Option Investor
Newsletter

Daily Newsletter, Sunday, 12/26/2010

Table of Contents

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

Leaps Trader Commentary

Five Days Left in 2010

by James Brown

Click here to email James Brown

Retail sales have continued to improve. Consumers' urge to buy something in the stores before Christmas must have been infectious because traders continued to lift stocks higher. The major U.S. averages are setting at new two-year highs and we've only got five trading days left for the year 2010. The S&P 500 index is up five weeks in a row and stocks are arguably short-term overbought. They're likely to stay overbought as investors wait for the calendar to roll over before locking in gains and incurring any new taxes.

One of the most bullish bits of news last week was the report on retail sales, which showed an improvement of +5.5% last weekend compared to a year ago. Store traffic is up. Sales are up. Consumers must be feeling a lot more optimistic in spite of our 10% unemployment. You've heard it a hundred times. Many believe that consumer spending powers 70% of the U.S. economy. Any news item that talks about improvement in retail sales should be positive for the stock market.

The U.S. dollar has been a major headline for the last couple of years. This is unlikely to change in 2011. While the Federal Reserve's QE2 program should keep the dollar weak the currency is still competing against the yen and euro, which have their own problems. Dollar weakness is normally bullish for commodities and vice versa. The bounce in the dollar this past week should have been bearish for commodities. Yet crude oil has rallied over $90 a barrel and people are talking about oil at $100 again. This news is having a negative impact on the airline stocks.

We have been warning readers for weeks that China might raise its interest rates. Investors have been worried that if China raises rates the slowdown in its economy will ripple throughout the entire globe and what if they go too far? This Saturday China did raise rates by 25 basis points to 5.81%. The question now is how will the world markets respond? Traders have been expecting this for so long now should anyone really be surprised? China needs to do something to combat the country's rising inflation. Stocks could see a move lower on this move come Monday but I would expect any sell-off to be short lived. Keep an eye on the Asian and European markets Monday morning to get a feel for what the U.S. markets might do.

Looking ahead at the economic calendar this week we do have a few noteworthy events but I'm not sure anyone will be paying attention. Volume is very light during the last week of the year, but then again sometimes super light volume can allow big moves to occur. This Tuesday we'll hear the latest Consumer Confidence reading for December. Plus the 20-city Case-Shiller home price index. Thursday will bring the weekly initial jobless claims and economists are expecting a drop toward 403,000 new unemployment claims. Thursday will also see the Chicago PMI data for December and pending home sales figures from November.

Looking at the major averages you could easily argue that stocks are overbought. The S&P 500 has delivered a very impressive December move. There really isn't a lot of significant overhead resistance until the 1300 area. The rally will probably just run out of gas instead of reversing at any clearly defined obstacle. On a short-term basis the S&P 500 should see some support near 1245 and the 1225 areas. When we actually see a correction the move will be a lot more exciting. A -5% pull back from current levels would be a dip toward 1,193. A -10% correction would be a drop toward the 1,130 level, which I consider to be pretty unlikely. I would focus on support near 1200 or the 1175 area. The time frame for any correction is the tricky part. More on that in a minute.

Daily chart of the S&P 500 index:

Weekly chart of the S&P 500 index:

Not much has changed for the NASDAQ Composite. The index is nearing new three-year highs. It remains short-term overbought but there isn't a lot of overhead resistance until it hits the 2725 area. I would expect some resistance near the 2700 level just because traders like to focus on big round numbers. When stocks correct, and they will, it could be painful in the NASDAQ. A normal -5% correction from current levels would be a dip to 2531. A -10% correction would be a decline near the 2400 area, which I'm certainly not expecting. Technically the NASDAQ composite has found support near its rising 40-dma back in November so keep an eye on it as an extra indicator to watch.

Daily chart of the NASDAQ Composite index:

Readers know I like to keep an eye on the SOX semiconductor index. Currently it remains inside its narrow bullish channel. A breakdown could be an early warning sign for the tech-heavy NASDAQ.

Weekly chart of the SOX semiconductor index:

Small cap stocks continue to perform very well. The Russell 2000 index ($RUT) has advanced through several layers of key resistance. The next level of potential resistance is the 800 mark. On a short-term basis broken resistance at 780 is new support. Yet a normal -5% correction would see a drop toward the 750 area. A -5% pull back from the 800 level would be the 760 level. Odds are the $RUT will see more volatility than its big gap peers. We may want to watch for a -7% or -10% correction in early 2011.

Daily chart of the Russell 2000 index:

Weekly chart of the Russell 2000 index:

Big picture, nothing has changed from my comments a week ago. Stocks are trending higher. Unless some news event occurs this trend should continue. The rise in Chinese interest rates could be an excuse to sell but then when stocks want to go down they always find an excuse. Right now it seems that investors are just happy to sit on their positions until the year ends. When January arrives it will bring with it a new round of inflows into funds who will put that money to work in stocks. Thus the first few trading days of January should have a bullish bias. It's the middle and later half of January I'm worried about.

Earlier I said the tricky party was timing for the correction. January provides a new year for investors to sell and worry about the tax implications a year down the road. Plus, the fourth quarter earnings season will being in mid January and earnings always provide a convenient opportunity to sell the news and lock in gains. Analysts will be keenly focused on corporate America's guidance for 2011. If management disappoints then stocks will naturally tend to fall as people readjust their expectations and valuations. I am expecting a pull back in the middle to second half of January. The correction could last a good two or three weeks but traders might start jumping in once we see a -5% decline.

On a positive note the bond market bubble appears to have burst. With the Fed focused on their QE2 program it should keep bonds unattractive and drive cash into the stock market. At the same time the QE2 program should be bearish for the dollar, which is bullish for commodities.

Our outlook for 2011 is bullish but we want to wait for a correction in January or February before launching any new bullish positions of significant size.

- James


Portfolio

Portfolio Update

by James Brown

Click here to email James Brown


Current Portfolio


Portfolio Comments:

The stock market has continued to melt higher thanks in part to strength in the financial sector and commodity-related names. I am suggesting readers take profits early in INFY and sell part of our position now. Our relatively new play in JAS has already been closed with the gap open higher on Thursday, Dec. 23rd.

New stop losses for ACI, COP, DE, INFY, ODFL, WYNN

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 play or option position exited or closed this week.



New Plays

No Mood To Sell

by James Brown

Click here to email James Brown

Editor's Note:

No surprises so far. The market has continued to drift higher just as we expected. Investors are not in a mood to sell before the year ends. Then January will hit and funds will see new inflows to start 2011. The next couple of weeks should have a bullish bias. However, once we move deeper into January I'm expecting some profit taking. The market could see a decent correction (maybe -10%). That's where we will want to consider launching our new long-term bullish positions as we look ahead into 2011 and beyond. Given our expectation for a pull back in mid January we're not adding anything new tonight although I did add three new watch list candidates. Meanwhile USG did jump from our watch list to our play list last week.


Play Updates

JAS Soars On Buyout News

by James Brown

Click here to email James Brown


Closed Plays


JAS has been closed.


Play Updates


Arch Coal Inc. - ACI - close: 34.45

12/25 update: ACI is performing as expected. Shares broke out higher from their sideways consolidation. The stock hit new two-year highs. I am raising our stop loss to $28.75. More conservative traders may want to raise theirs even higher. Bear in mind I would look for ACI to find support in the $31-30 zone. Our long-term target is $39.75. More aggressive traders could aim a lot higher, especially if you're holding the 2013 calls.

- Current Positions -
Nov 22, 2010 - entry price on ACI @ 30.15, option @ 3.90
symbol: ACI1221A35 2012 JAN $35 call - current bid/ask $ 5.60/ 5.70

- or -

Nov 22, 2010 - entry price on ACI @ 30.15, option @ 5.15
symbol: ACI1319A35 2013 JAN $35 call - current bid/ask $ 7.80/ 8.10

12/25/10 New stop loss @ 28.75
11/22/10 Play opened. ACI @ $30.15

Current Target: $39.75
Current Stop loss: 28.75
Play Entered on: 11/22/10
Originally listed in the New Plays 11/20/10


Akamai Technology - AKAM - close: 48.10

12/25 update: On Tuesday AKAM lost a patent claim against Limelight. Yet the stock didn't decline on this news, at least not on Tuesday. Overall the action last week was bearish with AKAM's rebound from the 100-dma failing. Shares have now broken their four-month trend of higher lows. This is very short-term bearish. Conservative traders will want to consider an early exit now to cut their losses early. I am anticipating a correction toward the 200-dma in the $45-44 area. No new positions at this time.

Previous Comments:
We have already taken profits on our 2011 calls. That leaves the 2012 calls. FYI: AKAM has seen some takeover chatter in the last several months.

- Current Positions -
Oct 06, 2010 - entry price on AKAM @ 45.50, option @ 7.50
symbol: AKAM1221A50 2012 JAN $50 call - current bid/ask $ 7.85/ 8.10

- Third Position -

Dec. 20, 2010 - entry price on AKAM @ 50.49, option @ 5.40
symbol: AKAM1221A60 2012 JAN $60 call - current bid/ask $ 4.45/ 4.65

12/25/10 AKAM is breaking down. Cautious traders exit early.
12/18/10 New Entry point, AKAM @ $50.87, 2012 Jan. $60 call ask @ $6.35
11/27/10 New stop @ 43.75
10/30/10 Sell the 2011 Jan. calls, option bid @ 5.10 (+78.9%)
10/06/10 Play triggered when AKAM hit $45.50

Chart of AKAM:

Current Target: $69.00
Current Stop loss: 43.75
Play Entered on: 10/06/10
Originally listed on the Watch List 10/02/10


Baidu, Inc. (Baidu.com) - BIDU - close: 100.16

12/25 update: Whew! It was a pretty ugly week for BIDU with shares spiking under technical support at its 100-dma and under the $95.00 mark. The stock dropped to $94.33 on Dec. 20th. That happened to be the same day Facebook founder Mark Zuckerberg was seen touring BIDU's headquarters. Facebook is currently a blocked website in China and Zuckerberg would like to launch his product to the 1.6 billion person Chinese market. I fail to see why this might push shares of BIDU lower. Fortunately the weakness quickly reversed. BIDU is hovering near round-number support/resistance at $100. The long-term trend is still up. I have been warning readers for weeks that a correction could pull BIDU down toward the $95 area. We will leave our stop loss at $94.00. I am not suggesting new bullish positions at this time.

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.

- Current Positions -
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 $20.40/20.70

12/20/10 BIDU spikes down to $94.33 (our stop is $94.00)
10/30/10 Adjusted exit target to $129.00.
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

Current Target: $129.00
Current Stop loss: 94.00
Play Entered on: 08/02/10
Originally listed on the Watch List 07/31/10


Berkshire Hathaway - BRK.B - close: 79.86

12/25 update: Nothing has changed for us with BRK.B. This stock is still consolidating sideways with a bearish trend of lower highs building over the last few weeks. This would suggest BRK.B is poised to breakdown. I am not suggesting new bullish positions at this time. We only have four weeks left on our 2011 January calls.

- Current Positions -
Oct 29, 2010 - entry price on BRK.B @ 79.00, option @ 1.25
symbol: BRKB1122A85 2011 JAN $85 call - current bid/ask $ 0.03/ 0.06

- or -

Oct 29, 2010 - entry price on BRK.B @ 79.00, option @ 5.00
symbol: BRKB1221A90 2012 JAN $90 call - current bid/ask $ 3.30/ 3.45

12/11/10 New stop loss @ 77.75.
11/20/10 New entry point on bounce from 200-dma
11/20/10 New stop @ 75.75
10/29/10 Play triggered on dip at $79.00.

Current Target: $ 99.00
Current Stop loss: 77.75
Play Entered on: 10/29/10
Originally listed on the Watch List 09/11/10


ConocoPhillips - COP - close: 67.08

12/25 update: The oil sector has continued to rally and COP marched to new two-year highs last week. The stock is now just a couple of dollars away from our target at $69.00. I am raising our stop loss to $59.75. Cautious traders might want to raise their stops closer to the 50-dma. COP is short-term overbought and due for some profit taking. I am not suggesting new bullish positions at this time.

Prior Comments:
We have already taken profits on the 2011 calls. That leaves the 2012 call position and our long-term target is $69.00.

- Current Positions -
May 20, 2010 - entry price on COP @ 51.00, option @ 4.75
symbol: COP 11A55.00 2012 JAN $60 call - current bid/ask $9.80/9.95

12/25/10 New stop loss @ 59.75
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!

Current Target: $ 69.00
Current Stop loss: 59.75
Play Entered on: 05/20/10
Originally listed on the Watch List 05/08/10


Deere & Co - DE - close: 83.58

12/25 update: After a weeklong consolidation sideways in mid December shares of DE broke out to another set of new two-year highs. The stock looks a little bit extended here and if DE does see a correction I would watch for short-term support near $80.00 and its rising 50-dma. We will inch up our stop loss to $74.80. Cautious traders may want to move their stop closer to $78.00 instead. Our first target is $88.00. I am not suggesting new bullish positions at this time.

- Current (very small) Positions -
Nov 26, 2010 - entry price on DE @ 75.50, option @ 4.75
symbol: DE1221A90 2012 JAN $90 call - current bid/ask $7.00/7.10

12/25/10 New stop loss @ 74.80
12/04/10 DE offered another entry point with the move over $77.50
11/26/10 DE hit our trigger @ 75.50

Current Target: $ 88.00, 94.00
Current Stop loss: 74.80
Play Entered on: 11/26/10
Originally listed on the Watch List --/--/--


Walt Disney Co. - DIS - close: 37.70

12/25 update: DIS is still consolidating sideways under resistance at $38.00. However, shares are doing it with a bullish trend of higher lows, which would suggest a breakout higher eventually. On a short-term basis I wouldn't be surprised to see another dip toward $37.00. Readers may want to wait for a close over resistance at $38.00 before considering new bullish positions. Bear in mind my editor's note and market wrap commentary this weekend (we could see a correction in January). Cautious traders might want to move their stop loss closer to $35.00.

- Current Positions -
Oct 27, 2010 - entry price on DIS @ 35.60, option @ 2.23
symbol: DIS1221A40 2012 JAN $40 call - current bid/ask $ 2.87/ 2.91

- or -

Oct 27, 2010 - entry price on DIS @ 35.60, option @ 3.63
symbol: DIS1319A40 2013 JAN $40 call - current bid/ask $ 4.30/ 4.65

10/27/10 Play opened, DIS opened @ $35.60

Current Target(s): $42.00
Current Stop loss: 32.75
Play Entered on: 10/27/10
Originally listed on the Watch List 10/24/10


EMC Corp. - EMC - close: 23.02

12/25 update: It wasn't much but EMC eked out another gain. The stock has been consolidating sideways the past few days near the $23.00 mark. If the market sees a correction I would expect EMC to find support near $22 and in the $21-20 zone. I am not suggesting new bullish positions at this time. We might want to consider raising our long-term exit target since we have a year on our 2012 calls.

- Current Positions -
May 6, 2010 - entry price on EMC @ 18.25, option @ 2.50
symbol: EMC 12A20.00 2012 Jan $20 call - current bid/ask $4.40/4.55

12/13/10 New stop loss @ 19.95
12/13/10 Target hit @ 22.50, Exit 2011 Jan. $20 calls @ $2.51 (+79.2%)
12/13/10 Target hit @ 22.50, Sell half 2012 $20 calls @ $4.15 (+66%)
12/11/10 New stop loss @ 19.49
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!

Current Target(s): $22.50 & 24.75
Current Stop loss: 19.95
Play Entered on: 05/06/10
Originally listed on the Watch List 03/20/10


Express Scipts - ESRX - close: 54.26

12/25 update: Caution! The action this past week in ESRX could be a bearish reversal. Shares rallied to a new high only to reverse. On the weekly chart this move has created a bearish engulfing candlestick (reversal) pattern. Normally these patterns need to see confirmation but we need to be aware of it. If ESRX were to see a correction I'm watching for support in the $52-50 zone. No new positions at this time. Currently our exit target is $59.50.

- Current Positions -
Oct 25, 2010 - entry price on ESRX @ 49.30, option @ 4.85
symbol: ESRX1221A55 2012 Jan $55 call - current bid/ask $6.15/6.30

- or -

Oct 25, 2010 - entry price on ESRX @ 49.30, option @ 7.10
symbol: ESRX1319A55 2013 Jan $55 call - current bid/ask $8.95/ 9.60

12/18/10 new stop @ 49.75
12/04/10 new stop @ 47.90
11/06/10 New stop @ 46.90
10/25/10 Trade is opened. ESRX opens @ $49.30

Current Target(s): $59.50
Current Stop loss: 49.75
Play Entered on: 10/25/10
Originally listed on the Watch List 10/16/10


SPDR Gold ETF - GLD - close: 134.66

12/25 update: The last couple of years have been big winners for gold and the GLD gold ETF. It looks like the U.S. dollar's bounce could be losing steam and a decline in the dollar should be bullish for gold prices. However, I am still concerned that the action in the GLD could be forming a top. If the GLD does see a correction we're looking at a potential drop toward the bottom of its long-term bullish channel near $125. Another $10 drop would be very painful for our options. While a potential correction does loom in front of us my long-term outlook for gold remains bullish. I'm not suggesting new positions at this time.

FYI: Goldman Sachs is forecasting gold to hit $1,700 an ounce in 2011. We might want to reconsider raising our final exit target. Currently the plan is to exit our calls on the GLD at $149.00.

- Current Positions -
Aug 6, 2010 - entry price on GLD @ 118.00, option @ 10.75
symbol: GLD1221A130 2012 Jan $130 call - current bid/ask $15.10/15.50

11/09/10 Target hit - GLD opened at $138.70, 2011 Mar. Call opened @ $20.00 (+159%)
11/06/10 new stop @ 123.40
10/30/10 New stop @ 121.00. Readers may want to exit ahead of FOMC meeting
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

Chart of GLD:

Current Target(s): $149.00
Current Stop loss: 123.40
Play Entered on: 08/06/10
Originally listed on the Watch List 06/05/10


Goldman Sachs - GS - close: 167.60

12/25 update: GS rallied back toward resistance in the $170-171 area (the high last week was 169.68). I wouldn't be surprised to see another dip back toward the $165-164 zone. Yet if the market sees a correction in January then GS might correct down toward the $156-155 area. We don't want to launch new positions at this time. Keep an eye on the banking indices. Strength in the financials will continue to bode well for shares of GS. FYI: GS is due to report earnings on January 19th.

- Current Positions -
Nov 22, 2010 - entry price on GS @ 160.75, option @ 4.25
symbol: GS1116D180 2011 Apr $180 call - current bid/ask $ 4.55/ 4.65

- or -

Nov 22, 2010 - entry price on GS @ 160.75, option @ 9.40
symbol: GS1221D190 2012 Jan $190 call - current bid/ask $10.20/10.50

12/11/10 New stop loss @ 152.75
11/22/10 GS hit our trigger @ $160.75

Current Target(s): $179.75, 199.50
Current Stop loss: 152.75
Play Entered on: 11/22/10
Originally listed on the Watch List 10/24/10


Humana Inc. - HUM - close: 55.43

12/25 update: HUM spent the holiday shortened week consolidating sideways with a trend of higher lows. Unfortunately this looks like a bear-flag pattern. Broken support near $56 remains short-term overhead resistance. There is no change from my prior comments. I would still expect significant support in the $52-50 zone. I am not suggesting new bullish positions at this time.

Previous Comments:
We have already sold (exited) our 2011 calls for a profit.

- Current Positions -
Sep 17, 2010 - entry price on HUM @ 50.50, option @ 6.40
symbol: HUM1221A55 2012 Jan $55 call - current bid/ask $ 6.90/ 7.40

12/11/10 New stop loss @ 49.75
11/20/10 Entry point on the dip.
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.

Current Target(s): $69.00
Current Stop loss: 49.75
Play Entered on: 09/17/10
Originally listed on the Watch List 09/04/10


Intl.Business Machines - IBM - close: 145.89

12/25 update: The last four weeks have largely been forgettable for IBM. However, this sideways consolidation should be a very strong base for what should be IBM's next leg higher. The trend of higher lows has narrowed and IBM looks poised to spring higher at any moment. If we can see a close over the $147.50 level we'll raise our stop loss. Readers looking for a new entry point might want to consider buying calls on a move past $147.

Prior Comments:
We have already exited the 2011 calls for a gain.

- Current Positions -
Sep 30, 2010 - entry price on IBM @ 136.00, option @ 7.80
symbol: IBM1221A150 2012 Jan $150 call - current bid/ask $ 9.80/10.00

10/29/10 IBM hit $144, our target to exit the 2011 calls (+71.8%)
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

Current Target(s): $159.00
Current Stop loss: 129.50
Play Entered on: 09/30/10
Originally listed on the Watch List 09/25/10


Infosys Technologies - INFY - close: 74.85

12/25 update: Wow! The rally in INFY has been impressive. This stock has soared to levels not seen since early 2000. Share are nearing potential resistance and with the big December rally I would be very, very tempted to exit right here. I'm suggesting we sell half of our 2012 position now. We will raise our stop loss to 66.75 on the remaining position. I am not suggesting new positions at this time.

Previous Comments:
We have already sold the 2011 calls for a profit. Our remaining positions are any 2012 calls. Our long-term target is $79.00.

- Current Positions -
July 1, 2010 - entry price on INFY @ 59.00, option @ 8.20
symbol: INFY 12A65.00 2012 Jan $65 call - current bid/ask $14.20/16.00

12/25/10 Take Profits, sell half of 2012 calls, option @ 14.20 (+73.1%)
12/25/10 New stop loss @ 66.75
12/18/10 New stop loss @ 63.90
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:

Current Target(s): $79.00
Current Stop loss: 66.75
Play Entered on: 07/01/10
Originally listed on the Watch List 06/26/10


US Airways Group, Inc. - LCC - close: 9.91

12/25 update: Warning! The action in LCC is very worrisome. Actually most of the airline stocks are rolling over. The most likely culprit is rising oil prices. Shares of LCC have broken down under what should have been stronger support near $10.00. If this trend continues we could see LCC hit our stop loss at $9.49 soon. I am not suggesting new bullish positions at this time. More conservative traders may want to cut their losses early.

- Current Positions -
Dec 3, 2010 - entry price on LCC @ 11.00, option @ 1.95
symbol: LCC1221A12.5 2012 Jan $12.50 call - current bid/ask $ 1.22/ 1.29

12/25/10 Readers may want to cut their losses early
12/03/10 Play triggered @ $11.00

Current Target(s): $14.90
Current Stop loss: 9.49
Play Entered on: 12/03/10
Originally listed on the Watch List: 11/27/10


L-3 Communications - LLL - close: 71.66

12/25 update: It looks like we can breathe a sigh of relief here. Two weeks ago LLL was on the verge of breaking down. In just the last few days the stock has been to rebound and broken higher through resistance near $71.00 and some of its key moving averages. That doesn't mean we're out of the woods here and I am hesitant to launch new positions. LLL still has overhead resistance near $74.00. More conservative traders could raise their stops toward the $69 level.

- Current Positions -
Nov 11, 2010 - entry price on LLL @ 71.87, option @ 5.80
symbol: LLL1221A75 2012 Jan $75 call - current bid/ask $ 4.70/ 5.00

11/11/10 Play triggered with LLL's gap open @ 71.87

Current Target(s): $79.50, 89.00
Current Stop loss: 67.75
Play Entered on: 11/11/10
Originally listed on the Watch List 11/06/10


McDonald's Corp. - MCD - close: 76.96

12/25 update: Is the correction in MCD already over? Shares have found some support near the $77 area. Yet I doubt the correction is done. Look for a failed rally near $78 and then a move toward the $74 area and possibly the rising 200-dma. The long-term trend remains higher. I am not suggesting new positions at this time.
FYI: One of these days MCD might announce another stock split. The stock's last split was 2:1 back in March 1999 around the $80 zone.

Previous Comments:
We have already sold the 2011 calls for a gain. Our long-term target for the 2012 calls is $89.00.

- Current Positions -
June 29, 2010 - entry price on MCD @ 66.50, option @ 2.20
symbol: MCD 12A80.00 2012 Jan $80 call - current bid/ask $3.60/ 3.70

11/06/10 New stop @ 71.90
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%)

Current Target(s): $89.00
Current Stop loss: 71.90
Play Entered on: 06/29/10
Originally listed on the Watch List 06/12/10


Microsoft Corp. - MSFT - close: 28.30

12/25 update: The rally in MSFT is now four weeks old. Shares are growing more and more overbought. The farther you stretch this rubber band the harder it snaps back. Don't be surprised to see a correction back toward $26 - of course a move that big could take weeks. While we're long-term bullish on MSFT I am not suggesting new positions at this time.

- Current Positions -
Oct 18, 2010 - entry price on MSFT @ 25.59, option @ 3.30
symbol: MSFT1221A25 2012 Jan $25 call - current bid/ask $4.65/ 4.75

- or -

Oct 18, 2010 - entry price on MSFT @ 25.59, option @ 2.30
symbol: MSFT1319A30 2013 Jan $30 call - current bid/ask $3.30/ 3.35

12/11/10 New stop loss @ 24.40
11/20/10 Another Entry Point on the dip toward the 50-dma
10/28/10 MSFT delivers stronger than expected earnings.

Current Target(s): $31.00
Current Stop loss: 24.40
Play Entered on: 10/18/10
Originally listed in New Plays on 10/16/10


Nike Inc. - NKE - close: 86.05

12/25 update: Optimism in NKE ahead of its earnings report last week pushed the stock to a new high near $92.50. The stock was extremely overbought with its rally from $70 and shares naturally saw some profit taking as investors decided to sell the news. I warned readers that cautious traders would want to exit ahead of the earnings report. We have a long-term time frame but I have to admit the action last week looks like a big bearish reversal. NKE is nearing support near $85-84 and its rising 50-dma. I am not suggesting new long-term bullish positions at this time. Our final target is $98.00.

Previous Comments:
We wanted to keep our initial position size small to limit our risk.

- Current Positions -
Nov 15, 2010 - entry price on NKE @ 82.91, option @ 5.40
symbol: NKE1221A90 2012 Jan $90 call - current bid/ask $6.25/ 6.45

12/18/10 New stop loss @ 83.90
11/15/10 Play opened on Monday morning, NKE @ 82.91

Current Target(s): $98.00
Current Stop loss: 79.75
Play Entered on: 11/15/10
Originally listed in New Plays on 11/13/10


NVIDIA Corp. - NVDA - close: 14.92

12/25 update: The SOX semiconductor index consolidated sideways last week and remains inside its bullish channel. Meanwhile, NVDA bounced back toward its recent highs and is retesting the $15 area. The trend is up but NVDA still looks overbought. I am not suggesting new long-term bullish positions at this time. If stocks correct, look for support near $13.75.

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.

- Current Positions -
Sep 13, 2010 - entry price on NVDA @ 10.75, option @ 1.69
symbol: NVDA1221A12.5 2012 Jan $12.50 call - current bid/ask $3.90/ 4.00

12/11/10 Decision - Sell now with option up +133% or Stay the course.
12/11/10 New long-term target at $17.75
12/04/10 New stop loss @ 12.25
11/20/10 New target at $15.75
11/20/10 new stop @ 11.40
11/13/10 New stop @ 10.89
11/06/10 New stop @ 10.40
11/04/10 Target hit @ 12.50, take profits: 2012 calls @ $2.40 (+42.0%)
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

Current Target(s): $12.50 & 17.75
Current Stop loss: 12.25
Play Entered on: 09/13/10
Originally listed in New Plays on 08/28/10


Old Dominion Freight Line Inc. - ODFL - close: 31.69

12/25 update: ODFL tagged new all-time highs after breaking out on Tuesday last week. If the market sees a correction look for ODFL to find support near $30 and near its 50-dma (approaching $29). Please note that I am raising our stop loss to $26.75. I am not suggesting new long-term bullish positions at current levels.

FYI: The spreads in the April options are ridiculous. Hopefully these will narrow as we get closer to expiration.

- Current Positions -
Nov 22, 2010 - entry price on ODFL @ 28.42, option @ 1.95
symbol: ODFL1116D30 2011 APR $30 call - current bid/ask $ 2.90/ 3.50

12/25/10 New stop loss @ 26.75
11/22/10 ODFL opens at $28.42

Current Target: $34.75
Current Stop loss: 26.75
Play Entered on: 11/22/10
Originally listed in the New Plays 11/20/10


Transocean Ltd. - RIG - close: 69.32

12/25 update: RIG is virtually unchanged for the week. I'm a little surprised that the oil service stocks aren't showing more strength considering the rise in oil prices. Traders did buy the dip again in RIG near $68.50. If this stock sees a bigger correction I would expect a decline into the $65-62.50 zone. For now the trend of higher lows is still intact but I'm not suggesting new long-term bullish positions at this time.

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 $78.50.

- Current Positions -
Jun 09, 2010 - entry price on RIG @ 43.50, option @ 7.25
symbol: RIG 12A60.00 2012 Jan $60 call - current bid/ask $14.90/15.15

12/11/10 New stop @ 61.90
12/04/10 New stop @ 59.90
11/13/10 new target @ 78.50
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%)

Current Target(s): $78.50
Current Stop loss: 61.90
Play Entered on: 06/09/10
Originally listed on the Watch List 06/05/10


U S G Corp. - USG - close: 16.16

12/25 update: USG has jumped from our watch list to our play list. Investor optimism is improving for the real estate sector and shares of USG, a construction material supplier, broke out past resistance near its 200-dma and the $15.00 level. We had a trigger to buy calls at $15.25. That trigger was hit on Dec. 20th. USG has a high amount of short interest and a potential squeeze (or just normal short covering) pushed USG to a new multi-month high of $16.75 last week. If you're looking for a new entry point I would wait for a dip back into the $15.25-15.00 zone, which should be new support.

- Current Positions -
Dec 20, 2010 - entry price on USG @ 15.25, option @ 1.50*
symbol: USG1221A20 2012 Jan $20 call - current bid/ask $ 1.80/ 2.00

- or -

Dec 20, 2010 - entry price on USG @ 15.25, option @ 3.00
symbol: USG1319A20 2013 Jan $20 call - current bid/ask $ 3.00/ 3.60

12/20/10 Play triggered at $15.25
*entry price is an estimate.

Chart of USG:

Current Target(s): $19.90, 24.75
Current Stop loss: 12.75
Play Entered on: 12/20/10
Originally listed on the Watch List: 12/11/10


WellPoint Inc. - WLP - close: 57.44

12/25 update: Investors bought the dip in WLP again and the stock is bouncing but shares still have a bearish trend of lower highs. WLP appears to be under performing healthcare sector. I remain cautious and will repeat my previous comments. If WLP closes under $55.00 readers will want to seriously consider an early exit. I am raising our stop loss to $53.75. I am not suggesting new positions at this time.

- Current Positions -
Oct 14th, 2010 - entry price on WLP @ 57.75, option @ $5.25
symbol: WLP1221A65 2012 Jan $65 call - current bid/ask $ 4.15/ 4.35

12/18/10 New stop loss @ 53.75.
11/20/10 Another entry point on the bounce from the 200-dma
10/14/10 Play Triggered when WLP hit $57.75, option @ $5.25

Current Target(s): $69.75
Current Stop loss: 53.75
Play Entered on: 10/14/10
Originally listed on the Watch List 10/11/10


Wynn Resorts - WYNN - close: 103.00

12/25 update: WYNN's bounce from two weeks ago is rolling over. We should expect shares to retest the $100 level. Odds are if the market corrects we could see WYNN dip toward support near $95.00. I want to avoid seeing this play get stopped out on an intraday spike so I'm adjusting our stop loss from $94.75 to $94.00. No new positions at this time. We'll wait for a bounce near $95.

Previous Comments:
Keep your positions small. This is an aggressive trade.

OPTION STRIKES: Note, given the $8.00 dividend the option strikes have been adjusted. The $110 calls are now the $102 calls. The $120 calls are now $112 calls.

- Current Positions -
Nov 19th, 2010 - entry price on WYNN @ 101.33, option @ $10.50
symbol: WYNN1119C102 2011 MAR $102 call - current bid/ask $ 8.40/ 8.55

- or -

Nov 19th, 2010 - entry price on WYNN @ 101.33, option @ $16.05
symbol: WYNN1221A112 2012 JAN $112 call - current bid/ask $14.80/15.05

11/19/10 Play opened on gap down at $101.33

Current Target(s): $119.00
Current Stop loss: 94.00
Play Entered on: 11/19/10
Originally listed on the Watch List 05/15/10


CLOSED Plays

Jo-Ann Stores, Inc. - JAS - close: 60.19

12/25 update: If you haven't already it's time to take profits. Shares of JAS gapped open higher on Thursday, December 23rd at $60.77. Our target to exit was $54.50 so our play was closed immediately. The stock's gap open higher was based on news that Leonard Green & Partners has offered to take JAS private in a $1.6 billion deal valuing JAS at $61 a share. Our option opened at $11.40 (+204%).

- Current Positions -
Dec 2, 2010 - entry price on JAS @ 44.50, option @ 3.75
symbol: JAS1116G50 2011 Jul $50 call - exit @ $11.40 (+204%)

12/23/10 JAS gaps above our exit target, play closed. option @ 11.40 (+204%)
12/02/10 Play triggered @ $44.50

Chart of JAS:

Current Target(s): $54.50
Current Stop loss: 41.45
Play Entered on: 12/02/10
Originally listed on the Watch List: 11/27/10


Watch

Metals, Commodities, and Banks

by James Brown

Click here to email James Brown

Editor's Note:

The stock market is still drifting higher. This trend might continue for another week or two. Then in mid January, around the onset of earnings season, there is a good chance the market will correct. That's when we will probably see our next significant entry point for long-term bullish positions. With this in mind, I'm adding new candidates with the expectation we'll see a correction in January and I've adjusted some of the entry points on some of our current candidates below.

Last week I listed about fifteen of the stocks on my radar. You can view that list here.

-James

P.S. I was going to add RMD as a bullish candidate to buy calls on the dip at $34.00 but the spreads on the options are just way too wide.


New Watch List Entries

AKS - AK Steel holding

CMP - Compass Minerals

NYB - New York Community Bancorp


Active Watch List Candidates

BVN - Compania de Minas Buenaventura

GME - GameStop Corp

MAT - Mattel Inc.

TGT - Target Corp

UPS - United Parcel Service

X - U.S. Steel Corp


Dropped Watch List Entries

F, SBUX, and WLL were removed from the watch list. USG graduated to our play list.


New Watch List Candidates:

AK Steel Holding - AKS - close: 16.56

Company Info

If the global economy continue to recover then demand for steel should continue to improve. This past month shares of AKS broke out from a major consolidation phase and past significant resistance. We want to buy call LEAPS on a correction back to the $15.00 level, which should be new support. If triggered we'll use a stop loss at $12.75. FYI: The Point & Figure chart for AKS shows a bullish breakout over resistance and a $25 long-term target.

Buy-the-Dip trigger: $15.00

BUY the 2012 January $15.00 calls (AKS1221A15)

- or -

BUY the 2013 January $20.00 calls (AKS1319A20)

Chart of AKS:

Originally listed on the Watch List: 12/25/10


Compass Minerals - CMP - close: 88.70

Company Info

The outlook for commodities remains bullish. Growing demand and a weaker U.S. dollar should both contribute to higher prices. Fertilizer has been a hot industry. CMP has managed to raise prices on some of its products recently, which suggests confidence by management. The stock has broken out to new highs, past major resistance in the $82.50 area. I am suggesting we wait for a correction to $82.75 as our entry point to buy calls. If triggered we'll use a stop loss at $77.95 although we might be able to get away with a stop closer to $80.00. Unfortunately, CMP does not have any LEAPS available and the longest dated options are 2011 Junes.

Buy-the-Dip trigger: $82.75

BUY the 2011 June $90.00 calls (CMP1118F90)

Chart of CMP:

Originally listed on the Watch List: 12/25/10


New York Community Bancorp - NYB - close: 19.30

Company Info

The banking and financial sector have helped lead the market higher in December. If this rally is going to continue the banks will need to correct before continuing higher. That's when we want to jump on board and increase our exposure to this sector. NYB is a mid-sized bank that has broken out from a significant consolidation. I am suggesting we use a buy-the-dip trigger at $18.00. It could take a few weeks for NYB to retrace that far. If triggered we'll start with a stop loss at $16.65. FYI: The Point & Figure chart for NYB is bullish with a long-term target of $33.50.

Buy-the-Dip trigger: $18.00

BUY the 2012 January $17.50 calls (NYB1221A17.5)

- or -

BUY the 2013 January $20.00 calls (NYB1319A20)

Chart of NYB:

Originally listed on the Watch List: 12/25/10


Active Watch List Candidates:


Compania de Minas Buenaventura - BVN - close: 48.24

I am long-term bullish on BVN but I'm growing more short-term cautious (see tonight's market commentary). We are moving our trigger to buy calls on BVN down to $46.00 and conservative traders may want to put their trigger near $43-42 instead. Keep your position size small to limit your risk.

Buy-the-Dip trigger: $45.00 (half a position)

BUY the 2011 JUNE $50 calls (BVN1119F50)


Ford Moto Co. - F - close: 16.78

Shares of Ford barely moved at all last week. The consolidation looks like it wants to breakout higher but I don't want to chase it. I am removing Ford from the watch list. It could take a while before we see an entry point for long-term positions.


Gamestop Corp. - GME - close: $22.22

GME was showing some relative strength late last week. I am raising our trigger to open positions from $21.00 to $21.25. More conservative traders may want to wait for a dip near the 50 or 200-dma instead. If triggered I'm suggesting a stop loss at $18.90. I would be very surprised to see GME breakdown under $20.00. Our long-term targets are $24.90 and $29.75.

Buy-the-Dip trigger: $21.25

BUY the 2012 January $22.50 call (GME1221A22.5)

- or -

BUY the 2013 January $25.00 call (GME1319A25)

Originally listed on the Watch List: 12/11/10


Mattel Inc. - MAT - close: 25.88

The action in MAT in just the last two trading days looks like a short-term bearish reversal. The stock should have some support near $25.00 but I'm expecting a market correction in January. We are moving our trigger to launch long-term positions to $24.00. If triggered we want to use a stop loss at $22.75. Our long-term targets are $29.00 and $36.00.

Buy-the-Dip trigger: $24.00

BUY the 2012 January $25.00 calls (MAT1221A25)

- or -

Buy the 2013 January $25.00 calls (MAT1319A25)

Originally listed on the Watch List: 12/04/11


Starbucks Corp. - SBUX - close: 32.63

SBUX is hovering near its highs and remains inside its bullish channel. I am very tempted to raise our buy-the-dip trigger. However, instead I am removing SBUX from our watch list. It could be weeks before we see an entry point for long-term positions.


Target Corp. - TGT - close: 60.26

TGT was showing some relative strength last week and rallied to new three-year highs. It would be very tempting to buy calls now but I'm expecting a correction in the next few weeks. We'll keep our trigger at $57.00 for now. If triggered we'll start with a stop loss at $53.75. Our long-term target is $69.75.

Buy-the-Dip trigger: $57.00

BUY the 2012 January $60 calls (TGT1221A60)

- or -

BUY the 2013 January $65 calls (TGT1319A65)

Originally listed on the Watch List: 12/11/10


United Parcel Service - UPS - close: 72.73

UPS is still consolidating sideways. I am moving our trigger back down to $70.10. More conservative traders could look for a dip near the rising 100-dma instead. If triggered we'll use a stop loss at $65.90. Our long-term targets are $79.50 and $87.50.

Buy-the-Dip trigger: $70.10

BUY the 2012 January $75 calls (UPS1221A75)

- or -

BUY the 2013 January $80 calls (UPS1319A80)

Originally listed on the Watch List: 12/04/10


Whiting Petroleum Corp. - WLL - close: 118.21

WLL continues to show relative strength and hit new highs last week. Unfortunately the stock just looks too overbought for us to consider positions any time soon. I am removing it from the watch list but would keep this stock on your radar screen for when the market eventually corrects.


United States Steel Corp. - X - close: 58.10

It looks like the rally in X may be running out of gas. It's time for some profit taking. I am suggesting bullish positions on a dip at $54.00. More conservative traders could just wait and see where X finds support again (it could be $52 or $50). If triggered we will start the play with a stop loss at $48.75. Our long-term targets are $64.75 and $74.75.

Buy-the-Dip trigger: $54.00

BUY the 2012 January $60.00 calls (X1221A60)

- or -

BUY the 2013 January $60.00 calls (X1319A60)

Originally listed on the Watch List: 12/11/10