Option Investor

Daily Newsletter, Tuesday, 6/29/2010

Table of Contents

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

Market Wrap

Europe Returns As A Problem

by Jim Brown

Click here to email Jim Brown

Global economic health issues returned to the forefront once again and knocked world markets for a substantial loss.

Market Stats Table

The market started off in the tank after a new debt worry surfaced in Europe. European banks are due to pay back 442 billion euros in emergency loans on Thursday. Analysts are worried there will be a liquidity shortfall of 100 billion euros if everyone makes those payments to the ECB on time. In order to repay these emergency funds that were loaned to banks one year ago on Thursday, the banks will have to have raised private capital, sold assets or accumulated the cash over the last year. Given the economic conditions in Europe there is considerable worry that many banks will be unable to pay back the loans. How many banks will roll over the loans and why is the key question.

Earlier this morning the Conference Board corrected its leading economic index for China to an April gain of only +0.3% from a previously reported rise of +1.7%. The sharp revision brought China's growth rate back into question. That +0.3% was the smallest gain in five months. The Shanghai Composite sold off sharply ending the day with a -4.3% loss.

If the problems overseas were not bad enough the U.S. Consumer Confidence for June posted a massive drop to 52.9 from 63.3 in May. The expectations component led the decline with a drop to 71.2 from 84.6 in May. The present conditions component fell to 25.5 from 29.8. The percentage of respondents planning on purchasing a car fell from 6% to 3.7%, homes 2.1% to 1.9% and appliances fell from 26% to 22.9%.

There was a major decline in confidence over the last month as the various news outlets hyped the chances for a second dip to the great recession. The number of respondents expecting the stock market to rise over the next 12 month fell to less than 25% from more than 33% in April. The decline in the markets since mid May was also blamed for some of the drop in confidence.

The drop in core job growth in the May report was also blamed along with the stubbornly high weekly jobless claims. This suggests jobs are still hard to get and the expectations for job growth in Q2 have been dashed. The news of the worst new home sales numbers in 40 years also weighed on homeowners who are already depressed about the value of their largest asset.

This was a dramatic report that seriously impacted stock market sentiment. When added to the debt worries from Europe and growth worries from China it was a triple portion of bad news.

Consumer Confidence Chart

The Case Shiller Home Price Indexes for the three-month period ended in April showed that prices rose 3.8% over the same period in 2009. This report is seriously lagging and I don't believe it is relative to today's market.

Tomorrow we will get the ISM-NY and ISM-Chicago reports and a decline in those regions will again pressure the markets. Thursday is the national ISM and another potential pothole.

Of course the big challenge is the nonfarm payrolls on Friday and they will be a cloud over the markets all week. The job estimates are all over the ballpark. A blind monkey throwing darts would have as good a chance as the current analyst consensus. Estimates range from a loss of -450,000 to as much as a +400,000 gain, excluding census terminations.

The census is expected to have terminated 350,000 workers. That suggests those estimates for a -450,000 job loss are actually expecting -100,000 jobs lost that are not census workers. The analysts projecting a gain of 400,000 jobs are obviously delusional or on drugs. The official consensus estimate including the census terminations is -110,000. With such a wide range of estimates there is a risk of a large surprise. Obviously quite a few analysts are significantly wrong and are guiding their clients into a severe shock of some form.

In stock news Tesla Motors (TSLA) shocked analysts and naysayers with an outstanding performance on their first day of trading. Tesla had a range of $14-$16 on their IPO and priced it at $17 last night. It opened at $19 and rallied to close at $23.73 for a $7 gain on a really bad day in the market.

Tesla has lost $290 million since inception and raised $220 million in their IPO. They also received another $50 million in a post IPO private placement from Toyota. Not bad for a company that was near bankruptcy just a few months ago. They have only sold 1,083 of their high performance electric sports cars with a price tag of $100,000. The key to the IPO was their expectations to sell 20,000 of their new Model S sedans in 2012. In theory those sedans will have a 300 mile range between charges. The Tesla roadster is powered by laptop batteries. Specifically 6,831 batteries per car and the Model S will use Panasonic laptop batteries.

Tesla is facing some formidable competition from Ford, Chevrolet, Nissan and Toyota which will all debut cheaper mainstream electric cars in the $30K to $45K range over the next two years. Let's hope the Tesla does not become the next version of the DeLorean, which despite the novel technology failed to turn it into a real business.

Micron Technology (MU) lost -13% today after reporting earnings and warning that DRAM growth could be flat to only slightly higher in the current quarter. Wedbush Securities was quick to tell investors that the warning was misunderstood. They guided lower because of slower than expected transitions to process technologies versus a slowing of market demand. Wedbush said the new processes will lower Micron's costs by 50% on DRAM chips in the second half of 2010 while selling prices will decline only 15%. If you believe Wedbush then this should be a buying opportunity.

Micron Chart

Citigroup became the first stock to trip the new single stock flash crash triggers today. Citi was trading at $3.80 on the NYSE when a trade on another exchange crossed at $3.31 and triggered the -10% in five minutes stop rule. Citi restarted trading after five minutes and the trade was busted as an erroneous trade. However, the event proved that the new single stock trading halts enacted after the flash crash actually worked.

Apple (AAPL) lost -$12 and closed near the low of the day after Cisco (CSCO) announced it was launching a tablet PC like the iPad but for office use. The tablet, named the Cius, will have a camera both front and back and run the Android operating system. The tablet will connect to the Internet through both WiFi and cellular broadband networks. The Cius will be able to use external monitors, mice and keyboards so it could be used as a desktop PC while at work and then a portable PC after hours. It will also have high definition video and sound. Perfect for downloading those movies while traveling or waiting for appointments. With the Cisco tablet entry Apple now has some real competition.

Cisco Cius Tablet PC

Late in the afternoon Bloomberg broke a report from Barclays saying Apple would debut a Verizon iPhone in January 2011 and Verizon rocketed higher into positive territory. Barclays claims a Verizon iPhone would net Apple another 8 million sales because of people with Verizon contracts and because of people moving from AT&T to Verizon and buying a new phone. Eight million additional iPhones is a strong incentive for Apple to finally make the break. However, this rumor has made the rounds several times before. Research in Motion (RIMM) dropped another $2 intraday when the Bloomberg news hit the wires.

Google (GOOG) is down -24% from its high and closed at a new ten month low today at $454. It was the fourth worst performer on the Nasdaq. Google announced it was going to stop forwarding Chinese traffic to its uncensored Hong Kong website in order to keep its Chinese Internet license. China threatened to cancel their license to operate in China if they continued the process. China said Google must continue to provide mapping and music services in China if they wanted to keep their license. Google said they had no plans to filter search results for things China deemed subversive, which is pretty much everything relating to freedom of speech.

Google Chart

Only one S&P-500 stock finished positive today and all 30 Dow components closed negative. The Dow was down -338 at its lows at 9811. Despite the recovery to only -268 for the day that was not a rebound. That was only traders who had been short taking profits before the close. There was no sentiment reversal and the internals were horrendous. The up volume was only 640 million shares and down volume was 10.6 billion. Volume was high at 11.2 billion shares. There were 671 advancers and 5,849 decliners. The S&P posted its lowest close since October at 1041.15.

Dow Components Table

The talking heads were all a twitter about S&P 1040 as the end of the world as we know it should that support be broken. For a few minutes the S&P did trade lower to 1035 but rebounded on short covering at the close to edge back over 1040.

That level is critical to technicians for multiple reasons. S&P 1043 is the 50% retracement level of the July to May rally. June 2009 was the first material decline after the March bounce. The 1042 level is two standard deviations away from the normal S&P trend. Lastly, the 1040 low in May was book ended with a 1044 low in February and a 1042 low in early June. To put it simply the 1040+ level has been pivotal on three prior dips and the tide was turned. A breakdown below 1040 would be a major sentiment change from minor correction of -14% to a return to a bear market. A break below 1040 could target 880 on the S&P.

S&P-500 Chart

S&P-500 Chart Longer Term

The Dow has fallen -7% or -724 points since last Monday's high at 10,595. That is a mini correction in only a week. The Dow did not close at a new low today but remained above 9800. The prior low on June 8th was 9757 and 9774 back on May 25th. The slightly better performance by the Dow today (-2.6%) compared to the S&P (-3.1%) or Nasdaq (-3.85%) was due to minimal declines by Verizon, thanks to the Bloomberg news, and the four drug companies, JNJ, PFE, MRK and PG. Those defensive plays helped keep the Dow from plunging further. Merck was the biggest loser of that group at 50-cents.

While the Dow may be the most visible market indicator with triple digit moves it is not really a representative indicator of the market because of its narrow breadth. However, a drop below 9800, while not as technically important as 1040 on the S&P, would still be a serious blow to market sentiment.

Dow Chart

The Nasdaq dropped a big -3.84% because of the hits to Google, Apple and RIMM among others. The chip stocks lost -4.64% thanks to the slaughter in Micron and the DRAM sector. Sandisk lost -7% and KLA-Tencor (KLAC) lost -6%. With chips leading the tech sector down and the big cap techs adding double-digit losses the Nasdaq had no chance. Techs are not normally favored over the summer months so the outlook here is not positive. The next support will probably be in the 2050-2063 range but that would mean the Dow and S&P broke below critical support levels. Those indexes would probably drag the Nasdaq lower with them.

Nasdaq Chart

I have been bearish since the S&P broke below 1100 and I see no reason to change my fur coat now. However, the S&P 1040 level is a bullish magnet. If the bulls decide to make a goal line stand this would be the place. However, I believe any rally from here will be short lived. I have heard many times there is no such thing as a triple bottom. Many technicians believe that is a bullish fairy tale and the third test of critical support is normally a prelude to a bullish head fake followed by a bigger decline.

Despite the Q2 earnings cycle being only a week away we have some critical economic reports later this week. Negative news there could negate positive earnings hopes. Lastly, we have seen weak guidance from several early reporters and analysts are worried that could become a pattern that leads to lower lows by the end of Q3. This is a known historical pattern in normal economic cycles.

For these reasons I see no reason to be long the market for more than a trade should we get a bounce from 1040. As I said in the weekend wrap you would be better off fishing or playing golf.

Jim Brown

New Option Plays

Long Trade Set-up

by Scott Hawes

Click here to email Scott Hawes
Editor's Note: I contemplated long and hard about whether or not to release the below long trade, but since we are at such a critical point in the market I believe it is best to wait until we know whether or not the market is going to break down further, or give us a relief rally. I think there has to be a bounce soon but I have been saying this since late last week. And long trades should be managed with caution because the bounces can be violent and are likely to be short lived. In either scenario you should know early tomorrow whether this trade set-up is going to work. And if you take it honor stops and protect profits as things can reverse quickly in these conditions.

Long ALTR (Altera Corp, close $24.96) - The stock is forming a bull flag on the daily chart and has comeback to test its 20-day, 50-day, and 100-day SMA's from above. In addition, the stock has a prior support/resistance level in the $24.10 to $24.50 area. Targets are $26.00 and $26.60.

In Play Updates and Reviews

Gains Outweigh Losses

by Scott Hawes

Click here to email Scott Hawes

Editor's Note: Good Evening. I am waiting to release new trades until we know whether or not this support holds on the S&P 500. It doesn't appear to me that it will but we may have to endure a bounce first. If that happens it will give us a better opportunity to initiate short positions at a better price. Tomorrow should be an interesting day. Any bounces could be violent but are also likely to be short lived. Our support on BAC was broken today and our stop was hit. However, our short position in WHR paid off and the those gains outweighed our losses on BAC. All three of our open positions currently have gains. I've adjusted some of the targets and stops to keep them from running away from us. Please email me with any questions.

Current Portfolio:

CALL Play Updates

Hanson Natural Corp - HANS - close 49.53 change -0.89 stop 38.65 *NEW*

Target(s): 39.95, 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: +4.5%
Time Frame: 1 to 2 weeks
New Positions: Yes

6/29: HANS held up relatively well until the end of the day. The stock is maintaining its upward trend line from 5/6 and is still above its 20-day and 200-day SMA's. We still have a small gain on this position and if the market bounces HANS should do well. I am going to tighten the stop to just below the 200-day SMA at $38.65. Our first target was hit yesterday and considering today's events I suggest readers consider selling into strength, or at least protecting profits if HANS proceeds higher from here. I've listed a new target of $39.95 which is where HANS struggled to break through today. This is an area to tighten stops to see if we can get more our of the stock.

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.

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 27.07 change -0.71 stop 29.65

Target(s): 26.60, 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: +25%
Time Frame: Several weeks
New Positions: Yes, but only on bounces

6/29: AVP is back below its 20-day SMA and I think the stock ultimately moves lower, but there could be bounce first. If the decline continues I don't anticipate it lasting too long considering the oversold conditions. As such, I have listed $26.60 as a new target which could be a logical bounce point for the stock. This is near the highs from 5/26 and 6/3. I would be quick to tighten stops or simply take profits at this level if it is hit tomorrow. However, if we bounce higher from here first I think that level becomes less important and we may see more downside.

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

Owens Corning - OC - close 31.42 change -0.83 stop 34.72

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
Current Gain/Loss: +5.4%
Time Frame: 1 to 2 weeks
New Positions: Yes, but only on bounces

6/29: August $32.50 PUTS were opened this morning at $2.75. OC saw some buyers step in late in the day and stock closed +1.6% off of its lows. It was down -2.57% on the day and the closing price of $31.42 was the lowest since June 9th. However, the market is oversold and stocks could bounce from here. OC remains below the 20-day and 50-day SMA's and its downward trend line from the May 13 highs. All of this should provide enough resistance to keep bounces under control.

6/28: 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.

Current Positions: August $32.50 PUTS, entry was at $2.75

Entry on June 29, 2010
Earnings 8/4/2010 (unconfirmed)
Average Daily Volume: 2.3 million
Listed on June 28, 2010

Penn National Gaming, Inc. - PENN - close 23.77 change -0.42 stop 27.60

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

6/29: Our trigger to enter shorts positions at $24.80 remains the same. If PENN trades up there in the coming days I suggest initiating short positions. There is a lot of overhead congestion and resistance above $24.80 to hold the stock down.

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 $2.50, estimated ask at entry $1.90

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


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: -35%
Time Frame: 1 week
New Positions: Closed

6/29: BAC broke below June's low and hit our stop at $14.65. We are flat the position for a loss. My basis for taking this trade was that June lows would hold for a bounce, but it failed and we have to step aside. The next level of support is $14.12 and if BAC breaks that it may go all the way down to the $12 to $13 area.

6/28: 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.

Closed Position: August $15.00 CALLS at $0.78, entry was at $1.20

Annotated Chart:

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


Whirlpool Corp - WHR - close 89.94 change -5.70 stop 105.50

Target(s): 94.10 (hit), 91.50 (hit), 86.05
Key Support/Resistance Areas: 101.70, 99.00, 97.50, 94.00, 85.25
Current Gain/Loss: +58.40%
Time Frame: 1 to 2 weeks
New Positions: Closed

6/29: Our 2nd target of $91.50 was hit today so we are flat WHR for a +58.40% gain. There could be more downside in WHR but I would be cautious of a bounce. If readers still have positions I suggest tightening your stops to protect profits. There is intraday resistance near $92.00 and $94.00.

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.

Current Position: August $95.00 PUTS @ 9.90, entry was at $6.25.

Annotated Chart:

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