Option Investor
Newsletter

Daily Newsletter, Thursday, 5/8/2014

Table of Contents

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

Market Wrap

Trying For New Highs

by Thomas Hughes

Click here to email Thomas Hughes
The Dow Jones Industrial Average tried to set a new high amid a flurry of central bank statements, earnings and economic reports before a late day sell off reversed early gains.

Introduction

Yesterday the S&P 500 bounced from the long term trend line on hopes that Russia was indeed willing to make some sort of amends over the Ukraine situation. Today, the Ukraine has already faded from the spotlight as the S&P and other indices powered higher on Chinese trade data, ECB and BOE policy, comments from Mario Draghi, earnings and better than expected jobless claims. The S&P continued its bounce from the trend line but remains capped by resistance, as does the Dow which is trying to set new highs. Today the Blue Chips moved back into territory I can describe as above the current all time closing high and below the all time intraday high.


Starting in Asian the markets moved higher on the heels of yesterday's Putin driven bounce in US equities. Adding to the positive tone was better than expected Chinese trade data. Exports rose in April by 1.7% versus an expected drop of -0.9% while imports rose by 0.8%. This beats the expected gain drop of -2.3% expected by analysts and the -11.3% drop seen last month. The Nikkei gained 0.9%, the Hang Seng about 0.5%. In Europe markets traded to upside as well as they awaited policy statements and comments from the BOE, the ECB and Mario Draghi. Both the ECB and the BOE held rates steady, as expected, leaving the EU indices little changed until the comment session with ECB president Draghi. During the statements delivered by Mario Draghi the EU indices first fell hard into negative territory then regained their footing to move back into the green and to new daily highs.

Here at home futures trading in the early hours held flat to negative from yesterday's closing prices. The Nasdaq continued to lag the other major indices driven in part by the 10% drop in shares of Tesla. The indices moved slightly lower initially after the ECB policy statement and were pushed even a little lower following the 8:30AM release of better than expected jobless claims and during the Draghi statements. At the open the indices held flat to slightly negative for the first fifteen minutes of trading then things began to pick up. By 9:45AM the S&P 500 had moved up near +5 and by 10AM +9 with the Dow near +70 and the Nasdaq +40. By noon the markets had crested today's wave and begun to decline. They drifted slowly back toward break even with the S&P and Nasdaq crossing into the red. The Dow was the only one of the three to maintain positive ground today.

The Economy

Today was light for US economic data, only jobless claims and natural gas inventories. Jobless claims was better than expected. Initial claims fell by -26,000 to 319,000 from a mild upward revision to last weeks figures. Last weeks number was raised by only 1,000 for a net drop of -27,000. The four week moving average of claims added 4,500 from a revised 320,250 (+250). No special factors were reported in the release. States leading with gains in claims were NY, MA and RI with +23,523, +3,983 and +1060 respectively. States leading with declines in claims were MI, NJ and PA with -6,642, -2,269 and -1,704. This weeks data brings the number of initial claims back below the moving average and toward the bottom of the 12 month range, neither good nor bad in terms of the over all jobs picture. On an unadjusted basis claims fell by -31,211 or nearly -10%.



Continuing claims shed -76,000 from a downward revision of -10,000 to hit 2.685 million. This data also brings the continuing claims below its four week moving average and back near lows set in late 2007. The four week moving average of continuing claims is at a new 7+ year low, of course the adjustment factors and data have been revised at least once per year since then but it is still a decent piece of data. Total claims rose by a marginal 10,353 to 2.832 million. This is just off of the long term lows for this data point.

Tomorrow is also light for data. Only two data points are to be released, wholesale inventories and JOLTS. Wholesale inventories is a factor of GDP while JOLTs is a report on currently available jobs openings. Next week is pretty big on data with next Thursday the big day of the week. There are a dozen reports scheduled for that day alone including the weekly unemployment claims figures, CPI, Industrial Production and Philly Fed.


The Dollar

The Dollar Index had a bit of a wild ride today. The expected statements, and then unexpected comments, from the ECB and Mario Draghi had a rippling effect through the euro into the dollar and the yen and to some extent gold. The ECB held rates steady at 0.25%, this was expected. The warnings over euro strength and his comfort level with “acting in June is needed”. This is perhaps the most concrete thing he has said over the past months in terms of an increase/addition to QE in the EU that has been speculated and hinted at with each new data point and ECB meeting. Additionally, comments and statements from Janet Yellen during her Capitol Hill testimony also helped with today's move. She stated today that she believes, although the full impact is unclear, that a minimum wage hike would have a “negative impact” on the economy.

The Dollar Index was at first pressured lower in the early part of today's trading. The index broke long term support at the $79 level before the Mario Draghi's warning on euro strength and support of QE reversed it. Following the statements the index bounced strongly from found support and moved back into the green. The index is trading near the long term lows with some support indicated at these levels on both the longer term weekly charts and shorter term daily charts.


The euro surged on the initial release of the ECB statement then fell on Draghi's comments. The eur/usd pair pushed up through resistance to tap the 2.5 year high of 1.4000 before Draghi's warning and resistance pushed the pair back down below 1.390.


The Gold Index

Gold prices tried to rebound today following yesterday's near $20 decline based on peaceful overtures from Russia and Putin toward the Ukraine. Early trading saw gold prices up about $5 to $1295 until data, the ECB policy and Draghi's comments helped to strengthen the dollar. After hovering around break even all morning prices began to dip in the afternoon, moving to -$2 or near $1287. Gold prices have been moving between $1315 and $1280 for over a month now, primarily driven by the wiffle waffling of Putin over the Ukraine. One week he's for peaceful solutions, the next week helicopters get shot down, each time driving gold prices to the opposite end of the range. Today's move was not Putin inspired but that does not mean he won't influence them tomorrow. In hindsight it seems as if Friday's have been big days for Ukrainian news. I still don't see any underlying reason to want to get long on gold but I also think the underlying trend may have been hijacked by Putin for the time being.

The Gold Index has retreated the rest of the way to my near term support line since last week. Earnings from the gold miners was in general better than expected, driven in large part by lower all-in-sustaining costs per ounce. The trouble is that future guidance was not that inspiring, especially since gold prices can't seem to move higher and stay there, there is only so much gain in profit a company can make on cost reductions. Keeping in mind that the Gold Index is in a long term down trend the indicators are looking pretty bearish. The MACD momentum has turned bearish and stochastic made a bearish crossover this week as well. The longer term chart of weekly prices echoes the bearish sentiment and indicates the index may only be in mid decline, starting from the retest of resistance at the 78.6% retracement level last month. A break below near term support at the $93 would help to confirm this analysis, providing a down side target near or below $80.


The Oil Index

The price of WTI fell today but hung around the $100 level. Early trading saw the prices of benchmark crude fall by about a quarter from yesterday's prices before making a brief dip below $100. Afternoon trading took the price of WTI back above $100 where it held into the close. Better than expected data from China and here at home, a seeming step toward peaceful resolution in the Ukraine, an expected increase in Libyan supply and US stockpiles all played a part in today's tug of war. The longer term expectation is for a snap back in the economy as much as 4% for the 2nd quarter, if the data starts to lead the market in that direction then oil prices could climb higher.

In the last week the Oil Index punched through the upper resistance of the previous all time high on earnings and the economy. The big oil companies reported over the past week and provided investors with generally better than expected earnings and positive guidance. The index traded to the downside today, losing about a half percent, stopping initially at the resistance turned support line at 1626. At this time the index may have entered a period of consolidation and potential pullback/correction so appropriate measures should be taken. The longer term divergence in momentum is persisting as well and momentum is turning to bearish in the near term. At the same time stochastic is extremely over bought and creating a potential bear cross. Today's candle signal is also bearish and broke support in the final hour of today's session. Should the index fail to regain current support next support would be around 1,600 and then 1,575.


Story Stocks

Earnings season is mostly behind us now but there are still some high profile names on the list. Yesterday, after the bell, Tesla reported better than expected earnings but failed to impress with revenue and forward guidance. Revenues fell significantly short of expectations, with expected future operating costs weighing on guidance. Shares fell more than 7.5% in the after hours market, triggering the short-sale circuit breaker. This morning TSLA was down as much as 10% or more from yesterday's closing price. At the open TSLA gapped down below a potential trend line, tried to move above and was rejected, shedding just over 10% for the day. In the wake of the report many analysts have cut their price targets, adding to the downward pressure. Shares of the stock are still above a potential long term area of support around the $175 level but this stock may experience some volatility in the nearer term as traders and investors adjust positions.


Randgold reported earnings of $0.80 per share versus the expected $0.68. This is up from last years $0.76 for the same quarter. The increase in profits is due in part to decreased costs on a year over year basis and increased production from several of its mine projects. On a quarter over quarter basis costs are up more than 9% from the previous quarter and could impact profits moving forward. The stock lost more than 2% today, falling from resistance and the short term moving average with increasingly bearish indicators. First support is around $75 with next support below that around $70.


Ford announced today that sales of its cars in China rose 29% in the month of April. This is on the heels of yesterday's announced $1.8 billion share repurchase program. The program is expected to increase share holder value through decreased dilution and help the company reduce it's automotive debt by over $800 million. The increase in Ford sales is an additional sign that imports into China rose last month and helps position the company for increased profits in the second quarter of calendar 2014. Today the stock gained about 2.5% but remains capped by resistance at the $16 level. Indicators are neutral in the longer term but show support between $15 and $16.


The Indices

The S&P 500 traded in a roughly 15 point range today between gains near +10 and losses near -5 from yesterday's close. This range represents the greater portion of distance between the long term up trend line and current resistance at the all time highs set earlier this year. Economic data, earnings and the possible ending of the violence in the Ukraine helped to lift prices from the trend line in the early part of the day. As the index approached a potential new closing high resistance set in, slowly pushing the index off of its intraday peak and down into the red. Regardless, the long term trend is up, the index is still above trend, support and the short term moving average at this time.


The indicators are positioned in such a way that they could either be indicating an impending drop in index prices or a potentially good entry point for bullish posistions. The thing is, the index is trapped in this narrowing range and will need to break out to confirm which signal is forming. What the catalyst for the bulls may be is hard to say. Tomorrow is light on economic data and earnings, while still rolling in at a rapid pace, are not quite as important as they were just a week ago. News could be a catalyst but the only thing I can think of is Russia, Putin and The Ukraine and I will be suspicious of anything positive Putin does until I am not. For the bears, it may only take a lack of buyers for the trend line to simply stop being important.

The Dow pushed higher during the day and also very nearly set a new all-time intraday high. It too fell back from resistance during the second half of the day but was able to remain positive relative to yesterday's close. The indicators on this chart are similar to the S&P 500, showing support over the longer term, weak in the near term and possibly indicating the top of a range. The long term trend is up here as well but again, to remain bullish in the nearer to short term a break above resistance is really needed. Without a catalyst for such a break it is possible the index could continue to drift sideways and/or correct back to longer term support near 16,000 and 15,750.


The Nasdaq is looking the worst out of the bunch in terms of it's ongoing correction. This index tried to regain a support level today but failed, and is now below what looks to be at the least near term resistance. Momentum is weak, but has just turned bearish and stochastic is displaying a bearish crossover. This could carry the index back down to stronger support at the 4,000 level or below that at it's long term up trend line near 3,800.


As I mentioned above, there isn't much on the economic calendar tomorrow to be viewed as a potential catalyst for the markets. Without said catalyst it is possible that the markets will drift sideways another day or even move lower on lack of buying volume. Support levels will be important to watch in this event until more data comes out next week. There are about 50 earnings reports tomorrow but none that I see as market shaking, that chapter of the market may be closed until the next go round starts in 8 weeks. Of course, the markets could easily drift higher if there is a lack of selling volume as well, we'll just have to see. What I do see as a real potential threat to the markets tomorrow and over the weekend is Russia and Putin, although it will likely be a short term threat and not a long term one. The Ukrainians are set to hold their vote on Sunday and it could spark a whole new round of violence. In the end though market direction will come down to who is stronger, the bulls or the bears. One side or the other will break the market out of the current patterns and send it on its way.

Until then, remember the trend!

Thomas Hughes

 


New Option Plays

Fill The Gap

by James Brown

Click here to email James Brown


NEW DIRECTIONAL PUT PLAYS

Acuity Brands, Inc. - AYI - close: 119.24 change: -2.57

Stop Loss: 121.75
Target(s): 112.00
Current Option Gain/Loss: Unopened
Time Frame: 4 to 6 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
AYI is in the technology sector. The company makes lighting components and equipment as well as lighting systems. The stock soared to all-time highs back in January following a better than expected earnings report on January 9th. The rally continued until AYI peaked near $145 in March. All of that earnings enthusiasm faded when they reported again in early April and missed both the top and bottom line estimates. It looks like AYI got ahead of itself and now it's retreating.

Today's display of relative weakness (-2.1%) left AYI poised to break support at the top of its January 9th gap higher. If shares move into the gap it will likely fill the gap and that means a drop toward the $110-111 area. The simple 200-dma happens to be near $111.

Today's low was $118.93. I am suggesting at trigger to buy puts at $118.75. If triggered our target is $112.00. More aggressive traders could aim lower since the Point & Figure chart for AYI is bearish with a $98 target.

Trigger @ 118.75

- Suggested Positions -

Buy the Jun $115 PUT (AYI14R115) current ask $2.90

Annotated Chart:

Entry on May -- at $---.--
Average Daily Volume = 375 thousand
Listed on May 08, 2014



In Play Updates and Reviews

Market Remains Indecisive

by James Brown

Click here to email James Brown

Editor's Note:

Early morning gains faded into the close. The market still can't decide what direction it wants to move. Both the NASDAQ and the Russell 2000 indices look bearish and poised for new relative lows.

MMM hit our bullish entry trigger.


Current Portfolio:


CALL Play Updates

The Boeing Company - BA - close: 130.57 change: +0.22

Stop Loss: 128.40
Target(s): to be determined
Current Option Gain/Loss: -16.3%
Time Frame: 6 to 9 weeks
New Positions: see below

Comments:
05/08/14: BA did not see the same volatility the rest of the market did on Thursday. Shares merely drifted sideways and eked out another gain. I am concerned about the market's performance and would hesitate to launch new positions here.

- Suggested Positions -

Long Jul $135 Call (BA1419G135) entry $2.75

05/05/14 triggered at $132.00

Entry on May 05 at $132.00
Average Daily Volume = 3.7 million
Listed on May 03, 2014


Gilead Sciences - GILD - close: 78.73 change: -0.04

Stop Loss: 74.45
Target(s): to be determined (potentially $85.00)
Current Option Gain/Loss: +24.0%
Time Frame: 4 to 8 weeks
New Positions: see below

Comments:
05/08/14: GILD briefly traded above resistance near $80.00 before following the broader market lower this afternoon. I am not suggesting new positions at this time.

More conservative traders may want to move their stop loss higher.

- Suggested Positions -

Long Jun $80 call (GILD1421F80) entry $2.12

05/01/14 new stop @ 74.45
04/30/14 triggered @ 77.00

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


3M Company - MMM - close: 140.83 change: -0.31

Stop Loss: 138.45
Target(s): to be determined
Current Option Gain/Loss: -22.3%
Time Frame: 4 to 8 weeks
New Positions: see below

Comments:
05/08/14: Our new play on MMM is open. The stock pushed to new all-time highs and hit our suggested entry point at $142.00. Unfortunately the market reversed midday and MMM followed it lower. Odds are good we could see MMM retest $140.00 or its 10-dma near $139.30.

Earlier Comments:
We're not setting an exit target yet but the Point & Figure chart for MMM is bullish with a $174 target.

- Suggested Positions -

Long Jun $140 call (MMM1421F140) entry $3.45*

05/08/14 triggered @ $142.00

Entry on May 08 at $142.00
Average Daily Volume = 2.65 million
Listed on May 07, 2014


Pacira Pharmaceuticals - PCRX - close: 75.56 change: +0.91

Stop Loss: 69.95
Target(s): to be determined
Current Option Gain/Loss: - 14.2%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
05/08/14: PCRX displayed some relative strength with a +1.2% gain. The volatility in PCRX continues with another big intraday range.

Earlier Comments:
If shares do breakout it could see a short squeeze. The most recent data listed short interest at 17% of the 33.6 million share float.

I do consider this a somewhat aggressive trade because the option spreads on PCRX are a bit wider than we like. The Point & Figure chart for PCRX is bullish with a $93 target.

- Suggested Positions -

Long Aug $80 call (PCRX1416H80) entry $7.00

05/06/14 triggered on gap higher at $75.32, suggested entry was $74.25

Entry on May 06 at $75.32
Average Daily Volume = 602 thousand
Listed on May 05, 2014


Potasch Corp. of Saskatchewan - POT - close: 36.26 change: +0.10

Stop Loss: 34.45
Target(s): to be determined
Current Option Gain/Loss: - 8.6%
Time Frame: 3 to 4 months
New Positions: see below

Comments:
05/08/14: Thursday ended up another quiet session for shares of POT. I don't see any changes from my prior comments. More conservative investors may want to raise their stop loss.

Earlier Comments:
(some of my earlier comments) 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.

- Suggested Positions -

Long Sept $35 call (POT1420i35) entry $2.65

05/02/14 triggered @ 36.50

Entry on May 02 at $36.50
Average Daily Volume = 5.0 million
Listed on April 26, 2014


Ventas, Inc. - VTR - close: 68.40 change: +0.52

Stop Loss: 64.75
Target(s): to be determined
Current Option Gain/Loss: +27.2%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
05/08/14: VTR ignored the market's afternoon weakness and delivered another gain. More conservative traders may want to consider taking profits as VTR near potential round-number resistance at $70.00.

- Suggested Positions -

Long Aug $65 call (VTR1416H65) entry $2.75

05/01/14 triggered @ 66.35

Entry on May 01 at $66.35
Average Daily Volume = 1.6 million
Listed on April 28, 2014




PUT Play Updates

ASML Holdings - ASML - close: 80.90 change: +0.44

Stop Loss: 82.05
Target(s): to be determined
Current Option Gain/Loss: -25.0%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
05/08/14: ASML traded above what should have been short-term resistance at $81.50 and its 10-dma this morning. Shares did pare their gains but I am not suggesting new positions with ASML above $80.00.

Earlier Comments:
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.

- Suggested Positions -

Long Jun $80 (ASML1421F80) entry $2.60*

05/06/14 triggered @ 79.85
*option entry price is an estimate since the option did not trade at the time our play was opened.

Entry on May 06 at $79.85
Average Daily Volume = 1.4 million
Listed on April 30, 2014


Fluor Corp. - FLR - close: 75.28 change: -0.21

Stop Loss: 75.55
Target(s): to be determined (possibly $67.00)
Current Option Gain/Loss: Unopened
Time Frame: 4 to 6 weeks
New Positions: Yes, see below

Comments:
05/08/14: FLR bounced up to technical resistance at its 50-dma and reversed lower. We are still on the sidelines waiting for a breakdown.

Earlier Comments:
I am suggesting a trigger to buy puts at $73.25. We're not setting an exit target yet but I am tentatively aiming for the $67 area. The Point & Figure chart for FLR is bearish with a $64 target.

Trigger @ $73.25

- Suggested Positions -

Buy the Jun $72.50 PUT (FLR1421R72.5)

Entry on May -- at $---.--
Average Daily Volume = 1.2 million
Listed on May 05, 2014


LinkedIn Corp. - LNKD - close: 145.07 change: + 1.70

Stop Loss: 155.25
Target(s): to be determined
Current Option Gain/Loss: - 7.0%
Time Frame: 4 to 8 weeks
New Positions: see below

Comments:
05/08/14: The stock market's bounce this morning lifted shares of LNKD to short-term technical resistance at its 10-dma. Then the rally in LNKD faded as the market rolled over. More conservative traders may want to consider moving their stop closer to today's high (151.61).

Earlier Comments:
Traders should consider this an aggressive, higher-risk trade due to LNKD's volatility. The stock can see big swings. Many of its bounces within the current down trend are $20-$30 each. I suggest small positions to limit risk.

*small positions* - Suggested Positions -

Long Jun $140 PUT (LNKD1421R140) entry $7.05

05/06/14 new stop @ 155.25
05/05/14 trade opens. LNKD gapped down at $144.40
(the whole market gapped/spiked down at the open and then bounced)

Entry on May 05 at $144.40
Average Daily Volume = 3.8 million
Listed on May 03, 2014


Omnicom Group - OMC - close: 66.20 change: +0.42

Stop Loss: 67.55
Target(s): 60.50
Current Option Gain/Loss: -18.8%
Time Frame: 4 to 8 weeks
New Positions: see below

Comments:
05/08/14: OMC saw a brief spike lower this morning and then immediately reversed higher to follow the market's bounce. Gains faded as the market rolled over. I would wait for a new drop under $65.75 before initiating new bearish positions.

Earlier Comments:
Technically the stock has broken down through multiple layers of support. I am suggesting an exit target at $60.50. The Point & Figure chart for OMC is bearish with a $59 target.

- Suggested Positions -

Long Jul $65 PUT (OMC1419S65) entry $2.65

05/07/14 triggered @ 65.75

Entry on May 07 at $65.75
Average Daily Volume = 2.0 million
Listed on May 06, 2014