Option Investor
Newsletter

Daily Newsletter, Sunday, 8/26/2012

Table of Contents

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

Leaps Trader Commentary

Focused on Bernanke

by James Brown

Click here to email James Brown

It had to happen sooner or later. Stocks finally saw some profit taking. The S&P 500 briefly tagged a four-year high early last week before pulling back. Even with the bounce on Friday the market ended a six-week winning streak. Helping fuel the rebound on Friday was news or should we say rumors that the European Central Bank (ECB) is considering a target range or band for yields in its proposed bond-buying program. Another headlines on Friday was news that Apple Inc. (AAPL) won its patent infringement suit against rival Samsung with the jury ordering a $1 billion reward to Apple. Speaking of Apple, the stock hit a new all-time high, almost hitting $675 a share, pushing the company's market cap to over $620 billion, make it the most valuable company on the planet.

It was a relatively quiet week for economic data. The existing home sales report for July came in at a 4.47 million unit pace, which was less than the 4.55 million annual pace expected. The weekly initial jobless claims rose from 368,000 to 372,000. The durable goods report for July saw its headline number rise +4.2%, which is a nice increase over June's +1.6% and above estimates of +2.4%. However, if you exclude the more volatile transportation component's +14.1% gain then the durable goods report showed a -0.4% decline.

Major Indices:

The S&P 500 lost -0.5% for the week. The index surpassed the old 2012 high of 1422 with a spike to 1426 on Tuesday. The gains didn't last with stocks reversing midday. The mid-week pullback saw the S&P 500 dip to round-number psychological support at the 1400 level on Thursday and Friday before bouncing on Friday morning.

The intermediate trend is still up but the S&P 500 could easily see another week or two of mild declines and still maintain the up trend. Of course stocks might just churn sideways as investors wait for the Federal Reserve Chairman's speech on Friday and the ECB President's speech on Saturday.

If the S&P 500 breaks down under 1400 the next level to watch is 1380 or potential support at the rising 50-dma. I still see the 1420 level as likely overhead resistance. A breakout higher could signal a run toward the 1440-1450 area.

Daily chart of the S&P 500 index:

The NASDAQ's bounce on Friday (+0.5%) was almost enough to push the index back into positive territory for the week. It wasn't quite enough and the NASDAQ snapped a five-week winning streak. The market's spike higher on Tuesday lifted the NASDAQ to round-number resistance at the 3100 level before reversing. If stocks continue to rally the levels to watch are overhead resistance at 3100 and the NASDAQ's 12-year highs near 3130 set back in March of this year.

On the other hand, if stocks retrace lower then look for support at the 3,000 mark and near 2950 or the simple 50-dma.

Daily chart of the NASDAQ Composite index:

The small cap Russell 2000 index saw the sharpest pullback with a four-day decline. The market's spike higher on Tuesday pushed the $RUT past resistance at 820 but it didn't last. The $RUT looks like it's headed for round-number support at the 800 level. If this level fails then there is potential technical support at the 50-dma, 100-dma, and 200-dma all in the 800-780 area.

Daily chart of the Russell 2000 index

Do you remember all the talk about the transportation sector and how they were not confirming the rally? Then two weeks ago the transports surged and bulls were claiming the rally finally had its confirmation. Well the rally in the transports has reversed, which doesn't help the technicians and is another caution flag for traders.

Daily chart of the Dow Jones Transportation Index

The economic and event calendar picks up a little bit this week. We'll see more data on house prices and sales. We'll get a second look at the U.S. Q2 GDP estimate, which is unlikely to change. We'll see both consumer confidence and consumer sentiment numbers. Plus, we'll get the Chicago PMI out on Friday. However, the media will be focused on the Republican's national convention which is supposed to start on Monday but might be delayed due to hurricane Isaac hitting the coast. The market will be focused on Federal Reserve Chairman Ben Bernanke's speech on Friday, August 31st in Jackson Hole.

Economic and Event Calendar

- Monday, August 27 -
The Republican national convention is supposed to begin but will likely be delayed due to hurricane Isaac.

- Tuesday, August 28 -
Case-Shiller 20-city home price index
Consumer Confidence (for August)

- Wednesday, August 29 -
Q2 U.S. GDP estimate
Pending Home Sales
Federal Reserve Beige Book

- Thursday, August 30 -
Weekly Initial Jobless Claims
Personal Income & Spending

- Friday, August 31 -
Chicago PMI for August
Fed Chairman Ben Bernanke speech in Jackson Hole
University of Michigan consumer sentiment (final for August)
Factory orders for July

Additional Events to be aware of:

Sep. 1st - ECB President Draghi speech
Sep. 3rd - Democrat convention begins
Sep. 6th - ECB meeting
Sep. 7th - U.S. nonfarm payrolls (jobs) report
Sep. 12th - German courts vote on constitutionality of ESM
Sep. 12-13th - (two-day) FOMC meeting

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

The Week Ahead:

Overall stocks are holding up pretty well considering all the challenges facing the U.S. and global economy. Oil prices have been on the rise and that's lifting gasoline prices, which in turn reduces the amount of discretionary spending consumers can make. The labor market in the U.S. remains weak. Europe is still dealing with its out of control debt issues and weak Eurozone members. Greece may still get kicked out of the Eurozone. Much of Europe is facing a recession while a few countries are in a depression. The slowdown in both Europe and the U.S. is having a big impact on China.

China's economy has fallen to its slowest pace in years. The lack of demand from the rest of the world has a created a new problem for China - lack of storage space. Unsold inventory is backing up and China's manufacturers are running out of space to store their goods. The Baltic dry goods index measures demand for shipping and the Baltic index is nearing multi-decade lows because there isn't any demand.

The big concern right now is that stocks have risen on expectations that the major central banks (The U.S. Fed, the ECB, China's central bank) will all announce some form of new stimulus soon. If there isn't new stimulus then this rally is likely to deflate. We probably won't see any stimulus in China until after the new leadership is in place so that's probably late October or November before they adjust their policies.

Fed Chairman Bernanke speaks this Friday, August 31st and Wall Street is holding its breath waiting for some hint of further stimulus (most likely QE3). Unfortunately, QE3 might be Bernanke's last "bullet" in his Fed policy gun. Currently the economic situation isn't bad enough for him to pull the trigger yet. Meanwhile ECB President is due to speak on Sept. 1st but he probably won't say anything of substance until the Sept. 6th ECB meeting. In reality Draghi probably won't say anything more to follow up on his "whatever it takes" comments from a couple of weeks ago until after the German court votes on the ESM and that's scheduled for Sept. 12th.

If I had to guess I would not be surprised to see stocks consolidate sideways while we wait for Bernanke to speak on Friday. Then assuming Bernanke disappoints the market his talk could be the catalyst that sparks another sell-off, which would be just in time for the traditionally weak month of September. It's a little early yet but there is also the potential that the S&P 500 fails here near 1420 and the move forms a bearish double-top pattern with its highs from spring of this year.

I don't want to sound too bearish here. Stocks have been pretty resilient lately in spite of the bearish trend of negative economic data from around the globe, including the U.S. I do want to caution readers that this is a delicate spot for the market with a lot of potential catalysts during a seasonally weak period on the calendar. Just throw another wildcard in the mix, the situation with Syria continues to worsen and the war drums between Israel and Iran are still getting louder.

The stock market volume will be very light this week. Not only is it the last week of "summer" with the Labor Day holiday just ahead of us but investors might also choose to stay on the sidelines until after Bernanke's speech this coming Friday.

James


Portfolio

Portfolio Update

by James Brown

Click here to email James Brown


Current Portfolio


Portfolio Comments:

The U.S. markets finally succumbed to some profit taking after a multi-week rally. Yet traders were buying the dip on Friday and stocks managed to pare their declines.

Will the rally resume? Or will stocks churn sideways as investors wait for Bernanke's speech on Friday?

URBN graduated from our watch list to our play list in a dramatic fashion.

CVS was closed as planned on Monday morning. VLO hit our exit target early in the week.

We have adjusted the stop losses on: DFS

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

Just Days Away

by James Brown

Click here to email James Brown

Editor's Note:

(August 25th, 2012)

The stock market's upward momentum has stalled a bit. Both the S&P 500 and the Dow Jones Industrial Average have pulled back after testing their 2012 highs. We don't know if the rally is going to reverse here or if stocks have paused to merely catch their breath before moving higher.

Fed chairman Bernanke is due to speak on Friday. ECB President speaks on Saturday. There are also several key events in the first two weeks of September that could spark a sell-off in stocks. I suspect that short-term the stock market will consolidate sideways as investors wait to hear Bernanke's and Drahgi's speeches.

Therefore with the major indices pulling back from resistance at their 2012 highs and potentially market-moving events just days away, I don't see this as an opportune time to load up on new bullish LEAPS trades. As a matter of fact, I just added a bearish candidate to the watch list tonight.

Here's a list of stocks on my radar screen. These have potential to be LEAPS trades if the right entry point presents itself:

OMX, OSK, ERSX, STX, HSY, SLV, ADP, RHT, FSLR, FTR, WMT, GLD, VOD, CVX,


Play Updates

VLO Hits Our Target

by James Brown

Click here to email James Brown


Closed Plays


CVS was closed as planned.
VLO hit our target.


Play Updates


Abbott Labs - ABT - close: 65.84

Comments:
08/25/12 update: ABT is virtually unchanged for the week. Shares drifted lower toward their 50-dma before finding support at the $65.00 level. The rebound here could actually be used as a new bullish entry point.

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 $ 2.76/ 2.81

- or -

JUL 02, 2012 - entry price on ABT @ 64.22, option @ 4.28
symbol: ABT1418A65 2014 JAN $65 call - current bid/ask $ 5.10/ 5.35

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: 34.47

Comments:
08/25/12 update: AIG is down less than 40 cents for the week thanks to a big +2.1% bounce on Friday. The stock looks poised to test resistance at the $35.00 level soon. A breakout past $35.00 would look very bullish on the weekly chart.

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 $ 5.75/ 5.85

- or -

May 18, 2012 - entry price on AIG @ 28.25, option @ 4.20
symbol: AIG1418A35 2014 JAN $35 call - current bid/ask $ 5.85/ 6.05

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: 87.50

Comments:
08/25/12 update: APA failed at resistance near $90.00 for the second time in two months this past week. Shares saw a pullback toward $86.40 before bouncing off its Friday lows. Investors might want to consider new positions if APA can close over $90.00.

- Suggested Positions -
Jun 18, 2012 - entry price on APA @ 87.10, option @ 3.45
symbol: APA1319A100 2013 JAN $100 call - current bid/ask $ 1.67/ 1.72

- or -

Jun 18, 2012 - entry price on APA @ 87.10, option @ 6.43
symbol: APA1418A100 2014 JAN $110 call - current bid/ask $ 4.70/ 4.90

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: 8.16

Comments:
08/25/12 update: Believe it or not but BAC is up for the week. That stretches the stock's run to five weeks of gains. Shares spiked past resistance near $8.20 before giving it back and dipping toward short-term round-number support at $8.00. I am not suggesting new positions at this time. However, a close over $8.40 or $8.50 could be used as a new bullish entry point (to buy 2014 calls).

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 $ 0.21/ 0.22
(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 $ 0.21/ 0.22
(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: 87.47

Comments:
08/25/12 update: Ouch! CAT has seen a sharp correction from Tuesday's high near $92.00 and its 100-dma all the way down to $86.40 on Friday morning. Technically the move looks like a failed rally pattern near $90.00, which was resistance. I am not suggesting new positions at this time. CAT should see some short-term support near $85.00 and its 50-dma.

More conservative traders may want to raise their stops closer to the $85 level.

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 $ 3.00/ 3.10

- or -

Aug 10, 2012 - entry price on CAT @ 88.26, option @ 7.90
symbol: CAT1418A100 2014 JAN $100 CALL - current bid/ask $ 7.55/ 7.75

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: 57.16

This is a bearish PUT option trade.

Comments:
08/25/12 update: CHRW is up 12 cents for the week. It may not be much but it is a gain and that's a lot better than the Dow Jones Transportation index, which pulled back sharply from its recent high. CHRW remains under a long-term trend of lower highs but I am not suggesting new positions at this time.

Currently we have a stop loss at $60.75 but more conservative traders may want to lower theirs closer to the simple 100-dma or closer to $58.00 instead.

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 $ 2.75/ 2.90

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


Discover Financial - DFS - close: 38.60

Comments:
08/25/12 update: DFS continues to rally. The stock is at a new all-time high. Shares got a boost this past week after news surfaced that DFS had inked a deal with EBAY's PayPal unit. Now merchants who accept Discover can let consumers pay for their purchases with PayPal using Discover's system.

I am raising our stop loss to $34.75.

NOTE: The $40.00 level could be round-number psychological resistance. I am suggesting we exit our 2013 calls when DFS hits $39.75. We will adjust our target for the 2014 calls to $44.00.

- Suggested Positions -
JUL 05, 2012 - entry price on DFS @ 35.28, option @ 2.15
symbol: DFS1319A37 2013 JAN $37 call - current bid/ask $3.40/3.70

- or -

JUL 05, 2012 - entry price on DFS @ 35.28, option @ 3.40
symbol: DFS1418A40 2014 JAN $40 call - current bid/ask $4.40/4.80

08/25/12 new stop loss @ 34.75
08/25/12 adjusted targets to $39.75 (2013 calls), $44 (2014 calls)
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: $39.75 for the 2013 call2, $44.00 for the 2014s
Current Stop loss: 33.45
Play Entered on: 07/05/12
Originally listed on the Watch List: 06/02/12


HollyFrontier Corp. - HFC - close: 38.99

Comments:
08/25/12 update: HFC saw some profit taking midweek. Shares dipped toward recent support and prior resistance at the $38.00 level. Aggressive traders might want to consider new positions now but I would suggest waiting for a new rise past $40.50.

Our long-term target is $44.50 for the 2013 calls and $48.50 for the 2014 calls. NOTE (option strike adjustment): HFC recently declared a special dividend of 50 cents a share payable on September 4th, 2012 to shareholders of record on August 27th. The option exchanges have adjusted some contracts by lowering the strike price by 50 cents. Our 2013 Jan $42 call is now a $41.50 call. The 2014 $45 call is now a $44.50 strike.

- Suggested Positions -
AUG 17, 2012 - entry price on HFC @ 40.50, option @ 2.75
symbol: HFC1319A41.5* 2013 JAN $41.5 call - current bid/ask $2.40/2.65

- or -

AUG 17, 2012 - entry price on HFC @ 40.50, option @ 5.00
symbol: HFC1418A44.5* 2014 JAN $44.50 call - current bid/ask $4.50/5.70

*The 2013 call was previously a $42 strike. Adjusted to $41.50 strike. The 2014 call was a $45 strike, now adjusted to a $44.50 strike (occurred in August 2012 due to a special dividend).

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: 32.63

Comments:
08/25/12 update: LEN is only down about 10 cents for the week thanks to a +1.8% gain on Friday. Many of the homebuilding stocks have been showing strength thanks to a bullish earnings report from Toll Brothers (TOL). LEN is currently trading at multi-year highs. I would still consider new positions now at current levels.

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 $2.31/2.36

- or -

AUG 17, 2012 - entry price on LEN @ 32.72, option @ 3.39
symbol: LEN1418A40 2014 JAN $40 call - current bid/ask $3.40/3.60

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: 43.86

Comments:
08/25/12 update: What had been a quiet week for LLY suddenly erupted on Friday. Before the opening bell on Friday LLY released news on its Solanezumab drug, which is their Alzheimer's treatment currently in development. This was a Phase III clinical trial with two studies over about 1,000 patients each. Unfortunately the study did not meet its "primary endpoints", which means it didn't show the improvement they were expecting. However, when they analyzed the pooled results from both studies they did see certain improvements. LLY didn't release the details.

Wall Street reacted by lifting shares of LLY to multi-year highs at $45.00 before selling the news. The stock did close Friday with a +3.4% gain.

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 $ 2.69/ 2.91

08/24/12 LLY spikes on news regarding Alzheimer treatment study
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: 85.34

Comments:
08/25/12 update: We have been expecting a correction in shares of MON so the pullback is not a surprise. I will point out that on the weekly chart MON has created a bearish reversal candlestick pattern. I normal pullback should mean a correction into the $82-80 zone. Wait for the dip before considering new positions.

- Suggested Positions -
Jul 17, 2012 - entry price on MON @ 85.84, option @ 4.35
symbol: MON1319A90 2013 JAN $90 call - current bid/ask $ 3.40/ 3.50

- or -

Jul 17, 2012 - entry price on MON @ 85.84, option @ 6.50
symbol: MON1418A100 2014 JAN $100 call - current bid/ask $ 5.70/ 5.90

08/25/12 adjust expectations, look for a dip toward $82
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: 43.12

Comments:
08/25/12 update: MRK is down about 20 cents for the week. Shares had fallen to technical support at its rising 50-dma before bouncing on Friday. I recently cautioned investors to expect a dip toward $42.00 and possibly $41.00. We have a stop loss at $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 $ 5.20/ 5.35

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: 30.56

Comments:
08/25/12 update: MSFT is down less than 40 cents for the week. Traders were buying the dip right where you would expect them to - at support near $30 and its 50-dma. Shares still have resistance at $31.00. 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 $ 1.93/ 1.96

- or -

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

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: 73.06

Comments:
08/25/12 update: Thus far the pullback in PEP has been pretty mild. Traders were buying the dips on Wednesday and Thursday this past week. Bigger picture PEP should have support at its simple 50-dma near $71.00 but short-term PEP actually looks poised to rally.

I am not suggesting new positions at this time.

- Suggested Positions -
Jul 02, 2012 - entry price on PEP @ 70.34, option @ 2.85
symbol: PEP1418A75 2014 JAN $75 call - current bid/ask $ 3.45/ 3.60

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: 24.01

Comments:
08/25/12 update: PFE has been consolidating sideways the last three weeks. Yet Friday's +1.1% gain pushed the stock into positive territory for the week. It also looks like a short-term bullish breakout over the three-week trend of lower highs. 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 $ 1.63/ 1.68

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: 62.43

Comments:
08/25/12 update: After several weeks of gains QCOM finally hit some profit taking on Tuesday this last week. Yet there was no follow through. The stock has been churning sideways. On a technical basis QCOM looks vulnerable to more profit taking and should decline. However, with the excitement about Apple's likely iPhone 5 launch this fall, it could keep shares of QCOM buoyant.

I would expect a dip toward $60 but it may not happen. 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 $ 2.74/ 2.79

- or -

Aug 10, 2012 - entry price on QCOM @ 61.71, option @ 4.75
symbol:QCOM1418A70 2014 JAN $70 call - current bid/ask $ 5.10/ 5.20

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: 45.87

Comments:
08/25/12 update: TJX spent the week churning sideways between new highs and prior resistance at $45.50. The stock closed virtually unchanged on the week.

If the market sees a correction then we can look for TJX to decline toward its 50-dma (currently near 44.25).

I am not suggesting new positions at this time.

- Suggested Positions -
Jun 20, 2012 - entry price on TJX @ 43.62, option @ 2.53
symbol: TJX1319A45 2013 JAN $45 call - current bid/ask $ 3.10/ 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: 42.09

Comments:
08/25/12 update: We have been expecting a correction lower in TWX. It looks like the pullback has finally started. Shares lost about half a point this past week. Traders did buy the dip on Friday but the bounce reversed at its simple 10-dma. I am expecting a pullback toward the $40 area.

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 $ 2.19/ 2.24

- or -

Aug 03, 2012 - entry price on TWX @ 40.66, option @ 2.85
symbol: TWX1419A45 2014 JAN $45 call - current bid/ask $ 3.25/ 3.35

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: 123.99

Comments:
08/25/12 update: UNP lost about a dollar for the week, which isn't bad considering the reversal lower in the transportation index last week. I remain bullish on UNP but readers may want to look for dips near $120 and the 50-dma before considering new bullish positions.

- Suggested Positions -
Jul 20, 2012 - entry price on UNP @ 122.10, option @ 3.80
symbol: UNP1319A130 2013 JAN $130 call - current bid/ask $ 4.00/ 4.15

- or -

Jul 20, 2012 - entry price on UNP @ 122.10, option @ 6.40
symbol: UNP1418A140 2014 JAN $140 call - current bid/ask $ 7.15/ 7.80

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


Urban Outfitters - URBN - close: 36.94

Comments:
08/25/12 update: URBN was the biggest surprise of the week. This stock was on our watch list. The plan was to wait for shares to close over $32.00 and then buy calls the next day. I mentioned that URBN had earnings on Monday night and that Tuesday could be volatile. Wall Street was expecting a profit of 33 cents a share.

The company reported earnings of 42 cents a share, a +8% improvement Revenues also surpassed expectations at $676.3 million, a +11% improvement. It was definitely a bullish report but I'm not sure the results warranted a +18% pop in the stock price. Shares gapped higher on Tuesday morning to close near $37.00. URBN did have some short interest but it wasn't outlandish (maybe 10% of the float). What's really impressive is that URBN has not seen any profit taking. The stock has managed to maintain these gains all week.

Hopefully, none of my readers were crazy enough to buy calls on a +18% pop in the stock price. However, if you did we're in a bit of a pickle. We wanted to buy calls when URBN closed over $32.00. Tuesday's close at $37.00 definitely meets that requirement. Officially the newsletter entered positions on Tuesday morning. I am worried that eventually URBN is going to see some profit taking and possibly try and fill the gap (let's hope not).

I am going to try and reduce our risk by raising our stop loss to $35.80, which is about ten cents under the August 21st low. I am not suggesting new positions. Our target was $35.00, which you could argue negated this entire trade since URBN gapped open above our target but I didn't spell that out so we'll roll with it. Our new target is $39.50.

I am not suggesting new positions.

- Suggested Positions -
Aug 21, 2012 - entry price on URBN @ 36.82, option @ 4.25*
symbol:URBN1319A35 2013 JAN $35 call - current bid/ask $ 4.20/ 4.40

- or -

Aug 21, 2012 - entry price on URBN @ 36.82, option @ 5.20*
symbol:URBN1319C35 2013 MAR $35 call - current bid/ask $ 4.90/ 5.30

08/25/12 adjusted our entry, stop, and exit target
stop loss 35.80, exit target 39.50
*option entry prices are an estimate. neither traded at the time of our entry

Chart of URBN:

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


U.S. Bancorp - USB - close: 33.11

Comments:
08/25/12 update: It was another quiet week for USB. Shares have been churning sideways the entire month of August. Shares tested their 50-dma and bounced on Friday. If there is no follow through on this bounce then look for a decline toward $32.00.

- 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/ 0.96

- or -

Jul 20, 2012 - entry price on USB @ 33.62, option @ 3.10
symbol: USB1418A35 2014 JAN $35 call - current bid/ask $ 2.82/ 2.97

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: 126.66

Comments:
08/25/12 update: Shares of Visa lost a couple of points this week. Shares had fallen to technical support at its rising 50-dma on Friday. If this level does not hold I would expect a dip toward the $122.50 area. The long-term trend is up but the three-week trend is currently down.

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 $ 4.40/ 4.55

- or -

JUL 03, 2012 - entry price on V @ 126.49, option @ 11.95
symbol: V1418A140 2014 JAN $140 call - current bid/ask $11.00/11.85

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


CLOSED Plays


CVS Caremark Corp. - CVS - close: 45.56

Comments:
08/25/12 update: CVS has not been cooperating so last week we decided to exit early. Our plan was to close positions on Monday morning (August 20th). CVS opened Monday at $45.54, a gap higher.

- Suggested Positions -
Jul 19, 2012 - entry price on CVS @ 45.98, option @ 0.93
symbol: CVS1319A50 2013 JAN $50 call - exit $0.53 (-43.0%)

- or -

Jul 19, 2012 - entry price on CVS @ 45.98, option @ 1.70*
symbol: CVS1418A55 2014 JAN $55 call - exit $1.29 (-24.1%)

08/20/12 planned exit on Monday
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

Chart of CVS:

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


Valero Energy - VLO - close: 29.24

Comments:
08/25/12 update: Target achieved.

I have to apologize. Last week I had two different exit targets listed for VLO. One said exit at $29.75 and the other said exit at $29.90. I am sorry if there was any confusion.

Fortunately, VLO hit $29.75 on August 20th and hit $29.90 on August 21st. So whatever your target, VLO hit it.

We are basing our exit price at the lower target of $29.75. If you excited on August 21st then your results should have been better.

- 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 - exit $4.90 +88.4%

08/20/12 target hit at $29.75
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

Chart of VLO:

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

Consumer Electronics & Mobile Chipsets

by James Brown

Click here to email James Brown


New Watch List Entries

BBY - Best Buy Inc.

SPRD - Spreadtrum Communications


Active Watch List Candidates

ATI - Allegheny Tech.

EMN - Eastman Chemical

ROST - Ross Stores

SCHW - Charles Schwab

SWKS - Skyworks Solutions

UIS - Unisys Corp.

WFC - Wells Fargo


Dropped Watch List Entries

URBN graduated to the play list.



New Watch List Candidates:


Best Buy Co. - BBY - close: 17.31

Company Info

This is a BEARISH PUT trade.

Shares of BBY seem to be in a long-term death march. Investors are consistently disappointed with the company's earnings results and the stock has been stair stepping lower in ugly fashion for several quarters. The most recent quarter was pretty bad with profits falling from $150 million in the year ago quarter to just $12 million. Same-store sales fell -1.6% versus a year ago +14% gain. It's widely known that BBY has turned into the high-end showroom for Amazon.com. Consumers come into a BBY store, shop around, ask questions, look at the merchandise, and then go to Amazon.com to buy it.

We think the long slide lower continues. I am suggesting we wait for BBY to close under $17.00 a share and then buy puts the next day. We'll use a stop loss at $20.25 to start. Our long-term target is $10.25.

I do consider this somewhat aggressive because BBY shares have been so volatile in recent weeks. That's why our stop loss is so wide. Plus, there has been talk that BBY might go private. That's probably our biggest risk since BBY shares might pop on news it's going private. FYI: The Point & Figure chart is bearish with a $10 target.

Keep position size small to limit risk!

Breakdown trigger: a Close under $17.00 (stop:20.25)

BUY the 2013 Jan $15 PUT (BBY1319m15) current ask $1.43

- or -

BUY the 2014 Jan $10 PUT (BBY1418m10) current ask $1.45

Chart of BBY:

Originally listed on the Watch List: 08/25/12


Spreadtrum Communications - SPRD - close: 19.61

Company Info

SPRD operates in the semiconductor industry making chipsets for mobile devices like smartphones. The stock has been stuck in the $17-20 range for several weeks. A breakout could signal a new run higher. I am suggesting a trigger to buy calls when SPRD closes above $20.50. We will aim for $24.00 since I'm only listing the 2013 calls. SPRD does have 2014s but the spreads are too wide.

Breakout trigger: Wait for a close over $20.50 (stop: 18.90)

BUY the 2013 Jan $22.50 call (SPRD1319a22.5) current ask $1.70

Chart of SPRD:

Originally listed on the Watch List: 08/25/12


Active Watch List Candidates:



Allegheny Technologies - ATI - close: 30.77

Comments:
08/25/12 update: It was a rough week for ATI. The stock's rally reversed under resistance near $34.00 and its 100-dma. Shares are now testing their 50-dma near $30.75. Overall I don't see any changes from my prior comments.

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.

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.

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


Eastman Chemical Co. - EMN - close: 55.27

Comments:
08/25/12 update: EMN has been flirting with resistance near $56.00 all week long. I don't see any changes from my prior comments.

Earlier Comments:
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 $55-56 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)

- or -

BUY the 2014 Jan $65 call (EMN1418A65)

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


Ross Stores, Inc. - ROST - close: 69.89

Comments:
08/25/12 update: The consolidation in ROST has been pretty mild. Traders bought the dip on Friday and the stock look poised to rally.

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)

- or -

BUY the 2014 Jan $80 call (ROST1418A80)

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


Charles Schwab Corp. - SCHW - close: 13.27

Comments:
08/25/12 update: SCHW managed to post a minor gain for the week while many of the financials saw profit taking.

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)

- or -

BUY the 2014 Jan $15 call (SCHW1418A15)

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


Skyworks Solutions - SWKS - close: 29.64

Comments:
08/25/12 update: SWKS continues to churn sideways under resistance at the $30.00 level.

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


Unisys Corp. - UIS - close: 21.16

Comments:
08/25/12 update: It was a volatile week for UIS. The stock shot higher, trading as high as $22.70 on Tuesday before reversing lower. We are still waiting for a dip toward support near $20.00.

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)

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


Wells Fargo & Co - WFC - close: 34.04

Comments:
08/25/12 update: WFC closed virtually unchanged for the week. 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