Option Investor
Newsletter

Daily Newsletter, Monday, 10/11/2010

Table of Contents

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

Leaps Trader Commentary

Market Resilience

by James Brown

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Another one bites the dust. The S&P 500 index managed to push its way past another significant resistance level, this time at the 1150 mark. One thing that is proven time and time again is if you think the stock market is overbought or oversold it can always get more overbought or oversold. Stocks remain overbought with big gains off their late August lows but optimistic bulls could argue we have room to run after a two-week consolidation sideways under the 1150 level. The question now is how will fund managers, facing yearend on October 31st, react to Q3 earnings news? Will they buy the news or sell the news? Window dressing kept stocks near their highs for the quarter end in September. Now funds are facing their yearend in just three weeks.

The market's resilience on Friday was pretty amazing. The jobs number was another huge disappointment. Economists were expecting jobs growth to come in near zero to potentially a small gain. Instead the Labor Department said the country lost jobs (-96,000) for the fourth monthly decline in a row. Private companies hired +64K people but layoffs at federal and state governments were higher than expected. The Labor Department also revised July and August numbers lower. It was not a bullish report so why did stocks rally?

Stocks pushed higher on Friday in spite of the bearish jobs report because the lack of job growth virtually guarantees that the Federal Reserve will launch a new quantitative easing program (QE for short) before yearend. At least that is the train of thought and investors focused on this silver lining in the dark cloud of job losses. We've been expecting a new QE program from the Fed for weeks now so it's already been priced into the market at this point. Yet some fed heads are suggesting that a new QE program is not a done deal. Even if the FOMC does announce a new QE program stocks could sell off anyway if the program isn't big enough. Estimates range from $100 billion to $1.5 trillion (with a T) but most are estimating the Fed will launch a new QE program in the $500 billion to $1 trillion range. The market will be keenly focused on tomorrow's release of the fed minutes from the latest meeting (September 21st) in hopes of gleaning some info on their plans for monetary policy. If the Fed does not launch a new QE program at their November meeting stocks should react negatively!

All of this expectation for a new QE program from the Federal Reserve has been pushing the U.S. dollar lower for several weeks now. The dollar slipped to new multi-month lows last week but appears to be trying an oversold bounce in the last few days. The dollar's decline has been pushing commodities higher so when it does bounce it could spark some sharp profit taking in commodities. Gold prices rallied to a new all-time high of $1,354 an ounce on Monday. Silver hit a new 30-year high at $23.675 intraday. Copper prices hit a new 27-month high. Oil has been surging higher for weeks but actually reversed today on hints the dollar might bounce. Meanwhile the bond market continues to rally as investors distrustful of the stock market's rally seek safety. Bond yields move opposite of prices so when prices hit new relative highs today the yields hit new relative lows.

Daily chart of the U.S. dollar ETF (UUP):

Weekly chart of the U.S. dollar ETF (UUP):

Daily chart of the GLD gold ETF:

Looking ahead Tuesday's focus will be on the Fed minutes and as long as there are no surprises then traders will focus on third-quarter earnings. Intel (INTC) will be the main earnings headline on Tuesday. Last week's earnings guidance from KLIC does not bode well for semiconductors but INTC is the 800 lb. gorilla in the industry. J.P. Morgan Chase (JPM) will report earnings on Wednesday and offer some insight into the banking sector. Google (GOOG) reports earnings on Thursday. Shares of GOOG have seen a $90 rally from their late August lows. If GOOG disappoints I would expect a correction toward the $505-500 zone. General Electric will be the main earnings headline on Friday. In addition to earnings we'll get the weekly initial jobless claims, the trade balance numbers, and the PPI report on Thursday. The CPI, retail sales figures, Michigan Sentiment reading, and the New York Empire State manufacturing survey comes out on Friday the 15th. I am tempted to say that we're facing a lot of landmines that could send stocks lower but after the reaction to the jobs data on Friday I'm not sure how much bad news it will take to actually spark some selling.

Short-term the trend is up. I'm looking for the S&P 500 to rally toward the May 13th highs near 1173. If we do see some profit taking then broken resistance at 1150, 1130, 1120 and 1100 can all act as support. Bigger picture the inverse head-and-shoulders pattern on the S&P 500 is forecasting a move to 1240 but I suspect the 2010 highs near 1220 could be tough to break.

Daily chart of the S&P 500 index:

The NASDAQ composite is still trying to breakout past resistance near the 2400 level. After a rally from the August lows near 2100 this index is very overbought. Overhead we can expect some resistance about every 25 to 50 points (2425, 2450, etc). On a pullback look for the NASDAQ composite to find support near 2300 and its simple 200-dma.

Daily chart of the NASDAQ index:

The small cap Russell 2000 index continues to power higher, which is a bullish signal for the market. Unfortunately, it's growing very overbought. Eventually this group will correct and the small caps tend to be volatile. On a more positive note the bullish "January effect" in small caps has been happening earlier and earlier each year and moved into the fourth quarter so the general trend for small caps should be higher for the next few months. I suggest readers stay patient and wait for the eventual correction. Broken resistance near 670 should be new support but it wouldn't surprise me to see a pullback all the way to 650.

Daily chart of the Russell 2000 index:

At this point I feel compelled to repeat some of my comments from last week. Analysts and investors expect Q3 earnings to be weak so even if corporate results are bad there is a chance stocks could rally on the "it could have been worse" attitude. At the same time stocks are very overbought, which might suggest traders will be quick to lock in gains and sell stocks on negative results. The real focus will probably be on forward looking guidance and not so much on how companies performed in the last quarter. Investors want to be assured that we're not facing a double-dip recession in 2011. Mutual funds are also looking for clarity. Stock funds have seen a lot of outflows over the past several months. Money managers have to make some decisions before their fiscal yearend in just a three weeks. As long as the S&P 500 holds above resistance at the 1150 level funds might feel like they have to be long the market.

I am still expecting a correction sometime before October ends. That may be wishful thinking on my part but odds favor a pull back, especially about the middle of earnings season once all the high-profile, big cap names have reported. Wait for the market to provide our next entry point. Don't rush into a position. It could take a couple of weeks of profit taking before it's time for us to launch new bullish trades.

- James


Portfolio

Portfolio Update

by James Brown

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Current Portfolio


Portfolio Comments:

The trend continues. Several stocks have seen their rally stall as we enter earnings season. Yet for a few the rally continues and they're hitting new relative highs like BUCY and IBM. The next couple of weeks could be volatile as investors react to earnings news.

New stop losses for BUCY and COP.

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

Profit Taking Vs. Window Dressing

by James Brown

Click here to email James Brown

Editor's Note:

The stock market is showing a lot more resilience than expected, especially after last week's dismal jobs report. Right now there is a lot of hope on the Federal Reserve to launch a new QE program before the year is out. This decision has already been factored into the market and if the FOMC fails to do so then stocks could see some very sharp profit taking.

Technically the market remains very overbought and due for a correction anyway. While it would be natural to see this pullback sparked by third-quarter earnings results any pullback will be battling some last minute window dressing (buying) before fiscal yearend for many mutual funds on October 31st.

We don't want to chase the market at these levels so we're focusing on strong stocks we want to buy on a dip. I just added three new candidates to the watch list.


Play Updates

Calm Before Earnings

by James Brown

Click here to email James Brown


Closed Plays


None. No closed plays this week.


Play Updates


Akamai Technology - AKAM - close: 44.18 change: -1.75

An earnings warning from EQIX sent several tech-related stocks lower. Shares of AKAM plunged from $47.91 to $43.61 on October 6th. The next day shares dipped to $42.91 before traders stepped in to buy the dip. It was a nearly perfect bounce from technical support at the 61.8% Fibonacci retracement of AKAM's August-September rally. Our bullish call LEAPS play was triggered on Oct. 6th at $45.50. Currently we have a stop loss at $41.90.

We were expecting a correction in AKAM but not so quickly. The short-term trend is still down and Monday's session produced another bearish turnaround. The close under $45.00 and its 100-dma is bearish. I could not find any reason for Monday's relative weakness. Wait for another bounce near $43.00 before considering new bullish positions again.

I remain longer-term bullish on AKAM. Our first target is $54.75. Our second, longer-term target is $59.75. FYI: AKAM has seen some takeover chatter in the last couple of months. Investors should note that AKAM is due to report earnings on Oct. 27th. I prefer the 2012 calls.

Oct 06, 2010 - entry price on AKAM @ 45.50, option @ 2.85
symbol: AKAM1122A50 2011 JAN $50 call - current bid/ask $ 2.36/ 2.43
-stop loss on AKAM @ 41.90

- or -

Oct 06, 2010 - entry price on AKAM @ 45.50, option @ 7.50
symbol: AKAM1221A50 2012 JAN $50 call - current bid/ask $ 7.20/ 7.50
-stop loss on AKAM @ 41.90

10/06/10 Play triggered when AKAM hit $45.50

Chart of AKAM:


Baidu, Inc. (Baidu.com) - BIDU - close: 99.74 change: +1.12

Shares of BIDU have been bouncing around a $10 range after topping out near $105 in late September. On a positive note shares of BIDU have been consolidating sideways instead of a sharp pull back after the failed rally pattern two weeks ago. While I'm hopeful that BIDU can breakout higher from here the better bet would be to expect a consolidation back toward $90. I am not suggesting new positions at this time. We have already sold the 2011 calls for a profit. We currently have half of our original 2012 position left. More conservative traders may want to raise their stops toward $85 or toward $90.

Previous Comments:
BIDU is a very volatile stock. This is an aggressive, higher-risk trade. Keep your position size small to limit your risk. We have already taken profits on the 2011 calls. Our target for the 2012 calls is $119. Our stop is at $79.00.

Only one position left.

Aug 02, 2010 - entry price on BIDU @ 83.50, option @ 13.00
symbol: BIDU1221A100 2012 JAN $100 call - current bid/ask $23.20/24.10
-stop loss on BIDU @ 79.00

10/02/10 Sell half of 2012 calls, BIDU @ 98.80, option @ 22.30 (+71.5%)
09/25/10 Take Profits on the 2011 calls, BIDU @ 97.83, option @ 14.75 (+84.3%)
09/25/10 New stop @ 79.00

Chart of BIDU:


Bucyrus Intl. - BUCY - close: 75.08 change: +0.77

The rally continues for mining equipment maker BUCY. Shares have broken out of the $68-72 range and BUCY is now hitting new two-year highs. The light volume is still a concern and does not offer any confidence in the move but the overall trend remains positive. I am not suggesting new bullish positions at this time. I am raising our stop loss to $63.75. FYI: Earnings are expected on Oct. 21st.

Note: We will plan to sell the rest of our 2011 calls when BUCY hits $78.50.

Previous Comments:
We have taken profits once already near $70. Our second, longer-term target is $87.50 although we'll probably sell the rest of our 2011 calls before BUCY gets that high.

Sep 01, 2010 - entry price on BUCY @ 61.00, option @ 8.50
symbol: BUCY1122A60 2011 JAN $60 call - current bid/ask $17.05/17.25
-stop loss on BUCY @ 63.75

- or -

Sep 01, 2010 - entry price on BUCY @ 61.00, option @ 13.00
symbol: BUCY1221A70 2012 JAN $70 call - current bid/ask $18.45/18.75
-stop loss on BUCY @ 63.75

10/11/10 New stop loss @ 63.75
09/18/10 Take Profits. We want to sell half of our 2011 Jan $60 calls.
BUCY is at $70.37. The calls are bid $13.85 (+62.9%) 09/18/10 New stop loss at $57.40

Chart of BUCY:


ConocoPhillips - COP - close: 59.79 change: +0.18

I suggest caution here. The rally in oil might be stalling. The rally in COP also appears to have stalled near resistance at the $60.00 level. The trend is up for COP but the stock is overbought. I would expect a pull back toward the $58 and $56 levels, both of which should act as short-term support. I'm not suggesting new positions at this time. Please note our new stop loss at $51.90.

Prior Comments:
Our first target is $69.00. FYI: The Point & Figure chart is suggesting a long-term $79 target.

May 20, 2010 - entry price on COP @ 51.00, option @ 3.75
symbol: COP 11A55.00 2011 JAN $55 call - current bid/ask $5.85/5.95
-stop loss on COP @ 51.90

- or -

May 20, 2010 - entry price on COP @ 51.00, option @ 4.75
symbol: COP 11A55.00 2012 JAN $60 call - current bid/ask $6.15/6.35
-stop loss on COP @ 51.90

10/11/10 New stop loss @ 51.90
09/04/10 COP gave us a new entry with the move over $54.00
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:


EMC Corp. - EMC - close: 20.06 change: +0.19

We are starting to see a little oversold bounce in shares of EMC. The stock saw a sharp correction but traders bought the dip near its rising 100-dma, which just happened to coincide near the 61.8% Fib retracement level. A new broker upgrade from hold to buy on Monday morning didn't hurt either. This might be a new bullish entry point but I'm still worry about an overdue correction in the major market averages. I'm also a little concerned by the strong volume on EMC's pull back. I would hesitate to launch new positions.

Previous Comments:
Our first target is $22.50 (sell at least half). 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 $1.24/1.27
-stop loss on EMC @ 17.80

- or -

May 6, 2010 - entry price on EMC @ 18.25, option @ 2.50
symbol: EMC 12A20.00 2012 Jan $20 call - current bid/ask $2.75/2.93
-stop loss on EMC @ 17.80

09/04/10 EMC has provided a new entry point with the move over $19
07/03/10 More Conservative Traders may want to exit early!

Chart of EMC:


SPDR Gold ETF - GLD - close: 132.29 change: +0.63

The almost nonstop rally in gold is about ten weeks old. Gold surged to new highs again last week on dollar weakness and growing expectations for the Federal Reserve to enact more quantitative easing. The GLD appeared to create a bearish engulfing reversal candlestick pattern on October 7th but there was no follow through. I still see it as a warning sign since the commodity and this ETF are so overbought and due for a correction. The 2011 March $120 calls have almost doubled from our entry point. I am very, very tempted to sell any remaining positions here. Readers may want to consider taking some profits in the 2012 calls as well. When the U.S. dollar finally sees an oversold bounce it could spark a very sharp and very painful correction in gold prices. We could easily see the GLD plunge to the $122.50-120.00 zone. I am not suggesting new bullish positions at this time.

Previous Comments
Our long-term target remains at $138.50 for now.

Aug 6, 2010 - entry price on GLD @ 118.00, option @ 7.70
symbol: GLD1119C120 2011 Mar $120 call - current bid/ask $14.90/15.20
-stop loss on GLD @ 118.49

- or -

Aug 6, 2010 - entry price on GLD @ 118.00, option @ 10.75
symbol: GLD1221A130 2012 Jan $130 call - current bid/ask $16.35/16.70
-stop loss on GLD @ 118.46

10/02/10 Sell half of the 2011 March calls, option @ 12.70 (+64.9%)
10/02/10 New stop $ 118.49
09/25/10 New stop @ 116.45, new target 138.50

Weekly Chart of GLD:


Humana Inc. - HUM - close: 51.29 change: +0.44

Good news! The tone of trading in shares of HUM is improving. Traders bought the dip twice near $49.00 last week and now the stock has broken out over short-term resistance near $51.00. This looks like a new bullish entry point to me and I would not hesitate to launch new positions. Of course given the market's overbought conditions you may want to slowly scale into any bullish positions on HUM. Shares of HUM garnered an upgrade in the last few days and technical indicators are turning positive again.

Previous Comments:
Our long-term target is $59.50. We're using a stop loss at $44.90. I'm listing the 2011 January calls but I prefer the 2012 Jan. calls. FYI: The point-and-figure chart is forecasting a long-term target of $66.00.

Sep 17, 2010 - entry price on HUM @ 50.50, option @ 1.85
symbol: HUM1122A55 2011 Jan $55 call - current bid/ask $1.60/ 1.75
-stop loss on HUM @ 44.90

- or -

Sep 17, 2010 - entry price on HUM @ 50.50, option @ 6.40
symbol: HUM1221A55 2012 Jan $55 call - current bid/ask $5.90/ 6.40
-stop loss on HUM @ 44.90

10/11/10 New Entry point - HUM is breaking out past $51.00.

Chart of HUM:


Intl.Business Machines - IBM - close: 139.66 change: +0.81

Wow! The relative strength in IBM has been unexpected. As a very liquid, large cap stock I'm not surprised to see fund managers chasing performance given the bullish breakout. Yet the rally has been almost nonstop from the late August lows. This is not natural. IBM is now testing potential resistance near $140. I would expect a correction sooner rather than later. Broken resistance in the $135-133 zone should be pretty strong support. I am suggesting readers wait for a dip toward support before launching new positions. FYI: Investors should note that IBM is due to report earnings on Oct. 18th. We should expect some volatility following the report.

Previous Comments:
Our first long-term target is $159.00. We currently have a stop loss at $129.50.

I Prefer the 2012 calls but readers may want to use the 2011s to capture a short-term move.

Sep 30, 2010 - entry price on IBM @ 136.00, option @ 3.90
symbol: IBM1122A140 2011 Jan $140 call - current bid/ask $5.40/ 5.55
-stop loss on IBM @ 129.50

- or -

Sep 30, 2010 - entry price on IBM @ 136.00, option @ 7.80
symbol: IBM1221A150 2012 Jan $150 call - current bid/ask $9.15/ 9.30
-stop loss on IBM @ 129.50

09/30/10 Play triggered $136.00, stop $129.50

Chart of IBM:


Infosys Technologies - INFY - close: 68.80 change: -0.69

The very impressive rally in INFY has stalled. Shares have spent the last few days consolidating sideways in the $68-70 zone. I really don't expect any progress out of INFY until after its earnings report on October 15th (before the bell). Wall Street is expecting a profit of 60 cents a share. My concern is that it may not matter if the earnings news is good or bad because traders could use the announcement to sell the news and lock in gains after the rally from its August lows. I would expect a correction toward $64.00, which should be decent support.

Previous Comments:
We have already sold the 2011 calls for a profit. Our remaining position are any 2012 calls. Our long-term target is $79.00. FYI: The P&F chart is now forecasting at $97 target.

July 1, 2010 - entry price on INFY @ 59.00, option @ 8.20
symbol: INFY 12A65.00 2012 Jan $65 call - current bid/ask $11.00/12.60
-stop loss on INFY @ 61.75

10/02/10 Sell the 2011 Calls, INFY @ 70.52, option @ 11.20 (+49.3%)
10/02/10 New stop @ 61.75
09/25/10 New stop @ 58.75

Chart of INFY:


Lockheed Martin - LMT - close: 70.48 change: +0.38

Be careful here with LMT. I remain concerned with the stocks relative weakness. Shares really aren't going anywhere. You could argue LMT is forming a neutral pennant shaped pattern of lower highs and higher lows. If that's true then odds favor LMT breaking down into a continuation of the prior trend. Last week I suggested waiting for a close over $71.00 before considering new positions. That hasn't happened yet. Today I would alter that plan and suggest waiting for a close over $71.50 or even a close over $72.00 before considering new bullish positions. More conservative traders may just want to step back and wait to see how the market reacts to earnings first. LMT is due to report earnings on the morning of October 19th. Analysts are expecting a profit of $1.56 a share. Given the huge sell-off in LMT over the last few months, a positive earnings surprise could really change things for the better.

Previous Comments:
Currently we have a stop loss at $67.90. Our first long-term target is $79.00.

Oct 01, 2010 - entry price on LMT @ 70.50, option @ 1.25
symbol: LMT1122A75 2011 Jan $75 call - current bid/ask $1.15/ 1.25
-stop loss on LMT @ 67.90

- or -

Oct 01, 2010 - entry price on LMT @ 70.50, option @ 5.10
symbol: LMT1221A75 2012 Jan $75 call - current bid/ask $4.60/ 4.80
-stop loss on LMT @ 67.90

10/01/10 Play triggered $70.50, stop $67.90

Chart of LMT:


McDonald's Corp. - MCD - close: 75.59 change: -0.51

You might think that the rising cost of commodities like corn, wheat, and beef would have a negative impact on shares of MCD. Thus far that has not been the case. The stock is still consolidating sideways but it's trying to breakout past resistance near $76.00 and hit new all-time highs again. While the overall trend is up it would not surprise me to see MCD churn sideways until its earnings report on October 21st. Wall Street is expecting a profit of $1.24 a share. I am not suggesting new positions at this time and more conservative traders may want to wait until after we see how investors react to the earnings data before considering positions.

Prior Comments:
Keep your positions small. Our long-term target is $79.75. FYI: The Point & Figure chart forecasting an $99 (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 $6.45/ 6.55
-stop loss on MCD @ 67.90

- or -

June 29, 2010 - entry price on MCD @ 66.50, option @ 2.20
symbol: MCD 12A80.00 2012 Jan $80 call - current bid/ask $3.95/ 4.10
-stop loss on MCD @ 67.90

10/02/10 New stop @ 67.90
08/28/10 New stop @ 66.75
07/17/10 Take Profits! 2011 Jan $70 call @ 4.00 (+51%), 2012 $80 call @ 3.50 (+59%)

Chart of MCD:


Millicom Intl. - MICC - close: 98.62 change: -0.11

MICC is holding up reasonably well. Traders bought the dip near $95 and its rising 50-dma a couple of times. Shares act like they want to go higher and volume has been pretty light on the consolidation. If you look hard enough you can see that MICC is bouncing from the bottom of a bullish channel. However, that could change if investors don't respond well to earnings. MICC is due to report on October 19th or the 20th, probably before the opening bell. The street is looking for a profit of $1.50 a share. I'm not suggesting new bullish positions at this time. More conservative traders may want to exit completely, especially ahead of earnings.

Previous Comments:
Keep your positions small to limit your risk. MICC is (normally) a volatile stock. We have already taken some money off the table as MICC neared $99. Our second, long-term target is the $109.00 levels. Our stop loss is at $86.40.

May 6, 2010 - entry price on MICC @ 80.00, option @ 8.60
symbol: MICC 11A90.00 2011 Jan $90 call - current bid/ask $11.70/12.60
-stop loss on MICC @ 86.40

09/04/10 Take Profits Early, MICC @ 98.79, option @ $12.90 (+50%)
plus new stop at $86.40

Chart of MICC:


NVIDIA Corp. - NVDA - close: 10.81 change: -0.05

Bingo! We were expecting a pull back toward $10.50 and that's exactly what NVDA provided. Traders bought the dip twice near $10.50 and its rising 40-dma. On a short-term basis the stock is struggling with some resistance near $11.00 but the stock looks poised to continuing bouncing. The recent strength in the SOX semiconductor index should help. However, we need to be aware that earnings results from Intel (INTC) and AMD this week could have an impact on shares of NVDA. INTC reports tomorrow.

Personally I would be tempted to launch new positions in NVDA right here but with the major market indices still so overbought there is a chance NVDA could test its 50-dma (near $10.25) or even the $10.00 level before moving higher again. If you're patient we might see a better entry point.

Previous Comments:
We took profits on the 2011 calls in late September. All we have left are the 2012 calls. Overall this remains an aggressive, higher-risk trade. NVDA has been struggling and sales growth has been slowing down but we are betting the worse has already been priced in for this stock. Keep your positions very small to limit our risk. Our first target is $12.50. Our second, longer-term target is $14.00.

Sep 13, 2010 - entry price on NVDA @ 10.75, option @ 1.69
symbol: NVDA1221A12.5 2012 Jan $12.50 call - current bid/ask $1.62/ 1.73
-stop loss on NVDA @ 9.95

09/25/10 Sell the 2011 calls, NVDA @ 12.26, option @ 2.70 (+70.8%)
09/25/10 new stop 9.95
09/13/10 Play Triggered @ $10.75

Chart of NVDA:


PEPSICO Inc. - PEP - close: 65.52 change: -0.23

Uh-oh! Last week PEP broke out past significant resistance in the $67.00-67.50 zone and the stock closed at new 52-week highs on Oct. 6th. Unfortunately investors were unhappy with the company's earnings report. PEP reported earnings of $1.22 a share with revenues rising +40% to $15.51 billion for the quarter. The net profit was inline with estimates but revenues beat analysts' estimates of $15.38 billion. While last quarter looked okay PEP's management lowered their 2010 forecasts and the stock reacted negatively. Shares gapped down on Oct. 8th and has continued to see some selling pressure. More conservative traders may want to raise their stop losses further. I am not suggesting new bullish positions at this time.

Previous Comments:
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 $6.10/6.20
-stop loss on PEP at $62.90

10/02/10 New stop @ 62.90
09/04/10 may want to consider new positions with 2012 calls
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: 61.91 change: -1.07

Oil stocks have continued to move higher thanks to strength in crude oil. Yet the rally in the oil service stocks has stalled a bit. The OSX oil services index has struggled with resistance near the 200 level. Meanwhile RIG has been digesting its gains with a multi-day consolidation lower. Broken resistance near $60.00 should offer new support and RIG should also find some support at the 50-dma. If you're looking for a new bullish entry point consider waiting for a bounce from the 50-dma. Please note I'm adjusting our target to sell the remainder of our 2011 calls from $68.00 to $67.00.

Previous Comments:
We have already taken profits once at $59.00. Our secondary, longer-term target is $75.00. We want to sell the 2011 calls at $67.00. This is a very aggressive trade given the unknown risks associated with RIG's connection to the Gulf oil spill.

Jun 09, 2010 - entry price on RIG @ 43.50, option @ 6.50
symbol: RIG 11A50.00 2011 Jan $50 call - current bid/ask $12.95/13.10
-stop loss on RIG @ 53.90

- or -

Jun 09, 2010 - entry price on RIG @ 43.50, option @ 7.25
symbol: RIG 12A60.00 2012 Jan $60 call - current bid/ask $11.55/11.80
-stop loss on RIG @ 53.90

10/02/10 New stop @ 53.90
09/10/10 Target Hit @ 59.00 (take some money off the table), 2011 Jan $50 call @ $11.45 (+76.1%), the 2012 Jan $60 call @ $10.35 (+42.7%)

Chart of RIG:


Steel Dynamics - STLD - close: 14.61 change: -0.04

Better than expected Q3 earnings from Alcoa (AA) offers a positive backdrop for STLD to report against. STLD is due to report on October 18th after the closing bell. Wall Street expects a profit of 9 cents per share. I would expect STLD to bounce around the $14-15 zone until the company reports so there is no need to rush into positions. More conservative traders may want to wait and see how traders react to STLD's earnings news before considering bullish positions.

Previous comments:
STLD will probably see some resistance near $16.00 and then in the $18.50 region. Our first long-term target is $19.00. We currently have a stop loss at $12.90.

Sep 23, 2010 - entry price on STLD @ 14.25, option @ 1.29
symbol: STLD1119B15 2011 Feb $15 call - current bid/ask $ 1.15/ 1.25
-stop loss on STLD @ 12.90

- or -

Sep 23, 2010 - entry price on STLD @ 14.25, option @ 2.50
symbol: STLD1221A15 2012 Jan $15 call - current bid/ask $ 2.40/ 2.60
-stop loss on STLD @ 12.90

09/24/10 Play Triggered, STLD @ $14.25

Chart of STLD:


TASER Intl. - TASR - close: 4.01 change: -0.05

Hmm.... there is a mystery here with TASR. I cannot explain what happened on October 4th and 5th. Shares suddenly collapsed on the 4th, plunging to new four-week lows on no news. Then the very next day TASR rallies back to erase the -6.9% loss. Furthermore the bounce continued and TASR broke out past resistance near $4.00 to hit new six-week highs. The stock is now seeing some profit taking and throughout the entire episode volume was pretty light.

If you're feeling optimistic then we can look at what happened last week and see a new test of support near $3.60 (see chart). I am more optimistic now seeing how support held up. Yet I hesitate to launch new positions with the major market indices still so overbought and due for a correction.

Previous Comments:
Our stop loss is at $3.45. Our long-term target is $4.90.

STRATEGY: Buy TASR stock (entry $3.69), stop loss $3.45

08/30/10 TASR opens Monday at $3.69 (entry point)
08/28/10 TASR listed as a new play

Chart of TASR:


Watch

Motors, Oil, and Healthcare

by James Brown

Click here to email James Brown


New Watch List Entries

F - Ford Motor Co.

WLL - Whiting Petroleum

WLP - WellPoint Inc.


Active Watch List Candidates

BRK.B - Berkshire Hathaway

BVN - Compania de Minas Buenaventura

CERN - Cerner Corp

DE - Deere & Co

HD - Home Depot

NKE - Nike Inc.

NOK - Nokia Corp

SRCL - Stericycle Inc.

WYNN - Wynn Resorts Ltd.


Dropped Watch List Entries

AKAM graduated to the play list. VMED was removed.


New Watch List Candidates:

Ford Moto Co. - F - close: 13.78 change: +0.12

Ford continues to fire on all cylinders. The stock has exploded higher last week after a two-week consolidation. Now shares are hitting new five-month highs as the company announces record-setting sales numbers for their operations in the Asia Pacific region and the Africa region. More specifically Ford said sales in China saw a +26% jump from September a year ago and for the first three quarters of the year their China sales are up +40%. In India Ford's sales doubled from a year ago.

We do not want to chase the current rally. Ford will eventually see another pullback. I'm suggesting we use a trigger at $12.75 to launch new long-term bullish positions. If triggered we'll use a stop loss at $10.90. Our first upside target is $14.40. Our second, longer-term target is $17.40. FYI: The Point & Figure chart is bullish with a $19.50 target.

Company Info:
Ford Motor Company, a global automotive industry leader based in Dearborn, Mich., manufactures or distributes automobiles across six continents. With about 159,000 employees and about 70 plants worldwide, the company's automotive brands include Ford, Lincoln and Mercury, production of which has been announced by the company to be ending in the fourth quarter of 2010. The company provides financial services through Ford Motor Credit Company. Ford's wholly owned subsidiaries, joint ventures and investment in China include Ford Motor (China) Limited, Ford Motor Research & Engineering (Nanjing) Co., Ltd., Ford Automotive Finance (China) Ltd., Changan Ford Mazda Automobile Co., Ltd., Changan Ford Mazda Automobile Co., Ltd. Nanjing Company, Changan Ford Mazda Engine Co., Ltd. and Jiangling Motors Co., Ltd (source: company press release or website)

Buy-the-Dip trigger: $12.75

I prefer the 2012 calls.

BUY the 2011 March 13.00 calls (F1119C13)

- or -

BUY the 2012 January $12.50 calls (F1221A12.5)

Chart of F:


Whiting Petroleum Corp. - WLL - close: 103.67 change: +0.16

The trend for oil stocks is up and shares of WLL have been outperforming many of its peers, especially following the breakout past resistance in the $93-94 zone. On a short-term basis crude oil and oil stocks are overbought. When the dollar eventually bounces oil should contract and that could spark some profit taking in the oil sector. We want to be ready. Look for a dip to $95.50 as an entry point to launch bullish positions in WLL. If triggered our stop loss is $89.40. Our first upside target is $109.00.

Company Info:
Whiting Petroleum Corporation, a Delaware corporation, is an independent oil and gas company that acquires, exploits, develops and explores for crude oil, natural gas and natural gas liquids primarily in the Permian Basin, Rocky Mountains, Mid-Continent, Gulf Coast and Michigan regions of the United States. (source: company press release or website)

Buy-the-Dip trigger: $95.50

I prefer the 2012 calls but the spreads are a little wide!

BUY the 2011 January $100 calls (WLL1122A100)

- or -

BUY the 2012 January $110 calls (WLL1221A110)

Chart of WLL:


WellPoint Inc. - WLP - close: 55.39 change: +0.38

WLP broke out to new four-month highs back in September and the move followed an inverse H&S pattern (bullish) created over the prior four months. When traders bought the dip at the rising 50-dma last week it looked like a bullish entry point to jump on board this healthcare stock. However, WLP did struggle with resistance near $57 and its simple 200-dma. While I am tempted to buy call LEAPS on WLP right here I would prefer to wait for a new relative high. I'm suggesting a trigger to launch positions at $57.75. If triggered we'll use a stop loss at $52.75, under the recent low. Our long-term target is $69.75.

Company Info:
WellPoint works to simplify the connection between Health, Care and Value. We help to improve the health of our communities, deliver better care to members, and provide greater value to our customers and shareholders. WellPoint is the nation's largest health benefits company, with more than 33 million members in its affiliated health plans, and a total of more than 69 million individuals served through all subsidiaries. As an independent licensee of the Blue Cross and Blue Shield Association, WellPoint serves members as the Blue Cross licensee for California; the Blue Cross and Blue Shield licensee for Colorado, Connecticut, Georgia, Indiana, Kentucky, Maine, Missouri (excluding 30 counties in the Kansas City area), Nevada, New Hampshire, New York (as the Blue Cross Blue Shield licensee in 10 New York City metropolitan and surrounding counties and as the Blue Cross or Blue Cross Blue Shield licensee in selected upstate counties only), Ohio, Virginia (excluding the Northern Virginia suburbs of Washington, D.C.), and Wisconsin. In a majority of these service areas, WellPoint does business as Anthem Blue Cross, Anthem Blue Cross and Blue Shield or Empire Blue Cross Blue Shield (in the New York service areas). WellPoint also serves customers throughout the country as UniCare (source: company press release or website)

Breakout trigger: $57.75

BUY the 2012 January $65 calls (WLP1221A65)

Chart of WLP:


Active Watch List Candidates:

Berkshire Hathaway - BRK.B - close: 82.95 change: -0.21

Not much has changed for BRK.B. Shares are still consolidating sideways. I am keeping our buy the dip strategy but I'm lowering it to $79.00. However, I'm also adding a breakout entry point. If we see BRK.B close over $84.25 then we will launch bullish positions the next morning (but only half your normal position size).

If triggered at $79.00 we'll use a stop loss at $74.40. If triggered above $84.25 then we'll use a stop loss at $79.40. Depending on our entry point our long-term targets are $92.50 and $99.00. I prefer the 2012 calls.

Buy-the-Dip trigger: $79.00 or buy when BRK.B closes over $84.25.

BUY the 2011 Jan. $85 calls (BRKB1122A85)

- or -

BUY the 2012 Jan $90 calls (BRKB1221A90)

Chart of BRK.B:


Compania de Minas Buenaventura - BVN - close: 48.99 change: +0.67

Wow! Shares of BVN have continued to soar. Shares are hitting new all-time highs. I'm tempted to drop it since the stock is running away without us. Instead I'm going to adjust our entry point. We will look to buy calls on a dip to $44.00 but we'll raise our stop loss to $39.90 and I'm suggesting we only buy half our normal position since this is turning into a more aggressive trade.

Buy-the-Dip trigger: $44.00 (half a position)

BUY the 2011 March $50 calls (BVN1119C50)

Chart of BVN:


Cerner Corp. - CERN - close: 85.67 change: -0.57

There is not much change in CERN. Shares have continued to consolidate sideways in the $84-86 zone. We still don't want to chase it. I am suggesting we launch bullish positions on a dip to $82.00. If triggered we'll use a stop loss at $77.90. Our first long-term target is $89.50. FYI: CERN is due to report earnings on Oct. 27th (unconfirmed).

Buy-the-Dip trigger: $82.00

BUY the 2011 January $85 calls (CERN1122A85)

- or -

BUY the 2012 January $90 calls (CERN1221A90)

Chart of CERN:


Deere & Co - DE - close: 75.31 change: -0.04

I am also tempted to give up on DE with the stock running away without us. Stocks in the agriculture space exploded higher last week on the USDA crop report. Yet I still don't want to chase DE. We will adjust our entry point. Move the trigger to launch bullish positions to $70.00 and adjust the stop loss to $65.95. If triggered I would only open half your normal position since this is turning into a more aggressive trade. I prefer the 2012 LEAPS over the 2011 options.

FYI: keep an eye on the U.S. dollar. When the oversold dollar bounces anything related to commodities could see a sell-off.

Buy-the-Dip trigger: $70.00 (only half a position)

BUY the 2011 March $75.00 calls (DE1119C75)

- or -

BUY the 2012 January $75.00 calls (DE1221A75)

Chart of DE:


Home Depot - HD - close: 31.79 change: -0.10

Shares of HD have spent just over two weeks now consolidating sideways under resistance near $32.00. More aggressive traders may want to seriously consider a breakout entry point to launch positions on a move over $32.50. I don't want to chase HD at this time so I'm suggesting we stick to the plan and wait for a dip to $30.00. If triggered our stop is $27.90. Our long-term target is $33.90 and $36.00. I prefer the 2012 calls over the 2011 calls.

Buy-the-Dip trigger: $30.00

BUY the 2011 Jan $30.00 calls (HD1122A30)
- or
BUY the 2012 Jan $30.00 calls (HD1221A30)

Chart of HD:


Nike Inc. - NKE - close: 81.98 change: -0.06

Shares of NKE have continued to inch higher and closed at new all-time highs on Friday. We don't want to chase it here but I do want to adjust our trigger higher. Adjust the entry point to $76.50 and adjust the stop loss to $71.90. Our long-term target is $98.00. I prefer the 2012 calls but more aggressive traders may want to use the 2011 calls and just exit early near $89 instead.

EDIT: After hours it was announced that NKE will become the official apparel maker for the NFL. Shares of NKE are trading higher after hours near $85. (I still would not chase it)

Buy-the-Dip trigger: $76.50

BUY the 2011 Jan $80 calls (NKE1122A80)

- or -

BUY the 2012 Jan $90 calls (NKE1221A90)

Chart of NKE:


Nokia Corp. - NOK - close: 10.96 change: +0.13

As the smartphone competition heats up with Microsoft launching its Windows 7 phones, shares of NOK have continued to climb. The stock has reached potential resistance near $11.00 and its exponential 200-dma. I would expect some profit taking soon. I am more optimistic about NOK so we will update our trigger to launch bullish positions from $9.85 to $10.05. More aggressive traders could jump in near $10.30 instead. If triggered we'll use a stop loss at $9.45. Our first long-term target is $11.85.

Buy-the-Dip trigger: $10.05 *updated*

I prefer the 2012 calls over 2011 calls.

BUY the 2011 January $10.00 calls (NOK1122A10)

- or -

BUY the 2012 January $10.00 calls (NOK1221A10)

Chart of NOK:


Stericycle - SRCL - close: 71.16 change: -0.49

SRCL tagged new highs again last week. The trend is up but we don't want to chase it (you've heard that before, right?). I am moving our trigger to buy the dip up from $66.00 to $67.00. We'll move our stop loss to $63.40. If triggered our long-term target is $79.00.

Buy-the-Dip trigger: $67.00 *updated*

BUY the 2011 May $70 calls (SRCL1119E70)

Chart of SRCL:


Virgin Media - VMED - close: 23.83 change: -0.13

I am giving up on VMED as a bullish candidate for now. Shares have continued to perform well and the trend is still very much up. Yet even on a pull back to what should be support near $22.00 the stock would still seem overbought. I'm placing it on my personal watch list for a correction so we'll wait and see but I want to make room on the watch list for new candidates.


Wynn Resorts - WYNN - close: 87.09 change: +0.32

Casino stocks were big winners on Friday thanks to positive comments from the Nevada Gaming Commission. The rally accelerated on Monday, probably due to lots of short covering as WYNN broke out past resistance. I remain very bullish on WYNN but we don't want to chase it, especially today. Broken resistance near $95.00 should be new support. I'm suggesting we move our trigger to launch bullish positions to $95.50. We'll move our stop loss to $87.99. If triggered at $95.50 we only want to open half our normal position size since this is an aggressive trade.

Buy-the-Dip trigger: $95.50 (small positions!) *updated*

BUY the 2011 Jan $100 calls (WYNN1122A100) *updated*
- or -
BUY the 2012 Jan $105 calls (WYNN1221A105) *updated*

Chart of WYNN: