Option Investor
Newsletter

Daily Newsletter, Sunday, 9/4/2011

Table of Contents

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

Leaps Trader Commentary

Failure at 50%

by James Brown

Click here to email James Brown

Another rocky week for stocks left the market on a sour note ahead of the three-day Labor Day weekend. By the time we hit the closing bell on Friday investors were rushing back into safe-haven trades. Gold was soaring back towards the recent highs. Meanwhile bonds rallied again leaving the yield on the 10-year note at 1.99% for the first time in about 50 years.

The volatility index (VIX) is traditionally used as a "fear gauge" on investor sentiment. Currently the VIX is at elevated levels near 34 but it is not trading near the recent panic highs in the 45-48 levels. Are investors turning numb to the market's big swings? Or have traders already bought all the protective puts they need during the last four weeks so there is no need to buy more and thus the VIX isn't spiking higher again? If investors already feel protected because they bought puts on the last two market sell-offs then maybe we will see a little less panic selling in stocks.

Daily chart of the Volatility (VIX) index:

Looking back at the first half of the week the stock market was in rally mode. The East coast was recovering from Hurricane Irene but the big headline on Monday was out of Europe. News of a merger between Greece's two largest banks was taken as a positive development in hopes it might strengthen the country's financial system. The headline helped fuel gains n financial stocks around the globe on Monday.

Tuesday the main stories were consumer confidence and the FOMC minutes. Analysts were hoping to find hints in the minutes of the last FOMC meeting about any future stimulus proposals. Yet the minutes were devoid of any significant details. Meanwhile the August consumer confidence report was a bust! Economists had been expecting a drop from 59 to 52. The report showed confidence plunging to 44.5, which is the lowest level since April 2009. Analysts believe that consumer confidence has an impact on consumer spending and consumer spending accounts for about 70% of the U.S. economy.

The correlation between consumer confidence and spending doesn't always hold up. Thursday we saw August same-store sales data for several major retailers. Generally these were results came in better than expected. Consumer attitudes may be deteriorating but they haven't closed their wallets yet. On Thursday we also saw the ISM manufacturing survey for August. Economists were expecting this ISM number to drop from 50.9 to 48.5. Readings under 50.0 indicate economic contraction. The August number came in at 50.6, which would suggest the U.S. is clinging to growth but at a very slow pace. Elsewhere on Thursday the latest PMI manufacturing data from Europe came in below expectations.

Stocks initially rallied on Thursday morning. Unfortunately the rally reversed at resistance near 1230 on the S&P 500 index, which happens to be the 50% retracement between the July highs and the August lows. Once the market failed at resistance we started seeing profit taking as market participants turned cautious ahead of Friday's jobs report. It looks like they had a reason to worry.

The August nonfarm payroll report was a disaster. Economists had been expecting job growth of +70,000 to +80,000 new jobs in August after July's +117,000. Yet the total job growth in August was zero! Current estimates put private sector job growth in August at +17,000 but this was erased by -17,000 job losses by the government. Analysts had been expecting private job growth of +100,000. Pouring salt on the wound were downward revisions for July from +117K to +85K and June's +46K to +20K. Remember, we need at least +150,000 a month just to stay even with population growth and new workers.

The trend of downward revisions to the job report does not bode well for August. What are the odds that a month from now we'll see this report revised lower into negative territory? The official unemployment rate was unchanged at 9.1% but real unemployment is closer to 16.2%. Looking at the details of the jobs report the average hours worked and average hourly earnings both ticked lower, which is not a healthy sign of future demand to hire new workers.

There were two more big stories on Friday. One was Operation Twist and the other was the FHFA lawsuits. The jobs data was so bad that several analysts firms are suggesting the Fed will try and lift short-term rates while pushing down longer-term interest rates with a move called "Operation Twist". The Federal reserve can accomplish this by selling short-term notes while buying long-term notes. The speculation suggests a September time frame to start this process.

After big gains earlier in the week the financials were hammered lower on Thursday and Friday. The losses on Friday were exacerbated by news that the Federal Housing Financial Authority (FHFA) is suing 17 financial firms, including several major banks for more than $200 billion. The FHFA claims that these firms committed fraud with their representation of the mortgages and mortgage backed securities that they sold during the end of the housing boom.

You may recall that two weeks ago the financials were falling but analysts kept claiming this isn't 2008 and that the banks are much healthier now than they were during the subprime and Lehman Brothers meltdown. There was speculation about which banks might need to raise capital again. The media made a big fuss about Bank of America's (BAC) $5 billion deal with Warren Buffett's Berkshire Hathaway because previously BAC claimed to not need any capital.

Now this new FHFA lawsuit is going to keep banks on the defensive. Instead of loaning money they're going to keep hoarding cash because banks will not know how much they might need to come up with should this lawsuit proceed. Lawsuits like these take years to process. This could be a wet blanket on our economy for a long time. Banking analyst Richard Bove speculated that the impact could be devastating for both the U.S. banks and the U.S. economy.

Major Indices:

The failed rally in the S&P 500 index last week looks pretty ugly. Stocks failed twice, on Wednesday and Thursday near the 50% retracement of the July high to the August (closing) low. You can see this on the daily chart below. You'll also notice on the shorter-term chart that the sell-off last week is also trading to the various Fibonacci retracements with Friday's drop to the 50% retracement. There is the possibility that the S&P 500 is actually building a bear-flag pattern. If this proves to be the case then a breakdown from the bear flag would currently forecast a drop toward the 1,000-980 area.

On a short-term basis the S&P 500 might see some support near the 1160-1150 area but the real support levels to watch are 1120 and 1100. Should stocks rally then we're still looking at resistance near 1205, 1230, and 1250.

Daily chart of the S&P 500 index:

Intraday chart of the S&P 500 index:

Potential Flag pattern on the S&P 500 index:

The technology-stock heavy NASDAQ also saw its bounce fail at the 50% retracement of the July-August sell-off. This was also near resistance at the 2600 area. Now the Thursday-Friday sell-off has produced a 50% pull back of the most recent bounce. On a positive note the NASDAQ has also filled the gap from August 29th. The NASDAQ could see a bounce soon. If it does not then we might be looking at a retest of the 2400-2350 area. Should the market rebound higher again then we're back to watching for resistance near 2550 and 2600.

Daily chart of the NASDAQ Composite index:

Intraday chart of the NASDAQ Composite index:

It's a very similar story with the small cap Russell 2000 index. The daily chart shows a failed rally and reversal at the 50% retracement of the sell-off. The intraday chart shows a 50% pull back from the bounce off its mid August lows. Further weakness will probably see a decline toward support in the $66-64 area on the IWM (or 660-640 on the Russell 2000 index). Overhead resistance is the $72-74 zone (720-740 for the $RUT).

Daily chart of the Russell 2000 ETF (IWM)

Intraday chart of the Russell 2000 ETF (IWM)

The economic calendar for this coming week is light. There will be two reports to watch for this holiday shortened-week. The first is the ISM services for August. Second is the Fed's Beige Book report for an anecdotal look at business conditions in the twelve regions. The biggest event for the week might be President Obama's speech on Thursday night. This newsletter tries to refrain from making political comments but it's no secret that Obama's disapproval rating hit a new all-time high last week at 52%. His administration needs to do something. Yet given the fiasco over raising the U.S. debt ceiling it could be nearly impossible to pass any new major spending bills or stimulus. As an American I hope that Obama can present some fresh ideas to foster a positive economic environment that would organically create job demand instead of wasting billions on temporary government jobs.

- Monday, September 5 -
U.S. markets closed for Labor Day holiday

- Tuesday, September 6 -
ISM Services for August

- Wednesday, September 7 -
Federal Reserve's Beige Book report

- Thursday, September 8 -
Weekly Initial Jobless Claims
Trade Balance numbers for July
Consumer credit numbers for July
President Obama's speech on Jobs

- Friday, September 9 -
Wholesale inventories for July

Looking ahead we could see more fireworks out of Europe. The problems in Italy and Greece are festering. The EU, IMF, and ECB seem unable to lance this wound. Italy is facing criticism over its austerity package. Berlusconi's coalition government keeps changing it. The ECB argues that Italy's austerity measures have to be as strict as the ones agreed to a month ago. Meanwhile Greece is likely to miss its 2011 austerity targets. At least that's what the current EU inspectors are claiming. The bond markets are already predicting a default by Greece. The country can't access the credit markets when the yield on its one-year note is 72% and the two-year Greek bond is yielding almost 50%.

No one can predict where the market will be a week from now. Odds are really good that Asian and European markets will be down on Monday as they react to our Friday morning plunge thanks to the jobs report. If European markets can bounce on Tuesday prior to our market opening then we might see a bounce. Otherwise I would expect a weak open on Tuesday. Long-term traders may want to just sit back and watch. Waiting for another dip or a bounce from the 1120 or 1100 level is not a bad idea. My only concern would be the bear-flag pattern forming on the S&P 500 index.

I should not say that is my only concern. The parade of weak economic data seems to be getting worse. Every single week there is another disappointing report. There was an article several days ago on CNN discussing a poll that showed 8 out of 10 Americans believe we are already in a new recession. It certainly appears that the U.S. economy is heading for another downturn. The question is can Washington or the Federal Reserve do anything about it?

In Bernanke's Jackson Hole speech he strongly suggested the Fed would do something at its next meeting on September 20-21. Speculation over some sort of QE3 program will hit a feverish pace prior to the meeting. We could reach the point where bad news is good news. What does that mean? Every piece of bad economic news could be viewed as more fuel for the Fed to cook up some sort of stimulus.

At the moment the U.S. stock market just produced its worst two-day start to the month of September since 1974. Traditionally September is one of the worst months of the year for stocks. However, there is a chance that money managers will be reluctant to sell in front of the next Fed meeting on hopes that Bernanke does announce some sort of stimulus package. Many mutual funds close their fiscal year at the end of October so they only have a couple of months to recover if they are having a bad year.

The combination of market volatility and economic uncertainty is a tough environment to make long-term option bets but it also presents opportunity. We just need to be patient and pick our entry points. I am suggesting that if you are going to trade then readers should trade small (positions) and try to limit your risk as much as you can. I'd rather wait to buy a bounce than try and catch the absolute bottom buying the decline.

- James


Portfolio

Portfolio Update

by James Brown

Click here to email James Brown


Current Portfolio


Portfolio Comments:

Technically the market's two-day pull back, while steep, is just a normal 50% retracement of the two-week rally. Stocks are in the middle of their recent range and given all the economic uncertainty I am suggesting investors stay cautious.

A dip near the August lows could be used as a new bullish entry point but keep your position size small.

There are no adjustments to our stop losses tonight.

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

Nasty Reversal

by James Brown

Click here to email James Brown

Editor's Note:

The market has seen a 50% retracement of its most recent two-week rally but the pull back happened in just two days. The result is a nasty-looking bearish reversal.

Were we due for some profit taking after a +8% gain in the S&P500 in less than two weeks? Yes, we were. That doesn't mean I want to rush in and buy the sell-off on Friday. The jobs data on Friday morning was a huge miss. There could be more fallout from this news.

We are not adding any new trades tonight. In addition to the new watch list candidates in this evening's newsletter, here is a list of stocks on my radar screen.

BMY, CHD, RIMM, JAZZ, BCR, MAKO, DLTR, and CRS

-James


Play Updates

Stocks Look Fragile

by James Brown

Click here to email James Brown

Editor's Note:

Sometimes it pays to wait. I warned readers a week ago that we might want to avoid launching new positions until after we see the market's reaction to the jobs report on Friday. Now the market looks like it could retest its August lows.

I would use a dip near the August lows as a new entry point but we want to keep our position size small to limit risk.

-James


Closed Plays


None. No closed plays this week.


Play Updates


Bank of America - BAC - close: 7.25

update 09/03: It was not a good week for BAC. Shares are down -6.5% for the week but they're off -13.5% from Monday's close. Our plan was to open small bullish call LEAPS positions on Monday at the open. BAC opened at $8.10 on August 29th. Shares churned sideways for a couple of days and then collapsed on Friday with a -8.3% drop.

Before we get to Friday, let's back up to Thursday when the Federal Reserve asked BAC to design a contingency plan in case economic conditions worsen. That says two things to us. The Fed is worried about the economy slowdown getting worse. Second, the Fed is worried about BAC. It certainly doesn't inspire a lot of confidence.

One of the market's biggest stories on Friday was the FHFA lawsuits against 17 financial firms for $200 billion. The Federal Housing Financial Authority is suing these firms over misrepresentation of the mortgages and mortgage related securities they sold during the housing boom. BAC is the largest target in this lawsuit with the FHFA aiming for more than $50 billion in damages. The stock gapped open lower on Friday and looks like it's headed for the next level of support near $7.00.

I cautioned readers a week ago that this BAC trade was like a lottery ticket. If we win, it should win big. If not, then we didn't have that much invested. Our investment is certainly smaller since Monday. I am suggesting that readers be ready to buy calls again on a dip or a bounce near the August lows near $6.00.

- Suggested Positions -
AUG 29, 2011 - entry price on BAC @ 8.10, option @ 0.57
symbol: BAC1221A10 2012 JAN $10 call - current bid/ask $ 0.35/ 0.38
No Stop on this position (at this time)

- or -

AUG 29, 2011 - entry price on BAC @ 8.10, option @ 1.50
symbol: BAC1319A10 2013 JAN $10 call - current bid/ask $ 1.11/ 1.15
No stop loss on this position (at this time)

09/03 no stop loss on this trade at this time.

Current Target: $12.00-to-$15.00
Current Stop loss: --.--
Play Entered on: 08/29/11
Originally listed in the New Plays 08/27/11


Baker Hughes Inc. - BHI - close: 58.27

update 09/03: BHI had a pretty good start to the week but the Thursday-Friday sell-off erased most of its gains. At this point I would prefer to wait for a dip or a bounce in the $55.00 area before considering new bullish positions.

Earlier Comments:
The plan was to keep our position size small. Our long-term targets are $67 and $74. I do want to caution traders that one of our biggest risks is probably news that BHI will make an acquisition. If BHI does purchase another company, then shares of BHI could gap open lower on us, which is another reason to keep our position size small.

- Suggested Positions -
AUG 29, 2011 - entry price on BHI @ 57.62, option @ 3.85
symbol: BHI1221A65 2012 JAN $65 call - current bid/ask $ 3.70/ 3.80

- or -

AUG 29, 2011 - entry price on BHI @ 57.62, option @ 7.00
symbol: BHI1319A70 2013 JAN $70 call - current bid/ask $ 6.90/ 7.15

Current Target: $67.00 and 74.00
Current Stop loss: 52.40
Play Entered on: 08/29/11
Originally listed in the New Plays 08/27/11


Cliffs Natural Resources - CLF - close: 78.49

update 09/03: CLF was an outperformer last week in spite of the -7.6% drop from its highs near $85.00 last week. The stock managed to end the week up +2.4%. The early rally last week stalled at resistance near $85.00 and its 50-dma and 200-dma. With that much overhead resistance I wasn't surprised to see CLF slow down.

I would expect shares to retest the $75.00 level support. Readers can use a new bounce from $75 as an entry point to buy calls but you may want to raise your stop loss a bit.

FYI: This past week there were some rumors that CLF was a takeover target.

Earlier Comments:
The plan was to use small positions to limit our risk. Our targets are $89.00 and $99.00.

- Suggested (SMALL) Positions -
Aug 18, 2011 - entry price on CLF @ 71.51, option @ 4.25
symbol: CLF1221A85 2012 JAN $85 call - current bid/ask $ 7.05/ 7.20

- or -

Aug 18, 2011 - entry price on CLF @ 71.51, option @ 10.50*
symbol: CLF1319A90 2013 JAN $90 call - current bid/ask $13.25/13.60

09/03 look for a dip toward $75.00
08/27 new stop loss @ 67.00
08/20 adjusted stop loss to $64.95.
08/18 *entry on 2013 Jan. $90 call is an estimate. Option did not trade on Thursday.

Current Target: $89.00 and 99.00
Current Stop loss: 67.00
Play Entered on: 08/15/11
Originally listed on the Watch List: 08/13/11


EMC Corp. - EMC - close: 21.43

update 09/03: EMC gave up less than 1% for the week. The rally stalled on Wednesday and Thursday and it does look like a short-term top near $23.00. I would wait for a dip (or a bounce) in the $21.00-20.00 zone as our next entry point to buy calls.

Earlier Comments:
The plan was to use small positions to limit our risk. Our first long-term target is $25.75. Our second target is $28.50. Aggressive traders could aim higher.

- Suggested (SMALL) Positions -
Aug 18, 2011 - entry price on EMC @ 20.25, option @ 2.20
symbol: EMC1221A20 2012 JAN $20 call - current bid/ask $ 2.75/ 2.80

- or -

Aug 18, 2011 - entry price on EMC @ 20.25, option @ 1.80
symbol: EMC1319A25 2013 JAN $25 call - current bid/ask $ 2.01/ 2.22

Current Target: $25.75 and 28.50
Current Stop loss: 18.90
Play Entered on: 08/18/11
Originally listed on the Watch List: 07/23/11


McDonalds Corp. - MCD - close: 89.09

update 09/03: MCD managed to set new all-time highs above $91.00 this past week. Yet even MCD could not avoid some profit taking. The stock broke down under $90.00 and its 10-dma, both of which were very short-term support. There is a good chance we could see MCD retreat back toward its rising 40 or 50-dma if the market averages plunge back toward their August lows. The simple 50-dma is currently at $86.50. I'd wait for a dip or a bounce near this area before launching positions.

Conservative traders might want to use a stop loss closer to the $84.50 area.

Earlier Comments:
The plan was to use small positions to limit our risk. Our first target is $99.00.

- Suggested (small) Positions -
Aug 15, 2011 - entry price on MCD @ 86.82, option @ 2.50
symbol: MCD1221A90 2012 JAN $90 call - current bid/ask $ 3.95/ 4.05

- or -

Aug 15, 2011 - entry price on MCD @ 86.82, option @ 3.90
symbol: MCD1319A95 2013 JAN $95 call - current bid/ask $ 5.20/ 5.35

09/03/11 look for a dip toward the 50-dma

Current Target: $99.00
Current Stop loss: 81.75
Play Entered on: 08/15/11
Originally listed in the New Plays 08/13/11


McDermott Int. Inc. - MDR - close: 13.58

update 09/03: MDR ended the week up +3% even after it saw a -6% pull back from its highs near $14.50. I do not see any changes from my prior comments. I'd prefer to wait for a new dip near $12.00 before launching new positions. Nimble traders may want to try buying calls on a bounce near $13.00 instead.

FYI: If we do see a new entry point, readers may want to buy the 2013 calls instead of the 2012s.

Earlier Comments:
The plan was to use small (half) positions to limit our risk and keep some cash in reserve in case we want to add to positions later. Our long-term targets are $19.50 and $23.50 but the $18 level and $22 level could prove to be tough resistance.

- Suggested (small) Positions -
Aug 15, 2011 - entry price on MDR @ 14.67, option @ 2.15
symbol: MDR1221A15 2012 JAN $15 call - current bid/ask $ 1.25/ 1.35

- or -

Aug 15, 2011 - entry price on MDR @ 14.67, option @ 1.15
symbol: MDR1221A17.5 2012 JAN $17.50 call - current bid/ask $ 0.55/ 0.65

08/20/11 adjust stop loss to $11.49

Current Target: $19.50, and $23.50
Current Stop loss: 11.49
Play Entered on: 08/15/11
Originally listed in the New Plays 08/13/11


Visa Inc. - V - close: 85.55

update 09/03: Visa lost 30 cents for the week. Were it not for Friday's $2.00 drop it would have been a different story. Visa is near potential support near $85.00 but I would not buy it now. Wait for a dip into the $83.00-82.00 zone before considering new long-term positions. Or better yet wait for a bounce from $81.00 as your entry point.

- Suggested (small) Positions -
Aug 18, 2011 - entry price on V @ 80.00, option @ 4.00
symbol: V1221A90 2012 JAN $90 call - current bid/ask $ 5.10/ 5.30

- or -

Aug 18, 2011 - entry price on V @ 80.00, option @ 7.75
symbol: V1319A100 2013 JAN $100 call - current bid/ask $ 8.05/ 8.55

08/27 new stop loss at $77.00

Current Target: $94.00, and $99.00
Current Stop loss: 77.00
Play Entered on: 08/18/11
Originally listed on the Watch List: 08/13/11


Walter Energy Inc. - WLT - close: 77.61

update 09/03: WLT's rebound failed at resistance near $85.00. Profit taking pulled it all the way back down to $74.57 on Friday morning. The $75.00 area has been support or resistance in the past several times over the last few weeks so this isn't too surprising. I warned readers last week that we might see WLT dip back toward the $75-70 zone. I am not convinced the sell-off is over.

Readers may want to wait and see if WLT can retest the bottom of this range in the $72-70 zone before considering new positions. I would definitely consider new positions on a dip near $70.00 with our stop at $69.00.

Earlier Comments:
WLT can be a volatile stock so I do consider this an aggressive, higher-risk trade. We have a wide stop loss and the option we're using is very out of the money. We definitely want to keep our position size small. We'll start this trade with a stop loss at $69.00. Our upside targets are $97.75 and $129.00 (a very long-term target).

- Suggested (small) Positions -
Aug 15, 2011 - entry price on WLT @ 82.82, option @ 6.65
symbol: WLT1221A100 2012 JAN $100 call - current bid/ask $ 4.30/ 4.50

- or -

Aug 15, 2011 - entry price on WLT @ 82.82, option @ 14.05
symbol: WLT1319A100 2013 JAN $100 call - current bid/ask $10.05/12.00

Current Target: $97.75 and $129.00
Current Stop loss: 69.00
Play Entered on: 08/15/11
Originally listed in the New Plays 08/13/11


Watch

Industrials and Fertilizer

by James Brown

Click here to email James Brown


New Watch List Entries

IR - Ingersoll-Rand

MOS - Mosaic Co.


Active Watch List Candidates

BMC - BMC Software

ESV - Ensco Plc.

EXXI - Energy XXI

LTD - Limited Brands Inc

KO - Coca-Cola Co

MMR - McMoRan Exploration

RRC - Range Resources


Dropped Watch List Entries

XOP was removed.



New Watch List Candidates:


Ingersoll-Rand - IR - close: 32.38

Company Info

The July-August sell-off in IR seems way overdone. The stock fell from $47 to $27.50 in less than two months (-41%). The decline is even worse from its May highs. The stock is starting to recover with a higher-high last week. Granted IR was very oversold so a big bounce isn't too surprising.

The company did miss earnings and guide lower back in July (you can see the gap down on July 21st) but at what point is that news priced in? I am suggesting we open long-term call positions on a dip at $30.00 with a stop loss at $26.95. The August low was $27.11. More conservative traders could wait for a dip closer to the $29-28 area instead as your entry point.

We do want to keep our position size small to limit our risk.

Buy-the-Dip trigger: $30.00

BUY the 2012 Jan $35 call (IR1221A35)

- or -

BUY the 2013 Jan $35 call (IR1319A35)

Chart of IR:

Originally listed on the Watch List: 09/03/11


Mosaic Co. - MOS - close: 70.00

Company Info

MOS is specialty chemical and fertilizer company. One enticing aspect about the fertilizer business is that food demand continues to grow every year. The U.S. and Europe might see an economic slow down but many third world countries are still growing. As their economies improve their population can buy more food. The long-term global prospects for the fertilizer business looks strong. Meanwhile short-term the group could be getting a boost by rising corn prices. The current corn crop could see yields significantly below expectations. While it's still going to be a record-breaking harvest demand for the seed is very high. Tight supplies should mean more demand for fertilizer.

MOS has rallied toward resistance in the $74-75 area. I am suggesting we buy calls if MOS hits $75.50 with a stop loss at $67.45. It's a wide stop but MOS can be a volatile stock. We'll use the $80/$85 calls.

FYI: Just in case MOS retreats lower then we'll be watching for a possible entry point on a dip in the $60-55 area instead (and we'll use lower option strikes).

Buy-the-breakout trigger: $75.50

BUY the 2012 Jan $80 call (MOS1221A80)

- or -

BUY the 2013 Jan $85 call (MOS1319A85)

Chart of MON:

Originally listed on the Watch List: 09/03/11


Active Watch List Candidates:



BMC Software - BMC- close: 38.92

update 09/03: The rebound in BMC reversed at resistance near $41.00. Shares look poised to retest its August lows. Aggressive traders may want to buy the dip near the $38.00-37.50 area. I am suggesting we wait and keep our entry point at $35.50.

If triggered at $35.50 we'll use a stop at $33.45. As an alternative readers may want to consider bullish positions if BMC can close above the $40.00 or $41.50 levels.

Buy-the-Dip trigger: $35.50

BUY the 2012 Jan $40 call (BMC1221A40)

- or -

BUY the 2013 Jan $40 call (BMC1319A40)

Originally listed on the Watch List: 08/20/11


Ensco Plc. - ESV - close: 47.14

update 09/03: It could be a while before ESV nears our current entry point. The stock's oversold bounce has reversed under resistance at the 50-dma. On a short-term basis the stock looks like it could dip toward support in the $45-44 area. I still would not buy it there, at least not yet. The plan is to buy calls on a dip at $40.50. If we are triggered at $40.50 we'll use a stop loss at $38.40. We do want to keep our position size small to limit our risk.

buy-the-dip at $40.50

BUY the 2012 Jan $45 call (ESV1221A45)

- or -

BUY the 2013 Jan $45 call (ESV1319A45)

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


Energy XXI - EXXI - close: 25.20

update 09/03: There is no change from my prior comments on EXXI. We're hoping for a dip back toward the August intraday lows. Nimble traders may want to buy a bounce from $22.00 if you see it. Right now our trigger to launch positions is at $21.50 with a stop at $19.45.

I do want to warn you that EXXI can be a volatile stock so keep your position size small.

FYI: EXXI does have 2013 January calls but the spreads are way too wide.

Buy-the-Dip trigger: $21.50

BUY the 2012 Jan $25 call (EXXI1221A25)

Originally listed on the Watch List: 08/27/11


Coca-Cola Co - KO - close: 69.74

update 09/03: Wow! I am honestly surprised that our trade on KO is not open yet. Last week I added a secondary entry point to buy call LEAPS if KO could close over $70.50. Shares have continued to show strength. KO hit a new intraday 52-week high of $71.10 on Thursday. Yet our condition to buy calls if KO closed over $70.50 was not met. The stock certainly came close. Shares closed at $70.45 on both Wednesday and Thursday.

Currently I am concerned with the market's steep sell-off the last couple of days. I'm removing our buy the close over $70.50 entry point. We will adjust our buy-the-dip entry point to $66.50 so it's just above the simple 200-dma. The stop loss will remain at $63.40.

Remember, this is a slow-moving stock. It's going to take months for KO to make significant headway but the trend is up. Our plan is to keep positions small to limit our risk.

Buy-the-Dip trigger: $66.50 - new trigger -

BUY the 2012 Jan. $70 call (KO1221A70)

- or -

BUY the 2013 Jan. $70 call (KO1319A70)

09/30 adjusting buy-the-dip trigger to $66.50
09/30 removing the secondary entry point
08/27 Adding a secondary entry point to buy $75 calls if KO can close over $70.50. stop loss at $66.40.

Originally listed on the Watch List: 08/13/11


Limited Brands, Inc. - LTD - close: 35.85

update 09/03: There is no change from my prior comments on LTD. The long-term trend is up but shares appear to be forming a huge bull-flag pattern. Right now shares just failed at the top of the flag. LTD could see a drop back toward the $32-30 zone. Right now we have a buy-the-dip trigger at $32.50 (stop at $29.45) but more conservative traders may want to use a trigger closer to the $30.50 area instead.

If we do not see a pull back in the next couple of weeks we will re-evaluate our entry point strategy.

Buy-the-Dip trigger: $32.50

BUY the 2012 Jan $35 call (LTD1221A35)

- or -

BUY the 2013 Jan $40 call (LTD1319A40)

Originally listed on the Watch List: 08/27/11


McMoRan Exploration Co. - MMR - close: 12.47

update 09/03: MMR is up over +5% for the week even after its pull back on Friday. Aggressive trades may want to consider buying a bounce near $12.00 or the $11.00 level. Currently our plan is to buy a dip at $10.25 with a stop at $9.40. If we do see MMR rebound and form a higher low then we'll re-evaluate our entry point strategy.

We want to keep our position size small.

Buy the dip at $10.25

BUY the 2012 Feb $12 call (MMR1218B12) -Februarys-

- or -

BUY the 2013 Jan $15 call (MMR1319A15)

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


Range Resources Corp. - RRC - close: 59.76

update 09/03: RRC was also showing relative strength and shares ended the week with a +6.4% gain. I am tempted to buy the bounce off Friday's low or even a dip near $60.00. However, the failed rally on Wednesday this past week could be a bearish double top. Given the stock's relative strength we will adjust our buy-the-dip trigger to $55.00 and our stop loss to $51.80, which is under the August low. If we do see RRC find support in the $60-57 area this week then we might re-evaluate our entry point again.

Buy-the-Dip trigger: $55.00 - new trigger -

BUY the 2012 Jan $60 call (RRC1221A60)

- or -

BUY the 2013 Jan $60 call (RRC1319A60)

Originally listed on the Watch List: 08/20/11


S&P Oil & Gas ETF - XOP - close: 51.06

update 09/03: Tonight I am removing XOP as a candidate. We can keep it on our radar screen but I'm a little concerned about energy stocks. There are exceptions. I'm fundamentally bullish on stocks like MMR and EXXI. Yet the XOP just produced another failed rally at resistance near $55.00. I might reconsider if we see the XOP rebound from support in the $46-45 area again.

Trade never opened.

Originally listed on the Watch List: 08/20/11