Option Investor
Newsletter

Daily Newsletter, Wednesday, 11/16/2011

Table of Contents

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

Market Wrap

Europe: Worse Not Better

by Todd Shriber

Click here to email Todd Shriber
A day that started with equity futures pointing lower got far worse in the last hour and finished with big declines for U.S. stocks after Fitch Ratings said Europe's sovereign debt contagion represents ''serious risk'' to American banks. That was enough to punish financial shares and nearly every other sector under the sun and led all three major U.S. indexes to losses of over 1.5%.

Stats Table

Europe's sovereign debt fiasco continues to play a heavy hand in global equity markets and that makes for tough sledding for most investors. It is especially painful for those playing U.S. stocks, which have held up well compared to most global markets, because economic data points here in the States have been decent recently.

In economic news released today, U.S. industrial output rose 0.7% in October, according to the Federal Reserve. That is good for the biggest jump since July and easily beat the 0.4% increase economists expected.

Consumer prices dipped 0.1% last month, according to the Labor Department. Excluding food and energy prices, the consumer price index increased 0.1%, the same increase seen in September. Economists expected no change in the October CPI reading.

Despite all the consternation and negative headlines out of Europe, crude oil enjoyed a solid day, jumping over $100 a barrel to its highest levels in five months. News that Enbridge Inc. (ENB) will pay $2 billion for ConocoPhillips' (COP) stake in the Seaway pipeline was one bright spot in the energy sector today and oil moved higher despite the Energy Department saying inventories at Cushing rose 890,000 barrels to 32 million last week.

Analysts surveyed by Bloomberg were expecting a decline of 1.2 million barrels. Still, oil bulls should take heart that their commodity of choice put in such a bullish performance on a day when the opposite easily could have been the case.

Oil Chart

Getting back to Europe, it should be noted the Dow was down less than 40 points at around 3PM New York time. Then came the Fitch report regarding U.S. banks' exposure to the Europe debacle and the rest is history. While the ratings agency did say the dollar amount in terms of European exposure by U.S. banks is ''manageable,'' it added the top five U.S. banks have a total of $114 billion in loans, deposits and other assets tied to French banks, the Associated Press reported.

Indeed, $114 billion in French exposure is manageable. Hey, that is almost $6 billion LESS than the market cap of JPMorgan Chase (JPM). Still, the Fitch report provided a predictable result and that was intense late-day damage on the financial services sector. And for those keeping track of French bonds, the yield on French 10-years was 3.69% today, almost 50% increase from early October and various press reports are saying investors are starting to fret France might join in the U.S. in losing the prestigious AAA credit rating.

XLF Chart

I never like being Debbie Downer, but there is a fair chance that the situation across the Atlantic is going to get worse before it gets better. If you did not see the Bloomberg Television interview with Citigroup Willem Buiter, I encourage you to just put his name into your search engine of choice and watch it.

If you do not have the time, I will give you one of the more important lines from the interview: ''Time is running out fast.  I think we have maybe a few months -- it could be weeks, it could be days -- before there is a material risk of a fundamentally unnecessary default by a country like Spain or Italy which would be a financial catastrophe dragging the European banking system and North America with it. So they have to act now.''

As I've said here numerous times in the past, Italy and Spain are much different ballgames than Greece or Portugal for the simple reason that the first pair's economies are far larger than Greece and Portugal. I have been showing charts of the iShares MSCI Italy Index Fund (EWI) for a while now, so I thought it would be interesting to change things up a bit and a look at the iShares MSCI Spain Index (EWP). Sure, Wednesday's decline was of the light volume variety, as you can see, this is a nasty looking chart.

Spain ETF Chart

Speaking of ugly charts, there is Abercrombie & Fitch (ANF), a company I will admit to having been less than kind to in the past. I have been more opposed to the style or lack thereof in Abercrombie clothes, but it looks like the object of my discontent should have been the stock itself. Shares of Abercrombie plunged almost 14% today on volume that was more than seven times the daily average.

The culprit was a weak third-quarter earnings report and downbeat fourth-quarter guidance. Abercrombie said its third-quarter profit rose to $50.9 million, or 57 cents per share, from $50 million, or 56 cents per share, a year earlier. Revenue increased almost 22% to $1.08 billion. Analysts expected a profit of 72 cents on sales of $1.07 billion.

The company added gross margins fell 360 basis points to 60.1%. Maybe Abercrombie will be able to raise prices next year, but that is a big ''maybe.'' Or maybe the reason the company had to keep prices low in the third quarter is because consumers are realizing other stores sell the same stuff Abercrombie does at better prices.

ANF Chart

In after-hours news, data storage provider NetApp (NTAP) was getting walloped, down almost 7% as of this writing after the company reported a fiscal second-quarter profit of $165.6 million, or 44 cents a share, on revenue of $1.51 billion, compared with earnings of $175.4 million, or 45 cents a share, on $1.25 billion in revenue a year earlier. On an adjusted basis, NTAP earned $235.5 million, or 63 cents. Wall Street was expecting a profit of 60 cents a share on $1.55 billion in revenue.

NTAP, a name that has been tossed around more than a few times in the past as a potential takeover target, issued some dour guidance. The company forecast an adjusted third-quarter profit of 36-40 cents a share on sales of $1.52-$1.61 billion. Analysts were expecting a profit of 63 cents a share on $1.65 billion.

NetApp Chart

Looking at the charts, there is more bad news about today's decline, as if we needed more. Support for the S&P 500 was 1240 heading into the day, but the index closed a few points below that area. Next support is 1225 and from there we could go to 1200. If the market can bounce from here, the S&P 500 would need to take out 1255 and then 1275 to have buyers feeling happy again.

S&P 500 Chart

There is a similar situation with the Dow Jones Industrial Average. The 12,000 area was important support that was violated today as 29 of the 30 Dow stocks closed in the red. MMM was the best performer of the lot and that stock was merely unchanged. PG was the next best performer with a drop of 0.44%. A drop below 11,600 would be bearish. Upside resistance after 12,000 can be found at 12,175 and 12,285.

Dow Chart

Looking at the Nasdaq, GMCR had a very nice day, but aside from that name, few others did. AAPL, AMZN, GOOG and PCLN were all lower and that sent the Nasdaq well below its 200-day moving average. Now the 2687 area is resistance with support found at 2600. A drop below 2600 means accelerated selling a possible decline below 2575.

Nasdaq Chart

The combination of the looming Super Committee deadline and Europe's ongoing trials and tribulations makes this a tricky time to be long. Small-caps are not doing much to illicit confidence and correlations are a real pain in the neck. XLU, one of the main utilities ETFs, has lagged the S&P 500 over the past five trading days while GLD and XLP, the largest staples ETF, have barely outperformed the S&P 500. Greenbacks anyone?

Todd Shriber


New Plays

Facing A Technical Breakdown

by James Brown

Click here to email James Brown

Editor's Note:

Stocks made a dramatic move lower today but it's not a breakdown yet. You can see from the chart below that the S&P 500 index is on the verge of breaking down from its sideways consolidation. Of course there is always the chance that traders buy this dip near the trendline of higher lows.

Sometimes the best trade is no trade. U.S. markets might churn sideways in a volatile range while we wait for news on the Super committee's plan (or lack thereof) for $1.5 trillion in spending cuts. Their deadline is November 23rd.

If you are looking or a trade then further weakness in the S&P 500 might be an entry point for bearish positions on the SPY. I'd aim for 1200 but aggressive traders could aim for 1180. The Dow Jones Industrials Average looks like it could drop toward 11,650 if stocks continue to fall. Alternatively you could prepare to buy another dip in the NASDAQ composite, which has found consistent support near the 2600 level. Easy ways to play the NASDAQ(100) is the QQQ or TQQQ ETFs.

Chart of the S&P 500 index:

-James


In Play Updates and Reviews

Financials Breakdown (again)

by James Brown

Click here to email James Brown

Editor's Note:
The XLF financial ETF broke down under short-term support thanks to continued worries over Europe and banks exposure to the debt crisis.

Our XLF trade was stopped out at $12.75.

We did adjust a couple of entry point strategies tonight.

-James

Current Portfolio:


BULLISH Play Updates

Allegheny Technologies Inc. - ATI - close: 48.36 change: -1.64

Stop Loss: 47.75
Target(s): 56.75
Current Gain/Loss: -5.1%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
11/16 update: I am starting to think we set our trigger to open positions too low. The stock opened lower, rallied off short-term support near $48.00, but the rally failed at $50.63. Now ATI is facing support at $48.00 again. A breakdown there could herald a drop toward the $45 level or even the 50-dma.

I am not suggesting new positions at this time. We will inch up our stop loss to $47.75.

current Position: Long ATI stock @ 50.60

- or -

Long DEC $52.50 call (ATI1117L52.5) Entry $2.75

11/16 new stop loss @ 47.75
11/14 trade triggered at $50.60

Entry on November 14 at $50.60
Earnings Date 01/26/12 (unconfirmed)
Average Daily Volume = 2.5 million
Listed on November 12, 2011


Beazer Homes - BZH - close: 2.16 change: -0.06

Stop Loss: 1.90
Target(s): 3.25
Current Gain/Loss: -1.3%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
11/16 update: Can we call it a "quiet" day for BZH with the stock only moving -2.7%. Nimble traders could launch new positions on a dip or a bounce off the $2.00 level.

current Position: Long BZH stock @ $2.19

- or -

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

11/12 new stop loss @ 1.90. More conservative traders may want to exit prior to the earnings report to lock in a gain.

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: 51.09 change: -1.57

Stop Loss: 49.40
Target(s): 54.50
Current Gain/Loss: - 0.2%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
11/16 update: Ouch! CASY just erased all of our unrealized gains with today's -2.9% plunge. I would wait for a dip or a bounce near the $50.00 level before considering new bullish positions. (Yesterday we raised the stop loss to $49.40.)

Earlier Comments:
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

11/15 new stop loss @ 49.40
11/12 new stop loss @ 48.75
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


Carlisle Companies - CSL - close: 43.61 change: -1.06

Stop Loss: 41.90
Target(s): 49.50
Current Gain/Loss: unopened
Time Frame: 6 to 8 weeks
New Positions: Yes, see below

Comments:
11/16 update: Our trade on CSL is still not open yet. The stock gapped open lower, negating our entry point strategy. Speaking of entry points I am adjusting ours. We will use a trigger at $45.05 to open bullish positions. More aggressive or nimble traders might want to consider buying CSL on a dip or a bounce from the $42.75 area. FYI: The Point & Figure chart for CSL is bullish with a $73.00 target.

NOTE: Options are available but the spreads are too wide to trade.

Trigger @ 45.05

Suggested Position: buy CSL stock @ the open

11/16 adjusted entry point strategy to use a trigger at $45.05

Entry on November xx at $ xx.xx
Earnings Date 02/07/12 (unconfirmed)
Average Daily Volume = 327 thousand
Listed on November 14, 2011


CEMEX - CX - close: 4.51 change: -0.13

Stop Loss: 4.29
Target(s): 5.10
Current Gain/Loss: + 0.6%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
11/16 update: CX gave up -2.8% and yet shares have spent the last five days churning sideways. I will repeat my suggestion from yesterday that more conservative traders may want to adjust their stop loss higher. If CX breaks the trend of higher lows it could see a drop toward $4.00.

I am not suggesting new positions at this time.

current Position: Long CX stock @ $4.48

- or -

Long Jan $5 call (CX1221A5) Entry $0.45

11/12 new stop loss @ 4.29, new exit target @ 5.10
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


Honeywell Intl. - HON - close: 53.29 change: -1.12

Stop Loss: 52.40
Target(s): 58.50
Current Gain/Loss: - 2.0%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
11/16 update: Uh-oh! HON has broke down under what should have been support near $54.00 and its 10 and 200-dma. More conservative traders may want to exit positions immediately. I am not suggesting new positions at this time.

Current Position: Long HON stock @ $54.40

- or -

Long DEC $55 call (HON1117L55) Entry $1.78

11/16 HON broke down under support near $54 and its 10 and 200-dma. More conservative traders may want to exit immediately
11/11 trade opened on HON's gap higher at $54.40
11/09 adjusted entry point strategy to Trigger @ 54.25, moved stop loss to $52.40

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


IMAX Corp. - IMAX - close: 19.27 change: +0.03

Stop Loss: 17.70
Target(s): 24.50
Current Gain/Loss: - 0.5%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
11/16 update: IMAX displayed a little relative strength today with a 0.1% gain. Unfortunately the rally reversed at technical resistance at the simple 100-dma intraday. I am not suggesting new positions at this time.

More conservative traders might want to consider a stop loss closer to $18.25 to limit risk.

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: 23.98 change: -0.61

Stop Loss: 22.95
Target(s): 29.00
Current Gain/Loss: + 1.1%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
11/16 update: Technology stocks were underperformers today. JNPR sank to a new four-day low with today's -2.4% decline. The $24.00 level should have been support. More conservative traders may want to raise their stops into the $23.50 area. I am upping the newsletter's stop loss to $22.95.

Currently our exit target is $29.00 but readers may want to exit at potential technical resistance near the exponential 200-dma.

Earlier Comments:
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

11/16 new stop loss @ 22.95
11/12 new stop loss @ 22.70
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


KB Home - KBH - close: 7.51 change: -0.02

Stop Loss: 6.70
Target(s): 9.50
Current Gain/Loss: -0.5%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
11/16 update: KBH was showing some relative strength intraday but the rally reversed near resistance at the $8.00 level. While KBH only lost -0.2% today the move looks like a bearish reversal. I am growing more cautious here. We are not suggesting new positions at this time.

Earlier Comments:
The most recent data listed short interest at more than 50% of the relatively small 65.4 million-share float. That's definitely enough fuel for a significant short squeeze.

KBH can be a volatile stock so we need to use a wide stop loss. This raises the risk profile on this trade. We will aim for $9.50 but the exponential 200-dma might be overhead resistance (currently at 9.10).

current Position: Long KBH stock @ 7.55

- or -

Long Jan $7.50 call (KBH1221A7.5) Entry $0.91

11/11 trade opened at $7.55

Entry on November 11 at $ 7.55
Earnings Date 01/09/12 (unconfirmed)
Average Daily Volume = 5.8 million
Listed on November 10, 2011


Kodiak Oil & Gas - KOG - close: 8.12 change: +0.28

Stop Loss: 7.20
Target(s): 9.75
Current Gain/Loss: + 8.1%
Time Frame: two to three months
New Positions: see below

Comments:
11/16 update: KOG flexed its relative strength muscles with a breakout to a new all-time high. KOG had been up +8.4% when it hit $8.50 this afternoon but shares faded lower to settle with a +3.5% gain. I am not suggesting new positions at this time.

Earlier Comments:
Our multi-month target is $9.75. FYI: The Point & Figure chart for KOG is bullish with a $13.75 target. KOG is a potential takeover target.

current Position: Long the stock @ 7.51

- or -

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

11/15 gap down at 7.41 and hit 7.21 before bouncing.
11/14 new stop loss @ 7.20
11/14 KOG announces plans to sell an additional 37.5 million shares of new stock
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


Newfield Exploration Co. - NFX - close: 42.41 change: -0.52

Stop Loss: 41.95
Target(s): 49.75
Current Gain/Loss: unopened
Time Frame: 6 to 8 weeks
New Positions: Yes, see below

Comments:
11/16 update: NFX continues to churn sideways in the $42.20-44.00 zone. Our trade is not open yet. NFX keeps gapping open lower negating our entry point strategy. The stock seems to be hugging the 50-dma.

We are adjusting our entry strategy. The new plan is a trigger to open bullish positions at $44.25. We will move our stop loss up to $41.95.

Earlier Comments:
I am suggesting we keep our position size small to limit our risk. More conservative traders might want to wait for a rally past possible resistance near $45.00 as an alternative entry point. FYI: The Point & Figure chart for NFX is bullish with a $57.00 target.

Trigger @ 44.25 (small positions)

Suggested Position: buy NFX stock @ $44.25

- or -

buy the DEC $45 call (NFX1117L45)

11/16 adjusted entry strategy to use a trigger at $44.25, stop @ 41.95

Entry on November xx at $ xx.xx
Earnings Date 02/16/12 (unconfirmed)
Average Daily Volume = 4.1 million
Listed on November 12, 2011


Ryder System, Inc. - R - close: 52.42 change: -1.12

Stop Loss: 51.40
Target(s): 59.50
Current Gain/Loss: unopened
Time Frame: 6 to 9 weeks
New Positions: Yes, see below

Comments:
11/16 update: Our new trade on R is not open yet. The stock failed under resistance near $54.00 and looks poised to test support near $52.00 soon. More aggressive traders could buy a dip or a bounce in the $52.00-51.50 zone. We are adjusting our entry point strategy to use a trigger at $54.05. We'll move our stop loss up to $51.40. Our multi-week exit target is $59.50. FYI: The Point & Figure chart for R is bullish with an $87 target.

NOTE: Thursday morning we will likely see R with a small gap down thanks to a 29-cent dividend. The dividend isn't payable until mid December but shares will begin trading ex-dividend on Thursday.

Trigger @ 54.05

Suggested Position: buy R stock @ $54.05

- or -

buy the 2012 Feb. $57.50 call (R1202B57.5)

11/16 adjusted entry strategy to use a trigger at $54.05 and a stop at $51.40

Entry on November xx at $ xx.xx
Earnings Date 02/02/12 (unconfirmed)
Average Daily Volume = 727 thousand
Listed on November 15, 2011


Red Hat, Inc. - RHT - close: 51.89 change: -0.83

Stop Loss: 49.40
Target(s): 54.90
Current Gain/Loss: + 3.2%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
11/16 update: RHT succumbed to some profit taking after yesterday's big rally. I would wait for a dip or a bounce near $51.00 before considering new positions. We are raising our stop loss up to $49.40.

Earlier Comments:
Our plan was to keep positions small to limit our risk.

(small positions)

current Position: Long RHT stock @ $50.25

- or -

Long DEC $52.50 call (RHT1117L52.5) Entry $1.50

11/16 new stop loss @ 49.40
11/11 trade opened at $50.25
11/09 adjusted entry point strategy: Trigger @ 50.25, stop loss 48.45

Entry on November 11 at $50.25
Earnings Date 12/21/11 (unconfirmed)
Average Daily Volume = 2.1 million
Listed on November 8, 2011


Xilinx Inc. - XLNX - close: 32.69 change: -0.28

Stop Loss: 31.40
Target(s): 35.75
Current Gain/Loss: + 0.5%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
11/16 update: XLNX managed to rally off the morning gap lower but shares reversed at $33.51. If stocks continue to struggle we could see XLNX retest the $32.00-31.70 zone again. I am not suggesting new positions at this time.

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

Financial SPDR ETF - XLF - close: 12.71 change: -0.32

Stop Loss: 12.75
Target(s): simple 200-dma
Current Gain/Loss: - 5.9%
Time Frame: 4 to 8 weeks
New Positions: see below

Comments:
11/16 update: Our aggressive trade on the financials, via the XLF, has been stopped out. Shares were holding support near $12.80 until the market's plunge lower in the last hour of trading. That's when the XLF hit our stop loss at $12.75. Now this ETF is testing technical support at the 50-dma.

Earlier Comments:
We want to keep our position size small!

(small positions)

current Position: Long the XLF @ $13.55, exit $12.75 (-5.9%)

- or -

2012 Jan $14 call (XLF1221A14) Entry $0.59, Exit 0.29 (-50.8%)

11/16 stopped out at $12.75
11/15 new stop loss @ 12.75
11/09 new stop loss @ 12.59
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.

chart:

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