Option Investor
Newsletter

Daily Newsletter, Sunday, 7/14/2013

Table of Contents

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

Leaps Trader Commentary

New All-Time Highs

by James Brown

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Federal Reserve Chairman Ben Bernanke continues to be the bull market's best friend. Mr. Bernanke's comments on Wednesday helped poured fuel on the fire and stocks delivered one of the best weeks of the year. The S&P 500 index, the Dow Industrials, and the Russell 2000 index all ended the week at all-time closing highs. The NASDAQ closed at a new 13-year high. Gold and silver produced strong oversold rebounds. Crude oil surged to close over $106.00 a barrel. Another metric making a new high was mortgage rates, which rose to new two-year highs. The U.S. dollar retreated from its recent highs while the bond market managed a bounce. The yield on the 10-year treasury ended at 2.601%. Year to date the S&P 500 index is up +17.8%, the Dow Industrials are up +18.0%, the transportation average is up +21.3%, banking index +25.7%, the semiconductor index +27.4%, and biotechs +40.8%.

One-Paragraph Market Summary

The market rally continues as the Federal Reserve reassures investors that reducing QE is not the same thing as raising rates. Bernanke's comments also helped reinforce that the Fed will keep rates low for an extended period of time. QE is the only thing that seems to matter to stocks. The market is ignoring the meltdown in Europe and the slowing Chinese economy. There is a growing trend of economists lowering their U.S. GDP estimates as well. Meanwhile rising gasoline prices could crimp consumer spending and soaring mortgage rates could put the brakes on the housing sector. The first wave of earnings data seems to be positive thanks to really low expectations. Earnings season will hit full speed soon and corporate guidance could have a big impact on keeping the rally alive or killing it. That's assuming a disappointing Chinese GDP number doesn't spark some profit taking first.

Economic data last week was mixed. The Producer Price Index (PPI) came in at +0.8%, which was higher than May's +0.5%. The rise was fueled by a jump in commodity prices, including gasoline prices. Consumer sentiment retreated from its recent highs. The University of Michigan Consumer Sentiment survey saw the preliminary July reading drop to 83.9 from June's 84.1. May's reading has been the cycle high at 84.5. The internal components saw a divergence with present conditions surging from 93.8 to 99.7 yet the expectations component dropped from 77.8 to 73.8.

The Federal Reserve said that consumer credit grew by almost $20 billion in May. That was an improvement over April's +$10.9 billion. This is a good sign for the U.S. economy. Speaking of the Fed the Fed minutes from the latest meeting made headlines last week. It seems that several members think that we should cut back on their QE purchases sooner rather than later. Of course the previously mentioned comments from Bernanke on Wednesday night really gave the market a jolt higher. Bernanke confessed that the U.S. labor market is not showing the true health of the unemployment situation and unemployment (and the under employed) is actually worse than the numbers might suggest. The market interpreted that as a sign that the Fed would stay accommodative for a very long period of time.

Europe

The situation in Europe continues to deteriorate. Last weekend I mentioned how the EU & IMF had given Greece a deadline to show they were complying with all the rules and achieving the Troika's guidelines before receiving the next tranche of aid. It looks like EU played chicken with Greece and the EU blinked. This last week the EU-IMF issued a statement that said Greece had made progress but there was still work to be done and they would review the situation again before sending Greece its next round of bailout money. Meanwhile the situation in Greece continues to worsen. Greek GDP is estimated to fall -5% this year but whisper numbers put it closer to -7%. Greek unemployment hit another new all-time high at 26.9% in April.

Fitch rating agency downgraded France's credit rating from AAA to AA-. France is one of the largest and strongest of the Eurozone members so that doesn't bode well. Standard & Poor's downgraded Italy's credit rating from BBB+ to BBB, which is almost junk bond territory. The IMF recently downgraded their forecast on Italy to -1.8% GDP growth. I mentioned Italy recently and how it's the third largest economy in the Eurozone and the slowdown in Italy is so bad that dozens of business are closing up shop every day and they are suffering from a rash of suicides.

Portugal remains in the headlines as well. As the country tumbles into economic turmoil it's also suffering some political scandals as well. There are stories that the EU and IMF are already working on a second bailout for Portugal because the first one, 78 billion euros, has failed. Yields on 10-year Portuguese bonds has risen above 7%, which is the danger zone before a country's economic health collapses.

China

China remains in the headlines and will continue to impact our markets this week as well. Citigroup recently lowered their 2013 GDP forecast on China from 7.7% to 7.4%. That's probably being generous. The official Chinese GDP goal is 7.5% growth in 2013. Yet a Chinese finance minister was quoted last week suggesting that China may only hit 7% and could actually see a drop to 6.5% growth. That does not bode well at all considering China's impact on the global economy. The Chinese government is supposed to release its Q2 GDP estimate on Monday (that will be Sunday night for us in the U.S.). If this Chinese GDP number is too soft it could spark some selling across the global equity markets including here in the U.S.

Major Indices:

The U.S. stock market is definitely in rally mode. Stocks are up three weeks in a row. The S&P 500 has closed at a new all-time closing high thanks to a +2.9% gain last week. This large cap index is up almost +18% for the year. After a three-week rally it might be time for a little profit taking but that may depend on the Chinese GDP numbers and earnings results this week.

The next level of overhead resistance for the S&P 500 is the 1700 mark. This close to it the 1700 level might actually act like a magnet. On the other hand if the S&P 500 retreats we can watch for likely support at 1640, 1620 and 1600.

chart of the S&P 500 index:

The NASDAQ composite has produced a very impressive rally. The index is up 300 points from its late June lows near 3300. The current rally appears to be a breakout from a bull-flag consolidation pattern. If this pattern holds then the upside target would be the 3650 area.

Currently the NASDAQ has rallied to new 13-year highs. On a short-term basis the NASDAQ is overbought and due for some profit taking. On a pullback the NASDAQ may find some support near 3525-3500. I would expect slightly stronger support near 3450, which would be a 50% retracement of the three-week rally.

chart of the NASDAQ Composite index:

The small cap Russell 2000 index continues to show relative strength and is probably one of the strongest signals for this bull market. If money managers were worried about the market they wouldn't be buying small caps. Last week the $RUT added +3.1% and rallied to a string of new all-time highs. For the year the $RUT is up +22.0%. Like the rest of the major indices the $RUT is looking overbought on a short-term basis. There might be possible support near 1020 but I would look for stronger support near the 1000 level if the market actually sees any profit taking.

There is no way to know what the next resistance level is but 1050 could be round-number resistance. Of course the $RUT could pullback right here from the 1040 level since it's testing a trend line of higher highs (see chart).

chart of the Russell 2000 index



Economic Data & Event Calendar

I mentioned earlier that China's GDP estimate on Monday (Sunday night) could be a major event if the results disappoint. As far as economic data in the U.S. the Philly Fed is probably the biggest report to watch. Fed Chairman Bernanke will continue to grab headlines with a two-day appearance before Congress. This used to be called the Humphrey-Hawkins testimony. Bernanke will speak to the House financial services committee on Wednesday and then speak with the Senate on Thursday. One of the biggest events of the week will be the Q2 earnings season hitting full speed. Dozens of major companies will be reporting.

Economic and Event Calendar

- Monday, July 15 -
June retail sales data
New York Empire State manufacturing survey
business inventory data
Chinese economic data

- Tuesday, July 16 -
Consumer Price Index (CPI)
industrial production
German ZEW sentiment survey

- Wednesday, July 17 -
housing starts and building permits (for June)
Fed Chairman Bernanke before congress (the House)
Fed's Beige Book

- Thursday, July 18 -
Weekly Initial Jobless Claims
Philly Fed survey
Fed Chairman Bernanke before congress (the Senate)

- Friday, July 19 -

Additional Events to be aware of:

July 31st - FOMC meeting interest rate decision
September - U.S. debt ceiling deadline

The Week Ahead:

Looking ahead the trend for stocks is obviously higher. Yet the Chinese GDP number on Monday could spark some profit taking if it disappoints. I think I've mentioned the Chinese GDP report about three times now tonight. One has to wonder if the Federal Reserve is also worried about the slowdown in China and the financial meltdown in Europe. Even though several Fed members believe they should cut QE purchases "soon" they have taken a rather dovish tone when speaking out. Is the Fed trying to bolster the market before the market sees another parade of bearish economic data?

Earnings will be a major theme this week. Thus far the general tone for earnings results has been bullish. Most believe that results from the banking sector will be healthy. Yet if you exclude the banks results are dramatically lower. This very low expectation might be what saves the market. If the bar is low enough then corporations might be able to jump over it. This is a change from a week or two ago when the tone wasn't so pessimistic. The fact that United Parcel Services (UPS) just warned is not a good sign. They are a major transportation/freight company. You could argue companies like UPS are the lifeblood of the economy. If UPS is warning what does that say about economic activity? Is UPS the canary in the coal mine?

It is a little bit odd that stocks are in rally mode with so much negative going on in the world. Granted it's an old-time market maxim that bull markets climb the wall of worry. Yet how often do we have a proxy war in Syria, Egypt on the verge of civil war, Greece, Portugal and possibly Spain and Italy on the verge of economic collapse. China is slowing down way too fast. The U.S. is barely showing any growth at all. That's quite the wall of worry. Like I said earlier, the only thing the stock market seems to care about is the Fed's QE program. It probably does not hurt that the U.S. bond market is sinking and investors are pulling massive amounts of money out of bonds and some of that is making it into stocks.

It will be very interesting to hear what corporate America has to say about their guidance for the second half of this year. It seems that Wall Street is turning negative about U.S. GDP growth. Recently Barclays has downgraded their Q2 GDP estimate to just +0.6% growth. JPMorgan downgraded their Q2 GDP estimate to +1% growth. Goldman Sachs lowered their Q2 GDP estimate to +1.3% growth.

We may have to worry about consumer spending soon. The rise in crude oil to $106 a barrel is going to have a negative impact on fuel prices. Analysts are expecting the price of gas at the pump to surge +10 to +20 cents in the next week as gas adjusts to the new higher price of oil. The national average is already at $3.50 a gallon. At what points does gas finally curb consumer spending? According to some estimates every one cent that gasoline goes up removes one billion dollars in consumer spending. While I am on the topic of consumer spending if you work for the defense department it might be time to tighten your belt. Starting tomorrow (Monday, July 15th) about 650,000 civil defense workers will be furloughed due to the sequestration cuts. This works out to them being forced to take one unpaid day off a week, which is a -20% cut in their paycheck. This will last for the next ten weeks.

James


Portfolio

Portfolio Update

by James Brown

Click here to email James Brown


Current Portfolio


Portfolio Comments:

The U.S. stock market has extended its gains to three weeks in a row. The S&P 500, the Dow Industrials, and the small cap Russell 2000 are all at new all-time closing highs.

M & WFM have graduated from our watch list to our active play list.

I have updated stop losses on C, HON, INTC, and JPM.

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

Financial Strength

by James Brown

Click here to email James Brown


- New Trades -


American Intl. Group - AIG - close: 46.74

Comments:
07/14/13: We've had AIG on our watch list for a while. Back in May and June the stock appeared to top out with failed rallies at resistance near $46.50. We were expecting a correction. Then AIG produced a big bounce off its late June lows. We recently changed our entry point strategy to buy call LEAPS if AIG could close above $46.75.

Shares almost got there on Friday. AIG hit an intraday high at $46.83 and closed at $46.74. That's good enough for us. We're adding AIG as a new candidate to launch positions on Monday morning at the opening bell. More conservative traders may want to wait and see if there is any follow through higher and only buy calls if AIG can traded above Friday's high.

Please note that we are moving the stop loss up to $42.40. Our long-term target will be adjusted to $54.75.

BUY the 2014 Jan $50 call (AIG1418a50) current ask $2.41

- or -

BUY the 2015 Jan $55 call (AIG1517a55) current ask $4.15

07/14/13 AIG came within a penny of hitting our new entry trigger (closing above $46.75). We are adding it as a new play tonight. Buy calls on Monday morning. Move the stop loss up to $42.40.
07/07/13 adjust entry strategy: wait for shares to close above $46.75 and then buy calls the next day. Stop loss at $41.40. Target 55.00.
06/16/13 adjust entry strategy: move the buy-the-dip trigger to $40.00, from 38.50. Move the stop loss to $36.35 from 34.75.

Chart of AIG:

Originally listed on the Watch List: 06/01/13



Play Updates

We Added Two New Candidates

by James Brown

Click here to email James Brown

Editor's Note:

We added two new plays this past week with both Macy's (M) and Whole Foods (WFM) graduating from our watch list to our active play list.


Closed Plays



None. No closed plays this week.




Play Updates


Bank of America - BAC - close: 13.78

Comments:
07/14/13: Financial stocks continued to rally last week. The XLF financial ETF closed at a new multi-year high. Meanwhile banking giants JPM and WFC both reported better than expected results on Friday. This probably boosted shares of BAC, which added +1.99% on Friday. It will be BAC's turn to report earnings on July 17th, before the opening bell.

Currently our stop loss is at $11.35, which is below the simple 200-dma. More conservative investors may want to raise their stop higher since BAC could see a big drop if the company disappoints with its earnings results.

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 $0.52/0.54

- or -

MAR 18, 2013 - entry price on BAC @ 12.29, option @ 1.13
symbol: BAC1517a15 2015 JAN $15 call - current bid/ask $1.41/1.42

07/07/13 new stop loss @ 11.35
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: 11.35
Play Entered on: 03/18/13

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


Citigroup, Inc. - C - close: 50.81

Comments:
07/14/13: The financial sector rally gave C a nice lift last week. Shares are up three weeks in a row and C managed to rally past potential resistance at its 50-dma and the $50.00 mark.

Citigroup is scheduled to report earnings on July 15th, before the opening bell. Wall Street expects earnings of $1.18 a share. I would not be surprised to see shares pullback following the report.

Tonight we are raising the stop loss up to $44.65.

- Suggested Positions -
JUN 21, 2013 - entry price on C @ 46.00, option @ 2.45
symbol: C1418a50 2014 JAN $50 call - current bid/ask $ 4.25/4.35

- or -

JUN 21, 2013 - entry price on C @ 46.00, option @ 3.65
symbol: C1517a55 2015 JAN $55 call - current bid/ask $ 4.95/5.05

07/14/13 new stop loss @ 44.65
06/23/13 adjust stop loss to $41.60
06/21/13 triggered on a dip at $46.00

Current Target:$ 59.00
Current Stop loss: 44.65
Play Entered on: 06/21/13
Originally listed on the Watch List: 05/25/13


Ford Motor Co. - F - close: 17.11

Comments:
07/14/13: Ford spent a few days consolidating sideways in the $16.50-17.00 zone but finally broke out past $17.00 on Friday. The stock is up significantly from its late June lows. The trend is obviously up but Ford has become overbought here. We should expect some profit taking between now and the end of the month. Ford reports earnings on July 24th. Shares could see a pullback after the announcement. Look for likely support near $16.00 and near the 50-dma.

- Suggested Positions -
(closed the 2014 calls on May 20th, at the open)
APR 29, 2013 - entry price on F @ 13.73, option @ 0.60
symbol: F1418a15 2014 JAN $15 call - exit $1.18 (+96.6%)

- or -

APR 29, 2013 - entry price on F @ 13.73, option @ 1.22
symbol: F1517a15 2015 JAN $15 call - current bid/ask $ 3.15/3.20

07/07/13 new stop loss @ 14.25
06/01/13 investors may want to exit our 2015 calls now with a bid at $2.34 (+91.8%)
06/01/13 adjust long-term target to $17.75
05/20/13 closed the 2014 calls at the open. Option @ +96.6%
05/18/13 prepare to exit the 2014 calls on Monday, May 20th
05/18/13 new stop loss @ 13.40

Current Target:$ 17.75
Current Stop loss: 14.25
Play Entered on: 04/29/13
Originally listed on the Watch List: 04/20/13


Honeywell Intl. - HON - close: 82.37

Comments:
07/14/13: HON rallied more than $2 last week to hit new all-time highs. More importantly shares have broken out from their $76-$81 trading range. The stock is poised for the next leg higher. However, HON is scheduled to report earnings on July 19th. The results come out before the opening bell. Analysts are expecting a profit of $1.21 a share. If HON disappoints or issues guidance that is too cautious it could short circuit the rally.

I am raising the stop loss to $75.75.

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

- Suggested Positions -
(closed the 2014 calls on May 20th at the open)
MAY 07, 2013 - entry price on HON @ 76.20, option @ 2.68
symbol: HON1418a80 2014 JAN $80 call - exit $5.10 (+90.2%)

- or -

MAY 07, 2013 - entry price on HON @ 76.20, option @ 4.10
symbol: HON1517a85 2015 JAN $85 call - current bid/ask $ 6.80/7.00

07/14/13 new stop loss at $75.75
05/20/13 closed the 2014 calls at the open. option @ +90.2%
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: 75.75
Play Entered on: 05/07/13
Originally listed on the Watch List: 05/04/13


Intel Corp. - INTC - close: 23.90

Comments:
07/14/13: We have been expecting shares of INTC to drop toward support near $23.00. The stock actually pierced that level on Wednesday last week with a spiked down to $22.64. INTC has recovered and looks poised to keep bouncing. However, the stock's relative weakness compared to the rest of the market and the semiconductor index is disturbing.

I am still suggesting a lot of caution here. We will raise our stop loss up to $22.45. More conservative traders may want to just exit early now instead. There are probably better candidates out there for our capital.

Please note that INTC is scheduled to report earnings on July 17th. The results come out after the closing bell. Wall Street expects a profit of 40 cents a share.

Earlier Comments:
We want to exit our 2014 calls when INTC hits $26.50. We will plan to exit our 2015 calls at $28.00.

- Suggested Positions -
APR 24, 2013 - entry price on INTC @ 23.28, option @ 0.89
symbol:INTC1418a25 2014 JAN $25 call - current bid/ask $ 0.94/0.96

- or -

APR 24, 2013 - entry price on INTC @ 23.28, option @ 1.74
symbol:INTC1517a25 2015 JAN $25 call - current bid/ask $ 1.79/1.84

07/14/13 new stop loss @ 22.45. Consider exiting early prior to the earnings report
06/08/13 adjust exit strategy:
plan to exit the 2014 calls when INTC hits $26.50
plan to exit the 2015 calls when INTC hits $28.00
05/18/13 The rally has stalled. INTC might correct lower soon
05/11/13 new stop loss @ 21.90

Current Target: $26.50 & $28.00 (see above)
Current Stop loss: 22.45
Play Entered on: 04/24/13
Originally listed on the Watch List: 04/20/13


JPMorgan Chase & Co. - JPM - close: 54.97

Comments:
07/14/13: The rally in JPM continued last week. Shares are up three weeks in a row. It's not a surprise to see JPM stall just under its May highs with resistance near $56.00 as investors waiting for the company's earnings report.

JPM announced Q2 earnings on Friday morning. Analysts were looking for $1.44 a share. The company delivered $1.60 a share. Revenues also beat estimates at $25.21 billion for the quarter. It looks like a strong quarter but these results also reflect $1.5 billion in loan loss reserves that JPM has "released". The company was relatively optimistic about the rest of the year but CEO Jamie Dimon stressed concern about the future for mortgage lending given the sharp rise in bond yields (and thus mortgage rates).

A little post-earnings pullback here would be normal. Yet if JPM retreats too much it will start to look like a bearish double top with a failure at the $56.00 level.

Please note our new stop loss at $48.75.

- Suggested Positions -
JUN 24, 2013 - entry price on JPM @ 50.25, option @ 1.60
symbol: JPM1418a55 2014 JAN $55 call - current bid/ask $ 3.05/3.15

- or -

JUN 24, 2013 - entry price on JPM @ 50.25, option @ 3.80
symbol: JPM1517a55 2015 JAN $55 call - current bid/ask $ 5.30/5.40

07/14/13 new stop loss @ 48.75
Current Target: $64.00
Current Stop loss: 48.75
Play Entered on: 06/24/13
Originally listed on the Watch List: 05/25/13


Macy's Inc. - M - close: 49.43

Comments:
07/14/13: Our new watch list candidate, Macy's (M), has already graduated to our play list. The plan was to buy calls if M could close above $50.25. The stock met that requirement on Monday with a surge past resistance at the $50.00 level. The stock closed at $50.27 on July 8th. Our trade opened the next day with M gapping higher at $50.50. Unfortunately there was no follow through. Shares of M reversed in what looks like a three-day bearish reversal candlestick pattern. The stock languished on Thursday and Friday as well, which is perplexing. One potential culprit that could be influencing retail stocks is the rise in gasoline prices. Oil has surged in recent sessions and gasoline prices are poised to follow with another march higher.

Bigger picture the retailers appear to be doing well. This past week brought the June same-store sales data. Macy's doesn't provide same-store sales data on a monthly basis but the industry showed growth of +4.1% in June. That was better than the 3.5% estimate. Industry experts are also expecting the back-to-school season to show +3% growth this year.

The gasoline issue could be a problem. Last week's performance in M does look like a potential bull-trap or failed rally pattern. Therefore the best move today might be to wait for Macy's to close above $50.75 or above $51.00 before initiating new bullish positions.

Earlier Comments:
If triggered our long-term target is $59.00. More aggressive investors may want to aim higher since the point & figure chart is forecasting a $76 target.

- Suggested Positions -
JUL 09, 2013 - entry price on M @ 50.50, option @ 1.85
symbol: M1418a55 2014 JAN $55 call - current bid/ask $ 1.35/1.40

- or -

JUL 09, 2013 - entry price on M @ 50.50, option @ 4.40
symbol: M1517a55 2015 JAN $55 call - current bid/ask $ 3.80/3.95

Chart of M:
Current Target: $59.00
Current Stop loss: 47.25
Play Entered on: 07/09/13
Originally listed on the Watch List: 07/07/13


NetApp, Inc. - NTAP - close: 39.30

Comments:
07/14/13: NTAP continues to slowly drift higher. Shares ended the week just below its mid-June highs near $39.50. I would expect the $40.00 level to short-term resistance as well. If NTAP can breakout past the $40 mark the stock could see some short covering. At the moment I would wait for a close above $40 before considering new bullish positions.

NTAP will probably report earnings in mid August.

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 $2.83/2.88

- or -

MAY 17, 2013 - entry price on NTAP @ 38.93, option @ 5.20
symbol: NTAP1517a40 2015 JAN $40 call - current bid/ask $5.00/5.10

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

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


Whole Foods Market - WFM - close: 56.23

Comments:
07/14/13: WFM was a new watch list candidate. The plan was to wait for shares to breakout from their trading range and close above $54.00. WFM flirted with a breakout past $54 on Monday but it didn't close above this level until Tuesday, July 9th. Our trade opened on Wednesday morning with WFM at $54.53. The stock has continued to rally and WFM is at new all-time highs. Yet on a short-term basis the stock actually looks overbought here. Odds are good WFM could see some profit taking. I would wait for a dip back into the $55-54 zone before considering new bullish positions.

- Suggested Positions -
JUL 10, 2013 - entry price on WFM @ 54.53, option @ 2.10
symbol: WFM1418a60 2014 JAN $60 call - current bid/ask $ 2.71/2.78

- or -

JUL 10, 2013 - entry price on WFM @ 54.53, option @ 6.20
symbol: WFM1517a60 2015 JAN $60 call - current bid/ask $ 6.85/7.00

Chart of WFM:

Current Target: $59.75 for the 2014 calls, $64.00 for the 2015 calls
Current Stop loss: 49.75
Play Entered on: 07/10/13
Originally listed on the Watch List: 07/07/13


Watch

Semis, Chemicals, & Specialty Retail

by James Brown

Click here to email James Brown

Editor's Note:

The market has continued to rally but we do not want to chase some of our watch list candidates. Therefore we are removing some candidates to make room for new ones tonight.



New Watch List Entries

CY - Cypress Semiconductor

EMN - Eastman Chemical Co.

PETM - PetSmart, Inc.


Active Watch List Candidates

DIS - Walt Disney

K - Kellogg Co.

MNST - Monster Beverage

UNP - Union Pacific


Dropped Watch List Entries

M and WFM have graduated to our active play list.
AIG has been moved to our new play section.
BZH, GM, JNJ, SBUX, and V have all been removed. I suggest placing them on your radar screen and we'll look at them again in a couple of weeks.



New Watch List Candidates:


Cypres Semiconductor - CY - close: 11.64

Company Info

As the company name might imply CY is in the semiconductor industry. The stock has been underperforming both the SOX index and the broader market indices. Yet it looks like after almost a year of consolidating sideways below the $11.50 area that the stock may have finally found a bottom.

The recent rally has lifted CY back toward resistance and shares are poised for a breakout. I am suggesting we wait for shares of CY to close above $12.10 and then buy calls the next morning. If triggered we can start with a stop loss at $10.90. Our long-term target is $14.75 for the 2014 calls and $16.00 for the 2015 calls.

Please note that CY is scheduled to report earnings this week on July 18th. More conservative investors will want to wait until after the earnings report to watch how the market reacts before initiating new positions.

Breakout trigger: Wait for a close above $12.10, buy calls the next day
start with a stop at $10.90

BUY the 2014 Jan $13 call (CY1418a13) current ask $0.65

- or -

BUY the 2015 Jan $15 call (CY1517a15) current ask $0.90

Chart of CY:

Originally listed on the Watch List: 07/14/13


Eastman Chemical Co. - EMN - close: 73.96

Company Info

EMN is in the basic materials sector of the market. The company is a major chemical manufacturer. The all-time high is about $75.00 and shares have been consolidating sideways under resistance at $75 for over four months in a row. A breakout here could launch the next major leg higher for the stock.

I am suggesting we wait for shares of EMN to close above $75.25 and then buy calls the next day. If triggered we will start with a stop loss at $69.75. Our long-term target for the 2014 call is $84. Our long-term target for the 2015 call is $95.00. FYI: The Point & Figure chart is bullish with a $91 target.

NOTE: EMN is scheduled to report earnings on July 29th.

Breakout trigger: Wait for a close above $75.25, buy calls the next day
start with a stop at $69.75

BUY the 2014 Jan $80 call (EMN1418a80) current ask $3.10

- or -

BUY the 2015 Jan $90 call (EMN1517a90) current ask $4.60

Chart of EMN:

Originally listed on the Watch List: 07/14/13


PetSmart, Inc. - PETM - close: 72.00

Company Info

PETM is a specialty retailer focused on pet food, pet products and services. If investors expected the economy to improve then consumer spending on pets should increase. I would be concerned that if the price of gasoline continues to rise it could put the brakes to all consumer spending. Yet right now shares of PETM are now showing a lot of concern. The stock's recent rally has pushed it up towards major resistance near the $72.00 level. A breakout here could end a year and a half consolidation under this area.

I am suggesting we wait for PETM to close above $72.50 and then buy calls the next day. More aggressive traders may want to use an intraday trigger instead of waiting for a close above $72.50. If we are triggered I am suggesting a stop loss at $67.90. Our target for the 2014 calls is $79.00 on PETM. Our target for the 2015 calls is $84.00. FYI: The Point & Figure chart is bullish with an $85 target.

NOTE: PETM will begin trading ex-dividend on July 31st. The quarterly cash dividend should be 16.5 cents.

Breakout trigger: Wait for a close above $72.50, buy calls the next day
start with a stop at $67.90

BUY the 2014 Jan $75 call (PETM1418a75) current ask $3.00

- or -

BUY the 2015 Jan $80 call (PETM1517a80) current ask $4.70

Chart of PETM:

Originally listed on the Watch List: 07/14/13


Active Watch List Candidates:



Beazer Homes - BZH - close: 18.78

Comments:
07/14/13: Some of the homebuilders delivered some pretty impressive bounces this past week. BZH surged on Thursday. If I was just looking at the weekly chart on BZH I would be tempted to buy calls here.

The fact that the Fed is likely to stay on the sidelines and keep QE going should help stabilize bond yields and thus mortgage rates. Yet that doesn't mean the bounce in BZH is an entry point. We could be seeing a dead-cat bounce in the stock.

Tonight I am removing BZH from the watch list but I am keeping it on my radar screen. A close above $20.00 is a potential trigger to look at BZH again.

Trade did not open.

07/14/13 removed from the watch list.

Originally listed on the Watch List: 06/16/13


Walt Disney - DIS - close: 66.98

Comments:
07/14/13: DIS delivered a bullish with a breakout from what is arguably a bull-flag pattern. It is unlikely that shares will correct lower toward the $58 area so we need to adjust our entry point strategy. Tonight we are moving the buy-the-dip trigger up to $65.00. We will move the stop loss up to $61.45. Our new target is $79.00 (although we may have to adjust that for the 2014 calls). I am also adjusting our option strikes.

NOTE: DIS is scheduled to report earnings on August 6th.

Buy-the-Dip trigger: $65.00, stop @ 61.45

BUY the 2014 Jan $70 call (DIS1418a70) current ask $2.54

- or -

BUY the 2015 Jan $70 call (DIS1517a70) current ask $5.60

07/14/13 new entry strategy: adjust buy-the-dip trigger to $65.00
move the stop loss to $61.45. Move the target to $79.00
adjust the option strikes
07/07/13 adjust entry trigger from $57.00 to $58.00

Originally listed on the Watch List: 06/01/13


General Motors - GM - close: 36.40

Comments:
07/14/13: I am afraid we have missed our entry point on GM. The stock came close with the mid-June correction lower but shares did not hit our entry point near $30.00. Since then GM has produced a very strong, three-week rally and broken out to new two-year highs. We do not want to chase it here.

I am removing GM as a watch list candidate but I would keep it on your radar screen for a correction lower.

Trade did not open.

07/14/13 removed from the watch list.
06/30/13 adjust buy-the-dip entry trigger to $30.50, from $30.00.

Originally listed on the Watch List: 06/01/13


Johnson & Johnson - JNJ - close: 89.99

Comments:
07/14/13: As I discussed last week JNJ has continued to rally and shares are now testing round-number resistance and its May 2013 highs near $90.00. After a three-week rally I would expect a pullback from here. However, JNJ may drift sideways until the company reports earnings on July 16th. JNJ's earnings results could determine its direction for the rest of summer.

We do not want to launch positions this close to the earnings report. Plus, JNJ is unlikely to hit our buy-the-dip entry point any time soon. Therefore I am removing JNJ as an active watch list candidate. However, I would definitely keep this stock on your radar screen. We may look at it again next week.

Trade did not open.

07/14/13 removed from the newsletter

Originally listed on the Watch List: 06/23/13


Kellogg Co. - K - close: 66.50

Comments:
07/14/13: K continues to climb and is now up five out of the last six weeks. As expected shares are testing their highs set in April 2013. A breakout here would be bullish. The high on Friday was $66.68. Thursday's high was $66.76. I am suggesting investors wait for K to close above $67.00 and then buy calls the next morning.

NOTE: K is due to report earnings on August 1st. More conservative traders may want to wait until after we see how the market interprets K's earnings results before initiating new positions even if K meets our entry requirement.

Breakout trigger: Wait for a close above $67.00, stop loss $63.75.

BUY the 2015 Jan $75 call (K1517a75) current ask $2.05

Originally listed on the Watch List: 06/16/13


Monster Beverage Corp. - MNST - close: 59.86

Comments:
07/14/13: MNST's performance last week was disappointing. Shares completely ignored the market's rally and drifted lower instead. If MNST continues to underperform we will likely drop it as a watch list candidate. At the moment I don't see any changes from my earlier comments.

Earlier Comments:
I do consider this an aggressive, higher-risk trade because of the volatility and the risk that another headline regarding the safety of MNST's drinks could send shares lower. Therefore I am suggesting we keep our position size small to limit risk.

Currently MNST has resistance in the $62.50-63.00 area. I am suggesting we wait for MNST to close above $63.00 and then buy calls the next day with a stop loss at $57.90. Our target is $74.00.

Breakout trigger:
Wait for MNST to close above $63.00, then buy calls the next day
stop loss at $57.90 *Small Positions*

BUY the 2014 Jan $70 call (MNST1418a70)

- or -

BUY the 2015 Jan $70 call (MNST1517a70)

Originally listed on the Watch List: 07/07/13


Starbucks Corp. - SBUX - close: 69.72

Comments:
07/14/13: SBUX continues to perform well with a rally that started off its late February 2013 lows. Currently shares have risen to resistance near $70.00 and the top of its bullish channel. We do not want to launch positions now. Since SBUX is not likely to hit our current buy-the-dip trigger near $60 any time soon I am removing the stock as an active watch list candidate. We can re-visit it on a dip near its 50-dma. I would definitely keep SBUX on your radar screen and watch it for a correction.

trade did not open.

07/14/13 removed from the watch list.

Originally listed on the Watch List: 06/23/13


Union Pacific Corp. - UNP - close: 160.75

Comments:
07/14/13: UNP is still showing relative strength with another weekly gain. The stock managed to tag a new all-time high on an intraday basis on Friday. We've been waiting for a breakout past its May 2013 highs. Our plan was to wait for UNP to close above $161.00 and then buy calls the next day. The stock is almost there at our entry. Yet I am going to adjust our entry trigger this close to the earnings report.

Friday's high was $161.70. Let's wait for UNP to close above $162.00 and then buy calls the next day. I actually expect that UNP will churn sideways the next few days as investors wait for UNP's earnings report. The company is due to report earnings on July 18th. The announcement will be ahead of the opening bell. Wall Street expects results of $2.35 a share.

So our new entry trigger is a close above $162.00. We'll adjust the stop loss to $153.00.

More conservative investors will want to consider waiting until after we see how the market digests UNP's earnings before initiating new positions.

Earlier Comments:
Our long-term target is $185.00 for the 2014 calls and $200 for the 2015 calls.

Breakout trigger: Wait for a close above $162.00
stop loss @ 153.00

BUY the 2014 Jan $180 call (UNP1418a180) current ask $2.62

- or -

BUY the 2015 Jan $200 call (UNP1517a200) current ask $4.50

07/14/13 adjust entry trigger to $162.00, adjust stop loss to $153.00

Originally listed on the Watch List: 06/08/13


Visa Inc. - V - close: 190.72

Comments:
07/14/13: After some volatility earlier in the week Visa managed to bounce back and close almost unchanged for the week. On a short-term basis I would be tempted to buy calls here and target a move to $200. Yet on a long-term, LEAPS time frame basis, we do not want to buy calls now this close to likely resistance at the $200 level.

Thus far our trade has not been triggered. Tonight I am removing Visa as a candidate. The company is due to report earnings in the last week of July. We can re-visit the stock and look at it again in a couple of weeks.

Trade did not open.

07/14/13 removed from the watch list. Look at it again in a couple of weeks after the earnings report.
07/07/13 updated the buy-the-dip entry trigger to $180.50.
Moved the stop loss to $174.40.
Updated the option strikes
06/16/13 I am adjusting the stop loss to $164.50 from 164.75.

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