Option Investor
Newsletter

Daily Newsletter, Thursday, 8/8/2013

Table of Contents

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

Market Wrap

Good Data, Tepid Market

by Thomas Hughes

Click here to email Thomas Hughes
Introduction

Surprising numbers from China and low jobless claims boosted early trading. S&P futures were up around +6 points during the first part of the morning on the big bounce in Chinese export data. Our own jobless claims added to the positive spin, further boosting early trading. The bullish vibe carried into the open and held, for about 15 minutes. Soon after the opening bell retail comp store sales, which are not that great an indicator, revealed some mixed signals in the sector. The early rally slowly lost steam, turning negative just before 10:30 AM.

Asian shares ended the trading day mixed. The stronger than expected Chinese export data helped to lift stocks on the Hong Kong Index but failed to boost mainland China. Japanese stocks fell to a one month low following the conclusion of the Bank Of Japan policy meeting. Japanese interest rates and policy remained unchanged, leaving investors wondering if Abe and Kuroda can really affect long term change in the country. European markets were buoyed by the news from China, gaining an average 0.30%. Chinese import data also saw a lift, more than 10%, and helped to boost the European markets.


The early weakness did not last long. After reaching bottom the indexes all quickly made their way back to positive territory. The S&P was capped at the 1700 level, the Dow at 15,500. Tomorrow could see the indexes move above near term resistance and approach all-time high levels. It could also see the markets halted at resistance, there isn't much in the way of market moving data scheduled for release.

The Economic Data

Data was light today, consisting primarily of jobless claims figures. Jobless claims remain mixed. No significant dip or drop has yet been noted. Initial claims gained 5,000 from a small upward revision for a net addition of 7,000 claims for this week. Initial claims are 333,000, just off the long term low and the fourth week of claims under 350K. This is good but is still not enough to significantly alter the jobs outlook of slow growth. The four week moving average of claims also posted a mild gains but is also still under 350,000.


Continuing claims also climbed, adding a 67,000 to last weeks unrevised figure of 2.951 million. This weeks 3.018 million continuing claims is above the 3 million mark but still near long term lows well below the 12 month high. Total claims for unemployment fell this week. This is the second week of decline since the total claims figured spiked. It appears that the spike in unemployment claims we witnessed over the last month is temporary. The longer term trend in claims is flat to down-ish but as of yet there is no sign of real improvement here. California's initial claims fell by more than -21,000, topping the list of states with declines in unemployment claims. No states reported an increase in claims more than 1,000.



Other data released today was monthly retail comp store sales figures. The data was mixed but most be taken with a grain of salt. In the past close to a hundred retailers participated in this release. Now the number is less than 12. What data we did get showed strength in some areas and weakness in others. Teen retail was one of the weakest segments. Even those with an increase in sales posted results below expectations. Costco was one, with a 4% gain that was only 1% below expectations. On a sector basis, the 11 companies that currently report are expected to post gains of close to 4.5% for July. Last year during the same period the average was closer to 1.5%. The XRT appears to be tracking with the broader market. The ETF has retreated from the recent new high and is now bouncing weakly from support. Indicators are mixed but the long term uptrend is intact. A break below the 30 day moving average could take the ETF down to the $77.50 level.

BOJ Holds Rates Steady

The Bank Of Japan held interest rates steady and made no indication of further policy change. This raised speculation over the banks, and Shinzo Abe's, ability to affect the yen and the Japanese economy in the long term. The yen spiked on the initial reaction but quickly fell back to yesterday's close. The pair is currently sitting on the long term 150 day moving average and is very close to Abe's original yen valuation target of 95. This pair may be winding up into a bullish triangle but as of yet no break out has occurred. At this time MACD is showing support at the current levels and stochastic is heavily oversold, leaving the pair open to rally. Any further declines will face long term support at 95.

USD/JPY

Gold Recovers Some Of Yesterday's Loss

Gold prices rebounded strongly today. The spot price of gold climbed more than $20 in today's trading to regain the $1300 level. The Gold Index, which has been suffering from the low prices of gold, climbed today as well. The index is near the long term lows and below the 30 day moving average. The MACD analysis points to the possibility of support at this level but no confirmation is evident. At best this index could be expected to trend sideways into the near future. A break above resistance or below support will be needed for a stronger assessment.

Gold Index

Gold companies did not fare so well in the past quarter and are not expected to do any better this quarter. The higher cost of energy and low gold prices are squeezing margins for the gold producers. Barrick Gold, in it's quarterly report, revealed that costs vary from mine to mine but can range up to three times the current price per ounce. This may lead miners to reduce production which could lead to higher prices for gold and profits for miners, at least on a short term basis.

The Oil Index

Oil dropped into today's session. The economic data and tapering were blamed. Strong, or just good, data leads to tapering which leads to fear of oil demand decreases. Adding to bearish feelings in the energy market were higher than expected gasoline inventories. The price of crude, Brent and Rbob all fell by more than 1%. However, oil prices are still at longer term high levels and supported by strengthening U.S. economic data. Also, today's Chinese import figures must have been ignored because it showed a big increase in petroleum imports. The Oil Index gapped open and then traded lower but found support once it fell beneath the short term moving average. By days end the index had recovered and regained the early high. The daily chart indicators are a little mixed but still support a rising market. On the long term charts the index appears to be near a point of change. I say this because the MACD peaks have narrowed their range to near zero while stochastic is trending sideways near the middle of the range. There is no strong direction indicated and the index is near the top of a long term range. At this time I see this index as range bound until we get a break above or below support/resistance. Support at 1350, resistance at 1430.

Oil Index

Earnings

This week is perhaps the fullest week for earnings report. I did not make an exact count but the number is up above 700 or so. Out of the week, today may have had the most individual reports. Aside from the sheer number there were not many high profile companies on the list. Priceline was one. The online discount travel site was expected to report earnings of over $9 per share. This is nearly a 100% gain from the previous quarter. Price action in Priceline has been bullish but technical indicators may have been foreshadowing poorer results than expected, but they weren't. Priceline beat expectations by nearly $0.70 per share. The results sent the stock price up over 5% in after hours trading and set a new high. The longer term charts are firmly bullish.

Priceline

Tata Motors also released today. This comes one day after Tesla Motors reported a surprising jump to profitability. Prices of TTM jumped more than 4% from a long term support line and potential bottom of a longer term trading range. The stock has been trapped below the $30 level since reaching it's peak in late 2010. At this time it looks like $22.50 is emerging as the new, higher bottom of the range. MACD shows increased support at this level. The India based motor company posted a big gain in earnings but still failed to meet expectations. Revenue decreases on a year over year basis by more than 20%, blamed largely on slowed growth among Jaguar and Land Rover brands.

Tata Motors

The Indexes

After the initial opening gap up the broad markets retreated into negative territory. It may have been the poor retail sales data but I think that is just forcing a reason on the market. I think it may have just been cautious investors waiting to get in. Once the S&P 500 turned negative it made a quick dip below 1690 and then promptly turned tail and lit out for higher ground. Once reaching the afternoon high 1700 produced some resistance. 1700 is the level where the index made its initial fall this morning as well. In the nearer term 1700 will be the level to watch but the index is indicated higher on the 30 minute charts.

SPX 30 minutes

On the daily charts the index (SPX) is bouncing from support. The index is still consolidating after breaking out to new highs last week but is showing positive action. This mornings pullback may have been nothing more than backing and filling, allowing traders to get in who may have missed this entry yesterday. This is also the second Thursday in a row that traders have stepped into the market and providing support at 1690. 1700 exists as a near term resistance, stronger resistance is at the current all-time high of 1709.67. Any break below the current support of 1690 will face further support at the 30 day moving average, the previous all-time high and the up trend line.

SPX daily

The Dow Jones Index is already below the previous all-time high and resting on the 30 day moving average. Longer term the Blue Chips are bullish with rising technicals. Nearer term the index is in a tight range between support and resistance. A failure to regain 15,500 could result in the index retreating to the long term up trend line.

Dow daily

The Nasdaq also gapped higher this morning before selling off intra-day. The indicators on the daily charts are not looking great for near term bears. The MACD and stochastic are both highly divergent and point to potential weakness. Near term support exists around the previous 13 year high level with additional levels around 3550 and 3500. This index, like the others, is extended well above the long term trend line and the 150 day moving average and in position for correction. A drop below support would be a warning sign of a potential 10% downside move. On the bullish side of the coin, the index is also in position to make another upside move. The longer term trend is up, the economy is expected to improve over the next 6 months, and the indexes are trading near all-time high levels.

Nasdaq daily

The Transports also fell below its support level. This index is also bouncing from the 30 day moving average. The long term trend is still up here as well. The indicators are currently moving lower but appear to be rolling over. Longer term trend could easily carry this index back over resistance and pull indicators back into bullish pose. However, there is significant resistance associated with the previous all-time highs and the cumulative affect of tapering, sequester and pay-roll taxes. Failure to more above this resistance could keep prices contained in the near to short term if not longer.

Dow Transports daily

In the longer term the broad markets are indicated higher. In the shorter and near term the indexes are mixed. Indicators are weakening but prices are holding support, for now. At the same time near term resistance is emerging. Tomorrow will be important because index prices could easily move above resistance or below support. I think though that tomorrow will be another mild day while the markets wait for a clearer signal. This signal could come from the data or directly from the Fed but I think it will be centered on tapering. Tomorrow there is not much in the way of data, Wholesale Inventories. Next week the calendar begins to fill up again. Housing starts, building permits, mortgage index, jobless claims, PPI, CPI, Philly Fed and Empire Manufacturing top the list. No one of the data points will alter the economic outlook but together they may. Tapering is factored in as far as I'm concerned and only the market can prove me wrong.

Until then, remember the trend!

Thomas Hughes


New Option Plays

Fill The Gap

by James Brown

Click here to email James Brown

Editor's Note:

In addition to tonight's new candidate(s), consider these stocks as possible trading ideas and watch list candidates. Some of these stocks may need to see a break past key support or resistance:

(bullish ideas) LEA, ROK, CREE, SIAL, BYI, CAB, OCR, ULTA, TRIP, FFIV



NEW DIRECTIONAL CALL PLAYS

eBay Inc. - EBAY - close: 53.57 change: +0.56

Stop Loss: 52.75
Target(s): 57.00
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
EBAY is not just the online auction site but has become a suite of online services including Stubhub, Half.com, and PayPal. Shares suffered some profit taking in mid July on management's disappointing guidance. Investors bought the dip near the bottom of EBAY's trading range. Now shares look poised to rally back toward the top of the range and fill the gap.

Currently EBAY is hovering just below resistance near $54.00. We are suggesting a trigger to buy calls at $54.15. If triggered our target is $57.00.

Trigger @ 54.15

- Suggested Positions -

Buy the Sep $55 call (EBAY1321i55) current ask $1.08

Annotated Chart:

Entry on August -- at $---.--
Average Daily Volume = 12.0 million
Listed on August 08, 2013



In Play Updates and Reviews

Stocks End 3-Day Dip

by James Brown

Click here to email James Brown

Editor's Note:

The U.S. market ended a three-day decline but gains were mild on Thursday. The initial rally failed but traders bought the dip and equities climbed back into the green by the closing bell.

COST has been removed. JNJ was stopped out.
UA was triggered.


Current Portfolio:


CALL Play Updates

CR Bard Inc. - BCR - close: 116.80 change: +0.59

Stop Loss: 113.95
Target(s): 119.75
Current Option Gain/Loss: - 11.1%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
08/08/13: BCR continues to inch higher and today shares were trying to rally past the $117.00 level.

- Suggested Positions -

Long Sep $120 call (BCR1321i120) entry $0.90

Entry on August 06 at $116.25
Average Daily Volume = 475 thousand
Listed on August 05, 2013


Lockheed Martin Corp. - LMT - close: 124.64 change: +0.10

Stop Loss: 123.45
Target(s): 129.75
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Comments:
08/08/13: LMT tested the $125.00 level multiple times today. Shares are still slowly drifting higher and LMT does look poised to breakout past this level.

After the market's close, on CNBC's Fast Money program, Carter Worth, who is the chief market technician at Oppenheimer & Co., had some interesting things to say about the defense stocks. Carter illustrated that the defense stocks have been outperforming the market. As a matter off fact Carter suggested that the defense stocks have done so well that they are now extremely overbought. He compared where they are now to their long-term 150-day moving average. According to his research the group has only been this over-bought (extremely high above their long-term moving average) something like 14 times ever and every time there was little upside and the group was closer to a top.

I certainly agree with Carter that the group and shares of LMT are overbought and extended. That's why we labeled this a momentum trade and suggested small bullish positions to limit our risk. It's worth noting that in spite of his concerns LMT did not show any weakness during the market's recent dip. Eventually the group will see a correction and because they are overbought the correction will be very sharp and painful. Until then the trend is up.

Traders may want to reduce their position size even smaller than normal and/or use a tighter stop loss to reduce your risk.

Earlier Comments:
LMT is currently hovering just below the $125.00 level. A breakout could keep the momentum going toward $130. We are suggesting small bullish positions if LMT can trade at $125.25. If triggered our target is $129.75.

Trigger @ 125.25 *small positions*

- Suggested Positions -

buy the Sep $125 call (LMT1321i125) current ask $2.15

Entry on August -- at $---.--
Average Daily Volume = 1.6 million
Listed on August 07, 2013


Polaris Industries - PII - close: 113.49 change: +0.82

Stop Loss: 113.40
Target(s): 119.75
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Comments:
08/08/13: PII managed a bounce off its rising 10-dma. We're still waiting for a breakout higher.

We are suggesting a trigger to buy calls at $116.25. If triggered our target is $119.75.

Trigger @ 116.25

- Suggested Positions -

Buy the Sep $120 call (PII1321i120)

Entry on August -- at $---.--
Average Daily Volume = 829 thousand
Listed on August 06, 2013


Shire plc - SHPG - close: 111.03 change: +0.74

Stop Loss: 108.95
Target(s): 118.50
Current Option Gain/Loss: -30.7%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
08/08/13: SHPG bounced to the top of its new short-term trading range near the $111 level. Readers may want to consider new positions on a rally past today's high (111.14).

Earlier Comments:
would keep position size small to limit risk.

*small positions* - Suggested Positions -

Long Sep $115 call (SHPG1321i115) entry $2.60

Entry on August 02 at $111.50
Average Daily Volume = 347 thousand
Listed on August 01, 2013


Under Armour, Inc. - UA - close: 71.98 change: +2.48

Stop Loss: 68.45
Target(s): 74.75
Current Option Gain/Loss: +24.3%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
08/08/13: UA started off slow this morning but after about an hour of trading the stock just took off higher. UA displayed relative strength with a +3.5% gain and a new all-time high. Our trigger to buy calls was hit at $70.50.

- Suggested Positions -

Long Sep $72.50 call (UA1321i72.5) entry $1.85

Entry on August 08 at $70.50
Average Daily Volume = 1.3 million
Listed on August 06, 2013


United Technologies - UTX - close: 106.26 change: +0.23

Stop Loss: 103.45
Target(s): 109.75
Current Option Gain/Loss: +12.9%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
08/08/13: It was a bit of a choppy session for shares of UTX. Shares managed to eke out a gain but they underperformed the S&P 500. I am not suggesting new positions at this time. More conservative traders may want to use a tighter stop.

FYI: UTX will begin trading ex-dividend on August 14th. The quarterly dividend should be 53.5 cents.

*small positions* - Suggested Positions -

Long Sep $105 call (UTX1321i105) entry $2.40

Entry on August 07 at $105.55
Average Daily Volume = 3.2 million
Listed on August 03, 2013


PUT Play Updates

Illumina Inc. - ILMN - close: 78.29 change: -0.26

Stop Loss: 80.25
Target(s): 75.25
Current Option Gain/Loss: - 5.0%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
08/08/13: ILMN underperformed the market today with a -0.3% decline. Yet shares still managed to find support at its rising 20-dma. I am not suggesting new positions at this time.

NOTE: Once ILMN fills the gap we can re-evaluate it for a potential bullish entry point.

*small positions* - Suggested Positions -

Long Sep $75 PUT (ILMN1321u75) entry $2.00

08/06/13 new stop loss @ 80.25

Entry on August 01 at $79.50
Average Daily Volume = 1.2 million
Listed on July 31, 2013


iShares Russell 2000 ETF - IWM - close: 104.15 change: +0.43

Stop Loss: 106.05
Target(s): 97.00
Current Option Gain/Loss: -28.3%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
08/08/13: The stock market's initial morning spike higher faded but traders bought the dip midday. Overall the session really didn't tell us much and stocks could go either way here. I am not suggesting new bearish positions at this time.

- Suggested Positions -

Long Sep $100 PUT (IWM1321u100) Entry $1.48

08/03/13 readers may want to consider an early exit

Entry on July 30 at $103.69
Average Daily Volume = 31 million
Listed on July 29, 2013



Longer-Term Play Updates



Chicago Bridge & Iron - CBI - close: 59.66 change: +0.49

Stop Loss: 55.75
Target(s): 74.50
Current Option Gain/Loss: -17.6%
Time Frame: 4 to 6 months
New Positions: see below

Comments:
08/08/13: CBI's bounce on Thursday outperformed the S&P 500. Yet shares remain below a two-week trend of lower highs.

I am not suggesting new positions at this time.

*Small Positions* - Suggested Positions -

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

07/20/13 new stop loss @ 55.75
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

Costco Wholesale - COST - close: 117.39 change: -1.95

Stop Loss: 117.90
Target(s): 124.75
Current Option Gain/Loss: Unopened
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
08/08/13: COST reported disappointing same-store sales and the stock spiked lower this morning. Shares fell from $119.34 to $116.08 pretty quickly. Traders did buy the dip near $116 but short-term upward momentum looks broken.

Our trade has not opened yet with our suggested trigger at $120.25. Tonight we are removing COST as a candidate. I would keep COST on your watch list. A dip or a bounce near $115 or its 50-dma might be an alternative bullish entry point.

Trade did not open.

08/08/13 removed from the newsletter

chart:

Entry on August -- at $---.--
Average Daily Volume = 1.4 million
Listed on August 03, 2013


Johnson & Johnson - JNJ - close: 93.34 change: -0.32

Stop Loss: 92.75
Target(s): 98.00
Current Option Gain/Loss: Aug.call -43.0% & Sept.call: -34.1%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
08/08/13: Our JNJ trade has been stopped out. The last few days have seen JNJ quietly consolidate sideways pretty much ignoring the market weakness. We thought JNJ might be able to escape the market's pullback without any real pain. Then this morning shares spiked higher only to immediately reverse lower. The stock broke down under short-term support at its 10-dma and eventually it our stop loss at $92.75 before paring its losses.

- Suggested Positions -

Aug $92.50 call (JNJ1317H92.5) entry $1.37 exit $0.78 (-43.0%)

- or -

Sep $95 call (JNJ1321i95) entry $0.82 exit $0.54 (-34.1%)

08/08/13 stopped out
08/03/13 new stop loss @ 92.75
08/01/13 new stop loss @ 92.35
07/31/13 new stop loss @ 91.90

chart:

Entry on July 29 at $93.05
Average Daily Volume = 9.0 million
Listed on July 27, 2013