Option Investor

Daily Newsletter, Monday, 7/19/2010

Table of Contents

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

Market Wrap

Optimism Renewed...At Least For A Day

by Todd Shriber

Click here to email Todd Shriber
Stocks caught a break on Monday, bouncing back from the largest loss this month as investors shrugged off weak housing data to focus on earnings from marquee energy and technology names. The gains were small in comparison to Friday's losses, but they were gains nonetheless with the Dow Jones Industrial Average adding over 56 points to settle 10,154. The S&P 500 gained just over six points to close at 1071 and the Nasdaq barely made a dent in last Friday's decline, adding 19 points today for close of 2198.23. Small-caps remained unimpressive with the Russell 2000 crawling higher by just 2.7 points to finish the day at 613.

Stats Table

Earlier in the trading session, stocks were plagued by a drop in the National Association of Home Builders/Wells Fargo confidence index, which fell to 14 this month from 16 in June. The July reading is the lowest since April 2009, according to Bloomberg News. The median estimate called for a drop to 16 and readings below 50 mean participants in the survey believe conditions are not encouraging. Of course the expiration of the housing tax credit may be to blame here, but even if the credit was still in place, it appears doubtful that the July number would have come in at or above 50.

While stocks notched only moderate gains, gold continued its precipitous decline, falling $6.30 to $1181.90 an ounce, the lowest close for a front-month contract in almost two months. Gold has retreated 6% from its June highs as speculators have unwound long bets on the yellow metal due to increasing signs of stability in the Eurozone and a rally in the Euro itself.

Gold's decline is interesting to say the least given that the uncertainty that permeates the current market environment should be a boon to gold prices. The $1200 level did not act as support and if gold continues to lose its safe haven status, more declines could be on the way.

Gold Chart

After being punished last Friday, financials were weaker again today. JPMorgan Chase (JPM) and Citigroup (C) both eked out small gains on the day, but Goldman Sachs (GS), PNC Financial (PNC) and Wells Fargo (WFC) all closed in the red. Bank of America (BAC), the largest U.S. bank by assets, was a drag on the Dow, losing almost 2.7%.

BofA was hammered last Friday when it reported second-quarter revenue results that were less than impressive to investors. Today, Goldman Sachs took BofA off its ''conviction buy list.'' ISI Group chimed in with a downgrade of its own, lowering BofA to ''hold'' from ''buy.'' The stock closed below $14 for just the second time in the past six months, but it bares noting that both times have been this month. This was a $19 stock as recently as mid-April. Ouch.

Bank of America Chart

The energy sector won some relief on Monday on the back of a strong second-quarter earnings update from oil services giant Halliburton (HAL). Halliburton, the second-largest oil services firm behind Schlumberger (SLB), has been caught up in the middle of the Gulf of Mexico oil spill because the company was a services provider to the Deepwater Horizon rig and the stock has been taken to task as a result.

This was a $35 stock on April 20, when the Deepwater Horizon exploded. Halliburton proceeded to traded as low as $21.10 in early June, but has rebounded nicely and with today's gain of more than 6%, the stock closed above $29 for the first time since May.

Halliburton said its second-quarter profit surged 83% and that demand for services from onshore projects should help offset the effects of the government's moratorium on deepwater offshore drilling. The Houston-based company earned 52 cents a share compared with an estimate of 37 cents. Halliburton CEO David Lesar said he believes that rigs that have left the Gulf in the wake of the moratorium to move to international locations will not ''return to the Gulf for some time, if at all.'' He expects 17 deepwater rigs to be operating in the Gulf at this time in 2011, but that is down from 33 before the moratorium was imposed.

Halliburton Chart

Dow component International Business Machines (IBM) was another widely-followed name to step into the earnings confessional on Monday and judging by the after-hours reaction to the results, investors were less than impressed. IBM traded higher by $1.76 to close at $129.79, but is down $5.44, or 4.19%, to $124.35 in after-hours trading as of this writing.

The company did say that its second-quarter profit rose 9% to $3.39 billion,or $2.65 a share, from $3.10 billion, or $2.34 a share, a year earlier. Sales rose 2% to $23.7 billion from $23.3 billion. Analysts were expecting a profit of $2.58 a share on revenue of $24.2 billion and top-line miss could be troubling. IBM said foreign currency changes weighed on revenue to the tune of $500 million, while noting analysts did not factor that into estimates.

More importantly, IBM said the value of signed services contracts tumbled 12% in the second quarter, a fact that highlights uncertainty about the global economic recovery. The company did issue new guidance for 2010, calling for a profit of at least $11.25 a share, five cents above previous estimates, but below the $11.27 per share estimate analysts had forecast. IBM has posted higher earnings growth for 30 consecutive quarters, but eight cents of the per share gains in the second quarter was attributable to share repurchases, according to the Associated Press.

IBM Chart

Semiconductor maker Texas Instruments (TXN) was another bellwether tech name to report after the close and the reception for TI's earnings was even worse than what IBM endured. In the after-hours session, Texas Instruments is down $1.34, or 5.24% to $24.21 after closing up 78 cents at $25.55 during traditional market hours.

The company said its second-quarter profit almost tripled to $769 million, or 62 cents per share, from $260 million, or 20 cents a share, a year earlier. That was in line with analysts' expectations. Revenue surged 42% to $3.5 billion, meeting Street forecasts. TI expects to earn 64 cents to 74 cents a share during the third quarter on sales of $3.55 billion to $3.85 billion. Analysts had been expecting a third-quarter profit of 64 cents on revenue of $3.65 billion.

While those numbers may appear bullish, investors probably wanted to see more out of TI following the blowout quarter delivered by Intel (INTC) last week. Speaking of Intel, the company delivered what was probably the best quarter in its history and the stock barely moved. TI provided what appears to be a small disappointment and that is why the shares are swooning tonight.

Texas Instruments Chart

Looking at the charts, the S&P 500 has obviously corrected its overbought condition in a meaningful way, bringing support at 1060 into play as a pivotal level. A violation of 1060 brings 1020 into play and from there, 950-975 could be an issue. Adding woes to those worries is that earnings reports can hardly be counted on to bolster stocks these days. Great quarters are barely rewarded, if it all, while any hint of disappointment has traders hitting the sell button and running for the exit.

S&P 500 Chart

The Dow found support around 10,100 and has another 70-80 points before bumping into resistance, but with the glum reaction to IBM's numbers, we may not have to worry about resistance on Tuesday. Johnson & Johnson (JNJ) reports before the bell and even if it beats and guides higher, chances are that will not be enough to make people just forget about IBM. Ten more Dow constituents report after Tuesday and that should make for an action-packed week. A week of big gains is a different story altogether.

Dow Chart

The Nasdaq was punished last Friday as the market absorbed lackluster results from Google (GOOG), sending the index well below support at 2220. IBM and Texas Instruments are not Nasdaq stocks, but those reports will probably keep investors on the sidelines when it comes to tech on Tuesday as they wait for Apple (AAPL) to report after the close.

This is a big week for Nasdaq earnings with eBay (EBAY), Qualcomm, Amazon (AMZN) and Microsoft (MSFT) among others all due to report. I doubt that resistance at 2300 will be challenged, but a flurry of bad reports could bring support at 2140 into play.

Nasdaq Chart

The Russell 2000 shed 4% on Friday, so a ''rebound'' of just 0.44% today is not too impressive, but on the bright side, the 610 area acted as support again. More damage to the Russell 2000 could bring 590 into play and if 590 does not hold, the mid-500s may not be far off.

Russell 2000 Chart

Overall, I get the feeling this week could be the bull's last best hope for the rest of the summer. Look at the earnings calendar and you will see that this is a star-studded week. Tech bulls need Apple to do its thing tomorrow and ALL bulls need Goldman Sachs to finally provide some good news. I would also be carefully watching Caterpillar (CAT) and Microsoft (MSFT) on Thursday for any signs that the global recovery is gaining steam.

New Option Plays

Long Trade Set-ups

by Scott Hawes

Click here to email Scott Hawes
Editor's Note: Good evening. We are getting mixed results and knee jerk reactions to earnings reports so we have chosen to tread lightly with new plays for the time being. We currently have long and short positions to take advantage of the moves. My expectation is that we should see some weakness in the market this week but that could all change (for better or worse) depending on earnings results. For now, initiating long positions on further weakness is probably the right call. The S&P 500 has solid horizontal support in the 1,050 to 1,055 area which is also near the 50.0% and 61.8% retracement levels from the July 1 lows to last week's highs. This is the area where I am interested in opening long positions and keeping tight stops on short positions. I have listed two stocks below with earnings in the near future that I like for long plays. These may or may not make it into the model portfolio.

Long MSFT: If earnings weren't this Thursday after the bell I would consider releasing this play. I believe MSFT could have a favorable earnings report but I would hedge the position if I were going long just in case. The stock has broken its longer term downtrend line and I would like to see the stock retest it from above which also corresponds to its 20-day SMA. This should provide a good support for a bounce.

Long PAR: The stock has been trading in a sideways channel between the $9.00 and $10.50 level since March. I like the stock to bounce at current levels, especially on any further weakness. Earnings are July 29th so that is the wild card.

In Play Updates and Reviews

Short Play Closed for Small Loss

by Scott Hawes

Click here to email Scott Hawes
Current Portfolio:

CALL Play Updates

Intrepid Potash, Inc. - IPI - close 22.17 change -0.31 stop 20.90

Target(s): 22.85, 23.20, 23.80
Key Support/Resistance Areas: 23.25, 22.00, 21,00
Time Frame: 1 to 2 weeks

7/19: IPI traded to within 6 cents of our entry before bouncing. I anticipate getting filled tomorrow. Futures are down in the aftermarket so readers may want to consider entering at a lower price in the $21.50 to $21.60 area depending on the strength of the weakness tomorrow. Our official entry remains at $21.80 which is -1.5% lower than current prices.

7/17: Ag stocks are gaining momentum and I like IPI on any further weakness. IPI has longer term support/resistance at $22.00 and $21.00. The stock broke below those areas during the weakness in the early July but has since rebounded and broken out of the resistance on strong volume. The stock retreated from its 50-day SMA on Friday on significantly lighter volume. I'm looking for a little more pullback and suggest readers initiate long positions if IPI trades down to $21.80. Our stop will be $20.90 which is below the 20-day SMA and the important $21.00 support level.

Suggested Position: August $22.00 CALL, current ask $1.30, estimated ask at entry $1.15

Entry on July xx
Earnings Date 8/4/10 (unconfirmed)
Average Daily Volume: 1.0 million
Listed on 7/17/10

Merck & Co - MRK - close 35.80 change -0.11 stop 35.38 *NEW*

Target(s): 36.30, 36.55, 36.95, 37.45
Key Support/Resistance Areas: 39.50, 38.75, 38.00, 36.35, 35.80
Current Gain/Loss: -0.9%
Time Frame: 1 to 2 weeks
New Positions: Yes, with the tighter stop

7/19: MRK had a relatively quiet day and remains above its 200-day, 50-day, and 20-day SMA's. My comments from below have not changed.

7/17: MRK broke out to new daily highs on Friday not seen since April but the breakout failed and the stock looks vulnerable to the down side. The stock has long term horizontal support between $35.80 and $35.60 and its 20-day, 100-day, and 200-day SMA's (all right at $35.60) are below Friday's closing price. This should provide support for the stock but if this sell-off gains steam I doubt MRK can hang in at these levels. If this support is broken the next stop will most likely be somewhere just below $35.00 which could also set-up an inverse head and shoulders pattern(see ovals on chart). This area is also near an upward trend line and its 50-day SMA. So the question is should we adjust our stop down a bit and sit through a -2% to -3% pullback if the $35.60 support level breaks? Considering the broad market sell off on Friday when even the more defensive sectors like pharmaceuticals were down over -2%, I say no. I am going to keep a tight leash on this trade and raise the stop to $35.38 while also bringing down the targets to see if we can make this a winner. MRK may go test the aforementioned SMA's prior to bouncing and I suggest we sell positions into strength using the above targets. These are good areas to consider tightening stops to see how much we can get out of the position.

7/13: MRK closed above resistance of $36.35 and looks like it is headed towards our targets. If the broader market continues bouncing we should have no issues hitting our target(s) and MRK could also act as a defensive play if there is a pullback.

Current Position: August $36.00 CALLS, entry was at $1.21

Entry on July 12, 2010
Earnings Date 7/30/10 (unconfirmed)
Average Daily Volume: 18 million
Listed on 7/10/10

United States Steel - X - close 41.22 change -0.14 stop 39.75

Target(s): 43.25, 44.60, 46.20
Key Support/Resistance Areas: 48.70, 46.25, 50-day SMA, 43.50, 40.80, $40.00
Current Gain/Loss: -45%
Time Frame: 1 week
New Positions: Yes, with tight stop

7/19: X if forming a bear flag on its intraday chart and looks vulnerable here. The aftermarket is looking weak and X may hit our stop tomorrow. Readers may want to consider exiting at the open to preserve capital. The stock is holding an upward trend line and is hovering around its 20-day SMA but the if the market gains momentum to the down side tomorrow I don't anticipate X moving being able swim to upstream.

7/17: Friday was blow to the bullish thesis on X but many things still exist to support it. X has intraday support at $40.80 and longer term support from June at $40.00. It also sits near its 20-day SMA and there are some important retracement levels from the July lows to recent highs in the $40.00 to $41.00 area that may support X on this pullback. I still think X should trade up near its 50-day SMA prior to moving much lower so I am sticking with the set-up on this trade but will be out if our stop is hit. Considering Friday's broad sell off I've adjusted the targets offered a lower first target of $43.25 which is good place to consider tightening stops or taking profits. I chose a further out of the money call than normal with a small delta of .28 to limit risk on this trade. NOTE: I view this an aggressive and potentially quick trade. Please use proper position size to manage risk.

Current Position: August $46.00 CALLS, entry was at $1.38

Entry on July 15, 2010
Earnings Date 7/27/10 (unconfirmed)
Average Daily Volume: 13.5 million
Listed on July 14, 2010

PUT Play Updates

Deere & Co. - DE - close 59.73 change -1.35 stop NONE *NEW*

Target(s): 59.10, 58.20, 57.05, 56.30, 55.40
Key Support/Resistance Areas: 59.00, 58.00, 56.85, 56.15, 55.00, 54.15
Current Gain/Loss: -68%
Time Frame: 1 to 2 weeks
New Positions: Yes, with a tight stop

7/19: DE gapped higher and then gave it up early, but rebounded into the close. I'm expecting a weak market tomorrow and suggest readers begin to tighten stops and exit positions as our targets approach. My comments from below have not changed.

7/17: DE gave some back on Friday and I expect the selling to continue, at least in the short term. Since May DE has made 4 round trips between $60 and $55. Obviously I never thought that the stock would do it again when the trade was released so now we are left to manage the exit at the best possible price. My plan going forward is to trail DE's decline with stops to see how much we can get out of the trade. The problem right now is that I do not see a proper level to place a new stop just yet. So for now I am keeping the trade open without one. Once a better reference point is established I will place a new stop. I've adjusted the targets above which are just above the updated key support/resistance areas. DE may find some support near these areas on the way down so I suggest readers use these levels as a guide to exit positions. $58.20 is just above the stock's 20-day and 50-day SMA's and is an area of high interest. The overall strength or weakness in the broader market should determine how far we can take this.

Current Position: August $55.00 PUTS, entry was at $3.00

Entry on July 6, 2010
Earnings 8/18/2010 (unconfirmed)
Average Daily Volume: 5.4 million
Listed on July 3, 2010

Lululemon Athletica Inc. - LULU - close 37.89 change -0.11 stop 40.42

Target(s): 38.00 (hit), 37.35, 35.80, 34.55
Key Support/Resistance Areas: 42.25, 39.75, 37.00, 35.16, 32.75
Current Gain/Loss: -7.6%
Time Frame: 1 week
New Positions: Yes

7/19: LULU came within 8 cents of our 2nd target where it found support and reversed higher. As such I'm going to raise the target 10 cents to $37.35. We currently have +3.2% gains and the new target should produce a winning trade. LULU is getting close to touching its a upward trend line from last July and the next target is a good place to tighten stops to see if we can get more out of the trade. If LULU breaks this trend line the stock could pick-up steam to the downside towards the 200-day SMA.

7/17: My comments from 7/15 haven't materially changed so I am adding to them in the 7/17 post. LULU is being contained by its 20-day and 50-day SMA's and the backside of its broken upward trend line that began in February. I expect this resistance to hold and LULU to turn lower. Friday's -4% decline took away 6 prior days gains. Our target of $38.00 was hit on Friday but I am looking for more downside. $37.25 is now the immediate target below but if LULU breaks its upward trend line that began last July this could gain steam to the downside towards the 200-day SMA. I've tightened the stop to $40.42.

Current Position: August $35.00 PUTS, entry was at $1.30

Entry on July 12, 2010
Earnings 8/19/2010 (unconfirmed)
Average Daily Volume: 700,000
Listed on July 1, 2010

PowerShares QQQQ Trust - QQQQ - close 44.72 change +0.38 stop 46.10

Target(s): 44.40 (hit), 43.75, 43.25, 42.55
Key Support/Resistance Areas: 46.77, 45.25, 44.46, 43.50, 42.50, 41.00
Current gain/loss: -15.00%
Time Frame: 1 weeks
New Positions: Yes

7/19: The NASDAQ 100 futures are down over -1% compared to the 4:00 PM close after IBM and Texas Instruments earnings. This should put pressure on QQQQ and get the ETF moving towards our more aggressive targets. As these targets approach I suggest readers tighten stops to see how much more we can get out of the position.

7/17: QQQQ hit our target of $44.40 and we are now approaching breakeven on the trade. I've moved the stop down to $46.10 which just above last week's highs. I'm comfortable giving this some room to work and suggest we ride it as far down as we can. Friday didn't really give us a good reference point to place a tighter stop but there is an intraday congestion area between $45.00 and $45.40 so a tighter stop could be placed above there. QQQQ may bounce and retrace some of Friday's losses but I expect the selling to resume. I've adjusted the targets above and suggest readers tighten stops as they are hit to protect against a reversal. $43.25 is a high area of interest to tighten stops or take profits. This level should give us a nice +30% gain.

Current Position: August $45.00 PUTS, entry was at $1.85

Annotated Chart:

Entry on July 8, 2010
Earnings N/A (unconfirmed)
Average Daily Volume: 100 million
Listed on July 7, 2010

Starbucks Corp. - SBUX - close 25.49 change +0.14 stop 26.05 *NEW*

Target(s): 25.30 (hit), 25.00, 24.85, 24.40
Key Support/Resistance Areas: 26.50, 26.00, 25.25, 24.80, 24.00, 23.60, 22.50
Current Gain/Loss: -37.1%
Time Frame: 1 to 2 days
New Positions: No

7/19: SBUX reports earnings after the bell on Wednesday and I suggest readers exit positions prior to the close on Wednesday. Today the stock was down about -1% in early trading and I'm looking for more weakness tomorrow. We have 3 near term targets listed above which are good areas to consider exiting positions tightening stops to ride this down as far as we can prior to earnings. For options traders, I strongly encourage you to exit prior to earnings as the volatility could get sucked out of the premium.

7/17: On Friday morning SBUX closed its gap lower on 6/29 (referred to in the update below) and then took a nose dive and closed its gap higher from 7/13. All of the stock's weekly gains were essentially erased with Friday's -3% loss. Similar to the Q's above SBUX didn't give us a good reference point on Friday to place tighter stop so I have moved the stop down to the top of last week's congestion area at $26.05. This should be enough room to see how far we can ride SBUX back down so we can turn this trade into a winner. The targets can be used as a guide to for potential bounce points on the way down.

Current Position: August $25.00 PUTS, entry was at $1.40

Entry on July 8, 2010
Earnings 7/21/2010 (unconfirmed)
Average Daily Volume: 10 million
Listed on July 3, 2010

Wynn Resorts - WYNN - close 80.01 change +0.44 stop 85.50

Target(s): 77.75, 75.50, 72.25
Key Support/Resistance Areas: 85.00, 84.00, 76.50, 72.00
Current Gain/Loss: -11%
Time Frame: 1 week
New Positions: Yes

7/17: WYNN broke down early and hit our trigger of $79.10 to enter short positions. The stock then recovered the remainder of the day and closed marginally higher. WYNN broke through an intraday down trend line and then rallied back up to test it from underneath which I am expecting to be a kiss goodbye. It is also below its 20-day and 50-day SMA's which should provide further resistance. However, I expect this to be a quick trade and suggest readers be quick to tighten stops or simply take profits if WYNN proceeds lower from here. Considering today's reversal I have listed a target just above today's low as the immediate near term target. I've also adjusted the more aggressive targets to give us the best chance at hitting them and taking profits.

7/15: I'm looking for WYNN to break down from here and touch its longer term upward trend line that began in November. This is at about $74.50 which is our first target. If the broader market is weak I see no reason why WYNN won't trade down to its 200-day SMA which it hasn't done since last July. The stock also broke below its 20-day and 50-day SMA's on Friday. I suggest readers initiate short positions if WYNN trades to $80.80 or $79.10 which is below Friday's low, whichever occurs first. NOTE: I view this trade as being aggressive and potentially quick.

Current Position: August $75.00 PUTS, entry was at $3.50

Entry on July 19, 2010
Earnings 7/29/10 (unconfirmed)
Average Daily Volume: 2.92 million
Listed on July 17, 2010

Ingersoll-Rand - IR - close 34.98 change +0.61 stop 35.75 *NEW*

Target(s): 34.20, 33.70, 33.25, 32.55
Key Support/Resistance Areas: 37.00, 36.50, 35.60, 34.20, 33.11, 31.50, 30.12
Final Gain/Loss: -15.55%
Time Frame: 1 to 2 weeks
New Positions: Closed

7/17: After early strength IR traded down to our target at $34.20. The stock was showing overall relative strength compared to broader market and was at a key support area which was the reason we closed the trade for -15% loss. IR made a double bottom with Wednesday's low at $34.15 and took off. There should be weakness tomorrow so if readers still have positions I suggest protecting capital and trailing stops down to get as much out the stock's decline as possible. IR needs to break below $34.15 to get any more downside.

7/17: IR held up better than I thought it would on Friday's sell off but still closed down -1.60%. The stock almost hit our first target again. This is obviously a key support level so if breaks through we will have a chance to take profits. The stock remains in a bear flag on the daily chart and appears to be consolidating before breaking lower. I've adjusted the targets above and suggest readers use these as a guide to tighten stops and exit positions if the stock heads lower from here. I've also tightened the stop to $35.75 which above the 200-day SMA.

7/15: IR was under pressure early and came within 1 penny of our first target before reversing. As a result, this target has been adjusted up 5 cents. IR is forming a bear flag on its daily chart and any broader market weakness should send this stock lower, and fast. My comments from below remain the same.

Closed Position: August $35.00 PUTS at $1.90, entry was at $2.25

Annotated Chart:

Entry on July 8, 2010
Earnings 7/19/2010 (unconfirmed)
Average Daily Volume: 5.4 million
Listed on July 7, 2010