Option Investor
Newsletter

Daily Newsletter, Wednesday, 6/19/2013

Table of Contents

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

Market Wrap

A Tale Of Two Markets

by Thomas Hughes

Click here to email Thomas Hughes
Introduction

There was big expectation wrapped up into today's FOMC meeting, policy announcement and press conference. Our fearless banking leader, Ben Bernanke, had quite a lot on his shoulders. Not only were we all waiting for the results of the announcement and statements but also for sign of when he would be leaving. After Obama's outing on TV the other day I don't think anyone will be surprised when we start hearing names for new candidates. Now brings the question of tapering back around to the present. Now the subject of conversation has turned to if he's on the way out is he going to leave things as is, or will he set the course for tapering before he leaves.


Traders around the world were a little nervous today. Asian stocks ended the day mixed. Most ended the day down by about 1% or so, the Nikkei was the one bucking the trend. Japanese stocks gained 1.8%. In Europe things were slightly calmer. Indexes here closed in the red but only mildly. The CAC 40 was the leader with a -0.5% decline. There was not much news from either region in a sort of economic calm before the Ben Bernanke storm.

SPX 30 Minute Chart Before

The market went very still right around 2PM. The S&P, which had been trading down about 3 pts all day climbed back to zero in tune with the announcement. After the announcement the index moved briefly into the green before falling back and losing 6 pts. At the same time gold moved lower, the dollar index spiked higher and oil declined. There was not much change to policy and nothing that I took as a move to calm market fears as was hinted at previously.

SPX 30 Minute Chart After

Fed Watch

Economic data was very light today other than the FOMC meeting and only includes mortgage index reading for June 15th. The index moved lower by 3.3% versus a gain of 5% last time. Not much attention was paid to it as all eyes and thoughts were turned to the Fed. In a nutshell the statement says that downside risks are diminished, housing is still improving and that the economy is growing a little faster than previously forecast. There was no change to policy and no change to QE. Based on the current inflation forecast, which was lowered by a half percent, and unemployment forecast tapering wouldn't begin until mid next year. Inflation is expected to run at 1% for this year and then tick up next year reaching the 1.7% level in late 2014. Unemployment is expected to drift lower over the next year until reaching 6.5% around the same time.

During the press conference Bernanke addressed the current policy and tapering. He said that the economic conditions were improving but still warranted the current stimulus. He also said that the committee would provide information on unwinding at the appropriate time. Based on current conditions and outlook he believes tapering could begin as soon as late this year and asset purchases could end by mid 2014. He went on to say that the market should not view economic conditions as triggers but as a threshold. What he meant was that 6.5% unemployment and 2% inflation will not necessarily trigger unwinding but are the conditions that may lead to it. The expected question about President Obama's remarks were brushed aside with a smile. The Dollar Index

The dollar spiked against the basket of world currencies after the announcement. The index had been trading down ahead of the announcement and looked ready to move even lower. The index is roughly in the middle of its 12 month range with strong bearish momentum. The recent decline from the peak last month has left the index oversold at this level. A bounce back could take the index to the 82 or 83 level.

Dollar Index

The yen slid sharply against the dollar on the news. The USD/JPY extended its bounce from the 38.2% retracement, 150 EMA and the 95 support level. This level (95) is the original target value for the yen versus the dollar set by Abe all the way back before he was elected. The Japanese fiscal policy is long term and has long term objectives, it makes sense to find long term support in this pair. There is some resistance ahead in the form of the short term moving average and previously breached Fibonacci. Stochastic is showing the second and stronger signal but a break above resistance would still be needed for a long term bullish outlook. Because the yen slide and dollar strength are being driven by stimulus policy in both countries there is still some downside risk here as well. However, I think we may see more action from the BOJ if the yen looks like it will move below 95.

USD/JPY

The euro also weakened versus the dollar. The EUR/USD fell back from its four month high to trade below the 1.3300 level. Declining momentum and overbought conditions suggest the pair may be at the top of a range and headed lower. If the pair fails to regain the 1.3300 level downside targets exist around 1.3200 and 1.3100.

EUR/USD

Gold Moves Lower

Gold prices have failed to recapture the $1380 level breached last week. The metal was trading to the upside today but only by a few dollars. After the FOMC announcement prices turned red and fell below $1360. It looks like the retest of recent lows around $1326 is eminent. The Gold Index has also moved lower and has now broken through the 78.6% retracement level for the second time. Momentum and stochastic are bearish at this time and point to lower prices. If the Gold Index fails to hold at the current levels a full retracement to the pre-recovery level of $75 is the next target.

Gold Index

Oil Index At Support

Oil prices declined today from its four month high. A bigger than expected build in oil inventories helped put pressure on prices. The oil index has not been matching its underlying commodity and has fallen back to support over the last few weeks while oil prices have moved up. The index is now sitting just above a long term support level with bullish indicators. Support exists at 1,350 with near term resistance at 1,400 and 1,425.

Oil Index

Story Stocks

There were some story stocks today. The early earnings season is underway and companies like Federal Express and Redhat were on tap. Federal Express beat expectactions smartly. Reported earnings of $2.13 per share were about a quarter higher than the consensus estimates. The gains in profits came on increased cost reductions and improved margins. The company cited tepid conditions and lower cost competitors as challenges but states that Fed Ex is positioned for long term growth. Company guidance for the full year was below expectations but that did not stop buyers from stepping in. The stock made a wild ride today as the initial sell-off was met with new buyers who sent prices up through resistance. By days end the stock closed close to where it opened, forming a large doji. I expect to see Fed Ex trade in a range over the near to short term.

Fed Ex

Men's Warehouse hit the headlines today with a highly irregular event. The companies founder and CEO Zimmer was fired this morning ahead of a major shareholder meeting. The meeting was postponed due to the event and company spokesman declined to comment on the why. Share prices took a big hit in early trading but regained most of the losses by the day's end.

Mens Warehouse

Redhat reported earnings after the bell today. The company was expected to earn about $0.21 per share and surprised markets with an exact match. Revenues, sales and subscriptions all grew by double digit numbers and the company expects to see that continue into the rest of the year. The stock traded down during the day but closed off of the lows. After the release prices jumped more than 2%. Indicators are inconclusive at this time but suggest the stock may move up in the near term. Competitor Oracle reports tomorrow.

Redhat

The VIX

The VIX declined today even while the SPX declined. This is a sign that options positions were being sold at the same time as stocks, keeping prices somewhat stable relative to each other. The VIX is moving down from the extreme high levels reached just last week as tapering fears were mounting. Indicators are moving down at this time, the 15 level will be an important potential support level for this index. If the VIX fails to break below 15 it could signal upcoming market reversal.

VIX

The Transports

The transports moved lower today along with the rest of the market. The DJT is now just below the 30 day EMA but above long term support and the point of the previous break out. Near term support exists at 6,250 with longer term support around 6,150. Indicators are still bullish and point to at least a retest of the recent highs near 6,500.

Transports

The S&P 500

The S&P turned volatile following the Fed announcement. After an initial venture into positive territory the index quickly fell back to -6 and then during the press conference dropped even more. Trading was up and down for a while until prices settled down to the days lows just before the close of trading. The move brought the index to just below the short term 30 day EMA but where does it leave us?

The S&P 500 long term up trend is still intact. Today's drop brought the index back down to the long term support of the up trend line and the line from which the index has bounced twice the month already. Since Ben and the FOMC have not altered the long term outlook I see no reason to alter my long term analysis. There have been no changes to policy, GDP growth expectations are improving, tapering is close but not too close and we can expect interest rates to remain low far into the future. The current level, supported by stochastic and MACD analysis, still look good as an entry point.

SPX daily

There is resistance to consider. The index is facing technical resistance at the new all time highs near 1675. There is also the economic conditions. Should data improve substantially the Fed may opt to move quicker than indicated and if it deteriorates the health of the economic recovery comes into question. For now I am looking to the long term trend line for sign of direction. A break below has a near term target of 1575. A bounce will find resistance at 1650, 1675 and 1690. A break above that could take the index up another 100 points. Failure to break above puts the index in danger of reversal.

Long term direction in the market is unclear at this time. At the moment the indexes look good to move up but there is risk in that assessment. The S&P will need to break out to a new high before a fully bullish stance can be taken. Until then the index could trade between resistance and the up trend line, possible testing both levels. Be careful of whipsaws and false signals. Tomorrow will see more unemployment data as well as Philly Fed and Leading Indicators. None of these reports is likely to move the market long term by itself but any could add volatility to tomorrow's session.

Until then, remember the trend!

Thomas Hughes


New Plays

Bullish Biotech

by James Brown

Click here to email James Brown

Editor's Note:

Additional Trading Ideas:

In addition to tonight's new candidate(s), consider these stocks as possible trading ideas and watch list candidates. Some of these may need to see a break past key support or resistance:

(bullish ideas) FNSR, ACAT, STX

(bearish ideas) SLV, GDX



NEW BULLISH Plays

Puma Biotechnology - PBYI - close: 40.01 change: +1.14

Stop Loss: 38.90
Target(s): 44.75
Current Gain/Loss: unopened

Entry on June -- at $--.--
Listed on June 19, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 194 thousand
New Positions: Yes, see below

Company Description

Why We Like It:
PBYI is a biotech firm focused on cancer treatments. The stock has been showing relative strength, especially today. Shares are on the verge of a bullish breakout past resistance at $40.00.

Today's high was $40.49. I am suggesting a trigger to launch bullish positions at $40.60. We do want to keep our position size small. Biotech stocks can be dangerous. The wrong headline with disappointing news about a drug trials or something similar can send a biotech stock gapping lower.

If triggered at $40.60 we'll use a stop loss at $38.90. Our target is $44.75.

Trigger @ 40.60 *Small Positions*

Suggested Position: buy PBYI stock @ (trigger)

Annotated chart:




In Play Updates and Reviews

Fed Sparks Stock Sell-off

by James Brown

Click here to email James Brown

Editor's Note:
The FOMC decision and Bernanke's comments today sparked a market sell-off this afternoon.

ACOR and HPQ were both triggered. I've adjusted a few stop losses tonight.


Current Portfolio:


BULLISH Play Updates

ACADIA Pharmaceuticals - ACAD - close: 18.09 change: -0.34

Stop Loss: 18.20
Target(s): 24.50
Current Gain/Loss: unopened

Entry on June -- at $--.--
Listed on June 15, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 4.1 million
New Positions: Yes, see below

Comments:
06/19/13: The correction in ACAD continues with the stock down three days in a row. We are currently on the sidelines waiting for a breakout past $20.00.

Earlier Comments:
A rally past resistance at $20 could fuel another bout of short covering. The most recent data listed short interest at 14% of the small 49.3 million share float.

I do consider this an aggressive, higher-risk trade because ACAD can be a volatile stock. Therefore we do want to keep our position size small. The June 10th high was $20.09. I am suggesting a trigger at $20.20 to buy the stock. If triggered our target is $24.50.

Trigger @ 20.20 *Small Positions*

Suggested Position: buy ACAD stock @ (trigger)



Acadia Healthcare - ACHC - close: 34.74 change: -0.69

Stop Loss: 33.60
Target(s): 38.50
Current Gain/Loss: - 1.2%

Entry on June 11 at $35.15
Listed on June 10, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 273 thousand
New Positions: see below

Comments:
06/19/13: Hmm... ACHC saw a very brief spike higher this morning and then immediately reversed lower. Shares gave back a good chunk of yesterday's rally. I am not suggesting new positions at this time.

current Position: Long ACHC stock @ $35.15

06/18/13 new stop loss @ 33.60
06/13/13 new stop loss @ 33.35



Acorda Therapeutics - ACOR - close: 34.84 change: -0.11

Stop Loss: 33.40
Target(s): 39.00
Current Gain/Loss: - 1.3%

Entry on June 19 at $35.30
Listed on June 18, 2013
Time Frame: 3 to 8 weeks
Average Daily Volume = 315 thousand
New Positions: see below

Comments:
06/19/13: Our new trade on ACOR has been triggered. Shares spiked higher this morning and hit our entry trigger at $35.30. Unfortunately, shares spent the rest of the day slowly fading lower. Nimble traders could buy a dip or a bounce near $34.00 if the pullback continues. Otherwise I would wait for a new rally past $35.40 before initiating positions.

Earlier Comments:
You will notice on the chart that ACOR can be volatile. The big rally back in April was a reaction to news regarding ACOR's Phase 2 data on its AMPYRA drug. The rally ran out of steam and ACOR eventually gave back all of its gains but the prior trend of higher lows remains intact.

I do consider this an aggressive, higher-risk trade. Biotechs can be very volatile due to headline risk. I am suggesting we keep our position size small.

*Small Positions*

current Position: long ACOR stock @ $35.30



Addus HomeCare - ADUS - close: 19.85 change: -0.50

Stop Loss: 18.49
Target(s): 24.00
Current Gain/Loss: -1.5%

Entry on June 17 at $20.15
Listed on June 15, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 178 thousand
New Positions: see below

Comments:
06/19/13: ADUS just gave back about two-thirds of yesterday's gains but it's worth noting that ADUS did bounce off its lows midday. This looks like another rebound off of short-term technical support at its rising 10-dma. I am inching our stop loss higher to $18.49.

*small positions*

current Position: Long ADUS stock @ $20.15

06/19/13 new stop loss @ 18.49



Delphi Automotive - DLPH - close: 52.09 change: +0.16

Stop Loss: 49.75
Target(s): 54.50
Current Gain/Loss: + 3.7%

Entry on June 07 at $50.25
Listed on June 06, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 2.3 million
New Positions: see below

Comments:
06/19/13: DLPH managed to ignore the market's weakness today. Shares broke through short-term resistance at the $52.00 level to hit another new high. Tonight we are raising the stop loss up to $49.75.

current Position: Long DLPH stock @ $50.25

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

Long Aug $50 call (DLPH1317H50) entry $2.40

06/19/13 new stop loss @ 49.75
06/17/13 new stop loss @ 49.25



Hewlett-Packard - HPQ - close: 25.43 change: -0.01

Stop Loss: 24.40
Target(s): 29.50
Current Gain/Loss: - 0.9%

Entry on June 19 at $25.65
Listed on June 17, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 22 million
New Positions: see below

Comments:
06/19/13: HPQ was showing relative strength this morning and hit new 52-week highs. The stock also hit our suggested entry trigger at $25.65. Shares did follow the market lower this afternoon and HPQ closed unchanged on the session. If the market continues to dip we could see HPQ slip toward the $25.00 mark. I would still be tempted to buy the stock near $25.00. More conservative traders could wait for a new relative high instead.

current Position: Long HPQ stock @ $25.65

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

Long Aug $25 call (HPQ1317H25) entry $1.70



Ryanair Holdings - RYAAY - close: 49.90 change: -0.06

Stop Loss: 48.95
Target(s): 55.00
Current Gain/Loss: - 1.2%

Entry on June 14 at $50.50
Listed on June 08, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 319 thousand
New Positions: see below

Comments:
06/19/13: You could argue that only losing six cents on today's session is a win by the bulls in RYAAY. I am concerned that today's move looks more like a failed rally at $51.00 and RYAAY's short-term trend of higher highs instead. I am not suggesting new positions. More conservative traders may want to raise their stops closer to $49.40. I am inching our stop loss up to $48.95.

Earlier Comments:
The plan was to keep our position size small.

*Small Positions*

current Position: Long RYAAY stock @ $50.50

06/19/13 new stop loss @ 48.95



Spirit Airlines - SAVE - close: 33.43 change: +0.44

Stop Loss: 30.95
Target(s): 34.00
Current Gain/Loss: +10.5%

Entry on May 28 at $30.25
Listed on May 25, 2013
Time Frame: 8 to 9 weeks
Average Daily Volume = 686 thousand
New Positions: see below

Comments:
06/19/13: SAVE ignored the market's weakness today and kept its rally alive with a +1.3% gain. This is another new record high for the stock. Shares hit $33.75 intraday. Our target exit $34.00. More aggressive traders may want to aim higher instead. The simple 20-dma has risen to $31.12. I am adjusting our stop loss to $30.95.

Don't forget that it was our plan to exit the July $30 calls at the opening bell this morning. SAVE's gap higher was a bonus.

current Position: Long SAVE stock @ $30.25

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

Jul $30 call (SAVE1320G30) entry $1.50 exit $3.05 (+103.3%)

06/19/13 new stop loss @ 30.95
06/19/13 closed the July $30 calls this morning
06/18/13 prepare to exit July $30 calls at the open tomorrow morning.
06/18/13 new stop loss @ 30.80
06/10/13 new stop loss @ 29.75
06/08/13 new stop loss @ 29.49
06/01/13 new stop loss @ 29.20



BEARISH Play Updates

Freeport-McMoRan - FCX - close: 29.19 change: -0.33

Stop Loss: 30.35
Target(s): 25.50
Current Gain/Loss: unopened

Entry on June -- at $--.--
Listed on June 15, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 20 million
New Positions: Yes, see below

Comments:
06/19/13: FCX struggled with resistance near the $30.00 level most of the day. When the market sold off this afternoon shares reversed sharply and plunged to a new relative low. Yet we're still waiting for shares to hit our entry trigger at $29.00. That could happen tomorrow morning.

I am suggesting a trigger to open bearish positions at $29.00. If triggered our target is $25.50 but I will point out that the April low near $27.25 could be short-term support and FCX might bounce on its initial test of this level.

FYI: FCX has a special $1.00 dividend payable on July 1st, 2013 to shareholders of record on June 14th.

Trigger @ 29.00

Suggested Position: short FCX stock @ (trigger)

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

Buy the Aug $27 PUT (FCX1317T27)



Rentech Nitrogen Partners - RNF - close: 27.95 change: +0.10

Stop Loss: 30.05
Target(s): 25.15
Current Gain/Loss: + 3.6%

Entry on June 17 at $29.00
Listed on June 13, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 159 thousand
New Positions: see below

Comments:
06/19/13: Warning! The action in RNF today looks like a bullish reversal. Shares dipped down to $26.90 midday. That was a new 11-month low. Then RNF rebounded and closed up +0.35% on the session. While the rest of the market was plunging this afternoon, shares of RNF were accelerating higher.

The stock looks poised to bounce and we could see it rally up to its first level of resistance at the 10-dma near $29.60. I am adjusting our stop loss down to $30.05. More conservative traders may want to lower their stop even further.

If you're trading the put option you might want to exit now to lock in gains. Current bid is $0.95.

Earlier Comments:
We want to keep our position size small because RNF is arguably already oversold. Of course it can remain oversold for months but we still want to limit our risk.

*small positions*

current Position: short RNF stock @ $29.00

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

Long Jul $27.50 PUT (RNF1320s27.5) entry $0.65

06/19/13 warning, RNF looks like it's reversing higher.
06/19/13 new stop loss @ 30.05
06/18/13 new stop loss @ 30.55