Option Investor
Newsletter

Daily Newsletter, Sunday, 1/1/2012

Table of Contents

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

Leaps Trader Commentary

Good bye, 2011. Hello, 2012.

by James Brown

Click here to email James Brown

The year 2011 has come and gone. Many of the major stories of 2011 will continue to impact the world and the markets for years to come. Lack of leadership and bitter bipartisan rivalry in the U.S. over raising the country's debt ceiling prompted Standard & Poor's to downgrade the U.S. credit rating for the first time in history with a drop from AAA to AA+. Across the Middle East it was a year for an "Arab Spring" that is still reshaping the region with major changes in Egypt, Libya, and ongoing conflict in Yemen and Syria. It was also a year marred by a massive earthquake and tsunami in Japan, where nearly 20,000 people lost their lives. This Japanese disaster was exacerbated by a dangerous meltdown at the Fukushima nuclear plant, which called into question the safety of nuclear energy around the world. Yet the major story for 2011 is the still unsolved toxic sovereign debt issues in Europe. After numerous summits and negotiations it seems that the EU's leaders are still unwilling or unable to make the hard decisions for what is essentially two different Europes, the relatively strong core versus the struggling periphery.

Here at home in the U.S. the holiday shortened week was quiet. Stocks traded with extremely light volume since so many market participants had already closed their books for the year and gone home. Worries over Europe remained front and center. Italy was successful in completing a couple of significant bond auctions last week but yields are uncomfortably high. The yield on the 10-year Italian note is hovering at 7%, which is unsustainable for any significant period of time. Italy needs to raise 113 billion euros worth of debt in the first quarter of 2012. They will be unable to do so if yields on their long-term bonds remain near 7%.

You can see the fear of Europe in the action in the euro. The currency is hitting new relative lows while the U.S. dollar is in rally mode. A rising dollar is traditionally bearish for commodities and silver and gold both sank to new relative lows last week. Gold made headlines when the precious metal fell to approximately -20% from its highs ($1,923 an ounce), which technically puts gold near new bear-market territory. I wouldn't start buying puts yet. Plenty of pundits are calling the drop in gold a new buying opportunity.

Weekly chart of the Euro currency ETF (FXE):

Weekly chart of the Gold ETF (GLD):

The was a lot of economic data last week but it didn't have much impact on the stock market. The Case-Shiller 20-city home price index fell -3.5% in October. The weekly initial jobless claims data surged from 366,000 to 381,000, which was worse than expected. The ECRI weekly leading index inched down from 121.3 to 120.9. The Chicago PMI for December slipped to 62.6 from 62.5 but that was better than expected. The New York ISM rose from 533.5 to 534.0. Consumer confidence for December rallied from 56.0 to 64.5. Economists were only expecting a rise to 58.0. The biggest surprise for the week was the pending home sales data, which surged +7.3% versus expectations of +0.6%. Housing analysts warned not to take that number at face value.

Major Indices:

December 31st, 2010 the S&P 500 closed at 1,257.64.

December 30th, 2011 the S&P 500 closed at 1,257.60. That's the smallest year-to-date change in 61 years.

Investors have been told for years that on average the market rises +10% a year. This is the basis for the buy-and-hold strategy. Bad years will be offset by good years and long-term you'll average a +10% annual return. That wasn't the case for the S&P 500 in 2011, which closed flat for the year (-0.0%). As a matter of fact that hasn't been the case for the last 11 years. The S&P 500 closed the year 1999 at 1,272. It just closed 2011 at 1,257. That's drop of -1%. For the record, if you were able to buy the bottom in 2009, and I'm not saying anyone did, the S&P 500 is up almost +90% from those lows. Of course everything is relative. The S&P 500's -0.0% for the year looks bad until you look at how the rest of the world performed in 2011. Britain's major index fell -6%. Germany dropped -15%. France and Japan fell -17%. The Chinese Shanghai index plunged -22%. Two countries that have constantly been in the headlines are Italy and Greece, which are down -25% and -52%, respectively. Suddenly flat for the year doesn't seem so bad.

Technically the S&P 500 index is hovering near its simple 200-dma and it remains under resistance in the 1265-1270 zone. A breakout higher should send us to the next level of resistance near 1285 and then the 1300 level. Further declines would push us to short-term support near 1250 and then round-number support near 1200. If you're optimistic then the inverse head-and-shoulders pattern on the S&P 500 is forecasting a rally toward 1,362 but the index has to breakout higher first. Last week I told you 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:

Looking at the NASDAQ composite index you can see that over the last few months it has been consolidating sideways in a big triangle pattern of lower highs and higher lows. These are normally neutral patterns. Given the narrowing consolidation it should see a breakout in the next couple of weeks (if not sooner). The simple 200-dma is overhead resistance as is the multiple trendlines of lower highs. Meanwhile a breakdown under 2500 would probably signal a new drop toward the 2011 lows.

Daily chart of the NASDAQ Composite index:

The small cap Russell 2000 index ($RUT) is also building what appears to be a potential inverse H&S pattern. A breakout past resistance (the neckline) would suggest a rally toward the 840 area. Of course the $RUT needs to push through resistance near 750 and its 200-dma near 760 first. If stocks turn lower then we can look for potential support near 710 and then 670.

Daily chart of the Russell 2000 index

The first week of January is going to be a busy one for economic data. One of the biggest events of the week will be on Monday while the U.S. market is closed. Economists are expecting China to announce their latest GDP estimate on Monday and analysts are expecting +8.5% growth. If this number is two low it's going to really fan the flames of fear that China is seeing a hard landing, which would boost worries over a global slow down.

On Tuesday in the U.S. the national ISM is expected to rise. Meanwhile the latest FOMC minutes will be released. On Friday the jobs report could be a major market mover. Economists are expecting +150,000 jobs versus +120,000 in November. We need to keep in mind that the December report could be artificially inflated with temporary seasonal workers that will get laid off in January and depress the January numbers.

- Monday, January 2 -
U.S. markets closed for New Year's holiday
China's GDP estimate

- Tuesday, January 3 -
ISM Index for December
FOMC minutes

- Wednesday, January 4 -
Factory Orders for November
Auto and Truck sales

- Thursday, January 5 -
Weekly Initial Jobless Claims
Challenger, Christmas & Gray mass layoff report
ADP Employment report
ISM Services for December

- Friday, January 6 -
Non-farm payrolls (jobs) report for December

The Week Ahead:

The U.S. markets did not see much of a Santa Claus rally (the last few days after Christmas). Traditionally that doesn't bode well for stocks come January. I suspect that the first few days of January could see a pop as fund managers put new money to work. However, odds are any rally stalls as investors wait for the Q4 earnings season to begin. Corporate guidance looking forward into 2012 will play a huge role in determining market direction for the rest of the first quarter.

I suspect the trend of very slow but improving economic data in the U.S. will continue. However, we will remain very susceptible to negative headlines out of Europe. There are significant chunks of Europe that are facing severe recessions as governments follow through on their austerity measures. The EU leaders still don't have a concrete plan to solve their toxic debt problem. Italy is in hot water with its long-term bond yields hovering near 7%. The EU has huge amounts of debt it needs to roll over in the first quarter of 2012 and that's not going to be an easy task if they can't bring bond yields down. Meanwhile there seems to be growing concern over China's economy.

One of the biggest landmines for the first quarter of 2012 will be credit downgrades. The major ratings agencies have already warned us by putting several countries on creditwatch negative. Here in the U.S. the 2012 Presidential race is heating up. All the attack ads on TV could be a bearish factor on investor and consumer sentiment.

One thing we can be sure of and that's 2012 will be an interesting year!

- James


Portfolio

Portfolio Update

by James Brown

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Current Portfolio


Portfolio Comments:

The U.S. markets were in hibernation mode last week. Stocks were content to churn sideways as investors counted down the last remaining trading days of 2011. It was a wild year with significant volatility and yet the S&P 500 index closed flat (-0.0%) for the year. Most of our candidates experienced a flat week but we did see KBH get stopped out.

I am suggesting investors take some money off the table in our BMY trade (see update for details). Readers may also want to take some profits in our KFT trade.

I have updated stop losses on: BMY

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

Cautious On January

by James Brown

Click here to email James Brown

Editor's Note:

After a very rough 2011 the S&P 500 managed to close flat on the year. Looking ahead 2012 may not be so kind. The EU mess in Europe will continue to dominate headlines, especially with Italian 10-year bond yields hovering at an unsustainable 7%. In the short-term we're going to see the Q4 earnings season begin soon.

Investors are already nervous. If corporate America fails to offer positive guidance looking ahead then money managers are going to be quick to sell equities and place their money in safe haven investments (which could mean even lower yields on the U.S. 10-year note).

I am also cautious on stocks. Technically some of the major averages, including the S&P 500 index, have built what looks like an inverse (bullish version) of a head-and-shoulders pattern. A breakout from this pattern would forecast a rally toward the 2011 highs. Yet there are a lot of obstacles in the road ahead. As Europe struggles with its toxic debt mess the world is growing more and more concerned with Europe's largest trading partner: China. There seems to be less confidence in China's ability to manage a soft landing for its economy. I am duplicating some of my comments from tonight's wrap here. Needless to say the market's path in 2012 will like be another volatile journey.

I am not adding any new trades tonight but we did add three new candidates to the watch list. Bullish investors might want to take a look at Alexion Pharmaceuticals (ALXN). I was tempted to add ALXN as a bullish trade given its recent breakout past resistance at $70.00 but the stock does not have any LEAPS available to trade.

-James


Play Updates

Stocks Drift Sideways Into 2012

by James Brown

Click here to email James Brown


Closed Plays


KBH has been closed.


Play Updates


Allergan Inc. - AGN - close: 87.74

Comments:
12/31/11 update: AGN has continued to drift higher but momentum indicators are suggesting that AGN is slowing down. I would not be surprised to see a pull back toward what should be support near $85.00 if the market declines.

The good news this week is that the spreads on the 2013 calls have narrowed (in our favor).

Keep in mind that the 2011 highs near $89.25 could be resistance.

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 $ 3.60/ 4.60

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: 5.56

Comments:
12/31/11 update: It was a rocky week for BAC but shares pared its losses to less than a nickel. Unfortunately 2011 was a rough year for BAC. The stock was the worst performer among the Dow Jones Industrial Average components with a -58% drop for the year. BAC still has a bearish trend of lower highs and lower lows.

Nimble traders could still try buying calls on bounces off the $5.00 level but readers may want to wait for a close over $6.00 or its 100-dma before considering new bullish positions. We only have three weeks left before 2012 January options expire.

While financials were some of the worst performers in 2011 the outlook is improving for 2012 with growth in business lending. I will note that there was a recent article on BAC suggesting that company may still have to raise up to $45 billion in capital over the next few years as it struggles with the bad mortgage burdens from its Countrywide acquisition. It will be interesting to hear what BAC has to say in its earnings report. BAC is due to report earnings on January 19th.

- 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 $ 0.21/ 0.23
(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 $ 0.21/ 0.23
(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: 35.24

Comments:
12/31/11 update: Strategy Update - I am taking a more conservative approach tonight. We want to go ahead and lock in some gains. I am suggesting we sell at least half of our BMY calls to take some money off the table. We will still keep a position active but I want to warn you that BMY could easily see a correction in January after five weeks of gains.

We'll lock in gains on Tuesday morning. Our final target for the remaining position is still $37.50.

We will raise our stop loss up to $31.45. 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 $ 2.60/ 2.67

12/31/11 new stop loss @ 31.45.
12/31/11 Prepare to lock in gains and sell half of our position on Tuesday morning (Jan 3rd, 2012). The 2013 Jan $35 call currently has a bid at $2.60 (a +116.6% gain).
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.

Chart of BMY:

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: 2.48

Comments:
12/31/11 update: It was a volatile week for homebuilders but the group got a bounce out of the stronger than expected pending home sales report. BZH is still building a bullish pattern of higher lows. The current challenge for the bulls is resistance in the $2.50-2.60 area. Beyond that BZH could have resistance at its simple and exponential 200-dma (near 2.86 and 2.75, respectively). 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 $ 0.85/ 1.00

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: 18.08

Comments:
12/31/11 update: Trading in CSCO took a turn for the worse last week. Shares are back under their 50-dma. A breakdown under the December low near $17.62 would be very bearish. More conservative traders might want to consider a higher stop loss. I am not suggesting new positions at this time.

Optimistically CSCO is building a neutral pennant pattern of lower highs and higher lows but it will take a breakout higher to reaffirm the prior up trend.

- Suggested Positions -
OCT 28, 2011 - entry price on CSCO @ 18.28, option @ 1.68
symbol: CSCO1319A20 2013 JAN $20 call - current bid/ask $1.54/1.58

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: 21.06

Comments:
12/31/11 update: Railroad stocks have been consolidating sideways with the rest of the transportation sector. Unfortunately for CSX this sideways move is starting to look like a lower high in its series of lower highs. If the market declines in January then we'll probably see CSX retesting support near $20.00. Nimble traders could buy dips near $20.00 but I am not suggesting new positions at this time. The $22 area with its exponential 200-dma and the 150-dma could be tough technical resistance for CSX to chew through. Fortunately if the transports do breakout it will provide a positive influence on shares of CSX.

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 $ 1.21/ 1.22

- or -

NOV 14, 2011 - entry price on CSX @ 22.59, option @ 3.30
symbol: CSX1418A25 2014 JAN $25 call - current bid/ask $ 2.17/ 2.48

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: 46.38

Comments:
12/31/11 update: EPD spent almost two weeks hovering near technical support at its 50-dma. That changed this past week with the stock showing relative strength. Shares have rallied toward their all-time highs set in early December. I am not suggesting new positions at this time.

There is additional good news with the options. The spreads on our 2013 Jan $50 calls has narrowed to a much more normal breadth (see below).

Earlier Comments:
Our long-term target is $59.00 but bear in mind that EPD doesn't move very fast. 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 $ 1.00/ 1.15

12/31/11 2013 Jan $50 call spreads have improved significant.
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: 25.76

Comments:
12/31/11 update: HPQ was one of the Dow Jones Industrials' worst performers in 2011 with a -38.8% drop from its 2010 closing price of $42.10. On a short-term basis the stock has been stuck in the $26-25 zone for almost two weeks. A breakdown under $25.00 would look very bearish. We currently have a stop loss at $24.75. I am not suggesting new positions at this time.

- 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/ 4.50
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


Kraft Foods Inc. - KFT - close: 37.36

Comments:
12/31/11 update: Investors may want to lock in gains right now. KFT hit new multi-year highs last week but the failed rally under $38.00 looks like a potential bearish reversal. Then again the drop on Wednesday morning was probably due to KFT trading ex-dividend. I would stay cautious anyway.

The $36.00 level should be decent support but more conservative traders may want to take some money off the table now while our option is up +68%. I am not suggesting new positions at this time. FYI: The Point & Figure chart is forecasting a long-term target at $49.50.

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 $ 3.95/ 4.10

12/31/11 Investors may want to take profits now.
12/28/11 begins trading ex-dividend
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: 73.56

Comments:
12/31/11 update: KMB is hovering near its all-time highs (set this past week) but the stock has also been struggling with new resistance at the $74.00 level. You could argue that KMB is short-term overbought. I would not be surprised to see a dip back toward $72.00, which should be new support.

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/ 3.40

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: 4.19

Comments:
12/31/11 update: Ouch! LDK has been a terrible performer. We had waited for a breakout past resistance near $5.00 but shares of LDK immediately reversed once our trade was opened. The stock is down five days in a row (-20%). It's possible that what we just witnessed was some last minute tax-loss selling.

I would hesitate to open new positions here. More conservative traders may want to raise their stops closer to the $4.00 area.

- Suggested Positions -
(buy LDK stock)
Dec 23, 2011 - entry price on LDK @ 5.31

- or -

Dec 23, 2011 - entry price on LDK @ 5.31, option @ 0.89
symbol: LDK1319A5 2013 JAN $5 call - current bid/ask $ 0.50/ 0.62

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

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


Pepsico, Inc. - PEP - close: 66.35

Comments:
12/31/11 update: The last week of the year proved to be a quiet one for PEP. The stock has been trading sideways in the $66.00-66.80 zone. Since PEP doesn't move very fast you certainly have choices on when to launch positions. Readers could wait for another bounce in the $65.50-65.00 zone or wait for a new relative high over $67.00 as your entry point.

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 @ 66.47, option @ 2.70
symbol: PEP1319A70 2013 JAN $70 call - current bid/ask $ 2.62/ 2.73

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

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


QUALCOMM Inc. - QCOM - close: 54.70

Comments:
12/31/11 update: QCOM only added seven cents for the week. More importantly traders bought the dip on Tuesday and Wednesday. Now shares of QCOM are hovering under resistance at the $55.00 mark. I am hesitant to open new positions at this time. January could be a tough month of the stock market. More conservative traders might want to consider a higher stop loss.

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 $ 4.60/ 4.75

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: 41.42

Comments:
12/31/11 update: In last week's low-volume environment, RAI did not have enough fuel to get past resistance near $42.00. I would not be surprised to see shares fade lower toward support near $40.00 or technical support at its 50-dma. Wait for that dip before considering new bullish positions.

- Suggested Positions -
Nov 18, 2011 - entry price on RAI @ 40.02, option @ 2.00
symbol: RAI1319A42.5 2013 JAN $42.50 call - current bid/ask $ 2.05/ 2.25

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


Starbucks Corp. - SBUX - close: 46.01

Comments:
12/31/11 update: 2011 was a good year for SBUX. The stock is up +43% in the last twelve months. SBUX managed to tag new all-time highs last week but shares have stalled at new resistance near $46.50. I don't see any changes from last week's comments. I would still consider new (small) bullish positions on dips in the $45.00 area. More conservative traders might want to use a higher stop loss. FYI: The Point & Figure chart for PEP is bullish with a long-term $75 target.

NOTE: 2014 calls are also available.

- Suggested (SMALL) Positions -
Dec 27, 2011 - entry price on SBUX @ 45.40, option @ 4.00
symbol: SBUX1319A50 2013 JAN $50 call - current bid/ask $ 4.10/ 4.25

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

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


Sherwin-Williams Co. - SHW - close: 89.27

Comments:
12/31/11 update: The rally in SHW stalled near the $90 level last week. Broken resistance in the $88-87 zone should be new support. Investors can look for a bounce in this area as a new entry point for bullish positions.

- 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/ 4.70

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: 40.12

Comments:
12/31/11 update: VZ continued to inch higher and end the year at new three-year highs. You could argue that VZ is short-term overbought here. Readers may want to wait for a dip or a bounce from the $38.50-38.00 zone before considering new bullish positions. VZ normally doesn't move very fast so it's unlikely to get away from us. Our long-term target is $45.00.

- Suggested Positions -
Dec 23, 2011 - entry price on VZ @ 39.42, option @ 2.17
symbol: VZ1319A40 2013 JAN $40 call - current bid/ask $ 2.48/ 2.56

- or -

Dec 23, 2011 - entry price on VZ @ 39.42, option @ 2.87
symbol: VZ1418A40 2014 JAN $40 call - current bid/ask $ 3.20/ 3.30

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: 26.46

Comments:
12/31/11 update: Shares of X posted a minor gain for the week but really outperformed on Friday with a +3.0% surge. X seems to be building on its bullish trend of higher lows but I am hesitant to launch new positions. There appears to be short-term resistance near $27.00.

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 $ 4.60/ 4.75

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: 84.76

Comments:
12/31/11 update: XOM saw its pre-Christmas rally stall. Shares spent last week consolidating sideways in the $84-86 zone. This isn't too surprising since volume was so light last week and the $85 level was resistance. I am suggesting readers wait for a dip or a bounce in the $83-82 zone before considering new positions. 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 $ 4.95/ 5.05

- or -

Dec 22, 2011 - entry price on XOM @ 83.56, option @ 6.25
symbol: XOM1418A95 2014 JAN $95 call - current bid/ask $ 6.50/ 6.75

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


KB Home - KBH - close: 6.72

Comments:
12/31/11 update: I have been warning readers about the recent weakness in KBH. The volatility last week was too much for our trade. The stock broke down to new multi-week lows and hit our stop loss at $6.38 only to bounce back to a gain for the week. Our stop loss was hit on Dec. 28th.

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 - exit $0.48 (-61.6%)

12/28/11 stopped out at $6.38, option @ 0.48
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

Chart of KBH:

Current Target: $9.90
Current Stop loss: 6.38
Play Entered on: 10/19/11
Originally listed on the Watch List: 10/15/11



Watch

Chemicals, Shipping, and Currencies

by James Brown

Click here to email James Brown


New Watch List Entries

DOW - The Dow Chemical Co.

FDX - FedEx Corp.

FXE - Euro currency ETF


Active Watch List Candidates

FDO - Family Dollar Stores

LLY - Eli Lilly

MCD - McDonald's Corp

MMM - 3M Co.

MSI - Motorola Solutions

NKE - Nike Inc.

ONNN - ON Semiconductor

V - Visa Inc.


Dropped Watch List Entries

DVN and TEVA have been removed from the watch list.



New Watch List Candidates:


The Dow Chemical Co. - DOW - close: 28.76

Company Info

DOW is a major chemical company. The stock appears to be forming a bottom over the last five months with resistance near $30.00. I am suggesting we wait for DOW to close over $30.25 and then open bullish positions with a stop loss at $27.25. Our long-term target is $39.50. I do expect DOW to find some resistance near $35.00.

FYI: The Point & Figure chart for DOW is bullish with a $46 target.

Breakout trigger: Wait for a close over $30.25, use a stop loss at $27.25

BUY the 2013 Jan $35 call (DOW1319a35)

- or -

BUY the 2014 Jan $40 call (DOW1418a40)

Chart of DOW:

Originally listed on the Watch List: 12/31/11


FedEx Corp. - FDX - close: 83.51

Company Info

Shipping giant FDX is on the verge of a breakout. The stock has been consolidating under resistance near $85-86 and its simple 200-dma for days. A breakout here could signal a run toward its 2011 highs in the $98 zone. In recent headlines FDX was named one of Morningstar's top picks for 2012 due to the company's growing ground shipment business. FDX also recently announced a rate hike increase, which suggest the company has pricing power.

I am suggesting that we wait for FDX to close over $86.50 and then buy calls the next day with a stop loss at $79.75. Our first target is $98.00. FYI: The Point & Figure chart for FDX is bullish with a $101 target.

Breakout trigger: Wait for FDX to close over $86.50, stop @ 79.75

BUY the 2013 Jan $100 call (FDX1319A100)

Chart of FDX:

Originally listed on the Watch List: 12/31/11


CurrencyShares Euro ETF - FXE - close: 128.92

Company Info

The problem in the EU is not going away. While the ECB has done a lot to alleviate some of the liquidity issues with European banks all they have done is kick the can down the road (yet again).

I expect a significant amount of volatility for the euro and the dollar but the path of least resistance for the euro is down. We could see the FXE retest its 2010 lows under $120 over the next twelve months.

More aggressive traders may want to buy put options now. I am suggesting we wait and buy puts when the FXE closes under $128.00. We'll start with a stop loss at $131.25. Our target is $120.00. FYI: The Point & Figure chart for the FXE is bearish with a $116 target.

Buy PUTS when the FXE closes under $128.00, stop @ 131.25

BUY the 2013 Jan $120 PUT (FXE1319M120)

Chart of FXE:

NOTE: As an alternative the other side of this trade would be buying calls on a U.S. dollar ETF (like the UUP).

Originally listed on the Watch List: 12/31/11


Active Watch List Candidates:



Activition/Blizzard, Inc. - ATVI - close: 12.32

Comments:
12/31/11 update: ATVI is showing more improvement. The stock continued to rally last week in spite of the low volume. There is still overhead resistance near $12.60 and the 50-dma. We are adjusting our entry point. Instead of waiting for a close over $13.00 we'll open bullish positions if ATVI can close over $12.75 instead. Our long-term target is $15.75.

Wait for a close over $12.75 (stop 11.90)

BUY the 2013 Jan $15 call (ATVI1319A15)

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


Devon Energy - DVN - close: 62.00

Comments:
12/31/11 update: I cautioned readers a week ago that if DVN did not improve we'll drop it as a candidate. Shares have continued to drift lower so we are removing DVN as a watch list candidate. A breakdown under $58.50 would be very bearish and could signal a drop toward its 2011 lows (near $51). Meanwhile it would take a rally past resistance near $70 before DVN started to look bullish again.

Trade did not open.

12/31/11 Removed DVN from the watch list.

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


Family Dollar Stores Inc. - FDO - close: 57.66

Comments:
12/31/11 update: FDO is still quietly consolidating sideways. That could change this week. The company is due to report earnings on January 5th, after the closing bell. Wall Street is expecting a profit of 68 cents a share. Overall I don't see any changes from my prior comments except I would prefer to wait until after we the market's reaction to FDO's earnings before initiating positions.

The current 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.

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: 41.56

Comments:
12/31/11 update: After a huge four-week surge in LLY the stock finally stalled. Shares are due for a correction.

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: 100.33

Comments:
12/31/11 update: MCD managed to eke out another weekly gain but momentum has stalled. I am still expecting a correction back toward its 50-dma or support near the $95.00 level. The plan is to buy calls on a dip at $95.50 with 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: 81.73

Comments:
12/31/11 update: MMM is still hovering under resistance near $83.00 and technical resistance at its exponential 200-dma and its simple 150-dma. There is no change from my prior comments.

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: 46.29

Comments:
12/31/11 update: MSI hit some profit taking this past week but the overall trend is unchanged. 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


Nike Inc. - NKE - close: 96.37

Comments:
12/31/11 update: NKE spent the week consolidating sideways in the $96-98 range. We are waiting for a breakout past resistance at $98.00.

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)

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


ON Semiconductor Corp. - ONNN - close: 7.72

Comments:
12/31/11 update: ONNN continues to slowly make progress as it rallied from the bottom of its trading range. There is still significant resistance in the $8.25 area along with its exponential 200-dma and its simple 150-dma.

I am 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: 40.36

Comments:
12/31/11 update: TEVA has continued to slip lower. Shares are now testing round-number support at $40.00. I suspect that this stock is still building a significant bottom but it could be weeks before we see TEVA breakout past resistance near $45.00. I am removing TEVA from the watch list but we'll keep it on our radar screen.

Trade Did Not Open

12/31/11 Removed TEVA from the watch list.

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


Visa, Inc. - V - close: 101.53

Comments:
12/31/11 update: Visa may have just formed a short-term bearish double top with the stock failing twice in the $103.25-103.50 zone. Shares have very short-term support at $100.00 but we want to see a dip back toward $98.00.

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)

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