Option Investor
Newsletter

Daily Newsletter, Saturday, 12/19/2009

Table of Contents

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

Leaps Trader Commentary

Could Be A Quiet Christmas

by James Brown

Click here to email James Brown

We are another week closer to Christmas and another week older but the stock market remains stuck in its trading range. I can sum up my commentary tonight in three words: nothing has changed. Short-term the economic picture is still improving with rising retail sales, an improvement in business inventories, manufacturing is looking better. There was a hiccup last week in the New York Fed Empire State index, which plunged unexpectedly. Yet this was balanced out (somewhat) by an improvement in the Philly Fed index a couple of days later.

The FOMC meeting last week failed to push the market from its trading range in spite of the bullish overtures and the continuation of the extended period of low interest rates. For the most part the stock market has been disconnected from the dollar's rise and even some of the commodities are fighting the uptrend in the dollar, which is normally bearish for commodities.

This week we've got the Chicago area Fed National Activity index and the Richmond Fed Manufacturing survey but the New York and Philly surveys failed to move the markets so I don't expect these will either. Tuesday will bring the latest revision to GDP and as long as the report isn't wildly outside of expectations the market will probably ignore it.

We have two weeks left for 2009 for a total of eight trading days. Fund managers have already placed their bets for the remainder of the year. Thus they have no need or desire to rock the boat or put more money at risk. This will probably keep the major indices range bound although I suspect we will still see a drift higher. There is probably going to be some last minute window dressing before the quarter ends. The rest of the year is going to be quiet and as long-term traders we won't see much action.

Now January is another story. Odds are growing that the market could see a correction in the middle of January only to bounce once earnings season begins. That's when we need to be active and use the pull back to launch new positions. Just keep in mind we may need to exit sooner than expected given my long-term outlook for the market.

I want to wish all of our readers a wonderful holiday and a very merry Christmas. Thank you for subscribing!

Chart of the S&P 500 Index:

Weekly Chart of the S&P 500 Index:

Weekly Chart of the Transportation Index:

Chart of the Russell 2000 Index:

Chart of the NASDAQ Composite:

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

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Portfolio

Portfolio Update

by James Brown

Click here to email James Brown


Current Portfolio


Portfolio Comments:

The sideways consolidation in the S&P 500 has reached six weeks now. Many of our candidates are following the market sideways. However, a few are showing relative strength. The rebound in the coal industry has been very encouraging. You'll notice that ORCL and UNH have made it to the list as both stocks broke out over major resistance.

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

Looking Ahead

by James Brown

Click here to email James Brown


Eight Trading Days Left in 2009


Editor's Note:

The stock market remains stuck in a trading range. While I'd like to think the market will breakout higher it looks like odds are growing for a correction in January. That's okay. We could use the pull back as a new entry point to launch positions. Unfortunately that's going to require some patience on our part as we wait for January to get here. Sometimes the best trade is no trade at all.

FYI: If you must buy something I think Kansas City Southern (KSU) looks good. The stock is outperforming its peers and has broken out over resistance at $30.00. Your challenge will be where to place the stop loss since we're expecting a market-wide dip in January.

No new trades tonight.


Play Updates

Software and Healthcare Make the List

by James Brown

Click here to email James Brown


Closed Plays


None.


Play Updates


ACI $21.21 +0.21 -- Arch Coal Inc.

The December bounce in ACI has stalled but the short-term trend is still up. Investors bought the dip twice near $20.80. ACI still has technical resistance at the 50-dma and some price resistance near $22.00 and again near $24.00.

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 $1.50/1.60
-stop loss on ACI @ 19.40

Chart of ACI:


ANR $43.50 +0.12 - Alpha Natural Resources, Inc.

It has proven to be a strong couple of weeks for ANR. The stock broke out to new 2009 highs this past week. I'm not suggesting new bullish positions at this time. Our LEAPS positions has turned positive.

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 $10.80/11.40
-stop loss on ANR @ 32.40
bought 1/2 LEAP position on 08/25/09 (option price @ 7.00)

Chart of ANR:


BAC $15.03 +0.17 - Bank of America Corp.

Financials continue to underperform the rest of the market. The sector managed a bounce on Friday but the short-term trend is still a bearish one of lower highs and lower lows. If the situation doesn't change we can expect BAC to drift toward our stop loss at $13.85. I am not suggesting new long-term LEAPS 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 $5.90/5.95
-stop loss on BAC @ 13.85

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

Chart of BAC


BQI $1.13 -0.00 -- Oilsands Quest Inc.

Oil is bouncing off its December lows but the strength in the dollar is pressuring this commodity. Crude oil prices need to be relatively high to make pulling oil out of the oil sands a worthwhile endeavor. Shares of BQI tagged the $1.05 level again. I would still consider buying the dips in the $1.05-1.00 zone but readers may want to wait for a new relative high instead. Our long-term goal is $2.90.

Nov 27th, 2009 - entry price on BQI @ 1.05, (buy the stock)
-stop loss on BQI @ 0.89

Chart of BQI:


CHK $26.06 +1.06 -- Chesapeake Energy Corp.

The combination of a cold snap across much of the country and a huge winter storm that has started hitting the Eastern U.S. has sent natural gas prices higher. Natural gas inventories saw their biggest one-week drop in inventories, for this time of year, ever as consumer kept the heat on. The rise in natural gas helped fuel the rebound in CHK. This stock has broken out past resistance near $25.00 and its 100 and 50-dma. Investors can use this move as a new bullish entry point to buy call LEAPS. 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 $4.85/5.00
-stop loss on CHK @ 20.95

Chart of CHK:


CNX $47.48 +1.41 -- Consol Energy Inc.

The rebound in CNX continues. The stock ha now cleared technical resistance at its 50-dma. I am not suggesting new bullish 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 $12.90/13.50
-stop loss on CNX @ 41.00

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

Chart of CNX


DE $54.83 +0.69 -- Deere & Co.

It's been a good week for DE with the stock bouncing back toward its 2009 highs. I am not suggesting new bullish positions at this time. We might get a new entry point on a January pull back.

Our long-term target on DE is $69.50. The Point & Figure chart is bullish with a $66 target.

Nov 18th, 2009 - entry price on DE @ 51.00, option @ 8.75(estimate)
symbol: VER-AJ, 2011 JAN $50 LEAP call - current bid/ask $10.30/10.45
-stop loss on DE @ 44.00

Chart of DE:


EMR $41.78 +0.28 -- Emerson Electric Co.

EMR, like the S&P 500, remains stuck in its sideways trading range. Although EMR has a much stronger longer-term trend of higher lows. There is no change from my prior comments. Depending on your personal style you can buy a dip near $41.00 or look for a breakout past resistance near $43.00 as a potential 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 $5.50/5.80
-stop loss on EMR @ 35.90.

Chart of EMR:


ESV $41.82 +0.10 -- ENSCO Intl. Inc.

We're not seeing much of a bounce in ESV but then oil stocks have suffered as the dollar drives oil futures lower. ESV is still hovering around its long-term trendline of higher lows. At the moment I hesitate to launch new positions with the six-week trend of lower highs in place. Our target is the $55-60 zone.

Dec. 3rd, 2009 - entry price on ESV @ 42.50, option @ $6.80
symbol: VKS-AI, 2011 JAN $45 call - current bid/ask $5.80/6.10
-stop loss on ESV @ 37.25.

Chart of ESV:


FSLR $135.67 - 0.06 -- First Solar

The rally in FSLR has failed at its trendline of lower highs. It looks like the next move could be lower. We only have a few weeks left before our 2010 January options expire.

I am 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. At this point the $100 put, part of an old spread, is nearly worthless.

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) $0.50.
If you're curious the 2010 Jan. $150 call is at $ 1.59.

Chart of FSLR


FST $22.34 +0.15 -- Forest Oil Corp.

Shares of FST have displayed impressive relative strength with a rally in spite of weakness in the oil sector. The stock looks a little short-term overbought here. 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 $5.90/6.30
-stop loss on FST @ 16.85

Chart of FST:


GHM $21.55 +0.80 -- Graham Corp.

GHM is really extending its gains. The stock out performed on Friday thanks to some positive analyst comments and a $25 price target. Shares are certainly moving a lot faster than expected. I am raising our stop loss to $15.75. Sadly the lack of volume is producing some HUGE spreads in the LEAPS options. Really, the spreads are so big they look like an error. When you choose to exit you may not want to use a market order.

Right now our target to exit is $24.00 but we may want to add a second, higher target.

Oct 26th, 2009 - entry price on GHM @ 15.15, option @ 2.65
symbol: GHM-FC, 2010 JUNE $15 call - current bid/ask $4.30/9.20
-stop loss on GHM @ 15.75

- or -

Oct. 26th 2009 - entry price on GHM (the stock) @ 15.15
- stop loss on GHM @ 15.75

Chart of GHM:


GNK $22.10 -0.56 -- Genco Shipping

The Baltic Dry Goods index has fallen two weeks in a row and looks like it's down about four out of the last five weeks. That's putting pressure on GNK and the stock is consolidating with a bearish trend of lower highs. At this point I would considering buying call LEAPS on a bounce from the 200-dma or a breakout over $25.00.

Our plan was to use small positions to keep our risk limited. Our long-term target is $39.00.

Nov 21st, 2009 - entry price on GNK @ 25.46, option @ 5.00
symbol: OKJ-AF, 2011 $30 LEAP call - current bid/ask $2.85/3.20
-stop loss on GNK @ 19.65

Chart of GNK:


HON $39.15 change: -0.39 - Honeywell Intl. Inc.

The last three days has seen HON turn bearish. The stock is testing very minor support in the $38-39 zone. If this continues I'd watch for stronger support near its 100-dma or the exponential 200-dma (near 36.50). Astute readers will note that shares have been selling off following HON's recent earnings guidance on Dec. 16th. It could just be normal profit taking after hitting 2009 highs. I'd wait for a strong bounce from support or a new high to open positions.

Our first target to take profits is at $49.00. Our second target is at $54.00. We'll use a stop loss at $35.75 although more conservative traders may want to use a stop closer to $38.00.

Dec 11th, 2009 - entry price on HON @ 41.00, option @ 3.25
symbol: VAD-AI, 2011 $45 LEAP call - current bid/ask $2.25/2.40
-stop loss on HON @ 35.75

Chart of HON:


INTC $19.63 +0.56 -- Intel Corp.

Shares of INTC have continued to underperform their peers in the semiconductor sector. The stock was sinking most of the week but managed a bounce on expiration Friday. 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 $2.15/2.22
-stop loss on INTC @ 16.90.

Chart of INTC:


MTW $10.01 +0.39 -- Manitowoc Inc.

It has been a good week for MTW. Shares did rebound from technical support at their 100-dma and now the stock is challenging round-number support/resistance at the $10.00 mark. If shares can clear the new trend of lower highs it might be time to consider new positions but not yet. 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 $2.65/2.80
-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:


ORCL $24.34 +1.46 -- Oracle Corp.

ORCL reported better than expected earnings on Thursday night and offered generally upbeat guidance for the current quarter. The news garnered at least one analyst upgrade. Shares gapped open higher at $24.01 and hit $24.74 intraday. Our plan was to buy call LEAPS if ORCL hit $24.05, which happened Friday morning so the play is open. However, odds are decent that ORCL will fill the gap so traders may want to wait for a dip toward $23.50 before launching positions. Our stop loss is at $21.75. Our long-term target is $29.75.

FYI: Shares of ORCL don't move very fast. Readers might want to consider turning this play into a calendar or diagonal spread to further maximize your gains.

Dec. 18th, 2009 - entry price on ORCL @ 24.05, option @ 2.55
symbol: VOC-AE, 2011 LEAP $25 call - current bid/ask $2.56/2.60
-stop loss on ORCL @ 21.75.

Chart of ORCL:


PBR $46.56 -0.61 - Petroleo Brasiliero

Our PBR trade appears to be in trouble. Shares broke very significant support at the long-term up trend of higher lows this past week. The selling stalled when PBR hit the rising 100-dma. More conservative traders may want to exit early since we don't have much time left. I am not suggesting new bullish positions.

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 $0.56/0.60
-stop loss on PBR at $44.40

Chart of PBR:


PEP $59.48 -0.56 -- PEPSICO Inc.

Wow! The sell-off in PEP has turned into a route with investors fleeing the stock. I expressed concern last week when PEP broke down under the bottom of its rising channel. The stock has retreated sharply on strong volume, erasing weeks of gains in just a few days. There was some news that the Pepsi division was not going to advertise in the next Super Bowl but the Frito Lay (snack food) unit is still expected to advertise.

The sharp, high-volume decline is very bearish. Traders may want to raise their stops toward Friday's low (58.77).

I'm not suggesting new bullish positions at this time. 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 $4.80/5.00
-stop loss on PEP at $54.95

Chart of PEP:


RAI $53.13 +0.32 -- Reynolds American Inc.

It was a very quiet week for RAI. The stock moved 13 cents for the week. The trend is up but momentum has obviously slowed. Don't be surprised to see some profit taking. The $50 level should be support. Readers may want to take profits early. 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 $13.10/13.60
-stop loss on RAI at $47.45

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

Chart of RAI:


RGLD $48.13 +1.13 -- Royal Gold Inc.

Continued strength in the dollar is dragging gold futures lower but the commodity and the gold miners managed a bounce on Friday. It looks like I was right to worry that RGLD may break support at $50.00. Shares did so on Thursday. I would look for a dip or a bounce near $45.00 as our next entry point. More aggressive traders could buy Friday's bounce from the 100-dma.

Our long-term 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 $5.00/5.40
-stop loss on RLGD @ 41.95

Chart of RGLD


TEX $19.21 -0.11 -- Terex Corp.

TEX has finally started to bounce with a breakout higher last Wednesday. If the stock can breakout over its 50-dma near $21.00 we might want to consider new bullish positions. Currently I'm not suggesting new bullish positions. 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 $4.00/4.30
-stop loss on TEX @ 17.75

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

Chart of TEX:


UNH $31.54 -0.28 -- UnitedHealth Group Inc.

As the healthcare bill gets closer to passing in the Senate the healthcare stocks have rallied higher. Shares of UNH hit our trigger to buy call LEAPS at $31.55 on Wednesday. Our play is open. If you're patient we might get a better entry point on a dip back toward $30.00, which should be support.

Keep in mind that the debate could always change again making this a more aggressive, higher-risk trade. I'd keep positions relatively small to limit your risk. Our long-term target is $42.50.

Dec 16th, 2009 - entry price on UNH @ 31.55, option @ 3.80
symbol: VUH-AG, 2011 JAN $35 LEAP call - current bid/ask $3.95/4.05
-stop loss on UNH @ 27.25

Chart of UNH:


UYG $5.51 +0.15 - ProShares Ultra Financials (2x) ETF

UYG gained one cent on the week. I remain concerned because financials are still underperforming the rest of the market and the trend of lower highs is unchanged. If something doesn't change soon we could get stopped out at $5.25 before the year is out. I am not suggesting new bullish 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

Two Reasons

by James Brown

Click here to email James Brown


New Watch List Entries

None

Editor's Note:

I am sure that you've noticed the watch list has shrunk significantly. There are two reasons for that. First, the watch list has been successful with a consistent stream of candidates graduating to the play list. Last week both ORCL and UNH hit our trigger and jumped to the play list. The second reason is my expectation for a better entry point in January. The market isn't going anywhere and will likely stay range bound for the rest of 2009. As I said in my commentary tonight odds are growing that we'll see a correction in January. That's when we want to be active and I'll have a fresh list of watch list candidates to buy the dip before we get there.


Active Watch List Candidates

DSX - Diana Shipping Inc.


Dropped Watch List Entries

ORCL - Oracle Corp. and UNH - UnitedHealth Group Inc. both graduated to the play list.

Active Watch List Candidates:


DSX $14.90 -0.08 - Diana Shipping Inc.

The Baltic Dry Goods index has continued to slide lower and that's putting pressure on DSX and the rest of the shipping industry. The stock is trying to bounce from the $14.50 region, which happens to coincide with the 61.8% Fibonacci retracement of the November rally. Nothing has changed from my prior comments.

I'm sticking to the plan and suggesting readers wait for DSX to hit our trigger at $17.05. We'll use the 2011 January $20 LEAP calls. More aggressive traders might want to consider jumping in early on a move over $16.00 instead.

If we're triggered at $17.05 I'm setting our long-term target at $24.00. We'll use a stop loss at $14.45.

Buy-the-Breakout trigger: $17.05

BUY the 2011 January $20.00 LEAPS (symbol: XDJ-AD)

Chart of DSX: