Option Investor
Newsletter

Daily Newsletter, Saturday, 2/5/2011

Table of Contents

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

Leaps Trader Commentary

It Just Keeps Going, And Going...

by James Brown

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This is the bull market that won't die! I am sure that's how the bears feel right about now. Daily headlines about the ongoing protest and unrest in Egypt are not having an effect on the market. Two weeks ago the disappointing Q4 GDP numbers failed to have an impact. Now this past Friday's severely disappointing jobs report failed to have an impact.

A week ago the market produced a huge bearish reversal and stocks look poised to collapse after weeks of gains. Yet there was no follow through lower. Soon the bounce turned into a route as shorts scrambled to cover positions. This drove the market past resistance to new two-year highs. A relatively consistent string of positive economic data for the U.S. certainly did not hurt.

The ISM services and ISM manufacturing data was positive. Investors blamed it on the weather and managed to shrug off the jobs number of +36,000 jobs when economists were looking for +150,000. On top of all the positive economic data (sans the jobs report) we're seeing an increase in money flows back into equity funds. For a long time the average investor has been sitting on the sidelines. Now we're starting to see some participation, which could rally help fuel another leg higher.

It was a bullish week for the major averages. The S&P 500 immediately bounced following the January 28th sell-off and reversal. There was zero follow through lower. Once traders saw that the market was not going to collapse the market surged higher, squeezing the shorts, on February 1st. Once past resistance at the 1300 level the S&P 500 took a few days to rest and consolidate gains. The trend is up and no one seems willing to sell.

Daily chart of the S&P 500 index:

Weekly chart of the S&P 500 index:

Once again traders bought the dip at the NASDAQ Composite's rising 40-dma. While we're only taking a few points the NASDAQ did manage to close above its January highs leaving the index at new two-year highs. After three weeks of chopping sideways the NASDAQ could be poised for another leg higher but I want to warn you that the 2007 highs near the 2800 level could be another touch obstacle to overcome (see weekly chart below).

Daily chart of the NASDAQ Composite index:

Weekly chart of the NASDAQ Composite index:

The semiconductor sector remains a leadership group even without any help from its biggest component Intel (INTC). The SOX index has respected its rising bullish channel and rallied to new two-year highs. This group's relative strength is a big positive for the NASDAQ. Eventually this is going to see a painful correction but for now the trend is higher.

Daily chart of the SOX semiconductor index:

There has not been any follow through on the Russell 2000's bearish breakdown but the bottom of its previous channel could now be resistance. Traders are still buying the dips in the small caps and the $RUT does look like it wants to breakout higher. If it does breakout, the $RUT could turn into the leadership group again after six weeks of churning sideways. A move past the January highs near 808 would certainly be a positive development.

Daily chart of the Russell 2000 index:

I do want to point out that the Dow Jones Transportation index has been underperforming. We're seeing a divergence between the major averages and the transports. Normally, a divergence like this is bearish. We want the transports to confirm the market rally and when they don't it's a warning sign. If we see the transports close under the 5,000 level again it will really cause concern. Can the market rally higher without this group? Yes, it can but a lot of investors believe in traditional Dow Theory and when the transports don't cooperate it will raise concern. Keep your eye on it.

Daily chart of the Dow Jones Transportation index:

The economic calendar for this coming week is pretty light. We'll get the normal weekly jobless claims on Thursday plus the wholesale inventory number. On Friday we will see the December trade balance numbers and the Michigan consumer sentiment figures. The biggest Wall Street event for the week will probably Cisco Systems' (CSCO) earnings report on February 9th, after the closing bell. Analysts are expecting CSCO to deliver a profit of 35 cents a share.

The lack of economic news and a dwindling earnings calendar will put even more focus on Egypt's plight. Yet unless things turn more violent I doubt Egypt is going to have much influence on our markets. This will leave investors looking for additional news and the focus could shift back towards Europe's debt troubles.

I have been looking for a market top and a correction to occur in the second half of January or first part of February but it would seem that is no longer in the cards. We're certainly overdue for a correction but that doesn't mean one is going to show up. An overbought market (or stock) can always get more overbought. We still want to buy dips near key support but I'm not expecting the big washout I was two weeks ago. I would still keep our position size small to limit our risk. Then we can slowly choose to add to positions as they develop.

- James


Portfolio

Portfolio Update

by James Brown

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Current Portfolio


Portfolio Comments:

The stock market continues to drift higher. The unrest in Egypt has had little impact. U.S. economic data continues to improve although the latest jobs report was extremely disappoint, still the market failed to sell-off on the news. Now the S&P 500 is setting at new two-year highs (again).

BIDU was a big winner last week. We had several candidates showing some relative strength. There are new stop losses for BIDU, DE, and DIS.

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

Respect The Trend

by James Brown

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Editor's Note:

The lack of follow through on the bearish reversal a week ago has put the bears on the run. The funny thing is that now both the bears and the bulls want the market to go down. Of course the bulls want a pull back so they can add to positions. Unfortunately, when both sides want the market to do something it rarely cooperates.

The trend is up. We do want to respect the trend but our focus is long-term trades. I am reluctant to buy new two-year highs. We are adjusting some of our entry point strategies on the watch list but I'm not suggesting new positions tonight.

One stock that did catch my eye that is not on the watch list is Wal-Mart (WMT). The breakout past resistance near $56 has reversed but shares are now testing new support. Investors could open bullish positions now or anywhere on a dip into the $56-53 zone. I would use a stop near the 200-dma (around $53.00). WMT does not move very fast so you may want to turn this into some sort of vertical spread or calendar spread to maximize your gains. It could take a long time for WMT to post any significant gains.


Play Updates

BIDU Soars on Earnings

by James Brown

Click here to email James Brown


Closed Plays


None. No closed plays this week


Play Updates


Arch Coal Inc. - ACI - close: 33.50

02/05 update: ACI's bounce from a week ago failed at the $35 level and shares have drifted back to the 50-dma. A recent upgrade for the stock failed to have much impact. I'm starting to wonder if ACI will test the $30 area again. Wait for a dip near $30 or $28 before considering new long-term bullish positions.

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 $ 4.50/ 4.65

- or -

Nov 22, 2010 - entry price on ACI @ 30.15, option @ 5.15
symbol: ACI1319A35 2013 JAN $35 call - current bid/ask $ 6.85/ 7.30

01/22/11 New stop loss @ 27.75
01/15/11 New stop loss @ 28.90
01/01/11 new stop loss @ 29.75
12/25/10 New stop loss @ 28.75
11/22/10 Play opened. ACI @ $30.15

Chart of ACI:

Current Target: $39.75
Current Stop loss: 28.90
Play Entered on: 11/22/10
Originally listed in the New Plays 11/20/10


Akamai Technology - AKAM - close: 47.88

02/05 update: This could be a very volatile week as AKAM reports earnings on February 9th, after the closing bell. Analysts are expecting a profit of 38 cents a share. The stock has been stuck between the $47 level and overhead resistance near its 50-dma and the $49.50-50.00 area. Overall the trend has taken on a more bearish tone, which is why a put a couple of weeks ago.

If AKAM breaks through the 200-dma it could herald a much deeper correction. I am repeating my previous comments that more conservative traders may want to exit bullish positions early right now or at least scale back on the size of your positions. I am not suggesting new trades 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 $ 6.50/ 6.70

- Third Position -

Dec. 20, 2010 - entry price on AKAM @ 50.49, option @ 5.40
symbol: AKAM1221A60 2012 JAN $60 call - current bid/ask $ 3.20/ 3.40

- Short-Term Put -

Jan. 22, 2011 - entry price on AKAM @ 48.93, option @ 1.15
symbol: AKAM1121Q40 2011 MAY $40 PUT - current bid/ask $ 1.48/ 1.53
(We'll update our entry price on Monday)

01/24/11 May $40 put opened at $1.15
01/22/11 Buy May $40 puts to protect ourselves
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: 117.68

02/05 update: Well it looks like we won't be needing those March puts after all. BIDU reported earnings on the evening of January 31st. The company delivered a profit 4 cents better than expected with strong revenues and management guided higher. The stock reacted by gapping open higher to new all-time highs. I would expect BIDU to fill this gap so it should eventually dip back toward the $110 level, which should act as new support. I am raising our stop loss to $99.00. Currently our final exit target is $129.00.

Our protective March $95 puts are now bidding 35 cents. I would expect them to expire worthless.

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 -
Aug 02, 2010 - entry price on BIDU @ 83.50, option @ 13.00
symbol: BIDU1221A100 2012 JAN $100 call - current bid/ask $27.90/28.25

- BONUS TRADE (short-term puts) -

Jan 22, 2011 - entry price on BIDU @ 105.10 option @ 2.80
symbol: BIDU1119O95 2011 MAR $95 PUT - current bid/ask $ 0.35/ 0.45
(we'll update the entry price for Monday's open)

01/31/11 BIDU reports strong earnings. Stock gaps higher on Feb. 1st
01/24/11 March $95 put opened at $2.80
01/22/11 Buy March $95 put
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

Chart of BIDU:

Current Target: $129.00
Current Stop loss: 99.00
Play Entered on: 08/02/10
Originally listed on the Watch List 07/31/10


Berkshire Hathaway - BRK.B - close: 83.17

02/05 update: BRK.B is consolidating sideways but with a bullish trend of higher lows. If the market cooperates we could see BRK.B breakout past resistance near $84-85 in the next few weeks. I remain somewhat cautious here. The trend has improved but BRK.B has not been a great performer. I would expect the company to report earnings in very late February.

- Current Positions -
Oct 29, 2010 - entry price on BRK.B @ 79.00, option @ 5.00
symbol: BRKB1221A90 2012 JAN $90 call - current bid/ask $ 3.35/ 3.65

01/22/11 2011 January calls expired (-100%)
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


Compania de Minas Buenaventura - BVN - close: 43.91

02/05 update: Mining stocks have rallied this past week. BVN appears to have turned the corner. However, shares failed twice at their 40-dma in the last couple of session. We might see this stock pull back toward $42 and its 200-dma again on a short-term basis. If we see another dip or bounce in the $42-40 I would use it as a new entry point but I would buy September calls.

FYI: I can't find an earnings report for BVN. Up through 2009 BVN would report earnings on March 31st but they seemed to have changed their schedule in 2010. I would expect them to announce earnings in the next few weeks.

Earlier Comments:
I cautioned readers that our entry point at $45 was an aggressive, higher-risk trade. Our plan was to open small (half) positions to limit our risk.

- Current Positions -
Jan 5, 2011 - entry price on BVN @ 45.00, option @ 3.90
symbol: BVN1119F50 2011 JUN $50 call - current bid/ask $ 1.30/ 2.10

01/22: Adjust the stop loss to $38.95
01/05: Play is opened at $45.00 (small positions only)

Current Target: $ 54.75
Current Stop loss: 38.95
Play Entered on: 01/05/11
Originally listed on the Watch List --/--/--


Deere & Co - DE - close: 93.21

02/05 update: It was a bullish week for DE with the stock breaking out from its trading range. I am raising our stop loss from $78.90 to $84.00. More conservative traders will certainly want to consider raising theirs even higher. DE appears to have some support near $88 and $85. I am not suggesting new positions at this time. Our final target is $99.00. FYI: DE is due to report earnings on Feb. 16th before the opening bell.

- 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 $11.80/11.90

02/05/11 New stop loss @ 84.00
01/15/11 New stop loss @ 78.90, Adjusted second target to $99.00
01/13/11 1st Target Hit $88.00. Option @ $10.00 (+110%)
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, 99.00
Current Stop loss: 84.00
Play Entered on: 11/26/10
Originally listed on the Watch List --/--/--


Walt Disney Co. - DIS - close: 40.71

02/05 update: DIS also delivered a strong week with the stock finally breaking out past key resistance near $40.00. I am raising our stop loss to $35.75. Now broken resistance at $40.00 should offer some short-term support followed by support at $38.00. I am not suggesting new positions at this time since DIS is due to report earnings soon but a dip near $38 could be a new entry point. Remember our first profit target is $43.00. I am adjusting our final target from $46.00 to $49.00.

FYI: Investors should note that DIS is due to report earnings on Feb. 8th after the closing bell. Wall Street expects a profit of 56 cents a share.

- Current Positions -
Oct 27, 2010 - entry price on DIS @ 35.60, option @ 2.23
symbol: DIS1221A40 2012 JAN $40 call - current bid/ask $ 4.15/ 4.25

- or -

Oct 27, 2010 - entry price on DIS @ 35.60, option @ 3.63
symbol: DIS1319A40 2013 JAN $40 call - current bid/ask $ 5.75/ 6.00

02/05/11 New stop loss @ 35.75
01/08/11 New stop loss @ 34.95
01/08/11 Target changed to $43.00 and $46.00
10/27/10 Play opened, DIS opened @ $35.60

Chart of DIS:

Current Target(s): $43.00, 49.00
Current Stop loss: 35.75
Play Entered on: 10/27/10
Originally listed on the Watch List 10/24/10


SPDR Gold ETF - GLD - close: 131.66

02/05 update: Commodities continue to attract buying interest. Gold managed a bounce this past week even as the U.S. dollar saw a flight to safety rebound higher. The GLD could see some resistance soon in the $132-134 zone so I wouldn't be launching new positions right here. If we see a test of the 200-dma or another rebound from the $128.00 level, then I might reconsider adding a new position. Bears could argue we're only seeing an oversold bounce before gold continues lower.

Currently our final long-term bullish target is $149.00. I'm not suggesting new bullish positions at this time.

FYI: Several weeks ago Goldman Sachs raised their 2011 price target on gold to $1,700 an ounce. Another firm raised their 2011 price target to $1,600 an ounce.

- Current Positions -
Aug 6, 2010 - entry price on GLD @ 118.00, option @ 10.75
symbol: GLD1221A130 2012 Jan $130 call - current bid/ask $11.65/12.00

- Short Term Put -

Jan 18, 2011 - entry price on GLD @ 133.63, option @ 1.70
symbol: GLD1116P125 2011 APR $125 PUT - current bid/ask $ 1.39/ 1.43

01/18/11 GLD opened at $133.63. April $125 put opened at $1.70
01/15/11 Added April Puts to protect ourselves from further declines.
01/08/11 Expecting a correction toward $125
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

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


Humana Inc. - HUM - close: 60.54

02/05 update: The rally for HUM continues. Yet the sharp pull back from its highs last week near $64 actually looks like a bearish top. HUM is about to report earnings so I'm not suggesting new positions at this time. The $55 level should offer support so a dip or bounce near $55 could be our next entry point although if you do launch positions there I would consider a stop loss near $52.

Look for HUM to report earnings on Feb. 7th before the opening bell. Analysts are expecting a profit of $0.81 a share.

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 $ 9.90/10.60

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


L-3 Communications - LLL - close: 78.58

02/05 update: Monday's strong bounce was encouraging since a week ago LLL appeared to be rolling over. Shares spent the rest of the week consolidating sideways. The $75-74 area should be decent support. I'd wait for a dip or bounce near this area before considering new positions.

- Current Positions -
Nov 11, 2010 - entry price on LLL @ 71.87, option @ 5.80
symbol: LLL1221A75 2012 Jan $75 call - current bid/ask $ 8.10/ 8.40

02/05/11 There was no follow through lower.
01/29/11 LLL is correcting lower!
01/08/11 Take Profits Early. LLL @ 78.23. Option @ $8.50 (+46.5%)
01/08/11 New stop loss @ 69.90
11/11/10 Play triggered with LLL's gap open @ 71.87

Current Target(s): $79.50, 89.00
Current Stop loss: 69.90
Play Entered on: 11/11/10
Originally listed on the Watch List 11/06/10


MEDNAX Inc. - MD - close: 61.23

02/05 update: MD has graduated from the watch list to our play list. The company reported earnings on February 3rd. Naturally after looking at the chart you can tell that investors were unhappy with the news. MD's headline number was inline with estimates but revenues were a miss and management actually guided lower for the first quarter. The company will have a chance to defend itself as MD presents at several investor conferences in the next two weeks. As expected the $60 area was support.

We had a trigger to buy calls on the dip at $61.00 with a stop loss at $55.90. MD opened at $60.33 on Feb. 3rd, triggering our play immediately. More conservative traders may want to raise their stops. The low on Feb. 3rd was $58.96. If the stock market corrects I think we see MD test its 200-dma near $57.50. The stock will now have overhead resistance at the top of the gap near $65. MD doesn't have LEAPS so we had to settle for 2011 August calls.

NOTE: Keep your position size small. The options on MD wide spreads, which puts us at a disadvantage!

- Current Positions -
Feb 03, 2011 - entry price on MD @ 60.33, option @ 3.60
symbol: MD1120H65 2011 AUG $65 call - current bid/ask $ 3.10/ 4.20

02/03 Trade triggered at $61.00, Option @ $3.60

Chart of MD:

Current Target(s): $69.50
Current Stop loss: 55.90
Play Entered on: 02/03/11
Originally listed on the Watch List 01/22/11


Microsoft Corp. - MSFT - close: 27.77

02/05 update: MSFT is virtually flat for the week. Shares kept bouncing near their 50-dma but struggled with new resistance around the $28.00 level. Overall the action over the past two weeks still looks like a big bearish reversal pattern. That's not surprising since we've been expecting MSFT to correct lower for a while now. I'd wait for a dip near $26 or the 200-dma before considering new positions. I would not begin new long-term 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 $3.85/ 3.95

- or -

Oct 18, 2010 - entry price on MSFT @ 25.59, option @ 2.30
symbol: MSFT1319A30 2013 Jan $30 call - current bid/ask $2.61/ 2.67

01/08/11 New stop loss @ 25.90
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.

Chart of MSFT:

Current Target(s): $31.00
Current Stop loss: 25.90
Play Entered on: 10/18/10
Originally listed in New Plays on 10/16/10


U S G Corp. - USG - close: 16.49

02/05 update: It was a very quiet week for USG. This trade is going to require some patience although I'm already starting to worry about our 2012 Jan. $20 calls (my worry is USG won't climb fast enough and the option will slowly evaporate). If the market corrects then USG should find support near $15.00. I am not suggesting new positions at this time.

- Current Positions -
Dec 20, 2010 - entry price on USG @ 15.25, option @ 1.50*
symbol: USG1221A20 2012 Jan $20 call - current bid/ask $ 1.65/ 1.85

- or -

Dec 20, 2010 - entry price on USG @ 15.25, option @ 3.00
symbol: USG1319A20 2013 Jan $20 call - current bid/ask $ 2.90/ 3.40

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

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: 65.07

02/05 update: WLP rallied to new multi-month highs on Friday but shares failed to hold on to most of their gains. The trend is up but I would not launch new positions at these levels. Wait for another dip near support around $60.

- Current Positions -
Oct 14th, 2010 - entry price on WLP @ 57.75, option @ $5.25
symbol: WLP1221A65 2012 Jan $65 call - current bid/ask $ 6.90/ 7.10

01/08/11 New stop loss @ 54.90
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: 54.90
Play Entered on: 10/14/10
Originally listed on the Watch List 10/11/10


Watch

Metals, Medical, and Auto Parts

by James Brown

Click here to email James Brown

Editor's Note:

We continue to add to our watch list but we're adjusting some of our entry point strategies to account for the market's strength.


New Watch List Entries

ATI - Allegheny Tech.

BWA - BorgWarner Inc.

HSIC - Henry Schein Inc

ORLY - O'Reilly Automotive


Active Watch List Candidates

AKS - AK Steel holding

BEAV - BE Aerospace Inc.

CMP - Compass Minerals

Costco Wholesale - COST

Fiserv, Inc. - FISV

FLR - Fluor Corp.

JRCC - James River Coal Co.

MAT - Mattel Inc.

MON - Monsanto Co.

NFX - Newfield Exploration

NYB - New York Community Bancorp

Teva Pharmaceuticals - TEVA

TIF - Tiffany & Co.

UNH - UnitedHealth Group, Inc

X - U.S. Steel Corp


Dropped Watch List Entries

MD graduated to our play list. I am removing VZ from the watch list.


New Watch List Candidates:

Alleghney Technology - ATI - close: 66.89

Company Info

Metal-related stocks have continued to show relative strength. I like ATI now that it has cleared resistance near $60.00. Let's wait for a dip back to the $61.00 level. If triggered we'll use a stop loss at $55.75. Our long-term targets are $75 and $85.

Buy-the-Dip trigger: $61.00

BUY the 2012 January $70.00 calls (ATI1221A70)

- or -

BUY the 2013 January $70.00 calls (ATI1221A70)

Chart of ATI:

Originally listed on the Watch List: 02/05/11


BorgWarner Inc. - BWA - close: 67.03

Company Info

This auto parts maker is due to report earnings on February 10th before the opening bell. Analysts are looking for a profit of 82 cents a share. I'm crossing my fingers that the stock sees a post-earnings sell-off so we can buy the dip. I'm suggesting a trigger to buy calls at $61.00 with a stop loss at $54.75. Only open half a position at first since BWA can be a volatile stock. Our first target is $74.00. BWA doesn't have LEAPS so we'll have to settle for July calls.

Buy-the-Dip trigger: $61.00

BUY the 2011 July $65 calls (BWA1116G65)

Chart of BWA:

Originally listed on the Watch List: 02/05/11


Henry Schein Inc. - HSIC - close: 66.30

Company Info

This medical equipment company has rallied to new all-time highs this past week. We don't want to chase it. I am suggesting we wait for a dip to $62.50 and launch positions there. If triggered we'll use a stop at $57.75, just under the 200-dma. Our long-term target is $75 HSIC doesn't have LEAPS so we'll have to settle for July calls.

Buy-the-Dip trigger: $62.50

BUY the 2011 July $65 call (HSIC1116G65)

Chart of HSIC:

Originally listed on the Watch List: 02/05/11


O'Reilly Automotive - ORLY - close: 57.58

Company Info

ORLY is due to report earnings on February 16th after the closing bell. Wall Street is looking for a profit of 63 cents a share. If the stock sees any post-earnings sell-off we want to be ready to buy the dip. The stock should have support in the $54-53 zone near its 200-dma. I am suggesting a trigger to open positions at $53.50 with a stop loss at $49.75. ORLY doesn't have LEAPS so we'll have to settle with the August calls.

Buy-the-Dip trigger: $53.50

BUY the 2011 August $55 calls (ORLY1120H55)

Chart of ORLY:

Originally listed on the Watch List: 02/05/11


Active Watch List Candidates:


AK Steel Holding - AKS - close: 15.84

02/05 update: AKS underperformed some of its peers in the metals industry. The failed rally near $17 might be a short-term top. I am raising our trigger to buy calls to $14.00 and we'll raise our stop loss to $11.75.

Buy-the-Dip trigger: $14.00 <-- New Trigger

BUY the 2012 January $15.00 calls (AKS1221A15)

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BUY the 2013 January $15.00 calls (AKS1319A15)

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


BE Aerospace Inc. - BEAV - close: 37.42

02/05 update: BEAV reported better than expected numbers but the stock is slipping anyway. I'm suggesting a trigger at $32.50. If triggered at $32.50 we'll use a stop loss at $29.45. BEAV doesn't have LEAPS so we'll have to settle for 2011 July calls. FYI: Earnings are due out on February 3rd.

Buy-the-Dip trigger: $32.50

BUY the 2011 July $35.00 calls (BEAV1116G30)

Originally listed on the Watch List: 01/22/11


Compass Minerals - CMP - close: 93.87

02/05 update: CMP is due to report earnings this week on Feb. 8th. I'm expecting some post-earnings volatility. Please note that I'm raising our trigger to buy the dip to $85.50. We'll move our stop loss to $79.00, just under the 200-dma. I would start this trade with small positions to limit our risk. Unfortunately, CMP does not have any LEAPS available and the longest dated options are 2011 Septembers

Buy-the-Dip trigger: $85.50 <-- New Trigger

BUY the 2011 September $90.00 calls (CMP1117I90)

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


Costco Wholesale - COST - close: 74.13

02/05 update: COST rallied to new two-year highs. Yet I wouldn't chase it. The $75.00 level was significant resistance back in 2008. Odds are still good this stock could see a correction. For now our trigger to buy the dip is at $66.00 but I'm considering a move toward the $70 area. If triggered we'll use a stop loss at $61.40, just under the simple 200-dma. FYI: Earnings are due out in early March.

Buy-the-Dip trigger: $66.00

BUY the 2012 January $70 calls (COST1221A70)

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BUY the 2013 January $70 calls (COST1319A70)

Originally listed on the Watch List: 01/29/11


Fiserv, Inc. - FISV - close: 60.27

02/05 update: If you look at the weekly chart it appears that FISV has produced a bearish reversal. I'm expecting a pull back toward support near $55.00. We'll use a trigger at $56.00 to open bullish positions. If triggered use a stop loss at $51.90, under the simple 200-dma.

Buy-the-Dip trigger: $56.00

BUY the 2011 September $60 calls (FISV1117I60)

Originally listed on the Watch List: 01/29/11


Fluor Corp. - FLR - close: 68.69

02/05 update: FLIR still looks top heavy and due for some profit taking. We will re-evaluate our entry point following the earnings report. There is no change from my prior comment. We want to launch bullish positions at $60.50 with a stop at $54.74.

FLR is due to report earnings on Feb. 23rd.

Buy-the-Dip trigger: $60.50

BUY the 2012 January $65 calls (FLR1221A65)

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BUY the 2013 January $70 calls (FLR1319A70)

Originally listed on the Watch List: 01/08/11


James River Coal Co. - JRCC - close: 21.77

02/05 update: The bounce has failed yet again at the 50-dma. I'm still expecting a correction. More aggressive traders may want to buy the dip at $20.00. I am suggesting a trigger to launch positions at $18.50. If triggered we'll use a stop loss at $15.90. JRCC doesn't have LEAPS so we'll have to settle for 2011 September calls. FYI: Earnings are due out in late February.

Buy-the-Dip trigger: $18.50

BUY the 2011 September $20 calls (JRCC1117I20)

Originally listed on the Watch List: 01/22/11


Monsanto Co. - MON - close: 74.66

02/05 update: Agriculture names broke to new highs early in the week and then MON's stock ran out of gas. I am suggesting we open bullish positions at $64.00 with a stop loss at $59.75. Our targets are $79.00 and $87.50.

Buy-the-Dip trigger: $64.00

BUY the 2012 January $70 calls (MON1221A70)

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BUY the 2013 January $75 calls (MON1319A75)

Originally listed on the Watch List: 01/08/11


Newfield Exploration Co. - NFX - close: 74.70

02/05 update: Oil service stocks have been strong outperformers. NFX rallied to another high and then stalled near round-number resistance at $75.00. There is still a good chance that NFX will see some profit taking following its earnings report. Plus, when this Egypt news finally blows over the risk premium in oil is going to contract and the energy sector could pull back as oil slides.

We want to wait to buy calls at $60.50. If triggered we'll use a stop loss at $54.40. Our long-term targets are the $75 and $85 levels.

FYI: Earnings are Feb. 16th.

Buy-the-Dip trigger: $60.50

BUY the 2012 January $65 calls (NFX1221A65)

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BUY the 2013 January $70 calls (NFX1319A70)

Originally listed on the Watch List: 01/15/11


Teva Pharmaceuticals - TEVA - close: 54.10

02/05 update: There is no change from my prior comments. TEVA is an Israeli based drug company. The unrest in Egypt has sent the Israel markets lower. The late December low was $50.25. I am suggesting we wait for another dip to $50.25 and use it as an entry point to buy call LEAPS on TEVA. If triggered we'll use a stop loss at $46.90, which is under the July lows from 2010. FYI: TEVA is due to report earnings on February 8th. If TEVA does not see a post-earnings dip we will re-evaluate and probably raise our entry point.

Buy-the-Dip trigger: $50.25

BUY the 2012 January $55 calls (TEVA1221A55)

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BUY the 2013 January $60 calls (TEVA1319A60)

Originally listed on the Watch List: 01/29/11


Tiffany & Co. - TIF - close: 61.96

02/05 update: The retail sector was a strong performer last week as most of the major retailers reported better than expected January same-store sales in spite of the weather. Shares of TIF received an upgrade that helped spur the rally. I am raising our buy-the-dip trigger to $55.50 but if triggered we only want to use small positions to limit our risk. If triggered we'll use a stop at $49.50.

Buy-the-Dip trigger: $55.50 <-- New Trigger

BUY the 2012 January $60 calls (TIF1221A60)

Originally listed on the Watch List: 01/22/11


UnitedHealth Group, Inc. - UNH - close: 42.49

02/05 update: Healthcare names have been showing relative strength. UNH has rallied to new multi-year highs. I am raising our trigger to buy the dip to $38.50 and our stop loss to $34.50.

Buy-the-Dip trigger: $38.50 <-- New Trigger

BUY the 2012 January $40 calls (UNH1221A40)

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BUY the 2013 January $45 calls (UNH1319A45)

Originally listed on the Watch List: 01/15/11


Verizon Communications - VZ - close: $34.95

02/05 update: I am temporarily removing VZ from the watch list. I'd still keep an eye on it in case shares do correct toward the $34-32 zone. On a short-term basis shares look ready to breakout but VZ likely has resistance near the $40 level.

Originally listed on the Watch List: 01/01/11


United States Steel Corp. - X - close: 58.17

02/05 update: I am tempted to raise our buy-the-dip trigger but X just produced a bearish reversal and potentially a bearish double top. Right now I'm expecting a dip toward the $52.50-50.00 zone. We'll re-evaluate our entry point strategy as X corrects lower. For now our trigger is at $48.50 near the 200-dma. Our stop will remain at $44.80. Keep your position size small to limit your risk. Our long-term targets are $64.75 and $74.75.

Buy-the-Dip trigger: $48.50

BUY the 2012 January $55.00 calls (X1221A55)

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BUY the 2013 January $60.00 calls (X1319A60)

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