Option Investor
Newsletter

Daily Newsletter, Saturday, 6/12/2010

Table of Contents

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

Leaps Trader Commentary

Volatile Crosscurrents

by James Brown

Click here to email James Brown

So much for summer doldrums. This feels more like a summer roller coaster ride with all the ups and downs. The S&P 500 managed to bounce back from the edge of the cliff after dipping toward the 1040 level (support) on June 8th. On a weekly basis the U.S. markets managed to end a three-week losing streak with the S&P 500 up 2.5%, the Russell 2000 up 2.8%, and the NASDAQ composite up 1.1%. Yet if you take a step back from the daily volatility stocks have been range bound the last few weeks. The U.S. dollar remains in an up trend thanks to continued weakness in the euro currency. Fearful investors continue to favor gold, which has managed to maintain its bullish up trend.

There are a lot of crosscurrents in this market and it's challenging to try and sift through what is important and form some sort of trading bias. We are going to briefly touch on the positives and negatives affecting the market and then check out what the charts are telling us.

China had a big influence on the global markets this past week and this time it was positive. The Chinese government said exports surged +50% in May compared to a year ago. Economists were only looking for a rise of +32%. The number of new loans also rose significantly above expectations, which is surprising since the government has been trying to slow down their growth by putting stricter requirements on the banks. Investment and factory output in China did slow somewhat but the trend is still positive. This positive news was tempered by signs of rising inflation. China's National Bureau of Statistics said consumer prices rose 3.1% in May up from 2.8% in April. This headline number was powered by a 6.1% jump in food costs, which is a bad sign for the large lower class in China, many of whom already spend half of their income on food. Analysts are still a little worried that growth will slow as the record-breaking 4 trillion yuan ($586 billion) stimulus begins to fade. Plus, there is the ever-present concern that China will take more stringent steps to cool down their red-hot economy (+11.9% growth in the first quarter) before it overheats. Overall I find the export news VERY promising. Someone has to be buying all of those exports, which is a positive sign for global growth.

Another BRIC country that is doing well is Brazil. The country announced their Q1 GDP came in at +9%, which is the highest level of growth since they started keeping records back in 1995. Brazil has seen a successive trend of quarterly growth numbers. While growth is expected to slow down for the rest of 2010 the full year estimates are for +6% growth.

Here at home in the U.S. there are more signs that the struggling economy may be stronger than we expect. On Friday traffic numbers for the port of Los Angeles and the port at Long Beach, California came in way above estimates. The number of incoming (full) and exiting (empty) cargo containers surged by double-digit percentage points. Traffic is approaching levels not seen since 2006, when the economy was booming. All of these goods have to be going somewhere and we haven't hit the busiest months of the year yet.

Consumer sentiment can help forecast consumer spending patterns. On Friday the preliminary University of Michigan Consumer Sentiment report came in better than expected. Economists were looking for a reading of 74.5 but June's advance number surged to a two-year high of 75.5. I'm a little surprised by the strength given the ongoing stream of weekly jobless claims and the disappointing non-farm payroll numbers. Maybe consumer attitudes brightened with the weather.

Geopolitical risks remain an issue for the global markets but last week the spotlight on North Korean, Iran, and Israel all faded. We never know when something is going to boil up to the surface. A week ago they were predicting war on the Korean peninsula. Fortunately the situation seems to have cooled and hopefully the longer we go without any incidents the better chance the markets have of staging a recovery.

EDIT: I may have spoken too soon. Late Saturday there were new reports that N.Korea threatened an "all-out military strike" if S.Korea continues their plans for psychological warfare with loudspeakers and large electronic displays along the border to N.Korea.

Meanwhile there are several negative factors having an impact on the market. Negative headlines from Europe seem to have slowed but the sovereign debt crisis in the EU remains a dark storm on the horizon. EU's inability to solve these debt challenges is the biggest problem and it's being compounded by the deterioration in the banking system. European banks are scared to lend to one another because they don't know if their neighbor banks are going to go under or not. It's very similar to what happened to our banking system in 2008. Investors are concerned that we could see debt defaults by Greece, Hungary, Portugal, Italy, Ireland and Spain. Even Britain has received some negative press with the credit rating agencies voicing their concern over Britain's deficits.

Spain made headlines late last week with rumors it was secretly asking for support from the EU to avoid a Greece-like meltdown. Remember, Spain is suffering from 20% unemployment and a severely depressed real estate market with years worth of inventory on the market. Several days ago there were headlines about potential cracks in the Spanish banking system when the government forced a handful of banks to merge together to strength their balance sheets. Now one of those banks, Caja Madrid, is looking at another government-sponsored merger with Bancaja. You may recall a few weeks ago when the EU put together their trillion euro bailout fund to help stave off future defaults. It looks like Spain may have been their primary target since the country's economy is four times the size of Greece.

The situation in Europe is pretty gloomy. Many of their economies have stalled and on the verge of falling back into a double-dip recession. Several countries are going to struggle seeing growth given their new strict austerity measures. Now add a banking system that is scared to lend. Credit is drying up and without credit economic activity slows down even more. This combination of factors (slow/no growth, potential debt defaults, vanishing credit) could last years. Plus Europe could see a banking washout like we did that forced major banks to recapitalize.

Several analysts are very worried about EU's impact on the global markets and they're telling investors to get out of stocks. Actually there has been a flurry of market calls advising investors to exit the stock market. I wonder if traders should avoid Europe and the U.S. and instead take another look at Brazil, India, China and Latin America where growth is still strong. Another thing that makes you wonder is China's recent comments about its exports rising +50% in May. The EU is China's number one trading partner. If China's business is so good are things really that bad in Europe? Keep an eye on the euro currency. The euro has become the proxy for investor sentiment regarding the EU's future. Last week the euro managed a meager oversold bounce from four-year lows to close near 1.21 against the dollar.

While we are on the subject of Europe let's talk about BP, formally known as British Petroleum before merging with Amoco back in 1998. BP's attempts at plugging the leak in the Gulf of Mexico have not been effective. The latest strategy does allow BP to collect about 15,000 barrels a day from the gushing well. Unfortunately, the U.S. government has recently increased their estimates for the leak to 40,000 barrels a day. The growing environmental disaster is fueling a hurricane of political rhetoric against BP. Many are worried that BP may be forced into bankruptcy to pay for the clean up costs. There is certainly a growing chance that BP will cut its upcoming cash dividend to shareholders to help pay for the clean up efforts. I'm not so sure BP will be forced into bankruptcy. The company has annual sales in the neighborhood of $230 billion with an after tax profit around $13 billion. I heard the latest estimate on clean up is around $70 billion. They are not going to have to come up with that money all at once.

Once the well eventually gets plugged and the clean up costs are more accurately defined there is a chance that someone could try and scoop up BP as a takeover target given the 50% haircut in its market cap. It will be interesting to see what headlines emerge over the weekend. The political rhetoric against BP is having an effect on U.S./U.K. relations. President Obama is due to meet with the British Prime Minister on Saturday (June 12th). Meanwhile BP's CEO will be facing questions from angry U.S. lawmakers when he appears before congress later this month. The bigger concern is how the oil spill and the damage in the Gulf will affect economic activity for years to come. There are already estimates that property values around the Gulf will be damaged for a long time.

I am not just concerned about housing values around the Gulf but across the nation. The pace of home sales is likely to plummet now that the tax-credit has expired. This may be prime time residential real estate selling season but with unemployment still stubbornly high and mortgage lending qualifications still strict the pace of improvement is likely to stall. Foreclosures remain at record highs and will continue to plague the economy for the next 12 to 24 months. The senior vice president at RealtyTrac offered his opinion that foreclosures might peak in the second half of 2010 but that remains to be seen. The chief economist at Fannie Mae, Doug Duncan, said that housing values may not bottom until the third quarter of 2010. Again, we'll have to wait and see. Zillow.com's chief economist, Stan Humphries, believes that even when we do hit bottom we're not going to see a sharp recovery. Home values could drift sideways for years.

The major influence on the housing market is going to be jobs. Stocks got a bounce on Thursday thanks in part to a drop in continuing unemployment claims, which fell to their lowest level in a year. Yet I strongly suspect that number is dropping because people have used up their unemployment benefits and they're falling off the list. Meanwhile initial weekly jobless claims are not improving. They continue to hover around the 450,000 level.

If consumers are nervous about their jobs then they're not going to spend very much. That was evident in the May retail sales number. Economists were expecting the May retail sales number to dip but still come in positive. Instead retail sales fell -1.2%, this was the first drop in eight months. Retail sales could end up being a sore spot in the economy until we see the back to school rush in August.

Technically the markets are mixed. This past week provided another oversold bounce and short squeeze from support. If you're bullish this looks like a possible double-bottom. I'm concerned the S&P 500 could be setting up for a rally toward resistance near 1150 that eventually rolls over and forms a huge bearish head-and-shoulders pattern. On a short-term basis the S&P 500 is facing resistance near 1100-1110 and its simple 200-dma. Active traders could try bullish strategies on a move over 1110 but look for resistance at 1150. You'll also want to keep an eye on the 50-dma. If the 50-dma crosses under the 200-dma it is normally a very bearish sell signal but that may not happen for another few weeks. If the S&P 500 closes under 1040 I think we're looking at a multi-week decline toward 950 with a pause near psychological support near the 1,000 level.

Chart of the S&P 500 (daily):

Chart of the S&P 500 (weekly):

The chart of the NASDAQ Composite looks similar with a bounce near the 2150-2140 zone. Unfortunately there is plenty of resistance in the 2300-2400 area. Right now I'm not very optimistic on the fate of the NASDAQ but I will point out several of the technical oscillators have turned bullish from oversold levels.

Chart of the NASDAQ:

The small cap Russell 2000 index managed a nice bounce from the 607 mark on Tuesday and closed back above its simple 200-dma (resistance) but has yet to break the bearish trend of lower highs.

Chart of the Russell 2000 index:

I want to draw your attention to the semiconductor index (SOX). The longer-term trend in the SOX is still bullish in spite of the correction from its April highs. Thus far investors have continued to buy chip stocks when the SOX nears support around the 325 area. Unfortunately the trend of lower highs makes this look like the SOX is coiling for a bearish breakdown lower. If the SOX can close over the 375 area it would really strength the NASDAQ but a breakdown under 325 could be a signal we're headed lower.

Chart of the Semiconductor Index (SOX):

The last chart I want to show you tonight really concerns me. During the 2008 crash, when money managers were desperate to park their money some place safe, there was a flood of buying in the short-term 13-week treasury bill. There were several times the yield on the bill was essentially zero but traders didn't care because it was "safe". In the last two weeks the yield on the 13-week bill has plunged. I see that as a sign money is moving into the short-term treasury as a safe haven because money managers don't trust the market.

Chart of the Short-term 13-week Bill (IRX):

This coming week we'll see another round of economic data but I'm not expecting any of them to be a market mover. The biggest reports are the Producer Price Index (PPI) and Consumer Price Index (CPI), which analysts will dissect for signs of inflation (or even deflation). Thus far inflation remains very low, which contributes to the Federal Reserve's stance to keep interest rates low for the foreseeable future.

Since 1927 the S&P 500 has seen 58 corrections of -10% of more. The current drop from the 2010 April highs to the May-June lows has been more than 14%. Out of those 58 corrections there were 33 times (56%) where the index did not hit the -20% boundary where most market technicians declare a new bear market has been born. I suspect that if we see the S&P 500 close under 1040 the odds of us hitting the -20% bear-market territory will skyrocket. On a short-term basis, last week's bounce from support just upped our chances of seeing some end of quarter window dressing but I doubt we'll actually see it until after the quadruple-witching option and future expiration on Friday, June 18th. Until expiration we may be stuck trading sideways.

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:

Stocks managed a nice bounce from support. You could argue the market has produce a bullish double bottom pattern but it needs to see some confirmation. Unfortunately the intermediate trend is still down. Several of our candidates delivered decent rebounds this past week. We're electing to close our TIE trade and take profits a little early.

RIG and RT graduated from the watch list to the play list. The stop loss on RT has been adjusted to $8.40.

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

Aerospace, Banking, & Natural Gas

by James Brown

Click here to email James Brown


Use Small Positions to Limit Risk!


Boeing Co. - BA - close: 65.38 change: +1.49

We have had BA on the watch list for a while and it is time we take a more active approach. One of the biggest risk BA faces is a potential budget cut by the Pentagon. However, defense is only part of their business. BA is a major player in the airline industry and the IATA just revised their 2010 forecast from a loss to a profit.

Instead of waiting for BA to dip toward support near $55.00, which may not happen, I'm suggesting very small bullish positions now. The stock delivered a solid bounce from round-number support near $60.00 and technical support at its rising 200-dma this past week. The close over $65.00 is another bullish development. Bears could argue this is just an oversold bounce but it looks like a text-book rebound from support.

Let's keep our positions very small. If BA continues to move in our favor we can slowly add to positions. I'm suggesting a stop loss at $59.45. Our long-term target is $79.00.

FYI: Readers may want to consider 2012 calls.

Jun 12, 2010 - entry price on BA @ 65.38, option @ 5.25
symbol: BA1122A70 JAN 2011 $70 LEAP call - current bid/ask $5.10/5.25
-stop loss on BA @ 59.45

Chart of BA:


Popular Inc. - BPOP - close: 2.90 change: +0.13

Why We Like It:
Many of the financial stocks appear handicapped as the market awaits the next round of rhetoric and headlines regarding the government's attempt at the biggest banking reform bill since the 1930s. The recent weakness in financials has created an entry point for us in BPOP. The stock has spent over a year building a base and now this correction is an entry point for speculative positions. I do consider this somewhat aggressive since we don't know what the final form of the banking reform will look like or how investors will react to it.

Fortunately, shares of BPOP are cheap enough they are like an option without an expiration date. Keep your position size limited. BPOP is still a bank and nonperforming loans could be a problem, especially since unemployment in Puerto Rico is more than 15% (Puerto Rico is BPOP's home base).

I am suggesting a stop loss at $2.40. Our first long-term target is $4.00. More aggressive traders may want to aim higher.

Company Info:

Founded in 1893, Popular, Inc. is the leading banking institution by both assets and deposits in Puerto Rico and ranks 34th by assets among U.S. banks. In the United States, Popular has established a community-banking franchise providing a broad range of financial services and products with branches in New York, New Jersey, Illinois, Florida and California. Popular provides processing technology services through its subsidiary EVERTEC, which processes approximately 1.1 billion transactions annually in the Caribbean and Latin America. (source: company press release or website)

Keep your position size small to limit your risk!

BUY the STOCK (BPOP) not the option.
Stop loss at $2.40.

Chart of BPOP:


U.S. Natural Gas ETF - UNG - close: 8.17 change: +0.18

We recently added the UNG to our watch list after the natural gas ETF broke out from a two-month basing pattern. Our original plan was to buy long-term call LEAPS on a dip near $7.80. I don't want to wait. I'm concerned we might miss the move if we wait for the dip. I would still keep our positions small to limit risk but I would go ahead and open positions now. I'm suggesting a stop loss at $7.35. Our first long-term target is $10.85 but we will probably adjust this as necessary.

Just because the options look "cheap" don't buy too many. Be disciplined with your position size. You can add to positions later once UNG confirms the trend change.

Jun 12, 2010 - entry price on UNG @ 8.17, option @ 1.38
symbol: UNG1122A8 JAN 2011 $8 LEAP call - current bid/ask $1.30/1.38
-stop loss on UNG @ 7.35

- or -

Jun 12, 2010 - entry price on UNG @ 8.17, option @ 1.59
symbol: UNG1221A10 JAN 2012 $10 LEAP call - current bid/ask $1.45/1.59
-stop loss on UNG @ 7.35

Chart of UNG:



Play Updates

Take Profits on TIE

by James Brown

Click here to email James Brown


Closed Plays


We are closing TIE.


Play Updates


BorgWarner Inc. - BWA - close: 37.82 change: +0.02

It was a very quiet week for BWA. The stock spent the entire week in the $36-38 range. Depending on your bias BWA is coiling for a move higher or forming a mini head-and-shoulders pattern for a breakdown lower. I am not suggesting new bullish positions at this time. More conservative traders could exit now to try and avoid a loss.

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 $3.90/4.40
-stop loss on BWA @ 33.75

05/29/10 Sell half of remaining position, BWA @ 37.26, option @ 3.90 (+0.00%)
04/29/10 1st Target Hit, BWA @ 44.50, option @ $7.63 (+95%)

Chart of BWA:


Cliffs Natural Resources - CLF - close: 55.97 change: +1.10

Volatility continues in CLF and shares rebounded more than 10% off their recent lows. The mining sector got a boost when word spread that Australia's Prime Minister was open to a compromise on the proposed "super tax" for miners. The big bounce in CLF is encouraging but we're not out of the woods yet. The stock has formed a pattern of lower highs and higher lows. This pennant-shaped pattern is normally neutral and stocks tend to breakout in the direction of the prior trend, which in this case was down with the April sell-off. Fortunately we do have the simple 200-dma providing some support.

Traders looking for an entry point could try and jump in on another bounce near $50.00 and the 200-dma or wait for a close over $60.00 and its 50-dma. Keep your positions very small.

Prior Comments:
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 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 $8.25/8.45
-stop loss on CLF @ 44.90

- or -

May 21, 2010 - entry price on CLF @ 46.50, option @ 7.55
symbol: CLF 12A70.00 2012 JAN $70 call - current bid/ask $10.00/10.80
-stop loss on CLF @ 44.90

06/05/10 Suggested Cautious Traders Exit Early!

Chart of CLF:


ConocoPhillips - COP - close: 53.50 change: +0.13

Crude oil managed a bounce and the oil sector stocks delivered a sharp two-day rebound late last week. Shares of COP managed to outperform with a move to new three-week highs. On one hand the action over the past few weeks has produced a higher low in its long-term up trend. Or you could argue that COP has formed a bear-flag pattern following the May sell-off. A close over short-term resistance at $54.00 would help alleviate the bear-flag fears. A close over $54 might also be a new bullish entry point but keep an eye on the 50-dma. 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 $3.70/3.95
-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 $4.10/4.50
-stop loss on COP @ 46.00

Chart of COP:


EMC Corp. - EMC - close: 18.67 change: +0.13

The action in EMC this past week was encouraging. Shares managed to rebound near their 200-dma and form a higher low. Shares appear to be building steam for a move higher. A close over June's high near $19.12 or the mid May high of $19.22 bolster this outlook. If the market can avoid a meltdown I think EMC's odds are improving. Keep any new positions small to limit your risk.

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 $1.15/1.19
-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 $2.37/2.57
-stop loss on EMC @ 16.75

Chart of EMC:


Fortune Brands - FO - close: 47.11 change: -0.20

The action in FO is also encouraging. Shares underperformed on Friday after Citigroup started coverage on them with a "sell" rating and a $41 price target before the bell on Friday. Traders bought the dip and FO recovered toward the close. Traders bought the dip last week near FO's rising 200-dma so the trend of higher lows is still intact. However, I will point out that FO needs to close over $48.25 or maybe the 50-dma closer to $50.00 to really affirm the up trend. If you do launch positions keep them small to limit your risk.

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 $1.65/ 1.80
-stop loss on FO @ 42.90

05/29/10 -Conservative traders should exit now-
04/17/10 Sell Half - FO @ $52.00, option @ $4.30 (+95%)

Chart of FO:


Lockheed Martin - LMT - close: 78.75 change: +0.28

Shares of LMT dipped to a new relative low at $75.74 but traders quickly bought the dip under $76.00 and LMT began a four-day rebound. The close over its 200-dma is technically bullish but I remain wary. LMT could face a lot more volatility. The Pentagon is still mulling over how they're going to shave $100 billion off their budget and LMT's programs could be affected. I am not suggesting new bullish positions in LMT at this time.

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 $ 3.30/ 3.60
-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 $ 4.80/ 5.40
-stop loss on LMT @ 74.75

06/05/10 More Conservative traders may want to exit early!

Chart of LMT:


Mckesson - MCK - close: 69.67 change: -0.03

It turned out to be a quiet week for MCK. Shares spent most of it drifting sideways in the $68-70 zone. Thus far MCK has managed to maintain its bullish trend of higher lows. However, it is worth noting that Reuters ran an article on June 9th showing that MCK was one of the top five stocks that saw the biggest change in short interest. Bears increased their short-interest from 2.1 million shares on May 14th to 15.1 million shares on May 28th. It could have been traders betting that MCK would roll over under the $70.00 level. Whatever the case the +600% surge in short interest is a warning. It also creates the opportunity for a short squeeze if MCK can break higher.

MCK will hold an analyst meeting on June 17th, which might produce some stock moving headlines.

Previous Comments:
This was labeled an aggressive trade with a plan to keep positions small. Our first target is $94.50.

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/ 4.00
-stop loss on MCK @ 63.99

- or -

May 18, 2010 - entry price on MCK @ 71.00, option @ 4.10
symbol: MCK 12A80.00 2012 Jan $80 call - current bid/ask $ 5.00/ 6.00
-stop loss on MCK @ 63.99

Chart of MCK:


Millicom Intl. - MICC - close: 85.14 change: +1.53

Things are looking up for MICC. After three weeks of consolidating sideways on either side of $80 and its 200-dma the stock managed to breakout higher thanks to the market's widespread rebound late last week. The rally did stall near short-term resistance near $85 and its 50-dma but hopefully this is just temporary. I'm still bullish on MICC but this remains an aggressive trade on a volatile stock.

Previous Comments:
If you open positions keep them small to limit your risk. MICC is a volatile stock. 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 $ 7.00/ 8.10
-stop loss on MICC @ 74.40

Chart of MICC:


PEPSICO Inc. - PEP - close: 63.56 change: -0.28

The sideways consolidation in PEP continues. Shares are stuck in the $61-64 zone with technical resistance at $64 and its 100-dma. If PEP does breakout the stock has additional resistance in the $66-67 zone. More aggressive traders may want to consider bullish positions on a close over $64 but I would up your stop toward $61 and keep your positions small. If the S&P 500 breaks down under 1040 I think PEP will follow it lower. 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 $6.15/6.30
-stop loss on PEP at $59.85

06/05/10 More cautious traders may want to exit now to avoid a loss.

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

Chart of PEP:


Transocean Ltd. - RIG - close: 46.85 change: +2.58

Our aggressive trade on RIG has been opened. We recently placed RIG on the watch list with a plan to buy call LEAPS if shares dipped toward the December 2008 low of $41.95. Sure enough on June 9th the stock fell to $41.88 and bounced the next day. Our official entry point was $43.50. The overall trend is still down and there is nothing stopping RIG from rolling over and plunging through $40.00, especially the way the political rhetoric is heating up over the oil spill. We don't know yet if RIG will have any exposure to the clean up costs and how much that might be. Given the huge decline in RIG's market cap investors seem to be pricing in a worst case scenario.

Previous Comments:
This is a very aggressive trade given the unknown risks associated with RIG's connection to the Gulf oil spill. Our stop loss is at $38.45. More conservative traders could place theirs closer to $40.00 or the low near $41.88. Our long-term targets are $59 and $75.

Jun 09, 2010 - entry price on RIG @ 43.50, option @ 6.50
symbol: RIG 11A50.00 2011 Jan $50 call - current bid/ask $ 7.70/ 7.95
-stop loss on RIG @ 38.45

- or -

Jun 09, 2010 - entry price on RIG @ 43.50, option @ 7.25
symbol: RIG 12A60.00 2012 Jan $60 call - current bid/ask $ 7.90/ 8.35
-stop loss on RIG @ 38.45

Chart of RIG:


Ruby Tuesday Inc. - RT - close: $10.02 change: +0.16

We have had RT on our watch list for a long time. Shares finally hit our trigger to open bullish positions last week. The stock dipped to $9.03 on June 8th. We suspected that the $9.00 level would act as support and placed our trigger to buy the stock or calls at $9.05. I am raising our stop loss to $8.40. Shares managed to bounce back toward $10.00, which as prior support is now new resistance. Don't be surprised to see RT bounce around the $9-10 zone for a while if the market doesn't trend higher.

Previous Comments:
I prefer buying the stock over the option. Our long-term targets are $12.00 and $14.75.

Jun 08, 2010 - entry price on RT stock @ 9.05
-stop loss on RT @ 8.40

- or -

Jun 08, 2010 - entry price on RT @ 9.05, option @ 1.90
symbol: RT 11A10.00 2011 Jan $10 call - current bid/ask $ 1.40/ 2.25
-stop loss on RT @ 8.40

Chart of RT:


WLT - Walter Energy Inc. close: $72.02 change: +2.31

Whew! A week ago things were looking pretty ugly for the coal stocks. Thankfully traders bought the dip in WLT near the May lows. This rebound could be part of a bullish double-bottom pattern. It could also be part of a larger bearish head-and-shoulders pattern. It all depends on your bias and time frame. Short-term WLT still has some resistance near the 200-dma and then near the $80.00 level.

The recent news out of China regarding the growing exports and growing loans through their banking system should bode well for the country's growth rate and that should be bullish for coal demand. Aggressive traders could use this bounce as a new bullish entry point but keep your positions small to limit your risk. WLT is a very volatile stock.

Prior Comments:
Keep an eye open on news regarding China. The plan was to use small positions to limit our risk. Our first target is $99.00.

May 6, 2010 - entry price on WLT @ 73.00, option @ 12.00
symbol: WLT 11A80.00 2011 Jan $80 call - current bid/ask $ 9.10/ 9.90
-stop loss on WLT @ 64.90

- or -

May 6, 2010 - entry price on WLT @ 73.00, option @ 14.10
symbol: WLT 12A90.00 2012 Jan $90 call - current bid/ask $12.00/14.60
-stop loss on WLT @ 64.90

Chart of WLT:


Wal-Mart Stores Inc. - WMT - close: 50.86 change: -1.36

It was a very quiet week for shares of WMT, which drifted sideways in a narrow range. Shares held up reasonably well considering the disappointing May retail sales numbers. The three-month trend is still down but thus far WMT is holding above its long-term trend of higher lows (see chart). I'm still bullish on WMT and see the dip near $50 as an entry point to buy long-term call LEAPS. If the U.S. economy is going to recover then WMT should be a major beneficiary. Even if we do roll over into a double-dip recession WMT should weather the storm better than most but odds are we'll be stopped out early on.

Previous Comments:
Our stop loss is at $48.95. 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 $3.80/4.00
-stop loss on WMT @ 48.95

Chart of WMT


CLOSED Plays

Titanium Metals - TIE - close: 19.56 change: +0.32

On May 29th in my editor's note for the play updates section I suggested that investors should be more defensive and quicker to take profits. I'm trying to follow that suggestion tonight with an early exit in TIE. The stock has continued to outperform. Shares broke out to new 52-week highs last week and hit $19.61 on Friday afternoon. Our final target we have been aiming for is $19.75. I suggest we go ahead and close this play early. More aggressive traders could keep this trade open since there is nothing slowing down this stock. The $20.00 level could be psychological, round-number resistance but it may be temporary resistance. TIE could hit $24-25 before the year is out at this pace and we still have the 2012 call LEAPS.

Previous Comments:
A few weeks ago we closed the 2011 January $15 call LEAP. Our final, long-term target is $19.75. More aggressive traders may want to aim a lot higher.

Feb. 20th, 2010 - entry price on TIE @ 12.06, option @ 2.60
symbol: WWN1221A15, 2012 JAN $15 LEAP call - current bid/ask $7.30/7.80
-stop loss on TIE @ 13.49

06/12/10 EXIT EARLY: TIE @ 19.56, option @ 7.30 (+180%)

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

Chart of TIE:



Watch

Mining & Fast Food

by James Brown

Click here to email James Brown


New Watch List Entries

BVN - Compania de Minas Buenaventura

MCD - McDonald's Corp.


Active Watch List Candidates

CRM - Salesforce.com

CRS - Carpenter Technology

GLD - SPDR Gold ETF

WYNN - Wynn Resorts Ltd.


Dropped Watch List Entries

RIG and RT graduated to the play list last week.
BA and UNG were promoted to a new play.
HSY was dropped as a watch list candidate.


New Watch List Candidates:

Compania de Minas Buenaventura - BVN - close: 38.46 change: -0.24

BVN is a mining company based in Peru. They mine for gold, silver, zinc, copper and more. There are plenty of disagreements about the prospects for global growth. Europe and the U.S. are facing challenges but large chunks of the world are still growing, which should bode well for commodity demand. I like BVN because the stock has been forming a HUGE cup-and-handle formation. Right now it's rising up toward the last section of the "handle" part of the formation. More cautious (and patient) traders could wait for a close over $42.50 before launching bullish positions. I want to jump in early. The $35.00 level should be short-term support. Let's use a trigger at $35.15 to open bullish positions. Unfortunately we don't have any LEAPS so the longest-dated options available are December 2010 calls. If triggered we'll use a stop loss at $29.90. Our first target is $42.25. Our second, more aggressive target is $47.50.

Company Info:
Buenaventura is Peru's largest publicly-traded precious metals company and a major holder of mining rights in Peru. The Company is engaged in the mining, processing, development and exploration of gold, silver and other metals via wholly-owned mines, as well as through its participation in joint exploration projects. Buenaventura currently operates seven mines in Peru (Orcopampa, Uchucchacua, Antapite, Julcani, Recuperada, Shila-Paula and Ishihuinca), has controlling interests in one mining company (El Brocal) and minority interests in other mining companies in Peru. (source: company press release or website)

Buy-the-Dip trigger: $35.15

BUY the 2010 December $40 calls (BVN1018L40)

Chart of BVN:


McDonald's Corp. - MCD - close: 69.54 change: +0.17

MCD is an American icon and the company continues to put up strong overseas sales growth. The stock hit new all-time highs back in April and the correction has been relatively mild. Traders have been buying the dips near $66 the last couple of weeks. I'd like to take advantage of the next dip if MCD produces one. Use a pull back into the $66-65 zone as a bullish entry point. Our official trigger is $66.50. We will use a stop loss at $63.25, just under the 200-dma. Our long-term target is $79.75.

Company Info:
McDonald's USA, LLC, is the leading foodservice provider in the United States serving a variety of wholesome foods made from quality ingredients to more than 26 million customers every day. Nearly 90 percent of McDonald's 14,000 U.S. restaurants are independently owned and operated by local business men and women. (source: company press release or website)

Buy-the-Dip trigger: $66.50

BUY the 2011 January $70 calls (MCD1122A70)
- or -
BUY the 2012 January $80 calls (MCD1221A80)

Chart of MCD:


Active Watch List Candidates:

Salesforce.com - CRM - close: 96.64 change: +4.22

Shares of CRM continue to outshine the rest of the market. The relative strength has pushed CRM to new all-time highs as it near the $100 mark. It's enough to make one regret not buying the dip near $76-75. I don't want to chase CRM at these levels but we will raise our trigger to buy the next correction. Our new entry point is $81.00. I expect CRM to tag the $100 level and correct. The question is will it breakdown under what should be new support near $90.00. If triggered our stop loss is $74.00. Our new long-term target is $119.00.

Buy-the-Dip trigger: $81.00

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

Chart of CRM:


Carpenter Technology - CRS - close: $38.99 change +2.26

I'm not quite ready to chase the rebound in CRS yet. The huge rebound this past week looks like short covering. More aggressive traders may want to consider bullish positions on a close over $40.00. I'm suggesting we up our trigger to buy a dip to $33.00 and we'll raise our stop loss to $29.40. Our long-term target is $44.75. Maybe by the time CRS finally hits our trigger the January calls will become available.

Buy-the-Dip trigger: $33.00

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

Chart of CRS:


SPDR Gold ETF - GLD - close: 120.01 change: +1.04

The debt challenges in Europe and the growing concern over the banking system is not going to be solved for a long time. That will continue to put pressure on the Euro and increase investors concerns. The trend for gold is up but we don't want to chase it here.

I'm suggesting a trigger to open positions at $115.00. More nimble traders could try and launch positions in the $112-110 zone. If triggered I'm suggesting a stop loss at $107.75, which is under the 200-dma.

Buy-the-Dip trigger: $115.00

BUY the 2010 March $120 call (GLD 11C120.00)

- or -

BUY the 2012 Jan. $130 call (GLD 12A130.00)

Chart of GLD:


Hershey Co. - HSY - close: 50.77 change: -0.99

I'm temporarily giving up on HSY. The stock has continued to outperform, which is very encouraging but we just don't want to chase it at these levels. I would still keep it on your personal watch list. I might reconsider new bullish positions on a bounce from $48 or the $45 areas. Our trigger at $42.50 was never hit.


Wynn Resorts - WYNN - close: 82.83 change: +1.49

I am going to turn more aggressive on WYNN. This is already an aggressive trade on a volatile stock but I think shares of WYNN are poised to breakout higher from their six-week consolidation. Keep positions very small. If WYNN reverses it is going to move fast!

I'm suggesting two different entry points depending on how WYNN trades. If the stock breaks out higher we'll use an entry point at $87.75 to buy calls. Our long-term target is $112.50. If WYNN dips first then we'll use a trigger at $76.00. If triggered at $76.00 our stop loss will be $69.75. If triggered at $87.75 our stop loss will be $79.45.

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: $76.00 or Break-out trigger: $87.75

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

- or

BUY the 2012 January $100.00 calls (WYNN 12A100.00)

Chart of WYNN: