Option Investor
Newsletter

Daily Newsletter, Sunday, 2/9/2014

Table of Contents

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

Leaps Trader Commentary

Sharp Rebound Short Circuits Correction

by James Brown

Click here to email James Brown

The month of February is historically the second-worst performing month of the year for the Dow Jones Industrial Average. Over the last 40 plus years whenever the S&P 500 ended the month of January with losses the losses carried over into February 72% of the time with an average decline of -2.4%. The S&P 500 almost achieved that loss on Monday, Feb. 3rd with a -2.3% plunge, making it the index's worst start to the month since 1933. The Dow Industrials plunged -326 points on Monday (-2.1%) making it the Industrials' worst start to February since 1983.

Disappointing economic data and worries about a slowdown in China combined with fears over emerging market losses all conspired together to spark the Monday (and Tuesday morning) sell-off in stocks. Investors have been yanking money out of stocks, at least up until February 5th. Outflows from U.S. equity funds surged to a record-breaking $24 billion last week. Year to date equity outflows have hit $28 billion. We've only seen five weeks of 2014 and already equity outflows from emerging market funds have surpassed all of 2013 with investors pulling out $18.6 billion in 2014 versus $15.2 billion in 2013, according to EPFR. Citigroup says that investors have been pulling money out of emerging market equity funds for 15 weeks in a row.

In spite of big losses on Monday all of the major U.S. stock indices managed to close in positive territory for the week with the exception of the small cap Russell 2000, which couldn't overcome the -3.1% plunge from Monday's drop and closed down -1.2% for the week. Most of 2014 has seen money flow out of stocks and into bonds. The yield on the 10-year bond closed at 2.58% on Monday. Since then bonds have retreated as equities bounced. The current pullback in bonds ends a four-week rally. Meanwhile commodities were on the rise last week with crude oil up +2.6% and back above $100 a barrel. Gold added +1.9% for its best weekly performance in a month. Gold futures look poised to breakout past potential resistance near the $1,270 an ounce level. Silver prices surged +4.5% for its best one-week gain in six months.

Economic Data

It was the start of a new month and the market digested a lot of economic data. The ISM manufacturing index delivered a disappointing January read of 51.3, down from 56.6. This is the lowest reading since June 2013. Numbers below 50.0 indicate contraction. The non-manufacturing ISM rose from 53.0 to 54.0, which was slightly above expectations for a rise to 53.7. Factory orders fell -1.5%, which matched a downwardly revised -1.5% from the previous month (November). The ADP National Employment Report said private payrolls increased +175,000 in January. That's down from December's report, which was adjusted lower from 238K to 227K.

The big report everyone was looking for was Friday's nonfarm payrolls (jobs) report. Economists were expecting between +175,000 to +189,000 new jobs in January. Unfortunately Friday's jobs number came in at +113,000. That's a huge miss and follows the prior month's disastrous report of just 75,000, revised up from 74,000. Together the December and January reports marked the worst two-month job growth in over three years.

BLS Jobs Data

Image from:
CNNMoney

Many were quick to blame the unusually cold weather on the disappointing jobs number. That's the excuse used to explain December's missing jobs. While January was cold we did not see a drop in jobs that should have been impacted by weather, like construction jobs. As a matter of fact, the construction sector added +48,000 jobs. Last year the monthly average job growth was +194,000. The recent two-month plunge has pulled the three-month average down to +143,000. Don't forget that the U.S. needs about +150K new jobs a month just to keep up with new graduates and immigration.

The unemployment rate made headlines with an unexpected -0.1% drop to 6.6%. That's because recent unemployment declines have been due to falling labor participation rates. Yet the newest data shows the labor participation rate actually went up from a 35-year low of 62.8% to 63.0%. Friday's report garnered the usual adjectives like "weak" and "disappointing" but I'm starting to hear more comments like "irrelevant". The U.S. government Bureau of Labor Statistics published a big disclaimer in Friday's report. Every year they make adjustments based on population data. The monthly jobs number has been widely criticized for its "seasonal adjustments". According to some research into these season adjustments the BLS added 2,103,000 to reach its +113,000 job gain last month. That seems a bit ridiculous. You can read the article here.

Overseas Data

Economic data overseas remains mixed. Both the Bank of England and the European Central Bank (ECB) left interest rates unchanged last week at 0.50% and 0.25%, respectively. ECB President Mario Draghi's press conference failed to spark any fireworks. The Eurozone retail PMI data increased from 47.7 to 50.5 yet retail sales fell -1.6% month over month. Eurozone Producer Price Index (PPI) climbed +0.2% for the month but its year over year reading fell -0.8%. That was actually slightly better than expected but worries remain about the potential for deflation.

Germany reported some unexpected bad data last week. Factory orders fell -0.5% when economists were expecting +0.4%. German industrial production also fell -0.6% when expectations were for +0.5%. The U.K. said industrial production rose +0.4% for the month, which is an improvement over the prior -0.1% reading. Spain's industrial production came in much better than expected with a +1.7% gain versus estimates for +0.5%. Yet Spain's unemployment continues to rise.

Economic data in Asia was relatively quiet. The Chinese stock market was closed all week for their Lunar New Year holiday. The Chinese HSBC Services PMI data slipped from 50.9 to 50.7, that's a record low and on the verge of turning negative (below 50.0). The recent Chinese manufacturing PMI report of 50.5, a six-month low, helped fuel the recent stock market sell-off. On a side note, there is some speculation that China is no longer releasing their jobless data to hide their growing unemployment problem.

Major Indices:

Last week saw the S&P 500 index breakdown below its 100-dma, the 1770 and 1750 levels. The index found support near 1740 and produced a short-term double bottom before rebounding. For the week the S&P 500 index eked out a +0.8% gain, which pared its year to date loss to -2.78%. You'll notice that the bounce has stalled right at round-number resistance near 1800. If that wasn't enough there is also technical resistance at the 50-dma near 1810. If the S&P 500 can climb above these levels then shorts might panic and cover more positions. The 1850 level remains significant overhead resistance.

If the S&P 500 were to reverse then I would expect support near 1740 to fail and we would likely see a correction lower toward the simple 200-dma near 1711 or the 1700 level.

A -10% correction would be a drop to 1665.

chart of the S&P 500 index:

Weekly chart of the S&P 500 index:

The NASDAQ flirted with a breakdown below support near 4000 and its 100-dma but managed a bounce. The rebound lifted the index back above its 50-dma but the 4150 area might be short-term resistance. If this rebound continues then 4200 and 4250 are the next likely resistance levels. The NASDAQ composite's sharp rebound has produced a hammer style bullish reversal candlestick on its weekly chart (just like the S&P500 index).

A typical -10% correction would mean a drop toward 3818.

chart of the NASDAQ Composite index:

Weekly chart of the NASDAQ Composite index:

The small cap Russell 2000 index was the worst performer among the major U.S. indices. The $RUT plunged -3.1% on Monday's sell-off and ended the week with a -1.2% decline. Year to date the $RUT is down -4.0%. The low on Tuesday was 1082. That's close enough to call it a test of support at the 1080 level. You'll notice the rebound has stalled near its 100-dma and the $RUT remains below broken support and what could be new resistance near the 1120 level.

If the $RUT manages to keep bouncing then 1140 and the 50-dma could also be overhead resistance. If stocks reverse lower then the $RUT is likely headed for its 200-dma near 1060.

A -10% correction would mean a drop toward 1063.

chart of the Russell 2000 index

Weekly chart of the Russell 2000 index



Economic Data & Event Calendar

It's a relatively quiet week for actual economic data. The events to watch will be the new Federal Reserve Chairman Janet Yellen speaking before Congress on Tuesday and the Senate on Thursday.

Economic and Event Calendar

- Monday, February 10 -
(nothing significant)

- Tuesday, February 11 -
Wholesale inventory data
Fed Chairman Yellen to speaks to Congress

- Wednesday, February 12 -
(nothing significant)

- Thursday, February 13 -
Weekly Initial Jobless Claims
China CPI data
Business inventory data from December
Retail sales data for January
Fed Chairman Yellen to speaks to the Senate

- Friday, February 14 -
Eurozone GDP estimate
U.S. industrial production data
University of Michigan Consumer Sentiment data
Valentine's Day

Additional Events to be aware of:

Feb. 17th - market closed for president's day
Mar. 19th - FOMC policy update and economic projections
Mar. 19th - new Fed Chairman Yellen's first press conference




Looking Ahead:

Believe it or not but earnings season is still underway although we are past the halfway point. Out of the 60% of the S&P 500 components who have reported their Q4 earnings results about 67% have beaten Wall Street's bottom line estimates. Revenue growth remains challenging but more companies than expected have managed to beat the revenue estimates. Unfortunately about 59% of the S&P 500 companies who have reported have also lowered their 2014 guidance. That doesn't bode well for the stock market.

Speaking of not boding well the U.S. just pasted the February 7th debt ceiling deadline. Treasury Secretary Jack Lew sent a letter to congressional leaders this week warning them that the U.S. can use extraordinary accounting measures to keep things afloat but these special accounting tricks would only last until February 27th. Overall the stock market seems rather sanguine about the issue. The current mood would suggest that the democrats and republicans will compromise more quickly this. Why is that? The republicans want to avoid another government shutdown when they believe that they have some momentum using the public's distaste over Obamacare as a political tool to their advantage. Midterm elections are only nine months away.

The stock market correction may or may not be over even though most of the major U.S. indices produced a bullish-reversal style candlestick on their weekly charts last week. Josh Brown, at the Reformed Broker blog, has gathered some interesting tidbits on market corrections. Since World War II there have been 27 corrections of at least -10% or more. There have only been 12 bear markets (a drop of -20% or more). Of those 27 corrections the average decline was -13.3% with an average duration of 71 days (he suggested these were trading days, not calendar days, so about three months). The U.S. stock market has only seen three corrections since the market bottom of March 2009. The most recent correction was 2011 that ended in September that year. Combine that with the fact that the average bull market move between these corrections is about 221 trading days, then we're way overdue for a larger pullback. Remember the average correction is -13.3%. The S&P 500's closing low on Monday at 1741 is only a -5.8% pullback.

While we're on the subject of market pullbacks Doug Kass made an interesting observation. Whenever there is a new Federal Reserve Chairman the stock market tends to see a -7% drop in the major indices. The S&P 500 has already seen a -5.8% drop. The NASDAQ Composite had a -6.4% drop. The Dow Industrials has seen a -7.3% pullback and the Russell 2000 has already seen a -8.5% correction.

I'd like to remind readers that the S&P 500 has now gone over 840 days without a -10% correction. Plus, a bull market struggle to make past their fifth anniversary and March 2014 will be five years for the current bull. I'm not saying the bull market is over but it should make investors more cautious. According to the statistics above, we're due for a full-sized -10% or more correction. Since the average correction is -13.3% then that means a drop toward 1610-1600 on the S&P 500. My concern right now is a bounce back toward the recent highs only to see it fail.

FYI: Listening to one of the CNBC commentators this week, one of them said, "Gentlemen, if your lady says she does not want anything for Valentine's day this year, she is lying." He implied you should get her something anyway. Sounds like wise advice.

James



Portfolio

Portfolio Update

by James Brown

Click here to email James Brown


Current Portfolio


Portfolio Comments:

It was the worst start to the month of February since 1933 for the S&P 500 index and since 1983 for the Dow Industrials. Fortunately, a sharp rebound lifted most of the major U.S. indices back into positive territory by Friday's closing bell.

The stock market's sharp sell-off on Monday and Tuesday last week tagged a few of our stop losses. ALK, DE, HFC, ITW, and SNDK were stopped out.

Last week our plan was to exit our AVGO and MSI trades on Tuesday, Feb. 4th.

This week I am suggesting we exit our LVLT trade on Monday morning, Feb. 10th.

I have updated stop losses on: HON, JPM, and SBUX.

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

Semiconductor Strength

by James Brown

Click here to email James Brown


- New Trades -


Micron Technology - MU - close: 24.51

Comments:
02/09/14: In our last newsletter the entry strategy for MU was adjusted. Instead of waiting for a dip toward support the trigger was switched to a breakout move. The plan was to wait for MU to close above $24.50 and then buy calls the next day. MU met that requirement with Friday's close at $24.51. Our play will open on Monday morning, Feb. 10th.

The long-term trend remains bullish with a strong pattern of higher lows. MU was very resistant to the market's recent sell-off. The current bounce has lifted shares to new multi-year highs. Our initial target will be $29.75.

Earlier Comments:
Keep in mind that late last year MU saw some volatility around news that a rival chip maker, Hynix, was building a new factory in 2014 and investors worried that might (naturally) impact supply and thus memory pricing. This could be a story that shows up again in 2014 even though the new factory probably won't start producing until 2015.

Trigger was a close above $24.50.

BUY the 2015 Jan $25 call (MU1517a25) current ask $3.70

- or -

BUY the 2016 Jan $30 call (MU1615a30) current ask $3.60

02/07/14 MU meets our entry point requirement with a close above $24.50
02/03/14 adjust entry strategy. Instead of a buy-the-dip trigger at $22.00, wait for MU to close above $24.50 and then buy calls the next day.

Daily Chart of MU:

Weekly Chart of MU:

Current Target: MU @ $29.75
Current Stop loss: 21.75
Play Entered on: 02/10/14
Originally listed on the Watch List: 01/12/14



Play Updates

Prepare To Exit LVLT

by James Brown

Click here to email James Brown

Editor's Note:

We want to close our LVLT trade immediately on Monday morning, Feb. 10th, to lock in potential gains.

GILD has graduated from our watch list to our play list.


Closed Plays


Our plan was to close the AVGO and MSI trades on Feb. 4th.

ALK, DE, HFC, ITW, and SNDK hit our stop loss.



Play Updates


Bank of America - BAC - close: 16.82

Comments:
02/09/14: BAC bounced from its rising 40-dma and managed to post a gain for the week. Shares look ready to breakout past the three-week trend of lower highs. 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 $2.76/2.80

02/03/14 move stop loss to $15.35, investors may want to just exit now to lock in potential gains
01/19/14 adjust exit target to $19.50 (from 18.00)
01/12/14 don't be surprised to see some post-earnings profit taking
01/05/14 new stop loss @ 14.75
11/24/13 new stop loss @ 13.70
11/17/13 new stop loss @ 13.35
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 @ $19.50 for 2015 call
Current Stop loss: 15.35
Play Entered on: 03/18/13

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


BB&T Corp. - BBT - close: 37.41 (as of Jan. 31, 2014)

Comments:
02/09/14: After a three-week pullback the correction in shares of BBT might be over. The stock dipped to an intraday low of $36.28 on Tuesday. If you're looking for an entry point you could buy this bounce or wait for a new close above $38.00 (although if you choose an entry point now I suggest you adjust your stop loss higher).

- Suggested Positions -
DEC 17, 2013 - entry price on BBT @ 35.81, option @ 0.99
symbol: BBT1517a40 2015 JAN $40 call - current bid/ask $1.28/1.33

02/03/14 conservative investors may want to exit now to avoid a potential loss (or raise their stop loss)
01/12/14 new stop loss @ 34.90

Current Target: BBT @ 42.50
Current Stop loss: 34.90
Play Entered on: 12/17/13
Originally listed on the Watch List: 12/15/13


The Walt Disney Co. - DIS - close: 75.67

Comments:
02/09/14: DIS reported earnings last week and results were better than expected. Wall Street was looking for a net profit of 91 cents a share with revenues of $12.23 billion. DIS delivered $1.04 a share on revenues of $12.31 billion. The stock soared toward its recent highs on Thursday.

It was a close call. DIS was testing support near $70 and its 100-dma earlier in the week during the market sell-off. Now DIS is hovering below resistance in the $76.00-76.50 area. I am not suggesting new positions at this time.

- Suggested Positions -
OCT 23, 2013 - entry price on DIS @ 68.81, option @ 3.70
symbol: DIS1517a75 2015 JAN $75 call - current bid/ask $7.15/7.25

01/05/14 new stop loss @ 69.40
12/29/13 new stop loss @ 67.40
12/08/13 new stop loss @ 65.75
11/24/13 new stop loss @ 64.75

Current Target: DIS @ 84.00
Current Stop loss: 69.40
Play Entered on: 10/23/13
Originally listed on the Watch List: 10/13/13


Delphi Automotive - DLPH - close: 62.41

Comments:
02/09/14: DLPH held up pretty well last week especially considering that management lowered their earnings guidance when the company reported earnings. DLPH announced earnings on Feb. 4th and beat estimates on both the top and bottom line. Management lowered guidance for the first quarter but reaffirmed full year 2014 estimates. Surprisingly shares of DLPH did not see a bit sell-off on the earnings warning. Shares briefly spiked lower under $59 and its 100-dma only to quickly rebound.

FYI: Investors should note that DLPH will begin trading ex-dividend on February 13, 2014. The quarterly cash dividend should be 25 cents.

- Suggested Positions -
JAN 24, 2014 - entry price on DLPH @ 60.25, option @ 4.49
symbol: DLPH1517a65 2015 JAN $65 call - current bid/ask $4.90/5.40

02/04/14 DLPH reports better than expected earnings but lowers Q1 guidance

Current Target: DLPH @ 75.00
Current Stop loss: 57.25
Play Entered on: 01/24/14
Originally listed on the Watch List: 01/19/14


Foot Locker, Inc. - FL - close: 38.67

Comments:
02/09/14: FL eked out a very minor gain for the week. At its close on Monday the stock was down more than 11% from its recent highs. Fortunately that proved to be support near FL's rising 100-dma. Shares have rebounded back toward overhead resistance near $39.00. I am not suggesting new positions at this time.

Earlier Comments:
Our long-term target is $48.00 but more aggressive traders could aim higher since the point & figure chart is forecasting a $60 target.

- Suggested Positions -
JAN 17, 2014 - entry price on FL @ 39.25, option @ 3.85*
symbol: FL1517a40 2015 JAN $40 call - current bid/ask $3.10/3.40

02/03/14 adjust stop loss to $36.49
01/17/14 triggered @ 39.25
*option entry price is an estimate since the option did not trade at the time our play was opened.

Current Target: exit when FL hits $48.00
Current Stop loss: 36.49
Play Entered on: 01/17/14
Originally listed on the Watch List: 12/29/13


Gilead Sciences - GILD - close: 78.75

Comments:
02/09/14: GILD was a watch list candidate. Shares hit our suggested buy-the-dip entry point at $76.25 on Friday morning (the intraday low on Thursday was $76.26). As expected GILD bounced from technical support at its 50-dma and ended Friday's session higher. I would still consider new positions now at current levels. We're starting this trade with a stop loss at $69.75. More conservative investors may want to use a higher stop closer to the $74 area.

Earlier Comments:
I am labeling this a more aggressive, higher risk trade. There is always the risk that the wrong headline sends any biotech stock gapping lower (or higher as the case may be). I'm suggesting small positions to start. Broken resistance near $75.00 should be new support. Currently the point & figure chart is bullish and forecasting at $98 target.

- Suggested Positions -
FEB 07, 2014 - entry price on GILD @ 76.25, option @ 7.30
symbol: GILD1517a85 2015 JAN $85 call - current bid/ask $8.30/8.40

02/07/14 triggered @ 76.25
01/26/14 move the buy-the-dip trigger from 75.25 to 76.25

Chart of GILD:

Current Target: exit when GILD hits $95.00
Current Stop loss: 69.75
Play Entered on: 02/07/14
Originally listed on the Watch List: 01/19/14


Honeywell Intl. - HON - close: 93.16

Comments:
02/09/14: HON has weathered the market's recent storm very well. The two-day bounce helped launch shares of HON to a new high. I am raising our stop loss to $87.45.

I am not suggesting new positions at this time.

Earlier Comments:
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 $11.60/11.80

02/09/14 new stop loss @ 87.45
12/29/13 new stop loss @ 84.85
12/22/13 adjust the exit target to $98.00
11/24/13 new stop loss @ 83.75
11/17/13 new stop loss @ 82.75
11/10/13 new stop loss @ 81.75
10/20/13 new stop loss @ 79.40
10/13/13 investors might want to take profits on our 2015 calls, which have doubled in value.
...please see earlier newsletter for prior comments...

Current Target:$ 98.00
Current Stop loss: 87.45
Play Entered on: 05/07/13
Originally listed on the Watch List: 05/04/13



Helmerich & Payne, Inc. - HP - close: 87.17

Comments:
02/09/14: HP looks relatively unscathed from the market's recent turmoil. Shares bounced at their rising 40-dma, which was support in late November. The next challenge for bulls is pushing HP past the $90.00 level. I am not suggesting new positions at this time.

- Suggested Positions -
DEC 05, 2013 - entry price on HP @ 81.00, option @ 5.60*
symbol: HP1517a90 2015 JAN $90 call - current bid/ask $ 7.00/7.40

02/03/14 new stop loss @ 82.45
01/26/14 new stop loss @ 81.40
01/12/14 new stop loss @ 79.65
12/29/13 new stop loss @ 77.45
12/05/13 trade opens with HP opening at $81.00
*option entry price is an estimate since the option did not trade at the time our play was opened.
12/04/13 HP closes at $80.97, above our suggested trigger @ 80.25
11/17/13 strategy change: Wait for HP to close above $80.25 and then buy calls the next day with a stop loss at $74.75. Our new long-term target is $95.00. New option strike at 2015 $90 call

Current Target:$ 95.00
Current Stop loss: 82.45
Play Entered on: 12/05/13
Originally listed on the Watch List: 10/27/13


Hospira Inc. - HSP - close: 42.89

Comments:
02/09/14: HSP held support near the $42.00 level just as we expected. Unfortunately the rebound from this support was a bit muted. Investors could be waiting for HSP's earnings report. The company will announce on February 12th before the opening bell (Wednesday). I would be tempted to buy calls here but the smarter move is to probably wait and see how HSP reacts following its earnings report. More conservative investors might want to raise their stop loss closer to $41.00 or even the 50-dma near $41.80.

Earlier Comments:
Our long-term target is $49.75. You may want to aim higher since the point & figure chart is forecasting at $69 target but I do see potential resistance at $50.00.

FYI: Earnings are scheduled for February 12th.

- Suggested Positions -
FEB 03, 2014 - entry price on HSP @ 43.00, option @ 4.60
symbol: HSP1517a45 2015 JAN $45 call - current bid/ask $ 3.50/4.00

02/03/14 triggered at $43.00

Current Target:$ 49.75
Current Stop loss: 39.90
Play Entered on: 02/03/14
Originally listed on the Watch List: 01/26/14


JPMorgan Chase & Co. - JPM - close: 56.62

Comments:
02/09/14: The market's volatility last week pushed JPM low enough to pierce its long-term trend line of higher lows (best seen on the weekly chart). Fortunately JPM and the financial sector bounced. Shares are now testing short-term resistance near $57 and its 50-dma. I am not suggesting new positions at this time. We will raise our stop loss to $53.65.

- Suggested Positions -
(2014 call exit on Monday, December 23rd)
JUN 24, 2013 - entry price on JPM @ 50.25, option @ 1.60
symbol: JPM1418a55 2014 JAN $55 call - exit $3.05 (+90.6%)

- or -

JUN 24, 2013 - entry price on JPM @ 50.25, option @ 3.80
symbol: JPM1517a55 2015 JAN $55 call - current bid/ask $ 5.15/5.25

02/09/14 new stop loss @ 53.65
01/26/14 a dip or a bounce near $54.00 could be used as a new bullish entry point
01/05/14 new stop loss @ 52.90
12/23/13 planned exit for 2014 calls, option @ +90.6%
12/22/13 prepare to exit the 2014 calls on Monday morning, Dec. 23rd
12/01/13 adjust exit target for the 2014 calls to exit when JPM hits $59.50
(see older updates for earlier comments)
Current Target: exit 2015 calls when JPM hits $64.00
Current Stop loss: 53.65
Play Entered on: 06/24/13
Originally listed on the Watch List: 05/25/13


Level 3 Communications - LVLT - close: 36.75

Comments:
02/09/14: LVLT was a big winner last week. The company reported earnings on the 5th and the results were good enough to send shares soaring. The rally stalled at its trend line of resistance. After a +18.5% gain in the last four days I am suggesting an immediate exit!

Prepare to exit positions on Monday morning, Feb. 10th.

- Suggested Positions -
OCT 31, 2013 - entry price on LVLT @ 29.39, option @ 4.40*
symbol:LVLT1517a30 2015 JAN $30 call - current bid/ask $ 8.30/9.20

02/09/14 prepare to exit immediate, Feb. 10th at the opening bell
01/12/14 new stop loss @ 29.75
12/29/13 new stop loss @ 28.75
12/08/13 new stop loss @ 27.75
11/24/13 new stop loss @ 26.75
*option entry price is an estimate since the option did not trade at the time our play was opened.

Chart of LVLT:
Current Target: $39.00
Current Stop loss: 29.75
Play Entered on: 10/31/13
Originally listed on the Watch List: 10/20/13


QUALCOMM Inc. - QCOM - close: 74.41

Comments:
02/09/14: QCOM held up pretty well. Traders bought the dip near short-term support at $72.00 and QCOM produced a gain for the week. Shares look poised to run tow their recent high near $76.00. While I'm long-term bullish on QCOM I am a bit hesitant to launch new positions.

- Suggested Positions -
NOV 15, 2013 - entry price on QCOM @ 71.34, option @ 4.90
symbol: QCOM1517a75 2015 JAN $75 call - current bid/ask $5.45/5.60

01/19/14 new stop loss @ 69.45
12/08/13 new stop loss @ 67.75
11/15/13 trade opens. QCOM @ 71.34
11/14/13 QCOM closes above entry trigger (above 70.50)

Current Target: $85.00
Current Stop loss: 69.45
Play Entered on: 11/15/13
Originally listed on the Watch List: 11/03/13


Starbucks - SBUX - close: 74.04

Comments:
02/09/14: SBUX gave us a bit of a scare on Monday when it pierced the $70.00 level (and triggered our play on the move lower). Fortunately the stock immediately bounced on Tuesday and ended the week with big gains. The rally back above $70 and back above its 200-dma is positive.

The $76.00 level and its 50-dma could both be overhead resistance. If you're looking for a new entry point I would suggest waiting for a dip back toward $72 or its 200-dma and then buy calls on a bounce. Please note I am moving the stop loss up to $67.90.

- Suggested Positions -
FEB 03, 2014 - entry price on SBUX @ 70.50, option @ 4.65
symbol: SBUX1517a75 2015 JAN $75 call - current bid/ask $6.50/6.55

- or -

FEB 03, 2014 - entry price on SBUX @ 70.50, option @ 6.75*
symbol: SBUX1615a80 2016 JAN $80 call - current bid/ask $8.15/8.45

02/09/14 new stop loss @ 67.90
02/03/14 triggered at $70.50
*option entry price is an estimate since the option did not trade at the time our play was opened.

Current Target: $82.00
Current Stop loss: 67.90
Play Entered on: 02/03/14
Originally listed on the Watch List: 01/05/14


Wells Fargo & Co. - WFC - close: 45.37

Comments:
02/09/14: The two-day rebound in WFC left shares with a fractional gain for the week. The close back above $45.00 and its 50-dma is technically encouraging. I would be tempted to launch new bullish positions if we see WFC close above $46.00.

- Suggested Positions -
DEC 26, 2013 - entry price on WFC @ 45.50, option @ 1.50
symbol: WFC1517a50 2015 JAN $50 call - current bid/ask $ 1.31/1.36

-- or --

DEC 26, 2013 - entry price on WFC @ 45.50, option @ 2.95*
symbol: WFC1615a50 2016 JAN $50 call - current bid/ask $ 2.72/2.89

01/19/14 new stop loss @ 42.90
12/26/13 trade opens with WFC @ $45.50
*option entry price is an estimate since the option did not trade at the time our play was opened.
12/24/13 WFC closed @ 45.39, above our trigger at $45.25

Current Target: Exit WFC hits $54.50
Current Stop loss: 42.90
Play Entered on: 12/26/13
Originally listed on the Watch List: 12/08/13



CLOSED Plays


Alaska Air Group - ALK - close: 77.82

Comments:
02/09/14: The stock market's sell-off early last week was too much for our new ALK trade. Shares hit our stop loss at $72.75 on Tuesday morning. ALK's rebound looks promising. The stock's long-term trend of higher lows remains in place. I would keep this stock on your watch list. The next challenge for the bulls is resistance near $80.00.

- Suggested Positions -
FEB 03, 2014 - entry price on ALK @ 75.25, option @ 7.90
symbol: ALK1517a80 2015 JAN $80 call - exit $6.80 (-13.9%)

02/04/14 stopped out @ 72.75
*option exit price is an estimate since the option did not trade at the time our play was closed.
02/03/14 triggered @ 75.25

Chart of ALK:

Current Target: $95.00
Current Stop loss: 72.75
Play Entered on: 02/03/14
Originally listed on the Watch List: 01/26/14


Avago Technologies - AVGO - close: 56.57

Comments:
02/09/14: Last week it looked like AVGO may have peaked. Our plan was to exit on Tuesday morning, Feb. 4th to lock in potential gains. Since then AVGO has rebounded and is nearing overhead resistance in the $57.00 area.

Our trade closed on Feb. 4th at $53.51 thanks to a gap higher that morning.

- Suggested Positions -
NOV 11, 2013 - entry price on AVGO @ 44.44, option @ 3.60
symbol: AVGO1517a50 2015 JAN $50 call - exit $7.50* (+108.3%)

02/04/14 planned exit this morning
*option exit price is an estimate since the option did not trade at the time our play was closed.
02/03/14 prepare to exit immediately (Tuesday morning, Feb. 4th)
01/19/14 new stop loss @ 49.75
More conservative investors may want to lock in profits now with the bid on our option at $9.30
01/12/14 new stop loss @ 47.25
12/29/13 new stop loss @ 45.90
12/22/13 new stop loss @ 44.90, adjust exit target to $58.50
12/08/13 new stop loss @ 42.40
...see earlier updates for older comments...

Chart of AVGO:

Current Target: $58.50
Current Stop loss: 49.75
Play Entered on: 11/11/13
Originally listed on the Watch List: 09/22/13


Deer & Co - DE - close: 86.56

Comments:
02/09/14: After all the volatility this past week DE actually managed a gain for the week. Unfortunately the declined on Tuesday morning were too much and DE hit our stop loss at $84.40.

I am still bullish on DE and would keep it on your watch list. The company reports earnings on February 12th. Let's look at it again after it reports.

- Suggested Positions -
DEC 10, 2013 - entry price on DE @ 87.26, option @ 5.85*
symbol: DE1517a90 2015 JAN $90 call - exit $3.85 (-34.1%)

02/04/14 stopped out
01/05/14 new stop loss @ 84.40
12/22/13 new stop loss @ 83.75
12/10/13 trade opens. DE @ 87.26
*option entry price is an estimate since the option did not trade at the time our play was opened.
12/09/13 DE closed @ 87.20, above our suggested entry of a close above $86.25

Chart of DE:

Current Target: DE @ 98.50
Current Stop loss: 84.40
Play Entered on: 12/10/13
Originally listed on the Watch List: 12/08/13


HollyFrontier Corp. - HFC - close: 44.97

Comments:
02/09/14: The sell-off in HFC continued midweek and shares hit our stop loss at $44.75 on Tuesday. Even with Friday's bit +2.6% bounce HFC still closed down for the week and marked its fourth weekly loss in a row.

Earlier Comments:
NOTE: The options for HFC have changed. Due to a 50-cent special dividend the option strikes have all been adjusted down by 50 cents. Our listed option strike 2015 January $49.50 has become $49.00.

- Suggested Positions -
NOV 26, 2013 - entry price on HFC @ 47.17, option @ 5.00*
symbol: HFC1517a49 2015 JAN $49 call - exit $3.05** (-39.0%)

02/04/14 stopped out
**option exit price is an estimate since the option did not trade at the time our play was closed.
01/12/14 new stop loss @ 44.75
12/15/13 new stop loss @ 43.75
*option entry price is an estimate since the option did not trade at the time our play was opened.

Chart of HFC:

Current Target: HFC @ 59.00
Current Stop loss: 44.75
Play Entered on: 11/26/13
Originally listed on the Watch List: 11/24/13


Illinois Tool Works Inc. - ITW - close: 79.68

Comments:
02/09/14: ITW hit our stop loss at $76.85 right near the closing bell on Monday, Feb. 3rd. The stock dipped again on Tuesday morning and then reversed to followed it with a four-day bounce. The next hurdle for ITW bulls is technical resistance at the 50-dma. Readers may want to keep ITW on their watch list.

- Suggested Positions -
JAN 24, 2014 - entry price on ITW @ 80.66, option @ 3.65*
symbol: ITW1517a85 2015 JAN $85 call - exit $2.40 (-34.2%)

02/03/14 stopped out at $76.85 (after the newsletter was sent)
01/24/14 trade opened on gap down at $80.66. Trigger was $80.75
*option entry price is an estimate since the option did not trade at the time our play was opened.
01/12/14 adjust the buy-the-dip entry point to $80.75 (from 80.25)

Chart of ITW:

Current Target: ITW @ 95.00
Current Stop loss: 76.85
Play Entered on: 01/24/14
Originally listed on the Watch List: 12/29/13


Motorola Solutions - MSI - close: 64.60

Comments:
02/09/14: After MSI's plunge on Monday and its breakdown below the 100-dma we wanted to exit immediately. We closed this trade on Tuesday morning with MSI opening at $63.00. Since then the market's widespread bounce has lifted MSI back above short-term resistance near its 10-dma and 100-dma. I am not suggesting new positions.

- Suggested Positions -
DEC 23, 2013 - entry price on MSI @ 66.75, option @ 4.10
symbol: MSI1517a70 2015 JAN $70 call - exit $2.16 (-47.3%)

- or -

DEC 23, 2013 - entry price on MSI @ 66.75, option @ 5.10
symbol: MSI1615a75 2016 JAN $75 call - exit $2.90* (-43.1%)

02/04/14 planned exit this morning
*option exit price is an estimate since the option did not trade at the time our play was closed.
02/03/14 prepare to exit immediate (on Tues. Feb 4th)
01/19/14 adjust stop to $62.45
01/12/14 new stop loss @ 62.75

Chart of MSI:
Current Target: Exit when MSI trades in the $80-90 zone.
Current Stop loss: 62.45
Play Entered on: 12/23/13
Originally listed on the Watch List: 12/08/13


SanDisk - SNDK - close: 71.61

Comments:
02/09/14: The market's recent volatility was too much for our SNDK trade. Shares hit our stop loss on Wednesday when they pierced support at the 100-dma and tagged a new multi-week low. Our stop was hit at $67.00. Unfortunately, SNDK immediately bounced and is up three days in a row and above all its key moving averages. I would keep SNDK on your watch list. If the market correction resumes then a dip near $65 or its 200-dma could be a new entry point.

Earlier Comments:
The plan was to start with small positions.

- Suggested (small) Positions -
JAN 13, 2014 - entry price on SNDK @ 72.51, option @ 5.80
symbol: SNDK1517a80 2015 JAN $80 call - exit $3.55* (-38.7%)

02/05/14 stopped out
*option exit price is an estimate since the option did not trade at the time our play was closed.
01/13/14 trade opens. SNDK @ 72.51

Chart of SNDK:

Current Target: $90.00
Current Stop loss: 67.00
Play Entered on: 01/13/14
Originally listed in the New Plays 01/12/14



Watch

Medical Devices & Homebuilders

by James Brown

Click here to email James Brown

Editor's Note:

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:

PVA, ANV, CRM, UPL, SCCO, STZ, ZNGA, ADBE, ROVI, LMT, BA, GD, NOC, RTN, ATK, SWI, MGM, STX, WDC, DNKN, BKW, ALK, DE, CAT, KMB, CL, ESRX, BHI, URI, TIF, DECK, PSX, SYK, FB, GE, MA,



New Watch List Entries

BSX - Boston Scientific

RYL - Ryland Group


Active Watch List Candidates

A - Agilent Tech

KBH - KB Home


Dropped Watch List Entries

GILD has graduated to our active play list.

MU has been moved to our new play section.



New Watch List Candidates:


Boston Scientific - BSX - close: 13.10

Company Info

BSX is in the healthcare sector. The company makes medical devices. The stock has fallen a long way from its 2004 highs near $45.00 a share. Momentum reversed last year with a rally from $5.00 in late 2012 to $12.00 in late 2013. Momentum has resumed this year with BSX climbing to new multi-year highs.

BSX reported earnings this past week that beat estimates by eight cents and managed guided higher. I suspect the up trend will resume if the market cooperates. More aggressive investors could buy calls right here. I am suggesting we wait for BSX to close above $13.50 and then buy calls the next morning. We'll start with a stop loss at $11.90. More conservative traders may want to wait for BSX to close above $14.00 before considering new positions.

If triggered our long-term target is the $17.00-18.00 area. The point & figure chart is much more bullish and forecasting at $32.50 target.

Breakout trigger: Wait for a close above $13.50
then buy calls the next morning, stop loss @ 11.90

BUY the 2015 Jan $15 call (BSX1517a15) current ask $0.97

- or -

BUY the 2016 Jan $15 call (BSX1615a15) current ask $1.80

Chart of BSX:

Originally listed on the Watch List: 02/09/14


Ryland Group - RYL - close: 45.06

Company Info

RYL is another homebuilder, like KBH, which is already on our watch list. However, RYL looks stronger than RYL and likely to breakout past key resistance sooner than KBH will.

2013 was a pretty good year for the residential real estate market. It wasn't so great for the homebuilders. Many of the homebuilder stocks spent a good portion of the year consolidating sideways and working off the excesses of 2012. That consolidation looks like it could be over soon for shares of RYL.

Shares of RYL weathered the market's recent storm very well. The latest new home sales figures have not been that exciting but this data hasn't stopped the rally in homebuilder stocks either. Currently shares of RYL are hovering at resistance near $45.00. The recent high was $45.44. I am suggesting we wait for RYL to close above $45.75 and then buy calls the next day. More aggressive investors may want to just jump in early right now. If we are triggered above $45.75 I am suggesting a stop loss at $41.25.

The $50.00 level was resistance back in early 2013 and will likely be resistance again. However, we are aiming for the $55-60 range. The point & figure chart for RYL is forecasting a long-term target of $64.00.

Breakout trigger: Wait for a close above $45.75
then buy calls the next day. Stop loss at $41.25.

BUY the 2015 Jan $50 call (RYL1517a50) current ask $4.90

Chart of RYL:

Originally listed on the Watch List: 02/09/14


Active Watch List Candidates:



Agilent Technologies - A - close: 59.42

Comments:
02/09/14: Shares of A have delivered a pretty strong bounce after testing support near $56.00. That's too bad when shares came so close to hitting our buy-the-dip trigger at $55.50.

A is due to report earnings on Feb. 13th. That's Thursday. The stock could always see some post-earnings volatility. I am actually moving our buy-the-dip trigger lower to $55.00. If shares do not hit our entry point on Friday then we'll re-evaluate our entry strategy next weekend.

Earlier Comments:
If triggered, start with a stop loss at $52.40. Our long-term target is $74.00.

FYI: A does plan on spinning off its electronic measurement company, Keysight Technologies, toward the end of 2014.

Buy-the-Dip trigger: $55.00

BUY the 2015 Jan $60 call (A1517a60)

- or -

BUY the 2016 Jan $65 call (A1615a65)

02/09/14 adjust the entry trigger to $55.00 (from $55.50)

Originally listed on the Watch List: 01/26/14


KB Home - KBH - close: 18.92

Comments:
02/09/14: KBH and the rest of the homebuilders held up reasonably well during the market's recent sell-off. Shares bounced at $18.15 near its 30-dma. More aggressive investors might want to consider buying calls now on this rebound. We're suggesting traders wait for a close above potential round-number resistance at $20.00. If triggered our long-term target is $25.00.

Breakout trigger: Wait for a close above $20.00,
then buy calls the next day with a stop at $18.45.

BUY the 2015 Jan $20 call (KBH1517a20)

Originally listed on the Watch List: 02/03/14