Option Investor
Newsletter

Daily Newsletter, Saturday, 10/16/2010

Table of Contents

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

Leaps Trader Commentary

Up Trend Continues

by James Brown

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The market rally continues. Traditionally the months of September and October are weak as we head into the third quarter earnings season. This year these months have been the exact opposite. Expectations for a new round of quantitative easing (QE) by the Federal Reserve has crushed the dollar and fueled big gains in commodities. Extremely low interest rates are making stocks look cheap by comparison. Unfortunately the economic data continues to come in mixed and we're not seeing any improvement in unemployment.

On Friday the New York Empire State manufacturing survey was bullish. The report showed an increase from 4.1 in September to 15.7 in October. Numbers above zero indicate growth and expansion and economists were only expecting a jump to 6. Counteracting the bullish data from New York was the disappointing consumer sentiment figures. The preliminary University of Michigan sentiment reading slipped from 68.2 in September to 67.9 in October. This was the weakest reading since July and the future buying plans component turned lower, which doesn't bode well for consumer spending.

At the same time the Commerce Department said September retail sales improved. August saw a +0.4% increase and economists were expecting the same +0.4% in September. Yet the government revised August higher to +0.7% and said September sales rose +0.6%. This is a very positive reading and suggests consumers attitudes may be sinking but they're still spending. On a similar note the National Retail Federation released an upbeat forecast for this holiday season, suggesting it could be the best Christmas season in the last four years.

One of the biggest headlines on Friday was Fed Chairman Ben Bernanke virtually confirming a new QE program with his comments in a speech he gave in Boston. Bernanke stated that there appears to be a case for "further action." Now the market has been enjoying a little QE euphoria lately with investors acting like the Fed has a placed a put option under the market (will buy the market if it goes down). Expectations for further QE has pushed the U.S. dollar to new eight-month lows and gold to new all-time highs and silver to new 30-year highs. The dollar's drop is alarming and countries like China are getting irritable and there is talk of a currency war as nations talk about devaluing their currencies to stay competitive in the export market.

A big question to ask is, "at what point is the QE news already factor into the stock market?" We've seen a pretty strong advance and some form of QE is already baked in. The market could see a "sell the news" reaction to any QE announcement no matter what the Fed says. There are growing concerns that the Fed's next QE move may not be big enough. Most are estimating the Fed to unveil a $500 billion to $1 trillion QE program although some analysts have suggested the Fed may leave it opened ended and without a cap.

Another challenge for the markets is the financial sector. Banking stocks have been a real drag on the markets this past week as investors worry over the foreclosure liabilities. This robo-signer scandal has raised questions over fraud. There are investigations over potential fraud in the actual foreclosure process and potential fraud in how these mortgages were marketed and securitized to begin with. Big investors who bought these mortgage-backed securities could sue the banks to buy them back if they can prove there was fraud involved. At the same time the current moratorium on foreclosures from BAC, JPM and GMAC Finance doesn't help matters. Any delays in the foreclosure process keeps these bad loans on the books, impacting bank profits and reserve requirements. Plus, any delays will significantly hamper the housing market pushing any recovery further and further into the future. There are some estimating that the banks liabilities could be in the $80 billion range. We know from JPM's recent earnings report that they are expecting more litigation as they increase their litigation reserves by another $1.3 billion.

There is a very real risk that this foreclosure issue could be the unexpected event that knocks the market back into the double-dip recession but I'm not giving up yet. Plus, long-time readers of this column already knew we were facing a tidal wave of foreclosures in 2010 and 2011. Speaking of which, RealtyTrac just said bank repossessions in September hit a new all-time high with more than 100,000 homes foreclosed by the banks.

Technically the market remains the same. Stocks are up, the dollar is down and commodities are surging to new relative highs. It's starting to look like this dynamic might actually change soon. While any QE program will continue to erode the value of the dollar, on a short-term basis the dollar is so oversold that it looks like it could see a bounce soon. That should spark some profit taking in commodities and stocks.

The S&P 500 is hovering near resistance around the 1173-1175 zone. If we see any sort of pull back I would look for support near 1150. Additional overhead resistance is probably the 1200 level and then 1220. The NASDAQ continues to surge and climbed to new five-month highs on Friday but this move is being fueled by just a handful of huge big cap names hitting new highs like GOOG, AAPL, and AMZN. This move is very evident in the NDX (NASDAQ-100 index), which actually broke out to new multi-year highs on Friday's rally. If you're just looking at the charts this rally in the NDX is a very bullish signal but the rally is going to run out of gas eventually. GOOG surged $60 (+11%) on Friday to $600 a share. How much higher do you think it's moving on Monday? AAPL could see a big spike higher on Monday-Tuesday this week as the company reports earnings but what are the odds AAPL will see some post-earnings profit taking?

Daily chart of the S&P 500 index:

Daily chart of the NASDAQ index:

Weekly chart of the NDX (NASDAQ-100 index):

Like I said, eventually this rally will stall and correct. That's okay. It would be healthy and allow us a potential entry point to pick trades heading into the fourth quarter. On a short-term basis the focus is going to be on earnings and the elections. This coming week is a huge week for earnings news with hundreds of companies reporting. Plus, we're down to just two weeks before the midterm elections. I would still like to see some sort of pull back in the second half of October but I'm a lot less confident that will happen. We can't forget that mutual funds are facing their fiscal yearend on October 31st. Given the market's gains and resilience I'm sure a few of them are feeling the need to chase stocks higher.

- James


Portfolio

Portfolio Update

by James Brown

Click here to email James Brown


Current Portfolio


Portfolio Comments:

The stock market has rallied to new five-month highs in spite of weakness from the financials. Technology and energy stocks continue to perform well. We are taking some profits early on MCD and selling the rest of the 2011 calls. Plus, RIG hit one of our targets to exit our 2011 calls. Please note we are closing the LMT play early.

New stop losses for HUM, MICC, and PEP.

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

Big Cap Tech

by James Brown

Click here to email James Brown

Microsoft Corp. - MSFT - close: 25.54 change: +0.31 stop: 23.25

Why We Like It:
After a painful sell-off in early summer shares of MSFT, one of the biggest technology companies on the planet, have found support. The stock has been consolidating sideways the last few months with a neutral trend of higher lows and lower highs. That has changed recently with MSFT's breakout higher. There is still some resistance near $25.50 but overall it looks like the bottom is in.

Investors have been focused on the tech sector for growth and while MSFT is a very mature company they still offer a lot of potential. I am suggesting new long-term call LEAP positions now. However, depending on your trading abilities, you can fine tune your entry point. If you're nimble enough you could try and buy a dip near the $25.00 or $24.50 levels. Or if you want to see more confirmation of the move higher you could wait for a close over $25.50 or even $26.00.

The $28.00 level could be significant resistance as would the 2010 highs near $31.50. Long-term my upside target is $31.00. FYI: MSFT is due to report earnings on Oct. 28th, after the closing bell. Wall Street expects a profit of 55 cents. Earnings reports can create a lot of volatility and more conservative traders may want to wait until after the report before launching positions. Remember, our time frame is nine to twelve months.

Company Info:

Founded in 1975, Microsoft (Nasdaq “MSFT”) is the worldwide leader in software, services and solutions that help people and businesses realize their full potential. (source: company press release or website)

Use the 2012 or 2013 January calls (Entry point - now, at current levels)

BUY CALL 2012 Jan $25.00 strike (MSFT1221A25) current ask $3.20

BUY CALL 2013 Jan $30.00 strike (MSFT1319A30) current ask $2.33

Chart of MSFT:

Weekly Chart of MSFT:


Play Updates

Still Bullish, Still Overbought

by James Brown

Click here to email James Brown


Closed Plays


LMT was closed as a trade.


Play Updates


Akamai Technology - AKAM - close: 47.09 change: +1.03

So far so good. AKAM is rebounding just as we planned. Once again the stock is the focus of some takeover rumors. While the rebound is encouraging I am somewhat concerned that AKAM has been unable to breakout back above its simple 50-dma, which is acting as overhead resistance. Another note of caution is that the bounce has yet to clear the 50% and 61.8% Fib retracement levels of the correction lower. If we see AKAM roll over under the $48-49 levels it could suggest another retest of its October low or a lower low ahead. We should keep in mind that the market has yet to correct and when it does it will have a negative influence on AKAM. FYI: In the last week Bloomberg released a list of the biggest changes in short interest. AKAM made the list for some of the biggest decreases. From September 15 to September 30th short interest in AKAM fell from 10.2 million to 8.1 million shares. At the time AKAM was surging to new highs so shorts were getting killed. Bears may have piled back in on the current pull back, which could fuel another short squeeze.

Please note I am not suggesting new bullish positions at this time. Wait for another bounce from the $45.00 level before considering new positions.

Previous Comments:
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 $ 3.25/ 3.40
-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 $ 8.75/ 9.00
-stop loss on AKAM @ 41.90

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

Chart of AKAM:

Intraday Chart of AKAM:


Baidu, Inc. (Baidu.com) - BIDU - close: 98.66 change: +0.46

The consolidation in BIDU continues. Just as the major market indices hover at their highs, shares of BIDU remain resilient. I'm a little surprised that BIDU did not see some kind of reaction to GOOG's earnings report since the two are big rivals in China. The situation could change real soon as BIDU announced it will report earnings on October 21st. Wall Street expects a profit of 41 cents a share. We've already sold our 2011 calls and we're currently keeping the 2012 call position open. However, more conservative traders may want to exit early ahead of the earnings report. After such a massive run up there is a pretty good chance BIDU will see some heavy profit taking. Or instead of exiting you may want to raise your stop loss. We have a VERY wide stop loss because BIDU is so volatile and our time frame is still several months out.

I am not suggesting new long-term bullish positions at this time. More nimble traders could look at playing some sort of short-term neutral position (like a strangle or a straddle) just ahead of the earnings report and hope for a big move either way on the earnings news. The sideways consolidation we're seeing now would suggest a breakout pretty soon but the break may not happen until BIDU reports.

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 $23.25/23.75
-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: 74.29 change: +0.17

After surging to new 52-week highs a week ago shares of BUCY have spent the last few days consolidating sideways. That's not a bad thing, a little consolidation is healthy. I would expect the stock to continue to trade sideways until it's earnings report due out on October 21st, after the closing bell. Wall Street expects a profit of $1.10 a share. I am not suggesting new bullish positions at this time. I would seriously consider selling the rest of our 2011 calls before the earnings announcement since there is no way to know what direction the stock might spike on the announcement. More conservative traders may want to just tighten their stops instead.

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

Sep 01, 2010 - entry price on BUCY @ 61.00, option @ 8.50
symbol: BUCY1122A60 2011 JAN $60 call - current bid/ask $16.10/16.30
-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 $17.65/18.10
-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: 60.78 change: +0.46

Oil and oil service stocks have continued to rally even though gains in crude oil have stalled a bit. The weaker U.S. dollar is normally bullish for oil prices but crude has not performed as well as the metals. Meanwhile shares of COP rallied to a new two-year high this past week. This stock and the energy sector remain very overbought and due for a correction. I am not suggesting new bullish positions at this time. FYI: COP is due to report earnings on Oct. 27th. The street expects a profit of $1.45 a share.

More conservative traders may want to take profits ahead of the company's earnings report.

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 $6.45/6.55
-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 $6.65/6.80
-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: 21.09 change: -0.12

It was a volatile week for EMC with shares surging higher on Thursday. The move higher was fueled by rumors that Oracle (ORCL) might be interested in buying EMC. It is worth noting that the rumor mill has been fond of using ORCL as a potential buyer. Just a few weeks ago rumors were swirling that ORCL might buy a semiconductor company like NVDA. I remain long-term bullish on EMC but we're not suggesting new positions at this time. The company is due to report earnings on Tuesday, October 19th. Wall Street is looking for a net profit of 30 cents a share.

FYI: We don't have a lot of time left or the 2011 calls (just a couple of months). Readers may want to consider an early exit if we see any sort of spike to new highs this week.

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 $2.03/2.07
-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 $3.45/3.60
-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: 133.68 change: -1.07

Investors need to ask themselves a couple of questions when it comes to gold. What is your time frame? Do you think the quantitative easing impact has already been factored into the market or not? Where is the long-term trend of dollar headed?

The time frame question is going to be specific to each trader. Gold has made such a big move higher that I see nothing wrong with exiting now and taking your money off the table. It's not a profit until you actually take it! At the same time I believe the long-term trend for the dollar is down. The U.S. debt levels continue to soar and the Fed appears ready to inflate their way out of the current situation. The long-term trend for the dollar should be down, which suggests the long-term trend for gold is higher.

On a short-term basis the dollar is extremely oversold and due for a bounce, which could happen soon but soon may be tomorrow it could be the middle of November, once we see how big the Fed's QE program will be. Therein lies another challenge. Everyone expects a QE program from the Fed but no one knows how big it will be. Will it be $500 billion? $1 Trillion? $1.5 Trillion? If the number is too small then stocks (and gold) could sell-off sharply. Actually we could see a sell-the-news move no matter how big the number is. A few analysts are suggesting that the Fed won't give us a number and leave the program open ended so they can keep it going until it works.

So what do we do now? If you're looking at the weekly chart of the GLD I would seriously consider exiting positions immediately, especially if you have the 2011 calls. We can afford to be a little more patient with the 2012 calls. If you're feeling more aggressive then look to exit on a move toward the red line on the weekly chart. It doesn't have to hit the red line just get close to it. Officially we will exit the 2011 calls if the GLD hits $138.00 (a slight change). We'll sell half of our 2012 calls if the GLD hits $138.00 but we'll keep a position open since the long-term trend is still up!

In summary, if the GLD hits $138.00, sell the rest of our 2011 March calls and sell half of our 2012 calls. More conservative traders may want to go ahead and take profits now!

Aug 6, 2010 - entry price on GLD @ 118.00, option @ 7.70
symbol: GLD1119C120 2011 Mar $120 call - current bid/ask $16.35/16.75
-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 $17.60/18.00
-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: 54.84 change: +0.53

It was a good week for HUM with shares surging to a new two-year high. In last week's newsletter I suggested we launch new positions given the entry point in HUM. The stock is now short-term overbought and I would expect some profit taking back toward $52.00. I am certainly tempted to take some profits in the 2011 calls but we'll hold on for now. FYI: Earnings are expected on Nov. 1st.

Note: I'm adjusting our exit targets on HUM. Our first target to take profits is at $59.50. Our second, longer-term target is $69.00. (I prefer the 2012 calls over the 2011s if we see another entry point down the road.) I am raising our stop loss to $47.40.

Sep 17, 2010 - entry price on HUM @ 50.50, option @ 1.85
symbol: HUM1122A55 2011 Jan $55 call - current bid/ask $3.30/ 3.60
-stop loss on HUM @ 47.40

- or -

Sep 17, 2010 - entry price on HUM @ 50.50, option @ 6.40
symbol: HUM1221A55 2012 Jan $55 call - current bid/ask $7.90/ 8.60
-stop loss on HUM @ 47.40

10/16/10 New stop loss @ 47.40
10/11/10 New Entry point - HUM is breaking out past $51.00.

Chart of HUM:


Intl.Business Machines - IBM - close: 141.06 change: -0.44

Another week, another gain for IBM. The stock is up seven weeks in a row. You see charts like this and it's a little surreal. I'm long-term bullish on IBM but short-term this stock is just too overbought to launch new positions. Earnings are due out on Oct. 18th and the stock could (should) see some profit taking following the report (after the closing bell). Analysts are looking for a profit of $2.75 a share.

I am suggesting that we plan on selling our 2011 calls if IBM hits $144.00, which could happen on a spike higher. This stock will eventually see a correction and we'll consider launching new positions again then.

Previous Comments:
Our first long-term target for the 2012 calls is $159.00. We currently have a stop loss at $129.50.

Sep 30, 2010 - entry price on IBM @ 136.00, option @ 3.90
symbol: IBM1122A140 2011 Jan $140 call - current bid/ask $5.95/ 6.05
-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 $9.60/ 9.85
-stop loss on IBM @ 129.50

10/16/10 Short-term target for 2011 calls set at $144.00.
09/30/10 Play triggered $136.00, stop $129.50

Chart of IBM:


Infosys Technologies - INFY - close: 68.61 change: -2.40

Buckle your seatbelts, we're probably in for more volatility with INFY. The company reported earnings Friday morning and delivered a profit of 65 cents a share, which was 4 cents better than expected. Revenues rose nearly +30% to $1.5 billion for the quarter, also beating expectations. Management has raised guidance for the current quarter and 2011. It was a very bullish report and yet traders sold the news. INFY was looking a little top heavy with new highs on Wednesday and Thursday. Shares lost -3.3% in profit taking on Friday. This move looks like a bearish reversal on the weekly chart and I would expect a correction back toward the $65-64 zone. We do have the 2012 calls so I plan on enduring the pull back.

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.

July 1, 2010 - entry price on INFY @ 59.00, option @ 8.20
symbol: INFY 12A65.00 2012 Jan $65 call - current bid/ask $11.20/12.80
-stop loss on INFY @ 61.75

10/15/10 INFY reports earnings.
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:


McDonald's Corp. - MCD - close: 77.48 change: +0.44

MCD continues to be one of the best performing Dow 30 components. The stock broke out to new all-time highs after consolidating under resistance near $76.00 for the last few weeks. The company is due to report earnings soon on October 21st, before the opening bell. Analysts are expecting a profit of $1.24 a share.

Please note that I am adjusting our exit strategy. We want to sell the 2011 Jan. $70 calls now! Take the money and get out. More nimble traders may want to wait until Wednesday afternoon (Oct. 20th) and sell before the closing bell to exit ahead of earnings. We will keep our 2012 calls but we'll raise our exit target to $89.00. FYI: The Point & Figure chart is currently forecasting a $102 target.

June 29, 2010 - entry price on MCD @ 66.50, option @ 2.65
symbol: MCD 11A70.00 2011 Jan $70 call - Sell Now: Bid @ $8.00 (+201%)
-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 $4.85/ 5.00
-stop loss on MCD @ 67.90

10/16/10 Sell the remaining 2011 calls, bid @ $8.00 (+201%)
10/16/10 New target for 2012 positions @ $89.00
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: 99.05 change: -1.57

Warning! The action in MICC looks somewhat bearish. The bullish breakout on Wednesday quickly rolled over and now MICC has created a three-candlestick bearish reversal pattern. At the same time MICC remains inside its bullish channel with support near the rising 50-dma. I would seriously consider an early exit now or before the earnings report due out on October 19th, before the opening bell. Wall Street is looking for a profit of $1.51 a share.

However, since the trend is still positive we'll keep our position open but we will raise the stop loss to $89.75. More conservative traders may want to up their stop loss toward the $94-95 zone. No new positions at this time.

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.

May 6, 2010 - entry price on MICC @ 80.00, option @ 8.60
symbol: MICC 11A90.00 2011 Jan $90 call - current bid/ask $11.70/12.30
-stop loss on MICC @ 89.75

10/16/10 New stop @ 89.75
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: 11.29 change: +0.13

Semiconductor stocks have been slowly edging higher in spite of the recent bearishness in Intel (INTC) following its earnings report. Meanwhile NVDA is still trying to rebound and the break back above the $11.00 level is bullish. I don't see a lot of changes from my prior comments. If the wider market eventually corrects it could pull NVDA down with it. However, this stock has been marching to the beat of its own drum lately. I remain bullish on the stock but would prefer to open positions on dips near the trendline of higher lows or the 50-dma.

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 $1.79/ 1.92
-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: 66.68 change: +0.04

We are still not seeing a lot of change in PEP. On a positive note there was not any follow through from its post-earnings sell-off. Traders bought the dip at $65.00 and shares are back to resistance near $67.00 again. I am raising our stop loss to $63.80. 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 $7.00/7.15
-stop loss on PEP at $63.80

10/16/10 New stop @ 63.80
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: 67.08 change: +0.40

Target achieved, but more on that in a moment. There has been a lot of focus on the drilling stocks as Washington eliminated the moratorium on deep water drilling. Yet the industry says it's all talk because the new rules have created a de factor moratorium. That hasn't stopped the OSX oil services index for hitting new relative highs. Shares of RIG have been performing well. The stock rallied to $68.89 on Thursday before stalling near its simple 200-dma. Yet shares actually hit $67.07 on Wednesday. Last week we had adjusted our exit target for the 2011 calls to exit at $67.00.

We still have some 2012 calls and we're aiming for $75.00, although I'm thinking about adjusting that higher to $79.75. No new positions at this time but I might reconsider on a bounce near $60.00.

Previous Comments:
We have already taken profits once at $59.00. Our secondary, longer-term target is $75.00. This is an 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 - exit @ 17.40 (+167.6%)
-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 $14.95/15.25
-stop loss on RIG @ 53.90

10/13/10 Target hit at $67.00 to exit the 2011 call option @ 17.40 (+167.6%)
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

Hmm... investors must be nervous about STLD's upcoming earnings report. The stock has failed to participate in the market's widespread rally. Shares continue to bounce around the $14-15 zone. This is somewhat worrisome and more conservative traders may want to exit ahead of the earnings report on October 18th, after the closing bell. Wall Street is looking for a profit of 9 cents a share. I am not suggesting new positions in front of earnings. Let's wait and see how the market chooses to interpret the news. More conservative traders could wait for a close over $15.00 or $15.25 before considering new 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 $ 1.00/ 1.10
-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 $ 2.20/ 2.35
-stop loss on STLD @ 12.90

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

Chart of STLD:


TASER Intl. - TASR - close: 4.18 change: +0.03

Good news! TASR is finally starting to participate in the market's rally. Shares have convincingly broken through resistance near $4.00 and traders bought the dip at $4.00 a few days ago. While I am growing more optimistic here I'm a little hesitant to launch new positions ahead of earnings. Another problem is we can't nail down the earnings date. TASR is expected to report sometime in the October 21st-27th time frame but that is unconfirmed. Consensus estimates are looking for a loss of one cent per share.

While I'm cautious on new positions I would be tempted to buy another bounce near the $4.00 level. Remember this is a volatile stock. Consider keeping very small positions since we have a wide stop loss.

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:


WellPoint Inc. - WLP - close: 57.78 change: +0.72

The action in WLP is very similar to the pattern in HUM. Healthcare stocks are starting to breakout from a five-month consolidation. WLP just broke through resistance near its September highs and technical resistance at its 200-dma. We had a trigger to buy call LEAPS if WLP hit $57.75, which happened on Thursday. I would still consider new positions at current levels. However, if you missed the entry point consider waiting for a dip back toward $56.00 before launching positions.

Our stop loss is at $52.75. Our long-term target is $69.75. FYI: WLP is due to report earnings on Nov. 3rd.

Oct 14th, 2010 - entry price on WLP @ 57.75, option @ $5.25
symbol: WLP1221A65 2012 Jan $65 call - current bid/ask $ 5.45/ 5.70
-stop loss on WLP @ 52.50

10/14/10 Play Triggered when WLP hit $57.75, option @ $5.25

Chart of WLP:


CLOSED Plays


Lockheed Martin - LMT - close: 70.02 change: -0.18

I am giving up early on LMT. The stock market has continued to march higher and higher and yet LMT is just not participating. The oversold bounce and breakout attempts keep failing. The six-month trend is still down. Now that might change if LMT can deliver a strong earnings report and guidance on Oct. 19th but I'm not willing to wait. There is no sense tying up our capital in LMT when we have so many more candidates to consider.

Exit now! We can re-evaluate following the earnings data.

10/16/10 - exit early!

Oct 01, 2010 - entry price on LMT @ 70.50, option @ 1.25
symbol: LMT1122A75 2011 Jan $75 call - current bid $1.00 (-20%)
-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 $4.40 (-13.7%)
-stop loss on LMT @ 67.90

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

Chart of LMT:


Watch

Oil Service and PBMs

by James Brown

Click here to email James Brown


New Watch List Entries

DO - Diamond Offshore

ESRX - Express Scripts


Active Watch List Candidates

BRK.B - Berkshire Hathaway

BVN - Compania de Minas Buenaventura

CERN - Cerner Corp

DE - Deere & Co

F - Ford Motor Co.

HD - Home Depot

NKE - Nike Inc.

NOK - Nokia Corp

SRCL = Stericycle Inc.

WLL - Whiting Petroleum

WYNN - Wynn Resorts Ltd.


Dropped Watch List Entries

WLP has graduated to the play list.


New Watch List Candidates:

Diamond Offshore - DO - $71.65 change: -0.06

Energy and oil service stocks have continued to rally even though oil's upward momentum has stalled in the last couple of weeks. Drilling have been showing relative strength now that the offshore drilling moratorium is officially gone. There are plenty in the industry that claim the new rules are onerous and leave a de factor moratorium still in place. Still it's not having much impact on the stock price. Shares of DO appear to have found a new bottom in the $57.50-67.50 zone.

The recent breakout looks like an entry point but we don't want to chase it with the market so overbought. I am suggesting we wait for a pull back and use a trigger at $67.50 to launch positions. If triggered we'll use a stop loss at $62.40 (under the 50-dma). Our long-term targets are $79.00 and $89.00. FYI: DO is due to report earnings on Oct. 21st.

Company Info:
Description Diamond Offshore provides contract drilling services to the energy industry around the globe and is a leader in deepwater drilling. (source: company press release or website)

Buy-the-Dip trigger: $67.50

BUY the 2011 March 80.00 calls (DO1119C80)

- or -

BUY the 2012 January 86.00 calls (DO1221A86)

Chart of DO:


Express Scipts - ESRX - close: 48.37 change: +096

As Americans adjust to the new healthcare reforms Wall Street should grow more comfortable too and the up trend in ESRX is likely to continue. Honestly, I was tempted to buy call LEAPS on ESRX tonight. However, the market remains overbought and there is a good chance this stock could retest its 50-dma.

I am suggesting a trigger to buy calls at $47.00. If triggered we'll use a stop loss at $44.75 (under the long-term trendline). Our first target is $53.75. I'm tentatively putting our second, longer-term target at $59.00. FYI: ESRX is due to report earnings on Oct. 27th.

Company Info:
Express Scripts, Inc., one of the largest pharmacy benefit management companies in North America, is leading the way toward creating better health and value for patients through Consumerology®, the advanced application of the behavioral sciences to healthcare. This approach is helping millions of members realize greater healthcare outcomes and lowering cost by assisting in influencing their behavior. Headquartered in St. Louis, Express Scripts provides integrated PBM services including network-pharmacy claims processing, home delivery services, specialty benefit management, benefit-design consultation, drug-utilization review, formulary management, and medical and drug data analysis services. The company also distributes a full range of biopharmaceutical products and provides extensive cost-management and patient-care services. (source: company press release or website)

Buy-the-Dip trigger: $47.00

I'm suggesting the 2012 and 2013 calls.

BUY the 2012 January $55 calls (ESRX1221A55)

- or -

BUY the 2013 January $55 calls (ESRX1319A55)

Chart of ESRX:


Active Watch List Candidates:

Berkshire Hathaway - BRK.B - close: 83.37 change: -0.24

BRK.B managed to eke out another gain for the week but shares are still struggling with resistance near $84.00. There were a couple of brief rallies over this level of resistance on Thursday and Friday but shares failed to close above it. I am still willing to buy call LEAPS on a pull back toward its simple 200-dma (currently nearing $78) and I've listed a trigger at $79.00 to launch positions with a suggested stop loss at $74.40. However, I think odds are favoring a bullish breakout higher. Let's move the breakout trigger from $84.25 to $84.50 and we will wait for BRK.B to actually close over $84.50 then launch positions the next morning with a trigger at $79.40. My long-term target is $99.00. I prefer the 2012 calls.

Buy-the-Dip trigger: $79.00 or buy when BRK.B closes over $84.50.

On a dip - BUY the 2011 Jan. $85 calls (BRKB1122A85)

- or -

On a breakout - BUY the 2012 Jan $90 calls (BRKB1221A90)

Chart of BRK.B:


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

Ouch! Another week has gone by and BVN continues to rally higher without us. The stock is up about +20% in the last three weeks so we don't want to chase it now. I don't see any changes from my prior comments. We will look to buy calls on a dip to $44.00 with a stop loss at $39.90 and I'm suggesting we only buy half our normal position since this is turning into a more aggressive trade. FYI: I can't find an earnings date for this Peruvian miner.

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

BUY the 2011 March $50 calls (BVN1119C50)

Chart of BVN:


Cerner Corp. - CERN - close: 86.49 change: -0.79

Shares of this medical technology company hit new five-month highs this past week near $88. Yet after breaking out from a two-week consolidation pattern the stock produced a bearish reversal pattern on Friday. I still don't want to chase CERN at these levels and suspect it might see a pullback following its earnings report. CERN is due to report earnings on Oct. 28th. The street is looking for a profit of 74 cents a share. I am suggesting we launch bullish positions on a dip to $82.00. If triggered we'll use a stop loss at $77.75. Our first long-term target is $89.50. I prefer the 2012 calls.

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

Shares of DE continue to look strong. The stock has spent the last several days consolidating sideways and digesting gains. The lack of profit taking is positive but that doesn't mean we want to chase it. DE doesn't report earnings until November but the stock could see some movement as investors react to earnings from rival Caterpillar (CAT), who reports on Oct. 21st. There is no change in our strategy. Wait for a dip to $70.00. If triggered we'll use a stop loss at $65.95. 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: DE might not dip all the way to $70. Keep an eye on the 50-dma.

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:


Ford Moto Co. - F - close: 13.80 change: -0.11

Ford managed to eke out another gain for the week but momentum seems to be struggling. The stock's gains are fading lower into the afternoon, which suggests the rally is running out of gas. Shares were upgraded to a "buy" on Thursday but the stock barely moved. Another reason F could be ready to correct lower. Overall I don't see any changes from last week's comments.

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.

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:


Home Depot - HD - close: 30.70 change: -0.11

We are finally starting to see a pullback in shares of HD. This is what we've been waiting for. Traders started buying the dip near $30.50 late in the week. I still think HD can test the $30 level and its rising 50-dma. 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

I prefer the 2012 calls.

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

Chart of HD:


Nike Inc. - NKE - close: 82.00 change: +0.23

Tuesday's failed rally higher in NKE and the sideways consolidation following suggests NKE is nearing a correction. The trend is very bullish and the new NFL deal should be a winner for NKE. However, we don't want to chase it here with a rally from $70 to $83. I am suggesting a trigger to buy call LEAPS at $76.50 with a stop loss at $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.

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: 10.88 change: -0.08

The rally in NOK stalled under its 200-dma, which isn't that surprising. This coming week the stock could see some volatility. AAPL's earnings on Monday night could spark a reaction in NOK on Tuesday morning. Plus, NOK is due to report earnings on Oct. 21st. I am inching our trigger to launch positions a little higher to $10.25. More conservative traders could keep their trigger lower near $9.80. Essentially I'm expecting a pullback to this range (10.25-9.75). If we are triggered at $10.25 I'm suggesting a stop loss at $9.45. Our first long-term target is $11.85.

Buy-the-Dip trigger: $10.25 *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: 71.90 change: -0.00

SRCL managed to tag new intraday highs last week but shares were unable to hold on to these gains. This might suggest the rally is losing steam. The stock is overbought and we're waiting for a correction. It's possible SRCL will merely churn sideways until its earnings report on Oct. 27th. Currently I'm suggesting a trigger to buy call LEAPS on the dip at $67.00 with a stop loss at $63.40. If triggered our long-term target is $79.00. FYI: The point and figure chart is bullish with an $89 target.

Buy-the-Dip trigger: $67.00

BUY the 2011 May $70 calls (SRCL1119E70)

Chart of SRCL:


Whiting Petroleum Corp. - WLL - close: 104.46 change: -0.40

The energy sector has continued to rally and WLL continues to participate. The stock extended its gains to hit new two-year highs. We're still waiting for a correction as the stock looks overbought given the $20 rally in the last eight weeks. Currently the plan is to buy call LEAPS on a dip to $95.50 but keep an eye on the $98.00 level, which could offer some support. If triggered our stop loss is $89.40. Our first upside target is $109.00. FYI: Earnings are due out on Oct. 27th.

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:


Wynn Resorts - WYNN - close: 101.94 change: +0.35

WYNN refuses to correct. It's tough to keep emotions out of the game when you miss a big move like WYNN's from two weeks ago. Makes me wish we had bought the dip near $86.00 in late September. However, I'm still bullish on WYNN and the recent consolidation (in the $100-104 zone) is a positive sign that we've got more buyers than sellers. When the market does correct I'm expecting WYNN to dip toward prior resistance and what should be new support near $95. If that fails to occur then WYNN could see some profit taking after its earnings report in late October (or early November).

Right now the plan is to buy call LEAPS on a dip at $95.50 with a stop loss at $87.99. This has turned into an aggressive trade so keep your positions small (half normal size).

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

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

Chart of WYNN: