Option Investor
Newsletter

Daily Newsletter, Sunday, 8/12/2012

Table of Contents

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

Leaps Trader Commentary

Fifth Week of Gains

by James Brown

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The S&P 500 index just closed its fifth week of consecutive gains. It was also the most boring week of gains. Volume was very low all week with many market participants away on vacation before back-to-school starts up again in the U.S. soon. Economic data continues to disappoint but the prevailing wisdom would suggest equities are rising on hopes of further stimulus from major central banks. A bounce in the U.S. dollar failed to stop another rise in commodities. For the week the S&P 500 added another +1.0%, the NASDAQ +1.7%, the Dow Industrials +0.8%, the small cap Russell 2000 +1.6%. One of the market's best performers was the SOX semiconductor index with a +4.0% gain on the week.

Looking back the markets got a boost on Monday as expectations rose that China would offer new stimulus to halt the slowdown in their economy. Then on Tuesday there were new headlines out of Europe that Germany's Chancellor Merkel had caved into peer pressure and would support the ECB's proposed bond-buying program. After those two headlines stocks were left without any further catalysts and equities churned sideways.

Economic data in the U.S. was mixed. The initial jobless claims came in at 361,000, which was a little less than expected. Another positive was the Q2 productivity reading came in at 1.6%, also better than estimated. The wholesale inventory numbers for June showed a decline but sales outpaced the drop in inventories, which leaves the inventory to sales ratio at its worst levels in over two and a half years.

Across the pond in Europe we saw Germany's industrial production for June come in worse than expected. Italy's Q2 GDP was negative for the fourth quarter in a row. Yet the market was focused on China this past week. China's industrial production for July fell to its slowest pace in three years at +9.2%. Another blow was the plunging July export number, which came in at +1% versus estimates for +8%. In June this number was +11.3%. This is a very clear signal that the world's demand for goods is slowing and reaffirming worries about a global slowdown.

After the export numbers came out we started seeing economists cutting their GDP estimates for China. Normally you might have expected the stock market to drop on this data but expectations are rising that China will announce new stimulus to counteract the slowdown. If they don't deliver something soon though investors may lose their patience.

Major Indices:

I mentioned earlier that the S&P 500 is now up five weeks in a row. While that is positive you could also argue that stocks might be a little bit overbought and due for a pullback. On a more short-term basis this past week was more sideways than up. Depending on your bullish or bearish bias the market has either run out of gas and is poised to pullback or it's merely catching its breath before continuing the advance.

The fact that the S&P 500 spent most of the week above round-number resistance at the 1400 level is positive. Yet at the same time the index seems to be at the top of a multi-week trend line of resistance. The range this past week looked like the 1395-1407 area. A breakdown below 1395 would probably signal a drop toward support near 1380. If that level fails then a drop to the 1360 area. If the S&P 500 breaks higher than we're looking at resistance at its 2012 highs near 1420. The high for the year (on April 2nd) is 1422.

Daily chart of the S&P 500 index:

While the S&P 500 was churning above the 1400 level the NASDAQ composite managed to consolidate sideways above the 3,000 level. Technically this is bullish you could argue the path of least resistance is up. If something happens and stocks turn lower and the NASDAQ breaks down under 3,000 then the next support levels are 2975 and 2950. If this rally continues then the levels to watch are 3050, 3075, and 3100. The 2012 highs are in the 3130-3135 area.

Daily chart of the NASDAQ Composite index:

The picture for the small cap Russell 2000 index is not quite so clear. It did spent the last few days chopping sideways. It is above the month of July's bearish trend of lower highs (bullish). It has not broken out past its July highs the way the S&P 500 or NASDAQ have (bearish?).

Right now the $RUT is hovering near round-number support/resistance at the 800 mark. The 780 level should still be support and now it's bolstered by the 50-dma and 200-dma. Speaking of those two moving averages the are both starting to slope higher, which is longer-term bullish. Yet the rally here probably has resistance near 810 and stronger resistance near 820.

Daily chart of the Russell 2000 index

The pace of economic data picks up this week. We'll see both the PPI and CPI readings, which should indicate that inflation remains lows. The New York state fed survey and Philadelphia fed survey will give us some regional readings on business and manufacturing activity. One of the big "events" of the week will be Cisco Systems (CSCO) earnings report on Wednesday. CSCO is a major component in NASDAQ-100, the Dow Jones Industrials, and the S&P 500 indices. While one stock may not move an index that much their report and guidance could spark a move either way since they are a large technology company and a bellwether for the tech industries.

A few events to keep aware of. Federal Reserve Chairman Ben Bernanke is schedule to speech at the Fed's annual Jackson Hole, WY event on August 31st. Plus, the U.S. debt ceiling will likely be hit in September.

Economic and Event Calendar

- Monday, August 13 -
(nothing significant)

- Tuesday, August 14 -
U.S. retail sales for July
Producer Price Index (PPI) for July
Business inventory report for June

- Wednesday, August 15 -
Consumer Price Index (CPI) for July
New York Empire State manufacturing report for August
Industrial production and capacity utilization
Cisco Systems (CSCO) reports earnings after the closing bell

- Thursday, August 16 -
Weekly Initial Jobless Claims
Housing starts & Building permits
Philly Fed survey

- Friday, August 17 -
University of Michigan consumer sentiment

The Week Ahead:

Looking at the market I can understand why investors might be scratching their heads as to why stocks keep rising. The stock market has plenty of reasons to fall. It seems like we can boil the market's strength down to one issue that that is expectation for further central bank stimulus.

We are not talking about just the U.S. Federal Reserve either. While many investors still believe the Fed will offer some sort of QE3 program, I believe the situation will have to get pretty bad before the Fed decides to use what many believe is their last bullet to save the economy. The central banks to watch are the European Central Bank (ECB), the Bank of England (BoE), the Bank of Japan (BoJ), and People's Republic Bank of China (PBoC).

ECB President Mario Draghi has promised to do whatever it takes to save the Eurozone but we're really not seeing any solutions yet. Although he did gain a minor win at German Chancellor Merkel's concession to support ECB bond-buying. We'll have to see if that tool actually gets further support and put into play or not. Meanwhile both the BoE and BoJ could launch further stimulus. Yet the real market mover here is China's central bank.

The economic data out of China recently has been terrible. Odds are the main reason the stock market has not sold off yet is growing expectation that China will announce some sort of new stimulus program. If that does not materialize in the next few weeks it could be bad news for global markets. Many people forget that China is going through a once-in-a-decade leadership change but we don't hear about it because the communist party there likes to do thing behind closed doors.

Let's recap some of our concerns for the market. You already know that August and September are seasonally bearish times of year for equities. Technically the transportation sector is not confirming the market's recent rise. Plus the volatility index (VIX) is very low and under the 15.0 level. Normally when the VIX is too low it's a sign of too much trader complacency and would suggest a market top is near. Unfortunately, using the VIX as a timing tool can be tough since "near" could be tomorrow or it could be several weeks.

Fundamentally we continue to see economic data signaling a potential recession. China's economic data is plunging. India, with a population almost the size of China, is also seeing its economy slow down. The U.S. economic data, while not great, is not falling as fast as it was. Although retail sales in the U.S. have declined three months in a row. Gasoline prices are on the rise again and that negatively impacts retail spending. You already know that consumer spending counts for nearly 70% of the U.S. economy. The U.S. is still facing the widely discussed "fiscal cliff" in January 2013. I'm not sure the government will actually do anything about the cliff until after the elections in early November.

The Q2 earnings season is almost over. We knew this was going to be a tough season and analysts had lowered expectations going into this earnings season. Yet so far only half of the S&P 500 companies have beaten Wall Street's estimates. That's the lowest in three years.

What do we do? The market is climbing in face of a parade of bad news. Is this just a case of no volume? Are there so many investors (big and small) not participating that stocks are drifting higher? They say volume is a weapon of the bulls. So rising markets on low volume is not a sign of confidence. Of course the challenge is trading the market in front of us and not trying to trade what the market "should" be doing according to our own analysis and bias.

I will continue to urge caution here. If we see an opportunity to initiate positions I would start small. Limit your position size and if the market continues to move in your favor then you have the freedom to add to your position. Or you can choose to sit back and wait. There will always be another market pullback. A quick look at any weekly chart on any major index will show you that there is almost always another opportunity to buy a dip down the road. Don't feel rushed to make trades. Wait for the right entry point. If Ben Bernanke doesn't tell the market what it wants to hear at his Jackson Hole speech it could spark a sell-off going into the month of September.

James



Portfolio

Portfolio Update

by James Brown

Click here to email James Brown


Current Portfolio


Portfolio Comments:

The stock market continues to rally and the S&P 500 just notched its fifth weekly gain in a row. The S&P 500 is clearly above resistance near 1400 and the NASDAQ is above the 3,000 level but can the market hold these levels?

We closed our Coca-cola (KO) trade as planned prior to the stock's 2-for-1 split. We also took profits on our VLO trade by closing the 2013 calls but we still have the 2014 calls.

We have adjusted the stop losses on: DFS and MRK

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

Still Worse Than Expected

by James Brown

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Editor's Note:

(August 11th, 2012)

The U.S. markets churned sideways all week but managed to stretch its string of gains to five weeks in a row. Overall little has changed for us. Economic data continues to come in worse than expected. The data out of China recently is very alarming. The only reason stocks have not sold off yet is expectation for further stimulus from major central banks, especially China's.

I am still expecting a correction lower into mid September but there is no guarantee that will happen. Until then we'll try to take advantage of any entry points we see but I would suggest investors stay cautious and keep their position size small to limit risk. Sometimes the best trade is no trade.

We did see two more of our watch list candidates graduate to our portfolio (CAT & QCOM). I have added three new candidates tonight.

In addition to the watch list, here is a list of stocks on my radar screen as possibles to keep an eye on. Some of these need to see a correction. Others need to see a breakout past resistance.

FSLR, ARLP, ANR, NFX, GM, XHB, SIRI, MMM, FTR, AGU, CVX, RIG, TGT, ROST, CP, SCHW, VOD, XOM


Play Updates

Going Out A Winner

by James Brown

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Editor's Note:

Overall it was a pretty quiet week for stocks. We did see CAT and QCOM make the jump from our watch list.

We did close our KO trade on Thursday as planned. We also closed our VLO 2013 calls on Tuesday to lock in gains.


Closed Plays


KO was closed as planned.


Play Updates


Abbott Labs - ABT - close: 66.11

Comments:
08/11/12 update: After peaking in early August ABT's profit taking appears to have slowed down. Shares have been hovering near $66.00. Friday's bounce actually looks short-term bullish but I would not buy calls here. If the market corrects lower, look for support near $64.00 and the 50-dma. I am not suggesting new positions at this time.

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 $ 2.90/ 2.94

- or -

JUL 02, 2012 - entry price on ABT @ 64.22, option @ 4.28
symbol: ABT1418A65 2014 JAN $65 call - current bid/ask $ 5.05/ 5.20

07/14/12 ABT is due to report earnings on July 18th
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


American Intl. Group - AIG - close: 32.60

Comments:
08/11/12 update: AIG continues to drift higher. Yet it doesn't look like it has completely broken away from the $30.00-32.50 area. Shares do look bullish on the weekly chart - if it can close over the $33 level.

Earlier Comments:
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 $ 4.25/ 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/ 4.90

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: 87.86

Comments:
08/11/12 update: APA seems to be struggling with technical resistance near its 100-dma. The action on Wednesday and Thursday actually looks like a very short-term bearish double top. I would not be surprised to see a dip back toward $85 and its 50-dma. I am not suggesting new positions.

- Suggested Positions -
Jun 18, 2012 - entry price on APA @ 87.10, option @ 3.45
symbol: APA1319A100 2013 JAN $100 call - current bid/ask $ 1.82/ 1.88

- or -

Jun 18, 2012 - entry price on APA @ 87.10, option @ 6.43
symbol: APA1418A100 2014 JAN $110 call - current bid/ask $ 4.35/ 4.50

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: 7.74

Comments:
08/11/12 update: BAC spent most of the week consolidating sideways inside the $7.60-7.80 zone. I am still concerned that the $8.00 level and the $8.20 level could be tough overhead resistance.

I am not suggesting new positions at this time.

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

- Suggested Positions -

AUG 29, 2011 - entry price on BAC @ 8.10, option @ 1.50
symbol: BAC1319A10 2013 JAN $10 call - current bid/ask $ 0.15/ 0.16
(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 $ 0.15/ 0.16
(no stop loss on this position)

07/21/12 BAC reported earnings this past week and investors have decided to sell the news. The stock looks vulnerable here and readers may want to exit early!
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.
...look for earlier comments in prior updates...

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


Caterpillar Inc. - CAT - close: 88.94

Comments:
08/11/12 update: CAT was a watch list candidate. Our plan was to wait for shares to close over $87.50 and then launch positions the next day. Well shares continued to climb this past week and closed at $88.40 on Thursday. Our trade opened on Friday morning at $88.26. I would still consider new positions now but more conservative traders might want to consider waiting for a new bounce off the rising 10-dma instead.

Our long-term target is the $110-115 zone (although we'll exit the 2013 calls before CAT hits our final target).

- Suggested (small) Positions -
Aug 10, 2012 - entry price on CAT @ 88.26, option @ 3.81
symbol: CAT1319A95 2013 JAN $95 CALL - current bid/ask $ 3.85/ 3.95

- or -

Aug 10, 2012 - entry price on CAT @ 88.26, option @ 7.90
symbol: CAT1418A100 2013 JAN $100 CALL - current bid/ask $ 8.00/ 8.20

08/10/12 trade opened on Friday morning @ $88.26
08/09/12 CAT closed above our trigger (which was 87.50)
08/06/12 adjust entry trigger to a close over $87.50
07/21/12 adjusted entry point to wait for a close over $88.00, stop loss 79.90

Chart of CAT:

Current Target: $110.00-115.00
Current Stop loss: 79.90
Play Entered on: 08/10/12
Originally listed on the Watch List: 07/07/12


CH Robinson Worldwide - CHRW - close: 54.23

This is a bearish PUT option trade.

Comments:
08/11/12 update: The stock market is up five weeks in a row so CHRW continues to underperform. Yet shares did show some strength on Friday. The stock has been trying to breakout past resistance near $54.00 lately. I suspect shares are trying to fill the gap down. That means we should expect a rebound back to the $55.50-56.00 area before CHRW hits resistance again.

Meanwhile in the news on Friday afternoon CHRW management announced a 33-cent cash dividend payable on October 1st this year. They also raised their stock buyback program up to an additional 10 million shares. Their current program had less than 2.5 million shares allowed.

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 $ 4.00/ 4.30

07/28/12 lowering the stop loss to $60.75.
07/14/12 raising the risk on this trade by adjusting the stop loss to $63.25.
06/02/12 new stop loss @ 62.25

Current Target: $50.50
Current Stop loss: 60.75
Play Entered on: 05/07/12
Originally listed in the New Plays 05/05/12


CVS Caremark Corp. - CVS - close: 44.95

Comments:
08/11/12 update: I am concerned about the lack of action in CVS. The stock has been chopping sideways for three weeks in a row. Yet the market has been rising. Shares were upgraded this past week but it had little impact on the stock. Readers will want to seriously consider an early exit now. I'm willing to give CVS another week or two. If it doesn't show some improvement we'll drop it.

I am not suggesting new positions at this time.

Our long-term target is $57.50 for the 2014 calls.

- Suggested Positions -
Jul 19, 2012 - entry price on CVS @ 45.98, option @ 0.93
symbol: CVS1319A50 2013 JAN $50 call - current bid/ask $0.51/0.54

- or -

Jul 19, 2012 - entry price on CVS @ 45.98, option @ 1.70*
symbol: CVS1418A55 2014 JAN $55 call - current bid/ask $1.22/1.32

07/21/12 adjust stop loss to $42.45
*entry price on the 2014 option is an estimate since the option didn't trade on the 19th.
07/19/12 trade opens as CVS gaps lower at $45.98 on news
07/18/12 CVS closed above our trigger at $48.50

Current Target: $57.50
Current Stop loss: 42.45
Play Entered on: 07/19/12
Originally listed on the Watch List: 07/14/12


Discover Financial - DFS - close: 36.84

Comments:
08/11/12 update: DFS continues to show strength and hit new highs again this past week. I would not chase it here. If recent history is any guide the stock could see another pullback toward its 30-dma or 40-dma. I am raising our stop loss up to $32.40.

- Suggested Positions -
JUL 05, 2012 - entry price on DFS @ 35.28, option @ 2.15
symbol: DFS1319A37 2013 JAN $37 call - current bid/ask $2.40/2.50

- or -

JUL 05, 2012 - entry price on DFS @ 35.28, option @ 3.40
symbol: DFS1418A40 2014 JAN $40 call - current bid/ask $3.30/3.60

08/11/12 new stop loss @ 32.40
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: 32.40
Play Entered on: 07/05/12
Originally listed on the Watch List: 06/02/12


Eli Lilly - LLY - close: 43.60

Comments:
08/11/12 update: LLY had a tough time early in the week with a Monday-Tuesday drop. Shares managed to find support at the rising 50-dma. Friday's session delivered a nice bounce but it was only enough to fill the gap. The long-term trend is still up but short-term the outlook is a little murky. I am not suggesting new positions at this time.

Currently we want to exit our 2014 calls when LLY hits $48.50.

- Suggested (SMALL) Positions -
(exited on July 23rd at the open)
Jan 05, 2012 - entry price on LLY @ 39.50, option @ 1.19
symbol: LLY1319A45 2013 JAN $45 call - exit $2.09 (+75.6%)

- or -

(still active)
Jan 05, 2012 - entry price on LLY @ 39.50, option @ 2.75
symbol: LLY1418A45 2014 JAN $45 call - current bid/ask $ 2.47/ 2.69

07/23/12 closed the 2013 calls @ the open (+75.6%)
07/21/12 prepare to exit the 2013 Jan $45 calls on Monday morning
07/21/12 adjust exit target for 2014 calls to $48.50
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: $48.50 (2014)
Current Stop loss: 39.75
Play Entered on: 01/05/12

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


Monsanto Co. - MON - close: 86.74

Comments:
08/11/12 update: It looks like the rally in MON has run out of fuel under round-number resistance at the $90.00 level. Odds are good we will see shares retreat back to potential support in the $85-84-83 area. Wait for the pullback. We can re-evaluate new entries when shares bounce. I'm focused on the $84 level as likely support.

- Suggested Positions -
Jul 17, 2012 - entry price on MON @ 85.84, option @ 4.35
symbol: MON1319A90 2013 JAN $90 call - current bid/ask $ 3.90/ 4.05

- or -

Jul 17, 2012 - entry price on MON @ 85.84, option @ 6.50
symbol: MON1418A100 2014 JAN $100 call - current bid/ask $ 5.65/ 5.90

08/11/12 look for a pullback toward $84 soon
07/17/12 trade opens with MON at $85.84
07/16/12 MON closes above our entry requirement ($85.25)

Current Target: $99.50
Current Stop loss: 79.90
Play Entered on: 07/17/12
Originally listed on the Watch List: 07/14/12


Merck & Co - MRK - close: 44.57

Comments:
08/11/12 update: MRK spent most of the last two weeks drifting sideways with a short-term trend of lower highs. Yet traders started buying the dips late this past week and Friday's move higher is a short-term bullish breakout. I don't see any changes from my prior comments.

Readers may want to take profits now. I am raising our stop loss up to $40.90. I am not suggesting new positions at this time. Our long-term target remains the $47.50 level since we have the 2014 options.

- Suggested Positions -
Jun 25, 2012 - entry price on MRK @ 39.91, option @ 3.14
symbol: MRK1418A40 2014 JAN $40 call - current bid/ask $ 5.95/ 6.10

08/11/12 new stop loss @ 40.90
07/14/12 new stop loss @ 39.49
07/14/12 Readers will want to seriously consider taking profits now.
MRK is at $43.47, option @ 5.15 (+93.9%)
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: 40.90
Play Entered on: 06/25/12

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


Microsoft - MSFT - close: 30.42

Comments:
08/11/12 update: MSFT has continued to drift higher yet the stock has failed to convincingly push past potential technical resistance at the 150-dma and the 100-dma. There is still sturdier resistance at the $31.00 level. I am not suggesting new positions at this time but a close over $31.25 might change my mind.

- Suggested Positions -
Jun 01, 2012 - entry price on MSFT @ 28.50, option @ 1.69
symbol:MSFT1319A30 2013 JAN $30 call - current bid/ask $ 1.77/ 1.79

- or -

Jun 01, 2012 - entry price on MSFT @ 28.50, option @ 3.05
symbol:MSFT1418A30 2014 JAN $30 call - current bid/ask $ 3.30/ 3.40

07/28/12 raise stop loss to $28.45
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: 28.45
Play Entered on: 06/01/12
Originally listed on the Watch List: 04/14/12


Pepsico, Inc. - PEP - close: 72.13

Comments:
08/11/12 update: PEP spent the week slowly consolidating lower. That's not a bid surprise after the stock hit new multi-year highs the week before. We can look for short-term support near $71.00 or the 50-dma near $70.00. I would be tempted to buy calls again on a bounce near $70.

- Suggested Positions -
Jul 02, 2012 - entry price on PEP @ 70.34, option @ 2.85
symbol: PEP1418A75 2014 JAN $75 call - current bid/ask $ 2.99/ 3.15

08/06/12 new stop loss @ 67.75
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: 67.75
Play Entered on: 07/02/12
Originally listed on the Watch List: 05/26/12


Pfizer Inc. - PFE - close: 23.94

Comments:
08/11/12 update: PFE, like most of the market, produced a quite week of trading sideways. I don't see any changes from my prior comments. I am not suggesting new positions at this time.

- Suggested Positions -
Jul 18, 2012 - entry price on PFE @ 23.53, option @ 1.30
symbol: PFE1418A25 2014 JAN $25 call - current bid/ask $ 1.40/ 1.45

08/06/12 new stop loss @ 21.35
07/18/12 trade opens. PFE @ 23.53
07/17/12 PFE meets our entry requirements (close over $23.40)
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.

Current Target: $28.00
Current Stop loss: 21.35
Play Entered on: 07/18/12
Originally listed on the Watch List: 04/21/12


QUALCOMM Inc. - QCOM - close: 61.98

Comments:
08/11/12 update: QCOM is another watch list candidate that has qualified as a new trade. The plan was to wait for shares to close over $61.50 and buy calls the next day. QCOM almost made it on Wednesday with a close at $61.45. It wasn't until Thursday's close at 62.00 did the stock qualify. Our trade opened on Friday morning at $61.71. I would still consider new positions now but the better trade might be to wait for a new dip or a bounce in the $61-60 zone.

- Suggested Positions -
Aug 10, 2012 - entry price on QCOM @ 61.71, option @ 2.56
symbol:QCOM1319A65 2013 JAN $65 call - current bid/ask $ 2.62/ 2.66

- or -

Aug 10, 2012 - entry price on QCOM @ 61.71, option @ 4.75
symbol:QCOM1418A70 2014 JAN $70 call - current bid/ask $ 4.70/ 4.85

Chart of QCOM:

Current Target: $68.50
Current Stop loss: 57.40
Play Entered on: 08/10/12
Originally listed on the Watch List: 08/06/12


The TJX Companies - TJX - close: 44.46

Comments:
08/11/12 update: Bullish analyst comments this past week were not enough to lift TJX out of this sideways churn. Investors are probably wait for the company's earnings report. TJX reports on Tuesday morning, before the opening bell (Aug. 14th). We have a stop loss at $39.75 but more conservative traders may want to tighten their stop loss closer to $42.00 instead just in case TJX disappoints with its numbers.

- Suggested Positions -
Jun 20, 2012 - entry price on TJX @ 43.62, option @ 2.53
symbol: TJX1319A45 2013 JAN $45 call - current bid/ask $ 2.55/ 2.65

- or -

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

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


Time Warner - TWX - close: 42.90

Comments:
08/11/12 update: TWX continues to soar following its earnings report on August 1st. The stock is up several days in a row and hitting new multi-year highs with every session. TWX is clearly short-term overbought here. It would be very tempting to go ahead and cash out now (currently +49% for a two-week trade on the 2013 calls) and just wait for the correction to jump back in.

I am not suggesting new positions at this time. You have to expect some profit taking soon.

- Suggested Positions -
Aug 03, 2012 - entry price on TWX @ 40.66, option @ 1.79
symbol: TWX1319A42 2013 JAN $42 call - current bid/ask $ 2.68/ 2.70

- or -

Aug 03, 2012 - entry price on TWX @ 40.66, option @ 2.85
symbol: TWX1419A45 2014 JAN $45 call - current bid/ask $ 3.40/ 3.55

08/11/12 readers might want to lock in gains now (+49% on the 2013 calls) in just two weeks and then jump back in on a correction in the stock.
08/03/12 TWX opens at $40.66 (trade opens)
08/02/12 TWX meets our entry requirement with a close over $40.50

Current Target: $49.00
Current Stop loss: 37.25
Play Entered on: 08/03/12
Originally listed on the Watch List: 07/21/12


Union Pacific Corp. - UNP - close: 122.01

Comments:
08/11/12 update: Transportation stocks, as a sector, have been underperforming this market. UNP was no exception last week. Technically the pullback last week has created a bearish engulfing candlestick reversal pattern on the weekly chart. I still expect support at $120 and at $115 but I am not suggesting new positions at this time.

- Suggested Positions -
Jul 20, 2012 - entry price on UNP @ 122.10, option @ 3.80
symbol: UNP1319A130 2013 JAN $130 call - current bid/ask $ 3.50/ 3.65

- or -

Jul 20, 2012 - entry price on UNP @ 122.10, option @ 6.40
symbol: UNP1418A140 2014 JAN $140 call - current bid/ask $ 6.40/ 6.85

08/11/12 that looks like a brand new bearish engulfing candlestick reversal pattern on the weekly chart today. Let's see if there is any follow through.

Current Target: $139.00
Current Stop loss: 111.75
Play Entered on: 07/20/12
Originally listed on the Watch List: 06/30/12


U.S. Bancorp - USB - close: 33.16

Comments:
08/11/12 update: Taking its cue from the major indices USB produced a quiet week. I don't see any changes from my prior comments. I suspect we will see this stock pull back toward the $32-31 area again. Wait for a dip near this area before considering new positions.

- Suggested Positions -
Jul 20, 2012 - entry price on USB @ 33.62, option @ 1.39
symbol: USB1319A35 2013 JAN $35 call - current bid/ask $ 0.95/ 0.99

- or -

Jul 20, 2012 - entry price on USB @ 33.62, option @ 3.10
symbol: USB1418A35 2014 JAN $35 call - current bid/ask $ 2.75/ 2.84

07/20/12 trade opens Friday morning
07/19/12 USB closes above our trigger <33.50
07/14/12 adjusted strategy: wait for a close over $33.50, stop 29.90
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

Current Target: $39.50
Current Stop loss: 29.90
Play Entered on: 07/20/12
Originally listed on the Watch List: 05/19/12


Visa, Inc. - V - close: 129.09

Comments:
08/11/12 update: Visa briefly tagged a new all-time high on Monday morning this past week. Shares appear to be retreating. I would look for a dip toward $125 or the 50-dma. Wait for a bounce near this area before considering new positions.

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 $ 5.35/ 5.50

- or -

JUL 03, 2012 - entry price on V @ 126.49, option @ 11.95
symbol: V1418A140 2014 JAN $140 call - current bid/ask $11.50/11.95

08/06/12 new stop loss @ 119.75
07/16/12 V pops on news of a settlement in 7-year lawsuit
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: 119.75
Play Entered on: 07/03/12
Originally listed on the Watch List: 06/30/12


Valero Energy - VLO - close: 29.10

Comments:
08/11/12 update: VLO has continued to march higher. Believe it or not this stock is up ten weeks in a row. I am worried shares are overbought and due for some profit taking. That's why our plan was to take profits on the 2013 Jan $25 calls on Tuesday morning, August 7th, to lock in gains.

We still have the 2014 call position but I am not suggesting new trades. VLO needs to see a healthy pullback.

- Suggested Positions -
(exited on August 7th at the open) JUL 05, 2012 - entry price on VLO @ 24.90, option @ 2.54
symbol: VLO1319A25 2013 JAN $25 call - exit $4.65 (+83.0%)

- or -

JUL 05, 2012 - entry price on VLO @ 24.90, option @ 2.60
symbol: VLO1418A30 2014 JAN $30 call - current bid/ask $ 4.05/ 4.20

08/07/12 closed the 2013 calls. exit @ 4.65 (+83.0%)
08/06/12 Exit 2013 Jan $25 calls on Aug 7th at the open
08/06/12 new stop loss @ 24.40
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


Coca-Cola Company - KO - close: 78.79

Comments:
08/11/12 update: It was not the best week for shares of KO. The plan was to exit positions ahead of the stock's 2-for-1 split scheduled for Monday. I had suggested a week ago that readers may want to exit on Tuesday, August 7th but for the newsletter we planned to exit on Thursday at the closing bell. Sadly KO has fallen five days in a row. The bid on our call option dropped more than a dollar to $7.30 (+102.7%).

- Suggested Positions (start with small positions) -
Mar 29, 2012 - entry price on KO @ 72.35, option @ 3.60
symbol: KO1418A75 2014 JAN $75 call - exit $7.30 (+102.7%)

08/09/12 closed positions at the closing bell.
08/06/12 new stop loss @ 77.75
08/06/12 prepare to exit on Aug. 9th at the closing bell
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.

Chart of KO:

Current Target: $87.00
Current Stop loss: 71.80
Play Entered on: 03/29/12
Originally listed on the Watch List: 03/17/12



Watch

Metals, Homebuilders, Semis

by James Brown

Click here to email James Brown

Editor's Note:

We continue to see our watch list candidates graduate to the active trade list. This past week saw CAT and QCOM make the leap. I have removed DIS as a candidate.



New Watch List Entries

ATI - Allegheny Tech.

LEN - Lennar Corp.

SWKS - Skyworks Solutions


Active Watch List Candidates

CLX - The Clorox Co.

HCP - HCP, Inc.

HFC - HollyFrontier

WFC - Wells Fargo


Dropped Watch List Entries

CAT & QCOM graduated to the play list.

I have removed DIS as a candidate.



New Watch List Candidates:


Allegheny Technologies - ATI - close: 32.52

Company Info

ATI is in the metal fabrication industry. If you consider all the negative news about slowing economic data I'm not surprised that shares have been underperforming the market this year. Yet it looks like all the bad news has been priced in. You could argue that ATI has created a bullish double bottom with the lows in June and July. Now the stock is on the verge of breaking out from this $28-33 trading range.

I do consider this an aggressive, higher-risk trade because the economic data is still negative and still suggesting a global slowdown. If this trade does open we want to keep our position size small. I am suggesting we wait for ATI to close over $34.00 and then buy calls the next day. We'll use a wide stop loss at $29.90. Our long-term target is $the $40-45 area. FYI: The Point & Figure chart for ATI has turned bullish with a $44 target.

Breakout trigger: Wait for a close over $34.00 (stop loss 29.90)

BUY the 2013 Jan $37.50 call (ATI1319A37.5) current ask $1.70

- or -

BUY the 2014 Jan $40.00 call (ATI1418A40) current ask $4.30

*small positions*

Chart of ATI:

Originally listed on the Watch List: 08/11/12


Lennar Corp. - LEN - close: 31.20

Company Info

The homebuilders, as a group, continue to climb albeit slowly. LEN appears to have broken out from a potential bull-flag consolidation pattern. Now shares sit just under resistance near $32.00 and multi-year highs.

I am suggesting we wait for LEN to close over $32.25 and then buy calls the next day with a stop loss at $29.75. Our long-term target is $36.00 for the 2013 calls and $39.50 for the 2014 calls. FYI: LEN is due to report earnings in mid September.

Breakout trigger: Wait for close over $32.25 (stop 29.75)

BUY the 2013 Jan $35 call (LEN1319A35) current ask $1.82

- or -

BUY the 2014 Jan $40 call (LEN1418A40) current ask $3.05

Chart of LEN:

Originally listed on the Watch List: 08/11/12


Skyworks Solutions - SWKS - close: 29.63

Company Info

SWKS is a semiconductor stock. This sector has been showing relative strength recently. Shares of SWKS appear to be breaking out from a multi-month consolidation under the $29-30 area. The late July high was $30.10. I am suggesting we wait for SWKS to close over $30.25 and then buy calls the next day. We'll use a stop loss at $27.40. Our long-term target is the $34.00-37.50 range (depending which option you buy).

FYI: The point & figure chart is bullish with a $40 target.

Breakout trigger: Wait for a close over $30.25 (stop loss 27.40)

BUY the 2013 Jan $32 call (SWKS1319a32) current ask $2.95

- or -

BUY the 2014 Jan $35 call (SWKS1418a35) current ask $5.40

Chart of SWKS:

Originally listed on the Watch List: 08/11/12


Active Watch List Candidates:



The Clorox Co. - CLX - close: 71.85

Comments:
08/11/12 update: CLX has bounced off its midweek lows but the rebound is struggling. The stock has hit resistance near $72 and its 50-dma. On a short-term basis CLX looks bearish. If shares don't improve soon we're going to drop it as a candidate.

Right now the plan is to wait for CLX to close over $75.50 and then buy calls the next day.

Breakout trigger: Wait for a close over $75.50 (stop 71.75)

BUY the 2013 Jan $75 call (CLX1319A75)

- or -

BUY the 2014 Jan $80 call (CLX1418A80)

Originally listed on the Watch List: 07/14/12


Walt Disney Co. - DIS - close: $49.65

Comments:
08/11/12 update: No, that's not a typo. DIS has closed unchanged for the week. There was a strong pop on Wednesday following its earnings report but there was no follow through higher.

I was hoping for some profit taking on the earnings report to provide an entry point. Unfortunately there hasn't been any profit taking yet. The long-term trend is clearly higher but I don't want to chase it. Aggressive traders might want to buy dips or bounce near the 30-dma or 40-dma. I am actually removing DIS as a candidate. I will keep it on my radar screen for a correction.

Trade did not open.

08/11/12 removing DIS as a watch list candidate.

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


HCP, Inc. - HCP - close: 45.45

Comments:
08/11/12 update: We have been expecting HCP to correct lower. So far so good. The stock has broken the multi-week trend line of higher lows. Right now the plan is to buy calls on a dip at $43.00 but if HCP doesn't move faster I'll probably drop it as a candidate and put it back on my radar screen.

Buy-the-Dip trigger: $43.00 (stop loss 39.45)

BUY the 2013 Jan $45 call (HCP1319a45)

08/06/12 adjust trigger dip to $43.00

Originally listed on the Watch List: 07/21/12


HollyFrontier Corp. - HFC - close: 38.48

Comments:
08/11/12 update: HFC flirted with resistance near $40.00 but failed to close over that level. Now shares are testing short-term support near $38.00. Aggressive traders might want to consider buying calls on Friday's intraday rebound higher. I would prefer to wait.

I am suggesting an entry if HFC can close over $40.50. We'll buy calls the next day with a stop loss at $36.90. Our long-term target is $44.50 for the 2013 calls and $48.50 for the 2014 calls.

Breakout trigger: close over $40.50 (stop 36.90)

BUY the 2013 Jan $42 call (HFC1319A42)

- or -

BUY the 2014 Jan $45 call (HFC1418A45)

Originally listed on the Watch List: 08/06/12


Wells Fargo & Co - WFC - close: 33.83

Comments:
08/11/12 update: It was a very quiet week for some of the large banking stocks. It's worth noting that on the weekly chart WFC just painted a new bearish engulfing candlestick reversal pattern. Overall I don't see any changes from my prior comments.

I am suggesting we buy calls if WFC Can close over $35.00. We'll buy calls the next day. Our starting target is $39.85. We'll use a stop loss at $32.75. FYI: The point & figure chart is bullish with a $57 target.

Breakout trigger: wait for close over $35.00 (stop 32.75)

BUY the 2014 $40 call (WFC1418A40)

Originally listed on the Watch List: 08/06/12