Option Investor
Newsletter

Daily Newsletter, Saturday, 11/21/2009

Table of Contents

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

Leaps Trader Commentary

Running Scared

by James Brown

Click here to email James Brown

November option expiration has come and gone and I've got good news and bad news. The good news is my commentary is going to be short tonight. The bad news is that you've only got 33 days left until Christmas. Just kidding. Actually the bad news is that nothing much has changed from the week before. Trading volume last week was extremely low. I guess that's a good thing considering we were down four days in a row. Lack of follow through on Monday's bullish breakout in the major indices was very disappointing.

Last weekend I said I was concerned by the growing number of failed rallies, bearish reversals and the ever popular bearish head-and-shoulders pattern. Unfortunately, the last five days of trading has only made the situation worse! The larger trend may still be up but momentum indicators are falling fast. Now traditionally the Thanksgiving shortened week tends to be a bullish one. This year could be different with the S&P 500 up 60% off its 2009 lows. If you thought last week's volume was low then this week's should be abysmally low.

I heard several comments about how fund managers are starting to play it safe by moving money into short-term treasuries. They may not be earning any interest but they're not at much risk either. Check out this chart of the yield on the short-term bonds. Ask yourself why fund managers would put their money into a note with a yield as close to 0.00% as you can get? Maybe this talk about money managers getting nervous is true.

Chart of the 13-week T-bill:

Overall I'm still very concerned by the under performance in the small cap names. Fund managers are definitely cautious and the small caps have produced a new lower high (see daily chart of the Russell 2000). You'll see a similar pattern (lower high) in the SOX semiconductor index. The group was clobbered on Thursday with a major downgrade but upward momentum had already stalled before the downgrade hit. Last week I mentioned how the financials had put in a new lower high. You'll also see a lower high in the oil service names as well as a few more sectors. The only groups that look bullish right now are drugs, retailers, and gold miners. Momentum in these last three groups is also starting to wane. The gold miners might be an exception but the price of gold looks very overbought and when it corrects the pull back in the miners could be painful.

On a short-term basis I'd keep my eye on the 1080 level for the S&P 500. If 1080 breaks down then we could be looking at a drop toward the November lows near 1030. Considering the bearish shadows growing across the market I would hesitate to launch new long-term LEAPS positions at this time. In the mean time, I wish everyone a wonderful Thanksgiving holiday!

We are looking at remodeling the various newsletters produced by Option Investor in 2010. It would really help us if you would take a couple minutes and answer the 10 questions about the LEAPS Trader Newsletter in the survey link below. Thank you in advance for your cooperation!

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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:

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:

Last week was definitely disappointing. Monday's bullish breakout over major resistance at 1100 on the S&P 500 failed to see any follow through. I'm hearing more and more market commentary about fund managers starting to play it safe as they try to hold on to gains going into the year end. Dollar strength is putting pressure on our commodity-related names (except for gold). My concern over the potential bearish head-and-shoulders patterns for the coal stocks in our portfolio has only gotten worse! More conservative traders may want to consider reducing their risk in these names or maybe an early exit.

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

Getting Promoted

by James Brown

Click here to email James Brown


This Ship Is Sailing Higher


GNK $25.46 +0.36 -- Genco Shipping

I am promoting GNK from our watch list to our play list. Shipping stocks have been showing relative strength throughout the month of November. GNK did see some profit taking on Thursday but it was due for a correction. Broken resistance near $24.00 offer new support. We were suggesting a trigger to buy LEAPS at $22.50, which is still a real possibility if the S&P 500 continues to slide lower. However, this stock has been marching to the beat of its own drum for months now and may not be so sensitive to the market's daily twists and turns.

I did recently read some commentary on how the shipping sector could be poised for trouble with a glut of new ships due to come online. Fortunately that appears to be a problem for the late 2010-early 2011 time frame. Short-term, if the global economy continues to improve, the shipping stocks should outperform.

Here's the plan. I would open small bullish LEAPS positions now. If the market does continue to retreat then we can look to add to our LEAPS position if GNK dips to and bounces near the $22.00 level. I'm listing our initial stop loss at $19.65, just under the simple 200-dma. More conservative traders may want to use a stop closer to $22.00 instead. Our long-term target is $39.00.

Use the 2011 January calls (Entry point - now, at current levels)

BUY CALL 2011 JAN $30.00 strike (OKJ-AF) current ask $5.00

Chart of GNK:



Play Updates

Most Commodity Names Weaken

by James Brown

Click here to email James Brown


Closed Plays


None.


Play Updates


ACI $22.26 -0.66 -- Arch Coal Inc.

It was not a good week for ACI. The stock produced a failed rally near $24.00 and broke technical support at the rising 50-dma. News that Goldman Sachs had raised their price target on ACI to $27 had no affect on the stock price. Shares of ACI appear to be building a bearish head-and-shoulders pattern with last week's high as the right shoulder. A breakdown under support at $20.00 would forecast a drop toward $14.00. More conservative traders may want to consider an early exit now. We have a long-term target on this stock so we're going to try and weather the volatility but we'll leave our stop loss at $19.40.

I am not suggesting new bullish positions at this time. 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 $2.20/2.50
-stop loss on ACI @ 19.40

Chart of ACI:


ANR $40.10 -0.22 - Alpha Natural Resources, Inc.

It looks like the rally in ANR is also running out of steam. Shares reversed at their October highs. Now we have a potential bearish double top pattern. I would expect a pull back toward $35 and possibly the exponential 200-dma. News that Goldman Sachs had raised their price target on ANR to $56 had no real affect on the stock. 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 $9.60/9.90
-stop loss on ANR @ 32.40
bought 1/2 LEAP position on 08/25/09 (option price @ 7.00)

Chart of ANR:


BAC $16.09 +0.01 - Bank of America Corp.

Shares of BAC did not make much progress last week even though billionaire hedge fund manager John Paulson made headlines with his call that BAC could double in the next two years. BAC has been bouncing around different technical levels with overhead resistance at its 40 and 50-dma(s) and support near its 10-dma and exponential 200-dma. If you take a step back it still looks like the oversold bounce has stalled at resistance. If you consider the S&P 500's recent weakness I would be cautious 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 $7.00/7.10
-stop loss on BAC @ 11.90

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

Chart of BAC


CHK $23.03 -0.35 -- Chesapeake Energy Corp.

It turned out to be an ugly week for CHK. The stock is down four days in a row after Monday's rally failed at its 20-dma. Natural gas futures have fallen to new multi-year lows, which is not helping the stock at all. The breakdown under $24.00 in shares of CHK is definitely bearish but the $22.00 level should be additional support with the simple 200-dma. I am adjusting our stop loss higher to 20.95. More aggressive traders may want to keep their stops under $20.00, which should be psychological round-number support. I'm not suggesting new long-term positions at this time. 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 $3.70/3.80
-stop loss on CHK @ 20.95

Chart of CHK:


CNX $46.00 -1.55 -- Consol Energy Inc.

Trading has definitely taken a bearish turn for the worse in CNX. This is another coal stock that's building a bearish head-and-shoulders pattern and if CNX closes under the neckline at $42.00 it will project a bearish target of $32.00. If that wasn't bad enough CNX just produced a short-term bearish double top near $50.00. News that Goldman Sachs had raised their price target on CNX to $58 had no affect at all.

I am adjusting our stop loss higher to $41.00 since the $42.00 level should be support. More conservative traders may want to exit early right now! I'm not suggesting new positions. 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 $12.30/13.40
-stop loss on CNX @ 41.00

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

Chart of CNX


DE $50.83 -0.06 -- Deere & Co.

DE produced some fireworks last week with a bullish breakout over major resistance at the $50.00 level. Shares hit our trigger to buy LEAPS at $51.00 on Wednesday, November 18th. Our estimated entry price on the 2011 January $50 call option is $8.75. I would still consider bullish positions now. However, with the S&P 500 looking vulnerable to more selling pressure I'd probably start with a small position that you can add to over time once the market looks a little stronger.

Our long-term target on DE is $69.50. 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. The results could produce some volatility. More cautious traders might want to consider some put protection.

Nov 18th, 2009 - entry price on DE @ 51.00, option @ 8.75(estimate)
symbol: VER-AJ, 2011 JAN $50 LEAP call - current bid/ask $ 8.35/ 8.55
-stop loss on DE @ 44.00

Chart of DE:


EMR $41.68 -0.18 -- Emerson Electric Co.

EMR has managed to keep a relatively bullish posture but the rally did stall last week at its 200-weekly moving average. Traders bought the dip near short-term support at $41.00 on Friday but I wouldn't be surprised to see a dip closer to $40.00 or even back to $38.00 if the market really turns south. Another bounce near $38 and its rising 100-dma is where I'd look for a new long-term entry point. 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 $5.80/6.20
-stop loss on EMR @ 33.50.

Chart of EMR:


FSLR $121.18 + 0.05 -- First Solar

FSLR tried another oversold bounce but it's already rolling over. I would focus on potential support at its September 2009 lows near $112. If that fails I'd look for possible support near $100.

We're not suggesting new positions at this time. Currently we are 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) $3.20.
If you're curious the 2010 Jan. $150 call is at $ 2.09.

Chart of FSLR


FST $17.68 -0.56 -- Forest Oil Corp.

It has been a truly terrible week for FST. The Monday rally reversed midday and it's been down hill ever since. Shares broke support at $18.00 and at the 100-dma. The early October low was $17.43 and shares hit $17.40 on Friday. The 200-dma near $17.00 should offer a little more support but that means our stop loss at $17.35 is too close. I'm adjusting our stop loss down to $16.85. FST is very short-term oversold and due for a bounce. Unfortunately stocks can always grow more oversold and the broader market doesn't look super strong right here. 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 $3.10/3.50
-stop loss on FST @ 16.85

Chart of FST:


GHM $18.86 -0.13 -- Graham Corp.

GHM extended its gains and hit new 2009 highs over the $20.00 level last week. The relative strength here is very encouraging but the stock is now short-term overbought and probably due for a correction. I'd look for short-term support in the $17.00-16.00 zone.

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 $5.00/5.40
-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 $19.24 -0.06 -- Intel Corp.

It was a rough week for the semiconductor stocks after the sector was downgraded on Thursday. Shares of INTC gapped open lower and fell toward the rising 100-dma on the downgrade. The analyst who issued the downgrade felt that inventories were rising too fast for current demand. I am seeing some bearish divergences between Intel's stock price and some of its technical indicators. It's certainly not a healthy sign for the stock. I'm concerned that last week could be a new lower high in a larger rounded top for INTC. More conservative traders may want to start taking some money off the table now. I would seriously consider closing all or part of the trade if INTC closes under $18.00 but I've been predicting that the stock will eventually fill the gap near $17.00. Shares should have support near the 200-dma and the $16.00 level.

An alternative stop loss strategy would be to put a stop on your LEAPS option instead of focusing on shares of Intel. If you choose this route I'd put the stop at breakeven. 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 $2.18/2.22
-stop loss on INTC @ 15.90.

Chart of INTC:


MTW $10.56 -0.35 -- Manitowoc Inc.

The rally in MTW is starting to roll over. Shares have found short-term support near $10.50 but I don't think it will hold. If the S&P 500 continues to slide lower we could see MTW dip toward its exponential 200-dma or worse, back to the $8.00 level. 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 $3.30/3.60
-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 $50.06 -0.98 -- Petroleo Brasiliero

Last week most of the energy sector turned lower. Shares of PBR managed to hit new 2009 highs. It could hold those highs but the stock out performed most of its peers. Unfortunately, if crude oil reverses lower on continued dollar strength PBR may not be able to maintain this strength.

NOTE: I want to repeat some earlier comments. We only have a few weeks left with our options expiring in January 2010. More conservative traders may want to exit early right now to avoid potential losses.

I would continue to look for support in the $46-45 zone. I'm inching our stop loss up to $44.40. 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 $3.00/3.15
-stop loss on PBR at $44.40

Chart of PBR:


PEP $62.08 +0.20 -- PEPSICO Inc.

As investors get nervous they're starting to put money into more defensive names and PEP has been able to stay near its 2009 highs. If shares see any profit taking look for support near the rising 50-dma (bottom of the bullish channel). I am not suggesting new bullish positions at this time.

I am adjusting our stop loss up to $54.95. 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 $6.20/6.60
-stop loss on PEP at $54.95

Chart of PEP:


RAI $50.88 +0.08 -- Reynolds American Inc.

Not much has changed for RAI. The stock continues to look strong. Broken resistance at $50.00 should be new support. 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 $10.60/11.10
-stop loss on RAI at $43.40

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

Chart of RAI:


RGLD $52.94 -0.34 -- Royal Gold Inc.

Gold has continued to hit new all-time highs in spite of a bounce in the U.S. dollar. Gold miners have continued to climb in gold's shadow. RGLD is also hitting new all-time record highs.

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 $7.30/8.10
-stop loss on RLGD @ 41.95

Chart of RGLD


TEX $20.30 -0.80 -- Terex Corp.

Uh-oh! The bulls are in trouble here. Round-number support at $20.00 is holding for now but shares of TEX have broken technical support at their 50-dma. This is a serious break in the stock's bullish up trend. I would expect a dip back toward $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 $5.63 -0.06 - ProShares Ultra Financials (2x) ETF

It was a forgettable week for UYG. This financial ETF has been churning sideways. Unfortunately I'm seeing more and more of a bearish title so some of the technical indicators. More conservative traders may want to exit completely right here. I am raising our stop loss to $4.80. More cautious traders could up their stop toward the 100-dma.

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: 4.80)

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

Chart of UYG:



Watch

Watching the Small Caps

by James Brown

Click here to email James Brown


New Watch List Entries

None.


Active Watch List Candidates

BQI - Oilsands Quest, Inc.

DSX - Diana Shipping Inc.

ESV - ENSCO Intl. Inc.,


Dropped Watch List Entries

DE (Deere & Co) has graduated to our play list.
GNK is being promoted to the play list. Check the new play section.


New Watch List Candidates:

Editor's Note:

I am still concerned by the relative weakness in the small cap stocks (I mention them in tonight's commentary). We're also seeing lower highs in the semiconductor sector, which tends to lead the NASDAQ. Meanwhile the transportation sector failed to hit new highs last week.

We will want to wait for a new closing high on the S&P 500 or a hefty correction before we get serious about launching new LEAPS positions. I'm not adding any stocks to the watch list tonight.

Active Watch List Candidates:


BQI $1.11 -0.06 -- Oilsands Quest Inc.

Strength in the U.S. dollar and lackluster demand is dragging crude oil futures lower. This is pushing the energy sector lower as well. It looks like BQI is poised to hit our trigger at $1.05 soon. More conservative traders may want to adjust their trigger down to $1.00. I'm going to try and reduce our risk by edging our stop loss up to $0.89.

Use wise judgment when it comes to your position size. Don't overdo 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:


DSX $17.25 +0.56 - Diana Shipping Inc.

DSX is starting to correct after its astonishing November rally. You may have read some commentary about how the shipping sector could suffer as new ships come online and flood the market with "supply". I believe that's a late 2010-early 2011 challenge. The next six months could still be very positive for the shipping stocks.

I'm going to keep our trigger at $14.50 for now but more aggressive traders may want to consider opening bullish positions on a dip near $15.50 instead. 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.

Buy-the-Dip trigger: $14.50

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

Chart of xxx:


ESV $44.34 -1.22 -- ENSCO Intl. Inc.

The correction in ESV continues. The stock broke down under technical support at its 50-dma. Yet the long-term trend is still higher. ESV should find stronger support near $42.00, which is where you'll see the trendline from its 2009 lows and its rising 100-dma. We have a trigger at $42.50. 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: