Option Investor
Newsletter

Daily Newsletter, Wednesday, 5/26/2010

Table of Contents

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

Leaps Trader Commentary

Short-term Bottom? Maybe.

by James Brown

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Stock markets around the world saw a 3% plunge on Tuesday morning. Investors had a lot on their plate and their first reaction was to hit the sell button - again. The European debt contagion was the main worry but rising tensions between North and South Korean didn't help. The euro currency decline continues to lift the dollar and that pushed commodities lower at the open. Commodities are also being affected by rising concerns that demand might slow down in China and in Europe, especially a Europe facing strict fiscal austerity measures.

Investors were also reacting to news that the Libor rate is rising quickly. The Libor rate is the rate banks charge each other for short-term loans. If this rate is rising it is a sign that banks are becoming distrustful of other banks. When banks stop lending to one another credit slows down and that slows down the global economy. The Libor has risen to its highest levels since July 2009. Meanwhile the distress in Europe is pushing money into the perceived safety of U.S. bonds and bonds have been surging for the last several days. The yield on the 10-year U.S. bond has fallen to 3.15%. It was 4.0% in early April. Yet I wonder if the world's appetite for U.S. debt has stalled. The Treasury department held an auction of 2-year notes this afternoon and demand was less than expected. Lately short-term U.S. treasuries have been very popular so today's auction performance could be a warning signal.

On top of all of this uncertainty and fear investors were facing the prospect of war on the Korean peninsula. South Korea has requested an apology from North Korea for sinking a S. Korean navy ship on March 26th, 2010 that killed 46 sailors. A multi-nation research team determined the boat was sunk by a North Korean torpedo. Instead of apologizing N. Korea has severed all ties with S. Korea and Kim Jong Il has ordered the country's 1.2 million-man army to combat-alert status. Tensions are mounting as N. Korea has banned the passage any S. Korean ships or planes through their territory. The U.S. navy is currently doing maneuvers with South Korea right now so hopefully North Korea won't do anything stupid.

The North Korean news makes for great headlines but the real story remains Europe. Investors are quickly losing trust. Germany's decision last week to ban short selling on certain securities has caused more turmoil and failed to stop the European markets for sliding lower. Now Germany is thinking about extending this ban. When countries start making arbitrary decisions about how their markets work without any notice investors big and small don't like it! Of course the real trouble is worry the debt contagion in Greece will spread to Portugal, Spain and Italy. The banking system in Spain was beginning to crack and regulators forced four Spanish banks to merge together in an effort to strength their balance sheets. I heard someone say that Spain's real estate market is so bad they have three-years worth of inventory on the market. Let's not forget Spain is struggling with 20% unemployment.

Economic news today was overshadowed by currency moves and the North Korea situation. Overall the economic data was positive. Consumer confidence soared to its highest levels since March 2008. May's reading hit 63.3, which was better than expected and well above April's 57.7. While this is a positive move it's a far cry from the last economic expansion back in 2007 where consumer confidence averaged about 97.

The Richmond Fed and Chicago Fed data came in positive. The Chicago Fed National Activity index came in at 0.29, which was the highest reading since December 2006. The Richmond Fed manufacturing survey came in 26. Numbers over zero are positive but this was a drop from 30 a month ago. I warned readers that we need to be on the alert for a slowdown in the economic data. This is only one report and one month doesn't make a trend but I'm concerned that the U.S. could roll over into the second half of a "W" shaped recession. A slowdown in the rate of growth across the various economic reports could be our signal the recession is getting closer.

The new home sales data doesn't come out until later this week but the housing sector underperformed today. The S&P/Case-shiller numbers were released and home prices for March declined. Some of the metropolitan areas are showing year over year gains but the U.S. national home price index fell 3.2% for the first three months of 2010. I am concerned that this trend will continue and 2010 could end up being a challenging year for real estate as foreclosures continue to rise.

I try to avoid politics in my commentary but for once Barney Frank said something that actually helped the markets. Frank is the House Financial Services Committee Chairman and he was quoted this afternoon as saying the current financial reform bill goes "too far" on derivatives trading. He suggested the language might get removed. This "news" gave financial stocks a nice bounce this afternoon and the sector recovered from a -3% decline to close in positive territory. The BKX and BIX banking indices are bouncing from a test of their 200-dma. Today's session looks like a bullish reversal pattern but it needs to see follow through.

Speaking of bullish reversals both the S&P 500 index, the DJIA, the Russell 2000, and the transportation index all appear to have a similar "hammer" candlestick. This is a bullish reversal pattern but I repeat it needs to see follow through. Fortunately these indices are either testing technical support near their 200-dma or they are testing a significant low so odds of a bounce higher are pretty good.

The S&P 500 index traded near the February 2010 low near 1044 and bounced. This could be the start of a multi-day rebound. Short-term traders might be able to use this as an entry point but do so cautiously. The 1100 level and the 200-dma are now overhead resistance for the S&P 500 and the prevailing trend is still down. My concern is that this bounce will probably roll over again. I'd like to see the market trade sideways and build a new base for it to consolidate and only then maybe we can talk about a new direction. The problems that caused this market correction have not gone away. Europe still doesn't know how they're going to solve this debt crisis. With the euro currency plunging it changes the trade situation for everyone. Suddenly Europe's imports from the U.S., Japan, and China are a lot more expensive. China is still trying to slow down its economy, which has an impact on the rest of the globe.

I hate to sound like a broken record but we remain hostage to the headlines in Europe. Many expect an overnight event like a major European bank going under but that has yet to happen. While Europe struggles to find a solution to their debt problem the whole region appears to be headed for the second half of a "W" shaped recession. The U.S. could be headed for the same fate in late 2010 or early 2011. This is a dangerous market to consider long-term bullish positions. Do so carefully and keep your position size small.

Chart of the S&P 500 Index:

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

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

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Current Portfolio


Portfolio Comments:

The market correction continues and we have seen a handful of trading candidates get knocked off our portfolio in the last few days. The recent lows have also triggered a few stocks off the watch list. I remain very cautious here. We'd like to see the S&P 500 hold the 1050 area but if concerns over Europe persist we could be looking at 1,000 or even 950 on the S&P 500 over the next several weeks to months.

If you do open new positions be sure to keep your position size small and reconsider using a tighter stop loss. I adjusted the stop loss on PEP and WMT.

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

Intraday Bounce

by James Brown

Click here to email James Brown


Lows Tested, Now What?


Editor's Note:

I have been warning readers that the market would test its "flash crash" lows. In some cases the major indices and sector indices have exceeded these lows. The S&P 500 has tested its low for 2010 and bounced. This is encouraging but only on a short-term basis. The market has reached oversold levels and this appears to be a technical bounce from support. It could be a bounce that lasts several days but now prior support levels will become new resistance levels. The short-term trend for stocks is still down.

I remain very cautious when it comes to launching new long-term bullish positions but I'm not quite ready yet to start buying long-term bearish positions either. Thus far the S&P 500 has given up about 12%. Technically a bear-market doesn't begin until an index has lost 20%. For the S&P 500 that would mean a decline toward the 975 area.

On a very short-term basis it looks like stocks could rally if we see some follow through on Tuesday's intraday bounce. Unfortunately, I think traders will eventually sell the rally. Nimble traders may want to consider new positions on CLF, a watch list candidate that graduated to the play list. I suspect this mining name could see a short-term rally. I would also take a look at FCX although you may want to wait for a move over $70 before launching positions in this stock (remember, just a short-term move).

The next LEAPStraders newsletters is only three (trading) days away. Let's see what happens between now and the weekend before we add any new candidates or watch list ideas.



Play Updates

Oil Stocks Continue to Slide

by James Brown

Click here to email James Brown


Closed Plays


ACI, BRK.B, CLR, FLS, FST and WLL have all been stopped out.


Play Updates


BorgWarner Inc. - BWA - close: 35.60 change: -0.60

It's been a rough few days for BWA. The stock has fallen toward support near its 200-dma and the $34.00 level. The low this morning was $33.93. That puts the correction in BWA near -23%. Previously I suggested readers wait for a strong bounce in the $35-37 zone as our next entry point. Friday's rebound from $34 certainly seemed to fit the bill but there was no follow through. Readers may want to wait for a move over $37.50 or $38.00 before considering new bullish positions. Although I would hesitate to launch new bullish positions if the major indices are still breaking down. The volatility is doing crazy things to the spread in the LEAPS. Readers will also want to see the spread narrow before considering new positions.

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 $2.55/4.20
-stop loss on BWA @ 33.40

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

Chart of BWA:


CIRCOR Intl. - CIR - close: 28.66 change: -0.36

Ouch! The correction in CIR has been vicious with shares falling from $36 to $28 in just the last nine trading days (That's -22%). Both the $30.00 area and the 200-dma should have offered stronger support but neither held up very well. The spreads in the options are still ridiculous but readers may want to consider an early exit. The close under $30 is very bearish! I am not suggesting new bullish positions at this time. If the market doesn't bounce soon CIR will probably hit our stop loss in a few days.

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 $0.80/2.05
-stop loss on CIR @ 27.45

Chart of CIR:


Cliffs Natural Resources - CLF - close: 51.69 change: +1.43

We have been waiting for CLF to hit its 200-dma and shares did so last week. Our trigger to buy calls was at $46.50 and on May 21st CLF dipped to $46.40. If you missed the entry point I would still consider bullish positions now. Or if you want to see more confirmation then look for a close over $55.00. This morning's upgrade of AKS by two different firms really gave the metal stocks a boost and CLF out performed with a 2.8% gain.

This is an aggressive trade. CLF can be volatile. Plus, there is a chance that Australia will levy a new tax on resource names like CLF. I suggested readers keep their position size small. Our stop loss is at $39.50. Our first target is $75.00.

May 21, 2010 - entry price on CLF @ 46.50, option @ 6.65
symbol: CLF 11A60.00 2011 JAN $60 call - current bid/ask $6.70/7.00
-stop loss on CLF @ 39.50

- or -

May 21, 2010 - entry price on CLF @ 46.50, option @ 7.55
symbol: CLF 12A70.00 2012 JAN $70 call - current bid/ask $8.60/9.50
-stop loss on CLF @ 39.50

Chart of CLF:


ConocoPhillips - COP - close: 49.92 change: -0.19

The sell-off in oil and oil stocks has been a little bit steeper than expected. I was looking for COP to dip toward the $50 area. Unfortunately this morning's widespread market weakness pushed COP to a low of $48.51. COP was on our watch list with a trigger to open positions at $51.00. The stock hit $51.00 on May 20th (the low was $50.77). Traders did buy the dip at $50.00 the next day but immediately sold the bounce on Friday. Oil stocks are going to remain hostage to the dollar, which is pushing oil futures lower. Currently both oil and oil stocks are oversold and due for a bounce. I would suggest readers wait for a move over $52.00 before considering new bullish positions in COP. Our first target is $69.00.

May 20, 2010 - entry price on COP @ 51.00, option @ 3.75
symbol: COP 11A55.00 2011 JAN $55 call - current bid/ask $2.99/3.10
-stop loss on COP @ 46.00

- or -

May 20, 2010 - entry price on COP @ 51.00, option @ 4.75
symbol: COP 11A55.00 2012 JAN $60 call - current bid/ask $3.90/4.10
-stop loss on COP @ 46.00

Chart of COP:


EMC Corp. - EMC - close: 17.85 change: -0.21

The NASDAQ has continued to breakdown to new relative lows and has closed under its 200-dma. Yet shares of EMC are holding on to its 200-dma - at least for now. The early May low was $17.10 and traders bought the dip at $17.11 on Friday. While it is encouraging that EMC might find support near the $17.00 level the short-term trend is still down. Shares of EMC were downgraded this morning, which contributed to the stock's gap down. Given the market's widespread weakness readers may want to consider an early exit from this trade. I hesitate to launch new positions here.

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 $1.08/1.14
-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 $2.30/2.48
-stop loss on EMC @ 16.75

Chart of EMC:


Fortune Brands - FO - close: 44.86 change: -0.45

The better than expected consumer confidence numbers really didn't help FO much today. I warned readers in FO's last update that shares were probably headed to their 200-dma, which the stock hit this morning. Traders bought the dip near $43.50 and FO managed to pare its losses by the closing bell. Thus far the correction in FO has hit -18%. If the $44 level fails then the next significant level of support is the $40 area.

Currently our stop loss is at $42.90. More conservative traders may want to raise their stops toward today's low (43.43). I am not suggesting new positions at this time since the short-term trend is still down. More aggressive traders may want to reconsider since this is probably the level that FO is more likely to see an oversold rebound.

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 $1.15/ 1.45
-stop loss on FO @ 42.90

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

Chart of FO:


Imation Corp. - IMN - close: 9.80 change: -0.09

It appears the correction wasn't over yet. IMN's oversold bounce rolled over near $11.00. Now shares are testing support near the 200-dma and they're getting close to the $9.50 level. I cautioned readers that we might see another entry point under $10.00. While I would be tempted to buy this dip right here a better strategy may be to wait for some signs of strength like a close over $10.25 or the 10.50 levels. More conservative traders may want to consider a tighter stop loss closer to $9.25 or $9.40ish.

I still prefer buying the stock over the calls. 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 $0.60/1.60
-stop loss on IMN @ 8.95

Chart of IMN:


Lockheed Martin - LMT - close: 80.40 change: +0.60

After searching the news I failed to see what caused the $5.00 range ($76 to $81) on Friday. The low was $76.06 but LMT rebounded to close back above support/resistance near $80.00. Tuesday morning, with the market's widespread decline, LMT dipped to $78.19 but still managed to bounce back. I'm encouraged by the rebounds but the short-term trend is still a bearish one of lower highs. If tensions on the Korean peninsula continue to escalate the defense names might see more buying interest. Given the short-term trend is still down I'm not suggesting new bullish positions but a close over $82.00 might change my mind.

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 $ 4.70/ 5.00
-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 $ 6.30/ 7.00
-stop loss on LMT @ 74.75

Chart of LMT:


Mckesson - MCK - close: 67.81 change: -0.34

Our breakout play on MCK has been triggered although it looks like we may end up being victims of a bull-trap pattern. MCK has been somewhat resistant to the market's weakness and shares have been slowly drifting higher. The stock spiked to $71.11 on May 18th. Our trigger to buy calls was hit at $71.00. Unfortunately MCK failed to hold those gains and has fallen back below the $70 level. Traders did buy the dip near $68 and the 50-dma but I would rather see MCK trade back above $71.00 again before launching new bullish positions. More nimble traders could try and jump in on a dip near $64-65 if we see one. Our first target is $94.50. This was labeled an aggressive trade with a plan to keep positions small.

May 18, 2010 - entry price on MCK @ 71.00, option @ 3.25
symbol: MCK 11A75.00 2011 Jan $75 call - current bid/ask $ 3.70/ 4.10
-stop loss on MCK @ 62.99

- or -

May 18, 2010 - entry price on MCK @ 71.00, option @ 4.10
symbol: MCK 12A80.00 2012 Jan $80 call - current bid/ask $ 5.10/ 6.00
-stop loss on MCK @ 62.99

Chart of MCK:


Millicom Intl. - MICC - close: 81.91 change: +1.22

MICC is weathering the market turmoil reasonably well. I warned readers to expect a retest of the $80 level. MICC went further than that and has been testing the rising 200-dma closer to $78. The low on Tuesday was $77.00. Traders have been buying these dips on an intraday basis, which is encouraging but the short-term trend is still down. Aggressive traders could launch positions now near $80 but I'd think about raising your stop loss. Alternatively you could wait for a close over short-term resistance near $85.00 or the 50-dma.

Keep in mind that this is a higher-risk trade given MICC's volatility and our relatively wide stop loss. I would use small positions if you do open a trade. 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 $ 6.10/ 7.50
-stop loss on MICC @ 67.75

Chart of MICC:


PEPSICO Inc. - PEP - close: 62.00 change: -0.43

PEP is generally considered a "safe" defensive stock but traders were selling shares anyway. The stock has dipped toward support near $62.00 and its rising 200-dma. I am inching up our stop loss to $59.85. More conservative traders may want to raise their stops toward today's low near $61.65 instead. I am not suggesting new bullish positions at this time. Our 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 $6.10/6.30
-stop loss on PEP at $59.85

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

Chart of PEP:


Titanium Metals - TIE - close: 15.99 change: +0.12

Traders continue to buy the dips in TIE even though most commodity-related stocks are struggling. Last week bulls bought the dip near TIE's rising 100-dma. They bought the dip again this morning but bounces are struggling near the $16.00 level. I remain concerned that if the major market averages continue to sink that TIE will eventually join them. Readers may want to take profits now. I am not suggesting new long-term positions at this time.

A few weeks ago we closed the 2011 January $15 call LEAP. We still have the 2012 January $15 call LEAP. 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 $4.80/5.20
-stop loss on TIE @ 12.90

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

Chart of TIE:


WLT - Walter Energy Inc. close: $73.45 change: +0.77

I don't want to sound too optimistic here but the volatile sell-off in shares of WLT just might be over. Shares found support near the $65.00 level. Even during last week's market sell-off WLT held support near $65. Now the stock is bouncing. The close back above its 200-dma is certainly a short-term bullish signal. I would be tempted to buy calls on WLT right here or on a close above $75.00. In the meantime keep an eye open on news regarding China. Fears that China will slow down its economy too much could send coal names back into a down trend again.

Our first target is $99.00.

The plan was to use small positions to limit our risk.

May 6, 2010 - entry price on WLT @ 73.00, option @ 12.00
symbol: WLT 11A80.00 2011 Jan $80 call - current bid/ask $10.00/11.60
-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 $12.70/15.00
-stop loss on WLT @ 62.40

Chart of WLT:


Wal-Mart Stores Inc. - WMT - close: 50.28 change: -0.72

The weakness in WMT is a bit of a mystery. You could blame the recent weakness as a post-earnings sell-off. WMT managed to beat the street by 3 cents but guided future inline with previous estimates. Same-store sales in the U.S. dipped 1.4%. Sales guidance was pretty lackluster. Another possible reason for the sell-off could be funds trying to raise cash. WMT is a very liquid big-cap name and funds could be raising cash by selling WMT.

I cautioned readers to look for a dip near $50.00 as our next entry point. Well here it is. I suggest we take advantage of this weakness. I am going to adjust our stop loss a little lower to $48.95 in an effort to avoid getting stopped out on an intraday spike lower.

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 $4.15/4.30
-stop loss on WMT @ 48.95 *new*

Chart of WMT


CLOSED Plays

Arch Coal Inc. - ACI - close: 20.50 change: +0.31

The sell-off in commodity names continued last week and ACI broke down under its 200-dma and the $22 level. Shares of ACI hit our stop loss at $21.95 on May 19th. The stock actually opened at $21.94 that morning. The sell-off seems to have stalled around the $19.25-20.00 area. This could turn out to be a short-term trade-worthy bottom but I'd want to see a move over $21.00 before considering any short-term trades. ACI does have plenty of overhead resistance now so any bullish positions should be considered higher risk.

Back on May 1st we did exit half of our position for a small profit.

May 14th, 2009 - entry price on ACI @ 16.00, option @ 2.40
symbol: ACI1122A30 2011 JAN $30 LEAP call - closed @ 1.20 (-50%)
-stop loss on ACI @ 21.95

05/01/10 Sell Half, ACI @ $27.00, option @ 3.00 (+25%)
05/19/10 Stopped out, ACI @ 21.94, option @ 1.20 (-50%)

--2nd Entry--
Feb 13th, 2010 - entry price on ACI @ 21.65, option @ 4.40
symbol: ACI1221A25 2012 JAN $25 LEAP call - closed @ 4.30 (-2.2%)
-stop loss on ACI @ 21.95

05/01/10 Sell Half, ACI @ $27.00, option @ 7.60 (+72%)
05/19/10 Stopped out, ACI @ 21.94, option @ 4.30 (-2.2%)

Chart of ACI:


Berkshire Hathaway Inc. - BRK.B - $76.23 -1.04

I have been warning readers that BRK.B would probably fall toward support in the $73-70 zone. Sure enough it did with traders buying the dip on Friday at the $70.00 mark. Unfortunately, the sell-off wasn't over yet. This morning's market weakness was enough to send BRK.B to a low of $68.48. That's enough to stop us out (stop was $69.00). The correction in BRK.B has hit 17%. I certainly regret not taking some money off the table in early March. The $70 area should be significant support in spite of the intraday lows today. Readers may want to put BRK.B back on their watch list to see if shares can find a bottom here.

Feb 6th, 2010 - entry price on BRK.B @ 73.57, option @ 4.80
symbol: 2011 JAN $80 BRKB1122A80 LEAP call - current bid/ask $4.10/4.30
-stop loss on BRK.B @ 69.00

05/25/10 Stopped out, BRK.B @ 69.00, option near $3.80 (-20.8%)

Feb 6th, 2010 - entry price on BRK.B @ 73.57, option @ 6.50
symbol: 2012 JAN $85 BRKB1221A85 LEAP call - current bid/ask $6.95/7.55
-stop loss on BRK.B @ 69.00

05/25/10 Stopped out, BRK.B @ 69.00, option near $6.80 (+4.6%)

Chart of BRK.B:


Continental Resources - CLR - close: 42.50 change: +0.54

The last update on CLR warned investors that if oil continues to slide we could see the stock trend lower. Sure enough oil continued to weaken and we saw CLR dip toward support near $40.00. For the most part CLR is holding on to support near the $40 area and its 200-dma, which is a positive sign. Unfortunately, on May 21st the stock hit our stop loss at $39.75 closing this play. I would be tempted to put CLR back on your watch list and look for a close over $45 or $46 as a possible entry point for bullish positions.

Our original plan called for a Half Position (or smaller) to limit our risk.

Apr 28, 2010 - entry price on CLR @ 45.25, option @ 4.40
symbol: CLR1018L50 2010 DEC $50 call - current bid/ask $3.60/4.10
-stop loss on CLR @ 39.75

05/21/10 Stopped out, CLR @ 39.75, option at $4.00 (-9%)

Chart of CLR:


Flowserve - FLS - close: 92.09 change: -1.47

The profit taking has been swift and brutal in shares of FLS. The stock has shaved off 15 points in the last ten days with a breakdown under support near its 200-dma and the $100 level. When the market crashed last Thursday shares of FLS gapped open lower at $96.45 and hit an intraday low of $92.33. That was enough to hit our stop loss and close this play at $92.40. Since then FLS has continued to drift lower and is now testing its 2010 lows near $90-89. If the stock was going to see an oversold bounce from support this is probably a good spot to bet on one albeit with a very tight stop loss. I am not suggesting new positions at this time.

May 6, 2010 - entry price on FLS @ 102.00, option @ 13.60
symbol: FLS 11A110.00 2011 Jan $110 call - closed at $7.30 (-46%)
-stop loss on FLS @ 92.40

05/20/10 Stopped out @ 92.40, option at $7.30 (-46%)

- or -

May 6, 2010 - entry price on FLS @ 102.00, option @ 14.90
symbol: FLS 12A120.00 2012 Jan $120 call - closed @ 13.40 (-10%)
-stop loss on FLS @ 92.40

05/20/10 Stopped out @ 92.40, option at $13.40 (-10%)

Chart of FLS:


Forest Oil Corp. - FST - close: 24.53 change: +0.27

The U.S. dollar has continued to rally, which is putting pressure on commodities and the oil stocks continue to drift lower. Shares of FST have slipped toward technical support at their 200-dma. Unfortunately the stock hit an intraday low of $23.27 on May 21st. That was enough to hit our stop loss and close this play at $23.45. Very long-term I'm bullish on oil but the next few months could see the sector struggle as investors worry about a decline in demand thanks to a slow down in Europe.

Oct 15th, 2009 - entry price on FST @ 23.85, option @ 7.40
symbol: FST1122A20.00 2011 $20 LEAP call - closed at $9.10 (+22.9%)
-stop loss on FST @ 23.45

05/21/10 Stopped out @ 23.45, option at $9.10 (+22.9%)

Chart of FST:


Whiting Petroleum - WLL - close: 77.08 change: +0.99

The market's sell-off last Thursday was pretty brutal and WLL broke down under technical support at its 100-dma on May 20th. The stock also hit an intraday low of $73.06. That was enough to close our play, which had a stop loss at $74.75. Since then traders have bought the dip near $70 (actually the low was 71.22) but WLL now faces overhead resistance near $80 and its 50-dma. The long-term trend for WLL is still bullish and I'd keep it on your watch list. A close over $85 may be a new entry point for bullish positions.

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 - closed @ 6.75 (-10%)
-stop loss on WLL @ 74.75

05/20/10 Stopped out @ 74.75, option at $6.75 (-10%)

Chart of WLL:



Watch

Graduations

by James Brown

Click here to email James Brown

Editor's Note:

The S&P 500 tested its 2010 lows this morning and bounced. Stocks had reached oversold levels again and this appears to be nothing more than a technical bounce. Granted it's a bounce that could last a few days. Let's see if the S&P 500 can rally back above its 200-dma and the 1100 level again. If not then we're probably looking at another leg down toward the 1000 area (or lower).


New Watch List Entries

None, no new watch list candidates tonight.


Active Watch List Candidates

BA - Boeing Co.

CRM - Salesforce.com

CRS - Carpenter Technology

HSY - Hershey Co.

RT - Ruby Tuesday, Inc.

WYNN - Wynn Resorts Ltd.


Dropped Watch List Entries

CLF, COP, and MCK all graduated to the play list.


Active Watch List Candidates:

Boeing Co. - BA - close: 62.78 change: -0.37

BA is still correcting. We have been looking for a dip toward $60 and shares hit $60.61 Tuesday morning when the market gapped open lower. More aggressive traders may want to consider buying calls on this bounce. I suspect that BA will actually hit $60.00 or its 200-dma (currently at $58.90) so I am moving our trigger to open bullish positions down to $60.00. 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.

Buy-the-Dip trigger: $60.00 (small size 1/2 to 1/4 normal trade size)

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

Chart of BA:


Salesforce.com - CRM - close: 82.13 change: -0.06

Shares of CRM are holding up very well, especially considering the news that management has lowered their earnings guidance for the next quarter. Normally lowered guidance would produce a much more bearish move in the stock price. While CRM is weathering the storm in the markets the short-term trend is still down with a failed rally near $85.00 on Monday. I expect CRM to drift toward $75.00 over the next few days and if the market really breaks down we'll be ready to buy the dip near $70.00. More aggressive traders may want to consider jumping in early near $75.00. If triggered our stop loss is $64.00. Our long-term target remains $99.00.

Buy-the-Dip trigger: $70.50

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: $37.75 change +0.63

The last several days have been volatile for CRS with shares dipping toward $33.00 on Friday. Friday's move is actually a bullish reversal pattern but the bounce on Monday stalled near $39.00. The upgrades for AKS on Tuesday morning was bullish news for metal stocks and CRS managed to deliver a 1.6% gain on Tuesday. I still think shares will continue to correct lower. More conservative traders could look for a dip near $30.00 or the 200-dma. I am suggesting a trigger to open bullish positions at $31.00. If triggered our stop is at $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)

Chart of CRS:


Hershey Co. - HSY - close: 46.07 change: -0.60

HSY is still holding up relatively well considering the market's volatility. Traders bought the dip near its 50-dma on Tuesday morning. I still expect a deeper correction to occur and it could take a few weeks before we get triggered. I am suggesting a trigger to buy call LEAPS a $42.50. If triggered we'll use a stop loss at $37.75. Our first target is $49.75. Our second, longer-term target is $57.00.

Buy-the-Dip trigger: $42.50

BUY the 2011 January $45.00 call (HSY 11A45.00)

- or -

BUY the 2012 January $50.00 call (HSY 12A50.00)

Chart of HSY:


Ruby Tuesday Inc. - RT - close: $10.48 change: -0.08

RT has moved from the $12-11 range to the $11-10 range. If shares break support at $10.00 should we expect the stock to trade into the $10-9 range? That's a distinct possibility so I'm moving our trigger to open bullish positions from $9.50 down to $9.25. More nimble traders could try and jump in near the $9.00 level. January 2011 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 $8.25. Our first long-term target is $12.00. Our longer-term target is $14.75.

Buy-the-Dip trigger: $9.25

BUY the stock at $9.25

- or -

BUY the 2011 January $10.00 calls (RT 11A10.00)

Chart of RT:


Wynn Resorts - WYNN - close: 79.57 change: +2.87

WYNN is seeing some strong intraday rebounds. That could be an indication of pent up buying interest. Last week on May 21st the stock slipped to $72.53. Not enough to open our trade, which has a trigger at $72.50. Thus far the bounces have stalled near the $80 level. I am not convinced the correction is over yet. We're moving our trigger down to $70.50 since WYNN may end up testing its 200-dma before all is said and done. If we are triggered at $70.50 we'll use a stop loss at $63.75. This is a volatile stock so we want to keep positions small. Our long-term target is $99.00.

Note: Back in November 2009 WYNN declared a special cash dividend of $4.00 a share, that was payable in December 2009. They adjusted the option symbols to reflect this cash dividend. We want to use the normal call LEAPS with the VEG root symbol.

Buy-the-Dip trigger: $70.50 *new*

BUY the 2011 January $80.00 calls (WYNN 11A80.00)
Use the call LEAPS with the VEG symbol: VEG1122A80

- or

BUY the 2012 January $90.00 calls (WYNN 12A90.00)

Chart of WYNN: