Option Investor
Newsletter

Daily Newsletter, Monday, 1/23/2012

Table of Contents

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

Market Wrap

Not A Manic Monday

by Todd Shriber

Click here to email Todd Shriber
By the skin of its teeth, the S&P 500 was able to muster a higher close as the market seemed please that European policymakers were once again at work trying to find a solution to the continent's sovereign debt woes. The Nasdaq suffered a small loss as did the Dow Jones Industrial Average where 18 of 30 constituents closed lower on the day.

Market Stats

At the stock-specific level, energy names were the big headline generators on the day for a variety of reasons. Natural gas futures spiked, if you can believe it, after Oklahoma-based Chesapeake Energy (CHK), the second-largest U.S. natural gas producer behind Exxon Mobil (XOM), snapped out of lengthy slide. The company said it will pare natural gas production and look for ways to boost its liquids (oil) output.

Chesapeake had 75 gas rigs operating in 2011 and that number has already fallen to 47, but the company is planning to cut that figure in half to 24. The company said it plans to raise to 85% the portion of its capital budget devoted to liquids exploration. To its credit, Chesapeake has been shedding billions of dollars worth of shale assets for a couple of years now. The problem is shares of Chesapeake have been waxed in recent months and the chart looks similar to the one of nat gas futures that I included below.

Nat Gas Chart

Speaking of stocks that snapped out of prolonged slumps, for one day at least, there is Petrobras (PBR), Brazil's state-controlled oil company. Petrobras ADRs surged 4.3% on better than double the average daily volume on news that Jose Sergio Gabrielli will be replaced as CEO, perhaps as soon as next month. Maria das Gracas Foster, 58, will replace Gabrielli, 62. Give Brazil credit for being somewhat progressive. A female president and a woman running the country's largest oil company. A lot of other countries cannot boast of one of those factoids let alone both.

I digress. When I saw this news break on Sunday I suspected Petrobras would go up today. I say that because while Gabrielli oversaw Petrobras making some of the most impressive oil discoveries the world has seen in decades, the stock has been dead money for two years. In fact, even BP (BP) has outperformed Petrobras by a wide margin in that time and that time includes the Gulf spill.

Investors apparently like the new leadership Petrobras is getting.

Petrobras Chart

There was also some activity on the mergers and acquisitions front in the energy sector as Apache (APA) said it will pay $2.85 billion for privately held Cordillera Energy Partners III LLC, a deal that will boost Apache's presence in the Anadarko Basin of Texas and Oklahoma. Cordillera and its investors will receive $600 million in Apache shares and the rest of the deal price will be paid in cash funded by debt. The effective date of the transaction is Sept. 1, 2011, with closing anticipated in the second quarter, Apache said in a statement.

The deal will give Apache access to 14,000 new potential drilling locations in the Anadarko Basin along with proved reserves of 71.5 million barrels of oil equivalent and current production of 18,000 barrels per day. Apache said it was producing 40,000 barrels per day in the central region at the end of 2011 and that the deal to buy Cordillera could triple that number and that is likely one reason why Apache said the transaction will be accretive to earnings this year.

Cordillera has substantial operations that include approximately 254,000 net acres in the prolific Granite Wash, Tonkawa, Cleveland and Marmaton plays in western Oklahoma and the Texas Panhandle, according to the statement.

Bank of America put a $160 price target on Apache today, which as you can see, is well above current levels.

Apache Chart

In other energy news of the rumor variety, the Sunday Times of London reported that BP (BP) may be interested in Cove Energy. Cove has been on the market for a few weeks now after a making a major gas discovery off the coast of Mozambique.

The Sunday Times also reported, and the story was picked up by some U.S. sources, that Anadarko Petroleum (APC) was looking to make move on Rockhopper, a U.K.-based explorer that has found as much as 700 million barrels of oil off the coast of the Falklan Islands. The Houston Business Journal reported Anadarko has agreed to make a $1.6 billion provisional investment in Rockhopper.

ConocoPhillips (COP), the third-largest U.S. oil company, fell slightly today after UBS downgraded the stock to "sell." The bank said Conoco's plans to spin-off its downstream business could impair the valuation and that the E&P company may face ''low organic free cash flow limiting future buybacks without asset sales & potential risk to dividend/growth in the event of a cyclical oil price pullback.''

In earnings news, shares of the world's second-largest provider of oilfield services, gave up 2% after the company said its fourth-quarter profit jumped 50% to $906 million, or 98 cents per share, from $605 million, or 66 cents per share, a year earlier. Revenue rose almost 37% to $7.06 billion. On an adjusted basis, Halliburton earned $1 a share. The company said it expects global revenue to increase this year.

My best guess regarding why Halliburton was off today, and I think I am correct, is the company's natural gas exposure. As in investors think the company is not oily enough.

Halliburton Chart

While Petrobras was benefiting from a change at the helm, one stock that was not was downtrodden BlackBerry maker Research In Motion (RIMM). RIM slid almost 8.5% today on volume that was better than double the daily average after the company named Thorsten Heins as its new CEO replacing co-CEOs Mike Lazaridis and Jim Balsillie.

This is probably a case of too little too late. After quarter upon quarter of disappointing analysts and investors, missing on already lowered earnings estimates and getting its butt kicked by basically all of its key rivals, it is going to take a lot more than an executive change to get investors interested in RIM again. Personally, I have no problem with RIM or its products. I am not long nor I am short the stock, but I get the impression only an acquisition will save this company from more market share and stock price declines.

RIM Chart

After-hours, stocks on the move include CSX (CSX). The railroad operator is a down almost 2.5% at this writing after saying it earned 43 cents a share in the fourth quarter while analysts were expecting 44 cents. Revenue was $3 billion, which was inline with Wall Street estimates. The problem was volumes. CSX said coal volume was off 8% while agricultural products and chemicals, fell 7% and 8%. Ag products and chemicals are CSX’s two largest segments.

CSX Chart

Semiconductor maker Texas Instruments (TXN) was up over 3% in after-hours trade despite forecasting a first-quarter profit of 16-24 cents a share on revenue of $3.02 billion to $3.28 billion. Analysts were expecting $3.22 billion and 32 cents. TI said it will shutter two factories, one in Japan and one in Texas, and layoff 1,000 workers as a result.

For the fourth quarter, TI posted a profit of $298 million, or 25 cents a share, compared with a profit of $942 million, or 78 cents a share, a year earlier. Revenue fell to $3.42 billion from $3.53 billion.

Texas Instruments Chart

Looking at the charts, the S&P 500's piddly move today does not change things from a technical perspective. There is still plenty of room to run to overhead resistance around 1345-1350. Support can be found in the 1295-1300 area. From there, next support is 1250-1260. There is an absolute avalanche of earnings reports this week with about 25% of the S&P 500 reporting, so even if Europe remains calm, and hopefully it will, there should be enough activity to spark some decent moves in the S&P 500.

S&P 500 Chart

Same goes for the Dow as not much changed today. Support is 12,600 and resistance is 12,750. Much of Friday's gains were attributable to IBM, but 12 Dow stocks, including many of the high-priced ones, step up to the earning plate this week. MCD gets the ball rolling tomorrow and Thursday could be an interesting day for the Dow with CAT and MMM reporting. CVX reports Friday.

Dow Chart

As for the Nasdaq, support is 2700 and resistance can be spotted at 2875. Of course, the big deal is Apple (AAPL) reporting tomorrow after the bell. The Nasdaq has held up pretty following Google’s (GOOG) big disappointment last week, but I do not if it can withstand a sequel from Apple. Hopefully, that will not be a situation we have to contemplate tomorrow.

Nasdaq Chart

Apologies for cutting this wrap short, but today is my birthday and I am going to do some mild celebrating in a few minutes.

Todd Shriber


New Plays

Energy & Mining

by James Brown

Click here to email James Brown

Editor's Note:

In addition to tonight's new candidates, consider these stocks as possible trading ideas:

BRY - BRY looks bullish here. Readers might want to wait for a rally past the October high near $48.00.

MRX - This stock looks weak and could be a bearish candidate on a breakdown below $32.00.


NEW BULLISH Plays

Gulfport Energy - GPOR - close: 33.20 change: +0.90

Stop Loss: 31.40
Target(s): 37.00
Current Gain/Loss: unopened
Time Frame: 3 to 6 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
Oil and energy stocks were showing relative strength on Monday. GPOR rallied to new multi-week highs. Shares could make a run at its 2011 highs. I am suggesting small bullish positions at the open but only if both GPOR and the S&P 500 open positive. We'll use a stop loss at $31.40. Our target is $37.00 but keep an eye on the $35.00 level, which could be resistance.

Do not enter position unless GPOR and the S&P500 are both positive at the open

Suggested Position: buy GPOR stock @ the open

- or -

buy the FEB $35 call (GPOR1218B35) current ask $0.90

Annotated chart:

Entry on January xx at $ xx.xx
Earnings Date 03/12/12 (unconfirmed)
Average Daily Volume = 522 thousand
Listed on January 23, 2011


Teck Resources - TCK - close: 41.60 change: +0.28

Stop Loss: 40.75
Target(s): 49.00
Current Gain/Loss: unopened
Time Frame: up to Feb 9 earnings report.
New Positions: Yes, see below

Company Description

Why We Like It:
TCK is a Canadian company in the metals and mining industry. Shares are on the verge of breaking out past significant resistance near $43.00 and its simple 200-dma. Shares are also testing resistance at its long-term trend line of lower highs on its weekly chart (see below). The October 27, 2011 high was $43.05.

I am suggesting small bullish positions if TCK can trade at $43.10 or higher. We'll use a stop loss at $40.75 to start. More aggressive traders might want to keep their stop under $40.00 instead. Our target is the $49.00 level. Our target is pretty optimistic given our time frame. We do not want to hold over the Feb. 9th earnings report. FYI: The Point & Figure chart for TCK is bullish with a long-term $61.00 target.

Trigger @ $43.10 (small positions)

Suggested Position: buy TCK stock @ 43.10

- or -

buy the Feb $43 call (TCK1218B43) current ask $1.10

Annotated chart:

Weekly chart:

Entry on January xx at $ xx.xx
Earnings Date 02/09/12 (confirmed)
Average Daily Volume = 2.3 million
Listed on January 23, 2011



In Play Updates and Reviews

Reloading Our New Entry Points

by James Brown

Click here to email James Brown

Editor's Note:
Our new candidates from this weekend are not open yet. We want to reload our entry point strategy.

Meanwhile I've added a trigger to the DIS trade. We have removed BMRN as a candidate.

Current Portfolio:


BULLISH Play Updates

Ball Corp. - BLL - close: 37.79 change: -0.12

Stop Loss: 39.00
Target(s): 36.65
Current Gain/Loss: + 3.3%
Time Frame: up to the earnings report (01/26)
New Positions: see below

Comments:
01/23 update: BLL dipped to its rising 10-dma and pared its losses with an afternoon rebound off its lows. Readers may want to start exiting now. We only have a few days left. The plan is to exit at $39.00 or prior to the earnings report on Jan. 26th. I am not suggesting new positions at this time.

current Position: Long BLL stock @ 36.55

- or -

Long Feb $35 call (BLL1221A35) entry 2.30

01/21/12 remember, we want to exit prior to earnings on 01/26
01/18/12 new stop loss @ 36.65
01/12/12 new stop loss @ 36.25
01/11/12 new stop loss @ 35.75
01/06/12 trade triggered at $36.55
01/05/12 adjusted stop loss to $35.35, plan to exit prior to earnings

Entry on January 06 at $36.55
Earnings Date 01/26/12 (confirmed)
Average Daily Volume = 985 thousand
Listed on January 03, 2011


Cisco Systems Inc. - CSCO - close: 19.83 change: -0.09

Stop Loss: 18.60
Target(s): 20.75
Current Gain/Loss: + 2.3%
Time Frame: up to CSCO's February earnings
New Positions: see below

Comments:
01/23 update: The rally in CSCO has paused as shares challenge resistance near $20. Do not be surprised to see CSCO dip toward short-term technical support at the rising 10-dma.

Earlier Comments:
We want to ride the stock up to its early February earnings report but exit prior to the announcement. FYI: The Point & Figure chart for CSCO is bullish with a long-term $27.00 target.

Long Position: Long CSCO stock @ 19.37

- or -

Long Feb $20 call (CSCO1218B20) Entry $0.43

01/18/12 trade opened on gap higher at $19.37

Entry on January 18 at $19.37
Earnings Date 02/08/12 (confirmed)
Average Daily Volume = 39.0 million
Listed on January 12, 2011


Walt Disney Company - DIS - close: 39.31 change: -0.13

Stop Loss: 37.90
Target(s): 42.50
Current Gain/Loss: unopened
Time Frame: up to earnings on Feb. 7th
New Positions: Yes, see below

Comments:
01/23 update: Our DIS trade is not open yet. DIS opened positive but the S&P 500 did not. I am adjusting our entry point strategy. We will use a trigger to open bullish positions at $39.60 with a stop loss at $37.90. However, readers will want to stay alert and watch for a dip to and bounce from the $38.00 level as an alternative entry point. Keep positions small.

Our bullish target might be a little optimistic given our time frame. We do not want to hold over DIS' earnings report on Feb 7th. Speaking of targets, we are aiming for $42.50 but the Point & Figure chart for DIS is bullish with a long-term $53 target.

Trigger @ 39.60 (Small Positions)

Suggested Position: buy DIS stock @ 39.60

- or -

buy the Feb $40 call (DIS1218B40)

01/23/12 adjusted strategy. Use trigger @ 39.60
01/21/12 trade not open yet. try again.

Entry on January xx at $ xx.xx
Earnings Date 02/07/12 (confirmed)
Average Daily Volume = 7.7 million
Listed on January 19, 2011


Human Genome Sciences - HGSI - close: 8.91 change: -0.02

Stop Loss: 8.30
Target(s): 11.00
Current Gain/Loss: - 1.6%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
01/23 update: This is an important test for HGSI's short-term trend. The stock didn't move much today but it did slip toward the rising 10-dma. Readers could use this dip as a new bullish entry point or wait for a bounce. As an alternative you could wait for a rally past $9.30 as a bullish entry point.

Keep in mind this is an aggressive trade and HGSI can be a volatile stock.

Our target is $11.00 but readers should note that the $10.00 level and the simple 100-dma could act as overhead resistance. I am suggesting we keep our position size small to limit our risk.

(small positions)

current Position: Long HGSI stock @ $9.06

- or -

Long Feb $10 call (HGSI1218B10) Entry $0.59

01/19/12 HGSI gapped open higher at $9.06 on a new "buy" rating

Entry on January 19 at $9.06
Earnings Date 02/23/12 (unconfirmed)
Average Daily Volume = 7.1 million
Listed on January 18, 2011


Host Hotels & Resorts - HST - close: 16.23 change: +0.37

Stop Loss: 15.45
Target(s): 17.90
Current Gain/Loss: unopened
Time Frame: up to the Feb. 14th earnings report
New Positions: Yes, see below

Comments:
01/23 update: HST did its part with a positive open but the S&P 500 did not. Our trade is not open yet. I am suggesting we try again. We want to launch small bullish positions at the open but only if both HST and the S&P 500 index open positive. Nimble traders may want to take a different approach and wait for a dip near the rising 10-dma instead as their entry point. FYI: The Point & Figure chart for HST is bullish with a $24.00 target.

Do not enter position unless HST and the S&P500 are both positive at the open
(Small Positions)

Suggested Position: buy HST stock @ the open

- or -

buy the Feb $16 call (HST1218B16)

Entry on January xx at $ xx.xx
Earnings Date 02/14/12 (confirmed)
Average Daily Volume = 7.5 million
Listed on January 21, 2011


J.P.Morgan Chase & Co - JPM - close: 37.36 change: +0.43

Stop Loss: 35.95
Target(s): 42.50
Current Gain/Loss: unopened
Time Frame: 6 to 8 weeks
New Positions: Yes, see below

Comments:
01/23 update: JPM outperformed the market today with a +0.8% gain. Unfortunately our trade is not open yet since the S&P 500 opened negative before moving higher. I am suggesting we try again. The plan is to launch new bullish positions at the open tomorrow morning but only if both the S&P 500 and JPM open positive. More conservative traders may want to wait for JPM to actually close over $38.00 before launching new positions.

If our trade is opened we'll use a stop loss at $35.95. Our multi-week target is $42.50. FYI: The Point & Figure chart for JPM is bullish with a long-term $56 target.

Do not enter position unless JPM and the S&P500 are both positive at the open

Suggested Position: buy JPM stock @ the open

- or -

buy the Feb $38 call (JPM1218B38)

- or -

buy the Mar $38 call (JPM1217C38)

01/23/12 trade not open yet, S&P 500 opened negative. Try again.

Entry on January xx at $ xx.xx
Earnings Date 01/13/12
Average Daily Volume = 35.2 million
Listed on January 21, 2011


SAIC, Inc. - SAI - close: 13.00 change: +0.00

Stop Loss: 12.74
Target(s): 14.50
Current Gain/Loss: - 0.7%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
01/23 update: SAI dipped toward the next level of support near $12.80 before bouncing back to close unchanged. I am growing a bit cautious here. We are not suggesting new positions at this time.

Earlier Comments:
Our target is $14.50 but I have to warn you that I see potential resistance near $13.50, and the 150-dma, the exponential 200-dma and the simple 200-dma.

(Small Positions)

Suggested Position: long SAI stock @ $13.10

- or -

Long Feb $12 call (SAI1218B12) Entry $1.30

Entry on January 17 at $13.10
Earnings Date 03/22/12 (unconfirmed)
Average Daily Volume = 1.7 million
Listed on January 14, 2011


Starbucks Corp. - SBUX - close: 47.34 change: -0.81

Stop Loss: 46.75
Target(s): 49.00
Current Gain/Loss: + 2.7%
Time Frame: up to the January earnings report.
New Positions: see below

Comments:
01/23 update: Ouch! We knew SBUX would see some profit taking eventually. I was hoping it would get postponed until the earnings report. Shares broke down under short-term support at the 10-dma, which is bearish. If SBUX drops again tomorrow then odds are good we'll see it hit our stop loss at $46.75. I am not suggesting new positions at this time. We still want to exit prior to the Jan. 26th earnings report.

current Position: long SBUX stock @ $46.08

- or -

Long FEB $47 call (SBUX1218B47) entry $1.56

01/21/12 new stop loss @ 46.75
01/19/12 Readers may want to take profits now!
01/18/12 new stop loss $ 46.40, adjust exit to $49.00
01/17/12 new stop loss @ 45.95
01/14/12 new stop loss @ 45.75, plan to exit prior to earnings
01/12/12 new stop loss @ 44.90
01/11/12 new stop loss @ 44.60
01/07/12 new stop loss @ 43.95

Entry on December 29 at $46.08
Earnings Date 01/26/12 (confirmed)
Average Daily Volume = 5.1 million
Listed on December 28, 2011


Smith & Wesson Holding Corp. - SWHC - close: 4.72 change: -0.02

Stop Loss: 4.45
Target(s): 5.65 or 6.40
Current Gain/Loss: - 2.2%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
01/23 update: SWHC dipped to $4.60 and its 20-dma before bouncing back to close almost unchanged on the session. I am not suggesting new positions at this time and more conservative traders may want to raise their stops toward today's intraday low.

Earlier Comments:
I do consider this a very aggressive trade and we want to keep our position size small. The $5.00 level could be resistance but we're going to aim higher. I am setting two different targets depending on your risk tolerance. I'd aim for $5.65 or $6.40. FYI: The Point & Figure chart for SWHC is bullish with a long-term $9.50 target.

(Small Positions)

Suggested Position: long SWHC stock @ $4.83

Entry on January 17 at $4.83
Earnings Date 03/12/12 (unconfirmed)
Average Daily Volume = 962 thousand
Listed on January 14, 2011


Textainer Group Holdings - TGH - close: 31.55 change: +0.21

Stop Loss: 29.40
Target(s): 34.00
Current Gain/Loss: + 3.1%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
01/23 update: It was a choppy first half of the day but TGH recovered to close up +0.6%. I am not suggesting new positions at this time.

Earlier Comments:
A breakout could spark some short covering. The most recent data listed short interest at 11% of the very small 12.8 million share float. That raises the risk of a short squeeze. Plus, TGH should appeal to the high-yield crowd since shares sport a 4.7% yield. NOTE: TGH does have options but the spreads are a little wide.

current Position: Long TGH stock @ 30.60

01/19/12 new stop loss @ 29.40
01/13/12 TGH hit our trigger at $30.60 and reversed in less than one second. I am suggesting caution here.

Entry on January 13 at $30.60
Earnings Date 02/09/12 (unconfirmed)
Average Daily Volume = 172 thousand
Listed on January 11, 2011


BEARISH Play Updates

C&J Energy Services, Inc. - CJES - close: 17.62 change: +0.10

Stop Loss: 19.75
Target(s): 15.00
Current Gain/Loss: + 1.0%
Time Frame: 4 to 6 weeks, exit prior to earnings
New Positions: see below

Comments:
01/23 update: CJES produced another oversold bounce this morning but gains began to fade after the first 30 minutes of trading. There is no change from my prior comments.

I am still a little cautious launching new positions given the broader market's strength but the trend in CJES is definitely down. The stock looks like it might have overhead resistance near $19.00 and its 10-dma (near 19.15).

Earlier Comments:
Our target is $15.00. We do want to keep our position size small to limit our risk. The most recent data listed short interest at about 15% of the small 35.9 million-share float. That does raise the risk of a short squeeze. You may want to use put options to limit your risk instead of shorting the stock. FYI: The Point & Figure chart for CJES is bearish with a $12.00 target.

(small positions)

Current Position: short CJES stock @ 17.80

- or -

Long Feb $17.50 put (CJES1218N17.5) Entry $0.98

Entry on January 18 at $17.80
Earnings Date 02/15/12 (unconfirmed)
Average Daily Volume = 923 thousand
Listed on January 17, 2011


CLOSED BULLISH PLAYS

BioMarin Pharmaceuticals - BMRN - close: 34.78 change: -0.42

Stop Loss: 34.75
Target(s): 39.50
Current Gain/Loss: unopened
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
01/23 update: BMRN is not cooperating. Shares continue to fade lower. It is unlikely that BMRN will hit our trigger to open bullish positions at $36.20 any time soon. The longer-term trend is still bullish. More nimble traders might want to consider buying a dip or a bounce near the rising 100-dma with a tight stop loss.

Trigger @ 36.20, stop loss 34.75 (small positions)

Our Trade Did Not Open.

01/23/12 BMRN not cooperating. Trade removed from newsletter
01/21/12 new stop loss @ 34.75, still waiting for a breakout.
01/19/12 trade did not open. Adjust entry to use a trigger at $36.20, new stop loss at $34.20
01/18/12 trade did not open. try again.

chart:

Entry on January xx at $ xx.xx
Earnings Date 02/16/12 (unconfirmed)
Average Daily Volume = 839 thousand
Listed on January 17, 2011