Option Investor
Newsletter

Daily Newsletter, Saturday, 7/3/2010

Table of Contents

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

Leaps Trader Commentary

New 2010 Lows

by James Brown

Click here to email James Brown

The stock market sank to new lows for the year as equities posted a second week of big losses. Investor sentiment has been souring as more and more economic data disappoints. Fears of a double-dip recession are mounting. The major market indices have broken down under key support levels, suggesting we are headed for another leg lower.

The non-farm payrolls (jobs) report on Friday was the big event for the week. Economists were expecting a loss of -110,000 jobs thanks to the government shedding more than 300,000 temporary census workers. The headline number was actually -125,000 jobs. Essentially the government only laid off -225,000 census workers. The key component Wall Street was watching is the private sector job growth. Analysts were expecting a gain of +112,000 new jobs in the private sector. The June jobs report only showed +83,000. While this is disappointing it is a lot better than May's +33,000.

The jobs report doesn't seem that bad does it? Unfortunately details surrounding the jobs report were all negative. Average hours worked every week fell to 34.1. If businesses are going to hire more people we need to see this number climbing. Before a manager goes through the hassle and expense of hiring someone new they are going to give their current staff more hours. Besides, +83,000 jobs is not going to cut it. We need around +150,000 private sector jobs a month just to keep up with population growth and immigration.

Another key detail in the jobs report was the drop in the unemployment rate from 9.7% to 9.5%. This is a deceptive move. The decline occurred because the labor force got smaller as more than 650,000 people gave up looking for work. That's certainly going to have a negative impact on consumer spending but more on that later. Overall the underemployment rate, which counts the unemployed (14.6 million in June) plus the people who are working part time but really want full-time work (11.2 million), has risen to 16% or almost 26 million people. At the current rate of job growth it is going to take several years before we get back to normal unemployment.

There has been talk of businesses picking up the slack as consumer spending stalls. I doubt that will happen. The inventory build out is slowing down. As a matter of fact the inventory replenishment cycle was a lot stronger than expected in the last two quarters and economists are expecting this to have a smaller affect in the second half of 2010. Plus, big and small businesses are facing new taxes in 2011 and corporations are still trying to figure out how much the new healthcare reforms are really going to cost them (another reason to not hire anyone new).

The secondary economic report on Friday was the factory orders number. Economists were expecting a drop of -1.0%. Factory orders for May fell -1.4%. This is a lagging report and only confirms the slowdown in manufacturing.

Technically the market looks really ugly. I feel like we've been talking about a breakdown in the major averages for weeks now. Now that the breakdown has finally happened there isn't a lot to say that hasn't already been said. The S&P 500 will probably see a bounce near the 1,000 level but I expect the index to slowly work its way lower toward the 950 area or possibly the 880-870 zone. The bearish head-and-shoulders pattern on the S&P 500 would suggest a decline toward 860 over the next few months. One is for sure, stocks tend to fall a lot faster than they climb. At the same time this move isn't going to happen all at once. We will see rebounds. Unfortunately bear-market rebounds tend to be very sharp. Now technically we're not in a bear market yet. The market needs to fall -20% from its highs. As we see the S&P 500 near the 975 level you'll probably hear a lot more media coverage about the "new bear market" in stocks.

Daily chart of the S&P 500 index:

Daily chart #2 of the S&P 500 index:

Weekly chart of the S&P 500 index:

At the end of the day I don't see any good reasons for investors to be buying stocks, especially not with a double-dip recession looming ahead of us. Think about the environment we are in. The residential real estate market is crumbling again with expectations for another -10% to -20% in prices. There are millions in foreclosures still to come. Commercial real estate remains soft. The labor market is struggling to create jobs. The government stimulus is due to expire at the end of this year. Manufacturing is slowing down. Europe's debt crisis remains unsolved. Plus we're facing a wave of new taxes next year. No wonder consumer confidence is plunging. You've heard it before consumer confidence is supposed to help forecast consumer spending. Consumer spending accounts for nearly 70% of the U.S. economy. As consumer spending stalls we can expect economic activity to slide.

On a short-term basis stocks are oversold. We could see a rebound soon. Plus there is the possibility that Q2 earnings results might spark some buying interest. Yet I suspect any rally will be short-lived. Investors are looking six-to-twelve months out and the picture is pretty muddy. What is the one thing that Wall Street hates the most? It is uncertainty. The only thing that might be able to turn this market around would be a parade of positive earnings guidance. If corporate America can offer positive guidance and raise their estimates then we could see a significant rally. Sadly, that's probably a day dream given the slowing economic data. We'll have to wait and find out as Q2 earnings season arrives in about two weeks.

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:

The market's sell-off continues and stocks broke down to new relative lows. More importantly the major averages have broken key support levels suggesting a new leg lower has begun. We had a handful of trades get stopped out. Investors need to stay defensive and consider scaling back positions or exiting early to protect capital.

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

Slowing Down

by James Brown

Click here to email James Brown


Greasing the Slide Lower


U.S. Oil Fund - USO - close: 32.60 change: -0.27

Why We Like It:
There are pockets of strength but for the most part the global economy is slowing down. Europe is on the verge of a double dip recession. The U.S. appears to be headed for another dip. China may have gone too far in trying to cool off their red hot economy. What does that mean for oil? Another recession should mean less demand!

The USO oil ETF has broken down. The oversold bounce has reversed. I suspect this ETF will breakdown to new relative lows over the next few weeks. I'm suggesting bearish positions now with a stop above the recent June high (stop loss: $36.15). Our first target to take profits is $28.00. Our second is $25.25.

Keep your positions small to limit your risk.

Company Info:

The United States Oil Fund LP is a domestic exchange traded security designed to track the movements of light, sweet crude oil ("West Texas Intermediate"). USO is a commodity pool organized as a Delaware limited partnership that issues units that may be purchased and sold on the NYSE Arca. The investment objective of USO is for the changes in percentage terms of its units' net asset value ("NAV") to reflect the changes in percentage terms of the spot price of light, sweet crude oil delivered to Cushing, Oklahoma, as measured by the changes in the price of the futures contract for light, sweet crude oil traded on the New York Mercantile Exchange (the "NYMEX"), less USO's expenses. http://www.unitedstatesoilfund.com/uso-details.php (source: company press release or website)

Use the 2011 or 2012 January PUTS (Entry point - now, at current levels)

BUY PUT 2011 JAN $30.00 strike (USO 11M30.00) current ask $2.52

- or -

BUY PUT 2012 JAN $25.00 strike (USO 12M25.00) current ask $2.81

Chart of xxx



Play Updates

Another Rough Week

by James Brown

Click here to email James Brown

Editor's Note:

The market's decline on Tuesday was rough. We had several stocks get stopped out. At the same time we had a few candidates get triggered from our watch list.


Closed Plays


LMT, NG, RT, WLT, and WYNN


Play Updates


Boeing Co. - BA - close: 61.94 change: -0.32

The market continues to fall and the S&P 500 has broken down through major support near 1,040. Meanwhile BA stumbled sharply on Tuesday and eventually gave up about 11% before Friday's closing bell. It all started on Monday when the Pentagon told America's largest defense contractors (including BA) that the U.S. needed more performance for less. The Defense department is looking at budget cuts and this new push for better efficiency could squeeze margins in the defense business. This isn't a new idea. We've been talking about the risk of budget cuts from the Pentagon for weeks now. We still don't have any numbers on what this might mean for BA but it raises concerns. This Pentagon news overshadowed a report that AirChina was buying 20 Boeing planes for $1.4 billion.

When the stock market crashed on Tuesday shares of BA were very poor performers with a gap open lower and a 6.3% drop on the session. The very next day BA announced it was buying Argon ST for $775 million in cash. Argon is known for their products in the command, control, communications, computers, combat systems, intelligence, surveillance, and reconnaissance. Wednesday also saw BA win a legal battle with rival Airbus. Judges in the World Trade Organization issued a sharp rebuke to the EU for their subsidies to Airbus. Essentially the WTO claims that without EU's subsidies Airbus wouldn't have been able to launch its recent passenger jets and thus Airbus has illegally stolen market share away from Boeing.

The selling did pause near BA's rising 200-dma but with the market breaking down to new relative lows we cannot count on this technical support as holding. More conservative traders may want to consider an early exit now or wait for a bounce. Right now the S&P is oversold and could see an oversold bounce any day now. If BA rallies back to $66 and fails we might want to exit there!

Remember we want to keep our positions very small. I'm suggesting a stop loss at $59.45. Our long-term target is $79.00.

Jun 12th, 2010 - entry price on BA @ 66.22, option @ 5.55
symbol: BA1122A70 2011 JAN $70 LEAP call - current bid/ask $4.10/4.20
-stop loss on BA @ 59.45

Chart of BA:


Popular Inc. - BPOP - close: 2.50 change: -0.06

Relief over the financial reform bill was short-lived. The banking indices plunged this past week with a five-day slide. Shares of BPOP followed the sector lower and posted a -14% loss for the week. The stock has closed near its early June low around $2.49 (low on Friday was $2.43). A bounce from here could set up for a bullish double bottom. If BPOP does not bounce we will quickly get stopped out at $2.40. I am not suggesting new bullish positions at this time. BPOP still has resistance near the $3.10 area.

Prior Comments:
Remember, keep your position size limited to reduce your risk. 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.

BUY the STOCK (BPOP) not the option.
06/14/10 Entry Point: BPOP opened @ 2.91.
Stop loss at $2.40.

Chart of BPOP:


BorgWarner Inc. - BWA - close: 37.47 change: -0.65

Shares of BWA, like the S&P 500, have posted two weekly declines in a row. It has been a volatile week but traders bought the dip on Thursday near $36.45. I would hesitate to launch new positions with the major market averages breaking down to new lows. More conservative traders who have not exited yet may want to raise their stop toward $36.00.

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 $3.50/4.80
-stop loss on BWA @ 34.75

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: 46.89 change: +0.04

It turned out to be a VERY ugly week for CLF. The combined fears of EU's banking problems, worries about China going too far to slow down their economy, and poor U.S. consumer sentiment sent the market plunging on Tuesday. Shares of CLF collapsed with a gap down and break under its simple 200-dma. For the week CLF fell -16.8%. We are still in this play by the skin of our teeth. The low on Thursday was $44.91. Our stop loss is at $44.90.

Shares of CLF are clearly short-term oversold and due for a bounce but just because it's oversold does not guarantee a bounce. The $45 level has been support and resistance in the past and might hold. However, it is worth noting that the breakdown under the 200-dma is very bearish and the simple 50-dma will cross under the 200-dma in a few days, which is also a very bearish signal.

More conservative traders may want to exit early right now. I suspect that CLF could see an oversold bounce back toward $52-55 and when it begins to roll over under the 50-dma - that is when I would exit early!

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 $3.85/4.00
-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 $ 6.15/ 6.40
-stop loss on CLF @ 44.90

06/05/10 Suggested Cautious Traders Exit Early!

Chart of CLF:


ConocoPhillips - COP - close: 48.82 change: -0.05

Oil stocks have been getting crushed. The OIX index managed to eke out a very small gain on Friday but that was enough to end a 9-day losing streak. Shares of COP have been sliding lower with the sector and just posted a ten-day losing streak! The path of least resistance is clearly lower but COP did not break down under the $48 level. The low on Thursday was $48.06. Our stop loss is $47.99. I've said it before, just because a stock is oversold and due for a bounce doesn't guarantee it will bounce.

The markets are worried about oil demand and pricing with the U.S. and Europe facing a possible double-dip recession. The first hurricane of the season has also raised concerns about production in the Gulf. I am very concerned by the relative weakness in the oil stocks and I would not open new bullish positions at this time. More conservative traders may want to abandon ship or consider an exit if any bounce fails near $52.00. I do want to point out on the weekly chart that the bearish reversal pattern from two weeks ago has now been confirmed!

Prior Comments:
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 $2.09/2.18
-stop loss on COP @ 47.99

- or -

May 20, 2010 - entry price on COP @ 51.00, option @ 4.75
symbol: COP 11A55.00 2012 JAN $60 call - current bid/ask $2.92/3.10
-stop loss on COP @ 47.99

07/03/10 More Conservative traders may want to exit early!

Chart of COP:


Carpenter Technology - CRS - close: $32.25 change -0.34

The plan was to jump into calls as CRS hit its trend of higher lows. Unfortunately, the market's weakness last week was too much. CRS broke down through the $34.00 level and looks headed for technical support at its 200-dma. We had a trigger to buy calls at $34.00 that was triggered on Tuesday's market crash. Nimble traders could try and open positions on a dip near $30 or preferably a bounce near $30.00. Officially I am not suggesting new bullish positions at this time. Let's wait and see if CRS actually holds the $30 level or not and then re-evaluate.

The plan was to initiate small positions to limit our risk. Our long-term target is $44.75. We'll use stop loss at $29.40.

June 29, 2010 - entry price on CRS @ 34.00, option @ 5.30*
symbol: CRS 10L35.00 2010 DEC $35 call - current bid/ask $3.30/3.60
-stop loss on CRS @ 29.40 *(entry price is an estimate)

Chart of CRS:


EMC Corp. - EMC - close: 18.04 change: -0.14

EMC fell five days in a row last week but unlike the NASDAQ and the S&P 500, shares of EMC did not breakdown to new relative lows. While the trajectory is pretty low the trend in EMC is still up - at least for now. Shares are testing technical support at their 200-dma. Unfortunately if the market continues to slide, which it probably will, then EMC may be forced to test the $17 level or lower. More conservative traders will want to seriously consider an early exit right now to limit any losses. I am not suggesting new bullish positions at this time.

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 $0.95/1.00
-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 $2.12/2.26
-stop loss on EMC @ 16.75

07/03/10 More Conservative Traders may want to exit early!

Chart of EMC:


Infosys Technologies - INFY - close: 58.88 change: -0.22

Our new watch list candidate INFY graduated to the play list on Thursday, July 1st when shares hit our trigger at $59.00. India's economy is still booming. While INFY could see an impact from a slow down in Europe and the U.S. I expect it will out perform its Western peers. The play is open but you don't have to jump in now. Readers could wait and see if INFY tests its 200-dma near $56 or wait for a close back above $62.50 level.

We have a stop loss at $54.90. Our long-term target is $79.00, which happens to coincide with the Point & Figure chart that has an $81 target.

FYI: earnings are expected on July 13th before the opening bell.

July 1, 2010 - entry price on INFY @ 59.00, option @ 7.50
symbol: INFY 11A60.00 2011 Jan $60 call - current bid/ask $5.90/ 6.20
-stop loss on INFY @ 54.90

- or -

July 1, 2010 - entry price on INFY @ 59.00, option @ 8.20
symbol: INFY 12A65.00 2012 Jan $65 call - current bid/ask $7.70/ 8.40
-stop loss on INFY @ 54.90

Chart of INFY:


McDonald's Corp. - MCD - close: 66.14 change: -0.57

Consumer stocks were hammered lower last week thanks in part to a sour consumer confidence number. Yet for all the market weakness shares of MCD lost less than $1.50. Traders are buying it near short-term support around $66.00. If this level fails MCD could see additional support at the 200-dma just north of $64.00.

While this pull back toward support looks like an entry point I would hesitate to launch new positions with the major market indices hitting new relative lows. If MCD fails to hold the $65-64 level it's probably headed for $60.00.

Keep your positions small. I'm suggesting a stop loss at $63.45. Our long-term target is $79.75.

June 29, 2010 - entry price on MCD @ 66.50, option @ 2.65
symbol: MCD 11A70.00 2011 Jan $70 call - current bid/ask $2.50/ 2.58
-stop loss on MCD @ 63.45

- or -

June 29, 2010 - entry price on MCD @ 66.50, option @ 2.20
symbol: MCD 12A80.00 2012 Jan $80 call - current bid/ask $2.30/ 2.44
-stop loss on MCD @ 63.45

Chart of MCD:


Mckesson - MCK - close: 67.16 change: +0.15

Shares of MCK are actually holding up reasonably well in spite of breaking down from its bullish channel two weeks ago. MCK only lost a dollar last week but the stock was not without some volatility, especially on Thursday. I couldn't find any specific catalyst for the intraday swing but MCK dipped toward its rising 100-dma near $65 and bounced. I have been warning readers to expect MCK to consolidate lower. The $65-64 zone should offer some support in addition to the simple 200-dma near $63.40.

I would hesitate to launch new positions with the major market indices setting new relative lows but if MCK holds support and builds a base sideways it may present a new opportunity.

Don't forget that three weeks ago this stock saw a sharp increase in short interest as it struggled with resistance near $71.

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 $ 2.75/ 3.20
-stop loss on MCK @ 62.90*new*

- or -

May 18, 2010 - entry price on MCK @ 71.00, option @ 4.10
symbol: MCK 12A80.00 2012 Jan $80 call - current bid/ask $ 4.20/ 4.90
-stop loss on MCK @ 62.90*new*

Chart of MCK:


Millicom Intl. - MICC - close: 81.30 change: -0.29

MICC essentially traded sideways all week except for the nasty drop on Tuesday when the market crashed lower. Shares found support near $80 and lost about five points for the week. The stock is also testing technical support near its 200-dma. The longer-term trend is still higher but if MICC breaks down under $80.00 it could herald a much larger correction. More conservative traders will want to seriously consider raising their stop loss toward the $80 area. I am not suggesting new bullish positions at this time.

Previous Comments:
If you open positions keep them small to limit your risk. MICC is (normally) 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 $ 5.60/ 6.60
-stop loss on MICC @ 74.40

Chart of MICC:


PEPSICO Inc. - PEP - close: 61.53 change: +0.01

Believe it or not PEP managed to post a gain for the week. Unfortunately I'm concerned that the path of least resistance is still down. If the market continues to slide then odds are very good that PEP will breakdown under the $60 level and hit our stop loss. More conservative traders will want to consider an early exit now. I am not suggesting new bullish positions at this time. Our final target has been $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 $4.85/5.00
-stop loss on PEP at $59.85

06/26/10 Repeat - More cautious traders will want to consider an exit.
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: 47.87 change: -1.02

The last two weeks have been very ugly for oil stocks but RIG did manage to bounce near the $45 area. If shares can close back above the $50.00 mark I would use it as a new bullish entry point. Alternatively you could look for another dip near $42.00 (or better yet a bounce from $42) as an entry point to buy LEAPS.

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 $41.80. Our long-term targets are $59 and $75. FYI: The P&F chart is forecasting an $82 target.

Jun 09, 2010 - entry price on RIG @ 43.50, option @ 6.50
symbol: RIG 11A50.00 2011 Jan $50 call - current bid/ask $ 7.45/ 7.65
-stop loss on RIG @ 41.80

- or -

Jun 09, 2010 - entry price on RIG @ 43.50, option @ 7.25
symbol: RIG 12A60.00 2012 Jan $60 call - current bid/ask $ 8.35/ 8.80
-stop loss on RIG @ 41.80

Chart of RIG:


U.S. Natural Gas ETF - UNG - close: 7.87 change: -0.25

Commodities were not immune to the market's weakness this past week but traders bought the dip in natural gas. The UNG managed to rebound from its 50-dma, which has taken on a much more bullish angle. I remain bullish on the UNG and readers have plenty of choices to pick their entry point. You could buy call LEAPS now or try and time an entry on a dip near $7.70 or a close over $8.35.

Prior Comments:
Look for the $9.00 level and the 200-dma to offer some overhead resistance. 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 $1.11/1.20
-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 $1.30/1.44
-stop loss on UNG @ 7.35

Chart of UNG:


CLOSED Plays

Lockheed Martin - LMT - close: 74.44 change: -0.02

Tuesday's market wide sell-off hit the defense stocks pretty hard. Investors were already nervous following a news that the Pentagon is pushing contractors to get more "bang for the buck", which could impact margins. Shares of LMT broke down under its May and June lows on Tuesday and hit our stop loss at $74.75 closing this play. FYI: The $73-72 zone might offer some additional support but the Point & Figure chart is now suggesting a $66 price target.

Previous Comments:
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 - stopped out at $2.00
-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 - stopped near $4.70
-stop loss on LMT @ 74.75

06/29/10 Stopped out of LMT @ 74.75. 06/26/10 Repeat - Conservative traders may want to exit early.
06/05/10 More Conservative traders may want to exit early!

Chart of LMT:


NovaGold Resources - NG - close: 6.42 change: +0.16

Our aggressive bet on this gold miner did not pay off. Gold prices plunged on Thursday. Some blame the drop in gold on money managers raising cash for the new quarter. Others blame the huge rally in the euro on Thursday. Whatever the reason gold-related stocks crashed on Thursday. NG fell from $6.98 to $6.01 intraday. Our stop loss at $6.26 was hit closing this play.

Previous Comments:
I consider this an aggressive, speculative play on the gold miners, which can be a very volatile group. Our stop loss is at $6.26. More cautious traders could use a stop near $6.50. I prefer the stock over the option because the spreads on the option are so wide.

Keep your position size small to limit your risk!

Buy the Stock: NG @ $7.50, stopped at $6.26 (-16.5%)

- or -

Jun 21, 2010 - entry price on NG @ 7.50, option @ 1.40
symbol: NG 11A7.50 2011 Jan $7.50 call - stopped near $0.80 (-42.8%)
-stop loss on NG @ 6.26

Chart of NG:


Ruby Tuesday Inc. - RT - close: $ 8.27 change: -0.27

Nearly anything related to the consumer this past week was clobbered thanks to a big drop in consumer confidence. Shares of RT broke down under the $9.00 level and technical support at its 200-dma. Shares hit our stop loss at $8.40 on June 30th, closing this trade.

Previous Comments:
I prefer the stock over the option given the option spreads.

Jun 08, 2010 - entry price on RT stock @ 9.05, Stopped @ 8.40 (-7.1%) -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 - stopped near $1.02 (-46.3%)
-stop loss on RT @ 8.40

Chart of RT:


WLT - Walter Energy Inc. close: $61.46 change: +2.23

News that China's leading economic indicators were revised sharply lower on Tuesday really knocked the wind out of the coal stocks. Shares of WLT gapped open lower and plunged to new relative lows. WLT hit our stop loss at $63.90 closing this trade. Chart readers could argue that WLT has created a bearish head-and-shoulders pattern. If that's true then the pattern is now suggesting a huge drop toward $30.00. Personally I think WLT could find support near $50 or the $40 levels.

Prior Comments:
Keep an eye open on news regarding China. The plan was to use small positions to limit our risk.

Stopped out on June 29th at $63.90

May 6, 2010 - entry price on WLT @ 73.00, option @ 12.00
symbol: WLT 11A80.00 2011 Jan $80 call - exit near $5.00 (-58.3%)
-stop loss on WLT @ 63.90

- or -

May 6, 2010 - entry price on WLT @ 73.00, option @ 14.10
symbol: WLT 12A90.00 2012 Jan $90 call - exit near $11.60 (-17.7%)
-stop loss on WLT @ 63.90

Chart of WLT:


Wynn Resorts - WYNN - close: 74.79 change: -1.34

WYNN went out on a high note a week ago. Unfortunately last week's market decline hit the casino stocks hard and WYNN erased more than three week's of gains with a 16% plunge last week. We knew WYNN was a volatile stock but this was unexpected. The poor consumer confidence numbers probably played a part in the sector's decline. WYNN broke down under $80.00 and hit our stop loss at $79.45 on Tuesday, June 29th.

Previous Comments:
This was labeled an aggressive, higher-risk trade. WYNN is a volatile stock. We want to keep our position size small to limit our risk.

Stopped out on June 29th at $79.45

Jun 21, 2010 - entry price on WYNN @ 87.75, option @ 11.90
symbol: WYNN 11A90.00 2011 Jan $90 call - exit near $8.70 (-26.8%)
-stop loss on WYNN @ 79.45

- or -

Jun 21, 2010 - entry price on WYNN @ 87.75, option @ 16.25
symbol: WYNN 12A100.00 2012 Jan $100 call -
NOTE: My quote services are telling me that the 2012 $100 calls traded at $16.25 on Tuesday. I believe that to be an error. Our exit would probably be in the $14.00 area. The last trade on Friday was $12.50.
-stop loss on WYNN @ 79.45

Chart of WYNN:



Watch

Ugly Out There

by James Brown

Click here to email James Brown

Editor's Note:

The recent breakdown under key support in the market's major averages is a very bearish development. This is suggesting we have a new leg down in front of us. The S&P 500 could eventually drop toward the 950 or even the 870 area although there will be significant bounces during the journey lower.

I am looking at several ETFs as potential candidates and they're all bearish. Readers may want to check out the DBC, XLY, or KOL ETFs. In the financial sector I would look at the UGY, FAS, IYG, and XLF ETFs. We may want to consider some inverse ETFs, which rise in value as the underlying index falls. Examples are the SRS, EEV, SZK, and the DUG. One of the most simple trades will be puts on the major index ETFs like the SPY (S&P 500) or the IWM (Russell 2000). However, I would not launch any new positions right this moment. On a short-term basis the stock market is oversold and oversold bounces tend to be pretty sharp. Look for a rebound and then as the rally stalls we can look for bearish entry points.

On a side note readers may want to do a little research on Baxter Intl. (BAX). If BAX can breakout over the $43.00 level it might be a bullish candidate.


New Watch List Entries

None, no new watch list candidates


Active Watch List Candidates

BVN - Compania de Minas Buenaventura

CRM - Salesforce.com

GLD - SPDR Gold ETF

MET - MetLife Inc.


Dropped Watch List Entries

CRS, INFY, and MCD have all graduated to the play list.

Active Watch List Candidates:

Compania de Minas Buenaventura - BVN - close: 37.03 change: -0.06

The mining sector followed the market lower this past week. The gold miners really under performed on Thursday when gold plunged. Shares of BVN slipped toward $36 and its rising 50-dma. I remain bullish on BVN but the pull back may not be over yet. I am suggesting we adjust our entry point from $35.15 to $32.00. We'll keep our stop loss at $29.90. Our first target is $42.25. Our second, more aggressive target is $47.50.

Buy-the-Dip trigger: $32.00

BUY the 2010 December $40 calls (BVN1018L40)

Chart of BVN:


Salesforce.com - CRM - close: 87.11 change: +0.04

The correction in CRM continues. The oversold bounce just failed near the 50-dma. I suspect this stock might trade back toward support near $75 and its rising 200-dma, especially now that the S&P 500 has broken down. We are adjusting our entry point for bullish positions down to $76.00. If triggered we'll use a stop loss at $69.00. Our first long-term target is $97.00. Our second target is $119.00. Please note our new options below.

Buy-the-Dip trigger: $76.00

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

Chart of CRM:


SPDR Gold ETF - GLD - close: 118.49 change: +1.45

The rally in gold has stumbled. Shares of the GLD struggled at new highs for three weeks above the $122 level. Now gold has broken the three-month trendline of support. I am expecting a correction toward the $112 level. I'm suggesting we adjust our trigger down to $112.50. We'll move our stop down to $107.40. Our target is $140.

Buy-the-Dip trigger: $112.50

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

- or -

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

Weekly Chart of GLD:


MetLife Inc. - MET - close: 37.20 change: -0.18

Any relative strength in the insurance stocks just vanished last week. MET posted five declines in a row. If this stock closes under $36.00 we'll drop it as a bullish candidate. Right now our plan is to wait for a breakout over $42.00. I am suggesting we use a trigger at $42.75 as our entry point to buy call LEAPS. If triggered we'll use a stop loss at $36.40, which is just under the May low. There is some resistance near $48 and $50 but our long-term target is the $55-60 zone.

Keep your positions small. We can add to this trade as MET reaffirms the up trend.

Breakout trigger: $42.75

BUY the 2011 January $45 call (MET 11A45.00)

- or -

BUY the 2012 January $50 call (MET 12A50.00)

Chart of MET: