Option Investor

Daily Newsletter, Monday, 6/28/2010

Table of Contents

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

Market Wrap

Stocks Continue To Lack Conviction

by Todd Shriber

Click here to email Todd Shriber
It was another uneventful day for stocks as the lack of buyers was once again obvious. The Dow Jones Industrial traded in a 100-point range for the day, but closed down just five points. The S&P 500 provided little in the way of excitement, losing two points to settle at 1074 and the Nasdaq followed suit, dropping almost three points to finished the day at 2220. Small-caps did not deviate from the trend either with the Russell 2000 closing lower by about 3.5 points at 641.

Stats Table

The S&P 500 has declined in five of the past six trading sessions and is now down 3.6% this year. From a sector perspective, it was a couple of the usual suspects that hampered the broader market today as there was pronounced weakness in energy and materials names. As a group, energy stocks tumbled 1.3% on the day, good enough to make them the biggest losers in the S&P 500. Both Exxon Mobil (XOM) and Chevron (CVX), the two largest U.S. oil companies, helped drag the Dow lower on Monday.

Speaking of oil stocks, somehow, someway BP (BP) managed to eke out a gain on Monday, despite touching a new 52-week low of $26.75. The company said that its total costs for the Gulf of Mexico oil spill oil have now reached $2.65 billion and for the previous three days leading up to Monday, it had spent $300 million. That is the first time since the spill started more than two months ago that BP has averaged $100 million a day in costs.

BP shares really cannot handle much more bad news and news that Tropical Storm Alex may turn into a hurricane soon qualifies as a bad news. BP said today that its plan to double the amount of oil it is capturing from the leaking Macondo well may be delayed by a week because of the large waves Alex may rustle up in the Gulf. The company did say that its plans to boost its oil capture efforts to 80,000 barrels per day by mid-July remain on schedule and that may have been enough to save the stock from another dramatic fall today.

BP Chart

There was some good news from the oil patch, though it was company-specific to drilling services provider Noble (NE). The Swiss company said it will acquire closely held rival Frontier Drilling for $2.16 billion. That transaction is expected to close by the end of next month and Noble will add six floating drill units to its fleet.

Perhaps more important than the Frontier purchase is news that Noble is reworking agreements with Royal Dutch Shell (RDS-A), the largest European oil company, giving Shell the ability to suspend contracts on two Noble rigs in the Gulf of Mexico due to the government-imposed moratorium on deepwater drilling. Noble was caught of guard earlier this month when Anadarko Petroluem (APC) said it would abandon drilling contracts with Noble because of the moratorium.

Noble said its efforts with Shell are designed to prevent a repeat of the Anadarko scenario. What is interesting about the Noble/Shell deal and any other subsequent deals of a similar nature that emerge from other services providers and exploration companies is that this move clearly shows that oil companies are not expecting the moratorium to last just six months. Even if the moratorium is short-lived, exploration and production companies and services providers are going to be apprehensive about investing in the Gulf until they know what they are up against in terms of government regulations.

I could not say it any better than Argus Research analyst Phil Weiss who told the Associated Press ''If this was going to be a short moratorium, they wouldn't have to come up with these kinds of solutions.'' By ''these kinds of solutions,'' Weiss meant Noble's deal with Shell.

Noble Chart

Another commodities name that was under pressure on Monday was Freeport McMoRan (FCX), which slid $1.91, or 2.87%, to close at $64.66. as gold prices endured one of their worst sessions in weeks, failing to muster any strength above $1260 an ounce. Copper prices also declined for the first time in three days and the combination of lower copper and gold prices is not good news for a company that makes its living by mining both metals.

Freeport McMoRan Chart

Prices for both metals started to look a little too lofty last week with copper prices reaching a one-month high on Friday. Gold traders are pointing to the aforementioned $1260 area as a heavy resistance point, so it might be reasonable to expect some profit-taking in the yellow metal over the near-term. Still, who wants to be in the way of gold's runaway train? Less than encouraging economic reports should continue to fuel the gold rally. We got one last week in the form of the revised first-quarter GDP number and this Friday could bring another troublesome update on the economy with the release of June non-farm payrolls. In other words, gold may the one asset class where buying on the dips is worthwhile advice in the current market environment.

Boeing (BA) shareholders got a big scare today when the aerospace giant and Dow component traded lower by as much as 44% before U.S. markets opened. The pre-market trade in Boeing is eerily reminiscent of what happened to fellow Dow member Procter & Gamble (PG) during the now infamous May 6 flash crash.

Of course, things could have been much worse for Boeing and its shareholders had the 44% drop taken place during regular market hours and exchanges canceled those trades in Boeing, but this situation is not going to alleviate fears that U.S. exchanges have taken the necessary corrective actions to prevent a sequel to May 6.

Ultimately, Boeing finished lower by 2.14% at $67.30 on news that Dubai Aerospace Enterprise wants to renegotiate airplane orders with Boeing and Airbus. That news was first reported by the French newspaper Les Echos and quotes unidentified sources.

Boeing Chart

In an effort to bring you some good news, I again bring up one of the usual suspects. Apple (AAPL), one of the few companies capable of delivering a steady stream of good news to investors on a regular basis these days, said that it sold 1.7 million iPhone 4 units in the three days since the release of the new product.

That compares with the 1 million units of the iPhone 3 Apple moved during that products debut weekend in 2008 and the 1 million units sold of the iPhone 3GS Apple sold during the 2009 debut weekend for that phone, according to CNET. The iPhone 4, which has a higher resolution screen than its predecessors and a five megapixel camera with LED flash and high definition video, outperformed the iPad when comparing sales for the first weekends that those products hit stores.

UBS analyst Maynard Um said sales of the new iPhone could reach 8 million this quarter and surge to 9.8 million next quarter as supply catches up with demand. Um noted that the 9.8 million estimate could actually prove to be too conservative. Looking at the exponential growth in iPhone sales, Um may be right.

iPhone Sales Chart

Looking at the charts, the S&P 500 followed up last week's 3.6% drop with another decline on Monday, keeping the index locked in the 1050-1100 range that formed during the latter half of May and the earlier part of this month. For the bulls, the S&P 500 needs to make its way back above 1085, then 1100, then 200-day moving average to encourage fresh buying.

In other words, the index has a lot of work to do on the upside. Trading just above 1070, if the index dips below that level, 1050 is likely to come back into play.

S&P 500 Chart

The Dow is sporting many of the same chart characteristics and is still residing in the middle of a familiar range. The 10,000 area may be nothing more than round number support and I would look more closely at 9800-9850 and if that range does not hold, a move back to the June low of 9757 is possible. The 200-day moving average is more than 200 points away on the upside.

Dow Chart

The Nasdaq put up an admirable fight last week in the face of some disappointing earnings reports, most notably from Research In Motion (RIMM), but even with Monday's small loss, the Nasdaq closed right at support at 2220. That has me thinking the next couple of days could be fairly important to the Nasdaq's near-term fortunes and if 2200 does not hold, a return to 2320 is a very real possibility.

Nasdaq Chart

The 635 area seems to be support the Russell 2000 and that is also close to the 200-day moving average at 638. I would not be bullish unless the Russell can add another 25 points or so from here, but a drop below 635 could bring the index back to 620.

Russell 2000 Chart

With the a holiday weekend looming, I expect volume to be light and trade to be sluggish heading into Friday's jobs report. That may not be a bad thing for the bulls, but there are plenty of other noteworthy economic data reports that will be released before Friday and if the current trend holds, I would not expect cheery news to be delivered from any of these reports. I think it is apparent the bears are going to run the show this summer.

New Option Plays

Short Candidate in Building Materials

by Scott Hawes

Click here to email Scott Hawes


Owens Corning - OC - close 32.25 change -0.03 stop 34.72

Company Description:
Owens Corning is a producer of glass fiber reinforcements and other materials for composites and of residential and commercial building materials. The Company operates in two business segments: composites, which include the Company's reinforcements and downstream businesses, and building materials, which includes its insulation, roofing and other businesses. The Company's products range from glass fiber used to reinforce composite materials for transportation, electronics, marine, infrastructure, wind-energy and other markets to insulation, roofing and manufactured stone veneer for residential, commercial and industrial applications. During the year ended December 31, 2009, the Company's Composites and Building materials business segments accounted for approximately 33% and 67% of total net sales.

Target(s): 29.75, 28.80, 27.60
Key Support/Resistance Areas: 34.55, 32.90, 32.60, 31.00, 29.50, 28.50, 27.00
Time Frame: 1 to 2 weeks

Why We Like It:
OC has made a lower high and a lower low and I believe the stock will make a another lower low, or at least retest its recent lows which is almost -5% lower than current levels. The stock is testing its 20-day and 50-day SMA's from below which I also think will hold as resistance. If OC bounces there is also a downward trend line and congestion above to keep things in check. Our stop will $34.72 which is above the downward trend line and its highs from late May and Mid June.

Suggested Position: August $32.50 PUTS, current ask $2.50

Annotated chart:

Entry on June xx
Earnings 8/4/2010 (unconfirmed)
Average Daily Volume: 2.3 million
Listed on June 28, 2010

In Play Updates and Reviews

Mixed Results

by Scott Hawes

Click here to email Scott Hawes
Current Portfolio:

CALL Play Updates

Bank of America - BAC - close 15.24 change -0.18 stop 14.65

Target(s): 15.50, 15.70, 16.05
Key Support/Resistance Areas: 16.45, 16.10, 15.00
Current Gain/Loss: -17.5%
Time Frame: 1 week
New Positions: Yes

6/27: On Friday negotiators finished their work on the FinReg reform bill which provided a framework for certainty to the banks, however, on Monday that certainty is now in question. The death of Robert Byrd (D-WV) early this morning and comments from Scott Brown (R-Mass) regarding an unexpected provision in the bill are causing the Obama administration challenges. Other Democrats have come forward today stating that they will not vote for the bill because it fails to properly regulate Wall Street firms. In other words they feel there should be more regulations than in the current form of the bill. The vote was scheduled to take place before the 4th of July holiday (i.e. this week) but it is unclear if the vote will proceed as scheduled. As such, I'm going to adjust the targets lower to $15.50 and $15.70. From a technical perspective, a bullish case can be made on the intraday charts. BAC broke through an hourly downtrend line on Friday and tested the backside of it today. It also did not take out Friday's lows and on the daily chart BAC looks like it is trying to form a higher low. A bearish case can be made because the stock was turned away at the 20-day SMA and it also printed a bearish engulfing candlestick. At the end of the day I believe the broader market is oversold and I expect there to be a bounce. This should get things moving in our direction but I also suggest tightening stops and selling into strength as the stock approaches our lowered targets.

6/26: Details of the FinReg reform bill have been agreed upon in principle by both aisles in Washington so the banks have more certainty. BAC has held a critical support level near $14.75 dating back 12/08 and 1/09. $14.75 is the dashed red line on the weekly chart below and it has been on this chart for quite some time. I believe the bank stocks are going to catch a bid, even if its short lived, so I suggest we take advantage and initiate long positions in BAC. Every time BAC dips down to this level buyers have stepped in creating bottom tails 4 of the past 5 weeks. The stock has also broken through a steep downtrend line and looks like it is forming a rounded bottom on the weekly chart. Our initial stop is $14.65 which is below the most recent lows from early June.

Current Position: August $15.00 CALLS, entry was at $1.20

Entry on June 28, 2010
Earnings Date 7/16/10 (unconfirmed)
Average Daily Volume: 163 million
Listed on 6/26/10

Hanson Natural Corp - HANS - close 40.42 change +0.69 stop 38.25

Target(s): 40.50 (hit), 41.25, 42.40, 43.25
Key Support/Resistance Areas: 42.50, 41.00, 40.25, 39.30, 38.50
Current Gain/Loss: +25% Time Frame: 1 to 2 weeks
New Positions: Yes

6/28: HANS closed above it 50-day SMA today and is maintaining the upward trend line that started on 5/7. The stock also traded to a new high that hasn't been since 5/18. Our first target of $40.50 was hit today but I think we have a good chance of hitting $41.25 so I am going to leave this open to see if we can get some follow through in the coming days.

6/26: HANS continues to make higher lows and if there is strength in the broader market early this week I believe our targets will be hit. On Friday the stock was increasing in the morning as the market was making now lows. The volume patterns are also bullish as the pullbacks tend to come on lighter volume. This shows me there may be institutions buying in this stock which bodes well for a bullish thesis. I've made some minor adjustments to the targets.

6/24: HANS printed a bullish engulfing candlestick today and closed +1.15% higher, despite the significant weakness in the broader market. The market should bounce soon, if not tomorrow, and this should bode well for HANS. The stock was turned back from its 50-day SMA today for the second time in the last 4 trading sessions. If it keeps knocking it should break through, and with the broader market in oversold conditions itching for a bounce, I expect this to happen and our targets to be hit. The 20-day and 200-day SMA are also providing support for the stock.

Current Position: August $40.00 CALLS, entry was at $2.20

Entry on June 23, 2010
Earnings Date 8/5/10 (unconfirmed)
Average Daily Volume: 1.1 million
Listed on 6/22/10

PUT Play Updates

Avon Products - AVP - close 27.78 change +0.29 stop 29.65

Target(s): 25.80, 25.25, 24.25
Key Support/Resistance Areas: 29.50, 29.00, 28.00, 27.17, 25.75, 25.00
Current Gain/Loss: -13%
Time Frame: Several weeks
New Positions: Yes

6/28: AVP found some support at its 20-day SMA which also corresponds to its late May highs. AVP could bounce from here if the market does but I believe it will be short lived. Our stop is high enough to account for volatility and I expect the stock to trade down to $25.80 within the next week or so.

6/26: AVP ran into prior support and its 50-day SMA this past week and is now turning lower. The stock made a lower high and I believe it is due to make a lower low, or at least retest its recent lows near $25.00. If we simply catch a portion of this move we will have a nice profitable trade. Our primary target is $25.25 but I have also listed $25.80 as a target which is an area to consider tightening stops or taking profits. If the selling picks up AVP could go all the way down to the $24.00 area which was a prior support/resistance level from 10/08 and 5/09. Our stop is $29.65 and our time frame is several weeks.

Current Position: August $27.00 PUTS, entry was at $1.45

Entry on June 28, 2010
Earnings 7/29/2010 (unconfirmed)
Average Daily Volume: 4.2 million
Listed on June 26, 2010

Penn National Gaming, Inc. - PENN - close 24.19 change -1.18 stop 19.26

Target(s): 24.05, 23.60, 23.05
Key Support/Resistance Areas: 27.00, 26.45, 26.00, 24.60, 24.00, 23.50, 22.50
Current Gain/Loss: N/A
Time Frame: 1 to 2 weeks
New Positions: Waiting to be triggered

6/28: PENN traded to within 26 cents of our entry trigger and reversed hard to the downside, closing -4.65% on the day. The position has run away from our trigger and I do not suggest chasing it lower. Let's wait for a bounce and be ready to pull the trigger on short positions if the stock trades to our new trigger of $24.80 to enter short positions. This equates to about a 50% retracement of today's losses.

6/26: PENN has a primary and secondary downtrend line as overhead resistance along with all of its SMA's which are declining. It is also below a key support resistance area at $26.45 dating back to late 2009. I believe the stock will bounce a tad higher from here before it makes new lows in the coming days/weeks. Let's use a trigger to enter short positions at $25.75. My primary target is $23.60 but I have also listed $24.05 as a target where the stock may find some support. If the selling intensifies PENN will probably trade down to the $22.50 area which is below our most aggressive target. I'm going to place a wide initial stop at $27.60 to account for volatility and will adjust it once we are in the position.

Suggested Position: August $25.00 PUTS, current ask $2.20, estimated ask at entry $1.85

Entry on June xx
Earnings 7/26/2010 (unconfirmed)
Average Daily Volume: 738,000
Listed on June 26, 2010

Whirlpool Corp - WHR - close 95.64 change -1.01 stop 105.50

Target(s): 94.10, 91.50, 86.05
Key Support/Resistance Areas: 101.70, 99.00, 97.50, 94.00, 85.25
Current Gain/Loss: +11%
Time Frame: 1 to 2 weeks
New Positions: Yes

6/28: WHR traded up to our trigger 0f $97.50 to enter short positions. The stock hit a brick wall and sold off the remainder the day. Our primary target is $91.50 but $94.10 may provide support. This is an area to consider tightening stops and protecting profits. If WHR bounces I believe there is enough overhead resistance to keep things in check, but we may have to exhibit some patience.

6/26: We are waiting to be triggered at $97.50 to enter short positions. My comments remain the same from Thursday. I still believe WHR has a good chance to trade down to $91.50 and eventually $86.05 but I do not suggest chasing it at these levels. The broader market should bounce from here and I suspect WHR will as well. But these bounces should be short lived and I suggest we take advantage them. I have lowered our entry to short positions to $97.50. My comments from the play release remain the same. WHR has been making lower highs and has broken many trend lines. The stock has one more trend line providing support from the July lows to the February lows. However, I think it only a matter of time before this is broken and the stock retests or breaks its recent lows near $91.50. WHR is also below its 20-day and 50-day SMA's and I think there is enough overhead resistance to enter short positions at $97.50, which is below Thursday's highs and the 20-day SMA. I am going to place a wide initial stop at $105.50 to account for volatility and will adjust it once we are in the position.

Current Position: August $95.00 PUTS, entry was at $6.25.

Entry on June 28, 2010
Earnings 7/21/2010 (unconfirmed)
Average Daily Volume: 2 million
Listed on June 23, 2010