Option Investor
Newsletter

Daily Newsletter, Tuesday, 11/8/2011

Table of Contents

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

Market Wrap

One PM Down, One to Go

by Jim Brown

Click here to email Jim Brown
Greek Prime Minister George Papandreou has agreed to resign and now Italy's Prime Minister Silvio Berlusconi has also agreed to resign once the current austerity budget passes.

Market Statistics

I hated history in school. I can imagine how bored future history students are going to be studying this current period and the various political events surrounding the European debt crisis. I know I am bored now and I am sure most other traders are as well.

The markets rallied on news of Berlusconi's departure as if some major company had just raised its earnings guidance. The market has deteriorated into a political betting parlor much like the sports betting rooms in Las Vegas. Every little rumor of some political event in a European country is a reason for some traders to place new bets. Somebody please slap me. I am in a horrible recurring nightmare and I can't wake up.

In theory the end of Berlusconi's tortured reign is a good thing for Italy but nobody knows who will replace him. Sometimes it is better to deal with the devil you know rather than take a chance on an unknown successor. For now the markets appear to be happy to see progress of any kind on the European scene but there is a pothole in our future. We just don't know today what that pothole will be.

The Italian 10-year bonds did not show a lot of excitement about the change. Yields on the bond traded at 6.8% and analysts are now expecting 7% soon. With euro 1.9 trillion in debt there is a train wreck in Italy's future unless something happens to change the trend on those yields. The ECB is continuing to buy Italian bonds in order to hold the rates down but obviously that is not working too well and the ECB does not have enough money to continue buying Italian bonds forever.

In the U.S. the limited economic calendar today was positive. Chain store sales rose +1.0% compared to +0.7% in the prior week. No big deal but a continued weekly gain suggests consumers are not pulling back and there are no recession fears.

The biggest report for the day was the Job Openings report for September. Job openings increased by +7.1% to 3.354 million, up from 3.129 million in August. This is the largest number of available jobs since the second half of 2008. Hiring also improved with 4.25 million new hires compared to 4.06 million in August.

The 3.354 million job openings at the end of September was +21.7% more than September 2010. This is another sign the economy is improving. Since it takes an average of 30-90 days to fill a position this suggests the Nonfarm Payroll report should improve in the months ahead despite the normal seasonal trends. The Job Openings report covers part of two Nonfarm reporting periods and is seen as more accurate since it has the benefit of being a lagging report using more data.

The economic calendar for the rest of the week is light with Consumer Sentiment on Friday the most watched report remaining.

Economic Calendar

In stock news the battle for Yahoo (YHOO) is heating up. Alibaba and Softbank are accelerating their talks with private equity firms to raise money for a full buyout of Yahoo. Reportedly the companies have grown impatient with the lack of progress in direct talks with Yahoo. Private Equity firms are reluctant to sign the nondisclosure forms from Yahoo because once signed it prevents them from talking to anyone else. This is because Jerry Yang wants to impede any transaction and limit the size of potential bids until he can orchestrate a buyout on his own. By signing the forms the companies do get advanced financial information and a management presentation about Yahoo operations and goals.

Yahoo owns 40% of Alibaba and that company wants to buy that stake back. Yahoo owns 35% of Yahoo Japan, which is majority owned by Softbank. That company also wants to buy back its stake. Rumors making the rounds have the two companies making a joint bid for all of Yahoo then removing their assets and transferring the rest to a private equity company.

Yahoo, AOL and Microsoft announced they were teaming up to sell advertising across all three networks. The news broke after the close and shares rallied to $16.44 in afterhours trade.

Yahoo Chart

McDonald's (MCD) reported same store sales for October rose +5.2% in the U.S., +4.8% in Europe and +6.1% in Asia. The company said the popularity of its Monopoly game in the U.S. helped push sales higher. A Sanford Bernstein analyst reiterated that "value continues to resonate with consumers in China due to the high inflation environment." Food inflation in China is up 3-4 times that of other countries. Food is the number one expense for most Chinese consumers.

McDonald's Chart

Weight Watchers (WTW) reported earnings of $1.09 compared to estimates of 94-cents on revenue that soared +81%. Their advertising campaigns over the last year are reaping benefits with many high profile celebrities joining the stable of testimonial promoters. Internet sales are really booming with an increase of +69% along with a 25% increase in North American meeting sales. Attendance in meetings rose +13.6%. The company raised full year guidance to a range of $4.05-$4.10 and well over analyst estimates of $3.99 per share. However, they killed the excitement over their shares when they said "As we enter 2012, we remain cautious about the uncertain economy and assume competition from other commercial weight loss competitors will be robust." That came from CEO David Kirchkoff and I am sure investors are lining up to lynch him after the stock declined -$10 from yesterday's high to $65.85 despite the good earnings.

WTW Chart

Activision (ATVI) reported earnings of 7-cents compared to analyst estimates of 2-cents. However, shares ticked lower on a decline in the number of World of Warcraft subscribers. WOW subscribers fell to 10.3 million from 11.1 million at the end of Q2. WOW generated more than $1 billion in revenue for ATVI in 2010. They said they are continuing to develop new content to draw subscribers back to the game. ATVI raised revenue estimates for the year by 10% on stronger than expected sales of Call of Duty, the most successful video game ever. The last version generated $1 billion in revenue in less than two months and set an industry record. Shares fell in afterhours trading.

ATVI Chart

Priceline (PCLN) rallied +44 to resistance at $550 after reporting earnings Monday night that more than doubled to $9.17 per share, up from $4.41 per share. Adjusted earnings were $9.95 compared to estimates of $9.30. Shorts were not happy. The company issued guidance for +29% growth for Q4 to a range of $929-$965 million and that was less than the $999.8 million analysts expected. Apparently investors were not concerned.

PCLN Chart

Gold rallied to $1804 intraday but gave back its gains once Berlusconi agreed to resign. Gold shares have been in rally mode because of the decline in the dollar. The apparent progress in Europe has strengthened the euro and weakened the dollar as a safe haven.

Gold Chart

Crude oil rallied +1.50 to close at $97 on the falling dollar but also on the worries over Iran. The UN's International Atomic Energy Agency (IAEA) was set to release a report critical of Iran and showing specifically how the country was attempting to build nuclear weapons and delivery systems. That rumor had been powering crude for the last week and when the report was released there was no material spike as the news was already priced into the market. Oil is also up on a slowdown in deliveries from the North Sea, violence in Nigeria, a lack of material progress on restarting Libyan production and expectations for rising demand as a result of better economic growth in America.

Crude Oil Chart

Don't look now but the markets have put in two consecutive gains and we are closing in on the October highs. The market action has been lackluster in the mornings but the afternoons have seen those slow meltups that indicate real buying rather than a surge in short covering. If we can break through the October high resistance stocks could really catch fire.

The S&P closed at 1275 with a gain of +15 points and that puts it only about 17 points below the October high at 1292. This was another technical close over the 200-day at 1272 but not enough points to really generate any trading excitement. However, every point we move higher from here is a buy signal with a move over 1292 and resistance at 1295 very positive.

S&P Chart

The Dow rallied ever closer to the October highs with only MCD (-0.02) and HPQ (-0.14) failing to close in positive territory. Strange that MCD did not close positive given their surge in same store sales but investors are probably moving to stocks with more risk now that the market appears to be healing.

The Dow should test the October highs this week at 12,285 but the real test will be the double top resistance in July at 12,750. That would be a good target for the normally bullish Thanksgiving week. Initial support is now 12,000.

Dow Chart

The Nasdaq extended its gains above the 200-day average of 2689. Apple returned to resistance just under $407 with a gain of $6.50 but it has yet to attract enough buyers to push over what I would call confirmation territory at $410. Once over $410 I think cautious buyers will begin jumping on for the next leg up to the October highs around $425. Once this happens the Nasdaq should respond accordingly and accelerate.

The Nasdaq 100 is testing the closing high at 2401 from October. The next few points will be critical and Apple's resistance will be the key. The next resistance points on the NDX are 2417 and 2435 then off to new 52-week highs.

Nasdaq Composite Chart

Nasdaq 100 Chart

Russell Chart

I don't know what news will power the markets on Wednesday. We are running out of European leaders. After the bell Cisco reports earnings and that could be a cloud over techs at the close. Hopefully they will have risen enough early to move over that critical resistance.

Overnight futures have been crazy of late with big double digit swings in reaction to headlines. This is no way to run a market but we have to play the hand we are dealt.

I am still in buy the dip mode with expectations of a continued move higher through Thanksgiving.

Jim Brown

Send Jim an email


New Plays

Industrials & Software

by James Brown

Click here to email James Brown


NEW BULLISH Plays

Honeywell Intl. - HON - close: 54.65 change: +0.69

Stop Loss: 52.25
Target(s): 58.50
Current Gain/Loss: unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
Industrial stock HON was upgraded this morning. This helped push shares past resistance near $54.00 and its simple 200-dma. After days of consolidation under this level we see today's move as a new entry point to launch bullish positions.

I am suggesting we buy HON or calls on the stock tomorrow morning but only if both HON and the S&P 500 index both open positive. We'll use a stop loss at $52.25 and aim for a move to $58.50. More aggressive traders could aim higher (near $60.00). FYI: The Point & Figure chart for HON is bullish with a $79 target.

*See Entry Details Above*

Suggested Position: buy the stock @ the open

- or -

buy the DEC $55 call (HON1117L55) current ask $1.87

Annotated chart:

Entry on November xx at $ xx.xx
Earnings Date 01/30/12 (unconfirmed)
Average Daily Volume = 5.3 million
Listed on November 8, 2011


Red Hat, Inc. - RHT - close: 50.53 change: -0.05

Stop Loss: 48.40
Target(s): 54.90
Current Gain/Loss: unopened
Time Frame: 3 to 6 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
Shares of RHT were downgraded to a "neutral" this morning but the news didn't have much affect on the stock price. RHT is still trading inside the $49.00-51.00 trading range. I suspect the stock is poised to breakout highs thanks to its bullish trend of higher lows.

We are suggesting bullish positions on RHT at the open tomorrow but only if both RHT and the S&P 500 index open positive. More conservative traders may want to use a trigger above $51.00 as their entry point instead. Our target is $54.90.

*See Entry Details Above*

Suggested Position: buy the stock @ the open

- or -

buy the DEC $52.50 call (RHT1117L52.5) current ask $1.80

Annotated chart:

Entry on November xx at $ xx.xx
Earnings Date 12/21/11 (unconfirmed)
Average Daily Volume = 2.1 million
Listed on November 8, 2011



In Play Updates and Reviews

NTAP Hits Our Target

by James Brown

Click here to email James Brown

Editor's Note:
Stocks extended their gains late Tuesday afternoon. We saw NTAP hit our exit target near its exponential 200-dma.

We also had several trades opened today (CASY, DY, KOG, and the XLF).

-James

Current Portfolio:


BULLISH Play Updates

Beazer Homes - BZH - close: 2.36 change: +0.33

Stop Loss: 1.75
Target(s): 3.25
Current Gain/Loss: +7.7%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
11/08 update: Homebuilding stocks were big performers today. BZH rallied sharply adding +16.2%. The stock broke through its 100-dma and closed at new multi-week highs. I would not chase it here. The $2.20 level could be new support.

Earlier Comments:
We have listed a very high target at $3.25 but I anticipate scaling that down. This is sort of a just-in-case BZH delivers better than expected earnings and the stock explodes kind of target. This industry is very heavily shorted so a short squeeze is a definite possibility.

Please note we are going to take the unusual step and hold over BZH's earnings in November. Normally we try to always exit ahead of earnings to avoid holding over the announcement.

FYI: You could buy calls but the spreads are so wide they could actually increase your risk (but they'll definitely leverage any move higher).

current Position: Long BZH stock @ $2.19

- or -

Long 2012 Jan $3.00 call (BZH1221A3) Entry $0.15

Entry on October 31 at $2.19
Earnings Date 11/15/11 (confirmed)
Average Daily Volume = 2.4 million
Listed on October 29, 2011


Casey's General Stores - CASY - close: 51.73 change: +0.93

Stop Loss: 47.95
Target(s): 54.50
Current Gain/Loss: + 1.0%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
11/08 update: Our new trade on CASY is open. The stock gapped higher at $51.19. Shares managed to hit $51.99 before trimming its gains. If you don't feel like launching positions here you could wait for a potential dip into the $50.50-50.00 zone instead. We are inching our stop loss up to $47.95.

Our target is $54.50. FYI: The Point & Figure chart for CASY is bullish with a $70.00 target.

Current Position: Long CASY stock @ $51.19

- or -

Long DEC $50 call (CASY1117L50) Entry $2.90

11/08 new stop loss @ 47.95
11/08 trade opened.

Entry on November 08 at $51.19
Earnings Date 12/06/11 (unconfirmed)
Average Daily Volume = 250 thousand
Listed on November 5, 2011


CEMEX - CX - close: 4.84 change: +0.10

Stop Loss: 4.24
Target(s): 4.95
Current Gain/Loss: + 8.0%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
11/08 update: Almost there! CX rallied to $4.93 this morning. Our exit target is $4.95. I don't see any changes from my prior comments. More aggressive traders may want to aim higher for their exit.

current Position: Long CX stock @ $4.48

- or -

Long Jan $5 call (CX1221A5) Entry $0.45

11/07 new stop loss @ 4.24
11/05 new stop loss @ 3.97
11/03 CX gapped open to $4.48 (+6.3%)

Entry on November 3 at $ 4.48
Earnings Date 10/26/11
Average Daily Volume = 20.3 million
Listed on November 2, 2011


Dycom Industries - DY - close: 19.49 change: -0.05

Stop Loss: 18.40
Target(s): 22.25
Current Gain/Loss: - 1.4%
Time Frame: 6 to 8 weeks or until earnings.
New Positions: see below

Comments:
11/08 update: Our trade on DY opened this morning with the stock's gap open higher at $19.78. The rally faded but traders bought the dip near short-term support around the $19.00 area. I would still consider new positions here at current levels but you may want to use the same technique for entries (only buying DY if both the stock and S&P 500 open positive).

Earlier Comments:
FYI: The Point & Figure chart for DY is bullish with a $32.50 target.
NOTE: We will probably choose to exit ahead of the earnings report to avoid holding over the announcement in late November.

current Position: Long DY stock @ $19.78

- or -

Long DEC $20 call (DY1117L20) Entry $1.30

11/08 trade opened on DY's gap higher at $19.78.

Entry on November 08 at $19.78
Earnings Date 11/22/11 (unconfirmed)
Average Daily Volume = 379 thousand
Listed on November 5, 2011


Healthstream Inc. - HSTM - close: 16.45 change: +0.43

Stop Loss: 14.65
Target(s): 18.00
Current Gain/Loss: + 4.0%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
11/08 update: HSTM managed to breakout past the $16.00 level to close at a new record high with today's +2.6% gain. I am not suggesting new positions at this time. We will raise our stop loss to $14.65.

Earlier Comments:
Our plan was to keep position sizes small to limit risk. Our target is $18.00. FYI: The Point & Figure chart for HSTM is bullish with a $17.50 target. NOTE: HSTM does have options but the spreads are too wide to trade.

(small positions)

current Position: Long HSTM @ $15.79

11/08 new stop loss @ 14.65
11/07 new stop loss @ 14.40
11/03 HSTM gapped open higher at $15.79

Entry on November 3 at $15.79
Earnings Date 10/24/11
Average Daily Volume = 134 thousand
Listed on November 2, 2011


IMAX Corp. - IMAX - close: 19.66 change: +0.15

Stop Loss: 17.70
Target(s): 24.50
Current Gain/Loss: + 1.4%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
11/08 update: IMAX isn't making much progress. Shares gained +0.7% today but they remain stuck under resistance at the $20.00 level (and possibly the 100-dma). Readers may want to wait for a breakout past $20.25 before considering new positions.

Earlier Comments:
Our multi-week target is $24.50. Keep in mind that the exponential 200-dma could be resistance near $22.25ish. FYI: The Point & Figure chart for IMAX is bullish with a $28.00 target.

Current Position: Long IMAX @ $19.38

- or -

Long DEC $20 call (IMAX1117L20) Entry $1.27

Entry on November 3 at $19.38
Earnings Date 10/27/11
Average Daily Volume = 1.2 million
Listed on November 2, 2011


Juniper Networks - JNPR - close: 24.63 change: +0.92

Stop Loss: 21.90
Target(s): 29.00
Current Gain/Loss: + 3.8%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
11/08 update: JNPR displayed relative strength today with a +3.8% gain and a breakout past its 100-dma. More conservative traders may want to consider exiting early and taking profits at the closing bell tomorrow (Nov. 9th) to avoid holding over CSCO's earnings report. Cisco Systems is a major rival for JNPR and CSCO's earnings could have a big influence on JNPR's stock on Thursday morning.

The plan was to keep positions small to limit our risk.

(small positions)

current Position: Long JNPR stock @ $23.72

- or -

Long JAN $25 call (JNPR1221A25) Entry $1.50

11/02 trade is open. JNPR opened at $23.72
11/01 Try again. New strategy. Buy JNPR if stock and S&P500 opens positive tomorrow, stop loss @ 21.90.
11/01 trade opened at $23.46, stopped out @ 22.75 (-3.0% loss)
option opened @ $1.80, exit $1.36 (-24.4%)
10/29 alternative entry point: dip at $23.00

Entry on November 2 at $23.72
Earnings Date 10/18/11
Average Daily Volume = 13 million
Listed on October 29, 2011


Kodiak Oil & Gas - KOG - close: 7.59 change: +0.22

Stop Loss: 6.75
Target(s): 9.75
Current Gain/Loss: + 1.0%
Time Frame: two to three months
New Positions: see below

Comments:
11/08 update: Our new trade on KOG is already open. Shares rallied past resistance near the $7.50 level and set new all-time closing high today. The all-time intraday high is $7.70.

We had a trigger to open bullish positions at $7.51. I would still consider new positions now or you could wait for a dip. Our multi-month target is $9.75. FYI: The Point & Figure chart for KOG is bullish with a $13.75 target.

current Position: Long the stock @ 7.51

- or -

Long 2012 MAR $7.50 call (KOG1217C7.5) Entry $1.25

11/08 trade opened at $7.51.

Entry on November 08 at $ 7.51
Earnings Date 03/05/12 (unconfirmed)
Average Daily Volume = 6.6 million
Listed on November 5, 2011


Financial SPDR ETF - XLF - close: 13.61 change: +0.25

Stop Loss: 12.74
Target(s): simple 200-dma
Current Gain/Loss: + 0.4%
Time Frame: 4 to 8 weeks
New Positions: see below

Comments:
11/08 update: Our bullish trade on the XLF is open. This ETF broke through potential resistance near $13.50 and its 10-dma and 100-dma. Our trigger was hit at $13.55.

Our multi-week target is the simple 200-dma (near $14.50ish) but there is potential resistance at the exponential 200-dma (closer to $14.00), not to mention possible resistance at the October highs.

We want to keep our position size small!

(small positions)

current Position: Long the XLF @ $13.55

- or -

Long 2012 Jan $14 call (XLF1221A14) Entry $0.59

11/08 trade opened at $13.55
11/07 new strategy: Instead of buying a dip, I am suggesting we buy a rally with a trigger at $13.55. New stop loss $12.74. Target simple 200-dma.

Entry on November 08 at $13.55
Earnings Date --/--/--
Average Daily Volume = 137 million
Listed on November 3, 2011


Xilinx Inc. - XLNX - close: 33.31 change: +0.34

Stop Loss: 31.40
Target(s): 35.75
Current Gain/Loss: + 2.4%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
11/08 update: XLNX managed to outperform its peers with a +1.0% gain (versus +0.6% in the SOX). This stock is nearing possible resistance near $34 and its October high. I am not suggesting new positions today.

Earlier Comments:
The plan was to keep our position size small to limit risk. Our multi-week target is $35.75. FYI: The Point & Figure chart for XLNX is bullish with a $46 target.

(small positions)

Current Position: Long XLNX stock @ 32.50

- or -

Long Jan $35 call (XLNX1221A35) Entry $0.95

Entry on November 1 at $32.50
Earnings Date 10/19/11
Average Daily Volume = 5.0 million
Listed on October 29, 2011


BEARISH Play Updates

None. We do not have any active bearish trades.


CLOSED BULLISH PLAYS

NetApp Inc. - NTAP - close: 43.94 change: +1.10

Stop Loss: 39.90
Target(s): 43.90
Current Gain/Loss: +10.4%
Time Frame: 2 to 3 weeks
New Positions: see below

Comments:
11/08 update: Target achieved. NTAP extended its recent gains and hit $44.94 intraday. Our exit target was hit at $43.90 early this morning.

current Position: Long NTAP stock @ 39.75, exit $43.90 (+10.4%)

- or -

NOV $40 call (NTAP1119K40) Entry $1.71, exit 4.30 (+151.4%)

11/08 exit target hit at $43.90
11/05 new stop loss @ 39.90, adjusted target to $43.90
11/03 new stop loss @ 38.40
11/01 new stop loss @ 37.25
11/01 NTAP gaps open lower at $39.75, our new entry point.

chart:

Entry on November 1 at $39.75
Earnings Date 11/16/11 (confirmed)
Average Daily Volume = 6.8 million
Listed on October 31, 2011