Option Investor
Newsletter

Daily Newsletter, Sunday, 12/18/2011

Table of Contents

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

Leaps Trader Commentary

Twas the Week Before Christmas

by James Brown

Click here to email James Brown

Odds of a Santa Claus rally seem to be fading with only two weeks left in the month of December. Concerns over Europe are weighing heavily on the market like a thick blanket of snow. Stocks experienced a three-day slide from Monday through Wednesday that left the S&P 500 down more than -3%. Semiconductor giant Intel (INTC) helped propel stocks lower with an earnings warning on Monday. Volume was very low all week except for Friday. Markets finally saw a surge of volume thanks to expiration of options and futures on Friday.

Market participants are cautious on the equities. Investors looking for a safe haven to put their money drove huge demand for U.S. treasury auctions this past week. The U.S. dollar also rallied as money searched for safety. The euro currency fell to an 11-month low on Wednesday thanks to a sharp surge in the dollar. This dollar strength had an impact on commodities. Gold produced a dramatic breakdown, falling below key support. The sell-off in crude oil weighed heavily on the energy and oil service stocks while boosting the airlines.

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

Daily chart of the Gold ETF (GLD):

Weekly chart of the Gold ETF (GLD):

One of the major stories this past week was the rating agencies. You may recall that back on December 5th the Standard & Poor's agency made headlines with their announcement they were placing all 17 euro zone nations on credit watch negative for a possible downgrading in the next several months. We had hoped that this threat might spur stronger action from the EU leaders at the December 9th summit. Unfortunately all of the credit rating agencies are very disappointed with the lack of action by the EU. The summit's new plan to make a plan strategy is falling on fallow ground.

I cautioned readers last week that the prospect for new credit rating downgrades threatened the market. This past Friday it was Fitch's turn to make headlines. The Fitch rating agency downgraded several U.S. and European banks on Friday morning. Fitch also released stinging remarks toward the situation in Europe. In their press release Fitch believes that "A comprehensive solution to the euro zone crisis is technically and politically beyond reach." They went on to say that without a solution and a credible financial backstop the situation will produce "episodes of severe financial market volatility" that will be especially hard on the troubled EU members struggling with significant debt problems. Speaking of troubled EU members Fitch put Spain, Italy, Belgium, Slovenia, Ireland, and Cyrus on credit watch negative for a possible downgrade in the next few months. Fitch also put France with its AAA rating on credit watch negative but said the time frame for a potential downgrade for France was a couple of years. If France gets downgraded it's going to cause a lot of problems for the entire EU system. As one of the largest and strongest members in the EU, France helps fund a lot of these bailout packages for smaller, struggling EU members.

Fitch wasn't the only credit rating agency casting a shadow across the markets on Friday. There was a persistent rumor that S&P might issue a downgrade somewhere in Europe on Friday after the closing bell. This rumor proved to be partially right only it wasn't S&P. It was Moody's. After the closing bell the Moody's rating agency downgraded Belgium by two notches from Aa1 to Aa3 and placed them on credit watch negative for future downgrades.

Another story on Europe, somewhat under the radar, was the ECB's new loan program. The ECB is offering three-year loans to European banks at just 1%. Currently banks can bring assets rated at A- to the ECB and receive cash. The theory right now is that EU-area banks are taking this 1% cash and buying short-term bonds from these struggling countries like Spain and Italy with yields in the 3% to 6% range, which allows them to pocket the different.

The ECB can't legally bailout the struggling EU countries. Market pundits are calling this a backdoor bailout since it allows European banks to buy these higher-risk bonds and drive yields down. It's being suggested that the ECB is going to lower the rating requirements on potential collateral to less than A-. If that happens then the European banks can bring more questionable debt to the ECB for cash to buy more questionable debt from countries like Spain and Italy. What could possibly go wrong with this plan, right? At the moment it seems to be working since bond yields have been quietly falling this past week. Global markets have been keying in on EU-area bond yields (mostly Italy's) as the barometer for investor sentiment on Europe. I want to remind you that the EU is racing against the clock. The area has more than one trillion euros worth of debt that needs to be rolled over in 2012. If they can't get bond yields down by the early part of 2012 then many of these countries will not be able to afford to pay interest on this debt. If this trick works then maybe the ECB has found a way to temporarily solve the EU crisis.

Looking at the economic headlines last week the results were mixed. November retails sales were a bit disappointing in spite of strong Black Friday results. The November data on price inflation was mild. The PPI rose +0.3% with core prices rising +0.1%. Meanwhile the Consumer Price Index came in at +0.0% but the core CPI rose +0.2%. The New York Empire State manufacturing survey jumped to 9.5 in December versus estimates for 3.0. The Philly Fed survey soared to 10.3 compared to estimates in the 4-5 range. Another positive was the most recent weekly initial jobless claims that fell to 366,000. This was well below the estimate for almost 400,000 and the lowest reading since May 2008. Last week's FOMC meeting was a dud. The committee left rates unchanged in the 0.00% to 0.25% zone. That's not a surprise. The focus was on the FOMC's statement and investors were hoping for some hint at QE3 to soothe concerns over a struggling global economy. The FOMC statement proved to be disappointing. Meanwhile overseas we're hearing mixed data on export levels and manufacturing activity in China, which refueled worries about a slowdown there.

Major Indices:

The key levels in the S&P 500 last week were 1250, 1230 and 1210. The index failed at 1250 early on. The 1230 area was support on Monday but resistance on Friday morning. The index bounced twice near 1210 on Wednesday. Looking at the daily chart you can see how the index failed near its 50-dma on Friday morning. The S&P 500 currently has a two-week bearish trend of lower highs and lower lows. I would still expect a dip toward the 1200 level, which should be psychological support. There is a lot of potential resistance in the 1230-1260 zone.

The trendline of lower highs is near the 1250 level now and the simple 200-dma represents technical resistance near 1260. If the index breaks down under the 1200 level then we're looking at a drop toward 1180 or 1160.

Daily chart of the S&P 500 index:

Intraday chart of the S&P 500 index:

The NASDAQ composite is back under support/resistance at the 2600 level. The sell-off midweek did fill the gap from late November. Unfortunately the oversold bounce on Friday reversed. The path of least resistance appears to be down. I wouldn't be surprised to see a decline toward the 2500 area again. The 2650 area and the simple 200-dma could end up being tough resistance.

Daily chart of the NASDAQ Composite index:

Bulls were probably hoping we would see an early occurrence of the January effect in December this year with the small caps outperforming. That hasn't happened yet. The two-week consolidation in the Russell 2000 index has hit the 50% retracement of its latest rally. Overhead the simple 150-dma seems to be the technical resistance to watch. If the $RUT breaks support at 700 then it could be a quick drop back toward its November lows.

Daily chart of the Russell 2000 index

The economic calendar slows down a bit this week. There will be multiple reports on the housing market and home sales (not listed below). The big reports to watch will be the third Q3 GDP estimate on Thursday. On Friday we will see the latest Durable Goods orders but I doubt anyone will be paying attention that close to the Christmas holiday.

- Tuesday, December 20 -
housing starts and building permits for November

- Wednesday, December 21 -
exiting home sales for November

- Thursday, December 22 -
Weekly Initial Jobless Claims
Q3 GDP estimate

- Friday, December 23 -
Durable Goods orders

The Week Ahead:

Twas the week before Christmas and looking ahead I am concerned about the stock market. Investors are weary from concern over the situation in Europe. It started almost two years ago with Greece. Now the major rating agencies are upping the pressure on EU leaders to do something. The first and second quarters of 2012 could be fraught with credit downgrade landmines that might go off at any time to sink the equity markets. We don't know yet if the downgrade for Belgium on Friday night will have an impact on our markets. I doubt it will given the size of Belgium's economy but it does start Monday off on a sour note.

You already know that December is historically a bullish time of year for stocks but that's for the average December. There are always exceptions. We could still see some window dressing by fund managers as they face the end of the year in two weeks. This coming week would be the week for that to happen since so many professionals are on holiday the week between Christmas and New Years. At the same time we could see an increase in tax-loss selling. That's when investors dump their losing positions near the end of the year to offset any taxable gains.

Short-term I am neutral on stocks, especially if you're looking for long-term positions. A close over 1265 and the S&P 500's simple 200-dma would definitely improve the mood on Wall Street. If stocks continue to sink then nimble traders can look for possible entry points near the November and October lows but until stocks bounce that's an aggressive, higher-risk strategy.

Keep position size small to limit your risk and have cash on hand in case we do see an entry point in the next few weeks.

- James


Portfolio

Portfolio Update

by James Brown

Click here to email James Brown


Current Portfolio


Portfolio Comments:

Investor sentiment on equities has started to sour. The major indices saw a -3% pull back last week. Traders are growing more concerned that Europe won't be able to solve its problems and headlines of potential credit downgrades for EU nations only reinforces this fear.

We've got two weeks left for the year. There is still a chance the market might see some year-end window dressing. However, volume is going to continue to fall as more and more professional traders pack up and go home for the holidays.

We saw RIG hit our stop loss last week. Meanwhile we had a scheduled exit for the ROST trade.

There are no new stop loss updates tonight.

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

Low-Volume Holiday Season

by James Brown

Click here to email James Brown

Editor's Note:

The U.S. market continues to look vulnerable here with a -3% pull back this past week. The indices have been unable to break the bearish trend of lower highs. Now this might turn out to be a normal correction after the sharp November-early December rally. Bull markets tend to climb the wall of worry.

My concern tonight is identifying what the catalyst might be to pull investors off the sidelines, especially as we head into the low-volume holiday season. We're choosing to not add any new active trades tonight but we are adding four new candidates to the watch list (LDK, LLY, TEVA, and VZ). In addition to those four stocks, I would keep my eye on KO and SBUX. A close over $68.00 for KO might be a bullish entry point as it breaks the bearish trend of lower highs. On SBUX I would watch for a close over resistance at $45.00 as a possible entry point.

-James


Play Updates

Stocks Shiver in December

by James Brown

Click here to email James Brown


Closed Plays


RIG & ROST were closed.


Play Updates


Allergan Inc. - AGN - close: 83.66

Comments:
12/17 update: AGN managed to eke out a small gain for the week. Shares have spent two weeks consolidating sideways in the $82-85 zone. I would wait for AGN to close over $85.50 or $86.00 before considering new bullish positions. However, given the wide spreads for AGN's options I'd probably avoid launching new plays and look elsewhere in our portfolio.

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 $ 2.35/ 4.40

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: 5.20

Comments:
12/17 update: Ouch! BAC lost -9% for the week. The Fitch ratings agency downgraded several banks on Friday and BAC was one of them. This news helped push BAC toward the bottom of its $5.20-5.40 trading range. The late November lows are in the $5.13-5.03 area. Odds are good we're going to see BAC retest this area. Investors can use a dip or a bounce near the $5.10-5.00 zone as a new entry point. We're not using a stop loss on current positions but more conservative traders may want to place a stop in the $4.90-4.80 area.

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 $ 0.28/ 0.29
(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 $ 0.28/ 0.29
(no stop loss on this position)

12/17/11 expect BAC to retest the $5.10-5.00 zone.
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: 34.22

Comments:
12/17 update: Investors were in the mood to buy safe-haven stocks last week. Shares of BMY rallied to new multi-year highs. The stock hit $34.50 at its high on Friday, which was our previous exit target but a week ago we raised our target to $37.50 instead. More conservative trades may want to go ahead and lock in profits now.

BMY does look overbought given the big bounce off its November lows. I am not suggesting new positions at this time.

- Suggested Positions -
SEP 19, 2011 - entry price on BMY @ 30.53, option @ 1.20
symbol: BMY1319A35 2013 JAN $35 call - current bid/ask $ 2.28/ 2.35

12/16/11 BMY hit our previous exit target at $34.50, more conservative traders may want to take profits now and exit early.
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: 2.24

Comments:
12/17 update: BZH saw a sharp decline toward technical support at its 50-dma before paring its losses. The 50-dma has held as support the last three days in a row. If you were looking for a new entry point this could work although you may want to use a higher stop loss.

- 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 $ 0.70/ 0.80

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: 17.94

Comments:
12/17 update: The action in CSCO this past week looks bearish The bounce on Friday failed near short-term resistance at $18.50. CSCO has a new short-term bearish trend of lower highs and lower lows. You could argue that CSCO has created a bearish double top with the peaks in November and December. If the market continues to pull back then CSCO will likely test the $17.50-17.00 zone. I am not suggesting new positions at this time.

- Suggested Positions -
OCT 28, 2011 - entry price on CSCO @ 18.28, option @ 1.68
symbol: CSCO1319A20 2013 JAN $20 call - current bid/ask $1.57/1.60

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: 20.41

Comments:
12/17 update: Our CSX trade was almost stopped out this past week. Shares have fallen from the $22.25 area to support near $20.00 in the past two weeks. Thursday saw an intraday dip to $19.87. We have a stop loss at $19.75. The $20 level should be support so investors can use this pull back as a new entry point to buy calls.

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 $ 1.23/ 1.28

- or -

NOV 14, 2011 - entry price on CSX @ 22.59, option @ 3.30
symbol: CSX1418A25 2014 JAN $25 call - current bid/ask $ 2.13/ 2.28

12/17/11 CSX is starting to bounce from support near $20. This can be used as a new entry point
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: 44.80

Comments:
12/17 update: EPD lost about 70 cents for the week. The stock is churning sideways between $45.75 (10-dma) and the $44.50 level (50-dma). I don't see any changes from my prior comments. Readers can look for dips near $44.00 or wait for a close over $46.50 as a new bullish entry point. 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 $ 0.75/ 1.10

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: 25.84

Comments:
12/17 update: It was a rough week for tech stocks. Monday's news that semiconductor giant Intel (INTC) issued an earnings warning due to the impact of hard drive supplies from Thailand flooding hit the entire tech sector. HPQ gapped open lower under the bottom of its $28.50-27.50 trading range. The sell-off has continued. HPQ is now under its 50-dma and headed for round-number support near $25.00. We have a stop loss at $24.75. Nimble traders can use a dip or a bounce near $25.00 as a new entry point.

- 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 $ 4.85/ 4.90
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: 7.22

Comments:
12/17 update: It was a painful week for KBH. The stock fell from $8.10 a week ago to $6.87 at Wednesday's lows (-15%). We knew this was going to be a volatile stock to trade. Shares have since bounced but the rebound failed near resistance at $7.50 on Friday morning. I am not suggesting new positions at this time. More conservative traders might want to raise their stop loss, especially before KBH reports earnings.

NOTE: The company is due to report earnings on Wednesday, December 21st before the opening bell. Wall Street expects a profit of 3 cents a share. If you want to try and protect yourself from any post-earnings volatility you'll have to make preparations by Tuesday's closing bell. The newsletter is going to hold over the announcement.

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 $ 0.85/ 0.92

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
price check: 12/14/11 KBH closed at 6.92 2013 jan 10 call: 0.75/0.84

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: 36.49

Comments:
12/17 update: KFT lost 21 cents for the week. The stock is consolidating sideways in the $36-37 zone and has been stuck in this range for over two weeks. I am not suggesting new positions at this time. Our final target is $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 $ 3.40/ 3.55

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: 71.28

Comments:
12/17 update: KMB displayed some relative strength with a gain for the week. Shares are now testing resistance in the $71.50 area. I am almost tempted to buy calls on a close over $72.00 but KMB has long-term resistance near $73.00.

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 $ 2.40/ 2.55

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: 38.40

Comments:
12/17 update: It was another rough week for LTD. Shares faded from $40 toward its November lows and technical support at its 200-dma. If the sell-off continues then LTD could hit our stop loss at $37.90. Should LTD manage a bounce I would be tempted to buy calls on a close over $40.00 again.

The mystery over LTD's missing option quotes is solved. The company is giving back $600 million with a special $2 dividend. The dividend is payable on December 23rd, 2011 but the stock began trading ex-dividend on December 8th. Our 2013 Jan $50 calls are now $48 calls.

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 $48 call - current bid/ask $ 2.05/ 2.20

(originally these were listed at $50 strike price calls, but LTD began trading ex-dividend on Dec. 8th, 2011, for a special $2.00 dividend)

12/08/11 LTD begins trading ex-dividend for a special $2 dividend
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: 52.61

Comments:
12/17 update: I am growing concerned over the trading action in QCOM. The stock has broken down from its sideways consolidating in the $54-56 zone. Shares are on the verge of breaking down below a bullish trendline of higher lows.

I am not suggesting new positions at this time.

Earlier Comments:
QCOM 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 $ 4.05/ 4.20

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: 40.66

Comments:
12/17 update: In spite of the Friday morning sell-off RAI still managed to post a gain for the week. Traders can use dips to support near $40.00 as a new entry point to launch positions. However, the market looks vulnerable here. Readers may want to wait for a new close over $41.00 instead (or wait for the S&P 500 to close over its 200-dma).

- 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 $ 1.90/ 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: 47.64

Comments:
12/17 update: RHT displayed some relative strength on Friday with a +3.0% gain. Is this traders positioning themselves for the earnings report on Monday? It was encouraging to see RHT bounce off support near $45.00 but the bounce has stalled near its 50-dma. Earnings are due after the closing bell on Monday (Dec. 19th). Wall Street is expecting a profit of 26 cents a share. If RHT disappoints we could see it gap open lower on Tuesday morning. I am not suggesting new positions at this time. 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.

- Suggested Positions -
Nov 01, 2011 - entry price on RHT @ 47.70, option @ 4.75
symbol: RHT1319A60 2013 JAN $60 call - current bid/ask $ 3.70/ 4.50

12/17/11 look for RHT to report earnings on Monday (12/19)
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


U.S. Steel Corp. - X - close: 25.87

Comments:
12/17 update: Material names like X have continued to struggle. Although on a positive note it looks like the two-week consolidation lower in X has found support near $25.00 and its 50-dma. The simple 100-dma near $26.75 could be resistance. Readers may want to wait for X to close above this level before considering new bullish positions.

More conservative traders may want to up their stop loss toward the $24 area.

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 $ 4.65/ 4.80

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


Transocean Ltd. - RIG - close: 43.26

Comments:
12/17 update: It was another rough week for RIG. A sell-off in crude oil prices weighed heavily on the oil and oil service stocks. RIG broke down below key support in the $41.00 area and then continued to fall and broke round-number support at $40.00. Shares hit our stop loss at $39.45 on December 15th. The action this week is extremely bearish with RIG closing at new seven-year lows.

- Suggested SMALL Positions -
Nov 29, 2011 - entry price on RIG @ 42.25, option @ 4.65
symbol: RIG1319A50 2013 JAN $50 call - exit $3.45 (-25.8%)

12/15/11 stopped out at $39.45. option bid @ 3.45

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: 47.00 (post 2-for-1 split)

Comments:
12/17 update: Our plan was to exit positions on Wednesday, December 14th at the close to avoid holding over ROST's 2-for-1 split. The stock closed at $92.83. The 2013 Jan $100 call closed with a bid of $7.60.

- Suggested Positions -
Oct 11, 2011 - entry price on ROST @ 84.36, option @ 5.30
symbol: ROST1319A100 2013 JAN $100 call - exit $7.60 (+43.3%)

12/14/11 planned exit. ROST closed @ 92.83. Option bid @ $7.60
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.

Chart of ROST

Current Target: $99.00
Current Stop loss: 89.00
Play Entered on: 10/11/11
Originally listed on the Watch List: 09/10/11


Watch

Four New Candidates

by James Brown

Click here to email James Brown

Editor's Note:

We are cleaning up the watch list tonight by removing a few candidates that are unlikely to get triggered any time soon. We're replacing them with four new candidates.

- James



New Watch List Entries

LDK - LDK Solar

LLY - Eli Lilly

TEVA - Teva Pharmaceuticals

VZ - Verizon Communications


Active Watch List Candidates

DVN - Devon Energy

FDO - Family Dollar Stores

MCD - McDonald's Corp

MMM - 3M Co.

MSI - Motorola Solutions

ONNN - ON Semiconductor

PEP - Pepsico Inc

SHW - Sherwin-Williams

XOM - Exxon Mobil


Dropped Watch List Entries

APC, NVDA, TJX, and WMT were all removed from the watch list.



New Watch List Candidates:


LDK Solar Co. Ltd. - LDK - close: 4.45

Company Info

Solar energy stocks have had a really rough year in 2011. It looks like shares of LDK, a Chinese solar stock, could have found a bottom. The lows in October and November look like a big double bottom pattern.

More aggressive traders may want to open bullish positions now. I am proposing two different entry points depending on how the market performs. The $5.00 level was significant support back in 2009 and 2010. This could prove to be significant resistance. We'll list a breakout trigger over $5.00 if LDK can rally higher. On the other hand LDK already looks overbought given the big bounce from its November lows. With the market looking weak LDK might correct so we'll list a buy-the-dip entry point too.

Buy-the-Dip trigger: $3.85, stop loss @ 3.25

BUY the shares of LDK stock @ $3.85
- or -
buy the 2013 Jan $5.00 call (LDK1319A5)

Breakout trigger: Wait for close over $5.05, then buy the next day, stop loss @ 3.95

BUY the shares of LDK stock @ (see above)
- or -
buy the 2013 Jan $5.00 call (LDK1319A5)

Chart of LDK:

Originally listed on the Watch List: 12/17/11


Eli Lilly - LLY - close: 40.53

Company Info

Investors have been buying high-dividend safe haven stocks. LLY certainly fits the bill with a 4.8% yield. The stock has broken out past major resistance to hit multi-year highs this past week. Investors could probably launch positions now. I want to try and get a better entry point by waiting for a small pull back.

We're suggesting a buy-the-dip entry point at $39.50 with a stop loss at $37.40. Our long-term targets are $44.75 and $48.00.

Buy-the-Dip trigger: $39.50

BUY the 2013 Jan $45 call (LLY1319A45)

- or -

BUY the 2014 Jan $45 call (LLY1418A45)

Chart of LLY:

Originally listed on the Watch List: 12/17/11


Teva Pharmaceuticals Industries - TEVA - close: 42.72

Company Info

It looks like TEVA may be forming a significant bottom in the $35-42 zone. However, there is significant resistance near $45.00. I am suggesting investors wait for TEVA to close over $45.25 and then buy calls the next day. If you prefer more aggressive traders could try and buy dips (or bounces) near the $40.00 level instead. FYI: The Point & Figure chart has recently turned bullish and is forecasting a $57 target.

NOTE: It could be a couple of weeks before TEVA hits our entry point.

Breakout trigger: Wait for TEVA to close over $45.25 and then buy calls the next day, stop loss @ 41.75

BUY the 2013 Jan $50 call (TEVA1319A50)

(FYI: 2014 calls are available)

Chart of TEVA:

Originally listed on the Watch List: 12/17/11


Verizon Communications - VZ - close: 38.78

Company Info

VZ is a slow-moving stock but the trend has turned bullish. This telecom giant has risen toward resistance near $39.00 and its 2011 highs. I am suggesting investors wait for VZ to close over $39.25 and then open bullish positions the next morning. If triggered our long-term target is $45.00.

Breakout trigger: Wait for VZ to close over $39.25, use a stop loss @ 36.75

BUY the 2013 Jan $40 call (VZ1319A40)

- or -

BUY the 2014 Jan $40 call (LLY1418A40)

Chart of VZ:

Originally listed on the Watch List: 12/17/11

Active Watch List Candidates:



Anadarko Petroleum - APC - close: 72.94

Comments:
12/17 update: It was another rocky week for APC. A decline in oil prices pulled energy stocks lower. APC is several points away from our proposed entry points. I am dropping it from the watch list to make room for something we could actually get triggered on.

Our trade did not open. APC is not close to either proposed entry point.

Removed from the watch list.

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


Activition/Blizzard, Inc. - ATVI - close: 11.88

Comments:
12/17 update: It was an ugly week for video game stocks. Both ATVI and ERTS posted losses. ATVI is now testing support near its 200-dma. If we see shares close under $11.60 then we'll drop ATVI as a candidate. I'm going to give this stock another two or three weeks. If it doesn't see improvement then we're dropping it from the watch list. 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. 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


Devon Energy - DVN - close: 60.45

Comments:
12/17 update: DVN lost about -10% for the week thanks to a widespread sell-off in energy stocks. Shares are testing round-number support near $60.00. If DVN doesn't see improvement soon we're going to drop it as a potential LEAPS candidate. Right now the plan is to buy calls if DVN can close over $70.25. 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)

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


Family Dollar Stores Inc. - FDO - close: 57.92

Comments:
12/17 update: FDO managed to eke out a small gain for the week. We're still waiting for a pull back. 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: 97.49

Comments:
12/17 update: MCD tagged new all-time highs last week above $98.50. I am starting to wonder if MCD might announce a stock split in the next few months. The last time MCD had a split it was a 2-for-1 split back in 1999 with shares around $85.

We still don't want to chase it here. Currently we're waiting for a correction back toward $90. However, I will adjust our entry point trigger from $90.00 to $91.50. We'll move our stop loss up to $87.25. Our long-term target is $108.00.

Buy-the-Dip trigger: $91.50, stop 87.25

BUY the 2013 Jan $100 call (MCD1319A100)

12/17/11 adjusted entry point to $91.50, stop loss to $87.25
11/26/11 adjusted stop loss to $86.45

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


3M Co. - MMM - close: 78.87

Comments:
12/17 update: MMM is hovering under the $80 level and near its 50 and 100-dma. I don't see any changes from my prior comments.

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


Motorola Solutions, Inc. - MSI - close: 46.16

Comments:
12/17 update: Profit taking in MSI was relatively minor last week. I don't see any changes from my prior comments.

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)

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


NVIDIA Corp. - NVDA - close: 13.51

Comments:
12/17 update: We are removing NVDA from the watch list. The stock has really underperformed the last couple of weeks. The stock looks poised to breakdown under short-term support near $13.50 soon.

We are removing NVDA from the watch list.

12/17/11 removed from the watch list
12/03/11 Adjusted entry strategy to wait for close over $16.25.

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


ON Semiconductor Corp. - ONNN - close: 7.39

Comments:
12/17 update: Semiconductor stocks were big losers last week thanks in part to INTC's earnings warning on Monday. ONNN has retreated back to the bottom of its trading range. More aggressive traders may want to open bullish positions now with a stop loss under Wednesday's low near $6.92. The newsletter will wait for a breakout.

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)

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


Pepsico, Inc. - PEP - close: 64.71

Comments:
12/17 update: PEP spent the week hovering in the $64-65 zone. Shares look ready to breakout past resistance if the market will cooperate.

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)

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


Sherwin-Williams Co. - SHW - close: 84.64

Comments:
12/17 update: SHW flirted with a breakdown under technical support at its rising 50-dma this past week. We are still waiting for a breakout to new highs.

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: 62.14

Comments:
12/17 update: TJX is still consolidating near its highs. The stock has spent more than two weeks now churning sideways in the $62-64 zone. I don't want to chase it here. It's unlikely that TJX will hit our entry point any time soon. Thus we're going to remove it from the watch list.

We are removing TJX from the watch list.

12/17/11 removed from the watch list.
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


Wal-Mart Stores Inc. - WMT - close: 58.27

Comments:
12/17 update: WMT is essentially unchanged for the week. I don't see any changes from my prior comments. Unfortunately 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.

I am temporarily removing WMT from our watch list. Readers can wait for a bounce off support near its exponential 200-dma (currently near $55).

12/17/11 removed from the watch list (moving too slowly).

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


Exxon Mobil -XOM - close: 80.16

Comments:
12/17 update: XOM continue to consolidate sideways in the $80-82 zone. 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