Option Investor
Newsletter

Daily Newsletter, Monday, 6/28/2010

Table of Contents

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

Market Wrap

Stocks Continue To Lack Conviction

by Todd Shriber

Click here to email Todd Shriber
It was another uneventful day for stocks as the lack of buyers was once again obvious. The Dow Jones Industrial traded in a 100-point range for the day, but closed down just five points. The S&P 500 provided little in the way of excitement, losing two points to settle at 1074 and the Nasdaq followed suit, dropping almost three points to finished the day at 2220. Small-caps did not deviate from the trend either with the Russell 2000 closing lower by about 3.5 points at 641.

Stats Table

The S&P 500 has declined in five of the past six trading sessions and is now down 3.6% this year. From a sector perspective, it was a couple of the usual suspects that hampered the broader market today as there was pronounced weakness in energy and materials names. As a group, energy stocks tumbled 1.3% on the day, good enough to make them the biggest losers in the S&P 500. Both Exxon Mobil (XOM) and Chevron (CVX), the two largest U.S. oil companies, helped drag the Dow lower on Monday.

Speaking of oil stocks, somehow, someway BP (BP) managed to eke out a gain on Monday, despite touching a new 52-week low of $26.75. The company said that its total costs for the Gulf of Mexico oil spill oil have now reached $2.65 billion and for the previous three days leading up to Monday, it had spent $300 million. That is the first time since the spill started more than two months ago that BP has averaged $100 million a day in costs.

BP shares really cannot handle much more bad news and news that Tropical Storm Alex may turn into a hurricane soon qualifies as a bad news. BP said today that its plan to double the amount of oil it is capturing from the leaking Macondo well may be delayed by a week because of the large waves Alex may rustle up in the Gulf. The company did say that its plans to boost its oil capture efforts to 80,000 barrels per day by mid-July remain on schedule and that may have been enough to save the stock from another dramatic fall today.

BP Chart

There was some good news from the oil patch, though it was company-specific to drilling services provider Noble (NE). The Swiss company said it will acquire closely held rival Frontier Drilling for $2.16 billion. That transaction is expected to close by the end of next month and Noble will add six floating drill units to its fleet.

Perhaps more important than the Frontier purchase is news that Noble is reworking agreements with Royal Dutch Shell (RDS-A), the largest European oil company, giving Shell the ability to suspend contracts on two Noble rigs in the Gulf of Mexico due to the government-imposed moratorium on deepwater drilling. Noble was caught of guard earlier this month when Anadarko Petroluem (APC) said it would abandon drilling contracts with Noble because of the moratorium.

Noble said its efforts with Shell are designed to prevent a repeat of the Anadarko scenario. What is interesting about the Noble/Shell deal and any other subsequent deals of a similar nature that emerge from other services providers and exploration companies is that this move clearly shows that oil companies are not expecting the moratorium to last just six months. Even if the moratorium is short-lived, exploration and production companies and services providers are going to be apprehensive about investing in the Gulf until they know what they are up against in terms of government regulations.

I could not say it any better than Argus Research analyst Phil Weiss who told the Associated Press ''If this was going to be a short moratorium, they wouldn't have to come up with these kinds of solutions.'' By ''these kinds of solutions,'' Weiss meant Noble's deal with Shell.

Noble Chart

Another commodities name that was under pressure on Monday was Freeport McMoRan (FCX), which slid $1.91, or 2.87%, to close at $64.66. as gold prices endured one of their worst sessions in weeks, failing to muster any strength above $1260 an ounce. Copper prices also declined for the first time in three days and the combination of lower copper and gold prices is not good news for a company that makes its living by mining both metals.

Freeport McMoRan Chart

Prices for both metals started to look a little too lofty last week with copper prices reaching a one-month high on Friday. Gold traders are pointing to the aforementioned $1260 area as a heavy resistance point, so it might be reasonable to expect some profit-taking in the yellow metal over the near-term. Still, who wants to be in the way of gold's runaway train? Less than encouraging economic reports should continue to fuel the gold rally. We got one last week in the form of the revised first-quarter GDP number and this Friday could bring another troublesome update on the economy with the release of June non-farm payrolls. In other words, gold may the one asset class where buying on the dips is worthwhile advice in the current market environment.

Boeing (BA) shareholders got a big scare today when the aerospace giant and Dow component traded lower by as much as 44% before U.S. markets opened. The pre-market trade in Boeing is eerily reminiscent of what happened to fellow Dow member Procter & Gamble (PG) during the now infamous May 6 flash crash.

Of course, things could have been much worse for Boeing and its shareholders had the 44% drop taken place during regular market hours and exchanges canceled those trades in Boeing, but this situation is not going to alleviate fears that U.S. exchanges have taken the necessary corrective actions to prevent a sequel to May 6.

Ultimately, Boeing finished lower by 2.14% at $67.30 on news that Dubai Aerospace Enterprise wants to renegotiate airplane orders with Boeing and Airbus. That news was first reported by the French newspaper Les Echos and quotes unidentified sources.

Boeing Chart

In an effort to bring you some good news, I again bring up one of the usual suspects. Apple (AAPL), one of the few companies capable of delivering a steady stream of good news to investors on a regular basis these days, said that it sold 1.7 million iPhone 4 units in the three days since the release of the new product.

That compares with the 1 million units of the iPhone 3 Apple moved during that products debut weekend in 2008 and the 1 million units sold of the iPhone 3GS Apple sold during the 2009 debut weekend for that phone, according to CNET. The iPhone 4, which has a higher resolution screen than its predecessors and a five megapixel camera with LED flash and high definition video, outperformed the iPad when comparing sales for the first weekends that those products hit stores.

UBS analyst Maynard Um said sales of the new iPhone could reach 8 million this quarter and surge to 9.8 million next quarter as supply catches up with demand. Um noted that the 9.8 million estimate could actually prove to be too conservative. Looking at the exponential growth in iPhone sales, Um may be right.

iPhone Sales Chart

Looking at the charts, the S&P 500 followed up last week's 3.6% drop with another decline on Monday, keeping the index locked in the 1050-1100 range that formed during the latter half of May and the earlier part of this month. For the bulls, the S&P 500 needs to make its way back above 1085, then 1100, then 200-day moving average to encourage fresh buying.

In other words, the index has a lot of work to do on the upside. Trading just above 1070, if the index dips below that level, 1050 is likely to come back into play.

S&P 500 Chart

The Dow is sporting many of the same chart characteristics and is still residing in the middle of a familiar range. The 10,000 area may be nothing more than round number support and I would look more closely at 9800-9850 and if that range does not hold, a move back to the June low of 9757 is possible. The 200-day moving average is more than 200 points away on the upside.

Dow Chart

The Nasdaq put up an admirable fight last week in the face of some disappointing earnings reports, most notably from Research In Motion (RIMM), but even with Monday's small loss, the Nasdaq closed right at support at 2220. That has me thinking the next couple of days could be fairly important to the Nasdaq's near-term fortunes and if 2200 does not hold, a return to 2320 is a very real possibility.

Nasdaq Chart

The 635 area seems to be support the Russell 2000 and that is also close to the 200-day moving average at 638. I would not be bullish unless the Russell can add another 25 points or so from here, but a drop below 635 could bring the index back to 620.

Russell 2000 Chart

With the a holiday weekend looming, I expect volume to be light and trade to be sluggish heading into Friday's jobs report. That may not be a bad thing for the bulls, but there are plenty of other noteworthy economic data reports that will be released before Friday and if the current trend holds, I would not expect cheery news to be delivered from any of these reports. I think it is apparent the bears are going to run the show this summer.


New Plays

Short Candidate

by Scott Hawes

Click here to email Scott Hawes

eBay, Inc - EBAY - close 20.71 change -0.24 stop 23.10

Company Description:
eBay Inc. (eBay) connects buyers and sellers globally on a daily basis through eBay, an online marketplace located at www.ebay.com, and PayPal, which enables individuals and businesses to send and receive online payments through www.paypal.com. The Company has two business segments: Marketplaces and Payments. On November 19, 2009, the Company sold its interest in Skype Luxembourg Holdings S.a.r.l., Skype Inc. and Sonorit Holdings, A.S. (collectively with their respective subsidiaries, the Skype Companies) to Springboard Group S.a.r.l. Prior to the sale, the Company operated in three segments. Its Communications segment, which consisted of Skype, enabled Internet communications between Skype users and provided connectivity to traditional fixed-line and mobile telephones. Following the completion of the sale of Skype, the Company operates through two business segments.

Target(s): 18.82, 18.40, 17.75
Key Support/Resistance Areas: 22.90, 21.50, 20.43, 20.30, 18.90, 18.39
Time Frame: 1 to 2 weeks

Why We Like It:
EBAY is hanging on to a key support level in the $20.30 to $20.50 area which I think will break in the coming days. If EBAY breaks this support there is not much below to hold it up until the $18.80 area which is below our first target of $18.82. The stock is below its 20-day and 50-day SMA's, both of which are declining, as well as its 20-week and 50-week SMA's (shown on the weekly chart below). I suggest we open short positions if EBAY trades to $20.27 which would be a break of support. I also suggest we use a trigger to short EBAY if it trades up to $21.30 which is just below a prior support area dating back to November and February lows. Our initial stop is $23.10 which is above the stock's recent highs and the 20-day and 50-day SMA's.

Suggested Position: Short EBAY stock if it trades to $21.30 or $20.27, whichever occurs first

Option Traders: Buy August $25.00 PUTS, current ask $1.40

Annotated Weekly Chart:

Entry on June xx
Earnings 7/21/2010 (unconfirmed)
Average Daily Volume: 19.8 million
Listed on June 28, 2010


In Play Updates and Reviews

Mixed Results

by Scott Hawes

Click here to email Scott Hawes
Current Portfolio:


BULLISH Play Updates

TD Ameritrade - AMTD - close 16.27 change -0.15 stop 15.68

Target(s): 17.14, 17.90, 18.20
Key Support/Resistance Areas: 16.40, 17.50, 17.90, 18.40
Current Gain/Loss: -0.91%
Time Frame: 1 to 2 weeks
New Positions: Yes

Comments:
6/28: AMTD peeked its head below the long term support level at $16.40. If the stock follows through to the downside tomorrow conservative traders may wan to consider exiting the position. But the stock is oversold and is due for a bounce. I've adjusted the first target to $17.14 which is below AMTD's 20-day SMA and a prior support level. t a minimum this is good place to tighten stops if the stock trades up to this level.

6/26: AMTD has come into an interesting support area in the $16.00 to $16.50 area dating back to January 2008 (see the weekly chart below). I believe the stock is poised to bounce from here. We're not looking to hit a home run here but simply catch a move up towards the stock's daily 20 and possibly 50-SMA's (see a daily chart). A $1 move will give us a +6% gain. Fundamentally, AMTD trades at a lower P/E ratio than many of its online brokerage peers. This is a countertrend trade at a key support level on a good company with strong fundamentals. Our stop will be $15.68.

Current Position: Long AMTD stock, entry was at $16.42

Options Traders:
Suggested Position: August $15.00 CALLS

Entry on June 28, 2010
Earnings Date 7/20/10 (unconfirmed)
Average Daily Volume: 5.1 million
Listed on June 26, 2010


Hanson Natural Corp - HANS - close 40.42 change +0.69 stop 38.25

Target(s): 40.50 (hit), 41.25, 42.40, 43.25
Key Support/Resistance Areas: 42.50, 41.00, 40.25, 39.30, 38.50
Current Gain/Loss: +2.54% Time Frame: 1 to 2 weeks
New Positions: Yes

Comments:
6/28: HANS closed above it 50-day SMA today and is maintaining the upward trend line that started on 5/7. The stock also traded to a new high that hasn't been since 5/18. Our first target of $40.50 was hit today but I think we have a good chance of hitting $41.25 so I am going to leave this open to see if we can get some follow through in the coming days.

6/26: HANS continues to make higher lows and if there is strength in the broader market early this week I believe our targets will be hit. On Friday the stock was increasing in the morning as the market was making now lows. The volume patterns are also bullish as the pullbacks tend to come on lighter volume. This shows me there may be institutions buying in this stock which bodes well for a bullish thesis. I've made some minor adjustments to the targets.

6/24: HANS printed a bullish engulfing candlestick today and closed +1.15% higher, despite the significant weakness in the broader market. The market should bounce soon, if not tomorrow, and this should bode well for HANS. The stock was turned back from its 50-day SMA today for the second time in the last 4 trading sessions. If it keeps knocking it should break through, and with the broader market in oversold conditions itching for a bounce, I expect this to happen and our targets to be hit. The 20-day and 200-day SMA are also providing support for the stock.

Current Position: Long HANS stock, entry was at $39.42

Options Traders:
Suggested Position: August $40.00 CALLS

Entry on June 23, 2010
Earnings Date 8/5/10 (unconfirmed)
Average Daily Volume: 1.1 million
Listed on 6/22/10


BEARISH Play Updates

Avon Products - AVP - close 27.78 change +0.29 stop 29.65

Target(s): 25.80, 25.25, 24.25
Key Support/Resistance Areas: 29.50, 29.00, 28.00, 27.17, 25.75, 25.00
Current Gain/Loss: -0.58%
Time Frame: Several weeks
New Positions: Yes

Comments:
6/28: AVP found some support at its 20-day SMA which also corresponds to its late May highs. AVP could bounce from here if the market does but I believe it will be short lived. Our stop is high enough to account for volatility and I expect the stock to trade down to $25.80 within the next week or so.

6/26: AVP ran into prior support and its 50-day SMA this past week and is now turning lower. The stock made a lower high and I believe it is due to make a lower low, or at least retest its recent lows near $25.00. If we simply catch a portion of this move we will have a nice profitable trade. Our primary target is $25.25 but I have also listed $25.80 as a target which is an area to consider tightening stops or taking profits. If the selling picks up AVP could go all the way down to the $24.00 area which was a prior support/resistance level from 10/08 and 5/09. Our stop is $29.65 and our time frame is several weeks.

Suggested Position: Short AVP stock, entry was at 27.62

Option Traders: Buy August $27.00 PUTS

Entry on June 28, 2010
Earnings 7/29/2010 (unconfirmed)
Average Daily Volume: 4.2 million
Listed on June 26, 2010


Grand Canyon Education - LOPE - close 24.08 change +0.58 stop 25.86 *NEW*

Target(s): 21.80, 20.80, 20.05
Key Support/Resistance Areas: 25.00, 24.25, 23.00, 21.50, 20.00
Current Gain/Loss: -3.21%
Time Frame: 1 to 2 weeks
new Positions: Yes

Comments:
6/28: LOPE did not act as I suspected today as the stock gained +2.47%. However, LOPE was turned away at its 50-day SMA and closed below our key support level at $24.25. The stock also remains in a downtrend and the stock sold off -2.35% in the last hour of trading so sellers are alive and well. The rally may have had something to do with short covering and speculation about the probes from Washington into the for-profit education sector. Volatility was expected in this position and I don't expect that to change. I've adjusted our stop up to $25.86 which is above the primary downtrend line. NOTE: This sector is volatile and I suggest small position size to manage risk. This is also a highly contentious sector and is being driven by news. There are three employment reports this week and if any of them are better than expected it could negatively affect the short term direction of education stocks, which will be good for our position. If the reports turn out to be worse than expected LOPE may be positively affected. But I believe there is enough resistance overhead to keep bounces in check.

6/26: Education stocks have come under political fire recently and are now being probed by pundits in Washington. There was a hearing on Thursday afternoon in which Senators criticized for-profit universities. This uncertainty has put pressure on many stocks in the sector and I believe it is far from over. According to Chronicles of Higher Education reporter Marc Perry, who observed the hearing, he had this say: At the conclusion of hearings about the for-profit education sector, Senator Tom Harkin said he doesn't think that any "reasonably objective" observer can say that nothing is wrong with the sector, and added that hearings about the sector will continue next month. One unnamed senator kept repeating the word "scam" during the hearing. Senator Al Franken, a Minnesota Democrat, repeatedly said that he wants "to shut the for-profit universities down," and asked one witness "What kind of laws do we need to pass to shut'em down?" This is not good for the sector. LOPE has made a series of lower highs and lower lows and I see no reason why this stock will not trade down to its 200-day SMA (currently $21.41). Our first target is $21.80 and I have provided two more aggressive targets should the selling intensify. LOPE has two primary downtrend lines overhead along with its 20-day, 200-day, and 100-day SMA's all turning lower. This should provide plenty of resistance and keep any bounces in check. Our initial stop will be $25.68 to account for short term volatility. NOTE: This sector is volatile and I suggest small position size to manage risk. This is also a highly contentious sector and is being driven by news. There are three employment reports this week and if any of them are better than expected it could negatively affect the short term direction of education stocks, which will be good for our position. If the reports turn out to be worse than expected LOPE may be positively affected. But I believe there is enough resistance overhead to keep bounces in check.

Current Position: Short LOPE stock, entry was at 23.33

Option Traders: Buy August $25.00 PUTS, current ask $2.60

Entry on June 28, 2010
Earnings 8/3/2010 (unconfirmed)
Average Daily Volume: 429,000
Listed on June 26, 2010


Macy's - M - close 18.82 change -0.20 stop 21.70

Target(s): 18.90, 18.10
Key Support/Resistance Areas: 22.25, 21.25, 20.90, 20.25, 19.40, 18.00
Time Frame: 1 to 2 weeks

Comments:
6/28: We are waiting for our trigger to enter short positions at $19.50. If we are patient I think M will trade up to this level. There is a lot of overhead resistance to keep bounces in check and this is good level to try a short position.

6/26: I've adjusted our trigger to enter short positions to $19.50. I'm expecting the market to bounce from here and M should trade up to our trigger in the coming days. I'll leave my comments from the play release. M collapsed Thursday closing -6% lower and near our 2nd target of $18.90. I still believe the stock will trade down to $18.10 but I do not suggest chasing it at these levels. The broader market should bounce from here and I suspect M will as well. But these bounces should be short lived and I suggest we take advantage them. As such, I have adjusted the entry trigger to $19.50 and the suggested option position. M broke down on 6/23 out of a descending triangle but was saved with a rally. The stock is hanging on to a thread and I do not see any reason why the stock will not continue its descent. The broader market may bounce higher but there is plenty of resistance overhead to keep M in check. I suggest we use $19.50 as a trigger to enter short positions. The next level of meaningful support is all the down near $18.00 which are highs from December. I am going to place a wide initial stop at $21.70 to account for volatility and will adjust it once we are in the position.

Suggested Position: Short M stock if it trades up to $19.50

Option Traders: Buy August $20.00 PUTS, current ask $2.00, estimated ask at entry $1.70

Entry on June xx
Earnings 8/12/2010 (unconfirmed)
Average Daily Volume: 11.7 million
Listed on June 23, 2010


Whirlpool Corp - WHR - close 95.64 change -1.01 stop 105.50

Target(s): 94.10, 91.50, 86.05
Key Support/Resistance Areas: 101.70, 99.00, 97.50, 94.00, 85.25
Current Gain/Loss: +1.91%
Time Frame: 1 to 2 weeks
New Positions: Yes

Comments:
6/28: WHR traded up to our trigger 0f $97.50 to enter short positions. The stock hit a brick wall and sold off the remainder the day. Our primary target is $91.50 but $94.10 may provide support. This is an area to consider tightening stops and protecting profits. If WHR bounces I believe there is enough overhead resistance to keep things in check, but we may have to exhibit some patience.

6/26: We are waiting to be triggered at $97.50 to enter short positions. My comments remain the same from Thursday. I still believe WHR has a good chance to trade down to $91.50 and eventually $86.05 but I do not suggest chasing it at these levels. The broader market should bounce from here and I suspect WHR will as well. But these bounces should be short lived and I suggest we take advantage them. I have lowered our entry to short positions to $97.50. My comments from the play release remain the same. WHR has been making lower highs and has broken many trend lines. The stock has one more trend line providing support from the July lows to the February lows. However, I think it only a matter of time before this is broken and the stock retests or breaks its recent lows near $91.50. WHR is also below its 20-day and 50-day SMA's and I think there is enough overhead resistance to enter short positions at $97.50, which is below Thursday's highs and the 20-day SMA. I am going to place a wide initial stop at $105.50 to account for volatility and will adjust it once we are in the position.

Suggested Position: Short WHR stock if it trades up to $97.50

Option Traders: Buy August $95.00 PUTS current ask $6.80, estimated ask at entry $6.40

Entry on June 28, 2010
Earnings 7/21/2010 (unconfirmed)
Average Daily Volume: 2 million
Listed on June 23, 2010