Option Investor
Newsletter

Daily Newsletter, Monday, 1/18/2010

Table of Contents

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

Leaps Trader Commentary

A Real Possibility

by James Brown

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Big picture the sell-off on Friday, January 15th wasn't that big or that significant but it could still be a warning sign. Last week I suggested that the market could see a scenario where stocks run up into earnings, spike on the news, and then reverse lower into the correction we've been waiting for. This remains a very real possibility, especially if the reaction to Intel's and JPMorgan Chase's earnings reports are any indication. Both companies beat Wall Street's earnings estimates and yet investors sold the news anyway.

I feel somewhat vindicated that JPM's CEO Jamie Dimon also believes that the second half of 2010 could be trouble. Dimon's cautious comments and JPM's significant rise in loan loss reserves spooked investors who were looking for the "all clear" signal that the worst was truly behind us. Dimon is naturally concerned about the record-high unemployment and a very fragile housing market. Regular readers to this column know that I'm expecting another tidal wave of foreclosures in 2010-2011. That's not going to help consumer confidence.

Speaking of the consumer, last week we saw the consumer sentiment index rise from 72.5 to 72.8. It is improvement but economists were looking for more. The combination of December's decline in retail sales could be an ominous sign for the future. Last year one of the big arguments was that Americans fundamentally changed their spending habits. Job insecurity (or losses) combined with plummeting retirement savings and falling home values has increased our savings rate. Now for a country's economy that is 70% consumer spending that's definitely going to slow things down.

On the positive front we're definitely seeing some improvement in the manufacturing data. The New York Empire State index witnessed huge improvements in both the overall reading and the new orders component. This helps reinforce the positive improvements in the wholesale inventory reports. We've been waiting for the massive rebuilding cycle for months and it looks like the cycle may have begun.

I remain very cautious on the market. The trend is still up for the major stock market averages and the transportation index but we are starting to see some bearish reversals and breakdowns in the smaller, sector indices. Those that haven't reversed yet look extremely overbought and due for a correction. Remember, we're not afraid of a correction. We want to see stocks retreat so we can buy the decline when it starts to bottom out. Be patient and wait for your entry point!

Chart of the S&P 500 Index:

Weekly Chart of the S&P 500 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


Portfolio

Portfolio Update

by James Brown

Click here to email James Brown


Current Portfolio


Portfolio Comments:

The stock market is starting to see some profit taking. Investors are selling the news and trying to lock in gains after this strong pre-earnings run up. This "selling the news" reaction could be a trend this entire reporting season. I hope readers took my suggestion a week ago to take some money off the table. It looks like we're back to watching for a correction.

I am suggesting that investors take profits by selling at least half on our GHM and MTW plays.

Last Friday was option expiration for 2010 January options including LEAPS. Our plays on FSLR and PBR have been closed.

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

Post-Earnings Correction?

by James Brown

Click here to email James Brown


Post-Earnings Correction?


Editor's Note:

Investors are choosing to sell the earnings news following the early January rise in stocks. It's a logical place to take profits after a company reports earnings. It doesn't matter whether the news is good or bad. Momentum traders like to exit and move into the next momentum candidate.

I am still concerned that the market could see a late-January correction. That's not a bad thing. A significant pull back can be used as a new entry point. However, that means we need to wait for that entry point. Now does not seem to be the best time to launch new long-term trades in stocks.

As I scroll through the sector indices most of them look overbought and way overdue for a pull back. Right now I would watch the oil stocks. They could candidates on a correction. I'd also keep my eye on technology and the banks.

We've got two more weeks of really heavy earnings announcements. Afterwards investors will return their focus toward economic data as earnings reports start to slow down.


Play Updates

2010 LEAPS Have Expired

by James Brown

Click here to email James Brown


Closed Plays


FSLR and PBR were closed.


Play Updates


ACI $26.35 -0.89 -- Arch Coal Inc.

Shares of ACI spiked to new 52-week highs last Monday on an analyst upgrade. The stock hit $28.34 and spent the rest of the week consolidating sideways. Shares do look a little overbought. Odds are pretty good that ACI could correct toward $24.00, which should be support.

More conservative investors might want to raise their stops toward $22. We want to sell half at $29.75. We'll sell the final half at $34.75. I'd be tempted to buy long-term calls again if we see a bounce near $24.00.

May 14th, 2009 - entry price on ACI @ 16.00, option @ 2.40
symbol: OSE-AF, 2011 JAN $30 LEAP call - current bid/ask $3.00/3.20
-stop loss on ACI @ 19.40

Chart of ACI:


ANR $48.15 -1.83 - Alpha Natural Resources, Inc.

I warned readers to expect a correction and right on cue ANR has reversed. After hitting our first target over a week ago ANR spiked to $53.34 last Monday and it's been down hill since. If you look at an intraday chart on ANR you can see how the last few days investors were selling into strength each morning. ANR should find some support in the $46-42.00. If it doesn't we'll get stopped out at $41.45. Our second and final target is $57.25. I am not suggesting new bullish positions at this time.

Aug. 25th, 2009 - entry price on ANR @ 34.00, option @ 7.00
symbol: VJV-AH, 2011 JAN $40 LEAP call - current bid/ask $13.00/14.30
-stop loss on ANR @ 41.45
bought 1/2 LEAP position on 08/25/09 (option price @ 7.00)

01/06/10 ANR hits 1st target at $49.80. Option @ $15.20 (+117.1%)

Chart of ANR:


BAC $16.26 -0.56 - Bank of America Corp.

The rally in the banking stocks has stalled. Investors were unhappy with the cautious comments from JPM's CEO Jamie Dimon and the sharp increase in JPM's loan loss reserves. If JPM, one of the country's strongest banks is expecting more loan losses, then it could spell bad news for the rest of the sector. Shares of BAC have been floating sideways trying to hold to technical support at its 100-dma. BAC "should" find some support near its 50-dma and if that fails then near the $15.00 level. I'd like to believe the worst is behind the banking sector but I hesitate to launch new long-term LEAPS positions in BAC at this time. BAC is due to report earnings on January 20th before the market's opening bell. Readers may want to consider the opportunity for protective puts.

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 $6.70/6.80
-stop loss on BAC @ 14.75

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

Chart of BAC


BQI $1.14 -0.03 -- Oilsands Quest Inc.

Last week was very quiet for BQI. Shares spiked higher last Monday but the rally failed near its January highs and BQI spent the rest of the week in a narrow sideways trading range. Oil prices are correcting and the stock looks poised for a dip toward $1.10 or its 200-dma near $1.05. I would wait for a dip or a bounce near $1.05 before considering new bullish positions. More conservative traders may want to raise their stops closer to $1.00. 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 $28.91 +0.19 -- Chesapeake Energy Corp.

The rally in natural gas prices has stalled and we're seeing a similar move in shares of CHK. Last week saw CHK find some support at its rising 21-dma but short-term it has a pattern of lower highs. I would expect a dip back toward $26.00 and/or its 100 or 50-dma. The $25 level should also offer some psychological support. 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 $5.60/5.70
-stop loss on CHK @ 20.95

Chart of CHK:


CNX $52.90 -0.92 -- Consol Energy Inc.

It's been a rough week for CNX. Shares saw the same spike higher last Monday that most of the coal stocks did. Yet the correction has been a little steeper in CNX. The stock has broken some short-term support levels. I would expect a pull back toward $50.00, which should be round-number support.

Currently we have a second target to take profits at $58.50. We have a third and final long-term target at $64.90. I am not suggesting new bullish positions at this time.

Sep 1st, 2009 - entry price on CNX @ 36.50, option @ 7.80(estimate)
symbol: VTL-AH, 2011 JAN $40 LEAP call - current bid/ask $16.10/16.60
-stop loss on CNX @ 44.95

1st Target hit 09/16/09 @ 48.50, option price $15.40 (+97%)

Chart of CNX


DE $56.33 -2.02 -- Deere & Co.

DE has given back a good chunk of its January gains. This almost looks like a bearish reversal but traders bought the dip twice near $56.00 last week. Even if DE does correct broken resistance near $50.00 should be significant support. I am not suggesting new positions at this time. Our long-term target on DE is $69.50.

Nov 18th, 2009 - entry price on DE @ 51.00, option @ 8.75(estimate)
symbol: VER-AJ, 2011 JAN $50 LEAP call - current bid/ask $10.35/10.55
-stop loss on DE @ 48.45

Chart of DE:


DSX $16.09 +0.04 - Diana Shipping Inc.

Shares of DSX were unchanged on the week at $16.09 but the stock did trade higher over the last few days and hit our breakout trigger at $16.25. Actually the stock gapped open higher last Monday above our trigger at $16.44. The plan was to buy the 2011 January $17.50 calls. Now that the play is open our long-term target is $24.00. Our stop loss is at $14.25. Considering the market's recent weakness readers may want to wait for a dip or a bounce near $15.50 before initiating new positions.

FYI: Investors should be aware that shipping stocks do face a headwind toward the end of 2010 and early 2011 as more ships come to market and put pressure on shipping rates. The problem is widely acknowledged but over the next six months I don't see it being a factor for us.

Jan 11th, 2010 - entry price on DSX @ 16.44, option @ 2.75(estimate)
symbol: XDJ-AW, 2011 JAN $17.50 LEAP call - current bid/ask $ 2.30/ 2.45
-stop loss on DSX @ 14.25

Chart of DSX:


EMR $44.32 -0.62 -- Emerson Electric Co.

EMR managed a gain on the week but the action last Friday looks like a short-term bearish reversal. Shares spiked to $45.55 and reversed. There is some minor support near $44.00 but I would expect a dip back toward its 50-dma or the $42.00 area. I am not suggesting new positions at this time. Our plan is to sell half of our position at our original target of $47.50. We'll sell the rest at $54.50.

Sept. 8th, 2009 - entry price on EMR @ 38.00, option @ $4.50
symbol: VHH-AH, 2011 JAN $40 call - current bid/ask $6.30/6.50
-stop loss on EMR @ 35.90.

Chart of EMR:


FST $27.14 -0.56 -- Forest Oil Corp.

Shares of FST gapped higher on Thursday as investors reacted to news that FST's Granite Wash Wells in Texas were exceeding production expectations. FST hit $28.72 on Thursday and looks vulnerable to profit taking here. I would expect FST to fill the gap with a dip toward $25 at a minimum. Broken resistance near $22.00 should be stronger support. I'm not suggesting new long-term 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 $9.10/9.30
-stop loss on FST @ 19.49

Chart of FST:


GHM $19.65 -0.37 -- Graham Corp.

GHM could be facing trouble. The stock has begun to breakdown from its sideways consolidation and trading last week definitely took on a more bearish tone. GHM should have some support near $18.00 and additional support at its rising 100-dma and exponential 200-dma. Yet we only have five months left before June 2010 options expire.

I am suggesting we sell half our position right now! Take some money off the table if you have not done so already. Nimble traders could hop back in once GHM finds support again. Just be aware of the painfully wide option spreads, which puts us at a disadvantage.

Our final target remains $24.00.

Oct 26th, 2009 - entry price on GHM @ 15.15, option @ 2.65
symbol: GHM-FC, 2010 JUNE $15 call - current bid/ask $4.90/5.90
-stop loss on GHM @ 15.75

01/18/10 sell half, GHM $19.65, option @ 4.90 bid

- or -

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

01/18/10 sell half, GHM $19.65

Chart of GHM:


GNK $25.01 -0.32 -- Genco Shipping

Some of the dry-bulk shippers garnered some positive analyst comments last week but for the most part GNK's rally has stalled. Shares might fill the gap from early January but we can watch the 50-dma for potential support. I'm not suggesting new positions at this time. Last week I was watching the $24 level. Right now I would wait for a bounce from the $22.50 region. 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 $3.40/3.90
-stop loss on GNK @ 20.95

Chart of GNK:


HON $42.63 change: +0.06 - Honeywell Intl. Inc.

HON managed to close the week with another gain. I suspect that investors are optimistic that HON will beat earnings estimates and want to wait to sell on a post-earnings pop. The company is due to report earnings on January 29th. If the stock does see a correction we can watch the $40 level for support. I am raising our stop loss to $37.75. Our first target to take profits is at $49.00. Our second target is at $54.00.

Dec 11th, 2009 - entry price on HON @ 41.00, option @ 3.25
symbol: VAD-AI, 2011 $45 LEAP call - current bid/ask $2.85/2.95
-stop loss on HON @ 37.75

Chart of HON:


INTC $20.80 -0.68 -- Intel Corp.

This past week was full of headlines about Intel. The company reported earnings on last Thursday after the closing bell. Earnings were much better than expected and gross margins rose toward 65%. Everything about the report was bullish and yet traders sold the news anyway. The stock had rallied to a new 52-week high prior to the report so it was natural to see some profit taking.

A few analysts believe that INTC's gross margins could be peaking near 65%. Other believe that INTC will do very well with a new PC upgrade cyclical beginning thanks to Windows 7. I think as long as the economy continues to show positive growth and investors sentiment remains positive then INTC should do fine. Although on a short-term basis the stock is probably due for more profit taking. I wouldn't be surprised to see INTC correct toward the $19-18 zone again.

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 $2.45/2.50
-stop loss on INTC @ 17.90.

Chart of INTC:


MTW $13.70 +0.65 -- Manitowoc Inc.

I'm surprised that MTW has managed another weekly gain on top of the early January rally. Shares looked so overbought a week ago. The rally clearly stalled and MTW chopped around until Friday. Last Friday the stock spiked higher to $14.60 only to reverse and give back most of its gains. On a short-term basis MTW is very short-term overbought and due for a deeper correction.

I am suggesting we take profits right now. Sell at least half of our position. Nimble traders could re-enter down the road but we want to lock in a gain now. More conservative traders may want to raise their stops on the remainder of their position toward $10.00. Our stop is currently at $8.95. I am 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 $4.80/5.10
-stop loss on MWT @ 8.95

01/18/10 Sell Half! MTW @ 13.70, option at $4.80 bid.

- or -

Oct. 30th 2009 - entry price on MTW (the stock) @ 9.10
- stop loss on MTW @ 8.95

01/18/10 Sell Half! MTW @ 13.70

Chart of MTW:


ORCL $25.24 -0.10 -- Oracle Corp.

It was a bullish week for ORCL with the stock breaking out past resistance near $25.00 and setting new 52-week highs. I am reluctant to chase it here. While the trend is ORCL is bullish I suspect the stock will eventually correct toward $23.00 again. 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 $2.77/2.82
-stop loss on ORCL @ 21.75.

Chart of ORCL:


PEP $62.29 -0.51 -- PEPSICO Inc.

We are very fortunate. A few weeks ago PEP's breakdown looked a lot like PBR's breakdown (today's closed plays). PEP had a similar oversold bounce that failed and the stock was poised for a deeper correction. That changed last week. Traders bought the dip at the 100-dma and PEP is back above short-term resistance near $62 and its 50-dma. The bulls still have a fight on their hands. The $64-65 level could be tough resistance to break. I am not suggesting new long-term positions. More conservative traders may want to raise their stops! 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 $5.50/5.70
-stop loss on PEP at $54.95

Chart of PEP:


RAI $53.81 -0.21 -- Reynolds American Inc.

RAI delivered a weekly gain and hit another new intraday high on Friday. The stock is flirting with a breakout over resistance near $54.00. If it breaks $54 I suspect it could sprint toward $60.00. More aggressive traders may want to raise their final targets. Right now our plan is to exit at $57.50. More conservative traders will want to consider taking some money off the table right here! I'm not suggesting new positions at this time.

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 $13.70/14.40
-stop loss on RAI at $49.45

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

Chart of RAI:


RGLD $47.21 -0.83 -- Royal Gold Inc.

The dollar is trying to bounce from technical support and that's thrown some doubt on the bounce in commodities including gold. Meanwhile the gold miners like RGLD are churning sideways. Shares of RGLD failed near resistance at $50.00 and its 50-dma early last week. I am raising our stop loss on RGLD to $44.00. More conservative traders may want to exit early right here to cut your losses. The weekly chart for RGLD has produced a bearish engulfing (reversal) candlestick pattern. I'm not willing to abandon ship just yet. The $45 level and the 200-dma should offer some support if RGLD corrects any deeper. I'm not suggesting new positions at this time.

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 $3.60/3.80
-stop loss on RLGD @ 44.00

Chart of RGLD


TBT $48.59 -0.60 -- UltraShort 20+ Year Treasury Bond ProShares

Stocks were weak on Friday as investors took profits and money flowed into bonds as a safety play. The TBT gapped open lower at $48.55 last Friday and traded sideways the rest of the session. Technically this is short-term bearish as Friday's decline breaks the multi-week sideways trading range.

The $48.00-46.00 zone could offer some support and TBT doesn't usually move very fast. You have time to wait for your entry point. This is a long-term trade (12 to 24 month time frame). Be sure to give yourself a wide stop loss.

Our first long-term target is $59.75. Our second target is $67.50.

FYI: The TBT is an exchange traded fund (ETF) that tries to deliver twice the inverse performance of the Barclays Capital 20+ Year U.S. Treasury index.

Jan. 09th, 2010 - entry price on TBT @ 50.63, option @ 4.90
symbol: XRJ-AC, JAN 2011 $55 LEAP call - current bid/ask $3.60/3.90
-stop loss on TBT @ 41.90

Jan. 09th, 2010 - entry price on TBT @ 50.63, option @ 7.90
symbol: YHT-AH, JAN 2012 $60 LEAP call - current bid/ask $6.45/7.10
-stop loss on TBT @ 41.90

Chart of TBT


TEX $22.89 -0.31 -- Terex Corp.

The rally in TEX has stalled. Shares have been digesting its prior gains with a healthy sideways move. I wouldn't be surprised to see a pull back toward $21 or the 50-dma. A new bounce near the 50-dma might be a new bullish entry point. 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 $5.70/6.00
-stop loss on TEX @ 17.75

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

Chart of TEX:


TLT $91.08 +0.56 -- iShares 20+Yr Bond ETF

The flood of money into bonds during the stock market's Friday decline sent the TLT higher. I suggested that readers may want to wait for a new failed rally near $92.00 as a possible entry point. It looks like that could happen soon. Our first target is $81.00. I'm suggesting a stop loss at $100.50. More conservative traders can use a stop closer to $96 or the 200-dma.

FYI: The TLT is an exchange traded fund that tries to mimic the performance of the Barclays Capital U.S. 20+Year Treasury Bond Index.

Jan. 09th, 2010 - entry price on TLT @ 89.29, option @ 6.40
symbol: VJL-MG, JAN 2011 $85 LEAP put - current bid/ask $5.00/5.30
-stop loss on TLT @ 100.50

Jan. 09th, 2010 - entry price on TLT @ 89.29, option @ 8.90
symbol: YLI-MB, JAN 2012 $80 LEAP put - current bid/ask $6.70/7.80
-stop loss on TLT @ 100.50

Chart of TLT


UNH $33.75 +0.43 -- UnitedHealth Group Inc.

Healthcare was one of the very few sectors to post any gains on Friday. UNH helped lead the charge with a 1.2% gain and a new 52-week high. Investors could be betting on the Obama administration having a hard time getting a strong healthcare reform bill through the final stages in Congress. Plus there is a key senate seat up for grabs in Massachusetts and the Republican candidate actually appears to be ahead in the polls. He rallying cry has been "send me to Washington and I'll stop the healthcare bill". If Mr. Brown wins the senate race this week healthcare stocks could rally even further. I am raising our stop loss to $28.95. The $30.00 level should be significant support.

The plan was to use small positions to limit our 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 $3.85/3.95
-stop loss on UNH @ 28.95

Chart of UNH:


UYG $5.99 -0.20 - ProShares Ultra Financials (2x) ETF

The rally in financial stocks stalled last week. The whole sector suffered profit taking as investors sold the JPM earnings news. The correction may not be over especially now that traders are worried what less healthy banks might have to say about loan losses. I am not suggesting new positions at this time but I'm optimistically looking at the $5.80-5.60 zone as possible support.

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: 5.30)

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

Chart of UYG:


VICR $ 9.30 -0.20 -- VICOR Corp.

The bullish breakout from early January has reversed. Fortunately there has not been a lot of profit taking in VICR yet and traders did buy the dip on Friday near the bottom of its prior trading range. If shares do correction I would look for support in the $8.50-8.00 zone. Let's wait and see how VICR performs this week before planning a new entry point.

Our twelve-month target is the $13.50-14.00 zone (one reason I prefer the stock over the option). Remember, if the market dips in January VICR will probably dip with it.

Dec 26th, 2009 - entry price on VICR@ 9.30, option @ 1.40
symbol: VQV-GB, 2010 JUL $10 LEAP call - current bid/ask $0.95/1.05
-stop loss on VICR @ 7.45

- or -

Dec. 26th 2009 - entry price on VICR (the stock) @ 9.30
-stop loss on VICR @ 7.45

Chart of VICR:


CLOSED Plays

FSLR $124.07 -0.77 -- First Solar

Ouch! Shares of FSLR just collapsed last week with a drop from the $140 area to $124. The solar sector was troubled by news that Germany plans to cut their solar energy subsidies. Our plays on FSLR have expired with January's option expiration.

The covered call play is over. It's possible you had your stock called away at any time over the last year when FSLR was trading above $150. However, if your stock was not called away then the 2010 January $150 calls we sold have now expired worthless and you still own shares of FSLR with a cost near $128.00. The stock is now $124.07. I'm suggesting we exit any remaining FSLR position. The stock's trend has been bearish for months. Our covered call summary looks like this:

Bought 100 shares of FSLR at $128.00.
Sold 2010 $150 LEAPS calls at $40.70.
The stock is now at $124.07.
Your profit on the play is: $36.77 = ($128.00 minus $124.07) + $40.70 calls.

Meanwhile, the last remnants of our bullish put spread (2010 Jan. $110 put) has expired.

Chart of FSLR


PBR $45.37 +0.23 - Petroleo Brasiliero

It's been a very tough six weeks for PBR. The oversold bounce failed near resistance and the recent weakness in oil only added to the bearish pressure on this stock. Our January 2010 $50 call has expired.

Apr. 4th, 2009 - entry price on PBR @ 35.10, option @ $2.80
symbol: PMJ-AJ, 2010 $50.00 LEAP call - current bid/ask $0.00/0.00
-stop loss on PBR at $44.40

Chart of PBR:



Watch

Fertilizer Stocks Correct Sharply

by James Brown

Click here to email James Brown


New Watch List Entries

None


Active Watch List Candidates

MOS - Mosaic Co.

POT - Potash Corp.

PPDI - Pharmaceutical Product Development Inc.


Dropped Watch List Entries

DSX graduated to the play list.


New Watch List Candidates:

Editor's Note:

In the new plays section tonight I discussed my reluctance to open new positions with the market looking fragile. As long-term traders we need to be patient and wait for the entry point. Stay disciplined.

Active Watch List Candidates:


MOS - Mosaic Co. $61.56 +0.72

Whoa! I thought MOS was due for a correction but I wasn't expecting it so quickly. Shares found support near the rising 30-dma. Unfortunately MOS hasn't been able to produce much of a bounce. I suspect the correction is not over yet.

We want to be cautious about launching new positions with the wider market still looking overbought. Therefore we are adjusting our trigger on MOS. Instead of buying LEAPS at $60.50 I'm moving our trigger down to $56.00. The low last week was $60.62 so we're still untriggered.

We will also lower our strike price for the 2011 January calls. Instead of the $70s we'll use the $65s. We'll keep the stop loss at $49.00. Our long-term target is the $90-100 zone. (Readers might want to consider the 2012 LEAPS too).

NOTE: In 2009 MOS issued a special cash dividend of $1.30 per share payable back on December 3rd, 2009. The CBOE issued a new LEAPS symbol to account for the dividend. The old 2011 LEAPS have a root symbol of ZHX. The LEAPS we want to use are the ZXW root symbols.

Buy-the-Dip trigger: $56.00

BUY the 2011 January $65 call (symbol: ZXW-AM)

Chart of MOS:


POT - Potash Corp. $115.39 +0.08

POT saw a similar decline with a gap down last Tuesday following the January 11th bearish reversal. Shares are struggling to hold short-term support near $115. I think it will break. This is a very volatile sector and stock and I suspect that POT will overcorrect to the downside. I am adjusting our entry point to buy LEAPS from $111.00 to $106.00. We'll keep our stop loss at $98.50. This can be a very volatile stock so keep your position size small. Our long-term target is $160 or higher.

FYI: The Point & Figure chart is bullish and points to a $168 target. POT is due to report earnings on January 28th and should report before the opening bell. More conservative traders may want to wait until after the earnings report before opening new bullish positions even if POT hits our trigger before then.

Buy-the-Dip trigger: $106.00

BUY the 2011 January $120 calls (symbol: VPT-AD)

Chart of POT:


PPDI $22.88 -0.52 -- Pharmaceutical Product Development Inc.

PPDI tried to bounce but shares ran out of steam under $23.50. This level was resistance all week long. I suspect that shares will correct back toward $22.00 and its 50-dma. If that level breaks then we're probably looking at a correction toward $20.50-20.00. Our plan is to wait for a breakout over significant resistance near $24.00. We have a trigger to buy LEAPS at $24.25. If triggered we'll use a stop loss at $21.90. Our first target is $29.25.

Breakout trigger: $24.25

BUY the 2010 July $25.00 calls (symbol: PJQ-GE)

Chart of PPDI: