Option Investor
Newsletter

Daily Newsletter, Sunday, 6/5/2011

Table of Contents

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

Leaps Trader Commentary

Another Disappointment

by James Brown

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The first week of June turned out to be a rough one for the bulls. Tuesday was the final day of trading for May and the market's major averages actually broke out above resistance. The situation reversed quickly on Wednesday morning as investors reacted to another downgrade for Greece, a disappointing ISM number, and worse than expected ADP employment numbers. The major indices all fell more than -2% and broke down under their 50-dma on Wednesday. Now three days later the market has broken a significant trendline of support dating back to the summer 2010 lows. The three major indices are all down about -2.3% for the week. This is the first time in almost seven years that the Dow Industrials have fallen five weeks in a row. It's been almost three years for the S&P 500.

Concerns about the U.S. economy continue to rise as we see a string of negative and worse than expected data. As a mentioned a moment ago the ISM came in worse than expected. The ADP employment data foreshadowed a drop in the May jobs number. Car and truck sales missed expectations. Plus, monthly same-store sales for the retail sector were widely disappointing.

Analysts had been lowering their estimates on the Friday morning jobs report. The consensus estimate kept falling +185,000, 170K, 165K to 150K. A few firms were expecting job growth in the +100-150,000 range. No one expected the +54,000 number. This was the smallest gain for jobs in eight months. April's +244,000 was an 11-month high but this was revised lower to 232K. March's +221K was revised lower to +194K. The economy needs about +125,000 new jobs a month just to keep pace with our population growth. The unemployment rate ticked up from 8.9% to 9.1%.

Meanwhile overseas the situation with Greece and the EU started to cool. Initially rumors of a second bailout for Greece on Tuesday helped fuel the stock market's rally that day. Thus the downgrade for Greece on Wednesday was somewhat unexpected. Thankfully it seems the IMF and EU have agreed on another round of "aid" for the struggling country. Expectations are this aid will be available in late June or early July. It's possible that the situation with Greece, while not solved, could be placed on the backburner again. The news has sent the euro currency soaring and the rally in the U.S. dollar has rolled over. This dollar weakness should have been bullish for commodities but the usually suspects did not see much of a rally last week. That could change if the dollar accelerates lower.

The S&P 500 saw four gains in a row followed by three declines in a row. Sadly Wednesday's drop erased most of those gains. The index has broken technical support at its 100-dma. Plus the S&P 500 has broken down below its trendline of higher lows. It settled on round-number, psychological support at the 1300 level on Friday. There is a chance that stocks can bounce from this level but I would not trust a rebound at this time. We are probably looking at a dip toward the 1280 and 1250 areas over the next few weeks.

Daily chart of the S&P 500 index:

Weekly chart of the S&P 500 index:

The NASDAQ is showing all sorts of bearishness. The weekly chart has a broken trendline and a bearish engulfing candlestick pattern. The daily chart has a failed rally at resistance and a breakdown to new six-week lows past key moving averages. If the market bounces the NASDAQ will likely find resistance at its 100-dma and 50-dma. Odds are good we'll see the NASDAQ composite test the 2700 level. If stocks continue to sink deeper into summer then we might be facing a drop toward the 2600 area and its 200-dma.

Daily chart of the NASDAQ Composite index:

Weekly chart of the NASDAQ Composite index:

Small caps had seen the biggest bounce in late May. Now they have produced the biggest reversal lower. Looking at the weekly chart you can see that the small cap index had rallied just enough to kiss the prior trendline before diving. I warned readers a week ago that this is the exact scenario I feared. If this correction continues we're probably looking at a fall toward the March or January lows.

Daily chart of the Russell 2000 ETF (IWM):

Weekly chart of the Russell 2000 ETF (IWM):

If the problem with Greece has been kicked down the road then economic data will have an even stronger impact on the markets. The biggest report this week is probably the Federal Reserve's Beige Book report due out on June 8th. We will also hear from Fed chairman Ben Bernanke on Tuesday. The market might pause as Wall Street waits to hear what Ben has to say. Believe it or not earnings season is only a month away with the second quarter ending on June 30th. The Q1 earnings season was generally strong but we could start to see companies warn that Q2 earnings will be less than expected. Investors will take a keen interest in Texas Instruments (TXN) as they provide their mid-quarter update on Wednesday.

Big picture I am concerned that stocks could face a rough summer. Now that the major indices have broken down under significant support we are likely facing a normal correction of -10%, give or take a percent or two. The economic growth in this country has clearly contracted. It's likely that analysts under estimated the impact of the Japan disaster and hopefully the aftershocks of that event will quickly fade from the economic landscape. However, the path of least resistance for stocks has turned lower. Investors are likely to stay on the sidelines through the end of June and into July. There is still too much uncertainty regarding the end of QE2. Furthermore, why buy stocks now if you're concerned about the company's earnings report in mid July.

I would seriously hesitate to launch any long-term bullish positions at this time when we might get a much better entry point four or six weeks from now.

- James


Portfolio

Portfolio Update

by James Brown

Click here to email James Brown
The U.S. stock market saw a bullish breakout on Tuesday, May 31st. Unfortunately the rally didn't last. Stocks collapsed on the first day of June and the major indices stretched their losses to five weeks in a row. The current trend is down and the major indices have broken their long-term up trend. Yet the S&P 500 paused at key support near 1300 on Friday. The market may yet bounce but I'm concerned traders will use any rally to launch new bearish positions.

The month of June is not historically a bullish one for stocks. This June suffers from uncertainty regarding the end of QE2 at the end of the month. The market's widespread weakness accelerated lower this past week and several of our bullish candidates have pulled back to key support at their long-term trendlines of higher lows. This could be a make or break weak for a number of our plays.

I am suggesting an early exit for our Ford trade.

BA, BMY, CACI, COST, DRI, FISV, and SMG all have updated 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

A Rough Start for Summer

by James Brown

Click here to email James Brown

Editor's Note:

The stock market has extended its losses to five weeks in a row. More importantly the major stock market averages have broken their longer-term up trend dating back to the summer 2010 lows. It's not looking good if you're bullish on stocks. June is historically a weak month for the market. To make matters worse there is still a lot of uncertainty surrounding the end of QE2 even though investors have known about it for months. Further complicating things was another week of bearish economic data.

Almost nothing has changed from my comments a week ago. I remain hesitant to launch new bullish positions. We want to take a wait-and-see approach. Let the market come to you instead of chasing stocks. If you do open positions I would strongly consider you keep your position size small to limit your exposure. I am not adding any new trades tonight but we are adding two new candidates to the watch list.


Play Updates

In Jeopardy!

by James Brown

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Editor's Note:

After five weeks of declines the market's pull back has put many of our bullish candidates' up trend in jeopardy of being broken.

We have adjusted our stop loss placement on several trades. Plus, we're closing our Ford trade early.

-James


Closed Plays


Ford has been closed.


Play Updates


Boeing Co. - BA - close: 74.84

06/04 update: Investors have a decision to make. BA was not immune to the market-wide weakness this past week. Shares broke down under their 50-dma and under the $75.00 level, both of which should have been support. The stock is at risk of hitting our stop loss at $73.90. So... do you leave our stop where it is at $73.90 or, after looking at the weekly chart below, do you adjust your stop loss lower to say $72.00 (under support near $72.50) or even adjust it lower (maybe $69.75) so BA gets a chance to bounce from its simple 200-dma.

If you believe the economy is only seeing a "soft patch" and not a double dip and that the market is merely correcting and not reversing then a dip toward BA's long-term up trend could be used as a new entry point. More conservative traders may want to keep their stop loss at $73.90. I am raising the risk on this trade by lowering our stop loss to $69.75, which would be an 8.8% decline from our entry point at $76.50. If BA does indeed drop toward its trendline of higher lows then look for a pull back toward the $72.00-71.50 area.

No new positions at this time. We'll wait and see if BA dips toward the next level of support.

FYI: We only have small positions open to limit our risk.

- Current Positions -
Apr 27, 2011 - entry price on BA @ 76.50, option @ 4.50
symbol: BA1221A80 2012 JAN $80 call - current bid/ask $ 3.65/ 3.75

Apr 27, 2011 - entry price on BA @ 76.50, option @ 4.95
symbol: BA1319A90 2013 JAN $90 call - current bid/ask $ 4.10/ 4.30

06/04/11 re-evaluated our risk and moved the stop loss to $69.75 under the simple 200-dma
05/14/11 New stop loss @ 73.90
04/27/11 Play opened. Small positions.

Chart of BA:

Current Target: $89.00, and $104.00
Current Stop loss: 69.75
Play Entered on: 04/27/11

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


BE Aerospace Inc. - BEAV - close: 35.91

06/04 update: Hmm... more conservative traders may want to abandon ship with our BEAV trade. Shares just saw their bounce fail and BEAV is headed for technical support at the 200-dma near $35.25. Currently our stop is at $34.75. If BEAV breaks down past the 200-dma we should get stopped out pretty quick. This will be a key test of BEAV's long-term up trend (see chart below). I am not suggesting new positions at this time.

Note: We have less than two full months left before July options expire!

- Current Positions -
Feb 23, 2011 - entry price on BEAV @ 34.00, option @ 2.75
symbol: BEAV1116G35 2011 JUL $35 call - current bid/ask $ 1.95/ 2.10

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: 27.98

06/04 update: The three-day correction in BMY has pulled shares under short-term support at $28.00 but the stock managed a meager bounce at technical support near the 50-dma. The correction may not be over yet. I would wait for a dip near $27.00 and its 200-dma before considering new bullish positions. Please note that I am raising our stop loss to $25.90.

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 $ 1.68/ 1.73

- or -

Mar 14, 2011 - entry price on BMY @ 26.14, option @ 1.63
symbol: BMY1319A27.5 2013 JAN $27.50 call - current bid/ask $ 2.42/ 2.50

06/04/11 New stop loss @ 25.90

Chart of BMY:

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: 60.17

06/04 update: Warning! CACI's relative strength has vanished. Shares reversed at the $64.00 level and plunged back toward the three-month trend of higher lows. The weekly chart has produced a big bearish engulfing reversal pattern candlestick. We have a stop loss at $59.25. That might be a little bit high since the 100-dma is at $59.00. I'm tweaking our stop down to $58.75 instead. I am not suggesting new positions at this time.

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 $ 1.40/ 1.60

- 2nd Position -

May 31, 2011 - entry price on CACI @ 63.14, option @ 2.65*
symbol: CACI1117I65 2011 SEP $65 call - current bid/ask $ 1.40/ 1.60

06/04/11 Adjustment - new stop @ 58.75
*5/31/11 estimate on the entry point of our 2nd position
05/28/11 New stop loss @ 59.25.
05/28/11 New entry point on the bounce. 2nd position above.
05/07/11 New stop loss @ 57.75

Current Target: $69.00
Current Stop loss: 58.75
Play Entered on: 04/04/11
Originally listed on the Watch List: 02/12/11


Canadian Natl. Railway Co. - CNI - close: 76.37

06/04 update: Transport stocks were underperformers on Friday but CNI managed a bounce from its Friday morning lows near $74.50. Taking a step back you can see that CNI has been consolidating sideways the last four weeks plus weeks. This consolidation is inside the larger, longer-term up trend. I wouldn't be surprised to see CNI dip to technical support at its 100-dma. Let's wait and see if shares can bounce off this moving average before considering new positions.

- Current Positions -
Feb 28, 2011 - entry price on CNI @ 72.39, option @ 2.90
symbol: CNI1221A80 2012 JAN $80 call - current bid/ask $ 3.20/ 3.50

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


Coach Inc. - COH - close: 61.01

06/04 update: COH was a new watch list candidate a week ago. The luxury retail stocks had been outperforming the market. Unfortunately the group reversed this past week. We were waiting to buy a dip at $61.00, which COH hit on Friday. Technically this pull back looks like a new entry point. Yet the market's five-week downtrend does not inspire a lot of confidence. The $58.00 level should be additional support. Let's wait and see if COH holds $60 or dips to $58.00 before considering new bullish positions.

We have a stop loss at $57.40. More aggressive traders may want to use a stop under $55 and its 100-dma instead. The plan was to keep our position size small to limit our risk. Currently our target is $75.00.

- Current Positions -
Jun 03, 2011 - entry price on COH @ 61.00, option @ 4.40
symbol: COH1221A65 2012 JAN $65 call - current bid/ask $ 4.20/ 4.40

- or -

Jun 03, 2011 - entry price on COH @ 61.00, option @ 6.80
symbol: COH1319A70 2013 JAN $70 call - current bid/ask $ 6.00/ 6.80

Chart of COH:

Current Target: $75.00
Current Stop loss: 57.40
Play Entered on: 06/03/11
Originally listed on the Watch List: 05/28/11


Costco Wholesale - COST - close: 77.81

06/04 update: Ouch! It was a painful week for COST. In the last three days the stock has fallen from $82.50 to under $78.00 and under its 50-dma. I am concerned that shares are probably headed for their 100-dma near $75.78 and most likely the $75.00 level. If that's the case then we need to either exit now or adjust our stop lower. Cautious traders will want to exit now. I am adjusting our stop loss to $74.75. At least this way COST has an opportunity to bounce from the $75.00 level without closing the trade. I will repeat that cautious traders will want to exit now since another $3.00 drop will not be healthy for our option values. You could exit now and avoid a loss. I am not suggesting new positions at this time.

- Current Positions -
Apr 7, 2011 - entry price on COST @ 76.37, option @ 3.80
symbol:COST1221A80 2012 JAN $80 call - current bid/ask $ 4.05/ 4.20

- or -

Apr 7, 2011 - entry price on COST @ 76.37, option @ 5.05
symbol:COST1319A85 2013 JAN $85 call - current bid/ask $ 5.40/ 5.65

06/04/11 Adjusting our stop to $74.75
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

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: 39.38

06/04 update: Uh-oh! DIS could be in serious trouble. The stock delivered a very bearish weak with Tuesday's failed rally near $42 and its 50-dma followed up with three down days in a row. Friday's breakdown under support at $40 is very bearish. Shares did manage a meager bounce off their exponential 200-dma but the trend is definitely down. DIS should have additional support at its simple 200-dma near $38.70 and at the $38.00 level as well. We have a stop loss at $37.85. Even though there is a chance DIS will bounce at one of these support levels more conservative traders may want to abandon ship anyway and just exit now. 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 $ 2.63/ 2.67

- or -

Oct 27, 2010 - entry price on DIS @ 35.60, option @ 3.63
symbol: DIS1319A40 2013 JAN $40 call - current bid/ask $ 4.70/ 4.85

06/04/11 DIS is breaking key support. consider an early exit now.
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: 40.30

06/04 update: This pull back to $40.00 should be a new entry point to launch bullish positions but with the market trending lower readers may want to wait. Consider waiting for shares to bounce from $40.00 before initiating new 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 $ 2.40/ 2.60

- or -

May 11, 2011 - entry price on DPS @ 40.55, option @ 1.00
symbol: DPS1119K45 2011 NOV $45 call - current bid/ask $ 0.70/ 0.90

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: $48.08

06/04 update: The holiday shortened week turned out to be an ugly one for DRI. Previous winners like luxury retail and restaurants were hammered lower. DRI is now down five days in a row. Shares have fallen through several short-term layers of support. It stalled on Friday near $48 and its 100-dma. The surge in volume on the sell-off is another bearish signal.

I will point out that DRI has a long-term trendline of support near $47.50 and the simple 200-dma near $47.00. I am suggesting we adjust our stop loss to $46.75 to give DRI room to test this level of significant support before it closes our trade. Of course this does raise our risk and potential loss if DRI continues to drop and breaks down through these key levels. I am not suggesting new positions at this time. I also want to add that DRI is due to report earnings on June 30th and conservative traders may want to exit prior to the report and/or avoid launching new positions in front of the report.

- Current Positions -
May 19, 2011 - entry price on DRI @ 52.03, option @ 2.74
symbol: DRI1221A55 2012 JAN $55 call - current bid/ask $ 1.25/ 1.35

- or -

May 19, 2011 - entry price on DRI @ 52.03, option @ 5.50
symbol: DRI1319A55 2013 JAN $55 call - current bid/ask $ 3.30/ 3.90

06/04/11 adjusted stop loss to $46.75, under the 200-dma.

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: 24.18

06/04 update: EAT is another restaurant stock that has gone from hero to goat in just a week. Granted the long-term trend is still higher but it is definitely in jeopardy with the bearish reversal this past week. EAT failed at resistance near $26.00 and plunged toward $24.00 and technical support at its 100-dma. I am not suggesting new positions at this time. If there is any follow through lower we will likely get stopped out at $23.90. FYI: We have less than two full months before July options expire.

- Current Positions -
Feb 23, 2011 - entry price on EAT @ 22.50, option @ $ 1.10
symbol: EAT1116G25 2011 JUL $25 call - current bid/ask $ 0.50/ 0.70

05/28/11 New stop @ 23.90
04/02/11 New stop @ 22.90
03/26/11 New stop @ $21.95

Current Target: $29.50
Current Stop loss: 23.90
Play Entered on: 02/23/11
Originally listed on the Watch List: 02/12/11


Fiserv, Inc. - FISV - close: 62.24

06/04 update: I am urging caution on FISV. Shares have reversed at resistance near $65.00 and now the stock is flirting with a breakdown under its 50 and 100-dma. Further weakness will make this look like a bearish double top pattern for FISV. The simple 200-dma has risen to $58.70 so I am raising our stop loss to $58.45. More conservative traders might want to consider a stop closer to the $60 level instead. I'm not suggesting new positions at these levels.

- Suggested Positions -
Feb 14, 2011 - entry price on FISV @ 62.30, option @ 3.20
symbol: FISV1117I65 2011 SEP $65 call - current bid/ask $ 1.65/ 1.80

06/04/11 new stop loss @ 58.45

Current Target: $74.75
Current Stop loss: 58.45
Play Entered on: 02/14/11
Originally listed on the Watch List: 01/29/11
Originally listed in the New Plays 02/12/11


Intel Corp. - INTC - close: 21.73

06/04 update: The correction in INTC continues. As expected the stock hit our buy-the-dip trigger at $22.00. I had cautioned readers to wait and suggested traders wait for a dip near the 50-dma or the 100-dma. INTC hit its 50-dma near $21.75 on Friday. The trend is still down so if you're looking for a new entry point I'd wait. We might get a better entry point near the $21.00 area. Currently we have a stop loss at $20.45, which is under the 200-dma. Our long-term (multi-month targets) is the $26-28 zone.

- Current Positions -
Jun 01, 2011 - entry price on INTC @ 22.00, option @ 1.41
symbol: INTC1221A22.5 2012 JAN $22.50 call - current bid/ask $ 1.24/ 1.27

- or -

Jun 01, 2011 - entry price on INTC @ 22.00, option @ 2.38
symbol: INTC1319A22.5 2013 JAN $22.50 call - current bid/ask $ 2.18/ 2.25

Chart of INTC:

Current Target: $26.00-28.00 zone
Current Stop loss: 20.45
Play Entered on: 06/01/11
Originally listed on the Watch List: 05/07/11


James River Coal Co. - JRCC - close: 20.33

06/04 update: Once again JRCC is threatening the bulls with a breakdown under support at the $20.00 level. It was an ugly week with shares reversing near resistance at $22.00 and closing under its 200-dma a couple of days later. The trend does look bearish and I would seriously consider an early exit right now. The only reason I'm not is that both JRCC and the S&P 500 are still trading above support ($20 for JRCC, 1300 for the S&P 500). We have a stop loss at $19.90 so if the stock continues to sink our trade will be closed soon. More conservative traders may want to exit now anyway. 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 $ 1.40/ 1.75

- or -

Apr 12, 2011 - entry price on JRCC @ 22.50, option @ 4.70
symbol: JRCC1319A27 2013 JAN $27 call - current bid/ask $ 2.40/ 3.00

06/04/11 JRCC has reversed and is now back under its 200-dma. Consider an early exit now.

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: 68.79

06/04 update: I warned readers a week ago that MON was poised for some profit taking. What surprised me was the pop over resistance at $70 on Tuesday. That particular move higher appears to be a reaction to an analyst upgrade (Citigroup) for rival agriculture companies Potash Corp. (POT) and Mosaic (MOS). The correction on MON found support Friday near $68 and its 50-dma. That doesn't mean the correction is over. I'm not suggesting new positions at this time. MON is due to report earnings on June 29th.

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 $ 6.05/ 6.15

- or -

Mar 15, 2011 - entry price on MON @ 65.50, option @ 8.75
symbol: MON1319A75 2013 JAN $75 call - current bid/ask $ 7.65/ 8.10

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


Scotts Miracle Grow Co. - SMG - close: 55.30

06/04 update: The relative strength we saw in SMG two weeks ago has vanished. Shares have reversed sharply lower and SMG broke down under its 100-dma on Friday. Now the stock is flirting with a breakdown under the $55 level. SMG has additional support near $54.00 at its long-term trendline of higher lows. Plus there could be additional support at its 200-dma near $53.30. I'm also concerned that the recent sell-off almost looks like the right shoulder to a bearish head-and-shoulders pattern. More conservative traders may want to exit immediately. I am adjusting our stop loss to $53.00 so it's under the 200-dma. No new positions at this time.

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 $ 0.95/ 1.10

06/04/11 new stop loss @ 53.00 (under the 200-dma).

Chart of SMG:

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: 43.73

06/04 update: It was a rocky week for SWN but shares rallied sharply off their Friday morning lows to close up +3.5% on the day and helping SWN post a gain for the week. SWN is still struggling with resistance near $44.00. I am not suggesting new positions at this time.

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 $ 3.90/ 4.00

- or -

Apr 7, 2011 - entry price on SWN @ 40.50, option @ 5.85
SWN1319A45 2013 JAN $45 call - current bid/ask $ 6.95/ 7.20

05/28/11 new stop loss @ 39.45
05/07/11 New stop loss @ 37.75

Current Target(s): $50.00-52.50
Current Stop loss: 39.45
Play Entered on: 04/07/11
Originally listed on the Watch List: 04/02/11


Union Pacific Corp. - UNP - close: 101.14

06/04 update: UNP tagged a new high on Tuesday only to erase four days of gains on June 1st. Shares found support on Friday near $100 and its 50-dma yet I remain cautious here. The transportation sector looks vulnerable. I am not suggesting new positions at this time. We currently have a stop loss at $97.00, which is under the 100-dma.

- Current Positions -
May 5, 2011 - entry price on UNP @ 100.15, option @ 5.00
UNP1221A110 2012 JAN $110 call - current bid/ask $ 4.30/ 4.40

- or -

May 5, 2011 - entry price on UNP @ 100.15, option @ 6.00
UNP1319A120 2013 JAN $120 call - current bid/ask $ 5.25/ 8.35

05/28/11 New stop loss @ 97.00

Current Target(s): $119.75-134.00
Current Stop loss: 97.00
Play Entered on: 05/05/11
Originally listed on the Watch List: 04/30/11


CLOSED Plays


Ford Motor Co - F - close: 14.01

06/04 update: I am giving up on Ford and suggesting an early exit now. Disappointing vehicle sales in May accelerated the stocks decline. Shares have broken potential support at $14.50. The next stop is likely the March lows near $13.75 but in reality what is there to stop this decline. Investors are growing worried about the consumer and a slow down in the U.S. economy. When we added the second position to the newsletter in early May it looked like Ford would bounce from technical support at its 200-dma. In the last month Ford has broken very significant support. I'm suggesting we hit the brakes and exit now.

FYI: After five weeks of declines and the chance that Ford might bounce from its March lows, more aggressive traders may want to risk holding on for another week or two and exit on a bounce near the $14.50-14.75 area to reduce our losses.

- Suggested Positions -
Feb 28, 2011 - entry price on F @ 15.29, option @ 2.17
symbol: F1221A15 2012 JAN $15 call - Exit @ $0.91 (-58.0%)

- or -

Feb 28, 2011 - entry price on F @ 15.29, option @ 1.50
symbol: F1319A20 2013 JAN $20 call - Exit @ 0.66 (-56%)

- Second Position, listed May 7th, 2011 -

May 9, 2011 - entry price on F @ 15.12, option @ 1.71
symbol: F1221A15 2012 JAN $15 call - exit @ 0.91 (-46.7%)

- or -

May 9, 2011 - entry price on F @ 15.12, option @ 1.09
symbol: F1319A20 2013 JAN $20 call - Exit @ 0.66 (-36.6%)

06/04/11 Exit early. Ford @ $14.01
06/04/11 Options @ -58.0%, -56%, 2nd position: -46.7%, -36.6%
05/28/11 Ford is growing weaker. Conservative traders may want to exit early now.
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

Chart of F:

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



Watch

Drugs & Credit Cards

by James Brown

Click here to email James Brown


New Watch List Entries

AGN - Allergan Inc.

V - Visa


Active Watch List Candidates

AXP - American Express Co

HOT - Starwood Hotels & Resorts

HSY - Hershey Co.

MCD - McDonald's Corp.

PEP - Pepsico

T - AT&T Inc.

ZMH - Zimmer Holdings


Dropped Watch List Entries

COH and INTC have graduated to the play list.



New Watch List Candidates:


Allergan Inc. - AGN - close: 79.82

Company Info

Drug stocks have been a strong sector in the market since the March 2011 lows. The DRG drug index rallied to new two and a half year highs. Not that rally has stalled and the group appears to be correcting. A correction would be normal after such a run up. AGN has a similar pattern. The stock peaked in mid May and is now starting to breakdown through support. Prior resistance at $75.00 should be more significant support.

I am suggesting we buy call LEAPS on a dip near $75.00 (trigger @ 75.50) since a pull back to this level would not break the current up trend in AGN's long-term pattern. If triggered we'll use a stop loss at $71.40, which is under the 200-dma. Our long-term targets are $85 and $97.50. Buy-the-Dip trigger: $75.50

BUY the 2012 Jan $80 call (AGN1221A80)

- or -

BUY the 2013 Jan $85 call (AGN1319A85)

Chart of AGN:

Originally listed on the Watch List: 06/04/11


Visa Inc. - V - close: 79.13

Company Info

Visa has been somewhat resistant to the market's five-week decline. Shares did see a sell-off around May 20th but traders bought the dip at Visa's rising 50-dma. The stock is only a couple of points from its 2011 highs. Long-term the trend of consumers moving away from cash and increasingly to plastic is not going to change.

I am suggesting we wait for Visa to close over $82.50 and then launch bullish positions. Normally our triggers are based on an intraday move but I want to see a close over this level. Currently the P&F chart is bullish with a $93 target. If we are triggered then I'm setting our target at $99.00.

Breakout trigger: wait for a close over $82.50

BUY the 2012 $85 call (V1221A85)

- or -

BUY the 2013 $90 call (V1319A90)

Chart of V:

Originally listed on the Watch List: 06/04/11


Active Watch List Candidates:



American Express Co. - AXP - close: 49.28

06/04 update: AXP has started to correct. You could argue that shares have produced a bearish double top with the two failed rallies under $52.00. I'm expecting the correction to continue but the larger trend is still bullish. Please note that we are adjusting our buy-the-dip entry point to $47.00 (from 47.50). More conservative traders may just want to wait and see where AXP is trading at the end of June since many analysts have turned short-term bearish on the market. We may end up seeing a better entry point in the $45-44 area near its 200-dma. If triggered at $47.00 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: $47.00

BUY the 2012 Jan $50 call (AXP1221A50)

- or -

BUY the 2013 Jan $50 call (AXP1319A50)

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


Starwood Hotels & Resorts - HOT - close: 58.03

06/04 update: There is no change from my previous comments on HOT. The stock is still churning sideways in the $56-62 area. We are waiting for HOT to close over the $62.00 level before we launch new bullish positions. More nimble traders may want to consider buying a bounce from support near $56.00 instead although I'd use a very tight stop loss if you do.

Earlier Comments:
Normally our triggers are intraday but this time I'm suggesting we wait for HOT to close above this level. If triggered we'll use a stop loss at $58.00. The $65.00 level remains overhead resistance but I'm setting our long-term target at $74.75. Currently the point and figure chart is bullish with a $72 target.

Breakout trigger: CLOSE above $62.00

BUY the 2012 Jan $65 call (HOT1221A65)

- or -

BUY the 2013 Jan $70 call (HOT1319A70)

Originally listed on the Watch List: 05/28/11


Hershey Co. - HSY - close: 55.02

06/04 update: The correction in HSY continues. The stock's oversold bounce failed at resistance near $56 and its 50-dma. I am now expecting a pull back toward prior resistance and what should be support near $52.00. Therefore we will adjust our buy-the-dip trigger to $52.25 and move our stop loss to $48.75. That puts our stop under $50.00 and its 200-dma. Our long-term targets are $60 and $64.

Buy-the-Dip trigger: $52.25

BUY the 2012 $55 calls (HSY1221A55)

- or -

BUY the 2013 $55 calls (HSY1319A55)

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


McDonald's Corp. - MCD - close: 80.54

06/04 update: Just as we expected the pull back in MCD has dipped to support near $80.00. I am looking for the correction to continue and we're using a buy-the-dip entry point at $78.50. Cautious traders might want to consider waiting for a dip near the simple 200-dma instead. 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)

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


Pepsico, Inc. - PEP - close: $68.97

06/04 update: There are no surprises here. PEP has begun to correct lower. The $68-66 area should offer significant support. Please note that I am adjusting our buy-the-dip entry point to $67.00. More aggressive traders could still buy a dip at $68.00 and cautious traders could wait for a dip closer to $66 and its 200-dma instead. If we are triggered at $67.00 we'll use a stop loss at $64.75. Our targets are $75 and $79. Buy-the-Dip trigger: $67.00 <-- updated

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: 30.65

06/04 update: AT&T has broken support at $31 and its 50-dma. The stock should be headed for the $30.00 level soon. I am suggesting we wait for a dip closer to $29 and its 200-dma. We have a buy-the-dip entry point at $29.25.

If triggered at $29.25 our stop will be $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

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: 65.82

06/04 update: ZMH has pulled back toward support near $65.00. If the market continues to slip I do not think this level will hold. I am suggesting we move our buy-the-dip trigger to $63.00. This would be a -10% pull back from its highs near $70 and we'll adjust our stop loss to $58.90. 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 <-- adjusted

BUY the 2012 Jan. $65 call (ZMH1221A65) <-- adjusted

- or -

BUY the 2013 Jan. $70 call (ZMH1319A70)

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