Option Investor
Newsletter

Daily Newsletter, Saturday, 1/14/2012

Table of Contents

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

Leaps Trader Commentary

S&P Downgrade Ahead of 3-day Weekend

by James Brown

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Stocks failed to crumble over fears of a significant downgrade for Europe. Overall it was another relatively quiet week for stocks. The U.S. market continued to drift higher and even with Friday's widespread decline the S&P posted another weekly gain. Thus far for 2012 the S&P 500 is up +2.5%. The major indices like the S&P 500, Russell 2000, Dow Industrials and the Transportation average all managed to hit new five-month highs late in the week. A good question to ask is where are the traders? Is everyone still on vacation? Volume continues to be very light. I suspect that market participants might be waiting for earnings season to kick into high gear before volume picks up.

The big event for the week just happened after the closing bell on Friday with Standard & Poor's downgrading several European nations. We'll cover that in a minute. Let's look at some of the major headlines from the week. Europe remained in the spotlight. Last Monday there was another meeting between France and Germany but it failed to inspire any major market moves. On Tuesday the Fitch credit rating agency expressed their opinion that France and Germany would probably keep their AAA credit ratings throughout 2012.

Thursday was a busy day with several headlines and economic data. It looks like European banks are using the cheap three-year 1% money they got from the ECB to buy sovereign debt. This was expected but it's still encouraging to see Italian and Spanish bond yields falling. Both countries held successful bond auction this past week. One down and several more to go as Italy needs to sell a significant amount of new debt in the first quarter. Speaking of the European Central Bank (ECB), it left interest rates unchanged at 1.0% but comments from its new chief Draghi reminded investors that the region faces economic risk. Across the channel the Bank of England left rates unchanged at 0.5%.

Economic data last week was mixed. The Federal Reserve's Beige Book was a non-event. Its anecdotal evidence continues to suggest moderate improvement. The December retail sales data was a disappointment with sales up +0.1% and core sales, without autos, dropped -0.2%. The weekly initial jobless claims rose unexpectedly from 375,000 to 399,000. On a positive note the University of Michigan Consumer Sentiment Survey surged to an eight-month high with an improvement from 69.9 in December to a 74.0 for January's preliminary reading.

As I mentioned earlier the biggest event for the week just occurred after the closing bell on Friday night with S&P downgrading several European countries. You may recall that S&P warned us back on December 5th when they put all 17 Eurozone nations on creditwatch negative and warned there could be downgrades. I have been cautioning readers that this was looming over the markets and would happen in the first quarter. The good news is that stocks really didn't react that much - at least not yet.

Rumors were circling Friday morning of a major downgrade and the U.S. market plunged to a -1% decline but slowly fought back to trim its losses by the closing bell on Friday. That's pretty encouraging considering that we're looking at a three-day weekend. Investors could have easily chosen to hit the "sell" button and wait for the dust to clear on Tuesday or Wednesday next week. The euro currency did drop to new 17-month lows on Friday but even the euro was bouncing off its worst levels of the day.

Overall there were nine EU countries that were downgraded by S&P. Italy, Portugal, Spain, and Cyprus all saw their credit ratings cut by two notches. France, Austria, Malta, Slovakia and Slovenia were downgraded by one notch. S&P reaffirmed their ratings on Germany, Ireland, Finland, Belgium, Estonia, Luxembourg and the Netherlands. While S&P removed all countries from their creditwatch negative list they kept their long-term outlook negative and suggested there could be more downgrades to come over the next couple of years.

The key point in that downgrade was France (sorry, Fitch). The markets have fretted over France losing its AAA rating for weeks. France and Germany are the two major tent poles holding up the EU. Now that France has been downgraded it affects the EFSF rescue fund, which will lose its own AAA rating. This means the EFSF will have to pay higher prices when it sells debt to raise cash for its bailout fund. Furthermore it puts a lot of pressure on French president Sarkozy. His party is facing re-elections in April and the opposition will surely use this downgrade as a hammer. Any big changes in French government could make it less cooperative with Germany as the two negotiate how to manage the EU crisis.

It's entirely possible that this downgrade news has been priced into the market, which is probably why the U.S. indices held up reasonably well on Friday. Yet I would not be surprised to see a knee-jerk reaction spike lower on Tuesday morning. Fortunately with our markets closed on Monday it might soften the blow giving investors more time to adjust their expectations and we'll get to see how Asia and European markets react to the news first. We do need to bear in mind that this massive downgrade will cause a reshuffling of risk. There are some hedge funds and mutual funds that might be forced to sell based on the lowered credit rating of the country they own debt on. Plus the downgrade will force a review and likely downgrade for all the related government entities, banks, insurance company, and more that all depend on these countries for financing and income (i.e. the EFSF).

Major Indices:

The S&P 500 index rallied to new five-month highs but it struggled with new resistance in the 1296-1297 area all week long. Traders bought the dip near its rising 10-dma and prior resistance near the 1280 level on Friday morning. If investors buy this intraday bounce then we could see the S&P 500 challenge round-number resistance at 1300. A breakout past 1300 sets up for a run toward heavy resistance at 1350 (eventually). The inverse head-and-shoulders pattern is suggesting a bullish target of 1362. If stocks do sell off on this S&P downgrade news then look for support at 1280 and at 1260.

Daily chart of the S&P 500 index:

The NASDAQ composite is now up +4.0% for 2012 but has yet to breakout past its October 2011 highs. The 2750 level is overhead resistance. If stocks pull back then we can watch for possible support at the 10-dma near 2677 or the simple 200-dma near 2660. A real sell-off could push the NASDAQ toward the trendline of higher lows (see chart).

Daily chart of the NASDAQ Composite index:

The small cap Russell 2000 index is normally more volatile than its larger-cap peers. Friday's pull back wasn't that bad. The -0.8% drop on Friday pared the $RUT's 2012 gains to +3.1%. Broken resistance near 760 and the simple 200-dma held up as short-term support. If this level breaks then look for support near 740 instead. Should the market rally then the $RUT's next obstacle is potential resistance in the 770-775 zone, essentially the June 2011 lows.

Daily chart of the Russell 2000 index

The U.S. markets are closed on Monday for the Martin Luther King holiday. The major events to watch are the NY Empire index, PPI, CPI, and Philly Fed survey. Yet the biggest event may end up being bond auctions in both Spain and France on Thursday. Given the new downgrades these auctions should see higher yields. If they're too high it could accelerate fears for Europe.

- Monday, January 16 -
U.S. markets are closed for holiday

- Tuesday, January 17 -
New York Empire State manufacturing index

- Wednesday, January 18 -
national Producer Price Index (PPI)
Industrial Production and Capacity Utilization

- Thursday, January 19 -
Weekly Initial Jobless Claims
national Consumer Price Index (CPI)
Housing Starts & Building Permits
Philadelphia Fed survey
Spain and France debt auctions

- Friday, January 20 -
Existing home sales data

The Week Ahead:

The beginning of the week is going to be dominated by reaction to the S&P downgrade that just occurred. Fortunately it seems that investors were in a sell the rumor, buy the news mood. Stocks were already bouncing after hours on Friday. This might be a relief rally that France was only downgraded by one notch and not two. If you can look past the EU downgrade news then the major headlines for the week will probably be corporate earnings.

Dow-component Alcoa (AA) and J.P.Morgan Chase (JPM) both reported this past week. AA's strong revenues were overshadowed by its earnings miss. JPM also reported a disappointing quarter. Many believe JPM to be the best-in-breed when it comes to banks so if JPM struggled then the rest of the financial sector may have had a rough quarter. JPM's CEO Jamie Dimon did offer some positive comments on improving loan demand and strong credit quality. He also expressed some concerns over Europe (there's a shock!). We are going to get a lot more commentary this week with the Q4 earnings season kicking into high gear. There will be dozens of high-profile companies announcing across the financial and technology sectors.

Outside of stocks we want to keep an eye on Iran and Greece. Iran has been a major story the last couple of weeks with the country's threats to shut down the Strait of Hormuz, which would cripple oil transport and delivery from the major middle east producers. There was a story on Friday that Iranian gunboats were harassing U.S. ships in the area. Plus there were headlines last week with a fourth high-profile assassination in Iran, this time a nuclear scientist. The topic this week will be the EU's discussion over an Iran oil embargo with a meeting scheduled for January 23rd. Odds are the EU will postpone any oil embargo for six months while they try to make other arrangements on where to buy oil.

The bigger challenge for the markets is Greece. The country has been negotiating with creditors over the details of its 50% haircut for its outstanding sovereign debt. Germany wants a 4% yield on any remaining Greek debt it owns. Banks want 8%. There is a group of hedge funds that are choosing to not play this game anymore and they want to collect on their CDS spreads and receive full value for their assets. This past week the negotiations failed. If Greece cannot lock down the details for this 50% haircut deal then the country will not qualify for its next bailout loan. Greece has a 14.4 billion euro bond it has to repay or rollover on March 20th and they don't have the money. They will be in default if they can't solve this problem in time to get everything approved and qualify for the next handout from the EU/ECB/IMF. There seems to be growing speculation that Greece may not remain in the EU at their current rate of progress.

It will be interesting to see how the markets digest all of these competing headlines. Looking at the calendar and the first full week of Q4 earnings I would bet this is the week we could see stocks reverse lower. Don't get me wrong. I'd rather see the S&P 500 breakout past 1300 and the current trend is up and the market's reaction to the downgrade rumors was pretty mild on Friday. I am hopeful that the bullish trend continues. However, the combination of the S&P downgrade and what could be a week full of disappointing earnings guidance could be too much for investors and stocks might break their bullish trend. Until it happens though the path of least resistance is up. Just remember that the U.S. market might see a knee-jerk reaction lower on Tuesday morning. Plus, this coming Friday marks January options expiration.

- James


Portfolio

Portfolio Update

by James Brown

Click here to email James Brown


Current Portfolio


Portfolio Comments:

The U.S. markets have extended their 2012 gains and the S&P 500 is up +2.5%. Investors seemed unconcerned over rumors of a credit downgrade in Europe on Friday and traders bought the dip near the S&P 500's rising 10-dma.

Earnings season is about to start. That means volatility for individual stocks could spike as traders buy or sell the news. Readers need to decide how they plan to approach this earnings season.

We saw FDX and NKE make the move from watch list to active trade this past week.

I have updated stop losses on: BZH, DOW, LDK, SHW, and X.

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

Update Your Radar

by James Brown

Click here to email James Brown

Editor's Note:

The U.S. market has continued to rally and many of the major indices hit new five-month highs last week. While the trend is up I am concerned that the combination of the S&P downgrades in Europe and the first full week of the Q4 earnings season could be just the excuse investors need to sell and try and lock in gains.

We are looking at a pivotal week for the market. Will corporate earnings guidance fuel bullish investor sentiment? Can the S&P 500 rally past round-number resistance at the 1300 level? How will the Standard & Poor's credit downgrade impact debt auctions in Europe this week?

I suspect this is the key week where the market either breaks out higher or reverses lower. Thus I am a bit hesitant to launch new long-term positions here, especially with stocks arguably short-term overbought after a four-week rally.

No new positions tonight. I will share what is on my radar screen:

JEC, MAKO, JPM, SCCO, and CIEN

These stocks all look bullish but I don't see a bullish entry point quite yet. The exception might SCCO, which looks tempting given this past week's breakout higher but I am cautious on the metal and mining stocks with the dollar in rally mode.


Play Updates

Q4 Earnings Season Has Begun

by James Brown

Click here to email James Brown

Editor's Note:

The fourth quarter earnings season was kicked off last week with Alcoa. The earnings parade picks up speed this week. After a four-week rally in stocks I am concerned that traders might use the earnings announcement as an excuse to sell and lock in profits. This is going to cause more volatility for individual names.

Individual investors need to decide how they are going to handle this risk. 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.

NOTE: We did see FDX and NKE join our active trades this past week.

-James


Closed Plays


None. No closed plays this week.


Play Updates


Allergan Inc. - AGN - close: 88.16

Comments:
01/14/12 update: AGN might be due for a pull back. Shares posted another gain for the week but the stock failed three times near the $89.40 level. I would not be surprised to see a pull back toward the $86-85 zone. If AGN drops any further I would be worried that it had formed a bearish double top with the peaks in October and January. Sadly looking at the options the spreads have widened again. I am not suggesting new positions at this time.

NOTE: AGN is due to report earnings on February 2nd.

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

- Suggested Positions -
OCT 17, 2011 - entry price on AGN @ 85.46, option @ 5.10
symbol: AGN1319A100 2013 JAN $100 call - current bid/ask $ 2.10/ 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: 6.61

Comments:
01/14/12 update: BAC delivered another bullish week with a breakout past its simple 100-dma. The stock soared to $7.02 on Thursday but pared its gains by Friday. At its highs on Thursday BAC was up +13.5% for the week. This coming week could be volatile. BAC is due to report earnings on January 19th before the opening bell. Wall Street is expecting a profit of 19 cents a share.

I am not suggesting new positions at this time. Our 2012 January options will expire after this coming Friday.

- 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 $ 0.40/ 0.42
(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 $ 0.40/ 0.42
(no stop loss on this position)

01/14/12 earnings are due out on Jan. 19th
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: 33.80

Comments:
01/14/12 update: It was a quiet week for shares of BMY. The stock looks like it's still correcting. I would expect a pull back toward support near $33.00 or its 50-dma. 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 $ 1.93/ 1.97

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: 3.02

Comments:
01/14/12 update: The rally continues for the homebuilders and BZH has already had a great year. At Thursday high of $3.28 the stock was up +32% for 2012. BZH has since pared those gains but traders bought the dip on Friday near its rising 10-dma. There seems to be a growing expectation that the housing market is going to improve in 2012. Mortgage rates at all-time lows under 3.9% certainly help but not many buyers can qualify for the best rates.

We were expecting the $3.00 area to be potential resistance. I would not be surprised to see additional profit taking. Prior resistance at $2.50 should be new support. We are raising our stop loss to $2.30, near the rising 50-dma.

I am also raising our exit target from $3.70 to $4.75. FYI: The Point & Figure chart has seen its bullish price target rise from $4.75 to $7.00.

- 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 $ 1.20/ 1.30

01/14/12 new stop loss @ 2.30, adjust exit target to $4.75
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: $4.75
Current Stop loss: 2.30
Play Entered on: 10/28/11
Originally listed on the Watch List: 10/22/11


Cisco Systems - CSCO - close: 19.06

Comments:
01/14/12 update: CSCO is still consolidating sideways under resistance in the $19.25-19.30 area. Readers may want to wait for a close over $19.30 before considering new positions. However, I would prefer to wait until after we see the market's reaction to CSCO's earnings report on Feb. 8th before considering new positions.

- Suggested Positions -
OCT 28, 2011 - entry price on CSCO @ 18.28, option @ 1.68
symbol: CSCO1319A20 2013 JAN $20 call - current bid/ask $1.84/1.87

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: 22.94

Comments:
01/14/12 update: I continue to hear a lot of positive analyst comments on the railroad stocks and many of them agree that CSX is the best way to play this industry. The stock rallied to new multi-month highs but plunged on profit taking Friday morning. Investors might want to consider buying a dip or a bounce near the $22.00 area but I would prefer to wait until after we see CSX's earnings. The company 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 $ 1.81/ 1.88

- or -

NOV 14, 2011 - entry price on CSX @ 22.59, option @ 3.30
symbol: CSX1418A25 2014 JAN $25 call - current bid/ask $ 2.78/ 2.97

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: 32.02

Comments:
01/14/12 update: DOW has been a strong performer with a +5.6% gain this past week. Shares broke through technical resistance at the simple 200-dma on Thursday. The trend is very bullish but I am a little worried that DOW is overbought after essentially a four-week rally. Readers may want to wait for a dip or a bounce off what should be support near $30.00. Or you could wait until after we see DOW's earnings report on February 2nd.

Please note our new stop loss at $27.75.

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 @ 30.46, option @ 2.40
symbol: DOW1319A35 2013 JAN $35 call - current bid/ask $ 2.97/ 3.05

- or -

Jan 09, 2012 - entry price on DOW @ 30.46, option @ 2.54
symbol: DOW1418A40 2013 JAN $40 call - current bid/ask $ 2.90/ 3.05

01/14/12 new stop loss @ 27.75
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).

Current Target: $39.50
Current Stop loss: 27.75
Play Entered on: 01/09/12

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


Enterprise Products Partners - EPD - close: 46.89

Comments:
01/14/12 update: EPD experienced some profit taking this past week. That's not unusual and the trend is still bullish. Shares have short-term support near $46 and its 50-dma. The $44.00 level is more significant support. On a very short-term basis the rebound on Friday looks like a bullish breakout over the short-term trend of lower highs. 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 $69 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 $ 1.05/ 1.15

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


FedEx Corp. - FDX - close: 90.37

Comments:
01/14/12 update: FDX has made the leap from our watch list to our play list. The stock was a huge winner last week with a breakout past resistance near $86.00. Our plan was to wait for FDX to close over $86.50 and then buy calls the next morning. The stock surged higher on January 10th and closed at $88.51. Our play was opened on the 11th at $88.08. FDX continue to rally and is now testing round-number resistance at $90.00.

Shares look short-term overbought. I would wait for a dip and consider buying a bounce near the $86-87 area. FYI: The Point & Figure chart for FDX is bullish with a $101 target.

- Suggested Positions -
Jan 11, 2011 - entry price on FDX @ 88.08, option @ 5.52
symbol: FDX1319A100 2013 JAN $100 call - current bid/ask $ 6.45/ 6.65

Chart of FDX:

Current Target: $98.00
Current Stop loss: 79.75
Play Entered on: 01/11/12
Originally listed on the Watch List: 12/31/11


CurrencyShares Euro ETF - FXE - close: 126.33

Comments:
01/14/12 update: Rumors that Europe might see new credit downgrades on Friday morning drove the euro currency to new 17-month lows. The FXE hit $125.75 before paring its losses. The trend is very much down but I am a little concerned that now the threat of a downgrade has occurred the euro could see a relief bounce. The put has already begun to factor this in with a decline in value despite the new lows in the FXE. Now couple that with a record amount of short interest in the euro and any bounce could be dramatic. Of course bear-market bounces tend to be sharp and fast before they run out of steam and roll over again.

I remain bearish here. The problems in Europe remain but I'm not suggesting new positions at this time. Look for overhead resistance near 130. 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 $ 4.90/ 5.15

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: 26.49

Comments:
01/14/12 update: Hmm... HPQ has been stuck churning sideways in the $26.00-27.00 zone for two weeks. The stock is lacking a short-term catalyst. That might change thanks to a parade of earnings from the technology sector this week. HPQ is not due to report for a few weeks yet. 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: 37.55

Comments:
01/14/12 update: KFT had rallied to new multi-year highs on Thursday but gains faded with the market's widespread decline on Friday. KFT still managed a gain for the week. While the trend is up I would not suggest new positions at this time. If the market corrects we could see KFT dip toward $36.00.

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 $ 4.25/ 4.35

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: 72.70

Comments:
01/14/12 update: KMB just barely managed to eke out a gain for the week. Shares have been consolidating sideways. Earnings are coming up on January 24th and we could see KMB chop sideways until their announcement. I am not suggesting new positions at this time. If the market sinks look for support near the 100-dma or the $70 level.

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 $ 2.40/ 2.55

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: 5.09

Comments:
01/14/12 update: Solar stocks saw a huge rally this past week after a report surfaced that prices in the industry appear to be stabilizing. From last week's close ($4.28) to this past week's high ($5.59) shares of LDK soared +30%. The stock has since pared those gains but the trend of higher lows and higher highs has been reaffirmed.

We don't want to chase a bit move like this. Investors can wait for a pull back and consider new positions on a bounce near the rising 30-dma.

Please note our new stop loss at $3.90.

- 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 $ 0.93/ 1.05

01/14/12 new stop loss @ 3.90
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: 39.94

Comments:
01/14/12 update: The correction in LLY may not be over yet. The stock managed a very minor gain for the week and shares seem to be fading lower from its January 10th highs. There is a growing chance that we could see LLY dip toward $39.00 or its 50-dma.

I remain long-term bullish on LLY but readers may want to hold off a bit. Consider waiting until after we see LLY's earnings report on January 31st before considering 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 $ 1.55/ 1.63

- or -

Jan 05, 2012 - entry price on LLY @ 39.50, option @ 2.75
symbol: LLY1418A45 2014 JAN $45 call - current bid/ask $ 1.80/ 2.50

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


Nike Inc. - NKE - close: 98.30

Comments:
01/14/12 update: Nike has been on the verge of a bullish breakout to new highs for weeks. The stock is actually trading at all-time highs now but it's been poised to rally from the $97 area for a while. The stock continues to build a bullish pattern of higher lows. We were waiting for NKE to close over $98.50 before initiating positions. That happened on Thursday with NKE's close at $99.10. The plan was to buy calls the next day (Friday morning).

Taking into consideration that we're about to hit a busy week of earnings news readers may want to hesitate on new positions. NKE doesn't report until March but data from rivals could have an impact. Bears could argue that NKE has a bearish wedge pattern forming. If that's the case then readers may want to place their stop loss closer to $97 or the 50-dma to limit risk.

Readers could choose to wait for NKE to close over the $99.00 level or the $100 mark before initiating new positions. FYI: The Point & Figure chart for NKE is bullish with a $115 target.

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

- Suggested Positions -
Jan 13, 2012 - entry price on NKE @ 98.39, option @ 4.95
symbol: NKE1319A110 2013 JAN $110 call - current bid/ask $ 4.95/ 5.10

Chart of NKE:

Current Target: $119.00
Current Stop loss: 92.25
Play Entered on: 01/13/12
Originally listed on the Watch List: 12/24/11


Pepsico, Inc. - PEP - close: 64.40

Comments:
01/14/12 update: PEP and the other soda drink stocks like KO and DPS have not had a good week. All of them are correcting lower. Shares of PEP have fallen toward technical support near its 50-dma and its prior trend line of lower highs. The recent relative weakness is troubling. Readers may want to raise their stop loss toward the $63.75 area. I am not suggesting new positions at this time.

- Suggested (SMALL) Positions -
Dec 27, 2011 - entry price on PEP @ 66.47, option @ 2.70
symbol: PEP1319A70 2013 JAN $70 call - current bid/ask $ 1.37/ 1.44

01/14/12 PEP and its rivals are all showing weakness. Readers may want to raise their stop loss
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: 56.54

Comments:
01/14/12 update: A week ago there was a lot of talk about QCOM's potential accounting issues. Those seem to have been forgotten in favor of headlines coming out of the CES show in Vegas. Shares of QCOM have been consolidating sideways and managed to eke out a small gain for the week.

I remain cautious. The concerns over QCOM's accounting have not disappeared. More conservative traders may want to abandon positions now since the accounting issue could be a black cloud over the stock's progress.

- Suggested (SMALL) Positions -
NOV 23, 2011 - entry price on QCOM @ 52.50, option @ 4.90
symbol: QCOM1319A60 2013 JAN $60 call - current bid/ask $ 4.90/ 5.00

01/07/12 new stop loss @ 51.45. Investors may want to exit early. The worry of potential accounting risks have 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: 41.32

Comments:
01/14/12 update: It was a quiet week for RAI. Shares continued to bounce after testing its rising 50-dma two weeks ago. Yet the stock remains under resistance near the $42 level. I am not suggesting new positions at this time.

- 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 $ 1.75/ 1.95

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: 47.36

Comments:
01/14/12 update: SBUX continues to drift to new all-time highs. The company is due to report earnings on January 26th. I strongly suspect that the stock could see a sell-the-news reaction as investors lock in gains. While we remain bullish we do not want to open new positions at this time. 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 $ 4.30/ 4.40

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: 95.13

Comments:
01/14/12 update: SHW continues to outperform. The last four weeks shares have soared from under $85 to over $95. The stock is very short-term overbought and readers may want to go ahead and lock in gains now for a quick turnaround. There is a good chance that SHW could see some profit taking after it reports earnings on January 26th. I am not suggesting new positions at this time. We will raise our stop loss to $86.75. Please note that I am adjusting our exit target down to $99.00.

Seriously, traders may want to think twice about just taking profits now. Our call is up +58% in about three weeks.

- Suggested Positions -
Dec 23, 2011 - entry price on SHW @ 88.92, option @ 3.90
symbol: SHW1319A100 2013 JAN $100 call - current bid/ask $ 6.20/ 6.80

01/14/12 new stop loss @ 86.75, adjust exit target to $99.00
01/07/12 new stop loss @ 84.40

Current Target: $99.00
Current Stop loss: 86.75
Play Entered on: 12/23/11

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


Verizon Communications - VZ - close: 38.92

Comments:
01/14/12 update: VZ is bouncing after the early January correction back toward support. The stock has short-term resistance near $39 and its 10-dma. I would be tempted to buy calls now but VZ has earnings coming up on January 24th. I'm suggesting investors wait until after we see the earnings report.

- Suggested Positions -
Dec 23, 2011 - entry price on VZ @ 39.42, option @ 2.17
symbol: VZ1319A40 2013 JAN $40 call - current bid/ask $ 1.80/ 1.87

- or -

Dec 23, 2011 - entry price on VZ @ 39.42, option @ 2.87
symbol: VZ1418A40 2014 JAN $40 call - current bid/ask $ 2.53/ 2.70

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: 27.43

Comments:
01/14/12 update: It was a choppy week for X. The stock is trading between resistance near $29.00 and support at its trend of higher lows. There is also potential technical support near the 50-dma.

At this point I would be tempted to buy calls on a close over $29.00 or the $30.00 level. Yet I would prefer to wait and see how the market reacts to X's earnings report due out on January 31st.

Please note that I am raising our stop loss to $23.60. More conservative traders may want to adjust theirs even higher.

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 $ 4.75/ 4.85

01/14/12 new stop loss @ 23.60
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: 23.60
Play Entered on: 11/09/11
Originally listed on the Watch List: 11/05/11


Exxon Mobil -XOM - close: 84.88

Comments:
01/14/12 update: Crude oil prices are seeing a tug of war. A rising U.S. dollar should push oil lower. Yet tensions with Iran and worries that Nigeria might see production fall due to a worker's strike have kept prices elevated. Meanwhile XOM has been slowly consolidating lower.

I am not suggesting new positions at this time. Broken resistance near $82.00 should be support. Wait for a dip or a bounce near $82 as our next entry point. Keep in mind that XOM is due to report earnings on January 31st.

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 $ 4.40/ 4.55

- or -

Dec 22, 2011 - entry price on XOM @ 83.56, option @ 6.25
symbol: XOM1418A95 2014 JAN $95 call - current bid/ask $ 5.85/ 6.00

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

Drug Maker

by James Brown

Click here to email James Brown


New Watch List Entries

TEVA - Teva Pharmaceuticals


Active Watch List Candidates

LXK - Lexmark Intl.

MCD - McDonald's Corp

MMM - 3M Co.

MSI - Motorola Solutions

ONNN - ON Semiconductor

SHAW - Shaw Group

V - Visa Inc.

YUM - Yum,! Brands


Dropped Watch List Entries

FDX and NKE graduated to the play list.



New Watch List Candidates:


Teva Pharmaceuticals - TEVA - close: 44.55

Company Info

TEVA is back! Shares have displayed impressive relative strength in January. The stock has broken out to new relative highs and powered past technical resistance at the 150-dma, exponential and simple 200-dma. Now TEVA is consolidating sideways under resistance at $45.00 near its April 2011 low.

I am suggesting we open bullish positions if TEVA can close over $45.25. If triggered we'll use a stop loss at $39.75. More conservative traders might consider a stop closer to $42 instead. Our long-term target is the $54.00 level. FYI: The Point & Figure chart for TEVA is bullish with a $57 target.

Breakout trigger: Wait for a close over $45.25, stop loss 39.75

BUY the 2013 Jan $50 call (TEVA1319A50)

- or -

BUY the 2014 Jan $50 call (TEVA1418A50)

Chart of TEVA:

Originally listed on the Watch List: 01/14/12


Active Watch List Candidates:



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

Comments:
01/14/12 update: ATVI and rival EA were down on Friday thanks to news that video game sales for 2011 lagged 2010's pace. I fail to see why ATVI would complain when their Call of Duty Modern Warfare 3 was the best selling entertainment title ever reaching $1 billion in sales in just over two weeks. The stock lost -2.5% anyway and is back under its 50-dma. I don't see any changes from my prior comments.

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


Lexmark Intl. Inc. - LXK - close: 34.72

Comments:
01/14/12 update: LXK is still inching higher and shares look poised to breakout past 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)

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


McDonald's Corp. - MCD - close: 100.35

Comments:
01/14/12 update: MCD continues to consolidating sideways. If you look hard enough you'll see a pennant pattern. These are supposed to be neutral but stocks tend to breakout in the direction of the previous trend and in this case that's higher. However, there is a chance that MCD will see some profit taking when they announce earnings on January 24th. I would wait for a dip.

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: 83.60

Comments:
01/14/12 update: MMM is still flirting with resistance near $85.00 and its simple 200-dma. I am still suggesting we wait for MMM to close over $85.00 before initiating positions. If triggered use a stop at $78.90. Readers may want to wait until after we see MMM's earnings report on January 26th before considering new positions. 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: 46.48

Comments:
01/14/12 update: MSI is essentially flat for the week. I don't see any changes from my prior comments. 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


ON Semiconductor Corp. - ONNN - close: 8.11

Comments:
01/14/12 update: ONNN rallied right up to resistance at $8.50 and reversed. That's not too surprising. Shares made need to generate some steam before finally breaking out from its trading range.

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


Shaw Group Inc. - SHAW - close: 27.67

Comments:
01/14/12 update: SHAW spent last week consolidating sideways on either side of technical resistance at its simple 200-dma. Shares still look a little overbought given the big rally from its December lows. 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)

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


Visa, Inc. - V - close: 100.74

Comments:
01/14/12 update: Visa is virtually flat for the week. Traders did buy the dip at its rising 30-dma. If we had a short-term time frame I would be tempted to buy calls now. However, earnings are coming up on February 8th. Readers may want to wait until after Visa reports before considering new positions.

Currently our plan is to buy a dip at $96.00 with a stop at $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: Rival MasterCard reports earnings on February 2nd.

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


Yum! Brands, Inc. - YUM - close: 61.23

Comments:
01/14/12 update: YUM has continued to rally and shares are at new record highs. I don't want to chase it. We will adjust our strategy to use a buy-the-dip trigger at $57.50 with a stop loss at $53.75. 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: $57.50, stop loss $53.75

BUY the 2013 Jan $60 call (YUM1319A60)

- or -

BUY the 2013 Jan $65 call (YUM1418A65)

01/14/12 adjusted entry point strategy to use a trigger at $57.50 and a stop at $53.75

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