Option Investor
Newsletter

Daily Newsletter, Sunday, 6/24/2012

Table of Contents

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

Leaps Trader Commentary

Sell The News (Again)

by James Brown

Click here to email James Brown

Buckle your seatbelt. It could be a bumpy summer. A week ago the S&P 500 and the Dow Industrials were breaking out past resistance ahead of the critical Greek vote on the 17th. The pro-bailout party won and yet traders decided to sell the news, which was a potential reaction we mentioned last week. Instead of focusing on the pro-euro news from Greece the markets worried about weakness in Spain. Yields on 10-year Spanish bonds traded over the key 7% level this past week.

With Greece and Spain as the backdrop stocks churned through the FOMC meeting and another round of disappointing economic data. By Friday's closing bell the S&P 500 was down -0.3% for the week. The Dow Industrials were off-0.9%, the NASDAQ was up +0.6% and the Russell 2000 index added almost +0.5% for the week. The U.S. dollar bounced as the euro reversed lower midweek. Oil hit new 2012 lows under $78 a barrel, while gold fell to a new low for the month.

The move in crude oil has been dramatic. WTI is off $30 from its 2012 highs while Brent crude is down $34. Oil hit new 2012 lows even though the Iran-U.N. talks in Moscow were a bust. Expectations were extremely low for anything fruitful to come out of the conference so it's not a surprise. The EU/Iran oil embargo is set to begin July 1st but Iran's rival Saudi Arabia has been pumping extra oil to make sure there is enough supply available when the embargo takes effect.

Economic data overseas continues to disappoint. Germany is the strongest economy in the Eurozone but their PMI report came in slower than expected. Meanwhile the latest PMI manufacturing report from China declined, posting its eighth month of disappointing data. Yet the biggest disappoint was probably the U.S. Philly Fed survey on Thursday. A month ago the Philly fed came in at -5.8. Economists were expecting it to improve to zero (0.0). Thursday's report showed a drop to -16.6 in June. It was the worst reading since August 2011. The Philly Fed's new orders component plunged from -1.2 to -18.9. Shipments also crumbled and backorders declined.

Thursday also showed that the initial weekly jobless numbers came in at 387,000 and last week's number was revised higher to 389,000. We're getting uncomfortably close to 400,000 new jobless claims and that doesn't bode well for the next nonfarm payrolls report (two weeks away). Another anecdotal evidence of a slowing economy came from the American Trucking Association, which said tonnage shipped plunged in April and May.

While we are on the subject of disappointments one of the biggest was probably the Federal Reserve meeting. No one was expecting any changes to policy and the FOMC left rates unchanged in the 0.0%-0.25% range. The markets were hoping for some hint at a new round of QE. Instead the Fed said they would extend Operation Twist throughout the rest of this year. Furthermore the Fed lowered their U.S. GDP 2012 growth forecast down from +2.4-2.9% to 1.9-2.4%. They also adjusted their unemployment estimates from 7.8-8.0% to 8.0-8.2% for the year.

The Federal Reserve says they stand "ready" to stimulate the economy should we need it. Many are wondering how they can help. They can't lower rates less than zero. Operation Twist, with the Fed buying longer-term U.S. bonds to help keep rates low, isn't really having much effect. The Fed already has $2.3 trillion on their balance sheet and eventually they'll have to sell them, which could send rates soaring. If the Fed does have any tricks left they're probably saving them in case the situation in Europe deteriorates any worse. Put it all together and the Fed isn't much help. The markets will have to move on their own without any QE stimulus for the foreseeable future.

I should mention the big bank downgrade by Moody's credit rating agency on Thursday night. Moody's downgraded ten banks, including some big American name firms like JPM, BAC, C, GS, and MS. Yet the downgrade didn't have much effect on the markets or the financial sector on Friday.

Major Indices:

The market's major indices are trading on technicals right now. The oversold bounce made an almost perfect 61.8% Fibonacci retracement of the April-May correction and then reversed. This retracement on the S&P 500 also coincided with resistance at the 1360 level and its 100-dma. This creates a new lower high for the market. The question is what's next? Does the sell-off continue and we see new lower lows under 1265? Or does the S&P 500 bounce and it creates a new higher low? Or do stocks churn sideways for a couple of weeks until the Q2 earnings season starts?

Levels to watch are resistance overhead at 1340 and 1360. Below is potential support at 1300 and the 200-dma as well as the June lows (1270-1265).

Daily chart of the S&P 500 index:

Trading in the NASDAQ composite was similar. The bounce made it past the 50% retracement of the correction lower (not shown) and almost made it to resistance at the 2950 level. Unfortunately, Thursday's sharp decline marks a pretty ugly reversal lower. Friday's bounce produced an "inside day" which suggests indecision by market participants.

You could argue for potential support near 2800 and its rising 200-dma but that didn't stop the NASDAQ during the early June plunge. At the moment the second quarter has produced a bearish trend of lower highs and lower lows.

Daily chart of the NASDAQ Composite index:

It's equally ugly for the small cap Russell 2000 index. The February-April bearish head-and-shoulders pattern was followed by a shorter, May-June inverse H&S pattern. The 780 level is a crucial pivot point of support or resistance. Unfortunately for the bulls the breakout above 780 and its 50-dma now looks like a bull-trap pattern.

I would argue the path of least resistance right now is probably down. The 780 and 800 levels remain resistance.

Daily chart of the Russell 2000 index

The main economic reports this week are the Chicago PMI and Consumer confidence. No one expects any change at in the third estimate for the Q1 GDP number. We'll see some new housing data as well. The real headline makers will probably be the two-day EU summit at the end of the week. Plus, the Supreme Court's decision on Obamacare should come out on Monday or Thursday this week. That news could have a big impact on healthcare stocks.

(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 25 -
new home sales for May

- Tuesday, June 26 -
Case-Shiller home price index
Consumer Confidence

- Wednesday, June 27 -
Durable goods orders
pending home sales for May

- Thursday, June 28 -
Weekly Initial Jobless Claims
EU Summit (two-day meeting begins)
Q1 GDP (3rd) estimate (+1.9% growth)

- Friday, June 29 -
EU Summit (two-day meeting ends)
Personal Income & Spending
Chicago PMI for June

The Week Ahead:

Looking ahead the media is focused on the Supreme Court decision on Obamacare and the EU summit. We're already seeing dramatic headlines and sound bites out of Europe about how this particular summit is it. How it has to be the "one" summit out of the two dozen summits they've had so far that needs to produce results. If they don't reach some sort of resolution this week it could be the end of the Eurozone and euro currency. It's probably just political grandstanding by frustrated leaders. Odds are nothing gets done except push things farther down the road. That's been the EU's playbook so far. It is worth noting that Spain's recent flirtation with 7% yields on its 10-year bonds is a major warning signal. If Spain falls into the financial abyss the worry is Italy won't be far behind.

Meanwhile the newly elected Greek government seems to have already formed the necessary coalition to avoid another election in 30 days. That should keep Greece off the radar for a week or two (we hope).

Once we get past the EU summit and the healthcare decision this week the market's focus will turn towards the Q2 earnings season. We've already seen several large multi-national firms issue warnings. The slowdown in Europe and China is hurting business. Plus the rising dollar is hurting their currency exchange and it's cutting into margins. We will most likely hear even more earnings warnings in the next two weeks before the season unofficially starts on July 9th with Alcoa's report.

I am concerned about earnings season. If results disappoint or if corporate guidance is too cautious and we hear too many businesses downgrading their forecasts it could jump start the market sell-off again. In the meantime the constant stream of disappointing economic data pointing to a global slowdown is going to weigh on the equity markets.

- James


Portfolio

Portfolio Update

by James Brown

Click here to email James Brown


Current Portfolio


Portfolio Comments:

The stock market's big oversold bounce off its June lows appears to be reversing. This could be a new lower high for the market's major indices. With a global slowdown on the way the outlook for equities could be stormy.

ADM and LTD were stopped out this past week.

We added FDO, MRK, and TJX from the watch list.

I have updated stop losses on: EBAY.

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

Market Trading on Technicals

by James Brown

Click here to email James Brown

Editor's Note:

The S&P 500 index produced a nearly perfect 61.8% Fibonacci retracement of the April-May correction. The rally reversed at this resistance area, which coincided with price resistance near the 1360 level and the 100-dma. Now the index is flashing a new lower high. Will the correction lower resume? Will the S&P 500 retest its June lows? What new catalyst can drive stocks higher in the face of a global economic slowdown and a weak Europe?

The market's don't have a lot of answers right now. I remain cautious on launching new positions. Although we did see three of our watch list candidates graduate to our active play list this past week. I am not suggesting any new trades tonight but we did add two new candidates to the watch list.

In addition, this is a list of stocks currently on my radar screen as potential candidates to keep an eye on:

DISCA, BRK.B, S, UNP, TSO, MWW, TGT, ANF


Play Updates

New Candidates Make the Jump

by James Brown

Click here to email James Brown

Editor's Note:

Overall stocks haven't made that much progress. Thursday's decline remains a potential reversal signal for many stocks. There are exceptions like MRK.

We did see ADM and LTD get stopped out.

FDO, MRK, and TJX all graduated from the watch list to active trades.


Closed Plays


ADM and LTD were stopped out.


Play Updates


Allergan Inc. - AGN - close: 91.59

Comments:
06/23/12 update: AGN's bullish breakout past resistance near $92 and its 50-dma has reversed. I am concerned that the stock may have produced a new lower high. The longer-term trend is still higher but AGN looks vulnerable. If the market continues to sink we could see AGN drop toward support near $88 and its 200-dma. I am not suggesting new positions at this time.

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 $ 2.40/ 2.80

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: 31.44

Comments:
06/23/12 update: AIG is only down four cents for the week. That's not bad. However, Thursday's session does look like a bearish reversal pattern. I would expect a pullback to $30.00 again. If the situation in Europe continues to unravel the financials will likely suffer the most. I am not suggesting new positions at this time.

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 $ 4.40/ 4.60

- or -

May 18, 2012 - entry price on AIG @ 28.25, option @ 4.20
symbol: AIG1418A35 2014 JAN $35 call - current bid/ask $ 4.95/ 5.25

06/16/12 new stop loss @ 26.95
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: 26.95
Play Entered on: 05/18/12
Originally listed on the Watch List: 04/07/12


Apache Corp. - APA - close: 82.25

Comments:
06/23/12 update: It was not a good week for oil stocks. Crude oil continued to plunge and constant worries over a global slowdown reversed the prior bounce in the energy sector. APA fell four days in a row only to bounce on Friday.

We remain long-term bullish on APA but right now the sector looks vulnerable. I'm not suggesting new positions at this time. A new close over $85.00 or the 50-dma might change my mind.

- Suggested Positions -
Jun 18, 2012 - entry price on APA @ 87.10, option @ 3.45
symbol: APA1319A100 2013 JAN $100 call - current bid/ask $ 1.94/ 2.05

- or -

Jun 18, 2012 - entry price on APA @ 87.10, option @ 6.43
symbol: APA1418A100 2014 JAN $110 call - current bid/ask $ 4.45/ 4.75

Current Target: $109.00
Current Stop loss: 79.75
Play Entered on: 06/18/12
Originally listed in the New Plays 06/16/12


Bank of America - BAC - close: 7.94

Comments:
06/23/12 update: Believe it or not BAC actually posted a gain for the week. It was only four cents but that's still a surprise when Moody's downgraded 10 major banks and BAC was one of them. It is worth noting that the current bounce attempt is struggling and BAC has technical resistance at the 100-dma and 300-dma directly overhead. On a short-term basis the stock looks poised to dip back toward the $7.50 area again.

I am not suggesting new positions at this time but I would start to turn more bullish again if BAC could close over $8.25.

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 $ 0.40/ 0.41
(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/ 0.41
(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: 35.36

Comments:
06/23/12 update: BMY displayed relative strength this week. Most of that strength was in Friday's +1.6% surge. The stock is now testing resistance at its late December 2011 highs and early January 2012 high. Odds are good BMY will see a short-term pullback but the trend is up.

Our exit target is $37.50. More aggressive traders could aim for $40 instead. 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 $ 1.54/ 1.60

06/23/12 there was no follow through on the bearish reversal. BMY has rallied toward its 2011/2012 highs.
06/16/12 BMY has created a bearish reversal under resistance
06/09/12 new stop loss @ 31.90
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).
(I have deleted previous 2011 comments on BMY, you can see them in older updates)

Current Target: $37.50
Current Stop loss: 31.90
Play Entered on: 09/19/11
Originally listed on the Watch List: 09/10/11


CH Robinson Worldwide - CHRW - close: 57.37

This is a bearish PUT option trade.

Comments:
06/23/12 update: Shares of CHRW failed right where they should have - at resistance near the $60.00 level and under its 50-dma. Readers can use this bearish reversal as a new entry point to buy puts. More conservative traders might want to consider adjust their stop loss closer to the $60.00 mark.

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 $ 3.40/ 3.60

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: 99.90

Comments:
06/23/12 update: The rally in CL has stalled (some might say reversed) at the prior highs near $102. Is the stock forming a bearish double top pattern? It's possible. That's why more conservative traders will want to go ahead and take profits now.

I am not suggesting new positions at this time.

- Suggested Positions -
MAR 16, 2012 - entry price on CL @ 95.48, option @ 2.92
symbol: CL1319A100 2013 JAN $100 call - current bid/ask $4.45/4.65

- or -

MAR 16, 2012 - entry price on CL @ 95.48, option @ 5.57
symbol: CL1418A100 2014 JAN $100 call - current bid/ask $ 8.95/ 9.30

06/16/12 readers may want to take profits now. options @ +98%, +78%
06/09/12 new stop loss @ 92.45
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: 92.45
Play Entered on: 03/16/12
Originally listed on the Watch List: 03/10/12


eBay Inc. - EBAY - close: 42.80

Comments:
06/23/12 update: It turned out to be a bullish week for EBAY. The stock broke out past resistance near $42.00. It rallied toward $44.00 and then reversed with the market weakness to retest the $42 area as new support again.

Short-term traders could use the bounce on Friday as a new entry point, although I'd want to see some confirmation first. Our long-term LEAPS trade has a target at $46.50. I am raising our stop loss up to $37.75.

Earlier Comments:
We have previously closed our 2013 position. We still have the 2014 calls.

- 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 $ 9.45/ 9.60

06/23/12 new stop loss @ 37.75
06/09/12 adjusted target to $46.50
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: $46.50
Current Stop loss: 37.75
Play Entered on: 03/12/12
Originally listed in the New Plays 03/10/12


Family Dollar Stores - FDO - close: 70.43

Comments:
06/23/12 update: FDO was a new watch list candidate and shares hit our buy-the-dip trigger at $70.25 on June 21st. We were expecting FDO to fill the gap and retest prior resistance at $70.00 as new support. I am a bit concerned with the broader market and its affects on FDO. Readers may want to wait for FDO to close above $71.25 before launching new positions. We have a stop loss at $65.75. More conservative traders could adjust their stops higher toward the 50-dma (near 67.90) instead.

Note: FDO is due to report earnings on June 28th. More conservative traders will want to wait and see how the market reacts to FDO's earnings before initiating positions. FYI: FDO's point and figure chart is bullish with a $102 target. (FDO does have 2014 options available but the spreads are way too wide)

- Suggested Position -
Jun 21, 2012 - entry price on FDO @ 70.25, option @ 3.00*
symbol: FDO1319A80 2013 JAN $80 call - current bid/ask $ 2.25/ 3.00

06/21/12 triggered @ 70.25
*entry price on the 2013 $80 call at $3.00 is an estimate since the option did not trade at the time our trade was triggered.

Chart of FDO:

Current Target: $84.50
Current Stop loss: 65.75
Play Entered on: 06/21/12

Originally listed on the Watch List: 06/16/12


Intel Corp. - INTC - close: 26.94

Comments:
06/23/12 update: INTC's oversold bounce in June has reversed with Thursday's plunge back under the 50 and 100-dma. INTC looks weak and it may have just formed a new lower high. If the market continues to sink we can look for INTC to retreat toward $26 and its 200-dma (near 25.50) again. 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 $ 0.67/ 0.70

- or -

Feb 21, 2011 - entry price on INTC @ 27.34, option @ 2.11
symbol: INTC1418a30 2014 JAN $30 call - current bid/ask $ 1.90/ 1.92

06/23/12 looks like the oversold bounce may have reversed
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: 74.94

Comments:
06/23/12 update: Investors are starting to worry that Q2 earnings results may not be so hot. Big multi-national companies could suffer due to the rising dollar's impact on their currency exchange.

Recent comments out of KO's main rival PepsiCo were not that encouraging for the industry. I am cautious on KO at this time. Further market weakness could push KO back towards the $72 area.

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 $ 5.20/ 5.35

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: 42.07

Comments:
06/23/12 update: Drug stocks, as a sector, have seen strong gains the last three weeks. LLY managed to tag new multi-year highs a few days ago. LLY did pare those gains so it's only up eight cents on the week. I don't see any changes from my prior comments. More conservative trades might want to raise their stops closer to $40. I am not suggesting new positions at this time.

- Suggested (SMALL) Positions -
Jan 05, 2012 - entry price on LLY @ 39.50, option @ 1.19
symbol: LLY1319A45 2013 JAN $45 call - current bid/ask $ 1.43/ 1.50

- or -

Jan 05, 2012 - entry price on LLY @ 39.50, option @ 2.75
symbol: LLY1418A45 2014 JAN $45 call - current bid/ask $ 2.16/ 2.32

06/23/12 LLY is hitting new multi-year highs.
06/09/12 new stop loss @ 38.75
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: 38.75
Play Entered on: 01/05/12

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


Merck & Co - MRK - close: 40.18

Comments:
06/23/12 update: MRK has seen a strong three-week rally. Shares were challenging four-month old resistance near $39.50 on Thursday. Friday the stock broke out past the $40.00 mark and closed above this key psychological level. Our plan was to buy calls if MRK closed above $40.00. Thus we'll open positions on Monday morning. More conservative traders may want to wait for a dip back to MRK's simple 10-dma before initiating positions. FYI: The Point & Figure chart has a long-term target of $60.00.

- Suggested Positions -
Jun 25, 2012 - entry price on MRK @ --.--, option @ -.--
symbol: MRK1418A40 2014 JAN $40 call - current bid/ask $ 3.30/ 3.40

06/22/12 MRK met our entry point requirement with a close over $40.00. Launch positions on Monday morning (conservative traders can wait for a dip to the 10-dma instead).

Chart of MRK:

Current Target: $47.50
Current Stop loss: 37.75
Play Entered on: 06/25/12

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


Microsoft - MSFT - close: 30.70

Comments:
06/23/12 update: MSFT's big announcement last week was a new tablet PC designed to compete with Apple's iPad line. I have to admit it looks pretty cool but we'll have to see how the market accepts it. Thus far the iPad has crushed its competitors but MSFT is going out on a limb and getting into the hardware market by making their own tablet.

Shares of MSFT surged on Tuesday but the rally was stopped cold near the $31 level all week long. The stock is in a new short-term range in the $30-31 zone. At this point I am cautious on the broader market so readers may want to wait for a close over $31.25 before initiating new positions.

Cautious traders might want to raise their stop closer to $28.

- Suggested Positions -
Jun 01, 2012 - entry price on MSFT @ 28.50, option @ 1.69
symbol:MSFT1319A30 2013 JAN $30 call - current bid/ask $ 2.46/ 2.50

- or -

Jun 01, 2012 - entry price on MSFT @ 28.50, option @ 3.05
symbol:MSFT1418A30 2014 JAN $30 call - current bid/ask $ 4.00/ 4.15

06/18/12 MSFT announces the "surface" line of tablets
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

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: 47.88

Comments:
06/23/12 update: MSI remains stuck in a trading range. If you look hard enough you can it's narrowing with lower highs and higher lows. These consolidations don't last that long and MSI should see a breakout one way or the other within the next week or two. Unfortunately, given the market's recent action the breakout might be down.

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 $ 0.96/ 1.05

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


Reynolds American Inc. - RAI - close: 43.33

Comments:
06/23/12 update: The rally off RAI's June lows continues. The stock hit new all-time highs this past week above $43.50. Although I want to point out that the rally seems to be losing steam. I would expect a pullback soon. Look for support in the $42.50-42.00 zone. Investors can use a dip near $42 as a new entry point. If you do launch positions I'd probably use the 2014 calls.

- Suggested Positions -
Nov 18, 2011 - entry price on RAI @ 40.02, option @ 2.00
symbol: RAI1319A42.5 2013 JAN $42.50 call - current bid/ask $ 2.25/ 2.40

06/16/12 RAI has broken out to new all-time highs. It could be time to look for new bullish positions. Consider the 2014 calls.
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


The TJX Companies - TJX - close: 43.20

Comments:
06/23/12 update: TJX is a watch list candidate that made the leap to our active trade list. The plan was to wait for TJX to close over $43.25 and then buy calls the next day. Well TJX closed at $43.48 on June 19th. Our trade opened on June 20th at $43.62. I would still consider new positions now but traders have the luxury of waiting. You could wait for a dip closer to $42.00 or the 50-dma and buy calls there or you could wait for a close over $44.00 and a new high instead.

- Suggested Positions -
Jun 20, 2012 - entry price on TJX @ 43.62, option @ 2.53
symbol: TJX1319A45 2013 JAN $45 call - current bid/ask $ 2.35/ 2.50

- or -

Jun 20, 2012 - entry price on TJX @ 43.62, option @ 5.10
symbol: TJX1418A45 2014 JAN $45 call - current bid/ask $ 4.70/ 5.00

06/20/12 trade opens
06/19/12 TJX closed above our entry requirement (above $43.25)

Chart of TJX:

Current Target: $49.75
Current Stop loss: 39.75
Play Entered on: 06/20/12

Originally listed on the Watch List: 06/16/12


UnitedHealth Group - UNH - close: 59.07

Comments:
06/23/12 update: This could be a volatile week for the healthcare stocks. It's the final week of June. The U.S. Supreme court should release their decision on Obamacare this Monday or Thursday. There has been speculation that the hospital stocks could see a 20% move either way. I haven't see any comments on the healthcare providers like UNH. Since UNH did hit new multi-year highs a few days ago we can surmise that investors are expecting the decision to be positive for healthcare providers. There is still a chance that the sector could see a "sell the news" move initially.

I am not suggesting new positions at this time.

- Suggested Positions -
Feb 15, 2012 - entry price on UNH @ 54.53, option @ 3.25
symbol: UNH1319A60 2013 JAN $60 call - current bid/ask $ 4.25/ 4.35

- or -

Feb 15, 2012 - entry price on UNH @ 54.53, option @ 5.00
symbol: UNH1418A60 2014 JAN $60 call - current bid/ask $ 7.65/ 8.05

06/09/12 Investors might want to consider buying short-term July puts to protect yourself from a negative reaction to the upcoming Court decision.
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: 43.95

Comments:
06/23/12 update: VZ has been consolidating sideways. Traders did buy the dip (twice) at its rising 10-dma. Short-term VZ looks poised to rally higher. Our exit target is $45.00. More aggressive trades could aim higher. 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 $ 4.30/ 4.40

- or -

Dec 23, 2011 - entry price on VZ @ 39.42, option @ 2.87
symbol: VZ1418A40 2014 JAN $40 call - current bid/ask $ 5.25/ 5.40

06/16/12 readers may want to take profits now!
2013 jan $40 call is +93%, 2014 jan $40 call is +77%
06/09/12 new stop loss @ 39.75
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: 39.75
Play Entered on: 12/23/11

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


CLOSED Plays


Archer-Daniels-Midland Company - ADM - close: 29.28

Comments:
06/23/12 update: It was not a good week for ADM. Shares fell five days in a row and plunged through potential support at a number of moving averages including the 300-dma and 200-dma. The stock also broke down under the $30.00 mark, which should have offered some round-number support.

Our trade was stopped out on June 20th at $29.45. The option bid was $0.47.

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 - exit $0.47 (-72.9%)

06/20/12 stopped out
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.

Chart of ADM:

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


Limited Brands, Inc. - LTD - close: 41.72

Comments:
06/23/12 update: LTD spent three weeks trying to build support near $42 and its simple 300-dma. The rally early this last week reversed at technical resistance at the 200-dma and the market wide plunge on Thursday pushed LTD back toward support. The sell-off continued on Friday and LTD broke down to new relative lows and hit our stop loss at $41.50.

- Suggested Positions -
May 18, 2012 - entry price on LTD @ 45.50, option @ 5.10
symbol: LTD1319A45 2013 JAN $45 call - exit $2.10 (-58.8%)

06/22/12 stopped out at $41.50
06/09/12 LTD did not participate in the market's big bounce. readers may want to exit early now
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

Chart of LTD:

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



Watch

Drug Makers & Oil Refining

by James Brown

Click here to email James Brown

Editor's Note:

FDO, TJX, and MRK have all graduated to the active play list. I removed HNZ tonight. Plus, I've adjusted a few entry points.



New Watch List Entries

ABT - Abbott Labs

VLO - Valero Energy


Active Watch List Candidates

AMRN - Amarin Corp.

DFS - Discover Financial

DIS - Walt Disney Co.

JPM - JPMorgan Chase

PEP - Pepsico Inc.

PFE - Pfizer Inc.

QCOM - QUALCOMM Inc.

SBUX - Starbucks Corp.

USB - U.S. Bancorp

WMT - Wal-Mart Stores


Dropped Watch List Entries

FDO, MRK, & TJX graduated to the play list.
HNZ was removed.



New Watch List Candidates:


Abbott Labs - ABT - close: 62.32

Company Info

ABT is a major drug maker. They also produce a number of medical devices for your eyes. The company's sales growth has been outperforming its peers. The stock has been showing relative strength. ABT is currently trading near its record all-time highs. Currently the Point & Figure chart is suggesting a $94 target.

Before we continue I want to warn you that trading the drug makers or biotech stocks has an industry-specific danger. You never know when an FDA approval might get denied or delayed. Or some clinical trial data might disappoint. Headlines like these can send a stock gapping down. On the other hand positive news could send it soaring.

I am suggesting we wait for ABT to close over $63.50. We'll buy calls the next day with a stop loss at $59.40. Our long-term target is $74.00 (over the next 12-18 mos).

Breakout trigger: Wait for a close over $63.50 (stop 59.40)

BUY the 2013 Jan $65 call (ABT1319A65) current ask $1.38

- or -

buy the 2014 Jan $65 call (ABT1418A65) current ask $3.70

Chart of ABT:

Originally listed on the Watch List: 06/23/12


Valero Energy - VLO - close: 23.50

Company Info

The oil refining stocks appear to have bottomed. Shares of VLO have recently broken out above resistance near $23 and its 200-dma. Yet there is still overhead resistance.

I am suggesting we wait for VLO to close over $24.25 and then we'll buy calls the next day with a stop loss at $22.25. Our long-term target is $29.75.

Breakout trigger: Wait for a close over $24.25 (stop 22.25)

BUY the 2013 Jan $25 call (VLO1319A25) current ask $2.10

- or -

BUY the 2014 Jan $30 call (VLO1418A30) current ask $2.44

Chart of VLO:

Originally listed on the Watch List: 06/23/12


Active Watch List Candidates:



Amarin Corp. - AMRN - close: 12.97

Comments:
06/23/12 update: AMRN has continued to drift higher. The stock is actually flirting with a bullish breakout past resistance near $13.00. Yet it can't quite seem to close over the $13.00 level, which has been our entry point requirement. So our trade isn't open yet.

I am adjusting our entry point strategy. We will wait for AMRN to close over $13.25 and then buy calls the next day.

Earlier Comments:
There has been some speculation that AMRN is a takeover target, which has fueled some of the sharp rallies higher. Currently the Point & Figure chart is bullish with a $15.00 target.

Our long-term target is $17.50.

FYI: We want to keep our position size small. AMRN can be a volatile stock. There are 2014 options available but the spreads are too wide.

Breakout trigger: Wait for a close over $13.25, stop @ 11.40

BUY the 2013 Jan $15 call (AMRN1319A15)

! Small positions !

06/23/12 adjust entry. wait for AMRN to close over $13.25 (instead of $13.00)

Originally listed on the Watch List: 06/09/12


Discover Financial - DFS - close: 33.61

Comments:
06/23/12 update: DFS has bee holding up reasonably well. Shares are still trading near their all-time (2012) highs. I will point out that Thursday's session has created a bearish reversal pattern and Friday's move has not negated that potential reversal.

We have been waiting for DFS to correct lower toward $28.00. That's unlikely to happen any time soon. However, there is still a good chance the financial sector corrects. I am proposing two different entry point strategies.

Our first strategy will be a buy-the-dip strategy to buy calls at $29.00 with a stop loss at $26.40. If triggered at $29.00 we'll use the following options:

buy the 2013 Jan $30 call (DFS1319A30)
- or -
buy the 2014 Jan $35 call (DFS1418A35)

However, we will also list a breakout entry strategy. DFS' record high is $34.75. If DFS can close over $35.00 then we'll buy calls the next day with a stop loss at $31.75. If triggered on this higher entry point then we'll use the following options:

buy the 2013 Jan $37 call (DFS1319a37)
- or -
buy the 2014 Jan $40 call (DFS1418a40)

06/23/12 adjusted entry point strategy to two different entries
06/16/12 DFS is scheduled to report earnings on June 19th.

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


Walt Disney Co. - DIS - close: $47.47

Comments:
06/23/12 update: DIS managed a gain for the week and shares are still trading near their midweek highs. We don't want to chase it.

I am suggesting we buy call LEAPS on a dip at $45.00 with a stop loss at $41.75. Our long-term target is $54.50.

Buy-the-Dip trigger: $45.00 (stop 41.75)

BUY the 2014 Jan $50 call (DIS1418A50)

Originally listed on the Watch List: 06/16/12


H.J. Heinz Co. - HNZ - close: 53.56

Comments:
06/23/12 update: The last few days have been pretty choppy for HNZ. Actually if you look at the last couple of months HNZ has been acting rather volatile. We've been waiting for a close at new highs above $55.50. However, I am dropping HNZ as a candidate.

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

Trade did not open.

06/23/12 removed from the watch list.

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


JPMorgan Chase - JPM - close: 35.99

Comments:
06/23/12 update: JPM has extended its oversold bounce to three weeks in a row. Even news that Moody's had downgraded JPM's credit rating failed to end the rally. Although technically Thursday's session still looks like a potential bearish reversal pattern.

The financials are still at risk for a deeper correction if Europe continues to unravel. If we see JPM produce a new higher low then we'll re-evaluate our entry strategy. Until then we are waiting for a plunge toward $30.00.

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 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


Pepsico, Inc. - PEP - close: 68.70

Comments:
06/23/12 update: This past week PEP warned that unfavorable exchange rates (due to the rising dollar) would negatively impact their earnings results. Shares of PEP held up pretty well in spite of the news although short-term the stock looks poised to contract lower. Our plan is unchanged.

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: 22.73

Comments:
06/23/12 update: Drug stocks as a sector have been doing relatively well. The rally in PFE stalled last week. Shares are churning sideways in a narrow range. I don't see changes from my prior comments.

I am suggesting we wait for this stock to close over $23.20 (and 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. (We'll exit the 2013 calls before shares hit our target)

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

BUY the 2014 Jan $25 call (PFE1418A25)

06/23/12 removed the 2013 call. We'll only play the 2014s
04/28/12 do not launch positions prior to the earnings report on May 1st.

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


QUALCOMM Inc. - QCOM - close: 55.64

Comments:
06/23/12 update: Recent stock action in QCOM doesn't look so healthy. The oversold bounce from a week ago has failed. Now QCOM is sitting on support near the $55.00 level. If we see QCOM close under $55.00 we will drop it as a candidate.

I am adjusting our entry to wait for a close over $60.00 instead of $62.00. The plan is to buy calls the next day with a stop loss at $57.45. Our long-term target is $74.00. We will probably exit the 2013 calls prior to hitting our final target.

Breakout trigger: Wait for close over $60.00, stop 57.45

BUY the 2013 Jan $70 call (QCOM1319A70)

- or -

BUY the 2014 Jan $75 call (QCOM1418A75)

06/23/12 adjust entry requirement to a close over $60.00 (instead of $62.00), if QCOM closes under $55.00 we'll drop it as a candidate.

Originally listed on the Watch List: 06/09/12


Starbucks Corp. - SBUX - close: 54.64

Comments:
06/23/12 update: The mid June rally in SBUX has reversed at resistance near $56.00. There is still a good chance that SBUX will correct toward $50.00. Readers may want to wait for a dip to $49.00 or its simple 200-dma as their entry point instead.

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.

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: 31.72

Comments:
06/23/12 update: The rally in USB has stalled at resistance near $32.00. Thursday's session has created a bearish reversal pattern but it needs to see confirmation. I am adjusting our strategy to buy a dip at $29.00 instead of $28.00. We'll raise the stop loss to $26.40. Our long-term target is $34.00. I prefer the 2014 calls but we'll list the 2013s as well.

Buy-the-Dip trigger: $29.00 (stop loss 26.40)

BUY the 2013 Jan $30 call (USB1319A30)

- or -

BUY the 2014 Jan $30 call (USB1418A30)

06/23/12 adjust entry trigger to $29.00, stop to 26.40
06/02/12 adjust entry trigger to $28.00

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


Wal-Mart Stores - WMT - close: 67.30

Comments:
06/23/12 update: It looks like the rally in WMT is finally losing steam. The Thursday-Friday move does look like a short-term bearish reversal. I would expect the correction to begin soon. I am adjusting our buy-the-dip trigger to $63.00.

Buy-the-Dip trigger: $63.00 (stop loss 57.90)

BUY the 2013 Jan $65 call (WMT1319A65)

- or -

BUY the 2014 Jan $70 call (WMT1418A70)

06/23/12 adjust trigger to $63.00, from $62.00

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