Option Investor
Newsletter

Daily Newsletter, Sunday, 11/6/2011

Table of Contents

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

Leaps Trader Commentary

Greek Referendum Sends Stocks on Rocky Ride

by James Brown

Click here to email James Brown

Are you seasick yet from all of these sharp up and down moves in the stock market? After the best October in 20 years stocks saw a crash early in the week with a -5% plunge in just two days. Yet traders bought the dip midweek and the S&P 500 rebounded +3.1% off its Tuesday lows. This index was up almost +20% from its October lows so we knew stocks were overbought and poised for profit taking but the violence in the move is still a little surprising.

It all started with a terrible hangover in Europe. The week before stocks were surging on positive news that the EU summit may have finally produced a solution for their Greece problem. Suddenly those hopes turned to doubts when the Greek Prime Minister Papandreou called for a referendum (general vote) on the EU bailout he had just agreed to. Europe was suddenly in chaos again and faith in the EU leaders to actually get anything done plunged. Making matters worse for investors and fueling the early week sell-off was the bankruptcy of MF Global a major trading firm.

Economic data was generally disappointing. In the U.S. the ISM manufacturing data was a miss with a drop from 51.6 in September to 50.8 in October. Economists had been expecting a rise to 52.1. Readings over 50.0 indicate growth and expansion. The ISM services index for October came in at 52.9 compared to estimates closer to 54.0. The ADP employment data was slightly better than expected with +110,000 new jobs in October versus estimates for +100,000. Monthly same-store sales data for October was pretty mixed. If there was an overall trend it seemed to be positive sales growth but less than expected. The jobs report on Friday could have been a market mover but it seemed to fizzle somewhat. Nonfarm payrolls came in at +80,000 new jobs for October but economists were expecting +95,000. The good news was a revision of +102,000 new jobs for the prior two months, which more than made up for October's shortfall. I will remind you that we need at least +150,000 new jobs a month to make any dent in the millions of unemployed and underemployed workers.

One of the big events of the week that also seemed to fizzle was the two-day FOMC meeting. Wednesday's announcement was a nonevent. Ben Bernanke and friends left rates unchanged in the 0.00% to 0.25% zone. Bernanke's quarterly press conference failed to stir any major market action. It is worth noting that the FOMC downgraded their 2011 GDP estimates from 2.8% to 1.65% and they downgraded their 2012 growth estimates from 3.5% to 2.7%.

Economic data overseas was also disappointing. China said their PMI survey came in at 50.4 in October, which is a decline from 51.2 in September. Meanwhile in Great Britain their October PMI dropped from 51.1 to 47.4. The only real highlight in Europe was the new ECB President Mario Draghi's decision to cut interest rates by 25 basis points to 1.25%. This was very unexpected and helped fuel market gains on Thursday.

Europe & Greece

The Greek Prime Minister's extremely unexpected call for his country to hold a referendum (public vote) on the EU bailout was a nightmare move for the rest of EU leaders. Depending on your perspective this was the reason stocks sold off. Then again with the market overbought investors were looking for any excuse to take profits. This certainly fit the bill as a reason to hit the sell button.

Papandreou has spent years working with his fellow EU leaders, the ECB and the IMF to "save" his country from a hard default. To work that hard and achieve a bailout two weeks ago only to throw it up to a public vote that hates all the government austerity appeared extremely foolish. I am simplifying the situation but there were immediate calls for a vote of confidence for Papandreou and his controlling party of the Greek government. This vote of confidence caused a lot of handwringing this past week over what happens if he loses the vote of confidence? Who could potentially take his place?

Sadly this soap opera could have a huge impact on the U.S. if Greece does see a hard default. If Greece officially goes bankrupt (technically they already are) then all the credit default swaps kick in, Greek debt plunges in value, and suddenly several major European banks will be insolvent. The debt contagion that EU leaders have been desperately trying to avoid would immediately spread. Most of Europe would fall into recession with several countries bordering on depression level business activity. There would be massive financial failures. The EU is a huge trading partner for the U.S. and the largest trading partner for China. If Europe crumbles it's going to have a big impact on the rest of the world.

EU regulators had hoped to have a solution to their Greece problem prior to the G20 meeting last week. Unfortunately this call for a referendum vote in Greece threw a wrench into their plans. Overall the G20 meeting seemed to be a dud. Germany, France and the U.S. were trying to drum up support for other countries to help contribute more money to the EFSF rescue fund but there weren't any takers (at least no one was interested in committing new capital). The trust factor in Europe has hit new lows. No one wants to be counterparty risk to anyone else.

We might want to look at this from another angle. We've been talking about a Greece default for months. Many believe there is a 100% chance of the country eventually filing bankruptcy and the major players are just stalling for time, trying to prop up their banking system and hoping economic activity will improve prior to the bomb going off. The real elephant in the room is Italy. Investors and analysts have been focused on Italian bond yields all week long. The bad news here is that these bond yields have been hitting new highs. A year ago the yield on a 10-year Italian bond was 4%. This past week it hit 6.39%. Italy's debt is 120% of its GDP and they cannot afford to rollover their debt at 6.3%. When Greece, Ireland and Portugal saw their bond yields hit 7% they had to cave in and ask the IMF for a bailout. Italy cannot ask for a bailout. They are the third largest economy in the EU. There is no one big enough to bail them out. If Italy goes under it's going to take the rest of the continent with it.

Essentially, nothing has been solved. Two weeks ago it seemed that the EU leaders had managed to take the worst case scenario off the table. Suddenly they are staring it in the face with the Greek referendum call. Thankfully at the moment the current Greek government is still in power and they have pulled their plans to hold a referendum. Stay tuned next week for the next exciting chapter in this EU experiment.

Major Indices:

Last week we talked about potential support near 1250 and then near the 1210-1200 area. Last Monday's drop paused near 1250. Tuesday saw a plunge toward 1215 before traders finally started buying the dip. The S&P 500 close at 1253, essentially at the 1250 support/resistance level. If stocks pull back again I would still expect support near 1200. Overhead the index is looking at resistance at 1285 and 1300.

Daily chart of the S&P 500 index:

The NASDAQ Composite pulled back from the 2735 region back to support near 2600in in just two days. At the moment the bounce back has paused under resistance near 2700 and its simple 200-dma. On a positive note the index's simple 50-dma has started to turn higher. If the NASDAQ can breakout past 2740 then we could see it challenge the 2011 highs in the 2850 region.

Daily chart of the NASDAQ Composite index:

The small cap Russell 2000 index experienced a big drop from 760 to 712 early last week. If you look at an intraday chart the short-term trend seems positive with traders buying the dip. Unfortunately the 775 area could be tough resistance since it's converging with the 200-dma. If we see the $RUT hit this area I would expect another pull back. Obviously a breakout past 775 would technically be bullish.

Daily chart of the Russell 2000 index

After a very busy week of economic data this coming week looks pretty barren. We'll see the latest look at consumer credit on Monday. Wholesale inventory data comes out on Wednesday. Import/Export price data for October comes out on Thursday. The first look at Michigan (consumer) Sentiment for November is released on Friday. Plus, there will be a two-day meeting, starting on Monday, for EU finance leaders as they work on the EFSF bailout fund. Then on Thursday the EU will publish their semi-annual economic outlook. Considering all the drama and concerns going forward they might downgrade their growth prospects (similar to what the Federal Reserve just did for the U.S. on Wednesday this past week).

- Thursday, November 10 -
Weekly Initial Jobless Claims
Import/Export price data
U.S. Trade Balance for September

- Friday, November 11 -
Michigan (consumer) Sentiment for November (1st look)

The Week Ahead:

Looking ahead all I see is European headlines. We are still in the tail end of Q3 earnings season and there are a couple of high-profile companies reporting (like CSCO). Odds are the only market moving events will be European. Greece and Italy will continue to dominate the headlines. If it seems like EU leaders can stop the bleeding (again) then stocks are likely to rally. If not, then the markets could be in for another rough week. It seems like the only thing we can count on are more triple-digit days for the Dow Industrial Average. We don't get small moves anymore. It feels like +2% or -2% sessions are becoming normal. That might be great if you're a successful day trader but it can be hell if you're not.

Odds are also really good we're going to hear a lot more about the "super committee" in Washington that is supposed to be finding a way to cut $1.2 trillion in spending cuts. Personally I have very little faith this committee will be able to accomplish this by the November 23rd deadline but I would love to be proven wrong on this one.

Seasonally we are in some of the most bullish months of the year (November and December) but seasonal patterns are not guarantees. European headlines could change the tone of the market in minutes. I am cautiously bullish but would be very careful when it comes to launching new positions. Investors may want to start small and if the trade moves in your favor consider adding to positions.

- James


Portfolio

Portfolio Update

by James Brown

Click here to email James Brown


Current Portfolio


Portfolio Comments:

It proved to be a very volatile week for stocks. After a +19.5% bounce from its October low the S&P 500 saw a -5% plunge on Monday-Tuesday this past week. Stocks started to rebound just as fast but lost momentum on Friday.

We had two stocks make the jump from our watch list to our play list (JPM & RHT). Plus, we had planned to do some profit taking on Monday, October 31st on both EMC and HPQ. We exited our 2012 calls and sold 1/2 of our 2013 positions.

I have updated stop losses on JPM and ROST.

Keep in mind that we're going to see some earnings announcements this week that could create more volatility in our portfolio.

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

Personal Products

by James Brown

Click here to email James Brown

Editor's Note:

In addition to tonight's new candidate, readers may want to keep an eye on LRCX, F, and ATVI as possible LEAPS candidates.

Short-term traders may want to consider putting these stocks on their watch list: PETM, KEX, and UA. They appear to offer some potential but they do not have LEAPS options available.

-James


- New Trades -


Kimberly-Clark Corp. - KMB - close: 69.71

Why We Like It:
KMB is known for a number of major brands that range from diapers to facial tissues, and healthcare supplies. The stock has been a slow but consistent winner over recent months. This pull back toward the $68-69 area looks like a bullish entry point.

The stock market has been a volatile place lately and investors could be drawn to KMB's more quiet trend and steady dividend yield (around 3%). I will point out that KMB does have long-term resistance in the $73.00-73.50 area. Therefore we will only open small (half-sized) positions now. When KMB closes above $74.00 we'll reconsider adding new positions to this play. Our long-term target is $79.75 but we'll readjust it as the play progresses. The Point & Figure chart is currently suggesting a long-term target of $98.00.

We'll open our small position on Monday morning. You could choose to wait for another dip toward the $68 level instead. We're listing this trade with a stop loss at $65.75.

FYI: KMB does have 2014 options available but the spreads are too wide at this time.

NOTE: KMB does not move very fast. Investors may want to try and maximize their returns by changing this into a vertical (a.k.a. calendar) spread.

- Suggested Positions -
Nov 07, 2011 - entry price on KMB @ --.--, option @ -.--
symbol: KMB1319A75 2013 JAN $75 call - current bid/ask $ 1.90/ 2.10

Chart of KMB:

Current Target: $79.75
Current Stop loss: 65.75
Play Entered on: 11/07/11
Originally listed in the New Plays 11/05/11



Play Updates

Stocks Remain Volatile

by James Brown

Click here to email James Brown


Closed Plays


None. No closed plays this week.


Play Updates


Allergan Inc. - AGN - close: 83.61

Comments:
11/05 update: As we expected AGN did trade lower. Shares violated the 50-dma on November 1st but found support in the $81-82 zone. The stock quickly rebounded with the market's big bounce. I am still concerned that the reversal that started two weeks ago has painted a big bearish reversal candlestick on the weekly chart. Readers may want to wait for a new close over $86.00 before considering new positions. 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 $ 2.85/ 4.60

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: 6.49

Comments:
11/05 update: It was an ugly week for BAC. Shares fell from $7.35 a week ago to $6.32 by Tuesday morning (-14%). U.S. financial stocks continued to get battered by headlines out of Europe over worries about what a European meltdown might mean for U.S. banks.

There was big news late in the week for BAC when the company disclosed in their 10-Q filing that they will probably raise capital again by selling more common stock, up to 400 million shares. That sounds like a lot but BAC has 10 billion shares outstanding. That's an increase of 4% or another way to look at it is a dilution of current shareholders by -4%. Yet the stock fell -6.0% on Friday.

The short-term action doesn't look healthy so we're not suggesting new positions at this time.

- Suggested Positions -
AUG 29, 2011 - entry price on BAC @ 8.10, option @ 0.57
symbol: BAC1221A10 2012 JAN $10 call - current bid/ask $ 0.06/ 0.07
(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 $ 0.70/ 0.71
(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: 31.34

Comments:
11/05 update: The post-earnings profit taking in BMY continued the first three days of the week. Shares bottomed on Wednesday with an intraday dip under its 50-dma and the $31.00 level.

I've been discussing the potential for a correction back to $30 for weeks now. That is still a distinct possibility. I would wait for a dip or a bounce near $30 before considering new bullish positions. More conservative traders may want to take profits now.

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 $ 1.24/ 1.33

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: 2.04

Comments:
11/05 update: BZH definitely experienced some profit taking this week. Shares closed down -7.2% but spent most of the week consolidating sideways above round-number support at the $2.00 level. There was an intraday spike down to $1.79 near its simple 50-dma but it lasted less than a minute.

Readers can choose to buy long-term bullish positions now or wait for a possible dip toward the $1.85-1.80 zone. Whether or not BZH will retest the 50-dma will depend on how the broader market performs.

NOTE: BZH is due to report earnings on Nov. 15th before the opening bell. More conservative traders may want to wait and see how the market reacts to this earnings news before considering new bullish positions.

- 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 $ 0.60/ 0.75

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

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: 16.67

Comments:
11/05 update: I warned readers to expect some profit taking, which is why we took some money off the table on Monday.

The correction in CBG continues. The stock is down -15% from its late October high near its exponential 200-dma. Recent weakness has been a bit troubling. It looks like shares are headed for the $16.00-15.00 zone. Unfortunately we have a stop loss at $15.75. If the correction continues we could see this play closing soon.

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 $ 1.55/ 2.00

10/31 scheduled exit to sell half of our March calls.
exit $2.30 (+27.7%)
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

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: 32.40

Comments:
11/05 update: CSC essentially closed the week unchanged but it was a rocky week. The stock fell to $29.72 on Nov. 1st but when the market bounced this stock bounced big. Previously I had suggested readers look for a dip near $31 as a possible entry point. Thursday saw a big rebound and a close back above $32 and its 100-dma.

Please note that I am not suggesting new positions at this time. CSC is due to report earnings on Nov. 9th before the market's opening bell. Analyst are expecting a profit of 67 cents a share.

- Suggested Positions -
OCT 28, 2011 - entry price on CSC @ 32.37, option @ 3.30
symbol: CSC1319A35 2013 JAN $35 call - current bid/ask $ 3.50/ 4.20

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: 18.03

Comments:
11/05 update: Last week provided a new entry point. I had suggested waiting for a dip into the $17.75-17.50 zone and CSCO fell toward $17.50 on November 1st. Now comes the hard part. CSCO is due to report earnings on November 9th after the closing bell. Wall Street expects a profit of 39 cents a share. If the company disappoints the stock could crash again.

The $17.00 level should be decent support but if earnings are bad we could see CSCO hit our stop loss at $16.40.

- Suggested Positions -
OCT 28, 2011 - entry price on CSCO @ 18.28, option @ 1.68
symbol: CSCO1319A20 2013 JAN $20 call - current bid/ask $1.69/1.72

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.

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: 24.67

Comments:
11/05 update: EMC held up reasonably well. After a rocky week and a drop toward its rising 20-dma (near $23.60 on Nov. 1st) the stock has rebounded back toward the $25 level. A week ago it was our plan to exit the rest of our 2012 calls and take profits by selling at least half of our 2013 calls at the open on Monday, October 31st.

I am not suggesting new positions at this time.

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

- Suggested (SMALL) Positions -
(closed on Oct. 31st)
Aug 18, 2011 - entry price on EMC @ 20.25, option @ 2.20
symbol: EMC1221A20 2012 JAN $20 call - exit $4.65 (+111.3%)

- or -

Aug 18, 2011 - entry price on EMC @ 20.25, option @ 1.80
symbol: EMC1319A25 2013 JAN $25 call - current bid/ask $ 3.25/ 3.40

10/31/11 scheduled exit. EMC gapped down at $24.47. The 2012 $20 call opened at $4.65 (+111.3%). We also had plans to sell half of our 2013 $25 calls, which opened at $3.02 (+67.7%)
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: 14.54

Comments:
11/05 update: Ouch! The profit taking on Monday and Tuesday last week was rough. I warned readers to look for a dip back toward the $14.00 zone but I wasn't expecting GLW to get there so fast. The stock is rebounding. I would be tempted to launch new positions at current levels.

- Suggested Positions -
OCT 25, 2011 - entry price on GLW @ 14.27, option @ 2.05
symbol: GLW1319A15 2013 JAN $15 call - current bid/ask $2.22/2.28

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: 26.97

Comments:
11/05 update: HPQ also suffered some steep profit taking on Monday-Tuesday last week. We had planned to exit the rest of our 2012 calls on Monday at the open. Our 2012 Jan $22.50 calls opened at $5.40 (+100%). We also wanted to sell half of our 2013 calls to lock in a gain. These 2013 January $25 calls opened at $5.70 on Monday (+52%).

I am not suggesting new positions at this time. The company is due to report earnings on November 21st.

- Suggested (SMALL) Positions -
Short(er)-Term Trade (exit Oct. 31st)
Sep 26, 2011 - entry price on HPQ @ 22.59, option @ 2.69
symbol: HPQ1221A22.5 2012 JAN $22.50 call - Exit $5.40 (+100%)
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 $ 5.60/ 5.80
Stop Loss @ 23.90

10/31/11 scheduled exit for the remainder of our 2012 calls @ the open. Options opened at $5.40 (+100%), plus we sold half of our 2013 $25 calls, which opened at $5.70 (+52%).
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

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: 57.61

Comments:
11/05 update: HSY managed to close the week with a gain. There wasn't much follow through lower although shares did hit a new four-week low on Tuesday but quickly rebounded. The short-term pattern is still somewhat bearish. I am not suggesting new positions at this time but more aggressive traders may want to consider positions in the $57.00-56.00 area. We are keeping our stop loss at $55.40 for now. I'm betting the simple 200-dma will act as support.

- Suggested (SMALL) Positions -
Oct 19, 2011 - entry price on HSY @ 60.57, option @ 3.90
symbol: HSY1319A65 2013 JAN $65 call - current bid/ask $ 1.54/ 2.68

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


JP Morgan Chase - JPM - close: 36.69

Comments:
11/05 update: Financial stocks have been volatile in reaction to headlines out of Europe. JPM fell from $36.69 Friday a week ago to $31.84 on Tuesday morning (-13.2%) Our plan was to buy a dip at $34.25 but the stock gapped open lower at $32.47 on November 1st, triggering our long-term bullish position.

Given this better than expected entry point I am moving our stop loss down to $29.90 (instead of $31.45). I would still consider new positions now but readers may want to slowly build up to a full position (only buying a few LEAPS at a time, based on your normal position size). Position size is unique to each individual investors based on the size of your account and risk tolerance.

Our long-term target is $46.00.

- Suggested Positions -
Nov 01, 2011 - entry price on JPM @ 32.47, option @ 2.38
symbol: JPM1319A40 2013 JAN $40 call - current bid/ask $ 2.84/ 3.00

11/05/11 new stop loss at $29.90

Chart of JPM:

Current Target: $46
Current Stop loss: 29.90
Play Entered on: 11/01/11
Originally listed on the Watch List: 10/29/11


KB Home - KBH - close: 7.07

Comments:
11/05 update: Ouch! Profit taking in KBH was pretty sharp with a drop from $7.47 on Oct. 28th to $6.40 on Nov. 1st (-14%). Traders bought the dip twice at $6.40 near its 50-dma. A week ago I warned readers that KBH might dip toward the $6.50 level. Investors can use this rebound from its 50-dma as a new bullish entry point.

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 $ 0.75/ 1.09

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: 35.18

Comments:
11/05 update: It proved to be a volatile week for KFT. The stock dipped toward $34.50 and technical support at its 50-dma prior to earnings. Then on Nov. 2nd, after the close, KFT reported earnings of 58 cents a share, which was 3 cents better than expected. Revenues were also stronger than expected. Management raised their 2011 guidance. This news was enough to launch KFT toward its 2011 high on Thursday but the rally stalled $36.30.

The earnings news is bullish but it looks like it's going to take another broad market rally to push KFT to new highs. The good news is that a lot of investors are still focused on high-dividend trades and KFT has a 3.3% yield. I would still wait for a close over $36.00 before considering new positions.

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

- Suggested (SMALL) Positions -
Sep 22, 2011 - entry price on KFT @ 32.71, option @ 2.35
symbol: KFT1319A35 2013 JAN $35 call - current bid/ask $ 2.85/ 3.05

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: 42.63

Comments:
11/05 update: It was a rocky week for LTD. The market sell-off on Tuesday pushed LTD toward its rising 30-dma. Then Thursday was a volatile session for retailers as investors reacted to October same-store sales results. Analysts were expecting +6.7% growth from LTD and the company only reported +6.0%. It's still a strong number but less than expected was the trend among retailers. LTD tried to soften the bad news by announcing they would increase their current stock buyback program by another $250 million.

LTD saw a brief dip toward $40 on Thursday while Friday's session was quiet. At this point I would wait for another close over the $44.00 level before considering new bullish positions again.

Don't forget that LTD is due to report earnings in the next couple of weeks (current estimate is around November 17th). 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 $ 3.30/ 3.60

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.

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


Red Hat Inc. - RHT - close: 50.59

Comments:
11/05 update: RHT posted a loss for the week but the volatility provided a better than expected entry point. RHT was on our watch list with a trigger to buy calls on a dip at $48.50. Shares gapped open lower at $47.70 on November 1st triggering our play. Traders bought the dip and shares almost recovered by Friday with a rebound back above the $50 level.

Readers could open new positions here but I'd rather wait for another dip in the $48.50 area. We have a stop loss at $43.95 but more conservative traders may want to consider a stop closer to $46 instead.

- Suggested Positions -
Nov 01, 2011 - entry price on RHT @ 47.70, option @ 4.75
symbol: RHT1319A60 2013 JAN $60 call - current bid/ask $ 4.30/ 5.70

Chart of RHT:

Current Target: $59.75
Current Stop loss: 43.95
Play Entered on: 11/01/11

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


Ross Stores Inc. - ROST - close: 89.41

Comments:
11/05 update: ROST continues to show relative strength. During the market sell-off early last week ROST did not break support near $86.00, at least not in a significant way. Shares now look like they are coiling for a breakout past resistance near $90.00.

Please note that we are raising our stop loss to $81.75 since the $83-82 zone should be support. Earnings for ROST are coming up in a couple of weeks. Current estimates place the announcement date around November 18th. We might choose to take profits prior to the earnings announcement. Our current target is $99.00.

- Suggested Positions -
Oct 11, 2011 - entry price on ROST @ 84.36, option @ 5.30
symbol: ROST1319A100 2013 JAN $100 call - current bid/ask $ 6.50/ 6.90

11/05/11 new stop loss @ 81.75
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: 81.75
Play Entered on: 10/11/11
Originally listed on the Watch List: 09/10/11


Watch

Video Games, Fast Food, Steel & More

by James Brown

Click here to email James Brown

Editor's Note:

We had two candidates (JPM & RHT) jump to the active trade list last week. I am adding four new candidates to the watch list tonight (ERTS, MCD, QCOM, and X).

- James



New Watch List Entries

ERTS - Electronic Arts

MCD - McDonald's Corp

QCOM - QUALCOMM

X - U.S. Steel


Active Watch List Candidates

EBAY - eBay Inc.

NVDA - NVIDIA Corp

RAI - Reynolds American

TJX - TJX Cos. Inc.


Dropped Watch List Entries

JPM and RHT graduated to our active trade list.



New Watch List Candidates:


Electronic Arts - ERTS - close: 25.20

Company Info

It has been years since ERTS has traded over the $25.00 level with any significant moves. Friday saw the stock rally to $26.13 before paring its gains. I blame the pull back on general market malaise and worried over what headlines the weekend might bring.

Bigger picture investors seem to be growing more confident with ERTS. The stock seems to have bottomed, just look at the weekly chart below. Nimble traders may want to consider buying a dip in the $24-23 zone. I am suggesting we wait for ERTS to close over $26.00 and we'll launch call LEAPS positions the next morning with a stop loss at $21.95.

Wait for ERTS to close over $26.00

BUY the 2013 Jan $30 call (ERTS1319A30)

Chart of ERTS:

Originally listed on the Watch List: 11/05/11


McDonald's Corp. - MCD - close: 93.81

Company Info

Shares of MCD continues to be a very strong performer in the Dow Industrial Average. The stock is sitting just pennies away from a new all-time high. The stock is seen as a "safer" trade in these tough economic times given their low-price menu and consistent same-store sales.

More aggressive traders might want to consider buying calls on a breakout over $94.00. I am suggesting we wait for a dip and buy calls on a dip at $91.00. We'll use a stop loss at $86.75. The $100.00 level could be round-number, psychological resistance but the Point & Figure chart is bullish with a long-term target of $112 (which could grow). We will set our long-term target at $108.00.

Buy-the-Dip trigger: $91.00

BUY the 2013 Jan $100 call (MCD1319A100)

Chart of MCD:

Originally listed on the Watch List: 11/05/11


QUALCOMM Inc. - QCOM - close: 56.50

Company Info

QCOM recently reported much better than expected earnings, beating both the top and bottom line estimates. Management raised their guidance looking ahead. The company is reaping the benefits from the booming smartphone market. The CEO said there is over 300 new devices in development that will use QCOM electronics inside. That sounds like there is a lot of potential for growth.

Shares exploded higher following the bullish earnings report. I am suggesting we wait and buy calls on a dip at $54.25, just above the simple 200-dma. If triggered we'll use a stop loss at $49.45. More conservative traders may want to wait and open positions when QCOM closes over resistance at the $60.00 level instead (and just adjust your stop loss higher). Our long-term target is $74.50.

Buy-the-Dip trigger: $54.25

BUY the 2013 Jan $60 call (QCOM1319A60)

Chart of QCOM

Originally listed on the Watch List: 11/05/11


U.S. Steel Corp. - X - close: 27.92

Company Info

The situation in Europe could still unravel, which would throw the region into chaos and recession. However, until that happens, it looks like investors are growing more comfortable with shares of X, a steel company, which is very affected by economic growth here and abroad.

Looking at the weekly chart it seems that shares of X have found a bottom. Yet short-term the stock is overbought. I am suggesting we wait and buy calls on a dip at $25.50. Keep in mind that X can be a volatile stock so we want to keep our position size small to limit our risk. If triggered at $25.50 we'll use a stop loss at $21.40. Our long-term target is $37.50.

Buy-the-Dip trigger: $25.50 (small positions)

BUY the 2013 Jan $30 call (X1319A30)

Chart of X:

Originally listed on the Watch List: 11/05/11


Active Watch List Candidates:



eBay Inc. - EBAY - close: 32.71

update 11/05: EBAY continues to churn sideways although the trading range seems to have narrowed. We are still waiting for a breakout past resistance.

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


NVIDIA Corp. - NVDA - close: 14.82

update 11/05: This could be a very big week for NVDA. The company is due to report earnings on Thursday, November 10th after the closing bell. Analysts are expecting a profit of 32 cents a share.

Currently we are waiting for a breakout past resistance near $16.00. I am suggesting we wait for a close over the $16.00 level and then open positions the next day. That might happen following the earnings report, which means we could see NVDA surge higher or plunge next Friday. Of course our plan is to open positions the next day. We'll start bullish positions with a stop loss at $13.90. Our long-term target is $22.50.

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)

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


Reynolds American Inc. - RAI - close: 38.11

update 11/05: Hmm... RAI seems to have lost its way. Shares are still in the $38-40 trading range. Yet the last two weeks have developed a trend of lower highs, which would suggest RAI is poised to breakdown.

At the moment 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.

Nimble traders may want to consider bullish positions on a dip or a bounce from the 200-dma near $36.00 instead.

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: 60.59

update 11/05: Shares of JTX continue to show strength. The stock rallied sharply from its early sell-off last week. Aggressive traders might want to consider buying a breakout past $61.50. Personally, I do not want to chase it, especially in front of earnings. TJX is due to report earnings on November 15th. There is always a chance that the stock will sell-off following its report.

I am leaving our buy-the-dip trigger unchanged at $55.00 with a stop loss at $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