Option Investor
Newsletter

Daily Newsletter, Tuesday, 10/16/2012

Table of Contents

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

Market Wrap

Earnings Drive Market Higher

by Thomas Hughes

Click here to email Thomas Hughes
Earnings are looking like they are going to be better than expected and the global markets are moving higher. The global markets continued yesterday's rally overnight and into this morning. The surprising earnings from Goldman Sachs this morning, Citi yesterday and other banks last week are starting to give traders the idea that more upside surprises are in store. Expectations are so low right now that it is not surprising that corporate earnings are coming in better than expected. There are still some notable earnings misses and a few companies that have reported results in-line with estimates but so far the trend has been for companies to beat the street. The surprises are not limited to any one sector which is good for the general markets but means that stock picking is especially important for short term traders.


US stock futures were solidly positive going into the start of trading today. Economic data and another surprise earnings report out of the banking sector from Goldman Sachs barely moved the early morning markets, which were already elevated. Futures trading held steady into the open with all three major indexes opening in the green. The S&P, Dow and Nasdaq all moved solidly higher during the day and closed at the session highs.

The positive string of economic data we have gotten over the last few weeks and into today have helped to improve the expectations for third quarter earnings and GDP. Yesterday's retail sales figures and today's Industrial Production figures are already causing some analysts to increase their expectations for the third quarter GDP. We will get the first look at those figures next week with the Advance GDP report.

Today's data included the CPI data for September and Industrial Production data. The CPI came in a little hotter than expected at 0.6% versus the expected 0.5% but did not cause much reaction. The number is inflated on rising energy and food prices. The figure is still tame in the long run and was not cause for concern. Stripping out volatile food and energy the Core CPI figure was a gain of 0.1%. The new data is unchanged from the previous month on the headline and reverses a drop of -0.1% on the core number.


The rest of the week is full of data. Tomorrow housing starts and building permits and then on Thursday more jobless data. Also on Thursday look out for Philly Fed and Leading Indicators.


Asian shares ended their trading mixed. The Nikkei average gained 1.4% and is trading near the middle of its 6 month range. The Heng Seng index only added 0.28% but is trading at a 5 month high. Asian data continues to be mixed, showing signs of improvement in one area and slowing in others.

Europe was the real story today in overseas news. The European markets made a nice jump to the upside with some indexes climbing over 2%. Portugal's announced austerity based budget, Spain's impending request for bail out (again) and the relaxed attitude being taken about Greek and Spanish long term debt restructuring is adding to upside momentum. Portugal has the right idea though. It is better to go ahead and make the cuts and get the job done now rather than wait til the last minute like Spain and Greece. Portugal's budget plans, though good for the country, did not spark enthusiasm from the citizenship and caused some rioting. The FTSE and the DAX both gained a little more than +1% while Spain jumped more than 3%.

Gold traded to plus side today halting the drop that brought the metal to a new two month low. The signs of stabilization in the economy will put a hold on QE for a while which should keep a cap on gold prices for the short term at least. The gold index is bouncing from the short term moving average and confirming support in the $205-$209 level. The index is consolidating following its recent market reversal and break out and could continue to climb higher. The elevated priced for gold, though down over the last few days, should be seen in results from the mining companies.

Gold Index, daily

Oil climbed about 0.2% today. Global fears and economic worry have held the price of oil around $92 for several weeks now. Sanctions against Iran and turmoil in Syria are helping to support the price and keep it from falling below $90. The Oil Index jumped back from a fall below its short term moving average today to retest a long term support/resistance line but indicators are good for it to come back down soon. The index has been trending in a narrowing range for several years and is now in a move back down toward the lower end that began a few weeks ago. Exxon is scheduled to report earnings November 1st of $1.97 per share. This would be a small increase from last quarter but Exxon has missed estimates before.

Oil Index, daily

US treasury yields climbed today. The ten year treasury yields gained 0.057%, moving up from the short term moving average. The yeild looks like it is building resistance at the the 1.75% level.

Ten Year Treasury Yields, daily

Earnings are now the dominant factor in the market. The news so far has been good. The low low expectations have set the bar at a level that corporations should, and are, jumping over with ease. The banking sector has already had some good reports and this mornings release from Goldman was no different. The banking giant reversed its loss from a year ago and blew away the street's expectations. Even with reported weak mortgage growth Goldman was able to post a profit of $2.85 per share, $0.65 above the analysts estimates. The bank earned $1.51 billion dollars on a 49% increase in investment banking and a 28% increase in fixed income/forex/commodities. The stock has been trending up strongly for month and breached a resistance line today. The early morning pop fell by late afternoon and left the stock down by 1%. The stock looks good for long term gains but may trade sideways for a little while until it returns to the long term trend.

Goldman Sachs, daily

Citi stunned the markets this morning with the resignation of Vikram Pandit. Everything said about his leaving was positive but speculation ran wild all day. Everyone agreed that there was probably something up with the decision. I would not be surprised to see some other headlined about it in the near future. The stock responded by extending yesterday's gains on increased volume. Citi stock added 1.6%.

Citi, daily

The entire banking sector traded mixed today. One bank was up and another was down. The Banking Index traded to negative today but remained above the short term moving average. The index has been trending up and has now entered a possible bull triangle. If the upside surprises in the banking sector continue with the rest of the big banks and the big regional banks the index could break out to the upside. Tomorrow is a big day for the sector and the market. Earnings are being released by American Express, Bank of America and US Bancorp.

Bank Index, daily

Intel traded sharply up today ahead of its earnings report after the bell. Early on it seemed the stock seemingly reversed it downtrend in one session but by the days end the candle signal was a little more ominous. The results failed to satisfy traders who drove the price down in after hours trading. In the report the company says that growth remains slow but inline with expectations, customers remain cautious and that these trends are expected to extend into the fourth quarter. Intel beat the streets estimates of $0.49 per share by $0.09, or $0.58 per share.

Intel, daily

IBM also failed to satisfy investors and dropped in after hours trading. The stock companies earnings came in just shy of the expected $3.62 per share expected by analysts. IBM also cited sluggish markets and expects the fourth quarter to be the same. The street had been expecting a much better report and had the stock up nearly 1% in regular trading. Following the report IBM shares lost over 7%, dropping well below the short term moving average and making a lower low.

IBM, daily

Johnson & Johnson moved up on its earnings announcement. The company reported a dip in profits but an increase in sales. Regardless, the company beat estimates by a penny and guided the full year to a level just above the previous range. The stock traded up to a long term resistance level and 4 year intra-day high and then fell back before the close. JNJ stock has been consolidating in a range since jumping over 10% this summer. Today's news and guidance could help the stock move past resistance.

Johnson & Johnson

Today's the S&P's move up began at the short term moving average and helps to confirm support around the 1425-1435 level. This is the level coincident with the break-out and continuation pattern the index made a few weeks ago. The S&P is trading very near to it's multi-year high and will likely retest if not surpass it very soon. The markets had to climb a wall of worry to get hear and now the worry is subsiding. The economic indicators are improving, the unemployment rate is coming down, earnings seem to be OK and the fourth quarter estimates are starting to be revised up.

S&P 500, daily

Longer term the economy is still facing many headwinds, headwinds that will have their effect on corporate profits and growth. The world is still growing very slowly, Europe is still in recession and there is no real sign of acceleration anywhere, just some signs of stabilization. There are also long term expectations from economists for the global economy to dip again next year and bring the US very near to recession.

On the long term charts of the S&P momentum is currently bullish but weak when compared to past rallies. This weakness is divergent from the long term trend and one sign of the impending market correction I have been looking out for. Because of this I still think the markets are heading up but the end of the “most hated rally” is getting closer and closer. In the short term the next resistance is around 1465, if the markets can get above that level and maintain it then the next target is 1565.

S&P 500, weekly

The VIX is still creeping along at historic low levels. The index has been trading in an increasingly narrow range. The VIX dropped at open but then moved up during the day, nearly making it back to break even.

VIX, daily

The Dow chart is showing a textbook Dow theory feature, a lower low. The index moved down from resistance and made a lower low than the previous low. Should the index fail to make a new high soon this will add weight to the impending market correction argument.

Dow, daily

There is still a lot of earnings to sift through. Market direction will likely not be determined this week but the reports will help clarify the past and give a hint of the future. Data will drive the underlying trend long term, the economic calendar is full this week but next week is when it really heats up. The FOMC meeting and rate announcement is on Wednesday next week and the advance 3rd quarter GDP figure is released on Friday.

Until then remember the trend and trade with caution.

Thomas Hughes


New Plays

Nearing Major Support

by James Brown

Click here to email James Brown


NEW BEARISH Plays

Navistar Intl. - NAV - close: 20.58 change: -1.08

Stop Loss: 21.25
Target(s): 16.00
Current Gain/Loss: unopened

Entry on October xx at $ xx.xx
Listed on October 16, 2012
Time Frame: 3 to 6 weeks
Average Daily Volume = 1.6 million
New Positions: Yes, see below

Company Description

Why We Like It:
NAV manufactures commercial trucks, engines, RVs, and other large vehicles and parts. Unfortunately for shareholders the stock has been trending lower with a bearish pattern of lower highs all year. Now this trend is about to produce a bearish breakdown under major support at the $20.00 level.

The September low was near $19.80. I am suggesting a trigger to open bearish positions at $19.75. The 2008 lows were near $15.50 so we're going to target a drop to $16.00. FYI: There is already a growing amount of bearish pressure on the stock with the most recent data listing short interest at 15% of the 47.4 million share float.

Trigger @ 19.75

Suggested Position: short NAV stock @ (trigger)

- (or for more adventurous traders, try this option) -

buy the NOV $20 PUT (NAV1217w20) current ask $1.30

Annotated chart:




In Play Updates and Reviews

Another Broad-Based Bounce

by James Brown

Click here to email James Brown

Editor's Note:
Stocks continued to rally for the second day in a row.

I am suggesting an early exit on our SYNA trade. I've updated multiple stops tonight.

Current Portfolio:


BULLISH Play Updates

American Intl. Group - AIG - close: 36.35 change: +0.06

Stop Loss: 34.45
Target(s): 39.75
Current Gain/Loss: + 1.0%

Entry on October 9 at $36.00
Listed on October 8, 2012
Time Frame: exit prior to earnings on Nov. 1st
Average Daily Volume = 44 million
New Positions: see below

Comments:
10/16/12: AIG posted a gain but it was a close call with shares fading lower into the afternoon. I would not be surprised to see AIG retest the $36.00 level as new short-term support.

Our target is $39.75 but we'll plan on exiting prior to the early November earnings report. FYI: The Point & Figure chart for AIG is bullish with a $42.50 target.

Current Position: Long AIG stock @ $36.00

- (or for more adventurous traders, try this option) -

Long Nov $37 call (AIG1211k37) entry $0.76

10/15/12 new stop loss @ 34.45



AOL Inc. - AOL - close: 37.31 change: +0.09

Stop Loss: 35.49
Target(s): 39.90
Current Gain/Loss: +0.2%

Entry on October 16 at $37.23
Listed on October 15, 2012
Time Frame: exit prior to the Oct. 31st earnings report
Average Daily Volume = 1.6 million
New Positions: see below

Comments:
10/16/12: Tuesday proved to be a slow session for AOL. The stock opened at $37.23, immediately dipped to $36.80 and then fought its way back into positive territory. Overall I don't see any changes from my prior comments and would still consider new positions at current levels.

Suggested Position: buy AOL stock @ $37.23

- (or for more adventurous traders, try this option) -

Long NOV $38 call (AOL1217k38) entry $1.10



Bio-Reference Labs - BRLI - close: 32.09 change: +0.02

Stop Loss: 30.95
Target(s): 34.75
Current Gain/Loss: + 6.1%

Entry on October 03 at $30.25
Listed on October 2, 2012
Time Frame: 4 to 6 weeks
Average Daily Volume = 232 thousand
New Positions: see below

Comments:
10/16/12: BRLI's peformance was disappointing. The market produced a widespread gain and yet BRLI closes virtually flat. Traders bought the dip at its rising 10-dma. I am raising our stop to $30.95. I am not suggesting new positions at this time. More conservative traders may want to take profits now.

current Position: Long BRLI stock @ $30.25

10/16/12 new stop loss @ 30.95
10/11/12 new stop loss @ 30.75
10/04/12 new stop loss @ 29.90
10/03/12 new stop loss @ 29.25
10/03/12 triggered @ 30.25



Colfax Corp. - CFX - close: 37.11 change: +0.50

Stop Loss: 35.90
Target(s): 39.90
Current Gain/Loss: + 0.3%

Entry on October 01 at $37.00
Listed on September 29, 2012
Time Frame: exit prior to the late October earnings report
Average Daily Volume = 753 thousand
New Positions: see below

Comments:
10/16/12: We were expecting CFX to breakout higher soon and shares delivered that break today. The stock actually gapped open higher. I am raising our stop loss to $35.90. I am not suggesting new positions at this time.

The plan was to keep our position size small to limit our risk. FYI: The Point & Figure chart for CFX is bullish with a long-term $59 target.

*Small Positions*

Suggested Position: Long CFX stock @ $37.00

10/16/12 new stop loss @ 35.90
10/13/12 new stop loss @ 35.40
10/01/12 triggered @ 37.00



Medidata Solutions - MDSO - close: 40.11 change: +0.11

Stop Loss: 39.40
Target(s): 43.00
Current Gain/Loss: unopened

Entry on October xx at $ xx.xx
Listed on October 13, 2012
Time Frame: exit prior to the late October earnings report
Average Daily Volume = 161 thousand
New Positions: Yes, see below

Comments:
10/16/12: I am starting to worry about MDSO. The stock market is up two days in a row and yet shares of MDSO can't escape the gravitational pull of the $40.00 mark. That's not very inspiring.

The plan is to keep our position size small to limit our risk. I am also raising our stop loss to $39.40. I am suggesting a trigger to launch small bullish positions at $40.50 with a stop loss at $39.25.

Trigger @ 40.50

Suggested Position: buy MDSO stock @ (trigger)



Plum Creek Timber - PCL - close: 43.88 change: +0.34

Stop Loss: 42.40
Target(s): 44.95
Current Gain/Loss: + 1.7%

Entry on October 15 at $43.15
Listed on October 13, 2012
Time Frame: exit prior to earnings on Oct. 29th (not yet confirmed)
Average Daily Volume = 1.1 million
New Positions: see below

Comments:
10/16/12: PCL continues to bounce but it seems to be having trouble with resistance near the $44.00 level. I am raising our stop loss to $42.40.

current Position: Long PCL stock @ $43.15

10/16/12 new stop loss @ 42.40
10/15/12 triggered at $43.15



BEARISH Play Updates

Centene Corp. - CNC - close: 34.98 change: -0.56

Stop Loss: 36.65
Target(s): 31.50
Current Gain/Loss: + 4.8%

Entry on September 20 at $36.75
Listed on September 19, 2012
Time Frame: exit prior to earnings on Oct. 23rd.
Average Daily Volume = 693 thousand
New Positions: see below

Comments:
10/16/12: CNC continues to show relative weakness with a -1.5% decline. The stock is now testing potential round-number support at $35.00.

I am not suggesting new positions at this time.

NOTE: We only have three days left on our October $35 PUT. The current bid on our put is 50 cents.

current Position: short CNC stock @ $36.75

- (or for more adventurous traders, try this option) -

Long Oct $35 PUT (CNC1220v35) Entry $1.20

10/13/12 new stop loss @ 36.65
10/10/12 new stop loss @ 37.05
10/02/12 new stop loss @ 38.05



World Fuel Services - INT - close: 34.50 change: +0.50

Stop Loss: 35.01
Target(s): 30.15
Current Gain/Loss: - 1.8%

Entry on October 15 at $33.90
Listed on October 13, 2012
Time Frame: exit prior to the late October earnings
Average Daily Volume = 300 thousand
New Positions: see below

Comments:
10/16/12: After five days of declines INT finally bounced with a +1.4% gain. The stock should have resistance at the $35.00 level. I would wait for a clearly defined failed rally under $35.00 or a new drop under $35.00 before considering new positions.

The plan was to keep our position size small to limit our risk. We do not want to hold over the late October earnings report (not yet confirmed). FYI: The Point & Figure chart for INT is bearish with a $27.00 target.

(Small Positions)

current Position: short INT stock @ $33.90

10/15/12 triggered @ 33.90



Sohu.com - SOHU - close: 39.28 change: +0.01

Stop Loss: 41.40
Target(s): 36.00
Current Gain/Loss: + 0.7%

Entry on October 10 at $39.55
Listed on October 9, 2012
Time Frame: Exit prior to the late October earnings report
Average Daily Volume = 472 thousand
New Positions: Yes, see below

Comments:
10/16/12: The stock market sees a broad-based rally and SOHU only gains a penny? I'll take it. If the bounce continues SOHU should find new resistance near $40.00 and the 10-dma at $40.15.

Keep in mind that we want to exit prior to the late October earnings report.

Earlier Comments:
I have to warn you that SOHU can be a volatile stock so we need to limit our position size to reduce our risk or consider trading the options. Our target is $36.00. More aggressive traders could aim for the $34.00 area.

*Small Positions*

current Position: short SOHU stock @ $39.55

- (or for more adventurous traders, try this option) -

Long Nov $37.50 PUT (SOHU1211w37.5) entry $1.85



Synaptics Inc. - SYNA - close: 23.91 change: +0.56

Stop Loss: 24.05
Target(s): 22.15
Current Gain/Loss: + 3.5%

Entry on September 26 at $24.79
Listed on September 25, 2012
Time Frame: Exit prior to the Oct. 25th earnings report
Average Daily Volume = 439 thousand
New Positions: see below

Comments:
10/16/12: Warning! We have been expecting SYNA to see a breakout one way or the other. Shares broke higher with a +2.3% gain. There is still potential resistance at $24.00 but I wouldn't risk it. I am suggesting an early exit tomorrow morning at the opening bell.

Earlier Comments:
I do consider this a higher-risk, more aggressive trade because SYNA has already seen a big move down. We want to limit our risk and keep our position size small.

*Small Positions*

current Position: short SYNA stock @ $24.79

- (or for more adventurous traders, try this option) -

(exit on Oct 2nd, at the open)
Oct $25 PUT (SYNA1220v25) Entry $1.15 exit $1.65 (+43.4%)

10/16/12 Prepare to exit tomorrow morning at the open
10/15/12 new stop loss @ 24.05
10/13/12 new stop loss @ 24.40, readers may want to exit early now
10/06/12 new stop loss @ 24.51
10/02/12 planned exit to close our put option at the open
10/01/12 new stop loss @ 24.70, plan on exiting our October puts at the opening bell tomorrow
09/29/12 new stop loss @ 26.05, adjust exit target to $22.15



Titanium Metals - TIE - close: 12.34 change: +0.31

Stop Loss: 12.65
Target(s): 11.00
Current Gain/Loss: + 0.6%

Entry on October 4 at $12.41
Listed on October 3, 2012
Time Frame: 6 to 8 weeks
Average Daily Volume = 1.5 million
New Positions: see below

Comments:
10/16/12: I cautioned readers yesterday that TIE looked like it would probably bounce today. Sure enough TIE rebounded. The stock added +2.5% and is testing technical resistance at the 01-dma. More conservative traders may want to lower their stops. I am not suggesting new positions at this time.

*Small Positions*

current Position: short TIE stock @ $12.41

10/13/12 new stop loss @ 12.65



Trimble Navigation - TRMB - close: 48.00 change: +0.86

Stop Loss: 48.55
Target(s): 42.50
Current Gain/Loss: unopened

Entry on October xx at $ xx.xx
Listed on October 10, 2012
Time Frame: exit prior to earnings on Nov. 1st
Average Daily Volume = 697 thousand
New Positions: Yes, see below

Comments:
10/16/12: TRMB delivered a +1.8% bounce but shares remain under several layers of resistance. If this bounce continues then we'll probably drop TRMB as a bearish candidate.

Earlier Comments:
I am suggesting small bearish positions if TRMB can trade at $46.50 or lower. If triggered our target is $42.50 but we want to exit prior to the next earnings report on November 1st.

Trigger @ 46.50 (Small Positions)

Suggested Position: short TRMB stock @ (trigger)

- (or for more adventurous traders, try this option) -

buy the Nov $45 PUT (TRMB1211w45)



Veeco Instruments - VECO - close: 30.06 change: +1.00

Stop Loss: 30.15
Target(s): 26.65
Current Gain/Loss: - 1.0%

Entry on October 08 at $29.75
Listed on October 6, 2012
Time Frame: exit prior to the Oct 22nd earnings report
Average Daily Volume = 740 thousand
New Positions: see below

Comments:
10/16/12: Ouch! Shorts are in panic mode here. VECO has extended its oversold bounce to four days in a row. The rally accelerated with a +3.4% gain. The stock closed right at resistance near $30.00 and the 300-dma. If there is any follow through tomorrow we'll get stopped out at $30.15. My worry is that VECO sees a spike higher only to reverse lower tomorrow afternoon. I am not suggesting new positions.

Earlier Comments:
A lot of investors are already bearish on this stock so there is a risk of a short squeeze should it unexpectedly move higher. The most recent data listed short interest at 29% of the 38.7 million share float. Thus you may want to use put options to limit your risk instead of shorting the stock.

current Position: short VECO stock @ $29.75

- (or for more adventurous traders, try this option) -

Long Nov $30 PUT (VECO1211w30) Entry $2.20

10/10/12 adjust exit target to $26.65
10/09/12 new stop loss @ 30.15
10/08/12 new stop loss @ 30.55