Option Investor
Newsletter

Daily Newsletter, Thursday, 10/24/2013

Table of Contents

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

Market Wrap

Waiting for The Fed

by Thomas Hughes

Click here to email Thomas Hughes
Introduction

Asian stocks traded mixed in the overnight session. In part due to a surprise gain in Chinese flash PMI data and partially due to rising concern over a renewed credit crisis in the country. PMI reading grew more than expected and support a recent string of positive data from the country. At the same time rising rates in China's money markets are causing some to fear liquidity problems. In Europe the mood was more positive. Flash PMI for the EU was a little below expectation but still expansionary. Auto stocks led in the European markets, helping to send them roughly 0.5% higher.


Futures trading here at home was also positive this morning. The S&p was indicated marginally higher ahead of today's economic data releases and extended that lead after the reports came out. Joblessness is still trending lower even though last months computer issues from California and Nevada are still skewing the data. At the open stocks extended the early gains, briefly, before falling back to the flat line during the first 15 minutes. The indices found support at yesterday's closing prices pretty quickly and bounced right back up. The S&P traded in a really tight 3 point range for the first part of the day, between 1745 and 1748 before extending that range to 1752 by lunchtime. The afternoon trading session saw the index churning within the early range with a bias to the high end. Later in the afternoon the indices moved a little higher and held strong into the close. The S&P and Nasdaq both closing near the recently set highs.

Today was one of the biggest single day's of earnings report within one of the biggest weeks of earnings season. So far there have been a few high profile misses and one or two real disappointments but no real scare. For every company reporting a miss there is another reporting a beat. Ford was the one that really caught my eye. I am a big fan of the company and was pleased to hear that the company was improving sales globally. A number of names reported after the bell including Amazon and Microsoft that will have an affect on Friday's trading. Amazon was expected to increase its loss from last quarter from (-0.02) to (-0.09). Also on the roster for tomorrow are Proctor&Gamble, Sherwin Williams, Weyerhauser, UPS and a handful of oil services/services drilling companies.

The Data

Jobless claims fell by a smaller than expected amount, including an upward revision of 4,000 to last weeks numbers. The back log of California claims caused last month is still working its way through the system. This week claims fell by -12,000 to hit a three week low of 352,000. This is still elevated from the previous lows near 300,000 but not too concerning at this time. The average of claims starting from the week before we learned about the California/Nevada computer revamps is 328,375. This is in line with the level of claims the week preceding the unexpected drop to 294,000 caused by the issues. Assuming that California and Nevada are the only causes of the jump in claims the drop in first time claims still holds and could indicate lower unemployment levels when the data is released in two weeks time. The four week moving average of claims also rose by more than 10,000 to reach 348,250, still below 350,000 and also not overly concerning at this time.


I think the continuing and total claims numbers may be a little more reliable. So far both of these numbers have been trending down, without any spike in claims. Continuing claims fell by 8,000 to 2.87 million from a mild upward revision. The revision to last week and the drop this week basically canceled each other out for claims to hold basically flat from last weeks reported number. So far the spike in initial claims has not filtered through into the continuing claims report. I see this as a good sign that any actual increase in joblessness was very short term and that overall joblessness is still in decline. The total claims also fell. This number dropped by 72,000 to 3.856 million, a new long term low.



For now, the California back log and the government shut down do not appear to have impacted joblessness. The shut down may have caused damage but it will not be seen in this round of data. However, I have begun to hear speculation that the data we can expect to get over the next two weeks may be skewed. The shut down may have hampered collection of the data and therefore the reported results could be based on incomplete data. This go round the data may not pack the punch it would have normally because the market may not believe it. The month after that the revisions to this month may be important. The Fed meets next week, I wonder if the data they will be using is complete. The talk of tapering is now focused on whether it will be this year or next year, some have even raised the possibility of more QE although I don't see that happening. On top of the FOMC meeting there are an additional 22 economic reports due out next week, not counting data from overseas.

The trade deficit increased last month by a small margin. Less exports and high oil prices combined to drive the deficit up 0.4% to $38.8 billion. This is less than expected but when adjusted for inflation is basically flat from the previous month. This data is also late, it was originally scheduled for release over two weeks ago. The next data point in this series will be out in another two weeks.

Gold Driven Higher

The prospects that the Fed won't taper this year are driving up the prices of gold. There is a chance the Fed will announce something to the effect that tapering is still a long ways off, there is also the chance they will announce that tapering is closer than gold bulls think. I am leery of gold at this level ahead of the FOMC and the data we are expecting to receive over the next two weeks. Gold may continue to drift upward until next Wednesday when the FOMC statement is released. The metal is trading right at the $1350 level at this time, a level that provided resistance last month. The Gold Index is still trending up and back into it's long term pennant formation. Today the index formed a long white candle, the second in three days, confirming a move up from the short term 30 day moving average. The candle pattern formed over the past three days is very bullish and points to higher prices. This analysis is supported by the indicators which are both bullish and rising. Longer term, the index is still caught up in the pennant formation and faces resistance at the $117 level. Just above and beyond that level is the long term down trend line and another potential area of resistance.


Earnings will be a big driver for the Gold Index, and in particular future earnings prospects. If the Fed puts off tapering and boosts the price of gold above $1350 or even $1400 then earnings outlooks for gold miners will improve and possible help them move higher. GoldCorp reported today. The company earned $0.23 per share, down about 60% from the same period last year. This is above the consensus estimates of $0.21 and the previous quarters $0.14. One highlight of the report was that mines across the company's portfolio had been able to reduce costs, one reason for the unexpected increase in earnings. The report was released before the market opened and sent the stock up in pre market trading. After the open the stock continued higher accompanied by bullish indicators. The outlook for this company is positive at this time, especially while gold prices are at higher levels. Looking forward there is potential resistance at the $27.50 and $30 levels.


Oil Touches Support

Oil prices pushed lower this morning on an increasing supply and increasing supply outlook. The shale gas boom is leading some analysts to estimate that the U.S. could be a net exporter of oil in the next year or two, adding to the downward pressure. Oil prices moved down in the early part of the day, touching the $96 per barrel price level before consolidating for a move back up. By mid afternoon prices had regained today's losses and crossed over into positive territory around $97 per barrel. A larger than forecast increase in natural gas supplies was initially met with selling. I think the gain in supply was expected by more than a few traders because natural gas moved into positive territory, almost in tandem with WTI crude. The Oil Index opened higher, moved lower and then eventually back above break even for the day. The index is sitting on a possible support level following a pullback in prices yesterday. The index is indicated higher but declining momentum suggests it may move sideways in the nearer terms. This index will also be impacted by data and the Fed over the next week as traders try to make sense of where the global is and where it is going. Lower oil prices will be a concern for the oil companies in the near term but longer term may result in a larger down stream sales volume as consumers are able to afford more of the product. The big oil companies report next week.


Apple And Icahn

Carl Icahn announced he upped his stake in Apple. He also sent a nice letter to Apple CEO Tim Cook requesting an immediate $150 billion (that's with a B) share buyback. No response from Apple is known by me at this time but Carl went on to say later that he may consider a proxy fight if neccesary. It is clear that Carl wants some of that money sitting in Apple's bank accounts. Let's not forget that George Soros also recently entered the Apple arena by purchasing a large stake just two months ago. Apple hasn't made any indication of what it is planning to do with that money yet and I don't think it is going to let Icahn and Soros have their way without a fight. The stock extended its rally today, breaking above $530 for the first time since last January. There is resistance ahead in the form of the previous long term up trend line, momentum is weak and the stock is overbought.


Story Stock

Ford reported better than expected earnings this morning. The auto maker was expected to earn $0.38 per share, less than the previous quarter. The actual results beat by $0.07 on an adjusted basis. The really good news in the report revolve around improvements in Europe. The European branch of Ford Motor Company is expected to return to profitability as soon as late next year or early 2015, ahead of previous estimates. The company also reported strengthening numbers on a global basis and was able to increase guidance for this year. The stock jumped in pre market trading, gapping up at the open to hit highs not seen since January of 2011. The stock is breaking out of long term triangle pattern but this move may be a whipsaw. Indicators are bullish and rising on the daily charts but divergences in MACD suggest the move is weak.


The Indices

The Dow is still trapped within it's 6 month range. The blue chips have not been making the same new highs as the broader markets. Perhaps it is because the market does not see as much earnings growth potential in this sector or that the dividends provided by these stocks are not attractive enough. In the short term the index is bullish although momentum is weak at this time and stochastic indicates it is overbought. Looking at the longer term charts of weekly prices the index is also trending sideways but the indicators are bearish. The disconnect between the long and short term charts may result in the index continuing to trend sideways. The thing to watch for tomorrow and over the next few days is the resistance of the upper end of the range, where the Dow is currently trading. If the Dow were to break above resistance it could move as high as 16,000 before it hits resistance. If the index remains trapped in the trading range support exists at the lower boundary around 14,800. If the a longer term correction ensues and the index breaks below the lower range boundary it could retreat all the way to 14,000.

Dow Daily

Dow Weekly

The SPX is making new highs, not today but this week. The last three days saw the index make a new high, pull back and then move back up. At this time the index is moving sideways, just above a potential support zone. Indicators are bullish but MACD is peaking and stochastic is overbought, suggesting the rally is slowing or could be slowing. Longer term the index is still indicated but the divergences in MACD and stochastic that I have been tracking are still present. If the index fails to hold support at the current levels it could enter a longer term correction but there is still no actual indication of that, just the prediction of a divergent indicator. Support levels in the near term are 1745,1740 and 1730. In the short to long term 1700, 1650 and 1600.

SPX daily

SPX weekly

So, the trend is still up but it is in question. The markets are concerned with earnings growth, economic growth and the Fed. There is also likely lingering fear of the next round of debt ceiling debates even though it has faded from the forefront for now. Tomorrow and the first part of next week will be dominated by earnings. Economic data gets heavy next week as well including the FOMC meeting on Tuesday and announcement on Wednesday. Good data will go a long way toward bolstering hopes for earnings growth but will also bring tapering sooner. Not so good data keeps tapering off the table. The FOMC is sure to give us some indication as well.

Until then, remember the trend!

Thomas Hughes


New Option Plays

Industrial Automation

by James Brown

Click here to email James Brown


NEW DIRECTIONAL CALL PLAYS

Rockwell Automation Inc. - ROK - close: 111.75 change: +1.32

Stop Loss: 108.95
Target(s): 117.50
Current Option Gain/Loss: Unopened
Time Frame: Exit PRIOR to earnings on November 7th
New Positions: Yes, see below

Company Description

Why We Like It:
ROK is in the industrial goods sector. They focus on industrial automation. The stock has been stair-stepping higher. Shares just broke out from the latest "step" a few days ago. Today saw ROK display relative strength but it's hovering just below short-term resistance at $112.00.

I am suggesting a trigger to buy calls at $112.25. If triggered our target is $117.50 but we will plan to exit prior to earnings on November 7th.

Trigger @ 112.25

- Suggested Positions -

buy the NOV $115 call (ROK1316K115) current ask $1.75

Annotated Chart:

Entry on October -- at $---.--
Average Daily Volume = 659 thousand
Listed on October 23, 2013



In Play Updates and Reviews

Stocks Drift Higher

by James Brown

Click here to email James Brown

Editor's Note:

There was no follow through on yesterday's pullback. The market drifted higher in what turned out to be a broad-based rally. The Dow Jones Transportation index extended its gains to seven days in a row.

DRQ was stopped out. VIAB was triggered.


Current Portfolio:


CALL Play Updates

3D Systems - DDD - close: 57.70 change: +0.95

Stop Loss: 53.45
Target(s): 64.00
Current Option Gain/Loss: - 2.2%
Time Frame: exit PRIOR to earnings on Oct. 29th
New Positions: see below

Comments:
10/24/13: DDD erased yesterday's losses with a +1.6% gain on Thursday. Yet the rally stalled near its highs around $58.00 from earlier this week. Readers may want to wait for a rally past $58.50 before considering new positions.

Earlier Comments:
DDD could see some short covering. The most recent data listed short interest at 32.5% of the 94.5 million share float.

Our target is $64.00. However, we will plan to exit prior to DDD's earnings report on October 29th.

- Suggested Positions -

Long NOV $60 call (DDD1316K60) entry $2.25

Entry on October 18 at $57.05
Average Daily Volume = 6.8 million
Listed on October 17, 2013


The Walt Disney Company - DIS - close: 69.05 change: +0.93

Stop Loss: 65.85
Target(s): 74.00
Current Option Gain/Loss: + 71.2%
Time Frame: exit PRIOR to earnings on November 7th.
New Positions: see below

Comments:
10/24/13: As expected traders bought the dip near support at $68.00. DIS outperformed the market with a +1.3% gain. I would still consider new positions here at current levels.

Our target is $74.00 but we will plan to exit prior to DIS' earnings report on November 7th.

FYI: Tuesday's rally has produced a new buy signal on the Point & Figure chart that is currently suggesting an $80 price target.

- Suggested Positions -

Long NOV $70 call (DIS1316K70) entry $0.66

Entry on October 22 at $68.10
Average Daily Volume = 7.1 million
Listed on October 21, 2013


Honeywell Intl. - HON - close: 87.28 change: +0.59

Stop Loss: 84.75
Target(s): 98.50
Current Option Gain/Loss: Unopened
Time Frame: 8 to 10 weeks
New Positions: Yes, see below

Comments:
10/24/13: HON continues to show relative strength. The stock set a new all-time closing high with today's gain. The next challenge is rising past its intraday high from September. The intraday high was $87.55 from September 19th.

I am suggesting a trigger to buy calls at $87.65. If triggered our multi-week target is $98.50.

Trigger @ 87.65

- Suggested Positions -

Buy the 2014 Jan $90 call (HON1418a90) current ask $1.40

Entry on October -- at $---.--
Average Daily Volume = 2.9 million
Listed on October 23, 2013


Helmerich & Payne, Inc. - HP - close: 75.88 change: +0.88

Stop Loss: 74.25
Target(s): 79.50
Current Option Gain/Loss: + 1.7%
Time Frame: 4 to 5 weeks
New Positions: see below

Comments:
10/24/13: HP found support near $74.50 for the second day in a row. Shares rebounded to a +1.1% gain. Today's move could be used as a new bullish entry point. I am raising our stop loss to $74.25.

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

10/24/13 new stop loss @ 74.25
10/22/13 new stop loss @ 73.75

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


iShares Russell 2000 ETF - IWM - close: 110.98 change: +0.59

Stop Loss: 105.95
Target(s): 114.00
Current Option Gain/Loss: +33.9%
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
10/24/13: Traders bought the dip in the small caps and the IWM set a new closing high today.

- Suggested Positions -

Long 2014 Jan $110 call (IWM1418a110) entry 2.80

10/23/13 new stop loss @ 105.95

Entry on October 16 at $108.55
Average Daily Volume = 41 million
Listed on October 14, 2013


J2 Global, Inc. - JCOM - close: 55.31 change: +0.11

Stop Loss: 53.25
Target(s): 59.75
Current Option Gain/Loss: - 7.5%
Time Frame: exit PRIOR to earnings on November 5th
New Positions: see below

Comments:
10/24/13: Hmm... JCOM really didn't participate in the market's rally today. I would be a little cautious here. Readers may want to readjust their stop loss.

Earlier Comments:
The stock looks ready to launch its next leg higher. New highs could spark a short squeeze. The most recent data listed short interest at 31% of the 43.7 million share float. Our target is $59.75 but more aggressive traders could aim higher. The Point & Figure chart for JCOM is bullish with a $77 target.

- Suggested Positions -

Long NOV $55 call (JCOM1316K55) entry $2.15

Entry on October 21 at $55.05
Average Daily Volume = 329 thousand
Listed on October 19, 2013


Medtronic, Inc. - MDT - close: 57.50 change: -0.15

Stop Loss: 55.40
Target(s): 59.75
Current Option Gain/Loss: +28.0%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
10/24/13: After displaying relative strength yesterday, MDT displayed some weakness today. However, if you look at the intraday chart traders were buying the dip near $57.00.

- Suggested Positions -

Long NOV $55 call (MDT1316K55) entry $2.07

Entry on October 22 at $56.75
Average Daily Volume = 3.4 million
Listed on October 21, 2013


Starbucks Corp. - SBUX - close: 79.05 change: -1.00

Stop Loss: 75.75
Target(s): 84.00
Current Option Gain/Loss: + 7.8%
Time Frame: exit PRIOR to earnings on October 31st
New Positions: see below

Comments:
10/24/13: Ouch! SBUX underperformed the market today. The stock gapped open lower and lost -1.24% by the closing bell. I didn't see anything specific to account for today's weakness. Shares are hovering near their simple 10-dma. Readers may want to raise their stop loss closer to the $78.00 level, which should be support. Keep in mind that we do not want to hold over SBUX's earnings report on October 31st.

- Suggested Positions -

Long NOV $80 call (SBUX1316k80) entry $1.65

10/22/13 adjust exit target to $84.00

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


Constellation Brands - STZ - close: 63.85 change: -0.14

Stop Loss: 61.90
Target(s): 67.50
Current Option Gain/Loss: +48.5%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
10/24/13: STZ seems to be treading water. The stock posted a minor decline as it hovers above short-term technical support at its 10-dma. There is no change from my prior comments.

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

10/22/13 new stop loss @ 61.90, readers may want to take profits now. Our option is up +84%.
10/16/13 new stop loss @ 59.75
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


Thor Industries - THO - close: 59.53 change: +0.55

Stop Loss: 57.75
Target(s): 64.75
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Comments:
10/24/13: THO bounced back toward its highs but failed to breakout past resistance at $60.00. I don't see any changes from my earlier comments. I am suggesting a trigger to buy calls at $60.25. If triggered our target is $64.75.

Trigger @ 60.25

- Suggested Positions -

Buy the NOV $60 call (THO1316K60) current ask $1.45

Entry on October -- at $---.--
Average Daily Volume = 528 thousand
Listed on October 19, 2013


Viacom, Inc. - VIAB - close: 84.39 change: +0.02

Stop Loss: 82.75
Target(s): 89.50
Current Option Gain/Loss: -19.3%
Time Frame: exit PRIOR to earnings on November 14th.
New Positions: see below

Comments:
10/24/13: Hmmm... we may need to be more careful here with VIAB. The S&P 500 slowly drifted higher all day long. Yet the rally in VIAB peaked midday and shares retreated to almost unchanged by the close. Unfortunately VIAB did breakout past resistance near $85.00 and hit our trigger to buy calls at $85.30 before reversing. I am not suggesting new positions with VIAB below $85.00.

Earlier Comments:
The September 27th intraday high was $85.22. I am suggesting a trigger to buy calls at $85.30. If triggered our target is $89.50. However, we will plan to exit prior to VIAB's earnings report in mid November.

- Suggested Positions -

Long DEC $85 call (VIAB1322L85) entry $3.10

Entry on October 24 at $85.30
Average Daily Volume = 2.6 million
Listed on October 22, 2013


PUT Play Updates


Currently we do not have any active put trades.




Longer-Term Play Updates



Chicago Bridge & Iron - CBI - close: 74.34 change: +0.76

Stop Loss: 68.40
Target(s): 79.00
Current Option Gain/Loss: +292.1%
Time Frame: 4 to 6 months
New Positions: see below

Comments:
10/24/13: Traders quickly bought the dip in CBI near its rising 10-dma. The stock rebounded to a +1.0% gain.

More conservative investors may want to lock in gains now. 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

10/19/13 new stop loss @ 68.40
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: 57.46 change: +0.37

Stop Loss: 53.90
Target(s): Sell half @ $58.00, sell the rest at $63.00
Current Option Gain/Loss: +88.8%
Time Frame: exit PRIOR to 2014 March option expiration
New Positions: see below

Comments:
10/24/13: The VGK completely erased yesterday's loss with a +0.6% gain. The ETF set a new two-year high closing high today.

Earlier Comments:
We are taking a multi-month time frame with this trade. FYI: The Point & Figure chart for VGK is bullish with a $63 target.

- Suggested Positions -

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

10/22/13 Strategy Update: Plan to exit half @ $58.00 and exit the rest at $63.00. New stop loss @ 53.90
10/19/13 new stop loss @ 52.75
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


CLOSED BULLISH PLAYS

Dril-Quip, Inc. - DRQ - close: 114.76 change: -0.65

Stop Loss: 114.75
Target(s): 124.50
Current Option Gain/Loss: Nov120c: -70.6% & Dec125c -66.6%
Time Frame: 3 to 5 weeks
New Positions: see below

Comments:
10/24/13: The correction in DRQ continued. Tuesday's move did prove to be a failed rally and bull trap pattern. The weakness continued today and DRQ hit our stop loss at $114.75.

Earlier comments:
I am suggesting small positions because the spread on DRQ's November options are a bit wide.

*small positions* - Suggested Positions -

NOV $120 call (DRQ1316k120) entry $2.90* exit $0.85 (-70.6%)

- or -

DEC $125 call (DRQ1322L125) entry $1.95 exit $0.65 (-66.6%)

10/24/13 stopped out
*option price is an estimate.

chart:

Entry on October 16 at $118.25
Average Daily Volume = 281 thousand
Listed on October 14, 2013