Option Investor
Newsletter

Daily Newsletter, Thursday, 9/5/2013

Table of Contents

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

Market Wrap

Eagerly Awaiting The NFP

by Thomas Hughes

Click here to email Thomas Hughes
Introduction

This morning started off rather quietly. World markets were holding their breath awaiting the results of BOJ and ECB policy meetings. Both the BOJ and the ECB held rates steady, in line with expectations. Asian markets ended the day mixed, European markets finished in the green after getting a lift from U.S. economic data. U.S. indices moved higher today, supported by stronger than expected economic data.


Pre-market action included a plethora of economic releases, many of which were much better than expected. The jobs picture is still not robust but based on today's releases it is at least firmly stable. Along with the ten economic releases scheduled for today there were also retail comp store sales figures. These numbers revealed what we already know about this sector; sales are strong in some places but weak in others. Teen retail remains one of the weakest spots in this sector. The data deluge continued into the open of today's trading. Productivity, Labor costs, ISM Services PMI and Factory Orders all came out after the bell.

Trading turned positive just after the opening and reached an early intra-day peak around 9:45. The S&P traded about 5 points to the upside and held a tight range until falling back near the flat line around mid morning. The rest of the day was dominated by mild trading as the indices hovered just over break even. The S&P moved up and down within the range during the after noon but late day weakness brought it down near the afternoon lows. All eyes are on the NFP report scheduled for release tomorrow morning.

Central Bankers, The Dollar and Gold

The dollar strengthened on the release of ECB and BOJ policy decisions. Both central banks, and the Bank Of England, held rates steady at 0.5%. Signs of stabilization and growth were seen in all three economic centers but that growth remained weak. The Dollar Index climbed 1.69% today, moving up from the short term moving average and the recently broken resistance level. Momentum is on the rise and stochastic is indicating higher prices at this time.

DXY

The BOJ decision was as expected. The important news here is Kuroda's stance on the economy and the upcoming tax hikes. Japan is planning on doubling the sales tax over the next 12 months and there is a lot of speculation over whether or not the Japanese economy can handle it. Kuroda reaffirmed the plan and made comments to the effect that not going through with the hikes would be worse for Japan. He also stated that the BOJ would “do what is necessary” to reach targets set earlier this year. Some economists are predicting that the BOJ will have to ease policy further, maybe after the first of the year, in order to reach its goal of 2% inflation. The BOJ current plans include doubling the yen cash base early 2015. The USD/JPY moved higher on the news, crossing above the 100 level and confirming the bullish break out. This pair is indicated higher with my next target at 102.50 and 105.

USD/JPY

The dollar gained against the euro as well. Comments from Mario Draghi and the ECB have led traders to believe that the current loose policy will remain in effect. This pair is moving down below the 1.3200 level with bearish technicals and indicated lower. I marked on my 12 month chart every time the pair has touched, crossed or been repelled by this level and came up with 15. Each comes with a significant candle that either confirms support/resistance or is a break above/below 1.3200. Based on this analysis my target for the EUR/USD is at the bottom of the 12 month range near 1.2750.

EUR/USD

Gold prices fell heavily today. The economic data is supportive of a strengthening economy and tapering, bullish for the dollar and bearish for gold. Adding to the pressure are the comments from he ECB which were also bullish for the dollar. Gold fell below $1400 early in the week and is now accelerating the decline. Today the price of gold fell by more than $20 to reach a two week low. The Gold Index has been fighting with a Fibonacci level and appears to be loosing. The index has now been below this level for 6 days and is indicated lower at this time. Today's move also brought the index beneath the 30 day EMA. There is a chance that the index could pick up support at this level but I don't see this as a more likely event unless gold prices pick back up.

GOX

The Oil Index

Oil prices ticked up today to trade near the recent high. Better than expected economic data and the growing support for U.S. action in Syria are two possible causes. The Oil Index traded higher today as well, continuing a bounce from the 30 day moving average that was confirmed yesterday. The index is indicated higher with rising bullish momentum and rising stochastic but still faces resistance. Closest resistance is the 1400 level on the technical side and Syria on the news front. 1400 is a long term resistance area that the index may be breaking through.

XOI

Today's Data

Today's data was compounded by the Monday holiday. Challenger and ADP which normally comes out on Wednesday was released today. Challenger reported that planned lay offs increased in August by over 33% from July reaching a 6 month high. This was a mild surprise but off-set by ADP and unemployment claims data. ADP Employment reported an estimated 176,000 new private sector jobs were added in August. This is in line with analysts expectations and down 22K from last months mildly revised 198,000. This data shows that job growth is somewhat stable, 11 out of the past 12 months have seen ADP payrolls increase by over 150,000. Within the report the data shows that job creation is broad based across multiple industries and geographic regions. Small business, which accounts for roughly 50% of GDP and 75% of employment added 71,000 new jobs.


Jobless claims fell across the board. Initial claims dropped by 9,000 from last weeks 1,000 claim upward revision to hit 323,000. This figure matches the recent 5 year low and adds to the recent downward bias to claims. The four week moving average dropped 3,000 to come in at 328,000 in this weeks release. California leads the nation with the largest drop in new claims. New York had the largest gain in claims. Only these three states had a gain or loss larger than 1,000.


Continuing claims fell by 43,000 to 2.951 million. Last weeks figure was revised up by 0.001 million. This is just off of the long term low. This figure has been trending below 3 million for about 18 weeks not counting the spike in July. Total claims for unemployment fell by over 72,000 to reach a new five year low. Together the jobless claims data is starting to look better. Initial and total claims are both trending down to new lows and continuing claims is holding steady below 3 million. At the same time jobs creation, according to ADP, is moderate and holding steady as well. This could lead to a positive surprise in U.S. unemployment numbers tomorrow. The expectation is for a slight rise from last months 7.4% to 7.5% this month.



Productivity and labor cost data was released at the same time as the claims data. ISM Services PMI and Factory Orders were released after the bell. 2nd quarter productivity was revised up to +2.3%, much higher than the expected 1.8% and the previous estimate of 0.9%. Labor costs remained unchanged. This is another positive sign for the economy, workers are working harder and it isn't costing business any more.

Factory orders were negative in August, declining by -2.4%. This was good news in the end though because the expectation was for a decline of 4%. Order in the previous month gained 1.5%. The ISM Services PMI held to the trend in PMI surprises begun last week. The expected 54.5 was blown away by the actual 58.6. Services was one of the best performing sectors in the ADP report.

Comp Store Sales

Comp store sales figures were released today by the 12 retailers still reporting. The general expectation was for a roughly 3% increase in comp sales over the previous month. Most stores were able to come in line or beat the expectation. There is still weakness in some areas of the retail sector including teen and electronics. The back to school season was strong but the deep discounts used to attract shoppers are a cause for concern. Back to school is the second most important shopping season after the holiday's. There is fear that discounting will continue into the fall and have a negative impact on margins. Walgreens and Costco were both able to beat. Walgreens posted 4.8% comp store growth, Costco 4%. The Retail Spyder moved up on the news, bouncing from support but contained by the short term moving average. Bearish momentum is subsiding, about the cross the center line, and stochastic is oversold with a bullish crossover. The index looks like it is moving higher in the near term but faces resistance. A move above the moving average has a target near $83.

XRT

Story Stock

One story of interest today is Green Mountain Coffee Roasters. They announced a new partnership with Campbell's. They are now going to be offering Campbell's Soup K-Cups. This idea is great I think and a natural evolution to the K-cup line. The new cups are meant to be a snack and are used with the Keurig brew system. Each pack makes a cup of soup based on Campbell's popular flavors. This is a way for GMCR to expand their product offering, build on their brand, increase sales while utilizing their current technology and not relying of coffee. Traders of GMCR were not as excited as I am about soup K-cups. The stock traded up just after the open but fell back during the day. Indicators are bullish though and point to higher prices for this stock long term. GMCR may be at peak or consolidation zone in the near term.

GMCR

Shares of Campbell's broke through support and extended recent losses. The stock is oversold but remain so due to excessive bearish momentum. Today's announcement is just one day after Campbell reported full year earnings that were in line with the company's guidance.

Campbell

The S&P 500

The S&P traded in a tight range today, less than 6 points. The better than expected data was not enough to move the market with so much riding on the NFP tomorrow and the FOMC in two weeks. At this point it looks like the data is still showing a growing and expanding economy and that tapering is likely to start in September. It also looks to me like tapering is factored in. We have known about it for months, been scared by it on numerous occasions, it is time for it to happen now so we can move on from it.

Today's trading kept the index contained between the long term trend line and the short term moving average. Short term traders are still fearful even though longer term traders are still supporting the market. Bearish momentum is still subsiding and about to cross over into bullishness. Stochastic is bullish and still at very low levels. Based on my current analysis I see the S&P 500 moving higher into the resistance zone between 1665 and 1685. I do not think it wise to take too strong a stance bullish or bearish though until after the taper meeting in two weeks.

SPX

The Dow is similarly positioned. The blue chip index is trading at the low end of the four month range, just above long term support. The indicators are lining up for an potential move up toward the top end of the range near 15,500. Economic data will likely lead the markets tomorrow and next week but the longer term direction may not be revealed until after the Fed meeting.

Dow

The Transports are also positioned for a possible move upward as well. This index has regained the long term trend line after a brief dip below it. MACD and stochastic are both indicative of support at the current level. Positive economic data may lead this index higher in a retest of the recent high but it will also likely be kept in check until after the Fed Meeting.

Transports

The data is good and point to continued recovery. The bad news is that this also means that Fed Tapering is on tap and that could be bad for the markets (not to mention the rising interest rates, debt ceiling). Currently the indicators and charts look good for a rally across the broad market but this rally faces tough headwinds if it does unfold. The market has put a lot of expectations on the NFP tomorrow. A disappointment here could send the market lower. Aside from the fact that the FOMC is meeting in only two weeks and that tapering may begin there is also technical resistance to consider as well. The long term trend is still up, for now. Data I think will lift the markets but the Fed may be a brick wall they can't break through. We'll find that out real soon.

Until then, remember the trend!

Thomas Hughes


New Option Plays

Specialty Retailer

by James Brown

Click here to email James Brown


NEW DIRECTIONAL CALL PLAYS

Tractor Supply Company - TSCO - close: 124.71 change: +0.99

Stop Loss: 121.75
Target(s): 134.00
Current Option Gain/Loss: Unopened
Time Frame: 3 to 6 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
TSCO is a specialty retailer that focuses on the farm and ranch industry. Their latest earnings report was bullish with TSCO beating Wall Street's estimates on both the top and bottom line. Management then raised their 2013 guidance. The company has also announced a 2-for-1 stock split set for Friday, September 27th.

Technically shares are in a long-term up trend. On a short-term basis the stock is consolidating sideways below round-number resistance at the $125.00 level. A breakout there could signal a move toward $130-135. I am suggesting a trigger to buy calls at $125.25. If triggered our target is $134.00. More conservative traders may want to take profits near $130 instead.

NOTE: The market could be volatile tomorrow as Wall Street reacts to the August jobs report due out Friday morning. We do not want to launch positions if TSCO gaps open higher than $126.00.

Trigger @ 125.25

- Suggested Positions -

Buy the Oct $130 call (TSCO1319j130) current ask $2.00

Annotated Chart:

Weekly Chart:

Entry on September -- at $---.--
Average Daily Volume = 352 thousand
Listed on September 05, 2013



In Play Updates and Reviews

Stocks Continue to Edge Higher

by James Brown

Click here to email James Brown

Editor's Note:

Overall Thursday's session was mostly up with only housing, utilities, and precious metals on the decline.

SBUX and UA were triggered today.
DVA, EBAY, SHW, and TWC were stopped out.
PII and RRGB have been removed.


Current Portfolio:


CALL Play Updates

NetSuite Inc. - N - close: 100.49 change: +1.74

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

Comments:
09/05/13: Traders bought the dip in N this morning near its 10-dma and the stock completely (exactly) reversed yesterday's loss to the penny. If Wall Street chooses to interpret the jobs data as bullish tomorrow then we could see N hit our suggested trigger at $101.05 on Friday morning.

Earlier Comments:
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)

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


Sturm, Ruger & Co. Inc. - RGR - close: 55.01 change: +2.64

Stop Loss: 49.95
Target(s): 57.50
Current Option Gain/Loss: +29.0%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
09/05/13: RGR has been languishing sideways all week. That changed with RGR producing a +5.0% gain. The rally was fueled by stronger than expected earnings from rival Smith & Wesson (SWHC). Management at SWHC also raised their guidance. Meanwhile shares of RGR are testing round-number resistance at the $55.00 mark.

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


Starbucks Corp. - SBUX - close: 72.05 change: -0.09

Stop Loss: 69.95
Target(s): 78.00
Current Option Gain/Loss: Oct75c: -15.2% & 2014Jan75c: - 9.8%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
09/05/13: SBUX rallied this morning thanks to some bullish analyst comments. The stock opened at $72.25 and rushed to $72.76 before paring its gains. The fact that SBUX closed negative on the session is a little bit disappointing. Our suggested entry point at $72.35 was hit this morning but traders may want to wait for a new rise past $72.50 before initiating positions given the afternoon pullback today.

Our target is $78.00. I do expect the recent high near $74.00 to offer some short-term resistance.

- Suggested Positions -

Long Oct $75 call (SBUX1319j75) entry $1.18

- or -

Long 2014 Jan $75 call (SBUX1418a75) entry $3.25

Entry on September 05 at $72.35
Average Daily Volume = 3.0 million
Listed on September 04, 2013


Under Armour, Inc. - UA - close: 76.89 change: +2.10

Stop Loss: 72.25
Target(s): 79.50
Current Option Gain/Loss: + 22.2%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
09/05/13: UA outperformed the market today with a +2.8% gain. I couldn't find any specific headline behind today's show of relative strength. Although the start of the NFL season tonight probably does not hurt UA. Today's breakout past the $75.00 level is bullish and UA hit our suggested entry point at $75.25.

- Suggested Positions -

Long Oct $77.50 call (UA1319j77.5) entry $2.25

Entry on September 05 at $75.25
Average Daily Volume = 1.1 million
Listed on September 03, 2013


PUT Play Updates

Diamond Offshore Drilling - DO - close: 63.41 change: -0.05

Stop Loss: 66.01
Target(s): 57.50
Current Option Gain/Loss: -20.0%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
09/05/13: Crude oil and energy stocks bounced today. DO added +0.77% but remains below short-term resistance at its 10-dma. Nimble traders could use a failed rally near the $64.50-65.00 zone as a new entry point.

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


iShares Russell 2000 ETF - IWM - close: 102.11 change: +0.16

Stop Loss: 103.25
Target(s): 99.00
Current Option Gain/Loss: -41.8%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
09/05/13: The small cap IWM briefly traded to a new six-day high and above its simple 50-dma before paring its gains. We are running out of time on this trade with just over two weeks left before our September options expire.

- 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



Longer-Term Play Updates



Chicago Bridge & Iron - CBI - close: 59.71 change: -0.20

Stop Loss: 55.75
Target(s): 74.50
Current Option Gain/Loss: -35.2%
Time Frame: 4 to 6 months
New Positions: see below

Comments:
09/05/13: It was another quiet day for shares of CBI. 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: 52.04 change: -0.03

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:
09/05/13: The VGK also traded inside a narrow range today suggesting investor indecision.

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

DaVita HealthCare - DVA - close: 111.55 change: +2.11

Stop Loss: 110.51
Target(s): 105.25
Current Option Gain/Loss: - 40.9%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
09/05/13: I warned readers yesterday that our DVA play was in trouble. This morning DVA shot higher at the open, rallied past its 10-dma and the $110 level and outperformed the market with a +1.9% gain. Our stop was hit this morning at $110.51. 1.45 a 10.35

- Suggested Positions -

Sep $110 PUT (DVA1321u110) entry $2.20* exit $1.30* (-40.9%)

09/05/13 stopped out
09/04/13 the action today is troubling. Readers may want to lower their stop or exit early
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.

chart:

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


eBay Inc. - EBAY - close: 51.95 change: +0.50

Stop Loss: 51.75
Target(s): 46.00
Current Option Gain/Loss: -71.8%
Time Frame: exit PRIOR to September option expiration
New Positions: see below

Comments:
09/05/13: EBAY continued to bounce as well and shares rallied another 50 cents and hit our stop loss along the way.

- Suggested Positions -

Sep $50 PUT (EBAY1321u50) entry $1.35 exit $0.38 (-71.8%)

09/05/13 stopped out
09/04/13 today's move is a warning signal for the bears. traders may want to exit bearish positions immediately

chart:

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


Polaris Industries - PII - close: 112.24 change: +1.12

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

Comments:
09/05/13: We are removing PII as a potential candidate. The stock has bounced three days in a row. Lack of follow through on the recent breakdown does not bode well for the bears. Our trade did not open.

Trade did not open.

09/05/13 removed from the newsletter. trigger was 108.65.

chart:

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


Red Robin Gourmet Burgers Inc. - RRGB - close: 67.52 change: +0.98

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

Comments:
09/05/13: Our RRGB play has not opened and tonight we are removing the stock as a potential bearish candidate. Shares found support near $65.00 and the stock is starting to look like a bullish candidate with today's bounce above its 10-dma.

Trade did not open.

09/05/13 removed from the newsletter. trigger was 64.65

chart:

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


Sherwin-Williams Co. - SHW - close: 174.36 change: +2.01

Stop Loss: 176.05
Target(s): sell half at 161.00, then exit the rest at $156.00
Current Option Gain/Loss: Sep165p: -36.3% & Oct165p: -23.4%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
09/05/13: Shares of SHW were upgraded this morning and that news produced a sharp spike higher. SHW rallied past its 50-dma on an intraday basis and hit $176.16 before reversing lower again. While today's move looks like a potential failed rally at technical resistance we did see SHW hit our stop loss at $176.05.

- Suggested Positions -

Sep $165 PUT (SHW1321u165) entry $1.10 exit $0.70 (-36.3%)

- or -

Oct $165 PUT (SHW1319v165) entry $3.20 exit $2.45 (-23.4%)

09/05/13 stopped out
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.

chart:

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


Time Warner Cable - TWC - close: 108.90 change: -1.01

Stop Loss: 110.55
Target(s): 105.00
Current Option Gain/Loss: -65.9%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
09/05/13: Moves like the one in shares of TWC today can definitely make you frustrated as a trader. The stock produced a brief, intraday spike higher this morning past resistance near $110 and its 20-dma. The stock hit $110.56 and then immediately reversed. Shares eventually underperformed the market to close down -0.9% near its lows for the session. It's probably no coincidence that our stop loss was at $110.55.

Earlier Comments:
We do want to keep our position size small.

- Suggested Positions -

Sep $105 PUT (TWC1321u105) entry $2.35 exit $0.80 (-65.9%)

09/05/13 stopped out
09/04/13 I am repeating my warning that readers may want to exit now.
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

chart:

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