Option Investor
Newsletter

Daily Newsletter, Wednesday, 12/18/2013

Table of Contents

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

Market Wrap

The Fed Tapered

by Thomas Hughes

Click here to email Thomas Hughes
The FOMC decided the market was as ready and set tapering to begin in January.

Introduction

The Fed decided to taper today despite my strong feelings to the contrary. Regardless, the market though it was a fine idea and used it as an excuse to rally to new highs. The FOMC has initiated a $10 billion per month taper to begin in January. The $10 billion, for this month at least, was split evenly between mortgage backed securities and long term Treasury bonds. The decision was nearly unanimous with only Boston Fed President Eric Rosengren dissenting. He pointed out that unemployment levels were still elevated and that inflation was still below the 2% target, both reasons I thought would keep the taper at bay. In his final appearance at the news conference (this is his last news conference, next month is his last meeting) Bernanke let us know that the recovery was not yet complete but so long as the economy continued to remain on the current track we could expect tapering to continue at a measured pace until completed. He also said that he had consulted with Janet Yellen before making the decision and that she was in full support.


As expected the markets took off like a shot. The equities markets rallied to new all time highs,the dollar strengthened versus the other major world currencies and gold broke through support to retest long term lows. This morning started off with futures in positive territory. International markets were mixed but generally to the upside. The Nikkei led in Asia as the BOJ is also meeting at this time. They will announce their decision on interest rates and QE overnight tonight and will impact trading in the morning. European markets closed in the green across the board led by Germany and Spain with +1% gains each. The U.S. markets drifted throughout the day, eventually sinking to a low for the S&P about 10 points below yesterday's closing price. Following the Fed's announcement volatility entered the market briefly before the bulls took full control. The S&P eventually added more than 29 points, making today's daily range nearly 40 points or 2.2%.

Today's Economic Data

Today's data was dominated by housing market related information. The first bit was mortgage applications. Applications fell by just over 5% to hit a 12 year low. This is a bit of a red flag but could be a one-off. Other data suggests that the housing recovery is still in swing. Building permits fell in November by -3.1% from Octobers figure but remains above the critical 1 million mark. October's figure, delayed because of the government shut-down, rose by 6.7%. The two months represent a net gain in permits from the period prior to the aforesaid shut down.

Housing starts data was also released for October and November. October starts increased by a small 1.8% from August but Novembers figure was a sharp 22.7% from October. This is the biggest increase in starts since January of 1990. The low number of mortgage applications may be a sign of some future weakness in housing but the permits and starts figures support a stable housing recovery.

Along with the FOMC statements came their outlook for the 2014 fiscal year. The committee is now expecting a slightly quicker rate of expansion than it did in the previous meeting. The high estimate for 2014 is for growth around 3%. Just two months ago in September they were projecting growth of 3.5%. The Fed is also expecting inflation to moderate somewhat to 1.6% and for unemployment to hover around 6.7%. Other estimates I have read are targeting growth in the 3.5% range for 2014.

The Gold Index

Gold prices fell by over 1.5% to approach the long term lows near $1200. The taper is definitely a dollar positive event and the gold market felt it strongly. The Gold Index fell as well despite the broad rally in stocks. The index made a new closing low today with indicators that are bearish. The Gold Index has been tied to gold prices and I see no reason for that to change at this time. If gold prices remain low or continue to move lower I would expect to see the index move lower as well. My target for a full retracement of the 2008-2011 bull market.


The Oil Index

Oil prices fell in today's trading but the Oil Index mirrored the broader market and rallied higher. The index made a strong on high volume upward from a previous resistance area in continuation of the long term trend line bounce begun earlier this week. Stochastic is indicating a buy but MACD has yet to turn bullish. At this time near term targets for the Oil Index exist around 1480 and 1500.


The Dollar

The dollar got a big boost from today's Fed decision. The dollar index surged on the news but fell back before the end of the days trading. The decision to begin the taper should continue to strengthen the dollar versus the major world currencies, providing the other central banks keep on stimulating their own economies. However, the doji candle stick formed in today's trading is pointing toward indecision. At this time the 80 level is beginning to emerge as support but it may not hold if investors decide it is time to enter riskier trades and begin to leave the dollar behind. Indicators are bearish but show that there is some support at this level. Longer term the index is bullish and may be gearing up for a move up from the 80 level. First resistance will be found at the 30 day EMA and just above at the 81 level.


The yen tanked against the dollar. The FOMC and the BOJ are now moving in opposite directions. The FOMC just began to wean the economy off of stimulus, the BOJ is right now as I am writing this considering an increase in stimulus. Weaker than expected data over the past month or so has led many to speculate that the BOJ could or would increase QE. In fact, BOJ Governor Kuroda has even said much to the effect. Analysts think the third phase of Abenomics may be about to be unveiled. If the BOJ does increase QE in some way it could send the yen sliding even further. Today the yen lost nearly two handles today and broke above the long term resistance of 103.75. MACD and stochastic have turned bullish in unison indicating higher prices are likely. We'll need to watch the 104 level closely to make sure support will hold, my next upside target for the USD/JPY is near the 110 level. If the pair is unable to hold the current level it could retreat as far the 100 or 95 level.


Story Stocks

There were quite a few stocks in the news today. JP Morgan's financial battles with the government are far from over. Today the Attorney General of Mississippi announce he was suing the company over how it handled mortgage issues in his state. JP Morgan is also suing the FDIC over claims associated with its having taken over Washington Mutual. JPM is suing for over $1 billion, a small sum compared to the billions it has to pay out in reparation for its role in the 2008 financial collapse. JPM alleges that the FDIC made promises to entice it to take over WaMu that were not honored. JPM stock surged higher today, moving up from the 30 day EMA on high volume. JPM now faces resistance at the $57.50 level.


BP announced that it had made a significant discovery in the Gulf Of Mexico. The find is located about 300 miles south of New Orleans and is located in a deep water section of the Gulf. Shares of BP climbed higher today in tandem with the general markets but only barely made it above the 30 day EMA. Stochastic is indicating a buy at this time but there is still resistance ahead.


Bitcoin took a big hit today. The digital currency got the smack down not once but twice. First, the Chinese government intensified its crackdown by disallowing new cash inflows to Bitcoin operators. This is on top of warning from the U.S. Treasury that Bitcoin operators may have to comply with federal anti-money laundering laws. The value of Bitcoins dropped more than $200 and now more than 50% lower than the all time high set just two weeks ago.

Ford released a statement today giving guidance for the full year 2013 and 2014. The motor company says that 2013 will be one of its best years in history. It also says that 2014 will another great year but has lowered its profit out look for several reasons including recession in Europe, higher than expected costs and numerous product launches. The stock lost more than 6% in today's trading and was one of only a few stocks to end in the red.


Oracle released earnings after the bell. Profits fell from the same period last year but came in ahead of analysts expectations. Revenue was also ahead of expectations for the first time in three quarters. One reason for the decline was a drop in adjusted software licenses and cloud computing revenues. The mixed results initially sent the stock trading to the downside in the after hours markets but it eventually regained its footing, moving more than 1% higher. The stock had been moving higher before the close. It gained more than 2% in the regular session before it even released earnings.


Oracle competitor Redhat reports tomorrow. The open source enterprise software provider is expected to report adjusted earnings in the range of $.25. Today the stock moved higher, breaking above resistance with a moderately strong buy signal. Momentum has turned bullish in tandem with a stochastic buy signal. This could be an indication of high expectations for Redhat earnings tomorrow. Today's action has brought share prices inside a window opened last quarter when earnings were a little disappointing. The entire range from $47.50 to $52.50 can be considered resistance, share prices could reverse at any point within it. Earnings will play a big part in where this stock goes but more importantly it will be future outlook.


The Indices

The equities market took the news of tapering very well. The S&P shot up more than 2% in response with the Dow and Nasdaq posting similar gains. All three set a new high. The S&P move came from the 30 day EMA and is a confirmation of the bounce that began this week from that level. Momentum is still bearish at this time but quickly receding. Taken in light of the long term up trend in the index this could precede a new up swing in index prices. The stochastic is showing an early buy signal, the %K has crossed the %D but %D is not yet pointing up although it is rolling over. Since this is a new high there is no real resistance, just targets that can be derived from a wide variety of methods. First support is the 30 day EMA.


The Dow charts looks almost identical to the S&P. The Blue Chip index is also making a move up from the 30 day EMA but is also moving up from strong support. The strength of the support is underscored by the stochastic signal which is much stronger than the S&P signal I described above because %D is pointing up. Momentum is bearish but receding and very nearly at the zero line. Once it turns bullish momentum traders could help propel this index higher in the short and long term. My current upside target for the Dow is just above the 16,500 level with support at the 15,750 level.


The Nasdaq's new high was barely that. The tech heavy index made it by about one and a half points with the weakest indicators of the three. Momentum is bearish and receding but not sharply and not close to the zero line. Stochastic is making a bullish crossover but the %D is so weak it is still pointing down.


All in all, it does appear as if the rally is still on. The taper has started and not only did the market not care, it was a catalyst for higher prices. Now that the taper is begun we may be able to put it on the back burner for a while, unless the data starts to show the economy is deteriorating. So long as the data is firm the taper should stay on and the markets could keep on rallying. Now that the known obstacle is out of the way it is time to start looking ahead to what the next one may be.

Tomorrow could be a make or break day for the markets. Today was very bullish but I would feel a lot better with some follow through, or at least some firm consolidation. Economic data and earnings will be the big driver until the next big hurdle reveals itself. Some had thought it might be the Debt Ceiling/Budget issue but that looks like it is going to pass on by this time without any fuss. It could be the impact from Obamacare but we won't get any clues about that until data starts to roll in at the end of January.

Until then, remember the trend!

Thomas Hughes


New Plays

Auto Parts

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)
CTAS, ABBV, KMX, HRL, GE, WFC, GM, ISIS, DFS



NEW BULLISH Plays

Delphi Automotive - DLPH - close: 60.13 change: +0.32

Stop Loss: 57.90
Target(s): 65.00
Current Gain/Loss: unopened

Entry on December -- at $--.--
Listed on December 18, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 1.4 million
New Positions: Yes, see below

Company Description

Why We Like It:
DLPH is in the consumer goods sector. This British company makes a wide range of auto parts. The stock has been a slow and steady performer over the last several months. The stock stumbled in early November on a disappointing earnings report and guidance but since then shares have recovered. Now DLPH is on the verge of a bullish breakout past resistance near $60.00.

We are suggesting a trigger to buy calls at $60.50. If triggered our multi-week target is $65.00. If DLPH can trade above $61.00 its point & figure chart will produce a new buy signal.

Trigger @ $60.50

Suggested Position: buy DLPH stock @ (trigger)

Annotated chart:

Weekly chart:




In Play Updates and Reviews

Who's Afraid Of The Taper?

by James Brown

Click here to email James Brown

Editor's Note:
Instead of selling off on news that the Federal Reserve will taper its QE program the market rallied. The Fed upgraded their outlook on the economy and promised to keep interest low for an extended period of time.

JCI has been removed. MU hit our stop loss. VNET hit our entry trigger.
We want to exit our FNP trade at the opening bell tomorrow.


Current Portfolio:


BULLISH Play Updates

Autodesk, Inc. - ADSK - close: 48.27 change: +0.77

Stop Loss: 46.40
Target(s): 49.85
Current Gain/Loss: + 3.7%

Entry on December 05 at $46.55
Listed on December 04, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 3.0 million
New Positions: see below

Comments:
12/18/13: ADSK spiked down to short-term technical support at its rising 10-dma before bouncing to a new multi-year closing high. I am raising our stop loss to $46.40. I am not suggesting new positions at this time.

FYI: The Point & Figure chart for ADSK is bullish with a $56.00 target.

current Position: long ADSK stock @ $46.55

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

Long 2014 Jan $47 call (ADSK1418a47) entry $1.35

12/18/13 new stop loss @ 46.40
12/14/13 adjust exit target to $49.85



Comerica Inc. - CMA - close: 46.36 change: +0.87

Stop Loss: 44.90
Target(s): 49.90
Current Gain/Loss: + 1.3%

Entry on November 25 at $45.76
Listed on November 21, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 1.5 million
New Positions: see below

Comments:
12/18/13: The financial sector was one of the market's best performers today. Shares of CMA tried to keep up with a +1.9% gain. More importantly today's rally in CMA is a bullish breakout to a new 52-week high. Tonight we are moving the stop loss to $44.90. I am not suggesting new positions at this time.

current Position: Long CMA stock @ $45.76

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

Long 2014 Jan $45 call (CMA1418a45) entry $1.72*

12/18/13 new stop loss @ 44.90
11/25/13 trade opened on gap higher at $45.76. suggested trigger was $45.65
*option entry price is an estimate since the option did not trade at the time our play was opened.



Fifth & Pacific Companies, Inc. - FNP - close: 32.95 change: -0.02

Stop Loss: 31.95
Target(s): 38.50
Current Gain/Loss: - 3.2%

Entry on December 10 at $34.05
Listed on December 07, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 1.3 million
New Positions: see below

Comments:
12/18/13: FNP bounced off its intraday lows but shares did not truly participate in the market's broad-based rally today. We are suggesting an immediate exit.

Earlier Comments:
We want to keep our position size small to limit our risk.

*small positions*

current Position: long FNP stock @ $34.05

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

Long 2014 Jan $35 call (FNP1418a35) entry $1.15*

12/18/13 prepare to exit immediately
12/12/13 we are adjusting the stop loss to $31.95
*option entry price is an estimate since the option did not trade at the time our play was opened.



Groupon, Inc. - GRPN - close: 11.27 change: +0.60

Stop Loss: 9.95
Target(s): 12.50
Current Gain/Loss: + 5.3%

Entry on December 17 at $10.70
Listed on December 12, 2013
Time Frame: to 8 weeks
Average Daily Volume = 18.4 million
New Positions: see below

Comments:
12/18/13: The stock market produced a big rally today but GRPN was already in rally mode before the market started to move thanks to new bullish analyst comments this morning. GRPN outperformed the major indices with a +5.6% gain.

I am moving our stop loss to $9.95.

Earlier Comments:
Our target is $12.50. A rally past $11.00 will create a new buy signal on GRPN's point & figure chart.

current Position: Long GRPN stock @ $10.70

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

Long 2014 FEB $12 call (GRPN1422b12) entry $0.67

12/18/13 new stop loss @ 9.95
12/17/13 triggered at $10.70




21Vianet Group, Inc. - VNET - close: 21.85 change: +1.37

Stop Loss: 19.45
Target(s): 24.90
Current Gain/Loss: + 3.1%

Entry on December 18 at $21.20
Listed on December 17, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 614 thousand
New Positions: see below

Comments:
12/18/13: VNET was a strong performer on Wednesday. The stock was in rally mode well before the market started to move. Shares hit our entry point at $21.20 before the market's post-Fed meeting surge higher.

After today's +6.6% gain I would not be surprised to see a little bit of profit taking tomorrow morning.

Earlier Comments:
We want to keep our position size small for a reason. First, VNET has obviously been very volatile over the last couple of months. That could make it tough to trade. Second, the post-IPO high from back in 2011 is $22.33 and that could be significant overhead resistance. I am not listing the options on VNET because the spreads are a bit too wide to trade. However, using the options could limit your risk.

*small positions*

current Position: Long VNET stock @ $21.20

12/18/13 triggered @ 21.20



WageWorks, Inc. - WAGE - close: 60.45 change: +1.06

Stop Loss: 57.75
Target(s): 67.50
Current Gain/Loss: unopened

Entry on December -- at $--.--
Listed on December 16, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 347 thousand
New Positions: Yes, see below

Comments:
12/18/13: WAGE set a new closing high today. Yet the intraday high was only $60.54. That was one cent away from our suggested entry point at $60.55. Thus we are still sitting on the sidelines. Odds are very good that WAGE will hit our entry point at $60.55 tomorrow morning and the stock might actually see a gap open higher.

Earlier Comments:
I am suggesting a trigger to launch bullish positions at $60.55. If triggered our multi-week target is $67.50.

Trigger @ 60.55

Suggested Position: buy WAGE stock @ (trigger)



BEARISH Play Updates

AECOM Technology - ACM - close: 28.20 change: +0.36

Stop Loss: 28.60
Target(s): 24.25
Current Gain/Loss: - 1.9%

Entry on December 16 at $27.68
Listed on December 14, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 525 thousand
New Positions: see below

Comments:
12/18/13: The market's post-Fed meeting rally gave shares of ACM a boost but the rally stalled at resistance near the 10-dma. I am concerned that if the market accelerates higher we could see ACM follow. More conservative traders may want to lower their stop loss. I am not suggesting new positions.

Earlier Comments:
Technically ACM has a bleak outlook. The stock has created a huge bearish head-and-shoulders pattern over the last year. The recent breakdown below support at $28.00 also breaks the neckline to this H&S pattern. The pattern is forecasting a drop toward $21.00. The Point & Figure chart is also bearish and forecasting a drop toward $23.00. Our target is $24.25 since the $24 level could be support.

*Small positions *

current Position: short ACM stock @ $27.68

12/16/13 trade opened on gap higher at $27.68



Cisco Systems - CSCO - close: 21.00 change: +0.08

Stop Loss: 21.55
Target(s): 17.00
Current Gain/Loss: - 1.3%

Entry on December 17 at $20.74
Listed on December 14, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 50 million
New Positions: see below

Comments:
12/18/13: Gains in CSCO were mild with shares underperforming the broader market. The NASDAQ added +1.1% but CSCO only added +0.3%. Yet even with CSCO's underperformance I am concerned. The market appears to be in rally mode and CSCO looks poised to breakout past resistance near $21.00. More conservative investors might want to exit early or lower their stop loss. I am not suggesting new positions.

current Position: short CSCO stock @ $20.74

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

Long Feb $20 PUT (CSCO1422n20) entry $0.63

12/18/13 CSCO is not cooperating and traders may want to exit early or lower their stop loss.
12/17/13 trade opens. CSCO @ $20.74
12/16/13 New entry point strategy: launch bearish positions at the opening bell on Tuesday, Dec. 17th. Prior entry point was a trigger at $19.85



CLOSED BULLISH PLAYS

Johnson Controls Inc. - JCI - close: 51.34 change: +0.02

Stop Loss: 49.75
Target(s): 57.50
Current Gain/Loss: unopened

Entry on December -- at $--.--
Listed on December 10, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 4.7 million
New Positions: see below

Comments:
12/18/13: JCI dipped to support near $50.00 and bounced yet the stock failed to really participate in the market's widespread rally today. We are removing JCI as an active candidate. Our trade did not open. Readers might want to keep JCI on their watch list for a bullish breakout past resistance near $52.00.

Trade did not open.

12/18/13 removed from the newsletter. suggested trigger was $52.10

chart:



Micron Technology - MU - close: 21.81 change: -1.11

Stop Loss: 21.90
Target(s): TBD
Current Gain/Loss: - 5.5%

Entry on December 16 at $23.17
Listed on December 14, 2013
Time Frame: exit PRIOR to earnings on Jan. 7th
Average Daily Volume = 44 million
New Positions: see below

Comments:
12/18/13: Shares of MU were a significant underperformer today over worries about competition. Multiple news sources quoted a story found in the South Korean newspaper Chosun Ilbo that SK Hynix, one of MU's main rivals, would build a new DRAM memory chip facility next year. If this is true the new plant would not start churning out DRAM chips until 2015. Yet worries that additional DRAM supply would hurt prices sent shares of MU plunging.

The stock gapped down at $22.49 and then fell to $20.81 before paring its losses. Our stop was hit at $21.90.

Earlier Comments:
Investors may want to limit their position size to reduce risk.

*Small positions *

closed Position: long MU stock @ $23.17 exit $21.90 (-5.5%)

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

Jan $23 call (MU1418A23) entry $1.57 exit $0.91* (-42.0%)

12/18/13 stopped out
*option exit price is an estimate since due to how fast shares of MU were trading at the opening bell.
12/16/13 trade opened on Monday with MU at $23.17

chart: