Option Investor
Newsletter

Daily Newsletter, Monday, 6/20/2011

Table of Contents

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

Market Wrap

Finally A Greek Solution?

by Todd Shriber

Click here to email Todd Shriber
Comments from Luxembourg's Jean-Claude Juncker, the leader of the group of Eurozone finance ministers, that a solution to Greece's sovereign debt woes will in fact be found lit a fire under U.S. stocks today, sending the S&P 500 and Dow Jones Industrial Average higher for a third consecutive day, the best winning streak for the two indexes since last month. The Nasdaq even got in on the party, gaining half a percent and the Russell 2000 was higher by nearly 1%.

Stats Table

The Greece news, while welcome, does not put the issue to be entirely. Not by a long shot. The International Monetary Fund (IMF) still is not negotiating a second rescue package for Greece while it weighs whether to approve the next payment of the country’s initial program, Bloomberg News reported. Still, Juncker added that he does not believe Italy is in danger of a Greece-esque crisis.

Good news again, but not enough to save the iShares MSCI Italy Index Fund (EWI) from a down day. Given that EWI was only down fractionally today, it would appear that the bulls and bears targeting this ETF wrestled with Juncker's remarks and headlines that broke late in Friday's trading session that Moody's Investors Service is mulling a downgrade of Italy's credit rating. Remember, unfortunately for short sellers and put buyers, there is no Greece-specific ETF, but EWI might be the next best thing.

Italy ETF

One stock that was on the move today was a controversial and familiar name: Molycorp (MCP), the largest U.S.-based rare earths miner. As the chart below indicates, recent weeks have not been kind to the Colorado-based company and that is due to a variety factors. Combining the market slamming the door shut on the high-beta trade and a pair of announcements regarding some substantial insider selling by early Molycorp investors and company executives was a toxic brew for the shares.

In reality, not much has changed regarding the rare earths story. Multiple press outlets noted late last week rare earths again doubled in recent weeks, that is a fact. I will interject my opinion that rare earths projects that are expected to come online over the next five years will be enough to curb the current supply/demand imbalance will not be enough to do so. Or at the very least, this is a risky proposition to bank on.

Enough my thoughts, because what JPMorgan had to say about Molycorp means more to your brokerage account anyway. The bank raised its price target on the stock today to $105 from $87, more than double where the shares closed today and have a look at the bank's new EPS estimates for Molycorp: 2012 to $5.93 from $5.25, 2013 to $14.48 from $12.51, and 2014 to $27.01 from $22.45.

Piper Jaffray chimed in as well, upgrading Molycorp to ''overweight'' from ''neutral,'' saying that the stock's recent pullback overly discounts an imminent plunge in rare earths prices. For more news and commentary on the energy and commodities sector, register for the Oil Slick daily newsletter (HERE).

Molycorp Chart

Speaking of high-beta materials stocks, there was more good news. In what has seemed like a constant barrage of earnings warnings, companies that actually raise guidance stand-out these days. One shining example is Canadian fertilizer producer Agrium (AGU). Citing rising global crop prices, particularly corn, Agrium, the largest North American farm products retailer, raised its second-quarter profit forecast to $4.10-$4.40 a share from previous guidance of $3.38-$3.88 and boosted its first half earnings estimate to $5.12-$5.42 a share up from prior guidance of $4.40-$4.90.

Agrium Chart

Dow component Wal-Mart (WMT), the world's largest retailer, was in the news today as well, winning a big legal battle after the U.S. Supreme Court overturned a decision by the Ninth Circuit Court, halting a major sexual discrimination suit against Wall-Mart. While the court did not rule on the merits of the case itself, it did rule that Wal-Mart is entitled to individual determinations of its employees' eligibility for back-pay, Forbes reported.

Obviously, Wal-Mart is pleased with the ruling and the company said as much, but as far as the plaintiffs go, their lawyers said the case is not over. The case would have been the largest employment class-action suit in U.S. history, involving 1.5 million female employees of Wal-Mart, according to Forbes. Shares of Wal-Mart rose less than half a percent.

Wal-Mart Chart

I do not want to be the first to go out on a limb and say banking sector mergers and acquisitions are back, but it is starting to feel that way. On the heels of last week's news that Capital One (COF) will pay $9 billion to acquire ING Groep's (ING) U.S. online banking business, the biggest retail bank deal in several years, PNC Financial Services (PNC) announced today it will pay $3.62 billion in cash and stock for Royal Bank of Canada's (RY) U.S. retail banking and credit card operations.

The retail banking business had been a money a loser for RY, not surprising given that the business is focused on the Southeastern part of the country, but with an already dominant presence in the Mid-Atlantic region and a Florida footprint, the deal makes sense for Pennsylvania-based PNC, which is looking to expand in the Southeast.

PNC is paying $3.45 billion for the bank and $165 million for the credit card operation, which represents a $112 million discount to the tangible book value of the unit, Reuters reported. PNC expects the acquisition to add to earnings by the end of 2013, or perhaps sooner depending on how much stock it uses to fund the deal. As of March 31, PNC had 2,446 branches and $259.38 billion of assets, according to Reuters.

PNC Chart

Looking at the charts, even with three days of gains, the S&P 500 has barely made a dent in six-plus consecutive weeks of losses. As was the case on Friday, the index bumped into resistance at 1280 and was not able to muster a close above the level. Maybe the best thing that can be said at this juncture is that the 200-day moving average at 1259 appears to be providing firm support.

I still think we need to see a test of 1250 and see that area hold before fresh capital is deployed. If 1250 does not hold as support, 1175 could be the first downside target.

S&P 500 Chart

The Dow was able to hold 12,000 on Friday and built on that today, but with today's close around 12,080, the blue-chip index still needs to notch a couple of solid days so it can takeout resistance at 12,200. The Dow's chart turned ugly early this month and I am afraid three days of gains is lot like putting lipstick on a pig in that a retreat to 11,750 is still a very real possibility.

Dow Chart

As I mentioned earlier, the Nasdaq got in on the positive action again today, but that does not mean it is time to feel positive about the index. The Nasdaq really has its work cut out for itself as it needs to deal with some resistance at 2640 and then again just below 2700. A break below the critical 2600 level would probably induce fresh selling and fortify the theory that there is no reason to be involved tech at the moment.

Nasdaq Chart

The Russell 2000 made only a faint effort to challenge resistance at 790 closing below that area once again and while a gain of nearly 1% is good for single day, the Russell's outlook is similar to the other indexes: One decent day is simply not enough to inspire tons of confidence. If the Russell moves below support at 775, 730 becomes a legitimate possibility.

Russell 2000 Chart

A couple of weeks ago, I predicted we might see a ''law of averages'' bounce and after six weeks of intense selling, we have probably seen that bounce over the past three sessions. Even if the Greece situation is miraculously solved in the next couple of days, that will only amount to a temporary catalyst because it will not do anything to change U.S. economic data or keep companies from issuing negative earnings guidance.

This might be a good time to start making a list of prospective long trades, but I would hold off on the shopping, at least until the end of the month.


New Plays

Nimble Traders Might Try

by James Brown

Click here to email James Brown

Editor's Note:

I would be wary of the market's bounce today. The market has been oversold and due for a rebound but the intermediate trend is still down. Now the bounce could last a few days but I'm concerned the market might roll over again on Wednesday following the FOMC meeting and Bernanke's press conference.

On a very short-term basis stocks look poised to move higher but I'm not willing to add bullish plays to the newsletter at this time. Since I think stocks might bounce for a couple more days I'm not adding bearish plays tonight either.

Personally, the best bet is to probably sit on your hands for a couple of days and wait. However, if you are nimble enough you might be able to find a bullish trade with some of these candidates below:

BAX - shares were showing plenty of relative strength today and have broken the three-week trend of lower highs.

UNH - this healthcare stock outperformed the market's major indices and closed near multi-year highs.

WAG - this drugstore stock has rallied toward its May highs and closed above resistance near $45.00. You might want to wait for a dip or wait for a rise past the May peak.

KFT - this defensive trade never broke down under its 50-dma and just rallied past short-term resistance. Caution - KFT doesn't move very fast.

DELL - this technology stock doesn't move very fast but shares are trending higher. DELL looks poised to move higher from here.

- James


In Play Updates and Reviews

The Bounce Continues

by James Brown

Click here to email James Brown

Editor's Note:
As expected the market continued to drift higher. There were some significant rebounds today but financials continue to underperform.

We did not see any candidates get triggered or get stopped out today.

-James

Current Portfolio:


BULLISH Play Updates

Cheesecake Factory Inc. - CAKE - close: 30.04 change: +0.29

Stop Loss: 28.95
Target(s): 33.95, 37.00
Current Gain/Loss: - 4.7%
Time Frame: 8 to 10 weeks
New Positions: see below

Comments:
06/20 update: CAKE dipped to technical support at its simple 200-dma this morning and bounced. The rebound managed to erase Friday's decline. Technically this is a new entry point but I'm reluctant to launch new positions.

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

06/09 CAKE is bouncing from the 200-dma as expected.
06/04 More conservative traders may want to exit early. We are expecting a drop to the 200-dma.

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


Dr. Pepper Snapple Group - DPS - close: 40.90 change: +0.36

Stop Loss: 39.40
Target(s): 44.90
Current Gain/Loss: + 1.6%
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
06/20 update: DPS produced a minor bounce from its 20-dma and closed up +0.88%. I would prefer to wait and launch new positions on a dip or bounce near $40.00 and its 50-dma.

Current Position: Long DPS stock @ $40.25

- or -

Long Aug $45 call (DPS1120H45) Entry @ $0.30

06/14 new stop loss @ 39.40
06/04 new stop loss @ 38.95

Entry on June 3 at $40.25
Earnings Date 07/28/11 (unconfirmed)
Average Daily Volume: 2.1 million
Listed on May 14th, 2011


Ecolab Inc. - ECL - close: 54.22 change: +0.27

Stop Loss: 52.45
Target(s): 57.00, 59.90
Current Gain/Loss: + 1.6%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
06/20 update: There was no follow through on Friday's decline. Yet I would not launch new positions at this time. Should the market turn lower then ECL should find support near $53.00.

Current Position: Long ECL stock @ 53.35

- or -

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

06/18 new stop loss @ 52.45
06/04 new stop loss @ 51.90

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


Nanometrics Inc. - NANO - close: 16.36 change: +0.03

Stop Loss: 15.85
Target(s): 19.25, 22.00
Current Gain/Loss: - 2.7%
Time Frame: 6 to 8 weeks or more
New Positions: see below

Comments:
06/20 update: The rebound in NANO today was not very encouraging. Shares dipped to support near $16.00 Monday morning and then barely made it back into positive territory. Technically this is another test of support and could be used as a new entry point but I'd rather see some follow through higher first.

We'll start with multi-week targets at $19.25 and $22.00. FYI: NANO does have options but the spreads are so wide I wouldn't trade them.

Current Position: Long NANO stock @ $16.82

Entry on June 13 at $16.82
Earnings Date 08/04/11 (unconfirmed)
Average Daily Volume: 467 thousand
Listed on June 11th, 2011


BEARISH Play Updates

Aon Corp. - AON - close: 49.58 change: +0.19

Stop Loss: 52.05
Target(s): 47.00
Current Gain/Loss: + 3.9%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
06/20 update: AON saw a middy rally to $50.19 before paring its gains. While the lower high is encouraging I am not suggesting new positions at this time.

(small positions only)

Current Position: short AON stock @ 51.61

06/18 adjusted exit target to $47.00
06/16 planned exit, June $50 put @ +11.1%
06/16 new stop loss @ 52.05
05/31 New stop loss @ 52.75
05/23 gap down entry @ 51.61

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


AO Smith Corp. - AOS - close: 40.50 change: +0.46

Stop Loss: 42.05
Target(s): 36.00, 33.00
Current Gain/Loss: - 1.4%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
06/20 update: Hmm... our AOS trade might be at risk. Traders bought the dip again this morning near $40.00 and shares closed above their 200-dma. At this time I would anticipate a bounce toward the 50-dma or the $41.50 level.

I am not suggesting new positions at this time.

FYI: The Point & Figure chart for AOS is bearish with a $33 target. Traders should also note that the most recent data listed short interest at 5% of the relatively small 38.2 million share float. That does raise the risk for a possible short squeeze and explains the volatile rallies in this stock.

NOTE: AOS does have options but the spreads appear too wide for us to trade them.

Current Position: short AOS stock @ $39.92

Entry on June 6 at $39.92
Earnings Date 07/20/11 (unconfirmed)
Average Daily Volume: 312 thousand
Listed on June 4th, 2011


Allegheny Technologies - ATI - close: 60.00 change: +1.38

Stop Loss: 62.05
Target(s): 52.75, 50.50
Current Gain/Loss: unopened
Time Frame: 4 to 6 weeks
New Positions: Yes, see trigger

Comments:
06/20 update: ATI produced a strong bounce today (+2.3%) but it stalled near short-term resistance at $60.00 and its 200-ema. Aggressive traders may want to get ready to open positions on a failed rally near $62.00. Currently our plan calls for a breakdown trigger at $57.40 before entering bearish positions.

If ATI does hit our trigger at $57.40 I'm suggesting a stop loss at $62.05. Our targets are $52.75 and $50.50. We do not want to hold over the late July earnings report.

Trigger @ $57.40 (but keep watch for a failed rally near $62.00 as an alternative entry point).

Suggested Position: Short ATI stock @ $57.40

- or -

buy the July $55 PUT (ATI1116S55) current ask $1.60

Entry on June x at $xx.xx
Earnings Date 07/27/11 (unconfirmed)
Average Daily Volume: 1.9 million
Listed on June 18th, 2011


Ford Motor Co. - F - close: 12.94 change: +0.17

Stop Loss: 13.85
Target(s): final target @ 12.55
Current Gain/Loss: +10.1%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
06/20 update: Once again Ford looks poised to bounce. Shares added +1.3% and almost produced a bullish engulfing candlestick pattern. There is no change from my prior comments. More conservative traders may want to exit now to lock in a gain or lower their stops.

I am not suggesting new positions at this time. The plan was to 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

06/16 new stop loss @ 13.85
06/13 New stop loss @ 14.26. Final target at $12.55
06/13 Take Profits Now! Ford @ 13.14 (+8.75%), Option @ $1.89 (+110%)
06/11 new targets at $12.75 and TBD.
06/11 new stop loss @ 14.55
06/08 new stop loss @ 15.01

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


F5 Networks - FFIV - close: 98.18 change: +0.98

Stop Loss: 108.05
Target(s): 95.75, 85.50
Current Gain/Loss: unopened
Time Frame: 4 to 6 weeks
New Positions: Yes, see trigger

Comments:
06/20 update: FFIV tagged a new relative low this morning before bouncing back into positive territory. We're expecting an oversold bounce back to resistance before FFIV rolls over again.

I am suggesting we launch positions at $103.00, just under technical resistance at the 50-dma. More conservative traders could wait for a bounce to $104.00 or even $105.00 as an alternative entry point. If triggered we'll use a stop loss at $108.05. Our targets are $95.75 and $85.50. However, we do not want to hold over the late July earnings report. FYI: The Point & Figure chart for FFIV is bearish with a $78 target.

Trigger @ $103.00

Suggested Position: Short FFIV stock @ 103.00

- or -

buy the July $100 PUT (FFIV1116S100)

Entry on June x at $xx.xx
Earnings Date 07/20/11 (unconfirmed)
Average Daily Volume: 2.3 million
Listed on June 18th, 2011


Honeywell Intl. - HON - close: 56.43 change: +0.58

Stop Loss: 59.05
Target(s): 54.00
Current Gain/Loss: + 2.1%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
06/20 update: The bounce in HON produced an inside day. This really doesn't tell us much except it's a sign of indecision by traders. I am not suggesting new positions at current levels. More conservative traders may want to lower their stops near the $58.00 level.

Earlier Comments:
We do want to keep our position size small to limit our risk.

- Small Positions -

Current Position: short HON stock @ 57.65

- or -

Long July $55 PUT (HON1116S55) Entry @ $0.75

06/18 new stop @ 59.05

Entry on June 2 at $57.65
Earnings Date 07/22/11 (unconfirmed)
Average Daily Volume: 4.1 million
Listed on June 1st, 2011


Johnson Controls Inc. - JCI - close: 37.39 change: +0.28

Stop Loss: 38.25
Target(s): 33.75, 31.00
Current Gain/Loss: - 2.8%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
06/20 update: JCI bounced again but the rebound failed to breakout past resistance at its 200-dma. If the market continues to rally it might be enough to lift JCI past $38.00, which would put our trade at risk of getting stopped out. I am not suggesting new positions tonight. We'll wait and see if this rebound rolls over. FYI: The Point & Figure chart for JCI is bearish with a $33 target.

-Small Positions Only-

Current Position: Short JCI stock @ $36.36

- or -

Long July $35 PUT (JCI1116S35) Entry @ $0.90

Entry on June 16 at $36.36
Earnings Date 07/25/11 (unconfirmed)
Average Daily Volume: 4.4 million
Listed on June 15th, 2011


Kohl's Corp. - KSS - close: 51.06 change: +0.93

Stop Loss: 51.75
Target(s): 47.50, 45.25
Current Gain/Loss: - 2.5%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
06/20 update: Relatively speaking KSS produced a pretty good bounce today (+1.8%). The close over its 10-dma and the $51.00 level is short-term bullish. We have a pretty tight stop at $51.75 so if this rebound sees any follow through we could get stopped out tomorrow.

The plan was to keep our position size small to limit our risk. FYI: The Point & Figure chart for KSS is bearish with a $43 target.

- Small Positions-

Current Position: short KSS stock @ $49.80

- or -

Long July $47.50 put (KSS1116S47.5) Entry @ $0.75

Entry on June 13 at $49.80
Earnings Date 08/11/11 (unconfirmed)
Average Daily Volume: 4.1 million
Listed on June 11th, 2011


Marriott Intl. Inc. - MAR - close: 33.12 change: -0.03

Stop Loss: 36.05
Target(s): 33.65, and 30.50
Current Gain/Loss: + 6.4%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
06/20 update: MAR continues to underperform. Shares tried to bounce from the $33.00 level but eventually rolled back over into negative territory. There is no change from my weekend comments.

The stock looks oversold and due for a bounce. More conservative traders may want to just take profits now and exit completely. I suspect the oversold bounce could reach the $35 level or the 50-dma. I am not suggesting new positions at this time.

Current Position: Short MAR stock @ $35.39

- or -

Long July $33 PUT (MAR1116S33) Entry @ $0.60

06/18 new stop loss @ 36.05
06/13 1st Target Hit @ $33.65 (+4.9%), Option @ 0.90 (+50%)
06/13 New stop loss @ 36.55
06/11 Adjusted exit targets to $33.65 and 30.50

Entry on June 8 at $35.39
Earnings Date 07/13/11 (unconfirmed)
Average Daily Volume: 3.7 million
Listed on June 7th, 2011


Charles Schwab - SCHW - close: 16.10 change: +0.19

Stop Loss: 17.55
Target(s): 15.25
Current Gain/Loss: unopened
Time Frame: 3 to 6 weeks
New Positions: Yes, see trigger

Comments:
06/20 update: SCHW is trying to rebound but it didn't make it very far. I don't see any changes from my weekend comments.

Aggressive traders may want to launch positions now or use a trigger $15.70 as an entry point for bearish positions. I am suggesting we wait for a bounce back toward overhead resistance and launch positions at $16.75 instead. If triggered we'll use a stop loss at $17.55 and aim for a drop to $15.25. This could take several weeks but we do not want to hold over the mid July earnings report.

Trigger @ 16.75

Suggested Position: short SCHW stock @ $16.75

- or -

Buy the July $17.00 PUT (SCHW1116S17)

Entry on June x at $xx.xx
Earnings Date 07/18/11 (unconfirmed)
Average Daily Volume: 10.2 million
Listed on June 13th, 2011


St. Jude Medical - STJ - close: 49.30 change: +1.11

Stop Loss: 51.05
Target(s): 47.00, 45.75
Current Gain/Loss: + 3.3%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
06/20 update: STJ rebound today (+2.3%) stalled at its 100-dma. I would not be surprised to see STJ rally back toward the $50 level or even its 50-dma but more conservative traders may want to lower their stops closer to $50.00 to reduce your risk. I am not suggesting new positions at this time. Our first target to take profits is at $47.00.

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

06/16 exit June $50 put @ $1.95 (+95%)
06/15 prepare to exit our June $50 puts on Thursday at the close
06/04 New stop loss @ 51.05, added second target at $45.75
05/23 New stop loss @ 52.26

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