Option Investor
Newsletter

Daily Newsletter, Thursday, 2/27/2014

Table of Contents

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

Market Wrap

Janet Yellen Soothes The Market

by Thomas Hughes

Click here to email Thomas Hughes
Calm,collected testimony by Janet Yellen before the Senate helped to soothe the markets and lead the S&P 500 to a new high.

Introduction

Today was relatively calm and quiet. Testimony from Janet Yellen, which was very calm and well spoken, helped to soothe some market fears. She says they Fed sees some areas of concern but that the economy is making progress. She noted the past 6 weeks of “soft” data but held to the taper saying it should be finished late this year. She also said that the fed would reconsider the pace of the taper if the data did not improve. This mornings release of Durable Goods orders may be the first sign of an end to the recent slow down in the economy. The equity markets were negative this morning in the early futures trading but moderated to flat line following the release of today's economic data. The indices turned positive just before the open and held just above break even going into Yellen's testimony. During the Q&A session the markets tread water, mostly to the upside, before moving slightly higher.


The global indices were mixed today. Asian market were quiet, no major data, earnings or news that I am aware of. In Europe trading was muted due to the trouble brewing in the Ukraine. The newly appointed government is meeting with the IMF in hopes of some form of assistance while protesters are still in the streets and Russia is building a military presence along the border. Early losses in the EU indices were tempered by the close with the DAX leading the losses with a -0.76% drop.


We are about to enter an economic data maelstrom. Beginning tomorrow there are more than 30 scheduled events for the next week. Tomorrow is the 2nd estimate for GDP. The consensus has the previous 3.2% revised down to the 2.6% range due to the soft data over the past two months. Later in the morning tomorrow there will also be the final Michigan Sentiment for February, Chicago PMI and Pending Home Sales. Then next week we've got auto sales, ISM and the Beige Book in the first half, punctuated by ADP employment change on Wednesday and then jobless claims, Challenger layoffs ,NFP and Unemployment figures on Friday. I am expecting to see data below expectations because that is what we've been getting. The weather effect is still a big question. I will also be paying attention to the forward looking components for signs of growth and expansion.

The Economy

Durable Goods orders declined by -0.1%, less than expected. The news was received well by the market in light of the recent softness as Ms. Yellen put it. The December figure was revised lower to -5.3%. Within the data the orders ex-transportation rose by 1.1%, much better than expected. The previous month saw a decline of -1.9%.

Initial claims for unemployment rose by 14,000 to 348,000 from last weeks downwardly revised 334,000. With last weeks revision claims jumped by a net 16,000 but remain under 350,000 and very near to the number of claims at this same time last year. The four week moving average was unchanged from last weeks revised 338,250. I think at this time any perceived downtrend in claims on my part is out the window. On an unadjusted basis first time claims fell by -10,000 to 310,000. Sixteen states reported a drop in claims greater than 1,000 led by California for a total greater than -36,000. Only four states had an increase in claims greater than 1,000 for a total greater than 10,000.


Continuing claims for unemployment climbed by 8,000 to 2.964 million. Last weeks figure was revised lower to 2.956 million from just over 2.980 million. With the revisions this weeks figure is a drop from last weeks number and both weeks are a wash and basically flat over the past 5 weeks hovering just under 3 million. Looking at this chart I think that longer term unemployment is up from the previous quarter and could be reflected in next weeks Unemployment data.


Total claims fell more than 25,000 to 3.486 million. Total claims seem to be holding steady after the slide induced by the expiration of benefit extensions. I think that expiring benefits could drive this number lower still so I don't put a lot of weight on it in terms of the unemployment figures. The previous rate was 6.6%. Estimates for next week have the number a little higher.


The Oil Index

Oil prices held steady around the $102 level today. Trading was mixed, today's range took prices in and out of the red. Warmer weather is on the horizon and that is causing some concern over demand for heating fuels. Supply concerns are still on the front burner due to the cold weather but also to geopolitical troubles. China demand speculation is also taking a toll on prices. Weak Chinese data has traders fearing demand estimates may be too high. Since last week the Oil Index has moved up to the next resistance and fallen back from it. The peak I suggested may have been forming last week took a little bit longer than first anticipated. Now the index is back above the long term trend line and finding some support aided by the short term moving average. The indicators are bullish and strong, pointing to higher prices provided the index can break above resistance in the 1475-1500 range.


The Gold Index

Gold prices also held fairly steady today. Prices moved up and down by about $10 during today's session but always returned to the $1330 level. The Gold Index traded in like fashion and is sitting in a similar position, just below long term resistance and just above near term support. The indicators show that the index has some support growing at the current levels but the question is, is it enough support to hold it up under the weight of a 3 year downtrend. The long term charts still look bearish so a retest of support in the $90-$95 range is a real possibility even if the trend in gold and the gold index has changed. If gold prices remain high then the index could also remain high but I think gold may retest as well. Gold prices are up now on 6-8 weeks of weak economic data. If/when the data begins to pick up again gold prices could retreat again and bring the gold complex down with it.


The Dollar

The dollar strengthened today on the data and then fell later on Janet Yellen's testimony. Her support of the economy and the taper were dollar positive I think but it was the cautious statements about adjusting the taper if the data persisted in its weakness that reversed the early trade. However, even with today's price action the dollar index appears to be bouncing off the bottom of its four month trading range and moving higher. The indicators are turning bullish within the range and support a move up to the $81-$81.50 levels.


The euro fell versus the dollar in early trading but found support mid day just below its 30 day moving average. The pair has been moving higher over the past month to retest resistance near the 1.380 level. The pair has built support along the 1.3500 and 1.36250 levels and looks like it could move the rest of the way up to the top of the range. This move could coincide with the ECB meeting next week to decide policy. There is some speculation it could increase QE or some other measure to help the struggling EU economy. Whatever the decision it is likely to be a catalyst for the euro and other currencies.


The USD/JPY fell to test support at the 102 level, again. The durable goods orders helped to lift the pair back up but it remained below yesterday's prices. The pair has been bobbing along this support level for nearly a month now and was indicated a buy but as of yet no move has yet begun. I thought the BOJ's move to expand its loan facilities would have done it but not so, at least not yet. I still think that Abenomics and tapering will drive this pair higher in the long term but the near to short term is questionable. The next BOJ and FOMC meetings are still a few weeks away. Until then economic data will be what moves this pair.


The Indices

The markets moved higher today. The S&P tiptoeing across the all-time high resistance line and others actually setting new highs. The S&P 500 looks like it wants to move higher, it just can't quite get over the resistance of the all time high. The market could be waiting for the GDP numbers tomorrow, or even for more data next week but I think the GDP could be a deciding factor, at least in the very near term. If it is much worse than expected then I think selling could follow. If it is as expected the index may tread water until next week and if it is better than expected then it could make a firm break to a new high. The indicators are bullish but softening. Momentum is on the decline and stochastic, though high in the range, is moving lower. On the one hand this is a good thing to happen while prices remain high but could lead the index lower if resistance is not broken. Support is around 1825 right now.


Both the Russell 2K and 1K made a new high today. The 2K moved about a quarter point higher on rising momentum. The RUT is now about 10% higher than the low set at the beginning of the month. Today is also the 12th up day out of the last 15. While it looks like the RUT and the RUI as well want to move higher it also looks like a little near term correction is due. Again, the GDP release tomorrow could be just the catalyst.


The tech heavy Nasdaq also made a new high today. This is the 11th day of up trading out of the past 15 for this index. It also has bullish indicators but like the indicators on the S&P 500 are softening.


The Dow Transports traded to the upside but did not make a new high. The Trannies are still about 2.5% below its all time high. The good news is that this index appears to be building support along the long term trend line. Momentum is bullish and stochastic is also confirming the trend line. Since last week the index has been able to move above short term resistance which is turning into additional support, aided by the 30 day EMA. Currently support is just below the current levels around 7,200-7,250 and the long term trend line. Resistance is just above 7,500 at the current all time high level.


The Dow Industrials also did not make a new high today but also traded to the upside. The blue chips are lagging the small caps, the techs and the broad market but are following them higher. Indicators here are also bullish but softening. On the bull side of the coin the index moved above a resistance line today opening up the chart for a try at the all time high provided support holds. The GDP data tomorrow could be a catalyst for this index as well as the others.


Janet Yellen soothed the markets with her words but that could be short lived. Tomorrow GDP data could lead the market to think that the economy and the recent economic slump are worse than feared. Or it could show that things are not as bad as we think. The markets, the indices, appear to be in a similar fix. They look like they could be halfway through a short term rally, or at the peak of a near term rally. The data tomorrow and over the next week will surely have an impact on which way the market moves. As I said earlier in the wrap I don't expect too much from the current numbers, it will be the forward looking components that matter more, at least to me. We know we are in a slump, we know that the data has been weak and weaker than expected, we have the whole weather effect thing to factor in and we're about to enter the warmer spring season. The data may cause a brief pull back in the markets but the long term trends are up and I see no reason for a major correction or reversal at this time.

Until then, remember the trend!

Thomas Hughes


New Plays

Bullish Basic Materials

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)
STC, IILG, HW, YRCW, OVTI, BLUE, TXT, LUV, TEX, CRZO, BITA, UIS, PMC, TEVA,



NEW BULLISH Plays

Penn Virginia Corp. - PVA - close: 15.01 change: +0.24

Stop Loss: 14.29
Target(s): 18.50
Current Gain/Loss: unopened

Entry on February -- at $--.--
Listed on February 27, 2014
Time Frame: 6 to 8 weeks
Average Daily Volume = 2.8 million
New Positions: Yes, see below

Company Description

Why We Like It:
PVA is in the basic materials sector. The company is an independent oil and gas producer in the U.S. The stock soared to new highs following its earnings report on Feb. 19th. PVA has now spent the last few days digesting gains in a sideways consolidation. There appears to be short-term resistance near $15.15. A breakout could spark some short covering. The most recent data listed short interest at 14% of the very small 19.4 million share float.

I am suggesting a trigger to open bullish positions at $15.20. If triggered our multi-week target is $18.50.

Trigger @ 15.20

Suggested Position: buy PVA stock @ (trigger)

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

Buy the APR $15 call (PVA1419D15) current ask $1.15

Annotated chart:




In Play Updates and Reviews

Stocks Drift Higher

by James Brown

Click here to email James Brown

Editor's Note:
The U.S. market continued to drift higher on Thursday and the S&P 500 set a new all-time closing high.

Overall it was a relatively quiet session for the Premier Investor play list.


Current Portfolio:


BULLISH Play Updates

Alcoa Inc. - AA - close: 12.03 change: -0.02

Stop Loss: 11.45
Target(s): 12.95
Current Gain/Loss: + 4.2%

Entry on February 19 at $11.55
Listed on February 11, 2014
Time Frame: 6 to 8 weeks
Average Daily Volume = 39 million
New Positions: see below

Comments:
02/27/14: AA delivered a quiet session on Thursday with shares consolidating sideways. AA appears to have short-term resistance at $12.16 and then again at the January highs near $12.30.

Earlier Comments:
Our multi-week target is $12.95. The Point & Figure chart for AA is very bullish with a $20.00 target.

current Position: Long AA stock @ $11.55

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

Long APR $12 call (AA1419D12) entry $0.47

02/26/14 new stop loss @ 11.45
02/22/14 new stop loss @ 11.25
02/19/14 triggered at $11.55



American Airlines Group - AAL - close: 36.56 change: -0.19

Stop Loss: 34.45
Target(s): 39.85
Current Gain/Loss: + 0.2%

Entry on February 24 at $36.50
Listed on February 20, 2014
Time Frame: 6 to 8 weeks
Average Daily Volume = 13.3 million
New Positions: see below

Comments:
02/27/14: AAL tagged multi-year highs on Wednesday morning. The last day and a half have seen some minor profit taking. Look for potential support near $36.00.

current Position: Long AAL stock @ $36.50

02/24/14 triggered @ 36.50



DR Horton Inc. - DHI - close: 24.87 change: +0.02

Stop Loss: 23.25
Target(s): 27.50
Current Gain/Loss: +2.1%

Entry on February 26 at $24.35
Listed on February 25, 2014
Time Frame: 6 to 8 weeks
Average Daily Volume = 8.0 million
New Positions: see below

Comments:
02/27/14: DHI maintained its big gains from yesterday with a sideways consolidation today. That's not surprising since shares are testing potential round-number resistance at the $25.00 mark. Broken resistance at $24.00 should offer new support.

current Position: Long DHI stock @ $24.35

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

Long Apr $25 call (DHI1419D25) entry $0.96*

02/26/14 triggered @ 24.35
*option entry price is an estimate since the option did not trade at the time our play was opened.



Dunkin' Brands Group - DNKN - close: 51.58 change: +0.27

Stop Loss: 49.75
Target(s): 57.50
Current Gain/Loss: + 1.8%

Entry on February 19 at $50.65
Listed on February 18, 2014
Time Frame: 6 to 8 weeks
Average Daily Volume = 1.1 million
New Positions: see below

Comments:
02/27/14: DNKN quietly drifted higher on Thursday with a +0.5% gain. I am not suggesting new positions at current levels.

Earlier Comments:
FYI: The Point & Figure chart for DNKN is bullish with a $60.00 target.

current Position: long DNKN stock @ $50.65

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

Long MAR $50 call (DNKN1422C50) entry $1.50*

02/25/14 new stop @ 49.75
02/19/14 triggered @ 50.65
*option entry price is an estimate since the option did not trade at the time our play was opened.



Flotek Industries - FTK - close: 25.26 change: +0.13

Stop Loss: 23.95
Target(s): 29.75
Current Gain/Loss: + 0.4%

Entry on February 24 at $25.15
Listed on February 18, 2014
Time Frame: 6 to 8 weeks
Average Daily Volume = 976 thousand
New Positions: see below

Comments:
02/27/14: FTK tested short-term support at its 10-dma and bounced. The move looks like a new bullish entry point for traders.

Earlier Comments:

FYI: The Point & Figure chart for FTK is bullish with a $31.00 target.

*small positions*

current Position: long FTK stock @ $25.15

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

Long Mar $25 call (FTK1422C25) entry $0.90*

02/24/14 triggered @ $25.15
*option entry price is an estimate since the option did not trade at the time our play was opened.



The Manitowoc Co. - MTW - close: 30.98 change: +0.14

Stop Loss: 29.60
Target(s): 34.85
Current Gain/Loss: + 0.6%

Entry on February 27 at $30.79
Listed on February 26, 2014
Time Frame: 6 to 8 weeks
Average Daily Volume = 3.9 million
New Positions: see below

Comments:
02/27/14: Our new trade on MTW opened this morning at $30.79. Nimble traders could have bought it lower with MTW's dip toward $30.00. The stock rebounded and looks poised for further gains. I would still consider new positions now at current levels.

Earlier Comments:
The plan was to keep our position size small to limit risk.

*Small positions*

current Position: Long MTW stock @ $30.79

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

Long Apr $30 call (MTW1419D30) entry $2.05*

02/27/14 trade opens at $30.79
*option entry price is an estimate since the option did not trade at the time our play was opened.



SolarWinds, Inc. - SWI - close: 46.49 change: +0.36

Stop Loss: 43.90
Target(s): 49.50
Current Gain/Loss: + 4.5%

Entry on February 18 at $44.50
Listed on February 15, 2014
Time Frame: 6 to 8 weeks
Average Daily Volume = 1.27 million
New Positions: see below

Comments:
02/27/14: SWI continued to drift higher and actually outperformed the major indices with a +0.78% gain. I am adjusting our stop loss to $43.90. More conservative traders may want to adjust theirs even higher.

Earlier Comments:
Our target is $49.50. More aggressive traders or those with a longer time frame may want to aim higher since the Point & Figure chart for SWI is bullish with a $63.00 target.

current Position: long SWI stock @ $44.50

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

Long MAR $45 call (SWI1422C45) entry $1.45

02/27/14 new stop loss @ 43.90
02/20/14 new stop loss @ 43.45
02/18/14 entry trigger hit at $44.50



BEARISH Play Updates

Eaton Vance - EV - close: 36.97 change: +0.44

Stop Loss: 37.05
Target(s): 30.50
Current Gain/Loss: unopened

Entry on February -- at $--.--
Listed on February 20, 2014
Time Frame: 6 to 8 weeks
Average Daily Volume = 1.0 million
New Positions: Yes, see below

Comments:
02/27/14: We're starting to lose patience on our EV trade. If shares close above their 20-dma (currently near $37.00) then we'll drop EV as a bearish candidate. Currently I am suggesting a trigger to open bearish positions at $35.50. If triggered our target is $30.50. The Point & Figure chart for EV is bearish with a $28.00 target.

Trigger @ 35.50

Suggested Position: short EV stock @ (trigger)



Harsco Corp. - HSC - close: 24.88 change: -0.09

Stop Loss: 25.40
Target(s): 21.50
Current Gain/Loss: unopened

Entry on February -- at $--.--
Listed on February 24, 2014
Time Frame: 6 to 8 weeks
Average Daily Volume = 447 thousand
New Positions: Yes, see below

Comments:
02/27/14: HSC underperformed the market today but we're still waiting on a new relative low.

Earlier Comments:
I am still suggesting a trigger to launch bearish positions at $24.40. If triggered our target is $21.50. I do expect shares to see short-term support near its February low ($23.21) and the $22.00 level.

Trigger @ 24.40

Suggested Position: short HSC stock @ (trigger)