Option Investor
Newsletter

Daily Newsletter, Sunday, 10/7/2012

Table of Contents

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

Leaps Trader Commentary

Stocks End Two-Week Decline

by James Brown

Click here to email James Brown

A week of better than expected economic data and improvement in the unemployment rate helped fuel a market rebound after a two-week decline. Stocks bounced but the tech-heavy NASDAQ lagged behind the other major indices thanks to a pullback in shares of Apple (AAPL). Apprehension about Spain's financial stability remains but these worries failed to spark any serious selling pressure. We are just a few days away from the Q3 earnings season and just over four weeks away from the U.S. presidential election.

Overall the flow of economic data turned positive last week. The ISM data for September came in at 51.5 versus estimates for 49.7. Numbers over 50.0 indicate growth. The ISM Services number hit 55.1 compare to estimates for a reading at 53.0. The factory orders for August fell to its worst levels since January 2009 at -5.2% but that was actually better than economists were expecting. The FOMC minutes were a non-event with the Federal Reserve claiming that economic activity continues to grow at a moderate pace.

The big economic event for the week was the jobs data. The ADP Employment Change report came out on Wednesday and showed a +162,000 increase in private jobs versus estimates of +130,000. The nonfarm payrolls jobs report said the U.S. added +114,000 jobs in September, which was close enough to be in-line with estimates. The government also adjusted August job growth from +96K to +142K and revised July's jobs number from +141K to +181K. The trend certainly seems to be improving. Yet the real surprise was the unemployment rate.

The unemployment rate is determined from the household survey each month. The fact that the U.S. unemployment rate has been at or above 8% for almost four years has been a political stumbling block for the current administration. Suddenly seeing a drop from 8.1% to 7.8% in one month immediately sparked cries of manipulation for political gain this close to November's election. The unemployment rate almost never moves more than 0.1% during any given month so it's understandable there would be concerns to suddenly see a -0.3% improvement.

Whether you believe the numbers or not the improvement in the unemployment rate is certainly bitter sweet. The only reason the unemployment rate dropped is because more than 450,000 people stopped looking for work. They didn't suddenly find a job. They just gave up so the government stopped counting them as part of the workforce. The number of people currently in the U.S. labor force participation rate has fallen to 30-year lows at 63.6%. One improvement found within the report on Friday was an increase in the average hourly earnings and the average workweek. Earnings ticked up +0.3% and the average workweek rose from 34.4 to 34.5. A rising workweek usually leads to more hiring but we need to see a positive trend in the average number of hours worked.

Statisticians did note that this was the third September in a row that we saw a large increase in part-time job growth. It could be teenagers and college kids back from summer and needing some money during the school year. It could be adults trying to pick up extra work to pay for the upcoming holiday shopping season. There is also a growing number of citizens who are accepting part time jobs because they cannot find full time work. Here's a head scratcher for you, a recent survey of businesses showed a large number of them were postponing any plans to hire more people until after there was some sort of resolution or postponement of the 2013 fiscal cliff, scheduled for January, or some sort of resolution to the Eurozone financial crisis with Greece and Spain. If most businesses are postponing hiring, where is the job growth coming from?

Major Indices:

Traders bought the dip. After a relatively minor two-week correction lower the major indices rallied. The S&P 500 index almost made it five gains in a row but stocks pared their gains on Friday and the S&P 500 closed in the red by less than two points. You'll notice on the chart that the S&P 500 seems to have found some resistance at the middle of the bullish channel and near its mid September highs. This could be setting up for a dip toward the bottom of the channel.

On a short-term basis I would look for support near 1440. If the 1440 level fails then look for additional support near 1420 and its rising 50-dma. If the rally is able to continue then the next levels of overhead resistance should be 1480 and the 1500 mark.

chart of the S&P 500 index:

The NASDAQ did produce a gain for the week but the composite index was struggling. Friday's move actually produced a bearish engulfing candlestick one-day reversal pattern. That certainly doesn't bode well for Monday. The late September low was 3080. We can look for possible short-term support in the 3100-3080 area. If that level breaks then it's probably a quick drop toward the 3040 level. If somehow the rally continues then the NASDAQ will encounter resistance at its September highs near 3200.

chart of the NASDAQ Composite index:

The small cap Russell 2000 index delivered a bounce for the week to end a two-week pullback. Unfortunately the sell-off from its intraday highs on Friday is not very encouraging. Currently there is a bullish trend of higher lows but if the $RUT breaks down under its 30-dma, then I suspect we'll see it fall toward support near 820.

If somehow the rally continues then look for the $RUT to challenge resistance at its September highs. That just happens to be a test of its all-time high set back in 2011 (near 870). A breakout past 870 on the $RUT would be very bullish for the market since it would signal confidence by fund managers to own small caps.

Daily chart of the Russell 2000 index

It's a relatively slow week for U.S. economic data. The PPI is probably the biggest report for the week. Investor attention will likely focus overseas, especially Europe. The Troika will release an update on Greece, which could worry the markets. Germany's Chancellor Merkel will also visit Greece this week, which will definitely generate headlines. You'll likely hear about the ESM bailout fund becoming operational this week. Another potential headline will be the USDA crop report thanks to the recent drought.

It's also worth noting that the Q3 earnings season will officially start on Tuesday with Alcoa's (AA) earnings report. Earnings season doesn't hit full swing until October 15th. Right now analysts are expecting the S&P 500's component companies to deliver a drop in earnings by -1.9%. Energy and oil companies could be some of the worst performers with an estimated -24% drop in earnings in the third quarter.

Economic and Event Calendar

- Monday, October 8 -
Troika's report on Greece
EU Finance ministers begin a two-day meeting

- Tuesday, October 9 -
Q3 Earnings Season begins
ECB President Draghi to speak

- Wednesday, October 10 -
Wholesale Inventory data for August
Federal Reserve Beige Book report

- Thursday, October 11 -
Weekly Initial Jobless Claims
Import/Export prices
Eurozone inflation data
Chinese government's new loan data
G7 Finance Minister meeting
Vice Presidential Debate

- Friday, October 12 -
PPI for September
Michigan Sentiment for October

Additional Events to be aware of:

Oct. 14th - Chinese inflation data
Oct. 16th - 2nd presidential debate
Oct. 21st - Spain's regional elections
Oct. 22nd - 3rd presidential debate
Oct. 23rd - FOMC meeting begins two-day meeting

The Week Ahead:

The next couple of weeks could be interesting. Prior to last week most of the economic data has continued to disappoint and that doesn't bode well for earnings season or corporate guidance. Yet Wall Street is already expecting a disappointing earnings season so there is always a chance that corporate results come in bad but better than expected, which could produce an upside surprise.

Politically we could hear a lot more about the upcoming fiscal cliff. Both Goldman Sachs and Morgan Stanley have adjusted their targets for the S&P 500 due to the impact of the fiscal cliff, due to hit the U.S. in January 2013, that's less than three months away. Goldman warned that the S&P 500 could drop 200 points over the next several months as investors growing increasingly worried that the fiscal cliff will push the U.S. back into recession. Morgan Stanley warned the move could be even worse thanks to the combination of the fiscal cliff in the U.S., a slowdown in China, and the ongoing struggles in Europe.

Investors remain cautious about the market. Even though the major indices are near their 2012 highs and multi-year highs, money continues to flow out of stocks. The Investment Company Institute said another $5.1 billion was withdrawn from stock funds the week ending September 26th. That follows a -$4.8 billion withdrawn the week before. Money continues to flow into the perceived safety of bonds with the yield on the ten-year bond closing the week at 1.8% and the yield on the 30-year bond at 3.0%.

Greece and Spain will definitely generate headlines this coming week with Troika's last report, an EU finance minister meeting, and Spain's upcoming regional elections. Greece claims they need more help while Spain says they don't need a bailout.

The markets do not seem to be pricing in any geopolitical risk. The situation in Iran is growing worse with inflation in the country starting to spiral out of control. As Iran's economy crumbles due to current sanctions the government could grow desperate and do something stupid like try and close the Straits of Hormuz. Meanwhile the civil war in Syria continues and now Syria is trading rocket fire with Turkey. You have to wonder why the current Syrian government would risk a conflict with Turkey when they can't control their own population.

Technically the U.S. stock market's trend is still higher but seeing the indices stop or reverse under their 2012 highs doesn't inspire a lot of confidence to buy stocks at current levels. We could be facing several days or weeks of consolidation or pullbacks while stocks generate enough momentum to breakout higher. I suspect it will be corporate earnings guidance and results that propel stocks one way or the other over the next three weeks.

James


Portfolio

Portfolio Update

by James Brown

Click here to email James Brown


Current Portfolio


Portfolio Comments:

The U.S. market ended a two-week decline but the rally failed to breakout past its September highs. Are we facing a bearish double top? Are stocks going to consolidate sideways while investors wait for Q3 earnings results to hit? Does the rally continue? These questions will likely be driven by corporate results. The Q3 earnings season begins this week but doesn't hit its full strength for another week yet.

Readers might want to consider taking profits early on our MRK and PFE trades. Visa, LEN, TWX and ABT are also doing very well.

We had KMB and SIRI jump from our watch list to play list.

CAT, MDR, and MSFT were stopped out.

LLY hit our bullish exit target. We also closed our 2013 calls on the TJX trade this last week.

I have adjusted stop losses on: ABT, MRK, PFE, TWX, and V.

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

One Good Thing

by James Brown

Click here to email James Brown

Editor's Note:

(October 06, 2012)

The stock market managed a gain for the week but failed to break out to new highs. While the Dow Industrials actually look poised to see a breakout the S&P 500 could be forming a potential bearish double top while the NASDAQ underperforms and has the potential to form a new lower high.

Market direction could be determined by headlines out of Europe this week with lots of attention focused on Greece and Spain. Yet the real catalyst is probably Q3 earnings season, which is about to begin. Corporate results and guidance could spark profit taking with the market near its 2012 highs. Or it could fuel new short covering since analysts are expecting a disappointing earnings season and there is the chance for an upside surprise.

It doesn't matter if stocks breakout or correct lower the one good thing about earnings season is that it should help produce a new entry point for us. We just have to be patient. The next two or three weeks could be volatile but I strongly suspect we'll either see new breakout entry points or buy-the-dip entry points before the end of October.

Thus I am less enthusiastic about adding new trades tonight. We did add two new watch list candidates to replace the two watch list stocks that moved to our active trades this past week.

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

CVLT, JNJ, WFM, COST, VOD, TSCO, MA, WMT, GM, LMT, LLL, EXPE, DECK, VZ,


Play Updates

LLY Hit Our Bullish Target

by James Brown

Click here to email James Brown

Editor's Note:

LLY hit our bullish target. CAT, MDR, and MSFT hit our stop loss. We added KMB and SIRI from the watch list.


Closed Plays


CAT, LLY, MDR, and MSFT were closed.


Play Updates


Abbott Labs - ABT - close: 71.61

Comments:
10/06/12: ABT continues to show relative strength. The stock has broken out past resistance near $70 and shares are hitting new highs. ABT is getting close to our exit target. It's also getting close to its Q3 earnings announcement, which is scheduled for October 17th.

I am adjusting our exit strategy. We will plan to exit our remaining ABT positions (the 2014 LEAPS) when the stock hits $73.00. If that does not happen we will plan on exiting prior to the October 17th earnings report. I am also adjusting our stop loss to $67.75.

- Suggested Positions -
JUL 02, 2012 - entry price on ABT @ 64.22, option @ 1.91
symbol: ABT1319A65 2013 JAN $65 call - exit $5.10 (+167.0%)

- or -

JUL 02, 2012 - entry price on ABT @ 64.22, option @ 4.28
symbol: ABT1418A65 2014 JAN $65 call - current bid/ask $ 8.00/ 8.35

10/06/12 Strategy update: Plan to exit at $73.00. If that does not happen, plan to exit prior to earnings on Oct. 17th. We are raising the stop loss to $67.75
09/24/12 closed 2013 calls @ $5.10 (+167%)
09/22/12 new stop loss @ 63.75
Prepare to exit our 2013 calls on Monday. current bid is $5.15
09/15/12 new stop loss @ 62.75
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:$73.00
Current Stop loss: 67.75
Play Entered on: 07/02/12
Originally listed on the Watch List: 06/23/12


American Intl. Group - AIG - close: 35.23

Comments:
10/06/12: It turned out to be a good week for ABT with the stock surging back toward major resistance near the $35.00 level. A breakout here would be very bullish but readers may want to wait for a close over $35.50 before considering new bullish positions.

Please note that I am adjusting our exit targets. We want to exit our 2013 calls when AIG hits $39.00. We will plan on exiting our 2014 calls when shares hit $42.50.

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 $ 5.70/ 5.80

- or -

May 18, 2012 - entry price on AIG @ 28.25, option @ 4.20
symbol: AIG1418A35 2014 JAN $35 call - current bid/ask $ 5.45/ 5.55

10/06/12 adjusting our exit targets. Plan on exiting our 2013 calls when AIG hits $39.00. We'll exit our 2014 calls when AIG hits $42.50
09/08/12 Treasury has announced an $18 billion sale of AIG stock
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


Bank of America - BAC - close: 9.32

Comments:
10/06/12: It also turned out to be a good week for shares of BAC. The stock rallied from the $9 area and hit $9.65 on Friday morning before paring its gains. The mid September high near $9.80 is the next resistance level and that's followed by likely round-number, psychological resistance at $10.00.

FYI: BAC is due to report earnings on Oct. 17th. Readers might want to consider exiting our 2013 call positions prior to the announcement to avoid a disappointment and potential pullback in the stock price.

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 $ 0.41/ 0.42
(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 $ 0.41/ 0.42
(no stop loss on this position)

09/08/12 BAC is breaking out. Consider buying 2014 calls on a dip near the $8.50-8.40 area
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


Chevron Corp. - CVX - close: 117.50

Comments:
10/06/12: CVX has continued to churn sideways inside the $116-118.50 zone. At this point I am not suggesting new positions but more aggressive traders could wait for CVX to close over resistance at $118.50 before considering new positions. If the energy sector retreats lower we can look for likely support near $114 and near $110. I want to warn you that current estimates for the energy sector are expecting a -24% reduction in earnings for the upcoming Q3 earnings season. That could spell bad news for the sector. Then again if results come in "less bad" it could spark a move higher for oil stocks.

Our long-term target is $129.00.

- Suggested (small) Positions -
Sep 12, 2012 - entry price on CVX @ 114.23, option @ 5.60
symbol: CVX1418a125 2014 JAN $125 Call - current bid/ask $ 5.80/ 6.00

09/15/12 new stop loss at $109.75
09/12/12 trade opened with CVX at $114.23
09/11/12 CVX closed over $114.00
09/07/12 CVX closed at $114.00. Wait for a close over $114.00.
Current bid/ask on our option is $5.75/5.90.

Current Target: $129.00
Current Stop loss: 109.75
Play Entered on: 09/12/12
Originally listed on the Watch List: 09/01/12


Discover Financial - DFS - close: 40.39

Comments:
10/06/12: DFS continues to rally and the stock hit new highs this past week. While the breakout past potential round-number resistance at $40.00 is bullish I am not suggesting new positions.

We still have the 2014 calls and we're aiming for $44.00.

- Suggested Positions -
JUL 05, 2012 - entry price on DFS @ 35.28, option @ 2.15
symbol: DFS1319A37 2013 JAN $37 call - exit $3.70 (+72.0%)

- or -

JUL 05, 2012 - entry price on DFS @ 35.28, option @ 3.40
symbol: DFS1418A40 2014 JAN $40 call - current bid/ask $5.10/5.30

09/29/12 new stop loss @ 35.75
09/27/12 hits our $39.75 target to exit 2013 calls (option @ $3.70)
09/27/12 DFS beats Wall Street's earnings estimates
09/22/12 more conservative traders may want to exit right now or before DFS reports earnings on Sep 27th.
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
...see prior updates for early comments.

Current Target: $39.75 for the 2013 call2, $44.00 for the 2014s
Current Stop loss: 35.75
Play Entered on: 07/05/12
Originally listed on the Watch List: 06/02/12


Eastman Chemical Co. - EMN - close: 59.13

Comments:
10/06/12: EMN outperformed the market with a sharp +2.8% rally on Friday. I didn't see any specific news behind Friday's outperformance. The stock is approaching its all-time high set just a few weeks ago. EMN is due to report earnings on Oct. 25th.

Our long-term target is to exit our 2014 calls when EMN hits $69.00.

- Suggested Positions -
SEP 07, 2012 - entry price on EMN @ 56.64, option @ 2.50
symbol: EMN1319a60 2013 JAN $60 call - current bid/ask $2.75/2.85

- or -

SEP 07, 2012 - entry price on EMN @ 56.64, option @ 5.55
symbol: EMN1418a65 2014 JAN $65 call - current bid/ask $5.50/5.70

Current Target: $69.00
Current Stop loss: 52.40
Play Entered on: 09/07/12
Originally listed on the Watch List: 08/18/12


HollyFrontier Corp. - HFC - close: 40.48

Comments:
10/06/12: It was a volatile week for HFC. The stock failed at resistance near $42.00 early on and saw a sharp decline on Tuesday and Wednesday. Traders did buy the dip but the path of least resistance might be down, at least short-term HFC should see some support at $38.00. More conservative traders may want to raise their stop loss.

Earlier Comments:
In the news HFC recently announced a special dividend of 50 cents a share payable on October 2nd to shareholders of record on September 25th. The ex-dividend date was Friday, Sept. 21st, 2012. Once again, the option exchanges have adjusted the strike prices again. They have decreased the strike price by 50 cents. Our 2013 Jan $41.50s are now $41.00s. The 2014 $44.50s are now $44.00s.

Our 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: HFC1319A41** 2013 JAN $41.00 call - current bid/ask $2.75/2.85

- or -

AUG 17, 2012 - entry price on HFC @ 40.50, option @ 5.00
symbol: HFC1418A44** 2014 JAN $44.00 call - current bid/ask $5.20/5.60

** 09/22/12 this past week the option exchanges have adjusted the strike prices again by lowering them another 50 cents to account for HFC's special dividend.
Our 2013 Jan $41.50s are now $41.00s and the 2014 $44.50 calls are now $44.00s.
*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


Joy Global, Inc - JOY - close: 57.15

Comments:
10/06/12: JOY spent most of the week consolidating sideways along the $56.00 level and its 50-dma and 100-dma. The intraday chart suggested JOY might break down. Yet shares turned upward on Thursday and Friday. I remain cautiously bullish here but I am not suggesting new positions.

- Suggested Positions -
SEP 25, 2012 - entry price on JOY @ 57.50, option @ 7.50
symbol: JOY1418A70 2014 JAN $70 call - current bid/ask $6.70/6.90

09/25/12 triggered on a dip at $57.50
09/22/12 adjust entry to buy a dip at $57.50, stop to $53.90

Current Target: $78.50
Current Stop loss: 53.90
Play Entered on: 09/25/12
Originally listed on the Watch List: 09/15/12


Kimberly-Clark - KMB - close: 86.89

Comments:
10/06/12: KMB is a new watch list candidate that has already graduated to our active trade list. The plan was to wait for shares to close over $86.25 and then buy calls the next day. KMB met our entry point requirements on October 1st with a close at $86.43. Shares opened the next day at $86.71. The stock has continued to drift higher. While the trend is up readers may want to take a more patient approach and look for a new drip back toward $86.00 as our next entry point.

Our long-term target is $99.00.

- Suggested Positions -
OCT 02, 2012 - entry price on KMB @ 86.71, option @ 3.95
symbol: KMB1418A90 2014 JAN $90 call - current bid/ask $3.70/3.90

Chart of KMB:

Current Target: $99.00
Current Stop loss: 83.45
Play Entered on: 10/02/12
Originally listed on the Watch List: 09/29/12


Lennar Corp. - LEN - close: 37.92

Comments:
10/06/12: It was a strong week for shares of LEN with a +9% gain. Most of that gain was on Wednesday's surge higher. A better than expected rise in mortgage applications fueled an industry-wide rally for the homebuilders on Wednesday.

Shares of LEN are approaching resistance at its 2012 highs set just two weeks ago near $39.00. I would expect a pullback, probably toward the $36 area.

I am not suggesting new positions at this time. Our target for the 2014 calls is still $39.50.

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 -
(target for 2013 calls was hit at $36.00 on 09/14/2012)
AUG 17, 2012 - entry price on LEN @ 32.72, option @ 2.07
symbol: LEN1319A35 2013 JAN $35 call - exit $3.70 (+78.7%)

- or -

AUG 17, 2012 - entry price on LEN @ 32.72, option @ 3.39
symbol: LEN1418A40 2014 JAN $40 call - current bid/ask $5.75/6.00

09/24/12 LEN reported earnings, investors sell the news
09/22/12 new stop loss @ 33.40
09/15/12 new stop loss @ 31.40
09/14/12 2013 call target hit at $36.00, option @ 3.70 (+78.7%)
09/08/12 readers may want to take profits early ahead of LEN's upcoming earnings report (which is expected some time in the next two weeks)

Current Target: $ 36.00(2013 calls), $39.50 (2014 call)
Current Stop loss: 33.40
Play Entered on: 08/17/12
Originally listed on the Watch List: 08/11/12


Monsanto Co. - MON - close: 91.16

Comments:
10/06/12: It was a bit of a volatile week for MON with a dip just under its mid September lows. The stock quickly bounced back and now MON is testing resistance at the $92 level. The gap down on the 3rd was a reaction to MON's earnings report. The company missed estimates by one cent and then guided earnings lower. The fact that investors bought the dip anyway on top of the earnings guidance is definitely positive.

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 $ 4.90/ 5.00

- or -

Jul 17, 2012 - entry price on MON @ 85.84, option @ 6.50
symbol: MON1418A100 2014 JAN $100 call - current bid/ask $ 6.70/ 6.90

10/03/12 MON reported earnings
09/22/12 new stop loss @ 84.75
09/08/12 new stop loss @ 83.75
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: 84.75
Play Entered on: 07/17/12
Originally listed on the Watch List: 07/14/12


Merck & Co - MRK - close: 46.28

Comments:
10/06/12: Drug giant MRK is extending its gains with a new multi-year high. At this rate the stock could hit our exit target of $47.50 pretty soon. More aggressive traders may want to raise their target. While more conservative traders may want to go ahead and take profits right now.

I am raising our stop loss to $42.75.

- Suggested Positions -
Jun 25, 2012 - entry price on MRK @ 39.91, option @ 3.14
symbol: MRK1418A40 2014 JAN $40 call - current bid/ask $ 7.10/ 7.20

10/06/12 readers may want to take profits now with the bid on our call at $7.10. New stop loss @ 42.75
09/22/12 new stop loss @ 41.85
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: 42.75
Play Entered on: 06/25/12

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


Pepsico, Inc. - PEP - close: 71.10

Comments:
10/06/12: You wouldn't know it by looking at the messy daily chart but PEP is actually up three weeks in a row. Shares have found technical support at the rising 100-dma. Yet the stock continues to look vulnerable. More conservative traders may want to exit early now. I am not suggesting new positions.

The next catalyst for PEP is probably the upcoming earnings report on Oct. 17th, which should propel the stock one way or the other.

- Suggested Positions -
Jul 02, 2012 - entry price on PEP @ 70.34, option @ 2.85
symbol: PEP1418A75 2014 JAN $75 call - current bid/ask $ 2.55/ 2.66

09/22/12 new stop loss @ 69.40, more conservative traders may want to exit early now.
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: 69.40
Play Entered on: 07/02/12
Originally listed on the Watch List: 05/26/12


Pfizer Inc. - PFE - close: 25.52

Comments:
10/06/12: PFE is another big drug company with a strong stock. Shares have produced a sharp three-week climb. I would expect some profit taking soon.

We are raising our stop loss to $23.40.

- Suggested Positions -
Jul 18, 2012 - entry price on PFE @ 23.53, option @ 1.30
symbol: PFE1418A25 2014 JAN $25 call - current bid/ask $ 1.98/ 2.02

10/06/12 new stop loss @ 23.40
09/29/12 new stop loss @ 22.75
09/22/12 new stop loss @ 22.45
09/08/12 new stop loss @ 21.90
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: 23.40
Play Entered on: 07/18/12
Originally listed on the Watch List: 04/21/12


QUALCOMM Inc. - QCOM - close: 62.64

Comments:
10/06/12: After a two-week decline QCOM managed to produce an anemic gain. Traders bought the dip early in the week near $61.50. The rebound late in the week seems to have broken the two-week trend of lower highs. Yet the sharp pullback from its intraday high on Friday is not very encouraging.

Our stop loss remains at $59.40 for now and I am not suggesting new positions.

- Suggested Positions -
Aug 10, 2012 - entry price on QCOM @ 61.71, option @ 2.56
symbol:QCOM1319A65 2013 JAN $65 call - current bid/ask $ 2.23/ 2.27

- or -

Aug 10, 2012 - entry price on QCOM @ 61.71, option @ 4.75
symbol:QCOM1418A70 2014 JAN $70 call - current bid/ask $ 5.00/ 5.15

09/15/12 new stop loss @ 59.40

Current Target: $68.50
Current Stop loss: 59.40
Play Entered on: 08/10/12
Originally listed on the Watch List: 08/06/12


SIRIUS XM Radio - SIRI - close: 2.69

Comments:
10/06/12: SIRI rallied to new multi-year highs this past week. Our plan was to wait for shares to close over $2.65 and then open positions the next day. SIRI met our entry requirement on Oct. 3rd with a close at $2.73. Our play opened the next day at $2.75. Depending on your tolerance for risk I suggested either the 2014 January $3.00 call or just buying the stock instead. I would still consider new positions now or you could try and buy a dip near $2.60.

Our long-term target is $3.90.

- Suggested Positions -
OCT 04, 2012 - entry price on SIRI @ 2.75, option @ 0.38
symbol:SIRI1418A3 2014 JAN $3.00 call - current bid/ask $ 0.32/ 0.35

- or -

Buy the Stock: Entry @ $2.75 on Oct. 4th, 2012

Chart of SIRI:

Current Target: $ 3.90
Current Stop loss: 2.29
Play Entered on: 10/04/12
Originally listed on the Watch List: 09/29/12


Spreadtrum Communications - SPRD - close: 19.96

Comments:
10/06/12: I am growing more concerned about SPRD. The stock is struggling and shares are down three out of the last four weeks. With the current short-term trend SPRD looks poised to hit our stop loss at $18.90 in the next week or two. More conservative traders may want to exit early now.

I am not suggesting new positions at this time.

- Suggested Positions -
Sep 07, 2012 - entry price on SPRD @ 20.59, option @ 1.95
symbol:SPRD1319a22.5 2013 JAN $22.5 call - current bid/ask $ 1.20/ 1.40

10/06/12 SPRD looks vulnerable. Investors may want to exit early

Current Target: $24.00
Current Stop loss: 18.90
Play Entered on: 09/07/12
Originally listed on the Watch List: 08/25/12


The TJX Companies - TJX - close: 45.40

Comments:
10/06/12: TJX managed a bounce for the week but the stock found itself struggling with the $46.00 level as resistance. I remain concerned that what we might be seeing is an oversold bounce that reverses into a new lower high.

It is disappointing that TJX didn't see a stronger rally on better than expected September same-store sales growth of +6.0%.

Last weekend I suggested an early exit and we planned to close our 2013 Jan $45 calls on Monday, October 1st. We still have the 2014 calls for now. 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 - exit $2.10 (-16.9%) exit Oct.1st

- or -

Jun 20, 2012 - entry price on TJX @ 43.62, option @ 5.10
symbol: TJX1418A45 2014 JAN $45 call - current bid/ask $ 4.70/ 4.90

10/01/12 closed the 2013 calls at the open.
09/29/12 prepare to exit the 2013 calls on Monday morning
09/22/12 TJX looks vulnerable with a close under the 50-dma
09/15/12 new stop loss @ 43.40
09/08/12 new stop loss @ 42.40, readers with the 2013 calls may want to exit early now
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: 43.40
Play Entered on: 06/20/12

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


Time Warner - TWX - close: 46.18

Comments:
10/06/12: The trend of higher lows in TWX continues and the stock is back above short-term resistance at the $46.00 level. Given TWX's relative strength I am raising our stop loss to $42.45. 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 - exit $4.55 (+154.1%)

- or -

Aug 03, 2012 - entry price on TWX @ 40.66, option @ 2.85
symbol: TWX1419A45 2014 JAN $45 call - current bid/ask $ 5.05/ 5.20

10/06/12 new stop loss @ 42.45
09/24/12 closed 2013 calls at the open ($4.55, +154.1%)
09/22/12 new stop loss @ 40.75.
Plan on exiting our 2013 calls on Monday morning at the open
09/08/12 new stop loss @ 39.85
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: 42.45
Play Entered on: 08/03/12
Originally listed on the Watch List: 07/21/12


U.S. Bancorp - USB - close: 34.92

Comments:
10/06/12: The financial sector was showing relative strength this last week. USB hit a new multi-year high before paring its gains on Friday. More conservative traders might want to start inching up their stops.

I am not suggesting new positions at this time with earnings coming up on October 17th.

- Suggested Positions -
Jul 20, 2012 - entry price on USB @ 33.62, option @ 1.39
symbol: USB1319A35 2013 JAN $35 call - current bid/ask $ 1.27/ 1.30

- or -

Jul 20, 2012 - entry price on USB @ 33.62, option @ 3.10
symbol: USB1418A35 2014 JAN $35 call - current bid/ask $ 3.15/ 3.25

09/15/12 new stop loss @ 31.40
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: 31.40
Play Entered on: 07/20/12
Originally listed on the Watch List: 05/19/12


Visa, Inc. - V - close: 140.26

Comments:
10/06/12: It was a bullish week for Visa. The stock rallied about six points to hit new all-time highs. I am raising our stop loss to $129.00. V is arguably short-term overbought so don't be surprised to see a dip. The $135 area should offer some support. I am not suggesting new positions at current levels.

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 $ 9.35/ 9.55

- or -

JUL 03, 2012 - entry price on V @ 126.49, option @ 11.95
symbol: V1418A140 2014 JAN $140 call - current bid/ask $16.50/17.15

10/06/12 new stop loss @ 129.00
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: 129.00
Play Entered on: 07/03/12
Originally listed on the Watch List: 06/30/12


Wells Fargo & Co - WFC - close: 35.84

Comments:
10/06/12: Traders bought the dip in WFC near technical support at its rising moving averages. Shares are nearing their multi-year highs set about three weeks ago. WFC could see the rally stall and the stock move sideways as investors wait for the company to report earnings on October 12th. Wall Street is looking for a profit of 87 cents a share. Then, after the report, WFC could see volatility either direction as traders react to the news.

I am not suggesting new positions at this time.

FYI: The point & figure chart is bullish with a $57 target.

- Suggested Positions -
SEP 14, 2012 - entry price on WFC @ 35.60, option @ 2.26
symbol: WFC1418a40 2014 JAN $40 call - current bid/ask $ 2.01/ 2.06

Current Target: $44.00
Current Stop loss: 32.75
Play Entered on: 09/14/12
Originally listed on the Watch List: 08/06/12


CLOSED Plays


Caterpillar Inc. - CAT - close: 85.43

Comments:
10/06/12: CAT underperformed last week and shares hit our stop loss at $84.75. I cautioned readers a week ago that CAT looked like it was headed lower. The stock hit our stop loss on Oct. 2nd.

- Suggested (small) Positions -
Aug 10, 2012 - entry price on CAT @ 88.26, option @ 3.81
symbol: CAT1319A95 2013 JAN $95 CALL - exit @ 1.40 (-63.2%)

- or -

Aug 10, 2012 - entry price on CAT @ 88.26, option @ 7.90
symbol: CAT1418A100 2014 JAN $100 CALL - exit @ 5.35 (-32.2%)

10/02/12 stopped out at $84.75
09/25/12 CAT gaps down after lowering its guidance
09/15/12 new stop loss @ 84.75
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

Chart of CAT:

Current Target: $110.00-115.00
Current Stop loss: 84.75
Play Entered on: 08/10/12
Originally listed on the Watch List: 07/07/12


Eli Lilly - LLY - close: 48.23

Comments:
10/06/12: Target achieved.

LLY has continued to rally and the stock hit new multi-year highs near $49.00 midweek. Our exit target was hit at $48.50 on October 4th.

- 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 - exit @ $5.05 (+83.6%)

10/04/12 target hit at $48.50
09/22/12 new stop loss @ 43.75
09/08/12 readers may want to take profits right here after another strong week
09/08/12 new stop loss @ 42.75
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

Chart of LLY:

Current Target: $48.50 (2014)
Current Stop loss: 43.75
Play Entered on: 01/05/12

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


McDermott Intl. - MDR - close: 11.52

Comments:
10/06/12: The correction in shares of MDR continued for a third week in a row. Shares hit our stop loss at $11.45 on October 3rd.

- Suggested Positions -
SEP 20, 2012 - entry price on MDR @ 12.55, option @ 2.00
symbol: MDR1418A15 2014 JAN $15 call - exit @ $1.20 (-40.0%)

10/03/12 stopped out at $11.45

Chart of MDR:

Current Target: $14.90
Current Stop loss: 11.45
Play Entered on: 09/20/12
Originally listed on the Watch List: 09/15/12


Microsoft - MSFT - close: 29.85

Comments:
10/06/12: MSFT eked out a small gain for the week. Unfortunately shares hit our stop loss at $29.45 on its Monday morning weakness. The bounce on Friday seems to have failed at technical resistance near the 200-dma. Worries over a slowdown in PCs and hardware sales has not helped MSFT recently.

- Suggested Positions -
Jun 01, 2012 - entry price on MSFT @ 28.50, option @ 1.69
symbol:MSFT1319A30 2013 JAN $30 call - exit @ $1.06 (-37.2%)

- or -

Jun 01, 2012 - entry price on MSFT @ 28.50, option @ 3.05
symbol:MSFT1418A30 2014 JAN $30 call - exit @ $2.78 (- 8.8%)

10/01/12 stopped out at $29.45
09/22/12 new stop loss @ 29.45
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

Chart of MSFT:

Current Target: $32.75 & 34.75
Current Stop loss: 29.45
Play Entered on: 06/01/12
Originally listed on the Watch List: 04/14/12



Watch

Financials & Discount Retailers

by James Brown

Click here to email James Brown


New Watch List Entries

COF - Capital One Financial

FDO - Family Dollar Stores


Active Watch List Candidates

CCL - Carnival Corp.

DE - Deere & Co.

FTR - Frontier Telecom

GE - General Electric

GLD - Gold ETF

JPM - JPMorgan Chase


Dropped Watch List Entries

KMB and SIRI graduated to our active play list.



New Watch List Candidates:


Capital One Financial Corp. - COF - close: 59.00

Company Info

The financial sector has been showing relative strength. Shares of COF are now testing major resistance near $60.00. A breakout here could signal the beginning of a new leg higher.

COF can be somewhat volatile so we want to keep our position size small. I am suggesting we wait for COF to close above $60.50 and then buy calls the next day. We'll use a stop loss at $57.25. Our long-term target is $74.00 but we'll have to keep an eye on potential resistance at $70.00.

Breakout trigger: Wait for a close over $60.50 (stop 57.25)

BUY the 2014 Jan $65 call (COF1418a65) current ask $5.20

Chart of COF:

Originally listed on the Watch List: 10/06/12


Family Dollar Stores - FDO - close: 69.02

Company Info

I mentioned FDO as a potential candidate in last week's new plays editor's note. The company reported earnings on Oct. 3rd and deliver results that were in-line yet management guided lower for the next quarter. Surprisingly traders bought the news anyway. FDO is now testing resistance near $70.00. I am expecting a correction.

The plan is to launch small bullish positions on a dip at $66.00 with a stop loss at $63.45. I wanted to buy the 2014 January calls but the spreads are outrageously wide. So tonight I am suggesting the April $75 call.

Buy-the-Dip trigger: $66.00 (stop 63.45) *Small Positions*

BUY the 2013 April $75 call (FDO1304d75) current ask $2.65

Chart of FDO:

Originally listed on the Watch List: 10/06/12


Active Watch List Candidates:



Carnival Corp. - CCL - close: 37.13

Comments:
10/06/12: There is still a decent chance the market might correct lower in October so we're not giving up on buying a big dip in CCL yet.

I am suggesting we open small bullish positions on a dip at $35.25 with a stop at $32.75.

Our long-term target is $42.00. FYI: The point and figure chart is bullish with a $48 target.

Buy-the-Dip trigger: $35.25 (stop loss @ 32.75) *Small Positions*

BUY the 2014 Jan $40 call (CCL1418a40)

09/22/12 earnings are due on Sep. 25th. We are adjusting our entry trigger to $35.25 and our stop loss to $32.75
09/15/12 move the trigger to $36.00 and the stop to $33.75

Originally listed on the Watch List: 09/08/12


Deere & Co. - DE - close: 82.78

Comments:
10/06/12: DE is holding up reasonably well and tagged a new relative high on Friday morning before paring its gains. We still don't want to chase it here.

Right now the plan is to wait and buy a dip at $79.00. More aggressive traders may want to consider buying a dip at $80.00 instead. We want to keep our position size small to limit our risk. Our long-term target is $94.00.

Buy-the-Dip trigger: $79.00 (stop loss 74.90) *Small Positions*

BUY the 2014 Jan $90 call (DE1418a90)

09/29/12 adjust our entry point to buy a dip at $79.00, adjust the stop loss to $74.90

Originally listed on the Watch List: 09/15/12


Frontier Comm. - FTR - close: 4.77

Comments:
10/06/12: FTR saw a pullback the first three days of the month but traders bought the dip near support in the $4.55-4.50 area. I don't see any changes from my prior comments. A breakout past resistance near $5.00 and its 300-dma would be bullish.

I am suggesting we buy calls after FTR closes above $5.20. Wait for FTR to close above our trigger and buy calls the next day with a stop at $4.65. Our long-term target is $6.90. More aggressive traders could aim higher.

Breakout trigger: Wait for a close over $5.20 (stop 4.65)

BUY the 2014 Jan $5 call (FTR1418a5)

Originally listed on the Watch List: 09/29/12


General Electric - GE - close: 23.12

Comments:
10/06/12: GE continues to show relative strength. Yet after a five-week climb I strongly suspect the stock could see some profit taking when it reports earnings. GE is scheduled to announce Q3 earnings on Oct. 19th. We will wait for a correction to buy a dip.

I am listing a buy-the-dip entry point at $21.50 with a stop loss at $19.75. Our long-term target is $27.50.

Buy-the-Dip trigger: $21.50 (stop 19.75)

BUY the 2014 Jan $25 call (GE1418a25)

Originally listed on the Watch List: 09/22/12


SPDR Gold ETF - GLD - close: 172.62

Comments:
10/06/12: The U.S. dollar produced a decline this last week, which helped lift GLD to a new relative high on Thursday. I still don't want to chase it at current levels.

Currently I am suggesting we buy calls on a dip at $165.50. Plan to exit the 2013 calls at $174.50. Exit the 2014 calls in the $185-200 range.

Buy-the-Dip trigger: $165.50 (stop loss @ 159.00)

BUY the 2013 Jan $175 call (GLD1319a175)

- or -

BUY the 2014 Jan $200 call (GLD1418a200)

09/15/12 adjust the trigger to $165.50, stop to $159.00.
09/08/12 adjust the buy-the-dip trigger to $164.00 (up from $162)

Originally listed on the Watch List: 09/01/12


JPMorgan Chase - JPM - close: 41.71

Comments:
10/06/12: Hmm... we may have to adjust our entry point strategy. JPM and the financial sector were showing relative strength this past week. JPM is on the verge of breaking out past resistance near $42.00. The company is due to report earnings on October 12th and I do not want to launch new positions at relative highs in front of an earnings report. There is too much risk of a sell-off on a disappointing report.

At the moment we will keep our strategy with a plan to buy a dip at $38.50. However, we will consider re-adjusting our entry point strategy after we see how investors react to JPM's earnings results and guidance. Our long-term target is $45.00.

Buy-the-Dip trigger: $38.50 (stop 35.75)

BUY the 2014 Jan $45 call (JPM1418a45)

Originally listed on the Watch List: 09/22/12