Option Investor
Newsletter

Daily Newsletter, Thursday, 12/27/2012

Table of Contents

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

Market Wrap

Reid Comments Help Set Stage

by Thomas Hughes

Click here to email Thomas Hughes
Futures trading was flat this morning ahead of the days economic data. The markets are still quiet due to the holidays and the fast approaching new year. Volumes are light and the markets are highly susceptible to fear and speculation. Rumors of an early Presidential return to Washington had traders hoping for a positive turn in the Fiscal Cliff drama we are all being forced to endure.


Economic data, though skewed by government closings this week, was roughly in line with the recent trends we have been seeing. Unemployment claims are down and housing is up. These releases put the markets in positive territory going into the open but kept them within a tight range. Advancing stocks led declining stocks by a small margin in early trading but that reversed after Sen. Reid took the podium around 10:30. In his remarks he made several stabbing comments aimed at Boehner, the republicans and the House. He spoke from the floor of the Senate, saying “we're here” and asking where the representatives were. He called Boehner a dictator, controlling the House and maneuvering to remain Speaker in 2013. He also reminded everyone that due to SOP and the “new” way things are handled in the House no solution could be passed before January. The markets seemed as if they would hold during all of this but soon after it became clear that nothing was happening the S&P took a dive and hit the days lowest levels.

Later in the day the President's return to the White House was followed by an announcement that the House of Representatives would reconvene Sunday. The return to eleventh hour negotiations was taken as a positive by the markets. The S&P regained all of today's sharp losses by the end of trading to close with only a very small loss.

The Data

Today's release of unemployment data came with a caveat. Many government offices on national, state and local levels were closed due to the holidays so data from as many as 17 states may have been estimated. Initial claims dropped by 12,000 to 350,000. This is below the estimates I saw which were in the range of 360,000. The four week moving average also fell and hit its lowest level since 2008.


Continuing claims for unemployment fell as well, dropping around 32,000 to hit 3.21 million. The effects from Hurricane Sandy are past but the data remains a little choppy. The holidays and the Fiscal Cliff will likely affect this data for another few weeks. Millions are expected to lose benefits after the first of the year and this would give us a drastic drop in our unemployment data.

Total claims climbed this week by nearly 75,000 to 5.475 million. This number is still is above the pre-Sandy level and could be a warning sign. Hiring may be in decline while employers keep their eye on how the Cliff resolves. The consumer confidence numbers reflect just how deep the uncertainty goes. The reading, 65.1, was well below estimates and last months 71.5.



New home sales was reported at 377,000. This is up 4.4% from last year and the highest level since 2010. While positive, this is still below the peak of 2008.

Around The World

Asian indexes ended their day higher on upbeat earnings and an eye on Cliff talks. China reported that industrial profits had risen over 22% since last year at this time. This was taken as another sign of a Chinese economy that is returning to expansion. The Nikkei was the real story from the region, reaching new 21 month highs. The Japanese index is being driven by the weakening yen and speculation is that this trend will continue. The new Prime Minister of Japan, Shinzo Abe, has set targets for the USD/JPY at 90 in hopes of further stimulating exports. The yen is currently trading around around 86 after another strong up day but leaves plenty of room for this trade to unfold.


European shares also moved higher on thin trading. The FTSE 100 brushed up against it's long term resistance before giving up some of today's ground. In European news the ECB is standing firm on requirements for sovereign debt purchases and Italy met its targets for 2013 debt sales but all other focus is on the Fiscal Cliff. The Euro continued to strengthen against the dollar and is making a move to retest the highs we saw last week.


Oil And Gold

Oil traded to the downside today but remains near the top of its 2 month trading range and recent highs. The oil index also traded to the downside, dropping briefly below the short term moving average. The index found support and bounced back, forming a possible hammer doji. MACD analysis suggests that the recent highs around 1265 will be retested. However, before that can happen the index will have to move back above 1250 resistance. Tomorrow could see choppy oil trading as Fiscal Cliff whispers compete with world macro economic data.


Gold traded mixed today, small declines early in the day were matched by equally small gains in afternoon trading. Gold is still down around $1650 and below support. The Gold Index is continuing its bounce from the long term trend line. Gold stocks performed strongly today compared to the general markets, moving the Gold Index back above the support of a retracement line. On the long term charts bearish momentum is in decline and convergent with a bottom forming in the index around $175. Long term targets for the Gold Index are around $225 and $250. Shorter term upside targets are around $200, provided we don't go over the cliff and take the world with us.


Story Stocks

Most of today's stock news, headlines, reporting and conjecture was firmly centered on the Fiscal Cliff. Some, at least, was focused on stocks and business. Marvell was one company that wished it wasn't in the news. Yesterday a jury ruled that the chip maker had indeed infringed on the patents of Carnegie Melon University and award the school over $1 billion in damages. A downgrade of the company came on the heels of the ruling and helped to drive shares of the stock down by more than 3%. The stock has been trending down all year, driven by declining sales and global outlook. The stock's drop today took it to a new intra-day low on high volume. Marvell has announced plans to fight the ruling but there will likely not be anything decided for some months or longer.

Marvell, daily

Domino's Pizza delivered good returns to its investors today. The pizza delivery chain has been trending up strongly since 2008 in the long term and since early this summer in the near term. The stock reached a new high today on comments from Oppenheimer, citing potential for revenue and earnings growth in the long term. The stock gained more than 1% today but fell before the end of trading to close below the recent all time high.

Domino's, daily

The Indexes

The Fiscal Cliff has thrown such a shadow over the markets that it is what is driving world stock prices at this time. Underlying trends, economic data and outlooks are all being thrown by the wayside while we all await the return to negotiations and eventual solution. Many institutional and hedge fund traders are out of the markets now with the end of the year so close and they may have it right. The wild ride the markets are taking us on at the moment are completely driven by knee-jerk reactions to whatever the latest whisper, rumor or political grand standing has told us. For example, this morning the rumor that the President's return to Washington was based on a new compromise offer had the markets up, if only mildly. Only an hour or so later statements from Sen. Reid, which did nothing but lay blame and point fingers, sent the markets crashing. Then later the wild ride to today's low levels was curbed by the Presidents arrival home and an announced recall of Congressmen for a reconvening of the negotiations.

Today's candle on the S&p is potentially very significant. The long legged doji and hammer signal is confirming that long term support remains above the long term ema in the 1400-1410 range. This candle would usually be a very telling sign for me but the combination of the holiday week and the Fiscal Cliff make judging near term and long term direction nerve wracking. The markets are moving on fear, conjecture, rumors and hearsay associated with the budget negotiations. There is no way to know what is going to come out next and which way the market is going to turn. Is the President going to slam the republicans, are the republicans going to slam the democrats, is there a new proposal, have the talks deteriorated again? The best thing that can happen for the stock markets in mind is for the Cliff issue to go away, and I don't mean disappear, I mean resolved. Even if tax hikes and spending cuts hurt Americans we need it resolved so that we can move forward.

S&P 500, daily

At this time it looks like the S&P 500 has entered a possible trading range with a bottom at 1400 and potential top around 1450. This really can't be confirmed until after the holiday and trading volumes return . Momentum has dipped into bearish territory on the daily charts but so far has remained weak. If bearish momentum builds and the index drops below 1400 than a retest of 1350 is likely. The MACD convergence with the indexes previous dip to 1350 in November adds some weight to this theory. On the other hand positive budget resolution could send the markets up to test the upper end of the range.

S&P 500 daily with MACD

Longer term the index is still in an uptrend. The index is still well above the uptrend line and the long term 150 day EMA. If this trend stays intact and the Cliff talks come to a satisfactory and quick conclusion this weeks selling pressure will be seen in hindsight as a great buying opportunity.

S&P 500 weekly

The VIX made a big move today as well. The index, which has been near the top of the sage range pushed up and broke through the 20 level. The early rise in fear was reversed in tandem with the S&P 500's climb back up from the day's low. A break above, and a close above, 20 will be a bearish signal longer term. It really is a wonder the VIX is not already at elevated levels. The lack of progress on the Cliff and it's expected repercussions to the US and world economy should have sent the VIX skyrocketing. Perhaps this means that the bulk of professional traders are not as worried about the Cliff as the media is. The OptionsXpress short put/call ratio climbed to .94 and made a new 3 month high. The last peak to this level was in October, just before the start of the October/November decline.

The VIX daily

The Dow Jones Index made a doji candle similar to the S&P today. This candle confirms that some support exists at the critical 13000 level. This could be the bottom of a range but with the Cliff at such a head I just can't be sure. A drop below could easily take the index down to 12,750 and then 12,500. Looking back at the Dow drop to 12,500 in November we can see a MACD convergence similar to the one I have noted in the S&P. This suggests to me that a retest, or at least a pullback, is in the cards.

Dow Jones Index daily

Without a doubt the Fiscal Cliff will be driving prices overnight, tomorrow and into the new year. Until a definitive plan is ratified the market is likely to remain range bound and volatile. Tomorrow be on the look out for more political posturing that could send the indexes down again. International markets should be active overnight tonight and into tomorrows trading. There is a new round of global macro economic data coming from China and the EU that could add even more volatility to trading in the US. At home we are expecting PMI data, pending home sales and energy inventories.

This is my last wrap of the year. It's been a great year and I am looking forward to another one whether the markets are moving up or down. The Fiscal Cliff has been a bur under the saddle for us all this year but it will soon be gone. We will be able to look back on it and say “I remember that, it seemed like such a big hurdle”. Until then...

Keep trading, keep trying and remember the trend!

Thomas Hughes


New Plays

The Song is Almost Over

by James Brown

Click here to email James Brown

Editor's Note:

The end of 2012 and the fiscal cliff deadline are both fast approaching. Politicians in Washington are still slow dancing while stocks do the fiscal-cliff cha-cha. Unfortunately, the song is almost over. It could turn into a game of musical chairs.

The volatility in the market today was totally driven by fiscal cliff headlines. Equities could see similar volatility tomorrow. We are not adding any new trades tonight. Let's hope some sort of deal gets done this weekend.


In Play Updates and Reviews

Stocks Teeter On the Cliff

by James Brown

Click here to email James Brown

Editor's Note:
Thursday produced a volatile market as traders reacted to every headline regarding the fiscal cliff. Comments from Senate Majority Leader Mr. Reid suggesting that the nation would go over the cliff fueled the market's sell-off. Then stocks reversed higher on news that congress would meet again this Sunday in a last minute effort to try and get a deal done before the year ends.

PEGA and STMP were stopped out. NUAN was removed. TEVA was triggered.

Current Portfolio:


BULLISH Play Updates

Banner Corp. - BANR - close: 30.53 change: +0.24

Stop Loss: 29.40
Target(s): 34.00
Current Gain/Loss: + 0.1%

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:
12/27/12: BANR tagged a new two-week low, beneath technical support at its 30-dma but managed to bounce back into positive territory. The long-term trend is still up but right now that trend is in jeopardy with BANR hovering at the bottom of its bullish channel. I am not suggesting new positions at this time.

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

*Small Positions*

current Position: Long BANR stock @ $30.49

12/15/12 new stop loss @ 29.40
11/21/12 out trade opened on the gap higher.



Ball Corp. - BLL - close: 44.64 change: -0.27

Stop Loss: 43.85
Target(s): 48.00
Current Gain/Loss: + 1.8%

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:
12/27/12: BLL dipped to technical support at its rising 40-dma before bouncing back. Shares trimmed their losses to -0.6% by the closing bell. I am not suggesting new positions at this time.

current Position: Long BLL stock @ $43.85

12/20/12 new stop loss @ 43.85
12/12/12 new stop loss @ 43.45
11/24/12 new stop loss @ 43.25
11/17/12 new stop loss @ 42.55
11/06/12 triggered @ 43.85



Cree, Inc. - CREE - close: 33.49 change: -0.06

Stop Loss: 32.45
Target(s): 39.00
Current Gain/Loss: - 0.8%

Entry on December 11 at $33.75
Listed on December 10, 2012
Time Frame: 6 to 8 weeks
Average Daily Volume = 1.3 million
New Positions: see below

Comments:
12/27/12: CREE traded down toward the $33.00 level before bouncing. The stock pared its losses to just -0.17%. CREE remains under new short-term resistance at its simple 10-dma. I am not suggesting new positions at this time.

Earlier Comments:
If this rally continues CREE could see a short squeeze. The most recent data listed short interest at 17% of the 113 million-share float. If triggered our multi-week target is $39.00. FYI: The Point & Figure chart for CREE is bullish with a $42 target.

current Position: long CREE stock @ $33.75

12/15/12 new stop loss @ 32.45



Dunkin' Brand Group - DNKN - close: 32.39 change: +0.04

Stop Loss: 31.25
Target(s): 35.75
Current Gain/Loss: - 0.3%

Entry on December 24 at $32.50
Listed on December 22, 2012
Time Frame: 6 to 8 weeks
Average Daily Volume = 1.1 million
New Positions: see below

Comments:
12/27/12: DNKN pulled back toward short-term support near $32 and its 20-dma before bouncing. DNKN actually managed to eke out a small gain. While I would be tempted to buy today's intraday bounce readers may want to wait. Consider waiting to see if both DNKN and the S&P 500 index open positive before considering new positions.

FYI: The Point & Figure chart for DNKN is bullish with a long-term $64 target.

current Position: Long DNKN stock @ $32.50

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

Long 2013 Mar $35 call (DNKN1316c35) entry $0.65

12/24/12 triggered @ $32.50



Fortune Brands Home & Security - FBHS - close: 29.13 change: +0.14

Stop Loss: 29.25
Target(s): 34.00
Current Gain/Loss: unopened

Entry on December xx at $ xx.xx
Listed on December 20, 2012
Time Frame: 6 to 8 weeks
Average Daily Volume = 1.5 million
New Positions: Yes, see below

Comments:
12/27/12: FBHS traded beneath its simple 50-dma on an intraday basis. The stock managed a sharp intraday rebound late this afternoon that actually left shares up +0.4% by the closing bell.

Right now we are still on the sidelines waiting for a breakout higher. I am suggesting a trigger to open bullish positions at $30.60. If triggered our multi-week target is $34.00.

Trigger @ 30.60

Suggested Position: buy FBHS stock @ (trigger)



Juniper Networks, Inc. - JNPR - close: 19.79 change: -0.10

Stop Loss: 19.25
Target(s): 23.50
Current Gain/Loss: - 1.8%

Entry on December 18 at $20.15
Listed on December 17, 2012
Time Frame: 6 to 8 weeks
Average Daily Volume = 7.8 million
New Positions: see below

Comments:
12/27/12: JNPR found support at its simple 300-dma again. Monday's low was $19.42 and today's low was $19.43. I am cautious on JNPR at the moment. I am not suggesting new positions at this time.

Earlier Comments:
The stock can be somewhat volatile so I am suggesting we keep our position size small. FYI: The Point & Figure chart for JNPR is bullish with a $26.00 target.

current Position: Long JNPR stock @ $20.15



SouFun Holdings - SFUN - close: 23.94 change: +0.36

Stop Loss: 22.85
Target(s): 27.25
Current Gain/Loss: - 1.0%

Entry on December 24 at $24.19
Listed on December 22, 2012
Time Frame: 6 to 8 weeks
Average Daily Volume = 357 thousand
New Positions: see below

Comments:
12/27/12: Today looks almost identical to yesterday for SFUN. The stock was up in the morning. It saw a swoon midday. Then there was a late afternoon rally again. Shares of SFUN managed to outperform the market with a +1.5% gain. If both SFUN and the S&P 500 index open positive tomorrow I would open new positions here. Or you could wait for a rally past $24.25 as your new entry point.

Earlier Comments:
There is a growing chance that SFUN could see a short squeeze. The most recent data listed short interest at nearly 19% of the very small 14.2 million share float.

I do consider this an aggressive, higher-risk trade. Therefore I am suggesting we keep our position size small to limit our risk.

*Small Positions*

current Position: Long SFUN stock @ $24.19



Suntech Power - STP - close: 1.33 change: +0.06

Stop Loss: 1.09
Target(s): 1.48
Current Gain/Loss: +19.8%

Entry on December 19 at $1.11
Listed on December 18, 2012
Time Frame: 6 to 8 weeks
Average Daily Volume = 1.8 million
New Positions: see below

Comments:
12/27/12: STP continues to outperform. The stock added +4.7% today. Our trade is approaching +20%. Readers may want to start taking profits early. The newsletter is still aiming for $1.48.

Please note our new stop loss @ 1.09.

Earlier Comments:
This can be a volatile stock. I am suggesting we keep our position size small to limit our risk.

*Small Positions*

current Position: long STP stock @ $1.11

12/27/12 new stop loss @ $1.09



Tenneco Inc. - TEN - close: 34.20 change: +0.10

Stop Loss: 32.90
Target(s): 37.00
Current Gain/Loss: + 3.2%

Entry on December 12 at $33.15
Listed on December 04, 2012
Time Frame: 6 to 8 weeks
Average Daily Volume = 517 thousand
New Positions: , see below

Comments:
12/27/12: TEN bounced off of short-term technical support at its 10-dma and closed in positive territory. I am raising our stop loss to $32.90. I am not suggesting new positions at this time.

Earlier Comments:
We need to be patient with TEN. The stock does not move very fast.

*Small positions*

current Position: Long TEN stock @ $33.15

12/27/12 new stop loss @ 32.90
12/22/12 new stop loss @ 32.45
12/15/12 new stop loss @ $31.85



BEARISH Play Updates

Teva Pharmaceuticals - TEVA - close: 36.95 change: -0.47

Stop Loss: 38.05
Target(s): 35.10
Current Gain/Loss: + 0.7%

Entry on December 27 at $37.20
Listed on December 22, 2012
Time Frame: 2 to 4 weeks
Average Daily Volume = 6.9 million
New Positions: see below

Comments:
12/27/12: TEVA has broken down to new 2012 lows. The plan was to open positions at $37.25. Yet TEVA gapped open lower at $37.20. The stock fell to $36.75 intraday before trimming its losses.

Earlier Comments:
This is somewhat of an aggressive trade. Short interest has probably increased over the last few days. The $35.00 level could be support as it was back in the year 2011. We will set a short-term target at $35.10 to cover. Readers will want to seriously consider using the put options to limit your risk.

*Small Positions*

current Position: short TEVA stock @ $37.20

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

Long 2013Jan $37.50 PUT (TEVA1319m37.5) entry $0.80



CLOSED BULLISH PLAYS

Nuance Communications - NUAN - close: 22.08 change: -0.08

Stop Loss: 22.40
Target(s): 25.75
Current Gain/Loss: unopened

Entry on December xx at $ xx.xx
Listed on December 19, 2012
Time Frame: 6 to 8 weeks
Average Daily Volume = 2.2 million
New Positions: see below

Comments:
12/27/12: We have been waiting for NUAN to breakout past resistance near $23 and its 200-dma. It seems this breakout is unlikely to happen any time soon so we are removing NUAN as a candidate.

Trade did not open.

12/27/12 removed from the newsletter

chart:



Pegasystems Inc. - PEGA - close: 22.64 change: -0.16

Stop Loss: 22.40
Target(s): 23.75
Current Gain/Loss: + 5.4%

Entry on December 10 at $21.25
Listed on December 04, 2012
Time Frame: 6 to 8 weeks
Average Daily Volume = 257 thousand
New Positions: see below

Comments:
12/27/12: I cautioned readers yesterday that PEGA looked vulnerable. The stock hit our stop loss at $22.40 today.

closed Position: Long PEGA stock @ $21.25 exit $22.40 (+5.4%)

12/27/12 stopped out
12/22/12 new stop loss @ 22.40
12/20/12 new stop loss @ 21.90
12/18/12 adjust exit target to $23.75
12/17/12 new stop loss @ $21.40
12/15/12 new stop loss @ $20.95
12/12/12 new stop loss @ $20.49

chart:



Stamps.com Inc. - STMP - close: 25.26 change: +0.10

Stop Loss: 24.80
Target(s): 29.50
Current Gain/Loss: - 5.5%

Entry on December 18 at $26.25
Listed on December 11, 2012
Time Frame: 4 to 8 weeks
Average Daily Volume = 250 thousand
New Positions: see below

Comments:
12/27/12: The stock market's sharp decline this morning helped push STMP below support at $25.00. The stock fell to its 200-dma before bouncing back this afternoon. Our stop loss was hit at $24.80.

Earlier Comments:
Don't forget that STMP can be a volatile stock and we want to keep our position size small to limit our risk.

*Small Positions*

closed Position: Long STMP stock @ $26.25 exit $24.80 (-5.5%)

12/27/12 stopped out
12/26/12 adjust the stop loss to $24.80

chart: