Option Investor
Newsletter

Daily Newsletter, Saturday, 8/1/2009

Table of Contents

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

Leaps Trader Commentary

Cross Your Fingers

by James Brown

Click here to email James Brown

I am going to keep my commentary pretty short tonight. Not much has changed in the last week. The earnings parade has generally been better than expected if you're willing to accept companies beating drastically lowered bottom line expectations and ignore all the top line misses. Companies can only slash costs and lay off workers so many times before it significantly impacts their business. The GDP report on Friday was better than expected but the improvement in the second quarter was somewhat overshadowed by a downwardly revised first quarter. We can probably ignore it since it's in the rearview mirror.

Right now the tone of the market is bullish. Investors are ignoring bad news and only focusing on good news. That's a great environment for the bulls but it makes me wonder what the next catalyst is going to be to spark a correction. Stocks are extremely overbought and due for a pull back. There seems to be a growing camp of traders that are pointing to the upcoming August non-farm payrolls (jobs) report this Friday, August 7th as the market event you want to get flat in front of.

The concern is that the jobs number will disappoint and finally ignite a sell-off in stocks. Yet is anyone really going to be surprised to see unemployment tick higher? They shouldn't. Everyone is expecting unemployment both here and in Europe to keep climbing well into the first half of 2010. Estimates range from 10% to 12% unemployment in the U.S. before the labor market finally reverses. So if the August jobs number "disappoints" is it really a disappointment? The bigger risk is probably an upside surprise with job losses coming in smaller than expected. Whatever the case the markets could sell the news anyway as an excuse to lock in gains. A lot of money managers and big traders go on vacation in August so volume tends to be light. Seasonally stocks don't perform well in August and September so it's another reason for money managers to sell and go on vacation. When they come back they put the kids back in school, and get ready to buy the October dip. However, 2009 hasn't followed normal seasonal trends and there is no reason for it to start now.

If we consider our current position with stocks overextended from a 10% gain off the July lows and investors nervous about the jobs report on Friday we probably shouldn't expect much from stocks Monday through Thursday. Yet I wouldn't be that concerned about a sell-off after the jobs report either. On the contrary we want to see a pull back. A lot of investors both big and small are waiting for a pull back. That's why any correction is likely to be shallow. Last week I briefly discussed why money managers are suffering from performance anxiety. They're worried about missing the move and they're worried about under performing the market. This stress is fueling their need to chase stocks higher when logically they don't want to.

Regular readers of this column know that I am concerned about how rising unemployment fuels rising foreclosures, a rising savings rate, and a decline in consumer spending. Consumer spending accounts for about 70% of our country's GDP. The second-quarter GDP report showed a 1.2% decline in consumer spending, which reversed the 0.6% gain in the first quarter. This is not going to change very fast and doesn't bode well for the back-to-school shopping season or the 2009 Christmas season. The only thing that might save the 2009 holiday season is going to be easy comparisons to last year, which was terrible. The recent housing reports that are starting to show a miniscule bounce in residential real estate is just that - a bounce. We're in the middle of summer. The last three months have been prime-time sales season. Homes are supposed to see a bounce. Sales tend to fall off a cliff in August. I've been warning readers for months that there is another wave (or two) of foreclosures on the horizon and it's not going to be pretty. Anemic consumer spending and another downturn in the housing sector are both going to be really big contributors to what will likely be the second half of a double-dip recession. The good news it that this probably won't have much of an impact until 2010.

It is starting to look like the rest of 2009 will probably be okay. Everything will depend on the steady flow of economic data and whether or not the data supports the current theory that the economy is recovering. We might still see a decline in September but that normally sets up for a fourth-quarter rally. What we should find very encouraging about the GDP report on Friday were the inventory numbers. Businesses cut inventory spending by more than $141 billion in the second quarter. That's huge! The shelves are getting bare and corporations should see an up tick in business as the country restocks their shelves. Economists are already ratcheting up their third and fourth quarter GDP forecasts based on the inventory number. Plus the cash-for-clunkers program could boost the economy. The $1 billion program was active for less than a week before it ran out of funds. At $4,500 a car that's more than 222,000 new cars sold. Congress rushed to add more funding and extend the program on Friday morning. A sharp spike in the auto industry should certainly boost the third quarter.

Weekly Chart of the S&P 500 Index:

Weekly Chart of the NASDAQ Composite:

Technically the markets are overbought. You can see above that the S&P 500 is testing resistance near the 1,000 level. The NASDAQ is also testing significant resistance at its trendline of lower highs. This overhead resistance is just one more reason that stocks could churn sideways this week ahead of the jobs report. The plan right now is to be patient and cross your fingers we get a correction. Look for support on the S&P 500 near 950.

~ James Brown


Portfolio

Portfolio Update

by James Brown

Click here to email James Brown


Current Portfolio


Portfolio Comments:

This week looks a lot like last week. A few sectors have been able to extend their gains but we're starting to see some stocks begin to correct after the strong July rally. The S&P 500 is still under resistance. A dip toward the 950 level, which should now be support, would be seen as an entry point to buy stocks.

Last week the U.S. dollar sank to new lows for the year. This trend should continue and that will boost commodities, which should help the oil and mining stocks.

Currently we have nine stocks on our watch list.

BEAV - BE Aerospace Inc., trigger: $13.00
BG - Bunge Limited, trigger $61.00
CNX - Consol Energy Inc., trigger $30.50
ERJ - EMBRAER - Empresa Brasileira de Aeronáutica, trigger $17.50
IGT - Intl. Game Tech., trigger $17.50
LNN - Lindsay Corp., trigger $33.50
MEE - Massey Energy Corp., trigger $20.50
MICC - Millicom Cellular, trigger: $62.50
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

It's A Virtue

by James Brown

Click here to email James Brown


The S&P & NASDAQ Flirt With Resistance


Editor's Note:

Unfortunately nothing has changed for us since last week. Stocks have only become more overbought. Well, at least the major averages have become more overbought. A lot of stocks have already begun to correct.

The S&P 500 index is flirting with resistance near the 1,000 level while the NASDAQ composite is testing resistance at its long-term trendline of lower highs. With double-digit gains in July investors should be quick to take profits. Yet at the same time I'm expecting any correction to be relatively shallow. Keep an eye on the 950 level for the S&P 500. Broken resistance should be new support. Last week I said that there is a lot of money on the sidelines and money managers are chasing performance. It still applies today.

Be patient when it comes to launching new positions. In addition to the three new candidates on our watch list I would also keep an eye on OM Group Inc. (OMG), a chemical company, and RTI International Metals Inc. (RTI). Both look like potential candidates for LEAPS if the market corrects.


Play Updates

Stocks Remain Overbought

by James Brown

Click here to email James Brown


Closed Plays


None. We did not close any plays.


Play Updates


ACGY $10.69 +0.33 -- Acergy S.A.

Shares of ACGY were somewhat volatile last week. The stock dipped under the $10.00 level but managed to bounce back the next day. ACGY is a seabed construction company and shares tend to follow along with the oil service stocks, which displayed similar volatility last week. The larger bullish trend of higher lows is still intact. 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 still 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 $1.80/2.20
-stop loss on ACGY @ 6.95

Chart of ACGY


ACI $17.41 -0.08 -- Arch Coal Inc.

The coal industry has continued to rally and managed to breakout to new highs for the year. The rally is about three weeks old and the group looks overbought and due for a correction. What I find worrisome is that ACI is under performing many of its peers. The reason has been ACI's recent debt offering and secondary offering of stock. Last week ACI raised $600 million in seven-year notes and sold another 17 million shares of stock at $17.50 a share. The capital is supposed to help ACI buy the Jacobs Ranch mining complex in Wyoming.

Now that the market and the coal sector overbought odds are good that ACI will see another dip. I would wait for another dip near $16.00 or even the $15.00 region before considering new bullish LEAPS positions. Our long-term target is the $30 region. If you do launch new positions I would buy the 2010 January $20 calls or 2011 January $25 calls.

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 $1.00/1.10
-stop loss on ACI @ 12.85

Chart of ACI:


BAC $14.79 +0.82 - Bank of America Corp.

It turned out to be a very strong week for BAC. The stock gained more than 18% and broke out over technical resistance at its exponential 200-dma. BAC is quickly approaching its May 2009 highs near $15.00 and I would expect a little profit taking.

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 $6.25/6.35
-stop loss on BAC @ none.

Chart of BAC


CRM $43.34 -0.39 -- Salesforce.com

After a very sharp three-week rally CRM spent last week consolidating sideways. A 50% correction of the rally would bring CRM near round-number support at $40.00. That's where I'd look for support. We want to sell half of our position at $49.00. We'll sell the second half at $57.00. I am not suggesting new LEAPS positions at this time.

April 1st, 2009 - entry price on CRM @ 30.00, option @ 4.30
symbol: CRM-AH, JAN 2010 $40 LEAP call - current bid/ask $6.90/7.10
-stop loss on CRM @ 34.90.
(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 $4.20/4.40
-stop loss on CRM @ 34.90.

Chart of CRM:


DBC $23.04 +0.45 -- PowerShares DB Commodity Index (ETF)

The weakness in the U.S. dollar finally restarted again. We've been expecting the bearish trend in the dollar to pick up for weeks. A weak dollar makes dollar-denominated commodities more expensive and an economy in recovery usually sees stronger demand for commodities. Both are a win-win for the DBC. 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 $4.60/5.80
-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 $2.60/3.50
-stop loss on DBC @ 18.90.

Chart of DBC:


DO $89.87 +0.02 -- Diamond Offshore

Oil service stocks have started to correct after the massive rally from the July lows. DO has pulled back from resistance in the $94-95 zone, which could be a potential bearish double top pattern. We want to buy LEAPS on a dip near $80.00. Right now our trigger is at $82.00. We'll put the stop at $69.95 but we could probably get away with a stop at $74.40.

-NEW- Buy the dip trigger: $82.00

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

Chart of DO:


DXO $4.64 +0.16 -- Deutsche Bank Double-long Oil ETN

Weakness in the U.S. dollar has breathed new life into the commodity rally. Oil rebounded sharply from its intra-week lows. The DXO is back to challenging short-term resistance near $4.60. I'm not suggesting new bullish positions at this time. Keep your eyes open for a dip near $3.50 or its 100-dma.

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 $21.47 +0.34 -- Electronic Arts

Investors need to be defensive here. Technically the upward trend off the 2009 lows has turned into a sideways consolidation. If you study the chart you can see the pennant formation of lower highs and higher lows. Now normally the pennant breaks out in the direction of the previous trend, which is up but it's not a guarantee. We may need to worry about ERTS. While they are the dominant player in their field a struggling consumer has been cutting back. The latest GDP report showed that consumer spending fell 1.2% in the second quarter. That doesn't bode well for anyone selling discretionary items like video games.

ERTS is due to report earnings on Tuesday, August 4th after the closing bell. I would seriously consider buying some cheap out of the money August puts before Tuesday's closing bell just in case ERTS bombs the earnings report and the stock plunges. These puts would be temporary insurance. The $19 or $18 strikes might work. I am not suggesting new bullish LEAPS positions at this time. We'll re-evaluate a potential entry point post earnings.

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 $1.20/1.30
-stop loss on ERTS @ 17.95.

-or-

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

Chart of ERTS:


FAS $57.57 +1.00 - Direxion Fincl.Bull 3x ETF

The banking stocks broke out higher last week. The RIFIN index is hitting new ten-week highs. The challenge is that most of the banking sector indices still have resistance at their May 2009 highs. With stocks looking overbought the May resistance would be a good spot to take some profits if you're a short-term trader. We're 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 $60.30 +1.89 - Freeport McMoran

The rally in the mining stocks stalled last week. The U.S. dollar made a mid-week rally attempt and the commodity-sensitive stocks plunged. The dollar quickly reversed. Copper futures have broken out to new highs for the year. FCX is close to hitting new 2009 highs as well.

The Point & Figure chart is bullish with a $93 target. We don't want to chase this move but investors might want to consider new positions near $50.00 or its 100-dma. 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 $11.40/11.55
-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 $15.40/15.70
-stop loss on FCX @ 39.45

Chart of FCX:


FSLR $154.39 -19.16 -- First Solar

Ouch! From July 14th to the 27th FSLR rallied from $140 to over $175. Last Thursday FSLR closed at $173.55. On Thursday night FSLR reported second quarter earnings. The company beat estimates by 49 cents with a profit of $2.11 per share. Revenues came in much better than expected making FSLR one of the few companies this season to see top-line growth. Shares soared more than $10 in after hours on Thursday night.

Everything changed following the company's conference call. When more details became available investors were unhappy with a significant rise in accounts receivable. Furthermore FSLR said they were resorting to a rebate plan as customers struggled to find financing. The stock's rally came to a screeching halt and shares gapped open lower to post an 11% decline on Friday. That's a reversal from $192.50 after hours on Thursday to $155 on Friday morning. Long-term FSLR still appears to be one of the best-positioned players in the field but we can probably expect more volatility in the stock price going forward.

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) $4.40.
The 2010 Jan. $250 put is worth $ 97.40.
If you're curious the 2010 Jan. $150 call is at $25.70.

Chart of FSLR


GLBL $6.83 +0.15 -- Global Industries

GLBL just spent the last week digesting its gains. A pause in the rally is healthy but investors might get nervous ahead of earnings. GLBL is due to report earnings on Wednesday, August 5th after the closing bell. Wall Street expects a profit of 16-cents a share. I am not suggesting new bullish positions at this time and more conservative traders will want to seriously consider taking profits ahead of the earnings report. Currently our stop loss is at $4.85. 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: 4.85)
Current target to exit is $8.85.

Chart of GLBL:


GT $17.02 +1.16 -- Goodyear Tire & Rubber Co.

Whoa! The rally in GT is getting a little crazy. The stock is up 70% from its July lows near $10.00. The relative strength is encouraging but stocks that rally this fast tend to have equally fast reversals. The company reported earnings on Thursday morning. Analysts were expecting a loss of 70 cents per share. GT reported a loss of only 35 cents per share. This sparked the breakout higher on Thursday, which looks more like a short squeeze. Friday's big gain is merely a continuation of the short covering.

I would expect some sort of correction sooner rather than later. Fortunately broken resistance near $14.00 should now offer new support. I'm not suggesting new LEAPS positions at these levels. 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 $3.50/3.70
-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 $2.85/3.60
-stop loss on GT @ 9.90.

Chart of GT:


HOS $21.78 +0.56 -- Hornbeck Offshore Services

HOS continued to under perform the market last week. The company reported earnings on July 30th and the results were under expectations. Furthermore management guided earnings lower. What's surprising is that HOS managed to find some support near $20.75 after its report. My concern now is that with the market so overbought if stocks correct HOS will continue to under perform and breakdown under the $20.00 level. I would wait for a dip or a bounce near its July lows (19.00-18.50 zone) before considering new bullish LEAPS positions. 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 $4.00/4.50
-stop loss on HOS @ 17.85
-or-
June 27th, 2009 - entry price on HOS @ 21.20, option @ 2.70
symbol: HOS-AE, 2010 JAN $25 LEAP call - current bid/ask $1.75/2.20
-stop loss on HOS @ 17.85

Chart of HOS:


INTC $19.25 -0.08 -- Intel Corp.

The rally in INTC is losing steam pretty fast. That's okay. The stock has been very overbought and due for a correction. I would wait for INTC to fill the gap near $17.00 before considering new bullish LEAPS positions. 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 $2.42/2.45
-stop loss on INTC @ 14.40.

Chart of INTC:


JOYG $37.18 +0.60 -- Joy Global Inc.

JOYG came close to a 50% retracement of its July rally. If you look at the daily chart's technicals the pull back may not be over yet. Readers might want to consider new positions on a dip in the $35-30 zone. I'd focus on the $33.00-32.00 zone. 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 $4.10/4.10
-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 $8.20/8.90
-stop loss on JOYG @ 24.75

Chart of JOYG:


KSU $20.31 -0.72 -- Kansas City Southern

KSU hit new five-month highs last week. The company reported earnings on Thursday morning and missed estimates by 3 cents. The stock rallied anyway. Shares are very short-term overbought and Friday's profit taking may be just the beginning. Broken resistance in the $18.00-17.00 zone should offer new support. 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 $1.00/1.25
-stop loss on KSU @ 13.90.

Chart of KSU:


MDR $19.54 +0.55 - McDermott Intl. Inc.

MDR's sell-off last week came close to a 50% correction of the rally of its July lows. Unfortunately some of the daily chart technicals are turning bearish. MDR is due to report earnings on August 10th and I don't want to launch new positions in front of earnings. 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 $2.60/2.70
-stop loss on MDR @ 14.75.

Chart of MDR:


MSFT $23.52 -0.29 -- Microsoft Corp.

The short-term oversold bounce in MSFT is fading. Last week MSFT announced a 10-year search deal with Yahoo (YHOO). Investors have been speculating on some sort of deal with YHOO for over a year and now that it's out of the way it's one less thing to worry about. Some feared that MSFT might pay too much and in the end MSFT didn't have to make any up front payments. Thus far MSFT is still clinging to its bullish channel but I expect some profit taking.

I would consider new long-term LEAPS positions anywhere in the $22.50-20.00 zone but I seriously doubt the stock will break $21.00 any time soon. More conservative traders may want to raise their stops toward the $20.00 mark.

This is going to be a long-term (18-month) trade. MSFT doesn't move that fast (normally). Investors might want to turn this into a calendar spread, selling calls against your LEAPS position like a covered-call trade. 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 $2.65/2.72
-stop loss on MSFT @ 18.40.

Chart of MSFT:


MT $36.04 +0.18 -- ArcelorMittal

It was a volatile week for MT. The company reported earnings and the results were a lot worse than expected. You can see the gap down on Wednesday. Yet a global stock market rally forgives a lot of bad news and shares bounced back toward $36.00. I still expect a correction. Look to open new LEAPS positions in the $31.00-30.00 zone. 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 $3.30/3.50
-stop loss on MT @ 24.45.

-or-

June 17th, 2009 - entry price on MT @ 30.50, option @ 2.00
symbol: MT-AJ, JAN 2010 $50 call - current bid/ask $1.05/1.15
-stop loss on MT @ 24.45.

Chart of MT:


NYX $26.95 -0.26 -- NYSE Euronext

NYX has been going sideways the last couple of weeks. Twice last week the stock failed at the $28.00 level. Some of the technical indicators on the daily chart are starting to turn bearish again. I think investors are a little nervous about the exchange stocks even though the news about possible increase in regulation will most likely hit the CME and the ICE exchanges. NYX reported earnings last week that were 6 cents better than expected but shares didn't react much. I would stay focused on the $24.00 region and its 100 and 200-dma. Wait for a dip or bounce near $24.00 before considering new bullish positions. Our long-term target is the $35.00-40.00 zone.

Apr. 11th, 2009 - entry price on NYX @ 21.51, option @ $1.81
-- NZV-AD, 2010 $30.00 LEAP call - current bid/ask $1.79/1.83
-stop loss on NYX at $19.95

Chart of NYX:


PBR $41.24 +0.34 -- Petroleo Brasiliero

PBR stumbled last week with a mild correction in oil stocks and a temporary decline in oil thanks to a one-day spike in the dollar. The longer-term trend in PBR is still up but short-term investors might get anxious. Earnings are coming on August 14th. There has been some rumor or concern that the new oil fields off the coast of Brazil may not be as great as previously expected and that some of the test wells have come up dry. I repeat I haven't read anything directly related to PBR and hopefully the company will shed some light on their progress after their next earnings report. With stocks overbought I'd wait for a dip in the $36-35 zone before considering new bullish positions although I'd probably wait until after the earnings report before initiating new LEAPS positions too. If PBR does offer a new entry point I'd buy the 2010 $45.00 calls not the $50s. 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 $1.60/1.70
-stop loss on PBR at $29.00

Chart of PBR:


PCU $25.76 +0.73 - Southern Copper Corp.

Weakness in the U.S. dollar has fueled a rally in copper futures with copper hitting new highs for 2009. This has helped PCU rally to its 2009 highs near $26.00. Last week's bounce from $24 is encouraging but PCU still looks a little overextended. I'd prefer to wait for a dip back in the $22.00-20.00 zone as our next entry point. Our target is $30.00.

April 20th, 2009 - entry price on PCU @ 19.00, option @ 1.95
symbol: PCU-AE, JAN 2010 $25 LEAP call - current bid/ask $3.40/3.60
-stop loss on PCU @ 16.45.

Chart of PCU:


PEP $56.75 +0.15 -- PEPSICO Inc.

PEP's trend is still up but momentum indicators are definitely waning. Nothing has changed for us since last week. I would consider launching new positions on a dip in the $54.00-52.00 zone. 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 $3.90/4.50
-stop loss on PEP at $51.50

Chart of PEP:


RAI $43.51 -0.22 -- Reynolds American Inc.

The rally continues for RAI. The stock is up four weeks in a row and up six out of the last seven weeks. Shares are overbought and with the wider market overbought odds are good RAI could see a pull back. I am suggesting readers launch new LEAPS positions on a dip near $40.00. I'm suggesting we take some money off the table at $49.50 and exit completely at $57.50.

July 24th, 2009 - entry price on RAI @ 42.50, option @ $1.45(estimate)
symbol: RAI-BI, 2010 FEB $45.00 LEAP call - current bid/ask $1.90/2.05
-stop loss on RAI at $35.99

or

July 24th, 2009 - entry price on RAI @ 42.50, option @ $4.50(estimate)
symbol: OWO-AH, 2011 JAN $40.00 LEAP call - current bid/ask $5.50/6.00
-stop loss on RAI at $35.99

Chart of RAI:


RIG $79.69 +1.01 -- Transocean Ltd.

Oil service stocks began to correct last week. I don't think it's over yet. RIG is due to report earnings on August 5th before the opening bell. More conservative traders may want considering buying some cheap out of the money puts the day before as a little insurance should RIG really disappoint Wall Street. I would consider buying LEAPS again on a dip near $70.00 but only after we see the reaction to the company's earnings report. Currently our target is $98.00.

July 3rd, 2009 - entry price on RIG @ 70.50, option @ 5.40
symbol: RIG-AP, JAN 2010 $80 call - current bid/ask $8.30/8.50
-stop loss on RIG @ 64.99.

-or-

July 3rd, 2009 - entry price on RIG @ 70.50, option @ 3.90
symbol: RIG-AZ, JAN 2010 $85 call - current bid/ask $6.10/6.30
-stop loss on RIG @ 64.99.

Chart of RIG:


SGY $10.86 +1.85 -- Stone Energy Corp.

Last week was super strong for SGY thanks to a 20.5% rally on Friday. The company reported earnings on Thursday night and the results were 48 cents better than the 17-cent estimate. Earnings also came in well above analysts' estimates. Given SGY's 12% short interest Friday's move was definitely filled with some short covering. We can expect some profit taking this week. I'm not suggesting new bullish positions at this time but look for SGY to fill the gap. Please note that I'm raising the stop loss to $5.80, just under July's low. Our target is $14.75.

June 22nd, 2009 - entry price on SGY @ 6.35, option @ 0.75
symbol: STQ-AB, 2010 JAN $10 LEAP call - current bid/ask $2.40/2.80
-stop loss on SGY @ 5.80

FYI: The symbol has changed from YLO-AB to STQ-AB

-or-

June 22nd, 2009 - entry price on SGY @ 6.35, (buying the stock)
-stop loss on SGY @ 5.80

Chart of SGY:


SLB $53.50 +0.07 -- Schlumberger Ltd.

Shares of SLB have rolled over and the stock looks headed for the $51-49 zone. Wait for the bounce before considering new bullish positions.

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 $3.40/3.50
-stop loss on SLB @ 44.90.

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

Chart of SLB:


UNG $12.87 -0.19 - U.S. Natural Gas ETF

I am not surprised to see the UNG drifting lower. Natural gas is still facing lackluster demand and too much supply but that will change. I'm suggesting readers wait for the UNG to show new signs of bottoming before we consider new bullish positions. It may take several weeks but this is a long-term 18-month investment so we have time before putting any more capital to work here.

Looking at the big picture it seems like natural gas is in the process of making long-term (multi-year) 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 $1.80/2.00
-stop loss on UNG @ no stop

Weekly Chart of UNG:


UYG $4.59 +0.08 - ProShares Ultra Financials (2x) ETF

The banking sector has broken out and the rally is charging toward its May 2009 highs. After such a sharp three-week run up I'm expecting some profit taking. If you're looking for a new entry point I would prefer to buy a dip. Watch the 100-dma for support.

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, $2.50 or higher based on your entry point.

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 $20.58 +0.40 -- Vodafone Group

The English stock market has turned in a very big rally off its July lows. VOD is finally participating. The stock broke through resistance near $20.00 and its exponential 200-dma. The rally past $20 was a new entry point if you were waiting for a breakout. I am raising our stop loss to $17.85. 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 $1.80/1.95
-stop loss on VOD @ 16.90

Chart of VOD:


WFR $18.72 -2.14 -- MEMC Electronic Materials Inc.

The short-term action in WFR is not looking very good. Shares broke down from their sideways consolidation thanks to a huge gap down in FSLR on Friday. Many of the short-term technical indicators are turning bearish. I would expect another test of support near $16.00 and its trendline of higher lows. Let's adjust our entry point to buy LEAPS down to the $16.50-15.50 zone. Our long-term target is the $30.00 region.

June 23rd, 2009 - entry price on WFR @ 17.50, option @ 2.50
symbol: CJC-AD, 2010 JAN $20 LEAP call - current bid/ask $1.70/1.85
-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 $2.10/2.30
-stop loss on WFR @ 14.75

Chart of WFR:



Watch

Food, Energy, and Aircraft

by James Brown

Click here to email James Brown


New Watch List Entries

BG - Bunge Limited

CNX - Consol Energy Inc.

ERJ - EMBRAER - Empresa Brasileira de Aeronáutica


Active Watch List Candidates

BEAV - BE Aerospace Inc.

IGT - Intl. Game Technology

LNN - Lindsay Corp.

MEE - Massey Energy Corp.

MICC - Millicom Intl. Cellular

WLT - Walter Energy Inc.


Dropped Watch List Entries

None. We did not drop any watch list candidates.


New Watch List Candidates:

BG $69.97 +0.53 -- Bunge Limited

BG has been steadily channeling higher since its October 2008 lows. The market's recent strength has allowed BG to hit new highs for 2009. Now the stock is short-term overbought and due for a correction. We want to hop on board this bandwagon on a correction near $60.00. If triggered we're going to aim for the $85-90 zone. Currently the Point & Figure chart is bullish with a $94 target.

Company Info:
Bunge Limited (www.Bunge.com, NYSE: BG) is a leading global agribusiness and food company founded in 1818 and headquartered in White Plains, New York. Bunge's 25,000 employees in over 30 countries enhance lives by improving the global agribusiness and food production chain. The company supplies fertilizer to farmers; originates, transports and processes oilseeds, grains and other agricultural commodities; produces food products for commercial customers and consumers; and supplies raw materials and services to the biofuels industry. (source: company press release or website)

Buy-the-Dip trigger: $61.00

BUY the 2010 January 70 calls (BGW-AN)

Chart of BG:


CNX $35.53 +1.28 -- Consol Energy Inc.

Shares of CNX have formed a significant bottom over the last several months. July's dip in the $29-30 zone tested the longer-term bullish trendline of higher lows. We want to buy LEAPS on another test of that trendline. If triggered our long-term is the $48.50 level. We'll use a stop loss at $24.40.

Company Info:
CONSOL Energy Inc. (NYSE: CNX) is the largest producer of high-Btu bituminous coal in the United States. Named one of America’s most admired companies by Fortune magazine, CONSOL Energy has evolved from a single-fuel mining company into a multi-energy producer of both high-Btu coal and gas. Together coal and gas fuel two-thirds of the nation's power. (source: company press release or website)

Buy-the-Dip trigger: $30.50

BUY the 2010 January 35.00 calls (symbol: CNX-AG)

Chart of CNX:


ERJ $19.49 +1.17 -- EMBRAER - Empresa Brasileira de Aeronáutica S.A.

Brazil's premier builder of jet airplanes appears to be weathering the global economic slowdown pretty well. The company just reported earnings that were better than expected. Longer-term the stock has built an inverse head-and-shoulders pattern over the last year and poised for a long-term rally. I am suggesting readers buy LEAPS (or January 2010 calls since that's the longest we can find) on a dip in the $17.50-16.00 zone. I prefer to buy near $16.00 but ERJ may not correct that much. Our target is the $29-30 zone. Set your stop at $14.70 under the July low.

Company Info:
Embraer (Empresa Brasileira de Aeronautica S.A. - NYSE: ERJ; Bovespa: EMBR3) is the world's largest manufacturer of commercial jets up to 120 seats, and one of Brazil's leading exporters. Embraer's headquarters are located in Sao Jose dos Campos, Sao Paulo, and it has offices, industrial operations and customer service facilities in Brazil, the United States, France, Portugal, China and Singapore. Founded in 1969, the Company designs, develops, manufactures and sells aircraft for the Commercial Aviation, Executive Aviation, and Defense segments. The Company also provides after sales support and services to customers worldwide. On June 30, 2009, Embraer had a workforce of 17,237 employees -- not counting the employees of its subsidiaries OGMA and HEAI -- and its firm order backlog totaled US$ 19.8 billion. (source: company press release or website)

Buy-the-Dip trigger: $17.50

BUY the 2010 January $20.00 call (symbol: ERJ-AD)

Chart of ERJ:


Active Watch List Candidates:


BEAV $15.04 +0.18 -- BE Aerospace Inc.

BEAV reported earnings last week that beat the estimates by five cents and the company raised guidance. That was enough to push the stock back above the $16.00 level. As a high-beta stock there is still a good chance that when the rest of the market finally corrects BEAV will overshoot to the downside. I am raising our entry point to $13.00.

Buy-the-Dip trigger: $13.00

BUY the 2010 January $15.00 calls (symbol: BQV-AC)
or
BUY the stock at $13.00

Note: At $13.00 you could just buy the stock instead but the $15 calls will allow you more leverage on your investment.

Chart of BEAV:


IGT $19.75 +0.03 --- Intl. Game Technology

The rally in IGT has totally stalled. Shares closed nearly unchanged for the entire week. A 38.2% Fibonacci retracement of the July rally would be near $17.60. I am suggesting that readers buy LEAPS on a dip into the $17.50-16.00 zone. Our long-term target is the $25.00-30.00 zone.

Buy-the-Dip trigger: $17.50 (17.50-16.00 zone)

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:


LNN $35.47 -0.89 -- Lindsay Corp.

After another failed rally near $38.00 shares of LNN are starting to correct. We have a good chance of being triggered at $33.50. Currently we have two different triggers. A breakout trigger at $41.55 and a buy the dip trigger at $33.50. If we are triggered we'll want to sell half near $50.00 and then the rest near $60.00. We'll use a stop loss under the June low at $29.65.

Buy-the-Dip trigger: $33.50 or Breakout trigger: $41.55

BUY the 2010 January $35.00 calls (NRR-AG)
or
BUY the 2010 January $40.00 calls (NRR-AH)

FYI: Readers might want to consider buying the 2010 March calls instead.

Chart of LNN:


MEE $26.60 +1.25 -- Massey Energy Corp.

MEE is helping lead the coal sector higher. The stock has gone almost straight up from its July lows near $16.00. Needless to say shares are very overbought and due for a correction. I am suggesting that readers buy LEAPS on a dip in the $20.50-18.00 zone. We'll use a stop at $15.75. Our long-term target is the $35.00-40.00 range. The P&F chart agrees and points to a $37.50 target.

Buy-the-Dip trigger: $20.50

BUY the 2010 January $25.00 call (MEE-AE)
-or
BUY the 2011 January $30.00 call (VHK-AF)

Chart of MEE:


MICC $74.15 -0.12 -- Millicom Intl. Cellular

The rally in MICC is finally starting to slow down. The plan is to buy LEAPS on a dip at $62.50. The $60.00 level and the rising cloud of moving averages should offer some support. It might take a while for MICC to correct that low so be patient. Buy-the-Dip trigger: $62.50

BUY the 2010 January $80 call (symbol: CQD-AP)

Chart of MICC:


WLT $49.36 +1.56 -- Walter Energy Inc.

WLT is another leader in the coal sector. The stock has broken out to new highs for the year. Eventually there will be some profit taking. Don't chase this move. Broken resistance near $40.00 should be new support. I'm suggesting we buy LEAPS in the $41.00-40.00 zone. We'll use a stop loss at $34.40. Our long-term target is $60.00.

Buy-the-Dip trigger: $41.00

BUY the 2010 January 50.00 call (WLT-AJ)

-or-

BUY the 2011 January 50.00 call (OZE-AJ)

Chart of WLT: