Option Investor
Newsletter

Daily Newsletter, Thursday, 5/20/2010

Table of Contents

  1. Market Wrap
  2. New Plays
  3. In Play Updates and Reviews

Market Wrap

Europe Continues To Grip Equity Markets

by Todd Shriber

Click here to email Todd Shriber
They say a picture is worth a thousand words, so before I get into what was happening in the market today, here is a picture to explain why we saw futures get battered overnight and U.S. stocks sink even further on Thursday.

Greece Protests

That picture was not taken or Wednesday or Thursday, but it certainly could have been dated May 19 or May 20 as protesters in Athens took to the streets to bemoan proposed austerity measures to get Greece's financial act together. In other words, Europe continues to be unsettling for equity investors and that sent all three major U.S. indexes down by at least 3.6% today. The Dow was the ''winner'' in percentage terms, losing ''just'' 3.6%, or 376 points, to close at 10,068. The S&P 500 tumbled by 43 points, or 3.9%, to settle at 1071.59 and the Nasdaq was smashed to the tune of 94 points, or 4.1%, to close at 2204. As I suspected earlier this week, small-caps were ready for a fall and that they did with the Russell 2000 losing 5% for to finish the day at 640.

Stats Table

I was not alive in the 1960s, but my mom loved to play the music from her youth around the house when I was growing group and one song that I remember hearing quite a bit was the Motown hit ''Nowhere to Run.'' The catchy chorus of that song goes something like ''nowhere to run to, nowhere to hide'' and that is an appropriate way of describing the current market environment because it appears the gold trade, has at least temporarily expired as a safe haven.

Gold had been enjoying a solid performance over the past month, fueled in large part by investors scurrying to find some asset class that would provide returns better than bonds or cash with some degree of relative safety. Late last week and early this week, enough pundits started to opine that gold was looking topped out and the chart below shows gold provided no shelter over the past couple of days from this European-infused storm.

Gold Chart

Speaking of plunging commodities, it was a wild day in the oil trading pits as crude opened about 2% higher from Wednesday's close only to drop by as much as by the early afternoon. NYMEX-traded crude for June delivery traded as low as $64.24 and yes, some of that volatility was due to the expiration of the June contract's expiration today.

All that means is the selling is going to be transferred to the July contract, which lost $1.68 to close at $70.80. Oil has traded lower in 12 of May's 14 trading days and is down by 22% since early April.

Oil Chart

How bad was the trade on U.S. exchanges today? Up volume on the NYSE was roughly 28 million shares compared to down volume of about 2 BILLION shares. All 30 Dow stocks were down on the day and all 10 industry groups tracked by the S&P 500 were down as well. A whopping 497 of that index's 500 constituents were down today.

An anecdotal example of ugly things were today can be seen in shares of Dow component Boeing (BA). The aerospace giant said it is ''insulated'' from Europe's economic woes and reiterated that it is looking at substantial order backlogs for 767s, 777s and the 787 Dreamliner through 2012. While Boeing shares are up more than 40% in the past year, the stock tumbled by almost 5% today on volume that was two-thirds higher than the daily average. The bottom line is a 5% single-day move for Boeing is not a regular event.

Boeing Chart

Another anecdote worth noting, and this one will serve to illustrate how bad things on the Nasdaq, is the decline of Apple (AAPL). In dollar terms, it was quite bloody, with Apple finishing the day down $10.58, or 4.26%, to close at $237.76. All this on a day when Standard & Poor's upgraded the stock to ''strong buy'' from ''buy'' while reiterating a $300 price target.

Moves of $10 have certainly been seen in Apple before, but they usually come on the upside. Have the fundamentals here changed? No. Will Apple thrash profit and revenue estimates the next time it reports? Probably. Still, the stock's decline of almost 10% in the past month highlights how dour market sentiment has become.

Apple Chart

A surprise jump in weekly jobless claims did not help the market today. The Labor Department said claims for the week ending May 15 increased to 471,000 from 446,000 during the previous week. That is good for the highest level in a month and when most economists were expecting claims of 440,000, an increase in this closely followed economic indicator was ill-timed to say the least. The Labor Department noted that there were no unusual factors to explain to increase in claims.

Jobless Claims

For the brave, or those interested in a short-term trade, Dell (DELL) may be worth watching tomorrow. The computer maker delivered its first-quarter results after the market closed and said that it earned $441 million, or 22 cents a share, compared with $290 million, or 15 cents a share, a year earlier. Revenue jumped 21% to $14.9 billion. Excluding items, Dell earned 30 cents a share. Analysts were expecting a profit of 27 cents a share on sales of $14.3 billion.

Dell said it is seeing an uptick in demand from corporate customers that are replacing old servers and mainframes. The company expects a pickup in PC demand later this year. Dell said revenue from large business increased 25% to $4.2 billion and sale from small and medium businesses rose 19% to $3.5 billion. Sales to consumers increased by 16% to $3.2 billion.

Dell also noted it is seeing some benefits from its acquisition of Perot Systems. That deal is helping Dell gain more customers in the public sector. After losing 4.41% during regular trading, Dell shares were down another 41 cents, or 2.93% in after-hours trading.

Dell Chart

Looking at the charts, and before we do that, you might want to pinch your nose, support for the Dow at 10,350 was ignored in a beak way as the index made its way to its lowest close since February 10. The 200-day moving average did not help stymie the decline either and 10,000 may be more of a case of round number or mental support than a legitimate place for the Dow to bounce from. The 9850-9875 area should be the next meaningful support area.

Dow Chart

Like the Dow, the S&P 500 made its way to its lowest close since February 10 and is also trading below its 200-day moving average. And as was the case with the Dow, a critical support level did not hold for the S&P 500 and by that I mean 1100. Obviously 1085 did not work either and with index closing right near its low of the day, 1065 could be taken out tomorrow.

S&P 500 Chart

Same story on the Nasdaq as 2300 did not hold and that has the index residing below its 200-day line as well. The 2185 area would appear to be the next support range, but the Nasdaq closed less than 20 points above that level today meaning that if tech stocks do not see some relief by tomorrow morning, 2150 could be an issue in the very near-term.

Nasdaq Chart

No need for me to toot my own horn, but small-caps rolled over in a big way today and 650 did not prevent further declines for the Russell 2000. The index closed right at its low of the day, an ominous sign. If the 200-day moving average at 628 does not prop the Russell 2000 up, another 30-50 points of downside could be in the cards.

Russell 2000

According to Bloomberg, the S&P 500 is now 24% below where it traded a decade ago, 17% below where it traded on May 18, 2001 and just 3% where it traded on the first day markets were open following the 9/11 terrorist attacks. Historical footnotes to be sure, but also illustrations of why I do not see much reason to be bullish here. Tomorrow is options expiration day and traders may not want to be holding positions over the weekend for fear of more news out of Europe. That said, if a $1 trillion bailout package has not put markets at ease, the EU is probably out of tricks.


New Plays

Keeping Powder Dry into OPEX

by Scott Hawes

Click here to email Scott Hawes

Editor's Note: Our portfolio is narrow going into Friday options expiration and we will regroup this weekend with several more new plays. Trying to predict what happens tomorrow is simply a guess. I have listed a trade idea for those interested below:

HAL - Coming into prior resistance level near $25.00 and upward trend line support from December 2008.



In Play Updates and Reviews

Longs Suffer, Shorts Thrive

by Scott Hawes

Click here to email Scott Hawes

Editor's Note:

Good evening. Boy, what a day. I have to say the gap down in the market today caught me off guard and our long positions in the model portfolio suffered from it. We closed 5 positions today as 3 were stopped out and 2 targets were hit for nice gains. The net percentage gain/loss on the closed positions is -6.34%. Our portfolio is narrow going into Friday options expiration and we will group this weekend with several more new plays. Trying to predict what happens tomorrow is simply a guess.

Our short positions have saved us on our long positions with losses. With all of the geopolitical events happening right now cash is a position and probably the best place to be until things get sorted out, especially if you are holding positions for any length of time. There has to be some sort of bounce in the markets and we still have a couple of longs to take advantage of it. My S&P 500 range is getting lower by the day and I expect more volatility, so staying on your toes is extremely important. Please feel free to email me with any questions.

Current Portfolio:


BULLISH Play Updates

EMC Corp. - EMC - close 17.68 change -0.52 stop 16.95 *NEW*

Target(s): 18.20, 19.00, 19.50
Key Support Areas: 17.65, 17.55, 17.44, 17.10
Key Resistance Areas: 17.80, 18.00, 18.50, 18.85
Current Gain/Loss: -0.39%
Time Frame: 1 to 2 weeks
New Positions: Yes, on weakness with a tight stop

Comments:
We were able to initiate long positions in EMC on the gap down today at $17.75. The stock bounced around and closed off of its lows but the market did not which is an encouraging sign. EMC is now below a long term pivot level dating back to June of 2007 at $18.00. The stock also broke through its upward trend line that began in May 2009. EMC is still above its 200-day SMA which should offer support below. I am playing this stock for a bounce and believe that we will get it but there could be another flush first. Since we entered at a better price this morning I want to move the stop down to $16.95 which is below the 200-day SMA and the plunge low of May 6th. There is no doubt this is aggressive so readers who want to avoid risk should exit the position to preserve capital. You can still exit for almost breakeven. I like the specific technology sector of EMC's business and I believe the stock is poised to bounce here with the overall market. EMC closed above the May 7 low of $17.66 which makes me want to give this some time to work. In light of the overall bearish tone in the market I would also like to offer a new lowered target of $18.20 which is near its 100-day SMA.

Current Position: Long EMC Stock, entry at $17.75.

Entry on May 20, 2010
Earnings Date: More than 2 months (unconfirmed)
Average Daily Volume: 25 million
Listed on 5/19/10


Dr. Pepper Snapple Group - DPS - close 36.27 change -1.80 stop 32.49

Target(s): 36.80, 38.80
Key Support Areas: 35.75, 34.75, 32.70
Key Resistance Areas: 36.80, 37.45
Current Gain/Loss: N/A
Time Frame: Several weeks
New Positions: Waiting for trigger

Comments:
We may get our entry in DPS after all as the stock is finally selling off. So we still wait patiently for the pullback to our trigger near $35.50. If there is more weakness in the market DPS should make it down here and I want to be ready to take advantage of it. If triggered our stop is $32.49. I view this as an aggressive trade so please keep your position size small since the market has been so volatile.

Suggested Position: Long DPS stock if it trades near $35.50

Entry on: May xx
Earnings Date: More than 2 months (unconfirmed)
Average Daily Volume: 1.9 million
Listed on: May 8, 2010


General Electric - GE - close 16.26 change -1.00 stop 15.94 *NEW*

Target(s): 17.00, 17.45, 18.25
Key Support Areas: 16.25, 16.00
Key Resistance Areas: 16.80, 17.20, 17.80, 18.00
Current Gain/Loss: -4.35% Time Frame: Several weeks

New Positions: Yes, on weakness with a tight stop

Comments:
GE closed on its 200-day SMA and avoided our stop just below. The stock is also just below its upward trend line that began in November and the pivot level of $17.00 dating back to September 2008. It is basically do or die time here for GE and the market in general. I'm looking for a bounce but I urge readers to be careful. I am making adjustments to the stop and targets as listed above to account for volatility tomorrow. This is an aggressive move so more conservative readers may want to simply exit GE, especially if there is any strength in the market tomorrow. I'm viewing the pullback in GE as opportunity to enter a quality name that may catch a bid as investors flee from more speculative names.

Suggested Position: Long GE Stock, entry at $17.00.

Entry on May 19, 2010
Earnings Date More than 2 months (unconfirmed)
Average Daily Volume: 88 million
Listed on 5/18/10, 2010


BEARISH Play Updates

NONE. ALL SHORT POSITIONS CLOSED DURING TODAY'S MARKET WEAKNESS.


CLOSED BULLISH PLAYS

AMR Corp. - AMR - close 6.53 change -0.48 stop 6.60

Target(s): 7.95, 8.25, 8.65
Key Support Areas: 6.44, 6.30, 6.00
Key Resistance Areas: 6.85, 7.00, 20-day SMA
Current Gain/Loss: -8.59%
Time Frame: Several weeks
New Positions: Closed

Comments:
Our thesis for taking this trade was a converging trend line and horizontal support near the $7.00 level. This thesis was still valid as of yesterday's close but today proved too much for the stock to overcome and the set-up failed. I also expected lower oil prices to bode well for the airlines but it wasn't meant to be, so we have taken a loss on the position at our stop. For readers who may still have positions there isn't much more support until $6.00 which is prior resistance from August and November 2009, so please be careful. There is some support at $6.45 and then a gap fill from early December at $6.30, but that's about it. If the overall market can muster a rally AMR may catch a bid here.

Closed Position: Long AMR stock at $6.60, entry was at $7.22

Annotated chart:

Entry on May 18, 2010
Earnings Date More than 2 months (unconfirmed)
Average Daily Volume: 19 million
Listed on 5/15/10, 2010


Broadridge Financial Solutions - BR - close 19.92 change -0.80 stop 20.36

Target(s): 21.95, 22.40, 22.75
Key Support Areas: 19.78
Key Resistance Areas: 20.70, 21.00, 22.00
Current Gain/Loss: -4.19%
Time Frame: Several weeks
New Positions: Closed

Comments:
Our thesis for taking this trade is basically the same as AMR, horizontal support and an upward trend line converging near the $21 level, along with good fundamentals as the stock trades below a 13 PE. However, the market has simply been too much for BR to overcome and the stock has been punished. So we have stepped aside at $20.36 as our stop was hit. For readers who may still have positions BR my line in the sand would be $19.50 as this was prior highs from April 2009 and lows from September 2009. If it breaks down from here the next stop is most likely $15.50 so I urge you to be careful.

Closed Position: Long BR Stock at $20.36, entry was at $21.25

Annotated weekly chart:

Entry on May xx
Earnings Date More than 2 months (unconfirmed)
Average Daily Volume: 1.2 million
Listed on 5/15/10, 2010


Quicksilver Resources, Inc. - KWK - close 12.22 change -0.25 stop 11.75

Target(s): 13.30, 14.25
Key Support Areas: 10.80, 10.10
Key Resistance Areas: 12.00, 12.25, 12.80
Current Gain/Loss: -7.48%
Time Frame: Several weeks
New Positions: Yes

Comments:
Our thesis for taking this trade was the sideways channel KWK has been trading in for the past 9 months, the double bottom it formed in November and May, and the fact that natural gas looks to be forming a solid base. It just goes to show you that none of these things really matter when global markets ware under severe pressure acting in unison. In any event, KWK broke down out of the sideways channel and we were stopped out of the position. Readers need to be cautious with positions here as I see limited support down to $10.80 and then $10.10 which is far below current levels. You could place stop under today's low if you want to give it some time and if you do I would be selling into strength in the coming days.

Closed Position: Long KWK Stock at $11.75, entry was at $12.70.

Annotated chart:

Entry on May 17, 2010
Earnings Date More than 2 months (unconfirmed)
Average Daily Volume: 3.0 million
Listed on 5/15/10, 2010


CLOSED BEARISH PLAYS

Baidu, Inc. ADR - BIDU - close 67.58 change -2.55 stop 72.75 *NEW*

Target(s): 71.50 (hit), 69.10 (hit on gap at $67.25), 65.10
Key Support Areas: 67.00, 65.00
Key Resistance Areas: 69.69, 71.00.
Current Gain/Loss: +9.43%
Time Frame: Several Weeks
New Positions: Closed

Comments:
BIDU gapped below our second target so per last night's updates we are flat on the position for a +9.43% gain. For readers who still have positions I would take profits here and book the gain. Use the above support/resistance areas as a guide. Unless we crash, which is a possibility, stocks should get some relief soon and I would not want to sit through a bounce.

Closed Position: Short BIDU stock at $67.25, entry was at $74.25

Annotated chart:

Entry on May 14, 2010
Earnings July 15, 2010 (unconfirmed)
Average Daily Volume: 68 million
Listed on May 13, 2010


Leggett & Platt, Inc. - LEG - close 22.54 change -1.06 stop 24.25

Target(s): 23.35 (hit), 23.00 (hit), 22.25
Key Support Areas: 22.50, 22.00
Key Resistance Areas: 23.25, 23.65
Current Gain/Loss: +4.49%
Time Frame: Several Weeks
New Positions: Closed

Comments:
LEG gapped open lower and quickly traded below our second target so per last night's updates we are flat on the position for a +4.49% gain. For readers who still have positions I would take profits here and book the gain. Use the above support/resistance areas as a guide. Unless we crash, stocks should get some relief soon.

Closed Position: Short LEG stock at $23.00, entry was $24.08

Annotated chart:

Entry on May 17, 2010
Earnings More than 2 months (unconfirmed)
Average Daily Volume: 2 million
Listed on May 15, 2010