Option Investor
Newsletter

Daily Newsletter, Saturday, 1/30/2010

Table of Contents

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

Leaps Trader Commentary

Retracement Mode

by James Brown

Click here to email James Brown

The new year started off pretty strong but the rally ran out of gas. The late-January, post-earnings sell-off showed up just as expected. So why are stocks breaking down? Earnings have been generally better than expected but it's still too much cost cutting and not enough new sales. Management remains cautious about 2010 and it's that same cautious attitude that's going to keep hiring at extremely low levels.

The stock market is selling off because stocks essentially got ahead of themselves. The earnings results and forward guidance is providing a little dose of reality. Last week's economic data was actually pretty strong. The Q4 GDP came in at +5.7%, which was way better than expected. Consumer sentiment and consumer confidence is holding up. Manufacturing data has been improving. The inventory rebuilding phase is underway. All of this is good news. We can ignore the home sales data for now. Existing home sales and new home sales numbers plunged. It was THE worst month in history (of the report) because the first edition of the new-homebuyer tax credit that was set to expire in November pulled all the real estate sales forward. Residential sales this winter could be very bleak but that's another story.

Sometimes the market environment just turns bearish and no matter what the news is investors sell it. We had some pretty impressive earnings reports last week and AAPL finally unveiled their tablet PC. Yet traders sold it all. On a short-term basis stocks are oversold and due for a bounce. When the market does bounce I would not buy it. Nimble traders could use the next bounce as a new entry point for short-term bearish trades. The question isn't if stocks bounce but when? Will it be Monday morning or will stocks churn sideways as investors wait for the January jobs report that comes out Friday? In the mean time we'll also get the New York and Chicago ISM numbers.

Short-term I am looking for a 10% correction in the S&P 500. That means a drop toward the 1050-1035 zone. This should coincide with the 38.2% Fibonacci retracement from the S&P'5 bounce off the July 2009 lows. While we are looking for a 10% pull back that doesn't mean you have to buy it. There is no guarantee that just because the market dips 10% it's going to bounce again. Readers are encouraged to keep an eye on the foreign markets to see how they might affect the U.S. Right now the major European markets are close to a 10% correction and Asian markets don't look any better.

Talking about Asian makes me think of China and how the Chinese government's attempt to slow down their economy (not necessarily a bad thing) could really put the brakes on this global recovery. If China is easing back on the stimulus we could see more governments do the same. At this point it's too early in the game for pulling stimulus out of the system. The China news took a toll on commodities, which were hammered pretty hard in January.

The U.S. dollar is another major factor pushing commodities lower and the dollar is rising because the euro is collapsing. I won't bore you with the details but you may have heard that Greece could default on its out of control debt. EU officials and the stronger EU countries have a dilemma. Do they bail out Greece, which would set a precedent and probably lead to bailouts for Ireland, Italy, Portugal and Spain. Or do you kick Greece out of the EU, which then puts the other four countries on the chopping block. Either way the strength of the euro is in serious trouble.

In summary, investors are nervous. The S&P 500 broke through support at 1085 and now we're looking at the 1050-1035 zone. If that breaks then look for support near the 200-dma or the 1,000 level for the S&P. The dollar is breaking out and that will continue to put pressure on commodities and all of the commodity-related stocks. Don't try and pick a bottom in this market. Remember, it's dangerous to try and catch a falling knife. You normally get cut.

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:

The January correction continues and the S&P 500 ended the month under key support near 1,085. Traders are now estimating the 1040-1035 zone as the next downside target since that would be a 10% correction.

Commodity stocks were hammered in the last couple of weeks on fears that China would cool its economy and the strength in the U.S. dollar. If you're looking for a new bullish entry point, take your time. Let the market come down to you. There's no need to try and catch one of these "falling knives".

We had a handful of stocks hit our stop loss this past week.

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.




New Plays

Downside Target

by James Brown

Click here to email James Brown


New Downside S&P 500 Target is 1045-1035


Editor's Note:

The S&P 500 has fallen through support at the 1,085 level. Now what?

Last week I suggested readers watch for the correction to reach the 1050-1035 zone. I still believe that's a good target to shoot for. Not only is 1035 close to a 10% correction in the S&P 500 but the 1045 area is the 38.2% Fibonacci retracement of the S&P's rally off the July 2009 lows.

Trying to pick a bottom is always dangerous so don't try. Be patient and let the market come to you. Better yet wait for a bounce once it looks like stocks have bottomed. You don't have to buy the absolutely bottom to be successful.

On a short-term basis I believe stocks are oversold and will probably see a rebound soon. Unfortunately the bounce will be an short-term entry point for bearish positions. This correction could take another two or three weeks.

Keep your eyes on the Watch List for new trades. Last week we had two stocks graduate from the watch list to the play list.



Play Updates

Market In Retreat

by James Brown

Click here to email James Brown


Closed Plays


ANR, DSX, GHM, GNK, and HON all hit our stop loss last week.


Play Updates


ACI $21.07 -3.47 -- Arch Coal Inc.

Ouch! ACI not only missed earnings estimates on Friday morning they guided lower! The stock gapped open lower at $22.64 and fell for a 14% decline breaking down through several layers of support. This is obviously very short-term bearish and we can expect ACI to fall toward round-number support near $20.00, which should be bolstered by the rising 200-dma.

If ACI does indeed hold support near $20.00 we can use it as a new bullish entry point to buy call LEAPS. Our exit strategy hasn't changed. We want to sell the final half of this trade at $34.75.

FYI: The December 2009 lows were $19.41 and $19.45. I want to give ACI just a little bit more maneuver room so I'm edging the stop loss down to $18.99.

May 14th, 2009 - entry price on ACI @ 16.00, option @ 2.40
symbol: OSE-AF, 2011 JAN $30 LEAP call - current bid/ask $2.35/2.50
-stop loss on ACI @ 18.99

Chart of ACI:


CHK $24.78 -0.73 -- Chesapeake Energy Corp.

Both crude oil and natural gas have continued to retreat as the U.S. dollar creeps higher on euro weakness. This has been tough for the oil and energy stocks to endure. CHK broke down under a handful of minor support levels. I cautioned readers to look for a dip toward $24.00 and CHK is getting close. Nimble traders may want to consider buying LEAPS on a bounce from $24 and its 200-dma. 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 $3.80/3.95
-stop loss on CHK @ 20.95

Chart of CHK:


CNX $46.61 -2.73 -- Consol Energy Inc.

Shares of CNX were upgraded on Friday following its earnings report on Thursday. Yet that didn't save the stock from selling off hard with a 5.5% decline and a breakdown under its 100-dma. The stock looks poised for a dip to $45.00 and its exponential 200-dma. I think our stop loss might be a little too tight. CNX will probably fall toward support near $42.50 and its 200-dma. I am adjusting our stop down to $41.40. I've been warning more conservative traders to exit so anyone still in should be willing to endure the volatility. I am not suggesting new bullish positions at this time.

Currently we have a second target to take profits at $58.50. We have a third and final long-term target at $64.90.

Sep 1st, 2009 - entry price on CNX @ 36.50, option @ 7.80(estimate)
symbol: VTL-AH, 2011 JAN $40 LEAP call - current bid/ask $11.20/11.90
-stop loss on CNX @ 41.45

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

Chart of CNX


DE $49.95 -1.16 -- Deere & Co.

The market correction has pulled shares of DE all the way down to prior resistance and what should be support near $50.00. This level also holds the 100-dma, which should add additional support. The stock has seen a 20% correction off its highs near $60. Technically this is a new bullish entry point, this dip to support. However, readers may want to wait for a bounce. first. We face a very real risk that DE dips toward its 200-dma near $46.00, which would stop us out and close this trade. More aggressive traders may want to lower their stops. 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 $ 6.70/ 6.85
-stop loss on DE @ 48.45

Chart of DE:


EMR $41.54 -0.13 -- Emerson Electric Co.

EMR has now broken down under its 50-dma and one of its long-term trend of higher lows. Shares are currently testing their 100-dma and I suspect the stock will dip to the $40.00 level. The real test will be on Tuesday. EMR reports earnings on Tuesday morning (Feb. 2nd). Lately the trend has been for investors to sell the earnings news no matter how good the results are. That doesn't bode well for EMR. The option has pulled back to our entry price. More conservative traders could exit now and avoid a loss. Or you could buy some cheap out of the money February puts to protect yourself from a sharp drop lower. 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 $4.50/4.70
-stop loss on EMR @ 37.40.

Chart of EMR:


FST $24.12 -0.63 -- Forest Oil Corp.

As expected shares of FST have pulled back toward $24.00. This is short-term support. Unfortunately with the major averages breaking down odds are growing that FST will fall toward $22 and its 50 or 100-dma. The $22-20 zone should be decent 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 $6.80/7.100
-stop loss on FST @ 19.49

Chart of FST:


INTC $19.40 -0.52 -- Intel Corp.

The semiconductor sector has been collapsing for days now. The SOX broke down through its 100-dma on Thursday last week and posted a 3.4% decline on Friday. INTC fell through its 100-dma on Friday after a few days of consolidation sideways. The next level of support for INTC appears to be the rising 200-dma near $18.50. Odds are very good that INTC will get there. The question is will it hold at the 200-dma? A breakdown under the $18.50-18.00 zone would be very bearish for INTC's long-term prospects.

I am not suggesting new long-term positions at this time. Our long-term target is the $24-26 zone.

June 13th, 2009 - entry price on INTC @ 16.31, option @ 1.36
symbol: VNL-AD, 2011 LEAP $20 call - current bid/ask $1.85/1.87
-stop loss on INTC @ 17.90.

Chart of INTC:


MOS - Mosaic Co. $53.51 -2.05

It proved to be an ugly week for the fertilizer/chemical names. POT reported earnings a couple of days ago. While POT beat estimates they guided lower and the whole sector plunged. Shares of MOS have broken support near $55.00 and the 100-dma. The next stop appears to be the 200-dma near $52.00.

Our trigger to buy LEAPS was hit last week at $56.00. Given the recent weakness I would wait for MOS to rebound first before launching new positions. Nimble traders could try buying dips at the 200-dma or even $50.00 but I'm suggesting readers wait for some signs of strength. Our stop loss is 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.

Jan 28th, 2010 - entry price on MOS @ 56.00, option @ 6.10
symbol: ZXW-AM, 2011 LEAP $65 call - current bid/ask $5.05/5.55
-stop loss on MOS @ 49.00

Chart of MOS:


MTW $10.90 -0.27 -- Manitowoc Inc.

MTW continues to slip lower but the velocity of its decline has slowed a bit. Shares have managed to hold support near the 50-dma. Given the market's widespread weakness we should expect a pull back closer to $10.00. More conservative traders may want to raise their stops toward $10.00. I am not suggesting new positions at this time. Our long-term target is $17.00.

FYI: It looks like MTW is due to report earnings around Feb. 2nd. Wall Street expects a profit of two-cents a share. Given the market's recent trend to sell the earnings news readers may want to consider some out of the money February puts to protect against any short-term implosions.

Oct 30th, 2009 - entry price on MTW @ 9.10, option @ 2.61
symbol: VMT-AB, 2011 JAN $10 call - current bid/ask $2.80/3.00
-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 $23.06 -0.41 -- Oracle Corp.

Shares of ORCL had their price target raised to $30 by an analyst firm on Thursday but it didn't help the stock price. I've been forecasting a pull back to the $23.00 level for weeks. Now that it's hear I just hope it stops. Broken resistance near $23 should be new support. However, given the market's widespread decline odds are growing that ORCL will see $22.00 and possibly its 200-dma. Currently the 200-dma is at $21.60. I am adjusting our stop loss down to $21.40 so ORCL has room to tag its 200-dma without hitting our stop.

While technically this dip to support is an entry point I would wait for the market to find a floor first. Be patient about opening new bullish 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 $1.77/1.81
-stop loss on ORCL @ 21.75.

Chart of ORCL:


PEP $59.62 -0.12 -- PEPSICO Inc.

I remain very cautious about PEP. You can see on the weekly chart below that PEP has clearly broken its up trend will still struggling with a long-term pattern of lower highs. Last week I suggested we protect ourselves with some March $55 puts. I would still consider owning those puts today. PEP is due to report earnings on Feb. 11th. I am not suggesting new long-term LEAPS 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 $4.10/4.20
-stop loss on PEP at $54.95

Temporary protective put:
Jan. 23rd, 2009 - entry price on PEP @ 60.39, option @ 0.50
symbol: PEP-OK March $55 put - current bid/ask $0.45/0.55

Chart of PEP:


POT - Potash Corp. $ 99.35 -5.14

It was definitely a rough week for POT as investors sold the earnings news. The company beat estimates for the fourth quarter but management issued a warning for the first quarter 2010 and for the full year. POT gapped open lower on Thursday at $104.41 and hit our trigger to buy calls at $101 before bouncing back from the 200-dma. Sadly the bounce didn't stick. Traders sold POT again on Friday for a 4.9% loss and a bearish breakdown under support at $100.00 and its 200-dma. This is very bearish. Fortunately, I think POT is so oversold it's due for a bounce but the earnings warning takes a lot of wind out of POT's sails.

We knew this was going to be a volatile stock and set our stop loss at $89.00. I am not suggesting new positions with POT under $100. You have time to wait. Shares could plunge to $80 over the next few weeks and even if POT did bounce the $105 and $110 levels are now short-term resistance so there is no rush. Our long-term target is $160 or higher.

Jan. 28th, 2010 - entry price on POT @ 101.00, option @ 11.75
symbol: VPT-AB, 2011 LEAP $110 call - current bid/ask $11.55/11.90
-stop loss on POT @ 89.00.

Chart of ORCL:


RAI $53.20 -0.61 -- Reynolds American Inc.

Shares of RAI actually managed a small gain for the week. Overall the stock continues to drift sideways. Of course sideways is a show of strength compared to the rest of the market. Unfortunately, I suspect that if the S&P 500 continues much lower RAI will eventually breakdown. The $50.00 level should be the next level of support if RAI falls under its 50-dma (52.83). I am still suggesting that readers take profits if you have not done so already. More conservative traders may want to exit completely. Our final target is $57.50. I'm not suggesting new positions at this time.

FYI: Earnings are due out on Feb. 4th before the market opens. Wall Street is looking for a profit of $1.16 a share. You may want to buy some protective puts in case RAI disappoints and shares crash on the earnings news.

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 $12.30/15.10
-stop loss on RAI at $49.45

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

Chart of RAI:


TBT $47.35 +0.09 -- UltraShort 20+ Year Treasury Bond ProShares

As stocks go down investors have been moving money into the perceived safety of bonds. That's been bearish for our TBT play. I believe this is temporary but there is no need to rush into positions with the TBT, which moves slowly. We can open positions now or you can wait for a dip or a bounce near the $45.00 level and its trend of higher lows. Our time frame is 12 to 24 months. 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 $3.25/3.55
-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 $6.25/6.40
-stop loss on TBT @ 41.90

Chart of TBT


TEX $19.55 -0.98 -- Terex Corp.

Yuck! The last two weeks in TEX have been murder with an 18% haircut. Shares have now fallen through what should have been significant support in the $21-20 zone. The next place to look for support is $18.00 and its rising 200-dma. More conservative traders will want to seriously consider an early exit right here. 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 $3.60/3.80
-stop loss on TEX @ 17.75

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

Chart of TEX:


TLT $92.31 +0.80 -- iShares 20+Yr Bond ETF

On a short-term basis it almost looks like the TLT has produced a bull-flag pattern. The close over the 50-dma on Friday is a bullish move. I've been warning readers that if the rally continues the TLT could hit $94.00 or at least trade near the 200-dma. Wait for a move toward the 200-dma, which would be a much better entry point to buy puts.

You have plenty of time to open positions. This ETF doesn't move very fast. Wait for your entry point. 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 $4.10/4.40
-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 $5.90/7.10
-stop loss on TLT @ 100.50

Chart of TLT


UNH $33.00 -0.43 -- UnitedHealth Group Inc.

Healthcare stocks managed a bounce midweek. It's already rolling over for the HMO index, which broke down under the 50-dma on Friday. I'm sure UNH will follow. I have been suggesting that readers wait for a dip near $30.00, which 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 $3.65/3.75
-stop loss on UNH @ 28.95

Chart of UNH:


UYG $5.43 -0.07 - ProShares Ultra Financials (2x) ETF

Believe it or not we're still long the UYG. Shares hit $5.33 and $5.32 last week. Our stop loss is at $5.30. I think the financials will continue to trend lower. Readers should decide, do you exit now at $5.43 or gamble the $0.13 on the chance banks produce a bounce soon. 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: 5.30)

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

Chart of UYG:


VICR $ 8.66 +0.02 -- VICOR Corp.

VICR shaved off about 20 cents last week. The close under $9.00 and its 50-dma is definitely short-term bearish. I've been warning that VICR will probably retreat toward $8.00. There is no change from my prior comments. Wait for a dip and probably a bounce near the $8.00 region before considering new long-term positions. More conservative traders may want to raise their stops toward the $8 level (but not too close).

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 call - current bid/ask $0.60/0.80
-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

ANR $40.61 -4.05 - Alpha Natural Resources, Inc.

The weaker than expected earnings from ACI hit the coal sector hard and shares of ANR lost 9.0%. At least that seems to be a plausible explanation for ANR's sudden drop from $45. I did not see any company-specific news. Shares of ANR hit our stop loss at $41.45 closing this trade. I'd keep ANR on your watch list for a pull back toward what should be support near $35.00 and its 200-dma.

Aug. 25th, 2009 - entry price on ANR @ 34.00, option @ 7.00
symbol: VJV-AH, 2011 JAN $40 LEAP call - current bid/ask $ 8.10/ 8.60
-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%)

01/29/10 ANR hits our stop loss at $41.45. Option @ 9.25.

Chart of ANR:


DSX $13.26 -0.60 - Diana Shipping Inc.

Worries over China cooling its economic growth have continued to plague the shipping stocks. DSX broke down under its 200-dma. Shares hit our stop loss at $14.25 on Wednesday last week.

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 $ 1.00/ 1.15
-stop loss on DSX @ 14.25

01/27/10 DSW hit our stop @ 14.25. Option @ $1.65

Chart of DSX:


GHM $15.88 -1.92 -- Graham Corp.

It has been an extremely ugly couple of weeks in GHM. The stock was trying to cling to support near the 100-dma. Unfortunately on Friday the stock reversed at $18.00 and then collapsed with a drop to $15.50 intraday. GHM hit our stop loss at $15.75 closing this trade. I'm not surprised that GHM hit its 200-dma I just wasn't expecting it to get there so fast. GHM lost more than 10% on Friday alone thanks to a disappointing earnings report on Friday morning.

Two weeks ago we sold half our position. Our final target is $24.00.

Oct 26th, 2009 - entry price on GHM @ 15.15, option @ 2.65
symbol: GHM-FC, 2010 JUNE $15 call - current bid/ask $2.15/2.75
-stop loss on GHM @ 15.75

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

01/29/10 Stopped out at $15.75, option @ 2.40

- 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

01/29/10 Stopped out @ 15.75

Chart of GHM:


GNK $19.16 -1.16 -- Genco Shipping

GNK is another shipping stock that has been hammered lower, day after day, as investors worry about China and the implications for less demand and trade. GNK hit our stop loss at $20.95 on Jan. 27th. Our plan was to use small positions to keep our risk limited.

Nov 21st, 2009 - entry price on GNK @ 25.46, option @ 5.00
symbol: OKJ-AF, 2011 $30 LEAP call - current bid/ask $1.30/1.45
-stop loss on GNK @ 20.95

01/27/10 Stopped @ 20.95, option near $2.00

Chart of GNK:


HON $38.64 change: -1.18 - Honeywell Intl. Inc.

HON is another earnings-sell-off fatality. The company beat estimates by a penny and reaffirmed its prior 2010 guidance. That wasn't enough for investors, not with the market in a sell-off mode. Shares of HON gapped open lower at $38.50 on Friday and fell to its exponential 200-dma near $37.60 Friday morning. Our stop loss was hit at $37.75 closing this trade.

Dec 11th, 2009 - entry price on HON @ 41.00, option @ 3.25
symbol: VAD-AI, 2011 $45 LEAP call - current bid/ask $1.45/1.55
-stop loss on HON @ 37.75

01/29/10 stopped @ 37.75, option @ 1.50

Chart of HON:



Watch

More Candidates

by James Brown

Click here to email James Brown


New Watch List Entries

AKAM - Akamai Technologies

BRK.B - Berkshire Hathaway (class B)

MSFT - Microsoft Corp.


Active Watch List Candidates

MCD - McDonald's Corp.

PETM - PETsMART

PNRA - Panera Bread Co.

PPDI - Pharmaceutical Product Development Inc.

WMT - Wal-Mart Stores Inc


Dropped Watch List Entries

MOS and POT graduated to our play list last week.


New Watch List Candidates:

AKAMAI Tech. - AKAM - $24.70 -0.61

AKAM has broken the up trend off its summer 2009 lows. We want to be ready to buy the pull back when it's done. Last year was a game changer for AKAM's stock with a major breakout (look at a multi-year chart). Now we just need a correction in the stock to hop on board.

That correction could happen soon. The company reports earnings on Feb. 3rd. Wall Street is looking for a profit of 43 cents a share. Lately investors have been selling the news no matter what the earnings.

I am suggesting we buy call LEAPS on a dip at $21.50. The $20.00 level should offer some support. If triggered our long-term target is $29.50. We'll start with a stop loss at $17.99.

Company Info:
If you use the Internet for anything - to download music or software, check the headlines, book a flight - you've probably used Akamai's services without even knowing it. We play a critical role in getting content from providers to consumers. Akamai has created a digital operating environment for the Web. Our global platform of thousands of specially-equipped servers helps the Internet withstand the crush of daily requests for rich, dynamic, and interactive content, transactions, and applications. When delivering on these requests, Akamai detects and avoids Internet problem spots and vulnerabilities, to ensure Websites perform optimally, media and software download flawlessly, and applications perform reliably. Hundreds of enterprises worldwide use our global platform to sell, inform, entertain, market, advertise, deliver software, and conduct their business online (source: company press release or website)

Buy-the-Dip trigger: $21.50

BUY the 2011 January $25.00 calls (OMU1122A25)

Chart of AKAM:


Berkshire Hathaway Inc. - BRK.B - $76.43 +2.68

Last year Berkshire Hathaway announced the acquisition of Burlington Northern (BNI). In order to reduce the tax effect of this event on BNI shareholders Berkshire split its "baby" B shares 50-to-1 last week. This is great news for the rest of us who didn't want to pay $3,400 for one share of stock. BRK.B (different services have different formats. It could be BRK-B, or BRK/B) has been trading sideways in the $67.50-72.50 zone for months until the split occurred. S&P decided to add the baby-Bs to their index since they needed a replacement for BNI and this news is giving the stock a boost.

Aggressive traders may want to jump in now. I am suggesting that readers wait for a pull back. We'll use a trigger at $71.50 to buy the stock. Our first target is $90.00. Our second target is $99.50.

Company Info:
Berkshire Hathaway and its subsidiaries engage in diverse business activities including property and casualty insurance and reinsurance, utilities and energy, finance, manufacturing, retailing and services. Common stock of the company is listed on the New York Stock Exchange, trading symbols BRK.A and BRK.B (source: company press release or website)

Buy-the-Dip trigger: $71.50

BUY the Stock (BRK.B) Stop loss at $64.95

Chart of BRK.B:


Microsoft - MSFT - $28.18 -0.98

Investors were unhappy with MSFT's $19 billion in profits last quarter. The company sold 60 million copies of its new Windows 7 software and that wasn't enough. I think this is just investors selling the news to lock in a gain. Stocks don't go up in a straight line. We want to buy the correction. I'm suggesting readers use a trigger to buy call LEAPS on MSFT at $25.00, which is actually under the 200-dma. If triggered we'll use a stop loss at $22.75. Our long-term target is $35.00.

Company Info:
Founded in 1975, Microsoft (Nasdaq “MSFT”) is the worldwide leader in software, services and solutions that help people and businesses realize their full potential. (source: company press release or website)

Buy-the-Dip trigger: $25.00

BUY the 2012 January $25 calls (WMF1221A25)

Chart of MSFT:


Active Watch List Candidates:


MCD $62.43 -0.40 -- McDonald's Corp.

MCD was showing relative strength last week until Thursday. Now shares appear to have reversed and could play catch up to the rest of the market. Our plan has not changed. We want to buy LEAPS on a dip at $60.00. However, stocks tend to overshoot to the downside. You could wait for a dip toward the 200-dma near $58.00 instead. If triggered at $60 we'll use a stop loss at $53.95. Our long-term target is $74.50. I'm suggesting the 2011 LEAPS. You may want to buy the 2012 instead.

Buy-the-Dip trigger: $60.00

BUY the 2011 January $65 calls (VMD-AM)

Chart of MCD:


PETM $25.75 -0.10 -- PETsMART Inc.

PETM is succumbing to market weakness and shares have rolled over like we thought they would. The plan is to buy LEAPS on a dip at $24.00. You could really use the $24.00-23.00 zone since the 200-dma will probably be support. If triggered our stop loss will be $21.40. Our long-term target is the $34-35 zone but given the lack of LEAPS we'll aim for 29.00.

Buy-the-Dip trigger: $24.00

Readers may want to consider buying the stock. PETM doesn't have LEAPS. The longest-dated options are 2010 Julys. BUY the 2010 July $25 calls (QPT-GE)

Chart of PETM:


PNRA $71.42 -0.59 -- Panera Bread Co.

PNRA continues to hold up very well considering the market's breakdown. Eventually shares will correction. We want to use a trigger to buy LEAPS at $65.50. If triggered we'll use a stop loss at $59.50. Our long-term target is the $84.50 level.

Buy-the-Dip trigger: $65.50

BUY the 2011 January $70 calls (ZGM-AN)

Chart of PNRA:


PPDI $23.36 -0.34 -- Pharmaceutical Product Development Inc.

PPDI surprised us last week with a spike past resistance near $23.75 and a move over the $24.00 level. I could not find any company specific news to account for this relative strength. The rally has begun to roll over as the market breaks down. The high last week was $24.11 so we're still sitting on the sidelines wait for a true breakout.

Bigger picture the relative strength is encouraging but with the market sinking I think PPDI corrects. Nimble traders may want to consider buying a bounce near $22.50 and its 50-dma. I'm suggesting readers stick with the plan and use a trigger at $24.25 to open bullish positions. You could even up your trigger to $24.55 just to make sure we're jumping on a more significant breakout above resistance.

If triggered at $24.25 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:


WMT $53.43 +0.82 -- Wal-Mart Stores Inc.

There is no change from last week's comments. WMT doesn't move very fast but it should correct with the rest of the market. The bounce on Friday reversed, which is short-term bearish. I still expect it could take a couple of weeks (or more) before WMT hits our trigger to open long-term positions at $50.50. If triggered we'll use a stop loss at $46.75. Our first long-term target is $62.50. More aggressive traders may want to use the 2011 January calls (the $50 strike VWT-AJ).

Buy-the-Dip trigger: $50.50

BUY the 2012 January $50 calls (WWT-AJ)

Chart of WMT: