Option Investor
Newsletter

Daily Newsletter, Thursday, 8/12/2010

Table of Contents

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

Market Wrap

Sea Of Red

by Todd Shriber

Click here to email Todd Shriber
Thursday was another rough day for stocks as a rise in jobless claims extended the S&P 500's losing streak to three days, good for the index's worst three-day run since early July. The index slipped almost six points to close just below 1084 while the Dow Jones Industrial Average gave up almost 59 points to continue three days of its own losses and settle around 10,320. Cisco (CSCO) predictably hampered the Nasdaq as the tech-laden index tumbled 18 points to close below 2200 at 2190. Small-caps were in the red as well with the Russell 2000 losing 3.4 points to settle just under 617.

Stats Table

For the week ended August 7, initial jobless claims rose by 2000 to 484,000, the highest level since February, according to the Labor Department. Economists were actually forecasting a decline in initial claims and the pop in new claims is just fuel on the fire for those that believe the economic recovery is losing steam in a big way. The median forecast of 42 economists in a Bloomberg survey called for a drop in jobless claims to 465,000 and the Labor Department revised last week's number up to 482,000 from 479,000.

Making matters worse was a sharp increase in the number of folks receiving supplemental unemployment benefits. That number jumped to 1.34 million thanks in part to Congress extending unemployment eligibility. Predictably, none of this is good news of stocks. I found an interesting chart on Seeking Alpha that highlights the correlation between jobless claims and the performance of the S&P 500.

Jobless Claims vs. S&P 500

The Federal Reserve's comments earlier this week that we should brace for slower economic growth, a decline in Chinese imports, disappointing action in equities and today's jobless claims news makes for a toxic combination of factors unless you happen to be long gold. The yellow metal's safe haven status has apparently been restored as gold rallied to its best one-day performance in two months today.

For the day, COMEX gold for December delivery was up $17.50, or 1.5%, to $1216.70 an ounce, but the bulk of those gains were seen in the moments immediately following release of the jobless claims data. Gold surged $10 an ounce following that release. Analysts said today's close above $1214.30, critical resistance and the 50-day moving average, is a bullish sign. Despite a nasty tumble from the June highs, gold is still up 11% year-to-date.

Gold Chart

No surprise here: Tech stocks were the biggest losers among the 10 industry groups in the S&P 500. Cisco, the largest maker of networking gear, got that ball rolling Wednesday after the close with an earnings report that was obviously disappointing. Making matters worse, the company said it expects revenue in the current quarter to come in as low as $10.64 billion while analysts had been forecasting $10.95 billion.

To top all of that off, Cisco CEO John Chambers, a man whose every word tech investors hang on every quarter, was less than cheery in his outlook for the economy. While Chambers did say Cisco did some hiring last quarter and expects to continue doing so, he added that his company is seeing ''unusual uncertainty'' and ''mixed signals'' about the strength of the economy.

Oppenheimer & Co. cut its rating on Cisco to ''perform'' from ''outperform,'' helping the shares lose almost 10% on the day. Cisco traded as low as $21 today, just 32 cents away from the 52-week low. Rival Juniper Networks (JNPR) tumbled almost 7% and JDS Uniphase was skewered to the tune of almost 6%.

Cisco Chart

The retail sector was also done in by the slack economic data and some troubling profit reports of its own. Proving that the stock market really is a game of not what did you for me yesterday, but what will you do for me tomorrow, we have Kohl's (KSS). The Wisconsin-based retailer that is more along the lines of a Target (TGT) than a Nordstrom (JWN) said its second-quarter profit rose 14% to $260 million, or 84 cents a share, from $229 million, or 75 cents a share, a year earlier. Analysts had been expecting a profit of 82 cents a share.

Unfortunately, Kohl's committed the big no-no in this market environment and that is to cut its full-year outlook. Kohl's pared the high end of its annual outlook because of sluggish sales growth and the uncertain economy. The company is now forecasting 2010 profit of $3.57 to $3.70 a share compared with previous guidance of $3.57 to $3.75 a share. Analysts were expecting $3.76 a share. The news sent Kohl's shares lower by $1.28, or almost 3%, to close at $46.50, but the stock traded as low as $45.57, just 28 cents off the 52-week low. Volume was more than triple the daily average.

Kohl's Chart

You might be wondering why I brought up Nordstrom in comparison to Kohl's. Here's why: The Seattle-based luxury department store operator delivered second-quarter results after the market closed today and said profit jumped 39% to $146 million, or 66 cents a share, from $105 million, or 48 cents a share, a year earlier. Revenue surged 13% to $2.5 billion. Those numbers were basically in line with Wall Street estimates and that is not going to be enough to excite investors in this environment.

Nordstrom did not do itself or its shareholders any favors by maintaining full-year guidance of $2.50 to $2.65 a share. Analysts are forecasting a profit of $2.62 a share. Reading between the lines here, it is reasonable to surmise that if Nordstrom is not boosting its outlook, then even the most affluent consumers are either tightening their own purse strings, feeling the pinch of the lethargic economy along with the rest of us or both. Nordstrom shares are down $1.45, or 4.34%, to $31.99 in the after-hours session.

Nordstrom Chart

Highlighting the fact that even the bluest of the blue chips are not safe places to hide these days, industrials slipped 0.8% as a group, good for the second-biggest loss in the S&P 500 behind technology issues. Aerospace giant Boeing (BA) lost just over 1% and has slid 4% in the past week, that is worse than the S&P 500's 3% swan dive.

Mr. Market has been even less kind to another Dow component, Caterpillar (CAT), the world's largest maker of mining and construction equipment. The shares were off nearly 2% today and have shed 5% in the past week. Caterpillar announced that it is building a new plant in Texas today and on a day when the employment picture, or lack thereof, continued to hamper stocks, this should have been good news.

Caterpillar did not say how many jobs it would create, but the facility is going to be 600,000 square feet and will take until mid-2012 to complete, so it is reasonable to assume a decent amount of new jobs will be needed to build the plant and then operate it once it is ready for production. In addition, Caterpillar said it would double the number of workers in the U.S. building excavators, but even that was not enough to salvage a winning day for a stock that now has an ugly chart.

Caterpillar Chart

I am reluctant to call any major U.S. bank not named Goldman Sachs (GS) a blue chip name, but if nothing else, Bank of America (BAC) is the largest U.S. lender by assets, a Dow component and one of the most widely held stocks out there. I bring up Bank of America because there has been plenty of chatter from various pundits lately about the fact that financials have been conspicuously absent from the most recent rally.

Bank of America is the poster child for that thesis. A flatter yield curve is becoming an issue for banks as yields for short- and long-term Treasuries drifter closer to each other. That is bad news for bank profits and their stocks. Bank of America touched another 52-week low today and the shares have shed 7% in the past week.

BofA Chart

Taking a look at the charts, support at 1100 for the S&P 500 did not hold today and I would point to old support at 1085 as the next support level, but sell-off helped the index violate that area as well. That brings 1060 back into play. On the upside, the S&P 500 will now have to make its way back above 1100 before dealing with the 1125 area again.

S&P 500 Chart

The Dow is having similar issues. The 200-day moving average didn't act as support yesterday and the Dow came within just three points touching the 50-day line today. Support was supposed to be 10,500, but that did not hold. I am not a big fan of relying on a collection of just 30 stocks for trading indicators, but with the Dow below 10,500, a return to the 10,100 neighborhood is not out of the realm of possibilty.

Dow Chart

Tech's historical weakness in August has been widely documented, so the Nasdaq's bearish ways are not altogether surprising, but there is something to worry about. The period Cisco delivered earnings for yesterday is usually the company's BEST quarter. The quarter the company is now in is usually the WORST. Support for the Nasdaq did not hold at 2200 and a break of 2100 could take the Nasdaq back to the 2065 area.

Nasdaq Chart

Simply put, this is a challenging time for small-caps and the Russell 2000 reflects that sentiment. The index has plunged through the 200-day moving average around 640 and with a pattern of lower highs evident, it might be best just to take a pass on small-caps at this juncture.

Russell Chart

I understand the urge to be involved in the market, but if you are shopping for stocks in the next few days, window shopping may be the way to go because August is only half over. Better prices could and probably should become available before Labor Day. Do not buy just for the sake of buying.


New Plays

Ag Stocks Are Heating Up

by Scott Hawes

Click here to email Scott Hawes


NEW BULLISH Plays

Intrepid Potash - IPI - close 24.07 change +1.01 stop 22.25

Company Description:
Intrepid Potash, Inc. is a domestic producer of muriate of potash. It is also engaged in the production and marketing of potash and langbeinite. The Company markets the langbeinite under the name of Trio. As of December 31, 2009, the Company owned five active potash production facilities, including three in New Mexico and two in Utah. During 2009, the Company produced approximately 504,000 tons of potash.

Target(s): 25.35, 26.30, 27.20
Key Support/Resistance Areas: 27.40, 26.50, 24.25, 22.65
Time Frame: 1 to 2 weeks

Why We Like It:
The agriculture market is heating up, literally. Heat waves and fires are causing a shortage of agriculture commodities and it is causing prices to spike. Farmers want and need to grow more crops and they need fertilizers to do it. So we are back with a play in IPI which was a dropped play a few weeks ago because we did not get triggered. Technically IPI has retraced about 50% of the +35% spike off of its 52 week low that was printed on 7/1. Today the stock bounced hard just above its 50-day SMA, gaining +4% and printing a bullish engulfing candlestick in the process. This appears to be the higher low that will lead to new highs. I suggest we use one of two triggers to enter positions which should happen tomorrow. If IPI trades to $24.42 (above today's high) or on any weakness to $23.90. The stock is up 23 cents in the after hours so we may get filled at the higher price. Regardless, the momentum is building and I think IPI will re-test its recent highs or print new highs. I've offered a near term target for readers looking for a quicker exit but I'm ultimately looking for the stock to head up to $26 to $27.

Suggested Position: Long IPI stock

Options Traders: Buy September $25.00 Calls, current ask $0.95

Annotated daily chart:

Entry on August xx
Earnings 11/4/2010 (unconfirmed)
Average Daily Volume: 937,000
Listed on August 12, 2010


In Play Updates and Reviews

Two Winners Closed

by Scott Hawes

Click here to email Scott Hawes

Editor's Note:
Good evening. TIN and DIA were closed today for +8.7% and +3.4% gains respectively. Our long positions are struggling but I am looking for a bounce here so we can control the damage. Feel free to email me with any questions.

Current Portfolio:


BULLISH Play Updates

Newmont Mining Corp - NEM - close 57.75 change +1.71 stop 52.20

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:
8/12: NEM gapped higher this morning and closed +3% on the day. The broader market gapped lower and couldn't get into positive territory. This confirms my thoughts that gold miners and gold are back as a defensive play that should do well in this environment. Unfortunately it doesn't appear we are going to filled at our ideal price but I suggest we take advantage of any weakness in the coming days. On the hourly chart NEM has an upward trend line near the $56.50 level which will be hit on Tuesday into Wednesday. This is also near a prior resistance level from last week and near today's opening print. Let's use a trigger of $56.75 to enter long positions. I think we'll get filled and if we are patient and it should pay off.

8/11: 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 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

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


Target Corp - TGT - close: 51.81 change: -0.20 stop: 50.80

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: -2.25%
Time Frame: Several Weeks
New Positions: Yes, with a tight stop

Comments:
8/12: TGT bounced off of its upward trend line and closed above its 20, 50, and 200 day SMA's today. The stock recovered nicely and the bullish case remains intact. But considering the broader market trend change that may be happening it is prudent to look for an exit using the above targets as a guide to tighten stops or exit positions.

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 32.60 change -0.44 stop 32.22 *NEW*

Target(s): 33.00, 33.90, 34.85, 35.35
Key Support/Resistance Areas: 37.00, 36.00, 34.75, 34.00, 33.00, 32.25
Current Gain/Loss: -8.30%
Time Frame: 1 to 2 weeks
New Positions: No

Comments:
8/12: We are living to fight another day with TCK and damage control has set-in. The stock gapped below our stop so per last night's updates we placed the stop underneath the opening range. TCK never took out the range so we are looking for a better exit. I've adjusted the targets above which should get hit on any bounces in the market. These are the areas readers should consider taking profits or tightening stops to protect against a reversal. Unfortunately, the position will most likely closed for a loss but let's see how far a bounce will take us.

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

Con-way Inc. - CNW - close: 27.90 change: -0.18 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:
8/12: CNW gapped down below the $28.00 support I mentioned yesterday and then rallied right up to it, closing +3% off of its lows. The break of support was probably a head fake so I expect CNW to bounce a little further here. I suggest we be patient and keep our trigger at $29.95 to enter short positions.

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.

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


CLOSED BEARISH PLAYS

SPDR DJIA ETF - DIA - close 103.45 change -0.68 stop 104.85

Target(s): 105.40(hit), 104.75(hit), 103.65(hit), 103.05(hit)
Key Support/Resistance Areas: 108.00, 107.00, 105.90, 104.75, 104.20, 103.50
Final Gain/Loss: +3.41%
Time Frame: 1 week
New Positions: Closed

Comments:
8/12: DIA gapped lower to its 50-day SMA which was just below our final target so positions were closed at the open. We have nice gain of +3.63% on the trade. I'll be looking for more short entries on the indexes on strength, perhaps up to their moving averages overhead, or gap fills.

8/11: DIA fell out of the rising wedge pattern and tanked lower today, hitting two targets. We now have a +46% gain on the options 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 on the options 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.

Closed Position: Short DIA stock at 102.85, entry was at $106.48

Options Traders: Buy September $106.00 PUTS

Annotated chart:

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


Temple Inland Inc. - TIN - close: 18.31 change: +0.28 stop: 21.25

Target(s): 18.25 (hit), 17.80 (hit), 16.25, 14.00
Key Support/Resistance Areas: 20.00, 19.00, 18.00, 16.00
Current Gain/Loss: +8.72%
Time Frame: Several Weeks
New Positions: Yes

Comments:
8/12: TIN opened below our target of $17.80 which is where I suggested taking profits yesterday. This proved to be the correct call as TIN immediately reversed and closed +4.5% off of its lows. We booked a nice gain of +8.72%, thank you very much Temple Inland. This stock can probably be shorted on any further strength, perhaps up into the $19.00 area. I have an alert set and this play may show up again.

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.

Closed Position: Short TIN stock at $17.80, 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