Option Investor
Newsletter

Daily Newsletter, Tuesday, 9/3/2013

Table of Contents

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

Market Wrap

September Starts With A Whimper

by Thomas Hughes

Click here to email Thomas Hughes
Introduction

I awoke this morning to a market relatively unchanged from Friday. Of course, futures trading was positive, very positive. The S&P futures were up near 14 points before 8 AM with little reason. There were no major market moving events, no shift in world economics or politics. I think it may just have been a little over exuberance on the part of early week traders. I am still looking at this week, and the next two, as important for the financial market. Not only are there numerous important economic data points for us here in the States but there are also at least as many on the international schedule as well. This week alone, even though it is shortened by the holiday, has over 100 international economic reports on the calendar.


Today was relatively light on data despite the enormous amount we are expecting throughout the week. In Asia and Europe PMI data was surprisingly good and helped to bolster support in China and Japan. European shares did not follow the lead of their Asian counterparts and finished the day in the red. Here at home ISM Manufacturing PMI was reported as 55.7, slightly ahead of last months 55.4 and the expected 51.6. Chinese PMI is now at a four month high and expanding. Eurozone PMI is now at the highest levels in over 2 years. All three readings are good but only a small piece of what to expect this week. Tonight, while we are all sleeping, the BOJ will be meeting and preparing a new statement on policy. That announcement will come out in the wee hours of Wednesday morning, just ahead of the ECB meeting. Thursday the ECB will reveal their thoughts on policy and the economy. Intermixed with these important central bank meetings will be all that data I mentioned. And I almost forgot about the G20 meeting, Syria and rising oil prices.


Looking a little further out the economic event that is really keeping the market in check right now is the FOMC and tapering. The next FOMC meeting which I have taken to call the taper meeting is two weeks away. September the 18th at 2PM we can all expect to find out what kind of tapering, or not, we get this month. Looking even further out than that there is yet another debt ceiling deadline approaching, a major election in Germany, impending tax changes in Japan, the sell off in emerging markets, rising interest rates and an upcoming change of leadership at the FOMC. Keeping things in focus though this week is going to be dominated by employment data. Because of the holiday some of the report days are skewed so Thursday will be data heavy with ADP, Challenger and unemployment claims. Friday is Non-Farm Payrolls and U.S. Unemployment Rate.

The Dollar Index

The dollar gained against the basket of world currencies today. The dollar index broke above its consolidation range to the upside with today's move up. Indicators are bullish and on the rise, next resistance is around the 83.00 level. I expect to see some volatility in this index during the week due to the BOJ and ECB meetings. Both have the ability to cause a ripple effect through the currency arena.


The USD/JPY began to break above the triangle pattern I have been following. This move would be in anticipation of the BOJ rate/policy decision and a little bit suspect because of it. Provided the pair remains on the up side of this break out after the release tomorrow I would be bullish on it with a target around 104 yen to the dollar. There may be resistance at the 100 level so waiting for move above that isn't a bad idea either. Momentum is still bearish on the weekly charts but declining, stochastic is bullish but not strong. On the daily charts both indicators are bullish and rising.


The EUR/USD pair fell in today's trading. The pair fell below the 1.3200 support/resistance line. This line has proven itself significant about a dozen times over the last 12 months. This pair has been trading in a wild sideways range during that time with several break throughs, rebounds and bounces from both directions of the 1.3200 level. So far, each time the pair moves across this line it has continued on for several days to two weeks. At the current time the pair is indicated down for the short term but the longer term charts show some support. Data may affect this pair tomorrow but the ECB meeting on Thursday will be the event to watch. It is possible that the ECB could begin their own brand of tapering or not. Either way the economic data plus the ECB decision are going to renew speculation in the euro's value versus the dollar in relation to expected tapering and the FOMC.


The Gold Index

The price of gold climbed by about a full percentage point today. One reason is rising support among republicans for the Presidents strike on Syria. Gold reached just over $1410, shy of the recent high. The Gold Index traded higher by nearly a percent as well. Despite the higher prices in gold the index did not retake the 78.6% Fibonacci level and remains tightly bound by Fibonacci resistance and short term moving average support. The MACD and stochastic indicators are currently bearish but show some support over the short to mid term. The longer term bear market in the Gold Index is over I think but I am not ready to get bullish on it just yet. It's still the early part of the week and there is a whole lot going on in the world that could really affect gold and Gold Index prices.


The Oil Index

The price of oil was boosted today by rising speculation over the Syria crisis. Early this morning news sources reported objects being fired over the Mediterranean. Later we learned that it was only a joint missile test by us and the Israeli's. Regardless of the cause it seems kinda coincidental that we are test firing missiles while the President is trying to get a strike OK'd by Congress. Support for the strike is growing but as of this writing there is no timetable. Getting back to oil, prices climbed by roughly $.075 from Friday prices to reach the $108.50 area. The Oil Index also traded higher but made a bearish candle by the day's end. The index is currently indicated up on the daily charts with rising MACD and stochastic. The index is also bouncing from the short term 30 day EMA in a confirmation of the previous bounce from long term support at 1350. Although indicated higher this index is still facing resistance and also has the added bonus of being affected by the events in Syria. Longer term the index is still running in its bull trend and appears to be bouncing from the 150 day EMA. There is still resistance here as well. Momentum is currently bearish but very weak and weakening, stochastic is bullish and pointing to higher prices.


Story Stocks

The story of today, aside from the economic hurricane approaching us, was M&A. More specifically the A. Three big acquisitions were announced today that had their respective stocks moving. The first was the Verizon purchase of Vodaphone's stake in Verizon Wireless. This one began over the weekend but was still big in the news today. Verizon took on a load of debt to finance the deal that includes cash and stock. The news sent shares of Verizon sharply lower in the early market hours but there were some buyers hungry for the stock at today's low prices. The merger is seen as a good move for Verizon and one that could pay off big before too long.


Vodaphone shares traded lower as well and also found support. This stock tested recently broken resistance with a fairly extreme move today. This stock is indicated higher and has the strength of significantly increased volume to back it up.


Yankee Candle was also snatched up today. The candle company was purchased by Jarden Corporation in a deal worth $1.75 billion. The deal is seen as a way for Jarden to increase it's offering and expand its reach. Shares of Jarden climbed more than 10% in today's trading.


Microsoft announced it's intended purchase of Nokia's handset operation. The deal is estimated at over $7 billion dollars and sent shares of Microsoft down in today's session. Of all the Dow stocks Microsoft was the worst performer. The stock fell more than 4.5% and came close to the four month low.


Shares of Nokia on the other hand gained on news of the sale. Shares of Nokia jumped more than 20% in the early market and remained at the elevated levels through to the close.


The S&P 500

The index appears to be bouncing, still, from the long term trend line. MACD is still bearish on the daily charts but the wave is decreasing at the same time the index is finding support along the trend line. Stochastic is still in extreme oversold condition but also forming a bullish buy signal. The chart also shows that there is still technical resistance ahead that must be addressed. This week is going to be an important one for the markets even if the S&P stays trapped between the trend line and its resistance.


On the longer term chart of weekly prices the index is still in its up trend. Bearish momentum is not very strong and been contained at the trend line for now. Stochastic is trending up and could cross over the upper signal line any time. The only resistance is a zone created by the current and previous all-time high. A break below the long term trend could take the index down to the 1600-1575 region. A break above resistance could take it as high as 1800.


At this time it looks like the index want to move higher it just can't. The problem is the enormous amount of data, central bank action, potential tapering, debt ceiling, Syria, rising oil and rising interest rates. Each of these things is reason to give a trader or investor pause, altogether it is a good reason to sit out on the sidelines. In the end I think it will be the FOMC meeting on September 18th that finally provides the answer we are looking for now. The data will either support tapering or it won't, the FOMC will decide to taper or it won't. Once we get past this hurdle we can return to the business of business for a while.

Until then, remember the trend!

Thomas Hughes


New Plays

Healthcare & Basic Materials

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)
INVN, ALGN, RPTP, AIG, IBCP, EMES, ELLI

(bearish ideas)
SNX, SEAS, PLD, PCL,



NEW BULLISH Plays

Alliance Healthcare Services - AIQ - close: 25.46 change: +1.16

Stop Loss: 23.95
Target(s): 29.50
Current Gain/Loss: unopened

Entry on September -- at $--.--
Listed on September 03, 2013
Time Frame: 4 to 8 weeks
Average Daily Volume = 120 thousand
New Positions: Yes, see below

Company Description

Why We Like It:
AIQ provides diagnostic imaging and radiation therapy services. The stock has been an incredible momentum trade this year with a rally from $6.00 to $25. It does not look like AIQ is slowing down. Shares hit some profit taking in mid August but traders bought the dip. Now AIQ is on the verge of hitting new multi-year highs.

Today's intraday high was $25.60. I am suggesting a trigger to open small bullish positions at $25.70. If triggered our target is $29.50. Please note that I am suggesting we use small positions to limit our risk. If this up trend breaks, AIG could fall pretty fast.

Trigger @ 25.70 *small positions*

Suggested Position: buy AIQ stock @ (trigger)

Annotated chart:



NEW BEARISH Plays

Rentech Nitrogen Partners - RNF - close: 24.71 change: -0.78

Stop Loss: 25.75
Target(s): 21.00
Current Gain/Loss: unopened

Entry on September -- at $--.--
Listed on September 03, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 167 thousand
New Positions: Yes, see below

Company Description

Why We Like It:
RNF is in the agricultural chemical industry. They make nitrogen-based fertilizer products. Wall Street is worried that falling profit margins might convince RNF management to cut its dividend. Currently, given the stock's decline, RNF has a pretty high dividend yield of 13%. Yet that's obviously not driving a lot of buying interest with shares at new lows for 2013.

RNF underperformed the market again today with a -3.0% drop and a close below potential round-number support at $25.00. We want to see a little bit more follow through. I am suggesting a trigger to launch bearish positions at $24.60. If triggered our target is $21.00. Investors may want to aim lower since the Point & Figure chart for RNF is bearish with a $17.00 target.

Trigger @ 24.60

Suggested Position: short RNF stock @ (trigger)

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

Buy the Oct $25 PUT (RNF1319v25) current ask $1.55

Annotated chart:




In Play Updates and Reviews

Tuesday Morning Rally Reverses

by James Brown

Click here to email James Brown

Editor's Note:
The U.S. market's Tuesday morning rally reversed pretty quickly but the major indices still managed to close with gains.

KIM was triggered.


Current Portfolio:


BULLISH Play Updates

Halliburton Company - HAL - close: 48.30 change: +0.30

Stop Loss: 46.99
Target(s): 49.85
Current Gain/Loss: + 2.5%

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: see below

Comments:
09/03/13: Traders continued to buy HAL near short-term support at $48.00 and its 10-dma today. More conservative traders may want to tighten their stops.

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

08/24/13 new stop loss @ 46.99
08/22/13 new stop loss @ 46.40



Constellation Brands Inc. - STZ - close: 55.18 change: +0.93

Stop Loss: 53.75
Target(s): 60.00
Current Gain/Loss: -0.3%

Entry on August 23 at $55.35
Listed on August 22, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 1.3 million
New Positions: see below

Comments:
09/03/13: It was a volatile morning for STZ. The stock was upgraded to a "buy" by Goldman Sachs. The stock gapped open higher, spiked to $55.62, and then plunged back toward $54.00. Traders jumped back in to buy the dip and STZ outperformed the market by closing up +1.7% at day's end.

If both STZ and the S&P 500 open positive tomorrow then I would be tempted to launch positions again. Otherwise readers may want to wait for STZ to close above $56.00 before considering positions.

current Position: Long STZ stock @ $55.35

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

Long Oct $60 call (STZ1319j60) entry $0.70

08/24/13 new stop loss @ 53.75



BEARISH Play Updates

Assurant Inc. - AIZ - close: 53.86 change: +0.82

Stop Loss: 54.05
Target(s): 48.00
Current Gain/Loss: unopened

Entry on September -- at $--.--
Listed on August 31, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 590 thousand
New Positions: Yes, see below

Comments:
09/03/13: AIZ did not see any follow through on Friday's bearish breakdown below its 50-dma. Instead the stock gapped open and outperformed the market with a +1.5% gain for the day. If this bounce continues then we'll likely drop AIZ as a bearish candidate. For now our plan remains unchanged.

Earlier Comments:
Friday's low was $52.94. I am suggesting a trigger at $52.75. If triggered our target is $48.00. Do not be surprised to see a temporary bounce near the $50.00 mark.

Trigger @ 52.75

Suggested Position: short AIZ stock @ (trigger)

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

Buy the Oct $52.50 PUT (AIZ1319v52.5)



Darden Restaurants - DRI - close: 46.21 change: -0.00

Stop Loss: 48.25
Target(s): 44.25
Current Gain/Loss: +2.0%

Entry on August 26 at $47.16
Listed on August 24, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 1.2 million
New Positions: see below

Comments:
09/03/13: The early morning rally in DRI failed at resistance near its 10-dma. Shares tagged a new relative low midday but bounced back to close unchanged on the session. I am not suggesting new positions at this time.

current Position: short DRI stock @ $47.16

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

Long Oct $45 PUT (DRI1319v45) entry $0.90



Fastenal Co. - FAST - close: 45.00 change: +1.01

Stop Loss: 45.01
Target(s): 40.25
Current Gain/Loss: unopened

Entry on August -- at $--.--
Listed on August 28, 2013
Time Frame: 3 to 6 weeks
Average Daily Volume = 1.5 million
New Positions: Yes, see below

Comments:
09/03/13: Hmm... FAST rebounded on Tuesday to what might be the top of a new trading range in the $44.00-45.50 zone. Shares did outperform the market with a +2.2% gain and the close above its 10-dma is short-term bullish. We are still on the sidelines waiting for a breakdown to new relative lows.

Earlier Comments:
FAST looks poised to break down even further and the next level of support should be the $40.00 area. Last Tuesday's low was $43.75. I am suggesting a trigger to open bearish positions at $43.70. If triggered our target is $40.25. More aggressive traders may want to aim lower. The Point & Figure chart for FAST is bearish with a $37 target.

Trigger @ 43.70

Suggested Position: short FAST stock @ (trigger)

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

buy the Oct $40 PUT (FAST1319v40)



InterDigital, Inc. - IDCC - close: 35.80 change: +0.26

Stop Loss: 36.25
Target(s): 30.25
Current Gain/Loss: unopened

Entry on September -- at $--.--
Listed on August 31, 2013
Time Frame: 4 to 8 weeks
Average Daily Volume = 342 thousand
New Positions: Yes, see below

Comments:
09/03/13: Shares of IDCC spiked past the $37.00 level this morning but the rally quickly reversed. Shares pared their gains to +0.7% by the close. The volatility this morning might imply that our suggested stop loss at $36.25 is too tight. More aggressive traders may want to use a wider stop. There is no change from my earlier comments.

Earlier Comments:
A breakdown under $35.00 could signal a drop toward $30.00. I am suggesting a trigger to open bearish positions at $34.85. If triggered our target is $30.50.

Trigger @ 34.85

Suggested Position: short IDCC stock @ (trigger)

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

buy the Oct $35 PUT (IDCC1319v35)



Kimco Realty - KIM - close: 19.89 change: -0.14

Stop Loss: 20.35
Target(s): 18.25
Current Gain/Loss: - 0.5%

Entry on September 03 at $19.80
Listed on August 31, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 2.9 million
New Positions: see below

Comments:
09/03/13: Our new play on KIM has been triggered. The early morning rally reversed at resistance near its 10-dma. Shares then broke down under round-number support at $20.00. KIM hit our suggested entry point at $19.80 late this morning. I would still consider new positions now.

current Position: short KIM stock @ $19.80

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

Long Oct $20 PUT (KIM1319v20) entry $0.95



Mellanox Technologies - MLNX - close: 38.01 change: -1.41

Stop Loss: 41.00
Target(s): 35.25
Current Gain/Loss: + 3.8%

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:
09/03/13: MLNX's attempt to rebound failed near resistance at its 10-dma. The stock reversed into a -3.5% decline, underperforming the market.

I am not suggesting new positions. More conservative traders might want to lower their stops closer to the $40.00 level.

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



Meritage Homes Corp. - MTH - close: 39.74 change: -0.18

Stop Loss: 40.25
Target(s): 35.25
Current Gain/Loss: unopened

Entry on August -- at $--.--
Listed on August 27, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 691 thousand
New Positions: Yes, see below

Comments:
09/03/13: MTH saw some more profit taking after last Thursday's big bounce. We're still waiting on a breakdown below support.

Earlier Comments:
We are suggesting a trigger to launch bearish positions at $38.40. If triggered our multi-week target is $35.25. FYI: The Point & Figure chart for MTH is bearish with a $31.00 target.

Trigger @ 38.40

Suggested Position: short MTH stock @ (trigger)

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

Buy the Oct $35 PUT (MTH1319v35)