Option Investor
Newsletter

Daily Newsletter, Monday, 4/22/2013

Table of Contents

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

Market Wrap

Monday Blues Don't Last

by Thomas Hughes

Click here to email Thomas Hughes
Introduction

The global markets opened with relative quiet today. Not much news of note came from Asia or Europe save expectations for U.S. economic data and earnings. The U.S. futures trading was mildly to the positive all morning but started moving lower about 30 minutes before the open. After the bell the S&P lost a point or two in the opening minutes and held that level through the 10 AM hour and the release of the existing home sales figures. The figures were disappointing to say the least but did not impact the market. In fact, the market seemed to shrug it off without even a second glance. Eyes immediately turned to potential positives within the number that could lead to more activity the housing market.


This week is big for data, the hard part about today is it is the first day of the week. We can take a look at what is on the schedule, get an idea of what we think is going to happen but then we have to wait and see. Today was light on the economic front but packed a punch with earnings. Tomorrow the data flow increases with new home sales and a reading of the housing price index. The big event on the economic calendar happens on Friday. We get the first estimate of Q1 GDP. Estimates range from the mid 2% to the low 3% range. I am leaning toward the high end of that range due to the Q1 economic trends. Joblessness was down and housing was up. Remember that the weakness we have been seeing the last few weeks happened in the 2nd quarter.


Earnings reports were strong today and will remain strong today. What banks and financial institutions that have not yet reported are most likely reporting this week as well as international giants like Caterpillar who reported today. Caterpillar failed to meet expectations and guided their stock lower but was still able to pull off a pretty decent day. The stock has been trading around a level that had potential to provide support. In a down trending market the earnings report would have sent the stock through that support. However, evidence in the report, company outlook and the CEO's statements suggest a bottom is or is about to be reached by Caterpillar. Not only did CEO Oberhelman state a bottom was forming in the mining side of the business he went on to say that he was the most optimistic he's been in over two years. All this combined to boost CAT shares by over 3%. MACD and stochastic support the possibility of a bottom but confirmation is required. Ingersoll Rand reports tomorrow and is expected to report $0.41 per share versus $0.76 in the previous quarter.

Caterpillar

Existing home sales, expected to rise by about 1%, dropped -0.6% in March. This unexpected drop, like I mentioned, did not have the expected impact on the market. A string of bad reports over the last month are blamed on the recent correction in the market and yet this number barely moved the S&p a full point after its release. In fact, you could say that the market found it's bottom for today's trading right after the release. The reason for the drop in sales is being blamed on the lack of inventory. Less homes for sale less homes being sold. The tight market is also causing prices to rise, another reason for the decline in sales. The general consensus of opinion from internet and TV articles is that this is good, or at least potentially good. If it leads to renewed activity in the housing market it is good. If it leads to a slowdown in housing then it is something else. The Homebuilders Spyder traded to the upside today but was capped below the 30 day moving average. The ETF is still trading above the longer term trend and has potential to move higher. A break above the moving average could take it above the long term resistance near $31. Housing data tomorrow and Wednesday, jobless claims and GDP on Friday will either help this market break out or provide resistance going into the near term.

Homebuilder Spyder

Halliburton reported an earnings beat and the stock jumped 3%. The consensus estimates were for EPS around $0.57, the actual results were for adjusted earnings of $0.67. Along with the good number was positive guidance for the rest of the year. Company executives are expecting earnings growth in the low double digits relative to the previous year. The stock had reached and possibly breached a long term support/resistance line Friday, today's move is a confirmation of the existence of support near $37.50. The jump was met with resistance at the short term moving average. At best Halliburton is moving up towards the top a trading range, at worst it will retest support at $37.50. MACD and stochastic indicator some support exists at $37.50, the volume spike today agrees. There is a lot of resistance ahead for this stock, the bounce may not go far.

Halliburton

Some buyers came into the oil market today. The price of crude rose by more than 1%. Brent also benefited from the bounce but natural gas dropped by over 3%. The oil index climbed in today's trading as well but is indicated down for the short term. Convergences of MACD peaks suggest the index will at least retest the recent lows. This may form a bottom but it is way to early to tell that. Economic data will have to improve with real signs of jobs and consumers, globally, for there to be a real marked improvement in oil demand or prices. The Oil Index looks good to return to support around 1250 where it may enter a range until further developments in oil demand and profit outlook for oil companies.

Oil Index

Apple is on the list for earnings tomorrow. This is the most poo pooed stock on the exchange today. The run up to $700 and drop to $400 was a stunning thing to watch. Tomorrow the company is expected to report earnings around $10.30 per share, well below the previous quarters $13.81. Expectations are super low and perhaps an easy mark for Apple to beat. This is Apple we're talking about. Just because the iPhone 5 is not as big a hit as expected Apple still makes the best devices and has the best operating system. I think Apple could surprise the markets and beat estimates. Even if Apple only comes in line with estimates it will still be a relief to Apple investors. Earnings are reported after the bell Tuesday and could lead to a short term relief rally in Apple.

Apple

The Indexes Today

I tend to watch the S&P 500 most closely. It is the index I like and the one I trade. This does not make it the only index I should watch and I am reminded of this weekly when I read the market wraps of Linda and the others. I know Linda is a Russel follower and focuses on that market for her wraps so that is what I will do today as well. For a personal point of reference I will start with a quick update of the S&P. After the opening the index fell a few points, hit the morning low after the existing home sales figures and then rallied into the afternoon. Once the day's high was hit the index trade sideways into the close. Today's candle formed above the short term moving average and continues the bounce that began last Friday. Last week, Thursday and Friday, the S&P hit two week lows that brought it very close to touching the long term up trend line. Friday's action turned positive and moved up from that trend line but did not regain the upside of the moving average. The fact Friday was an up day was bullish but the failure to regain the moving average was a negative. That negative was removed today with a move and close above the average.

S&P 500

Where is the S&P now? Now the S&P is in a mild bounce from the long term trend. It is making this bounce very close to the resistance of all-time high territory but a bounce it is. The potential is high for a reversal pattern to form at the current level but it is not forming yet. The most recent low was a little lower than the previous low and perhaps a precursor to other indications. A move back above 1572 would be a good sign for the bulls.

The Russel 2K performed a little differently and is in a little different position than the S&P. The S&P is still trending up and may have entered a reversal zone, the Russel broke trend over a month ago and may already be confirming a reversal. My first line suggested a head and shoulders may have been forming but this line did not take into account the lower low. Moving my line up to the bottom of the highest low it now looks like the RUT could be breaking down from a double top. There is currently support around 900 but a break below that support could bring this index down to the long term trend around 850-865.

Russel 2K daily

Even with the double top in play the long term trend in the RUT is still up. If the top plays out to its full extent the downside targets are 50 points below the current level, in line with the long term trend and a good place for potential support bounces to take place. MACD and stochastic on the long term charts are bearish and indicating down at this time but again, strong support exists just below the current levels. The long term 150 day moving average and the long term up trend line are strong areas of support for the RUT, especially when they coincide with each other. The RUT may experience more weakness in the coming weeks if support at 900 does not hold. For the long term, the trend remains up and I am in the buy-the-dip crowd until the long term trend is broken.

Russel, weekly

The transports are also confirming a short term top. The double top I pointed out in a Thursday wrap a few weeks ago has been confirmed since with a lower high and a move below the short term moving average. There has also been a move below the base line of the chart pattern but so far it has not held. The difference in the most recent break and the previous is that this time it also broke the up trend. This has some short term bearish potential at least. Indicators on the daily charts are neutral, longer term they are bearish. At this time the transports look like it is in a range with a potential top around 6,250 and bottom around 5,750.

Transportation Average

The week ahead is going to be a full one. There are a lot of earnings releases to sort through and some very important economic data. Will they be enough to lift the indexes back up to the recent highs? It is possible and even likely. The RUT and the Transports may have begun their reversal but the S&p has not. It is likely it will work its way up to retest the all time highs set two weeks ago before beginning any serious retreat. Earnings fro the likes of Texas Instruments, who beat estimates, will impact early trading tomorrow. Other early market events include China and European PMI numbers.

Until then, remember the trend!

Thomas Hughes


New Plays

I.T. Consulting

by James Brown

Click here to email James Brown


NEW BEARISH Plays

Virtusa Corp. - VRTU - close: 22.38 change: -0.34

Stop Loss: 22.65
Target(s): 20.10
Current Gain/Loss: unopened

Entry on April -- at $--.--
Listed on April 22, 2013
Time Frame: 3 to 4 weeks
Average Daily Volume = 116 thousand
New Positions: Yes, see below

Company Description

Why We Like It:
VRTU is in the information technology consulting business. The stock delivered an impressive rally from $15 in December to almost hit $25 in March. Back in late March the stock was downgraded a couple of times and its upward momentum was broken. Now traders appear to be selling into strength as they lock in profits. VRTU just broke down below its simple 50-dma today and looks ready to break down below the $22.00 level soon.

More aggressive traders could launch bearish positions immediately and use a stop above the 20-dma. I am suggesting a trigger to open bearish positions at $21.80, which is just below today's low. We'll use a stop at $22.65. Our initial target is $20.10. I would keep our position size small to limit our risk.

Trigger @ 21.80 *Small Positions*

Suggested Position: short VRTU stock @ (trigger)

Annotated chart:




In Play Updates and Reviews

Bulls Are Not Giving Up

by James Brown

Click here to email James Brown

Editor's Note:
The U.S. market rallied again with some help from gains in Europe and Asia.

FLWS was triggered.
CASY was stopped out.


Current Portfolio:


BULLISH Play Updates

Big Lots Inc. - BIG - close: 36.62 change: +0.11

Stop Loss: 34.75
Target(s): 41.50
Current Gain/Loss: unopened

Entry on April -- at $--.--
Listed on April 20, 2013
Time Frame: 3 to 6 weeks
Average Daily Volume = 650 thousand
New Positions: Yes, see below

Comments:
04/22/13: BIG continues to tick higher but it has not yet broken out past its early March high. I don't see any changes from my weekend comments.

I am suggesting a trigger to open bullish positions at $36.80. If BIG does break out higher it could see a short squeeze. The most recent data listed short interest at 17% of the 52.7 million share float.

If triggered our target is $41.50. The Point & Figure chart for BIG is bullish with a long-term $53.00 target.

Trigger @ 36.80

Suggested Position: buy BIG stock @ (trigger)



1-800-Flowers.com - FLWS - close: 5.38 change: +0.03

Stop Loss: 5.09
Target(s): 5.95
Current Gain/Loss: - 0.6%

Entry on April 22 at $ 5.42
Listed on April 20, 2013
Time Frame: exit PRIOR to earnings on April 30th
Average Daily Volume = 139 thousand
New Positions: see below

Comments:
04/22/13: Fortunately we did not have to wait long for FLWS to hit our entry trigger at $5.41. Shares actually gapped open higher this morning at $5.42. The initial pop higher reversed but traders bought the dip and shares recovered to outperform the S&P 500 with a +0.5% gain.

Earlier Comments:
FLWS can be somewhat volatile so I do consider a more aggressive, higher-risk trade. We will want to keep our position size small. Our target is $5.95. However, the plan will be to exit prior to the April 30th earnings report so we don't have much time. The Point & Figure chart for FLWS is bullish with a long-term $10.75 target.

*Small Positions*

current Position: Long FLWS stock @ $5.42



The Kroger Co. - KR - close: 34.21 change: +0.50

Stop Loss: 32.40
Target(s): 36.50
Current Gain/Loss: +1.1%

Entry on April 19 at $33.85
Listed on April 18, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 4.2 million
New Positions: see below

Comments:
04/22/13: Positive analyst comments helped shares of KR outperform the market today. The stock rallied to a new multi-year high on today's +1.48% gain.

Earlier Comments:
Shares of KR are now hitting new 13-year highs. We should take note of its old highs. The closing high was $34.16 and the intraday high was $34.91 from March 1999. These levels could be potential overhead resistance. Yet it was so long ago they may not matter anymore. If you're worried about KR seeing resistance at these levels then you may want to wait for KR to close above these levels before initiating positions.

FYI: KR should begin trading ex-dividend on May 13th, 2013. The quarterly dividend should be 15 cents.

current Position: buy KR stock @ $33.85



Starz - STRZA - close: 22.47 change: +0.51

Stop Loss: 20.85
Target(s): 24.50
Current Gain/Loss: +3.3%

Entry on April 10 at $21.75
Listed on April 06, 2013
Time Frame: exit PRIOR to earnings on May 9th
Average Daily Volume = 1.6 million
New Positions: see below

Comments:
04/22/13: We have been patiently waiting for STRZA to breakout from its sideways consolidation. It looks like the breakout has begun today with a +2.3% gain and a new all-time high. Readers may want to adjust their stop loss higher.

*Small Positions*

current Position: Long STRZA stock @ $21.75

04/17/13 new stop loss @ 20.85
04/13/13 new stop loss @ 20.65
04/10/13 trade opened on gap higher at $21.75
04/09/13 adjust entry trigger from $21.50 to $21.55



The TJX Companies - TJX - close: 47.14 change: +0.14

Stop Loss: 46.45
Target(s): 52.00
Current Gain/Loss: - 1.3%

Entry on April 09 at $47.75
Listed on April 08, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 4.7 million
New Positions: see below

Comments:
04/22/13: TJX eked out a +0.29% gain but the rally was stymied at the stock's simple 20-dma. I remain very cautious here. We're not suggesting new positions.

Earlier Comments:
Our target is $52.00. However, there is a risk that the $50.00 mark could be round-number resistance.

current Position: Long TJX stock @ $47.75

04/18/13 today's decline is bad news. TJX looks ready to hit our stop at $46.45 soon.



BEARISH Play Updates

The ADT Corp. - ADT - close: 43.84 change: +0.13

Stop Loss: 44.65
Target(s): 38.00
Current Gain/Loss: unopened

Entry on April -- at $--.--
Listed on April 16, 2013
Time Frame: exit PRIOR to earnings on May 1st
Average Daily Volume = 3.7 million
New Positions: Yes, see below

Comments:
04/22/13: At first glance ADT closed unchanged on the session but the stock began trading ex-dividend this morning. Shares managed to bounce back before failing at short-term resistance near $44.00 again.

I am suggesting a trigger to open bearish positions at $42.50. If triggered our target is $38.00. More conservative traders may want to exit near $40.00 instead. The Point & Figure chart for ADT is bearish with a $35 target.

Keep in mind that we plan to exit prior to earnings on May 1st.

Trigger @ $42.50

Suggested Position: short ADT stock @ (trigger)



BroadSoft, Inc. - BSFT - close: 24.10 change: -0.46

Stop Loss: 25.15
Target(s): 20.75
Current Gain/Loss: - 0.2%

Entry on April 11 at $24.50
Listed on April 09, 2013
Time Frame: exit PRIOR to earnings in early May
Average Daily Volume = 854 thousand
New Positions: see below

Comments:
04/22/13: The good news here is that Friday's 46-cent bounce was erased today. Traders sold the rally this morning and again when BSFT bounced this afternoon. Nimble traders could use a new relative low as an alternative entry point.

Over the weekend we were concerned that BSFT looked poised to bounce so we closed the May $25 puts this morning at the opening bell.

Earlier Comments:
Please note that we do want to limit our position size to reduce our risk. The most recent data listed short interest at 21% of the small 27.6 million-share float. Thus if BSFT were to suddenly turn higher it could spark a short squeeze. Furthermore there has been some speculation that BSFT is a takeover target. You may want to consider buying a put option instead of shorting the stock as a way to limit your risk.

*Small Positions*

current Position: short BSFT stock @ $24.50

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

May $25 put (BSFT1318Q25) entry $2.60 exit $2.20 (-15.3%)

04/22/13 closed the May $25 put position at the open
04/20/13 new stop loss @ 25.15,
prepare to exit the May $25 puts immediate on Monday (04/22)



Cabot Microelectronics - CCMP - close: 32.58 change: +0.04

Stop Loss: 33.40
Target(s): 30.25
Current Gain/Loss: +0.3%

Entry on April 03 at $32.69
Listed on April 02, 2013
Time Frame: exit PRIOR to earnings on April 25th
Average Daily Volume = 104 thousand
New Positions: see below

Comments:
04/22/13: CCMP failed to keep up with the bounce in the semiconductor sector today. That's good news if you're bearish.

We are running out of time. CCMP is due to report earnings on April 25th and we do not want to hold over the announcement. I am not suggesting new positions at this time.

Earlier Comments:
We want to keep our position size small.

*Small Positions*

current Position: short CCMP stock @ $32.69

04/18/13 new stop loss @ 33.40



Computer Sciences Corp. - CSC - close: 44.31 change: +0.08

Stop Loss: 47.25
Target(s): 42.00
Current Gain/Loss: + 3.7%

Entry on April 15 at 46.00
Listed on April 13, 2013
Time Frame: 4 to 6 weeks
Average Daily Volume = 1.5 million
New Positions: see below

Comments:
04/22/13: Monday proved to be a quiet session for shares of CSC. Traders did buy the dip intraday. I suspect we are going to see CSC bounce soon. Look for resistance near $46 or its simple 10-dma.

current Position: short CSC stock @ $46.00

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

Long May $45 PUT (CSC1318Q45) entry $1.95

04/20/13 new stop loss @ 47.25



Electronic Arts - EA - close: 17.28 change: +0.19

Stop Loss: 17.55
Target(s): 15.00
Current Gain/Loss: -3.2%

Entry on April 18 at $16.75
Listed on April 17, 2013
Time Frame: exit PRIOR to earnings on May 7th
Average Daily Volume = 4.0 million
New Positions: see below

Comments:
04/22/13: Hmm... traders bought the dip in EA again. The stock outperformed the broader market with a +1.1% gain. Shares are nearing what should be short-term resistance at $17.50. I am not suggesting new positions at this time.

current Position: short EA stock @ $16.75

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

Long May $17 PUT (EA1318Q17) entry $1.00



CLOSED BEARISH PLAYS

Casey's General Stores - CASY - close: 55.61 change: +1.18

Stop Loss: 55.15
Target(s): 50.00
Current Gain/Loss: -3.8%

Entry on April 17 at $53.15
Listed on April 16, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 249 thousand
New Positions: see below

Comments:
04/22/13: The oversold bounce in CASY continued on Monday and shares outperformed the market with a +2.1% gain. The stock rallied past technical resistance at its 200-dma and 300-dma. Shares also hit our stop loss at $55.15.

closed Position: short CASY stock @ $53.15 exit $55.15 (-3.8%)

04/22/13 stopped out
04/17/13 trade opened on gap down at $53.15. trigger was $53.50

chart: