Option Investor
Newsletter

Daily Newsletter, Sunday, 10/21/2012

Table of Contents

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

Leaps Trader Commentary

Earnings Disappointment Weighs On The Market

by James Brown

Click here to email James Brown

The S&P 500 had rallied +2.3% the first three days of the week. Then it gave most of it back with a slide that started on Thursday (thanks to Google) and then accelerated lower on Friday. Disappointing earnings results and guidance from a handful of high-profile names has sapped investors enthusiasm for stocks. The drop on Friday (-1.7% for the S&P 500) was the worst one-day drop since late June. It was also the 25th anniversary of Wall Street's Black Monday. That's when the Dow Jones Industrial Average fell 23% in one day on October 19th, 1987, scarring a generation of investors in the process.

This past week was the first full week of Q3 earnings results. It's also the first quarter in three years where corporate profits are negative (year over year). We'll talk about earnings in a moment. There were a number of headlines from overseas. In Europe the German ZEW survey saw its current conditions component fall to its lowest level since June 2010. Meanwhile investors were very disappointed that the recent EU summit failed to come up with some sort of solution for Spain. On Tuesday there was hope that Spain might actually ask for a bailout but there was no follow through. Spain definitely needs some financial aid but they are unwilling to accept the strings attached to any new EU bailout. EU leaders did make progress on agreeing to a new banking oversight scheme. The plan calls for new EU-wide banking regulation to be submitted by the end of 2012 and then eventually approved and implemented by the end of 2013.

Meanwhile across the Pacific ocean China was making headlines. The latest Chinese Q3 GDP estimate came in at +7.4% growth. That sounds good compared to the U.S's +1.3% growth rate. Yet for China, at +7.4%, it was the slowest level of growth since Q1 2009. It was also the seventh consecutive quarter of slowing growth. On a positive note China saw both its retail sales numbers and industrial production figures come in better than expected. Plus, China's consumer price index fell to +1.9%.

It was a busy week for economic data in the U.S. The September retail sales number came in at +1.1%, which was better than the prior months upwardly revised +1.2% and the +0.7% estimate for September. The Consumer Price Index (CPI) for September hit +0.6%, which was slightly above expectations but the core CPI only rose +0.1%. The New York Empire State manufacturing survey for October improved to -6.2. A month ago this came in at -10.4 but economists were expecting an improvement to -4.0. Readings above zero indicate growth while under zero it suggests economic contraction. On a more positive note the Philly Fed survey improved to 5.7 for October compared to the prior month's reading at -1.9. Analysts had been expecting an improvement to 1.0. The employment component of the survey plunged to -10.7, the lowest reading since late 2009.

Housing data was the big positive surprise this week. Both building permits and housing starts came in better than expected for September. Permits rose from an 801,000 annual pace a month ago to 894,000 in September. Housing starts improved from an annual pace of 758,000 to 872,000. This surge in housing starts was the biggest improvement since July 2008. Unfortunately, the existing home sales numbers failed to impress. The National Association of Realtors said existing home sales for September slipped -1.7% to a seasonally adjusted 4.75 million pace. NAR did report that nationwide inventories have fallen to a more normal level of 5.9 months of inventory. This is the lowest inventory reading since March 2006. Declining inventory levels helped fuel a +11.3% jump in the median price of a home, now at $183,900.

We are in the middle of Q3 earnings season. Thus far it's been rather disappointing. A string of earnings or revenue misses from big names like General Electric (GE), McDonald's (MCD), Microsoft (MSFT), Intel (INTC), Intl. Business Machines (IBM), and Google (GOOG) have all played their part in the market's bearish reversal lower this past week. Thus far 117 companies in the S&P 500 index have reported their Q3 results and the average earnings growth is down -4.0% from a year ago. That's twice as bad as the recent Wall Street estimates of -2.1% earnings growth.

Major Indices:

Stocks rallied the first three days of the week but the S&P 500 rolled over once it hit the 1462-1465 area. The index has seen a sharp drop back toward recent support near 1430 and its rising 50-dma. A breakdown here (under the October 12th low of 1425) would forecast a drop to the next support level at 1400. If the 1400 level breaks then we're probably looking at a drop to 1380 or the simple 200-dma (currently at 1374).

If you're feeling optimistic then you could argue the S&P 500 might be building a bull-flag pattern but a close under 1420 would definitely look negative and break the pattern.

chart of the S&P 500 index:

Disappointing earnings reports from the likes of Intel (INTC) and Google (GOOG) have weighed heavily on the NASDAQ. The composite underperformed the other major indices with a -2.1% drop on Friday. I cautioned readers that the next likely support level could be the 3,000 mark. Currently the NASDAQ is down about -6% from its September highs. You could argue it's a bit oversold here so there is a good chance the NASDAQ might bounce off the 3,000 mark. You'll notice that the index has a bearish trend of lower highs and lower lows.

If the 3000 level were to fail then the next level of support is probably the simple 200-dma near 2970 or the exponential 200-dma near 2950.

chart of the NASDAQ Composite index:

The small cap Russell 2000 bounced from support near 820 but failed at its trend of lower highs. Now it is testing key support near 820 again. The close under its simple 50-dma is bearish. The next level of support looks like the trend line from its October 2011 low, which just happens to coincide with its rising 200-dma (see chart).

The short-term trend is down but a close under its simple 200-dma (or the 800 level) could signal that the larger trend for the $RUT has turned bearish.

Daily chart of the Russell 2000 index

Last week the flow of Q3 earnings results turned into a downpour. This week the pace of earnings announcements will turn into a flood with hundreds of companies reporting. Outside of earnings results we could see headlines out of Europe. Spain is holding its regional elections on Sunday, October 21st. There is a Spanish bond auction on Tuesday so it will be interesting to see how bond buyers react to the election headlines. Italy will also sell debt on Friday. Meanwhile ECB President Mario Draghi meets with the German Parliament on Wednesday, which could spark headlines.

Here in the U.S. investors might be focused on the third and final presidential debate to be held on Monday night. Midweek is a two-day FOMC meeting but after the last meeting's QE-infinity program, this meeting is not expected to produce any headlines. Last but not least is an early look at U.S. GDP growth for the third quarter, which is released on Friday morning.

In corporate news, besides earnings reports, we will see the media focus on Apple's launch of the iPad mini. Plus we'll see Microsoft launching its new Windows 8 operating system and its new Surface tablet, a rival for Apple's iPad.

Economic and Event Calendar

- Monday, October 22 -
3rd U.S. presidential debate

- Tuesday, October 23 -
FOMC meeting begins two-day meeting
Eurozone Consumer Confidence
Chinese Manufacturing PMI report

- Wednesday, October 24 -
FOMC meeting ends, interest rate decision Wednesday afternoon
New Home Sales (for September)
Eurozone PMI report

- Thursday, October 25 -
Weekly Initial Jobless Claims
Durable Goods Orders (for September)
Pending Home Sales (for September)

- Friday, October 26 -
U.S. Q3 GDP estimate
University of Michigan consumer sentiment (for October)

Additional Events to be aware of:

Nov. 6th - U.S. Presidential Election

The Week Ahead:

Looking at the week ahead I am concerned that stocks will likely continue to drop or at best churn sideways. Investors are probably in a wait and see mode. Thus far earnings results have not been very inspiring. Plus, we have the presidential election in two weeks. Who wins the White House could definitely influence investor sentiment. We also have October 31st quickly approaching, which is fiscal year end for many mutual funds. This could generate window dressing (or undressing) depending how the market moves from current levels.

A couple of weeks ago analysts estimates for Q3 earnings growth had fallen to -2.1%. Right now the average corporate report is showing -4.0% growth. If this doesn't improve quickly it will definitely dampen investor appetite for stocks. A good question I read this weekend regarding earnings asked if what were are seeing is just a bump in the road for earnings growth or a sign of things to come given a slowing global economy and the fast approaching fiscal cliff for the U.S.

Speaking of the fiscal cliff, CNBC had an interesting article discussing a Bank of America analyst report on the impact of the cliff and perception of the cliff by investors. There was a survey of fund managers and the vast majority (72%) thought that investors have not yet priced in the potential impact of the fiscal cliff. Think about that for a moment. Almost three out of four fund managers do not think investors have properly considered the impact the fiscal cliff will have on corporate earnings and business and how that might be reflected in the stock market. If something were to somehow awaken investors to the risk facing the economy, the Bank of America analyst suggested that the S&P 500 could quickly fall to 1250 and likely continue down to the 1,000 level. That is a -30% haircut from current levels.

While we're talking about investor perception I should mention the AAII sentiment survey. Last week the most recent survey showed that bearish sentiment rose 5.7% to 44.5%. This is the highest reading since early June 2012. It's also the eight week in a row that bearish sentiment was above the long-term historical average of 30%. Investors surveyed are asked if they think stocks will rise or fall over the next six months. Historically 39% of investors are bullish and 30% are bearish. The most recent survey showed only 28.7% of investors are bullish. Now take into account that October normally starts the best six months of the year for stocks. There is definitely a disconnect with investors somewhere.

James


Portfolio

Portfolio Update

by James Brown

Click here to email James Brown


Current Portfolio


Portfolio Comments:

Google, IBM, Microsoft, Intel, McDonald's, and General Electric were just some of the high-profile companies that delivered disappointing earnings results and guidance this past week. Investor sentiment shifted late in the week and stocks gave back most of their gains from the Monday-Wednesday bounce.

The stock market looks vulnerable with the S&P 500 sitting on support near 1430 and the NASDAQ composite at support near 3000 and the Russell 2000 index on support near 820. A breakdown here would definitely look bearish!

We want to exit our 2013 January calls on Visa on Monday morning at the open.

ABT was stopped out.

MRK hit our bullish exit target.

I have adjusted stop losses on: EMN, FDO, JOY, LEN, MON, PFE, TWX

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

Multi-Year Highs

by James Brown

Click here to email James Brown


- New Trades -


Capital One Financial Corp. - COF - close: 60.75

Comments:
10/20/12: COF was a watch list candidate. The stock has been consolidating under resistance at the $60.00 level. The plan was to wait for shares to close above $60.50 and then buy calls the next day. The company reported earnings on October 18th, after the closing bell. Analysts were expecting a profit of $1.70 a share. COF delivered earnings of $2.01. Revenues surged +39% to 5.78 billion, which was also above estimates.

The market reacted by pushing COF past resistance at $60 and shares closed at a new multi-year high. Friday's close meets our entry point requirements. The plan is to open positions on Monday morning. The P&F chart is bullish with a $71 target. We are actually aiming for $74.00. I am moving our stop loss to $56.85.

Earlier Comments:
COF can be somewhat volatile so we want to keep our position size small. We'll have to keep an eye on potential resistance at $70.00.

- Suggested Positions - (small positions)
OCT 22, 2012 - entry price on COF @ --.--, option @ -.--
symbol: COF1418a65 2014 JAN $65 call - current bid/ask $ 5.20/ 5.50

Chart of COF:

Current Target:$ 74.00
Current Stop loss: 56.85
Play Entered on: 10/22/12
Originally listed on the Watch List: 10/06/12



Play Updates

MRK Hits Our Target

by James Brown

Click here to email James Brown

Editor's Note:

Prepare to exit our 2013 January Visa calls on Monday morning. I have updated several stop losses tonight.


Closed Plays


ABT hit our stop
MRK hit our exit target
PEP was closed on Monday morning


Play Updates


American Intl. Group - AIG - close: 35.70

Comments:
10/20/12: AIG delivered a strong week right up until Thursday's close. Then on Friday AIG gave back almost all of its gains with a -4.0% plunge. Broken resistance near $35.00 "should" provide new support but it's not guaranteed.

I am not suggesting new positions at this time.

FYI: AIG is due to report earnings on November 1st.

Earlier Comments:
Our plan was to keep our initial position size small to limit our risk. 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.

- 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 $ 6.00/ 6.10

- or -

May 18, 2012 - entry price on AIG @ 28.25, option @ 4.20
symbol: AIG1418A35 2014 JAN $35 call - current bid/ask $ 5.20/ 5.40

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: 9.44

Comments:
10/20/12: BAC posted a gain for the week but most of the time shares were churning sideways. The stock is consolidating inside a pennant-shaped pattern of lower highs and higher lows. This consolidation is narrowing and that would suggest that BAC will see a breakout, one way or the other, relatively soon.

I am not suggesting new positions at this time. With the 2013 January calls, any decline is going to hurt the calls pretty hard.

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 $ 0.39/ 0.40
(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 $ 0.39/ 0.40
(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: 113.38

Comments:
10/20/12: CVX produced a strong three-day bounce and rallied back above its 50-dma. Unfortunately the market-wide decline on Friday pushed CVX back under this moving average. If the market continues to weaken we can expect CVX to retest the $112-110 zone.

I am not suggesting new positions at this time. The $116 level is probably new short-term resistance.

FYI: CVX is due to report earnings on Nov. 2nd.

- Suggested (small) Positions -
Sep 12, 2012 - entry price on CVX @ 114.23, option @ 5.60
symbol: CVX1418a125 2014 JAN $125 Call - current bid/ask $ 4.00/ 4.20

10/10/12 CVX gaps down following lowered guidance
10/09/12 CVX lowers earnings guidance
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: 39.62

Comments:
10/20/12: DFS managed a gain for the week in spite of the two-day pullback. The stock has failed twice now in the $40.80 area. That's a bit concerning and might signal a short-term bearish double top. On a short-term basis I would expect another dip toward the 50-dma. I am not suggesting new positions.

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

- Suggested Positions -
(Closed on Sept. 27th)
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 $4.70/5.00

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: 54.25

Comments:
10/20/12: This could be a volatile week for EMN. The company is due to report earnings on October 25th, after the closing bell. Right now I am concerned about EMN. You could argue the peak in September and the early peak in October have formed a bearish double top and this last week has created a new lower high. Currently our stop loss is at $52.40. That's not a great spot for it. Readers should decide to either raise their stop so it's closer to support near $54.00 or lower their stop so it's underneath the rising 200-dma (currently at 51.68). If you choose the latter stop loss you are giving EMN room to maneuver and potentially dip toward support near $52 and its 100-dma or 200-dma. I am actually moving our stop loss higher to $53.75.

If you're holding the 2013 calls, you might want to consider an early exit now. I am not suggesting new positions at this time.

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 $1.50/1.60

- or -

SEP 07, 2012 - entry price on EMN @ 56.64, option @ 5.55
symbol: EMN1418a65 2014 JAN $65 call - current bid/ask $4.20/4.50

10/20/12 new stop loss @ 53.75

Current Target: $69.00
Current Stop loss: 53.75
Play Entered on: 09/07/12
Originally listed on the Watch List: 08/18/12


Family Dollar Stores - FDO - close: 65.10

Comments:
10/20/12: It was a volatile week for FDO. Actually most of the "dollar stores" were showing weakness, especially on Wednesday. There were rumors of lowered guidance for some of the stocks in this industry. FDO dipped under its 50-dma but bounced back on Wednesday. Traders have continued to sell the stock and now FDO is testing the 50-dma again.

The simple 200-dma is currently at $63.39. I am adjusting our stop loss down to $62.95. I want to give FDO room to dip to this technical support and bounce without stopping us out. I am not suggesting new positions at this time.

- Suggested Positions -
OCT 12, 2012 - entry price on FDO @ 65.88, option @ 1.70
symbol: FDO1320d75 2013 APR $75 call - current bid/ask $1.20/1.75

10/20/12 adjust stop loss to $62.95

Current Target: $74.50
Current Stop loss: 62.95
Play Entered on: 10/12/12
Originally listed on the Watch List: 10/06/12


Joy Global, Inc - JOY - close: 62.21

Comments:
10/20/12: It was a good week for JOY with shares up several days in a row. The stock is approaching what could be resistance at its September highs. I would not be surprised to see a pullback toward $60.00 soon.

New stop loss @ 54.75.

- Suggested Positions -
SEP 25, 2012 - entry price on JOY @ 57.50, option @ 7.50
symbol: JOY1418A70 2014 JAN $70 call - current bid/ask $8.65/9.10

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: 54.75
Play Entered on: 09/25/12
Originally listed on the Watch List: 09/15/12


Kimberly-Clark - KMB - close: 86.88

Comments:
10/20/12: We should expect some volatility on Wednesday. KMB is scheduled to report earnings on October 24th, before the opening bell. The results could send KMB past resistance near $88.00 or send it lower toward support at its 100-dma. I am not suggesting new positions at this time.

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 $3.50/3.70

10/13/12 adjust stop loss to $82.90

Current Target: $99.00
Current Stop loss: 82.90
Play Entered on: 10/02/12
Originally listed on the Watch List: 09/29/12


Lennar Corp. - LEN - close: 38.73

Comments:
10/20/12: LEN and the homebuilders in general have done well this past week. LEN rallied to new multi-year highs. Shares almost hit our exit target at $39.50 with an intraday high of $39.25. I am turning more aggressive on LEN and the homebuilding stocks. I do think the $40.00 level is likely resistance and LEN will probably see a pullback on its initial test of $40.00. Keep in mind that we also have more than a year for our 2014 calls to work.

I am adjusting our exit target on our 2014 Jan $40 calls from $39.50 to $44.00. We'll move the stop loss higher to $33.90.

More conservative traders may want to take profits anyway, especially with the bid on our call up to $6.10.

I am not suggesting new positions at this time.

- 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 $6.10/6.30

10/20/12 new stop loss @ 33.90, adjust exit target on 2014 calls to $44.00
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%)
...

Current Target: $ 36.00(2013 calls), $44.00 (2014 call)
Current Stop loss: 33.90
Play Entered on: 08/17/12
Originally listed on the Watch List: 08/11/12


Monsanto Co. - MON - close: 88.69

Comments:
10/20/12: Believe it or not but MON managed a small gain for the week. Unfortunately, I am not bullish. Shares look like they are coiling for a breakdown low. If MON breaks support near $88.00 I think it will drop into the $84.00-82.00 zone before finding support. So, we either need to move our stop loss so it's under $82.00, probably under the 200-dma at $81.72, or move our stop loss higher. I am suggesting we move it higher and raise the stop to $87.45. If MON breaks down we want to exit. I'd rather close positions early and we can reconsider jumping back in down the road.

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 $ 3.35/ 3.45

- or -

Jul 17, 2012 - entry price on MON @ 85.84, option @ 6.50
symbol: MON1418A100 2014 JAN $100 call - current bid/ask $ 5.55/ 5.70

10/20/12 new stop loss @ 87.45
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: 87.45
Play Entered on: 07/17/12
Originally listed on the Watch List: 07/14/12


Pfizer Inc. - PFE - close: 25.76

Comments:
10/20/12: PFE has continued to rally and shares hit the $26 level this past week. PFE is at multi-year highs and readers may want to take profits now ahead of the company's earnings report. PFE is scheduled to report earnings on Oct. 30th, before the opening bell.

I am not suggesting new positions at this time and we will raise our stop loss to $23.90.

- Suggested Positions -
Jul 18, 2012 - entry price on PFE @ 23.53, option @ 1.30
symbol: PFE1418A25 2014 JAN $25 call - current bid/ask $ 2.05/ 2.09

10/20/12 new stop loss @ 23.90
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: 23.90
Play Entered on: 07/18/12
Originally listed on the Watch List: 04/21/12


SIRIUS XM Radio - SIRI - close: 2.92

Comments:
10/20/12: SIRI has managed to extend its gains once again. The stock is at new multi-year highs and currently up five weeks in a row. Odds are good that SIRI will see some profit taking sooner or later. That "sooner" might be the company's earnings report. SIRI is scheduled to report earnings on October 30th. After a five-week gain the earnings announcement would make a good excuse to sell and take profits.

I am not suggesting new positions at this time. 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 $ 0.45/ 0.49

- or -

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

10/20/12 warning! SIRI is up five weeks in a row and growing overbought. The stock could see a sell-off on its earnings report

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: 20.88

Comments:
10/20/12: SPRD really underperformed the market on Friday with a -4.4% decline. Shares had failed at resistance near $22.00 for the prior three days in a row. In spite of the pullback on Friday SPRD still posted a gain for the week. I would expect a dip back toward support near $20 and its 50-dma.

FYI: Earnings are expected in early November.

- 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 $ 1.30/ 1.50

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


Time Warner - TWX - close: 44.93

Comments:
10/20/12: I want to warn you that TWX looks vulnerable here. The stock chopped sideways all week and ended on a down note with a -2.0% drop on Friday. This looks like a new lower high after weeks of churning sideways. Odds are growing that TWX will see a significant correction lower. I'm thinking maybe a dip back into the $42-40 zone.

We will raise our stop loss to $43.75. If TWX breaks support near $44 and its 50-dma we'll get stopped out. Readers may want to just exit early now. I am not suggesting new positions at this time.

- Suggested Positions -
(closed 2013 call on Sep 24th)
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 $ 4.10/ 4.25

10/20/12 new stop loss @ 43.75
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: 43.75
Play Entered on: 08/03/12
Originally listed on the Watch List: 07/21/12


U.S. Bancorp - USB - close: 34.23

Comments:
10/20/12: The bounce in USB is not seeing much follow through. I am concerned that shares are producing a new trend of lower highs. I fear a correction will pull it back down into the $33-32 zone. I am not suggesting new positions at this time.

- Suggested Positions -
Jul 20, 2012 - entry price on USB @ 33.62, option @ 1.39
symbol: USB1319A35 2013 JAN $35 call - current bid/ask $ 0.91/ 0.94

- or -

Jul 20, 2012 - entry price on USB @ 33.62, option @ 3.10
symbol: USB1418A35 2014 JAN $35 call - current bid/ask $ 2.74/ 2.83

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: 139.97

Comments:
10/20/12: Midweek Visa had rallied to new all-time highs and traded above $143 a share. Yet the market's widespread profit taking pulled shares back down to their 10-dma on Friday. If the market continues to show weakness I would not be surprised to see V dip back toward the $136-134 area.

Please note that I am suggesting we exit our 2013 Jan calls at the opening bell on Monday morning. We'll keep our 2014 options. I am not suggesting new positions at current levels.

FYI: Visa is scheduled to report earnings on Oct. 31st.

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 $ 8.70/ 8.90

- or -

JUL 03, 2012 - entry price on V @ 126.49, option @ 11.95
symbol: V1418A140 2014 JAN $140 call - current bid/ask $16.30/16.65

10/20/12 prepare to exit our 2013 calls at the open on Monday
10/13/12 readers may want to take profits early if you're holding the 2013 calls.
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: 34.34

Comments:
10/20/12: Hmm... the recent action in WFC is not very encouraging. The bounce off technical support near its 100-dma and 150-dma didn't get very far. Shares are reversing under resistance in the 34.50-35.00 area where there is a small cloud of moving averages. I suspect that we're going to see WFC correct lower and potentially drop toward $33 and its simple 200-dma. I am not suggesting new positions at this time.

- Suggested Positions -
SEP 14, 2012 - entry price on WFC @ 35.60, option @ 2.26
symbol: WFC1418a40 2014 JAN $40 call - current bid/ask $ 1.48/ 1.54

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


Abbott Labs - ABT - close: 66.15

Comments:
10/20/12: It was an ugly week for ABT. The Monday-Wednesday action produced a three-day bearish candlestick reversal pattern. Then on Wednesday night ABT reported earnings that beat estimates by two cents. Yet ABT missed the revenue estimate and provided disappoitning guidance.

The stock gapped down on its earnings report Thursday morning and opened at $66.08. Our stop loss was at $67.75 so the play was closed immediately.

- Suggested Positions -
(closed on Sept. 24th)
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 - exit $4.60 (+7.4%)

10/18/12 stopped out on gap down at $66.08
10/13/12 Readers may want to take profits prior to earnings on Oct. 17th
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
...see early updates for older notes...

Chart of ABT:

Current Target:$73.00
Current Stop loss: 67.75
Play Entered on: 07/02/12
Originally listed on the Watch List: 06/23/12


Merck & Co - MRK - close: 47.03

Comments:
10/20/12: Target achieved.

MRK continued to rally last week and hit the $48.00 level before reversing on Friday. Our exit target was hit at $47.50 on October 17th.

- Suggested Positions -
Jun 25, 2012 - entry price on MRK @ 39.91, option @ 3.14
symbol: MRK1418A40 2014 JAN $40 call - exit $8.00 (+154.7%)

10/17/12 target hit
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).

Chart of MRK:

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: 69.88

Comments:
10/20/12: Last weekend we decided it was time to exit PEP before shares broke down any further. The plan was to exit on Monday morning. PEP opened on Oct. 15th at $70.04.

- Suggested Positions -
Jul 02, 2012 - entry price on PEP @ 70.34, option @ 2.85
symbol: PEP1418A75 2014 JAN $75 call - exit $2.07 (-27.3%)

10/15/12 planned exit at the open
10/13/12 prepare to exit on Monday morning
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.

Chart of PEP:

Current Target: $79.00
Current Stop loss: 69.40
Play Entered on: 07/02/12
Originally listed on the Watch List: 05/26/12



Watch

Games & Defense

by James Brown

Click here to email James Brown

Editor's Note:

COF hit our entry point requirement on Friday. I have moved it to the new plays section.



New Watch List Entries

HAS - Hasbro Inc.

LLL - L-3 Communications


Active Watch List Candidates

CNX - CONSOL Energy

DE - Deere & Co.

FTR - Frontier Telecom

GE - General Electric

GLD - Gold ETF

SWN - Southwestern Energy


Dropped Watch List Entries

CCL and JPM have been removed
COF has graduated to an active trade. See its update in the new plays section.



New Watch List Candidates:


Hasbro Inc. - HAS - close: 39.05

Company Info

Would you believe that there are less than 65 days until Christmas? Analysts expect that holiday shopping will rise +4% this year. That should be good news for shares of toy and game maker Hasbro. The stock is currently consolidating below resistance at the $40.00 level.

I am suggesting we wait for HAS to close over $40.25 and open bullish positions the next day with a stop loss at $37.25. Our long-term target is $45.00.

FYI: HAS is due to report earnings on Oct. 22nd.

Breakout trigger: Wait for a close over $40.25 (stop 37.25)

BUY the 2014 Jan $40 call (HAS1418a40) current ask $3.60

Chart of HAS:

Originally listed on the Watch List: 10/20/12


L-3 Communications - LLL - close: 73.61

Company Info

LLL is a defense contractor for the U.S. government. The stock has been consolidating sideways under major resistance at $75.00 for several months. LLL looks poised to breakout soon.

I am suggesting we buy calls the day after LLL closes above $75.50. We'll use a stop loss at $72.25. Our long-term target is $85.00. The Point & Figure chart for LLL is bullish with an $85 target. FYI: LLL is scheduled to report earnings on Oct. 30th.

NOTE: We will not open positions if LLL gaps open above $76.50 or sees a one-day surge where the stock closes above $76.50. This is an effort to try to avoid any post-earnings volatility.

Breakout trigger: Wait for a close over $75.50 (stop 72.25)

BUY the 2014 Jan $80 call (1418a80) current ask $3.60

Chart of LLL:

Originally listed on the Watch List: 10/20/12


Active Watch List Candidates:



Carnival Corp. - CCL - close: 38.19

Comments:
10/20/12: The rally in CCL appears to have failed at is September high near $39. This looks like a potential bearish double top. I am removing CCL as a candidate. Shares did not hit our buy-the-dip trigger at $35.25. Readers may want to keep it on their radar screen.

Trade did not open.

10/20/12 removed from the watch list.
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


CONSOL Energy Inc. - CNX - close: 35.21

Comments:
10/20/12: CNX has held up reasonably well. The stock posted a gain for the week. It will be interesting to see how investors react to CNX's earnings report, which is scheduled for October 25th.

I am suggesting we open small bullish positions on a dip at $33.50 with a stop loss at $29.90. Our long-term target is $42.50. The Point & Figure chart for CNX is bullish with a long-term $47 target.

Buy-the-Dip trigger: $33.50 (Small Positions, stop 29.90)

BUY the 2014 Jan $40 call (CNX1418a40)

Originally listed on the Watch List: 10/13/12


Deere & Co. - DE - close: 84.99

Comments:
10/20/12: Instead of pulling back shares of DE broke out. I discussed this in previous updates and suggested an alternative entry point to buy a breakout past $84.00. DE produced a multi-day rally and traded above $87 before pulling back on Friday. Broken resistance near the $83.50-84.00 zone should be new support.

I am adjusting our buy-the-dip trigger up to $83.50 and we'll move the stop loss to $79.45. I would start with small positions to limit our risk. I am adjusting our target to $97.50.

FYI: DE is not scheduled to report earnings until late November.

Buy-the-Dip trigger: $83.50 (stop loss 79.45) *Small Positions*

BUY the 2014 Jan $90 call (DE1418a90)

10/20/12 adjust the buy-the-dip trigger to $83.50, move the stop to $79.45, move the target to $97.50
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: 4.76

Comments:
10/20/12: FTR continues to churn sideways. there is resistance near $5.00 and short-term support near the 50-dma. I suspect that FTR might continue to move sideways until the company reports earnings on November 6th.

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: 22.03

Comments:
10/20/12: GE reported earnings on the 19th and missed Wall Street's estimates by one cent. Revenues for the quarter were also a miss at $36.35 billion. Investors sold the news and GE lost -3.4% on Friday. We have been expecting a correction lower so it's not a surprise.

Please note that I am moving our buy-the-dip trigger down to $21.00 and moving our stop loss to $19.45. Our long-term target is $27.50.

Buy-the-Dip trigger: $21.00 (stop 19.45)

BUY the 2014 Jan $25 call (GE1418a25)

10/20/12 adjust the buy-the-dip trigger to $21.00 and our stop to $19.45

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


SPDR Gold ETF - GLD - close: 166.97

Comments:
10/20/12: A two-day bounce in the U.S. dollar helped spark some profit taking in gold. The GLD fell to its rising 50-dma near $166. After looking at the stock market, the dollar, and gold; I suspect we could see the GLD dip further than $165. Therefore I am moving our buy-the-dip trigger down to $163.00 and moving our stop loss to $157.75.

I am also adjusting our 2013 call from Januarys to Junes.

Plan to exit the 2013 calls at $174.50. Exit the 2014 calls in the $185-200 range.

Buy-the-Dip trigger: $163.00 (stop loss @ 157.75)

BUY the 2013 Jun $175 call (GLD1322a175)

- or -

BUY the 2014 Jan $200 call (GLD1418a200)

10/20/12 adjust the buy-the-dip trigger to $163.00, stop to $157.75
adjust the 2013 call from Jan. $175 to June $175
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: 42.32

Comments:
10/20/12: JPM has held up relatively well. It would be tempting to buy the stock's breakout past resistance near $42.00 and use this pullback to $42 as an entry point. Unfortunately the broader market looks vulnerable right now. I suspect JPM will retreat but it could be a while before it hits the $39 area. I am removing JPM as a candidate, at least for now.

Trade did not open

10/20/12 removed JPM as a candidate
10/12/12 JPM reported earnings

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


Southwestern Energy - SWN - close: 35.25

Comments:
10/20/12: SWN did not make any progress this past week. Nimble traders might want to try and buy a dip near $34 or its 50-dma. I am suggesting we wait for SWN to close over $37.00 and then buy calls the next day with a stop loss at $33.40. Our long-term target is $44.00. The Point & Figure chart for SWN is bullish with a long-term $51 target.

FYI: SWN is due to report earnings on Nov. 1st.

Breakout trigger: Wait for a close above $37.00 (stop 33.40)

BUY the 2014 Jan $40 call (SWN1418a40)

Originally listed on the Watch List: 10/13/12