's weakness today with a bounce from support near $75.00. The stock tacked on +1.7%. I am not suggesting new positions at this time.

Earlier Comments:
The old 2012 highs were near $65.00. This could be new support. We will aim for $66.00.

- Suggested Positions -

Long Jun $75 PUT (VRTX1322R75) entry $3.60

Entry on May 02 at $76.30
Average Daily Volume = 3.8 million
Listed on May 01 2013



Longer-Term Play Updates



Chicago Bridge & Iron Co. - CBI - close: 57.25 change: +0.17

Stop Loss: 51.90
Target(s): 62.50
Current Option Gain/Loss: July's: +81.8% or Jan's: +44.8%
Time Frame: 3 to 4 months
New Positions: see below

Comments:
05/09/13: Positive analyst comments on CBI helped shares gap open higher this morning. CBI briefly traded above the $58.00 level before paring its gain.

Please review our original play description on this page here.

- Suggested Positions -

Long 2013 Jul $55 call (CBI1320G55) Entry $2.20*

- or -

Long 2014 Jan $60 call (CBI1418A60) Entry $2.90*

05/08/13 new stop loss @ 51.90
*option entry price is an estimate since the option did not trade at the time our play opened.

Entry on April 22 at $51.53
Average Daily Volume = 2.5 million
Listed on April 20 2013