Option Investor
Newsletter

Daily Newsletter, Sunday, 12/4/2011

Table of Contents

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

Leaps Trader Commentary

Another Short Covering Fueled Rebound

by James Brown

Click here to email James Brown

Schizophrenic ~ "experiencing or maintaining contradictory attitudes, emotions, etc."

That's one of the informal definitions of schizophrenic on Dictionary.com and it certainly seems to apply to the stock market. From November 11th to the end of Thanksgiving week the S&P 500 index plunged -8.3%. This past week the same index rebounded +7.4%. These extremely sharp moves are hard to trade. Unfortunately for traders most of this week's gains were fueled by super strong opening spikes, fueled by short covering on Monday and Wednesday.

Last week started off with a bang in Europe. Hope for a new eurozone "fiscal pact" to bring stability to the EU region on Monday launched big gains for the European markets. Plus there was hints that the IMF might be trying to find a way to lend money to Italy. The rally stalled a bit on Tuesday but stocks posted another gain. Then a parade of positive news sent stocks soaring on Wednesday morning. The big headline was a coordinated effort by six central banks including the Federal Reserve and ECB to provide more liquidity to Europe's struggling banking system. China announced they were lowering their bank reserve requirements, which suggested they were less worried about inflation and more concerned about keeping their growth at a strong pace. This was positive news after nearly a year of China trying to tap on the brakes to slow down their economy.

The good news on Wednesday kept coming with the ADP report and the Chicago PMI. The ADP employment report showed a jump of +205,000 jobs in private payrolls compared to estimates for only +125,000. The Chicago PMI rose from 58.4 in October to 62.6 in November. Economists had been expecting a decline. All of this positive news fueled huge gains on Wednesday with the S&P 500 index surging almost 52 points, the NASDAQ rallied nearly 105 points and the Dow Industrials were up almost 500 points.

The ADP numbers offered hope for positive news on Friday's nonfarm payroll data. The November jobs number came in at +120K, which was generally in-line with expectations but the Labor Department revised October's number from +80K to +100K and revised September's jobs number from +158K to +210K. The unemployment report, calculated off the Household survey, fell from 9.0% to 8.6%. Unfortunately a large part of that move was due to 320,000 workers giving up on their search for a job so they were no longer counted as part of the work force.

Additional economic data this past week was a disappointing new home sales data for October, which came in at an annual pace of 307,000. November's same-store sales numbers from the retailers were mixed in spite of all the Black Friday hype. The U.S. ISM manufacturing data improved from 50.8 in October to 52.7 in November, which was better than expected. Yet China's PMI manufacturing data fell from 50.4 in October to 49.0 in November.

Major Indices:

Is it a coincidence that the S&P 500 index rallied off the 50% retracement of its October move higher? The answer is probably "yes" but the November 25th close at 1158 offered a nice line-in-the-sand for traders to bet against. I cautioned readers that any rebound might end up being just an oversold bounce. Unfortunately we've moved from oversold with the -8.3% drop to overbought with last week's +7.4% surge. You'll notice that the rally has stalled exactly at resistance near its trendline of lower highs. The S&P 500 also has potential resistance at its simple 200-dma near 1265.

Now a breakout from here could definitely fuel more short covering. If the S&P 500 can rally past 1265 then the next hurdle is 1285 and then 1300. On the other hand, stocks could see some profit taking after such a big one-week move. The 1220 and 1200 levels are short-term support.

Daily chart of the S&P 500 index:

The NASDAQ composite has seen an equally impressive bounce (+7.5%) for the week. Now the index is resting under its simple 200-dma and a trendline of lower highs. The 2600 level might offer some short-term support but if stocks retreat I would expect a dip toward the 2550 area. Should the NASDAQ manage to break the trend of lower highs then we're looking at a potential run at its 2011 highs.

Daily chart of the NASDAQ Composite index:

The small cap Russell 2000 index delivered a +10% bounce off its 61.8% Fib retracement (see chart). It looks like the $RUT has broken through a trendline of lower highs but it's still struggling with the exponential 200-dma as resistance. Small caps used to benefit from big gains in January and it became so dependable that market watchers called it the "January effect". Then investors started front running the move and the January effect started happening earlier and earlier until small caps were seeing big moves in December. If this market rally continues I would expect the small caps to outperform. Just look for likely resistance at its October high and the simple 200-dma. The 700 level is probably short-term support.

Daily chart of the Russell 2000 index

I would also keep an eye on the transports and the financials. Traditionally the market cannot sustain a rally without support from both sectors. The Dow Jones Transportation average has rallied right back to resistance near the 5,000 level and its simple 200-dma. Meanwhile the XLF financial ETF has seen a strong bounce last week (+9.5%) but it's still struggling with a long-term trend of lower highs, thanks to ongoing worries over Europe's potential risk to U.S. banks.

Daily chart of the Dow Jones Transportation Average

Weekly chart of the XLF Financial ETF

This week the U.S. economic calendar is a lot lighter but these events will be overshadowed by headlines in Europe. Monday's headlines will be dominated by any word from a meeting between German leader Angela Merkel and French leader Sarkozy. They are meeting in Paris to argue over how to handle the debt crisis and hopefully present a united front in the EU summit on Friday. The new austerity-focused Greek government will vote on their 2012 budget on Wednesday. If the budget doesn't pass then they may not get the next round of bailout funds. The ECB will release their next interest rate decision on Thursday and most are expecting the new ECB President to lower rates again. Meanwhile there is growing concern that China could be facing a tough time to avoid a hard landing as their economy slows. The Chinese CPI/PPI inflation data will make headlines on Thursday. Friday will hold the umpteenth EU summit as leaders wrestle with how to solve their toxic debt problem.

- Monday, December 5 -
Factor Orders for October
ISM Services for November
Germany's Merkel & France's Sarkozy meet in Paris

- Wednesday, December 7 -
Greece votes on its 2012 budget

- Thursday, December 8 -
Weekly Initial Jobless Claims
Wholesale Inventory data for October
ECB interest rate decision
China's CPI/PPI data released

- Friday, December 9 -
Michigan (consumer) Sentiment for December
EU Summit

The Week Ahead:

As you might expect the week ahead will be dominated by news from Europe. Any progress on some sort of solution will lift stocks and any setbacks will spark new selling efforts. There is a risk that Spain could see its credit rating downgraded again but that's not necessarily surprising. There have been worries over the last few weeks that France might actually lose its AAA credit rating, which would be very bad for the EU region since France is a major part of any rescue package for the struggling EU members. The calendar above outlines the events to watch. Of course you'll also want to keep an eye (or ear) open for news on European bond yields. Italy's 10-year yields are still in the 7% range. Spain and France have seen their bond yields creep higher as well. Any significant spike higher in bond yields will spook investors and could spark another sell-off.

It is worth noting that seasonally the month of December is traditionally a bullish time of year for stocks. The first week of the month typically sees a rally with the normal influx of mutual fund inflows being put to work. Then later in the month you'll normally have mutual fund and hedge fund managers chasing stocks as they try reach for performance or window dressing their portfolios for the end of the year. This is your traditional "Santa Claus" rally. Then there is the retail investor that could decide to put part of their yearend Christmas bonus to work in the stock market. I say "could" because the volatility in this market could just as easily scare them away.

Another thing to keep in mind is the next FOMC meeting is December 13th. There has been slow but growing expectation for some sort of hint at a new QE3 program to help stimulate the U.S. economy. If China's economy is starting to slow down and now Europe's economy is slowing down, then the Fed might try and preemptively rev the U.S. engine to keep it from slowing down too.

Last week's bounce in the market is encouraging but until the major indices breakthrough their trend of lower highs, then the path is technically still lower. I remain 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's amazing the difference a week can make. The +7% bounce in the S&P 500 index last week has had a big impact on our portfolio. A lot of positions that were underwater two weeks ago are now back in positive territory. We did lose GLW thanks to some negative news on LCD glass volumes but RIG made the jump from our watch list to our active trade list.

The market's short-term trend is up but stocks are short-term overbought and the action has stopped right at resistance. There is a high chance of profit taking this week after last week's big rally.

I have updated the stop losses on BZH, HPQ, KBH, KFT, ROST, and X.

Disclaimer: At any given time the author may have positions in any or all of any companies mentioned in the Leaps Newsletter.

--Position Summary Table--
Table lists Directional CALL or PUT/LEAPS only.
Insurance puts, if applicable, are not shown.

Red symbol/name represents a play or option position exited or closed this week.



New Plays

A couple more stocks to watch

by James Brown

Click here to email James Brown

Editor's Note:

These are very volatile markets. The S&P 500 saw a two-week drop of -8.3% only to bounce back +7.4% in one week. While the rebound is encouraging the major indices have seen the rally stall right at resistance. The markets are facing significant event risk with a handful of key meetings in Europe over the next week or two. I am somewhat reluctant to chase this big bounce in stocks without more follow through. Thus we're not adding any new trades tonight but we did reload the watch list with new candidates much more likely to get triggered if the rally continues.

In addition to the new watch list candidates tonight, investors might want to keep their eye on ARG and YUM as potential candidates. ARG has surged to new highs so I would wait for shares to consolidate. I'm looking at the $72-70 zone as a possible area to consider new bullish positions for ARG. YUM has seen a rally back to its 2011 highs. A breakout past the $57-58 zone would be very bullish. I'm a little concerned that YUM is short-term overbought.

Two more stocks that caught my eye are GPRO and HRL. Unfortunately neither stocks have LEAPS options available but readers may want to consider shorter-term trades (weeks, not months). I would be tempted to buy calls on GPRO if it can close over $66.00. On HRL I would want to see a close over $30.50 before considering bullish positions.

-James


Play Updates

Huge Rebound for Stocks

by James Brown

Click here to email James Brown


Closed Plays


GLW has been stopped out.


Play Updates


Allergan Inc. - AGN - close: 83.57

Comments:
12/03 update: Shares of AGN have seen a significant rebound. The stock had closed under its 200-dma last week near $79 a week ago. On Friday the stock was challenging resistance near $85.00. On a short-term basis the move on Friday looks like a bearish reversal but I would expect traders to buy the dip in the $83-81 zone assuming the wider market doesn't crash. It's an ugly image but big picture AGN still has a bullish trend of higher lows and higher highs. I would prefer to see AGN close over $85.50 before investors consider new bullish positions.

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/ 4.30

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: 5.64

Comments:
12/03 update: Financials were showing relative strength last week with investors buying the beaten down sector. There is still significant European risk associated with the major U.S. banks but there is a chance last week was the bottom for BAC. The $5.15-5.00 zone where traders have been buying dips the past two weeks is support. Combine that with the early October low at $5.13 and we have the potential for a bullish double bottom pattern.

I am a little reluctant to open new positions. We already bought the dip on November 23rd.

Earlier Comments:
A couple of weeks 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 $ 0.01/ 0.02
(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 $ 0.39/ 0.40
(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 $ 0.39/ 0.40
(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.

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: 32.77

Comments:
12/03 update: Shares of BMY outperformed the broader market with a +8.6% rally last week. The stock has gone almost straight up this past week. Is this end of year window dressing by fund managers? Is it another rush into a high-dividend stock? The rally on Friday stalled (and reversed) near resistance at its 2011 highs around the $33.25 area. I would expect some short-term profit taking after last week's big advance.

NOTE: I am reducing our two exit targets to just one. Instead of having an exit target at $33.50 and $35.75 we'll condense them down to $34.50 instead.

- Suggested Positions -
SEP 19, 2011 - entry price on BMY @ 30.53, option @ 1.20
symbol: BMY1319A35 2013 JAN $35 call - current bid/ask $ 1.69/ 1.76

12/03/11 reduce our two exit targets to just one at $34.50
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: 2.42

Comments:
12/03 update: BZH has also delivered an impressive move higher. Shares rallied +28% last week and managed to rally past its mid November highs. We did see the rally stall on Friday near technical resistance at the 150-dma. After such a big move higher I would expect some profit taking soon. Look for support in the $2.25-2.20 zone.

Please note that we are raising our stop loss up to $1.85.

- 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 $ 0.80/ 0.95

12/03/11 new stop loss @ 1.85
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: 1.85
Play Entered on: 10/28/11
Originally listed on the Watch List: 10/22/11


Cisco Systems - CSCO - close: 18.55

Comments:
12/03 update: CSCO rallied just over a $1.00 for the week. Shares could struggle with the mid November highs near $19.00-19.15. I am not suggesting new positions at this time. I will point out that if CSCO rolls over from current levels you could argue it's building a bearish head-and-shoulders pattern over the last six weeks. More conservative traders might want to reconsider their stop loss placement.

- Suggested Positions -
OCT 28, 2011 - entry price on CSCO @ 18.28, option @ 1.68
symbol: CSCO1319A20 2013 JAN $20 call - current bid/ask $1.85/1.91

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: 21.65

Comments:
12/03 update: A potential railroad strike has been averted this week, which would have been costly during the holiday shopping season. The railroad industry managed to come to an agreement with two major labor unions and extended talks with a third union. This helped put a bottom under the rails. Shares of CSX surged from $20.00 a week ago to $22.23 on Friday morning. The stock is now testing resistance at its exponential 200-dma. I am not suggesting new positions at this time.

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 $ 1.77/ 1.84

- or -

NOV 14, 2011 - entry price on CSX @ 22.59, option @ 3.30
symbol: CSX1418A25 2014 JAN $25 call - current bid/ask $ 2.65/ 2.90

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: 46.28

Comments:
12/03 update: EPD garnered some positive analyst comments on TV this week. The market's widespread gains helped push EPD to new all-time highs. Big picture nothing has changed for us. I would still consider new positions in the $45.00-44.00 zone.

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 $ 1.45/ 1.70

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


Hewlett-Packard - HPQ - close: 27.68

Comments:
12/03 update: At Friday's intraday high HPQ was up more than +10% for the week. Unfortunately the stock couldn't breakout past resistance near the $28.50 level. After such a big bounce I would expect some profit taking. Obviously a close over resistance would be very positive. There is still a potential hurdle for HPQ near the $29.75-30.00 zone at the top of the August gap down.

While the recent action is bullish I am not suggesting new positions at this time.

Please note our new stop loss at $24.75.

FYI: It is worth noting that the Point & Figure chart for HPQ is bullish with a $41 target.

- 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 $ 6.05/ 6.20
Stop Loss @ 24.75

12/03/11 new stop loss @ 24.75
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: 7.94

Comments:
12/03 update: KBH has seen a big jump this week with a +18% gain. Shares rallied right to resistance near the $8.00 level. Volume has been strong on the rally, which is normally a good signal for the bulls. I wouldn't chase it here right at resistance.

Please note our new stop loss at $6.38.

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 $ 1.17/ 1.29

12/03/11 new stop loss @ 6.38
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: 6.38
Play Entered on: 10/19/11
Originally listed on the Watch List: 10/15/11


Kraft Foods Inc. - KFT - close: 36.50

Comments:
12/03 update: KFT has produced a very strong move and a breakout to new multi-year highs. The close over $36.00 is very bullish but KFT looks short-term overbought here. Readers may want to wait a few days and then re-evaluate if you're looking for a new entry point.

Please note our new stop loss at $33.85. Given KFT's recent strength I am raising our final exit target from $38.00 to $40.00.

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

- Suggested (SMALL) Positions -
Sep 22, 2011 - entry price on KFT @ 32.71, option @ 2.35
symbol: KFT1319A35 2013 JAN $35 call - current bid/ask $ 3.60/ 3.70

12/03/11 new stop loss @ 33.85, adjusted exit target to $40.00
11/12/11 new stop loss @ 32.40

Current Target: $40.00
Current Stop loss: 33.85
Play Entered on: 09/22/11
Originally listed on the Watch List: 09/17/11


Kimberly-Clark Corp. - KMB - close: 70.73

Comments:
12/03 update: KMB delivered a nice bounce but the stock struggled with resistance near $71.50. Friday's performance actually produced a bearish engulfing candlestick pattern, which might indicate a short-term bearish reversal. I wouldn't be surprised to see some profit taking. However, the long-term trend is still bullish and KMB should benefit from investors looking for a nice dividend. I am not suggesting new positions at this time.

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 $ 2.20/ 2.40

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: 42.61

Comments:
12/03 update: LTD is up +11% for the week. Yet you'll notice that the stock's rally has stalled at the new trendline of lower highs starting at the October peak. I wouldn't be surprised to see some profit taking here. Readers may want to consider buying another bounce off $40.00.

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 $ 3.10/ 3.40

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: 54.34

Comments:
12/03 update: It seems like most analyst have very positive expectations and opinions for QCOM. Yet the stock isn't seeing the love I was expecting from investors. Is all the good news priced in? Shares do have a multi-month trend of higher lows and higher highs. Yet QCOM isn't even close to its 2011 highs near resistance at $60.00.

Readers may want to wait on new positions. I suspect we might see QCOM provide us another entry point near $52.50 again before the month is out.

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 $ 5.00/ 5.10

11/23/11 QCOM hits our trigger @ 52.50

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: 41.26

Comments:
12/03 update: RAI hit new all-time highs at $42.18 on Thursday. Shares have since pulled back and to be honest it looks like a short-term bearish reversal. I would expect RAI to retest support near $40.00 again or even the rising 50-dma. Wait for a dip near these levels before considering new bullish 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 $ 2.00/ 2.25

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: 50.22

Comments:
12/03 update: RHT is up about +10% for the week. Not bad for five days of work. Volume did fade on Thursday and Friday. While I am bullish on RHT I would not chase it here. After a +10% move it could see some profit taking. Traders will also want to keep in mind that RHT has earnings coming up on Monday, December 19th. More conservative traders may want to wait and see how the market reacts to earnings before considering new positions.

- Suggested Positions -
Nov 01, 2011 - entry price on RHT @ 47.70, option @ 4.75
symbol: RHT1319A60 2013 JAN $60 call - current bid/ask $ 4.80/ 6.10

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


Transocean Ltd. - RIG - close: 42.76

Comments:
12/03 update: RIG has made the leap from our watch list to our play list. Back in 2008 and 2010 shares of RIG found support in the $42-41 zone and produced significant rebounds off these multi-year lows. We are betting that RIG will do it again. The stock hit our buy-the-dip trigger at $42.25 on November 29th. Shares actually gapped down at $43.03 and fell to $41.28 (a multi-year low) before bouncing. Readers may want to look for another dip near $42.00 or more conservative traders could wait for a close over $45.00 as their entry point for bullish positions.

- Suggested SMALL Positions -
Nov 29, 2011 - entry price on RIG @ 42.25, option @ 4.65
symbol: RIG1319A50 2013 JAN $50 call - current bid/ask $ 4.60/ 4.75

Chart of RIG:

Current Target: $59.00
Current Stop loss: 39.45
Play Entered on: 11/29/11
Originally listed on the Watch List: 11/26/11


Ross Stores Inc. - ROST - close: 92.42

Comments:
12/03 update: It was a very big week for ROST. The stock soared +8.1% and broke out to new highs. I wouldn't chase it here. ROST has a stock split coming up on December 15th. We will most likely exit just prior to the stock split and re-evaluate ROST on a post-split basis.

The recent low was $83.98. I am raising our stop to $83.90.

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 $ 7.70/ 7.80

12/03/11 new stop loss @ 83.90
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: 83.90
Play Entered on: 10/11/11
Originally listed on the Watch List: 09/10/11


U.S. Steel Corp. - X - close: 27.81

Comments:
12/03 update: Last week was a big one for shares of X. The stock surged almost +25% with more than +15% of that on Wednesday's big move higher. The rally stalled right at resistance near its early November highs and its simple 100-dma. I am not suggesting new positions at this time. Please note that I am inching up our stop loss to $21.90.

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 $ 6.10/ 6.30

12/03/11 new stop loss at $21.90
11/09/11 Trade opened at $25.50 (small positions)

Current Target: $37.50
Current Stop loss: 21.90
Play Entered on: 11/09/11
Originally listed on the Watch List: 11/05/11


CLOSED Plays


Corning Inc. - GLW - close: 13.22

Comments:
12/03 update: Earlier this week GLW lowered its Q4 guidance on LCD glass volumes. This sent the stock down sharply. The stock gapped open lower at $13.57 on November 29th and spiked down to $12.64 before rebounding. Our stop loss was hit at $12.85. The bid on our 2013 Jan $15 call was trading near $1.50 at the time.

- Suggested Positions -
OCT 25, 2011 - entry price on GLW @ 14.27, option @ 2.05
symbol: GLW1319A15 2013 JAN $15 call - exit $1.50 (-26.8%)

11/29/11 GLW lowered guidance on LCD glass volumes, stock plunges. Stop loss hit at $12.85.

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


Watch

Industrials & Energy

by James Brown

Click here to email James Brown

Editor's Note:

We are cleaning up the watch list tonight. I've removed some candidates that may not get triggered any time soon. We're replacing them with a handful of new candidates.

- James



New Watch List Entries

MMM - 3M Co.

SHW - Sherwin-Williams

XOM - Exxon Mobil


Active Watch List Candidates

APC - Anadarko Petroleum

FDO - Family Dollar Stores

MCD - McDonald's Corp

NVDA - NVIDIA Corp

TJX - TJX Cos. Inc.

USO - U.S. Oil ETF

WMT - Wal-Mart Stores Inc.


Dropped Watch List Entries

RIG has graduated to the play list. We have chosen to remove EBAY, ERTS, and MSFT from the watch list.



New Watch List Candidates:


3M Co. - MMM - close: 79.76

Company Info

Dow Jones Industrial component MMM is building on a bottom after a painful third quarter. Shares still have a lot of overhead resistance in the $83-85 zone, especially with the simple and exponential 200-dma(s). If shares can breakthrough these levels then MMM could make a run at its 2011 highs.

I am suggesting we buy calls after MMM closes above $85.00. We'll use a stop loss at $78.90. Our long-term target is $97.00.

We are listing the 2013 calls. MMM does have 2014s available.

Wait for Close over $85.00, then buy calls, stop: 78.90

BUY the 2013 Jan $95 call (MMM1319A95)

Chart of MMM:

Originally listed on the Watch List: 12/03/11


Sherwin-Williams Co. - SHW - close: 85.87

Company Info

SHW makes paints and coatings and distributes them on a global scale. The stock has seen a rally back to major resistance in the $87-88 zone. A breakout past this level would be new all-time highs for SHW. I am suggesting investors wait for SHW to close over $88.00 and then buy calls the next session with a stop loss at $82.45. If triggered our long-term target is $99.50. FYI: The Point & Figure chart for SHW is bullish with a $92 target.

Wait for SHW to close over $88.00, then buy calls, stop: 82.45

BUY the 2013 Jan $100 call (SHW1319A100)

Chart of SHW:

Originally listed on the Watch List: 12/03/11


Exxon Mobil -XOM - close: 79.79

Company Info

XOM is one of the largest oil giants on the planet. Shares appear to be breaking out from a bull flag pattern. This past week's close over the simple 200-dma is also bullish. Yet I want to see more confirmation. XOM has a bearish trend of lower highs starting at the April (2011) peak.

I am suggesting investors wait for XOM to close over $82.00 and then buy calls the next day with a stop loss at $76.40. There is potential resistance at $85 and $87.50 but our long-term target is $94.00.

Wait for XOM to close over $82.00, then buy calls, stop 76.40

BUY the 2013 Jan $90 call (XOM1319A90)

- or -

BUY the 2014 Jan $95 call (XOM1418A95)

Chart of XOM:

Originally listed on the Watch List: 12/03/11


Active Watch List Candidates:



Anadarko Petroleum - APC - close: 80.48

Comments:
12/03 update: APC has seen a significant jump from under $72 to over $80 in a week. Yet the stock remains inside the very wide trading range and under resistance at the $85.00 level. I don't see any changes from my prior comments. We have two different entry points.

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: 12.27

Comments:
12/03 update: The rebound in ATVI stalled at the $12.50 level and its 20-dma. I would expect a pull back toward $12.00 soon. Aggressive traders might try buying a bounce off $12.00 or the 200-dma near $11.70. 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: 29.60

Comments:
12/03 update: The rebound in EBAY really didn't keep pace with the rest of the market. I am removing EBAY from our watch list. Aggressive traders might still want to consider buying a bounce off the $27.50-27.00 zone.

Trade Never Opened.

12/03/11 We are giving up. EBAY's bounce failed to keep pace with the market.
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: 23.00

Comments:
12/03 update: ERTS saw a nice bounce last week. Yet the stock struggled with new resistance near $23.80 the last couple of days and shares underperformed on Friday with a -1.4% decline. I still think ERTS could be a buy on a dip near $18.50 but that could take a while to occur. I'd also look at ERTS if shares close over $25.50. In the meantime I am removing ERTS from our watch list. It's unlikely to hit either trigger any time soon.

Trade Never Opened.

12/03/11 We are removing ERTS as a candidate
11/26/11 updated strategy to use a dip at $18.50 and a stop at $17.40, changed option to 2013 $25 call.

Chart of ERTS:

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


Family Dollar Stores Inc. - FDO - close: 58.70

Comments:
12/03 update: Last week's breakout makes FDO look like a short-term buy although I'd wait for a dip near $58.00. Longer-term I would not want to open positions here. We will adjust our buy-the-dip entry point to $54.50 so it's above the 100 and 200-dma. I am adjusting our stop loss to $51.25. I am suggesting we keep our position size small. Our long-term target is $69.50.

Buy-the-Dip trigger: $54.50, stop loss 51.25

BUY the 2013 Jan $60 call (FDO1319A60)

12/03/11 Adjusted trigger to buy the dip at $54.50 and stop loss to $51.25, they were 53.00 and $49.45.

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


McDonald's Corp. - MCD - close: 95.70

Comments:
12/03 update: MCD surged from $92 to $96 last week. The rally might continue as fund managers look to window dress their portfolios with strong stocks prior to the end of the year. Yet given our long-term outlook we don't want to chase MCD here. We'll leave our buy-the-dip entry point at $90.00 (stop loss @ 86.45). Our long-term target is $108.00. More aggressive traders might want to buy a dip near the 50-dma instead.

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: 25.22

Comments:
12/03 update: MSFT's bounce last week stalled at resistance in the $25.60 area. At the moment it looks like a normal oversold bounce. While MSFT might still offer some opportunity on a dip near $24.00 I am removing MSFT from our watch list.

Trade Did Not Open

12/03/11 Removing MSFT from the watch list.
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: 15.72

Comments:
12/03 update: I would keep a close eye on NVDA. The stock could be in play this coming week. Shares have seen a rebound back to resistance near the $16.00 level. Shares actually hit $16.05 on Friday but our entry point called for NVDA to close above the $16.00 mark. Shares also have potential technical resistance at the simple 200-dma currently at $16.19. I am adjusting our entry point to buy calls on NVDA when the stock closes above $16.25. If that occurs we will buy calls the next morning. More nimble traders may want to buy calls on NVDA when it hits $16.25 on an intraday basis instead since a breakout past $16.00 could spark some short covering and NVDA might surge several percentage points on that session.

Earlier Comments:
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 $16.25 (small positions)

BUY the 2013 Jan. $20 call (NVDA1319A20)

12/03/11 Adjusted entry strategy to wait for close over $16.25.

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


TJX Cos. Inc. - TJX - close: 62.24

Comments:
12/03 update: TJX has continued to perform well and shares closed at new all-time highs. Like MCD we could TJX continue to climb as fund managers dress up their portfolios for year end. Yet I wouldn't chase it here, not with long-term positions. Currently we have a buy-the-dip entry point at $56.25 (stop loss @ 52.40). We will leave it like this for another week or two and then re-evaluate.

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: 39.03

Comments:
12/03 update: Oil rallied with stocks last week. Yet the USO did not make a new high. I am still expecting a correction and don't see any changes from my comments a week ago.

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. 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


Wal-Mart Stores Inc. - WMT - close: 58.09

Comments:
12/03 update: WMT managed a bounce last week but the action is not looking very bullish. Shares have created a lower high and Friday's session was disappointing. Bears could argue this is a bearish double top pattern. There is support near $56.00 but I am suggesting we wait for a dip toward stronger support near $54.00. We'll use an entry point at $54.50. Our long-term target is $63.50.

It could take a few weeks before WMT hits our entry point, just keep this one on your watch list.

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)

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