Option Investor
Newsletter

Daily Newsletter, Thursday, 10/18/2012

Table of Contents

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

Market Wrap

Third Quarter Earnings Trough?

by Thomas Hughes

Click here to email Thomas Hughes
Signs of economic stabilization are still percolating through the data. Speculation is rising that the third quarter will be an economic and earnings trough for the US and China. US stock futures traded flat to positive overnight before moving slightly to the negative following unemployment claims data. Newly released GDP data from China helped spur buying in Asian markets but this weeks jobless numbers put pressure on our own. The S&P futures trade held steady, just below the flat line going into to the open of trading. Other data, including a few earnings reports, kept the markets flirting with break even through the lunch hour.


The Economy

I was unsurprised by this mornings jump in unemployment claims. Last weeks number was too good to be true and there was speculation this morning about its validity. Last weeks number was revised up by 3,000 to 342,000, spring-boarding this weeks data another 46,000 claims up to an adjusted 388,000 claims for initial unemployment benefits. This number was more than 20,000 more than expected. Likewise, the four week moving average also climbed. The average of initial claims is still trending down and near 6 month lows.


Continuing claims and total claims for unemployment fell this week. Continuing claims fell by 29,000 to 3.25 million. Continuing claims has been in decline for several weeks and near long term lows for months. As an indicator it may be signaling that job creation is starting to out pace job losses. Total claims fell by 42,000, basically unchanged, to an even 5 million. Total claims has also been in decline for months and is at long term lows. The downward trend in total claims plus the recent drop in unemployment suggests that more people are finding jobs and not just quitting the hunt.



Other important data, released mid-morning, added a little volatility to trading but eventually helped the general markets climb firmly into positive territory. The Philadelphia Fed survey of manufacturing climbed a surprising 5.7% versus the expected 1%. This reversed last months -1.9% decline and ends a 5 month streak of declines in the survey results.

The Conference Boards index of leading indicators was released simultaneously to the Philly Fed and was equally surprising. The leading indicators, which is based on last months information and looks 3-6 months ahead, climbed 0.6%. This still shows only a modest expectation of growth but is much better than the predicted 0.1% and last months -0.4%. Taken individually and together, along with other data over the last two weeks seems to be confirming the possibility of a fourth quarter bounce. Data is not good, the economy is not accelerating, but a short term up swing in GDP is very probably in the works.


The data driving Asian markets overnight was the release of China's 3rd quarter GDP figures. The worlds second largest economy declined, as expected, to 7.4% growth in the 3rd quarter. Within the data are signs that China is stabilizing, at least in the short term. Retail and industrial production both rose during the third quarter and are expected remain steady. The data caused Cramer to take a China “hard-landing … off the table”. Asian markets gained 0.5-1.5%.

European shares traded into the green, barely, as more riots and protests erupted across the region. Striking workers in Greece are trying to bring the government to a halt in order to try and keep their benefits. The irony is that the loss of production will cost the government over a billion euros, exacerbating the underlying problem. The EU summit, which also met today, was another cause for protests. The Euro leaders are expected to be working on plans for a kind of “economic czar” for the region.

Oil trading was volatile today. The price of light crude was down as much as 1.25% this morning before climbing back into positive territory in the afternoon. Conflicting data over global stabilization and supply concerns were drivers of the movement. The Oil Index traded in a very narrow range today, around the mid-point of yesterday's candle. The index has gained more than 3.5% in the last 3 days and looks like it is going to retest the upper boundary of its trading range. On the long term charts the index still has bullish momentum and is supported by the 150 day moving average.

Oil Index, daily

Gold lost $10 early in trading, slipped a little more during the morning hours, and then bounced back some in the afternoon. Gold has been trading below $1750 all week and could be heading lower. The signs of economic stabilization will put pressure on gold prices in the near term. The Gold Index traded lower today as well, dropping down to the short term moving average. I have been watching a possible bull triangle formation on this chart that I now believe to be invalid. The index has moved beyond the point of the triangle and now has some downside risk. The index could fall to $200, if this happens watch for support to form or a break down to lower levels.

Gold Index, daily

The rate on the ten year treasury held steady from yesterday. The yield traded in a very narrow range, remaining above the short term moving average. If the yield continues to climb the next resistance is around 1.81%.

Ten Year Treasury Yields, daily

Earnings

Earnings reports added their own volatility to today's trading. I'll start with Google, which was scheduled to report after the bell. The companies reporting agency made a “fat finger” mistake and published the report prematurely. The results in the early release were well below expectations and caused the stock to sell off by close to 10%. The mistake was caught fairly quickly and trading was halted, pending a statement from Google. In the early report Google made $9.03 per share on a big decline in cost-per-click. The consensus estimate reported by CNBC was for Google to earn over $10.50 per share but the Zacks Research estimate was a more modest $8.88. Google said the report contained incorrect information and that they would amend the report as soon as possible. Trading resumed around 3:20 PM. Google trades remained depressed but regained some ground before the close.

Google, daily

Nokia reported a better than expected quarter, narrowing the predicted loss significantly. The company improved margins although sales slowed. The stock traded down from yesterday's close but remained above the short term moving average. The stock has been trading near the years lows for four months. MACD suggests a base has formed and today's volume may indicate growing support.

Nokia,daily

Goldman Sachs reported this morning before the bell too. The bank swung to a quarterly loss on debt valuations but ex-items beat Wall Street expectations. MS earned $0.28 per share versus the expected $0.24 on revenue that blew away projections by more than $1 billion. The stock opened trading in positive territory but quickly fell to bearish pressure. Today's candle signal, a divergence in MACD plus the volume spike, raises a red flag for this stock. Morgan Stanley could retreat to support around $16.25.

Goldman Sachs, daily

Ebay reported after the bell yesterday. The online marketplace posted double digit gains in revenue and per share profits. The stock climbed more than 4% on the news with a spike in volume. Momentum in the stock turned bullish today as well. The stocks move was halted at short term resistance so watch for a break above $50.65.

Ebay, daily

Travelers Companies also beat the Streets expectations. Their results and future expectations sent the stock gapping up by close to 4% to reach an all time high. This stock has been trending up for some time now and it looks like it will keep going. Today's jump cam with a spike in volume and momentum.

Travelers, daily

Microsoft reported after the bell today. Earnings were expected to be in a range around $0.50 per share, about 30% lower than last quarter. The stock traded down during today's session, below the short term moving average and above the long term support. The company actually reported earnings of $0.65 per share ex items, but GAAP earnings were below forecast.

Microsoft, daily

Chipotle Mexican Grill also reported after the bell. The fast-casual food chain was expected to earn $2.30 per share, a decline of 10% from last quarter. The stock traded down from a resistance level today ahead of the report which foreshadowed a slight miss. Chipotle posted earnings of $2.27 per share, an increase of nearly 20% from the same period last year. The gains, though substantial, was not enough to keep investors interested and caused the stock to drop sharply.

Chipotle Mexican Grill, daily

The Indexes

The major indexes opened slightly lower today following the jobless data. Stocks drifted in early morning trading, moving in a small range just below the break even line. By lunchtime earnings and economic data had pushed the S&P and other major indexes into positive territory until Google's earnings release error. Without Google's report blunder the markets could have drifted up a little higher in the range before the close. With the blunder the S&P and other indexes fell shell sharply to hit the days lowest levels. The markets regained some of their upward momentum once Google trading resumed but failed to cross back into the green.

The S&P and DOW are trading near 4 year highs and important short term resistance levels. For the S&P 500 the magic number is 1456; The S&P needs to surpass and close above this level. The index has been trading below this point now for weeks. The sideways action is good for building a base of support for the index but the longer it stays here the more chance of it breaking back down. The poor reports from tech may bring the broad markets down in the short term, the S&P could retreat to support at 1430.

S&P 500, daily

On the thirty minute charts of the S&P we can see a nice move up from support that begins on 10/15. This bounce starts to break down once it approaches resistance. Google's earnings can be blamed for the breakdown today.

Earnings in general are better than expected although clearly not good enough in some cases. Regardless, the data and underlying economic trend will determine market direction- not third quarter earnings. The S&P will likely trade within this range this week and into next week ahead of the FOMC meeting and advance GDP numbers.

S&P 500, 30 minute bars

The VIX moved down today in early trading before bouncing back up after the Google scare. The index is still near long term lows.

VIX, daily

The Nasdaq was hit hardest by the Google fiasco. The index has now made what looks at this time to be a second lower low in a short-term downtrend. The index has also made a second move lower from a resistance level/short term moving average; the first happened last Monday. So far the big earnings misses have only been in the tech sector. This weakness will be a drag on the broad markets but should not pull them down. The S&P and the DOW both remained above their short term moving averages and support.

Nasdaq, daily

Dow, daily

Things still look good as we progress into the fourth quarter. Economic indicators are pointing to a trough in world GDP centered on the third quarter. I would not be too surprised to see more signs of stability soon. Next week the FOMC meets on Wednesday and will make an interest rate decision. The rate should remain steady but the statement will be full of information for traders. On Friday we get the advance GDP numbers for the third quarter. From I have seen over the last few weeks there is a good chance that 3rd quarter GDP will be better than estimated.

Until the S&P falls below 1425 the underlying trend will remain bullish. Earnings season will provide volatility which will provide lots of trading opportunities but not long term direction. Tomorrow be on the look out for reports from the likes of McDonald's, Schlumberger and GE.

Be vigilant and remember the trend!

Thomas Hughes


New Plays

Looking for Strength in Financials

by James Brown

Click here to email James Brown


NEW BULLISH Plays

Bank of America - BAC - close: 9.47 change: +0.03

Stop Loss: 9.25
Target(s): 10.45
Current Gain/Loss: unopened

Entry on October xx at $ xx.xx
Listed on October 18, 2012
Time Frame: 6 to 8 weeks
Average Daily Volume = 141 million
New Positions: Yes, see below

Company Description

Why We Like It:
The financial sector has been showing relative strength this past week and the XLF looks like it could breakout past its 2012 highs. We want to look at BAC as bullish candidate. I suspect BAC will perform better than the XLF. You can see from the chart below that BAC has a bullish bias to its pennant-shaped consolidation pattern. This past week has found resistance at $9.60.

I am suggesting a trigger to launch bullish positions at $9.65 with a stop loss at $9.25. Our multi-week target is $10.45.

Trigger @ 9.65

Suggested Position: buy BAC stock @ (trigger)

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

buy the 2013 Jan $10 call (BAC1319a10) current ask $0.41

Annotated chart:




In Play Updates and Reviews

Intraday Rally Fades

by James Brown

Click here to email James Brown

Editor's Note:
The market snapped a three-day winning streak as the intraday rally faded lower today.

DWA hit our trigger this morning.

Current Portfolio:


BULLISH Play Updates

American Intl. Group - AIG - close: 37.21 change: +0.35

Stop Loss: 34.85
Target(s): 39.75
Current Gain/Loss: + 3.4%

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:
10/18/12: AIG surged to a new 52-week high today, hitting $37.67 at its best levels. The stock pared its gains by the closing bell. I am raising our stop loss to $34.85.

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

10/18/12 new stop loss @ 34.85
10/15/12 new stop loss @ 34.45



AOL Inc. - AOL - close: 36.36 change: -0.71

Stop Loss: 35.49
Target(s): 39.90
Current Gain/Loss: -2.3%

Entry on October 16 at $37.23
Listed on October 15, 2012
Time Frame: exit prior to the NOV 6th earnings report
Average Daily Volume = 1.6 million
New Positions: see below

Comments:
10/18/12: I warned readers last night that after yesterday's performance AOL looked like it was headed lower. The stock lost -1.9% today. The question is where will it bounce. The combination of the failed rally at $38 and the two-day pullback is starting to look bearish. I'm not suggesting new positions at this time.

In other news AOL announced a new product today. The company unveiled "Alto" which is a web-based email service that lets you sync up to five email accounts. You can use @gmail, @yahoo mail, @aol mail, and Apple's @mac.com email accounts with Alto. The plan is to add even more services that will work with Alto.

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: 32.12 change: +0.12

Stop Loss: 31.15
Target(s): 34.75
Current Gain/Loss: + 6.2%

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:
10/18/12: BRLI saw a little bit of a shakeout this morning with a dip toward $31. The stock recovered and eventually closed in positive territory. Today's low was $31.20. I am raising our stop loss to $31.15.

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

10/18/12 new stop loss @ 31.15
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: 36.76 change: -0.55

Stop Loss: 35.90
Target(s): 39.90
Current Gain/Loss: - 0.6%

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:
10/18/12: Uh-oh! The three-day bounce in CFX is failing at its early October highs. That doesn't bode well and readers may want to just exit early now. 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



DreamWorks Animation - DWA - close: 21.58 change: +1.33

Stop Loss: 19.75
Target(s): 22.00
Current Gain/Loss: +4.8%

Entry on October 18 at $20.60
Listed on October 17, 2012
Time Frame: exit prior to the Oct. 30th earnings report
Average Daily Volume = 902 thousand
New Positions: see below

Comments:
10/18/12: Our new DWA trade is off to a strong start. Just as expected when DWA broke through resistance at $20.50 shares started to see a short squeeze. The stock surged to a +6.5% gain on the session. Our exit target is $22.00 but more aggressive traders could aim higher.

Earlier Comments:
The stock could see a short squeeze. The most recent data listed short interest at 43% of the 63 million share float. We do not want to hold over the October 30th earnings report.

current Position: Long DWA stock @ $20.60

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

Long NOV $20 call (DWA1217k20) Entry $1.45

10/18/12 triggered @ 20.60



Plum Creek Timber - PCL - close: 44.51 change: +0.36

Stop Loss: 42.95
Target(s): 44.75
Current Gain/Loss: + 3.2%

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:
10/18/12: PCL continues to post gains and is starting to look short-term overbought with a streak of five gains in a row. I am adjusting our exit target down to $44.75 and raising our stop loss to $42.95. Readers may want to exit early.

current Position: Long PCL stock @ $43.15

10/18/12 new stop loss @ 42.95, adjust target to $44.75
10/16/12 new stop loss @ 42.40
10/15/12 triggered at $43.15



BEARISH Play Updates

Navistar Intl. - NAV - close: 20.54 change: -0.62

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

Comments:
10/18/12: There was no follow through on yesterday's bounce in NAV.

Earlier Comments:
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)



Sohu.com - SOHU - close: 39.31 change: -0.44

Stop Loss: 41.01
Target(s): 36.00
Current Gain/Loss: + 0.6%

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: see below

Comments:
10/18/12: SOHU displayed some volatility this morning. Shares rallied past their 10-dma and hit $40.44 before reversing under their 100-dma and eventually closing down on the session. I am lowering our stop loss to $41.01.

Readers can use today's intraday reversal lower as a new entry point.

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

10/18/12 new stop loss @ 41.01



Titanium Metals - TIE - close: 12.28 change: +0.03

Stop Loss: 12.65
Target(s): 11.00
Current Gain/Loss: + 1.0%

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:
10/18/12: Thursday was a relatively quiet session for TIE. Shares churned sideways. There is no change from my prior comments. More conservative traders might want to consider adjusting their stop loss lower. 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: 47.65 change: -0.34

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:
10/18/12: We suspected that yesterday was a new failed rally and lower high. However, we want to see confirmation before launching positions.

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)