Option Investor
Newsletter

Daily Newsletter, Monday, 10/10/2011

Table of Contents

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

Leaps Trader Commentary

Stocks Bounce Big But Still Look Fragile

by James Brown

Click here to email James Brown

Bear trap. Bullish reversal. Short squeeze. Bear-market rally. Whatever you want to call it, the action in stocks last week was pretty volatile. The major indices reversed from a significant breakdown under support and new 52-week lows to close positive on the week. The S&P 500 rebounded from 1074 at Tuesday's low to 1171 by Friday morning. That's a +9% bounce in less than a week. The small cap Russell 2000 index bounced from 601 on Tuesday to almost 676 on Friday morning (+12.4%). There are plenty of stocks that are up more than +10% from their Tuesday lows. Yet in spite of the rebound the trend is still a bearish one of lower lows and lower highs.

Bob Pisani, on CNBC, said this was the first time the stock market had closed positive two weeks in a row in the last three months. Investors digested a number of lackluster economic reports. Friday's jobs report was better than expected. Yet the focus remains on Europe. Europe is driving this market. It's no surprise that investors were doing a little profit taking on Friday after Moody's and Fitch issued new credit downgrades. More on that in a bit. Sadly, in other news, this past week co-founder of Apple Inc. (AAPL), Steve Jobs, passed away. Many consider him a true icon and technology visionary who changed the world.

Stocks stumbled out of the Q4 gate with Monday's decline and breakdown. It felt like a bear market with stocks ignoring good news and bankruptcy rumors swirling. Monday's rumor target was American Airlines (AMR) and shares fell -33% on rumors the company was going to file for bankruptcy protection. AMR denied the story. The U.S. ISM data for September was better than expected at 51.6 when economists were expecting a drop from 50.6 to 50.5. Numbers above 50.0 indicate growth and you can see how close we are to dipping into negative territory. Meanwhile PMI economic numbers from France and Germany were bearish.

Tuesday is when the magic happened. Or should I saw short squeeze. Officially the S&P 500 fell into bear market territory with a drop under 1,090 on Tuesday. Federal Reserve Chairman Ben Bernanke's comments to the Joint Economic Committee on that the Fed was still ready to take necessary action to strengthen the economy had very little impact on stocks. Finally, late in the day stocks were firmly in the red when the story broke that Europe was planning to recapitalize their major banks to protect them from a Greek debt default. The euro reversed higher and the dollar plunged on this news. The S&P 500 had been rolling over and was headed back toward its Tuesday morning lows. When this story broke the short covering began in earnest. This index rallied from 1080 to 1125 in less than an hour (+4%).

Wednesday and Thursday saw the oversold bounce in stocks continue. The U.S. ISM services data came in better than expected at 53.0. The retail sector's September same-store sales data was generally better than expected, which suggested the U.S. consumer is still hanging in there. Meanwhile in Europe the rush to prop up the financial system continued. The Governor of the Bank of England, Sir Mervyn King, made headlines with his statement that the region was facing its worst financial crisis since the 1930s if not the worst crisis ever. The BoE announced they were increasing their 200 billion pound quantitative easing program to 275 billion pounds. Across the channel the European Central Bank (ECB) left interest rates unchanged.

The tone of trading changed a bit on Friday. Investors were naturally worried about headline risk over the weekend. Friday morning Moody's downgraded several British and Portuguese banks. Yet here in the U.S. the news was positive with a better than expected nonfarm payroll (jobs) report. The rally on the jobs data didn't last and investors began to sell into strength. After a massive bounce from Tuesday's lows traders wanted to lock in gains before the weekend. The selling intensified on Friday afternoon after Fitch downgraded credit ratings for the countries of Italy and Spain. Financial stocks led the decline with the BKX banking index down -4.3% on Friday.

Overall the pivotal event for the week was an awakening in the Eurozone that their banks did need to be recapitalized and that a Greek default was virtually unavoidable. At least that was the general theme and a concerted effort by the major EU players on saving the banks fueled the stock market gains. Now we just need to see some follow through on these bank recapitalization plans.

Europe & Greece

Looking a little bit deeper into Europe and Greece we are definitely seeing some movement by regulators. We've talked about it before. Europe seems to be having their Lehman Brothers style of meltdown where the banks don't trust each other and the definitely not lending to each other. One of the big headlines for the week was Dexia, a large Dutch bank. Both Belgium and France came together to bailout Dexia for the second time in three years to prevent the financial giant from collapsing.

We have seen two different stress tests on the European banks in the last couple of years. Both times the results came back positive with passing grades with no concerns that the banks need to recapitalize. Almost no one believed these tests were accurate but the party line was, "EU banks are fine. There is no need to worry." The markets knew better. Finally we're hearing EU leaders admit that yes, there is a problem. As you already know, the first step to solving the problem is admitting you have one. We have been writing about finance minister meetings and summits on solving the EU debt crisis for months. Yet this past week it seems the stock market finally believes European leaders will actually do something about it. At least that's the tone or the message equity investors are hearing.

It's also no surprise that Fitch downgraded Italy's and Spain's credit ratings. The question is why did they take so long. We've talked about the sovereign credit downgrades before. They're nothing new and we will likely see more as this drama unfolds. Fitch is keeping both on credit watch negative for the possibility of new downgrades in the future (again, no surprise here). One event that could really cause some market volatility would be a credit downgrade for France or Germany. These are the two biggest economic engines for the EU. They're also assuming the biggest responsibility for any bailout funds. A credit downgrade for either of these two would definitely raise concerns across the region. Speaking of which many analysts are expecting Europe to see a recession (or two) in the next several months and for some of the struggling countries, it could be borderline depression level business activity thanks to all the austerity measures.

German chancellor Angela Merkel and French President Sarkozy met together in Berlin for their eight summit in less than two years. These two are trying come together and present a united front before EU leaders meet on October 13th and the G20 meets later this month. If you recall Germany is taking a harder stance on Greece and would rather let them default but France, whose banks own a lot of Greek debt, wants to save Greece somehow. Their meeting was Sunday. The headlines on Sunday night said Merkel and Sarkozy have agreed to an end of October deadline for some sort of "comprehensive" rescue plan to stabilize the Eurozone (source: Financial Times). These two leaders did not offer a lot of details. The lack of details could send stocks lower on Monday, but Merkel was quoted saying, "We are determined to do whatever is necessary for the recapitalization of our banks". If market participants choose to focus on the "whatever it takes" comment, then stocks could rally.

It is worth remembering that EU leaders are meeting on October 13th to decide if they will release the next tranche of bailout funds to Greece (about 8 billion euros). Without this loan it was expected that Greece would be bankrupt by October 17th but now it looks like Greece can make it a few more weeks and wouldn't run out of money until mid November. There is still a growing speculation that Greece will default within the next year and probably before the end of this year. Some are expecting Greece could default in the next four or five weeks. It could be a race. Will the new €440 billion ESFS fund get approved by all the Eurozone members before Greece defaults? Will it matter? Some analysts are suggesting that the EU will need €2 trillion in rescue funds before this sovereign debt debacle is all over.

Jobs Report:

Before we talk about the major indices let's go over the jobs report quickly. Economists were expecting the headline job number to be +60,000 in September. The nonfarm payroll report came in at +103,000. That's 43K better than expected, right? Unfortunately we have to delete about 45,000 jobs from striking Verizon employees going back to work. Thus September's report was pretty much in line with expectations. Private payrolls rose +137,000 but the government continues to cut jobs. The real surprise on Friday was the revisions to the prior jobs report. We were expecting the August jobs report, which came in at zero, to be revised lower. Instead the August report was revised higher to +57,000. July's was revised higher from +85K to +127K. The U.S. really needs a minimum of +150,000 a month just to breakeven with our population growth. We're not there yet but the trend seems to be improving, which should ease some of the recession fears for the U.S.

Major Indices:

The S&P 500 dipped into bear-market territory under the 1,090 level only to reverse higher. I've said it before. Bear-market rallies tend to be very fast and sharp. These bear-market rallies seduce investors back into the market only to roll over again. It is certainly possible that last week was the bottom but I'm not convinced. The big bounce stalled at the trendline of lower highs. The larger trend is still down. I don't think we'll know if the market has bottomed yet until we see a couple of weeks of Q3 earnings. Plus, we'll need to see more from Europe and how well they accomplish their plans to recapitalize the banks. If Europe stumbles in their rescue plans then equities can easily reverse lower.

The S&P 500 has short-term resistance in the 1180 area near its simple 50-dma. Beyond that there is resistance near 1200 and then near 1230. If stocks do pull back we can probably look for short-term, temporary support near 1120 and 1100 again.

Bear Flag pattern on the S&P 500 index:

The NASDAQ composite broke down under its August lows on Tuesday morning but rallied off the 2300 level. The rebound carried back to 2500 and its 50-dma before finally seeing some profit taking. Is this just an oversold bounce and bear market rally? Or has the NASDAQ seen a bullish double bottom in the 2350-2300 zone? We really won't know these answers on Monday. Short-term the NASDAQ looks poised for more profit taking.

Looking at an intraday chart you can see a mini double bottom near 2300 on Tuesday and a short-term double top near 2500 on Friday. A normal 38.2% Fibonacci retracement would mean a dip back to 2430. On a short-term basis I would wait for a new bounce in the 2430-2400 region before considering new bullish positions. Bigger picture you can still argue the trend is down. If the NASDAQ does roll over the bear-flag pattern is still in play. The flag pattern would suggest a multi-week drop toward the 2100 area. This would line up with the weekly chart's support near 2100.

Daily chart of the NASDAQ Composite index:

The small cap stocks continue to be very volatile. The Russell 2000 index experienced a big breakdown last Monday. Tuesday's turnaround produced a bullish engulfing candlestick reversal pattern. Unfortunately Friday's session produced a bearish engulfing candlestick reversal pattern. From Tuesday's low to Friday's high the $RUT rallied about 75 points or (+12%). The $RUT remains in bear-market territory, down -24% from its 2011 highs. I would remain pretty cautious on the small caps until we see the $RUT close above its 50-dma.

Daily chart of the Russell 2000 index

Intraday chart of the Russell 2000 index

The headlines in Europe continue to fuel volatility in the banking stocks. The sector hit new two-year lows early last week. Then when stocks reversed the financials experienced a big bounce yet it stalled at resistance. It certainly looks like a bear-market rally. Nimble traders could use this action as a new entry point for short-term bearish positions and just put a stop loss above last week's high. You can see the trend on the XLF and BKX charts below.

Intraday chart of the XLF financial ETF:

Intraday chart of the BKX banking index:

We're also keeping an eye on the Dow Jones Industrial Average (DJIA) and the Dow Jones Transportation average. The DJIA witnessed a huge bounce from 10,400 to 11,200. Unfortunately for the bulls the 11,200 area is both resistance at the top of its bearish channel and its technical resistance near the 50-dma (not shown on the chart below). The Dow Transports are showing a similar trend of lower highs and lower lows.

Intraday chart of the Dow Jones Industrials

Intraday chart of the Dow Jones Transportation Index

Looking at the economic calendar we have a quiet week. The bond market is closed on Monday for Columbus Day. Monday will also be the first day of trading for the Chinese markets after a weeklong holiday. The FOMC minutes from the last meeting come out on Tuesday. The 13th is an EU meeting on Greece. Then on Friday we'll see import/export prices, business inventories, and the first look at October's Michigan Sentiment numbers.

The biggest event, other than the EU meeting, is probably the beginning of Q3 earnings. Dow-component Alcoa (AA) starts the season with their report on Tuesday. The big reports this week are J.P.Morgan Chase (JPM) and Google (GOOG) on Thursday.

- Monday, October 10 -
Bond market closed for holiday.
Equity markets are open

- Tuesday, October 11 -
FOMC minutes
AA's earnings

- Thursday, October 13 -
Weekly Initial Jobless Claims
EU meeting on Greece
JPM and GOOG report Q3 earnings

- Friday, October 14 -
Business inventories for August
Import/Export prices for September
Michigan Sentiment for October

The beginning of Q3 earnings this coming week will be a nice distraction from the market's focus on Europe. Unfortunately, as we witnessed with most of the economic data, the news does not matter unless it's about Europe. This will still be a pivotal earnings report. Investors want to know if business slowed down in the third quarter and what corporate execs are seeing as they look forward to the fourth quarter and 2012. Currently the bullish camp is arguing that stocks are cheap on a valuation basis. We need to see strong earnings to support that idea otherwise stocks are going to get even cheaper if investors sell the news.

I remain very cautious on the stock market. The S&P 500 did hit bear market territory and bounce. The rebound does have the characteristics of a typical bear-market rally. The larger trend is still negative with lower lows and lower highs. The focus in Europe to recapitalize the banks is very encouraging but it should have been done a couple of years ago. This process was messy in the U.S. How much worse is saving the banks going to be with the various EuroZone members all squabbling over the details?

There are analysts that believe last week will be the lows for the year and that bigger picture we're looking at a bullish entry point. Traditionally the fourth quarter is normally a bullish time for stocks. If corporate earnings guidance is positive then it could keep the rally alive. However there are plenty of analysts and traders who strongly believe we will either retest the lows or make new lows before the end of the year. There are concerns that Wall Street's Q3 earnings estimates are still too high, which sets up for a disappointment.

The drama over Greece is not over yet but we definitely seem to be getting closer to an "end" whatever that might be. Although I suspect the default is still a few weeks away. When that happens we should expect a knee jerk reaction lower in stocks and a spike in the bond market. The euro will drop and the dollar will rally. The question will be, given all the preparation in anticipation of a default, how quickly will investors buy the Greece-default dip? We can't answer that today because we don't know yet the ripple effects of such an event.

Looking back at the headlines for the week the most powerful one was not Europe's plans to recapitalize their banks. It was the death of Steve Jobs. The man was far from perfect but he did have some keen insights into both business and life. The New York Times published this as part of their tribute to Jobs:

"Steve [Jobs] made choices," Dr. Ornish said. "I once asked him if he was glad that he had kids, and he said, 'It's 10,000 times better than anything I've ever done.' "

My thoughts are don't forget why you're working so hard. Make sure you take time to enjoy your family and friends. When we are on our death bed, we are not going to wish we had worked more. We're going to wish we had more positive memories of those important to us. We are going to want to look back and remember a life well lived.

- James


Portfolio

Portfolio Update

by James Brown

Click here to email James Brown


Current Portfolio


Portfolio Comments:

Last week started off strong for the bears but the market reversed sharply on Tuesday. Equities experienced a very widespread bounce. Unfortunately the Monday-Tuesday weakness was enough to hit stop losses on several trades.

We saw KO, MCD, NVDA, and V all get stopped out early in the week.

IWM and IYT, both bearish trades, were triggered but IYT has been stopped out on the big bounce.

BMC plunged without warning on Friday and hit our stop loss.

I've updated the stop loss for BMY, EMC, HPQ and IWM.

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

A Schizophrenic Market

by James Brown

Click here to email James Brown

Editor's Note:

We are facing a schizophrenic market. Every other week we are rotating between extreme pessimism and euphoria, between massive drops and huge rebounds. I really do not want to sound like a broken record but bear-market rallies tend to be very fast and sharp. Even though the market is up about +10% from its Tuesday low the overall trend is still a bearish one of lower highs and lower lows.

I am not convinced we've hit the bottom for stocks. Yet the action in Europe with EU leaders, including Germany's Merkel and France's Sarkozy, on recapitalizing the banks is very positive for the market. So far it's all just talk until we actually see a plan come together. This week could be rocky if the EU does not approve the next loan for Greece. Everyone is expecting Greece to default so they might decide to stop throwing good money after bad. It does seem like the default time horizon for Greece has sped up significantly. Instead of a default in the next year many are wondering if it will be in the next month.

The extreme market volatility makes it very tough to trade. I would hesitate to chase stocks after a +10% bounce. I would also hesitate to launch new bullish positions with the market paused near downtrend resistance. Thus we are not adding any new long-term trades tonight.

-James


Play Updates

Bouncing from the Bear

by James Brown

Click here to email James Brown

Editor's Note:

Stocks just experienced an extremely volatile week. The breakdown back on Monday and Tuesday morning hit some of our stop losses.

-James


Closed Plays


BMC IYT, KO, MCD, NVDA, and V were all closed.


Play Updates


Bank of America - BAC - close: 5.90

update 10/08: Another rocky week for the financials saw BAC plunge to $5.13 on Tuesday morning before bouncing back to $6.33 on Friday morning. That's a -16% drop from the prior Friday's close to its low on Tuesday and a +23.3% bounce from Tuesday's low to Friday's morning spike. Unfortunately for the bulls this stock is rolling over under its bearish trendline of lower highs.

Our September 26th position had a stop loss at $5.75. These were closed on October 3rd. The 2012 January $7.50 call at $0.48 and the 2013 January $10 call at $0.74.

I am not suggesting new positions at this time. We'll wait to see if share retest the $5.00 area or close above $6.50 before considering new positions.

- Suggested Positions -
AUG 29, 2011 - entry price on BAC @ 8.10, option @ 0.57
symbol: BAC1221A10 2012 JAN $10 call - current bid/ask $ 0.08/ 0.10
(no stop loss on this position)

- or -

AUG 29, 2011 - entry price on BAC @ 8.10, option @ 1.50
symbol: BAC1319A10 2013 JAN $10 call - current bid/ask $ 0.73/ 0.78
(No stop loss on this position)


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

SEP 26, 2011 - entry price on BAC @ 6.48, option @ 0.66
symbol: BAC1221A7.50 2012 JAN $7.50 call - Exit $0.48 (-27.2%)
Stop loss @ 5.75

- or -

SEP 26, 2011 - entry price on BAC @ 6.48, option @ 1.00
symbol: BAC1319A10 2013 JAN $10 call - Exit $0.74 (-26%)
Stop loss @ 5.75

10/03/11 Sept. 26th position stopped out at $5.75.
2012 Jan. $7.50 call @ 0.48 (-27.2%)
2013 Jan. $10 call @ 0.74 (-26%)
10/01 raising our stop loss on the Sep. 26th position to $5.75
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: see details above
Play Entered on: 08/29/11
Originally listed in the New Plays 08/27/11


Bristol Meyers Squibb - BMY - close: 32.38

update 10/08: BMY continues to show relative strength. The stock is up a dollar for the week and broke out to new multi-year highs. While the trend is positive I would not chase it here. Investors could wait for a dip or a bounce near $30 before considering new positions. Please note our new stop loss at $29.40.

We have two targets. Our first target is $33.50.

Earlier Comments:
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 $ 2.26/ 2.36

10/08/11 new stop loss @ 29.40
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: 29.40
Play Entered on: 09/19/11
Originally listed on the Watch List: 09/10/11


EMC Corp. - EMC - close: 22.39

update 10/08: It was a big week for EMC. Traders bought the dip near support at $20.00 again. The market's widespread bounce lifted EMC to $22.85 on Friday morning. That's a +14% bounce. The $23.00 level has been resistance in the past few weeks and EMC pared its gains by the closing bell. Essentially the stock is at the top of its trading range. I am not suggesting new positions at this time. Please note we are raising our stop loss to $19.85.

NOTE: If you're holding the 2012 Jan. calls then you may want to take some profits now. Our 2012 Jan. $20 call is up +50%.

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 $ 3.30/ 3.40

- or -

Aug 18, 2011 - entry price on EMC @ 20.25, option @ 1.80
symbol: EMC1319A25 2013 JAN $25 call - current bid/ask $ 2.55/ 2.70

10/08/11 new stop loss @ 19.85
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: 19.85
Play Entered on: 08/18/11
Originally listed on the Watch List: 07/23/11


Hewlett-Packard - HPQ - close: 24.88

update 10/08: HPQ was an outperformer last week. Traders bought the dip near $22 and the stock rallied to a new four-week high and closed up +10% for the week. If you're looking for a new entry point I would consider buying a bounce in the $24.00-23.00 zone.

Please note that we're updating our stop losses to $21.40.

- Suggested (SMALL) Positions -
Short(er)-Term Trade
Sep 26, 2011 - entry price on HPQ @ 22.59, option @ 2.69
symbol: HPQ1221A22.5 2012 JAN $22.50 call - current bid/ask $ 4.15/ 4.25
Stop Loss @ 21.40

- or -

Longer-term Trade
Sep 26, 2011 - entry price on HPQ @ 22.59, option @ 3.75
symbol: HPQ1319A25 2013 JAN $25 call - current bid/ask $ 5.00/ 5.20
Stop Loss @ 21.40

10/08/11 new stop loss (both positions) at $21.40

Current Target: $29.50
Play Entered on: 09/26/11
Originally listed in New Plays: 09/24/11


iShares Russell 2000 ETF - IWM - close: 65.50

update 10/08: Our new bearish play on the IWM is not panning out as expected. We did see the breakdown last Monday. The plan was to buy calls the day after the IWM closed under $63.00. Shares closed at $60.99 on Monday and opened at $60.32 on Tuesday morning. We pretty much bought our puts at the bottom of the week. The very sharp oversold bounce was unexpected. The close back above what should have been resistance near $64 and $65 was also very unexpected. Yet in spite of the bounce the overall trend is still down.

If we see the IWM close under $64 again I would be tempted to launch new bearish positions. I am adjusting our target to $52.50.

Stop Loss

If the IWM can close above $68.00 then we'll exit the next morning at the open.

- Suggested Positions -
Oct 04, 2011 - entry price on IWM @ 60.32, option @ 6.36
symbol: IWM1221M60 2012 JAN $60 PUT - current bid/ask $ 3.79/ 4.14

10/04/11 Trade begins at the open. IWM @ 60.32
10/03/11 meet our entry point requirement (close under $63.00)

Chart of IWM:

Current Target: $52.50
Current Stop loss: close over 68.00
Play Entered on: 10/04/11
Originally listed on the Watch List: 10/01/11


Kraft Foods Inc. - KFT - close: 33.76

update 10/08: KFT gave us a scare on Tuesday. When the market was breaking down shares of KFT spiked lower to $31.88 before rebounding higher. Our stop loss is at $31.75. This stock managed a bounce back to $34.00 by Friday afternoon. I am concerned that KFT is building a new trend of lower highs and lower lows. More conservative traders may want to scale back positions or exit early. I am not suggesting new positions at this time.

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 $ 2.53/ 2.72

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


CLOSED Plays


BMC Software - BMC- close: 36.98

update 10/08: I could not find any reason behind BMC's sell-off on Friday. Think back to Tuesday, when the market was breaking down to new lows. BMC only dipped to $37.07 and then rallied to almost $41 by Thursday afternoon. Yet Friday's session (-9.4%) was negative almost immediately following the opening spike past $41.00. Shares accelerated lower on big volume and broke down to new lows. Our stop loss was hit at $36.90.

- Suggested Positions -
SEP 22, 2011 - entry price on BMC @ 39.74, option @ 2.05
symbol: BMC1221A45 2012 JAN $45 call - Exit $0.45 (-78.0%)

- or -

SEP 22, 2011 - entry price on BMC @ 39.74, option @ 5.40
symbol: BMC1319A45 2013 JAN $45 call - Exit $2.70 (-50%)

10/07/11 stopped out at $36.90
10/01 Readers may want to exit early now! BMC @ $38.56
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


iShares Dow Jones Transport ETF - IYT - close: 78.15

update 10/08: The IYT was a new watch list candidate last week. The plan was to buy puts if the IYT closed under $74.00. Shares hit our entry point condition on Monday with a close at $72.40. Shares opened on Tuesday morning at $71.51 and quickly bounced. The market's widespread, oversold bounce carried the IYT from $70.82 to $79.67 on Friday (a +12.4%). This sort of volatility is pretty rare. We had set a stop loss to close positions at $78.25. The IYT hit our stop on Thursday.

I would keep the IYT on your watch list. The overall trend for this group is still bearish.

- Suggested Positions -
Oct 04, 2011 - entry price on IYT @ 71.51, option @ 3.00
symbol: IYT1221M65 2012 JAN $65 PUT - Exit $2.15 (-28.3%)

10/06 stopped out at $78.25
10/04 opens at $71.51
10/03 closes under $74.00

Chart of IYT:

Play Entered on: 10/04/11
Originally listed on the Watch List: 10/01/11


Coca-Cola Co - KO - close: 65.90

update 10/08: The stock market's extreme volatility last week pushed KO to a new relative low on Tuesday. Shares hit our stop loss at $63.49. The stock has tried to bounce back but has stalled near technical resistance at its 200-dma.

Earlier comments:
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 - Exit $1.30 (-42.2%)

- or -

Sep 22, 2011 - entry price on KO @ 67.00, option @ 3.00
symbol: KO1319A75 2013 JAN $75 call - Exit $2.20 (-26.6%)

10/04/11 stopped out at $63.49
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: 87.20

update 10/08: A week ago we raised our stop loss from $79.50 to $84.75 on worries that the market's major indices would breakdown. Sure enough the market did breakdown but stocks immediately reversed higher. Yet the market weakness on Tuesday as enough to hit our new stop loss on MCD.

The long-term trend for MCD is still higher. I would keep this stock on your watch list.

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 - Exit $2.60 (+4.0%)

- or -

Aug 15, 2011 - entry price on MCD @ 86.82, option @ 3.90
symbol: MCD1319A95 2013 JAN $95 call - Exit $4.30 (+10.2%)

10/04/11 stopped out at $84.75
10/01/11 new stop loss at $84.75
09/10/11 adjusted stop loss down to $79.50
09/03/11 look for a dip toward the 50-dma

Chart of MCD:

Current Target: $99.00
Current Stop loss: 84.75
Play Entered on: 08/15/11
Originally listed in the New Plays 08/13/11


NVIDIA Corp. - NVDA - close: 14.15

update 10/08: We knew NVDA was a volatile stock. Yet the volatility in NVDA over the past few weeks has been ridiculous. The August low to the September high was a +38% gain. The September high to the October low was a -28.5% plunge. In the last three and a half days the stock is up +18%. These sorts of swings are very hard to trade around on a weekly newsletters. You're probably better off trying to day trade NVDA.

The long-term story on NVDA remains compelling but we've been stopped out at $12.25. This occurred near the opening bell on Monday (Oct. 3rd). I'd like to see shares settled down a bit before we consider new positions.

Our plan was to use small positions to limit our risk.

- Suggested (small) Positions -
SEP 14, 2011 - entry price on NVDA @ 15.62, option @ 2.40
symbol: NVDA1221A15 2012 JAN $15 call - Exit $0.80 (-66.6%)

- or -

SEP 14, 2011 - entry price on NVDA @ 15.62, option @ 4.25
symbol: NVDA1319A15 2013 JAN $15 call - Exit $2.45 (-42.5%)

10/03/11 stopped out at $12.25

Chart of NVDA:

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: 86.25

update 10/08: Visa continued to drop early last week and hit our stop loss at $84.45 on Monday. Shares dipped under $82 on Tuesday morning. Yet the widespread rebound lifted shares back to $88.00 on Friday morning.

I remain longer-term bullish on Visa but short-term I would not open new positions. Wait to see if shares correct back toward $80 and its 200-dma before considering new positions.

- Suggested (small) Positions -
Aug 18, 2011 - entry price on V @ 80.00, option @ 4.00
symbol: V1221A90 2012 JAN $90 call - Exit $5.50 (+37.5%)

- or -

Aug 18, 2011 - entry price on V @ 80.00, option @ 7.75
symbol: V1319A100 2013 JAN $100 call - Exit $9.10 (+17.4%)

10/03/11 stopped out at $84.45
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


Watch

Technology Bellwether

by James Brown

Click here to email James Brown

Editor's Note:

In addition to tonight's new watch list candidate, I would add MO, SO and JJC to your radar screen.

MO was showing some relative strength on Friday with a +1.7% gain and a breakout past recent resistance. There is additional resistance near $28.00. Readers may want to wait for a close over $28.00 as a bullish entry point.

SO is a utility stock with a long-term up trend. Shares are less than a dollar away from its recent all-time highs. Traders bought the dip near prior resistance and what is now new support at $41.00 last week. If you think the market retreats again then wait for another dip near $41.

JJC is a copper ETF. Copper has seen a very dramatic sell-off on global slowdown concerns. These worries might be overblown. The bounce last week did produce a bullish reversal pattern on the weekly chart. You could wait for a dip back toward the $41-40 zone as an entry point. Or wait for confirmation of the bullish reversal with a follow up weekly gain. Note - JJC doesn't have LEAPS.

- James



New Watch List Entries

Cisco Systems - CSCO


Active Watch List Candidates

AGN - Allergan

HSY - Hershey Co

LTD - Limited Brands Inc

ROST - Ross Stores

TJX - TJX Cos. Inc.


Dropped Watch List Entries

IWM and IYT moved to the play list. PSMT was dropped.



New Watch List Candidates:


Cisco Systems - CSCO - close: 16.66

Company Info

Business has been tough for technology giant CSCO over the last couple of years. You can see how Wall Street reacted to disappointing earnings news and guidance with the big spikes down on the weekly chart. Now it would seem that all the bad news has been priced in for CSCO. Shares are building a base in the $15.00-17.00 zone. Last week would have been the perfect opportunity for CSCO to breakdown further but traders bought the dip at $15.00 again. Now shares face resistance near $17.00 and its 200-dma around $17.25. A breakout here would be very bullish.

I am suggesting we launch bullish positions when CSCO can close above the $17.50 level (open positions the following session). If triggered we'll use a stop loss at $15.45. Our long-term target is $21.75.

Trigger: Close above $17.50

BUY the 2013 Jan. $20 call (CSCO1319A20)

Chart of CSCO:

Weekly chart of CSCO:

Originally listed on the Watch List: 10/08/11


Active Watch List Candidates:



Allergan Inc. - AGN - close: 81.50

update 10/08: AGN saw a nasty breakdown last Monday. Shares broke the bullish trend of higher lows. Now the oversold bounce is stalling. I'm concerned that AGN is poised to drop back toward $78 or its 200-dma again.

Currently we are waiting for a breakout to new highs. The plan is to buy calls if we see AGN close above $86.00.

If triggered we'll use a stop loss at $79.45. Our long-term target is $99.00.

TRADING NOTE: Good news. The option spreads on the 2013 calls are getting better, but they are still pretty wide. Keep positions small.

Earlier Comments:
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 $86.00

BUY the 2013 Jan $100 call (AGN1319A100)

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


Hershey Co. - HSY - close: 58.99

update 10/08: Traders bought the dip on Tuesday near $57.00. The rebound is lifting HSY back toward resistance near $60.00. The stock continues to trade inside a bullish trend of higher highs and higher lows.

The larger trend is still up and I suspect that HSY could see more buying interest as people start to think about the Halloween holiday. Right now our plan is to buy calls when HSY closes above $60.25. We'll start with a stop loss at $55.75.

trigger: A close over $60.25

BUY the 2013 Jan $65 call (HSY1319A65)

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


Limited Brands, Inc. - LTD - close: 40.43

update 10/08: LTD has been showing a lot of volatility with big swings over the last few weeks. This past week saw a dip toward $37 and its 50-dma. We still do not want to chase it. and remain on the sidelines. The plan is to buy calls on a dip at $35.50. If triggered we'll use a stop loss at $32.90. More aggressive traders may want to keep their stop under the August low instead. We want to keep our position size small.

Buy-the-Dip trigger: $35.50

BUY the 2013 Jan $40 call (LTD1319A40)

10/01/11 adjusted stop loss to $32.90, if triggered
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


PriceSmart Inc. - PSMT - close: 70.57

update 10/08: I fear we may have missed the entry point in PSMT. Shares dipped to $56.25, just above its 100-dma, on Tuesday and then rallied to $72.36 by Friday morning. That's a +28.6% bounce. Unfortunately our entry point to buy calls was at $55.50. We do not want to chase PSMT higher. I am removing the stock from our watch list. Shares are too volatile right now.

Trade Did Not Open!

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


Ross Stores Inc. - ROST - close: 81.99

update 10/08: ROST delivered a dramatic week as well. The stock fell to $74.48 on Tuesday before bouncing back and surging to $82.80 by Friday morning. ROST could see a breakout to new highs soon. Currently the plan is to wait for a close above $83.00. I am adjusting our option strike to the 2013 Jan $100 call with a stop loss at $75.75.

Buy a close over $83.00

BUY the 2013 Jan $100 call (ROST1319A100)

10/08/11 adjusted option strike to 2013 Jan. $100 call
10/01/11 new strategy: buy a close over $83.00
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


TJX Cos. Inc. - TJX - close: 55.70

update 10/08: I am not convinced the market's sell-off is over. There is still a good chance that TJX will correct back down toward support near its rising 200-dma. The plan is to buy calls on a dip at $52.00. More conservative traders may want to wait for a bounce from this area instead. If triggered we'll use a stop loss at $49.40.

Buy-the-Dip trigger: $52.00

BUY the 2013 Jan $60 call (TJX1319A60)

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