Option Investor
Newsletter

Daily Newsletter, Saturday, 7/10/2010

Table of Contents

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

Leaps Trader Commentary

Summer Roller Coaster

by James Brown

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The summer roller coaster ride in the stock market continues. The combination of a new quarter with the normal inflow of funds to money managers and a small turnaround in sentiment for the banks helped power the best weekly gain for the year. Investors are feeling more confident that the European stress tests will show the 91 banks participating are in better shape than expected. Now add to the mix some decent economic news like Germany's strong May export data and a drop in the weekly initial jobless claims here in the U.S. Blend it, bake it, and serve it up after a nasty two week sell-off and you have a great recipe for an oversold bounce.

We still have about two weeks left before results from Europe's stress tests on the banks are due to be released. We already know that markets hate uncertainty. Whether or not you believe these are accurate tests on the banks the results will still provide the impression of more clarity and transparency on the health of the European banking system. While I'm on the subject of Europe both the Bank of England and the ECB left rates unchanged last week. The BoE left rates at 0.5% and the ECB at 1.0%. For months now the euro has been the sentiment indicator for Europe. As investors worried about the health and future of Europe the euro plunged. Now the euro is rebounding although there is plenty of skepticism that this is just a massive amount of short covering driving this rally. After sinking to new four-year lows in June against the dollar we shouldn't be surprised to see the euro produce a prolonged oversold bounce. If this bounces continues I think we could see the euro rally towards the $1.30 level before running out of steam again.

Weekly Chart of the FXE euro ETF:

Chart of the FXE euro ETF:

The amount of economic news last week was pretty light. I mentioned the rise in Germany's exports for May. That is very encouraging but then again Germany is the EU's largest and strongest member. GDP growth had appeared to stall the previous quarter. If Germany can show that growth has restarted it will certainly help investor sentiment. In the U.S. we had the Wholesale Trade report for May, which came in at +0.5% versus +0.2% in April. This is suggesting the U.S. economy is still growing although lately for every report that shows growth there seems to be another that shows growth has stalled. On Thursday the financial media made a big deal out of the drop in weekly jobless claims. Initial claims fell -21,000 to 454,000. Economists were expecting a drop to 460,000. I don't see why this is significant since the weekly initial claims has been bouncing around the 450,000-a-week level for months. The four-week moving average is still very high at 466,000. The same report showed that continuing claims plunged -224,000 to 4.41 million. Unfortunately, I suspect this is due to workers that have exhausted their unemployment benefits and have now fallen off the list.

Several major retailers reported their June same-store sales figures on Thursday. The results were very mixed. A few managed to beat Wall Street's estimates but for the most part increased traffic in stores did not translate into increased sales receipts. Over half of the companies that reported their same-store sales figures missed their estimates. This is a little worrisome. June and July are clearance months for retailers with huge discounts. If consumers aren't parting with their cash when they're surrounded by 50% off sales, when are they going to start buying again? The retailers could be underperformers the rest of this year. Consumers are still nervous about their job security. Any revenues the retailers did bring in during the second quarter could see a decrease in margins due to all of the discounts. There is still a chance for this sector to beat last year's numbers because the comparisons are easy but once we get past July the year over year comparisons get tougher. Wall Street will be keenly focused on how the retail sector does in August as the back-to-school season ramps up.

If consumers aren't spending where is the money going? Nervous consumers tend to save more and we still have an elevated savings rate, which is actually healthy for the country longer term. It seems a lot of our discretionary income is going to pay down debt. The Federal Reserve announced that consumer borrowing continues to plunge. Economists were looking for a drop of -$2.3 billion in May. The Fed said borrowing fell -$9.1 billion and they revised April from +$993 million to -$14.9 billion. The trend in consumer borrowing has been down for over a year with declines in 15 out of the last 16 months. Americans are paying down their credit card debts and deleveraging their personal balance sheets. This is very, very healthy for individuals but it makes it tougher on the country's economic rebound. You've heard it a thousand times, it is generally accepted that 70% of the U.S. economy is consumer spending. The more money we send to pay debts is less money to spend at the store. I can't give American consumers all the credit. Banks have been cutting credit lines and available credit for several months now.

Speaking of the banks, mortgage rates on a 30-year fixed loan fell to an all-time record low of 4.57%. Freddie Mac has been tracking rates since 1971 and this is the lowest on record. Interest rates were lower in the 1950s but mortgages were for 20 years back then. Unfortunately, residential real estate demand has fallen off a cliff since the tax credit expired. Anyone who was interested in buying a home probably rushed to get under contract before the deadline expired. Compounding the problem are the strict banking guidelines to qualify, which limits the number of consumers who can take advantage of these record-low rates.

The Mortgage Bankers Association said mortgage applications inched up from a week ago but are still down -35% from a year ago. The real estate market is going to struggle for a long time. The number of foreclosure filings remain near record levels and consistently come in at over 300,000 filings a month. One out of four mortgages in the U.S. are underwater and more and more consumers are choosing to walk away since it will take years before they have any positive equity again. For many Americans who would love to refinance at these low rates they can't because they have no equity in their house or they no longer qualify given stricter lending standards at the bank. According to one analyst the banks own more residential real estate than homeowners for the first time in American history due to years of elevated foreclosures. The Obama administration's HAMP loan modification program has been a failure with a high percentage of homeowners that do not qualify and an alarmingly high percentage of homes that are modified still going into default afterwards.

I do see a silver lining. There was (is) a huge worry that a significantly large chunk of adjustable rate mortgages will reset in 2010-2011 and the reset would send monthly mortgages rates higher, which in turn would further complicate the foreclosure problem. If mortgage/interest rates stay this low we could actually see mortgages reset lower! Cross your fingers that rates stay this low through 2011.

I would caution readers on the last week's market rally. Don't trust it. Stocks had reached oversold levels and this is just a relief rally. I warned you a week ago that any rallies we did see would probably be very sharp, which is typical for a bear market rally. Now officially we are not in a bear market but given the market breakdown in late June it is safer to operate under the assumption stocks will act like they're in a bear market. Technically the S&P 500 is bouncing from the 38.2% Fibonacci retracement level of the rally off the 2009 lows (see weekly chart below). I do not think it is a coincidence that the oversold bounce in so many sectors and indices has stalled near the 50% retracement of the prior two-week sell-off. In the absence of any fundamental news traders look toward technicals. That could change soon as earnings season approaches.

Weekly chart of the S&P 500 index:

Daily chart of the S&P 500 index:

Dow-component Alcoa (AA) officially kicks off the second quarter earnings season on Monday. AA reports after the closing bell and Wall Street is looking for a profit of 12 cents a share. AA typically disappoints. The companies to watch are Intel (INTC), J.P.Morgan Chase Bank (JPM), Google (GOOG), Bank of America (BAC), Citigroup (C) and General Electric (GE). INTC reports on Tuesday. JPM and GOOG report on Wednesday. BAC, C, and GE report on Friday. The following week the flood gates will open and we will hear dozens and dozens of companies reporting. Analysts are expecting Q2 earnings to rise +27.1% compared to +58.1% in the first quarter. Year over year comparisons should still be relatively easy to beat but Wall Street knows that. The bigger question will be, "did the company make a profit on improving sales or by cost cutting?" and what is their outlook for the second half of this year? Corporate America's guidance on the next couple of quarters could shed some light on our prospects for a double-dip recession or not.

Apparently the IMF does not believe in the double-dip scenario, at least not globally. The IMF updated their 2010 forecast and raised their estimate on global growth from +4.2% to +4.6%. This move is being driven by a strong Asia, the current rebound in the U.S. and some of the emerging market economies. It is worth noting that the IMF did point out that the European debt crisis still poses a significant risk toward global growth. What puzzles me is how the IMF can be so bullish. The U.S. weekly leading economic indicators are plunging. At the same time the Baltic dry goods index is also suggesting a severe drop off in shipping demand. If economic activity is so strong why do these two indicators look so bearish.

Chart of Weekly Leading Indicators

Chart of Baltic Dry Goods Index (close up)

Chart of Baltic Dry Goods Index (wide view)

On a short-term basis stocks will likely chop higher for the next week or two thanks to Q2 earnings. Obviously we will see lots of individual stock winners and losers as investors react to earnings news. Unless corporate guidance improves significantly I suspect we will see the market rally stall and roll over in the second half of July. That will set up for another decline into August where I expect the S&P 500 will retest the 1,000 level. If the 1,000 level breaks then the next area of significant support will be the 950 region.

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 stock market delivered one of its best weeks in several months. Yet is was also a frustrating week. Both BPOP and CLF dipped just low enough to hit our stop losses to close our trade before rebounding with big gains. Some of the best performers on the board right now are MCD and RIG. Short-term the market may still trend higher but I'm worried about the second half of July and August. That is why I'm tempted to take profits already in both MCD and RIG. Traders need to stay defensive.

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

Tread Carefully

by James Brown

Click here to email James Brown

Editor's Note:

Currently our market bias is for the current rebound to carry through for another week or two. Unless corporate earnings guidance is a lot stronger than expected the rally will likely stall. The major indices will retest their July lows. If the market breaks to new lows then we could see the S&P 500 eventually trade down toward the 950 level. Given this outlook we don't want to add any new bullish candidates just yet.

Keep an eye on the watch list for new trading ideas.


Play Updates

Market's Best Performance In Months

by James Brown

Click here to email James Brown


Closed Plays


BPOP, CLF, and UNG have been closed.


Play Updates


Boeing Co. - BA - close: 64.66 change: -0.07

The market's widespread oversold bounce allowed BA to tack on about three points last week. Traders bought the dip near its rising 200-dma on Tuesday morning. Shares are now hovering around round-number resistance near $65 and have yet to breakout past technical resistance at the 50-dma. I am concerned that BA, like so many other stocks, is facing a bearish trend of lower highs.

In news this week BA announced it had signed an agreement to purchase privately held Narus, a technology company focused on real-time computer network traffic and software that deals with cyber attacks. Terms of the deal were not disclosed. The bigger announcement was BA's latest bid on the U.S. aircraft tanker refueling bid. This is a story that has been filled with politics and scandal for years. Many of the U.S. air force refueling tankers are 50 years old. Right now U.S.-based Boeing, Europe's Airbus (EADS), and a new competitor Antonov, a Ukrainian plane builder, have submitted new bids for the project to build 179 new tankers. In a surprising move BA actually lowered its bid on the project.

Last week I said that if BA rebounds and fails near $66 then readers may want to exit early to save some capital. I'm still suggesting that plan today.

Remember we want to keep our positions very small. 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 $4.15/4.25
-stop loss on BA @ 59.45

Chart of BA:


BorgWarner Inc. - BWA - close: 39.93 change: +1.04

BWA under performed on Tuesday with a sharp drop toward the 200-dma. It didn't look good for the bulls. Fortunately BWA managed to turn things around with an equally sharp bounce the following session. Shares really performed well on Friday in spite of the low volume. I remain cautious on BWA so we're not suggesting new bullish positions. More cautious traders might want to raise their stops toward last week's low near $35.68.

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

Feb 17th, 2010 - entry price on BWA @ 37.55, option @ 3.90
symbol: BWA1122A40 2011 JAN $40 LEAP call - current bid/ask $4.40/5.40
-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:


ConocoPhillips - COP - close: 52.30 change: +0.75

After a very sharp two-week sell-off the oil stocks finally bounced. Crude oil also saw a rebound with a bounce over $76, which helped the oil sector's gains. COP closed back above its simple 200-dma, which is a positive sign. However, I don't think it's a coincidence that the rally stopped right at the 50% retracement of the sell-off(see chart). I remain very cautious on COP. If this bounces fails, readers will want to consider an early exit!

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 $2.88/2.96
-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 $3.65/3.90
-stop loss on COP @ 47.99

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

Chart of COP:


Carpenter Technology - CRS - close: $35.54 change +1.11

Traders continued to buy the dip near $32.00 early last week and the market's bounce helped CRS reclaim the $35 level. The IMF's upgraded out look for the global economy certainly doesn't hurt companies like CRS. Technically shares are still facing short-term resistance near $36 and its 50-dma closer to $37.00. Plus, there is the trend of lower highs to deal with. Yet if you step back and look at a weekly chart it almost looks like CRS is forming a big bull flag-shaped pattern. I would still be tempted to open bullish positions near $32 or on a breakout above the trendline of lower highs. Keep in mind this trade is somewhat aggressive, especially since CRS does not have LEAPS available.

Previous Comments:
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 $4.70/5.00
-stop loss on CRS @ 29.40 *(entry price is an estimate)

Chart of CRS:


EMC Corp. - EMC - close: 19.45 change: +0.08

EMC made headlines last week with its purchase of software firm Greenplum Inc. This pits EMC against Oracle (ORCL) in the data warehousing software and hardware business. Terms were not disclosed but EMC didn't move much on the news. A day later EMC was upgraded and given a $22 price target. A positive market that day really allowed EMC to rally sharply. The stock is up about 8% in the last four days and nearing its potential trendline of lower highs. I would expect some profit taking soon but the overall trend is still higher. I am not suggesting new bullish positions at this time.

I inching up our stop loss to $16.95. Readers may want to consider a higher stop (maybe near $17.50 or the 200-dma). 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 $1.47/1.51
-stop loss on EMC @ 16.95

- or -

May 6, 2010 - entry price on EMC @ 18.25, option @ 2.50
symbol: EMC 12A20.00 2012 Jan $20 call - current bid/ask $2.85/2.96
-stop loss on EMC @ 16.95

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

Chart of EMC:


Infosys Technologies - INFY - close: 62.57 change: +1.23

It turned out to be a strong week for INFY with shares rising four days in a row. INFY gained about 3 1/2 points. The stock is poised to challenge its 52-week high soon. Bear in mind that this week could see additional volatility. INFY is due to report earnings on July 13th before the opening bell. Wall Street is looking for a profit of $0.57 a share. I would hesitate to launch new positions ahead of the earnings report.

FYI: If you are worried that INFY might disappoint and the stock crashes then consider buying some short-term puts. July options expire in five days so they should be cheap. You could buy some puts on Monday at the close, if INFY disappoints on Tuesday the puts should rally. I'm not recommending this strategy on INFY today but it is available to you. The July 60 puts are only 65 cents.

Previous Comments:
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.

July 1, 2010 - entry price on INFY @ 59.00, option @ 7.50
symbol: INFY 11A60.00 2011 Jan $60 call - current bid/ask $7.60/ 7.90
-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 $9.30/10.00
-stop loss on INFY @ 54.90

Chart of INFY:


McDonald's Corp. - MCD - close: 69.22 change: +0.20

Our bullish bet on MCD is finally off to a decent start. Shares rallied sharply the last three days. The close over MCD's 50-dma is a bullish signal but the stock has additional resistance at its trendline of lower highs. I remain positive on MCD but if the market rolls over we can expect shares to follow. That's why I am very tempted to actually take profits early right here, especially on the 2011 LEAPS. The goal of the newsletter is longer-term trades but the 2011 $70 calls are already up almost 34%. You may want to consider it! I am not suggesting new positions at this time but if shares retest the $66 area I'd consider buying calls on the bounce.

Prior Comments:
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 $3.55/ 3.65
-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 $2.97/ 3.15
-stop loss on MCD @ 63.45

Chart of MCD:


Mckesson - MCK - close: 67.43 change: -0.56

Uh-oh! I have to issue a warning here. MCK still managed a gain for the week but the stock clearly underperformed the rest of the market. Shares were downgraded a few days ago but the stock hasn't moved much. Instead shares are churning sideways in the $67-68 zone. I am warning readers again that MCK is probably headed for the $65-64 level and possibly its 200-dma. Wait for shares to test this area and bounce before considering new bullish positions.

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 $ 2.30/ 2.50
-stop loss on MCK @ 62.90

- 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/ 4.70
-stop loss on MCK @ 62.90

Chart of MCK:


Millicom Intl. - MICC - close: 84.95 change: +0.31

MICC is still trading without much direction. Shares did bounce this past week but they are stuck hovering around the $85 area, which has been both support and resistance in the past. You can clearly see the trend of higher lows and lower highs, which is a neutral trend. Longer-term the trend in MICC is still higher. Once again more conservative traders may want to consider upping 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. FYI: Earnings are expected around July 20th but the date is unconfirmed.

May 6, 2010 - entry price on MICC @ 80.00, option @ 8.60
symbol: MICC 11A90.00 2011 Jan $90 call - current bid/ask $ 6.80/ 9.20
-stop loss on MICC @ 74.40

Chart of MICC:


PEPSICO Inc. - PEP - close: 63.50 change: -0.50

The oversold bounce managed its second week in shares of PEP. Shares are now testing technical resistance near the 50-dma and prior support and resistance near the $64 area. I remain cautious on PEP. Since the May highs the stock has a bearish trend of lower highs and lower lows. There is no change from my prior comments. More conservative traders will want to consider an early exit now. I am not suggesting new bullish positions at this time. Our final target remains $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 $5.75/5.85
-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: 51.83 change: -0.24

The oversold bounce in shares of BP have been picking up steam. That has lightened the mood in the oil sector. A rebound in crude oil prices last week didn't hurt either. Furthermore a U.S. district court has rejected the Obama administration's request for a stay on a lower court's decision to repeal the six-month offshore drilling ban.

Shares of RIG managed to deliver an 8.2% gain for the holiday-shortened week. I remain bullish on RIG and the close over $50 looks like a potential entry point. More conservative traders may want to use a stop loss closer to $45.00.

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 $ 8.85/ 9.05
-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 $ 9.35/ 9.70
-stop loss on RIG @ 41.80

Chart of RIG:


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

If the U.S. is facing a double dip recession and Europe is facing a double-dip recession, and China is slowing down its economy, then odds are demand for oil will eventually slow down again. Thus we needed a hedge or some way to play this decline in demand. I would still consider new put positions here or you can wait for the bounce to stall and roll over before initiating positions. Look for the $36.00 level to be overhead resistance on the USO oil ETF. FYI: I have heard arguments that the oil spill and moratorium on drilling in the Gulf (currently repealed by the courts) will have a longer-term bullish affect on oil prices due to lower production but I have not heard the time frame for this argument.

Previous Comments:
I'm suggesting a stop loss at $36.15. Our first target to take profits is $28.00. Our second is $25.25. Keep your positions small to limit your risk.

- PUT PLAY -

July 06, 2010 - entry price on USO @ 33.06, option @ 2.34
symbol: USO 11M30.00 2011 Jan $30 PUT - current bid/ask $ 1.71/ 1.77
-stop loss on USO @ 36.15

- or -

July 06, 2010 - entry price on USO @ 33.06, option @ 2.70
symbol: USO 12M25.00 2012 Jan $25 PUT - current bid/ask $ 2.15/ 2.22
-stop loss on USO @ 36.15

Chart of USO


CLOSED Plays


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

The banking sector has seen a very nice four-day rally thanks in part to bullish analyst comments and optimism over the outcome for the European stress tests. Sadly BPOP underperformed its peers on Tuesday and Wednesday and managed to slip to new relative lows under the $2.40 level.

BPOP hit our stop loss at $2.40 on Tuesday, closing this play before shares produced a +22.5% rally off its lows of the week. If BPOP can close above the resistance near the $3.10 level I would give BPOP another look.

07/06/10 - BPOP hit our stop loss at $2.40 (-17.5%)

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

Chart of BPOP:


Cliffs Natural Resources - CLF - close: 51.07 change: +1.65

Shares of CLF also displayed some volatility, especially on Tuesday. Shares plunged over 4% after the company announced it was paying $757 million for INR Energy's coal mine business. Analysts raised concerns that CLF might be paying much, which pushed the stock price lower. CLF managed to rebound quickly with a +14% rally off its lows for the week. Unfortunately, shares of CLF hit our stop loss at $44.90 on Tuesday afternoon before the rebound. Now shares are testing technical resistance near its 200-dma.

Prior Comments:
This is an aggressive trade. CLF can be volatile. I suggested readers keep their position size small.

07/06/10 Stopped out at $44.90

May 21, 2010 - entry price on CLF @ 46.50, option @ 6.65
symbol: CLF 11A60.00 2011 JAN $60 call - exit near $3.10 (-53%)
-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 - exit near $6.30 (-16.5%)
-stop loss on CLF @ 44.90

06/05/10 Suggested Cautious Traders Exit Early!

Chart of CLF:


U.S. Natural Gas ETF - UNG - close: 7.44 change: +0.01

Has the rally failed in natural gas or did we have the stop loss too tight? The UNG had been holding near support but broke down sharply on Thursday with a -4.5% plunge. The EIA inventory report showed an unexpected build up in natural gas stockpiles. The market must have been expecting a draw down since natural gas demand normally rises when the weather gets hotter (energy demand for air conditioners). Instead the EIA said natural gas inventories rose +78 billion cubic square feet instead of the expected +72 bcf.

Shares of the UNG fell to an intraday low of $7.35. It is coincidence that our stop loss was $7.35? Maybe. The trade has been closed. I'd reconsider launching new positions if the UNG retests the $7.00 area and bounces again. Or you could wait for a close above its 200-dma.

Prior Comments:
Just because the options look "cheap" don't buy too many. Be disciplined with your position size.

07/08/10 Stopped out at $7.35

Jun 12, 2010 - entry price on UNG @ 8.17, option @ 1.38
symbol: UNG1122A8 JAN 2011 $8 LEAP call - exit @ 0.86 (-37.6%)
-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 - exit @ 1.07 (-32.7%)
-stop loss on UNG @ 7.35

Chart of UNG:



Watch

Time for Short-term Trades

by James Brown

Click here to email James Brown

Editor's Note:

I hesitate to add a bunch of new watch list candidates. Short-term we are expecting the market to bounce for another week or two before rolling over again. If the market does roll over then we'll be looking for more bearish candidates near the end of July. Last week I mentioned some ETFs to watch. Keep an eye on the DBC, a failure near 23 might be a bearish entry point. On the XLY look for a failure near 31. For the KOL watch for a failure near the 34-35 zone. On the XLF I would look for a breakdown under 13.00.

When the market rolls over investors should turn more defensive. Therefore we may want to check out more defensive dividend plays. I see potential in the utility sector. Stocks like ED, SO, PEG, and NI could be potential candidates and these have an average dividend yield of 5.1%.

Since I don't see any long-term entry points at this time readers may want to consider some short-term trades. Stocks like BAX, PCLN, AXO, MTB, ACGL, and CF look like they might be short-term candidates. Watch them for a potential entry point but my time frame would only be a couple of weeks. I would also keep an eye on the mining stocks. Copper looks like it is setting up for an oversold bounce and when it breaks the neckline of the inverse head-and-shoulders pattern the mining stocks could be outperformers for a couple of weeks.

One more candidate I would watch is CLB. Shares of this oil services stock have been really outperforming its peers. CLB is due to split 2-for-1 on Monday, July 9th. I'm putting this on my personal watch list as a possible 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.


Compania de Minas Buenaventura - BVN - close: 39.18 change: +0.93

Did we miss the entry point? Traders bought the dip twice in the $36-37 zone with a little help from BVN's rising 50-dma. It certainly looks like BVN is poised to rally toward its highs near $42.50. However, I don't believe the market's correction is over. A month from now BVN could be trading at $35.00 or lower. Aggressive traders may want to consider small positions now. I am suggesting we be patient and wait. Keep the trigger at $32.00 (although I could see buying a bounce from $35.00 if one happens, our previous entry point was $35.15).

If triggered at $32.00 we'll use a stop loss at $29.49 (new change). 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: 91.78 change: +0.21

With a bounce from $84 to $92 you could pose the same question for CRM, did we miss the entry point? My answer is still no. Yes stocks might rally for the next week or two but we're still expecting a deeper correction. Keep an eye on the $75 region for support. Right now our suggested trigger to buy call LEAPS is $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: 118.36 change: +1.15

Gold delivered a bounce on Friday but I don't believe the correction is over. Equities rarely move in a straight line. After failing to breakout past the $122-125 zone for multiple weeks the GLD will likely retest its longer-term bullish trendline. 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: 40.10 change: +0.66

The insurance sector still has potential but I remain somewhat cautious on launching new positions. Shares of MET managed to fill the gap created a week ago but there is still multiple layers of overhead resistance. The clearest level is the $42.00 mark. Right now I'm suggesting bullish call positions with a trigger at $43.25 but be sure to keep your positions very small. If triggered we'll use a stop loss at $36.20 under the July low. There is some resistance near $48 and $50 but our long-term target is the $55-60 zone.

Breakout trigger: $43.25(adjusted from last week)

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

- or -

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

Chart of MET: