Option Investor
Newsletter

Daily Newsletter, Sunday, 9/1/2013

Table of Contents

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

Leaps Trader Commentary

Syria vs. the Taper: Stocks Lose

by James Brown

Click here to email James Brown

Stocks posted another losing week marking the end of August, one of the worst months this year for equities. Better than expected economic data renewed fears that the Federal Reserve would begin tapering their QE program in September. The threat of the Fed reducing their QE program has sparked a major sell-off in emerging markets and their currencies with India's rupee leading the way lower. Taper fears were almost overshadowed by geopolitical risks which helped push crude oil toward $110 a barrel as the U.S. moved closer to a strike on Syrian President Assad's regime. The rise in oil came just in time for the Labor Day holiday in the U.S. where more than 34 million Americans were expected to travel for the long weekend, with most of them driving to their destination. At the end of the week the S&P 500 had lost -1.8%. The NASDAQ was down -1.8% and the Russell 2000 index lost -2.6%. Transports were hit hard by rising oil prices and the Dow Jones Transportation average lost -3.5%.

Most of the economic data this past week was actually positive. The Richmond Fed manufacturing index bounced from -6 to +14, when economists were only expecting a bounce back to zero. The Chicago PMI inched higher from 51.6 in July to 53.0 in August. Consumers were feeling better. The Conference Board's Consumer Confidence index rose from an upwardly revised 81.0 in July to 81.5 in August. The final reading on the University of Michigan consumer sentiment survey for August was adjust from 80.0 to 82.1. Meanwhile the weekly initial jobless claims continue to drift lower, falling -6,000 to 331,000. The four-week moving average has declined to its lowest levels in almost six years.

chart of initial jobless claims:

The latest estimate on U.S. Q2 GDP growth was a surprise. The first estimate was +1.67% growth. That number was revised higher to +2.5% growth. Unfortunately, almost the entire change was due to a significant revision in net exports. There are already concerns that this trend in net exports might reverse in the third quarter. The sharp improvement in the headline number is still positive for investor sentiment.

Housing data was mixed. The Case-Shiller home price index rose +12% year over year for the June reading. Yet pending home sales for July dropped -1.3%, which was worse than expected and shows an acceleration from June's -0.4%. This slowdown could be a reflection of rising interest rates with the average 30-year mortgage rate now at 4.8%. Rising rates continue to impact mortgage applications. The MBA weekly mortgage index lost -2.5%. That is the 14th decline out of the last sixteen weeks for the index.

Syria

Syria was one of the biggest stories last week and will remain a potential market moving event going forward. Worries that the U.S. might launch a strike at Syrian President Assad's military plagued the markets all week long. Over the last two and a half years the civil war in Syria has killed more than 100,000 people and created two million of refugees. Suddenly the U.S. and its allies are up in arms because of reports that Assad used chemical weapons to kill more than 1,400 people.

It might seem odd that Assad can kill tens of thousands with bullets, rockets, and tanks but as soon as chemical weapons are involved we are supposed to care. That's because the civilized world expects wars to follow rules and try to make warfare a little less barbaric. Too often chemical weapons end up killing innocent civilians. Unfortunately, Assad is fighting for his survival and will likely do whatever it takes to stay alive. The bad news is that Assad has one of the largest stock piles of chemical weapons in the Middle East.

Believe it or not but there is the question of if chemical weapons were actually used and who used them. U.N. inspectors claim that chemical weapons were used but they won't say by which side and they still need a week or two to verify their findings. Meanwhile there are rumors floating around that it was the rebels who used chemical weapons. One has to wonder, Assad is fighting nine different rebel groups (most of them linked to Al-Qaeda) and he was winning the fight. Why would Assad risk involving the U.S. if he's winning? The idea has been proposed that the rebels did it for the sole purpose to get the Americans involved.

Why does the stock market care about the Syrian civil war and if the U.S. gets involved? Syria does not produce a lot of oil. Yet oil prices have been rising as tensions in the area heat up. It's because Syria could be the fuse that ignites a much larger regional conflict. We have to look at some of the players. Syria's two main allies are Russia and Iran. Russia has a naval base in Syria and Syria buys a lot of military arms from Russia. Iran supports Syria because Assad and the minority sect that rules the country is Shiite Muslim while the rebels are Sunni Muslims (Iran is mostly Shiite). The Shiites and Sunnis have been killing each other for over 1,000 years. Saudi Arabia is Sunni and they're supporting the rebels. The U.S. is allied with the Saudis, which is why the U.S. is providing weapons to the rebels, which is twisted since most of the rebels are linked to the terrorist group Al-Qaeda, which was responsible for the 9-11 attack on the U.S.

Syria has threatened that if the U.S. attacks them then Syria will strike at Israel. Syria also threatened to retaliate against its neighbors who are interfering in the conflict. That could include several countries like Jordan, Turkey, Saudi Arabia. Iran has also threatened to attack Israel if the U.S. gets involved. Israel has promised to protect itself and respond in kind. These are likely empty threats by both Syria and Iran. If either country were to attack Israel it would provoke a much stronger response from the U.S. If Syria were to attack Turkey, a member of NATO, it would provoke a response from all of NATO. At the same time Russia has been consistently warning the U.S. to not get involved and Russia has been sending more warships to the Mediterranean. The last thing we want is an armed conflict with Russia.

President Obama has felt compelled to act because of his promise to punish Syria if they cross the "red line" of using chemical weapons. Secretary of State John Kerry delivered a stern speech on Friday, while the stock market was open, that set the tone for an imminent strike on Syria. Yet President Obama is quickly losing support for any military action. The United Kingdom has been supportive of the U.S. and Prime Minister David Cameron had been seen as a U.S. ally on a strike against Syria. Yet the British people do not support any military action and the British Parliament just voted no against Cameron's resolution for action against Syria. That was a painful blow to Obama's aggressive stance. The U.N. security council has already said no to any military action because Russia has vetoed it. Rhetoric was starting to rise that any unilateral action by the U.S. would actually be illegal based on international law. NATO doesn't want to get involved either with its secretary general in a recent interview stating that, "NATO will have no role in any military action in Syria."

The situation isn't much better for President Obama at home. Over 200 congressman and senators have already voiced their disagreement with military action in Syria. A recent poll suggests that only 9% of Americans would approve of any action. Obama had boxed himself into a corner with his rhetoric about how the U.S. would act if Syria crossed the line. If it's proven that Syria did use weapons, then Obama does need to act. Otherwise failure to strike might embolden countries like Iran and N. Korea. Prime Minister Cameron's failure to get a positive vote in Britain might have provided Obama a way out. This Saturday President Obama spoke from the White House and said that he had already decided to strike at Syria but would wait and present the issue to congress to be debated and approved when they return to Washington. That was a surprise but probably one of the smartest moves Obama has made in office. If congress votes no then he can blame congress for America's failure to act and it gets him off the hook for his "red line" comments. This also gives Obama time to work behind the scenes. There is a G20 Leader's summit coming up in Russia in just a few days (Sept. 5-6th). Obama will be face to face with leaders from all over the world including Russia, Britain, France, Germany, China, and Saudi Arabia.

Europe

Turning back to economic news, it was another week of generally positive news out of Europe. The Eurozone retail PMI inched higher from 49.5 to 50.3. Numbers above 50.0 indicate growth. Germany's Ifo business climate index rose from 106.2 to 107.5 in spite of a -1.4% month over month drop in German retail sales. Greece remains simmering in the background. The country did confess that yes they will need a third bailout. Greece could become a bigger issue for the markets as we get closer to the German elections in late September.

Major Indices:

The mid-August bounce in the S&P 500 failed and now the index has broken down below its simple 100-dma. This index did manage to bounce near 1628 a few times this past week. This short-term support seems to coincide with a trend line crossing the June low (see daily chart below). The S&P 500 is now down three out of the last four weeks and the intermediate trend (down) is testing its longer-term up trend.

Stocks might see a short-term bounce from current levels but I am expecting the S&P 500 to test the 1600 level before September is over. Actually given all the potential land mines for the market in September we could see the S&P 500 drop toward its June lows and/or its simple 200-dma in the 1560 area.

chart of the S&P 500 index:

The NASDAQ composite has not seen that much profit taking. It too is down three out of the last four weeks but the NASDAQ is only off -2.7% from its early August highs. There does appear to be short-term support in the 3575 area. If that level breaks then I would expect the NASDAQ to correct lower toward the 3500 mark and potential technical support at the rising 100-dma.

chart of the NASDAQ Composite index:

Profit taking in the small cap Russell 2000 was worse with a -2.6% drop for the week. The index failed near prior support at 1040 and now the $RUT looks poised to test the 1,000 level and its 100-dma soon. I would expect another short-term bounce at 1,000. There is no guarantee the index will hold this level. A breakdown below 1,000 and its 100-dma could portend a drop toward the 950 level and its simple 200-dma.

chart of the Russell 2000 index

Weekly chart of the Russell 2000 index



Economic Data & Event Calendar

It's a brand new month and that means lots of economic data reports. China starts us off on Sunday with the latest HSBC China manufacturing PMI data. The U.S. markets are closed on Monday for holiday. Then we'll see the ISM index and the Fed's Beige book report later in the week. The market's focus will likely be on Friday's jobs report since a strong jobs number will likely assure that the Fed will begin tapering their QE program in September.

We will also get the latest interest rate decisions out of Japan and the EU. ECB President Draghi will hold a press conference after the ECB's decision is released.

We are a week away from U.S. lawmakers returning to Washington on September 9th. Previously they were due to debate the U.S. debt ceiling and budget issue but now they will likely debate the Syrian conflict issue first.

Economic and Event Calendar

- Monday, September 02 -
Eurozone PMI data
U.S. market closed for Labor Day
China's non-manufacturing PMI

- Tuesday, September 03 -
ISM index
Construction spending data

- Wednesday, September 04 -
MBA mortgage index
auto and truck sales data
Federal Reserve Beige Book Report
Eurozone services PMI
Bank of Japan's interest rate decision

- Thursday, September 05 -
Weekly Initial Jobless Claims
ADP Employment Change report
factory orders
ISM services
European Central Bank (ECB) interest rate decision
ECB President Mario Draghi press conference
G-20 Leadership summit begins in Russia

- Friday, September 06 -
unemployment rate
Non-farm payrolls (jobs) report for August

Additional Events to be aware of:

Sept. 9th - Congress returns to Washington.
Sept. 18th - FOMC meeting & Bernanke press conference
Sept. 22nd - German elections
September - U.S. debt ceiling deadline

The Week Ahead:

As we look ahead to next week we could see stocks bounce on Tuesday in reaction to President Obama delaying any military action on Syria. The Syria question could be delayed three or four weeks as we wait for the U.N. inspectors to verify their findings on chemical weapons and give the U.S. congress a chance to debate and vote on the issue. Delaying the Syria question is probably good for stocks but it also means it could remain a black cloud hovering over the market's head.

We could see the market throw another "taper tantrum" in September. I am surprised that market participants do not have whiplash from the back and forth on is the taper happening or not. It seems like every other week the mood changes from it's on to it's off. Currently it looks like the taper is back "on" for September. The chatter among Wall Street analysts this past week seemed to suggest that the Federal Reserve is looking for any excuse they can to begin tapering in September.

Long-term the taper is positive because it means the Fed believes that U.S. growth is strong enough to continue without additional stimulus. Yet short-term it's going to cause volatility. Plus there are always unintended consequences. Without going into too much detail, the America's multiple QE programs were a boon for emerging markets. Now that the Fed is poised to scale back its QE program we're seeing money rush out of emerging markets. Currencies for many of these already weak economies are crumbling, which only exacerbates their problems. According to PIMCO's Mohamed El-Erian, the U.S. could face a negative feedback loop where U.S. companies struggle to find growth in these emerging markets.

I want to reinforce the idea that the next few weeks could be very volatile. The Syria issue, the jobs report, the potential for the Federal Reserve to begin tapering (likely at the September 18th FOMC meeting), and the U.S. debt ceiling and budget debate are all potential land mines for the stock market. I would hesitate to launch new long-term bullish positions now when we might see a much better entry point come October.

James


Portfolio

Portfolio Update

by James Brown

Click here to email James Brown


Current Portfolio


Portfolio Comments:

Stocks continued to sink through the last week of August. The markets now face an uncertain September. The Fed is likely to announce its long awaited QE taper. Meanwhile Washington will debate Syria and the U.S. budget and debt ceiling in the coming weeks.

C and CY were stopped out last week.

I have updated stop losses on: 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

Reluctant

by James Brown

Click here to email James Brown


- New Trades -


Editor's Note:

(September 01, 2013)

No new trades tonight.

Stocks are in an intermediate down trend and will soon be testing the market's longer-term up trend. A breakdown could spark some serious profit taking after such a strong year.

If worries over the Fed QE taper and the U.S. debt ceiling were not enough the market is now worried about Syria and any U.S. involvement. Thankfully, as of Saturday, it looks like President Obama has postponed any decision on Syria (see tonight's commentary for more).

Unfortunately, the current mood of the market does expect the Federal Reserve to announce a reduction in QE at the mid September FOMC meeting. That is likely short-term negative for equities.

I am reluctant to add new plays now when stocks could be a lot lower a month from now. However, there are exceptions and our watch list has a few candidates that are bucking the market's recent weakness. Tonight we're adding MAKO, MDVN, and SJM as possible candidates.

I am not listing any radar screen symbols tonight.



Play Updates

Out of the Frying Pan

by James Brown

Click here to email James Brown

Editor's Note:

We just finished a painful month for stocks in August. September could be worse. Is this going to be a case of jumping out of the frying pan and into the fire? I suggest investors double-check their stop loss placement. We're about to start what could be a very volatile month.


Closed Plays


C & CY were stopped out.



Play Updates


American Intl. Group - AIG - close: 46.46

Comments:
09/01/13: The financial sector continues to sink and it's pulling AIG lower. For now AIG is outperforming many of its peers in the financials by falling less. Currently shares are testing short-term support near $46 and its 50-dma. If market weakness continues I would expect AIG to dip toward $45.00 and its 100-dma.

- Suggested Positions -
JUL 15, 2013 - entry price on AIG @ 46.99, option @ 2.50
symbol: AIG1418a50 2014 JAN $50 call - current bid/ask $1.67/1.72

- or -

JUL 15, 2013 - entry price on AIG @ 46.99, option @ 4.05
symbol: AIG1517a55 2015 JAN $55 call - current bid/ask $3.25/3.45

08/04/13 new stop loss @ 43.75
07/15/13 trade opens. AIG opens at $46.99
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.

Current Target:$ 54.75
Current Stop loss: 43.75
Play Entered on: 07/15/13
Originally listed on the Watch List: 06/01/13


Bank of America - BAC - close: 14.12

Comments:
09/01/13: The market pullback this past week hit BAC pretty good. Shares underperformed with a -3.0% loss for the week. BAC is now testing support near $14.00 and its 50-dma.

If this market weakness continues I would look for BAC to dip toward $13.50 and its 100-dma. If it gets really bad we could see BAC drop toward $13.00. I am not suggesting new positions at this time.

- Suggested Positions -
(exit target hit on 07/23/13 @ $15.00)
MAR 18, 2013 - entry price on BAC @ 12.29, option @ 0.44
symbol: BAC1418a15 2014 JAN $15 call - exit $1.04 (+136.3%)

- or -

MAR 18, 2013 - entry price on BAC @ 12.29, option @ 1.13
symbol: BAC1517a15 2015 JAN $15 call - current bid/ask $1.50/1.52

07/23/13 $15.00 exit target hit for the 2014 Jan. $15 calls.
07/20/13 new stop loss @ 12.75. Adjust the exit target for the 2014 calls to exit when BAC hits $15.00. Our exit for the 2015 calls is $18.00 on BAC
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: BAC @ 15.00 for 2014 calls. BAC @ $18 for 2015 call
Current Stop loss: 12.75
Play Entered on: 03/18/13

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


Eastman Chemical Co. - EMN - close: 76.00

Comments:
09/01/13: It was a painful week for EMN. The stock produced a failed rally at resistance near $80.00 on Monday and the Monday-through-Wednesday drop pushed shares to the $75 level. EMN ended the week with a -4.6% decline.

We expected the $75 level to act as support and more aggressive traders may want to consider buying calls here. I am concerned that if the market continues to see widespread selling that EMN may drop toward its 150-dma near $72.00. Currently our stop loss is at $74.40. FYI: Thursday's low was $74.75.

Earlier Comments:
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.

- Suggested Positions -
JUL 18, 2013 - entry price on EMN @ 75.34, option @ 3.60*
symbol: EMN1418a80 2014 JAN $80 call - current bid/ask $ 3.10/3.40

- or -

JUL 18, 2013 - entry price on EMN @ 75.34, option @ 4.90*
symbol: EMN1517a90 2015 JAN $90 call - current bid/ask $ 4.70/5.00

08/04/13 new stop loss @ 74.40
07/18/13 Trade opened. EMN opens at $75.34
*option entry price is an estimate since the option did not trade at the time our play was opened.
07/17/13 EMN meets our entry requirement with a close above $75.25

Current Target: 2014 calls: target $84 on EMN. 2015 calls: target $95
Current Stop loss: 74.40
Play Entered on: 07/18/13
Originally listed on the Watch List: 07/14/13


Ford Motor Co. - F - close: 16.19

Comments:
09/01/13: It was a choppy week for shares of Ford. I am concerned that the selling is not over yet. The midweek two-day bounce appears to have failed with Friday's reversal near the 20-dma and 50-dma. Furthermore Friday's session has also created a bearish engulfing candlestick reversal pattern. I suspect that we will see Ford testing the $15.50 area in the next couple of weeks. More conservative traders may want to raise their stops. I am not suggesting new positions at this time.

- 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 $ 2.66/2.70

08/04/13 new stop loss @ 14.85
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: 14.85
Play Entered on: 04/29/13
Originally listed on the Watch List: 04/20/13


Halliburton Company - HAL - close: 48.00

Comments:
09/01/13: The midweek strength in the energy sector started to fade on Thursday and Friday. HAL ended the week sitting on short-term support at its 10-dma with a -1.4% loss for the week. If the market looked stronger I would be tempted to buy calls now. However, if market weakness continues then investors might want to consider waiting for HAL to correct toward the $45-46 levels, which may prove to be a new bullish entry point for us.

- Suggested Positions -
AUG 21, 2013 - entry price on HAL @ 47.22, option @ 1.82
symbol: HAL1418a50 2014 JAN $50 call - current bid/ask $ 2.37/2.42

- or -

AUG 21, 2013 - entry price on HAL @ 47.22, option @ 4.80
symbol: HAL1517a50 2015 JAN $50 call - current bid/ask $ 5.40/5.55

Current Target:$ 52.50 for the 2014 calls, $56.0 for the 2015 calls
Current Stop loss: 43.75
Play Entered on: 08/21/13
Originally listed on the Watch List: 08/18/13


Honeywell Intl. - HON - close: 79.57

Comments:
09/01/13: The correction lower in shares of HON seems to be picking up speed. The stock is now down four weeks in a row. The breakdown below the $80.00 level is bearish. Shares are currently clinging to technical support at the 100-dma. If there is any follow through lower this week then we could see HON hit our stop loss at $78.40. If that happens I would not be surprised to see HON drop toward the $75 level or potentially down to the 200-dma.

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

- 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 $ 5.15/5.35

08/25/13 new stop loss @ 78.40
08/04/13 new stop loss @ 77.45
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: 78.40
Play Entered on: 05/07/13
Originally listed on the Watch List: 05/04/13


JPMorgan Chase & Co. - JPM - close: 50.53

Comments:
09/01/13: Big American banks continue to see scandals. This time JPM is in the spotlight for its hiring practices in Asia. I doubt this story had much impact on the stock price, which was already in correction mode.

The sell-off in JPM has pushed shares to a four-week decline and now JPM is testing round-number, psychological support at the $50.00 mark. I am concerned that JPM might see an intraday spike below $50.00 only to bounce at its simple 200-dma near $49.35. Therefore I am actually increasing our risk by adjusting the stop loss down to $48.99 (from 49.65).

If JPM can hold support near the $50.00 level then we'll be able to use this pullback as a new entry point but I would hesitate to launch new positions at the moment.

- Suggested Positions -
JUN 24, 2013 - entry price on JPM @ 50.25, option @ 1.60
symbol: JPM1418a55 2014 JAN $55 call - current bid/ask $ 0.93/0.96

- or -

JUN 24, 2013 - entry price on JPM @ 50.25, option @ 3.80
symbol: JPM1517a55 2015 JAN $55 call - current bid/ask $ 3.15/3.25

09/01/13 adjust stop loss to $48.99
07/21/13 new stop loss @ 49.65
07/14/13 new stop loss @ 48.75
Current Target: $64.00
Current Stop loss: 48.99
Play Entered on: 06/24/13
Originally listed on the Watch List: 05/25/13


NetApp, Inc. - NTAP - close: 41.54

Comments:
09/01/13: NTAP held up pretty well last week, only falling about -1%. Shares are essentially consolidating sideways. There should be short-term technical support at the rising 40-dma (near 41.20).

Currently we have a stop loss at $39.25. More conservative investors may want to raise their stop closer to the $40.00 level.

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 $3.45/3.55

- or -

MAY 17, 2013 - entry price on NTAP @ 38.93, option @ 5.20
symbol: NTAP1517a40 2015 JAN $40 call - current bid/ask $6.05/6.20

08/11/13 new stop loss @ 39.25
08/04/13 new stop loss @ 38.75
07/21/13 new stop loss @ 36.85
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: 39.25
Play Entered on: 05/17/13
Originally listed on the Watch List: 05/11/13


Old Dominion Freight Line - ODFL - close: 43.42

Comments:
09/01/13: Hmm... ODFL doesn't look so great. The transportation stocks were hurt by the sharp rise in oil prices. Shares of ODFL have broken down below technical support at the 50-dma. If this weakness continues then the next stop is likely the simple 100-dma, just above the $42.00 level. Our stop loss is at $41.95. Considering the market's likelihood for volatility in September, more conservative investors might want to consider calling it quits now with an early exit to cut their losses. I am not suggesting new positions at this time.

- Suggested Positions -
AUG 14, 2013 - entry price on ODFL @ 45.62, option @ 1.25
symbol: ODFL1418a50 2014 JAN $50 call - current bid/ask $0.50/0.95

09/01/13 conservative traders may want to cut their losses now
08/14/13 trade opens. ODFL opens at $45.62.
08/13/13 ODFL meets our entry requirement with close at $45.65
08/11/13 adjust the entry trigger. Wait for ODFL to close above $45.50 instead of $45.25.

Current Target: $54.00
Current Stop loss: 41.95
Play Entered on: 08/14/13
Originally listed on the Watch List: 07/28/13


PetSmart, Inc. - PETM - close: 70.43

Comments:
09/01/13: PETM almost hit our stop loss last week. The stock market's sharp sell-off on Tuesday (Aug. 27th) pushed PETM below the $80 level but the stock bounced near its 100-dma (the low was $69.54). Our stop loss is at $69.40. Unfortunately given Friday's reversal lower in PETM it looks like shares may retest their 100-dma again soon.

I am not suggesting new positions at this time.

- Suggested Positions -
JUL 16, 2013 - entry price on PETM @ 72.70, option @ 3.40
symbol:PETM1418a75 2014 JAN $75 call - current bid/ask $ 1.75/1.90

- or -

JUL 16, 2013 - entry price on PETM @ 72.70, option @ 5.15*
symbol:PETM1517a80 2015 JAN $80 call - current bid/ask $ 3.60/4.00

08/11/13 new stop loss @ 69.40
08/04/13 new stop loss @ 68.90
07/16/13 trade opened. PETM opens at $72.70
*option entry price is an estimate since the option did not trade at the time our play was opened.
07/15/13 PETM meets our entry requirements with a close above $72.50

Current Target: Target for 2014 calls: PETM @ 79.00, 2015 target @ 84
Current Stop loss: 69.40
Play Entered on: 07/16/13
Originally listed on the Watch List: 07/14/13


Union Pacific Corp. - UNP - close: 153.54

Comments:
09/01/13: Railroads are very efficient transport machines. They can move one ton of freight almost 450 miles on one gallon of fuel. Rising fuel costs still impact railroad margins. The weakness in the transportation sector affected the rails this past week. UNP lost 4 1/2 points (-2.8%).

The stock's breakdown below $155 and its 100-dma is technically bearish. I am very concerned that we will see UNP hit our stop loss at $152.00 soon. The August 28th low was $152.04. More conservative investors may want to abandon ship immediately. I am not suggesting new positions.

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

- Suggested Positions -
JUL 22, 2013 - entry price on UNP @ 163.80, option @ 3.10
symbol: UNP1418a180 2014 JAN $180 call - current bid/ask $ 0.77/0.85

- or -

JUL 22, 2013 - entry price on UNP @ 163.80, option @ 4.75
symbol: UNP1517a200 2015 JAN $200 call - current bid/ask $ 2.60/2.76

08/18/13 adjust stop loss to $152.00.
07/22/13 trade will open.
07/19/13 UNP closed above our trigger
07/14/13 adjust entry trigger to $162.00, adjust stop loss to $153.00

Current Target:
Exit 2014 calls when UNP hits $185.00, 2015 calls @ $200
Current Stop loss: 152.00
Play Entered on: 07/22/13
Originally listed on the Watch List: 06/08/13


Whole Foods Market - WFM - close: 52.75

Comments:
09/01/13: It was a rocky week for WFM. Yet shares pared their losses to less than 15 cents for the week thanks to a big bounce off its Thursday morning low. WFM is now sitting just below short-term resistance at the $53.00 level.

There is no guarantee that the correction is over so I would hesitate to launch new positions. If the market weakness continues then look for WFM to test support near $50.00.

- Suggested Positions -
JUL 10, 2013 - entry price on WFM @ 54.53, option @ 2.10
symbol: WFM1418a60 2014 JAN $60 call - current bid/ask $ 0.88/0.93

- or -

JUL 10, 2013 - entry price on WFM @ 54.53, option @ 6.20
symbol: WFM1517a60 2015 JAN $60 call - current bid/ask $ 4.45/4.65

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


CLOSED Plays


Citigroup, Inc. - C - close: 48.33

Comments:
09/01/13: The stock market sell-off on Tuesday pushed Citigroup below its 100-dma. Follow through selling on Wednesday morning was enough to push C below the $48 level and hit our stop loss at $47.75. For now C is holding just above its simple 150-dma. If the stock doesn't recover soon the long-term up trend could be in jeopardy.

- Suggested Positions -
(exited the 2014 calls on July 22nd, 2013 at the open)
JUN 21, 2013 - entry price on C @ 46.00, option @ 2.45
symbol: C1418a50 2014 JAN $50 call - exit $5.00 (+104.0%)

- or -

JUN 21, 2013 - entry price on C @ 46.00, option @ 3.65
symbol: C1517a55 2015 JAN $55 call - exit $3.40 (-6.8%)

08/28/13 stopped out at $47.75
08/04/13 new stop loss @ 47.75
07/22/13 scheduled exit for the 2014 Jan. $46 calls at the open.
07/21/13 prepare to exit our 2014 calls on Monday morning (07/22/2013)
07/21/13 new stop loss @ 45.75
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

Chart of C:

Current Target:$ 59.00
Current Stop loss: 47.75
Play Entered on: 06/21/13
Originally listed on the Watch List: 05/25/13


Cypres Semiconductor - CY - close: 11.32

Comments:
09/01/13: It was a painful week for CY as well. Shares gave up -3.9% by Friday's closing bell. The market's sharp sell-off on Tuesday (Aug. 27th) was too much for CY. Share shit our stop loss at $11.35. The stock saw another spike lower on Wednesday morning before bouncing. Unfortunately the oversold bounce appears to be failing at its 10-dma.

- Suggested Positions -
JUL 19, 2013 - entry price on CY @ 12.50, option @ 1.02*
symbol: CY1418a13 2014 JAN $13 call - exit $0.35 (-65.6%)

- or -

JUL 19, 2013 - entry price on CY @ 12.50, option @ 1.20*
symbol: CY1517a15 2015 JAN $15 call - exit $0.65 (-45.8%)

08/27/13 stopped out at $11.35
08/23/13 CY is bouncing from support near $11.50
07/21/13 new stop loss @ 11.35
07/19/13 trade opened. CY opens at $12.50
*option entry price is an estimate since the option did not trade at the time our play was opened.
07/18/13 CY meets our entry requirement with a close above $12.10

Chart of CY:

Current Target: $14.75 for the 2014 calls, 16.00 for the 2015 calls
Current Stop loss: 11.35
Play Entered on: 06/21/13
Originally listed on the Watch List: 07/14/13



Watch

Medical Devices, Biotech, & Food

by James Brown

Click here to email James Brown


New Watch List Entries

MAKO - MAKO Surgical

MDVN - Medivation, Inc.

SJM - The J. M. Smucker Co.


Active Watch List Candidates

DD - E.I. du Pont

DECK - Deckers Outdoor Corp.

DG - Dollar General

FLR - Fluor Corp.

HOG - Harley Davidson

KORS - Michael Kors Holdings

NVDA - NVIDIA Corp.

PFE - Pfizer Inc.

STZ - Constellation Brands

VRSN - VeriSign, Inc.


Dropped Watch List Entries

GE, PG, and YUM have all been removed.



New Watch List Candidates:


MAKO Surgical Corp. - MAKO - close: 14.95

Company Info

MAKO is a medical device company. The stock suffered an extremely painful year in 2012 with a plunge from $45 a share toward $13 thanks to missed earnings numbers and lowered guidance. Since then it looks like MAKO has finally found a bottom. The latest earnings report in July was still a miss but traders bought the news anyway.

More recently shares have been showing relative strength and have put together a two-week rally while the market sinks. I am suggesting we wait for MAKO to close above $15.25 and then buy calls the next day with a stop loss at $13.95. More conservative investors may want to wait for MAKO to close above $16.25 as an alternative entry point since the $16.00 level has been resistance in the past.

If we are triggered our long-term target is $19.50. FYI: The point & figure chart is bullish with a $24 target.

Breakout trigger: Wait for a MAKO to close over $15.25
then buy calls the next day with a stop loss at $13.95

BUY the 2014 Jan $15 call (MAKO1418a15) current ask $1.95

- or -

BUY the 2015 Jan $20 call (MAKO1517a20) current ask $2.40

Chart of MAKO:

Originally listed on the Watch List: 09/01/13


Medivation - MDVN - close: 56.53

Company Info

MDVN is a biotech company. The headline currently moving the stock is MDVN's prostate cancer drug, Xtandi. Some analysts expect that sales could soar from $230 million a year now toward $2.2 billion in less than ten years. Others are speculation that MDVN could be a takeover target.

Shares have been chopping sideways in a very wide $42-60 trading range for several months. A breakout past resistance near $60.00 would be very bullish. You'll notice that the consolidation has been narrowing near the top of its range, which might suggest a breakout higher is approaching.

I am suggesting an intraday trigger to buy MDVN at $61.00. More conservative investors might want to wait for MDVN to close above $60 or close above $61 as an alternative entry point. If MDVN hits $61.00 we'll start with a stop loss at $54.90. Our long-term target is $75.00 but we may have to adjust it given our time frame. I'm only listing the 2014 calls. MDVN does have 2015 calls but the spreads are too wide.

NOTE: MDVN's options look a little expensive. I am suggesting smaller positions to limit our exposure.

Breakout trigger: $61.00

BUY the 2014 Jan $65 call (MDVN1418a65) current ask $5.90

Chart of MDVN:

Originally listed on the Watch List: 09/01/13


The J. M. Smucker Company - SJM - close: 106.14

Company Info

SJM operates three segments: U.S. Retail Coffee; U.S. Retail Consumer Foods; and International, Foodservice, and Natural Foods (source: YahooFinance). They market their products under a number of well known brand names. The July rally pushed SJM to new all-time highs. Since then shares have seen an orderly and consistent correction back down toward prior resistance near $105. This level should be new support. It's no coincidence that SJM's correction also stalled near its longer-term up trend of higher lows.

If SJM bounces from support here we want to be ready. The simple 50-dma is currently at $108.00. I am suggesting we wait for SJM to close above $108.50. If that occurs we can buy calls the next day with a stop loss at $104.25, just below Thursday's lows (Aug. 29th). I do expect some resistance near $115.00 but we're aiming for $119.00.

trigger: Wait for SJM to close above $108.50
then buy calls the next day. Stop loss @ 104.25

BUY the 2014 Jan $115 call (SJM1418a115) current ask $1.65

Chart of SJM:

Weekly Chart of SJM:

Originally listed on the Watch List: 09/01/13


Active Watch List Candidates:



E.I. du Pont - DD - close: 56.62

Comments:
09/01/13: The correction lower in DD continues. The stock is now down four weeks in a row. It is worth noting that DD has been holding at technical support on its 50-dma the last few days. I am willing to give DD another week to see if shares continue to drop or if they start to recover before dropping it as a candidate. Nimble investors might want to consider buying a bounce off the $55 level and use a tight stop loss. Officially the newsletter is waiting for a breakout past resistance near $60.00.

Earlier Comments:
I am suggesting we wait for DD to close above $60.50 and then buy calls the next morning with a stop loss at $57.90. Our long-term target is $69.00.

Breakout trigger: Wait for DD to close above $60.50
Then buy calls the next day. Stop loss @ 57.90.

BUY the 2014 Jan $65 call (DD1418a65)

- or -

BUY the 2015 Jan $65 call (DG1517a65)

Originally listed on the Watch List: 08/11/13


Deckers Outdoor Corp. - DECK - close: 58.73

Comments:
09/01/13: Traders bought the dip midweek and DECK pared its losses. Shares still look poised to breakout past major resistance near the $60.00 level.

Earlier Comments:
I am suggesting we wait for DECK to close above $60.50 and then buy calls the next day with a stop loss at $55.75. However, I am putting a limit on this entry point. Do not open positions if DECK closes above $62.00. More aggressive traders could an intraday trigger instead waiting for a close above $60.50. If triggered our target is $74.00. FYI: The point & figure chart is forecasting a bullish target of $87.00.

We want to keep our position size small to limit our risk. DECK can be a volatile stock.

Breakout trigger: Wait for DECK to close above $60.50
Then buy calls the next day. Stop loss @ 55.75.
* do NOT launch positions if DECK closes above $62.00. *

BUY the 2014 Jan $65 call (DECK1418a65)

- or -

BUY the 2015 Jan $70 call (DECK1517a70)

Originally listed on the Watch List: 08/25/13


Dollar General Corp. - DG - close: 53.97

Comments:
09/01/13: DG flirted with a breakout past resistance near $56.00 last Monday. The rally failed and shares are now down four days in a row. We're not giving up yet. DG is due to report earnings on September 4th. Wall Street expects a profit of 74 cents a share. More conservative traders may want to wait until after we see how the market reacts to DG's earnings before considering new positions, regardless of our suggested entry point below.

I am suggesting we wait for DG to close above $56.50. However, I am putting a limit on this entry strategy. We do not want to launch positions if DG closes above $58.00. If that entry requirement is met then we can buy calls the next morning with a stop loss at $52.45. Our long-term target is $64.00 for the 2014 calls. Our target is $69.00 for the 2015 calls.

FYI: The point & figure chart is bullish with a $78.00 target.
DG is due to report earnings in early September.

Breakout trigger: Wait for DG to close above $56.50
Then buy calls the next day. Stop loss @ 52.45.
* do NOT buy calls if DG closes above $58.00 *

BUY the 2014 Jan $60 call (DG1418a60)

- or -

BUY the 2015 Jan $70 call (DG1517a70)

Originally listed on the Watch List: 08/04/13


Fluor Corp. - FLR - close: 63.43

Comments:
09/01/13: FLR had a rough week with shares falling the last four days in a row. Shares are off more than three points from Monday's close near $66.50. If FLR does not recover soon we will likely drop it as a candidate. Let's give it another week and then re-evaluate.

Earlier Comments:
Shares were hovering below resistance near the $67 level. This also happens to be the neckline of an inverse or bullish reversion of a head-and-shoulders pattern. A breakout past this level would forecast a rally toward the 2011 highs. The Point & Figure chart is even more bullish with an $82 target.

I am suggesting we wait for FLR to close above $67.00 and then buy calls the next morning. If triggered we'll start with a stop loss at $63.75. Our long-term target is $74.75.

Breakout trigger: Wait for FLR to close above $67.00
Then buy calls the next day. Stop loss @ 63.75.

BUY the 2014 Jan $70 call (FLR1418a70)

- or -

BUY the 2015 Jan $75 call (FLR1517a75)

Originally listed on the Watch List: 08/11/13


General Electric - GE - close: 23.14

Comments:
09/01/13: I am throwing in the towel on our GE candidate. It is possible that shares might find support near $23 and its rising 200-dma. Unfortunately the current trend is down with GE off five out of the last six weeks. I will probably keep GE on my radar screen merely because it's such a market bellwether. However, tonight we are removing GE as an active candidate.

Trade did not open.

09/01/13 removed from the watch list
Trigger was a close above $25.25

Originally listed on the Watch List: 08/04/13


Harley-Davidson - HOG - close: 59.98

Comments:
09/01/13: Shares of HOG continue to show relative strength. Traders bought the dip near its short-term moving averages last week and now HOG is back to testing resistance near $60.00.

I am suggesting we wait for HOG to close above $60.50 and then buy calls the next day with a stop loss at $56.75. However, I am putting a limit on this entry point. Do not open positions if HOG closes above $62.00. More aggressive traders could an intraday trigger instead waiting for a close above $60.50. If triggered our target is $69.00.

NOTE: The broader market still looks weak. Investors may want to start with small positions first and then build up to a normal position size later.

Breakout trigger: Wait for HOG to close above $60.50
Then buy calls the next day. Stop loss @ 56.75.
* do NOT launch positions if HOG closes above $62.00. *

BUY the 2014 Jan $65 call (HOG1418a65) current ask $1.77

- or -

BUY the 2015 Jan $70 call (HOG1517a70) current ask $3.95

Originally listed on the Watch List: 08/25/13


Michael Kors Holdings - KORS - close: 74.09

Comments:
09/01/13: Any worries about a slowing consumer are not affecting KORS. The stock has continued to rally and shares hit new all-time highs this past week. We still do not want to chase it in spite of the relative strength. KORS is flirting with a long-term trend line of higher highs. Considering the strong potential for more market volatility in September I'd rather wait for a correction in KORS.

Earlier Comments:
Broken resistance near $65.00 should be new support. I am suggesting we buy calls if KORS can trade down to $66.00. We'll start with a stop loss at $62.00 but more aggressive traders may want to put their stop below the $60.00 mark instead. Our bullish target to exit the 2014 calls is $74.50. Our target to exit the 2015 calls is $84.50. Currently the point & figure chart is bullish with an $82 target.

Buy-the-Dip trigger: $66.00

BUY the 2014 Jan $70 call (KORS1418a70)

- or -

BUY the 2015 Jan $75 call (KORS1517a75)

Originally listed on the Watch List: 08/18/13


NVIDIA Corp. - NVDA - close: 14.75

Comments:
09/01/13: The profit taking in NVDA has been relatively mild. It is worth noting that NVDA is down four days in a row and seems to have found new short-term resistance at its 10-dma. We are still on the sidelines and waiting for a breakout higher.

Earlier Comments:
Due to NVDA's recent volatility I am labeling this a more aggressive, higher-risk trade and thus suggest we use smaller positions to limit our risk. The suggested entry point is to wait for NVDA to close above $15.50 and then buy calls the next day with a stop loss at $14.25. Our target to exit the 2014 calls is $18.00. Our target to exit the 2015 calls is $19.75. Currently the point & figure chart is bullish and forecasting at $23 target.

Breakout trigger: Wait for a close above $15.50
then buy calls the next morning. Start with a stop at $14.25.

BUY the 2014 Jan $16 call (NVDA1418a16)

- or -

BUY the 2015 Jan $17 call (NVDA1517a17)

Originally listed on the Watch List: 08/18/13


Pfizer Inc. - PFE - close: 28.21

Comments:
09/01/13: I cautioned readers last week that we might see PFE decline toward technical support at its 200-dma. Sure enough that's where PFE fell to midweek. This stock is testing its long-term trend line of support dating back to 2011. I am tempted to buy alls here and just use a stop loss at $27.45 or maybe a stop at $26.90. However, concerns about the broader market with all the potential challenges we face in September are holding me back. I'd rather stay on the sidelines and watch than jump in too early ahead of what could be a very volatile month in September. For now our plan is unchanged.

Earlier Comments:
I am suggesting investors wait for PFE to close above $30.25. If that occurs we can launch positions the next morning. We'll start with a stop loss at $28.45. Our long-term target is $35.00.

Breakout trigger: Wait for PFE to close above $30.25
buy calls the next day. Start with a stop loss at $28.45

BUY the 2014 Jan $30 call (PFE1418a30)

- or -

BUY the 2015 Jan $30 call (PFE1517a30)

Originally listed on the Watch List: 07/28/13


Procter & Gamble Co. - PG - close: 77.89

Comments:
09/01/13: It has been an ugly three weeks for PG. The stock has retreated from resistance near the $82 area. This past week found PG testing support near $76 and its 200-dma. It's very unlikely that we will see PG hit our suggested entry point at $83.00 any time soon so we're removing PG as a watch list candidate.

Trade did not open.

09/01/13 removed from the watch list. Trade did not open.
suggested entry was a close above $83.00

Originally listed on the Watch List: 08/04/13


Constellation Brands - STZ - close: 54.25

Comments:
09/01/13: The recent profit taking in shares of STZ has been pretty mild. The stock was hitting new all-time highs just a week ago. I don't see any changes from my earlier comments.

Earlier Comments:
I am suggesting we wait for STZ to close above $56.25 a share. If that trigger is met we can buy calls the next day. I am suggesting a wide stop loss at $49.95 but more conservative types may want to use a stop closer to the $53.00 level. Our long-term target is the $65-70 zone.

Breakout trigger: Wait for STZ to close above $56.25
Then buy calls the next day. Stop loss @ 49.95.

BUY the 2014 Jan $60 call (STZ1418a60)

- or -

BUY the 2015 Jan $65 call (STZ1517a65)

Originally listed on the Watch List: 08/25/13


VeriSign, Inc. - VRSN - close: 47.99

Comments:
09/01/13: VRSN is another stock that has seen a four-day plunge lower. Shares flirted with a bullish breakout past resistance at $50.00 on Monday but there was no follow through. Now shares are down four days in a row and breaking down below their 30-dma. If this weakness continues we will likely drop VRSN as a candidate. Let's give it another week and see how it performs.

Earlier Comments:
I am suggesting we wait for VRSN to close above $50.25 and then buy calls the next day. More aggressive traders may want to jump in on an intraday trade at $50.25 because VRSN has above average short interest and a breakout past $50.00 could spark some short covering. If VRSN meets our entry requirement I am suggesting a stop loss at $47.40. Our target to exit the 2014 calls is $57.50. Our target to exit the 2015 calls is $64.50. Currently the point & figure chart is bullish with a $76 target.

Breakout trigger: Wait for a close above $50.25
then buy calls the next morning. Start with a stop at $47.40.

BUY the 2014 Jan $55 call (NVDA1418a55)

- or -

BUY the 2015 Jan $55 call (NVDA1517a55)

Originally listed on the Watch List: 08/18/13


Yum! Brands - YUM - close: 70.02

Comments:
09/01/13: Shares of YUM have also suffered a painful three-week correction lower. The stock failed at resistance near $75.00 in early August. Since then we've seen it breakdown below several layers of potential support. It is unlikely that YUM will hit our suggested entry point (a close over $75.25) any time soon. Therefore we are removing YUM as an active watch list candidate.

Trade did not open.

09/01/13 removed from the watch list. Trade did not open.
suggested entry was a close over $75.25

Originally listed on the Watch List: 08/04/13