Option Investor
Newsletter

Daily Newsletter, Monday, 8/12/2013

Table of Contents

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

Market Wrap

Market Support Ahead Of Data

by Thomas Hughes

Click here to email Thomas Hughes
Introduction

Futures for U.S. indices were decidedly lower this morning. The weakness seen last week carried through and was bolstered by mixed data from the Asian sector. Data from Japan and the possibility of renewed QE in China raised cautionary flags for traders in the early morning hours. Japanese GDP was reported as 2.6% for the 2nd quarter, the third consecutive quarter of growth but a full percentage point below expectations. In China a new report states that there may be more stimulus coming for troubled areas of its economy. Chinese stocks jumped on the news, reaching a near two month high; Japanese stocks faltered, shedding -0.70%.


Today was a light one in terms of domestic news. The weekly economic calendar is full, but today only one release was scheduled. The Treasury Budget was released at 2:00 PM with little fanfare. In business news the headlines were dominated by Blackberry's announced exploration of strategic alternatives. The announcement caused trading in the stock to be halted in the pre-market session. When trading was allowed to open at 8:30 AM share prices jumped more than 8%. The rest of the week will be quite full of news as there are more than two dozen scheduled economic releases.

One thing that did not get much attention was the impressive snap back rally in gold. Gold prices climbed more $25 or 1.5% to reach $1336 during intra-day trading. Gold prices have become volatile over the last week to ten days, I would not be surprised to see prices trade below $1300 again. Today's move is the third daily gain in a row, a near two week high and yet still below the long term resistance line I have at $1350. Economic data will be an important driver of gold prices, this week could provide a turning point for the metal. This week is important because it is the first big data week since the last FOMC meeting and the first clues as to what they (the FOMC) may do about tapering come September. Weaker than expected data could lead the FOMC to ease off on plans to taper and possibly even consider additional easing, strong data could lead to increased expectation of September tapering.

Economic Calendar

The Gold Index

The Gold Index has responded to the rebound in gold prices by climbing as well. The index has gained for the past three sessions, forming two long white candles in what could be a continuation signal. However, the index is still below Fibonacci resistance and will need a strong catalyst to get investors to drive up the price. Should gold keep moving higher and break through its own resistance this could be the catalyst that the Gold Index needs. Stochastic and MACD both suggest that there is some support at the current level that could last into the mid term. On the long term weekly charts both indicators are both on the rise but do not indicate a bottom or even support at this time. High energy costs are eating into the gold miners margins from one side while a strengthening world economy is squeezing them from the other.

Gold Index

The Oil Index

Oil prices held steady today. After an initial dip into negative territory the price of crude regained last week's closing price before moving higher in the late afternoon. Driving today's oil action was new supply disruption concerns from Libya. Oil has now been trading above $100 for over 6 weeks, or the entire third quarter to date. This means that there is a significant chance for third quarter earnings in the sector to be ahead of expectations. The Oil Index has responded to the high price of oil by drifting lower. The index is now hovering above a long term support and is also approaching a rising up trend line.

Oil Index

The USD/JPY

The unexpectedly weak GDP numbers from Japan have helped to weaken the yen a little. The currency had been strengthening in recent weeks on expectations the country was strengthening faster than expected. The weak GDP data put that thought to bed for now. Yen printing will continue into the future while dollar printing is likely coming to an end. The USD/JPY pair is winding up into a potential bull triangle with a target between 110 and 120. The pair is currently trading near the lower end of the 4 month range and is in oversold condition. Strong data here at home this week could be the catalyst to send this trade higher. A break above the 100 level and the top of the triangle is needed for a stronger bullish stance.

USD/JPY

Story Stocks

Blackberry announced that they were in strategic search for solutions to its growth problems. The company is expected to announce something more concrete in the near future. Possibilities include going private as well as other arrangements. The stock got a big boost from the news and climbed more than 8% in the pre market trading. During the day the stock traded down from the session high but remained well above last week's closing price. Looking at the chart I do not get a very bullish feeling. The share price is still trading near an 8 month low and below the window opened two month ago. The question now is what will Blackberry do and how much per share will it cost them (or their new partner/owner etc).

Blackberry

Apple made a big announcement today as well. The iPhone maker reported that the next new iPhone would be launched next month. The current release date is set for September 5th and is the first new piece of hardware from Apple since the iPad mini last winter. The stock has been gaining in value over the last month and saw another jump in prices today. Shares of Apple climbed $12, or nearly 3%, only to be stopped near the recent high and long term down sloping resistance of $466-$467. This resistance line is the extension of a neck line marking a the H&S reversal formed last year. A break above this line could take Apple up to the $500-$550 level in the near to short term.

Apple

The Indices

The major U.S. indices traded in a very tight range today. After initially opening down about 3 points the index dropped briefly below the long term support before climbing back above it. After regaining the upper side of support the index managed to claw its way up to break even before running out of steam. For the remainder of the day the index traded between flat line and -4ish, but never fell below support again. The current support level is the previous all-time intra-day high level set way back in May of this year. The index has been trading at or just above this level for over a month now, giving the indicators a chance to pullback from overbought. The long term and short term up trends are still intact with growing support at the current level. A drop below the 1690 level could result in a small pullback. If such a pullback were to occur there are three significant support lines within 3% of the current level and the long term support level of the 150 EMA roughly 5% lower.

SPX daily

The Russell 2000 has made a similar sideways consolidation over the past 3-4 weeks. This index has been trading over and under the 1050 level allowing the short term 30 day moving average to catch up with it. The sideways move has also alleviated over bought conditions in this market as well. Near term support is currently near the 1035 level with resistance at the current all time high of 1063. On the weekly charts the Russell is still bullish but extremely extended. There is a possibility of pullback here but I don't see it in the indicators.

Russell 2000

The Dow has been testing its support for several days now. The blue chip index fell below its first support line last week and breached the 30 day moving average Friday. The index has been able to hold the moving average so far and even traded into the positive today. The data deluge begins tomorrow and is expected to be good. This could spark another moving average bounce. There is also some risk the index could break the moving average at which point next support is the up trend line. Indicators on the daily charts are still moving lower but at their current levels still indicate a rising/supported market. On the longer term charts MACD is very mildly bullish despite the black candle formed last week. This, along with the stochastic, also supports a rising market.

Dow Industrials

The Transports have also tested support. This index moved up today from the moving average. The move resulted in the stochastic turning up as well, a good sign for bullish sentiment. Momentum is still bearish but may be peaking. The index still has a resistance line to break but if momentum is shifting back to the buy side it may not hold. The transports are foreshadowing strong economic data but less than expected could cap the index at resistance.

Dow Transports

The Nasdaq Composite led the market today and is almost indicating a buy. MACD is crossing over to bullish and stochastic is almost making a crossover. The thing standing in the way is economic data. The techs were hot this summer and they have been hot since the June swoon. Some good data could add momentum to this trade, carrying the index higher. There is risk here though. The index has formed a fairly big divergence from the last two MACD peaks. This could signify serious weakness and leaves the index susceptible to pullback if the data is not up to snuff. I also want to take this time to point out that a previous market leader, Apple, which has suffered greatly over the last year is now coming back on the scene.

NASDAQ, daily

Data is what is on the minds of traders today. Not the data today, but the data we start to see tomorrow. This week is big on data and importance. There are only a few more weeks left until the next FOMC meeting in mid-September. If tapering is coming the data tomorrow and this week should be strong. If this is the case then the economy is still doing OK. OK used to be enough to drive the indices higher, will it be enough now. For now, the markets appear to be rolling over into bullishness again. At least they are getting ready to be bullish if the data is right. Regardless, the markets all have resistance in the form of recent all time highs that need to be broken.

Until then, remember the trend!

Thomas Hughes


New Option Plays

Biotech & Chemicals

by James Brown

Click here to email James Brown


NEW DIRECTIONAL CALL PLAYS

Jazz Pharmaceuticals - JAZZ - close: 82.14 change: +1.26

Stop Loss: 79.75
Target(s): 88.00
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
JAZZ is a specialty biopharmaceutical company. The company reported earnings last week. While JAZZ missed Wall Street's bottom line estimates by eight cents a share, management did raised their 2013 guidance higher. Traders bought the news and shares broke out past resistance near $80.00.

Now after consolidating sideways in the $80-82 zone for a couple of days JAZZ looks poised to take off again. I am suggesting a trigger to buy calls at $82.35. If triggered our target is $88.00.

Trigger @ 82.35

- Suggested Positions -

Buy the Sep $85 call (JAZZ1321i85) current ask $2.30

Annotated Chart:

Entry on August -- at $---.--
Average Daily Volume = 700 thousand
Listed on August 12, 2013


NEW DIRECTIONAL PUT PLAYS

Monsanto Co. - MON - close: 95.68 change: -0.57

Stop Loss: 96.25
Target(s): 90.25
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
Fertilizer and agricultural chemical giant Monsanto continues to underperform the market. The oversold bounce just failed near $98 and its 10-dma. Now the stock is flirting with a breakdown below support near $95 and its 300-dma.

Today's low was $94.56. I am suggesting a trigger to buy puts at $94.40. If triggered our short-term target is $90.25 but more aggressive traders could aim lower. The point & figure chart is suggesting an $84 target.

Trigger @ 94.40

- Suggested Positions -

buy the Sep $90 PUT (MON1321u90) current ask $0.85

Annotated Chart:

Entry on August -- at $---.--
Average Daily Volume = 3.1 million
Listed on August 12, 2013



In Play Updates and Reviews

Markets Manage A Mixed Monday

by James Brown

Click here to email James Brown

Editor's Note:

Market performance was mixed on Monday with the Dow Industrials and the S&P 500 posting minor losses and the NASDAQ and Russell 2000 eking our minor gains.

CONN hit our suggested entry trigger.


Current Portfolio:


CALL Play Updates

CR Bard Inc. - BCR - close: 116.72 change: -0.65

Stop Loss: 114.65
Target(s): 119.75
Current Option Gain/Loss: -22.2%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
08/12/13: BCR erased Friday's gain with minor pullback on Monday. Shares did underperform the broader market today. There should be short-term support in the $115-116 zone.

- Suggested Positions -

Long Sep $120 call (BCR1321i120) entry $0.90

08/10/13 new stop loss @ 114.65

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


Conns Inc. - CONN - close: 67.11 change: +1.66

Stop Loss: 64.40
Target(s): 74.00
Current Option Gain/Loss: + 0.0%
Time Frame: exit PRIOR to earnings in early September
New Positions: see below

Comments:
08/12/13: CONN spent the first part of Monday consolidating sideways. Something happened this afternoon that sparked a big move higher. I couldn't find any headlines to explain today's relative strength. We were expecting a bullish breakout and CONN hit our suggested entry point at $66.65.

Earlier Comments:
If the rally continues CONN could see more short covering. The most recent data listed short interest at more than 18% of the small 24.1 million share float. Our short-term target is $74.00. However, more conservative traders may want to exit near $70.00, which might be round-number resistance.

- Suggested Positions -

Long Sep $70 call (CONN1321i70) entry $2.70

Entry on August 12 at $66.65
Average Daily Volume = 394 thousand
Listed on August 10, 2013


eBay Inc. - EBAY - close: 53.28 change: -0.05

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

Comments:
08/12/13: Traders bought the dip in EBAY this morning but the rebound failed to see any real follow through higher. We are waiting on a breakout past the $54.00 level.

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)

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


Lockheed Martin Corp. - LMT - close: 123.00 change: -1.02

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:
08/12/13: LMT continued to see profit taking on Monday. Shares ended the session sitting on short-term technical support at its 10-dma. If the stock doesn't bounce here we might drop it. Currently we are still sitting on the sidelines waiting on a breakout past resistance at $125.00. 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)

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


Polaris Industries - PII - close: 113.12 change: -0.29

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:
08/12/13: PII spent Monday' session drifting sideways near its simple 10-dma. Nimble traders might want to consider buying calls on a dip or a bounce near the $110.00 level (and use a tight stop loss). We are currently on the sidelines waiting for a breakout to new highs. I am 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


Qihoo 360 Technology - QIHU - close: 68.87 change: -0.29

Stop Loss: 66.49
Target(s): 74.50
Current Option Gain/Loss: Unopened
Time Frame: 1 to 2 weeks
New Positions: Yes, see below

Comments:
08/12/13: QIHU rebounded off its Monday morning lows. The stock managed to tag a new intraday high but QIHU couldn't breakout past round-number resistance at the $70.00 mark.

There is no change from my weekend comments.

This is an aggressive, higher-risk momentum trade. What makes QIHU even more risky is the time frame. The company is expected to report earnings sometime in the August 20-24th time frame. There is no confirmed date yet. We do not want to hold over the announcement. That gives us about ten to fourteen days for this trade to work.

We are suggesting a trigger to buy small bullish positions at $70.25. If triggered our short-term target is $74.50. Traders could obviously aim higher. The Point & Figure chart for QIHU is bullish with an $84 target.

Trigger @ 70.25 *small positions, higher-risk trade*

- Suggested Positions -

Buy the Sep $75 call (QIHU1321i75)

Entry on August -- at $---.--
Average Daily Volume = 2.2 million
Listed on August 10, 2013


Shire plc - SHPG - close: 110.13 change: -1.11

Stop Loss: 109.40
Target(s): 118.50
Current Option Gain/Loss: -48.0%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
08/12/13: Ouch! SHPG underperformed the market today. Shares gapped open lower and briefly traded to a new one-week low at $109.75 before paring its losses. We have a stop loss at $109.40. More conservative traders may want to adjust theirs closer to today's low instead.

Earlier Comments:
The plan was to keep our position size small to limit risk.

*small positions* - Suggested Positions -

Long Sep $115 call (SHPG1321i115) entry $2.60

08/10/13 new stop loss @ 109.40

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


Under Armour, Inc. - UA - close: 73.93 change: +1.24

Stop Loss: 69.25
Target(s): 74.75
Current Option Gain/Loss: +78.3%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
08/12/13: UA's rally continued on Monday with the stock hitting $74.45 intraday. Our exit target is $74.75 but more conservative traders may want to take profits now.

- Suggested Positions -

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

08/12/13 readers may want to take profits now
option bid at $3.30
08/10/13 new stop loss @ 69.25

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


United Technologies - UTX - close: 105.54 change: -0.08

Stop Loss: 104.45
Target(s): 109.75
Current Option Gain/Loss: - 7.9%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
08/12/13: UTX produced a relatively quiet session and closed almost unchanged on Monday. The short-term trend of lower highs is starting to worry me. I am not suggesting new positions at this time.

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

08/10/13 new stop loss @ 104.45

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: 78.72 change: +0.01

Stop Loss: 79.65
Target(s): 75.25
Current Option Gain/Loss: -17.5%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
08/12/13: Traders bought the dip in ILMN this morning and the stock continued to trade sideways inside the $77.50-79.50 zone. We are moving our stop loss down to $79.65. I am not suggesting new positions at this time.

*small positions* - Suggested Positions -

Long Sep $75 PUT (ILMN1321u75) entry $2.00

08/12/13 new stop loss @ 79.65
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: 104.59 change: +0.55

Stop Loss: 106.05
Target(s): 97.00
Current Option Gain/Loss: -38.5%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
08/12/13: It was an odd session for the IWM. Shares gapped open lower at a new low for the month of August and then a few minutes later shot higher. The fact that the IWM closed on its high for the day would suggest a bullish open for tomorrow morning. 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: 59.65 change: -0.21

Stop Loss: 55.75
Target(s): 74.50
Current Option Gain/Loss: -21.5%
Time Frame: 4 to 6 months
New Positions: see below

Comments:
08/12/13: CBI spent Monday's session churning sideways under round-number resistance at the $60.00 mark. I remain cautious here and we're 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


Vanguard FTSE Europe ETF - VGK - close: 52.82 change: -0.27

Stop Loss: 51.25
Target(s): 58.50
Current Option Gain/Loss: Unopened
Time Frame: exit PRIOR to 2013 December option expiration
New Positions: Yes, see below

Comments:
08/12/13: VGK shot lower at the open and then spent the rest of the day drifting sideways. There is no change from our new play description from the weekend newsletter.

Earlier Comments:
We are taking a multi-month time frame with this trade. I am suggesting we wait for the VGK to close above $53.50 and then buy calls the next morning. If we are triggered our target is $58.50 but we'll adjust it as the trade progresses.

FYI: The Point & Figure chart for VGK is bullish with a $63 target.

Trigger: Wait for a close above $53.50, then buy calls the next morning.

- Suggested Positions -

Buy the 2013 Dec $55 call (VGK1322L55)

Entry on August -- at $---.--
Average Daily Volume = 3.0 million
Listed on August 10, 2013