Option Investor
Newsletter

Daily Newsletter, Saturday, 7/18/2009

Table of Contents

  1. Leaps Trader Commentary
  2. Portfolio
  3. New Plays
  4. Play Updates
  5. Watch

Leaps Trader Commentary

Caught Off Guard

by James Brown

Click here to email James Brown

Last week was a lesson on the power of expectation in the stock market. The first ten days of July were very bearish with the S&P 500 appearing to break the neckline of a bearish technical head-and-shoulders pattern, thus forecasting a new leg lower. Investors big and small had placed bets on a market decline moving into earnings season with the expectation that earnings results and guidance would disappoint. Essentially the argument was that mediocre earnings that were just "less bad" had already been priced into the market with the second quarter rise in stocks. It would take truly impressive results to move stocks higher and with fears mounting that the economic recovery was still in question no one was expecting any earnings fireworks.

The exception was Goldman Sachs (GS). Everyone expected GS to beat Wall Street's estimates. Yet no one expected the truly momentous quarter that Goldman generated. The company delivered a profit of $4.93 a share compared to the $3.54 estimate. I won't bore you with details but this earnings report last Tuesday really kicked off a week of bullish surprises. Wait, let me correct myself. Actually it was the Meredith Whitney upgrade of GS last Monday and her short-term bullish call on banks is what really started the rally and caught investors off guard. It was several weeks ago Whitney shared her very bearish views on the banks and how investors shouldn't trust any second quarter earnings results because they were essentially fake. Thus a few pundits were pretty skeptical of Whitney's call on GS and the banks immediately in front of earnings season and with the S&P 500 hovering around support.

The unexpected bullish reversal by Whitney on the banks was like a lightning strike that started a brush fire during a heat wave in summer. Soon the fire turned into a raging inferno fueled by upside surprises in GS, Intel (INTC), IBM, J.P.Morgan (JPM) and more. With the crowd going into the week with a bearish bias there was a massive short-covering rally that lifted the market to one its best one-week gains in years both here and in Europe. Last week I said that stocks might bounce on earnings news but expect it to roll over into a new lower high. It is common for the bearish head-and-shoulders pattern to produce a second right shoulder. That did not happen. The violent rally may have been due to it being an option expiration week, which could have exacerbated the volatility but stocks raced past the right shoulder to new relative highs.

Now we're left with a stock market that is short-term overbought, facing heavy overhead resistance, and 80% of the S&P 500's earnings reports are still to come. If you're a fund manager do you go long the market here? The S&P 500 is still in a trading range with support in the 880-875 zone and resistance at 950. A breakout over 950 would be very bullish and stocks would probably see a quick rally toward round-number, psychological resistance at 1,000. Meanwhile earnings results tend to be strongest at the beginning of earnings season and deteriorate throughout the second half. On top of that the third quarter tends to be the weakest time of year for stocks. Seasonally we're in the worst six months of the year for the market and the worst four months of the year for technology. Yet some of these historically seasonal trends are not working. The tech-heavy NASDAQ is breaking out to new highs for the year.

Daily chart of the S&P 500:

Monthly chart of the S&P 500:

Daily chart of the NASDAQ Composite:

Weekly chart of the NASDAQ Composite:

The short-term trend in stocks is now up. I do expect the S&P 500 to rally toward resistance at 950. Yet how many traders are going to start betting on a failed rally and begin shorting stocks at resistance? If the S&P 500 breaks out past 950 we can bet on more short covering and probably some real buying as money managers struggle to beat their benchmarks. I decided to look at some key sectors to see if they held any clues to the market's strength and whether or not this new rally has future. Traditionally Dow Theory suggests that we can't have a sustainable market rally without the transportation sector. Looking at the transportation index ($TRAN) we see a key breakout over significant resistance at 3200, where the 50-dma and 200-dma converged. Yet the index failed to breakout past its right shoulder and it remains under heavy resistance at the 3400 level. I think one sector to watch inside the transports is the railroads. The DJUSRR railroad index did breakout to new relative highs. If this group stays strong it could lead the transports higher.

Chart of the Transportation index:

Chart of the DJUSRR railroad index:

The next group I looked at was the financials, more specifically the banking indices. The banks are what led us lower during the bear market and they're the group that led us higher out of the March 2009 low. You'll notice that the BKX banking index and the BIX banking index both saw their rallies stall at the 200-dma on Wednesday and they've been unable to breakout above this technical resistance. If this sector can breakout from here then this rally has a good chance of staying alive. However, what can the next round of bank earnings say that hasn't already been said by JPM, GS, BAC and Citigroup?

Chart of the BKX banking index:

Chart of the BIX banking index:

The next sector I looked at was the semiconductor sector. Intel's earnings last week were much better than expected and it fueled a huge move in the SOX semiconductor index. Intel's comments about a potential bottom for the PC market were bullish and definitely a feather in the cap for bulls claiming the worst is behind us. Usually the semis tend to lead the NASDAQ and it was especially true last week. Both the SOX and the NASDAQ rallied to new highs for the year. Yet the gap higher in the SOX worries me. It is very uncommon for the SOX to gap open and these gaps almost always get filled. The trend is up for the sector but that doesn't mean investors have to chase this move.

Chart of the SOX semiconductor index:

The next area I looked at was oil and the U.S. dollar. Last week I wrote that oil would eventually bounce. That bounce appeared near the trendline of higher lows. You can also see it near the 100-dma on the USO oil ETF. Fundamentals for oil remain shaky. Demand is relatively weak and inventories are high. It will take new data that the global economy is really improving to keep the bullish trend alive. Oil bulls were happy to hear that China's second quarter GDP, just announced last week, came in at a +7.9% growth rate. Keep in mind that China's economy is also enjoying an astronomical 4 trillion yuan ($585 billion) government stimulus package. Hopefully the stimulus can keep the Chinese economy running long enough for the rest of the world to catch up and return to growth. The Chinese Shanghai stock market closed near 13-month highs on Friday. Jumping back to the U.S. dollar, it looks like the dollar is breaking down from its six-week consolidation. This should be bullish for oil, gold, copper and the rest of the commodity sector. If the commodity rally returns it would be one more leg for the wider market's rally to stand on.

Chart of the USO:

Chart of the UUP (U.S. dollar ETF):

A week ago I was in the camp expecting a breakdown. Today I am reluctantly and very cautiously bullish. Yet I would not want to chase this move in the market and I would not want to launch new positions with the S&P 500 still stuck under resistance at 950. I suspect that the healthiest scenario would be to see the S&P 500 consolidate under 950 for a couple of weeks and slowly build enough steam for a breakout higher. If stocks continue to climb at their current pace the move is unsustainable and the correction would probably be just as sharp. Something to keep in mind as we move forward is the retail sector. Consumers remain very week and we're going to start hearing more talk about the back-to-school shopping season. Right now expectations for back-to-school are not very high and this could forecast another skinny fourth quarter and holiday shopping season.

~ James Brown


Portfolio

Portfolio Update

by James Brown

Click here to email James Brown


Current Portfolio


Portfolio Comments:

Better than expected earnings results caught investors off guard and the market exploded higher for one of the best weekly performances in years. Now stocks are short-term overbought and investors left wondering if the earnings parade can keep the momentum alive. The key level will be overhead resistance near 950 on the S&P 500.

Currently we have six stocks on our watch list.

BEAV - BE Aerospace Inc., trigger: $10.50
CELG - Celgene Corp., trigger: 43.00
IGT - Intl. Game Tech., trigger 15.25
MICC - Millicom Cellular, trigger: $50.50
RAI - Reynolds American, trigger $38.00 or $42.50
WLT - Walter Energy Inc., trigger 36.00

Disclaimer: At any given time the author may have positions in any or all of any companies mentioned in the Leaps Newsletter.

--Position Summary Table--
Table lists Directional CALL or PUT/LEAPS only.
Insurance puts, if applicable, are not shown.

Red symbol/name represents a dropped play this week.


Jim's portfolio and updates has been included in the normal play updates section.

New Plays

Running At Resistance

by James Brown

Click here to email James Brown


A Change in Tone


Editor's Note:

Head-and-shoulders pattern? What head-and-shoulders pattern? You've probably heard this a dozen times already but stocks have reversed sharply on short covering thanks to bullish analyst comments and some wildly positive earnings surprises. The short-term trend is up and money managers are racing to catch up again, especially if they were caught short.

Now the S&P 500 is running toward major resistance at 950. Will it breakout? No one knows but odds are good we'll test that level. More importantly there has been a change in tone. The better than expected earnings results have inspired a little enthusiasm for stocks. Granted we've only seen the first week and we still have over 80% of the S&P 500 earnings announcements to go. Investor sentiment could change just as fast if the results and the guidance start to disappoint.

We're adding three new stocks to the watch list and all three report earnings this week. Odds are good we could be triggered on some post-earnings volatility.


Play Updates

Bear skins For Sale

by James Brown

Click here to email James Brown


Closed Plays


None, there were no closed plays.


Play Updates


ACGY $10.26 -0.34 -- Acergy S.A.

It was a strong week for ACGY. The stock rallied from the $9.00 region to almost $11.00 thanks to a pop on its earnings report. You can see the spike in volume on July 15th. Results were inline with estimates and the stock was upgraded on Thursday following its earnings. Shares have since dipped back toward round-number support/resistance at $10.00. More conservative traders may want to consider a higher stop loss.

I'm not suggesting new LEAPS positions at this time. Our stop is at $6.95. Our plan is to exit in the $14.50-15.00 zone. ACGY is testing resistance on its Point & Figure chart, which is currently forecasting a bullish target of $24.00.

April 25th, 2009 - entry price on ACGY @ 7.61, option @ 1.05
symbol: QLS-AB, 2010 JAN $10 LEAP call - current bid/ask $1.75/2.15
-stop loss on ACGY @ 6.95

Chart of ACGY


ACI $16.45 -0.03 -- Arch Coal Inc.

The coal sector rebounded thanks to a bounce in crude oil. Shares of ACI soared from $14.00 last Monday to $16.72 on Friday. While this bounce is encouraging we're not out of the woods. The rally in ACI stalled right at technical resistance with its 50-dma and 200-dma near $17.00.

ACI is due to report earnings on July 24th (Friday) before the opening bell. If you want to protect yourself consider buying a short-term (August) put the day before. I'd probably use a slightly out of the money put to reduce my cost in case ACI rallies on earnings. I am not suggesting new bullish positions at this time.

May 14th, 2009 - entry price on ACI @ 16.00, option @ 1.30
symbol: ACI-AE, 2010 JAN $25 LEAP call - current bid/ask .40/0.50
-stop loss on ACI @ 12.85

-or-

May 14th, 2009 - entry price on ACI @ 16.00, option @ 2.40
symbol: OSE-AF, 2011 JAN $30 LEAP call - current bid/ask $1.15/1.35
-stop loss on ACI @ 12.85

Chart of ACI:


BAC $12.89 -0.28 - Bank of America Corp.

BAC reported earnings on Friday morning and the results were 33 cents a share versus estimates at 28 cents a share. Investors sold the news after a strong rally earlier in the week. While BAC failed at resistance near $13.50 it did breakout over its simple 200-dma. The stock got a boost on Monday after Meredith Whitney came out with a surprisingly bullish call on bank stocks and said BAC looked cheap.

I'm not suggesting new LEAPS positions at this time. I want to remind readers that this is a long-term, two-year trade. Our exit target is the $30-40 zone.

Jan 25th, 2009 - entry price on BAC @ 6.24, option @ 2.38
symbol: VBA-AB, JAN 2011 $10 LEAP call - current bid/ask $5.00/5.20
-stop loss on BAC @ none.

Chart of BAC


CRM $40.84 +0.76 -- Salesforce.com

Strength in the NASDAQ and the rest of the tech sector played a big part in CRM's stellar rise last week. The stock is up 7 out of the last 8 trading days and has broken out above resistance at its exponential 200-dma, its 50-dma and the $40.00 mark. The stock looks short-term overbought and due for a correction.

I am not suggesting new LEAPS positions at this time. Traders may want to consider raising their stop closer to $35.00. Our exit target to sell our LEAPS position is $49.00.

April 1st, 2009 - entry price on CRM @ 30.00, option @ 4.30
symbol: CRM-AH, JAN 2010 $40 LEAP call - current bid/ask $5.60/5.80
-stop loss on CRM @ 32.45.
(note: readers have reported getting a better entry price than $4.30)

-or-

April 1st, 2009 - entry price on CRM @ 30.00, option @ 2.00
symbol: CRM-AI, JAN 2010 $45 LEAP call - current bid/ask $3.20/3.40
-stop loss on CRM @ 32.45.

Chart of CRM:


DBC $21.77 +0.32 -- PowerShares DB Commodity Index (ETF)

Commodities have been bouncing even though the dollar's weakness hasn't been that pronounced. The commodity sector appears to be rebounding near its multi-month trendline of higher lows. I would consider new LEAPS positions in the $21.00-22.00 zone. Our long-term target is $30.00.

FYI: The DBC is an ETF on the Deutsche Bank Liquid Commodity index using futures on light sweet crude oil, heating oil, aluminum, gold, corn and wheat.

July 6th, 2009 - entry price on DBC @ 21.50, option @ 4.28
symbol: VCZ-AT, 2011 JAN $20 LEAP call - current bid/ask $4.10/4.90
-stop loss on DBC @ 18.90.

-or-

July 6th, 2009 - entry price on DBC @ 21.50, option @ 2.62
symbol: VCZ-AY, 2011 JAN $25 LEAP call - current bid/ask $2.20/2.55
-stop loss on DBC @ 18.90.

Chart of DBC:


DO $85.05 +0.78 -- Diamond Offshore

Whew! We're out of our 2010 January $100 calls. The big bounce in the oil sector lifted DO from $76 to $85 last week. It was our plan to sell our $100 calls when DO traded at $81.00 again. On July 15th the stock gapped open at $81.92 and we closed the play with the calls at $7.30, which happened to be our entry price.

We still want to buy long-term LEAPS on DO but we need a little more clarity on the strength of the oil sector. The big bounce last week was encouraging and the daily chart's MACD has turned positive again. Yet the longer-term weekly chart's technical picture is mixed. DO's Point & Figure chart has turned bullish again but faces resistance soon.

I am going to keep our trigger to buy LEAPS again at $72.50 until after we see how investors react to DO's earnings report on July 23rd (this Thursday). We'll re-evaluate potential entry points next weekend.

July 2nd, 2009 - entry price on DO @ 80.08, option @ 7.30
symbol: KWJ-AT, 2010 JAN $100 LEAP call - exit on July 14th @ 7.30
- stop loss on DO @ 67.45

-NEW- Buy the dip trigger: $72.50

BUY 2010 JANUARY $80 CALL (symbol: KWJ-AP)
-or-
BUY 2010 JANUARY $90 CALL (symbol: KWJ-AR)

Chart of DO:


DXO $3.98 +0.13 -- Deutsche Bank Double-long Oil ETN

Crude oil is bouncing from its trendline of higher lows. This ETF is now testing resistance near $4.00 and its 50-dma. I wouldn't be surprised to see another dip near $3.50, which can be used as an entry point.

Prior comments on this play:
The DXO is our long-term oil position. When we say long-term we're talking two or three years (or more). Currently the plan is to build a long-term position averaging down on dips. The $2.50 region is the sweet spot to buy the DXO. Anything under $2.50 is a gift. I want to repeat that this is not a trade. It's a multi-year investment. Currently our exit target is the $25.00 to $30.00 zone.

The Crude oil double-long ETN (exchange-traded note) offers investors two times the leveraged exposure to the monthly performance of the Deutsche Bank optimum yield crude oil index plus the monthly TBill index return.

Basically, when oil was $147 a barrel this ETN was $29.65. If oil returns to the $150 range over the next few years this ETN could rally to $30 for a 1500% return. This ETN does not expire. It can be used in IRAs and has no margin requirements like crude oil futures.

ETN Info:

Deutsche Bank ETN Fact Sheet

Deutsche Bank Pricing Description

Our plan called for buying this ETN instead of the options.

Current position in the DXO = $2.15 entry (no stop loss at this time)

Chart of DXO


ERTS $20.93 -0.52 -- Electronic Arts

ERTS is still consolidating sideways. Unfortunately Friday's action looks like a short-term bearish reversal. I am not suggesting new positions at this time. Earnings are currently expected on July 28th but that date is unconfirmed.

We have two targets. We want to take part of the position off the table at $29.00. Take the rest off at $34.00.

April 20th, 2009 - entry price on ERTS @ 18.00, option @ 1.08
symbol: EZQ-AE, JAN 2010 $25 LEAP call - current bid/ask $1.05/1.20
-stop loss on ERTS @ 17.95.

The symbol has changed from WZW-AE to EQZ-AE.

-or-

April 20th, 2009 - entry price on ERTS @ 18.00, option @ 0.70
symbol: WZW-AF, JAN 2010 $30 LEAP call - current bid/ask .25/0.35
-stop loss on ERTS @ 17.95.

The symbol has changed from WZW-AF to DXU-AD.

Chart of ERTS:


FAS $47.53 -1.11 - Direxion Fincl.Bull 3x ETF

The moves in the FAS are certainly more exciting following the reverse split. Shares launched last week with a bag following the Meredith Whitney-inspired rally in banking stocks last Monday. The rally in the FAS stalled near $50.00. This coincides with the BKX and BIX indices stalling at technical resistance with the 200-dma. Of course the FAS trades off the Russell 1000 financial services index, which rallied to the 650 level and paused.

If the banks fail at current levels it might portend a new relative low. On the other hand if the banks can breakout from here they could lead the market higher and help the S&P 500 breakout over major resistance at the 950 level. I am not suggesting new bullish positions in the FAS at this time.

Currently we have sold one third of our position at $12.00 (post-split price of $60.00) and we plan to sell another third at $120.00. We'll re-evaluate our final target for the last third of our position as needed. FYI: On July 9th, 2009 the FAS performed a 1:5 reverse split.

Our plan called for buying the ETF instead of the options.

Current position in the FAS = $2.64 entry (stop loss: 2.64)
post-split prices are: $13.20 entry (stop loss: 13.20)

Exit 1/3 position @ 12.00 (+354%) /post-split: 60.00

Chart of FAS

Chart of RIFIN (Russell 1000 financial services)


FCX $55.50 +1.68 - Freeport McMoran

Wow! It's amazing the difference a week can make. FCX soared from $45 to over $55.00 for an 18.9% gain. The stock has broken through several layers of resistance. The bearish head-and-shoulders pattern has been invalidated. FCX is due to report earnings on Tuesday morning, July 21st. I would expect some profit taking on their results unless they just knock the ball out of the park. A correction back toward $45.00 is probably a new entry point. Our long-term target is $69.00.

June 22nd, 2009 - entry price on FCX @ 46.00, option @ 6.00
symbol: FCX-AK, 2010 JAN $55 LEAP call - current bid/ask $9.05/9.20
-stop loss on FCX @ 39.45
-or-
June 22nd, 2009 - entry price on FCX @ 46.00, option @ 10.00
symbol: OBQ-AL, 2011 JAN $60 LEAP call - current bid/ask $12.80/13.10
-stop loss on FCX @ 39.45

Chart of FCX:


FSLR $144.55 -0.63 -- First Solar

Uh-oh! Normally the solar energy sector tends to follow oil. Last week oil bounced yet shares of FSLR did not. Well, I might be exaggerating a little. FSLR did bounce from $140 to $150 but the rally at $150 reversed, which doesn't bode well short-term. The $140 level is close to the 61.8% Fibonacci retracement of FSLR's March-May rally. If the stock breaks down under $140.00 we could see a serious correction back toward $100.00! We are not suggesting new positions.

This play looked like a done deal back on April 30th when shares spiked higher. Here's a repost of our April 30th, 2009 trade recap:

The covered-call trade is now at maximum profit. We bought FSLR at $128.00 and sold the 2010 $150 LEAP for $40.70. After the April 30th move odds are almost guaranteed that we'll be called out but we have to leave it in our portfolio until we are. Profit if called is $40.70 for the call option we sold and a $22 rise in the stock price (from $128 to $150). Together that's a $62.70 gain on a $128 investment (+48.9%).

Our put-spread play is a position we plan on holding until expiration in January 2010. We bought the 2010 $100 LEAP put for $32.90. We sold the 2010 $250 LEAP put for $135.70. Our net credit was $103 into our account. If you covered on April 30th by buying back the $250 LEAP put (at the time trading around $80.00) our profit would only be about $23.00. That's not our plan. We're holding this position until January 2010 and will buy back the $250 LEAP put then with the expectation it will be worth even less (as the stock continues to climb).

Covered Call position:

Long 100 shares of FSLR @ $128.00
Short 2010 $150 LEAPS Call LZL-AA @ $40.70
Profit if called is $40.70 in option premium + $22 in stock (+49%)

Put Spread position:

Long 2010 $100 LEAPS Put LQM-MT @ $32.90
Short 2010 $250 LEAPS Put LZL-MJ @ $135.70, net credit $103

Currently the 2010 Jan. $100 put is worth (bid) $6.80.
The 2010 Jan. $250 put is worth $106.00.
If you're curious the 2010 Jan. $150 call is at $21.30.

Chart of FSLR


GLBL $5.96 +0.15 -- Global Industries

GLBL delivered a 15% gain last week. The stock bounced from support near $5.00 and is now challenging resistance at the $6.00 level. I am not suggesting new bullish positions at this time.

Please note that our stop loss is at $3.95. Readers might want to consider the use of a higher stop loss or an early exit to lock in a gain. Our target to exit is $8.85.

Our plan called for buying the stock instead of the options. Our entry point to buy GLBL was hit on January 6, 2009

Current position in GLBL = $4.10 entry (stop loss: 3.95)
Current target to exit is $8.85.

Chart of GLBL:


GT $12.92 +0.31 -- Goodyear Tire & Rubber Co.

The oversold bounce in GT really picked up speed last week. The stock gained more than 17% and broke through resistance near $12.00 and its 50-dma. With a 29% rally from the $10.00 level I'm not suggesting new positions at this time. Our long-term target is $25.00.

June 6th, 2009 - entry price on GT @ 12.94, option @ 2.20
symbol: GT-AC, 2010 $15 LEAP call - current bid/ask $1.15/1.30
-stop loss on GT @ 9.90.
-or-
June 6th, 2009 - entry price on GT @ 12.94, option @ 2.65
symbol: VYR-AD, 2011 $20 LEAP call - current bid/ask $1.25/1.65
-stop loss on GT @ 9.90.

Chart of GT:


HOS $24.27 +0.05 -- Hornbeck Offshore Services

HOS produced a massive bounce last week with a 22% gain. The rally has stalled just under its 50-dma under $25.00. After such a big move I would not chase it. I am not suggesting new LEAPS positions at this time. Our long-term target is $35.00.

June 27th, 2009 - entry price on HOS @ 21.20, option @ 4.90
symbol: HOS-AD, 2010 JAN $20 LEAP call - current bid/ask $5.90/6.60
-stop loss on HOS @ 17.85

The symbol has changed from WVG-AD to HOS-AD.
-or-
June 27th, 2009 - entry price on HOS @ 21.20, option @ 2.70
symbol: HOS-AE, 2010 JAN $25 LEAP call - current bid/ask $3.30/4.00
-stop loss on HOS @ 17.85

The symbol has changed from WVG-AE to HOS-AE.

Chart of HOS:


INTC $18.79 +0.29 -- Intel Corp.

Intel almost single-handedly led the charge higher in tech stocks last week. The company reported earnings that were much better than expected and offered positive guidance. The stock gapped open higher and has continued to scream to new highs for the year. You can see Intel's affect on the SOX semiconductor index and the NASDAQ with Wednesday's gap higher. The stock posted a 17% gain for the week.

I'm not suggesting new LEAPS positions at this time. Our target is the $24-26 zone.

FYI: Shares of Intel don't move very fast. Readers might want to consider turning this play into a calendar spread to further maximize your gains.

June 13th, 2009 - entry price on INTC @ 16.31, option @ 1.36
symbol: VNL-AD, 2011 LEAP $20 call - current bid/ask $2.28/2.33
-stop loss on INTC @ 14.40.

Chart of INTC:


JOYG $35.92 +0.26 -- Joy Global Inc.

As commodities and miners rallied shares of JOYG followed in their wake and posted a 15% gain last week. I'm not suggesting new positions at this time. Our stop loss on this play is at $24.75. Our first target is $48.50. More conservative traders may want to consider a higher stop loss!

June 22nd, 2009 - entry price on JOYG @ 33.00, option @ 3.80
symbol: JQY-AH, 2010 JAN $40 LEAP call - current bid/ask $3.90/4.10
-stop loss on JOYG @ 24.75
-or-
June 22nd, 2009 - entry price on JOYG @ 33.00, option @ 6.90
symbol: ZMC-AH, 2011 JAN $40 LEAP call - current bid/ask $7.90/8.30
-stop loss on JOYG @ 24.75

Chart of JOYG:


KSU $18.36 +0.82 -- Kansas City Southern

KSU produced one of the most impressive rallies of the week. The stock shot from support near $14.75 to a new high over $18.00 for an 18.7% gain. This move has created a new bullish buy signal on the Point & Figure chart that currently points to a $24 target and could rise. yet after such a sharp rally we have to expect some profit taking. I am not suggesting new LEAPS positions at this time. Our long-term target is the $27.50-30.00 zone.

May 9th, 2009 - entry price on KSU @ 17.01, option @ 0.90
symbol: LJR-AE, 2010 LEAP $25 call - current bid/ask .55/0.70
-stop loss on KSU @ 13.90.

Chart of KSU:


MDR $18.29 +0.02 - McDermott Intl. Inc.

MDR did see an oversold bounce from the $16.00 region but the rally stalled in the $18.00-18.50 zone. I'm not suggesting new positions at this time. Our target to exit is a move into the $30.00-35.00 zone.

April 4th, 2009 - entry price on MDR @ 15.56, option @ 2.70
symbol: MDR-AD, 2010 $20 LEAP call - current bid/ask $2.25/2.40
-stop loss on MDR @ 14.75.

Chart of MDR:


MSFT $24.29 -0.15 -- Microsoft Corp.

There seems to be a growing chorus of bulls regarding the release of Windows 7 and how it could help spark a new upgrade cycle in hardware (a.k.a. computers). Seems like good time to have Windows 7 release in time for the holidays and in time for what should be an economic rebound. MSFT bounced from the $22.00 level last week and is testing resistance in the $24.25-24.50 zone.

The company reports earnings on July 23rd (Thursday) after the market's closing bell. Wall Street expects a profit of 36 cents a share. Investors might want to consider buying some cheap out of the money puts just in case MSFT says something that seriously disappoints the market. However, I'm not recommending the put insurance because any serious correction is going to be seen as a bullish entry point. I'm not suggesting new LEAPS positions at this time.

This is going to be a very long-term play as MSFT doesn't move very fast in spite of its recent performance. My long-term target is the $30 region.

June 2nd, 2009 - entry price on MSFT @ 21.60, option @ 2.20
symbol: VMF-AE, 2011 Jan. $25 call - current bid/ask $3.15/3.30
-stop loss on MSFT @ 18.40.

Chart of MSFT:


MT $35.06 +0.38 -- ArcelorMittal

The bullish trend in MT is still alive. Two weeks ago the stock was breaking key support but the rally returned. Metal and material stocks were strong and shares of MT gained 18% last week. Readers may want to consider new bullish positions on another dip near $30.00. Our long-term target is the $50 region. We'll use a stop loss at $24.45.

June 17th, 2009 - entry price on MT @ 30.50, option @ 2.70
symbol: MT-AH, JAN 2010 $40 call - current bid/ask $3.50/3.80
-stop loss on MT @ 24.45.

The symbol has changed from LLU-AH to MT-AH.

-or-

June 17th, 2009 - entry price on MT @ 30.50, option @ 2.00
symbol: MT-AJ, JAN 2010 $50 call - current bid/ask $1.15/1.45
-stop loss on MT @ 24.45.

The symbol has changed from LLU-AJ to MT-AJ>

Chart of MT:


NYX $26.52 -0.09 -- NYSE Euronext

NYX has bounced back above resistance at the $26.00 level but I'm not convinced the six-week down trend has been broken yet. The stock has overhead resistance at its 50-dma near $27.50. I'm not suggesting new positions at this time. Our long-term target is the $35.00-40.00 zone.

Apr. 11th, 2009 - entry price on NYX @ 21.51, option @ $1.81
-- YVX-AU, 2010 $30.00 LEAP call - current bid/ask $2.12/2.18
-stop loss on NYX at $19.95

The symbol has changed from YVX-AU to NZV-AD.

Chart of NYX:


PBR $40.02 +0.61 -- Petroleo Brasiliero

Oil stocks produced some of the biggest rebounds last week. PBR did not disappoint with a rally from $36.00 to $40.00. Unfortunately the $40.00 level is round-number resistance and its bolstered by the 50-dma. I am not suggesting new positions at this time. The plan is to sell half our position at $49.50 and the rest at $57.50.

Apr. 4th, 2009 - entry price on PBR @ 35.10, option @ $2.80
symbol: PMJ-AJ, 2010 $50.00 LEAP call - current bid/ask $1.45/1.55
-stop loss on PBR at $29.00

Chart of PBR:


PEP $56.66 -0.60 -- PEPSICO Inc.

PEP rallied to a new high for the year last week. The stock pared its gains but PEP continues to out perform. What a difference a week makes. I was expecting a correction toward $52.50. I hesitate to chase this move with the S&P 500 nearing significant resistance at 950. Plus, PEP is due to report earnings on July 22nd. Let's wait and see what their results are. I'm not suggesting new LEAPS position at this time. Our long-term target is the $65-70 zone. We'll use a stop loss at $51.50. This is an 18-month bet.

July 7th, 2009 - entry price on PEP @ 57.25, option @ $4.50(estimate)
symbol: VP-AL, 2011 $60.00 LEAP call - current bid/ask $4.10/4.60
-stop loss on PEP at $51.50

Chart of PEP:


PCU $22.89 +0.62 - Southern Copper Corp.

PCU, just like FCX, soared as commodities rebounded. The stock rallied sharply from support near its 100-dma and posted an 18.7% gain on the week. I can't find a confirmed earnings date but the company could announce as early as this Friday (July 24th) or the week after. I would expect some profit taking after last week's rally and potentially on any earnings results. I'm not suggesting new bullish positions at this time. Our target is $30.00.

April 20th, 2009 - entry price on PCU @ 19.00, option @ 1.95
symbol: YPV-AE, JAN 2010 $25 LEAP call - current bid/ask $2.20/2.35
-stop loss on PCU @ 16.45.

The symbol has changed from YPV-AE to PCU-AE.

Chart of PCU:


RIG $74.34 +0.82 -- Transocean Ltd.

RIG is another volatile oil services stock and the oversold bounce from $65.00 made it to $75.00 by Friday. The $75.00 level does look like short-term resistance and it's strengthened by the 50-dma. I'm not suggesting new LEAPS position at this time.

July 3rd, 2009 - entry price on RIG @ 70.50, option @ 5.40
symbol: RIG-AP, JAN 2010 $80 call - current bid/ask $6.00/6.30
-stop loss on RIG @ 59.90.

-or-

July 3rd, 2009 - entry price on RIG @ 70.50, option @ 3.90
symbol: RIG-AZ, JAN 2010 $85 call - current bid/ask $4.30/4.50
-stop loss on RIG @ 59.90.

Chart of RIG:


SGY $7.68 -0.17 -- Stone Energy Corp.

SGY delivered a big bounce coming close to a 15% gain last week. Shares are testing potential resistance near $8.00. I'm not suggesting new positions at this time. Our stop loss is $4.90. Our target is $14.75.

June 22nd, 2009 - entry price on SGY @ 6.35, option @ 0.75
symbol: YLO-AB, 2010 JAN $10 LEAP call - current bid/ask .95/1.15
-stop loss on SGY @ 4.90

-or-

June 22nd, 2009 - entry price on SGY @ 6.35, (buying the stock)
-stop loss on SGY @ 4.90

Chart of SGY:


SLB $56.01 +0.53 -- Schlumberger Ltd.

SLB, another oil service stock, gained more than 10% on the week. Shares did manage to edge past technical resistance at its exponential 200-dma and the 50-dma but the stock is now facing resistance near $56.00. I am not suggesting new LEAPS positions at this time.

NOTE: SLB is due to report earnings on Friday, July 24th before the market opens. Readers might want to protect themselves with slightly out of the money puts. Personally I'd buy them on Thursday at the close. If SLB sells off on earnings then we try and capture a short-term gain in the puts to offset any losses in our leaps. If SLB rallies on earnings then we quickly sell the puts (for a loss). Remember, they're supposed to be insurance. It's up to you on how much of an insurance premium you want to pay. If the stock market is still in rally mode by Thursday (July 23rd) I'd probably not waste any money buying puts on SLB.

Currently our exit strategy has three parts. The plan is to sell one third of our position at $59.00, which was originally our first target. We'll sell another one third at $69.00. We'll exit our final third at $77.50.

April 20th, 2009 - entry price on SLB @ 45.01, option @ 3.00
symbol: SLB-AL, JAN 2010 $60 LEAP call - current bid/ask $5.00/5.20
-stop loss on SLB @ 44.90.

1st exit @ $59.00 (1/3 of position) option @ $7.25 (+141% estimate)

Chart of SLB:


UNG $13.16 +0.02 - U.S. Natural Gas ETF

UNG spent several days consolidating in the $12.00-12.50 zone. Late last week it began to rally. I don't trust it. The larger trend is still down and I want to see more of a base. I am not suggesting new long-term LEAPS positions at this time.

Big picture natural gas is in the process of making long-term lows here but that doesn't mean the commodity won't get more oversold first Our long-term target is the $25-30 zone.

June 16th, 2009 - entry price on UNG @ 16.26, option @ 3.90
symbol: ZZM-AT, JAN 2011 $20 LEAP call - current bid/ask $1.80/2.20
-stop loss on UNG @ no stop

Weekly Chart of UNG:


UYG $4.02 -0.07 - ProShares Ultra Financials (2x) ETF

The bounce in financials has fueled a bullish breakout in the UYG. Shares rallied past their 50-dma and the $4.00 mark. If the banking indices can breakout past their 200-dma then we might want to buy the breakout in shares of UYG. Keep an eye on the BKX and BIX banking indices and the DJUSFN index.

Please note that we have set our stop loss on UYG at breakeven at $1.50. More conservative traders might want to consider a stop near $2.00 or $2.25.

Don't forget that the UYG trades off the DJUSFN index.

The plan is to hold the UYG for 18 to 24 months or longer. We'll evaluate potential exit points along the way.

Our strategy called for buying the ETF instead of the options.

Current position in the UYG = $1.50 entry (stop loss: 1.50)

Chart of UYG:


VOD $18.61 -0.54 -- Vodafone Group

VOD displayed some volatility last week but the gap opens are to be expected as the U.S. traded shares adjust for VOD trading in London. Shares are still in the $18.00-20.00 trading range. I would still consider positions in the $18.50-18.00 zone or on a breakout over $20.00. More conservative traders may want to use a stop loss closer to $18.00. Our target is the $27.50 region.

July 10th, 2009 - entry price on VOD @ 18.25, option @ 1.10
symbol: VOD-AD, 2010 JAN $20 LEAP call - current bid/ask $1.05/1.15
-stop loss on VOD @ 16.90

Chart of VOD:


WFR $18.76 +0.65 -- MEMC Electronic Materials Inc.

Last WFR rallied on its semiconductor roots and not its exposure to solar energy. The rally in semis lifted WFR from $16.00 to almost $19.00 and the stock broke through a handful of key moving averages. I'm not suggesting new LEAPS positions at this time. Our target is the $30.00 region. Earnings are expected on Thursday, July 23rd after the market's closing bell. Investors might want to protect themselves with a little insurance in the form of short-term puts.

June 23rd, 2009 - entry price on WFR @ 17.50, option @ 2.50
symbol: CJC-AD, 2010 JAN $20 LEAP call - current bid/ask $2.55/2.70
-stop loss on WFR @ 14.75

-or-

June 23rd, 2009 - entry price on WFR @ 17.50, option @ 3.43
symbol: ZET-AE, 2011 JAN $25 LEAP call - current bid/ask $2.95/3.20
-stop loss on WFR @ 14.75

Chart of WFR:



Watch

A 100% Increase

by James Brown

Click here to email James Brown

We're doubling the size of our watch list and focusing on earnings results this week.


New Watch List Entries

Intl. Game Technology

Reynolds American Inc.

Walter Energy Inc.


Active Watch List Candidates

BEAV - BE Aerospace Inc.

CELG - Celgene Corp

MICC - Millicom Intl. Cellular


Dropped Watch List Entries

None. We did not drop any watch list candidates.


New Watch List Candidates:

IGT $17.68 +0.55 --- Intl. Game Technology

It you look at a long-term chart of IGT you can see that shares put in a very significant bottom with the November 2008 and March 2009 lows. In the last few months the stock has broken through resistance near $14.00 and just retested it two weeks ago. The new trend is up. Yet short-term IGT looks overbought. I suspect that might change this week. The company reports earnings on July 23rd before the market's opening bell. Wall Street's estimates are at 18-cents a share. After such a big run up in IGT from the July low the stock should see some profit taking. We want to buy LEAPS on a dip near $15.00. Our long-term target is the $25.00-30.00 zone.

NOTE: Readers may want to wait until after IGT reports earnings no matter what even if the stock hits our trigger before the report. There's always a chance that company disappoints badly and shares gap lower.

Company Info:
International Game Technology (www.IGT.com) is a global company specializing in the design, development, manufacturing, distribution and sales of computerized gaming machines and systems products. (source: company press release or website)

Buy-the-Dip trigger: $15.25

BUY the 2010 January $17.50 call (IGT-AW) -or-
BUY the 2010 January $20.00 call (IGT-AD) -or- BUY the 2011 January $20.00 call (VGG-AD)

Chart of IGT:


RAI $41.01 +0.65 -- Reynolds American Inc.

RAI is also forming a significant bottom. Last week the stock broke out over resistance near $40.00 and its 200-dma. Shares look poised to breakout over stronger resistance at $42.00 and really launch into a new leg higher. However, earnings are due out on July 23rd before the market opens. Wall Street expects a profit of $1.16 a share.

I am listing two different entry points to buy LEAPS on RAI. One is a breakout entry point at $42.50. The other is a buy the dip entry point at $38.00. Currently the Point & Figure chart is bullish with a $62 target.

NOTE: Readers may want to wait until after RAI reports earnings no matter what even if the stock hits our trigger before the report. There's always a chance that company disappoints badly and shares gap lower.

Company Info:
Reynolds American Inc. (NYSE: RAI) is the parent company of R.J. Reynolds Tobacco Company, Conwood Company, LLC. and Santa Fe Natural Tobacco Company, Inc. (source: company press release or website)

Buy-the-Dip trigger: $38.00 - or -

The Breakout trigger: $42.50

BUY the 2010 FEBRUARY $45.00 call (RAI-BI) -or-

BUY the 2011 JANUARY $40.00 call (OWO-AH)

Chart of RAI:


WLT $43.00 +1.36 -- Walter Energy Inc.

The relative strength in shares of WLT, a coal company, makes the stock look like a buy right now. The company produces a lot of metallurgical coal that's crucial for smelting, which could be the cause for the stock's out performance compared to the rest of the sector. However, instead of buying the breakout I think we should wait. The company is due to report earnings on July 22nd, after the market's closing bell. Analysts are expecting a loss of 4-cents a share. There's always the chance that the stock sells-off on the earnings news.

I'm suggesting readers buy LEAPS on a dip in the $36.00-35.00 zone. If WLT doesn't sell-off post earnings we'll re-evaluate. Our long-term target is $60.00.

NOTE: Readers may want to wait until after WLT reports earnings no matter what even if the stock hits our trigger before the report. There's always a chance that company disappoints badly and shares gap lower.

Company Info:
Walter Energy, based in Tampa, Fla., is a leading producer and exporter of premium U.S. metallurgical coal for the global steel industry and also produces steam coal and industrial coal, metallurgical coke and coal bed methane gas. The Company has revenues of approximately $1.2 billion and currently employs approximately 2,150 people. (source: company press release or website)

Buy-the-Dip trigger: $36.00

BUY the 2010 January 50.00 call (WLT-AJ)

-or-

BUY the 2011 January 50.00 call (OZE-AJ)

Chart of xxx:


Active Watch List Candidates:


BEAV $14.26 +0.07 -- BE Aerospace Inc.

That $12.50 entry point we used to have on BEAV is looking pretty good right about now. Yet a week ago the stock market looked poised to begin a new leg lower. No one was expecting a massive short squeeze to lift the S&P 500 up 7% in five days. BEAV has rallied toward resistance near $14.00 and its 50-dma and exponential 200-dma. We're not going to launch positions here. I would be tempted to buy LEAPS on another dip near $12.00 but for now we'll leave the trigger at $10.50. Another week should provide a lot more clarity.

Buy-the-Dip trigger: $10.50

BUY the 2010 January $15.00 calls (symbol: BQV-AC)

Note: At $10.50 you could just buy the stock instead but the $15 calls will allow you more leverage on your investment.

Chart of BEAV:


CELG $46.83 -0.21 -- Celgene Corp.

This could be the week we get triggered. CELG is due to report earnings on July 23rd before the opening bell. The stock could see some profit taking on its earnings report. The $43.00 level lines up well with the 50% retracement of its March-June rally. We'll use a stop loss at $39.00. Our target is $59.50.

Buy-the-Dip trigger: $43.00

BUY the 2010 January $50 call (symbol: LQH-AJ)

Chart of CELG:


MICC $60.77 +0.15 -- Millicom Intl. Cellular

The market's short-squeeze helped produce a breakout over resistance at $58.00 in MICC. The company is due to report earnings on July 21st before the opening bell. Shares could see some volatility this week. Our entry point at $50.50 may be too optimistic. We'll re-evaluate after we see how investors react to earnings. We'll use a stop loss at $44.80. Our target is the $75-80 zone. Buy-the-Dip trigger: $50.50

BUY the 2010 January $60 call (symbol: CQD-AL)

Chart of MICC: