Option Investor
Newsletter

Daily Newsletter, Thursday, 7/18/2013

Table of Contents

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

Market Wrap

Markets Reach New Highs

by Thomas Hughes

Click here to email Thomas Hughes
Introduction

Thursday is always a full day, even when it's slow. Today however was not a slow Thursday. Although it did not come with a big bang market forces combined to drive the indexes to new all-time highs. This morning the early markets were reeling from yesterday's surprise after-hours earnings releases. Two factors were in play; earnings season and economic data. The data was not that great but it wasn't bad either. Jobless claims were mixed, Leading Indicators were weaker than expected but Philly Fed numbers blew away expectations. The earnings reports are mixed as well. Some companies are beating expectations and others are not. The good news is that more companies are beating than missing estimates for earnings.


Ben Bernanke continued to testify on Capital Hill and his stance has not changed. He pledges “highly accomodative policy” for the foreseeable future. He also says that the recovery and end of QE is not on autopilot. Based on his statements and the data at hand tapering, and higher interest rates, may not be as close as some think. The economic thresh hold has not yet been reached and I'm not so sure it will be any time soon. However the ever changing conditions could easily force the FOMC into acting. In any event, even if tapering were to begin tomorrow low interest rates are likely to continue for some time to come.

The S&P futures were able to trade into positive territory in the early market. The positive spin carried through into the open at which time the S&P quickly moved up into new all-time-high territory. The index, accompanied by the Dow, Nasdaq and other major indexes continued to move higher into the morning, reaching an early peak around 10:30. During Beranke's testimony the markets retreated by a small amount but appeared to find support at the previous all-time-high level. After that trading was mellow, the indexes fluctuated by only a small margin during the afternoon hours before finally closing near the upper end of today's trading range.

Breaking It All Down- The Data

Today's list of events begins with the release of initial jobless claims. The initial claims made a surprising drop from a downward revision to last week's figures for a net decline of -26,000. The figure reported today of 334,000 is close to the long-term low. This brings the figure firmly back below the 350K level but it still appears as if initial claims is holding steady. The four week moving average also fell from a downward revision and is now back below 350K as well. I would like to see more of a decline in this figure but there is a chance it is being affected by the increase in the participation rate. For now I will be satisfied with holding steady but will keep a close eye on other factors.


The continuing claims made a surprise peak which may just be the result of last weeks spike in initial claims. This is the second week of increases in continuing claims and a five month high. Looking at the state by state break down there were numerous lay-offs in Michigan and New York centered around manufacturing and transportation. Other states, including MI and NY also reported lay-off's in education and services. The previous weeks continuing claims were also revised higher. Total claims fell by a meager 1,903 to just above the 5 year low.



The Philadelphia Federal Reserve Manufacturing Index set a new high and soundly beating the expectations. The consensus was 3.0-5.5, the actual was 19.8, a 26 month high. This is also more than 6 points higher than last months reading of 12.5. Within the report the employment sector posted a 7.7. the first positive reading in 4 months. The final bit of data today was the Leading Indicators, which came in a little weaker than expected with a 0% change over last month. This reading shows that growth is expected to have continued on at the same pace as last month. Over the last 12 months the LDI have been choppy but mostly positive. There is no data on my calendar tomorrow, next week brings us housing data during the first half and some more manufacturing data during the second half.


Earnings- Banking Sector

Bank earnings keep rolling in. Today marks the end of the big banks but there are still dozens of regional financials yet to report. This morning Morgan Stanley and BB&T held to trend and reported better than expected numbers on the top and bottom line. The entire sector performed above expectations last quarter and they all reportedly expect this performance to continue. The Banking Index made another big move up today and set another new high. At this time the daily charts is overbought but bullish momentum is on the rise. Longer term conditions are the same, however, caution is required due to the extended nature of the price action.

Banking Index

Morgan Stanley reported better than expected earnings and a $5 million dollar stock buy back. Expectations of EPS in the range of $0.40 were beaten by a nickel on $8.5 billion in revenue. Revenue increased by $1.6 billion over last year at this time. Revenues from trading and equity sales increased by more than 38% in the same period. The stock jumped in early trading, gaining about 5% intra-day. The move opens a gap and brings the stock above long term resistance with bullish technicals long and short term.

Morgan Stanley

BB&T also reported better than expected earnings. The NC based bank beat by 2 cents and set a company record for shareholder earnings. The bank reports that gains were made based on their diversification strategy, credit quality improvements and interest income. This stock actually dropped in early trading, opening lower than yesterday's closing prices. The stock dipped down near to the short term moving average where it found support and managed to recover the day's losses. The charts are bullish long and short term but suggest that the current rally may be cresting. First support is around the $34 level and the 30 day EMA.

BBT

Regional banker FifthThird also reported today. The bank beat the expectations of $0.44 with EPS of $0.66. The reported EPS was affected by pre-tax benefits from the sales of a position in Vantiv and warrants associated with the same. The bank also reported favorable credit trends and increases in deposits, loan growth and interest income. The stock also opened below yesterday's close. FITB reached and breached the support of the 30 day moving average before catching a bid and moving higher. This chart is presenting similar to BB&T, bullish in the long and short term but with declining indicators suggestive of a consolidation or short term top.

FifthThird Bancorp

Earnings-Technology

Yesterday Intel reported weak revenue and weak earnings and cut its full year outlook. Today AMD reported after the bell. The actual results were a loss, but better than expected. The stock traded higher in the after market. Indicators on the daily chart are bullish and point to a break. The expectation for good results was very high. Over the past few days the stock has traded up against resistance in a tightening range forming a potentially bullish signal. Failure to break above $4.50 will likely keep this stock in a trading range.

AMD

The Semiconductor Index fell in today's trading but remains above the long term trend and the nearest long term support level. The long term trend remains up and indicators on the weekly and daily charts are still bullish if weakening. This index may also be cresting a short term peak at this time. Closest support at this time is around 480 with next closest just below that at 475 and the 30 day moving average.

SOX

Other techies reporting today include IBM (yesterday after the bell) and Microsoft today. IBM beat expectations and was able to raise its full year outlook. Microsoft was not. During the day the stock traded to the downside but remained above the $35 support level. Following Microsoft's earnings release prices fell below to the $34 level and the longer term up trend. MACD and stochastic are both bullish following MSFT's recent break out to 5+year highs but are currently in decline

MSFT

Google was also on the after hours earnings list for today. The search giant was expected to report earnings in the range of $9.00-$10.78, depending on where you look. The actual $9.56 was either better or worse than expected but revenue was on the light side regardless. Costs per click declined more than expected which counts for most of the revenue decline. The stock had been trending up over the past year but tht may have ended today. After hours trading saw prices drop by about $40 following the report.

Google

The Technology Sector Spyder is approaching the top of a possible trading range with bullish indicators. Strong momentum and overbought conditions are both in decline on the daily charts with the weekly charts indicating a stochastic buy signal. The long term trend is up for this ETF but there is sign of a possible top here as well, a break above resistance would have a longer term bullish outlook. Failure to reach new highs would put the ETF in danger of topping out. the sharp after hours sell off in MSFT and GOOG will weigh heavily on this ETF in the morning.

Technology Spyder

The Yen Trade

The yen weakened ahead of impending elections in Japan. The election are expected to bolster the ranks of the Japanese government with Shinzo Abe supporters. This will pave the way for more of Abe's long term plans for stimulating the Japanese economy. The USD/JPY has found support along the 30 day moving average ahead of the elections and is now extending a bounce that began yesterday. Today's move has brought the pair back over the 100 level for the second time since correcting in May/June. Indicators on the long term and near term charts are declining but as yet support has been holding.

USD/JPY

The S&P 500

The S&P 500 is showing an early long term stochastic buy signal. The caveat as always is that today is only Thursday so the analysis of weekly candles is only temporary until this week's candle is completed. However, at this time, bullish activity is taking the index to new all time highs. The May/June correction made a very small bearish peak in MACD that is already on the verge of crossing back over to bullish. Declining stochastic is also rolling over, creating a higher trough and sign of support. Stochastic is also presenting a crossover signal, although I think it may be the early signal. The real danger now is how much fall out spills over into the broader markets at tomorrow's open. The sharp after hours sell off in GOOG and MSFT will have a big effect on index prices tomorrow.

SPX weekly

Today's break above the previous all-time intra-day highs is a good sign but not overly convincing. The bulls tip toed over the line like they were afraid to get their feet wet. The indicators on the daily charts are declining which is another reason to doubt today's move as a definitive break above resistance. It is possible that the market could trade up against resistance for a few days or retest the support of the previous all-time closing high before moving higher. If all of my if's line up with the stars and moon. The longer term analysis of daily MACD and Stochastic both indicate strong support at the current levels between 1575-1650 and that prices are likely to move higher. Tomorrow could be a volatile one as the markets digest the after hours reports of Microsoft and Google.

SPX daily

Until then, remember the trend!

Thomas Hughes


New Option Plays

Oil Refiners

by James Brown

Click here to email James Brown


NEW DIRECTIONAL PUT PLAYS

Marathon Petroleum - MPC - close: 68.29 change: -1.46

Stop Loss: 70.15
Target(s): 61.00
Current Option Gain/Loss: Unopened
Time Frame: exit PRIOR to earnings on Aug. 1st
New Positions: Yes, see below

Company Description

Why We Like It:
MPC is an oil refiner. The company recently issued an earnings warning that its Q2 results would be significantly less than Wall Street was expecting. Shares are now testing support in the $68.00 area and look poised to keep falling. The stock found support near $67.60 in early July. I am suggesting a trigger to buy puts at $67.45. If triggered our target is $61.00. More conservative traders may want to exit near $64.00 instead.

Trigger @ 67.45

- Suggested Positions -

buy the Aug $65 PUT (MPC1317T65) current ask $1.60

Annotated Chart:

Entry on July -- at $---.--
Average Daily Volume = 3.8 million
Listed on July 18, 2013



In Play Updates and Reviews

Stocks Close At New Highs

by James Brown

Click here to email James Brown

Editor's Note:

The bulls continue to push stocks higher and the market's major indices closed at new record highs.

ENR was stopped out. FIRE and HAR were triggered.
We want to exit the PRU and LL trades at the opening bell tomorrow morning.


Current Portfolio:


CALL Play Updates

Automatic Data Processing - ADP - close: 72.82 change: +0.50

Stop Loss: 70.95
Target(s): 74.00
Current Option Gain/Loss: + 87.8%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
07/18/13: The market's major indices have continued to hit new highs. Yet ADP has been struggling the last few days. The overall trend is still bullish but I am growing more cautious here.

Tonight I am suggesting we go ahead and sell at least half of our call positions at the opening bell tomorrow to lock in gains. The rest we will continue to aim for $74.00.

- Suggested Positions -

Long Aug $70 call (ADP1317H70) entry $1.65

07/18/13 prepare to sell half of our position at the open tomorrow to lock in some gains
07/15/13 new stop loss @ 70.95
07/11/13 new stop loss @ 69.85
07/10/13 new stop loss @ 69.40
07/06/13 new stop loss @ 68.40
06/27/13 new stop loss @ 67.90

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


Ameriprise Financial - AMP - close: 86.84 change: +1.05

Stop Loss: 84.65
Target(s): 89.25
Current Option Gain/Loss: + 0.0%
Time Frame: exit PRIOR to earnings on July 24th
New Positions: see below

Comments:
07/18/13: The financial sector continued to strength today. AMP rebounded from support near $85 and its 10-dma. Shares added +1.2% and set a new all-time closing high.

Earlier Comments:
Our target is $89.25. However, we will plan to exit prior to the earnings report on July 24th.

- Suggested Positions -

Long Aug $85 call (AMP1317H85) entry $3.30

07/15/13 new stop loss @ 84.65
07/11/13 trade opened on gap open at $86.17. Trigger was $85.25.

Entry on July 11 at $86.17
Average Daily Volume = 1.25 million
Listed on July 09, 2013


Borg Warner - BWA - close: 90.82 change: +1.46

Stop Loss: 86.40
Target(s): 93.00
Current Option Gain/Loss: +40.4%
Time Frame: exit PRIOR to earnings on July 25th
New Positions: see below

Comments:
07/18/13: BWA continued to show strength today with a +1.6% gain and a bullish breakout past the $90.00 mark. Readers may want to inch up their stops.

Earlier Comments:
It is possible that $90.00 could be round-number resistance but we're aiming for $93.00. Please note that we will plan on exiting positions prior to the earnings report on July 25th. FYI: The Point & Figure chart for BWA is bullish with a $114 target.

- Suggested Positions -

Long Aug $90 call (BWA1317H90) entry $2.10*

07/15/13 new stop loss @ 86.40
07/11/13 trade opened on gap higher at $88.28. Trigger was $87.75
*option entry price is an estimate since the option did not trade at the time our play was opened.

Entry on July 11 at $88.28
Average Daily Volume = 860 thousand
Listed on July 10, 2013


Eastman Chemical Co. - EMN - close: 74.87 change: -0.41

Stop Loss: 73.49
Target(s): 79.75
Current Option Gain/Loss: -11.7%
Time Frame: exit PRIOR to earnings on July 29th
New Positions: see below

Comments:
07/18/13: EMN tagged a new all-time high above the $76 level today but the rally reversed. The close back below the $75.00 level is troubling. Suddenly we are faced the possibility that yesterday's bullish breakout past resistance was a bull-trap pattern. I am not suggesting new positions with EMN below $75.00.

Earlier Comments:
Our target is $79.75. However, we will plan on exiting positions prior to the earnings report on July 29th. FYI: The Point & Figure chart for EMN is bullish with a $91 target.

- Suggested Positions -

Long Aug $75 call (EMN1317H75) entry $2.55

Entry on July 17 at $75.25
Average Daily Volume = 1.3 million
Listed on July 11, 2013


Sourcefire, Inc. - FIRE - close: 60.25 change: +0.82

Stop Loss: 57.95
Target(s): 64.75
Current Option Gain/Loss: - 5.0%
Time Frame: exit PRIOR to the earnings report on July 29th
New Positions: see below

Comments:
07/18/13: The rally in FIRE continued on Thursday and shares have broken out past major resistance at the $60.00 level. The stock has also hit our suggested entry point to buy calls at $60.25.

Earlier Comments:
A breakout here could spark a short squeeze. The most recent data listed short interest at 18% of the 30.0 million-share float. Please note that we do not want to hold over the earnings report on July 29th. FYI: The Point & Figure chart for FIRE is bullish with a long-term $74 target.

- Suggested Positions -

Long Aug $65 call (FIRE1317H65) entry $2.00

Entry on July 18 at $60.25
Average Daily Volume = 431 thousand
Listed on July 17, 2013


Harman Intl. Industries - HAR - close: 55.85 change: +1.28

Stop Loss: 54.40
Target(s): 59.75
Current Option Gain/Loss: -11.1%
Time Frame: Exit PRIOR to earnings on August 6th
New Positions: see below

Comments:
07/18/13: HAR decided to participate in today's market rally. The rise in HAR looks like a reaction to some sort of news, possibly another company's earnings report since shares saw a sharp surge higher in the first hour of trading. HAR did briefly traded above resistance at $56.00 and hit our trigger to buy calls at $56.10.

I would wait for a new rally past $56.10 or $56.20 before initiating new positions.

Don't forget that we will plan on exiting positions prior to the company's earnings report on August 6th. FYI: The Point & Figure chart for HAR is bullish with a long-term $81 target.

- Suggested Positions -

Long Aug $57.50 call (HAR1317H57.5) entry $1.80*

*option entry price is an estimate since the option did not trade at the time our play was opened.

Entry on July 18 at $56.10
Average Daily Volume = 785 thousand
Listed on July 13, 2013


Noble Energy - NBL - close: 65.66 change: +1.80

Stop Loss: 62.45
Target(s): 68.50
Current Option Gain/Loss: +59.2%
Time Frame: Exit PRIOR to earnings on July 25th
New Positions: see below

Comments:
07/18/13: NBL surged +2.8% to a new all-time high thanks to bullish news regarding an oil field near Israel. NBL previously estimated that the Leviathan field might contain 34 million barrels of condensate, a raw input used to make light, sweet crude oil. Yet according to a new Bloomberg report out today NBL now estimates there could be 1.5 billion barrels of oil in the field. NBL owns a 39.6% stake in the Leviathan field.

Earlier Comments:
We will plan on exiting positions prior to NBL's earnings report on July 25th. More aggressive traders may want to aim higher. This past week has generated a new triple-top breakout buy signal on the point & figure chart with a $74.00 target.

- Suggested Positions -

Long Aug $65 call (NBl1317H65) entry $1.35

07/15/13 new stop loss @ 62.45
07/13/13 new stop loss @ 61.40

Entry on July 09 at $63.05
Average Daily Volume = 1.9 million
Listed on July 06, 2013


Prudential Financial - PRU - close: 78.52 change: +1.46

Stop Loss: 75.90
Target(s): 79.00
Current Option Gain/Loss: +83.3%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
07/18/13: Strength in the financial sector helped PRU rallied +1.89% today. Shares closed near the top of its recent trading range. We've been aiming for $79.00 but I am suggesting we exit immediately at the opening bell tomorrow to lock in gains.

- Suggested Positions -

Long Aug $75 call (PRU1317H75) entry $2.40

07/18/13 prepare to exit at the opening bell tomorrow
07/15/13 new stop loss @ 75.90, readers may want to exit now.
07/09/13 new stop loss @ 74.75, adjust exit target to $79.00
07/02/13 new stop loss @ 72.40

Entry on July 01 at $73.65
Average Daily Volume = 3.1 million
Listed on June 29, 2013


Visteon Corp. - VC - close: 65.35 change: +0.37

Stop Loss: 64.40
Target(s): 72.50
Current Option Gain/Loss: -53.5%
Time Frame: Exit PRIOR to earnings on Aug. 8th
New Positions: see below

Comments:
07/18/13: The bounce in VC today failed near the $66 level. That is not very encouraging. I would be cautious on VC tomorrow.

- Suggested Positions -

Long Aug $70 call (VC1317H70) entry $1.40

07/16/13 triggered on gap open higher at $66.89
suggested trigger was $66.75

Entry on July 16 at $66.89
Average Daily Volume = 484 thousand
Listed on July 13, 2013


PUT Play Updates

Green Mountain Coffee Roasters - GMCR - close: 73.86 change: +1.63

Stop Loss: 75.01
Target(s): 65.50
Current Option Gain/Loss: -19.7%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
07/18/13: Bullish data that GMCR's market share of the K-cups industry had grown helped spur a rally in the stock. GMCR rallied up to technical resistance near its 50-dma before paring its gains. For the moment GMCR still has a bearish trend of lower highs but that could change if the stock sees any follow through higher tomorrow.

Today's high was $74.78. We are adjusting our stop loss down to $75.01. I am not suggesting new positions at this time.

Earlier Comments:
GMCR does have an above average level of short interest and shares will likely be volatile. We will want to keep our position size small to limit our risk. Our short-term target is $65.50. More aggressive traders could aim for the $61-60 zone instead since $60 looks like stronger support. FYI: The Point & Figure chart for GMCR is bearish with a $57 target.

- Suggested (Small) Positions -

Long Aug $65 PUT (GMCR1317T65) entry $3.65

07/18/13 new stop loss @ 75.01

Entry on July 17 at $71.90
Average Daily Volume = 4.0 million
Listed on July 16, 2013


Lumber Liquidators - LL - close: 87.05 change: +1.18

Stop Loss: 88.25
Target(s): 80.25
Current Option Gain/Loss: -21.4%
Time Frame: exit PRIOR to earnings on July 24th
New Positions: see below

Comments:
07/18/13: LL continues to bounce after testing its 10 and 50-dma. The stock managed to outperform the major indices today with a +1.37% gain. We are throwing in the towel and suggesting an early exit at the opening bell tomorrow.

Earlier Comments:
I want to point out that this is a higher-risk, more aggressive trade.

*use Small Positions* - Suggested Positions -

Long Aug $80 PUT (LL1317T80) entry $2.80

07/18/13 prepare to exit at the opening bell tomorrow

Entry on July 16 at $85.75
Average Daily Volume = 840 thousand
Listed on July 15, 2013




Longer-Term Play Updates



Chicago Bridge & Iron - CBI - close: 62.27 change: +0.51

Stop Loss: 53.75
Target(s): 74.50
Current Option Gain/Loss: +45.0%
Time Frame: 4 to 6 months
New Positions: see below

Comments:
07/18/13: CBI bounced back toward its highs for the week with a +0.8% gain. I am not suggesting new positions at this time.

*Small Positions* - Suggested Positions -

Long 2014 Jan $65 call (CBI1418A65) entry $2.55

06/29/13 CBI might be poised to dip into the $57-55 zone again.
06/24/13 triggered @ 56.75
06/22/13 adjust entry trigger to $56.75
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 24 at $56.75
Average Daily Volume = 1.8 million
Listed on June 01, 2013


CLOSED BULLISH PLAYS

Energizer Holdings - ENR - close: 105.94 change: +0.87

Stop Loss: 104.65
Target(s): 109.50
Current Option Gain/Loss: + 12.7%
Time Frame: Exit PRIOR to earnings on July 31st
New Positions: see below

Comments:
07/18/13: Sometimes it feels like the stock market is a malevolent creature. This morning ENR spiked lower and traded just low enough to hit our stop loss at $104.65 only to bounce immediately. Shares eventually rallied to a +0.8% gain. I couldn't find any news or catalyst to explain the spike down this morning.

Nimble traders may want to consider buying calls on a rally past today's high and aiming for the $110 level.

- Suggested Positions -

Aug $105 call (ENR1317H105) entry $2.75* exit $3.10** (+12.7%)

07/18/13 stopped out
**option exit price is an estimate since the option did not trade at the time our play was closed.
07/15/13 new stop loss @ 104.65
07/13/13 new stop loss @ 102.75. Adjust exit target from $109.75 to $109.50
*option entry price is an estimate since the option did not trade at the time our play was opened.

chart:

Entry on July 09 at $103.25
Average Daily Volume = 497 thousand
Listed on July 01, 2013