Option Investor
Newsletter

Daily Newsletter, Thursday, 2/13/2014

Table of Contents

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

Market Wrap

Market Proves Resilient

by Thomas Hughes

Click here to email Thomas Hughes
The market sold off in early futures trading but regained the lost ground during the open session.

Introduction

Asian and European indices traded down in the overnight sessions following the weak performance of the U.S. markets yesterday. The Nikkei led the Asian markets lower with a more than 2% decline. European shares began lower but were mostly able to regain positive ground after the volatile U.S. open. Futures trading here at home was negative in the earliest part of the morning and then fell hard after the release of economic data at 8:30AM. When I first checked the S&P was indicated down about -9 points, after the release of data it dropped to -15 real fast. A larger than expected drop in Retail Sales for January was most likely to blame. However, after the initial sell off index prices rebounded to open near flat from yesterday's prices.


Yesterday's lack luster action is perhaps a good sign. The market was wrestling ( on the S&P 500) with a short term resistance and seems to have moved past it now with little trouble making this mornings sell off in futures nothing more than a knee-jerk reaction. The SPX is now moving higher with the all time high near 1850 the next target for resistance and now that is only about 20 points away. Earnings are still on the front burner although most of the official season is behind us. More than 70% of S&P companies have reported better than expected earnings but at the same time more have provided weak or dissapointing guidance than not. The guidance may prove to be what provides resistance for the markets in the next few weeks as we wait for the next round of data.

The Economy

Jobless claims were basically flat across the board this week. Initial claims, adjusted, gained 8,000 from last weeks unchanged 331,000. The four week moving average of initial claims rose mildly to hit 336,750. On an unadjusted basis first time claims gained only 3,277, less than half the adjusted number, to reach 358,914. These gains are mild and could be the result of the severe winter weather we have been experiencing here on the east coast. At this time first time claims are trending sideways with little indication of a change anytime soon. Only 6 states reported a decline in claim of more than 1,000 with California in the lead with -9,631 followed up by Georgia and Indiana with about -2,500 each. Five states reported a jump in claims of more than 1,000 led by Wisconsin with 5,041 and New York with 4,830.


Continuing claims were also flat. Claims for a second week of unemployment benefits fell by -18,000 on the headline but last weeks number was revised up by a comparable margin. Looking at the table continuing claims are edging down from the peak set last month but are still elevated from the lows we saw last fall when the economy was advancing. While the longer term trend in this data is down the trend over the last 6 months is more or less flat.


Total claims gained this week, about 57,000, from last weeks low. The recent dip in total claims, driven by expiring long term benefit extensions, may have hit bottom but I am not betting the house on that. I would not be surprised to see this number trend a little lower before all is said and done. I think that the expired Emergency Unemployment Compensation program has more to do with the decline in long term unemployment than anything else at this time and could continue to impact this number over the next few weeks to months. The last two months of weak NFP numbers does not lead me to think that jobs creation is a major contributor to the decline in long term unemployment at this time either.


Retail sales, expected to be flat to slightly negative were perhaps the reason the markets sold off so hard following the 8:30 combined release of data. The expectations were for a decline of about -0.1%, the actual was 0.4%. December was also revised to -0.1% as well. However, I want to point out that the margin of error for this data as reported is ±0.5% so the decline could be much better or worse than actually reported. The snow effect is yet to fully factored in and could impact sales in February as well. I just got about 8 inches at my house and it's still sprinkling down now. The retail data itself was delayed a few seconds, maybe a minute, possibly due to weather.


Business Inventories were released at 10AM. Inventories, a component of GDP, rose a tenth more than expected. Actual figure, 0.5%, the expected was 0.4%. November was also revised to +0.4%.

The Oil Index

Crude prices fell today, WTI dropped below $100 for a brief time after setting a 4 month intraday high yesterday. Near term fear pushed prices lower in Brent as well but a variety of factors helped both types of oil to find support. The 2014 demand outlook is improving, the EIA and OPEC have issued statements raising their expectations for the year. At the same time the cold weather is increasing use of distilate and gas products while refineries enter the regular maintenance season. Natural gas prices rose again for some of the same reasons, namely the cold weather and expected drawdowns of gas and distillate supplies. Gas prices moved back above $5 and just under the long terms highs around $5.50 set two weeks ago.

The Oil Index fell from resistance today, gapping slightly lower. Over the past two weeks the index has been bouncing up from a four month low but has now met longer term resistance around 1425. The indicators are weakly bullish, a break above 1425 is needed for a bullish stance. Even then there is still resistance in the form of the short term 30 day EMA, the long term 150 day EMA and then the long term trend line. Higher prices for crude, gas and derivitives will surely help the oil producers in the long term but for now this index could remain trapped by resistance.


The Gold Index

Gold prices tip toed up to the $1300 level today and crossed right over. Gold prices have been trading just under this level, a three month high, for three days now and could be gearing up for a test of resistance. Meanwhile, the Gold Index has broken the long term down trend. This happened on Tuesday and now the index is gearing up for a possible test of resistance around $105-$110. Momentum is bullish and on the rise at this time though still weak. Stochastic is showing signs of support around the $90 level. The Gold Index could really go either way at this point, depending I think on where gold prices themselves go.


Barrick Gold reported earnings today. The gold miner reported a net loss of -$2.51 per share on impairment charges and other off-sets. Adjusted earnings were $0.37 per share, below the streets estimates of $0.42 and last years fourth quarter result of $0.58. The stock climbed today by about 5% but was capped at long term resistance around the $20 level. The indicators are very weak and do not indicate strong direction. If gold prices remain high, or move higher above $1300 it could take the gold miners with it as earnings expectations rise with price of the underlying commodity.


The Dollar

The Dollar Index moved down toward the lower end of it's four month trading range between $80 and $81.50. This brings the index down to a one month low and below the long and short term moving averages. Indicators remain weak and point to a continuation of the currently sideways trend for the time being. Economic uncertainty, the FOMC and tapering remain the main concerns with the EU/ECB and BOJ/Abenomics coming in close behind.


The Euro gained against the dollar today, climbing back above the 1.3650 resistance/support line. Indicators are midly bullish on the daily charts with some signs of support around the 1.3500 level. Supportive comments from Mario Draghi last week could be helping support this pair. Economic data over the next two weeks could keep volatility up. Support is at 1.3500 and the short term moving average around 1.36250. Resistance around 1.3750 and 1.380.


The Dollar lost ground to the yen today as well but price action may be confirming support. The pair has tested a second support after testing and bouncing from the long term 150 day EMA. This support is coincident with a possible triangle/pennant forming over the short to long term. Indicators are also confirming this support as well, MACD momentum has turned positive and stochastic is strongly pointing up with room to move higher in the near and short term. I still believe that longer term policy from the BOJ and FOMC will continue to drive this pair higher. Janet Yellen is in support of continuing the taper should data warrant it, the BOJ is satisfied with the progress and state of it QE program which still has months and months to go.


Story Stocks

Pepsico blew away the street's estimates in my opinion and yet the stock fell more than 2% today. The soda giant is the parent company for brands such as Quaker, Tropican and Frito Lay. Profits in the quarter were up more than 5% due in part to the performance of new addition Frito Lay and savings from cost cuts and the ongoing restructuring at the company. Earings were $1.12 versus the expected $1.01 and last year's fourth quarter of $1.06. Revenue topped streets estimates as well, with the whole report spurring the company board to raise the dividend by $0.15 to $2.62, about 3.5% of the current stock prices. Nothing in the report or statement led me to believe the company was in any way expecting anything different in the coming quarters, in fact, executives commented on how well their cost saving plans and changes were coming along.


Comcast has signed a deal to buy Time Warner Cable. The deal is worth over $45 billion and is expected to make billions more for other firms involved with the deal. Comcast shares fell nearly 4% while shares of Time Warner gained nearly 7%.

GM recalled close to 3 quarters of a million vehicles today. Models included are from years 05-07 and have to do with a faulty ignition switch that has led to some injuries. Shares of GM dropped over 1.5% on the news, approaching long term support around the $35 level.

The Indices

The transports moved higher today, in a continuation of a long term trend line bounce. The index regaine the upper side of resistance and the short term moving average. The indicators are also turning bullish with MACD poking up above the zero line and stochastic moving strongly higher, both in line with the long term trend. Next resistance is around the 7,500 level and the most recent all time highs.


The Dow advanced today as well. This is the 6th out of 8 days of advance for the index, since it the correction hit bottom last week. Indicators are bullish and on the rise though stochastic is overbought in the near term. Today's action confirms the 30 day moving average as a near term support with resistance just above at 16,225. Next support if the short term average does not hold is the 15,500-15750 level.


The SPX extended its bounce as well. The index is now back above the long term trend line, the long and short term moving averages and back inside the holiday 2013 trading range/resistance range. Indicators are bullish and rising, in line with the long term trend and pointint to higher prices. However, there is significant resistance to break. The index is already inside the trading range set during December but must break above to be very bullish longer term. At this time earnings outlook and guidance is clouding the future, as well as the economic dip, and providing at least some near term resistance. A retest of support may not be out of the question either.


On the long term charts the index is still recovering from the recent correction. The indicators are still bearish but momentum is waning and stochastic is still fairly high in the range. Again, the index looks like it is making a nice bounce from the long term trend but may have a little more near to short term weakness that may correspond to a retest of the trend line. The long term trend is up but a break above the previous all time high is needed to maintain that stance.


The market seems to be OK with Janet Yellen, the Fed and Tapering. The dip in economic activity seems to be weathering just fine as well. Now we are waiting to see if, how and how strongly the economy picks back up when it does pick back up. There are some lingering concerns with China but when aren't there. Europe is still struggling but is making some progress but they still have a long way to go. Once again we are awaiting the data. The markets may move higher to test resistance but if the data does not show the economy expanding I think it will not be broken.

Tomorrow will be dominated by economic data in the form of industrial production, capacity utilization and Michigan Sentiment as well as earnings. After the bell today AIG reported far better than expected, sending the stock higher in the after hours session. The company reported $1.15 per share versus an expected $0.96 on revenue as expected. The company also went on the boost the dividend and increase the current share repurchase program. The dividend increase is 25% and the not the first of such increases I have heard this earnings season. More could be on the way, a rising market with increased dividend payouts and increased stock repurchase programs is pretty nice.

Until then, remember the trend!

Thomas Hughes

 


New Option Plays

Buying The Bounce

by James Brown

Click here to email James Brown


NEW DIRECTIONAL CALL PLAYS

Monster Beverage - MNST - close: 71.33 change: -0.47

Stop Loss: 69.90
Target(s): 77.50
Current Option Gain/Loss: Unopened
Time Frame: 4 to 5 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
MNST is in the consumer goods sector. The company makes "alternative" beverages and is probably best known for their Monster branded energy drinks. Potential legal issues regarding the alleged dangers of drinking energy drinks and marketing toward children have been a dark cloud over the company for a few years now. Yet the current rally in the stock price would suggest investors are not worried. The company has been rumored to be a takeover target with the most likely buyer being Coca-Cola (KO) although it's worth noting those rumors have been around for a while as well.

The stock's performance over the last two days is a bit worrisome but after such a big bounce MNST was due for a little profit taking. The stock bounced exactly where it should have today as MNST found support at prior resistance. I am suggesting we take advantage of this pullback and bounce and buy calls tomorrow. However, we want to keep our position size small to limit our risk.

*Small Positions at the opening bell*

- Suggested Positions -

Buy the MAR $75 call (MNST1422C75) current ask $2.15

Annotated Chart:

Intraday Chart:

Entry on February -- at $---.--
Average Daily Volume = 1.39 million
Listed on February 13, 2014



In Play Updates and Reviews

CNQR Hits Our Bullish Target

by James Brown

Click here to email James Brown

Editor's Note:

The U.S. market managed to shrug off the disappointing January retail sales data.

CNQR hit our bullish exit target. CSC hit our entry trigger.
SJM hit our stop loss.

Several stop losses have been updated tonight.


Current Portfolio:


CALL Play Updates

Caterpillar Inc. - CAT - close: 96.11 change: -0.06

Stop Loss: 93.85
Target(s): 99.85
Current Option Gain/Loss: +13.1%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
02/13/14: Our new play on CAT is off to a good start. The gap down this morning was a gift. Shares opened lower at $95.29 as the market started the day negative. CAT quickly rebounded and pared its losses to virtually unchanged.

The Point & Figure chart for CAT is bullish with a $117 target.

small positions - Suggested Positions -

Long MAR $97.50 call (CAT1422C97.5) entry $1.45

02/13/14 planned entry at the opening bell
CAT gapped down at $95.29

Entry on February 13 at $95.29
Average Daily Volume = 8.3 million
Listed on February 12, 2014


Salesforce.com - CRM - close: 63.13 change: +1.65

Stop Loss: 59.90
Target(s): 67.50
Current Option Gain/Loss: + 7.5%
Time Frame: Exit PRIOR to earnings on Feb. 27th
New Positions: see below

Comments:
02/13/14: Great news! CRM finally decided to participate in the market's rally. Shares bounced from their simple 10-dma this morning and then raced to a +2.6% gain and closed at new highs.

NOTE: CRM has set its earnings date for Feb. 27th. We will plan to exit prior to earnings.

Earlier Comments:
Our target is $67.50. However, we will plan on exiting prior to CRM's earnings report in late February. FYI: The Point & Figure chart for CRM is bullish with an $82 target.

- Suggested Positions -

Long Mar $62.50 call (CRM1422C62.5) entry $3.30*

02/11/14 new stop loss @ 59.90
02/05/14 triggered @ 61.75
*option entry price is an estimate since the option did not trade at the time our play was opened.

Entry on February 05 at $61.75
Average Daily Volume = 4.8 million
Listed on February 01, 2014


Computer Sciences - CSC - close: 62.31 change: +0.86

Stop Loss: 59.45
Target(s): 68.00
Current Option Gain/Loss: Mar $60c + 4.9% & Jun $65c: + 1.3%
Time Frame: 4 to 8 weeks
New Positions: see below

Comments:
02/13/14: Our new play on CSC has opened. The market's weakness this morning produced a spike down in CSC to $60.92 but shares quickly rebounded. By midday CSC was hitting new relative highs. Our suggested entry point was tagged at 62.15.

Earlier Comments:
Our target is $68.00. I will point out that CSC did see additional resistance in the past near the $63-64 zone back in 2007. I prefer the June calls but I'm listing March as well for shorter-term traders. FYI: The Point & Figure chart for CSC is bullish with a $78 target.

- Suggested Positions -

Long MAR $60 call (CSC1422C60) entry $2.81*

- or -

Long JUN $65 call (CSC1421F65) entry $2.27*

02/13/14 triggered @ 62.15
*option entry price is an estimate since the option did not trade at the time our play was opened.

Entry on February 13 at $62.15
Average Daily Volume = 1.59 million
Listed on February 12, 2014


Facebook, Inc. - FB - close: 67.33 change: +2.88

Stop Loss: 63.85
Target(s): 69.75
Current Option Gain/Loss: +52.7%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
02/13/14: Shares of FB raced higher today. It was encouraging to see FB hold support near $64.00 in spite of the market's weakness this morning. After testing $64 again FB displayed relative strength with a +4.4% gain. We are adjusting our stop loss up to $63.85.

Earlier Comments:
Our short-term target is $69.75. More aggressive investors could aim higher since the Point & Figure chart for FB is bullish with an $89 target.

- Suggested Positions -

Long MAR $70 call (FB1422C70) entry $1.27

02/13/14 new stop loss @ 63.85
02/11/14 triggered @ 64.75

Entry on February 11 at $64.75
Average Daily Volume = 60 million
Listed on February 08, 2014


F5 Networks - FFIV - close: 111.74 change: +0.19

Stop Loss: 108.60
Target(s): 118.50
Current Option Gain/Loss: - 2.8%
Time Frame: 4 to 5 weeks
New Positions: see below

Comments:
02/13/14: As the stock market spiked lower this morning shares of FFIV gapped down at $110.25 and dipped to $108.80 before bouncing back. Shares almost didn't make it into positive territory. However, the overall trend remains a bullish one. I would be tempted to launch new positions here if both FFIV and the NASDAQ open positive tomorrow.

We are adjusting our stop loss up to $108.60.

Earlier Comments:
Our multi-week target is $118.50. We'll start with a stop loss at $106.90. More conservative traders will want to consider a higher stop loss.

- Suggested Positions -

Long MAR $115 call (FFIV1422C115) entry $3.14

02/13/14 new stop loss @ 108.60
02/11/14 triggered @ 111.10

Entry on February 11 at $111.10
Average Daily Volume = 2.8 million
Listed on February 10, 2014


Gilead Sciences - GILD - close: 82.55 change: +0.55

Stop Loss: 79.75
Target(s): 89.75
Current Option Gain/Loss: Mar $85c: - 8.0% & Apr $85c: - 5.2%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
02/13/14: The spike down in GILD this morning bounced at $80.90. Shares rallied back and managed to outperform the S&P 500 but not the NASDAQ. I would consider new positions now. More conservative traders might want to wait for a move above yesterday's high at $82.93.

We are adjusting our stop loss up to $79.75.

Earlier Comments:
Our target is $89.50. I am listing both the March and the April calls. Pick a month that best suits your time frame.

FYI: The Point & Figure chart for GILD is currently bearish but a move above $83.00 should produce a new triple-top breakout buy signal.

- Suggested Positions -

Long MAR $85 call (GILD1422c85) entry $2.00

- or -

Long APR $85 call (GILD1419D85) entry $3.04*

02/13/14 new stop loss @ 79.75
02/12/14 triggered @ 82.50
*option entry price is an estimate since the option did not trade at the time our play was opened.

Entry on February 12 at $82.50
Average Daily Volume = 13.7 million
Listed on February 11, 2014


Lockheed Martin - LMT - close: 159.80 change: +0.88

Stop Loss: 155.65
Target(s): 165.00
Current Option Gain/Loss: +155.6%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
02/13/14: LMT managed to deliver another gain today with a +0.5% advance. Yet as expected the $160 level is proving to be potential resistance. The low this morning was $156.64. I am raising our stop loss up to $155.65.

Earlier Comments:
Our multi-week target is $165.00. That is a little bit aggressive since the $158-160 zone could be overhead resistance. Use small positions to limit risk.

- Suggested *small* Positions -

Long MAR $155 call (LMT1422C155) entry $2.23

02/13/14 new stop loss @ 155.65
02/12/14 new stop loss @ 153.45
02/12/14 planned exit to sell half this morning.
LMT gapped higher (+$1.15)
Option opened @ 5.10 -30c spread = $4.80 exit (+115.2%)
02/11/14 Sell Half now to lock in potential gains
(sell half of our position tomorrow morning, Feb. 12, at the open)
02/11/14 new stop loss @ 151.90
02/08/14 new stop loss @ 149.65
02/06/14 triggered at $152.25

Entry on February 06 at $152.25
Average Daily Volume = 2.4 million
Listed on February 05, 2014


Constellation Brands Inc. - STZ - close: 79.44 change: +0.44

Stop Loss: 76.40
Target(s): 84.75
Current Option Gain/Loss: Mar$80c: + 0.0% & Apr$80c: + 0.0%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
02/13/14: Shares of STZ were pretty resilient this morning. The stock didn't see the same weakness the rest of the market did. I would still consider new positions at current levels. We will adjust our stop loss higher to $76.40.

Earlier Comments:
The prior highs near $81.50 could be overhead resistance but we're aiming for $84.75. STZ does not move super fast so you may want to buy the April calls instead of the March calls.

Trigger @ 79.00

- Suggested Positions -

Buy the MAR $80 call (STZ1422C80) entry $1.70

- or -

Buy the APR $80 call (STZ1419D80) entry $3.30

02/13/14 new stop loss @ 76.40
02/12/14 triggered @ 79.00

Entry on February 12 at $79.00
Average Daily Volume = 1.5 million
Listed on February 11, 2014


United Parcel Service - UPS - close: 96.56 change: +0.53

Stop Loss: 94.40
Target(s): 99.85
Current Option Gain/Loss: + 8.1%
Time Frame: 4 to 5 weeks
New Positions: see below

Comments:
02/13/14: Traders quickly bought the dip in UPS this morning and the stock closed the session up +0.55%. Meanwhile the UPS board raised the quarterly cash dividend by 8% to 67 cents a share.

Tonight we are adjusting our stop loss to $94.40.

- Suggested Positions -

Long MAR $95 call (UPS1422C95) entry $1.96

02/13/14 new stop loss @ 94.40
02/11/14 triggered @ 96.15

Entry on February 11 at $96.15
Average Daily Volume = 4.3 million
Listed on February 08, 2014




PUT Play Updates


Currently we do not have any active put trades.




CLOSED BULLISH PLAYS

Concur Technologies - CNQR - close: 124.84 change: +2.55

Stop Loss: 116.75
Target(s): 125.00
Current Option Gain/Loss: +143.3%
Time Frame: 4 to 5 weeks
New Positions: see below

Comments:
02/13/14: Target achieved at $125.00.

The rally in CNQR accelerated again with a +2.0% gain on Thursday. Shares hit an intraday high of $125.42.

- Suggested Positions -

MAR $120 call (CNQR1422C120) entry $3.00* exit $7.30** (+143.3%)

02/13/14 target hit @ 125.00
**option exit price is an estimate since the option did not trade at the time our play was closed.
02/12/14 new stop loss @ 116.75
02/11/14 new stop loss @ 114.75
02/10/14 triggered @ 116.65 *option entry price is an estimate since the option did not trade at the time our play was opened.

chart:

Entry on February 10 at $116.65
Average Daily Volume = 822 thousand
Listed on February 08, 2014


CLOSED BEARISH PLAYS

The J.M.Smucker Company - SJM - close: 95.14 change: +1.43

Stop Loss: 95.05
Target(s): 90.50
Current Option Gain/Loss: -11.2%
Time Frame: Exit PRIOR to earnings on Feb. 14th
New Positions: see below

Comments:
02/13/14: Our SJM trade has been stopped out.

We were already planning to exit this trade today at the closing bell to avoid holding over the earnings report tomorrow. However, the stock market's widespread bounce helped fuel a +1.5% gain in SJM and the stock hit our stop loss at $95.05.

- Suggested Positions -

MAR $95 PUT (SJM1422o95) entry $2.75 exit $2.44 (-11.2%)

02/13/14 stopped out
02/12/14 prepare to exit positions tomorrow at the close.
02/12/14 SJM began trading ex-dividend this morning
02/10/14 new stop loss @ 95.05, only 3 days left!
02/05/14 new stop loss @ 95.55
02/05/14 new stop loss @ 96.55
02/03/14 triggered @ 96.25

chart:

Entry on February 03 at $96.25
Average Daily Volume = 896 thousand
Listed on February 01, 2014