Option Investor
Newsletter

Daily Newsletter, Sunday, 7/24/2011

Table of Contents

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

Leaps Trader Commentary

Debt Ceiling Hostage

by James Brown

Click here to email James Brown

The first full week of Q2 earnings season is now behind us. Overall the results have been good but corporate guidance has been a little timid compared to prior quarters. Investors are still a bit nervous and have lifted gold to new all-time highs. The dollar has dropped on euro strength thanks to progress in Europe on another bailout deal for Greece. Meanwhile there has been no progress in the U.S. on the debt ceiling talks.

A quick recap of last week's events starts with the plunge on Monday, led by financials. This pushed the S&P 500 under the 1300 level but traders bought the dip at 1295, which happens to be the 61.8% Fibonacci retracement of its June rally. At the time European markets were sinking on worries the PIIGS countries were getting worse. Tuesday saw a strong market rebound on news that leaders in Washington were closer to a deal on the debt ceiling issue. A rebound in Europe and a round of better than expected earnings news didn't hurt. Housing starts surged to the best reading in six months at an annualized pace of 629,000 units. Building permits also came in better than expected at 624,000.

Wednesday saw further improvement in Europe thanks to a successful debt auction by Portugal, one of the PIIGS. Here in the U.S. the June existing home sales came in light at 4.77 million. Another round of strong earnings news on Thursday continued to fuel the rally. Investors ignored a bounce in the weekly initial jobless claims at 418,000. The big event in Europe was yet another meeting with EU, IMF, and ECB leaders who agreed on a new deal to help Greece's recovery. Back at home in the U.S. the Philly Fed survey came in better than expected at +3.2, which was a big improvement over last month's -7.7 reading. By Friday's closing bell the S&P 500 had rallied +2.1% for the week, which essentially erased the -2% decline the prior week. Yet from the Monday morning lows the S&P 500 has seen a +3.8% rebound.

Unfortunately the rally seemed to stall on Friday as talks broke down between congressional leaders and the White House on the debt ceiling debate. The S&P 500 struggled to get past the 1345 level. If the S&P 500 index can rally higher then the next level of resistance is 1360. Currently the index is only 25 points away from a new multi-year high above 1370. If stocks retreat then the S&P 500 should find some short-term support at 1330 and then at 1320.

Daily chart of the S&P 500 index:

Weekly chart of the S&P 500 index:

Big cap technology stocks helped fuel big gains for the NASDAQ composite and NASDAQ-100 index ($NDX). The NASDAQ rebounded from support near 2750 on Monday and surged toward past the 2850 level by Friday. The composite is less than 30 points away from a new multi-year high. While the $NDX has already broken out past resistance and closed at new ten-year highs on Friday. This move by the $NDX is very bullish. It's going to be interesting to see if the rally continues with so many high-profile tech names reporting earnings this week.

Daily chart of the NASDAQ Composite index:

Daily chart of the NASDAQ-100 index:

The small cap stocks seemed to lag behind their big cap brothers. The small cap Russell 2000 index only managed a +1.5% gain for the week but it saw the same +3.7% bounce off its Monday lows. It's going to take another +3% rally to get the $RUT to its 52-week highs. Typically the small cap earnings are not as strong as the big cap results so this group could lag over the next couple of weeks. I'm not saying it can't rally but there is more opportunity for an earnings landmine in the small caps.

Daily chart of the Russell 2000 ETF (IWM)

The SOX semiconductor index produced an interesting week. The semis fell to a new relative low and appeared to break support last Monday. Yet the group reversed higher, thanks in part to a strong earnings report from Intel. The intermediate trend is still bearish with lower highs and lower lows and the 50-dma has crossed under the 200-dma but the long-term trend of higher lows is still intact for now. We'll have to wait and see if the current bounce rolls over or not.

Weekly chart of the SOX semiconductor index:

The Dow Jones Transportation index still has a long-term bullish trend of higher lows and higher highs. Yet the sector's gain last week was only +1.6%. If this group can keep last week's bounce alive then it will provide some confidence that the wider market's rally has further to go. A close under 5250 would be worrisome and suggest a drop toward technical support at the 200-dma.

Daily chart of the Transportation index:

Looking at the economic calendar this week we've got some big reports coming up. The July consumer confidence comes out on Tuesday. Durable goods orders and the Federal Reserve's Beige Book are released on Wednesday. The biggest event is probably the Q2 GDP estimate on Friday. Economists are expecting the Q2 GDP to come in at +1.6%. Goldman Sachs is estimating +2%. Of course we're also facing a very, very heavy earnings announcement week with hundreds of companies reporting their Q2 results.

- Tuesday, July 26 -
Case-Shiller 20-city home price index
Consumer Confidence for July

- Wednesday, July 27 -
Durable Goods Orders for June
Federal Reserve Beige Book

- Thursday, July 28 -
Weekly Initial Jobless Claims

- Friday, July 29 -
U.S. GDP estimate for Q2
Chicago PMI for July

Normally the Q2 earnings announcements would take center stage. This time I fear that the debt ceiling issue will hog the spotlight. As of this weekend lawmakers were at a stalemate and unable to come to a deal. It's been widely reported that President Obama wanted a deal by July 22nd. Now we are facing the hard deadline of Tuesday, August 2nd. The credit rating agencies have already warned us that they might have to downgrade the USA's triple-A rating. Even if congressional leaders do patch some sort of band-aid deal together at the last minute then we could still face a credit downgrade for failing to have a stronger plan in place.

Previously I had a hard time imagining that lawmakers would not raise the debt ceiling limit. It's not like they haven't done it before. Actually the debt ceiling has been raised nearly a hundred times in the past century. Now I'm not so sure it will get done but that's probably what congressional leaders want you and their opponents to believe. I strongly suspect what we are witnessing is the epic game of brinksmanship I warned you about a couple of weeks ago.

On a side note, there is a great illustration of just how big the U.S. debt really is. You can check out the website here.

U.S. National Debt (source:www.wtfnoway.com)

If we do see a deal on the debt ceiling get done then it would be short-term bullish for the market. On the other hand, the closer we get to next weekend without a deal is one step closer to financial Armageddon. America is the lynchpin to the global financial system. If our credit rating is downgraded it will have significant repercussions around the world. If you did check out the website I just linked to then you know that this country will eventually face a day of reckoning for our debt and unfunded liabilities. There is just no way to ever pay back that much money. Most people were hoping that crisis was still several years down the road.

I remain market neutral. Last week's +2% gain was nice. The bullish breakout in the NASDAQ-100 index is very encouraging. Europe's agreement for a new bailout rules for Greece should be very positive. Yet the stock market will remain hostage to the debt ceiling issue. If you forced me to make a bet I would bet that a deal gets done, which would be bullish for stocks. In the meantime, if you see opportunity I would trade small. I'd rather keep some cash available in case the market sees another sell-off in August.

- James


Portfolio

Portfolio Update

by James Brown

Click here to email James Brown


Current Portfolio


Portfolio Comments:

Thus far results from the Q2 earnings season have been better than expected. Yet guidance has been not been as strong as previous quarters. This week our play list is going to see a lot of earnings announcements. I am suggesting readers take some money off the table for a couple of our candidates. Readers may want to consider additional defensive moves as discussed in the play updates section prior to the earnings announcement.

Our play list did see BA get stopped out. CACI doesn't look very healthy. Railroads still have a strong up trend. PEP made the leap from our watch list to our play list although instead of launching new positions in PEP I'd check out KO instead.

There are new stop losses for FISV, MON, SWN, and UNP.

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

Basic Materials & Consumer Goods

by James Brown

Click here to email James Brown

Flotek Industries Inc. - FTK - close: 10.55

Company Info

Why We Like It:
FTK is in the basic materials sector but the company actually serves the oil services industry and oil services are outperforming again. Shares of FTK have been on a tear. This past week saw the stock breakout past major resistance in the $9.50-10.00 zone and close at new two-year highs.

I am suggesting we buy calls now! However, this is an aggressive entry point. Not only is FTK short-term overbought here but the company is due to report earnings in early August and we can't find a confirmed earnings date yet. Therefore we need to keep our position size very small. I would only buy 1/4 or 1/2 of your normal trade size here. Personally, I would prefer to launch new positions on a bounce from the $9.50 area so save some cash in reserve and if we see the pull back near $9.50 we can add to positions.

Why buy now if we'd rather buy a dip near $9.50? Well FTK has above average short interest (about 12%) and a very small float (39 million shares) so the short squeeze could keep going. Our long-term target is $14.75. I'm suggesting a stop loss at $8.90.

Start Small

- Suggested Positions -
Jul 25, 2011 - entry price on FTK @ --.--, option @ -.--
symbol: FTK1217C10 2012 MAR $10 call - current bid/ask $ 2.25/ 2.50

- or -

Jul 25, 2011 - entry price on FTK @ --.--, option @ -.--
symbol: FTK1217C12.5 2012 MAR $12.50 call - current bid/ask $ 1.45/ 1.60

Chart of FTK:

Current Target: $14.75
Current Stop loss: 8.90
Play Entered on: 07/25/11
Originally listed in the New Plays 07/23/11


The Coca-Cola Co. - KO - close: 69.73

Company Info

Why We Like It:
KO is one of the largest beverage companies in the world and arguably the best known brand on the globe. The company appears to be winning the cola wars. Management just reported earnings a couple of days ago. KO beat estimates by a penny with revenues surging almost +47%. Investors did not seem spooked by higher commodity costs in the earnings report. Now the Point & Figure chart is forecasting a long-term target of $95.

The earnings news pushed KO past resistance near $69 and the stock closed at new ten-year highs. Shares don't move super fast and the $70 level could be round-number, psychological resistance so I am suggesting we start by keeping our positions small. Only buy 1/4 or 1/2 of your normal trade size. Another reason I want to keep our position size small is that shares could be forming a very long-term bear wedge pattern (illustrated on the chart below).

It's unlikely that KO is going to run away without us. I would launch positions now. We'll start with a wide (aggressive) stop loss at $64.90, near the simple 200-dma. Our long-term targets are $79 and $84.

I see this as an 18-month investment. We will list the 2012 January calls but don't expect KO to hit our targets by then.

Start Small

- Suggested Positions -
Jul 25, 2011 - entry price on KO @ --.--, option @ -.--
symbol: KO1221A70 2012 JAN $70 call - current bid/ask $ 2.47/ 2.51

- or -

Jul 25, 2011 - entry price on KO @ --.--, option @ -.--
symbol: KO1319A75 2013 JAN $75 call - current bid/ask $ 2.53/ 2.62

Chart of KO:

Current Target: $79.00 & 84.00
Current Stop loss: 64.90
Play Entered on: 07/25/11
Originally listed in the New Plays 07/23/11



Play Updates

An Announcement Heavy Week

by James Brown

Click here to email James Brown

Editor's Note:

This is a very busy week for Q2 earnings. We have a few trading candidates that will report this week. Cautious traders may want to consider one of the following: you could take profits or scale back positions ahead of the announcement, you could raise your stop loss, or you could buy some short-term puts a temporary protection from a disastrous earnings announcement.

Keep in mind that if we don't see a debt ceiling deal soon the entire market could start to retreat lower.

-James


Closed Plays


BA has been closed.


Play Updates


Bristol-Myers Squibb Company - BMY - close: 29.49

07/23 update: It was a bullish week for BMY. Positive analyst comments and a positive reaction to news that BMY is buying Amira Pharmaceuticals for $325 million helped lift shares of BMY to new two-year highs. I am still concerned that the $30.00 level might be resistance so I'm not suggesting new positions at this time. Investors need to be aware that BMY is due to report earnings on July 28th before the opening bell. Wall Street is expecting a profit of 54 cents a share.

I am suggesting we take profits early on Wednesday, July 27th at the closing bell to take some money off the table prior to the earnings report. Or you could take some money off the table right now. Conservative traders may want to seriously consider raising their stop loss too. We have a wide stop at $26.95, still under the 200-dma.

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 $ 2.65/ 2.69

- or -

Mar 14, 2011 - entry price on BMY @ 26.14, option @ 1.63
symbol: BMY1319A27.5 2013 JAN $27.50 call - current bid/ask $ 3.40/ 3.50

07/23/11 Plan taking some profits on July 27 at the close. Or consider taking so money off the table now.
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: 61.56

07/23 update: Investors have a decision to make. Do you hold on or do you exit early right now? I warned readers last week that CACI had performed a three-candle reversal pattern lower on the week chart. This past week confirmed the bearish reversal with another decline. The larger trend of higher highs and higher lows is still in place but shares have fallen to technical support at the 100-dma. A breakdown here would be even more bearish.

Cautious traders will want to seriously consider an early exit. I am expecting lawmakers to get it together and agree on a debt ceiling deal, which could fuel the market's next move higher. I am not suggesting new positions at this time. We will leave our stop loss at $59.75. More conservative trades may want to up their stop closer to $61.00 instead.

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 $ 0.90/ 1.10

- 2nd Position -

May 31, 2011 - entry price on CACI @ 63.14, option @ 2.65*
symbol: CACI1117I65 2011 SEP $65 call - current bid/ask $ 0.90/ 1.10

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: 79.01

07/23 update: The bullish trend of higher lows and higher highs continues for the railroad industry. Traders bought the dip on Monday and CNI has been moving erratically higher. Unfortunately, everything could change if CNI blows the earnings report. The company is due to report on Monday (July 25) after the closing bell. Analysts are expecting a profit of $1.25 a share. I am not suggesting new positions in front of the earnings report.

- Current Positions -
Feb 28, 2011 - entry price on CNI @ 72.39, option @ 2.90
symbol: CNI1221A80 2012 JAN $80 call - current bid/ask $ 4.10/ 4.40

- 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 $ 2.20/ 2.35

07/11/11 CNI opened lower, 2012 Jan. $85 call opened @ $1.85
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: 66.80

07/23 update: COH spent most of the week churning sideways inside the $66-68 range. Even a downgrade on Friday couldn't shock COH out of this range. The larger trend is up but I'm still concerned COH might see a dip back toward the $62 area so I am reluctant to open new positions here. COH is expected to report earnings in the first week of August but there is no confirmed date yet.

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 $ 6.80/ 7.00

- or -

Jun 03, 2011 - entry price on COH @ 61.00, option @ 6.80
symbol: COH1319A70 2013 JAN $70 call - current bid/ask $ 8.80/ 9.10

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: 81.67

07/23 update: I was expecting a dip toward the 100-dma but traders bought the dip near $79.00 on Monday instead. If you look at the last couple of months you can see that COST is actually consolidating in a big pennant-shaped pattern of higher lows and lower highs. That's not necessarily a bad thing. I would expect to see a breakout one way or the other within the next two or three weeks.

Currently we have a stop loss at $76.75. More conservative traders may want to raise theirs toward the 100-dma near $78 or even toward the $79 area. 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 $ 5.45/ 5.55

- or -

Apr 7, 2011 - entry price on COST @ 76.37, option @ 5.05
symbol:COST1319A85 2013 JAN $85 call - current bid/ask $ 6.70/ 6.90

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: 40.36

07/23 update: The action in DPS over the past three weeks has been very disappointing. This last week saw a plunge toward its June lows. Shares did see a big bounce but the oversold bounce failed at new resistance near $41 and its 50-dma. DPS did not react very much to news that rivals KO and PEP reported better than expected earnings. KO rallied to new highs while investors sold the news in PEP. DPS will report earnings on July 27th before the opening bell. Wall Street is looking for a profit of 77 cents a share.

I am not suggesting new positions before the earnings report. If DPS misses the stock will most likely see a breakdown to new relative lows and hit our stop loss at $39.40.

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 $ 2.15/ 2.40

- or -

May 11, 2011 - entry price on DPS @ 40.55, option @ 1.00
symbol: DPS1119K45 2011 NOV $45 call - current bid/ask $ 0.50/ 0.65

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: 62.16

07/23 update: The correction in FISV reversed when it hit technical support at the 200-dma last Monday. Currently the oversold bounce has reached an area of congestion in the $62-63 area. I'm expecting the stock to drift sideways until its earnings report on July 26th. FISV doesn't announce until after the closing bell. Analysts are expecting a profit of $1.08 a share but FISV has been consistently beating estimates by 5-to-10 cents for the last several quarters. If they don't produce another strong beat this quarter the stock might sell-off sharply.

I am not suggesting new positions in front of the earnings announcement. Please note our new stop loss at $59.45.

- Suggested Positions -
Feb 14, 2011 - entry price on FISV @ 62.30, option @ 3.20
symbol: FISV1117I65 2011 SEP $65 call - current bid/ask $ 0.75/ 0.90

07/23/11 new stop loss @ 59.45
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: 23.13

07/23 update: It was a good week for INTC. Bears were unable to take the stock down below the $22.00 level. The company reported earnings last Wednesday and beat estimates significantly. Management also raised some of their guidance. The stock initially sold off on Thursday morning but quickly rebounded. If the market cooperates I would expect INTC to challenge resistance near $24 soon.

If we get a resolution to the U.S. debt ceiling problem then I would consider new bullish positions on INTC.

- 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 $ 1.75/ 1.79

- or -

Jun 01, 2011 - entry price on INTC @ 22.00, option @ 2.38
symbol: INTC1319A22.5 2013 JAN $22.50 call - current bid/ask $ 2.76/ 2.81

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: 56.00

07/23 update: KALU produced a series of new two-year highs last week. Earnings are coming up this week so shares might drift sideways as investors wait for the report. The company reports on July 27th after the close. Wall Street is looking for a profit of 53 cents.

I am not suggesting new bullish positions in front of the earnings report. Plus, I am not suggesting new positions because the spreads on KALU's options are outrageously wide right now! It's ridiculous. We won't be playing KALU again if this doesn't improve.

Earlier Comments:
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 @ 53.56, option @ 2.35
symbol: KALU1117L60 2011 DEC $60 call - current bid/ask $ 2.15/ 6.50

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: 75.41

07/23 update: MOS got some help from Goldman Sachs this past week. The firm upgraded MON to their "conviction buy" list with a $96 price target. Yet shares of MON remain stuck under resistance in the $76 area. I am not suggesting new positions at this time. If the market happens to see a correction we can look for support near $70.00. Please note our new stop loss at $67.00.

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 $ 9.00/ 9.15

- or -

Mar 15, 2011 - entry price on MON @ 65.50, option @ 8.75
symbol: MON1319A75 2013 JAN $75 call - current bid/ask $10.70/10.90

07/23/11 new stop loss @ 67.00
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: 67.00
Play Entered on: 03/15/11
Originally listed on the Watch List: 01/08/11


Targa Resources - NGLS - close: 35.62

07/23 update: NGLS did not make any progress last week. Shares consolidated sideways in a narrow range. Considering the strength in the market this past week NGLS' failure to participate is a caution signal. I am not suggesting new positions at this time. I do have some good news. The spreads on the December $35 calls have narrowed but they are still too wide and another reason I am not suggesting new positions tonight.

FYI: NGLS is due to report earnings on Aug. 8th.

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 $ 1.60/ 2.35

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


Pepsico, Inc. - PEP - close: $68.53

07/23 update: It looks like Coca-Cola might be winning the cola wars. This past week Coke (KO) reported earnings and beat by one cent with revenues up +46.8%. The stock rallied to new multi-year highs. PEP reported earnings and beat by one cent but revenues were only up +13.7%. The stock plunged to new three-month lows.

Our buy-the-dip trigger was hit at $67.50. Actually PEP gapped open lower at $67.31 on July 21st so our entry point was better but shares almost hit our stop loss at $64.75 the same day. The close under what should have been support near $66 and its 200-dma is very worrisome. I am not suggesting new bullish positions in PEP at this time. More conservative traders may want to abandon ship and put your money in KO instead. I'm adding KO as a new candidate this weekend.

- Suggested Positions -
Jul 21, 2011 - entry price on PEP @ 67.31, option @ 1.17
symbol: PEP1221A70 2012 JAN $70 call - current bid/ask $ 0.88/ 0.91

- or -

Jul 21, 2011 - entry price on PEP @ 67.31, option @ 2.95
symbol: PEP1319A70 2012 JAN $70 call - current bid/ask $ 2.50/ 2.62

Chart of PEP:

Current Target: $75.00, 79.00
Current Stop loss: 64.75
Play Entered on: 07/21/11
Originally listed on the Watch List: 05/14/11


Southwestern Energy Co. - SWN - close: 49.00

07/23 update: Buy-out speculation continues. The rally that started on July 15th continued last week. Shares extended their gains and SWN is getting closer to the $50 mark. SWN is also short-term overbought. The company is due to report earnings on July 28th, after the closing bell. Wall Street is looking for a profit of 43 cents a share. Currently our first target to take profits in SWN is at $52.00. However, with the stock overextended there is a chance investors will sell the earnings news and lock in gains after the report. That's why I am suggesting we go ahead and take profits in SWN on July 28th, at the close. That way we can take some money off the table prior to any post-earnings volatility. We'll keep our long-term, secondary target at $57.00. Cautious traders could go ahead and take profits now. Please note our new stop loss at $43.90.

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 $ 6.75/ 6.85

- or -

Apr 7, 2011 - entry price on SWN @ 40.50, option @ 5.85
SWN1319A45 2013 JAN $45 call - current bid/ask $10.00/10.25

07/23/11 new stop loss @ 43.90
07/23/11 Prepare to take profits on July 28th at the close.
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: 43.90
Play Entered on: 04/07/11
Originally listed on the Watch List: 04/02/11


Union Pacific Corp. - UNP - close: 103.80

07/23 update: UNP garnered at least one analyst upgrade following its earnings report on July 21st. The company beat the $1.57 estimate by 2 cents. Revenues for the quarter were up +16.3%. Prior to the report shares were testing technical support at the 100-dma. Now the stock is back above its 50-dma but it's testing resistance in the $104 area. I'm bullish on the rails but I'm not enthusiastic about new positions in UNP tonight. Please note our new stop loss at $98.00.

- Current Positions -
May 5, 2011 - entry price on UNP @ 100.15, option @ 5.00
UNP1221A110 2012 JAN $110 call - current bid/ask $ 4.15/ 4.25

- or -

May 5, 2011 - entry price on UNP @ 100.15, option @ 6.00
UNP1319A120 2013 JAN $120 call - current bid/ask $ 5.80/ 6.85

07/23/11 new stop loss @ 98.00
05/28/11 New stop loss @ 97.00

Current Target(s): $119.75-134.00
Current Stop loss: 98.00
Play Entered on: 05/05/11
Originally listed on the Watch List: 04/30/11


Zimmer Holdings, Inc. - ZMH - close: 63.29

07/23 update: Heads up! This could be the week we see some movement in ZMH. Cautious traders might actually want to consider an early exit now to avoid or limit any losses. On a short-term basis the stock just failed again at technical resistance at the 50-dma. Looking at the last three or four weeks ZMH is trading in a neutral trend of higher lows and lower highs. Looking at the last several months you could argue ZMH is forming a bearish head-and-shoulders pattern but has yet to break the neckline. The company is due to report earnings this week on July 27th before the opening bell. Consensus estimates are at $1.19 a share.

I am not suggesting new positions prior to the earnings report. Currently we have a stop loss at $58.90, just under the simple 200-dma. Readers could choose to raise their stop loss instead.

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 $ 3.90/ 4.20

- or -

Jun 10, 2011 - entry price on ZMH @ 63.00, option @ 5.50
ZMH1319A70 2013 JAN $70 call - current bid/ask $ 5.70/ 6.70

07/23/11 ZMH just failed at the 50-dma again. Cautious readers may want to scale back or exit early prior to the earnings report.
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


CLOSED Plays


Boeing Co. - BA - close: 72.67

07/23 update: Do you remember last Monday? The whole market swooned and the S&P 500 traded under the 1300 level. That same day, July 18th, BA plunged under round-number support at $70.00 and hit our stop loss at $69.75 closing our trade. We were stopped out before American Airlines announced the biggest plane order in history. We were stopped out before BA was upgraded later in the week. Unfortunately for shareholders the oversold bounce in BA has not broken the bearish trend of lower highs and lower lows.

If you missed it AMR announced a deal for 460 single-aisle planes worth up to $40 billion split between Boeing and European rival Airbus. AMR will order 200 planes from BA and 260 from Airbus.

I had warned that BA looked weak and that cautious traders may want to exit early last weekend. The plan was to keep our position size small to limit our risk.

- Current Positions -
Apr 27, 2011 - entry price on BA @ 76.50, option @ 4.50
symbol: BA1221A80 2012 JAN $80 call - Exit @ $1.55 (-65.5%)

Apr 27, 2011 - entry price on BA @ 76.50, option @ 4.95
symbol: BA1319A90 2013 JAN $90 call - Exit @ $2.30 (-53.5%)

07/18/11 Stopped out @ 69.75.
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.

Chart of BA:

Current Target: $89.00, and $104.00
Current Stop loss: 69.75
Play Entered on: 04/27/11

Originally listed on the Watch List: 03/26/11



Watch

IT Storage and Oil Exploration

by James Brown

Click here to email James Brown

Editor's Note:

In addition to the new watch list candidates tonight, here is a list of stocks currently on my radar screen: DRI, SLB, HAL, MCD, VAR, ENR, VMW, and PVH. They don't all have LEAPS but they might offer some longer-term option trades. Consider putting them on your watch list and look for the right entry point.

- James



New Watch List Entries

EMC - EMC Corp

MMR - McMoRan Exploration


Active Watch List Candidates

AXP - American Express Co

HSY - Hershey Co.

EXXI - Energy XXI Ltd

WLP - Wellpoint Inc.

WNR - Western Refining


Dropped Watch List Entries

JJC and MCD have been removed. PEP made it to the play list.



New Watch List Candidates:


EMC Corp. - EMC - close: 27.76

Company Info

EMC is a major player in information storage and given the move toward the "cloud" for both computing and storage it should mean strong business for EMC. The long-term up trend has stalled over the last few months but EMC is only a couple of points from new ten-year highs. A breakout from this consolidation could herald the next leg higher.

I am suggesting we buy call LEAPS when EMC closes at $28.70 or higher. If triggered we'll set our initial stop loss at $26.40. Our long-term targets are $34 and $39.

Trigger: buy on a close above $28.70

BUY the 2012 Jan $30 call (EMC1221A30)

- or -

BUY the 2013 Jan $30 call (EMC1319A30)

Chart of EMC:

Originally listed on the Watch List: 07/23/11


McMoRan Exploration Co. - MMR - close: 18.06

Company Info

MMR is poised for significant growth over the next couple of years. This company, along with EXXI (another LEAPS candidate), are reopening and re-drilling old oil wells and leases in the Gulf of Mexico that larger firms have given up on. The latest tests show that MMR has found some very significant oil and gas reserves.

Aggressive traders may want to go ahead and buy calls now. Over the last several months MMR has been trading under resistance in the $19.00 area. I am suggesting we buy calls when MMR closes above $19.25. When this occurs we'll start the play with a wide stop loss at $17.30. Should MMR retreat then we might reconsider and buy calls on a bounce near $16.50 instead.

Launch positions on a close above $19.25

BUY the 2012 Feb $20 call (MMR1218B20) -Februarys-

- or -

BUY the 2013 Jan $20 call (MMR1319A20)

Chart of MMR:

Originally listed on the Watch List: 07/23/11


Active Watch List Candidates:



American Express Co. - AXP - close: 52.24

07/23 update: AXP delivered a great earnings report on July 20th. Results were 11 cents better than expected at $1.07 a share. AXP said their high-end clientele pushed spending to new highs and borrowing rose as well. It was a bullish report. Yet the stock could not get past resistance near the $53.00 level.

The long-term trend is up but I'm expecting a correction. We will adjust our buy-the-dip entry point down to $49.00 (hopefully inline with the rising 100-dma). We'll move our stop loss to $45.95. Our long-term targets are $59 and $64.

Buy-the-Dip trigger: $49.00

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


Energy XXI Ltd. - EXXI - close: 34.89

07/23 update: Little has changed for EXXI. The stock is still building a bullish trend of higher lows. Aggressive traders may want to buy calls now or on a move over $35.50. I am hoping we get a better entry point on a dip back to $32.50 (previously $32.25). A dip to the 200-dma would be even more exciting. Alternatively we could always go long on a close over resistance at $37.00 instead.

If we are triggered at $32.50 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 $44.00 and $49.50.

Buy-the-Dip trigger: $32.50

BUY the 2012 Jan $40 call (EXXI1221A40) - new strike

- or -

buy the 2012 Jan $40 call (EXXI1319A40) - new strike

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


Hershey Co. - HSY - close: 58.93

07/23 update: Friday was a big day for HSY. The stock surged +2.4% and broke out past resistance at $58.00. The stock closed at new five-year highs. The move is bullish and I'm almost tempted to buy calls now. However, I could not find the news that drove the stock higher on Friday. Plus, HSY is due to report earnings on July 26th (Tuesday morning). Analysts are looking for a profit of 55 cents. I do not want to launch positions in front of earnings. If shares are still trading above resistance at $58.00 next week then we'll reconsider a new entry point near these levels. We need to adjust our entry point (currently $52.25) but we need to see the market reaction to earnings before making that change. Nimble traders could try buying a dip near the 50-dma, if HSY sees one, but with a tight stop, maybe near the 100-dma.

In summary, earnings are this week. We will change our entry point strategy or remove HSY as a candidate next week.

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: 57.90

07/23 update: JJC lost six cents for the week. Given the plunge in the dollar this past week I'm surprised that JJC did not see significant gains. Instead the action in JJC looks like a short-term top. Our plan was to buy a dip at $56.00.

Unfortunately, I am giving up on JJC. This ETF still offers opportunity but the spreads on the 2011 December and 2012 March calls are just too wide.

Our trade never opened.

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


McDonald's Corp. - MCD - close: 88.56

07/23 update: MCD is performing very well. The company just reported earnings on July 22nd and results came in at $1.35 a share with revenues up +16%. Analysts were only expecting a profit of $1.28. Worldwide sales were up +5.6%. The stock reacted by gapping open higher and spiking to $89.57 before paring its gains. I remain very bullish on MCD but the stock is just too overbought and overextended for us to consider long-term bullish positions.

I am removing MCD as a candidate but it will be back. Keep it on your watch list. I'd look for a dip toward the 30 or 50-dma.

Our play never opened. MCD is too overbought at current levels.

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


Wellpoint Inc - WLP - close: 74.41

07/23 update: This could be the week we get triggered. WLP is still underperforming but we've been expecting a pull back toward what should be major support at $70.00. The company reports earnings on July 27th. There is always a chance that investors sell the news.

Right now the plan is to buy calls on a dip at $70.00. I am moving our stop loss to $66.50, under the 200-dma.

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: 20.80

07/23 update: After four weeks of huge gains it looks like WNR is finally seeing some profit taking. Thus far the pull back has been very mild. Given the big gains WNR might over-correct. I am adjusting our buy-the-dip entry point to $18.50. We'll use a stop loss at $16.95. More conservative traders could hope for a dip closer to $18.00 instead. 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