Option Investor
Newsletter

Daily Newsletter, Tuesday, 9/3/2013

Table of Contents

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

Market Wrap

September Starts With A Whimper

by Thomas Hughes

Click here to email Thomas Hughes
Introduction

I awoke this morning to a market relatively unchanged from Friday. Of course, futures trading was positive, very positive. The S&P futures were up near 14 points before 8 AM with little reason. There were no major market moving events, no shift in world economics or politics. I think it may just have been a little over exuberance on the part of early week traders. I am still looking at this week, and the next two, as important for the financial market. Not only are there numerous important economic data points for us here in the States but there are also at least as many on the international schedule as well. This week alone, even though it is shortened by the holiday, has over 100 international economic reports on the calendar.


Today was relatively light on data despite the enormous amount we are expecting throughout the week. In Asia and Europe PMI data was surprisingly good and helped to bolster support in China and Japan. European shares did not follow the lead of their Asian counterparts and finished the day in the red. Here at home ISM Manufacturing PMI was reported as 55.7, slightly ahead of last months 55.4 and the expected 51.6. Chinese PMI is now at a four month high and expanding. Eurozone PMI is now at the highest levels in over 2 years. All three readings are good but only a small piece of what to expect this week. Tonight, while we are all sleeping, the BOJ will be meeting and preparing a new statement on policy. That announcement will come out in the wee hours of Wednesday morning, just ahead of the ECB meeting. Thursday the ECB will reveal their thoughts on policy and the economy. Intermixed with these important central bank meetings will be all that data I mentioned. And I almost forgot about the G20 meeting, Syria and rising oil prices.


Looking a little further out the economic event that is really keeping the market in check right now is the FOMC and tapering. The next FOMC meeting which I have taken to call the taper meeting is two weeks away. September the 18th at 2PM we can all expect to find out what kind of tapering, or not, we get this month. Looking even further out than that there is yet another debt ceiling deadline approaching, a major election in Germany, impending tax changes in Japan, the sell off in emerging markets, rising interest rates and an upcoming change of leadership at the FOMC. Keeping things in focus though this week is going to be dominated by employment data. Because of the holiday some of the report days are skewed so Thursday will be data heavy with ADP, Challenger and unemployment claims. Friday is Non-Farm Payrolls and U.S. Unemployment Rate.

The Dollar Index

The dollar gained against the basket of world currencies today. The dollar index broke above its consolidation range to the upside with today's move up. Indicators are bullish and on the rise, next resistance is around the 83.00 level. I expect to see some volatility in this index during the week due to the BOJ and ECB meetings. Both have the ability to cause a ripple effect through the currency arena.


The USD/JPY began to break above the triangle pattern I have been following. This move would be in anticipation of the BOJ rate/policy decision and a little bit suspect because of it. Provided the pair remains on the up side of this break out after the release tomorrow I would be bullish on it with a target around 104 yen to the dollar. There may be resistance at the 100 level so waiting for move above that isn't a bad idea either. Momentum is still bearish on the weekly charts but declining, stochastic is bullish but not strong. On the daily charts both indicators are bullish and rising.


The EUR/USD pair fell in today's trading. The pair fell below the 1.3200 support/resistance line. This line has proven itself significant about a dozen times over the last 12 months. This pair has been trading in a wild sideways range during that time with several break throughs, rebounds and bounces from both directions of the 1.3200 level. So far, each time the pair moves across this line it has continued on for several days to two weeks. At the current time the pair is indicated down for the short term but the longer term charts show some support. Data may affect this pair tomorrow but the ECB meeting on Thursday will be the event to watch. It is possible that the ECB could begin their own brand of tapering or not. Either way the economic data plus the ECB decision are going to renew speculation in the euro's value versus the dollar in relation to expected tapering and the FOMC.


The Gold Index

The price of gold climbed by about a full percentage point today. One reason is rising support among republicans for the Presidents strike on Syria. Gold reached just over $1410, shy of the recent high. The Gold Index traded higher by nearly a percent as well. Despite the higher prices in gold the index did not retake the 78.6% Fibonacci level and remains tightly bound by Fibonacci resistance and short term moving average support. The MACD and stochastic indicators are currently bearish but show some support over the short to mid term. The longer term bear market in the Gold Index is over I think but I am not ready to get bullish on it just yet. It's still the early part of the week and there is a whole lot going on in the world that could really affect gold and Gold Index prices.


The Oil Index

The price of oil was boosted today by rising speculation over the Syria crisis. Early this morning news sources reported objects being fired over the Mediterranean. Later we learned that it was only a joint missile test by us and the Israeli's. Regardless of the cause it seems kinda coincidental that we are test firing missiles while the President is trying to get a strike OK'd by Congress. Support for the strike is growing but as of this writing there is no timetable. Getting back to oil, prices climbed by roughly $.075 from Friday prices to reach the $108.50 area. The Oil Index also traded higher but made a bearish candle by the day's end. The index is currently indicated up on the daily charts with rising MACD and stochastic. The index is also bouncing from the short term 30 day EMA in a confirmation of the previous bounce from long term support at 1350. Although indicated higher this index is still facing resistance and also has the added bonus of being affected by the events in Syria. Longer term the index is still running in its bull trend and appears to be bouncing from the 150 day EMA. There is still resistance here as well. Momentum is currently bearish but very weak and weakening, stochastic is bullish and pointing to higher prices.


Story Stocks

The story of today, aside from the economic hurricane approaching us, was M&A. More specifically the A. Three big acquisitions were announced today that had their respective stocks moving. The first was the Verizon purchase of Vodaphone's stake in Verizon Wireless. This one began over the weekend but was still big in the news today. Verizon took on a load of debt to finance the deal that includes cash and stock. The news sent shares of Verizon sharply lower in the early market hours but there were some buyers hungry for the stock at today's low prices. The merger is seen as a good move for Verizon and one that could pay off big before too long.


Vodaphone shares traded lower as well and also found support. This stock tested recently broken resistance with a fairly extreme move today. This stock is indicated higher and has the strength of significantly increased volume to back it up.


Yankee Candle was also snatched up today. The candle company was purchased by Jarden Corporation in a deal worth $1.75 billion. The deal is seen as a way for Jarden to increase it's offering and expand its reach. Shares of Jarden climbed more than 10% in today's trading.


Microsoft announced it's intended purchase of Nokia's handset operation. The deal is estimated at over $7 billion dollars and sent shares of Microsoft down in today's session. Of all the Dow stocks Microsoft was the worst performer. The stock fell more than 4.5% and came close to the four month low.


Shares of Nokia on the other hand gained on news of the sale. Shares of Nokia jumped more than 20% in the early market and remained at the elevated levels through to the close.


The S&P 500

The index appears to be bouncing, still, from the long term trend line. MACD is still bearish on the daily charts but the wave is decreasing at the same time the index is finding support along the trend line. Stochastic is still in extreme oversold condition but also forming a bullish buy signal. The chart also shows that there is still technical resistance ahead that must be addressed. This week is going to be an important one for the markets even if the S&P stays trapped between the trend line and its resistance.


On the longer term chart of weekly prices the index is still in its up trend. Bearish momentum is not very strong and been contained at the trend line for now. Stochastic is trending up and could cross over the upper signal line any time. The only resistance is a zone created by the current and previous all-time high. A break below the long term trend could take the index down to the 1600-1575 region. A break above resistance could take it as high as 1800.


At this time it looks like the index want to move higher it just can't. The problem is the enormous amount of data, central bank action, potential tapering, debt ceiling, Syria, rising oil and rising interest rates. Each of these things is reason to give a trader or investor pause, altogether it is a good reason to sit out on the sidelines. In the end I think it will be the FOMC meeting on September 18th that finally provides the answer we are looking for now. The data will either support tapering or it won't, the FOMC will decide to taper or it won't. Once we get past this hurdle we can return to the business of business for a while.

Until then, remember the trend!

Thomas Hughes


New Option Plays

Software & Sports Apparel

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)
APC, HOG, CNQR, SBUX, ALXN, Z, QIHU, HUM

(bearish ideas)
R, COV, AGU,



NEW DIRECTIONAL CALL PLAYS

NetSuite Inc. - N - close: 100.49 change: +1.06

Stop Loss: 97.85
Target(s): 109.00
Current Option Gain/Loss: Unopened
Time Frame: 4 to 6 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
NetSuite is in the business software industry. The stock has a long-term up trend (see a weekly chart) but upward momentum stalled back in July. Since the mid July peak shares of N have been consolidating sideways inside the $90-100 zone. Now six weeks later it looks like N is finally breaking out past key resistance near the $100 level.

Today's high was $100.91. I am suggesting a trigger to buy calls at $101.05. If triggered our multi-week target is $109.00. I would not be surprised to see N find some short-term resistance around the $105 area.

Trigger @ 101.05

- Suggested Positions -

Buy the Oct $105 call (N1319j105) current ask $2.65

Annotated Chart:

Entry on September -- at $---.--
Average Daily Volume = 294 thousand
Listed on September 03, 2013


Under Armour, Inc. - UA - close: 74.13 change: +1.49

Stop Loss: 72.25
Target(s): 79.50
Current Option Gain/Loss: Unopened
Time Frame: 3 to 6 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
UA makes sports-related apparel and footwear. The stock soared to new all-time highs following its earnings report in late July thanks to management raising their guidance. The rally peaked in early August near $74.50. Since then UA has been consolidating sideways with traders buying the dips. The stock is building a bullish consolidation pattern and poised to breakout higher again.

There is clear resistance near the $74.50 area. More aggressive traders might want to buy calls on a rally past $74.60. However, it's possible that the $75.00 level could act as round-number, psychological resistance. Therefore I am suggesting a trigger to buy calls at $75.25. If triggered our target is $79.50.

Trigger @ 75.25

- Suggested Positions -

Buy the Oct $77.50 call (UA1319j77.5) current ask $1.75

Annotated Chart:

Entry on September -- at $---.--
Average Daily Volume = 1.1 million
Listed on September 03, 2013



In Play Updates and Reviews

Early Gains Fade On Syria Worries

by James Brown

Click here to email James Brown

Editor's Note:

The stock market's Tuesday morning rally faded on Syria worries. Yet traders were starting to buy the dip late Tuesday afternoon.

DO was triggered. MAN was stopped out.


Current Portfolio:


CALL Play Updates

Sturm, Ruger & Co. Inc. - RGR - close: 52.07 change: -0.30

Stop Loss: 49.95
Target(s): 57.50
Current Option Gain/Loss: -27.4%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
09/03/13: It was a down day for RGR. The stock failed near technical support near its 20-dma for the third time in four sessions. Shares underperformed the broader market with a -0.5% decline.

I am not suggesting new positions at this time. We'll wait and see if RGR dips toward its simple 50-dma.

Earlier Comments:
If this rally continues it could spark a short squeeze. The most recent data listed short interest at 30% of the very small 18.8 million share float.

- Suggested Positions -

Long Oct $55 call (RGR1319j55) entry $1.24

08/28/13 trade opened on gap higher at $53.45. Trigger was 52.65

Entry on August 28 at $53.45
Average Daily Volume = 341 thousand
Listed on August 27, 2013


PUT Play Updates

Diamond Offshore Drilling - DO - close: 63.46 change: -0.57

Stop Loss: 66.01
Target(s): 57.50
Current Option Gain/Loss: + 0.0%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
09/03/13: Shares of DO opened higher this morning but the rally attempt failed near its descending 10-dma. The stock reversed to close down -0.89%, underperforming the market. DO's decline today also broke down below support near $64.00 and hit our suggested entry point to buy puts at $63.75.

Earlier Comments:
If triggered our target is the $57.50 level. I would not be surprised to see a temporary bounce near the $60.00 mark.

- Suggested Positions -

Long Oct $60 PUT (DO1319v60) entry $0.85

Entry on September 03 at $63.75
Average Daily Volume = 1.0 million
Listed on August 28, 2013


DaVita HealthCare - DVA - close: 108.59 change: +1.08

Stop Loss: 110.51
Target(s): 105.25
Current Option Gain/Loss: + 18.1%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
09/03/13: DVA gapped open higher this morning. Shares spent most of the day churning sideways inside the $108-109 zone. Traders might want to adjust their stop loss closer to the $110 level or the 10-dma.

Keep in mind that we'll most likely close this trade before next Friday to avoid holding over the stock split.

Earlier Comments:
Our short-term target is $105.25. More aggressive traders could aim lower since the Point & Figure chart for DVA is bearish with a $96 target.

FYI: Investors should note that DVA does have a 2-for-1 split coming up on September 9th.

- Suggested Positions -

Long Sep $110 PUT (DVA1321u110) entry $2.20*

08/29/13 new stop loss @ 110.51
08/27/13 trade opens on gap down at $109.95
*option entry price is an estimate since the option did not trade at the time our play was opened.

Entry on August 27 at $109.95
Average Daily Volume = 833 thousand
Listed on August 26, 2013


eBay Inc. - EBAY - close: 50.32 change: +0.33

Stop Loss: 51.75
Target(s): 46.00
Current Option Gain/Loss: -27.4%
Time Frame: exit PRIOR to September option expiration
New Positions: see below

Comments:
09/03/13: EBAY bounced this morning but it's rebound failed near short-term technical resistance at its 10-dma. The gains faded and shares settled with a +0.6% gain (or about one third of Friday's decline). I would wait for a new drop under $50.00 or under $49.60 before considering new bearish positions.

Earlier Comments:
Our target is $46.00. More aggressive traders may want to aim lower.

NOTE: We are listing the September puts, which expire in less than four weeks. You might want to play the Octobers instead.

- Suggested Positions -

Long Sep $50 PUT (EBAY1321u50) entry $1.35

Entry on August 30 at $49.75
Average Daily Volume = 8.2 million
Listed on August 28, 2013


iShares Russell 2000 ETF - IWM - close: 101.06 change: +0.68

Stop Loss: 103.25
Target(s): 99.00
Current Option Gain/Loss: - 8.7%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
09/03/13: Global markets bounced on Monday and the small cap ETF reacted on Tuesday morning by spiking higher. Yet the rebound stalled and reversed near last Thursday's highs. By the closing bell the IWM had pared its gains to +0.6%.

Keep in mind that we have less than three weeks left on our September puts.

- Suggested Positions -

Long Sep $100 PUT (IWM1321u100) Entry $1.48

08/31/13 new stop loss @ 103.25
08/27/13 adjust exit target to $99.00
08/24/13 new stop loss @ 105.25
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


Polaris Industries - PII - close: 109.86 change: +0.65

Stop Loss: 112.05
Target(s): 101.00
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Comments:
09/03/13: PII's early gains faded. The stock actually hit a new relative low this afternoon but PII bounced at $108.68. Thus our trade is not open yet. The suggested entry point to buy puts is at $108.65.

Earlier Comments:
Upward momentum stalled in August and shares have begun to correct lower. PII tried to find support near $110 but the bounce just failed near $112. Now PII is breaking down to new four-week lows and we suspect shares could see a correction toward round-number, psychological support near $100.

I am suggesting a trigger to buy puts at $108.65. If triggered our target is $101.00.

Trigger @ 108.65

- Suggested Positions -

buy the Oct $105 PUT (PII1319v105) current ask $2.05

Entry on September -- at $---.--
Average Daily Volume = 535 thousand
Listed on August 31, 2013


Red Robin Gourmet Burgers Inc. - RRGB - close: 66.42 change: +1.56

Stop Loss: 66.75
Target(s): 60.25
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Comments:
09/03/13: RRGB is not cooperating. The stock erased Friday's losses (almost exactly) with a strong bounce today. Yet RRGB failed to breakout back above its simple 10-dma. If shares continue to bounce we will likely drop RRGB as a bearish candidate. For the moment, our plan is unchanged.

Earlier Comments:
RRGB's longer-term trend is still higher. We're just trying to capture a correction back toward likely support near $60.00 and its 50-dma.

Friday's low was $64.74. I am suggesting a trigger at $64.65. Our target is $60.25.

Trigger @ 64.65

- Suggested Positions -

Buy the Oct $60 PUT (RRGB1319v60)

Entry on September -- at $---.--
Average Daily Volume = 152 thousand
Listed on August 31, 2013


Sherwin-Williams Co. - SHW - close: 171.08 change: -1.32

Stop Loss: 176.05
Target(s): sell half at 161.00, then exit the rest at $156.00
Current Option Gain/Loss: Sep165p: +45.4% & Oct165p: +12.5%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
09/03/13: SHW displayed some volatility this morning. The stock spiked higher but the rally reversed at resistance near $175.00 and some moving averages. Shares eventually underperformed the broader market with a -0.7% gain. Our new plan was to buy puts at the opening bell today. The small gap higher actually helped our entry point with the put options opening lower.

Earlier Comments:
SHW's long-term up trend is in serious jeopardy. The Point & Figure chart has turned bearish and is forecasting a $136 target.

I am suggesting we plan on exiting half of our position at $161.00. We'll plan on exiting the remain of our position at $156.00.

- Suggested Positions -

Buy the Sep $165 PUT (SHW1321u165) entry $1.10

- or -

Buy the Oct $165 PUT (SHW1319v165) entry $3.20

09/03/13 trade opened this morning (SHW @ 172.92)
08/31/13 entry point strategy change: buy puts now following Friday's intraday reversal.
Adjust the stop loss to $176.05
Adjust the option strike from Sep $160 to 165 put.
Previous plan was an entry trigger at $165.90.

Entry on September 03 at $172.92
Average Daily Volume = 781 thousand
Listed on August 27, 2013


Time Warner Cable - TWC - close: 109.25 change: +1.90

Stop Loss: 110.55
Target(s): 105.00
Current Option Gain/Loss: -48.9%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
09/03/13: TWC and CBS were making headlines today as the two companies came together on a content agreement after more than a month of bickering that produced a blackout for millions of cable subscribers. News of an agreement produced a spike higher on both stocks and TWC was up +2.4% at its best levels of the day. Yet the rebound in TWC failed at resistance near $110.

On a short-term basis today's close above the 10-dma is bullish and more conservative traders may want to abandon ship immediately to cut their losses. We're not suggesting new positions at this time.

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

09/03/13 readers may want to exit early now. News of an agreement with CBS sparked a bounce in TWC.
08/29/13 new stop loss @ 110.55

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: 60.45 change: +0.62

Stop Loss: 55.75
Target(s): 74.50
Current Option Gain/Loss: -23.5%
Time Frame: 4 to 6 months
New Positions: see below

Comments:
09/03/13: CBI bounced with +1.0% gain, which was enough to outperform the major indices. Shares are still consolidating sideways and the range seems to be narrowing, which should suggest a breakout, one way or the other, is coming soon. 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: 51.78 change: +0.74

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:
09/03/13: Global markets bounced on Monday. The VGK gapped open higher this morning in response. Yet gains faded by the closing bell. We are still in a wait and see mode.

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 2014 Mar $55 call (VGK1422L55)

08/24/13 adjust the option strike from 2013 Dec $55 to $2014 Mar $55.

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


CLOSED BEARISH PLAYS

ManpowerGroup Inc. - MAN - close: 66.65 change: +1.80

Stop Loss: 67.05
Target(s): 61.00
Current Option Gain/Loss: -50.0%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
09/03/13: Shares of MAN gapped open higher this morning at $65.82. The rally continued with MAN pushing past short-term resistance near $67.00 and its 20 and 30-dma before paring its gains. The stock still outperformed the major indices with a +2.7% gain today. I didn't see any specific headlines behind today's move. Our stop loss was hit at $67.05.

- Suggested Positions -

Sep $65 PUT (MAN1321u65) entry $1.70 exit $0.85* (-50.0%)

09/03/13 stopped out
*option exit price is an estimate since the option did not trade at the time our play was closed.

chart:

Entry on August 27 at $65.75
Average Daily Volume = 530 thousand
Listed on August 21, 2013