Option Investor
Newsletter

Daily Newsletter, Sunday, 7/10/2011

Table of Contents

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

Leaps Trader Commentary

Stocks Remain Buoyant

by James Brown

Click here to email James Brown

The stock market managed to extend the rally another week in spite of mixed economic news. Lack of profit taking on the big gains from the prior week was seen as a bullish signal. The U.S. dollar posted a gain for the week but gains appeared to stall. Both the dollar and the euro have been trading sideways in a multi-week consolidation pattern of lower highs and higher lows. We should see these currencies breakout one way or the other soon. Meanwhile gold and silver saw a four-day rally. Year to date the S&P 500 is up +6.5%, the NASDAQ composite is up +6.1% and the small cap Russell 2000 index is up +7.2%.

I am going to briefly touch on some of the economic headlines from last week. Here in the U.S. the Commerce Department said durable goods orders were up +2.1%. The June ISM services survey came in at 53.3, which was slightly under expectations but still in growth territory above 50.0. The weekly initial jobless claims came in at 418,000 but this was down from 432,000 the prior week. The ADP employment report was much, much better than expected at +157,000 new private sector jobs. Economists were only expecting +60,000. This fueled enthusiasm for a positive jobs report on Friday morning.

Overseas the latest PMI survey for China came in at 54.1, which is still in positive territory. China also raised interest rates by 25 basis points in a widely expected move. Moody's rating service said they were reviewing some Chinese banks for understated loans to local governments. Meanwhile in Europe Moody's sparked some concern when they downgraded Portugal's debt to junk status. This renewed fears that the EU has more problems than just Greece. The ECB raised interest rates by 25 basis points to 1.50%. Its counterpart, the Bank of England, left rates unchanged at 0.5% and said they would leave their 200 billion pound quantitative easing program unchanged. In other news Barclays raised their 2012 estimates on oil prices by $10 to an average of $115 a barrel.

The biggest economic report of the week was the Friday morning non-farm payroll report. Estimates for this report were all over the map but on average the estimates were for growth of about +80,000 to +100,000 jobs. The Department of Labor reported that June only saw +18,000 jobs and the unemployment rate ticked up from 9.1% to 9.2%. Furthermore the gain in May was revised lower from +54K to +25K and April was revised down from +232K to +217K. The revisions were -44,000 jobs and June only saw a gain of +18,000 so we actually lost ground. Simply put the June jobs report was a disaster. This would have been the perfect excuse to sell stocks and lock in gains after such a big bounce from the late June lows. Yet profit taking was rather mild and the markets actually rebounded off their lows of the session on Friday.

Looking at the stock market's major indices there is still a chance they are forming a bearish head-and-shoulders pattern. Yet the rally this past week is making that less likely, especially for the NASDAQ and the Russell 2000. The S&P 500 had stalled at resistance near 1340 for a couple of days but the ADP data on Thursday pushed the index to a new five-week high. We were less than ten points away from the S&P 500's 2011 high. Then the jobs report hit. Traders started the buying the dip by lunchtime on Friday.

At the moment the S&P 500 remains short-term overbought and due for some profit taking but it may not happen. If this week's earnings results come in better than expected then we might see stocks challenge their 52-week highs or even breakout. If instead a normal pull back occurs then I would look for the S&P 500 to find support near 1320 and then at the 1300 level.

Daily chart of the S&P 500 index:

Weekly chart of the S&P 500 index:

The rally in technology stocks this past week helped fuel big gains for the NASDAQ composite. It soared past potential resistance in the 2840-2850 area. The NASDAQ probably would have hit new multi-year highs had it not been for the jobs disaster on Friday morning. Even then the NASDAQ saw a strong bounce off its intraday lows. Unfortunately while the rally's strength is encouraging the NASDAQ also remains very, very short-term overbought. It would be tough to chase it at these levels. The 2800 level is probably the first area of support on a pull back.

Daily chart of the NASDAQ Composite index:

Weekly chart of the NASDAQ Composite index:

The small cap Russell 2000 index also saw an extension of the prior week's rally. The $RUT made a run at its 2011 highs and stalled at 860 on Thursday. Profit taking on Friday was minor with a -0.6% loss. Just like the NASDAQ the strength of this rally is amazing but the $RUT is extremely short-term overbought and due for some profit taking. If not here at its highs then where would you expect profit taking to take place? Don't get me wrong. The market can stay irrational a lot longer than anyone expects. I'm just concerned who is going to keep the buying pressure up to lift stocks past their highs without some sort of consolidation first?

Daily chart of the Russell 2000

Weekly chart of the Russell 2000

We continue to watch the SOX semiconductor index. What is important is that the NASDAQ managed to rally without the semis. The SOX has been stuck under resistance near 420 and its 50-dma. Plus, the SOX has yet to break the trendline of lower highs.

Weekly chart of the SOX semiconductor index:

Even though oil was rising the first part of the week the Dow Jones transportation index still managed to rally to all-time record highs by Thursday. The long-term trend is up but the group, like so many others, is short-term overbought here.

Weekly chart of the Transportation index:

Looking ahead we have a busy week of economic data. The FOMC minutes on Wednesday the 13th would normally be a headline event but now that Bernanke is doing press conferences this may not hold much heft any more. The PPI and CPI will be significant reports. Plus the Empire state manufacturing index and the Michigan Sentiment numbers will make headlines. Yet dwarfing everything will be Ben Bernanke's semiannual testimony before Congress and the onset of Q2 earnings season. Bernanke speaks before Congress on Wednesday and the Senate on Thursday. Earnings begin on Monday with Alcoa (AA) reporting after the closing bell.

- Wednesday, July 13 -
Import/export prices
FOMC minutes
Bernanke's testimony before Congress

- Thursday, July 14 -
weekly initial jobless claims
PPI for June
Retail sales for June
Bernanke's testimony before the Senate

- Friday, July 15 -
CPI for June
NY Empire State manufacturing survey
Michigan Sentiment for July

Looking ahead we will hopefully hear a lot less out of Europe - at least for another week. The Greece problem should be on the backburner and recent headlines about Portugal's debt or Italian banks don't seem to have much impact on U.S. stocks. On Sunday, July 10, President Obama is supposed to be meeting with congressional leaders to hammer out some sort of compromise on the debt ceiling problem. If they announce an agreement on Monday morning it could fuel further gains for the market. Otherwise this issue will remain a black cloud on the not too distant horizon. We want to see an agreement by July 22nd to avoid a default in early August.

The real focus this week will be Q2 earnings. Investors have been agonizing over the recent economic soft patch but most of the economic data, minus the labor market, has been showing a significant improvement. Previously earnings expectations were for a soft second quarter. Are investors still expecting disappointing earnings numbers or has the recent rash of better than expected economic data lifted expectations for corporate results? Here's another way to look at this question. Do investors buy the earnings news because they could have been worse? Or do investors sell the news because results should have been better? Right now the Federal Reserve is forecasting significant improvement in the second half of 2011. Will corporate guidance reaffirm this view or will it throw more doubt on the recovery and fuel fears of a double-dip recession?

Earnings season officially kicks off on Monday but the real flood of earnings doesn't hit for another week. In addition to Alcoa's (AA) report traders will be looking for results from FAST on Tuesday, from YUM and MAR on Wednesday, from JPM and GOOG on Thursday, and Citigroup (C) on Friday.

As LEAPS traders not much has changed for us since last week. The market remains short-term overbought. Odds are we could see individual stocks sell-off sharply as investors react to earnings news. The volatility could be a matter of fast money rotating out of companies that report and into new stocks prior to announcements hoping for a pop higher.

More importantly the market's resilience this past week was impressive. I remain bullish but we want to stay cautious in our approach to new positions. I am suggesting investors trade small to limit risk. In addition to buying dips near support I am also starting to see a lot more potential for breakout buy signals.

I am not dismissing my cautious comments from a week ago. These next two weeks could be pivotal. Will the market breakout past its 2011 highs or will it reverse lower? In the meantime we still want to be careful about not buying stocks that are too over extended. Fortunately the tone of the market has changed significantly in the past two weeks. Let's hope bulls can whistle while they work.

- James


Portfolio

Portfolio Update

by James Brown

Click here to email James Brown


Current Portfolio


Portfolio Comments:

The U.S. stock market's major indices continue to show strength. Instead of profit taking after the market's big gains from two weeks ago the market consolidated sideways. In some cases the rally continued. Both the small cap index and the technology-laden NASDAQ composite both extended their gains. Stocks remain very short-term overbought and we're about to dive into the Q2 earnings season.

Looking at our portfolio, the rally has stalled for most of our candidates but that's not surprising since most of them are short-term overbought. A few have started to correct already.

There are new stop losses for COH, COST, and INTC.

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

Aluminum & Natural Gas

by James Brown

Click here to email James Brown

Kaiser Aluminum - KALU - close: 54.38

Company Description link

Why We Like It:
Resources, commodities, and basic material names are on the move again. While the economic data has been a little mixed lately most are still expecting a stronger second half for 2011 and beyond. Shares of KALU have seen a significant rally and a breakout from a multi-month consolidation in the $46-53 zone. This past week, instead of correcting lower, KALU has digested gains by moving sideways.

I am suggesting small bullish positions now at current levels. More conservative traders could wait for a dip into the $53-52 area instead. I said small positions because shares are still arguably short-term overbought and the spreads on KALU's options are a bit wider than we would prefer.

We will use a stop loss at $49.75. Our long-term targets are $64.00 and $69.00 but that might be a little too optimistic since KALU does not have LEAPS. FYI: The Point & Figure chart for KALU is forecasting a long-term target of $65.00.

NOTE: KALU does not have LEAPS so we are choosing to play the 2011 December calls.

- Suggested Positions -
Jul 11, 2011 - entry price on KALU @ xx.xx, option @ x.xx
symbol: KALU1117L60 2011 DEC $60 call - current bid/ask $ 1.80/ 2.50

Chart of KALU:

Current Target: $64.00, 69.50
Current Stop loss: 49.75
Play Entered on: 07/11/11
Originally listed in the New Plays 07/09/11


Targa Resources - NGLS - close: 35.86

Company Description link

Why We Like It:
NGLS is in the natural gas business. Like many stocks in the energy sector NGLS just experienced a significant rally. However, for NGLS the stock has broken out past major resistance near the $36.00 level and closed at new all-time, record highs. After months of consolidating sideways below this key level NGLS should be poised for more gains.

I do consider this a slightly more aggressive trade. NGLS does not have normal LEAPS. We have to settle for the 2011 December calls. Plus, the spreads are a little bit too wide. We need to keep our position size small to limit our risk. I'm suggesting new positions now with NGLS above $35.00. We'll use a stop loss at $33.75. Our target is $39.75.

- Suggested Positions -
Jul 11, 2011 - entry price on NGLS @ xx.xx, option @ x.xx
symbol: NGLS1117L35 2011 DEC $35 call - current bid/ask $ 1.75/ 2.55

Chart of NGLS

Current Target: $39.75
Current Stop loss: 33.75
Play Entered on: 07/11/11
Originally listed in the New Plays 07/09/11


Play Updates

Stocks Hold Their Gains

by James Brown

Click here to email James Brown


Closed Plays


None. No closed plays this week.


Play Updates


Boeing Co. - BA - close: 75.07

07/09 update: BA had been showing some strength and by Thursday the stock had broken out above technical resistance at its 50-dma. Yet the market sell-off Friday morning thanks to the lousy jobs report knocked BA's gains to less than a dollar for the entire week. The short-term trend is up but BA has not yet convincingly broke the multi-week trend of lower highs. I remain cautiously optimistic but I am not suggesting new bullish 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 $ 2.82/ 2.88

Apr 27, 2011 - entry price on BA @ 76.50, option @ 4.95
symbol: BA1319A90 2013 JAN $90 call - current bid/ask $ 3.40/ 3.55

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: 29.12

07/09 update: BMY has a similar story. Shares had been slowly drifting higher only to see its gains for the week erased by Friday's profit taking. The long-term trend is higher but BMY has spent more than two weeks struggling under the $29.50 area. Any significant market pull back could push BMY down toward support near $28.00 again. 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 $ 2.42/ 2.46

- or -

Mar 14, 2011 - entry price on BMY @ 26.14, option @ 1.63
symbol: BMY1319A27.5 2013 JAN $27.50 call - current bid/ask $ 3.05/ 3.15

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: 65.52

07/09 update: It turned out to be a bullish week for CACI. Shares rallied to new four-year highs with the move past $66 on Wednesday and Thursday. After four weeks of gains the stock is short-term overbought. I would not be surprised to see a pull back into the $64-62 area. Currently our exit target is the $69.00 mark. 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. 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 $ 3.10/ 3.30

- 2nd Position -

May 31, 2011 - entry price on CACI @ 63.14, option @ 2.65*
symbol: CACI1117I65 2011 SEP $65 call - current bid/ask $ 3.10/ 3.30

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: 79.19

07/09 update: CNI spent most of the week consolidating sideways near $80. Yet the jobs-induced sell-off on Friday sent CNI to its lows for the week. Shares of CNI should have support in the $77.50-75.00 area. I am suggesting we take advantage of this pull back to launch new positions. I'm listing the 2012 Jan. $85 calls below. 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 $ 4.30/ 4.50

- 2nd Position, listed 7/9/11 -

Jul 11, 2011 - entry price on CNI @ --.--, option @ -.--
symbol: CNI1221A85 2012 JAN $85 call - current bid/ask $ 2.25/ 2.45

07/09/11 Add a 2nd position (2012 Jan $85 call)
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

Chart of CNI:

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: 66.82

07/09 update: Investors continued to bid up consumer-related names. Nearly two dozen retailers reported June same-store sales figures on Thursday and the majority of them beat expectations. COH gapped open higher on Thursday and hit a new all-time high of $69.20 but eventually succumbed to profit taking. Fortunately COH held up very well on Friday in spite of the jobs numbers.

The stock remains short-term overbought here. I would still prefer to launch new positions on a dip back near the $62.00 area but honestly COH may not pull back that far any time soon. COH earnings are expected in early August. The plan was to keep our position size small to limit our risk.

Please note our new stop loss at $59.00. I am also adjusting our targets to $74.00 and $79.00.

- Current Positions -
Jun 03, 2011 - entry price on COH @ 61.00, option @ 4.40
symbol: COH1221A65 2012 JAN $65 call - current bid/ask $ 6.80/ 7.00

- or -

Jun 03, 2011 - entry price on COH @ 61.00, option @ 6.80
symbol: COH1319A70 2013 JAN $70 call - current bid/ask $ 8.60/ 8.90

07/09/11 New stop loss @ 59.00, targets are $74.00 & $79.00
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: $74.00 & $79.00
Current Stop loss: 59.00
Play Entered on: 06/03/11
Originally listed on the Watch List: 05/28/11


Costco Wholesale - COST - close: 81.41

07/09 update: Warning! The action in COST last week looks like a failed rally type of move. Shares were inching higher and saw a spike past $83.00 on Thursday morning as investors reacted to news. COST reported June same-store sales of +14.0% versus estimates of +13.1%. This fueled the move higher but COST failed at its May highs. Shares could be forming a bearish double top here.

I am not suggesting new positions at this time. Plus, I am raising our stop loss to $76.75. This leaves the stop under the June lows and under its 100-dma.

- Current Positions -
Apr 7, 2011 - entry price on COST @ 76.37, option @ 3.80
symbol:COST1221A80 2012 JAN $80 call - current bid/ask $ 5.35/ 5.50

- or -

Apr 7, 2011 - entry price on COST @ 76.37, option @ 5.05
symbol:COST1319A85 2013 JAN $85 call - current bid/ask $ 6.55/ 6.75

07/09/11 new stop loss @ 76.75
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: 76.75
Play Entered on: 04/07/11
Originally listed on the Watch List: 01/29/11


Dr. Pepper Snapple Group, Inc. - DPS - close: 41.92

07/09 update: DPS surged to new all-time highs on Tuesday. Shares ran into some profit taking on Thursday thanks to an analyst downgrade. Yet there was no follow through on Friday morning. The jobs data would have been the perfect excuse to sell anything. I would be tempted to buy calls on Friday's intraday bounce. More conservative traders could wait for a dip and then buy a bounce off the $41.00 level instead. If you do launch new positions I'd probably buy the 2012 February calls.

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 $ 3.20/ 3.40

- or -

May 11, 2011 - entry price on DPS @ 40.55, option @ 1.00
symbol: DPS1119K45 2011 NOV $45 call - current bid/ask $ 0.95/ 1.10

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: 64.61

07/09 update: It turned out to be a bullish week for FISV. The stock rallied to new all-time, record highs on Thursday with a move past $65. The Friday morning profit taking was not that bad and traders bought the dip near $64.00.

This action looks bullish. I am extremely tempted to buy calls right now (maybe the Dec. $65s) but FISV has not yet broken the trendline on the chart below.

- Suggested Positions -
Feb 14, 2011 - entry price on FISV @ 62.30, option @ 3.20
symbol: FISV1117I65 2011 SEP $65 call - current bid/ask $ 1.90/ 2.00

07/09/11 readers may want to consider a 2nd position.
06/25/11 new stop loss @ 58.95
06/04/11 new stop loss @ 58.45

Chart of FISV

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: 23.09

07/09 update: Intel managed to keep the rally going with another strong week in spite of an analyst downgrade. Shares remain short-term overbought so I would expect a pull back sooner rather than later. Keep in mind that INTC is due to report earnings on July 20th. Cautious traders may not want to open new positions this close to the earnings report. You could wait until after we hear INTC's results and see the market reaction to them.

Please note that we are raising our stop loss to $20.85, which is under support near $21.00 and its 200-dma.

- 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 $ 1.78/ 1.82

- or -

Jun 01, 2011 - entry price on INTC @ 22.00, option @ 2.38
symbol: INTC1319A22.5 2013 JAN $22.50 call - current bid/ask $ 2.74/ 2.80

07/09/11 new stop loss @ 20.85

Current Target: $26.00-28.00 zone
Current Stop loss: 20.85
Play Entered on: 06/01/11
Originally listed on the Watch List: 05/07/11


Monsanto Co. - MON - close: 75.17

07/09 update: Many of the agricultural chemical and fertilizer names have extended their rallies. MON is outperforming some of its peers. The stock has rallied toward resistance near the $75.00 level. Shares remain short-term overbought so I would not launch new positions but a dip or a bounce near the $70 area could be a new bullish entry point for us.

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 $ 9.05/ 9.20

- or -

Mar 15, 2011 - entry price on MON @ 65.50, option @ 8.75
symbol: MON1319A75 2013 JAN $75 call - current bid/ask $10.60/10.90

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.

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: 43.91

07/09 update: SWN eked out another weekly gain but shares failed to breakout past its 2011 highs. The stock is essentially at the top of its trading range. We should expect a correction back into the $43-42 zone. 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 $ 3.25/ 3.35

- or -

Apr 7, 2011 - entry price on SWN @ 40.50, option @ 5.85
SWN1319A45 2013 JAN $45 call - current bid/ask $ 6.55/ 6.70

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: 104.30

07/09 update: UNP managed to hit a new all-time high above $107.50 this past week but shares have reversed lower. The reversal and the close over what should have been support at $105.00 is a short-term bearish signal. If we see another bounce from the $102 or $100 levels then I might consider new bullish positions. Otherwise I would not buy calls here. We have less than two weeks before UNP reports earnings on July 21st.

- Current Positions -
May 5, 2011 - entry price on UNP @ 100.15, option @ 5.00
UNP1221A110 2012 JAN $110 call - current bid/ask $ 4.55/ 4.65

- or -

May 5, 2011 - entry price on UNP @ 100.15, option @ 6.00
UNP1319A120 2013 JAN $120 call - current bid/ask $ 6.35/ 6.60

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: 64.52

07/09 update: By Thursday ZMH had rallied through resistance at its 40 and 50-dma. Yet the reaction to the jobs report on Friday turned ZMH's gain into a loss for the week. Personally I'd rather buy a dip or a bounce near $63.00 if you're looking for an 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 $ 4.50/ 4.70

- or -

Jun 10, 2011 - entry price on ZMH @ 63.00, option @ 5.50
ZMH1319A70 2013 JAN $70 call - current bid/ask $ 5.70/ 6.30

07/09/11 Look for a dip or a bounce near $63 as an entry point.
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


Watch

Energy and Oil Stocks on the Rise

by James Brown

Click here to email James Brown

Editor's Note:

I am trimming a few candidates from our watch list tonight while adding a couple of new ones. Plus, I want to share what is on my radar screen although these may not all have LEAPS options.

On my radar screen: PVH, ENR, VAR, PEGA, LYV.

- James



New Watch List Entries

EXXI - Energy XXI Ltd

WNR - Western Refining


Active Watch List Candidates

AXP - American Express Co

HSY - Hershey Co.

JJC - iPath Copper ETF

MCD - McDonald's Corp.

PEP - Pepsico

WLP - Wellpoint Inc.


Dropped Watch List Entries

AGN, BCR, and AT&T have been removed.



New Watch List Candidates:


Energy XXI Ltd. - EXXI - close: 34.72

Company Info

EXXI has been very active buying up leases from other firms. EXXI and McMoran have both been very successful with some recent joint ventures and production for the two companies is increasing rapidly. The stock is certainly up significantly over the last two years but shares are still undervalued and EXXI is a takeover target.

Aggressive traders may want to buy calls now. On the weekly chart it looks like EXXI is forming a huge bull-flag pattern. I am suggesting we buy calls on a dpi at $32.25. Essentially I'm looking for the stock to fill the gap from late June. More conservative traders could wait for a close over resistance at $37.00 instead.

If we are triggered at $32.25 I'm suggesting a stop loss at $27.75, under the June low. Our long-term targets are $39.50 and $44.50.

Buy-the-Dip trigger: $32.25

BUY the 2011 Jan $35 call (EXXI1221A35) current ask $4.80

- or -

You could try and buy 2013 calls but the spreads are VERY wide. Consider placing a limit order inside the spread. I would try the 2013 $40 calls.

Chart of EXXI:

Originally listed on the Watch List: 07/09/11


Western Refining Inc. - WNR - close: 20.61

Company Info

WNR is a midcontinent refiner that can take advantage of buying oil at WTI prices while the competition is forced to pay the higher Brent oil prices. Currently the spread between WTI and Brent oil futures is about $20, which is a HUGE difference. I am a little surprised that WNR is not trading higher but shares have seen a significant move already off its June lows. Friday saw WNR breakout to new multi-year highs thanks to some short covering. WNR happens to have very high short interest so the short squeeze could be really big. Yet I don't want to chase a +5% move.

I'm crossing my fingers WNR sees some profit taking so we can hop on board. I am suggesting a buy-the-dip entry point at $19.00. More conservative traders could hope for a dip closer to $18.00 instead. If we are triggered at $19.00 I'll start this trade with a stop loss at $17.25. Our long-term targets are $24.75 and $29.50. More aggressive traders could aim higher. FYI: The Point & Figure chart is bullish with a $28.50 target.

Buy-the-Dip trigger: $19.00

BUY the 2012 Jan $20 call (WNR1221A20) current ask $3.60

- or -

BUY the 2013 Jan $20 call (WNR1319A20) current ask $5.90

Chart of WNR:

Originally listed on the Watch List: 07/09/11


Active Watch List Candidates:



Allergan Inc. - AGN - close: 84.85

07/09 update: AGN delivered a gain for the week but shares essentially churned sideways. The action on Thursday could be seen as a failed rally/reversal near its May highs. Thus AGN is at risk of forming a bearish double top. Thus I am not inclined to chase it here. I would be tempted to buy calls on a dip or a bounce near the 50-dma or the 100-dma but until we get through earnings season or until AGN gets past the threat of a double top I will remain cautious. I am actually going to remove AGN from our watch list. I am still long-term bullish on the stock but I do not see an entry point for buying LEAPS any time soon.

Our trade never opened.

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


American Express Co. - AXP - close: 53.07

07/09 update: AXP has managed to extend its gains and set new multi-year highs. Earnings are coming up in less than two weeks (July 20th). Therefore I want to be patient and keep our entry point at $50.00. There is a chance that AXP will see a post-earnings dip and hit our entry point. More conservative trades could set their entry point closer to $48.00 and the 100-dma instead.

If we are triggered at $50.00 we'll start with a stop loss at $45.75. Our targets are $59.00 and $64.00.

Buy-the-Dip trigger: $50.00

BUY the 2012 Jan $55 call (AXP1221A55)

- or -

BUY the 2013 Jan $55 call (AXP1319A55)

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


C.R.Bard Inc. - BCR - close: 112.82 change: -0.50

07/09 update: I have the same concerns with BCR that I have with AGN. The stock looks bullish and the long-term trend is up. Yet currently shares could be forming a bearish double top. Our current buy-the-dip entry point is way too low. Yet I don't see a potential LEAPS entry point any time soon. Aggressive traders might want to consider buying a dip or a bounce near the 50-dma (near $110). I am actually removing BCR from the watch list. Earnings are coming up in a couple of weeks. Maybe we will see an entry point on a post-earnings sell-off in BCR.

Our play never opened.

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


Hershey Co. - HSY - close: 57.78

07/09 update: We have been waiting for an entry point in HSY for a long time. Right now our buy-the-dip entry point near support at $52.00 seems way too low. Earnings are coming up in about 15 days so I'm willing to wait and see if there is any correction following the earnings results. Then we'll re-evaluate. We certainly do not want to buy HSY here with shares at resistance near $58.00.

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


iPath Copper ETF - JJC - close: 57.79

07/09 update: It was a choppy week for the U.S. dollar but copper extended its rally significantly. The metal and the JJC ETF are still short-term overbought. We do not want to chase it. We will adjust our buy-the-dip entry point to $56.00 with a stop loss at $52.75. Our first target is $61.75. Our second, more aggressive target is $64.00.

I want to reiterate some of my 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.

Buy-the-Dip trigger: $56.00 (small positions only!)

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

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


McDonald's Corp. - MCD - close: 85.60

07/09 update: MCD has extended its gains to challenge the $86.00 level. I do not see any changes from my prior comments. Broken resistance near $83.00 should be new support. We have a trigger to buy calls 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. 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)

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


Pepsico, Inc. - PEP - close: $69.93

07/09 update: Earnings for PEP are coming up on July 21st. I am reluctant to change our entry point strategy until after we see the market's reaction to PEP's results. Currently our buy-the-dip trigger is at $67.50. If we do get triggered at $67.50, 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: 31.14

07/09 update: AT&T offers long-term potential but shares are just moving too slowly. I am removing AT&T as a candidate. The stock never hit our entry point.

Originally listed on the Watch List: 04/09/11


Wellpoint Inc - WLP - close: 78.00

07/09 update: It looks like WLP is starting to correct lower. Shares are flirting with a breakdown under its 50-dma right now. I am going to leave our buy-the-dip entry point at $70.50 for now. I realize that's pretty low but the $70 level should be significant support. If the market or WLP corrects that is where we want to buy it. WLP is due to report earnings on July 27th.

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