Option Investor
Newsletter

Daily Newsletter, Thursday, 11/14/2013

Table of Contents

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

Market Wrap

Yellen Soothes Markets

by Thomas Hughes

Click here to email Thomas Hughes
Hopeful markets were reassured by Janet Yellen's dovish comments and pushed to make new highs.

Introduction

The global markets rallied in the overnight sessions. The rally in U.S. markets yesterday, driven by the unexpectedly dovish comments from Federal Chair Nominee Janet Yellen, spilled over into Asian and European markets. Asian indexes gained an average +1%, led by the Nikkei's 2.12% gain. In Europe the positive sentiment was a little muted as some weaker than expected data renewed concern over the strength of the current recovery. German GDP was reported as in line with expectations while France's expected return to growth was dashed by a -0.1% drop. While France really isn't that important for us, it is a major part of the EU economy and thereby does have some affect on the global economic picture.


U.S. futures trading was positive this morning and pointed to an open at a new all time intra day high for the S&P. Domestic economic data, in particular unemployment claims, was a little weaker than expected but did not seem to phase bullish sentiment. Neither did a few high profile earnings misses from the the likes of Wal Mart, Cisco and others. All eyes were on Capital Hill, awaiting the start of Yellen's confirmation hearing. Following the release of the data futures trading cooled off a little. The S&P 500, Dow and Nasdaq all opened near to flat from yesterday's closing prices. The first half hour of trading saw the indices bob and weave within a very tight range.

Once the hearings began the tone, statements, questions and answers were very soothing. Yellen supports the economic recovery, she believes a stronger recovery is needed before the taper starts, QE will continue for now until data shows it isn't needed and the markets took it all very well. The S&P and Dow extended gains made yesterday but the Nasdaq struggled to reach break even. A few disappointing earnings statements were the cause but it was able to move into the green.

The Data

We got a few bits of data today, nothing market moving and all in line with current trends. Unemployment claims fell by 2,000 from last week's upwardly revised figure to hit 339,000. Factoring in the revision this is a net gain of 3,000 from last week and within the expected range. The four week moving average was also revised up for last week, this week's figure fell nearly 6,000. This is the sixth week of decline since the California/Nevada spike was reported and well past the government shut down. It looks like neither had any long lasting affect on unemployment and that the slowly improving unemployment situation is still slowly improving. Only two states reported a drop in claims greater than 1,000, Oregon and California, for a net decline of -5,500. Four states reported an increase in claims greater than 1,000; MI, OH, NJ and MA for a net gain around 7,300.


Continuing claims held steady from last weeks mild upward revision. This makes a net increase around 20,000 claims from last weeks reported numbers. Looking at the table it appears as if there is no impact from the October events in the data, it also appears as if longer term unemployment is holding steady around the current level. This could negatively impact November unemployment figures even thought the long term trend is down and claims are near long term lows.


Total claims for unemployment fell this week by nearly 55,000 claims. This is 21.75% lower than last year's rate, in line with the 21-25% rate of decline I have observed over the past year or so. Total claims are retreating from the 4 million level and near to the long term low of 3.86. This figure also, when looking at the table, appears to be holding relatively stable over the past two months. Good because no serious impact from October but potentially bad for November employment figures. However, 3rd quarter GDP was much better than expected and October NFP was also a bit surprising so November could be surprising as well. Keep in mind that the Initial claims is for the week ending 11/9 while the other two figures are from the week prior to that.


Productivity and labor costs were also released today, both in line with expectations. Non Farm Productivity levels rose 1.9% from the previous month versus a gain of 1.8% for that time period. The consensus was around 2%. This increase was bolstered by an unexpected drop in labor costs. The consensus was for cost to increase by 0.5% but the actual was reported as -0.1%. The Trade Gap widened by 8%. This was blamed on the shut down and could negatively impact GDP in the fourth quarter. Tomorrow's calendar has 6 releases scheduled.


The Dollar Strengthens

Several factors combined to help strengthen the dollar. Unemployment data from home, GDP in Europe, Janet Yellen's support of economic recovery, the ECB rate cut last week and an impending meeting of the Bank of Japan to name a few. The EUR/USD dropped from a new resistance level at 1.35000. This level provide support for the pair on the way up to the most recent peak. In the longer term the pair has just crested above a 50% Fibonacci Retracement and now fallen back below it coincident with the ECB rate cut. In the short term weaker than expected data in the EU and semi-strength in the U.S could help to pressure this pair further. My current target is the next Retracement level around the 1.31250.

EUR/USD

The yen lost some ground to the dollar today as well. The USD/JPY pair moved up from just above the short term moving average to test the 100 level. This level has provided significant resistance in the past and could do so again now. Momentum is bullish but weak and stochastic is bullishly crossing over the upper signal line. The short term analysis is cautiously bullish contingent on a solid move above 100. This move could hinge on the BOJ meeting next week (release of policy statement on Thursday). I haven't heard or read anything to the effect but I suspect there may be some expectation the BOJ will make some dovish indication in support of Abenomics behind some of this weeks rise in the pair. Recent changes to fundamentals that could influence the BOJ decision is the lack of tapering by the FOMC and the ECB rate cut. Regardless of the cause the 100 level is the one to watch, at least until after next Thursday.

USD/JPY

The Gold Index

Gold got a big lift from Janet Yellen's statements. Her support of QE while the economic recovery is still so “fragile” added $20 to the spot price. Gold is now trading back up toward the $1300 level which is looking like it might provide some resistance. The bounce in gold prices was enough to keep the Gold Index from breaking down through the lower boundary of the long term pennant formation. Indicators are bearish but weakly so. There is some support for the index along the lower edge of the boundary but it may be fading. I think it is going to take some positive change in the expectation for profits to lift this index out of the pennant and I don't see that happening while gold prices remain at such low levels.

Gold Index

The Oil Index

Oil gained about a quarter percent on renewed hopes driven by Yellen. This is after oil prices hit an intraday low more than 1% below yesterday's closing prices. Oil has now been trading below $95 for over two weeks with a real chance it could go lower. Talks with Iran, although stalling over some key points, is relieving some tensions and helping to take some premium out of the price at the same time increasing supplies are doing the same. The Oil Index traded to the upside today, extending a bounce from the 30 day moving average. The potential short term H&S I pointed out last week did not carry through. Bearish momentum is in decline and the peak analysis suggests support along the current trend line. Lower oil prices may be bad for oil production companies but it is good for the economy, gas consumers, gas retailers and in the end oil producers so it may be a diamond in disguise. Current resistance is around 1,480 with support along the 30 day EMA around 1450.

Oil Index

Earnings Roundup

About 100 or so companies reported today. The biggest news I saw was from the retail sector. Several names such as Wal Mart, Kohls and others reported revenue and earnings misses. Wal Mart reported a small increase in revenue for quarter and $1.14 EPS. This was ahead of the previous quarter's $1.08 but well below the expected $1.35. Guidance for the fourth quarter was projected in a range that includes the average estimate of $1.58. Full year guidance was revised to a dime below the estimated $5.21-$5.31 from the last quarters statement. The quarter included all of October and could have been impacted by the shut down despite the stronger than expected economic data. Comp sales in October were down by 0.3%. The stock fell in early trading, opening more than 1% lower than yesterday's closing price. Shares of WMT quickly found support however and were driven up to make a new 6 month high. Momentum is bullish but weak and the stock is extremely overbought. It is possible that Wal Mart is at the top of a range. Current resistance is just above the current level at $80 with near term support at $77.50.

WMT

Anybody trading yesterday's doji on the Kohl's chart got a happy surprise today indeed. Anyone bullish on that stock did not. Today's release of earnings was far below the general expectation. The company reported a much larger than expected drop in quarterly sales versus the same period last year resulting in a cut to full year guidance. The company says that the fourth quarter will be as expected but reduced the full year range by $0.12 to $4.08-$4.23. The stock lost more than 7% in early trading, gap down at the open. Some buying came in at the low prices but not enough to regain the days losses.

KSS

The Retail Spyder (XRT) is looking rather bullish despite the less than stellar reports from the sector today and this week. There is some speculation that the shopping season could be better than expected already and if the better than expected economic strength from the third quarter carries into this one then I can see it happening. The sector has been trending up over the last 12 months and recently broke out to new highs. Previous resistance was tested as support and then in a text book move the ETF is now bouncing up off the 30 day EMA. Momentum is bullish and comparing the two peaks since the break to new highs is convergent with higher prices. Stochastic is bullish and crossing above the upper signal line. This ETF looks like it is in rally mode and could keep moving higher.

XRT

The S&P 500

The S&P 500 opened just above the flat line today, bobbing over and under for the first half hour of trading. Some stocks were moving, particularly the ones releasing earnings, but for the most part the markets were awaiting Janet Yellen. Her remarks, released to the market yesterday, provided some relief and her performance during the hearing today reinforced that feeling. As soon as she began to speak the markets began to lift, reaching an early high just before 11:30AM. The middle part of the day saw the index, and the other major indices, fall back some before retesting the early high in late afternoon trading. On the short term daily charts the index is indicating a buy. MACD hit zero today and is crossing over to the bullish side at the same time stochastic has pointed up. This signal has resulted in 50-100 points of up side each time it has happened over the last 12 months.

SPX daily

The long term charts of weekly prices echo the bullish signals displayed on the daily charts. Momentum is bullish and on the rise while stochastic is also bullish and crossing above the upper signal line. While at this time the long term divergences we have all been tracking over the past 6 months are still present they may soon be erased. The current long term bull wave is still on the rise and could move another 50-100 points higher in the short term and as much as 100-300 points higher in the longer term provided nothing emerges to reverse the long term trends.

SPX Weekly

Janet Yellen gave the market a soothing balm. Her position was one of support for the economy and continued QE. She want's it to end, but she supports it now and until the “fragile” recovery is strong enough to stand on here own. Perhaps more soothing than here words was here demeanor. She was confident, relaxed and had her answers ready to hand. A much different impression than the one I get from Ben Bernanke and that little waver in his voice. For now QE is still in place and is still data dependent. Targets for unemployment are still around the 6.5% level which, based on the current rates of decline, we will achieve in the early spring. While money is flowing in the markets are likely to flow up. It is possible that only a change to the underlying fundamentals in the form of reduced stimulus can turn the markets now.

Until then, remember the trend!

Thomas Hughes


New Plays

Long-Term Bullish Channel

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)
KS, SPWR, LAMR, YHOO, ADSK, TXN, ALL, USB, BAC, MS, CSX, PBI, EHTH, P,



NEW BULLISH Plays

Seagate Technology - STX - close: 50.10 change: +1.33

Stop Loss: 47.95
Target(s): 57.50 or top of its channel.
Current Gain/Loss: unopened

Entry on November -- at $--.--
Listed on November 14, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 4.3 million
New Positions: Yes, see below

Company Description

Why We Like It:
STX is in the technology sector. The company makes electronic data storage products (like disk drives and solid-state drives). The company's most recent earnings report in late October was a miss but shares really didn't see much of a reaction to the report. Traders bought the dip in early November and now shares are surging back toward their highs. Shares peaked in the $50.50-50.66 area in the second half of October. A breakout would be a new all-time high and could signal a race back toward the top of STX's long-term bullish channel (see weekly chart below).

I am suggesting a trigger to open bullish positions at $50.70. If triggered our target is $57.50 or the top of its weekly channel, whichever the stock hits first.
FYI: The Point & Figure chart for STX is bullish with a long-term $77.00 target.

Trigger @ 50.70

Suggested Position: buy STX stock @ (trigger)

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

buy the 2014 Jan $55 call (STX1418a55) current ask $0.74

Annotated chart:

Weekly chart:




In Play Updates and Reviews

Big Caps Keep Climbing

by James Brown

Click here to email James Brown

Editor's Note:
The large cap indices continue to hit new highs. The Russell 2000 underperformed and actually closed negative, which could be a warning signal.

CRL and VRSN were triggered.
NAV and TDC were closed as planned.


Current Portfolio:


BULLISH Play Updates

Anika Therapeutics - ANIK - close: 30.82 change: -0.41

Stop Loss: 29.75
Target(s): 38.00
Current Gain/Loss: unopened

Entry on November -- at $--.--
Listed on November 12, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 275 thousand
New Positions: Yes, see below

Comments:
11/14/13: ANIK failed again near the $32.00 level. If this happens again we will likely drop it as a candidate. The pullback today stalled at its simple 10-dma. Currently we are suggesting a trigger to launch positions at $32.05. If triggered our target is $38.00.

Earlier Comments:
I do consider biotech stocks to be higher-risk, more aggressive trades. We never know when a headline about some clinical trial or FDA approval process could spark a big gap down or gap higher in the stock. I am suggesting small positions to limit our risk.

Trigger @ 32.05 *small positions*

Suggested Position: buy ANIK stock @ (trigger)



CBOE holdings - CBOE - close: 50.54 change: -0.11

Stop Loss: 49.25
Target(s): 57.50
Current Gain/Loss: - 2.3%

Entry on November 11 at $51.75
Listed on November 09, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 530 thousand
New Positions: see below

Comments:
11/14/13: Lack of follow through on yesterday's bounce does not inspire any confidence in CBOE. I am not suggesting new positions at the moment.

current Position: long CBOE stock @ $51.75

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

Long 2014 Jan $50 call (CBOE1418a50) entry $2.85



Charles River Labs Intl. - CRL - close: 51.65 change: +0.62

Stop Loss: 49.40
Target(s): 55.00
Current Gain/Loss: + 0.3%

Entry on November 14 at $51.50
Listed on November 13, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 418 thousand
New Positions: see below

Comments:
11/14/13: Our new play on CRL is off to a strong start. Shares outperformed the market with a +1.2% gain and a new high. The breakout past the $51.00 area is bullish. Our suggested entry point to launch positions was hit at $51.50.

Our plan was to keep our position size small to limit our risk. FYI: The Point & Figure chart for CRL is bullish with a $58.00 target.

*small positions*

current Position: long CRL stock @ $51.50



Brinker Intl. Inc. - EAT - close: 45.92 change: +0.02

Stop Loss: 44.75
Target(s): 49.75
Current Gain/Loss: + 0.4%

Entry on November 06 at $45.75
Listed on November 05, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 1.4 million
New Positions: see below

Comments:
11/14/13: For the third time in as many days shares of EAT dip to and bounced from their rising 10-dma. Traders may want to wait for a new high above $46.30 before initiating new positions.

Earlier Comments:
The latest data listed short interest at 10% of the 65.5 million share float. If this rally continues it could spark some short covering. Our target is $49.75. More aggressive traders could aim higher. The Point & Figure chart for EAT is bullish with a $67.50 target.

I want to urge a little caution if you plan to use the call options. EAT's January options have some relatively wide spreads. The 2014 January $45s seem to be the exception for now but that doesn't mean the spread will stay this narrow (it could get worse).

current Position: long EAT stock @ $45.75

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

Long 2014 Jan $45 call (EAT1418a45) entry $1.70*

11/13/13 new stop loss @ 44.75
*option entry price is an estimate since the option did not trade at the time our play was opened.



Evercore Partners - EVR - close: 52.62 change: -0.38

Stop Loss: 49.95
Target(s): 59.00
Current Gain/Loss: + 0.2%

Entry on November 07 at $52.50
Listed on November 06, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 439 thousand
New Positions: see below

Comments:
11/14/13: EVR underperformed the financial sector and the broader market today. Traders did buy the midday dip. More conservative traders might want to wait for a rally past $53.00 before initiating positions.

Our multi-week target is $59.00. More aggressive investors could aim higher since the Point & Figure chart for EVR is bullish with a $69 target.

current Position: Long EVR stock @ $52.50



Five Below, Inc. - FIVE - close: 53.44 change: +1.34

Stop Loss: 49.65
Target(s): 58.50
Current Gain/Loss: + 2.3%

Entry on November 12 at $52.25
Listed on November 11, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 694 thousand
New Positions: see below

Comments:
11/14/13: Shares of FIVE retested short-term technical support at their 10-dma this morning and then surged to a +2.5% gain and a new all-time closing high. Readers may want to start raising their stops.

Earlier Comments:
There are plenty of investors who believe FIVE's valuation is too rich. That has led to a rise in short interest. The most recent data listed short interest at 19% of the 46.6 million share float. If FIVE continues to rally it could see a lot more short covering. The recent breakout past round-number resistance at $50.00 should have the bears in a panic. The Point & Figure chart for FIVE is bullish with a $68.00 target.

current Position: long FIVE stock @ $52.25

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

Long DEC $55 call (FIVE1322L55) entry $1.91



HB Fuller Co. - FUL - close: 49.50 change: +0.05

Stop Loss: 47.65
Target(s): 49.75
Current Gain/Loss: + 7.1%

Entry on October 15 at $46.20
Listed on October 12, 2013
Time Frame: 4 to 8 weeks
Average Daily Volume = 405 thousand
New Positions: see below

Comments:
11/14/13: FUL hit an intraday high of $49.62. Our exit target is $49.75. More conservative traders may want to just exit now.

current Position: long FUL stock @ $46.20

11/09/13 new stop loss @ 47.65
11/07/13 new stop loss @ 47.40
11/04/13 new stop loss @ 46.95
10/29/13 new stop loss @ 46.75
10/22/13 new stop loss @ 45.75
10/17/13 new stop loss @ 44.95
10/15/13 be careful. FUL hit our trigger on a very brief intraday spike
10/14/13 adjust entry trigger to $46.20 from $46.15



Halliburton Co. - HAL - close: 56.26 change: +0.72

Stop Loss: 53.65
Target(s): 57.50
Current Gain/Loss: + 3.9%

Entry on November 06 at $54.15
Listed on November 04, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 7.8 million
New Positions: see below

Comments:
11/14/13: HAL continued to rally following yesterday's bounce. Today's +1.29% gain left shares at a new two-year closing high. Wednesday's low was $53.72. I am raising our stop loss to $53.65.

Earlier Comments:
Currently our target is $57.50 but we're debating whether to raise that target to $59.50. The Point & Figure chart for HAL is bullish with a $62.00 target.

current Position: long HAL stock @ $54.15

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

Long 2014 Jan $55 call (HAL1418a55) entry $1.78

11/14/13 new stop loss @ 53.65
11/13/13 new stop loss @ 53.25



VeriSign, Inc. - VRSN - close: 55.81 change: +0.71

Stop Loss: 53.75
Target(s): 59.50
Current Gain/Loss: +1.0%

Entry on November 14 at $55.25
Listed on November 13, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 1.1 million
New Positions: see below

Comments:
11/14/13: The rally in VRSN continues and shares broke through resistance near $55.00. Our trigger to launch positions was hit at $55.25.


FYI: The Point & Figure chart for VRSN is bullish with a long-term $76.00 target.

current Position: long VRSN stock @ $55.25

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

Long 2014 Jan $55 call (VRSN1418a55) entry $2.01



Consumer Staples ETF - XLP - close: 43.28 change: +0.31

Stop Loss: 41.65
Target(s): 47.50
Current Gain/Loss: + 1.2%

Entry on October 29 at $42.75
Listed on October 28, 2013
Time Frame: 9 to 12 weeks
Average Daily Volume = 7.0 million
New Positions: see below

Comments:
11/14/13: The XLP did see some follow through on Wednesday's big bounce. Shares outperformed the major indices with a +0.7% gain and a bullish breakout past resistance to new record highs.

current Position: long the XLP @ $42.75

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

Long 2014 Jan $43 call (XLP1418a43) entry $0.71*

11/06/13 new stop loss @ 41.65
10/30/13 FYI: today's session has created a bearish reversal pattern. Look for a dip back toward $42.00.
*option entry price is an estimate since the option did not trade at the time our play was opened.



BEARISH Play Updates


None. We do not have any active bearish trades.



CLOSED BULLISH PLAYS

Navistar Intl. - NAV - close: 39.74 change: -0.01

Stop Loss: 38.65
Target(s): 44.75
Current Gain/Loss: - 1.2%

Entry on November 11 at $40.25
Listed on November 09, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 824 thousand
New Positions: see below

Comments:
11/14/13: We decided last night that NAV was not performing well and we could close positions today. Shares opened at $39.76 and spent another day drifting sideways, not participating in the market's widespread rally.

closed Position: long NAV stock @ $40.25 exit $39.76 (-1.2%)

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

2014 Jan $40 call (NAV1418a40) entry $3.00* exit $2.60** (-13.3%)

11/14/13 planned exit at the open
**option exit price is an estimate since the option did not trade at the time our play was closed.
11/13/13 prepare to exit at the open tomorrow morning
*option entry price is an estimate since the option did not trade at the time our play was opened.

chart:



CLOSED BEARISH PLAYS

Teradata Corp. - TDC - close: 44.80 change: -0.15

Stop Loss: 47.05
Target(s): 37.00
Current Gain/Loss: - 2.5%

Entry on November 04 at $43.40
Listed on October 31, 2013
Time Frame: 4 to 8 weeks
Average Daily Volume = 4.1 million
New Positions: see below

Comments:
11/14/13: TDC has not been cooperating with our bearish plans for the stock. We decided last night to exit positions at the opening bell this morning. TDC gapped open lower at $44.48.

closed Position: short TDC stock @ $43.40 exit $44.48 (-2.5%)

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

2014 Jan $40 PUT (TDC1418m40) entry $0.90 exit $0.59 (-34.4%)

11/14/13 planned exit
11/13/13 prepare to exit tomorrow morning at the open
11/04/13 triggered at $43.40
11/02/13 adjust entry trigger from $43.50 to $43.40

chart: