Option Investor
Newsletter

Daily Newsletter, Sunday, 1/8/2012

Table of Contents

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

Leaps Trader Commentary

Stocks See Momentum Stall

by James Brown

Click here to email James Brown

The U.S. markets are off to a good start with the S&P 500 index up +1.6% this year. Unfortunately most of those gains came from Tuesday's rally. Stocks were unable to build on gains and spent the rest of the week churning sideways. What worries me is that most of the economic data this past week was positive but stocks lost momentum. Investors seem to be waiting for something and that something could be the next debt auction in Europe or the onset of Q4 earnings season here in the U.S.

We knew that China would help set the tone with their GDP estimate last Monday. Economists were expecting +8.5% Q4 growth and the country's state-run newspaper said China saw +8.8% growth. What was surprising is that China said 2012 could see growth fall under the 8% level. Many feel this is a significant threshold for China. Growth less than 8% would see rising unemployment as millions of Chinese move from rural communities toward the cities looking for jobs. Helping offset this news was generally positive manufacturing data out of India and Europe.

There was a fly in the ointment on Europe's economic data. While the region saw an improvement in manufacturing activity the EU's strongest member, Germany, said manufacturing actually fell for the third month in a row in December. German PMI data came in at 48.1. Numbers under 50.0 indicate contraction and potential recession. Germany is a major exporter and their exports saw their biggest drop in six months.

If Germany is struggling the rest of the EU region can't be doing that well. This was evident in new worries over Spain last week. Even Hungary, which is not a member of the Eurozone, made headlines with a recent debt auction. Hungary held an auction of one-year notes but they were only able to sell 75% of the available debt and yields on the debt that was sold rose to 9.9%. This obviously doesn't bode well for Hungary's financial stability if investors are demanding almost 10% returns on one-year notes. Speaking of bond yields, Italy continues to be front and center for investors with Italian 10-year bond yields still hovering at 7%. The 7% level has traditionally been considered the threshold on whether or not a country needs to seek an IMF bailout or not and Italy is considered too big to be bailed out.

Looking back home in the U.S. it was a busy week for economic data. The big reports were in the job market. The ADP employment report helped set a positive tone with +325,000 new jobs in December. Unfortunately stocks failed to react to the news. The Labor Department's nonfarm payrolls (jobs) report came out on Friday with +200,000 new jobs in December. This was up from November's +100K and better than the 150K estimate. Yet stocks again ignored this positive data. The unemployment rate fell from 8.7% to 8.5% but this was due to another drop in the size of our work force again.

In other economic news the December ISM manufacturing data came in at 53.9, which is up from 52.7 in November and better than expected. The ISM services index rose from 52.0 to 52.5 but this was under the 53.0 estimate. Construction spending from November rose +1.2%, which was better than the +0.5% expected. The weekly initial jobless claims dropped 15,000 to 372,000, which was in-line with estimates. Another event that failed to move the markets was the FOMC minutes, which was released last week. The next FOMC meeting is still a couple of weeks away.

Major Indices:

Looking at the S&P 500 index the good news is that we see a bullish breakout past resistance in the 1265-1270 zone. Now the S&P 500 is poised to breakout past resistance at 1285. That sets up for a run toward round-number resistance at 1300. Another positive is that last week's advance is a bullish breakout past technical resistance at the simple 200-dma and what appears to be the neckline to an inverse head-and-shoulders pattern, which is forecasting a rally toward 1,362. Yet another positive is the move past 1,270, which has created a brand new triple-top breakout buy signal on the S&P 500's Point & Figure chart, which is now forecasting a long-term target of 1,430. That's a lot of positives for the index but I would stay cautious. January tends to see a correction in the second half of the month.

Short-term the S&P 500 is looking at resistance at 1285 and support near 1260.

Daily chart of the S&P 500 index:

The NASDAQ composite turned in a strong week with a +2.6% gain. The index has also broken through several layers of resistance (see chart) including its simple 200-dma. The next hurdle for the bulls is probably round-number resistance at 2700. The 50-dma and the 2600 level are probably short-term support. Last week I cautioned readers that the NASDAQ was on the verge of a breakout from its neutral pattern of lower highs and higher lows. Let's hope this tech-heavy index can build on last week's gains.

Daily chart of the NASDAQ Composite index:

The small cap Russell 2000 index managed a +1.1% gain but the index remains under resistance near 760 and its simple 200-dma. The good news is that if the $RUT can breakout past 760 it could signal a new leg higher with a target in the 840 area. On a short-term basis I would look for support near 730-725.

Daily chart of the Russell 2000 index

The economic calendar this week is a little light. The major events are probably the Federal Reserve's Beige Book report on Wednesday and the ECB interest rate decision on Thursday.

- Tuesday, January 10 -
whole sale inventory data

- Wednesday, January 11 -
Fed's Beige Book report

- Thursday, January 12 -
Weekly Initial Jobless Claims
European Central Bank (ECB) decision on interest rates
(U.S.) Retail Sales for December

- Friday, January 13 -
Import/export data
Michigan Consumer Sentiment for January

The Week Ahead:

Looking ahead this week will begin the Q4 earnings season with Dow-component Alcoa (AA) reporting on Monday (Jan. 9th). Wall Street is expecting AA to deliver a loss of 1-cent a share. Earnings season doesn't really kick into high gear until the following week. There is still a chance we could see some earnings warnings for companies announcing later in the season. The week ahead of us will be filled with speculation about corporate earnings and guidance. The real key for stocks will be guidance. Investors want to know what management sees as they look ahead into the first and second quarter of 2012. If corporate leaders are too cautious it could spark a correction in stocks. Of course there is always the risk that investors choose to sell the earnings news no matter what the results are and the market sees a correction anyway.

What is troubling for longer-term traders is that retail investors continue to pull money out of equity markets. U.S. equity funds saw outflows for the ninth week in a row. Since 2007 the retail investor crowd has pulled out $450 billion from equity funds.

One positive I see this past week is that investors might be growing numb to the problems in Europe and the EU. The last few months the euro currency was seen as a barometer of investor sentiment on Europe and hopes that the EU will find a solution for their problems. If the euro was up then stocks were up and if the euro declined then stocks declined. That relationship seemed to break down last week with the euro currency hitting new relative lows. The euro is still a decent barometer for investor sentiment toward Europe but now we might be seeing signs of a decoupling from the U.S. equity markets.

A week ago I warned readers that U.S. stocks could see a pop higher and then stall. That's exactly what happened although to be honest I thought the pop might last two or three days. Now we are facing a questionable Q4 earnings season. The temptation for investors to sell the (earnings) news could be tough to resist.

Overall my comments from last week remain true today. Here's a repost:

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.

My market bias this week is neutral but I'm expecting a pull back in stocks the last two weeks of January.

- James


Portfolio

Portfolio Update

by James Brown

Click here to email James Brown


Current Portfolio


Portfolio Comments:

Wall Street was off to a strong start to 2012 with Tuesday's rally higher. Unfortunately stocks were unable to build on that gain. The major indices spent most of the week consolidating sideways. We did see a few individual names move. BAC and BZH performed well. Stocks like PEP and VZ underperformed.

You'll notice that three of our watch list candidates were activated to new trades. Dow Chemical (DOW) met our entry point requirements at Friday's closing bell. We will open new positions on Monday morning but please see play update for details.

I have updated stop losses on: BZH, LDK, QCOM, SHW, and XOM.

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:

The U.S. markets did not make a lot of progress following Tuesday's rally on January 3rd. Fortunately the major averages look like they want to trade higher. What concerns me is that January tends to have a correction on the latter half of the month. This might be due to profit taking as investors react to Q4 earnings announcements.

I am cautiously optimistic here but we are expecting a market pull back. Thus I am not adding any new active trades tonight. This past week we had three stocks graduate from our watch list to our active trade list and we just added three new watch list candidates tonight.

In addition to our new watch list stocks I am putting JPM, NWSA, MAKO and BRK.B on my radar screen as possible bullish LEAPS candidates.

If you are willing to trade stocks that don't have LEAPS then put AVY, IMOS, and KRA on your radar screen. I don't think these stocks are buys yet but they could be worth watching.


Play Updates

Stocks Slip Sideways, Euro Drops to New Low

by James Brown

Click here to email James Brown

Editor's Note:

The fourth-quarter earnings season is going to begin soon. Investors will have to make decisions on whether or not you consider some sort of hedge on your long-term LEAPS positions. Our time frame for most of our trades are six to twelve months. That means each quarter we face the risk of a disappointing earnings report that sends the stock down sharply. Readers can choose to raise their stop loss, buy a short-term put to protect against an overreaction to the downside, or do nothing and just ride out any volatility.

We did see three watch list candidates make the jump to our active trade list.

-James


Closed Plays


None. No closed plays this week.


Play Updates


Allergan Inc. - AGN - close: 87.07

Comments:
01/07/12 update: AGN had a down week. Shares popped higher with the market on Tuesday and faded for the rest of the week. The stock is nearing potential resistance at its 2011 highs so it's not surprising to see a little profit taking. I would wait for a bounce near the $85-84 zone before considering new bullish positions.

Investors need to be aware that AGN is due to report earnings in early February. You may want to wait until after we see the reaction to earnings before considering new positions.

Earlier Comments:
Option spreads are wide for these LEAPS. We want to keep our position size pretty small to limit our risk.

- Suggested Positions -
OCT 17, 2011 - entry price on AGN @ 85.46, option @ 5.10
symbol: AGN1319A100 2013 JAN $100 call - current bid/ask $ 3.10/ 3.70

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: 6.18

Comments:
01/07/12 update: BAC outperformed last week with a +11% surge. Shares broke through resistance near the 50-dma and the $6.00 level. The rally stalled at its simple 100-dma on Thursday. While it would be tempting to buy this breakout I would wait. BAC is due to report earnings on January 19th. Investors may want to wait and see how the market reacts to BAC's earnings news before considering new positions.

We only have two weeks left before 2012 January options expire.

- 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 $ 0.30/ 0.32
(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 $ 0.30/ 0.32
(no stop loss on this position)

01/07/12 BAC broke out past its 50-dma and the $6.00 this past week
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:
01/07/12 update: After a very impressive December we were expecting some profit taking in BMY. Our plan was to take profits at the open on Tuesday and sell at least half of our calls. The 2013 January $35 call opened with a bid of $2.58 on Tuesday (+115%).

Shares of BMY did pull back but found some short-term support near its early December highs. I am not suggesting new positions at this time.

NOTE: BMY is due to report earnings on January 26th.

- Suggested Positions -
SEP 19, 2011 - entry price on BMY @ 30.53, option @ 1.20
symbol: BMY1319A35 2013 JAN $35 call - current bid/ask $ 2.09/ 2.14

01/03/12 planned exit, sell half, bid on 2013 Jan $35 call @ 2.58 (+115%)
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.

Current Target: $37.50
Current Stop loss: 31.45
Play Entered on: 09/19/11
Originally listed on the Watch List: 09/10/11


Beazer Homes - BZH - close: 2.86

Comments:
01/07/12 update: Wow! It was a very strong week for BZH. Shares surged from the $2.50 level to almost $3.00 on Friday. The stock was up +20% on the week before paring its gains to +15%. The breakout past its exponential and simple 200-dma is technically bullish but BZH is arguably short-term overbought here. I would expect some profit taking. Fortunately broken resistance near $2.50 should offer new support.

We are raising our stop loss up to $2.15. We want to stay under the 50-dma for now.

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 $ 1.10/ 1.35

01/07/12 new stop loss @ 2.15
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: 2.15
Play Entered on: 10/28/11
Originally listed on the Watch List: 10/22/11


Cisco Systems - CSCO - close: 18.85

Comments:
01/07/12 update: CSCO is up more than +4% in the last four trading days. Yet the rally has stalled at resistance near the $19.00 level. On a positive note shares are still building on the bullish trend of higher lows. Earnings for CSCO are still three or four weeks away but investors may want to wait until after we see the market's reaction to CSCO's earnings news before considering new positions. 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 $1.78/1.82

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: 22.69

Comments:
01/07/12 update: CSX ended the holiday shortened week with a +7.7% gain. The stock was up even higher midday on Friday but shares ran into resistance near $23.00 and its simple 200-dma. The outperformance in shares of CSX is encouraging but it looks like time for some profit taking. The $23.00 level has been resistance since mid August. I would expect a dip back toward the $22.00 level and the 200-ema. Although I will point out that technical traders could argue CSX has broken out from an inverse head-and-shoulders pattern, albeit one with a slanted neckline. This is another positive for the stock. Readers may want to consider adjusting their stop loss higher.

NOTE: CSX is due to report earnings on January 23rd.

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 $ 1.70/ 1.77

- or -

NOV 14, 2011 - entry price on CSX @ 22.59, option @ 3.30
symbol: CSX1418A25 2014 JAN $25 call - current bid/ask $ 2.76/ 2.93

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


The Dow Chemical Co. - DOW - close: 30.32

Comments:
01/07/12 update: DOW is a watch list candidate that has soared +5% last week. The stock was facing multiple layers of resistance at $29.00, the 150-dma, the exponential 200-dma and the $30.00 level. DOW managed to push past all of them. Our plan was to buy calls when DOW closed above $30.25. That just happened on Friday. Thus we will enter this trade on Monday morning at the open. However, I am suggesting that readers might want to wait. DOW is arguably short-term overbought. You might want to wait for a dip and then buy a bounce off the $29.00 area instead.

Earlier Comments:
Our long-term target is $39.50. I do expect DOW to find some resistance near $35.00. The Point & Figure chart for DOW is bullish with a $46 target.

- Suggested Positions -
Jan 09, 2012 - entry price on DOW @ --.--, option @ -.--
symbol: DOW1319A35 2013 JAN $35 call - current bid/ask $ 2.36/ 2.45

- or -

Jan 09, 2012 - entry price on DOW @ --.--, option @ -.--
symbol: DOW1418A40 2013 JAN $40 call - current bid/ask $ 2.49/ 2.60

01/06/12 DOW meets our entry requirement with a close over $30.25. Plan is to buy calls on Monday morning (01/09/12).

Chart of DOW:

Current Target: $39.50
Current Stop loss: 27.25
Play Entered on: 01/09/12

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


Enterprise Products Partners - EPD - close: 47.99

Comments:
01/07/12 update: EPD delivered a strong week with a surge to new all-time highs. It is worth noting that the stock was very volatile on Friday. In less than 20 minutes the stock plunged -5% only to bounce back and close almost unchanged on Friday. Shares of PAA, another pipeline stock, saw a very similar move. It's a bit troubling. PAA looks a lot more overbought than EPD and if PAA corrects it could put pressure on our EPD trade. I am not suggesting new positions at this time.

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 $ 1.15/ 1.55

01/06/12 EPD (and PAA) both see sharp intraday dips (-5% or more)
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


CurrencyShares Euro ETF - FXE - close: 126.71

Comments:
01/07/12 update: Our new trade on the Euro ETF has been opened. We just listed the FXE on our watch list a week ago. The euro has continue to fall. Our plan was to buy puts if the FXE closed under $128.00. Shares met that requirement on January 5th with a close at $127.45. Our trade was opened on Friday morning with the FXE's gap down at $127.01. We have a stop loss at $131.25. Our target is $120.00 but more aggressive traders may want to aim lower.

On a short-term basis readers may want to wait for a new failed rally in the $128-130 zone before initiating new positions. FYI: The Point & Figure chart for the FXE is bearish with a $116 target.

- Suggested Positions - (This is a bearish PUT trade)

Jan 06, 2012 - entry price on FXE @ 127.01, option @ 5.60
symbol: FXE1319M120 2013 JAN $120 PUT - current bid/ask $ 5.30/ 5.50

Chart of FXE:

Current Target: $120.00
Current Stop loss: 131.25
Play Entered on: 01/06/12

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


Hewlett-Packard - HPQ - close: 26.40

Comments:
01/07/12 update: HPQ popped higher with the market on Tuesday and spent the rest of the week churning sideways. The stock is struggling with technical resistance near its 40 and 50-dma. I am not suggesting new positions at this time. A breakdown under $25.00 would look very bearish. We currently have a stop loss at $24.75.

- 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 $ 4.60/ 4.70
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: 37.55

Comments:
01/07/12 update: KFT made headlines this week when it announced a deal with SodaStream (SODA) to partner up and provide KFT flavors through SODA's carbonation machines. The news did little for KFT's stock but helped send SODA to new relative highs. Shares of KFT have been bouncing around the $37-38 range.

I am not suggesting new positions at this time and more conservative traders may want to take profits now. 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 $ 4.00/ 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: 72.63

Comments:
01/07/12 update: After hitting new all-time highs in late December shares of KMB took a rest. The stock reversed at resistance near $74.00 on Tuesday and has been down every day since. KMB should find some short-term support in the $72-70 zone. I am not suggesting new positions at this time.

NOTE: KMB is due to report earnings on January 24th.

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.

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

- 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 $ 2.50/ 2.65

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: 4.28

Comments:
01/07/12 update: Last week LDK announced some new projects in California but the news failed to have much impact on the share price. The stock spent last week consolidating sideways in a narrow range. The stock should have support near $4.00 and its 50-dma. I am raising our stop loss up to $3.60. We are not suggesting new positions at this time.

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 $ 0.60/ 0.65

01/07/12 new stop loss @ 3.60

Current Target: $ 9.00
Current Stop loss: 3.60
Play Entered on: 12/23/11

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


Eli Lilly - LLY - close: 39.88

Comments:
01/07/12 update: LLY is another recent graduate from our watch list. The plan was to buy calls on a dip at $39.50. Shares hit our trigger on Thursday with a plunge to $39.25 intraday. I was expecting the stock to pull back on profit taking. Unfortunately the pull back was exacerbated by bad news from management. The company issued bearish guidance for 2012 below Wall Street's current estimates. The stock should still offer opportunity as investors are currently drawn to the safe-haven, high-dividend stocks in an uncertain market. Yet instead of buying calls now readers may want to wait for a dip closer to the $39.00-38.00 zone. Better yet, wait for LLY to report earnings on January 31st and then see how the market reacts before initiating new positions.

- Suggested (SMALL) Positions -
Jan 05, 2012 - entry price on LLY @ 39.50, option @ 1.19
symbol: LLY1319A45 2013 JAN $45 call - current bid/ask $ 1.48/ 1.55

- or -

Jan 05, 2012 - entry price on LLY @ 39.50, option @ 2.75
symbol: LLY1418A45 2013 JAN $45 call - current bid/ask $ 2.01/ 2.50

Chart of LLY:

Current Target: $44.75 & 48.00
Current Stop loss: 37.40
Play Entered on: 01/05/12

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


Pepsico, Inc. - PEP - close: 65.39

Comments:
01/07/12 update: PEP underperformed the market. Shares popped to a new relative high on Tuesday but couldn't hold it. The stock fell toward technical support at its simple 200-dma on Friday. I would use a bounce here or off the 200-ema near $64.50 as a new bullish 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 $ 1.78/ 1.85

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: 56.16

Comments:
01/07/12 update: Hmm.... QCOM managed to post gains for the week but investors have a new dilemma to deal with. There are new concerns surfacing that QCOM might have to deal with some accounting irregularities. The company had an SEC investigation back in 2010 but sources are saying QCOM may have substantial accounting risk yet to be disclosed. This is very troubling. If it's true any new disclosure could send shares of QCOM down -10 to -20% in a heartbeat.

In light of this new development I am raising our stop loss to $51.45. Of course this may not help much if QCOM gaps down one day on some new headline. More conservative traders may want to abandon positions now since QCOM hasn't been performing all that well to begin with.

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 $ 4.85/ 5.00

01/07/12 new stop loss @ 51.45. Investors may want to exit early. The worry of potential accounting risks has cast a shadow over QCOM.
11/23/11 QCOM hits our trigger @ 52.50

Current Target: $74.50
Current Stop loss: 51.45
Play Entered on: 11/23/11
Originally listed on the Watch List: 11/05/11


Reynolds American Inc. - RAI - close: 40.44

Comments:
01/07/12 update: Last week I cautioned readers that RAI might dip toward support near $40 and its 50-dma. That's what shares delivered. Investors could use this dip as a new entry point. If you're feeling cautious then wait to see if RAI dips toward the next level of support near $38.00 and its 200-dma instead.

- 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 $ 1.45/ 1.65

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: 46.72

Comments:
01/07/12 update: SBUX is up about 1.5% for the week. Traders bought the dip near short-term support at the rising 10-dma. The stock remains at all-time highs. I am not suggesting new positions at this time. I would keep an eye on likely support at the $45.00 or $44.00 levels. 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/ 4.20

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: 92.50

Comments:
01/07/12 update: The first week of the new year was a bullish one for SHW. The stock broke out to new all-time highs, past resistance near $90.00. Volume was pretty strong to start the year. I am not suggesting new positions at this time but the $90.00 level should now offer new short-term support.

We will raise our stop loss to $84.40. Currently our exit target is $99.50. Investors might want to consider a higher target. Readers should be aware that SHW is due to report earnings on January 26th.

- Suggested Positions -
Dec 23, 2011 - entry price on SHW @ 88.92, option @ 3.90
symbol: SHW1319A100 2013 JAN $100 call - current bid/ask $ 5.00/ 5.70

01/07/12 new stop loss @ 84.40

Current Target: $99.50
Current Stop loss: 84.40
Play Entered on: 12/23/11

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


Verizon Communications - VZ - close: 38.33

Comments:
01/07/12 update: Ouch! After surging to new three-year highs in late December VZ erased about three weeks of gains with last week's four-day plunge. Volume was strong on the sell-off as well, which isn't a good sign.

I am somewhat surprised by the sell-off. It looks a bit like window-undressing. Now that we're into the first quarter money managers could be taking positions off. Part of Friday's decline was VZ began trading ex-dividend for its upcoming January 31st dividend. Yet it's the dividend that should keep investors in the stock. With the market still looking uncertain VZ's 5% annual yield should be a big draw.

The $38.00 area should be significant support. Investors can wait for VZ to bounce near this level as a new bullish entry point.

FYI: VZ is due to report earnings on January 24th.

- Suggested Positions -
Dec 23, 2011 - entry price on VZ @ 39.42, option @ 2.17
symbol: VZ1319A40 2013 JAN $40 call - current bid/ask $ 1.63/ 1.69

- or -

Dec 23, 2011 - entry price on VZ @ 39.42, option @ 2.87
symbol: VZ1418A40 2014 JAN $40 call - current bid/ask $ 2.31/ 2.47

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: 27.30

Comments:
01/07/12 update: X delivered a strong rally early last week with a surge from the $26.50 toward the $29.00 area but shares began to fade late in the week. I would expect the stock to fill the gap. That means a dip back toward the $26.50 zone. Wait for a new bounce in the $26.50-26.00 area before considering new positions.

More conservative traders may want to raise their stop loss.

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 $ 4.85/ 5.00

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: 85.12

Comments:
01/07/12 update: XOM's early gains last week faded and shares are consolidating sideways near the $85.00 level. There is no change from my prior comments. I am suggesting readers wait for a dip or a bounce in the $82.50 area before considering new positions. Broken resistance at $82.00 should be new support.

I am raising our stop loss to $77.90.

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 $ 4.80/ 4.90

- or -

Dec 22, 2011 - entry price on XOM @ 83.56, option @ 6.25
symbol: XOM1418A95 2014 JAN $95 call - current bid/ask $ 6.25/ 6.55

01/07/12 new stop loss @ 77.90

Current Target: $94.00
Current Stop loss: 77.90
Play Entered on: 12/22/11

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


Watch

Printers, Construction, & Fast Food

by James Brown

Click here to email James Brown


New Watch List Entries

LXK - Lexmark Intl.

SHAW - Shaw Group

YUM - Yum! Brands


Active Watch List Candidates

FDO - Family Dollar Stores

FDX - FedEx Corp.

MCD - McDonald's Corp

MMM - 3M Co.

MSI - Motorola Solutions

NKE - Nike Inc.

ONNN - ON Semiconductor

V - Visa Inc.


Dropped Watch List Entries

DOW, FXE and LLY graduated to the active trade section of the newsletter.



New Watch List Candidates:


Lexmark Intl. Inc. - LXK - close: 34.10

Company Info

LXK is a major player in the printer and ink industry. Shares saw some significant swings in 2011. The stock has developed a more positive tone the last few months and looks like it's on the verge of breaking out past major resistance at $35.00.

I am suggesting we wait for LXK to close above $35.25 and then buy calls the next day with a stop at $31.75. There is some resistance near $40 but our long-term target is $44.00.

NOTE: LXK is due to report earnings in very late January or early February. We don't have a confirmed date yet. Investors may want to wait and see how the market reacts to LXK's earnings report before considering new positions.

FYI: The Point & Figure chart on LXK is bullish with a $51 target.

Wait for a close over $35.25, stop loss 31.75

BUY the 2013 Jan $40 call (LXK1319A40)

Chart of LXK:

Originally listed on the Watch List: 01/07/12


Shaw Group Inc. - SHAW - close: 27.28

Company Info

SHAW is a heavy construction company. Shares experienced a very volatile and rough 2011. Yet it looks like the stock ha finally bottomed. Investors have priced in previous worries about a slowing economy and now SHAW is on the mend.

The recent rally that began three weeks ago has stalled at technical resistance near the 200-dma. I am suggesting we wait and buy a dip at $25.00 with a stop loss at $22.35. I would start with small positions to limit risk.

FYI: The Point & Figure chart on SHAW is bullish with a $37 target.

Buy-the-Dip trigger: $25.00, stop loss @ 22.35

BUY the 2013 Jan $30 call (SHAW1319A30)

- or -

BUY the 2014 Jan $30 call (SHAW1418A30)

Chart of SHAW:

Originally listed on the Watch List: 01/07/12


Yum! Brands, Inc. - YUM - close: 59.85

Company Info

YUM is best known by its many franchise brands like Taco Bell, Pizza Hut, and KFC. The stock was a winner in 2011 with the stock closing near all-time highs. Shares are currently trading under resistance at $60.00. I am expecting a correction before YUM continues higher. Therefore I am suggesting a buy-the-dip trigger at $56.00 with a stop loss at $53.40. Our long-term target is $69.00.

NOTE: YUM is due to report earnings on February 6th. Investors may want to wait and see how the market reacts to YUM's earnings report before considering new positions.

FYI: The Point & Figure chart on YUM is bullish with an $84 target.

Buy-the-Dip trigger: $56.00, stop loss $53.40

BUY the 2013 Jan $60 call (YUM1319A60)

- or -

BUY the 2013 Jan $65 call (YUM1418A65)

Chart of YUM:

Originally listed on the Watch List: 01/07/12


Active Watch List Candidates:



Activition/Blizzard, Inc. - ATVI - close: 12.24

Comments:
01/07/12 update: Shares of rival EA were underperforming last week. Yet ATVI found support near $12.00 again. Bulls could argue ATVI is building an inverse head-and-shoulders pattern. The stock needs to breakout past its 50-dma and the $12.50 level.

Our plan is to wait for ATVI to close over $12.75 and then buy calls the next day. 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


Family Dollar Stores Inc. - FDO - close: 53.63

Comments:
01/07/12 update: FDO reported earnings on January 5th, after the closing bell. Investors were disappointed with the results and guidance. The stock plunged toward technical support near its 200-dma. Shares look very vulnerable to more profit taking.

I am dropping FDO as a watch list candidate since it's unlikely that the stock will hit our entry point requirement to close over $61.00 any time soon.

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

Trade did not open.

01/07/12 removed FDO as a watch list candidate. 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


FedEx Corp. - FDX - close: 85.49

Comments:
01/07/12 update: It was a choppy week for FDX but shares managed to post a gain anyway. Shares continue to trade under resistance near $86.00. If the stock can breakout higher we could see it hit our entry point soon.

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)

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


McDonald's Corp. - MCD - close: 100.60

Comments:
01/07/12 update: Tuesday's action in MCD looked like a bearish reversal pattern but there was no follow through lower. The stock recovered to actually post a gain for the week. I still don't want to chase it here.

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.

FYI: MCD is due to report earnings on January 24th. There is always the chance shares sell-off as investors do some profit taking following the announcement.

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: 83.37

Comments:
01/07/12 update: MMM posted gains for the week and shares managed to hold above technical resistance at the simple 150-dma and exponential 200-dma, which is a positive sign.

More aggressive traders might want to buy calls on MMM now. 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.

NOTE: MMM is due to report earnings on January 26th. Investors may want to wait and see how the market reacts to earnings before considering new positions.

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: 46.55

Comments:
01/07/12 update: It was another quiet week for MSI. We're still waiting for a breakout past resistance. If MSI doesn't make any progress by the end of January we might drop it as a candidate. Keep in mind that MSI is due to report earnings on January 25th. Investors may want to wait and see how the market reacts to earnings before considering new positions.

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: 97.99

Comments:
01/07/12 update: NKE has been flirting with a breakout past resistance at $98.00 all week long.

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: 8.06

Comments:
01/07/12 update: Semiconductor stock ONNN continues to march higher. Shares are now testing technical resistance at the 150-dma and its exponential 200-dma. I am focused on price resistance in the $8.30-8.40 zone. That's why 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


Visa, Inc. - V - close: 100.71

Comments:
01/07/12 update: Visa failed to make any progress last week. The stock has been churning sideways in the $103.50-100.00 zone for over two weeks now. I am concerned that shares could see a stronger correction. We will adjust our buy-the-dip entry point down to $96.00 and move our stop loss down to $89.75. Our long-term target is $119.00.

Readers may want to consider an alternative entry point like a close over $104.00 with a stop near $99.00 instead.

NOTE: Visa is due to report earnings in early February.

Buy-the-Dip trigger: $96.00, with a stop loss @ 89.75

BUY the 2013 Jan $110 call (V1319A110)

01/07/12 Adjusted entry point strategy to buy a dip at $96.00 with a stop at $89.75.

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