Option Investor
Newsletter

Daily Newsletter, Sunday, 6/19/2011

Table of Contents

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

Leaps Trader Commentary

FOMC, Bernanke's Press Conference and the End of QE2 Approaches

by James Brown

Click here to email James Brown

Less than one point! That was the S&P 500's best attempt at an oversold bounce to end the six-week losing streak. Technically this fractional gain for the week does snap the market's multi-week decline but the trend is still down. I had warned readers to expect a drop toward the simple 200-dma and the S&P 500 tagged this technical support on Thursday afternoon. Stocks are getting pushed around by a number of crosswinds. The issue with Greece continues to take center stage. We're feeling the effects of Japan's supply chain problems. Inflation at the consumer level is on the rise both here and abroad. A week ago it seemed that China would be successful in engineering a soft landing for its economy but worries are back that it will be a much harder landing. If China has a hard landing it will impact the entire globe.

One thing that did change last week was the action in the volatility index (VIX). After weeks of consolidating sideways under the 20 level the VIX finally broke out suggesting traders are growing less complacent about the market and actually starting to get a little fearful even as the market tried to bounce. We need to see a capitulation type of day to end this correction but that hasn't happened yet so the correction probably isn't over. The S&P 500 is down about -6.6% from its highs. We probably need to see a pull back into the -8% to -12% range before stocks actually bottom.

Daily chart of the Volatility Index:

Greece remains the biggest headache for the markets. The bickering among EU leaders appears to be ebbing as French and German leaders came to an agreement on new terms for the next Greek bailout. Until they sign the check for that bailout it's just talk. People have been predicting that Greece would eventually default for a long time now but that idea, that Greece has no way to ever pay back its loans and will have to default, has been gaining traction this past week. While EU and ECB leaders say they won't allow it to happen the market is certainly expecting a default to happen. The problem is that while some pundits claim a Greek default has already been priced into the market we really don't know that it has. All of the myriad repercussions of such an event are unknown.

European banks own tens of billions of Greek debt. Some put the estimate at more than $150 billion. The major U.S. banks also own tens of billions of debt but to a much smaller extent than their EU brethren. What is not known is how much all of these banks owe or own in Credit Default Swaps (CDS) agreements. When these banks bought the Greek debt they also bought CDS to protect themselves and that means another bank had to sell them that CDS. It has become this huge spider web of intertwined counter-party risk of CDS liabilities and no one knows how much because these are unregulated. If Greece defaults then some of the major European banks could go bankrupt and when they go bankrupt they'll spark more bankruptcies across the continent. Those banks that are "too big to fail" will likely be nationalized by their countries but the rest of the financial institutions will be out of luck. Pick your favorite metaphor. This is a flimsy house of cards or a domino ready to spark a collapse of dominos.

Fortunately it seems that the Greek problem might get kicked down the road yet again. Unfortunately it's not going away any time soon. The credit rating agencies are still downgrading the other PIIGS countries, which merely reminds investors that Greece isn't the only problem and the EU still has bigger problems with Italy, Ireland, Portugal and Spain. It's quite possible that when it comes time for the strongest EU members to hand over the next round of Greek bailout money they will say no and instead keep that money to prop up their failing banks that might go under when Greece eventually defaults. If you were in their position and your constituency was getting angrier and angrier with your country's support for Greece, would you continue to have over billions of euros to Greece knowing you'll never see it again or would you try and support your local financial institution?

At the same time the latest economic data in the U.S. continues to disappoint. The New York Empire manufacturing survey for June plunged from 11.9 to -7.8. Negative territory means a contracting economy and this is the lowest level since November. The Philly Fed survey also fell into contraction territory with a drop from +3.9 to -7.7. Back in March the Philly Fed was up at 43.4. The combination of both surveys falling into negative territory raises new fears that the U.S. could face a double-dip recession.

The recent consumer sentiment numbers were disappointing with a drop from 74.3 to 71.8. Economists had been expecting a dip to 74.0. The U.S. consumer price index (CPI) is running hot at +3.6% a year. This is the highest level since late 2008. The weekly initial jobless claims came in at over 400,000 for the tenth week in a row. With economic data falling off a cliff there will be a huge focus on Ben Bernanke's press conference on Wednesday.

Last week I warned readers to expect the S&P 500 to drop toward technical support at its 200-dma. This happened on Thursday. Friday's oversold bounce from support stalled at the 10-dma. There is a chance, now that options expiration is over, that the S&P 500 might continue to rebound from its 200-dma but the overall trend is still down. At this point I still think there is a good chance we'll see the S&P 500 test its March lows near 1250. If the 1250 level breaks then we're looking at a drop toward the 1200 area.

Daily chart of the S&P 500 index:

Weekly chart of the S&P 500 index:

I also cautioned readers to expect the NASDAQ to fall to the 2600 level. Sure enough this tech-heavy index broke down under its simple 200-dma and hit support near 2600 on Thursday. Friday's oversold bounce failed near 2650 and its 200-dma. I do still think there is a decent chance the NASDAQ can muster a short-term oversold bounce from the 2600 level but I would not launch new long-term trades here. Nimble traders may want to consider short-term bullish trades with a tight stop loss. Broken support near 2700 could be new overhead resistance.

Daily chart of the NASDAQ Composite index:

Weekly chart of the NASDAQ Composite index:

As expected the small cap Russell 2000 index (and the Russell 2000's ETF, the IWM) found support near 780 (78.00) and its 200-dma. This coincides with the March lows. On a very short-term basis you could argue the small cap index has produced a bullish double bottom but we need to see a stronger rebound from these lows. A close over 800 (80.00 for the IWM) might suggest the $RUT has found a bottom but there is overhead resistance at the 50-dma and 100-dma. I would remain very, very skeptical of any bounce here at least for the next two or three weeks.

Daily chart of the Russell 2000 ETF (IWM)

Weekly chart of the Russell 2000 ETF (IWM):

The SOX semiconductor index has continued to breakdown. The early bounce attempt on Tuesday failed at new resistance at the 200-dma. The only good thing here is that the SOX is growing more and more oversold and should try and bounce soon, probably near 380 or the 375 levels.

Weekly chart of the SOX semiconductor index:

The sell-off in the transportation sector stalled last week. This is one sector that did manage an oversold bounce and you can see from the weekly chart below that it is testing its long-term trendline of higher lows. A breakdown under this level would be very bearish. Not shown is the simple 200-dma, which is just above the 5,000 mark.

Weekly chart of the Transportation index:

This week the economic calendar is pretty light but we do have a two-day FOMC meeting and Fed chairman Ben Bernanke's press conference on Wednesday after the FOMC announcement that day. Here are some of the highlights:

-Tuesday, June 21-
Existing Home Sales for May

-Wednesday, June 22-
earnings from FedEx (FDX)
FOMC interest rate decision (12:30 P.M.)
Ben Bernanke's press conference (2:00 P.M.)

-Thursday, June 23-
weekly initial jobless claims (last week was 414,000)
New Home Sales for May
earnings from Oracle (ORCL)
earnings from Micron (MU)

-Friday, June 24-
Q1 GDP (third estimate)
Durable (goods) Orders for May

Naturally the most important events of the week will be the FOMC meeting and Bernanke's press conference on Wednesday. No one expects any changes to monetary policy so the focus will be on the Fed's statement. Shortly thereafter it will be followed up with the press conference. Many people expect the Fed to downgrade their GDP estimates so you can expect Ben to be grilled over that decision. It would not surprise me to see the stock market stall and drift sideways on Tuesday and then Wednesday morning as investors wait for these events. Volatility is likely to rocket higher after the FOMC announcement and after last week's "gain" in the stock market we could see the FOMC meeting kick-start the sell-off lower again.

There is a chance that stocks could see some end-of-quarter window dressing now that options expiration is over but even if stocks do see any window dressing I would expect it to be mild. Once we get past the FOMC event on Wednesday the market's attention will turn toward the jobs report data in early July and then the beginning of Q2 earnings season. Corporate results and guidance will either end this correction and begin a new leg higher or results will renew the market correction push stocks lower still. We are approaching the busiest three weeks of earnings warning season. That means every day could have an unexpected landmine go off and jolt stocks lower on some high-profile warning.

In summary the major averages have reached support but the trend is still down. Will they rebound and end the second quarter on an up note? Or will stocks continue to sink fueled by earnings warnings and failing economic data? Of course there is the third option that stocks chop sideways for a while. Although I doubt stocks would move sideways for too long not when the Fed decision and Ben's press conference offers a great excuse to sell stocks again.

Why buy stocks now when we might see a better entry point lower in two to four weeks down the road? Investors might want to wait and see how the market reacts to the first week or two of earnings data before considering any entries. Furthermore we have the end of QE2 coming up so the first half of July could be volatile as investors adjust to the end of this stimulus.

Even if stocks bounce I still think it gets worse before it gets better!

- James


Portfolio

Portfolio Update

by James Brown

Click here to email James Brown


Current Portfolio


Portfolio Comments:

The S&P 500 ended its six-week losing streak by a very, very slim margin. While this does not inspire any confidence in the rebound we did see a handful of our candidates post gains for the week. The intermediate trend for stocks is still lower and investors need to stay on the defensive.

Our DIS play has been stopped out. Our MON trade looks like it could be in jeopardy.

No new stop losses tonight.

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

Stocks Could Bounce

by James Brown

Click here to email James Brown

Editor's Note:

The S&P 500 index snapped the six-week losing streak with a gain of less than one point. That is not very convincing and does not inspire any confidence in the oversold bounce. Now that June options expiration is over the market might see a stronger rebound from the 200-dma but the intermediate trend is still down. I don't see any changes from my prior comments which I'm reposting below:

Earlier Comments:
A drop to 1,250 on the S&P 500 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 may want to consider the idea of waiting until the market gets a chance to react to July's Q2 earnings news. That would mean our next entry point may not be until mid to late July.

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

No Confidence In the Bounce

by James Brown

Click here to email James Brown


Closed Plays


DIS has been stopped out


Play Updates


Boeing Co. - BA - close: 74.16

06/18 update: The battle of diverging trends continues in BA. The down trend that began in mid May continues but it's facing the long-term up trend on BA's weekly chart. The stock has been struggling with short-term resistance near $75.00 and I would not be surprised to see a dip toward support near $70.00 and its simple 200-dma. We could wait for a dip or a bounce near $70 before considering new long-term call positions. However, if BA does dip to $70.00 it will look like a bearish breakdown of the long-term up trend (see chart).

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 $ 3.45/ 3.85

Apr 27, 2011 - entry price on BA @ 76.50, option @ 4.95
symbol: BA1319A90 2013 JAN $90 call - current bid/ask $ 3.80/ 4.05

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: 37.93

06/18 update: I would seriously consider an early exit now in our BEAV trade. The stock has been showing relative strength but the rally has stalled at its long-term overhead resistance (see chart below). We are down to our last four weeks before July options expire. I am not suggesting new positions at this time.

- 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/ 4.00

06/18/11 Consider an early exit now (bid @ $3.20)
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: 27.52

06/18 update: I cautioned readers to look for a dip to $27.00 and BMY almost got there on Thursday. The short-term trend is bearish with lower highs and lower lows. We can expect a dip toward the 100-dma near $27.00 or the 200-dma near $26.80. Wait for the dip or better yet a bounce from these levels 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 $ 1.47/ 1.52

- or -

Mar 14, 2011 - entry price on BMY @ 26.14, option @ 1.63
symbol: BMY1319A27.5 2013 JAN $27.50 call - current bid/ask $ 2.21/ 2.28

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: 61.77

06/18 update: CACI displayed some relative strength last week with a rally past nearly all of its short-term moving averages, including the 50-dma. The stock got a boost on Friday thanks to an analyst upgrade to a "buy". The rebound is encouraging but I would not launch new positions at this time. More conservative traders may want to inch up their stop closer to technical support at 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 $ 1.75/ 1.95

- 2nd Position -

May 31, 2011 - entry price on CACI @ 63.14, option @ 2.65*
symbol: CACI1117I65 2011 SEP $65 call - current bid/ask $ 1.75/ 1.95

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: 75.44

06/18 update: Railroad stocks have continued to trend lower with a pattern of lower lows and lower highs but the DJUSRR railroad index did manage another bounce from its simple 100-dma. Meanwhile CNI is trying to bounce from short-term support near $74.00 and its 100-dma. Right now the bounce does not look very convincing and CNI still has a short-term trend of lower highs. 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 $ 3.20/ 3.40

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: 59.31

06/18 update: COH managed to eke out a minor gain for the week. Shares almost hit our stop loss at $57.40 on Thursday but COH bounced at $57.61. Unfortunately the bounce has stalled near short-term resistance at $60.00 and its 20 and 30-dma. More aggressive traders may want to raise their risk a little bit and widen their stop loss to give COH more room to move. I am concerned that a real breakdown under $58.00 will lead to a drop toward the 200-dma closer to $53.00. We'll keep our stop loss at $57.40 for now but I am not suggesting new bullish positions at this time. Given the market's down turn readers may want to consider an early exit to minimize any losses. 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 $ 3.60/ 3.80

- or -

Jun 03, 2011 - entry price on COH @ 61.00, option @ 6.80
symbol: COH1319A70 2013 JAN $70 call - current bid/ask $ 5.60/ 6.00

06/18/11 COH looks weak. Readers may want to consider an early exit.

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: 79.63

06/18 update: COST has extended its bounce to two weeks in a row. Shares seem to breakout from their sideways consolidation on Friday but I couldn't find any specific news behind the move. It wasn't surprising to see the rally stall and have COST close near the $80 strike price for June option expiration. The long-term trend is still up but I'm not convinced the correction is necessarily over so I'm 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 $ 5.25/ 5.40

- or -

Apr 7, 2011 - entry price on COST @ 76.37, option @ 5.05
symbol:COST1319A85 2013 JAN $85 call - current bid/ask $ 6.45/ 6.90

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


Dr. Pepper Snapple Group, Inc. - DPS - close: 40.54

06/18 update: DPS posted a gain for the week but shares didn't see that much follow through on its bounce from support near the 50-dma. After consolidating sideways the last few days and the failed rally in Friday morning DPS looks ready to retest the $40.00 level and its 50-dma again. I would wait for another bounce from $40 before considering new positions. If shares breakdown under $40 then it could be a quick drop toward the next level of support near $38.00. 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 $ 2.75/ 3.20

- or -

May 11, 2011 - entry price on DPS @ 40.55, option @ 1.00
symbol: DPS1119K45 2011 NOV $45 call - current bid/ask $ 0.85/ 1.05

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: 61.19

06/18 update: Warning! FISV has broken under support near $62.00 and its 100-dma. This was also the neckline to a bearish head-and-shoulders pattern that is now forecasting a drop toward $59.00. Coincidentally the $59 level should have support thanks to the rising 200-dma. The recent weakness would also suggest that the peak in early June is the second half to a bearish double top pattern. More conservative traders may want to abandon ship right now. I am expecting a dip toward $60.00 and most likely the 200-dma near $59.00. 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 $ 1.05/ 1.02

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: 21.19

06/18 update: Semiconductor stocks have continued to underperform. This past week saw the SOX index breakdown under what should have been support at the 400 level. Meanwhile shares of INTC have continued to slowly drift lower toward what should be support near $21.00 and the 200-dma. We have been expecting this dip toward the 200-dma and while we can use this pull back as an entry point I'd rather wait. There seems to be no slow down in the sell-off in the SOX. Let's wait and see if INTC actually bounces at $21.00 and more conservative traders may want to wait for INTC to close back above $22.00 before considering new bullish 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/ 1.12

- 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: 65.85

06/18 update: More than one third of U.S. corn is produced to make ethanol and the senate's recent vote to end incentives for ethanol production is bad news for many farmers and agriculture companies since the lack of ethanol subsidies is expected to reduce demand for corn. Shares of MON have been sinking the last few days as this story plays out. Shares are back under their 50-dma and under their exponential 200-dma and the stock is moving quickly toward the next level of support near $65.00 and its simple 200-dma. I am concerned since MON never broke the four-month bearish trend of lower highs and lower lows!

More conservative traders may want to arise their stop loss close to the $65 level or even sell part or all of your positions to minimize your exposure. If the broader market continues to sink I would expect MON to break $65 and drop toward its May lows near $62.30.

Furthermore MON is due to report earnings on June 29th. Cautious traders may want to abandon ship prior to the earnings report since we don't know how the end of ethanol incentives might impact MON's future revenues. I'm not suggesting new 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 $ 4.70/ 4.80

- or -

Mar 15, 2011 - entry price on MON @ 65.50, option @ 8.75
symbol: MON1319A75 2013 JAN $75 call - current bid/ask $ 6.65/ 6.90

06/18/11 Get defensive. Consider raising your stop loss or reducing your position size. Decide if you're willing to hold over the earnings report or if you'll exit early prior to the announcement.
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: 41.16

06/18 update: Hmm... energy stocks have delivered a mixed performance the last few days. Last Monday saw SWN breakdown under support near $42 and its 50-dma. This was followed by four days of consolidating sideways. The stock looks vulnerable to more selling pressure, which means we will probably see a drop toward the $40.00 level. Currently our stop loss is at $39.45 and if the broader market indices accelerate lower there is a growing chance we'll get stopped out. It will be interesting to see how oil prices move following the FOMC's comments and Bernanke's press conference on Wednesday. Many are expecting the Fed to downgrade their growth estimates, which would mean less demand for oil and thus lower oil prices at least in theory.

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 $ 2.76/ 2.84

- or -

Apr 7, 2011 - entry price on SWN @ 40.50, option @ 5.85
SWN1319A45 2013 JAN $45 call - current bid/ask $ 5.65/ 5.85

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: 100.01

06/18 update: Railroad stocks have a two-week bearish trend of lower highs and lower lows. UNP managed a bounce off its 100-dma but shares stalled near the $100.00 level to close on this option strike price for June expiration. The long-term trend for UNP is still up but momentum has stalled completely. Some of the technical indicators on the weekly chart have turned bearish. If the stock market's major averages continue to sink there is a good chance we'll get stopped out at $97.00. 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 $ 4.00/ 4.15

- or -

May 5, 2011 - entry price on UNP @ 100.15, option @ 6.00
UNP1319A120 2013 JAN $120 call - current bid/ask $ 5.40/ 5.80

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: 62.05

06/18 update: The correction in ZMH continues and shares have broken down under technical support at the 100-dma. I had cautioned readers that ZMH might see a drop toward the $60.00 level. I would wait for that drop or better yet a bounce near $60.00 before considering new long-term call positions.

Earlier comments:
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 $ 3.40/ 3.60

- or -

Jun 10, 2011 - entry price on ZMH @ 63.00, option @ 5.50
ZMH1319A70 2013 JAN $70 call - current bid/ask $ 4.60/ 5.00

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


Walt Disney Co. - DIS - close: 38.04

06/18 update: A couple of months ago DIS was one of our best performers. That changed following the earnings report in May when DIS missed estimates. Since then DIS has broken down through several layers of support. This past week the sell-off continued and DIS hit our stop loss at $37.85 closing this trade.

- Current Positions -
Oct 27, 2010 - entry price on DIS @ 35.60, option @ 2.23
symbol: DIS1221A40 2012 JAN $40 call - exit @ $2.00 (-10.3%)

- or -

Oct 27, 2010 - entry price on DIS @ 35.60, option @ 3.63
symbol: DIS1319A40 2013 JAN $40 call - exit @ $4.00 (+10.1%)

06/16/11 Stopped out @ 37.85. Options @ -10.3% & +10.1%
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

Chart of DIS:

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



Watch

Why Buy Now?

by James Brown

Click here to email James Brown

Editor's Note:

The stock market's intermediate trend is down and there are plenty of potholes along the road that could derail any rebound attempt. The next three weeks could see a rash of earnings warnings prior to the onset of Q2's earnings season in mid July. The FOMC meeting and Bernanke's press conference on Wednesday could be an excuse to hit the sell button again.

Why buy stocks now when we might get a better entry point another -5% or -10% lower in the next three or four weeks? That's the question you have to ask.

I am not adding any new bullish LEAPS candidates tonight. We need to exercise patience and wait for the right entry point. Hopefully we'll see a capitulation type of sell-off soon and then we can re-evaluate potential candidates.



New Watch List Entries

None, no new watch list candidates


Active Watch List Candidates

AGN - Allergan Inc.

AXP - American Express Co

BCR - C.R.Bard Inc.

HSY - Hershey Co.

MCD - McDonald's Corp.

PEP - Pepsico

T - AT&T Inc.


Dropped Watch List Entries

Visa (V)


Active Watch List Candidates:



Allergan Inc. - AGN - close: 80.84

06/18 update: AGN has spent the last couple of weeks consolidating sideways between the $79.00 and $81.50 levels. Friday saw a little relative strength but the rally stalled at the top of this trading range. Some of the technical indicators on the daily chare are turning bullish again. Nimble traders may want to consider buying a breakout past $82.00 with a stop loss near $79.00. The newsletter will continue to wait for a deeper correction. We have a buy-the-dip trigger at $75.50 and we'll move our stop loss to $72.00, keeping it under the simple 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: 48.50

06/18 update: AXP managed a nice bounce on Thursday as the stock rebounded near the $47.00 level but the rally stalled under its 50-dma. Technically the $47.00 level should be support thanks to this level being prior resistance. If you think the market has bottomed then a bounce over $49.00 with a stop under $47.00 could work. I am not convinced the market correction is over so we'll wait and keep our buy-the-dip trigger at $45.50 with a stop loss at $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

BUY the 2012 Jan $50 call (AXP1221A50)

- or -

BUY the 2013 Jan $50 call (AXP1319A50)

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


C.R.Bard Inc. - BCR - close: 108.67 change: -0.00

06/18 update: BCR is still consolidating sideways although it has a bearish trend of lower highs. I'm expecting a correction down toward the early April highs near $101, which should be support. At this point a pull back that deep would require a breakdown under technical support at the 50-dma and 100-dma. We may have to adjust our strategy if BCR finds support near the 100-dma.

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)

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


Hershey Co. - HSY - close: 55.66

06/18 update: HSY has been showing relative strength. Traders bought the dip near $54 and its 100-dma this past week. Now HSY is testing resistance near $56 and its 50-dma. Many of the short-term technical oscillators have turned bullish again. Nimble traders may want to reconsider their entry point and look at dips near $54.00 or a breakout past $56.50 as alternatives. I'm not convinced the market's correction is over yet so we'll leave our buy-the-dip trigger 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: 82.52

06/18 update: MCD is another defensive name that has been showing relative strength. Shares added to their bounce from short-term support at $80.00 and now MCD is nearing resistance at its all-time highs near $53. I am not willing to chase it at least not with the market in a downtrend.

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: $68.72

06/18 update: PEP has now spent two weeks consolidating sideways but you'll notice that shares have a bearish trend of lower highs. This would suggest the correction is not over yet. 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: 30.77

06/18 update: AT&T has been bouncing between $30 and $31 this past week. The stock has technical resistance at its 50-dma overhead and round-number support near $30 below. I am still expecting a dip toward $29.00 and its simple 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: 74.43

06/18 update: I'm cutting Visa loose as a candidate. Shares have been churning sideways on either side of technical support at its 200-dma and I suspect shares will drop toward support near $70.00. Our plan was to go long on a close above $82.50 but that could be a while to achieve. We'll remove V as a watch list candidate tonight. Readers may want to keep the stock on their own personal watch list to see if support at $70.00 holds are not.

Visa never hit our trigger to open positions.

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