Option Investor
Newsletter

Daily Newsletter, Monday, 5/24/2010

Table of Contents

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

Market Wrap

The Bears Now Have Their Claws Into Mondays

by Todd Shriber

Click here to email Todd Shriber
Monday is usually a pretty reliable day of the week for U.S. stocks, reliable in the sense that stocks usually go up on the first day of the week. That is what makes today's trade one part concerning and one part disappointing. After moving higher on 10 of the past 12 Monday, stocks traded lower today with the Dow Jones Industrial Average erasing Friday's gains, losing 127 points, or 1.24%, to settle at 10066.57. The S&P 500 could not keep its head above water at 1085, tumbling 14 points, or 1.3%, to close at 1073.65 while the Nasdaq lost 15.5 points to finish the day at 2213.55. Small-caps did not help the cause either with the Russell 2000 shedding 8 points, or 1.24%, to finish at 641.21.

Stats Table

Most of the losses were accumulated in another one of those infamous late day-sell offs as the Dow shed roughly 80 points in the last 30 minutes of trading. On the other hand, consider that Chinese stocks were up overnight, oil finally traded higher and there was really no news, good or bad, out of Europe and the fact that U.S. equities could not build on Friday's gains might highlight the point that the path of least resistance is down.

I mentioned in the weekend wrap that perhaps the only reason to explain the bullish trade in financials on Friday was news that Congress is inching closer to passing the financial regulatory reform bill. I stated that while I was personally surprised this sector moved higher on Friday, it may have been a case of the banks at least knowing what they have to contend with now that passage of the reform bill is imminent.

Well, that trend was short-lived as financials were the biggest losers among the 10 industry groups tracked by the S&P 500. Bank of America (BAC) and JPMorgan Chase (JPM), the two largest U.S. banks, dragged the Dow lower, losing 3.69% and 3.57%, respectively. Those losses pale in comparison to the punished dealt out to Wells Fargo (WFC). California-based Wells Fargo traded lower by 4.65% after Goldman Sachs trimmed its rating on the bank to ''neutral'' from ''buy.''

Wells closed just below its 200-day moving average and it looks there might be several more dollars on the downside to be had here. Goldman cited valuation as the reason for the downgrade, noting that it sees more value in Bank of America, JPMorgan and Citigroup (C) than it does in Wells.

Wells Fargo Chart

It was a disappointing weekend at the box office, at least for one entertainment company that failed to meet expectations with the latest edition of a popular film franchise.

Shrek

That is right, the fourth installment of the popular Shrek franchise, ''Shrek Forever After,'' made its debut this weekend grossing $70.8 million, beating ''Iron Man 2'' by a wide margin. I do not have kids, but I do not live in a cave either, so I have heard how popular the Shrek movies are with children and the new film was being shown in 3-D in select markets. That allowed some theaters to charge as much as $20 per ticket.

Shares of DreamWorks (DWA), the film's producer, were hammered on news that the weekend's receipts fell short of Paramount's $80 million estimate. Paramount, a unit of Viacom (VIA), distributes the Shrek films. Dreamworks traded lower by as much as 13% before closing down 11%. The stock was already showing considerable weakness, trading below its 50- and 200-day lines going into the weekend and news that this version of Shrek significantly lagged the last two installments in terms of opening weekend receipts had the bears in prime position to punish the stock. Volume was more than six times the daily average.

Last week, Thomas Weisel analyst Benjamin Mogil lowered his rating on DreamWorks in anticipation of a rough opening weekend for Shrek and that sent the stock tumbling. On Monday, he lowered his revenue expectations for the film to $260 million from $315 million and cut his price target on the stock to $34 from $38. Ouch.

DreamWorks Chart

Even so-called defensive names are offering little in the way of protection. The Utilities Select SPDR ETF (XLU) was down almost 1% today and individual defensive names like Coca-Cola (KO), Johnson & Johnson (JNJ) and Procter & Gamble (PG) all weighed on the Dow today. Campbell Soup (CPB), the epitome of a defensive stock, was down fractionally today on almost double the average daily volume after the company delivered its fiscal third-quarter earnings.

Campbell said it earned $168 million, or 49 cents a share, for the quarter ended May 2, compared with $174 million, or 49 cents a share, a year earlier. Excluding items, the company earned 54 cents, beating the consensus estimate of 51 cents a share. Revenue did rise almost 7% to $1.8 billion from $1.69 billion, but the revenue increase was merely inline with analysts' forecasts.

Campbell Soup Chart

One stock that bucked the negative trend today was Sprint-Nextel (S). The telecom sector is another defensive realm, but Dow components AT&T (T) and Verizon (VZ) are basically flat in the past three months. For ages, Sprint was kind of the laughing stock of telecom stocks, but the company deserves some credit as its shares are up more than 40% in the past three months.

The bullishness continued on Monday as Sprint gained almost 9% on nearly twice its average daily volume on the back of a bullish write up in Barron's over the weekend and a Goldman Sachs upgrade. Goldman upgraded Sprint to ''buy'' from ''neutral'' while Citigroup reiterated its ''buy'' rating on the stock.

Sprint is gaining traction as the first mobile phone provider to offer 4G service, which can deliver speeds up to 10 times faster than existing 3G wireless networks, according to Barron's. Sprint currently offers its 4G service to 40 million people in 32 cities with aim of boosting that total to 100 million by the end of this year with new coverage in cities such as Boston, Los Angeles, New York, San Francisco and Washington, Barron's reported.

Sprint Chart

Looking at the charts, 10,000 is once again back in play on the Dow and as I have been saying, if 10,000 does not hold, 9850-9875 would be the next stopping point. From there, 9500 could become an issue.

Dow Chart

I have been keeping my eye on 1065 on the S&P 500 and while that level was not breached today, the index closed less than nine points that area. Assuming the S&P 500 cannot find support there or at 1050-1055, a return to 975 could become an unfortunate reality.

S&P 500 Chart

The Nasdaq reclaimed its 200-day line on Friday only to fall below it again today. I mentioned 2185 as a support area to watch on the downside and if that number is violated a return to the February low of 2100.17 is likely.

Nasdaq Chart

The 650 range is looking like new resistance for the Russell 2000 and the index only briefly traded above that level on Monday. Worse yet, the Russell 2000 closed barely above its low of the day. If the 200-day moving average at 629 does not prop up the Russell 2000, a move to the low 600 area could be in the offing.

Russell 2000 Chart

Stocks moved higher on Friday thanks in large part to a 20-minute rally into the close. On Monday, it was a 20- or 30-minute sell-off into the close that multiplied the losses. Wipe out those two days, which essentially result in a draw, and we are basically back to where we were on Thursday and that is not an alluring proposition.

Even worse regarding Monday's trade was Chinese stocks could not help their U.S. counterparts move higher and the downdraft was back for high-beta fare like energy, financials and materials names. I still see more downside before stocks resume their bullish ways.


New Plays

Bullish Bet on a Miner

by Scott Hawes

Click here to email Scott Hawes


NEW BULLISH Plays

Kinross Gold Corp - KGC - close 16.64 change +0.01 stop 16.06

Company Description:
Kinross Gold Corporation is engaged in gold mining and related activities, including exploration and acquisition of gold-bearing properties, the extraction and processing of gold-containing ore, and reclamation of gold mining properties. Kinross' gold production and exploration activities are carried out principally in the United States, Brazil, Chile, Ecuador and the Russian Federation. Gold is produced in the form of dore, which is shipped to refineries for final processing. Kinross also produces and sells silver. It operates under 11 segments: Fort Knox, Round Mountain, Kettle River-Buckhorn, Kupol, Crixas, Maricunga, La Coipa and Porcupine Joint Venture. On January 7, 2009, Kinross completed its acquisition of 100% of Minera Santa Rosa SCM and 60% interest in Teck Cominco Limited. (source: company press release or website)

Target(s): 17.25, 17.75
Key Support Areas: 16.25
Key Resistance Areas: 17.25, 17.95
Time Frame: 1 to 2 weeks

Why We Like It:
KGC has been trading in a sideways channel between $16.25 and $19.25 for over 3 months. The stock is near the bottom of that channel and I believe the stock is ready to move higher in the coming days along with other gold miners. KGC is also testing the backside of its broken downtrend line from December. I believe KGC should easily trade up to its 50-day SMA which is also above our target of $17.75. I suggest readers initiate long positions if the stock trades down near $16.40. Our stop is below the recent channel at $16.05. This sets up more than a 3:1 risk/reward trade: we are risking $0.35 to make $1.35. Gold stocks tend to be volatile so please use proper position size to limit risk.

Suggested Position: Long KGC stock if it trades down near $16.40

Option Traders:
Suggested Position: Buy JUNE $16.00 CALL, current ask $1.27, estimated ask at entry $1.15

Annotated Chart:

Entry on May xx
Earnings Date More than 2 months (unconfirmed)
Average Daily Volume: 7.2 million
Listed on 5/24/10, 2010


In Play Updates and Reviews

EMC Closed, RCL Opened

by Scott Hawes

Click here to email Scott Hawes
Current Portfolio:


BULLISH Play Updates

Dr. Pepper Snapple Group - DPS - close 36.83 change +0.11 stop 35.95 *NEW*

Target(s): 36.80 (hit), 37.00, 37.95
Key Support Areas: 35.75, 34.40, 32.70
Key Resistance Areas: 36.93, 37.15
Current Gain/Loss: +3.75%
Time Frame: 1 to 2 weeks
New Positions: No

Comments:
DPS is currently above our first target of $36.80 and we have gained +3.75%. I am going to move our stop up to $35.95 to protect our profits in this trade. I've listed another target of $37.00 which is below today's highs. This means we will most likely exit tomorrow. The stock has good support with its 20-day and 50-day SMA's below. For readers who want to give this trade more room protective stops could be placed below these levels. But I urge readers to be careful and consider booking profits because if the market is truly going to unwind DPS won't be spared. Our final target of $37.95 may be wishful thinking and I don't suggest holding out for this target.

Current Position: Long DPS stock at $35.50

Entry on: May 21
Earnings Date: More than 2 months (unconfirmed)
Average Daily Volume: 1.9 million
Listed on: May 8, 2010


General Electric - GE - close 16.01 change -0.41 stop 15.94

Target(s): 16.25, 17.00, 17.45, 18.25
Key Support Areas: 16.00
Key Resistance Areas: 16.25, 16.80, 17.20, 17.80, 18.00
Current Gain/Loss: -5.82% Time Frame: Several weeks
New Positions: No

Comments:
GE just can't find its footing here and it appears that we may get stopped out tomorrow. If we gap lower I'll use the same rule for managing the exit as I did on Friday. GE gapped opened significantly lower on Friday and below our stop. When this happens I have a rule for exiting positions if the stock has an opening gap up or down through, or very close to stops. For long positions here is my rule of thumb: If a stock gaps down below the stop that has been established, wait for the first 15 minutes of trading before doing anything. Then place a new protective stop just under the low of that first 15 minutes of trading. Reverse the entire scenario for shorts. The reason I do this is because I want to measure the real strength or weakness in the stock. I don’t want a Good Til Cancelled (GTC) stop to be unnecessarily triggered at the open because often times stocks gap and reverse immediately, which keeps us in the position and looking for a better exit. In GE’s case this worked perfectly on Friday and kept us in the position. I suggest selling into strength or tightening stops if GE happens to rebound tomorrow. The resistance areas listed above are areas to consider exiting or tightening stops.

Current Position: Long GE Stock 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


MetroPCS Communications - PCS - close 8.44 change +0.05 stop 7.80

Target(s): 9.00, 9.25
Key Support Areas: 8.18, 8.05, 7.85
Key Resistance Areas: 8.62, 8.90
Current Gain/Loss: N/A Time Frame: 1 to 2 weeks
New Positions: Waiting to be triggered

Comments:
PCS has shown relative strength while the overall market has declined in recent weeks. There was major volatility during the flash crash in this stock which appears to have shaken out the weak hands. The stock has responded nicely since and bounced off of its 20-day SMA on Friday. I'm playing for a bounce in PCS along with the overall market and I suggest readers initiate long positions if PCS retests its lows from Friday near $8.20. If the market bounces from here I think PCS is poised to retest its recent highs, which are near our targets of $9.00 and $9.25. We'll use tight a stop at $7.80, which is below a gap fill from 5/10 to 5/11. I also like the 2:1 risk/reward set-up of this trade: we are risking 40 cents to make 80 cents, and possibly $1.05.

Suggested Position: Long PCS stock at if it trades down near $8.20

Entry on May xx
Earnings Date More than 2 months (unconfirmed)
Average Daily Volume: 9.6 million
Listed on 5/22/10, 2010


BEARISH Play Updates

Royal Caribbean - RCL - close 27.91 change -0.43 stop 31.50

Target(s): 25.05, 24.05
Key Support Areas: 27.38, 25.00
Key Resistance Areas: 28.85, 29.80
Current Gain/Loss: +3.09%
Time Frame: Several Weeks
New Positions: Yes

Comments:
RCL traded right up to our first entry trigger at $28.85 so we are now short the stock at $28.80. The lack of follow through to the early morning strength was enough for us to enter short. The stock traded as high $28.91 and retested this area twice but failed. RCL has been pummeled over the last couple of weeks and I believe there is more downside in the stock's future. The stock has broken an upward trend line that started on 7/8/09 and is ever so close to breaking its longer term upward trend line that started on 3/3/09. If RCL breaks below $27.38 (Friday's low) I believe the stock should see $25.05 in short order which is our first target. Our second more aggressive target is $24.05. Our initial stop will be $31.50 and our time frame is several weeks.

Current Position: Short RCL stock at $28.80

Option Traders:
Suggested Position: Buy JUNE $28.00 PUT

Entry on May 24
Earnings More than 2 months (unconfirmed)
Average Daily Volume: 4.5 million
Listed on May 22, 2010


CLOSED BULLISH PLAYS

EMC Corp. - EMC - close 18.06 change +0.10 stop 16.95

Target(s): 18.20, 20-day SMA, 18.70
Key Support Areas: 17.65, 17.55, 17.45, 17.10
Key Resistance Areas: 17.80, 18.00, 18.50, 18.85
Current Gain/Loss: +2.54%
Time Frame: 1 to 2 weeks
New Positions: Closed

Comments:
We made a judgment call to close EMC at our first target of $18.20 today for a +2.54% gain. Lack of continued follow through on the market's early strength was the clue to close the position. I'll leave my comments from the weekend as they have not changed. The stock is now battling its long term pivot level dating back to June of 2007 at $18.00. EMC is finding support on a trend line that began with the 9/3/09 lows to 2/5/10 lows, and finally the flash crash lows on 5/6/10. But the stock still faces overhead congestion like many others. If EMC can get over $18.00 we should hit our first target at $18.20. Our more aggressive second target has been lowered to $18.70 which is just below the stock's 50-day and 20-day SMA's. I've also listed the 20-day SMA as a target and urge readers to exit positions or tighten stops if the stock trades anywhere near this level to protect capital and protect against a reversal. EMC could trade up to its 50-day SMA if the bounce in the overall market can continue this week. With the extreme up and down volatility and oversold conditions we could easily see a continued short covering rally creating a sharp move higher and if that happens we need to be taking profits.

Closed Position: Long EMC Stock at $18.20, entry was at $17.75.

Annotated chart:

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