Option Investor
Newsletter

Daily Newsletter, Sunday, 10/24/2010

Table of Contents

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

Leaps Trader Commentary

Potential Headline Risk

by James Brown

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The U.S. stock market continues to drift higher. Last week produced minor gains for the S&P 500 but they were still gains and the third weekly gain in a row. The index is up seven out of the last eight weeks. Momentum is slowing and volume on Friday was very light since no one seems willing to place any new bets as we approach the fiscal year end for many mutual funds (October 31st), and the midterm elections (November 2nd), and the next FOMC meeting (Nov. 2-3rd). Market participants were also keeping a wary eye on the G20 meeting this weekend. Last week's surprise rate hike by China cause some turmoil in the currency markets. Rhetoric has been escalating over the sharp decline in the U.S. dollar. The potential for more volatility in the currency markets this week following the G20 meeting was another reason for traders to stick to the sidelines.

In addition to the major events listed above we will also see a parade of new economic data this week. Markets will digest the new and existing home sales numbers and the Case-Shiller home price index. Plus, we'll see another reading on consumer confidence, durable goods orders, and the Chicago PMI. One of the biggest economic reports out will be the advanced GDP estimate for the third quarter. Currently consensus estimates expect +2.0% GDP growth last quarter. Naturally we might expect a disappointment in the GDP number to spark some selling in stocks and increase fears of a double dip. However, lately any bad news has been accepted as just another reason for the Federal Reserve to start a new round of quantitative easing.

If you study the S&P 500 you can see the index has been struggling with the 1185 level this past week. If the intermediate up trend continues we could see the index hit 1200 before the month is out but if I had to bet I would expect stocks to churn sideways into month end. Short-term support for the S&P 500 is the 1160, 1150 and 1130 levels. On the upside there is potential resistance at 1200 and 1220. If stocks actually see a correction then I would look for a pull back toward the 1130 area, which lines up with the 38.2% Fibonacci retracement level.

Daily chart of the S&P 500 index:

The tech-heavy NASDAQ composite remains strong, if overbought, and closed near its five-month highs just under 2480. Strength in the NASDAQ has been driven by amazing gains in the big cap tech names, which is clearly evident in the NASDAQ-100's (NDX) bullish breakout to new multi-year highs. These stocks can't keep this pace up for long but for now the trend is still up. The 2500 level might be round-number resistance for the NASDAQ composite but I would watch the 2010 highs near 2520 as the real level to watch. The 2400 level should offer some support but a normal correction would bring the NASDAQ composite back down toward the 38.2% Fib retracement area (currently 2335). Long-term the breakout in the NASDAQ-100 (NDX) is very positive but it's too overbought and overextended at current levels.

Daily chart of the NASDAQ index:

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

The small cap Russell 2000 index has also seen its upward momentum stall. The $RUT is actually flirting with a breakdown from its bullish channel. I suspect that a drop under short-term support near 690 could portend a deeper correction toward support (prior resistance) near 670. I would view a pull back to or bounce from the 670 level as a new bullish entry point on the small cap sector, especially as we head deeper into the fourth quarter.

Daily chart of the Russell 2000 index:

We also want to keep a close eye on the transports ($TRAN) and the semiconductor index (SOX). Traditionally the market can't rally without participation in the Dow Jones Transportation index. Meanwhile the SOX tends to lead the NASDAQ higher or lower. That hasn't been the case lately but the chips still have a big impact on the index. Currently the transports have been performing very well but the $TRAN is nearing potential resistance at its 2010 highs around the 4800 level. This would be a good spot for the $TRAN to tag resistance and reverse into some profit taking. The 4500 level should be decent support for the transports.

Daily chart of the Dow Jones Transportation index:

The SOX semiconductor index still has a bearish pattern of lower highs and lower lows on the weekly chart but the sector has produced a decent bounce from its August lows. On a short-term basis the SOX looks poised to breakout over resistance near 360, which could inspire more confidence in the NASDAQ. We're going to see earnings from some chip stocks this week and these results could be the catalyst the SOX needs to breakout or roll over under resistance.

Daily chart of the SOX semiconductor index:

Earnings season is still very much in full swing. Corporate results will dominate the headlines. Individually stocks could see lots of volatility based on their results but bigger picture I would expect the market to just churn sideways through the last week of the month. Mutual funds should already be done with their window dressing before their fiscal year ends. Normal traders are unlikely to place any new bets ahead of the midterm elections and the FOMC meeting. Currently there are huge expectations for the Federal Reserve to announce a new quantitative easing program on November 3rd. If they do not announce a QE program or they do announce and the size of the program is too small then the stock market, which has been rising on QE expectations for weeks now, could see a significant sell-off.

I remain optimistic for a fourth quarter rally but would love to see a strong two-week correction lower to provide us a new entry point to launch bullish positions. I would be very hesitant to open new long-term positions ahead of the November 2-3rd time frame. Even if the FOMC does announce a new QE program the market could see a "sell-the-news" reaction no matter what size the program is. Actually, one of my biggest concerns right now is that we might see stocks initially spike higher on the QE news, the indices could hit their 2010 highs, and then reverse lower. This could form a potential bearish double top pattern. You could say we have a lot of headline risk with the elections and the FOMC meeting just days away. Ideally we see some sort of pull back in mid November that stops at support and sets us up for a rally into December and January.

- James


Portfolio

Portfolio Update

by James Brown

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Current Portfolio


Portfolio Comments:

Gains for the stock market are slowing as money managers face their yearend and the markets face midterm elections and the potential for QE2. We want to take advantage of some of the recent strength and take profits in COP, EMC, and HUM. I'm also suggesting an early exit for the MICC and PEP plays. Please note we're updating several stop losses this weekend.

New stop losses for BIDU, COP, EMC, HUM, MCD, RIG, and TASR.

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

Healthcare Services

by James Brown

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Express Scipts - ESRX - close: 49.00 change: +0.73

Why We Like It:
Healthcare-related names have been performing well recently. While ESRX hasn't shown the same strength that the HMO healthcare index has, the overall pattern for ESRX remains bullish. The stock has been consolidating sideways the last few weeks and is starting to rebound more strongly from technical support near its 100 and 200-dma. We've seen too many watch list candidates get away from us so I'm suggesting we launch new positions now. Keep in mind this entry point is somewhat aggressive since ESRX is due to report earnings on October 27th, after the closing bell. Wall Street is looking for a profit of 65 cents a share. The earnings report could launch ESRX either direction so to limit our risk I'm suggesting we only open small positions (only half your normal trade size). We'll also use a relatively tight stop loss at $45.85.

ESRX does have some resistance near the $53-54 level but our long-term target is $59-60.

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)

I'm suggesting the 2012 and 2013 calls.

BUY the 2012 January $55 calls (ESRX1221A55) -current ask $4.85

- or -

BUY the 2013 January $55 calls (ESRX1319A55) -current ask $7.10

Chart of ESRX:


Play Updates

Taking Profits Again

by James Brown

Click here to email James Brown


Closed Plays


MICC and PEP have been closed.


Play Updates


Akamai Technology - AKAM - close: 47.61 change: +1.00

Gains for the stock market last week were pretty meager but they were still gains. AKAM eked out a 50-cent gain. The stock is still trading under resistance near $48 and its 50-dma but investors are still buying the dips too. The technical indicators on AKAM's daily chart are improving again. Shares look ready to breakout higher. However, AKAM is due to report earnings on Thursday, October 28th after the closing bell. It's possible that AKAM continues to hover sideways in the $45-48 zone until after its earnings report. Wall Street is expecting a profit of 34 cents a share.

A week ago I said look for a bounce from $45 as our next entry point and AKAM provided one for us. More conservative traders might want to inch up; their stops toward $43.75-44.00. I'm leaving our stop at $41.90 for now. I do remain bullish on AKAM but we have to consider the possibility that this stock could be creating a bear-flag pattern.

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.

Oct 06, 2010 - entry price on AKAM @ 45.50, option @ 2.85
symbol: AKAM1122A50 2011 JAN $50 call - current bid/ask $ 3.25/ 3.35
-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 $ 8.60/ 8.95
-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: 107.28 change: +4.80

BIDU delivered a strong earnings report on October 21st. The company reported earnings of 45 cents a share, which was three cents better than expected. Revenues soared +76% to $337.2 million, also beating estimates. Management raised their guidance for the fourth quarter. BIDU saw some wild swings after hours on Thursday night with a range of $107 to $97 but shares gapped open at $105.36 on Friday and tagged a new all-time intraday high of $109.34 Friday morning. This is a bullish breakout from a three-week consolidation. Don't be surprised to see BIDU fill the gap with a dip to $103.00 before moving higher again. Nimble traders could use this dip as a potential entry point but you'll want to use a very tight stop (maybe $99.00). Speaking of stops, I'm moving our stop loss to $94.00.

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.

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 $27.45/28.10
-stop loss on BIDU @ 94.00

10/23/10 New stop loss @ 94.00
10/21/10 BIDU reports strong earnings.
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: 68.44 change: -5.07

Ouch! BUCY reported earnings on Thursday night of 94 cents a share. That missed estimates by 17 cents! Revenues also missed consensus estimates at $937.2 million. Evidently the big miss was due to delays getting loan guarantees on a big coal-fired project in India. According to management these necessary guarantees have been secured and the project is on schedule for next year. The stock plunged on Friday giving up -6.8% but traders started buying the dip near prior support near $68.00. I'm not convinced the profit taking is over and BUCY may test the $64.50-65.00 level soon. If you're looking for an entry point I would wait for a dip or a bounce near $65.00.

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 $10.70/10.90
-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 $13.05/13.50
-stop loss on BUCY @ 63.75

10/21/10 BUCY misses earnings.
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: 61.67 change: +0.55

COP has continued to rally, setting new two-year highs this past week. I strongly suspect that COP could see some profit taking once the company reports earnings on October 27th (before the opening bell). The street is looking for a profit of $1.45 a share. If COP does pull back we can look for support near the $58 and $56 levels. I am raising our stop loss to $54.85.

Please note that we are going to exit (sell) the 2011 Jan. $55 calls now. More aggressive traders may want to try and hang on to these through the end of December. I'd rather book profits now and hang on to the 2012 calls. Our long-term target for the 2012 calls is still $69.00.

May 20, 2010 - entry price on COP @ 51.00, option @ 3.75
symbol: COP 11A55.00 2011 JAN $55 call - exit now, bid @ 7.05 (+88%)

- or -

May 20, 2010 - entry price on COP @ 51.00, option @ 4.75
symbol: COP 11A55.00 2012 JAN $60 call - current bid/ask $6.85/7.00
-stop loss on COP @ 54.85

10/23/10 Exit the 2011 Jan. $55 calls @ 7.05 (+88%)
10/23/10 New stop loss @ 54.85
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:


Diamond Offshore - DO - $69.51 change: +0.88

A spike in the U.S. dollar on Tuesday sent commodities reeling and the oil service stocks reacted to the drop in crude oil. There wasn't much follow through on the dip but DO continued to see volatility. On October 21st the company reported earnings of $1.43 a share, which was 9 cents better than expected. Revenues also beat estimates. Volatility surrounding the report pushed shares of DO to $67.29 intraday. Our trigger to buy calls was hit at $67.50.

DO was a watch list candidate. While this new trade is now open I suspect that shares may consolidation lower toward the $65.00 level. Patient investors may want to wait for a dip closer to $65 before launching positions.

We have a stop loss at $62.40. Our first long-term target is $79.00. Our second, longer-term target is $89.00.

FYI: Investors should note that DO announced a normal, quarterly dividend of 12.5 cents per share plus they announced a special one-time cash dividend of 75 cents per share. These dividends are payable to shareholders (not LEAP holders) on December 1st; the shareholder record date is November 1st.

Oct 21, 2010 - entry price on DO @ 67.50, option @ 1.90
symbol: DO1119C80 2011 Mar $80 call - current bid/ask $2.00/2.07
-stop loss on DO @ 62.40

- or -

Oct 21, 2010 - entry price on DO @ 67.50, option @ 4.79
symbol: DO1221A86 2012 Jan $86 call - current bid/ask $4.55/5.05
-stop loss on DO @ 62.40

10/21/10 Play triggered on a dip at $67.50

Chart of DO:


EMC Corp. - EMC - close: 21.44 change: +0.08

It was an important week for EMC. The company reported earnings on Oct. 19th and announced Q3 earnings that were inline with estimates (30 cents). Revenues came in at $4.21 billion, which beat estimates. More importantly management has raised its fiscal year 2010 guidance. The company claims they have gained market share and increased profitability.

The stock is still struggling with some resistance near $21.60 and thus far EMC is still creating a lower high in the shadow of the late September peak. The long-term trend is up but I hesitate to launch new positions at this time. We only have a couple of months left on the 2011 calls so I am suggesting we go ahead and sell at least half of our 2011 call position.

If you're looking for a new entry point consider waiting for another bounce from the $20.00 level. I am raising our stop loss to $18.45.

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 $2.06/2.11
-stop loss on EMC @ 18.45

- or -

May 6, 2010 - entry price on EMC @ 18.25, option @ 2.50
symbol: EMC 12A20.00 2012 Jan $20 call - current bid/ask $3.60/3.70
-stop loss on EMC @ 18.45

10/23/10 Sell Half of the 2011 calls, bid @ 2.06 (+47%)
10/23/10 New stop loss @ 18.40
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: 129.73 change: +0.26

We knew it was going to happen sooner or later. The GLD's three-month, nearly non-stop rally, finally stopped. Maybe it's just a correction. Last Tuesday the stock market reacted sharply to news that China has unexpectedly raised its interest rates. The dollar surged and commodities plunged. For the most part it was a one-day move but gold stumbled again on Thursday. Bigger picture, this pull back was way over due and probably isn't over yet. We can probably expect gold to consolidate flat or continue lower until we hear the FOMC's plans for the new quantitative easing program. If the Fed says they're going to spend $1 Trillion or more then the dollar should remain weak, fueling more interest in gold.

On a short-term basis I would expect the GLD to slip toward the $127.50-122.50 zone. I am not suggesting new positions at this time. We still want to sell (exit) the rest of our 2011 March calls if the GLD hits $138.00. 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 $11.35/11.55
-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 $14.50/14.85
-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: 56.97 change: +0.70

Shares of HUM continue to surge and the stock has broken out from its bullish channel to hit new multi-year highs. Don't expect this stock to keep up the pace. Short-term, the trend is obviously higher, but I am suggesting we go ahead and take profits on our 2011 January $55 calls. More aggressive traders may want to hold on to these options and sell them just before October 31st. HUM is due to report earnings on November 1st. Wall Street is looking for a profit of $1.66 a share. I would expect some profit taking on the earnings report.

Exit the 2011 calls now. We'll look for a new entry point on any post-earnings pull back. Please note our new stop at $48.75.

Previous Comments:
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.)

Sep 17, 2010 - entry price on HUM @ 50.50, option @ 1.85
symbol: HUM1122A55 2011 Jan $55 call - exit (sell) now, bid @ 4.40 (+137%)

- or -

Sep 17, 2010 - entry price on HUM @ 50.50, option @ 6.40
symbol: HUM1221A55 2012 Jan $55 call - current bid/ask $8.80/ 9.70
-stop loss on HUM @ 48.75

10/23/10 Exit (sell) the 2011 Jan. $55 calls, bid @ 4.40 (+137%)
10/23/10 New stop loss $ 48.75
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: 139.67 change: -0.16

The nearly non-stop rally in IBM finally stopped, or at least paused. Just as we expected IBM saw some profit taking on its earnings report. The company beat estimates by seven cents with a profit of $2.82 a share. Revenues exceeded expectations and management issued bullish guidance. Overall it was a strong report and shares of IBM saw a "sell the news" move.

I remain long-term bullish on IBM but would much rather launch new positions on a pull back near the $133-132 zone. Our long-term target is $159.00. Our stop is at $129.50.

Sep 30, 2010 - entry price on IBM @ 136.00, option @ 3.90
symbol: IBM1122A140 2011 Jan $140 call - current bid/ask $4.50/ 4.60
-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 $8.35/ 8.55
-stop loss on IBM @ 129.50

10/18/10 IBM reported earnings
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

As we expected, INFY continued to show some volatility. The stock gapped down on Tuesday and broke short-term support near $68.00. I was expecting a dip toward the $65-64 zone. I'm still expecting a deeper correction and would probably target the $64-62 zone at this time (over the next few weeks). Wait for the bounce before launching positions near $64-62.

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 $10.50/12.50
-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: 78.55 change: +0.11

MCD beat earnings last week. Analysts were expect $1.24 a share and MCD delivered $1.28. Revenues also surpassed estimates. MCD surged to a new high of $79.48 intraday on Thursday. Shares look a little short-term overbought and Thursday's session looks like a top. I would expect a pull back toward support near $76.00. If $76 doesn't hold then look for support near $72.00. Please note I am raising our stop loss to $69.75. No new positions at this time.

Previous Comments:
We have already sold the 2011 calls for a gain. Our long-term target for the 2012 calls is $89.00. FYI: The P&F chart is now suggesting a $108 target.

June 29, 2010 - entry price on MCD @ 66.50, option @ 2.20
symbol: MCD 12A80.00 2012 Jan $80 call - current bid/ask $5.10/ 5.25
-stop loss on MCD @ 67.90

10/23/10 New stop @ 69.75
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:


Microsoft Corp. - MSFT - close: 25.38 change: -0.04 stop: 23.25

We could be facing a boring week for MSFT. It wouldn't surprise me to see the stock churn sideways in a narrow range until Thursday. MSFT reports earnings on Thursday night after the closing bell. Analysts expect a profit of 55 cents a share. Thus Friday could be exciting as the market reacts to MSFT's earnings data. If you're more aggressive then you may want to launch positions ahead of earnings. If you're more conservative then I suggest waiting until after the earnings report. Essentially we have plenty of time and can enter positions anywhere in the $24.00-26.00 zone. You may want to wait for a close over $26.00 to initiate positions.

Previous Comments:
The $28.00 level could be significant resistance as would the 2010 highs near $31.50. Long-term my upside target is $31.00. Our time frame is nine to twelve months. Stop loss at $23.25.

Oct 18, 2010 - entry price on MSFT @ 25.59, option @ 3.30
symbol: MSFT1221A25 2012 Jan $25 call - current bid/ask $2.98/ 3.05
-stop loss on MSFT @ 23.25

- or -

Oct 18, 2010 - entry price on MSFT @ 25.59, option @ 2.30
symbol: MSFT1319A30 2013 Jan $30 call - current bid/ask $2.16/ 2.27
-stop loss on MSFT @ 23.25

Chart of MSFT:


NVIDIA Corp. - NVDA - close: 11.80 change: +0.71

After several days of drifting sideways in a narrow range shares of NVDA finally showed some strength with a +6.4% move on Friday. There was renewed speculation that NVDA could be a takeover candidate. I'm not going to complain. However, I want to warn readers that this week we're going to hear earnings data from a number of semiconductor companies, which could have an impact on shares of NVDA.

If the unexpected occurs and NVDA is subject to a real takeover bid and shares gap open higher one day, we will want to exit all of our positions immediately.

I would prefer to launch new positions on a bounce from the rising 50-dma. With all the earnings news and potential volatility ahead of us this week we might see a new entry point soon.

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 $1.76/ 2.02
-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:


Transocean Ltd. - RIG - close: 65.24 change: +0.17

The rally in RIG has paused but that's been normal for the stock these past several weeks. RIG tends to surge higher and then consolidate sideways for several days. This time RIG is consolidating under technical resistance at its 200-dma. The stock should find support in the $62-60 zone, bolstered by the 50-dma, if the market does see a pull back. I am not suggesting new positions at this time. RIG is due to report earnings in early November. Please note our new stop loss at $54.85.

Previous Comments:
We have taken profits twice, once at $59.00, and then we exited the 2011 calls at $67.00. We still have the 2012 calls and we're aiming for $75.00 although I'm thinking about adjusting that exit toward $79.00 instead. Both the $75.00 and $80.00 levels should be overhead resistance. 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 @ 7.25
symbol: RIG 12A60.00 2012 Jan $60 call - current bid/ask $13.70/13.95
-stop loss on RIG @ 54.85

10/23/10 New stop @ 54.85
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: 14.32 change: -0.03

Earnings for STLD were out on Oct. 18th. The company missed Wall Street's 10-cent estimate by one cent. Revenues were stronger and came in better than expected. Reaction to the news was muted. Shares of STLD continue to drift sideways in a narrow range. I am tempted to exit early right here! However, we'll keep the play alive for another week, maybe two but I would keep your finger close to the exit trigger. More conservative traders may want to raise their stops toward $13.80 instead. I am not suggesting new positions at this time. Let's wait for a close over $15.50 and its 200-dma.

Previous comments:
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 $ 0.90/ 0.95
-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 $ 2.05/ 2.20
-stop loss on STLD @ 12.90

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

Chart of STLD:


TASER Intl. - TASR - close: 4.53 change: -0.01

TASR has continued to rally and the stock is up +25% from its October low. Earnings are this week and I suspect odds are very high TASR could see some profit taking on the news. I am suggesting we sell at least half of our position right now! On a pull back TASR could plunge to support near $4.00 in a heartbeat. Look for earnings on Oct. 27th before the opening bell. Analysts are expecting a loss of one cent per share. I am raising our stop loss to $3.75.

Previous Comments:
Our long-term target is $4.90.

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

10/23/10 Sell at least Half of our position: TASR @ 4.53 (+22.7%)
10/23/10 New Stop @ 3.75
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: 57.54 change: +0.91

Healthcare stocks tumbled on Tuesday with the rest of the market but they were quick to recover. WLP is clinging to gains above its 200-dma. Last week I suggested looking for a dip toward $56.00 as a new entry point and sure enough WLP provided one for us. The stock is still offering a potential entry point at current levels. Keep in mind that earnings are due on November 3rd and WLP could see additional volatility following the report.

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 $ 5.10/ 5.35
-stop loss on WLP @ 52.50

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

Chart of WLP:


CLOSED Plays

Millicom Intl. - MICC - close: 94.47 change: +1.11

Warning! MICC is starting to roll over. I warned readers last week that the action looked bearish. Shares of MICC have broken their four-month bullish channel and fallen under support near $95 and its 50-dma. On a short-term basis I would expect MICC to retreat toward support near $88.00-87.00 and its 200-dma. Longer-term the trend is still up. If we had longer-dated options I would be tempted to keep the play open and just endure the pull back but 2012 options were not available when we launched this play. Thus, I'm suggesting we exit now to preserve capital. Nimble traders can keep MICC on their watch list should the stock find support at its long-term trendline.

Exit Early!

May 6, 2010 - entry price on MICC @ 80.00, option @ 8.60
symbol: MICC 11A90.00 2011 Jan $90 call - current bid/ask $ 7.90/ 8.40
-stop loss on MICC @ 89.75

10/23/10 Exit early, bid @ 7.90 (-8.1%)
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:


PEPSICO Inc. - PEP - close: 65.01 change: -0.17

I'm giving up on our PEP play. Shares produced a failed rally two weeks ago and the oversold bounce has rolled over under resistance near $67.00. Now shares are flirting with support near $65.00. I am suggesting an early exit now to avoid a loss.

Exit early.

July 7th, 2009 - entry price on PEP @ 57.25, option @ $4.50(estimate)
symbol: VP-AL, 2011 $60.00 LEAP call - exit now, bid @ 5.35 (+18.8%)
-stop loss on PEP at $63.80

10/23/10 Exit early, option bid @ 5.35 (+18.8%).
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:


Watch

Media and Financials

by James Brown

Click here to email James Brown

Editor's Note:

There are plenty of candidates out there but I hesitate to load up on new ones when I'm expecting some sort of pull back following the midterm elections and the FOMC meeting in early November. Plus, we already have a pretty large watch list. However, I wanted to point out a few stocks that caught my eye.

I came very close to adding RTN as a bullish candidate. A dip toward $46.00 might be an entry point but earnings are due out later this week. We'll wait and see how the market reacts to earnings. BEXP is another stock that caught my eye. Shares look very bullish but I noticed spreads on the options were a little wide. I really like MCHP at current levels and was tempted to launch new positions on it, especially with Friday's breakout from the three-week consolidation. Yet MCHP still has resistance near $32 and there are a lot of semiconductor company earnings this week that could have a negative impact on MCHP. GD is another defense name that looks ready to breakout higher. I'm watching resistance near the $65.00 level. CTAS appears to be on the verge of breaking out from a very wide and very long-term consolidation pattern. A close over $28.50 for CTAS might be a bullish entry point. MYL caught my eye and again I was tempted to launch bullish positions with the new close over its 200-dma but earnings are this week so I'd rather wait and see how investors react to MYL's earnings news.


New Watch List Entries

DIS - Walt Disney Co

GS - Goldman Sachs


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

DO has graduated to the play list and ESRX has moved to the new plays section.


New Watch List Candidates:

Walt Disney Co. - DIS - close: 34.97 change: +0.29

If you believe we are not headed for a double dip recession then it's not a big jump to expect improvement in consumer spending, which should bode well for the likes of DIS. This stock has been consolidating sideways for almost six months now and looks poised to breakout higher soon. I'm suggesting we wait for DIS to close over $35.50 before launching long-term bullish positions. If triggered we'll use a stop loss at $33.40. The $38 level is overhead resistance but our first target is $39.75. FYI: DIS is due to report earnings on November 11th.

Company Info:
Since its founding in 1923, The Walt Disney Company and its affiliated companies have remained faithful to their commitment to produce unparalleled entertainment experiences based on the rich legacy of quality creative content and exceptional storytelling. The Walt Disney Company, together with its subsidiaries and affiliates, is a leading diversified international family entertainment and media enterprise with four business segments: media networks, parks and resorts, studio entertainment and consumer products. (source: company press release or website)

Breakout trigger: Wait for DIS to close over $35.50

BUY the 2012 January $40.00 call (DIS1221A40)

- or -

BUY the 2012 January $40.00 call (DIS1319A40)

Chart of DIS:


Goldman Sachs - GS - close: 157.76 change: -1.54

Investors remain nervous over the financials but GS is outperforming its peers. The worst seems to be behind it for this stock as GS hits new relative highs. On a short-term basis GS has produced a bearish reversal but that could offer us a new entry point. I am suggesting a trigger to buy call LEAPS at $152.50 and we'll use a stop loss at $147.45. If triggered our first target is $179.00.

Company Info:
Founded in 1869, Goldman Sachs remains one of the largest investment banking firms in the world.

Buy-the-Dip trigger: $152.50

BUY the 2011 April $170 calls (GS1116D170)

- or -

BUY the 2012 January $180 calls (GS1221A180)

Chart of GS:


Active Watch List Candidates:

Berkshire Hathaway - BRK.B - close: 83.34 change: +0.33

Shares of BRK.B lost three cents for the entire week as they continue to bounce around the $82-84 range. I see no change from my prior comments.

Prior Comments:
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. If BRK.B does breakout I'm suggesting we wait for the stock to close over $84.50 and then launch positions the next morning with a stop loss 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: 50.35 change: +0.92

Like most commodity-related stocks the rally in BVN paused on Tuesday in reaction to China's interest rate spike and the big bounce in the dollar. There hasn't been much follow through lower yet but we still don't want to chase it. It might take a couple of weeks but I'm suggesting we wait for a dip to $44.00. If triggered use a stop loss at $39.90. We want to keep positions small (half your normal trade size) to limit our risk. 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: 88.11 change: +2.10

CERN has spent the last three weeks consolidating sideways in the $84-88 zone but on Friday shares managed to close above this level (barely). I am almost tempted to chase it here. However, CERN is due to report earnings on October 28th, after the market's closing bell. The stock could see some profit taking on the news so we'll wait. Right now the plan is to launch bullish positions on a dip to $82.00 with a stop loss at $77.75. Our first long-term target is $92.50.

Buy-the-Dip trigger: $82.00

BUY the 2012 January $90 calls (CERN1221A90)

Chart of CERN:


Deere & Co - DE - close: 77.25 change: +0.20

DE is still inching higher and closed the week at new two-year highs. There is no change from my prior comments. We do not want to chase it. Given DE's summer and fall rally higher this is turning into a more aggressive trade. If we are triggered I'm suggesting we use small positions (only half your normal trade size) to limit our risk. Right now the plan is to wait for a dip to $70.00 to open bullish trades. If triggered use a stop at $65.95.

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

BUY the 2012 January $75.00 calls (DE1221A75)

Chart of DE:


Ford Moto Co. - F - close: 13.95 change: +0.14

Traders quickly bought the dip on Tuesday and Ford closed the weak near its six-month highs. I still don't want to chase this stock.

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

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

Chart of F:


Home Depot - HD - close: 31.48 change: -0.33

HD slipped toward $30.20 before bouncing sharply last week. Unfortunately that wasn't low enough to hit our trigger at $30.00. You might think this odd but I'm actually moving our trigger lower, down to $29.00. We are facing a week with two reports on home sales and two reports on home prices. I suspect these will disappoint again and home-related stocks could see some selling pressure. Our new trigger is $29.00 and our stop is unchanged at $27.90. Our long-term target is $33.90 and $36.00.

Buy-the-Dip trigger: $29.00

BUY the 2012 Jan $30.00 calls (HD1221A30)

Chart of HD:


Nike Inc. - NKE - close: 81.92 change: -0.19

NKE only lost eight cents for the week as traders quickly bought the dip on Tuesday. NKE remains overbought and due for a real correction. We don't want to chase it here. 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.

Buy-the-Dip trigger: $76.50

BUY the 2012 Jan $90 calls (NKE1221A90)

Chart of NKE:


Nokia Corp. - NOK - close: 11.06 change: -0.22

NOK saw a little excitement on Thursday as the market reacted to the company's earnings report. NOK delivered a profit of 0.14 euros per share versus the 0.09 euro estimate. Revenues also beat expectations and the stock spiked to $11.62 on Thursday but the 200-dma held its gains in check. I am still expecting a more significant pull back in the next three to four weeks. We'll keep our trigger at $10.25. More conservative traders could eye the 50-dma and wait for a dip to the moving average instead. If we are triggered I'm suggesting a stop loss at $9.45. Our first long-term target is $11.85.

Buy-the-Dip trigger: $10.25

BUY the 2012 January $10.00 calls (NOK1221A10)

Chart of NOK:


Stericycle - SRCL - close: 72.21 change: +0.00

This could be the week. I'm about ready to give up on SRCL as a candidate but the company reports earnings on October 27th, after the closing bell. Shares should see some profit taking on the news, which might provide an entry point. Wall Street is expecting a profit of 63 cents a share. I am suggesting a trigger to open bullish positions on a dip at $67.00 with a stop loss at $63.40. Right now I'm suggesting we only use small positions (half your normal trade size) to limit our risk. If triggered our long-term target is $79.00. FYI: The point and figure chart is bullish with an $89 target. (May options are the longest options currently available.)

Buy-the-Dip trigger: $67.00 (half position)

BUY the 2011 May $70 calls (SRCL1119E70)

Chart of SRCL:


Whiting Petroleum Corp. - WLL - close: 100.97 change: -0.51

It looks like the rally in WLL has finally paused. Shares are starting to roll over. I suspect WLL could see a hefty pull back as it reports earnings this week on October 27th, after the closing bell. Analysts are estimating a profit of $1.33 a share.

I am adjusting our entry point strategy and moving the trigger down to $94.00 with a stop loss at $88.90. Our first upside target is $109.00.

Buy-the-Dip trigger: $94.00

BUY the 2011 March $100 calls (WLL1119C100)

- or -

BUY the 2012 January $110 calls (WLL1221A110)

Chart of WLL:


Wynn Resorts - WYNN - close: 104.42 change: +1.18

Shares of WYNN continue to outperform. Traders bought the dip on Tuesday and WYNN rebounded to new relative highs. Earnings will be here quickly on November 2nd and WYNN could see a sell the news reaction so I'm willing to wait. The plan is to launch bullish positions 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).

I have adjusted our suggested options.

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

BUY the 2011 MAR $105 calls (WYNN1119C105)
- or -
BUY the 2012 Jan $110 calls (WYNN1221A110)

Chart of WYNN: