Option Investor
Newsletter

Daily Newsletter, Thursday, 10/3/2013

Table of Contents

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

Market Wrap

Economy Faces New Threat

by Thomas Hughes

Click here to email Thomas Hughes
Introduction

Even though non-essential government agencies are currently shut-down they still released some data today. However, from what I have heard and read so far we will not get any data tomorrow. This includes the Non-Farm Payrolls and U.S. Unemployment rate. The numbers today were OK, not great and not bad, but they failed to support the markets in the face of the current state of politics. Futures trading was mildly positive ahead of the open but still below yesterday's fair value close. At the open the indices quickly fell into negative territory and were spurred lower by a statement from the Treasury Department. Apparently, the economy faces a new threat...a default by the U.S. Government. Duh. Isn't that what the current sell-off is all about?


The Treasury statement, released shortly after 10AM, predicts that a default could lead to a new financial crisis and recession. It warned that credit could freeze and that any disruptive event could cause the dollar to plummet. The statement, aimed at both sides of the argument, is a harsher version of Warren Buffets admonishments yesterday. He called the bickering “extreme idiocy” and I agree. Following the release markets fell to new lows with the S&P trading as low as 1670 before Speaker Boehner came and out and said he would reach an agreement to prevent a default. After his press conference the market regained more than half of the early morning losses.

Talk of the shut-down is dominating the news to the point that nearly nothing has been said about the two central banks meetings this week or the upcoming earnings season. The ECB and the BOJ both met and both released their policy statements. The ECB held steady on rates and comments, though positive on the state of the EU, left the door open for further support of the recovery if needed. The BOJ starts their meeting today. There is growing pressure on Abe to up stimulus in order to meet targets and alleviate the effects of next years upcoming sales tax hikes. For now, statements from the BOJ say they will act if needed but on hold until the 2nd quarter of 2014.

Earnings season starts in earnest next week. Alcoa reports on Tuesday, JP Morgan and Wells Fargo on Friday. Alcoa was recently downgraded based on aluminum prices and growth concerns. I am not expecting a lot from the report but think the statement and out look could mean a lot. JP Morgan and Wells are also expected to earn less than last quarter and again, the statements and future out look will be important. For now, the long term trend in the S&P is still up but that could change if the shut-down persists. The indices fell off just before the close. The S&P closed in the lower half of today's range, down -15 points.

The Economic Data

Until we hear of an end to the budget battle today's release of jobless claims is the last employment data we will get for a while. Today initial claims gained 1,000 from a small 2,000 claim upward revision. The moving average fell -3,750 to hit a five year low. The initial claims data looks good. So far there has not been any spike in claims due to the CA/NV hiccup of last month. However, the new uncertainty is how will the shut-down and furlough affect claims over the next few weeks. How long will the shut-down last, how many folks will file for unemployment and when it's all over, how many will go back to their government jobs? The ADP report this week was moderately good. 162,000 private jobs is in line with the trend and the trend is for moderate job growth. If the NFP number was equally good there is a good chance unemployment could drop again.


Continuing and total claims both climbed in this weeks data. The continuing claims by 104K and the total claims by 81K. Continuing claims has climbed for the last two weeks and could perhaps be where any irregularities in the CA/NV reporting could be showing up. The number is still well below the 3 million mark and in line with the longer term trend of declining unemployment. Total claims has also climbed for the past two weeks but by a much smaller margin. This number is still just above long term lows and in line with the down trend in unemployment. No states reported an increase in claims greater than 1,000, 7 states including CA, GA, NY and SC reported drops in claims greater than 1,000.



ISM and Factory Orders were released at 10AM, just before the Treasury Statements. ISM numbers, though still firmly expansionary, fell more than expected. September ISM came in at 54.4, the expectation was for 57.5, last month was 58.6. Last months number was an 8 year high so it is not to unexpected for there to be some decline this month. Factory orders, well, when I went to the Census Bureau website I got a message saying that “Due to the lack of Government funding....” .

The Gold Index

Gold continued it's wild ride. This week has seen the metal down nearly $40 one day, up nearly $30 the next and then today, down again. It looks like there are some buyers willing to get in around the $1300 level but the metal is indicated lower for now. The Gold Index is now breaking the lower boundary of the pennant formation I have been watching over the past few weeks. Momentum is weak but stochastic is breaking below the lower signal line, pointing to weakness in the market. Longer term momentum is still bullish but in decline. A confirmed break of the pennant would have a target at the full retracement of the previous bull market around 30 points lower from the current level. Gold could experience a lot of volatility over the next few days and weeks which could carry over into the Gold Index. The shut down/debt ceiling will have the most near term effect. Economic data and tapering won't matter if the country grinds to a halt.

The Gold Index

The Oil Index

Oil traded in a tight range today but held the gains made yesterday. The price of oil is now near the middle of the three month range and off the lows set earlier this week. The Oil Index traded down today but held at the newly forming support around 1,400 level. This level is a previous resistance line of mine and coincident with the 30 day moving average. Longer term indicators are weakly bullish at this time but highly divergent. Shorter term indicators are bearish but also weak. It looks as if the index is winding up into the point of a triangle formed by the long term trend line and my resistance line at 1430. The mixed nature of the indicators leaves potential direction once a break occurs very debatable. Until then, I expect the index to continue trading between the long term trend and upper resistance.

The Oil Index

The Dollar

The Dollar Index sank to a new 8 month low today. The fear of the long term impacts of government shut down on the U.S. recovery is causing investors to seek other havens. Further impacting the dollar are a string of data from the EU and Asia pointing to firming economic recovery in those regions. The dollar dropped versus the euro and the yen today. The EUR/USD climbed to reach an 8 month high. This pair is now near the top of a nearly 2 year trading range. Indicators on the daily charts are positive but diverging from the new highs.

EUR/USD

The USD/JPY fell in today's trading but found support at the 150 day moving average. The pair has now dropped below support at 97.50 and the top of the previously broken triangle pattern. Abenomics and dollar weakness are battling here. Abe and Kuroda need the yen to remain weak in order for their plans to work. With the mounting pressure on Abe to increase stimulus is seems like the current BOJ meeting would be a good time to do something. However, BOJ statements that it would hold-fast belie that sentiment. If this pair fails to regain the upper side of the triangle tomorrow or Monday the chance that it will fall below the long term moving average and possibly retest the 95 level come into play.

USD/JPY

Story Stocks

A few stocks made it into the headlines before the Capital Hill shooting took over the media. Tesla was first up this morning in an ongoing story. An incident with one of their cars resulted in a fire after hitting a “large object”, according to the report I read. No injuries were reported. This comes just after a major downgrade caused the stock to drop 10%. Today the fall was halted at the short term 30 day moving average. Trading volume was very high, forming a doji candle. The $173.50 level will be important, a drop below this level could take Tesla down to $150.

Tesla

With earnings just around the corner Alcoa and the big banks were also in the news. Alcoa reports on Tuesday and the market is not expecting much from it. Deutsche Bank downgraded the stock yesterday to a sell based on aluminum prices and demand. Last quarter the aluminum producer reported $0.07 last quarter and is expected to report less this time around. EPS projections for next year are much higher than for the current year so any guidance or forward looking statements will be important for the company and the overall economic outlook. The stock dropped 2% today and is now trading near the bottom of the long term range. Current support target exists around the $7.75 level.

Alcoa

The big banks begin reporting next Friday. Wells Fargo and JP Morgan are both currently trading near their 150 day moving averages. The two charts are similar but distinctly different, but each indicates potential support at their current levels. Their is some concern over growth hanging over the sector and the added burden of JP Morgans lingering troubles. The Banking Index is also trading at a potential support zone but much higher in relation to either Wells or JPM. The last time I checked into the BKX it had dropped down from a reversal and hit a potential support level, the one it is on now. In between then and now it has bounced up to test resistance and failed. The failure to break resistance is a concern but the MACD and stochastic also indicate support is growing at the current level. Earnings will be a big concern for the banks. Any weakness in the reports, or in the guidance, could send them crashing through support.

Bank Index

The S&P 500

The S&P bounced around a lot today, and in a fairly large range compared to the last few weeks. A lot of noise has entered the markets. There is a lot of uncertainty over the shut-down/debt ceiling even though Boehner has assured us the U.S. wont default. Adding to this is the economic condition, we need to know, we want to know, what the data is. I feel robbed of a crucial part of my month without the NFP tomorrow. There is also some uncertainty over earnings, even though the data over the last month has been in line with the trend of steady, moderate growth. The S&P 500 hit its low today shortly after 12PM, nearly 25 lower than yesterday's close. The drop took the index down to just above my support line at the previous all-time high around 1668. This is also just above the long term trend line. The indicators bearish at this time but momentum is very weak compared to previous peaks and helps confirm support along the trend line. If you are still of the buy the dip mentality, as I am, it is starting to look like it could soon be a pretty good time to get in again.

SPX Daily

In the longer term the SPX is still trending up. The indicators are currently bearish but weak. The stochastic could be forming a divergence but I would like to have some other confirmation of that signal such as a break of the trend line before acting on it. At this time the index appears to in a regular correction to trend and could begin to move back up over the next week or so. This would be in line with earnings season, provided the current weakness does not grow. The divergence is an additional warning sign but without a break of trend the long term trend is up.


However, there could be some lingering weakness. The shut-down, debt ceiling, economic data, earnings could individually or in combination change the over all out look. The effect of the shut-down will keep moving the market in the near term but will likely not do much to hurt the overall trend. Look to the data and the earnings for that.

Until then, remember the trend!

Thomas Hughes


New Plays

Bullish Channel

by James Brown

Click here to email James Brown


NEW BULLISH Plays

WuXi Pharma Tech - WX - close: 28.15 change: +0.50

Stop Loss: 26.95
Target(s): 31.50
Current Gain/Loss: unopened

Entry on October -- at $--.--
Listed on October 03, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 289 thousand
New Positions: Yes, see below

Company Description

Why We Like It:
WX is in the healthcare sector. The company operates biotech, pharmaceutical and medical device research and development in the U.S. and China. They are headquartered in Shanghai, China.

The stock looks like a momentum trade with shares up five weeks in a row and up ten out of the last eleven weeks. Traders just bought the dip (twice) near $27.00 as the stock rebounds off the bottom of its bullish channel.

I am suggesting small bullish positions if WX can trade at $28.30. If triggered our target is $31.50. We will have to keep a careful eye on the $30.00 level, which might prove to be round-number resistance.

Trigger @ 28.30 *small positions*

Suggested Position: buy WX stock @ (trigger)

Annotated chart:




In Play Updates and Reviews

Market Bounce Reverses

by James Brown

Click here to email James Brown

Editor's Note:
The stock market accelerated lower on bearish comments from the U.S. treasury regarding the impact of a debt default (referencing the debt ceiling debate). The Treasury said the situation could worsen and be as bad or worse than the 2008 financial crisis.

KKD hit our entry trigger. PRIM was stopped out.


Current Portfolio:


BULLISH Play Updates

Avago Technologies - AVGO - close: 43.30 change: -0.11

Stop Loss: 41.30
Target(s): 44.50
Current Gain/Loss: + 7.6%

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:
10/03/13: AVGO held up well during today's market weakness. Shares continued to find support in the $43 area (actual low was $42.82). While this strength is encouraging if the market really breaks down we will probably see AVGO dip toward $42.00 if not lower. I am not suggesting new positions at this time.

Earlier Comments:
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

10/01/13 new stop loss @ 41.30
09/28/13 new stop loss @ 40.85
09/24/13 new stop loss @ 39.85
09/21/13 new stop loss @ 39.40



Twenty-First Century Fox, Inc. - FOXA - close: 33.15 change: -0.56

Stop Loss: 32.45
Target(s): 37.50
Current Gain/Loss: - 2.8%

Entry on October 01 at $34.10
Listed on September 30, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 8.6 million
New Positions: see below

Comments:
10/03/13: FOXA underperformed the market with a -1.6% decline and tested short-term support near $33.00. A bounce from here could be a new bullish entry point but investors may want to hesitate. The broader market is starting to turn negative on the situation in Washington.

current Position: Long FOXA stock @ $34.10



Goodyear Tire & Rubber Co. - GT - close: 22.78 change: -0.49

Stop Loss: 21.85
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:
10/03/13: Ouch! GT gave up -2.1% today with a dip toward short-term support at its simple 10-dma. Currently our stop loss is at $21.85. Cautious traders might want to consider a stop closer to the rising 20-dma (near 22.24).

current Position: long GT stock @ $22.50

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

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

10/01/13 new stop loss @ 21.85
09/24/13 new stop loss @ 21.65



Krispy Kreme Doughnuts, Inc. - KKD - close: 21.18 change: +1.20

Stop Loss: 19.19
Target(s): 23.25
Current Gain/Loss: + 4.3%

Entry on October 03 at $20.30
Listed on October 02, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 1.25 million
New Positions: see below

Comments:
10/03/13: Our new play on KKD is off to a strong start. Shares ignored the market's weakness this morning and instead KKD surged higher. The move today almost looks like a short squeeze but KKD does not have that much short interest. The breakout past its mid September highs and above its 50-dma is bullish. Our trigger to open bullish positions was hit this morning at $20.30. After a +6.0% gain today I would expect some profit taking tomorrow.

NOTE: KKD is prone to some intraday spikes. I am suggesting small positions to limit our risk.

*small positions*

current Position: Long KKD stock @ $20.30



Lions Gate Entertainment - LGF - close: 35.81 change: -0.93

Stop Loss: 34.60
Target(s): 40.00
Current Gain/Loss: - 2.6%

Entry on October 02 at $36.75
Listed on October 01, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 1.75 million
New Positions: Yes, see below

Comments:
10/03/13: It was not a good day for LGF. The stock lost -2.5% and gave back more than half of its prior two-day rally. The next test is potential support at $35.00 or its simple 50-dma near $34.85. I would wait for a bounce before considering new positions.

current Position: Long LGF stock @ $36.75



PolyOne Corp. - POL - close: 30.64 change: -0.06

Stop Loss: 29.25
Target(s): 34.50
Current Gain/Loss: -0.4%

Entry on September 30 at $30.75
Listed on September 28, 2013
Time Frame: 4 to 6 weeks
Average Daily Volume = 412 thousand
New Positions: see below

Comments:
10/03/13: POL continues to weather the market's pullback pretty well. Traders bought the dip near support at $30.00 yet again. The stock bounced back to almost unchanged.

current Position: Long POL stock @ $30.75



PRD Energy - PREGF - close: 1.05 change: +0.07

Stop Loss: TBD
Target(s): TBD
Current Gain/Loss: + 0.0%

Entry on September 27 at $1.05
Listed on September 26, 2013
Time Frame: 6 to 9 weeks
Average Daily Volume = 130 thousand
New Positions: see below

Comments:
10/03/13: Shares of PREGF steadily drifted higher on Thursday while ignoring the market's volatility. Today's +6.8% gain puts this play back to breakeven.

*Higher Risk, Speculative Trade*

current Position: Long PREGF stock @ $1.05



Ryanair Holdings - RYAAY - close: 50.37 change: +0.35

Stop Loss: 48.90
Target(s): 54.50
Current Gain/Loss: - 0.0%

Entry on September 26 at $50.35
Listed on September 25, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 540 thousand
New Positions: see below

Comments:
10/03/13: Our patience with RYAAY might pay off. The stock outperformed the broader market today with a +0.69% gain. Today's rise is also a bullish move back above short-term resistance near $50.00 and its 50-dma and 100-dma.

*small positions*

current Position: Long RYAAY stock @ $50.35



Seagate Technology - STX - close: 45.56 change: -0.39

Stop Loss: 43.75
Target(s): 47.00
Current Gain/Loss: +7.8%

Entry on September 25 at $42.25
Listed on September 24, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 3.5 million
New Positions: see below

Comments:
10/03/13: After a strong four-day rally higher STX hit some profit taking with a -0.8% pullback. We can watch for likely support near $44.00 or more conservative traders can just exit now to lock in gains.

current Position: Long STX stock @ $42.25

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

Long 2014 Jan $45 call (STX1418a45) entry $1.71

10/02/13 new stop loss @ 43.75
10/01/13 new stop loss @ 41.95
09/30/13 new stop loss @ 41.40
09/26/13 new stop loss @ 40.90



The TJX Companies - TJX - close: 56.19 change: -0.52

Stop Loss: 55.40
Target(s): 62.00
Current Gain/Loss: - 1.0%

Entry on October 01 at $56.75
Listed on September 28, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 3.1 million
New Positions: see below

Comments:
10/03/13: The decline in TJX kept pace with the pullback in the S&P 500 with both pulling back about -0.9%. Today's low in TJX was $55.82, which keeps the trend of higher lows intact for now. However, if the market continues to sink we could see TJX hit our stop loss at $55.40 soon. I am not suggesting new positions today.

In other news, there was an interesting note from the National Retail Federation today. The NRF released their 2013 holiday shopping forecast and expect overall retail sales in November and December to show +3.9% growth in 2013. That's above 2012's 3.5% growth rate and above the 10-year average of +3.3% growth. However, they also warned that the situation in Washington D. C. could impact consumer confidence if the lack of political cooperation persists. The government shutdown and concerns over the debt ceiling could hamper consumers' appetite to spend money.

Earlier Comments:
Our $62.00 target might be a little aggressive. More conservative investors may want to exit near $60.00.

current Position: Long TJX stock @ $56.75

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

Long 2014 Jan $60 call (TJX1418a60) entry $1.15



Ubiquiti Networks - UBNT - close: 35.25 change: +0.45

Stop Loss: 32.90
Target(s): 39.75
Current Gain/Loss: unopened

Entry on October -- at $--.--
Listed on October 01, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 853 thousand
New Positions: Yes, see below

Comments:
10/03/13: Traders bought the dip in UBNT near $34.00 midday. The stock's afternoon rebound lifted shares to a +1.29% gain. The relative strength is encouraging and we could see UBNT hit our suggested entry point at $35.75 tomorrow. I don't see any changes from my prior comments.

Earlier Comments:
UBNT could see another short squeeze. The most recent data listed short interest at more than 32% of the very small 19.5 million share float. If the market continues to rally I suspect odds of a short squeeze in UBNT definitely go up. Today's high was $35.47. I am suggesting a trigger at $35.75. If triggered our short-term target is $39.75.

NOTE: I do consider this a more aggressive, higher-risk trade because UBNT can be a volatile stock. I am suggesting smaller positions to limit risk.

Trigger @ 35.75 *small positions*

Suggested Position: buy UBNT stock @ (trigger)



BEARISH Play Updates

Urban Outfitters - URBN - close: 36.70 change: -0.22

Stop Loss: 38.25
Target(s): 34.50
Current Gain/Loss: + 1.5%

Entry on September 24 at $37.25
Listed on September 19, 2013
Time Frame: 3 to 4 weeks
Average Daily Volume = 2.8 million
New Positions: see below

Comments:
10/03/13: URBN spent the day churning sideways. Shares eventually settled with a -0.59% loss. I am not suggesting new positions at this time.

Earlier Comments:
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.

current Position: short URBN stock @ $37.25

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

Long Oct $38 PUT (URBN1319v38) entry $1.45

09/28/13 new stop loss @ 38.25



CLOSED BULLISH PLAYS

Primoris Services - PRIM - close: 24.76 change: -0.71

Stop Loss: 24.75
Target(s): 28.50
Current Gain/Loss: - 2.9%

Entry on September 23 at $25.50
Listed on September 21, 2013
Time Frame: exit PRIOR to earnings in early November
Average Daily Volume = 222 thousand
New Positions: see below

Comments:
10/03/13: The Thursday morning market sell-off hit PRIM pretty hard. Shares spiked down below support near $25.00 and hit our stop loss at $24.75.

While our trade has been closed I would keep PRIM on your watch list. A dip near the $23.00-24.00 zone could prove to be another bullish entry point.

closed Position: Long PRIM stock @ $25.50 exit $24.75 (-2.9%)

10/03/13 stopped out
10/01/13 new stop loss @ 24.75

chart: