Option Investor
Newsletter

Daily Newsletter, Sunday, 6/3/2012

Table of Contents

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

Leaps Trader Commentary

Another Week of Disappointing Data

by James Brown

Click here to email James Brown

The post-holiday bounce on Tuesday didn't last very long. Equity markets immediately turned south again. The sell-off is picking up speed both in Europe and the U.S. as investors start betting on Eurozone break up and a global recession. Nearly every piece of economic data released last week was negative or worse than expected.

The euro currency continues to plummet and hit a new two-year low near $1.23. This is helping fuel a rally in the U.S. dollar, which is up five weeks in a row. Gold managed to rally on Friday as stocks broke support. Oil is in freefall thanks to a rising dollar and lower demand as economic activity slows down. Crude oil prices hit new 2012 lows, trading under $83 a barrel. Money is rushing into the safety of bonds with the yield on the U.S. ten-year note hitting 1.44% intraday and closing at 1.46% on Friday. In the 66 years they have been keeping records on bond yields, that is an all-time low.

Europe, Greece, and Spain remain in the spotlight. A recent poll showed that most Greeks want to stay in the eurozone while most investors are expecting Greece will exit the euro. An Greek exit would cut the country's income in half and exacerbate the country's unemployment problem. The problem is the country has been in recession for years and the strict austerity is not going to help spur any growth. It seems the anti-austerity political party is gaining the lead as we near the June 17th elections.

Meanwhile money is rushing for the exits in Spain as the bank run continues. The region is extremely worried about the health of Spanish banks. Spain's leaders have called for the banks to shore up their balance sheets and raise more capital. Investors and consumers are not waiting around to see if the banks will fail or not. In the month of May more than 66 billion euros left the country.

China was making headlines last week. On Tuesday there was hope that the government would offer some new stimulus to help their slowing economy. Yet those expectations were dashed given recent comments in the state-run papers. The HSBC Chinese manufacturing index showed a drop from 49.3 in April to 48.4 in May. This is a new five-month low. Readings under 50.0 indicate contraction, over 50 suggests growth. The official Chinese PMI data came in at 50.4, down from 53.3. Most analysts don't trust the "official" numbers. The government is expected to cut the bank reserve ratio again this weekend but so far their cuts haven't been enough to stop the economic slowdown. Meanwhile China's neighbor, India, made headlines with their quarterly GDP growth rate falling to 5.3%. Yes, they are growing at +5% but that was the lowest quarterly growth rate in nine-years. India is also concerned that their economy is slowing down too fast.

The parade of economic data in the U.S. this past week was pretty dismal. The ISM index fell from 54.8 in April to 53.5 in May, which was lower than expected. The Q1 GDP estimate was revised down from +2.2% to +1.9%, also lower than expected. The Chicago PMI unexpectedly fell from 56.2 in April to 52.7 in May. Economists were expecting the ADP employment report to show a gain of +157,000 new jobs but it came in at +133,000. The weekly initial jobless claims rose from an estimated 368,000 to 383,000. The pending home sales data for April plunged to -5.5% compared to estimates for +0.6%. The Consumer Confidence index for May fell from 68.7 in April to 64.9 in May. This doesn't match up well with the four-year high in the University of Michigan Consumer Sentiment report issued last week. Vehicle sales in the U.S. were expected to rise from a 14.4 million pace in April to 14.5 but May saw a drop to a 13.8 million pace, the slowest pace in five months.

The mother of all economic reports is the monthly nonfarm payroll (jobs) report. Economists had been expecting growth of +150,000 to +175,000 new jobs. Yet May's report only showed a gain of +69,000. Pouring salt on the wound was a downward revision of -49,000 jobs for the prior two months. Meanwhile the unemployment rate ticked up to 8.2% after months of being at 8.1%. The U.S. unemployment level has been at 8% or higher for 40 months, which is the longest streak since 1948.

Add up all the headlines and it was nothing but bad news and traders decided to hit the "sell" button.

Major Indices:

The S&P 500 index is down -3.0% for the week, which reduced its year to date gains down to +1.6%. The index is also down -10% from its 2012 highs near 1,422. Unfortunately this past week saw the S&P 500 index breakdown under support at the 1300 level and its simple 200-dma at 1285. A lot of traders were keying in on the 1280 level, which has also been broken.

All of these broken support levels are now new overhead resistance. If the sell-off continues the next level of significant support is probably 1250. The index started the year at 1257.

Daily chart of the S&P 500 index:

Weekly chart of the S&P 500 index:

The NASDAQ was hammered for a -3.1% loss on the week, which has reduced its year to date gains down to +5.4%. Technology stocks, especially the semiconductors, have really been underperforming. This past week saw the NASDAQ composite index break support near 2800, 2750, and both its 200-dma and 300-dma. This trend of lower lows would suggest the NASDAQ is headed for the next level of support at 2700. If 2700 fails then the next significant support level is probably 2600.

Daily chart of the NASDAQ Composite index:

Weekly chart of the NASDAQ Composite index:

The small cap Russell 2000 index fell -3.7% last week and is now down -0.4% for the year. The oversold bounce failed at prior support near 780. Friday's plunge saw a new breakdown under its 200-dma. The next level of significant support is probably the 700 area. Coincidentally the bearish head-and-shoulders pattern is forecasting a drop toward 710.

Daily chart of the Russell 2000 index

Weekly chart of the Russell 2000 index

After last week's rush of economic data the calendar slows down a bit this week. The major events will be the European Central Bank (ECB) meeting on Wednesday and Ben Bernanke's testimony before congress on Thursday. There is a good chance the ECB could announce a rate cut or potentially some hint at future QE.

It's not on the calendar this week but some time during the month of June we are expecting the U.S. Supreme Court's decision on Obamacare.

FYI: The IMF's quarterly review of Greece has been postponed from the end of May until after the June 17th elections.

Economic and Event Calendar

- Monday, June 04 -
Factory Orders for April

- Tuesday, June 05 -
ISM Services for May

- Wednesday, June 06 -
Federal Reserve Beige Book report
ECB meeting (interest rate decision)

- Thursday, June 07 -
Weekly Initial Jobless Claims
Fed Chairman Bernanke's testimony before Congress

- Friday, June 08 -
Wholesale Inventory data for April

Upcoming events:

Supreme Court ruling on Obamacare (some time in June)
June 14th OPEC meeting
June 17th, Greek elections
June 18-19th, Iran/multi-nation talks (Russia, U.S., China, France, U.K.)
June 19th, FOMC meeting
June 28-29th, EU summit
mid June 2012, IMF quarterly review of Portugal and Ireland

The Week Ahead:

Looking ahead the future looks stormy. Stocks are sinking but eventually the markets will see an oversold bounce. The challenge is that it will just be a bounce. It could take a while before stocks see a bottom. Financial stocks could be serious underperformers if the troubles in Europe escalate. One concern I have is the volatility index (VIX). Normally during periods of fear we'll see a capitulation day in the markets with big volume to the downside for stocks and a big spike higher in the VIX. The VIX is rising but it's nowhere near the levels we've seen a major bottoms. It used to be that spikes above 30 suggested a market bottom. Yet in 2010 and 2011 the VIX spiked past the 45 level.

Weekly chart of the Volatility Index (VIX)

It seems that Europe has some significant soul-searching to do. Are they willing to bite the bullet and do what needs to be done to save the euro? Or will Greek exit and thus paving the way for countries like Portugal, Spain and an potentially Italy to exit as well? This past week the ECB President, Mario Draghi, suggested that the current situation is unsustainable and the Eurozone was on the verge of "disintegration". Those are pretty strong words coming from a head of the ECB. It will be interesting to see if the ECB cuts rates on Wednesday or announces some new form of QE.

Federal Reserve Chairman Ben Bernanke speaks before Congress on Thursday and he could hint at some new plan. Operation Twist is scheduled to end at the end of June. If all they do is extend twist I doubt it's going to have much impact. Last month PIMCO head Bill Gross suggested that the Fed will announce QE 3 if we see a few months of worse than expected jobs data. Well May certainly qualifies as "worse" but is one month of bad data enough to spur the Fed to action? Or will the Fed, as many believe, hold on to any ammo it has left to stimulate the economy, and save it until the Eurozone starts to implode on a Greek exit?

The next big trigger for the market could be the June 17th election in Greece. If the anti-austerity crowd wins they've already warned they will renegotiate all the prior bailout agreements. Eventually the EU or maybe just Germany, will say "no" but it's possible Greece could try to hold the EU hostage for more "financing" as they like to call it.

Meanwhile in the U.S. the economic picture seems to be slowing down. Home sales should be on the up swing considering that we're in the major selling season but the most recent data showed pending home sales were falling. That doesn't bode well. Mortgage rates are at all time lows, under 4%, but most people can't qualify for those rates or they can't move because their own house is under water.

The market's trend is down. It's likely to stay that way until something happens. It could be the announcement of a new QE program from the Federal Reserve or it could be some new QE program from the ECB (maybe another LTRO program). Or maybe the Greeks will vote to stay in the Eurozone after all. Elsewhere in the world we're going to hear more about Iran as we near the EU oil embargo set to begin on July 1st. This could spark a bounce in oil prices.

Cash is a valid position. There is no need to rush into new bullish positions now. Trying to catch the falling knife usually results in injury.

- James


Portfolio

Portfolio Update

by James Brown

Click here to email James Brown


Current Portfolio


Portfolio Comments:

The stock market resumed its correction lower and the S&P 500 has officially hit the -10% correction mark. Unfortunately the breakdown under support at 1300 and the simple 200-dma looks pretty bearish. The sell-off in technology and energy stocks is getting pretty bad. We lost both EPD and XOM this past week. The real surprise is the acceleration lower in consumer names. MCD was also stopped out.

There were no stop loss changes tonight.

Disclaimer: At any given time the author may have positions in any or all of any companies mentioned in the Leaps Newsletter.

--Position Summary Table--
Table lists Directional CALL or PUT/LEAPS only.
Insurance puts, if applicable, are not shown.

Red symbol/name represents a play or option position exited or closed this week.




New Plays

Traders on the Run

by James Brown

Click here to email James Brown

Editor's Note:

Last week I talked about the "wall of worry" that bull markets like to climb. Well... it looks like the wall is currently winning. The S&P 500 has broken down under key support levels and finally hit a -10% correction from its 2012 highs.

There is growing concern over a breakup of the Eurozone. Economic activity in Europe, China, and the U.S. is all slowing down. The recent jobs report in America was another disaster. We could be in for a very volatile summer with big moves both directions as traders react to headlines from Europe.

I looked at over 1,200 stocks this weekend searching for trading ideas. We did add two new candidates to the watch list tonight. Overall it looks pretty ugly out there. Investors do not want to be in stocks right now. You can see that money is flowing into the safety of bonds with yields on the U.S. ten-year note at a record, all-time low of 1.46%.

We are not adding any new trades this evening.

Here is a list of stocks currently on my radar screen as potential candidates to keep an eye on:

DIS, STX, DPS, and TGT


Play Updates

Stock Market Correction Resumes

by James Brown

Click here to email James Brown

Editor's Note:

MSFT has joined the active trade list.

I remain cautious on the market. Readers will want to double check their stop loss placement.


Closed Plays


EPD, MCD, and XOM were stopped out.


Play Updates


Archer-Daniels-Midland Company - ADM - close: 30.92

Comments:
06/02/12 update: ADM had been holding up relatively well during the market's recent drop. Shares finally broke down on Friday with a -3.0% plunge. ADM has now closed under its 50-dma and 100-dma. The stock should have some support near $30.00. If not we have a stop loss at $29.45, which is just under the simple 200-dma.

Believe it or not ADM has not yet broken the bullish trend of higher lows on its weekly chart but a close under its 200-dma would definitely change that.

I am not suggesting new positions at this time.

Earlier Comments:
We want to keep our new position size small to limit our exposure here. Start with half your normal position size or less.

- Suggested (small) Positions -
Feb 21, 2011 - entry price on ADM @ 31.31, option @ 1.74
symbol: ADM1319A35 2013 JAN $35 call - current bid/ask $ 1.39/ 1.45

05/12/12 new stop loss @ 29.45
05/01/12 ADM beat estimates by 18 cents.
04/28/12 ADM is scheduled to report earnings on May 1st.
02/21/12 trade opened on Tuesday @ 31.31
02/18/12 start with small positions to limit our exposure.
02/17/12 ADM meets our entry point requirements with a close over $31.25. Open positions the next day (Feb. 21st).
02/11/12 adjust entry trigger to wait for close over $31.25
FYI: 2014 calls are also available.

Current Target: $37.75
Current Stop loss: 29.45
Play Entered on: 02/21/12
Originally listed on the Watch List: 01/28/12


Allergan Inc. - AGN - close: 88.09

Comments:
06/02/12 update: AGN closed at new three month lows with Friday's -2.3% decline. Shares look poised to test their 200-dma near $87.00 soon. If that fails then AGN will likely test round-number support at $85.00. The stock's long-term up trend is in jeopardy here and a close under $85 will break it. I am not suggesting new positions at this time.

FYI: Yet again the option spreads for our 2013 Jan $100 calls is getting worse. Actually it's getting ridiculous. We will most likely avoid trading AGN in the future until the option spreads improve.

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 $ 0.70/ 3.80

05/02/12 AGN missed earnings estimates by a penny, guided lower
04/28/12 Exit strategy adjustment! We are not selling half at $99.00. Instead we'll aim for $109.00 to exit positions. See tonight's note for details on alternative exits
03/31/12 adjusted exit strategy. Sell half at $99.00 and sell the remainder at $109.00
03/10/12 new stop loss at $84.50
02/02/12 earnings in-line but guided lower for 2012
01/28/12 earnings are due on Feb. 2nd. Readers might want to raise their stop or consider some sort of hedge prior to the report.
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:$109.00
Current Stop loss: 84.50
Play Entered on: 10/17/11
Originally listed on the Watch List: 09/24/11


American Intl. Group - AIG - close: 27.21

Comments:
06/02/12 update: Ouch! AIG was crushed on Friday. Shares had been consolidating sideways between resistance at $30 and support at its exponential 200-dma. Yet the market's sharp decline, led in party by the financial sector, helped push shares of AIG to a -6.7% drop.

Unfortunately the situation in Europe is like a quickly spreading cancer for the financial stocks. If Greece votes for the anti-austerity party in their upcoming elections (in two weeks) the financial sector could plunge again. At the moment I would expect AIG to dip toward its 200-dma and the $26.00 level. Nimble traders can look for a bounce near $26 as a new entry point.

Our plan was to keep our initial position size small to limit our risk.

- Suggested Positions - (small positions @ first)
May 18, 2012 - entry price on AIG @ 28.25, option @ 3.40
symbol: AIG1319A30 2013 JAN $30 call - current bid/ask $ 2.80/ 2.92

- or -

May 18, 2012 - entry price on AIG @ 28.25, option @ 4.20
symbol: AIG1418A35 2014 JAN $35 call - current bid/ask $ 3.50/ 3.80

05/18/12 triggered at $28.25
05/05/12 The U.S. government is planning to sell 164 million shares at $30.50 and AIG will probably gap down on this news.
Move the trigger down to $28.25, and move the stop loss to $25.75.
04/28/12 adjust buy-the-dip trigger to $30.00 and stop to $27.40

Current Target:$ 39.00
Current Stop loss: 25.75
Play Entered on: 05/18/12
Originally listed on the Watch List: 04/07/12


Bank of America - BAC - close: 7.02

Comments:
06/02/12 update: This past week was starting to look like a potential bottom in BAC. The stock has broken out past its two-month trend of lower highs. Yet now the multi-day bounce is starting to look like a bear-flag consolidation pattern. The precarious situation in Europe and the potential for the Eurozone to fracture does not bode well for financial stocks. BAC could easily drop to new relative lows, especially if the upcoming Greek elections don't go well for the pro-euro crowd.

I am not suggesting new positions at this time.

Earlier Comments:
Currently we do not have a specific exit target. The plan has been to exit in the $12.00-15.00 zone.

- Suggested Positions -

AUG 29, 2011 - entry price on BAC @ 8.10, option @ 1.50
symbol: BAC1319A10 2013 JAN $10 call - current bid/ask $ 0.29/ 0.30
(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 $ 0.29/ 0.30
(no stop loss on this position)

05/19/12 BAC has pulled back to the 61.8% retracement
03/17/12 BAC has broken out from its multi-week trading range. Broken resistance near $8.30 should be new support.
01/28/12 financials seem a bit overbought here.
01/21/12 2012 Jan. $10 calls have expired (-100%)
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: 33.33

Comments:
06/02/12 update: BMY actually posted a gain for the week. The stock may have gotten a boost from headlines that one of its experimental drugs appears to be making progress against cancer. BMY is current developing a drug that helps unlock the body's own immune system to shrink cancer tumors. There is still a lot of testing to be done.

Recent action in the stock is encouraging I remain cautious here. You could argue that BMY has been building a bearish head-and-shoulders pattern over the last three months. I am not suggesting new positions at this time.

- Suggested Positions -
SEP 19, 2011 - entry price on BMY @ 30.53, option @ 1.20
symbol: BMY1319A35 2013 JAN $35 call - current bid/ask $ 1.17/ 1.23

05/26/12 new stop loss @ 31.45
02/11/12 adjust stop loss to $30.90
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


CH Robinson Worldwide - CHRW - close: 56.89

This is a bearish PUT option trade.

Comments:
06/02/12 update: Normally plunging oil prices would be bullish for the transports. Oil has fallen sharply in recent weeks and that should help lower fuel costs for the transportation companies. Yet one of the reasons that oil is falling are expectations that demand is shrinking due to slowing economic growth around the world. An economic slowdown means less demand for transporting goods.

Shares of CHRW have broken down to new 18-month lows. The next level of potential support is the $55 area. Look for an oversold bounce there.

I am lowering our stop loss down to $62.25.

Our multi-month target is a drop to $50.50. We want to keep our position size small to limit our risk.

- Suggested (small) Positions -
May 07, 2012 - entry price on CHRW @ 60.61, option @ 3.00
symbol:CHRW1319M55 2013 JAN $55 PUT - current bid/ask $ 4.40/ 4.60

06/02/12 new stop loss @ 62.25

Current Target: $50.50
Current Stop loss: 62.25
Play Entered on: 05/07/12
Originally listed in the New Plays 05/05/12


Colgate-Palmolive Co. - CL - close: 96.48

Comments:
06/02/12 update: Thus far CL continues to trade as expected. We warned readers that CL looked poised to correct lower and I suggested the stock would dip into the $96-94 area. It's almost there with Friday's -1.8% drop and the recent breakdown under the 50-dma.

Investors can use a dip near $94 as a new bullish entry point but I'm suggest readers wait for a bounce near $94 before launching new positions.

- Suggested Positions -
MAR 16, 2012 - entry price on CL @ 95.48, option @ 2.92
symbol: CL1319A100 2013 JAN $100 call - current bid/ask $3.90/4.20

- or -

MAR 16, 2012 - entry price on CL @ 95.48, option @ 5.57
symbol: CL1418A100 2014 JAN $100 call - current bid/ask $6.80/8.60

06/02/12 correction continues. look for a dip toward $94
05/26/12 Still expecting a correction into the 96-94 zone.
05/19/12 CL looks poised to see a correction toward $96-94
05/05/12 new stop loss @ 91.75
04/26/12 CL reports earnings that are in-line with estimates.
03/31/12 CL is performing well but expect resistance at the $100 level and a possible pullback.

Current Target: $109.00
Current Stop loss: 91.75
Play Entered on: 03/16/12
Originally listed on the Watch List: 03/10/12


eBay Inc. - EBAY - close: 38.82

Comments:
06/02/12 update: EBAY came close to testing both sides of its $38-42 trading range last week. Now the stock sits on support near $38 after breaking down under its 50-dma. I suspect EBAY will continue to slip lower and shares are likely to test the $36.50-36.00 area before finding a bottom again.

Investors can use a dip near $36.00 or its 100-dma as a new entry point to launch positions.

We have previously closed our 2013 position. We still have the 2014 calls. I am not suggesting new positions at this time.

- Suggested Positions -
(previously closed 2013 position)
Mar 12, 2012 - entry price on EBAY @ 36.36, option @ 2.85
symbol: EBAY1319A40 2013 JAN $40 call - exit @ $4.80 (+68.4%)

- or -

Mar 12, 2012 - entry price on EBAY @ 36.36, option @ 5.11
symbol: EBAY1418A40 2014 JAN $40 call - current bid/ask $ 7.40/ 7.55

05/14/12 closed 2013 Jan $40 calls with a bid at $4.80 (+68.4%)
05/12/12 exit the 2013 Jan $40 calls at the open on Monday. Currently the bid is $4.90
04/28/12 EBAY closed near its highs. Readers may want to take profits now. The bid on the 2013 call is at $5.10 (+78.9%), and the bid on the 2014 call is at $7.95 (+55.5%)
04/21/12 new stop loss at $34.90
04/18/12 EBAY reports better than expected earnings and provides stronger 2012 earnings guidance. The stock spikes higher.
04/07/12 EBAY could see a dip toward $34.00
03/31/12 action this past week looks short-term bearish. Look for a pullback

Current Target: $44.50
Current Stop loss: 34.90
Play Entered on: 03/12/12
Originally listed in the New Plays 03/10/12


Intel Corp. - INTC - close: 25.14

Comments:
06/02/12 update: The situation is looking grim for our INTC trade. Semiconductor stocks were crushed for another -5% loss on the week. The loss in the SOX index is worse if you count from Tuesday's high. The oversold bounce in INTC has reversed. Now the stock is testing support near $25.00 and its simple 200-dma again.

Odds are pretty high that INTC will see another spike lower and hit our stop loss at $24.75. I am not suggesting new positions at this time.

- Suggested (small, half-sized) Positions -
Feb 21, 2011 - entry price on INTC @ 27.34, option @ 1.30
symbol: INTC1319A30 2013 JAN $30 call - current bid/ask $ 0.53/ 0.56

- or -

Feb 21, 2011 - entry price on INTC @ 27.34, option @ 2.11
symbol: INTC1418a30 2014 JAN $30 call - current bid/ask $ 1.53/ 1.62

06/02/12 INTC is testing support near $25 and its 200-dma again
05/23/12 INTC dipped to $24.92 intraday before rebounding
02/21/12 INTC opened at $27.34.
02/18/12 start with small positions to limit our exposure.

Current Target: $34.00
Current Stop loss: 24.75
Play Entered on: 02/21/12

Originally listed on the Watch List: 02/11/12


Coca-Cola Company - KO - close: 73.09

Comments:
06/02/12 update: When investors start dumping defensive stocks like KO it could be a signal we're getting close to a market bottom. Shares had been consolidating sideways until Friday's market plunge helped push KO to a -2.1% drop. Friday also markets a technical breakdown under its 50-dma. Of course it didn't help that last week saw a lot of headlines about New York's proposed sugar-drink ban, which is terribly mislabeled. Mayor Bloomberg is not banning sugary drinks but is suggesting that businesses who sell them limit them to 16 ounces. Research proves that if you are given a larger serving then you'll consume it and the current trend of super-sized soda servings is adding to the country's obesity epidemic.

Looking at KO's stock price we can look for support near $72.00 or near the $70.00 level.

I am not suggesting new positions at this time.

Earlier Comments:
We will plan to exit positions prior to KO's proposed 2-for-1 split scheduled for August.

- Suggested Positions (start with small positions) -
Mar 29, 2012 - entry price on KO @ 72.35, option @ 3.60
symbol: KO1418A75 2014 JAN $75 call - current bid/ask $ 4.65/ 4.80

05/14/12 sold half of our 2014 Jan $75 calls on Monday at the open
the bid opened at $6.20 (+72.2%)
05/12/12 prepare to sell half at the open on Monday morning to take some money off the table. Current bid is $6.55.
04/28/12 new stop loss @ 69.75
More conservative traders may want to take profits now, bid @ $5.90
04/25/12 KO's BoD has recommended a 2-for-1 split subject to shareholder approval in July. Split to occur in August.

Current Target: $87.00
Current Stop loss: 69.75
Play Entered on: 03/29/12
Originally listed on the Watch List: 03/17/12


Eli Lilly - LLY - close: 40.16

Comments:
06/02/12 update: LLY, another defensive name, had been holding up relatively well until Friday's market decline pushed LLY to a -1.9% drop. If the market correction continues we can look for LLY to drop toward the $39 area and its rising 200-dma. I am not suggesting new positions at this time.

FYI: Suddenly the option spreads on our 2014 calls just got a lot wider!

- Suggested (SMALL) Positions -
Jan 05, 2012 - entry price on LLY @ 39.50, option @ 1.19
symbol: LLY1319A45 2013 JAN $45 call - current bid/ask $ 1.42/ 1.49

- or -

Jan 05, 2012 - entry price on LLY @ 39.50, option @ 2.75
symbol: LLY1418A45 2014 JAN $45 call - current bid/ask $ 1.69/ 2.40

04/25/12 LLY beat earnings estimates by 12c and raised guidance
03/17/12 LLY's close over $40.00 looks like a new bullish entry point
01/28/12 new stop loss @ 37.75

Current Target: $44.75 & 48.00
Current Stop loss: 37.75
Play Entered on: 01/05/12

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


Limited Brands, Inc. - LTD - close: 42.89

Comments:
06/02/12 update: Ouch! The sell-off in LTD this past week was painful with a -7.5% plunge. LTD reported better than expected May same-store sales of +6% but that failed to stop the sell-off in the share price. LTD has broke down under potential support at $45.00 and now its simple 200-dma. This stock has not closed under its simple 200-dma in months and the last couple of times it did, shares quickly reversed higher. I'm not so convinced we're going to see LTD bounce soon and if this drop continues we'll see LTD hit our stop loss at $41.50 soon. More aggressive trades will want to move their stop so it's under $41.00 or the $40.00 level to give LTD more room to maneuver.

I am not suggesting new positions at this time.

- Suggested Positions -
May 18, 2012 - entry price on LTD @ 45.50, option @ 5.10
symbol: LTD1319A45 2013 JAN $45 call - current bid/ask $ 3.50/ 3.80

05/18/12 triggered on a dip at $45.50
04/28/12 adjust entry point to buy a dip at $45.50, stop $41.50
03/24/12 adjusted buy-the-dip trigger to $44.00 with a stop at $39.75

Current Target: $59.00
Current Stop loss: 41.50
Play Entered on: 05/18/12
Originally listed on the Watch List: 03/10/12


Microsoft - MSFT - close: 28.45

Comments:
06/02/12 update: MSFT is a watch list candidate that has graduated to the play list. We have been expecting shares to correct toward their 200-dma, which the stock hit on Friday. Our plan was to buy calls when shares hit $28.50 with an initial stop loss at $26.45. More conservative traders may want to wait for MSFT to close above its simple 10-dma before they consider new bullish positions.

- Suggested Positions -
Jun 01, 2012 - entry price on MSFT @ 28.50, option @ 1.69
symbol:MSFT1319A30 2013 JAN $30 call - current bid/ask $ 1.66/ 1.69

- or -

Jun 01, 2012 - entry price on MSFT @ 28.50, option @ 3.05
symbol:MSFT1418A30 2014 JAN $30 call - current bid/ask $ 3.00/ 3.05

06/01/12 triggered at $28.50
05/19/12 adjust the trigger to $28.50, stop to $26.45
05/05/12 adjust the trigger to $29.00
04/28/12 adjust buy-the-dip trigger to $29.50, stop to $26.75

Chart of MSFT:

Current Target: $32.75 & 34.75
Current Stop loss: 26.45
Play Entered on: 06/01/12
Originally listed on the Watch List: 04/14/12


Motorola Solutions, Inc. - MSI - close: 46.96

Comments:
06/02/12 update: MSI managed to hold support near $47 and its exponential 200-dma. While shares did not breakdown to new relative lows, which is encouraging, the short-term trend still looks bearish. There is a chance that MSI will bounce near $46 and its 300-dma but I would expect this stock to hit our stop loss at $45.75 if the market doesn't rebound soon. I am not suggesting new positions at this time.

- Suggested Positions -
Feb 17, 2012 - entry price on MSI @ 49.35, option @ 2.27
symbol: MSI1319A55 2013 JAN $55 call - current bid/ask $ 1.12/ 1.30

02/18/12 new stop loss @ 45.75
02/17/12 trades opens on Friday morning at $49.35
02/16/12 MSI meets our requirement to open positions
02/04/12 if triggered, use a stop loss at $43.95
01/28/12 MSI underperformed as investors sold the stock following its earnings report. If MSI doesn't improve this week we'll drop it as a candidate.

Current Target: $64.50
Current Stop loss: 45.75
Play Entered on: 02/17/12

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


NetEase.com - NTES - close: 60.04

Comments:
06/02/12 update: NTES gave up -3.7% on Friday but shares still posted a gain for the week. The stock managed to rally toward its 2012 highs near $62.50 before profit taking hit on Friday. The relative strength is encouraging but I am not suggesting new positions at this time.

Readers may want to take profits now with the option bid at $8.30 (+76%).

Earlier Comments:
Our long-term target is $64.00. Currently the Point & Figure chart is bullish with a $68 target. I want to remind readers that NTES can be volatile so we want to start with small positions (at least half your normal trade or smaller).

- Suggested (Small) Positions -
Feb 29, 2012 - entry price on NTES @ 52.74, option @ 4.70
symbol:NTES1319A60 2013 JAN $60 call - current bid/ask $ 8.30/ 9.50

05/26/12 new stop loss @ 54.90. Cautious investors may want to exit early now!
05/16/12 NTES reports better than expected earnings
05/05/12 readers may want to take profits now or raise their stop loss prior to the earnings report on May 16th. Option bid @ 7.20 (+53.1%)
03/24/12 new stop loss @ 49.40
Nimble traders may want to take profits now (current bid $7.80, +66%) and they re-enter positions on a correction.

Current Target: $ 64.50
Current Stop loss: 54.90
Play Entered on: 02/29/12

Originally listed on the Watch List: 02/25/12


Reynolds American Inc. - RAI - close: 41.06

Comments:
06/02/12 update: RAI spent most of the week consolidating sideways near $42 before succumbing to profit taking on Friday with a -1.8% decline. The $42.00-42.80 zone remains overhead resistance for RAI. If the market sell-off accelerates we'll probably see shares dip back toward round-number support at $40.00 and technical support at its 200-dma (also near $40).

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 $ 1.25/ 1.35

05/26/12 new stop loss @ 39.35
05/05/12 the oversold bounce is reversing. readers may want to exit lower
04/24/12 RAI reports earnings and misses. Shares spike lower!
03/10/12 another close over $42.50 could be used as a bullish entry point.
01/28/12 RAI and the rest of the tobacco stocks are underperforming. Readers might want to exit early now given RAI's relative weakness.

Current Target: $49.00
Current Stop loss: 39.35
Play Entered on: 11/18/11
Originally listed on the Watch List: 10/22/11


UnitedHealth Group - UNH - close: 55.04

Comments:
06/02/12 update: UNH has been churning sideways the last few weeks. Investors are waiting on the U.S. Supreme Court's decision on the constitutionality of the Affordable Health Care Act (a.k.a. Obamacare). The results of this ruling could have a profound impact on the healthcare stocks. We don't have a firm date for the Court's decision but it's expected soon (some time during the month of June).

I would be tempted to buy calls again if we see UNH close over $57.00.

- Suggested Positions -
Feb 15, 2012 - entry price on UNH @ 54.53, option @ 3.25
symbol: UNH1319A60 2013 JAN $60 call - current bid/ask $ 3.15/ 3.30

- or -

Feb 15, 2012 - entry price on UNH @ 54.53, option @ 5.00
symbol: UNH1418A60 2014 JAN $60 call - current bid/ask $ 6.30/ 6.65

05/26/12 Don't forget - the Supreme Court ruling on Obamacare is in June
04/19/12 UNH reported earnings that beat estimates and raised guidance
03/31/12 new stop loss @ 52.75. Adjust exit to $64.00
03/24/12 action this past week has turned bearish. expecting a correction toward the $50 area.

Current Target: $64.00
Current Stop loss: 52.75
Play Entered on: 02/15/12

Originally listed on the Watch List: 02/11/12


Verizon Communications - VZ - close: 41.03

Comments:
06/02/12 update: VZ remains resilient in the face of a widespread market decline. The stock actually flirted with new multi-year highs this past week but shares were unable to breakout past resistance near $42.00. On a short-term basis the $40.00 level should be support.

I don't see any changes from my prior comments. More conservative investors may want to raise their stop loss. I am not suggesting new positions at this time.

- Suggested Positions -
Dec 23, 2011 - entry price on VZ @ 39.42, option @ 2.17
symbol: VZ1319A40 2013 JAN $40 call - current bid/ask $ 2.77/ 2.82

- or -

Dec 23, 2011 - entry price on VZ @ 39.42, option @ 2.87
symbol: VZ1418A40 2014 JAN $40 call - current bid/ask $ 3.75/ 3.85

05/12/12 new stop loss @ 37.75
04/05/12 VZ began trading ex-div for its upcoming April 30th dividend
03/10/12 VZ is starting to see some positive momentum higher
01/28/12 readers may want to consider an early exit immediately
01/24/12 VZ reported earnings and missed by a penny. Shares broke down on this news.

Current Target: $45.00
Current Stop loss: 37.75
Play Entered on: 12/23/11

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


CLOSED Plays


Enterprise Products Partners - EPD - close: 47.53

Comments:
06/02/12 update: The sell-off in EPD has been pretty rough the last there days. Shares have fallen from $50 to $46.38 on Friday morning. The stock sliced through potential support near $48.00, its exponential 200-dma and its simple 200-dma. Our stop loss was hit at $46.75.

Thankfully, we did take some money off the table back in April.

- Suggested Positions -
Nov 21, 2011 - entry price on EPD @ 45.17, option @ 1.45
symbol: EPD1319A50 2013 JAN $50 call - exit $1.20 (-17.2%)

06/01/12 stopped out at $46.75
05/26/12 I am repeating my suggestion that cautious traders exit early now!
05/02/12 EPD beat earnings and revenue estimates
04/30/12 sold half on Monday at the open. option bid @ 2.85 (+96.5%)
04/28/12 plan to sell half of our position on Monday morning. Current option bid is $2.95 (+103%)
04/21/12 readers may want to take profits now. The bid on our call option is at $3.10 (+113%)
02/18/12 new stop loss @ 46.75
02/04/12 new stop loss @ 44.75
01/28/12 new stop loss @ 43.75
01/21/12 new stop loss @ 43.40
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.

Chart of EPD:

Current Target: $59.00
Current Stop loss: 46.75
Play Entered on: 11/21/11
Originally listed in the New Plays 11/19/11


McDonald's Corp. - MCD - close: 91.05

Comments:
06/02/12 update: A week ago MCD was sitting at $91 and had just completed a -10% correction off its highs. Unfortunately the correction wasn't over yet because shares just lost another -4.7% last week. The breakdown under support near $90 and its 300-dma is definitely bearish but MCD is looking pretty oversold at this point. This past week does mark a breakdown under MCD's long-term trend of higher lows.

Our trade was stopped out on Friday at $86.75. I would keep MCD on your watch list for a correction toward the $80.00 level and reconsider potential positions there.

- Suggested Positions -
May 17, 2012 - entry price on MCD @ 90.25, option @ 3.20
symbol: MCD1319A95 2013 JAN $95 call - exit $2.03 (-36.5%)

- or -

May 17, 2012 - entry price on MCD @ 90.25, option @ 4.75
symbol: MCD1418A100 2014 JAN $100 call - exit $3.65 (-23.1%)

06/01/12 stopped out at $86.75
05/19/12 new stop loss at $86.75
05/17/12 triggered on a dip at $90.25
05/12/12 move the trigger to $90.25, stop loss to $87.75
05/05/12 another adjustment. move the trigger to $91.00, stop to $88.40, adjusted the option strikes.
04/28/12 adjust the buy-the-dip trigger to $95.00
04/14/12 adjust buy-the-dip trigger to $94.00.

Chart of MCD:

Current Target: $109.00
Current Stop loss: 86.75
Play Entered on: 05/17/12
Originally listed on the Watch List: 11/05/11


Exxon Mobil - XOM - close: 77.92

Comments:
06/02/12 update: A huge five-week plunge in the price of crude oil is finally starting to have its affect on shares of XOM. This stock had been holding above support near its 200-dma and the $80 level. Yet XOM finally broke down and plunged to new six-month lows this past week. Our stop loss at $79.40 was hit on Thursday.

- Suggested Positions -
Dec 22, 2011 - entry price on XOM @ 83.56, option @ 4.63
symbol: XOM1319A90 2013 JAN $90 call - exit $1.20 (-74.0%)

- or -

Dec 22, 2011 - entry price on XOM @ 83.56, option @ 6.25
symbol: XOM1418A95 2014 JAN $95 call - exit $2.45 (-60.8%)

05/31/12 stopped out at $79.40
04/26/12 XOM missed earnings estimates by 9 cents
04/14/12 XOM has broken down from its 3-month trading range.
03/17/12 XOM has bounced off the bottom of its bullish channel.
03/03/12 bears could argue that XOM is forming a potential double top pattern with the peak in late January and late February
02/11/12 recent action looks like a bearish H&S pattern with an $80 target.
01/28/12 readers may want to raise their stop prior to earnings
01/21/12 new stop loss at $79.40
01/07/12 new stop loss @ 77.90

Chart of MCD:

Current Target: $94.00
Current Stop loss: 79.40
Play Entered on: 12/22/11

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


Watch

Credit Cards & Discount Retail

by James Brown

Click here to email James Brown

Editor's Note:

We are pruning some watch list candidates off the newsletter today. The market's correction is taking a toll.



New Watch List Entries

DFS - Discover Financial

WMT - Wal-Mart Stores


Active Watch List Candidates

HNZ - H.J. Heinz Co.

JPM - JPMorgan Chase

MRK - Merck & Co

PEP - Pepsico Inc.

PFE - Pfizer Inc.

SBUX - Starbucks Corp.

USB - U.S. Bancorp


Dropped Watch List Entries

MSFT graduated to the play list.

ATVI, ECA, and HAL are being removed.



New Watch List Candidates:


Discover Financial - DFS - close: 30.72

Company Info

Financial stocks helped lead the market lower. DFS was near the front of the pack with a -7.2% decline. I am expecting further weakness but DFS should find support near $28.00 and its simple 200-dma.

I am suggesting we buy calls on a dip at $28.00 with a stop loss at $26.40. More conservative traders may want to wait for DFS to actually bounce off $28 before considering new positions first.

Buy-the-Dip trigger: $28.00

BUY the 2013 Jan $30 call (DFS1319A30)

- or -

BUY the 2014 Jan $35 call (DFS1418A35)

Chart of DFS:

Originally listed on the Watch List: 06/02/12


Wal-Mart Stores - WMT - close: 65.55

Company Info

The largest retailer in the world has been showing impressive relative strength the past few weeks. The stock has broken out to new 12-year highs. Yet the rally looks like it's slowing as the market's weakness starts to weigh on WMT.

We want to be ready to buy the dip when it shows up. I am suggesting we buy calls on a dip at $62.00 with a stop loss at $57.90, just under the simple 200-dma. More conservative traders could use a stop loss closer to $60 instead.

Buy-the-Dip trigger: $62.00

BUY the 2013 Jan $65 call (WMT1319A65)

- or -

BUY the 2014 Jan $70 call (WMT1418A70)

Chart of WMT:

Originally listed on the Watch List: 06/02/12


Active Watch List Candidates:



Activision Blizzard, Inc. - ATVI - close: 11.65

Comments:
06/02/12 update: ATVI has fallen to the next level of support near $11.50. If you think the market is done moving lower then this might be a spot to speculate on a bounce, with a tight stop loss. If this level breaks the next level of significant support looks like the $10.50 area.

Our plan was to buy a breakout when ATVI closed above $13.25. That is unlikely to happen any time soon. We are dropping ATVI from the watch list.

Trade did not open.

06/02/12 removed from the watch list.

Originally listed on the Watch List: 03/24/12


Encana Corp. - ECA - close: 19.17

Comments:
06/02/12 update: The correction in ECA continues. The bounce failed near $21.00 this past week. The bounce two weeks ago now looks like a bear flag. ECA looks headed for the $18.00-17.50 zone. We might re-visit this stock if shares near support near $18. Until then it's unlikely that ECA is going to breakout past resistance near $22.50 soon. I am dropping ECA from the watch list.

Trade did not open.

06/02/12 removed from the watch list.

Originally listed on the Watch List: 05/12/12


Halliburton Co. - HAL - close: 29.97

Comments:
06/02/12 update: Crude oil prices look like they are in freefall with a sharp five-week plunge. The OSX oil services index is breaking down to new lows. HAL is also hitting new relative lows. However, traders bought the dip twice on Thursday and Friday near $29.00.

With the market breaking down and oil breaking down, you would expect HAL to be showing more weakness. If HAL is not going to accelerate lower now? Then when is it? Based on this lack of performance I am removing HAL from the watch list. We might reconsider it again if we see shares close under $29.00 or under their 2011 low.

Trade did not open.

06/02/12 removed from the watch list.

Originally listed on the Watch List: 05/26/12


H.J. Heinz Co. - HNZ - close: 52.51

Comments:
06/02/12 update: HNZ is flirting with a breakdown under technical support at its 200-dma and 300-dma. If we see shares close under $52.00 it would look very bearish on the weekly chart.

We are currently waiting for HNZ to breakout to new highs. The plan is to launch positions after HNZ closes above $55.50. Our long-term target is $64.00.

Breakout trigger: close over $55.50, stop loss @ 51.85

BUY the 2013 Jan $55 call (HNZ1319A55)

- or -

BUY the 2014 Jan $60 call (HNZ1418A60)

Originally listed on the Watch List: 05/12/12


JPMorgan Chase - JPM - close: 31.93

Comments:
06/02/12 update: So far so good. We've been expecting JPM to continue moving lower. Right now the plan is to buy calls when JPM dips to $30.25. More conservative traders might want to wait for a JPM to dip to $29.00 instead. I'm expecting support at $30.00 but real support is the $28.00 area.

I would prefer the 2014 calls but more aggressive traders could use the 2013 calls instead.

Buy-the-Dip trigger: $30.25 (stop loss @ 27.75)

BUY the 2013 Jan $33 call (JPM1319a33)

- or -

BUY the 2014 Jan $35 call (JPM1418A35)

Originally listed on the Watch List: 05/19/12


Merck & Co - MRK - close: 37.18

Comments:
06/02/12 update: MRK did not see that much weakness last week. Shares are hovering above support near $37.00 and its exponential 200-dma. I'm not willing to give up just yet.

Currently we are waiting to launch positions until MRK can close over $40.00 and then buy calls the next day. Our long-term target is $47.50. FYI: The Point & Figure chart has a long-term target of $60.00.

Breakout trigger: Wait for close over $40.00, stop loss @ 37.75

BUY the 2014 Jan $40 call (MRK1418A40)

Originally listed on the Watch List: 05/05/12


Pepsico, Inc. - PEP - close: 67.51

Comments:
06/02/12 update: Traders bought the dip on Friday, which trimmed PEP's losses to about a dollar for the week. Currently, I am suggesting we wait for PEP to close above $70.25. We'll buy calls the next day with a stop loss at $65.75. Our long-term target is $79.00. FYI: The Point & Figure chart is currently forecasting an $80 target.

Breakout trigger: Wait for a close over $70.25, stop loss @ 65.75

BUY the 2014 Jan $75 call (PEP1418A75)

Originally listed on the Watch List: 05/26/12


Pfizer Inc. - PFE - close: 21.64

Comments:
06/02/12 update: PFE tried to hold support near $22 and its 100-dma but started breaking down on Thursday and Friday. I've been warning readers to look for a correction lower toward $21.00 or even the simple 200-dma.

At the moment we are leaving our strategy unchanged with plans to buy calls when PFE closes above $23.20 (and then launch positions the next morning). Our long-term target is $28.00. I will list the 2013 calls but I prefer the 2014 because PFE does not move very fast.

Breakout trigger: Wait for a close over $23.20, use a stop at $20.65

BUY the 2013 Jan $22.50 call (PFE1319A22.5)

- or -

BUY the 2014 Jan $25 call (PFE1418A25)

04/28/12 do not launch positions prior to the earnings report on May 1st.

Originally listed on the Watch List: 04/21/12


Starbucks Corp. - SBUX - close: 52.15

Comments:
06/02/12 update: The oversold bounce in SBUX has run out of steam. Consumer related names were hit hard on Friday. SBUX really underperformed with a -5% drop.

I am suggesting we buy calls if SBUX trades down to $50.25. The $50.00 level should be round-number support. We'll use a stop loss at $47.00. More conservative traders may want to wait for a dip to $48.50 as their entry point instead.

Our long-term target is $64.00.

Buy-the-Dip trigger: $50.25 (stop loss @ 45.75)

BUY the 2013 Jan $55 call (SBUX1319A55)

- or -

BUY the 2014 Jan $60 call (SBUX1418A60)

05/19/12 adjust stop loss to $45.75

Originally listed on the Watch List: 05/05/12


U.S. Bancorp - USB - close: 29.60

Comments:
06/02/12 update: USB is correcting lower as we expected. However, my enthusiasm is somewhat diminished to trade the financial sector as we see Europe slowly implode. The $28 level should still be support for USB but readers may want to use a tighter stop loss to reduce risk. I am adjusting our buy-the-dip trigger to $28.00 (from 28.25). We'll use a stop loss at $25.90. Our long-term target is $34.00. I prefer the 2014 calls but we'll list the 2013s as well.

Buy-the-Dip trigger: $28.00 (stop loss 25.90)

BUY the 2013 Jan $30 call (USB1319A30)

- or -

BUY the 2014 Jan $30 call (USB1418A30)

06/02/12 adjust entry trigger to $28.00

Originally listed on the Watch List: 05/19/12