Option Investor
Newsletter

Daily Newsletter, Monday, 6/21/2010

Table of Contents

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

Market Wrap

Yuan News Not Enough To Boost Stocks

by Todd Shriber

Click here to email Todd Shriber
Stocks checked into Heartbreak Hotel for a second consecutive Monday as big gains on the back of China's move to relax the Yuan's peg to the U.S. Dollar evaporated to turn into another day of small losses. The Dow Jones was up as much as 144 points early in the session, but closed down eight points at 10,442. The S&P 500 slid four points to settle at 1113, barely above the 200-day moving average while the Nasdaq tumbled almost 21 points for a close of 2289. Small-caps were no better with the Russell 2000 shedding seven points to close at 660.

Stats Table

Overnight, China said it would relax a nearly two-year old Yuan/Dollar peg that was implemented in July 2008 during the nascent stages of the financial crisis in a bid by Beijing to support China's exporters. The relaxed peg sent the Yuan up 0.4% against the Dollar on Monday to 6.7976, but the reaction in equity markets may have been knee-jerk to say the least and that is probably why stocks could not hold their gains into the close.

The Chinese government, for all that can be said about it, is not known for doing business in hasty fashion and if it thought relaxing Yuan/Dollar peg would lead to dramatic near-term appreciation for the Yuan, the peg would not have been relaxed in the first place. On Friday, Yuan forwards were pricing in a 1.8% for the currency against the greenback over the next year. On Monday, that jumped to 2.7% over the same time frame.

In other words, this is by no means a dramatic move and Chinese policy makers said as much in their weekend statement, saying the action will result in only gradual changes while ruling out significant appreciation against the Dollar.

It should be noted that a stronger Yuan may not be good news for certain U.S. stocks. Retailers were the biggest losers among the 24 groups tracked by the S&P 500, tumbling almost 2% as a a group due to concerns that a stronger Chinese currency will increase the cost of importing Chinese products. Pick a marquee retail name and it is likely that the shares were down today.

Dow components Wal-Mart (WMT), the world's largest retailer, and Home Depot (HD), the largest home improvement reatailer, were both down more than 1% as was Target (TGT). Best Buy (BBY) tumbled almost 2% on the Yuan news, not surprising considering that so many of the retailer's items are produced in China. None of this was good news for the SPDR S&P Retail ETF (XRT), which slid 2.13% on the day.

XRT Chart

Industrials and materials names caught a bid on the Yuan news as speculation swirled China's demand for energy products and industrial metals would remain robust. Copper soared the most in a week on rumors Chinese demand will grow. September copper futures jumped 5.8 cents, or 2%, to $2.9595. That helped buoy gains in materials and mining stocks such as Freeport McMoRan (FCX), which gained 3.31% on the day.

Coal stocks also got a big boost on the currency news. China is the world's largest coal consumer and plenty of U.S. coal producers have already upped their production of metallurgical coal, a key ingredient in the steel-making process. This is the coal that Chinese steelmakers crave. Shares of Alpha Natural Resources (ANR), Cliffs Natural Resources, Massey Energy (MEE), Patriot Coal (PCX) and Walter Energy (WLT) all jumped between 3% and 4%. Good news for the Market Vectors Coal ETF (KOL), which is nearing a critical point on its chart. The ETF's 50- and 200-day moving averages are separated by just a few pennies and a move beyond those lines could be very bullish for KOL.

KOL Chart

Among financials, Visa (V) and MasterCard (MA) were solid performers, gaining 4% each as Congress mulled a compromise that would protect the transaction fees the companies charge to banks, according to Bloomberg News. The House may keep in place the Senate's proposal to limit fees charged to consumers for each swipe of their debit cards.

Essentially, the compromise is intended to protect consumers while not significantly altering the way Visa and MasterCard do business. One analyst said that if the proposal becomes law, the companies will see small changes to their business models, but nothing as extreme as was originally feared.

MasterCard Chart

What would a day in the market be without some news related to the Gulf of Mexico oil spill? BP (BP) shares tumbled 4.5% after the company said it has spent $2 billion on spill cleanup and containment efforts. That compares with the $1.6 billion the embattled oil company said it had spent on cleanup costs through June 14. Do the math and you'll find that BP's daily costs have jumped 10% to an average of $33 million per day.

To add to BP's pain, the U.S. Chemical Safety Board said it is starting an investigation into what caused the largest oil spill in U.S. history. The agency said the investigation will be handled by the same investigators that worked the two-year probe of BP's 2005 fatal blast at its Texas City refinery. The Chemical Safety Board does not have enforcement authority, but it can recommend new safety protocols.

BP is also locked in a schoolyard brawl with Anadarko (APC), the independent oil and gas producer that owned a 25% non-operating in the Macondo well project. BP is considering suing Anadarko over the latter's potential refusal to pay its share of the spill cleanup tab. Texas-based Anadarko said last week BP should absorb all of the costs because of the reckless way in which it operated the Deepwater Horizon rig.

Anadarko is considering arbitration rather than litigation to resolve the dispute and that would keep the proceedings private. Analysts have speculated the company could be facing up to $6 billion in spill-related costs, so if the company is able to reduce that amount, the news would likely be bullish for the stock. Speaking of Anadarko shares, Barron's reported that J.P. Morgan is recommending selling the August 45 calls against an existing position in the stock.

Anadarko Chart

Looking at the charts, not a lot has changed since I visited with you on Saturday, though the sell-off that ensued after enthusiasm for the Yuan news dissipated really hit the S&P 500 in a bad way. The index was looking quite strong early in the session, flirting with 1130 only to tumble all the way to 1110, where the index bounced off the 200-day moving average.

Certainly, it is a positive sign that the index found support at that critical line, but a close in the neighborhood of 1130 would have been decidedly more bullish as that would have given the index a chance to break the 50-day moving average at 1137 over the next day or two. I am still of the mind that if 1100 does not hold as support, the bears will gain control again.

S&P 500 Chart

I mentioned over the weekend that a move toward 10,550 for the Dow would be bullish. The Dow was actually trading close to 10,600 before the heartbreaking sell-off started. The 200-day moving average did not come into play, but investors are still left with the feeling of what could have been for the Dow on Monday. I reiterate a ''bullish above 10,550, bearish below 10,185'' feeling on the Dow.

Dow Chart

Earlier, I mentioned the effects a stronger Yuan would have on retailers and some of that same selling pressure was seen in technology issues, leading to a decline of almost 1% for the Nasdaq. Again, this was another gut-wrenching scenario because the Nasdaq traded as high as 2341, representing a flirtation with the 50-day moving average at 2350.

The flirtation was short-lived as the index collapsed below 2300 by the end of the session. This will not be a problem if the Nasdaq can starting making some gains soon, but a close at 2289 is not all that far away from support at 2250. Cautious is the word of the day with the Nasdaq.

Nasdaq Chart

The Russell 2000 was the biggest loser on a percentage basis. I noted over the weekend that from Friday's close at 667, the small-cap index could go anywhere and anywhere was down on Monday. The action here has been less than impressive over the past several days and I would be wary as the Russell 2000 approaches 650. We will need to see 675 to encourage some fresh buying here.

Russell 2000 Chart

I admit I liked the action in commodities and materials names today and if Chinese demand is legitimate, that is perhaps one catalyst that could boost these leadership groups, and in turn the broader market, over the summer. One day does not beget a trend, so I am not jumping for joy, especially due to the lack of catalysts out there until earnings season starts in earnest. Even with that, there are no guarantees. I think it is time to take cues from the technicals and use the numbers highlighted here to make bullish or bearish bets.


New Plays

Short Candidate

by Scott Hawes

Click here to email Scott Hawes


NEW BEARISH Plays

Simpson Manufacturing Co - SSD - close 26.89 change -0.13 stop 28.82

Company Description:
Simpson Manufacturing Co., Inc., through its subsidiary, Simpson Strong-Tie Company Inc. (SST), the Company designs, engineers and manufactures wood-to-wood, wood-to-concrete and wood-to-masonry connectors, SST Quik Drive screw fastening systems and collated screws, stainless steel fasteners, and pre-fabricated shear walls. SST Anchor Systems offers a line of adhesives, mechanical anchors, carbide drill bits and powder actuated tools for concrete, masonry and steel. SST is the Company’s connector products segment. The Company's subsidiary, Simpson Dura-Vent Company, Inc. (SDV), designs, engineers and manufactures venting systems for gas, wood, oil, pellet and other alternative fuel burning appliances. SDV is the Company's venting products segment. SST's Anchor Systems product line is included in the connector product segment. The Company markets its products to the residential construction, light industrial and commercial construction, remodeling and do-it-yourself (DIY) markets.

Target(s): 25.75, 25.35, 24.25
Key Support/Resistance Areas: 28.70, 27.75, 26.90, 26.00, 25.30, 24.00
Time Frame: 1 to 2 weeks

Why We Like It:
SSD hit a key resistance area near $28.70 on 6/14 and has retreated ever since. The stock is barely hanging on to its 200-day SMA and I believe it is poised to retest its June lows and possibly its late February lows near $24.00. The stock remains below its 20-day SMA and if the market continues lower form here we should easily hit our targets. Our stop is $28.82 which is above the highs from 6/14. My only concern is a possible inverse head and shoulders pattern on the daily chart. But if there is a bounce I believe it will be short lived considering today's bearish price action.

Suggested Position: Short SSD stock at current levels

Option Traders: Buy August $25.00 PUTS, current ask $1.25

Annotated chart:

Entry on June xx
Earnings 7/28/2010 (unconfirmed)
Average Daily Volume: 337,000
Listed on June 21, 2010


In Play Updates and Reviews

Three Long Positions Closed for Gains

by Scott Hawes

Click here to email Scott Hawes

Editor's Note: Good Evening. Three of our long positions hit targets today for nice gains. We now only have 2 short positions opened and are waiting to be triggered on CSCO. Today's price action was bearish as the SPX formed a bearish engulfing candlestick pattern and also turned down at its 50% retracement from the April highs to May lows at 1,130. The 61.8% retracement is at 1,150 and there is also the 50-day, 100-day, and 20-week SMA's all in the 1,130 to 1,140 area. I still anticipate all of these levels holding as resistance if there are any bounces higher from here. Our model portfolio is now firmly biased to the short side. We still need to stay nimble and protect profits on short positions as there appears to be no immediate end in sight for decreased volatility. Please email me with any questions.

Current Portfolio:


BULLISH Play Updates

Cisco Systems - CSCO - close 23.34 change -0.15 stop 22.20

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

Comments:
My comments from the weekend remain the same except I am adjusting the position to August $22.00 calls as opposed to July. I think we will see our trigger to enter long positions this week so I'll wait for $22.85. If there is a pullback in the market this is 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 August $22.00 calls for about $1.63 (current ask is $1.98). If CSCO then proceeds to rally to the top of its base at $23.65 we should make about 55 cents on the position for a +35% gain. If CSCO breaks out it could rally to fill a gap which is up near our more aggressive 2nd target of $24.20 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 once it is opening.

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

Option Traders:
Suggested Position: Buy August $22.00 CALL, current ask $1.98, estimated ask at entry $1.63

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



BEARISH Play Updates

International Game Technology - IGT - close 18.11 change -0.24 stop 19.10 *NEW*

Target(s): 17.80, 17.30, 16.80
Key Support/Resistance Areas: 19.00, 18.75, 18.09, 17.55, 17.25, 16.60
Current Gain/Loss: +2.74%
Time Frame: 1 week
New Positions: Yes

Comments:
IGT opened at $18.62 which was near our trigger of $18.50 to enter short positions. The stock proceeded to make a new low and closing low and sits at it lowest closing price since late March. I've adjusted our first target up to $17.80 (+10 cents) which is near the early March closing prices that provided resistance. For options traders, the July $19 puts should be worth $1.35 if this target is hit which would give readers a +42% gain. This is definitely a place to consider taking profits or tightening stops to protect profits. I'm going to move the stop down to $19.10 which is above the 20-day SMA and the 6/16 high. My comments from the play release remain mostly the same. 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. I've provided three targets which are good places to tighten stops if IGT continues lower from our entry.

Current Position: Short IGT at $18.62

Option Traders: Buy July $19.00 PUTS

Entry on June 21
Earnings 7/22/2010 (unconfirmed)
Average Daily Volume: 4.8 million
Listed on June 19, 2010


Mohawk Industries - MHK - close 51.88 change -0.45 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: +2.72%
Time Frame: 1 to 2 weeks
New Positions: Yes

Comments:
My comments remain the same from the weekend updates. 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. MHK 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

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


CLOSED BULLISH PLAYS

GMX Resources Inc. - GMXR - close 7.72 change -0.28 stop 7.15 *NEW*

Target(s): 8.12 (hit), 8.40, 8.85, 9.40
Key Support/Resistance Areas: 7.52, 8.20, 8.50, 9.00, 9.50
Current Gain/Loss: +8.87%
Time Frame: Several weeks
New Positions: Closed

Comments:
GMXR opened at $8.22 so we are flat the position for +8.87% gain. The stock spent the entire morning above $8.12 which was our adjusted target and then things took a turn for the worse just after noon. For traders who have the ability to trade intraday there were a couple of different areas to place protective stops which should have protected your profits. Look at a 15 minute chart and email me with any questions. I'll leave my comments from the weekend as they are still valid. 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 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.

Closed Position: Long GMXR stock at $8.22, entry was 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 14.15 change +0.08 stop 13.42

Target(s): 14.75 (hit), 14.90
Key Support/Resistance Areas: 15.00, 14.35, 13.60, 13.15
Current Gain/Loss: +5.28% Time Frame: 1 to 2 weeks
New Positions: Closed

Comments:
NOG hit our target of $14.75 three times today and retreated each time. We got the bounce we were looking for and our flat the position for a +5.28% gain. My biggest concern with NOG is there hasn't been any follow through to the upside and the rallies in the stock keep getting sold into. And with the market falling apart today I urge readers to protect whatever profits you have left. There is a bullish case to be made as my comments below from the weekend are still valid but protecting profits is paramount with the current volatility. NOG is still holding the upward trend line that has formed with the lows from 5/25, 6/8, and 6/18 and the stock's 20-day SMA (currently $13.87) 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.

Closed Position: Long NOG stock at $14.75, entry was at $14.01

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 29.54 change -0.13 stop 27.25

Target(s): 30.37 (hit), 30.95, 31.80
Key Support/Resistance Areas: 32.00, 30.60, 29.00, 27.50
Current Gain/Loss: +3.83%
Time Frame: Several weeks
New Positions: Closed

Comments:
ORA rallied up to our lowered target of $30.37 this morning so we are flat the position for a +3.83% gain. The stock remains above its 50-day SMA but retreated from its 100-day SMA this morning which was our lowered target $30.37. ORA remains in a bull flag and I am still bullish on the stock. But if it fails it could go down to retest its 20-day SMA just above $28.00. Today's price action is yet another example of how protecting capital is paramount in this volatile market. For readers with options, I'm disappointed with the pricing as it did not give us the gains we anticipated. It appears that the volatility has been sucked out of the premium we paid. If readers still have option positions I suggest one of two things: 1) placing a GTC sell limit order and try to unwind your positions on any strength in the stock (if there is any bounce in the stock from here you should be able to get $0.90 to $1.00), or 2) if you remain bullish on the stock consider rolling the option position to a later month so that time decay does not eat away at your premium. Regardless, if the market heads lower ORA probably will as well so be careful hanging on to option positions hoping the stock will rally higher because time decay is going to start to affect premium soon. I'll leave my comments from the weekend. 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, or simply taking profits. We should be able to get about $1.30 for the CALLS at this level. 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. I suggest readers take advantage of any spikes and take profits on the trade. A strategy to consider would be placing a GTC sell limit order on your option at $1.25, for example, and see if you get filled. 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.

Closed Position: Long ORA stock at $30.37, entry was at $29.25

Annotated Chart:

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