Option Investor
Newsletter

Daily Newsletter, Monday, 10/31/2011

Table of Contents

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

Leaps Trader Commentary

Up Four Weeks in a Row

by James Brown

Click here to email James Brown

Stocks rallied again. The U.S. market is up four weeks in a row and poised to mark one of its best monthly gains on record. Investors continue to ignore bearish economic data and focus on positive headlines. It was a rocky week with big swings both directions but headlines out of Europe drove the market higher. Strength overseas weighed heavily on the U.S. dollar as both the euro and yen currencies rallied against the greenback. This helped fuel big gains for commodities. The stock market strength also drove the volatility index (VIX) to new two-month lows and a breakdown from the VIX's 30-47 trading range.

Currently the S&P 500 index is up +13.6% for the month of October but it's up +19.6% from its October low near 1,074. The NASDAQ composite is up +19.0% from its October intraday low. The small cap Russell 2000 index is up +26% from its October low.

chart of the U.S. dollar ETF (UUP):

chart of the Gold ETF (GLD):

chart of the Copper ETF (JJC):

Economic data last week was mixed. The S&P/Case-Shiller 20-city housing price index for August was bearish. Home prices fell -3.8%, which was worse than the -3.5% estimate. Another bearish report was the Conference Board's consumer confidence index for October, which came in worse than expected at 39.8 compared to estimates for a drop to 46.0. This contradicts the final October reading for the Consumer Sentiment data, which rose to 60.9 compared to the initial October reading of 57.5. Durable goods data showed a -0.8% decline in the headline number and a +1.7% gain minus the transportation component. Economists had been predicting -1.0% and +0.4%, respectively. Two of the most bullish reports this past week was a positive reading in China's PMI manufacturing survey done by HSBC plus the final estimate on the U.S. Q3 GDP data, which came in at +2.5%, which was better than the +2.3% estimate.

Europe & Greece

Naturally Europe was the main driving force behind the market's volatile moves. Early last week there were fears that there would be no progress made at the EU summit. This was especially true after the EU finance ministers postponed their Wednesday meeting. The EU summit continued without the bankers and leaders from all 27 EU members did meet on Wednesday. I was very surprised that Wednesday's session was not more negative for stocks. As of the close on Wednesday we had little in the way of details or confirmation of any significant agreements. It seemed that crucial details for the EU's rescue package would likely get postponed until November.

Everything changed on Thursday. Suddenly the market had some numbers it could hold on to. EU leaders said they would try to reduce Greece's debt burden with a 50% haircut as long as it was voluntary. The EU would recapitalize the banks and inflate the EFSF rescue fund to $1.4 trillion. This news fueled a significant amount of short covering and stocks delivered a very strong session. The major indices rallied to new two-month highs. The euro currency surged against the dollar.

chart of the euro ETF (FXE):

The general consensus among market pundits was that the EU's decisions had taken the worst case scenario off the table. Plus, it had kicked the can down the road well into 2012. Yes, I said kick the can. Europe's problems are not solved. Far from it. ECB President Trichet, currently on his way out the door before his successor takes over in November, acknowledged this in an interview this weekend. Even if an immediate default by Greece has been postponed the EU still has to worry about Italy and Spain as potential default candidates (they are the main reasons behind the EU's plans to boost the EFSF).

Major Indices:

The S&P 500 index has surged past resistance at 1250, 1260 and its simple 200-dma. The next stop looks like resistance at 1300 except that the market is very short-term overbought. A +20% rally in less than four weeks is just not normal. I'd like to think the 1260-1250 level will hold up as support but I can't say that with any confidence. A normal 38.2% Fibonacci retracement would mean a dip back toward the 1210-1200 area. I don't necessarily think the S&P 500 will dip that far in the immediate future but it's not out of the question. I suspect that if the 1260 level fails as support then the S&P 500 is probably looking at a dip toward the 1240 area.

Daily chart of the S&P 500 index:

2nd Daily chart of the S&P 500 index:

The NASDAQ composite has rallied +19% from its October lows near 2300. The breakout past 2700 and its simple 200-dma is certainly bullish on a technical basis. Yet the index looks overbought given the big gains. If the market does see a correction I would watch the 2600 area to act as support.

Daily chart of the NASDAQ Composite index:

The small caps have been big winners. The Russell 2000 index is up +26% from its October low. This past week produced a breakout past its late August highs and past resistance at its 100-dma and exponential 200-dma. My concern now is that the $RUT has stalled at long-term resistance near 760. I cautioned readers last week that the $RUT could rally toward the 760-770 area. If the stock market does see a correction I would look for support near 720 and if that level fails then the 700 level or its 50-dma.

Daily chart of the Russell 2000 index

Intraday chart of the Russell 2000 index

We have a very busy week for economic data. Now that the Europe situation has been put on hold the U.S. economic headlines are going to carry more weight. The key reports to watch are the Chicago PMI, the national ISM and ISM services indices, and of course the jobs report on Friday. Economists are expecting +105,000 to +115,000 new jobs in October. A better than expected number here could do a lot to keep this stock market rally alive.

One of the biggest events of the week is a two-day FOMC meeting that wraps up on Wednesday. No one expects the Federal Reserve to alter interest rates so the focus will be on the Fed's statement and comments on the U.S. economy. If that wasn't enough the Fed's decision will be followed up with a press conference by Fed Chairman Ben Bernanke. Thus far Bernanke has done a pretty good job cheerleading the economy but there is always a risk he says the wrong think and stocks tanks. Wednesday afternoon could be volatile.

- Monday, October 31 -
Chicago PMI (ISM) for October

- Tuesday, November 1 -
(National) ISM index for October
Construction spending
vehicle sales

- Wednesday, November 2 -
ADP Employment report for October
FOMC interest rate decision (end of two-day meeting)
Ben Bernanke press conference (after FOMC announcement)

- Thursday, November 3 -
Weekly Initial Jobless Claims
(national) ISM services for October
factory orders for September

- Friday, November 4 -
Non-farm payroll (jobs) report for October
monthly unemployment rate

The Week Ahead:

Looking ahead I suspect that traders could use any hiccup in the parade of economic data as an excuse to sell and lock in profits after a +20% bounce. Monday will probably be quiet as fund managers try to leave things unchanged for their fiscal year-end statements. Then the beginning of the month for November could be bullish as fund managers put new money to work. Only this time I wonder if they'll wait and hope for a pull back before buying stocks. I did mention that Wednesday could be volatile due to the FOMC meeting. I will point out that there was an increase in rumor activity surrounding a QE3 program by the Fed to help stimulate the U.S. economy. Since we've seen an uptick in positive economic news I seriously doubt the Fed is going to announce QE3 this week.

What does worry me is the November 23rd deadline for the "super committee" in Washington, which is charged with finding $1.2 trillion in spending cuts to reduce the deficit. This bipartisan group has to come up with a deal by Thanksgiving or there will be automatic cuts of $1.5 trillion. This "deal" to work together on reducing the deficit was crucial to getting the U.S. debt ceiling increase passed this past summer. The automatic cuts are supposed to be targeted at defense spending and entitlements and are said to be so deep that neither side wants this to happen. We'll have to wait and see how this plays out. With just over three weeks left I suspect we might get past this week without too many headlines. Yet the media frenzy could pick up significantly as we approach the final two weeks. This event could weigh on investor sentiment since Wall Street hates the unknown and no one knows how this is going to play out.

The good news tonight is that both the U.S. and Chinese economies seem to be showing some signs of improvement. The U.S. appears to be inching away from another recession while the Chinese appear to have engineered a soft landing for their red hot economy. I realize you've heard this before about China but it's been a constant on-again-off-again worry as economists and investors fret over how China tries to slow things down without throwing the global economy into a recession.

Plus, this past week actually produced some results out of Europe. Granted we still don't have a lot of details but this time the market doesn't seem to care. Two weeks ago EU leaders approve an eight billion euro loan to Greece, which postponed any default into 2012. Now the latest changes to the rescue fund, and a proposed 50% haircut on Greek debt should alleviate a lot of concerns. Just keep in mind that this is not a done deal. The 50% haircut on Greek debt is supposed to be voluntary. The bank recapitalization plan still has to iron out the kinks.

The market's trend is still higher but I strongly suspect we will see a market pull back soon once October ends and we roll into a new calendar month. A big portion of this move higher in stocks has been a chase for performance by fund managers. No one wanted to get left behind so portfolio managers were chasing stocks higher. Once their fiscal year ends on Monday they will all breathe a sigh of relief. Stocks could see some window "undressing" the rest of the week.

Strategy wise we can look to buy the dip but the challenge is knowing when to jump in. After a +20% rebound in the S&P 500 the pull back could be significant. Fortunately the November-December time frame is historically a very bullish one for stocks. Investors can focus on key support levels and wait for the market to test it or bounce before putting new money to work.

- James


Portfolio

Portfolio Update

by James Brown

Click here to email James Brown


Current Portfolio


Portfolio Comments:

The U.S. market continued to surge higher. Investors decided to take a positive view of the EU leaders recent summit. While details remain vague it seems that investors are growing more confident that the EU will be able to prevent a banking collapse. This kept the stock market rally alive. The U.S. markets are on track for one of their best monthly gains in years.

We had several stocks make the jump from our watch list to our active trade list (BZH, CBG, CSC, CSCO, GLW, and LTD).

I am suggesting we take profits in our EMC and HPQ trades. Please see details in our play updates section.

There are new stop losses for CBG, CSCO, EMC and HPQ.

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

How Deep?

by James Brown

Click here to email James Brown

Editor's Note:

Better than expected economic data and finally some good news out of Europe helped fuel another big weekly gain for the stock market. Early in the week there were doubts about the highly anticipated EU summit, especially when the EU finance ministers postponed their meeting. Yet by week's end it seemed that the EU leaders had agreed to cut Greece's debt burden by 50%, issued plans to recapitalize the major EU banks, and raise the EFSF rescue fund to $1.4 trillion.

All this good news was enough to push the S&P 500 index past potential technical resistance at its simple 200-dma. Yet now the S&P 500 is up almost +20% from its October low near 1074. A 20% move in less than a month is pretty incredible and stocks are now overbought and way overdue for some profit taking. A pull back in the next week or two would be both normal and healthy.

Unfortunately my crystal ball to predict the future is a little bit murky. We don't know how deep any pull back might be. I'm not adding any new trades tonight. This past week we added five plays from the watch list to the active trade list. I've added three new watch list candidates tonight.

-James


Play Updates

Taking Another Look at EMC and HPQ

by James Brown

Click here to email James Brown

Editor's Note:

I am concerned that the U.S. stock market is very short-term overbought with the +20% move from its October lows. Odds are growing every day that stocks will see some profit taking sooner rather than later.

Please note that I am suggesting we take some profits in our EMC and HPQ trades. Look for details in their individual updates.

-James


Closed Plays


None. No closed plays this week.


Play Updates


Allergan Inc. - AGN - close: 84.40

Comments:
10/29 update: AGN sold off midweek following its earnings report. The company reported on October 26th and beat estimates by 2 cents yet management guided lower for the next quarter. AGN fell from $87 down to $83 on this news. The stock market's widespread gains probably limited the downside. Now we are facing an overbought market that is due for some profit taking. This could pull AGN lower. I would expect a dip toward the 50-dma near $82 or a dip toward $80.00.

I am not suggesting new positions at this time. 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 $ 2.65/ 4.50

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: 7.35

Comments:
10/29 update: It turned out to be a very big week for financials. The news out of Europe helped fuel gains for this sector. BAC rallied almost +14% and broke out past its 50-dma and the 47.00 level. EU leaders did not just kick the can down the road they punted the can several months down the road and took the worst case scenario off the table. At least that is how stocks are reacting. It remains to be seen if Europe can follow through on their rescue plans. I would be tempted to buy calls again on a dip and bounce from its 50-dma.

- Suggested Positions -
AUG 29, 2011 - entry price on BAC @ 8.10, option @ 0.57
symbol: BAC1221A10 2012 JAN $10 call - current bid/ask $ 0.10/ 0.12
(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 $ 0.87/ 0.92
(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: 32.09

Comments:
10/29 update: It was a volatile week for BMY. On Wednesday shares dipped below short-term support at $32.00. Thursday morning the company reported earnings that beat estimates by three cents. Revenues were better than expected but management issued lackluster guidance. The stock spiked to a new high on Thursday only to drop on Friday in profit taking and some neutral analyst comments.

I do not see any changes from my prior comments. We've been expecting a pull back toward $30.00 for quite a while now. I would still expect a correction within BMY's longer-term up trend. 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 $ 1.46/ 1.57

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


Beazer Homes - BZH - close: 2.20

Comments:
10/29 update: BZH has made the leap from our watch list to our play list. The plan was to wait for a close over $2.05 and then buy the stock or buy call LEAPS the next day. Shares closed at $2.07 on Thursday. The stock opened at $2.12 on Friday morning and the 2013 January $2.50 call opened at $0.70.

I would still consider new positions now or you could wait for a dip back toward $2.00.

- Suggested Positions -

(stock position)
OCT 28, 2011 - entry price on BZH @ $2.12

(option position)
OCT 28, 2011 - entry price on BZH @ 2.12, option @ 0.70
symbol: BZH1319A2.5 2013 JAN $2.50 call - current bid/ask $ 0.65/ 0.80

10/28 trade begins: BZH opens @ $2.12
10/27 BZH meets our entry point requirement with a close over $2.05

Chart of BZH:

Current Target: $3.70
Current Stop loss: 1.57
Play Entered on: 10/28/11
Originally listed on the Watch List: 10/22/11


CB Richard Ellis - CBG - close: 18.98

Comments:
10/29 update: CBG delivered a very strong performance this past week. Our plan was to buy call options when CBG closed above $16.00. That happened on October 24th with a close at $16.74. Our trade opened on October 25th with CBG at $16.63 and the 2012 March $18 call opening at $1.80(estimate).

The stock continued to rally in spite of negative earnings. The company missed estimates by 2 cents but revenues were better than expected at $1.5 billion for the quarter. The company guided in line. Investors could have been betting on a disappointing quarter and the decent news probably sparked some short covering. The stock soared from Thursday's close of $17.12 to hit $19.61 intraday on Friday (a +14% move). The stock is up +24% for the week. I would expect some profit taking soon.

The move in CBG has been so fast that I am suggesting we go ahead and take some money off the table now. We will sell half of our March $18 calls at the open on Monday to lock in a gain. We'll raise our stop loss up to $15.75. We will also adjust our final target from $20.00 to $21.50.

NOTE: CBG does not have LEAPS. We are using the 2012 March calls.

- Suggested Positions -
OCT 25, 2011 - entry price on CBG @ 16.63, option @ 1.80
symbol: CBG1217C18 2012 MAR $18 call - current bid/ask $ 2.70/ 3.10

10/29 Plan on selling half at the open on Monday to lock in a gain.
new stop loss @ 15.75
adjusted final target from $20.00 to $21.50

Chart of CBG:

Current Target: $21.50
Current Stop loss: 15.75
Play Entered on: 10/25/11
Originally listed on the Watch List: 10/15/11


Computer Sciences Corp. - CSC - close: 32.44

Comments:
10/29 update: The market's big move on Thursday pushed CSC past resistance at $31.00. Shares actually gapped higher and rallied past its 100-dma to close at $32.81 on Thursday. Our plan was to wait for CBG to close over $31.00 and then buy calls the next morning. Our trade was opened on Friday morning. Readers may want to wait for a dip back toward $31.00, which should be new support and buy calls there. Actually you might want to wait until after we see CSC's earnings report on November 9th and wait to see how the market reacts to their numbers and then consider an entry point.

- Suggested Positions -
OCT 28, 2011 - entry price on CSC @ 32.37, option @ 3.30
symbol: CSC1319A35 2013 JAN $35 call - current bid/ask $ 3.60/ 4.10

Chart of CSC:

Current Target: $39.00
Current Stop loss: 27.75
Play Entered on: 10/28/11
Originally listed on the Watch List: 10/22/11


Cisco Systems - CSCO - close: 18.56

Comments:
10/29 update: The stock market's big rally on Thursday lifted CSCO out of its trading range. Our plan was to buy calls on a dip at $16.65 or a close over $17.75. Thursday saw CSCO close at $18.44. Our trade was launched on Friday with CSCO at $18.28. Unfortunately, CSCO does look short-term overbought. Readers may want to wait for a dip back toward the $17.75-17.50 zone, which should be support. As an alternative you might want to wait until after CSCO reports earnings on November 9th and wait to see how the market reacts to their Q3 results.

NOTE: We are adjusting our stop loss to $16.40.

Overall CSCO appears to have formed a significant bottom and the action this past week is a breakout past resistance. Our long-term target is $21.75.

- Suggested Positions -
OCT 28, 2011 - entry price on CSCO @ 18.28, option @ 1.68
symbol: CSCO1319A20 2013 JAN $20 call - current bid/ask $1.78/1.80

10/29/11 new stop loss @ 16.40
10/28/11 stock opens at $18.28
10/27/11 CSCO meets our entry requirement: close at $18.44
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.

Chart of CSCO:

Current Target: $21.75
Current Stop loss: 16.40
Play Entered on: 10/28/11
Originally listed on the Watch List: 10/08/11


EMC Corp. - EMC - close: 25.03

Comments:
10/29 update: EMC continues to march higher. The stock added another dollar and has closed near potential round-number resistance at the $25.00 level. I am suggesting we go ahead and exit the remainder of our 2012 January calls on Monday at the opening bell. Currently the bid on the 2012 Jan. $20 calls is up to $5.15 (+134%). We will also sell half of our 2013 Jan. $25 calls at the open on Monday. The current bid for these options is at $3.35 (+86.1%). I am removing our exit target of $25.75 since we're taking profit now and we'll adjust our final target on the 2013 calls down to $27.50.

I would expect EMC to find resistance in the $25.00-25.50 zone near its 200-dma. We should expect a pull back soon. No new positions at this time.

Please note our new stop loss at $22.20 near the 50-dma.

Earlier Comments:
The plan was to use small positions to limit our risk.

- Suggested (SMALL) Positions -
Aug 18, 2011 - entry price on EMC @ 20.25, option @ 2.20
symbol: EMC1221A20 2012 JAN $20 call - current bid/ask $ 5.15/ 5.30

- or -

Aug 18, 2011 - entry price on EMC @ 20.25, option @ 1.80
symbol: EMC1319A25 2013 JAN $25 call - current bid/ask $ 3.35/ 3.45

10/29/11 Plan to sell the rest of our 2012 Jan $20 calls on Monday at the open. Also plan to sell half of our 2013 Jan $25 calls on Monday at the open.
10/29/11 new stop loss @ 22.20
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: final target for 2013 calls @ $27.50
Current Stop loss: 22.20
Play Entered on: 08/18/11
Originally listed on the Watch List: 07/23/11


Corning Inc. - GLW - close: 15.31

Comments:
10/29 update: It was a very bullish week for GLW with a rally from $13.74 to $15.31 (+11.4%). Our plan was to buy call LEAPS when GLW closed over $14.00. That happened on October 24th with GLW closing at $14.29. The stock opened on October 25th at $14.27. The stock continued to rally and the market's big move higher on Thursday lifted GLW past its 100-dma.

GLW is arguably short-term overbought. I would expect a dip back toward the $14.50-14.00 zone. I'd wait for a dip back toward $14 before considering new bullish positions.

- Suggested Positions -
OCT 25, 2011 - entry price on GLW @ 14.27, option @ 2.05
symbol: GLW1319A15 2013 JAN $15 call - current bid/ask $2.57/2.64

Chart of GLW:

Current Target: $18.00
Current Stop loss: 12.85
Play Entered on: 10/25/11
Originally listed on the Watch List: 10/22/11


Hewlett-Packard - HPQ - close: 27.94

Comments:
10/29 update: HPQ delivered another strong week. Traders bought the dip near its 20-dma on Wednesday and the stock rallied to $28.57 intraday on Friday. We have been aiming for the $29.50 level. Yet after the market's meteoric rise in October I am suggesting we go ahead and exit our 2012 Jan. $22.50 calls now instead of waiting for HPQ to hit $29.50. Currently the bid on these calls is up to $5.95 (+121.1%) and we'll plan to exit on Monday morning. I am also suggesting we take profits in the 2013 calls and sell half of our position. Current bid on the 2013 Jan. $25 calls is at $6.05 (+61.3%).

HPQ is short-term overbought. I would expect a pull back toward the $26.50-26.00 area, which should be support. Since we are taking profits now we will adjust our final target for the rest of our 2013 calls from $29.50 to $32.50.

I am raising the stop loss on our 2013 call position to $23.90.

FYI: HPQ is due to report earnings in about three weeks.

- 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 $ 5.95/ 6.10
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 $ 6.05/ 6.25
Stop Loss @ 23.90

10/29/11 new stop loss on 2013 calls at $23.90
10/29/11 prepare to exit remainder of 2012 position on Monday @ open
prepare to sell 1/2 (half) of 2013 position on Monday at open
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

Chart of HPQ:

Current Target: 2013 call target: 32.50
Play Entered on: 09/26/11
Originally listed in New Plays: 09/24/11


Hershey Co. - HSY - close: 57.45

Comments:
10/29 update: Last week I cautioned readers that HSY might disappoint in its earnings report on October 27th. HSY did not disappoint but investors were obviously unhappy with the results. The company delivered a profit of 84 cents a share on revenues of $1.62 billion for the quarter. These were both in-line with Wall Street's numbers. Guidance was only in-line and management did have some cautious comments on the price of commodities (obviously a significant cost for HSY). The stock plunged from $60 to $57 on this news and hit an intraday low of $56.40 on Friday. The move is a significant show of relative weakness considering the market's strength late in the week.

At this point I am cautious on HSY. The long-term trend is still higher but I'm not suggesting new positions at this time. Please note that I am moving our stop loss down to $55.40, which is underneath the simple 200-dma.

- Suggested (SMALL) Positions -
Oct 19, 2011 - entry price on HSY @ 60.57, option @ 3.90
symbol: HSY1319A65 2013 JAN $65 call - current bid/ask $ 1.50/ 2.42

10/29/11 adjust stop loss to $55.40, under 200-dma
10/27/11 reports earnings that are in-line with estimates
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

Current Target: $67.00 & 74.00
Current Stop loss: 55.40
Play Entered on: 10/19/11
Originally listed on the Watch List: 09/17/11


KB Home - KBH - close: 7.47

Comments:
10/29 update: It was a rocky week for KBH. The stock traded in big swings between the $7.10 and $8.00 range. The simple 100-dma seems to be overhead resistance while traders were buying the dip at the rising simple 10-dma. Short-term I am concerned the market is overbought and due for a pull back. This could weigh heavily on the homebuilders. I would not be surprised to see KBH dip back toward the $6.50 area. I am not suggesting new positions at this time. 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 $ 1.06/ 1.20

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

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: 35.40

Comments:
10/29 update: KFT has not made much progress. The stock market is soaring and delivered one of its best monthly gains ever. Yet KFT has been churning sideways for two weeks in a row. Investors might be waiting for earnings. KFT's earnings are Wednesday, November 2nd, after the market's closing bell. Analysts are expecting a profit of 55 cents a share.

I am not suggesting new positions in front of the earnings report. Readers may want to consider launching new positions on a close over resistance at $36.00 (although you'll want to consider a higher exit target).

More conservative traders might want to consider a higher stop loss prior to the earnings report just in case KFT misses badly and the stock tanks on the news.

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 $ 2.90/ 3.10

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


Limited Brands, Inc. - LTD - close: 43.89

Comments:
10/29 update: LTD is another watch list graduate. The plan was to buy calls when TLD closed above $43.50. That happened on October 24th with a close at $43.79. Shares opened the next day at $43.70 and the option opened at $4.25 (this is an estimate, the option didn't trade at that time). The stock continued to rally. On Thursday, during the market's big move higher, LTD hit a new record high of $45.45 intraday. Shares hit some profit taking on Friday.

Now the market looks overbought. I would not be surprised to see LTD dip back toward the $42 area. Readers may want to wait for another bounce from the $42 region before considering new bullish positions. Our long-term target is the $54.00 level. We have a stop loss at $37.90. The plan was to keep our position size small.

- Suggested (SMALL) Positions -
Oct 25, 2011 - entry price on LTD @ 43.70, option @ 4.25
symbol: LTD1319A50 2013 JAN $50 call - current bid/ask $ 3.70/ 3.90

10/25/11 trade begins when LTD opens at $43.70
10/24/11 closed at $43.79, meets our entry point requirement
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.

Chart of LTD:

Current Target: $54.00
Current Stop loss: 37.90
Play Entered on: 10/25/11
Originally listed on the Watch List: 08/27/11


Ross Stores Inc. - ROST - close: 87.57

Comments:
10/29 update: Hmm... the trading in ROST last week was rather disappointing. Shares did hit new all-time highs but they spent much of their time churning sideways on either side of the $88 level. You could argue that the rally in ROST is losing steam. I would expect some profit taking soon. Look for a dip back toward the $85-83 zone. 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 $ 5.30/ 5.60

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

Financials & Technology

by James Brown

Click here to email James Brown



New Watch List Entries

JPM - JP Morgan Chase

NVDA - NVIDIA Corp

RHT - Red Hat Inc.


Active Watch List Candidates

EBAY - eBay Inc.

RAI - Reynolds American

TJX - TJX Cos. Inc.


Dropped Watch List Entries

BZH, CBG, CSC, GLW, and LTD all graduated to the active play list. MDR was removed.



New Watch List Candidates:


JP Morgan Chase - JPM - close: 36.69

Company Info

The market's reaction to the EU summit was bullish. Investors seem to be giving Europe the benefit of the doubt that they will be able to follow through on plans to bolster the banks, finalize a voluntary haircut for Greece debt, and leverage their EFSF rescue fund. Essentially they have taken the worst case scenario off the table and this should make investors more comfortable owning financials.

JPM is considered the best in breed for the banks. I am suggesting we buy calls on a dip at $34.25 with a stop loss at $31.45. Our long-term target is $46.00.

Buy-the-Dip trigger: $34.25

BUY the 2013 Jan. $40 call (JPM1319A40)

Chart of JPM:

Originally listed on the Watch List: 10/29/11


NVIDIA Corp. - NVDA - close: 15.60

Company Info

NVDA can be a very volatile stock but if you can catch it when the stock is trending you could rack up big gains. The stock is currently consolidating sideways in the $14-16 zone. On a short-term basis the stock market is overbought and due for a dip. That means we could see NVDA dip back toward $14.00 soon. Nimble traders may want consider a dip at $14.00 as their entry point. That's not the plan for the newsletter.

I am suggesting readers wait for a close over resistance at $16.0 and we'll start bullish positions the following morning with a stop loss at $13.90. Our long-term target is $22.50.

FYI: Earnings are November 10th, after the closing bell. Wall Street is looking for a profit of 31 cents a share.

NOTE: Due to NVDA's volatility this is an aggressive trade. We want to keep our position size small.

Wait for a close over $16.00 (small positions)

BUY the 2013 Jan. $20 call (NVDA1319A20)

Chart of NVDA

Originally listed on the Watch List: 10/29/11


Red Hat Inc. - RHT - close: 51.86

Company Info

It was a very bullish week for RHT. The stock broke through major resistance in the $48 zone and closed at new record highs. We do not want to chase it here. Broken resistance near $48.00 should be new support. I am suggesting a buy-the-dip entry point at $48.50. If triggered we'll use a stop loss at $43.95. Our long-term target is $59.75.

Buy-the-Dip trigger: $48.50

BUY the 2012 Jan. $60 call (RHT1319A60)

Chart of RHT:

Originally listed on the Watch List: 10/29/11


Active Watch List Candidates:



eBay Inc. - EBAY - close: 33.25

update 10/29: EBAY underperformed the market again but shares were starting to play catch up on Friday with a +2.9% gain. Shares remain inside their multi-month trading range with resistance near $35.00.

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)

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


McDermott Intl. - MDR - close: 10.86

update 10/29: MDR was not supposed to report earnings until early November. Yet the company issued an earnings warning this past week. Shares gapped down sharply on Thursday with a drop toward the $10.00 area. Shares actually hit $9.34 intraday on Thursday morning. This is near the 2010 low. After a -25% correction on Thursday is all the bad news priced in? The $10 area has been significant support in the past. More aggressive traders might want to consider buying calls on MDR now with a stop loss under $9.30. We are choosing to remove MDR from watch list following this earnings warning. Our trigger to open positions (close over $15.25) was not hit.

Trigger: Buy a close over $15.25

Trade Did Not Open.

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


Reynolds American Inc. - RAI - close: 39.13

update 10/29: RAI underperformed the market last week thanks to a disappointing earnings report on October 25th. Shares fell toward short-term support near $38.00 before starting to bounce back later in the week. I do not see any changes from my prior comments. We are waiting for a breakout past resistance at $40.00.

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 $37.85. Our long-term target is $49.00.

Trigger: Buy a close over $40.00

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

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


TJX Cos. Inc. - TJX - close: 60.37

update 10/29: TJX has rallied to new all-time highs with a breakout past resistance near $60.00. I would be tempted to buy calls now, however the stock market looks very overbought and due for a correction lower. Plus, TJX is due to report earnings on November 15th. Readers may want to wait and see how the market reacts to TJX's earnings report before considering new positions. A disappointing report could exacerbate any correction fueled by a market pull back.

We will go ahead and raise our buy-the-dip trigger to $55.00 and raise our stop loss to $51.75.

Buy-the-Dip trigger: $55.00

BUY the 2013 Jan $60 call (TJX1319A60)

10/29/11 adjusted trigger to $55.00, stop to $51.75
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