Option Investor
Newsletter

Daily Newsletter, Saturday, 4/17/2010

Table of Contents

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

Leaps Trader Commentary

SEC Sucker Punches Goldman Sachs

by James Brown

Click here to email James Brown

The first four days of the week turned out to be strong for stocks. Positive earnings news from big cap names like JPM, INTC and CSX helped lift the major market indices to new 52-week highs. Unfortunately the market tone took a definite turn for the worse on Friday but more on that in a minute.

Investors continue to ignore bearish news out of Europe and China. The Greece problem refuses to die but it seems like worries over Greece are diminishing following news the European Union and the IMF have finally committed to offer a $61 billion aid package. The EU has pledged more than $40 billion in three-year loans at below-market rates while the IMF is filling in the rest.

Meanwhile on the other side of the globe China is once again trying to slam on the brakes to cool its overheating economy. This time the focus was on China's real estate bubble. Government agencies announced higher mortgage rates and down-payment requirements for all second homes effective immediately following news that properties values surged more than 11% in March from a year ago. With China's economy growing at a double-digit pace it's only a matter of time before the country's central bank begins to raise interest rates and a move like that would be felt around the globe.

Economic data this past week is starting to disappoint. Rising foreclosures are still a problem but then readers of this column already knew this plague of repossessions isn't going away any time soon. On Thursday, RealyTrac announced that the number of homes in the U.S. being foreclosed by banks surged 35% in the first quarter of 2010 compared to 2009. We're on track for over one million foreclosures this year. One out of every 138 homes in this country received a foreclosure-notice. Those numbers are a lot worse for states like Nevada, Florida and California. Don't forget that prior estimates for five to six million foreclosures over the next three years were doubled by the White House a few weeks ago toward the 10 to 12 million range.

Troubled real estate numbers and unemployment go hand in hand. The Labor Department announced that weekly initial jobless claims surged 24,000 to 484,000 while continuing claims jumped 73,000 to 4.639 million workers. With numbers like these it's probably not a surprise to hear that consumer sentiment sank. Economists were actually expecting the Reuters/University of Michigan's consumer sentiment numbers to rise to 75.0. Instead the report showed a drop in consumer sentiment from 73.6 in March to 69.5 in April. This was definitely a surprise considering the rise in the jobs report for last month. There is some speculation that the passage of the healthcare reform bill has dampened consumer spirits. The concern here is that falling consumer sentiment tends to equal falling consumer spending, which accounts for nearly 70% of the U.S. economy.

Goldman Sachs made headlines last week - twice! The first time was on Tuesday when Goldman's Chief U.S. Economist issued bearish comments about the recovery and the U.S. economy in the second half of 2010. Gosh, that sounds like someone else I know. Of course the real headlines were on Friday. The politically motivated SEC fraud charge announcement against GS was timed perfectly on Friday, just two weeks ahead of a vote on financial reform. It doesn't matter whether you admire or loathe the current administration in the White House, you have to give them credit for creativity and some shrewd tactics to get what they want.

I'm not going to dissect the SEC's charges against Goldman. That's already been done ad nauseam across the news at this point. However, I will suggest this could be the event that sparks a bearish reversal in the stock market although I doubt it. It may be more like the beginning of the reversal. The unexpected news from the SEC against Goldman sparked a market-wide sell-off and banking stocks led the decline. The BKX and BIX banking indices fell 3.4% and 2.8%, respectively.

Technically Friday's big down day has created a three-day candlestick bearish reversal pattern on the S&P 500. Yet I would hesitate to launch any short-term bearish trades. This week is one of the busiest weeks for Q1 earnings season with over 120 S&P 500 component companies reporting. There are several really big names that are going to report earnings this week and given the tone of earnings season thus far I expect them to beat estimates.

Stocks could get one last gasp higher on better than expected earnings news before we roll over into a post-earnings depression. We talked about this last week. Stocks run up into their earnings report. If the news is good they might spike higher following the report but then the momentum stalls or reverses. Investors sell into strength. The news is out. What's left to drive stocks higher? Thus we have a good chance the market finally rolls over as we move into the second half of April and earnings season.

In summary, the trend is still up but we're nearing a potential trend change. Investors are nervous about what financial reform means for the banking system and bank stock profits. They're also nervous that the FOMC might change the wording to their "extended period" language on low rates at the April 27-28th two-day FOMC meeting. The next week or two could be the beginning of a much needed correction. I'm still watching the 1150 level and the 1100 level as likely areas of support for the S&P 500. If you're looking for a long-term bullish entry point today is probably not your day. Be patient and let the market come to you.

Chart of the S&P 500 Index:

Weekly Chart of the S&P 500 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:

You should notice a lot of changes in the portfolio this week. The market's major indices managed to hit new 52-week highs again but investors were quick to hit the sell button on Friday. There are a lot of questions on how Washington's aim for financial reform will impact Wall Street and corporate America.

I am suggesting we take profits on several winning trades at current levels. We've been expecting a post-earnings correction so we're jumping the gun a little and exiting early now.

Closed plays tonight include EMR, INTC, MOS, ORCL, OXY, RAI, and part of TIE.

There are adjusted stop losses for MTW and POT.

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

Last Time I Checked

by James Brown

Click here to email James Brown


Nearing Exhaustion?


Editor's Note:

After six weekly gains in a row the S&P 500 index finally posted a loss. We have been concerned about the market being overbought and due for a normal, healthy correction. Now finally, thanks to a surprise announcement by the SEC slapping fraud charges on Goldman Sachs, we have a potential turning point in the market. I don't necessarily expect the market to reverse lower immediately. We will probably get a week's worth of bullish earnings news but I suspect the rally is nearing its exhaustion point.

Right now the plan is to expect the market to roll over in the second half of April and look for a entry point once the major indices have completed a 5% to 10% retracement. In the meantime we can search for potential candidates to buy on the dip. The LEAPStraders newsletter already has a dozen candidates on the watch list. I'm listing a few more candidates on my personal watch list that I'm hoping see a correction in the next few weeks. A few stocks that caught my eye: CMG, CRM, CLF, ETN, FLS, LZ, PSA, and UNP.

No new bullish positions tonight. Exercise patience and let the market come to you. When the market does pull back we'll probably see several candidates get triggered in a very short time frame. Decide now which ones appeal the most to you.



Play Updates

Take Profits Early

by James Brown

Click here to email James Brown

Editor's Note:

We are choosing to take profits on several positions now before earnings season has a chance to spoil the party.


Closed Plays


EMR, INTC, MOS, ORCL, OXY, RAI, and part of TIE have all been closed.


Play Updates


Arch Coal Inc. - ACI - close: 26.00 change: -0.67

It was another bullish week for ACI but shares gave back 2.5% on Friday as the market sank on the Goldman Sachs fraud charge. Earlier in the week Citigroup upgraded ACI to a "buy". The coal industry garnered additional bullish analyst comments a couple of days later. Shares of ACI rallied toward their March highs on Thursday before Friday's market-wide sell-off.

It's possible this could be a bearish double top if ACI reverses lower here. There is a big risk the market continues to sink come Monday as more investors react to the market's surprising Friday decline. However, ACI is due to report earnings on Monday morning (April 19th). Wall Street expects the company to report a profit of 8 cents a share. ACI's results could supersede any broad market strength or weakness. The most recent data listed short interest at more than 10% of ACI's float. A better than expected result could spark a little short covering. Odds are pretty good that ACI will see a gap open (up or down) on Monday morning.

I am not suggesting new bullish positions in ACI at this time. Our final target for the LEAP trade 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 $2.60/2.70
-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 $6.60/7.10
-stop loss on ACI @ 19.85

Chart of ACI:


Biogen IDEC - BIIB - close: 53.64 change: -0.77

After weeks of consolidating sideways it looks like the BTK biotech index is finally going to correct lower following it's stunning February-March rally. When the sector index does correct it could put additional pressure on shares of BIIB. Then again BIIB may not need any help. The stock has been correcting for four weeks in a row now with a drop from $60 to almost $53 on Friday morning.

I haven't uncovered any specific news to account for the stock's relative weakness. The company reported generally positive news regarding its Tysabri MS drug a few days ago. The stock was due for a correction but why it's correcting ahead of its earnings report and ahead of the rest of the market is a mystery. The 50-dma and the $56-55 zone, which should have offered some support did not help at all. Could it be that someone wants to get out before BIIB reports earnings on April 20th? Analysts are expecting a profit of $1.13 a share. BIIB reports Tuesday morning before the bell. More conservative traders may want to exit ahead of the report.

I am not suggesting new bullish positions at this time. The $52.00 level is the next line of potential support. 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 $2.55/2.90
-stop loss on BIIB @ 51.85

Chart of BIIB:


Berkshire Hathaway Inc. - BRK.B - $78.72 -1.35

We have been expecting a deeper correction in BRK.B for weeks now. The stock spent most of last week consolidating along its rising 50-dma but shares finally broke that level of technical support on Friday. The Goldman Sachs fraud news sent most financial-related stocks lower. Berkshire is a conglomerate of several companies but they do have a strong insurance business and the company did take a high-profile stake in Goldman during the financial crisis last year. Currently that stake is profitable but the sharp drop in GS shares today could have spooked traders. Investors are also worried that the GS news today strengthens the government's push for financial reform.

Shares of BRK.B did spike down toward $75.50 on Friday but managed to rebound off its lows. I have been suggesting that readers look for a dip into the $77-73 zone before considering new bullish positions. We need to take another look at that strategy now that market conditions have "changed". Financial stocks could see a multi-week decline as this Goldman news gets digested. Readers may want to focus on the $73-70 zone for BRK.B. Broken resistance near $70.00 should be very strong support, which is now bolstered by the rising 200-dma. More conservative traders will want to consider waiting to buy LEAPS on a bounce than choosing to buy on a dip.

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 $5.70/6.10
-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 $7.40/7.90
-stop loss on BRK.B @ 69.00

Chart of BRK.B:


BorgWarner Inc. - BWA - close: 38.35 change: -0.70

The trend of higher lows in BWA continues but the rally has failed again in the $39.50-40.00 zone. Friday's move certainly looks like a bearish reversal but we've seen these before and BWA has yet to see much follow through on these patterns. This time could be different with the market looking vulnerable following Friday's decline. I am still suggesting that readers looking for a new entry point wait for a pull back into the $36-34 zone (which is a change from $36-35). The rising 200-dma near $34 should offer some support. Such a move would break the bullish trend of higher lows but the stock so wait for the bounce before jumping in. An alternative entry point would be to wait for a breakout (and close) over $40.00.

BWA has earnings on April 29th and Wall Street expects a profit of 41 cents a share.

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 $3.50/4.00
-stop loss on BWA @ 32.49

Chart of BWA:


Celgene Corp. - CELG - close: 60.88 change: +0.26

Last week CELG announced a new partnership with Agios Pharmaceuticals, a privately-held biotech firm, to target cancer cell metabolism. I don't think the announcement had much affect on the stock price since CELG appears to be helping Agios finance its research and will have the option to license any breakthroughs.

I've been warning readers to expect a pull back toward the $60-58 zone. Shares of CELG broke through their 50-dma and finally tested the $60.00 level, which is potential round-number support. Unfortunately, I don't expect it will hold. The BTK biotech index is finally beginning to waver after weeks of drifting sideways in an overbought condition. Any correction in the sector could accelerate any correction in CELG. While I would like to think the $58.00 level will hold for CELG shares may dip toward its 200-dma closer to $55. I would be hesitant to open new positions until we see a strong bounce from support and preferably support in the $55-58 zone.

FYI: CELG is due to report earnings on April 29th.

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 $4.80/5.00
-stop loss on CELG @ 54.75

Chart of CELG:


Fortune Brands - FO - close: 52.00 change: -0.44

The rally in FO continued last week although it seems to have stalled near the $53.00 level. The stock garnered an upgrade to a "buy" and the next day Fitch raised their outlook on FO to "stable". I remain bullish on FO but I'm concerned about the broader market. I'm suggesting readers take a defensive approach here and go ahead and sell half our position. Sell half now and if the market corrects we can reconsider increasing our position if we see another entry point.

On a short-term basis we can look for FO to find support near $50.00 and the $48.00 levels. Our long-term target is $59.75.
FYI: FO has earnings on April 29th.

Mar. 12th, 2009 - entry price on FO @ 47.55, option @ $2.20
symbol: FO1018I50 SEP 2010 $50 call - current bid/ask $4.30/ 4.70
-stop loss on FO @ 45.75

04/17/10 Sell Half - FO @ $52.00, option @ $4.30 (+95%)

Chart of FO:


Forest Oil Corp. - FST - close: 26.40 change: -0.59

Readers need to take a moment and reconsider how much risk they're willing to take here on FST. Not only have shares formed a lower high in April but technicals on the daily and weekly charts are starting to turn bearish. On a short-term basis I am expecting a correction back to the $25.00 level but if the market sees much follow through lower FST could end up hitting our stop loss before the month is over.

Longer-term we're still bullish on oil and oil stocks through the rest of the year but over the next few weeks oil and the energy sector could easily correct before making new relative highs. Conservative traders will want to seriously consider exiting part or all of their LEAPS position now. If you exit now you can potential avoid any significant loss.

I am not suggesting new bullish positions at this time. Our long-term target is $37.50.

Oct 15th, 2009 - entry price on FST @ 23.85, option @ 7.40
symbol: OJG-AD, 2011 $20 LEAP call - current bid/ask $ 7.90/ 8.10
-stop loss on FST @ 23.45

Chart of FST:


McDermott Intl. - MDR - close: 27.22 change: -0.66

MDR was a watch list candidate and shares hit our trigger to open bullish positions when the stock broke out past resistance at $28.00. The plan was to buy the 2011 January $30 calls. However, I warned readers that we were at risk of seeing MDR spike higher and reverse, which is exactly what appears to be happening. This is why the plan was to open half (or less) your normal position to downsize our risk. Bigger picture the forecast is still bullish but MDR could correct back toward the $25-24 zone before resuming its up trend.

I am suggesting we take a wait and see approach here. We'd much rather buy call LEAPS on a bounce from $24 and its 200-dma, which could happen if we're patient. Our long-term target is $37.50. Investors may want to consider 2012 LEAPS and aim higher.

- Half position size -
Apr 14th, 2010 - entry price on MDR @ 28.25, option @ 2.95
symbol: 2011 JAN $30 LEAP call - current bid/ask $ 2.35/ 2.55
-stop loss on MDR @ 23.90

Chart of MDR:


Manitowoc Inc. - MTW - close: 15.29 change: -0.23

Shares of MTW continue to impress. The stock was upgraded on April 12th and shares surged to a new 52-week high. The stock spent the rest of the week consolidating sideways. More conservative traders may want to go ahead and take profits now. While the trend is up the market looks vulnerable. If the S&P 500 really starts to breakdown MTW could become a target for profit taking.

I am not suggesting new bullish positions at this time. Please notice our new stop loss at $11.75. I am adjusting our long-term target from $17.00 to $16.75.

Oct 30th, 2009 - entry price on MTW @ 9.10, option @ 2.61
symbol: VMT-AB, 2011 JAN $10 call - current bid/ask $5.80/6.00
-stop loss on MWT @ 11.75 *new*

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 @ 11.75 *new*

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

Chart of MTW:


PEPSICO Inc. - PEP - close: 66.14 change: -0.13

Not much has changed in a week. Shares of PEP are still drifting sideways. It looks like traders are selling into strength but there is not much follow through lower. I'm still expecting a correction toward the $64 maybe $62 area but at this rate it could take a while. It depends on the company's earnings report. PEP is due to report earnings on April 22nd, before the opening bell. Wall Street expects a profit of 75 cents a share. I would not be surprise to see PEP drift sideways into its earnings report.

I am not suggesting new bullish positions at this time. Our (adjusted) final target is $72.25. FYI: In other news PEP said their annual shareholders meeting will be held on May 5th.

July 7th, 2009 - entry price on PEP @ 57.25, option @ $4.50(estimate)
symbol: VP-AL, 2011 $60.00 LEAP call - current bid/ask $7.50/7.60
-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: $107.80 change: -2.35

Ouch! It was another painful week for POT with a $7 decline. The correction, now five weeks old, has shaved off 15% from its highs near $128. There seems to be some disagreement among analyst firms over the agriculture names. Goldman Sachs downgraded POT last week from a "buy" to a "neutral". While another firm is suggesting investors buy this decline in the industry.

The inventory levels for potash continue to fall, which one might think is a very bullish development for this sector since distributors will need to buy more product from manufacturers like POT. Yet the stock is still sinking. I cautioned readers last week that the correction may not be over yet. The breakdown under the $110 level is bearish. Shares are now testing their exponential 200-dma as possible support.

I strongly suggest that more conservative traders consider an early exit now to avoid any losses. I suspect that POT will make a push for the $105 level and if that fails then a drop toward $100. Please note that I'm adjusting our stop loss to $98.50. I am not suggesting new bullish positions at this time.

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 $13.20/13.40
-stop loss on POT @ 98.50 *new*

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

Chart of ORCL:


PartnerRe Ltd. - PRE - close: 79.59 change: -0.26

PRE continues to struggle with resistance near the $81 region. The action this past week certainly looks like another bearish failed rally pattern. I've been suggesting readers wait for a correction toward $76 before considering new positions. That correction could be ready to start. Nimble traders may want to consider exiting now (near $3.00 on the option) and then just jump back in on a dip or bounce in the $76-75 zone.

I would prefer to open positions on a bounce in the $75-76 zone versus buying a decline into this area. If we do see a new entry point I would use the November calls. Our first target is $84.90. Our second, longer-term target is $97.50 but this could be wishful thinking given the August options.

Feb. 13th, 2010 - entry price on PRE @ 76.28, option @ 2.70
symbol: PRE1021H80, 2010 AUG $80 call - current bid/ask $3.00/3.50
-stop loss on PRE @ 73.75

Chart of PRE:


UltraShort 20+ Year Treasury Bond ProShares - TBT - cls: 47.70 chg: -0.72

Are investors nervous about Q1 earnings? It looks like money was moving back into the bond market last week. The TBT slipped again following the prior week's bearish failed rally pattern. It looks like this ETF is headed back toward the $46.50 area. Nimble traders may want to consider buying dips or bounces near $46.50. I am suggesting most readers wait for a breakout and close over the $51.50 mark before considering new bullish positions.

Our first long-term target is $59.75. Our second target is $67.50. Keep in mind that this security tends to move pretty slowly.

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 $2.07/2.20
-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 $4.25/4.50
-stop loss on TBT @ 45.90

Chart of TBT


Titanium Metals - TIE - close: 16.18 change: -0.76

I have to urge caution again. TIE managed a bounce early last week but the rally failed at resistance near 17.30-17.50. The stock looks poised for a correction and it could be an ugly one. I'm expecting a pull back toward the $14-13 zone. The trader in me wants to sell all of our calls right now and then look to jump back in around $13.00. That might be the right move for some of you. However, these are supposed to be long-term positions where we ride through the ups and downs. To satisfy the urge to sell something I am suggesting we sell the 2011 January $15 call LEAP right now. We'll keep the 2012 January $15 call LEAP.

I am not suggesting new bullish positions at this time. We've already sold half our position on March 27, 2010. Our final, 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 $3.10/3.40
-stop loss on TIE @ 11.90

04/17/10 EXIT EARLY, TIE @ 16.18, option @ 3.10 (+121.4%)

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 $5.50/6.20
-stop loss on TIE @ 11.90

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

Chart of TIE:


iShares 20+Yr Bond ETF - TLT - close: 89.86 change: +0.65

The bond market continued to bounce following the prior week's bullish reversal. The very short-term trend is still up inside the larger downtrend. The TLT is now testing potential resistance near $90.00 and its 50-dma. If the rebound continues we can look for additional resistance in the $91.50-92.50 zone. I am not suggesting new positions at this time. Our first, long-term 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 $3.70/3.80
-stop loss on TLT @ 93.15

Jan. 09th, 2010 - entry price on TLT @ 89.29, option @ 8.90
symbol: YLI-MB, JAN 2012 $80 LEAP put - current bid/ask $6.15/6.30
-stop loss on TLT @ 93.15

Chart of TLT


UnitedHealth Group Inc. - UNH - close: 30.73 change: +0.10

Our UNH play may not be long for this world. I have been warning readers to expect a pull back toward support near $30.00 for several weeks now. It finally happened thanks to relative weakness in the healthcare sector. The broader market indices hit new 52-week highs last week but healthcare stocks continued to sink instead. That's a definitely a warning signal.

The HMO healthcare index has pulled back to short-term support near the 1500 level but it looks like it could correct down toward stronger support near the 1375-1400 zone. If that occurs then UNH will probably hit our stop loss at $28.95. I wish I could tell you that this pull back to support near $30.00 is a new buying opportunity but given Friday's action in the market we just don't know. Will there be follow through on Monday or will investors consider Friday a Goldman Sachs specific event?

Adding to the volatility this week will be UNH's earnings report. The company announces on April 20th before the market opens. Wall Street is looking for a profit of 69 cents a share. Investor reaction to UNH's results on Tuesday will probably determine if this play survives or not. Cautious traders may want to consider some short-term protective puts. I am not suggesting new positions at this time.

The plan was to use small positions to limit our risk. Our long-term target is $42.50.

FYI: In other news UNH issued a press release last week telling the Federal government and the 50 states how they could save up to $366 billion in healthcare costs over the next ten years. Changing how the system cares for long-term care needs and disabilities along with an overhaul of Medicaid's administrative process were the main suggestions.

Dec 16th, 2009 - entry price on UNH @ 31.55, option @ 3.80
symbol: VUH-AG, 2011 JAN $35 LEAP call - current bid/ask $1.94/2.01
-stop loss on UNH @ 28.95

Chart of UNH:


Visa Inc. - V - close: 93.85 change: -0.60

The rally in V continues. News that Capital One's credit card defaults rose from 10.19% in February to 10.87% in March did not have much affect on Visa since Visa doesn't issue credit. Odds are the rise in consumer spending helped give V a lift. Better consumer spending should mean more sales and in today's world that means more transactions using Visa-branded cards. The stock has rallied to new all-time highs hitting $95.26 on Thursday. While the trend is up and V is showing strength that does not mean the stock will be immune to any market-wide correction. If the S&P 500 sees any follow through lower Visa could become a target for profit taking.

I'm bullish on this stock but we might get a better entry point to open positions on a dip near the $87.50 area (watch the 100-dma). 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 $5.15/5.30
-stop loss on V @ 81.75

Chart of V:


Wal-Mart Stores Inc. - WMT - close: 54.11 change: -0.02

WMT continues to trade as expected. We were looking for a dip toward $54.00 and we got it. The question is will the correction stop here or will WMT trade toward $52.50 or even the $50.00 level? I remain very bullish on WMT but short-term the trend is down. I would stay patient and wait for shares to dip further. This is a very long-term trade for us and we can enter positions anywhere in the $54-50 zone. Right now I would focus on the $52 area as an action point to consider putting capital at work.

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 $4.55/4.65
-stop loss on WMT @ 49.45

Chart of WMT


CLOSED Plays

EMR $51.80 -1.15 -- Emerson Electric Co.

Take profits now! EMR rallied to new 52-week highs with a move toward $53.00 on Thursday. Traders were quick to take profits on Friday as the market rolled over and EMR gave up 2.1%. EMR has already hit our first target at $47.50 and we were aiming for $54.50 but given the market's performance on Friday I am suggesting an early exit right now.

I would much rather lock in a gain here than see the LEAP meltdown if the market sees any follow through lower.

Sept. 8th, 2009 - entry price on EMR @ 38.00, option @ $4.50
symbol: VHH-AH, 2011 JAN $40 call - current bid/ask $12.10/12.40
-stop loss on EMR @ 44.75

04/17/10 EXIT EARLY @ 51.80, option @ $12.10 (+168.8%)

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

Chart of EMR:


Intel Corp. - INTC - close: 23.92 change: -0.30

Target achieved. It turned out to be a very bullish week for INTC with the stock soaring more than 6%. The company delivered a very bullish earnings report on April 13th and shares hit $24.37 by Thursday afternoon. Our target to exit has been the $24.00-26.00 range. I'm suggesting we exit now.

The details of INTC's report were very positive. The company beat estimates by 5 cents and revenues came in at $10.3 billion versus estimates of $9.8 billion. INTC's management raised their Q2 revenue estimates and their gross margin estimates. Longer-term I remain bullish on INTC but shares are overbought here. We may reconsider new positions following a correction.

June 13th, 2009 - entry price on INTC @ 16.31, option @ 1.36
symbol: VNL-AD, 2011 LEAP $20 call - current bid/ask $4.50/4.60
-stop loss on INTC @ 19.80

04/17/10 Target Achieved, INTC @ 23.92, option @ $4.50 (+230%)

Chart of INTC:


Mosaic Co. - MOS - close: $54.13 change: -1.03

I am suggesting we cut our losses on MOS. The stock was downgraded by Goldman Sachs this past week even. The firm believes potash prices could fall even though inventories for the industry have continued to slip for several months now. MOS has been under performing the market and broke down under potential support near $55.00 and its 200-dma.

Now it's certainly possible that shares rebound from here (here being the February lows near $53.00) but I would rather exit now. We still have exposure to the sector with the POT trade.

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 @ 6.27
symbol: ZXW-AM, 2011 LEAP $65 call - current bid/ask $3.30/3.50
-stop loss on MOS @ 51.90

04/17/10 Exit Early, MOS @ 54.13, option @ 3.30 (-47%)

Chart of MOS:


Oracle Corp. - ORCL - close: 25.95 change: -0.25

I am kicking ORCL off the newsletter for moving too slowly. I have mentioned this was a concern. While the trend is up and I think ORCL could be trading near $29-30 by the end of the year there is also an opportunity cost. I would rather free up our money tied up in ORCL to have available for candidates that offer more reward. Patient investors may want to keep this trade active. Just keep in mind that any time premium on the 2011 call is going to start eroding fast, especially once we get into the second half of the year. Our long-term target was $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 $2.81/2.87
-stop loss on ORCL @ 22.95

04/17/10 Exit Early, ORCL @ 25.95, option @ 2.81 (+10%)

Chart of ORCL:


Occidental Petrol - OXY - close: 85.06 change: -1.41

Our aggressive trade on OXY did not get off to a very good start. There has been no follow through on its bounce from support near $85.00. Instead shares have only churned sideways bouncing along the $85 level even though the market hit new 52-week highs midweek. I find the lack of follow through higher to be disappointing and would rather take a 10% loss now than see it worsen.

I'm still bullish on OXY but we'd much rather open positions on a bounce from $77.50 than suffer through that decline and hope it bounces. Aggressive traders could let it ride since shares are still holding support near $85 for now. I hate to jump in and out of a trade like this but we need to make adjustments for market conditions.

I labeled this an aggressive trade because last week seemed like a riskier entry point and I suggested we only open small (half-sized) positions.

Apr. 10th, 2010 - entry price on OXY @ 86.56, option @ 7.00
option: 2011 JAN $90 call - current bid/ask $6.25/6.45
-stop loss on OXY @ 77.45

04/17/10 Exit Early, OXY @ 85.06, option @ 6.25 (-10%)

-or-

Apr. 10th, 2010 - entry price on OXY @ 86.56, option @ 8.00
option: 2011 JAN $100 call - current bid/ask $7.35/7.75
-stop loss on OXY @ 77.45

04/17/10 Exit Early, OXY @ 85.06, option @ 7.35 (-8.1%)

Chart of OXY:


Reynolds American Inc. - RAI - close: 53.84 change: -0.15

We have a new strategy for RAI - exit now! Big picture nothing has really changed for RAI. Shares are still consolidating sideways and the larger trend is still up. Short-term the market made a new high last week and RAI did not. Normally I would argue that RAI's trend of higher lows is bullish. Yet I'm also motivated to have readers lock in a gain with our LEAP call rising in value in spite of RAI's sideways movement.

Instead of holding on for our (adjusted) final target of $59.75 I am suggesting we exit 100% right now. Go ahead and lock in a profit.

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 $13.40/15.10
-stop loss on RAI at $50.75

04/17/10 Exit Early, RAI @ 53.84, option @ $13.40 (+197%)

10/19/09 Sell Half, RAI @ 49.50, option @ $8.90 (+97%)

Chart of RAI:



Watch

Basic Materials

by James Brown

Click here to email James Brown


New Watch List Entries

WLT - Walter Energy Inc.


Active Watch List Candidates

APA - Apache Corp.

CIR - CIRCOR Intl.

CRS - Carpenter Technology

CVD - Covance Inc.

DE - Deere & Co.

EMC - EMC Corp.

IMN - Imation Corp.

MICC - Millicom Intl.

RT - Ruby Tuesday, Inc.

SAFM - Sanderson Farms Inc.

TRMB - Trimble Navigation


Dropped Watch List Entries

MDR graduated to the play list last week.


New Watch List Candidates:

WLT - Walter Energy Inc. close: $93.43 change: -4.55

When it comes to the coal industry investors seem to favor the companies that mine the metallurgical coal used in the steel and metal production. WLT is a favorite momentum play for stocks in this group. Long-term this could be a good investment as the global economy recovers (we hope). However, short-term the stock may have gotten ahead of itself. Prior to Friday's 4.6% decline shares of WLT were up more than 30% for the year and up almost 55% from its February lows. It is very possible that WLT has been priced for perfection and investors could end up selling the news when the company reports earnings on April 28th.

Aggressive traders may want to consider short-term bearish positions. I am suggesting we buy call LEAPS on a correction. This stock tends to move in extremes so I'm expecting any profit taking to be sharp. Look for a dip to $77.50 as our entry point to buy calls. If triggered our stop loss is $67.50 (under the 200-dma). Our first target is $99.50. Our second target is $110.
FYI: WLT can be a volatile stock. Readers may want to keep their position size small when initiating a position.

Company Info:
Walter Energy is a leading U.S. producer and exporter of premium hard coking coal for the global steel industry and also produces steam coal and industrial coal, metallurgical coke and coal bed methane gas. The Company has revenues of approximately $1.0 billion and employs approximately 2,100 people. (source: company press release or website)

Buy-the-Dip trigger: $77.50

BUY the 2011 January $85 calls (WLT 11A85.00)
- or -
BUY the 2012 January $90 calls (WLT 12A90.00)

Chart of WLT:


Active Watch List Candidates:

APA - Apache Corp. - close $105.44 change: -1.23

The rally in energy stocks stalled last week and APA continues to struggle with resistance near the $108 level. The action in just the last two sessions suggest APA could be poised to correct lower. I am suggesting we wait for APA to breakout past resistance. We will use a trigger at $110.50 to open bullish positions. If triggered at $110.50 we'll use a stop loss at $102.45. Our first target is $124.75.

FYI: Readers should know that APA is due to report earnings at the end of April but the April 29th announcement date is unconfirmed.

Breakout trigger: $110.50

BUY the 2011 January $115 calls (APA 11A115.00) *updated*

Chart of APA:


CIRCOR Intl. - CIR - close: 34.60 change: +0.06

CIR displayed relative strength again last week but the rally has been unable to breakout past resistance near the $35.00 level. I am still expecting a correction back toward the $30.00 region. More conservative traders may want to wait and buy calls on a bounce from $30.00 instead of buying a dip to $30. 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.

NOTE: I would only start with half a position. We want to keep our exposure limited.

Buy-the-Dip trigger: $30.50

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

Chart of CIR:


Carpenter Technology - CRS - close: $38.63 change +0.13

It might be wishful thinking but the recent action in CRS looks like it could be a top. I'm long-term bullish on the stock but don't want to chase it after the big move higher. Odds are when CRS corrects it will be sharp. We want to wait for a pull back toward the $30.00 level. If triggered we'll use a stop at $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 (CRS 10I35.00)

Chart of CRS:


Covance Inc. - CVD - close: 61.77 change: -0.24

Shares of CVD continue to struggle with resistance near $63.00. At the same time shares did not see that much of a sell-off on Friday. Instead investors were buying the dip intraday. Aggressive traders might want to consider bullish positions on a breakout higher. I am suggesting we wait for a dip back toward support and its 200-dma near $55.00. We'll use a trigger at $56.00 to open positions. If triggered we'll use a stop loss at $53.45. If triggered our long-term target is $74.50. Currently the Point & Figure chart is bullish with a $79 target.

Buy-the-Dip trigger: $56.00

BUY the 2010 November $60.00 calls (CVD 10K60.00)

Chart of CVD:


DE - Deere & Co. - close: 60.51 change: -1.25

DE managed to tag a new 52-week high on Thursday before reversing. I am still expecting a correction before shares continue their longer-term trend higher. However, I'm adjusting our entry point. We want to launch positions on a dip at $52.50. If triggered we'll use a stop loss at $47.90. Our first target is $69.75. FYI: The Point & Figure chart is bullish with a long-term target of $89.00.

Buy-the-Dip trigger: $52.50

BUY the 2011 January $55 call (DE 11A55.00) *updated*
- or -
BUY the 2012 January $60 call (DE 12A60.00)

Chart of DE:


EMC Corp. - EMC - close: 19.36 change: +0.01

It turned out to be a very bullish week for EMC with the stock soaring last Monday thanks to an upgrade. The stock managed to break out to a new 52-week high. The company is about to report earnings on April 21st. Will investors buy the news or sell the news?

At this time we don't want to chase it but I will raise our trigger to $17.60 from $17.25. We'll keep the stop loss, if triggered, at $15.90. 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: $17.60 *new*

BUY the 2011 January $17.50 LEAP CALL (EMC 11A17.50)
- or -
BUY the 2012 January $20.00 LEAP call (EMC 12A20.00)

Chart of EMC:


Imation Corp. - IMN - close: 11.70 change: -0.25

The rally continues for IMN with shares breaking out to a new 52-week high last week. The $12.00 level looks like it could be resistance and we don't want to chase it here. I am adjusting our trigger to open bullish positions from $10.15 to $10.35.

I am suggesting we buy the stock (or calls) on a dip at $10.35. If triggered our first target is $12.25. Our second target is $14.25. We'll use a stop loss at $9.24. FYI: The Point & Figure chart is bullish with a $17.50 target.

Buy-the-Dip trigger: $10.35

Buy the IMN stock at $10.35

-or-

BUY the 2010 October $12.50 call (IMN 10J12.50)

Chart of IMN:


Millicom Intl. - MICC - close: 86.45 change: -3.47

MICC issued a press release last week stating the company would pay a special dividend of $4.60 per share on top of the $1.40 annual dividend already in place. Plus the company would initiate a $300 million stock buy back program. The stock initially popped higher on the news and investors immediately sold it! This failed rally pattern looks bearish and the follow through on Friday is even worse. We're still longer-term bullish on MICC but short-term it appears the correction we've been waiting for has finally begun.

This could be an interesting week since MICC is due to report earnings on April 20th. Results come out before the opening bell. Analysts are looking for a profit of $1.31 a share. The $80.00 level should be support. However, I am adjusting our trigger to open bullish positions from $81.00 down to $77.00. The rising 200-dma near $75.00 should offer technical support. We'll move our stop loss down to $69.00. Our long-term target is $99.50 and the $109.00 levels.

Buy-the-Dip trigger: $77.00

BUY the 2011 January LEAP $90.00 calls (MICC 11A90.00)

Chart of MICC:


Ruby Tuesday Inc. - RT - close: $11.54 change: -0.45

Shares of RT look poised to plunge. The post earnings rally has reversed and traders sold into strength again last week. Nimble traders may want to open bearish positions now with a stop above $12.20 or $12.60. I'm tempted to buy some May puts. However, for the newsletter we're looking at the longer-term bullish posture. Broken resistance in the $9.00-9.50 zone should be support. I am suggesting we buy the stock (or calls) on a dip at $9.50. If triggered we'll use a stop at $8.45.

It could take a few weeks for RT to correct low enough to finally hit our entry point. If we are triggered at $9.50 our first target is $12.00. Our longer-term target is $14.75.

Buy-the-Dip trigger: $9.50

BUY the stock at $9.50

- or -

BUY the 2010 October $10.00 calls (RT 10J10.00)

Chart of RT:


Sanderson Farms Inc. - SAFM - close: 58.37 change: -0.68

SAFM rallied to the top of its bullish channel thanks to an analyst upgrade last Monday. Now the rally looks tired under potential resistance at $60.00. There is no change from my prior comments. We don't want to chase it here. Right now the plan is to buy calls on a dip at $48.50 with a stop loss at $43.90. However, we might decide to jump in if we see SAFM bounce from the $50 area. If triggered our target is $59.75. I would aim higher but we only have a few months with the November calls.

Buy-the-Dip trigger: $48.50

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

Chart of SAFM:


Trimble Navigation - TRMB - close: 29.83 change: -0.33

TRMB managed to rally to another new 52-week high last week. I'm encouraged by the relative strength but we don't want to chase it. The correction may not happen until after TRMB reports earnings in late April but we want to wait for the stock to pull back. Broken resistance near $26.00 should be support. If you're really conservative you could wait for a dip closer to $25.00. I'm suggesting a trigger for bullish positions 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 November $30 calls (TRMB 10K30.00)

Chart of TRMB: