Option Investor
Newsletter

Daily Newsletter, Saturday, 4/24/2010

Table of Contents

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

Leaps Trader Commentary

Better than Expected Earnings Results Continues to Power the Market Higher

by James Brown

Click here to email James Brown

Better than expected earnings results and benign economic data continue to power the stock market higher. All of the major U.S. indices (S&P 500, NASDAQ, DJIA, Russell 2000) closed at new 52-week highs. It would appear that investors have no fear of a sovereign default by Greece. Risk of a default have been driving the euro currency lower and the dollar has been rising as a result. Money has also been flowing into the U.S. bond market the last couple of weeks but bonds pulled back a bit in the last couple of sessions.

Sadly the Greek meltdown continues. Last week's promise of a $61 billion aid package by EU leaders and the IMF was not enough. The Greek bond market continued to implode and yields on the 10-year Greek bond soared to 9% this past week. The country's finance minister finally capitulated and asked the IMF to activate the country's emergency loan package. Unfortunately this could take weeks to actually happen so the damage in Greece isn't over yet.

There are plenty of pundits of the opinion that this Greece disaster is only the beginning. Portugal is next on the list followed by either Italy or Spain. These last two countries are several times larger than Greece and will have a much bigger impact on the EU and the world stage. For now the U.S. markets seem to have grown bored with the Greece problem. The major indices barely moved on Friday's news that Greece officially turned to the IMF for immediate aid.

Financial news this past week saw big headlines in the real estate sector. The sale of existing homes soared 6.8% in March while the sale of new home sales soared +27%. I want to caution investors to not read too much into this one report. It was just a week ago the headlines were about the record number of foreclosures across the country and it's only going to get worse. Furthermore, last month (February), the pace of new home sales hit an all-time low! The rebound is March is nothing more than an oversold bounce from depressed levels that has been exacerbated by the homebuyer tax credit that expires at the end of April. Of course this didn't stop the homebuilder industry from seeing a big short-squeeze. The DJUSHB home construction index has seen a sharp four-day rally to a new 52-week high.

The real story has been the earnings news. The number of companies that have thus far beat expectations this season is north of 70%. I warned readers a week ago that earnings results could still power the market higher. The idea that we could see a post-earnings season depression (sell-off) is still valid but I'm willing to admit I'm starting to worry it may not happen. On a short-term basis the S&P 500 and the NASDAQ indices both look poised to rally higher from here. I still wonder how close were are to a top. Do you recall, months ago, all the analysts that pegged their upside S&P 500 target around the 1220 level? Well here we are. knocking on the door of 1220.

The NASDAQ's breakout past 2500 is bullish and the next level of resistance appears to be the 2008 Q2 highs around 2550. I would probably focus more on the small cap Russell 2000 index. The relative strength in the small caps has been a very bullish development. Yet now the small caps look the most overbought. Check out a longer-term chart of the $RUT and you'll see that the 760-765 area looks like it could be tough resistance with at least three failed rallies there back in 2008.

Investors should also bear in mind that we're facing another FOMC meeting and seasonal trends that could impact the market. The FOMC meeting is April 27th-28th. After all the positive economic data we've been seeing investors are somewhat concerned that the Federal Reserve could make a change to their "extended period" language concerning low interest rates. If that changes the reaction in the markets could be painful. We're also facing the end of the month and the seasonal trend of the "Sell in May and go away" crowd. The sell-in-May issue is not new and honestly seasonal trends have not been very reliable the last couple of years but it is worth noting. Historically May does mark the beginning of the worst six months of the year.

In summary not much has changed for us. Without Friday's afternoon rally to new highs the major averages would have closed under last week's high. The concept that the markets could see a post-earnings season correction is still valid but if we don't see some weakness soon we'll have to re-adjust our outlook. I am starting to hear arguments that business will finally pick up spending and carry the economy forward instead of depending so much on the consumer.

Speaking of the consumer it seems that consumer spending is not that weak. Almost anything consumer-related has been soaring. I consider Starbucks, with their overpriced coffee drinks, a good indicator of consumer's discretionary spending. SBUX just reported a very strong quarter with earnings above estimates, revenues rose 8.6%, and management raised guidance for the rest of 2010. Granted the company could be reaping the benefits of their store closures but revenues are improving, which is a positive read on the consumer. The second quarter is starting to look a little brighter.

I realize this sounds like a broken record but we need to stay patient. Wait for a normal, healthy correction before launching new long-term bullish positions. Chasing stocks now seems like a dangerous game with the market up almost 12 weeks without much of a pause.

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:

Overall stocks didn't make much progress last week, unless they were small caps. I'm still expecting a post-earnings season correction so readers may want to think about taking some money off the table, especially on the candidates that have surged toward their 52-week highs.

There are adjusted stop losses for ACI, BWA, PRE, TIE, and V.

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

Watching the Watch List

by James Brown

Click here to email James Brown


Energy Stocks Have Potential


Editor's Note:

The U.S. stock market continues to rally. While I am still expecting a correction in the next week or two it may not happen. Stocks will see a pull back eventually but for now the trend remains higher. We still don't want to chase stocks at these levels but with momentum clearly in favor of the bulls we've added a few more watch list candidates. However, this time our new candidates only need a dip to hit our entry point triggers instead of a healthy correction. I do consider our new watch list candidates more aggressive but we need to trade the market we see in front of us and not what we want to happen.

Aside from today's new watch list candidates (CLR, LMT, and WLL) I would also take another look at OXY. Last week we cut OXY from the play list. The stock's rally appeared to be in jeopardy. Here it is a week later and OXY is ready to rally again. Investors will want to reconsider this stock as a potential bullish candidate.



Play Updates

Handful of Highs

by James Brown

Click here to email James Brown

Editor's Note:

Several stocks are trading at or near their 52-week highs. I would hesitate to chase these here. Readers may want to think about taking some money off the table on a few of these to lock in a profit.


Closed Plays


BIIB turned lower following its earnings report and hit our stop loss.


Play Updates


Arch Coal Inc. - ACI - close: 28.13 change: +0.53

Shares of ACI continue to climb in spite of a disappointing Q1 earnings report. The company announced a profit of 3 cents a share versus estimates of 8 cents. Revenues were also a miss. Yet management raised their full year 2010 guidance on stronger metallurgical coal sales. ACI now expects 2010 earnings in the $1.00-1.40 range compared to estimates of $0.89. The stock has been creeping higher all week and shares are now challenging their 2010 highs near $28.00. In other news ACI raised their cash dividend from 9 cents to 10 cents a share, payable on June 15th to shareholders of record on June 1st.

The recent strength the last couple of weeks is encouraging and helps break up the bearish head-and-shoulders pattern that has been forming over the last several months. While I remain bullish on ACI I'm not suggesting new bullish positions at this time. Our final target for the LEAP trade is $34.75. Please note our new stop loss at $21.95.

FYI: Readers may want to consider taking some money off the table right now. The 2012 option has almost doubled.

May 14th, 2009 - entry price on ACI @ 16.00, option @ 2.40
symbol: OSE-AF, 2011 JAN $30 LEAP call - current bid/ask $3.50/3.70
-stop loss on ACI @ 21.95 *new*

--2nd Entry--
Feb 13th, 2010 - entry price on ACI @ 21.65, option @ 4.40
symbol: YEP1221A25 2012 JAN $25 LEAP call - current bid/ask $8.20/8.50
-stop loss on ACI @ 21.95 *new*

Chart of ACI:


Berkshire Hathaway Inc. - BRK.B - $78.95 +0.27

If you just looked at the closing numbers then last week was very forgettable. Shares of BRK.B barely moved. Yet the trend continues to deteriorate. The midweek bounce failed near $80.00 and its 50-dma. It certainly looks like the path of least resistance is down for the moment. That's okay. We've been expecting a correction in BRK.B for weeks. While the $77-75 zone could offer some support I am suggesting readers focus on the $73-70 zone instead. The market has yet to correct and when it does it will probably over-correct. The $70.00 level is bolstered by the simple 200-dma and should be very significant support. 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 $5.80/6.10
-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 $7.60/8.10
-stop loss on BRK.B @ 69.00

Chart of BRK.B:


BorgWarner Inc. - BWA - close: 41.16 change: +0.97

BWA delivered a solid performance last week with shares finally breaking out past resistance at the $40.00 level. While I would have preferred to open new positions on a dip I did suggest an alternative entry point with a close over $40.00, which happened on Thursday. Investors have been buying the dips for weeks now. Let's just hope that BWA does not disappoint the street when they report earnings on April 29th. The results come out before the opening bell and analysts are expecting a profit of 41 cents a share. Naturally, I'm expecting some post-earnings profit taking so readers may still want to take a wait-and-see approach before launching positions. Please note our new stop loss at $33.90 near the 200-dma.

Our first target is $44.50. Our second target is $49.75.

Feb 17th, 2010 - entry price on BWA @ 37.55, option @ 3.90
symbol: ZWY1122A40 2011 JAN $40 LEAP call - current bid/ask $5.00/5.70
-stop loss on BWA @ 33.90 *new*

Chart of BWA:


Celgene Corp. - CELG - close: 59.81 change: +1.15

Ouch! It was a painful week for CELG. The stock broke down under round-number support at $60.00 with two days of selling. I have yet to find any specific news to account for the sharp selling pressure on Wednesday and Thursday morning. There was some chatter that maybe investors are worried about how the healthcare reform law will affect CELG sales. I cautioned readers a week ago that the $58 level may not hold and CELG could correct toward technical support at its rising 200-dma. Thankfully traders bought the dip on Thursday near $57.00. Unfortunately, I'm not very enthusiastic about buying this bounce at least not with the major market averages still looking overbought.

Right now the levels I am watching are likely support in the $57-55 zone and overhead resistance in the $60-62 zone. You can choose to buy dips or bounces near support or wait for a breakout over resistance again but bigger picture I'm reluctant to open positions with the market still this extended.

Keep in mind that the BTK biotech index has begun to correct and that could put additional pressure on shares of CELG. Furthermore the company is due to report earnings on April 29th. The results come out before the market opens and Wall Street expects a profit of 60 cents a share.

Our long-term 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 $4.30/4.50
-stop loss on CELG @ 54.75

Chart of CELG:


Fortune Brands - FO - close: 53.86 change: +0.13

Consumer-related stocks continue to march higher and FO managed to make new 52-week highs. I don't see any big changes from my prior comments. I remain bullish on the stock but would hesitate to buy it ahead of its earnings report. Short-term the stock should have some support near $50.00 but if the market really corrects then shares of FO could pull back toward the $48-46 zone.

We have already chosen to sell half our position near $52. Our long-term (final) target is $59.75.

FYI: FO is due to report earnings on April 29th. The results come out before the opening bell and analysts expect a profit of 31 cents a share.

Mar. 12th, 2009 - entry price on FO @ 47.55, option @ $2.20
symbol: FO1018I50 SEP 2010 $50 call - current bid/ask $5.50/ 5.90
-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: 30.31 change: +1.78

It's amazing the difference another week can make. A few days ago I was worried that FST was about to breakdown and retest the $25-24 zone. Instead shares have surged back toward their March highs near $30.00. The stock garnered some bullish analyst comments on Thursday, which helped accelerate the rally. Short-term shares look strong but they have to get through resistance at $30.00 first. I wouldn't be surprised to see a dip and bounce near $28.00 before FST finally breaks out higher.

We also want to keep in mind that FST is due to report earnings in about six trading days. The results come out on Monday, May 3rd after the closing bell. Wall Street wants to see a profit of 47 cents a share. The strength in oil service stocks is encouraging since this is normally a seasonally weak period before oil rallies into summer for driving season.

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 $10.20/11.40
-stop loss on FST @ 23.45

Chart of FST:


McDermott Intl. - MDR - close: 28.70 change: +0.94

The trading gods have smiled on us and the correction in MDR appears to have been aborted. Traders bought the dip on Monday near its rising 30-dma and the stock has been making its way higher since. Now shares are hitting new 52-week highs. While the action in MDR is bullish I'm still somewhat reluctant to open new positions. My concern remains the broader market and how long it's been without a correction. Readers could choose to open small positions in MDR. We started with a half position given our aggressive entry point.

If the stock does correct I'm looking for support in the $26-24 zone. 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 $ 2.90/ 3.20
-stop loss on MDR @ 23.90

Chart of MDR:


Manitowoc Inc. - MTW - close: 15.63 change: +0.09

MTW has spent the last few days consolidating its gains. Actually the stock has spent almost two weeks now churning sideways and given the trend of higher lows MTW looks poised to rally from here. The success of any future rally could be determined by the company's earnings report. MTW announces on April 27th after the closing bell. Analysts are expecting a loss of 1 cent per share.

On a short-term basis if MTW can breakout past the $15.75 level I would expect a move toward the $17.50-17.75 zone. Therefore I am adjusting our final target again. We've already taken profits once. We'll move the final target to exit to $17.50. More aggressive traders, or if you bought the stock instead of the option, may want to hold on and aim for the $20.00 level over the next several months.

I am not suggesting new bullish positions at this time.

Oct 30th, 2009 - entry price on MTW @ 9.10, option @ 2.61
symbol: VMT-AB, 2011 JAN $10 call - current bid/ask $6.00/6.30
-stop loss on MWT @ 11.75

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

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

Chart of MTW:


PEPSICO Inc. - PEP - close: 64.71 change: -0.05

As expected PEP continued to drift sideways into its earnings report. Management announced a profit of 89 cents a share, which was 14 cents better than expected. Unfortunately, the revenue number missed estimates. PEP offered 2010 guidance that was inline with prior estimates of 12% growth. Investors decided to sell the news. That's not too surprising since we were expecting a correction toward the $64-62 areas. I would still watch for a dip toward $62 or even the rising 200-dma.

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 $6.40/6.55
-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: $109.84 change: +0.90

POT finally produced an oversold bounce. Shares managed to end three weeks of declines with a gain this past week. Yet the trend is still down. I would not be surprised to see shares of POT churn sideways as investors wait for the company's earnings report. POT is due to announce results on April 29th before the market opens. Wall Street expects a profit of $1.32 a share.

The stock should have short-term support near $105 and its simple 200-dma. If that fails then the $100 level could offer some round-number support. POT can be volatile following its earnings reports and traders may want to consider the cost of buying a protective put ahead of the earnings announcement. I am not suggesting new bullish positions at this time. Let's wait and see what the company has to say about earnings.

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 $14.30/14.50
-stop loss on POT @ 98.50

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

Chart of ORCL:


PartnerRe Ltd. - PRE - close: 81.57 change: +0.50

A week ago it looked like PRE was going to roll over after failing more than once near the $81 level. Traders changed their mind and bought the dip on Monday and PRE has been up every day since. Now shares are breaking out to new six-month highs. The relative strength is encouraging but I hesitate to chase the stock here. The 2009 highs near $81.70 remain potential resistance.

I remain long-term bullish on PRE but short-term I am not suggesting new positions. Please note our new stop loss at $74.75. 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 $3.90/4.30
-stop loss on PRE @ 74.75 *new*

Chart of PRE:


UltraShort 20+ Year Treasury Bond ProShares - TBT - cls: 47.37 chg: +0.31

U.S. bonds continue to garner money as the bond market rallied. I suspect most of this is concern over Europe and the festering problem with Greece. The U.S. dollar has been rising as the euro sinks toward its lows. A week ago I suggested that nimble traders may want to buy calls on a dip near $46.50 and the low on Thursday was $46.37. The TBT is bouncing from this short-term level of support. For those of us that are less aggressive I'm suggesting we wait for a 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 $2.09/2.21
-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 $4.40/4.60
-stop loss on TBT @ 45.90

Chart of TBT


Titanium Metals - TIE - close: 16.72 change: +0.31

The correction in TIE was also cut short this past week. Traders jumped in on Monday to buy the dip and TIE ended up with a gain for the week. Depending on the time frame you look at TIE is still overbought and due for a pull back or it's ready to rally higher. Given the market's trajectory I wouldn't be surprised to see TIE challenge its highs near $17.30 soon. I'm still long-term bullish on this stock but I'm not suggesting new bullish positions at this time. I will raise the stop loss to $12.90.

Last week we sold the 2011 January $15 LEAP but kept the 2012 January $15 LEAP open. Our final, long-term target is $19.75.

Feb. 20th, 2010 - entry price on TIE @ 12.06, option @ 2.60
symbol: WWN1221A15, 2012 JAN $15 LEAP call - current bid/ask $4.70/5.00
-stop loss on TIE @ 12.90 *new*

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

Chart of TIE:


iShares 20+Yr Bond ETF - TLT - close: 90.11 change: -0.32

The bond market has continued to rally but it appear to run out of steam Thursday and Friday. Shares of the TLT failed right where you might expect near its trendline of lower highs and its 100-dma. More aggressive traders may want to consider new bearish positions at this time. I am not suggesting new positions for the average investor. 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 $3.60/3.75
-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 $6.20/6.35
-stop loss on TLT @ 93.15

Chart of TLT


UnitedHealth Group Inc. - UNH - close: 30.95 change: +0.49

The HMO healthcare sector index managed a bounce this week and that helped UNH hold on to support near the $30.00 level. Unfortunately we also saw UNH produce a failed rally near short-term resistance near $32.00. It is somewhat disappointing to see UNH act this weak following its earnings report. The company delivered a Q1 profit of $1.03 a share compared to estimates for just $0.69. Revenues rose over 5% and management raised their 2010 guidance. The lack of support by investors following this bullish earnings news could be a warning signal. Readers may want to wait for UNH to close over its 50-dma (currently near $32.60) before considering new bullish positions.

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 $1.92/1.98
-stop loss on UNH @ 28.95

Chart of UNH:


Visa Inc. - V - close: 96.59 change: +1.45

Anything consumer-related continues to march higher and shares of Visa managed to breakout to new all-time highs. The rally picked up steam on Thursday and managed to push past the $95 level. Visa should have a clear shot at the $100 level soon. The $100.00 mark could act like a psychological magnet for traders but it could also be round-number resistance. This past week saw V garner bullish analyst comments and a new $110 price target.

More conservative traders may want to consider taking profits ahead of Visa's earnings report since there is always a chance investors could sell into strength to lock in gains. The company is due to announce on April 28th after the closing bell. Wall Street is expecting a profit of 91 cents a share. I am not suggesting readers chase this stock. Broken resistance near $90.00 should become new support. Please note that I am raising our stop loss to $84.90. More conservative traders may want to adjust theirs even higher. 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 $6.50/6.60
-stop loss on V @ 84.90 *new*

Chart of V:


Wal-Mart Stores Inc. - WMT - close: 54.53 change: +0.04

WMT managed to eke out a gain for the week as investors bought the dip near $54.00. I don't see any changes from my prior comments and since WMT tends to move somewhat slowly I'm not expecting any real changes in our strategy. 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 $4.80/5.00
-stop loss on WMT @ 49.45

Chart of WMT


CLOSED Plays

Biogen IDEC - BIIB - close: 52.59 change: +0.56

It has been a disappointing week for BIIB. The company reported earnings on April 20th and missed estimates and the revenue numbers. The oversold bounce from Monday was sold immediately and shares eventually broke down under support near $52.00. The stock hit our stop loss at $51.85 on Thursday. This week's weakness makes sense given the earnings news but the relative weakness over the last several weeks remains a mystery. The BTK biotech index is beginning to correct so the weakness in BIIB may not be over yet.

Feb 19th, 2010 - entry price on BIIB @ 56.60, option @ 4.60
symbol: OIY1122A60 2011 JAN $60 LEAP call - current bid/ask $2.30/2.50
-stop loss on BIIB @ 51.85

04/22/10 Stopped out $51.85, option @ $2.20 (-52%)

Chart of BIIB:



Watch

Energy & Defense

by James Brown

Click here to email James Brown

Editor's Note:

We're still looking for a dip to launch positions but our new candidates could be triggered this week.


New Watch List Entries

CLR - Continental Resources

LMT - Lockheed Martin

WLL - Whiting Petroleum


Active Watch List Candidates

APA - Apache Corp.

CIR - CIRCOR Intl.

CRS - Carpenter Technology

DE - Deere & Co.

EMC - EMC Corp.

IMN - Imation Corp.

MICC - Millicom Intl.

RT - Ruby Tuesday, Inc.

SAFM - Sanderson Farms Inc.

TRMB - Trimble Navigation

WLT - Walter Energy Inc.


Dropped Watch List Entries

CVD has been dropped as a watch list candidate.


New Watch List Candidates:

Continental Resources - CLR - close: 47.65 change: +2.22

Energy stocks are on the move again. CLR caught my eye as shares appear to breakout from the top of its sideways trading range. I'm surprise the stock has not performed better given the company's recent string of better than expected earnings results. CLR reports earnings again the first week of May. More aggressive traders may want to consider buying calls on a rally past $48 or even the $50 level. I am suggesting we wait for a dip. We'll get a better entry point on the option if we can launch positions on a dip near $45.00. I'm suggesting a trigger at $45.25. If triggered we will use a stop loss at $39.75. Our bullish target is $59.00.

FYI: I am suggesting if we do get triggered that readers only launch a half position (or smaller) since the market remains so overbought.

Company Info:
Continental Resources is an independent oil and natural gas exploration and production company with operations in the Rocky Mountain, Mid-Continent and Gulf Coast regions of the United States. We focus our exploration activities in large new or developing plays that provide opportunities to acquire large, undeveloped acreage positions for future drilling operations. We have been successful in targeting unconventional resource plays, such as the Bakken Shale in Montana and North Dakota, where horizontal drilling, advanced fracture stimulation and enhanced recovery technologies facilitate the economic production of oil and natural gas reserves. (source: company press release or website)

Buy-the-Dip trigger: $45.25

Half position or smaller!

BUY the 2010 December $50 calls (CLR 10L50.00)

Chart of CLR:


Lockheed Martin - LMT - close: 86.92 change: +0.25

Shares of LMT just turned in a strong week thanks to a better than expected earnings report. Bigger picture the stock looks ready to continue to rally but short-term LMT is testing resistance near the $87.00 area. More aggressive traders may want to consider buying calls on a breakout over $87-88. We'll get a better price on our options if we can open positions on a dip. I am suggesting we use a trigger at $83.50 to open positions. We'll use a stop loss at $78.50. Our first target is $99.00. Our second, longer-term target is $109.00. FYI: The point & figure chart is bullish and is forecasting a $92 price target.

FYI: I am suggesting if we do get triggered that readers only launch a half position (or smaller) since the market remains so overbought.

Company Info:
Headquartered in Bethesda, MD, Lockheed Martin is a global security company that employs about 140,000 people worldwide and is principally engaged in the research, design, development, manufacture, integration and sustainment of advanced technology systems, products and services. The corporation reported 2008 sales of $42.7 billion. As a global security and information technology company, the majority of Lockheed Martin's business is with the U.S. Department of Defense and the U.S. federal government agencies. In fact, Lockheed Martin is the largest provider of IT services, systems integration, and training to the U.S. Government. The remaining portion of Lockheed Martin's business is comprised of international government and some commercial sales of our products, services and platforms. (source: company press release or website)

Buy-the-Dip trigger: $83.50

Half position or smaller!

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

Chart of LMT:


Whiting Petroleum - WLL - close: 86.98 change: +2.23

WLL is another candidate in the oil and energy sector. Shares have been consistently drifting higher for weeks. On a short-term basis the stock looks like a buy right now with a new 52-week closing high following three weeks of consolidating sideways. However, energy stocks look a little overbought here. We'll get a better price on our option if we wait for a dip. I am suggesting we use a trigger at $83.50 to initiate positions. If triggered we'll use a stop loss at $74.75. Our long-term target is $99.50. More aggressive traders could aim for the $109 area. Investors should note that WLL is due to report earnings on April 28th. Thus more cautious traders may want to wait until after we see the market reaction to earnings before launching positions even if WLL hits our trigger prior to the announcement.

FYI: I am suggesting if we do get triggered that readers only launch a half position (or smaller) since the market remains so overbought.

Company Info:
Whiting Petroleum Corporation, a Delaware corporation, is an independent oil and gas company that acquires, exploits, develops and explores for crude oil, natural gas and natural gas liquids primarily in the Permian Basin, Rocky Mountains, Mid-Continent, Gulf Coast and Michigan regions of the United States. (source: company press release or website)

Buy-the-Dip trigger: $83.50

Half positions or smaller!

BUY the 2011 January $90 calls (WLL 11A90.00)

Chart of WLL:


Active Watch List Candidates:

APA - Apache Corp. - close $109.87 change: +1.63

Oil stocks have continued to rally in spite of a rocky week for oil prices and a bearish oil inventory report on Wednesday. Shares of APA posted gains four days in a row and are now challenging resistance at the $110 level. Currently our plan is to buy call LEAPS on a breakout at $110.50. However, if we are triggered I am suggesting we use small positions (at least half your normal trade size if not smaller) given this more aggressive entry point. If triggered at $110.50 we'll use a stop loss at $102.45. Our first target is $124.75.

It is still unconfirmed but it looks like APA is due to report earnings on April 29th before the opening bell. Analysts expect a profit of $2.24 a share. Readers may want to wait until after the earnings to see how the market reacts to the news before initiating positions even if the stock hits our trigger in the meantime.

Breakout trigger: $110.50 (half position)

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

Chart of APA:


CIRCOR Intl. - CIR - close: 36.02 change: +0.57

The rally in CIR continues with the stock up four points from its April lows. Shares closed at new 52-week highs on Friday and look overbought at current levels. We are bullish on CIR but we don't want to chase it. We were expecting CIR to report earnings this week but the company said they were going to announce on May 10th instead. A 20% drop seems like a lot but we would rather wait for CIR to correct back toward the $30.00 level. If shares happen to find support near $32.00 instead then we might reconsider bullish positions there. Right now our trigger to open positions is at $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.

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: $42.52 change +0.96

The rally in CRS is just getting ridiculous. The stock surged from almost $36.00 at its lows on Monday to over $42.50 on Friday. The stock is up 63% from its February 2010 lows. Shares remain very overbought and they're just getting more overbought. The last correction from January to February was a 20% pull back. I am suggesting we raise our trigger to buy calls from $30.00 to $33.00. We'll raise our stop loss to $29.40. We'll raise our long-term target to $44.75. It could take weeks for CRS to pull back enough and hit our trigger.

Keep in mind that CRS is due to report earnings on April 27th before the opening bell. Analysts expect a profit of 11 cents. Don't be surprised if investors decide to sell the news and lock in profits after the report. Please note the new option listed (Decembers).

Buy-the-Dip trigger: $33.00

BUY the 2010 December $40 calls (CRS 10L40.00)

Chart of CRS:


Covance Inc. - CVD - close: 62.26 change: -0.15

I am temporarily dropping CVD as a watch list candidate. The overall posture is still bullish. The stock actually hit a new one-year high last week. I would rather wait for a correction and it may not stop at the 200-dma. Earnings are due out this week (April 28th). Let's see what happens after earnings. For today we're removing CVD as a candidate but I'm still watching it for support in the $56-55 zone.


DE - Deere & Co. - close: 61.79 change: +0.83

Shares of DE are still bouncing around the $59-62 zone. Traders bought the dip again on Monday and Thursday. Shares look tired so we'll wait for a pull back. Readers should be aware that rival Caterpillar (CAT) is due to report earnings on Monday (April 26) before the opening bell. CAT's results could have a significant influence on shares of DE this week.

Right now our plan is to buy call LEAPS on a dip to $52.50, which would be near the rising 200-dma. If triggered we'll use a stop loss at $47.90. Our first target is $69.75.

Buy-the-Dip trigger: $52.50

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

Chart of DE:


EMC Corp. - EMC - close: 19.98 change: +0.14

Not only did EMC beat earnings estimates but the company raised its 2010 guidance. Shares reacted with a rally to new 52-week highs. The stock is now testing potential round-number, psychological resistance at $20.00. I am suggesting we raise our trigger. The trend is up but EMC can still correct. We'll use a pull back to $18.25 as our entry point to buy call LEAPS. Our new stop loss is $16.40. Our long-term target is $22.50. (Readers may want to buy 2012 calls and aim higher)

Buy-the-Dip trigger: $18.25 *new*

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

Chart of EMC:


Imation Corp. - IMN - close: 12.32 change: +0.47

The rally continues in IMN with another new 52-week high. Shares are very overbought with the stock up nearly 45% from its February 2010 low near $8.50. We do not want to chase it and hope to see some profit taking once the company reports earnings. IMN is due to announce on April 27th before the opening bell. Wall Street expects a profit of 12 cents a share. After we see how investors react to the earnings news we'll reconsider adjusting our trigger to enter positions.

Currently 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: 92.96 change: +0.53

MICC delivered a bullish performance following its earnings report on April 20th. Shares soared to a new 52-week high around $94 and spent the rest of the week consolidating those gains. Aggressive traders may want to consider positions now. MICC certainly looks headed for the $100 level. I am suggesting readers wait. Broken resistance near $80.00 should offer some support. We'll raise our trigger to buy a pullback from $77.00 to $81.00. We'll move the stop loss to $74.75. Our long-term target is $99.50 and the $109.00 levels.

Buy-the-Dip trigger: $81.00

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

Chart of MICC:


Ruby Tuesday Inc. - RT - close: $12.00 change: -0.01

Hmm... after two weeks of bearish reversals traders decided to buy the dip in RT. The stock looks like it wants to rally again in spite of being so overbought. I still don't want to chase it here. The stock is up over 50% in just the last few months. Eventually RT will see a larger pull back. Right now I'm suggesting we use a trigger at $9.50 to open long-term bullish positions (I prefer the stock over the option). 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: 58.15 change: +0.35

The rally in SAFM has stalled at the top of its bullish channel. Is this the beginning of the correction or just another pause on the way up. Shares look very overbought so we're waiting for an entry point on a correction back to $48.50. However, if we see shares find support closer to $50.00 we will probably re-adjust our entry point. 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: 31.01 change: +0.16

Technology stocks continue to rally and TRMB managed a new 52-week high near $31.60 last week. The stock remains very overbought. There is a chance TRMB could see some profit taking following its earnings report this week. The company announces on April 29th after the closing bell. Analysts expect a profit of 32 cents a share.

I am adjusting our entry point trigger to $26.75. 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: $26.75

BUY the 2010 November $30 calls (TRMB 10K30.00)

Chart of TRMB:


WLT - Walter Energy Inc. close: $95.96 change: +2.48

Traders bought the dip in WLT twice near the $90 level last week. Shares look poised to retest the $100 area soon. The stock remains overbought following the rally from its February lows. WLT is a momentum stock that tends to go to extremes. When the correction comes the stock will most likely over-correct, which is why our trigger is so low at $77.50. It's possible the profit taking could start following WLT's earnings report. The company is due to announce on April 28th after the closing bell. Wall Street wants to see a profit of 89 cents a share. Given the huge rally in this stock you could argue it's been price for perfection and investors could use any excuse to lock in gains.

Right now our plan is to open bullish positions at $77.50. 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.

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: