Option Investor
Newsletter

Daily Newsletter, Sunday, 8/19/2012

Table of Contents

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

Leaps Trader Commentary

Stocks Surge Toward 2012 Highs

by James Brown

Click here to email James Brown

Would you believe that summer is almost over. Some school systems have already started classes. Looking back at summer 2012 it has been a rocky ride. Stocks would rally for a few days and then decline for a few days. Yet the overall trend has been higher - at least since the early June lows. That volatility vanished this past week. The dog days of summer have seen volume plunge to near Christmas-season levels. Volume will likely stay in hiding until after the early September Labor Day holiday.

It was a busy week for economic data. Manufacturing data continues to disappoint and suggest a potential recession ahead. Yet a surprise improvement in consumer sentiment and retail sales in the U.S. helped fuel market gains. A few of the noteworthy headlines from this sleep-inducing week on Wall Street was an Apple (AAPL) upgrade and a $900 price target as Wall Street gets excited for the company's widely expected iPhone 5 launch this fall. Shares of AAPL broke out to new all-time highs on Friday, making AAPL the first company in history to hit a $600 billion market cap. Meanwhile shares of Facebook (FB) continue to plunge. The stock is down -50% from its $38 IPO price (just three months ago) following a massive lock up expiration of 270 million shares this past week.

Here's a quick review of recent U.S. economic data. Industrial production rose +0.6% in July, while capacity utilization came in at 79.3%. Both were in-line with estimates. The wholesale producer price index (inflation reading) came in at +0.3% in July, which was higher than the +0.2% estimate. The consumer price index (inflation) reading was unchanged (+0.0%) in July versus a +0.2% estimate. Housing permits rose to an annual pace of 812,000 compared to estimates of 770K but housing starts only rose to a 746K pace versus estimates of 763K. Meanwhile the weekly initial jobless claims were pretty much in-line with estimates at 366,000.

Manufacturing data continues to disappoint. The New York Empire State manufacturing (Fed) survey plunged to -5.9 in August. Readings under zero indicate contraction. July's reading was 7.4 and economists were only expecting a drop to 6.0 in August. The Philly Fed manufacturing survey rose to -7.1 in August after July's -12.9. Economists were expecting a rise to -6.5. This is the fourth month in a row the Philly Fed has been in contraction territory.

We did see some positive news. The retail sales number for July rose +0.8% compared to estimates for only +0.3%. This ended a three-month string of declines and revived hope that the U.S. consumer wasn't dead yet. The preliminary University of Michigan consumer sentiment survey for August was 73.6. That's up from the prior reading of 72.3 and better than the estimate of 72.2. The current conditions component hit its best levels since January 2008. The rise in sentiment is a little bit surprising with gasoline prices hitting their highest levels in three months. Speaking of fuel, if we look at the price of oil in Europe this past week saw Brent crude oil, hit a new all-time record high of 94.83 euros a barrel.

Major Indices:

The S&P 500 index advanced +0.8% last week, marking the sixth weekly gain in a row. Year to date the index is up +12.7%. The S&P 500 spent the first three days of the week churning sideways then surged on Thursday toward the next level of resistance near 1420. The high for the year was April 2nd at 1422.

Can the S&P 500 breakout past resistance at 1420? Anything is possible but we've got two weeks left in August and Ben Bernanke's speech in Jackson Hole is coming up on the 31st. Will stocks churn sideways until the Fed Chairman's speech on monetary policy and the economy or will momentum carry stocks higher? After a six-week rally the bears could easily argue that stocks are overbought and due for a correction lower, especially now that the S&P 500 is at resistance.

If the S&P 500 does see a pullback we can look for support near 1400 and then 1380. If it does manage to breakout then we can look for resistance in the 1440-1450 level.

Daily chart of the S&P 500 index:

The tech-heavy NASDAQ has continued to show strength. Big gains in technology big caps like AAPL, GOOG, AMZN, and CSCO have all played a role. The NASDAQ held support near 3,000 early in the week and then surged past potential resistance at the 3050 mark. Now the NASDAQ is nearing the early May highs in the 3075-3080 area.

If the NASDAQ does see a pullback we can look for short-term support near 3025. Overhead resistance remains 3100 and the 2012 highs near 3125-3130. The high for the year is 3134 on March 27th. FYI: The NASDAQ gained +1.8% for the week and is up +18.1% for the year.

Daily chart of the NASDAQ Composite index:

There has been a lot of digital ink already spent discussing the lack of confirmation of the market's rally by the small caps and the transportation sector. Traders have learned to distrust any rally if the small caps and the transports are not participating. This past week that finally changed. Both the small cap Russell 2000 index and the Dow Jones transportation index delivered strong gains. While both continue to lag the big cap indices like the NASDAQ, SP500, and the Dow Industrials but the rally this past week helped soothe some concerns.

The $RUT is up +2.2% for the week and now up +10.6% for the year. Meanwhile the Dow Jones Transportation average is up +2.5% for the week but only up +3.4% for the year. The $RUT has rallied straight to resistance at 820. A breakout here could signal a run to 840 while support is back near the 800 level.

Daily chart of the Russell 2000 index

Daily chart of the Dow Jones Transportation Index

It is worth noting that the volatility index ($VIX) is plunging. Normally low levels on the VIX are a sign of investor complacency and that usually precedes a market top. An old market adage says, "when the VIX is low, it's time to go". Unfortunately, using the VIX as a timing tool is way more art than science. The volatility index can remain low for a long period of time.

You'll notice on the chart that the $VIX has fallen to levels not seen since June of 2007. It's definitely a signal to be aware of.

chart of the Volatility Index (VIX) index

The event and economic calendar is pretty quiet this week. We'll get some additional data on home sales. The big event is probably the FOMC minutes from the last meeting (due out Tuesday). We will still see a few earnings reports. Some of the bigger names reporting this week are: DELL, BBY, MDT, URBN, HPQ, CRM.

It was a year ago, September 2011, when Germany approved the European Financial Stability Facility (EFSF) and the ESM. These are two bailout funds to help bring stability to the Eurozone. Now the German courts are going to announce whether or not these are constitutionally legal on September 12th. If the German court says "no" it could spark some volatility in the market.

A few events to be aware of:

Aug. 31st - Federal Reserve Chairman Ben Bernanke speaks at the Fed's annual Jackson Hole summit.

Sep. 13th - next FOMC meeting

Also in September, the IMF will release their review of Greece. Plus, the U.S. will likely hits its debt ceiling again.

Economic and Event Calendar

- Monday, August 20 -
(nothing significant)

- Tuesday, August 21 -
FOMC minutes from the last meeting

- Wednesday, August 22 -
Existing Home Sales for July

- Thursday, August 23 -
Weekly Initial Jobless Claims
New Home Sales for July

- Friday, August 24 -
Durable Goods Orders for July

The Week Ahead:

Honestly, little has changed for us since last week. Stocks are still climbing on expectations of new stimulus from central banks in China, Europe, and the U.S. This past week stocks got a boost when Germany's Merkel seemed to lend her support behind ECB President's recent comments about doing whatever it takes to save the Eurozone. Shorts continue to cover as stocks refuse to correct lower. Now here we are testing our highs for the year. If Ben Bernanke disappoints the market in his speech on the 31st or in the FOMC meeting on September 13th then the market is likely to go down.

Elsewhere if we don't hear anything out of China soon or if the situation deteriorates in Europe, it could spark some profit taking. It seems like we're hearing more and more cooperation from Germany as it works with its neighbors to solve the EU's financial struggles. yet there are still serious issues unsolved. All they have done so far is continue to kick the can down the road. Finland has actually started to consider what would it take to exit the euro if they need to. Finnish leaders admit that the EU will eventually run out of money to throw at these problems. The Fins don't want to be on the hook for additional bailout bills. Nobody wants to be the first to leave the euro since they'll be seen as the bad guys that crashed this multi-nation experiment.

In other news the saber rattling between Iran and Israel is picking up. Iran has issued several more outrageous statements about destroying Israel. This is likely political grandstanding to save face at home. Currently Iran's economy is out of control. Inflation is surging. There are reports that food inflation was running at +5% a month. That means in five months your food costs +20% more. It's easier for Iranian leaders to focus popular attention on a common "enemy" like Israel than solve their domestic problems. Plus, there has been talk for months that Israel might launch a unilateral attack at Iran's nuclear infrastructure before the end of summer 2012. Well here we are running out the last days of summer. I certainly hope no one is stupid enough to pull the trigger since oil prices would skyrocket and global stock markets would plunge on an outbreak of hostilities.

At the moment we have a U.S. market that continues to rally while ignoring the weeks and weeks of bad economic news. We're just weeks away from the U.S. presidential campaign. We're two weeks away from Bernanke's speech in Jackson hole and about three weeks away from the next Fed meeting. On top of it all the stock market's big cap indices have rallied to resistance at their 2012 highs. Do you buy stocks now? Do you wait for a correction?

Personally, I would hesitate to buy stocks with the market sitting just beneath resistance following a multi-week rally. Chances for a pullback are just too high. However, there are always individual stories that might make certain stocks compelling. Just remember that the broader market's movement can account for up to 80% of individual stock's performance. Volume is going to remain low the next couple of weeks. As LEAPS traders we are supposed to have a longer-term time frame. Readers may want to take a wait and see approach and see how the market reacts to Bernanke's speech at the end of August before starting any new significant trades.

James


Portfolio

Portfolio Update

by James Brown

Click here to email James Brown


Current Portfolio


Portfolio Comments:

Stocks are up for their sixth week in a row. Now the major indices are testing their 2012 highs. Can the momentum continue as we approach the end of summer?

We had two stocks, HFC and LEN, graduate from our watch list to our play list.

I am suggesting we exit our CVS trade on Monday morning.

We have adjusted the stop losses on: AIG, APA, CAT, DFS, PEP, TJX, TWX, and VLO.

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

No Denying

by James Brown

Click here to email James Brown

Editor's Note:

(August 18th, 2012)

It was shaping up to be a super quiet week for stocks until equities surged on Thursday. Now the S&P 500 and the Dow Industrials are testing their 2012 highs. The NASDAQ is showing strength but not quite at its 52-week highs yet. Meanwhile both the small cap Russell 2000 index and the transports decided to participate in the rally, which helped alleviate some technical fears.

Overall stocks continue to advance in spite of generally weak economic news. The only positive surprises were the recent retail sales numbers and consumer sentiment figures. While these were positive the overwhelming balance of economic data remains soft. Stocks seem to be rising on hope for new stimulus from the world's major central banks (U.S., Europe, China). If no stimulus announcements are forthcoming in the next few weeks then stocks are likely to drop.

There is no denying that the trend is up. In spite of the economic data I am cautiously bullish. However, that doesn't mean we have to load up the truck on new positions at this time. Instead of adding new trades tonight with the S&P 500 sitting just below resistance I've added five new candidates to the watch list instead.


Play Updates

Time to Update Stop Losses

by James Brown

Click here to email James Brown

Editor's Note:

HFC and LEN have graduated from the Watch List to our active trade list below.

I have updated several stop losses on our current trades.


Closed Plays


None. No closed plays this week


Play Updates


Abbott Labs - ABT - close: 65.92

Comments:
08/18/12 update: It was a disappointing Friday for ABT. Shares had been slowly drifting higher until Friday's -0.7% decline. Furthermore, on a short-term basis, Friday's decline is technically a bearish engulfing candlestick reversal pattern. This could be signaling a deeper pullback to come. That would make this past week a lower high. If you study the weekly chart a dip to the long-term trend of higher lows could see ABT correct into the $64-62 area.

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 $ 2.69/ 2.75

- or -

JUL 02, 2012 - entry price on ABT @ 64.22, option @ 4.28
symbol: ABT1418A65 2014 JAN $65 call - current bid/ask $ 4.95/ 5.10

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: 34.80

Comments:
08/18/12 update: AIG has been showing plenty of strength this past week. The stock is up over two dollars and shares are now testing resistance at its early May highs near $35.00. The big-picture trend still looks very bullish but I would not buy it here. The stock is likely to pullback soon. Broken resistance near $32.50 should offer some support.

I am raising our stop loss up to $29.45.

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 $ 5.85/ 6.00

- or -

May 18, 2012 - entry price on AIG @ 28.25, option @ 4.20
symbol: AIG1418A35 2014 JAN $35 call - current bid/ask $ 5.95/ 6.15

08/18/12 new stop loss @ 29.45
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: 29.45
Play Entered on: 05/18/12
Originally listed on the Watch List: 04/07/12


Apache Corp. - APA - close: 89.06

Comments:
08/18/12 update: APA has spent the last couple of weeks consolidating sideways under resistance near $90.00. If you look hard enough you can see a slightly bullish trend of higher lows suggesting APA is poised to breakout higher. If APA can clear resistance at $90 the next challenge for the bulls is the descending 200-dma. Please note our new stop loss at $81.40. 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 $ 1.97/ 2.03

- or -

Jun 18, 2012 - entry price on APA @ 87.10, option @ 6.43
symbol: APA1418A100 2014 JAN $110 call - current bid/ask $ 4.75/ 4.95

08/18/12 new stop loss @ 81.40

Current Target: $109.00
Current Stop loss: 81.40
Play Entered on: 06/18/12
Originally listed in the New Plays 06/16/12


Bank of America - BAC - close: 8.00

Comments:
08/18/12 update: Shares of BAC have climbed four weeks in a row. Unfortunately, if Friday's session is any indication, the rally is running low on gas. The move on Friday looks like a short-term failed rally. Of course after a four-week run BAC is due for a little pullback. Whether or not BAC does correct lower may depend on if the stock market's major indices can breakout past resistance this week.

I would expect BAC to dip into the $7.80-7.60 area. 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 $ 0.18/ 0.19
(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 $ 0.18/ 0.19
(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: 90.01

Comments:
08/18/12 update: Workers at one of CAT's Illinois plants have agreed to a new multi-year deal, ending a labor strike. That may have helped shares gap higher on Friday morning. CAT has closed right at resistance at the $90.00 level so it's not a bullish breakout yet. If the rally does continue there is likely resistance in the $93.50-95.00 zone. Plus, the exponential 200-dma, 300-dma, and 200-dma could all be overhead technical resistance. In spite of the hurdles in front of it CAT does look bullish but I would not launch new positions at current levels.

Please note our new stop loss at $81.75.

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 $ 3.90/ 3.95

- or -

Aug 10, 2012 - entry price on CAT @ 88.26, option @ 7.90
symbol: CAT1418A100 2013 JAN $100 CALL - current bid/ask $ 8.20/ 8.40

08/18/12 new stop loss at $81.75
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

Current Target: $110.00-115.00
Current Stop loss: 81.75
Play Entered on: 08/10/12
Originally listed on the Watch List: 07/07/12


CH Robinson Worldwide - CHRW - close: 57.04

This is a bearish PUT option trade.

Comments:
08/18/12 update: Ouch! CHRW is up almost three dollars for the week. The stock just posted its third weekly gain as well. I was expecting CHRW to find more resistance in the $55-56 area. Yet the stock has really accelerated higher in the last four or five days. The close over $56 and its 50-dma is short-term bullish.

Longer-term the trend is still down. Currently we have a stop loss at $60.75 but more conservative traders may want to lower theirs closer to the simple 100-dma (near $59.40) or closer to $58.00 instead.

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 $ 2.80/ 2.95

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: 45.31

Comments:
08/18/12 update: I am giving up on CVS. The stock is up the last two days in a row but I think it's too little too late. The S&P 500 index is up six weeks in a row. Yet CVS has been stuck churning inside the $44-46 area.

I am suggesting we abandon ship and exit positions on Monday morning.

- Suggested Positions -
Jul 19, 2012 - entry price on CVS @ 45.98, option @ 0.93
symbol: CVS1319A50 2013 JAN $50 call - current bid/ask $0.53/0.55

- or -

Jul 19, 2012 - entry price on CVS @ 45.98, option @ 1.70*
symbol: CVS1418A55 2014 JAN $55 call - current bid/ask $1.26/1.35

08/18/12 prepare to exit on Monday morning
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: 37.77

Comments:
08/18/12 update: Shares of DFS produced a big move higher on Thursday. The stock broke out from its sideways consolidation and shares are trading at new record highs. It looks like the move higher on Thursday may have been reaction to news that DFS was partnering with Google in the new Google Wallet program.

Please note our new stop loss at $33.45.

- Suggested Positions -
JUL 05, 2012 - entry price on DFS @ 35.28, option @ 2.15
symbol: DFS1319A37 2013 JAN $37 call - current bid/ask $2.85/3.00

- or -

JUL 05, 2012 - entry price on DFS @ 35.28, option @ 3.40
symbol: DFS1418A40 2014 JAN $40 call - current bid/ask $3.80/4.10

08/18/12 new stop loss @ 33.45
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: 33.45
Play Entered on: 07/05/12
Originally listed on the Watch List: 06/02/12


HollyFrontier Corp. - HFC - close: 39.87

Comments:
08/18/12 update: HFC is a watch list candidate that has graduated to our active trade list. The plan was to wait for HFC to close over $40.50 and then buy calls the next day. Our trade opened on Friday morning. However, if you want to get technical HFC didn't actually close "over" $40.50 it closed "at" $40.50. If you are waiting for an entry point I would buy calls now or look for a new rise past $40.50. I strongly suspect that HFC's relative weakness on Friday and drop to $40.00 was probably due to option expiration.

Our long-term target is $44.50 for the 2013 calls and $48.50 for the 2014 calls.

- Suggested Positions -
AUG 17, 2012 - entry price on HFC @ 40.50, option @ 2.75
symbol: HFC1319A42 2013 JAN $42 call - current bid/ask $2.65/2.75

- or -

AUG 17, 2012 - entry price on HFC @ 40.50, option @ 5.00
symbol: HFC1418A45 2014 JAN $45 call - current bid/ask $4.90/5.10

Chart of HFC:

Current Target: $ 44.50(2013 calls), $48.50 (2014 call)
Current Stop loss: 36.90
Play Entered on: 08/17/12
Originally listed on the Watch List: 08/06/12


Lennar Corp. - LEN - close: 32.74

Comments:
08/18/12 update: LEN is another watch list candidate that has graduated to our active trade list. Some of the homebuilders have been showing relative strength as investors bet that the worst is over for the housing market. Shares of LEN have climbed to new multi-year highs. Our plan was to wait for LEN to close over $32.25 and then buy calls the next day. That trigger was hit with Thursday's rally past $32. Our trade opened on Friday morning. I would still consider new positions now.

Earlier Comments:
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.

- Suggested Positions -
AUG 17, 2012 - entry price on LEN @ 32.72, option @ 2.07
symbol: LEN1319A35 2013 JAN $35 call - current bid/ask $2.28/2.34

- or -

AUG 17, 2012 - entry price on LEN @ 32.72, option @ 3.39
symbol: LEN1418A40 2014 JAN $40 call - current bid/ask $3.40/3.55

Chart of LEN:

Current Target: $ 36.00(2013 calls), $39.50 (2014 call)
Current Stop loss: 29.75
Play Entered on: 08/17/12
Originally listed on the Watch List: 08/11/12


Eli Lilly - LLY - close: 42.42

Comments:
08/18/12 update: I am growing concerned about LLY. Shares have been underperforming the market these last two weeks. Believe it or not the longer-term trend is still higher but recent weakness doesn't bode well for LLY. Look for support near $42 or near the 200-dma (closer to $41). 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 $ 2.24/ 2.59

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: 87.87

Comments:
08/18/12 update: A week ago it looked like MON's rally had run out of steam under resistance at $90 and shares would correct lower. The stock has managed to churn sideways in the $86-89 area. There is still resistance near $90 and odds favor a correction but if the market's major indices can breakout then MON might follow suit. I am not suggesting new positions at this time.

- Suggested Positions -
Jul 17, 2012 - entry price on MON @ 85.84, option @ 4.35
symbol: MON1319A90 2013 JAN $90 call - current bid/ask $ 4.35/ 4.45

- or -

Jul 17, 2012 - entry price on MON @ 85.84, option @ 6.50
symbol: MON1418A100 2014 JAN $100 call - current bid/ask $ 6.10/ 6.30

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: 43.34

Comments:
08/18/12 update: After several weeks of gains MRK was way overdue for a pullback. Shares managed to consolidate sideways for a couple of weeks after that last big surge in late July. Now MRK is finally starting to correct. This is normal. A typical 38.2% Fibonacci retracement of the June-July rally would mean a pull back toward $42.00. A 50% retracement would be a dip to $41.00.

Conservative traders may want to take profits now and then reconsider a new entry on a bounce once the correction is over.

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 $ 5.15/ 5.20

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: 30.90

Comments:
08/18/12 update: MSFT has managed to chew threw technical resistance in the $30-31 area. Now the stock has climbed to resistance at the $31.00 level. I would be tempted to launch new bullish positions if MSFT can close over $31.25.

- Suggested Positions -
Jun 01, 2012 - entry price on MSFT @ 28.50, option @ 1.69
symbol:MSFT1319A30 2013 JAN $30 call - current bid/ask $ 2.14/ 2.16

- or -

Jun 01, 2012 - entry price on MSFT @ 28.50, option @ 3.05
symbol:MSFT1418A30 2014 JAN $30 call - current bid/ask $ 3.75/ 3.80

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: 73.39

Comments:
08/18/12 update: PEP has consolidated sideways the last couple of weeks near the $72 area. Now with the market's recent surge late this past week the stock has hit new three-year highs. I am raising our stop loss up to $68.75.

- Suggested Positions -
Jul 02, 2012 - entry price on PEP @ 70.34, option @ 2.85
symbol: PEP1418A75 2014 JAN $75 call - current bid/ask $ 3.55/ 3.75

08/18/12 new stop loss @ 68.75
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: 68.75
Play Entered on: 07/02/12
Originally listed on the Watch List: 05/26/12


Pfizer Inc. - PFE - close: 23.79

Comments:
08/18/12 update: PFE hit new multi-year highs in late July and early August. Since then the stock has been consolidating sideways in a relatively narrow range. If the stock sees a pullback we can look for support near $23.00. 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 $ 1.38/ 1.42

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: 63.29

Comments:
08/18/12 update: Apple's iPhone 5 has not even been confirmed yet but rumors are swirling that Apple (AAPL) will announce one this fall (possibly September). It's estimated that AAPL's iPhone 5 could be the biggest smartphone launch in history. QCOM, who makes components for the iPhone, is riding the wave of AAPL enthusiasm higher. Shares of QCOM are up five weeks in a row. Shares look pretty overbought here and due for a pullback.

FYI: A typical 50% retracement of the July-August rally would be a dip to $58. I expect the $60 level to act as support.

I am not suggesting new positions at this time.

- Suggested Positions -
Aug 10, 2012 - entry price on QCOM @ 61.71, option @ 2.56
symbol:QCOM1319A65 2013 JAN $65 call - current bid/ask $ 3.05/ 3.10

- or -

Aug 10, 2012 - entry price on QCOM @ 61.71, option @ 4.75
symbol:QCOM1418A70 2014 JAN $70 call - current bid/ask $ 5.20/ 5.25

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: 45.91

Comments:
08/18/12 update: TJX has not been moving very fast over the last few weeks. Yet the stock has maintained the bullish trend of higher lows and higher highs. This past week saw TJX breakout to new all-time highs on Friday.

We are raising our stop loss up to $40.85. If TJX does see a pullback it should find some support in the $43.50-43.00 area.

- Suggested Positions -
Jun 20, 2012 - entry price on TJX @ 43.62, option @ 2.53
symbol: TJX1319A45 2013 JAN $45 call - current bid/ask $ 3.20/ 3.30

- or -

Jun 20, 2012 - entry price on TJX @ 43.62, option @ 5.10
symbol: TJX1418A45 2014 JAN $45 call - current bid/ask $ 5.90/ 6.10

08/18/12 new stop loss @ 40.85
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: 40.85
Play Entered on: 06/20/12

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


Time Warner - TWX - close: 42.61

Comments:
08/18/12 update: The first two weeks of August saw TWX surge from $39 to almost $43. Since then shares have been consolidating sideways in a narrow range. This stock remains overbought and should see a pullback lower. However, a correction is not guaranteed. If TWX does retreat I would look for support near $40. More conservative traders may want to take profits now if you hold the 2013 calls and reconsider jumping back in on a dip.

I am raising our stop loss to $38.75.

I am not suggesting new positions at this time.

- Suggested Positions -
Aug 03, 2012 - entry price on TWX @ 40.66, option @ 1.79
symbol: TWX1319A42 2013 JAN $42 call - current bid/ask $ 2.48/ 2.52

- or -

Aug 03, 2012 - entry price on TWX @ 40.66, option @ 2.85
symbol: TWX1419A45 2014 JAN $45 call - current bid/ask $ 3.35/ 3.50

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: 38.75
Play Entered on: 08/03/12
Originally listed on the Watch List: 07/21/12


Union Pacific Corp. - UNP - close: 125.01

Comments:
08/18/12 update: There has been a lot of focus on the transportation sector not confirming the broader market's rally. Yet this past week saw the transportation index surge higher. This rally in the sector helped UNP gain three points for the week. Shares actually set a new closing high this week. I am raising our stop loss to $114.75. 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 $ 4.50/ 4.65

- or -

Jul 20, 2012 - entry price on UNP @ 122.10, option @ 6.40
symbol: UNP1418A140 2014 JAN $140 call - current bid/ask $ 7.30/ 7.75

08/18/12 new stop loss at $114.75
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: 114.75
Play Entered on: 07/20/12
Originally listed on the Watch List: 06/30/12


U.S. Bancorp - USB - close: 33.11

Comments:
08/18/12 update: The financial sector has been quietly churning sideways in a very narrow range. That started to change with financials moving higher in the last couple of sessions. Unfortunately, USB is not participating in the rally yet. This stock is still moving sideways. If USB doesn't join ranks with the rest of the financials soon we could see this stock correct lower toward the $32-31 area.

- Suggested Positions -
Jul 20, 2012 - entry price on USB @ 33.62, option @ 1.39
symbol: USB1319A35 2013 JAN $35 call - current bid/ask $ 0.92/ 0.95

- or -

Jul 20, 2012 - entry price on USB @ 33.62, option @ 3.10
symbol: USB1418A35 2014 JAN $35 call - current bid/ask $ 2.74/ 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: 128.69

Comments:
08/18/12 update: Visa has not made any progress. Shares are churning sideways under the $130 level. I don't see many changes from my prior comments. If this stock corrects we can look for likely support near $125 and then at $120. If Visa can move higher there is short-term resistance near $132. Beyond $132 it's blue-sky territory for V.

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 $ 5.10/ 5.25

- or -

JUL 03, 2012 - entry price on V @ 126.49, option @ 11.95
symbol: V1418A140 2014 JAN $140 call - current bid/ask $11.45/12.20

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: 28.80

Comments:
08/18/12 update: VLO continues to digest its gains in a sideways consolidation. After a non-stop ten-week rally higher VLO remains overbought even after a two-week drift sideways. Odds would favor a correction lower but with the major indices poised to breakout past resistance we could see VLO follow the market higher. I suspect that a breakdown under $28.00 would probably signal a bigger retreat toward the $26.50-26.00 area.

Currently we only have the 2014 call position left and our exit target is $29.90. I am not suggesting new positions.

I am raising our stop loss to $25.75. More conservative traders will want to seriously consider an early exit right now. The 2014 calls are up +67%.

- 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 $ 4.35/ 4.45

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: 25.75
Play Entered on: 07/05/12
Originally listed on the Watch List: 06/23/12


Watch

Five New Candidates

by James Brown

Click here to email James Brown


New Watch List Entries

EMN - Eastman Chemical

ROST - Ross Stores

SCHW - Charles Schwab

UIS - Unisys Corp.

URBN - Urban Outfitters


Active Watch List Candidates

ATI - Allegheny Tech.

SWKS - Skyworks Solutions

WFC - Wells Fargo


Dropped Watch List Entries

LEN and HFC have graduated to the active play list.

I have removed CLX and HCP as candidates.



New Watch List Candidates:


Eastman Chemical Co. - EMN - close: 55.71

Company Info

EMN is a major chemical company. Normally you might that with a slowing global economy and rising oil prices (a major input cost for chemicals) that shares of EMN would be suffering. This stock is actually setting new all-time record highs. The $55 level has been major resistance for years.

I am suggesting readers wait for EMN to close over $56.00 and then buy calls the next day with a stop loss at $52.40. Our long-term target is to exit our 2014 calls when EMN hits $69.00.

Breakout trigger: Wait for EMN to close over $56.00, buy calls the next day (stop loss 52.40)

BUY the 2013 Jan $60 call (EMN1319A60) current ask $2.35

- or -

BUY the 2014 Jan $65 call (EMN1418A65) current ask $4.90

Chart of EMN:

Originally listed on the Watch List: 08/18/12


Ross Stores, Inc. - ROST - close: 69.47

Company Info

ROST is a discount and off-price apparel chain. Investors seem to love this stock. The company just reported earnings this past week. ROST beat by a penny but guided lower. That's right. Management lowered guidance and yet shares did not see a sell-off. Instead the stock is bouncing off rising technical support at the 50-dma and is poised to breakout past resistance at $70.00 soon.

If investors are willing to ignore bad news then we want to take a look. The bullish trend of higher lows would suggest a breakout past $70 soon. I am suggesting we wait for ROST to close over $70.50 and then buy calls the next day with a stop loss at $66.45. Our long-term target is $84.50. FYI: The P&F chart is bullish with a $92 target.

We do want to limit our position size and keep them small to reduce our risk.

Breakout trigger: Wait for a close over $70.50 (stop: 66.45)

*Small Positions*

BUY the 2013 Jan $75 call (ROST1319A75) current ask $2.10

- or -

BUY the 2014 Jan $80 call (ROST1418A80) current ask $4.80

Chart of ROST:

Originally listed on the Watch List: 08/18/12


Charles Schwab Corp. - SCHW - close: 13.20

Company Info

Shares of this financial services company appear to have found a bottom. Now they are starting to breakout from a multi-week consolidation. I want to see a little more confirmation. I am suggesting investors wait for SCHW to close over $13.60 and then buy calls the next day. We will start with a stop loss at $12.45. Our long-term target is $15.50 (exit the 2014 calls when SCHW hits $15.50).

Breakout trigger: Wait for SCHW to close over $13.60

BUY the 2013 Jan $12.50 call (SCHW1319A12.5) current ask $1.45

- or -

BUY the 2014 Jan $15 call (SCHW1418A15) current ask $1.30

Chart of SCHW:

Originally listed on the Watch List: 08/18/12


Unisys Corp. - UIS - close: 21.00

Company Info

UIS is an I.T. services company. Big picture the stock bottomed back in June. On a short-term basis the bullish breakout past $20.00 looks pretty good but the rally stalled right at short-term resistance near $21.00.

I am suggesting we buy calls on a dip at $20.25. We'll use a stop loss at $18.75. Our target is $24.50. I am only suggesting the 2013 calls because the spread on the 2014 calls is too wide.

Buy-the-Dip trigger: $20.25 (stop 18.75)

BUY the 2013 Jan $20 call (UIS1319A20) current ask $1.75

Chart of UIS:

Originally listed on the Watch List: 08/18/12


Urban Outfitters - URBN - close: 31.40

Company Info

Shares of this "lifestyle" and apparel retailer have spent the last four weeks consolidating sharp mid-July rally. Now URBN looks like it's on the verge of another breakout higher. I am suggesting we wait for URBN to close over $32.00 and buy calls the next day with a stop loss at $29.90. Our target is only $35.00. Traders should be aware that the $33.75-34.00 area has been resistance in the past.

Instead of listing the 2014 calls, which only has some odd strikes for URBN, I'm including the March 2013s in addition to the January 2013s.

FYI: The Point & Figure chart is bullish with a long-term target of $46.

NOTE: Tuesday could be volatile as investors react to URBN's earnings report due out Monday night. Wall Street estimates are for 33 cents a share.

Breakout trigger: Wait for a close over $32.00 (stop loss: 29.90)

BUY the 2013 Jan $35 call (URBN1319A35) current ask $1.35

- or -

BUY 2013 MARCH $35 call (URBN1316C35) current ask $1.95

Chart of URBN:

Originally listed on the Watch List: 08/18/12


Active Watch List Candidates:



Allegheny Technologies - ATI - close: 32.41

Comments:
08/18/12 update: ATI is still consolidating sideways under short-term resistance at the $33.00 level. I don't see any changes from my prior comments on August 11th. It looks like all the bad news about the global economy has been priced in. 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)

- or -

BUY the 2014 Jan $40.00 call (ATI1418A40)

*small positions*

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


The Clorox Co. - CLX - close: 72.39

Comments:
08/18/12 update: Hmm... I am a little concerned that the market has been able to rally to new relative highs but CLX is not keeping up. I am removing CLX as a watch list candidate. Readers may want to keep an eye on it for a breakout past resistance near $73.50-74.00.

Our trade did not open.

08/18/12 removed CLX as a watch list candidate.

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


HCP, Inc. - HCP - close: 44.99

Comments:
08/18/12 update: We have been expecting HCP to correct lower. However, seeing HCP correct lower while the stock market is advancing to new relative highs is too much of a divergence! I am removing HCP as a watch list candidate.

Readers may want to keep HCP on their radar screen for a bounce from likely support near $42.00.

Trade did not open.

08/18/12 removed HCP as a candidate.
08/06/12 adjust trigger dip to $43.00

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


Skyworks Solutions - SWKS - close: 29.80

Comments:
08/18/12 update: SWKS continues to coil sideways under resistance near $30.00. Shares look like they are ready to breakout higher any day now. 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)

- or -

BUY the 2014 Jan $35 call (SWKS1418a35)

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


Wells Fargo & Co - WFC - close: 34.03

Comments:
08/18/12 update: Financials have been churning sideways in a narrow range the last couple of weeks. Then in just the last couple of days we've seen a move higher. WFC has not broken out higher yet but shares are building a bullish trend of higher lows. 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