Option Investor
Newsletter

Daily Newsletter, Thursday, 3/6/2014

Table of Contents

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

Market Wrap

Market Climbs On NFP Hopes

by Thomas Hughes

Click here to email Thomas Hughes
World markets rise on future hopes, Non-Farm Payrolls in focus for tomorrow.

Introduction

The global markets were relatively positive today. Asian and European markets were both largely in the green. Asian stocks had been treading water from the previous day's close until the last hour or two of trading. The Nikkei led, helped in part by a weakening yen, with a 1.59% gain. European markets had their eyes on the ECB and the policy statement released today. The ECB maintained their lending rate, as expected, and did not change QE policy, also as expected. The ECB sees signs of stabilization and slow growth but does not see the need to increase their efforts to stimulate the economy. The EU markets closed in the green, barely, after a choppy day of trading. Our own markets were trading to the upside in the early hours as well. S&P futures were up in the +5 range, the Dow around +40, before and after the 8:30 release of jobless claims data.


The initial claims fell this week but the overall trend is still sideways in terms of first time claims. Longer term claims dropped again but may still be feeling the impact of expiring benefit extensions. Other data, such as the Challenger survey of planned lay-offs, revealed more weakness in the jobs sector. Other data, particularly the backward looking Q4 productivity and February factory orders, were also down. The markets did not seem to care as the early gains carried into the open and were extended upon throughout the morning. Eyes seem to be on the NFP report tomorrow and hopes that the current dip in economic activity will end soon. Comments from the retail sector this morning revealed that although weather did impact traffic and sales they saw strong demand in the second half of the month as the weather abated, something I noted around my home town as well.


Today's rally was pretty broad. A look at the Select SPDR's website showed that 9 of the 10 S&P sectors tracked by the ETF's were up in the first half of today's. The only declining sector was the Utilities, XLU. Afternoon trading was a little less robust. The indices retreated from the intra-day highs set during the morning, some moving into negative territory. The Nasdaq hit a new 14 year high before it turned tail and went in to the red. The S&P 500 and Dow Jones Industrials were both able to hold onto positive territory going into the close.

The Data

According to data compiled by Challenger, Grey & Christmas the number of planned layoffs fell in February. The number declined by over 7% to 41,000 after surging in January by more than 50%. Planned layoffs are well above the lows set in December last year but basically flat over the past 12 months. This neither helps or hinders the jobs picture in my opinion. This is the second piece of the monthly jobs bundle, the first was yesterday's ADP report. ADP job creation was reported below expectation but more in line with the last two months of NFP. The previous month ADP number was also revised sharply lower.

Initial jobless claims fell last week by -26,000 to 323,000. The previous weeks figure was revised up by 1,000. The four week moving average of claims dropped by -2,000 to 336,500. This is a three month low and a possible first sign that the labor market is firming a little. If I am not mistaken the weekly release of initial claims, which is lagging by less than a week, is the most current view of labor conditions if also a very unreliable one. Nonetheless, this is a data point to take note of for future reference. On an unadjusted basis initial claims gained 5,702 this week. Nine states reported a drop in claims greater than 1,000 with a total near -22,000. Seven states reported a jump in claims greater than 1,000 with a total just under 20,000.


Continuing claims fell as well. This number fell -8,000 from a downward revision to last weeks data to hit 2.907 million. This is an 8 week low for this figure. Continuing claims have been elevated over the past two months, though slowing coming down. This weeks number could be another indication that labor conditions are firming somewhat going into the spring. This number lags the current by two weeks, and the initial claims data by one week.


Total claims also fell but I still think this number could be affected by the expired benefit extensions. Total claims fell by over -86,000 to 3.399 million. This is a new low. Even if the total claims are being impacted by benefit extensions it could also be moving lower on firming labor conditions. Together, all three measures of jobless claims are lower, moving lower and could be indicating a turn in labor conditions. I don't expect to see much proof of that in tomorrow's NFP and unemployment data but it should become apparent next month providing the trends in the data I see now hold up for March and into the spring.


Some final data for Q4 was also released today but I don't think it matters that much. Productivity in the quarter was revised lower, below expectations, to 1.8%. This is also a drop from the third quarter. I don't think it matters too much because it is the third revision of data for a quarter that ended more than 8 weeks ago.

The Gold Index

Gold prices made a wild swing today. Early in the morning the spot price for gold was down in the -$5 to -$10 range, then it turned around and shot up about $10. I think the ECB decision and unfolding drama in the Ukraine/Crimea had something to do with it. Weak U.S. data could also have had a hand in the move. Prices moved above the $1350 mark today in the U.S. session but had a hard time staying above that level. This could become resistance if prices do not move higher soon. Economic data and the upcoming Fed meeting will be a factor in this move.

The Gold Index moved up today as well but is still below the resistance of the lower boundary of the previous bear pennant. With gold prices up near 5 and 6 month highs another wave of buying in the gold stocks might not be out of the question. However, I think I am going to need to see a break back into and above the pennant before getting truly bullish on the gold miners. The index is finding short term support along the 30 day EMA near the $100 level but faces resistance just above near $105.


The Oil Index

Oil prices fell again, the third day of declines after the Putin inspired rally on Monday, before whipsawing back up. Prices dropped to near $100 before bouncing back to the $101 level. Look to the $100 level for support, a break could take oil back to $95, over the next few days. The Oil Index traded to the upside today, challenging resistance but once again failing to break it. High oil prices could mean better earnings for oil companies but were prices elevated high enough, long enough to really make a difference? The index has been fighting the long term resistance level for almost two weeks and could reverse it if not broken soon. The index is struggling to hold the current uptrend, a trend that is now intersecting with resistance set during the 2008 market reversal. A break above the 1485 level has another resistance just above at 1500.


The Dollar Index

The dollar sank to a four month low versus the basket of international currencies. The Dollar Index dropped more than a half percent, breaking the lower end of the four month range and sinking to near a five month low.


The euro strengthened versus the dollar. The ECB decision and statements helped to rally some belief that things are turning around in the EU. Despite low inflation the bank held rates unchanged on the expectation that there were be some gradual upward movement as the economy slowly improved. The EUR/USD pair moved up sharply from the 30 day EMA today but was halted at a Fibonacci Retracement near 1.3875.


The yen finally started to move this week. This pair made a retest of support Monday during the heat of the Ukraine sell-off and then began to move upward from there. The pair has made two strong white candles but at this time is still contained by resistance near the 103 level. Today's move brings the pair up to a five week high with strengthening technicals. As the winter wears on and the spring grows closer so to does the planned Japanese usage tax hike and the chances the BOJ will need to increase QE. Meanwhile, Fed tapering and Abenomic are still moving this pair in the longer term.


Sector Snapshot

The banks were one of today's hottest sectors. The Banking Index moved up nearly a full percent, making the third of what I will call almost a Three White Soldiers. The index is moving up on bullish indicators but is also facing resistance just above the current level around $71.50. Bullish momentum is on the rise and stochastic has plenty of room to move up so a test of resistance is likely. Economic data will play a big role in moving this index. Tomorrow's NFP report could help to move this and other indices as well. Looking a little farther out the next FOMC is in just under two weeks. Statements, policy changes, interest rates and the taper are all factors as well.


Looking at the XLF things are a little different. This index is already breaking out to new highs and could be foreshadowing a similar move in the BKX. One thing to note is that the XLF includes a lot of the smaller and regional banks, unlike the BKX. The indicators here are also bullish. The MACD is converging with today's spike in prices so even if there is a pullback or consolidation it looks at this time as though we can still expect higher prices in this sector. An improving economy, improving jobs, improving spending, improving housing sector and etc can only benefit the banks whose job it is to handle all of that money.


Story Stocks

There were a quite a few earnings reports today despite being after the so-called earnings season. The top name on the list today was Costco, who posted a miss. The company was expected to earn about $1.16, up $0.20 from last quarter, but reported only $1.05. This is down 15% from the same quarter last year. The drop was blamed on weaker sales, weak exchange rates and poor performance from the non-foods group of merchandise. Same store sales grew by 5% in the quarter while new memberships grew just over 4%. This quarter continues the trend of weakening membership growth and is one area of concern cited by analysts. The stock dropped more than 2% before the open but found some support around the $110-$112 level.


The Indices

The indices were mixed today after setting new highs this week. The S&P, Dow and Transports were all able to move into the green while others like the Nasdaq and Russell 2000 dipped into the red. The S&P moved up nearly 8 points in today's trading before peaking out in the early afternoon. The index appears to want to move higher even though the data and the earnings are not really leading the way. I know that I for one am expecting an end to the winter weakness in the economy and think that there could be signs of this soon. Tomorrow's NFP report will likely not be that sign but what it could be is confirmation that the economic dip is only as bad as it has been and no worse. This, to me, would be in line with the longer term trends, the expected winter slow down and the upcoming expected pick up in activity.

The S&P 500 is moving higher with bullish technicals. Momentum and stochastic are both diverging in the nearer term but longer term analysis suggests that higher prices could still come. With the index back at new all time highs it is harder to pinpoint where resistances might be. One way is to look on the calendar for potential market moving events, the next real big one after the NFP tomorrow will be the FOMC meeting in two weeks. There could be some near term weakness once the NFP is released but the long term trends are still up. Near term support is now around the 1850 level.


The Nasdaq traded into the red today, after making a new 14 year high. Even with the afternoon weakness the index is still riding high on a bullish wave. The indicators are strongly bullish in the longer term but diverging in the nearer term. Like the S&P 500, there may be some near term weakness but the longer term trend is still up.


The Dow is right behind the other two indices but has not quite made it to a new high yet. Resistance is about 150 higher near the current all time around the 16,575 level. Indicators are bullish on this index as well, but are also diverging in the nearer term indicating the current rally is losing steam. Be on the lookout for a pullback or consolidation with support around the 16,250 level.


The markets are setting new highs. That is something that is hard to argue with. So long as new highs are being set weakness, dips and corrections are buying opportunities. Until the data, the earnings or something else emerges as a sign that something is changing the trends are up. The dip we are experiencing was expected. The fact it was a little deeper than expected could be the fault of the “weather effect”, or not. The important thing is when will it end and when will the next uptick in activity begin. This weeks employment data could be an early sign of this happening. Don't expect to see too much in tomorrow's data but pay attention to any forward looking components and the weekly claims. Next month's data and NFP may be better, showing a resumption of growth, or not.

Until then, remember the trend.

Thomas Hughes


New Plays

Going For The Gold

by James Brown

Click here to email James Brown


NEW BULLISH Plays

Gold Miners ETF - GDX - close: 26.79 change: +0.29

Stop Loss: 25.90
Target(s): 30.00
Current Gain/Loss: unopened

Entry on March -- at $--.--
Listed on March 06, 2014
Time Frame: 6 to 8 weeks
Average Daily Volume = 38.8 million
New Positions: Yes, see below

Company Description

Why We Like It:
The GDX is an exchange traded fund (ETF) that follows the gold miners. The top ten holdings are ABX (13.8%), GG (12.75%), NEM (6.7%), NCMGF, SLW, AU, FNV, AUY, GOLD, and KGC. Both gold futures and gold mining stocks have risen sharply this year. Normally the miners tend to outperform gold when the commodity is rising.

Currently the GDX has been consolidating sideways the last couple of weeks but now the ETF looks poised for a breakout past resistance near $27.00. The point & figure chart is bearish but a move above $27.00 would generate a new buy signal.

I am suggesting a trigger to buy the GDX at $27.15. If triggered our target is $30.00. I do see resistance in the $31.00 area.

Trigger @ 27.15

Suggested Position: buy the GDX @ $27.15

Annotated chart:




In Play Updates and Reviews

Stocks Consolidate Ahead of Jobs Data

by James Brown

Click here to email James Brown

Editor's Note:
The major U.S. indices consolidated sideways ahead of the Friday morning jobs report.

IM, PWR, and STRZA hit our entry triggers.


Current Portfolio:


BULLISH Play Updates

Alcoa Inc. - AA - close: 12.06 change: -0.04

Stop Loss: 11.55
Target(s): 12.95
Current Gain/Loss: + 4.4%

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:
03/06/14: Shares of AA were downgraded today although the news didn't have that much impact. The stock spiked higher this morning and briefly traded above its January highs near $12.30 before reversing lower. A failure here would look like a bearish double top. I am not suggesting new positions at this time.

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

03/05/14 new stop loss @ 11.55
02/26/14 new stop loss @ 11.45
02/22/14 new stop loss @ 11.25
02/19/14 triggered at $11.55



DR Horton Inc. - DHI - close: 23.86 change: -0.10

Stop Loss: 23.65
Target(s): 27.50
Current Gain/Loss: -2.0%

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:
03/06/14: Homebuilding stocks were mixed today. DHI almost hit our stop loss with an intraday low of $23.69. Our stop is at $23.65 and if shares see any follow through lower tomorrow we can expect to be stopped out.

current Position: Long DHI stock @ $24.35

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

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

03/05/14 new stop loss @ 23.65
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: 51.43 change: +0.26

Stop Loss: 50.65
Target(s): 57.50
Current Gain/Loss: + 1.5%

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:
03/06/14: DNKN did not confirm yesterday's bearish reversal pattern. I am not suggesting new positions. More conservative traders could raise their stop again.

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*

03/04/14 new stop @ 50.65
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.



Electronic Arts - EA - close: 29.21 change: +0.12

Stop Loss: 27.60
Target(s): 34.00
Current Gain/Loss: + 1.2%

Entry on March 04 at $28.85
Listed on March 01, 2014
Time Frame: 6 to 8 weeks
Average Daily Volume = 5.0 million
New Positions: see below

Comments:
03/06/14: EA continues to push higher and tagged new multi-year highs with today's spike to $29.65. The intraday pullback might suggest more profit taking ahead. I would not be surprised to see a dip toward its 10-dma again.

Earlier Comments:
We want to keep our position size small to limit our risk. Our multi-week target is $34.00. The Point & Figure chart for EA is bullish with a $43.00 target.

*small positions*

current Position: Long EA stock @ $28.85

03/04/14 new stop @ 27.60
03/04/14 triggered @ 28.85



Flotek Industries - FTK - close: 27.21 change: +0.49

Stop Loss: 25.25
Target(s): 29.00
Current Gain/Loss: + 8.2%

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:
03/06/14: The relative strength in FTK continues with a +1.8% gain on top of its earlier gains this week. Shares look short-term overbought here. I am adjusting our exit target down to $29.00. More conservative traders may want to take some money off the table. I am moving our stop loss to $25.25.

Please note that I am also suggesting we exit our March $25 calls immediately at the opening bell tomorrow. The current bid/ask is $2.15/2.60.

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*

03/06/14 new stop loss @ 25.25, adjust target to 29.00
prepare to exit our March $25 calls Friday morning.
03/04/14 new stop loss @ 24.90, adjust target to $29.50
03/03/14 new stop loss @ 24.40
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.



Ingram Micro Inc. - IM - close: 29.80 change: -0.06

Stop Loss: 28.75
Target(s): 34.00
Current Gain/Loss: - 1.2%

Entry on March 06 at $30.15
Listed on March 05, 2014
Time Frame: 6 to 8 weeks
Average Daily Volume = 1.5 million
New Positions: see below

Comments:
03/06/14: Our new play on IM has been triggered but I am urging caution here. The stock spiked higher this morning and hit an intraday high of exactly $30.15. That happened to be our suggested entry point to open bullish positions. IM spent the rest of the day fading lower. At this point I would wait for a rally past $30.15 before initiating new positions.

current Position: Long IM stock @ $30.15

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

Long JUN $30 call (IM1421F30) entry $1.50

03/06/14 triggered at $30.15 (happened to be the intraday high)



The Manitowoc Co. - MTW - close: 30.69 change: +0.25

Stop Loss: 29.90
Target(s): 34.85
Current Gain/Loss: - 0.3%

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:
03/06/14: MTW displayed some strength today with a +0.8% gain. The stock did not see any follow through on yesterday's bearish reversal candlestick.

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*

03/04/14 new stop loss @ 29.90
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.



Oasis Petroleum - OAS - close: 44.48 change: +0.32

Stop Loss: 42.90
Target(s): 49.85
Current Gain/Loss: - 1.5%

Entry on March 04 at $45.15
Listed on March 03, 2014
Time Frame: 6 to 8 weeks
Average Daily Volume = 2.7 million
New Positions: see below

Comments:
03/06/14: OAS bounced near support in the $44 area and its 200-dma. A new rally above $45.00 could be used as a bullish entry point. More conservative traders may want to raise their stop loss higher.

Earlier Comments:
Our target is $49.85. I do expect OAS to see some short-term resistance near $48.00.

current Position: Long OAS stock @ $45.15

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

Long Apr $45 call (OAS1419D45) entry $2.50*

03/05/14 new stop @ 42.90
03/04/14 triggered @ 45.15
*option entry price is an estimate since the option did not trade at the time our play was opened.



Penn Virginia Corp. - PVA - close: 15.46 change: +0.26

Stop Loss: 14.29
Target(s): 18.50
Current Gain/Loss: + 1.7%

Entry on February 28 at $15.20
Listed on February 27, 2014
Time Frame: 6 to 8 weeks
Average Daily Volume = 2.8 million
New Positions: see below

Comments:
03/06/14: PVA dipped to its simple 10-dma and bounced. Shares outpaced the market with a +1.7% gain. If you were looking for a new entry point then today's rebound could work.

Earlier Comments:
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.

current Position: Long PVA stock @ $15.20

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

Long APR $15 call (PVA1419D15) entry $1.25*

02/28/14 triggered @ 15.20
*option entry price is an estimate since the option did not trade at the time our play was opened.



Quanta Services, Inc. - PWR - close: 36.43 change: +0.63

Stop Loss: 34.65
Target(s): 39.85
Current Gain/Loss: + 1.1%

Entry on March 06 at $36.05
Listed on March 04, 2014
Time Frame: 6 to 8 weeks
Average Daily Volume = 2.0 million
New Positions: see below

Comments:
03/06/14: Our new play on PWR has been triggered. The stock quietly consolidated sideways below the $35.90 level for about an hour this morning. Then suddenly PWR surged higher and rallied the rest of the day. PWR ended the session with a +1.75% gain and new multi-year highs.

current Position: Long PWR stock @ $36.05

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

Long Apr $35 call (PWR1419D35) entry $1.70*

03/06/14 triggered @ 36.05
*option entry price is an estimate since the option did not trade at the time our play was opened.



Sprint Corp. - S - close: 8.88 change: -0.24

Stop Loss: 8.40
Target(s): 10.50
Current Gain/Loss: -1.2%

Entry on March 04 at $ 8.99
Listed on March 03, 2014
Time Frame: 6 to 8 weeks
Average Daily Volume = 21 million
New Positions: see below

Comments:
03/06/14: The selling that began late yesterday continued into Thursday. Investors are worried that regulatory hurdles may prevent TMUS from merging wit Sprint. Shares of Sprint fell to $8.75 before starting to bounce. Traders may want to wait for a new rally above $9.00 before initiating positions.

Earlier Comments:
Our multi-week target is $10.50. The Point & Figure chart for S is bullish with an $11 target.

current Position: Long S stock @ $8.99

03/05/14 new stop @ 8.40
03/04/14 trade opens on gap higher at $8.99



Starz - STRZA - close: 33.18 change: +0.21

Stop Loss: 31.40
Target(s): 36.50
Current Gain/Loss: - 0.5%

Entry on March 06 at $33.35
Listed on March 05, 2014
Time Frame: 6 to 8 weeks
Average Daily Volume = 1.0 million
New Positions: see below

Comments:
03/06/14: Shares of STRZA extended its gains to four up days in a row. The stock hit our suggested entry point at $33.35 intraday. I would still consider new positions now at current levels.

current Position: Long STRZA stock @ $33.35

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

Long Apr $35 call (STRZA1419D35) entry $0.76

03/06/14 triggered @ 33.35



Tyson Foods, Inc. - TSN - close: 40.17 change: -0.25

Stop Loss: 38.45
Target(s): 44.50
Current Gain/Loss: + 0.0%

Entry on March 05 at $40.15
Listed on March 01, 2014
Time Frame: 6 to 8 weeks
Average Daily Volume = 4.3 million
New Positions: see below

Comments:
03/06/14: TSN retreated back toward the $40 level today. I don't see any changes from my prior comments and would still consider new positions now at current levels.

Earlier Comments:
We are suggesting small bullish positions if TSN can trade at $40.15. If triggered our multi-week target is $44.50.

*small positions*

current Position: Long TSN stock @ $40.15

03/05/14 triggered @ 40.15



Tata Motors - TTM - close: 34.69 change: +0.03

Stop Loss: 33.90
Target(s): 39.75
Current Gain/Loss: unopened

Entry on March -- at $--.--
Listed on March 04, 2014
Time Frame: 6 to 8 weeks
Average Daily Volume = 1.75 million
New Positions: Yes, see below

Comments:
03/06/14: TTM is still consolidating sideways. We are waiting on a breakout higher.

Earlier Comments:
TTM is below round-number resistance near $35.00. Tuesday's high was $35.25. I am suggesting a trigger to launch bullish positions at $35.40. If triggered our target is $39.75. More aggressive investors may want to aim higher since the Point & Figure chart for TTM is very bullish with a long-term $52.00 target.

Trigger @ 35.40

Suggested Position: buy TTM stock @ (trigger)

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

Buy the Apr $35 call (TTM1419D35)



BEARISH Play Updates


None. We do not have any active bearish trades.