Option Investor
Newsletter

Daily Newsletter, Sunday, 7/8/2012

Table of Contents

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

Leaps Trader Commentary

Markets Pullback, EU Troubles Remain

by James Brown

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New central bank rate cuts overseas could not overpower another round of disappointing economic data. The low-volume holiday week gains in the U.S. market were erased with the S&P 500 index plunging on Friday in reaction to a dismal jobs number. Currencies were making big moves and a rise in the U.S. dollar was taking a toll on commodity prices. Meanwhile traders suffered through another round of earnings warnings as we approach the Q2 earnings season. For the week the S&P 500 index lost -0.5%. The NASDAQ is down -0.5%, the Dow Industrials are down -0.8%, yet the Russell 2000 index managed a +1.0% gain. One of the worst performers for the week was the SOX semiconductor index with a -2.4% decline.

The U.S. markets closed early last Tuesday and were closed all day on Wednesday for the fourth of July holiday. This led to a serious lack of volume that probably exacerbated both the move up and the move down. Some of the biggest headlines of the week were overseas. ECB President Draghi lowered his outlook for EU growth and to help stimulate their economy the European Central Bank cut their interest rate by 0.25% from 1.0% to 0.75%. This is a new all-time record low rate for the ECB. The ECB's peer, the Bank of England, left rates unchanged but raised their QE asset-buying program by $78 billion. One of the biggest surprises of the week was a rate cut by China's central bank, which lowered rates to 6.0%. The New York Times speculated on some global central bank cooperation since the announcement of these moves all came out within an hour of each other. Draghi denied any teamwork with his peers.

While we're on the subject of Europe the bond market is still flashing the "no confidence" signal. The big EU summit was only a week ago but yields on Spanish bonds have rallied again. Remember, the key level to watch is a 7% yield on 10-year bonds, which most economists believe is an unsustainable level for any country to service their debt. By Friday's closing bell the 10-year Spanish bond had a yield right at the 7.0% mark. Italy's bond yields are also in the rise with the Italian 10-year bond yield near 6.0%. In contrast money is surging into the safety of German bonds. The German 10-year bond yield fell to a new low under 1.5%. The German 2-year bond yield actually went negative for a moment on Friday with a minus 0.001 percent yield.

It was the first week of July so there were a number of economic reports. The U.S. ISM manufacturing index fell from 53.5 in May to 49.7 in June. Readings under 50.0 indicate contraction and suggest a potential recession. This was the first time the ISM closed under 50 since July 2009. The ISM services index fell from May's 53.7 to 52.1, which is the lowest reading since January 2010. Thursday brought the June same-store sales numbers from the few retailers still reporting (about 20) and most retailers missed analysts estimates.

It wasn't all bad. Gas prices have been falling the last several weeks, which may have helped auto sales. June vehicle sales hit an annual pace of 14.05 million, which was better than the 13.9 million estimate. Construction spending rallied in May and Factory Orders came in better than expected with a +0.7% gain. Consumers may not have been spending money in the stores but they were spending it in restaurants with the National Restaurant Association saying sales were rising to levels not seen since 2006.

On the job front the weekly initial jobless claims came in at 374,000. This was the first time initial claims were under 380K since mid May. The ADP employment report for June showed +176,000 new private payroll jobs, which is must better than the +133,000 estimate. This ADP news was such a surprise that many analysts were raising their forecast for the Friday morning nonfarm payroll report. Unfortunately that was a mistake. The biggest economic headline of the week was the June jobs number. Prior to Thursday the consensus estimate was for +90,000 jobs. After Thursday's ADP number many analysts were raising their estimates into the +125K to +150K range. Unfortunately the nonfarm payroll report came in at +80,000 jobs for June. May's numbers were revised up but April's were revised down and the net revisions was a loss of -1,000 jobs. The jobs data is very disappointing for everyone. It's not strong enough to suggest the economy is improving but it's not weak enough to spur the Federal Reserve into action.

Major Indices:

Last week the S&P 500 produced a bullish breakout past resistance at the 1360 level. Unfortunately it didn't last. The Thursday-Friday pullback dragged the S&P 500 back below 1360 and its 100-dma. You can see on the intraday chart that the index bounced at its Fibonacci retracement of the recent rally.

At the moment the S&P 500 has an intermediate trend of higher lows and higher highs (since early June) but this is within the larger bearish trend of lower highs and lower lows (since April). Yet you could argue the longer-term trend is still one of higher highs and higher lows from its 2011 low.

On a short-term basis I would expect the 1340 level to act as support since this area is bolstered by the simple 50-dma. The 1360 and 1380 levels are likely resistance. If the 1340 level fails then the S&P 500 might see another drop toward its 200-dma near 1300.

Intraday chart of the S&P 500 index:

Daily chart of the S&P 500 index:

The NASDAQ composite produced a similar pullback. Friday's market sell-off pushed the tech-heavy NASDAQ to its 38.2% Fib retracement of its most recent rally. Plus, you can see on the daily chart that the NASDAQ has yet to conquer the 61.8% retracement level on the rebound higher. Short-term levels of resistance remain 2950, 2975, and 3000. Potential support is at 2900 and 2880.

Intraday chart of the NASDAQ Composite index:

Daily chart of the NASDAQ Composite index:

The small cap Russell 2000 index has seen the strongest move. That fact is rather surprising. Normally small caps are seen as more risky than their big cap rivals. Given the trend of weak economic data and trouble in Europe why would the small caps be outperforming? We might be able to explain away last Monday and Tuesday as follow up short covering that was exaggerated by the low volume week. The index saw its rally reverse at resistance near 820. The 800 level might be short-term support but I would focus on the 780 level instead. If this rally somehow continues then 820 and 840ish would be overhead resistance.

Daily chart of the Russell 2000 index

After last week's parade of economic reports the flow of data slows down this week. The main economic events will be the PPI and University of Michigan sentiment numbers, which both come out on Friday. The FOMC minutes on Wednesday could be a market mover if there is any hint of new QE plans by the Fed. The real market moving news will be earnings. Dow-component Alcoa (AA) launches Q2 earnings season on Monday but the real bellwether to watch is J.P.Morgan (JPM), who reports on Friday. Earnings don't really pick up speed until the following week but JPM will have a big impact on the financial sector.

Economic and Event Calendar

- Monday, July 09 -
Alcoa (AA) begins Q2 earnings season

- Tuesday, July 10 -
(nothing significant)

- Wednesday, July 11 -
Wholesale inventory data
FOMC Minutes from the last meeting

- Thursday, July 12 -
Weekly Initial Jobless Claims
Import/Export prices for June

- Friday, July 13 -
PPI for June
University of Michigan (consumer) Sentiment
J.P.Morgan(JPM) reports earnings

The Week Ahead:

Looking ahead the market is facing a number of obstacles. The situation in Europe remains troubled. Last week's euphoria over the new plan to save the Eurozone has already faded. German chancellor Merkel is facing a lot of opposition back home after caving into peer pressure at the last EU summit. Meanwhile Italian and Spanish bond yields are climbing and they are a clear sign the bond markets do not have any faith that the EU members can come together and save the union. The 17 nations that use the euro currency will need to ratify the new changes and that could take months. Finland is already considering the cost of leaving the Eurozone instead of having to pay up to save their less fiscally responsible neighbors. Meanwhile the IMF has already warned that they will likely have to downgrade their global growth forecasts because manufacturing data in U.S., Europe, and China is all slowing down. Look for that IMF announcement in the next two weeks.

There does seem to be some growing speculation that the Federal Reserve might offer some sort of new stimulus at the upcoming July 31st-August 1st meeting. What form that stimulus might take is unclear. That's why analysts will be analyzing the FOMC minutes this Wednesday. Then again this might just be another big disappointment for the market.

Assuming that Iran doesn't do anything stupid and actually try and close the Straits of Hormuz this month then the market's focus will be on the Q2 earnings season. I warned readers last week that we could see more earnings warnings and we have. Wall Street continues to lower their estimates and it's possible that they might lower them too far, which would create the opportunity for an upside surprise. However, the trick will be corporate guidance. America is facing a fiscal cliff in January. No one knows who is going to win the presidential election in November. All of this uncertainty has businesses on the sidelines. That means they're less likely to hire people. They are less likely to spend money until some of this uncertainty goes away. It also means that corporate management might be too cautious with their guidance and that could tank the stock market.

I suspect there is a good chance we'll see the market retest its June lows over the next six to nine weeks. I hope I'm wrong but I would be cautious when it comes to new bullish trades.

- James


Portfolio

Portfolio Update

by James Brown

Click here to email James Brown


Current Portfolio


Portfolio Comments:

A disappointing nonfarm payrolls report helped spark some profit taking during the low-volume week that held the Fourth of July holiday. Many market participants were out of town. Investor focus will soon turn toward Q2 earnings season.

Our VZ trade hit our exit target this past week.

We've added three new trades from the watch list: DFS, V, and VLO.

I have updated stop losses on: RAI

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 Remains Vulnerable

by James Brown

Click here to email James Brown

Editor's Note:

I am concerned about the market and how vulnerable it might be to negative headlines. The euphoria from the latest EU summit has already worn off. The labor market in the U.S. continues to weaken. Economic data from around the globe continues to slow down. The situation in Europe is far from solved. The market's focus is about to turn to the Q2 earnings season.

There is a very good chance that corporate guidance will be too weak and too conservative. If companies start lowering guidance it's going to push stock prices lower. Thus I would not be in a rush to launch new long-term bullish positions if we might get a better entry point three or four weeks from now. If you forced me to predict the future then I would look for the market to drop toward its June lows sometime over the next four to eight weeks. The wildcard would be the FOMC meeting at the end of July. If the Fed surprises with some new form of stimulus then stocks could rally.

This past week we did have three watch list candidates graduate to our active trade list. I just added two new watch list candidates tonight.

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

GS, MS, DLTR, TSO, OXY, CCJ, MDR, WFM, PHM, DHI, CIEN, SCHW,


Play Updates

VZ Hits Our Exit Target

by James Brown

Click here to email James Brown


Closed Plays


VZ hit our exit target.


Play Updates


Abbott Labs - ABT - close: 64.75

Comments:
07/07/12 update: ABT spent the week churning sideways above the $64.00 level. I don't see many changes from my prior comments. Patient traders may want to wait for a dip back toward $63.00 since broken resistance tends to become new support.

Earlier Comments:
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.

- Suggested Positions -
JUL 02, 2012 - entry price on ABT @ 64.22, option @ 1.91
symbol: ABT1319A65 2013 JAN $65 call - current bid/ask $ 2.06/ 2.12

- or -

JUL 02, 2012 - entry price on ABT @ 64.22, option @ 4.28
symbol: ABT1418A65 2014 JAN $65 call - current bid/ask $ 3.90/ 4.35

07/02/12 ABT opened at $64.22
06/29/12 ABT closed @ 64.47. Plan was to wait for a close over $63.50 and buy calls the next day. We will open positions on Monday, July 2nd.

Current Target:$74.00
Current Stop loss: 59.40
Play Entered on: 07/02/12
Originally listed on the Watch List: 06/23/12


Allergan Inc. - AGN - close: 93.70

Comments:
07/07/12 update: AGN saw a big move higher on Monday and Tuesday last week but the stock has already started to correct lower. The breakout over resistance near $94.00 didn't hold. If the market continues to dip we can look for AGN to retest the $92-90 zone again. 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 $ 3.00/ 3.30

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: 31.57

Comments:
07/07/12 update: AIG didn't make much progress last week. Shares churned sideways on either side of $32.00. The stock never closed over $32.50. Investors could use a close over $32.50 as a new bullish entry point but keep positions small. I still think that financials could see a volatile summer.

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 $ 4.20/ 4.35

- or -

May 18, 2012 - entry price on AIG @ 28.25, option @ 4.20
symbol: AIG1418A35 2014 JAN $35 call - current bid/ask $ 4.70/ 5.00

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


Amarin Corp. - AMRN - close: 15.12

Comments:
07/07/12 update: AMRN managed to tag a new 52-week high on Tuesday and Thursday before pulling back on Friday. Shares do look a little bit overbought here. I wouldn't be surprised to see another dip to the 10-dma or the $14.00 level. The stock might even "fill the gap" from late June and that would mean a dip to $13.50.

Readers could wait for a dip back toward the $13.50-13.00 zone as a bullish entry point to buy calls.

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.

- Suggested Positions - (small positions)
Jun 26, 2012 - entry price on AMRN @ 13.52, option @ 3.36
symbol:AMRN1319A15 2013 JAN $15 call - current bid/ask $ 4.30/ 4.40

06/26/12 trade opened: option @ 3.36
06/25/12 closed over our trigger (13.25) AMRN closed @ 13.39
06/23/12 adjust entry. wait for AMRN to close over $13.25 (instead of $13.00)

Current Target:$ 17.50
Current Stop loss: 11.40
Play Entered on: 06/26/12
Originally listed on the Watch List: 06/09/12


Apache Corp. - APA - close: 85.53

Comments:
07/07/12 update: Volatility in oil has been increasing in recent weeks. Big moves in the U.S. dollar and the drama with Iran are the main culprits. These swings in oil are having an impact on the energy sector stocks. APA surged to $90 early last week only to reverse and plunge back toward $85.00 by Friday. I warned readers last week that APA should have support at $85.00 and investors can use this pullback as a new bullish entry point.

- Suggested Positions -
Jun 18, 2012 - entry price on APA @ 87.10, option @ 3.45
symbol: APA1319A100 2013 JAN $100 call - current bid/ask $ 2.24/ 2.34

- or -

Jun 18, 2012 - entry price on APA @ 87.10, option @ 6.43
symbol: APA1418A100 2014 JAN $110 call - current bid/ask $ 4.65/ 5.00

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: 7.66

Comments:
07/07/12 update: It was not a good week for BAC. The stock's rally appears to have reversed at technical resistance near the simple 100-dma and the simple 300-dma. The current LIBOR scandal among the big banks doesn't breed any investor confidence. BAC looks poised to test support near $7.50 and its 50-dma soon. I am not suggesting new positions at this time. BAC is scheduled to report earnings around July 18th.

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: 34.61

Comments:
07/07/12 update: Ouch! After spiking higher on Monday, shares of BMY are down three days in a row. This $1.50 drop has beaten up our option values. I suspect the $34.00 level should offer some support but I'm not suggesting new positions at this time.

On Friday there were headlines that BMY (& LLY) won approval in the U.S. to widen the use of Erbitux to help treat colorectal cancer but I can't tell if this positive news came out during market hours or afterwards.

- Suggested Positions -
SEP 19, 2011 - entry price on BMY @ 30.53, option @ 1.20
symbol: BMY1319A35 2013 JAN $35 call - current bid/ask $ 1.30/ 1.36

06/30/12 adjusted exit target to $38.50
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: $38.50
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: 60.51

This is a bearish PUT option trade.

Comments:
07/07/12 update: It was a strong week for CHRW but I suspect that last Monday's breakout higher may have been short covering empowered by the lack of normal volume in the market. The breakout past the 50-dma and the $60.00 level is short-term bullish but the rally seems to be reversing at the $62.00 level. We have a stop loss at $62.25. I am not suggesting new positions at this time.

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 $ 2.35/ 2.55

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: 104.29

Comments:
07/07/12 update: CL managed to eke out a gain for the week but shares were essentially drifting sideways above the $104 level. More conservative traders may want to 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 $6.80/7.05

- or -

MAR 16, 2012 - entry price on CL @ 95.48, option @ 5.57
symbol: CL1418A100 2014 JAN $100 call - current bid/ask $10.80/11.45

06/30/12 new stop loss @ 95.75
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


Discover Financial - DFS - close: 35.31

Comments:
07/07/12 update: DFS is a watch list candidate that has made the jump to our active play list. The plan was to wait for shares to close above $35.00 and then buy calls the next day. DFS closed at $35.45 on July 3rd. Shares opened at $35.28 on the 5th. I would still consider new positions now or you could wait for a dip near $34.00 as an alternative entry point.

Currently our long-term target is $42.50.

- Suggested Positions -
JUL 05, 2012 - entry price on DFS @ 35.28, option @ 2.15
symbol: DFS1319A37 2013 JAN $37 call - current bid/ask $2.05/2.20

- or -

JUL 05, 2012 - entry price on DFS @ 35.28, option @ 3.40
symbol: DFS1418A40 2014 JAN $40 call - current bid/ask $3.10/3.40

07/05/12 trade opens with DFS at $35.28
07/03/12 DFS closes at $35.45, above our trigger @ 35.00
06/30/12 removed the buy-the-dip trigger.
06/23/12 adjusted entry point strategy to two different entries
06/16/12 DFS is scheduled to report earnings on June 19th.

Current Target: $ 42.50
Current Stop loss: 31.75
Play Entered on: 07/05/12
Originally listed on the Watch List: 06/02/12


eBay Inc. - EBAY - close: 40.41

Comments:
07/07/12 update: Hmm... EBAY is not cooperating. The mid June breakout higher is starting to look like a bull trap pattern. Shares just closed under technical support at its 50-dma. EBAY is also testing its multi-month trend of higher lows and a breakdown under $40.00 would definitely look bearish. The $38.00 level still looks like it should be support (our stop is at $37.75) but more conservative traders may want to raise their stop closer to $40.00 instead. I am not suggesting new positions at this time. The company should be poised to report earnings in a couple of weeks (near July 18th).

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 $ 7.60/ 7.75

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


Intel Corp. - INTC - close: 26.16

Comments:
07/07/12 update: The semiconductor sector was one of the market's worst performers last week. INTC isn't helping. The bounce has failed at the 50-dma. If you look hard enough INTC is forming a bearish head-and-shoulders pattern with the neckline at the simple 200-dma. A close under the late June low, based on this h&s pattern, would suggest a decline towards $23.50.

INTC is due to report earnings on July 17th. 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 $ 0.39/ 0.42

- or -

Feb 21, 2011 - entry price on INTC @ 27.34, option @ 2.11
symbol: INTC1418a30 2014 JAN $30 call - current bid/ask $ 1.45/ 1.53

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.

Chart of INTC:

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: 78.15

Comments:
07/07/12 update: KO tagged new highs on Tuesday and has since pulled back to the $78 level. Prior resistance in the $77.50-78.00 zone could offer some short-term support but if the market really accelerates lower I would expect a drop toward $76 and the 50-dma. 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 $ 6.80/ 6.85

06/30/12 new stop loss @ 71.80
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: 71.80
Play Entered on: 03/29/12
Originally listed on the Watch List: 03/17/12


Eli Lilly - LLY - close: 42.66

Comments:
07/07/12 update: LLY also tagged a new multi-year high early in the week. Shares have since seen some profit taking. Broken resistance near $42.00 should offer new support. 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 $ 1.61/ 1.67

- or -

Jan 05, 2012 - entry price on LLY @ 39.50, option @ 2.75
symbol: LLY1418A45 2014 JAN $45 call - current bid/ask $ 2.08/ 2.48

06/30/12 new stop loss @ 39.75
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: 39.75
Play Entered on: 01/05/12

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


Merck & Co - MRK - close: 41.51

Comments:
07/07/12 update: MRK, like many of the big drug stocks, tagged a new relative high early and the week and has since retreated. MRK still looks overbought here and due for a bigger correction. I am not suggesting new positions at this time. More conservative traders may want to start raising their stops.

If the market (and drug stocks) correct lower I would expect a likely pullback toward the $40 level. FYI: The Point & Figure chart has a long-term target of $60.00.

- Suggested Positions -
Jun 25, 2012 - entry price on MRK @ 39.91, option @ 3.14
symbol: MRK1418A40 2014 JAN $40 call - current bid/ask $ 3.80/ 3.95

06/25/12 MRK gap down at $39.91
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).

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: 30.18

Comments:
07/07/12 update: MSFT spent the week churning sideways. Friday saw a drop toward short-term support near $30.00 and its 50-dma. I don't see any changes from my prior comments. Investors might want to wait for a close over $31.20 before considering new bullish positions. MSFT will report earnings on July 19th.

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 $ 1.99/ 2.03

- or -

Jun 01, 2012 - entry price on MSFT @ 28.50, option @ 3.05
symbol:MSFT1418A30 2014 JAN $30 call - current bid/ask $ 3.60/ 3.70

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: 46.97

Comments:
07/07/12 update: I have to warn you that the situation with MSI is not improving. Over the last couple of months MSI has developed a bearish trend of lower highs. Now MSI is testing support in the $46.50 area. A breakdown here would quickly hit our stop loss at $45.75. The current trend is suggesting new relative lows soon. More conservative traders may want to exit now!

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 $ 0.61/ 0.72

07/07/12 more conservative traders may want to exit now.
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


Pepsico, Inc. - PEP - close: 70.22

Comments:
07/07/12 update: PEP is little changed for the week with a 44-cent decline. I would still be tempted to open positions now or you could look for a dip toward the rising 30 or 40-dma as an alternative entry point since PEP seems to be channeling higher.

- Suggested Positions -
Jul 02, 2012 - entry price on PEP @ 70.34, option @ 2.85
symbol: PEP1418A75 2014 JAN $75 call - current bid/ask $ 2.57/ 2.75

07/02/12 PEP opened at $70.34
07/02/12 launch positions at the open
06/29/12 PEP meets our entry requirement with a close above $70.25.

Current Target: $79.00
Current Stop loss: 65.75
Play Entered on: 07/02/12
Originally listed on the Watch List: 05/26/12


Reynolds American Inc. - RAI - close: 45.50

Comments:
07/07/12 update: Readers may want to go ahead and take profits right now! RAI has seen a dramatic rise from its early June lows near $40 to almost $45.75 this past week. Shares definitely look short-term overbought and due for a pullback. We are raising our stop loss up to $41.40. 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 $ 3.60/ 3.80

07/07/12 new stop loss @ 41.40, readers may want to take profits now!
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: 41.40
Play Entered on: 11/18/11
Originally listed on the Watch List: 10/22/11


The TJX Companies - TJX - close: 44.43

Comments:
07/07/12 update: Shares of TJX are showing relative strength thanks to strong June same-store sales. Analysts were only expecting +3.7% sales growth but TJX reported +7% June same-store sales. The company also raised its guidance, which is a good sign for the bulls. Shares ended the week at new record highs. Investors can use this move as a new entry point.

- Suggested Positions -
Jun 20, 2012 - entry price on TJX @ 43.62, option @ 2.53
symbol: TJX1319A45 2013 JAN $45 call - current bid/ask $ 2.85/ 3.00

- or -

Jun 20, 2012 - entry price on TJX @ 43.62, option @ 5.10
symbol: TJX1418A45 2014 JAN $45 call - current bid/ask $ 5.30/ 5.60

07/05/12 TJX beats June same-store sales estimates and raises guidance
06/20/12 trade opens
06/19/12 TJX closed above our entry requirement (above $43.25)

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: 55.82

Comments:
07/07/12 update: Ouch! The end of June post-Supreme Court decision slide in UNH continued this past week. UNH fell toward short-term support near the $55 area and its 150-dma. I am concerned that the action in the last two weeks of June is starting to look like a bearish double top pattern. More conservative traders may want to abandon ship right now and exit early.

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 $ 2.39/ 2.48

- or -

Feb 15, 2012 - entry price on UNH @ 54.53, option @ 5.00
symbol: UNH1418A60 2014 JAN $60 call - current bid/ask $ 5.60/ 5.80

07/07/12 UNH is acting weak. Readers may want to exit early
06/28/12 The U.S. Supreme Court upheld Obamacare's new healthcare law. UNH experienced some sharp intraday volatility
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


Visa, Inc. - V - close: 125.28

Comments:
07/07/12 update: Visa is another watch list candidate that has graduated to our play list. We wanted to wait for Visa to close over $125.50 and then buy calls the next day. Visa closed at $126.62 on July 2nd so our trade opened on the 3rd with Visa at $126.49. I would still consider new positions now or you could wait for a dip into the $124-123 area. The $120.00 level looks like it should offer some decent support.

Earlier Comments:
Our long-term target is $149.00 (although we'll likely exit our 2013 calls before V reaches our target).

- Suggested Positions -
JUL 03, 2012 - entry price on V @ 126.49, option @ 5.85
symbol: V1319A135 2013 JAN $135 call - current bid/ask $ 5.30/ 5.45

- or -

JUL 03, 2012 - entry price on V @ 126.49, option @ 11.95
symbol: V1418A140 2014 JAN $140 call - current bid/ask $11.10/11.65

07/03/12 trade opens with Visa at $126.49
07/02/12 Visa closes above our trigger @ 125.50

Current Target: $149.00
Current Stop loss: 117.45
Play Entered on: 07/03/12
Originally listed on the Watch List: 06/30/12


Valero Energy - VLO - close: 24.56

Comments:
07/07/12 update: VLO is also a watch list candidate that has made the jump to our active play list. We wanted to wait for VLO to close over $24.50 and buy calls the next day. The stock closed at $25.01 on July 3rd so our trade opened on the 5th with VLO gapping down at $24.90. Shares dipped to $24.00 and its 10-dma on Friday morning before bouncing. I would still consider new positions now but more conservative traders might want to wait for a dip or a bounce off the $23.50 level before considering new positions instead.

- Suggested Positions -
JUL 05, 2012 - entry price on VLO @ 24.90, option @ 2.54
symbol: VLO1319A25 2013 JAN $25 call - current bid/ask $ 2.31/ 2.37

- or -

JUL 05, 2012 - entry price on VLO @ 24.90, option @ 2.60
symbol: VLO1418A30 2014 JAN $30 call - current bid/ask $ 2.36/ 2.51

07/05/12 trade opened with VLO gapping down at $24.90
07/03/12 VLO closed at $25.01, above our trigger (24.50)
06/30/12 adjust entry strategy: wait for close over $24.50, stop 22.45

Current Target: $29.75
Current Stop loss: 22.45
Play Entered on: 07/05/12
Originally listed on the Watch List: 06/23/12


CLOSED Plays


Verizon Communications - VZ - close: 44.42

Comments:
07/07/12 update: VZ hit our exit target at $45.00 on July 2nd. The stock did it again (hit $45) on July 5th and has since pulled back to short-term support near $44.00.

- Suggested Positions -
Dec 23, 2011 - entry price on VZ @ 39.42, option @ 2.17
symbol: VZ1319A40 2013 JAN $40 call - exit $5.00 (+130.4%)

- or -

Dec 23, 2011 - entry price on VZ @ 39.42, option @ 2.87
symbol: VZ1418A40 2014 JAN $40 call - exit $5.65 (+96.8%)

07/02/12 exit target hit at $45.00
06/30/12 new stop loss @ 41.75
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.

Chart of VZ

Current Target: $45.00
Current Stop loss: 41.75
Play Entered on: 12/23/11

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


Watch

Undervalued & Building a Bottom

by James Brown

Click here to email James Brown


New Watch List Entries

CAT - Caterpillar Inc.

SHLD - Sears Holding Corp


Active Watch List Candidates

DIS - Walt Disney Co.

JPM - JPMorgan Chase

PFE - Pfizer Inc.

SBUX - Starbucks Corp.

SYK - Stryker Corp

UNP - Union Pacific Corp

USB - U.S. Bancorp


Dropped Watch List Entries

DFS, V, and VLO all graduated to the play list.



New Watch List Candidates:


Caterpillar Inc. - CAT - close: 84.61

Company Info

There was a lot of chatter this past week about how cheap CAT is and how investors should be buying it now. It makes sense that the stock is sinking since there is a growing expectation that the U.S., Europe, and most of the world are slowing down. However, if the Fed suddenly comes out with some sort of new stimulus it could help turn CAT around and shares could rally pretty fast. The next Fed meeting is at the end of July.

Right now CAT is in a bearish down trend of lower highs and lower lows. Broken support near $90.00 should be new resistance. I am suggesting we wait for CAT to close over $90.50 and then buy calls the next day with a stop loss at $84.75. Our long-term target is the $110-115 zone (although we'll exit the 2013 calls before CAT hits our final target).

Breakout trigger: Close over $90.50, stop loss @ 84.75

BUY the 2013 Jan $95 call (CAT1319A95)

- or -

BUY the 2014 Jan $100 call (CAT1418A100)

Chart of CAT:

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


sears Holding Corp. - SHLD - close: 61.03

Company Info

The company that runs Sears and K-Mart may have found a bottom for its stock price. Shares are rising off the June lows and now the stock is breaking out past resistance at several key moving averages and the $60.00 level. If this rally continues the stock could see a short squeeze. The most recent data listed short interest at 47% of the 45.5 million share float.

I want to see confirmation of this rally. Wait for SHLD to close over $64.00 and then buy calls the next day with a stop loss at $57.40. Our target is $84.00 but we might aim higher. SHLD seems to be building an inverse head-and-shoulders pattern on the weekly chart. This pattern would suggest a rally toward the 2010 highs near $125 (I know, it seems a bit too optimistic).

Breakout trigger: Wait for a close over $64.00, stop loss $57.40

BUY the 2013 Jan $70 call (SHLD1319A70) current ask $3.90

- or -

BUY the 2014 Jan $75 call (SHLD1418A75) current ask $6.35

Chart of SHLD:

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


Active Watch List Candidates:



Walt Disney Co. - DIS - close: $48.04

Comments:
07/07/12 update: DIS posted a loss for the week but shares have maintained the bullish up trend. We may have to wait for DIS to report earnings before this stock finally sees a correction lower. I would not chase it here.

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


JPMorgan Chase - JPM - close: 33.90

Comments:
07/07/12 update: JPM plunged on Thursday as investors reacted to news that JPM might be involved in the current LIBOR price fixing scandal being investigated by U.S. and U.K. regulators. Meanwhile, traders are getting nervous about JPM and its upcoming earnings report this Friday (July 13th). This past week has created a bearish engulfing candlestick reversal pattern. I strongly suspect we'll see JPM spike down into the $30-28 zone again.

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


Pfizer Inc. - PFE - close: 22.54

Comments:
07/07/12 update: It was a down week for PFE with the stock declining three days in a row. We're still waiting for a breakout higher. Currently we want to wait for PFE to close above $23.40 and then buy calls the next day.

Our long-term target is $28.00.

Breakout trigger: Wait for a close over $23.40, use a stop at $20.95

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


Starbucks Corp. - SBUX - close: 51.97

Comments:
07/07/12 update: SBUX has been underperforming the last few days and the stock is down two weeks in a row. Shares currently sit on the bottom of its $51-56 trading range. Our recently adjusted entry point strategy is unchanged.

I am suggesting we wait for SBUX to close above $56.25 and then buy calls the next day with a stop loss at $50.75. Our long-term target is $69.00.

Breakout Trigger: wait for a close over $56.25, stop loss 50.75

BUY the 2013 Jan $60 call (SBUX1319A60)

- or -

BUY the 2014 Jan $65 call (SBUX1418A65)

06/30/12 adjust strategy to wait for a close over $56.25, new stop @ 50.75, adjust option strikes.
05/19/12 adjust stop loss to $45.75

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


Stryker Corp. - SYK - close: 53.54

Comments:
07/07/12 update: SYK hit some profit taking this past week. News out on Friday that SYK was recalling some hip implant products didn't help matters. Shares fell to their 50-dma before paring their losses. Our plan is unchanged.

I am suggesting we wait for SYK to close over $56.50 and then buy calls the next day with a stop loss at $50.75. We will set our targets at $64.50 and $69.50.

Breakout trigger: Wait for close over $56.50 (stop 50.75)

BUY the 2013 Jan $60 call (SYK1319A60)

- or -

BUY the 2014 Jan $60 call (SYK1418A60)

Originally listed on the Watch List: 06/30/12


Union Pacific Corp. - UNP - close: 116.75

Comments:
07/07/12 update: UNP tagged resistance near $120 and retreated this past week. The stock is nearing what should be short-term support in the $116-115 zone. Nimble traders might want to consider buying a bounce from this area. I am suggesting we wait for UNP to close over $121.00 and then buy calls the next day. We will start with a stop loss at $111.75. Our long-term target is $139 (although we'll probably exit our 2013 calls way before UNP hits our target).

Breakout trigger: Wait for a close over $121 (stop loss 111.75)

BUY the 2013 Jan $130 call (UNP1319A130)

- or -

BUY the 2014 Jan $140 call (UNP1418A140)

Originally listed on the Watch List: 06/30/12


U.S. Bancorp - USB - close: 32.01

Comments:
07/07/12 update: USB continues to outperform many of its peers in the financial sector. Yet we did see the stock reverse near resistance at its 2012 highs (around the $32.50 level). We're going to give USB another two weeks and then re-evaluate. Currently the plan is to buy a dip at $29.00. However, readers may want to consider buying calls if USB can close over the $33.00 mark instead (and adjust your stop loss and target appropriately).

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)

06/30/12 readers might want to consider an alternative entry point
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