Option Investor
Newsletter

Daily Newsletter, Monday, 5/2/2011

Table of Contents

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

Market Wrap

No bin Laden Boost

by Todd Shriber

Click here to email Todd Shriber
For those of us that took a peak at equity futures Sunday night following news of Osama bin Laden's death at the hands of a U.S. Navy Seals team at his Pakistan compound, Monday's performance by stocks is nothing short of disappointing. While crowds across the U.S. were spotted cheering news of the death of the mastermind of the September 11, 2001 terrorist attacks, Mr. Market's enthusiasm for the news quickly waned as three major U.S. indexes suffered small losses and the Russell 2000 really took it on the chin, slumping 1.2%.

Stats Table

Not surprisingly, the ''buy the dollar because bin Laden is dead'' trade lasted about a nanosecond. Well, a tad longer because the U.S. dollar index was higher from Friday's close, but it also touched 72.22, a level last seen nearly three years ago. The dollar index shot above 73 overnight on the bin Laden news, but the greenback's intraday performance today was not all that impressive, indicating that it is going to take a lot more than the death of a marquee terrorist figure to right the currency's ills.

This is not a political statement, but I will guess that plenty of Americans and folks in other countries are happy bin Laden is dead. Still, the dollar faces myriad problems that would still be around if bin Laden was alive today. Investors are not big fans of the buck these days as the chart indicates.

US Dollar Index

The market quickly realized that the dollar was not going to elicit a lot of excitement today and gold finished the day higher yet again and the decline in oil was negligible. Silver was where the action was on the downside with the primary culprit being news that CME Group (CME), parent company of the Comex, the exchange where silver trades in the U.S., boosted its margin requirements on silver contracts 13% to $14,513 per contract from $12,825 on Friday.

Combine that with light volume and a chorus of traders saying silver was overbought and you have the recipe for a decline. An educated guess would be that CME wants to dampen volatility in the silver market by creating a more expensive barrier to entry. That could have the intended impact, but there is no guarantee it will mean the end of silver's uptrend. On Nov. 9, 2010, CME raised the margin requirement to $6,500 an ounce from $5,000. We all know what silver has done since then.

Silver Chart

In economic news, the Institute for Supply Management said its manufacturing index fell to 60.4 in April from 61.2 in March, but the April reading still beat the 59.5 median estimate of economists. Readings above 50 are considered bullish and the index has accomplished that feat for 21 straight months. For a positive spin on the April number, consider that it it has been matched or exceeded in only 89 months since the start of 1948, or 11.7% of the time, according to Zacks Investment Research.

ISM Chart

It can also be said that Monday's action was disappointing because there was a pair of noteworthy takeover announcements totaling over $10 billion and that was not enough to generate market-wide enthusiasm. Starting with the larger of the two deals, Israeli generic drug giant Teva (TEVA) said it will acquire Cephalon for $6.8 billion, a deal that values Cephalon at $81.50 a share, an almost 6% premium to where the shares closed on Friday.

The combined company would have a portfolio of branded drugs with $7 billion in annual sales and more than 30 potential products in late-stage development, according to the Associated Press. Cephalon's big revenue drugs include Provigil, a treatment for sleep disorders, and the cancer treatment Treanda.

Cephalon Chart

Take a look at this chart and you will quickly understand why the next deal I will discuss took place:

Coal Prices

Prices for metallurgical coal, the grade of coal that is in high demand by Asian steelmakers, jumped 74% in the first quarter to $225 per ton, according to Bank of America Merrill Lynch, and that is prompting more consolidation in the coal sector. The latest deal comes courtesy of Missouri-based Arch Coal (ACI), the second-largest U.S. coal company, which announced today it will pay $3.4 billion for International Coal (ICO) to boost its metallurgical coal exposure.

Arch will pay $14.60 a share for ICO, a 32% premium to where the shares closed on Friday. Arch is forecasting pro forma metallurgical coal sales of 11 million tons this year and 14 million tons over the next three years thanks to the purchase of International Coal, Bloomberg reported. The company expects $70 million to $80 million in annual cost savings as a result of the deal and expects it will boost profits next year.

The coal sector has been kind to investment bankers in recent months. Add up the Arch/ICO deal, a $3.3 billion purchase by Walter Energy (WLT) and Alpha Natural's $8.5 billion deal for Massey Energy (MEE) and there has been over $15 billion worth of deals in this space in just a few months. Per usual, traders were kicking around a few names that could be the next coal targets. I spotted Patriot Coal (PCX) and James River (JRCC) in a couple of reports on the matter. Consol Energy could be one to keep an eye as well as the company may look to sell some coal assets to focus more on natural gas.

For one stop-shopping for most of the potential buyers and sellers in the coal industry, the Market Vectors Coal ETF (KOL) might be worth a look. For more news on the coal industry, register for a free trial of the OilSlick daily newsletter (HERE).

After hours, another chapter was written in the ongoing saga to acquire NYSE Euronext (NYX), the operator of the New York Stock Exchange, when Nasdaq OMX (NDAQ) and IntercontinentalExchange (ICE) decided to take their $11 billion bid for NYSE Euronext straight to the company's shareholders, making the overture hostile.

NYSE Euronext has all but ignored Nasdaq and ICE in favor of a $10.2 billion bid from Germany's Deutsche Boerse, a move that has irked some shareholders. To this point, NYSE Euronext has not really done much beyond tell its shareholders to vote in favor of the Deutsche Boerse plan and the German company has shown no indication it will boost its offer.

If Nasdaq and ICE are successful in their bid for their rival, the deal would undoubtedly draw intense antitrust scrutiny, something the companies have said they can sidestep by splitting the NYSE Euronext's businesses among them. Nasdaq wants the cash equities operation while ICE wants the derivatives business. I do not want to speculate about what is going to happen next with this situation because there's a fair chance I will be wrong, but I feel safe in saying this story is nowhere near complete.

NYSE Euronext Chart

Looking at the charts, on Sunday night, it looked as though the S&P 500 would open up right near resistance at 1373 and make a run past that area. That run never came to fruition and with a loss of just two points, the situation is not much different today than it was after Friday's close. The 1373 level is still first resistance followed by the all-important 1400 mark. The 1340-1345 area looks like support. S&P 500 Chart

The situation is not much different on the Dow as the blue-chip index still faces resistance in the 12,950-13,000 area. Pfizer (PFE) reports earnings tomorrow, but I expect that to a be a non-event and the rest of the week is empty in terms of Dow earnings. Support is well off at 12,400.

Dow Chart

The Nasdaq earnings calendar is also pretty barren this week in terms of marquee reports. The index is still above old resistance at 2861, which may turn to new support. The Nasdaq needs to reclaim 2875 before dealing with resistance at 2900.

Nasdaq Chart

As the Russell 2000 was the sturdiest performer among the indexes on Friday, it was the weakest link today, shedding 10.5 points to close right at old resistance/hopefully new support at 855 (give or take a couple of tenths of a point). Resistance would be the 865-870 area and then 880, but I know I will be watching how strong support is at 855 over the next few days.

Russell 2000 Chart

As I always, I am trying to steer clear of letting one day decide my outlook for the week, but I think the ''Sell in May'' crowd may have gotten some ammo today when considering the following factors: The death of bin Laden, over $10 billion in M&A activity, Warren Buffett saying over the weekend that he is still bullish on the U.S. economy and it was the first trading day of the month, normally a fine day to be long. It was just an ugly way to start the week when it should have been so much more.


New Plays

Semiconductors Might See Profit Taking

by James Brown

Click here to email James Brown

Editor's Note:

Shares of Intel (INTC) are very short-term overbought and when this stock corrects it could pull the entire industry lower. However, the recent action has been bullish so we want to be ready to buy the dip. I prefer NVDA instead of INTC as a bullish candidate.

- James


NEW BULLISH Plays

NVIDIA Corp. - NVDA - close: 19.73 change: -0.27

Stop Loss: 18.19
Target(s): 21.85
Current Gain/Loss: unopened
Time Frame: less than two weeks
New Positions: Yes, see trigger

Company Description

Why We Like It:
NVDA has rallied to new multi-week highs thanks to strength in the semiconductor sector. The breakout past its 50 and 100-dma are bullish. However, the stock could see a pull back if the market and tech stocks finally see some profit taking this week. We want to be ready to buy a dip. I am suggesting bullish positions when NVDA dips to $19.05. If triggered we'll use a stop loss at $18.19. Our target is $21.85 but we might have to exit early to avoid holding over earnings.

FYI: NVDA is due to report earnings on May 12th after the closing bell. We do not want to hold over this report so our plan is to exit on May 12th at the close.

buy-the-dip trigger @ 19.05

Suggested Position: buy NVDA stock @ 19.05

- or -

Buy the May $20 call (NVDA1121E20)

Annotated chart:

Entry on May x at $xx.xx
Earnings Date 05/12/11 (confirmed)
Average Daily Volume: 19.0 million
Listed on May 2nd, 2011


In Play Updates and Reviews

Target has broken support

by James Brown

Click here to email James Brown

Editor's Note:
TGT was underperforming the market on Monday and broke down under support near $49.00. We are dropping it as a potential bullish candidate. Our trade never opened. I'm also suggesting an early exit on our BID trade.

-James

Current Portfolio:


BULLISH Play Updates

Autodesk Inc. - ADSK - close: 44.66 change: -0.32

Stop Loss: 41.90
Target(s): 48.50
Current Gain/Loss: unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see trigger

Comments:
05/02 update: ADSK is getting closer to our buy-the-dip trigger at $44.25. The low today was $44.28. More conservative traders may want to hold out for a dip in the $43.50-43.00 zone instead as their entry point. Our target is $48.50 but we'll plan on exiting ahead of the mid May earnings report.

Trigger @ $44.25

Suggested Position: buy ADSK stock @ $43.75

- or -

Buy the May $45 calls (ADSK1121E45) current ask $1.60

Entry on April x at $xx.xx
Earnings Date 05/19/11 (unconfirmed)
Average Daily Volume: 2.1 million
Listed on April 23rd, 2011


Complete Production Services - CPX - close: 33.89 change: -0.05

Stop Loss: 29.90
Target(s): 34.75, 37.25
Current Gain/Loss: unopened
Time Frame: 6 to 8 weeks
New Positions: Yes, see trigger

Comments:
05/02 update: I am pleasantly surprised by the relative strength in CPX today. The OSX oil services index lost -2.8% making it one of the worst performers on Monday. Yet CPX barely moved. We still want to see a dip first. I'm suggesting we use a trigger to open bullish positions in CPX at $32.00. More conservative traders could wait for a dip closer to $31.00 instead. We'll set our stop loss at $29.90. FYI: The Point & Figure chart for CPX is bullish with a $47 target.

Buy-the-dip Trigger @ $32.00

Suggested Position: Buy CPX stock @ $32.00

- or -

buy the June $35 call (CPX1118F35)

Entry on April x at $xx.xx
Earnings Date 04/21/11
Average Daily Volume: 2.2 million
Listed on April 28th, 2011


E.I. du Pont de Nemours & Co. - DD - close: 56.19 change: -0.60

Stop Loss: 53.95
Target(s): 59.95, 62.50
Current Gain/Loss: - 0.4%
Time Frame: 6 to 8 weeks
New Positions: Yes, see below

Comments:
05/02 update: DD saw a little bit of volatility this morning after opening lower at $56.42. The stock bounced around under the $57 level before finally inching lower. I would still consider new positions now or you can wait for a dip closer to the $55 level.

Small Positions

Current Position: long DD stock @ $56.42

- or -

Long the June $57.50 call (DD1118F57.5) Entry @ 1.08

Entry on May 2 at $56.42
Earnings Date 04/21/11
Average Daily Volume: 4.8 million
Listed on April 30th, 2011


Discover Financial Services - DFS - close: 24.67 change: -0.17

Stop Loss: 23.40
Target(s): 27.25
Current Gain/Loss: unopened
Time Frame: 6 to 8 weeks
New Positions: Yes, see trigger

Comments:
05/02 update: Once again DFS has failed at resistance near $25.00. There is no change from my prior comments. We have a buy-the-dip trigger at $24.10 plus we have a breakout trigger at $25.25. If triggered at $24.10 then our stop loss is at $23.40. If triggered at $25.25 then we'll use a stop under last week's low at $24.20. If DFS hits our breakout trigger then option traders can use the May $25 calls instead. We want to keep our position size small to limit our risk.

Buy-the-Dip Trigger @ $24.10 (Small Positions)

- or -

Buy-the-breakout at $25.25 (stock or May $25 calls)

Suggested Position: buy DFS stock @ $24.10

- or -

Buy the May $24 calls (DFS1121E24)

04/30 Added an alternative entry point @ $25.25
04/26 New trigger @ 24.10, New stop loss @ 23.40

Entry on April x at $xx.xx
Earnings Date 06/23/11 (unconfirmed)
Average Daily Volume: 5.9 million
Listed on April 12th, 2011


Dick's Sporting Goods Inc. - DKS - close: 40.61 change: -0.32

Stop Loss: 39.40
Target(s): 42.75, 44.75
Current Gain/Loss: +3.1%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
05/02 update: DKS is still hovering in the $40.50-41.00 area. I don't see any changes from my weekend comments. Nimble traders could launch positions now or wait for some follow through higher before initiating positions. I do want to point out that DKS appears to be forming a possible bearish wedge pattern. That's a bit worrisome. Keep your positions small to limit our risk.

FYI: The Point & Figure chart for DKS is bullish with a $65 target.

- Small Positions -

Current Position: Long DKS stock @ $39.39

- or -

Long the June $40 calls (DKS1118F40) Entry @ $2.35

04/26 New stop loss @ 39.40
04/16 New stop loss @ 38.95
04/09 New stop loss @ 38.45, New targets @ 42.75 and $44.75
04/02 New stop loss @ 37.45

Entry on March 21 at $39.39
Earnings Date 05/18/11 (unconfirmed)
Average Daily Volume: 1.6 million
Listed on March 19th, 2010


EMC Corp. - EMC - close: 28.11 change: -0.23

Stop Loss: 26.45
Target(s): 29.95, 32.25
Current Gain/Loss: unopened
Time Frame: 6 to 8 weeks
New Positions: Yes, see trigger

Comments:
05/02 update: The action in EMC today looks like a short-term bearish reversal. I would expect a decline soon, which is what we have been waiting for. I am suggesting a trigger to open positions at $27.55. More conservative traders could wait for a potential dip closer to the $27.00 mark instead.

FYI: The Point & Figure chart for EMC is bullish with a $34.50 target.

Buy-the-dip Trigger @ $27.55

Suggested Position: buy EMC stock @ $27.55

- or -

Buy the June $27.00 calls (EMC1118F27)

Entry on April x at $xx.xx
Earnings Date 04/20/11
Average Daily Volume: 21.4 million
Listed on April 27th, 2011


iShares Gold Trust - IAU - close: 15.06 change: -0.21

Stop Loss: 14.38
Target(s): 15.75
Current Gain/Loss: + 4.8%
Time Frame: 9 to 12 weeks
New Positions: see below

Comments:
05/02 update: Gold and silver spiked higher this morning only to reverse course midday and close lower. I am not suggesting new positions at this time. We should expect additional profit taking this week.

We do want to keep our position size small. Our first upside target is $15.75.

FYI: If the IAU moves too slowly for you then check out the double-long (2x) gold ETF (symbol: DGP).

- Small Positions Only -

Current Position: Long the IAU @ $14.36

- or -

Long the July $14.00 call (IAU1116G14) Entry @ $0.60

04/30 New stop loss @ 14.38, consider taking profits now.
04/27 New stop loss @ 14.15

Entry on April 11 at $14.36
Earnings Date --/--/--
Average Daily Volume: 3.8 million
Listed on April 9th, 2011


Oracle Corp. - ORCL - close: 36.37 change: +0.41

Stop Loss: 32.95
Target(s): 38.00
Current Gain/Loss: + 4.8%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
05/02 update: ORCL appears to be marching to the beat of its own drum. The stock rallied again and closed at new multi-year highs on Monday. We do not want to chase it here. No new positions at this time.

Current Position: Long ORCL stock @ $34.70

- or -

Long the June $35 call (ORCL1118F35) Entry @ $0.98

Entry on April 25 at $34.70
Earnings Date 06/23/11 (unconfirmed)
Average Daily Volume: 25.1 million
Listed on April 23rd, 2011


SAIC, Inc. - SAI - close: 17.46 change: +0.06

Stop Loss: 16.95
Target(s): 18.40
Current Gain/Loss: + 0.7%
Time Frame: 8 to 9 weeks
New Positions: see below

Comments:
05/02 update: It was a quiet session for SAI. We should still expect a dip toward the $17.20 area. I am not suggesting new positions at this time. Our target is $18.40.

Current Position: long SAI stock @ $17.33

- or -

Long the August $18.00 call (SAI1120H18) entry @ $0.55

04/30 Warning, SAI has produced a reversal. consider an early exit
04/27 New stop loss @ 16.95

Entry on April 6 at $17.33
Earnings Date 06/02/11 (unconfirmed)
Average Daily Volume: 2.4 million
Listed on April 5th, 2011


Steven Madden, Ltd. - SHOO - close: 52.64 change: -0.51

Stop Loss: 49.95
Target(s): 54.75
Current Gain/Loss: + 3.3%
Time Frame: less than 2 weeks
New Positions: see below

Comments:
05/02 update: Uh-oh! I warned readers over the weekend that you might want to take profits early. SHOO spiked toward $54.00 this morning before declining under the $52 level. Thankfully shares pared their losses but SHOO still looks vulnerable. Lack of volume on the drop today might be a good sign. I am not suggesting new positions at this time. SHOO is due to report earnings on Thursday morning, May 5th. We do not want to hold over the earnings report so we need to plan on exiting on May 4th at the closing bell.

(Small Positions)

Current Position: long SHOO stock @ $51.45

04/30 New stop @ 49.95, consider an early exit now.

Entry on April 26 at $51.45
Earnings Date 05/05/11 (confirmed)
Average Daily Volume: 235 thousand
Listed on April 25th, 2011


BEARISH Play Updates

Raytheon Co. - RTN - close: 48.99 change: +0.44

Stop Loss: 50.15
Target(s): 45.25
Current Gain/Loss: + 0.6%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
05/02 update: So far so good. RTN bounced toward its exponential 200-dma and stalled. The plan was to open small bearish positions. I would still do so today. Or you can wait for another failed rally move near resistance at the $50 level. We do want to keep our positions very small since the market's trend is still up. Readers may want to use put options to limit your maximum risk.

Small Positions

Current Position: Short RTN stock @ $48.68

- or -

Long the May $47.00 PUTs (RTN1121Q47) Entry @ $0.28

Entry on May 2 at $48.68
Earnings Date 04/28/11
Average Daily Volume: 2.6 million
Listed on April 30th, 2011


CLOSED BULLISH PLAYS

Sothebys Holding - BID - close: 49.96 change: -0.56

Stop Loss: 47.95
Target(s): 54.90
Current Gain/Loss: - 0.7%
Time Frame: 2 to 3 weeks
New Positions: see below

Comments:
05/02 update: I am giving up on our BID play. Shares spiked toward $52 this morning and reversed. While it looks like the stock wants to break higher it just isn't making any progress. Plus, we still don't know when the company will report earnings, which will likely happen in the next week or two. I'm suggesting an early exit now.

closed Position: long BID stock @ $50.35, exit $49.96 (-0.7%)

- or -

May $50 calls (BID1121E50) entry @ $2.60, Exit @ 2.10 (-19.2%)

05/02 Exit early. BID @ 49.96 (-0.7%), Option @ -19.2%
04/30 New stop loss @ 47.95
04/30 No confirmed earnings date. Conservative traders will want to exit now. No new positions.

chart:

Entry on April 21 at $50.35
Earnings Date 05/05/11 (unconfirmed)
Average Daily Volume: 1.0 million
Listed on April 20th, 2011


Target Corp. - TGT - close: 48.80 change: -0.30

Stop Loss: 49.40
Target(s): 53.75, 55.90
Current Gain/Loss: unopened
Time Frame: about 3 weeks
New Positions: Yes, see trigger

Comments:
05/02 update: TGT is still underperforming and shares closed under support near $49.00. More aggressive traders might want to consider launching bearish positions right here. Our bullish trade was never triggered. I am removing TGT as a candidate.

Trigger @ 51.25 was never hit.

chart:

Entry on April x at $xx.xx
Earnings Date 05/18/11 (confirmed)
Average Daily Volume: 6.3 million
Listed on April 27th, 2011