Option Investor
Newsletter

Daily Newsletter, Wednesday, 8/11/2010

Table of Contents

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

Market Wrap

Worldwide Sell-Off

by James Brown

Click here to email James Brown

Market Stats

Stocks sold off sharply on renewed worries over an economic slowdown. Yesterday the Federal Reserve confirmed our fears about the U.S. economic recovery slowing down. While the initial reaction to the FOMC announcement was positive, investor sentiment changed overnight. The markets began to wonder, why didn't the Fed act more aggressively if the situation is getting worse. Weak economic data out of China and Japan, disappointing comments from the Bank of England, and U.S. trade numbers that were worse than expected all combined to deliver a bad day for stocks around the globe. The U.S. dollar and treasuries surged as money ran for safer securities. The yield on the 10-year note fell to 2.69% and the yield on the 2-year note hit a new all-time record low of 0.48% intraday before settling at 0.52%. Gold futures rose modestly with a $1.90 gain to $1,199.90 an ounce. Crude oil futures sold off sharply with a -3.6% decline to $77.34 a barrel.

Chart of the U.S. dollar ETF (UUP):

Chart of the Euro ETF (FXE):

Foreign markets are rolling over with big declines in Japan and Europe. While the dollar is rising against the euro it fell to a new 15-year low against the yen. This yen strength combined with a sharp drop in machinery orders sent the Japanese markets tumbling. The NIKKEI index lost -2.7%. Meanwhile in China the government said investment and factory output fell to its slowest pace in almost a year. Investors have been fearful that as China slams on the brakes to slow down its red hot economy it might go too far. Now that China is seeing success in their efforts to slow down their economy the world worries that the pullback will affect earnings for companies around the globe. The Hong Kong Hang Seng index lost -0.8% but the Shanghai index managed a +0.47% gain.

Wednesday saw painful declines in European stocks. The major indices posted their biggest one-day drop in six weeks and closed at three-week lows. Disappointment in the U.S. Fed's choice of actions on Tuesday was combined with worrisome comments from the Bank of England today. The BoE said the economic rebound in the U.K. was "highly uncertain" and the central bank might need to produce more stimulus and more quantitative easing. Exacerbating the bearish comments was a sharp drop in Britain's July consumer confidence index, which fell 7 points to 56. The flight to safety is also evident in the German bond market with the yield on the 10-year bund falling to 2.43%, the lowest level since 1989. At the end of the day the English FTSE lost -2.4%. The German DAX lost -2.1% and the French CAC-40 fell -2.7%.

The Commerce Department's report on U.S. trade for June was a market-moving event this morning. It was widely expected that the trade gap would worsen but no one expected the trade deficit widen to $49.9 billion. This was an 18.8% jump from May to June. Sales of American exports fell -1.3% to $150.5 billion while imports rose +3% to $200.3 billion. The problem here is the impact on GDP estimates. The trade gap is so much worse than expected that the U.S. estimates on Q2 GDP growth will probably get revised from an already disappointing +2.4% growth to +1.3%. This could spark a flurry of downgrades as Wall Street firms reduce their expectations for growth in the second half of 2010. The Commerce Department will release its revised Q2 GDP estimates on Friday, August 27th.

The U.S. Treasury Department was making headlines and not for the $24 billion auction of 10-year bonds. Just one day after Congress passed and President Obama signed into law the $26 billion jobs bill the Treasury said July's budget deficit rose to $165 billion. Thus far, for the 2010 fiscal year, U.S. government revenues are up 0.7% over 2009 levels at $1.75 trillion. Yet government spending is up to $2.92 trillion. That's actually down -2.8% from a year ago. Currently the Obama administration expects the 2010 deficit to hit a record-breaking $1.47 trillion.

President Obama has not been very successful in his attempts to slow down the tide of foreclosures. The latest plan involves the Treasury providing $3 billion to unemployed homeowners. I hate the idea of people losing their homes and I certainly don't want to argue politics but this seems to be delaying the inevitable. This morning the Treasury Department said it would provide $2 billion to 17 states that have the worst unemployment levels. The remaining $1 billion would be given to the Department of Housing and Urban Development for a new program that provides zero-percent interest rate loans up to $50,000 for up to 24 months. Part of the money to fund this comes from the $700 billion Wall Street bailout that has been returned to the Treasury. As yet there are no estimates on how many homeowners this might help. Without knowing the details it certainly seems like the government is trying to push the foreclosure problem down the road until either housing values rebound or jobs rebound.

Government agencies were also in the news as regulators reported on a review of the May 6th, 2010 "flash crash" where the Dow Jones Industrial Average lost more than 700 points in just a few minutes. There has been a number of changes since the May 6th event, most notably trading curbs on individual stocks, but in spite of the changes put in place by the SEC and the exchanges we remain at risk. After questioning industry analysts and insiders over the still not fully understood market breakdown CFTC Commissioner Michael Dun said not only can the crash happen again, several of the people the panel questioned believe it will happen again. Another follow up report is expected in September and the advisory committee will likely make recommendations in October.

Earnings reports continue to trickle in. Today's biggest headline in corporate earnings was technology giant Cisco Systems (CSCO). Wall Street was looking for a profit of 42 cents a share on revenues of $10.88 billion. The company beat by a penny with 43 cents a share on revenues of only $10.8 billion. CSCO is the major player when it comes to IT spending on routers and switches for Internet traffic and networking. Their results are a reflection of the health of the entire industry. The $10.8 billion in sales was a record-setting pace for CSCO and up +27% from a year ago but it also proves that CSCO and the tech sector is not immune to the global slowdown. Investors are worried that a drop in government spending across the U.S. and around the world could have a negative impact on CSCO.

This afternoon CNBC said that CSCO normally beats estimates by 14%. While the company beat on the bottom line it was a narrow win and the revenue miss was very disappointing for Wall Street. CSCO said orders remain strong with most of their big markets seeing orders up +20% and emerging markets up +35% year over year. Last quarter the company generated $3.2 billion in cash, lifting its cash hoard to $39.9 billion. CEO John Chambers said the company still expects +18% growth this quarter in spite of the cautious attitudes pervading so many of his customers. CSCO lost 2.3% during normal trading and fell another -8% in after hours to $21.85 a share.

Chart of the Cisco Systems (CSCO):

Technically the market looks pretty ugly. It's not very often we see the S&P 500 lose -2.8% in one session. It was a very widespread decline with every sector in the red. Here is a list of some of the worst performers:

-4.8% Banking Index (BIX)
-4.5% Airline Index (XAL)
-4.3% Dow Jones Railroad Index (DJUSRR)
-4.2% Dow Jones Casino Index (DJUSCA)
-4.2% Semiconductor Index (SOX)
-4.2% Dow Jones Transportation Index ($TRAN)
-4.0% Healthcare index (HMO)
-3.8% Cyclicals (CYC)
-3.8% Defense Sector (DFI)
-3.6% Oil Services Index (OSX)
-3.4% Biotech Index (BTK)
-3.0% Oil Index (OIX)
-2.5% Goldminers ETF (GDX)
-2.0% Retail Index (RLX)

We were expecting the market decline with the bear-wedge pattern stalling under resistance. The S&P 500 managed to stop at its 50-dma on Wednesday afternoon. If the market does see an oversold bounce I would expect it to fail in the 1110-1120 zone and short-term traders could use any bounce as a new entry point for bearish positions. Once the S&P 500 breaks the 50-dma we can look for short-term support near 1160, 1140 and the July lows in the 1020-1010 zone. Whether it takes two weeks or six weeks I would expect a retest of the July lows.

Chart of the S&P 500 index:

The NASDAQ doesn't look any better. The index gapped open lower at its 50-dma and then continued to fall from there. This is a very ugly breakdown and while we might see an oversold bounce look for the top of the gap near 2250 to be new overhead resistance. On a short-term basis we can look for support near 2150-2140 near the late May-early June lows. However, I would expect a correction toward the July lows over the next few weeks. We have been warning readers to keep an eye on the SOX semiconductor index. Today that index fell toward significant support in the 330-325 zone. A close under 325 would be very bearish and help lead the NASDAQ lower.

Chart of the NASDAQ index:

Chart of the SOX Semiconductor index:

We like to look at the Russell 2000 small cap index as a measure of fund manager sentiment. The index has broken down under its 50-dma and 200-dma again. It has also closed under the short-term trendline of higher lows. Overall the trend of lower highs and lower lows is back in play.

Chart of the small cap Russell 2000 index:

Looking ahead I don't see a lot of compelling reasons for traders to buy stocks at this time. August and September are traditionally the worst months of the year for stocks. The Q2 earnings season was generally positive but the optimism was short lived, which is exactly what we expected. After weeks and weeks of economic data as evidence of our slowing momentum the Fed just confirmed for us that we are in "soft patch". The double-dip recession camp has lots of ammunition and many are placing odds of a double dip in the U.S at 50%. Europe remains weak and now there are renewed worries that China may be slowing down too fast. I do think there is a chance we'll see a late fall rally higher. However, I would prefer to look for bullish positions on a bounce from the July lows. We may not see that entry point for several more weeks.

-James


New Plays

Miners Should Perform

by Scott Hawes

Click here to email Scott Hawes
Good evening. I've released a new long play on NEM below which I think will do well over the next several weeks. We currently have a couople of short positions to take advantage of continued market weakness and I plan to release more short plays once the market retraces some the recent declines. TCK is in jeopardy of being stopped but I think TGT will be fine on this pullback. I anticipate continued selling in the next day or two and I would be protecting profits against a hard reversal on short positions. We will be able to re-enter short positions at a better price. Please email me with any questions.


NEW BULLISH Plays

Newmont Mining Corp - NEM - close 56.04 change -1.36 stop 52.20

Company Description:
Newmont Mining Corporation (Newmont) is a gold producing company with assets or operations in the United States, Australia, Peru, Indonesia, Ghana, Canada, New Zealand and Mexico. It is also engaged in the production of copper, principally through its Batu Hijau operation in Indonesia and Boddington operation in Australia. At December 31, 2009, Newmont had proven and probable gold reserves of 91.8 million equity ounces and an aggregate land position of approximately 33,400 square miles

Target(s): 59.30, 60.50, 61.50
Key Support/Resistance Areas: 62.00, 59.50, 58.00, 55.00, 54.30, 52.30
Time Frame: Several weeks

Why We Like It:
NEM is approaching a long term upward trend line that began with its November 2008 lows to February 2009. The stock has also broken out above a key pivot level in the $55 to $56 area dating back to 2007. NEM has now turned back to test the pivot level and I suggest we take advantage of the weakness. In addition, if the Fed is going to monetize the country's debt then gold and gold miners should do well and act as a defensive play. I am looking for NEM to reverse to the $55.05 to $54.40 level. We will use $54.40 as a trigger to enter long positions but aggressive traders may consider $55.05. Our stop will be $52.20 which is below the 200-day SMA and the long term upward trend line. I am looking for NEM to bounce up to possibly retest its YTD highs.

Suggested Position: Long NEM stock if it trades to $54.40

Annotated daily chart:

Annotated weekly chart:

Entry on August xx
Earnings 11/3/2010 (unconfirmed)
Average Daily Volume: 7.7 million
Listed on August 10, 2010


In Play Updates and Reviews

Shorts Perform

by Scott Hawes

Click here to email Scott Hawes
Current Portfolio:


BULLISH Play Updates

Target Corp - TGT - close: 52.01 change: -0.93 stop: 50.80 *NEW*

Target(s): 52.50, 53.45, 54.70, 55.25
Key Support/Resistance Areas: 51.50, 53.75, 54.75, 55.30
Current Gain/Loss: -1.87%
Time Frame: Several Weeks
New Positions: No

Comments:
8/11: TGT and the retail sector held up relatively well today considering the broader market sell off. However, we need to stay nimble and considering the sudden trend change it is prudent to begin looking for an exit, even if it is a loss. TGT's chart is still in an uptrend. The stock is maintaining its upward trend line and is above its 20, 50, and 200 day SMA's. I've tightened the stop to $50.80 to limit losses and I want to caution readers that if the market continues its path downward without pause our stop may get hit. Exiting positions now is an option and should be considered to protect capital. I've added $52.50 and $52.85 as targets that should be considered as areas to tighten stops or exit positions.

8/10: TGT sold off early, closed its gap higher from yesterday, and then rallied in the afternoon which created its 3rd consecutive bottoming tail candlestick. The stock's chart looks good and there is solid support all the way down to $51.50. But if we break higher I suggest readers be cautious in protecting gains as I believe the broader market is vulnerable. I've added $54.70 as a target which is near the 6/15 swing high where TGT will probably start to see some resistance. I've also updated the key support/resistance areas above.

Current Position: Long TGT stock, entry was at $53.00

Entry on August 9, 2010
Earnings Date 08/18/10 (unconfirmed)
Average Daily Volume: 5.5 million
Listed on August 7, 2010


Teck Resources Ltd - TCK - close 34.93 change -0.40 stop 32.65

Target(s): 33.90, 34.45, 36.00
Key Support/Resistance Areas: 37.00, 36.00, 34.75, 34.00, 33.00, 32.25
Current Gain/Loss: -7.06%
Time Frame: 1 to 2 weeks
New Positions: No

Comments:
8/11: Materials stocks sold off hard today on the bad data out of China and we are most likely going to get stopped out. The upward trend line has been broken and TCK closed below its 50-day SMA. Our long set-up has failed and it is time to look for an exit. If the stock gaps below or near our stop tomorrow I suggest we institute our stop rule in that we will let the first 15 or 30 minutes of trading settle in before doing anything, and place a new stop below the opening range. This will allow us to determine the true strength or weakness in the market and keep us in the trade looking for a better exit. I've adjusted the targets above and if we exit at them unfortunately this trade will be loser.

8/10: TCK gapped lower and drifted higher the entire day. The stock bounced perfectly off of its upward trend line that began on 7/1 and remains above its 20-day and 50-day SMA's. My comments from below are still valid.

8/9: TCK rebounded nicely today closing +2% higher. The stock is maintaining its 20-day SMA and upward trend line. I'm looking for TCK to move back up towards its 200-day SMA and possibly its 5/10 highs. I suggest taking profits or tightening stops at these levels. I've adjusted the 2nd target to $36.75.

Current Position: Long TCK stock, entry was at $35.55

Entry on August 5, 2010
Earnings More than 2 months (unconfirmed)
Average Daily Volume: 6.4 million
Listed on July 31, 2010



BEARISH Play Updates

SPDR DJIA ETF - DIA - close 104.13 change -2.53 stop 104.85 *NEW*

Target(s): 105.40 (hit), 104.75 (hit), 103.65, 103.05
Key Support/Resistance Areas: 108.00, 107.00, 105.90, 104.75, 104.20, 103.50
Current Gain/Loss: +2.21%
Time Frame: 1 week
New Positions: Yes

Comments:
8/11: DIA fell out of the rising wedge pattern and tanked lower today, hitting two targets. We now have a +46% gain which needs to be protected. I've lowered the stop to $104.85 which is above the intraday congestion area from today and the 20-day SMA. This should provide enough resistance to keep any bounces in check. I suspect DIA may head towards its 50-day SMA which is just below $103. We have two more targets: $103.65 which just above the low on 7/30, and $103.05 which is just above the 50-day SMA. These are the areas I suggest taking profits or tightening stops. If we get stopped out our gain should still be +30%.

8/10: DIA keeps getting close to hitting our target but the market keeps getting saved. Today in early trading this position could have been closed for a +10% gain but stocks rallied. I suspect we may have a spike in the markets over the next day or two but I do believe we will get a meaningful correction that could happen at anytime within the next week, and it could happen fast. DIA is forming a bearish rising wedge pattern and if it lets go we should see a $2 or $3 drop relatively quick. This is what we are positioned for and should the drop happen I suggest readers begin to tighten stops as our targets approach to protect capital and against a reversal.

Current Position: Short DIA stock, entry was at $106.48

Options Traders: Buy September $106.00 PUTS

Entry on August 3, 2010
Earnings: N/A (unconfirmed)
Average Daily Volume: 14 million
Listed on August 2, 2010


Con-way Inc. - CNW - close: 28.18 change: -1.71 stop: 34.05

Target(s): 28.75, 28.25, 25.50
Key Support/Resistance Areas: 25.00, 28.00, 32.00
Current Gain/Loss: N/A
Time Frame: Several Weeks
New Positions: Yes, trigger 29.95

Comments:
8/11: CNW has long term support right here at $28.00. If it breaks it should head towards our most aggressive target of $25.50. However, I don't think it will get there prior to closing some of the gaps the stock has experienced in the past few days. Let's lower the trigger to $29.95 and see if we get a bounce in the next day or two and I'll continue to adjust with the market. Aggressive traders can still consider this short but it could reverse in an instant so I consider it more of a day trade vehicle with the oversold conditions until we get a bounce.

8/10: CNW lost -2.26% today and the stock looks very vulnerable to me, but I sure would like to short it at a better price. Let's lower our trigger to enter short positions to $31.00. This was yesterday's highs and could set-up a potential double top play. I'm just not sure if CNW can bounce a dollar to get there. Aggressive traders could consider positions on any strength.

8/9: CNW has a ways to go to reach our trigger to enter short positions. Depending on the reaction to tomorrow's FOMC announcement aggressive traders may consider positions at current levels. A break below $29.90 should get things moving to the downside.

8/7: A number of the transport stocks have been doing very well. As a matter of fact the Dow Jones Transportation index looks poised to breakout higher. Unfortunately for shareholders of CNW the opposite is true. The company reported earnings this past week and missed estimates. The stock gapped down but managed a bounce from support. Odds are good that CNW could fill the gap before rolling over again. The top of the gap at $32.00 should be new resistance. I am suggesting a trigger to open bearish positions at $31.75. We'll use a stop loss at $34.05. (More conservative traders could always wait for a close under $28.00 before launching positions). Our first target is $25.50.

Suggested Position: Short CNW stock if it trades to 29.95

Entry on August xx
Earnings Date 11/03/10 (unconfirmed)
Average Daily Volume: 1.0 million
Listed on August 7, 2010


Temple Inland Inc. - TIN - close: 18.03 change: -0.95 stop: 21.25

Target(s): 18.25 (hit), 17.80, 16.25, 14.00
Key Support/Resistance Areas: 20.00, 19.00, 18.00, 16.00
Current Gain/Loss: +7.54%
Time Frame: Several Weeks
New Positions: Yes

Comments:
8/11: We are up +7.5% in this trade and our first target has been hit. TIN is at a key support area and its flash crash lows are also just below so I've added a target of $17.80. This stock has sold off so far and so fast it is due for a bounce. I would be inclined to take profits at this level and possibly re-enter on a bounce higher.

8/10: TIN still looks good short. If the stock breaks today's lows we should easily reach our first target. My comments from below remain the same.

8/8: Short positions were initiated at the open and TIN spent most of the day rolling over. The chart of TIN looks vulnerable and I like the short play. But I also want to caution readers that if the broader market breaks higher TIN could just as easily bounce with it. I've added $19.00 as a support/resistance area and $18.25 as a target. A move to $18.25 is more than 6% away from our short entry.

Suggested Position: Short TIN stock, entry was at $19.50

Annotated Chart:

Entry on August 9, 2010
Earnings Date 10/21/10 (unconfirmed)
Average Daily Volume: 1.8 million
Listed on August 7, 2010



CLOSED BULLISH PLAYS

Gaylord Entertainment Co. - GET - close 28.32 change -1.11 stop 27.90

Target(s): 29.00, 29.95, 30.80, 31.75
Key Support/Resistance Areas: 30.00, 29.00, 28.25
Current Gain/Loss: -4.54%
Time Frame: 1 to 2 weeks
New Positions: Yes, with a very tight stop

Comments:
8/11: It wasn't meant to be with GET,, or any long positions for that matter. The stock broke out of its bull flag and the broader market weakness took it down hitting our stop for a loss. Today's gap was lower than our $27.90 stop so the loss is more than I anticipated. If there wasn't a gap and the stock simply hit the stop our loss would have been -3.3% as opposed to -4.5%. This is the risk with swing trades in a volatile market and something we must deal with as traders. in any event, GET is near its late May/early June highs which acted as resistance and may now act as support. But the stock is most likely headed for its 50-day SMA (another -3% from here) and possibly its 200-day SMA. If readers still have positions I would keep a tight leash on the trade.

8/10: The hotel sector had a bad day and GET lost -3.77%. Our trigger to enter long positions at $28.85 was hit after GET gapped down so we are long the stock in the model portfolio. GET broke down out of the bull flag which was one of the reason for initiating the trade to begin with. This has me concerned but GET did manage to close above the key support level of $28.25 when there was a lot of noise in the market. Buyers stepped in late in the day so it appears our stop is in the right place. Its do or die time now with GET and we need the broader market to move higher to help our cause. There is a good chance we get stopped out and if so, I suggest getting out of the way. I've also offered a lowered target near today's highs at $29.00 which is a good area for readers to consider tightening stops. Trailing stops is probably a good idea.

Current Position: Long GET stock, entry was at $28.85

Options Traders: September $30.00 CALL

Entry on August 10, 2010
Earnings 11/3/2010 (unconfirmed)
Average Daily Volume: 630,000
Listed on August 9, 2010