Option Investor
Newsletter

Daily Newsletter, Sunday, 7/3/2011

Table of Contents

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

Leaps Trader Commentary

Fireworks on Wall Street

by James Brown

Click here to email James Brown

The U.S. stock market celebrated the fourth of July a little early this year because there were plenty of fireworks on Wall Street this past week. A week ago it looked like the S&P 500 index might breakdown under key technical support at its simple 200-dma. Now five trading days later the major U.S. indices are all up between +5.5% to +6.5% and back in positive territory for the year. It was the best weekly performance in twelve months.

The bond market has been in rally mode for almost three months. That changed dramatically this past week. With the end of QE2 looming on June 30th there was a sudden multi-day sell-off as investors yanked money out of the bond market. It looks like a lot of that cash was funneled into equities. Combine this influx with some end-of-quarter window dressing and place it in front of a long holiday weekend and you get low-volume summer trading days that exacerbate the move higher.

Before we look at what happened in the markets lets quickly touch on some of the headlines and economic data that influenced trading. Early in the week the U.S. personal income numbers came in at +0.3% but spending was unchanged. This was actually a disappointment as economists were looking for more. Meanwhile the Greece problem was heating up but cooperation between Germany and France presented a unified front for the EU's stance on Greece's debt problems, which soothed investors' fears.

Pending home sales for May surged +8.2%, blowing away estimates for a -0.6% drop. A better than expected Richmond Fed manufacturing survey helped set a positive tone for the market. Investors were ignoring the photos and headlines of massive rioting in Greece and instead applauded news that the struggling country's parliament had passed the new five-year austerity program. This program was required by the EU and IMF before they would release the next round of bailout money to Greece. This vote was followed up the next day with a positive vote in parliament on the implementation plan.

Meanwhile the weekly initial jobless claims continue to disappoint. Last week these came in at 428,000, still higher than expected. This number has been consistently above the 400K level and doesn't bode well for the monthly jobs report due out this week. Fortunately we continued to see positive economic data from the manufacturing sector. The Kansas City Fed manufacturing survey reported a sharp rebound higher. Overshadowing this report was the Chicago PMI, which reversed higher. Economists had been expecting the Chicago area PMI to drop to 54.0 but the survey rose to 61.1.

The next day the markets focused on the U.S. ISM manufacturing index, which rose to 55.3 compared to estimates for a drop to 51.1. Remember, numbers under 50.0 indicate contraction and numbers over 50.0 show growth. Overall the balance of data for the week was much better than expected. This new show of strength in the U.S. is suggesting the soft patch in the economy could be on its way out. Many believe that most of the economic weakness in the second quarter was due to the supply chain disruptions in Japan. Thankfully the global impact from Japan's disaster should be healed at this point.

The stock market's reaction to this generally positive economic data along with the seasonal effects, the window dressing, and rotation out of bonds produced a huge move higher. The S&P 500 was up five days in a row and rallied through resistance near 1300, 1320, and both its 50-dma and 100-dma. Last week's rally also broke the intermediate trend of lower highs.

Optimistically this could be the start of a midsummer rally but we'll have to get past the June jobs report this coming Friday and we need to see strong numbers as Q2 earnings season begins. Naturally after such a big move some profit taking would be expected. It wouldn't surprise me to see the S&P 500 consolidate sideways for several days as investors wait for the jobs report and the first week or two of earnings data.

On the other hand, if the S&P 500 were to stall right here near the 1340 area and eventually roll over it would look like a huge bearish head-and-shoulders pattern that has taken more than six months to build. If this is an H&S pattern then a breakdown under the neckline in the 1260-1250 area would forecast a drop toward the 1150 area. I'm not making a forecast here. I'm just looking at possibilities.

On a short-term basis The S&P 500 could have support near 1320 and if that level fails then support near 1300.

Daily chart of the S&P 500 index:

Weekly chart of the S&P 500 index:

Naturally we see a very similar move in the NASDAQ composite. Technology stocks were some of the market's best performers last week. The NASDAQ's rebound pushed through resistance at 2700, 2750, 2800 and its 50 and 100-dma. The index is now closing in on resistance in the 2840-2850 zone. Of course the NASDAQ is very short-term overbought here and we should expect some profit taking. Hopefully it will find some support near 2750. Like the S&P 500 there is the chance that the NASDAQ is building a huge H&S pattern.

Daily chart of the NASDAQ Composite index:

Weekly chart of the NASDAQ Composite index:

We see the same moves in the small cap indices. It is encouraging to see that the rally was broad based and not just focused on the large caps. The potential for an H&S pattern isn't so clear in the small cap index or ETF. On a short-term basis the Russell 2000 ETF should find support near 82.00 and its converging 50 and 100-dma.

Daily chart of the Russell 2000 ETF (IWM)

Weekly chart of the Russell 2000 ETF (IWM)

I am still watching the SOX semiconductor index. Chip stocks saw their rally accelerate on Thursday and Friday. The SOX powered past resistance at 410 and its 200-dma but stalled at resistance near the 420 level. Plus the SOX has not yet broken the bearish trend of lower highs (see chart).

Weekly chart of the SOX semiconductor index:

One of the market's best performers last week was the transportation sector. The Dow Jones Transportation index surged more than +6% and set a new all-time closing high. This is very bullish. Dow Theory suggests we can't have a sustained market rally without the transports. Long-term the trend here is still very bullish. Short-term the transports are now overbought and due for some profit taking.

Weekly chart of the Transportation index:

Looking ahead the economic calendar will be dominated by the June non-farm payroll report on Friday, July 8th. Estimates are all over the place but consensus is about +85,000 jobs in June versus +83,000 in May. A better than expected jobs report could easily fan the flames for this new up-trend in stocks. It would not surprise me to see the market stall mid week as investors wait for the report. Due to the market holiday on Monday the ADP employment report, normally published on Wednesday, will come out on Thursday.

- Monday, July 4 -
U.S. stock markets are closed (holiday)

- Tuesday, July 5 -
May Factory Orders

- Wednesday, July 6 -
ISM Services index
Challenger, Christmas & Gray mass layoffs report

- Thursday, July 7 -
weekly initial jobless claims
ADP Employment report

- Friday, July 8 -
Non-farm payroll (jobs) report for June
Unemployment rate
Wholesale inventories

Now that the Greece problem has been kicked down the road another month and Q2 earnings don't start for another week, what will investors focus on? Odds are the market might turn its focus to the U.S. debt ceiling debate. Democrats and Republicans are still fighting over this. We have to have a signed agreement to raise the debt ceiling by July 22nd to avoid a default in early August. Technically we reached our debt ceiling weeks ago but through various accounting tricks the U.S. has been able to juggle its bills until August.

The final outcome will be a vote to raise the debt ceiling and it will get passed. The question is who will blink first? Will it be the Democrats or the Republicans? Many of the new Republicans were placed in office by the Tea Party movement with a focus to lower government spending and debt. There is going to be a lot of deal making and a lot of rhetoric hitting the airwaves over the next month. We might have two weeks of calm with investors focused on corporate earnings starting the second full week of July. Yet if congress can't come together and agree on a deal by July 15th you can be everyone will be focused on this issue the following week!

As long-term LEAPS traders what do we do now? The stock market just ended almost two months of declines with a violent move higher. The real issue here is earnings. The job report this Friday is important but we've seen a bad number before and the market didn't collapse. Hopefully the debt ceiling issue is just a circus sideshow that will eventually get solved. Now that we're seeing a sudden improvement in economic data the focus should be on earnings. While we will certainly see some bombs due to a worse than expected second quarter the investors and analysts want to hear guidance for the third quarter and beyond.

Traditionally, the market likes to peak in the second week of July and then slide lower into early October. Now that doesn't always happen and I've got a feeling it might not happen this year. Of course feelings don't count for much on Wall Street. What we do know is that stocks are short-term overbought. I am reluctant to chase stocks here at current levels. We don't know if the market will see any follow through higher, will it reverse lower again, or will it consolidate sideways?

I am suggest that we remain patient. We do not want to launch new bullish positions at the top of the right shoulder to a bearish H&S pattern (see my comments above). We're going to have to wait and see how the markets react to earnings news. A question to ask is, "did last week's rally save us from a deeper correction lower? or did it merely postpone the correction until earnings season?" I don't want to sound too bearish here. This past week has healed a lot of technical damage over the last month and my market view has improved significantly. There are plenty of stocks that are seeing a huge bull market. We just need the right entry point. Unfortunately today is not that entry point.

Enjoy your fourth of July holiday!

- James


Portfolio

Portfolio Update

by James Brown

Click here to email James Brown


Current Portfolio


Portfolio Comments:

The U.S. stock market reversed sharply last week thanks to improvement with the situation in Greece and positive surprises in some key economic data. Combine that with some end of quarter window dressing and it happened to be the right recipe for a +6% surge in stocks.

The rally this past week was truly impressive with widespread gains for five days in a row. Stocks were slicing through overhead resistance and shorts were running for cover. Low volume for most of the week only exacerbated the moves.

Stocks are now short-term overbought and probably due for some profit taking.

We saw BEAV hit our exit target last week.

There are new stop losses for CNI, DPS, and MON.

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

Countdown to Q2 Earnings

by James Brown

Click here to email James Brown

Editor's Note:

The beginning of the Q2 earnings season is only a week away when Alcoa (AA) kicks it off on July 11th. Corporate results and guidance will provide a lot more data on how businesses are faring in this current environment. Will earnings guidance line up with the Federal Reserve's outlook for a rebound in the second half of this year?

The market's big bounce this past week is very encouraging since a week ago it looked like stocks were poised to breakdown under major support levels. Yet now stocks are short-term overbought. We don't want to chase them here. Therefore I am not adding any new candidates tonight.

I will admit that the last couple of months have been tough. Normally I like to add a new play every week plus a couple of new watch list candidates every week. Usually we see our watch list candidates get triggered as new plays and make the jump to our active trade list a few times a month. We have seen a lag in this activity lately. I suspect that this coming week will be another quiet one for us at LEAPStrader but I am expecting to see a lot more activity as we move deeper into July. Everything will likely depend on earnings results and how the market chooses to interpret corporate guidance.


Play Updates

A Dramatic Reversal Higher

by James Brown

Click here to email James Brown


Closed Plays


BEAV hit our exit target.


Play Updates


Boeing Co. - BA - close: 74.27

07/02 update: BA delivered five gains in a row producing a $3.00 gain on the week. Shares seemed to stall on Friday under resistance at the $75.00 level. While the big bounce is encouraging BA has not yet broken the two-month bearish trend of lower highs. Past the $75.00 level there is additional resistance at the 50-dma near $76.00. Now with the stock market's major averages short-term overbought and due for a dip I would not launch new positions at this time.

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 $ 2.98/ 3.05

Apr 27, 2011 - entry price on BA @ 76.50, option @ 4.95
symbol: BA1319A90 2013 JAN $90 call - current bid/ask $ 3.25/ 3.40

06/25/11 BA dips toward support near $70 and 200-dma as expected.
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


Bristol-Myers Squibb Company - BMY - close: 29.15

07/02 update: Instead of filling the gap shares of BMY bounced early when they hit their rising 50-dma. Now shares are back above prior resistance at $29.00. The trend is up but I am not suggesting new bullish positions at this time.

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 $ 2.47/ 2.51

- or -

Mar 14, 2011 - entry price on BMY @ 26.14, option @ 1.63
symbol: BMY1319A27.5 2013 JAN $27.50 call - current bid/ask $ 3.10/ 3.20

06/25/11 New stop loss @ 26.95
06/04/11 New stop loss @ 25.90

Current Target: $32.00
Current Stop loss: 26.95
Play Entered on: 03/14/11
Originally listed in the New Plays 03/12/11


CACI International - CACI - close: 64.94

07/02 update: CACI did not see quite the same surge the stock market did but it was still a bullish week. The company raised their earnings guidance on June 29th. Shares really didn't move until Friday, where the stock rallied +2.9% and broke out past resistance to close at new relative highs. 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 $ 2.90/ 3.10

- 2nd Position -

May 31, 2011 - entry price on CACI @ 63.14, option @ 2.65*
symbol: CACI1117I65 2011 SEP $65 call - current bid/ask $ 2.90/ 3.10

06/25/11 new stop loss @ 59.75
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: 59.75
Play Entered on: 04/04/11
Originally listed on the Watch List: 02/12/11


Canadian Natl. Railway Co. - CNI - close: 81.05

07/02 update: It was a very bullish week for the railroad stocks. Many of them like CNI, NSC, and UNP all broke out from their sideways consolidation and rallied to new highs. Shares of CNI soared from $75 to $81 and closed at all-time highs. I am not suggesting new positions now. Nimble traders may want to consider buying calls on a dip near $78.00 with a stop near $75.00. Speaking of stops I am raising our stop from $72.75 to $74.90. Our target is $89.00.

- Current Positions -
Feb 28, 2011 - entry price on CNI @ 72.39, option @ 2.90
symbol: CNI1221A80 2012 JAN $80 call - current bid/ask $ 5.40/ 5.70

07/02/11 new stop loss @ 74.90
06/25/11 new stop loss @ 72.75
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: 74.90
Play Entered on: 02/28/11
Originally listed in the New Plays 02/26/11


Coach Inc. - COH - close: 65.99

07/02 update: Wow! What a difference a week can make. A week ago it looked like COH was going to breakdown from a bearish H&S pattern. Instead COH proved to be a big outperformer last week. Actually almost anything related to consumers did well during the market's sharp rebound. COH surged more than seven points and closed at new all-time highs. The stock is now short-term overbought and we should expect some profit taking. The $64 and $62 levels should offer some short-term support.

If you're looking for a new entry point I'd prefer to buy a new bounce from the $62.00 area but there's no guarantee we'll see one. 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 $ 6.30/ 6.50

- or -

Jun 03, 2011 - entry price on COH @ 61.00, option @ 6.80
symbol: COH1319A70 2013 JAN $70 call - current bid/ask $ 8.10/ 8.50

07/02/11 Look for some profit taking after the big rally
06/25/11 COH appears to be forming an H&S pattern. Consider an early exit now.
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: 81.54

07/02 update: Gains in COST last week were pretty timid compared to the market's but the stock did post a gain. My concern today is that the stock market is short-term overbought and due for a dip. How will COST react to a market pull back? The stock should have some support in the $79-77 area with additional support near $75. Nimble traders might want to consider buying a bounce from the rising 100-dma if we happen to see one. 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 $ 5.50/ 5.60

- or -

Apr 7, 2011 - entry price on COST @ 76.37, option @ 5.05
symbol:COST1319A85 2013 JAN $85 call - current bid/ask $ 6.75/ 6.90

06/25/11 expecting a dip toward the 100-dma
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: 42.15

07/02 update: The big rally in DPS this past week just erased the prior four weeks of declines and congestion. The stock is now testing resistance at its mid May highs near $42. I would not be surprised to see a dip back toward the $41 area, which should be short-term support. Please note that I am raising our stop loss to $39.40. I am not suggesting new positions at this time. FYI: DPS does not have LEAPS so we are using the November 2011 calls.

- Current Positions -
May 11, 2011 - entry price on DPS @ 40.55, option @ 2.85
symbol: DPS1119K40 2011 NOV $40 call - current bid/ask $ 3.40/ 4.10

- or -

May 11, 2011 - entry price on DPS @ 40.55, option @ 1.00
symbol: DPS1119K45 2011 NOV $45 call - current bid/ask $ 1.05/ 1.45

07/02/11 new stop loss @ 39.40
06/25/11 DPS looks poised to correct toward the $38 level.

Current Target: $46.00
Current Stop loss: 39.40
Play Entered on: 05/11/11
Originally listed on the Watch List: 05/07/11


Fiserv, Inc. - FISV - close: 63.75

07/02 update: FISV participated with the market's rebound with five gains in a row. Shares managed to rally past resistance at its 100-dma and then its 50-dma. Yet the stock remains inside its sideways trading range and FISV still has resistance in the $64.50 area. While last week was improvement I am still not suggesting new positions.

- 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/ 1.65

06/25/11 new stop loss @ 58.95
06/04/11 new stop loss @ 58.45

Current Target: $74.75
Current Stop loss: 58.95
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: 22.53

07/02 update: Semiconductors were strong performers last week and the SOX index managed to rally past resistance at 410 and both its simple and exponential 200-dma. This is very encouraging but the SOX stalled at resistance near 420 and the index still has a bearish trend of lower highs to overcome.

Meanwhile Intel got a late start to the rally last week but made up for it with big gains on Thursday and Friday. INTC's rally back above resistance at $22.00 is a big improvement. I would be tempted to launch new long-term LEAPS positions on a dip back into the $22.00-21.75 area.

Cautious traders might want to raise their stops closer to the $21.00 level. FYI: INTC is due to report earnings on July 20th.

- 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 $ 1.48/ 1.51

- or -

Jun 01, 2011 - entry price on INTC @ 22.00, option @ 2.38
symbol: INTC1319A22.5 2013 JAN $22.50 call - current bid/ask $ 2.45/ 2.51

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: 72.65

07/02 update: MON reported earnings on June 29th. The safer trade would have been to exit prior to the report but the newsletter decided to hold over the report. We were lucky. The company beat Wall Street's estimates by 15 cents. Furthermore management raised their 2011 earnings guidance into the $2.84-2.88 range while analysts were only estimating $2.81. Investors chose to focus on the positive news instead of focusing on the negative news like MON's admission the SEC is looking into its customer incentive programs over the last couple of years. I repeat that we were lucky. The earnings news garnered some positive analyst comments.

In reaction to the earnings news MON managed to rally more than six points for the week. More importantly MON has broken the five-month trend of lower highs. Shares are short-term overbought so we should expect some profit taking soon. We all know how volatile MON can be. I would expect a dip to $70 and would not be surprised to see a dip to $68. Please note our new stop loss at $64.00.

I am not suggesting new positions at this time but might reconsider on a dip to one of these levels.

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 $ 7.15/ 7.30

- or -

Mar 15, 2011 - entry price on MON @ 65.50, option @ 8.75
symbol: MON1319A75 2013 JAN $75 call - current bid/ask $ 9.10/ 9.30

07/02/11 new stop loss @ 64.00
06/25/11 Earnings are June 29th. Consider exiting ahead of the announcement.
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.

Chart of MON:

Current Target(s): $85.00
Current Stop loss: 64.00
Play Entered on: 03/15/11
Originally listed on the Watch List: 01/08/11


Southwestern Energy Co. - SWN - close: 43.80

07/02 update: I warned readers to expect a dip toward $40.00. Sure enough SWN broke support at its 100-dma and dipped to $40.04 on Monday. The stock reversed course and rallied the next four days in a row. The stock is now up almost +10% from its Monday low. SWN's rally has stalled at significant resistance near the $44 level. I would expect a pull back into the $42.50 area. 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 $ 3.35/ 3.45

- or -

Apr 7, 2011 - entry price on SWN @ 40.50, option @ 5.85
SWN1319A45 2013 JAN $45 call - current bid/ask $ 6.65/ 6.80

07/02/11 SWN has reversed higher and stalled at resistance near $44.
06/25/11 SWN looks poised to drop toward support near $40.00.
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: 106.76

07/02 update: It turned out to be a very bullish week for the transportation sector. Railroads helped drive these gains. Shares of UNP soared +6.7% and broke out past resistance at $105 to close at new all-time highs. I would not chase it here. If you are looking for a new entry point consider waiting for a bounce from the $104-103 area.

- Current Positions -
May 5, 2011 - entry price on UNP @ 100.15, option @ 5.00
UNP1221A110 2012 JAN $110 call - current bid/ask $ 5.65/ 5.85

- or -

May 5, 2011 - entry price on UNP @ 100.15, option @ 6.00
UNP1319A120 2013 JAN $120 call - current bid/ask $ 7.25/ 7.50

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: 65.09

07/02 update: ZMH produced a dramatic turnaround with a rally past resistance at its 100-dma and then at the $64 level. I would not chase the bounce. ZMH's rally stalled near resistance at $65 and its 50-dma. Let's wait and see if shares pull back and bounce again in the $64-63 area. Then we can re-evaluate a new entry point.

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.

- Current Positions -
Jun 10, 2011 - entry price on ZMH @ 63.00, option @ 4.00
ZMH1221A65 2012 JAN $65 call - current bid/ask $ 4.70/ 4.90

- or -

Jun 10, 2011 - entry price on ZMH @ 63.00, option @ 5.50
ZMH1319A70 2013 JAN $70 call - current bid/ask $ 5.60/ 6.10

06/25/11 We are still expecting a dip toward $60.00. Wait for a bounce from this level before considering new positions.

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


BE Aerospace Inc. - BEAV - close: 41.29

07/02 update: It turned out to be a very bullish week for BEAV. The stock managed to breakout past resistance at the $40.00 level and shares closed at new multi-year highs. Our exit target was hit at $39.90 on June 28th. The bid on our call was at $4.90 (+78.1%). Today that same 2011 July $35 call is bid at $6.10 and will expire in two weeks.

Readers may want to keep BEAV on their watch list. The trend remains bullish.

- Current Positions -
Feb 23, 2011 - entry price on BEAV @ 34.00, option @ 2.75
symbol: BEAV1116G35 2011 JUL $35 call - exit @ $4.90 (+78.1%)

06/28/11 Target hit @ 39.90, option +78.1%
06/25/11 new stop loss @ 36.75, Plan on exiting July 1st
06/25/11 adjusted exit target to $39.90
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: $39.90
Current Stop loss: 36.75
Play Entered on: 02/23/11
Originally listed on the Watch List: 01/22/11



Watch

Copper Is Rising

by James Brown

Click here to email James Brown


New Watch List Entries

JJC - iPath Copper ETF


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.

WLP - Wellpoint Inc.


New Watch List Candidates:


iPath Copper ETF - JJC - close: 56.61

Company Info

The JJC is an exchange traded fund (ETF) that mimics the Dow Jones-UBS Copper Total Return Sub-Index, which is focused on copper futures contracts. A lot of pundits like to call commodity "Dr. Copper" because the price and demand for copper can tell you the health of the economy. The last four months have seen copper prices declining but the slide started to level off last month. You can see from the weekly chart below that the JJC never broke the long-term up trend. Now after last week's better than expected economic data we're seeing a rally higher in copper prices. Combine that with what looks like a bearish pattern for the U.S. dollar and copper could be poised for a new leg higher.

I do want to point out a couple of concerns. Technically the 50-dma just crossed under the 200-dma a few days ago. Normally this is a very bearish development. Second, the options on JJC do not have a lot of volume or open interest. Option prices could be very volatile and the spreads could get wider on us, putting us at a disadvantage. Third, JJC does not (yet) have LEAPS so we'll have to use the December calls. Fourth, this equity is going to be very sensitive to the movement in the dollar. Finally, this ETF is going gap open, up or down, almost every day as it reacts to the price of copper futures. Therefore we want to keep our position size pretty small to limit our risk.

Short-term JJC looks a little overbought here. I am suggesting we launch bullish positions on a dip at $55.00. If triggered we'll use a stop loss at $51.00, which is under the May low. More conservative traders may want to consider a stop closer to $52.75 instead. Our first target is $61.75. Our second, more aggressive target is $64.00. Buy-the-Dip trigger: $55.00 (small positions only!)

BUY the 2011 Dec. $60 call (JJC1117L60) current ask $2.90

Chart of JJC:

Weekly Chart of JJC:

Originally listed on the Watch List: 07/02/11


Active Watch List Candidates:



Allergan Inc. - AGN - close: 84.57

07/02 update: I suspect that our plan to buy AGN on a dip near support at $75.00 is not going to work. The market's sudden reversal higher has lifted AGN toward its all-time highs set in May. The $85 level might be resistance so we don't want to launch positions now. I have to suggest we wait a week or two and then re-evaluate.

I'm not moving our trigger tonight so it remains at $75.50 but I doubt AGN will correct that low any time soon.

Prior Comments:
If triggered at $75.50 we'll use a stop at $72.00. 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: 52.34

07/02 update: The market's super strong rally this past week has lifted AXP past resistance near $52.00. Yet we don't want to chase it here. I am making a significant adjustment and raising our buy-the-dip trigger from $45.50 to $50.00. This is a much more aggressive entry point so we do want to keep our position size small. If triggered at $50.00 we'll use a stop loss at $45.75.

Keep in mind that AXP is due to report earnings on July 20th. Cautious traders may want to avoid initiating new long-term positions in front of earnings. You could choose to wait and see how investors react to AXP's earnings first and then decide on an entry point.

With our new entry point at $50.00 I am updating our targets to $59.00 and $64.00. I've updated our strike prices below.

Buy-the-Dip trigger: $50.00

BUY the 2012 Jan $55 call (AXP1221A55)

- or -

BUY the 2013 Jan $55 call (AXP1319A55)

Chart of AXP:

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


C.R.Bard Inc. - BCR - close: 111.69 change: +1.83

07/02 update: We need to adjust our expectations on an entry point in BCR. It is highly unlikely this stock will see a dip toward $100 any time soon. Yet after the market's big rally last week I don't want to chase it here. I am leaving our buy-the-dip trigger unchanged at the moment but we might want to consider buying dips or a bounce near the $110 area. We will re-evaluate next week after we see if BCR has any follow through on the rally or does it consolidate sideways.

Prior Comments: If triggered at $101.00 we plan to use a stop 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: 57.41

07/02 update: HSY participated in the stock market's rally but shares remain under significant resistance at $58.00. Now that the market looks short-term overbought and due for a dip we don't want to chase HSY now. It is unlikely that HSY will see a decline toward our current trigger at $52.25. We do need to adjust our entry point strategy but I want to see where HSY goes next before moving that trigger point. Right now I'm watching potential support at its rising 100-dma.

Prior Comments:
Currently our plan is to buy call LEAPS 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: 85.65

07/02 update: It was a big week for MCD. The stock powered past resistance near $83.00 and surged to new all-time highs. The stock is definitely short-term overbought here. I am adjusting our entry point to a much more aggressive trigger at $83.25. If MCD pulls back and hits our trigger at $83.25 we'll use a stop loss at $79.40. More aggressive traders could place their stop under the 200-dma instead. I have updated our strike price below. Our profit targets are $92.50 and $99.50.

Buy-the-Dip trigger: $83.25

BUY the 2012 Jan $85 call (MCD1221A85)

- or -

BUY the 2013 Jan $90 call (MCD1319A90)

Chart of MCD:

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


Pepsico, Inc. - PEP - close: $70.19

07/02 update: After five gains in a row shares of PEP actually stumbled lower on Friday. The weekly chart looks bullish but I'm reluctant to chase PEP after a big one-week move higher. We will raise our buy-the-dip entry point to $67.50 for now but we might have to adjust it again next week. More aggressive traders could look for a dip near $69.00.

If we do get triggered at $67.50 (an unlikely event this week), we'll use a stop loss at $64.75. Our targets are $75 and $79.

Buy-the-Dip trigger: $67.50

BUY the 2012 Jan. $70 call (PEP1221A70)

- or -

BUY the 2013 Jan. $70 call (PEP1319A70)

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


AT&T - T - close: 31.68

07/02 update: AT&T has broken the six-week trend of lower highs but shares remain inside the $30-32 trading range. We probably need to raise our buy-the-dip entry point. The current trigger at $29.25 won't be hit any time soon. However, before we update our entry point strategy I wait and watch AT&T for another week. The larger trend is up but AT&T doesn't move super fast. Investors should keep that in mind when planning a position. Don't tie up too much capital here. There is an opportunity cost if AT&T doesn't move fast enough. Right now I'm thinking another bounce in the $30.50 are might qualify as an entry point but no changes yet.

Prior Comments:
We have a buy-the-dip entry point at $29.25 with a stop at $27.90. I would keep our position size small to limit our risk. 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


Wellpoint Inc - WLP - close: 80.79

07/02 update: The story is similar with WLP. The trend is up but I don't want to chase it. Actually on a short-term basis, if you were buying, say August calls, then WLP looks like a buy right now. You could use a stop under the 50-dma. However, I have two concerns. The stock market is short-term overbought and due for a dip. Secondly, if WLP fails near the $82.00 level it will look like a potential bearish double top pattern. Thus while we probably need to adjust our entry point higher I am reluctant to change it tonight.

Prior Comments:
I am suggesting a buy-the-dip trigger at $70.50 with a stop loss at $64.75. If we do get triggered we want to keep our position size small to limit our risk.

Buy-the-Dip trigger: $70.50

BUY the 2012 Jan. $75 call (WLP1221A75)

- or -

BUY the 2013 Jan. $80 call (WLP1319A80)

Originally listed on the Watch List: 06/25/11