Option Investor
Newsletter

Daily Newsletter, Thursday, 10/10/2013

Table of Contents

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

Market Wrap

Budget Debate Relief Lifts Stocks

by Thomas Hughes

Click here to email Thomas Hughes
Introduction

The early morning hours brought a glimmer of hope that the budget battle was beginning to cool down. There was no evidence of a deal but at least sides were talking. The hope helped to drive index futures significantly higher. The S&P 500 was indicated to open about 1% higher with the Dow and Nasdaq in similar standing. The talk on TV was about evenly split between the budget debate and actual business news. Earnings season started this week and will begin to heat up tomorrow when Wells Fargo and JP Morgan report. After the open the major indices built on the early gains seen in the futures markets and continued higher throughout the day. The evolving story surrounding the budget stand-off centers around Speaker Boehner new attempt to get a temporary debt-ceiling increase passed so that the two sides could sit down and talk. The markets got a boost each time a new detail emerged until the S&P 500 hit today's high just over 1692. The made the biggest one day gain of the year today, the S&P the second biggest.


Asian stocks closed in mixed territory because they did not get the news from Washington in time. European markets were lifted on the hopes of a deal to raise the debt limit. The major European indices gained between 1 and 2% in today's trade. International economic data was pretty light today. The Bank Of England held rates steady. In Japan machinery orders rose more than 5%, well above expectations and the first rise in three months. This is a sign that Abenomics is working at least a little. Here at home jobless claims number made a surprising jump but the numbers were blamed on California's computer malfunctions last month.

Leading the U.S. markets today were the banks. Wells Fargo was up a little over 1% just after the open, JP Morgan about 1.5%, both closing up more than 2.5%, JPM more than 3.5%. The talk is not so much that the banks are expected to report great earnings but that the future outlook and guidance should see improvements. Regardless of what the earnings expectations are today's rally in the banking sector was mostly due to the apparent progress made in the debt ceiling battle. The solution is short term but would grant a short term but increases hopes that a quick and painless budget can be passed soon. By the days end the Banking Index was up nearly 3%.

Unemployment Claims Spike

Initial claims were released today despite the government shut-down. Initial claims were reported to have jumped 66,000 in the last week, but the gains are blamed primarily on lingering issues and back logs related to California's computer glitches. Looking deeper into the report only three states reported an increase of more than 1,000 in the last week, including California. Gains in those three states totaled less than 4,000. That leaves over 60,000 claims unaccounted for and less than 50 states to account for them...it doesn't add up to me unless I add in those claims attributed to California and the computer problems. This weeks initial claims hit 374,000, the highest level since March of this year. The moving average of claims gained 20,000 reaching 325,000. I halfway expected to see a spike like this, now we have to wait and see if it lingers. The government shut-down could lead to an increase in claims over the next few weeks.


Continuing claims fell this week by 16,000. Claims fell to 2.905 million from a mild revision to last weeks data. This is still well below the 3 million mark and in line with the longer term trend of declining unemployment. The question now though is how will the California issue affect continuing and even the total claims figures. How many of these people are still on the books and how many more claims are still back logged in California? There could be some volatility in this and all the unemployment figures until the government shut down and the California affect work through the system. Total claims rose slightly to 4.02 million. This is just above the long term lows for total claims and in line with the longer term trend in claims.



Import and export prices were scheduled for release today but not due to the shut down.

The Gold Index

Gold fell in today's trading session. A stronger dollar helped to push gold below $1,300 on an intraday basis. Gold has been flirting with $1,300 for a couple of weeks now and has now fallen through. Gold lost over 1.5% today, driven lower by the move forward in the budget debate, falling below $1,300 to reach a session low of $1287. The Gold Index initially traded to the upside today along with the rest of the market but eventually turned lower before the close. It is still trading below the lower boundary of a long term triangle pattern with mixed indicators. On the short term daily charts MACD is bearish but declining and near zero, stochastic is oversold and beginning to turn up. Long term momentum is still bullish but in decline and stochastic is in the middle of the range pointing down. In the short term this index is indicated lower but the longer term consolidation may still be in effect. If so this index may be producing a whip saw at this time and could remain trapped within the triangle until a strong catalyst emerges to drive prices one direction or the other. Based strictly on my trend lines the Gold Index could trade sideways within my triangle for up to 2 months. I am wary of the break-out without some form of stronger signal than what is now being displayed. Today's drop in gold prices could also provide a catalyst for the Gold Index to move lower.

The Gold Index

The Banking Index

The banking sector was one of today's top movers. The Banking Index gained nearly 3% during today's session. Although there is little hope of robust earnings growth among the banks there is growing expectation for increased profitability in banks ranging from the regional operators up to the big names like Wells and JP Morgan. Factors like improved economic conditions, credit risk and M&A activity are being cited by analysts as reasons to expect signs of improving profits for the banking sector. Looking at the Banking Index it appears as if support is emerging around the $62.50 level. Today's rise brought the index back up above that level and above the 30 day moving average. Bullish divergences in the MACD and the stochastic also show support at the current levels. If the banking sector delivers the kind of earnings reports the market is looking for this index could continue to move higher with next resistance at the $65 level. Today's action produced bullish stochastic and MACD crossovers.

The Banking Index

Wells Fargo is also making a bounce from an indicated support level. This stock moved more than 2% higher as well but is still well below the short term moving average. Wells is expected to earn about $0.97 per share, slightly lower than the previous quarter and in line with current full year expectations. The bank has already warned that refinancing volume is down significantly, just how badly this impacts the current quarter and what they say about future loan growth and profit centers will be under careful scrutiny. Support is currently at $40, just under the 150 day moving average, with a possible upside target of $42.50 and $44.

Wells Fargo

JP Morgan is in the spotlight for more than just it's earnings and future potential. The company is being dogged by lingering legal issues and possible fines related to the Whale and the mortgage crisis. The recent meeting between Jamie Dimon and the federal authorities resulted in very little news on the outcome and impact to JPM's bottom line. Speculation puts a settlement at $11 billion dollars, the exact amount and details around such a settlement will be a top priority for traders of this stock. Today's price action is a continuation of a bounce from support. A support similar in nature to both WFC and BKX. MACD and stochastic both indicate support at the current level and price is trading above the 150 day moving average. There are also bullish stochastic and MACD signals emerging on this chart. Tomorrow's report could make or break this trade, a break above $52.50 could carry this stock higher. Currently support exists around $50 with resistance near $52.50. A break below support could take JPM down to $47.50 or $45. A break above resistance has a target over $55. After the bell JPM announced several new actions aimed at raising cash. Wells and JPM both report before the bell.

JP Morgan

The Dollar

The dollar strengthened on the news of a potential short term increase to the debt ceiling. The index gained about 0.15%, extending yesterday's move up from the $80 support level. The index is currently indicated up with a target near the $81 resistance pierced just a few weeks ago. If the budget debate/debt ceiling can move forward the dollar could strengthen further.

The Dollar Index

The euro held firm against the dollar in today's trading. The pair moved slightly lower to retest support before moving back up to the break even level. Indicators have just turned bearish, MACD has just crossed into bearish territory and stochastic is pointing down and moving lower. The 1.3500 level is currently providing support, if it holds the pair could test long term resistance up around the 1.3750 level. If support for the euro fails and the dollar continues to strengthen the pair could move lower to support levels around the 1.3375 level or lower.

The EUR/USD

The yen weakened significantly against the dollar in today's trading. The better than expected machinery orders helps to solidify faith in Abenomics and the long term success of his and BOJ Governor Kuroda's plans for Japanese recovery. The pair had fallen back beneath the upper boundary of a triangle pattern but today re-broke that pattern. At the same time the pair has also broken back above an important Fibonacci retracement level with an early stochastic signal. If current conditions hold true this pair could easily retest the 100 resistance level over the near term. Other factors impacting this trade, the EUR/USD and the dollar index beside the debt ceiling/budget debate are economic trends, the possibility of FOMC tapering and the possibility of increased stimulus from the BOJ.

USD/JPY

The Dow

The Dow gained 2%. today. The blue chip index made a strong move up from a support level that has been tested now for the third time since May of this year. Indicators are bearish on the short term daily charts but peaking out and coincident with the bottom of a possible trading range. Looking back over the past 5 months we can see that the index has been indeed trading in such a range between support at 14,775 and resistance around 15,550. If the five month trend holds we can expect the index to move back up to the top of the range over the near term. The relief of a debt ceiling resolution could be what carries the index up to the top the range. At that point I think it will be economic data, the FOMC and the earnings outlook that takes over market sentiments.

The Dow

The Nasdaq

The Nasdaq Composite gained over 2% in today's trading, leading the major indices. This index has been a leader all year, making steady gains even as the Dow has been treading water. Improving economic conditions raised hopes of profit growth in the sector that has helped it to reach the current high levels. This index is still well above the long term trend line and trending up. There divergences between the index and the indicators but there are no signs of reversal at this time. The recent weakness , driven by the political situation, is short term in nature so far as I can tell. Currently potential resistance exists at 3,750 and at the recent 13 year highs near 3,819.

Nasdaq

The S&P 500

The S&P has been trending up over the last year as well. Not quite as sharply as the Nasdaq but definitely better than the range bound Dow. The debt ceiling/budget battle brought the index down from an all time high over the last few weeks and it is now bouncing back higher. Early this week the index broke below the trend line but today I think relief overcame the nearer term fear and allowed the market to return to trend. Not much really happened today except that the market got a sign that there would be an end to the current stand off, which I don't think anyone really believed wouldn't happen. Relief was the catalyst for today's rally and it may carry the index even higher, a resolution to the stand off even higher until the index reaches the next resistance level around the current all-time high of 1725.50.

The S&P 500

Just the idea that the two sides in the budget battle were mellowing toward each other caused futures to gain more than 15 points in the pre market hours. Throughout the day as the story developed the index continued to gain, ratcheting 5-10 points higher with each new sign that the impasse was coming to a close. Tomorrow could another big move in the market, especially if a stop-gap measure to increase the debt ceiling is passed. Not to mention earnings, earnings and the long term trend. The political battle will impact prices in the near term but it will be earnings, the economy and the FOMC that impact the long term trend.

Until then, remember the trend!

Thomas Hughes


New Plays

China & Healthcare

by James Brown

Click here to email James Brown


NEW BULLISH Plays

iShares China Large Cap ETF - FXI - close: 38.14 change: +0.42

Stop Loss: 36.70
Target(s): 41.75
Current Gain/Loss: unopened

Entry on October -- at $--.--
Listed on October 10, 2013
Time Frame: 6 to 9 weeks
Average Daily Volume = 17.6 million
New Positions: Yes, see below

Company Description

Why We Like It:
The FXI is the large cap Chinese company ETF that tracks the FTSE China 25 index. There is always a lot of opinion about China. Lately there seems to have been a resurgence in warnings that China's economy might be slowing down too fast again. There is no consensus and some analysts believe China's economy is actually improving. If the action in the FXI is any indication then investors seem to be bullish.

The FXI has been respecting its three-month trend line of support with traders buying the dips this past week. If this trend continues we could see the FXI make a run at its 2013 highs near $42.00.

I am suggesting a trigger to open bullish positions at $38.25. There is a good chance that the FXI might gap open above our trigger and that's okay. This ETF might see some short-term resistance in the $39.25 area and the $40.00 level but our multi-week target is $41.75.

Trigger @ 38.25

Suggested Position: buy the FXI (ETF) @ (trigger)

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

buy the 2014 Jan $40 call (FXI1418a40) current ask $0.96

Annotated chart:



HEALTHSOUTH Corp. - HLS - close: 36.10 change: +0.79

Stop Loss: 34.75
Target(s): 39.75
Current Gain/Loss: unopened

Entry on October -- at $--.--
Listed on October 10, 2013
Time Frame: exit PRIOR to earnings on Oct. 28th
Average Daily Volume = 459 thousand
New Positions: Yes, see below

Company Description

Why We Like It:
HLS is in the healthcare sector. The company provides specialized rehabilitative treatment. The stock has been showing consistent relative strength. HLS was relatively unaffected by the market's sell-off from its September highs. Instead HLS has managed to keep the rally going and is now up six weeks in a row. Today saw HLS breakout past short-term resistance at $36.00 and set a new closing high.

I am suggesting a trigger to open bullish positions at $36.25. If triggered our target is $39.75 but we do not want to hold over the earnings report scheduled for October 28th.

Trigger @ 36.25

Suggested Position: buy HLS stock @ (trigger)

Annotated chart:




In Play Updates and Reviews

Stocks Rally On Hope

by James Brown

Click here to email James Brown

Editor's Note:
The stock market rallied on hope for a debt ceiling deal between democrats and republicans but so far it's just hope. No deal has been made yet.

BJRI was stopped out. RJF has been removed.


Current Portfolio:


BULLISH Play Updates

Krispy Kreme Doughnuts, Inc. - KKD - close: 23.08 change: +0.13

Stop Loss: 21.40
Target(s): (sold half @ 23.25) exit the 2nd half at $24.75
Current Gain/Loss: (+14.5%) 2nd half = +13.7%

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:
10/10/13: KKD underperformed the broader market today but shares still posted a +0.5% gain. The stock has already had a strong performance this month and KKD is currently trying to chew through resistance in the $23.25-23.50 zone. I am not suggesting new positions at this time. More conservative traders may want to use a higher stop loss.

Earlier Comments:
I am suggesting we sell half of our position at $23.25. We want to adjust our final exit target to $24.75.

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

10/08/13 new stop loss @ 21.40
10/08/13 1st target hit at $23.25 (sell half) +14.5%
10/05/13 Strategy Update: new stop loss @ 20.45
Plus, we want to sell half of our position at $23.25 and then exit the rest of our position at $24.75.



PRD Energy - PREGF - close: 1.04 change: -0.00

Stop Loss: 0.93
Target(s): TBD
Current Gain/Loss: - 0.5%

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:
10/10/13: Thursday proved to be a quiet day for shares of PREGF. The stock did not participate in the broader market rally. Instead PREGF closed unchanged on the session. A bounce from here or from the $1.00 level could be used as a new bullish entry point.

*Higher Risk, Speculative Trade*

current Position: Long PREGF stock @ $1.05

10/05/13 new stop loss @ 0.93



BEARISH Play Updates

Cliffs Natural Resources - CLF - close: 20.67 change: +0.58

Stop Loss: 20.85
Target(s): 16.25
Current Gain/Loss: unopened

Entry on October -- at $--.--
Listed on October 09, 2013
Time Frame: exit PRIOR to earnings on Oct. 24th
Average Daily Volume = 6.6 million
New Positions: Yes, see below

Comments:
10/10/13: CLF erased yesterday's decline with a big +2.88% bounce today. It's worth noting that the rebound did stall at the $21.00 level and nts its 10-dma. CLF is still trading with a bearish trend of lower highs, at least for now. There is no change from my Wednesday night new play comments.

Earlier Comments:
Traders may want to use the option to limit their risk. CLF does have above average short interest. The latest data listed short interest at 34% of the 152 million share float.

I am suggesting a trigger to open small bearish positions at $19.75. If triggered our target is $16.25. However, we do not want to hold over CLF's earnings report on October 24th. FYI: The Point & Figure chart for CLF is bearish with a $15.00 target.

Trigger @ 19.75 *small positions*

Suggested Position: short CLF stock @ (trigger)

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

Buy the NOV $20 PUT (CLF1316w20)



Urban Outfitters - URBN - close: 36.46 change: +0.76

Stop Loss: 36.75
Target(s): 34.50
Current Gain/Loss: + 2.1%

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:
10/10/13: Several large retail chains reported their September same-store sales data this morning. The results were mixed with multiple companies missing estimates. Yet that didn't stop most of the retail names from participating in the stock market's widespread rally today. URBN surged +2.1% to close just above short-term technical resistance at its 10-dma. If there is any follow through higher tomorrow we could see URBN hit our stop at $36.75. 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 exit $2.85* (+96.5%)

10/09/13 planned exit to close our Oct. 38 puts at the open.
*option exit price is an estimate since the option did not trade at the time our play was closed.
10/08/13 new stop loss @ 36.75
prepare to exit the October $38 puts at the open.
10/07/13 new stop loss @ 37.25
10/05/13 new stop loss @ 37.75
09/28/13 new stop loss @ 38.25



ValueClick, Inc. - VCLK - close: 19.48 change: +0.17

Stop Loss: 20.51
Target(s): 18.05
Current Gain/Loss: + 1.9%

Entry on October 08 at $19.85
Listed on October 07, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 1.2 million
New Positions: see below

Comments:
10/10/13: VCLK gapped open higher this morning but shares pared their gains by the closing bell. The stock ended today's session with a +0.8% gain. A failed rally near $20.00 could be used as a new bearish entry point. More conservative traders might want to tighten their stops closer to $20.00.

Trigger @ 19.85

Suggested Position: short VCLK stock @ (trigger)

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

Long NOV $20 PUT (VCLK1316w20) entry $1.45

10/08/13 new stop loss @ 20.51



CLOSED BEARISH PLAYS

BJ's Restaurant - BJRI - close: 29.41 change: +0.44

Stop Loss: 29.55
Target(s): 25.00
Current Gain/Loss: - 6.5%

Entry on October 07 at $27.75
Listed on October 05, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 315 thousand
New Positions: see below

Comments:
10/10/13: BJRI was already not cooperating with us. The stock had already begun an oversold bounce prior to today's widespread market rally. Thus today's market bounce gave BJRI the push it needed to hit our stop loss.

Earlier Comments:
I am suggesting small positions because BJRI does have above average short interest. The most recent data listed short interest at 17% of the small 23.2 million share float. I am not listing the options but you could buy put options to limit your risk in a bearish trade on BJRI.

closed Position: short BJRI stock @ $27.75 exit $29.55 (-6.5%)

10/10/13 stopped out

chart:



Raymond James Financial - RJF - close: 41.90 change: +1.20

Stop Loss: 41.15
Target(s): 36.25
Current Gain/Loss: unopened

Entry on October -- at $--.--
Listed on October 08, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 931 thousand
New Positions: see below

Comments:
10/10/13: The financial sector was a strong outperformer today and RJF outperformed its peers with a +2.94% gain. Our trade has not opened yet (trigger was $36.25) so we are removing RJF from the newsletter.

Trade did not open.

10/10/13 removed from the newsletter

chart: