Option Investor
Newsletter

Daily Newsletter, Sunday, 5/4/2014

Table of Contents

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

Leaps Trader Commentary

Markets Have A Lot To Digest

by James Brown

Click here to email James Brown

Stocks endured a torrent of headlines and economic data last week and managed to post gains in spite of the growing conflict in Ukraine. There was an increase in M&A activity in the healthcare sector. The FOMC cut their QE program by another $10 billion a month. Jobs in the U.S. grew more than expected. Earnings data continues to stream in. Yet the focus remains on Ukraine. After traders bought the market's dip last Monday, equities saw a three-day bounce before stalling on Thursday and Friday. Housing and biotechs were some of the market's best performers last week while commodities like oil, silver, and gold all posted losses.

Economic Data

There was a steady parade of economic data for the market to digest. Factory orders rose +1.1% in March after a +1.5% gain in February. The Conference Board's Consumer Confidence Index slipped form 83.9 in March to 82.3 in April. The present situation component of the consumer confidence survey slipped from 82.5 in March to 78.3 in April. Personal income rose +0.5% in March following a +0.4% gain in February while personal spending came in better than expected with a +0.9% gain in March following a +0.5% gain in February.

The Chicago PMI data showed that manufacturing activity for the region rose from 55.9 in March to 63.0 in April. This was the best reading since October last year. The National ISM manufacturing index improved from 53.7 in March to 54.9 in April. Numbers above 50.0 for these surveys suggest economic growth. The New York area's ISM number only rose +0.3 points to 627.4. It was the smallest monthly gain in almost a year. Construction spending edged higher with +0.2% growth in March following a downwardly revised -0.2% drop in February. Meanwhile the Case-Shiller 20-city home price index showed home prices rose 13.2% in February from a year ago.

The Federal Reserve held a two-day meeting last week. As expected the Fed left rates unchanged and lowered their QE purchases by another $10 billion to $45 billion a month. The Fed's statement did reinforce the idea that the U.S. economy's slowdown in the first quarter was due to "adverse weather conditions". This is a theme we've been hearing for weeks and probably helped the market shrug off the terrible Q1 GDP numbers. Current estimates put U.S. GDP growth for the fourth quarter of 2013 at +2.6%. The preliminary estimate for the first quarter was a very anemic +0.1%. Early numbers can be volatile and it will likely be revised but will it be revised lower or higher? That is a pretty significant drop.

The ADP Employment report said private firms hired +220,000 new people in April. That leads us to Friday's nonfarm payroll report (a.k.a. the jobs report). Economists were expecting about +210,000 new jobs in April for this report. April's number was +288,000. March's report was revised up from +192K to +203K. February's data was revised higher from +197K to +222K. Put it all together and we had a pretty healthy number compared to the recent trend.

At the same time the U.S. unemployment plunged from 6.7% to 6.3%. That's the biggest one-month drop in three years and the lowest level since September 2008. Why the big drop? We had another huge surge down in the U.S. labor force, which saw another 806,000 people leave the work force. The U.S. labor force participation rate is at the lowest levels since 1978. This does not imply a strong, growing economy. A Bloomberg article referred to divergence between rising jobs and falling participation as "one of the biggest conundrums of the U.S. economic expansion."

Another challenge for the economy is the quality of jobs added. Comstock Partners pointed out that the lowest paying jobs "accounted for 22% of the job losses in the recession, but 44% of the jobs gained back in the recovery. Given these numbers, it is no wonder that consumer spending has been so restrained during the last few years."

Overseas Data

Economic data overseas was generally benign. Most global markets were closed on May 1st for Labor Day, also known as International Workers' Day. In Europe the Eurozone Consumer Confidence index improved slightly from -9.3 to -9.0. Eurozone manufacturing PMI inched higher from 53.3 to 53.4. Germany's manufacturing PMI ticked lower from 54.2 to 54.1. French manufacturing PMI advanced from 50.9 to 51.2. The U.K.'s manufacturing PMI rose from 55.8 to 57.3. Numbers above 50.0 suggest economic growth. Great Britain also said its GDP rose +0.8% for the quarter. Meanwhile Eurozone unemployment was unchanged at 11.8%.

In Japan the country saw a surge of activity ahead of a sales tax increase that took affect on Aril 1st. Household spending rose +7.2% in March while retail sales in March gushed +11.0%, showing the biggest jump since March 1997. One has to wonder how much Japan has pulled forward retail sales to avoid the tax increase and will now see a slowdown in activity. Japan's PMI dipped from 53.9 to 49.4. That's the first time their manufacturing activity has hit contraction territory in 14 months. Meanwhile the Bank of Japan left interest rates unchanged.

Nearby China said its manufacturing PMI improved from 50.3 to 50.4. Home prices in China, across its major cities, rose for the 23rd month in a row.

Ukraine-Russian Conflict

Sadly the situation in Ukraine is getting worse and getting worse quickly. Some are calling it a "civil war" in Ukraine as pro-Ukraine forces fight pro-Russian forces who want to secede from Ukraine. Ukraine's military has started taking back several towns and separatist occupied buildings in eastern Ukraine and the rebels are fighting back. People are dying on both sides. Two Ukrainian helicopters have been shot down. One was allegedly hit by a surface to air missile. Now where would Ukrainian rebels get one of those?

As you know Europe and the United States are blaming Russia for this conflict in Ukraine. Russia used unmarked soldiers to seize the Crimean region and then fostered anti-Ukraine sentiment until the people voted to leave Ukraine. Now they're taking a similar approach in eastern Ukraine. The Kiev government and the west claim to have proof that Russia has forces, dressed as Ukraine civilians, leading the rebellion.

The Ukraine government has been patient with protestors who seized government buildings and put up roadblocks in several eastern Ukrainian towns in recent weeks. When the militants seized U.N. observers last week the Ukrainians launched a more forceful approach to deal with the rebels. Now it appears the region is in open conflict.

The stock market panicked a bit on Friday when Russian President Putin called for an emergency meeting of the U.N. Security Council over the situation in Ukraine. Investors feared this was as preliminary step before he sent Russian troops into Ukraine as "peacekeepers". Russia's envoy to the U.N. was met with rebuke by some of the security council members for Russia's bogus pleas for help. The U.S. is said to have intercepted radio transmissions between Russia and the Ukraine separatists, which should remove any doubt over who is behind the Ukrainian rebellion.

The situation does not bode well for the stock market or the Russian or European economies. If Russian troops do cross the Ukraine border then the U.S. and EU will launch even stronger sanctions against Russia. Russia has promised to counter with their own sanctions against European and American companies. These sanctions could seriously hurt Russia's and Europe's economies who do a lot of business with each other. The equity markets would likely drop sharply on a Russian invasion into Ukraine and the bond market would rally as investors seek the safety of U.S. treasuries.

Germany Chancellor Angela Merkel was at the White House on Friday for a joint press conference with President Obama urging Russia to back down. Merkel and Germany are in a tough position. They do a lot of business with Russia and Germany imports a significant portion of their natural gas and oil from Russia. If the situation escalates Russia could hike up the price of energy or cut if off altogether. A recent New York Times article reported that Germany is Russia's third largest export market at $35.6 billion a year. Germany is also Russia's second largest import partner at $38.3 billion.





Major Indices:

The S&P 500's bounce off last Monday's low carried it toward resistance in the 1885-1890 area. The big cap index added +0.95% for the week, pushing its year to date gains to +1.7%. The long-term trend evident on the weekly chart below is still higher. Unfortunately short-term the momentum seems to be rolling over.

The 1890-1900 zone is overhead resistance. A breakout past 1900 would do a lot to inspire investor confidence and likely spark a significant amount of short covering. However, any such breakout would need to be more than just a few points past the 1900 mark. If the index does roll over then it could find support at 1850, 1840 (near its 100-dma), and the 150-dma near 1810.

chart of the S&P 500 index:

Weekly chart of the S&P 500 index:

The NASDAQ delivered a +1.19% gain for the week thanks in part to a decent bounce in the biotech stocks. Yet the rebound in the NASDAQ composite stalled at its trend line of lower highs and its simple 30-dma. This doesn't really inspire any confidence. The 100-dma and 50-dma are both overhead and likely resistance as well.

A breakout past 4200 could change investor sentiment on the NASDAQ. If the current bounce does roll over then we're probably looking at the NASDAQ retesting 4000 or its simple 200-dma.

chart of the NASDAQ Composite index:

The small cap Russell 2000 index underperformed its large cap peers with a +0.5% gain for the week. The $RUT is still down nearly 3% for the year. The bounce in the $RUT has also stalled near its trend of lower highs. There is additional overhead technical resistance in the 1150-1160 zone.

If this rebound rolls over we could see this index breakdown below support at its 200-dma and the 1100 level. A drop past the February intraday low of 1,082 probably signals a major correction for the $RUT.

The 2014 closing high was 1,187 on March 4th. A -10% correction would be a drop to 1,068.

chart of the Russell 2000 index

I normally do not discuss the Dow Jones Industrial Average since it is only 30 stocks. This past week the $INDU did set a new all-time closing high on April 30th at 16,580. The index appears to have resistance in the 16,600-16,625 zone. A close above 16,625 could boost investors confidence in spite of the narrow focus of the index, especially since financial media likes to quote the Dow Industrials as "the market".

chart of the Dow Jones Industrial Average



Economic Data & Event Calendar

After the rush of economic data last week this coming week looks pretty barren. The only market-mover on the list is probably the ECB decision and Draghi's press conference and that seems unlikely. The HSBC PMI data for China will be released on Sunday, May 4th and that has influenced the market in the past.

We are still in the midst of earnings season although the peak of announcements has passed. These reports will move individual stocks but are unlikely to move the broader market.

The real event for the market will be Ukraine and how that conflict develops.

Economic and Event Calendar

- Monday, May 05 -
ISM Services index

- Tuesday, May 06 -
Eurozone Services PMI
Eurozone Retail sales

- Wednesday, May 07 -
German factory orders

- Thursday, May 08 -
Weekly Initial Jobless Claims
ECB interest rate decision
ECB President Draghi's press conference

- Friday, May 09 -
Wholesale inventory data

Additional Events to be aware of:

May 26 - U.S. market closed for Memorial Day


Looking Ahead:

It could be an interesting week for stocks with the major U.S. indices setting at or near resistance. Do stocks breakout higher or do they roll over? The answer depends on Ukraine and given the escalation of violence in Ukraine I suspect we will see stocks roll over.

Russia has amassed an army of soldiers, tanks and aircraft on Ukraine's borders in recent weeks and Putin is just waiting for an excuse to send them into Ukraine to "protect" Russian-speaking people from the "evil" Ukraine government. While it is highly unlikely that the U.S. or Europe will get involved in a shooting war with Russia over Ukraine the economic sanctions that sprout from such an event would hurt international trade.

A Russian invasion of eastern Ukraine is already considered an inevitable event for some political pundits. Eastern European countries are growing nervous. I mentioned last week that Estonia, Latvia, and Lithuania were former Soviet states and now members of NATO. Any attack on a NATO country is supposed to spark a response from all 28 NATO countries but that doesn't necessarily make these Russian neighbors any less nervous.

Several NATO members are already flying defensive air patrols along NATO's border. What happens if one of them is accidentally shot down by the Russians? How will Russian President Putin respond if NATO announces new military bases in Estonia, Latvia and Lithuania? Analysts are already trying to guess what Russia's next move is after Ukraine? How far will Putin's land grab go?

The Washington Post and the Royal United Services have produced a detailed map of Russian forces that certainly make it look like Putin is preparing to invade Ukraine. You can view map of Russia's military on the Ukraine border (here).

Geopolitical tensions will be making headlines this week but market internals are also a factor. We've commented on the record high margin debt levels before. The last two times we saw margin debt retreat significantly from record highs it signaled a market top. It would appear that margin debt is retreating again so it's one more warning signal for investors to be aware of.

We also want to keep an eye on the bond market. I've been cautioning readers that if the yield on the 10-year U.S. bond falls below the 2.6% or its February 2014 low of 2.579% it could be a major warning for the equity market. The recent violence in Ukraine has helped produce a flight of quality into U.S. bonds and the yield has sunk to 2.59% as of Friday's close. Bonds look poised for a breakout rally, which will pull yields lower. Art Cashin updated his warning line to watch as a drop below 2.5% yield.

chart of the 10-year U.S. bond yield

Let's recap. We have a stock market that has bounced and stalled at resistance. Large cap indices are only a few points away from new highs while the NASDAQ and Russell 2000 remain in an intermediate down trend. That could be signaling that money managers want to keep their investments in liquid large caps so they can get out more quickly. Last week there were headlines that hedge funds had large bearish bets on the small caps. The U.S. GDP growth has plunged from +2.6% to +0.1%. Many blame this on the weather even though that excuse may not be entirely accurate. Job growth has accelerated but that has been blamed on a snap back from the cold winter months. At the same time the U.S. labor participation rate has fallen to levels not seen since 1978. The calendar has just crossed into the worst six months of the year time frame. We're approaching midterm elections, where stocks historically tend to be more volatile ahead of the election. China's economy is slowing down. Russia appears ready to invade Ukraine, which is facing a "civil war" led by separatists guided and armed by Russia.

That is a lot for the market to digest. If you forced me to predict the market's direction I would expect the NASDAQ and Russell 2000 to retest their April lows. If that occurs the S&P 500 would likely follow them lower. If somehow Russia does back down then a breakout to new highs in the S&P 500 and Dow Industrials could fuel a significant market-wide rally initially powered by short covering.

James







Portfolio

Portfolio Update

by James Brown

Click here to email James Brown


Current Portfolio


Portfolio Comments:

The S&P 500 and the Dow Industrials are testing resistance and only a few points away from new record highs. At the same time the NASDAQ and the Russell 2000 index are both still in an intermediate down trend.

Our plan was to close BBT on Monday, April 28th.

CBI and WDC hit our stop loss.

I have updated the stop loss on HES.

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

Keep A Cautious Eye On Ukraine

by James Brown

Click here to email James Brown


- New Trades -


Editor's Note:

(May 04, 2014)

Stock market investors should remain cautious. The major U.S. indices have bounced to resistance and stalled as violence flares up in eastern Ukraine. If Russia sends troops across Ukraine's borders it could spark a sell-off in equities.

That doesn't mean we don't see opportunities. Tonight we are adding three new candidates to the watch list. Traders may want to start with small positions to limit risk just in case Russia does cause a decline. I am also updating my radar screen of stocks to watch for potential entry points in the coming weeks.

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. In no particular order:

DPZ, PKG, YUM, PEP, AIG, Z, ODFL, NVS, HOG, TIF, V, MA, PAY, GD, LMT, ATK, CP, GBX, TRN, HAL, PBR, DFS, AA, TTWO, CR, ALK, BKW, GE,



Play Updates

Stocks Struggle With Gains

by James Brown

Click here to email James Brown

Editor's Note:

CLX has graduated from our watch list to our active play list.

I am concerned that the market could be vulnerable to selling pressure if the situation in Ukraine worsens. Investors should double check their stop loss placement.


Closed Plays


Our plan was to close BBT on Monday, April 28th.
CBI and WDC hit our stop loss.



Play Updates


Big Lots Inc. - BIG - close: 39.79

Comments:
05/04/14: BIG is still slowly building on its pattern of higher lows. Shares look poised to breakout past $40.00 if the market will cooperate. More conservative investors may want to wait for a close above $40.00 before initiating new bullish positions here.

- Suggested Positions -
APR 22, 2014 - entry price on BIG @ 39.29, option @ 4.15*
symbol: BIG1517a40 2015 JAN $40 call - current bid/ask $3.90/4.30

04/22 trade opens. BIG opened at $39.29
*option entry price is an estimate since the option did not trade at the time our play was opened.
04/21 BIG closed above our trigger at $39.25

Current Target: BIG @ 47.00
Current Stop loss: 35.75
Play Entered on: 04/22/14
Originally listed on the Watch List: 04/13/14


Caterpillar Inc. - CAT - close: 105.01

Comments:
05/04/14: CAT managed to eke out another weekly gain. That puts its winning streak at three up weeks in a row and up six out of the last seven weeks. The stock should find short-term support near $104 and near $100 if the market sees any pullback.

Earlier Comments:
Our long-term target is the $115-125 zone. Currently CAT's point & figure chart is bullish with a $126 target.

- Suggested Positions -
APR 03, 2014 - entry price on CAT @ 101.92, option @ 3.50*
symbol: CAT1517a110 2015 JAN $110 call - current bid/ask $4.05/4.20

- or -

APR 03, 2014 - entry price on CAT @ 101.92, option @ 7.40*
symbol: CAT1615a110 2016 JAN $110 call - current bid/ask $7.95/8.25

04/27/14 new stop @ 98.45
04/03/14 trade opens. CAT @ 101.92
*option entry price is an estimate since the option did not trade at the time our play was opened.
04/02/14 CAT meets our entry trigger with a close above $101.00

Current Target: CAT @ 115.00-125.00 zone
Current Stop loss: 98.45
Play Entered on: 04/03/14
Originally listed on the Watch List: 03/30/14


The Clorox Co. - CLX - close: 89.58

Comments:
05/04/14: CLX is a watch list candidate that has graduated to our active play list. The plan was to buy calls if shares closed above $91.50. CLX tends to be viewed as a "safe haven" trade due to its recession proof product line and dividend yield. Investors have been buying dips at the trend of higher lows for weeks.

CLX met our entry point requirement on April 28th with a close at $91.57. Our trade opened on the 29th at $91.74. I cautioned readers last week that CLX could be volatile following its earnings report. Sure enough, after CLX reported earnings on May 1st the stock plunged to $87.50. This pierced the 50-dma, the 200-dma, additional support but managed a rebound off its intraday low. The market reacted to a disappointing report both the top and bottom line missed Wall Street's estimates. CLX management then issued lowered guidance for 2014 and 2015. Now the question is will CLX fill the gap and reverse lower or will it continue its larger trend higher?

I would wait for a new close above $91.00 before initiating new positions.

Earlier Comments:
Our long-term target is the $100-110 zone. The point & figure chart is bullish with a $128 target. I would hesitate to buy the 2016 calls because the spreads are so wide but over time they should narrow.

- Suggested Positions -
APR 29, 2014 - entry price on CLX @ 91.74, option @ 2.70*
symbol: CLX1517a95 2015 JAN $95 call - current bid/ask $1.70/2.05

- or -

APR 29, 2014 - entry price on CLX @ 91.74, option @ 2.80*
symbol: CLX1615a100 2016 JAN $100 call - current bid/ask $1.75/2.45

05/01/14 CLX drops on disappointing earnings news and lowered guidance.
04/29/14 trade opened. CLX opens at $91.74
04/28/14 CLX closes above $91.50, our suggested trigger

Chart of CLX:

Current Target: CLX @ 110.00-115.00 zone
Current Stop loss: 86.90
Play Entered on: 04/29/14
Originally listed on the Watch List: 04/20/14


The Walt Disney Co. - DIS - close: 80.31

Comments:
05/04/14: Shares of DIS bounced off technical support at its rising 100-dma again. The stock was showing relative strength on Friday with a +0.9% gain and a breakout past potential resistance at $80.00 and its 50-dma. This coming week could be volatile for the stock as investors react to earnings.

DIS is scheduled to report earnings on May 6th, after the closing bell. Analysts are looking for a profit of 96 cents a share. I am not suggesting new positions at this time. More conservative investors may want to take profits before DIS announces results to avoid any post-earnings drop.

- Suggested Positions -
OCT 23, 2013 - entry price on DIS @ 68.81, option @ 3.70
symbol: DIS1517a75 2015 JAN $75 call - current bid/ask $ 9.00/ 9.15

04/27/14 DIS looks poised to hit new relative lows and our stop loss
04/13/14 investors may want to take profits now. DIS could be headed for $70.00
03/09/14 new stop loss @ 74.75, traders may want to take some money off the table here. DIS is overbought and due for a dip.
03/02/14 new stop loss @ 71.75
02/16/14 more conservative traders may want to take profits now.
We are adjusting our long-term target from $84 to $89
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 @ 89.00
Current Stop loss: 74.75
Play Entered on: 10/23/13
Originally listed on the Watch List: 10/13/13


Hess Corp. - HES - close: 88.67

Comments:
05/04/14: HES reported earnings on April 30th. The street was expecting $1.07 a share on revenues of $2.15 billion. HES delivered $1.38 on revenues of $2.68 billion, a strong beat. One Wall Street firm raised their price target on HES to $99 a share following the report. The stock spiked past $90.00 and hit new multi-year highs before paring its gains.

I would not be surprised to see a little post-earnings weakness but we can look for support near $86 and $84.00. I am moving our stop loss to $83.45.

- Suggested Positions -
APR 22, 2014 - entry price on HES @ 87.50, option @ 3.15*
symbol: HES1517a95 2015 JAN $95 call - current bid/ask $ 3.05/ 3.20

- or -

APR 22, 2014 - entry price on HES @ 87.50, option @ 5.80*
symbol: HES1615a100 2016 JAN $100 call - current bid/ask $ 5.15/5.65

05/04/14 new stop @ 83.45
04/30/14 HES delivered better than expected earnings and revenues
04/22 trade opened. HES opens at $87.50
*option entry price is an estimate since the option did not trade at the time our play was opened.
04/21 HES closes at $87.78, above our entry trigger of $87.50

Current Target: HES @ 109.00
Current Stop loss: 83.45
Play Entered on: 04/22/14
Originally listed on the Watch List: 04/06/14


Honeywell Intl. - HON - close: 92.37

Comments:
05/04/14: HON has gone nowhere the last two months with the stock stuck in the $90-96 range. This past week has started to look bearish with HON struggling beneath its 50-dma and small trend of lower highs. More conservative investors may want to just take profits now. I am not suggesting new positions at this time.

- 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 $ 9.60/ 9.80

04/27/14 investors may want to just take profits now!
03/02/14 new stop loss @ 89.75, adjust target to $99.00
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
...please see earlier newsletter for prior comments...
The plan was to use small positions to limit our risk.

Current Target: exit when HON hits $99.00
Current Stop loss: 89.75
Play Entered on: 05/07/13
Originally listed on the Watch List: 05/04/13



Joy Global Inc. - JOY - close: 59.25

Comments:
05/04/14: I am starting to worry about our new JOY trade. The stock is now down tow weeks in a row. Broken resistance at $60.00 should have been new support. Now JOY is retreating and shares are failing at the 10-dma, which is rolling over. Weakness in commodity prices last week probably weighed on JOY's stock. On a short-term basis I am expecting JOY to test what should be support near $58 and its 50-dma. I would wait for a bounce near its 50-dma before considering new bullish positions.

- Suggested Positions -
APR 08, 2014 - entry price on JOY @ 60.75, option @ 4.40
symbol: JOY1517a65 2015 JAN $65 call - current bid/ask $ 3.15/ 3.30

- or -

APR 08, 2014 - entry price on JOY @ 60.75, option @ 6.05
symbol: JOY1615a70 2016 JAN $70 call - current bid/ask $ 4.40/4.85

04/08/14 JOY hit our entry trigger at $60.75

Current Target: We're aiming for the $75-80 zone
Current Stop loss: 55.75
Play Entered on: 04/08/13
Originally listed on the Watch List: 04/06/14


NuStar Energy - NS - close: 57.91

Comments:
05/04/14: NS delivered another gain for the week. Unfortunately the action on the stock last week looks bearish. The intraday spike higher on Tuesday and the bearish engulfing candlestick reversal pattern on Friday are both signaling what is probably a short-term top for NS. At the very least I am expecting a dip into the $54-56 zone. I suspect that if the market does turn south NS should benefit as investors seek refuge in the stock's 7% dividend yield.

I am not suggesting new positions at this time.

Earlier Comments:
Our target is $64.50. More aggressive investors with a longer time frame may want to aim higher since the point & figure chart is targeting an $87 target.

- Suggested Positions -
APR 04, 2014 - entry price on NS @ 55.25, option @ 3.10*
symbol: NS1517a55 2015 JAN $55 call - current bid/ask $ 4.00/4.40

04/04/14 our play opens. NS @ 55.25
*option entry price is an estimate since the option did not trade at the time our play was opened.
04/03/14 NS closes above $55.25
Current Target: exit calls when NS hits $64.50
Current Stop loss: 51.75
Play Entered on: 04/04/14
Originally listed on the Watch List: 03/23/14


QUALCOMM Inc. - QCOM - close: 78.99

Comments:
05/04/14: QCOM continued its oversold, post-earnings disappointment bounce last week but the rally did seem to stall at its converging 10-dma and 30-dma. Meanwhile investors had a few QCOM headlines to digest.

QCOM announced it had spun off its location awareness technology and renamed the business Gimbal Inc. According to a Reuters article, "The technology allows retailers and sports venues to track the specific location of customers on their premises and send context-aware messages, like special offers for products and services, to their smartphones. It is part of a growing trend in which smartphones and tablets are used to offer customized recommendations to consumers depending on where they are and what they are doing. The advanced Bluetooth technology behind Gimbal, which can be more accurate than GPS and works indoors, meets standards for iBeacon technology used in Apple stores." QCOM remains a minority stake holder in the business.

QCOM is also facing a new, second lawsuit from ParkerVision Inc. (PRKR), the wireless chip company that sued and won a $173 million patent-infringement case against QCOM last year. This time PRKR is suing QCOM over patents that relate to how smartphone communicate with cell towers.

I remain concerned with QCOM given its disappointing earnings results and the revelation it had received a Wells Notice from the SEC last quarter. I am not suggesting new positions. If QCOM rolls over I'm looking for support near its 100-dma.

- Suggested Positions -
NOV 15, 2013 - entry price on QCOM @ 71.34, option @ 4.90
symbol: QCOM1517a75 2015 JAN $75 call - current bid/ask $7.00/7.15

04/24/14 QCOM's earnings were a disappointment and they disclosed a Wells Notice. Investors may want to exit now and wait for the dust to clear.
04/20/14 new stop @ 74.70
03/30/14 new stop @ 73.75
03/23/14 new stop @ 71.75
03/04/14 QCOM raises dividend and buyback program
02/19/14 QCOM being investigated by Chinese authorities
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: 74.70
Play Entered on: 11/15/13
Originally listed on the Watch List: 11/03/13


Wells Fargo & Co. - WFC - close: 49.58

Comments:
05/04/14: The financial sector continued to drift higher last week and WFC followed suit. The company announced they were raising their dividend by 17% to 35 cents a share.

The stock has encountered round-number resistance at the $50.00 level again. Do not be surprised to see another pullback. Support is still down in the $46-47 area. I'm not suggesting new positions at this time.

- Suggested Positions -
DEC 26, 2013 - entry price on WFC @ 45.50, option @ 1.50
symbol: WFC1517a50 2015 JAN $50 call - current bid/ask $ 2.19/2.24

-- or --

DEC 26, 2013 - entry price on WFC @ 45.50, option @ 2.95*
symbol: WFC1615a50 2016 JAN $50 call - current bid/ask $ 3.90/4.05

04/06/14 WFC looks poised for a pullback
03/30/14 new stop loss @ 44.80
03/09/14 new stop loss @ 43.90
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: 44.80
Play Entered on: 12/26/13
Originally listed on the Watch List: 12/08/13



CLOSED Plays


BB&T Corp. - BBT - close: 37.33

Comments:
05/04/14: Our plan was to exit our BBT trade on Monday, April 28th. The stock has not been cooperating and continued to underperform the major indices last week. Shares opened on the 28th at $37.50, a 17-cent gap higher.

- Suggested Positions -
DEC 17, 2013 - entry price on BBT @ 35.81, option @ 0.99
symbol: BBT1517a40 2015 JAN $40 call - exit $0.95 (-4%)

04/28/14 planned exit
04/27/14 prepare to exit on Monday morning, April 28th
04/17/14 BBT drops on its earnings report
04/06/14 new stop @ 36.90
03/30/14 new stop @ 36.40
03/23/14 adjust exit target to $44.00
03/16/14 BBT has formed a potential bearish double top.
03/02/14 new stop loss @ 35.80
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

Chart of BBT:

Current Target: BBT @ 44.00
Current Stop loss: 36.90
Play Entered on: 12/17/13
Originally listed on the Watch List: 12/15/13


Chicago Bridge & Iron - CBI - close: 80.79

Comments:
05/04/14: Construction-related stocks like CBI did not perform well last week. Shares broke down to new multi-week lows fell through support near $80 and under its 100-dma and 150-dma. Our stop loss was hit at $79.45 on April 28th.

The oversold bounce off last week's low is already struggling. I suspect CBI will see a deeper correction over the next few weeks. I would keep this stock on your radar screen.

- Suggested Positions -
MAR 07, 2014 - entry price on CBI @ 85.52, option @ 6.85
symbol: CBI1517a90 2015 JAN $90 call - exit $3.35* (-51.0%)

- or -

MAR 07, 2014 - entry price on CBI @ 85.52, option @ 8.50
symbol: CBI1615a100 2016 JAN $100 call - exit $5.40* (-36.4%)

04/28/14 stopped out
*option exit price is an estimate since the option did not trade at the time our play was closed.
04/27/14 the stock looks poised to break support and hit our stop
04/23/14 CBI missed the revenue estimate in its earnings report
03/07/14 trade opens with CBI @ $85.52
03/06/14 CBI closes above our entry requirement of $85.00

Chart of CBI:

Current Target: CBI @ 99.50
Current Stop loss: 79.45
Play Entered on: 03/07/14
Originally listed on the Watch List: 03/02/14


Western Digital Corp. - WDC - close: 83.68

Comments:
05/04/14: Technology stocks were underperformers last week and WDC helped lead the way lower. Shares collapsed on Thursday following their earnings report out the night before. The company beat the bottom line estimate but lowered their guidance. Naturally traders sold the news on this earnings warning. The stock gapped down below our stop loss and opened at $85.53 on May 1st. Our stop was $85.75.

- Suggested Positions -
APR 01, 2014 - entry price on WDC @ 92.56, option @ 6.85*
symbol: WDC1517a100 2015 JAN $100 call - exit $3.25** (-52.5%)

- or -

APR 01, 2014 - entry price on WDC @ 92.56, option @ 9.65*
symbol: WDC1615a110 2016 JAN $110 call - exit $5.50** (-43.0%)

05/01/14 stopped out
**option exit price is an estimate since the option did not trade at the time our play was closed.
04/30/14 reported earnings and lowered guidance
04/01/14 trade opens. WDC opened @ 92.56
*option entry price is an estimate since the option did not trade at the time our play was opened.
03/31/14 WDC meets entry requirement with close above $91.25

Chart of WDC:

Current Target: WDC @ $110.00
Current Stop loss: 85.75
Play Entered on: 04/01/14
Originally listed on the Watch List: 03/30/14



Watch

Industrials & Retail

by James Brown

Click here to email James Brown



New Watch List Entries

ITW - Illinois Tool Works

RGR - Sturm, Ruger & Co

WSM - Williams-Sonoma Inc.


Active Watch List Candidates

KORS - Michael Kors


Dropped Watch List Entries

CLX has graduated to our active play list.



New Watch List Candidates:


Illinois Tool Works, Inc. - ITW - close: 85.43

Company Info

ITW is in the industrial goods sector. The company makes engineered fasteners, components, and equipment for the automotive, food equipment, and construction industries. ITW has been a strong performer thanks to a trend of better than expected earnings. In their last report a couple of weeks ago ITW raised their guidance and shares rallied to new all-time highs.

Broken resistance near $84.00 is acting as new support and traders just bought the dip there a few days ago. The intraday high in April was $86.46. I am suggesting we wait for a close above $86.50. If that occurs we can buy calls the next morning with a stop loss at $81.75. Our long-term target is the $98-100 zone.

Breakout trigger: Wait for a close above $86.50
then buy calls the next morning with a stop at $81.75

BUY the 2015 Jan $90 call (ITW1517a90) current ask $2.75

- or -

BUY the 2016 Jan $90 call (ITW1615a90) current ask $6.00

Chart of ITW:

Weekly Chart of ITW:

Originally listed on the Watch List: 05/04/14


Sturm, Ruger & Co. - RGR - close: 67.79

Company Info

RGR is in the industrial goods sector. The company has been making firearms since 1949. Shares of gun makers have seen big gains in recent years. Consumers were on a gun buying frenzy on fears that a democrat controlled senate and the Obama administration might pass tougher gun control laws. Now the gun "fever" has passed and the gun makers are facing some tough earnings comparisons to prior years. Yet the long-term trend for RGR remains higher. The industry could see a new round of gun buying pressure as democrats look at the last two years of Obama's presidency as a chance to pass something.

I am setting some strict rules on our potential RGR entry point. The company reports earnings on Monday, May 5th, after the closing bell. Analysts expect a profit of $1.12 a share. If RGR reports positive results and does not lower guidance I would expect shares to surge higher on Tuesday morning due to the high amount of short interest in the name. If RGR disappoints or issues an earnings warning then the stock will likely reverse lower.

Here's the plan, do not even consider initiating positions in RGR until May 7th or later. Ideally we want to see RGR close in the $70.00-72.50 zone. If RGR closes above $72.50 then do not open positions and we will re-evaluate next weekend. Since we're waiting until Wednesday to see where RGR closes, that gives us Thursday and Friday as potential entry points. Remember, if we see RGR close above $72.50, before we are triggered (close in the 70.00-72.50 zone) then the trade is off. More conservative investors may want to just wait and week and let the post-earnings dust settle before considering positions.

If we are triggered with a close in the $70-72.50 zone then we'll start with a stop loss at $64.45. Our long-term target is the $90-100 zone.

This is an aggressive trade, use small positions.

Please see the detail entry point requirements above!

BUY the 2015 Jan $85 call (RGR1517a85) current ask $1.80

Chart of RGR:

Weekly Chart of RGR:

Originally listed on the Watch List: 05/04/14


Williams Sonoma - WSM - close: 63.06

Company Info

WSM is in the services sector. The company runs a chain of home furnishing stores with almost 600 locations. The stock soared to all-time highs back in March following its earnings report. Results were better than expected driven by +10.4% growth in comparable brand revenues, a +14.6% increase in its Pottery Barn brand, and +18.3% sales growth for its West Elm brand. WSM also said its direct-to-consumer sales surged +11.5%. All this sales growth helped investors overlook WSM's lowered earnings guidance. The company lowered profit guidance but raised their 2015 revenue estimates to just above analysts estimates.

The stock hit some profit taking in early April but the selling has stalled. Shares have been consolidating sideways the last three weeks. I am suggesting we wait for WSM to close above $64.50. If that occurs we can buy calls the next day with a stop loss at $59.75. Our long-term target is the $75-85 zone.

Breakout trigger: Wait for WSM to close above $64.50
then buy calls the next morning with a stop at $59.75.

BUY the 2015 Jan $70 call (WSM1517a70) current ask $2.65

- or -

BUY the 2016 Jan $75 call (WSM1615a75) current ask $4.50

Chart of WSM:

Weekly Chart of WSM:

Originally listed on the Watch List: 05/04/14


Active Watch List Candidates:



Michael Kors - KORS - close: 93.21

Comments:
05/04/14: KORS delivered a significant bounce last week with a rebound from support near $86 and a rally toward resistance near $95 and its 50-dma. Shares also garnered some bullish analyst comments, which helped boost shares. I would not chase the bounce here. KORS still has a trend of lower highs.

I am raising our buy-the-dip trigger from $81.00 to $83.00. We'll move the stop loss to $79.00. More aggressive investors might want to consider buying another dip or a bounce near $86 again.

Earlier Comments:
I do want to caution you on this trade. We are attempting to "catch the falling knife". That can be hazardous. If we are triggered our target is $99.00.

Buy-the-Dip trigger: $83.00, stop loss at $79.00

BUY the 2015 Jan $90 call (KORS1517a90)

05/04/14 move the buy-the-dip trigger from $81.00 to $83.00.
move the stop loss to $79.00

Originally listed on the Watch List: 04/13/14