Option Investor
Newsletter

Daily Newsletter, Thursday, 5/16/2013

Table of Contents

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

Market Wrap

Data Spins Bullish Traders

by Thomas Hughes

Click here to email Thomas Hughes
Introduction

The futures trade was to the upside this morning ahead of economic releases. Mixed trading in Asian and European markets failed to dampen the bullish spirits carried over from Wednesday. The positive vibe was dashed though when the market was bombarded with economic data. 4 bundles of important and closely watched data were released simultaneously at 8:30 AM with a follow up release at 10:00. Some of the data was weaker than expected but not taken too seriously, at least for now. Following the 8:30 release futures fell by only a few points and opened the trading day near to break even.


Following the open the S&P traded within a fairly tight range for the day, just over 7 points. The candle formed is a doji but more likely a spinning top than a reversal sign. The 10:00 AM release of Philly Fed numbers was the catalyst that sent the index to hit the daily low of 1653.35. After touching today's bottom the index did not stay there long, moving back up to near the break even level and eventually turning positive around 11:30 AM.

In the end the direction of today's market was down. The S&P 500, DOW and NASDAQ indexes all closed the day in the red but close to yesterday closing prices. The S&P fell by about 8 points, the NASDAQ 6 and the DOW 30. The recent uptrend is still intact but today's data gave us reason to pause for a breather. Tomorrow is light in the way of economic data and could see similar trading action as we saw today. Michigan Sentiment and Leading Indicators are what's on tap.

The Economic Data

Like I mentioned before there was an onslaught of data today right at 8:30. Only one data point, Building Permits, showed a gain but it isn't very strong of an indicator. Permits rose by 14% to just over 1 million. The more solid number, Housing Starts, was lower than last months 1.021 million and lower than the expected 900,000 for this month. This is a 16% drop in starts and a reason to suspect the strength of the current housing recovery. However, one data point does not make a trend and the large number of permits suggests at least that more starts will be seen in the next months data.

Moving on to the weekly release of unemployment claims there was a surprising jump in first time claims. Initial claims gained 32,000, 40,000 if you count in the revision to last week's figures. This puts the number of claims at 360,000 and a 6 week high. The four week moving average also climbed, adding 1,250 to reach 339,250. The jump in claims is a surprise but not too shocking I think. The trend in first time claims is still firmly sideways to downish.


Continuing claims fell this week and reached a new low. However, there was a mild upward revision to last weeks release that played into that new low being reached. Nevertheless looking at this table are trending down and hovering around 5 year lows. There may be a small peak in this number next week due to this weeks peak in initial claims.


Total claims is the real story on the unemployment front although it is still undecided just how good this story is. Total claims fell by just over 30,000 to reach a new 5 year low. The way this number keeps trending down leads me to think that the total U.S. unemployment level is headed lower as well. If this happens because of jobs growth then that is good but if it is simply because people can't find work and fall of the books then that is bad.


Consumer level inflation remains low. The CPI reading for April showed that consumer prices had fallen by -0.4%. This is double the -0.2% drop expected by analysts. The core number rose by 0.1%, but less than the 0.2% expected. This reading of the economy is good, while inflation is stable the Fed can keep their foot on the gas. The final piece of economic data for the day was the Philly Fed reading for may which fell to -5.2. Out of all them this was probably the biggest miss, consensus estimates were in the +2 range.

Asia, Japan, The Yen And The Dollar

Asian markets were fairly quiet yesterday. Chinese markets climbed to reach a 1 week high and the Nikkei retreated by about -0.4%. There were no headlines from the region impacting trading today and nothing on the horizon for tomorrow. The yen is still sliding versus the dollar and is expected to continue moving lower. The plans to stimulate the Japanese economy extend out at least 2 years. Looking at charts of weekly closings the USD/JPY is clearly in the hands of a bull market being led by economic policies. The pair has broken above resistance at 100 with the next likely halting point around 105. Day to day action may be volatile but longer term I have targets at 110 and 120.

USD/JPY

The European Connection

European markets had a wild trade today, moving higher then lower and then finally closing just shy of break even. A mixed earnings scene in the EU is weighing on European stocks. Negative sentiments were not helped by the weak U.S. data but got some lift from a drop in local inflation. The euro regained some ground from yesterday's losses versus the dollar but remains low in the two month range. The pair is sitting on a 50% retracement support level but indicators are bearish. The 1.2900 level may be a turning point for this trade. A break below 1.2900 could take it down to 1.2750.

EUR/USD

The Oil Index

Trading was a bit mixed in the energy pits today. Brent traded flattish for the day and closed just above yesterday's prices. Light crude, after trading flat for most of the day, received an afternoon lift that boosted prices by nearly a full percent. Natural gas prices did not hold up today after a larger than expected build in inventory was reported. Nat Gas fell by 3.5%. The Oil Index is still acting favorably but seems to be facing resistance at 1400. Higher oil prices are great news for oil companies, if the market can get past the data and start seeing growth oil prices and the oil index could move higher.

Oil Index

The Gold Index

Gold prices slid again today and hit a new four week low. Now that the price of the metal is below $1400 I think a retest of the recent low of $1321.50 is inevitable. The holders of gold stocks are not liking the prospects these companies have for earnings growth with the low low prices of gold. The Gold Index is testing lows set last month and made a new intra-day low today. This is an ominous sign and may indicate that the Gold Index is going to move lower. The weekly charts are bearish and the daily charts suggest a break through support is likely.

Gold Index

Earnings Season Wanes But Still Packs A Punch

Even though earnings season has pretty much run its course there are still a few big names out there making headlines. Starting with Cisco, which reported yesterday after the bell, earnings are good. The Software company reported earnings rose 14% in the quarter and beat analysts expectations. The company went on to guide next quarter earnings slightly above estimates. The company said that trends were good and that it expects to benefit from this time of rapid change in the industry. The markets were pleased with this report and drove the stock up in the after hours (on Wednesday). Today it continued that climb reaching a peak near 13% above yesterday's close.

Cisco

Applied Materials reported after the bell today. The stock received a down grade today from Goldman Sachs that was pretty bad. Goldman says there is up to 40% downside risk in AMAT. A drop of that magnitude would take the stock down to the $9 level, well below any near and long term support levels present. For this target to be reached any time soon AMAT would need to suffer something catastrophic. The stock traded down today but remained above the near term support around $14.50. The reported earnings were well above expectations and the stock traded higher after hours.

Applied Materials

Dell is another tech giant that reported after the bell. The company was expected to report a decline in earnings from $0.40 to $0.34 per share. Today's trading action was tight and remained capped by the 30 day EMA. The reported earnings were much lower, $0.21 per share even though revenue was higher than expected. 2nd quarter guidance was not forthcoming due to impending take over possibilities. The stock held flat in after hours trading.

Dell

Toyota Motors reported after the bell too, but much later than the rest due to Japanese market hours. The stock has been trending up strongly over the last few months, aided in part by the strong U.S. auto market, a recovered Toyota and the Abe yen trade. Earnings expectations were high, 75% higher than last quarter. Watch for sharp moves in this stock tomorrow.

Toyota

Wally World, Wal Mart, missed on their 1st quarter earnings and guided lower than expected. The report sent the stock lower but it seemed to find support around $77.50. The earnings miss was by a penny, not bad except that revenue was much lighter than expected. What really shocked the market was 2nd quarter guidance which came in about a nickel under expectations. The stock dropped in early trading, moved lower during the day and then found support coincident with the short term moving average and a near term congestion band.

Wal Mart

The S&P 500

I think it goes without saying that the S&P and other major indexes are trending up. Where they go from here is always in question so we must look to the charts to get our clues. On the daily charts it looks like the index is still moving higher. The index is above the psycho level, I mean psychological level, of 1650 with strong bullish indicators. MACD momentum is bullish and strong when compared to past peaks even if it is diverging from the recent highs nearer term. This divergence does not mean a correction is coming, just that momentum is slowing. Likewise the overbought stochastic, which is a sign of a strong market, does not necessarily precede a drop. However, the MACD is diverging and stochastic is rolling over so caution is due.

S&P 500 daily

On the weekly charts MACD and stochastic are both indicating bullishness and potential higher prices. However, this chart is also indicating caution. The index is extended well beyond the 150 day moving average and my up trend line. There is plenty of room on this chart for the index to pull back and maintain the up trend. If there is a large pullback I expect to see support kick in around 1600.

S&P 500 weekly

Tomorrow there is the possibility we will see the indexes continue moving lower. There is not much data to lend support and earnings are not providing much either. Looking at the charts of one hour closings we can see that price action is still above 1650 but indicators are moving lower. Near term resistance exists around 1660 providing a possible top for tomorrow's trading if there is any upward movement.

S&P 500 60 minute

Today's data was a surprise but not much to worry about at this time. One bad day does not a down trend make so they say. We'll have to keep watching the data and the charts to see what story they tell. For now the trend remains up with a chance of correction or consolidation. I will be looking to protect positions and enter new ones on dips while watching for a sign of reversal to develop.

Until then, remember the trend!

Thomas Hughes


New Option Plays

Healthcare & Small Caps

by James Brown

Click here to email James Brown


NEW DIRECTIONAL PUT PLAYS

Covidien - COV - close: 65.67 change: -0.75

Stop Loss: 67.05
Target(s): 62.00
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
COV makes healthcare products. The company reported earnings on April 26th. The Q1 EPS numbers were above Wall Street estimates but management guided lower. This warning sparked the big sell-off. Since then COV has managed to bounce back but the rebound is rolling over now that shares have filled the gap.

I am suggesting a trigger to buy puts at $65.55. If triggered our target is $62.00.

Trigger @ 65.55

- Suggested Positions -

buy the Jun $65 PUT (COV1322R65) current ask $1.10

Annotated Chart:

Entry on May -- at $---.--
Average Daily Volume = 3.5 million
Listed on May 16 2013


iShares Russell 2000 - IWM - close: 97.95 change: -0.25

Stop Loss: 98.75
Target(s): 95.05
Current Option Gain/Loss: Unopened
Time Frame: 2 to 3 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
The small cap Russell 2000 index has produced an impressive four-week rally. Yet momentum is slowing down and technical indicators are starting to suggest the rally is about to rollover.

The trend is still up so I would consider this a more aggressive, higher-risk trade. I am suggesting a trigger to buy puts at $97.45. If triggered our target is $95.05. Broken resistance at $95.00 should be new support. If we see the IWM bounce at $95.00 we might switch and buy calls on the rebound.

Trigger @ 97.45

- Suggested Positions -

buy the Jun $95 PUT (IWM1322R95) current ask $1.16

Annotated Chart:

Entry on May -- at $---.--
Average Daily Volume = 41.8 million
Listed on May 16 2013



In Play Updates and Reviews

Shares of CBI Surge

by James Brown

Click here to email James Brown

Editor's Note:

Shares of Chicago Bridge & Iron (CBI) surged on news that Berkshire Hathaway initiated a position in the first quarter. We are adjusting our exit strategy on CBI.

Our MLM trade was triggered today.


Current Portfolio:


CALL Play Updates

The Boeing Co. - BA - close: 97.95 change: -0.25

Stop Loss: 93.40
Target(s): 99.00
Current Option Gain/Loss: +58.4%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
05/16/13: Shares of BA held up reasonably well. They traded sideways most of the session before slipping late in the day to a -0.4% decline. Upon further review today we've decided to adjust our stop loss down to $93.40. More conservative traders may want to keep their stop loss closer to $95.00 or its simple 10-dma instead. I am not suggesting new positions.

- Suggested Positions -

Long Jun $95 call (BA1322F95) entry $2.02

05/16/13 re-adjust stop loss back down to $93.40
05/15/13 new stop loss @ 94.40
05/14/13 new stop loss @ 93.75

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


HanesBrands Inc. - HBI - close: 50.98 change: -0.20

Stop Loss: 49.40
Target(s): 54.75
Current Option Gain/Loss: - 2.5%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
05/16/13: Thursday was also a relatively quiet day for HBI. Look for short-term support near $50.00 or its 10-dma.

- Suggested Positions -

Long Jun $50 call (HBI1322F50) entry $2.00

05/14/13 new stop loss @ 49.40

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


Michael Kors - KORS - close: 59.27 change: -1.23

Stop Loss: 57.65
Target(s): 64.75
Current Option Gain/Loss: -35.2%
Time Frame: exit PRIOR to earnings on May 29th
New Positions: see below

Comments:
05/16/13: Wal-Mart (WMT) was a major story today and a drag on the retail sector. WMT's earnings report this morning was not very encouraging. It is worth noting that WMT and KORS focus on very different markets. This drop in KORS just looks like some profit taking but the close below its 10-dma is short-term bearish. More conservative traders may want to tighten their stops.

- Suggested Positions -

Long Jun $62.50 call (KORS1322F62.5) entry $3.40

05/13/13 trade triggered on gap open higher at $61.55
trigger was $60.65

Entry on May 13 at $61.55
Average Daily Volume = 3.5 million
Listed on May 11 2013


Lockheed Martin - LMT - close: 104.00 change: -0.05

Stop Loss: 101.45
Target(s): 109.00
Current Option Gain/Loss: + 5.8%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
05/16/13: The market's weakness today kept a lid on LMT's gains. The stock tried to rally but gave back all of its advances. If shares of LMT dip further we can look for potential support near $102.50.

- Suggested Positions -

Long Jun $105 call (LMT1322F105) Entry $0.85

Entry on May 15 at $103.05
Average Daily Volume = 1.7 million
Listed on May 14 2013


MEDNAX, Inc. - MD - close: 92.70 change: +0.73

Stop Loss: 88.90
Target(s): 98.50
Current Option Gain/Loss: +27.7%
Time Frame: 4 to 8 weeks
New Positions: see below

Comments:
05/16/13: The relative strength in shares of MD continues with a +0.79% gain. More conservative traders might want to start thinking about inching up their stop loss. I would expect broken resistance at $90.00 to offer new support.

Earlier Comments:
If triggered our target is $98.50. However, I am suggesting we keep our position size small. MD doesn't trade a lot of volume and the options do not see a lot of volume either.

*Small Positions* - Suggested Positions -

Long Jun $95 call (MD1322F95) entry $0.90

Entry on May 14 at $91.15
Average Daily Volume = 242 thousand
Listed on May 11 2013


Martin Marietta Materials - MLM - close: 109.92 change: +0.43

Stop Loss: 107.45
Target(s): 118.50
Current Option Gain/Loss: - 9.6%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
05/16/13: MLM managed to buck the market's pullback and post another gain. Shares of MLM briefly traded above resistance at $110.00 and the stock did hit our trigger at $110.25 before pulling back. I would wait for a new rise past $110.25 or today's high at $110.37 before initiating new positions.

Earlier Comments:
MLM is currently hovering below short-term resistance at $110. A breakout here could spark more short covering. The most recent data listed short interest at 11% of the rather small 45.9 million share float.

- Suggested Positions -

Long Jun $110 call (MLM1322F110) entry $3.10

Entry on May 16 at $110.25
Average Daily Volume = 378 thousand
Listed on May 15 2013


O'Reilly Auto. - ORLY - close: 110.71 change: -1.25

Stop Loss: 109.75
Target(s): 119.00
Current Option Gain/Loss: Unopened
Time Frame: 4 to 6 weeks
New Positions: Yes, see below

Comments:
05/16/13: BA followed the market lower today. The stock actually underperformed the market with a -1.1% decline. Shares are testing what should be short-term support near their 10-dma and the $110 level. Currently we're still on the sidelines. I am suggesting a trigger to buy calls at $112.25. If triggered our target is $119.00. The Point & Figure chart for ORLY is bullish with a $137 target.

Trigger @ 112.25

- Suggested Positions -

buy the Jun $115 call (ORLY1322F115)

Entry on May -- at $---.--
Average Daily Volume = 813 thousand
Listed on May 15 2013


Occidental Petroleum - OXY - close: 90.93 change: -0.10

Stop Loss: 87.75
Target(s): 98.50
Current Option Gain/Loss: -19.8%
Time Frame: 4 to 8 weeks
New Positions: see below

Comments:
05/16/13: Hmm... OXY managed to eke out a small gain yet the rally intraday failed at resistance near $92.00. At this point traders may want to wait for a breakout past $92.00 before considering new bullish positions.

Earlier Comments:
On the weekly chart (see below) OXY has created a huge, inverse head-and-shoulders pattern, which is bullish. FYI: The Point & Figure chart for OXY is bullish with a $114 target.

- Suggested Positions -

Long Jun $92.50 call (OXY1322F92.5) entry $1.95

Entry on May 14 at $90.75
Average Daily Volume = 6.3 million
Listed on May 13 2013


WellPoint Inc. - WLP - close: 76.84 change: -0.99

Stop Loss: 74.65
Target(s): 79.75
Current Option Gain/Loss: +47.1%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
05/16/13: WLP hit some profit taking today. Shares underperformed with a -1.2% pullback. I suspect we are going to see WLP fill the gap with a dip to $76.00 before it moves higher again.

- Suggested Positions -

Long Jun $75 call (WLP1322F75) entry $1.91

05/14/13 new stop loss @ 74.65

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


Energy ETF - XLE - close: 80.77 change: -0.40

Stop Loss: 79.45
Target(s): 89.00
Current Option Gain/Loss: Unopened
Time Frame: 4 to 8 weeks
New Positions: Yes, see below

Comments:
05/16/13: The market's pullback today weighed on the XLE and shares drifted sideways. We are still waiting on a bullish breakout higher.

I am suggesting a trigger to buy calls at $81.55. If triggered our multi-week target is $89.00. The $90.00 level was major resistance back in 2008 and will probably be a hurdle for the ETF to cross.

Trigger @ 81.55

- Suggested Positions -

buy the Jun $85 call (XLE1322F85)

- or -

buy the Sep $85 call (XLE1321i85)

Entry on May -- at $---.--
Average Daily Volume = 13.0 million
Listed on May 14 2013


PUT Play Updates

Allergan Inc. - AGN - close: 100.42 change: -2.40

Stop Loss: 104.25
Target(s): 97.00
Current Option Gain/Loss: +32.4%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
05/16/13: AGN spiked lower this morning. Shares tried to bounce from round-number support at $100.00 but it didn't get very far. I am lowering the stop loss down to $104.25. We are also adjusting our exit target down to $97.00. More conservative traders may want to exit near the rising 200-dma instead (currently near $98.40).

Don't be surprised to see AGN try and bounce from $100 again tomorrow but the $103.00 level should be new resistance.

- Suggested Positions -

Long Jun $100 PUT (AGN1322R100) entry $1.85

05/16/13 new stop loss @ 104.25, adjust exit target to $97.00

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



Longer-Term Play Updates



Chicago Bridge & Iron Co. - CBI - close: 59.58 change: +1.82

Stop Loss: 54.90
Target(s): 62.00 for the July calls, $69 for the 2014 calls
Current Option Gain/Loss: July's: +154.5% or Jan's: +86.2%
Time Frame: 3 to 4 months
New Positions: see below

Comments:
05/16/13: CBI was a big winner today. Not only were shares up thanks to last night's news about Berkshire Hathaway initiating a position but this morning CBI garnered a bullish upgrade from another firm. Shares spiked toward $60.00 but were unable to close above this round-number resistance level.

More conservative traders with the July calls may want to consider taking profits now. Please note that we are adjusting our exit strategy:

Plan to exit the July calls at $62.00. I am placing a $69.00 target for our 2014 January calls.

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*

05/16/13 Target for the July $55 calls is $62.00 on CBI
05/16/13 Target for the 2014 Jan. calls is $69.00 on CBI
05/15/13 new stop loss @ 54.90, adjust exit target to $62.00
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