Option Investor
Newsletter

Daily Newsletter, Thursday, 8/22/2013

Table of Contents

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

Market Wrap

Unusual, Unexpected and Odd

by Thomas Hughes

Click here to email Thomas Hughes
Introduction

Today started out like many others but soon took an unusual turn. Up until 12:20 we were having what I would call a normal day of trading. Trading volume was light but a round of positive data had stocks rebounding from yesterday's sell off. Then, just after lunch, a glitch in quote dissemination lead to a halt of NASDAQ listed options. The NASDAQ had a problem delivering bid/ask spreads that snowballed into a full blow shut down. Tape “C”, or NASDAQ, symbols were traded on other exchanges initially but were soon halted there as well. The problem lasted for about three hours but eventually was solved. The problem did not affect execution on other exchanges so far as I have learned and traders were able to close open NASDAQ orders if desired.

NASDAQ one day

Around The World

Asian shares took a tumble when they opened, following the lead set by U.S. equities Wednesday afternoo. The FOMC minutes did not change anything about the outlook but sure did add some volatility to yesterday's trading. After the initial dip a surprising Flash PMI reading from China helped to reverse the bearish sentiment. Asia markets did not manage to reach positive territory but did close well off the daily lows. This months PMI reading of 50.1 is a four month high and the first signs of expansion in Chinese manufacturing for the same duration. HSBC economists think that Chinese QE efforts are “filtering through”. Much of the strength in this months report was for new orders as manufacturers and wholesalers try to replenish inventory.

The positive vibe sparked by Chinese PMI carried into the European open. These indices were also boosted by additional positive surprises in Euro Zone and German PMI readings. German PMI rose to 53.4 from last months 52.1 and the Euro Zone as a whole rose to 51.7 from 50.5. Both readings are better than expected and both are at 2 year highs. European indices gained 1-2% in today's session. Futures trading here at home was positive as well and also helped by our own economic data. Housing is still improving, jobless claims remain relatively low and the Leading Indicators rose more than expected.


The Data

Just a day after the Fed failed to reveal anything new about their thoughts on tapering we got a round of strong data. Not just from overseas, which is good for the global recovery, but here at home too. It's the data here at home though that is most important. The first bit of data today was the weekly jobless claims figures. Initial claims rose by 13,000 from a mild upward revision to hit 336,000. This is a four week high but still below the 350,000 we have been watching for the last year or so. The moving average fell this week due to the previous four week high dropping out of the equation. This is now the 6 week of initial claims under 350,000. No states reported a gain in claims of more than 1,000. California and Ohio led with drops in claims of -4,000 and -1,500 respectively.


Continuing claims ticked up by a hairs breadth. The gain of 29,000 puts this figure just under the 3 million mark. This figure has been hovering around 3 million for about 3 months now and appears to be holding fairly steady save for a random spike up or down. The total claims figure dropped and is this weeks headline for the jobs front. Total claims fell by -148,707 to hit a new five year low. The downward trend is not strong but it is there, total unemployment claims for one reason or another are coming down. This could mean that jobs creation is picking up, it could also mean that people are falling off the books. The next NFP and Unemployment release is scheduled for two weeks from tomorrow.



I want to point out once again that unemployment claims are being affected by the auto industry. The big three auto makers cut out summer lay-offs in order to increase production. They want to increase production to build inventory. Sound familiar? It should because a few paragraphs ago I reported HSBC just released surprisingly strong Chinese PMI data that revealed businesses were trying to rebuild inventory. A global shift to increased production could result in the stronger second half economists have been expecting.

The Home Price Index and Leading Indicators round out today's U.S. economic data. The Home Price Index gained .8% in the past month, ahead of expectations. This is just a day after Existing Home Sales posted a 6% increase. The Leading Indicators Index also came in ahead of expectations. This gauge of the economy was expected to rise by 0.5%, the actual was 0.6%. The only thing on the calendar for tomorrow is New Home Sales. Next week look out for Durable Goods, Consumer Confidence, Pending Home Sales, Chicago PMI, Michigan Sentiment and the second estimate for 2nd quarter GDP.


The Dollar

The dollar strengthened against the basket of international currencies but remains trapped within the middle of its longer term trading range for now. The FOMC minutes failed to change the outlook for tapering but today's data seemed to reinforce the idea that September could be it. Currency trading remained active throughout the afternoon despite the pause in NASDAQ options. We may see a squeeze in the dollar market until the next round of international central bank meetings in September.

Dollar Index

The yen lost ground to the dollar in today's trading. The USD/JPY broke above the 98 level, a level coincident with a Fibonacci retracement and the short term 30 day EMA. The pair is still within its narrowing trading range and indicated up. MACD and stochastic are both moving higher on the daily charts, on the weekly charts bearish momentum has peaked and stochastic confirms the shorter term bullish sentiment. My outlook for this pair is like this; Japan GDP is not improving as quickly as expected which could lead to more QE, the U.S. economy has improved to point where QE is about to end. I believe those two factors, together, will push the USD/JPY out of the current range to the upside but that remains to be seen. For now the pair is indicated up and is approaching a down sloping resistance line.

USD/JPY

The Euro also lost some ground to the dollar but found some support before days end. This pair dropped down to Fibonacci support and then snapped back up, forming a doji candle. Diverging indicators and long term resistance/trading range lead me to think this pair may have topped out. This pair may stall and trade sideways until the ECB and FOMC meetings next month. The pair is currently at the support level of 1.3325, next support is 1.3200, resistance is 1.3500.

EUR/USD

Oil Index

Oil recovered some of this weeks losses today. The stronger than expected PMI data helped to boost demand in oil as well as some other commodities such as copper and gold. Oil gained over a dollar today (about 1.25%) and the Oil Index gained a comparable percentage point. The index is now making a nice bounce from the term trend line begun in mid-2012. This bounce is the third since it was the trend line was established more than 12 months ago. The bounce also brings the index back above my long term support/resistance line, the line this index has been trading around the past 7 months. The index has bearish momentum but the long term peak analysis suggests a well supported market. Stochastic is in extreme oversold levels and making a bullish crossover. The long term trend is intact, this index looks good for buying opportunities going into the near to short term. Longer term there is still some resistance ahead.

Oil Index

The Gold Index

Gold prices moved higher today one the back of better than expected PMI data. Physical demand for gold is up, for today, but the economic data that supports demand for gold as an industrial material is the same data that leads to tapering. The threat of a scale back of FOMC asset purchases is a headwind for gold and could result in more volatility in this metal. The Gold Index traded marginally higher today in another day of trading just above the recently broken Fibonacci retracement. Higher gold prices are leading to raised expectations among the gold miners but they face the same dangers as the underlying metal. The index is indicated higher at this time with the next up side target around $124.90

Gold Index

Story Stocks

There were a few story stocks on my list today but they quickly faded from the spotlight in light of the three hour delay. HPQ and SHLD both reported worse than expected earnings and both of their shares plummeted. The miss by HPQ is disappointing because I like Meg Whitman and want them to do good. However, declining PC demand is a bog of quicksand HPQ just can't get out of. As for Sears, this should have been expected. On the one hand we have seen a host of disappointing reports from retailers of all variety, not to mention the decline of the American mall scene and the example being set by JC Penny.

Sears

The Indices Today

The major indices did not have a bad day despite the ridiculous problem experienced by NASDAQ. NASDAQ listed stocks, which were leading in the morning hours, took a break, flat lined for a while, reopened about 3:40PM and then continued to lead the markets. What was obvious, and this may have been helped by the light volumes, is that it wasn't that big of a deal. The NYSE, AMEX and other major exchanges were still operational. Stocks and options other than NASDAQ listed issues were still being traded. In fact, the S&P for one, climbed during the debacle. Trading on the S&P 500 dipped briefly during the mid point of the ordeal but then climbed back to the days highs. Once trading on NASDAQ listed issues resumed all the major indices climbed higher to end near the top of today's range.

S&P 30 minute

On the daily charts the S&P is trading at the long term up trend line. The index today made a bullish candle engulfing the past three candles and climbed to just above the trend line. Bearish momentum is peaking at this time and stochastic is entering extreme oversold levels. Keeping in mind that we are still in a long term bull market no matter what anybody says we, or I rather, should expect a bounce from this point or very near to hear. The longer term trend shows a rising market. The longer term economic trend shows a strengthening economy. Taper fears helped to bring us down to this level. Data supports tapering by showing a stronger economy. A stronger economy leads to higher corporate profits and higher stock prices. Presently there is no indication of higher prices in the indicators, just the recognition that the index is at a place where it is reasonable to expect a bounce to occur. In order to place a trade a more concrete signal is required.

S&P daily

Tomorrow could be a mild day. But then again its expiration day so I wouldn't count on it too much. Other than that there is not much happening to move the markets other than a few earnings reports. Next week there are some important economic events but again nothing to market moving that I can see. The week after that we'll get the next round of monthly data including the ADP/Challenger/NFP bundle.

Until then, remember the trend!

Thomas Hughes


New Option Plays

Flying High

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)
DRQ, CVD, ALNY, SBUX, LMT, CI, RTN, FLR, YELP, LII, OPEN, RH, FDX, HUM, PRU,



NEW DIRECTIONAL CALL PLAYS

Buffalo Wild Wings Inc. - BWLD - close: 109.55 change: +2.93

Stop Loss: 106.25
Target(s): 118.50
Current Option Gain/Loss: Unopened
Time Frame: 3 to 6 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
BWLD is cashing in on the hot wings, beer and sports bar concept. Aside from the correction lower in July the stock has been a consistent winner since its late 2012 lows. BWLD displayed relative strength today with a +2.7% gain and a surge to round-number, psychological resistance at the $110 mark. This is a new all-time high. If the rally continues BWLD could see some short covering.

We are suggesting a trigger to buy calls at $110.25. If triggered our target is $118.50. The Point & Figure chart for BWLD is bullish with a $121 target.

Trigger @ 110.25

- Suggested Positions -

buy the Oct $115 call (BWLD1319j115) current ask $2.10

Annotated Chart:

Entry on August -- at $---.--
Average Daily Volume = 425 thousand
Listed on August 22, 2013



In Play Updates and Reviews

Economics Power A Rebound

by James Brown

Click here to email James Brown

Editor's Note:

Better than expected economic data out of China and Europe fueled a rebound in stocks. Meanwhile the NASDAQ suffered a three-hour trading outage.

MON was triggered and then later stopped out.


Current Portfolio:


CALL Play Updates

Alliant Techsystems - ATK - close: 100.03 change: +1.02

Stop Loss: 97.90
Target(s): 108.00
Current Option Gain/Loss: Unopened
Time Frame: 6 to 9 weeks
New Positions: Yes, see below

Comments:
08/22/13: ATK shot higher at the open but the rally stalled at $101.24. That means our play is not open yet since our suggested trigger to buy calls is $101.25. ATK faded back toward the $100 level by the closing bell. More aggressive traders may want to buy calls now. I am suggesting we stick to our trigger at $101.25.

The recent high is near $101.00. We are suggesting a trigger to buy calls at $101.25. If triggered our target is $108.00. The option spreads on ATK are a little bit wide therefore I am suggesting we use small positions to limit our risk.

Trigger @ 101.25 *small positions*

- Suggested Positions -

buy the Nov $105 call (ATK1316k105)

Entry on August -- at $---.--
Average Daily Volume = 462 thousand
Listed on August 20, 2013


Lumber Liquidators - LL - close: 102.68 change: +2.88

Stop Loss: 98.25
Target(s): 108.00
Current Option Gain/Loss: +25.0%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
08/22/13: The really in LL continued with a +2.88% gain on Thursday. This is a new all-time high for the stock. We are raising our stop loss to $98.25.

Earlier Comments:
A breakout past the $100 level could spark some short covering. The most recent data listed short interest at 25% of the small 26.2 million share float.

Our target is $108.00. More conservative traders may want to exit near $105.00 instead.

- Suggested Positions -

Long Sep $105 call (LL1321i105) entry $2.20

08/22/13 new stop loss @ 98.25

Entry on August 21 at $100.25
Average Daily Volume = 611 thousand
Listed on August 20, 2013


Shire plc - SHPG - close: 113.99 change: -0.03

Stop Loss: 111.75
Target(s): 118.50
Current Option Gain/Loss: + 7.6%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
08/22/13: SHPG gapped down at the open but traders bought the dip near $113.00. The stock was pushing higher until the NASDAQ trading outage for three hours. When trading re-opened SHPG spiked to a new four-day high above $114.50 and then retreated.

We are raising our stop loss to $111.75. I am not suggesting new positions.

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

08/22/13 new stop loss @ 111.75
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


SINA Corp. - SINA - close: 81.53 change: +2.12

Stop Loss: 77.49
Target(s): 89.00
Current Option Gain/Loss: -15.6%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
08/22/13: SINA is launching a new chat product to compete with a rival's mobile chat application. This news may have helped shares rally this morning. The stock outperformed the broader market with a +2.6% gain.

I am not suggesting new positions at the moment.

- Suggested Positions -

Long Sep $85 call (SINA1321i85) entry $2.75

08/21/13 adjust stop loss from $77.70 to $77.49

Entry on August 19 at $81.35
Average Daily Volume = 2.9 million
Listed on August 17, 2013


PUT Play Updates

Apache Corp. - APA - close: 78.99 change: +1.77

Stop Loss: 80.55
Target(s): 71.00
Current Option Gain/Loss: - 7.5%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
08/22/13: A widespread market bounce combined with outperformance in the energy stocks and a relative quiet in Egypt has helped shares of APA rally. The oversold bounce continues for a third day in a row. The stock has cleared short-term resistance near $78.00 and is headed for the next level of resistance near $80.00 and its 200-dma. A failure near $80.00 could be used as a new bearish entry point.

FYI: The Point & Figure chart for APA is bearish with a $72 target.

- Suggested Positions -

Long Oct $75 PUT (APA1319v75) entry $1.60

08/19/13 trade opened on gap down at $78.42. Trigger was $78.75

Entry on August 19 at $78.42
Average Daily Volume = 2.6 million
Listed on August 17, 2013


Boeing Company - BA - close: 105.14 change: +1.23

Stop Loss: 105.55
Target(s): 100.25
Current Option Gain/Loss: -52.0%
Time Frame: 1 to 2 weeks
New Positions: see below

Comments:
08/22/13: Our BA trade could be in trouble again. The market's widespread bounce today helped push BA back above its 50-dma and back above the $105 level. BA is once again testing its three-week bearish trend line of lower highs. If the market continues to rally tomorrow I do expect BA to hit our stop loss at $105.55. The high today was $105.50.

- Suggested Positions -

Long Sep $100 PUT (BA1321u100) entry $1.75

08/15/13 trade opened on gap down at $103.19. Trigger was $103.75

Entry on August 15 at $103.19
Average Daily Volume = 4.6 million
Listed on August 14, 2013


Digital Realty Trust - DLR - close: 53.30 change: +0.72

Stop Loss: 54.25
Target(s): 50.25
Current Option Gain/Loss: -28.5%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
08/22/13: The bounce in DLR continues as well with a +1.3% gain. Shares are still trading below what should be resistance at $54.00. I am not suggesting new positions at this time.

Earlier Comments:
Our short-term target is $50.25. More aggressive traders may want to aim lower since the Point & Figure chart for DLR is bearish with a $42 target.

- Suggested Positions -

Long Sep $50 PUT (DLR1321u50) entry $1.05

08/19/13 new stop loss @ 54.25

Entry on August 14 at $53.75
Average Daily Volume = 1.8 million
Listed on August 13, 2013


eBay Inc. - EBAY - close: 51.08 change: +0.12

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:
08/22/13: The early morning bounce in EBAY failed and shares closed on their low for the day.

Earlier Comments:
EBAY is nearing major support near $50.00. I am suggesting a trigger to buy puts at $49.90. More conservative traders may want to wait for a drop below the March 2013 low of $49.55 before initiating new put positions. If we are triggered at $49.90 our first target is $45.50.

Trigger @ 49.90

- Suggested Positions -

buy the Sep $50 PUT (EBAY1321u50)

- or -

buy the Oct $45 PUT (EBAY1319v45)

Entry on August -- at $---.--
Average Daily Volume = 8.6 million
Listed on August 21, 2013


Hanesbrands Inc. - HBI - close: 61.12 change: +0.36

Stop Loss: 60.60
Target(s): 55.25
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Comments:
08/22/13: HBI is not cooperating. If shares continue to rebound higher tomorrow we might drop it as a candidate. At the moment our plan is unchanged.

We are suggesting a trigger to buy puts at $58.95. If triggered our target is $55.25.

Trigger @ 58.95

- Suggested Positions -

buy the Sep $55 PUT (HBI1321u55)

Entry on August -- at $---.--
Average Daily Volume = 1.1 million
Listed on August 20, 2013


iShares Russell 2000 ETF - IWM - close: 102.91 change: +1.43

Stop Loss: 104.25
Target(s): 98.50
Current Option Gain/Loss: -27.0%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
08/22/13: The small cap IWM outperformed its large cap peers with a +1.4% gain. This ETF is testing short-term resistance near $103.00. If the rally continues the next level of resistance should be $104.00.

I am not suggesting new bearish positions at this time.

- Suggested Positions -

Long Sep $100 PUT (IWM1321u100) Entry $1.48

08/19/13 new stop loss @ 104.25
08/15/13 adjust exit target from $97.00 to $98.50
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


ManpowerGroup Inc. - MAN - close: 67.08 change: +1.13

Stop Loss: 67.05
Target(s): 61.00
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Comments:
08/22/13: Shares of MAN bounced in the first 30 minutes of trading and then spent the rest of the day churning sideways in a narrow range just above the $67.00 level. There is no change from my prior comments.

We are suggesting a trigger to buy puts at $65.75. There is arguably potential short-term support at $65.00 but we are aiming for a drop to $61.00.

Trigger @ 65.75

- Suggested Positions -

buy the Sep $65 PUT (MAN1321u65)

Entry on August -- at $---.--
Average Daily Volume = 530 thousand
Listed on August 21, 2013


Time Warner Cable - TWC - close: 108.96 change: +0.81

Stop Loss: 111.60
Target(s): 105.00
Current Option Gain/Loss: -23.4%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
08/22/13: TWC followed the market higher and managed a +0.74% gain but remains below resistance at the $110 level.

Earlier Comments:
We do want to keep our position size small. There is potential support at $108.00. The next level of support is $104.00. If we are triggered at $109.50, our target is $105.00.

- Suggested Positions -

Long Sep $105 PUT (TWC1321u105) entry $2.35

Entry on August 16 at $109.50
Average Daily Volume = 2.3 million
Listed on August 15, 2013



Longer-Term Play Updates



Chicago Bridge & Iron - CBI - close: 61.25 change: +1.95

Stop Loss: 55.75
Target(s): 74.50
Current Option Gain/Loss: - 9.8%
Time Frame: 4 to 6 months
New Positions: see below

Comments:
08/22/13: CBI managed to erase about three days of losses with today's +3.28% bounce.

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


Vanguard FTSE Europe ETF - VGK - close: 52.90 change: +0.66

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:
08/22/13: VGK managed to erase all of yesterday's decline with a +1.2% bounce today.
I don't see any changes from my earlier comments.

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


CLOSED BEARISH PLAYS

Monsanto Co. - MON - close: 96.25 change: +1.44

Stop Loss: 96.25
Target(s): 90.25
Current Option Gain/Loss: -30.0%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
08/22/13: It was a very frustrating day for our MON trade. The stock was drifting higher with the broader market and we were sitting on the sidelines waiting for a breakdown. Then in one minute, at 2:57 p.m., MON started to see some really irregular trading with several sharp ticks lower toward $95.00, then under $95.00. All within the same one-minute window MON dipped down to $94.00 and then rebounded right back into the $96.00 area. Our play was both triggered at $94.40 and stopped out at 96.25 by the closing bell. Sometimes the market does not want to work with you. The September $90 put high for the day was 60 cents but that may not be accurate given how fast the move in MON was.

- Suggested Positions -

Sep $90 PUT (MON1321u90) entry $0.60 exit $0.42 (-30.0%)

08/22/13 stopped out at $96.25
08/22/13 triggered at $94.40

chart:

Intraday chart:

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