Option Investor
Newsletter

Daily Newsletter, Wednesday, 12/18/2013

Table of Contents

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

Market Wrap

The Fed Tapered

by Thomas Hughes

Click here to email Thomas Hughes
The FOMC decided the market was as ready and set tapering to begin in January.

Introduction

The Fed decided to taper today despite my strong feelings to the contrary. Regardless, the market though it was a fine idea and used it as an excuse to rally to new highs. The FOMC has initiated a $10 billion per month taper to begin in January. The $10 billion, for this month at least, was split evenly between mortgage backed securities and long term Treasury bonds. The decision was nearly unanimous with only Boston Fed President Eric Rosengren dissenting. He pointed out that unemployment levels were still elevated and that inflation was still below the 2% target, both reasons I thought would keep the taper at bay. In his final appearance at the news conference (this is his last news conference, next month is his last meeting) Bernanke let us know that the recovery was not yet complete but so long as the economy continued to remain on the current track we could expect tapering to continue at a measured pace until completed. He also said that he had consulted with Janet Yellen before making the decision and that she was in full support.


As expected the markets took off like a shot. The equities markets rallied to new all time highs,the dollar strengthened versus the other major world currencies and gold broke through support to retest long term lows. This morning started off with futures in positive territory. International markets were mixed but generally to the upside. The Nikkei led in Asia as the BOJ is also meeting at this time. They will announce their decision on interest rates and QE overnight tonight and will impact trading in the morning. European markets closed in the green across the board led by Germany and Spain with +1% gains each. The U.S. markets drifted throughout the day, eventually sinking to a low for the S&P about 10 points below yesterday's closing price. Following the Fed's announcement volatility entered the market briefly before the bulls took full control. The S&P eventually added more than 29 points, making today's daily range nearly 40 points or 2.2%.

Today's Economic Data

Today's data was dominated by housing market related information. The first bit was mortgage applications. Applications fell by just over 5% to hit a 12 year low. This is a bit of a red flag but could be a one-off. Other data suggests that the housing recovery is still in swing. Building permits fell in November by -3.1% from Octobers figure but remains above the critical 1 million mark. October's figure, delayed because of the government shut-down, rose by 6.7%. The two months represent a net gain in permits from the period prior to the aforesaid shut down.

Housing starts data was also released for October and November. October starts increased by a small 1.8% from August but Novembers figure was a sharp 22.7% from October. This is the biggest increase in starts since January of 1990. The low number of mortgage applications may be a sign of some future weakness in housing but the permits and starts figures support a stable housing recovery.

Along with the FOMC statements came their outlook for the 2014 fiscal year. The committee is now expecting a slightly quicker rate of expansion than it did in the previous meeting. The high estimate for 2014 is for growth around 3%. Just two months ago in September they were projecting growth of 3.5%. The Fed is also expecting inflation to moderate somewhat to 1.6% and for unemployment to hover around 6.7%. Other estimates I have read are targeting growth in the 3.5% range for 2014.

The Gold Index

Gold prices fell by over 1.5% to approach the long term lows near $1200. The taper is definitely a dollar positive event and the gold market felt it strongly. The Gold Index fell as well despite the broad rally in stocks. The index made a new closing low today with indicators that are bearish. The Gold Index has been tied to gold prices and I see no reason for that to change at this time. If gold prices remain low or continue to move lower I would expect to see the index move lower as well. My target for a full retracement of the 2008-2011 bull market.


The Oil Index

Oil prices fell in today's trading but the Oil Index mirrored the broader market and rallied higher. The index made a strong on high volume upward from a previous resistance area in continuation of the long term trend line bounce begun earlier this week. Stochastic is indicating a buy but MACD has yet to turn bullish. At this time near term targets for the Oil Index exist around 1480 and 1500.


The Dollar

The dollar got a big boost from today's Fed decision. The dollar index surged on the news but fell back before the end of the days trading. The decision to begin the taper should continue to strengthen the dollar versus the major world currencies, providing the other central banks keep on stimulating their own economies. However, the doji candle stick formed in today's trading is pointing toward indecision. At this time the 80 level is beginning to emerge as support but it may not hold if investors decide it is time to enter riskier trades and begin to leave the dollar behind. Indicators are bearish but show that there is some support at this level. Longer term the index is bullish and may be gearing up for a move up from the 80 level. First resistance will be found at the 30 day EMA and just above at the 81 level.


The yen tanked against the dollar. The FOMC and the BOJ are now moving in opposite directions. The FOMC just began to wean the economy off of stimulus, the BOJ is right now as I am writing this considering an increase in stimulus. Weaker than expected data over the past month or so has led many to speculate that the BOJ could or would increase QE. In fact, BOJ Governor Kuroda has even said much to the effect. Analysts think the third phase of Abenomics may be about to be unveiled. If the BOJ does increase QE in some way it could send the yen sliding even further. Today the yen lost nearly two handles today and broke above the long term resistance of 103.75. MACD and stochastic have turned bullish in unison indicating higher prices are likely. We'll need to watch the 104 level closely to make sure support will hold, my next upside target for the USD/JPY is near the 110 level. If the pair is unable to hold the current level it could retreat as far the 100 or 95 level.


Story Stocks

There were quite a few stocks in the news today. JP Morgan's financial battles with the government are far from over. Today the Attorney General of Mississippi announce he was suing the company over how it handled mortgage issues in his state. JP Morgan is also suing the FDIC over claims associated with its having taken over Washington Mutual. JPM is suing for over $1 billion, a small sum compared to the billions it has to pay out in reparation for its role in the 2008 financial collapse. JPM alleges that the FDIC made promises to entice it to take over WaMu that were not honored. JPM stock surged higher today, moving up from the 30 day EMA on high volume. JPM now faces resistance at the $57.50 level.


BP announced that it had made a significant discovery in the Gulf Of Mexico. The find is located about 300 miles south of New Orleans and is located in a deep water section of the Gulf. Shares of BP climbed higher today in tandem with the general markets but only barely made it above the 30 day EMA. Stochastic is indicating a buy at this time but there is still resistance ahead.


Bitcoin took a big hit today. The digital currency got the smack down not once but twice. First, the Chinese government intensified its crackdown by disallowing new cash inflows to Bitcoin operators. This is on top of warning from the U.S. Treasury that Bitcoin operators may have to comply with federal anti-money laundering laws. The value of Bitcoins dropped more than $200 and now more than 50% lower than the all time high set just two weeks ago.

Ford released a statement today giving guidance for the full year 2013 and 2014. The motor company says that 2013 will be one of its best years in history. It also says that 2014 will another great year but has lowered its profit out look for several reasons including recession in Europe, higher than expected costs and numerous product launches. The stock lost more than 6% in today's trading and was one of only a few stocks to end in the red.


Oracle released earnings after the bell. Profits fell from the same period last year but came in ahead of analysts expectations. Revenue was also ahead of expectations for the first time in three quarters. One reason for the decline was a drop in adjusted software licenses and cloud computing revenues. The mixed results initially sent the stock trading to the downside in the after hours markets but it eventually regained its footing, moving more than 1% higher. The stock had been moving higher before the close. It gained more than 2% in the regular session before it even released earnings.


Oracle competitor Redhat reports tomorrow. The open source enterprise software provider is expected to report adjusted earnings in the range of $.25. Today the stock moved higher, breaking above resistance with a moderately strong buy signal. Momentum has turned bullish in tandem with a stochastic buy signal. This could be an indication of high expectations for Redhat earnings tomorrow. Today's action has brought share prices inside a window opened last quarter when earnings were a little disappointing. The entire range from $47.50 to $52.50 can be considered resistance, share prices could reverse at any point within it. Earnings will play a big part in where this stock goes but more importantly it will be future outlook.


The Indices

The equities market took the news of tapering very well. The S&P shot up more than 2% in response with the Dow and Nasdaq posting similar gains. All three set a new high. The S&P move came from the 30 day EMA and is a confirmation of the bounce that began this week from that level. Momentum is still bearish at this time but quickly receding. Taken in light of the long term up trend in the index this could precede a new up swing in index prices. The stochastic is showing an early buy signal, the %K has crossed the %D but %D is not yet pointing up although it is rolling over. Since this is a new high there is no real resistance, just targets that can be derived from a wide variety of methods. First support is the 30 day EMA.


The Dow charts looks almost identical to the S&P. The Blue Chip index is also making a move up from the 30 day EMA but is also moving up from strong support. The strength of the support is underscored by the stochastic signal which is much stronger than the S&P signal I described above because %D is pointing up. Momentum is bearish but receding and very nearly at the zero line. Once it turns bullish momentum traders could help propel this index higher in the short and long term. My current upside target for the Dow is just above the 16,500 level with support at the 15,750 level.


The Nasdaq's new high was barely that. The tech heavy index made it by about one and a half points with the weakest indicators of the three. Momentum is bearish and receding but not sharply and not close to the zero line. Stochastic is making a bullish crossover but the %D is so weak it is still pointing down.


All in all, it does appear as if the rally is still on. The taper has started and not only did the market not care, it was a catalyst for higher prices. Now that the taper is begun we may be able to put it on the back burner for a while, unless the data starts to show the economy is deteriorating. So long as the data is firm the taper should stay on and the markets could keep on rallying. Now that the known obstacle is out of the way it is time to start looking ahead to what the next one may be.

Tomorrow could be a make or break day for the markets. Today was very bullish but I would feel a lot better with some follow through, or at least some firm consolidation. Economic data and earnings will be the big driver until the next big hurdle reveals itself. Some had thought it might be the Debt Ceiling/Budget issue but that looks like it is going to pass on by this time without any fuss. It could be the impact from Obamacare but we won't get any clues about that until data starts to roll in at the end of January.

Until then, remember the trend!

Thomas Hughes


New Option Plays

Industrial Goods & Energy

by James Brown

Click here to email James Brown


NEW DIRECTIONAL CALL PLAYS

Chicago Bridge & Iron - CBI - close: 80.13 change: +1.87

Stop Loss: 77.70
Target(s): 89.50
Current Option Gain/Loss: Unopened
Time Frame: Exit PRIOR to CBI's earnings report in February
New Positions: Yes, see below

Company Description

Why We Like It:
CBI is in the industrial goods sector. The company is an energy infrastructure engineering and construction business. There seems to be a growing camp of analysts and economists who believe the global economy is improving and that should be a bullish environment for CBI's business. The stock has spent the last few weeks consolidating below resistance at the $80 level. Today's market-wide rally has pushed CBI right back to resistance at $80.00. A breakout here could signal the next major leg higher.

I am suggesting a trigger to buy calls at $80.35. If triggered our target is $89.50. We want to exit prior to CBI's earnings report in February. FYI: The point & figure chart is on the verge of a new triple-top breakout buy signal.

Trigger @ 80.35

- Suggested Positions -

Buy the April $85 call (CBI1419D85) current ask $3.00

Annotated Chart:

Entry on December -- at $---.--
Average Daily Volume = 1.5 million
Listed on December 18, 2013


Helmerich & Payne - HP - close: 81.52 change: +0.68

Stop Loss: 79.40
Target(s): 87.00
Current Option Gain/Loss: Unopened
Time Frame: exit PRIOR to January option expiration
New Positions: Yes, see below

Company Description

Why We Like It:
Do not confuse this company with Hewlett-Packard Co. (symbol: HPQ), which is commonly referred to as HP. Helmerich & Payne (HP) is in the basic materials sector and operates in the oil & gas drilling industry.

Shares of HP have been outperforming its peers in the oil and energy industry for weeks. Investors have consistently bought the dip. Today saw HP close at a new record high. We are suggesting a trigger to launch bullish positions at $81.75. If triggered our short-term target is $87.00 but we will plan to exit prior to January option expiration.

Trigger @ 81.75

- Suggested Positions -

Buy the Jan $82.50 call (HP1418a82.5) current ask $1.80

Annotated Chart:

Entry on December -- at $---.--
Average Daily Volume = 1.0 million
Listed on December 18, 2013



In Play Updates and Reviews

Stocks Rally On Taper News

by James Brown

Click here to email James Brown

Editor's Note:

The U.S. stock market surged higher on what looks like short covering after the Federal Reserve announced a $10 billion a month reduction in its QE program.

IWM and TIF hit our entry triggers.
WDC was closed as planned.
IBM and KSU hit our stop loss.


Current Portfolio:


CALL Play Updates

Advance Auto Parts - AAP - close: 109.27 change: +0.87

Stop Loss: 107.95
Target(s): 117.50
Current Option Gain/Loss: Unopened
Time Frame: exit PRIOR to January option expiration
New Positions: Yes, see below

Comments:
12/18/13: AAP briefly dipped below its simple 10-dma before bouncing back. More nimble traders may want to buy today's intraday bounce and use a stop just below today's low (106.88) as an alternative entry point. We are still suggesting an entry trigger at $110.65.

Earlier Comments:
We are suggesting a trigger to buy calls at $110.65. If triggered our short-term target is $117.50. Longer-term traders may want to aim higher since the Point & Figure chart for AAP is bullish with a $140 target.

Trigger @ 110.65

- Suggested Positions -

buy the Jan $110 call (AAP1418a110)

Entry on December -- at $---.--
Average Daily Volume = 923 thousand
Listed on December 14, 2013


Allergan, Inc. - AGN - close: 101.13 change: +2.06

Stop Loss: 97.75
Target(s): 104.00
Current Option Gain/Loss: +60.0%
Time Frame: Exit prior to January option expiration
New Positions: see below

Comments:
12/18/13: The market's afternoon rally pushed AGN back above $100 and shares closed at a new six-month high. I am raising our stop loss to $97.75.

The Point & Figure chart for AGN is bullish with a $110 target.

- Suggested Positions -

Long 2014 Jan $100 call (AGN1418a100) entry $2.00

12/18/13 new stop loss @ 97.75
12/16/13 adjust exit target to $104.00
12/06/13 triggered on gap higher at $98.02, suggested trigger was $97.00

Entry on December 06 at $98.02
Average Daily Volume = 1.9 million
Listed on December 05, 2013


Aon Plc. - AON - close: 83.93 change: +2.11

Stop Loss: 81.30
Target(s): 84.85
Current Option Gain/Loss: +67.6%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
12/18/13: We were starting to worry about the lack of movement in shares of AON. Thankfully the stock redeemed itself with a +2.5% surge to new highs.

Please note that we are moving the stop loss to $81.30 and moving the exit target to $84.85.

- Suggested Positions -

Long 2014 Jan $82.50 call (AON1418a82.5) entry $1.70

12/18/13 new stop loss @ 81.30, adjust exit target to $84.85
12/17/13 new stop loss @ 80.90
12/07/13 new stop loss @ 80.75
11/23/13 new stop loss @ 79.85
11/18/13 new stop loss @ 79.45
11/13/13 new stop loss @ 78.75

Entry on November 08 at $80.50
Average Daily Volume = 2.3 million
Listed on November 06, 2013


3D Systems - DDD - close: 81.99 change: +0.61

Stop Loss: 78.90
Target(s): 89.00
Current Option Gain/Loss: - 9.6%
Time Frame: exit PRIOR to January option expiration
New Positions: see below

Comments:
12/18/13: DDD was making headlines today with news they were buying part of Xerox's product design, engineering, and chemistry group for $32.5 million.

Shares of DDD tested short-term technical support at its 10-dma near $79.20 before bouncing back into positive territory.

More conservative traders may want to wait for DDD to trade above its December 11th high of $82.65 before initiating positions.

Keep in mind that DDD shares can be volatile. I am suggesting we keep our position size small to limit our risk.

*small positions* - Suggested Positions -

Long Jan $85 call (DDD1418a85) entry $3.54

Entry on December 17 at $82.05
Average Daily Volume = 5.7 million
Listed on December 14, 2013


Illumina Inc. - ILMN - close: 104.62 change: +2.61

Stop Loss: 99.45
Target(s): 109.00
Current Option Gain/Loss: +11.7%
Time Frame: Exit PRIOR to 2014 January option expiration
New Positions: see below

Comments:
12/18/13: ILMN continued to show relative strength today after garnering more bullish analyst comments. The stock outperformed with a +2.5% gain and closed at a new high.

Earlier Comments:
Further gains could spark some short covering since the most recent data listed short interest at 26% of the 125 million-share float.

Our target is $109.00. More aggressive traders may want to aim higher since the point & figure chart is bullish with a $146 target. P&F chart readers will also notice that ILMN is about to produce a new triple-top breakout buy signal.

NOTE: Biotech stocks can be volatile and the wrong headline could send shares gapping lower. Investors may want to limit their position size.

- Suggested Positions -

Long 2014 Jan $105 call (ILMN1418a105) entry $3.40

12/16/13 new stop loss @ 99.45

Entry on December 11 at $102.00
Average Daily Volume = 931 thousand
Listed on December 09, 2013


Russell 2000 ETF - IWM - close: 112.88 change: +1.53

Stop Loss: 109.25
Target(s): TBD
Current Option Gain/Loss: +28.6%
Time Frame: exit PRIOR to January option expiration
New Positions: see below

Comments:
12/18/13: The IWM performed well today. Shares hit our upside trigger at $111.65 before the market's big rally post-Fed meeting. You got multiple chances to buy calls at our trigger today. The IWM closed at its high of the day, which should bode well for tomorrow.

Earlier Comments:
We're not setting a target price yet. It will probably be in the $115-120 zone.

- Suggested Positions -

Long 2014 Jan $112 call (IWM1418a112) entry $1.78

Entry on December 18 at $111.65
Average Daily Volume = 35 million
Listed on December 17, 2013


Michael Kors - KORS - close: 84.19 change: +1.28

Stop Loss: 79.90
Target(s): 89.00
Current Option Gain/Loss: +16.2%
Time Frame: 4 to 8 weeks
New Positions: see below

Comments:
12/18/13: Today's widespread market rally finally pushed KORS convincingly through resistance near the $83.00 area. If you were looking for a momentum breakout entry point then this would qualify. More conservative investors may want to raise their stop loss.

- Suggested Positions -

Long 2014 Jan $85 call (KORS1418a85) entry $1.85

12/14/13 new stop loss @ 79.90
12/07/13 new stop loss @ 78.49, readers may want to consider an early exit right here
11/22/13 trigger hit at $81.05
11/21/13 adjust entry strategy. Instead of buying a dip at $76.50, move the entry trigger to $81.05. Adjust the stop loss to $77.75. Adjust the option strike to 2014 Jan. $85 call.

Entry on November 22 at $81.05
Average Daily Volume = 7.2 million
Listed on November 20, 2013



Lockheed Martin - LMT - close: 143.73 change: +2.88

Stop Loss: 137.75
Target(s): 149.00
Current Option Gain/Loss: +34.3%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
12/18/13: The rally in LMT accelerated with a +2.0% gain. Shares closed just below resistance near $144.00 (its late November highs). I would not be surprised to see a short-term pullback here.

Earlier Comments:
Our multi-week target is $149.00. Keep in mind that the $144-145 area is currently overhead resistance.

I'm listing the March calls. If you want to take a more short-term approach then the 2014 January calls are much cheaper.

- Suggested Positions -

Long Mar $145 call (LMT1422C145) entry $3.35

Entry on December 16 at $140.25
Average Daily Volume = 2.0 million
Listed on December 14, 2013


Tiffany & Co - TIF - close: 91.47 change: +1.15

Stop Loss: 88.45
Target(s): 98.50
Current Option Gain/Loss: + 0.0%
Time Frame: exit PRIOR to February option expiration
New Positions: see below

Comments:
12/18/13: The market's afternoon rally lifted TIF to a new high. Shares hit our suggested entry point at $91.25. I would still consider new positions at current levels.

Earlier Comments:
The Point & Figure chart for TIF is bullish with a $102 target.

- Suggested Positions -

Long FEB $95 call (TIF1422b95) entry $2.15

Entry on December 18 at $91.25
Average Daily Volume = 1.25 million
Listed on December 16, 2013


United Parcel Service - UPS - close: 102.98 change: +1.00

Stop Loss: 100.45
Target(s): 108.00
Current Option Gain/Loss: -22.4%
Time Frame: 4 to 8 weeks
New Positions: see below

Comments:
12/18/13: UPS' main rival, FedEx (FDX), reported earnings this morning before the opening bell. FDX missed Wall Street's earnings estimate by 8 cents but raised its guidance. This bullish guidance should be good news for UPS as well.

Shares of UPS dipped to their simple 30-dma this afternoon before bouncing back to a new closing high. It's worth noting that shares of UPS are sitting on resistance at the $103.00 level.

A breakout past $103.00 could be used as an alternative entry point although you may want to buy April calls.

- Suggested Positions -

Long 2014 Jan $105 call (UPS1418a105) entry $0.98

12/12/13 new stop loss @ 100.45
11/23/13 new stop loss @ 99.75
11/20/13 new stop loss @ 98.95

Entry on November 14 at $101.25
Average Daily Volume = 3.8 million
Listed on November 13, 2013




PUT Play Updates

Sears Holdings - SHLD - close: 43.95 change: -0.50

Stop Loss: 48.60
Target(s): 40.15
Current Option Gain/Loss: - 3.6%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
12/18/13: SHLD continues to show relative weakness with a -1.1% decline today. The fact that SHLD did not participate in today's very widespread market bounce this afternoon is a very good sign for the bears.

Earlier Comments:
Our short-term target is $40.15. Keep in mind that there are already a lot of bears in this stock. The most recent data listed short interest at 56% of the 50.7 million share float. That's plenty of fuel for a short squeeze if the stock can bounce. It's another reason to keep your position size small.

- Suggested Positions - *small positions*

Long 2014 Jan $39 PUT (SHLD1418m39) entry $1.66

12/16/13 new stop loss @ 48.60

Entry on December 12 at $46.18
Average Daily Volume = 1.5 million
Listed on December 11, 2013


CLOSED BULLISH PLAYS

Western Digital Corp. - WDC - close: 82.10 change: -1.30

Stop Loss: 77.70
Target(s): 84.75
Current Option Gain/Loss: +54.0%
Time Frame: Exit PRIOR to January option expiration
New Positions: see below

Comments:
12/18/13: After missing our exit target by five cents yesterday we decided in last night's newsletter it was time to exit our WDC trade. The plan was to exit at the opening bell. Shares saw a small gap down at $83.28 and then plunged toward the $80.50 area. WDC's failure to participate in the market's post-FOMC meeting rally is a bit surprising.

Our option gapped down from $5.15 to $4.85 (with a 15-cent spread).

- Suggested Positions -

2014 Jan $80 call (WDC1418a80) entry $3.05 exit $4.70 (+54.0%)

12/18/13 planned exit at the opening bell
12/17/13 prepare to exit tomorrow morning at the open.
WDC missed our exit target by 5 cents. We want to go ahead and exit early.

chart:

Entry on December 16 at $80.25
Average Daily Volume = 1.9 million
Listed on December 12, 2013


CLOSED BEARISH PLAYS

Intl. Business Machines - IBM - close: 178.70 change: +2.94

Stop Loss: 178.65
Target(s): 170.25
Current Option Gain/Loss: -41.9%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
12/18/13: With the market surging higher on Wednesday after the FOMC meeting it was not a surprise to see IBM catching a bid. The stock pushed its way past resistance near $178.00 and hit our stop loss at $178.65.

The long-term trend is still down. Keep an eye on potential resistance at the top of its bearish channel (see chart).

- Suggested Positions -

Long 2014 Jan $175 PUT (IBM1418m175) entry $3.15 exit $1.83 (-41.9%)

12/18/13 stopped out
12/14/13 readers may want to take profits now with IBM testing its October lows.
12/09/13 new stop loss @ 178.65

chart:

Entry on December 03 at $176.90
Average Daily Volume = 5.1 million
Listed on December 02, 2013


Kansas City Southern - KSU - close: 120.80 change: +3.32

Stop Loss: 119.50
Target(s): 114.00
Current Option Gain/Loss: -35.4%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
12/18/13: The transportation industry and the railroad stocks were strong performers today. KSU outperformed them both with a +2.8% bounce and a rally back above resistance at $120 and its 50-dma. Our stop loss was hit this afternoon at $119.50.

- Suggested Positions -

2014 Jan $115 PUT (KSU1418m115) entry $2.40* exit $1.55 (-35.4%)

12/18/13 stopped out
12/16/13 new stop loss @ 119.50
12/11/13 triggered @ 117.75
*option entry price is an estimate since the option did not trade at the time our play was opened.

chart:

Entry on December 11 at $117.75
Average Daily Volume = 486 thousand
Listed on December 07, 2013