Option Investor
Newsletter

Daily Newsletter, Sunday, 12/11/2011

Table of Contents

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

Leaps Trader Commentary

Three Weeks Left

by James Brown

Click here to email James Brown

The stock market survived the latest EU summit and ended the week on a positive note. The prior three weeks had been extremely volatile and stocks stalled Monday through Wednesday with the S&P 500 churning in a 20-point range while investors waited for news from Europe. Investors turned nervous on Thursday with the market down -2% only to see equities rebound when the EU didn't dissolve on Friday. Forgive me for being a little cynical here. Once again EU leaders have agreed to another vague plan to save the euro experiment. All they succeeded in doing was kicking the can down the road another three months (they hope). The S&P 500, NASDAQ Composite, and Russell 2000 indices all ended the week right underneath resistance and their multi-month trendline of lower highs.

One of the biggest headlines of the week came out on Monday. The Standard & Poor's rating agency placed all 17 euro zone nations on creditwatch negative for a potential downgrade in the coming months. This should have spurred EU leaders to stronger action. S&P said they will review the latest agreements from Friday's summit, which might delay any downgrade. Given the lack of any true progress from the EU on Friday, what do you want to bet that we see Standard & Poor's issue new downgrades before the end of the first quarter of 2012?

Meanwhile the European Central Bank (ECB) lowered interest rates by 25 basis points on Thursday. That was in-line with expectations but markets were unnerved by news that the decision to lower rates was not unanimous and that the ECB's economic outlook had turned more cautious. I don't see why that was a surprise. How could their economic outlook improve with so many of the EU nations are bordering on recessions? People are hoarding cash. Greece is seeing a run on their banks as average citizens have been pulling money out for months (wouldn't you?). You have multiple nations focused on austerity, which means less government spending, less economic activity, higher unemployment. I am not arguing that these EU nations should not be cutting their government spending but the natural effect of austerity reforms is less economic activity. If caution from the ECB wasn't enough the European Banking Authority's latest stress tests were unveiled on Thursday, adding more concern for the major European banks.

The major economic reports out last week were mixed. The U.S. ISM services index for November fell to 52.0, which was below expectations but remains in growth territory. Factory orders for October dropped 0.4%, which was generally in-line with estimates. The weekly initial jobless claims dropped to 381,000, which was better than expected and definitely a move in the right direction. Consumer sentiment for December rallied 3.6 points to 67.7, which is the highest reading since summer. Overseas the latest CPI and PPI readings on inflation in China both declined, which was better than expected.

The biggest event was Friday's conclusion to the latest EU summit. There was a lot of expectation going into this event. Some were expecting new treaties to be drafted. Many believe that this debt problem in Europe is not going away until the ECB steps up as the lender of last resort but the new ECB President said this week that won't happen. So what did the EU leaders agree to on Friday? It appears they've all agreed to stricter rules on tighter fiscal regulations, automatic penalties if individual governments don't comply with the EU standards, and an agreement to kick start the European Stability Mechanism (ESM) that will begin in July 2012 instead of in 2013. What is really surprising is that they actually got 26 of the 27 EU nations to agree to this new accord. The United Kingdom was the only nation that refused to play along (the U.K. is not part of the 17-nation euro zone, with the common euro currency).

The problem is that the EU didn't enforce the rules they already had on deficits. How will the enforce these new penalties if governments don't follow these new stricter rules? Now each of these 26 countries are going to have to approve of these new changes and then come back for a vote in March. What are the odds that each nation is going to approve this new agreement? It's only been a couple of days since Friday's conclusion to the EU summit and there are already multiple countries voicing concerns over the new changes.

Unfortunately the EU doesn't have a lot of time. There is more than one trillion euros of debt coming due in 2012. Over 500 billion euros of that is due in the first six months of the year. If the EU doesn't come together quickly then the bond market could force the issue with rising interest rates. Italy and Spain's interest rates are still uncomfortably high and yields on French 10-year bonds have been rising as well. If bond yields get too high then these countries can't afford to roll over their debt. Italy is already in the danger zone. (cue music for Kenny Login's "Highway to the Danger Zone")

Major Indices:

After churning sideways in a 20-point range (1245-1265) the first three days of the week the S&P 500 dropped toward 1230 and its exponential 200-dma on Thursday's decline. The market looked poised for a new correction lower only to see stocks rebound on Friday on EU headlines. This index remains under resistance at its simple 200-dma and the 1265 level. It's also still under resistance at its multi-month trendline of lower highs dating back to the July peaks (see chart).

If the S&P 500 can breakout past 1265 then we are probably looking at a run towards the October peak near 1290 and likely the 1300 level. A rally past 1300 sets up for a move into the 1320-1340 zone. On the other hand, if stocks retreat then the S&P 500 is looking at potential support near 1220 and 1200 again.

Daily chart of the S&P 500 index:

The NASDAQ composite has also been struggling with multiple trendlines of lower highs. Thursday's close under 2600 and its simple 50-dma looked pretty ominous. Friday saw a +1.9% bounce but this index remains under resistance, including the simple 200-dma. A close over 2675 would be encouraging but the 2700 level could be another obstacle for the bulls. A breakout past this resistance could set up for a run into the 2820-2850 zone.

Daily chart of the NASDAQ Composite index:

The action in the small cap Russell 2000 index is similar. What's different on this chart is the clear resistance at the $RUT's 150-dma on the daily chart (black moving average). A breakout past this level could set up for a nice run back into the 800-850 zone. I've also listed a 90-minute interval intraday chart. Here you can see the Thursday's pull back almost completed a 38.2% Fibonacci retracement of the most recent rally.

Normally the small caps tend to perform well in December and January but they're going to have to break this trend of lower highs first.

Daily chart of the Russell 2000 index

Intraday chart of the Russell 2000 index

Investors still want to watch the transportation index. Currently the Dow Jones Transportation average is hovering under resistance at its 200-dma and the 5,000 level. A close past 5,070 would negate what currently looks like a potential double top pattern.

Daily chart of the Dow Jones Transportation Average

We have a relatively busy week for economic data. The big headlines to watch are CPI, PPI, and Philly Fed survey. The biggest event is probably the FOMC meeting on Tuesday. It's the last FOMC event for this year. No one is expecting any changes out of the Fed but there is the possibility that the Fed hints at QE3 in 2012.

- Tuesday, December 13 -
Retail Sales for November
Business Inventories for October
FOMC interest rate decision

- Wednesday, December 14 -
Import/Export Prices for November
OPEC meeting

- Thursday, December 15 -
Weekly Initial Jobless Claims
Producer Price Index (PPI) for November
Industrial Production
Capacity Utilization
Philadelphia Fed Survey

- Friday, December 16 -
Consumer Price Index (CPI) for November

The Week Ahead:

If we are lucky it would be nice to see headlines out of Europe diminish for a few days. Maybe there will be a post-summit lull and we can see the market move without so much EU-inspired volatility. Unfortunately that is not likely to happen. Investors will still be watching EU-region bond yields, specifically Italy, for any changes in the health of the EU. There is always the ever-present danger of another credit downgrade for any of the struggling EU members. Bigger picture it looks like this most recent summit may has given EU leaders another two or three months before the situation heats up again.

Closer to home investors might want to worry about corporate earnings. They were overshadowed by news out of Europe but there were some earnings warnings this past week. Analysts have been lowering their Q4 earnings estimates. On average this year's Q3 earnings were up +17.9%. While Q4 earnings estimates have fallen from +17% down to +10% over the last few months. There is reason to worry. Both consumers and governments are cutting back on spending in Europe and China has seen a minor slowdown as well. Given the large number of global companies in the U.S. this pull back is going to have an impact. Of course it's possible that as earnings estimates continue to fall it will allow for an earnings season of positive, better than expected surprises that fuels a Q1 rally in stocks.

We only have three weeks left for the year. Traditionally December is one of the most bullish months for stocks. Over the past 80 years the S&P 500 index averaged a +1.4% gain in December. The S&P 500 closed Friday at 1255. Currently J.P.Morgan has a 1350 year-end target. That's looking pretty optimistic at this point. Other targets are 1270 (Credit Suisse), 1250 (Goldman Sachs), and the average among the top 12 firms is 1278 (source: Birinyi Associates). The market could still see a Santa Claus rally fueled by fund managers chasing performance for their year-end statements.

Investors may want to stay neutral on the market until we see a breakout. Fortunately there is a very clear buy signal, which would be a close over 1265 on the S&P 500.

I would stay cautious on launching new positions and keep position size small when starting any new trades.

- James


Portfolio

Portfolio Update

by James Brown

Click here to email James Brown


Current Portfolio


Portfolio Comments:

The U.S. market spent a few days resting and consolidating sideways before investors got a little nervous ahead of the EU summit on Thursday. Yet Thursday's market-wide sell-off was softened by a decent bounce on Friday. The major indices are still trading under resistance. A breakout could herald a new rally toward the end of the year. I would definitely wait for the S&P 500 to close over resistance before considering new bullish positions.

We are planning to exit our ROST position on Wednesday this week. You can read the details in the play updates section.

Please note there was some sort of error with the LTD option quotes this weekend. The value listed below for LTD's call option is out of date.

I have updated the stop loss on ROST.

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

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

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



New Plays

Worth A Look?

by James Brown

Click here to email James Brown

Editor's Note:

The U.S. market's major indices (S&P500, NASDAQ, $RUT) are still trading under bearish resistance and trendlines of lower highs. While December is normally a bullish time of year for stocks there is no guarantee we'll see a Santa Claus rally this year. I remain cautious on adding new positions but if bulls can power stocks past resistance then it could signal a new run higher.

Instead of listing new trades tonight we have added new candidates to the watch list section just in case the market does rally.

As I search for potential stocks to trade sometimes I come across possible candidates that do not have LEAP options available. While these do not qualify for this newsletter I thought readers might find them interesting and take a look.

(Potential Bullish Candidates that do not have LEAPS)

RDEN, DLB, LH, AVY, OXM, PWE, and TICC

Most of these have been consolidating sideways. Some of them still need to breakout past resistance before I would consider them possible buys.

-James


Play Updates

Prepare to Take Profits

by James Brown

Click here to email James Brown

Editor's Note:

We are electing for an early exit on one of our bullish candidates this week. That candidate is ROST. The stock has a 2-for-1 split coming and begins trading post-split on Thursday. See the ROST update for details.

-James


Closed Plays


None. No closed plays this week.


Play Updates


Allergan Inc. - AGN - close: 83.49

Comments:
12/10 update: This stock is down less than a quarter (25 cents) for the week. AGN has spent several days now consolidating under resistance at the $85.00 level. Thursday's drop pretty much filled the gap from late November, which is a good thing. If the market retreats then look for AGN to dip toward its 200-dma near $80.00. If you're looking for a new bullish entry point I'd wait for AGN to close over $85.50 before considering new positions. However, The spreads on our 2013 January calls just keeps getting wider! We won't trade AGN again until this improves.

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 $ 1.75/ 4.10

12/10/11 spreads on our 2013 calls are getting wider!
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: 5.72

Comments:
12/10 update: BAC spent the week consolidating sideways under the $5.90 level. The action almost looks like a bull-flag pattern and Thursday's dip tested short-term technical support at its simple 10-dma. Unfortunately, I am still cautious here. U.S. financials will remain hostage to headlines out of Europe and the EU summit on Friday accomplished very little but postpone any true action.

Nimble traders could try buying calls on dips in the $5.20-5.00 zone. Or you might want to consider bullish positions if we see BAC close above the $6.00 level.

NOTE: Our option prices did not change for the week.

Earlier Comments:
A few 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: 33.54

Comments:
12/10 update: BMY has managed to keep the rally alive. The stock closed at new multi-year highs on Friday. Although it is worth noting that volume has been fading all week long. BMY is short-term overbought with a two-week bounce from $30 to $33.50 (+11.6%). I would still expect some profit taking after such a big move. BMY is normally a slow-moving stock.

BMY did raise their dividend by 3%. The stock currently has a yield of 3.9%, which makes it attractive given Wall Street's current fad for high-dividend stocks.

Please note that I am altering our exit target again. We still have a year before our options expire and BMY is just not hitting new multi-year highs. More conservative traders may want to leave their exit target at $34.50. I am setting our exit target at $37.50. Compare that to the Point & Figure chart, which is forecasting a $41 target.

- Suggested Positions -
SEP 19, 2011 - entry price on BMY @ 30.53, option @ 1.20
symbol: BMY1319A35 2013 JAN $35 call - current bid/ask $ 2.02/ 2.07

12/10/11 adjust exit target to $37.50
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: $37.50
Current Stop loss: 29.40
Play Entered on: 09/19/11
Originally listed on the Watch List: 09/10/11


Beazer Homes - BZH - close: 2.47

Comments:
12/10 update: BZH gained a nickel for the week. Shares are actually consolidating sideways in a triangular pennant pattern. These are supposed to be neutral consolidations but normally the prior trend (up, in this case) wins out. It is worth noting that BZH is consolidating under technical resistance at its simple 150-dma. The next level of major resistance is likely the $3.00 mark.

I am not suggesting new positions at this time.

- 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 $ 0.85/ 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: 18.88

Comments:
12/10 update: CSCO eked out a gain for the week even though shares remain inside the $18.50-19.00 trading range. We remain long-term bullish on CSCO but we're not suggesting new positions here. If the stock fails to breakout to new highs this looks like a potential bearish double top pattern forming.

- Suggested Positions -
OCT 28, 2011 - entry price on CSCO @ 18.28, option @ 1.68
symbol: CSCO1319A20 2013 JAN $20 call - current bid/ask $1.98/2.00

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: 21.32

Comments:
12/10 update: CSX lost about 30 cents for the week. The stock is currently in no-man's land with support near $30.00 and overhead resistance at $22.25. Nimble traders can buy dips near the $20.00 level but given this market I'd be more interested in buying bounce off the $20 mark.

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 $ 1.57/ 1.63

- or -

NOV 14, 2011 - entry price on CSX @ 22.59, option @ 3.30
symbol: CSX1418A25 2014 JAN $25 call - current bid/ask $ 2.50/ 2.75

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: 45.50

Comments:
12/10 update: EPD ran into a speed bump this past week. Management has decided to take advantage of their record-high stock price and raise capital. The company announced a secondary offering of 9 million units (shares) at $44.68. The stock immediately gapped from approximately $46 to hit $44.40 before bouncing. Currently EPD has about 192.4 million shares outstanding so this new offering dilutes current shareholders by 4.6%. The stock only fell -3.4% at Thursday's open and has since recovered a good chunk of this decline. The lack of any real selling pressure is bullish.

Investors can choose to wait for another dip into the $44.00 area or wait for a new close over $46.50 before considering new bullish positions. Just remember that EPD doesn't move very fast.

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 $ 1.10/ 1.40

12/08/11 EPD gapped down on news of a 9 million share secondary price at $44.68.

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: 27.90

Comments:
12/10 update: HPQ posted a gain for the week but shares remain inside their $27.50-28.50 trading range. One of the big headlines for the week was news that HPQ would make its webOS platform open source code.

I don't see any changes from my prior comments. HPQ still has a lot of resistance in the $28.50-30.00 zone. I am not suggesting new positions at this time.

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/ 6.15
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: 8.10

Comments:
12/10 update: KBH delivered a gain for the week but shares are currently stuck under technical resistance at the simple 150-dma. I am not suggesting new bullish positions at this time. If the market corrects the KBH should have some support near $7.50. If the market rallies then the next hurdle is the $9.00 level.

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 $ 1.22/ 1339

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: 36.70

Comments:
12/10 update: KFT spent the week consolidating sideways but Friday's +1.5% bounce left shares at a new multi-year closing high. The $36.00 level is holding up as short-term support. If the S&P 500 can close above resistance at 1265 then I'd consider looking at new bullish positions in KFT with the stock above $36.00.

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 $ 3.65/ 3.80

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: 70.14

Comments:
12/10 update: KMB has spent the last few days hovering near the $70.00 level. I am not suggesting new positions at this time. Look for support near $68.00.

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 $ 2.10/ 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: 40.83

Comments:
12/10 update: Hmm... LTD has risen to new two-week highs on Wednesday to close right at resistance near $44.00. Then Thursday produced a sharp market-wide decline and the stock was crushed, gapping open lower under $42.00 and its 50-dma. It looks like an overreaction to the market's decline because I couldn't find any company-specific news to explain Thursday's plunge. The stock did begin trading ex-dividend on December 8th, which would explain the gap down but the quarterly dividend was only 20 cents. What is concerning is the lack of a rebound on Friday while the rest of the market was in rally mode.

I would hesitate to launch positions here but nimble traders could buy a bounce off the $40.00 level.

NOTE: There appears to be some sort of error with LTD's option quotes. I've tried multiple sources and can't get a current bid/ask for the 2013 Jan $50 call. Let's see if things improve on Monday. If not we'll call one of the exchanges.

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*

*12/10/11 bid/ask for our 2013 $50 call is out of date
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: 55.18

Comments:
12/10 update: QCOM has spent almost two weeks consolidating sideways in the $53.60-55.50 zone. Friday's bounce (+2.0%) is encouraging and appears to break the short-term trend of lower highs but the stock remains inside this range.

I am not suggesting new positions at this time.

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 $ 5.20/ 5.35

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: 40.54

Comments:
12/10 update: RAI gapped down on December 7th as the stock adjusted for the company's latest quarterly dividend. Shares spent the rest of the week consolidating sideways. I would consider new bullish positions with RAI near support at $40.00 but readers may want to wait for the S&P 500 to close over resistance at 1265 before considering new bullish positions here.

- 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 $ 1.85/ 2.10

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: 49.70

Comments:
12/10 update: RHT has spent the last three days churning sideways in a relatively narrow range. I am cautious with the stock under the $50.00 level. Further weakness from here would make last week's peak look like the second half of a bearish double top pattern.

I want to remind readers that RHT is due to report earnings on Monday, December 19th, after the closing bell. More conservative traders may want to consider buying some sort of hedge prior to the close that Monday or raise their stop loss on this position to limit your risk. I am not suggesting new positions at this time.

- Suggested Positions -
Nov 01, 2011 - entry price on RHT @ 47.70, option @ 4.75
symbol: RHT1319A60 2013 JAN $60 call - current bid/ask $ 4.60/ 5.30

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: 43.26

Comments:
12/10 update: RIG struggled with resistance at $46.00 the first part of the week. Shares did garner some bullish analyst comments on CNBC but it failed to help the stock price. Investors might want to consider new positions now with Friday's intraday bounce from $41.75. However, an alternative entry point would be to wait for RIG to close over resistance at $46.00 instead.

We have a stop loss at $39.45. More conservative traders may want to use a stop just under the 52-week low at $41.28 instead.

- Suggested SMALL Positions -
Nov 29, 2011 - entry price on RIG @ 42.25, option @ 4.65
symbol: RIG1319A50 2013 JAN $50 call - current bid/ask $ 4.95/ 5.15

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: 93.58

Comments:
12/10 update: ROST has spent over a week now churning sideways in the $92-94 zone. Although with Friday's bounce the stock looks poised to breakout higher. This stock is going to start trading post 2-for-1 split on December 16th. I am suggesting we exit positions on Wednesday, December 14th at the closing bell to avoid any hassles with the effects of the split on our option position.

Please note that I am raising our stop loss to $89.00.

- Suggested Positions -
Oct 11, 2011 - entry price on ROST @ 84.36, option @ 5.30
symbol: ROST1319A100 2013 JAN $100 call - current bid/ask $ 7.80/ 8.20

12/10/11 Prepare to exit on Weds. Dec. 14th at the closing bell to avoid holding over the stock split.
12/10/11 new stop loss @ 89.00
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: 89.00
Play Entered on: 10/11/11
Originally listed on the Watch List: 09/10/11


U.S. Steel Corp. - X - close: 27.48

Comments:
12/10 update: Shares of X spent the week hugging technical resistance at its descending 100-dma. The stock managed to find some short-term support near its simple 10-dma on Thursday's market-wide decline. Big picture the action in X over the last couple of months looks like a bottom. Yet I wouldn't buy calls now. Wait for another bounce from the $25.00 level as a possible entry point.

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 $ 5.65/ 5.85

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


Watch

A Handful Of New Candidates

by James Brown

Click here to email James Brown


New Watch List Entries

DVN - Devon Energy

MSI - Motorola Solutions

ONNN - ON Semiconductor

PEP - Pepsico Inc


Active Watch List Candidates

APC - Anadarko Petroleum

FDO - Family Dollar Stores

MCD - McDonald's Corp

MMM - 3M Co.

NVDA - NVIDIA Corp

SHW - Sherwin-Williams

TJX - TJX Cos. Inc.

WMT - Wal-Mart Stores Inc.

XOM - Exxon Mobil


Dropped Watch List Entries

USO has been removed.



New Watch List Candidates:


Devon Energy - DVN - close: 66.56

Company Info

DVN is a large oil and gas company that appears to be forming a bottom. If you study the daily chart you'll see that shares are forming an inverse head-and-shoulders pattern. The stock has resistance near $70. I am suggesting we wait for DVN to close over $70.25 and we'll buy calls the next day with a stop loss at $62.50. More conservative traders may want to wait for DVN to close over its simple 200-dma before considering bullish positions (if you do, adjust your stop loss higher). Our long-term target is $89.

FYI: 2014 calls are also available.

Wait for DVN to close over $70.25, buy calls the next day, stop 62.50

BUY the 2013 Jan $80 call (DVN1319A80)

Chart of DVN:

Originally listed on the Watch List: 12/10/11


Motorola Solutions, Inc. - MSI - close: 47.02

Company Info

This communication equipment company is climbing back towards major resistance at the $48.00 level. A breakout here would be new multi-year highs. I am suggesting we wait for MSI to close above $48.25 and then buy calls the next day with a stop loss at $43.75. Our long-term target is $64.50. The Point & Figure chart is bullish with a $58 target.

FYI: 2014 calls are also available.

Wait for MSI to close over $48.25, buy calls the next day, stop 43.75

BUY the 2013 Jan $55 call (MSI1319A55)

Chart of MSI:

Originally listed on the Watch List: 12/10/11


ON Semiconductor Corp. - ONNN - close: 8.14

Company Info

ONNN is a semiconductor stock that has been building a bottom in the $6.50-8.50 range for months. A breakout from this trading range could portend a new leg higher. I am suggesting we wait for ONNN to close over $8.50 and then buy calls the next day with a stop loss at $7.70. More conservative traders may want to wait for ONNN to close over its simple 200-dma instead. Our long-term target is $11.45. I would keep our position size small.

Wait for ONNN to close over $8.50, buy calls the next day, stop 7.70

BUY the 2013 Jan $10 call (ONNN1319A10)

(small positions)

Chart of ONNN:

Originally listed on the Watch List: 12/10/11


Pepsico, Inc. - PEP - close: 65.19

Company Info

PEP has spent four months building a base under resistance in the $65-66 zone. Now shares are on the verge of breaking out past technical resistance at its 200-dma and its multi-month trendline of lower highs.

I am suggesting we wait for PEP to close over $66.25 and then launch positions the next day with a stop loss at $62.75. Our target is $71.75. I would keep our position size small to limit our risk. FYI: The Point & Figure chart for PEP is bullish with an $81 target.

Wait for PEP to close over $66.25, buy calls the next day, stop 62.75

BUY the 2013 Jan $70 call (PEP1319A70)

(small positions)

Chart of PEP:

Originally listed on the Watch List: 12/10/11

Active Watch List Candidates:



Anadarko Petroleum - APC - close: 80.25

Comments:
12/10 update: There is little change in APC. The stock is still chopping around in a very wide range. If the market rallies then look for APC to run toward resistance near $85.00. 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: 12.24

Comments:
12/10 update: ATVI closed virtually unchanged for the week. As expected the stock did see a dip toward $12.00. Aggressive traders might want to buy this bounce with a tight stop loss. I don't see any other changes from my prior comments.

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


Family Dollar Stores Inc. - FDO - close: 57.86

Comments:
12/10 update: We are still waiting for FDO to dip toward support in the $55-54 area. Currently the newsletter is suggesting investors wait for a dip and buy calls at $54.50. If triggered we'll use a stop loss at $51.25. I am suggesting we keep our position size small. Our long-term target is $69.50.

FYI: An alternative entry point would be a close over resistance at the $60.00 level.

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: 98.03

Comments:
12/10 update: Investors are still loving large cap, dividend names. MCD's dividend isn't that high but it's still near 3% and the stock just keeps on inching higher. MCD hit new all-time highs on Friday. The $100 level is most likely round-number, psychological resistance so we don't want to buy calls now.

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


3M Co. - MMM - close: 82.20

Comments:
12/10 update: MMM spent another week consolidating sideways under resistance in the $83-84 zone. The stock also has overhead resistance in the form of some long-term moving averages.

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)

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


NVIDIA Corp. - NVDA - close: 14.90

Comments:
12/10 update: NVDA saw a dip to its trendline of higher lows on Friday. Short-term traders might want to buy Friday's intraday bounce with a stop under Friday's low. Given our long-term perspective we still want to wait for NVDA to breakout over major resistance near $16.00.

Currently the plan is to buy calls after NVDA closes above $16.25. We will adjust our stop loss higher to $14.25. 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) stop 14.25

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


Sherwin-Williams Co. - SHW - close: 86.36

Comments:
12/10 update: Little has changed for SHW. The stock has spent over a week now consolidating sideways in the $85-87 zone. We are waiting for a breakout past resistance.

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)

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


TJX Cos. Inc. - TJX - close: 63.25

Comments:
12/10 update: Hmm.... TJX continues to hold up pretty well. The stock is less than a dollar from all-time highs. Investors might want to consider a more aggressive entry point and buy calls on a dip near support at $60.00 and its 50-dma. At the moment I am still holding out for a pull back toward its long-term trend of support. Our plan calls for buying calls on a dip at $56.25. 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: 38.50

Comments:
12/10 update: We are dropping the USO as a long-term candidate. We remain long-term bullish on oil but an ETF that has to constantly roll forward its futures contracts could be frustrating for investors as the process has a negative impact on the ETF's share price.

NOTE: We're adding DVN as new candidates tonight. Investors might want to look at the XOP or the XLE as an alternative to the USO.

Trade did not open.

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


Wal-Mart Stores Inc. - WMT - close: 58.32

Comments:
12/10 update: WMT is little changed from a week ago. This is a slow-moving stock. It could take weeks before we see WMT provide an appropriate entry point and months for the stock to actually move high enough for us. Trading WMT LEAPS is going to require some patience.

Earlier Comments:
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.

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


Exxon Mobil -XOM - close: 81.34

Comments:
12/10 update: XOM is edging closer to resistance at the $82.00 level. We could see shares produce an entry point this week. The plan is to buy calls after we see XOM close above $82.00.

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)

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