Option Investor
Newsletter

Daily Newsletter, Thursday, 12/26/2013

Table of Contents

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

Market Wrap

Santa's Rally Keeps Giving

by Thomas Hughes

Click here to email Thomas Hughes
The Santa Rally extended gains and helped the market set new all time highs.

Introduction

The markets were fairly quiet this morning while most of the world woke up from its holiday stupor. Asian markets were the most active but ended the day mixed despite the Santa Rally in the U.S. markets. Japan and Hong Kong were both positive while mainland China gave up more than 1% on liquidity fears. European shares were higher but their trading day was shortened and marked by low volume. Low volume was the word of the day in the U.S. markets as well. Futures trading was positive ahead of the economic data and gained slightly after it. The S&P opened about 5 points higher and held those gains throughout the morning. Lunchtime saw the indices flirt with new intraday highs and then again by mid afternoon. The trading day was quiet but moved steadily higher until the end.


The Economic Data

It's been two weeks since the last time I was able to touch base on jobless claims. In that time claims have made a worrisome spike. This weeks claims fell back to lowe levels but there could be more volatility in this number in the coming weeks. It could be that seasonal adjusting is having some affect. Today, initial claims fell by 42,000 from a revised 380,000 to hit 338,000. The four week moving average added just over 4,000 to reach 348,000. The largest declines in new claims come from New York, Pennsylvania and Georgia accounting for a net drop of -40,000 claims. California and Illinois top the list for increases in claims with +4,600 and +3,686 respectively. These two states cited layoffs in manufacturing, retail and service industries. Jobs has been a cornerstone of the recovery and one of the key reasons tapering was begun last week. If the increase in jobless claims is persistnent it could lead the Fed to hold off on tapering next month.


Continuing claims gained 46K from a revised 2.877 million to reach 2.93 million. This is the third week of gains in this figure and the third week since it hit a 5 year low. At this time the figures are still below 3 million but are clearly on the rise. This weeks initial claims could push the continuing claims higher in the next week or two. Today's data is not bad per se but if the levels of unemployment claims keeps rising or if it even just maintains the levels set this week and last week then overall unemployment levels are in danger of rising. It will be two weeks until the next release of NFP and Unemployment data.


Total claims for unemployment fell by 0ver 130,000 to hit 4.279 million. The total claims has spiked along with the initial, today's drop does not bring it back to the low levels seen just two weeks ago. Total claims is still above 4 million and, based on the other two data points, looks like it may stay above 4 million at least for the next week or so. Unless the cause for the spike in the two shorter term data points is not long lasting, or job creation picks up. Of the three, I think total claims is the most important to watch. Seasonal, short term and one-off events that can raise initial and continuing claims don't always come through into this number, making it a better judge of the underlying trend.


Data this week and next week if pretty light. Next week is the end of the month as well as the New Year which means the market will be closed on Wednesday. Data usually released the first Friday of the month, NFP and Unemployment, is being pushed back to the next week. Until then there are a few data points to be on the alert for, including next Thursday's unemployment claims figures.


Story Stocks And The Retail Sector

There was not a lot of news on the wires today. The big headline was the disspointing performance of Federal Express in delivering packages on time. The company was swamped with more than expected traffic and was unable to deliver all as promised. The headline is bad in terms of the holiday, many plans were spoiled because of late or still as yet undelivered packages. However, once you look at the problem from a traders perspective it starts to look like a symptom of good things. The reason why Fed Ex had so much trouble over the past few days is because they received more than expected package volume. A lot more. The company had planned for a certain amount of traffic based on last years figures and this years performance to date. The bad news for them, and perhaps good news for retailers, is that online shopping in the weekend before Christmas increased by 37% over last year. This should become evident in earnings for Fed EX and the online retailers. Today shares of FDX traded at new all time highs. The stock is making a bounce from the short term moving average and recently broken above resistance with high volume. The indicators are bullish at this time and could indicate higher stock prices in the near to short term. Support levels exist just below the current levels at the $140 level, the short term moving average and at $130.


The retail sector has been in the spot light as usual for this time of the year. Depending on where you get your data the sector is doing better or worse than expected. Physical sales at brick-and-mortar stores is down but on line sales are up. Mastercard released a statement this mornings saying that holiday sales were up more than 2% over last year. Post holiday shopping could help to increase that gain. Gift cards are a big segment of the retail sector for the holiday season and the next two weeks are very important because of that. Shoppers are in the malls right now spending those gift cards, in order for the retailers to be able to book those gift card sales before the end of the year the shoppers have to spend it. Factors that could impact post holiday and gift card sales are heavy discounting, returns and exchanges. The XRT Retail Spyder traded to the upside today in continuation of the moving average bounce that began last week with the FOMC taper decision. The indicators are bullish and pointing to higher stock prices. However, there is resistance ahead at the previous high near $89.00. Support is at the moving average and the $85 level. At this time it looks like the XRT will at least test resistance. Whipsaws are possible so a confirmed break is neccesary for a longer term bullish stance.


Fed EX competitor UPS said that they too had experienced higher than expected volume over the holiday week. What they didn't say was that they had any problems. In fact, UPS said it operated at nearly 99% success rate and experienced no delays. UPS actually traded to the downside today. The stock has been trending up and even out pacing the rally in Fed Ex. The indicators are bullish and share prices are near all time highs. Today's news from Fed Ex would have I thought helped to send UPS higher and Fed Ex lower instead of the opposite. Today's price action is likely a combination of the amount of news coverage Fed Ex is getting and light trading volumes.


Amazon, the company responsible for selling a lions share of online merchandise, traded up today. The stock has been able to maintain share prices above $400, a resistance level broken last week after the Fed meeting. This level could be the starting point of a post holiday rally driven by better than expected sales. If the news that online sales in the week prior to Christmas jumped 37% we can assume that Amazons sales also jumped a comparable percent as well. At this time the indicators are bullish. The $400 level will be very important over the next week, if it can hold the stock could keep moving higher, if not first support is likely around $375 with the next likely target around $350.


Gold And The Gold Index

Gold got a boost today. The metal gained about $10 and reclaimed the $1200 handle. Gold prices have been under a lot of pressure lately and could continue to move lower. The taper adds a new dynamic to the trade however. Economic data will continue to drive the Fed's taper decisions, the data and the decisions will drive gold prices along with the dollar and other major world currencies. Before the taper began there were two questions; will the fed taper and if it does, how much? Now the questions have compounded; will the Fed taper the same? Will the Fed taper more, less? If the data weakens, jobs growth slows and unemployment rises will the Fed re-increase QE, Anti-taper if you will. I still don't see a bottom in gold, or a reason to buy in but that doesn't mean it is not there. For now I remain bearish or at least firmly neutral with a bearish bias on this metal. The Gold Index is still drifting lower. The index barely budged during last weeks massive Fed induced rally and does not appear to be gaining in bullish traction. The indicators on the long and short term charts are mixed while shares trade just below the 30 day EMA. Resistance is at the moving average with downside targets at $80, $75 and $65 for a full retracement of the 2008 -2009 bull market in gold.


Oil And The Oil Index

Oil prices traded to the upside today but did not break the $100 level. US WTI ended the day at $99.61, Brent at $111.98. Energy prices are being heavily influenced by expectations and world events at this time. Supply concerns from Libya and South Sudan wrestle with output increases planned by Iraq, Iran and other countries. Saudi Arabia says there is no shortage of demand at the same time more and more production is coming on line, especially in U.S. shale oil deposits in the Marcellus, Bakken and Eagle Ford regions. Meanwhile, Kazakstan's Kashagan Oil Field, one of the largest on Earth, remains closed due to leaking pipeline; there will be no decision on it's reopening for weeks at the least. The Oil Index extended its gains today as well. The index broke above the 1480 resistance again and is heading up to retest the most recent high around 1510. The indicators are bullish and gaining strength on the short term daily charts, on the long term weekly charts they are bullish but in decline. The index is bullish but may have trouble breaking out to new highs. The resistance level of 1510 will be crucial for this trade. If the index is able to break above my first target is 1550. If the index does not break above there are several support levels between the current level and the long term trend line around 1435-1450.


The Yen

The yen extended its losses versus the dollar and most other world currencies. Abenomics and Fed Tapering are pulling the dollar and yen apart and could take the pair to a long term high. Last weeks Fed Taper decision caused the pair to break above the 1.03.75 resistance set last spring and now the pair is moving higher again. The four trading days between the Fed decision and today were a consolidation above resistance now support that was confirmed with todays long white candle. Indicators are bullish in the long and short term, my current targets for this pair exist at 110 and 120. Changes to the taper, QE or Abenomics are risks to this trade.


The VIX

The VIX is trading at long term low levels. Almost approaching pre-financial crisis levels, that low. At this time the market is exibiting little fear, perhaps it finally believes the recovery is really on. However, the low level of fear may be cause to be afraid. I can't help thinking about my uncle's point about the Affordable Care Act. Of course it is good for people to have insurance but the financial burden on families will surely have an impact on spending and the economy. It may be nothing and appear as a blip on the radar but it may be not. For now, the VIX is low and the trend is up.


The Indices

The markets made a slow and steady drive higher today. The S&P 500 and Dow Jones Industrial Average both closed at new record highs. The caveat is that it is the holiday week and volumes are very light. Adding to that is the fact that Christmas was on Wednesday so it is really easy to take Thursday and Friday off for a nice long vacation. However, discounting that, the index is looking rather robust at this time. The index has been moving steadily higher since the Fed decision last Wednesday. Indicators are bullish and gaining strength, pointing to a continuation of the current trend.


Using the SPY ETF as a reference point on volume we can see that volume on Tuesday and today was light, but not excessively so. A little under average today, not too bad. The volume on Wednesday, Thursday and Friday of last week are what is important for me today. The Fed induced rally came with more than double average daily volume for those three days of the week, just before volume fell off for the holiday. I want to point out that the volume spike on the SPY was accompanied by a strong moving average bounce and a strong white candle.


Looking at the chart of the Dow we can see that a similar volume spike occurred in this index last Wednesday. At the same time the index made a long white candle and made a new high. The MACD and stochastic indicators are bullish on this index as well and point to higher prices. The caveat is that there may be some backing and filling over the next week as traders, investors and institutional money comes back to work. I would expect some form of consolidation at the least if not an actual pull back, maybe as far as the 30 day EMA. There is no technical resistance at this time, support targets on a pull back are around 16,200 and 16,000.


The holidays are still upon us and Santa is still driving the bulls to new highs. 2013 was a pretty good year for the stock markets. The S&P, Dow, Russels and others are all at new all time highs while the Nasdaq is making new highs not seen since the DOTCOM days. To put things in perspective the Dow is up about 25% and the S&P about 30%, for the year. This makes an attractive place for taking some profits, if just to book some nice gains. I don't think there will be any massive rush to get out of the market, just the chance that some profit taking may occur before the end of the year.

Looking into 2014 what could the markets bring? At this time the trend is up with no end in sight. The trend could continue but the markets are long overdue for a major correction. A correction could occur but what will cause it? Jobless claims have been elevated, not a lot but enough to give us reason to start speculating the job recovery may have stalled. The impact of the ACA is still an unknown and could also raise fear in the market, however I think the ACA as a catalyst is still a couple of months away. It will take data to move the market in either event. If job growth slows or stops, or if the ACA hurts consumer spending, then the Fed may have to stop or reverse the taper but this is all wild speculation. Regardless of market direction, there will be ample opportunity for savvy options traders to profit. And speaking of the end of the year, the next time I write the Wrap it will be next year.

And I almost forgot that earnings season starts in only two weeks with Alcoa on January 9th!

Until then, remember the trend!

Thomas Hughes

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New Plays

New Highs In Biotech

by James Brown

Click here to email James Brown


NEW BULLISH Plays

NewLink Genetics - NLNK - close: 23.50 change: +0.08

Stop Loss: 21.90
Target(s): 27.50
Current Gain/Loss: unopened

Entry on December -- at $--.--
Listed on December 26, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 219 thousand
New Positions: Yes, see below

Company Description

Why We Like It:
NLNK is in the healthcare sector. The company operates in the biotech field. They focus on cancer treatments using immunotherapeutic products.

Biotech stocks have been strong performers this year. NLNK is no exception. However, biotech stocks can be hazardous to trade. The wrong headline about some failed clinical trial or a set back with the FDA approval process can send biotech stocks crashing. If you're tempted to trade a stock like NLNK do so cautiously.

I consider this an aggressive, higher-risk trade. Shares are currently trading near their all-time highs set back in June 2013. I am suggesting a trigger to launch small bullish positions at $23.80. If triggered our target is $27.50 but you may want to aim higher. There is a chance that NLNK could see a short squeeze. The most recent data listed short interest at 22% of the very small 15.2 million share float.

Trigger @ 23.80 *small positions*

Suggested Position: buy NLNK stock @ (trigger)

Annotated chart:




In Play Updates and Reviews

ADSK Hit Our Target

by James Brown

Click here to email James Brown

Editor's Note:
The U.S. stock market continues to melt higher as we approach the end of 2013.

ADSK hit our bullish exit target today.

GE hit our entry trigger.


Current Portfolio:


BULLISH Play Updates

TD Ameritrade Holding Corp. - AMTD - close: 30.22 change: -0.22

Stop Loss: 29.45
Target(s): 33.85
Current Gain/Loss: unopened

Entry on December -- at $--.--
Listed on December 21, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 1.9 million
New Positions: Yes, see below

Comments:
12/26/13: Hmm... AMTD displayed some relative weakness today (-0.7%). Nimble traders may want to consider buying a dip near the $30.00 mark. I am suggesting a breakout. There is no change from my earlier comments.

Earlier Comments:
The stock has been gaining momentum and this past week shares hit new multi-year highs. As a matter of fact, shares of AMTD have not traded above $30.00 a share since the year 1999. Last Thursday's high was $30.58. I am suggesting a trigger to open bullish positions at $30.65. If triggered our target is $33.85 as the $34.00 level looks like potential resistance.

Trigger @ 30.65

Suggested Position: buy AMTD stock @ (trigger)



Comerica Inc. - CMA - close: 47.51 change: +0.14

Stop Loss: 45.40
Target(s): 49.90
Current Gain/Loss: + 3.8%

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:
12/26/13: CMA spent most of today's session inside a narrow 30-cent range. Yet the high for the day was $48.69. I suspect that high, which happened to be the opening trade, is actually a bad tick. I am turning a bit more cautious. CMA is up several days in a row. We'll move our stop loss to breakeven at $45.76. 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*

12/26/13 new stop loss @ 45.76
12/24/13 new stop loss @ 45.40
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.



DreamWorks Animation - DWA - close: 35.47 change: -0.09

Stop Loss: 33.45
Target(s): 39.50
Current Gain/Loss: + 0.3%

Entry on December 20 at $35.35
Listed on December 19, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 702 thousand
New Positions: see below

Comments:
12/26/13: Today was a forgettable session for DWA. On Tuesday shares rose nine cents. Today saw DWA give back those nine cents. On a short-term basis I would not be surprised to see DWA dip back to $35.00 or possibly the $34.50 area. For anyone counting today's decline snapped a seven-day winning streak for DWA's stock price.

Investors may want to start raising their stop loss.

current Position: long DWA stock @ $35.35

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

Long Mar $35 call (DWA1422c35) entry $2.65*

12/20/13 triggered @ 35.35
*option entry price is an estimate since the option did not trade at the time our play was opened.



General Electric - GE - close: 27.83 change: +0.22

Stop Loss: 26.95
Target(s): 31.50
Current Gain/Loss: + 0.3%

Entry on December 26 at $27.75
Listed on December 24, 2013
Time Frame: Exit PRIOR to earnings on January 17th
Average Daily Volume = 37 million
New Positions: see below

Comments:
12/26/13: Our new trade on GE has been triggered. The stock gapped open higher at $27.68 and quickly hit our suggested entry point at $27.75. GE displayed relative strength with a +0.79% gain on the session.

Our short-term target is $31.50 but we will plan on exiting prior to GE's earnings report in mid January. Odds are our $31.50 target is a bit too optimistic. We may end up exiting closer to $30.00.

current Position: long GE stock @ $27.75

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

Long Feb $28 call (GE1422B28) entry $0.58

12/26/13 triggered @ 27.75



Groupon, Inc. - GRPN - close: 11.99 change: +0.15

Stop Loss: 10.70
Target(s): 12.50
Current Gain/Loss: +12.1%

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:
12/26/13: GRPN continues to impress. Shares are now up eight days in a row and outperformed the market today with a +1.26% gain. You'll notice that shares failed to close above the $12.00 mark. I am worried that $12.00 is potential resistance. Readers may want to take profits now. I am not suggesting new positions.

We will adjust our stop loss to breakeven at $10.70.

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

12/26/13 new stop loss @ 10.70
12/23/13 more conservative traders may want to take some money off the table with GRPN hovering below the $12.00 level.
12/19/13 new stop loss @ 10.40
12/18/13 new stop loss @ 9.95
12/17/13 triggered at $10.70




Spirit Aero Systems - SPR - close: 34.18 change: +0.19

Stop Loss: 32.75
Target(s): 38.50
Current Gain/Loss: + 0.4%

Entry on December 24 at $34.05
Listed on December 21, 2013
Time Frame: Exit PRIOR to earnings in February.
Average Daily Volume = 1.2 million
New Positions: see below

Comments:
12/26/13: SPR continues to drift higher and added +0.55% today. I would consider new positions here or you could wait for a new relative high above $34.30.

Earlier Comments:
Our multi-week target is $38.50 but we will plan on exiting positions prior to SPR's earnings report in February.

current Position: long SPR stock @ $34.05

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

Long Apr $35 call (SPR1419D35) entry $2.50*

12/24/13 triggered @ 34.05
*option entry price is an estimate since the option did not trade at the time our play was opened.



Tempur Sealy Intl. - TPX - close: 53.44 change: +0.74

Stop Loss: 50.95
Target(s): 57.50
Current Gain/Loss: + 1.0%

Entry on December 24 at $52.91
Listed on December 23, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 757 thousand
New Positions: see below

Comments:
12/26/13: TPX shot higher this morning. The stock briefly traded above $54.00 before paring its gains. Even with the afternoon pullback TPX outperformed the market with a +1.4% rally today.

If the market were to see a dip we can look for TPX to find short-term support near $52.00. Tonight we're raising our stop loss to $50.95.

Earlier Comments:
If this rally continues the stock could see some short covering. The most recent data listed short interest at 17% of the 50 million share float. Our multi-week target is $57.50. More aggressive traders, with enough patience, may want to aim higher since the Point & Figure chart for TPX is bullish with a long-term $66.00 target.

current Position: long TPX stock @ $52.91

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

Long Mar $55 call (TPX1422c55) entry $3.50*

12/26/13 new stop loss @ 50.95
12/24/13 trade opens at $52.91
*option entry price is an estimate since the option did not trade at the time our play was opened.



21Vianet Group, Inc. - VNET - close: 22.82 change: -0.40

Stop Loss: 20.75
Target(s): 24.75
Current Gain/Loss: + 7.6%

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:
12/26/13: VNET ran into some profit taking today. Shares tagged a new high this morning and then sank to a -1.7% decline. If the recent trend (up one day then down the next) is any indication then look for a bounce tomorrow. I am not suggesting new positions at this time.

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

12/24/13 new stop loss @ 20.75, adjust exit target to $24.75
12/21/13 new stop loss @ 19.90
12/18/13 triggered @ 21.20



WageWorks, Inc. - WAGE - close: 62.39 change: +1.74

Stop Loss: 58.85
Target(s): 67.50
Current Gain/Loss: +3.0%

Entry on December 19 at $60.55
Listed on December 16, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 347 thousand
New Positions: see below

Comments:
12/26/13: WAGE bounced from support near $60.00 again. This time the bounce lifted shares to another new high. WAGE outperformed the market with a +2.8% gain. I am raising our stop loss to $58.85.

current Position: long WAGE stock @ $60.55

12/26/13 new stop loss @ 58.85
12/19/13 triggered at $60.55



Western Refining, Inc. - WNR - close: 41.22 change: -0.28

Stop Loss: 38.95
Target(s): 46.00
Current Gain/Loss: - 0.3%

Entry on December 24 at $41.35
Listed on December 23, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 1.9 million
New Positions: see below

Comments:
12/26/13: WNR slipped to short-term support near $41.00 before trimming its losses. I would still consider new positions now at current levels. If you're worried the market is due for a dip then consider waiting for WNR to dip into the $40.50-40.00 zone and buy a dip there.

Earlier Comments:
More nimble traders may want to look for a dip back into the $40.50-40.75 zone as an alternative entry point. I would keep in mind that there is a lot of short interest. The most recent data listed short interest at about 28% of the 50.6 million share float. That could fuel a short squeeze in WNR. I am suggesting small positions to limit our risk just in case there is a worker strike at the NTI plant and retail gas stations. Our short-term target is $46.00. More aggressive traders could aim higher since the Point & Figure chart for WNR is bullish with a $50.00 target.

*Small positions *

current Position: Long WNR stock @ $41.35

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

Long Mar $42 call (WNR1422c42) entry $2.70*

12/24/13 trade opened this morning at $41.35
*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

Autodesk, Inc. - ADSK - close: 49.39 change: -0.31

Stop Loss: 47.40
Target(s): 49.85
Current Gain/Loss: + 7.1%

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:
12/26/13: Target achieved.

ADSK rallied this morning before paring its gains and reversing into negative territory. The stock was kind enough to hit our exit target at $49.85 before turning negative.

ADSK does look overbought here and the $50 level could be round-number resistance. I would keep it on your watch list for a correction. We might be able to trade it again soon.

closed Position: long ADSK stock @ $46.55 exit $49.85 (+7.1%)

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

(option exit on December 23rd)
2014 Jan $47 call (ADSK1418a47) entry $1.35 exit $2.75* (+103.7%)

12/26/13 target hit
12/23/13 new stop loss @ 47.40
12/23/13 planned exit for the 2014 Jan $47 call
*option exit price is an estimate since the option did not trade at the time our play was closed.
12/21/13 prepare to exit the 2014 Jan $47 call on Monday morning
12/18/13 new stop loss @ 46.40
12/14/13 adjust exit target to $49.85

chart: