Option Investor
Newsletter

Daily Newsletter, Sunday, 11/27/2011

Table of Contents

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

Leaps Trader Commentary

New Six-Week Lows

by James Brown

Click here to email James Brown

The Thanksgiving shortened trading week proved to be another rough one for stocks. Disappointing economic data and a parade of negative headlines continued to feed the sell-off. The S&P 500 index gave up -4.6% while the small cap Russell 2000 index dropped -7.4% in just the last four trading days. Transports (-6.3%), financials (-5.7%), and semiconductors (-7.3%) all helped lead the market lower. Let's take a quick look at last week's milestones.

The stock market started the week off on a sour note with the Dow Industrials down -300 points on Monday. Moody's credit rating agency caused the market to shiver with comments regarding France's credit rating. France is one of the largest and strongest of the EU countries but it's triple A credit rating could be in jeopardy. Monday's market was also plagued by headlines regarding the super committee's failure to come to an agreement on reducing the deficit by $1.2 trillion over the next ten years.

Stocks failed to see much relief on Tuesday when the Q3 GDP estimate came in worse than expected at +2.0% versus expectations for +2.5% growth. Selling got ugly again on Wednesday as investors headed out for the Thanksgiving holiday. Roiling the markets was news that Germany, the EU's biggest and strongest economy, essentially saw its bond auction fail. Germany tried to sell six billion euros in debt but only managed to sell 3.6 billion. Germany is considered the one of the safest EU country to buy debt from. If there is no market for German debt it spells major trouble for the rest of the region.

Meanwhile German PMI data came in at 47.9 compared to 49.1 in October. The string of disappointing economic data continued with China's Flash PMI falling to 48.0 in November, down from 51.0 in October. News that U.S. initial weekly jobless claims came in at 393,000 was mostly ignored. Elsewhere at home in the U.S. the Durable goods orders for October dropped -0.7% versus estimates for -0.9%. Minus the more volatile transportation orders the Durable goods number came in at +0.7%, which was better than expected. All of this was on top of news that the Federal Reserve was imposing another, more stringent round of stress tests for the major U.S. banks scheduled for early 2012.

Headlines out of Europe continue to plague stocks. This past week saw the Fitch rating agency cut Portugal's credit rating to junk status at BB+. S&P downgraded Belgium's rating to AA. Investors continue to focus on European bond yields. Spanish and Italian bond yields are still way too high. Eventually the yields will get too high for these countries to continue servicing their debt and they will either need to default or ask for some sort of bailout. We already know that Italy is considered too big to be bailed out. The country currently owes 1.9 trillion euros in debt and needs to roll over 440 billion euros worth of new bonds to pay for expiring debt soon. Greece made headlines again with worries that the recent agreement for a 50% voluntary haircut on its sovereign debt may not be enough and it might have to be closer to 75%.

Think about it for a moment. These European banks all bought and sold credit default swaps on debt they've purchased from other banks and fellow EU countries. Why are they so scared to actually call in these swaps? Why are they willing to take a 50% haircut on billions debt they own from Greece? The reason they are worried is that if they call in their credit default swaps the bank they bought them from might not be able to pay it or the bank they bought them from would have to call in their own swaps to cover the swaps they sold, and so on. Eventually someone is going to throw up their hands and say, "sorry, we don't have enough money to cover these derivatives". Once one bank fails it could trigger a domino effect because the failed bank had counterparty risk to another bank, which was the counterparty to another bank, etc. If a major bank fails it would jeopardize the entire system. This is the major reason why European banks have been so reluctant to lend to each other. The fight right now is between those countries that want the European Central Bank (ECB) to be the lender of last resort but Germany doesn't want that to happen because as the biggest and strongest of the bunch Germany will end up shouldering the burden for the rest of the region.

Switching gears for a moment, we can't talk about Thanksgiving week without mentioning Black Friday. It's the official start to the holiday shopping season. Many retailers started their Black Friday sails earlier in the week. Of course there were plenty of headlines regarding controversy from stores that were opening on Thanksgiving evening instead of waiting until Friday morning. The good news here is that the American consumer is very alive and well. Store traffic across the country was higher than expected. Some analysts were pegging Black Friday sales at three times better than prior expectations. These are early estimates but the tone is positive and it could be a bullish catalyst for retail stocks on Monday. We will also be hearing about the flood of online traffic for Cyber Monday.

Major Indices:

Last week I talked about the "slim chance" that the S&P 500 holds support at the 1200 level. The index blew through that level within the first five minutes of trading on Monday morning. The S&P managed to hold above support near 1180 on Monday and Tuesday and then plunged below it on Wednesday's big drop. Friday's close at 1158 is near the 50% retracement of the S&P 500's rally from the October lows to the October highs. Can the index bounce here? Of course it can. The problem we have is the market's new bearish trend lower. Any bounce is just an oversold bounce that has to make it past multiple layers of resistance. Even though December is normally a bullish season for stocks I am concerned that the path of least resistance is probably lower here.

If the sell-off continues we can look for potential support at 1120 and then 1100. Overhead we have possible resistance about every 20 points at 1180, 1200, etc.

Daily chart of the S&P 500 index:

The tech-heavy NASDAQ composite tried to hold support at the 2500 level on Monday and Tuesday but broke down on Wednesday's market-wide plunge. This index is down -5% in just the last four days and down -10.8% from its October high. On a short-term basis the NASDAQ is very oversold and due for a bounce. Unfortunately now the 2500 level is new resistance, as is the top of the gap down near 2570 and then broken support at 2600.

Daily chart of the NASDAQ Composite index:

The small caps were hammered lower last week. The Russell 2000 index plunged -7.4%, breaking below several layers of potential support. Friday's close left the $RUT at its 61.8% Fibonacci retracement. The 680 and 700 levels are now potential overhead resistance.

Daily chart of the Russell 2000 index

We have a very busy week for economic data. There will be plenty of reports on the housing market. The major announcements will look at the wider economy and the labor market. Wednesday will see the ADP Employment report, the Chicago PMI, and the Fed's Beige Book released. Thursday will see the national ISM index. Friday will deliver the jobs report for November.

- Monday, November 28 -
New Home Sales for October

- Tuesday, November 29 -
Case-Shiller index on home prices
Consumer Confidence for November

- Wednesday, November 30 -
Challenger Corporate Layoff report
ADP Employment report for November
Chicago PMI
Pending Home sales for September
Federal Reserve Beige Book for November

- Thursday, December 1 -
Weekly Initial Jobless Claims
ISM Index
Auto & Truck sales

- Friday, December 2 -
non-farm payrolls (jobs) report for November
Unemployment rate

The Week Ahead:

Looking ahead the market is going to have a divided focus. We have several potentially market moving economic reports in the U.S. this week. Yet there are also several significant meetings coming up in Europe. This coming Tuesday finance ministers from the 17-nation eurozone will be meeting one day ahead of the 27-nation European Union gathering of finance ministers. Headlines and bickering among the various EU members about how to handle their toxic debt problem could push the markets lower. Two weeks from now there is yet another summit for EU leaders in Brussels but whether or not anything productive comes out of the meeting is the question.

Last week I warned readers that this Thanksgiving week could be a rough one. The technical damage to the market is pretty nasty. I am concerned that even if we do see an oversold bounce traders will sell into strength and reload their shorts. Essentially the path of least resistance appears to be down. There is the chance that we might get some positive economic data from the U.S., which could improve investor sentiment. Yet until the U.S. manages to decouple from the problems in Europe it might be hard to sustain any significant rallies. Markets are global and everyone is interconnected. That's the problem. As EU struggles with its debt problems all the austerity measures being enacted around Europe are going to lead to lower GDP growth. Several countries could see recessions or worse. Lower activity in Europe means lower activity in China because the EU is China's largest trading partner. The U.S. will also feel the impact of a slowdown in Europe and China. Fortunately, the Federal Reserve already knows this and there is growing speculation that the Fed might launch or at least hint at some sort of QE3 at their next meeting on December 13th.

Things to watch for this week are Italian and Spanish bond yields. You'll also want to keep an eye on the euro currency. Rising bond yields and/or a falling euro have meant weak stock markets in the last few weeks. I'd also watch for headlines from the Fed's Beige book, the ISM index, and of course the non-farm payroll report out on Friday.

Overall I would be very cautious when it comes to launching new positions. If you do choose to put money to work in the market I would keep your position size small to limit your risk.

- James


Portfolio

Portfolio Update

by James Brown

Click here to email James Brown


Current Portfolio


Portfolio Comments:

It has been a rough two weeks for the U.S. market. The S&P 500 is down another 100 points (-8.3%) from its close on November 11th. The holiday shortened four-day Thanksgiving week saw the S&P 500 lose -4.6%, the NASDAQ composite fell -5.0% and the small cap Russell 2000 dropped -7.4%.

The market's breakdown this past week is an ominous sign for what is usually a bullish season for stocks.

Last week we saw QCOM make the jump from our watch list to play list but we lost EMC, HSY, INTC, and JPM to the market's widespread decline.

I have updated the stop loss on BZH.

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

The VIX should be higher

by James Brown

Click here to email James Brown

Editor's Note:

The stock market has seen a pretty significant drop in the last two weeks. The major indices have broken down through major levels of support. Yet in spite of the decline the volatility index, while elevated, is not as high as many market analysts think it should be. This is a signal that investors haven't capitulated so the sell-off may not be over.

On a short-term basis the stock market is oversold and due for a bounce. However, the market's trend is down and with the prospect of more weakness ahead of us I am not adding any new trades tonight but we did add three new candidates to our watch list.

I am almost tempted to buy calls on the S&P 500 ETF (SPY) should we see the S&P 500 index trade near 1100 again. An entry near 1100 with a stop under 1074 might work as a trade.

-James


Play Updates

Techs & Financials Drop

by James Brown

Click here to email James Brown

Editor's Note:

Investors are losing confidence again. The stock market is accelerating lower. We are seeing a lot of stocks break support. We had a handful of trades get stopped out during last week's market decline.

I would be very cautious and hesitate to open new positions in the current market environment.

-James


Closed Plays


EMC, HSY, INTC and JPM have been closed.


Play Updates


Allergan Inc. - AGN - close: 78.68

Comments:
11/26 update: The stock market's two-week sell-off has been ugly. Shares of AGN have lost -7.4% over the last couple of weeks. The breakdown under support at $80.00 and under support at its 200-dma is bearish. The low on Friday was $78.42 and our stop loss is at $77.45. AGN's long-term trend is still higher but if this market decline continues then AGN will probably hit our stop loss soon. More conservative traders may want to exit early. I am not suggesting new positions at this time.

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 $ 1.20/ 4.20

11/19/11 Taking an aggressive stance on our stop loss and moving it down to $77.45
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: 77.45
Play Entered on: 10/17/11
Originally listed on the Watch List: 09/24/11


Bank of America - BAC - close: 5.17

Comments:
11/26 update: Worries over the European debt contagion and how much exposure the U.S. banks might have to Europe continues to drive the financials lower. BAC is now down four weeks in a row. Last week we speculated that BAC would test its October lows near $5.15. I suggested we open small bullish positions on a dip at $5.15, which was hit on Wednesday, November 23rd. BAC slipped to $5.12 on Friday before bouncing.

The $5.00 level is a major line in the sand for investors. If BAC closes under $5.00 it will be extremely bearish and suggest the stock is headed for its early 2009 lows in the $2.50 area. Readers may want to exit positions if we see BAC close under $5.00. Currently our positions do not have a stop loss.

Earlier Comments:
A week ago there was a report from Reuters suggesting that S&P was going to change the way they rate the credit ratings of banks. Bank of America, Citigroup (C) and Morgan Stanley (MS) might all see their credit rating downgraded by S&P after they implement this new rating process. That will likely send shares of BAC lower.

- Suggested Positions -
AUG 29, 2011 - entry price on BAC @ 8.10, option @ 0.57
symbol: BAC1221A10 2012 JAN $10 call - current bid/ask $ 0.00/ 0.01
(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 $ 0.36/ 0.37
(No stop loss on this position)

(2nd Position, bought the dip at $5.15)

NOV 23, 2011 - entry price on BAC @ 5.15, option @ 0.35
symbol: BAC1319A10 2013 JAN $10 call - current bid/ask $ 0.36/ 0.37
(no stop loss on this position)

11/23/11 BAC hits new trigger @ 5.15 to buy calls.
11/19/11 New trigger to buy calls @ $5.15 (see 2nd 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.

Chart of BAC:

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


Bristol Meyers Squibb - BMY - close: 30.16

Comments:
11/26 update: The correction in BMY continues and the market's widespread weakness hasn't helped. Shares are now down about -10% from their 2011 highs. The stock is testing technical support at its rising 100-dma. It could test the $30.00 mark soon. We have a stop loss at $29.40. More conservative traders might want to raise their stops closer to $30.00 while more aggressive traders may want to lower their stop so its under the 200-dma instead.

I would be tempted to buy calls here near $30.00 but I'd probably wait for the stock market to stop falling before I consider new positions.

Earlier Comments:
We have two exit targets. One at $33.50 and a longer-term target at $35.75. 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 $ 0.94/ 0.99

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: 1.88

Comments:
11/26 update: It's been a rough two weeks for BZH with a drop from $2.40 to $1.88 (-21.6%). Shares have bounced twice off its simple 50-dma but I do not expect this level to hold if the stock market continues to fall. Please note that I am raising our stop loss to $1.75. I would wait for a close over $2.05 before considering new bullish positions again.

- 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 $ 0.55/ 0.65

11/26/11 new stop loss at $1.75
11/15/11 BZH reports a loss of 57 cents a share, worse than expected
11/12 BZH has seen a big bounce. Cautious investors may want to take profits now before BZH reports earnings on Nov. 15th. (BZH +13.2%, option +21.4%)
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: 1.75
Play Entered on: 10/28/11
Originally listed on the Watch List: 10/22/11


Cisco Systems - CSCO - close: 17.50

Comments:
11/26 update: CSCO has seen a -10% correction in less than two weeks. Traders bought the dip near its 50-dma on Friday morning. I would be tempted to buy calls at current levels but more conservative traders may want to wait for a dip or a bounce from the $17.00 mark.

- Suggested Positions -
OCT 28, 2011 - entry price on CSCO @ 18.28, option @ 1.68
symbol: CSCO1319A20 2013 JAN $20 call - current bid/ask $1.58/1.63

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


CSX Corp. - CSX - close: 20.00

Comments:
11/26 update: CSX has fallen more than 10% in less than two weeks thanks to the market's sharp reversal lower. CSX's breakdown under short-term support at $21.00 and its 50-dma is bearish. Yet shares managed to hold at round-number support near the $20.00 mark. Readers can use this dip to $20.00 as a new entry point but personally I would wait for a rebound before initiating positions. A rally past $20.50 would work for me.

Earlier Comments:
I do see potential resistance at the $24.00 level and the $26.75-27.00 zone. Yet the Point & Figure chart for CSX is bullish with a $33.50 target.

- Suggested Positions -
NOV 14, 2011 - entry price on CSX @ 22.59, option @ 2.24
symbol: CSX1319A25 2013 JAN $25 call - current bid/ask $ 1.40/ 1.48

- or -

NOV 14, 2011 - entry price on CSX @ 22.59, option @ 3.30
symbol: CSX1418A25 2014 JAN $25 call - current bid/ask $ 2.19/ 2.39

11/26/11 I had cautioned readers to expect a potential dip to $20.00. CSX hit this level on Friday.

Current Target: $29.75
Current Stop loss: 19.75
Play Entered on: 11/14/11
Originally listed in the New Plays 11/12/11


Enterprise Products Partners - EPD - close: 44.12

Comments:
11/26 update: EPD held up pretty well until the market's drop on Wednesday. Shares of EPD finally succumbed to the market-wide decline. Shares are now resting above what should be significant support at the $44.00 level. I would use this pull back as a new bullish entry point to open positions.

Earlier Comments:
Our long-term target is $59.00. FYI: The Point & Figure chart for EPD is bullish with a $60 target. I am listing the 2013 calls but there are also 2014s available (with a much wider spread).

- Suggested Positions -
Nov 21, 2011 - entry price on EPD @ 45.17, option @ 1.45
symbol: EPD1319A50 2013 JAN $50 call - current bid/ask $ 1.20/ 1.40

Current Target: $59.00
Current Stop loss: 41.75
Play Entered on: 11/21/11
Originally listed in the New Plays 11/19/11


Corning Inc. - GLW - close: 13.95

Comments:
11/26 update: Shares of GLW have also seen a -10% correction in the last two weeks. The stock is currently flirting with support near $14.00 and its 50-dma. The stock's P/E has fallen from 7.0 to 6.5. Unfortunately, cheap stocks can always get cheaper. More conservative traders may want to raise their stop loss toward $13.75 or the $13.50 area. Currently we have our stop set at $12.85. At this time I would prefer to see a close over $14.50 again 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 $2.08/2.14

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: 25.39

Comments:
11/26 update: The big headlines for HPQ last week was the earnings report on November 21st. The company beat estimates by 4 cents with a profit of $1.17 a share. Yet management lowered their earnings guidance for the first quarter and for 2012. This could be a case of the new CEO Meg Whitman trying to lower Wall Street's expectations going forward so it's easier for HPQ to beat them.

Previously I warned readers that we might see HPQ drop toward $25 following its earnings report. Shares have managed to test their 50-dma twice last week. Yet I am not convinced this is a bottom for the stock, at least not yet. I am not suggesting new positions at this time although nimble traders may want to consider buying a bounce from the $24.00 region.

- Suggested (SMALL) Positions -
Longer-term Trade
Sep 26, 2011 - entry price on HPQ @ 22.59, option @ 3.75
symbol: HPQ1319A25 2013 JAN $25 call - current bid/ask $ 4.90/ 5.00
Stop Loss @ 23.90

11/19/11 Readers need to decide: Take profits now (+76%) or hold on and expect some volatility following HPQ's earnings report on Nov. 21st
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


KB Home - KBH - close: 6.71

Comments:
11/26 update: From KBH's intraday high two weeks ago the stock has seen a -15.3% correction lower. Shares are flirting with a breakdown under their 50-dma. If the stock market's decline continues we will probably see KBH test its early November lows (support) near $6.40. I am not suggesting new positions at this time. If Europe gets worse then our exports to Europe will slow down and that could mean higher unemployment here in the U.S., which means less demand for housing.

Earlier Comments:
KBH can be a volatile stock. There is no need to chase it. 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 $ 0.83/ 0.94

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: 34.32

Comments:
11/26 update: KFT spent the last week churning sideways in a 65-cent range. Unfortunately it was under technical resistance at its 50 and 100-dma. I am not convinced the sell-off in the market and KFT is over yet. Thus I am not suggesting new bullish positions at this time. KFT doesn't move very fast so it's unlikely to get away from us.

Earlier Comments:
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 $ 2.70/ 2.84

11/12/11 new stop loss @ 32.40

Current Target: $38.00
Current Stop loss: 32.40
Play Entered on: 09/22/11
Originally listed on the Watch List: 09/17/11


Kimberly-Clark Corp. - KMB - close: 68.69

Comments:
11/26 update: KMB was not immune to the market's recent weakness. Shares broke down to new six-week lows. The stock should find significant support in the $68-66 zone so we could see an entry point soon. Although in this market I would prefer to buy a bounce instead of buying the dip. It may be another week or two before we see a new entry point in KMB.

Earlier Comments:
KMB does have long-term resistance in the $73.00-73.50 area. Therefore we will only start with small (half-sized) positions. 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. 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 -
(half sized position)
Nov 07, 2011 - entry price on KMB @ 69.50, option @ 2.05
symbol: KMB1319A75 2013 JAN $75 call - current bid/ask $ 2.00/ 2.25

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


Limited Brands, Inc. - LTD - close: 38.33

Comments:
11/26 update: Ouch! The two-week sell-off in LTD has been painful with a -13.3% correction. The stock is nearing potential support near $38.00 and its simple 200-dma. We have a stop loss at $37.90 should LTD break this level. I would prefer to buy a bounce instead of a dip. Readers may want to wait for a close over $39.00 or $40.00 before considering new positions.

Earlier Comments:
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 $ 2.15/ 2.35

11/16/11 LTD reports earnings one cent above estimates
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


QUALCOMM Inc. - QCOM - close: 51.86

Comments:
11/26 update: QCOM also experienced a -10% correction in the last several days. I suspect the big drop on Wednesday was a reflection of light volume due to the holiday. Our trigger to buy calls was hit at $52.50 on November 23rd. I would still consider new positions now but you definitely have a choice depending on your risk tolerance. You could wait and hope to get a better entry point on a dip near $50.00. Or you could wait for a close back above potential resistance at its simple 200-dma near $54.00.

Currently we have a stop loss at $49.40. Our long-term target is $74.50.

Earlier Comments:
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.

- Suggested (SMALL) Positions -
NOV 23, 2011 - entry price on QCOM @ 52.50, option @ 4.90
symbol: QCOM1319A60 2013 JAN $60 call - current bid/ask $ 4.65/ 4.75

11/23/11 QCOM hits our trigger @ 52.50

Chart of QCOM:

Current Target: $74.50
Current Stop loss: 49.40
Play Entered on: 11/23/11
Originally listed on the Watch List: 11/05/11


Reynolds American Inc. - RAI - close: 39.99

Comments:
11/26 update: Tobacco and cigarette stocks have been historically seen as safe haven trades. They have a recession-proof product and RAI sports a strong dividend. The stock has definitely earned its safe-haven status this past week. Shares merely consolidated sideways near multi-year highs while the rest of the market dropped.

I would still consider new positions now or you could wait for a new relative high to open positions.

- Suggested Positions -
Nov 18, 2011 - entry price on RAI @ 40.02, option @ 2.00
symbol: RAI1319A42.5 2013 JAN $42.50 call - current bid/ask $ 1.75/ 2.15

Current Target: $49.00
Current Stop loss: 37.85
Play Entered on: 11/18/11
Originally listed on the Watch List: 10/22/11


Red Hat Inc. - RHT - close: 44.93

Comments:
11/26 update: The profit taking in RHT has been pretty sharp with a -15% correction in less than two weeks. The breakdown under what should have been support near $48.00 is bearish. Now shares are testing round-number support near $45.00. The intraday low on Friday was $44.89 and our stop loss is at $44.75. If the market's sell-off continues on Monday we will likely see RHT hit our stop loss. On the other hand this dip to support could offer an entry point if RHT bounces. Readers may want to wait for a close over $46.00 or its 50-dma before considering new positions.

FYI: Technical traders will note that the pull back has stalled at the 38.2% Fibonacci retracement of the August-November rally. It's also a 50% retracement of the October-November move higher.

- Suggested Positions -
Nov 01, 2011 - entry price on RHT @ 47.70, option @ 4.75
symbol: RHT1319A60 2013 JAN $60 call - current bid/ask $ 3.20/ 4.40

11/12/11 new stop loss @ 44.75

Current Target: $59.75
Current Stop loss: 44.75
Play Entered on: 11/01/11

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


Ross Stores Inc. - ROST - close: 85.43

Comments:
11/26 update: Lack of profit taking is a form of relative strength and ROST has been holding up pretty well. Shares have been consolidating sideways near the $85 level and the stock hit its 50-dma on Friday. I will point out that ROST does have a short-term bearish trend of lower highs and lower lows.

I don't see any changes from my prior comments. If you're looking for a new entry point then I would wait for a dip or a bounce into the $84-83 zone before considering new positions.

Earlier Comments:
ROST announced a 2-for-1 stock split when they reported earnings on November 17th. The split is set for Dec. 16th.

- Suggested Positions -
Oct 11, 2011 - entry price on ROST @ 84.36, option @ 5.30
symbol: ROST1319A100 2013 JAN $100 call - current bid/ask $ 4.80/ 5.60

11/17/11 ROST reported earnings that were in-line and announced a 2-for-1 stock split set for Dec. 16th
11/12/11 Cautious investors may want to take profits early. Option has a bid of $6.70 (+26.4%)
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


U.S. Steel Corp. - X - close: 22.27

Comments:
11/26 update: Investors are once again growing worried that the situation in Europe with its debt troubles and widespread austerity packages is going to slow down growth. Plus the economic situation in China might be worse than previously expected. If the global economy slows down then demand for steel will drop. This attitude has taken its toll on shares of X. The sell-off has been brutal with a -18% drop in less than two weeks. Shares broke down under what should have been support in the $25-24 zone.

More conservative traders may want to exit early now. We're going to hold on since X is now oversold and due for a bounce. We are leaving our stop loss at $21.40.

Earlier Comments:
This is an aggressive trade because X can be volatile and we have a wide stop loss. That's why we're using small positions to limit our risk.

- Suggested (SMALL) Positions -
Nov 09, 2011 - entry price on X @ 25.50, option @ 5.00
symbol: X1319A30 2013 JAN $30 call - current bid/ask $ 3.50/ 3.70

11/09/11 Trade opened at $25.50 (small positions)

Current Target: $37.50
Current Stop loss: 21.40
Play Entered on: 11/09/11
Originally listed on the Watch List: 11/05/11


CLOSED Plays


EMC Corp. - EMC - close: 21.88

Comments:
11/26 update: Tech stocks have been underperforming the last several days. EMC has crashed from above $24 to under $22 in the last six sessions. Our stop loss was hit at $22.20 on November 23rd. Our remaining position, the 2013 Jan $25 call, was trading at $2.16 (bid).

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

- Suggested (SMALL) Positions -
(Remaining positions)
Aug 18, 2011 - entry price on EMC @ 20.25, option @ 1.80
symbol: EMC1319A25 2013 JAN $25 call - exit $2.16 (+20.0%)

11/23/11 stopped out at $22.20.
11/19/11 EMC has fallen back to support near $23.00 and its 50-dma. A bounce here could be a new bullish entry point.
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

Chart of EMC:

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


Hershey Co. - HSY - close: 55.36

Comments:
11/26 update: HSY has been a disappointment. The $60.00 level looked like significant resistance so we waited for HSY to close above $60.25. Yet there was no follow through higher. HSY struggled with the $60.50-61.00 zone and eventually plunged following its earnings report on Oct. 27th. Shares have been in a long, slow decline every since with a pattern of lower lows and lower highs since the oversold bounce failed at its 50-dma in early November. HSY hit our stop loss at $55.40 on November 22nd with the bid on our 2013 Jan $65 call at $1.65.

- Suggested (SMALL) Positions -
Oct 19, 2011 - entry price on HSY @ 60.57, option @ 3.90
symbol: HSY1319A65 2013 JAN $65 call - exit $1.70 (-56.4%)

11/22/11 stopped out at $55.40, option bid @ 1.70.
This is an estimate. The option did not trade at that time.
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

Chart of HSY:

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


Intel Corp. - INTC - close: 22.73

Comments:
11/26 update: INTC has reversed from 3-year highs above $25 with -11% correction lower. Prior resistance at $24 failed to offer much support. Shares hit our stop loss at $22.90 on November 23rd.

If INTC can hold support near $22.00 I would be tempted to buy calls on a bounce with a tight stop loss under $22.00.

- Suggested Positions -
Nov 16, 2011 - entry price on INTC @ 25.13, option @ 1.08
symbol: INTC1319A30 2013 JAN $30 call - exit $0.68 (-37.0%)

- or -

Nov 16, 2011 - entry price on INTC @ 25.13, option @ 2.00
symbol: INTC1418A30 2014 JAN $30 call - exit $1.35 (-32.5%)

Chart of INTC:

Current Target: $29.75
Current Stop loss: 22.90
Play Entered on: 11/16/11
Originally listed on the Watch List: 11/12/11


JP Morgan Chase - JPM - close: 28.48

Comments:
11/26 update: Constant worries over Europe and how much exposure the major U.S. banks might have to the toxic debt that's drowning the EU has pulled the financials lower. Shares of JPM broke down under the $30.00 level and hit our stop loss at $29.90 on Nov. 21st. The stock is now testing its October lows near $28.00. More aggressive traders may want to consider buying calls on a bounce from this level ($28) with a tight stop loss.

Earlier Comments:
I have been suggesting that readers take a very cautious approach to position size. Start small to limit our risk.

- Suggested Positions -
Nov 01, 2011 - entry price on JPM @ 32.47, option @ 2.38
symbol: JPM1319A40 2013 JAN $40 call - exit @ $1.85 (-22.2%)

11/21/11 stopped out @ 29.90
11/19/11 If we get stopped out, consider buying calls on a dip near $28.00
11/12/11 remember to keep position size small.
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



Watch

Discount Stores, Oil Services, and Retail

by James Brown

Click here to email James Brown

Editor's Note:

Stocks have seen a sharp two-week correction lower. We are using the pull back as a chance to adjust some entry point strategies below.

- James



New Watch List Entries

FDO - Family Dollar Stores

RIG - Transocean Ltd.

WMT - Wal-Mart Stores Inc.


Active Watch List Candidates

APC - Anadarko Petroleum

ATVI - Activision/Blizzard, Inc.

EBAY - eBay Inc.

ERTS - Electronic Arts

MCD - McDonald's Corp

MSFT - Microsoft Corp.

NVDA - NVIDIA Corp

TJX - TJX Cos. Inc.

USO - U.S. Oil ETF


Dropped Watch List Entries

QCOM graduated to the play list.



New Watch List Candidates:


Family Dollar Stores Inc. - FDO - close: 55.80

Company Info

FDO is only a few points off its all-time high and the long-term trend is still higher. The recent three-week consolidating lower has been slow and orderly and not the violent drop lower we've seen in the market's major indices. Aggressive traders may want to buy calls on FDO now. I am suggesting we use a trigger to buy calls on a dip at $53.00 with a stop loss at $49.45. Our long-term target is $69.50.

Buy-the-Dip trigger: $53.00, stop loss 49.45

BUY the 2013 Jan $60 call (FDO1319A60)

Chart of FDO:

Originally listed on the Watch List: 11/26/11


Transocean Ltd. - RIG - close: 44.51

Company Info

You have to admit the trend in RIG doesn't look very optimistic. Shares are in an eight-month decline of lower lows and lower highs. Yet we still see opportunity. Investors decided that enough was enough and bought the stock twice when it fell into the $42.00 area back in 2008 and 2010. What are the odds that this support level holds up again?

Given the down trend I do consider this an aggressive trade so we'll want to keep our position size small. I am suggesting we buy calls when RIG hits $42.25. If triggered we'll use a stop loss at $39.45. More conservative traders could use a stop closer to $41.45 instead, since that would be a breakdown under its prior lows.

Buy-the-Dip trigger: $42.25, stop loss @ 39.45 (small positions)

BUY the 2013 Jan $50 call (RIG1319A50)

Chart of RIG:

Originally listed on the Watch List: 11/26/11


Wal-Mart Stores Inc. - WMT - close: 56.89

Company Info

The world's largest retailer has been showing some strength the last couple of months. This past week WMT consolidated sideways instead of participating in the market's sell-off lower. Yet I am not convinced the correction in WMT is done. Aggressive traders might want to consider call positions now or on a move past $57.50. I am suggesting readers wait for a dip to $54.50. If triggered at $54.50 we'll use a stop loss at $51.75. Our long-term target is $63.50.

Buy-the-Dip trigger: $54.50, stop loss @ 51.75

BUY the 2013 Jan $60 call (WMT1319A60)

- or -

BUY the 2014 Jan $60 call (WMT1418A60)

Chart of WMT:

Originally listed on the Watch List: 11/26/11


Active Watch List Candidates:



Anadarko Petroleum - APC - close: 71.84

Comments:
11/26 update: Currently APC continues to sink lower through its very large trading range. It is unlikely that APC will close over resistance near $84 any time soon but we're going to keep our "buy a close over $85.25" trigger to launch positions. However, we are also adding a "buy a dip at $62.00" just in case the market gets carried away with the sell-off lower.

In summary, if APC closes over $85.25 then we'll buy calls the next day with a stop loss at $77.00 and we want to use the 2013 Jan $110 calls. On the other hand if APC hits $62.00 (on an intraday basis) then we'll buy calls at $62.00 with a stop loss at $56.50 and we'll use the 2013 $90 calls.

Wait for a close over $85.25 (stop loss $77.00)

BUY the 2013 Jan $110 call (APC1319A110)

- or -

buy calls on a dip at $62.00 (stop loss $56.50)

buy the 2013 Jan $90 call (APC1319A90)

Originally listed on the Watch List: 11/12/11


Activition/Blizzard, Inc. - ATVI - close: 11.75

Comments:
11/26 update: ATVI spent this past week consolidating sideways between resistance near $12.00 and support at its 200-dma near $11.60. Aggressive traders may want to buy calls on a close over $12.10. I am still suggesting readers wait for a much bigger move higher. We're listing a trigger to wait for ATVI to close over $13.00 and then initiate call positions the next morning with a stop at $11.90 (new). Our long-term target is $15.75.

Wait for a close over $13.00

BUY the 2013 Jan $15 call (ATVI1319A15)

Originally listed on the Watch List: 11/19/11


eBay Inc. - EBAY - close: 28.23

Comments:
11/26 update: We are taking a more aggressive approach to bullish positions on EBAY. The stock has been trending lower toward the bottom of its year-long trading range in the $27.00-35.00 zone. It's unlikely that EBAY will close over resistance at $35.00 any time soon. I am listing a riskier entry point to buy calls on a dip at $27.25 with a stop loss at $25.75. We want to keep our position size small to limit our risk. I am updating our strike price below.

Trigger: Buy a dip at $27.25 (stop loss 25.75)

BUY the 2013 Jan $35 call (EBAY1319A35)

11/26/11 updated strategy to use a dip at $27.25 and a stop at $25.75, changed option to 2013 $35 call.

Chart of EBAY:

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


Electronic Arts - ERTS - close: 20.83

Comments:
11/26 update: Video games are a popular gift for the holidays. You might think that investors would be buying shares of ERTS in anticipation of a strong quarter. Yet the stock is falling lower with the rest of the market. The recent close under its 200-dma is bearish. Shares of ERTS look poised to test support at $20.00 or the $18.00 level.

We already know that this market tends to overshoot to the upside or downside. Therefore we are adjusting our entry point strategy. I am listing a trigger to buy calls on a dip at $18.50 with a stop loss at $17.40, which is under the August lows. We want to keep our position size small to limit our risk. I have adjusted our strike price below.

buy a dip at $18.50 with a stop at $17.40.

BUY the 2013 Jan $25 call (ERTS1319A25)

11/26/11 updated strategy to use a dip at $18.50 and a stop at $17.40, changed option to 2013 $25 call.

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


McDonald's Corp. - MCD - close: 92.10

Comments:
11/26 update: MCD is still holding up well. Shares lost less than a dollar last week. I still expect a dip toward support. We want to buy calls on a dip at $90.00 with a stop loss at $86.45. We will set our long-term target at $108.00.

Buy-the-Dip trigger: $90.00

BUY the 2013 Jan $100 call (MCD1319A100)

11/26/11 adjusted stop loss to $86.45

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


Microsoft Corp. - MSFT - close: 24.30

Comments:
11/26 update: Shares of MSFT have been in freefall the last two weeks. The stock is down seven days in a row. It's unlikely that we'll see the stock breakout past resistance near $27.50 any time soon. However, that doesn't mean we don't see opportunity. Investors have been buying dips in the $23.80-23.60 zone for months. We will adjust our entry point strategy.

I am suggesting we open small bullish positions on a dip at $23.85 with a tight stop loss at $23.35. That way if MSFT nears support we'll be triggered but if it breaks down to new lows we'll quickly get stopped out to limit any risk.

I have adjusted our strike prices below.

Buy a dip at $23.85, stop loss 23.35 (small positions)

BUY the 2013 Jan $25 call (MSFT1319A25)

- or -

BUY the 2014 Jan $25 call (MSFT1418A25)

11/26/11 adjusted our entry point to buy small positions on a dip at $23.85 with a stop loss at $23.35. New strike prices.

Chart of MSFT:

Originally listed on the Watch List: 11/12/11


NVIDIA Corp. - NVDA - close: 14.04

Comments:
11/26 update: NVDA has not broken down to new relative lows like so many of its peers. Shares are consolidating sideways in the $13.50-15.50 zone. There is additional overhead resistance near the exponential 200-dma, the 150-dma and the $16.00 level. There is no change from my prior comments.

Earlier Comments:
I am suggesting we wait for a close over the $16.00 level and then 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


TJX Cos. Inc. - TJX - close: 58.75

Comments:
11/26 update: TJX is showing relative strength by not participating in the market's sell-off. Shares have managed to consolidate sideways with technical support at its 50-dma. Aggressive traders may want to buy calls on a breakout past $60.00. I am still hoping for a pull back. We have a trigger to buy calls on a dip at $56.25 with a stop loss at $52.40. More conservative traders may want to wait and hope for a dip closer to $55.00 instead as their entry point.

Buy-the-Dip trigger: $56.25, stop loss 52.40

BUY the 2013 Jan $60 call (TJX1319A60)

11/12/11 new trigger @ 56.25, new stop 52.40
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


U.S. Oil ETF - USO - close: 37.16

Comments:
11/26 update: The USO spent last week consolidating sideways. It still looks a little overbought given its huge rally off the October lows. There ETF could definitely see a tug of war between those investors who feel the global economy is slowing (less oil demand) and those that believe rising demand in emerging markets will continue to put pressure on tight supplies. It's going to be months before Libya gets its oil facilities back to 100%. Meanwhile there is the ongoing feud between Israel and Iran over Iran's nuclear weapons program. If that ever escalates to military action oil prices are definitely going higher.

We do want to keep our position size in the USO small. Oil can be a volatile commodity and this ETF is continually rolling over its futures positions to avoid taking delivery, which can cause swings in the ETF's price.

I am suggesting we buy calls on a dip at $36.00. The $35.00 level should offer some support. If triggered we'll use a stop loss at $33.75, under the 50-dma. Our long-term target is the $45-50 zone.

Buy-the-Dip trigger: $36.00

BUY the 2013 Jan $40 call (USO1319A40)

- or -

BUY the 2013 Jan $50 call (USO1418A50)

Originally listed on the Watch List: 11/12/11