Option Investor
Newsletter

Daily Newsletter, Saturday, 6/19/2010

Table of Contents

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

Market Wrap

Friday Action Is Lackluster As Stocks Inch Higher

by Todd Shriber

Click here to email Todd Shriber
The major U.S. indexes managed to eke out some small gains on Friday, trading in a tight range on quadruple witching day. The S&P 500 gained almost 1.5 points to close at 1117.51, extending a two-week winning streak that represents the index's best two-week run since November. The Dow Jones Industrial Average added just 16 points to settle at 10,450 while the Nasdaq remained above 2300, adding almost three points to close at 2309. Small-caps were about as boring as their large-cap brethren with the Russell 2000 adding just one point to close just below 667.

Stats Table

Stocks seemed to get a lift from speculation that Europe is actually making some progress on solving its sovereign debt crisis and that rosy outlook seemed to be fortified by a rally in the Euro as the beleaguered common currency used by 16 European countries gained the most against the U.S. Dollar in more than a year this week.

The Euro rose 2.3% to $1.2388 against the greenback as traders unwound bearish bets that the Euro's decline would continue. Hedge funds and other speculators reduced short positions in the EUR/USD pair to 62,360 contracts on June 15 compared to 111,945 a week earlier – a drop of 44%, according to Bloomberg News.

Analysts said most of the Euro rally was obviously fueled by short covering, but the fact that Spain was able to hawk $3.7 billion in 10-year bonds on Thursday did not hurt matters. Demand was almost twice the amount on offer, according to Bloomberg. The country was also able to successfully sell almost $592 million in 30-year bonds.

Euro Chart

Not to rain on anyone's risk appetite parade, but times have changed as the weekly gains for the major U.S. indexes lagged those seen in the Euro. A rally in the Euro used to encourage far more bullish action in equities than was seen this week and would have been seen by many investors as a sign that risk appetite was at work again. Not so fast. NYMEX-traded gold for August delivery closed at a record high on Thursday and moved to another record high of $1263.70 on Friday before settling at $1258.30. That is still good enough for a new record closing price.

Investors flocked to the yellow metal after the Philadelphia Federal Reserve Survey and jobless claims data released on Thursday provided less-than-encouraging assessments regarding the economic recovery. Gold's ascent has some pundits saying the trade is ''crowded,'' but there is no getting around the fact that gold futures are up 15% this year, dwarfing the returns offered by stocks.

Gold Chart

With the SPDR Gold Shares ETF (GLD), the second-largest ETF in the world by assets, trading well into the triple digits after touching a new all-time on Friday at $123.50, some investors may want to find other, more cost-effective ways to play gold's bullish ways. Caterpillar (CAT), the world's largest maker of mining and construction equipment, was the Dow's biggest gainer on Friday, jumping nearly 1%.

While that may not be saying much, if gold prices continue to soar, miners are going to want to pull more of the yellow metal out of the ground and that could spur sales of Caterpillar's heavy mining equipment, none of which is cheap.

Caterpillar Chart

Caterpillar was up almost 8% this week, but even more impressive gains could be spotted in the shares of Newmont Mining (NEM), the largest U.S. gold miner, which soared 10% on the week. Options traders seem to be feeling bullish on Newmont as more than 49,000 contracts traded in the name on Friday, more than twice the daily average. Nearly 60% of that volume was in the form of calls.

Volume in the stock was nearly 50% above the daily average on Friday as the stock traversed $60 for the first time in more than four years. After closing at $61.25, Newmont is within earshot of its all-time of $62.70.

Newmont Mining Chart

Gold talk may be a good segue to talk about Goldman Sachs (GS). Wall Street's most prestigious and vilified investment bank was back in the news on Friday. Fortunately for wary shareholders in this marquee name, the Goldman news broke late in the day and the stock was able to manage a small gain on the day.

Goldman has asked the Securities and Exchange Commission (SEC) for more time to reply to the April 16 lawsuit that accuses Goldman of defrauding investors in mortgage backed securities. The firm was originally supposed to respond on Monday, but asked a judge to grant it an extension until July 19. Now infamous Goldman employee Fabrice Tourre also has until July 19 to respond to the SEC inquisition.

The SEC did grant the extension, according to some press reports. Goldman has maintained that it did nothing wrong and that plans to fight the charges. It is the company's right to fight the charges, but given the dramatic plunge in Goldman shares since mid-April, it might be in the company's best interests to go ahead and cut Uncle Sam a settlement check, which everyone knows Goldman can easily afford, and put this issue to rest so the stock can get back to being the juggernaut it once was.

Goldman Chart

Speaking of some of the more controversial names out there, Friday was another event-filled day for BP (BP) and other names that are tied to the Gulf of Mexico oil spill. Rumors that BP may commence a bond offering as early as Tuesday started to pick up steam. In addition, some press reports said the embattled oil giant may seek up to $5 billion in loans from a syndicate of banks. Reuters actually reported that number may be as high $7 billion.

CNBC reported on Thursday that BP could issue between $5 billion and $10 billion in bonds, but investors fear the impact that a new issue could have on current BP bondholders. The bottom line with a BP bond issue is that the company is going to have to offer a juicy yield, perhaps in the order of 8%-10% to get investors interested in longer-term commercial paper.

CNBC said that BP is shopping the offering to the likes of Fidelity, PIMCO and other bond giants, but the results of those efforts remain to be seen. PIMCO does own $100 million in short-dated BP paper, but whether or not the world's largest bond fund manager embraces longer-term, riskier BP fare may be another issue altogether.

Not helping matters is the fact that Fitch downgraded BP's credit ratings on Tuesday, the second downgrade from that ratings agency in a month. Moody's followed that up with its own downgrade of BP on Friday. ''Moody's updated assessment is that the spill will have a sustained negative impact on the group's free cash flow generation and overall financial profile for a number of years,” the ratings agency said.

Lower ratings equal higher borrowing costs for BP and that is not the best of news for a company whose $20 billion contribution to an escrow account to compensate spill victims is viewed as a floor, not a ceiling.

Moody's also took the ratings knife to Anadarko Petroleum (APC), the independent oil and gas producer that owned a 25% interest in the Macondo well. The Moody's rating cut took Anadarko's credit rating to ''Ba1,'' which is junk status. Rising containment costs and the potential for further increases in litigation costs could hamper Anadarko, Moody's said.

Anadarko has been pretty quiet since the spill started, especially when considering this was almost a $74 stock on April 20. On Friday, Anadarko closed below $43. Well enough is enough as far as Anadarko is concerned and the company's CEO James Hackett was vocal in his assessment that the blame for the spill, now the largest in U.S. history, should be placed squarely at BP's doorstep.

Hackett said he was ''shocked'' at how BP operated the rig and that ''BP's behavior and actions likely represent gross negligence or willful misconduct.'' Anadarko claims that a joint-operating agreement between the companies means BP is responsible for damages related to the spill. Anadarko said it was surprised by the Moody's downgrade and that it will work ''diligently'' to regain investment graded investment grade status. The company also said something about protecting shareholders, but at this point, that is may just be perceived as idle chatter.

Anadarko Chart

There is something to the theme of appearing less liable for the spill than BP. Just take a look at shares of Transocean (RIG), the world's largest provider of offshore drilling services and the owner of the Deepwater Horizon rig. Transocean has seen its share price almost cut in half since the rig exploded on April 20 and heading into Friday's trading, the shares were down 14% this month alone, but the stock surged $5.18, or almost 10.5%, to $54.61, capping a 17% gain for the week. There was also some notable options activity in Transocean as traders scooped more than 95,000 calls compared to 61,000 puts. Some traders were even selling the Transocean June 50 puts after the stock moved above that level on Friday. Those options expired yesterday.

Most folks do not have warm and fuzzy feelings toward Transocean following the Gulf disaster. After all, the company's public relations team is only slightly more sensitive than BP's, as highlighted by a closed-door meeting in Switzerland to authorize a dividend and the company's attempts to get a Houston judge to cap its spill-related liabilities at $26.7 million.

What is becoming apparent is that the markets love to find a scapegoat, and in the case of the Gulf of spill, BP stands to be the biggest loser from the standpoint of how much cash the company is going to have to payout in the coming years. Another thing to consider is that perhaps some of the selling in names like Halliburton (HAL), Transocean, and yes, Apache, has been overdone.

Moody's lowered its ratings on Transocean last week for the same reasons it cut Apache and BP yesterday, but the more the blame for this epic disaster flows to BP, the more Transocean shares are going to benefit.

Transocean Chart

Looking at the charts, the Dow has broken out of the 10,250 range and further closes above 10,400 could be a bullish sign and support can be found at 10,200. A move above 10,550 would indicate further strength and perhaps bring about some fresh buying, but I would be cautious on the Industrials if the index peaks below the 10,185 level.

Dow Chart

More importantly, the S&P 500 has also broken out above the 200-day moving average and with Friday's close just above 1117, the index inched above a secondary resistance point. This is a moderately bullish sign and on the downside, a violation of 1100 might send the bulls running for cover. A move below old support at 1085 would clearly be bearish.

S&P 500 Chart

The Nasdaq continues to inch further away from 2300, though Friday's gains were lukewarm and that might be a generous assessment. Support can now be found at 2250 and there is a lot of real estate in between where the index currently resides and its next resistance point, which is just below 2400. Further strength in the S&P 500 would also lend a hand to the Nasdaq.

Nasdaq Chart

I am a bit more cautious regarding small-caps as the Russell 2000 probably needs to break above 675 in order to confirm bullishness. Laboring just below 667, the index could swing either way from here, meaning Monday and Tuesday could be important days in terms of where the Russell 2000 ends up next week. A move above 675 would be bullish, a retreat below 650 would be equally as bearish.

Russell 2000 Chart

I am always a little apprehensive about what the summer months can bring for stocks and I think that conservative posture is warranted this summer. The follow through after the major indexes reclaimed their 200-day moving averages has not been impressive and if earnings is indeed going to serve as a positive catalyst, the reports had better be a lot more encouraging than what we have seen from Best Buy (BBY) and FedEx (FDX), or the S&P 500 is going to have some challenges meeting the rosy year-end targets offered by so many analysts just a few months ago. Happy Father's Day to all the dads reading this.


New Plays

Short Candidate

by Scott Hawes

Click here to email Scott Hawes


NEW BEARISH Plays

International Game Technology - IGT - close 18.35 change -0.11 stop 19.26

Company Description:
International Game Technology (IGT) is a global gaming company specializing in the design, manufacture, and marketing of electronic gaming equipment and systems products. IGT maintains an array of entertainment-inspired gaming product lines. In addition to its United States production facilities in Nevada, it manufactures gaming products in the United Kingdom, and through third-party manufacturers in Japan and China. The Company derives its revenues from the distribution of electronic gaming equipment, systems, services and licensing. It operates in two segments: North America and International. North America consists of its operations in the United States and Canada, comprising 77% of consolidated revenues during the fiscal year ended October 3, 2009 (fiscal 2009). International consists of its operations in all other jurisdictions worldwide, comprising 23% of consolidated revenues during fiscal 2009.

Target(s): 17.70, 17.30, 16.80
Key Support/Resistance Areas: 19.00, 18.75, 18.09, 17.55, 17.25, 16.60
Time Frame: 1 to 2 weeks

Why We Like It:
IGT is in a solid downtrend and I expect it to continue. The stock is making lower highs and lower lows. The stock is below all its SMA's and a downtrend line that it recently touched on Tuesday 6/15 before a big gap down. All of this should provide plenty of resistance and if the overall market reverses lower anytime in the coming days IGT will be one of the first stocks to go. Ideally I would like to see IGT test $18.75 before initiating short positions which is Friday's highs and within the prior three day's trading range. But I'm not so sure we will see a bounce this high. I suggest we use a trigger of $18.50 to initiate short positions. Our stop is above the 100-day, 20-day, and 200-day SMA's and the recent downtrend line. This is a wide stop for now to account for volatility and will be adjusted when a better price is determined. I've provided three targets which are good places to tighten stops if IGT continues lower from our entry.

Suggested Position: Short IGT stock if it trades up near $18.50

Option Traders: Buy July $19.00 PUTS, current ask $1.15, estimated ask at entry $1.05

Annotated chart:

Entry on June xx
Earnings 7/22/2010 (unconfirmed)
Average Daily Volume: 4.8 million
Listed on June 19, 2010


In Play Updates and Reviews

Starting to Shift Bias

by Scott Hawes

Click here to email Scott Hawes

Editor's Note: Good Evening. I think the S&P 500 may have a little more upside left, but not too much until it runs into formidable resistance. The 61.8% retracement from the April highs to May lows is at 1,150, while the 50% retracement is at 1,130. There is also the 50-day, 100-day, and 20-week SMA's all in the 1,130 to 1,140 area. I anticipate all of these levels holding as resistance before we see more downside in the markets. As such, I am starting to position the model portfolio with more bias to the short side, especially as these levels approach. Current long positions should be managed with tight stops and I suggest being quick to take profits as targets are reached. I have made several adjustments to our long positions. Please email me with any questions.

Current Portfolio:


BULLISH Play Updates

Cisco Systems - CSCO - close 23.49 change +0.32 stop 22.20

Target(s): 23.55, 24.20
Key Support/Resistance Areas: 23.65, 22.55
Time Frame: 1 to 2 weeks

Comments:
I'm sticking with our set-up on CSCO and waiting for $22.85. If there is a pullback in the market this a stock I feel comfortable owning and will be looking for a bounce. Hopefully we can get filled this week so let's see what the market gives us. The stock hit a low of $23.05 on Thursday which was another entry for more aggressive traders. CSCO remains in the base it has built for the past 3 to 4 weeks and is trading in a $1 range (4.5%) between $22.55 and $23.55. $22.50 is key pivot level for the stock dating back to 2006. If the stock trades up to $23.80 and breaks higher out of the base that could also be used a trigger to enter for aggressive traders, but until that happens we are playing for a pullback. The remainder of my comments remain the same from the play release. CSCO looks stable here with a lot of support and I suggest we take advantage of the reliable price pattern that is being built. I would like to use $22.85 as a trigger to enter long positions. If triggered readers should be able to purchase July $22.00 calls for about $1.30 (current ask is $1.73). If CSCO then proceeds to rally to the top of its base at $23.55 we should make about 55 cents on the position for a +40% gain. If CSCO breaks out it could rally to fill a gap which is up near our more aggressive 2nd target of $24.40 and below the stock's 200-day SMA. Another entry could be considered at $23.05. Our stop will be $22.20. NOTE: I view this trade as potentially being quick.

Suggested Position: Long CSCO stock if it trades down near $22.85

Option Traders:
Suggested Position: Buy July $22.00 CALL, current ask $1.73, estimated ask at entry $1.30

Annotated Chart:

Entry on June xx
Earnings Date 8/5/10 (unconfirmed)
Average Daily Volume: 69 million
Listed on 6/16/10


GMX Resources Inc. - GMXR - close 8.00 change +0.21 stop 7.15 *NEW*

Target(s): 8.12, 8.40, 8.85, 9.40
Key Support/Resistance Areas: 7.52, 8.20, 8.50, 9.00, 9.50
Current Gain/Loss:
Time Frame: Several weeks
New Positions: Yes

Why We Like It:
GMXR traded down to $7.51 in early trading, triggering our entry to buy the stock. This was almost to the penny of Wednesday's lows and is a great example of the powerful double bottom pattern. I chose the entry trigger of $7.55 because it was near various intraday highs in May and June, as well as Wednesday's low after GMX broke out of the most recent downward trend line. So far we have been rewarded with more than +5% bounce off of those lows. Now that we are in the position at the lower trigger price I would like to offer two additional targets of $8.12 (below Wednesday's high) and $8.40 (near mid-April lows). These are areas where readers can also used to tighten stops to protect profits. Hitting these targets would constitute +7.5% and +11.2% gains, respectively. I would also like to move up our stop to $7.15 to limit risk in case there is a reversal. A tighter stop could even be placed in the $7.60 area or just below the double bottom in the $7.30 to $7.40 area, and if you get stopped out you can always re-enter at a better price when the stock finds its footing. I would rather protect profits than hang on and see a winner turn into a loser. I believe this play has a lot of upside potential but I also believe there is risk of a hard reversal in the overall market. GMXR has broken three longer term downward trend lines (starting on 10/16, 2/2, and 3/12) and appears to be ready to break out of recent resistance at $8.20. The stock has made a series of higher lows on the daily chart and is forming an ascending triangle. GMXR has closed above its 50-day SMA the past four days and may also be forming a bull flag. Volume has been noticeably higher in recent weeks, especially on days when the stock is advancing as opposed to pulling back. This signals that institutional money may be acquiring the stock which is a bullish indicator. NOTE: The options have a wide spread so I am going to refrain from officially suggesting an option position. The August $5 calls which are DITM look fine but trading the stock is suggested.

Current Position: Long GMXR stock at $7.55

Annotated Chart:

Entry on June 18, 2010
Earnings Date 8/3/10 (unconfirmed)
Average Daily Volume: 1.6 million
Listed on 6/17/10


Northern Oil & Gas - NOG - close 14.07 change +0.07 stop 13.42

Target(s): 14.75, 14.90
Key Support/Resistance Areas: 15.00, 14.35, 13.60, 13.15
Current Gain/Loss: +0.43% Time Frame: 1 to 2 weeks
New Positions: Yes

Comments:
We are long NOG stock at Friday's open at $14.01. My opening price data is conflicting but all of my intraday charts and time and sales data I could find show $14.01 so this is what I have used as the opening print. If any readers have something different please let me know and I will make the adjustment. NOG is holding the upward trend line that has formed with the lows from 5/25 and 6/8 and the stock's 20-day SMA (currently $13.79) is below and turning up. The stock also has solid support at $13.80 and $13.60 which are prior resistance areas from earlier this year which should now act as support. We are counting on all of this to hold as support and provide a bounce in NOG. Ideally, I would like to see the stock make a trip up to its 50-day SMA in the coming days, which is also near the June 3 and 15 highs. Our targets are $14.75 and $14.90 (adjusted) which are below the aforementioned highs and the 50-day SMA. If the trade plays out how we expect the gain will be about 5% to 6%. NOTE: I consider this a volatile stock and industry so please use proper position size to limit risk.

Current Position: Long NOG stock $14.01

Option Traders:
Suggested Position: Buy July $12.50 CALL

Annotated Chart:

Entry on June 18, 2010
Earnings Date 8/13/10 (unconfirmed)
Average Daily Volume: 670,000
Listed on 6/8/10


Ormat Technologies - ORA - close 29.67 change +0.06 stop 27.25

Target(s): 30.37, 30.95, 31.80
Key Support/Resistance Areas: 32.00, 30.60, 29.00, 27.50
Current Gain/Loss: +1.44%
Time Frame: Several weeks
New Positions: Yes

Comments:
ORA closed above its 50-day SMA for the fourth consecutive day and is forming a bull flag on its intraday and daily charts. I am looking for a move to $30.37 (adjusted first target) this week which is just below the 100-day SMA. This is an area where I suggest tightening stops to see if we can get more out of the stock. If it breaks through the 100-day SMA there is little resistance until our next two targets. Ultimately, I think ORA can make it up to the $31.80 area but it may take some time depending on the overall strength or weakness in the broader market. ORA has been stubborn to pullback so I wouldn't be surprised to see some sort of retracement before proceeding higher. We are keeping a wide stop to account for volatility and will adjust it this week. If readers want to keep a tighter leash on the trade a stop could be placed below the 20-day SMA or just below our entry price if you want it really tight.

Current Position: Long ORA stock at $29.25

Option Traders:
Suggested Position: Buy July $30.00 CALL

Annotated Chart:

Entry on June 16, 2010
Earnings Date 8/4/10 (unconfirmed)
Average Daily Volume: 345,000
Listed on 6/15/10


BEARISH Play Updates

Mohawk Industries - MHK - close 52.33 change -0.10 stop 58.05

Target(s): 52.05 (hit), 51.50, 50.40, 49.10
Key Support/Resistance Areas: 55.00, 52.00, 50.00
Current Gain/Loss: +1.88%
Time Frame: 1 to 2 weeks
New Positions: Yes

Comments:
We are looking for MHK to fill the gap below its current price which is just above the 200-day SMA. If there is any weakness in the market this should happen relatively quick. Since the lower end of the gap corresponds with its 200-day SMA this is a logical place for the stock to bounce. I suggest taking profits at this level or at least tightening stops to protect them. Our first target of $52.05 has been hit and I've listed another target just above Thursday's lows at $51.50 which is also a good area to tighten stops. I've moved the stop to $56.15 which is still wide to account for volatility. MHK has made a series of lower highs on the intraday charts and still looks vulnerable. My comments from the play release remain mostly the same. MHK has rallied +14% from its 6/8 lows and finds itself in a resistance and congestion area between $53.00 and $55.00. The stock has also hit its 100-day and 20-day SMA's and has been stopped. I believe it is time for the stock to turn back down from here and fill the gap higher between 6/11 and 6/14. MHK is a residential and commercial manufacturer of floor products in the US and Europe. The construction industry is struggling on both continents and consumer spending is weak. Any bad news about the industry or lowered guidance warnings could send the stock tumbling. Fundamentally, the company trades at about 28 times trailing earnings which I think is too high. NOTE: This stock is volatile so please use proper position size to limit risk.

Current Position: Short MHK stock at $53.33

Option Traders:
Suggested Position: Buy August $50.00 PUT

Annotated Chart:

Entry on June 17, 2010
Earnings 7/20/2010 (unconfirmed)
Average Daily Volume: 975,000
Listed on July 29, 2010