Option Investor
Newsletter

Daily Newsletter, Sunday, 7/17/2011

Table of Contents

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

Leaps Trader Commentary

The Debt Ceiling Looms

by James Brown

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It turned out to be a rocky week for the U.S. stock market. Concerns over the EU's weakest members continues to plague the market both here and abroad. Fed Chairman Ben Bernanke made his semiannual appearance before congress this past week. Economic data was mixed. Earnings season began with stronger than expected results. Yet it was the debt ceiling debate that seemed to garner most of the headlines. By the closing bell on Friday the major averages were down more than -2% for the week.

The problems started last Monday with concerns surging over Italy's debt and worries the country might follow Greece in need of a bailout. Markets around the globe were selling off and the dollar was rising versus the euro. Four days later a very motivated Italian government managed to pass significant austerity measures in an effort to assuage fears over their fiscal strength.

On Wednesday Mr. Bernanke gave his testimony before congress. He mentioned the potential for QE3 and the market saw an intraday rally. This helped push the dollar lower while gold soared to a new all-time high. The very next day with Bernanke before the Senate he seemed to back away from any QE3 talk and stocks sank again.

Last week also saw the latest GDP data out of China with +9.5% growth last quarter. This seemed to soothe fears that the country might see a hard landing as it tries to slow down growth. There were some analysts that felt this was actually too slow and that China needed double-digit growth to handle their population's migration from the fringes into the major cities. Elsewhere in the world the EU released their results for the European bank stress tests. The test results showed that 82 of the 90 banks tested passed. Those that failed only needed 2.5 billion euros worth of capital. Most analysts were skeptical of the results, since many were expecting north of 25 billion euros worth of capital needing to be raised.

One of the biggest topics of the week was the ongoing debt ceiling debate between democrats, the republicans, and the White House. The lack of progress on a deal has the markets worried they may not reach one in time. Both Moody's and Standard & Poor's put the U.S.'s triple-A credit rating on watch for a possible downgrade.

Alcoa, Google, J.P.Morgan, and Citigroup were the biggest earnings headlines last week. Alcoa missed by a penny but beat on revenues. GOOG, JPM, and C all beat the estimates. GOOG saw a massive rise of almost $70 on Friday in reaction to a terrific quarter. Yet JPM and C saw their intraday gains fade. Citigroup closed on its lows for the week.

In economic news the results were mixed. The Consumer Price Index (CPI) for June fell -0.2%. Economists were only expecting -0.1%. The New York Empire State manufacturing survey rallied from -7.8 in June to -3.8 in July. Numbers under zero still represent contraction. Analysts were looking for a bounce back into positive territory in the +7 area. Unfortunately, this is the first time in more than 24 months that the Empire State survey has produced back to back negative readings. The Consumer Sentiment readings for July were also a disappointment. Sentiment sank from 71.5 in June to 63.8 in July. These are the lowest levels in over a year. Normally analysts try to correlate falling consumer sentiment levels with falling consumer spending. Consumer spending accounts for almost 70% of the U.S. economy.

A week ago I had cautioned readers that the market was still overbought and due for some profit taking. While the action was bearish last week so far that's what it looks like - profit taking. The S&P 500 broke down under what should have been support near 1320 and near its 50 and 100-dma. Yet the selling could not break technical support near the 50% retracement of the rally off its June lows. The S&P 500 should have additional support at 1300. If the 1300 level fails then the 1280 area is next and this bill be bolstered by the rising 200-dma. A breakdown under the 200-dma would be very bearish for stocks. I also want to point out that the weekly chart is reason for concern. The S&P 500 could be forming a bearish H&S pattern.

Daily chart of the S&P 500 index:

Weekly chart of the S&P 500 index:

After three weeks of big gains the NASDAQ finally succumbed to some profit taking with a -100 point drop at Thursday's low. The NASDAQ managed a bounce from its 50 and 100-dma but the short-term trend is still down. We don't know yet if the NASDAQ is stuck in a massive 2600-2900 trading range or if it too is building a bearish head-and-shoulders pattern. On a short-term basis the 2750-2740 area should offer some support. Beyond that the 2700 level is likely support.

Daily chart of the NASDAQ Composite index:

Weekly chart of the NASDAQ Composite index:

The Russell 2000 index was off -3.2% for the week at its worst levels on Thursday. The small cap index seemed to find some support at the 100-dma but the short-term trend is still down. The $RUT might find some support in the 820-810 area but the chart is messy. On a positive note we do not see the same potential H&S pattern on the weekly chart but the $RUT still has a lower high. Right now the easiest answer is the small caps are just seeing profit taking after three weeks of big gains.

Daily chart of the Russell 2000

Weekly chart of the Russell 2000

The semiconductor stocks were big losers this past week. Earnings results and guidance from the likes of NVLS and MCHP sent the group plunging lower. The SOX has failed at its 50-dma and near resistance at 420. Now the index is testing support at its June lows. It's also nearing the long-term trendline dating back to 2009. It seems the path of least resistance for this key group is down. Plus the 50-dma just crossed under the 200-dma, which is normally a very bearish signal.

Daily chart of the SOX semiconductor index:

Weekly chart of the SOX semiconductor index:

We continue to watch the Dow Jones Transportation index. The group saw a sharp sell-off last week and fell through their 50-dma. Friday the sector seemed to find some support at its 100-dma. I am concerned with the weekly chart. The last three candles form a bearish reversal pattern. For the moment the long-term trend is still up. A close under that trendline of higher lows would be very bearish for the sector and the market as a whole.

Daily chart of the Transportation index:

Weekly chart of the Transportation index:

Looking ahead the economic calendar is pretty light. We'll see a lot of housing data. The biggest report is probably the Philly Fed report on Thursday.

- Tuesday, July 19 -
Housing Starts & Building Permits

- Wednesday, July 20 -
Existing Home Sales for June

- Thursday, July 21 -
weekly initial jobless claims
Philadelphia Fed manufacturing survey

This week is very busy with almost 300 companies reporting Q2 earnings results. There will be 14 of the 30 Dow components report and over 110 of the S&P 500 index reporting. Normally earnings announcements would dominate the headlines but the debt ceiling fight could steal the spotlight. August 2nd is the deadline to raise the debt ceiling or the U.S. is in a world of trouble. Officials want to reach some sort of compromise by July 22nd so there is time to get the necessary legislation passed prior to August 2nd. If we reach Aug. 2nd without a deal then odds are the country will continue to pay the interest on its bonds to avoid a technical default and just not pay something else (maybe shut down non crucial government services?). Unfortunately, we would probably end up losing our triple-A credit rating, which would cause us plenty of pain with higher interest rates.

Right now I am market neutral. One down week does not make a trend and we were expecting some profit taking anyway. Bigger picture the market's upward momentum has stalled and the major indices could be forming a bearish head-and-shoulders top formation. This week's earnings results will be crucial. Do the better than expected numbers continue to roll in? What will the general trend for guidance be? Are corporate executives still cautious or do they see a stronger second half?

I am still under the belief that a debt ceiling deal will get done and that right now we are merely watching an epic game of brinksmanship from both democrats and republicans. However, there have been some comparisons to the TARP deal. The first time congress tried to pass the TARP deal the vote failed and the market plunged sharply. I suspect that if we do not reach a debt deal by the necessary deadlines we could see the U.S. markets cascade lower as investors seek the safety of cash.

Therefore it seems that the safest bet today is to just step back and watch. If anything I would suspect that volatility might spike as we get closer to the informal July 22nd deadline for a debt deal. Nimble traders may want to consider some short-term calls on the volatility index (VIX) but that's just a speculative bet. If you are compelled to launch new call LEAPS positions then I would definitely keep your position size small both to limit your risk and have some cash available just in case we see a better entry point at lower levels in a few weeks.

- James


Portfolio

Portfolio Update

by James Brown

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Current Portfolio


Portfolio Comments:

It was a rough week for the U.S. market. Concerns over the EU's struggling members like Italy and the lack of progress on the debt ceiling talks in the U.S. sapped investors confidence. Most of our candidates only suffered mild profit taking. Yet BA and UNP were underperformers and definitely had a bad week. I would like to think there is some sort of quote error with the bid on the NGLS call since the bid has collapsed. The spreads for the long-term NGLS options are untradeable right now. If it's not an error then I fail to see how the market makers are offering us a fair market for those options.

There are new stop losses for SWN.

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

Pivotal Week

by James Brown

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Editor's Note:

This could be a pivotal week for the U.S. markets with the first full week of Q2 earnings reports and the informal debt ceiling deadline on Friday, July 22nd. Corporate news may end up taking a back seat to the bickering in Washington.

The market seems to be in a state of flux. If we don't see a deal on the debt ceiling soon I'm concerned that stocks could see a sharp sell-off. Therefore I am not suggesting any new positions at this time but I will post some trading ideas in the watch list note tonight.


Play Updates

A week of profit taking

by James Brown

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Editor's Note:

The S&P 500 narrowly avoided one of its worst weeks in a year but for most of our candidates the profit taking was relatively mild. There were exceptions. BA and UNP did not have a good week.

-James


Closed Plays


None. No closed plays this week.


Play Updates


Boeing Co. - BA - close: 71.28

07/16 update: It was not a good week for BA. The S&P 500 lost over 2%. BA gave up about -5%. The stock has fallen back toward its June lows and is currently testing technical support at its simple and exponential 200-dma. A breakdown from here might be strong enough to also break through round-number, psychological support at the $70.00 mark.

Our risk now is that BA disappoints with its earnings report. The company doesn't report for several more days. The announcement is expected on July 28th, before the opening bell. I would not be surprised to see BA churn sideways in the $71-75 zone until its earnings report. Then again, that can change, if the market's indices accelerate lower. I am still not suggesting new positions at this time. More conservative traders may want to exit early right now.

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 $ 1.83/ 1.88

Apr 27, 2011 - entry price on BA @ 76.50, option @ 4.95
symbol: BA1319A90 2013 JAN $90 call - current bid/ask $ 2.62/ 2.73

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: 28.97

07/16 update: BMY is holding up pretty well. Shares only lost 15 cents for the week. We are seeing some decay in the technical oscillators but BMY could fare well since drug stocks are normally considered defensive names. I am still not suggesting new positions at these levels since the $30.00 area has been significant resistance in the past. Keep in mind that BMY reports earnings on July 28th. The announcement will come out before the opening bell.

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 $ 2.37/ 2.41

- 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: 63.13

07/16 update: CACI gave back almost two and a half points last week with most of the decline on Monday and Friday. Short-term technicals are naturally looking ugly here. Unfortunately I am concerned with the weekly chart, which is showing a three candlestick bearish reversal pattern. Last week I had cautioned readers to expect a dip into the $64-62 area. CACI is nearing technical support at its 50-dma. If that level breaks then it will be a quick drop toward the next level of technical support at the 100-dma, which held up in early June. 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 $ 1.65/ 1.90

- 2nd Position -

May 31, 2011 - entry price on CACI @ 63.14, option @ 2.65*
symbol: CACI1117I65 2011 SEP $65 call - current bid/ask $ 1.65/ 1.90

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: 77.91

07/16 update: The long-term trend for most of the major railroad stocks remains very bullish. Yet this last week the group struggled. CNI churned inside the $77-79 area. I would not be surprised to see a dip toward support near $75.00 and its 100-dma. Our biggest concern is CNI's earnings. The company reports on July 25th (a week from Monday). Analysts are looking for $1.25 a share. Cautious traders may want to consider buying some short-term puts prior to the earnings announcement on Monday night (7/25).

I would be tempted to buy calls on a dip or a bounce near $75.00. Keep in mind we have a stop loss at $74.90.

FYI: CNI opened lower on July 11th and the 2012 Jan. $85 call opened at $1.85.

- Current Positions -
Feb 28, 2011 - entry price on CNI @ 72.39, option @ 2.90
symbol: CNI1221A80 2012 JAN $80 call - current bid/ask $ 3.80/ 4.10

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

Jul 11, 2011 - entry price on CNI @ 78.49, option @ 1.85
symbol: CNI1221A85 2012 JAN $85 call - current bid/ask $ 1.95/ 2.15

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

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: 65.48

07/16 update: COH spent most of last week churning sideways in a $2.00 range. Shares managed to close above round-number support at $65.00. The mild profit taking is encouraging but I am not convinced the pull back is over. Readers may want to wait for a bounce from $64.00 or better yet a dip or bounce near $62.00 before initiating new positions.

The plan was to keep our position size small to limit our risk.

FYI: COH doesn't report earnings until August.

- 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 $ 8.20/ 8.60

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: 79.87

07/16 update: I am urging caution on COST. I warned readers last weekend that COST had produced what looked like a bearish reversal. This past week did not help. Shares have broke down under their 50-dma and have now closed under the $80.00 mark. The MACD indicator on the daily chart has turned bearish. I am expecting a pull back toward technical support near its 100-dma, which will coincide with a drop toward the early June lows.

We have a stop loss at $76.75. More aggressive traders may want to adjust their stop so that it's under the $75.00 level, which should be stronger support. Conservative traders might want to consider an early exit now to lock in a gain. I am not suggesting new positions at this time.

FYI: COST doesn't report earnings again for a couple of months.

- Current Positions -
Apr 7, 2011 - entry price on COST @ 76.37, option @ 3.80
symbol:COST1221A80 2012 JAN $80 call - current bid/ask $ 4.75/ 4.85

- or -

Apr 7, 2011 - entry price on COST @ 76.37, option @ 5.05
symbol:COST1319A85 2013 JAN $85 call - current bid/ask $ 6.05/ 6.25

07/16/11 Cautious traders may want to exit now
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: 40.83

07/16 update: DPS was not immune to the market's pull back this past week. Unfortunately, DPS broke down under its simple 50-dma and what should have been stronger support near the $41.00 area. The next level of likely support is the $40.00 mark and the June lows in the $39.70 region. At this point I would be in no rush to launch positions. We can wait for DPS to dip and then look to buy a bounce from support.

FYI: DPS reports earnings on July 27th.

Earlier Comments:
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 $ 2.55/ 2.75

- or -

May 11, 2011 - entry price on DPS @ 40.55, option @ 1.00
symbol: DPS1119K45 2011 NOV $45 call - current bid/ask $ 0.65/ 0.85

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: 61.37

07/16 update: Ouch! FISV just gave back all of the prior week's gains and more! Shares fell through its 10, 20, 30, 40, and 50-dma in addition to what should have been short-term support near $62.00. Essentially FISV is retreating toward the bottom of its multi-month $60-65 trading range. The July 7th close above resistance at $65 was a fluke or a trap. The next level of support is significant near the $60 level and FISV's simple 200-dma.

I am not suggesting new bullish positions at this time. FISV is due to report earnings on July 26th.

- 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

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: 22.37

07/16 update: Semiconductor stocks were significant underperformers last week. Investors were not happy with earnings results or guidance from MCHP and NVLS. Their news helped push the SOX index back toward its June lows. Meanwhile INTC spent the week consolidating sideways but with a trend of lower highs. Shares remain above support at the $22.00 level but that could change pretty quickly. INTC reports earnings on Wednesday, July 20th, after the closing bell. Analysts are expecting a profit of 51 cents a share.

I am not suggesting new positions in front of the earnings report. If INTC does see any profit taking on the report I would expect a dip toward the 200-dma close to the $21 area. Currently we have a stop loss at $20.85.

- 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 $ 1.50/ 1.53

- 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

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


Kaiser Aluminum - KALU - close: 54.24

07/16 update: KALU gapped down on Monday, July 11th, providing us a better entry point. Traders then spent the rest of the week buying dips near the stock's rising 20-dma. Essentially shares are forming a pennant pattern of higher lows and lower highs. This is supposed to be a neutral pattern but normally the prevailing trend resumes.

Given our long-term time frame I would still buy calls now but you could certainly try and time an entry point on a dip near $52.00 or wait for a breakout and a close over $56.00 instead.

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. Unfortunately the spreads are a little wide right now.

- Suggested Positions -
Jul 11, 2011 - entry price on KALU @ 53.56, option @ 2.35
symbol: KALU1117L60 2011 DEC $60 call - current bid/ask $ 1.60/ 2.40

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


Monsanto Co. - MON - close: 74.06

07/16 update: MON has spent the last week and a half consolidating sideways in the $74-75 region. The lack of profit taking is a show of relative strength but that doesn't mean MON won't see a pull back. I'd wait for a dip or a bounce from the $70 area before considering new bullish positions.

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 $ 8.45/ 8.60

- or -

Mar 15, 2011 - entry price on MON @ 65.50, option @ 8.75
symbol: MON1319A75 2013 JAN $75 call - current bid/ask $10.20/10.50

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


Targa Resources - NGLS - close: 35.93

07/16 update: NGLS gapped open lower on July 11th placing our entry point at $35.61. There was not much follow through and shares found support north of $35.00. If the market can cooperate NGLS looks poised to rally from current levels. I would still consider new positions in the $35.00-36.50 area but readers may want to hesitate on launching new plays. This week could be a volatile one for stocks due to earnings season and the debt ceiling debate.

NOTE: Something has happened to our 2011 DEC $35 calls. The spreads have blown out. The bid is now $0.35 with an ask of $3.70. I can't explain why. If you choose to trade these I would use a limit order and place it inside the spread. There is no guarantee you'll get filled.

I am adding a secondary target at $44.00. Our first target is $39.75.

FYI: NGLS reports earnings in August.

Earlier Comments:
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.

- Suggested Positions -
Jul 11, 2011 - entry price on NGLS @ 35.61, option @ 2.50
symbol: NGLS1117L35 2011 DEC $35 call - current bid/ask $ 0.35/ 3.70

07/16/11 Spreads on the 2011 DEC calls are now outrageously wide! Do not use market orders

Current Target: $39.75, 44.00
Current Stop loss: 33.75
Play Entered on: 07/11/11
Originally listed in the New Plays 07/09/11


Southwestern Energy Co. - SWN - close: 47.53

07/16 update: Friday's buyout news for Petrohawk (HK) has suddenly made SWN a potential takeover target. Shares of SWN surged +8.8% as investors speculate it too could be acquired as the industry sees more consolidation. The rally past resistance at $45.00 is very bullish but I would not chase it here. Wait for SWN to correct and retest the $45.00 level as new support before considering new positions. Please note that I am raising our stop loss to $41.95. I am setting our first exit target at $52.00. We'll set our secondary target at $57.50.

FYI: SWN is due to report earnings on July 28th.

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 $ 5.80/ 5.95

- or -

Apr 7, 2011 - entry price on SWN @ 40.50, option @ 5.85
SWN1319A45 2013 JAN $45 call - current bid/ask $ 8.90/ 9.35

07/16/11 new stop loss @ 41.95, targets adjusted to $52.00 & 57.50
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): $52.00, 57.50
Current Stop loss: 41.95
Play Entered on: 04/07/11
Originally listed on the Watch List: 04/02/11


Union Pacific Corp. - UNP - close: 100.74

07/16 update: It was not a good week for UNP. After breaking down through support near $105 the prior week UNP continued to correct lower. Shares have fallen toward psychological support near $100 and technical support at the 100-dma. Now the simple 100-dma has been consistent support for months and its 2011 history would suggest this is a good spot to launch new bullish positions. However, UNP is due to report earnings on Thursday, July 21st. The announcement is before the opening bell and Wall Street is expecting a profit of $1.58 a share.

It's possible that UNP merely churns sideways as investors wait for the earnings report. Then the stock could see a big surge or a breakdown on the earnings news. We already have a stop loss at $97.00. Cautious traders could tighten that a little bit. The low on Friday was $99.07. I am not suggesting new positions in front of the earnings report. Conservative traders might want to consider buying some short-term puts before the close on Wednesday just in case UNP delivers a disappointing earnings report.

- Current Positions -
May 5, 2011 - entry price on UNP @ 100.15, option @ 5.00
UNP1221A110 2012 JAN $110 call - current bid/ask $ 3.45/ 3.50

- or -

May 5, 2011 - entry price on UNP @ 100.15, option @ 6.00
UNP1319A120 2013 JAN $120 call - current bid/ask $ 5.35/ 5.70

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: 63.68

07/16 update: Profit taking in ZMH last week was pretty mild but the action was still bearish. The midweek rally failed at resistance near $65 and under its 50-dma. Now some of the technical indicators on the daily chart are starting to deteriorate (again). I would not be surprised to see ZMH retreat toward support near $60.00. I am not suggesting new bullish positions at this time. ZMH is due to report earnings on July 28th. We'll wait and see how the market reacts to their earnings news before considering new 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.

- Current Positions -
Jun 10, 2011 - entry price on ZMH @ 63.00, option @ 4.00
ZMH1221A65 2012 JAN $65 call - current bid/ask $ 4.40/ 4.60

- or -

Jun 10, 2011 - entry price on ZMH @ 63.00, option @ 5.50
ZMH1319A70 2013 JAN $70 call - current bid/ask $ 5.90/ 6.50

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

Get Ready for Earnings

by James Brown

Click here to email James Brown

Editor's Note:

Q2 earnings season is about to hit full swing. The results could be Wall Street's version of fireworks with plenty of individual stock winners and losers making big moves. Meanwhile the debt ceiling talks are still raging without any signs of a deal. I am reluctant to add new candidates to our watch list tonight. If we don't see a debt deal soon the U.S. market could plunge before we ever reach the August 2nd deadline.

If you feel compelled to trade check out these candidates: CHD, KMT, and LLY. They all appear to be offering a bullish entry point right now but I'd rather wait to see where the market is trading a week from now before making any decisions.

CHD - this stock has rallied to new all-time highs. This past week saw shares ignore market weakness and breakout past resistance near $42.00. The relative strength is impressive and after three months of consolidating sideways this looks like a bullish entry point.

KMT - shares have spent several months consolidating sideways in the $37-44 range. These past two weeks saw a breakout and KMT is already rebounding from its correction. On a short-term basis Friday's move looks like a bullish entry point. One of my concerns is that KMT has resistance near $46 dating back to 2007. Aggressive traders could buy calls now. Others may want to wait for a close over $46.00 instead.

LLY - This drug stock does not move very fast. The stock has been trading sideways under resistance at $38.00 for nearly two years. If you look at a multi-year chart you can see LLY has been suffering for a very long time. However, the rally in April and May broke some very long-term resistance trendlines. On a short-term basis the action on Friday with the bounce near $38.00 looks like a new bullish entry point. Investors could buy call LEAPS now and target the $49-50 area but it may take a couple of years to get there.

- James



New Watch List Entries

None, no new watch list candidates


Active Watch List Candidates

AXP - American Express Co

HSY - Hershey Co.

EXXI - Energy XXI Ltd

JJC - iPath Copper ETF

MCD - McDonald's Corp.

PEP - Pepsico

WLP - Wellpoint Inc.

WNR - Western Refining


Active Watch List Candidates:


American Express Co. - AXP - close: 51.81

07/16 update: This could be an interesting week for AXP. The company reports earnings on July 20th after the closing bell. Cautious traders will not want to open positions until after we see the market's reaction to AXP's results.

Currently we have a buy-the-dip entry point at $50.00. 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


Energy XXI Ltd. - EXXI - close: 34.26

07/16 update: EXXI came super close to hitting our entry point on Thursday. The low was $32.28. Currently our trigger to launch positions is at $32.25. If you're bearish on the market you could wait for a dip closer to the $30.00 level instead as your entry point.

If we are triggered at $32.25 I'm suggesting a stop loss at $27.75, under the June low. Or you could choose an alternative stop closer to the 200-dma instead. Our long-term targets are $39.50 and $44.50.

Buy-the-Dip trigger: $32.25

BUY the 2011 Jan $35 call (EXXI1221A35)

- 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.

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


Hershey Co. - HSY - close: 56.80

07/16 update: HSY gave back almost a dollar last week. Shares remain under resistance at $58.00 while the stock has potential support at $56, its 100-dma, at $54, and then at $52. Further declines from current levels would make this look like a potential bearish double top pattern. We don't want to launch positions here. HSY is going to report earnings on July 26th. We'll re-evaluate our entry point after we see investor reaction to the results.

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: 57.96

07/16 update: JJC managed to eke out a gain after spending most of the week consolidating sideways. Aggressive traders may want to buy calls now. I am still expecting a pull back. The plan is to buy a dip at $56.00 with a stop at $52.75. Our first target is $61.75. Our second, more aggressive target is $64.00.

Earlier Comments:
I want to reiterate some of my concerns. 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. JJC does not (yet) have LEAPS so we'll have to use the December calls. My next concern is 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)

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


McDonald's Corp. - MCD - close: 85.48

07/16 update: MCD has spent the last two weeks consolidating sideways. Either the rally has stalled or MCD is merely catching its breath for the next leg higher. I do not want to chase it here, not with earnings coming up on July 22nd.

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: $68.53

07/16 update: PEP just spent the last six days correcting lower. Ye traders bought the dip twice on Friday near support at the $68.00 level. Is this a new short-term bottom? We won't know until PEP bounces. At the moment our entry point is at $67.50. Aggressive traders may want to go ahead and buy a bounce from current levels. I am suggesting readers wait. PEP could see some volatility this week after the company reports earnings on July 21st.

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


Wellpoint Inc - WLP - close: 74.90

07/16 update: We have been expecting a correction in WLP. That correction appears to be underway. The initial bounce from support near $75 has failed. The stock actually looks like a short-term bearish candidate. Nimble traders may want to buy some August puts right here and target a drop into the $71-70 zone.

I am adjusting our buy-the-dip trigger to $70.00 and moving our stop loss higher to $65.75. This will keep our stop under the 200-dma. Keep in mind that WLP is due to report earnings on July 27th. More conservative traders will not want to open positions prior to the announcement.

Prior Comments:
If we do get triggered we want to keep our position size small to limit our risk.

Buy-the-Dip trigger: $70.00

BUY the 2012 Jan. $75 call (WLP1221A75)

- or -

BUY the 2013 Jan. $80 call (WLP1319A80)

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


Western Refining Inc. - WNR - close: 21.13

07/16 update: Hmm... WNR looks like it's running away from us. Shares managed to extend their gains and the stock is now up four big weeks in a row. I am still reluctant to chase it. We will leave our 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.

Earlier Comments:
WNR happens to have very high short interest so the short squeeze could be really big. Plus, the Point & Figure chart is bullish with a $28.50 target.

Buy-the-Dip trigger: $19.00

BUY the 2012 Jan $20 call (WNR1221A20)

- or -

BUY the 2013 Jan $20 call (WNR1319A20)

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