Option Investor
Newsletter

Daily Newsletter, Sunday, 5/19/2013

Table of Contents

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

Leaps Trader Commentary

Stocks Look Overbought

by James Brown

Click here to email James Brown

The stock market rally continues to surge higher with the S&P 500 index extending its gains to four weeks in a row. For anyone keeping score the S&P 500 index is now up 1,001 points from its March 2009 low of 666. The large cap index is also up almost 77% of the trading days in May. Another piece of stock market trivia was the Dow Jones Industrial Average uncanny midweek strength with the index up 18 Tuesdays in a row. That has never happened before not that it means anything.

This remains a broad-based rally with financials, technology, and transports all rising. The transportation average is up +23% for the year. The small caps Russell 2000 index is up +17.3% year to date. Biotechs are a stand out with a +29.7% surge year to date. The sudden rally in the U.S. dollar is crushing gold and silver with gold down almost -$90 for the week. Gold shorts have reached all-time highs. Oddly enough the rise in the dollar is not pushing oil prices lower.

There were a number of economic reports out last week and the data was mixed. The regional economic reports continue to show the U.S. economy sliding lower but consumer sentiment was the positive surprise for the week. On Friday the University of Michigan Consumer Sentiment Survey came out at 83.7. That was up from 76.4. Friday's reading is the highest level since July 2007. Normally, during non-recessionary years, the sentiment has an average of 87.6. I suspect this sudden improvement in consumer sentiment is a reflection of rising home values and the rising stock market, which generates a wealth effect. That's exactly what Fed Chairman Ben Bernanke wants. If a consumer feels wealthy they will spend more but we'll talk about that later.

The Philly Fed manufacturing index plunged from -2 to -5.2 in May. Numbers below zero indicate economic contraction and suggest recession. The New York Empire State manufacturing survey reversed from +3.1 to -1.4. Another negative surprise was the industrial production numbers, which dropped -0.5% in April, from a downwardly revised -0.3% in March. Retail sales in April rose +0.1% versus a -0.5% drop in March. Weekly jobless claims bounced +32,000 to 360,000, which was above estimates.

Another issue were the inflation gauges. There is no inflation unless you look at energy and food. The latest reports actually suggest a more deflationary environment. The Producer Price Index dropped -0.7% in April, down from -0.6% in March. The Consumer Price Index fell -0.4% versus estimates for -0.3%.

The homebuilder confidence index broke a three-month down trend with a bounce in May. The survey of builders came in at 44 in May, up from 41 in April. Yet this confidence was not very evident in the housing starts data. A couple of days later the national housing starts showed a -16.5% plunge from 1.036 million in March to 853,000 in April. This is the lowest reading on housing starts in five months and the biggest one-month drop in over a year. Multi-family housing starts plunged even faster with a -39% drop. If residential real estate is recovering why the slowdown in starts? Lumber prices are plunging as well if there was a big construction boom in housing then demand for lumber would be higher. Something doesn't smell right in the homebuilder industry.

An anecdotal story to the consumer spending issue is Wal-Mart's (WMT) earnings report. The company reported earnings a few days ago and WMT missed the earnings estimate, missed the revenue estimate, and reported a drop in same-store sales. If that wasn't bad enough management guided lower for the second quarter. WMT is the biggest retailer on the planet. If the economy was improving it would be reflected in WMT sales. Granted you could argue that the rising stock market and rising home prices may have not have much of a "wealth effect" influence on the average Wal-Mart shopper. The company's disappointing results remain a potential warning signal for the broader economy, especially since consumer spending is considered 70% of the U.S. economy.

Looking overseas there were plenty of headlines from Europe. The Eurozone is stuck in recession with its Q1 GDP estimate coming in at -0.2% growth. That was improvement from the prior quarter's -0.6%. Germany's GDP was +0.1%, France reported -0.2% growth. Italy said their economy fell -0.5%. Meanwhile Eurozone industrial production rose +1.0%, up from the prior month's +0.3% reading.

Japan was making headlines with its Q1 GDP estimate coming in at +0.9% growth, which was better than expected. Japan also said its core machinery orders surged +14.2% month over month compared to +7.5% the month before. The Japanese NIKKEI stock market index continues to surge and rallied past the 15,000 mark for the first time since January 2009.

We did hear some good news out of China with the country's retail sales coming in at +12.8%, up from +12.6% the prior month. China also said its industrial production rose +9.3% versus the prior reading of 8.9%.

Major Indices:

The S&P 500 index posted a +2.0% gain for the week and is up +16.9% for the year. It's up +23.2% from the November 2012 low. The strength in this large cap index is impressive. Unfortunately the index just closed near its multi-month trend line of higher highs. Thus odds favor a short-term pullback (see the daily chart below).

If somehow the rally continues then 1675 and 1700 are potential resistance levels. If the index pulls back then 1635, 1620 and 1600 are potential support levels. Although in February and April the index saw dips to the 40-dma and 50-dma, and if it saw a similar dip now that would break below the 1600 level.

chart of the S&P 500 index:

The NASDAQ has been on fire with a steady stream of new relative highs. It posted a +1.8% gain for the week and is up +15.8% for the year. The nearly non-stop run from its mid-April low leaves the index very short-term overbought and definitely due for a pullback.

The index closed Friday right at round-number resistance at 3500. The NASDAQ is so over extended that any correction could be painful. The 3400, 3365, and 3300 levels are potential support levels. If somehow the rally continues then 3550 and 3600 are possible resistance levels.

Hypothetically, if the market were to suddenly see a -5% correction then the NASDAQ would drop to 3,325.

Daily chart of the NASDAQ Composite index:

The small cap Russell 2000 index is also up four weeks in a row. This index posted a +2.1% gain for the week and is up +17.3% for the year. I've been warning readers that the 1,000 level could prove to be round-number, psychological resistance for the $RUT. It looks like we're going to find out soon if that's true or not. The $RUT is so overbought that the nearest support is probably the prior resistance near 955.

chart of the Russell 2000 index



Economic Data & Event Calendar

We are about to start the third full week of May and the economic data slows to a crawl. We'll see existing home sales and new home sales data. The real "event" for the week will be the release of the FOMC minutes from the prior meeting and Chairman Bernanke's testimony before congress on Wednesday. Mr. Bernanke will be providing the Fed's "economic outlook". The meeting starts at 10:00 a.m.

Economic and Event Calendar

- Monday, May 20 -
(nothing significant)

- Tuesday, May 21 -
(nothing significant)

- Wednesday, May 22 -
existing home sales for April
FOMC minutes
Fed Chairman Bernanke speaks before congressional committee

- Thursday, May 23 -
Weekly Initial Jobless Claims
new home sales data

- Friday, May 24 -
Durable Goods Orders

Additional Events to be aware of:

May 27th - U.S. market closed for Memorial day
September - U.S. debt ceiling deadline

The Week Ahead:

The market's trend is clearly up. Yet we all know that stocks don't go straight up. There are ebbs and flows. Right now we're way over due for an ebb lower. Currently the U.S. market is very overbought. The number of S&P 500 components above their simple 200-dma is almost 94%. The last time this reading was this high was back in early 2011, right before the market peaked.

Another market internal reading at extremes is the S&P 500 bullish percent data, which calculates how many S&P 500 components have a point & figure chart buy signal. Right now bullish percent number is at 89%. Usually readings above 70.0 are considered overbought. The last time the S&P 500 bullish percent was this extreme was the first quarter of 2011. You guessed it - right before the market rolled over. Now I'm not declaring the market is going to reverse tomorrow. I want to caution you that the market is reaching extremes. Odds are growing for a retracement lower. A -3% to -5% pullback would be healthy at this point and also provide us a better entry point than chasing stocks at their highs.

I do think part of the challenge for market bears is the lack of alternatives for investors. Where else are they going to put their money? Gold has lost its luster. Bond market experts are calling a top in bonds. Trying to short the market is fighting the fed and several of the world's major central banks. There was some research done on the Fed's QE program and the U.S. treasury's scheduled issuance. Right now the treasury is not going to issue enough debt in 2013 to meet the Federal Reserve's demand. That means the Fed will have to buy treasuries on the secondary market. This will encourage normal bond buyers to put their money in other assets, potentially the equity market.

Overall I am troubled by the disconnect between the stock market and the reality in the economy. We just saw two of our regional manufacturing survey's turn negative. The trend of economic data has been bearish for months now. Yet stocks continue to ignore economic data. Previously the stock market would stumble and quiver any time someone suggested the Fed might cut back on its QE program. Yet this past week there has been a switch. A couple of influential analysts and hedge fund managers have suggested that when the Fed "tapers" its QE program it will be bullish. If they don't taper (reduce their QE) then it would be bearish and suggest the economy is getting worse.

One thing we have to keep in mind is that the market is always right. We don't want to fight the trend. Yet that doesn't mean we have to chase stocks higher when we're seeing some warning signs. These are probably just short-term warnings signs on the market internals. I do think we're in a buy-the-dip sort of market. The question is how much of a dip do we wait for? Personally I would be tempted to wait for a -3% to -5% decline or a dip toward the key moving averages or trend of higher lows. If and when you do initiate new positions consider starting small and then add to it as the trade progresses.

James


Portfolio

Portfolio Update

by James Brown

Click here to email James Brown


Current Portfolio


Portfolio Comments:

Equities are growing more and more overbought. Veteran traders know that we're going to see a correction eventually and probably sooner rather than later.

We closed our M trade as planned on Monday, May 13th.

Tonight I am suggesting we exit our 2014 Ford calls, the 2014 HON calls, and the 2015 MRK calls immediately on Monday morning.

I have updated stop losses on: F, HON, and LOW

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

Time to Pause?

by James Brown

Click here to email James Brown


- New Trades -


Editor's Note:

(May 18, 2013)

Bullish momentum in the U.S. stock market continues but it's starting to hit extremes. On a short-term basis the market is very overbought and due for some profit taking to help alleviate its overbought condition.

Why put new money into the market when it could see a -3% correction any day now. The high-beta names will see an even bigger pullback. Fortunately I do think any weakness will be a short-term pullback. There are too many investors on the sidelines just praying for a pullback so they can buy the dip.

I can't say that a market pullback is imminent but odds of a retracement get bigger every day. The S&P 500 index just closed near its multi-month trend line of higher highs. The Russell 2000 index just closed below potential round-number resistance at the 1,000 mark. These events don't guarantee a market reversal but the indices are at levels that should make savvy traders pause.

The LEAPStrader newsletter did see two of our watch list candidates graduate to active trades this past week. I'm adding two more watch list candidates tonight. Plus, I've added a few more symbols to my radar screen.


Radar Screen:
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:

CY, NKE, WFR, C, AIG, CSCO, NAV, M, UTX, WFC, CS, GS, JPM, KSU, SODA, ODFL, WSM, UNP, RRC, UPS, GRPN, JNJ, ORLY, TSCO, LVS, HOG, CAT, RF, SOHU, NVDA, FSLR, DIS, TGT, PNRA, KMB, CL, SBUX, WFM, CLX, UA, SJM, K, TJX, GLW, COST, DNKN, PAYX, LULU, BHI, CBI, SIRI, EA


Play Updates

Taking Money Off the Table

by James Brown

Click here to email James Brown

Editor's Note:

The stock market's rally has been impressive. We want to take advantage of this strength. I am suggesting we exit some of our 2014 calls in F and HON.

Plus we want to exit our MRK trade immediately.
See play updates for details.


Closed Plays


Macy's (M) was closed as planned on May 13th. We closed the option with a +60% rise in value.



Play Updates


Bank of America - BAC - close: 13.43

Comments:
05/18/13: Shares of BAC are stair-stepping higher from $12.00 to $13.00 and now to $13.50. The rally has paused right on a five-month trend line of higher highs starting from early January this year. Financials have been a big part of this rally but I suspect BAC is poised for a pullback. I am not suggesting new positions at this time.

- Suggested Positions -
MAR 18, 2013 - entry price on BAC @ 12.29, option @ 0.44
symbol: BAC1418a15 2014 JAN $15 call - current bid/ask $0.57/0.58

- or -

MAR 18, 2013 - entry price on BAC @ 12.29, option @ 1.13
symbol: BAC1517a15 2015 JAN $15 call - current bid/ask $1.42/1.43

05/04/13 BAC did not participate in the market's rally this past week. Investors should turn more defensive here.

Current Target:$ 18.00
Current Stop loss: 10.90
Play Entered on: 03/18/13

Originally listed on the Watch List: 03/09/13


Bed Bath & Beyond - BBBY - close: 69.11

Comments:
05/18/13: Warning! Shares of BBBY could be in trouble. The up trend stalled this past week. A number of retail stocks were struggling the last few days. BBBY broke down below its 10-dma but traders bought the dip near $68 and its 20-dma.

I am concerned that BBBY is about to see a correction lower and it could be painful. Do not be surprised to see a pullback toward $66 and its 50-dma. More conservative investors might want to just take profits right now instead of enduring the decline.

- Suggested Positions -
MAR 21, 2013 - entry price on BBBY @ 63.06, option @ 5.20
symbol: BBBY1418a65 2014 JAN $65 call - current bid/ask $7.95/8.05

05/18/13 BBBY could be poised for a painful pullback here.
05/11/13 new stop loss @ 64.65
05/04/13 new stop loss @ 63.75
04/13/13 new stop loss @ 62.25
03/30/13 Nimble traders could exit now (for a small profit) and re-enter positions on a pullback.
03/21/13 trade opens with BBBY opening at $63.06
03/20/13 BBBY meets our entry requirement (close over $62.50) with a close at $63.34

Current Target:$ 74.50
Current Stop loss: 64.65
Play Entered on: 03/21/13
Originally listed on the Watch List: 03/16/13


Dollar Tree, Inc. - DLTR - close: 49.76

Comments:
05/18/13: DLTR gained about half a point for the week. Wednesday's move was bullish with a breakout past resistance at $50.00. Yet there was no follow through on Thursday or Friday. DLTR might be stuck, hovering near $50.00, until the company reports earnings.

Earnings will be here soon and more conservative investors will need to seriously consider taking profits now, prior to the announcement, since an earnings disappointment could spark a sharp move lower. DLTR is scheduled to announce earnings on May 23rd, before the opening bell. Wall Street is looking for a profit of 57 cents a share.

- Suggested Positions -
FEB 28, 2013 - entry price on DLTR @ 45.25, option @ 4.76
symbol:DLTR1418a45 2014 JAN $45 call - current bid/ask $ 7.10/7.30

05/18/13 Readers may want to take profits prior to the earnings report
04/13/13 new stop loss @ 44.75
03/30/13 new stop loss @ 43.45
More conservative investors might want to take profits as DLTR moves into the $49-50 zone.
03/16/13 new stop loss @ 41.40
02/28/13 trade opened following gap higher, above our trigger

Current Target: $53.50
Current Stop loss: 44.75
Play Entered on: 02/28/13
Originally listed on the Watch List: 02/23/13


Ford Motor Co. - F - close: 15.08

Comments:
05/18/13: Ford continues to impressive with another big rally last week. The stock is up four weeks in a row and has now broken out past resistance at its January 2013 highs.

The stock does look short-term overbought here. I am suggesting we go ahead and exit our 2014 January calls, which have doubled in value, and close this position on Monday morning, May 20th. We will keep the 2015 calls open but raise the stop loss to $13.40.

Earlier Comments:
Our long-term target is $16.50. You could certainly aim higher. Currently the Point & Figure chart is forecasting a $24.50 target.

- Suggested Positions -
APR 29, 2013 - entry price on F @ 13.73, option @ 0.60
symbol: F1418a15 2014 JAN $15 call - current bid/ask $ 1.19/1.21

- or -

APR 29, 2013 - entry price on F @ 13.73, option @ 1.22
symbol: F1517a15 2015 JAN $15 call - current bid/ask $ 1.84/1.88

05/18/13 prepare to exit the 2014 calls on Monday, May 20th
05/18/13 new stop loss @ 13.40

Current Target:$ 16.50
Current Stop loss: 13.40
Play Entered on: 04/29/13
Originally listed on the Watch List: 04/20/13


Honeywell Intl. - HON - close: 80.75

Comments:
05/18/13: Shares of HON have been screaming higher. The stock's rally in the month of May has been nearly non-stop. Our 2014 calls have almost doubled already.

HON stock is overbought and due for some profit taking. I am suggesting we go ahead and exit our 2014 calls immediately to lock in gains now. More aggressive traders may want to hold on and see if HON can hit $82 and then exit the 2014 calls there instead. We will leave the 2015 calls open but I am raising the stop loss to $74.50.

Earlier Comments:
Let's keep our position size small to start.

- Suggested Positions -
MAY 07, 2013 - entry price on HON @ 76.20, option @ 2.68
symbol: HON1418a80 2014 JAN $80 call - current bid/ask $ 5.10/5.20

- or -

MAY 07, 2013 - entry price on HON @ 76.20, option @ 4.10
symbol: HON1517a85 2015 JAN $85 call - current bid/ask $ 6.15/6.35

05/18/13 prepare to exit 2014 Jan. calls immediately on Monday, May 20th
05/18/13 new stop loss @ 74.50
05/07/13 Our trade opens
05/06/13 HON meets our entry requirement with a close above $76.00

Current Target:$ 95.00
Current Stop loss: 74.50
Play Entered on: 05/07/13
Originally listed on the Watch List: 05/04/13


Intel Corp. - INTC - close: 24.04

Comments:
05/18/13: It looks like the rally in INTC has stalled. I'm not surprised and last week warned readers that INTC was overbought. After a huge, five-week rally INTC was due for some profit taking. The profit taking may not be over yet. If the market pulls back I would expect INTC to see a dip toward $23.00 or possibly $22.50.

Earlier Comments:
Our long-term target is $26.50 but we may have to exit our 2014 calls before then.

- Suggested Positions -
APR 24, 2013 - entry price on INTC @ 23.28, option @ 0.89
symbol:INTC1418a25 2014 JAN $25 call - current bid/ask $ 1.10/1.12

- or -

APR 24, 2013 - entry price on INTC @ 23.28, option @ 1.74
symbol:INTC1517a25 2015 JAN $25 call - current bid/ask $ 1.94/1.99

05/18/13 The rally has stalled. INTC might correct lower soon
05/11/13 new stop loss @ 21.90

Current Target: $26.50
Current Stop loss: 21.90
Play Entered on: 04/24/13
Originally listed on the Watch List: 04/20/13


The Coca-Cola Company - KO - close: 42.97

Comments:
05/18/13: KO managed a breakout to new multi-year highs on Thursday but profit taking pulled it lower again on Friday. It looks like KO is in the process of breaking out from its four-week consolidation in the $41.50-43.00 range. I don't see any changes from my prior comments. Our exit target remains $44.00 but more aggressive traders may want to seriously consider aiming higher!

Earlier Comments:
KO's all-time high is $44.47 from July 1998. We are leaving the long-term exit target at $44.00.

- Suggested Positions -
(closed 2014 calls on April 1st, 2013 at the open)
FEB 12, 2013 - entry price on KO @ 38.05, option @ 1.01
symbol: KO1418a40 2014 JAN $40 call - exit $1.97 (+95.0%)

- or -

FEB 12, 2013 - entry price on KO @ 38.05, option @ 1.75
symbol: KO1517a40 2015 JAN $40 call - current bid/ask $5.00/5.15

04/20/13 new stop loss @ 39.65, readers may want to take profits now.
04/01/13 exited 2014 calls at the open. Option @ $1.97 (+95.0%)
03/30/13 prepare to exit our 2014 Jan $40 calls on Monday, April 1st, 2013 at the opening bell to lock in gains. Current bid is $2.09.
03/30/13 new stop loss @ 38.25
03/23/13 new stop loss @ 37.65
Our 2014 calls have almost doubled and readers may want to take profits early right now

Current Target: $44.00
Current Stop loss: 39.65
Play Entered on: 02/12/13
Originally listed on the Watch List: 02/09/13


Lowe's Companies - LOW - close: 42.67

Comments:
05/18/13: LOW could see some profit taking soon. The sprint higher in LOW is stalling a bit. The stock could be out of breath and needs to pause. The company reports earnings on Wednesday, May 22nd and investors could use the news to sell and lock in gains. LOW's report comes out before the opening bell. Wall Street expects a profit of 51 cents a share.

Broken resistance near $40.00 should be new support. I am raising our stop loss up to $39.00.

Earlier Comments:
NOTE: LOW's main rival, Home Depot (HD), reports earnings on May 21st. Shares of LOW could react to HD's results.

- Suggested Positions -
MAY 07, 2013 - entry price on LOW @ 40.87, option @ 1.57
symbol: LOW1418a45 2014 JAN $45 call - current bid/ask $ 2.22/2.28

- or -

MAY 07, 2013 - entry price on LOW @ 40.87, option @ 3.52
symbol: LOW1517a45 2015 JAN $45 call - current bid/ask $ 4.35/4.50

05/18/13 new stop loss @ 39.00, LOW could see a pullback after its earnings report
05/07/13 Our trade opens.
05/06/13 LOW meets our entry requirement with a close above $40.25

Current Target: $49.50
Current Stop loss: 39.00
Play Entered on: 05/07/13
Originally listed on the Watch List: 05/04/13


Merck & Co. - MRK - close: 45.99

Comments:
05/18/13: I am concerned about our MRK trade. The stock has been underperforming many of its peers and the broader market. Shares only gained four cents for the week. The stock action this past week looks like a failed rally at resistance near $47.00.

I am suggesting we exit our remaining positions, the 2015 calls, immediately on Monday morning, May 20th.

- Suggested Positions -
(closed 2014 call position on April 15, 2013)
MAR 13, 2013 - entry price on MRK @ 44.54, option @ 2.06
symbol: MRK1418a45 2014 JAN $45 call - exit $3.60 (+74.7%)

- or -

MAR 13, 2013 - entry price on MRK @ 44.54, option @ 3.60
symbol: MRK1517a45 2015 JAN $45 call - current bid/ask $4.35/4.50

05/18/13 prepare to exit immediately on May 20th at the open
05/11/13 new stop loss @ 43.90
05/01/13 MRK lowered its 2013 guidance
04/15/13 closed 2014 calls
04/13/13 prepare to exit 2014 calls on Monday, April 15th at the opening bell.
new stop loss @ 43.40 and new target of $53.50 for 2015 calls.
03/30/13 MRK is not participating in the market's rally or drug sector rally. Investors will want to turn more defensive here.
03/16/13 use the dip to $44.00 as another entry point to buy calls
03/13/13 trade opens with MRK gapping down at $44.54
03/12/13 MRK gaps open higher and closed at $45.04, above our suggested entry (close above $44.25).

Current Target: $53.50
Current Stop loss: 43.90
Play Entered on: 03/13/13
Originally listed on the Watch List: 02/23/13


Marvell Technology - MRVL - close: 11.43

Comments:
05/18/13: MRVL was a watch list candidate that has graduated to our active play list.

The bullish market has allowed MRVL to keep the rally going. The stock is up several days in a row and shares hit our intraday trigger to buy calls at $11.25 this past week. If you missed the entry I would consider waiting for a dip back toward $11.00 since broken resistance at $11 should be new support. Plus, MRVL is due to report earnings on May 23rd. Earlier I cautioned more conservative investors to wait until after we see how the market reacts to MRVL's earnings before initiating positions.

MRVL's earnings are scheduled for Thursday, May 23rd, after the closing bell. Analysts are estimating 14 cents a share.

- Suggested *Small* Positions -
MAY 13, 2013 - entry price on MRVL @ 11.25, option @ 0.78
symbol: MRVL1418a13 2014 JAN $13 call - current bid/ask $0.83/0.85

- or -

MAY 13, 2013 - entry price on MRVL @ 11.25, option @ 0.97
symbol: MRVL1517a15 2015 JAN $15 call - current bid/ask $0.97/1.13

Chart of MRVL:

Current Target: $15.00
Current Stop loss: 10.25
Play Entered on: 05/13/13
Originally listed on the Watch List: 05/04/13


NetApp, Inc. - NTAP - close: 37.84

Comments:
05/18/13: NTAP was a watch list candidate that has graduated to our active play list.

NTAP has broken out past resistance as we expected. Unfortunately the recent volatility has produced an unsatisfactory entry point. I cautioned readers that CSCO's earnings report could move shares of NTAP. Sure enough both CSCO and NTAP exploded higher on Thursday, following CSCO's report. NTAP surged from $36.23 to 38.46 (a +6% gain on Thursday). Our plan was to wait for shares of NTAP to close above $37.15 and then buy calls the next day. That means our trade opened on Friday morning with NTAP gapping open even higher at $38.93. The stock almost immediately reversed lower in profit taking.

I am still bullish on NTAP. The stock appears to have broken out from a major bottoming pattern. Yet short-term the stock is overbought and likely to retrace back down toward $37.00 or $36.00. I would wait for the pullback or possibly a bounce from the $37-36 area before initiating new positions.

I am adjusting our stop loss to $34.90.

Earlier Comments:
FYI: NTAP's point & figure chart is bullish with a $58 target.

- Suggested *Small* Positions -
MAY 17, 2013 - entry price on NTAP @ 38.93, option @ 3.35
symbol: NTAP1418a40 2014 JAN $40 call - current bid/ask $2.70/2.79

- or -

MAY 17, 2013 - entry price on NTAP @ 38.93, option @ 5.20
symbol: NTAP1517a40 2015 JAN $40 call - current bid/ask $4.50/4.75

05/18/13 adjust stop loss to $34.90
05/17/13 trade opens on NTAP's gap open higher at $38.93
05/16/13 NTAP met our entry requirement with a close above $37.15

Chart of NTAP:

Current Target: $44.75
Current Stop loss: 34.90
Play Entered on: 05/17/13
Originally listed on the Watch List: 05/11/13


U.S. Oil (ETF) - USO - close: 34.21

Comments:
05/18/13: I am urging a lot of caution here with our USO put play. The ETF is not cooperating. The U.S. dollar is surging higher and we have record levels of oil inventories in the U.S. If that wasn't enough we have declining economic activity. Those three factors combined should be pulling oil prices lower! Yet the USO has rebounded off its mid-week lows. This is very perplexing. The USO is about to hit technical resistance at its simple 300-dma soon near $34.25. A close over this moving average would be bullish and nimble investors could use that as a signal to exit.

Right now we have a stop loss at $35.05. I am adjusting our stop loss strategy to: if we see the USO close above $34.50, then exit immediately the next day! I am not suggesting new positions at this time.

NOTE: Right now this is a put play with 2013 September puts.

Earlier Comments:
There is still a significant risk that Israel and Iran eventually start shooting at each other as Israel tries to stop Iran's nuclear weapons program. If that happens oil will definitely skyrocket higher. However, no one expects any Israel/Iran conflict until late summer. Oil could plunge to new relative lows before that happens.

This is a PUT play

- Suggested Positions -
APR 15, 2013 - entry price on USO @ 31.94, option @ 1.39
symbol: USO1321u30 2013 SEP $30 PUT - current bid/ask $ 0.52/ 0.55

05/18/13 adjust stop loss strategy to: if we see the USO close above $34.50, then exit immediately the next day!

Current Target:$ 29.50
Current Stop loss: see above
Play Entered on: 04/15/13
Originally listed on the Watch List: 04/06/13


Vodafone Group - VOD - close: 30.23

Comments:
05/18/13: VZ was threatening to stop the dividend in Verizon Wireless, its joint venture with VOD. Yet the company has backed down and now VOD will collect a $3.2 billion dividend from the joint venture. This news may have helped shares of VOD. Overall it appears that VOD is underperforming the broader market. Although the current rebound from Tuesday's low does appear to have broken through the short-term down trend. If you're feeling optimistic the pullback might look like a bull-flag pattern.

I remain cautious here and I'm not suggesting new positions at this time. More conservative traders may want to raise their stop closer to $29.50 instead.

- Suggested Positions -
APR 26, 2013 - entry price on VOD @ 30.63, option @ 2.07
symbol: VOD1418a30 2014 JAN $30 PUT - current bid/ask $ 1.80/ 1.90

- or -

APR 26, 2013 - entry price on VOD @ 30.63, option @ 1.00
symbol: VOD1517a35 2015 JAN $35 PUT - current bid/ask $ 0.90/ 1.15

05/11/13 new stop loss @ 28.90

Current Target:$36.00
Current Stop loss: 28.90
Play Entered on: 04/26/13
Originally listed on the Watch List: 04/20/13


Wal-Mart Stores - WMT - close: 77.87

Comments:
05/18/13: After several weeks of consolidating sideways WMT was in breakout mode on Wednesday. Unfortunately the breakout higher was short-circuited by WMT's earnings report. The company reported on Thursday night and missed estimates by a penny. They also missed the revenue estimate and guided lower for the second quarter. This was bad news all the way around. I am surprised the stock did not see a much steeper post-earnings sell-off.

I am warning your right now that WMT will likely retreat lower toward the $74.00 level, which should offer support.

NOTE: Since we've already closed the 2014 calls, I am raising our exit target to $89.00.

- Suggested Positions -
(exited 2014 Jan. $75 calls on Monday, April 29th, 2013)
MAR 05, 2013 - entry price on WMT @ 73.47, option @ 3.10
symbol: WMT1418a75 2014 JAN $75 call - exit $6.05*(+95.1%)

- or -

MAR 05, 2013 - entry price on WMT @ 73.47, option @ 2.97
symbol: WMT1517a80 2015 JAN $80 call - current bid/ask $ 5.15/5.25

05/16/13 WMT reports earnings that miss estimates, miss revenues, and guides lower.
05/11/13 adjust exit target to $89.00.
04/29/13 planned exit for 2014 calls
*exit price is an estimate. The option did not trade when we closed this part of the play.
04/27/13 prepare to exit our 2014 calls immediately on Monday morning (04/29/13)
04/13/13 new stop loss @ 73.45
04/06/13 new stop loss @ 71.40
03/30/13 new stop loss @ 69.45

Current Target: $89.00
Current Stop loss: 73.45
Play Entered on: 03/05/13
Originally listed on the Watch List: 02/02/13


CLOSED Plays


Macy's Inc. - M - close: 48.67

Comments:
05/18/13: Our plan was to exit our Macy's position on Monday, May 13th, at the opening bell. That way we could avoid the risk of holding over the company's earnings report. After such a big rally higher there was a chance investors could choose to sell the earnings news no matter how good the report was.

M reported on the 15th and the results were better than expected. Shares spiked toward $49.00 on the news. The trend is still higher but Macy's is very overbought and due for a correction.

- Suggested Positions -
MAR 21, 2013 - entry price on M @ 42.22, option @ 2.85
symbol: M1418a45 2014 JAN $45 call - exit $4.58 (+60.7%)

05/13/13 closed on May 13th, at the open
05/11/13 prepare to exit positions immediately to lock in gains.
05/04/13 new stop loss @ 42.75, investors may want to just take profits now.

Chart of M:

Current Target: $48.50
Current Stop loss: 42.75
Play Entered on: 03/21/13
Originally listed on the Watch List: 03/09/13



Watch

Big Banks & Data Storage

by James Brown

Click here to email James Brown


New Watch List Entries

CS - Credit Suisse

WDC - Western Digital Corp


Active Watch List Candidates

EL - The Est

V - Visa


Dropped Watch List Entries

MRVL and NTAP graduated to our active play list.



New Watch List Candidates:


Credit Suisse Group - CS - close: 30.26

Company Info

CS is a major bank based in Switzerland. Many of the European stock markets have surged thanks to central stimulus and big gains from their American rivals. Financials have helped lead the rally. It would appear that investor concerns over the European credit crisis are easing, at least for the moment.

Shares of CS are testing significant resistance at the $30.00 level. A breakout here could be a new bullish buy signal. It would also look like a breakout from the neckline on an inverse head-and-shoulders pattern.

Short-term I am concerned that the U.S. and Europe are overbought and due for a pullback. Bigger picture I do think the trend is higher. I am suggesting we wait for CS to close above $30.65. If the stock closes above this level we can buy calls the next day with a stop loss at $27.75. More conservative investors may want to use a stop closer to $29.00 instead. We do want to keep our position size small since I consider this a more aggressive entry point given the market's major indices look over extended.

If triggered our long-term target is the $37.50-40.00 zone. The Point & Figure chart has a long-term target of $57.50.

Breakout trigger: Wait for a close above $30.65, then buy calls the next day
Use a stop loss at $27.75

BUY the 2014 Jan $33 call (CS1418a33) current ask $1.75

- or -

BUY the 2015 Jan $35 call (CS1517a35) current ask $2.90

Chart of CS:

Originally listed on the Watch List: 05/18/13


Western Digital Corp. - WDC - close: 60.46

Company Info

WDC is in the data storage business. The company is transitioning from a hard-drive, PC-focused business to non-PC memory and storage. According to the CEO this year, 2013, will see more than 50% of WDC's revenues come from non-PC product sales.

Traders have been buying the dips for months but the rally accelerated in May. Shares are currently at new all-time highs. We do not want to chase it here. I am suggesting we wait and buy a dip at $55.00. If you're really patient then look for a dip toward the rising 50-dma, which has been an entry point multiple times this year.

If WDC hits our buy-the-dip trigger at $55.00 our long-term target is $70.00. The Point & Figure chart is currently forecasting a long-term target of $82.00. We'll start with a stop loss at $52.25.

Buy-the-Dip trigger: $55.00, stop loss @ 52.25

BUY the 2014 Jan $65 call (WDC1418a65)

- or -

BUY the 2015 Jan $70 call (WDC1517a70)

Chart of WDC:

Originally listed on the Watch List: 05/18/13


Active Watch List Candidates:



The Est - EL - close: 70.85

Comments:
05/18/13: The rally in EL has stalled a bit these last couple of weeks. Shares did manage to hit a new intraday high on Wednesday but pulled back from the $72 level. The larger trend is up but the lack of progress is concerning.

We are making a strategy change tonight. Instead of waiting for a close above $72.00 before initiating positions we will switch to a buy-the-dip strategy. Broken resistance in the $65-66 zone should be new support on any significant pullback. We will move the entry trigger to $65.50. We will move the stop loss to $62.25. We are also adjusting the option strike from 2014 Jan $80 down to 2014 Jan $75.

Earlier Comments:
Currently the point & figure chart is bullish with a $93 target. We want to keep our position size small to limit our risk.

NOTE: 2015 calls are available but the spreads are significantly wider.

Buy-the-dip strategy at $65.50, stop loss at $62.25

BUY the 2014 Jan $75 call (EL1418A75) current ask $3.50

05/18/13 strategy change: switch entry point to buy-the-dip at $65.50, move the stop loss to $62.25. Move the option strike to 2014 Jan $75 call

Originally listed on the Watch List: 05/04/13


Visa Inc. - V - close: 184.57

Comments:
05/18/13: Visa has continued to rally with shares hitting new all-time highs late this past week. I don't want to chase it here although I'm worried that the market's current euphoria might send Visa higher. Shares appear to have broken through the long-term trend of higher highs.

Tonight we are leaving our strategy unchanged. Eventually the market is going to see a correction. When that happens V is not immune. I am suggesting we buy calls on a dip at $171.00. More nimble traders could try and target an entry point on a dip near the 30, 40, or 50-dma instead. If we are triggered at $171.00 I am suggesting a stop loss at $164.75. Our long-term target is $198.50.

Buy-the-Dip trigger: $171.00

BUY the 2014 Jan $180 call (V1418A180)

- or -

BUY the 2015 Jan $200 call (V1517A200)

Originally listed on the Watch List: 05/11/13