Option Investor
Newsletter

Daily Newsletter, Saturday, 10/24/2009

Table of Contents

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

Leaps Trader Commentary

Not Good Enough

by James Brown

Click here to email James Brown

We are a little more than two weeks into the third quarter earnings season. Thus far about 80% of the companies that have reported have beat Wall Street's estimates. Yet it's not good enough. There are a few standouts but for the most part businesses are still beating the bottom line due to cost cutting than true improvement in sales. It could be selective memory but there seem to be more companies raising guidance this time compared to the last earnings season but investors are just shrugging off good news. That's never a good sign.

Here's a little quote from last week's column, "A bigger warning sign could be the reaction we are seeing to earnings results. 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." My warning still holds true today. If the best results can't move the market higher than what's going to happen as results deteriorate? We will still hear from a large number of companies this week (Oct. 26-30th) but for the most part the tone has been set and the stock market has failed to move.

The S&P 500 index has produced a failed rally under round-number resistance at the 1100 level. The Dow Jones Industrial Average has failed three times at the 10,100 level. The NASDAQ composite has been struggling with the 2190-2200 level in spite of very strong earnings from some high profile companies. Last week I warned readers about a potential (bearish) double top in the small cap Russell 2000 index and the transportation index. Sure enough they're both rolling over into what looks like a double top pattern.

Chart of the S&P 500 Index:

Weekly Chart of the S&P 500 Index:

Chart of the Russell 2000 Index:

Chart of the Dow Jones Transportation Index:

Recent economic data hasn't been that great. Two weeks ago the consumer sentiment numbers were worse than expected. On Friday the existing home sales came in way better than expected and the market ignored it. A few analysts feel that the National Association of Realtors seasonally adjusted numbers are all smoke and mirrors anyway. How can the seasonally adjusted number that was released show a +9% surge while the unadjusted numbers show a -5% decline in sales? The room for error seems to be pretty large. Of course many feel that last months existing home sales were a one-time anomaly anyway since buyers were rushing to close deals to get the new home buyer tax credit before it expires. This past week also brought a surprisingly negative report from Britain. Economists were looking for the British economy to see +0.2% positive GDP growth. Everyone was shocked to see a -0.4% GDP growth for the third quarter, especially after France and Germany have already seen their GDP turn positive. Thus England remains in recession and it casts some doubt on the U.S. recovery. We'll get a look at our own GDP numbers this coming Thursday.

The trend in the U.S. dollar is down and the currency hit new 14-month lows last week. I don't know anyone who expects a true bullish reversal in the dollar but it is oversold and due for a rebound. The currency doesn't have to correct but if it does will push commodities low and that will spark profit taking in the miners and the energy stocks. These have been key sectors of leadership lately.

The last several weeks we've been working with the theory that fund managers have been chasing performance as they try to maximize any gains before their year ends on October 31st. We are now down to the last week of October. What are the odds that they buy the market now or just choose to hold and wait it out. That may be the best we can hope for right now - that the market just churns sideways. Unfortunately most of the technicals indicators and the recent price action is suggesting the rally has run out of steam is and stocks are about to contract.

I'm going to repeat my comments from last week. I would expect a correction in the S&P 500 but the index should find some support near 1,050, which coincides with its rising 50-dma and the long-term trendline off its March 2009 lows. If the S&P 500 breaks the 1,050 level then I'd look for a drop toward the 1,000 level, which should be stronger support. With the market struggling at new highs this is not a great entry point to initiate new long-term LEAPS positions. Pick your stocks carefully and wait for a big enough correction.

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 continue to whittle down the play list and we're taking money off the table. This weekend I've closed DISH and HOS early. Last week the plan was to take profits in DO and RAI at specific targets and dates. This weekend I'm also suggesting readers take profits in MDR, RIG, and TEX.

The market acts like it's forming a short-term top. I would expect more profit taking over the next week or two. If we get the S&P 500 to pull back toward support we can take another look at new bullish entry points. 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

Discipline to Wait

by James Brown

Click here to email James Brown


Watch the 1,050 level on the S&P 500


Editor's Note:

The stock market is struggling to make new highs even as the vast majority of earnings reports come in better than expected. If positive earnings news isn't going to lift stocks, then what will lift stocks?

The market looks a little top-heavy here. It's not a great spot to open new long-term positions. I'm suggesting investors be patient and wait. We'll get another correction eventually. Right now I'm watching the 1,050 level on the S&P 500. That's where the index should find support at its long-term trendline of higher lows and its 50-dma.

No new plays tonight.



Play Updates

Money Off The Table

by James Brown

Click here to email James Brown

Editor's Note:

We have a few companies that are due to report earnings this week. Readers may want to consider exiting early before the announcement or buying some cheap protective puts as a little insurance in case the stock plunges after the report.


Closed Plays


DISH, DO, and HOS were closed.


Play Updates


ACI $24.03 -0.66 -- Arch Coal Inc.

We only have three months left if you own the 2010 January LEAPS. The market and ACI look like they've created a top last week and poised to correct. More conservative traders with the 2010 calls may want to take an early exit. ACI is a volatile stock and I wouldn't be surprised to see a pull back toward the $21-20 zone. I am not suggesting new positions at this time.

Our long-term target is the $30 region.

ACI is due to report earnings on October 30th before the market opens. Investors interested in protecting themselves with some short-term puts will want to consider buying them now or just before the announcement (that means Thursday night before the closing bell). The newsletter is not suggesting any puts.

May 14th, 2009 - entry price on ACI @ 16.00, option @ 1.30
symbol: ACI-AE, 2010 JAN $25 LEAP call - current bid/ask $1.75/1.85
-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 $3.20/3.60
-stop loss on ACI @ 17.95

Chart of ACI:


ANR $37.86 -2.04 - Alpha Natural Resources, Inc.

ANR has produced what could be a bull trap and bearish reversal pattern. More conservative traders with the 2010 January calls may want to take profits now. If ANR does correct I would look for a dip toward $35.00 and possibly the 100-dma near $32.50. Our long-term target is the $50-60 zone. I am not suggesting new bullish positions at this time.

Aug. 25th, 2009 - entry price on ANR @ 34.00, option @ 5.10
symbol: HIC-AG, 2010 JAN $35 LEAP call - current bid/ask $5.20/5.50
-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 $8.30/8.70
-stop loss on ANR @ 29.50
bought 1/2 LEAP position on 08/25/09 (option price @ 7.00)

Chart of ANR:


BAC $16.22 -0.30 - Bank of America Corp.

BAC has suffered profit taking all week long after its earnings report two Friday's ago. Shares are testing short-term support near $16.00. If that breaks we can look for technical support at the 100-dma near $15.00 or price support near $14.00. Unfortunately I believe a close under $15.00 would be very bearish and suggest a much deeper correction was occurring. More conservative traders may want to consider taking profits off the table. If not all your position then at least part of your position.

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 $7.05/7.15
-stop loss on BAC @ 11.90

Chart of BAC


BG $63.54 -1.04 -- Bunge Limited

BG reported earnings last Thursday. The company beat Wall Street's estimates but guided lower. The guidance is dramatic. BG expects fiscal year 2009 earnings in the $3.10-3.50 region. Analysts were estimating $4.69. I'm surprised the stock didn't see a bigger decline. Shares spiked down toward $61.50 and bounced.

I am not suggesting new bullish positions at this time. More conservative traders may want to raise their stop loss toward $59.00. 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 $3.30/3.60
-stop loss on BG @ 56.99

Chart of BG:


CLF $37.83 -0.80 -- Cliffs Natural Resources Inc.

CLF has failed to break resistance at the $40.00 level several times now. The rally is losing steam. I would expect a correction soon. More conservative traders may want to bail out completely right now. I am not suggesting new positions. Our second and final target remains $44.75.

The company will report earnings on Friday morning, October 30th.

Sept. 5th, 2009 - entry price on CLF @ 26.19, option @ 4.84
symbol: CLF-AE, 2010 JAN $25 LEAP call - current bid/ask $13.10/13.40
-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 $47.42 -1.58 -- Consol Energy Inc.

CNX spiked to a new high last week and hit $53.00 before reversing. Shares then traded lower on its earnings news. Wall Street was looking for earnings of 66 cents. CNX missed by 18 cents. Shares are still in their bullish channel but the correction could take it lower through support.

We only have three months left for the 2010 January calls. If you're holding these calls consider an complete exit right here and now. I am not suggesting new positions at this time.

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 $12.80/13.00
-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 $13.90/14.40
-stop loss on CNX @ 37.40

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

Chart of CNX


CRS $21.53 -1.19 -- Carpenter Technology Corp.

Caution! CRS has broken down from its recent consolidation and broken through support near $22.00. Shares tagged their 100-dma on Friday. I would expect a dip toward support near $20.00 now. Earnings are due out on Tuesday morning (Oct. 27th) and the results could produce some volatility. I'm not suggesting new positions at this time.

Note that I am raising the stop loss to $18.50.

Sep 1st, 2009 - entry price on CRS @ 20.50, option @ 3.10
symbol: CRS-CD, 2010 MAR $20 call - current bid/ask $3.40/3.70
-stop loss on CRS @ 18.50

Chart of CRS:


EMR $39.68 -0.49 -- Emerson Electric Co.

EMR is holding up pretty well and has been able to maintain its bullish trend. Earnings are coming up on November 3rd. Readers may want to wait until after the earnings report before considering new bullish 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 $4.40/4.70
-stop loss on EMR @ 33.50.

Chart of EMR:


FSLR $152.39 - 3.69 -- First Solar

FSLR managed a gain for the week but it had to claw its way back from the mid $140s again. Shares are still facing a trendline of overhead resistance that it just can't seem to get past. FSLR is due to report earnings on October 28th after the closing bell. Their results will probably determine the stock's next trend.

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) $1.60.
If you're curious the 2010 Jan. $150 call is at $16.80.

Chart of FSLR


FST $22.07 -0.91 -- Forest Oil Corp.

Ouch! We knew FST was overbought and due for a dip but the stock is down four days in a row. If this pull back continues look for a bounce near $20 and use it as a new bullish entry point. 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 $5.60/6.70
-stop loss on FST @ 17.35

Chart of FST:


GT $17.75 +0.02 -- Goodyear Tire & Rubber Co.

Shares of GT have bounced back toward resistance near $18.00 and appear stuck there. The stock might churn sideways until the company reports earnings on October 28th before the opening bell. 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 $3.40/3.60
-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 $3.20/3.70
-stop loss on GT @ 11.90

Chart of GT:


INTC $19.78 -0.34 -- Intel Corp.

Investors are still slowly taking profits in INTC. I would expect the correction to continue.

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 $2.47/2.54
-stop loss on INTC @ 15.90.

Chart of INTC:


MDR $25.49 -0.25 - McDermott Intl. Inc.

Take profits!
MDR has been trading sideways for about three weeks now. I'm concerned that shares could correct lower. I am suggesting that readers exit half of our position now near $25.50. We'll make $29.75 our final exit. I'm not suggesting new positions at this time.

April 4th, 2009 - entry price on MDR @ 15.56, option @ 2.70
symbol: MDR-AD, 2010 JAN $20 LEAP call - current bid/ask $5.80/6.00
-stop loss on MDR @ 20.90

Sell Half @ 25.49 (10/24/09) option @ $5.80 (+114.8%)

Chart of MDR:


MSFT $28.02 +1.43 -- Microsoft Corp.

Friday was a big day for MSFT. The stock gapped open higher and hit $29.35 before paring its gains. The move was fueled by better than expected earnings on Friday morning. Analysts were looking for 32 cents a share. MSFT delivered 40 cents. I suspect part of the selling on Friday morning was due to a mistake by CNBC when they were reporting MSFT's numbers. CNBC said MSFT had drastically lowered its revenue guidance when in reality MSFT had only lowered its expense guidance.

More conservative traders may want to take profits now. I'm betting that Windows 7 is going to be a hit and shares of MSFT will continue to rally well into the fourth quarter and beyond. Keep in mind our upside target is only $30.00. More aggressive traders may want to aim for $32 or $34. I'm not suggesting new long-term positions at this time.

June 2nd, 2009 - entry price on MSFT @ 21.60, option @ 2.20
symbol: VMF-AE, 2011 Jan. $25 call - current bid/ask $4.75/4.95
-stop loss on MSFT @ 19.95.

Chart of MSFT:


MT $38.18 -0.62 -- ArcelorMittal

MT is still seeing profit taking from its early October high. 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 $2.25/2.55
-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 $0.30/0.40
-stop loss on MT @ 31.75

Chart of MT:


NYX $29.15 -0.18 -- NYSE Euronext

It feels like NYX has been churning sideways for months now. I suspect the consolidation continues until the company reports earnings on Friday, October 30th. I've been concerned by the stock's relative weakness. The S&P 500 has been hitting new highs while NYX just stumbles sideways. I would seriously consider an early exit before the company reports or consider buying some cheap November puts on the day before earnings.

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 $1.47/1.51
-stop loss on NYX at $23.65

Chart of NYX:


PBR $49.59 -0.75 -- Petroleo Brasiliero

PBR is still flirting with 2009 highs but the action last week has turned bearish. I'm expecting a dip back toward the $47-45 zone.

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 $3.30/3.50
-stop loss on PBR at $39.50

Chart of PBR:


PEP $61.03 -0.47 -- PEPSICO Inc.

PEP has spent the last several days consolidating its gains. Look for support near $60.00 and again near $58.00. 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 $5.60/6.00
-stop loss on PEP at $51.50

Chart of PEP:


RAI $48.44 +0.48 -- Reynolds American Inc.

Target achieved. Last week I suggested readers sell half their position at $49.50 or at the close on October 21st, whichever came first. Fortunately RAI hit $49.68 on Oct. 19th and hit $50.00 on Oct. 20th. The company reported earnings on Thursday that beat estimates by 7 cents and management raised their guidance. The stock sold off anyway. Shares remain short-term overbought and due for a deeper correction. I'm not suggesting new positions at this time.

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 $4.10/4.50
-stop loss on RAI at $39.75

Sold Half on 10/19 @ 49.50, option @ $4.10 (+182%)

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 $ 7.20/10.60
-stop loss on RAI at $39.75

Sold Half on 10/19 @ 49.50, option @ $8.90 (+97%)

Chart of RAI:


RIG $89.86 -2.89 -- Transocean Ltd.

It's time to take some money off the table. While the trend for oil service stocks and RIG is still up on a short-term basis the group looks poised to correct.

I am suggesting readers sell half their LEAPS position right here near $90.00. We'll keep our second and final target at $109.00. I'm not suggesting new positions at this time. Please note our new stop loss at $77.50.

July 3rd, 2009 - entry price on RIG @ 70.50, option @ 5.40
symbol: RIG-AP, JAN 2010 $80 call - current bid/ask $12.30/12.60
-stop loss on RIG @ 77.50.

Sell Half (10/24/09) at $89.85, option @ 12.30 (+127.7%)

-or-

July 3rd, 2009 - entry price on RIG @ 70.50, option @ 3.90
symbol: RIG-AZ, JAN 2010 $85 call - current bid/ask $ 8.90/ 9.20
-stop loss on RIG @ 77.50.

Sell Half (10/24/09) at $89.85, option @ 8.90 (+128.2%)

Chart of RIG:


SLB $65.20 -3.40 -- Schlumberger Ltd.

Ouch! SLB lost 4.9% on Friday after one analyst firm downgraded it to a "sell". I am raising our stop loss to $56.75. More conservative traders may want to sell the remainder of their position. I am not suggesting new positions at this time. Our third and final target is $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 $ 7.50/ 7.80
-stop loss on SLB @ 56.75

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 $23.68 +0.18 -- Terex Corp.

It's been a volatile week for TEX. Shares almost hit $26.00 Tuesday and fell toward $21 on Thursday after its earnings report. The company missed estimates badly and management guided lower. I'm surprised the selling wasn't worse!

Given TEX's earnings results and the market's recent weakness I am suggesting readers sell half their position now. We'll make $29.50 our second and final target. I'm not suggesting new positions at this time.

Sept. 11th, 2009 - entry price on TEX @ 18.25, option @ 4.40
symbol: HAG-AC, JAN 2010 $15 LEAP call - current bid/ask $8.80/9.00
-stop loss on TEX @ 16.75

Sell half (10/24/09), option at $8.80 (+100%)

-or-

Sept. 11th, 2009 - entry price on TEX @ 18.25, option @ 4.10
symbol: VXQ-AD, JAN 2011 $20 LEAP call - current bid/ask $7.50/8.30
-stop loss on TEX @ 16.75

Sell half (10/24/09), option at $7.50 (+82.9%)

Chart of TEX:


UYG $5.97 -0.16 - ProShares Ultra Financials (2x) ETF

The financial sector is struggling a bit. I wouldn't be surprised to see a correction toward $5.20-5.00. More conservative traders may want to sell all of their position now. 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 $22.29 -0.77 -- Vodafone Group

VOD gapped open higher on Thursday but then gave it all back in profit taking on Friday. Look for a dip toward $21.00. 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 $2.40/2.55
-stop loss on VOD @ 19.40

Chart of VOD:


X $40.87 -0.76 United States Steel Corp.

Warning! We are in real danger of getting stopped out here. Not only has X dropped back toward support near $40.00 but it has produced a bearish head-and-shoulders pattern. If X breaks $40 it's probably headed for $30.00, at least that's what the pattern is forecasting.

More conservative traders may want to exit early right now or buy some short-term puts. X reports earnings on Tuesday morning and we're at risk that the stock might gap down at the open on Tuesday. The November $35 puts are currently $0.45. If you choose to buy puts Monday is your only chance.

Our stop loss is at $39.75. I am not suggesting new LEAPS positions at this time. 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 $2.10/2.20
-stop loss on X @ 39.75

Chart of X:


XIDE $7.16 -0.15 Exide Technologies

The trading in XIDE has also taken on a bearish tone. Shares have pulled back to round-number support near $7.00. I wouldn't be surprised to see a correction back toward $6.50. 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 $1.10/1.25
-stop loss on XIDE @ 5.45

-or-

Buy the stock @ 6.50, stop loss at $5.45

Chart of XIDE:


CLOSED Plays

DISH $18.48 -0.28 -- Dish Network Corp.

The short-term trading action in DISH still looks bearish. The stock tried to bounce and failed. Now it's testing support near $18.00 and its 50-dma again.

Considering the market's recent weakness I am suggesting an early exit in DISH. Exit now and limit or avoid any losses. The 2010 January $15 calls closed with a bid at $3.30.

August 22nd, 2009 - entry price on DISH @ 17.18, option @ $3.20
symbol: HSW-AC, 2010 JAN $15 call - current bid/ask $3.30/3.50
-stop loss on DISH @ 15.45.

Early exit on 10/24/09. option was at $3.30 (bid).

Chart of DISH:


DO $105.80 -1.21 -- Diamond Offshore

Our plan was to close this DO play on October 21st at the closing bell to avoid holding over earnings. DO closed at $105.88 on Wednesday.

Sep 2nd, 2009 - entry price on DO @ 86.50, option @ 12.30
symbol: KWJ-AR, 2010 JAN $90 LEAP call -
-stop loss on DO @ 87.00

Exit Oct. 21st at the close: Option at $22.50 (+82.9%)

-or-

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

Exit Oct. 21st at the close: Option at $10.80 (+107%)

Chart of DO:


HOS $27.37 -1.31 -- Hornbeck Offshore Services

There is a chance that HOS will bounce from support near its trendline off the 2009 lows. I don't want to bet on it with just three months left. The stock is reversing after forming what appears to be a bearish double top. If you look at the weekly chart you might be able to argue that HOS has produced a bullish cup and handle formation. If that is the case then we can use a breakout over $31.00 as a new entry point.

I'm suggesting an early exit now to avoid this play turning into a loss. More aggressive traders may want to let it ride. Keep in mind that earnings are expected on November 5th.

June 27th, 2009 - entry price on HOS @ 21.20, option @ 4.90
symbol: HOS-AD, 2010 JAN $20 LEAP call - current bid/ask $ 7.20/ 8.50
-stop loss on HOS @ 21.90

Early exit on 10/24/09. option at $7.20 bid (+46.9%)

-or-

June 27th, 2009 - entry price on HOS @ 21.20, option @ 2.70
symbol: HOS-AE, 2010 JAN $25 LEAP call - current bid/ask $3.60/4.50
-stop loss on HOS @ 21.90

Early exit on 10/24/09. option at $3.60 bid (+33.3%)

Chart of HOS:



Watch

Ratchet Down

by James Brown

Click here to email James Brown


New Watch List Entries

BQI - Oilsands Quest, Inc.


Active Watch List Candidates

AVY - Avery Dennison

BUCY - Bucyrus Intl.

CHK - Chesapeake Energy Corp.

CR - Crane Co.

ESV - ENSCO Intl. Inc.,

GHM - Graham Corp.

MTW - Manitowoc Inc.

PCX - Patriot Coal Corp.

TRN - Trinity Industries

TXT - Textron Inc.


Dropped Watch List Entries

We're dropping BUCY.


New Watch List Candidates:

BQI $1.50 -0.02 -- Oilsands Quest Inc.

The sharp rally in crude oil has fueled a rally in non-traditional sources like the oil sands. The stock has built a significant base or bottom over the last several months and shares appear to be breaking out. Yet at the moment both oil and BQI look short-term overbought and due for some profit taking.

While I would be tempted to start buying the stock around $1.25 I'm actually setting our trigger to open bullish positions at $1.15. We'll use a stop loss at $0.90. Please use wise judgment when it comes to your position size. Don't over do it just because the stock is "cheap".

I'm setting our first target at $2.90.

Company Info:
Oilsands Quest Inc. is a public company (Amex: BQI) engaged in a variety of projects in the oil and gas industry in Western Canada with an emphasis on the oil sands. The company is aggressively exploring Canada's largest contiguous oil sands land holding, which is located in northeast Alberta and northwest Saskatchewan. Oilsands Quest is leading the development of an oil sands industry in the province of Saskatchewan. Oilsands Quest is incorporated in Colorado, U.S.A. Its main operating subsidiaries are Oilsands Quest Sask Inc., Township Petroleum Corporation and Oilsands Quest Technology Inc. (source: company press release or website)

Buy-the-Dip trigger: $1.15

BUY the stock at $1.15

Chart of BQI:


Active Watch List Candidates:


AVY $ 37.79 -0.53 -- Avery Dennison

AVY soared to new 2009 highs last week. Shares are very overbought and due for some profit taking. I would expect some selling after the company announces earnings on October 27th (before the market opens). A 50% correction of the current run would be about $31.55. We'll keep our trigger at $32.00 for now. I expect it will take a couple of weeks or longer before we're triggered. If triggered our stop loss is $29.40. Our long-term target is $44.50.

Buy-the-Dip trigger: $32.00

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

Chart of AVY:


BUCY $48.36 +5.83 -- Bucyrus Intl.

It looks like we missed the boat on BUCY. Shares rallied sharply into earnings and then soared on Friday after it reported earnings. I'm still bullish on the stock but short-term it's way too overbought to consider bullish positions.

I am removing it from the play list and will wait for a correction.

Chart of BUCY:


CHK $26.73 -1.21 -- Chesapeake Energy Corp.

Energy stocks look like they could still see some significant profit taking. I am moving our trigger to buy LEAPS on CHK down to $24.00. More conservative traders may want to move it down to $22.00. I'm adjusting the stop loss to $20.75. If triggered our target is $40.00.

Buy-the-Dip trigger: $24.00

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

Chart of CHK:


CR $27.19 -0.38 -- Crane Co.

CR is still consolidating sideways. That might change after the company reports earnings on October 26th. Our plan is to buy LEAPS on a dip at $24.25. If triggered our target is $34.75 and our stop is $21.90.

Buy-the-Dip trigger: $24.25

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

Chart of CR:


ESV $50.32 +1.13 -- ENSCO Intl. Inc.

ESV is showing relative strength and broke out to new highs on Friday. The stock is very overbought and due for a correction. I am raising our trigger from $40.00 to $42.00. If triggered at $42.00 we'll use a stop at $37.25. We're going to aim for the $55-60 zone.

Buy-the-Dip trigger: $42.00

BUY the 2011 January $45 call (VKS-AI)
(More aggressive traders may want to trade January 2010 or March 2010 calls instead)

Chart of ESV:


GHM $16.03 -0.52 -- Graham Corp.

The correction in GHM is right on schedule. The (new) plan is to buy June 2010 LEAPS 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.

We can now buy June instead of March calls. However, 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.

Buy-the-Dip trigger: $15.15

BUY the 2010 June $15.00 Call (GHM-FC)

or

BUY the stock (GHM) at $15.15

Chart of GHM:


MTW $11.63 +0.10 -- Manitowoc Inc.

MTW continues to hit new highs. The stock might see some profit taking after the company reports earnings on October 29th. I am raising our trigger to open bullish positions from $8.60 to $9.10. It may take a couple of weeks for MTW to hit our entry point. Our long-term target is $17.00.

Buy-the-Dip trigger: $9.10

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

or BUY the STOCK at $9.10

Chart of MTW:


PCX $11.57 -0.75 -- Patriot Coal Corp.

PCX has continues to correct as we expected. Please note that I'm adjusting our strategy to reduce our risk. Our new trigger to open positions is at $10.75. Our new stop loss is $9.75. Our long-term target is the $20-25 zone.

Investors may want to wait until after we see how the market reacts to the company's earnings on October 27th before considering new bullish positions.

Buy-the-Dip trigger: $10.75

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

or

Buy the stock @ 10.75.

Chart of PCX:


TRN $18.12 -0.50 -- Trinity Industries

Nothing has changed for us. TRN is still consolidating sideways. We want to buy LEAPS on a dip at $16.25. If triggered we'll use a stop at $13.90. I would use small positions (about 1/2 our normal trade or less). Earnings are expected on October 28th. Readers may want to wait and see the reaction to earnings first on the 29th before considering new positions.

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 $19.13 -0.51 -- Textron Inc.

TXT is still consolidating sideways but the tone has turned a bit more bearish. I am lowering our trigger to open positions from $16.25 to $15.00. If triggered we'll use a stop loss at $13.45. Our long-term target is the $30 region.

FYI: Earnings are October 27th before the opening bell. I would expect some profit taking after earnings.

Buy-the-Dip trigger: $15.00

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

Chart of TXT: