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Newsletter

Daily Newsletter, Tuesday, 10/15/2013

Table of Contents

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

Market Wrap

Stocks Stall Awaiting Debt Deal

by Thomas Hughes

Click here to email Thomas Hughes
Introduction

Asian and European indices finished their trading day in the green. Optimism of a U.S. debt deal helped lift these sectors as global markets await the outcome. Tomorrow they may not be so optimistic. There was little other news of interest from around the world. In China new data suggests that inflation is rising faster than anticipated. Consumer inflation rose to 3.1%,the highest level in 7 months. This caused some speculation that the Chinese central bank will have to curb some of its stimulus policies but for now economist do not see it as a threat to the Chinese economy. In Europe headlines were dominated by local issues including the new budgets from ailing countries Italy, Portugal and Ireland. The upcoming release of the new Italian budget is expected to cause some trouble for the nation.


The early morning hours saw futures trading to the upside, if only by a point or two. Hope of a debt deal solution were high and carried into the morning although a new House proposal was met with disdain by the Senate. Today was also rather full of business news and even a little economic data. Earnings season is now in full swing. There were not an excessive number of reports today but there were a few high profile names on the list. This week is dominated by the banking sector but that does not mean other sectors are not reporting as well. The combination of hope and news had the U.S. indices hugging the flat line going into the open of today's session.

Today's political wrangling resulted in a market moving on every twist in the story. At the open the S&P 500 fell about 8 points before hitting an early morning low. After that renewed hopes had the markets moving back up before a mid-morning scare sent them back down. Just before lunch time the S&P poked its head into positive territory and then quickly fell back to trade around -4 for the early part of the afternoon. Early support for the S&P 500 kicked in just above 1,700 and then again around 1,702. Afternoon trading saw the index hover just above 1,705 before even more political BS hit the media. The Senate ceased all their debate while the House was working out it's plan. The Senate made this announcement only a short while after Senator Reid told us the House plan would be rejected. This development caused the markets to sink to new lows. The S&P sank as low as -14, the Dow -140, before bouncing back higher again and then falling back down toward the daily lows just before the close. After the bell Fitch put a down grade on U.S. credit watch to negative, maintaining the AAA rating for now. The futures trade dropped close to a full percent on the news indicating tomorrow's open lower at this time.

SPX one day

Today's Data

Data released today included the Empire State index of business conditions. The index was expected to fall slightly from last month's 6.29 but not as much as the actual figure. This month's reading of 1.52 is still expansionary but reveals that conditions are only slightly changed from last month. Within the report business optimism levels are still strong. This month's rise is the smallest gain in NY regional business activity in the last 5 months. Tomorrow's calendar includes the Fed's Beige Book, mortgage index, CPI, TIC flows and a housing index. From what I can tell the Bureau of Labor Statistics web site is being updated and I think the rest of the data is coming from the Fed itself or the private sector there should be no effect from the shut down. Regardless, the data we have been getting has not received much attention in light of the budget battle.

Gold Trades Lower

Gold prices traded much lower this morning on the early optimism. Prices moved as low as -20, touching the $1250 level. Later the renewed lack of progress saw prices move up to just above yesterday's closing price. Gold prices are trading at 3 month lows and very close to touching the long term low below $1200. The Gold Index actually trade to the upside today. The index is still trending below the lower boundary of the pennant formation but not strongly. The index is currently making a couple of spinning tops with indicators supporting the indecision. The MACD is bearish but divergent from the two month down trend. The divergence is a potential sign of an impending rally but that does not make one a guarantee. The stochastic is also extremely oversold and currently displaying a bullish crossover. The two indicators together suggest that the Gold Index is ready and/or about to make a move up. However, with the low low prices of gold it is hard to see a reason for this. The indicators could actually be showing a complete lack of interest in gold stocks. Without a catalyst to spark a rally I can easily see the Gold Index move lower simply because there are no buyers. Longer term the index is still in a downtrend and breaking out of a triangle/pennant formation to the downside after a near five month consolidation, during which time the price of the underlying commodity has not improved.

The Gold Index

The gold companies like Barrick report towards the end of the month. Barrick on October 31st, spooky. Barrick is expected to report earnings of $0.49 per share, more than 25% lower than last quarter. Earnings will obviously be affected by gold prices but will also be impacted by divestiture of mines in Australia and other moves made during the quarter. ABX stock has been trading in much the same way as the Gold Index. It is trading out a longer term consolidation, although it has not broken out yet. Indicators are currently bearish and beginning to gain momentum, stochastic is now crossing below the lower signal line indicating weakness in the stock.

Barrick Gold

Earnings Rundown

Domino's Pizza reported a strong quarter of growth but failed to meet expectations for earnings. The company was expected to report adjusted earnings of $0.52 per share but missed that target by one cent. The company reported strong comp store growth, revenue growth, earnings growth and new store growth but the stock still lost over 4% in today's trading. Shares of DPZ have been trending up strongly all year and are now about 5% off the all time highs. It looks like $65 could be emerging as support, longer term MACD analysis suggests a retest of the all-time highs is likely. More stores and strong comp sales could equal continued revenue for this company into the next few quarters.

Domino's

Citigroup reported an earnings miss today as well. The banking giant lost more than 1.5% in early pre market trading but managed to regain that loss before the open. The bank reported earnings that were 2 cents shy of estimates on revenue that also fell short of expectations. At the open shares popped up slightly to the bottom of the window opened last week before falling back into negative territory before the close. Today's action also brought the stock down below the 30 day moving average. Support exists at $47.50, current resistance is at $50. Indicators remain bullish at this time but are very weak.

Citigroup

Johnson and Johnson was an early market leader. The consumer products company reported adjusted earnings of $1.36, just above estimates. Revenue increased by about a half billion over the same quarter last year and was able to increase guidance to the upper end of the previously stated range. The stock surged higher at the open by around 3%, crossing above resistance around the $90 level. After the initial surge sellers drove prices back below resistance, forming a possible shooting star doji. Indicators are currently bullish but could be overbought in the near term. The $90 to $91 level will be important to watch moving forward for signs of strength or weakness.

Johnson & Johnson

Coca Cola reported an earnings that also beat expectations, if only by a penny. The company reported eps of $0.54 per share, up on a comparable basis from last year. The company reported growth in the range of 2% in most it's global segments including the emerging markets although the report cited volatility in that sector. Shares of KO gapped open today but quickly fell to selling pressure. The stock has been in a down trend since late May and today's move is in line with that trend. Divergences in MACD suggest that a bottom is approaching but there is no other sign of one yet. The 12 month low is just under $36, about $2 lower than the current prices.

Coca Cola

After the bell today Intel and Yahoo both reported better than expected earnings. Shares of both companies traded higher in the aftermarket hours. Yahoo shares failed to hold the gains after investors had the time to dig into the guidance.

The Indices

It will be impossible to tell which way the market will move until the debt ceiling political break down gets resolved. Today's action makes it clear that the market is hanging on every development and is ready to go whichever way the political wind will blow. We have less than 2 days left before the debt ceiling is reached so hopefully that resolution will come tomorrow. Until then, or we default, whichever comes first, lets take a look at the longer term analysis of the the major indices, starting with the SPX charts of weekly prices. The SPX is still trending higher but is well above the primary, super long term, trend line. The primary trend line is about 300 points (17.6%) lower than the current level of the market and a potential target for a full market correction. Both MACD and stochastic are presenting long term divergences from price action that could be heralding such a correction. The index is also currently above the secondary, long term, trend line and long term support as well. It is possible the divergences mentioned before are predicting a test of this support and the index will keep moving up. Last weeks candle is suggestive of a test, the long lower wick shows that prices fell into the support zone and were propelled upward from it. While the index is able to maintain support and the long term trend I will remain bullish on the index. However, caution is warranted, especially now while who know's what is going on up on Capitol Hill. Plus the Fithch credit watch downgrade adds a whole new spin to tomorrow's outlook.

SPX weekly

The Dow looks a little different. It too has been trending up over the long term and is above the primary trend. However, it has done so in more a sideways fashion when compared with the S&P. Over the last few months the index has been in a consolidation that has relieved long term over bought conditions brought on by the rally earlier this year. The indicators suggest that support exists at the current levels which are consistent with the 6 month trading range and the 150 day moving average. A break below this level could bring on a full correction with a target 13,000. This index has broken the secondary up trend line and could remain trapped in the current range. Support exists around 14,800, resistance around 15,600.

Dow Weekly

The Russell 2000 is trending higher and just made a new all time high. It is also displaying some glaring divergences between prices and the indicators. MACD has made a series of four lower bullish peaks with the most recent one barely above 0. Stochastic is overbought in the short and long term AND is moving lower about to cross under the upper signal line. The index is still above the secondary up trend line as well but could be in danger of breaking it. However, the divergences here could be signaling the testing of support of start of an upcoming trading range similar to what I have described for the S&P and the Dow.

Russell 2000 Weekly

If there is no end to the debt ceiling issue before tomorrow I expect to see the markets move lower. The Fitch announcement after the bell pretty much cinches that. Of course, there could be no solution and then a solution which could mean lower markets early in the day and then higher markets later on. Regardless of direction the extremes of these moves will be capped by the long term trends and the current future expectations. The markets want to move higher, long term support is evident in all three major indices even if the bull market is running out of steam. Look for some form of measure, plan, stop gap or band aid to be put on the government debt issue, then look to earnings guidance and economic data for market direction. The Fitch watch downgrade is only a blip, as soon as the debt ceiling extension gets passed the watch will likely go away.

Until then, remember the trend!

Thomas Hughes


New Option Plays

Winging Higher

by James Brown

Click here to email James Brown


NEW DIRECTIONAL CALL PLAYS

Buffalo Wild Wings, Inc. - BWLD - close: 120.34 change: +1.13

Stop Loss: 118.40
Target(s): 129.00
Current Option Gain/Loss: Unopened
Time Frame: exit PRIOR to earnings on Oct. 29th
New Positions: Yes, see below

Company Description

Why We Like It:
Thus far 2013 has been a great year for BWLD. Most of the analyst commentary on the stock seems to be positive. Wall Street does not seem worried that McDonald's (MCD) has launched a new product called "mighty wings" that might compete with BWLD. Shares surged back in early October on what looked like short covering and a spike to $121.13 on October 2nd. Since then BWLD saw some profit taking. However, traders jumped in to buy the dip and now BWLD is testing resistance near its early October high.

The most recent data listed short interest at 9% of the very small 18 million share float. A breakout to another new high could spark more short covering. More aggressive traders may want to buy calls if BWLD can trade above $121.25, which would be a new high. I want to see a bit more follow through since a failure here would look like a potential bearish double top pattern. Tonight we're suggesting small bullish positions if BWLD can trade at $122.00. If triggered we'll start with a stop loss at $118.40. Our target is $129.00.

Trigger @ 122.00 *small positions*

- Suggested Positions -

Buy the NOV $125 call (BWLD1316K125) current ask $3.70

Annotated Chart:

Entry on October -- at $---.--
Average Daily Volume = 324 thousand
Listed on October 15, 2013



In Play Updates and Reviews

Stocks Snap Four-Day Bounce

by James Brown

Click here to email James Brown

Editor's Note:

The U.S. stock market ended a four-day bounce as investors worry over the lack of progress in Washington.


Current Portfolio:


CALL Play Updates

Dril-Quip, Inc. - DRQ - close: 117.72 change: -0.34

Stop Loss: 114.75
Target(s): 124.50
Current Option Gain/Loss: Unopened
Time Frame: 3 to 5 weeks
New Positions: Yes, see below

Comments:
10/15/13: DRQ spent Tuesday bouncing off its intraday lows and trying to rally. Unfortunately shares remain stuck under resistance near $118.00. The intraday high today was $118.14. I do not see any changes from our Monday night new play description.

Earlier comments:
I am suggesting a trigger to buy calls at $118.25. If triggered we'll use a stop loss at $114.75. Our target is $124.50. However, we will most likely exit prior to DRQ's earnings report expected in early November. If you are willing to hold over the earnings announcement then you may want to use the December options instead of November options. I am suggesting small positions because the spread on DRQ's November options are a bit wide.

Trigger @ $118.25 *small positions*

- Suggested Positions -

buy the NOV $120 call (DRQ1316k120)

- or -

buy the DEC $125 call (DRQ1322L125)

Entry on October -- at $---.--
Average Daily Volume = 281 thousand
Listed on October 14, 2013


Helmerich & Payne, Inc. - HP - close: 74.58 change: -0.53

Stop Loss: 71.75
Target(s): 79.50
Current Option Gain/Loss: -11.2%
Time Frame: 4 to 5 weeks
New Positions: see below

Comments:
10/15/13: HP spent most of the day churning sideways between $74 and $75. The $74.00 level should offer some short-term support. If this level fails we could see HP dip toward its simple 10-dma near $73.00. I would be tempted to buy a dip near the 10-dma but more conservative traders may want to wait for a bounce.

We do not want to hold over the mid-November earnings report. FYI: The Point & Figure chart for HP is bullish with an $82 target.

- Suggested Positions -

Long NOV $75 call (HP1316K75) entry $2.31

Entry on October 14 at $74.50
Average Daily Volume = 1.1 million
Listed on October 12, 2013


iShares Russell 2000 ETF - IWM - close: 107.16 change: -1.06

Stop Loss: 104.80
Target(s): 114.00
Current Option Gain/Loss: Unopened
Time Frame: 8 to 12 weeks
New Positions: Yes, see below

Comments:
10/15/13: The small cap index was hit the hardest among the major indices with a -0.97% decline in today's widespread pullback. Lack of follow through on yesterday's breakout to new highs is disappointing. Fortunately, today's high was only $108.23. Thus far there is no change from my earlier comments.

Earlier comments:
A deal in Washington will get done eventually and that could turn on the "all clear signal" for market participants to jump back in with both feet. I am suggesting a trigger to buy calls at $108.55. If triggered our target is $114.00. We'll start with a stop loss at $104.80, just below last Thursday's low.

Trigger @ $108.55

- Suggested Positions -

buy the 2014 Jan $110 call (IWM1418a110)

Entry on October -- at $---.--
Average Daily Volume = 41 million
Listed on October 14, 2013


Starbucks Corp. - SBUX - close: 76.71 change: -1.39

Stop Loss: 75.75
Target(s): 82.50
Current Option Gain/Loss: -33.3%
Time Frame: exit PRIOR to earnings in very late October
New Positions: see below

Comments:
10/15/13: Ouch! SBUX got burned with a -1.77% decline on Tuesday. Compare that to a -0.5% drop in the NASDAQ and a -0.7% pullback in the S&P 500. I didn't see any specific news to account for today's display of relative weakness. It is worth noting that today's drop following yesterday's bullish breakout suddenly smells like a potential reversal (making yesterday a potential bull trap). I am not suggesting new positions at this time.

Earlier Comments:
Our target is $82.50. Yes, it's possible that the $80.00 level could be round-number, psychological resistance but after a three-week consolidation sideways under the $78.00 level we suspect that $80 is not going to stop the rally in SBUX. We do not want to hold over SBUX's earnings, which will likely occur at the end of the month of early November.

- Suggested Positions -

Long NOV $80 call (SBUX1316k80) entry $1.65

Entry on October 14 at $78.25
Average Daily Volume = 3.7 million
Listed on October 12, 2013


Constellation Brands - STZ - close: 62.30 change: -0.88

Stop Loss: 58.90
Target(s): 67.50
Current Option Gain/Loss: +15.9%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
10/15/13: STZ has been showing relative strength and after hitting new highs I am not surprised to see a little profit taking. The stock did underperform the broader market with a -1.39% dip today. If the $62 level fails as support then look for a dip toward STZ's rising 10-dma near $61.00. I would be tempted to use a dip or a bounce near the 10-dma as a new entry point.

Earlier Comments:
Our target is $67.50 but we may end up exiting near $65.00, which could be potential round-number resistance.

- Suggested Positions -

Long NOV $62.50 call (STZ1316k62.5) entry $1.38

10/11/13 trade opened on gap higher at $61.25,
trigger was $61.10

Entry on October 11 at $61.25
Average Daily Volume = 1.9 million
Listed on October 10, 2013


Zimmer Holdings - ZMH - close: 86.38 change: -1.27

Stop Loss: 83.49
Target(s): 89.50
Current Option Gain/Loss: +11.1%
Time Frame: exit PRIOR to earnings on Oct. 24th
New Positions: see below

Comments:
10/15/13: After a five-day rally shares of ZMH finally hit some profit taking. The stock tagged a new relative high above $88.00 this morning before reversing into a -1.44% decline. Broken resistance near $85.00 should be new support.

Earlier Comments:
FYI: The medical device stocks could see a little volatility surrounding the political wrangling in Washington. The republicans and some democrats support repealing the recent medical device tax. Yet Senate Majority Leader Harry Reid and President Obama has rejected any suggestions to repeal this tax. It could be a bargaining chip in the negotiations between both sides over the budget and debt ceiling. Although it's worth noting that shares of ZMH have been ignoring all the drama lately.

- Suggested Positions -

Long NOV $85 call (ZMH1316k85) entry $2.70

10/14/13 adjust exit target to $89.50

Entry on October 10 at $85.55
Average Daily Volume = 1.2 million
Listed on October 09, 2013


PUT Play Updates

McDonald's Corp. - MCD - close: 93.80 change: -0.92

Stop Loss: 95.05
Target(s): 90.25
Current Option Gain/Loss: -35.4%
Time Frame: 2 to 3 weeks
New Positions: see below

Comments:
10/15/13: It looks like the oversold bounce in MCD might be over. Shares gapped down this morning and MCD underperformed the market with a -0.9% decline. The stock got a push lower from a bearish analyst note from Goldman Sachs. After a survey of 2,000 customers it seems that MCD might be losing customers and MCD was ranked last on a list of 23 fast-food chains for food quality and healthfulness. This is good news if you're bearish on the stock.

Earlier Comments:
Our time frame is only two, maybe three weeks as we do not want to hold over MCD's earnings report expected in late October.

- Suggested Positions -

Long NOV $90 PUT (MCD1316W90) entry $0.93

10/12/13 adjust stop loss to $95.05

Entry on October 09 at $93.75
Average Daily Volume = 4.3 million
Listed on October 07, 2013


Newmont Mining - NEM - close: 26.10 change: +0.36

Stop Loss: 27.10
Target(s): 21.00
Current Option Gain/Loss: -14.1%
Time Frame: Exit PRIOR to earnings on October 31st
New Positions: , see below

Comments:
10/15/13: Gold prices bounced off their Tuesday morning lows and shares of NEM followed suit. Today's rebound in NEM has technically produced a bullish engulfing candlestick reversal pattern. That's a warning sign for shorts and bearish option traders. More conservative traders may want to lower their stop loss. If this bounce continues I would expect NEM to test technical resistance at its simple 10-dma (near 26.50) soon.

Earlier comments:
Our target is $21.00 but we will plan to exit prior to NEM's earnings report scheduled on October 31st.

- Suggested Positions -

Long NOV $25 PUT (NEM1316W25) entry $0.92

Entry on October -- at $---.--
Average Daily Volume = 9.1 million
Listed on October 12, 2013



Longer-Term Play Updates



Chicago Bridge & Iron - CBI - close: 71.15 change: -1.35

Stop Loss: 64.00
Target(s): 79.00
Current Option Gain/Loss: +201.9%
Time Frame: 4 to 6 months
New Positions: see below

Comments:
10/15/13: Hmmm... today's action in CBI could be a warning signal. The stock almost completely reversed yesterday's gain (and breakout to new highs). The $70.00 level "should" be short-term support but I suspect that if the market accelerates lower we could see CBI drop toward the $67-66 area. I am not suggesting new positions at this time.

FYI: CBI is due to report earnings on October 29th.

*Small Positions* - Suggested Positions -

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

10/01/13 new stop loss @ 64.00, adjust target to $79.00
09/21/13 new stop loss @ 59.75
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: 54.92 change: -0.20

Stop Loss: 50.95
Target(s): 58.50
Current Option Gain/Loss: + 8.3%
Time Frame: exit PRIOR to 2014 March option expiration
New Positions: see below

Comments:
10/15/13: European markets were up across the board today. Yet selling pressure in the U.S. pulled the VGK lower. Shares produced a minor decline of -0.3%. If the market retreats lower we could see the VGK retest its 50-dma again.

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