Option Investor
Newsletter

Daily Newsletter, Saturday, 10/17/2009

Table of Contents

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

Leaps Trader Commentary

Beware The Ides of Earnings Season

by James Brown

Click here to email James Brown

You might be familiar with the term "the Ides of March" from Shakespeare's play "Julius Caesar". Given Caesar's assassination on that date the term has taken on a more foreboding tone. Not many people know that the Roman calendar also used the term "Ides" for the 15th day of May, July, and October. Now I'm not going to warn you to beware the Ides of October but the S&P 500 rallied to 1,096 on Thursday the 15th and it could be a short-term top for the market.

The market's trend is obviously upward but there are several warning signs to consider. The easiest to see is that stocks are short-term overbought and running out of momentum under key, psychological resistance. The S&P 500 has the 1100 level looming above and the DJIA is struggling to hold the 10,000 level. A minor pull back would be in order and I would look for support near the S&P 500's rising 40 or 50-dma around the 1050 level. This happens to coincide with minor support at the 1060 and 1040 levels. Another technical warning sign are the bearish divergences we're seeing between price (new highs) and some of the indicators, which are not hitting new highs.

A bigger warning sign could be the reaction we are seeing to earnings results. If I were an ancient Roman-era soothsayer I might warn investors to beware the Ides of Earnings Season. The quality of earnings is front-loaded and will steadily get worse as the season progresses. Thus last week and this week should bear the best results and if last week is any indication we could be in for a rocky ride. Why am I concerned? Aside from BAC's miserable earnings on Friday morning most of the big reports were much better than expected. Yet investors are selling the news. Intel's report, which was very strong, sent the stock much higher but shares failed to hold the gains. JPM has sold off from its highs. GS beat by an extra $1 billion and sold off. This season investors want to see sales growth not just cost cutting to make the bottom line.

This week could surprise us and investors could start buying the news but I doubt it. The end of October is the end of the fiscal year for many mutual funds and the mentality could have changed to protect profits first and that means sell-the-news! Given the market's gains you could argue that a great earnings report has already been baked into these prices. If the first two weeks of earnings can't produce a bigger pop for the market then the second half of earnings season could be trouble.

Lately our theory has been that money managers would continue to chase performance through the end of October to maximize their results as they try to catch up to their peers and the major benchmarks. Thus far that theory has been working. The rally could fall victim to its own success. As we get closer and closer to the 1100-1120 zone, a major target for many investors, we could see more and more investors selling to lock in gains. Overall our bias is still bullish. The trend is your friend, right? We need to be cautious here. More than that we need to be guarded. Guard any gains you might have. Consider taking some money off the table now or as we near 1100 on the S&P 500. Or consider raising your stop losses. In all honesty I'm surprised that Friday wasn't worse given BAC's results and the consumer sentiment numbers.

Yes, we still have economic data to worry about. Earnings will continue to hog the headlines but Friday's consumer sentiment data was worrisome. Economists were expecting anything from a very small decline to a small gain. September's consumer sentiment was a new relative high at 73.5. October's preliminary reading fell to 69.4. Consumers are still worry about job security. That's going to translate into increased savings and less consumer spending. This week I would keep an eye on the Producer Price Index (PPI) on Tuesday morning and the Federal Reserve's Beige Book report on Wednesday.

Technically I'm also concerned about potential resistance on the small cap Russell 2000 index and the Dow Jones Transportation index. Not only are these key market indices but they're also measures of sentiment. If investors start selling the small caps then they're growing concerned about the future. Historically investors like to see the transports confirm a market rally and if the transports stumble it will be another reason to turn defensive.

In summary the trend is still up but the rally looks tired. Short-term I'd look for a pull back. We have several clues to keep track of as we measure the health of the market. Consider reducing your risk by either raising your stop loss or reducing position size.

Chart of the Russell 2000 Index:

Chart of the Dow Jones Transportation 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:

We're trimming the portfolio this weekend. Five of the LEAPS plays hit our profit targets. I've decided to close three more plays early since they're under performing the market.

Speaking of the market the trend is still up but the rally looks a little tired with the major indices short-term overbought and near resistance. That's a recipe for some profit taking.

I would be cautious about opening new long-term positions. If an opportunity does present itself consider scaling into it a little bit at a time to limit your risk.

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

Are We Nearing The End Zone?

by James Brown

Click here to email James Brown


Still Cautious


Editor's Note:

Sadly nothing has changed since last week. The market is higher but instead of looking stronger stocks just look more overbought and due for some profit taking. The initial reaction to earnings has been mixed. INTC, JPM, and GOOG all rallied on their earnings results but have already started to retreat. GOOG just reported so give it time. It too could see some profit taking.

Imagine we are watching a football game between the bulls and the bears. The bulls have the ball and they've been running it down the field. They're getting closer and closer to the end zone, which for us might be the 1,100-1,120 zone on the S&P 500 index. Here we are at 1,087. Is this where you would want to launch new long-term positions? Probably not.

I am suggesting readers wait for a little consolidation first before considering new positions. Stocks are up two weeks straight and probably need a rest.

No new plays tonight.


Play Updates

Cashing In & Cashing Out

by James Brown

Click here to email James Brown


Closed Plays


ACGY - closed ahead of earnings
FAS - hit our target
FCX - hit our target
LNN - an early exit
PCU - hit our target
SLB - hit our target
SPW - an early exit
WFR - an early exit

There are more details below.


Play Updates


ACI $24.23 +0.18 -- Arch Coal Inc.

ACI is looking pretty strong here. Instead of failing at resistance near $24.00 the stock has managed to close above this level. Shares are still short-term overbought but as long as the market holds up I would expect the trend to continue. I am not suggesting new positions at this time.

Our long-term target is the $30 region.

May 14th, 2009 - entry price on ACI @ 16.00, option @ 1.30
symbol: ACI-AE, 2010 JAN $25 LEAP call - current bid/ask $2.10/2.20
-stop loss on ACI @ 17.95

-or-

May 14th, 2009 - entry price on ACI @ 16.00, option @ 2.40
symbol: OSE-AF, 2011 JAN $30 LEAP call - current bid/ask $3.50/3.80
-stop loss on ACI @ 17.95

Chart of ACI:


ANR $37.66 -1.13 - Alpha Natural Resources, Inc.

ANR is not keeping pace with some of its peers. The stock has been consolidating sideways with a bearish trend of lower highs. Nothing has really changed from my previous comments. I would expect a dip toward $36-35. Our long-term target is the $50-60 zone.

Aug. 25th, 2009 - entry price on ANR @ 34.00, option @ 5.10
symbol: HIC-AG, 2010 JAN $35 LEAP call - current bid/ask $7.70/8.60
-stop loss on ANR @ 29.50

bought 1/2 LEAP position on 08/25/09 (option price @ 5.10)

-or-

Aug. 25th, 2009 - entry price on ANR @ 34.00, option @ 7.00
symbol: VJV-AH, 2011 JAN $40 LEAP call - current bid/ask $8.20/9.40
-stop loss on ANR @ 29.50
bought 1/2 LEAP position on 08/25/09 (option price @ 7.00)

Chart of ANR:


BAC $17.26 -0.84 - Bank of America Corp.

BAC delivered a very disappointing earnings report on Friday morning and yet the stock only lost 4.6%. I'm surprised the selling wasn't more aggressive. The bullish breakout last Wednesday followed by Thursday's bearish reversal and Friday's drop altogether looks like a top for the stock. I would encourage more conservative traders to seriously consider an early exit right here.

I'm not suggesting new positions at this time. Our long-term target is the $25-30 zone.

Jan 25th, 2009 - entry price on BAC @ 6.24, option @ 2.38
symbol: VBA-AB, JAN 2011 $10 LEAP call - current bid/ask $8.20/8.35
-stop loss on BAC @ 11.90

Chart of BAC


BG $66.34 +0.22 -- Bunge Limited

BG has been showing some relative strength. The stock looks a lot more attractive with the breakout over resistance near $65.00. This could be used as a new entry point for bullish positions. However, readers may want to wait until after the company reports earnings on Thursday, October 22nd before the opening bell. Our target is the $85-90 zone.

Sep 15th, 2009 - entry price on BG @ 63.00, option @ 5.90
symbol: BGW-DN, 2010 APR $70 LEAP call - current bid/ask $5.00/5.50
-stop loss on BG @ 56.99

Chart of BG:


CLF $38.78 -1.00 -- Cliffs Natural Resources Inc.

Target achieved. Shares of CLF soared last week with a rally to $40.05 on Thursday. Our first target to take profits was $39.75. I suggested readers sell half. Our second and final target is $44.75 but more aggressive traders may want to aim for $50.

The $40.00 level does look like round-number, psychological resistance and I would expect some profit taking from here. Take note that CLF is due to report earnings on October 29th. Also note that I'm raising our stop loss to $29.00.

Sept. 5th, 2009 - entry price on CLF @ 26.19, option @ 4.84
symbol: CLF-AE, 2010 JAN $25 LEAP call - current bid/ask $14.10/14.30
-stop loss on CLF @ 29.00 (FYI: Gap open entry)

10/15/09 Sold Half @ $39.75, Option @ 14.60 (+201.6%)

Chart of CLF:


CNX $49.65 -1.37 -- Consol Energy Inc.

The rally in CNX has stalled near $51. Shares do look overbought following a two-week rally and I would expect a dip toward the $46-45 zone. I'm not suggesting new positions at this time. We are raising the stop loss to $37.40.

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

Take note that CNX is expected to report earnings on October 22nd before the market opens.

Sep 1st, 2009 - entry price on CNX @ 36.50, option @ 5.75
symbol: CNX-AG, 2010 JAN $35 LEAP call - current bid/ask $15.10/15.30
-stop loss on CNX @ 37.40

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 $16.10/17.00
-stop loss on CNX @ 37.40

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

Chart of CNX


CRS $23.70 -0.92 -- Carpenter Technology Corp.

CRS is still consolidating sideways under $25.00. I am not suggesting new positions at this time. Our long-term target is the $35.00-40.00 zone. FYI: Earnings are expected on October 27th.

Sep 1st, 2009 - entry price on CRS @ 20.50, option @ 3.10
symbol: CRS-CD, 2010 MAR $20 LEAP call - current bid/ask $4.90/5.40
-stop loss on CRS @ 17.50

Chart of CRS:


DISH $18.48 -0.28 -- Dish Network Corp.

DISH has finally seen a correction. The move looks pretty ugly on the weekly chart, like a big red, bearish reversal pattern. It is a failed rally near its August and 2009 highs. However, shares found support near $18.00 and its rising 50-dma on Friday. If DISH bounces from here I'd use it as a new entry point. More conservative traders may want to consider a tighter stop loss near $17.00 or closer to $18.00. 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 $3.90/4.10
-stop loss on DISH @ 15.45.

Chart of DISH:


DO $105.61 -0.38 -- Diamond Offshore

Strategy Update!
A rally in oil has fueled some big gains for the oil service stocks. DO broke out over the $100 level and now it is within striking distance of our exit target at $109.00. More aggressive traders may want to aim for the $120 level instead.

Please note that we will close this play on Wednesday, October 21st at the closing bell to avoid holding over DO's earnings report on Thursday morning. We'll exit earlier if DO hits our target at $109.00. Aggressive traders will want to consider holding over the earnings report.

FYI: 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 $20.70/22.60
-stop loss on DO @ 87.00

-or-

Sep 2nd, 2009 - entry price on DO @ 86.50, option @ 5.20
symbol: KWJ-AT, 2010 JAN $100 LEAP call - current bid/ask $13.90/14.50
-stop loss on DO @ 87.00

Chart of DO:


EMR $39.12 -0.71 -- Emerson Electric Co.

EMR really didn't move much for the week and I don't see any changes from my prior comments. I would wait for a close over $40.00 before launching new LEAPS positions. Our target is $47.50. 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 $4.20/4.50
-stop loss on EMR @ 33.50.

Chart of EMR:


FSLR $147.54 - 5.22 -- First Solar

FSLR garnered positive analyst comments on Friday and the stock sold off anyway. Volume spiked on Wednesday and then it really surged on Thursday to almost four times the normal volume. I suspect that FSLR has reversed and the new trend is down. Friday's close under its simple 200-dma doesn't help the bulls. Of course all of this could change if the company reports better than expected earnings when they announce around Halloween.

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) $1.95.
If you're curious the 2010 Jan. $150 call is at $14.30.

Chart of FSLR


FST $23.88 +0.03 -- Forest Oil Corp.

FST has graduated from our watch list to our play list. We had two different entry point strategies. One was to buy LEAPS on a dip at $18.25. The other was to buy LEAPS on a close above $22.50. FST flirted with the $22.50 level most of the week but didn't close above this level until Thursday.

The October low was $17.43. I'm suggesting a starting stop loss at $17.35. More conservative traders may want to use a stop closer to $20.00. FST does look overbought with this big rally from $17.40 to almost $24.00. I would use a dip back near the $20 area as another entry point to buy LEAPS. Our long-term target is $37.50.

FYI: Earnings are out on November 2nd after the market's closing bell.

Oct 15th, 2009 - entry price on FST @ 23.85, option @ 7.40
symbol: OJG-AD, 2011 $20 LEAP call - current bid/ask $7.00/7.50
-stop loss on FST @ 17.35

Chart of FST:


GT $17.46 -0.35 -- Goodyear Tire & Rubber Co.

I haven't heard any more about the U.S.-China trade war that started with some tariffs on Chinese tires. Shares of GT managed to rebound after hitting the 38.2% retracement of its July-August rally. Unfortunately shares still have a bearish cast to them. I'm actually seeing a lot of mixed or conflicting technical signals. More conservative traders may want to raise their stops.

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 $3.20/3.40
-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 $3.10/3.60
-stop loss on GT @ 11.90

Chart of GT:


HOS $29.55 -0.75 -- Hornbeck Offshore Services

The rally in energy stocks has pushed HOS toward resistance near its June 2009 highs. Shares look short-term overbought and due for a dip. Our long-term target is $35.00. Please note our new stop at $21.90.

June 27th, 2009 - entry price on HOS @ 21.20, option @ 4.90
symbol: HOS-AD, 2010 JAN $20 LEAP call - current bid/ask $ 9.50/10.60
-stop loss on HOS @ 21.90
-or-
June 27th, 2009 - entry price on HOS @ 21.20, option @ 2.70
symbol: HOS-AE, 2010 JAN $25 LEAP call - current bid/ask $5.40/6.30
-stop loss on HOS @ 21.90

Chart of HOS:


INTC $20.18 -0.49 -- Intel Corp.

INTC reported earnings last week that were much better than expected. Revenues were strong and the company said margins were rising toward 60%. Overall it was a great report. The stock spiked over $21.00 and reversed. The move and the big volume is shaping up to look like a blow-off top. I'm expecting the correction to continue for now. Long-term the trend is still up but shares could correct toward $17.00 before that changes.

I am not suggesting new long-term positions at this time. 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 $2.59/2.66
-stop loss on INTC @ 15.90.

Chart of INTC:


MDR $25.50 -0.45 - McDermott Intl. Inc.

More conservative traders may want to consider an early exit for MDR. The stock market rallied to new 2009 highs last week and yet MDR is still stuck trading sideways. The longer-term trend is still upward but the relative weakness is worrisome. An alternative to an early exit would be a much higher stop loss. I am raising our stop loss to $20.90. I'm not suggesting new positions at this time.

We want to sell 50% to 75% of our position at $29.75. We'll sell the remainder at $34.00.

April 4th, 2009 - entry price on MDR @ 15.56, option @ 2.70
symbol: MDR-AD, 2010 $20 LEAP call - current bid/ask $6.00/6.20
-stop loss on MDR @ 20.90

Chart of MDR:


MSFT $26.50 -0.21 -- Microsoft Corp.

It seems like every other day I see another positive review for Windows 7, MSFT's new operating system that launches on October 22nd. The company reports earnings on October 23rd so it's going to be a big week. The trend is up and MSFT is showing relative strength with a new 2009 high.

More conservative traders may want to take some money off the table before MSFT reports earnings. I'm not suggesting new long-term positions at this time.

Note: No, it's not your imagination. The premiums in MSFT's options just collapsed this past week. Makes me wonder if there has been a flood of investors selling calls on top of a VIX that's hitting new relative lows.

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 $3.75/3.85
-stop loss on MSFT @ 19.95.

Chart of MSFT:


MT $38.98 -1.96 -- ArcelorMittal

Steel stocks were strong early in the week and MT soared to $41.00. The stock hit some profit taking on Friday. I'm not that alarmed as a fill the gap move would be healthy. If you look at the chart MT might be forming a bearish H&S pattern. I'm raising our stop loss to $31.75. I'm not suggesting new positions at this time. 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 $2.95/3.10
-stop loss on MT @ 31.75

-or-

June 17th, 2009 - entry price on MT @ 30.50, option @ 2.00
symbol: MT-AJ, JAN 2010 $50 call - current bid/ask $0.50/0.60
-stop loss on MT @ 31.75

Chart of MT:


NYX $29.20 -0.74 -- NYSE Euronext

NYX gave us a little bullish breakout on Wednesday last week. I would still look for short-term support in the $28.50-28.00 region. I'm a little bit concerned with NYX's relative weakness. The market is hitting new highs but NYX is not. More conservative traders may want to start taking some money off the table. If NYX closes under $27.00 we'll consider an early exit for the newsletter. I'm not suggesting new long-term 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
-- NZV-AD, 2010 $30.00 LEAP call - current bid/ask $1.64/1.67
-stop loss on NYX at $23.65

Chart of NYX:


PBR $50.37 -0.16 -- Petroleo Brasiliero

The rally in oil fueled a similar rally for the energy sector. PBR broke out past major resistance and is now testing psychological resistance near $50.00. I am raising our stop loss to $39.50.

I'm suggesting we sell half our position at $54.50. We'll sell the second half at $59.50.

Apr. 4th, 2009 - entry price on PBR @ 35.10, option @ $2.80
symbol: PMJ-AJ, 2010 $50.00 LEAP call - current bid/ask $3.80/3.90
-stop loss on PBR at $39.50

Chart of PBR:


PEP $62.29 -0.39 -- PEPSICO Inc.

PEP is still showing relative strength with another new 2009 high. I am not suggesting new positions at this time.

More conservative traders might want to raise their stops toward the $55 region. Our exit target is the $69.90 mark.

July 7th, 2009 - entry price on PEP @ 57.25, option @ $4.50(estimate)
symbol: VP-AL, 2011 $60.00 LEAP call - current bid/ask $6.40/6.80
-stop loss on PEP at $51.50

Chart of PEP:


RAI $48.46 +0.48 -- Reynolds American Inc.

Traders quickly bought the dip in RAI and the stock is hitting new 2009 highs. The relative strength is great but shares are very short-term overbought.

Currently our first target to take profits (sell half) in RAI is $49.50. The company is due to report earnings on October 22nd before the opening bell. I am suggesting that readers sell half our position at the close on October 21st if RAI has not yet hit our target at $49.50.

Our second and final target is $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 $3.90/4.50
-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 $ 8.10/10.00
-stop loss on RAI at $39.75

Chart of RAI:


RIG $91.08 -0.40 -- Transocean Ltd.

Traders bought the dip midweek in RIG and shares look poised to move higher from here. We want to sell half our position at $98.00. We'll sell the second half at $109.00.

July 3rd, 2009 - entry price on RIG @ 70.50, option @ 5.40
symbol: RIG-AP, JAN 2010 $80 call - current bid/ask $13.60/13.80
-stop loss on RIG @ 74.90.

-or-

July 3rd, 2009 - entry price on RIG @ 70.50, option @ 3.90
symbol: RIG-AZ, JAN 2010 $85 call - current bid/ask $10.10/10.30
-stop loss on RIG @ 74.90.

Chart of RIG:


SLB $69.08 +0.29 -- Schlumberger Ltd.

Target achieved. The rally in SLB has been phenomenal with the stock soaring straight up for almost two weeks. Shares broke out through resistance and rallied straight for the $70 level. Our second target to take profits was at $69.00, which shares hit on Friday (10/16/09).

I am raising our stop loss to $54.90. Our third and final target is $77.50 but that's probably weeks away.

FYI: Earnings are expected on October 23rd. I wouldn't be surprised to see some post-earnings profit taking.

April 20th, 2009 - entry price on SLB @ 45.01, option @ 3.00
symbol: SLB-AL, JAN 2010 $60 LEAP call - current bid/ask $10.70/10.90
-stop loss on SLB @ 54.90

1st exit @ $59.00 (1/3 of position) option @ $7.25 (+141% estimate)
2nd exit @ $69.00 (1/3 of position) option @ $10.70 (+256%)

Chart of SLB:


TEX $23.11 -0.15 -- Terex Corp.

Wow! TEX has continued to soar with a string of new 52-week highs. The stock is short-term oversold and way overdue for a pull back. I am raising our stop loss to $16.75.

Traders need to be aware that TEX is due to report earnings on October 21st after the closing bell. Odds are pretty good that the stock could see some post earnings profit taking.

I would not open new positions at this time. 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 $8.30/8.50
-stop loss on TEX @ 16.75

-or-

Sept. 11th, 2009 - entry price on TEX @ 18.25, option @ 4.10
symbol: VXQ-AD, JAN 2011 $20 LEAP call - current bid/ask $7.30/7.80
-stop loss on TEX @ 16.75

Chart of TEX:


UYG $6.08 -0.29 - ProShares Ultra Financials (2x) ETF

Target achieved. JPM's earnings report on Wednesday was so good the financial ETFs gapped open higher. Shares of UYG opened at $6.31 on Wednesday. Our target to sell half was $6.25. I will repeat my comments from last week. More conservative traders may want to sell all of their position. The reaction to earnings from GS and BAC wasn't that inspiring and the financials could be due for a larger correction. As an alternative you may want to just raise your stop loss toward $4.50 or even near $5.00. I am not suggesting new positions at this time. Our second and final target is $9.50.

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

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

Current position in the UYG = $1.50 entry (stop loss: 3.99)

10/14/09 Exit - Sell Half @ 6.31 (gap open exit, +320%)

Chart of UYG:


VOD $22.07 -0.31 -- Vodafone Group

VOD delivered a nice bounce from its 50% retracement level but the rebound looks a little tired here. I'm not suggesting new 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 $2.30/2.40
-stop loss on VOD @ 19.40

Chart of VOD:


X $43.44 -2.19 United States Steel Corp.

I'm starting to get concerned with the consolidation in shares of X. The stock has been under performing the market and its peers in the metal industry. It looks like a bear-flag pattern. I am raising our stop loss to $39.75. The stock would have to breakdown under its multi-month trendline of higher lows and breakdown under the $40.00 mark and its 100-dma before hitting our stop loss.

I am not suggesting new LEAPS positions at this time. Readers may want to consider short-term puts as protection ahead of the October 27th earnings report. 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 $3.60/3.80
-stop loss on X @ 39.75

Chart of X:


XIDE $7.69 -0.17 Exide Technologies

I remain cautious on XIDE. The rebound failed to breakthrough the $8.00 level and shares have struggled under this resistance all week. I'm expecting a dip toward the 50-dma or the $6.50 region. I am raising our stop loss to $5.45. I'm not suggesting new positions at this time.

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 $1.45/1.65
-stop loss on XIDE @ 5.45

-or-

Buy the stock @ 6.50, stop loss at $5.45

Chart of XIDE:


CLOSED Plays

ACGY $13.03 -0.48 -- Acergy S.A.

ACGY peaked under resistance near $14.00 just over a week ago and it's been a slow slide lower toward $13.00. We can't say the profit taking has been that bad. Readers may want to keep an eye on it for a correction back toward its trendline of higher lows because our play was closed last week on October 13th (ACGY closed at $13.59).

Our target was $14.50 but we did not want to hold over earnings due out October 14th. Last week the newsletter said exit at the close on Tuesday, October 13th to avoid holding over the announcement.

April 25th, 2009 - entry price on ACGY @ 7.61, option @ 1.05
symbol: QLS-AB, 2010 JAN $10 LEAP call - Exit Oct. 13th @ $4.10 (+290%)

Chart of ACGY


FAS $85.88 -6.07 - Direxion Fincl.Bull 3x ETF

Thank you JP Morgan Chase (JPM). The bank reported stellar earnings on Wednesday morning and the FAS gapped open higher at $90.83. Last week I suggested readers exit the FAS at $90.00. The long-term trend is still up and more aggressive traders may want to aim higher but we've closed the play.

Previous Comments on FAS:
Currently we have sold one third of our position at $60.00 (pre-split price of $12.00) 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 target price: 12.00

Exit 2/3 position @ 90.00 (+581%) (exit was Weds. Oct. 14th)

Chart of FAS


FCX $75.73 -0.20 - Freeport McMoran

I am suggesting an exit in FCX. The stock just spent a week flirting with the $76.00-76.50 zone while our second and final target was $77.00. Technically the trend is still bullish and I would not be surprised to see shares to hit $80.00. However, FCX is due to report earnings this week and I don't want to hold over the report.

Thus I'm suggesting an early exit now. Take the money and run. FCX is due to report earnings on October 21st.

June 22nd, 2009 - entry price on FCX @ 46.00, option @ 6.00
symbol: FCX-AK, 2010 JAN $55 LEAP call - current bid/ask $21.55/21.65
-stop loss on FCX @ 49.95

09/05/09 - Take Profits (sell half) at $66.00, option @ 15.00 (+150%)
10/17/09 - Final Exit at $75.74, option @ 21.55 (+259%)

-or-

June 22nd, 2009 - entry price on FCX @ 46.00, option @ 10.00
symbol: OBQ-AL, 2011 JAN $60 LEAP call - current bid/ask $23.20/23.95
-stop loss on FCX @ 49.95

09/05/09 - Take Profits (sell half) at $66.00, option @ 18.50 (+85%)
10/17/09 - Final Exit at $75.74, option @ 23.20 (+132%)

Chart of FCX:


LNN $34.78 -2.84 -- Lindsay Corp.

It looks like we should have been more aggressive with an early exit. I had grown cautious on LNN and last week talked about exiting early on a bounce near $40.00. Shares made it to $39.00 and failed. The reversal is picking up speed and LNN closed at new three-month lows. I'm hitting the eject button before it gets worse.

August 7, 2009 - entry price on LNN @ 41.55, option @ 8.80
symbol: NRR-AG, 2010 JAN $35 LEAP call - current bid/ask $ 3.10/ 3.40
-stop loss on LNN @ 34.50
10/17/09 Early Exit @ 34.78, option @ 3.10 (-64%)
-or-
August 7, 2009 - entry price on LNN @ 41.55, option @ 6.00
symbol: NRR-AH, 2010 JAN $40 LEAP call - current bid/ask $1.45/1.65
-stop loss on LNN @ 34.50
10/17/09 Early Exit @ 34.78, option @ 1.45 (-75%)

Chart of LNN:


PCU $34.21 -0.59 - Southern Copper Corp.

Target achieved. As expected PCU continued to rally and hit our second and final target at $34.00 last week. The stock hit $34.00 on Monday, Oct. 12th and then again later in the week. Our play is closed.

April 20th, 2009 - entry price on PCU @ 19.00, option @ 1.95
symbol: PCU-AE, JAN 2010 $25 LEAP call - current bid/ask $8.50/8.80
-stop loss on PCU @ 22.00

Target Hit @ 29.75 on 08/24/09. Sold 1/2 at $6.00 (+207%)
Target hit @ 34.00 on 10/12/09. Sold 2/2 at $9.00 (+361%)

Chart of PCU:


SPW $57.06 -1.69 -- SPX Corp.

Abandon ship! SPW is showing too much relative weakness. I'm suggesting an early exit now to cut our losses early.

Oct 2nd, 2009 - entry price on SLB @ 58.50, option @ 5.70
symbol: SPW-CL, 2010 MAR $60 LEAP call - current bid/ask $4.30/4.60
-stop loss on SPW @ 52.40

10/17/09 early exit @ 57.06, option @ 4.30 (-24.5%)

Chart of SPW:


WFR $15.53 -0.18 -- MEMC Electronic Materials Inc.

I'm giving up on WFR. The stock rolled over under its 200-dma and fell toward round-number support near $15.00. Now short-term the intraday bounce from $15.00 on Friday is a positive sign and we could look for a rebound from here. However, bigger picture the trend is broken and I'm cutting our losses now before they get any worse. I'm closing this play now. More aggressive traders could hang on and try to exit on a bounce near $16.50-17.00 (or higher). FYI: Earnings are October 22nd.

June 23rd, 2009 - entry price on WFR @ 17.50, option @ 2.50
symbol: CJC-AD, 2010 JAN $20 LEAP call - current bid/ask $0.40/0.50
-stop loss on WFR @ 14.95

10/17/09 Early Exit @ 15.53, option @ $0.40 (-84%)

-or-

June 23rd, 2009 - entry price on WFR @ 17.50, option @ 3.43
symbol: ZET-AE, 2011 JAN $25 LEAP call - current bid/ask $1.15/1.30
-stop loss on WFR @ 14.95

10/17/09 Early Exit @ 15.53, option @ $1.15 (-66%)

Chart of WFR:



Watch

Looking Tired

by James Brown

Click here to email James Brown


New Watch List Entries

GHM - Graham Corp.


Active Watch List Candidates

AVY - Avery Dennison

BUCY - Bucyrus Intl.

CHK - Chesapeake Energy Corp.

CR - Crane Co.

ESV - ENSCO Intl. Inc.,

MTW - Manitowoc Inc.

PCX - Patriot Coal Corp.

TRN - Trinity Industries

TXT - Textron Inc.


Dropped Watch List Entries

FST graduated to our play list.


New Watch List Candidates:

GHM $17.71 +1.43 -- Graham Corp.

GHM is an industrial goods producer and the stock has produced a significant base over the last several months. Shares are starting to breakout to new highs for the year. We don't want to chase the rally but if the market corrects we want to be ready to buy a dip.

I'm suggesting readers buy March LEAPS, which are the longest ones available, on a dip at $15.15. Investors will want to note that GHM is due to report earnings on October 30th before the opening bell. More conservative traders may want to wait until after the earnings report before initiating positions.

I wish there were longer-dated options available. As an alternative investors may want to just buy the stock instead. Our target is $24.00. We'll use a stop loss at $12.40.

Company Info:
With world-renowned engineering expertise in vacuum and heat transfer technology, Graham Corporation is a global designer, manufacturer and supplier of ejectors, pumps, condensers, vacuum systems and heat exchangers. For over 70 years, Graham Corporation has built a reputation for top quality, reliable products and high-standards of customer service. Sold either as components or complete system solutions, the principal markets for Graham’s equipment are the petrochemical, oil refining and electric power generation industries, including cogeneration and geothermal plants. Graham equipment can be found in diverse applications, such as metal refining, pulp and paper processing, ship-building, water heating, refrigeration, desalination, food processing, drugs, heating, ventilating and air conditioning. Graham’s reach spans the globe. Its equipment is installed in facilities from North and South America to Europe, Asia, Africa and the Middle East. (source: company press release or website)

Buy-the-Dip trigger: $15.15

BUY the 2010 March $15.00 Call (GHM-CC)

or

BUY the stock (GHM) at $15.15

Chart of GHM:


Active Watch List Candidates:


AVY $ 37.80 -0.32 -- Avery Dennison

AVY has continued to show relative strength. The stock is even more overbought than it was a week ago. Right now the plan is to buy LEAPS on a dip at $32.00. If triggered our stop loss is $29.40. Our long-term target is $44.50. FYI: Earnings are due out on October 27th.

Buy-the-Dip trigger: $32.00

BUY the 2010 January $35 calls (symbol: AVY-AG)

Chart of AVY:


BUCY $39.05 -0.68 -- Bucyrus Intl.

BUCY has extended its gains and hit new highs for the year. The stock is nearing potential round-number resistance at $40.00. I'm sticking with our trigger at $34.10. A post-earnings sell-off could be just the catalyst we need to get triggered.

We'll use a stop loss at $29.00. Our long-term target is $49.00.

FYI: Earnings are expected on October 22nd after the closing bell.

Buy-the-Dip trigger: $34.10

BUY the 2010 April $35.00 call (HBU-DG)

Chart of BUCY:


CHK $28.67 -0.26 -- Chesapeake Energy Corp.

CHK produced a bearish reversal at resistance on Wednesday. I'm expecting a pull back toward $25.00, which would be enough to hit our trigger. More conservative traders may want to move their trigger lower toward $23.00 or $22.00 and place your stop under $20.00. I'm leaving our stop at $21.45 for now. If triggered our target is $40.00.

FYI: Earnings are expected on October 26th but the date is not confirmed yet.

Buy-the-Dip trigger: $25.00

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

Chart of CHK:


CR $27.21 -0.35 -- Crane Co.

CR managed to hit new highs again last week but momentum is stalling. I am adjusting our trigger from $25.00 down to $24.25. We'll move the stop loss to $21.90. Our long-term target is $34.75. FYI: Earnings are expected on October 26th.

Buy-the-Dip trigger: $24.25

BUY the 2010 March $25 calls (CR-CE)

Chart of CR:


ESV $47.29 -1.05 -- ENSCO Intl. Inc.

ESV has soared to new 52-week highs. Shares are short-term overbought and I suspect the stock will see some post-earnings profit taking. ESV reports earnings on October 22nd before the opening bell.

Our trigger is to buy LEAPS on a dip at $40.00. We'll use a stop at $37.25. We're going to aim for the $55-60 zone.

Buy-the-Dip trigger: $40.00

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:


MTW $10.66 -0.23 -- Manitowoc Inc.

MTW also managed to hit new 2009 highs but momentum is fading. I would expect a correction toward the rising 50-dma. Thus we need to raise our trigger. I'm adjusting the entry point to $8.60. It may take a couple of weeks for MTW to hit our entry point. Our long-term target is $17.00. FYI: Earnings are out on Oct. 29th.

Buy-the-Dip trigger: $8.60

BUY the 2011 January $10 calls (symbol: VMT-AB)

or BUY the STOCK at $8.60

Chart of MTW:


PCX $13.29 -0.71 -- Patriot Coal Corp.

PCX has rallied to resistance near $14.00 and stalled. This could be a double top if it reverses here. I'm expecting some profit taking. The plan is to buy LEAPS on a dip at $11.00. The stock can be volatile so we'll use a stop loss at $8.75. Our long-term target is the $20-25 zone.

FYI: Earnings are out on October 27th before the opening bell.

Buy-the-Dip trigger: $11.00

BUY the 2011 January $15 LEAP call (OKI-AC)

or

Buy the stock @ 11.00.

Chart of PCX:


TRN $18.22 -0.49 -- Trinity Industries

TRN may have formed a bearish double top with resistance near $19.00. I am adjusting our trigger to buy LEAPS from $17.05 to $16.25. We'll keep the stop loss at $13.90.

Our target is the $25-30 zone. More conservative traders may want to use a stop closer to $15.00.

Buy-the-Dip trigger: $16.25

BUY the 2011 January $20 LEAP call (XYT-AD)

Chart of TRN:


TXT $19.92 -0.42 -- Textron Inc.

Nothing has changed for us since last week. We're still waiting for a correction toward $16.00. Our trigger to open positions is at $16.25. If triggered we'll use a stop loss at $13.75. Our long-term target is the $30 region.

Buy-the-Dip trigger: $16.25

BUY the 2011 January 17.50 call (symbol: XUD-AW)

Chart of TXT: