Option Investor
Newsletter

Daily Newsletter, Saturday, 5/28/2011

Table of Contents

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

Market Wrap

Four In A Row

by Jim Brown

Click here to email Jim Brown

The major indexes completed their fourth consecutive week of losses with the exception of the Russell 2000 and NYSE Composite. The NYSE was higher thanks to influence from the energy sector.

Market Statistics

It was definitely a holiday Friday; the news was light and volume even lighter. Only 5.3 billion shares traded and the lowest since April 25th, the Monday after Easter. Everyone was focused on their plans for the holiday weekend rather than trading.

More than 35 million people will travel over the weekend and 31 million of those will travel by car. That is an increase of +0.5% over 2010. They are fortunate that the national average for gasoline has declined to $3.81 per gallon and as low as $3.60 in the Midwest. Only New York, California, Chicago and DC are still averaging about $4.06 per gallon.

Two surveys were taken last week and the results were slightly different. In one survey 76% of the responders said the high gasoline prices were impacting their plans for the weekend. However, in the other survey 65% said it would not change their plans for driving. The way I read that is simple. The distance to grandma's house or the beach has not changed. If you always go to a relative's house or the lake for Memorial Day then your distance traveled will not change. However, reading the headline from the second survey in another way it suggests 35% of consumers DID change their plans because of high gasoline prices.

Friday's Consumer Sentiment Survey showed an unexpected rise in sentiment to 74.3 from 72.4 for May. That is a +4.5 point increase from the April reading. The complete March decline has not yet been erased but we are making progress. The present conditions component declined slightly from 82.5 to 81.9 but the expectations component rose sharply from 61.6 to 69.5. Inflation expectations declined from 4.6% to 4.1%.

Analysts seem to believe we went through a soft patch in March and early April and that softness is easing thanks to the falling gasoline prices and the worry over a nuclear disaster in Japan spreading to the USA that failed to come to pass.

Consumer Sentiment Chart

It is strange that sentiment improved as well as it did with another report showing Pending Home Sales Index for April declined by -11.6% to 81.9 from 94.1. Analysts blame the drop in contract signings to severe weather and rising oil prices. The index fell in all regions with the exception of the Northeast. Nationally sales are now -26.5% below the April 2010 level. That was the end of the homebuyer tax credit and the cyclical peak in the index. Obviously making comparisons to that period are going to be tough. Sales slipped to the lowest level since Sept 2010.

On the flipside home affordability today is at an all time high. Foreclosures are expected to decline by year-end and the summer buying season will help reduce some of the excess inventory on the market.

Moody's Pending Home Sales Chart

The economic calendar for next week is packed full of critical events. Three different ISM reports culminating with the national ISM on Wednesday. Expectations are for a decline in the Chicago and national ISM reports.

Also on the list are three employment reports led by the ADP report on Wednesday and ending with the Non-Farm Payrolls on Friday. That is the most important report for the week and even more so after the sharp downturn in the regional Fed surveys. However, everyone expected a sharper decline in hiring last month and it did not happen. Will hiring in May also be better than expected? Estimates are for a gain of 185,000 jobs compared to the +244,000 gain in April.

The national ISM and the Non-Farm Payrolls are going to be the major potholes in the market's path next week.

Economic Calendar

Friday's equity rally was powered by a sharp decline in the dollar because of the continued decline in our economic reports. This was a reaction to the lackluster +1.8% GDP growth for Q1 that was reported on Thursday. The sharp drop in the dollar was accentuated by a +1.50 rise in the Euro. The dollar was weak because a sagging economy suggests it may be a long time before the Fed begins to raise interest rates. The Financial Times reported a Eurozone officer as saying China may buy euro bonds in June and that would reduce demand for U.S. treasuries. The ECB raised its interest rate to 1.25% in April compared to the Fed's interest rate at less than 0.25%. Analysts believe the Fed will not increase rates until 2012-Q1 at the earliest. If the economy continues to weaken it could be a lot longer.

Dollar Index Chart

Euro Chart

In stock news Broadcom (BRCM) moved sharply higher after FBR Capital Markets said they had the potential to become one of the world's largest suppliers of chipsets for smartphones. FBR added Broadcom to their "top picks" list. They rate the company an outperform. FBR believes Broadcom is poised to benefit from the rapid growth of the 4G smartphone mania. Broadcom reported a weak view of Q2 revenue when they reported earnings. They said weakness in orders from major customers was the reason. FBR feels this is a temporary pause in what will be an increasingly busy market.

Broadcom Chart

Another chipmaker, Marvell Technology (MRVL) survived missing estimates by a penny on Thursday night and rallied +11% on Friday thanks to some strong guidance. Marvell reported earnings of 29-cents with analysts expecting 30-cents. Shares initially declined but immediately reversed after the company raised estimates for Q2 and the full year. Marvell said Q1 would be the low point for the year and projected earnings of 37-cents for Q2 compared to analyst estimates for 34-cents. Marvell predicted revenue from the mobile and wireless market to grow in excess of 20%.

Marvel Chart

Abbott Laboratories (ABT) got its second dose of bad medicine on Thursday when federal scientists halted a large study of the drug Niaspan when it failed to reduce heart attacks and slightly increased the number of strokes among patients in the study. Niaspan is an extra strong prescription strength dose of a form of Niacin that raises good HDL and lowers LDL and triglycerides. Raising good cholesterol (HDL) was thought to reduce the impact of the bad cholesterol (LDL) and lead to fewer heart attacks. It is not without some serious side effects but it does work well in patients that are either not getting the desired results with a statin drug or are allergic to statins.

I have taken Niaspan in the past because I am allergic to statins so I paid particular attention to the news on Friday. Niaspan has been taken for decades and it is a fairly expensive drug at $325 per month for the 2,000MG per day dose. I am sure it will continue to be sold and be effective for its original purpose. They just can't claim the rise in HDL will reduce heart attacks. Abbott received just over $900 million in revenue from Niaspan in 2010. Several analysts slashed their estimates by half for 2011 to account for a possible decline in sales.

Only a week ago Abbott was told by a panel of advisers that the drug Trilipix would need to be relabeled to indicate that it failed to lower heart attacks in a study of diabetics. Trilipix is a fibrate that was advertised to lower triglycerides while boosting HDL.

Abbott's cholesterol drugs account for $2.6 billion or 7% of its total revenue. The small drop because of the label changes in both these drugs should be inconsequential toward Abbott's earnings. They will likely offset any decline in sales by cost cutting or repricing to account for the drop. Wells Fargo cut 6-cents from their projected 2010 earnings of $4.90 per share. That lessened the impact to the stock to a decline of only 59-cents on Friday but there was a dollar loss on Thursday as well.

Abbott Chart

Medco Health Solutions (MHS) was crushed on Friday after Blue Cross Blue Shield chose CVS Caremark (CVS) over MHS for a three-year contract worth $3 billion. MHS had the contract and filled 9.8 million mail-in prescriptions for Blue Cross but BCBS opted to renew the contract with CVS instead of MHS. Medco earnings won't be impacted until 2012 because the existing contract still has time remaining. Lazard Capital said the contract was worth 35-cents a year in earnings for MHS or roughly less than 10% with projected earnings in the $4.07 range. MHS lost -9% while CVS gained +2%.

Medco Chart

Polo Ralph Lauren (RL) was knocked for a major loss on Wednesday after reporting earnings that missed street estimates. RL dropped -$14 on the news. By Friday's close they had gained $11 of that back. Several analysts reiterated their buy ratings on the stock and went out of their way to call the drop a buying opportunity. Obviously somebody was listening.

Polo Ralph Lauren Chart

Lululemon Athletica (LULU) continued its plunge from a harsh downgrade on Thursday. FBR cut their rating to underperform (aka "reduce" rating) from market perform or neutral. Analyst Lizabeth Dunn said the shares were priced to perfection and there was earnings risk for the June 10th earnings. A Nomura analyst reiterated his "reduce" rating and a price target of $47. LULU closed at $90 on Friday.

LULU Chart

Happy Memorial Day and welcome to the official start of the summer doldrums. To celebrate the kickoff of summer most people eventually end up at a group barbecue or dinner of some sort. This year it will cost a lot more to feed the hungry mob because of the rise in food inflation. One survey estimated it would cost $199 to feed a group of twelve. That is a $45 increase over Memorial Day 2010.

The cost of food has rocketed higher over the last year but fortunately that is not included in the government's inflation numbers. (Sarcasm) For instance ground beef for those hamburgers is up +14%, lettuce +28%, tomatoes +86%, potatoes +27%, and corn on the cob +150%. An ear of corn cost 20-cents last year and 50-cents this year. This is due in part to 43% of the 2010 corn crop being used as ethanol. Gasoline to get you to the picnic will cost +37% more and coffee after desert is up +83%. However, a case of beer only rose +3% so buy an extra case to help you forget about the price inflation for the picnic.

In some areas of the country Memorial Day also marks the first weekend of swimsuit season. For some that is exciting but for others it is the start of torture season. Another survey found that 41% of U.S. adults would rather go to the dentist than go shopping for a new swimsuit. Those self-conscious individuals will spend the summer making up excuses for not going to the beach or appearing in public partially clothed. For me, I am scheduling a dentist appointment. Maybe several!

If you want to earn some extra cash OptionsXpress is offering $500 cash to any Option Investor reader that opens an account. With that cash you can pay for a new swimsuit and the Memorial Day picnic. You know we don't normally advertise for third parties in our newsletters but I have received a lot of inquiries about brokers recently and OX is one I normally recommend anyway so I agreed to a limited promotion. Click the image below for details.

As we head into June the outlook is not bright. So far in May the Dow has declined -2.8% from the 12,810 high close on the last day of April. That is -369 points and relatively speaking the decline has been rather painless. There were some big moves but most were erased the next day or even the same day with rebounds. If we are going to have a correction this is definitely preferable to a -10% drop in two weeks. This type of move allows traders to enter and exit positions within the trend without the stomach churning volatility that accompanies many corrections.

There are still stocks making new highs with 220 on Friday alone. That was the most in more than a week. There were only 64 new lows on Friday.

It should be no surprise to anyone that the economy is going through a soft patch. We report on it almost every day. However, the election cycle is in full bloom and we know from experience that politicians will do everything possible to add stimulus in some form in order to get reelected. They just may not call it stimulus this time. That should keep the markets from declining to far although the debt ceiling confrontation is going to add some negative sentiment. Once we are past that hurdle and the politicians have gamed the event to their best advantage the markets should begin to rebound. Unfortunately that scenario has a couple of months to run with August 2nd the unofficial drop dead date on the debt ceiling.

Most of us would ignore the possibility of a U.S. debt default the same way we ignore the possibility of a large asteroid strike eliminating a major U.S. city. However, the background chatter has increased to the point that credit default swaps on U.S. debt have more than doubled in volume over the last year. The Financial Times reported that the amount of one-year credit default swaps on U.S. debt has increased to $24 billion in derivative value today compared to only $12 billion for the same month in 2010.

Zero Hedge reported treasuries held in custody by the Federal Reserve for foreign accounts this week experienced their biggest drop in four years. That could suggest foreign investors and central banks are scaling back their investments in U.S. debt. On the other side of that coin the yield on 10-year treasuries has been falling as investors buy treasuries as a safe haven as the economy weakens. The yield on the 10-year closed at 3.06% on Friday, nearly a six month low and well below the 3.6% on April 8th.

Some analysts are predicting a rocky June. Even though the end of QE2 has been known and discussed for months there is still the uncertainty about what will really happen to rates when it expires. If the economy was accelerating the rate would not be that material but in a declining economy real interest rates are critical.

The current worry is that the current soft patch will turn into a rough patch or even another recessionary dip caused by high fuel prices. That was not supposed to happen until the middle of 2012 but the Libyan crisis took 1.3 mbpd out of circulation and accelerated the coming oil crisis.

Regardless of the filler surveys on how gasoline prices are affecting Memorial Day travel they are affecting the daily lives of consumers. The rising prices have slowed the economy and that decline was rather dramatic. I believe it is because consumers have a very vivid recent memory of the price spike in 2008 to make them pay attention in 2011. They did not wait as long this time around to park the gas-guzzler and avoid the weekly trips to Wal-Mart. Fool me once shame on you, fool me twice shame on me. Consumers were not going into debt again over gasoline prices.

John Mauldin has made the term "muddle through economy" famous. He claims it means years of slow below trend growth and more susceptible to short term recessions. We definitely have the slow growth and unless it changes almost immediately we could drop back into a recession. However, various analysts are now calling for the summer to be a short-term version of the muddle through economy. Growth is +1.8% and could decline even lower in Q2 but remain in growth mode. In the fall most analysts expect it to accelerate again thanks to the rising corporate profits and election politics. The QE2 end and debt ceiling battle will be behind us by then.

The real point of concern for me is the gasoline prices. I wrote on Thursday about the new and higher price predictions for crude by Goldman, Morgan Stanley and JP Morgan. If crude hits those $120-$130 targets later this year the price of gasoline is going right back to $4 and consumers are going to stay home again. Every 50-cent increase in gasoline takes $70 billion out of the economy over a year's time. AAA predicted the average family will spend only $692 on its vacation in 2011 compared to $809 in 2010. Out of every $10 earned by an average family they estimate just under $1 is spent on fuel. (8.9%) That is a 40% bigger chunk than normal. In 2000 it was 5.7%. Only twice before have they spent this much. That was 1981 and the first gas crisis at 8.8% and in July 2008 at 10.2%. Households spent an average of $369 on fuel in April. For the same period in 2009 they spent just $201.

We are already seeing analysts lower their S&P targets for the year based on the weakening fundamentals. Goldman lowered their estimates from 1500 to 1450 for the S&P. Citigroup and UBS both raised their earnings estimates for the S&P-500 but left their price targets the same. That means they are pricing in more risk along with more earnings power.

June could be rough simply because there is no reason to buy stocks with so much economic and political uncertainty. Market volume is going to slow until vacations are over and Labor Day arrives to signal the close of summer. It happens this way every year only this time there is an entire list of potential problems hanging like a cloud over the market.

I am actually encouraged by the lack of a major decline in May. Given the "sell in May and go away" trend we could have seen a decent decline. That is especially true given the QE2 end, European debt crisis, weakening economy, debt ceiling, etc. Heck we could be trading at Dow 12,000 again and I would not have been surprised. Instead there has been little real effort to sell off the market. The volatility index routinely trades under 16 in what would be a strong sell signal but nothing happens.

I think investors are confused. They saw the 1425 to 1550 S&P targets from a couple months ago and took them as gospel. Up until last week those targets had not changed. How much longer will they continue to hold stocks in anticipation of those targets being hit? Obviously nobody knows.

On Friday the S&P rallied to downtrend resistance at 1335 and managed to hold over the 1330 level despite some afternoon selling. I am pretty sure this was short covering ahead of the three-day weekend but we will never know for sure. The pattern has not changed and the declines have now stretched for four consecutive weeks. That has not happened since February 2010. Support is now 1315 and resistance 1335.

S&P Chart

The Dow pattern is the same as the S&P with a narrow downtrend channel and rising support in the form of the 100-day average. The chart suggests we will see a test of support at 12,200-12,225 soon. The rebound from the lows of the week was lackluster and failed to touch the top of the descending channel. Sector rotation is causing blocks of Dow stocks to weaken and the defensive stocks are not strong enough to compensate.

Dow Chart - Daily Short Term

Dow Chart - Daily Longer Term

All the big cap techs seemed to rally on Friday and that included FFIV, BIDU, GOOG, FSLR, AAPL, SINA, CREE and BRCM. Since most of those were heavily shorted earlier in the week I still believe it was just short covering on Friday. The Nasdaq is in the same pattern as the other indexes although it has been somewhat weaker based on the moving average breaks. I still expect further weakness. Support is 2750 and resistance 2800.

Nasdaq Chart

The Russell 2000 is somewhat confusing since it closed with a gain for the week. The pattern is the same but evidently there was enough short covering to push it back over the 50-day. The two-day support test at 810 could be significant but I think it was more coincidental than strategic. However, a continued push higher to close over 838 and the February high would be a very positive sign. It would suggest fund manager sentiment is improving. Why that would be the case is beyond me but let's wait and see if it happens before I consult my crystal ball for a reason.

Russell Chart

The Wilshire-5000, now the Dow Total Stock Market Index, cannot be gamed by hedge funds or pushed around by strategically placed trades. It is a true picture of the overall market. Obviously the chart looks exactly like the ones above only with a perfect textbook rebound off the 100-day. Should that average break in the coming weeks it would be a warning with a dip below 13,800 a sell signal.

Total Stock Market Index Chart

In summary I believe there will be more weakness ahead. I am not looking for a sudden washout but more of a choppy market with minor rebounds and declines. The trend appears to be heading slowly lower.

European event risk and currency fluctuations will continue to be a problem. The economic reports next week are market movers with the national ISM and Non-Farm Payrolls the most critical.

We are at that point on the calendar where I like to use the term "why buy?" Investors, as opposed to traders, have no real incentive to put additional money at risk ahead of the summer doldrums. This year they have even less reason because of the uncertainty surrounding QE2 and the economy. Until this cloud of uncertainty clears I doubt we will see a sustained rally.

I would continue to be cautious. Enter passively, exit aggressively.

Jim Brown

Send Jim an email

"The only difference between me and a madman is that I'm not mad."
Salvador Dali


New Plays

Circuit Boards & Services

by James Brown

Click here to email James Brown

Editor's Note:

The market's major indices are down four weeks in a row. Yet I found more bullish candidates than bearish ones. There are so many people expecting a deeper correction the market might rise just to spite them. If you are interested in bullish trading ideas check out this list of stocks I'm watching:

NWSA, LINTA, CBS, GME, ERTS, MMC, BBY, CTAS, and MAR.

- James


NEW BULLISH Plays

Jabil Circuit Inc. - JBL - close: 21.22 change: +0.32

Stop Loss: 19.90
Target(s): 22.95, 24.75
Current Gain/Loss: + 0.0%
Time Frame: until June 21st, 2011
New Positions: Yes, see below

Company Description

Why We Like It:
Tech stocks have been seeing lower highs and lower lows the last few weeks. Just the opposite is true for JBL. Shares are climbing in a bullish channel of higher lows and highs. The recent bounce from $20.00 looks like a bullish entry point. Shares do still have overhead resistance near $22 but if this trend continues we should see JBL breakout past this level in the next week or two.

I am suggesting small bullish positions now. We only have about four weeks for this trade to work as JBL reports earnings on June 21st and we don't want to hold over the announcement.

- Use Small Positions -

Suggested Position: buy JBL stock @ current levels

- or -

buy the July $22 call (JBL1116G22) current ask $0.95

Annotated chart:

Entry on May 30 at $xx.xx
Earnings Date 06/21/11 (confirmed)
Average Daily Volume: 3.6 million
Listed on May 28th, 2011


NEW BEARISH Plays

H&R Block - HRB - close:

Stop Loss: 16.55
Target(s): 14.10
Current Gain/Loss: unopened
Time Frame: until June 23rd, 2011
New Positions: Yes, see trigger

Company Description

Why We Like It:
There were a lot of headlines in HRB's corner of the world last week. Rival Jackson Hewitt Tax Service filed for bankruptcy. The Department of Justice has failed an antitrust lawsuit against HRB and its plans to acquire TaxACT. Meanwhile HRB declared a 15-cent quarterly cash dividend. Looking at the stock shares of HRB appear to be correcting lower. Shares spent a month failing at resistance near $18 in April. Since then HRB has bounced from its early May sell-off but the bounce has stalled under resistance at its 50-dma. The action in the past two weeks looks like a bear-flag pattern. I am seriously tempted to launch positions now. However, HRB has not yet broken the new trend of higher lows (bottom of the bear flag).

I am suggesting a trigger to open bearish positions at $15.60, which is under last week's low. More conservative traders may want to wait for a breakdown under the rising 100-dma, which could act as possible support. If we are triggered at $15.60 our target is $14.15 near the 200-dma.

Trigger @ 15.60

Suggested Position: Short HRB stock @ $15.60

- or -

buy the July $15.00 PUT (HRB1116S15) current ask $0.65

Annotated chart:

Entry on May x at $xx.xx
Earnings Date 06/23/11 (confirmed)
Average Daily Volume: 5.8 million
Listed on May 28th, 2011


In Play Updates and Reviews

Financials Flex on Friday

by James Brown

Click here to email James Brown

Editor's Note:
Financial stocks were some of the best performers on Friday. Unfortunately the trend for the banking indices is still a bearish one of lower highs and lower lows. Meanwhile we saw VLO hit our stop loss on Friday.

-James

Current Portfolio:


BULLISH Play Updates

Cheesecake Factory Inc. - CAKE - close: 31.56 change: -0.28

Stop Loss: 28.95
Target(s): 33.95, 37.00
Current Gain/Loss: + 0.1%
Time Frame: 8 to 10 weeks
New Positions: see below

Comments:
05/28 update: Friday's low-volume session saw CAKE's rally run out of gas at its trendline of higher highs. If the current trend continues we could see CAKE pull back toward the $30.50 area again before bouncing. CAKE doesn't move very fast so we can wait to buy the next dip or bounce near its 30-dma.

Earlier Comments:
Keep in mind that CAKE doesn't move very fast (at least not normally) so we'll need some patience for this trade to work. FYI: The Point & Figure chart for CAKE is bullish with a $59 target.

Current Position: Long CAKE stock @ $31.53

- or -

Long the July $33 call (CAKE1116G33) Entry @ $0.75

chart:

Entry on May 20 at $31.53
Earnings Date 07/21/11 (unconfirmed)
Average Daily Volume: 1.0 million
Listed on May 19th, 2011


Capital One Financial - COF - close: 54.04 change: +1.17

Stop Loss: 51.75
Target(s): 57.00, 59.50
Current Gain/Loss: + 1.8%
Time Frame: 4 to 8 weeks
New Positions: see below

Comments:
05/28 update: Financials were some of the better performers on Friday. COF outperformed its peers with a +2.2% gain. I would still consider new bullish positions here or you could wait for another dip or bounce near $53.00. However, COF might be forming a bearish wedge pattern. I'd keep new positions small to limit our risk.

Current Position: Long COF stock @ $53.07

- or -

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

05/17 New stop loss @ 51.75

chart:

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


Corn Products Intl. - CPO - close: 56.60 change: +0.60

Stop Loss: 53.60
Target(s): 59.90
Current Gain/Loss: + 0.5%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
05/28 update: CPO posted another gain albeit on low volume this Friday. Little has changed from my Thursday comments. The stock has short-term support at $55.00 and readers may want to wait for a dip near this level before initiating new positions. The $58.00 mark is probably short-term resistance but we'll set our first target at $59.90. FYI: The Point & Figure chart for CPO is bullish with an $82 target.

Current Position: Long CPO stock @ 56.28

- or -

Long June $55 call (CPO1118F55) Entry @ $2.10

chart:

Entry on May 27 at $56.28
Earnings Date 07/25/11 (unconfirmed)
Average Daily Volume: 688 thousand
Listed on May 26th, 2011


Danaher Corp. - DHR - close: 54.44 change: +0.80

Stop Loss: 52.65
Target(s): 58.00-60.00 zone
Current Gain/Loss: - 1.3%
Time Frame: 8 to 10 weeks
New Positions: see below

Comments:
05/28 update: Close enough! On Thursday I suggested readers wait for a close over $54.50 before considering new positions. The stock outperformed on Friday with a +1.5% gain to close at $54.44. I would consider new positions here.

Current Position: Long DHR stock @ $55.17

- or -

Long the Sept. $57.50 call (DHR1117I57.5) Entry @ $1.90

chart:

Entry on May 19 at $55.17
Earnings Date 07/21/11 (unconfirmed)
Average Daily Volume: 3.5 million
Listed on May 18th, 2011


Dr. Pepper Snapple Group - DPS - close: 41.06 change: -0.50

Stop Loss: 37.90
Target(s): 44.90
Current Gain/Loss: unopened
Time Frame: 8 to 10 weeks
New Positions: Yes, see trigger

Comments:
05/28 update: The correction in DPS continues. Shares failed near their 10-dma on Friday and closed at their lows for the week. We've been waiting for a correction so hopefully it continues this week. I'm suggesting a buy-the-dip entry point at $40.25. If triggered we'll use a stop loss at $37.90. Our target is $44.90.

buy-the-dip Trigger @ $40.25

Suggested Position: buy DPS stock @ $40.25

- or -

Buy the August $45 call (DPS1120H45) current ask $0.80

chart:

Entry on May x at $xx.xx
Earnings Date 07/28/11 (unconfirmed)
Average Daily Volume: 2.1 million
Listed on May 14th, 2011


Ecolab Inc. - ECL - close: 53.99 change: +0.69

Stop Loss: 50.95
Target(s): 57.00, 59.90
Current Gain/Loss: + 1.2%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
05/28 update: The breakout in ECL continues. Shares rallied +1.29% on Friday to close at new all-time highs. I would still consider new positions here but you might want to wait for a dip back toward the $53.25-53.00 area instead.

Current Position: Long ECL stock @ 53.35

- or -

Long July $55 call (ECL1116G55) Entry @ $0.60

chart:

Entry on May 26 at $53.35
Earnings Date 07/26/11 (unconfirmed)
Average Daily Volume: 1.5 million
Listed on May 18th, 2011


EMC Corp. - EMC - close: 28.43 change: +0.22

Stop Loss: 26.45
Target(s): 29.95, 32.25
Current Gain/Loss: + 3.1%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
05/28 update: EMC is up three days in a row. Shares are nearing resistance at its 2011 highs near $28.70. I wouldn't be surprised to see EMC churn sideways for a couple of days before breaking out. I'm not suggesting new positions at this time. Our first target is $29.95.

Current Position: Long EMC stock @ $27.55

- or -

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

Second Option Position (listed 05/12/11)

Long the June $29.00 calls (EMC1118F29) Entry @ $0.45

05/12 New entry point. Added second option position.

chart:

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


Expedia Inc. - EXPE - close: 27.69 change: +0.33

Stop Loss: 24.74
Target(s): 27.75, 29.75
Current Gain/Loss: + 7.1%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
05/28 update: EXPE made another rally attempt at resistance near $28.00 but didn't quite make it. A week of consolidating sideways might have recharged EXPE enough to rally toward $30.00 but I would not start new positions at these levels. Our final target is $29.75.

Current Position: Long EXPE stock @ 25.85

- or -

Long the June $25 call (EXPE1118F25) Entry @ $1.20

- or -

Long the July $27 call(EXPE1116G27) Entry @ $0.95

05/21 New stop loss @ 25.40
05/20 1st Target Hit @ 27.75 (+7.3%), June $25 call @ $2.70 (+125%), July $27 call @ $1.40 (+47.3%)

chart:

Entry on May 18 at $25.85
Earnings Date 07/28/11 (unconfirmed)
Average Daily Volume: 5.5 million
Listed on May 17th, 2011


Kansas City Southern - KSU - close: 58.48 change: -0.02

Stop Loss: 53.45
Target(s): 59.75, 62.50
Current Gain/Loss: + 3.7%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
05/28 update: KSU tagged a new all-time high on Friday morning. Technically the stock has created an inverse head-and-shoulders pattern that is forecasting a move toward $62.00. I would look for a dip near $57.00 before launching new positions. Our upside targets are $59.75 and $62.50.

Current Position: Long KSU stock @ $56.39

- or -

Long the June $60 call (KSU1118F60) Entry @ $0.53

chart:

Entry on May 19 at $56.39
Earnings Date 07/27/11 (unconfirmed)
Average Daily Volume: 1.0 million
Listed on May 18th, 2011


Rosetta Resources - ROSE - close: $48.13 change: -0.03

Stop Loss: 43.90
Target(s): 54.00
Current Gain/Loss: + 1.7%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
05/28 update: ROSE didn't make much progress on Friday. Shares still look poised to move higher. Readers can launch positions now or if you're patient consider waiting for a dip into the $47.00-46.00 area before launching positions. The $50.00 level is still overhead resistance but we're aiming for $54.00.

-Small Bullish Positions-

Current Position: Long ROSE stock @ $47.35

- or -

Long July $50 call (ROSE1116G50) Entry @ $1.95

chart:

Entry on May 26 at $47.35
Earnings Date 08/08/11 (unconfirmed)
Average Daily Volume: 967 thousand
Listed on May 25th, 2011


Riverbed Technology, Inc. - RVBD - close: 37.93 change: +0.36

Stop Loss: 34.95
Target(s): 39.90, 43.00
Current Gain/Loss: + 1.8%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
05/28 update: RVBD extended its bounce to three days in a row. I remain cautiously bullish here. If you launch positions I would keep our position size small to limit risk. Look for short-term support near the 20-dma or the $36 level.

Current Position: Long RVBD stock @ $37.25

- or -

Long the June $40 call (RVBD1118F40) Entry @ $1.15

chart:

Entry on May 12 at $37.25
Earnings Date 07/21/11 (unconfirmed)
Average Daily Volume: 5.1 million
Listed on May 11th, 2011


DENTSPLY Intl. - XRAY - close: 39.14 change: +0.09

Stop Loss: 37.30
Target(s): 42.00, 44.50
Current Gain/Loss: + 0.3%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
05/28 update: Friday was a quiet day for XRAY. Shares drifted sideways near $39.00 all day long. There is no change from my Thursday comments. Readers can buy this bounce but consider upping your stop loss closer to the $38 level. 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.

Current Position: Long XRAY stock @ 39.00

- or -

Long the June $40 call (XRAY1118F40) Entry @ 0.60

chart:

Entry on May 12 at $39.00
Earnings Date 07/25/11 (unconfirmed)
Average Daily Volume: 904 thousand
Listed on May 7th, 2011


BEARISH Play Updates

Aon Corp. - AON - close: 51.37 change: -0.57

Stop Loss: 53.05
Target(s): 46.50
Current Gain/Loss: - 0.4%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
05/28 update: Right on cue AON failed at resistance near $52.00. This move on Friday looks like a new entry point for bearish positions.

Our target is the $46.50 level. I would expect some support near $50.00 and the 100-dma so don't be surprised to see an initial bounce near this area. NOTE: The option spreads on AON are a little wide. Conservative traders may not want to play the options.

(small positions only)

Current Position: short AON stock @ 51.61

- or -

Long the June $50 PUT (AON1118R50) entry @ $0.45

05/23 gap down entry @ 51.61

chart:

Entry on May 23 at $51.61
Earnings Date 07/29/11 (unconfirmed)
Average Daily Volume: 1.7 million
Listed on May 21st, 2011


Ford Motor Co. - F - close: 14.60 change: +0.04

Stop Loss: 15.15
Target(s): 13.25
Current Gain/Loss: - 1.3%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
05/28 update: Not much has changed for Ford. The stock has been moving sideways the last couple of days. I would wait and watch for a failed rally near resistance at $14.75 or the $15.00 level before starting new bearish positions. Currently our target is $13.25. Do not be surprised if Ford produces a short-term bounce near its March lows near $13.75. I would keep our position size small to limit our risk.

Small Positions!

Current Position: Short F stock @ $14.40

- or -

Long July $15 PUT (F1116S15) Entry @ $0.90

chart:

Entry on May 25 at $14.40
Earnings Date 07/21/11 (unconfirmed)
Average Daily Volume: 57 million
Listed on May 24th, 2011


St. Jude Medical - STJ - close: 50.56 change: +0.37

Stop Loss: 52.26
Target(s): 47.00
Current Gain/Loss: + 0.8%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
05/28 update: STJ is still bouncing. We're looking for overhead resistance near $51.00 or the 50-dma closer to $52. Wait for the bounce to reverse before initiating new positions. Currently our target is $47.00. More aggressive traders may want to aim lower.

Earlier Comments:
We wanted to keep our position size small (about half or less than a normal trade) to limit our risk.

(Small Positions)

Current Position: Short STJ stock @ 51.00

- or -

Long the June $50 PUT (SJT1118R50) Entry @ $1.00

05/23 New stop loss @ 52.26

chart:

Entry on May 20 at $51.00
Earnings Date 07/21/11 (unconfirmed)
Average Daily Volume: 2.6 million
Listed on May 16th, 2011


CLOSED BEARISH PLAYS

Valero Energy - VLO - close: 26.92 change: +0.50

Stop Loss: 27.05
Target(s): 23.00
Current Gain/Loss: - 6.1%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
05/28 update: We've been worried about VLO the last couple of days. The stock has been bouncing from Monday's low and after Thursday it looked like VLO might surge higher and break one of its trends of lower highs. Sure enough VLO rallied again on Friday and hit our stop loss at $27.05 closing this trade. The weekly chart has produced a bullish engulfing reversal candlestick.

Closed Position: Short VLO stock @ $25.49, exit 27.05 (-6.1%)

- or -

June $25 PUT (VLO1118R25) Entry @ $0.90, exit @ 0.20 (-77.7%)

05/27 Stopped out @ 27.05 (-6.1%), Option -77.7%
05/23 Triggered @ 25.49.

chart:

Entry on May 23 at $25.49
Earnings Date 07/27/11 (unconfirmed)
Average Daily Volume: 11 million
Listed on May 14th, 2011