Option Investor
Newsletter

Daily Newsletter, Thursday, 9/19/2013

Table of Contents

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

Market Wrap

Stocks Falter

by Thomas Hughes

Click here to email Thomas Hughes
Introduction

Index futures were up this morning after a round of increases in global stock prices. World markets followed through on yesterday's Fed inspired rally gaining more than 1% on average. The decision to hold tapering off was a big surprise to most market participants and in light of today's economic data may have been misplaced. Jobless claims are still at 6 year lows (with some caveats) and a string of other data released today showed surprising gains that, released last week, would have helped solidify the idea that tapering was going to happen. Perhaps it (tapering) will begin next month but even now that is in question. Some pundits are now speculating that the taper may not begin this year at all.


Bernanke stated several times during the press conference that tapering was data dependent. He also said that the data did not warrant the taper at this time which is in line with statements made earlier in the year. The threshold of 6.5% unemployment has not yet been reached although today's data suggests it could be closer than some think. There is no data scheduled for release tomorrow but it is triple witching day.

After the opening the broad markets traded around the flat line. The S&P opened up by roughly 3 points and traded in a range between +3 and 0 for most of the morning. The release of Philly Fed, Existing Home Sales and Leading Indicators helped to support the markets around 10 AM but that boost was short lived. Following the release the S&P moved up to the top of the morning range (about +3) before falling back into negative territory where it remained the rest of the day.

Today's Data

The big report of the day was the jobless claims numbers. The big revisions I was expecting from last week did not materialize and this weeks numbers are also at long term low levels. However, the two states which did not report in full last week reported similar delays in data processing this week. It will be hard to say for sure what is going on with claims until this issue is resolved. Initial claims from last week were revised up by only 2,000 claims, this weeks figures rose by 15,000 to reach 309,000. The four week moving average fell by 7,000 to reach 314,700. California is one of the states with a back log of claims which accounts for at least some of the -25,000 drop reported this week. There were 8 other states reporting a drop in claims of more than 1,000 (not including Nevada, the other state with a back log). No states reported an increase of more than 1,000 claims.


Continuing claims and total claims both fell this week. Continuing claims fell by 28,000 from last weeks downwardly revised 2.815 million. This is another multi-year low for continuing claims. If the data were more trustworthy this would be a great sign for the economy. However, we still have to wait for California and Nevada to catch up and this could take weeks at best. Total claims fell by over -235,000 to reach 4.037 million. It is unclear at this time how the back log will affect future reports. Will claims from last week be revised or will the claims be included in a future week? I am expecting more revisions and a possible spike in claims once the back log in claims gets worked out.



There was some good data released today that is more trustworthy. Existing home sales is one of them. Existing home sales increased by 1.7% versus an expected decline for the month. The annual rate of sales is now 5.48 million, the expected rate was closer to 5 million. This data came with a caveat though, it is based on contracts signed in June. Buyers were being spurred by higher interest rates at the time. Real estate analysts believe that the rate of sales has diminished since then.

The Philly Fed Survey and the Leading Indicators were also much better than expected. The Philly Fed incredibly so. The expected reading of 8.0 (9.3 in the previous month) was blow away by the actual reading of 22.3. This shows a robust expansion in manufacturing for the Philadelphia region. Within the report the employment and new orders segments showed the biggest gains. Leading indicators were expected to decline mildly from last months 0.6% gains. The actual 0.7% means that this month is should be better than expected for the economy.


Global Markets

Asian markets got a boost from the FOMC statements and policy decision. On average the Asian indexes gained 1.5-2% on the news led by the emerging markets. The Nikkei made the biggest gains of the major Asian indices with 1.8% and the yen made a see saw move against the dollar. The USD/JPY pair fell on the news initially but bounced back today recapturing all of yesterday's losses and more. The fall yesterday brought the pair down to the 23.6% retracement level of the original Abe/Kuroda rally from November 2012 to May 2013. This move seems to confirm support and the recent triangle break out. Looking ahead there is still resistance at 100 to deal with. Without a break above that level I remain cautious longer term. The lack of tapering, economic data and future expectations of tapering will be going head to head with Abenomics for now.


The European markets lifted as well although a little less enthusiastically. European indices gained roughly 0.75-1.25% on the news. Europe has been making steady progress on its own, progress supported in part by improvements in China as well as continued improvement here at home. This is being reflected in index prices which are trading at all time highs, just like ours own. The euro was the real winner in this arena. The euro gained over 1.5% on the news versus the dollar. Today the eur/usd pair is trading just above a long term resistance with bullish technicals.


The Gold Index

Gold made an impressive 5% swing after the Fed announcement. Today the metal increased the gains made yesterday, adding another $10-$15 to the initial $60+ move. $1300 looks like pretty firm support at this time, $1400 for resistance. Tapering is still ahead, we haven't escaped it, and could put some pressure on gold prices moving forward. The Gold Index got a boost yesterday along with gold and the general market. The index rose back to retest the 78.6% Fibonacci level it has been trading around the last few months. On the short term daily charts the index appears to be forming a longer term pennant centered around the retracement level. Today the index fell back from resistance, counter to golds move higher. Indicators are mixed, the stochastic is pointing higher while momentum remains bearish. Added to the other evidence it appears the index could indeed be range bound within the pennant.


Longer term on the weekly charts the index is still in a down trend and the pennant formation is still present. Indicators are still bullish but weak and suggestive of the aforementioned range. Currently resistance is at the retracement, around $111, with the next target the upper edge of the pennant around $118. Support is around the $99-$100 level, coincident with the lower edge of the pennant.


The Oil Index

Oil traded lower today on comments from Iranian President Hassan Rouhani. His new statements concerning Iran's quest for nuclear weapons point to reduced tensions with the west and a possible end or at least easing of sanctions placed on the country's oil exports. If so Iranian oil exports could significantly increase in the not to distant future. Even with the new pledge global tensions in places such as Libya and Egypt are still keeping oil prices high. The Oil Index is still benefiting from the sustained high oil prices. The index has now reached my second resistance line since the last trend line bounce. Momentum is bullish but weak and suggestive of a top/top of a range. Stochastic is also bullish but overbought. The long term trend is still up but the index may be at a short term top. A correction or consolidation is very possible at the current level. A break above the 1425 resistance level would be bullish, until then I see support at the 1,400 level and the long term trend line around 1,375.


Earnings Focus

Last week I began my focus on the upcoming earnings season by touching base with Adobe, Oracle and Redhat. These three tech companies are my signal that earnings are close and include my favorite stock, Redhat. Just to be clear, it's my favorite because it is the first stock I started watching, instigated by a friend losing his inheritance during the tech crash. Back to the point, earnings. Adobe was the first to release, Oracle second and Redhat is scheduled for Monday. Adobe at last glance was near the highs of an uptrend. The earnings reported by the company were not that great but the forward guidance was pretty good. The company is changing to a subscription based model for its software services, a move seen as very good for future revenue and earnings. The stock traded flat Monday and Tuesday, then got a pop yesterday before the opening bell following the announcement. Indicators are bullish but the gap opened yesterday needs to be tested before getting bullish from this point.


Oracle followed up with a better than expected report but dashed the good spirit with weaker than expected guidance. The company made an 8% gain in profits despite the third consecutive quarter of declining sales. Company executive lowered the outlook for current quarter to include the possibility of negative revenue growth and for adjusted earnings below the current consensus estimates. The stock did not gap down as with the previous two earnings reports but today's long legged doji may be just as telling. Indicators are bullish and stochastic has room to move higher. However, there is significant resistance at the $34 level.


Redhat reports on Monday. The open source software company is expected to earn $0.22 per share, a slight decline from last quarters $0.24. Some of the developments driving this stock over the last quarter are advances made in enterprise level open source applications and in cloud computing. The stock is making new four month highs with weakly bullish technicals. Next resistance is around the $55 level, support at $52.50 and $50.


Conagra was the big name reporting today. The food giant reported a shortcoming in profits and cut it's 2014 forecast. The company was expected to earn in the range of $0.40 versus the previous quarters $0.60. The actual results of $0.37 were attributed to softer volumes and significant investments by the company. Management reported that cost reduction plans were already in action and that they expect 2nd half of the year improvements to offset 1st half weakness. Current full year guidance was lowered to $2.34-$2.38, lower than previously offered but in line with the consensus estimates. The stock traded to the downside today, losing about 5% on an intraday basis.


The Indexes

There was not much follow through today in the markets. The indices opened higher after the global markets rallied overnight but could not maintain the gains. Even the better than expected economic data could not inspire more buyers to step in. The Fed relieved us all, I think, by not tapering but tapering is still on the way. Yesterday's rally brought the S&P and other major indices to new highs. The daily chart is breaking out with bullish momentum and rising stochastic which point to higher prices.


On the longer term charts of weekly prices things are looking a little different. Stochastic is making a bullish crossover but at this time is below the upper signal line and divergent from price action. This is cause to raise a red flag of caution, especially since momentum is still bearish in this time frame. The long term MACD also shows a series of divergent bullish peaks starting with the first peak of the rally starting at the beginning of the year.


The long term trend is still up for the S&P. However, the combined long and short term analysis suggest that a correction may be building. Tomorrow is triple witching day and could add a significant amount of volatility to stock trading. Not only that there is no scheduled economic data or earnings releases to help support the market. In addition, the S&P alone is up more than 5% since hitting bottom on the last dip and is in good position for some profit taking. With the improvements to the economy here and abroad I am maintaining my bullish stance on the markets, but with caution. At the current level I think a better buying opportunity will present itself before the market makes another move higher. In the meantime it is still a stock pickers market. Next week we'll get more data including some of the more forward looking housing numbers, jobless claims and the final revision to 2nd quarter GDP.

Until then, remember the trend!

Thomas Hughes


New Plays

Underperforming Retail

by James Brown

Click here to email James Brown


NEW BEARISH Plays

Urban Outfitters - URBN - close: 38.12 change: +0.15

Stop Loss: 38.60
Target(s): 34.50
Current Gain/Loss: unopened

Entry on September -- at $--.--
Listed on September 19, 2013
Time Frame: 3 to 4 weeks
Average Daily Volume = 2.8 million
New Positions: Yes, see below

Company Description

Why We Like It:
URBN is in the apparel store industry. It's a tough business with a very price conscious consumer. Shares of URBN plunged a few days ago on worries that Q3 same-store sales would come in a lot lower than expected. URBN has been trying to hold support near $38.00, which happens to be the bottom edge of a very large $38-44 trading range.

The stock didn't participate (much) in the market's widespread rally yesterday afternoon following the Fed meeting. While shares displayed a little relative strength today the overall pattern still looks bearish.

Yesterday's low was $37.34. I am suggesting a trigger to launch bearish positions at $37.25. If triggered our target is the November 2012 lows near $34.50.

FYI: The Point & Figure chart has produced a sell signal and is forecasting at $31.00 target.

Trigger @ 37.25

Suggested Position: short URBN stock @ (trigger)

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

buy the Oct $38 PUT (URBN1319v38) current ask $1.10

Annotated chart:




In Play Updates and Reviews

MGM Hits Our Bullish Target

by James Brown

Click here to email James Brown

Editor's Note:
Stocks took the day off to catch their breath after yesterday's afternoon sprint higher.

MGM hit our bullish exit target.
GT and YHOO were triggered.


Current Portfolio:


BULLISH Play Updates

Avago Technologies - AVGO - close: 40.75 change: +0.08

Stop Loss: 38.25
Target(s): 44.50
Current Gain/Loss: + 1.2%

Entry on September 17 at $40.25
Listed on September 10, 2013
Time Frame: 9 to 12 weeks
Average Daily Volume = 2.1 million
New Positions: see below

Comments:
09/19/13: AVGO provided us another entry point this morning with a dip toward the $40 area. Traders jumped in and the stock rebounded to close at another high.

Earlier Comments:
FYI: The Point & Figure chart for AVGO is bullish with a long-term $56.00 target.

current Position: long AVGO stock @ $40.25

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

Long 2014 Jan $40 call (AVGO1418a40) entry $2.80



Celldex Therapeutics - CLDX - close: 28.60 change: +1.84

Stop Loss: 24.75
Target(s): 29.00
Current Gain/Loss: +13.7%

Entry on September 17 at $25.15
Listed on September 16, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 1.5 million
New Positions: see below

Comments:
09/19/13: The rally in CLDX is picking up speed. Shares surged +6.8% on strong volume. Odds are good that we will see CLDX hit our suggested exit target at $29.00 tomorrow morning. I am raising our stop loss to $24.75.

NOTE: I am suggesting we go ahead and exit our October $25 calls immediately at the opening bell tomorrow morning. The current bid/ask is $4.20/4.40.

Earlier Comments:
NOTE: Traders need to be aware that biotech stocks can be a higher-risk trade. You never know when an unexpected headline about some clinical trial or FDA approval process could send the stock plunging or soaring. I am suggesting investors keep their position size small to limit risk.

*small positions*

current Position: long CLDX stock @ $25.15

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

Long Oct $25 call (CLDX1319j25) entry $2.05

09/19/13 new stop loss @ 24.75
prepare to exit the October $25 calls at the open tomorrow morning
09/18/13 new stop loss @ 23.90
*option entry price is an estimate since the option did not trade at the time our play was opened.



Freeport-McMoRan Copper & Gold - FCX - close: 34.60 change: +0.05

Stop Loss: 31.85
Target(s): 36.00
Current Gain/Loss: + 7.1%

Entry on September 11 at $32.30
Listed on September 09, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 11.5 million
New Positions: see below

Comments:
09/19/13: FCX tagged potential round-number resistance at $35.00 and then retreated. Shares still managed to post another gain. There was a lot of talk today on CNBC about how the Fed's decision to not taper QE is bullish for gold, which should be positive for FCX.

current Position: Long FCX stock @ $32.30

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

Long 2014 Jan $35 call (FCX1418a35) entry $1.15

09/18/13 new stop loss @ 31.85



Goodyear Tire & Rubber Co. - GT - close: 22.23 change: +0.06

Stop Loss: 21.39
Target(s): 25.00
Current Gain/Loss: - 1.2%

Entry on September 19 at $22.50
Listed on September 18, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 4.2 million
New Positions: see below

Comments:
09/19/13: Our new trade on GT has been opened. The stock opened higher at $22.48, tagged $22.50 and then retreated back toward $22.00. Our suggested entry point to launch bullish positions was hit at $22.50. I would actually be tempted to launch positions now at current levels given the afternoon rebound from the $22 area.

current Position: long GT stock @ $22.50

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

Long 2014 Jan $23 call (GT1418a23) entry $1.63



Lions Gate Entertainment - LGF - close: 35.45 change: -0.83

Stop Loss: 34.90
Target(s): 39.90 & 42.50
Current Gain/Loss: - 5.2%

Entry on September 16 at $37.41
Listed on September 14, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 1.1 million
New Positions: see below

Comments:
09/19/13: I still can't find any news to explain the sudden weakness in shares of LGF. The stock is now down three days in a row. The breakdown below $36.00 today is short-term bearish. LGF ended the session sitting on its rising 30-dma. LGF looks poised to drop toward its 50-dma near $34.25. Of course a breakdown below $35.00 will hit our stop loss at $34.90. I am not suggesting new positions at this time.

Earlier Comments:
I am setting our first target at $39.90. Our second, more aggressive target is $42.50.

current Position: long LGF stock @ $37.41

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

Long 2014 Jan $40 call (LGF1418a40) entry $1.75

09/16/13 trade opened on gap higher at $37.41
suggested trigger was $37.20.



NVIDIA - NVDA - close: 15.93 change: -0.07

Stop Loss: 14.95
Target(s): 16.90
Current Gain/Loss: + 2.1%

Entry on September 11 at $15.60
Listed on September 10, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 8.4 million
New Positions: see below

Comments:
09/19/13: NVDA managed to hit a new 52-week high on an intraday basis this morning. Unfortunately, NVDA was unable to keep these gains and posted a -0.4% decline. This stock continues to look short-term overbought. I would not chase it here. More conservative traders may want to start raising their stop loss.

Earlier Comments:
Our plan was to use small positions to limit our risk.
FYI: The Point & Figure chart for NVDA is bullish with a long-term $23.00 target.

current Position: long NVDA stock @ $15.60



PerkinElmer Inc. - PKI - close: 38.58 change: -0.05

Stop Loss: 36.49
Target(s): 42.50
Current Gain/Loss: + 1.1%

Entry on September 16 at $38.15
Listed on September 12, 2013
Time Frame: 6 to 9 weeks
Average Daily Volume = 784 thousand
New Positions: see below

Comments:
09/19/13: PKI rallied to new highs this morning near $39.00 but eventually retraced all of its intraday gains. Readers may want to wait for a dip or a bounce near the rising 10-dma before initiating new positions.
FYI: The Point & Figure chart for PKI is bullish with a $46.50 target.

current Position: Long PKI stock @ $38.15



Toro Co. - TTC - close: 54.62 change: -0.38

Stop Loss: 53.40
Target(s): 59.50
Current Gain/Loss: - 1.1%

Entry on September 16 at $55.20
Listed on September 14, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 235 thousand
New Positions: see below

Comments:
09/19/13: Today's session was a down one for TTC (-0.69%) but the stock is still churning sideways above support near the $54.00 level. Readers may want to wait for another dip or a bounce near $54 before initiating new positions.
FYI: The Point & Figure chart for TTC is bullish with a long-term $72.00 target.

current Position: long TTC stock @ $55.20

09/16/13 trade opened on gap higher at $55.20
suggested trigger was $55.15



Yahoo! Inc. - YHOO - close: 31.03 change: +0.60

Stop Loss: 29.25
Target(s): 34.75
Current Gain/Loss: + 1.4%

Entry on September 19 at $30.60
Listed on September 18, 2013
Time Frame: 9 to 12 weeks
Average Daily Volume = 13.3 million
New Positions: see below

Comments:
09/19/13: YHOO keeps the rally going with its fourth gain in a row. The stock displayed relative strength today with a +1.95% gain and another multi-year high. Our suggested entry point to launch positions was hit early this morning at $30.60.

Earlier Comments:
Our plan was to keep our position size small to limit our risk.

*small positions*

current Position: Long YHOO stock @ $30.60

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

Long 2014 Jan $32 call (YHOO1418a32) entry $1.70*

*option entry price is an estimate since the option did not trade at the time our play was opened.



BEARISH Play Updates

Axiall Corp. - AXLL - close: 39.81 change: +0.15

Stop Loss: 40.65
Target(s): 35.25
Current Gain/Loss: -2.7%

Entry on September 18 at $38.75
Listed on September 17, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 1.0 million
New Positions: see below

Comments:
09/19/13: AXLL spent Thursday's session churning sideways below resistance at the $40.00 level. I would wait for a new drop below $39.00 or even a drop below $38.60 before initiating new positions.

Earlier Comments:
Our target is $35.25. More aggressive traders may want to aim lower since the P&F chart is bearish with a quadruple-bottom breakdown sell signal and a $29.00 target.

FYI: AXLL is due to begin trading ex-dividend on September 25th. The quarterly cash dividend should be 16 cents.

current Position: short AXLL stock @ $38.75

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

Long Oct $40 PUT (AXLL1319v40) entry $2.20*

*option entry price is an estimate since the option did not trade at the time our play was opened.



Mellanox Technologies - MLNX - close: 35.64 change: -1.09

Stop Loss: 39.25
Target(s): 35.25
Current Gain/Loss: + 9.8%

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:
09/19/13: MLNX is the bearish gift that keeps on giving. Shares continue to display relative weakness and lost another -2.9% today. Our exit target is $35.25. More aggressive traders may want to aim lower. I am adjusting our stop loss down to $38.25 tonight.

I am not suggesting new positions.

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

09/19/13 new stop loss @ 38.25
09/14/13 new stop loss @ 39.25
09/04/13 new stop loss @ 40.15
08/22/13 warning! MLNX has produced a one-day bullish reversal pattern



CLOSED BULLISH PLAYS

MGM Resorts Intl. - MGM - close: 20.18 change: +0.41

Stop Loss: 18.95
Target(s): 19.95
Current Gain/Loss: + 6.7%

Entry on September 09 at $18.70
Listed on September 07, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 7.6 million
New Positions: see below

Comments:
09/19/13: Target hit.

Gambling-related stocks continued to show relative strength today. MGM outpaced the broader market with a +2.0% gain. Today's move is also a breakout past potential round-number resistance at the $20.00 mark. Our exit target was hit at $19.95.

closed Position: long MGM stock @ $18.70 exit $19.95 (+6.7%)

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

Oct $20 call (MGM1319j20) entry $0.38 exit $0.73 (+ 92.1%)

09/19/13 target hit.
09/18/13 new stop loss @ 18.95
09/16/13 new stop loss @ 18.65

chart: