Option Investor
Newsletter

Daily Newsletter, Saturday, 3/27/2010

Table of Contents

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

Leaps Trader Commentary

Blood In the Water

by James Brown

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The seemingly unstoppable market rally suddenly looks vulnerable. The combination of headline trauma and stress are finally wearing down the bulls. Bears smell blood in the water and they have begun to circle. With the major U.S. averages up more than 10% from their February lows without any sort of significant consolidation the shorts know a correction is coming.

I suspect that investors have been beaten over the head with too many headlines this past week as we rush from healthcare to Greece to Korea. It was just a week ago that the fervor over the healthcare vote had reached a fever pitch. The vote occurred. The bill was passed. Healthcare stocks spiked higher on Monday and reversed in a classic sell the news move. As one crisis faded another took its place.

The Greece situation came to a head. The Greek prime minister threatened to go to the IMF for help, something EU regulators did not want, especially France. There was a hidden battle between Germany and France, the two largest EU economies. France holds a lot of Greek debt so they don't want them to default. Germany has no taste for a bailout using their tax payer funds to bail out a nation they feel is lazy and corrupt (not my words). In the end a compromise was reached that included bilateral loan agreements and IMF involvement as a last-ditch safety net for Greece and any additional countries that may be struggling. The two-day meeting in Brussels was not just about Greece. The EU is worried that Spain, Portugal, Ireland and Italy are next in line.

As the Greece situation appeared solved there was another flare up in the East. On Friday a South Korean navy ship exploded and sank off the west coast of North Korea. Reports claim the S. Korean ship exploded from the rear and from under the water line, which certainly sounds like a torpedo. Yet news reports quickly down played the event as a threat from N. Korea and focused on the rescue efforts. Stocks reversed their morning gains on the report and the market never really recovered.

I suspect that investors were happy to have another excuse to sell stocks. The market is up huge in the last eight weeks and the pressure for money managers to perform has been hot. The question is how will they finish the race with just three days left in the first quarter?

Imagine the market, a weary racer, nearing the end of a marathon. They can see the finish line. Some racers will find a last bit of energy to sprint across the finish. Others are merely happy to stumble across the line grateful the race is over. I suspect that we could have a stumbling finish for the quarter end. Trading action these past few days has been weak. Volume was low. Traders were selling into strength. We have a series of failed rallies. The bullish camp can argue that there was no real follow through to Thursday's bearish reversal but I wouldn't open new bullish positions on that idea.

We could end up seeing stocks slowly drift into the first quarter end. Then the correction could begin. Fund manager pressure for performance will ease. The market's focus will return toward economic data and the next earnings season. Speaking of economic data we have a very full week ahead of us. A few of the highlights will be the Case-Shiller home price data, consumer confidence, New York and Chicago ISM numbers, the national ISM manufacturing number, the ADP employment report on Wednesday and the non-farm payrolls (jobs) report on Friday. The biggest report of the week will be the jobs report and yet the market will be closed for good Friday.

Expectations for the jobs report are positive with growth around +300,000 jobs yet more than a third of that number could be temporary jobs for the U.S. census. Professional traders will know that jobs numbers for the next few months will be artificially inflated by the census but how till the market react? Will investors hold over the three-day weekend? If the jobs number disappoints then stocks could gap down on Monday morning, April 5th.

Traders need to be careful. The market is up big. The rally looks tired. Stocks are lacking a new catalyst to drive them higher. Now maybe things will change with a new week of economic data but we know the focus will be on the Friday jobs report and that could keep any further rally in check. Be patient and let the market come to you. There is no need to chase it here.

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:

Readers may want to consider exiting early any remaining coal stock plays. The sector is getting hammered. CNX was stopped out last week and ACI could be next. We also last CHK as natural gas prices continue to sink.

On a more positive note we're taking some money off the table with gains in PEP and TIE. I'm suggesting readers sell half of our positions in both trades.

My outlook has not changed from last week. The trend is up but the rally looks very fragile and a correction should occur any day now. I would hesitate to launch new bullish positions.

There are a couple of new stop losses tonight.

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

Nearing the Finish Line

by James Brown

Click here to email James Brown


(Still) Waiting For An Entry, Round 3


Editor's Note:

The S&P 500 index was up 13% from its February lows when it tagged the 1180 level on Thursday. That's a huge move without any significant correction on the way up. The small caps are up even more! It can be dangerous to try and chase big moves like this especially when the trading action this past week is suggesting the rally is almost out of steam.

This is not an environment to launch new long-term bullish positions. Corrections are a normal part of a healthy market. We need to be patient and wait for the market to provide an entry point.

I added three new candidates to the watch list this weekend so we will be ready when the correction finally shows up.



Play Updates

Taking Profits Again

by James Brown

Click here to email James Brown

Editor's Note:

Coal and energy stocks continued to underperform. The action in CHK, CNX, and ACI has been ugly! We are choosing to take some money off the table in PEP and TIE.


Closed Plays


CHK and CNX have been stopped out.


Play Updates


Arch Coal Inc. - ACI - close: 22.69 change: -0.20

Coal stocks tried to mount a rebound but the sector rolled over on Wednesday and Thursday last week. Even a new "buy" rating for ACI was not enough to stop the selling. I have been warning investors about this retreat for days and ACI is now on the downward slope of the right shoulder to a bearish head-and-shoulders pattern. The neckline and support should be near the $20 region. I've said it before. More conservative traders will want to consider an early exit to cut their losses. The bearish pattern in ACI combined with an overbought market that looks poised to correct does not bode well at all. The best we can hope for right now is that ACI rallies from the 200-dma or the $20 level. If the H&S pattern holds true it would forecast a decline toward $13. I'm not suggesting new bullish positions at this time. Our final target is $34.75.

May 14th, 2009 - entry price on ACI @ 16.00, option @ 2.40
symbol: OSE-AF, 2011 JAN $30 LEAP call - current bid/ask $1.30/1.40
-stop loss on ACI @ 19.85

--2nd Entry--
Feb 13th, 2010 - entry price on ACI @ 21.65, option @ 4.40
symbol: YEP1221A25 2012 JAN $25 LEAP call - current bid/ask $4.50/4.90
-stop loss on ACI @ 19.85

Chart of ACI:


Biogen IDEC - BIIB - close: 58.15 change: -0.12

The rally in the biotech sector has stalled and the group remains very overbought. Shares of BIIB have already started to correct. There could be some short-term support near $56 and its 50-dma but I would expect a pull back toward the $55-54 zone. I cautioned readers a week ago to look for a pull back and it has begun. At this point I would definitely wait for a solid bounce in the $54-55 region before considering new bullish positions. Our first target to take profits is at $64.90.

Feb 19th, 2010 - entry price on BIIB @ 56.60, option @ 4.60
symbol: OIY1122A60 2011 JAN $60 LEAP call - current bid/ask $4.60/5.10
-stop loss on BIIB @ 51.85

Chart of BIIB:


Berkshire Hathaway Inc. - BRK.B - $81.30 -0.40

Shares of Berkshire's B-shares have been overbought and due for a correction for weeks now. It looks like the pull back may have begun. I suspect this is a strong candidate for window dressing by fund managers but the stock has actually been drifting lower for over a week, which doesn't really support the window-dressing concept. BRK.B needs a healthy pull back and the dip could be anywhere in the $78 to $72 area. I'm not suggesting new positions at current levels. In the mean time more conservative traders may want to take some money off the table.

Our first target is $90.00. Our second target is $99.50

Feb 6th, 2010 - entry price on BRK.B @ 73.57, option @ 4.80
symbol: 2011 JAN $80 XPB1122A80 LEAP call - current bid/ask $6.70/7.00
-stop loss on BRK.B @ 69.00

Feb 6th, 2010 - entry price on BRK.B @ 73.57, option @ 6.50
symbol: 2012 JAN $85 WDW1221A85 LEAP call - current bid/ask $8.00/8.40
-stop loss on BRK.B @ 69.00

Chart of BRK.B:


BorgWarner Inc. - BWA - close: 37.03 change: -0.36

BWA managed a gain for the week but the action on Thursday and Friday looks like a bearish reversal and a new lower high. I am still expecting a correction toward the $34.00 level or its 200-dma. I am not suggesting new bullish positions at this time.

Our first target is $44.50. Our second target is $49.75. FYI: More conservative traders might want to use a stop loss closer to $34.00.

Feb 17th, 2010 - entry price on BWA @ 37.55, option @ 3.90
symbol: ZWY1122A40 2011 JAN $40 LEAP call - current bid/ask $3.10/3.50
-stop loss on BWA @ 32.49

Chart of BWA:


Celgene Corp. - CELG - close: 62.14 change: -0.56

I warned readers a week ago that CELG had formed a bearish reversal and short-term top. The stock is now testing short-term support near $62.00. I do not believe it will hold. Look for a pull back toward the $60-58.00 zone. We can launch new bullish positions if CELG rebounds from this lower level of support. Investors will want to keep an eye on the BTK biotech index, which is in desperate need of a correction. If the BTK does correct CELG's own pull back could get exaggerated.

Our target is the $74.00 level. I have been suggesting the 2011 Jan. $65 calls but readers may want to buy the 2012 calls.

FYI: A few weeks ago CELG was number 5 on Morningstar's top ten list of potential takeout (acquisition) targets.

Mar 1st, 2010 - entry price on CELG @ 60.75, option @ 5.40
symbol: VCS1122A65 2011 JAN $65 LEAP call - current bid/ask $5.50/5.70
-stop loss on CELG @ 54.75

Chart of CELG:


Deluxe Corp. - DLX - close: 19.72 change: +0.09

DLX produced a gain for the week but I'm still cautious on the stock. The trend is up but momentum is still waning. DLX is still having trouble closing above the $20 level. The first level of support would be the 50-dma and just below that is what should be price support near $18.00. More conservative traders may want to raise their stop losses toward the $18 area. I am not suggesting new positions at this time. Wait for shares to bounce after a correction. Our target is $24.75.

Mar 1st, 2010 - entry price on DLX @ 19.10, option @ 1.10
symbol: DLX1016J20 2010 OCT $20 call - current bid/ask $1.30/1.65
-stop loss on DLX @ 16.75

Chart of DLX:


EMR $49.80 +0.31 -- Emerson Electric Co.

EMR continues to show relative strength. The stock tagged a new 52-week high on Friday at $50.20. Midweek shares garnered an upgrade and a new broker price target at $55.00. More conservative traders may want to exit right here. When the market corrects I would expect EMR to dip toward the $46-45 zone. We are upping our stop loss to $43.75. EMR has already hit our first target at $47.50. Our second and final target is $54.50.

Sept. 8th, 2009 - entry price on EMR @ 38.00, option @ $4.50
symbol: VHH-AH, 2011 JAN $40 call - current bid/ask $10.30/10.80
-stop loss on EMR @ 43.75 *new*

02/18/10 1st Target hit @ 47.50, option @ $8.80 (+95.5%)

Chart of EMR:


Fortune Brands - FO - close: 49.06 change: -0.46

You could argue that the lack of profit taking in shares of FO is a bullish sign. I suspect that money managers are just waiting for the quarter to end before locking in gains. FO is short-term overbought. I am expecting a correction. Wait for a dip toward the $46-44 zone before considering new bullish positions. Overall I remain very bullish on FO. We just need to wait for the right entry point. Our target is $62.00.

Mar. 12th, 2009 - entry price on FO @ 47.55, option @ $2.20
symbol: FO1018I50 SEP 2010 $50 call - current bid/ask $2.85/ 3.10
-stop loss on FO @ 39.95

Chart of FO:


Forest Oil Corp. - FST - close: 25.00 change: -0.44

Ouch! Oil and oil service stocks have continued to under perform thanks in part to a rally in the dollar on the back of euro currency weakness. Once shares of FST broke technical support at the 50-dma shares accelerated lower. On a short-term basis the sell-off looks complete and shares are off 16% from their recent highs near $30.00. However, the wider market (S&P 500) is still overbought and looks poised to correct, which could send FST even lower!

I am not suggesting new bullish positions at this time and more conservative traders will want to seriously consider an early exit right here to avoid or minimize any losses. If it looks like FST bounces and then begins to roll over again the newsletter will probably abandon ship. 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 $ 6.90/ 7.10
-stop loss on FST @ 23.45

Chart of FST:


Intel Corp. - INTC - close: 22.24 change: -0.11

INTC helped lead the semiconductor sector higher with a rally to new 52-week highs last week. Yet the rally was stopped cold near the $22.75 level. The trend is up but stocks are overbought. Look for a correction back to the $21.50-21.00 zone. I am inching our stop loss up to $19.25, which is still under the simple 200-dma. FYI: Earnings are coming up on April 13th.

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 $3.30/3.35
-stop loss on INTC @ 19.25 *new*

Chart of INTC:


Mosaic Co. - MOS - close: $59.35 change: +0.91

This could end up being a very volatile week for MOS, which already sees more than its fair share of volatility. Right now it's tough to read what's happening with MOS. Fundamentally the industry should be poised to do well with a projected rise in demand for their products. Yet the trading has been erratic in MOS. You could almost argue the stock has produced a bear-flag pattern this past week. Thursday's session was a one-day bearish reversal pattern but there was no follow through on Friday. Technical indicators are not much help given all the choppiness. The Point & Figure chart, which tends to eliminate a lot of the noise is still bullish.

MOS reports earnings on March 31st after the closing bell. Wall Street expects a profit of 63 cents a share. A few analysts have predicted that MOS will beat estimates. If too many investors start getting too optimistic for MOS' earnings report then that sets up a stronger chance of a disappointment and the usual sell-off. If management says the wrong thing or delivers poor results this stock could easily be trading near $54 or less in a heartbeat. I am not suggesting new positions at this time. We will wait and see how the stock reacts following its earnings announcement.

If you already have a bullish LEAP position in MOS then I am suggesting we buy the April $50 puts. They're cheap but if MOS collapses on us it should take the sting out of any correction in the LEAP calls. Currently the April $50 puts are going for $0.17 each. You could choose the $55s for $0.78. 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 $6.50/6.90
-stop loss on MOS @ 51.90

Buy the April $50 puts (current ask $0.17) as a precaution over earnings.

Chart of MOS:


Manitowoc Inc. - MTW - close: 13.13 change: -0.03

MTW continues to build on its trend of higher lows and higher highs but just barely. The intraday reversals on Thursday and Friday last week are actually worrisome. I would expect shares to correct back toward $12.00 or its 100-dma on any market pull back. Thus I'm not suggesting new bullish 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 $4.00/4.30
-stop loss on MWT @ 9.85

01/18/10 Sell Half! MTW @ 13.70, option at $4.80 bid (+83.9%)

- or -

Oct. 30th 2009 - entry price on MTW (the stock) @ 9.10
- stop loss on MTW @ 9.85

01/18/10 Sell Half! MTW @ 13.70 (+50.5%)

Chart of MTW:


Oracle Corp. - ORCL - close: 25.69 change: -0.35

ORCL rallied to new multi-year highs just ahead of its earnings report on Thursday. The stock hit $26.25. Results of $0.38 a share were in-line with expectations. Revenues came in a little bit ahead of estimates. Guidance was generally in-line with Wall Street's estimates. It was only natural to see some profit taking on Friday after the event and the 1.3% decline on Friday was pretty minor. If the market corrects I would look for ORCL to pull back toward the $24 area. I am not suggesting new positions at this time. 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 $2.72/2.76
-stop loss on ORCL @ 21.40.

Chart of ORCL:


PEPSICO Inc. - PEP - close: 66.59 change: +0.04

PEP's rally has been stopped in its tracks. After a six-week rally from $59 to $67 it looks like shares have finally ran out of gas. I suspect money managers are just waiting for the quarter to end before taking some profits off the table. I am suggesting that we take some money off the table right now! We'll sell half our position at current levels and up our final target to $72.25. Look for a dip toward the $64-62 zone on any market correction.

July 7th, 2009 - entry price on PEP @ 57.25, option @ $4.50(estimate)
symbol: VP-AL, 2011 $60.00 LEAP call - current bid/ask $8.00/8.15
-stop loss on PEP at $59.40

03/27/10 SELL HALF: PEP $ 66.59, Option @ $8.00 (+77.7%)

Chart of PEP:


Potash Corp. - POT - close: $120.72 change: +0.75

The profit taking continues and Thursday's session has produced a bearish reversal pattern. I am still suggesting that readers wait for a correction into the $115-110 zone and then look for a bounce before considering new bullish positions. This week rival MOS is due to report earnings on March 31st after the closing bell. MOS' results could have an impact on shares of POT.

We sold half our position near $125. Our final target is $160.00.

Jan. 28th, 2010 - entry price on POT @ 101.00, option @ 11.75
symbol: VPT-AB, 2011 LEAP $110 call - current bid/ask $22.80/23.15
-stop loss on POT @ 99.50

SELL HALF (03/13/10) option @ $26.35 bid (+124%)

Chart of ORCL:


PartnerRe Ltd. - PRE - close: 80.20 change: +0.19

Shares of PRE continue to perform well but I would keep a wary eye on the IUX insurance index. This index is up about seven weeks in a row and looks very overbought and due for a correction. If the market and the IUX index correct we can expect PRE to follow suit. Readers may want to step back and see what happens over the next week or two before considering new bullish positions in PRE.

Our first target is $84.90. Our second, longer-term target is $97.50.

Feb. 13th, 2010 - entry price on PRE @ 76.28, option @ 2.70
symbol: PRE1021H80, 2010 AUG $80 call - current bid/ask $3.50/3.80
-stop loss on PRE @ 69.75

Chart of PRE:


Reynolds American Inc. - RAI - close: 53.42 change: -0.17

I'm sorry to say that RAI is going nowhere fast. Shares spent most of last week in a $1.00 range. Resistance in the $54-55 zone is still very much alive. More conservative traders will want to consider between taking profits now or raising their stops toward the $52 level. I am not suggesting new positions at this time. At the moment our final exit target is $57.50. More aggressive traders may want to aim higher.

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 $12.70/14.90
-stop loss on RAI at $49.75

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

Chart of RAI:


UltraShort 20+ Year Treasury Bond ProShares - TBT - cls: 49.24 chg: -0.14

We are finally starting to see some action in the bond market. The U.S. continues to sell record levels of debt. Investors are starting to grasp just how dangerous this ballooning debt could be. Or it could be a move by the Chinese to lower how much they buy U.S. treasuries since the U.S. is threatening them with the "currency manipulator" label. Whatever the reason is it doesn't matter. The demand for bonds is falling and yields are rising. I suspect this could end up being a multi-year trend.

The TBT still has a bearish trend of lower highs so I'm sticking to my prior comments. Readers will want to wait for a move over the $51.50 level before considering new bullish positions.

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 $2.65/2.89
-stop loss on TBT @ 45.90

Jan. 09th, 2010 - entry price on TBT @ 50.63, option @ 7.90
symbol: YHT-AH, JAN 2012 $60 LEAP call - current bid/ask $5.00/5.25
-stop loss on TBT @ 45.90

Chart of TBT


Titanium Metals - TIE - close: 16.21 change: +0.29

Take profits now! Shares of TIE surged to new 18-month highs last week. News that Boeing was raising their airplane production levels and rumors that TIE could be a takeover target combined to send TIE to an intraday high of $17.00. Titanium is a major component in aircraft construction so news that BA was raising their build out rate is bullish for TIE. Thursday's session looks like a bearish reversal and while there was no confirmation I am suggesting we take profits now. The combination of TIE looking very overbought combined with a market rally that looks very fragile seems like a good excuse to take some money off the table.

I am suggesting we sell half of our TIE position now. We will raise our stop loss to $11.90. Our long-term target is $19.75.

Feb. 20th, 2010 - entry price on TIE @ 12.06, option @ 1.40
symbol: VWN1122A15, 2011 JAN $15 LEAP call - current bid/ask $3.20/3.50
-stop loss on TIE @ 11.90 *new*

03/27/10 SELL HALF: TIE @ 16.21, option @ 3.20 (+128.5%)

Feb. 20th, 2010 - entry price on TIE @ 12.06, option @ 2.60
symbol: WWN1221A15, 2012 JAN $15 LEAP call - current bid/ask $4.50/4.80
-stop loss on TIE @ 11.90*new*

03/27/10 SELL HALF: TIE @ 16.21, option @ 4.50 (+73%)

Chart of TIE:


iShares 20+Yr Bond ETF - TLT - close: 88.50 change: +0.25

The action in the TLT is the mirror opposite of the TBT. As bonds decline the TLT followed them lower. Shares of the TLT actually hit new relative lows at $88.37 on Thursday. I have been suggesting that readers look for a close under the $88.00 level before considering new put LEAPS. Our first target is $81.00.

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 $3.85/4.45
-stop loss on TLT @ 94.15

Jan. 09th, 2010 - entry price on TLT @ 89.29, option @ 8.90
symbol: YLI-MB, JAN 2012 $80 LEAP put - current bid/ask $5.85/6.90
-stop loss on TLT @ 94.15

Chart of TLT


UnitedHealth Group Inc. - UNH - close: 32.63 change: -0.49

Uh-oh! The relative strength rally in healthcare stocks peaked on Monday following the vote on healthcare. The sector has been slipping lower ever since. You could argue that this past week has created a new lower high for UNH. We are now faced with the strong possibility that shares are headed back toward support near $30.00 again. I am not suggesting new bullish positions at current levels.

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 $3.00/3.10
-stop loss on UNH @ 28.95

Chart of UNH:


Visa Inc. - V - close: 90.25 change: -0.16

The action in V last week was certainly encouraging. There was no follow through on the previous week's reversal. Traders bought the dip near $88 and shares slowly regained the pivotal $90 level. Unfortunately it might be short-lived. The market's rally is losing steam fast. If the S&P 500 corrects it would not surprise me to see V pull back toward the $85 region and its 100-dma. Therefore I am not suggesting new bullish positions at this time. We can be ready to buy the dip but stay on the sidelines for now. Our long-term target is the $109 mark. Investors might want to consider the 2012 LEAPS instead.

Mar 9th, 2009 - entry price on V @ 91.00, option @ 4.60
symbol: VSK1122A100 JAN 2011 $100 LEAP call - current bid/ask $4.20/4.40
-stop loss on V @ 81.75

Chart of V:


Wal-Mart Stores Inc. - WMT - close: 55.51 change: -0.10

The rally in WMT has stalled. Shares spent last week churning sideways in a narrow range. Honestly, I don't see any changes from my prior comments. Shares look poised to correct. We can launch new positions on a dip into the $54-52.50 range but I would be patient and wait to buy LEAPS on a bounce. This is a long-term trade for us so you can take your time on an entry point.

Our long-term target is the $63.00 level. Since WMT does not move very fast readers may want to supplement their position by turning it into a calendar spread or a diagonal spread to enhance their gains.

Mar 7th, 2009 - entry price on WMT @ 54.14, option @ 4.60
symbol: WWT1221A55 JAN 2012 $55 LEAP call - current bid/ask $5.40/5.55
-stop loss on WMT @ 49.45

Chart of WMT


CLOSED Plays

Chesapeake Energy Corp. - CHK - close: 24.21 change: +0.42

Natural gas has continued to sink to new multi-year lows. Consumption during the winter months has been a lot less than expected and storage levels remain above five-year highs. It looks like shares of CHK are finally beginning to catch up to the weakness in its main commodity. Last week's big rally in the dollar also hammered commodity stocks lower. The stock hit our stop loss at $22.75 on Thursday closing this trade.

Oct 30th, 2009 - entry price on CHK @ 24.00, option @ 4.70
2nd entry Feb. 6th, 2009 - entry on CHK @ 24.52, option @ 3.80
symbol: VEC-AE, JAN 2011 $25 LEAP call - current bid/ask $2.03/2.10
-stop loss on CHK @ 22.75

Position Closed on 03/25/10 at $22.75, Option closed at $2.07 (-56% & -45%)

Chart of CHK:


Consol Energy Inc. - CNX - close: 42.50 change: -0.47

The ugliness in shares of CNX continues and so does the acquisition spree. Two weeks ago CNX plunged on news it was buying the natural gas business from Dominion Resources. On Monday, March 22nd CNX announced it was buying the rest of CNX Gas Corp. that it did not already own for about $363 million. Shares of CNX gapped open lower and spiked down toward the $43.00 level. Our stop loss was hit at $43.99 closing this trade. The stock tried to bounce midweek but rolled over again with the rest of the coal names. CNX also broke down under its 200-dma, which should have been technical support. All together it has been a horrendous couple of weeks with CNX falling from $55 to $42.50.

CNX hit our first target back in September.

Sep 1st, 2009 - entry price on CNX @ 36.50, option @ 7.80(estimate)
symbol: VTL-AH, 2011 JAN $40 LEAP call - current bid/ask $ 7.90/ 8.30
-stop loss on CNX @ 43.99

STOPPED OUT 03/22/10 @ 43.99, option price $9.60 (+23%)

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

Chart of CNX



Watch

Industrial Goods, Construction and Chicken!

by James Brown

Click here to email James Brown


New Watch List Entries

CIR - CIRCOR Intl.

MDR - McDermott Intl.

SAFM - Sanderson Farms Inc.


Active Watch List Candidates

CRS - Carpenter Technology

EMC - EMC Corp.

IMN - Imation Corp.

RT - Ruby Tuesday, Inc.

TRMB - Trimble Navigation

TSCO - Tractor


Dropped Watch List Entries

I am dropping the XHB as a watch list candidate.


New Watch List Candidates:

CIRCOR Intl. - CIR - close: 33.66 change: +0.90

Shares of this industrial goods company have continued to show relative strength. CIR spent over a year building a base under resistance near the $30 level. In the past couple of months shares have managed a significant breakout over this pivotal level. A recent string of better than expected earnings results (last three quarters) certainly hasn't hurt investment sentiment for the stock.

Here's the plan. The market looks fragile and I'm expecting a correction. CIR should have support near $30.00 now. I'm suggesting we buy the longest calls available (currently Novembers) if CIR pulls back and hits $30.50. If triggered we'll use a stop at $27.75. Our long-term target is the $40 area. FYI: The P&F chart is pointing to a $47 target.

Company Info:
CIRCOR International, Inc designs, manufactures, and supplies valves, related products and services to OEMs, processors, manufacturers, the military, and utilities that rely on fluid-control to accomplish their missions. Our products enable end users to control process fluids safely and efficiently in petrochemical, power-generation, scientific (instrumentation) and industrial (manufacturing) applications. (source: company press release or website)

Buy-the-Dip trigger: $30.50

BUY the 2010 NOV $35 calls (CIR 10K35.00)

Chart of CIR:


McDermott Intl. - MDR - close: 25.65 change: -0.28

MDR is a major engineering and construction company. As governments put their stimulus money to work rebuilding infrastructure odds are MDR could be garnering some of the business. Shares have a long-term bullish up trend and are currently creeping toward resistance near the $28.00 level. I am suggesting we use a breakout trigger to buy LEAPS at $28.25. If triggered we'll use a stop loss at $24.75. Our long-term target is $37.50. Investors may want to consider 2012 LEAPS and aim higher. Currently the Point & Figure chart is suggesting a $37 target.

Company Info:
McDermott is a leading engineering and construction company, with specialty manufacturing and service capabilities.The Company provides its services to a variety of customers in the energy and power industries, including the U.S. Government. McDermott operates in 23 countries and has over 20,000 employees (source: company press release or website)

Breakout trigger: $28.25

BUY the 2011 JAN $30.00 CALLS (MDR 11A30.00)

Chart of MDR:


Sanderson Farms Inc. - SAFM - close: 56.04 change: +1.18

Shares of SAFM have spent years trading under major resistance at $50.00 and the $55.00 levels. Now in just the last few weeks the stock has broken out past both. A string of significant earnings beats over the last four quarters does not hurt the fundamental picture. Right now the market looks overbought. We want to be ready to buy the dip in SAFM. I am suggesting we use a trigger at $51.00 to buy options. Unfortunately the longest-dated options currently available are Novembers. If triggered we'll use a stop loss at $44.90. Our target is $59.75. I would aim higher but we only have a few months.

Company Info:
Sanderson Farms has grown from a small general feed and seed business in 1947 to one of the nation's leading food corporations in 2009, with sales of more than $1.78 billion. We are currently the fourth largest poultry producer in the U.S., processing over 2.4 billion pounds of meat annually. (source: company press release or website)

Buy-the-Dip trigger: $51.00

BUY the 2010 NOV $55 calls (SAFM 10K55.00)

Chart of SAFM:


Active Watch List Candidates:


Carpenter Technology - CRS - close: $35.29 change +1.15

Shares of CRS have continued to hold to its gains in spite of weakness in the basis materials sector. Please note I am adjusting our entry point to $30.00 and raising our stop loss to $27.45. Our long-term target is $44.50. Currently the Point & Figure chart is very bullish with a $57 price target.

Buy-the-Dip trigger: $30.00

BUY the 2010 September $35 calls (symbol: CRS1018I35)

Chart of CRS:


EMC Corp. - EMC - close: 18.56 change: -0.17

Not much has changed. EMC is still consolidating sideways in the $18.50-19.00 zone. I am adjusting our trigger to buy the dip down to $17.50. We'll keep the tight at $16.24, just under the 200-dma. If triggered our long-term target is $22.50. FYI: The Point & Figure chart is bullish with a $34.50 target. (Readers may want to buy 2012 calls and aim higher)

Buy-the-Dip trigger: $17.50

BUY the 2011 January $20.00 LEAP CALL (symbol: VUE1122A20)

Chart of EMC:


Imation Corp. - IMN - close: 11.46 change: +0.00

IMN managed to tag new 52-week highs last week. Unfortunately it wasn't able to hold on to those gains. This suggest the rally is running out of steam and IMN is nearing a correction.

I am suggesting we buy the stock (or calls) on a dip at $10.15. If triggered our first target is $12.25. Our second target is $14.25. FYI: The Point & Figure chart is bullish with a $17.50 target.

Buy-the-Dip trigger: $10.15

Buy the IMN stock at $10.15

-or-

BUY the 2010 October $12.50 call (symbol: IMN1016J12.5)

Chart of IMN:


Ruby Tuesday Inc. - RT - close: $10.90 change: +0.03

RT has managed to extend its gains as we near the close of the first quarter. Shares remain very overbought and I suspect money managers are merely waiting for the quarter to end before locking in gains. We want to take advantage of any pull back. I am suggesting we use a dip to $9.50 as our entry point. We'll use a stop loss at $7.90.

I am suggesting readers buy the stock but options are available so we will list both. If triggered our first target is $12.25. Our second, longer-term target is $14.75. FYI: The Point & Figure chart is very bullish with a $19 target.

FYI: Readers should note that RT is due to report earnings on April 7, 2010. It can be dangerous to hold a position over earnings. Readers may want to wait until after we see the market reaction to RT's numbers before initiating positions even if shares hit our trigger beforehand.

Buy-the-Dip trigger: $9.50

BUY the stock at $9.50

- or -

BUY the 2010 October $10.00 calls (symbol: RT1016J10)

Chart of RT:


Trimble Navigation - TRMB - close: 28.21 change: +0.05

TRMB rallied to new one-year highs midweek. Yet now it looks like the rally is reversing and the correction may have already begun. We want to be ready to buy the dip. Broken resistance near $26.00 should offer new support. I'm suggesting a trigger to buy calls at $26.05. If triggered we'll use a stop loss at $23.95. Our first target is $29.95. Our second target is $32.25. FYI: The P&F chart is bullish with a $42 target.

Buy-the-Dip trigger: $26.05

BUY the 2010 August $30 calls (symbol: TUH1021H30)

Chart of TRMB:


Tractor Supply Co. - TSCO - close: 58.23 change: +0.14

The situation is similar here with TSCO. Shares managed to tag a new 52-week high a few days ago but since then it appears the correction may have begun. Broken resistance near $55.00 should offer support. I'm suggesting a trigger to buy calls on a dip at $55.25. If triggered our first target is $69.00. We'll use a stop loss at $49.75.

Buy-the-Dip trigger: $55.25

BUY the 2010 October $55 call (symbol: QTF1016J55)

Chart of TSCO:


Homebuilders ETF - XHB - close: 16.96 change: +0.08

It was close but no cigar! The XHB hit $17.21 on Thursday before reversing. Our trigger to open positions has been $17.25. I am dropping the XHB as a bullish candidate due to news out this past week. The government said the sale of new homes fell to an all-time historic low since records began more than 40 years ago. That cannot bode well for earnings. Even though the chart looks bullish I suggesting we avoid launching new bullish trades for now. Let's see how the sector looks after the next earnings season.