Option Investor
Newsletter

Daily Newsletter, Saturday, 11/14/2009

Table of Contents

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

Leaps Trader Commentary

Fragmentation

by James Brown

Click here to email James Brown

Investors need to be careful here. The long-term trend is still up but we're starting to see a lot of fragmentation in the market. Significant sectors in the market like financials and small caps have been under performing. We're seeing a lot of bearish reversals and failed rallies and quite a few bearish head-and-shoulders patterns are forming. Of course these aren't guarantees that stocks will turn lower. One of the S&P 500's biggest rallies was just last July when it reversed higher from a bearish head-and-shoulder pattern, which fueled massive short squeeze for several days.

I find that the tone last week was somewhat encouraging. It seems that traders are ignoring bad news and only choosing to focus on good news again. That's a tough market to be bearish in. Did you know that last week Realty Trac said there were more than 320,000 foreclosure notices filed in October? It didn't get a lot of play in the media. October was the eight month in a row that foreclosure filings came in at more than 300,000. Eight months ago 300,000 was an all-time, historical high for foreclosure filings. Now it's ignored by the market. Regular readers already know my bearish stance on real estate so I won't bore you with it tonight.

Let's take Friday's consumer sentiment data as another example. Economists were expecting a rise from 70.6 in October to 71.0 in November. The University of Michigan said their survey of consumers showed a drop in sentiment to 66.0. What did the market do? It shrugged it off. The data for this consumer sentiment was taken before the last jobs report revealed that unemployment had hit 10%. It would be easy to think that consumer sentiment has sunk even further given all the press about double-digit unemployment.

Sinking consumer sentiment is fundamentally bearish for retailers. Just don't tell the retail stocks. They're in rally mode. The RLX retail index hit new 2009 highs last week. We are going to hear from several more retailers this week when they announce their third quarter earnings reports. It will be interesting to see if investors continue to ignore bad news.

I'm going to keep my commentary brief tonight. Essentially I'm concerned by the relative weakness in small caps. Big caps are out performing because fund managers are nervous and it's easier to get your money out of large, liquid big cap names if you need to retreat quickly. I'd like to see the S&P 500 breakout over the 1100 level before committing any new capital to the market. A lot of the bulls out there are looking for a rally to 1200 or higher. I'd probably wait for the S&P 500 to close over 1105 or 1110 before putting any more money to work in stocks.

Chart of the S&P 500 Index:

Weekly Chart of the S&P 500 Index:

Chart of the Russell 2000 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 (some analysts are predicting it will not show up until 2011). Lousy consumer spending, rising foreclosures, and lagging job growth will be the main culprits. Several 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 and 2011. 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:

Most of our portfolio posted gains for the week but I'm concerned that several stocks produced a bearish reversal on Wednesday or Thursday. I'm really concerned about our exposure to the coal sector. Several coal names are forming a bearish head-and-shoulders pattern. On the positive side of the slate shares of MSFT hit our final target at $29.75 closing the play.

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

No Conviction

by James Brown

Click here to email James Brown


Market Indecision


Editor's Comments:

Stocks act like they want to move higher but volume on the two-week rally has been pretty light. Complicating matters is relative weakness in the small cap names. The rebound in the transports has been steady but the transportation index could be forming a bearish head-and-shoulders pattern. Actually I'm seeing possible H&S patterns all over the market.

I'm suggesting investors wait and see if the S&P 500 can get over the crucial 1100 level. We'll study how the rest of the market reacts to the move (or reversal) before launching new trades.



Play Updates

Microsoft (MSFT) Tags Our Target

by James Brown

Click here to email James Brown


Closed Plays


Microsoft (MSFT) hit our exit target near $30.00.


Play Updates


ACI $22.73 +0.03 -- Arch Coal Inc.

I'm seeing a lot of mixed signals in ACI and many of the coal stocks. Last week it looks like ACI has produced a bearish reversal with the failed rally near $24.00. Yet shares have been finding support near the rising 50-dma. At the same time it looks like ACI is forming a bearish head-and-shoulders pattern. That's what really worries me here. The stock should have additional support at the exponential 200-dma and then a little lower at the $20.00 level. Yet if ACI dips that low the H&S pattern will look even worse (stronger).

I am not suggesting new bullish positions right here and if the S&P 500 fails at the 1100 level we might want to jump out of this trade early!

Our long-term target is the $30 region.

May 14th, 2009 - entry price on ACI @ 16.00, option @ 2.40
symbol: OSE-AF, 2011 JAN $30 LEAP call - current bid/ask $2.55/2.65
-stop loss on ACI @ 19.40

Chart of ACI:


ANR $39.31 +0.03 - Alpha Natural Resources, Inc.

ANR is another coal stock that looks like it could be forming a bearish head-and-shoulders pattern. The peak last week could be the second shoulder. I'm not suggesting new bullish positions at this time.

Our long-term target is the $50-60 zone.

Aug. 25th, 2009 - entry price on ANR @ 34.00, option @ 7.00
symbol: VJV-AH, 2011 JAN $40 LEAP call - current bid/ask $8.90/9.50
-stop loss on ANR @ 32.40
bought 1/2 LEAP position on 08/25/09 (option price @ 7.00)

Chart of ANR:


BAC $15.98 +0.08 - Bank of America Corp.

BAC delivered a decent bounce last week but the rally stalled at technical resistance near the 50-dma. The financials have under performed the rest of the market and last week could be a new "lower high". If the S&P 500 can close over the 1100 then I expect the financials to try and catch up with the rest of the market. If the S&P 500 reverses then bulls are in serious trouble and traders will want to consider exiting early!

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 $7.05/7.10
-stop loss on BAC @ 11.90

10/31/09 Sell Half -- option at $6.00 (+152%)

Chart of BAC


CHK $25.03 +0.32 -- Chesapeake Energy Corp.

CHK is still trying to rebound from its early November low. Unfortunately crude oil looks vulnerable to more profit taking and natural gas prices are sinking to new lows on record-high storage and lackluster demand. The $22-24 zone should be support but we may get a better entry point a week or two from now. I'm not suggesting new positions just yet. Our long-term target is $40.00.

Oct 30th, 2009 - entry price on CHK @ 24.00, option @ 4.70
symbol: VEC-AE, JAN 2011 $25 LEAP call - current bid/ask $4.95/5.05
-stop loss on CHK @ 20.75

Chart of CHK:


CNX $46.84 -0.09 -- Consol Energy Inc.

CNX is yet another coal stock that appears to be building a bearish head-and-shoulders pattern. If you have positions in more than one coal stock you may want to pare them down so that you only have exposure to one stock in the same sector, especially with the group looking vulnerable to more selling pressure.

I find the action on CNX's daily chart pretty bearish and more conservative traders will want to consider an early exit right now (and lock in a gain)!

The $42.50-40.00 zone should be support but if CNX does pull back it will only strengthen the bearish H&S pattern. A close under $42.50 would forecast a decline toward $32.50. I am raising our stop loss to $39.50.

I'm 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 @ 7.80(estimate)
symbol: VTL-AH, 2011 JAN $40 LEAP call - current bid/ask $12.90/14.30
-stop loss on CNX @ 39.50

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

Chart of CNX


EMR $41.77 +0.44 -- Emerson Electric Co.

EMR has been trading sideways this past week in the $41-42 zone. If the S&P 500 can breakout over the 1100 level then we can expect EMR to follow it higher. Otherwise, a breakdown from here could look like a big double top pattern. I am not suggesting new positions at this time. Our target is $47.50.

Sept. 8th, 2009 - entry price on EMR @ 38.00, option @ $4.50
symbol: VHH-AH, 2011 JAN $40 call - current bid/ask $5.80/6.10
-stop loss on EMR @ 33.50.

Chart of EMR:


FSLR $118.29 + 2.92 -- First Solar

The trend in FSLR is still down. Shares might find some support at their September lows near $112. If that fails I'd look for possible support near $100.

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 $90.

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%) if FSLR is above $150.00.

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) $4.05.
If you're curious the 2010 Jan. $150 call is at $ 2.07.

Chart of FSLR


FST $19.90 -0.08 -- Forest Oil Corp.

It has not been a good week for the oil refiners. FST produced a bearish reversal pattern near $22.00 on the 11th. I suspect that shares will correct toward $18.00, which should be support. If you don't want to endure that sort of pull back then consider an early exit now. I'm not suggesting new bullish positions at this time. Our long-term target is $37.50.

Oct 15th, 2009 - entry price on FST @ 23.85, option @ 7.40
symbol: OJG-AD, 2011 $20 LEAP call - current bid/ask $4.50/4.90
-stop loss on FST @ 17.35

Chart of FST:


GHM $16.78 +0.37 -- Graham Corp.

GHM hasn't made much progress. Shares have been consolidating sideways near $17.00 the last several days. Volumes have been very, very light. I might consider new bullish positions if we see another bounce from the $15.00 level near its exponential 200-dma and its trendline of higher lows.

Our target is $24.00. Our stop is at $12.40.

Oct 26th, 2009 - entry price on GHM @ 15.15, option @ 2.65
symbol: GHM-FC, 2010 JUNE $15 call - current bid/ask $3.40/3.90
-stop loss on GHM @ 12.40

- or -

Oct. 26th 2009 - entry price on GHM (the stock) @ 15.15
- stop loss on GHM @ 12.40

Chart of GHM:


INTC $19.82 +0.14 -- Intel Corp.

The oversold bounce in INTC continued last week but it may have peaked near $20.50 on Thursday. There was big news in the semiconductor sector. It seems that Intel is making a huge gamble that it will be cheaper to pay off rival AMD with a $1.25 billion settlement and promises to play nice than to keep fighting various anti-trust and other legal battles around the globe over the next several years.

Shares of AMD surged more than 20% on the news while INTC only spike to $20.50 and retreated. This could end up being a new lower high, which is bearish and suggest INTC has further to correct.

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 $2.54/2.59
-stop loss on INTC @ 15.90.

Chart of INTC:


MTW $10.75 -0.04 -- Manitowoc Inc.

MTW managed another gain for the week but the action last week actually looks bearish. I would expect a pull back toward $10.00 and its rising 50-dma. I'm going to raise our stop loss to $7.90 since the $8.00 level should be strong support. I'm not suggesting new positions at this time. Our long-term target is $17.00.

Oct 30th, 2009 - entry price on MTW @ 9.10, option @ 2.61
symbol: VMT-AB, 2011 JAN $10 call - current bid/ask $3.40/3.70
-stop loss on MWT @ 7.90

- or -

Oct. 30th 2009 - entry price on MTW (the stock) @ 9.10
- stop loss on MTW @ 7.90

Chart of MTW:


PBR $50.18 +0.90 -- Petroleo Brasiliero

PBR is still out performing many of its peers in the oil sector but shares are stuck under resistance at the $52.00 level. I'm concerned that if crude oil does break down from here that PBR will correct toward the $46-45 zone.

The company reported earnings after the closing bell on Friday. I'm not seeing any big reaction in after hours trading but that doesn't mean much on a Friday night. I'm not suggesting new bullish positions at this time.

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 $3.30/3.40
-stop loss on PBR at $43.40

Chart of PBR:


PEP $61.94 +0.67 -- PEPSICO Inc.

PEP's larger trend is still up but shares produced a bearish reversal at resistance near the October highs. This could be the beginning of a bearish double top pattern. I am not suggesting new bullish 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 $6.30/6.60
-stop loss on PEP at $51.50

Chart of PEP:


RAI $50.32 +1.00 -- Reynolds American Inc.

RAI has started showing some relative strength again. Friday's bullish breakout over round-number resistance at $50.00 is very positive. I am raising our stop loss to $43.40. 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 @ $4.50(estimate)
symbol: OWO-AH, 2011 JAN $40.00 LEAP call - current bid/ask $ 9.60/10.70
-stop loss on RAI at $43.40

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

Chart of RAI:


RGLD $50.95 +1.01 -- Royal Gold Inc.

Weakness in the U.S. dollar has pushed gold futures toward new all-time highs near $1,120 an ounce. Yet the rally in the gold miners paused a bit last week. Shares of RGLD appear to have formed a mini bull-flag consolidation pattern. We're still bullish here. I would launch new positions now. More conservative traders might want to wait for a little more confirmation and look for a move over $52.50 to initiate a trade.

We'll use a stop loss at $41.95, which is under the 200-dma. The Point & Figure chart has a new buy signal with a $72 target. Our target to exit is $64.50.

Nov. 7th, 2009 - entry price on RGLD @ 50.70, option @ 7.50
symbol: ZMO-AL, 2011 JAN $60 LEAP call - current bid/ask $6.80/7.30
-stop loss on RLGD @ 41.95

Chart of RGLD


TEX $21.08 -0.45 -- Terex Corp.

The bounce in TEX is losing momentum. Shares look poised to breakdown under technical support at the 50-dma soon. If TEX does correct lower look for support near $18.00. I'm not suggesting new positions at this time.

Our final target is $29.50.

Sept. 11th, 2009 - entry price on TEX @ 18.25, option @ 4.10
symbol: VXQ-AD, JAN 2011 $20 LEAP call - current bid/ask $5.70/6.60
-stop loss on TEX @ 17.75

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

Chart of TEX:


UYG $5.67 -0.01 - ProShares Ultra Financials (2x) ETF

Investors have another tough decision to make. Do you exit early now after the UYG produced a bearish failed rally pattern under $6.00 last week? Or you do keep the position open because the S&P 500 might breakout over resistance at the 1100 level and drag the financials higher in spite of themselves?

We've already taken profits once and the $5.00 level has proven to be support thus far. I'm willing to hold on here and ride it out for now. More conservative traders may want to exit early. I am not suggesting new positions at this time. Our second and final target is $9.50.

FYI: 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: 4.40)

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

Chart of UYG:


CLOSED Plays

MSFT $29.63 +0.27 -- Microsoft Corp.

Target achieved. Shares of MSFT have been showing a lot of relative strength. The stock tagged a new 2009 high at $29.79 on Friday thanks to some positive analyst comments and a new $34 price target. Our final target to take profits was at $29.75 so our play is closed.

June 2nd, 2009 - entry price on MSFT @ 21.60, option @ 2.20
symbol: VMF-AE, 2011 Jan. $25 call - current bid/ask $6.25/6.30
-stop loss on MSFT @ 21.95.

11/13/09 - Final Exit @ 29.75, option @ 6.33 (+187.7%)

10/31/09 - Sell Half @ 27.73, option @ 4.80 (+118%)

Chart of MSFT:



Watch

New Candidates to Watch

by James Brown

Click here to email James Brown
Editor's Note:

Investors should remain cautious with the S&P 500 under resistance at the 1100 level and the small cap Russell 2000 under performing the rest of the market.

I'm removing a few candidates where the trigger is just too far away to be practical and replacing them with more realistic watch list candidates.


New Watch List Entries

DE

DSX

GNK


Active Watch List Candidates

BQI - Oilsands Quest, Inc.

ESV - ENSCO Intl. Inc.,

TXT - Textron Inc.


Dropped Watch List Entries

AVY - Avery Dennison
CR - Crane Co.
PCX - Patriot Coal Corp.
TXT - Textron Inc.


New Watch List Candidates:

DE $47.58 +0.17 -- Deere & Co.

If the economy is recovering then business should start picking up for DE. Check out the stock's long-term weekly chart. Shares have built a huge base with resistance at $50.00. A breakout over $50 would be an excellent entry point for bullish positions.

I'm suggesting a trigger to buy LEAPS at $51.00. If triggered our long-term target is $69.50. Currently the Point & Figure chart is bullish with a $66 target. FYI: Readers will want to note that DE is due to report earnings around November 25th.

Company Info:
John Deere consists of three major business segments (agriculture and turf, construction and forestry, and credit). Those segments, along with the support operations of parts and power systems, are focused on helping customers be more productive as they help to improve the quality of life for people around the world. The company's products and services are primarily sold and serviced through John Deere's dealer network. (source: company press release or website)

Breakout trigger: $51.00

BUY the 2011 January $50 LEAPS (symbol: VER-AJ)

Chart of DE:


DSX $16.30 +0.75 - Diana Shipping Inc.

The shipping stocks have been soaring on strength in the Baltic Goods Index, which measures prices (and thus demand) for transporting goods by freighter. Shares of DSX have rallied to new multi-month highs. The bullish breakout is great but DSX actually looks a little overbought here.

I'm suggesting investors buy LEAPS on a dip at $14.50. This is a volatile sector so I wouldn't be surprised to see a retracement toward $14.00. The P&F chart is currently bullish with a $23.00 target. If we're triggered at $14.50 I'm setting our long-term target at $24.00. We'll use a stop loss at $11.85.

Company Info:
Diana Shipping Inc. is a global provider of shipping transportation services, and specializes in transporting dry bulk cargoes, including such commodities as iron ore, coal, grain and other materials. The Company is incorporated in the Marshall Islands; our principal executive offices are in Athens, Greece. (source: company press release or website)

Buy-the-Dip trigger: $14.50

BUY the 2011 January $15.00 LEAPS (symbol: XDJ-AC)

Chart of DSX:


GNK $24.91 +0.81 -- Genco Shipping

GNK is another shipping stock that's showing lots of relative strength. Shares broke out over resistance near $24.00 last week but shares look overbought with a 25% rally off its November lows. The big volume on the rally is bullish but I don't want to chase it here, not with the S&P 500 still under resistance.

I'm suggesting readers use a trigger at $22.50 to buy LEAPS. If triggered we'll use a stop loss at 18.90 and set our long-term target at $39.00. The P&F chart is bullish with a $40 target.

Company Info:
Genco Shipping & Trading Limited is an international ship owning company. We transport iron ore, coal, grain, steel products and other drybulk cargoes along worldwide shipping routes. Our wholly owned modern fleet of dry cargo vessels consists of Panamax, Handymax and Handysize vessels that provide an essential link in international trade. Ours is a global industry and Genco Shipping & Trading Limited is very well placed to serve it professionally and competitively (source: company press release or website)

Buy-the-Dip trigger: $22.50

BUY the 2011 January $30 call (symbol: OKJ-AF)

Chart of GNK:


Active Watch List Candidates:


AVY $ 39.21 +0.52 -- Avery Dennison

I am dropping AVY as a watch list candidate. The trend is up but shares are too extended to consider long-term positions. More nimble traders may want to watch it for a short-term trade.

I'm putting it on my personal watch list for a pull back toward its long-term trendline of higher lows (just watch the 100-dma). Our trigger was at $31.50, which seems a bit too far away.


BQI $1.21 -0.06 -- Oilsands Quest Inc.

Crude oil looks vulnerable to more selling. That could be the catalyst we need to pull BQI down toward round-number support at the $1.00 level.

We are keeping our trigger on BQI at $1.05. If triggered our stop loss is at $0.85. 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 long-term target at $2.90.

Buy-the-Dip trigger: $1.05

BUY the stock (not options) at $1.05

Chart of BQI:


CR $29.02 +0.20 -- Crane Co.

I'm removing CR as a watch list candidate. The long-term trend is still bullish but we need to see a correction first. Shares should have some support in the $25-24 zone. I'm moving it to my personal watch list for a dip near its 100-dma. Our last trigger was un-hit at $22.60.


ESV $45.94 +0.84 -- ENSCO Intl. Inc.

ESV has pulled back toward short-term support in the $44.50 zone. Short-term technical indicators have turned bearish. If the market corrects we have a good chance of getting triggered at $42.50. More conservative traders may want to use a trigger closer to $40.00 and its 100-dma. If triggered at $42.50 we'll use a stop at $37.25. Our target is the $55-60 zone.

Buy-the-Dip trigger: $42.50

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:


PCX $12.92 +0.22 -- Patriot Coal Corp.

I'm dropping PCX from the watch list. We already have multiple coal stocks in our LEAPS portfolio. Almost all of them, including PCX, are forming a bearish head-and-shoulders pattern. I'd still keep an eye on PCX for support near its 200-dma. Of course it would have to break round-number support near $10.00 first.


TXT $19.81 -0.15 -- Textron Inc.

I'm dropping TXT as a bullish LEAPS candidate. The stock appears to be forming a bearish double top with the peaks in September and now in November. A strong close over the $21.00 level could change our perspective. Nimble traders may want to consider bearish positions if TXT breaks down under $17.50.