Option Investor
Newsletter

Daily Newsletter, Sunday, 5/22/2011

Table of Contents

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

Leaps Trader Commentary

Lost on Wall Street

by James Brown

Click here to email James Brown

It proved to be a disappointing week for stock market bulls. Concerns over Greece, economic data in the U.S. and a round of bearish earnings numbers helped undermine investor confidence. Stocks managed a bounce off their Tuesday lows but the rebound stalled, which produced a three-week trend of lower highs and lower lows. The market's major indices look like they are in jeopardy of breaking their longer-term bullish trend of higher lows.

The situation in Greece has graduated from the back burner to front and center again. The country's debt was downgraded again. This time by the Fitch rating agency to junk bond status. Of course this really shouldn't be a surprise. Investors have been growing more and more concerned that Greece will default on its debt. Readers of this newsletter know we've been expecting that Greece will eventually default on its debt or see some sort of restructuring of its debt, which is merely a nice way of saying "default". Restructuring usually means bad news if you're a debt holder. It was always a matter of when, not if Greece would default.

Sure, sure, you've heard all of this about Greece before, right? Do you remember the firestorm over Greece and its bailout a year ago? This past week the yield on a Greek 10-year bond surged to 15.8%. This is more than 100% higher than its yield a year ago. That's telling you investors are demanding big payouts to hold this debt because they're worried the country will default.

It's not really about Greece. It's about the structure and safety of the EU and euzo-zone. If Greece defaults or chooses to leave the euro zone what does that mean for Portugal and Spain. Spain is the real worry because their economy and debts are so much larger than Greece. There are a lot of very important European banks holding massive amounts of debt for Greece, Portugal and Spain. We're going to hear more about Portugal and Spain soon. Both countries need to roll over significant amounts of debt in the next several weeks. The total is about 20 billion euros worth of bonds. If the debt auctions don't fare well it will pour gasoline on the fire for Europe's debt worries.

Weakness in Europe's debt markets will send the euro currency falling, which will boost the dollar. Normally a rising dollar is bearish for commodities. On a positive note falling commodities should mean less inflation here at home. After a week of churning sideways the euro already looks poised to resume its down trend and the U.S. dollar is poised to resume its up trend. While I'm on the subject of Europe this past week saw some concerns about the growth rates in Germany, which is Europe's largest and arguably strongest economy. Here at home the parade of economic data has been distressing. The Philly Fed survey seems to be imploding. A month ago the Philadelphia Federal Reserve index dropped from 43.4 to 18.5. This week the same index plunged from 18.5 to 3.9. Economists had been expecting a minor drop to 17.5. This is a HUGE drop in just two months.

Meanwhile the data on the real estate industry is not improving. Spring is here. New and existing home sales should be improving. That's not the case. Existing home sales fell from an annualized pace of 5.09 million units to 5.05 million in April. Analysts had been expecting a rise to 5.23 million. Housing starts are also struggling. April housing starts came in at 523,000, which was down from the prior month's 585,000 and well below expectations. Building permits were also declining and came in at 551,000. The new home sales data for April comes out on Monday and economists are looking for 300,000.

On top of the disappointing economic news were some earnings misses. Retailers Aeropostale (ARO) and The Gap (GPS) were making headlines. ARO reported earnings inline, missed on the revenue number and then guided Q2 lower. GPS managed to beat estimates by a penny, but then issued a warning for the second quarter. The negative headlines overshadowed the earnings beat by rival Abercrombie & Fitch (ANF) who delivered a profit 15 cents better than expected. ANF's revenues were above estimates and margins were also significantly higher. The retail sector could see more profit taking if investors start to worry about the consumer. Currently the RLX retail index is only down -3.6% from its all-time high set just two weeks ago.

Last weekend I warned readers to watch the 1330 and 1320 levels on the S&P 500. Last Monday's close under 1330 looked bearish and Tuesday saw a drop under 1320 before the market produced an intraday bounce. Now the bounce has stalled and the S&P 500 has a three-week bearish trend of lower highs and lower lows. If this trend continues then we're probably looking at the S&P 500 falling to its 100-dma near 1313-1315 and if that level fails then a drop to the 1300 level. If you're feeling optimistic then you can argue the S&P 500 is forming a bull-flag consolidation pattern only without much of a flag pole. If a reversal higher occurs then a move past the 1345-1350 zone could spark some short covering and send us back toward the early May highs.

Daily chart of the S&P 500 index:

Weekly chart of the S&P 500 index:

The NASDAQ Composite has been a lot more volatile. The breakdown under 2800 saw a drop toward technical support at its 100-dma. Now the oversold bounce is already stalling. It looks like the NASDAQ is ready to slip lower again. If the 100-dma fails then it could see a plunge toward the 2700 area. I will repeat my comments from last week. A close under 2700 would look ominous for tech stocks.

Daily chart of the NASDAQ Composite index:

What worries me is the breakdown in the small cap Russell 2000 index (also evident in the IWM Russell 2000 ETF below). Three weeks ago the $RUT produced a bearish reversal pattern. Stocks have continued to slip since then. This past week saw the $RUT (and IWM) break its trendline of higher lows. If we see the $RUT close under its 100-dma it could be forecasting a much more significant correction lower. Right now the short-term trend is down!

Weekly chart of the IWM (Russell 2000) ETF:

This coming week is full of economic reports. New home sales and pending home sales will shed more light on the real estate sector. Personal income/spending and the Michigan Sentiment numbers for May will highlight the consumer. The durable goods orders and the second estimate on the Q1 GDP will focus on the economy.

Overall I don't see a lot of changes from my comments last weekend. Once again the U.S. markets will be held hostage to the situation with Europe's PIGS countries and the strength or weakness in the euro and dollar. The U.S. market lacks leadership. Small caps look poised to underperform as investors look for safety in large cap blue-chip names. Yet if the market accelerates lower even the blue chips will fall, albeit to a lesser degree.

I will steal a comment from Jim in the OptionInvestor newsletter. Investors are in a "why buy" period on the calendar. Earnings season is over. We're in the worst six months of the year (remember the sell in May strategy) and we're facing the prospect of slow, summer doldrums. Economic data seems to be suggesting a slowdown in the U.S. economy. Europe is slowly losing its grip on the Greece situation. I heard someone refer to the meltdown in Greece is like watching a car crash occur in super slow motion. Plus, if that wasn't enough, we have a dark cloud of uncertainty surrounding the U.S. markets when QE2 expires at the end of June, which is less than six weeks away. The one thing the stock market hates the most is uncertainty. You could say the market is lost and looking for direction again. This could be a pivotal week as stocks decide to bounce and resume the up trend or fall and break the up trend. There is always the chance stocks churn sideways and postpone the decision (up or down) another week.

I am suggesting a defensive, step back and watch mindset. I would not rush to buy the dip this week.

- James


Portfolio

Portfolio Update

by James Brown

Click here to email James Brown


Current Portfolio


Portfolio Comments:

The month of May has produced a bearish trend of lower highs and lower lows for the stock market's major averages. The S&P 500 just produced a new lower high on Thursday leaving us facing the probability of a new lower low soon. The long-term trend is still up but that could change if we see the major indices start breaking significant support. Thus investors need to stay on the defensive with bullish trades.

We had ACI hit our stop loss last week. I am suggesting an early exit in ATI and DOW. I am also suggesting we take some money off the table in our COST trade.

CNI and F 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

Why Now?

by James Brown

Click here to email James Brown

Editor's Note:

Almost nothing has changed for us in the last week except that the market's major indices have extended their weekly losses to three in a row. There is still no leadership and financials continue to sink. It seems that more and more the economic data is suggesting the U.S. economy is slowing down. While on one hand it will keep the Federal Reserve on the sidelines and could fuel the need for even more stimulus. On the other hand a slowing economy does not mean healthy earnings numbers, which impacts stock prices.

We have know about the end of QE2 for a long time but investors are still confused about what that might mean for the market and the economy. I am suggesting that investors stay in a defensive posture. We do not need to be in a rush to open new long-term bullish positions. Why buy stocks now when we might get a better entry point in a couple of weeks or a month from now. The market's long-term trend is still up but the short-term trend (last three weeks) is a bearish one.

In this environment we need to be cautious when adding new trades. I'm not adding any new candidates tonight but we did include two new candidates with a buy-the-dip entry point on our watch list.


Play Updates

Taking Money Off the Table

by James Brown

Click here to email James Brown

Editor's Note:

We want to take some money off the table in our COST trade before earnings this week.

-James


Closed Plays


AKS, ATI, and DOW have been closed.


Play Updates


Boeing Co. - BA - close: 77.52

05/21 update: BA found support near $76 last week. The stock is trying to bounce but prior support near $78 is acting as resistance. If the market continues to slip we can expect BA to pull back toward more significant support in the $75-74 area. I'd wait for a bounce near $75 before considering new bullish positions.

- Current Positions -
Apr 27, 2011 - entry price on BA @ 76.50, option @ 4.50
symbol: BA1221A80 2012 JAN $80 call - current bid/ask $ 5.10/ 5.20

Apr 27, 2011 - entry price on BA @ 76.50, option @ 4.95
symbol: BA1319A90 2013 JAN $90 call - current bid/ask $ 5.15/ 5.35

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: 37.36

05/21 update: We were fortunate that BEAV found support at its 50-dma again. BEAV is currently consolidating sideways with a neutral trend of higher lows and lower highs. As this coil narrows we can expect a breakout one way or the other soon. Traditionally I'd expect a breakout in the prevailing trend, which for BEAV the long-term trend is still higher. However, the recent weakness in the stock market's major indices could weigh on BEAV's performance and produce a breakdown.

I am not suggesting new positions at this time. More conservative traders may want to up their stop toward the $35.50 area or the 50-dma.

- Current Positions -
Feb 23, 2011 - entry price on BEAV @ 34.00, option @ 2.75
symbol: BEAV1116G35 2011 JUL $35 call - current bid/ask $ 3.20/ 3.50

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

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: 28.37

05/21 update: After weeks of gains BMY is finally seeing some profit taking. Shares should see some support near $28.00. If that level fails then the 50-dma near $27.50 and the 200-dma near $26.65 should offer additional support. I am not suggesting new positions at this time. We'll wait to see where BMY bounces before considering new positions.

Our long-term target 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 $ 1.94/ 1.99

- or -

Mar 14, 2011 - entry price on BMY @ 26.14, option @ 1.63
symbol: BMY1319A27.5 2013 JAN $27.50 call - current bid/ask $ 2.65/ 2.72

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: 62.32

05/21 update: Shares of CACI are still holding up reasonably well. Traders bought the dip near $61 last week. CACI still has a bullish trend of higher lows. If CACI corrects and follow the market lower we can look for potential support near its 50-dma, near $60.00 and then near its 100-dma. I am not suggesting new bullish positions at this time. Our stop is currently under the 100-dma.

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 $ 2.25/ 2.55

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: 77.02

05/21 update: CNI delivered a gain for the week. Shares bounced from technical support at their 50-dma. The weekly chart has produced a bullish engulfing candlestick pattern. Unfortunately the bounce has not yet cleared the short-term trend of lower highs. You could argue that CNI is forming a bull-flag pattern. With the stock market looking fragile here I wouldn't be surprised to see another dip near the 50-dma again. The 100-dma has risen to the $72 level. I am raising our stop loss to $71.75. 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 $ 3.60/ 3.80

05/21/11 new stop loss @ 71.75
05/05/11 new entry point @ 75.00
04/02/11 New stop loss @ 69.00

Current Target: $89.00
Current Stop loss: 71.75
Play Entered on: 02/28/11
Originally listed in the New Plays 02/26/11


Costco Wholesale - COST - close: 83.40

05/21 update: Take Profits Now! COST has been showing relative strength and managed to post another gain for the week in spite of the market's weakness. The stock remains very overbought with its sharp rally from its March lows. Earnings are coming up on May 25th. What are the odds that investors decide to sell the news and lock in profits no matter what the results are?

I am suggesting we sell at least half of our position now. Plus, more conservative traders may want to raise their stop loss closer to the $79-80 area. I am not suggesting new positions now. I am expecting some profit taking following the earnings announcement.

- Current Positions -
Apr 7, 2011 - entry price on COST @ 76.37, option @ 3.80
symbol:COST1221A80 2012 JAN $80 call - current bid/ask $ 7.55/ 7.65

- or -

Apr 7, 2011 - entry price on COST @ 76.37, option @ 5.05
symbol:COST1319A85 2013 JAN $85 call - current bid/ask $ 8.30/ 8.55

05/21/11 Take Profits - Sell Half now! COST @ 83.40.
2012 $80 call @ $7.55 (+98.6%), 2013 $85 call @ $8.30 (+64.3%)
05/14/11 New stop loss @ 75.75
04/30/11 New stop loss @ 73.40

Chart of COST:

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: 41.50

05/21 update: DIS spent last week consolidating sideways after the earnings-induced sell-off the week before. The stock has a $44-40 trading range but I am not interesting in buying calls now with the stock market's major averages looking vulnerable to more selling pressure. 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 $ 6.10/ 6.20

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


Dr. Pepper Snapple Group, Inc. - DPS - close: 42.10

05/21 update: DPS managed to eke out another gain for the week but upward momentum seems to be stalling a bit. This past week saw DPS raise its quarterly cash dividend +28% to 32 cents a share. I would wait for a dip near $40.00 before considering new bullish positions. 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 $ 3.50/ 3.90

- or -

May 11, 2011 - entry price on DPS @ 40.55, option @ 1.00
symbol: DPS1119K45 2011 NOV $45 call - current bid/ask $ 1.30/ 1.55

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


Darden Restaurants - DRI - close: $51.52

05/21 update: The rally in restaurant stocks continues. DRI has broken out to new all-time highs. Shares met our condition to launch positions on Thursday. We wanted to see DRI close above the $51.00 level. Shares did so with a big surge higher on Friday to close near $52.00. I would still consider new positions now but there is a good chance we'll get a better entry point on a dip into the $51-50 zone soon.

Now that our play is open our stop loss is at $47.40. Our long-term targets are $59.50 and $64.75.

- Current Positions -
May 19, 2011 - entry price on DRI @ 52.03, option @ 2.74
symbol: DRI1221A55 2012 JAN $55 call - current bid/ask $ 2.50/ 2.70

- or -

May 19, 2011 - entry price on DRI @ 52.03, option @ 5.50
symbol: DRI1319A55 2013 JAN $55 call - current bid/ask $ 4.90/ 5.40

Chart of DRI:

Current Target: $59.50, 64.75
Current Stop loss: 47.40
Play Entered on: 05/19/11
Originally listed on the Watch List: 05/14/11


Brinker International - EAT - close: 25.76

05/21 update: EAT is another restaurant stock that is performing well. Shares hit new three-year highs on Thursday. If the stock market didn't look so vulnerable right now I would consider new bullish positions in EAT. Unfortunately the market looks poised for more selling - at least on a short-term basis. 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 $ 1.45/ 1.75

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: 15.00

05/21 update: Ford has been going nowhere for the past three weeks now. You could argue Ford is merely churning sideways near support at $15.00 and technical support at its 50 and 200-dma. However, if you look close enough Ford has a bearish trend of lower highs and lower lows over the last three weeks. I am concerned that if the market accelerates lower Ford will break key support in the $15 area. If this happens I would bet on a test of the March lows near $13.75. Please note that I am raising our stop loss to $13.49. More conservative traders may want to up their stop loss toward the $14.50 area instead. I am not suggesting new bullish positions at this time.

- Suggested Positions -
Feb 28, 2011 - entry price on F @ 15.29, option @ 2.17
symbol: F1221A15 2012 JAN $15 call - current bid/ask $ 1.47/ 1.50

- or -

Feb 28, 2011 - entry price on F @ 15.29, option @ 1.50
symbol: F1319A20 2013 JAN $20 call - current bid/ask $ 0.94/ 1.00

- 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 $ 1.47/ 1.50

- or -

May 9, 2011 - entry price on F @ 15.12, option @ 1.09
symbol: F1319A20 2013 JAN $20 call - current bid/ask $ 0.94/ 1.00

05/21/11 New stop loss @ 13.49
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: 13.49
Play Entered on: 02/28/11
Originally listed in the New Plays 02/26/11


Fiserv, Inc. - FISV - close: 63.10

05/21 update: FISV displayed some strength last week and broke out higher from its sideways consolidation. This is encouraging but given the market's recent weakness I would not launch new positions at this time. FYI: More conservative traders may want to raise their stops closer to the $60.00 level.

- Suggested Positions -
Feb 14, 2011 - entry price on FISV @ 62.30, option @ 3.20
symbol: FISV1117I65 2011 SEP $65 call - current bid/ask $ 2.05/ 2.25

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: 21.06

05/21 update: The month of May has not been kind to coal stocks. On a positive note shares of JRCC seem like they might have found a bottom hear the 200-dma. Shares have been consolidating sideways the past several sessions. I remain very cautious here. The $20.00 level is key support and it's not that far away. We have a stop loss at $19.90. On a short-term basis the $22 area looks like resistance. 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 $ 1.85/ 2.15

- or -

Apr 12, 2011 - entry price on JRCC @ 22.50, option @ 4.70
symbol: JRCC1319A27 2013 JAN $27 call - current bid/ask $ 2.90/ 3.40

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: 66.33

05/21 update: Hmm.... it was an interesting week for MON. A week ago I wrote it was do or die for MON. Shares saw a dip toward $62 but it bounced intraday. On the 18th MON surged up and through its 200-dma and back above the $65.00 level. The oversold bounce did stall near its 50-dma but the action this past week has created hope the $62-63 area could be the support we were expecting. MON did break one trendline of lower highs but the intermediate trend is still a bearish one of lower highs and lower lows. I am not suggesting 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 $ 4.90/ 5.00

- or -

Mar 15, 2011 - entry price on MON @ 65.50, option @ 8.75
symbol: MON1319A75 2013 JAN $75 call - current bid/ask $ 6.55/ 7.00

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

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: 50.55

05/21 update: PCAR has broken down under technical support at its 50-dma and 200-dma but it has managed to bounce near psychological support at the $50.00 level. Lack of follow through on the sell-off is encouraging but the short-term trend is still down. A close under $50 could signal a drop toward its March lows, which would stop us out and break the long-term up trend for PCAR. I am not suggesting new bullish positions at this time.

More conservative traders may want to raise their stop loss closer to the $49.00 levels.

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 $ 2.95/ 3.10

- or -

Mar 21, 2011 - entry price on PCAR @ 50.75, option @ 8.00
PCAR1319A54.7 2013 JAN $54.70 call - current bid/ask $ 5.80/ 6.70

05/14/11 New stop loss @ 47.75

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: 57.48

05/21 update: SMG slipped to $56.17 at its lowest levels last week. I'm not convinced the correction is over and would still look for a dip toward support near $55 and its 100-dma.

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 $ 1.60/ 2.00

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: 42.87

05/21 update: SWN has been showing some relative strength. Investors have been buying dips near SWN's rising 50-dma. Technical signals are starting to turn bullish again. I am tempted to launch new positions here but I'm more concerned about another downturn for the market's major averages, which would probably weigh on SWN as well. More conservative traders might want to raise their stops closer to the $40 level.

Earlier comments:
We wanted to keep our position size small to limit our risk.

- Current (SMALL) Positions -
Apr 7, 2011 - entry price on SWN @ 40.50, option @ 2.90
SWN1221A45 2012 JAN $45 call - current bid/ask $ 3.50/ 3.60

- or -

Apr 7, 2011 - entry price on SWN @ 40.50, option @ 5.85
SWN1319A45 2013 JAN $45 call - current bid/ask $ 6.40/ 6.65

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: 101.99

05/21 update: UNP posted a gain for the week but the action hasn't been very inspiring. The stock bounced from the $99 level but saw its rally reverse at resistance near $104. Odds are good UNP will see another dip into the $100-98 zone. I'm not suggesting new positions today. We'll wait and see where UNP bounces from next week.

- Current Positions -
May 5, 2011 - entry price on UNP @ 100.15, option @ 5.00
UNP1221A110 2012 JAN $110 call - current bid/ask $ 4.50/ 4.65

- or -

May 5, 2011 - entry price on UNP @ 100.15, option @ 6.00
UNP1319A120 2013 JAN $120 call - current bid/ask $ 5.95/ 6.75

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


AK Steel Holding - AKS - close: 14.13

05/21 update: It was another choppy week for shares of AKS. The stock traded under support near $14.00 on May 17th. The oversold bounce has now failed at its 200-dma. Our stop loss was hit at $13.90 on May 17th.

Earlier comments:
AKS can be volatile so our plan was to limit our risk by keeping our position size small.

- Current Positions -
Feb 22, 2011 - entry price on AKS @ 16.10, option @ 1.55
symbol: AKS1221A20 2012 JAN $20 call - Stopped out: $0.45 (-70.9%)

- or -

Feb 22, 2011 - entry price on AKS @ 16.10, option @ 2.95
symbol: AKS1319A20 2013 JAN $20 call - Stopped out: $1.69 (-42.7%)

05/17/11 Stopped out @ 13.90. 2012 $20 call @ 0.45 (-70.9%), 2013 $20 call @ 1.69 (-42.7%)
05/14/11 AKS has confirmed its bearish breakdown. Readers will want to consider an early exit now!

Chart of AKS:

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: 63.78

05/21 update: Ouch! It's been an ugly week for ATI. The stock is down about five points in the last few sessions. ATI has broken down through several layers of support. While we can certainly argue that ATI is oversold and due for a bounce the trend is down and volume has been rising on the decline. The $60.00 level should still offer some support. More aggressive traders may want to hang on and just move your stop loss under the $60.00 level. I am suggesting an early exit now to cut our losses early.

- Suggested Positions -
Mar 10, 2011 - entry price on ATI @ 60.78, option @ 6.40
symbol: ATI1221A70 2012 JAN $70 call - Exit @ $5.50 (-14.0%)

- or -

Mar 10, 2011 - entry price on ATI @ 60.78, option @ 10.20
symbol: ATI1319A70 2013 JAN $70 call - Exit @ $10.30 (+0.00%)

05/21/11 Exit early. ATI @ 63.78. Options @ -14% & +0.0%
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

Chart of ATI:

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


Dow Chemical - DOW - close: $36.01

05/21 update: Abandon ship! The outlook for DOW has changed drastically in the last two weeks. The bullish breakout from late April has reversed. This last week saw DOW breakdown under its 50-dma and under its 100-dma. The stock looks headed for the $35-34 zone and possibly its 200-dma. I am suggesting an early exit now before we get stopped out.

- Current Positions -
May 9, 2011 - entry price on DOW @ 39.60, option @ 3.70
symbol: DOW1221A40 2012 JAN $40 call - Exit @ $1.79 (-51.6%)

- or -

May 9, 2011 - entry price on DOW @ 39.60, option @ 4.00
symbol: DOW1319A45 2013 JAN $45 call - Exit @ $2.41 (-39.7%)

05/21/11 Exit Early. DOW @ 36.01. Options @ -51.6% & -39.7%

Chart of XXX:

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


Watch

Credit Cards & Value Meals

by James Brown

Click here to email James Brown


New Watch List Entries

AXP - American Express Co

MCD - McDonald's Corp.


Active Watch List Candidates

HSY - Hershey Co.

INTC - Intel Corp.

PEP - Pepsico

T - AT&T Inc.

ZMH - Zimmer Holdings


Dropped Watch List Entries

DRI has graduated to the play list.



New Watch List Candidates:


American Express Co. - AXP - close: 51.19

Company Info

Bad debts and write offs for the credit card industry have been improving. Stocks like AXP, COF, and DFS have been showing relative strength lately. As a matter of fact AXP hit new two-and-a-half year highs this past week. After almost a year of trading sideways AXP could be at the start of a new long-term leg higher. However, short-term, weakness in the financials and the market at large could pull it lower. That's what we want to see - a short-term correction. The $48-47 area should be significant support. I am suggesting a buy-the-dip entry point at $47.50. If triggered we'll set our stop loss at $43.90, under the 200-dma. Our long-term targets are $55 and $65. Buy-the-Dip trigger: $47.50

BUY the 2012 Jan $50 call (AXP1221A50)

- or -

BUY the 2013 Jan $50 call (AXP1319A50)

Chart of AXP:

Originally listed on the Watch List: 05/21/11


McDonald's Corp. - MCD - close: 82.33

Company Info

Maybe it's their dollar menu. Or maybe it's the extra-value meals. Whatever it is investors seem to love shares of MCD again. A number of the restaurant stocks have been showing strength. Consumers maybe watching their wallets but they're still going out to eat. MCD is a bonus winner because of its low price point menu. The stock has broken out to new all-time highs. Now normally I would expect prior resistance near $80.00 to act as new support. Yet I suspect that if the market accelerates lower we will see MCD trade under $80. That's why I'm suggesting a buy-the-dip trigger at $78.50. If triggered we'll use a stop loss at $75.75, under the simple 200-dma. Our long-term targets are $89 and $99. The P&F chart is suggesting a $113 target. Buy-the-Dip trigger: $78.50

BUY the 2012 Jan $80 call (MCD1221A80)

- or -

BUY the 2013 Jan $85 call (MCD1319A85)

Chart of MCD:

Originally listed on the Watch List: 05/21/11


Active Watch List Candidates:



Hershey Co. - HSY - close: 56.14

05/21 update: HSY had big news this past week. The stock dropped sharply on news its CEO David West was leaving the company to run Del Monte Foods. There has been speculation that Mr. West's departure might mean HSY is now a takeover target, which could explain why there wasn't much follow through on the sell-off. HSY bounced twice near $55 this past week. I am still expecting a correction lower so nothing has changed for our strategy.

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: 23.22

05/21 update: Shares of Intel are holding up pretty well considering Goldman Sachs just slapped a "sell" rating on the stock a couple of days ago. The downgrade failed to push INTC out of its $23-24 trading range. I do think upward momentum has stalled. INTC has been trading under resistance at $24 for almost three weeks now.

There is one change from my prior comments. We'll move our buy-the-dip trigger from $22.25 down to $22.00. More conservative traders could wait for a dip or a bounce from the 200-dma instead. Our long-term targets are the $26-28 zone. If triggered we'll use a stop loss at $20.45.

Buy-the-Dip trigger: $22.00

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


Pepsico, Inc. - PEP - close: $71.30

05/21 update: There has been little slow down in the rally for PEP. Shares hit new two-year highs this past week. We don't want to chase it. I am suggesting a buy-the-dip entry point at $68.00. That's between the 38.2% and 50% retracements of its March-May rally. If triggered we'll use a stop loss at $66.40 and use targets at $75 and $79. Buy-the-Dip trigger: $68.00

BUY the 2012 Jan. $70 call (PEP1221A70)

- or -

BUY the 2013 Jan. $70 call (PEP1319A70)

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


AT&T - T - close: 31.32

05/21 update: Not much has changed for AT&T. The stock is still consolidating sideways. However, if the market accelerates lower AT&T should follow. Furthermore I'm expecting it to overcorrect. While $30.00 should be support I am moving our buy-the-dip trigger even lower to $29.25. Essentially, we're looking for a dip to the simple 200-dma. I'm moving our stop loss to $27.90. 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: $29.25 <-- new Trigger

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: 67.70

05/21 update: It looks like ZMH is finally starting to correct lower. Aggressive traders may want to buy a dip near $65.00, which should offer some support. I suspect that ZMH will correct lower that's why our trigger is at $64.00. If triggered we'll use a stop loss at $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: $64.00 <-- updated

BUY the 2012 Jan. $70 call (ZMH1221A70)

- or -

BUY the 2013 Jan. $70 call (ZMH1319A70)

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