Option Investor
Newsletter

Daily Newsletter, Wednesday, 5/11/2011

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
The market has days when nothing seems to work from the long side and today was one of them as stocks were slammed with the S&P 500 shedding 1.1%, the Index's worst one-day performance since March. Concerns over rising interest rates also hit the Dow Jones Industrial Average and the Nasdaq, both of which were down about 1%. The Russell 2000 slid nearly 2%.

Stats Table

Oil was certainly one of the culprits to roil the market today after a 5.5% drop on the back of the U.S. Energy Department report that showed weekly inventory rose to 370.3 million barrels last week, an increase of almost 3.8 million barrels from the prior week. Gasoline inventories surged by 1.28 million barrels to 205.8 million barrels for the first weekly gain in three months. Making matters worse was a halt in gasoline futures trading on the New York Mercantile Exchange after gasoline fell 25 cents, limit down on the NYMEX. Rising inflation and lower-than-expected industrial output data for April also weighed on oil prices today.

For more news and commentary on the energy sector, register for a free trial of the OilSlick newsletter (HERE).

Oil Chart

Chinese inflation data was another issue to plague stocks today, particularly materials names. Inflation in the world's fastest growing major economy checked in at 5.3% for April, topping the government's target of 4% for the fourth consecutive month. That data point is concerning enough on its own, but another tidbit may have had more to do with today's sell-off. Chinese industrial output slowed to 13.4% last month, the weakest level since November. A 17.1% expansion in retail sales was below economists' median 17.6% estimate, according to Bloomberg News.

The simple way of looking at the situation is Chinese growth is showing some signs of slowing, but inflation is not and that is a toxic brew for global equity markets.

Weak Chinese economic data sends investors and traders in any number of sectors running for cover, but as I just noted, you can always count on materials names to take it on the chin when China spooks the market. If the Chinese economy is not humming along at the pace investors have become accustomed to, copper usually gets whacked and that was the case day as shares of Freeport McMoRan plunged on volume that was roughly 50% above the daily average. The stock closed below its 200-day moving average.

Freeport McMoRan

Good news was obviously hard to come by today, but give Intel (INTC) some credit for finishing with a modest gain on the day. The world's largest semiconductor maker said it is raising its dividend 16%. That is the second dividend hike from Intel in the past six months and the new quarterly dividend will be 21 cents up from 18.1 cents. California-based Intel will spend $4 billion on dividends this year compared with $3.5 billion last year. Dividend hikes sure are more pleasant than margin hikes, aren't they?

Intel Chart

In more good news from tech land, shares of Rovi (ROVI), the TV listings data provider, soared almost 18% on volume that was more than six times the daily average after the company boosted its full-year guidance to $2.25-$2.55 a share. Analysts were expecting a profit of $2.38.

Rovi Chart

I have my doubts that what follows will be a major catalyst for the Dow or the Nasdaq on Thursday, but it certainly was a pleasant surprise compared to what investors have seen out of the company following its few earnings reports. After the bell today, Cisco Systems (CSCO) posted a fiscal third-quarter profit of 42 cents a share on revenue of $10.9 billion. Analysts were expecting a profit of 37 cents on revenue of $10.9 billion, so the top-line number was inline with what Wall Street was looking fir, but meeting estimates is better than disappointing, especially in Cisco's case.

The results also topped guidance Cisco gave in February that forecast a profit of 35-38 cents on revenue of $10.89 billion. CEO John Chambers said on the company's conference call that it plans to save $1 billion through restructuring and a workforce reduction is expected this summer.

''We have acknowledged our challenges. We know what we have to do. We have a clear game plan, and we are a company with a track record of market-shaping innovation. We thank our shareholders, employees, customers and partners as we transition to the next phase of Cisco,'' Chambers said in a statement.

It does not appear that shareholders appreciate the requisite Chambers candor. Cisco's fourth-quarter outlook is tepid at best and the job cuts are not going to do much to generate enthusiasm. As such, shares of Cisco are down 1% in after-hours trading as of this writing.

Cisco Chart

Another sector where it is hard to find good news these days is the junkyard known as the financials services group. That makes a 3.5% jump for American International Group (AIG) today all the more impressive. Along with its best friend forever, the federal government, AIG will sell 300 million shares to the public, according to a regulatory filling. The company did not specify a price for the offering, but the stock closed over $30 today, so it the share sale would raise over $9 billion.

Taxpayers forked over $182 billion to save AIG from the brink of collapse during the financial crisis and while the stock has plummeted this year, the government still has a profitable trade going. The break-even stock price at which taxpayers would fully recover their investment is considered to be around $27 to $28, the Associated Press reported.

AIG Chart

Taking a look at the charts, factor in today's decline and the ''sell in May'' crowd is having their way this month just when it appeared that old market notion would not prove valid this May. The S&P 500 is now down 1.4% for the month, but the 1340 held as support today. The index did violate that level intraday, but was able to muster a close at 1342. On the upside, resistance is 1370 and if 1340 does not hold, second support is further back at 1300.

S&P 500 Chart

Everything was looking like roses for the Dow heading into today as the index was just 116 points off a new two-year high. Make that almost 250 points after today's carnage. Resistance is firm at 12,800 and those that are trading from the long side are hoping the same can be said of support at 12,600. This much is clear: The Dow probably will not move higher if CVX and XOM keep turning in performances similar to today's.

Dow Chart

As Jim noted last night, the Nasdaq was a mere point away from a new closing high, but that dream was dashed today. Resistance is still just above 2900 and support can be found in the 2800-2825 area. There were some interesting pockets of strength today in the Nasdaq, including online travel stocks, media technology firms and computer peripherals makers and recent strength from tech names could be suggesting the group is ready to be a market leader should the broader market run higher into year-end.

Nasdaq Chart

The Russell 2000 was the leader among the major indexes on the upside yesterday and it was easily the worst performer on the downside today. After failing at the 855-860 resistance area, the Russell came to an almost dead stop today at support at 840. From here, next support is 830.

Russell 2000 Chart

Hmmm, concerns about inflation are rising and risk appetite sure looks like it is declining. Sounds like a good time to take a look at consumer staples names in my opinion. Along those lines, Only four Dow stocks were higher today. Exclude Intel and the other three were staples names, KFT, JNJ and PG. Several big staples stocks were ''less bad'' than the broader market today. There is nothing wrong with playing a little defense from time-to-time.


New Plays

Approaching a Buy Signal

by James Brown

Click here to email James Brown


NEW BULLISH Plays

Riverbed Technology, Inc. - RVBD - close: 36.05 change: +0.50

Stop Loss: 34.95
Target(s): 39.90, 43.00
Current Gain/Loss: unopened
Time Frame: 6 to 8 weeks
New Positions: Yes, see trigger

Company Description

Why We Like It:
RVBD is a networking stock that has seen a significant retracement off its 2010 rally to new all-time highs back in March. The stock has been consolidating sideways the last five weeks. Now RVBD is trying to breakout past resistance near its 50-dma at $36.60 and its 100-dma closer to $37.15. Nimble traders might consider buying a dip near $35.00. I am suggesting we use a trigger to launch bullish positions at $37.25. If triggered at $37.25 our targets are $39.90 and $43.00. The $40.00 level could be round-number resistance so we want to take some money off the table near this area. FYI: The Point & Figure chart for RVBD is currently bearish but a breakout past the $37.00 level would produce a new triple-top breakout buy signal.

Trigger @ $37.25

Suggested Position: buy RVBD stock @ $37.25

- or -

Buy the June $40 call (RVBD1118F40)

Annotated chart:

Entry on May x at $xx.xx
Earnings Date 07/21/11 (unconfirmed)
Average Daily Volume: 5.1 million
Listed on May 11th, 2011


In Play Updates and Reviews

The Market's Rebound Falters

by James Brown

Click here to email James Brown

Editor's Note:
New margin requirements and rising inventories for oil sparked a sell-off across the market. Energy stocks were hammered lower. I am dropping TDW as a candidate.

-James

Current Portfolio:


BULLISH Play Updates

Autodesk Inc. - ADSK - close: 45.20 change: +0.05

Stop Loss: 42.75
Target(s): 48.50
Current Gain/Loss: + 2.1%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
05/11 update: Investors were buying the dip in ADSK near $44.50 midday. The stock actually rallied higher into the closing bell to close up on the session. Shares certainly look poised to breakout past resistance soon but that may depend on if the rest of the market reverses lower or not. Our target is $48.50 but we'll plan on exiting ahead of the mid May earnings report.

Current Position: Long ADSK stock @ $44.25

- or -

Long the May $45 calls (ADSK1121E45) Entry @ $1.19

05/10 New stop loss @ 42.75

Entry on May 3 at $44.25
Earnings Date 05/19/11 (confirmed)
Average Daily Volume: 2.1 million
Listed on April 23rd, 2011


Arrow Electronics, Inc. - ARW - close: 45.88 change: -0.38

Stop Loss: 43.90
Target(s): 49.90
Current Gain/Loss: - 0.9%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
05/11 update: ARW gave up -0.8% on Wednesday. I don't see any changes from my Tuesday night comments. I would still consider new positions here or you can wait for a dip near the $45.00 level instead. Our target is $49.90. FYI: The Point & Figure chart for ARW is bullish with an $81 target.

Current Position: long ARW stock @ $46.30

- or -

long the June $47.50 call (ARW1118F47.5) Entry @ $1.20

Entry on May 11 at $46.30
Earnings Date 07/28/11 (unconfirmed)
Average Daily Volume: 1.1 million
Listed on May 10th, 2011


Capital One Financial - COF - close: 53.03 change: -0.92

Stop Loss: 50.85
Target(s): 57.00, 59.50
Current Gain/Loss: - 0.0%
Time Frame: 4 to 8 weeks
New Positions: Yes, see below

Comments:
05/11 update: I am urging caution on our COF trade. The consolidation has taken on a much more bearish tone and shares look poised to drop toward the $52-51 area soon. I am not suggesting new positions at this time.

Current Position: Long COF stock @ $53.07

- or -

Long the June $55 calls (COF1118F55) Entry @ $0.96

Entry on May 5 at $53.07
Earnings Date 07/21/11 (unconfirmed)
Average Daily Volume: 3.7 million
Listed on May 4th, 2011


Discover Financial Services - DFS - close: 24.18 change: -0.40

Stop Loss: 23.40
Target(s): 27.25
Current Gain/Loss: + 0.3%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
05/11 update: I am growing concerned with our DFS play as well. Both DFS and COF look poised to retreat lower. I am not suggesting new positions at this time.

(Small Positions)

Current Position: long DFS stock @ $24.10

- or -

Long the May $24 calls (DFS1121E24) Entry @

05/04 Triggered at $24.10.
04/30 Added an alternative entry point @ $25.25
04/26 New trigger @ 24.10, New stop loss @ 23.40

Entry on May 4 at $24.10
Earnings Date 06/23/11 (unconfirmed)
Average Daily Volume: 5.9 million
Listed on April 12th, 2011


The Dow Chemical Co. - DOW - close: 39.00 change: -1.74

Stop Loss: 38.75
Target(s): 43.00, 44.85
Current Gain/Loss: - 3.6%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
05/11 update: The sell-off in DOW today seems way overdone. Oil is used as a base for a lot of chemicals. The drop in oil today should have been bullish for DOW. You could argue the worries over a global slowdown is the culprit behind DOW's -4.2% drop today. Not only did DOW fall to support near $39.00, there was a late day spike lower to $38.81. If there is any follow through lower tomorrow we will most likely get stopped out at $38.75. I am not suggesting new positions at this time.

Current Position: Long DOW stock @ 40.46

- or -

Long the June $42 call (DOW1118F42) Entry @ $0.79

Entry on May 11 at $40.46
Earnings Date 07/27/11 (unconfirmed)
Average Daily Volume: 8.5 million
Listed on May 10th, 2011


EMC Corp. - EMC - close: 27.30 change: -0.14

Stop Loss: 26.45
Target(s): 29.95, 32.25
Current Gain/Loss: - 0.9%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
05/11 update: EMC managed an intraday bounce off the $27 level and its 40-dma. There is no change from my prior comments. More conservative traders might want to wait for a new rise past $27.75 (or a close over $27.50) before initiating new positions.

Current Position: Long EMC stock @ $27.55

- or -

Long the June $27.00 calls (EMC1118F27) Entry @ $1.35

Entry on May 3 at $27.55
Earnings Date 04/20/11
Average Daily Volume: 21.4 million
Listed on April 27th, 2011


Ingersoll-Rand - IR - close: 50.36 change: -1.72

Stop Loss: 48.75
Target(s): 54.75
Current Gain/Loss: + 0.4%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
05/11 update: IR completely erased yesterday's gains with a plunged back toward $50.00. I would be tempted to use this dip near round-number support at $50.00 as a new entry point. However, the sharp reversal lower, after yesterday's new two-year high, makes this move look like a possible bull trap pattern. Readers may want to wait for a bounce from $50.00 before considering new positions. Our target is $54.75.

Current Position: long IR stock @ $50.12

- or -

Long the June $50 call (IR1118F50) Entry @ $1.80

Entry on May 9 at $50.12
Earnings Date 07/22/11 (unconfirmed)
Average Daily Volume: 2.6 million
Listed on May 7th, 2011


KLA-Tencor - KLAC - close: 44.30 change: -0.71

Stop Loss: 43.95
Target(s): 49.85
Current Gain/Loss: unopened
Time Frame: 6 to 8 weeks
New Positions: Yes, see trigger

Comments:
05/11 update: KLAC is slowly drifting lower. We're still waiting for a breakout past last week's high. I am suggesting we use a trigger to launch bullish positions at $46.25. We'll use a stop loss at $43.95.

Trigger @ 46.25

Suggested Position: buy KLAC stock @ 46.25

- or -

buy the June $47.00 calls (KLAC1118F47) current ask $1.65

Entry on May x at $xx.xx
Earnings Date 07/28/11 (unconfirmed)
Average Daily Volume: 653 thousand
Listed on May 9th, 2011


Kansas City Southern - KSU - close: 55.57 change: -1.71

Stop Loss: 54.75
Target(s): 64.00
Current Gain/Loss: - 2.4%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
05/11 update: KSU is not off to a very good start here. Shares fell -2.9% with a dip toward last week's lows. The sell-off in oil today should have been bullish for the transports. We have to blame the weakness on worries over a global economic slowdown. I would wait for a bounce in the $55-56 area before considering new bullish positions.

Current Position: Long KSU stock @ 56.99

- or -

Long the June $60 call (KSU1118F60) Entry @ $0.90

Entry on May 11 at $56.99
Earnings Date 07/27/11 (unconfirmed)
Average Daily Volume: 1.0 million
Listed on May 10th, 2011


NVIDIA Corp. - NVDA - close: 19.87 change: +0.09

Stop Loss: 18.90
Target(s): 21.85
Current Gain/Loss: + 4.3%
Time Frame: less than two weeks
New Positions: see below

Comments:
05/11 update: NVDA held up pretty well. It would seem that investors are not interested in selling the stock until they see the company's earnings report. Our plan is to exit this trade tomorrow (May 12th) at the closing bell to avoid holding over earnings out tomorrow night. I am raising our stop loss to $18.90.

Current Position: Long NVDA stock @ 19.05

- or -

Long the May $20 call (NVDA1121E20) Entry @ $0.56

05/11 New stop loss @ 18.90, Prepare to exit tomorrow at the close.

Entry on May 3 at $19.05
Earnings Date 05/12/11 (confirmed)
Average Daily Volume: 19.0 million
Listed on May 2nd, 2011


Oracle Corp. - ORCL - close: 34.98 change: -0.64

Stop Loss: 33.95
Target(s): 38.00
Current Gain/Loss: + 0.8%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
05/11 update: ORCL slipped back toward short-term technical support at its rising 20-dma. I would still consider new positions here at current levels.

Current Position: Long ORCL stock @ $34.70

- or -

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

05/10 New stop loss @ 33.95

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: 17.28 change: -0.18

Stop Loss: 16.95
Target(s): 18.40
Current Gain/Loss: - 0.2%
Time Frame: 8 to 9 weeks
New Positions: see below

Comments:
05/11 update: Just as we expected, SAI has retested support near $17.20. I am still not suggesting new positions at this time.

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


DENTSPLY Intl. - XRAY - close: 38.61 change: -0.15

Stop Loss: 37.30
Target(s): 42.00, 44.50
Current Gain/Loss: unopened
Time Frame: 6 to 8 weeks
New Positions: Yes, see trigger

Comments:
05/11 update: XRAY erased yesterday's gains but the stock managed an intraday bounce off its rising 10-dma. Aggressive traders may want to launch bullish positions now. The newsletter is suggesting an entry point at $39.00. If triggered our profit targets are $42.00 and $44.50. FYI: The Point & Figure chart for XRAY is bullish with a $59 target.

NOTE: Readers may want to avoid the options. XRAY doesn't have a lot of option volume and the spreads are wide, which puts traders at a disadvantage.

Trigger @ $39.00

Suggested Position: buy XRAY stock @ 39.00

- or -

buy the June $40 call (XRAY1118F40)

Entry on May x at $xx.xx
Earnings Date 07/25/11 (unconfirmed)
Average Daily Volume: 904 thousand
Listed on May 7th, 2011


BEARISH Play Updates

Raytheon Co. - RTN - close: 49.36 change: +0.04

Stop Loss: 50.15
Target(s): 45.25
Current Gain/Loss: - 1.4%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
05/11 update: Almost the entire market was sliding lower today and yet RTN ekes out a rise. If RTN does not show some weakness tomorrow I will close this play early.

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 BEARISH PLAYS

Tidewater Inc. - TDW - close: 55.27 change: -0.98

Stop Loss: 60.10
Target(s): 52.00
Current Gain/Loss: unopened
Time Frame: 4 to 6 weeks
New Positions:

Comments:
05/11 update: I am giving up on TDW. The trend is probably lower but we are not seeing a very good set up to enter positions. I am dropping TDW as a candidate.

Our play never opened.

chart:

Entry on May x at $xx.xx
Earnings Date 05/19/11 (confirmed)
Average Daily Volume: 502 thousand
Listed on May 3rd, 2011