Option Investor
Newsletter

Daily Newsletter, Sunday, 5/15/2011

Table of Contents

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

Leaps Trader Commentary

Has the Tone Changed?

by James Brown

Click here to email James Brown

The tone of trading last week seem to grow a lot more cautious even though the numbers weren't that bad. The S&P 500 fell less than three points for the week. The small cap Russell 2000 and the NASDAQ composite both eked out fractional gains. Yet market commentators seem to take a bearish view of last week's action.

Has the buy-the-dip crowd lost their nerve? Or is this merely another week of consolidation before stocks resume their bullish trend of higher highs and higher lows. If you wanted to be picky about it the market's major averages could probably see a decline toward their rising 100-dma and still not break the bullish pattern of higher lows. If this happens technical traders could argue the structure of the market was changing since this would create a three-week trend of lower highs and lower lows.

There have been growing concerns that the U.S. and global economy has hit a "soft patch". What I find interesting is that this past week saw generally positive economic data but this failed to fuel any market gains. The consumer sentiment numbers for April rose 2.6 points to 72.4 after a sharp drop to 67.5 in March. Economists were only expecting a rise to 69.5. Rising consumer sentiment numbers are supposed to reflect stronger consumer spending.

Elsewhere the Consumer Price Index (CPI) was generally benign. Analysts were expecting a +0.8% rise in the headline number. Yet the April CPI came in at +0.4%. The core CPI, which excludes the more volatile food and fuel components, only rose +0.2%. Inflation remains relatively tame in spite of the volatility across the commodity sector. Speaking of commodities, the rally in the U.S. dollar continued for another week, which puts pressure on commodities that are traded in dollars. Another issue is concern that China's economy might slow down too fast (a recurring concern) and thus demand for commodities could ebb. On Friday the Chinese government raised bank reserve requirements again since they are trying to tap the breaks on their red hot economy.

Another challenge for investor sentiment is the Eurozone. I warned readers last week that Europe's sovereign debt issues and Greece would remain an issue. It looks like Greece is struggling to make its new debt payments in spite of the bailout. Now the Eurozone is trying to figure out what the next step is to avoid a meltdown. There are a lot of European banks that hold billions in Greek debt and a default would have serious repercussions across the region. Last week there were rumors that Greece wanted to leave the Eurozone, which would put the whole concept of the Euro area at risk. 17 of the 27 European Union members make up the euro zone, which uses the euro currency. If one leaves it could start a domino effect. Concerns over Greece and Europe have sent the euro currency plunging. This move is boosting the dollar, which is having a negative impact on commodities. Expect more headlines this week. There is a meeting on Monday for Eurozone finance ministers. I'm sure they grow tired of Greece being the main topic.

Chart of the Euro ETF:

Chart of the U.S. dollar index:

A week ago the S&P 500 closed near support at the 1340 level. Once again the index closed just a few points off this level. As you can see in the daily chart below the S&P 500 bounced from its 50% retracement of the late April rally. Traders might be worried that the sideways action last week has done little to cancel what appeared to be a bearish reversal in the first week of May. While the index might see more selling the long-term trend is still very much higher. On a short-term basis a close under 1330 would be bearish but we can look for support near 1320. If the 1320 level breaks then cross your fingers and hope the 100-dma acts as support. Otherwise we're looking at a dip toward the 1300 level.

Daily chart of the S&P 500 index:

Weekly chart of the S&P 500 index:

The NASDAQ managed a very minor gain after a week of moving sideways. We shouldn't be that surprised to see the NASDAQ consolidate sideways near these resistance levels. Little has changed from a week ago. The 2800 level should still offer some support. If that fails there is the 50-dma and 100-dma near 2750. Either could be a buy-the-dip entry point for short-term traders. Now a close under 2750 would be a lot more ominous. There's no harm in taking a step back to wait and see where the index will bounce.

Daily chart of the NASDAQ Composite index:

One chart I am worried about is the small cap Russell 2000 index. Thus far the $RUT still has a bullish trend of higher lows and higher highs. Unfortunately the first week of May produced a bearish reversal pattern. The sideways consolidation this past week has done little to alleviate the potential reversal lower from earlier in the month. Normally a bullish engulfing candlestick pattern needs to see confirmation, which hasn't happened yet. The problem is that when the $RUT does break down it could move lower really fast. The small cap index is currently testing technical support at its 50-dma. Plus it's testing support at one of its long-term trendlines of higher lows. A breakdown here would look very bearish! If you're feeling pessimistic you could argue the $RUT is building a bear wedge pattern on its daily chart. There is reason to be cautious on the small caps.

Daily chart of the Russell 2000 index:

Weekly chart of the Russell 2000 index:

Another chart I want to point out is the yield on the short-term 13-week treasury bonds. Sometimes big money likes to park their cash in short-term treasuries for "safety". A quick glance at the chart below and you can see that the yield on the short-term treasury has been falling for more than three months. Yields fall as the bond rises. This trend of lower lows started when the S&P 500 first peaked back in February this year. How scared of the stock market do you have to be to buy short-term treasuries with a yield this close to zero? Someone is scared to have their money in stocks. The first time the short-term yields got this close to zero was during the 2008 bear market in stocks.

Daily chart of the Short-Term Treasury Yield:

Weekly chart of the Short-Term Treasury Yield:

Looking ahead we have another full week of economic data. Some of the highlights will be the New York Federal Reserve's Empire State manufacturing survey on Monday, the FOMC minutes on Wednesday, the existing home sales and Philly Fed survey on Thursday. The FOMC minutes could make headlines if reporters find something that might hint at a change in policy or allude to a QE3 program. The Philly Fed will be interesting. Last month the Philly Fed saw a huge plunge from 43.4 to 18.5. This month economists are expecting a decline to 17.5. We'll also start hearing more data about housing and the real estate market over the next two weeks.

I am somewhat concerned that headlines out of the Middle East might negatively impact investor sentiment. On Sunday there were stories of Arab protestors marching on Israel's borders from three different areas at the same time. Coordination through Facebook and online social media allowed Arabs and Palestinians to stage protests on the Syrian border, Lebanon border, and the Gaza border of Israel. Israel is blaming the Syrian government of helping orchestrate these events as an effort to deflect the negative attention from Syria's own brutal crackdown on protestors of the Syrian government. Recently headlines out of the middle east haven't had much impact on the U.S. markets but this time it involves shots fired along the Israeli border so you never know when Wall Street might get nervous.

In summary I am growing more cautious on stocks. The tone of trading seems to have changed even though the larger trend is still higher. The market is lacking leadership and the financial sector continues to be an anchor weighing down the market. Concerns seem to be growing over a slowdown in the U.S. economy even though some of the recent data has been positive. Investors will be watching this week's economic reports for more clues. The end of QE2, just a few weeks away, remains a black cloud over the market. Meanwhile the situation with Greece remains a time bomb. You never know when a headline about Greece can derail the market.

I do think there is an opportunity if we see another pull back in the market. The challenge will be determining if this is just a normal pull back in the course of the longer-term up trend. Or if this is the start of something more ominous.

- James


Portfolio

Portfolio Update

by James Brown

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Current Portfolio


Portfolio Comments:

Looking at the market's current status the major indices still have a bullish trend of higher lows and higher highs. Yet action this past week might suggest the rally is in jeopardy and stocks might see another pull back. Commodity-related names have been hammered lower as a sharp rally in the U.S. dollar sends commodity prices falling. This past week saw coal stocks under perform. The weakness in oil failed to fuel any gains for transports.

I am suggesting we take some money off the table in our BEAV trade. We also want to close our BRK.B trade early. Meanwhile, ACI has hit our stop loss.

BA, BEAV, COST, and PCAR all have new stop losses.

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

Losing Conviction?

by James Brown

Click here to email James Brown

Editor's Note:

Investors seem to be losing their conviction. Technically the larger trend for the markets is still higher yet we are seeing some bearish divergences and a few sell signals start to develop. Leadership names for most of 2011 have faltered plus the financials are showing new weakness.

Investors used to buy bad news because it meant the Fed would be stuck on the sidelines even longer. Now even good news has failed to move the market. Of course there are plenty of negative headlines fighting for your attention.

Meanwhile the end of QE2 has already been discussed ad nauseum so the markets should not be surprised by its approach at the end of June. Yet there remains a cloud of uncertainty regarding how the markets will react to this event. The stock market is supposed to be looking ahead the next six to nine months (or longer) so the end of QE2 should already be baked in. Of course we all know the market is prone to bouts of irrationality.

Investors may want to take a more defensive approach to current positions and to launching new bullish trades. I'd look for stocks with a strong up trend and wait for a dip near support. We've added a couple of strong candidates to the watch list tonight. I'm not adding any new candidates this evening.


Play Updates

Resource names struggle on rally in the dollar

by James Brown

Click here to email James Brown


Closed Plays


ACI and BRK.B have been closed.


Play Updates


AK Steel Holding - AKS - close: 14.23

05/14 update: Worries of a slow down in the second half of 2011 have weighed heavily on the steel stocks. Shares of AKS continued to fall and have now broken down under technical support at the 200-dma. Shares fell toward round-number price support near $14.00 on Friday afternoon. AKS is now very short-term oversold with a nearly constant decline from its late April highs. The stock is overdue for a bounce but I'm concerned that may not happen in time. If the stock market continues to fall on Monday we could see AKS hit our stop loss at $13.90. I am not suggesting new positions at this time. The recent breakdown in AKS is very bearish. More conservative traders will want to consider an early exit now!

AKS can be volatile so our plan was to limit our risk by keeping our position size small. Our long-term target is the $25.00 area.

- Current Positions -
Feb 22, 2011 - entry price on AKS @ 16.10, option @ 1.55
symbol: AKS1221A20 2012 JAN $20 call - current bid/ask $ 0.48/ 0.52

- or -

Feb 22, 2011 - entry price on AKS @ 16.10, option @ 2.95
symbol: AKS1319A20 2013 JAN $20 call - current bid/ask $ 1.50/ 1.63

05/14/11 AKS has confirmed its bearish breakdown. Readers will want to consider an early exit now!

Current Target: $25.00
Current Stop loss: 13.90
Play Entered on: 02/22/11
Originally listed on the Watch List: 12/25/10


Allegheny Technology - ATI - close: 68.81

05/14 update: ATI received an upgrade to a "buy" from Goldman Sachs last week but the news failed to have any lasting impact. ATI is still chopping sideways in the $68-72 range. If ATI breaks support at $68 I would anticipate a drop toward the $65 level and possibly the 100-dma. More conservative traders may want to raise their stop loss closer to the $65 level. ATI only lost about $1.20 on the week but I am not suggesting new positions at this time.

- Suggested Positions -
Mar 10, 2011 - entry price on ATI @ 60.78, option @ 6.40
symbol: ATI1221A70 2012 JAN $70 call - current bid/ask $ 8.30/ 8.60

- or -

Mar 10, 2011 - entry price on ATI @ 60.78, option @ 10.20
symbol: ATI1319A70 2013 JAN $70 call - current bid/ask $13.30/14.40

04/30/11 New stop loss @ 61.90
04/30/11 Adjusted targets to $74.50 and $84.50
04/02/11 New stop loss @ 59.00

Current Target: $74.50, and $84.50
Current Stop loss: 61.90
Play Entered on: 03/10/11
Originally listed on the Watch List: 02/05/11


Boeing Co. - BA - close: 79.03

05/14 update: BA is still holding up pretty well. Shares only suffered a minor loss for the week. The stock is consolidating sideways in the $78-80 area. Given the market's recent weakness I am not suggesting new positions at this time. If the stock market continues to sink we should expect BA to break lower and probably retest support in the $76-75 area. A bounce near $75 could be used as a new bullish entry point.

Please note that I am raising our stop loss to $73.90.

- Current Positions -
Apr 27, 2011 - entry price on BA @ 76.50, option @ 4.50
symbol: BA1221A80 2012 JAN $80 call - current bid/ask $ 6.05/ 6.15

Apr 27, 2011 - entry price on BA @ 76.50, option @ 4.95
symbol: BA1319A90 2013 JAN $90 call - current bid/ask $ 5.80/ 6.00

05/14/11 New stop loss @ 73.90
04/27/11 Play opened. Small positions.

Current Target: $89.00, and $104.00
Current Stop loss: 73.90
Play Entered on: 04/27/11

Originally listed on the Watch List: 03/26/11


BE Aerospace Inc. - BEAV - close: 37.84

05/14 update: BEAV displayed some relative strength last week and managed to end the week with a gain. I wouldn't celebrate just yet. The stock ha been unable to break the bearish trend of lower highs. This trend goes all the way back to the highs from late 2007. Now with the stock market looking fragile there is a good chance BEAV is about to roll over again. I would expect a dip back toward the $35.50 level of support or even the simple 200-dma. If we're lucky shares might bounce at the 50-dma near $36.00.

A drop back toward $35 would be very painful for our calls. I am suggesting we sell part of our position now to lock in a gain. More conservative traders may want to just exit completely right here. I am not suggesting new positions at this time. If somehow BEAV breaks out higher then I'm moving our upside target to $42.50. I am also moving our stop loss to $34.75.

- Current Positions -
Feb 23, 2011 - entry price on BEAV @ 34.00, option @ 2.75
symbol: BEAV1116G35 2011 JUL $35 call - current bid/ask $ 3.60/ 3.90

05/14/11 Sell at least half now. Bid @ $3.60 (+30.9)
05/14/11 Adjusted upside target to $42.50
05/14/11 New stop loss @ 34.75
04/30/11 New stop loss @ 33.95
04/09/11 New stop loss @ 32.95
04/02/11 New stop loss @ 31.95

Chart of BEAV:

Current Target: $42.50
Current Stop loss: 34.75
Play Entered on: 02/23/11
Originally listed on the Watch List: 01/22/11


Bristol-Myers Squibb Company - BMY - close: 28.81

05/14 update: Investors have been turning to more defensive names, which is probably why BMY is still trading near its three-year highs. I'm still concerned that BMY looks overbought but big cap defensive names will probably fare better than most if the stock market declines. BMY should have some support at $28.00. I am not suggesting new positions at this time.

Our long-term targets is $32.00. Investors might want to consider turning this trade into a calendar spread or vertical spread to maximize its potential.

- Suggested Positions -
Mar 14, 2011 - entry price on BMY @ 26.14, option @ 1.13
symbol: BMY1221A27.5 2012 JAN $27.50 call - current bid/ask $ 2.29/ 2.34

- or -

Mar 14, 2011 - entry price on BMY @ 26.14, option @ 1.63
symbol: BMY1319A27.5 2013 JAN $27.50 call - current bid/ask $ 2.97/ 3.05

Current Target: $32.00
Current Stop loss: 24.95
Play Entered on: 03/14/11
Originally listed in the New Plays 03/12/11


CACI International - CACI - close: 62.71

05/14 update: CACI still looks pretty good trading near multi-year highs. Shares did consolidate sideways the last few days but that's healthy. If the market corrects lower we can look for CACI to dip toward the $61-60 zone. A bounce from the $60 area can be used as a new bullish entry point.

Earlier Comments:
I do consider this a more aggressive trade and if we keep our position size small we can limit our risk. Our first upside target is $69.00. CACI doesn't have LEAPS so we'll have to use the 2011 September calls.

- Current (small) Positions -
Apr 4, 2011 - entry price on CACI @ 62.04, option @ 3.30
symbol: CACI1117I65 2011 SEP $65 call - current bid/ask $ 2.55/ 2.85

05/07/11 New stop loss @ 57.75

Current Target: $69.00
Current Stop loss: 57.75
Play Entered on: 04/04/11
Originally listed on the Watch List: 02/12/11


Canadian Natl. Railway Co. - CNI - close: 75.64

05/14 update: You might naturally think that a drop in oil prices, which means lower fuel prices, would be celebrated by the transport stocks. Yet transports were unable to avoid the selling pressure last week and railroads stocks underperformed. Good news about lower oil prices were overshadowed by concerns of a slow down in the economy. I am not concerned that the CNI might retrace lower toward its rising 100-dma, which would be a painful move in our options but the long-term up trend for CNI would still be intact. More conservative traders may want to consider a much tighter stop loss to limit potential losses. I am not suggesting new positions at this time.

- Current Positions -
Feb 28, 2011 - entry price on CNI @ 72.39, option @ 2.90
symbol: CNI1221A80 2012 JAN $80 call - current bid/ask $ 3.10/ 3.40

05/05/11 new entry point @ 75.00
04/02/11 New stop loss @ 69.00

Current Target: $89.00
Current Stop loss: 69.00
Play Entered on: 02/28/11
Originally listed in the New Plays 02/26/11


Costco Wholesale - COST - close: 82.72

05/14 update: COST is still bucking the trend in the market. Shares rallied to new all-time highs last week and COST continues to look overbought here. More conservative traders may want to either take profits now or up their stop loss significantly. Earnings are coming up in about ten days. If COST extends its gains this coming week I will seriously consider taking an early exit in front of the earnings report to avoid any negative surprises in COST's report. I am not suggesting new bullish positions at this time.

Please note our new stop loss at $75.75. Conservative traders may want theirs even higher.

- Current Positions -
Apr 7, 2011 - entry price on COST @ 76.37, option @ 3.80
symbol:COST1221A80 2012 JAN $80 call - current bid/ask $ 7.20/ 7.35

- or -

Apr 7, 2011 - entry price on COST @ 76.37, option @ 5.05
symbol:COST1319A85 2013 JAN $85 call - current bid/ask $ 7.95/ 8.15

05/14/11 New stop loss @ 75.75
04/30/11 New stop loss @ 73.40

Current Target: $89.50, 99.00
Current Stop loss: 75.75
Play Entered on: 04/07/11
Originally listed on the Watch List: 01/29/11


Walt Disney Co. - DIS - close: 41.52

05/14 update: DIS had rally toward multi-year highs on May 10th but the stock sold off sharply following its earnings report. Analysts were looking for 56 cents a share. DIS delivered 49 cents, a 7-cent miss. The sour spot in their report was their Parks and Resorts division that saw income slide -3%. Shares of DIS gapped open lower the next day and spent the rest of the week consolidating near technical support at its 100-dma.

The stock continues to have additional support in the $40 area but many of the technicals indicators have naturally turned bearish following recent trading. It may take several weeks for DIS to find its footing again. I am not suggesting new positions at this time.

- Current Positions -
Oct 27, 2010 - entry price on DIS @ 35.60, option @ 2.23
symbol: DIS1221A40 2012 JAN $40 call - current bid/ask $ 4.00/ 4.10

- or -

Oct 27, 2010 - entry price on DIS @ 35.60, option @ 3.63
symbol: DIS1319A40 2013 JAN $40 call - current bid/ask $ 6.05/ 6.15

02/12/11 New stop loss @ 37.85
02/09/11 1st Target Hit. Options @ +137% and +103%
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

Current Target(s): $43.00, 49.00
Current Stop loss: 37.85
Play Entered on: 10/27/10
Originally listed on the Watch List 10/24/10


Dow Chemical - DOW - close: $38.37

05/14 update: Our new DOW play is not off to a great start. The rally early last week failed. I did suggest readers could look for a dip toward the 50-dma as a new entry point that that is exactly what DOW has provided. However, the stock market looks fragile and could see further declines. Readers may ant to wait and see if shares of DOW bounce from the 100-dma instead as an alternative entry point to buy calls.

More conservative traders could put their stop closer to the rising 100-dma instead. Our long-term targets are $47.00 and $56.00. FYI: The Point & Figure chart is bullish with a $69 target.

- Current Positions -
May 9, 2011 - entry price on DOW @ 39.60, option @ 3.70
symbol: DOW1221A40 2012 JAN $40 call - current bid/ask $ 2.85/ 2.89

- or -

May 9, 2011 - entry price on DOW @ 39.60, option @ 4.00
symbol: DOW1319A45 2013 JAN $45 call - current bid/ask $ 3.20/ 3.35

Current Target: $47.00, $56.00
Current Stop loss: 35.90
Play Entered on: 05/09/11
Originally listed on the Watch List: 04/30/11


Dr. Pepper Snapple Group, Inc. - DPS - close: 41.78

05/14 update: Our new watch list candidate DPS is off to a great start. The stock ignored the market's recent weakness and broke out to new all-time highs this past week. The close over resistance in the $40.00 area is very bullish. We had a trigger to buy calls at $40.55, which was hit on May 11th. If you missed the entry point readers may want to wait for another dip into the $40.75-40.00 zone as a new entry point. We'll use a stop loss at $37.95 but more conservative traders could put their stop closer to the $39.00-39.50 area instead. Currently our exit target is $46.00. DPS does not have LEAPS so we'll have to use the November 2011 calls.

- Current Positions -
May 11, 2011 - entry price on DPS @ 40.55, option @ 2.85
symbol: DPS1119K40 2011 NOV $40 call - current bid/ask $ 3.40/ 3.70

- or -

May 11, 2011 - entry price on DPS @ 40.55, option @ 1.00
symbol: DPS1119K45 2011 NOV $45 call - current bid/ask $ 1.25/ 1.45

Chart of DPS:

Current Target: $46.00
Current Stop loss: 37.95
Play Entered on: 05/11/11
Originally listed on the Watch List: 05/07/11


Brinker International - EAT - close: 25.31

05/14 update: EAT displayed some strength with a gain last week. Shares are now approaching resistance at their three-year highs in the $25.50-26.00 zone. I breakout here after a two-month consolidation would be very bullish. At the moment I am not suggesting new positions at this time.

- Current Positions -
Feb 23, 2011 - entry price on EAT @ 22.50, option @ $ 1.10
symbol: EAT1116G25 2011 JUL $25 call - current bid/ask $ 1.35/ 1.60

04/02/11 New stop @ 22.90
03/26/11 New stop @ $21.95

Current Target: $29.50
Current Stop loss: 22.90
Play Entered on: 02/23/11
Originally listed on the Watch List: 02/12/11


Ford Motor Co - F - close: 15.08

05/14 update: Ford closed virtually unchanged on the week. That's not necessarily a bad thing. The stock appears to have technical support at its 50-dma and 200-dma directly below it. On a positive note the 50-dma is flattening out. Previously it looked like the 50-dma would cross under the 200-dma, which is normally a very bearish signal. That can still happen if Ford breaks down from last week's consolidation. Readers may want to wait for a close over technical resistance at its 100-dma before considering new bullish positions.

Our long-term exit targets are $19.75 and $24.00.

- Suggested Positions -
Feb 28, 2011 - entry price on F @ 15.29, option @ 2.17
symbol: F1221A15 2012 JAN $15 call - current bid/ask $ 1.57/ 1.60

- or -

Feb 28, 2011 - entry price on F @ 15.29, option @ 1.50
symbol: F1319A20 2013 JAN $20 call - current bid/ask $ 1.00/ 1.06

- Second Position, listed May 7th, 2011 -

May 9, 2011 - entry price on F @ 15.12, option @ 1.71
symbol: F1221A15 2012 JAN $15 call - current bid/ask $ 1.57/ 1.60

- or -

May 9, 2011 - entry price on F @ 15.12, option @ 1.09
symbol: F1319A20 2013 JAN $20 call - current bid/ask $ 1.00/ 1.06

05/07/11 New entry point on bounce from $15.00
03/26/11 New stop loss @ $12.95

Current Target: $19.75, and $24.00
Current Stop loss: 12.95
Play Entered on: 02/28/11
Originally listed in the New Plays 02/26/11


Fiserv, Inc. - FISV - close: 62.00

05/14 update: FISV has spent two weeks in a row churning sideways in the $61-63 range. It's getting sandwiched between the 100-dma beneath it and the 20 and 30-dma above it. This neutral pattern doesn't offer us any clues about direction and oscillating technicals aren't much help with this much sideways movement. Obviously a close under the 100-dma or the $61.00 level would be bearish. I am not suggesting new bullish positions at this time.

- Suggested Positions -
Feb 14, 2011 - entry price on FISV @ 62.30, option @ 3.20
symbol: FISV1117I65 2011 SEP $65 call - current bid/ask $ 1.70/ 1.90

Current Target: $74.75
Current Stop loss: 57.50
Play Entered on: 02/14/11
Originally listed on the Watch List: 01/29/11
Originally listed in the New Plays 02/12/11


James River Coal Co. - JRCC - close: 21.11

05/14 update: Coal stocks have been struggling the last couple of weeks. Earnings news from JRCC this past week certainly didn't help. Analysts were expecting a profit of 27 cents but JRCC said earnings were -28 cents. That's a 55-cent miss for the quarter with revenues down more than -10%. I'm surprised the stock did not see a much steeper sell-off. JRCC produced a two-day sell-off that round support at its exponential 200-dma. This is a new relative low but JRCC has not yet broken down through likely support at its simple 200-dma or the March lows near $20.00. Of course that doesn't mean the stock won't break down below these levels. Investors seem to be selling into strength even though longer-term fundamentals for energy stocks seem to be bullish.

More conservative traders may want to abandon ship. I'm not willing to give up just yet as long as the $20 level holds up. I am not suggesting new positions at this time.

- Current Positions -
Apr 12, 2011 - entry price on JRCC @ 22.50, option @ 3.10
symbol: JRCC1221A25 2012 JAN $25 call - current bid/ask $ 1.90/ 2.20

- or -

Apr 12, 2011 - entry price on JRCC @ 22.50, option @ 4.70
symbol: JRCC1319A27 2013 JAN $27 call - current bid/ask $ 3.00/ 3.70

Current Target: $29.50
Current Stop loss: 19.90
Play Entered on: 04/12/11
Originally listed on the Watch List: 01/22/11


Monsanto Co. - MON - close: 63.79

05/14 update: This is it. It's do or die for our MON play. The stock has continued to sink under a bearish trend of lower highs and lower lows. With shares close at new four-month lows on Friday readers may want to exit early now. However, the stock has stalled near technical support at its simple 200-dma. The problem now is the stock market's recent weakness. Further declines in the major averages will likely push MON lower and stop us out under the $62 level. MON's trend has been bearish the last few weeks and a breakdown below this support level would suggest a much more deeper correction to come. We do not want to open new bullish positions at this time.

Prior Comments:
Our plan was to keep our position size small to limit our risk since MON can be so volatile at times. Our long-term targets are the $85-90 zone.

- Current (SMALL) Positions -
Mar 15, 2011 - entry price on MON @ 65.50, option @ 6.75
symbol: MON1221A70 2012 JAN $70 call - current bid/ask $ 3.90/ 4.05

- or -

Mar 15, 2011 - entry price on MON @ 65.50, option @ 8.75
symbol: MON1319A75 2013 JAN $75 call - current bid/ask $ 5.55/ 5.70

04/09/11 New stop loss @ 61.75, Readers may want to exit early now.

Chart of MON:

Current Target(s): $85.00
Current Stop loss: 61.75
Play Entered on: 03/15/11
Originally listed on the Watch List: 01/08/11


PACCAR Inc. - PCAR - close: 51.67

05/14 update: After three weeks of churning sideways PCAR displayed relative weakness on Friday with a -2.9% loss. The bearish trend of lower highs and lower lows over the last three weeks is subtle but it's still there. Shares are nearing technical support at both its 50-dma and 200-dma near $51.00. Nimble traders might want to consider bullish positions if PCAR can bounce from the $50.00 or $51.00 levels but keep your position size small to limit your risk.

More conservative traders may want to raise their stop loss closer to the $49.00 levels. I'm inching our stop loss to $47.75 but keeping our stop loss under the long-term trend line of higher lows on the weekly chart.

FYI: If looks like PCAR must have had some sort of special dividend to create these odd strike prices. Instead of a normal $55.00 strike price PCAR has $54.70 strikes.

- Current (SMALL) Positions -
Mar 21, 2011 - entry price on PCAR @ 50.75, option @ 3.70
PCAR1221A54.7 2012 JAN $54.70 call - current bid/ask $ 3.50/ 3.70

- or -

Mar 21, 2011 - entry price on PCAR @ 50.75, option @ 8.00
PCAR1319A54.7 2013 JAN $54.70 call - current bid/ask $ 6.40/ 7.50

05/14/11 New stop loss @ 47.75

Chart of PCAR:

Current Target(s): $58.00, 64.00
Current Stop loss: 47.75
Play Entered on: 03/21/11
Originally listed on the Watch List: 03/19/11


Scotts Miracle Grow Co. - SMG - close: 58.77

05/14 update: SMG managed a gain for the week but shares are retreating from their new all-time highs set on May 10th. Given the stock market's recent declines I would expect SMG to pull back toward the $57.00-55.00 zone again. No new positions at this time. Let's wait and watch to see where it bounces.

Earlier Comments:
We want to keep our position size small to limit our risk. SMG doesn't have LEAPS so we'll have to buy September calls. Our target is the $65-70 zone.

- Current (SMALL) Positions -
Mar 25, 2011 - entry price on SMG @ 58.00, option @ 3.00
SMG1117I60 2011 SEP $60 call - current bid/ask $ 2.40/ 2.65

Current Target(s): $65.00-70.00
Current Stop loss: 53.75
Play Entered on: 03/25/11
Originally listed on the Watch List: 03/05/11


Southwestern Energy Co. - SWN - close: 41.20

05/14 update: SWN has not been immune to the pull back in energy stocks but shares did seem to find some support at their 50-dma on Thursday and Friday. At the moment SWN still has a bullish trend of higher lows and higher highs. It would not surprise me to see SWN dip toward support near $40.00 or even the $39.00 level, neither of which would break the bullish pattern. I am not suggesting new bullish positions at this time. I would keep your position size small.

- Current (SMALL) Positions -
Apr 7, 2011 - entry price on SWN @ 40.50, option @ 2.90
SWN1221A45 2012 JAN $45 call - current bid/ask $ 2.95/ 3.05

- or -

Apr 7, 2011 - entry price on SWN @ 40.50, option @ 5.85
SWN1319A45 2013 JAN $45 call - current bid/ask $ 5.60/ 5.85

05/07/11 New stop loss @ 37.75

Current Target(s): $50.00-52.50
Current Stop loss: 37.75
Play Entered on: 04/07/11
Originally listed on the Watch List: 04/02/11


Union Pacific Corp. - UNP - close: 100.46

05/14 update: My comments in our CNI trade are just as appropriate here. Investors were taking profits in the railroad stocks on worries of a slow down in the economy. For the moment UNP is holding support at the $100 level. Yet if the stock market continues to slide lower I do not expect this level to hold. UNP should have additional support at its rising 100-dma (currently near $96.40). I would wait for a dip or a bounce near the 100-dma before considering new bullish positions.

- Current Positions -
May 5, 2011 - entry price on UNP @ 100.15, option @ 5.00
UNP1221A110 2012 JAN $110 call - current bid/ask $ 4.25/ 4.40

- or -

May 5, 2011 - entry price on UNP @ 100.15, option @ 6.00
UNP1319A120 2013 JAN $120 call - current bid/ask $ 5.40/ 5.95

Current Target(s): $119.75-134.00
Current Stop loss: 94.45
Play Entered on: 05/05/11
Originally listed on the Watch List: 04/30/11


CLOSED Plays


Arch Coal Inc. - ACI - close: 30.90

05/14 update: The sell-off in ACI and the rest of the coal industry continued. ACI was underperforming both its peers and the market with a sharp decline. Furthermore ACI broke down under support at its exponential 200-dma, at its simple 200-dma and at the $30.00 level. Our stop loss was hit on Thursday at $29.75 closing this trade. What's odd is the long-term outlook and demand for coal remains positive. ACI was even upgraded on Thursday but that didn't stop the sell-off.

This breakdown and close under $30.00 is very bearish and ACI could be headed for the $25-20 range.

- Current Positions -
Nov 22, 2010 - entry price on ACI @ 30.15, option @ 3.90
symbol: ACI1221A35 2012 JAN $35 call - Exit @ 2.05 (-47.4%)

- or -

Nov 22, 2010 - entry price on ACI @ 30.15, option @ 5.15
symbol: ACI1319A35 2013 JAN $35 call - Exit @ 4.10 (-20.3%)

05/12/11 Stopped out @ 29.75, Options @ -47.4% & -20.3%
04/23/11 Adjusted targets to $39.75 and $44.75
03/05/11 New stop loss @ 29.75
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, $44.50
Current Stop loss: 29.75
Play Entered on: 11/22/10
Originally listed in the New Plays 11/20/10


Berkshire Hathaway - BRK.B - close: 79.65

05/14 update: The situation does not look good for BRK.B. Shares have been consolidating sideways under resistance in the $81-82 zone while shares have been unable to break the bearish trend of lower highs. At the moment BRK.B looks poised to drop toward support near $79.00 and this time I'm not expecting it to hold. More aggressive traders may want to let it ride. I am throwing in the towel. I'm giving up and suggesting an early exit now before our losses get any bigger.

- Current Positions -
Oct 29, 2010 - entry price on BRK.B @ 79.00, option @ 5.00
symbol: BRKB1221A90 2012 JAN $90 call - Exit @ $1.86 (- 62.8%)

05/14/11 Exit early. BRK.B @ $79.65. Option @ -62.8%
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.

Chart of BRK.B:

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


Watch

Relative Strength Candidates

by James Brown

Click here to email James Brown

Editor's Note:

Investors may want to be cautious on new entries at this time. The market looks a little vulnerable here. A few stocks currently on my radar screen are KO, MCD, and GIS. These large cap, defensive names have been showing relative strength, which says something about investor sentiment at the moment. Yet even these stocks could correct lower if the market starts to slide.

I'd keep an eye on them. We might see an entry point in these names over the next few weeks. I will add that KO and GIS don't move very fast so investors will need patience.



New Watch List Entries

DRI - Darden Restaurants

PEP - Pepsico, Inc.


Active Watch List Candidates

HSY - Hershey Co.

INTC - Intel Corp.

T - AT&T Inc.

ZMH - Zimmer Holdings


Dropped Watch List Entries

DPS has already graduated to the play list.



New Watch List Candidates:


Darden Restaurants - DRI - close: $50.31

Company Info

You might think that with gasoline prices on the rise in recent months a discretionary consumer name like DRI might see its stock price struggle. Money poured into our gas tank means less money for eating out. Yet many of the restaurant names have been performing pretty well. DRI pretty much ignored the market weakness this month. Instead shares are breaking out from a multi-month consolidation sideways. DRI is on the verge of hitting new all-time highs.

Nimble traders may want to consider buying a dip or bounce near the $48.00 level. If the right opportunity presents itself the newsletter my try and do just that. However, tonight we're listing a breakout trigger to open bullish positions when DRI closes above $51.00. That's right, I said when it closes above the $51.00 level. Normally our triggers are based on an intraday move. We'll set our stop loss at $47.40. Our long-term targets are $59.50 and $64.75.

Breakout trigger: $51.00 (a close above this level)

BUY the 2012 Jan $55 call (DRI1221A55) current ask $2.15

- or -

BUY the 2013 Jan $55 call (DRI1319A55) current ask $4.60

Chart of DRI:

Originally listed on the Watch List: 05/14/11


Pepsico, Inc. - PEP - close: $70.56

Company Info

The stock has seen a few false starts and it's taken over a year but PEP has finally and very convincingly broken out past major resistance at the $67.00 level. The stock stalled at $67.00 back in March 2010. PEP saw a few bull traps over the months. Now investors are pouring money into large cap, defensive names and PEP has broken out to new two-year highs.

Currently the stock market's major indices look a little vulnerable to more selling pressure. If that happens we want to be ready to buy a dip in PEP. Broken resistance at $67.00 should be new support. I'm suggesting a buy-the-dip entry point at $68.00 with a stop loss at $66.40. If triggered our long-term targets are $75 and $79. Buy-the-Dip trigger: $68.00

BUY the 2012 Jan. $70 call (PEP1221A70)

- or -

BUY the 2013 Jan. $70 call (PEP1319A70)

Chart of PEP:

Originally listed on the Watch List: 05/14/11


Active Watch List Candidates:



Hershey Co. - HSY - close: 57.34

05/14 update: HSY displayed relative strength this past week. Yet the new rally is stalling near resistance at its recent highs set in April near $58.00. If the market corrects from current levels there is a good chance HSY will finally see some profit taking. We still do not want to chase it at current levels.

I'm suggesting a buy-the-dip entry point at $53.00. If triggered at $53.00 we'll use a stop loss at $49.45. Our long-term targets are $60 and $64.

Buy-the-Dip trigger: $53.00

BUY the 2012 $55 calls (HSY1221A55)

- or -

BUY the 2013 $55 calls (HSY1319A55)

Originally listed on the Watch List: 04/02/11


Intel Corp. - INTC - close: 23.41

05/14 update: The SOX semiconductor index spent the week consolidating sideways. Yet one of its biggest components posted another gain. INTC ended the week just under its highs from a week ago. The stock remains short-term overbought and due for a correction. I am suggesting a buy-the-dip entry point at $22.25 since broken resistance at $22.00 should be new support. More conservative traders may want to wait and see if INTC dips back toward its 50-dma before considering new bullish positions. Our long-term targets are the $26-28 zone. If triggered we'll use a stop loss at $20.75.

Buy-the-Dip trigger: $22.25

BUY the 2012 Jan. $22.50 call (INTC1221A22.5) current ask $2.26

- or -

BUY the 2013 Jan. $22.50 call (INTC1319A22.5) current ask $3.20

Originally listed on the Watch List: 05/07/11


AT&T - T - close: 31.41

05/14 update: AT&T has moved from one sideways consolidation to another. Shares spent most of April moving sideways above prior resistance near $30. Now the stock is moving sideways above prior resistance at $31. If I was just looking at AT&T's chart I'd expect a breakout higher from the current consolidation. Yet the market's major indices look fragile so I'd rather wait and see if AT&T will retest the $30 area.

Currently we have a buy-the-dip entry point at $30.25. If triggered we'll use a stop loss at $28.45. Our long-term target is the $36-40 zone. AT&T doesn't move very fast so we will need lots of patience.

Buy-the-Dip trigger: $30.25

BUY the 2012 January $30.00 call (T1221A30)

- or -

BUY the 2013 January $30.00 call (T1319A30)

Originally listed on the Watch List: 04/09/11


Zimmer Holdings, Inc. - ZMH - close: 68.89

05/14 update: ZMH posted another gain with the big surge higher on May 10th. This is a new two-year high for ZMH. The rally seems to have paused under round-number resistance at $70.00. We don't want to open positions here. Broken resistance in the $64-65 area should be new support. We'll move our buy-the-dip entry point from $63.00 to $64.00 and move our stop loss, if triggered, to $59.90. Our long-term targets are $78.50 and $88.50, although the high $80s might be a little optimistic.

Buy-the-Dip trigger: $63.00

BUY the 2012 Jan. $70 call (ZMH1221A70)

- or -

BUY the 2013 Jan. $70 call (ZMH1319A70)

Originally listed on the Watch List: 04/30/11