Option Investor
Newsletter

Daily Newsletter, Sunday, 7/31/2011

Table of Contents

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

Leaps Trader Commentary

A Default or a Downgrade

by James Brown

Click here to email James Brown

Blame it on Washington. Stocks suffered one of their worst weeks all year long as market participants began to grow increasingly worried that we would not see a debt ceiling deal before the August 2nd deadline. The ongoing Q2 earnings season continues to produce better than expected results but guidance has been lackluster at best. Sprinkle in some disappointing economic data like the Q2 GDP estimate and it fueled fears of another recession. The S&P 500 index lost -3.9% for the week. The Dow Industrials fell -4.2%. the NASDAQ composite dropped -3.5%. The small cap Russell 2000 index plunged -5.3%. While the volatility index (VIX) surged +44% to new four-month highs.

The economic data this past week was definitely mixed. Initial jobless claims came in at under 400,000 for the first time in a long time but the news was ignored. The New York ISM continues to climb to new relative highs but it too was ignored. Pending home sales came in better than expected. The final reading for the July consumer confidence was virtually unchanged at 63.7 but it's the lowest level since March 2009.

The Chicago ISM (previously the purchasing managers index) dropped from 61.1 in June to 58.5 in July. Readings above 50 indicate growth but it's moving the wrong direction. While the big report this past week was the advance Q2 GDP estimate. Economists were hoping for growth of +1.8%. I mentioned last week that Goldman Sachs had been predicting +2.0%. The government's estimate came in at +1.28%. Making matters worse was a very sharp revision for the Q1 GDP from +1.9% down to +0.4%. Ouch! If we see a similar revision for Q2 down the road it could be in negative territory. This prompted several analysts to start slashing their Q3 and Q4 estimates. For months now we've heard the Federal Reserve and plenty of corporate CEOs talk about how things will be better in the second half of this year. Now suddenly the second half doesn't look so hot. Folks are starting to worry about another recession again. Having the U.S. on the verge of insolvency does not help matters but more on the debt issue in a bit.

Two weeks ago the S&P 500 saw a +3.8% surge from its intraday lows on Monday, July 18th to that Friday's close. We completely reversed that bounce with a -3.9% plunge this week. The sell-off accelerated on Wednesday the 27th. Friday saw the S&P 500 dip toward technical support at its simple 200-dma and bounce but the rebound was fading lower into the closing bell. Technically a bounce from the 200-dma would look like a bullish entry point. It's an easy spot to place a bet because you can limit your losses with a tight stop loss. Unfortunately, this time, if we do not see a debt deal by Monday morning the market could gap open lower under this support. If the 200-dma fails then we're probably looking at drop to the 1250 level. If the 1250 level doesn't hold then the next levels to watch are the 1225-1220 zone and then 1200. On the other hand if we do see a debt deal come Monday morning then the S&P 500 could challenging 1350 before the week is over. I do have to point out that further declines will start to look like the right shoulder to a bearish head-and-shoulders pattern on the S&P 500 chart. This pattern would forecast a drop from 1250 toward 1140ish.

Daily chart of the S&P 500 index:

Weekly chart of the S&P 500 index:

Better than expected earnings were not enough to keep the NASDAQ at its highs. The big cap tech stocks were holding up pretty well until Wednesday. Then the NASDAQ-100 (NDX) index reversed sharply from ten-year highs. Thus far the NDX still looks relatively healthy but a close under the 2320-2300 zone would be worrisome.

Meanwhile the NASDAQ composite has plunged back under its 100-dma and flirted with a breakdown under its 50-dma this Friday. You can see on the weekly chart that it too is facing the prospect of a big head-and-shoulders pattern although it's a lot farther away from a breakdown.

Weekly chart of the NASDAQ Composite index:

Daily chart of the NASDAQ-100 index:

The small cap stocks were underperformers this past week. The Russell 2000 index flirted with a breakdown under technical support at its simple and exponential 200-dma on Friday. The weekly chart for the $RUT does not show the same H&S pattern seen on the S&P 500 but it still looks vulnerable. A close under the June lows would look very bearish.

Daily chart of the Russell 2000

Weekly chart of the Russell 2000

The SOX semiconductor index is still sinking under a bearish trendline of lower highs. The index is also on the verge of breaking down below its long-term trendline of higher lows.

Weekly chart of the SOX semiconductor index:

Dow Theory practitioners like to follow the transports. The Dow Jones Transportation index appears to be breaking down below its trendline of higher lows. This also follows the bearish reversal from all-time highs in early July. On the daily chart (not shown) the $TRAN traded below its simple 200-dma on Friday before bouncing back. There is potential support near 4900 but a close under the June lows would look pretty ominous.

Weekly chart of the Transportation index:

We have a very busy week of economic reports ahead of us. The major events will be the ISM on Monday, the ISM services and ADP employment report on Wednesday and the jobs report on Friday. Of course the BIGGEST event of the week will be the August 2nd debt ceiling extension deadline. Currently economists are expecting +80,000 new jobs in the nonfarm payroll report. That's up from last month's +18K jobs. You may recall that last month analysts were expecting +125K new jobs. If you consider the recent run of negative economic reports there is a rising chance that Friday's jobs number could actually come in negative! Q2 earnings results will continue to flow but we're past the biggest wave of earnings and their importance will subside.

- Monday, August 1 -
ISM index for July

- Tuesday, August 2 -
DEBT CEILING EXTENSION DEADLINE
personal income and spending
auto and truck sales

- Wednesday, August 3 -
ADP employment report for July
ISM Services for July
Factory Orders for June
mass layoffs report

- Thursday, August 4 -
Weekly Initial Jobless Claims

- Friday, August 5 -
Non-farm payrolls (jobs) report for July
consumer credit for June

All right, let's talk about the debt ceiling issue. This was THE headline all of last week and it will remain front and center until the ceiling is extended. The U.S. has been consistently raising its debt ceiling for decades. Unfortunately, our liabilities are so grossly above and beyond our income that it's become a major wedge for politicians. I am going to try and avoid being political here. I don't care if you're republican or a democrat. As of today the U.S. needs to extend its debt ceiling to keep operating. Now some will argue that a default would be good for us because it will force us to get our house in order. I'm not going to go there because the unforeseen consequences of such an event would be monstrous.

Eventually we do need to massively cut spending and we will need to balance the budget. The question is how we do this and when we do this. The obvious argument is that we don't want to cut spending too much with the economy already on fragile footing. Yes there are opponents who will disagree. Right now all eyes are on Washington to get a deal done and it better not be just a short-term extension to kick the can down the road. Even if lawmakers come together in compromise and actually pass a debt extension bill by the deadline the U.S. could still see a credit downgrade.

I mentioned a couple of weeks ago that I do not see the U.S. failing to make its interest payments to bond holders. If the August 2nd deadline is not met the country would still pay its bond holders and just not pay someone else. While we would technically avoid a default it's still a default and we would see a credit downgrade. If politicians do pass a debt extension but it doesn't have enough spending cuts in it then the ratings agencies could still downgrade the U.S. to a double A rating.

There are plenty of analysts who will argue that the market has already factored in a downgrade to a double-A rating. If there is a downgrade there might be a temporary knee-jerk reaction but overall it's already baked into the stock market. Yet a downgrade has not been baked into the economy. If the U.S. loses the triple-A rating it will cause interest rates to rise across the country. Everyone from consumers to corporations to local and state governments would all see their interest rates rise. We could also see a wave of credit downgrades for any institutions that depend on the U.S. government. Rising interest rates could slow spending, slow investment, and slow hiring.

Believe it or not this past week saw U.S. bonds rally with the yield falling to 2.8%. Yes, the very debt that is in jeopardy of getting downgraded is in rally mode because in a sea of bad debts (think Europe) the U.S. with a double-A rating is still a "safe haven" trade. Money managers both here in the U.S. and overseas have to put their money somewhere. Many of these fund managers cannot just sit there in cash. If they are pulling it out of equities the U.S. bond market is still the safest spot for it. Granted that's an opinion being expressed by market pundits on Wall Street but it helps explain the rally in bonds.

Let's pretend that lawmakers in Washington actually come together with a deal before Monday and the market believes it could actually get passed by the deadline. This would be seen as short-term bullish and stocks will likely gap open higher on Monday morning. We could see a rally back toward the summer highs. If there is no deal by Monday morning then stocks will most likely gap open lower and we could see a repeat of the TARP sell-off. You may remember that the first time congress tried to pass the TARP program the vote failed and the Dow Industrials plunged -800 points on the news. I'm not saying we'll see a drop that big but I'm not saying it can't happen either.

There have been a few estimates of what happens if the U.S. actually defaults (a.k.a. no debt deal by Aug. 2nd). Some have predicted a -30% drop in stocks. There are also predictions of what happens if there is a deal but we still get a debt downgrade. These predictions are for a -5% to -10% correction in stocks.

What really concerns me, assuming we do get a debt ceiling extension passed, is that the market still faces a storm of uncertainty. The U.S. economy seems to be slowing drastically and the situation in Europe is not improving in spite of all the bailout attempts. It seems like every week another EU country gets downgraded. Italy recently moved heaven and earth to pass their austerity package to assuage investor fears but when Italy held a bond auction this past week they paid the highest interest in almost three years. Spain is also a major problem for the EU. They just sold debt with yields at three-year highs. Both of these countries have to sell more debt this week. If Spain finally falters and forces a bailout from the EU it's going to rock the boat for the entire region and you can bet U.S. investors will see the volatility in our stock market.

On a positive note Spain doesn't seem to be in immediate peril but we could be facing a torture of a thousand cuts all over again. How many months have we been talking about Greece's debt struggles and they're still in jeopardy. The problem is that Spain is significantly larger than Greece. You can bet that EU's sovereign debt problems are going to remain a thorn for the market for a long time to come.

One investment that has been rising on all of this uncertainty in the U.S. and abroad is gold. The precious metal surged to a new all-time high above $1,630 an ounce this past week. I hate to say it but we sold our gold GLD calls a little too early. There are analysts now predicting that gold will rally into the $1,750-2,000 zone in 2012. At the current rate it could be at $1,750 before the end of this year. Although I will warn you that some have predicted a -$100 drop in gold if a debt ceiling deal gets done on time but the pull back will only be temporary.

The last couple of weeks I have ended my wrap with a market neutral outlook. As of Saturday night there is no deal in Washington, which would force a bearish outlook for the coming week. Even if a deal does get done the positive effects are likely to be short-lived. Our time frame for our LEAPS trades are normally six to twelve months. I am concerned that the stock market could be significantly lower four to six weeks from now and that means we need to be patient when it comes to launching new positions.

- James


Portfolio

Portfolio Update

by James Brown

Click here to email James Brown


Current Portfolio


Portfolio Comments:

The last week of July was a somber one. Stocks were retreating lower the entire week thanks to headline after headline regarding the debt ceiling extension and lack of progress in Washington. Concerns over a credit downgrade for the U.S. remain a very dark cloud although many analysts believe it's already been priced into the market. The stock market's big plunge on Wednesday, July 27th knocked out some of our trades. By Friday's closing bell it was one of the worst weeks this year.

We had plans to take profits in the SWN trade on July 28th at the closing bell. Thank goodness we did. The stock sank following its earnings report. A couple of our candidates, EXXI and KALU, are having trouble with their option spreads. At least that's the nice way of saying it. The spreads are so wide we can't trade them. You have to wonder what the market makers in these options are doing!

If we do not see a debt ceiling deal that actually has a chance of passing by Monday morning then stocks are likely to sell-off again and we'll see more stops get hit.

There are no new stop losses.

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

Plenty of Black Clouds

by James Brown

Click here to email James Brown

Editor's Note:

I want to share something with you. I am sick and tired of writing about this debt ceiling extension deadline and the political disaster in Washington. I am just as sure you are sick of hearing about it. Some of my comments here will repeat my market commentary.

Politicians need to have some sort of deal by Sunday night so one house can vote on it Monday and the other can pass it on Tuesday. If we don't see a deal the markets could see a pretty sharp plunge similar to what we saw when the TARP plan failed to pass the first time. If you forgot let me remind you that the Dow Industrials fell about 800 points on that news. What will really irk you is that even if lawmakers do get a deal done this weekend it does not mean the U.S. will avoid a downgrade. Depending on what's in the bill and how many spending cuts are passed the credit rating agencies could still downgrade the U.S. triple-A rating.

Combine the prospect of a U.S. rating downgrade with the terrible economic data (i.e. the Q2 GDP estimate) we just got this past week. Analysts are cutting their estimates for the second half. While Q2 earnings have been good the guidance has not. The next couple of months could be challenging for the stock market.

I am hopeful that we will see a debt deal this weekend but doubts are rapidly increasing. If we do see a deal it should at least be short-term bullish but we will have plenty of black clouds on the horizon. This could be a tough time to launch new long-term LEAPS positions given all the uncertainty.

We'll have to see if the bulls can once again try and climb the wall of worry.


Play Updates

One of the Worst Weeks All Year

by James Brown

Click here to email James Brown

Editor's Note:

Growing concerns over the debt ceiling extension and lawmakers inability to get a deal done has powered a widespread decline in the U.S. market. A round of negative economic data did not help matters. It was one of the worst weeks for stocks all year long. We saw a handful of trades get stopped out.

If we don't see a deal in Washington by Monday morning we're going to see even more trades get stopped out.

-James


Closed Plays


CACI, CNI, DPS, NGLS, and PEP were stopped out.


Play Updates


Bristol-Myers Squibb Company - BMY - close: 28.66

07/30 update: BMY slowly faded lower toward support near $28.50. Although shares did see a pop on Thursday thanks to the earnings news. BMY reported profits one cent better than expected and raised its 2011 guidance. If the market doesn't bounce soon BMY will break support and then shares are probably facing a drop toward the 200-dma near $27.

Our plan was to take some money off the table on Wednesday, July 27th at the closing bell just in case BMY missed the earnings numbers. The 2012 Jan. $27.50 call was trading with a bid at $2.19 (+93.8%) and the 2013 Jan. $27.50 call had a bid at $2.95 (+80.9%).

I am not suggesting new 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 $ 2.13/ 2.18

- or -

Mar 14, 2011 - entry price on BMY @ 26.14, option @ 1.63
symbol: BMY1319A27.5 2013 JAN $27.50 call - current bid/ask $ 2.96/ 3.05

07/27/11 taking profits. Options @ $2.19 (+93.8%) & $2.95 (+80.9%)
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


Coach Inc. - COH - close: 64.56

07/30 update: After two weeks of consolidating sideways above the $65 level shares of COH have finally started to correct. Shares dipped toward their 50-dma on Friday. If you are worried that COH might sell-off on its earnings report then Monday is your last chance to exit. COH will report earnings on Tuesday morning (Aug. 2nd). Wall Street is looking for a profit of 65 cents a share.

I've been warning readers to expect a dip toward $62. Now we have to worry how far will COH fall if there is no debt deal in Washington come Monday. I am not suggesting new positions at this time.

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 $ 5.70/ 5.90

- or -

Jun 03, 2011 - entry price on COH @ 61.00, option @ 6.80
symbol: COH1319A70 2013 JAN $70 call - current bid/ask $ 7.80/ 8.10

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: 78.25

07/30 update: Our COST play is in jeopardy here. The stock has dipped toward its early June lows and closed under what should have been technical support at the 100-dma. COST did rebound off its Friday low of $77.19 but the rebound was stalling under new short-term resistance at $79.00. If there is no debt ceiling deal by Monday I would expect COST to hit our stop loss at $76.75. More aggressive traders might want to consider placing their stop loss under $75.00 or under the 200-dma instead. If there is a deal on Monday then I would expect a bounce. I am not suggesting new bullish positions at this time.

- Current Positions -
Apr 7, 2011 - entry price on COST @ 76.37, option @ 3.80
symbol:COST1221A80 2012 JAN $80 call - current bid/ask $ 3.85/ 4.00

- or -

Apr 7, 2011 - entry price on COST @ 76.37, option @ 5.05
symbol:COST1319A85 2013 JAN $85 call - current bid/ask $ 5.35/ 5.65

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


Energy XXI Ltd. - EXXI - close: 32.81

07/30 update: Our buy-the-dip trigger in EXXI was hit on July 27th. Shares have been slowly consolidating lower with a short-term bearish trend of lower highs and lower lows. The stock should have support at $32.00 but if the $32 level breaks then it could be a quick trip toward support near $30 and its 200-dma. Readers may want to wait on launching new positions. While EXXI is not normally a volatile stock the resolution to the debt ceiling deal might cause some swings. If we do see a dip toward $30.00 I'd take it.

We started this play with a stop loss at $27.75, which is just under the June low. More conservative traders may want to use a stop closer to the $30.00 level instead. Our long-term targets are $44.00 and $49.50.

NOTE: Right now the spreads on the Jan. 2013 calls are outrageously wide. I would not use them at this time although you could try placing a limit order inside the spread.

- Current Positions -
Jul 27, 2011 - entry price on EXXI @ 32.50, option @ 2.00
symbol:EXXI1221A40 2012 JAN $40 call - current bid/ask $ 1.75/ 2.05

- or -

Jul 27, 2011 - entry price on EXXI @ 32.50, option @ 6.00
symbol:EXXI1319A40 2013 JAN $40 call - current bid/ask $ 2.90/ 6.70

07/30 spreads on the 2013 calls are too wide!
07/27 triggered @ 32.50.

Chart of EXXI:

Current Target: $44.00, 49.50
Current Stop loss: 27.75
Play Entered on: 07/27/11
Originally listed on the Watch List: 07/09/11


Fiserv, Inc. - FISV - close: 60.36

07/30 update: FISV reported earnings on July 26th. The company beat the estimate by 5 cents with revenues that were slightly above expectations. Guidance was only in-line with estimates. Shares spiked higher on the news and immediately reversed. That's the failed rally you see on Wednesday morning. Now the stock is testing key support near $60.00 and its 200-dma. FISV actually looks poised for a breakdown but its short-term future probably depends on the debt ceiling deal. If we do see a deal then I'm expecting the market to gap open higher. If there is no deal then FISV will likely gap open lower and under our stop loss at $59.45. I am not suggesting new bullish positions at this time.

NOTE: We only have seven weeks before these September options expire. If FISV does gap down these options will likely see the bid vanish. The newsletter will close this trade at a loss but personally I'd hold these just in case FISV rebounds before expiration to try and recoup some capital.

- Suggested Positions -
Feb 14, 2011 - entry price on FISV @ 62.30, option @ 3.20
symbol: FISV1117I65 2011 SEP $65 call - current bid/ask $ 0.35/ 0.55

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


Flotek Industries Inc. - FTK - close: 9.43

07/30 update: Our aggressive trade in FTK is off to a rough start. The market just saw one of its worst weeks of the year! FTK has retreated -10% in a week. I did caution readers that it was a very aggressive entry point and that I wanted to buy calls on a dip near $9.50 instead. Bingo! We're at $9.50. I would buy calls here but the stock is likely to gap open one way or the other come Monday morning due to the debt debacle in Washington.

The plan was to keep our position size very small, either 1/2 or 1/4 our normal trade size to keep some cash in reserve in case we see a pull back. Well now we have the pull back. I am suggesting new positions (you can see the 2nd position below) but only if both the S&P 500 and FTK open in positive territory on Monday morning. Remember, I'm expecting a gap open.

Earlier Comments:
FTK has above average short interest (about 12%) and a very small float (39 million shares) so there is a chance the stock could see another short squeeze higher. We want to keep positions small.

- Small Positions (1/4 or 1/2 your normal trade) -
Jul 25, 2011 - entry price on FTK @ 10.41, option @ 2.40
symbol: FTK1217C10 2012 MAR $10 call - current bid/ask $ 1.70/ 1.85

- or -

Jul 25, 2011 - entry price on FTK @ 10.41, option @ 1.50
symbol: FTK1217C12.5 2012 MAR $12.50 call - current bid/ask $ 1.00/ 1.15

- 2nd Position, listed 07/30/11 -

Aug 1, 2011 - entry price on FTK @ --.--, option @ -.--
symbol: FTK1217C10 2012 MAR $10 call - current bid/ask $ 1.70/ 1.85

07/30/11 Listed 2nd Position to buy the dip near $9.50 but only if FTK and the S&P 500 open higher on Monday, Aug. 1st.

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


Intel Corp. - INTC - close: 22.33

07/30 update: Semiconductor stocks have been struggling. The SOX index failed near short-term resistance at 410 on Tuesday and has now fallen back toward its July lows near support at 380. The current trend is a bearish one of lower highs for the SOX. Meanwhile INTC has retreated from the top of its recent trading range near $23.25 back down toward the $22.20-22.00 zone. The $22.00 level is support and I would be tempted to buy calls again if we see a resolution to the debt ceiling issue.

- 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 $ 1.40/ 1.44

- or -

Jun 01, 2011 - entry price on INTC @ 22.00, option @ 2.38
symbol: INTC1319A22.5 2013 JAN $22.50 call - current bid/ask $ 2.42/ 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: 55.82

07/30 update: KALU reported earnings on July 27th and beat estimates by 10 cents with a profit of 63 cents a share. Revenues rose +20%. The stock did not see much reaction on Thursday morning. Then Thursday afternoon saw a dip toward the rising 50-dma but KALU quickly rebounded. Friday produced a +3.6% gain in a big display of relative strength.

Unfortunately, I am very frustrated to report that the option spread problem with KALU's December options has gotten worse. Last week the spread was a bid of $2.15 to $6.50. Today there is no bid and the ask is $3.60. My comments from last week remain unchanged. If these spreads do not improve we will not trade KALU again. I remain bullish on the stock so investors may want to consider just buying the stock instead.

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 $ -.--/ 3.60

07/30 still have problems with the spreads (bid 0.00/3.60)
07/23 problems with the December option spreads ($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


The Coca-Cola Co. - KO - close: 68.01

07/30 update: The market lost about -4% for the week. KO gave up -2.4%. Shares opened at $69.12 last Monday and have slowly faded toward the $68 level. Short-term technical oscillators are turning bearish but the long-term trend is still up. I would still consider new positions here but readers may want to wait. This coming week could be volatile as stocks react to the debt ceiling news.

Our plan was to keep our opening positions small, 1/4 to 1/2 your normal trade size.

Earlier Comments:
The Point & Figure chart is forecasting a long-term target of $95. 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.

- Suggested (SMALL) Positions -
Jul 25, 2011 - entry price on KO @ 69.12, option @ 2.25
symbol: KO1221A70 2012 JAN $70 call - current bid/ask $ 1.76/ 1.81

- or -

Jul 25, 2011 - entry price on KO @ 69.12, option @ 2.40
symbol: KO1319A75 2013 JAN $75 call - current bid/ask $ 2.07/ 2.17

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


Monsanto Co. - MON - close: 73.48

07/30 update: MON gave up -2.5% versus the market's -4% drop last week. Shares managed to hit a new 52-week high on Monday but the rally didn't last. The move now looks like a potential bull-trap maneuver with the close over $76 and then Tuesday's reversal. Shares are currently testing short-term support near $73. If the market sells off on lack of a debt deal in Washington then I would not be surprised to see MON drop toward $70 and its 50-dma. I am not suggesting new bullish positions at this time.

Prior Comments:
Our plan was to keep our position size small to limit our risk since MON can be so volatile at times. Our long-term targets are the $85-90 zone.

- Current (SMALL) Positions -
Mar 15, 2011 - entry price on MON @ 65.50, option @ 6.75
symbol: MON1221A70 2012 JAN $70 call - current bid/ask $ 8.05/ 8.15

- or -

Mar 15, 2011 - entry price on MON @ 65.50, option @ 8.75
symbol: MON1319A75 2013 JAN $75 call - current bid/ask $10.00/10.30

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


Southwestern Energy Co. - SWN - close: 44.56

07/30 update: Ouch! The combination of earnings and the market's widespread plunge on Friday morning knocked SWN for a big loss. The stock gapped open lower on Friday at $45.98 and then plunged to a -6.1% decline. We were worried about a sell-off on earnings, which is why I suggested we take some money off the table on July 28th at the closing bell. The 2012 Jan $45 call closed with a bid of $5.75 (+98.2%) and the 2013 Jan $45 call closed with a bid of $9.05 (+54.7%). Both options were hammered lower on Friday.

The company reported earnings that were four cents better than expected with a profit of 48 cents a share. Revenues surged almost +30%. These results garnered SWN some bullish analyst comments on Friday morning but it wasn't enough. I will point out that shares stalled near prior resistance and what should be support in the $44.50-44.00 zone. A bounce from this level could be used as a new entry point. Unfortunately, if we do get a debt ceiling deal in Washington then SWN will likely gap open higher. If we don't see a deal, well, you get the idea.

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 $ 4.00/ 4.15

- or -

Apr 7, 2011 - entry price on SWN @ 40.50, option @ 5.85
SWN1319A45 2013 JAN $45 call - current bid/ask $ 7.25/ 7.65

07/28/11 Planned exit to take some money off the table at the closing bell. 2012 Jan. $45 call bid $5.75 (+98.2%), 2013 Jan. $45 call bid $9.05 (+54.7%)
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: 102.48

07/30 update: The Dow Jones Transportation index is on the verge of a significant breakdown. This index violated its 200-dma on an intraday basis Friday morning. This is also near the long-term trendline of higher lows. Yet while the transports as a group saw some serious profit taking, the profit taking in UNP wasn't that bad. If we fail to get a debt deal by Monday morning then we will probably see UNP hit our stop loss at $98.00. If there is a deal then UNP will hopefully breakout past resistance near $105. I would hesitate to launch new positions here.

- Current Positions -
May 5, 2011 - entry price on UNP @ 100.15, option @ 5.00
UNP1221A110 2012 JAN $110 call - current bid/ask $ 4.25/ 4.40

- or -

May 5, 2011 - entry price on UNP @ 100.15, option @ 6.00
UNP1319A120 2013 JAN $120 call - current bid/ask $ 6.15/ 7.10

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


Wellpoint Inc - WLP - close: 67.55

07/30 update: Whoa! It's been a really, really bad week for WLP. The company reported earnings on July 27th. The company beat Wall Street's estimates by three cents and beat the revenue estimate as well. Guidance was mixed but it appeared inline with prior numbers. Yet the stock was getting hammered in pre-morning trading on Wednesday. Of course Wednesday was the same day the entire market plunged lower. The combination of investors unhappy with the earnings report and the market-wide plunge produced a big drop in WLP. The stock gapped open at $71.19 and then dropped to $68.70 at the close on the 27th. Our trigger to buy the dip at $70.00 was hit. Unfortunately, the market and WLP continued to fall for the rest of the week. Shares of WLP violated technical support at its rising 200-dma on Friday morning and hit a low of $66.68. Our stop loss happens to be $66.50.

This move lower seems to be extremely overdone. Of course now the short-term direction for WLP will depend on Washington's ability to get a debt ceiling resolution. If we get a deal WLP will likely rebound and gap open higher on Monday. If not, we'll shares will probably gap open below our stop loss. I would buy a bounce here but that depends on how big the gap up on Monday is.

Earlier Comments:
We want to keep our position size small to limit our risk.

- Current Positions -
Jul 27, 2011 - entry price on WLP @ 70.00, option @ 3.00
WLP1221A75 2012 JAN $75 call - current bid/ask $ 2.35/ 2.45

- or -

Jul 27, 2011 - entry price on WLP @ 70.00, option @ 5.75
WLP1319A80 2013 JAN $80 call - current bid/ask $ 4.80/ 5.15

Chart of WLP:

Current Target(s): $80.00 & 89.00
Current Stop loss: 66.50
Play Entered on: 07/27/11
Originally listed on the Watch List: 06/25/11


Zimmer Holdings, Inc. - ZMH - close: 60.02

07/30 update: ZMH underperformed this past week with a -5% decline. The company reported earnings on July 27th. ZMH beat estimates by two cents and revenues were also a beat. Yet guidance was only in-line with expectations. The stock saw a temporary rebound from the $60 level but the rally stalled at $62 since the market was plunging on Wednesday. The retreat lower continued and now ZMH is facing support near $60 and its simple 200-dma. Of course now the short-term direction is probably up to lawmakers in Washington. If we get a deal then ZMH should bounce. If not then ZMH will most likely hit our stop loss at $58.90. I do have to point out that the recent weakness in ZMH has produced the right shoulder to a bearish head-and-shoulders pattern. Now these patterns do not guarantee a sell-off but it's a very worrisome signal. A close under $59.00 would produce a new sell signal that would forecast a drop toward $50.00. I am not suggesting new positions at this time.

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 $ 3.20/ 3.50

- or -

Jun 10, 2011 - entry price on ZMH @ 63.00, option @ 5.50
ZMH1319A70 2013 JAN $70 call - current bid/ask $ 4.30/ 4.70

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


CACI International - CACI - close: 59.08

07/30 update: CACI finally broke support and now its long-term trend is in jeopardy. I warned readers four weeks ago that the action in early July looked like a potential top. Now the stock has fallen, almost nonstop, for three and a half weeks. This past week saw a breakdown under the $60.00 level. Our stop loss was hit at $59.75.

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 - exit @ 0.50 (-84.8%)

- 2nd Position -

May 31, 2011 - entry price on CACI @ 63.14, option @ 2.65*
symbol: CACI1117I65 2011 SEP $65 call - exit @ 0.50 (-81.1%)

07/27/11 Stopped out @ 59.75. Options @ -84.8% & -81.1%
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

Chart of CACI:

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: 74.86

07/30 update: It was a terrible week for CNI. Shares failed at $80 on Monday and then proceeded to plunge past support near $76, past support near its 100-dma and past support near $75.00. The action this past week has broken the long-term trendline of support (see chart below). Our stop loss at $74.90 would have been hit on Friday but CNI actually gapped open lower at $74.60 instead.

- Current Positions -
Feb 28, 2011 - entry price on CNI @ 72.39, option @ 2.90
symbol: CNI1221A80 2012 JAN $80 call - exit $2.55 (-12.0%)

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

Jul 11, 2011 - entry price on CNI @ 78.49, option @ 1.85
symbol: CNI1221A85 2012 JAN $85 call - exit $1.20 (-35.1%)

07/29/11 Stopped out/gap lower @ 74.60, Options @ -12% & -35.1%
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

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


Dr. Pepper Snapple Group, Inc. - DPS - close: 37.76

07/30 update: It was an ugly, ugly week for DPS. Shares broke down under multiple layers of support including the long-term trendline on the weekly chart, the 100-dma, the simple and exponential 200-dma, the $40.00 mark and the $38.00 level. Our stop loss was hit on July 27th at $39.40 after DPS reported earnings. The company reported results that were only inline with expectations. I doubt it was the earnings news that drove DPS lower but it didn't help. Wednesday was the big drop in the market and DPS merely went along for the ride.

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 - Exit $1.50 (-47.3%)

- or -

May 11, 2011 - entry price on DPS @ 40.55, option @ 1.00
symbol: DPS1119K45 2011 NOV $45 call - Exit $0.35 (-65%)

07/27/11 stopped out @ 39.40, options @ -47.3% & -65%
07/02/11 new stop loss @ 39.40
06/25/11 DPS looks poised to correct toward the $38 level.

Chart of DPS:

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


Targa Resources - NGLS - close: 34.43

07/30 update: The market's spike lower on Friday morning was just enough to push NGLS to $33.69. Our stop loss was hit at $33.75. The stock managed an intraday rebound but shares are suffering a short-term bearish trend of lower highs. I would keep NGLS on your watch list. Shares still offer opportunity. We may want to wait for a bounce from the 200-dma or a close back above $36.50 before initiating new positions. Keep in mind the spreads are probably too wide and readers may want to just buy the stock instead. 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 - exit $1.35 (-46%)

07/29/11 stopped out @ 33.75, option @ $1.35 (-46%)
07/16/11 Spreads on the 2011 DEC calls are now outrageously wide! Do not use market orders

Chart of NGLS:

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: $64.04

07/30 update: Ouch! The sell-off in PEP has been relatively brutal. The stock is definitely underperforming its peers. The stock opened lower on Monday and just continued to fade lower. Our stop loss at $64.75 was hit on Monday.

- Suggested Positions -
Jul 21, 2011 - entry price on PEP @ 67.31, option @ 1.17
symbol: PEP1221A70 2012 JAN $70 call - exit $0.69 (-41.0%)

- or -

Jul 21, 2011 - entry price on PEP @ 67.31, option @ 2.95
symbol: PEP1319A70 2012 JAN $70 call - exit $2.16 (-26.7%)

07/25/11 stopped out @ 64.75. options @ -41% & -26.7%

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


Watch

Oil Drilling

by James Brown

Click here to email James Brown

Editor's Note:

I remain cautious on new watch list candidates. This will be another pivotal week for the market as we face the Aug. 2nd debt extension deadline. Stocks could be a lot higher or a lot, lot lower a week from now.

I've had Core Labs (CLB) on my personal watch list. Friday's bounce from support near $105 looks like a bullish entry point. However, if we do not get a debt deal this stock could fall toward the $100 level or even its 200-dma. Aggressive traders may want to look for a dip. I would consider it an aggressive trade because spreads on the long-term calls are pretty wide. Actually the spreads are wide enough I probably would not list CLB on the newsletter but nimble traders could still make money in it. Check out the long-term weekly chart. A dip toward the $95-100 area would line up with the long-term trend of higher lows.

- James



New Watch List Entries

ESV - Ensco Plc.


Active Watch List Candidates

AXP - American Express Co

EMC - EMC Corp

MMR - McMoRan Exploration

WNR - Western Refining


Dropped Watch List Entries

EXXI and WLP graduated to the play list. HSY was removed.



New Watch List Candidates:


Ensco Plc. - ESV - close: 53.25 change: +0.62

Company Info

ESV is an offshore oil and gas drilling company. The stock has been pretty resistant to the volatility in both the stock market and the oil markets. Given the slowly growing trend of higher lows it looks like ESV may have found a bottom. On Friday the stock actually closed above technical resistance at its 50-dma and 200-dma. I also have to point out that the 50-dma is about to cross under the 200-dma, which is normally a very bearish signal. That's one reason why I would not launch positions just yet. The stock could also have additional resistance at its 100-dma near $55.00.

I am suggesting we wait for ESV to close above the $55.00 level and then buy call LEAPS. We'll use a stop loss at $51.75, just under Friday's low. There is some resistance at $60.00 but we'll set our long-term targets at $64.50 and $69.50. Investors will want to note that ESV does report earnings on August 8th. Wall Street is looking for a profit of 70 cents a share. Conservative traders will want to wait and see how the market reacts to the earnings news before considering new bullish positions.

Breakout trigger: Wait for ESV to close over $55.00

BUY the 2012 Jan $60 call (ESV1221A60)

- or -

BUY the 2013 Jan $65 call (ESV1319A65)

Chart of ESV:

Originally listed on the Watch List: 07/30/11


Active Watch List Candidates:



American Express Co. - AXP - close: 50.04

07/30 update: This could be a defining week for AXP. Shares gave up about two points this past week with a drop toward round-number support at $50.00. Yet the market's reaction to the debt ceiling issue could either launch AXP or crush it. Last week we lowered our buy-the-dip entry point to $49.00. If congress does not get a deal together I would not be surprised to see AXP plunged toward support near $47.00 or the 200-dma near $46.00. Thus I am lowering our buy-the-dip entry point to $47.00 with a stop loss at $44.75. If on the other hand there is a deal then AXP will likely gap open higher on Monday anyway. Should AXP rebound from current levels then we'll reconsider buying it above $50 the following week. Our readers are more nimble than a once a week newsletter so more aggressive traders may want to go ahead and buy calls on AXP if a deal is announced before the open on Monday morning.

Buy-the-Dip trigger: $47.00 - new trigger -

BUY the 2012 Jan $50 call (AXP1221A50)

- or -

BUY the 2013 Jan $55 call (AXP1319A55)

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


EMC Corp. - EMC - close: 26.08

07/30 update: EMC has retreated back toward $26 and looks like it's headed for the 200-dma near $25. If we don't see a debt deal soon I would not be surprised to see EMC actually break down below key support near $25.

Currently 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)

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


Hershey Co. - HSY - close: 56.44

07/30 update: HSY reported earnings on the 26th. The stock saw a spike to a new multi-year high on the news and immediately reversed. Shares have been down on big volume ever since. Now HSY is testing support near $56 and its rising 100-dma. The MACD indicator on the daily chart did not confirm the new high. This is starting to feel like the second peak to a bearish double top. I still think HSY could offer some opportunity but I'm not willing to buy it here. We will remove HSY as a LEAPS candidate and revisit it down the road. A bounce near $54 or its 200-dma might change my mind.

Our trade never opened.

Originally listed on the Watch List: 04/02/11


McMoRan Exploration Co. - MMR - close: 16.84

07/30 update: It was a rough week for MMR. Shares broke down under both the 50-dma and 200-dma. The stock has essentially filled the gap from late June. Would I buy it here? No. Right now the plan is to launch long-term call positions on a close above $19.25 with a stop at $17.30. Now given the potential for the market to sell-off further if we do not see a debt ceiling deal I'm starting to wonder if MMR will fall toward the bottom of its trading range near $15.00. Buying a bounce from $15.00 would be a much more attractive entry point.

Launch positions on a close above $19.25

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

- or -

BUY the 2013 Jan $20 call (MMR1319A20)

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


Western Refining Inc. - WNR - close: 20.43

07/30 update: WNR has held up very well. Shares only gave up -1.7% versus the -4% drop in the market. I'm still expecting a correction. WNR reports earnings on August 4th. Investors are probably expecting big numbers since WNR gets to buy crude at WTI prices and sell the finished product at Brent prices (that's the story in a nutshell). With expectations high there could be a disappointment. Plus, we have the whole debt ceiling fiasco.

I am lowering our buy-the-dip trigger to $17.75 near the 100-dma. If triggered we'll use a stop loss at $15.75. If a week from now we should have an answer to the debt deal and see the results of WNR's earnings report, which may require an adjustment in our entry point strategy.

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: $17.75 - new trigger

BUY the 2012 Jan $20 call (WNR1221A20)

- or -

BUY the 2013 Jan $20 call (WNR1319A20)

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