Option Investor
Newsletter

Daily Newsletter, Thursday, 1/23/2014

Table of Contents

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

Market Wrap

Weak Data Spooks Markets

by Thomas Hughes

Click here to email Thomas Hughes
Introduction

The markets dropped today as investors weighed the weak PMI data from China. Chinese manufacturing data has now fallen below the 50 mark, confirming some fears of slow down in the region. Asian indices, particularly the main land Hand Seng Index, fell on the news early this morning when it was released. European indices responded in similar fashion and shed about a half percent.Our own markets fell steadily throughout the day before making a small bounce in the late afternoon. Data and the economy was the focus of the morning hours, earnings more so after the bell.


Futures trading on the U.S. indices was in the red slightly ahead of today's economic releases. The S&P 500, Dow and Nasdaq were all indicated lower by around 0.3%. After the unemployment claims came out futures trading doubled the earlier losses. The 9AM release of the FHFA Housing Price index did little to support the market. Home Prices, while rising, have slowed their rate of increase. Likewise, other indicators of the economy released at 10AM were much the same. The economy is still growing but not as much as it was last month. The S&P opened about 8 points lower than yesterdays close and then kept moving lower through lunch time. By noon the index had hit a low near -20 from yesterday's close but failed to break support. Today's trading was knee jerk reaction to news that although was not as good as expected is still good. I think eyes are really on the FOMC meeting and what they do with the taper. On the charts of hourly prices we can see that the S&P at least is still well within the range set at the end of 2013. As a point of reference, the FOMC announcement is four trading days away.

Hourly Price Chart SPX

The Data

Chinese PMI, expected to remain above the expansionary 50 level, fell to 49.6. The is not the official reading, it is only the flash reading of the HSBC index but it does offer an insight into the country. China did not slow as much as first thought last year but signs are pointing to more softness in that economy this year. Other factors involved include the recent New Year holiday, which may have caused a lower than usual reading.

On a net basis first time unemployment claims are unchanged. The headline was a drop of -1,000 from last weeks revised number. This week number 326,000, last weeks was 326,000, revised down to 325,000. This number is OK but not too exiting. It is consistent with the longer term trend and indicative of a firmer if not firming labor market. However, with the recent fluctuations and the questions raised by seasonal adjusting I would like to see this number move down, and even more importantly see the longer term total claims number come down. The four week moving average was also revised down for last week by 250 claims. This week the average fell again from the recent high to 331,500 and a 6 week low.


Continuing claims continued to rise this week despite downward revisions and declining total claims. Continuing claims increased by over 35K to hit a new 6 month high of 3.056 million. Last weeks figures were revised lower by a few thousand to 3.022 million. The increasing level of continuing claims is also raising my level of concern. It could be carry over from the December spike in initial claims or it could be something else. 2014 is a new year with new legislation for business and employers to deal with, it could be impacting hiring. On a more positive note, the rise in continuing claims could be linked to the trend of under-qualified or mis-qualified workers in the work force I have been hearing about, which is still a problem but one less ominous and more easily fixed. Regardless of the cause this number needs to be watched closely.


Total claims figures was a big surprise and one that I am surprised was not discussed more in the news. The total number of Americans fell by over 1 million (1,000,000) to hit a new low not seen since before the 2008 crisis. My first reaction is whoa, that's good news, but then if you consider the fact that unemployment benefits extensions ran out beginning January 1st, and this data is for the week ending January 4th, then it looks more like the drop is based on people falling off the roster than it does anything else. There could be more volatility in this and other employment claims numbers over the next few weeks at least.


The FHFA Housing Price Index, the index of home prices purchased through Fannie or Freddie, gained 0.1% in November. This is down slightly from October's increase of 0.5%. While this number shows some slowing in the housing market it is also two months old. Existing home sales also gained by 0.1%. This data is for December and wraps up 2013. The total number of existing homes sold in 2013 hit a 6 year high of just over 5.09 million.

Markitt, an independent data firm, released it's flash PMI reading for the U.S. today as well. The reading fell from the previous reading of 55 in December to 53.7 for January. A fall in out put and new order growth were blamed for the drop this month. While showing some slowing, this number is expansionary and shows growth in the U.S. manufacturing industry.

The Leading Indicators was a little weaker than expected but still expansionary. It too gained 0.1% in the most recent data release pointing toward slow growth, but growth, for January. Within the release are included several statements to the effect that signs are pointing to a good 2014, but “uncertainties remain” and that “business caution and concern ….still exist”.


The Gold Index

Gold trading had been to the upside in the earliest part of today's session. The $1250 resistance level held until just after the 8:30AM time frame. At that time, a combination of weak Chinese data, tepid unemployment claims and other factors drove the trade through $1250 to reach a 6 week high near $1265. The FOMC meeting next week is the next really important economic event that could move gold prices, until then prices could keep moving higher. Longer term the gold market is still showing signs of weakness, if it is putting in a bottom there will be a retest of support before I get too bullish on it. Current support for gold is around $1200 with next resistance around $1300. The Gold Index has also been moving higher, extending if slightly its gains above the 30 day moving average. However, looking at this chart in terms of the down trend it is looking weak. The indicators are not strong, stochastic is rolling over even before crossing into the over bought zone and MACD is very weak. At the same time the index is approaching the long term down trend line. Rising gold prices could help to lift the Gold Index and gold stocks in general over the next week, until the FOMC meeting. A failure to break above and hold the long term trend line could result in the index moving down to retest the recent lows around $82.50.


The Oil Index

Oil prices have been moving higher since hitting a 6 month low last week. Supply fears, which should be diminishing in the wake of weaker than expected Chinese data, did not abate in today's trade. Oil prices continued the bounce begun last week and added another half percent today. The price is now holding just below the $97 level, which could become resistance if demand growth expectations are lowered. The Oil Index has been trending sideways since last week but made a big move lower today, toward the bottom of the two week range. The indicators are bearish but already showing signs of support. The index is just above the long term trend line which is the most likely area to find buyers at this time. A few oil companies have reported so far but the bulk of them release earnings at the end of next week, just after the FOMC meeting. The long term trend is still up so I am still bullish on the oil sector in general but there is at least one thing to be wary of, long term resistance. The resistance level just above $1,500 is coincident with key levels of the 2008 market reversal.


The Dollar

The dollar weakened today against yen and the euro. Better than expected data from the EU and Germany helped the euro gain strength while the BOJ's lack of movement on QE policies helped to strengthen the yen. German flash PMI came in at just over 56, ahead of the expected 54.3 while at the same time the current account balance for the EU rose unexpectedly. Even French manufacturing recovered somewhat and grew to 48.8. The euro got a big boost from the improvement sending the EUR/USD back up above its 30 day EMA and a previous support/resistance level.


The yen got a boost today from BOJ statements. Governor Kuroda does not think any more stimulus is needed and that the target monetary base is still good and that inflation targets will be met. The yen strengthened and the USD/JPY moved sharply lower on the news. This may be bearish for the pair in the shorter term but longer term the trend is still up. Even without further stimulus there is still stimulus. The current target is still over a year out, in that time the BOJ will keep printing money while the FOMC stops printing it. Today's move brought the pair below support and the short term moving average. The 103.75 level will be important to watch going into next week and the FOMC. Next support is at 102.50 with resistance at the current level and next at 105.


Story Stocks

Netflix was one of the very few bright spots in the market today. Streaming content provider wowed investors with results that were way ahead of the expectations. Profits were up in the range of 500%, revenue in the range of 25% and total subscribers crossed the 4 million mark. The company has proven the momentum is still building and has some room to grow. Share prices surged at least 15% in the after hours yesterday, when the report was released. Today the stock opened at those levels, above the previous up trend line, and held them into the close.


McDonalds released this morning, its report was not so great. The company reported profits and earnings that were flat from the previous year. A slight decline in comp sales plus a slight rise in costs off set each other in the quarter. The full year results were not much better. Revenue increase about 2% for the year while profits increased only about 4%. Today the stock actually moved higher on the news, bouncing off of a long term support line. On the weekly charts the indicators are weak but suggest there is some support at the current level which is echoed on the daily charts.


The Indices

The weak Chinese PMI was the catalyst for today's sell-off. It is the same thing as when the NFP came out. The market is trading in a range awaiting the FOMC meeting next week and is reacting to the data that could impact their decisions as well as the global growth outlook. Looking back to Monday the 13th , the first trading day following the last NFP report, the market sold off hard and hit support at what I have termed the Pre-Holiday Support Level. Today the same thing happened, the market(the S&P 500) got some bad news, unexpected news, and sold off to the Pre-Holiday Support Level. Support is the key word here for right now. The support level is still good and the trend is still up. A break below the current support level around 1818 could take the market lower to the next support target at the long term trend line.


The Dow is in a similar position. One notable difference is that where the S&P 500 is forming more of a sideways consolidation or rectangle pattern, the Dow is making a triangle. The Dow also fell to test it's pre-Holiday support. It appears as if the triangle is focused on the FOMC meeting, reinforcing my idea that the financial markets in general are focusing on the Fed and what it will be doing. A break out of this pattern to either side could take the Dow as much as 600-800 points in the short term. The long term trend is still up and the index is about 4.5% above my trend line.


The Transports led the market today and even poked its head into positive territory before the close, making a new all-time intra-day high. The transports have already broken out of its Holiday trading range and has moved higher by over 250 points, or +4%. This index has been leading the Industrials higher, if it continues to do so we can expect the Dow is going to be making its break to the upside next week. At this time the indicators on the daily charts are bullish and on the rise. On the long term weekly charts also bullish and ticking up.


The long term trends in the stock markets are up. The long term trends in the economic data are up. These two things go hand in hand. At this time the data still points to long term economic growth, but for some reason the market seems to want Fed permission to believe it. Based on past performance, the Fed thinks that the economy is doing OK, there are still reasons to be wary but things are good enough to bring QE to an end. Until the fed tells us what it thinks, we'll just have to keep guessing, using the data as our guide. Plus, there is the whole Janet Yellen issue to contend with, she'll be in charge starting next week. There are no economic announcements tomorrow so earnings will be the talk of the day. Earnings season as also added some churn to the markets. The reports have been a mixed bag, nothing surprising after the last year of reporting. Some are doing well, some are not so good. After the bell today Microsoft and Starbucks both released. Microsoft made a big splash with a positive surprise of $0.78 versus the expected $0.68. Starbucks also beat but not be as big a margin.

Until then, remember the trend!

Thomas Hughes


New Option Plays

Can You Hear Me Now?

by James Brown

Click here to email James Brown


NEW DIRECTIONAL CALL PLAYS

SBA Communications - SBAC - close: 92.78 change: +1.31

Stop Loss: 89.90
Target(s): 98.50
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
SBAC is in the services sector. The company operates wireless communications towers across North and Central America. SBAC delivered a strong performance in 2013 even after its post-earnings sell-off in November last year. Fortunately the stock found support near its rising 50-dma. Since those late November lows SBAC has rallied back to challenge and now breakout past its all-time highs near $92 a share. The $100 level will act like a magnet and levitate the stock higher.

I am suggesting a trigger to buy calls at $93.00. If triggered our target is $98.50. More aggressive traders could aim higher but I suspect the $100.00 mark could be round-number resistance. FYI: The Point & Figure chart for SBAC is bullish with a $107 target.

Trigger @ 93.00

- Suggested Positions -

Buy the MAR $95 call (SBAC1422C95) current ask $1.80

Annotated Chart:

Weekly Chart:

Entry on January -- at $---.--
Average Daily Volume = 1.1 million
Listed on January 23, 2014



In Play Updates and Reviews

China Sparks Stock Sell Off

by James Brown

Click here to email James Brown

Editor's Note:

Disappointing economic data out of China sparked a widespread market sell-off. Yet once again dip buyers were active this afternoon.

ORLY, TMO, and YELP hit our stop losses today.
GMCR hit our entry trigger. We want to exit our STX trade tomorrow at the closing bell.


Current Portfolio:


CALL Play Updates

Accenture - ACN - close: 83.92 change: -1.48

Stop Loss: 83.25
Target(s): 89.50
Current Option Gain/Loss: -43.0%
Time Frame: exit PRIOR to February option expiration
New Positions: see below

Comments:
01/23/14: It was a rough day for shares of ACN. The stock had been showing strength but the market's widespread sell off today sparked some profit taking. ACN underperformed with a -1.7% decline. The low today was $83.50. Our stop is at $83.25. I am not suggesting new positions at this time.

- Suggested Positions -

Long Feb $85 call (ACN1422B85) entry $1.58

Entry on January 22 at $85.15
Average Daily Volume = 3.3 million
Listed on January 18, 2014


Chicago Bridge & Iron - CBI - close: 81.91 change: -1.04

Stop Loss: 79.65
Target(s): 89.50
Current Option Gain/Loss: -20.9%
Time Frame: Exit PRIOR to CBI's earnings report in February
New Positions: see below

Comments:
01/23/14: CBI was not immune to the market's weakness. Shares actually underperformed with a -1.2% decline. I do expect the $80 level and the 50-dma, near $80, to offer support.

Earlier Comments:
Our target is $89.50. We want to exit prior to CBI's earnings report in February.

- Suggested Positions -

Long April $85 call (CBI1419D85) entry $3.10

12/28/13 new stop loss @ 79.65

Entry on December 19 at $80.35
Average Daily Volume = 1.5 million
Listed on December 18, 2013


Cigna Corp. - CI - close: 89.54 change: -0.12

Stop Loss: 88.40
Target(s): 95.00
Current Option Gain/Loss: -13.7%
Time Frame: exit PRIOR to earnings on February 7th
New Positions: see below

Comments:
01/23/14: CI almost hit our stop loss this morning. Shares gapped down at $88.72 and then spiked lower to $88.63. Our stop loss is at $88.40. Fortunately CI pared its losses and closed down -0.1% versus a -0.8% drop in the S&P 500. I am not suggesting new positions at this time.

Earlier Comments:
I am suggesting a $95.00 target. However, we'll plan on exiting prior to the earnings report on February 7th. FYI: The Point & Figure chart for CI is bullish with a $119 target.

Trigger @ 90.25

- Suggested Positions -

buy the Feb $90 call (CI1422B90) entry $2.47

01/21/14 triggered @ 90.25

Entry on January 21 at $90.25
Average Daily Volume = 1.0 million
Listed on January 15, 2014


Green Mountain Coffee Roasters - GMCR - close: 80.86 change: -0.29

Stop Loss: 77.95
Target(s): 88.00
Current Option Gain/Loss: -9.8%
Time Frame: exit PRIOR to earnings on February 5th
New Positions: see below

Comments:
01/23/14: GMCR saw some volatility this morning. The stock managed to tag a new relative high and hit our suggested entry point at $81.75 before almost immediately reversing lower. Thankfully traders bought the dip at $79.63. I would wait for a new high above $81.80 before launching new positions.

Earlier Comments:
A breakout could spark some short covering. The most recent data listed short interest at 46% of the 128 million-share float. We will plan on exiting prior to the earnings report in early February. FYI: The Point & Figure chart for GMCR is bullish with a $98 target.

- Suggested Positions -

Long Feb $85 call (GMCR1422B85) entry $3.66

01/23/14 triggered @ 81.75

Entry on January 23 at $81.75
Average Daily Volume = 2.3 million
Listed on January 22, 2014



Northrop Grumman - NOC - close: 117.50 change: -2.82

Stop Loss: 117.25
Target(s): 124.00
Current Option Gain/Loss: - 3.7%
Time Frame: exit PRIOR to earnings on January 30th
New Positions: see below

Comments:
01/23/14: NOC's rival Lockheed Martin (LMT) reported earnings this morning and LMT's results sparked a sell off across the defense contractors. LMT plunged -3.9% following its results. NOC followed it lower with a -2.4% decline and a drop to its simple 10-dma. The low today was $117.45. If there is any follow through lower tomorrow then we'll see NOC hit our stop at $117.25. Our NOC February $120 call was cut almost in half with today's decline.

I am not suggesting new positions at this time. We will plan on exiting prior to earnings on January 30th.

Earlier Comments:
Our target is $124.00. I'll confess that might be a little bit optimistic since the $120 level could be round-number resistance.

- Suggested Positions -

Long FEB $120 call (NOC1422B120) entry $1.35

01/23/14 NOC plunges following earnings from LMT
01/22/14 new stop loss @ 117.25
01/14/14 new stop loss @ 114.65
01/10/14 triggered @ 116.50

Entry on January 10 at $116.50
Average Daily Volume = 1.3 million
Listed on January 09, 2014


QUALCOMM Inc. - QCOM - close: 75.87 change: +0.09

Stop Loss: 74.65
Target(s): 79.75
Current Option Gain/Loss: +14.2%
Time Frame: Exit PRIOR to earnings on January 29th
New Positions: see below

Comments:
01/23/14: Shares of QCOM held up well today with traders buying the dip midday near $75.00. The stock managed to bounce back into positive territory. QCOM was making headlines today with news it had purchased approximately 2,400 patents from Hewlett-Packard (HPQ).

I am raising our stop loss to $74.65.

Earlier Comments:
Our short-term target is $79.75. This is a short-term trade. QCOM is due to report earnings on January 29th. Yet Apple (AAPL), who QCOM does a lot of business with, reports earnings on January 27th. We will definitely plan to exit prior to QCOM's earnings report and might consider an exit ahead of AAPL's report.

FYI: The Point & Figure chart for QCOM is bullish with a $93 target.

- Suggested Positions -

Long Feb $75 call (QCOM1422B75) entry $1.96

01/23/14 new stop loss @ 74.65
01/21/14 triggered @ 75.25

Entry on January 21 at $75.25
Average Daily Volume = 8.3 million
Listed on January 16, 2014


NASDAQ-100 ETF - QQQ - close: 88.48 change: -0.30

Stop Loss: 86.75
Target(s): 94.00
Current Option Gain/Loss: + 0.0%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
01/23/14: The market's major indices suffered widespread profit taking today. Yet the pullback in the NASDAQ-100 index wasn't that bad. The QQQ dipped to short-term support near its 10-dma and bounced only closing down -0.33% versus -0.5% drop in the NASDAQ composite and a -0.88% drop in the S&P 500.

More conservative traders may want to raise their stop loss.

Earlier Comments:
We wanted to use small positions to limit our risk. Our optimistic, multi-week target is $94.00.

*small positions* - Suggested Positions -

Long Mar $90 call (QQQ1422C90) entry $1.20

Entry on January 22 at $88.75
Average Daily Volume = 29 million
Listed on January 21, 2014


Seagate Technology - STX - close: 60.74 change: -0.26

Stop Loss: 59.65
Target(s): 65.00
Current Option Gain/Loss: - 8.7%
Time Frame: exit PRIOR to earnings on January 27th.
New Positions: see below

Comments:
01/23/14: I warned readers last night that STX would likely be weak this morning. Sure enough the stock gapped open lower and shares opened at $59.78. Fortunately there was almost no follow through and STX pared its losses by the closing bell. The trend is higher and I would expect STX to rally from here. However, earnings are coming up on Monday, January 27th. I am suggesting we plan on exiting our STX positions tomorrow, Friday, at the closing bell (as we do not want to hold over the earnings report).

FYI: The low today was $59.69. Our stop loss remains at $59.65.

- Suggested Positions -

Long Feb $60 call (STX1422B60) entry $3.10

01/23/14 prepare to exit tomorrow (Friday) at the closing bell
01/22/14 be careful. STX looks like it could gap down tomorrow morning
01/21/14 new stop loss @ 59.65
01/15/14 triggered @ 60.85

Entry on January 15 at $60.85
Average Daily Volume = 3.5 million
Listed on January 14, 2014




PUT Play Updates

Rock-Tenn Co. - RKT - close: 99.77 change: -0.27

Stop Loss: 100.65
Target(s): 97.00
Current Option Gain/Loss: + 0.0%
Time Frame: Exit PRIOR to earnings on January 28th
New Positions: see below

Comments:
01/23/14: I continue to urge caution on RKT. The stock briefly broke down below technical support at its 50-dma but shares quickly rebounded from the $98 area. RKT posted a loss of -0.2% versus the -0.88% drop in the S&P 500. The simple 10-dma looks like overhead resistance so we'll adjust our stop loss down to $100.65.

- Suggested Positions -

Long FEB $100 PUT (RKT1422N100) entry $3.70

01/23/14 new stop loss @ 100.65
01/22/14 new stop loss @ 101.15
01/18/14 new stop loss @ 102.25
01/16/14 new stop loss @ 102.55
01/13/14 new stop loss @ 103.55
01/11/14 adjust exit target from $96.00 to $97.00

Entry on January 09 at $101.96
Average Daily Volume = 656 thousand
Listed on January 08, 2014



CLOSED BULLISH PLAYS

O'Reilly Automotive - ORLY - close: 136.02 change: +0.03

Stop Loss: 133.90
Target(s): 144.00
Current Option Gain/Loss: -25.5%
Time Frame: Exit PRIOR to earnings on February 5th
New Positions: see below

Comments:
01/23/14: ORLY is not cooperating with us. Shares tagged a new high yesterday, hit our suggested entry point, and then reversed. Today's market sell off pulled ORLY to a -1.2% decline and shares fell toward short-term technical support at its simple 10-dma. The stock also hit our suggested stop loss at $133.90.

- Suggested Positions -

Feb $140 call (ORLY1422B140) entry $2.62 exit $1.95* (-25.5%)

01/23/14 stopped out at $133.90
*option exit price is an estimate since the option did not trade at the time our play was closed.

chart:

Entry on January 22 at $136.55
Average Daily Volume = 545 thousand
Listed on January 21, 2014


Thermo Fisher Scientific - TMO - close: 112.81 change: -1.89

Stop Loss: 113.90
Target(s): 119.75
Current Option Gain/Loss: -32.8%
Time Frame: Exit PRIOR to earnings in late January or Early February
New Positions: see below

Comments:
01/23/14: We were worried about TMO yesterday and in last night's newsletter adjusted the stop loss to $113.90. That turned out to be a good move as TMO underperformed the market with a -1.6% decline today. TMO hit our stop within the first 15 minutes of trading today. If shares don't see a decent rebound tomorrow then the weekly chart will form a bearish engulfing candlestick reversal pattern.

- Suggested Positions -

Feb $115 call (TMO1422B115) entry $3.35* exit $2.25** (-32.8%)

01/23/14 stopped out
01/22/14 new stop loss @ 113.90
01/21/14 Caution: Today's move has created a bearish candlestick pattern
01/15/14 triggered @ 115.25
*option entry price is an estimate since the option did not trade at the time our play was opened.

chart:

Entry on January 15 at $115.25
Average Daily Volume = 1.8 million
Listed on January 14, 2014


Yelp, Inc. - YELP - close: 79.45 change: -1.83

Stop Loss: 79.75
Target(s): 98.00
Current Option Gain/Loss: -38.3%
Time Frame: Exit PRIOR to earnings on Feb. 5th
New Positions: see below

Comments:
01/23/14: After touching a new all-time high on Tuesday shares of YELP are down three days in a row. The stock gapped open lower at $80.24 and quickly spiked down toward the $77.50 area. Our stop was hit at $79.75.

Earlier Comments:
I do consider this an aggressive, higher-risk trade. YELP can be volatile and because of that volatility the options are not cheap. I am suggesting small positions.

*small positions* - Suggested Positions -

Feb $90 call (YELP1422B90) entry $4.87 exit $3.00 (-38.3%)

01/23/14 stopped out
01/21/14 triggered @ 83.75

chart:

Entry on January 21 at $83.75
Average Daily Volume = 2.7 million
Listed on January 18, 2014