Option Investor
Newsletter

Daily Newsletter, Sunday, 9/25/2011

Table of Contents

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

Leaps Trader Commentary

Falling Into Fall

by James Brown

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Stocks are suffering with a multiple personality disorder. Two weeks ago stocks were up five days in a row with widespread gains. This past week stocks are down sharply four days in a row with a dead cat bounce on Friday. Financials, industrials, commodity-related stocks, and precious metals were all crushed this past week. The only real winners were bonds and the U.S. dollar. By the closing bell on Friday the S&P 500 was down -6.5%, the NASDAQ composite was off -5.3%, the small cap Russell 2000 index gave up -8.6% and the Dow Jones Transportation average had lost almost -10% for the week. It was the worst weekly performance for the market since October 2008 (almost three years).

What happened to the market? Essentially stocks crumbled under a storm of negative headlines and fears. Naturally Greece tops the list as investors continue to fret over a potential default. China was making headlines when they announced the third, consecutive monthly decline in its manufacturing output. Transports underperformed thanks to some bearish comments from FedEx (FDX) over their volumes. The Federal Reserve played their part. Wednesday was the conclusion of a two-day fed meeting and investors were expecting some sort of stimulus package. Unfortunately, the Fed only delivered a $400 billion "operation twist" of selling short-term bonds to buy long-term bonds. This had been expected so it was old news. Interest rates are already near record lows. Many analysts failed to see how putting more pressure on rates would help our stalled economy. Furthermore, Ben Bernanke's comments were not exactly inspiring, which suggested we're closer to a recession than previously believed.

Stocks began to sell-off in earnest on Wednesday following the Fed's announcement. The selling pressure picked up speed on Thursday when the Dow Industrial average was off more than -500 points intraday. Volume was huge on Thursday and down volume beat up volume by a margin of 50-to-1. Volatility spiked back toward its highs and is currently back above the 40 level. Big investors continue to pour money into the safety of bonds and the yield on the U.S. 10-year note hit a record low of 1.7% late this week. One surprise this week was the sell-off in gold. You would have thought that with stocks in sell-off mode that gold would be in rally mode. Instead gold was correcting. There were rumors that the CME would raise margin requirements on gold and precious metals. Gold fell more than -$100 intraday on Friday. Silver plunged and copper fell into a new bear market (-20% off its highs). Sure enough, after the closing bell on Friday the CME did announce new margin requirements, which would suggest the news had been leaked. Another contributing factor to last week's market-wide sell-off was analyst downgrades. Moody's was especially busy. On Tuesday Moody's downgraded Italy's debt, which isn't that surprising given Italy's economic woes. On Wednesday Moody's downgraded Bank of America (BAC), Citigroup (C) and Wells Fargo (WFC). Then on Friday Moody's downgraded eight Greek banks. What surprises me is that the Greek banks still had a rating that had room to be downgraded further.

Greece & Europe

Headlines out of Europe will continue to dominate the markets. This weekend the G20, the IMF, and the World Bank are all holding meetings to address the financial problems in Europe. Last week Germany was supposed to vote on changing the European Financial Stability Fund (EFSF) but it was postponed to this week. As the main economic engine for the EU region Germany's vote is critical for the EFSF. If the EFSF gets upgraded then Germany's bill for the rescue fund will increase from 123 billion euros to 211 billion. German Chancellor Angela Merkel was trying to drum up support claiming that a Greek default could not be permitted due to the unforeseen consequences and potential contagion to other struggling economies. In what will surely be another overhyped meeting the Greek Prime Minister, Mr. George Papandreou, will travel to the German capital on Tuesday to talk with Merkel.

Major Indices:

I am very concerned about the major U.S. indices. The sell-off this past week is a bearish breakdown on multiple levels. The S&P 500 has broken below its September lows. Plus, the plunge on Thursday looks like a breakout from the huge bear-flag pattern we've been discussing. This sets up for a drop toward the 1,000 level. It's not going to get there all at once but the path of least resistance is down. The selling managed to stall at support near the August lows but there was almost no volume on Friday's dead-cat bounce.

If the S&P 500 index can bounce from its August lows (again) then it might morph into a bullish double bottom pattern. However, the bottom of the bear-flag is now resistance. I would be concerned that any bounce is going to roll over under 1150-1160.

Bear Flag pattern on the S&P 500 index:

Weekly chart of the S&P 500 index:

The NASDAQ composite has broken one trendline of higher lows but it looks a little bit healthier than the S&P 500. Unfortunately, we still see a bear-flag consolidation pattern. While a bounce near its August lows is likely it may end up being a speed bump on the way down. Of course the breakdown hasn't happened yet but the larger trend is not showing any strength. Currently the bear-flag would be suggesting a drop toward the 2100 area.

Daily chart of the NASDAQ Composite index:

Weekly chart of the NASDAQ Composite index:

Small cap stocks were underperformers last week. That's not surprising since they are normally more volatile than the large cap stocks. Unfortunately the sell-off is a breakdown from the bear-flag pattern. That sell-off has stalled at support near the August lows. A breakdown under Thursday's low would suggest the $RUT has begun a new leg lower. The 600 level will probably offer some support but the flag pattern is forecasting a drop toward 550 or lower.

Daily chart of the Russell 2000 index

Weekly chart of the Russell 2000 index

We have a busy week of economic data. The main reports to watch are the Durable (goods) orders, Q2 GDP estimate, and the Chicago PMI. If these figures come in negative it will reinforce the recession worries. It's worth noting that these will probably take a back seat to what's happening in Europe.

- Monday, September 26 -
New Home Sales (August)

- Tuesday, September 27 -
Consumer Confidence (September)

- Wednesday, September 28 -
Durable (goods) orders (August)

- Thursday, September 29 -
Weekly Initial Jobless Claims
Q2 GDP estimate
Germany's vote on the EFSF

- Friday, September 30 -
Chicago PMI for September
- End of the third quarter -

Looking ahead I don't see a lot of changes. Friday is the end of the third quarter. It's possible the market could see some window dressing but I am concerned that investors are likely to sell into strength. In about two weeks the focus is going to change toward corporate earnings as Alcoa (AA) kicks off the Q3 earnings season on October 11th. An outbreak of positive earnings news could be just what this market needs to change the tone of trading. Unfortunately we won't know how earnings season is shaping up for another month. Given the trend of bearish economic data we could be facing negative corporate earnings numbers and guidance.

If you believe that stocks will hold their August lows and bounce then this is a good spot to buy some calls on the major indices. You might want to consider calls on the DIA, the SPY, or the IWM but I would use a tight stop under the August low or last week's low depending on which ETF you use. Alternatively, if you're expecting a breakdown, then consider short-term put options to capture the move lower. October options still have four weeks left until expiration. Traders also have a third choice and that's a market-neutral strategy like a straddle or a strangle on the major indices. Unfortunately, with volatility this high, buying options for a straddle or strangle could be very expensive but that doesn't mean the strategy can't work.

Overall I am very cautious on stocks. If we do break the August lows then we're looking at a bearish target of 1050 and 1,000 on the S&P 500 and probably 550 on the small cap Russell 2000 index.

- James


Portfolio

Portfolio Update

by James Brown

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Current Portfolio


Portfolio Comments:

The U.S. stock market just delivered one of its worst weekly performances since October 2008. The S&P 500 and DJIA lost -6.5%. The NASDAQ composite lost -5.3%. The small cap Russell 2000 index gave up -8.6%. The Dow Jones Transports fell almost -10%. Many of the commodity names were hammered even lower!

We saw several trades get stopped out. The pull back also hit some triggers on our watch list to buy the dip.

I would be very cautious on launching new positions. If the major indices breakdown under their August lows it sets up for a much bigger decline.

BAC, EMC, and V all have new stop losses.

Note: V did hit our first profit target.

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

What Is Your Time Frame?

by James Brown

Click here to email James Brown


- New Trades -

Hewlett-Packard - HPQ - close: 22.32

Company Info

It was a big week for HPQ. The company booted its CEO and replaced him with Meg Whitman, who had been very successful with EBAY. I strongly suspect that the stock is at or near a bottom. The stock is trading near old support/resistance dating back to the 2004-2005 time frame. I am going to list a couple of different entry points and stops depending on your time horizon. Our target for both is $29.50.

Longer-term Time Frame

I am suggesting investors buy the 2013 calls now and we'll use a stop loss at $19.70.

BUY the 2013 Jan $25 call (HPQ1319A25) current ask $3.60


Shorter-term Time Frame

I am suggesting readers wait for a dip to $20.25 and then buy the 2012 January $22.50 calls with a stop loss at $19.45.

Buy-the-Dip trigger: $20.25

BUY the 2012 Jan $22.50 call (HPQ1221A22.5) current ask $2.56

Chart of HPQ:

Originally listed in New Plays: 09/24/11



Play Updates

Worst Week in Almost 3 Years

by James Brown

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Editor's Note:

The stock market suffered one of its worst weeks in almost three years. We had five stocks hit our stop losses. One stock, Visa (V), hit our profit target.

If you think the stock market will bounce from its August lows, then this is a new entry point. If you believe we will see the market breakdown further then wait on new bullish positions and you may want to consider some put options to capture the next leg down.

-James


Closed Plays


BHI, CLF, IR, MDR, and WLT were closed.


Play Updates


Bank of America - BAC - close: 6.31

update 09/24: It was a ugly week for the stock market. Banks were big underperformers as investors worried about exposure to Europe. BAC suffered some bearish analyst comments and downgrades. The stock fell from the $7.00 area toward its August lows near $6.00. Last week I suggested readers wait for a dip near $6.00 as our next entry point. This is it!

I am suggesting new bullish positions now (see below) but we'll add a stop loss at $5.40. More aggressive traders may want to use a stop under $5.00. Bear in mind that a breakdown under $6.00 might signal a drop toward its 2009 lows in the $4.00-3.00 zone. You may want to use a tighter stop loss.

- Suggested Positions -
AUG 29, 2011 - entry price on BAC @ 8.10, option @ 0.57
symbol: BAC1221A10 2012 JAN $10 call - current bid/ask $ 0.13/ 0.15
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 $ 0.82/ 0.87
No stop loss on this position (at this time)


2nd Position, listed 09/24/11, opened on 09/26/11

SEP 26, 2011 - entry price on BAC @ -.--, option @ -.--
symbol: BAC1221A7.50 2012 JAN $7.50 call - current bid/ask $ 0.61/ 0.64

- or -

SEP 26, 2011 - entry price on BAC @ -.--, option @ -.--
symbol: BAC1319A10 2013 JAN $10 call - current bid/ask $ 0.82/ 0.87

09/24 adding 2nd position, stop loss at $5.40
09/03 no stop loss on this trade at this time.

Chart of BAC:

Current Target: $12.00-to-$15.00
Current Stop loss: 5.40
Play Entered on: 08/29/11
Originally listed in the New Plays 08/27/11


BMC Software - BMC- close: 38.85

update 09/24: BMC experienced a sharp pull back toward the bottom of its prior trading range and support near its August and September lows. We had plans to buy a dip at $40.25 but on September 22nd BMC gapped open lower at $39.74. Traders did buy the dip on Friday but I'm not convinced the pull back is over. If the stock market continues to drop then we should expect BMC to retest its August lows near $37.20. I am moving our stop loss down to $36.90.

I am hesitant to open new positions with the market perched preciously on the edge of support. Readers may want to jump in on a dip or a bounce near $37.50. Our targets are $46.50 and 49.75.

- Suggested Positions -
SEP 22, 2011 - entry price on BMC @ 39.74, option @ 2.05
symbol: BMC1221A45 2012 JAN $45 call - current bid/ask $ 1.25/ 1.70

- or -

SEP 22, 2011 - entry price on BMC @ 39.74, option @ 5.40
symbol: BMC1319A45 2013 JAN $45 call - current bid/ask $ 3.70/ 4.50

09/24 new stop loss @ 36.90
09/22 play opened at $39.74 (gap down)
09/17 adjusted entry point to buy the dip at $40.25, stop 37.40
09/17 adjusted option strikes to 2012 and 2013 Jan $45s.

Chart of BMC:

Current Target: $46.50, 49.75
Current Stop loss: 36.90
Play Entered on: 09/22/11
Originally listed on the Watch List: 08/20/11


Bristol Meyers Squibb - BMY - close: 30.89

update 09/24: BMY managed to post a gain for the week in spite of the widespread market losses. The stock tagged new multi-year highs on Wednesday at $31.78. Traders bought the dip at its simple 10-dma on Thursday's market sell-off. The low of $29.66 on Friday looks like a bad tick.

If the stock market breaks down under its August lows then BMY will likely be dragged lower as well. I would look for support in the $29-28 zone. If the stock market bounces from its August lows then readers may want to consider new positions in BMY on another bounce from the $30 level.

Earlier Comments:
BMY could have resistance in the $32.00-32.50 zone dating back to mid 2007. NOTE: BMY is not a very fast moving stock. We will need to be patient.

- Suggested Positions -
SEP 19, 2011 - entry price on BMY @ 30.53, option @ 1.20
symbol: BMY1319A35 2013 JAN $35 call - current bid/ask $ 1.42/ 1.51

09/16 Friday's close at $30.53 is our trigger to buy calls. Our entry will be Monday morning.

Current Target: $33.50 and 35.75
Current Stop loss: 27.75
Play Entered on: 09/19/11
Originally listed on the Watch List: 09/10/11


EMC Corp. - EMC - close: 20.62

update 09/24: It was a painful week for EMC. The broader market lost -6.5% yet EMC gave up -9.4%. Shares fell toward support near the August lows. Speaking of the August lows, I'm concerned that EMC might actually dip to $19.85 before rebounding. I am moving our stop loss from $19.80 to $19.49. I realize we just raised it to $19.80 a week ago but trading is more art than science and I'd hate to see EMC dip into the $19.75 area only to bounce back.

If you believe the market will hold the August lows then this is a new bullish entry point. If not, and you believe the market will breakdown to new lows then wait. EMC could drop toward the next level of support near $18.00 on further market weakness.

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 $ 2.18/ 2.25

- or -

Aug 18, 2011 - entry price on EMC @ 20.25, option @ 1.80
symbol: EMC1319A25 2013 JAN $25 call - current bid/ask $ 1.89/ 2.17

09/24 new stop loss @ 19.49
09/17 new stop loss @ 19.80

Chart of EMC:

Current Target: $25.75 and 28.50
Current Stop loss: 19.49
Play Entered on: 08/18/11
Originally listed on the Watch List: 07/23/11


Kraft Foods Inc. - KFT - close: 33.72

update 09/24: We had planned to buy calls on the dip at $33.50 but KFT gapped open lower on Thursday at $32.71. Shares quickly rebounded and pared its gains by the close on Thursday. Unfortunately the stock did not see much follow through on Friday. Technically this looks like a bounce near support at the rising 200-dma. We picked KFT because it's a defensive stock. I would probably look for a new dip near $32.50 or a close over $34.50 before considering new positions.

NOTE: KFT is a very slow moving stock. It will take months to make any progress. Once a position is open readers may want to turn these into calendar spreads (a.k.a. vertical spreads).

- Suggested (SMALL) Positions -
Sep 22, 2011 - entry price on KFT @ 32.71, option @ 2.35
symbol: KFT1319A35 2013 JAN $35 call - current bid/ask $ 2.42/ 2.55

Chart of KFT:

Current Target: $38.00
Current Stop loss: 31.75
Play Entered on: 09/22/11
Originally listed on the Watch List: 09/17/11


Coca-Cola Co - KO - close: 67.42

update 09/24: Our trade on KO is finally open. Shares saw a big gap down on Thursday. The stock market's widespread plunge on Thursday's session pushed KO to 66.62 intraday before shares started to bounce. Our buy-the-dip entry point was hit at $67.00. While the long-term trend for KO is still higher the short-term outlook is cloudy. The 50-dma and the top of the gap down could be resistance. If the stock market continues to break down then we could see KO drop toward the $65-64 zone.

Shares of KO do not move very fast. I would wait on launching new positions and we can re-evaluate next week.

Earlier comments:
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.

- Suggested Positions -
Sep 22, 2011 - entry price on KO @ 67.00, option @ 2.25
symbol: KO1221A70 2012 JAN $70 call - current bid/ask $ 2.24/ 2.32

- or -

Sep 22, 2011 - entry price on KO @ 67.00, option @ 3.00
symbol: KO1319A75 2013 JAN $75 call - current bid/ask $ 2.85/ 2.98

09/22/11 play opened at $67.00
09/17/11 stocks are showing strength. New entry point at $67.00, stop at $63.49
09/10/11 adjusted entry point to $64.50, stop loss to $61.45
09/03 adjusting buy-the-dip trigger to $66.50
09/03 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.

Chart of KO:

Current Target: $80.00
Current Stop loss: 63.49
Play Entered on: 09/24/11
Originally listed on the Watch List: 08/13/11


McDonalds Corp. - MCD - close: 87.37

update 09/24: It was a volatile week for MCD. Shares produced a bearish reversal pattern Monday-through Wednesday but traders bought the dip on Thursday near the stock's rising 100-dma. Last week I suggested readers wait for a bounce in the $86-85 area as a new entry point. We got that bounce on Friday but the rally stalled near MCD's 50-dma. I am a little hesitant to launch new bullish positions. If the S&P 500 breaks down under the 1100 level then the market could be headed much, much lower. I would not be surprised to see MCD test support near $80 if the S&P500 breaks down. More conservative traders might want to raise their stops toward the $84 area. Currently our stop is at $79.50.

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 $ 3.35/ 3.45

- or -

Aug 15, 2011 - entry price on MCD @ 86.82, option @ 3.90
symbol: MCD1319A95 2013 JAN $95 call - current bid/ask $ 5.05/ 5.25

09/10/11 adjusted stop loss down to $79.50
09/03/11 look for a dip toward the 50-dma

Current Target: $99.00
Current Stop loss: 79.50
Play Entered on: 08/15/11
Originally listed in the New Plays 08/13/11


NVIDIA Corp. - NVDA - close: 13.79

update 09/24: It was a painful week for stocks (one of the worst since 2008) and shares of NVDA underperformed with a -10.8% drop for the week versus -6.5% for the S&P 500. At its lowest levels on Thursday the stock was down -14.2% for the week. This pull back in NVDA has essentially filled the gap from September 7th. Aggressive traders could buy calls now. Personally, I would prefer to wait for a new close over $14.50 before considering new bullish positions.

- Suggested (small) Positions -
SEP 14, 2011 - entry price on NVDA @ 15.62, option @ 2.40
symbol: NVDA1221A15 2012 JAN $15 call - current bid/ask $ 1.46/ 1.51

- or -

SEP 14, 2011 - entry price on NVDA @ 15.62, option @ 4.25
symbol: NVDA1319A15 2013 JAN $15 call - current bid/ask $ 3.05/ 3.30

Current Target: $19.75
Current Stop loss: 12.25
Play Entered on: 09/15/11
Originally listed on the Watch List: 09/10/11


Visa Inc. - V - close: 90.08

update 09/24: Target achieved, but more on that in a moment. Visa fell less than a dollar for the week. Traders bought the dip on Thursday near its 50-dma. The stock outperformed on Friday with a +2% rally and a close over potential resistance at $90.00. On September 20th this stock rallied to $94.75. Our first target was hit at $94.50. The bid on the 2012 Jan $90 call was at $9.80 (+145.0%) and the bid on the 2013 Jan $100 call was at $11.10 (+43.2%). Two days later the stock was testing the $86 level thanks to the very sharp, market-wide plunge.

If you believe the market will hold its August lows then this might be a new entry point in Visa but if you buy calls now be sure to tighten your stop loss. Speaking of stops, we are moving our stop loss to $84.45. I'd rather get stopped out earlier and save some money to reconsider new positions on a dip near $80 and its 200-dma if the market breaks down further.

- Suggested (small) Positions -
Aug 18, 2011 - entry price on V @ 80.00, option @ 4.00
symbol: V1221A90 2012 JAN $90 call - current bid/ask $ 7.70/ 8.00

- or -

Aug 18, 2011 - entry price on V @ 80.00, option @ 7.75
symbol: V1319A100 2013 JAN $100 call - current bid/ask $10.85/11.45

09/24 new stop loss at $84.45
09/20 1st target hit at $94.50
bid 2012 Jan $90 call @ $9.80 (+145%)
bid 2013 Jan $100 call @ $11.10 (+43.2%)
09/17 new stop loss @ 81.45. Readers may want to take some profits here with the 2012 calls up +87.5%
08/27 new stop loss at $77.00

Chart of V:

Current Target: $94.50, and $99.00
Current Stop loss: 84.45
Play Entered on: 08/18/11
Originally listed on the Watch List: 08/13/11


CLOSED Plays


Baker Hughes Inc. - BHI - close: 49.61

update 09/24: Many of the commodity-related stocks were crushed this past week and the oil service stocks were no exception. BHI was hammered for a -16% loss last week as it broke down from its pennant-shaped consolidation pattern. Our stop loss would have been hit on September 22nd but BHI actually gapped open lower at $51.63. Our stop was $52.40. The play was closed immediately. Our plan was to keep our position size small to limit our risk.

- Suggested Positions -
AUG 29, 2011 - entry price on BHI @ 57.62, option @ 3.85
symbol: BHI1221A65 2012 JAN $65 call, exit $1.71 (-55.5%)

- or -

AUG 29, 2011 - entry price on BHI @ 57.62, option @ 7.00
symbol: BHI1319A70 2013 JAN $70 call, exit $4.35 (-37.8%)

09/22 stopped out on gap open lower at $51.63 (stop was 52.40)

Chart of BHI:

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: 57.84

update 09/24: CLF mines iron ore and coal. A sharp increase in worry over a global economic slow down plus news that two different coal miners lowered their guidance this past week produced a crushing blow for the sector. Shares of CLF just fell off a cliff with a drop of -29% from last Friday's close to Thursday's close. This Friday's +4.8% gain is an oversold/dead-cat bounce.

I warned readers a week ago if you were feeling cautious to lock in a gain. We were planning to raise the stop to $72.20 if CLF could close over $80.00 but it did not happen. Our stop loss was hit on September 21st at $67.00. The plan was to use small positions to limit our risk.

- Suggested (SMALL) Positions -
Aug 18, 2011 - entry price on CLF @ 71.51, option @ 4.25
symbol: CLF1221A85 2012 JAN $85 call exit $2.65 (-37.6%)

- or -

Aug 18, 2011 - entry price on CLF @ 71.51, option @ 10.50*
symbol: CLF1319A90 2013 JAN $90 call exit $7.25 (-30.9%)

09/21 stopped out at $67.00.
09/17 if CLF closes over $80.00 then move stop to $72.20
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.

Chart of CLF:

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


Ingersoll-Rand - IR - close: 31.00

update 09/24: Our new trade on IR did not last very long. The stock was on our watch list with a plan to buy the dip at $33.00 and use a stop loss at $31.00. Shares gapped open lower at $32.97 on September 21st. Unfortunately the very next day (Thursday) shares of IR gapped open lower again but this time at $30.53. With our stop at $31.00 the play was closed immediately. Readers may want to consider new bullish positions if we see IR dip and bounce from the $27.00 level.

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

- Suggested (SMALL) Positions -
Sep 21, 2011 - entry price on IR @ 32.97, option @ 2.50*
symbol: IR1221A35 2012 JAN $35 call exit $1.90 (-24.0%)

- or -

Sep 21, 2011 - entry price on IR @ 32.97, option @ 3.20
symbol: IR1319A40 2013 JAN $40 call exit $2.95 (- 7.8%)

09/22 play closed on gap down at $30.53, stop was 31.00
09/21 play opened at $32.97 on gap down
*option did not trade, this is an estimate
09/17 adjusted strategy to buy the dip at $33.00, stop loss @ 31.00, new option strikes as well

Chart of IR:

Current Target:
Current Stop loss: 31.00
Play Entered on: 09/21/11
Originally listed on the Watch List: 09/03/11


McDermott Int. Inc. - MDR - close: 11.17

update 09/24: Industrial names were hammered lower last week on growing concerns of a global economic slowdown. MDR fell -23% for the week and broke down to new 52-week lows. Shares hit our stop loss at $11.49 on September 22nd.

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.

- Suggested (small) Positions -
Aug 15, 2011 - entry price on MDR @ 14.67, option @ 2.15
symbol: MDR1221A15 2012 JAN $15 call Exit $0.40 (-81.3%)

- or -

Aug 15, 2011 - entry price on MDR @ 14.67, option @ 1.15
symbol: MDR1221A17.5 2012 JAN $17.50 call Exit $0.30*(-73.9%)

09/22/11 stopped out at $11.49
*option did not trade. this is an estimate
08/20/11 adjust stop loss to $11.49

Chart of MDR:

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


Walter Energy Inc. - WLT - close: 64.50

update 09/24: Ouch! It was an extremely ugly week for WLT. The stock fell from $82.19 on Friday a week ago to $61.00 at its intraday low on Thursday this past week. That's a -25.7% plunge. Just three weeks ago WLT was trading near $97, which makes this correction a -37% drop. The story behind WLT's big drop was an earnings warning. Management lowered their guidance for Q3 and Q4 of this year.

We had a stop loss at $73.50 but on September 20th it closed at $75.00 and September 21st the company warned and shares opened at $64.39, closing our trade immediately. You could argue that WLT has produced a bear-flag pattern and if that's true then the sell-off is not over. The bear flag would suggest a target near $40.00.

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.

- Suggested (small) Positions -
Aug 15, 2011 - entry price on WLT @ 82.82, option @ 6.65
symbol: WLT1221A100 2012 JAN $100 call Exit $2.15 (-67.6%)

- or -

Aug 15, 2011 - entry price on WLT @ 82.82, option @ 14.05
symbol: WLT1319A100 2013 JAN $100 call Exit $6.50 (-53.7%)

09/21/11 stopped out on gap down at $64.39
09/10/11 new stop loss @ 73.50

Chart of WLT:

Current Target: $97.75 and $129.00
Current Stop loss: 73.50
Play Entered on: 08/15/11
Originally listed in the New Plays 08/13/11


Watch

Healthcare & Retail

by James Brown

Click here to email James Brown

Editor's Note:

In addition to tonight's new watch list candidates, these stocks caught my eye: CROX, TDC, RL, ALXN

CROX - look for a breakout past $29.00

TDC - look for a rally past resistance at $55.00

RL - shares look like a buy right now but the options are very, very expensive.

ALXN - I don't want to chase it here. Wait for a dip, either near $60 or near the $57.50 area.

- James



New Watch List Entries

AGN - Allergan

PSMT - PriceSmart

TJX - TJX Cos. Inc.


Active Watch List Candidates

HSY - Hershey Co

LTD - Limited Brands Inc

LVS - Las Vegas Sands Corp

ROST - Ross Stores

RRC - Range Resources

VMW - VMware, Inc.


Dropped Watch List Entries

BMC, IR, KFT, and KO all jumped to the play list last week. MOS was removed as a candidate.



New Watch List Candidates:


Allergan Inc. - AGN - close: 82.12

Company Info

AGN is a healthcare stock. Traders bought the dip near its 50-dma last week. Friday's bounce puts it less than four points away from a new all-time high. I am suggesting we open bullish positions if AGN can close over $85.50. If triggered we'll use a stop loss at $79.45. Our long-term target is $99.00.

NOTE: Option spreads are wide for these LEAPS. We want to keep our position size pretty small to limit our risk.

Wait for a close over $85.50

BUY the 2013 Jan $100 call (AGN1319A100)

Chart of AGN:

Originally listed on the Watch List: 09/24/11


PriceSmart Inc. - PSMT - close: 68.28

Company Info

PSMT has been outperforming the market for weeks. Shares finally succumbed to some profit taking this past week. If the pull back continues we want to be ready to buy the dip at $61.00. If triggered at $61.00 we'll use a stop loss at $57.75. Our long-term targets are $74.00 and $84.00 but we're only using the 2012 January calls so $84 might be a bit optimistic.

Buy-the-Dip trigger: $61.00

BUY the 2012 Jan $70 call (PSMT1221A70)

Chart of PSMT:

Originally listed on the Watch List: 09/24/11


TJX Cos. Inc. - TJX - close: 56.57

Company Info

If the S&P 500 index looked healthier I would seriously consider buying calls on TJ Maxx right now. Unfortunately, the market is at support and it could go either way. If stocks break down further then we could see TJX retest support near its rising 200-dma. Should that happen then we want to be ready.

I am suggesting a buy-the-dip trigger at $52.00 with a stop loss at $49.40.

Buy-the-Dip trigger: $52.00

BUY the 2013 Jan $60 call (TJX1319A60)

- or -

BUY the 2014 Jan $60 call (TJX1418a60)

Chart of TJX:

Originally listed on the Watch List: 09/24/11


Active Watch List Candidates:



Hershey Co. - HSY - close: 59.08

update 09/24: HSY weathered the week's volatility pretty well. Traders bought the dip near $57.00 and Friday saw HSY outperform the major indices. Our plan is unchanged. We want to wait for a close over resistance at $60.00 and then initiate positions. We'll start with a stop loss at $55.75.

trigger: A close over $60.00

BUY the 2012 Jan $65 call (HSY1221A65)

- or -

BUY the 2013 Jan $65 call (HSY1319A65)

Originally listed on the Watch List: 09/17/11


Limited Brands, Inc. - LTD - close: 40.37

update 09/24: LTD managed to end the week with a gain. Traders bought the dip on Thursday at $38.00 near its 100-dma. If you think the major indices will hold their August lows then this is an entry point but I would use a tight stop loss. I am concerned that the sell-off is not over yet. We will adjust our entry point again and move the buy-the-dip trigger back down to $35.50. This will allow us to buy a dip near technical support at the 200-dma. If triggered we'll use a stop loss at $31.35.

Buy-the-Dip trigger: $35.50 *new trigger*

BUY the 2013 Jan $40 call (LTD1319A40)

09/24/11 new trigger @ 35.50, updated 2013 option strike
09/17/11 new trigger @ 37.50, updated option strikes.

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


Las Vegas Sands - LVS - close: 44.38

update 09/24: LVS flirted with a breakout over $50.00 but it never closed over $50.00. Thus our trade never opened. The market's widespread sell-off pulled LVS back down toward its 200-dma and its September lows near $44. We are not changing our strategy. We'll continue to wait for a close over $50.00. If triggered we'll use a stop loss at $44.75. Our first target is $59.00. FYI: The Point & Figure chart is bullish with a $60 target.

trigger: Close Over $50.00

BUY the 2013 Jan $60 call (LVS1319A60)

Originally listed on the Watch List: 09/17/11


Mosaic Co. - MOS - close: 57.70

update 09/24: Congratulations if you bought the short-term puts. MOS delivered a terrible week with five down days in a row. The stock collapsed from $70 to hit $56.52 on Friday morning. Last week I suggested nimble traders buy short-term puts on a drop under $68.00. If you did buy puts, I'd take profits now. The August lows could hold.

Normally news that a stock is getting added to the S&P 500 index is bullish. Yet MOS did not see a very positive reaction. It was announced on Thursday evening that MOS would be added to the index, which explains the massive volume on Friday.

Previously I suggested that we'd look for an alternative entry point on a dip into the $60.00-55.00 zone. Well the dip is here but I'm not that enthusiastic about buying calls. The company pre-announced its earnings results on Friday morning and the results were disappointing, which explains the lack of a bounce on the S&P news. The combination of negative earnings plus a stock market clinging to support is not encouraging.

I am going to remove MOS as a candidate tonight. Nimble traders might want to consider buying a dip or a bounce near $55.00 and just try and use a tight stop loss.

Buy-the-breakout trigger: $75.50

Trade Never Opened!

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


Ross Stores Inc. - ROST - close: 79.53

update 09/24: Hmm... ROST held up pretty well last week. On a short-term basis it looks like a buy. Traders bought the dip twice on Thursday near $77.25. Nimble traders could buy calls here with a stop loss near $77.00 or under $76.00. Yet longer-term I'm more cautious on an entry point. The market looks vulnerable. The simple 200-dma is near $73.00. I am adjusting our trigger again. We'll move the buy-the-dip trigger down to $73.00 and move our stop loss down to $69.50. More aggressive traders will want their stop under the August low instead.

Buy-the-Dip trigger: $73.00 *new trigger*

BUY the 2013 Jan $85 call (ROST1319A85)

09/24/11 new trigger at $73.00, stop 69.50
09/17/11 new trigger at $76.50, stop @ 71.40, new strikes.

Originally listed on the Watch List: 09/10/11


Range Resources Corp. - RRC - close: 58.53

update 09/24: Wow! It was a very volatile week for RRC. Monday saw a spike over $70 on takeover speculation. Wednesday saw another spike, this time past $77 on takeover speculation. Yet Friday the stock collapsed on legal troubles brewing in the state of Pennsylvania over the Marcellus shale formation.

The low on Friday was $57.77. Given the relative weakness on Friday (-11.5%) I am adjusting our entry point. We will move the buy-the-dip entry point down to $52.50 and adjust our stop loss to $49.40. More aggressive traders may want to buy a dip near $55.00 instead.

Buy-the-Dip trigger: $52.50 *new trigger*

BUY the 2013 Jan $60 call (RRC1319A60) *new strike

09/24/11 new trigger at $52.50, stop 49.40
09/17/11 new trigger at $57.00, stop 53.45

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


VMware, Inc. - VMW - close: 85.60

update 09/24: Last week's drop under the 200-dma might be considered a bearish breakdown for VMW. Nimble traders might want to consider buying dips near the August lows around $77.00. At the moment, we are going to leave our entry point unchanged at $96.00. with a stop loss at $89.00. I do consider this an aggressive, higher-risk trade. The $100 level has been resistance in the past and could be resistance again. If we are triggered at $96.00 we want to keep our position size small. Our target is $119.50. NOTE: That's a lot of money to buy the 2013s. You may want to stick with the 2012s instead.

Breakout trigger: $96.00 (Small Positions)

BUY the 2013 $110 call (VMW1319A110)

Originally listed on the Watch List: 09/17/11