Option Investor
Newsletter

Daily Newsletter, Thursday, 8/22/2013

Table of Contents

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

Market Wrap

Unusual, Unexpected and Odd

by Thomas Hughes

Click here to email Thomas Hughes
Introduction

Today started out like many others but soon took an unusual turn. Up until 12:20 we were having what I would call a normal day of trading. Trading volume was light but a round of positive data had stocks rebounding from yesterday's sell off. Then, just after lunch, a glitch in quote dissemination lead to a halt of NASDAQ listed options. The NASDAQ had a problem delivering bid/ask spreads that snowballed into a full blow shut down. Tape “C”, or NASDAQ, symbols were traded on other exchanges initially but were soon halted there as well. The problem lasted for about three hours but eventually was solved. The problem did not affect execution on other exchanges so far as I have learned and traders were able to close open NASDAQ orders if desired.

NASDAQ one day

Around The World

Asian shares took a tumble when they opened, following the lead set by U.S. equities Wednesday afternoo. The FOMC minutes did not change anything about the outlook but sure did add some volatility to yesterday's trading. After the initial dip a surprising Flash PMI reading from China helped to reverse the bearish sentiment. Asia markets did not manage to reach positive territory but did close well off the daily lows. This months PMI reading of 50.1 is a four month high and the first signs of expansion in Chinese manufacturing for the same duration. HSBC economists think that Chinese QE efforts are “filtering through”. Much of the strength in this months report was for new orders as manufacturers and wholesalers try to replenish inventory.

The positive vibe sparked by Chinese PMI carried into the European open. These indices were also boosted by additional positive surprises in Euro Zone and German PMI readings. German PMI rose to 53.4 from last months 52.1 and the Euro Zone as a whole rose to 51.7 from 50.5. Both readings are better than expected and both are at 2 year highs. European indices gained 1-2% in today's session. Futures trading here at home was positive as well and also helped by our own economic data. Housing is still improving, jobless claims remain relatively low and the Leading Indicators rose more than expected.


The Data

Just a day after the Fed failed to reveal anything new about their thoughts on tapering we got a round of strong data. Not just from overseas, which is good for the global recovery, but here at home too. It's the data here at home though that is most important. The first bit of data today was the weekly jobless claims figures. Initial claims rose by 13,000 from a mild upward revision to hit 336,000. This is a four week high but still below the 350,000 we have been watching for the last year or so. The moving average fell this week due to the previous four week high dropping out of the equation. This is now the 6 week of initial claims under 350,000. No states reported a gain in claims of more than 1,000. California and Ohio led with drops in claims of -4,000 and -1,500 respectively.


Continuing claims ticked up by a hairs breadth. The gain of 29,000 puts this figure just under the 3 million mark. This figure has been hovering around 3 million for about 3 months now and appears to be holding fairly steady save for a random spike up or down. The total claims figure dropped and is this weeks headline for the jobs front. Total claims fell by -148,707 to hit a new five year low. The downward trend is not strong but it is there, total unemployment claims for one reason or another are coming down. This could mean that jobs creation is picking up, it could also mean that people are falling off the books. The next NFP and Unemployment release is scheduled for two weeks from tomorrow.



I want to point out once again that unemployment claims are being affected by the auto industry. The big three auto makers cut out summer lay-offs in order to increase production. They want to increase production to build inventory. Sound familiar? It should because a few paragraphs ago I reported HSBC just released surprisingly strong Chinese PMI data that revealed businesses were trying to rebuild inventory. A global shift to increased production could result in the stronger second half economists have been expecting.

The Home Price Index and Leading Indicators round out today's U.S. economic data. The Home Price Index gained .8% in the past month, ahead of expectations. This is just a day after Existing Home Sales posted a 6% increase. The Leading Indicators Index also came in ahead of expectations. This gauge of the economy was expected to rise by 0.5%, the actual was 0.6%. The only thing on the calendar for tomorrow is New Home Sales. Next week look out for Durable Goods, Consumer Confidence, Pending Home Sales, Chicago PMI, Michigan Sentiment and the second estimate for 2nd quarter GDP.


The Dollar

The dollar strengthened against the basket of international currencies but remains trapped within the middle of its longer term trading range for now. The FOMC minutes failed to change the outlook for tapering but today's data seemed to reinforce the idea that September could be it. Currency trading remained active throughout the afternoon despite the pause in NASDAQ options. We may see a squeeze in the dollar market until the next round of international central bank meetings in September.

Dollar Index

The yen lost ground to the dollar in today's trading. The USD/JPY broke above the 98 level, a level coincident with a Fibonacci retracement and the short term 30 day EMA. The pair is still within its narrowing trading range and indicated up. MACD and stochastic are both moving higher on the daily charts, on the weekly charts bearish momentum has peaked and stochastic confirms the shorter term bullish sentiment. My outlook for this pair is like this; Japan GDP is not improving as quickly as expected which could lead to more QE, the U.S. economy has improved to point where QE is about to end. I believe those two factors, together, will push the USD/JPY out of the current range to the upside but that remains to be seen. For now the pair is indicated up and is approaching a down sloping resistance line.

USD/JPY

The Euro also lost some ground to the dollar but found some support before days end. This pair dropped down to Fibonacci support and then snapped back up, forming a doji candle. Diverging indicators and long term resistance/trading range lead me to think this pair may have topped out. This pair may stall and trade sideways until the ECB and FOMC meetings next month. The pair is currently at the support level of 1.3325, next support is 1.3200, resistance is 1.3500.

EUR/USD

Oil Index

Oil recovered some of this weeks losses today. The stronger than expected PMI data helped to boost demand in oil as well as some other commodities such as copper and gold. Oil gained over a dollar today (about 1.25%) and the Oil Index gained a comparable percentage point. The index is now making a nice bounce from the term trend line begun in mid-2012. This bounce is the third since it was the trend line was established more than 12 months ago. The bounce also brings the index back above my long term support/resistance line, the line this index has been trading around the past 7 months. The index has bearish momentum but the long term peak analysis suggests a well supported market. Stochastic is in extreme oversold levels and making a bullish crossover. The long term trend is intact, this index looks good for buying opportunities going into the near to short term. Longer term there is still some resistance ahead.

Oil Index

The Gold Index

Gold prices moved higher today one the back of better than expected PMI data. Physical demand for gold is up, for today, but the economic data that supports demand for gold as an industrial material is the same data that leads to tapering. The threat of a scale back of FOMC asset purchases is a headwind for gold and could result in more volatility in this metal. The Gold Index traded marginally higher today in another day of trading just above the recently broken Fibonacci retracement. Higher gold prices are leading to raised expectations among the gold miners but they face the same dangers as the underlying metal. The index is indicated higher at this time with the next up side target around $124.90

Gold Index

Story Stocks

There were a few story stocks on my list today but they quickly faded from the spotlight in light of the three hour delay. HPQ and SHLD both reported worse than expected earnings and both of their shares plummeted. The miss by HPQ is disappointing because I like Meg Whitman and want them to do good. However, declining PC demand is a bog of quicksand HPQ just can't get out of. As for Sears, this should have been expected. On the one hand we have seen a host of disappointing reports from retailers of all variety, not to mention the decline of the American mall scene and the example being set by JC Penny.

Sears

The Indices Today

The major indices did not have a bad day despite the ridiculous problem experienced by NASDAQ. NASDAQ listed stocks, which were leading in the morning hours, took a break, flat lined for a while, reopened about 3:40PM and then continued to lead the markets. What was obvious, and this may have been helped by the light volumes, is that it wasn't that big of a deal. The NYSE, AMEX and other major exchanges were still operational. Stocks and options other than NASDAQ listed issues were still being traded. In fact, the S&P for one, climbed during the debacle. Trading on the S&P 500 dipped briefly during the mid point of the ordeal but then climbed back to the days highs. Once trading on NASDAQ listed issues resumed all the major indices climbed higher to end near the top of today's range.

S&P 30 minute

On the daily charts the S&P is trading at the long term up trend line. The index today made a bullish candle engulfing the past three candles and climbed to just above the trend line. Bearish momentum is peaking at this time and stochastic is entering extreme oversold levels. Keeping in mind that we are still in a long term bull market no matter what anybody says we, or I rather, should expect a bounce from this point or very near to hear. The longer term trend shows a rising market. The longer term economic trend shows a strengthening economy. Taper fears helped to bring us down to this level. Data supports tapering by showing a stronger economy. A stronger economy leads to higher corporate profits and higher stock prices. Presently there is no indication of higher prices in the indicators, just the recognition that the index is at a place where it is reasonable to expect a bounce to occur. In order to place a trade a more concrete signal is required.

S&P daily

Tomorrow could be a mild day. But then again its expiration day so I wouldn't count on it too much. Other than that there is not much happening to move the markets other than a few earnings reports. Next week there are some important economic events but again nothing to market moving that I can see. The week after that we'll get the next round of monthly data including the ADP/Challenger/NFP bundle.

Until then, remember the trend!

Thomas Hughes


New Plays

Rising Spirits

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) SWY, CHK, UBNT, MCRS,



NEW BULLISH Plays

Constellation Brands Inc. - STZ - close: 55.18 change: +1.24

Stop Loss: 52.95
Target(s): 60.00
Current Gain/Loss: unopened

Entry on August -- at $--.--
Listed on August 22, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 1.3 million
New Positions: Yes, see below

Company Description

Why We Like It:
Headquartered in Victor, New York, Constellation Brands produces a wide variety of wines and spirits. There has been some concern in the markets about the strength of the consumer. Yet based on STZ's new all-time high the market is not worried about consumer's demand for alcohol.

The stock has spent nearly three months basing in the $49-55 zone. The last two weeks have seen a consolidation in the $53-55 area. Today's breakout past $55.00 is very bullish. I am suggesting a trigger to launch bullish positions at $55.35. If triggered our target is $60.00. More aggressive traders may want to aim higher.

Trigger @ 55.35

Suggested Position: buy STZ stock @ (trigger)

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

Buy the Oct $60 call (STZ1319j60) current ask $0.65

Annotated chart:




In Play Updates and Reviews

AUDC Hits Our Target

by James Brown

Click here to email James Brown

Editor's Note:
Shares of AudioCodes Ltd. (AUDC) hit our bullish exit target today.


Current Portfolio:


BULLISH Play Updates

Electronic Arts - EA - close: 27.78 change: +1.12

Stop Loss: 26.25
Target(s): 29.75
Current Gain/Loss: + 2.5%

Entry on August 20 at $27.10
Listed on August 17, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 4.2 million
New Positions: see below

Comments:
08/22/13: Shares of EA got a boost from Gamestop (GME). EA makes the games while GME is a specialty retailer that sells them. This morning GME reported earnings that beat estimates on both the top and bottom line and then management raised their guidance. Shares of GME soared on the news and settled with a +9.0% gain. EA also shot higher and added +4.2% to close at new multi-year highs.

current Position: long EA stock @ $27.10

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

Long Sep $28 call (EA1321i28) $0.55



Halliburton Company - HAL - close: 47.28 change: +0.84

Stop Loss: 46.40
Target(s): 49.85
Current Gain/Loss: + 1.5%

Entry on August 19 at $47.10
Listed on August 17, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 9.0 million
New Positions: Yes, see below

Comments:
08/22/13: Strength in the energy sector helped lift HAL to a new two-year high. We are raising our stop loss to $46.40.

Earlier Comments:
Our target is $49.85. If you have a longer time frame you could aim higher.

current Position: long HAL stock @ $47.10

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

Long Oct $50 call (HAL1319j50) entry $0.69

08/22/13 new stop loss @ 46.40



Ocwen Financial Corp - OCN - close: 50.66 change: +0.20

Stop Loss: 49.75
Target(s): 55.00
Current Gain/Loss: - 0.2%

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:
08/22/13: OCN tried to rally this morning but shares pared their gains. I remain cautious here. I am not suggesting new positions at this time.

Earlier Comments:
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

08/19/13 new stop loss @ 49.75
08/08/13 traded on gap higher at $50.76. Trigger was $50.70



BEARISH Play Updates

Mellanox Technologies - MLNX - close: 39.93 change: +0.84

Stop Loss: 41.00
Target(s): 35.25
Current Gain/Loss: - 1.1%

Entry on August 21 at $39.50
Listed on August 20, 2013
Time Frame: 3 to 6 weeks
Average Daily Volume = 713 thousand
New Positions: see below

Comments:
08/22/13: The first couple of hours of trading today saw MLNX bounced back toward the $40.00 level. Then the NASDAQ had a three-hour trading outage and halted trades on all NASDAQ-listed stocks. That explains the gap in MLNX's intraday chart. Broken support near $40.00 should be new resistance but it's worth noting that today's session has actually created a bullish engulfing candlestick reversal pattern. That's a warning signal for the bears.

Earlier Comments:
I would keep position small because MLNX does have above average short interest at 15% of the 37.5 million share float. FYI: The Point & Figure chart for MLNX is bearish with a $27.00 target.

current Position: short MLNX stock @ $39.50

08/22/13 warning! MLNX has produced a one-day bullish reversal pattern



Tempur Sealy Intl. - TPX - close: 36.68 change: +0.32

Stop Loss: 38.05
Target(s): 31.00
Current Gain/Loss: unopened

Entry on August -- at $--.--
Listed on August 21, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 1.7 million
New Positions: Yes, see below

Comments:
08/22/13: Thursday delivered a relatively quiet session of TPX. Shares traded inside of Wednesday's range. We're waiting for a breakdown below support.

Earlier Comments:
I am suggesting a trigger to open bearish positions at $35.75. If triggered our target is $31.00.

NOTE: Investors might want to limit their position size. The most recent data listed short interest at 16% of the relatively small 45.7 million share float. Meanwhile more aggressive traders may want to aim lower since the point & figure chart is forecasting at $26 target.

Trigger @ 35.75

Suggested Position: short TPX stock @ (trigger)

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

Buy the 2014 Jan $30 PUT (TPX1418m30)



CLOSED BULLISH PLAYS

AudioCodes Ltd. - AUDC - close: 6.35 change: +0.25

Stop Loss: 5.70
Target(s): 6.35
Current Gain/Loss: +12.0%

Entry on August 16 at $ 5.67
Listed on August 15, 2013
Time Frame: 4 to 8 weeks
Average Daily Volume = 229 thousand
New Positions: see below

Comments:
08/22/13: Target achieved.

AUDC has delivered an impressive performance. Shares are up +27% in just the last two weeks. We were able to catch about +12% of that move. AUDC hit our suggested target at $6.35 today.

closed Position: Long AUDC stock @ $5.67 exit $6.35 (+12.0%)

08/22/13 target hit
08/21/13 new stop loss @ 5.70
08/20/13 new stop loss @ 5.45, adjust target to $6.35
08/19/13 new stop loss @ 5.35
08/16/13 trade opened on gap higher at $5.67. Trigger was $5.65

chart: