Option Investor

Daily Newsletter, Monday, 6/7/2010

Table of Contents

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

Market Wrap

Last-Hour Jitters Doom Stocks Again

by Todd Shriber

Click here to email Todd Shriber
It is becoming a familiar refrain: Stocks start the day looking decent only to be mired in a tailspin by the time the closing bell rings. The Dow Jones Industrial Average was up about 50 points early in the day and was down just 42 points at 3:15 p.m. before closing down at 9816.48, down 115 points. The S&P 500 lost 14 points to close barely above critical support at 1050. Tech is once again looking weak with the Nasdaq shedding 45 points to close at 2173.90. Small-caps look broken as the Russell 2000 lost almost 15.5 points to settle at 618.49.

Stats Table

Monday used to be a pretty reliable day of the week for the bulls. Now, with the potential for negative news to emerge over the weekend that is related to Europe, the Gulf of Mexico oil spill and a host of other factors, Monday has turned into just another adventure and not the good kind. There was no clear reason why the selling worsened late in the day, but it might be reasonable to assume that given the tenuous economic situation in Europe, not many traders want to be holding long positions overnight these days. Of course, selling begets selling and it was clear that some of the selling that was seen after 3 p.m. was computer-driven.

While there were not a lot of negative headlines impacting the broader market today, there was plenty of bad news for individual names. Combine that factor with what has become an obviously toxic environment for the bulls and it is hard to find shelter from the storm. Gold remains the winner under this scenario. Gold for August delivery, the most actively traded contract, shot up $23.10, or almost 2%, to close at $1240.80 per ounce. That is just a couple bucks off the May 12 record.

Gold priced in Euros is also hovering near a new record with that rise fueled by the economic problems of Greece, Portugal, Spain and now Hungary. The yellow metal is volatile to be sure, but it is hard to deny that as long as Europe remains a concern, gold prices are probably going higher.

Gold Chart

I always like to use Apple (AAPL) as a way of highlighting just how bad things are on these ugly down days, if the stock is down and it was today. Apple lost $5.02, or almost 2%, to $250.94, putting the stock in danger of violating its 50-day moving average. Apple is probably still a good stock, but in a testament to how difficult it is to be long in this market, Apple traded lower on the day of one of its highly anticipated product announcements.

At the Apple developers conference, CEO Steve Jobs unveiled the iPhone 4, which will cost $199 or $299, depending on data capacity. The new iPhone is thinner and features a higher-resolution screen and longer battery life and the camera on the new iPhone can be used for video conferencing. If you are a tech geek, this might be exciting stuff. On the other hand, either investors were not excited or the market is so bad that even juggernauts like Apple are going to have endure haircuts every now and then.

Apple Chart

In other bad stock-specific news, drugstore operator and pharmacy benefits operator CVS Caremark (CVS) was hammered after drugstore chain Walgreen (WAG) said it will end its relationship with CVS's pharmacy benefits unit. Those headlines sent CVS Caremark lower by $2.75, or 8.1%, to a close of $31.04, below the 200-day moving average.

Walgreen says it wants better prices and believes CVS employs tactics designed to drive traffic to CVS stores. Walgreen says it will not renew existing Caremark plans or participate in new ones. Unless something changes, within three years Walgreen will basically have nothing to do with Caremark.

CVS Caremark has been down this road before, losing pharmacy benefits customers, but the loss of Walgreen as a customer/partner is an especially bitter pill to swallow (no pun intended) because Walgreen is the largest U.S. drugstore chain by total stores and sales. For its part, CVS says Walgreen is trying to gain higher reimbursement rates and that it was surprised by the Walgreen decision.

All of this comes on top of the late 2009 announcement that CVS lost $4.8 billion in pharmacy benefits contracts and suffered $1.7 billion in Medicare losses as other big customers moved their business elsewhere.

CVS Chart

On a day when there is plenty of bad stock-specific news to go around, that probably means at least one financial stock is being painted with the negative headlines brush. On Monday, two of the sector's marquee names suffered through less than cheery news. Bank of America (BAC), the largest U.S. bank and a Dow component, tumbled 3.4% to $14.83 after the Federal Trade Commission announced the bank's Countrywide business will pay $108 million to settle claims it charged excessive fees to home buyers.

Bank of America's purchase of Countrywide was controversial at the time and given Countrywide's deep involvement in the subprime mortgage fiasco, it is not surprising to the bank having to deal with these type of fines. Still, a 3.4% drop for $108 million settlement seems a bit steep given that Bank of America has a market value of almost $150 billion.

In more news regarding fallen stars, Goldman Sachs (GS) lost $3.57, or 2.51%, to close at $138.68 after the Financial Crisis Inquiry Commission subpoenaed the Wall Street giant, accusing Goldman of stonewalling its investigation. The Commission says that Goldman has supplied it with the equivalent of several billion printed pages of data and has been less than forthcoming about derivatives, securitization and other businesses, according to the New York Times.

Apparently, Goldman did not learn its lesson from its run in with the SEC recently, meaning that butting heads with these government agencies and commissions hurts shareholders the most. Goldman's chart is far from inviting and believe it or not, the stock is trading less than $4.50 away from its 52-week LOW. Goldman has an average trading range of $5.32 on a given day, so a new 52-week could be reached as early as Tuesday. Deutsche Bank reiterated its ''buy'' rating on Goldman today but lowered its price target to $205 from $220.

Goldman Chart

Looking at the charts, support at 10,000 for the Dow evaporated last Friday and triple-digit moves, mainly losses, have become the order of the day. Friday's close was the lowest since February and with today's declines, 9500 looks to be the next support area. The Dow now resides almost 500 points below its 200-day moving average, another bearish sign.

Dow Chart

The S&P 500 month has suffered through its worst two-day run since March 2009 and with a close just above support at 1050, things are starting to look dicey. The index bumped up against resistance at 1106, the 200-day line, a few times and failed, but the 1065 area had worked as support until today. A move below 1050 clears the way for a significant bearish move of another 35-50 points.

S&P 500 Chart

It might be fair to say tech is once again broken. The Nasdaq was holding above the 200-day moving average before Friday, but has now lost almost 130 points in the last two trading sessions. Apple was weak as I mentioned, Google (GOOG) had its own negative news events to contend with today and on Sunday night, Jefferies lowered earnings estimates and price targets for Amazon (AMZN) and eBay (EBAY) because of the weakening Euro. Look to 2125 as the next support level for the Nasdaq.

Nasdaq Chart

Small-caps are rolling over as I suspected they would a couple of weeks ago. The Russell 2000 found support at its 200-day line on Friday, but that went out the window with Monday's 15-point decline. Trading in no man's land at 618, below February's support at 625, a move to 600 or lower seems likely for the small-cap index.

Russell 2000 Chart

Something that I have found interesting since the start of this correction is the chorus of pundits that seem to be raising what a normal correction in a bull market is. The estimates have gone from 10% to 12% to 15% following today's declines. History shows that the usual corrections in a bull market are 10%-12%. I get the feeling that calling a 15% decline a correction is dangerous. Remember that a bear market is defined by a 20% decline in two months. If the S&P sees 1000 in the next week or two, that is about 20% off the April peak of 1219.80.

New Option Plays

Vulnerable Short Candidates

by Scott Hawes

Click here to email Scott Hawes

Aeropostale, Inc. - ARO - close 27.72 change -1.06 stop 29.55

Company Description:
Aeropostale, Inc. is a mall-based specialty retailer of casual apparel and accessories. The Company designs, markets and sells its own brand of merchandise principally targeting 14 to 17 year-old young women and young men. The Company also sells Aropostale merchandise through its e-commerce Website, www.aeropostale.com. During the fiscal year ended January 30, 2010 (fiscal 2009), the Company launched P.S. from Aeropostale, which offers casual clothing and accessories focused on elementary school children between the ages of 7 and 12.

Target(s): 27.00, 26.35, 25.25
Key Support/Resistance Areas: 29.35, 28.50, 27.50, 27.00, 26.30, 25,00
Time Frame: 1 to 2 weeks

Why We Like It:
ARO rallied hard last week making a double top with the highs from May 5. The retail sector has some catching up to do with the broader market declines as the sector is still several percentage points away from its February lows. I believe ARO is a vulnerable stock that is ready for sharper decline. I suggest readers initiate puts if ARO retraces some of its losses today and tests its 20-day SMA from below up near $28.20. This is also an intraday support/resistance area that is logical place for ARO to reverse back down. Our first target is $27.00 but ARO should be ultimatley be testing its 200-day SMA near $26.35 which is our 2nd target.

Suggested Position: Buy July $27.00 PUT if ARO trades up near $28.20, current ask $1.60, estimated ask at entry $1.40.

Annotated chart:

Entry on June xx
Earnings 8/19/2010 (unconfirmed)
Average Daily Volume: 3.3 million
Listed on June 7, 2010

Arch Caol - ACI - close 20.60 change -0.67 stop 21.80

Company Description:
Arch Coal, Inc. is a coal producer in the United States. During the year ended December 31, 2009, the Company sold approximately 126.1 million tons of coal, including approximately 7.5 million tons of coal, it purchased from third parties. The Company sells coal to power plants, steel mills and industrial facilities. As of December 31, 2009, it operated 19 active mines at 11 mining complexes located in the United States. The Company operates in three segments: the Powder River Basin, the Western Bituminous region and the Central Appalachia region.

Target(s): 19.30, 18.00
Key Support/Resistance Areas: 22.00, 21.75, 21.40, 21.0020.40, 19.25
Time Frame: 1 to 2 weeks

Why We Like It:
ACI is forming a bear pennant on its weekly chart and I believe it is poised to test its recent lows near $19.30. There is also an upward trend line from its November 2009 lows near $18.00 that ACI could easily trade down to if the overall market continues to be weak. I would like to see ACI retrace some of today's losses and use $20.95 as a trigger to enter short positions. I want to keep a tight leash on this trade and use a stop of $21.80 which is just above today's highs.

Suggested Position: Buy July $20.00 PUT if ACI trades up near $20.95, current ask $1.35, estimated ask at entry $1.20

Annotated weekly chart:

Entry on June xx
Earnings 7/22/2010 (unconfirmed)
Average Daily Volume: 6.4 million
Listed on June 7, 2010

In Play Updates and Reviews

AAPL Opened

by Scott Hawes

Click here to email Scott Hawes
Current Portfolio:

CALL Play Updates

Direct TV - DTV - close 37.71 change -0.19 stop 35.70

Target(s): 38.50, 39.50, 41.50
Key Support/Resistance Areas: 38.60, 37.00, 36.30
Current Gain/Loss: N/A
Time Frame: Several weeks
New Positions: Waiting to be triggered

DTV remains strong in a weak tape. The stock is approaching our $37.00 entry trigger which is where I suggest entering long positions. The stock is holding an upward trend line from February which is right on its rising 50-day SMA, currently at $36.32. This should offer solid support and gives us a good reference point to place a protective stop at $35.70. I've listed 3 targets as possible exit areas. These are good areas to at least tighten stops.

Suggested Position: Buy July $37.00 CALL, current ask $2.26, estimated ask at entry $1.80

Annotated Chart:

Entry on June xx
Earnings Date 8/5/10 (unconfirmed)
Average Daily Volume: 12.3 million
Listed on 6/5/10

Qualcomm Inc - QCOM - close 35.01 change -0.29 stop 34.20

Target(s): 20-day SMA, 36.45 (hit), $36.75, 38.00, 38.95
Key Support/Resistance Areas: 37.50, 37.00, 36.25, 35.25, 34.50
Current Gain/Loss: -15%
Time Frame: 1 to 2 weeks
New Positions: No

QCOM held up relatively well most of the day before selling off late. The stock is still holding the long term support area dating back to 2007 in the $35.00 to $35.25 area. Our first target of $36.45 was hit on Thursday last week and I am looking for the stock to bounce towards these levels from here. This is still a valid target but I suggest readers watch the 20-day SMA and tighten stops if QCOM trades up this level this week. I've also listed $36.75 as a target which is just below Thursday's highs. If the markets bounce QCOM should do well as it is a quality name in a good industry. I'm going to move the stop up to $34.20 which is below the stock's recent lows to protect capital if things proceed lower.

Current Position: July $36.00 CALL, entry at $1.30

Entry on 6/1/2010
Earnings Date 7/21/2010 (unconfirmed)
Average Daily Volume: 26 million
Listed on 5/29/10

Quest Software - QSFT - close 19.00 change -1.01 stop 18.10

Target(s): 19.60, 20.00, 20.50, 21.00
Key Support/Resistance Areas: 18.60, 19.36, 20-day SMA, 50-day SMA
Current Gain/Loss: +0.00%
Time Frame: Several weeks
New Positions: Yes

The profit takers showed up in QSFT today which triggered our long entry at $19.00. The stock remains above the recent breakout of resistance at $18.70 which are highs from April, January, and October and should now act as support. QSFT closed almost to the penny of its 12/2007 high at $18.87. The market is oversold and any bounces should bode well for QSFT as investors may flock to relative strength names like QSFT. I am expecting a quick bounce and suggest not hesitating to take a quick profit if QSFT spikes higher from here. NOTE: We have chosen a $20.00 out of the money call option to limit capital at risk.

Current Position: July $20.00 CALL, entry at $0.85

Annotated chart:

Entry on June xx
Earnings Date 8/10/10 (unconfirmed)
Average Daily Volume: 1.9 million
Listed on 6/2/10

PUT Play Updates

Apple Inc - AAPL - close 255.96 change -7.15 stop 267.50 *NEW*

Target(s): 245.00, 238.00, 233.00
Key Support/Resistance Areas: 265, 260, 257, 250, 243, 237, 232
Current Gain/Loss: +29%
Time Frame: 1 to 2 weeks
New Positions: Yes, but only on bounces

AAPL gapped higher this morning and traded in a $2.25 range during the first 15 minutes of trading. When the stock broke below this range it was our signal to initiate PUTS in the stock even though it didn't trade up to our initial entry target of $262. It was apparent the stock was weak and our July $250 puts were opened for $10.50. AAPL will inevitably bounce so readers who haven't initiated positions can do so on strength in the stock. I wouldn't be surprised to AAPL test our entry area near $257.00 in the next day or two. This is an intraday resistance area and will provide readers a second chance to enter. AAPL has a developers conference this week. The stock typically spikes on the keynote announcement by Steve Jobs then struggles the next couple of weeks. Apple has stubbornly refused to give up much ground and I believe the stock is due for a correction. The stock made a recent double top on the dailies and also a lower high. We'll use a stop of $267.50 which is above the recent highs.

Current Position: July $250.00 PUT, entry at $10.70.

Annotated chart:

Entry on June 7, 2010
Earnings 7/20/2010 (unconfirmed)
Average Daily Volume: 29 million
Listed on June 5, 2010