Option Investor
Newsletter

Daily Newsletter, Wednesday, 4/30/2014

Table of Contents

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

Market Wrap

The Third Time Is a Charm for the DOW

by Keene Little

Click here to email Keene Little
It was close but by the end of the day with a final push into the close the DOW was able to close above its December 31st closing high at 15576, which is a good thing for the bulls since it was the 3rd attempt.

Wednesday's Market Stats

On April 3rd and then again on April 4th the DOW was able to climb above its December 31st intraday high at 16588.25 but was unable to close above its closing high at 16576.66 (December 31st). Today was the 3rd attempt with a rally above the intraday high, with a high at 16592, and a close at 16580.84. New all-time high by 4 points! Woohoo! I don't watch CNBC but my guess is they broke out the party hats.

There were a few economic reports that mattered this morning, the first being the ADP Employment Change report, which gives us a heads up for what the government's Payrolls report will look like on Friday. The ADP report showed a gain of 220K jobs, which was a little better than the 215K expected and an improvement over the 209K for March (revised up from 191K). As far as the Fed is concerned, that's a good trend and one which supports their continued taper program.

Before the bell we also got a first look at GDP for Q1 2014 and it was disappointing, coming in at only +0.1%. That was much worse than the 1.0% expected by the market and down from 2.6% for Q4 2013. This will have the Fed worrying that the economy is not getting enough help from the Fed. But then shortly after the open we got the Chicago PMI and it came in much better than expected -- 63.0 vs. 56.5 -- and better than 55.9 in March.

GDP was most negatively affected in Q1 by a drop in exports while personal consumption, especially for services, helped. I've circled the primary contributors to GDP in Q1 on the chart below. Personal consumption increased by +3.0%, which unfortunately is being supported by an increase in consumer debt, and that added 2 percentage points to GDP. But exports declined -7.6%, taking away a percentage point from GDP and as you can see on the chart the big swing in exports from positive in Q4 to negative in Q1 was the biggest negative contributor to GDP. And that begs the question about how the weather gets the blame for a poor GDP number -- exports have nothing to do with our weather. Must have been global warming.

GDP Contributors, chart courtesy businessinsider.com

The big report that the market waited most of the day for was the FOMC announcement at 14:00. No surprise, the rate stays the same at 0.25%. And also not surprisingly, the taper program is continuing with another $10B/month reduction that keeps the Fed on track to eliminate its bond-buying program by October. A summer drop in the stock market, along with poor GDP numbers, could stop and maybe reverse the taper program but that can only be speculated at this point. At the moment is trying to paint a hopeful picture of the U.S. economy and is looking past the Q1 GDP, thinking the weather had an adverse effect that's not representative of the true economy. Wishful thinking perhaps but that's their story and they're sticking to it.

The market's positive response (?) to the economic reports and the FOMC announcement made it possible for the DOW to make a new high for the week so far but the rally can hardly be called inspiring. The choppy slow climb up from Tuesday morning looks ready for at least a pullback to correct the rally from Monday but the longer-term pattern continues to support the idea that we have not yet seen the final high for this year's rally. But I continue to believe the upside potential is dwarfed by the downside risk and therefore any trades on the long side are probably not worth the bet. Downside risk means the potential for a nasty surprise one morning

The DOW's weekly chart below shows price has essentially been consolidating sideways since December, with the sharp January decline quickly retraced in February and chopping sideways since March. Price has been hanging just below the trend line along the highs from 2000-2007, which stopped the December and April rallies. Currently near 16650 it's less than 100 points away. The choppy move higher is a bearish ending pattern, especially with the bearish divergence on the oscillators, so I'm showing only a little more upside before it tops out. The more bullish potential is shown with a rally to the top of the parallel up-channel from 2009, near 17200 by the end of May. While that would be a nice trade on the long side I continue to see downside risk outweighing upside potential. For now I see upside potential to the 16700-16800 area.

Dow Industrials, INDU, Weekly chart

The daily chart of the DOW shows an idea for a rising wedge pattern for the leg up from April 11th, which would fit nicely for the final wave to complete the longer-term rally. For an a-b-c move up from February the c-wave would be 62% of the a-wave at 16735, replicating the pattern for the a-b-c move up from October 2013 to December 2013, where the c-wave was 62% of the a-wave. If it rallies up to the trend line along the highs from March 7 - April 4 by the end of next week it should make it up to about 16800.

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- stay bullish above 16,320
- bearish below 16,015

Looking at the 60-min chart below it would be easy to say the DOW closed at resistance and will be followed by at least a pullback on Thursday. It's common for the market to do the opposite of what it did in the afternoon following an FOMC announcement. So while I show a continuation higher tomorrow and up to about 16700 by the end of the week, it would not be at all surprising to see a pullback and then another leg up into the end of the week. A drop below Monday's low at 16312 would have me doubting the upside. A choppy rise into the end of next week, to complete the rising wedge pattern (just an idea for now), is what I'm depicting. Note that the 127% extension of the previous decline (April 4-11), at 16796, correlates nicely with the 16800 trendline projection.

Dow Industrials, INDU, 60-min chart

With this afternoon's little push higher SPX broke has now broken its downtrend line from April 4-24, near 1879. If that line is used for support on a back test it will mean stay long since the upside potential is the 1920 area (maybe 1910 if the Gann Square of Nine chart will be the key indicator here). The 127% extension of the previous decline (April 4-11) is at 1919.83 and two equal legs up from April 11th is at 1921.34. The 1920 projection crosses the trend line along the highs from December near May 15th but a little throw-over above the line next week would be a nice finish to the rally.

S&P 500, SPX, Daily chart

Key Levels for SPX:
- stay bullish above 1850
- bearish below 1812

Last Wednesday I showed a weekly chart of the Nasdaq with a bullish projection to about 4500 (from 4100) into the summer to reach the top of a parallel up-channel from 2012. While keeping that in mind, the short-term pattern of the techs, along with the significant weakness is so many of the previous high-flyers, has me seriously wondering about the upside potential. But at this point, as long as NDX holds above 3500 I'll give the bulls the nod for at least another leg up for its rally off the April 15th low. Upside potential, if it finishes next week at its broken uptrend line form October 2013, is to about 3660-3670, which would also be a test of its April 3rd high.

Nasdaq-100, NDX, Daily chart

Key Levels for NDX:
- bullish above 3614
- bearish below 3425

The RUT remains the weakest and most potentially bearish index and today was the 3rd test in the past two weeks of its 200-dma, leaving yet another tail on its candlestick following the test. But the more it hammers on support, including its price-level support at 1120, the weaker it becomes as the dipsters start to give up. The RUT really needs to get a rally going if the broader market is to get something going to the upside. If I was to make a trading decision based solely on the RUT I would definitely be short here and place my stop just above 1147. But as long as the broader market holds up I can't turn bearish even this index yet.

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- bullish above 1159
- bearish below 1095

For quite a while I've been thinking we'll see a rally in bonds and a resulting decline in yields. I've been showing the chart of TNX and its choppy bounce off the February 3rd low, which looks like a bear flag. There's the potential for another bounce back up to the top of the flag but after the strong decline the past two days I'm wondering if it's ready to start a more serious decline from here, which would mean strong bond buying.

10-year Treasury Yield, TNX, Daily chart

Countering the bearish view I have for TNX, and therefore a bullish view for bonds, I must admit I'm second guessing myself when I look at the pattern for TLT, the 20+ year Treasury bond ETF. I can easily argue that we've got an a-b-c bounce off the August 2013 low and that the c-wave (the leg up from December 31st) is 162% of the a-wave at 111.88. Last week's high was at 111.99 and it hit the top of what can be interpreted as a rising wedge (ending diagonal for the c-wave). Short term I see the potential for a little higher, maybe even up to its downtrend line from July 2012 - April 2013, currently near 113.75. But as a bond bull, I'm feeling a little less bullish based on this A-B-ending diagonal-C bounce pattern, which calls for a complete retracement (back below the December 31st low at 101.17). And if TLT sells off it will cause yields to head higher, not lower, and it has me wondering it would also be accompanied by a rally in the stock market. I'll continue to monitor this closely.

20+ Year Treasury ETF, TLT, Daily chart

The banking index supports the idea that we'll see the market rally for a little more into next week. Following a 5-wave move down from March 21st, which confirms a downtrend is now the primary trend, we can expect a bounce correction and a 50% retracement of the decline, at 70.57, crosses its broken uptrend line from June 2012 at the end of next week. That would give the DOW and SPX time to make it up to their upside projections and then they'd be synch for the start of the bear market decline.

KBW Bank index, BKX, Daily chart

No change to the U.S. dollar's picture. The weekly chart below shows it's stuck. Trade the range break -- long above 81.50, short below 79.

U.S. Dollar contract, DX, Weekly chart

Last week I had pointed out a long-term repeating pattern for the commodity index (using DJUBS) with the repeating 50% retracements of its declines, as well as the a-b-c bounce pattern off the August 2013 low and the 5th wave of the rally from November 2013. The wave pattern and the price correlation with the different price projections at 138.16-138.66 provided a strong reason to suspect it was very close to completing its rally and once it's finished we should see the start of another decline to new lows.

The daily chart below is updated to show it got the little extra boost higher that I had projected last week and it hit a high of 138.67 yesterday, a penny over the price projection at 138.66 where the 5th wave of the rally from November equals the 1st wave. This morning it gapped down and dropped below Monday's low before bouncing back up to Monday's close (not reflected in today's candle. It's obviously very early to make a major reversal call here but that's the setup -- I'm looking for a resumption of its decline that will drop it well below its November low at 122. A decline in commodity prices would likely mean a rally in the dollar and/or a decline in global demand, neither or which would be a good sign for the stock market.

DJ UBS Commodity index, DJUBS, Daily chart

Gold has been struggling at its 20- and 200-dma's since bouncing back up to them on April 24th. Currently at 1299.90 and 1318.30, resp., today it closed below both, as well as its downtrend line from March 17 - April 14 and could be an indication it's ready to start down a little more quickly. At least that's the way I continue to lean on this shiny metal (and commodities in general). The weekly chart below shows a downside projection to 1155 (62% retracement of its 2008-2011 rally) and its uptrend line from 2005-2008 by July but there's more bearish potential for a drop down to 1090 and perhaps even 1000 before a longer-term bottom is in place.

Gold continuous contract, GC, Weekly chart

Oil broke its uptrend line from January-March last week, back tested it on Monday and Tuesday, and then dropped lower today. It did a little bouncing around its 20-, 50- and 200-dma's in the past week, currently at 102.10, 101.37 and 100.68, resp., but is now below all of them. A drop below 97 would be more bearish, in which case it would likely head for its uptrend line from 2011-2013, currently near its 200-week MA at 94.24. That might be good for a bounce but at that point the larger pattern would support much lower prices for oil, which is what I'm depicting on its weekly chart.

Oil continuous contract, CL, Weekly chart

Tomorrow is a big day (morning) for economic reports but probably nothing market moving. We'll get some unemployment claims numbers, personal income/spending, Core PCE Prices, ISM, Construction Spending and auto/truck sales.

Economic reports and Summary

The blue chips are at/near all-time highs and look to be on course for higher highs into next week. For a while I've been pointing to SPX 1910 as an important upside number to keep in mind (from the Gann Square of Nine chart, as it relates to previous important secular tops and bottoms for SPX) but add another 10 points and we've got some Fibs and trend lines supporting a rally up to that area by the end of next week. The market is very weak with fewer stocks participating in the rally (fewer new 52-week highs, negative divergence in the advance-decline line/volume, momentum slowing, etc.) but it doesn't prevent at least one last gasp to the upside. And if the new highs continue to show bearish divergence, especially with a price pattern that supports a top being made, we'll then have a good setup to short the market.

The techs and small caps are especially weak and suggest long is not the place to be. Downside risk, especially in these, looks much more significant than upside potential and I suggest trading accordingly. While leaning long for the short term, which is supported by the banking index, it's only by hedging my core short position with short-term long positions (full disclosure). If we get a little more of a rally out of this market into next week I suspect we'll have a better sense for how a potential top is setting up. Trade very carefully in the meantime.

Good luck and I'll be back with you next Wednesday.

Keene H. Little, CMT

In the end everything works out and if it doesn't work out, it is not the end. Old Indian Saying


New Option Plays

Fading Oversold Bounce

by James Brown

Click here to email James Brown

Editor's Note:

In addition to tonight's new candidate(s), consider these stocks as possible trading ideas and watch list candidates. Some of these stocks may need to see a break past key support or resistance:

(bullish ideas)
WSO, SAFM, HBI, XOM, ULTI, UTHR, LAD, CMI, CR, SPW, MSM, MMM,

(bearish ideas)
GTLS, CME, DISCA, WRLD, CBRL,




NEW DIRECTIONAL PUT PLAYS

ASML Holdings - ASML - close: 81.39 change: -0.73

Stop Loss: 82.05
Target(s): to be determined
Current Option Gain/Loss: Unopened
Time Frame: 6 to 8 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
ASML is in the technology sector. The company, based in Europe, is in the semiconductor industry. The stock has been a big winner during this five-year bull market. Yet it looks like the rally peaked in October last year. ASML has been chopping lower. The selling pressure accelerated in April. Shares gapped down on April 16th after reporting earnings and lowering their Q2 sales guidance. Since then the oversold bounce has failed at the 10-dma multiple times.

More aggressive traders could buy puts here. I am suggesting a trigger to buy puts at $79.85. That's just under the April 16th low of $79.94. I will point out that ASML might have some support near $75.00, which is near a long-term trend line of higher lows. However, the Point & Figure chart for ASML is bearish with a $67.00 target.

Trigger @ 79.85

- Suggested Positions -

Buy the Jun $80 (ASML1421F80) current ask $2.15

Annotated Chart:

Entry on April -- at $---.--
Average Daily Volume = 1.4 million
Listed on April 30, 2014



In Play Updates and Reviews

Stocks Shrugged Off GDP Disappointment

by James Brown

Click here to email James Brown

Editor's Note:

The stock market shrugged off the disappointing Q1 U.S. GDP estimate.

DVN was stopped out. GILD hit our entry trigger. CTRX was closed.


Current Portfolio:


CALL Play Updates

Adobe Systems - ADBE - close: 61.69 change: +0.78

Stop Loss: 59.45
Target(s): to be determined
Current Option Gain/Loss: -36.8%
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
04/30/14: The bounce from support continues with ADBE gaining +1.28% today. I don't see any changes from my prior comments. I did hear Dr. J issuing bullish comments on ADBE on CNBC today.

- Suggested Positions -

Long Jul $65 call (ADBE1419G65) entry $3.20

04/21/14 ADBE opened at $64.00

Entry on April 21 at $64.00
Average Daily Volume = 4.8 million
Listed on April 19, 2014


Diamondback Energy, Inc. - FANG - close: 71.94 change: -0.28

Stop Loss: 69.25
Target(s): to be determined
Current Option Gain/Loss: -32.3%
Time Frame: exit PRIOR to earnings in May
New Positions: see below

Comments:
04/30/14: Energy stocks underperformed the broad market indices on Wednesday. Shares of FANG dipped toward support near $70 and its 20-dma before bouncing. More conservative traders might want to inch their stop loss higher.

Earlier Comments:
FANG could see some short covering. The most recent data listed short interest at 37% of the small 32.5 million share float. That's plenty of fuel for a short squeeze. FYI: The Point & Figure chart for FANG is bullish with an $85 target.

- Suggested Positions -

Long May $75 call (FANG1417E75) entry $1.70*

04/25/14 adjust stop to $69.25
04/21/14 new stop @ 69.45
04/19/14 new stop @ 68.75
04/16/14 triggered @ 71.25
*option entry price is an estimate since the option did not trade at the time our play was opened.

Entry on April 16 at $71.25
Average Daily Volume = 948 thousand
Listed on April 14, 2014


Gilead Sciences - GILD - close: 78.49 change: +2.25

Stop Loss: 73.45
Target(s): to be determined (potentially $85.00)
Current Option Gain/Loss: +35.3%
Time Frame: 4 to 8 weeks
New Positions: see below

Comments:
04/30/14: Our brand new play on GILD is open. Traders bought the dip near $75.50 this morning and then rallied to new relative highs. Our trigger to buy calls was hit at $77.00.

Earlier Comments:
If triggered our temporary target is $84.75. We'll re-evaluate our exit strategy as the trade progresses.

- Suggested Positions -

Long Jun $80 call (GILD1421F80) entry $2.12

04/30/14 triggered @ 77.00

Entry on April 30 at $77.00
Average Daily Volume = 23 million
Listed on April 29, 2014


Potasch Corp. of Saskatchewan - POT - close: 36.16 change: +0.40

Stop Loss: 34.45
Target(s): to be determined
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 months
New Positions: Yes, see below

Comments:
04/30/14: Shares of POT continue to inch higher. The stock outperformed the market with a +1.1% gain today. The stock looks poised to breakout to new relative highs soon.

Earlier Comments:
(some of my earlier comments) The March high in POT's share price was $36.29. We are suggesting a trigger to buy calls at $36.50. We're not setting an exit target just yet. We'll start with a stop at $34.45.

FYI: rival potash producers Agrium (AGU) and Mosaic (MOS) both report earnings on May 6th. Their results and guidance could influence trading in POT.

Trigger @ $36.50

- Suggested Positions -

Buy the Sept $35 call (POT1420i35)

Entry on April -- at $---.--
Average Daily Volume = 5.0 million
Listed on April 26, 2014


Ventas, Inc. - VTR - close: 66.08 change: +0.16

Stop Loss: 64.75
Target(s): to be determined
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Comments:
04/30/14: VTR also drifted higher after traders bought the dip this morning. O I don't see any changes from my prior comments.

Earlier Comments:
We're suggesting investors wait for a move above the April high ($66.30). The newsletter's suggested entry point is $66.35 with a stop at $64.75.

Trigger @ 66.35

- Suggested Positions -

Buy the Aug $65 call (VTR1416H65) current ask $2.65

Entry on April -- at $---.--
Average Daily Volume = 1.6 million
Listed on April 28, 2014




PUT Play Updates

QIWI Plc - QIWI - close: 28.93 change: +0.45

Stop Loss: 30.25
Target(s): to be determined
Current Option Gain/Loss: -34.0%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
04/30/14: QIWI is still bouncing and added another +1.5% on Wednesday. At this point I would wait for a new failed rally below $30.00 before considering new bearish positions.

Earlier Comments:
I suggest small positions to limit risk. We're not setting an exit target yet but the P&F chart for QIWI is bearish with a $19 target.

*Small Positions* - Suggested Positions -

Long Jun $25 PUT (QIWI1421R25) entry $2.50

04/28/14 trade opened. QIWI gapped down at $27.37

Entry on April 28 at $27.37
Average Daily Volume = 657 thousand
Listed on April 26, 2014


Ralph Lauren Corp. - RL - close: 151.37 change: -0.94

Stop Loss: 156.15
Target(s): to be determined
Current Option Gain/Loss: +13.5%
Time Frame: exit PRIOR to earnings on May 9th
New Positions: see below

Comments:
04/30/14: RL bounced off the $150 level this morning. Yet shares still underperformed the major indices.

Earlier Comments:
If you are patient enough traders could aim for a drop toward $140. The Point & Figure chart is actually very bearish and forecasting at $112 target. We're not setting an exit target yet but plan on exiting positions prior to RL's next earnings report on May 9th.

- Suggested Positions -

Long May $150 PUT (RL1417Q150) entry $3.70

04/26/14 new stop @ 156.15
04/24/14 triggered @ 152.45

Entry on April 24 at $152.45
Average Daily Volume = 891 thousand
Listed on April 21, 2014


Toyota Motor Corp. - TM - close: 108.42 change: +0.92

Stop Loss: 109.25
Target(s): 100.50
Current Option Gain/Loss: -36.9%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
04/30/14: The Japanese stock market managed a gain today, which may have given TM a boost. The stock is up three days in a row and the close of above $108 is arguably short-term bullish (within its longer-term bearish trend).

Our stop loss is at $109.25 but that is because we plan on exiting prior to TM's earnings report in the next week or so. More aggressive traders may want to move their stop so it's above technical resistance at the 50-dma.

Earlier Comments:
Our target is $100.50. However, we will plan to exit prior to TM's earnings report in May. The company has not set a date yet but we expect the announcement to be in the first half of May and will update our exit when they publish their earnings date. FYI: The Point & Figure chart for TM is bearish with a $90 target.

- Suggested Positions -

Long May $105 PUT (TM1417Q105) entry $1.11

04/26/14 new stop @ 109.25
04/23/14 TM opens at $108.28

Entry on April 23 at $108.28
Average Daily Volume = 602 thousand
Listed on April 22, 2014



CLOSED BULLISH PLAYS

Devon Energy - DVN - close: 70.00 change: -0.48

Stop Loss: 69.45
Target(s): 74.75
Current Option Gain/Loss: -30.9%
Time Frame: exit PRIOR to earnings on May 7th
New Positions: see below

Comments:
04/30/14: The stock market's early morning drop was too much for shares of DVN. The stock fell below short-term support near $70.00 and dipped to $69.45 before paring its losses. Our stop loss just happened to be $69.45.

- Suggested Positions -

May $70 call (DVN1417E70) entry $1.94* exit $1.34** (-30.9%)

04/30/14 stopped out at low of the day
**option exit price is an estimate since the option did not trade at the time our play was closed.
04/17/14 triggered @ 70.35
*option entry price is an estimate since the option did not trade at the time our play was opened.

chart:

Entry on April 17 at $70.35
Average Daily Volume = 3.7 million
Listed on April 16, 2014


CLOSED BEARISH PLAYS

Catamaran - Corp. - CTRX - close: 37.75 change: -1.01

Stop Loss: 39.55
Target(s): to be determined
Current Option Gain/Loss: +25.0%
Time Frame: Exit PRIOR to earnings on May 1st
New Positions: see below

Comments:
04/30/14: CTRX was kind enough to drop to new relative lows before we exited this trade. Our plan was to exit today at the closing bell to avoid holding over the earnings report out tomorrow.

- Suggested Positions -

May $40 PUT (CTRX1417Q40) entry $2.20 exit $2.75 (+25.0%)

04/30/14 planned exit
04/29/14 prepare to exit tomorrow
new stop @ 39.55
04/21/14 CTRX opened @ $39.06

chart:

Entry on April 21 at $39.06
Average Daily Volume = 3.3 million
Listed on April 19, 2014