Option Investor
Newsletter

Daily Newsletter, Sunday, 8/7/2011

Table of Contents

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

Leaps Trader Commentary

One Word: Broken

by James Brown

Click here to email James Brown

I can sum up last week with one word - broken.

That pretty much summarizes just about everything. We can apply this adjective to all the major stock markets in the U.S., Asia, Europe, the politics in Washington D.C. and the EU's attempts to stave off the debt contagion. We just experienced the worst one-week drop in the U.S. market in over two years. The S&P 500 fell -7.1%. The NASDAQ composite lost -8.1%. The small cap Russell 2000 index plunged -10.3%. Since the recent highs in late July or early August the German DAX index is down -15%. The English FTSE is off -11.5%. The Japanese NIKKEI is down -9.4% and the Hong Kong Hang Seng is off -10%. In just the last two weeks the S&P 500 have given up -10.7%. All of these markets have broken significant support. The big four U.S. indices have all broken their long-term up trends from the 2009 lows. To top it off the volume on this sell-off was absolutely massive!

I'm going to try and cover a lot of ground quickly here. It seems like ages ago we were waiting for the U.S. to pass a debt ceiling extension yet that was only last weekend. In just a week we've seen a number of bearish headlines. The ISM manufacturing and ISM services indices both came in lower than expected. Personal Income spending for June dropped unexpectedly. Retailers' July same-store sales were unimpressive. The PMI manufacturing data in China and most of Europe all declined and lends more credence to the global slowdown concerns.

On the positive side we did see a better than expected ADP employment report at +114K jobs. More importantly the U.S. government's non-farm payroll (jobs) report also came in better than estimated at +117,000 new jobs. The whisper number for a lot of traders was zero new jobs or even negative numbers. Congressional and senate leaders finally agreed on a debt ceiling deal and it was signed into law on Tuesday. Markets rallied on the expectation of a deal Monday morning but stocks quickly reversed lower. Tuesday ended up being one of the worst one-day drops in a year but we didn't know what Thursday held in store for us.

There were rumors all week long that the U.S. could lose its triple-A credit rating. Granted that's not a surprise. There has been speculation that we might lose this rating for months. Unfortunately the actual "deal" in Washington on Tuesday was not as aggressive in its spending cuts as the credit agencies liked. Moody's and Fitch said they would let us keep our AAA rating for now but kept us on creditwatch negative for a possible downgrade. No word yet on Tuesday from S&P on the U.S. rating. Meanwhile Europe was experiencing their own little meltdown. Concerns over Italy and Spain began to accelerate. The markets ended up plunging on Thursday with the worst one-day drop in almost three years thanks to a -500 point decline in the DJIA, a -5% drop in the NASDAQ Composite and a -4.7% drop in the S&P 500.

Safe havens like gold and treasuries were naturally in rally mode. Gold hit $1,640 an ounce on Tuesday. It hit $1,675 intraday on Wednesday and tagged $1,685 on Thursday before succumbing to the market-wide sell-off. The U.S. bond market was also surging higher. The very debt that investors were worried could get downgraded was being bought. The yield on the ten-year note fell from 2.8% a week ago to 2.4% intraday on Friday. I know most of us do not trade bonds but that is a BIG move. The U.S. two-year note saw its yield fall to an all-time record low of 0.25%. Money managers were looking for safety in anything and they would rather park it in the 2-year note with almost no yield than risk it in the market. Bonds did see a reversal lower intraday on Friday after reaching overbought levels.

The U.S. markets gapped open higher on Friday morning thanks to the better than expected jobs report. Unfortunately the rumors over a U.S. credit downgrade were getting hotter. Many blame these downgrade worries for the -400 point loss from Friday morning to the Friday lows in the Dow Industrials. Then news broke after the European markets closed that the ECB would consider buying bonds from the struggling countries of Italy and Spain. Buying bonds is a form of quantitative easing. England has been doing it. The U.S. did it with the QE2 program. Analysts saw this move by the ECB as a significant step to cooling the EU debt default fears. Granted the ECB said they "might" choose to take this step if the two countries agreed to new, very strict reforms but it was enough to spark a market rebound. The DJIA reversed its losses to recouped its 400 point decline. Yes, that's two 400-point swings in one day.

The big intraday bounce was starting to look and feel like a capitulation bottom in the stock market. Then after the U.S. markets closed on Friday the news outlets broke the story that Standard & Poor's had actually downgraded the U.S. credit rating for the first time in history. More on that later.

Friday saw the S&P 500 sink to 1168 before bouncing on the ECB news. This is an intraday breakdown under what should have been support near 1175 and the late November lows. The big intraday bounce looks like a potential bottom. Unfortunately, we do not know how the market will react to the U.S. credit downgrade news. I would expect some knee-jerk selling on Monday morning. Where we bounce is the question.

If you're a short-term trader then a dip to the 1150 level on the S&P 500 index would look like a bullish entry point. If the 1150 level breaks then we're talking a drop toward the 1100 area. A close under the 1090 mark would put us in a new bear-market (a.k.a. more than 20% off the highs).

We've mentioned the bearish head-and-shoulders on the S&P 500 before. The breakdown this past week definitely puts that pattern in play. The H&S pattern is forecasting a bearish target of 1130 over the next few months. At the current speed we could be there in a week. Broken support at 1250 is now new resistance. One thing to remember about bear markets is that they tend to see very sharp and fast rebounds that run out of gas and form new lower highs. I am concerned we could be seeing a new lower highs and lower lows pattern.

Weekly chart of the S&P 500 index:

Daily chart of the S&P 500 index:

The NASDAQ composite's breakdown under 2600 creates the sell signal for its bearish head-and-shoulders pattern. This pattern is forecasting a drop toward the 2325 level. We can look for broken support near 2600 to be new resistance.

Daily chart of the NASDAQ Composite index:

Weekly chart of the NASDAQ Composite:

The small cap Russell 2000 index was hammered for a -10% loss in just one week. This index is down -17.3% from its April highs. A -20% move would signal a new bear market. If the $RUT closes under support near 700 it could be a significant warning signal for the rest of the market.

Daily chart of the Russell 2000

Weekly chart of the Russell 2000

No chart for the SOX semiconductor index tonight. It has broken below its long-term up trend. Broken support in the 375-380 area should be new resistance.

I do want to point out the -9.4% drop in the Dow Jones Transportation index last week. At the lows on Friday this index was down more than 1,000 points from its all-time high in July. The transports essentially hit -19% and bounced. If stocks do not recover soon we could see the $TRAN testing support near prior resistance at the 4500 level.

Weekly chart of the Transportation index:

The economic calendar this week is a little light. The FOMC meeting on Tuesday is the biggest event. Wall Street will be laser-focused on what Ben Bernanke has to say following the U.S. credit downgrade. Of course the reaction to the downgrade is not on the calendar but Monday morning will be pretty interesting. Other highlights for the week will be the wholesale inventories, retail sales, and the Michigan sentiment reading.

- Tuesday, August 9 -
FOMC MEETING

- Wednesday, August 10 -
Wholesale Inventories

- Thursday, August 11 -
Weekly Initial Jobless Claims
U.S. Trade Balance numbers

- Friday, August 12 -
Michigan Sentiment for August
Retail Sales for July
Business Inventories

Last week I wrote about the prospect for a downgrade to the U.S. credit rating. Here's an excerpt of what I said:

"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."

Here we are a week later with a downgrade by S&P and I don't have anything new to add. If you have a fixed rate interest rate on your house or car then you're fine. Going forward rates "should" rise but that's not a guarantee. Just look at how fast the yields on the 10-year note have been dropping, which puts downward pressure on rates.

I have said it before. 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 money out of equities then the U.S. bond market is still the safest spot for it. The U.S. bond market is the deepest, most liquid market of its kind. It is massively bigger than our stock market and it's 10 to 20 times larger than its nearest rivals. The U.S. bond market is the place to park your money. That's exactly what money managers are doing. The yield on the short-term U.S. note is at 0.01% and hit 0.005% intraday on Friday. I mentioned earlier that the two-year note saw its yield fall to 0.25% for the first time in history because so many investors are buying it as a safe haven investment.

Last week I wrote:

"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...

... and you can bet U.S. investors will see the volatility in our stock market. "

Some analysts might argue that the better than expected jobs data on Friday throws cold water on the economic slowdown in the U.S. but I don't agree. Yes, we were happy to see the stronger numbers. However, one report does not reverse the virtual parade of negative economic numbers over the past several weeks. Furthermore we need about +150,000 new jobs a month just to keep pace with the population growth, new graduates, and immigration. So +117,000 jobs does not cut it.

What happens in Europe this week could be the pivotal event for our markets. Will the ECB actually commit to its own QE program for Italy and Spain? If we get some sort of resolution, even temporary, it would be helpful. Meanwhile here at home the Fed comments on Tuesday could give the markets a push one way or the other. No one really expects QE3 but there has certainly been a lot of talk about the possibility of more stimulus of some kind in the U.S.

The last few weeks, in my market commentary, I have been cautioning readers that stocks might be a lot lower "four to six weeks from now". Well here we are, a lot lower, just a lot sooner than I expected. Right now there is no way to know if the sell-off is done. While we would love to see a "V" shaped bottom to this correction it doesn't always happen so cleanly. Some would argue that bottoms are a process for the stock market. At the moment we do not know how the U.S. markets will react to the S&P downgrade. I do expect some selling on Monday morning but we don't know if Monday will be a bottom or will it merely initiate a new leg lower.

- James


Portfolio

Portfolio Update

by James Brown

Click here to email James Brown


Current Portfolio


Portfolio Comments:

It was a terrible week for the bulls. Stocks were slaughtered. The NASDAQ Composite fell -8.1%. The S&P 500 dropped -7.1%. The small cap Russell 2000 plunged -10.3%. That's just last week. The market is off significantly from its July highs. Thursday's massive market drop with the Dow Industrials falling -500 points was brutal. We had a lot of our trades get stopped out on Thursday.

AXP and WNR jumped from the watch list to our play. Yet WNR was both trigged and stopped out on the same down move (Thursday).

There is a new stop loss for KO.

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

Very Oversold

by James Brown

Click here to email James Brown

Editor's Note:

I have been warning readers in the LeapsTrader commentary that stocks could be a lot lower as we near the end of summer. I will confess I was not expecting the sell-off to happen so soon or so quickly. Nearly everything was sold indiscriminately, which is normally a sign of a bottom or at least a short-term capitulation.

Stocks are now very oversold and due for a big bounce. Unfortunately market participants face a lot of uncertainty. How does the U.S. credit downgrade compare to the ECB news on Friday that the ECB could start buying Italian and Spanish bonds? (see tonight's market commentary)

Furthermore, there is a lot of uncertainty regarding the U.S. and global economy in the second half of 2011. For months we've been told by the Federal Reserve that the back half of 2011 would get better but that view looks very cloudy thanks to a parade of slowing economic reports. Recent corporate earnings results have been strong but guidance has been lackluster and cautious.

The sell-off is extremely overdone for a number of stocks. On the positive side this correction should end up producing a great entry point for new positions. The challenge is determining when to open positions. Our entry point might be a week from now or it could be in October. It's hard to say when we have not seen the market reaction to the U.S. credit downgrade or heard from the Federal Reserve who meets on Tuesday.

The first part of this week could be extremely volatile again. Would you rather try and initiate new long-term LEAPS positions with the S&P 500 at 1200 or at 1100? Obviously 1100 would be more attractive so we'll wait and see where the market closes next Friday.

No new trades tonight. I did list a number of stocks on my radar screen in the watch list tonight.


Play Updates

A Tidal Wave

by James Brown

Click here to email James Brown

Editor's Note:

A tidal wave of selling has crashed across the markets both here and abroad. The major indices have sliced through significant support like it did not exist. This past week was one of the worst weeks since the 2008 bear market. We have seen the vast majority of our bullish LEAPS positions get stopped out.

-James


Closed Plays


BMY, COH, COST, EXXI, FISV, FTK, INTC, KALU, MON, SWN, UNP, WLP, WNR, and ZMH were stopped out.


Play Updates


American Express Co. - AXP - close: 47.21

08/06 update: Financials were hit pretty hard last week with the banking indices down nearly -10%. AXP fell from $50 to an intraday low of $46.46 on Friday. Shares found technical support at their 200-dma and bounced. This looks like a new bullish entry point. The problem is we do not know how the market will react on Monday morning to the U.S. credit downgrade. I would expect a gap lower. Investors may want to wait 30 to 60 minutes on Monday morning and then consider new bullish positions. Currently we have a stop loss at $44.75 but if AXP breaks down too far under $46 then shares could plunge toward the $44-42 area.

Our trader was triggered on Thursday when AXP hit our entry point at $47.00. Our long-term targets are $59 and $64.

- Suggested Positions -
Aug 04, 2011 - entry price on AXP @ 47.00, option @ 2.60
symbol: AXP1221A50 2012 JAN $50 call - current bid/ask $ 3.00/ 3.15

- or -

Aug 04, 2011 - entry price on AXP @ 47.00, option @ 3.50
symbol: AXP1319A55 2013 JAN $55 call - current bid/ask $ 4.00/ 4.25

08/04/11 play opened at $47.00

Chart of AXP:

Current Target: $59.00, 64.00
Current Stop loss: 44.75
Play Entered on: 08/04/11
Originally listed on the Watch List: 05/21/11


The Coca-Cola Co. - KO - close: 66.77

08/06 update: Our KO trade almost didn't survive. The huge market drop on Thursday took KO from $68 to under $66. Friday morning saw a drop under its 200-dma but the stock rallied off the $65.00 level. Our stop loss is at $64.90. I am concerned that Monday morning the market could gap down due to the U.S. credit downgrade news but I suspect the weakness will be temporary.

The June low was $64.43. I am lowering our stop loss to $63.95. Traders may want to consider only exiting this trade if KO closes under $64.50 instead of using intraday stops like the newsletter. Aggressive traders might want to try and buy an intraday bounce in KO on Monday.

Earlier Comments:
Our plan was to keep our opening positions small, 1/4 to 1/2 your normal trade size. 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 $ 1.77/ 1.82

- or -

Jul 25, 2011 - entry price on KO @ 69.12, option @ 2.40
symbol: KO1319A75 2013 JAN $75 call - current bid/ask $ 2.20/ 2.31

08/06/11 adjust stop loss to $63.95 to give KO more room. We do not know how the market will react to the U.S. downgrade news on Monday.

Current Target: $79.00 & 84.00
Current Stop loss: 63.95
Play Entered on: 07/25/11
Originally listed in the New Plays 07/23/11


CLOSED Plays


Bristol-Myers Squibb Company - BMY - close: 27.43

08/06 update: Healthcare and drug stocks were crushed lower last week. The DRG drug index fell from Monday's high of 327 to Friday's low of 295. That's a -9.7% drop and a breakdown under several layers of what should have been support. BMY was holding up reasonably well and by Thursday the stock has fallen toward its June lows and technical support near its 200-dma. Yet Friday's market plunge was too much. BMY traded down to $26.62 before bouncing. Our stop loss was hit at $26.95.

I would keep BMY on your watch list. Shares are nearing their long-term trendline of higher lows. I'd wait to see if the stock can build on support near the $27 area.

- Suggested Positions -
Mar 14, 2011 - entry price on BMY @ 26.14, option @ 1.13
symbol: BMY1221A27.5 2012 JAN $27.50 call - exit @ $1.52 (+34.5%)

- or -

Mar 14, 2011 - entry price on BMY @ 26.14, option @ 1.63
symbol: BMY1319A27.5 2013 JAN $27.50 call - exit @ $2.00 (+22.6%)

08/05/11 stopped out @ 26.95
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

Chart of BMY:

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: 56.96

08/06 update: It proved to be a very ugly week for COH and most of the retail stocks. COH plunged from its Monday highs above $66 to $54.52 on Friday morning. Shares broke down through multiple layers of what should have been support at the 50-dma, the $62 level, the $60 level, the 100-dma, the $58 level, and the 200-dma. The sharp bounce from Friday's low and close over the 200-dma offers some hope that COH may have found a bottom. Aggressive traders may want to try again right here and use a stop loss under Friday's low. Although you may want to wait until Tuesday before considering positions since Monday could be a crazy day due to the U.S. credit downgrade.

Our option trade was stopped out when COH hit $59.00 on Thursday, August 4th. 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 - exit $3.05 (-30.6%)

- or -

Jun 03, 2011 - entry price on COH @ 61.00, option @ 6.80
symbol: COH1319A70 2013 JAN $70 call - exit $5.85 (-13.9%)

08/04/11 stopped out @ 59.00
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.

Chart of COH:

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: 76.74

08/06 update: I cautioned readers last weekend that our COST play was at risk. The failed rally on Monday was another warning signal. Shares hit our stop loss at $76.75 on Tuesday just before the closing bell. Longer-term COST should offer a lot of potential and I would keep COST on your watch list. The sell-off this past week actually wasn't that bad.

- Current Positions -
Apr 7, 2011 - entry price on COST @ 76.37, option @ 3.80
symbol:COST1221A80 2012 JAN $80 call - Exit $3.40 (-10.5%)

- or -

Apr 7, 2011 - entry price on COST @ 76.37, option @ 5.05
symbol:COST1319A85 2013 JAN $85 call - Exit $4.70 (-6.9%)

08/02/11 stopped out @ 76.75
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

Chart of COST:

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: 26.71

08/06 update: EXXI was murdered last week. The drop from last Friday's close to this Friday's low was -24.1%. The breakdown under support near $30 and the 200-dma was very bearish but shares hit our stop when they broke below the June lows near $28.00. I still believe EXXI offers long-term potential but we may end up seeing a better entry point in a few weeks. If the $25 level breaks then look for support in the $22.50-20.00 zone. Of course that's assuming the spreads on these options improve!

Our trade was stopped out on Thursday when it hit $27.75.

- Current Positions -
Jul 27, 2011 - entry price on EXXI @ 32.50, option @ 2.00
symbol:EXXI1221A40 2012 JAN $40 call - exit $0.60 (-70%)

- or -

Jul 27, 2011 - entry price on EXXI @ 32.50, option @ 6.00
symbol:EXXI1319A40 2013 JAN $40 call - exit $2.20 (-63.3%)

08/04 stopped out @ 27.75
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: 56.67

08/06 update: FISV was already at the bottom of its trading range a week ago. This past week's market sell-off pushed shares through support near $60 and $58.00. The stock hit our stop loss at $59.45 on Monday, Aug. 1st.

- Suggested Positions -
Feb 14, 2011 - entry price on FISV @ 62.30, option @ 3.20
symbol: FISV1117I65 2011 SEP $65 call - exit $0.25 (-92.1%)

08/01/11 stopped out @ 59.45
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

Chart of FISV:

Current Target: $74.75
Current Stop loss: 58.95
Play Entered on: 02/14/11
Originally listed on the Watch List: 01/29/11
Originally listed in the New Plays 02/12/11


Flotek Industries Inc. - FTK - close: 7.02

08/06 update: We were not expecting a -25.5% plunge in FTK. At its worst levels on Friday morning FTK was down -31% for the week. Shares managed to bounce back and close above technical support at its 200-dma. The sell-off here is extremely overdone. FTK has not seen a 25% change in its business. Aggressive traders may want to try again right here near the 200-dma. However, I'd probably wait until Tuesday to consider positions. We do not know how stocks will react on Monday thanks to the U.S. credit downgrade.

Our trade was stopped out on Wednesday at $8.90. Unfortunately our second position was triggered on Monday with the gap open higher.

Earlier Comments:
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 - Exit $1.38 (-42.5%)

- or -

Jul 25, 2011 - entry price on FTK @ 10.41, option @ 1.50
symbol: FTK1217C12.5 2012 MAR $12.50 call - Exit $0.80* (-46.6%)

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

Aug 1, 2011 - entry price on FTK @ 9.72, option @ 2.00*
symbol: FTK1217C10 2012 MAR $10 call - exit $1.38 (-31%)

08/03/11 stopped out @ $8.90. *option did not trade. this is an estimate.
08/01/11 2nd position is open. FTK opened higher @ 9.72. Option did not trade but I estimate an entry at $2.00
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.

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


Intel Corp. - INTC - close: 20.79

08/06 update: Big cap stocks fared better than small cap but technology stocks were hit hard and Intel was not immune to the market sell-off. This past week saw INTC breakdown under support near $22, its 100-dma, its 200-dma and the $21.00 level. Our stop loss at $20.85 was hit on Thursday near the closing bell.

- Current Positions -
Jun 01, 2011 - entry price on INTC @ 22.00, option @ 1.41
symbol: INTC1221A22.5 2012 JAN $22.50 call - Exit $0.95 (-32.6%)

- or -

Jun 01, 2011 - entry price on INTC @ 22.00, option @ 2.38
symbol: INTC1319A22.5 2013 JAN $22.50 call - Exit $1.85 (-22.2%)

08/04/11 stopped out @ 20.85
07/09/11 new stop loss @ 20.85

Chart of INTC:

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: 48.68

08/06 update: Believe it or not KALU was holding up reasonably well the first half of the week. When the market saw its massive drop on Thursday shares of KALU finally broke down. When it broke the stock dropped fast and saw a -14% decline for the week. KALU fell through several layers of what should have been support like the 50-dma, the $52.00 level, the 100-dma, the $50.00 mark, and its 200-dma.

Our stop loss was hit on Friday at $49.75. We will probably not trade KALU again until the option spreads improve. Speaking of option spreads, KALU does not have one! I don't see how a bid of $0.00 and an ask of $4.00 qualifies as a "market". It's outrageous. Technically we'd have to say that we were stopped out with a bid of $0.00, which means a -100% loss.

- Suggested Positions -
Jul 11, 2011 - entry price on KALU @ 53.56, option @ 2.35
symbol: KALU1117L60 2011 DEC $60 call - current bid/ask $ -.--/ 4.00

08/05 stopped out @ 49.75
08/05 there is NO BID but a $4.00 ask! Ridiculous!
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)

Chart of KALU:

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


Monsanto Co. - MON - close: 67.15

08/06 update: It was an ugly week for MON. Shares fell more than -10% and plunged through what should have been support at $70, its 100-dma and 200-dma. Our stop loss was hit at $67.00 on the market's huge drop this Thursday.

Prior Comments:
Our plan was to keep our position size small to limit our risk since MON can be so volatile at times.

- Current (SMALL) Positions -
Mar 15, 2011 - entry price on MON @ 65.50, option @ 6.75
symbol: MON1221A70 2012 JAN $70 call - Exit $5.30 (-21.4%)

- or -

Mar 15, 2011 - entry price on MON @ 65.50, option @ 8.75
symbol: MON1319A75 2013 JAN $75 call - Exit $7.60 (-13.1%)

08/04/11 stopped out @ 67.00
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.

Chart of MON:

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: 37.70

08/06 update: Shares of SWN were mortally wounded last week with a -15.3% sell-off. The stock crashed through several layers of support. SWN is now off -23% from its July highs. The breakdown under support at $44.00 was enough to stop us out. Our play was closed at $43.90 on late Monday morning.

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 - Exit $3.65 (+25.8%)

- or -

Apr 7, 2011 - entry price on SWN @ 40.50, option @ 5.85
SWN1319A45 2013 JAN $45 call - Exit $6.65 (+13.6%)

08/01/11 stopped out @ 43.90
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

Chart of SWN:

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: 92.47

08/06 update: The Dow Jones Transportation index produced a serious breakdown. The $TRAN index has gone from an all-time high of 5,627 in July to a low of 4,550 on Friday morning. That's a -19% correction and puts the transports on the verge of a new bear market. Railroad stocks were no exception. Shares of UNP saw a -10% drop last week and broke through several layers of support. Our stop loss was hit at $98.00 on August 2nd.

- Current Positions -
May 5, 2011 - entry price on UNP @ 100.15, option @ 5.00
UNP1221A110 2012 JAN $110 call - Exit $2.50 (-50%)

- or -

May 5, 2011 - entry price on UNP @ 100.15, option @ 6.00
UNP1319A120 2013 JAN $120 call - Exit $5.20 (-15.3%)

08/02/11 stopped out @ 98.00
07/23/11 new stop loss @ 98.00
05/28/11 New stop loss @ 97.00

Chart of UNP:

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: 61.95

08/06 update: Our trade on WLP did not last very long. The sell-off in WLP was exacerbated by weakness in the healthcare sector last week. WLP hit our stop loss at $66.50 on Monday before lunchtime. The stock is nearing what should be a new level of support near $60.00 and WLP decline has stalled at is long-term trendline of higher lows (see chart below). Aggressive traders may want to reconsider and buy calls on a bounce from the $60 level (just use a tight stop loss).

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 - Exit $1.70 (-43.3%)

- or -

Jul 27, 2011 - entry price on WLP @ 70.00, option @ 5.75
WLP1319A80 2013 JAN $80 call - Exit $4.40 (-23.4%)

08/01/11 stopped out @ 66.50

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


Western Refining Inc. - WNR - close: 14.83

08/06 update: WNR qualifies for one of our most short-lived trades ever! Thursday was a double whammy for the stock. Not only did the Dow Industrials plunge -500 points on Thursday but WNR reported earnings that morning. The company missed expectations by 17 cents even though revenues were up +19%. The stock collapsed on this news and the drop was exaggerated by the market's massive sell-off.

Thursday saw shares open lower at $18.94, hit our trigger to buy options on the dip at $17.75, and then the stock hit our stop loss at $15.75 by the closing bell.

The sell-off in WNR last week was extreme. For the week the stock is down -27% but at its lows on Friday WNR was down -35% for the week. The stock did manage to bounce back intraday on Friday and close above what should have been support near $14.00 and its 200-dma. The story still works. WNR is a midcontinent refiner that can buy oil at WTI prices and sell the finished product at Brent prices. Aggressive traders may want to consider launching new positions here but I would wait until midday on Monday or wait till Tuesday so we can see how the market reacts to the U.S. downgrade news.

- closed Positions -
Aug 04 2011 - entry price on WNR @ 17.75, option @ 1.60
WNR1221A20 2012 JAN $20 call - Exit $1.15 (-45%)

- or -

Aug 04 2011 - entry price on WNR @ 17.75, option @ 4.00*
WNR1319A20 2013 JAN $20 call - Exit $2.10* (-47.5%)

08/04 our trade was opened and closed on the same down move.
* option did not trade. these are an estimate.

Chart of WNR:

Current Stop loss: 15.75
Play Entered on: 08/04/11
Originally listed on the Watch List: 07/09/11


Zimmer Holdings, Inc. - ZMH - close: 57.56

08/06 update: ZMH is only down about two and a half points for the week but that was still enough to stop us out. Monday saw a failed rally at its 200-ema that turned into a breakdown below its simple 200-dma. Our trade was stopped out at $58.90. ZMH struggled with the $58.00 level as resistance all week long but overall the selling pressure was mild compared to the rest of the market. Of course that does not negate the bearish head-and-shoulders pattern that ZMH has created. This pattern is forecasting a drop toward the $50-48 zone over the next few months.

- Current Positions -
Jun 10, 2011 - entry price on ZMH @ 63.00, option @ 4.00
ZMH1221A65 2012 JAN $65 call - Exit $2.00 (-50%)

- or -

Jun 10, 2011 - entry price on ZMH @ 63.00, option @ 5.50
ZMH1319A70 2013 JAN $70 call - Exit $4.10 (-25.4%)

08/01/11 stopped out at $58.90
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.

Chart of ZMH:

Current Target(s): $78.50 & 88.50
Current Stop loss: 58.90
Play Entered on: 06/10/11
Originally listed on the Watch List: 04/30/11


Watch

Muddy Waters

by James Brown

Click here to email James Brown

Editor's Note:

The one thing Wall Street hates the most is uncertainty. Right now we're swimming in it. Stocks collapsed last week thanks to bearish economic data, fallout over the debt ceiling deal, worries over a U.S. credit downgrade, and a serious concerns over Europe.

Many of these issues remain. We do not know (yet) how the market will react to the S&P downgrade of the U.S. credit rating. The downgrade could already be priced in or the market could plunge another 500 points on Monday. We really don't know. That's why I am suggesting a lot of caution and patience when it comes to new LEAPS positions. There is too much uncertainty in the air. I suspect the market will calm down a bit after the FOMC meeting on Tuesday.

We are not adding new watch list candidates tonight. However, I am sharing some of the stocks on my radar screen. Here's what I'm watching for a potential entry point assuming the markets finally stop falling on a daily basis.

On my radar: ENR, PVH, BCR, KFT, HAL, HSY, DRI, DLTR, RRC, RL, ANF, VFC, and IBM. (aggressive traders could watch stocks like AAPL and AMZN).

Three stocks that I was really tempted to add to the watch list tonight were AGN, HUM, and PM.

AGN dipped to support near $75.00 and its 200-dma on Friday. This is also the long-term trendline dating back to the 2009 lows. I would be tempted to buy calls on another dip near $75.00 and try and use a tight stop loss.

HUM has seen a significant correction with healthcare stocks falling sharply the past two weeks. HUM is currently testing support near $70.00. I would be tempted to buy calls on a dip near its 200-dma around the $67.50 area and use a stop loss just under $65.00.

PM has held up very well compared to the rest of the market. Shares still have a bullish trend of higher lows and they're not that far from their highs. Investors might want to consider buying a dip near the June lows or near the $64 level and its rising 200-dma.

- James



New Watch List Entries

None, no new watch list candidates


Active Watch List Candidates

EMC - EMC Corp

ESV - Ensco Plc.

MMR - McMoRan Exploration


Dropped Watch List Entries

AXP and WNR graduated to the play list last week.


Active Watch List Candidates:



EMC Corp. - EMC - close: 26.08

08/06 update: EMC plunged more than -11% last week. The breakdown under the $25.50-25.00 zone and its 200-dma is very bearish. The stock has also broken below its long-term trend of higher lows. The likelihood of EMC hitting our entry point condition of a close over $28.70 seems very farfetched at the moment.

EMC still offers plenty of opportunity. Their business did not plunge -10% in a week. However, the market craziness may not be over yet. I am removing our entry point strategy but we'll keep EMC on the watch list. Consider this a one-week probation as we wait to see where things shake out following the U.S. credit downgrade. If EMC can find support and hold it near $22 then maybe we'll reconsider a lower entry point. For the moment the $25.00 area should be new resistance. Who knows? Maybe a week from now we'll be looking at EMC near support at $20.00.

Temporarily Removing Our Entry Point on EMC.

Just wait and watch for this week.

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


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

08/06 update: At the low on Friday ESV was down -17% for the week. The sell-off is overdone and share are trying to find support near $45 and its long-term trendline of higher lows (see chart). Aggressive traders may want to buy calls now. I am concerned about how low the market might dip on Monday in reaction to the U.S. downgrade news. Thus, I'd rather wait until next weekend and re-evaluate our entry point strategy.

We will temporarily remove our entry point to buy calls on ESV. We will re-add an entry point next weekend or remove ESV as a candidate.

FYI: 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.

Temporarily removing our entry point on ESV. We just want to wait and watch this week.

Chart of ESV:

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


McMoRan Exploration Co. - MMR - close: 16.84

08/06 update: The story has not changed for MMR even though shares just dropped -18% last week. The breakdown through the bottom of its trading range, the break under $14.00, and the breakdown under its long-term trendline are all very bearish. I suspect the move lower is very, very overdone but I would not buy the dip here.

I am suggesting readers just wait and watch to see how MMR performs this coming week. Will it bounce back above prior support at $14.00 or will it collapse toward potential support near $12.00? We will either adjust our entry point strategy next weekend or remove MMR as a candidate.

Temporarily Remove the Entry Point Strategy on MMR.

Just wait and watch this week!

Chart of MMR:

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