Option Investor
Newsletter

Daily Newsletter, Saturday, 10/22/2011

Table of Contents

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

Leaps Trader Commentary

Are Stocks Ignoring Europe

by James Brown

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The Dow Industrials and the S&P 500 closed at new multi-week highs on Friday. Is the stock market finally ignoring Europe? You and I could only wish that were true! Traders may be weary of the story in Europe but stocks produced a volatile week in reaction to the various EU headlines. Overall economic data in the U.S. was either benign or neutral. Corporate earnings have been better than expected. The stock market has weathered a number of potentially bearish headlines. At the end of the week the S&P 500 was up another +1.1% and breaking out past key resistance levels. The S&P's move off the October low is now up to +15.2%.

Two weeks ago stocks had seen very strong gains and we were poised for profit taking on Monday. Sure enough, stocks sank but there was no follow through on Tuesday. Looking back on the week there were a number of headlines that helped move the market. Business confidence surveys in Germany and France came in low. Moody's put France on credit watch negative. Currently France has a triple-A rating (the highest). While this unofficial downgrade isn't a big surprise given France's position to help back stop the EU's financial troubles it remains a negative. Moody's also downgraded Spain's credit rating two notices. This was in part a catch up move since both S&P and Fitch had already downgraded Spain. It also reinforced the issue that Greece isn't the only problem in Europe. If EU leaders don't find the right solution for their Greece problem it's going to make matters worse with Spain and Italy.

Another major headline was China's Q3 GDP came in at +9.1%. This was seen as bearish since economists had been expecting +9.3% growth. Worries over a slowdown in China have been plaguing the commodity markets since China is such a massive consumer of raw commodities. While on the topic of economic data most of the data for the U.S. was benign. The Producer Price Index (PPI) reading on inflation came in at +0.8% with the core PPI at +0.2%. The Consumer Price Index (CPI) reading for inflation was only +0.3% with the core CPI at +0.1%. The Fed's Beige Book sparked some afternoon profit taking on Wednesday but overall it was a nonevent. The Beige book said most of the 12 regions saw slow to modest growth last month. One of the most bullish reports for the week was the Philly Fed survey, which bounced back from -17.5 in September to +8.7 in October. Economists were only expecting a rebound to -8.8.

We are in the middle of Q3 earnings season. Generally speaking the results have been positive. Approximately 70% of the S&P 500 companies reporting thus far have beaten estimates. The two big exceptions last week were Apple Inc. (AAPL) and Goldman Sachs (GS). AAPL missed the earnings estimate for the first time in years. Wall Street analysts had grown too bullish on AAPL and raised their estimates beyond the company's guidance. Meanwhile GS reported a big loss and missed estimates by 68 cents a share. This was only the second quarterly loss in the last twelve years for GS. The surprise following GS' report was a rally in the stock price instead of a sell-off on the earnings miss.

Europe & Greece

Europe remains in the spotlight. EU leaders are holding a major summit on Sunday and on Wednesday next week. Friday the stock market rallied on news that EU leaders had postponed any decision on Greece and the banking system on Sunday's meeting. Art Cashin called it a "stay of execution" rally on Friday morning. There were a lot of traders who were short the market expecting negative headlines or lack of a deal from the EU summit on Sunday. The fact that Europe postponed this decision to give them more time sparked short covering. Bulls would argue that giving EU regulators more time increases the odds that they actually come to some sort of agreement, which was unlikely to occur by Sunday night.

On Friday afternoon the next big headline was money for Greece. EU leaders finally voted to approve the next installment of the rescue funds to Greece. I have to issue a correction. Previously I was reporting this as 8 billion euros but this "loan" to Greece is actually worth $8 billion dollars, which is only 5.8 billion euros. The great news is that this should postpone any Greek default into next year. Since we're talking about rescue funds we should mention the EFSF. One of the biggest headlines of the week was news that EU leaders want to increase the size of the EFSF to 2 trillion euros. At least that was the idea floated a few days ago. This headline alone probably helped buoy the stock market.

EU leaders have a significant challenge. They need to organize a default for Greece in such a way that it does not trigger the "hard" default rules, which would launch all the credit default swaps and ignite the bad debt bank contagion they have been trying so hard to avoid. The recent 21% Greek debt haircut will probably end up being raised to 50% or 60%. The next challenge is protecting the major European banks. This means the banks need to be recapitalized. This has been a major sticking point. Some countries want to keep the recapitalization in the 90-100 billion euro range. Others believe it needs to be in the 250-300 billion euro range (or more). Finally now that EU leaders have finally voted and approved the newly expanded 440 billion euro EFSF fund, they are talking about making it five times bigger (2 trillion euros).

Monday is going to be a lot more quiet than traders were expecting since there will not be any major decisions made at Sunday's meeting. This pushes all the excitement out to Thursday (Oct. 27th).

Major Indices:

Technically the market still looks bullish. The S&P 500 index has been building a short-term trend of higher lows and higher highs. The breakout over resistance in the 1225-1230 zone is another positive. Plus, the S&P 500 has broken out past technical resistance at the simple 100-dma and the exponential 200-dma. If this rally continues the S&P 500 will be testing resistance at its March lows near 1250 soon. If the index can rally past 1250 then we're looking at the simple 200-dma near 1275 as overhead resistance.

If stocks retreat I would look for short-term support at 1220 and 1200.

Intraday (60-min) chart of the S&P 500 index:

Daily chart of the S&P 500 index:

Weekly chart of the S&P 500 index:

The NASDAQ composite is holding up relatively well. Traders bought the dip Thursday midday and the NASDAQ was able to pare its losses. You could argue the NASDAQ is forming a bull-flag consolidation pattern. If the rally continues the next level of resistance would be the simple 200-dma and the 2700 level. If it is a bull-flag pattern then it would suggest an upside target near the NASDAQ's 52-week highs (2850-2900).

Daily chart of the NASDAQ Composite index:

Intraday chart of the NASDAQ Composite index:

The small cap Russell 2000 index has been underperforming the S&P 500 index. Looking at the intraday chart below you can see the $RUT has been stuck in a trading range for almost two weeks. The good news is that the $RUT is poised to breakout from this range soon. A breakout could portend a rally towards the 760-770 area.

Daily chart of the Russell 2000 index

Intraday chart of the Russell 2000 index

The economic calendar this week is relatively quiet. We'll see multiple reports on housing and residential real estate. The biggest reports are probably the sentiment numbers and the Q3 GDP estimate. Economists are expecting Q3 GDP to improve to +2.2% growth. This is another very full week for Q3 earnings and the market will digest hundreds of corporate reports. Yet all of this news will take a back seat to the drama in Europe.

- Tuesday, October 25 -
consumer confidence for October
Case-Shiller home price index

- Wednesday, October 26 -
Durable Goods Orders
New Home Sales

- Thursday, October 27 -
Weekly Initial Jobless Claims
Q3 GDP estimate

- Friday, October 28 -
Employment Cost index
(Final) Michigan Sentiment for October

We are still facing questions about the U.S. economy. Last week I mentioned that the bond market was forecasting a 60% chance of recession in the next 12 months. That hasn't changed. The ECRI leading indicators continue to slip and just posted their 11th weekly decline signaling another recession. What I find positive was that Beige book was neutral (instead of negative) and the Philly Fed saw a really big bounce into positive territory, which helps alleviate some of the recession worries.

Another significant change last week seemed to be improvement to investor sentiment. I read about several investors and portfolio managers putting cash to work in the equity market in spite of the market's overbought conditions. Naturally fund managers are afraid to miss the move higher and they are afraid to underperform their peers. This fear can still fuel the rally as they race for performance. We only have a few days left before October 31st marks the fiscal year end for a lot of mutual funds. Thus the last days of October should have a bullish bias. The only real worry would be talks breaking down in Europe.

In summary, the path of least resistance for the stock market seems to be up. If you study the chart of the S&P 500 it does not look like a market that is afraid to hold over the EU summit. This would suggest that investors are giving EU leaders the benefit of the doubt and traders are willing to wait for Wednesday's meeting - at least for now. If last week was any indication the market can change its mind pretty quickly. The $8 billion payment to Greece should put a Greek default on the backburner for a few weeks. Seasonally we're in a bullish time of year. The mutual fund fiscal year end on October 31st should be a positive catalyst.

- James


Portfolio

Portfolio Update

by James Brown

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Current Portfolio


Portfolio Comments:

Stocks experienced a choppy week. The major indices alternated between big gains and losses but eventually closed at new relative highs for the week. Many felt Friday's move was mostly short covering on headlines out of Europe. Market direction next week will depend on the next round of headlines from the EU summit on Sunday and the meeting next Wednesday in Europe.

Our portfolio saw HSY and KBH move from the watch list to active trades. Meanwhile AGN and ROST have rallied to new record highs.

There are new stop losses for EMC and ROST.

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

Significant Turning Point

by James Brown

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Editor's Note:

The U.S. stock market continues to climb. Stocks in general still look overbought but you could argue that the major indices just spent the last several days consolidating sideways, albeit with lots of volatility.

We are now facing the much hyped and hard to predict EU summit. Actually EU leaders are holding six days of talks as they discuss how to let Greece default without sparking widespread contagion, how to protect the EU banking system, and how to bolster the EFSF rescue fund. The big days for these meetings are Sunday and Wednesday. They just announced there will be no major decisions on Sunday.

These meetings in Europe could be a significant turning point for the market. Headlines out of Europe will either kill the rally and send us lower or pour fuel on the fire and launch us into the next leg higher into the fourth quarter.

As it stands now I'm not eager to chase the big move off the October low. We're not adding any new trades tonight. However, we did add six new candidates to the watch list this evening (they are: BZH, CSC, EBAY, GLW, MDR, and RAI). Plus, last week I listed several potential trades here in the new plays section. I still like NVDA if it can close over $16.00 or dip back to $12.00. The earnings report from MCD was bullish but I wouldn't chase it here. Look for a dip or a bounce from $90 as a possible entry point in MCD. ATVI is showing relative strength and the breakout past resistance at $13.00 is very bullish but I would not chase it.

-James


Play Updates

Seeing New Highs

by James Brown

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Editor's Note:

A few of our long-term LEAPS candidates are breaking out to new all-time highs. Overall it was another bullish week for stocks. Earnings news has been positive thus far. We saw HSY and KBH make the jump from our watch list to active trade list.

-James


Closed Plays


None. No closed plays this week.


Play Updates


Allergan Inc. - AGN - close: 88.38

Comments:
10/22 update: It turned out to be a bullish week for AGN. The stock managed to convincingly breakout past resistance near $86 and close at new all-time highs. The Point & Figure chart's bullish breakout buy signal looks even stronger now and is suggesting a long-term target of $109. Even though the stock looks strong here I would hesitate to launch new positions at the moment. AGN is due to report earnings on Wednesday morning (Oct. 26th) before the market's opening bell. Analysts are expecting a profit of 90 cents a share. With the stock at all time highs there could be an urge to sell the news and book profits by shorter-term traders.

I am very tempted to raise our stop loss but we'll leave it at $79.45 for now. More conservative traders may want to up their stop toward $82 or may be towards $83.75 instead. Our long-term target is $99.00.

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

- Suggested Positions -
OCT 17, 2011 - entry price on AGN @ 85.46, option @ 5.10
symbol: AGN1319A100 2013 JAN $100 call - current bid/ask $ 5.60/ 6.20

10/22/11 Earnings are coming up. Readers might want to consider raising their stop loss. We are keeping ours at $79.45.

Current Target: $99.00
Current Stop loss: 79.45
Play Entered on: 10/17/11
Originally listed on the Watch List: 09/24/11


Bank of America - BAC - close: 6.46

Comments:
10/22 update: As a sector most of the financials are higher this week but it's been a rocky few days with big ups and downs. Investors are reacting to every rumor and headline out of Europe regarding the summit. BAC did report earnings on the 18th. The results were much better than expected at 56 cents a share versus estimates of 22 cents. That helps explain the big pop in BAC shares on the 18th. Yet the stock was unable to breakout past resistance at the simple 50-dma all week long.

Meanwhile the situation in Europe will have big implications for the banking sector. BAC is likely to see big swings depending on the success or failure of EU leaders to get some sort of comprehensive plan in place. I'm a little reluctant to launch new positions here. Investors might want to consider waiting for a close over $7.00 before evaluating 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/ 0.09
(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 $ 0.76/ 0.79
(No stop loss on this position)

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.

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: 32.56

Comments:
10/22 update: BMY spent the week consolidating sideways and yet shares are still inside their narrow bullish channel. That could change. The company is due to report earnings on October 27th, before the opening bell. Wall Street expects a profit of 58 cents a share. I remain concerned that BMY could see profit taking back down toward the $30.00 level. More conservative traders may want to take profits now.

I am not suggesting new positions at this time. We have two exit targets. One at $33.50 and a longer-term target at $35.75.

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 $ 2.00/ 2.06

10/22/11 BMY is due to report earnings this week on Oct. 27th. Readers may want to take profits now or prior to the report.
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: 24.03

Comments:
10/22 update: It was our plan to sell at least half of our 2012 January calls on Monday at the open. These calls opened with a bid of $3.55 (+61.3%). A day later EMC reported earnings, beat estimates by one cent and guided higher. The stock gapped open higher on Tuesday and rallied toward resistance near $24 and its 100-dma. EMC spent the rest of the week digesting gains and consolidating sideways.

I am not suggesting new positions at this time. Please note that we will raise our stop loss to $21.40.

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 $ 4.40/ 4.50

- or -

Aug 18, 2011 - entry price on EMC @ 20.25, option @ 1.80
symbol: EMC1319A25 2013 JAN $25 call - current bid/ask $ 3.15/ 3.25

10/22/11 new stop loss @ 21.40
10/17/11 sold half of 2012 calls @ open, bid $3.55 (+61.3%)
10/15/11 Plan to Sell Half of our 2012 calls ASAP
10/08/11 new stop loss @ 19.85
09/24 new stop loss @ 19.49
09/17 new stop loss @ 19.80

Current Target: $25.75 and 28.50
Current Stop loss: 21.40
Play Entered on: 08/18/11
Originally listed on the Watch List: 07/23/11


Hewlett-Packard - HPQ - close: 25.38

Comments:
10/22 update: It was our plan to sell at least half of our 2012 calls on Monday at the open. These calls opened with a bid of $4.10 (+52.4%).

HPQ posted a small loss for the week. Shares experienced some volatility as investors reacted to different earnings reports across the week. I am surprised that HPQ did not see stronger weakness following the disappointing report from rival IBM. The good news tonight is that HPQ has rallied back above the $25.00 level and closed back above its simple 50-dma.

I am not suggesting new positions at this time. HPQ remains under resistance near the $26.50 level.

- 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 $ 4.10/ 4.20
Stop Loss @ 22.85

- 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 $ 4.80/ 4.90
Stop Loss @ 21.40

10/17/11 Planned exit, sell 1/2 of 2012 position, bid @ 4.10 (+52.4%)
10/15/11 new stop loss for the 2012 position @ 22.85
10/15/11 Plan to sell 1/2 of 2012 calls on Monday
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


Hershey Co. - HSY - close: 60.26

Comments:
10/22 update: We have been waiting for an entry point on HSY for a long time. After weeks of flirting with a breakout past resistance at $60.00 the stock finally did it. Our plan was to open bullish positions if shares could close over $60.25. The stock closed at $60.55 on October 18th. Our trade opened the next day with HSY opening at $60.57 and our options opening at $3.90. We have a stop loss at $55.90. More conservative traders may want to raise their stop closer to the rising 100-dma or even the trendline of higher lows that began in August (see chart below).

In previous watch list updates I suggested that more conservative traders wait for a close over $61.00 before initiating positions. You may want to wait for that close if you're still looking for an entry point. There is always a chance that HSY disappoints when they report earnings and the company is due to report on October 27th. The announcement will be prior to the market open. Analysts are expecting a profit of 84 cents a share. I will note that the Point & Figure chart is bullish and is currently suggesting a long-term target of $80.00. I am suggesting that we take profits at $67.00 and at $74.00.

- Suggested (SMALL) Positions -
Oct 19, 2011 - entry price on HSY @ 60.57, option @ 3.90
symbol: HSY1319A65 2013 JAN $65 call - current bid/ask $ 2.99/ 3.85

10/19/11 HSY opens at $60.57, option opens @ 3.90
10/18/11 HSY meets our entry requirement with a close over $60.25

Chart of HSY:

Current Target: $67.00 & 74.00
Current Stop loss: 55.90
Play Entered on: 10/19/11
Originally listed on the Watch List: 09/17/11


KB Home - KBH - close: 6.68

Comments:
10/22 update: It was a big week for many housing stocks. KBH rallied from $6.68 to $7.53 for a +12.7% gain. Nimble traders saw an even bigger move from the 50-dma near 6.19 to $7.53 (+21%). Our plan was to buy call LEAPS when KBH closed above resistance at $7.00. The stock did so on October 18th with a close at $7.02. Shares opened at $7.17 the next morning and our 2013 $10 call opened at $1.25 on the 19th. At this point I would wait for a new bounce from $7.00 or the $6.50 level before considering new bullish positions.

Earlier Comments:
If there is a breakout the stock could see a short squeeze. The most recent data listed short interest at 52% of the 65 million-share float.

- Suggested Positions -
(Stock Position)
Oct 19, 2011 - entry price on KBH @ 7.17

- or -

(Option Position)
Oct 19, 2011 - entry price on KBH @ 7.17, option @ 1.25
symbol: KBH1319A10 2013 JAN $10 call - current bid/ask $ 1.19/ 1.31

10/19/11 Trade opens. KBH opens @ 7.17, option @ 1.25
10/18/11 KBH meets our entry requirement with a close above $7.00

Chart of KBH:

Current Target: $9.90
Current Stop loss: 5.95
Play Entered on: 10/19/11
Originally listed on the Watch List: 10/15/11


Kraft Foods Inc. - KFT - close: 35.20

Comments:
10/22 update: KFT closed virtually unchanged on the week. The stock has been consolidating sideways inside the $34.50-35.50 zone. A breakout past $35.50 would be bullish but I would not launch new positions at this time.

Keep in mind that KFT is due to report earnings on November 2nd.

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 $ 3.10/ 3.25

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


Ross Stores Inc. - ROST - close: 87.21

Comments:
10/22 update: After several days of consolidating sideways in the $83-85 zone shares of ROST finally broke out to new all-time highs on Friday. Please note that we are raising our stop loss from $77.00 to $79.25. I am not suggesting new positions at this time.

- Suggested Positions -
Oct 11, 2011 - entry price on ROST @ 84.36, option @ 5.30
symbol: ROST1319A100 2013 JAN $100 call - current bid/ask $ 6.20/ 6.50

10/22/11 new stop loss @ 79.25
10/15/11 adjusted stop loss to $77.00
10/11/11 ROST opened at $84.36
10/10/11 ROST closed above $83, our requirement to open the trade
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.

Current Target: $99.00
Current Stop loss: 79.25
Play Entered on: 10/11/11
Originally listed on the Watch List: 09/10/11


Watch

Reloading the Watch List

by James Brown

Click here to email James Brown

Editor's Note:

The markets look like they are at a major turning point. Does the rally reverse? Or does the stock market make a run higher into year-end?

Right now the trend is up and investors seem to be growing less worried about Europe. At least that's the tone today. It could change tomorrow.

- James



New Watch List Entries

BZH - Beazer Homes

CSC - Computer Sciences

EBAY - eBay Inc.

GLW - Corning Inc.

MDR - McDermott Intl.

RAI - Reynolds American


Active Watch List Candidates

CBG - CB Richard Ellis Group

CSCO - Cisco Systems

LTD - Limited Brands Inc

TJX - TJX Cos. Inc.


Dropped Watch List Entries

HSY and KBH graduated to the play list.



New Watch List Candidates:


Beazer Homes - BZH - close: 1.97

Company Info

The U.S. residential real estate market is still a long way from being healthy. Yet it looks like investors have priced in all the bad news with shares of BZH trading near $2.00 a share. The stock appears to have formed a bottom over the last couple of months and is beginning to breakout past various levels of resistance.

I am suggesting we open small bullish positions if and when BZH can close over $2.05. When this happens we will open small positions the next day at the open with a stop loss at $1.57. Our long-term target is $3.70 but we might adjust that for the simple 200-dma instead.

Trigger: Buy a close over $2.05

BUY the BZH (the stock) on a close over $2.05

- or -

buy the 2013 Jan $2.50 call (BZH1319A2.5) current bid/ask $0.60/0.75

Chart of BZH:

Originally listed on the Watch List: 10/22/11


Computer Sciences Corp. - CSC - close: 30.03

Company Info

After months of correcting lower it looks like this tech stock has found a bottom. CSC has spent several weeks consolidating sideways in the $26-30 zone. Now CSC is on the verge of a bullish breakout.

I am suggesting that we wait for CSC to close above the $31.00 level and then open positions the next morning. If triggered we'll use a stop loss at $27.75. Our long-term target is $39.00 but we might adjust that for the simple 200-dma. FYI: Readers may want to note that CSC is due to report earnings on November 9th. Cautious investors might want to wait and see how the market reacts to CSC's earnings first before initiating positions.

Trigger: Buy a close over $31.00

BUY the 2013 Jan $35 call (CSC1319A35) current ask $3.50

Chart of CSC:

Originally listed on the Watch List: 10/22/11


eBay Inc. - EBAY - close: 32.12

Company Info

Shares of EBAY have spent nearly a year trading sideways in the $27.00-35.00 range. Currently shares are near the top of the range and traders just bought the dip near its 50 and 200-dma. Given the market's up trend there is a growing chance that EBAY might breakout from its trading range sooner rather than later. If that happens we want to be ready.

I am suggesting investors wait for a close over resistance at $35.00. If that occurs we'll open bullish positions the next day with a stop loss at $29.95. Our long-term target is $45.00.

Trigger: Buy a close over $35.00

BUY the 2013 Jan $40 call (EBAY1319A40) current ask $2.97

Chart of EBAY:

Originally listed on the Watch List: 10/22/11


Corning Inc. - GLW - close: 13.74

Company Info

GLW appears to be breaking out from its seven-month slide from $23 to $12. Now the stock is on the verge of breaking out past its 50-dma and resistance near $14.00. The company is due to report earnings soon on October 26th, which might be the catalyst to fuel the next move higher.

I am suggesting investors wait for a close over $14.00. If this occurs we'll launch positions the next morning with a stop loss at $12.85. Our target is $18.00 but we might need to adjust it for the simple 200-dma.

Trigger: Buy a close over $14.00

BUY the 2013 Jan. $15 call (GLW1319A15) current ask $1.95

Chart of xxx:

Originally listed on the Watch List: 10/22/11


McDermott Intl. - MDR - close: 14.19

Company Info

MDR is a heavy construction company. Investors have been cautious on industrial names due to worries over a potential slow down across the globe. If the EU summit delivers positive news then investor sentiment toward this industry should improve. Currently MDR is consolidating under resistance at $15.00.

I am suggesting we open small bullish positions if MDR can close above $15.25. Should this occur we'll launch positions the next morning with a stop loss at $12.75. Our upside target is $21.00 but we might make an adjustment for the simple 200-dma instead.
NOTE: MDR is due to report earnings on November 8th (still an unconfirmed date). More conservative traders might want to wait and see how the market reacts to MDR's earnings report before initiating positions.

Trigger: Buy a close over $15.25

BUY the 2013 Jan. $17.50 call (MDR1319A17.5) current ask $2.50

Chart of MDR:

Originally listed on the Watch List: 10/22/11


Reynolds American Inc. - RAI - close: 39.73

Company Info

A strong dividend and a recession proof product have made RAI a popular stock to own. The stock is currently trading near all-time highs. After two weeks of consolidating sideways RAI looks poised to breakout past resistance at $40.00. Earnings are coming up in just a few days (Oct. 25th) and analysts are expecting a profit of 73 cents a share.

A positive earnings report could be just what this stock needs to breakout. I am suggesting we wait for a close over $40.00. If that occurs we'll launch bullish positions the next morning with a stop loss at $38.25. Our long-term target is $49.00.

Trigger: Buy a close over $40.00

BUY the 2013 Jan $42.50 call (RAI1319A42.5) current ask $2.05

Chart of RAI:

Originally listed on the Watch List: 10/22/11


Active Watch List Candidates:



CB Richard Ellis - CBG - close: 15.29

update 10/22: CBG did not make a lot of progress this past week. Shares bounced around the $14.00-15.50 trading range. Yes, the stock was rather volatile. We should expect more volatility this week with earnings due out on October 25th, after the closing bell. Wall Street is looking for a profit of 26 cents a share.

Aggressive traders may want to consider bullish positions if CBG can breakout past resistance at $15.50. I want to see stronger confirmation. We're suggesting that investors wait for CBG to close above $16.00 and we'll open positions the following day with a stop loss at $13.25. Our long-term target is $20.00. More aggressive traders could aim for the 200-dma instead. FYI: The Point & Figure chart for CBG has turned bullish with a $19.50 target.

NOTE: CBG does not have LEAPS. We're going to speculate with the 2012 March calls.

Buy calls on a close above $16.00

BUY the 2012 March $18 call (CBG1217C18)

Originally listed on the Watch List: 10/15/11


Cisco Systems - CSCO - close: 17.38

update 10/22: CSCO has also seen some volatility with swings from $17.60 to $16.80 but the stock has not yet closed back under its 200-dma or 200-ema. Currently our plan is to open bullish positions on a dip at $16.65 (last week's low was $16.80). I am adding a secondary entry point to launch positions if CSCO can close over $17.75. Obviously we would prefer to buy a dip but the market may not cooperate.

If triggered at either entry we'll use a stop loss at $14.85. Our long-term target is $21.75.

Adjusted entry point - Wait for dip to $16.65 or close over $17.75

BUY the 2013 Jan. $20 call (CSCO1319A20)

10/22/11 Added entry to buy a close over $17.75
10/15/11 We are adjusting our entry point. Wait for a dip to $16.65
10/14/11 CSCO hit our entry point requirement for a close over $17.50.

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


Limited Brands, Inc. - LTD - close: 42.71

update 10/22: LTD has now spent two weeks consolidating sideways inside the $41.00-43.00 zone. The stock looks poised to breakout higher soon. I do not see any changes from my prior comments. Aggressive traders may want to buy calls on a breakout past $43.25. I am suggesting we actually wait for LTD to close over $43.50 and then open positions the next day with a stop loss at $37.90. I'm listing the 2013 $50 call. We want to keep our position size small.

Wait for a close above $43.50, then buy calls!

BUY the 2013 Jan $50 call (LTD1319A50)

10/15/11 New Strategy: buy a close over $43.50, stop 37.90
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


TJX Cos. Inc. - TJX - close: 59.84

update 10/22: Hmm... TJX is showing impressive relative strength. The stock rallied +2.1% on Friday and broke out past resistance near $58.75. Yet we do not want to chase it. TJX has a trend of higher highs but it tends to pull back once it hits the trendline. Plus the $60.00 level could be round-number resistance. We definitely like the long-term up trend but we don't want to buy it near the top of its rising channel.

Currently our plan is to wait for a dip and buy call LEAPS when TJX touches $54.00 again. If triggered we'll use a stop loss at $51.45.

Buy-the-Dip trigger: $54.00

BUY the 2013 Jan $60 call (TJX1319A60)

10/15/11 adjusted entry point to buy the dip at $54.00, stop at $51.45

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