Option Investor
Newsletter

Daily Newsletter, Saturday, 5/8/2010

Table of Contents

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

Leaps Trader Commentary

Greece is the Word

by James Brown

Click here to email James Brown

Thousand-point intraday market moves, European debt crisis, wild currency moves, commodity prices collapse, volatility surges to new one-year highs. Whew! Are we having fun yet? We have been expecting a market correction and the correction has made a grand entrance. The NASDAQ composite, S&P 500 and small cap Russell 2000 index have already seen a 10% correction (or more) from their recent highs. The question is "will investors buy the dip this time or has the trend really changed?"

The main story driving this market remains the meltdown in Greece and its sovereign debt crisis. The problems with Greece's debt challenges have been discussed ad nauseam for weeks now. I do not want to bore you with repetition and will try and boil this down to the essence of the problem and why this is important.

It seems like every week the situation in Greece would come to a head as we moved into the weekend. EU leaders would scramble to meet and promise to hammer out a solution before Monday to "calm" the markets. Promises of support were pledged but money never changed hands. The "markets" never believed any of it and continued to send yields on Greek debt and credit default swaps soaring to new highs. The yield on a Greek 5-year bond recently hit 15%, which is a clear signal that investors consider them at high risk for default.

A week ago it seemed like the EU, the IMF and Greece had finally come to a real solution with a $140 billion aid package (which initially started out as a $61 billion aid package a few weeks prior). Unfortunately this new aid package would take weeks of red tape to actually get processed and Greece is facing an $11 billion debt payment on May 19th that they can't afford. In the mean time Germany, the EU's largest and strongest economy, has been balking at handing over cash to bailout Greece. Germany was not the only country in the EU that is reluctant to contribute their tax payer dollars to help Greece but Germany has been the most vocal. The idea of a Greece bailout is very unpopular with average Germans and German leadership was facing a tough election.

In just the last couple of days the German finance minister has convinced lawmakers to approve their portion of the Greece bailout suggesting that any other alternative would eventually cost the German people even more money and carry significantly more risk. While this is a positive step toward cooling market fears of a Greek default there are many who are still concerned that Greece will eventually end up taking the $140 billion aid money and end up defaulting anyway. The riots in Greece that have shutdown the country's transit systems and airports is a very loud and clear signal that the Greek people will not quietly accept these severe budget cuts required by the EU as a condition of the bailout. You know the other EU members are asking themselves if they will ever see this money again.

You may have heard the term before...that Greece is the "canary in the coal mine" for EU's sovereign debt challenges. It's not that Greece is so vital to the survival of the euro zone. In perspective it's relatively small. The worry is that if Greece doesn't survive and gets kicked out of the euro zone then the security of the euro currency is in doubt. Investors worry that it start a cascade of defaults across Europe that will eventually kill the euro and euro-zone. Currently Greece has about $236 billion in debt, which is about 120% of its GDP. They are running a deficit of 14% of their GDP. The combination of extremely high debt and huge cuts in spending is going to suffocate growth in Greece making it nearly impossible for them to pay back all of this debt.

Not only does Greece have to finance new debt to keep the country going but they have to find investors to buy their old debt as it matures (roll it over). Now who is going to buy billions of dollars of debt from a country on the verge of bankruptcy? The ECB recently stated they won't be buying any Greek bonds. This is the main reason the bailout will cost so much. Now apply this concept to the rest of the PIIGS countries. Portugal has been identified as the next country that could default and they have $286 billion in debt. The next weakest appears to be Spain with $1.1 trillion in debt and an economy struggling with 20% unemployment. Ireland has $867 billion in debt and Italy has $1.4 trillion (numbers come from the New York Times and the Bank for International Settlements).

The economic rebound in France and Germany, the EU's biggest members, has already stalled. If the EU rolls back over into a double-dip recession who is going to buy all of this debt that needs to get refinanced? It's not all due at once but you can see the scope of the problem. If the EU has struggled for months coming up with a solution for Greece what are they going to do for Spain that is nearly four times the size of Greece? There have been examples of countries that managed to turn things around but it normally requires them to devalue their currency. The 16 nations in the euro zone cannot devalue their currency because they agreed to use the euro.

All of this uncertainty has wreaked havoc in the currency markets. The euro has fallen to new one-year lows against the dollar and the drop has been fast. Euro weakness has pushed the U.S. dollar higher by more than 6% in a week. If you don't trade currencies you don't realize what a monumental move that is. Currency trades are normally measured in pips or 0.0001 (1/100th) of a one percent. Thus a 6% move is huge. Most commodities are traded in dollars and this sudden dollar strength has yanked the carpet out from underneath the commodity market with oil futures down 13% and copper futures down 15% in a week's time. Gold is the exception. Normally gold moves opposite the dollar but all of this uncertainty and fear has investors pouring money into the safety of gold so gold has rallied. Investor fear has also pushed money into the apparent safety of the U.S. bond market and out of equities. Wall Street hates uncertainty. On Thursday when the S&P 500 broke down under what should have been key support near the 1150 level the selling escalated into an intraday market crash.

Chart of the U.S. dollar ETF (UUP):

Chart of the Euro currency ETF (FXE):

Thursday's market meltdown in the U.S. remains a mystery. The popular story blames an institutional trader in Proctor and Gamble who mistakenly hit the "b" button instead of "m" button so instead of entering an order to sell millions it was billions. There are plenty of skeptics regarding the "fat-finger" trade as the catalyst behind the meltdown but situations like that have happened before. Other's blame the high-frequency trading by computers. Program trading already accounts for the majority of our daily market volume. Industry experts claim these lightning-quick computers that trade in milliseconds offer greater market liquidity but ironically during the meltdown there was no liquidity. On several stocks the bids just vanished. There was no one there to buy at any price. I think Jim's OptionInvestor market wrap this weekend offers a very plausible explanation. When the market broke support there were probably millions of stop losses hit and triggers to go short that quickly escalated. It's possible that some highly leveraged hedge fund had to liquidate positions due to margin calls. All of it could have been exacerbated by the massive moves in commodities and currencies, which were being influenced by the Greece situation.

Having the market correct on us is not a problem. We've actually been expecting it. Unfortunately the system broke down for a few minutes and that creates more fear and uncertainty. Combine that with the uneasiness over Europe and anyone with big gains over the last year could be thinking it's time to take profits and get out. Complicating matters is the fact that capital gains are going to rise from current levels of 15% and income taxes are also poised to rise in 2011. I can certainly see the allure of taking profits now with the 15% capital gains rate and putting your money somewhere safer.

I have to admit that trying to plan long-term trades as we look out over the next six, nine, or twelve months is challenging. Readers already know that I have been worried about a double-dip recession hitting the U.S. in late 2010 or early 2011. Now it looks like Europe is going to slide into a double-dip recession a lot faster than expected. If the EU economies slow down and the euro continues to fall not only will their consumption of U.S. goods decline but the drop in the currency will make their exports more competitive with our own. Investors launching new bullish LEAPS positions will want to do so cautiously. I would consider scaling into positions a little bit at a time and only add to positions that appear to be showing strength. We can use the market correction as an entry point but you may want to look to buy the bounce instead of buying the actual dip.

That's enough bad news, let's talk about the good news. The jobs report on Friday was very strong. Sure, it's disappointing that the news failed to lift stocks but the results are encouraging. Economists were expecting the U.S. to see 185,000 new jobs. The Labor Department announced that April saw 290,000 new jobs. Now we've already been warned that spring and summer would see hundreds of thousands of new temporary census jobs created that could skew these numbers. The good news is that census workers only accounted for 66,000 of the April jobs gain. The private sector added about 230,000 new positions. What makes Friday's report even more bullish were the revisions for February and March. The Labor Department revised February from -14,000 to +39,000 and March was changed from +162,000 to +230,000. Altogether the economy just saw a boost of 411,000 new jobs (290K +121K in revisions). The unemployment rate did spike to 9.9% but that was due to a sudden increase in jobseekers trying to rejoin the workforce.

If you combine the jobs report with the previous week's positive data from the GDP, the PMI, retail sales, personal consumption, and consumer confidence numbers we are really starting to see some improvement. Bears will argue that all of this positive economic data was already baked into the market and they might be right but until we see the rate of improvement slow down the fundamentals in the economy should be positive for stocks.

Now What?

I have been warning readers for weeks to expect a correction in the second half of April to early May. Now that the market has corrected what do we do? The S&P 500's drop from the 1220 area to the 1100 level is both a 10% correction and a test of round-number support near 1100 and technical support at its rising 200-dma. The NASDAQ has seen a 10% drop from its highs near 2530 and is testing support near 2200 and technical support at its rising 200-dma. The Russell 2000 index has produced a 12% correction and is testing support near the 650 level. Transports are off a little more than 10%. Semiconductors are down more than 13%. Banking indices are also off about 10%. While there has been a lot of damage in stock prices the larger trend off the 2009 lows is still up (for now). Last week I pointed out that the 1220 level on the S&P 500 was a major Fibonacci level of the bear-market decline and the market's bearish reversal under 1220 could be a signal that the rebound off the 2009 low is just a bull market inside a larger bear market cycle. If you subscribe to the larger bear-market philosophy then you may want to consider exiting bullish positions now or on the next oversold bounce (like maybe a bounce back to 1150 or 1180 on the S&P 500).

If you study the weekly charts most of the technicals appear to be rolling over into bearish sell signals from overbought levels. Yet on a short-term basis stocks look oversold and due for a bounce. What is a trader to do? I think active traders can use the recent weakness as an entry point but as I said earlier consider limiting your exposure with very small positions. Just because stocks are down 10% doesn't mean the profit taking is over and that the market will automatically rebound. The market tends to go to extremes. We were overbought for a while, we could move to more oversold levels. Obviously I'd like to see the S&P 500 hold the 1100 area. If we bounce here then great but even seeing the index consolidate sideways near 1100 would be okay. If the correction continues then we will probably see a decline toward the 1025-1,000 level on the S&P 500.

It has become a tired cliché but the Chinese symbol for crisis is composed of two characters, one represents danger and the other opportunity. I feel like that's where the markets are at now. A 10% correction in an uptrend could be an opportunity to jump on board. It's also a warning to the danger that the trend could have changed. The challenge is how do we interpret recent moves? I am concerned that the velocity of the market's decline underscores a deeper lack of trust in the rally and probably the fate of the economic recovery. The 900+ point drop in the Dow Industrials on Thursday has scarred investor sentiment and brought back memories of the 1987 market crash.

Investor sentiment has definitely been damaged and it could take weeks before sentiment has healed again. Until it's healed the prevailing mood could be one of selling into strength. Unfortunately we remain hostage to the situation in Europe. EU leaders are meeting over the weekend yet again as they try to "defend" the euro from speculators. Of course the euro weakness is centered on the fiscal strength of Greece and the rest of the euro zone. If the EU can present a solid plan that assuages market fears then maybe stocks will rebound higher this week. Although given the track record of EU leadership I would be in the wait and see camp. Don't be surprised if the major indices retest the Thursday low before bouncing higher.

Chart of the S&P 500 Index:

Chart of the S&P 500 Index (WEEKLY):

Chart of the NASDAQ Composite 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 late 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. Estimates were in the 3 to 5 million foreclosures over the next three years but a White House advisor was quoted with estimates in the six to ten million range over the next three years. This only reinforces my own belief that we will see another tidal wave of foreclosed homes in 2010 and 2011. 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:

Thursday's incredible volatility has produced significant changes in our portfolio. Several plays hit our stop loss but almost an equal number of candidates from our watch list were triggered and added to the portfolio. The market's correction may not be over yet so I would stay cautious when it comes to initiating new positions. Considering scaling into positions in small bites.

I adjusted the stop losses for BWA and WLT.

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

Get Small

by James Brown

Click here to email James Brown


Don't Bet the Farm


Editor's Note:

So far so good. Okay, may be not "good" but we have been expecting the market to correct on us. Granted I wasn't expecting it to happen so fast but stocks do fall a lot faster than they climb. Several stocks on our portfolio were stopped out thanks to Thursday's market plunge. Yet that same plunge triggered several candidates from our watch list. I do want to take advantage of market weakness to launch new positions but the ferocity of the declines is a warning sign. We need to limit our risk.

You have probably heard of professional traders using the term "getting small" with their trades. When the market turns volatile or acts erratic traders try and limit their risk by decreasing the size of their trades and/or tightening their stop losses. Getting smaller lets you stay in the market but you minimize your exposure. The details are going to be unique for each trader. Cautious traders will want to consider sitting out until some of this dust over Greece finally clears. More aggressive traders will trade less often and use smaller positions. If you have open positions you may want to sell a portion of your investment to take some money off the table. In a "fast market" your stop losses may not be honored.

The 10% correction in the major averages is healthy but I'm not sure the correction is over yet. I've adjusted some of the triggers on our watch list and added three more candidates in case the sell-off isn't done. Keep your risk limited by using small positions. You can always add to positions down the road.



Play Updates

Volatility Brings Change

by James Brown

Click here to email James Brown


Closed Plays


CELG, MDR, MTW, POT, PRE, TLT, UNH, and V were all stopped out this week thanks to Thursday's huge intraday swings.


Play Updates


Arch Coal Inc. - ACI - close: 23.84 change: -0.33

It's been a rough week for stocks and ACI was no exception. Shares gave up more than 10% with a drop back toward their exponential 200-dma near $23.00 on Thursday. ACI retested this level Friday morning and is now off more than 15% from its recent highs. Most of its peers are off about 20% from their recent highs. I cautioned readers a week ago to expect a dip toward $25-24 and the stock over corrected. The question is will support in the $22 zone around its 200-dma actually hold up. You could argue that the peak in January and April is a bearish double top. I am not suggesting new bullish positions at this time. We already sold half our position for profit. Our final long-term target for the LEAP trade is $34.75.

May 14th, 2009 - entry price on ACI @ 16.00, option @ 2.40
symbol: ACI1122A30 2011 JAN $30 LEAP call - current bid/ask $2.05/2.30
-stop loss on ACI @ 21.95

05/01/10 Sell Half, ACI @ $27.00, option @ 3.00 (+25%)

--2nd Entry--
Feb 13th, 2010 - entry price on ACI @ 21.65, option @ 4.40
symbol: ACI1221A25 2012 JAN $25 LEAP call - current bid/ask $5.70/6.40
-stop loss on ACI @ 21.95

05/01/10 Sell Half, ACI @ $27.00, option @ 7.60 (+72%)

Chart of ACI:


Berkshire Hathaway Inc. - BRK.B - $74.41 -0.18

Bingo! I have been suggesting readers wait for a dip into the $73-70 zone before considering new bullish positions. The market sell-off on Thursday pushed BRK.B to $71.50 before bouncing. Shares slipped to $72.73 on Friday if you missed the Thursday entry point. Now the correction may not be over yet so I would still consider positions in the $73-70 zone but would focus on the $72 level and possibly the rising 200-dma near $71, which should offer some technical support. More conservative traders may want to wait and buy a bounce instead of buying calls on a decline. The correction in BRK.B has hit about 13%.

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 BRKB1122A80 LEAP call - current bid/ask $5.85/6.70
-stop loss on BRK.B @ 69.00

Feb 6th, 2010 - entry price on BRK.B @ 73.57, option @ 6.50
symbol: 2012 JAN $85 BRKB1221A85 LEAP call - current bid/ask $9.00/9.80
-stop loss on BRK.B @ 69.00

Chart of BRK.B:


BorgWarner Inc. - BWA - close: 37.09 change: -2.49

Ouch! It's been a painful week for BWA. After hitting new 52-week highs two weeks ago shares just gave up more than 14% and on rising volume. The rally failed on May 6th after BWA was upgraded to a "buy" and shares plunged to their 100-dma during Thursday's meltdown. Traders sold the bounce again on Friday for a 6.2% loss on no news. The breakdown under $40 and its 50-dma is technically bearish but BWA should have some support near $35.00. Unfortunately our stop loss is pretty close to the $35 level and the 200-dma is near the $34.25 area.

More conservative traders may want to start taking some money off the table right now since I do expect BWA to test the $35 level. I am raising our risk on this trade by adjusting our stop loss lower. The late January low was $33.99 and the February low was near $33.85. I am moving our stop loss down to $33.40. BWA would have to breakdown under its 200-dma before hitting our stop. I am not suggesting new bullish positions at this time.

We have already taken profits once at $44.50. Our second and final long-term target is $49.75.

Feb 17th, 2010 - entry price on BWA @ 37.55, option @ 3.90
symbol: BWA1122A40 2011 JAN $40 LEAP call - current bid/ask $4.00/5.40
-stop loss on BWA @ 33.40 *new*

04/29/10 1st Target Hit, BWA @ 44.50, option @ $7.63 (+95%)

Chart of BWA:


CIRCOR Intl. - CIR - close: 30.79 change: -1.35

CIR was a watch list candidate that was triggered on Thursday's panic selling. We were looking for a dip toward support near $30.00 with a trigger to buy calls at $30.50. This past week the stock has been correcting and CIR slipped to $29.80 on Thursday opening our play. Unfortunately, I have bad news to tell you. The option prices on CIR have been outrageously priced. A few days ago the 2010 November $35 calls were trading around $0.30 but on Thursday they traded at $5.00, even during the market decline. Right now these options have a massive spread with a bid at $1.50 and an ask at $4.90. I would not use market orders at these prices. Try a limit order in the $1.50-2.00 range and see if you get filled. Officially the newsletter will have to use the $5.00 price from Thursday, which puts us at a handicap but you the reader may be able to get a better price.

The $30.00 level should be decent support supported by the 200-dma near $29.00. More conservative traders may want to wait and buy a bounce instead of buying the correction. Readers also need to keep in mind that CIR is due to report earnings on May 10th and Wall Street expects a profit of 16 cents a share. Cautious investors will want to consider waiting until after the earnings report before considering putting any capital to work since the stock could see a post-earnings move.

We will keep our stop loss at $27.45 for now. Our long-term target is the $40 area.

NOTE: I suggested readers only initiate half a position to limit our risk.

May 6th, 2010 - entry price on CIR @ 30.50, option @ 5.00
symbol: CIR 10K35.00 2010 NOV $35 call - current bid/ask $1.50/4.90
-stop loss on CIR @ 27.45

Chart of CIR:


Continental Resources - CLR - close: 43.70 change: -1.21

Whoa! Sell in May and go away seems to be the action here in CLR. Shares did hit a new high last Monday near $52 but it's been down hill every day since. The company reported earnings on May 5th and beat estimates by 8 cents. Revenues also beat estimates by a wide margin with CLR reporting sales of $248.3 million for the first quarter. That didn't seem to matter. The panic selling on Thursday pushed CLR to an intraday low of $41.00. The $42.00 level should offer some short-term support backed up by additional support near $40 and its 200-dma. However, after an 14.7% decline in four days I would be extra cautious about launching new positions. Our long-term target is $59.00.

Half Position (or smaller)

Apr 28, 2010 - entry price on CLR @ 45.25, option @ 4.40
symbol: CLR1018L50 2010 DEC $50 call - current bid/ask $4.00/4.70
-stop loss on CLR @ 39.75

Chart of CLR:


EMC Corp. - EMC - close: 19.01 change: -0.62

EMC is another watch list candidate that was triggered on Thursday's intraday plunge. Shares were already correcting and the Thursday weakness pushed EMC way past our trigger to buy calls at $18.25 and sent the stock down toward its exponential 200-dma near $17.10. When EMC hit our trigger at $18.25 the 2011 January $20 call was trading around $1.40 (the low for the day was $1.23). The 2012 January $20 call was trading around $2.50 and its low for the day was around $2.39. EMC is still correcting and shares lost another 2.6% on Friday with a drop toward the $18.00 level. While we could launch positions right here near $18.00 I would not be surprised to see shares retest the 200-dma near $17.30 so I strongly suggest readers wait and look for a dip into the $17.50-17.30 as a better entry point.

Currently our stop loss is at $16.75. More aggressive traders may want to use a wider stop (maybe $15.90). Our first target is $22.50. Our second, longer-term target is $24.75.

May 6, 2010 - entry price on EMC @ 18.25, option @ 1.40
symbol: EMC 11A20.00 2011 Jan $20 call - current bid/ask $1.34/1.39
-stop loss on EMC @ 16.75

- or -

May 6, 2010 - entry price on EMC @ 18.25, option @ 2.50
symbol: EMC 12A20.00 2012 Jan $20 call - current bid/ask $2.42/2.50
-stop loss on EMC @ 16.75

Chart of EMC:


Flowserve - FLS - close: 103.50 change: -3.89

The profit taking in shares of FLS continues. Flowserve was on our watch list with a trigger to buy calls at $102.00. The stock hit our trigger on Thursday's intraday dive when FLS hit $101.00 before bouncing back to $107.39. Unfortunately the selling continued into Friday with a breakdown under the stock's 100-dma. At this time I would fully expect shares to test the $100 level and its rising 200-dma. While the play is open look for a dip close to $100 or better yet a bounce from $100 as our next entry point.

You may have noticed that the call LEAPS options on FLS didn't move that much during Thursday's fire sale. When FLS hit our trigger at $102 the 2011 January $110 call was trading around $13.60. The 2012 January $120 call was trading around $14.90. Currently we have a stop loss at $92.40 and our long-term target is $135.00.

May 6, 2010 - entry price on FLS @ 102.00, option @ 13.60
symbol: FLS 11A110.00 2011 Jan $110 call - current bid/ask $11.10/12.10
-stop loss on FLS @ 92.40

- or -

May 6, 2010 - entry price on FLS @ 102.00, option @ 14.90
symbol: FLS 12A120.00 2011 Jan $120 call - current bid/ask $14.90/17.00
-stop loss on FLS @ 92.40

Chart of FLS:


Fortune Brands - FO - close: 47.04 change: -2.21

The reversal that started the last week of April has continued into a full scale correction in FO. Shares are now off more than 15% from their recent highs and I don't think it's over yet. Thursday's weakness produced a breakdown under $50.00 and its 50-dma. Traders sold the intraday bounce and Friday lost another 4.4%. I am expecting a drop toward $45.00, which means we are looking at getting stopped out soon. I am longer-term bullish on FO so I'm willing to increase our risk by adjusting our stop loss lower. The 200-dma is near $43.50. Let's move our stop down to $42.90. More conservative traders may want to go ahead and just exit now to preserve capital since we are taking more risk and we're only dealing with September calls and not LEAPS. I am not suggesting new bullish positions at this time but a nice bounce in the $45 area could be our next entry point.

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

Mar. 12th, 2009 - entry price on FO @ 47.55, option @ $2.20
symbol: FO1018I50 SEP 2010 $50 call - current bid/ask $2.35/ 2.60
-stop loss on FO @ 42.90 *new*

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

Chart of FO:


Forest Oil Corp. - FST - close: 25.91 change: -1.48

FST reported earnings on Monday, May 3rd and missed estimates by 5 cents with revenues also failing to meet expectations. Yet the stock popped higher on Tuesday morning. Traders quickly sold into strength and the move marked the beginning of the correction for FST. Overall the oil sector has been victim to currency moves. The sovereign debt crisis in Europe has pushed the euro lower and the U.S. dollar has rallied in response. The dollar strength has produced a sharp correction in oil prices, which is dragging down the oil stocks. FST is testing support near $25.00 and its exponential 200-dma.

I am not suggesting new bullish positions given the recent weakness. More conservative traders may want to go ahead and exit early now to limit losses. Our long-term target is $37.50.

Oct 15th, 2009 - entry price on FST @ 23.85, option @ 7.40
symbol: FST1122A20.00 2011 $20 LEAP call - current bid/ask $ 7.90/ 8.30
-stop loss on FST @ 23.45

Chart of FST:


Imation Corp. - IMN - close: 9.78 change: -0.68

The correction in shares of IMN continues and I don't think it's over yet. IMN has been a watch list candidate. Our plan was to buy the stock or call options on a dip to $10.00. Shares rallied on Thursday morning only to reverse near $11.00 and its 10-dma and 50-dma. Then the market sell-off occurred and IMN dipped to $9.89 hitting our trigger to open positions at $10.00. My preference was for the stock but I also suggested the 2010 October $10 call yet the call didn't trade on Thursday. The ask on the call should have been trading around $1.00 when we were triggered.

IMN was sold hard again on Friday for a 6.5% decline. It looks like shares are headed for the $9.50 level, which should be the next level of support. The velocity of the correction has been steep with a 22% haircut in just the last couple of weeks. Readers may want to wait and buy a bounce from $9.50 instead of buying the dip. I am moving our stop loss down to $8.95. Our first long-term target is $12.25. Our second, even longer-term target is $14.25.

May 6, 2010 - entry price on IMN @ 10.00,
Stop loss at $8.95

- or -

May 6, 2010 - entry price on IMN @ 10.00, option @ 1.00
symbol: IMN 10J10.00 2010 Oct $10 call - current bid/ask $0.90/1.40
-stop loss on IMN @ 8.95

Chart of IMN:


Lockheed Martin - LMT - close: 81.27 change: -1.58

After consolidating sideways for a couple of weeks LMT broke down with the market's Thursday sell-off. Shares dipped to $78.74 on Thursday, which was more than enough to hit our trigger at $80.50. Our watch list strategy was to buy the 2011 or 2012 call LEAPS. The 2011 January $85 calls were trading around $6.50 when LMT hit our trigger. The 2012 January $90 calls were trading near $7.70. The correction may not be over yet. The $80 level should offer support, bolstered by the 100-dma but LMT could dip closer to the $78-77 zone. Readers may want to wait on launching new positions since we may get a better entry point in the next few days. Our stop loss is at $74.75. Our first target is $99.00. Our second, longer-term target is $109.00.

FYI: Our plan was to only use small (half) positions to limit our risk.

May 6, 2010 - entry price on LMT @ 80.50, option @ 6.50
symbol: LMT 11A85.00 2011 Jan $85 call - current bid/ask $ 5.50/ 5.80
-stop loss on LMT @ 74.75

- or -

May 6, 2010 - entry price on LMT @ 80.50, option @ 7.70
symbol: LMT 12A90.00 2012 Jan $90 call - current bid/ask $ 6.60/ 7.70
-stop loss on LMT @ 74.75

Chart of LMT:


Millicom Intl. - MICC - close: 79.71 change: -1.11

MICC suffered a 10% correction this past week. We had the stock on our watch list to buy a dip near support around $80.00. MICC hit our trigger at $80.00 on Thursday's market meltdown when the stock hit $78.35. The 2011 January $90 calls were trading around $8.60. Unfortunately the sell off continued on Friday and share briefly traded under technical support at the 200-dma. The low on Friday was $75.31. The long-term trend is still up and thus far the correction from its recent high has shaved off about 15%. I am concerned that MICC might dip toward the $70.00 level before finally rebounding so we're going to adjust our stop loss down to $67.75, which is just under the February low. This does raise the risk level for this trade. While I am tempted to buy this dip near the 200-dma readers may want to wait and see if shares do fall toward $70 and reconsider an entry point there. Our long-term target is $99.50 and the $109.00 levels.

May 6, 2010 - entry price on MICC @ 80.00, option @ 8.60
symbol: MICC 11A90.00 2011 Jan $90 call - current bid/ask $ 6.80/ 7.90
-stop loss on MICC @ 67.75

Chart of MICC:


PEPSICO Inc. - PEP - close: 64.57 change: -0.13

Shares of PEP weathered the week relatively well. The stock spent most of the time failing to breakout over new resistance near $66.00. Thursday saw a failed rally at $66 and a drop toward $62.00 on the market swoon but PEP closed Thursday at $64.70. I have been warning readers to expect a correction toward the $63-62 area. I would still expect PEP to retest the same levels again before moving higher. I'm not suggesting new bullish positions at this time.

Our (adjusted) final target is $72.25.

July 7th, 2009 - entry price on PEP @ 57.25, option @ $4.50(estimate)
symbol: VP-AL, 2011 $60.00 LEAP call - current bid/ask $7.15/7.40
-stop loss on PEP at $59.40

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

Chart of PEP:


Titanium Metals - TIE - close: 15.40 change: -0.79

Investors reacted positively to TIE's earnings report. The company reported on May 5th and TIE's profit of 9 cents a share beat estimates of only 3 cents. Revenues also surged past analysts' estimates. The stock rallied on the news and garnered some bullish analyst comments. While the stock did fail at resistance in the $17.00-17.30 area TIE closed virtually unchanged for the week. I remain longer-term bullish on TIE but readers will want to seriously consider taking profits right now! The market correction may not be over yet and now that earnings are out most of the good news should already be baked in.

A few weeks ago we closed the 2011 January $15 call LEAP. We still have the 2012 January $15 call LEAP. I am not suggesting new positions at this time. 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 $4.40/4.80
-stop loss on TIE @ 12.90

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

Chart of TIE:


Whiting Petroleum - WLL - close: 90.33 change: +0.87

Readers may want to reconsider their bullish positions in WLL. The stock rallied to $93 on Monday and then immediately reversed lower. The drop from $93 to Friday's low near $77 is a 17% correction. Most of the oil sector has suffered due to the euro's decline. The plunging euro currency has sent the U.S. dollar skyrocketing higher. Commodities are traded in dollars and that pushed crude oil down. The oil sector stocks react as a result and WLL plunged. Technically the weekly chart has produced a huge bearish engulfing candlestick, which is normally a reversal pattern but it needs to see some confirmation. The close under the $82-80 zone is another bearish development.

I'm repeating myself but more cautious traders may want to abandon ship. If the market continues to slide we could easily get stopped out under $75.00 soon. I am not suggesting new bullish positions at this time. Our long-term target is $99.50. More aggressive traders could aim higher. Remember, this was an aggressive entry point and we wanted to keep positions small to limit our risk (half a position).

Half position

Apr 27, 2010 - entry price on WLL @ 83.50, option @ 7.50
symbol: OVK1122A90 JAN 2011 $90 LEAP call - current bid/ask $ 8.20/ 8.90
-stop loss on WLL @ 74.75

Chart of WLL:


WLT - Walter Energy Inc. close: $73.28 change: -0.80

How low will it go? We were expecting shares of WLT to be volatile and over correct to the down side. Shares dipped to $66.87 on Thursday afternoon, which pushes the correction in WLT to about 33% from its highs near $100. Our trigger to open positions was at $73.00 and WLT almost hit our trigger on Wednesday, May 5th but the stock bounced at $73.10. Our trade didn't open until Thursday's decline. The 2011 January $80 call was trading around $12.00 and the 2012 January $90 call was trading near $14.10 when WLT hit our trigger.

Currently WLT is trying to find support near $70.00 and its rising 200-dma. If this level breaks I would expect shares to fall toward their February low near $63.50. Therefore I am adjusting our stop loss from $64.50 to $62.40. Aggressive traders could launch positions now but I would suggest readers wait. We might get a better entry point on a dip or bounce in the $65 region. Our first target is $99.00.

FYI: I cautioned readers that WLT was a very volatile stock and investors may want to use small positions to limit their risk.

May 6, 2010 - entry price on WLT @ 73.00, option @ 12.00
symbol: WLT 11A80.00 2011 Jan $80 call - current bid/ask $11.10/12.10
-stop loss on WLT @ 62.40

- or -

May 6, 2010 - entry price on WLT @ 73.00, option @ 14.10
symbol: WLT 12A90.00 2012 Jan $90 call - current bid/ask $13.70/15.40
-stop loss on WLT @ 62.40

Chart of WLT:


Wal-Mart Stores Inc. - WMT - close: 52.40 change: -0.83

Shares of WMT weathered the recent storm on Wall Street pretty well. Shares slipped to $51.53 on Thursday's market decline and traders sold it again on Friday with a breakdown under the simple 200-dma, which should have offered stronger support. I have been suggesting readers wait for a dip near the $52.50-52.00 area as a potential entry point to buy calls and we just got it. However, given the market's weakness I am starting to wonder if we will see an even better entry point near the $51-50 zone.

I've said it before, WMT doesn't move that fast so you can take your time on an entry point. Shares have managed to close above the $52 level for now and I would feel comfortable buying LEAPS anywhere in the $53-50 zone it just depends on how patient you are. This is a very long-term trade for us. We don't have to buy the dips. You can wait to buy a bounce (which could be weeks away).

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

Mar 7th, 2009 - entry price on WMT @ 54.14, option @ 4.60
symbol: WWT1221A55 JAN 2012 $55 LEAP call - current bid/ask $5.10/5.35
-stop loss on WMT @ 49.45

Chart of WMT


CLOSED Plays

Celgene Corp. - CELG - close: 57.49 change: -0.61

It has been a rough week for CELG and Thursday was down right ugly. The stock plunged from $60 to $53.39 on Thursday hitting our stop loss at $54.75 along the way. The option was trading around $2.00 when we were stopped out and the LEAP hit $1.15 at its low for the day. Our play has been closed but readers may want to put CELG on their watch list for a correction toward the $50.00 level, which could end up being significant support.

Mar 1st, 2010 - entry price on CELG @ 60.75, option @ 5.40
symbol: VCS1122A65 2011 JAN $65 LEAP call - current bid/ask $4.50/4.75
-stop loss on CELG @ 54.75

05/06/10 Stopped out @ 54.75, option @ $2.00 (-62.9%)

Chart of CELG:


McDermott Intl. - MDR - close: 23.50 change: -1.34

It turned out to be a very bad week for MDR. Shares lost 17.3% with the intraday drop to $22.66 on Friday. Our bullish play was stopped on during Thursday's market meltdown when MDR hit our stop loss at $23.90. The call option was trading around $1.60 when we were stopped out. The low for the day was $1.45. This was an aggressive trade and the plan was to limit our risk with a small position.

- Half position size -
Apr 14th, 2010 - entry price on MDR @ 28.25, option @ 2.95
symbol: 2011 JAN $30 LEAP call - current bid/ask $ 1.40/ 1.70
-stop loss on MDR @ 23.90

05/06/10 Stopped out @ 23.90, option @ 1.60 (-45%)

Chart of MDR:


Manitowoc Inc. - MTW - close: 12.39 change: -0.75

The correction in MTW continues and shares lost another 11%. I warned readers a week ago that MTW looked poised to move lower and suggested an early exit. Shares of MTW were very volatile on Thursday and the stock dipped to exactly $11.75, which happened to be our stop loss. Our trade is closed and the option traded down to $4.28 on Thursday.

Oct 30th, 2009 - entry price on MTW @ 9.10, option @ 2.61
symbol: VMT-AB, 2011 JAN $10 call - current bid/ask $3.60/4.00
-stop loss on MWT @ 11.75

05/06/10 Stopped out, option @ 4.28 (+63.9%)

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

05/06/10 Stopped out, MTW @ 11.75 (+29%)

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

Chart of MTW:


Potash Corp. - POT - close: $99.97 change: -0.40

The correction in POT slashed off another 10% this past week. Shares broke down under support near $105 and immediately fell toward round-number, psychological support near $100.00. Thursday's market weakness was too much and POT hit our stop loss at $98.50 closing this trade. The option was trading around $11.15 when we were stopped out. The low for the option on Thursday was $10.80.

We sold half our position near $125 in March.

Jan. 28th, 2010 - entry price on POT @ 101.00, option @ 11.75
symbol: VPT-AB, 2011 LEAP $110 call - current bid/ask $11.15/11.45
-stop loss on POT @ 98.50

05/06/10 Stopped out @ 98.50, option @ 11.15 (-5%)

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

Chart of ORCL:


PartnerRe Ltd. - PRE - close: 72.71 change: -0.38

Stocks connected to the oil spill in the Gulf of Mexico are still getting hammered. PRE broke down under technical support at its 200-dma and then fell under what should have been support near $75.00. The stock hit our stop loss at $74.75 on Wednesday. The option was trading around $1.60 when we were stopped out. The very next day PRE announced earnings that were significantly better than expected but the news failed to have an impact on the stock price. Shares actually sank deeper.

Feb. 13th, 2010 - entry price on PRE @ 76.28, option @ 2.70
symbol: PRE1021H80, 2010 AUG $80 call - current bid/ask $0.75/1.00
-stop loss on PRE @ 74.75

05/05/10 Stopped out @ 74.75, option @ 1.60 (-40.7%)

Chart of PRE:


iShares 20+Yr Bond ETF - TLT - close: 95.58 change: -1.21

The Greek contagion scare has sent the euro currency plunging lower this past week. In response the U.S. dollar has soared and money has flowed into the apparent safety of U.S. bonds. This rally in the bond market pushed the TLT higher and we were stopped out at $93.15 on Tuesday, May 4th. At the time we were stopped out the 2011 January $85 put was trading around $2.80. The 2012 January $80 put was trading near $5.60.

Eventually the U.S. is going to suffer for our rising debt load but for now we appear safe compared to the alternatives in Europe.

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 $3.20/3.45
-stop loss on TLT @ 93.15

05/04/10 Stopped out @ 93.15, option @ 2.80 (-56%)

Jan. 09th, 2010 - entry price on TLT @ 89.29, option @ 8.90
symbol: YLI-MB, JAN 2012 $80 LEAP put - current bid/ask $6.15/6.90
-stop loss on TLT @ 93.15

05/04/10 Stopped out @ 93.15, option @ 5.60 (-37%)

Chart of TLT


UnitedHealth Group Inc. - UNH - close: 29.02 change: -0.22

UNH continued to slowly drift lower this past week but didn't breakdown under the $29.00 level until Thursday's market meltdown. UNH fell to $27.97 before paring its losses but our stop loss was hit at $28.95 closing this trade. The option was trading around $1.75 when we were stopped out. The plan was to use small positions to limit our risk. If UNH can find support again in the $23.50 area we might want to take another look at it for a possible trade.

Dec 16th, 2009 - entry price on UNH @ 31.55, option @ 3.80
symbol: VUH-AG, 2011 JAN $35 LEAP call - current bid/ask $1.73/1.84
-stop loss on UNH @ 28.95

05/06/10 Stopped out @ 28.95, option @ $1.75 (-54%)

Chart of UNH:


Visa Inc. - V - close: 82.29 change: -0.63

It has been an extremely ugly week for shares of Visa. The stock corrected sharply and when Thursday's market plunge occurred traders rushed to lock in profits. The stock fell to $75.91 intraday. We were actually stopped out at $84.90 on Wednesday, May 5th. The option was trading around $4.00 when we were stopped out. Aggressive traders may want to keep an eye on the stock since Visa is testing support near $80 and its rising 200-dma.

Mar 9th, 2009 - entry price on V @ 91.00, option @ 4.60
symbol: VSK1122A100 JAN 2011 $100 LEAP call - current bid/ask $3.50/3.60
-stop loss on V @ 84.90

05/05/10 Stopped out @ 84.90, option @ 4.00 (-13%)

Chart of V:



Watch

Not Over Yet

by James Brown

Click here to email James Brown

Editor's Note:

The market's correction has been swift and Thursday's intraday swing was low enough to trigger several of our watch list candidates.


New Watch List Entries

BA - Boeing Co.

CLF - Cliffs Natural Resources

COP - ConocoPhillips


Active Watch List Candidates

CRM - Salesforce.com

CRS - Carpenter Technology

DE - Deere & Co.

RT - Ruby Tuesday, Inc.


Dropped Watch List Entries

CIR, EMC, FLS, IMN, LMT, MICC, and WLT all graduated to the play list.


New Watch List Candidates:

Boeing Co. - BA - close: 66.72 change: -1.25

Shares of BA spent six weeks consolidating sideways above the $70.00 level. Now that the stock has begun to correct I think shares will retest support near $60.00 and its rising 200-dma. Longer-term trend remains higher and as long as the economy continues to improve investor sentiment for BA should remain positive. I am suggesting a trigger to buy call LEAPS on a dip to $60.50. If triggered we will use a stop loss at $54.75. Our long-term target is $79.00. We want to keep positions sizes small to 1/2 or 1/4 your normal trade to limit our risk.

Company Info:
Boeing is the world's leading aerospace company and the largest manufacturer of commercial jetliners and military aircraft combined. Additionally, Boeing designs and manufactures rotorcraft, electronic and defense systems, missiles, satellites, launch vehicles and advanced information and communication systems. As a major service provider to NASA, Boeing operates the Space Shuttle and International Space Station. The company also provides numerous military and commercial airline support services. Boeing has customers in more than 90 countries around the world and is one of the largest U.S. exporters in terms of sales. (source: company press release or website)

Buy-the-Dip trigger: $60.50 (small size 1/2 to 1/4 normal trade size)

BUY the 2011 January $70 call (BA 11A70.00)

Chart of BA:


Cliffs Natural Resources - CLF - close: 56.12 change: +0.12

Commodity-related stocks still offer potential gains, especially now that they have seen such a sharp correction. I am tempted to buy calls on CLF right here near $55 however, I'm not sure the correction is over yet. I am suggesting we use a trigger at $47.50 to launch bullish positions. If triggered we'll use a stop loss at $39.50. Our first target is $75.00.

FYI: Investors need to know that miners with operations in Australia present greater risk. Currently the Australian government is considering a 40% "resource super profit tax". If this measure gets passed then CLF could see a much larger decline. I would keep your position size small to limit your risk.

Company Info:
Cliffs Natural Resources Inc. (NYSE: CLF)(Paris: CLF) is an international mining and natural resources company. A member of the S&P 500 Index, we are the largest producer of iron ore pellets in North America, a major supplier of direct-shipping lump and fines iron ore out of Australia and a significant producer of metallurgical coal. With core values of environmental and capital stewardship, our colleagues across the globe endeavor to provide all stakeholders operating and financial transparency as embodied by the Global Reporting Initiative (GRI) framework (source: company press release or website)

Buy-the-Dip trigger: $47.50

BUY the 2011 January $60 call (CLF 11A60.00)

- or -

BUY the 2012 January $70 call (CLF 12A70.00)

Chart of CLF:


ConocoPhillips - COP - close: 54.68 change: -0.41

The combination of the oil spill in the Gulf and the 13% plunge in oil futures thanks to the dollar's rally has been tough on the oil sector. COP has seen a 10% correction but still looks bullish. I am actually tempted to buy calls on COP right here near $55.00 but I'm not convinced the correction is over yet. I'm suggesting we use a trigger to open bullish positions at $51.00. If triggered we'll use a stop loss at $46.00. Our first target is $69.00.

Company Info:
ConocoPhillips is an international, integrated energy company with interests around the world. Headquartered in Houston, the company had approximately 29,900 employees, $155 billion of assets, and $179 billion of annualized revenues as of March 31, 2010. (source: company press release or website)

Buy-the-Dip trigger: $51.00

BUY the 2011 January $55 call (COP 11A55.00)

- or -

BUY the 2012 January $60 call (COP 12A60.00)

Chart of COP:


Active Watch List Candidates:

Salesforce.com - CRM - close: 85.60 change: -2.54

CRM tried to hold on to its lofty levels but eventually succumbed to the market wide profit taking. Shares actually traded near $90 this past week only to crash towards $76 on Thursday and Friday. News that Goldman Sachs had upgraded CRM to a buy with a $102 target did not have much of an impact. Our trigger to buy call LEAPS on CRM has been $75.50 and the recent lows have been near $76.00. I am tempted to launch positions now. However, the market tends to move to extremes and I think CRM might overshoot the $75 level and actually trade closer to $70.00. Therefore I'm adjusting our trigger down to $70.50. We'll move the stop loss to $64.00. Our long-term target remains $99.00.

Buy-the-Dip trigger: $70.50 *adjusted

BUY the 2011 January $80 calls (CRM 11A80.00)
- or -
BUY the 2012 January $90 calls (CRM 12A90.00)

Chart of CRM:


Carpenter Technology - CRS - close: $38.45 change +1.10

CRS is actually hold up very well, especially given the weakness in so many commodity-related stocks. The company announced a price increase for some of its stainless steel products. I am still expecting a correction in spite of CRS' recent relative strength. I'm moving our trigger down from $33 to $31 as a momentum stock like CRS will probably over-correct to the downside. We'll move our stop to $26.90. Our long-term target is $44.75. My time frame for CRS to hit our trigger is the next two or three weeks.

Buy-the-Dip trigger: $31.00

BUY the 2010 December $35 calls (CRS 10L35.00) *adjusted*

Chart of CRS:


DE - Deere & Co. - close: 56.38 change: -0.01

DE was not immune to the market weakness but held up reasonably well during Thursday's meltdown. Shares hit $52.73 on Thursday afternoon, not enough to hit our trigger. I am going to keep our trigger at $52.50 but more cautious investors may want to consider using a trigger closer to $50.00. I am adjusting our stop loss to $46.90. 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:


Ruby Tuesday Inc. - RT - close: $9.93 change: -0.64

A few weeks ago it seemed like RT refused to correct. Now investors are taking profits. The breakdown under the 50-dma and the $10.00 level this past week is certainly short-term bearish. I am expecting this stock to tag prior resistance and what should be strong support near $9.50. More nimble or conservative traders could wait and try to jump in on a dip near $9.00 if RT provides one. October options are the longest ones available so I prefer buying the stock over an option. It could take another two or three weeks before RT finally hits our trigger. If triggered we'll use a stop at $8.45. 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: