Option Investor
Newsletter

Daily Newsletter, Tuesday, 10/26/2010

Table of Contents

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

Market Wrap

Still No Change

by Jim Brown

Click here to email Jim Brown
The markets continue to wait on the Fed and a peaceful year-end for mutual funds on Friday. All the bets have been placed and we are waiting for the Fed to turn over their cards.

Market Statistics

Currencies and economics continued to push stocks around but the movements were slight as funds protect their positions for year-end. Having the indexes at six-month highs for the mutual fund fiscal year end would be the perfect ending for fund managers trying to protect their bonuses. I suspect they will continue to try to pin the indexes to these levels for the rest of the week.

On the economic front the news was mixed with Consumer Confidence rising slightly to 50.2 from 48.5. Not a giant leap but at least in the right direction. However, the low level of confidence suggests holiday spending could be a problem. The expectations component led the gains with a +2.3 point move to 67.8 from 65.5.

Buying plans were flat with the exception of a -3.5 point drop in the percentage of people planning on buying a household appliance or big screen TV. Only 24.2% of respondents said they were considering a purchase. That is the lowest level since June.

On the positive side this was only the second improvement in an October in the last 20 years. The +13% stock market rally was credited with the improvement. More consumers said they expected the market to move higher over the next six months.

Consumer Confidence Chart

The Richmond Fed Manufacturing Survey rose back into positive territory at +5 from the September reading at -2. New orders rebounded from zero to 8.0 but backorders remained flat at -12. This is another in the string of regional Fed manufacturing surveys that has shown improvement even though it was only a minor gain. However, rising employment has been a theme in these reports. Employment in Richmond rose from -3 to +4 for a 7-point gain.

Richmond Fed Manufacturing Survey

There were a couple of home price reports but they did not tell us anything we did not already know. The Case-Shiller showed home prices declined in August by -0.3% for the 20-city index. This is a lagging report and we saw information on Friday that suggested the drop accelerated sharply in September with a -2.9% drop for Sept/Oct. It will be another month before Case Shiller reports those numbers.

The FHFA Purchase Only Home Price Index, also for August, showed prices declined -2.4% over August 2009. This was actually better than expected but still a negative trend. I doubt there is anyone in the country that was surprised housing prices are declining after the end of the homebuyer tax credit so the reports were ignored.

Tomorrow we will get the Mortgage Applications, Durable Goods, New Home Sales and oil and gas inventories. The big report for the week is still the GDP and regional ISMs on Friday.

Economic Calendar

The main focus for the market other than just counting down the minutes until the Fed meeting is still earnings. We have had some mixed results and some weak guidance but overall the picture is still positive. The most important earnings for Wednesday are from ADP. They process the payrolls for millions of workers across the country and that makes their guidance and commentary important.

Earnings Calendar

Broadcom (BRCM) reported earnings after the bell that more than tripled to 60-cents from 16-cents in the comparison quarter. Net of charges that rose to 74-cents and beat the 70-cent analyst estimate. Revenue increased +44%. Broadcom said both wired and wireless businesses posted solid growth. Broadcom raised guidance for revenue to $1.8-$1.9 billion for Q4 and that was more than the $1.75B analysts were expecting. Broadcom shares spiked more than 10% in after hours trading to hit $42.

Broadcom Chart

Silicon Image (SIMG) did even better than Broadcom with earnings of $60.5 beating the estimates of $49 million. Earnings per share were 18-cents and that beat estimates by a whopping 13-cents. They also raised guidance for Q4 and raised profit margin estimates to 55% to 56%. Shares rallied nearly 25% in after hours.

SIMG Chart

F5 Networks (FFIV) also beat the street with earnings of 79-cents compared to estimates of 71-cents. Revenue was up +10%. They raised their guidance significantly to 80-82 cents per share and analysts were only expecting 73-cents. FFIV rallied +$7 in after hours trading.

FFIV Chart

In the energy sector we start getting the earnings from the big guns on Wednesday with COP, on Thursday XOM and Friday CVX. Today we heard from the services sector again with National Oilwell Varco (NOV). The earnings did not show any giant gains and were flat with the comparison quarter but the shares were the second biggest gainer on the S&P. NOV beat the street slightly and the backlog was flat at $4.7 billion but the guidance was outstanding.

NOV has pending orders with Petrobras to outfit several DOZEN new rigs Petrobras is building. Now that Petrobras has their funding NOV expects these orders to tentative orders to go firm in the next month or so and add billions to its backlog for delivery in 2011 and 2012. We have been long NOV in the OilSlick newsletter in anticipation of this event.

Register for my OilSlick.com newsletter and receive free daily updates and commentary on the energy sector. Register here

NOV Chart

Ameritrade (AMTD) posted profits that declined by 27% in Q3 as a result of a dramatic decline in trading activity after the flash crash. The worry by the average retail trader after the flash crash has been persistent and funds continue to flow out of mutual funds. Investors are scared as they get close to retirement and Ameritrade said this was a challenge for the quarter although the trend had improved slightly towards the end of the quarter. The zero interest rate is also a challenge because Ameritrade can't profit from interest on funds in customer accounts. The only way they can profit today is by trading activity until those rates begin to rise and daily trading activity has been running -30% lower than 2009. AMTD posted earnings of 20-cents and below analyst estimates of 23-cents.

AMTD shares plunged on the news but recovered to positive territory after several brokers said made positive comments. AMTD finished the day flat.

The metals sector posted the biggest losers. AK Steel reported a loss of 54-cents compared to estimates for a 34-cent loss. Higher iron ore prices and weak steel selling prices eroded profits. Iron ore had a benchmark price that was 98.65% over the 2009 benchmark. This was significantly higher than the 65% increase AKS had expected. Weak demand continues to be a problem preventing steel companies from passing on price increases. AKS declined -4% on the news.

U.S. Steel (X) posted a Q3 loss of $51 million compared to the profit it forecast as recently as July. They said steel prices decline across the board and customers were decreasing inventory levels ahead of the slower building season over the winter months. This is consistent with comments from the other steel companies and it appears there is a bear market in the steel market. U.S. Steel declined -3% on the news.

Engine maker Cummins Inc (CMI) reported earnings of $1.33 after items and that missed estimates of $1.41. Despite the miss profits nearly tripled but it was on a +56% increase in overseas sales not U.S. sales. The U.S. market continues to be weak because of tighter Federal emission standards that pushed up the cost of engines and lowered performance. Before the new standards went into effect the engine makers saw companies buying up all the available inventory of the older style engines to use as future replacements. They are still fighting that excess inventory held by trucking companies. CMI shares are up over 100% in the last 12 months so profit taking on the miss was to be expected. CMI shares lost -6% on the news.

So far in the Q3 earnings cycle S&P reported that 210 companies have reported with an overall gain of 26.8% over Q3-2009. Over 179 companies have beaten estimates by an average of 58.7% while 28 companies have missed earnings by an average of -25.7%. IBM rescued the Dow from a -70 opening drop when they announced they were buying back an additional $10 billion in stock. That represents 6% of the outstanding shares. The new program will be added to $2.3 billion unspent in a prior $8 billion authorization. IBM said it was going to request authorization for another buyback at the April board meeting. IBM shares had opened a couple dollars negative and the news spiked the stock about $3 to $142 and rescued the Dow from its drop. The excitement faded as the day progressed and IBM closed up only 83-cents.

Research In Motion (RIMM) demoed their new PlayBook tablet at the Adobe developers conference and apparently it was a hit. Comments were "pretty impressive" and now some analysts are speculating it could actually take a bit out of the iPad market. The RIM CEO showed off the tablet for the first time and told onlookers "We are delivering a professional experience that you are used to seeing on your desktops and laptops. We are not trying to dumb down the Internet for a small mobile device." The tablet is aimed at business clients and appears to be suddenly attracting a lot of attention. RIMM gained +6% on the news.

RIMM Chart

The biggest competitor in the business space will be Cisco's professional tablet with high definition audio and video and will include Cisco's Telepresence product. That is a high-end video conferencing application. The tablet will run the Android OS and is expected to deliver in Q1.

Cisco Tablet

It was another boring day in the markets as investors and fund managers wait for the week to expire. Fund managers are hoping for a peaceful finish for October with the markets up +13% since August 31st. This would be the best possible outcome for fund managers to end the year on a high note. I would not be surprised to see one more attempt to spike the market on Wednesday and then hold it through Friday.

As we move into next week there is an entire list of things that could go wrong and I won't repeat them here again but suffice to say there is a possibility of a big vacuum next week. The Fed knows this too and I am hoping they pull one more rabbit out of their hat to keep the consumer sentiment positive. What they are doing is just a band-aid on the bigger problem but as stock traders we want to see them keep pushing stocks higher at least through year-end.

The Dow closed at 11,169 and still in striking distance of a new high for the year this week but also far enough away to require some major momentum to make it happen. I doubt we will see +5, -5 moves the rest of the week. Eventually somebody is going to blink and we will get a decent move. Support is 11,100 and resistance 11,250 and that is the range I expect until the next news event.

Dow Chart - Daily

Dow Chart - 10 min

The S&P posted a whopping +0.02 point gain to close right on 1185 for the second consecutive gain. There is no reason to over analyze this because the technicals are clear. The 1185 level is showing some serious magnetism and fund managers are probably clinging to that level as a launch point for one last try to break 1200 before their October year-end. Support is 1180 making for one extremely tight range that will eventually see a jail break by next week. The only question is which direction the fugitives will run.

S&P-500 Chart

The Nasdaq is undergoing a classic pin job at 2500. If anyone ever has a doubt that fund mangers and market makers control the market they only need to look at the Nasdaq for the last two days. They have pinned it to 2500 and I suspect they will eventually move it over that level by a few points before Friday's close. The current resistance level is 2515-2520 and I fully expect that to be tested before the week is over and I believe they will try to close the week at that level. It would look great in all their year-end publications to be over the 2500 threshold and sitting at the high for the year.

It is going to be a tough job without any material tech earnings to provide motive power but hopefully the string of chip stock earnings after the bell today will lift the SOX and that give managers what they need to lift the Nasdaq.

Nasdaq Chart

In summary I believe managers will try to close the indexes at this level or slightly higher on Friday. Whether they wait until Friday or try it before the major economic reports is unknown. There is no magic formula for this week. It is simply a numbers game for the final windows dressing month of their fiscal year. The added quicksand factor is the unknown Fed announcement next week. That should keep volume low and volatility nonexistent. I am still in buy the dip mode long term but I would be overly cautious in holding longs past Friday's close.

Jim Brown


New Plays

Coal Miner

by Scott Hawes

Click here to email Scott Hawes


NEW BULLISH Plays

Patriot Coal - PCX - close 13.68 change +0.12 stop 12.90

Target(s): 15.25, 15.95
Key Support/Resistance Areas: 15.30, 14.15, 13.00, 12.50
Current Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see entry point below

Company Description:
Patriot Coal Corporation (Patriot) is a producer of coal in the eastern United States, with operations and coal reserves in Appalachia and the Illinois Basin. It is also a producer of metallurgical coal. The Company’s operations consist of 14 mining complexes which include company operated mines, contractor-operated mines and coal preparation facilities. One of its mining complexes is located in northern West Virginia, 12 are located in southern West Virginia and three are located in western Kentucky. Patriot ships coal to electric utilities, industrial users and metallurgical coal customers via various company owned and third-party loading facilities and multiple rail and river transportation routes. (source: company press release or website)

Why We Like It:
As signs of inflation begin to build momentum so are resource stocks. Many coal stocks have lagged compared to other names in the commodities space, but they are showing signs of momentum. PCX is forming a bullish cup and handle pattern and its volume patterns point to building bullish momentum. The stock surged higher on heavy volume in early October and pulled back on lighter volume. Now the stock is finding support at its rising 20-day SMA. I suggest readers use a trigger of $14.17 to enter bullish positions on a breakout. If the stock pulls back prior to breaking out we may consider a lower entry, perhaps near support at $13.00. We are looking for a move up towards the stock's 200-day SMA, or about $1.00 to $1.75 higher than our current trigger.

Note: I consider this an agressive trade and readers should expect volatility. Please use proper position size to manage risk.

Trigger: $14.17

Suggested Position: Long PCX stock at $14.17
Options Traders: Buy December $14.00 CALL

Annotated chart:

Entry on October xx
Earnings Date More than two months (unconfirmed)
Average Daily Volume: 3.6 million
Listed on October 26, 2010


In Play Updates and Reviews

Winner Closed

by Scott Hawes

Click here to email Scott Hawes
Current Portfolio:


BULLISH Play Updates

Boyd Gaming - BYD - close 8.25 change -0.13 stop 7.42

Target(s): 8.65, 8.95, 9.20
Key Support/Resistance Areas: 9.60, 9.25, 8.75, 8.00, 7.40
Current Gain/Loss: +0.61%
Time Frame: 1 to 2 weeks
New Positions: Yes

Comments:
10/26: BYD traded within yesterday's range and is consolidating near its 100-day SMA. I am looking for a continued move higher and view dips as buying opportunities. There is solid support near $8.00.

10/25: Investors liked BYD's earnings report this morning and the stock surged +4.8% higher. $8.00 should now act as support on any dips. Our first target is 12 cents above today's high. Ultimately, I think BYD makes a higher high and trades up towards $8.95, however, a broader market correction could provide some dips which I would view as buying opportunities.

10/23: BYD has continued to bounce after finding support at its 20-day SMA and key long term support/resistance level in the $7.40 to $7.60 area. BYD gained almost +4% on Friday. Resistance is at $8.00 and also keep an eye on the 100-day SMA near $8.30. Let's raise the stop to $7.42.

Current Position: Long BYD stock, entry was at $8.20

Entry on October 14, 2010
Earnings 10/27/10 (unconfirmed)
Average Daily Volume: 1.8 million
Listed on October 9, 2010


Citigroup Inc - C - close 4.18 change -0.03 stop 3.78

Target(s): 4.60, 4.75, 4.90
Key Support/Resistance Areas: 4.30, 4.00
Current Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes

Comments:
10/26: I suggest we open positions in C at current levels tomorrow. Conservative traders may want to wait for a close above $4.30 before launching positions. However, I am comfortable getting the nearly 3% discount at current levels. We'll raise the stop to $3.78. Use small position size to manage risk.

10/25: C is trading very well in comparison to its peers (BAC, JPM) and has been a relative out performer. I think the stock is poised to break over $4.30 and there is limited resistance overhead. I suggest readers initiate long positions on a dip or a breakout. We'll use a trigger of $4.11 on a dip and $4.34 on a breakout. Our initial stop will be $3.60 and it will be adjusted once the position is opened.

Suggested Position: Long C stock
Options Traders: Buy December $4.00 CALL, current ask $0.30

Entry on October xx
Earnings Date More than two months (unconfirmed)
Average Daily Volume: 523 million
Listed on October 25, 2010


Companhia Brasileira de Distribuicao - CBD - cls: 36.18 chg: -0.28 stop: 34.75

Target(s): 39.00
Key Support/Resistance Areas: 35.25, 36.50, 39.00
Current Gain/Loss: +0.16%
Time Frame: 4 to 6 weeks
New Positions: Yes

Comments:
10/25 & 10/26: CBD has found support at its 20-day SMA and regained all of Friday's losses. However, the stock may be in a bear flag and if the broader market corrects CBD may trade down $35.25 which I view as buying opportunity. Tighter stops could be considered at $35.90 which is below Friday's low.

10/23: CBD has been drifting lower since the stock split on Monday. The stock has support near current levels and down to the $35.00 level. I would view dips as buying opportunities.

10/16: (James) Shares of Brazilian grocery food chain CBD appear to be in breakout mode. The Brazilian economy continues to grow and the surging middle class likes to spend. This has pushed CBD toward all-time highs. Now normally I wouldn't list a stock in the $70s as a Premier Investor play. However, CBD will see a 2-for-1 split on Monday morning (Oct. 18th). The stock should open around $38.20. I am suggesting we look to buy CBD on a pull back. Broken resistance near $73.50 (post-split will be $36.75) should be new support. Thus, use a trigger at $36.75 to open bullish positions. We'll use a stop loss at $34.75 since the $70 level (post-split: $35) should be additional support.

If triggered our first target is $39.00 (pre-split $78.00). Our second, longer-term target is $42.00. The inverse (bullish version) head-and-shoulders pattern would suggest a bullish target of $88 (post-split would be $44). The Point & Figure chart is very bullish with a price target of $101.00 (post-split $50.50).

Current Position: Long CBD stock, entry was at $36.75

Entry on October 19, 2010
Earnings Date 11/10/10 (unconfirmed)
Average Daily Volume: 545,000
Listed on October 16th, 2010


Hansen Natural Corp. - HANS - close: 51.42 change: -0.17 stop: 46.90

Target(s): 50.00, 52.50,
Key Support/Resistance Areas: 45.00, 47.50, 50.00, etc.
Current Gain/Loss: Unopened
Time Frame: 4 to 6 weeks
New Positions: Yes, see below for details

Comments:
10/25 & 10/26: We need to remain patient and use dips as buying opportunities. $49.25 could also be considered an entry point. This is near the swing low on 10/19 after HANS broke out higher. If readers are considering call positions on a dip I suggest buying the December strikes. I've also raised the stop to $46.90.

10/21 & 10/23: We are waiting for our trigger at $48.25. I like the set-up and suggest we remain patient. We could get a pullback in the coming days and using the dips as buying opportunities is the right strategy. I would not chase the stock at current levels. Let's be patient.

10/16: (James) HANS is probably best known for their Monster brand energy drinks. The stock has been a monster in its own right and shares have been a popular momentum trade over the years. Well once again shares of HANS are surging higher. We'd like to hop on board but we don't want to chase it at these levels. I'm suggesting a trigger to buy the stock (or call options) at $48.25 since broken resistance at $48.00 should be new support. I'm suggesting a stop loss at $44.95 but we may want to raise the stop closer to the rising 50-dma (technical support) currently near 46.20.

If triggered at $48.25 our first target is $51.00. Our second target is $52.50. FYI: The point & figure chart is very bullish and is forecasting a long-term target of $78.

Suggested Position: BUY the stock at $48.25

- or -

BUY the December $50.00 calls (on a dip at $48.25).

Entry on October xx
Earnings Date 11/04/10 (unconfirmed)
Average Daily Volume: 4.5 million
Listed on October 16, 2010


Jeffries Group, Inc - JEF - close 23.67 change -0.36 stop 22.75

Target(s): 25.10, 25.75
Key Support/Resistance Areas: 25.85, 25.25, 24.25, 23.50, 23.00
Current Gain/Loss: -1.25%
Time Frame: 3 to 4 weeks
New Positions: Yes

Comments:
10/26: After breaking out on 10/20 JEF has retraced all of the gains and is finding support near its 50-day SMA, which is also at a support level of $23.50. I view this dip as a buying opportunity with a tight stop below. The pullback over the past three days looks like a bull flag to me.

10/25: JEF bounced back today but is struggling at its 200-day SMA. $23.50 offers solid support. My comments from the weekend remain valid.

10/23: JEF printed a bearish engulfing candlestick on Friday and I doubt the stock will be able to swim against the current of a broader market correction, should a correction happen. The stock gapped higher on Thursday and then Friday it retraced the gain and closed the gap. The 50-day SMA and prior resistance is just below near $23.50. The stock and price action look good to me but we are likely going to need the market to continue its march higher. For now, I continue to view dips as buying opportunities.

Suggested Position: Long JEF stock if it trades to $23.91
Options Traders: Buy December $24.00 CALL, current ask $1.10

Entry on October 21, 2010
Earnings Date 1/20/11 (unconfirmed)
Average Daily Volume: 1.1 million
Listed on October 19, 2010


Mylan Inc. - MYL - close: 19.60 change: -0.05 stop: 18.65

Target(s): 19.80 (hit), 20.40, 21.00, 22.00
Key Support/Resistance Areas: 18.50, 19.25, 19.80, 20.50
Current Gain/Loss: +1.82%
Time Frame: 4 to 6 weeks
New Positions: Yes, on pullbacks

Comments:
10/26: I do not see many changes from my comments last night. MYL is consolidating near its highs. If the stock can break above $19.80 there is little resistance until $20.50. If our second target of $20.40 is reached I suggest readers use the strength to book gains or tighten stops to protect them.

10/25: MYL continued higher today and reached our first target of $19.80. There is resistance at $19.80 and I would not be surprised to see the stock pullback if the broader market corrects. The 200-day SMA and prior resistance at $19.25 should now act as support on dips. MYL is bullish as long as the stock remains above its rising 20-day SMA and upward trend line. I've raised the stop to $18.65.

10/23: MYL closed above its 200-day SMA and at a new high not seen since 5/28. Everything looks good here but we need to see follow through. We several targets and will begin to tighten stops as they approach.

Note: I do consider this an aggressive trade so keep your positions somewhat smaller. Buy the stock now (or the calls) and target a move to $20.00, $21 and beyond. FYI: The P&F chart is forecasting at $33 target.

Current Position: Long MYL stock, entry was at $19.25
Options Traders: Long November $20.00 calls

Entry on October 18, 2010
Earnings Date 10/28/10 (unconfirmed)
Average Daily Volume: 4.5 million
Listed on October 16, 2010


PerkinElmer, Inc - PKI - close 23.31 change -0.30 stop 22.32

Target(s): 23.60 (hit), 23.90, 24.40
Key Support/Resistance Areas: 25.40, 24.40, 23.30, 22.50, 22.15
Current Gain/Loss: +2.21%
Time Frame: 1 to 2 weeks
New Positions: Yes, on pullbacks

Comments:
10/26: PKI has found resistance at $23.75 with a possible bearish double top with the highs on 10/13. There is long term support at current levels, the rising 20-day SMA and upward trend line just below (both near $23.15). If our second target of $23.90 is reached I suggest readers use the strength to book gains or tighten stops to protect them.

10/25: PKI reached our first target today. The stock needs to take out today's high or it could pullback as a bearish double top pattern may be forming. There is support at $23.30, the rising 20-day SMA and upward trend line. Tighter stops could be considered near $22.75. I continue to view dips as buying opportunities.

10/23: PKI has bounced back nicely after the sell-off early last week. The stock close above a long term support/resistance level of $23.30 and is now dealing with a two month long congestion area (b/w $23.30 and $24.45) from March/April. I've adjusted the targets and suggest readers use strength as an opportunity to exit positions or tighten stops to protect profits. We've moved the stop up to $22.32.

10/21: PKI came within 6 cents of our first target. If the broader market holds up we should have no issues reaching our targets. Our stop is below the 200-day SMA and two support levels.

Current Position: Long PKI stock, entry was at $23.10

Entry on October 12, 2010
Earnings 11/4/10 (unconfirmed)
Average Daily Volume: 1.4 million
Listed on October 11, 2010


TJX Companies - TJX - close 46.11 change +0.42 stop 44.10

Target(s): 46.70, 47.20, 47.95
Key Support/Resistance Areas: 48.50, 47.00, 45.40, 43.50
Current Gain/Loss: +1.30%
Time Frame: 2 to 4 weeks
New Positions: Yes, on pullbacks

Comments :
10/26: The breakout continued in TJX today as the stock gained nearly +1%. I don't think we should get too greedy with this trade, rather book a decent gain. As such, I've adjusted the targets slightly and suggest readers consider taking profits and/or tightening if they are reached.

10/25: TJX broke out of the ascending triangle today and hit our trigger to launch bullish positions. Let's raise the stop $44.10 and keep a tight leash on this in case a more meaningful broader market correction occurs.

10/21 & 10/23: $45.40 has acted like a brick wall in TJX since late September. If the stock breaks above the high and tight bullish ascending triangle it should move higher quickly. We are playing the breakout with a trigger of $45.52.

Suggested Position: Long TJX stock if it trades to $45.52

Entry on October xx
Earnings Date 11/16/10 (unconfirmed)
Average Daily Volume: 3 million
Listed on October 18, 2010


BEARISH Play Updates

Leggett & Platt, Inc. - LEG - close 20.44 change +0.25 stop 21.75

Target(s): 19.80, 19.20
Key Support/Resistance Areas: 22.00, 21.70, 21.50, 21.30, 20.55, 19.70, 19.00
Current Gain/Loss: +0.24%
Time Frame: 1 to 3 weeks
New Positions: Yes

Comments:
10/26: LEG is consolidating near its lows after post-earnings sell off. Any broader market weakness should send the stock towards our targets in a hurry. I still like new short positions, especially on bounces.

10/25: LEG triggered our entry for bearish positions at 20.49 as the selling continued and the stock broke below Friday's low. We are looking for a quick move towards the July and August lows. I've lowered the stop $21.75 and raised our targets by 10 cents each. My comments from the play release are below.

10/23: Shareholders of LEG have been taken on a wild ride as of late. After plummeting -24% from its May highs to August lows, the stock went up in a straight line until 10/13, gaining +26% along the way. On Thursday after the bell the stock reported earnings and they were terrible. The company missed earnings, missed revenues, and lowered guidance. The company said that "certain markets primarily related to residential furnishings, weakened noticeably in the third quarter and as a result, third quarter sales were lower than those in the second quarter, which rarely occurs." The stock lost -8% on Friday and I do not believe the selling is done. I suggest we capitalize on the momentum and initiate short positions if LEG trades to $21.46 (above Friday's high and near the 200-day SMA) or breaks below $20.49 (below Friday's low). Conservative traders may want to wait for the break down. All of the moving averages are overhead and I suspect there are still many unhappy investors looking to dump the stock. We'll place a tight initial stop overhead at $22.05.

Trigger: $21.46 or $20.49

Suggested Position: Short LEG stock
Options Traders: BUY the December $20.00 PUT, current ask $0.75

Entry on October 25, 2010
Earnings Date: More than two months (unconfirmed)
Average Daily Volume: 1.5 million
Listed on October 23, 2010


Pulte Group, Inc - PHM - close 7.97 change -0.14 stop 8.66

Target(s): 7.75, 7.30, 7.00
Key Support/Resistance Areas: 9.00, 8.00, 7.00, 6.50
Current Gain/Loss: +2.21%
Time Frame: 1 to 3 weeks
New Positions: Yes

Comments:
10/26: PHM lost -1.73% today and closed below $8.00 for only the second time in past 2 months. Tomorrow before the bell we get a report on new home sales which may end up determining our fate in this trade. If PHM trades down to our first target at $7.75 I suggest readers consider booking the gain, or at least tightening stops to see how much more we can get out of trade. If the stock surges higher our stop is in place. Tighter stops could be considered at $8.25 and $8.40.

10/25: PHM saw a quick spike higher this morning but the sellers showed up and the stock collapsed towards Friday's lows, losing -1.58% on the day. I've added a target of $7.75 and adjusted the remaining targets. I suggest readers tighten stops or exit positions if PHM trades down towards $7.75. This will produce nearly a +5% gain.

10/23: PHM is consolidating below all of its moving averages and feels like it is ready to take a nose dive. On the intraday charts the stock is forming a symmetrical triangle in that prices are coiling for a break out, which in reality could be higher or lower. I expect it to be lower as we are due for healthy broader market correction. However, I've lowered the stop to $8.66 in case we are wrong. $7.70 is an area readers may want to consider exiting positions or tightening stops if PHM gets there.

Note: We will most likely experience some volatility in this trade so please use appropriate position size to manage risk. I also like an option play here so that your risk is better defined.

Current Position: Short PHM stock, entry was at $8.15 Option Traders: Long December $8.00 PUT

Entry on October 21, 2010
Earnings Date 11/3/10 (unconfirmed)
Average Daily Volume: 4.5 million
Listed on October 16th, 2010


CLOSED BULLISH PLAYS

Itron, Inc - ITRI - close 63.22 change +0.60 stop 58.45

Target(s): 63.00 (hit), 64.00 (hit), 65.00
Key Support/Resistance Areas: 66.00, 64.00, 63.00, 60.50, 59.00, 57.00
Final Gain/Loss: +6.22%
Time Frame: 1 to 3 weeks
New Positions: Yes

Comments:
10/26: We used the strength in ITRI as our opportunity to close positions at $64.00 for +6.22% gain today. The company reports earnings tomorrow after the bell so I encourage readers to use caution. I do expect a good report but often times that doesn't matter and the stock sells off. And considering the overbought broader market conditions taking the gain is the right call. At a minimum I would tighten stops somewhere between $59.25 and $61.80.

10/25: ITRI surged +3.15% higher today. I could not find any news to cause the spike but I'm not complaining. The stock now needs to contend with the $63.00 resistance level and considering the broader market's overbought conditions ITRI could experience a pullback. There is support in the $60.50 to $61.00 area.

10/23: ITRI is struggling at its 20-day and 100-day SMA's. A dip towards the 50-day SMA ($59.00 area) is not out of the question. I continue to view dips as buying opportunities. We are targeting a move back up to its recent highs at $63.00 with incremental $1 moves higher from there, possibly all the way up to $66.00.

Closed Position: Long ITRI stock at $64.00, entry was at $60.25

Annotated chart:

Entry on October 19, 2010
Earnings 10/27/2010 (unconfirmed)
Average Daily Volume: 412,000
Listed on October 4, 2010