Option Investor
Newsletter

Daily Newsletter, Saturday, 7/24/2010

Table of Contents

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

Leaps Trader Commentary

Stress Tests Revealed

by James Brown

Click here to email James Brown

The third quarter stock market rebound continues. After shaking off what looked like a bearish failed rally pattern a week ago the major U.S. averages surged to new one-month highs following M&A news in the biotech sector, a dividend increase from General Electric (GE), and another round of positive earnings reports. The S&P 500 index is up +3.5% for the week and up over +9% from its July intraday lows. The NASDAQ composite is up +4.2% for the week and up +10% from its July lows. The Dow Jones Industrial Average is up +3.2% for the week and +7.9% from its July lows.

Just a few days ago the market was slipping lower on Federal Reserve Chairman Ben Bernanke's semiannual testimony before Congress. His words that the Fed's economic outlook for the U.S. was "unusually uncertain" fueled the decline on Wednesday. Losses proved to be short lived. A week of better than expected earnings results from the likes of Apple (AAPL), Microsoft (MSFT), United Parcel Service (UPS), Caterpillar (CAT), American Express (AXP), Verizon (VZ) and Ford Motor Co. (F) all helped boost investors confidence that the U.S. economy may not be as weak as the recent economic reports have been suggesting. Thus far about 85% of the 149 S&P 500 component companies that have reported their Q2 earnings have managed to beat Wall Street's earnings estimates.

Market gains were accelerated on Friday after General Electric raised their quarterly cash dividend by 20% from 10 cents to 12 cents and restarted their stock buyback program. Both events are seen as a vote of confidence on GE's business and the state of the economy. The dividend is payable on October 25th to shareholders of record on September 20th. There was also big news in the biotech sector. The Wall Street Journal broke the story that French drug maker Sanofi-Aventis, the world's fourth largest drug manufacturer, was in talks to buy Genzyme Corp. (GENZ). Shares of GENZ immediately spiked from $54 to over $62 a share and closed with a +15.4% gain.

Investor confidence has also gotten a boost from strong gains overseas. Speculation that the Chinese government might ease their fiscal policies in the second half of this year has fueled the rally in China. The Hong Kong Hang Seng index is up +2.8% for the week. The Chinese Shanghai index is up +6.1% on the week. Keep an eye on the Shanghai index, which is nearing potential resistance in the 2600 area. Meanwhile the bounce continues in the European markets as well. The German DAX index is forming a bullish pattern of higher lows. The English FTSE index has rallied back toward resistance near the 5400 level. A breakout over 5400 would certainly be a bullish development.

Powering the strength in Europe this past week has been strong economic data and speculation that the stress test of EU banks would yield positive results. The United Kingdom reported a +1.1% increase in its GDP for the second quarter. Economists were only expecting an improvement from +0.3% in the first quarter to +0.6%. In Germany the IFO institute reported that their business climate (confidence) index, which surveys 7,000 managers, rose to its highest reading since July 2007 at 106.2. Economists were actually expecting a drop from 101.8 to 101.5. Euro zone industrial orders data also came in better than expected. Together these headlines overshadowed a report that ratings agency Moody's has put the nation of Hungary under review for a possible credit downgrade. Talks between the government of Hungary and the IMF have broken down and Moody is concerned about the country's budget deficits.

Of course one of the biggest stories on Friday was the release of the stress tests results for 91 major EU banks. If you read the headlines then you know that only 7 of the 91 banks failed. The tests were billed as a success in offering new transparency for the financial system, which is supposed to build investor confidence. The stress test report said EU banks need to raise about 3.5 billion euros in capital (about $4.5 billion).

The market has been anticipating these results for weeks and the testing process has been widely criticized for its lack of details. Well now we are finally starting to get some details and you can bet analysts will spend the weekend digging deeper into these numbers. A good question to ask is why do EU banks only need to raise 3.5 billion euros in capital? Just a few days ago the best minds on Wall Street were estimating that the EU banks would need to raise 60-90 billion euros worth of capital.

Another question to ask is why did only 7 banks out of 91 banks fail? Of these seven, one was a Greek bank, one was a German bank, and the rest were Spanish banks. All were expected to fail so there was no surprise. When the U.S. did their stress tests many months ago 10 of 19 banks needed to raise capital (approximately $75 billion worth). The markets are also left wondering why this stress test did not test for a worst case scenario (a.k.a. sovereign debt default) when odds of Greece defaulting are so high. The EU banking regulators who ran this test did not force banks to count sovereign debt on their trading balance sheets. Instead of having to mark-to-market these securities, which would have been a big discount from their face value, the banks were allowed to count the assets at full value because they were holding them to maturity. It certainly seems like this test was not strict enough to offer the market any real clarity or confidence.

The real test will be Monday. The results of this EU bank stress tests were released after the close of trading in Europe. Monday will be the first time Europe can trade on this news. Investors will be watching the inter-bank lending rates. The EU banking system has been struggling because none of the European banks trust each other so they don't want to lend to each other. Instead they have been borrowing from the ECB. If EU banks actually believe the results from this stress tests then inter-bank rates should go down. Yes, Monday could be a very interesting session.

While I'm on the topic of foreign countries it is worth noting that both Brazil and Canada raised their interest rates this past week thanks to the strength of their economies. This could put some pressure on the dollar. Actually, if the markets believe in the EU stress test results then the euro should rally. One analyst firm has raised their target on the euro to $1.30 but that isn't so far away with the euro closing near $1.287 on Friday. More importantly if the euro continues to rally then the dollar will continue to slide. Dollar weakness should fuel commodity strength. Gold has been underperforming lately. Oil has started to drift higher. The real winner this past week was copper. A couple of weeks ago (July 10th) in the LEAPStrader watch list I suggested readers watch copper for a breakout. Copper has continued to rally and broke out over resistance with a +8.7% rally for the week. Copper inventories have fallen for approximately five months in a row. That hasn't happened since 2004, before the housing market peaked. Falling inventories suggest demand for copper is picking up, which is a bullish sign for the global economy.

Technically this past week has reversed some of the short-term indicators into more bullish postures but the S&P 500 is still testing resistance near 1100 and still has additional resistance at its 200-dma and the June highs near 1130.

Daily chart of the S&P 500 index:

Weekly chart of the S&P 500 index:

The NASDAQ is showing a little more strength with a bullish breakout above its 50-dma and 200-dma in the last few days. I still want to warn you that the NASDAQ is trading with a bearish trend of lower highs and lower lows. The bearish signal of the 50-dma crossing under the 200-dma is not going to reverse any time soon. Short-term the NASDAQ trend is up but there is plenty of resistance near the 2300 area.

Daily chart of the NASDAQ index:

More aggressive traders may want to check out the small caps. The small cap Russell 2000 has produced a bullish breakout over its 50-dma and 200-dma. On a short-term basis the $RUT looks poised to rally higher but there appears to be significant resistance in the 670-675 zone. I would be cautious here.

Daily chart of the Russell 2000 index:

I am willing to admit I was surprised by the market's strength this past week. The recent string of positive earnings reports has painted a brighter picture of the economy. However, while most companies are managing to beat earnings estimates, we are seeing more miss the revenue number. That suggests business may be tougher then they're letting on and they made the numbers with cost cutting. Furthermore, all of the challenges facing the U.S. and Europe have not changed. Europe's debt crisis remains unsolved. The U.S. is still facing stubbornly high unemployment and a deteriorating housing market. Investors will be keenly focused on the back-to-school shopping season to gauge the strength of the U.S. consumer but back-to-school doesn't start for another couple of weeks.

I would be very cautious when it comes to launching new long-term LEAPS positions. This seems to be more of a short-term traders market. Stock mutual funds have continued to see outflows while money is moving into bond funds. This is a pattern that hasn't changed for months. So if money is moving out of stock funds what would be driving the market higher? The answer might be short covering and short-term traders. Most investors are still confused. Earnings results are coming in better than expected and we're hearing lots of bullish guidance and comments about the economy. Yet the actual economic data over the past few weeks is clearly showing a slowdown in the economy. What should investors pay more attention to... the economic data or the earnings numbers? Neither are infallible and both are subject to interpretation.

Before I go I need to mention North Korea. A few weeks ago North Korea was making a lot of noise about the potential for war. The saber rattling cooled off but now N. Korea is making headlines again. The U.S. plans to perform military exercises with the South Korean navy with up to 20 ships and 200 aircraft. N. Korea doesn't appreciate this show of force and is threatening a "nuclear deterrence" should the U.S. and S. Korea proceed with these exercises. Essentially this is a wild card for our weekend. If something serious occurs it could quickly derail the markets.

~ James Brown


Portfolio

Portfolio Update

by James Brown

Click here to email James Brown


Current Portfolio


Portfolio Comments:

It was not a good week for put plays. Bullish comments from BTU following the company's better than expected earnings report ignited a sharp rally in coal stocks. Both the KOL and WLT were stopped out. I urge caution on MICC and RIG. We were expecting the correction in MICC but RIG's under performance is alarming.

Please note the new stop loss for RIG ($39.80).

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

Earnings Inspired Rally

by James Brown

Click here to email James Brown

Editor's Note:

The market has managed to rally on a wave of better than expected earnings results. While the short-term trend is now up I remain wary of launching new long-term bullish positions. The major averages are still dealing with a bearish trend of lower highs and lower lows.

We're not adding any new plays tonight but I have added a couple of new candidates to the watch list.


Play Updates

Stocks Rebound on Earnings News

by James Brown

Click here to email James Brown


Closed Plays


KOL and WLT have been stopped out.


Play Updates


BorgWarner Inc. - BWA - close: 42.97 change: +0.79

The news flow on BWA has been very quiet lately but I'm not complaining. After two weeks of consolidating sideways shares look rested and ready for another leg higher. The stock broke out to new relative highs on Friday. The next obstacle is the 2010 highs near $44.50. I suspect that BWA might inch up toward this level and then stall as investors wait for the company's earnings report.

BWA is due to report earnings on Friday, July 30th before the opening bell. Wall Street expects a profit of 66 cents a share. More conservative traders may want to go ahead and take profits ahead of the earnings report just in case BWA disappoints.

Prior Comments:
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 $6.60/7.10
-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: 53.79 change: +0.52

Sentiment seems to be improving for the oil sector. There has been a few headlines regarding storms moving toward the Gulf of Mexico but that is pretty normal this time of year. One of the bigger headlines this past week was a story that four of the five biggest western oil companies (Exxon Mobil, Chevron Corp., ConocoPhillips, and Royal Dutch Shell PLC) have all pulled together and will form a $1 billion nonprofit joint venture to develop a system that can mobilize within 24 hours of an oil well blow out. These oil companies want to be able to handle emergencies down to 10,000 feet of water and be able to capture up to 100,000 barrels a day. You'll notice that BP was not included in this list.

Technically shares of COP are improving. The stock has been chopping around the last couple of weeks but after traders bought the dip on July 20th the short-term trend has been up. A breakout over $54.00 would be encouraging. That might happen after COP's earnings report. The company is due to report earnings on Wednesday, July 28th before the opening bell. Analysts are estimating a profit of $1.57 a share. I would not launch new positions ahead of the earnings report.

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 $3.10/3.20
-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 $3.85/4.05
-stop loss on COP @ 47.99

07/17/10 COP's bounce has failed. Consider an early exit!
07/03/10 More Conservative traders may want to exit early!

Chart of COP:


Carpenter Technology - CRS - close: $37.17 change +1.37

It has been a very good week for CRS. Traders bought the dip on Tuesday, July 20th when CRS fell toward its simple 200-dma. The stock is up more than 15% from this low. If you're feeling optimistic we might be able to call the two lows in July a bullish double bottom pattern but CRS still has a bearish trend of lower highs to break. While the trend appears to be improving for CRS I would hesitate to launch new positions in front of earnings. CRS is due to report earnings on July 29th before the opening bell. Wall Street expects a profit of $0.27 a share.

Previous Comments:
The plan was to initiate small positions to limit our risk. Our long-term target is $44.75.

June 29, 2010 - entry price on CRS @ 34.00, option @ 5.30*
symbol: CRS 10L35.00 2010 DEC $35 call - current bid/ask $5.40/5.60
-stop loss on CRS @ 29.90 *(entry price is an estimate)

Chart of CRS:


EMC Corp. - EMC - close: 20.21 change: +0.34

Shares of EMC continue to show strength. The company reported earnings this past week beating analysts' estimates by a penny with profits of 28 cents a share. Revenues also beat estimates at $4.02 billion for the quarter. Furthermore EMC raised their guidance for the year telling investors they expect to beat their prior guidance on profits and revenues. Analysts remain bullish on the company and one firm expressed their opinion that EMC is still in the early stages of a significant growth cycle.

Technically EMC saw a correction down to the 50% retracement of its two-week July rally and traders quickly bought the dip. If the market cooperates EMC has a good chance to hit new relative highs before the month is out.

Previous Comments:
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 $1.72/1.76
-stop loss on EMC @ 17.45

- or -

May 6, 2010 - entry price on EMC @ 18.25, option @ 2.50
symbol: EMC 12A20.00 2012 Jan $20 call - current bid/ask $3.05/3.20
-stop loss on EMC @ 17.45

07/17/10 new stop @ 17.45
07/03/10 More Conservative Traders may want to exit early!

Chart of EMC:


Infosys Technologies - INFY - close: 60.18 change: +0.22

Shares of INFY were downgraded to a "sell" on Tuesday, which helped account for the stock gapping open lower that day. Fortunately, traders bought the dip but INFY is still struggling with some resistance near $60 and a small cloud of moving averages. I would prefer to open new positions on a bounce from the simple 200-dma near $56.00 but readers may want to consider waiting to buy calls on a close above the $65.00 level instead.

Previous Comments:
We have a stop loss at $54.90. Our long-term target is $79.00.

July 1, 2010 - entry price on INFY @ 59.00, option @ 7.50
symbol: INFY 11A60.00 2011 Jan $60 call - current bid/ask $5.20/ 5.40
-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 $7.20/ 8.00
-stop loss on INFY @ 54.90

Chart of INFY:


McDonald's Corp. - MCD - close: 69.90 change: -1.50

Shares of MCD have been churning sideways this past week as investors waited for the company's earnings report. MCD delivered a better than expected profit of $1.13 a share on revenues of $5.95 billion. Wall Street was expecting $1.12 a share on $5.91 billion. MCD said same-store sales rose +4.8% globally. In the U.S. they were up +3.7%. Months ago MCD introduced their McCafe line of drip coffee as they try and steal market share from Starbucks. They have been very successful and have done well expanding their coffee drinks to include new frappes (McFrappes) and their new fruit smoothies.

MCD is the world's largest restaurant company and management is very happy with these results. Don Thomson, MCD's COO, said that the company continues to perform well and take market share, which is impressive in today's high-unemployment, low consumer confidence environment. I'm not too surprised to see some "sell-the-news" profit taking on Friday morning but shares pared their losses by the close. Shares of MCD remain under resistance in the $71.50-72.00 zone. If you are looking for an entry point I'd probably wait for another bounce from the $67 area or a close over $72.00.

Prior Comments:
Keep your positions small. Our long-term target is $79.75. FYI: The Point & Figure chart forecasting an $82 (long-term) target.

June 29, 2010 - entry price on MCD @ 66.50, option @ 2.65
symbol: MCD 11A70.00 2011 Jan $70 call - current bid/ask $3.50/ 3.65
-stop loss on MCD @ 64.75

- or -

June 29, 2010 - entry price on MCD @ 66.50, option @ 2.20
symbol: MCD 12A80.00 2012 Jan $80 call - current bid/ask $3.05/ 3.25
-stop loss on MCD @ 64.75

07/17/10 Take Profits! 2011 Jan $70 call @ 4.00 (+51%), 2012 $80 call @ 3.50 (+59%)

Chart of MCD:


Mckesson - MCK - close: 65.63 change: +1.08

Uh-oh! Trading in MCK has certainly taken a turn for the worse. Apparently earnings from a rival firm, MHS, on Thursday were disappointing. Actually it wasn't earnings but the company's gross margins are coming under pressure. Traders sold off the entire PBM industry. What really concerns me was the volume on MCK's decline. Shares saw volume of more than 9.4 million shares versus the normal 2.8 million. High-volume declines are normally a warning sign. Now I have been warning readers that MCK would probably retest the $65-64 zone and shares hit $63.60 on Thursday. The oversold bounce on Friday has stalled and the short-term trend is very bearish. MCK is under performing while the market moves higher and that seems like a good reason for more conservative traders to exit early or at least scale back their positions.

The $64 region should be support so I'm not ready to abandon ship just yet. However, I'm not suggesting new bullish positions at this time. Let's wait and see what MCK's earnings look like on July 30th. The company is due to report before the opening bell. Analysts expect a profit of $1.09 a share.

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 $ 1.50/ 1.60
-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 $ 3.20/ 3.60
-stop loss on MCK @ 62.90

Chart of MCK:


Millicom Intl. - MICC - close: 92.55 change: +0.54

MICC is having a pretty good week in spite of lousy earnings number. The company reported on July 20th and Wall Street's estimates were in the $1.36-1.40 a share range. MICC delivered $1.23, so it looks like a miss, but shares didn't react too badly. The stock did gap lower but immediately bounced on Tuesday at the 50-dma near the $84.00 mark. MICC said revenues for the quarter were up +14% to $929 million, which was above estimates. Revenues in S. America grew +19% while revenues in Africa jumped +23%. Gross margins slipped from 79.1% to 78.9%. Meanwhile the company ended the quarter with 36.7 million wireless subscribers, which is a +19% improvement from a year ago.

Market reaction to these results has been bullish and MICC is up more than eight points off its intra-week low. Rising volume on the rally is another positive signal. If you're looking for an entry point I would watch for MICC to retest and bounce from the $88 level. Keep in mind that shares still have some resistance near $94.00.

Previous Comments:
Keep your positions 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 $ 9.60/10.70
-stop loss on MICC @ 74.40

Chart of MICC:


PEPSICO Inc. - PEP - close: 64.45 change: +0.24

PEP reported earnings on July 20th and beat estimates by 2 cents with a profit of $1.10 a share. Revenues soared +39.7% to $14.8 billion, which also beat estimates. PEP reaffirmed their prior guidance for the rest of 2010. The stock's initial reaction was a spike higher and shares closed at new relative highs on Tuesday. Unfortunately there has been no follow through with PEP stuck under the $65.00 level.

I am cautiously optimistic here. Shares of PEP appear to have formed an inverse (bullish version) head-and-shoulders pattern with resistance near $65. A breakout would suggest a rally toward $70 but PEP has substantial resistance near the $67.00 level. 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 $6.00/6.10
-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: 45.26 change: -1.41

We should be worried about RIG. It appears that the rebound has failed. Both BP and RIG were down big on Monday as the markets worried about oil seepage from the ground around the capped Macondo well head. Shares of RIG lost more than -7% on Monday alone. Exacerbating the loss was one firm's price target downgrade for RIG from $86 to $69 on Monday. Yet most of the market and most of the oil sector bounced from their Tuesday lows and drifted higher the rest of the week. Even BP and APC are drifting higher from their Tuesday lows but RIG is not.

Why would shares of RIG be sinking and shares of BP climbing? I did read one opinion that expressed concern about demand for RIG's drilling equipment in the Gulf might be lowered than expected given the oil industry is still frustrated over the White House's moratorium on drilling. That might be a stretch since the moratorium has failed to hold up in court. Although I will say on an anecdotal note, I spoke to someone who works for Schlumberger (SLB) in Louisiana this past week. She said the industry is frozen as they wait for more clarity on the drilling ban.

I suspect the problem here is the new story that some of the fire alarms on the deepwater drilling rig that exploded had been disabled. Transocean owns the rig but it was leased and operated by BP. It is unclear who's responsibility the fire alarms would be. At first glance it seems like the responsibility would be BP's since it is their people running the rig. Yet the sell-off in shares of Transocean (RIG) suggests the market thinks this could be RIG's responsibility.

We knew this was an aggressive trade so I want to give room for RIG to maneuver. I'm suggesting we adjust our stop loss to $39.80. This way RIG can dip toward the $40.00 level if need be and we can give it a chance to bounce.

In other news RIG said they were preparing to move the two relief wells out of the path of Tropical Storm Bonnie. BP has two Transocean rigs trying to drill a relief well so they can plug the Macondo well with cement and seal it permanently.

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 now at $39.80. 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 $ 5.00/ 5.15
-stop loss on RIG @ 39.80

- or -

Jun 09, 2010 - entry price on RIG @ 43.50, option @ 7.25
symbol: RIG 12A60.00 2012 Jan $60 call - current bid/ask $ 6.15/ 6.45
-stop loss on RIG @ 39.80

Chart of RIG:


U.S. Oil Fund - USO - close: 35.39 change: -0.03

In the last two sessions the USO oil ETF has gotten a boost thanks to weakness in the U.S. dollar. prior to Thursday's breakout over the $35.00 level the USO was stuck in a $34-35 trading range. If the dollar continues to fall it will be bullish for commodities and yet U.S. demand for oil remains slack with oil inventories nearing their recent highs.

Whether or not the U.S. sees a double dip recession the economy is clearly slowing down. That should be bearish for oil demand and prices. I would wait and watch the USO to see if it produces another failed rally under the $36.00 level. If we do see the failed rally use it as a new entry point for bearish positions. 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 $ 1.35/ 1.40
-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 $ 1.82/ 1.87
-stop loss on USO @ 36.15

Chart of USO


Consumer Discretionary Sector - XLY $31.55 +0.45

Reaction to the Q2 earnings cycle has taken on a much more bullish tone in the last few days. Traders are buying stocks and the XLY has broken out past its mid-July highs and broken out above its simple 50-dma. These are clearly short-term bullish developments. Yet the situation for the consume remains unchanged. Consumer sentiment and confidence has been falling, which should translate into less sales for consumer discretionary items.

I'm not ready to give up yet. Watch the $32.00 level for potential resistance. If we see a failed rally, use it as a new entry point for puts.

Previous Comments:
Use a stop loss at $32.25. Our first target is $26.00.

This is a PUT play!

July 19, 2010 - entry price on XLY @ 30.09, option @ 1.95
symbol: XLY 11M28.00 2011 Jan $28 PUT - current bid/ask $ 1.24/ 1.35
-stop loss on XLY @ 32.25

- or -

July 19, 2010 - entry price on XLY @ 30.09, option @ 2.81
symbol: XLY 12M25.00 2012 Jan $25 PUT - current bid/ask $ 2.18/ 2.32
-stop loss on XLY @ 32.25

Chart of XLY


CLOSED Plays

Market Vectors Coal ETF - KOL - $34.20 +0.55

Ouch! Our coal-sector play did not last long thanks to a better than expected earnings report from energy-giant Peabody Energy (BTU). Peabody reported earnings on July 20th and beat estimates by 6 cents while revenues missed estimates. Investors were more interested in the company's assessment of the coal industry. BTU said coal imports were rising in 2010 and coal stockpiles have been falling sharply and should be back toward normal levels soon. BTU said China's demand has been moving higher again. Their report sparked a big rally in coal stocks and the KOL rocketed higher with a breakout past resistance near $32.50 and its 50-dma.

Our play was stopped out at $33.25 on Thursday, July 22nd. The plan was to keep positions small to limit our risk.

- This is a PUT play -

07/22/10 Stopped out @ 33.25. Option was at $1.65 (-31.2%)
07/19/10 Option opened @ $2.40

PUT 2011 JAN $27.00 strike (KOL1122M27) opened Monday at $2.40

Chart of KOL


Walter Energy - WLT - close: 73.30 change: +0.95

Our new WLT put play has been killed by the four-day rally in coal stocks thanks to BTU's earnings report. In the KOL closed play update above I discuss how very positive comments from BTU's management regarding the coal industry has ignited a fire under the coal stocks. Is it true buying or just short covering, we don't know yet. What we do know is WLT surged 10 points last week. Our play was stopped out at $70.55 on Wednesday (July 21).

This is a PUT play.

07/21/10 Stopped out! WLT @ 70.55

PUT 2011 JAN $55.00 strike (WLT1122M55) Opened @ $5.60, closed @ 4.50 (-19.6%)

- or -

PUT 2012 JAN $50.00 strike (WLT1221M50) Opened @ $10.20, closed @ 8.70 (-14.7%)

Chart of WLT



Watch

Mining & Software

by James Brown

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Editor's Note:

In addition to our new candidates tonight I am keeping an eye on F, MTD, and IBM. I like F's breakout over the $12.00 level but shares look a little overbought given the rally from $10. MTD is breaking out over the $120 level after it reported much better than expected earnings but management lowered guidance for the third quarter. If MTD retests and bounces at the $116 level it might be a buy. IBM has been stuck under resistance in the $133-134 zone for months. I would wait for a close over $134-135 as a bullish entry point.


New Watch List Entries

BUCY - Bucyrus Intl.

NTAP - NetApp, Inc.


Active Watch List Candidates

BVN - Compania de Minas Buenaventura

CRM - Salesforce.com

GLD - SPDR Gold ETF

MA - Mastercard Inc.


New Watch List Candidates:

Bucyrus Intl. - BUCY - close: 61.68 change: +3.28

Copper inventories have been falling for nearly five months in a row. That hasn't happened since 2004. Strong demand for copper is a bullish sign for the global economy and it should also be bullish for the miners, which should boost BUCY. Keep in mind that a weak dollar should also be bullish for commodities. Now both copper and BUCY have already rallied sharply this past week. We do not want to chase them.

I am suggesting a trigger to open small bullish positions on BUCY at $56.00. If triggered we'll use a stop loss at $49.50. Our first target is $69.00, which coincides with the bullish point & figure chart target. FYI: I prefer the 2012 call LEAPS but the 2011s should work.

Company Info:
Bucyrus International, Inc. is a world leader in the design and manufacture of high productivity mining equipment for surface and underground mining. BUCYRUS surface equipment is used for mining coal, copper, iron ore, oil sands and other minerals, and underground equipment is used primarily for mining coal. In addition to machine manufacturing, Bucyrus manufactures high-quality OEM parts and provides world-class support services for its equipment. Bucyrus International, Inc. is headquartered in South Milwaukee, Wisconsin, USA (source: company press release or website)

Buy-the-Dip trigger: $56.00

BUY the 2011 Jan $65 calls (BUCY1122A65)

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BUY the 2012 Jan $70 calls (BUCY1221A70)

Chart of BUCY:


NetApp, Inc. - NTAP - close: 43.11 change: +1.14

NTAP is a software company, who's stock has continued to show relative strength. This past week NTAP broke out past significant resistance near $42.00 to close at new multi-year highs. This is a simple momentum play but we don't want to buy the breakout. Wait for a correction. I'm suggesting a trigger at $38.50. If triggered we'll use a stop loss at $34.75 (although we might want to put the stop under the 200-dma instead). If triggered our long-term target is $49.00. FYI: NTAP is due to report earnings on August 18th.

Company Info:
NetApp creates innovative storage and data management solutions that accelerate business breakthroughs and deliver outstanding cost efficiency. (NTAP makes enterprise storage and data management software and hardware) (source: company press release or website)

Buy-the-Dip trigger: $38.50

BUY the 2011 Jan $40.00 calls (NTAP1122A40)

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BUY the 2012 Jan $45.00 calls (NTAP1221A45)

Chart of NTAP:


Active Watch List Candidates:

Compania de Minas Buenaventura - BVN - close: 38.32 change: -1.03

Mining stocks have been showing strength thanks to strong earnings results and a rally in copper prices. If the market chooses to believe the EU stress tests are real then the euro should rally and the dollar could sink, which will also give commodities a boost. I am adjusting our trigger to open positions on BVN to $35.00 and we'll up the stop loss to $31.75. We might reconsider bullish positions if BVN can breakout over resistance near $42.50. Bear in mind that BVN is due to report earnings on July 30th, after the closing bell. Wall Street expects a profit of 67 cents a share.

If triggered at $35.00, our first target is $42.25. Our second, more aggressive target is $47.50.

Buy-the-Dip trigger: $35.00

BUY the 2011 March $40 calls (BVN1119C40)

Chart of BVN:


Salesforce.com - CRM - close: 99.77 change: +3.84

Aggressive traders may want to consider starting bullish positions on CRM if shares confirm this breakout over the $100 level. Personally, I would rather not chase it but the move to new highs is certainly positive. The stock will see another correction eventually. I am upping our trigger to $81.00 and our stop loss to $74.00. If triggered our first long-term target is $99.50. Our second target is $119.00.

Buy-the-Dip trigger: $81.00

BUY the 2012 January $90 calls (CRM 12A90.00)

Chart of CRM:


SPDR Gold ETF - GLD - close: 116.09 change: -0.77

The GLD is getting closer to our entry point. The GLD found some support near $115 and its 100-dma but the bounce has been pretty anemic. If gold rallies on any dollar weakness come Monday readers may want to initiate small positions in the GLD early instead of waiting for our trigger to be hit. Otherwise the plan is to launch positions at $112.50. If triggered we'll use a stop loss at $107.40. Our target is $140.

Buy-the-Dip trigger: $112.50

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

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

Weekly Chart of GLD:


Mastercard Inc. - MA - close: 212.94 change: + 4.54

Shares of MA continue to show a lot of volatility. The stock dipped toward $193.00 this past week before surging back toward its July highs. We are still on the sidelines. If MA closes above $220 I'll drop it as a bearish candidate. For now the bearish H&S pattern is still in play. More conservative traders may want to wait for a close under $192.00 before initiating positions. I'm suggesting an intraday trigger at $192.00 (it was $192.40) to launch small bearish PUT LEAP positions. If triggered we'll use a wide stop loss at $213.00. Our first target is $161.00. FYI: MA is due to report earnings on August 3rd.

Break Down trigger: $192.00

I prefer the 2012 PUT LEAPS but the 2011 PUTS should also work well.

Keep your positions small. MA can be a very volatile stock!

BUY the 2011 Jan $180 PUT LEAPS (MA1122M180)

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BUY the 2012 Jan $160 PUT LEAPS (MA1221M160)

Chart of MA: