Option Investor
Newsletter

Daily Newsletter, Wednesday, 8/18/2010

Table of Contents

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

Market Wrap

S&P 500 Tests 1100 Again

by James Brown

Click here to email James Brown

Market Stats

The S&P 500 posted its third day of gains this week but the rally failed near resistance at the 1100 level for the second day in a row. There was an absence of any significant economic data on Wednesday but investors continued to digest late season earnings news from the likes of Target, Analog Devices, and Deere & Co. The dollar managed a minor bounce after two days of declines. Bonds eked out a small gain. Commodities bounced back from their intraday lows with gold up $3.10 to $1,231.40 an ounce. Crude oil closed down 47 cents at $75.30 a barrel. The EIA reported that oil inventories declined by 800,000 barrels, which was much less than expected. We are quickly running out of oil storage at Cushing, Oklahoma.

Foreign markets were mostly lower. Japan and India were exceptions with the Japanese NIKKEI index edging up +0.9%. This follows a new eight-month low the NIKKEI set yesterday. Strength in the yen against the dollar makes Japanese exports more expensive in the U.S. and it's having an impact on the Japanese stock market. Meanwhile India's Sensex index delivered a +1.15% gain. The Chinese market was quiet. The Chinese Shanghai index slipped -0.21% and the Hong Kong Hang Seng fell -0.54%.

The 16-nation eurozone reported a better than expected rise in construction output for June, which rose +2.7% versus +0.7% in May. The data was buoyed by a +7.2% jump in Spain's construction. Germany, Europe's biggest economy, saw construction output fall -0.9% but that was better than the -1.9% decline in May. Unfortunately investors pretty much ignored the report. Overall banks and commodity-related stocks led the decline in Europe. The German DAX index fell -0.32%. The French CAC-40 lost -0.41%. The English FTSE gave up -0.89%.

Yesterday traders reacted to the PPI data and industrial production numbers. Today the only news was corporate earnings and the Potash/BHP deal. Shares of POT rallied another +3.3% to a new two-year high near $148 following yesterday's +28% gain on the BHP Billiton $38.5 billion takeover offer. As you know POT initially rejected the offer and now BHP has moved into hostile takeover mode. There was a lot of speculation about POT today and a few analysts are expecting the final bid price to reach $160 a share. Normally, merger and acquisition news is considered bullish for the market since it is a sign of confidence by management to spend your cash on acquisitions instead of hoarding it.

While on the topic of M&A news a Citigroup analyst issued his opinion that the homebuilders are poised for a significant round of mergers. The U.S. residential real estate market is still struggling with new home sales falling and building permits sliding after the expiration of the tax credit. In an effort to build up market share the major players may resort to acquisitions. Josh Levin is the analyst and he believes D.R.Horton (DHI), KB Home (KBH), MDC Holdings (MDC), and Pulte Group Inc. (PHM) are likely buyers. The potential targets are Beazer Homes USA Inc. (BZH), Meritage Homes Corp. (MTH), and Ryland Group Inc. (RYL). It is worth noting that the entire group appears to be rebounding from the bottom of a two-month consolidation near their 2010 lows. The DJUSHB home construction index rose +1.6% for the day.

During the session earnings were the major headlines. After Home Depot and Wal-Mart's earnings reports yesterday, Target (TGT) led the earnings parade. Target Corp. is the country's second largest discount retailer. They reported a profit of 92 cents a share on revenues of $15.53 billion this morning. The EPS number matched estimates but revenues were a little under estimates of $15.62 billion. Shares of TGT gapped open lower this morning but traders bought the dip as TGT's management sounded more confident about the second half of this year. Same-store sales rose +1.7% and gross margins inched up a tenth of a percent to 32.0%. TGT said traffic was strong and their credit card division did very well. TGT expects to earn 68 cents in the third quarter and $1.38 in the fourth this year.

Another retailer reporting today was BJ's Wholesale Club, the company competes with Costco (COST) and Wal-Mart's Sam's Club. Shares of BJ had surged +27% in the first three weeks of July but the stock has since cut those gains in half. BJ reported this morning and missed estimates by 6 cents with a profit of 67 cents a share. Adding insult to injury was negative guidance where BJ expects 2011 earnings to hit $2.40-2.50 a share versus Wall Street's estimates of $2.68. The stock gapped down near $41.50 at the opening bell but managed to trim its losses with a -2.7% decline to $42.14.

Yet another retailer making headlines today was American Eagle Outfitters (AEO). There is growing speculation that AEO, and its 1,000 apparel stores, might be a takeover target - at least that is what the option market is suggesting. There was a huge jump in call option activity. The busiest strike price was the September $13 calls. The stock rallied +4.2% on Wednesday to close at $12.84. The stock has been churning sideways in the $11.50-13.00 zone for over two months. AEO is due to report its Q2 earnings on August 25th before the opening bell. Wall Street expects a profit of 13 cents a share.

Deere & Co. (DE), the largest producer of farm equipment and an S&P 500 component, reported earnings before the bell this morning. Wall Street was expecting a profit of $1.22 a share on revenues of $6.5 billion. DE delivered $1.44 a share on revenues of $6.22 billion. This is a significant improvement from a year ago with profits doubling from Q2 2009. Unfortunately, DE issued some mixed guidance for the fourth quarter. Management expects Q4 revenues to come in at $6.24 billion, which is above analysts' estimates, but DE sees Q4 profits around $375 million, which is under expectations. Shares fell 1.8% today but that's pretty minor considering the +21% gain off DE's July lows.

The technology sector got some news from the semiconductor industry with earnings from ADI and AMAT in the last 24 hours. Analog Devices Inc. (ADI) reported earnings last night after the market's closing bell. The company reported earnings that were 5 cents better than expected with a profit of 65 cents a share. Revenues surged +46% to $720 million, besting estimates of $706.5 million. The company said their backlog continues to grow and management raised guidance. ADI now sees Q4 earnings in the 68-72 cent range on revenues in the $740-770 million zone. Wall Street was expecting Q4 results of 61 cents on revenues near $715 million. The stock gapped open higher and posted a +4.4% gain for the session. Shares remain inside their four-month old, $27-31.50 trading range.

The results from Applied Materials (AMAT) were more disappointing. The world's biggest manufacturer of semiconductor-making equipment missed estimates by 8 cents with a profit of 17 cents a share. The 17 cents might not compare to consensus estimates and Reuters is suggesting that AMAT actually beat expectations with a profit of 29 cents versus Wall Street's 25 cent estimate. Revenues did manage to beat expectations at $2.5 billion compared to $2.4 billion. AMAT offered some positive guidance for the third quarter, where the company sees revenues rising by 5%. AMAT's management raised their Q4 earnings guidance into the 28-32 cent range, above consensus estimates of 26 cents. The stock closed virtually unchanged on the session. Unfortunately, given last week's breakdown in AMAT's stock price the trend still looks bearish.

The major headline after hours tonight was General Motors filing for an IPO later this year. There has been speculation for months that GM would try and IPO right around the November elections. The company filed for an IPO with regulators today in what many believe is the next step in becoming an independent company again. The White House and GM both came under extremely heavy criticism when GM filed for bankruptcy and eliminated about $40 billion in liabilities. Yet bankruptcy wasn't enough to save the failing automaker and the U.S. government engineered a $50 billion bailout. Now the U.S. owns about 61 percent of GM. It is expected that the U.S. Treasury will sell a significant portion of its stake and reduce its ownership to under 50%. Analysts speculate that the Treasury will then slowly sell off its remaining shares over the next few years. The ticker symbol will be "GM" and the stock will be listed on both the NYSE and on the Toronto exchange in Canada.

The S&P 500 managed its third gain in a row this week but the index clearly failed at short-term resistance near 1100. That was the second failed rally in a row. I want to warn readers to stay cautious. This is just an oversold bounce from last week's sell-off. The path of least resistance is still down and I would look for the bounce to roll over in the 1100-1110 zone. I find it interesting that the rebound stalled at 1100. Not only is that round-number resistance but it's also the 50% retracement of the recent sell-off (see chart below). If you are a calls only or long only player I would wait. We might get a better entry point near 1040 or 1010 in September.

Hourly Chart of the S&P 500 index:

Chart of the S&P 500 index:

The NASDAQ doesn't look much better. It will probably fill the gap and trade back into the 2260-2270 zone but first it has to breakthrough technical resistance at its simple 50-dma. The NASDAQ has been struggling near the 2225-2230 area. Eventually I would expect a retracement back toward the July lows in the 2100-2080 zone.

Chart of the NASDAQ index:

The small cap Russell 2000 index doesn't look any different. The oversold bounce this week has thus far produced a 50% retracement of last week's sell-off. The index managed to tag its simple 10-dma midday before paring its gains. I would not be surprised to see the $RUT bounce toward 640 before rolling over. The question is, "will the July lows near 590 hold as support?"

Chart of the Russell 2000 index:

Looking ahead at Thursday stocks will react to the weekly initial jobless claims and then Friday will be impacted by earnings after the closing bell. The trend for the weekly jobless claims has been rising and that's a significant stumbling block for the bulls. If this economy is going to recover we need to see jobless claims going down. Unfortunately American businesses are unlikely to begin hiring again until after we see how the November elections play out and/or how the holiday shopping season shapes up. Tomorrow economists are expecting initial claims to come in at 475,000. We will also see additional economic data from the Leading Indicators report and the Philly Fed report. Analysts are estimating the Philly Fed will see an improvement from 5.1 to 7.5.

Thursday night headlines will be dominated by earnings from tech giants Hewlett-Packard (HPQ) and Dell (DELL). Investors are keenly interested in what HPQ will have to say following the unexpected departure of CEO Mark Hurd earlier this month. Wall Street expects HPQ to deliver a profit of $1.08 a share. Dell Inc. is the planet's third largest PC maker and it looks like investors have lost confidence in the stock and the management team. The stock is trading near one-year lows and with the huge bearish double top forming over the last several months it looks like DELL is headed for its 2009 lows near $8.00. The Point & Figure chart is forecasting a decline toward $7.00. Analysts are expecting DELL to report a profit of 30 cents a share.

School has already started for millions of students around the country but it still feels like summer on Wall Street. Volumes remain very low and they might stay low until after the Labor Day holiday. My market outlook hasn't changed. I'm still expecting a pull back toward 1040 or 1010 on the S&P 500. Maybe if the index can hold these levels we might see a bullish entry point for a late Q3, early Q4 rally. The U.S. still faces the rising risk of a double-dip recession and slipping consumer confidence and spending doesn't help. If we see a market breakdown then my long-term outlook is for a decline toward 950 on the S&P 500 index.

-James


New Plays

Small Cap Ag Play

by Scott Hawes

Click here to email Scott Hawes


NEW BULLISH Plays

The Andersons, Inc - ANDE - close 36.92 change +0.10 stop 33.33

Company Description:
The Andersons, Inc. is an entrepreneurial, customer-focused company with interests in the agriculture and transportation markets. The Company operates in five business segments: Grain & Ethanol, Rail Group, Plant Nutrient Group, Turf & Specialty Group, and Retail Group. In August 2009, the Company completed the acquisition of the assets of the fertilizer division of Hartung Brothers, Inc. (HBI).

Target(s): 39.15, 40.50, 41.50
Key Support/Resistance Areas: 41.50, 40.50, 39.20, 38.00, 35.50
Time Frame: 1 to 3 weeks

Why We Like It:
We are back with a play in the agriculture sector after a nice winning trade in IPI that was closed this week. The agriculture sector continues to heat up and is gaining momentum. Farmers want and need to grow more food to keep up with demand, especially from emerging markets. Many potash companies have seen significant gains in recent weeks because potash levels need to be replenished in farmland soil. ANDE is a downstream play in this space as they provide products and services to the industry that enable farmers to grow crops and distribute them. I also believe this stock and sector can do well in a down market. Technically, ANDE is forming a long term ascending triangle while finding support above a key pivot level since March (see ovals on chart). I suggest readers take advantage of the momentum and initiate long positions now. Our initial stop will be $33.33, which is below upward trend lines and moving averages, but it will be adjusted as the trade develops. Our targets are +6%, +9.5%, and +12% higher, respectively. NOTE: Average daily volume is a tad light in this stock so I consider it an aggressive play. However, volume has ticked up significantly in recent days/weeks which is a bullish sign.

Suggested Position: Long ANDE stock at current levels

Options Traders: Buy December $40.00 Calls, current ask $2.10

Annotated daily chart:

Annotated weekly chart:

Entry on August xx
Earnings 10/28/2010 (unconfirmed)
Average Daily Volume: 180,000
Listed on August 18, 2010


In Play Updates and Reviews

Solid Gains In Longs

by Scott Hawes

Click here to email Scott Hawes

Editor's Note:
NOTE: James will be filling in for me the remainder of the week. I look forward to catching up with you on Monday.

Current Portfolio:


BULLISH Play Updates

Athenahealth, Inc. - ATHN - close 31.18 change -0.19 stop 26.90

Target(s): 31.50 (hit), 32.95, 34.00
Key Support/Resistance Areas: 34.25, 31.75, 30.00, 28.25, 25.75
Current Gain/Loss: +3.07%
Time Frame: 1 to 2 weeks
New Positions: Yes, preferably on weakness

Comments:
8/18: ATHN is consolidating near its highs of the past few days. The stock has had a pattern recently of selling off early in the morning only to get bought immediately. Today's volume was on extremely light volume which is a bullish sign. Our first target has been hit and if our 2nd target of $32.95 is reached we will have a gain of nearly +9%. Broader market strength will certainly help our cause to get there.

8/17: ATHN tacked on more gains after yesterday's breakout. Our first target of $31.50 has been hit and I've added a 2nd target of $32.95. I'm going to raise the stop to $26.90 which is below all of the upward trend lines and the 20-day SMA. My comments from below remain valid.

8/16: ATHN had a huge day closing +5.67% on the day. The stock was having a fabulous day and this afternoon the company received an upgrade which helped add to the gains. Our lower target to enter positions was missed by 37 cents so positions were entered on strength at $30.25. ATHN is finding a little resistance at $31.50 which is just below the July 2009 lows. There could be a pullback here which will provide a second chance entry point. If we break above today's highs ATHN has some clear air up towards our more aggressive targets. I've added $32.95 (adjusted on 8/17) as our second target.

8/14: ATHN is in the business of automating health care records and billing. I like ATHN as a long defensive play that should thrive as healthcare regulation takes form. Technically ATHN had a huge gap down after they missed earnings estimates in late April. Since then the stock has formed a nice cup and handle pattern which signals the "changing of the guard" from sellers to buyers. The company reported earnings in late July that beat estimates and the stock is now gaining momentum. On Friday, ATHN closed right on a downward trend line from January but I think it is only a matter of time before this is broken, which is typical of a cup and handle formation. Ideally, I suggest traders initiate long positions on any weakness, but a break out is another strategy. Let's use $28.50 as a trigger on weakness and $30.25 as a trigger on strength. ATHN has a big gap to fill all the way up near $34.00 which is our most aggressive target. Our near term target is $31.50. Our initial stop is $25.50 which is below its upward trend line and the rising 20-day SMA.

Current Position: Long ATHN stock, entry was at $30.25

Options Traders: Long September $31.00 CALL

Entry on August 16, 2010
Earnings 10/28/2010 (unconfirmed)
Average Daily Volume: 767,000
Listed on August 14, 2010


Newmont Mining Corp - NEM - close 59.49 change +1.11 stop 56.40

Target(s): 59.30, 60.50, 61.50
Key Support/Resistance Areas: 62.00, 59.50, 58.16, 55.00, 54.30, 52.30
Current Gain/Loss: +4.83%
Time Frame: Several weeks
New Positions: No

Comments:
8/18: NEM keeps chugging higher and closed +1.90% today. We have nearly +5% gains. I've moved the stop up to $56.40 which is just below breakeven on the trade, the 20-day SMA, and the recent upward trend line. If NEM can break above today's highs it should fill a gap lower on 7/16 and hit our second target of $60.50. Once again, this could happen fast and I suggest we close positions at this level, or at least tighten stops to protect gains.

8/17: NEM closed just above its 50-day SMA and is about $1 away from 1st target. A trip up to this level could happen fast and I suggest readers be quick to protect profits or simply exit positions if this level is reached. My comments from below remain valid.

8/16: NEM gained +1.75% and is consolidating above its 100-day SMA and below its 50-day SMA's. We need a break above Thursday's high and the 50-day SMA to get NEM moving towards our targets. I am expecting strength in the broader market which should help our cause.

8/14: We are in NEM at $56.75 per last night's updates. The stock is consolidating below its 50-day SMA and any broader market strength or strength in gold should catapult NEM up towards our targets.

Current Position: Long NEM stock, entry was at $56.75

Entry on August 13, 2010
Earnings 11/3/2010 (unconfirmed)
Average Daily Volume: 7.7 million
Listed on August 10, 2010


Oceaneering International - OII - close 51.56 change -0.42 stop 46.60

Target(s): 53.00, 54.40, 57.00
Key Support/Resistance Areas: 57.50, 54.50, 53.40, 49.00
Current Gain/Loss: +4.80%
Time Frame: 1 to 2 weeks
New Positions: Yes, preferably on weakness

Comments:
8/18: There is not much to report on OII as the stock traded within Tuesday's range. OII appears to be consolidating some of those gains before another leg higher. If our $53.00 target is reached we will have a +7.50% gain. Take profits or protect them at this level. My comments from below remain valid.

8/17: OII surged +4.69% higher today and we have gained +5.65% in the position. The stock is approaching our first target of $53.00 which is also just below the 100-day SMA and recent swing high. This is an area to consider taking profits, or at least protecting them.

8/16: Long positions in OII were initiated at the open at $49.20. The stock finished the day strong closing +0.34% higher. We need OII to break above its 20-day SMA at $50.19 and the stock should re-test its recent swing high just above our first target of $53.00.

8/14: With the recent oil leak in the Gulf of Mexico the oil services industry is being turned upside down with regulations and drilling moratoriums. I think OII will benefit because the new rules in the gulf point to more underwater robotic contracts. And it just so happens that OII recently raised their guidance because of it. This past week's dip has come right into an upward trend line and a prior resistance level which should now act as support. This is a buying opportunity in OII. I suggest readers enter long positions now. Our stop is $46.60 which is below OII's recent swing low and its rising 50-day SMA. We have three realistic near term targets that will produce a winning nice trade if they are reached.

Current Position: Long OII stock, entry was at $49.20

Options Traders: Long September $50.00 CALL

Entry on August 16, 2010
Earnings 10/28/10 (unconfirmed)
Average Daily Volume: 807,000
Listed on August 14, 2010


BEARISH Play Updates

Chesapeake Energy - CHK - close 20.88 change -0.44 stop 22.85

Target(s): 19.70, 18.80, 18.05
Key Support/Resistance Areas: 22.50, 21.60, 20.30, 19.65, 18.75, 18.00
Current Gain/Loss: -0.34% Time Frame: 1 to 2 weeks
New Positions: Yes

Comments:
8/18: CHK lost -2% today and continues to look vulnerable. The stock looks ready to break down from two bear flags: A small bear flag (from the 8/5 swing high) within a larger bear flag (from the mid June swing highs). Some broader market weakness should get CHK moving lower in earnest.

8/17: CHK rallied higher with the market today and closed an unfilled gap from 8/12. The remains below its moving averages and trend lines which should keep bounces in check. I suggest exhibiting patience with this trade while the broader market completes this bounce.

8/16: We are short CHK as of the open at $20.81. CHK looks vulnerable but the stock could bounce with the market so we may need to exhibit some patience. CHK has trend lines, moving averages, and resistance levels overhead to keep bounces in check. My comments from below have not changed.

8/14: CHK is a good company but it is facing significant headwinds. There is increasing pressure to ban drilling in the Marcellus shale. Pennsylvania is considering a year long moratorium so they can study fracturing problems and its impact on drinking water. If the process is halted in the Marcellus shale then it will probably be halted in the Haynesville and Barnett shale plays, which are the primary assets of CHK. Technically, CHK looks like it is about ready to lose it. The stock is trading in a wide downward channel and on Friday it closed below an upward trend line. It would be nice to short CHK on a bounce but I'm not sure it will happen. I suggest we initiate short positions now. Our most aggressive target right now is to test the July 2009 lows near $18.05. Our stop is $22.85 which is above the recent swing high and several moving averages.

Current Position: Short CHK stock, entry was at $20.81

Options Traders: Long October $20.00 PUTS

Entry on August 16, 2010
Earnings: 11/2/2010 (unconfirmed)
Average Daily Volume: 10 million
Listed on August 14, 2010


Con-way Inc. - CNW - close: 27.95 change: +0.41 stop: 31.55 *NEW*

Target(s): 28.25, 26.75, 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 29.20

Comments:
8/18: CNW gained +1.49% today. We are looking for more bounce up to $29.20 which is our trigger to enter short positions. I've updated the above targets and stop should we get filled.

8/17: CNW gained +3% today but the stock finished the day near its lows. Let's move the trigger down $29.20 to enter short positions. I'll adjust the stop once we are in the trade.

8/16: CNW can't seem to catch a bid. I suggest we remain patient here and see if CNW bounces with the market up to our trigger to enter short positions at $29.80. My comments from below have not changed.

8/14: The sellers are obviously overwhelming the buyers in CNW and the stock has run away from us, closing -4.30% on Friday. I do not suggest chasing it down here. I am going to leave this play open and see if CNW manages to bounce back up to fill some of these recent gaps. I'm going to lower the trigger to $29.80. If anyone caught it short it has been a good play, but unfortunately our trigger wasn't hit.

Suggested Position: Short CNW stock if it trades to $29.20

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


SPDR Retail ETF - XRT - close 37.91 change +0.47 stop 39.28

Target(s): 36.00, 35.25, 34.65
Key Support/Resistance Areas: 39.00, 38.00, 37.60, 36.50, 35.80, 35.00
Current Gain/Loss: -1.04%
Time Frame: 1 to 2 weeks
New Positions: Yes

Comments:
8/18: Mixed earnings results keep pouring out of the retailers but there is one common theme and that is they are offering cautious comments while guidance is nothing to write home about. I believe today's +1.26% bounce will be short lived and someone with deep pockets does as well. Option volume in the September PUT strikes in XRT was approximately 25K compared to the CALL strikes of approximately 3.2K. I like this volume flow and expect XRT to head lower from here.

8/17: We are short XRT as of the open today at $37.52. Retailers caught a bid today when Wal-Mart and Home Depot beat earnings estimates, while others posted mixed results. However, WMT and HD narrowed their guidance and I believe the bounce in XRT will be short lived and is a good short at these levels. If the broader market remains strong we may need to be patient, but when the bounce is over XRT should quickly head towards our targets.

8/16: The retail sector is facing many headwinds from a weak consumer and many analysts are already pointing to a dismal back to school season. In addition, retailers are going to have offer deeper discounts than they are currently just to get consumers into stores to buy things. This will negatively affect earnings and if retailers begin to warn investors by lowering guidance XRT will suffer. I've chosen the ETF as opposed to individual names to filter out some of the earnings noise being reported this week by many major retailers. I do expect a bounce in the overall market in the coming days and suggest readers initiate short positions on any strength. We'll use $37.35 as a trigger to enter short positions in XRT. Our stop will be $39.28 which is above two downtrend lines and the 20, 50, and 200-day SMA's. If triggered, our first two targets are -3.5% and -5.5% away, respectively.

Current Position: Short XRT stock, entry was at $37.52

Options Traders: Long September $36.00 PUTS

Entry on August 17, 2010
Earnings: 11/2/2010 (unconfirmed)
Average Daily Volume: 12 million
Listed on August 16, 2010