Option Investor
Newsletter

Daily Newsletter, Thursday, 10/31/2013

Table of Contents

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

Market Wrap

Spooky Markets

by Thomas Hughes

Click here to email Thomas Hughes
The FOMC and data seemed to support the markets at first, then something spooked traders and the markets sold off. Introduction

Yesterday the FOMC revealed that there would be no taper, as expected. The markets subsequently let out some steam and shed a few points. Today it seemed as if that may continue today but better than expected data, earnings and liquidity helped to provide support. Asian stocks fell during the overnight session, losing about 1% on average. Although the Fed did not signal an end to QE the less dovish stance they provided gave investors there reason for concern. In Europe things were much the same in the early part of the trading day but positive U.S. data and earnings provided them a boost as well. The European indices closed mostly higher, with France's CAC 40 the one notable exception.


The futures trade indicated a mildly negative opening prior to the release of today's economic data. Now that the FOMC meeting has passed, and there is no taper, the data and earnings are coming back into focus. Even the Fed said in it's statement that it was waiting for more confirmation of the current economic trends. From what I read it seemed as if they could have begun to scale back on QE now but wanted to make doubly and triply sure the economy is on solid ground. Following the jobless claims release the indices moved marginally higher and held that ground into the open of today's trading. Adding a lift was Chicago PMI which, according to Rick Santelli, was a “blow out number”.

After the open the indices tread water around the flat line. The S&P 500 moved up and down in a 6-8 point range over and under 0 for the first half of the day. The other major indices behaved in much the same way, moving lower and higher in tight range around yesterday's closing prices. The new fear emerging is that an asset bubble is forming because of the FOMC's loose policy. It's not a big fear at this time but one that could easily grow and in need of monitoring. After hitting an intraday high after lunch the S&P 500 kept churning in positive territory before moving lower at the end of the day.

The Data

Initial jobless claims fell this week, but not as much as expected. The numbers fell by 10,000 from last weeks unrevised figures to hit 340,000. This is the first week since the California computer issues that it has been below the 350,000 mark. This week California reported no carryovers and the effect of the government shut down appear to be declining rapidly. Government employees claiming a first weeks unemployment fell by over 65% from the previous week. The four week moving average of first time claims rose to 356,250, above the 350,000 mark but heavily impacted by the recent spike in claims attributable to the carryover of claims from the prior month. Assuming there is no affect from California or the shut down in this weeks data it is not looking to bad. It is below the 350K mark and only about 10K above where the claims were prior to the recent issues. It appears to me as if joblessness, at least in this metric, remained at low levels over the past month.


Continuing and total claims both increase in this weeks data. Continuing claims climbed by just over 31,000 but since last weeks claims were revised lower this week's gain is a wash. Continuing claims are holding steady at +5 year lows with no apparent impact from the government shut down. Total claims increased by about 39K this week but remain at low levels below 4 million. This weeks total was 3.896 million. This is roughly 22% lower than last year and inline with the 20-24% decline rate over the past two years. Based on this it also looks like unemployment levels are still in decline and that next weeks release of NFP and Unemployment figures could be a surprise. Both will likely be heavily impacted by the government shut down and may require a deeper analysis than usual.



The Chicago PMI was a real big surprise, so big in fact that Mr. Santelli even questioned its accuracy. The mid-west gauge of manufacturing increased by over 10 points from last months expansionary reading of 55.7. This months reading was 65.9, implying a very large increase in manufacturing activity. Within the number the new orders component came in at a whopping 74.3 with backlog orders climbing a comparable amount.

On tomorrow's economic calendar, auto and truck sales followed up by the ISM survey. Next week be on the look out for 3rd quarter GDP on Thursday and the NFP/Unemployment figures on Friday.

The Gold Index

The FOMC gave the gold market what it wanted, causing a fairly large sell-off today. Gold prices declined by over $25 dollars today to hit a two week low. The gold market was inflated on expectations of no-taper and the fulfilment of that expectation gave reason for profit taking. Not only that the slightly less dovish position of the Fed reinforced the fact that QE would end, even if we don't know when just yet. The move down in gold prices also confirms the $1350 level as resistance with current support targets at $1300 and $1250. The Gold Index fell alongside the underlying commodity. Indicators suggest that the recent bullish wave in the index may have peaked in the shorter term. Longer term the index still has bullish momentum but it is weakening. For now it looks as if the Gold Index is still trapped inside the long term pennant consolidation pattern.

Gold Index

Barrick Gold Reported earnings today. The miner reported significant improvements to operations, increased cost saving efforts for 2014 fiscal year, all-in sustaining costs of $914 per ounce(of gold), earnings above the consensus estimates and improved full year guidance to the high year of the range. Despite all this positive news ABX lost about 5% in today's trading. Today's drop was held at the short term 30 day EMA but declining momentum and overbought conditions suggest it is trading at the top of its nearly 7 month range. ABX could be poised for real improvements in earnings over the next year, provided the price of gold does not remain at the current low levels. If it does organic earnings growth expectations for Barrick could decline and keep the stock range bound for the near to short term. Current resistance is around $21.25 with support near $13.25. Adding further pressure to the stock was a $30 billion equity offering announced by the company after hours.

Barrick Gold

The Oil Index

Oil prices also fell in the wake of the FOMC decision. West Texas Intermediate fell by nearly a half percent to approach a 4 month low. Increasing supply from around the world is helping to keep oil prices low for now. The Oil Index gained in today's trading. The index is still trending up after breaking above support just over two weeks ago. There is a divergence in momentum that suggests a near term peak may have formed but longer term analysis suggests higher prices could still be ahead. There is a potential support about 25 points lower than the current level that could provide an entry point for such a move. Earnings from Exxon were one cause of today's rise in the Oil Index.

Oil Index

Exxon reported earnings dropped by 18% from the third quarter last year. This was less than expected and helped to send the stock up by 2% during today's trading. Earnings were impacted by declining margins in it's downstream business segments. The weakness in refining margins was enough to off-set strength in exploration and production which are expected to lead to increased profits in the coming year. Today's action brought shares of XOM above near term resistance with rising indicators but the late day sell off pushed it back down below. If Exxon can break above this level it could move up to $92.50 and $94 over the next few weeks. Longer term the stock appears to be moving up to the top of a 15 month trading range with a target around $95.In the near term it is producing a potential shooting star on the daily charts.

Exxon

The Dollar

The Dollar Index strengthened today, gaining about a half percent in a continuation of its bounce from the long term support of 79. The less dovish comments from the FOMC helped to curb talk and expectation of unlimited QE and helped to put a floor in dollar value. The euro finally made the drop from resistance I have been looking for over the last month. The EUR/USD ratcheted upward several times over the past few weeks as the expectations for no-tapering grew. Today the pair fell nearly two handles from 1.37399 to 1.35958, the single largest decline for the past 12 months. The pair fell below support, the short term moving average, momentum turned bearish and stochastic is rolling over in the upper signal zone. The pair may keep moving lower in the near term until the ECB or economic data can alter current perceptions. The next scheduled meeting of the ECB is next Friday, November 7th. My next targeted support is around the 1.35000 level.

EUR/USD

The yen and Abenomics is still wrestling with the dollar and the Fed. The last two days have seen the USD/JPY pair hover around flat line, creating two doji spinning tops sitting just above long term support. The lack of taper could influence the BOJ to renew it's efforts to weaken the yen. The last I read the BOJ was waiting until the first part of the second quarter of next year to decide if more QE was needed. That statement was made when tapering was a real possibility in the mind of the global market. Now that tapering has been pushed off until who knows when it could lead to action from either President Abe or the BOJ. In any case, I think this pair is winding up for a big move once it breaks away from the 98 level. The 98 level is also coincident with the 23.6% Fibonacci retracement of the Shinzo Abe rally in the pair. Holding this level is another bullish indicator. Currently, support exists at the 98 level with my upside target still around the 100 level with a longer term target between 104 and 105.

USD/JPY

Earnings Roundup

Facebook was the top name in earnings. The social media behemoth reported earnings that beat estimates but a reported decline in teen users. The report revealed just how psychotic the market can be. The report was released after the bell yesterday, sending the stock up by over 15% at first, then back down into negative territory. This morning saw some similar instability in prices until the opening bell. FB shares opened more than 3% lower from yesterday's close but found support, climbed throughout the day and closed up for the day. Long term support seems to be growing for FB shares between the $45 and $50 level.

FB

Starbucks also beat estimates but a conservative outlook for the next fiscal year sent the stock lower in early trading. After the bell the stock climbed into positive territory, making a Long White Candle moving up from the short term EMA. Both indicators are bullish at this time but prices are diverging over the short to long term. The problem with Starbucks isn't growth, its growth rate, which is slowing. The current quarter saw record eps with a 34% increase from the same quarter last year. Profits were driven in large part by declining cost and improved margins. The company reaffirmed fourth quarter and full year guidance that was slightly below estimates.

SBUX

The Indices

The major indices tread water today. Early trading saw the S&P open right at the flat line, move higher for minute, then move lower and back again for the first few hours of trading. Then, around lunchtime the index moved more firmly into positive territory and stayed there for most of the rest of the afternoon. However, late day weakness saw the index move back down and briefly move into the negative before once again bouncing back into positive territory. By days end the index sold off on reports that there was $6 billion in stocks currently for sale. The S&P moved down to close near the days low around -6.5 points.

SPX daily

It may be safe to say that the Fed decision did not cause a major correction...for now. Tomorrow when we wake up things may looks entirely different than they do now. However, even without a major correction it also looks as if the rally in stocks may have reached a near/short term peak. Momentum is bullish but declining rapidly and at the same time stochastic is extremely overbought. This may lead to a sideways consolidation or a pullback. Currently near term support exists around 1750 with longer term support around 1730. These levels are coincident with the short term moving average and the most recent previous all time high. At this time the long term trend is still up so I will be looking for another “buy the dip” scenario over the next week or two with these levels as possible areas for entry. Economic data and earnings will be the main drivers in the near to short term with QE, tapering, the debt ceiling/Fed budget, earnings outlook and now potential asset bubbles impacting the long term.

On the long term chart of weekly prices the index is bullish and indicated higher. Keep in mind that the last candle, and therefore the newest portions of MACD and stochastic, are as yet incomplete. MACD is bullish and rising, stochastic is bullish and rising. The long term divergences are still present but sign of reversal is still not present. I remain bullish long term with near and short term caution.

SPX weekly

The Fed meeting is over and for now fundamentals are unchanged. Earnings and economic data are back in focus. Today's data and earnings reports support the ongoing trend of slow to moderate growth. Data over the next week will be very important to watch for more than one reason. First we need to see that the underlying trends of improving employment levels and economic growth are still intact. Second we need to see that there are no long lasting affects from the government shut down. Providing that we can expect the economy to keep improving, for unemployment to keep coming down and for the consumer to continue to spend then I would expect the market to find support and keep moving higher. If not, then a correction to trend may be on the way. Today's Chicago PMI was a really promising number in my opinion. It could foreshadow a round of better than expected data in the near future, data that will reinforce economic expansion, earnings growth and tapering.

Until then, remember the trend!

Thomas Hughes


New Option Plays

Failing At Resistance

by James Brown

Click here to email James Brown


NEW DIRECTIONAL PUT PLAYS

Garmin Ltd. - GRMN - close: 46.75 chane: -1.52

Stop Loss: 49.25
Target(s): 43.50
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
GRMN is in the technology sector. They design and manufacture GPS systems. The company just reported earnings on October 30th, before the opening bell. Wall Street was expecting a profit of 59 cents on revenues of $628 million. GRMN beat estimates with a profit of 69 cents with revenues at $643 million. Management went on to raise their 2013 guidance. By all accounts this looked like a bullish report so why are investors selling the news?

GRMN reacted to its earnings news with a spike above resistance near $50.00, which immediately reversed. Today the selling continued with another sell-off this morning and a breakdown below support. I suspect that after a nine-week, non-stop rally higher GRMN is just due for some profit taking.

I do consider this an aggressive trade. GRMN has obviously been volatile the last couple of days. Plus the most recent data listed short interest at 13% of the 121 million share float.

I am suggesting small bearish put positions now at the opening bell tomorrow. More nimble traders may want to wait and see if GRMN bounced toward $48 and then launch positions there instead. We'll start this trade with a stop at $49.25. Our target is $43.50. At this point GRMN should be nearing significant support in the $43.00 area and we might switch directions and buy calls.

*Small Positions!*

- Suggested Positions -

Buy the DEC $45 PUT (GRMN1322X45) current ask $1.12

Annotated Chart:

Weekly chart:

Entry on November -- at $---.--
Average Daily Volume = 1.2 million
Listed on October 31, 2013



In Play Updates and Reviews

Stocks Out Of Breath

by James Brown

Click here to email James Brown

Editor's Note:

The U.S. markets ended the month of October out of breath after sprinting higher nearly all month long. The S&P 500 closed with a +4.4% gain in October.

Our FFIV trade was triggered today.


Current Portfolio:


CALL Play Updates

The Walt Disney Company - DIS - close: 68.59 change: +0.12

Stop Loss: 65.85
Target(s): 74.00
Current Option Gain/Loss: + 16.6%
Time Frame: exit PRIOR to earnings on November 7th.
New Positions: see below

Comments:
10/31/13: DIS managed to squeak out a small gain, which was enough to outperform the major indices. Although it looks like shares will retest support near $68.00 soon.

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


Dover Corp. - DOV - close: 91.79 change: -0.05

Stop Loss: 89.95
Target(s): 99.50
Current Option Gain/Loss: Unopened
Time Frame: 4 to 8 weeks
New Positions: Yes, see below

Comments:
10/31/13: DOV recovered off its morning lows but failed to hit new highs. There is no change from my prior comments.

I see the mid-September peak near $92.85 as potential trouble. Therefore we're suggesting a trigger to buy calls at $93.00. If triggered our target is $99.50. The Point & Figure chart for DOV is bullish with a $105 target.

Trigger @ 93.00

- Suggested Positions -

Buy the DEC $95 call (DOV1322L95)

Entry on October -- at $---.--
Average Daily Volume = 1.0 million
Listed on October 29, 2013


Honeywell Intl. - HON - close: 86.73 change: +0.01

Stop Loss: 84.75
Target(s): 98.50
Current Option Gain/Loss: -26.2%
Time Frame: 8 to 10 weeks
New Positions: see below

Comments:
10/31/13: HON tried to rally but gave back all of its gains in the market's afternoon slide. Shares did close virtually unchanged which was enough to outperform the major indices. I remain cautious here. Traders may want to wait for a rally above $88.00 before considering new positions.

- Suggested Positions -

Long 2014 Jan $90 call (HON1418a90) entry $1.45

10/30/13 Caution. HON hit our trigger but the stock produced a potential bearish reversal pattern today.

Entry on October 30 at $87.65
Average Daily Volume = 2.9 million
Listed on October 23, 2013


Helmerich & Payne, Inc. - HP - close: 77.55 change: +0.04

Stop Loss: 75.75
Target(s): 79.50
Current Option Gain/Loss: +34.1%
Time Frame: 4 to 5 weeks
New Positions: see below

Comments:
10/31/13: HP also managed to eke out a small gain and outperform the major indices. More conservative traders may want to take profits now. I am not suggesting new positions.

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

10/29/13 new stop loss @ 75.75
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: 109.19 change: -0.64

Stop Loss: 107.75
Target(s): 114.00
Current Option Gain/Loss: - 1.4%
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
10/31/13: The small cap Russell 2000 index (and ETF) underperformed the S&P 500 and the NASDAQ composite. That doesn't bode well for the bulls. IWM shares look poised to drop toward support near $108.00 soon.

I am not suggesting new positions.

- Suggested Positions -

Long 2014 Jan $110 call (IWM1418a110) entry 2.80

10/29/13 new stop loss @ 107.75
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: 54.98 change: +0.03

Stop Loss: 53.75
Target(s): 59.75
Current Option Gain/Loss: -23.2%
Time Frame: exit PRIOR to earnings on November 5th
New Positions: see below

Comments:
10/31/13: JCOM also managed to close in positive territory today but it was a fight. We do not have much time left on this trade and more conservative traders may want to exit immediately. Currently we are planning to exit positions on November 4th to avoid holding over JCOM's earnings report on November 5th.

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

10/31/13 prepare to exit on Nov. 4th
10/29/13 new stop loss @ 53.75

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


Medtronic, Inc. - MDT - close: 57.40 change: -0.54

Stop Loss: 56.45
Target(s): 59.75
Current Option Gain/Loss: +22.5%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
10/31/13: MDT continued to see some profit taking, down for a second day on Thursday. Shares did find some short-term support at the rising 10-dma. We'd like to see a bounce here but I am not convinced the pullback is over. I'm not suggesting new positions at this time.

- Suggested Positions -

Long NOV $55 call (MDT1316K55) entry $2.07

10/29/13 new stop loss @ 56.45

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


Packaging Corp. of America - PKG - close: 62.28 change: +0.50

Stop Loss: 59.75
Target(s): 67.50
Current Option Gain/Loss: - 23.3%
Time Frame: 6 to 9 weeks
New Positions: see below

Comments:
10/31/13: PKG bucked the market's down trend today and added +0.8%. Traders bought the dip near its 10-dma this morning and the stock actually hit a new record high before paring its gains.

- Suggested Positions -

Long 2014 Jan $65 call (PKG1418a65) entry $1.50

Entry on October 28 at $62.50
Average Daily Volume = 1.0 million
Listed on October 23, 2013


Pall Corp. - PLL - close: 80.52 change: -0.01

Stop Loss: 77.90
Target(s): 86.00
Current Option Gain/Loss: -13.6%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
10/31/13: The intraday rally in PLL rolled over below yesterday's highs. Shares closed virtually unchanged on the session but they do look poised for more profit taking tomorrow morning. I would not be surprised to see PLL retest the $80.00 mark or its 10-dma.

Earlier Comments:
Our target is $86.00. However, we will plan to exit prior to PLL's earnings report in late November (not date set yet). FYI: The Point & Figure chart for PLL is bullish with a long-term $113 target.

- Suggested Positions -

Long DEC $85 call (PLL1321L85) entry $1.10

Entry on October 28 at $80.50
Average Daily Volume = 551 thousand
Listed on October 23, 2013


SanDisk Corp. - SNDK - close: 69.50 change: -0.14

Stop Loss: 67.90
Target(s): 74.75
Current Option Gain/Loss: -20.0%
Time Frame: 4 to 8 weeks
New Positions: see below

Comments:
10/31/13: SNDK churned sideways before settling on its 10-dma this afternoon. I would wait for a rally above $70.35 before considering new bullish positions.

Our target is $74.75 but we may want to aim higher. The Point & Figure chart for SNDK is bullish with an $82 target.

NOTE: SNDK will begin trading ex-dividend on October 31st. The quarterly cash dividend should be 22.5 cents.

- Suggested Positions -

Long 2014 Jan $72.50 call (SNDK1418a72.5) entry $2.75

Entry on October 29 at $70.60
Average Daily Volume = 5.0 million
Listed on October 28, 2013


Constellation Brands - STZ - close: 65.30 change: +0.61

Stop Loss: 63.40
Target(s): 68.50
Current Option Gain/Loss: +113.7%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
10/31/13: Thankfully there was no follow through on yesterday's bearish reversal pattern. STZ rebounded from its 10-dma this morning and closed up +0.9%.

- Suggested Positions -

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

10/30/13 new stop loss @ 63.40
10/29/13 new stop loss @ 63.25
10/28/13 adjust exit target to $68.50
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


PUT Play Updates

F5 Networks - FFIV - close: 81.54 change: -1.96

Stop Loss: 85.01
Target(s): 76.00
Current Option Gain/Loss: + 3.1%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
10/31/13: As we expected the relative weakness in FFIV continued and shares broke down below support. The stock underperformed the market with a -2.3% decline. Our trigger to buy puts was hit at $82.00.

- Suggested Positions -

Long DEC $80 PUT (FFIV1322X80) entry $3.15

Entry on October 31 at $82.00
Average Daily Volume = 2.2 million
Listed on October 30, 2013


Union Pacific Corp. - UNP - close: 151.40 change: +0.81

Stop Loss: 151.55
Target(s): 141.00
Current Option Gain/Loss: Unopened
Time Frame: 3 to 5 weeks
New Positions: Yes, see below

Comments:
10/31/13: UNP was testing significant support yesterday so it's not a complete surprise to see it bounce today. Overall the intermediate trend is still down. There is no change from my prior comments.

Wednesday's low was $149.23. The June low was $148.45. I am suggesting a trigger to buy puts at $148.00. If triggered our target is $141.00.

Trigger @ 148.00

- Suggested Positions -

Buy the DEC $145 PUT (UNP1322X145)

Entry on October -- at $---.--
Average Daily Volume = 2.7 million
Listed on October 30, 2013



Longer-Term Play Updates



Vanguard FTSE Europe ETF - VGK - close: 56.78 change: -0.30

Stop Loss: 53.90
Target(s): Sell half @ $58.00, sell the rest at $63.00
Current Option Gain/Loss: +61.1%
Time Frame: exit PRIOR to 2014 March option expiration
New Positions: see below

Comments:
10/31/13: The VGK continued to see a little profit taking today. I would expect shares to drop toward the $55-56 zone soon.

Don't forget that we have two exit targets for this trade! More conservative traders could lock in gains now with our option up +94%.

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