Option Investor
Newsletter

Daily Newsletter, Thursday, 4/24/2014

Table of Contents

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

Market Wrap

Ukraine Weighs On Earnings

by Thomas Hughes

Click here to email Thomas Hughes
Early trading saw big gains until new comments and actions from Russia sent traders running for cover.

Introduction

The earliest part of today's trading day began with quite a lift. The better than expected earnings reports from FB and AAPL after the bell yesterday put a real bid into the NASDAQ. The US indices were indicated up by about 6 points for the S&P 500 and over 50 points for the NASDAQ. Asian markets were mixed while European indices were in the green. The 8:30 release of economic data gave the markets a small boost, sending the S&P, Dow and NASDAQ all up another couple of points. At one point the NASDAQ was up by over 70 points in the early trading but the bullish activity moderated slightly before the opening.


The first few minutes to a quarter hour of trading saw the indices perform as the early futures trading had indicated. All indices moved to the upside with the NASDAQ briefly turning positive for the year. Around 9:45AM reports of Russian troop movements, military exercises and comments from Putin sent global markets down sharply. The NASDAQ shed all of its early gains to dip briefly into the red while the S&P and Dow both ventured deeper into negative territory. These levels held for about an hour or so until the underlying trends of earnings and the economy took back control of market direction. The major indices slowly but surely regained traction, moving back into the green and near the early highs by lunch time. The after noon hours saw more of the same. After making an early after noon peak the indices drifted lower with the S&P and Dow dipping back into negative territory. Around 3PM the indices bounced back and were able to hold positive territory until the close.


The Economy

Orders for Durable Goods was first up on the economic calendar today. Orders rose by 2.6%, more than a 1/2% more than expected, while last months reading was revised up to 2.1%. Ex-transportation the orders rose by 2%, also ahead of expectations. Non-defense orders reversed last months -1.3% decline with a better than expected +2.2% this time around. Actual shipments of goods also rose, by 1%.

Initial claims for unemployment climbed by 24,000 this week. This is from an upward revision of 1,000 to last weeks report of 304,000 for a net increase of 25,000. This weeks increase is nearly twice the expected the increase but still near long term lows. The four week moving average gained 4,750 to reach 316,750. The top five states reporting an increase in claims greater than 1,000 added just over 19,000 to this weeks report. The top five states reporting a decrease in claims totaled just over -5,000. The 12 month trend in claims is sideways to down with the low end of the range just over 300,000. This will be an important level economically speaking, a drop below this number could indicate strengthening in labor. The next round of macro economic data is due out next week and includes the first estimate for 1st quarter GDP as well as the monthly release of non farm payrolls and US unemployment. On an unadjusted basis initial claims dropped by -20,993, falling to 297,870.


Continuing claims fell again this week, shedding another -61,000. This is the 6th of 8 weeks of declines in this number since hitting a peak in late January early February and puts it at a new low. This is the lowest level of continuing claims (seasonally adjusted and revised) since December 8th, 2007. Last weeks figure was revised slightly higher. The total number of American on unemployment also fell in this weeks report, dropping over -82,000 to 2.922 million. This is also a new low and could be indicative of current improvements in labor markets. We'll have to look at participation rates along with other jobs data including the ADP and Challenger reports.

The Gold Index

Gold trading was volatile today. The spot price of gold fell by nearly $15 in overnight trading before the reports from Russia/Ukraine reversed that trade and sent the price up more than $10 from yesterday's average prices. Unlike the equity markets, where the Russian affect quickly wore off, the increase in gold prices lingered into the afternoon. Immediately, as in tomorrow and over the weekend, Russia could continue to impact gold prices. Looking out a bit, the next FOMC meeting is just next week, Wednesday being the day of the rate announcement. I think Fed rate policy, tapering and more importantly the interest rate outlook will have a longer lasting affect on gold prices.

The Gold Index traded in a tight range today, just below the short term 30 day EMA. The index is in a possible short term trading range yesterday with a long with boundaries of $92.50 at the low end with $100 as resistance. Today's action was weak as are the indicators. In the near to short term MACD and stochastic both show some support but with the longer term downtrend it is unclear just how strong it might be at this time. A break below support could take the index down to near the $82.50-$85 range. At this time earnings, along with gold prices, could influence index direction. The major gold miners are expected to begin reporting next week, led by Barrick Gold on 4/30, followed by GoldCorp and RoyalGold the next day.


Barrick Gold is expected to report $0.19 per share, roughly half what it earned in the previous quarter. Shares of the stock have been moving lower over the past two months following a double top which formed just above long term resistance. Today's action resulted in a bearish candle forming beneath the short term trend line along with bearish indicators. Current targets are along the near term support line at $17 and just below near $15.50. The longer term weekly charts are also consistent with Barrick moving toward the lower end of the range.


The Oil Index

Oil prices gained about a half percent today as Russia's posturing trumped reports or record inventory levels. WTI closed just below $102 per barrel with Brent trading near $110.50. Natural gas prices declined by about a half percent in today's session to close near $4.75. Additionally, improving economic conditions are also helping to support higher WTI prices.

The Oil Index has been moving higher over the past two weeks following the trend line bounce of 4/11. Candlestick action appears as if index momentum may be cresting in the near term but indicators support higher prices in the short to mid terms. Stochastic is strongly bullish at this time and crossing the upper signal line. There is still a divergence in MACD to keep an eye on but momentum remains bullish here as well. Resistance exists just above the current levels at the previous all time high near 1625 set in mid May, 2008. This level is likely to provide at least some near term volatility if not an actual pull back or correction. Earnings will play a big role in index direction over the next week as more than 50% of the top ten holdings are scheduled to report between 4/29 and 5/02.


Exxon Mobil is scheduled to report on Thursday, May 1st. The company is expected to earn $1.87 per share, just shy of the previous quarter. Elevated oil prices could possible elevate revenues providing consumption was in line with expectation but at the same time rising costs could impair earnings potential. Shares of XOM have been trending higher since hitting a bottom in early February but are still below long term resistance. The divergence in MACD is more noticeable here than on the Oil Index and coupled with a stochastic that is also diverging and indicative of resistance make very skeptical of a long term bullish outlook. Earnings may prove to be better than expected but I remain cautious/nuetral without a break above $102.


Earnings Round Up

Today was the single biggest day for earnings out of the entire season. At least 60 S&P 500 companies reported today with 20 coming after the bell. Apple was the big headline of the day and one among several high profile reports before the bell, beating estimates and announcing a 7 for 1 stock split. The report and announcement had shares of AAPL up more than $44 or 8.5% in pre market trading and is responsible for much of today's gains. The company reported EPS of $11.62 versus the expected $10.18 in a return to growth from last years disappointing results. Total revenues for the quarter totaled $45.6 billion versus the estimated $43.5. Forward looking statements and earnings guidance is in line with the current consensus range but offer no insight into specifics on new product launches expected later this year. Shares of AAPL gapped up at the open, trading above a long term resistance with strongly bullish indicators. Apple could continue higher until the split but a test/retest of support along the $560 is likely. The stock split is scheduled for June 2, 2014.


FaceBook also stunned investors with its performance last quarter. The social media giant reported EPS of $0.34 versus an expected $0.24. Revenue topped the $2.5 billion mark, about 0.15 billion more than expected. Earnings this quarter are nearly triple the same period last year due mostly to an 85% increase in ad sales. The company also reported an increase in active monthly users of 15%. Shares of FB climbed more than 4% in the pre market trading hours. Shares opened near the top of yesterday's range but quickly sold off and finished the day lower. Indicators are bullish so higher prices could be on the way. Support exists around the $60 level, near the low for today's trading.


Caterpillar reported earnings today before the bell. The machinery maker beat on both the top and bottom line despite a decline in the mining segment. Revenue came in at $13.24 billion with EPS of $1.44 versus the expectations for revenue of $13.15 billion and EPS of $1.24. One area of surprising strength within the was “building (increasing) business in China” according to company CEO. Shares of CAT were up by about 3.5% in the pre-markets. Shares of CAT gapped up at the open to a near two year high only to fall under selling pressure to form a bearish candle. The MACD has just turned bullish but is high divergent, stochastic is below the upper signal line and moving lower at this time. The stock is indicated higher in the longer term but may be in for a period of consolidation or correction. Look for near term support around the $105 level with longer term support just below around the $100 level.


General Motors also reported before the bell. The auto maker reported revenue slightly below expectations but blew away the projections for EPS. The consensus estimate was in the $0.04 range, th actual is $0.29 on an adjusted basis. According to company CFO the $1.3 billion charge due to the current recall is overshadowing the strong results of the company. GM gained about 3.5% in the pre marekt hours, gapped up at the open and then sold off to support during the day.


The after hours were dominated by a slew of earnings releases. The top three names on the list being Amazon, Microsoft and Starbucks. Microsoft beat on the top and bottom lines. MSFT reported revenue only slightly ahead of expectations with EPS of $0.68 compared to the expected $0.63. Shares of MSFT wer up more than 1.5% in the after hours trade.

Amazon beat on the top line with EPS in line with estimates. The company reported revenues of $19.74 billion compared to the expected $19.38 billion. Earnings per share were in line at $0.21. The stock popped 2% initially in the after hours before settling down to trade around 0.5% above the closing prices.

Pandora reported revenues ahead of expectations and less of a loss than predicted. The online radio reported earnings of $180 million, $5 million better than expected, with the loss of -$0.15 per share a penny less.

Starbucks missed on the revenue end but was able to report EPS in line with expectations. The company reported revenue of $3.87 billion compared to the expected $3.95 billion with EPS of $0.56. The stock popped, then dropped, then traded even with today's closing prices. The forward guidance for the next two quarters is in line with current consensus.

Visa was another volatile trade in the after hours. The payment processor reported light revenue but beat on the bottom line. Revenue of $3.16 billion was $0.3 billion less than expected, the EPS of $2.20 was $0.02 better.

The Indices

The S&P 500 made a small gap up today at the open but traded mostly to the downside from there. This action created a bearish candle while at the same time closing above yesterday's closing prices. The index is sitting above the short term moving average and accompanied by bullish indicators. Today's candle action suggests there may be near term weakness but the longer term trends are still up. MACD and stochastic both show support along the long term trend line and are on the rise in the near term. Resistance is just above the current level at or near the current all time high of 1890. Looking back on the past 4-5 trend line bounces the average movement upward is about 150 points which leaves another possible 75 to 100 points for the S&P 500 this time around.


The Dow has yet to set a new high this year but may be setting up it now. The Transports, as a leading indicator of the blue chips, set another new high for this year just this week. At this time the Dow Industrials are bouncing from an area of strong support but capped by the resistance of the current all time high. The MACD and stochastic are both bullish and indicating higher prices providing the index can break above the 16,550 level. Dow trading will be affected tomorrow by Microsoft and Visa.


The Nasdaq Composite performed like so many stocks today, it gapped up at the open only to sell off during the day. The index, after bouncing from significant support level last week, is now hovering around the short term moving average with bullish techinicals. Results from Microsoft for one could help to lift the Nasdaq and S&P 500 in tomorrow's trade.


Looking to next week and possible sources of resistance, reversal or continuation there is the FOMC meeting Tuesday/Wednesday along with the monthly employment data and the first estimate of 1st quarter GDP. Provided there are no surprises the index could easily move past current resistance on the back of improving economic conditions and earnings.

There is also Russian, Putin and The Ukraine to keep in mind. There could be more scares and knee jerk reactions like the one this morning. To date these little scares have been just that, scares, and have all been short lived.

Until then, remember the trend!

Thomas Hughes


New Plays

Momentum Is Stalling

by James Brown

Click here to email James Brown

Editor's Note:

Many were expecting the stock market to rally on Apple's (AAPL) earnings and stock split news last night. Unfortunately, the S&P 500 has been stuck in a range the last couple of sessions. The rally appears to be losing steam.

Shares of AAPL did not disappoint with a +8.19% gain but the market failed to follow suit. The major U.S. indices did gap higher but almost immediately began to sell-off. Investors were focused more on geopolitical concerns and Russian troop movements than corporate earnings in the U.S.

My concerns yesterday about the big cap indices being close to resistance and potentially rolling over remain the same. This feels like a dangerous spot to consider new bullish positions. The NASDAQ and Russell 2000 are still in a bearish trend of lower highs and the S&P 500 and the Dow Industrials are both hovering just below their all-time highs. All of them could roll over and we are nearing the seasonal "sell in May" phenomenon.

We are not adding any new trades tonight.




In Play Updates and Reviews

Small Caps Underperform Major Indices

by James Brown

Click here to email James Brown

Editor's Note:
The small cap Russell 2000 index underperformed its big cap rivals today with a -0.2% drop versus a +0.1% gain in the S&P 500.

Stocks were volatile this morning as investors reacted to geopolitical concerns over Russian troop movements.

RAX hit our entry trigger. WFM hit our stop loss.


Current Portfolio:


BULLISH Play Updates

CenturyLink, Inc. - CTL - close: 34.63 change: +0.02

Stop Loss: 32.95
Target(s): to be determined
Current Gain/Loss: +0.8%

Entry on April 16 at $34.35
Listed on April 14, 2014
Time Frame: exit PRIOR to earnings on May 7th
Average Daily Volume = 5.5 million
New Positions: see below

Comments:
04/24/14: CTL's attempt at a bounce struggled near last week's highs. I am not suggesting new positions at this time.

Plan on exiting prior to CTL's earnings report in early May.

current Position: long CTL stock @ $34.35

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

Long May $34 call (CTL1417E34) entry $0.95*

04/16/14 new stop @ 33.35
04/16/14 triggered @ 34.35
*option entry price is an estimate since the option did not trade at the time our play was opened.



Manitowoc Company - MTW - close: 31.58 change: +0.02

Stop Loss: 29.95
Target(s): to be determined
Current Gain/Loss: + 1.4%

Entry on April 17 at $31.15
Listed on April 16, 2014
Time Frame: Potential exit PRIOR to earnings on May 1st
Average Daily Volume = 2.1 million
New Positions: see below

Comments:
04/24/14: Shares of Caterpillar (CAT) rallied on its earnings news but this did not translate into any sort of gains for MTW. Today's performance in MTW looks a lot like yesterday's. I would not be surprised to see shares dip lower soon. We expect $30.00 to hold as support.

current Position: Long MTW stock @ $31.15

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

Long May $30 call (MTW1417E30) entry $2.05*

04/17/14 triggered @ 31.15



Pilgrim's Pride Corp. - PPC - close: 22.33 change: -0.18

Stop Loss: 20.90
Target(s): to be determined
Current Gain/Loss: + 4.1%

Entry on April 15 at $21.45
Listed on April 14, 2014
Time Frame: exit PRIOR to earnings on April 30th
Average Daily Volume = 914 thousand
New Positions: see below

Comments:
04/24/14: The action in PPC is potentially bearish. Technically today's move has produced a bearish engulfing candlestick reversal pattern. The stock is in jeopardy of breaking its streak of ten up weeks in a row.

More conservative investors may want to raise their stop loss closer to the $21.75-22.00 area. I am not suggesting new positions.

Earlier Comments:
This is currently a short-term trade. We plan to exit prior to PPC's earnings report on April 30th. However, we might be tempted to hold over the announcement.

FYI: The Point & Figure chart for PPC is bullish with a long-term $35.50 target.

current Position: Long PPC stock @ $21.45

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

Long May $20 call (PPC1417E20) entry $2.10*

04/23/14 new stop @ 20.90
04/21/14 new stop @ 20.75
04/15/14 triggered @ 21.45
*option entry price is an estimate since the option did not trade at the time our play was opened.



Tutor Perini Corp. - TPC - close: $30.60 change: -0.03

Stop Loss: 28.45
Target(s): to be determined
Current Gain/Loss: + 1.2%

Entry on April 14 at $30.25
Listed on April 12, 2014
Time Frame: 6 to 8 weeks
Average Daily Volume = 255 thousand
New Positions: see below

Comments:
04/24/14: TPC can't seem to keep any upward momentum going. Shares have essentially churned sideways the last few days. I am not suggesting new positions at this time.

current Position: Long TPC stock @ $30.25

04/14/14 triggered @ 30.25



The WhiteWave Foods Company - WWAV - close: 28.34 change: -0.35

Stop Loss: 25.75
Target(s): to be determined
Current Gain/Loss: - 1.4%

Entry on April 21 at $28.75
Listed on April 19, 2014
Time Frame: 4 to 8 weeks, depending on earnings
Average Daily Volume = 1.5 million
New Positions: see below

Comments:
04/24/14: WWAV was an underperformer today. Yesterday's intraday pullback continued today and shares briefly pierced technical support at the simple 50-dma. More conservative investors may want to adjust their stop loss higher. If WWAV breaks through the $28 level it's probably headed for $27.00.

Earlier Comments:
Earnings are coming up in about three to four weeks. We'll decide then if we plan to exit prior to the report or hold over the announcement.

current Position: Long WWAV stock @ $28.75

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

Long Jul $30 call (WWAV1419G30) entry $1.25

04/21/14 triggered @ $28.75



BEARISH Play Updates

DSW Inc. - DSW - close: 34.09 change: -0.05

Stop Loss: 35.25
Target(s): to be determined
Current Gain/Loss: - 0.2%

Entry on April 21 at $34.02
Listed on April 19, 2014
Time Frame: 6 to 8 weeks
Average Daily Volume = 1.25 million
New Positions: Yes, see below

Comments:
04/24/14: DSW spent Thursday's session drifting sideways near the $34.00 level. This stock could bounce tomorrow if it reacts to earnings from shoemaker Deckers (DECK). DECK beat estimates and the stock is up strong after hours tonight. This could pressure DSW higher tomorrow morning.

Earlier Comments:
We're not setting a target yet but $30.00 would be a good start. The Point & Figure chart for DSW is bearish with a $26.00 target.

current Position: short DSW stock @ $34.02



Guess' Inc. - GES - close: 26.99 change: +0.02

Stop Loss: 27.85
Target(s): 23.00
Current Gain/Loss: unopened

Entry on April -- at $--.--
Listed on April 21, 2014
Time Frame: 6 to 8 weeks
Average Daily Volume = 871 thousand
New Positions: Yes, see below

Comments:
04/24/14: GES is still flirting with support near $27.00. The intraday low was $26.79. I don't see any changes from my earlier comments.

Earlier Comments:
The stock is technically bearish with a pattern of lower highs that is pushing GES against major support near $27.00. The February intraday low was $26.76. I am suggesting a trigger to open bearish positions at $26.65. If triggered our target is $23.00 but we will plan on exiting prior to GES' earnings in late May.

Trigger @ 26.65

Suggested Position: short GES stock @ (trigger)

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

Buy the Jun $27 PUT (GES1421R27) current ask $1.55



Rackspace Hosting, Inc. - RAX - close: 30.25 change: -0.13

Stop Loss: 32.05
Target(s): to be determined
Current Gain/Loss: - 1.7%

Entry on April 24 at $29.75
Listed on April 22, 2014
Time Frame: 3 to 4 weeks
Average Daily Volume = 2.7 million
New Positions: see below

Comments:
04/24/14: RAX fell to new multi-year lows before paring its losses and closing back above round-number support at $30.00. Today's intraday low just happens to be $29.75. That was our suggested entry point to initiate bearish positions. Our play is now open but I am not suggesting new positions until we see RAX back below $29.75.

Earlier Comments:
There are already a lot of bears in RAX. The most recent data listed short interest at 19% of the 116.9 million share float. That can make any bounce in RAX a potential short squeeze. I would consider this a higher-risk, more aggressive trade.

We are not setting a bearish target just yet. RAX is expected to report earnings in mid May but no official announcement date has been set. We will most likely exit prior to their earnings report. Considering the high short interest I would probably prefer to limit risk with a put option. FYI: The Point & Figure chart for RAX is bearish with a $21.00 target.

current Position: short RAX @ $29.75

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

Long May $30 PUT (RAX1417Q30) entry $2.00*

04/24/14 triggered @ 29.75
*option entry price is an estimate since the option did not trade at the time our play was opened.



CLOSED BEARISH PLAYS

Whole Foods Market - WFM - close: 51.02 change: +1.22

Stop Loss: 50.35
Target(s): to be determined
Current Gain/Loss: - 4.4%

Entry on April 21 at $48.23
Listed on April 19, 2014
Time Frame: exit PRIOR to earnings on May 6th
Average Daily Volume = 4.4 million
New Positions: see below

Comments:
04/24/14: The move in WFM looks like short covering. I don't see any company specific news to explain the rally this morning. I checked news on WFM's rivals and didn't see anything. The market gapped open this morning and with WFM's pop above resistance at $50.00 it probably sparked some short covering and shares surged +2.4%. Our stop was hit pretty early at $50.35.

closed Position: short WFM stock @ $48.23 exit $50.35 (-4.4%)

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

May $47.50 PUT (WFM1417Q47.5) entry $1.60 exit $0.82* (-48.7%)

04/24/14 stopped out
*option exit price is an estimate since the option did not trade at the time our play was closed.
04/21/14 WFM opened at $48.23

chart: