Option Investor
Newsletter

Daily Newsletter, Monday, 8/12/2013

Table of Contents

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

Market Wrap

Market Support Ahead Of Data

by Thomas Hughes

Click here to email Thomas Hughes
Introduction

Futures for U.S. indices were decidedly lower this morning. The weakness seen last week carried through and was bolstered by mixed data from the Asian sector. Data from Japan and the possibility of renewed QE in China raised cautionary flags for traders in the early morning hours. Japanese GDP was reported as 2.6% for the 2nd quarter, the third consecutive quarter of growth but a full percentage point below expectations. In China a new report states that there may be more stimulus coming for troubled areas of its economy. Chinese stocks jumped on the news, reaching a near two month high; Japanese stocks faltered, shedding -0.70%.


Today was a light one in terms of domestic news. The weekly economic calendar is full, but today only one release was scheduled. The Treasury Budget was released at 2:00 PM with little fanfare. In business news the headlines were dominated by Blackberry's announced exploration of strategic alternatives. The announcement caused trading in the stock to be halted in the pre-market session. When trading was allowed to open at 8:30 AM share prices jumped more than 8%. The rest of the week will be quite full of news as there are more than two dozen scheduled economic releases.

One thing that did not get much attention was the impressive snap back rally in gold. Gold prices climbed more $25 or 1.5% to reach $1336 during intra-day trading. Gold prices have become volatile over the last week to ten days, I would not be surprised to see prices trade below $1300 again. Today's move is the third daily gain in a row, a near two week high and yet still below the long term resistance line I have at $1350. Economic data will be an important driver of gold prices, this week could provide a turning point for the metal. This week is important because it is the first big data week since the last FOMC meeting and the first clues as to what they (the FOMC) may do about tapering come September. Weaker than expected data could lead the FOMC to ease off on plans to taper and possibly even consider additional easing, strong data could lead to increased expectation of September tapering.

Economic Calendar

The Gold Index

The Gold Index has responded to the rebound in gold prices by climbing as well. The index has gained for the past three sessions, forming two long white candles in what could be a continuation signal. However, the index is still below Fibonacci resistance and will need a strong catalyst to get investors to drive up the price. Should gold keep moving higher and break through its own resistance this could be the catalyst that the Gold Index needs. Stochastic and MACD both suggest that there is some support at the current level that could last into the mid term. On the long term weekly charts both indicators are both on the rise but do not indicate a bottom or even support at this time. High energy costs are eating into the gold miners margins from one side while a strengthening world economy is squeezing them from the other.

Gold Index

The Oil Index

Oil prices held steady today. After an initial dip into negative territory the price of crude regained last week's closing price before moving higher in the late afternoon. Driving today's oil action was new supply disruption concerns from Libya. Oil has now been trading above $100 for over 6 weeks, or the entire third quarter to date. This means that there is a significant chance for third quarter earnings in the sector to be ahead of expectations. The Oil Index has responded to the high price of oil by drifting lower. The index is now hovering above a long term support and is also approaching a rising up trend line.

Oil Index

The USD/JPY

The unexpectedly weak GDP numbers from Japan have helped to weaken the yen a little. The currency had been strengthening in recent weeks on expectations the country was strengthening faster than expected. The weak GDP data put that thought to bed for now. Yen printing will continue into the future while dollar printing is likely coming to an end. The USD/JPY pair is winding up into a potential bull triangle with a target between 110 and 120. The pair is currently trading near the lower end of the 4 month range and is in oversold condition. Strong data here at home this week could be the catalyst to send this trade higher. A break above the 100 level and the top of the triangle is needed for a stronger bullish stance.

USD/JPY

Story Stocks

Blackberry announced that they were in strategic search for solutions to its growth problems. The company is expected to announce something more concrete in the near future. Possibilities include going private as well as other arrangements. The stock got a big boost from the news and climbed more than 8% in the pre market trading. During the day the stock traded down from the session high but remained well above last week's closing price. Looking at the chart I do not get a very bullish feeling. The share price is still trading near an 8 month low and below the window opened two month ago. The question now is what will Blackberry do and how much per share will it cost them (or their new partner/owner etc).

Blackberry

Apple made a big announcement today as well. The iPhone maker reported that the next new iPhone would be launched next month. The current release date is set for September 5th and is the first new piece of hardware from Apple since the iPad mini last winter. The stock has been gaining in value over the last month and saw another jump in prices today. Shares of Apple climbed $12, or nearly 3%, only to be stopped near the recent high and long term down sloping resistance of $466-$467. This resistance line is the extension of a neck line marking a the H&S reversal formed last year. A break above this line could take Apple up to the $500-$550 level in the near to short term.

Apple

The Indices

The major U.S. indices traded in a very tight range today. After initially opening down about 3 points the index dropped briefly below the long term support before climbing back above it. After regaining the upper side of support the index managed to claw its way up to break even before running out of steam. For the remainder of the day the index traded between flat line and -4ish, but never fell below support again. The current support level is the previous all-time intra-day high level set way back in May of this year. The index has been trading at or just above this level for over a month now, giving the indicators a chance to pullback from overbought. The long term and short term up trends are still intact with growing support at the current level. A drop below the 1690 level could result in a small pullback. If such a pullback were to occur there are three significant support lines within 3% of the current level and the long term support level of the 150 EMA roughly 5% lower.

SPX daily

The Russell 2000 has made a similar sideways consolidation over the past 3-4 weeks. This index has been trading over and under the 1050 level allowing the short term 30 day moving average to catch up with it. The sideways move has also alleviated over bought conditions in this market as well. Near term support is currently near the 1035 level with resistance at the current all time high of 1063. On the weekly charts the Russell is still bullish but extremely extended. There is a possibility of pullback here but I don't see it in the indicators.

Russell 2000

The Dow has been testing its support for several days now. The blue chip index fell below its first support line last week and breached the 30 day moving average Friday. The index has been able to hold the moving average so far and even traded into the positive today. The data deluge begins tomorrow and is expected to be good. This could spark another moving average bounce. There is also some risk the index could break the moving average at which point next support is the up trend line. Indicators on the daily charts are still moving lower but at their current levels still indicate a rising/supported market. On the longer term charts MACD is very mildly bullish despite the black candle formed last week. This, along with the stochastic, also supports a rising market.

Dow Industrials

The Transports have also tested support. This index moved up today from the moving average. The move resulted in the stochastic turning up as well, a good sign for bullish sentiment. Momentum is still bearish but may be peaking. The index still has a resistance line to break but if momentum is shifting back to the buy side it may not hold. The transports are foreshadowing strong economic data but less than expected could cap the index at resistance.

Dow Transports

The Nasdaq Composite led the market today and is almost indicating a buy. MACD is crossing over to bullish and stochastic is almost making a crossover. The thing standing in the way is economic data. The techs were hot this summer and they have been hot since the June swoon. Some good data could add momentum to this trade, carrying the index higher. There is risk here though. The index has formed a fairly big divergence from the last two MACD peaks. This could signify serious weakness and leaves the index susceptible to pullback if the data is not up to snuff. I also want to take this time to point out that a previous market leader, Apple, which has suffered greatly over the last year is now coming back on the scene.

NASDAQ, daily

Data is what is on the minds of traders today. Not the data today, but the data we start to see tomorrow. This week is big on data and importance. There are only a few more weeks left until the next FOMC meeting in mid-September. If tapering is coming the data tomorrow and this week should be strong. If this is the case then the economy is still doing OK. OK used to be enough to drive the indices higher, will it be enough now. For now, the markets appear to be rolling over into bullishness again. At least they are getting ready to be bullish if the data is right. Regardless, the markets all have resistance in the form of recent all time highs that need to be broken.

Until then, remember the trend!

Thomas Hughes


New Plays

That Sinking Feeling

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) SHOO, NXPI, FNGN, KMX, HAL, WCN, WM, EA, LRN, MCRS, MDCA, CRUS



NEW BEARISH Plays

Linn Energy - LINE - close: 23.93 change: -1.06

Stop Loss: 25.05
Target(s): 20.50
Current Gain/Loss: unopened

Entry on August -- at $--.--
Listed on August 12, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 2.5 million
New Positions: Yes, see below

Company Description

Why We Like It:
LINE is an oil and natural gas company focused on energy reserves inside the continental U.S. Back in February LINE announced it would buy Berry Petroleum (BRY). Yet news of an SEC inquiry into LINE has cast doubt on the merger deal. The SEC news was disclosed in early July and shares of LINE plunged from about $33 to $20. The oversold bounce failed at the 61.8% Fibonacci retracement level of the selloff. Now LINE is starting to accelerate lower again. The stock could retest its lows near $20.00.

Friday's low was $23.76. I am suggesting a trigger to open bearish positions at $23.65. If triggered our target is $20.50. The July low was $20.35.

Trigger @ 23.65

Suggested Position: short LINE stock @ (trigger)

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

Buy the Sep $22 PUT (LINE1321u22) current ask $1.10

Annotated chart:




In Play Updates and Reviews

BBRY Hits Our Target

by James Brown

Click here to email James Brown

Editor's Note:
Shares of BlackBerry Limited (BBRY) hit our bullish exit target today. We also saw USTR hit our suggested entry trigger.


Current Portfolio:


BULLISH Play Updates

Best Buy Co. - BBY - close: 30.86 change: +0.23

Stop Loss: 29.75
Target(s): 33.50
Current Gain/Loss: + 1.5%

Entry on August 01 at $30.40
Listed on July 25, 2013
Time Frame: exit PRIOR to earnings on August 20th
Average Daily Volume = 4.9 million
New Positions: Yes, see below

Comments:
08/12/13: BBY shot higher on Monday morning but the rally failed at $31.60. By the closing bell shares had pared their gains significantly. I don't see any changes from my earlier comments. We are planning to exit prior to the earnings report on August 20th.

current Position: Long the stock @ $30.40

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

Long Sep $32 call (BBY1321i32) entry $1.20

08/01/13 new stop loss @ 29.75



FLIR Systems - FLIR - close: 33.18 change: +0.19

Stop Loss: 31.95
Target(s): 36.00
Current Gain/Loss: + 0.4%

Entry on August 02 at $33.05
Listed on August 01, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 1.2 million
New Positions: see below

Comments:
08/12/13: This morning FLIR issued a press release stating the company had acquired "certain assets of DigitalOptics Corporation's micro-optics business for a purchase price of $14.9 million. Included in the purchase are fabrication equipment and more than 200 patents and pending applications associated with the design and production of complex optical surfaces, substrates, and low cost components."

It's possible that the news may have contributed to the early morning rally. FLIR did manage to outperform the market with a +0.5% gain.

More conservative traders may want to raise their stop near Friday's low at $32.51.

current Position: Long FLIR stock @ $33.05



Luminex Corp. - LMNX - close: 21.65 change: +0.51

Stop Loss: 20.40
Target(s): 23.00
Current Gain/Loss: + 5.1%

Entry on August 07 at $20.60
Listed on August 06, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 167 thousand
New Positions: see below

Comments:
08/12/13: LMNX displayed relative strength today with a +2.4% gain and a bullish breakout above its simple 50-dma. The stock is nearing its next obstacle. The bottom of the July 30th gap down near the $21.50-22.00 zone could be short-term resistance. I am not suggesting new positions. I am raising our stop loss to $20.40.

*small positions*

current Position: Long LMNX stock @ $20.60

08/12/13 new stop loss @ 20.40



Lowe's Companies - LOW - close: 45.80 change: +0.12

Stop Loss: 44.40
Target(s): 49.50
Current Gain/Loss: + 0.4%

Entry on August 08 at $45.60
Listed on August 05, 2013
Time Frame: exit PRIOR to earnings on Aug. 21st
Average Daily Volume = 5.9 million
New Positions: see below

Comments:
08/12/13: Shares of LOW were upgraded this morning. This news may have helped fuel the early morning spike higher. Unfortunately the rally reversed near its highs from Thursday last week around the $46.25 level.

Traders might want to consider looking for a dip near $45.00 as an alternative bullish entry point.

Don't forget that we will plan on exiting prior to LOW's earnings report on August 21st.

current Position: Long LOW stock @ $45.60

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

Long Sep $45 call (LOW1321i45) entry $1.90



Ocwen Financial Corp - OCN - close: 51.75 change: -0.15

Stop Loss: 49.25
Target(s): 55.00
Current Gain/Loss: + 2.0%

Entry on August 08 at $50.76
Listed on August 07, 2013
Time Frame: 4 to 8 weeks
Average Daily Volume = 1.8 million
New Positions: see below

Comments:
08/12/13: OCN's performance today was almost identical to Friday's performance. Shares failed near $52.25 again and then spent the rest of the day slowly drifting lower (essentially sideways).

If the market were to dip I would look for OCN to test the $51-50 zone again.

Earlier Comments:
If triggered our multi-week target is $55.00. More aggressive traders could aim higher. The Point & Figure chart for OCN is bullish with a $63 target.

current Position: Long OCN stock @ $50.76

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

Long Sep $50 call (OCN1321i50) entry $2.70

08/08/13 traded on gap higher at $50.76. Trigger was $50.70



Texas Instruments - TXN - close: 39.71 change: -0.07

Stop Loss: 38.90
Target(s): 44.50
Current Gain/Loss: unopened

Entry on August -- at $--.--
Listed on August 03, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 8.2 million
New Positions: Yes, see below

Comments:
08/12/13: TXN is still testing our patience with its sideways consolidation below resistance at $40.00.

We are suggesting a trigger to launch bullish positions at $40.20. If triggered our multi-week target is $44.50.

Trigger @ $40.20

Suggested Position: buy TXN stock @ (trigger)

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

buy the Sep $40.00 call (TXN1321i40)



United Stationers - USTR - close: 43.52 change: +0.22

Stop Loss: 41.95
Target(s): 48.50
Current Gain/Loss: - 0.1%

Entry on August 12 at $43.55
Listed on August 10, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 275 thousand
New Positions: see below

Comments:
08/12/13: USTR spent the first half of Monday consolidating sideways before eventually deciding to keep the rally alive with an afternoon march higher. Shares hit our suggested entry trigger at $43.55 and closed with a +0.5% gain.

Earlier Comments:
USTR could see more short covering. The most recent data listed short interest at more than 13% of the small 39.4 million share float.

current Position: long USTR stock @ $43.55

08/12/13 triggered @ 43.55



BEARISH Play Updates

MDC holdings - MDC - close: 29.64 change: +0.30

Stop Loss: 30.35
Target(s): 25.50
Current Gain/Loss: - 1.9%

Entry on August 09 at $29.08
Listed on August 08, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 943 thousand
New Positions: see below

Comments:
08/12/13: The homebuilders spiked higher this morning. The rally in MDC hit $30.11 before reversing. We're expecting the $30.00 level to be overhead resistance so traders may want to launch new bearish positions now.

Earlier Comments:
Keep in mind that the homebuilders have been volatile. I am suggesting small positions. You may want to consider just buying puts since your risk is limited to the cost of the put option.

*Small Positions*

current Position: short MDC stock @ $29.08

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

Long Sep $30 PUT (MDC1321u30) entry $2.10

08/09/13 trade opened with MDC opening at $29.08



Saia, Inc. - SAIA - close: 29.51 change: +0.93

Stop Loss: 30.25
Target(s): 25.25
Current Gain/Loss: unopened

Entry on August -- at $--.--
Listed on August 10, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 192 thousand
New Positions: Yes, see below

Comments:
08/12/13: SAIA came close to erasing Friday's loss with a +3.25% bounce today. The overall trend still looks bearish. Nimble traders may want to consider launch bearish positions on a bounce or a failed rally near the $30.00 mark. Officially the newsletter is suggesting a trigger to launch bearish positions at $28.25. If triggered our target is $25.25.

Trigger @ 28.25

Suggested Position: short SAIA stock @ (trigger)



CLOSED BULLISH PLAYS

BlackBerry Limited - BBRY - close: 10.78 change: +1.02

Stop Loss: 8.49
Target(s): 10.90
Current Gain/Loss: +21.0%

Entry on August 05 at $9.01
Listed on August 03, 2013
Time Frame: 6 to 9 weeks
Average Daily Volume = 16.3 million
New Positions: see below

Comments:
08/12/13: Target achieved.

News that BBRY was evaluating its "strategic options" (a.k.a. putting itself up for sale) helped fuel another strong one-day gain. Shares surged toward $11.00 and managed to hit $10.93 intraday. The stock settled with a +10.4% gain for Monday. Our bullish exit target was hit at $10.90.

*small positions*

closed Position: Long BBRY stock @ $9.01 exit $10.90 (+21.0%)

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

2014 Jan $10 call (BBRY1418a10) entry $0.99 exit $2.04 (+106.0%)

08/12/13 target hit at $10.90

chart: