Option Investor
Newsletter

Daily Newsletter, Monday, 12/26/2011

Table of Contents

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

Leaps Trader Commentary

Santa Visits Wall Street

by James Brown

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The week before Christmas proved to be a bullish one for stocks. The market stumbled a bit on Monday the 19th as the world reacted to news that North Korea's dictator Kim Jong II had passed away. Market sentiment quickly reversed higher on Tuesday thanks to positive economic data overseas and a successful Spanish bond auction. Later in the week the U.S. markets eventually shrugged off news that the Q3 GDP estimate was revised down from +2.0% growth to +1.8%. The ECB launched a new funding program, which helped alleviate lending concerns in Europe but simultaneously alarmed market watchers at the large number of banks that needed help. Technology stocks lagged behind the market thanks to a disappointing earnings report from Oracle (ORCL) released on Tuesday night. By the closing bell on Friday the S&P 500 index had rallied +5.2% off its lows from Monday afternoon. For the week the S&P 500 is up +3.7%, the NASDAQ Composite is up +2.4%, and the small cap Russell 2000 index is up +3.5%. Year to date the S&P 500 is up +0.6%, the NASDAQ is down -1.2% and the $RUT is down -4.5%.

Economic data last week was mixed. The latest Q3 GDP estimate was a disappointment with an unexpected from +2.0% to +1.8% growth. Investors ignored the news as estimates for the Q4 are moving higher into the +3.5% to +4.0% zone. Helping fuel estimates for the fourth quarter was the durable goods report for November, which rose +3.8% compared to a -0.7% drop in October. Economists had only been expecting a rise of +2.0% in durable goods. Most of this move was fueled by a huge surge in aircraft orders. Home sales were making headlines. New Home sales in November rose +1.6% to an annualized paced of 315,000. It was almost a +10% jump from the same month a year ago. Another slice of good news was the falling inventory levels. Overall home sales continue to lag and 2011 might end up being the slowest year since they began keeping records back in 1963. Another positive report last week was the weekly initial jobless claims, which fell to 364,000. Economists had been expecting 380-390K.

Major Indices:

The S&P 500's +5% bounce is encouraging although doing so in a four-day time period suddenly makes the index look short-term overbought. The S&P 500 managed to breakout past resistance near 1230, 1250 and at key technical resistance at the simple 200-dma. Yet the rally paused right at early December resistance at 1265.

In a normal market, after a +5% bounce, I'd probably expect some profit taking ahead of us. Yet given our spot on the calendar there is a decent chance we could see stocks extend their gains. Volume is going to be low and that's going to allow for exaggerated moves and bulls currently have the momentum. If the S&P 500 can breakout pas resistance at 1265 then the next hurdle is the 1285 area and then 1300. It is worth noting that further gains will look like a bullish breakout from an inverse head-and-shoulders pattern. This H&S pattern appears to be forecasting a move toward 1350-1370. Chart readers might find it interesting that the Point & Figure chart on the S&P 500 is still bearish but a move past 1270 would produce a new triple-top breakout buy signal.

Daily chart of the S&P 500 index:

Intraday (2-month) chart of the S&P 500

The NASDAQ composite sank to new December lows on Monday at 2518 before surging on Tuesday to 2600. There was profit taking on Wednesday thanks to ORCL's earnings report but the NASDAQ bounced near 2550 and by Friday's closing bell the index was above resistance at the 2600 level. This tech-heavy index is struggling with a trend of lower highs and there is still technical resistance at its simple 200-dma overhead. If the NASDAQ can breakout past its 200-dma near 2661 and the December high near 2675 then we might see the index make a run toward the 2011 highs in the 2840-2880 zone.

Daily chart of the NASDAQ Composite index:

Weekly chart of the NASDAQ Composite index:

The Russell 2000 index is up +5.6% from its lows on Monday near 708. The sharp four-day bounce has produced a bullish breakout past technical resistance at its 150-dma. This small cap index also appears to be on the verge of a breakout from an inverse H&S pattern. If that's true then the H&S pattern would forecast a rally into the 830-840 area. On a short-term basis the 750 level, the simple 200-dma near 763, and the late October high near 770 are all overhead resistance for the $RUT.

Daily chart of the Russell 2000 index

Two-month chart of the Russell 2000 index

The week between Christmas and New Years is a quiet one for economic data. The major reports in the U.S. will be the Consumer Confidence number and the Chicago PMI data. Yet the biggest event will probably be overseas. Italy will hold a three-year bond auction on Wednesday. Rates have been rising in Italy and they want to sell up to 8.5 billion euros of debt. If rates on this auction end up being too high or they don't sell the full amount then it will signal distress in the EU again and could spark new weakness in equity markets.

- Tuesday, December 27 -
Consumer Confidence for December

- Wednesday, December 28 -
Italy will hold a 3-year bond auction (8.5 billion euros)

- Thursday, December 29 -
Weekly Initial Jobless Claims
Chicago PMI for December

The Week Ahead:

"If Santa should fail to call, bears may come to Broad and Wall." is an old market maxim. Looking ahead at the last week of the year it would appear that the seasonal trends are in force. Historically the "Santa Claus" rally is the last five days of the year. It looks like Santa came early this year with a big bounce last week. Bulls currently have momentum on their side. Stocks could see a combination of window dressing for the end of the quarter with strong stocks getting stronger and tax loss selling with weak stocks getting weaker. Of course everything could change if Italy's bond auction on Wednesday doesn't perform well.

Looking out into the first quarter of 2012 the focus will remain on Europe but earnings results will be a factor. Here in the states we have a very slowly improving economy. Investors will be expecting good news out of corporate earnings that begin in about three weeks. If Q4 earnings results disappoint then it could get ugly for stocks. At the same time we're facing the rising likelihood of the credit rating agencies announcing significant downgrades in Europe in the first quarter. Meanwhile U.S. banks will be facing tougher stress tests.

Currently no one seems happy with the EU's latest plan to make a plan strategy. The EU zone needs to raise more than one trillion euros of debt in 2012. That will be impossible to do if rates don't come down. Italy alone has to raise 440 billion euros of debt in 2012 ($574 billion). Fortunately it seems that rates, outside of Italy, have been falling in Europe. The rumor is that EU banks are taking the 1% loans from the ECB and are using that money to buy short-term EU area bonds at more than 1% to pocket the difference. Pundits are calling it a backdoor bailout.

Technically the U.S. indices appear to be on the verge of a bullish breakout from an inverse head-and-shoulders pattern. Now these patterns are not 100% accurate but it's another factor in favor of the bulls.

I would stay cautious on launching new positions. That doesn't necessarily mean don't trade but if we see an opportunity I would be cautious on opening positions and would keep our position size small to limit risk.

- James


Portfolio

Portfolio Update

by James Brown

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Current Portfolio


Portfolio Comments:

The stock market produced a significant bounce this past week, albeit on very light holiday volume. The S&P 500 index has rallied more than +5% from December 19th (Monday) lows. Now the major indices are setting near resistance. Will the rally continue for the last four trading days of 2011? Or will stocks drift sideways or worse as weary investors look toward a new year.

We have had four stocks graduate from the watch list to our active trade list. This past week also saw LTD and RHT get stopped out.

There are new stop losses on AGN, BZH, KFT and KMB.

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

Bubbling Higher

by James Brown

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- New Trades -


Pepsico, Inc. - PEP - close: 66.57

Comments:
12/24/11 update: PEP has been on our watch list with the suggested entry point to buy calls if shares can close over $66.25. The stock accomplished that task on Friday with a close at $66.57. We want to buy calls at the open on Tuesday morning with a stop loss at $62.75. PEP's recent breakout past its simple 200-dma and the $65-66 level is bullish. Both PEP and its rival KO are both breaking out past resistance. The two look poised to make a run (although it's probably a slow run) toward their 2011 highs.

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.

- Suggested (SMALL) Positions -
Dec 27, 2011 - entry price on PEP @ --.--, option @ -.--
symbol: PEP1319A70 2013 JAN $70 call - current bid/ask $ 2.66/ 2.74

12/27/11 launch positions at the open on Tuesday
12/23/11 PEP meets our entry point requirements at the closing bell.

Chart of PEP:

Current Target: $71.75
Current Stop loss: 62.75
Play Entered on: 12/27/11
Originally listed on the Watch List: 12/10/11


Starbucks Corp. - SBUX - close: 45.44

Comments:
12/24/11 update: Shares of SBUX, the ubiquitous coffee shop, have been steadily marching higher for months. This past week saw SBUX breakout past resistance near $45.00 and close at new all-time, record highs.

I am suggesting we launch small bullish positions at the open on Tuesday morning with a stop loss at $39.75. More conservative traders might want to consider a stop loss closer to the $42.50 area instead. Our target is $55.00. FYI: The Point & Figure chart for PEP is bullish with a long-term $75 target.

NOTE: 2014 calls are available.

- Suggested (SMALL) Positions -
Dec 27, 2011 - entry price on SBUX @ --.--, option @ -.--
symbol: SBUX1319A50 2013 JAN $50 call - current bid/ask $ 3.80/ 3.90

12/27/11 launch positions at the open on Tuesday

Chart of SBUX

Current Target: $55.00
Current Stop loss: 39.75
Play Entered on: 12/27/11
Originally listed on the Watch List: 12/10/11



Play Updates

Candidates At All-time Highs

by James Brown

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Editor's Note:

We have a few active candidates that have rallied to new all-time, record highs thanks to the market's four-day push higher.

We also have a handful of new active trades from our watch list. Meanwhile LTD and RHT have been stopped out.

-James


Closed Plays


LTD and RHT have been closed.


Play Updates


Allergan Inc. - AGN - close: 87.42

Comments:
12/24/11 update: It was a bullish week for AGN but a disappointing one if you're holding long-term calls. AGN rallied almost four points for the week and broke through resistance near $85.00. Yet the bid/ask on our 2013 calls barely moved.

Fortunately the trend is bullish for AGN and the next obstacle is the 2011 highs near $89.25. Don't be surprised if AGN stalls on its first attempt to break out.

Please note our new stop loss at $81.60.

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 $ 2.30/ 4.20

12/24/11 new stop loss @ 81.60
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: 81.60
Play Entered on: 10/17/11
Originally listed on the Watch List: 09/24/11


Bank of America - BAC - close: 5.60

Comments:
12/24/11 update: BAC is up +7.6% for the week but it's up +12.2% from its closing low on Monday at $4.99. The breakdown under $5.00 early last week was pretty ominous but financials reversed higher. The next hurdle for BAC is probably the 50-dma and price resistance in the $5.90-6.00 zone. I am not suggesting new positions at this time.

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 $ 0.00/ 0.01
(no stop loss on this position)

- or -

AUG 29, 2011 - entry price on BAC @ 8.10, option @ 1.50
symbol: BAC1319A10 2013 JAN $10 call - current bid/ask $ 0.26/ 0.27
(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 $ 0.26/ 0.27
(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: 35.11

Comments:
12/24/11 update: BMY extended its gains, rising another 90 cents for the week. Shares closed at new multi-year highs. More conservative traders will want to seriously consider taking profits right now with the option up +106%. BMY is definitely short-term overbought with a four-week rally. Broken resistance near $33.00 should be new support. A normal 38.2% Fibonacci retracement of this four-week move would mean a dip back toward the $33.40 area. More conservative traders may want to raise their stop loss toward the $31.50-32.00 zone.

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 $ 2.48/ 2.50

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: 2.44

Comments:
12/24/11 update: It was a bullish week for BZH with a sharp bounce off technical support near its 50-dma. Shares also broke through technical resistance at its simple 150-dma. Now the stock is challenging resistance in the $2.55 area. We will move our stop loss up to $1.95. I am not suggesting new positions at this time. FYI: The P&F chart for BZH is bullish with a $4.75 target.

- 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 $ 0.90/ 0.95

12/24/11 new stop loss @ 1.95
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: 1.95
Play Entered on: 10/28/11
Originally listed on the Watch List: 10/22/11


Cisco Systems - CSCO - close: 18.47

Comments:
12/24/11 update: It was a rocky week for CSCO with the stock rebounding off new December lows hit last Monday. If you look at the intraday chart it almost looks like an inverse head-and-shoulders pattern formed over the last couple of weeks with resistance at $18.50. Readers could use a close over $18.50 as a new entry point. More conservative traders could wait for a new relative high and a close over $19.25 instead.

- Suggested Positions -
OCT 28, 2011 - entry price on CSCO @ 18.28, option @ 1.68
symbol: CSCO1319A20 2013 JAN $20 call - current bid/ask $1.65/1.68

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: 21.34

Comments:
12/24/11 update: The bounce off support from $20 continued last week with CSX up the last four days in a row. Shares really didn't dip that much on Monday when the market moved lower. While I am bullish on this industry (railroads) I am a little concerned with CSX still stuck under a trendline of lower highs. I am not suggesting new positions at this time.

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

- Suggested Positions -
NOV 14, 2011 - entry price on CSX @ 22.59, option @ 2.24
symbol: CSX1319A25 2013 JAN $25 call - current bid/ask $ 1.29/ 1.34

- or -

NOV 14, 2011 - entry price on CSX @ 22.59, option @ 3.30
symbol: CSX1418A25 2014 JAN $25 call - current bid/ask $ 2.32/ 2.46

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: 45.52

Comments:
12/24/11 update: It was a quiet week for EPD. Shares consolidated sideways along its rising 50-dma most of the week. I would be tempted to buy calls on another close over $46.00. Unfortunately something has happened to the options. The spread on our 2013 $50 calls has widened significantly. That might be a good reason to hesitate to see if the spread narrows before initiating positions. Bear in mind 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 $ 0.35/ 0.85

12/24/11 spreads on the 2013 Jan $50 calls have widened significantly.
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: 25.88

Comments:
12/24/11 update: HPQ is essentially flat for the week, which isn't bad considered the impact Oracle's (ORCL) earnings had on tech stocks. On a positive note traders bought the dip twice near $25.00. On a not so positive note HPQ has a short-term trend of lower highs. You could argue that HPQ is stuck in the $25.00-28.50 zone. That means investors can buy calls on this bounce from $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 $ 4.40/ 4.55
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: 6.62

Comments:
12/24/11 update: Watch out! The trading in KBH last week was very bearish. I warned readers that KBH was due to report earnings on Wednesday, Dec. 21st and it might see some volatility. The company blew away the earnings estimates of 3 cents a share with a profit of 18 cents a share. Revenues also beat expectations at $479.9 million for the quarter. The company's backlog of orders to build homes rose to the highest levels in three years. Yet the news wasn't good enough for the street. The stock saw a spike higher toward $8.00 that quickly reversed. Wednesday produced a bearish reversal pattern and Thursday and Friday's relative weakness only confirms it.

Readers will want to seriously consider an early exit now. I am not suggesting new positions at this time. We have a stop loss at $6.38.

Earlier Comments:
KBH can be a volatile stock. There is no need to chase it. If there is a breakout the stock could see a short squeeze. The most recent data listed short interest at 52% of the 65 million-share float.

- Suggested Positions -
(Stock Position)
Oct 19, 2011 - entry price on KBH @ 7.17

- or -

(Option Position)
Oct 19, 2011 - entry price on KBH @ 7.17, option @ 1.25
symbol: KBH1319A10 2013 JAN $10 call - current bid/ask $ 0.52/ 0.61

12/24/11 Readers may want to exit early. Investors are selling the stock falling its earnings report.
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: 37.74

Comments:
12/24/11 update: KFT delivered a strong performance. The stock broke out from its $36-37 trading range and surged to nine-year highs. Currently our exit target is $40.00. More aggressive traders may want to aim higher. I am raising our stop loss to $34.25. FYI: The Point & Figure chart is forecasting a long-term target at $67.50.

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 $ 4.10/ 4.25

12/24/11 new stop loss @ 34.25
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: 34.25
Play Entered on: 09/22/11
Originally listed on the Watch List: 09/17/11


Kimberly-Clark Corp. - KMB - close: 73.73

Comments:
12/24/11 update: KMB is showing relative strength. The stock has broken out past resistance near $72.00 and closed at all-time, record highs on Friday. I wouldn't chase it here. Look for a dip or a bounce near the $72.00 level as a possible entry point. We are raising our stop loss to $68.25. More conservative traders may want to use a stop closer to $70.00 instead.

FYI: The P&F chart's bullish target has risen from $98 to $109.

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 $109. 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 $ 3.30/ 3.50

12/24/11 New stops loss @ 68.25. KMB has broken out to all-time highs.

Current Target: $79.75
Current Stop loss: 68.25
Play Entered on: 11/07/11
Originally listed in the New Plays 11/05/11


LDK Solar Co. Ltd. - LDK - close: 4.94

Comments:
12/24/11 update: LDK has made the leap from our watch list to play list. The plan was to open bullish positions if LDK could close over $5.05. Shares almost did it on Dec. 20th with a close at $5.03. Yet shares were struggling with technical resistance at the simple 150-dma. Thursday saw LDK close at $5.24, meeting our entry point requirements. The stock opened at $5.31 on Friday morning and then immediately plunged. I didn't see any news to account for Friday's relative weakness but the close under $5.00 is discouraging. At this point readers may want to wait for a new bounce from the $4.50 area before considering new positions.

- Suggested Positions -
Dec 23, 2011 - entry price on LDK @ 5.31, option @ 0.89
symbol: LDK1319A5 2013 JAN $5 call - current bid/ask $ 0.90/ 1.05

Chart of LDK:

Current Target: $ 9.00
Current Stop loss: 3.25
Play Entered on: 12/23/11

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


QUALCOMM Inc. - QCOM - close: 54.63

Comments:
12/24/11 update: QCOM has been lost and churning sideways the last few weeks. This past week actually saw a breakdown under its 100-dma and exponential 200-dma but the sell-off didn't last, not with the market in a four-day bounce. I'm still cautious on QCOM, at least short-term. I might be tempted to launch new bullish positions if QCOM can close over $55.75.

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 $ 4.50/ 4.60

11/23/11 QCOM hits our trigger @ 52.50

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


Reynolds American Inc. - RAI - close: 41.72

Comments:
12/24/11 update: Defensive stocks are in fashion right now. RAI broke through short-term resistance near $41.00. The stock is less than a point from new all-time highs. The close over $41 looks like an entry point but readers may want to wait for the S&P 500 to close over 1270 before initiating positions.

- Suggested Positions -
Nov 18, 2011 - entry price on RAI @ 40.02, option @ 2.00
symbol: RAI1319A42.5 2013 JAN $42.50 call - current bid/ask $ 2.10/ 2.30

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


Sherwin-Williams Co. - SHW - close: 89.68

Comments:
12/24/11 update: Paintings and coating producer SHW has made the jump from watch list to active trade. The stock produced an impressive four-day rally and broke through major resistance in the $87.50-88.00 zone. Shares are now trading at all-time highs. Our trigger to open positions was a close over $88.00, which happened on Dec. 22nd. Our trade opened on December 23rd at $88.92. I would still consider new positions now or you can wait for a dip in the $88.00 area. Our target is $99.50.

- Suggested Positions -
Dec 23, 2011 - entry price on SHW @ 88.92, option @ 3.90
symbol: SHW1319A100 2013 JAN $100 call - current bid/ask $ 4.10/ 4.60

Chart of SHW:

Current Target: $99.50
Current Stop loss: 82.45
Play Entered on: 12/23/11

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


Verizon Communications - VZ - close: 39.98

Comments:
12/24/11 update: VZ is another watch list candidate that has graduated to the play list. Shares have managed to breakout past resistance near its 2011 highs to close at new three and a half year highs. Our plan was to buy calls if VZ could close over $39.25, which happened on Dec. 22nd. Our entry was Friday morning and VZ rallied to round-number resistance at $40.00. I would still consider new positions now or you could wait for a dip into the $39.00-38.50 zone. VZ normally doesn't move very fast so it's unlikely to get away from us. Our long-term target is $45.00. We'll start this trade with a stop at $36.75.

- Suggested Positions -
Dec 23, 2011 - entry price on VZ @ 39.42, option @ 2.17
symbol: VZ1319A40 2013 JAN $40 call - current bid/ask $ 2.35/ 3.41

- or -

Dec 23, 2011 - entry price on VZ @ 39.42, option @ 2.87
symbol: VZ1418A40 2014 JAN $40 call - current bid/ask $ 3.10/ 3.25

Chart of VZ:

Current Target: $45.00
Current Stop loss: 36.75
Play Entered on: 12/23/11

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


U.S. Steel Corp. - X - close: 26.21

Comments:
12/24/11 update: It looks like X has broken the two-week trend of lower highs and lower lows. Shares are still struggling with technical resistance near the simple 100-dma. Looking at the last three months the stock appears to have set a new higher low, which is positive. I am cautiously optimistic here. U.S. economic data, while mixed, still has an underlying trend of improvement, which is positive for the big industrial names like X.

More conservative traders may want to up their stop loss toward the $23 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 $ 4.55/ 4.70

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


Exxon Mobil -XOM - close: 85.22

Comments:
12/24/11 update: It was a very bullish week for XOM with a five-dollar surge to new four-month highs. Shares broke out past resistance at $82.00 and rallied to the next level of resistance near $85.00. Our plan was to buy calls if XOM could close over $82.00, which happened on Dec. 21st with XOM closing at $83.12. Our trade opened on Dec. 22nd with XOM at $83.56. I wouldn't chase it here after this four-day rally. Wait for a dip back into the $83-82 zone. Broken resistance at $82.00 should be new support.

Earlier Comments:
There is potential resistance at $85 and $87.50 but our long-term target is $94.00.

- Suggested Positions -
Dec 22, 2011 - entry price on XOM @ 83.56, option @ 4.63
symbol: XOM1319A90 2013 JAN $90 call - current bid/ask $ 5.10/ 5.20

- or -

Dec 22, 2011 - entry price on XOM @ 83.56, option @ 6.25
symbol: XOM1418A95 2014 JAN $95 call - current bid/ask $ 6.65/ 6.90

Chart of XOM:

Current Target: $94.00
Current Stop loss: 76.40
Play Entered on: 12/22/11

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


CLOSED Plays


Limited Brands, Inc. - LTD - close: 40.25

Comments:
12/24/11 update: It's been a rough couple of weeks for LTD. Shares violated multiple levels of support. This past week saw a breakdown under its 200-dma. LTD hit our stop loss at $37.90 on Monday, Dec. 19th. I would keep LTD on your watch list since the stock's long-term trend is still higher.

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 - exit $1.90 (-55.2%)

(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)

12/19/11 stopped out at $37.90
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.

Chart of LTD:

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


Red Hat Inc. - RHT - close: 47.64

Comments:
12/24/11 update: Ouch! It was a painful week for RHT with a -12.6% loss in the previous five trading days. The problem was RHT's earnings report. Analysts were expecting a profit of 26 cents a share. RHT reported 28 cents. Revenues also squeezed past estimates. Yet investors were disappointed in RHT's new billings number. The stock sold off hard.

We had a stop loss at $44.75. Shares gapped open lower at $42.95 on Dec. 20th immediately closing our trade. The option opened with a bid at $1.50.

- Suggested Positions -
Nov 01, 2011 - entry price on RHT @ 47.70, option @ 4.75
symbol: RHT1319A60 2013 JAN $60 call - exit $1.50 (-68.4%)

12/20/11 RHT gaps open lower under our stop loss at $44.75, immediately closing our trade.
12/19/11 RHT reports earnings. Investors disappointed with results
12/17/11 look for RHT to report earnings on Monday (12/19)
11/12/11 new stop loss @ 44.75

Chart of RHT:

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

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



Watch

Footwear & Business Services

by James Brown

Click here to email James Brown

Editor's Note:

In addition to the new candidates on tonight's watch list these stocks are on my radar screen. I wouldn't buy options yet but they're worth watching.

ARG, MMP, TICC, MYL, SHAW, YUM, AKAM, JNPR,

- James



New Watch List Entries

NKE - Nike Inc.

V - Visa Inc.


Active Watch List Candidates

DVN - Devon Energy

FDO - Family Dollar Stores

LLY - Eli Lilly

MCD - McDonald's Corp

MMM - 3M Co.

MSI - Motorola Solutions

ONNN - ON Semiconductor

TEVA - Teva Pharmaceuticals


Dropped Watch List Entries

LDK, VZ, SHW, XOM and PEP all graduated from the watch list to the play list (or new play section).



New Watch List Candidates:


Nike Inc. - NKE - close: 96.90

Company Info

NKE made headlines this past week when customers started a brawl over the company's newly released Air Jordans. The could end up causing a stir as well. Shares have been consolidating sideways under the $98.00 level the last several weeks. The long-term trend is up.

I am suggesting we buy calls on NKE after the stock closes above $98.50. More conservative traders may want to wait for NKE to close above $100.00 instead since the $100 mark could be round-number resistance. Our long-term target is $119.00. FYI: The Point & Figure chart for NKE is bullish with a $115 target.

NOTE: 2014 calls are available but they're high-dollar options.

Wait for a close over $98.50, stop loss 92.25

BUY the 2013 Jan $110 call (NKE1319A110)

Chart of NKE:

Originally listed on the Watch List: 12/24/11


Visa, Inc. - V - close: 102.48

Company Info

Shares of V have been showing relative strength with a breakout to new highs and past round-number resistance at $100 this past week. More aggressive traders may want to buy calls now. We'd like to catch Visa on a dip. Broken resistance near $98.00 should offer new support. I am suggesting we buy calls on a dip at $98.25 with a stop loss at $92.25. Our long-term target is $119.00. FYI: The Point & Figure chart for V is bullish with a $129 target.

Buy-the-Dip trigger: $98.25, with a stop loss @ 92.25

BUY the 2013 Jan $110 call (V1319A110)

Chart of V:

Originally listed on the Watch List: 12/24/11


Active Watch List Candidates:



Activition/Blizzard, Inc. - ATVI - close: 12.20

Comments:
12/24/11 update: ATVI was showing some relative strength on Friday and broke through resistance near $12.00 and its 100-dma near $12.13. You could argue that ATVI has formed a bullish double bottom with the late November and last week's lows. Aggressive traders might want to buy calls now. I still see resistance near $12.50 and its 50-dma so we'll wait.

I am 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: 62.51

Comments:
12/24/11 update: DVN saw a decent bounce off last week's low but I wouldn't buy it here. If we do not see DVN continue to improve this coming week then we'll drop it as a candidate. Currently the plan is to buy calls if DVN can close over $70.25. 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: 58.76

Comments:
12/24/11 update: FDO is still bouncing off a trendline of higher lows that started back in early August. It seems unlikely that we're going to see FDO dip toward support in the $55-54 zone. Therefore we will adjust our entry point. The new plan is to buy calls if FDO can close over $61.00. We'll use a stop loss at $55.75. Our target is $74.50.

I consider this a more aggressive entry point. We want to keep our position size small.

I have adjusted our option strike.

FYI: FDO's earnings are early January. Readers might want to wait until after we see the market's reaction to the earnings news first before considering new positions.

Wait for a close over $61.00, stop loss @ 55.75 (small positions only)

BUY the 2013 Jan $70 call (FDO1319A70)

12/24/11 adjusted entry point strategy. wait for a close over $61.00
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


Eli Lilly - LLY - close: 41.64

Comments:
12/24/11 update: Investors remain on the defensive. High-dividend, safety trades like LLY are still attracting cash. Yet we do not want to chase it after such a big rally off its late November lows. Our plan is unchanged.

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)

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


McDonald's Corp. - MCD - close: 100.15

Comments:
12/24/11 update: Shares of MCD continue to show relative strength. This past week saw the stock breakout past round-number, psychological resistance at the $100 mark. Shares still seem overbought. We do not want to chase it here. However, we will adjust our entry point to buy a dip at $95.50 and a stop loss at $89.50. Our long-term target is $108.00.

Buy-the-Dip trigger: $95.50, stop 89.50

BUY the 2013 Jan $100 call (MCD1319A100)

12/24/11 adjusted entry point to $95.50, stop loss to $89.50
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: 82.20

Comments:
12/24/11 update: MMM is bouncing back after a test of its trend of higher lows. The stock is nearing resistance in the $82.50-83.00 zone and its 100-dma and exponential 200-dma. More aggressive traders might want to buy calls if MMM can close over $83.50. We are leaving our entry point unchanged with plans to open bullish positions when MMM closes over $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: 47.12

Comments:
12/24/11 update: MSI spent the week consolidating sideways while respecting the bullish trend of higher lows. Shares are poised to breakout past short-term resistance at $47.50 soon. We're still waiting for a breakout to new 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)

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


ON Semiconductor Corp. - ONNN - close: 7.60

Comments:
12/24/11 update: ONNN is starting to bounce from the bottom of its trading range. You could argue the recent bounces near the $7.00 level represent a new bullish double bottom. Aggressive traders could launch positions here. I am still suggesting investors 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


Teva Pharmaceuticals Industries - TEVA - close: 41.67

Comments:
12/24/11 update: TEVA saw some volatility on Wednesday but traders bought the dip near support at $40.00 and its 50-dma. The reason for the volatility was news that TEVA was guiding its 2012 earnings estimates lower. The company tried to offset this bad news with an announcement the company would launch a $3 billion stock buy back program over the next three years. At current values that is about 8% of the company's outstanding shares.

Currently our plan is to buy calls when TEVA closes over $45.25. More aggressive traders may want to jump in early if TEVA can close over $44.00.

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)

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