Option Investor
Newsletter

Daily Newsletter, Tuesday, 2/18/2014

Table of Contents

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

Market Wrap

Data Stalls Rally

by Thomas Hughes

Click here to email Thomas Hughes
Weak economic data stalls rally as traders await FOMC minutes tomorrow afternoon.

Introduction

The early morning hours were relatively quiet following last weeks huge rally in U.S. equities. The trading week started today due to the Presidents Day bank holiday yesterday. Futures trading was mildly positive, lifted in part by dovish policy changes made by the BOJ at their meeting yesterday. The bank doubled its already $3.5 trillion yen loan facility and extended the window on that facility by a full year. Asian stocks, except for the Nikkei which rallied more than 3%, were mostly mixed on the news. European were also mixed after data showed that forward looking sentiment in Germany had fallen below expectations. Adding to the mix of overseas data was UK inflation levels had fallen below the target 2% to the lowest level since 2009.


Our own markets were able to maintain positive territory, at least until the release of economic data here at home. Empire State Manufacturing, released at 8:30AM, was well below expectations and caused futures to fall sharply before bouncing back to break even. Other data released later in the morning was also below expectations but did not seem to impact trading in quite the same way as Empire State. At the open the major indices were slightly negative but after the first hour of trading had at least moved above break even. The rest of the day saw equities tread water and hover around the break even point. Techs led the markets today, setting a new 13.5 year high with the aid of Tesla and Apple. The FOMC minutes, scheduled for release tomorrow at 2:00PM may be what kept the markets in check today.

The Economy

The economic dip that began with the first of the year is not quite over, at least according to today's data. Empire State Manufacturing, released at 8:30AM, fell nearly 8 points from the previous months unrevised 12.51. This is double the expected drop, consensus estimates were for a reading in the range of 8-10. After the release S&P futures quickly lost about 8 points only to bounce back within minutes. There is speculation of the effect of the weather in January and how it is impacting the data and will impact data going into the February readings.

Long Term TIC flows fell to -$45.9 billion in December. This is more than double the expected -$22 billion and almost double Novembers -$28 billion. TIC flows measure the amount of foreign investment dollars coming into U.S. treasury and equities markets. This is the second month of major declines in foreign investment in the U.S. TIC flow data was released at 9AM and did not make an impact on trading that I could see.

The National Association of Home Builders released their index of builder sentiment at 10AM. The data, also much worse than expected, sent the indices back into the red for just a minute but they soon recovered. The index dropped by 10 points, the largest drop on record, to 46 from the previous months 56. This is the first negative reading since spring of last year. As expected, the weather was blamed on some of the drop but surprisingly, so was a lack of labor and a shortage of lots. The NAHB reported that builders are not sure they will be able to fill current need due to the lack of labor and lots.


Oil Climbs

WTI benchmark crude gained over 2% in today's session to hit an intraday high near $103. This is a fresh 4 month high for WTI. Supply, mostly in the form of derivatives and distillates, is a concern due to the ongoing winter weather being experienced across the country. Brent and Nat Gas also reached new highs. Nat Gas topped the $5.50 mark and is now trading near the all time intraday high just over $5.75. The Oil Index traded to the upside today, crossing back above the previously broken up trend line. Momentum is strongly bullish and stochastic is rising but the index may have reached a peak. Today's action has formed a small pin bar which could indicate a small pullback or sideways consolidation may form at the current level. Near term support is the trend line with longer term support just below at the 1430 level with resistance just above at the 1485 level. The resistance level, which has repelled Oil Index prices twice in the last three months, is coincident with resistance set during the 2008 market reversal and could provide continued resistance into the future. Higher oil prices will mean higher revenue and could mean higher profits for oil producers.


The Gold Index

Gold prices held steady today around the $1320 level after profit taking yesterday and in the overnight session. Weak data continues to pressure the dollar and lift gold. This could continue until U.S. economic growth returns sometime this spring. Current GDP estimates have the first quarter around 2.5%, dropping from the fourth quarters 4.1%, and then expanding back to around 3.5% by the second quarter. The Gold Index is receiving a benefit from higher gold prices and has been moving higher as well. The index traded lower today however, as it reached a resistance level at the close of last week. Indicators are bullish at this time but not overly strong. The index could keep moving higher, especially if gold prices keep moving up, but a break above the $105 level is needed. If not the index could remain range bound in the near to short term. Stochastics indicates support around the $90 level,


The Dollar

The dollar retreated today to reach the bottom of a four month trading range. Weaker data has helped to weaken the dollar versus other world currencies, especially the euro. This may continue if the data does not begin to pick back up soon. The FOMC minutes released tomorrow could help. If the Fed sees the current dip as tolerable and stands by their forward view it could help to support dollar value. There is other data this week that could either help or hinder the dollar as well. Tomorrow Mortgage Index, Housing Starts and Building Permits then employment claims on Thursday and then the Philly Fed and Leading Indicators on Friday. The indicators are bearish but very weak at this time with oversold conditions in the near term.


The euro gained against the dollar today, approaching long term resistance around the 1.3800 level. The indicators are bullish and consistent with support around the 1.3500 and 1.36250 levels. Weak data or the FOMC minutes could help this pair to reach resistance over the next few days.


The BOJ surprised the markets today by increasing their loan facilities. The consensus expectations was for no move by the bank but the doubling and extension of government lending facilities was a positive surprise for yen bears. The BOJ doubled the amount of the lending facility to ¥7 trillion, doubled the amount that individual banks could borrow and extended the program for a full year. Even with the expansion the potential affect is seen as limited since Japanese companies are already flush with cash. Analysts expect the bank to increase QE sometime this spring to combat the weaker than expected GDP numbers released last week. Japanese GDP was expected to be 2.8% but was actually only 1%. Adding to the speculation that the bank will increase QE this spring is the planned start of a usage tax hike from 5% to 8% intended to curb debt. In its statement the BOJ remained positive about the current state of the stimulus program and their targeted 2% inflation.

The USD/JPY moved higher on the news but met some resistance at the short term 30 day moving average. Today's move is a possible confirmation of support that is coincident with a similar confirmation signal in the stochastic indicator. Momentum is still weak but above the zero line. I expect to see the pair move up to test resistance around 103.75 after breaking past the moving average. U.S. economic data and the FOMC could impair this trade.


Story Stocks

Filings for Q4 position changes for the major hedge funds and activists investors was released this morning. Warren Buffet's Berkshire Hathaway sold its stakes in both Dish Network and Glaxo Smith Kline. Looks like Dish is losing out to DirecTV. Berkshire added positions in Goldman Sachs and Liberty Mutual. GreenLight Capital added a stake in Micron Technologies. George Soros added positions in JPMorgan, Citi, trimmed it's position in Herbalife and doubled a short position on the S&P 500.

Aluminum giant Alcoa announced that it was closing some of it's operations in Australia. The miner will be shutting down one smelter and two other production facilities. The company said that the facilities were no longer competitive and were not financially viable going into the future. The shut downs are planned for later this year and will cost Australia 1,000 jobs.

Coca Cola reported earnings today that barely met expectations. Top line revenue was slightly short of estimates while bottom line earnings per share were in line with the expected $0.46 per share. Slower sales of carbonated beverages was one reason for the weak results along with “macroeconomic problems”. The company expects to regain momentum later this year. The stock lost over 3% in today's trading to approach long term support at the $37 level.


Actavis announced that it would buy Forest Labs in a deal worth $25 billion in cash and stock. Forest Laboratories surged nearly 30% on the news while Actavis shares jumped about 9%.

Tesla shares climbed to a new record high. A report today suggests that Tesla and Apple are in possible talks but the purpose of those talks is as yet unclear. The reported meeting took place over a year ago and has led to speculation of iCars and other possible collaborations. The stock also received an upgrade today from Baird with a price target of $215. Tesla is scheduled to report earnings tomorrow. The stock climbed 3% today with bullish indicators. Momentum is divergent over the long term and stochastic is a little weak so caution is in order.


The Indices

The major indices tread water today. The weak economic data was troubling but largely brushed off in favor of what the FOMC might say tomorrow. The SPX's total range was barely a quarter point for the whole day today, forming a small white candle just below resistance. The indicators are bullish and rising so the index will likely test resistance at least however headwinds may keep it moving in more of a sideways range over the near to short term. I think it will come down to whether the FOMC minutes show the Fed is more positive over the future than the data is about the present. The next possible resistance is just a few points higher at the current all-time high.


The Nasdaq Composite actually made a new 13.5 year high today. The index gained over a half percent to cross above the 4270 level. Momentum is very strong at this time and points to higher prices sometime in the future. Stochastic, while overbought in the nearer terms still has plenty of room to move higher in the short to long term. The last momentum peak of this magnitude occurred last May and led to 7 months of rally.


The Transports moved lower today. This index is wrestling with resistance and still 4.5% below the most recent high. The indicators are bullish but weak and momentum looks to have peaked. The index may retest support along the long term trend line around the 7,150 level. This level will be important to watch over the next few days as the FOMC minutes and other data is released. If the transports breaks the trend line it could lead the rest of the market with it.


The Dow traded to the negative today as well. The blue chips also in a tight range similar to the SPX. Indicators are bullish and on the rise but the index is still below a significant resistance level. This level is coincident with the bottom of the range set just after Christmas and into the first part of the current year. Momentum could carry the index up to retest this level but a break above it is needed for a more bullish stance. The FOMC outlook as revealed by the minutes as well as economic data could provide the catalyst for rally or resistance.


Some traders and investors at least are anticipating a return to economic growth. The rally in equities over the past two weeks is evidence of that. The question is, when will it happen. Perhaps the FOMC minutes will give us a clue. So far the economic data this year has not been great. Not bad, just not as good as expected and that has helped the markets to correct. The dip in economic activity was expected but the possible weather effect is clouding our ability to view it and may prolong it, which I think could hold the markets back. Or we may see a sharp snap back in growth once the weather clears, which is eminent.

Tomorrow the FOMC minutes may be more important for what they say about the state of the economy and the next 3-6 months than what they say about the taper, although the two issues will be closely tied together. Looking at the charts of the Comp, SPX DJI and DJT I see a mixed market. One index is making new highs, one is about to, another is approaching resistance and the last looks about to retest support. If the Transports (DJT) are the leaders then there may be more weakness in the coming weeks, if the Nasdaq (Comp) is leading then the markets may all reach new highs soon. Tomorrow be on the look out for Housing Starts and Permits data as well as earnings from Tesla Motors.

Until then, remember the trend!

Thomas Hughes

 


New Option Plays

Security Software

by James Brown

Click here to email James Brown


NEW DIRECTIONAL CALL PLAYS

Imperva Inc. - IMPV - close: 59.81 change: +1.86

Stop Loss: 57.90
Target(s): 68.00
Current Option Gain/Loss: Unopened
Time Frame: exit prior to March option expiration
New Positions: Yes, see below

Company Description

Why We Like It:
IMPV is in the technology sector. The company makes security software. The company reported earnings in early February (Feb. 6th) and beat Wall Street's top and bottom line estimates. Management then raised their full year 2014 estimates. The stock soared toward the $60 level. Shares have spent the last week consolidating sideways and digesting its gains.

IMPV currently looks poised to break out past resistance near $60.00. Today's high was $60.26. I am suggesting a trigger to buy calls at $60.50. If triggered our target is $68.00.

FYI: The Point & Figure chart for IMPV is bullish with a $77.00 target.

Trigger @ 60.50

- Suggested Positions -

buy the MAR $60 call (IMPV1422c65) current ask $3.00

Annotated Chart:

Entry on February -- at $---.--
Average Daily Volume = 264 thousand
Listed on February 18, 2014



In Play Updates and Reviews

Stocks Drift On Tuesday

by James Brown

Click here to email James Brown

Editor's Note:

Stocks drifted sideways on Tuesday as markets digested more disappointing economic data. The NAHB housing market index and New York Empire State fed survey both declined.

CLR and PEP hit our entry triggers. LMT was closed this morning.


Current Portfolio:


CALL Play Updates

Caterpillar Inc. - CAT - close: 96.56 change: +0.01

Stop Loss: 94.40
Target(s): 99.85
Current Option Gain/Loss: + 9.6%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
02/18/14: Tuesday was a quiet day for stocks and especially so for shares of CAT, which closed almost unchanged for the session. Tonight we're adjusting our stop loss up to $94.40.

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

02/18/14 new stop loss @ 94.40
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


Continental Resources - CLR - close: 117.88 change: +4.61

Stop Loss: 109.75
Target(s): 119.75
Current Option Gain/Loss: +33.3%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
02/18/14: Our new play on CLR is off to a strong start with a +4.0% rally today. Our plan was to buy calls at $113.75 but shares gapped open higher at $114.38 this morning. I am raising the stop loss to $111.75.

The intraday high today was $118.48. Our short-term target remains $119.75. More aggressive traders may want to aim higher.

NOTE: CLR is due to report earnings in the next two to three weeks (very late February or early March) and we will plan to exit prior to the announcement.

- Suggested Positions -

Long MAR $120 call (CLR1422C120) entry $3.00 *

02/18/14 trade opened on gap higher at $114.38. Suggested trigger was $113.75.
*option entry price is an estimate since the option did not trade at the time our play was opened.

Entry on February 18 at $114.38
Average Daily Volume = 1.1 million
Listed on February 15, 2014


Salesforce.com - CRM - close: 63.73 change: +0.93

Stop Loss: 59.90
Target(s): 67.50
Current Option Gain/Loss: +15.1%
Time Frame: Exit PRIOR to earnings on Feb. 27th
New Positions: see below

Comments:
02/18/14: Traders bought the dip in CRM this morning and shares eventually outperformed the broader market with a +1.48% gain today. Readers may want to start moving their stop loss higher.

Earlier Comments:
Our target is $67.50. CRM has set its earnings date for Feb. 27th. We will plan to exit prior to earnings. 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: 62.88 change: +1.16

Stop Loss: 59.45
Target(s): 68.00
Current Option Gain/Loss: Mar $60c +17.4% & Jun $65c: + 7.9%
Time Frame: 4 to 8 weeks
New Positions: see below

Comments:
02/18/14: CSC also displayed relative strength today with a +1.8% gain. The stock shot higher this morning and closed at new multi-year highs.

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: 67.30 change: +0.21

Stop Loss: 64.25
Target(s): 69.75
Current Option Gain/Loss: +30.7%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
02/18/14: FB bounced off the $67.00 level this morning and eked out a small gain. I am adjusting our stop loss higher to $64.25. More conservative traders may want to move theirs higher but we're going to try and keep ours just below the simple 10-dma (currently at $64.60).

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

02/18/14 new stop loss @ 64.25
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: 112.12 change: +0.21

Stop Loss: 108.60
Target(s): 118.50
Current Option Gain/Loss: - 4.4%
Time Frame: 4 to 5 weeks
New Positions: see below

Comments:
02/18/14: Shares of FFIV continued to drift sideways on Tuesday. Look for support near $110 or its 10-dma if the market dips.

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: 83.81 change: +2.60

Stop Loss: 79.75
Target(s): 89.75
Current Option Gain/Loss: Mar $85c: +10.0% & Apr $85c: +13.4%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
02/18/14: Shares of GILD shot higher today with a +3.2% gain. That's welcome news since the recent sideways action was starting to worry us. GILD closed just below its all-time high set in January at $84.40.

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


Monster Beverage - MNST - close: 72.01 change: +0.42

Stop Loss: 69.90
Target(s): 77.50
Current Option Gain/Loss: + 0.0%
Time Frame: 4 to 5 weeks
New Positions: see below

Comments:
02/18/14: MNST drifted higher on Tuesday after bouncing from the $71.00 level this morning. I would still consider new positions here at current levels.

Earlier Comments:
We want to keep our position size small to limit our risk.

*Small Positions * - Suggested Positions -

Long MAR $75 call (MNST1422C75) entry $2.10

02/14/14 trade opened at $71.00

Entry on February 14 at $71.00
Average Daily Volume = 1.39 million
Listed on February 13, 2014


Starbucks Corp. - SBUX - close: 73.97 change: -1.06

Stop Loss: 73.95
Target(s): 79.00 & 81.75
Current Option Gain/Loss: Unopened
Time Frame: 4 to 6 weeks
New Positions: Yes, see below

Comments:
02/18/14: Uh-oh! Coffee prices saw a big move higher today. The JO coffee ETN surged +9% today as coffee prices hit 13-month highs. Worries are growing over the Brazilian coffee harvest. According to an IBD report a hot 2014 January with the weakest rainfall in 20 years in Brazil is pushing coffee futures higher. Arabica coffee futures are trading around $1.50 a pound. That's almost +50% from their November 2013 low.

If this is a short-term spike then coffee prices for the major U.S. coffee companies will likely not be affected but if coffee continues to rise then companies like SBUX may feel the need to raise their prices.

Shares of SBUX underperformed the market today with a -1.4% decline. Currently we are still on the sidelines. We are suggesting traders wait for a breakout over $76.00. I'm listing a suggested entry point at $76.15. If triggered I am setting two potential targets. Our conservative target is $79.00. Our more aggressive target is $81.75.

Trigger @ 76.15

- Suggested Positions -

Buy the Mar $77.50 call (SBUX1422C77.5)

- or -

Buy the Apr $80 call (SBUX1419D80)

Entry on February -- at $---.--
Average Daily Volume = 8.1 million
Listed on February 15, 2014


Constellation Brands Inc. - STZ - close: 80.17 change: +0.80

Stop Loss: 77.40
Target(s): 84.75
Current Option Gain/Loss: Mar$80c: +11.7% & Apr$80c: + 6.0%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
02/18/14: STZ is still bubbling higher with a +1.0% gain on Tuesday. I am raising our stop loss up to $77.40.

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

02/18/14 new stop loss @ 77.40
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: 96.49 change: +0.75

Stop Loss: 94.40
Target(s): 99.85
Current Option Gain/Loss: - 0.5%
Time Frame: 4 to 5 weeks
New Positions: see below

Comments:
02/18/14: Hmm... UPS saw a little bit of volatility today. The stock spiked up to $98 and tagged technical resistance at its simple 100-dma this morning. Just as quickly the stock reversed and traded down toward the $96 area by early afternoon. I am not suggesting new positions at this time.

- 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

Pepsico, Inc. - PEP - close: 78.18 change: +0.09

Stop Loss: 80.15
Target(s): 74.00
Current Option Gain/Loss: - 8.4%
Time Frame: 4 to 8 weeks
New Positions: see below

Comments:
02/18/14: Our new play on PEP has been triggered. The stock broke down below what should have been support at $78.0 and hit a low of $77.78. Our suggested trigger to buy puts was hit at $77.85. Unfortunately PEP rebounded and closed back above the $78.00 level. I would wait for a new low below $77.78 before initiating new positions.

- Suggested Positions -

Long APR $75 PUT (PEP1419P75) entry $0.95*

02/18/14 triggered @ 77.85
*option entry price is an estimate since the option did not trade at the time our play was opened.

Entry on February 18 at $77.85
Average Daily Volume = 5.7 million
Listed on February 15, 2014



CLOSED BULLISH PLAYS

Lockheed Martin - LMT - close: 162.70 change: -0.19

Stop Loss: 155.65
Target(s): 165.00
Current Option Gain/Loss: +245.2%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
02/18/14: Our plan was to exit positions at the opening bell this morning to lock in potential gains. LMT gapped down at $161.53 this morning (a -$1.36 drop). The option gapped down as well.

- Suggested *small* Positions -

MAR $155 call (LMT1422C155) entry $2.23 exit $7.70 (+245.2%)

02/18/14 planned exit this morning. LMT gapped down at $161.53
02/15/14 prepare to exit on Tuesday morning
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

chart:

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