Option Investor
Newsletter

Daily Newsletter, Thursday, 11/21/2013

Table of Contents

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

Market Wrap

Dow 16,000

by Thomas Hughes

Click here to email Thomas Hughes
The Senate Banking Committee backs Yellen, the BOJ back the economy, earnings guidance is poor and the markets rallied.

Introduction

There was a lot for the global markets to digest this morning. Not only were heads still spinning from yesterday's somewhat confusing FOMC minutes there was a central bank statement and a fresh round of economic data. Asian markets were impacted most heavily by the Bank Of Japan policy meeting and statements. The Nikkei climbed nearly 2% on the announcement that Japanese recovery was on track and that the BOJ saw the global economy in a positive light. BOJ Governor Kuroda stated that the Eurozone and U.S. economies are “gaining strength” and went on to say the outlook for Japan and the world was “brightening”.


Data from the Eurozone did not fully support the stance of the BOJ. EU PMI data came in a little weaker than expected at 51.5, still expansionary but not as strong as last months 51.9 and the expected 52. The drop caused some concern that the EU recovery is loosing steam. EU indices opened lower but climbed throughout the day to close at or near yesterday's closing highs. U.S. futures trading was positive and gained some strength going into the open. Unemployment and inflation data were in line with the current trends and helped to support prices. The U.S. markets opened broadly higher and extended early gains going into the morning. Around 10:15 we got word that the Senate Banking Committee was backing Yellen for fed chief and the markets hit their early high.

Other talk this morning centered around concerns for the holiday shopping season. A few companies have issued warnings and/or cautions that the consumer may not be as strong as expected. This sentiment flies in the face of other estimates I have heard and read that this could be a record holiday season. A few companies such as Lowes and Target are two notable disappointments but they are balanced by positive reports from other retailers like Home Depot. If you balance the extremes somewhere in the middle is an OK shopping season. The fears were not too great however, as the major indices were able to extend the early gains into the afternoon.

The Data

Initial jobless claims fell 21,000 from an upward revision of 5,000 to last week data, making a net drop of 16,000. This weeks figure of 323,000 is the lowest level since the California back log first came into the data nearly two months ago. This week's drop is a reassurance that pre-shut down trends in labor were not affected. The four week moving average also fell, hitting 338,500 and a four week low. Initial claims are now sitting at the levels seen just prior to the Cali snafu and government shut down. Only one state reported a drop in claims more than 1,000. 12 states reported a jump in claims of more than 1,000 led by California's +4,737 for a total near 25,000. This means that there were mild declines in claims across the remaining 37 states.


Continuing claims rose in this weeks data, adding 66,000 for a total of 2.876 million. The gain is a wash because last weeks continuing claims were revised lower. The two weeks cancel each other out and remain flat for the past 4-8 weeks. Based on this it appears as if job growth may have stalled out during the October period. Total claims fell this week and may be indicate that the long term decline in unemployment may be gaining momentum. Total claims fell by -32,376 to hit 3.875, just off the long term low and more than 26% lower than last year's total claims and nearly 50% lower than 2 years ago. The question now is if jobs growth will pick back up in November and December.



The Consumer Price Index was released simultaneous to the employment claims. Consumer level inflation declined at the rate of -0.2%, in line with the expectations. Last month's reading was -0.1%. This is an important factor in the Fed's taper decision, if inflation is not rising they will be less inclined to begin the taper. The Philly Fed survey declined as expected but surprised with the extent. The actual number was 6.5, the expected was 15.0 (last month's 19.8 was a big surprise). Tomorrow be on the look out for housing starts and building permits. The calendar on my platform has two releases listed for each, September and October, so it looks like it will be a double dose of shut down delayed data points.

The Yen Trade

The yen weakened considerable following the BOJ statement and press conference. Although the BOJ did not enact any further QE they indicated it could happen and that they were still committed to the long term plan currently underway. In the face of impending tapering that could be enough to push the USD/JPY back up to retest it's highs around 103.75. Kuroda's statements in support of the U.S. and EU recovery while at the same time standing firm on long term QE underscore what some traders may have already determined; soon dollar printing will slow down while yen printing keeps on going. Since the BOJ's targets for inflation are expected to be met in 2015 we may also expect Japanese QE policy to go on until then as well (which is there own target). Over the last week the USD/JPY moved above the 100 level which had been a resistance several times in the past. The pair held firm until today's meeting and then began to move up. At this time the move is being driven more on expectations than actual changes to fundamentals so it may not be very strong. Momentum is weakly bullish and on the rise.

USD/JPY

The Gold Index

BOJ Governor Kuroda's stance on the economy may have added pressure to gold. His comments in support of the U.S. recovery could be taken as an indication that tapering is fast approaching. Adding this to the FOMC minutes it looks more and more likely that it will start sooner rather than later. Regardless, gold prices fell another $15-$20 in the early part of today's trading dropping from previous support at $1250 to hit a 5 month low. The Gold Index has finally succumbed to the dead weight of low gold prices. The index broke through the bottom of the long term pennant formation and is approaching a long term low. Momentum is bearish and on the rise, but still weak compared to the past few months. The momentum could grow if gold prices remain at such low levels. If the index's break below the pennant is confirmed my next target is around $75.

Gold Index

The Retail Sector

A couple of bad reports have been focused on by the media. I'm not saying that the retail sector is in good shape but I don't think it's quite as bad as some may believe. This morning Target reported an earnings miss that shocked investors, not good by any means, but offset by other positive reports from other retailers. This is the same for Lowe's report yesterday. Lowe's missed on revenue, earnings and provided an earnings caution for the fourth quarter. Just the day before that Home Depot reported better than expected earnings. The point, this sector like the entire market is still in stock picker mode. The XRT has been trending up for the past 11 months and still looks fairly strong. The momentum is bullish and since breaking out to new highs last month convergent with higher prices. The long term charts are equally bullish at this time and we are heading into the holiday season. Numbers for Black Friday and Cyber Monday could be elevated simply because there are 6 less days of shopping between Thanksgiving and Christmas.

Retail Spyder

Target's third quarter results were an improvement over last years third quarter but not by enough. Comps in the quarter rose by 0.7%, well below expectations, and resulted in EPS 13% below the consensus. The company cited a cautious consumer environment and negative impacts from dilution in the Canadian unit. The company went on the guide fourth quarter and full year guidance lower as well. If the consumer is weaker than expected this holiday then the current guidance could be right on. The stock, which has been trending sideways for over a year, dropped more than 3% in today's session. The price is now below a long term support/resistance line the stock has been trading around since the middle of last year at the $65-$66 level.

Target

Dollar Tree was not immune to third quarter softness. The discount retailer also reported earnings below estimates and guided lower in the fourth quarter. Profits fell to $0.58 per share from last years $0.68, just below the expected $0.60 analysts had predicted for this quarter. The company reduced full year EPS guidance to $1.01-$1.07 from a previously expected $1.10. Dollar Tree is another area where fourth quarter earnings could be a positive surprise, especially since the guidance has been lowered. Third quarter spending may have been impacted by the shut down but other data have shown this impact is negligible in the longer term. This stock has been trending up strongly for 9 months, today's 4% drop brought price down to a potential support area. Volume buying stepped in and helped to drive prices up off the lows.

Dollar Tree

The Indices

The major indices hit new highs last week and then spent the first half of this week cooling off. The FOMC minutes, economic data and evolving taper out look helped to hold index prices down. Today the markets bounced back from the downward pressure. The SPX moved up by nearly 1% led by the Blue Chips which set a new closing high. The NASDAQ made today's biggest percent move at just under 1.25%. Looking at the daily chart of the SPX we can see a market that is drifting higher in fits and starts. At this time the MACD and the stochastic are displaying wicked divergences and suggest a correction in the short term could be coming. Today's action is bullish although light on volume. The 1800 level is current resistance and is the important level for to watch tomorrow. If the bulls fail to advance then next week could some sideways to down action.

SPX daily

Longer term the index is more bullish. The momentum is bullish and rising, stochastic is bullish and crossing above the upper signal line. Both are also in the process of erasing long term divergences that have been casting a shadow on the longer term bullish outlook. There is still reason for caution though. On this chart the MACD could be rising or it could be peaking, the candle is not fully formed. Tomorrow will be a key day for analysis on this chart. If the bulls can get the SPX above 1800 at the close then the index could keep rallying. A failure to break 1800 would be bearish, at least in the near to short term. The first major support zone if prices fall is about 50 points below the current level around 1750.

SPX weekly

The Dow Industrials moved up to make a new high today, crossing above 16,000. There are short term divergences on this chart as well but if the Transports can be relied upon as an indicator of future Dow prices then I expect to see this index move higher even if there is a correction of some sort. Long term momentum is bullish and rising with more strength than the SPX. Stochastic indicates the index is neither overbought or oversold and is being accumulated.

Dow Weekly

The Transports gained more than 1% today as well but did not make a new high. This index has some a glaring divergence in the short term similar to the SPX. The recent all-time intra day high set earlier this week could provide the resistance for a short term consolidation or correction. In the long term this index is also still bullish but the current wave may be peaking. The 7,250 level will be important to watch on this chart tomorrow. A break above could result in a renewal of the rally while a failure could lead to consolidation and/or correction.

Transports daily

Loose fiscal policy is still on the table around the world. Even though we now also have tapering back on the table. The taper fear helped to push stocks lower this week but I think it is very short lived. If the Fed tapers it means the economy is on track and growing. If the Fed tapers it means QE is still happening, just a little less, and so long as money is flowing in the markets are flowing up. The divergences showing up on the short term daily charts are a cause for caution going into tomorrow. If the markets can not break to new highs then some form of correction may occur. If they can then it may be rally on until the next market hurdle appears. The Dow may have already tipped the hand by making its new high today. With or without a correction the long term trends are still up and there is no sign of reversal.

Until then, remember the trend!

Thomas Hughes


New Plays

Financials Rising

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)
WOOF, HIG, MS, NWL, RESI, LNC, BMA, KS, TEN, SEE, MU, LUV, KEY,



NEW BULLISH Plays

Comerica Inc. - CMA - close: 45.29 change: +0.50

Stop Loss: 44.40
Target(s): 49.90
Current Gain/Loss: unopened

Entry on November -- at $--.--
Listed on November 21, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 1.5 million
New Positions: Yes, see below

Company Description

Why We Like It:
CMA is in the financial sector. This regional bank operates three segments: a business bank, retail bank, and wealth management. The stock has been a consistent performer for the bulls with traders buying the dips near its 10-dma. Now after more than a week of consolidating sideways near the $45.00 level shares of CMA are breaking out to multi-year highs.

Today's intraday high was $45.52. I am suggesting a trigger to launch bullish positions at $45.65. If triggered our target is $49.90.

Trigger @ 45.65

Suggested Position: buy CMA stock @ (trigger)

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

Buy the 2014 Jan $45 call (CMA1418a45) current ask $1.50

Annotated chart:




In Play Updates and Reviews

Dow Industrials Close Above 16,000

by James Brown

Click here to email James Brown

Editor's Note:
The big cap Dow Jones Industrial Average managed to close above the 16,000 mark for the first time in history today. The rest of the major U.S. indices also turned higher with a widespread rally on Thursday.

Prepare to exit our CLF trade tomorrow morning.


Current Portfolio:


BULLISH Play Updates

Anika Therapeutics - ANIK - close: 30.87 change: -0.35

Stop Loss: 29.75
Target(s): 38.00
Current Gain/Loss: - 3.7%

Entry on November 18 at $32.05
Listed on November 12, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 275 thousand
New Positions: see below

Comments:
11/21/13: I am concerned about ANIK's lack of movement today. Shares underperformed the market during a widespread rally. If ANIK does not improve tomorrow we might drop it. More conservative traders may want to just exit early now at the opening bell tomorrow. I am not suggesting new positions at this time.

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.

*small positions*

current Position: long ANIK stock @ $32.05

11/21/13 ANIK is not performing well. Traders may want to exit early now.



Bio-Reference Labs Inc. - BRLI - close: 37.04 change: +0.65

Stop Loss: 34.95
Target(s): 39.75
Current Gain/Loss: + 2.2%

Entry on November 20 at $36.25
Listed on November 18, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 225 thousand
New Positions: see below

Comments:
11/21/13: Not surprisingly shares of BRLI continues to rally, especially on a day the market is bouncing. Shares outperformed the major indices with a +1.78% gain. I am raising our stop loss to $34.95.

Earlier Comments:
A breakout past $36.00 could spark some serious short covering. The most recent data listed short interest at 44% of the very small 24.4 million share float.

Our target is $39.75. More aggressive traders may want to aim higher. The Point & Figure chart for BRLI is bullish with a $49.00 target.

current Position: long BRLI stock @ $36.25

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

Long Dec $35 call (BRLI1322L35) entry $2.30

11/21/13 new stop loss @ 34.95



CBOE holdings - CBOE - close: 54.14 change: +1.22

Stop Loss: 50.90
Target(s): 57.50
Current Gain/Loss: + 4.6%

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:
11/21/13: CBOE is racing higher with a +2.3% gain and another new high. I am raising our stop loss to $50.90.

current Position: long CBOE stock @ $51.75

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

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

11/21/13 new stop loss @ 50.90
11/20/13 new stop loss @ 49.95



Cliffs Natural Resources - CLF - close: 26.43 change: -0.80

Stop Loss: 25.85
Target(s): 34.00
Current Gain/Loss: -5.6%

Entry on November 19 at $28.00
Listed on November 16, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 9.2 million
New Positions: see below

Comments:
11/21/13: Some of the mining and resource names did not perform well today. CLF was definitely an underperformer with a -2.9% decline. Today's weakness may have been a reaction to news that CLF was closing plans on a chromite project.

I am suggesting we exit immediately at the opening bell tomorrow. More aggressive traders may want to give it another day and see if CLF can bounce from the $26.00 level instead.

current Position: long CLF stock @ $28.00

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

Long 2014 Jan $30 call (CLF1418a30) entry $1.20

11/21/13 prepare to exit at the opening bell tomorrow



Charles River Labs Intl. - CRL - close: 51.56 change: +0.05

Stop Loss: 49.90
Target(s): 55.00
Current Gain/Loss: + 0.1%

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:
11/21/13: CRL is still bouncing but the rally today underperformed the rest of the market. The stock remains below resistance near $52.00. More conservative investors might want to raise their stop closer to the $50.75 level.

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

11/20/13 new stop loss @ 49.90



Brinker Intl. Inc. - EAT - close: 47.19 change: +1.08

Stop Loss: 45.40
Target(s): 49.75
Current Gain/Loss: + 3.1%

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:
11/21/13: EAT was a big winner today with a +2.3% gain and a new all-time high. I am raising our stop loss to $45.40.

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*

11/21/13 new stop loss @ 45.40
11/18/13 new stop loss @ 44.95
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.



eHealth, Inc. - EHTH - close: 44.76 change: +0.64

Stop Loss: 43.75
Target(s): 49.75
Current Gain/Loss: unopened

Entry on November -- at $--.--
Listed on November 16, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 427 thousand
New Positions: Yes, see below

Comments:
11/21/13: The rally in EHTH stalled midday. Shares pared their gains by the close but still outperformed the market with a +1.45% advance.

Currently I am suggesting a trigger to launch bullish positions at $46.25. We do want to keep our position size small to limit our risk.

Trigger @ 46.25

Suggested Position: buy EHTH stock @ (trigger)



Evercore Partners - EVR - close: 54.74 change: +2.08

Stop Loss: 51.90
Target(s): 59.00
Current Gain/Loss: + 4.3%

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:
11/21/13: It was a big day for EVR. The stock surged past resistance near $54.00 and outperformed the market with a +3.94% gain. This is a new all-time high. I didn't see any specific news to account for today's relative strength. We are raising the stop loss to $51.90.

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

11/21/13 new stop loss @ 51.90
11/19/13 new stop loss @ 51.40



Exterran Holdings, Inc. - EXH - close: 33.09 change: -0.15

Stop Loss: 31.90
Target(s): 36.50
Current Gain/Loss: - 0.8%

Entry on November 20 at $33.35
Listed on November 19, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 900 thousand
New Positions: see below

Comments:
11/21/13: It was a disappointing session for EXH. Shares tagged a new high but its strength faded midday. Nimble traders might want to try and launch positions on a dip near its rising 10-dma (currently near 32.60).

current Position: long EXH stock @ $33.35



VeriSign, Inc. - VRSN - close: 55.94 change: +0.66

Stop Loss: 53.75
Target(s): 59.50
Current Gain/Loss: +1.2%

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:
11/21/13: VRSN bounced from support near $55.00 but failed to breakout past short-term resistance near $56.00. That could change tomorrow if the market continues to rebound on Friday.


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: 42.94 change: +0.08

Stop Loss: 41.65
Target(s): 47.50
Current Gain/Loss: + 0.4%

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:
11/21/13: XLP delivered a relatively quiet session. Shares churned sideways between $42.75 and $43.00. I am not suggesting new positions at this time.

current Position: long the XLP @ $42.75

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

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

11/16/13 new stop loss @ 41.95
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

Atlas Air Worldwide - AAWW - close: 37.34 change: +0.91

Stop Loss: 38.05
Target(s): 31.00
Current Gain/Loss: unopened

Entry on November -- at $--.--
Listed on November 20, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 500 thousand
New Positions: Yes, see below

Comments:
11/21/13: Hmm... there was no follow through on yesterday's sell off in AAWW. Instead shares managed to completely erased yesterday's drop. The big picture pattern is still bearish. Nimble traders may want to look for a failed rally near $38.00 as an alternative entry point for shorts. At the moment our plan is unchanged.

I am suggesting a trigger to launch bearish positions at $36.00. If triggered our target is $31.00. More aggressive investors may want to aim lower since the Point & Figure chart for AAWW is bearish with a $23.00 target.

Trigger @ $36.00

Suggested Position: short AAWW stock @ (trigger)

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

Buy the 2014 Feb $35 PUT (AAWW1422n35)