Option Investor
Newsletter

Daily Newsletter, Sunday, 6/12/2011

Table of Contents

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

Leaps Trader Commentary

Getting Worse Before It Gets Better

by James Brown

Click here to email James Brown

I'm sure you have heard it a dozen times already. The U.S. stock market is now down six weeks in a row, a feat that hasn't happened since 2002. The combination of another week of bearish economic data and investors without a reason to buy left stocks to crash under their own weight. The correction has been accelerating lower with steep losses in just the last two weeks. Yet in spite of these declines we're not seeing much movement in the volatility index (VIX), which is supposed to be the "fear index". At current levels the VIX is not suggesting much fear on the part of option buyers. The VIX is up two weeks in a row but it's merely at the top of its ten-week trading range. This is another clue that the market's correction could have further to fall. Traditionally there needs to be a spike in the VIX before stocks actually hit any sort of bottom.

Daily chart of the Volatility Index:

Glancing over the highlights from last week the U.S. reported that exports hit a record high in April and that the deficit came in lower than expected. This is good news but it didn't have much impact on the market. China seems to be doing a good job engineering a soft landing for their red-hot economy but there are new worries that the recent slowdown in China's exports are a clear signal that the global economy is slowing down. So good news for China, not so good news for the world.

Gasoline prices in the U.S. fell another nickel (on average) across the country. This is beneficial for the struggling U.S. consumer but fuel prices remain elevated. Last week's initial jobless claims were once again worse than expected at 427,000. This is the ninth week in a row that initial claims have been over 400K so we're not seeing any improvement in job creation or retention. Looking at the market, investors continue to grow nervous over stocks with equity funds seeing $7.7 billion withdrawn and a lot of that money being placed into the safety of bonds.

A week ago we thought the problem with Greece had temporarily cooled with the latest round of bailout money. Yet this past week European leaders were arguing over the future challenges for the struggling country. Germany, one of Europe's strongest economies, is getting tired of handing money to a Greece that isn't seeing much improvement. The German finance minister Mr. Schaeuble is arguing with ECB head Mr. Trichet over requirements for future aid to Greece. Germany is suggesting that some sort of restructuring of Greek debt might be necessary (a.k.a. a default) while Trichet argues the ECB will not allow a default. The euro currency plunged on this disagreement, which sent the dollar bouncing higher in response.

In other news several of the largest U.S. banks saw an intraday bounce on Friday. Banks have been hoarding money because they're not sure how much capital they will need to keep on the books as new regulations head their way. Many were expecting that the biggest banks, also called the Systemically Important Financial Institutions (SIFIs), which is another name for those banks the U.S. has decided are "too big to fail" will need to hold an extra 3% of capital. Yet Friday afternoon there was word that it might be closer to 2.0% or 2.5%. This would free up billions of dollars to be put to work. Unfortunately banks were still some of the worst performing stocks last week in spite of the bounce.

I cautioned readers a week ago that the S&P 500 was probably headed for the 1280 level and the 1250 level. Last Monday saw a very quick breakdown under support at the 1300 mark. The index closed at 1279 on Wednesday. Unfortunately Thursday's bounce from support near 1280 was immediately erased with Friday's plunge to new twelve-week lows. The close under 1280 leaves the S&P 500 on a collision course with technical support at the rising exponential 200-dma near 1262 and the simple 200-dma near 1253. We might as well aim for the 1250 level, which was the March low (actually it was 1249).

Daily chart of the S&P 500 index:

Weekly chart of the S&P 500 index:

The sell-off in the NASDAQ is accelerating. There was a brief pause at the 2700 level that lasted all of one day. Friday left this technology-heavy index sitting on potential support at its exponential 200-dma. Yet with the NASDAQ closing on its lows for the session it doesn't bode well for Monday. We can probably expect a drop to the simple 200-dma near 2628 or more likely the 2600 level near its March lows. Aggressive traders might want to bet on a bounce from the 2600 level but if you do I'd try and use a tight stop loss if you can and then only within the context of a short-term trade.

Daily chart of the NASDAQ Composite index:

Weekly chart of the NASDAQ Composite index:

The sell-off in the small cap Russell 2000 index has been rough. In the last two weeks this index has lost -8%. There was barely any pause at what should have been support near the 800 level. Now this index is already testing its March lows and the exponential 200-dma. It's possible the $RUT could bounce near 780 or the simple 200-dma and since this is a volatile group the bounce could be a sharp one but don't be fooled. It could take a while for the $RUT to establish a new bottom. At this point I would be wary of any "V" bottom type of move like the one we saw in March.

Daily chart of the Russell 2000 index:

Weekly chart of the Russell 2000 index:

I also want to mention that the SOX semiconductor index has already broken below its simple 200-dma and below its March lows. This is very bearish but there is a chance the SOX could see an oversold bounce from the 400 level, which was significant resistance in the past. Unfortunately the current trend is down with a bearish pattern of lower lows and lower highs.

Daily chart of the SOX semiconductor index:

The Dow Jones Transportation index ($TRAN) has also produced a very sharp sell-off in the last two weeks. This index has settled on its long-term trendline of higher lows but I don't believe it will hold. Odds are good the $TRAN will drop toward its 200-dma near the 5,000 level or even the February and March lows closer to 4900. Dow Theory suggests that we can't have any sort of sustained rally without participation on the transports and a breakdown under 5,000 would be very bearish.

Weekly chart of the Transportation index:

Looking ahead we have a very, very busy week for economic data. Here are some of the highlights:

-Tuesday, June 14th-
May Retail sales
Producer Price Index (PPI)
Business inventories

-Wednesday, June 15th-
Consumer Price Index (CPI)
New York State Empire Manufacturing survey

-Thursday, June 16th-
Weekly Initial Jobless claims
Housing Starts
Building Permits
Philly Fed survey

-Friday, June 17th-
Michigan Consumer Sentiment

This is an abbreviated list. There is another handful of reports coming out that aren't listed but they are unlikely to have an immediate impact on stocks. From the list above the ones to watch are the PPI, CPI, the two business activity surveys (New York and Philadelphia) and the consumer sentiment number. I would definitely keep an eye on the Philly Fed survey. This indicator has imploded from a high of 43.4 in March to 3.9 in May.

Not much has changed since my comments last week. Investor sentiment has clearly soured with stocks accelerating lower in the last two weeks. Eventually stocks will see an oversold bounce but I would be skeptical. I would not expect the market to make much progress until after we see a week or two of the Q2 earnings numbers in the middle of July and then only if corporate guidance is positive. If corporate guidance is negative then it could launch a new leg lower for the stock market, which may not end until October.

This week we're facing a quadruple-witching options and futures expiration on Friday. There is a decent chance that stocks will start to mellow out and drift sideways as investors wait for option expiration to occur. Although this may be wishful thinking on my part. Once we get past this week the market might actually see some window dressing as we approach the end of the second quarter on June 30th.

Currently the NASDAQ and Russell 2000 indices have turned negative for the year, down -0.3% and -0.5% respectively. The S&P 500 is still up about +1%. I suspect these numbers are going to get worse before they get better. I would seriously hesitate to launch any long-term bullish positions at this time when we might get a much better entry point a few weeks from now.

- James


Portfolio

Portfolio Update

by James Brown

Click here to email James Brown


Current Portfolio


Portfolio Comments:

The market continues to sink and stocks actually look short-term oversold but then market can always grow more oversold. It's starting to look like the "sell in May" strategy would have been a good one this year. Last week I warned readers that it was a make or break week for some of our trades. We had a handful of candidates get stopped out on last Monday's sell-off.

I am suggesting an early exit for our DRI trade. Meanwhile EAT, JRCC and SMG have been stopped out. ZMH has made the jump from our watch list to play list.

No 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

Eventually

by James Brown

Click here to email James Brown

Editor's Note:

The market sell-off continues. A non-stop six-week decline is a bit unusual but seeing a market correction in summer is not. The S&P 500 is off more than -6.5% and looks like it is headed for the 200-dma near 1,250. A drop to 1,250 would push the correction to -8%. If the S&P 500 breaks down under 1,250 then it's probably headed for 1,200, which would be almost -12%. A drop to 1,200 would also be a 50% retracement of the S&P 500's rally off the lows from last August.

Eventually stocks will see another oversold bounce and it might last more than a day or two but the important thing to note is that the trend is down and traders are likely to sell into strength. We could try and buy dips at major support levels (like 1,250 or the 200-dma) or we could wait until we see how the market reacts to July's Q2 earnings season. Whatever strategy we choose the place to buy stocks (or long-term call options) is not at current levels.

If we do happen to see a bullish entry point we'll need to trade defensively and keep our position size small to limit our risk. I am not adding any new trades tonight.


Play Updates

Correction Continues

by James Brown

Click here to email James Brown


Closed Plays


DRI, EAT, JRCC, and SMG have been closed.


Play Updates


Boeing Co. - BA - close: 72.69

06/11 update: If you did not change your stop loss with us last week then BA has hit our prior stop at $73.90. Shares tried to hold support at the 100-dma but broke down again on Friday. Now shares are nearing their long-term trendline of support (higher lows) and what should be additional support near $70.00 and the simple 200-dma. I am not suggesting new positions at this time. Wait for BA to test and bounce from the $70 area and then we can re-evaluate launching new positions.

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 $ 2.81/ 2.87

Apr 27, 2011 - entry price on BA @ 76.50, option @ 4.95
symbol: BA1319A90 2013 JAN $90 call - current bid/ask $ 3.30/ 3.50

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.

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: 36.99

06/11 update: BEAV actually managed a gain for the week. Shares got a pop on Tuesday when Goldman Sachs added them to their conviction buy list. The rally didn't make much progress as BEAV continues to churn sideways in a neutral pattern of lower highs and higher lows. More conservative traders may want to exit now to minimize any losses. I am not suggesting new positions at this time.

Note: We have about five weeks 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 $ 2.60/ 2.75

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: 27.45

06/11 update: The correction in BMY continues. I've been warning readers to look for a dip near $27.00. Early last week shares bounced at $27.50 but the rebound struggled with old resistance at $28.00. Now BMY is rolling over again and appears headed for the next level of support near $27.00 and the 200-dma. I would wait for a dip near $27.00 and its 200-dma before considering new bullish 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 $ 1.40/ 1.44

- or -

Mar 14, 2011 - entry price on BMY @ 26.14, option @ 1.63
symbol: BMY1319A27.5 2013 JAN $27.50 call - current bid/ask $ 2.11/ 2.19

06/04/11 New stop loss @ 25.90

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: 60.06

06/11 update: CACI has spent the week consolidating sideways near $60.00 and its 100-dma. If we had not moved our stop loss to $58.75 this play would have been stopped out on Monday. The bad news is that the short-term trend is still down. CACI may have bounced twice from technical support at the 100-dma but the stock looks poised to breakdown further. I strongly suggest that more conservative traders consider an early exit now.

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 $ 1.25/ 1.45

- 2nd Position -

May 31, 2011 - entry price on CACI @ 63.14, option @ 2.65*
symbol: CACI1117I65 2011 SEP $65 call - current bid/ask $ 1.25/ 1.45

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: 75.13

06/11 update: The last two weeks have seen a huge sell-off in the transports as investors worry about a slow down in the economy. The railroad stocks were not immune. Fortunately CNI has fared better than some of its peers but shares still look poised to move lower. I'm still expecting a dip toward the 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 $ 2.95/ 3.20

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: 59.12

06/11 update: COH broke down under the $60 level this past week. The stock looks poised to test support near $58.00 and its 50-dma soon. We have a stop loss at $57.40. More aggressive traders might want to consider placing their stop under the $55 level instead. Investors are turning more cautious on the retailers. Previously the high-end retailers seemed immune but COH has produced a two-week correction.

I am not suggesting new bullish positions at this time. I'd prefer to wait for either a strong bounce from $58 or maybe a close back above $61.00 before considering new positions. The plan was to keep our position size small to limit our risk.

- Current Positions -
Jun 03, 2011 - entry price on COH @ 61.00, option @ 4.40
symbol: COH1221A65 2012 JAN $65 call - current bid/ask $ 3.40/ 3.60

- or -

Jun 03, 2011 - entry price on COH @ 61.00, option @ 6.80
symbol: COH1319A70 2013 JAN $70 call - current bid/ask $ 5.40/ 5.70

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: 78.30

06/11 update: I want to urge caution on COST. The stock posted a bounce this past week but shares are still in correction move. The rebound appears to be rolling over under resistance at $80 and I would expect COST to fall toward the next level of support near $76.00 and the 100-dma. We currently have a stop loss at $74.75 but more conservative traders may want to consider a higher stop. Or you may want to exit completely right here. You could exit now and avoid a loss. A drop toward $76 or $75 would be a painful one for the call options.

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 $ 4.30/ 4.40

- or -

Apr 7, 2011 - entry price on COST @ 76.37, option @ 5.05
symbol:COST1319A85 2013 JAN $85 call - current bid/ask $ 5.65/ 5.85

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: 74.75
Play Entered on: 04/07/11
Originally listed on the Watch List: 01/29/11


Walt Disney Co. - DIS - close: 38.50

06/11 update: Mayday! Mayday! Mayday! The DIS ship is sinking! Two weeks ago the stock broke down under the $40 level. Now after a week of churning sideways between $40 and technical support at the 200-dma, shares have broken down under the 200-dma this Friday. Broken resistance near $38.00 should still be support but readers may want to exit early anyway. We have a stop loss at $37.85. 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 $ 2.17/ 2.22

- or -

Oct 27, 2010 - entry price on DIS @ 35.60, option @ 3.63
symbol: DIS1319A40 2013 JAN $40 call - current bid/ask $ 4.20/ 4.35

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: 40.31

06/11 update: DPS managed to eke out a weekly gain by the smallest of margins. Shares found support at their rising 50-dma. Under normal circumstances I would consider this bounce near support at $40 and near support at the 50-dma as a new bullish entry point. However, given the market's six-week sell-off with no relief in sight yet I would hesitate to launch 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 $ 2.45/ 2.65

- or -

May 11, 2011 - entry price on DPS @ 40.55, option @ 1.00
symbol: DPS1119K45 2011 NOV $45 call - current bid/ask $ 0.75/ 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


Fiserv, Inc. - FISV - close: 62.31

06/11 update: Little has changed for our FISV trade. The stock managed to post a gain for the week but shares still look poised to correct lower. If you look at the last few weeks FISV has created a bearish head-and-shoulders pattern. A breakdown under the neckline near $62 would forecast a drop toward $59.00 and likely the 200-dma. Naturally a drop to $60 would have a very ugly impact on our call option. I am not suggesting new 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 $ 1.50/ 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: 21.38

06/11 update: It was another bearish week for INTC. The stock struggled with short-term technical resistance at its 10-dma all week long. Then on Friday shares broke down under their 100-dma. I have been warning readers that we might get a better entry point on a dip near $21.00 and its 200-dma. We could see INTC hit this level pretty soon. Wait for the dip or bounce near $21 before considering new positions. 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 $ 1.07/ 1.11

- or -

Jun 01, 2011 - entry price on INTC @ 22.00, option @ 2.38
symbol: INTC1319A22.5 2013 JAN $22.50 call - current bid/ask $ 1.99/ 2.05

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


Monsanto Co. - MON - close: 68.77

06/11 update: Some of the agriculture names rallied on Thursday in response to the latest USDA crop report. MON was one of them and the stock bounced from support near its 30 and 40-dma. Unfortunately the rebound has stalled at resistance near $70 and its 100-dma. The early June pull back in MON was essentially a 50% retracement of the rally off its May lows. The intermediate trend is technically up but MON has yet to break through the bearish trend of lower highs and lower lows dating back to February. Cautious traders may want to raise their stops closer to the $64 or $65 levels. 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 $ 5.85/ 5.95

- or -

Mar 15, 2011 - entry price on MON @ 65.50, option @ 8.75
symbol: MON1319A75 2013 JAN $75 call - current bid/ask $ 7.70/ 8.05

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


Southwestern Energy Co. - SWN - close: 42.22

06/11 update: Energy stocks look vulnerable here. Thus far SWN has been able to buck the trend and this stock continues to build a bullish trend of higher lows. Yet the rallies have been unable to breakout and close above resistance at $44.00. I suspect that SWN's pattern of higher lows could get broken soon and shares might drop toward support near $40.00. 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 $ 3.15/ 3.25

- or -

Apr 7, 2011 - entry price on SWN @ 40.50, option @ 5.85
SWN1319A45 2013 JAN $45 call - current bid/ask $ 6.10/ 6.35

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: 99.60

06/11 update: Warning! Once again UNP looks poised to correct lower. On a very short-term basis UNP has a trend of lower highs and lower lows. This past week also saw UNP close under support at its 50-dma and under the $100.00 level. There is still some support at prior resistance near $99.00 and if this breaks then the 100-dma might offer support near $98. Currently we have a stop loss at $97.00. My concern is a breakdown under its 100-dma could lead to a drop toward the 200-dma, hitting our stop loss along the way. I am not suggesting new positions at this time.

- Current Positions -
May 5, 2011 - entry price on UNP @ 100.15, option @ 5.00
UNP1221A110 2012 JAN $110 call - current bid/ask $ 3.70/ 3.80

- or -

May 5, 2011 - entry price on UNP @ 100.15, option @ 6.00
UNP1319A120 2013 JAN $120 call - current bid/ask $ 5.40/ 5.60

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


Zimmer Holdings, Inc. - ZMH - close: 62.86

06/11 update: The correction in ZMH accelerated lower this past week with a drop below support at $65.00 and below support at the 50-dma. Our trigger to buy calls was hit on Friday at $63.00. Shares are nearing their 100-dma and if this level fails then it's probably a quick drop toward the next level of support near $60.00.

Healthcare stocks had been one of the market's strongest sectors. When this market correction is over I expect healthcare to remain popular with investors. I like ZMH since an aging baby boomer population is going to see rising demand for ZMH's replacement joints and implants. In the meantime readers may want to hesitate on launching new positions. We might get a better entry point near $60 if we're patient.

Our long-term targets are $78.50 and $88.50, although the high $80s might be a little optimistic.

- Current Positions -
Jun 10, 2011 - entry price on ZMH @ 63.00, option @ 4.00
ZMH1221A65 2012 JAN $65 call - current bid/ask $ 3.80/ 4.00

- or -

Jun 10, 2011 - entry price on ZMH @ 63.00, option @ 5.50
ZMH1319A70 2013 JAN $70 call - current bid/ask $ 5.00/ 5.50

Chart of ZMH:

Current Target(s): $78.50 & 88.50
Current Stop loss: 58.90
Play Entered on: 06/10/11
Originally listed on the Watch List: 04/30/11


CLOSED Plays


Darden Restaurants - DRI - close: $46.96

06/11 update: Abandon ship! DRI has continued to correct lower. This past week saw a breakdown under its long-term trendline of support and below its 200-dma on Friday. DRI hit a low of $46.81 and our stop is at $46.75. I am suggesting an early exit now. More aggressive traders might want to reconsider and let it ride since DRI is very short-term oversold and due for a bounce but if you do keep your position open you may want to widen your stop loss even further.

- Current Positions -
May 19, 2011 - entry price on DRI @ 52.03, option @ 2.74
symbol: DRI1221A55 2012 JAN $55 call - Exit @ $ 0.95 (-65.3%)

- or -

May 19, 2011 - entry price on DRI @ 52.03, option @ 5.50
symbol: DRI1319A55 2013 JAN $55 call - Exit @ $ 3.00 (-45.4%)

06/11/11 Exit early. DRI @ 46.96. Options @ -65.3% & -45.4%
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: 46.75
Play Entered on: 05/19/11
Originally listed on the Watch List: 05/14/11


Brinker International - EAT - close: 23.29

06/11 update: The correction lower continues in EAT. This past week saw the stock break support at its 100-dma and quickly hit our stop loss at $23.90. Our play was closed on Monday morning.

- Current Positions -
Feb 23, 2011 - entry price on EAT @ 22.50, option @ $ 1.10
symbol: EAT1116G25 2011 JUL $25 call - Exit @ 0.50 (-54.5%)

06/06/11 stopped out @ 23.90, Option @ -54.5%
05/28/11 New stop @ 23.90
04/02/11 New stop @ 22.90
03/26/11 New stop @ $21.95

Chart of EAT:

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


James River Coal Co. - JRCC - close: 19.80

06/11 update: JRCC broke down under support at $20.00 and hit our stop loss at $19.90 on June 6th.

- Current Positions -
Apr 12, 2011 - entry price on JRCC @ 22.50, option @ 3.10
symbol: JRCC1221A25 2012 JAN $25 call - Exit @ $1.25 (-59.6%)

- or -

Apr 12, 2011 - entry price on JRCC @ 22.50, option @ 4.70
symbol: JRCC1319A27 2013 JAN $27 call - Exit @ $2.25 (-52.1%)

06/06/11 Stopped out @ 19.90, Options @ -59.6% & -52.1%
06/04/11 JRCC has reversed and is now back under its 200-dma. Consider an early exit now.

Chart of JRCC:

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


Scotts Miracle Grow Co. - SMG - close: 51.64

06/11 update: Ouch! It was a rough week for SMG. The stock was downgraded on Monday morning before the open. Combine that with a down day for the markets on Monday and SMG gapped open lower at $53.91 and quickly plunged through its 200-dma. Shares hit our stop loss at $53.00 on June 6th. The stock hasn't seen much of a bounce either with shares slowly sinking throughout the rest of the week.

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

- Current (SMALL) Positions -
Mar 25, 2011 - entry price on SMG @ 58.00, option @ 3.00
SMG1117I60 2011 SEP $60 call - Exit @ $0.50 (-83.3%)

06/06/11 stopped out @ 53.00, option @ -83.3%
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: 53.00
Play Entered on: 03/25/11
Originally listed on the Watch List: 03/05/11


Watch

Medical Devices

by James Brown

Click here to email James Brown

Editor's Note:

In addition to BCR in tonight's watch list, readers may want to keep an eye on the healthcare sector as an area that might offer entry points as the market's correction continues. Investors might want to check out the UNG natural gas ETF as well. The UNG has been an underperforming equity for years but it looks like it may have finally found a bottom.



New Watch List Entries

BCR - C.R.Bard Inc.


Active Watch List Candidates

AGN - Allergan Inc.

AXP - American Express Co

HSY - Hershey Co.

MCD - McDonald's Corp.

PEP - Pepsico

T - AT&T Inc.

V - Visa


Dropped Watch List Entries

ZMH has graduated to the play list. HOT has been removed.



New Watch List Candidates:


C.R.Bard Inc. - BCR - close: 108.98 change: -1.51

Company Info

BCR is a healthcare company that makes medical devices. The stock hit new all-time highs back in May. Since then shares have produced a bearish trend of lower highs and lower lows but the profit taking has actually been relatively mild. While the relative strength is encouraging we don't want to launch positions now. It seems the market is headed for a deeper correction, which will weigh on shares of BCR. Aggressive traders might want to buy a dip near $105. I am suggesting we buy long-term calls on a dip at $101.00. If triggered we'll use a stop loss at $97.75. Buy-the-Dip trigger: $101.00

BUY the 2012 Jan. $105 (BCR1221A105)

Chart of BCR:

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


Active Watch List Candidates:



Allergan Inc. - AGN - close: 79.14

06/11 update: AGN slipped to a new five-week low and closed under technical support at its 50-dma on Friday. We are expecting a drop toward support near $75.00. More conservative traders may want to wait and see if shares dip toward their 200-dma instead before launching bullish positions.

I am suggesting we buy call LEAPS on a dip at $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)

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


American Express Co. - AXP - close: 47.74

06/11 update: AXP almost hit our buy-the-dip trigger on Friday. Financial stocks have continued to underperform but large cap stocks in the group saw a bounce on Friday afternoon. I am concerned that the market's sell-off is accelerating but we haven' yet seen a capitulation sort of sell-off yet. I am suggesting we alter our entry point strategy. Normally a dip $47.00 would look like a new entry point but I'm moving our buy-the-dip trigger down to $45.50 and we'll move our stop loss down to $42.90.

More conservative traders may just want to wait and see where AXP is trading at the end of June before considering new positions. Our long-term targets are $55 and $65. Buy-the-Dip trigger: $45.50 -- adjusted

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: 54.98

06/11 update: The action in HOT has turned increasingly bearish! This past week saw a breakdown under its 200-dma. Now HOT is testing support near $55.00 around the March lows. A breakdown here would look very bearish. Our plan was to buy calls when HOT closes above the $62 level. Since that possibility is growing more remote I am dropping HOT as a bullish candidate.

HOT has been removed as a candidate

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


Hershey Co. - HSY - close: 53.92

06/11 update: HSY continues to trade with a bearish trend of lower highs. This is within the context of the larger up trend and thus far the pull back is just a normal correction. Broken resistance at $52.00 should be support. I am suggesting we launch bullish positions on a dip at $52.25. If triggered we'll use a stop loss at $48.75. 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: 80.36

06/11 update: MCD spent the week bouncing along support near the $80 level. The company announced that their global same-store sales grew +3.1%. Long-term the trend is up but I'm expecting the correction to pull MCD toward $78.00 or the simple 200-dma. Currently our plan is to launch positions 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)

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


Pepsico, Inc. - PEP - close: $68.69

06/11 update: Shares of PEP also spent the week churning the sideways. The bounce attempt on Thursday failed at resistance near $70 and its 30-dma. Traders have been buying the dips near PEP's 50-dma but I'm expecting this level to fail. Right now our plan is to launch bullish positions on a dip at $67.00. More conservative traders could wait for a dip or a bounce near the 200-dma closer to the $66.00 level 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

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: 30.34

06/11 update: AT&T spent most of the week hovering inside the $30.20-30.60 area. I don't see any changes from my prior comments. 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. Let's keep our position size small to limit our risk.

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 (small positions)

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


Visa Inc. - V - close: 74.69

06/11 update: It was a volatile week for Visa, especially on Wednesday. The U.S. Senate voted down the Tester amendment, which would have delayed news rules on interchange fees that credit card issues charge to merchants. This past week has seen Visa breakdown under its 50-dma, its 100-dma, its exponential 200-dma. Now shares are sitting on their simple 200-dma. If this stock does not bounce this week we'll drop it as a candidate. Currently the plan is to launch bullish positions when Visa closes above the $82.50 mark.

In the news last week Visa announced it was buying the South African company Fundamo for $110 million. This increases Visa's footprint in the mobile payments business.

Breakout trigger: wait for a close over $82.50

BUY the 2012 $85 call (V1221A85)

- or -

BUY the 2013 $90 call (V1319A90)

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