Option Investor
Newsletter

Daily Newsletter, Saturday, 10/3/2009

Table of Contents

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

Leaps Trader Commentary

It's Up to Earnings

by James Brown

Click here to email James Brown

Stocks suffered another weekly decline after a parade of disappointing economic data. It wasn't just one or two reports either. Almost every piece of economic news that investors were hoping would reinforce the bullish view for the recovery failed. The only good news was GDP and pending home sales. The last look at Q2 GDP came in at -0.7% when economists were expecting a revision from -1.0% to -1.1%. Pending home sales came in a lot higher than expected but the markets shrugged it off. August is typically the peak for the summer (and yearly) selling season and this year there was a rush to sign contracts so buyers would have time to close before the $8,000 tax credit expires at the end of October. This real estate news was apparently "baked in".

What was not expected were all the disappointments. The Conference Board's consumer confidence numbers fell from 54.5 in August to 53.1 in September. Analysts were expecting a rise to 57.0. The Chicago PMI missed estimates. The National ISM number was a disappointment. The ADP employment report was worse than expected. Weekly initial jobless claims were higher than expected. The non-farm payrolls report was worse than expected. Economists were estimating the U.S. lost 180,000 jobs in September. The jobs report showed a loss of 263,000 and they revised August losses even higher. Factory orders fell. Mortgage applications fell even though mortgage rates are approaching their all-time lows. It was not a good week for the bulls. Yet the sell-off in stocks was not panicked.

Last week I told investors to watch for potential support at 1,040 and 1,020. The S&P 500 bounced at both levels. The biggest concern I see right now was the volume. Volume was huge for the down days, which is normally a bearish signal. We were expecting a pull back and now we got one with the S&P 500 down about 5% from its September highs. The question is does our theory about money managers chasing performance still hold up? September was the end of the third quarter but October is the end of the fiscal year for many mutual funds and hedge funds. Anyone who was under invested during the market's rally since March is looking to buy stocks on a pull back. On the other hand money managers could also be looking to lock in gains if they're worried stocks have actually reversed. It's a good, old-fashioned tug-of-war between the bulls and the bears.

My bias for the rest of 2009 remains bullish but the outlook for the next two or three weeks is murky. The tone of the market could be changing thanks to last week's round of disappointing economic data. Suddenly the strength of the economic rebound is in doubt. A lot of market participants have been betting on a strong "V" shaped recovery. Readers know that I believe we'll see a "W" shaped recovery but I wasn't expecting us to hit the middle of the "W" until late 2009-early 2010. The next big market driver is going to be earnings and earnings season will be here in another week or so. If the general trend of earnings is better than expected or if management's guidance comes across as more bullish then the rally should take off again. If there are too many high-profile earnings misses and management is still too cautious or downright bearish then stocks may continue to correct. Our fate will be decided in the next couple of weeks. Alcoa (AA) typically kicks off earnings season and they report on October 7th. The bulk of earnings don't really start until the following week. Then it turns into a flood of earnings starting the 19th of October.

Next week's economic calendar is pretty light and with the bulks of earnings still more than a week away the short-term downtrend may continue. Here's what I'm watching. Keep an eye on the Dow Jones Transportation index, which should find some support in the 3600-3500 zone. The SOX semiconductor index could find support in the 300-285 zone. I would definitely watch the banking indices. If these breakdown under their September lows it could portend a deeper correction is upon us. The S&P 500 is currently testing its 50-dma. If the pull back continues I would be surprised if it broke the 1,000 level and I would be worried if it closed under the early September lows near 990.

Chart of the Transportation Index:

Chart of the BKX banking Index:

Chart of the BIX banking Index:

Chart of the S&P 500 Index:

LONGER TERM OUTLOOK

Previous Comments on my Long-Term Outlook:

My long-term outlook has not changed. I still expect the economy to see a double-dip, "W"-shaped rebound with the second dip in 2010. Lousy consumer spending, rising foreclosures, and lagging job growth will be the main culprits. A few weeks ago there were some comments out of the U.S. Treasury concerning foreclosures. The Obama administration's HAMP loan modification program can only help a certain number of homeowners and one official said that even if the HAMP program was a total success we should still expect millions of new foreclosures. This only reinforces my own belief that we will see another tidal wave of foreclosed homes in 2010. Some analysts are forecasting upwards of six million foreclosures in the next three years. What is that going to do to consumer confidence and consumer spending? It's not going to help! You can review my long-term outlook here. It's the second half our my "Two Months Left" commentary.

~ James Brown


Portfolio

Portfolio Update

by James Brown

Click here to email James Brown


Current Portfolio


Portfolio Comments:

This market correction is two weeks old. I suspect it continues for another week, maybe more, but stocks should find another bottom in October.

Currently we have twelve stocks on our watch list.

AVY - Avery Dennison, trigger: $30.25
BEAV - BE Aerospace Inc., trigger: $16.00
CHK - Chesapeake Energy Corp., trigger 23.50
COST - Costco Wholesale, trigger 51.50
ERJ - EMBRAER - Empresa Brasileira de Aeronáutica, trigger $20.50
ESV - ENSCO Intl. Inc., trigger 38.00
FWLT - Foster Wheeler, trigger 26.00
IGT - Intl. Game Tech., trigger $17.25
MEE - Massey Energy Corp., trigger $25.00
MTL - MECHEL OAO, trigger 13.25
MTW - Manitowoc Inc., trigger 7.25
TXT - Textron Inc., trigger 15.25

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.

The LEAPStrader portfolio table will be uploaded to the website later tonight.


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


New Plays

Next Couple of Weeks

by James Brown

Click here to email James Brown


Opportunity Approaches


Editor's Note:

My market bias is still bullish for 2009 but short-term the outlook is murky. The correction probably continues this week and possibly into the following week. We want to use this pull back as an opportunity to open new positions. However, investor reaction to earnings season will be a crucial component for the market's direction going forward. Investors may want to scale in positions instead of jumping in all at once.

No new plays tonight. I would keep my eyes on the watch list for our next trade.


Play Updates

It's Not Over Yet

by James Brown

Click here to email James Brown


Closed Plays


None, there were no closed plays.


Play Updates


Editor's Note:

The market's correction is two weeks old and some expect it's only half done. Actually I wouldn't be surprised to see stocks bounce this week but that doesn't mean we don't see new relative lows first.


ACGY $11.83 -0.28 -- Acergy S.A.

ACGY managed to hit a new 2009 high last week before the market started to tank. Volume has been pretty light on the pull back. I suspect the $11.50-10.75 zone will offer some support. Investors should be aware that ACGY is due to report earnings around October 14th but that date is unconfirmed at the moment. Cautious traders may want to buy some short-term (October) puts just ahead of the report to protect against a sharp, post-earnings move lower. Please note I'm moving our stop loss to $8.85.

I'm not suggesting new LEAPS positions at this time. Our plan is to exit in the $14.50-15.00 zone although I'm starting to suspect that ACGY could go higher.

April 25th, 2009 - entry price on ACGY @ 7.61, option @ 1.05
symbol: QLS-AB, 2010 JAN $10 LEAP call - current bid/ask $2.35/2.80
-stop loss on ACGY @ 8.85

Chart of ACGY


ACI $20.49 -0.49 -- Arch Coal Inc.

ACI has corrected more than 16% from its 2009 highs and shares are now testing round-number support and technical support near $20.00. I would consider new LEAPS positions in the $20.00-18.00 region (right now works) but I'd prefer to buy positions on a bounce.

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 rather than the ones originally listed below.

May 14th, 2009 - entry price on ACI @ 16.00, option @ 1.30
symbol: ACI-AE, 2010 JAN $25 LEAP call - current bid/ask $0.90/1.00
-stop loss on ACI @ 15.95

-or-

May 14th, 2009 - entry price on ACI @ 16.00, option @ 2.40
symbol: OSE-AF, 2011 JAN $30 LEAP call - current bid/ask $2.25/2.50
-stop loss on ACI @ 15.95

Chart of ACI:


ANR $33.98 +0.18 - Alpha Natural Resources, Inc.

ANR, another coal stocks like ACI, has also seen a 16% correction. I suspect that ANR may continue to dip toward the $31-30 zone. Readers can look for a new entry point there.

We still have a trigger at $30.50 to buy the second half of our LEAPS position. Our long-term target is the $45.00-50.00 zone.

Aug. 25th, 2009 - entry price on ANR @ 34.00, option @ 5.10
symbol: HIC-AG, 2010 JAN $35 LEAP call - current bid/ask $5.60/5.90
-stop loss on ANR @ 29.50

Symbol just changed from ANR-AG to HIC-AG

bought 1/2 LEAP position on 08/25/09 (option price @ 5.10)
plan to buy 2nd half when ANR hits $30.50.

-or-

Aug. 25th, 2009 - entry price on ANR @ 34.00, option @ 7.00
symbol: VJV-AH, 2011 JAN $40 LEAP call - current bid/ask $6.20/7.10
-stop loss on ANR @ 29.50
bought 1/2 LEAP position on 08/25/09 (option price @ 7.00)
plan to buy 2nd half when ANR hits $30.50.

Chart of ANR:


BAC $16.34 +0.13 - Bank of America Corp.

BAC looks like it's about to breakdown. The stock has spent almost two months in the $16.00-18.00 zone and last week's sell-off broke multiple layers of support. BAC might see some support at its exponential 200-dma or the $14.00 level but they don't look very concrete.

More conservative traders may want to consider taking profits now and jumping back in later. However, I want to remind readers that this is a long-term, two-year trade. Our exit target is the $30-40 zone.

Trading note: Readers might want to consider some cheap October put options if you're worried about a serious correction over the next two weeks.

FYI: Earnings are expected on October 16th before the opening bell.

Jan 25th, 2009 - entry price on BAC @ 6.24, option @ 2.38
symbol: VBA-AB, JAN 2011 $10 LEAP call - current bid/ask $7.45/7.70
-stop loss on BAC @ 9.75

Chart of BAC


BG $61.50 +0.54 -- Bunge Limited

I've got good news and bad news. The good news is that BG managed to hold support near $60.00 in spite of breaking down under its trendline of higher lows. The bad news is that the eight-week bearish trend of lower highs is still in place. The simple 200-dma has risen to $57.20. I'm adjusting our stop loss down a little to $56.99, which will give BG a chance to bounce from the 200-dma if the correction continues.

I'm not suggesting new positions at this time. Wait for a move over $65.00 before considering new positions. Our target is the $85-90 zone. We have a tight stop loss at $57.49.

Sep 15th, 2009 - entry price on BG @ 63.00, option @ 5.90
symbol: BGW-DN, 2010 APR $70 LEAP call - current bid/ask $3.80/4.00
-stop loss on BG @ 56.99

Chart of BG:


CLF $30.18 -0.36 -- Cliffs Natural Resources Inc.

CLF broke down under support near $32.00 and is now testing support in the $29-30 zone with the 50-dma and exponential 200-dma. The stock's correction has seen almost a 20% pull back. I'm repeating my comments from last week to use a bounce in the $28.00-30.00 zone as a new bullish entry point. Consider using the 2011 January $30 LEAPS instead of our original trade.

Our long-term target is the $40.00-45.00 zone. More aggressive traders may want to aim for $50.

Sept. 5th, 2009 - entry price on CLF @ 26.19, option @ 4.84
symbol: CLF-AE, 2010 JAN $25 LEAP call - current bid/ask $ 6.90/ 7.10
-stop loss on CLF @ 22.24 (FYI: Gap open entry)

Chart of CLF:


CNX $43.04 -0.24 -- Consol Energy Inc.

CNX has only corrected about 14% from its highs near $50. I've been looking for support near $42.00 and $40.00. At this point I'd watch for a bounce near $40.00 as a potential entry point.

CNX has already hit our first target at $48.50. We will plan to sell the second half or our position at $57.50.

Sep 1st, 2009 - entry price on CNX @ 36.50, option @ 5.75
symbol: CNX-AG, 2010 JAN $35 LEAP call - current bid/ask $ 9.80/10.00
-stop loss on CNX @ 34.75

Target hit 09/16/09 @ 48.50, option price $14.50 (+152%)

-or-

Sep 1st, 2009 - entry price on CNX @ 36.50, option @ 7.80(estimate)
symbol: VTL-AH, 2011 JAN $40 LEAP call - current bid/ask $11.50/12.50
-stop loss on CNX @ 34.75

Target hit 09/16/09 @ 48.50, option price $15.40 (+97%)

Chart of CNX


CRS $22.27 -0.36 -- Carpenter Technology Corp.

The correction in CRS has shaved off 15% from its 2009 highs and the stock is now testing support near $22.00. If this level fails we can look for additional support near $20.00. I would consider new bullish positions on a bounce near $20.00. Our long-term target is the $35.00-40.00 zone.

Sep 1st, 2009 - entry price on CRS @ 20.50, option @ 3.10
symbol: CRS-CD, 2010 MAR $20 LEAP call - current bid/ask $4.20/4.70
-stop loss on CRS @ 17.50

Chart of CRS:


DISH $19.24 -0.12 -- Dish Network Corp.

DISH has been somewhat resistant to any profit taking. The stock hit new six-week highs and held on to its gains while the market sank. I'm not suggesting new positions at this time. Our long-term target is the $25.00-30.00 zone.

August 22nd, 2009 - entry price on DISH @ 17.18, option @ $3.20
symbol: HSW-AC, 2010 JAN $15 call - current bid/ask $4.70/5.00
-stop loss on DISH @ 15.45.

Chart of DISH:


DO $92.45 -1.33 -- Diamond Offshore

It looked like DO had created a bearish double top with the peak in June and then July but traders bought the pull back at the long-term trendline of higher lows. Now DO has produced another, smaller bearish double top near $97.00. Once again it's testing the long-term trendline of higher lows. Will the trendline hold this time?

If DO does breakdown from here I would expect to see support in the $85-84 zone. I'm not suggesting new positions at this time.

If you're concerned that DO might breakdown from here then consider some cheap October puts (that expire in two weeks).

Our first target is $109.00. Readers might want to consider the 2011 January calls if you're launching new positions.

FYI: New January 2010 options have been added with the normal DO- root symbol. If you're going to buy new option positions I'd use these new symbols. The new 2010 January $90 call is DO-AA. The new 2010 January $100 call is DO-AC.

If you're curious about the KWJ- root symbol the CBOE created them back in February 2009 to account for DO's special cash dividend in March 2009. There was another special cash dividend in July 2009 and the KWJ series now represents 100 shares of DO plus $562.50 in cash.

Sep 2nd, 2009 - entry price on DO @ 86.50, option @ 12.30
symbol: KWJ-AR, 2010 JAN $90 LEAP call - current bid/ask $12.20/12.60
-stop loss on DO @ 79.45

-or-

Sep 2nd, 2009 - entry price on DO @ 86.50, option @ 5.20
symbol: KWJ-AT, 2010 JAN $100 LEAP call - current bid/ask $6.70/6.90
-stop loss on DO @ 79.45

Chart of DO:


EMR $38.31 -0.78 -- Emerson Electric Co.

EMR is nearing potential support at $38.00 again. Last week I suggested that readers could open new bullish positions on a dip into the $38-37 zone. I would fine tune that a little and look for a dip into the $37-36 region. EMR doesn't move super fast so I'm listing the 2011 LEAPS.

Sept. 8th, 2009 - entry price on EMR @ 38.00, option @ $4.50
symbol: VHH-AH, 2011 JAN $40 call - current bid/ask $4.20/4.40
-stop loss on EMR @ 33.50.

Chart of EMR:


FAS $72.16 -0.44 - Direxion Fincl.Bull 3x ETF

The sell-off in financials is easy to see in the FAS. This ETF tumbled to $68.26 on Friday morning. I've been warning readers that we could see some volatility and the FAS has delivered.

I am not suggesting new bullish positions in FAS at this time.

Previous Comments on FAS:
Currently we have sold one third of our position at $60.00 (pre-split price of $12.00) and we plan to sell another third at $120.00. Honestly, I'm thinking we may want to take profits at $90.00 but we'll make that decision when the FAS gets there. 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.

FYI: The FAS is based off and moves with the Russell 1000 Financial Services index.

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

Current position in the FAS = $2.64 entry (stop loss: 7.00)
post-split prices are: $13.20 entry (stop loss: 35.00)

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

Chart of FAS

Chart of RIFIN (Russell 1000 financial services)


FCX $65.86 +0.46 - Freeport McMoran

The correction in FCX hit -14% at the Friday lows near $63.00. Concerns over the pace of the recovery and a bearish breakdown in copper prices has weighed on shares of FCX. The price of copper could be a real problem. After several weeks of trading sideways copper is correcting and doesn't show any signs of slowing down yet. The long-term trend in FCX is still up but the stock could see $55.00 before it sees $73 again. I hope that's not the case but I'm not suggesting new positions at this time.

FCX has already hit our first target at $66.00. Our second and final target is $77.00. More conservative traders may want to use a stop closer to $55 or higher.

June 22nd, 2009 - entry price on FCX @ 46.00, option @ 6.00
symbol: FCX-AK, 2010 JAN $55 LEAP call - current bid/ask $13.80/13.95
-stop loss on FCX @ 49.95

09/05/09 - Take Profits (sell half) at $66.00, option @ 15.00 (+150%)

-or-

June 22nd, 2009 - entry price on FCX @ 46.00, option @ 10.00
symbol: OBQ-AL, 2011 JAN $60 LEAP call - current bid/ask $16.60/17.70
-stop loss on FCX @ 49.95

09/05/09 - Take Profits (sell half) at $66.00, option @ 18.50 (+85%)

Chart of FCX:


FSLR $150.00 + 6.24 -- First Solar

FSLR popped on Friday morning after it was announced the stock will replace Wyeth in the S&P 100 index. At the moment it looks like FSLR is forming a bull-flag pattern but it will take a close over $155 and its 100-dma before it looks like a bullish entry point (for short-term positions). The stock still has significant resistance in the $155-160 zone.

We're not suggesting new positions at this time. At the moment we're long the 2010 January $100 put and we have a covered call play that should be fine if FSLR stays above $100.

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

- Update 08/15/09 -
Cover the 2010 $250 Put at $109.40. Keep the $100 put.

Currently the 2010 Jan. $100 put is worth (bid) $2.70.
If you're curious the 2010 Jan. $150 call is at $17.60.

Chart of FSLR


GT $15.35 -0.87 -- Goodyear Tire & Rubber Co.

GT really under performed on Friday with a 5.3% decline on above average volume. I couldn't find any specific news behind the relative weakness. GT has finally reached the 38.2% Fibonacci retracement of the July-August rally but I wouldn't bet on a bounce here. Look for a dip closer to $14.00, which should be stronger support.

I'm not suggesting new LEAPS positions at these levels. We have two targets. The plan is to sell half at $22.75 and half at $26.75.

June 6th, 2009 - entry price on GT @ 12.94, option @ 2.20
symbol: GT-AC, 2010 $15 LEAP call - current bid/ask $2.05/2.15
-stop loss on GT @ 11.90
-or-
June 6th, 2009 - entry price on GT @ 12.94, option @ 2.65
symbol: VYR-AD, 2011 $20 LEAP call - current bid/ask $2.30/2.90
-stop loss on GT @ 11.90

Chart of GT:


HOS $25.99 -0.59 -- Hornbeck Offshore Services

HOS is still trading in the $26-28 trading range but I expect shares will eventually dip toward stronger support near $24.00. We might want to consider new bullish positions if HOS bounces near the 50-dma. 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 $6.60/7.00
-stop loss on HOS @ 19.95
-or-
June 27th, 2009 - entry price on HOS @ 21.20, option @ 2.70
symbol: HOS-AE, 2010 JAN $25 LEAP call - current bid/ask $3.20/3.80
-stop loss on HOS @ 19.95

Chart of HOS:


INTC $18.97 +0.07 -- Intel Corp.

There are no surprises here. Last week I told readers that INTC looked ready to head lower. Shares broke short-term support near $19.20 and it the next significant levels of support are $18.50 and then $18.00.

I am not suggesting new long-term positions at this time. Please note that INTC is due to report earnings on October 13th after the market's closing bell. Our long-term 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 or diagonal 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 $2.22/2.27
-stop loss on INTC @ 15.90.

Chart of INTC:


LNN $36.14 -0.70 -- Lindsay Corp.

Ouch! LNN has taken a significant turn for the worse last week. Shares broke down under support near $40.00 and the selling pressure picked up with big volume on the decline. The stock is now very short-term oversold and due for a bounce. We may want to exit on any rebound from here especially if LNN starts to roll over under $40.00. More conservative traders may want to exit early right now. I am not suggesting new positions at this time.

August 7, 2009 - entry price on LNN @ 41.55, option @ 8.80
symbol: NRR-AG, 2010 JAN $35 LEAP call - current bid/ask $ 4.10/ 4.50
-stop loss on LNN @ 34.50
-or-
August 7, 2009 - entry price on LNN @ 41.55, option @ 6.00
symbol: NRR-AH, 2010 JAN $40 LEAP call - current bid/ask $2.10/2.55
-stop loss on LNN @ 34.50

Chart of LNN:


MDR $24.18 -0.42 - McDermott Intl. Inc.

The correction in MDR is now three weeks old. Shares are testing support near $24.00 and the rising 50-dma. I would expect a rebound soon. If not here then near the $22.00 level. More conservative traders might want to raise their stops closer to $22.00.

We want to sell 50% to 75% of our position at $29.75. We'll sell the remainder at $34.00. FYI: The Point & Figure chart has a $38 target.

April 4th, 2009 - entry price on MDR @ 15.56, option @ 2.70
symbol: MDR-AD, 2010 $20 LEAP call - current bid/ask $5.20/5.40
-stop loss on MDR @ 19.00

Chart of MDR:


MSFT $24.96 +0.08 -- Microsoft Corp.

MSFT managed to bounce from technical support near its 50-dma and the three-month trend of higher lows. I'm not suggesting new long-term positions at this time.

This should be a long (18-month) trade. MSFT doesn't move that fast (normally). Investors might want to turn this into a calendar or diagonal spread, selling calls against your LEAPS position. 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 $3.20/3.30
-stop loss on MSFT @ 19.95.

Chart of MSFT:


MT $34.52 -0.45 -- ArcelorMittal

Danger, Will Robinson! Shares of MT have broken significant support at its long-term trendline and near the $35.00 level. This is very bearish and more conservative traders may want to consider an early exit. I do see some short-term support near $34.00 so an alternative might be a tighter stop loss. I'm not suggesting new positions at this time. The $30.00 level should be the next significant level of support. Our long-term target is the $50 region.

June 17th, 2009 - entry price on MT @ 30.50, option @ 2.70
symbol: MT-AH, JAN 2010 $40 call - current bid/ask $1.75/1.90
-stop loss on MT @ 29.50

-or-

June 17th, 2009 - entry price on MT @ 30.50, option @ 2.00
symbol: MT-AJ, JAN 2010 $50 call - current bid/ask $0.30/0.40
-stop loss on MT @ 29.50

Chart of MT:


NYX $27.31 -0.45 -- NYSE Euronext

I have to warn readers that NYX is also breaking significant support with the recent declines. There is potential support at $26 and $24 but I'm not suggesting new positions at this time. Please note our new stop loss at $23.65, just under the July 2009 low. Our long-term target is the $35.00-40.00 zone.

Trading note - an alternative idea would be to buy some short-term puts to protect against a significant downturn.

Apr. 11th, 2009 - entry price on NYX @ 21.51, option @ $1.81
-- NZV-AD, 2010 $30.00 LEAP call - current bid/ask $1.23/1.27
-stop loss on NYX at $23.65 *new*

Chart of NYX:


PBR $44.72 +0.29 -- Petroleo Brasiliero

PBR flirted with a new 2009 high at $46.50 last week. The long-term trend is still up even though momentum has stalled. I'm not suggesting new long-term 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 $1.60/1.75
-stop loss on PBR at $33.50

Chart of PBR:


PCU $29.11 -0.43 - Southern Copper Corp.

The trend in PCU is still up but the stock looks tired. The MACD has a bearish divergence and other short-term technicals have turned negative. I'm not suggesting new positions at this time and wouldn't be surprised to see a correction back toward $25.00. More conservative traders may want to exit completely right here!

PCU has already hit our first target at $29.75. We plan to sell the second half of our position at $34.00.

April 20th, 2009 - entry price on PCU @ 19.00, option @ 1.95
symbol: PCU-AE, JAN 2010 $25 LEAP call - current bid/ask $5.30/5.50
-stop loss on PCU @ 22.00

Target Hit @ 29.75 on 08/24/09. Sold 1/2 at $6.00 (+207%)

Chart of PCU:


PEP $60.90 +2.44 -- PEPSICO Inc.

PEP was upgraded on Friday and given a $70 price target. This fueled a 4.1% rally and a new 2009 high. Volume was strong on the move. More conservative traders might want to raise their stops toward the $55 region. Our long-term target is the $65-70 zone. We'll use a stop loss at $51.50. This is an 18-month bet.

FYI: PEP is due to report earnings on October 8th after the market's closing bell. Readers may want to protect themselves with some cheap October puts should the stock disappoint. This is just a suggestion for the cautious trader. The newsletter is not buying any protective puts.

July 7th, 2009 - entry price on PEP @ 57.25, option @ $4.50(estimate)
symbol: VP-AL, 2011 $60.00 LEAP call - current bid/ask $6.20/6.60
-stop loss on PEP at $51.50

Chart of PEP:


RAI $44.16 -0.25 -- Reynolds American Inc.

There is no change from my prior comments on RAI.

A normal Fibonacci retracement of the June-August rally would produce a dip towards the $43.00 or $41.75 levels.

I'm not suggesting new LEAPS positions at this time. Wait and watch for support near $42.00. We want to take some money off the table at $49.50 (sell half) 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 $1.90/2.10
-stop loss on RAI at $39.75

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 $5.50/6.20
-stop loss on RAI at $39.75

Chart of RAI:


RIG $81.90 -0.99 -- Transocean Ltd.

RIG has produced a short-term bearish double top pattern. I would expect a dip toward the 100-dma near $77.50. This is where RIG should find technical support at its trendline of higher lows. More conservative traders may want to place their stop loss closer to $75.00. Currently our upside 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 $ 8.00/ 8.20
-stop loss on RIG @ 69.95.

-or-

July 3rd, 2009 - entry price on RIG @ 70.50, option @ 3.90
symbol: RIG-AZ, JAN 2010 $85 call - current bid/ask $5.60/5.80
-stop loss on RIG @ 69.95.

Chart of RIG:


SLB $56.83 -0.30 -- Schlumberger Ltd.

The correction in SLB has only produced an 11% decline so it may not be over yet. Last week's breakdown under what should have been support near $58.00 is disappointing but SLB did manage to hold technical support at its 100-dma.

Currently our exit strategy has three parts. The plan was 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 $5.10/5.30
-stop loss on SLB @ 49.90

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

Chart of SLB:


SPW $56.77 -1.28 -- SPX Corp.

The correction in SPW was a little sharper than expected. I was looking for a pull back toward support near $58.00. Shares hit our trigger at $58.50 and kept right on falling, slicing through the 50-dma. The next level of support should be the $55.00 region and its exponential 200-dma. Wait for a bounce before considering new bullish positions. I'm setting our stop loss at $52.40. More conservative traders may want to use a stop closer to $54-55 instead. Our long-term target is the $79.00 mark.

Oct 2nd, 2009 - entry price on SLB @ 58.50, option @ 5.70
symbol: SPW-CL, 2010 MAR $60 LEAP call - current bid/ask $4.60/4.90
-stop loss on SPW @ 52.40

Chart of SPW:


TEX $18.11 -1.34 -- Terex Corp.

Ouch! The sell-off in TEX has been pretty sharp with a 12% decline in just two days. The stock is now testing support near $18.00 and its exponential 200-dma, which is the area I suggested investors should watch. This pull back has reached a 50% correction of the September rally. Yet it would take a dip to $17.00 (near its 50-dma) to hit a 38.2% Fibonacci retracement of the July-September rally. We definitely want to see a bounce before considering new bullish positions. Our upside target is the $28.00-30.00 zone.

Sept. 11th, 2009 - entry price on TEX @ 18.25, option @ 4.40
symbol: HAG-AC, JAN 2010 $15 LEAP call - current bid/ask $4.10/4.30
-stop loss on TEX @ 14.25

-or-

Sept. 11th, 2009 - entry price on TEX @ 18.25, option @ 4.10
symbol: VXQ-AD, JAN 2011 $20 LEAP call - current bid/ask $4.10/4.90
-stop loss on TEX @ 14.25

Chart of TEX:


UYG $5.43 -0.01 - ProShares Ultra Financials (2x) ETF

The banking stocks continued to lead the market lower, especially these last couple of days. I would not be surprised to see the UYG test the $5.00 level. I don't see any changes from my prior comments.

More conservative traders may want to raise their stop toward $4.00. I am not suggesting new positions at this time.

Editor's Note: The idea is to hold this ETF as a long-term investment but experienced investors may want to trade it by taking profits now and re-entering on a pull back.

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. It's true that as a leveraged ETF there will be slippage in the daily performance between UYG and the underlying index.

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

Current position in the UYG = $1.50 entry (stop loss: 3.20)

Chart of UYG:


VOD $22.09 -0.25 -- Vodafone Group

Right on cue VOD has pulled back toward short-term support at $22.00. If it doesn't bounce here then look for strong support in the $21-20 zone. I would strongly consider raising the stop loss toward the $20.00 level. I'm not suggesting new long-term positions at this time. 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 $2.45/2.60
-stop loss on VOD @ 17.85

Chart of VOD:


WFR $15.38 -0.32 -- MEMC Electronic Materials Inc.

I think it's time we found an exit in WFR. Shares have collapsed in the last two weeks and they're on the verge of breaking the $15.00 level. The stock is so oversold that I'd like to see a bounce and get out on the rebound (maybe near $17.00). If WFR can't manage an oversold bounce we'll be stopped out at $14.95 soon. I'm not suggesting new positions at this time.

June 23rd, 2009 - entry price on WFR @ 17.50, option @ 2.50
symbol: CJC-AD, 2010 JAN $20 LEAP call - current bid/ask $0.50/0.60
-stop loss on WFR @ 14.95

-or-

June 23rd, 2009 - entry price on WFR @ 17.50, option @ 3.43
symbol: ZET-AE, 2011 JAN $25 LEAP call - current bid/ask $1.25/1.55
-stop loss on WFR @ 14.95

Chart of WFR:


X $40.75 -1.51 United States Steel Corp.

U.S. Steel (X) is a watch list candidate that hit our trigger on Friday. The stock's correction has been pretty steep with a 20% pull back in less than three weeks. X is now approaching round-number support near $40.00 and technical support near the 100-dma and its trendline of higher lows. Our trigger to buy LEAPS was at $41.00. If you haven't entered positions yet I would wait for a bounce first. Our stop loss is at $37.40. Our long-term target is the $60-70 zone.

Oct 3rd, 2009 - entry price on X @ 41.00, option @ 3.35
symbol: FBJ-AI, 2010 JAN $45 LEAP call - current bid/ask $3.30/3.40
-stop loss on X @ 37.40

Chart of X:


XIDE $7.10 -0.33 Exide Technologies

The bounce in XIDE has rolled over and shares have broken their trendline of higher lows. I would expect the correction to reach the $6.50 or $6.00 levels. Wait for a bounce from one of these levels before considering new positions.

Our long-term target is $12.00.

Sep 2nd, 2009 - entry price on XIDE @ 6.50, option @ 1.25
symbol: FRU-CU, 2010 MAR $7.5 call - current bid/ask $1.10/1.45
-stop loss on XIDE @ 4.85

-or-

Buy the stock @ 6.50, stop loss at $4.85

Chart of XIDE:



Watch

Looks Ugly

by James Brown

Click here to email James Brown

It's only been a 5% drop in the S&P 500 but it still looks ugly. We have adjusted some trigger points.


New Watch List Entries

AVY - Avery Dennison


Active Watch List Candidates

BEAV - BE Aerospace Inc.

CHK - Chesapeake Energy Corp.

Cost - Costco Wholesale

ERJ - EMBRAER - Empresa Brasileira de Aeronáutica

ESV - ENSCO Intl. Inc.,

FWLT - Foster Wheeler

IGT - Intl. Game Technology

MEE - Massey Energy Corp.

MTL - MECHEL OAO

MTW - Manitowoc Inc.

TXT - Textron Inc.


Dropped Watch List Entries

SPW & X hit our trigger and graduated to the play list.


New Watch List Candidates:

AVY $ 33.95 -0.78 -- Avery Dennison

Shares of AVY were downgraded on Friday. The analyst believes that the stock has gotten ahead of itself. Given the weak job market and lackluster economic recovery the analyst felt that demand may not be strong enough for AVY's products. I see a stock that has built a strong base over the last several months. AVY was overbought and due for a correction in mid September and now it's seeing that correction. Broken resistance near $30.00 should offer new support and an entry point to hop on the bullish trajectory.

Use a trigger at $30.25 to buy calls and we'll use a relatively tight stop loss at $26.95. Our long-term target is $44.50.

Company Info:
Avery Dennison is a recognized industry leader that develops innovative identification and decorative solutions for businesses and consumers worldwide. The Company’s products include pressure-sensitive labeling materials; graphics imaging media; retail apparel ticketing and branding systems; RFID inlays and tags; office products; specialty tapes; and a variety of specialized labels for automotive, industrial and durable goods applications. A FORTUNE 500 Company with sales of $6.7 billion in 2008, Avery Dennison is based in Pasadena, California and has more than 32,000 employees in over 60 countries. (source: company press release or website)

Buy-the-Dip trigger: $30.25

BUY the 2010 January $30 calls (symbol: AVY-AF)

Chart of AVY:


Active Watch List Candidates:


BEAV $18.29 -0.48 -- BE Aerospace Inc.

The correction continues in BEAV. If it breaks the 50-dma there could be a quick decline toward $16.00 and the 100-dma. If triggered at $16.00 we'll use a stop loss at $13.40.

Buy-the-Dip trigger: $16.00

BUY the 2010 January $15.00 calls (symbol: BQV-AC)
or
BUY the stock at $16.00

Note: At $16.00 you could just buy the stock instead but the $15 calls will allow you more leverage on your investment.

Chart of BEAV:


CHK $26.70 +0.20 -- Chesapeake Energy Corp.

The energy stocks have begun to correct. CHK has been very resilient in spite of the price for natural gas. I am suggesting investors buy LEAPS on a dip at $23.50. We'll use a stop loss at $19.90. Our long-term target is $40.00.

Buy-the-Dip trigger: $23.50

BUY the 2011 January $25 calls (symbol: VEC-AE)

Chart of CHK:


COST $56.47 +0.78 -- Costco Wholesale

At the current rate COST is correcting we may never get triggered. The huge gap higher has left air pockets, which COST could quickly fill if the correction continues. I suspect that COST will trade sideways until its earnings report on October 7th, 2009.

Our plan is to buy LEAPS on a dip at $51.50. If triggered we'll use a stop loss at $47.00. Our target is the $65.00 region.

Buy-the-Dip trigger: $51.50

BUY the 2010 January $50 calls (symbol: PRQ-AJ)

Chart of COST:


ERJ $22.57 +0.29 -- EMBRAER - Empresa Brasileira de Aeronáutica S.A.

ERJ has pulled back to the 50-dma. If this market correction continues we have a good chance of getting triggered. If triggered at $20.50 we'll use a stop loss at $17.75. Our target is the $29-30 zone. FYI: The P&F chart is bullish with a $42 target.

Buy-the-Dip trigger: $20.50

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

Chart of ERJ:


ESV $40.00 -0.82 -- ENSCO Intl. Inc.

After three weeks of failing at $43.00 shares of ESV are poised to correct. The stock should find support near its 100-dma around $38.00. We want to buy LEAPS on a dip at $38.00. We'll use a stop loss at $34.90. The Point & Figure chart is bullish with a $55.00 target. We're going to aim for the $55-60 zone.

Buy-the-Dip trigger: $38.00

BUY the 2011 January $40 call (VKS-AH)
(More aggressive traders may want to trade January 2010 or March 2010 calls instead)

Chart of ESV:


FWLT $31.14 -1.09 -- Foster Wheeler AG

I'm turning more cautious on FWLT. The stock is testing the 38.2% Fib retracement of the July-September rally but I think the correction will continue. I'm adjusting our trigger to buy LEAPS down from $29.00 to $26.00 and our stop loss to $23.90. Our bullish target is the $45-50 zone.

Buy-the-Dip trigger: $26.00

BUY the 2011 January $30.00 calls (symbol: ZHF-AF)

Chart of FWLT:


IGT $19.94 -0.28 --- Intl. Game Technology

This is it. IGT is testing the bottom of its bullish channel. Aggressive traders will want to buy bullish positions now. I suspect that IGT will actually correct toward $18.00 so I'm adjusting our trigger to buy LEAPS down to $18.25. We'll move the stop loss down to $16.90.

We only want to open small positions at least 1/2 our normal trade size. Our long-term targets are $25.00 (sell half) and $29.00 (sell half).

Buy-the-Dip trigger: $18.25 *new*

BUY the 2011 January $20.00 call (VGG-AD)

Chart of IGT:


MEE $26.73 +0.13 -- Massey Energy Corp.

The correction in MEE has been pretty sharp and the stock is approaching our trigger at $25.00. If triggered our stop loss is at $19.95.

NOTE: I would only open half a position at this time. If conditions warrant we can add to it later.

More conservative traders may want to use a stop near $21.75 instead. Our long-term target is the $40.00. Readers may want to consider the 2011 January calls instead.

Buy-the-Dip trigger: $25.00

BUY the 2010 January $25.00 call (MEE-AE)

Chart of MEE:


MTL $16.92 -0.15 -- MECHEL OAO

MTL still looks very overbought and any correction is likely to be a sharp one.

I am adjusting our trigger to $12.75. We'll use a stop loss at $9.75. The Point & Figure chart is bullish with a $27 target. Our long-term target is also $27.00.

Buy-the-Dip trigger: $12.75 *new*

BUY the 2010 April $15.00 calls (symbol: MTL-DC)

or BUY the STOCK @ 12.75

Chart of MTL:


MTW $8.14 -0.59 -- Manitowoc Inc.

The correction in MTW has been a bit faster than I expected. Odds are good the market might keep slipping for another week or more. I am adjusting our trigger to open bullish positions from $8.00 to $7.25. Our long-term target is $17.00.

Buy-the-Dip trigger: $7.25 *new*

BUY the 2011 January $7.50 calls (symbol: VMT-AU)

or BUY the STOCK at $7.25

Chart of MTW:


TXT $17.51 -0.64 -- Textron Inc.

So far so good. We're looking for a correction toward $15.00. I'm suggesting investors buy LEAPS on a dip at $15.25. We'll use a stop loss at $11.75 near the simple 200-dma. Our long-term target is the $30 region.

Buy-the-Dip trigger: $15.25

BUY the 2011 January 15.00 call (symbol: XUD-AC)

Chart of TXT: