Option Investor
Newsletter

Daily Newsletter, Thursday, 11/29/2012

Table of Contents

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

Market Wrap

Data Helps Lift Markets

by Thomas Hughes

Click here to email Thomas Hughes
Introduction

Futures were up in early trading. Yesterday's 100 point turn around on the Dow seemed to have lifted spirits. This mornings surprising GDP data also helped to lift US and world markets until further posturing from Rep Boehner and Reid sent stocks back down near yesterday's closing prices. They both claim neither side is serious. Reid continued to call on the same immediate compromise the President is asking for. Nothing new was revealed, leaving the situation exactly as it was before. Yesterday the S&P regained what to me is highly significant support level, 1400. Today, the Dow regained a similar level when it crossed over 13,000. Holding these levels will be important for bulls in the near term but longer term direction is murky. The indexes are certainly in a time of transition and market direction is highly questionable while they are still so sensitive to political rhetoric and sniping. The fiscal cliff is on everyone's mind. The potential for long term damage to the economy is feared above all else. Too much change could off set the delicate balance we have going on right now, or it could be the push we need to get things moving again.

Things seem to be quieting down around the world. China's transition of leadership has been fairly quiet and European issues are returning to a low simmer. According to today's headlines global attention is focused outward and on our fiscal cliff.

It seems to me that of the three major players involved in global economics, China, Europe and the US, the other two are taking care of business and now its our turn. Removing the fiscal cliff could be the next step in the chain of events leading to world GDP growth.


Today's Economic Releases

The big headline today was 3rd quarter GDP. The previous estimate was for a downward revision from 2% to 1.8%. I think everyone was surprised to see an upward revision to 2.7%. The gains were mostly on a rise in inventory and an increase in exports. In the revision estimates for spending income were reduced and inflation remained low. While not a large revision or even a robust number it does indicate that the economy is growing more and faster than was expected. I think that maybe in this sluggish market that could be enough to inspire some confidence, at least for the short term. It also leads me to bring up my earlier theories of a fourth quarter GDP bounce and the potential it brings for revenue and profit surprises in the next round of earnings releases.


The Sandy Effect on unemployment seems to be receding as fast as the storm waters themselves. Initial claims for unemployment fell this week to 393,000. This is 23,000 lower than last weeks upwardly revised 416K. Analysts had been expecting claims to fall to about 390K, basically in line with the reported results. The good news is that the number is back below the 400K level that economists believe reveals a net loss in jobs, the bad news is that the four week moving average rose above 400K. The average gained 7,500 to 405,250. We'll have to wait and see if initial claims continue to retreat and how holiday and post-holiday hiring/firing affect the overall trend.


Continuing and total claims for unemployment both fell this week as well. Both of these two data points are near the long term lows and appear to steady, if not trending slightly in the case of total claims. Continuing claims fell be 70K to an adjusted 3.29 and total claims fell nearly 60K to 5.18 million. Once again, it does not appear as if Sandy had any real long term damage on overall employment in the US.



Pending home sales were also released today. The pending sales data hit a five year high. Sales in October rose over 5% from Septembers upwardly revised number. On a year over year basis pending home sales have risen over 13%. This is yet another sign of returning strength in the housing market and supports the recently reported rise in home prices.

Global Eyes On US Cliff

Asian markets edged higher today on strengthening US data and potential Fiscal Cliff resolution. News from Asia was pretty quiet. China's governmental transition is not causing any waves and signs are good that the country will meet and probably exceed its target for fiscal growth in 2012. The most recent economic release for China is home sales, which jumped over 30%.

Japan is still struggling with growth and may be slipping back into recession. This could spur more a quicker call to action for the BOJ than is already expected. Elections in Japan, scheduled for mid December, are likely to put Shinzo Abe on the seat of power. He has already stated his plans for “unlimited easing” which sparked a slide in yen values.

European markets made new highs today. The resolution of Greek dealings and, of course, US data helped to calm fears and pave the way for the prospects of what to do next. Greece will be pushed aside for a time providing they stick to the plan. Even Spain is receding in the headlines but this is one that is more likely to reemerge. Spain has yet to enter into any actual deal and its financial standing is still on shaky ground.

Oil And Gold

All the data and political posturing combined to halt yesterday's sharp drop in gold prices. Today golds $10 gain the price in the mid point of a range that has been established over the last few weeks between $1700 and $1750. The Gold Index has been trending sideways now for over two weeks, ever since falling below support. So far the resistance of old support has been holding and now has the added weight of short and long term moving averages.

The index has retreated quite a bit since hitting its peak earlier this year. This is to be expected in any rally but this one has dropped below a crucial support/resistance pivot point. When applying Fibonacci retracements of the earlier move up and break above the resistance the 38% line is coincident with the same resistance line. This line should have been support and the stopping point for any pull back. Now, not only has the index fallen below the 38% line it has also broken the 50% retracement. At this point I the possibility of a 78% or even a 100% retracement is on the table.


Oil also posted some big numbers today. The price of crude rose nearly 2% with gas and Brent close behind. Tensions in the mid east were the cause of supply concerns which have been helping prices edge higher for the last few weeks. Also, the larger than expected GDP figure and the eminent Fiscal Cliff resolution helped to lift prices. The oil index tried to continue a jump it started yesterday. The move today is the second attempt this market has tried to surpass the 150 day EMA and is the second time it failed. Today's doji symbol indicates indecision so it will take another candle or more to confirm the EMA as resistance.


Story Stocks

Research In Motion is beginning to reemerge as a contender in mobile and wireless. We're getting closer and closer to the launch of Blackberry 10 and the responses from the investment community are promising. Today RIMM received another upgrade, this time from Goldman Sachs. The report states that Goldman believes the company will exceed revenue and profit expectations for the next four quarters and that they give the launch a 30% chance of success based on early reviews. The stock jumped close to 10% in premarket trading, putting price firmly above my previously drawn resistance line. The stock encountered heavy selling after the open and was forced back down below the line. I will be watching this line closely now, a solid move above would, especially with the recent gains in volume, would be very bullish in my view. The Goldman target price for RIMM is $16.


Tiffany's diamond isn't as sparkly as analysts had estimated. The jewelry store missed its 3rd quarter revenue and profit estimates, sending the stock down sharply. The miss impacted the bottom line enough to cause executives to lower company guidance to a range $0.30 below the previous. The news was released premarket and sent shares lower by more than 10% at the open. The low prices attracted some buyers who helped to drive the stock during the day but still failed to regain support levels. The stock is a dividend payer, yielding more than 2% at today's prices, which could be an extenuating factor in both the stocks sharp decline and the number of buyers who stepped in to bring the price up to the days highs. The support/resistance line at $60 will be important in the near term for this stock. I would watch for moves above or a confirmation of this line.


La-Z-Boy also missed targets, sending it's shares lower. The furniture manufacturer's 2nd quarter profits dropped more than 16% as rising costs cut into margins. The drop was expected but 16% was much more than expected. Shares of this stock also opened sharply lower but they were met by more sellers than buyers and continued to fall during the day.


Special dividends are emerging as a driver of stocks this year. Costco made headlines yesterday and today Disney became another of the more that 170 special dividends this year. If it they can be taken as an example any corporation wanting to boost share value should issue a special dividend before the end of the year. The tactic is returning value to shareholders, helping them to avoid higher taxes and now is attracting hordes of investors seeking to lock in some end of the year profits. Costco had its biggest day in more than 2 years yesterday and today Disney gained more than 1% and regained the upper side of its short term moving average for the first time in nearly two months.


The Indexes

The S&P continued its support bounce today despite the minor fluctuation caused by political rambling. The GDP data and hopes for resolution to the cliff helped yesterday's mega turn-around and retest of support continue rallying into today. Trading over the last four days, around the 1400-1410 level and the long term EMA, when taken together, has been a nice consolidation move above the psychological and technical level of 1400.

Trading on the S&P maintained a fairly tight range today, between yesterday's close near 1410 and the previously significant number of 1420. 1420 proved to be resistance today for short term traders on hourly charts. I think this resistance will be short lived in the mid term and give way under upward pressures. The more significant resistance will be found at 1430 on the daily charts. Depending on how politics develop the market may move through this level as well. If no solution is reached and things remain in “happy talk” mode the markets could drift higher on Santa Rally induced buying and special dividends.


The markets never go straight up and there are lots of potential causes for worry aside from the fiscal cliff. Hopes and dreams may carry the markets higher while the negotiations are still in the earliest phases but there will likely be another pullback soon. Politicians are still haggling on details of the fiscal solution and have yet to reveal what the plan will actually look like. Once we do get a look at a real solution, one that is likely to make to the Presidents desk, we could see that pullback.

At this time, on the daily charts, momentum is bullish and still on the rise so for this reason I am looking for the S&P to move up to resistance rather than move down to support. However, I am still expecting a test of the recent lows, or at least of recent support, based on my previous MACD analysis. The convergence of MACD with the decline from 1465 to 1350 suggests that there are still some selling yet to come.


Widening the focus to weekly closings it looks like the S&P could easily retest the highs around 1465. The uptrend is still intact and we've got a nice candle signal forming on the 150 day moving average. Looking back over the last couple of years similar set ups have yielded 150 to 200 point moves in the S&P 500. The caveats to any rally is that the longer term trend, as measured by momentum, is in decline and the top could be near if not at a hand. There is a lot of resistance moving forward and these levels are coincident with long term highs, all time highs and other important technical levels associated with the 2008-2009 bear market.


For now, it seems, politics is getting in the way of real business and market cycles. The economic recovery is being threatened by political grandstanding and sniping, two things that never help anything. Until the fiscal cliff (geez I am tired of writing that) is out of the way, at least kicked down the road into 2013, it will hard to tell which way the market really wants to go. Will fear of taxes keep more people out of the markets than the prospects of investment gains will attract in?

I know if they don't solve the fiscal cliff soon I know I would like to thrown something off it myself...

Until then, happy trading

Thomas Hughes


New Plays

Potential Short Squeeze

by James Brown

Click here to email James Brown


NEW BULLISH Plays

Skullcandy, Inc. - SKUL - close: 8.66 change: +0.18

Stop Loss: 8.45
Target(s): 11.50
Current Gain/Loss: unopened

Entry on November xx at $ xx.xx
Listed on November 29, 2012
Time Frame: 6 to 8 weeks
Average Daily Volume = 702 thousand
New Positions: Yes, see below

Company Description

Why We Like It:
SKUL makes headgear and audio accessories (a.k.a. earphones). The stock broke down under major support near $12.00 early in November. The sell-off accelerated following a disappointing earnings report and lowered earnings guidance. Yet now it looks like SKUL may have found a bottom. The stock could see a short squeeze. The most recent data listed short interest at 42% of the very small 15.6 million-share float.

Aggressive traders could launch positions now. I am suggesting a trigger to open bullish positions at $9.05. If triggered I am setting our multi-week target at $11.50.

Trigger @ 9.05

Suggested Position: buy SKUL stock @ (trigger)

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

buy the 2013 Jan $10 call (SKUL1319a10) current ask $0.35

Annotated chart:




In Play Updates and Reviews

VMED Hit Our Target

by James Brown

Click here to email James Brown

Editor's Note:
Shares of VMED hit our bullish target today.

Our NTGR trade was stopped out. We closed APOL this morning.

Current Portfolio:


BULLISH Play Updates

Affymax - AFFY - close: 24.77 change: +0.51

Stop Loss: 22.65
Target(s): 27.50
Current Gain/Loss: + 2.8%

Entry on November 26 at $24.10
Listed on November 21, 2012
Time Frame: 3 to 6 weeks
Average Daily Volume = 678 thousand
New Positions: Yes, see below

Comments:
11/29/12: AFFY seems to be gaining strength. Shares added +2.1% today. It's possible the $25.00 level could be round-number resistance. I am not suggesting new positions at this time.

*Small Positions*

current Position: long AFFY stock @ $24.10



Banner Corp. - BANR - close: 29.83 change: +0.13

Stop Loss: 28.90
Target(s): 34.00
Current Gain/Loss: - 2.2%

Entry on November 21 at $30.49
Listed on November 20, 2012
Time Frame: 8 to 10 weeks
Average Daily Volume = 157 thousand
New Positions: see below

Comments:
11/29/12: BANR spent the day churning under the $30.00 level. I would wait for a new close above $30.00 before considering new positions.

NOTE: BANR doesn't move very fast. This trade could take a couple of months.

*Small Positions*

current Position: Long BANR stock @ $30.49

11/21/12 out trade opened on the gap higher.



Ball Corp. - BLL - close: 44.74 change: +0.00

Stop Loss: 43.25
Target(s): 48.00
Current Gain/Loss: + 2.0%

Entry on November 06 at $43.85
Listed on November 3, 2012
Time Frame: 6 to 8 weeks
Average Daily Volume = 687 thousand
New Positions: see below

Comments:
11/29/12: It looks like shares of BLL closed unchanged today at $44.74 but in reality the stock is up 10 cents. Shares began trading ex-dividend for its quarterly 10-cent dividend this morning.

More conservative traders may want to tighten stops closer to the $44 level.

current Position: Long BLL stock @ $43.85

11/24/12 new stop loss @ 43.25
11/17/12 new stop loss @ 42.55
11/06/12 triggered @ 43.85



EZchip Semiconductor - EZCH - close: 38.85 change: +0.16

Stop Loss: 36.40
Target(s): 44.00
Current Gain/Loss: + 1.3%

Entry on November 27 at $38.35
Listed on November 26, 2012
Time Frame: 6 to 12 weeks
Average Daily Volume = 414 thousand
New Positions: Yes, see below

Comments:
11/29/12: Shares of EZCH ignored an analyst downgrade today and rebounded to close up +0.4%. There is no change from my prior comments. Readers may want to start inching up their stops.

Our multi-week target is $44.00. I would expect a pullback on the first test of potential resistance at $40.00.

current Position: Long EZCH stock @ $38.35



Tesla Motors - TSLA - close: 33.69 change: +0.46

Stop Loss: 30.90
Target(s): 34.90
Current Gain/Loss: + 4.5%

Entry on November 19 at $32.25
Listed on November 15, 2012
Time Frame: 6 to 8 weeks
Average Daily Volume = 1.0 million
New Positions: see below

Comments:
11/29/12: Traders bought the dip in TSLA midday and the stock outperformed with a +1.3% gain. Readers may want to start inching up their stop loss.

Earlier Comments:
There is a good chance that TSLA could see a short squeeze. The most recent data listed short interest at 62% of the 76 million-share float.

current Position: Long TSLA stock @ $32.25

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

Long Dec $33 call (TSLA1222L33) entry $0.90

11/24/12 new stop loss @ 30.90



ValueClick, Inc. - VCLK - close: 18.91 change: -0.02

Stop Loss: 17.85
Target(s): 20.75
Current Gain/Loss: + 3.9%

Entry on November 20 at $18.20
Listed on November 19, 2012
Time Frame: 4 to 6 weeks
Average Daily Volume = 666 thousand
New Positions: see below

Comments:
11/29/12: Thursday turned out to be a very quiet session for VCLK. The stock drifted sideways to close almost unchanged on the day.

Earlier Comments:
I will point out that VCLK could see potential resistance at $19.50 and the $20.00 mark. I would keep our position size small. VCLK has been volatile in the past.

current Position: Long VCLK stock @ $18.20

11/28/12 new stop loss @ 17.85



BEARISH Play Updates

Chesapeake Granite Wash Trust - CHKR - close: 18.59 change: +0.06

Stop Loss: 18.75
Target(s): 16.40
Current Gain/Loss: unopened

Entry on November xx at $ xx.xx
Listed on November 26, 2012
Time Frame: 6 to 8 weeks
Average Daily Volume = 226 thousand
New Positions: Yes, see below

Comments:
11/29/12: The rally this morning failed near $19 but CHKR still managed to eke out a gain. There is no change from my prior comments on CHKR.

Earlier Comments:
The current trend of lower highs and lower lows would suggest CHKR is poised to new hit new lows. I am suggesting a trigger to open small bearish positions at $17.90. Our initial target is $16.40 but we might reconsider and aim lower.

Trigger @ 17.90 *Small Positions*

Suggested Position: short CHKR stock @ (trigger)



CIT Group - CIT - close: 37.00 change: +0.18

Stop Loss: 37.05
Target(s): 33.25
Current Gain/Loss: unopened

Entry on November xx at $ xx.xx
Listed on November 21, 2012
Time Frame: 3 to 6 weeks
Average Daily Volume = 1.5 million
New Positions: Yes, see below

Comments:
11/29/12: CIT continues to churn in its narrowing trading range.

We are waiting for a breakdown under $36 as our entry point. I am suggesting we use a trigger at $35.90 to launch small bearish positions. Our target is $33.25.

Trigger @ 35.90

Suggested Position: short CIT stock @ (trigger)

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

buy the 2013 Jan $35 PUT (CIT1319m35)



Cliffs Natural Resources - CLF - close: 28.89 change: -0.72

Stop Loss: 31.05
Target(s): 25.25
Current Gain/Loss: + 2.5%

Entry on November 28 at $29.62
Listed on November 27, 2012
Time Frame: 4 to 6 weeks
Average Daily Volume = 7.7 million
New Positions: see below

Comments:
11/29/12: Traders sold into strength this morning. CLF's bounce reversed into a -2.4% decline. This looks like a new entry point.

Earlier Comments:
I would classify this as a higher-risk trade because so many investors are bearish on CLF. The most recent data listed short interest at almost 20% of the 141 million-share float. That does raise the risk of a short squeeze but the trend is clearly down. We want to keep our position size small to limit our risk. You may want to use the put option to limit your risk.

*small positions*

current Position: short CLF stock @ $29.62

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

Long DEC $30 PUT (CLF1222x30) entry $1.60

11/28/12 triggered on gap down at $29.62



Imperva Inc. - IMPV - close: 29.36 change: +0.46

Stop Loss: 30.65
Target(s): 25.50
Current Gain/Loss: + 0.8%

Entry on November 13 at $29.60
Listed on November 12, 2012
Time Frame: 6 to 8 weeks
Average Daily Volume = 221 thousand
New Positions: see below

Comments:
11/29/12: IMPV is eating away at any gains as it churns under resistance near $30.00. Readers may want to just exit early now. I am not suggesting new positions at this time.

Earlier Comments:
We want to keep our position size small because IMPV can be a volatile stock. Our target is $25.50. FYI: The Point & Figure chart for IMPV is bearish with a $25.00 target.

current Position: short IMPV stock @ $29.60

11/19/12 new stop loss @ 30.65



MICROS Systems - MCRS - close: 43.62 change: +0.47

Stop Loss: 44.05
Target(s): 40.10
Current Gain/Loss: unopened

Entry on November xx at $ xx.xx
Listed on November 28, 2012
Time Frame: 3 to 6 weeks
Average Daily Volume = 542 thousand
New Positions: Yes, see below

Comments:
11/29/12: MCRS gapped open higher this morning thanks to an upgrade. Yet traders sold the rally near short-term resistance. There is no change from my prior comments.

The November low was $42.95. I am suggesting a trigger to open bearish positions at $42.85. If triggered our target is $40.10. More aggressive traders could aim for the 2011 lows (near $38.50).

Trigger @ 42.85

Suggested Position: short MCRS stock @ (trigger)



CLOSED BULLISH PLAYS

Virgin Media, Inc. - VMED - close: 34.51 change: +0.47

Stop Loss: 33.25
Target(s): 34.50
Current Gain/Loss: + 5.0%

Entry on November 19 at $32.85
Listed on November 15, 2012
Time Frame: 6 to 8 weeks
Average Daily Volume = 3.5 million
New Positions: see below

Comments:
11/29/12: VMED hit our new target at $34.50. A breakout here would be a new record high. We wanted to take the safer bet and exit near its 2012 October high than risk seeing it reverse there. I would keep VMED on your watch list to buy a dip near the trend of higher lows.

*small positions*

closed Position: Long VMED stock @ $32.85 exit $34.50 (+5.0%)

11/29/12 target hit
11/28/12 new stop loss @ 33.25
11/26/12 adjust the exit target to $34.50

chart:



CLOSED BEARISH PLAYS

Apollo Group - APOL - close: 19.58 chane: +0.24

Stop Loss: 20.15
Target(s): 15.25
Current Gain/Loss: - 3.2%

Entry on November 26 at $18.85
Listed on November 21, 2012
Time Frame: 3 to 6 weeks
Average Daily Volume = 678 thousand
New Positions: see below

Comments:
11/29/12: APOL has not been cooperating. Shares posted yet another gain making it five days in a row. Our plan was to exit at the open this morning.

*Small Positions*

closed Position: short APOL stock @ $18.85 exit $19.45 (-3.2%)

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

2013 Jan $17 PUT (APOL1319m17) entry $0.84 exit $0.56*(-33.3%)

11/29/12 closed this morning
*option exit price is an estimate since the option did not trade at the time our play was closed.
11/28/12 prepare to exit early at the open tomorrow

chart:



Netgear Inc. - NTGR - close: 35.40 change: +0.86

Stop Loss: 35.15
Target(s): 30.25
Current Gain/Loss: - 1.9%

Entry on November 07 at $34.50
Listed on November 3, 2012
Time Frame: 6 to 8 weeks
Average Daily Volume = 381 thousand
New Positions: see below

Comments:
11/29/12: I didn't see any specific news to account for the relative strength in NTGR today. The stock initially failed at resistance near $35.00 this morning. Traders bought the dip soon thereafter and NTGR broke out higher and hit our stop loss at $35.15.

closed Position: short NTGR stock @ $34.50 exit $35.15 (-1.9%)

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

DEC $33 PUT (NTGR1222x33) entry $1.00 exit $0.35 (-65.0%)

11/29/12 stopped out at $35.15
11/14/12 new stop loss @ 35.15
11/13/12 caution, CSCO's earnings could have an impact on NTGR tomorrow
11/07/12 triggered @ 34.50

chart: