Option Investor
Newsletter

Daily Newsletter, Wednesday, 6/19/2013

Table of Contents

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

Market Wrap

A Tale Of Two Markets

by Thomas Hughes

Click here to email Thomas Hughes
Introduction

There was big expectation wrapped up into today's FOMC meeting, policy announcement and press conference. Our fearless banking leader, Ben Bernanke, had quite a lot on his shoulders. Not only were we all waiting for the results of the announcement and statements but also for sign of when he would be leaving. After Obama's outing on TV the other day I don't think anyone will be surprised when we start hearing names for new candidates. Now brings the question of tapering back around to the present. Now the subject of conversation has turned to if he's on the way out is he going to leave things as is, or will he set the course for tapering before he leaves.


Traders around the world were a little nervous today. Asian stocks ended the day mixed. Most ended the day down by about 1% or so, the Nikkei was the one bucking the trend. Japanese stocks gained 1.8%. In Europe things were slightly calmer. Indexes here closed in the red but only mildly. The CAC 40 was the leader with a -0.5% decline. There was not much news from either region in a sort of economic calm before the Ben Bernanke storm.

SPX 30 Minute Chart Before

The market went very still right around 2PM. The S&P, which had been trading down about 3 pts all day climbed back to zero in tune with the announcement. After the announcement the index moved briefly into the green before falling back and losing 6 pts. At the same time gold moved lower, the dollar index spiked higher and oil declined. There was not much change to policy and nothing that I took as a move to calm market fears as was hinted at previously.

SPX 30 Minute Chart After

Fed Watch

Economic data was very light today other than the FOMC meeting and only includes mortgage index reading for June 15th. The index moved lower by 3.3% versus a gain of 5% last time. Not much attention was paid to it as all eyes and thoughts were turned to the Fed. In a nutshell the statement says that downside risks are diminished, housing is still improving and that the economy is growing a little faster than previously forecast. There was no change to policy and no change to QE. Based on the current inflation forecast, which was lowered by a half percent, and unemployment forecast tapering wouldn't begin until mid next year. Inflation is expected to run at 1% for this year and then tick up next year reaching the 1.7% level in late 2014. Unemployment is expected to drift lower over the next year until reaching 6.5% around the same time.

During the press conference Bernanke addressed the current policy and tapering. He said that the economic conditions were improving but still warranted the current stimulus. He also said that the committee would provide information on unwinding at the appropriate time. Based on current conditions and outlook he believes tapering could begin as soon as late this year and asset purchases could end by mid 2014. He went on to say that the market should not view economic conditions as triggers but as a threshold. What he meant was that 6.5% unemployment and 2% inflation will not necessarily trigger unwinding but are the conditions that may lead to it. The expected question about President Obama's remarks were brushed aside with a smile. The Dollar Index

The dollar spiked against the basket of world currencies after the announcement. The index had been trading down ahead of the announcement and looked ready to move even lower. The index is roughly in the middle of its 12 month range with strong bearish momentum. The recent decline from the peak last month has left the index oversold at this level. A bounce back could take the index to the 82 or 83 level.

Dollar Index

The yen slid sharply against the dollar on the news. The USD/JPY extended its bounce from the 38.2% retracement, 150 EMA and the 95 support level. This level (95) is the original target value for the yen versus the dollar set by Abe all the way back before he was elected. The Japanese fiscal policy is long term and has long term objectives, it makes sense to find long term support in this pair. There is some resistance ahead in the form of the short term moving average and previously breached Fibonacci. Stochastic is showing the second and stronger signal but a break above resistance would still be needed for a long term bullish outlook. Because the yen slide and dollar strength are being driven by stimulus policy in both countries there is still some downside risk here as well. However, I think we may see more action from the BOJ if the yen looks like it will move below 95.

USD/JPY

The euro also weakened versus the dollar. The EUR/USD fell back from its four month high to trade below the 1.3300 level. Declining momentum and overbought conditions suggest the pair may be at the top of a range and headed lower. If the pair fails to regain the 1.3300 level downside targets exist around 1.3200 and 1.3100.

EUR/USD

Gold Moves Lower

Gold prices have failed to recapture the $1380 level breached last week. The metal was trading to the upside today but only by a few dollars. After the FOMC announcement prices turned red and fell below $1360. It looks like the retest of recent lows around $1326 is eminent. The Gold Index has also moved lower and has now broken through the 78.6% retracement level for the second time. Momentum and stochastic are bearish at this time and point to lower prices. If the Gold Index fails to hold at the current levels a full retracement to the pre-recovery level of $75 is the next target.

Gold Index

Oil Index At Support

Oil prices declined today from its four month high. A bigger than expected build in oil inventories helped put pressure on prices. The oil index has not been matching its underlying commodity and has fallen back to support over the last few weeks while oil prices have moved up. The index is now sitting just above a long term support level with bullish indicators. Support exists at 1,350 with near term resistance at 1,400 and 1,425.

Oil Index

Story Stocks

There were some story stocks today. The early earnings season is underway and companies like Federal Express and Redhat were on tap. Federal Express beat expectactions smartly. Reported earnings of $2.13 per share were about a quarter higher than the consensus estimates. The gains in profits came on increased cost reductions and improved margins. The company cited tepid conditions and lower cost competitors as challenges but states that Fed Ex is positioned for long term growth. Company guidance for the full year was below expectations but that did not stop buyers from stepping in. The stock made a wild ride today as the initial sell-off was met with new buyers who sent prices up through resistance. By days end the stock closed close to where it opened, forming a large doji. I expect to see Fed Ex trade in a range over the near to short term.

Fed Ex

Men's Warehouse hit the headlines today with a highly irregular event. The companies founder and CEO Zimmer was fired this morning ahead of a major shareholder meeting. The meeting was postponed due to the event and company spokesman declined to comment on the why. Share prices took a big hit in early trading but regained most of the losses by the day's end.

Mens Warehouse

Redhat reported earnings after the bell today. The company was expected to earn about $0.21 per share and surprised markets with an exact match. Revenues, sales and subscriptions all grew by double digit numbers and the company expects to see that continue into the rest of the year. The stock traded down during the day but closed off of the lows. After the release prices jumped more than 2%. Indicators are inconclusive at this time but suggest the stock may move up in the near term. Competitor Oracle reports tomorrow.

Redhat

The VIX

The VIX declined today even while the SPX declined. This is a sign that options positions were being sold at the same time as stocks, keeping prices somewhat stable relative to each other. The VIX is moving down from the extreme high levels reached just last week as tapering fears were mounting. Indicators are moving down at this time, the 15 level will be an important potential support level for this index. If the VIX fails to break below 15 it could signal upcoming market reversal.

VIX

The Transports

The transports moved lower today along with the rest of the market. The DJT is now just below the 30 day EMA but above long term support and the point of the previous break out. Near term support exists at 6,250 with longer term support around 6,150. Indicators are still bullish and point to at least a retest of the recent highs near 6,500.

Transports

The S&P 500

The S&P turned volatile following the Fed announcement. After an initial venture into positive territory the index quickly fell back to -6 and then during the press conference dropped even more. Trading was up and down for a while until prices settled down to the days lows just before the close of trading. The move brought the index to just below the short term 30 day EMA but where does it leave us?

The S&P 500 long term up trend is still intact. Today's drop brought the index back down to the long term support of the up trend line and the line from which the index has bounced twice the month already. Since Ben and the FOMC have not altered the long term outlook I see no reason to alter my long term analysis. There have been no changes to policy, GDP growth expectations are improving, tapering is close but not too close and we can expect interest rates to remain low far into the future. The current level, supported by stochastic and MACD analysis, still look good as an entry point.

SPX daily

There is resistance to consider. The index is facing technical resistance at the new all time highs near 1675. There is also the economic conditions. Should data improve substantially the Fed may opt to move quicker than indicated and if it deteriorates the health of the economic recovery comes into question. For now I am looking to the long term trend line for sign of direction. A break below has a near term target of 1575. A bounce will find resistance at 1650, 1675 and 1690. A break above that could take the index up another 100 points. Failure to break above puts the index in danger of reversal.

Long term direction in the market is unclear at this time. At the moment the indexes look good to move up but there is risk in that assessment. The S&P will need to break out to a new high before a fully bullish stance can be taken. Until then the index could trade between resistance and the up trend line, possible testing both levels. Be careful of whipsaws and false signals. Tomorrow will see more unemployment data as well as Philly Fed and Leading Indicators. None of these reports is likely to move the market long term by itself but any could add volatility to tomorrow's session.

Until then, remember the trend!

Thomas Hughes


New Option Plays

Oil Services & Consumer Goods

by James Brown

Click here to email James Brown


NEW DIRECTIONAL CALL PLAYS

Cameron Intl. Corp. - CAM - close: 64.09 change: +0.13

Stop Loss: 63.75
Target(s): 69.75
Current Option Gain/Loss: Unopened
Time Frame: 3 to 5 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
CAM is in the oil services industry. The company reported a disappointing earnings result back in April and management guided lower. Yet investors bought the news anyway. The stock has seen a rocky ride since then but traders keep buying dips to the long-term trend of higher lows.

Today CAM was showing relative strength and eked out a gain. The May 21st high was $65.51. I am suggesting a trigger to buy calls at $65.60. More conservative traders will want to seriously consider waiting for a breakout past $66.00 instead (or even a close above $66.00) since the $66 level could also be resistance. If triggered our short-term target is $69.75. FYI: The Point & Figure chart for CAM is bullish with a $76 target.

Trigger @ 65.60

- Suggested Positions -

Buy the Jul $65 call (CAM1320G65) current ask $1.60

Annotated Chart:

Entry on June -- at $---.--
Average Daily Volume = 1.6 million
Listed on June 19, 2013


Green Mtn Coffee Roasters - GMCR - close: 81.78 change: +2.48

Stop Loss: 78.99
Target(s): 95.00
Current Option Gain/Loss: Unopened
Time Frame: 3 to 6 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
GMCR is a specialty coffee maker that make the single-serving K-cup products popular. Traders have been consistently buying the dips since the late May correction down to $70.00. The $81.70 level was tough resistance back in May and shares managed to breakout past that mark today while the rest of the market was sinking.

GMCR can be a volatile stock so we do want to keep our position size small to limit risk. Today's move is a bullish breakout to new 52-week highs. If the rally continues GMCR could see a short squeeze. The most recent data listed short interest at 33% of the 129 million share float.

I am suggesting a trigger to buy calls at $83.05. If triggered our multi-week target is $95.00. FYI: The Point & Figure chart for GMCR is bullish with a $105 target.

Trigger @ $83.05 *Small Positions*

- Suggested Positions -

Buy the Jul $85 call (GMCR1320G85) current ask $2.44

- or -

Buy the Aug $90 call (GMCR1317H90) current ask $4.25

Annotated Chart:

Entry on June -- at $---.--
Average Daily Volume = 3.3 million
Listed on June 19, 2013



In Play Updates and Reviews

Traders Sell The News

by James Brown

Click here to email James Brown

Editor's Note:

Investors were unhappy with Bernanke's taper talk and stocks sold off this afternoon.

CVX was triggered. DVA was stopped out.


Current Portfolio:


CALL Play Updates

Automatic Data Processing - ADP - close: 69.04 change: -0.56

Stop Loss: 67.00
Target(s): 74.00
Current Option Gain/Loss: -21.2%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
06/19/13: The bounce failed at round-number resistance at the $70.00 mark this morning. ADP followed the market lower this afternoon and closed on the $69.00 level. More conservative traders may want to consider a tighter stop loss.

Earlier Comments:
If triggered our target is $74.00 but that could be optimistic since ADP still has resistance at $72.00. We may need patience to give ADP time to hit our target.

- Suggested Positions -

Long Aug $70 call (ADP1317H70) entry $1.65

Entry on June 18 at $69.25
Average Daily Volume = 1.8 million
Listed on June 17, 2013


Colfax Corp. - CFX - close: 52.46 change: -0.79

Stop Loss: 50.90
Target(s): 55.00
Current Option Gain/Loss: +12.9%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
06/19/13: CFX succumbed to profit taking and produced a -1.4% decline. Technically today's move has created a bearish engulfing candlestick reversal pattern. Look for potential support at $52.00 and potential support at the 10-dma.

- Suggested Positions -

long SEP $55 call (CFX1321i55) entry $1.55

06/18/13 new stop loss @ 50.90
06/15/13 new stop loss @ 49.80

Entry on June 10 at $51.05
Average Daily Volume = 1.29 million
Listed on June 04, 2013


Chevron Corp. - CVX - close: 120.50 change: -1.02

Stop Loss: 119.75
Target(s): July calls: 126.50, August call: 129.50
Current Option Gain/Loss: Jul: -45.0% & Aug -30.2%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
06/19/13: CVX saw a spike right at 2:00 p.m. and rallied just enough to hit our trigger at $122.25 before reversing lower with the market. The stock closed on its lows for the session and looks poised to test the $120.00 level soon. I would wait for a bounce off $120.00 before initiating new positions. If the market starts accelerating lower tomorrow we could see CVX hit our stop loss.

Earlier Comments:
I'm listing both the July and August calls but I prefer the August strike. Target $126.50 with the July calls. Target $129.50 with the August calls.

- Suggested Positions -

Long Jul $125 call (CVX1320G125) entry $1.00

- or -

Long Aug $125 call (CVX1317H125) entry $1.75

Entry on June 19 at $122.25
Average Daily Volume = 6.4 million
Listed on June 18, 2013


Domino's Pizza - DPZ - close: 59.77 change: -0.67

Stop Loss: 58.75
Target(s): 64.75
Current Option Gain/Loss: -27.9%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
06/19/13: DPZ gave back -1.1% but is still holding above its 20-dma. I am not suggesting new positions at this time.

Earlier Comments:
I am suggesting that investors keep their position size small.

*Small Positions* - Suggested Positions -

Long Jul $60 call (DPZ1320G60) entry $2.15

06/18/13 new stop loss @ 58.75

Entry on June 04 at $60.30
Average Daily Volume = 733 thousand
Listed on May 30, 2013


Rock-Tenn Company - RKT - close: 105.77 change: -0.65

Stop Loss: 103.45
Target(s): 114.00
Current Option Gain/Loss: -24.2%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
06/19/13: RKT could not escape the market's pullback today but the decline was mild. Look for support near $104.00.

Earlier Comments:
If triggered our target is $114.00. More nimble traders may want to consider trying to buy a dip near $104.50 since broken resistance near $104.00 should be new support.

- Suggested Positions -

Long Jul $110 call (RKT1320G110) entry $1.65

06/17/13 triggered on gap open higher at $106.45, trigger was $106.25
option opened lower at $1.65

Entry on June 17 at $106.45
Average Daily Volume = 594 thousand
Listed on June 15, 2013


The Fresh Market, Inc. - TFM - close: 51.87 change: -0.87

Stop Loss: 50.75
Target(s): 58.50
Current Option Gain/Loss: -40.0%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
06/19/13: On a short-term basis today looks a little bit ugly for TFM. The stock lost -1.6% and closed right below its simple 10-dma. This moving average has been support for several weeks. If this decline sees any follow through tomorrow we could see TFM hit our stop loss at $50.75.

Earlier Comments:
If this trend continues TFM could see more short covering. The most recent data listed short interest at 13.9% of the small 40 million share float. FYI: The Point & Figure chart for TFM is bullish with a long-term $85 target.

- Suggested Positions -

Long Jul $55 call (TFM1320G55) entry $1.25

06/18/13 triggered @ 53.10
06/17/13 adjust the entry strategy to buy calls when TFM hits $53.10
adjust the stop loss to $50.75, adjust the target to $58.50.
adjust the option strike to the July $55 call
06/13/13 adjust buy-the-dip trigger to $51.00 from $50.75

Entry on June -- at $---.--
Average Daily Volume = 741 thousand
Listed on June 11, 2013


Toyota Motor Co. - TM - close: 120.78 change: -1.51

Stop Loss: 118.25
Target(s): 130.00
Current Option Gain/Loss: -33.8%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
06/19/13: TM failed at the $123.00 level this morning. Shares followed the U.S. market lower this afternoon. If TM breaks down under $120.00 we could witness shares dive toward our stop loss at $118.25.

Earlier Comments:
Don't forget that TM tends to gap open, up or down, each day in reaction to trading back home in Japan, although lately TM has ignored the some of the volatility in the NIKKEI index.

- Suggested Positions -

Long Jul $125 call (TM1320G125) entry $3.43

06/18/13 trade opened on gap higher at $122.44. Trigger was $122.10

Entry on June 18 at $122.44
Average Daily Volume = 821 thousand
Listed on June 13, 2013


Whirlpool Corp. - WHR - close: 126.80 change: -2.81

Stop Loss: 124.75
Target(s): 132.00
Current Option Gain/Loss: +13.8%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
06/19/13: WHR spent the day churning sideways until the FOMC decision. Then shares plunged with the rest of the market. The stock gave back -2.1%. I'm not suggesting new positions at this time.

- Suggested Positions -

Long Jul $125 call (WHR1320G125) entry $4.70

06/18/13 new stop loss @ 124.75, readers may want to take profits now
06/15/13 new stop loss @ 121.45
06/13/13 new stop loss @ 120.90
06/07/13 trade opened on gap higher at $123.49, trigger was 123.35

Entry on June 07 at $123.49
Average Daily Volume = 826 thousand
Listed on June 06, 2013


PUT Play Updates

Agrium Inc. - AGU - close: 89.24 change: -0.29

Stop Loss: 90.05
Target(s): 81.00
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Comments:
06/19/13: Hmm... I am suddenly less enthusiastic about our AGU put play. The stock market produced a widespread sell-off this afternoon. AGU did follow it lower but AGU's decline was only -0.3% versus a -1.3% drop in the S&P 500. We don't want to see relative strength in our put candidate. I'm not changing our strategy yet but I am suggesting we limit our position size and keep positions small to limit our risk.

Earlier Comments:
The May 2nd low was $87.92. I am suggesting a trigger to buy puts at $87.80. If triggered our target is $81.00.

FYI: AGU will begin trading ex-dividend on June 26th. The quarterly cash dividend should be 50 cents.

Trigger @ 87.80 *Small Positions*

- Suggested Positions -

Buy the Jul $85 PUT (AGU1320s85)

06/19/13 keep position size small.

Entry on June -- at $---.--
Average Daily Volume = 744 thousand
Listed on June 15, 2013


eBay Inc. - EBAY - close: 52.23 change: -0.33

Stop Loss: 52.05
Target(s): 45.50
Current Option Gain/Loss: Unopened
Time Frame: 3 to 6 weeks
New Positions: Yes, see below

Comments:
06/19/13: EBAY failed twice near $53.00 and its 20-dma today. Yet it's worth noting that EBAY only lost -0.6% versus a -1.1% drop in the NASDAQ. We are still on the sidelines.

Currently we are suggesting investors wait for a breakdown below $50.00 and use an entry trigger at $49.85.

FYI: The Point & Figure chart for EBAY is bearish with a $44 target.

Trigger @ 49.85

- Suggested Positions -

Buy the Jul $50 PUT (EBAY1320s50)

Entry on June -- at $---.--
Average Daily Volume = 10.7 million
Listed on June 12, 2013


iShares Russell 2000 - IWM - close: 98.29 change: -1.22

Stop Loss: 100.65
Target(s): 93.50
Current Option Gain/Loss: -34.4%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
06/19/13: There was no follow through on yesterday's bullish breakout in the major indices including the Russell 2000. The market was falling fast this afternoon and IWM reversed yesterday's gains. It looks like investors sold the Fed news as we suspected they might.

I am not suggesting new positions at this time.

*Small Positions* - Suggested Positions -

Long Jul $95 PUT (IWM1320S95) entry $1.80

06/13/13 conservative traders may want to exit ASAP. The IWM has produced what appears to be a bullish reversal pattern but it needs confirmation.

Entry on June 11 at $97.45
Average Daily Volume = 43 million
Listed on June 08, 2013



Longer-Term Play Updates



Chicago Bridge & Iron - CBI - close: 61.08 change: -0.02

Stop Loss: 53.75
Target(s): 74.50
Current Option Gain/Loss: Unopened
Time Frame: 4 to 6 months
New Positions: Yes, see below

Comments:
06/19/13: CBI spiked higher this morning after garnering a higher price target of $75.00 from an analyst firm. The rally didn't last. CBI struggled with the $62.00 level as investors waited for the Fed decision. Shares pulled back to close almost unchanged. Of course the fact that CBI did not post any losses is a sign of relative strength.

Currently we are on the sidelines with a buy-the-dip trigger at $56.50.

Earlier Comments:
Last time we added CBI we successfully caught the bounce from mid April back toward its March highs. You can read the background details and bullish fundamentals for CBI in our original play description
here, since it still applies. Just scroll down to the "longer-term trades" section of the page.

Trigger @ 56.50 *Small Positions*

- Suggested Positions -

Buy the 2014 Jan $65 call (CBI1418A65)

06/15/13 entry strategy change: change the breakout trigger at $65.25 to a buy-the-dip trigger at $56.50. Adjust the stop loss to $53.75.
Adjust the option strike to the 2014 Jan. $65 call

Entry on June -- at $---.--
Average Daily Volume = 1.8 million
Listed on June 01, 2013


CLOSED BULLISH PLAYS

DaVita Healthcare - DVA - close: 126.82 change: -2.68

Stop Loss: 127.95
Target(s): 134.00
Current Option Gain/Loss: -13.5%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
06/19/13: We were concerned that DVA might underperform today and that's why we raised the stop loss last night. Shares did hit our stop at $127.95 pretty early this morning.

Earlier Comments:
It is possible that the May highs near $131.25 could be overhead resistance but we're targeting a move to $134.00. FYI: The Point & Figure chart for DVA is bullish with a $141 target.

*small positions* - Suggested Positions -

Jul $135 call (DVA1320G135) entry $1.85 exit $1.60 (-13.5%)

06/19/13 stopped out
06/18/13 new stop loss @ 127.95

chart:

Entry on June 11 at $128.05
Average Daily Volume = 573 thousand
Listed on June 10, 2013