Option Investor
Newsletter

Daily Newsletter, Thursday, 9/12/2013

Table of Contents

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

Market Wrap

Confusing Data Points To Taper

by Thomas Hughes

Click here to email Thomas Hughes
Introduction

The international scene was fairly quiet today. There was not much of real interest to me in the news from Asia and Europe beside the typical business news. Asian indices were mixed, fear of the taper still on the minds of traders. In Europe stocks traded to the downside but closed off of the daily lows. Weaker than expected industrial production data was the cause. Here at home trading was little affected by the international action. Eyes are on the FOMC meeting next week and data scheduled for release today. Jobless claims were much better than expected but come with a grain of salt. Two states, “one large and one small”, did report complete data due to computer systems updates.


Futures trading was flat ahead of the release of jobless data. If not for the caveat this figure would have been very bullish in my opinion. As it is, the market did not know quite how to take it. We need to expect revisions to the data but just how much? The two states in question reported some of their data, just not all of it. After the release futures trading remained flat going into the open at which time trading was basically flat throughout the morning. The S&P and other major indexes traded in a very tight range going into the noon hour. The remainder of the day saw the indices drift sideways through the afternoon.

The Data

As I said, initial claims for unemployment fell to hit new lows. Claims dropped by 31,000 to hit 292,000. This is the lowest level of first time claims since 2006. Last weeks figures were unrevised. The four week moving average dropped by -7,500 to 321,000. Of the states that did report full figures CA led the way with a drop of nearly -5,000 followed by NV with -2125. Only one state had a gain in claims more than 1,000, Oregon with a reported 1087. analysts had been expecting a small gain in claims in the range of 7,000-8,000. It is possible the data will still show a drop in claims. Initial claims had been falling in recent weeks reaching a new low just last week. The question is just how much of a revision are we going to get? Based on the reports we can certainly expect the number to go up. The problem with the data centers around a computer upgrade which prevented the data from being entered. Some of the data was entered, just not all of it. The rub is that we have to wait until next week, after the FOMC meeting, to find out.


Continuing and total claims also both fell by huge margins in this weeks data. It is unclear how the computer issue affects these numbers though since they are both lagging the initial claims by at least a week. Total claims is unrevised and is based on data recorded in previous weeks. Continuing claims fell by -73,000 from last weeks data which was revised lower. This week continuing claims reached a new five year low, echoing the decline in initial claims over the previous three weeks. Total claims also fell to a new low. Total claims fell by -122,971 to 4.272 million.



Other data released, import/export prices, was not faulty so far as I know. Import prices declined by -0.2%, export prices by -0.1%. Tomorrow be on the look out for Retail Sales, PPI, Michigan Sentiment and Business Inventories. Next week begins this months round of housing data, the Leading Indicators and of course, the FOMC meeting. The Fed is scheduled to announce their policy decisions (taper no taper) Wednesday at 2:00 PM.

Oil And The Oil Index

Oil traded back to the upside today. Oil prices are still being impacted by the Syria issue but that fear is subsiding. Unrest in other parts of the world such as Libya and Egypt are also helping to keep oil prices higher. Today's EIA release of Natural Gas inventories was bullish for that aspect of the sector as well. Infection totaled 65BCF, less than the expected range of 68-74 BCF. The sustained higher oil prices has been helping the Oil Index which has now broken above the first resistance line. The index is still indicated up but not very strongly. The Fed and tapering is still providing long term resistance, without a break above the second resistance line the short term outlook is range bound. Even without the Fed there is still a risk premium in the oil markets due to Syria that could evaporate very quickly.

Oil Index

Gold And The Gold Index

The declining chances of a U.S. strike on Syria is the major cause for today's decline in Gold, at least according to the headlines. Today's unemployment data also helped to pressure gold prices. Even with the caveat traders took the data as a sign that tapering would start next week. So far this week gold has fallen more than $60, or 4.5%, and looks like it may hit $1300 soon. The Gold Index traded lower as well but not as sharply. The index is indicated down, but not strongly. The $100 level could emerge as support but that may depend on where gold prices go. The Fed meeting will likely have a big impact on gold prices and the Gold Index. If taper yes then I see a stronger dollar and weaker gold, if taper no then weaker dollar and stronger gold.

Gold Index

The Dollar

The dollar fell today versus the yen. The USD/JPY pair has been fighting with the 100 resistance level over the last week and has so far not been able to hold it's ground. The pair currently has support at the short term moving average, which is coincident with the top of the triangle range breached last week. Indicators are bullish but may be indicating a near term top or at least resistance. This resistance is likely related to the FOMC and tapering, which of course we will find out about next week. The BOJ is still committed to printing more yen and tapering is coming, even if not next week, so I am still bullish longer term on this pair.

USD/JPY

The dollar held it's ground versus the euro today. The pair is now trading under a Fibonacci line and above the short term moving average. The move back above 1.3200 was a surprise but perhaps should have been expected. Anytime something looks like a sure thing in the market it's usually a sure thing that the opposite will happen. This pair could experience more volatility going into next week and certainly after the FOMC meeting.

EUR/USD

Story Stocks

The big story in stocks today focused on earnings. Only about 2 dozen companies reported when I looked at the list I was reminded that Adobe and Oracle report next week. Even though Alcoa, which reports in about four weeks, is the “official” start of earnings season I view Oracle as the herald of the approaching season. Of the companies reporting today Lululemon was the one at the top of the list. LULU was able to maintain earnings versus the year ago period but revenues fell. Further, LULU lowered full year guidance to just below the previously expected range of $1.97-$2.00. Shares of the stock fell more than 5% in today's trading.

Lululemon

Moving on to next week Oracle is scheduled to report earnings on Wednesday. The expectation is for quarterly earnings to fall more than 50% on a sequential basis. The stock has been trading up over the last few months but is still down on a YTD and trading under resistance. The previous two earnings reports sparked huge down gaps in trading each worth about 5-6%.

Oracle

Oracle competitor Adobe reports the day before on Tuesday. Adobe is expected to report higher earnings on a sequential basis but lower on a year-over-year basis. Expectations are for earnings near $0.34 per share, versus last year's $0.55. The stock is traded lower today but has been moving up recently. Indicators are bullish and point to higher prices in the near future.

Adobe

The Indices

Trading was subdued today. Without much in the news, wishy washy data and the Fed hanging over everything it is no wonder. The SPX hung around flat line for much of the morning before moving down to the daily low around lunchtime. During the afternoon the index moved up off of the lows but remained in the red. At the current time momentum is still on the rise but that could change soon. Stochastic is overbought near term but still has plenty of room to move higher in the short and long terms. Today's trading range hovered the resistance level of 1687-88. This level is coincident with the intra-day all time high set in late May this year. For now, the trend is still up and the index appears to be moving higher. However, the FOMC is still ahead of us and could alter the course of the market. I remain bullish on the S&P but with caution. Next resistance is the current all time high, a break above here would be bullish longer term.

SPX

The Dow Industrials traded around the flat line today as well. This index appears to be taking a breather after forming Three White Soldiers over the first three days of this week. The indicators are bullish here as well, but likewise, there is still resistance ahead in the form of technical levels and the FOMC. The three white soldiers would be a very bullish sign if not for the Fed, it is possible theindex is merely moving up to the top of the resistance range ahead of a sell-off. A break above 15,500 would confirm the bullish stance here.

Dow

The techs are still leading the general markets. While the S&P and the Dow both remain below their all-time high resistance the Nasdaq Composite is making new highs. Today the index traded in similar fashion to its cousins but managed to put a positive spin on it. Momentum is still weak here but is rising, stochastic is pointing up with room to move higher.

NASDAQ

The Transports suffered today's largest losses. This index is falling back from resistance but is indicated higher. Stochastic is indicating a solid support base and the volume spike associated with this weeks moving average bounce confirms it. However, to take a bullish stance the index needs to break above the current resistance level. The impending Fed meeting may keep the index in check.

Transports

It looks to me like the markets want to move higher. This may mean that the tapering has been factored in like I have suggested in previous recaps. However, the Fed is still providing some resistance to the markets, resistance exacerbated by the Syria issue. For now, the major indices are still trending up but caution is due. Volumes are picking up but still subdued. Traders and investors may be waiting to see what happens next week.

Until then, remember the trend!

Thomas Hughes


New Option Plays

Software Strength

by James Brown

Click here to email James Brown


NEW DIRECTIONAL CALL PLAYS

Cornerstone OnDemand, Inc. - CSOD - close: 54.60 change: +0.91

Stop Loss: 52.25
Target(s): 59.50
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
CSOD is in the software industry. According to CSOD they are a global leader of cloud-based talent management software solutions with over 12 million users in 190 countries.

The stock has been a consistent performer for the bulls with shares sort of stair-stepping higher. CSOD currently seems to be breaking out of a four-week sideways consolidation above the $50 level. Today's session saw CSOD display relative strength and ignore the market's widespread decline.

The $55.00 level looks like overhead resistance. I am suggesting a trigger to buy calls at $55.25. If triggered our target is $59.50.

Trigger @ 55.25

- Suggested Positions -

Buy the Oct $55 call (CSOD1319j55) current ask $2.25

Annotated Chart:

Weekly Chart:

Entry on September -- at $---.--
Average Daily Volume = 367 thousand
Listed on September 12, 2013



In Play Updates and Reviews

S&P 500 Snaps Seven-Day Win Streak

by James Brown

Click here to email James Brown

Editor's Note:

The S&P 500 posted its first decline for the month of September as stocks deliver a relatively mild but widespread pullback.

FLR and NOC were triggered.


Current Portfolio:


CALL Play Updates

Alnylam Pharmaceuticals - ALNY - close: 55.52 change: -0.44

Stop Loss: 53.20
Target(s): sell half at $60.0 and half at $64.00
Current Option Gain/Loss: -26.5%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
09/12/13: ALNY tried to rally this morning but ran out of steam before it hit $58.00. Shares gave back all of its intraday gains to settle lower -0.7%. ALNY should still see short-term support at the 10-dma near $54.80-55.00 but a breakdown under the 10-dma could spell trouble. More conservative traders may want to raise their stop loss.

Earlier Comments:
We want to keep our position size small to limit our risk. I am suggesting we sell half of our position at $60.00 and then we'll aim for $64.00 with the other half.

*small positions* - Suggested Positions -

Long Oct $60 call (ALNY1319j60) entry $2.45

Entry on September 09 at $56.50
Average Daily Volume = 464 thousand
Listed on September 07, 2013


Anadarko Petroleum - APC - close: 95.53 change: +0.86

Stop Loss: 91.65
Target(s): 99.50
Current Option Gain/Loss: +13.1%
Time Frame: 3 to 5 weeks
New Positions: see below

Comments:
09/12/13: APC displayed relative strength (+0.9%) and ignored the market's widespread decline. Traders may want to start adjusting their stop loss higher.

- Suggested Positions -

Long Oct $95 call (APC1319j95) entry $3.05*

*option entry price is an estimate since the option did not trade at the time our play was opened.

Entry on September 11 at $94.25
Average Daily Volume = 2.55 million
Listed on September 09, 2013


Fluor Corp. - FLR - close: 67.72 change: +0.57

Stop Loss: 64.75
Target(s): 74.50
Current Option Gain/Loss: Oct70c: - 4.7% & 2014jan70c: - 3.1%
Time Frame: 4 to 8 weeks
New Positions: see below

Comments:
09/12/13: FLR also outperformed the market's major indices and posted a +0.8% gain. Today's move marks a bullish breakout past major resistance near the $67.00 level. Our trigger to buy calls was hit at $67.65.

Our target is $74.50. You may want to aim higher. The Point & Figure chart for FLR is bullish with an $82 target.

- Suggested Positions -

Long Oct $70 call (FLR1319j70) entry $1.05

- or -

Long 2014 Jan $70 call (FLR1418a70) entry $3.20

Entry on September 12 at $67.65
Average Daily Volume = 1.1 million
Listed on September 11, 2013


Hanesbrand Inc. - HBI - close: 61.34 change: -1.66

Stop Loss: 59.90
Target(s): 68.50
Current Option Gain/Loss: Unopened
Time Frame: 3 to 6 weeks
New Positions: Yes, see below

Comments:
09/12/13: Thursday proved to be a relatively quiet day for shares of HBI. The stock churned sideways in the $61.00-61.75 zone and closed almost unchanged. Lack of follow through on yesterday's drop is encouraging. We're not giving up yet but we're still on the sidelines.

I am suggesting a trigger to buy calls at $63.25. If triggered our target is $68.50. I do expect to see some temporary resistance at the prior high near $65.00.

Trigger @ 63.25

- Suggested Positions -

buy the Oct $65 call (HBI1319j65)

Entry on September -- at $---.--
Average Daily Volume = 612 thousand
Listed on September 10, 2013


Lennox Intl. - LII - close: 72.76 change: -0.66

Stop Loss: 69.65
Target(s): 74.90
Current Option Gain/Loss: +16.1%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
09/12/13: Uh-oh! The spike higher this morning and then reversal back into negative territory feels a little like a short-term top. Today's move erased yesterday's gains. I would not be surprised to see a dip back into the $72-71 zone. I am not suggesting new positions at this time.

Our short-term target is $74.90. More aggressive traders could aim higher.

- Suggested Positions -

Long Oct $70 call (LII1319j70) entry $3.10*

09/11/13 new stop loss @ 69.65
*option entry price is an estimate since the option did not trade at the time our play was opened.

Entry on September 09 at $71.00
Average Daily Volume = 386 thousand
Listed on September 07, 2013


NetSuite Inc. - N - close: 106.34 change: -0.51

Stop Loss: 101.45
Target(s): 109.00
Current Option Gain/Loss: +67.2%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
09/12/13: Shares of N tagged a new all-time high at $107.97 this morning before finally succumbing to the market's widespread dip today. N is arguably short-term overbought here and profit taking could be quick and painful. More conservative traders may want to exit immediately to lock in gains. The bid on our call is at $4.60.

Earlier Comments:
Our multi-week target is $109.00.

- Suggested Positions -

Long Oct $105 call (N1319j105) entry $2.75*

09/12/13 readers may want to take profits now
09/11/13 new stop loss @ 101.45
09/10/13 new stop loss @ 99.45
*option entry price is an estimate since the option did not trade at the time our play was opened.

Entry on September 09 at $101.05
Average Daily Volume = 294 thousand
Listed on September 03, 2013


Northrop Gruman - NOC - close: 95.74 change: +0.63

Stop Loss: 92.75
Target(s): 99.75
Current Option Gain/Loss: Oct97.5c: + 4.5% & 2014j100c: - 5.0%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
09/12/13: NOC shot higher this morning and briefly traded above the $96.00 level before paring its gains. NOC managed to shrug off the market's widespread decline on Thursday. Our trigger to buy calls was hit at $95.25 early this morning.

Earlier Comments:
You could certainly argue that the August highs in the $96.25-96.50 zone are overhead resistance, odds are good that NOC will make a run at the $100 level.

FYI: The Point & Figure chart for NOC is bullish with a long-term $160 target.

- Suggested Positions -

Long Oct $97.50 call (NOC1319j97.5) entry $1.10

- or -

Long 2014 Jan $100 call (NOC1418a100) entry $2.16

Entry on September 12 at $95.25
Average Daily Volume = 1.2 million
Listed on September 11, 2013


Starbucks Corp. - SBUX - close: 75.67 change: +0.28

Stop Loss: 69.95
Target(s): 78.00
Current Option Gain/Loss: Oct75c: +94.9% & 2014Jan75c: +33.8%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
09/12/13: SBUX also managed to ignore the market's decline today and post a +0.37% gain. This is yet another new all-time high. SBUX is arguably short-term overbought here and more conservative traders may want to take profits now. Our October $75 call has almost doubled (+94.9%). I am not suggesting new positions at this time.

- Suggested Positions -

Long Oct $75 call (SBUX1319j75) entry $1.18

- or -

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

09/11/13 SBUX at new highs. Cautious traders may want to lock in some gains.

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


Tractor Supply Company - TSCO - close: 130.68 change: -0.20

Stop Loss: 124.75
Target(s): 134.00
Current Option Gain/Loss: +77.2%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
09/12/13: Shares of TSCO weathered the market's decline today very well. The stock closed virtually unchanged after spending the entire day drifting sideways.

Readers may want to seriously consider just taking profits now. I am not suggesting new positions.

Earlier Comments:
Our target is $134.00. More conservative traders may want to take profits near $130 instead.

NOTE: The company has announced a 2-for-1 stock split set for Friday, September 27th.

- Suggested Positions -

Long Oct $130 call (TSCO1319j130) entry $2.20*

09/12/13 traders may want to take profits now. Ask @ $3.90 (+77.2%)
09/11/13 new stop loss @ 124.75
*option entry price is an estimate since the option did not trade at the time our play was opened.

Entry on September 09 at $125.25
Average Daily Volume = 352 thousand
Listed on September 05, 2013


UnitedHealth Group - UNH - close: 74.74 change: -0.44

Stop Loss: 73.40
Target(s): 79.75
Current Option Gain/Loss: -10.8%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
09/12/13: UNH gapped open higher this morning at $75.32 but the rally didn't last and shares faded to a -0.5% decline. Our suggested trigger to buy calls was $75.25 so the gap higher opened our play. Nimble traders may want to try and time an entry on a dip near $74.00 if the slide continues. Otherwise readers may want to wait for a new high before initiating positions.

- Suggested Positions -

Long Oct $75 call (UNH1319j75) entry $2.30

09/12/13 trade opened on gap higher at $75.32. Trigger was $75.25

Entry on September 12 at $ 75.32
Average Daily Volume = 3.3 million
Listed on September 10, 2013


PUT Play Updates

Bed Bath & Beyond Inc. - BBBY - close: 72.10 change: -0.19

Stop Loss: 73.55
Target(s): 66.50
Current Option Gain/Loss: Unopened
Time Frame: exit PRIOR to earnings on Sept. 25th
New Positions: Yes, see below

Comments:
09/12/13: Hmm... today's performance in BBBY is casting some doubt on our bearish play. The market produced a widespread decline and yet BBBY barely moved at all. That's not what we want to see in our bearish candidates. We're not giving up on BBBY yet but traders may want to limit their position size.

Earlier Comments:
I am suggesting a trigger to buy puts at $71.45. If triggered our target is $66.50, just above the simple 200-dma. Please note that I would not be surprised to see a short-term bounce from the $70.00 level and the $72.00 area, once broken as support, should be new resistance. FYI: BBBY is expected to report earnings on September 25th. We will most likely exit prior to the earnings report to avoid any surprises.

Trigger @ 71.45

- Suggested Positions -

buy the Oct $70 PUT (BBBY1319v70)

Entry on September -- at $---.--
Average Daily Volume = 1.45 million
Listed on September 10, 2013


Diamond Offshore Drilling - DO - close: 64.88 change: -0.41

Stop Loss: 66.01
Target(s): 57.50
Current Option Gain/Loss: -52.9%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
09/12/13: Traders bought the morning dip in DO for the third day in a row but the intraday bounce faded. Shares lost -0.6%, which underperformed the major indices. I remain cautious here. No new positions at this time. Broken resistance at the 10-dma might prove to be new short-term support (currently near $64.40).

Earlier Comments:
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

09/11/13 DO is not cooperating and traders may want to exit early now

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



Longer-Term Play Updates



Chicago Bridge & Iron - CBI - close: 64.34 change: +0.19

Stop Loss: 57.65
Target(s): 74.50
Current Option Gain/Loss: +33.3%
Time Frame: 4 to 6 months
New Positions: see below

Comments:
09/12/13: CBI is still showing relative strength and managed to eke out another gain. Yet it's no surprise to see the rally stall near its May 2013 highs under the $65.00 level. I would expect CBI to see a little bit of profit taking here. The $62 area should be new support.

*Small Positions* - Suggested Positions -

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

09/11/13 new stop loss @ 57.65
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: 53.71 change: -0.24

Stop Loss: 50.95
Target(s): 58.50
Current Option Gain/Loss: - 2.7%
Time Frame: exit PRIOR to 2014 March option expiration
New Positions: see below

Comments:
09/12/13: After a strong two-week bounce the rally in the VGK stalled on Thursday. Investors might want to wait for a dip before initiating new positions. Look for short-term support near $53.00.

Earlier Comments:
We are taking a multi-month time frame with this trade. 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.

- Suggested Positions -

Long 2014 Mar $55 call (VGK1422L55) entry $1.80*

09/11/13 trade opens. VGK @ 53.60
*option entry @ 1.80 is an estimate. Ask closed at $1.75 yesterday
09/10/13 entry trigger met. open positions tomorrow.
09/10/13 new stop loss @ 50.95
08/24/13 adjust the option strike from 2013 Dec $55 to $2014 Mar $55.

Entry on September 11 at $---.--
Average Daily Volume = 3.0 million
Listed on August 10, 2013