Option Investor

Daily Newsletter, Thursday, 8/12/2010

Table of Contents

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

Market Wrap

Sea Of Red

by Todd Shriber

Click here to email Todd Shriber
Thursday was another rough day for stocks as a rise in jobless claims extended the S&P 500's losing streak to three days, good for the index's worst three-day run since early July. The index slipped almost six points to close just below 1084 while the Dow Jones Industrial Average gave up almost 59 points to continue three days of its own losses and settle around 10,320. Cisco (CSCO) predictably hampered the Nasdaq as the tech-laden index tumbled 18 points to close below 2200 at 2190. Small-caps were in the red as well with the Russell 2000 losing 3.4 points to settle just under 617.

Stats Table

For the week ended August 7, initial jobless claims rose by 2000 to 484,000, the highest level since February, according to the Labor Department. Economists were actually forecasting a decline in initial claims and the pop in new claims is just fuel on the fire for those that believe the economic recovery is losing steam in a big way. The median forecast of 42 economists in a Bloomberg survey called for a drop in jobless claims to 465,000 and the Labor Department revised last week's number up to 482,000 from 479,000.

Making matters worse was a sharp increase in the number of folks receiving supplemental unemployment benefits. That number jumped to 1.34 million thanks in part to Congress extending unemployment eligibility. Predictably, none of this is good news of stocks. I found an interesting chart on Seeking Alpha that highlights the correlation between jobless claims and the performance of the S&P 500.

Jobless Claims vs. S&P 500

The Federal Reserve's comments earlier this week that we should brace for slower economic growth, a decline in Chinese imports, disappointing action in equities and today's jobless claims news makes for a toxic combination of factors unless you happen to be long gold. The yellow metal's safe haven status has apparently been restored as gold rallied to its best one-day performance in two months today.

For the day, COMEX gold for December delivery was up $17.50, or 1.5%, to $1216.70 an ounce, but the bulk of those gains were seen in the moments immediately following release of the jobless claims data. Gold surged $10 an ounce following that release. Analysts said today's close above $1214.30, critical resistance and the 50-day moving average, is a bullish sign. Despite a nasty tumble from the June highs, gold is still up 11% year-to-date.

Gold Chart

No surprise here: Tech stocks were the biggest losers among the 10 industry groups in the S&P 500. Cisco, the largest maker of networking gear, got that ball rolling Wednesday after the close with an earnings report that was obviously disappointing. Making matters worse, the company said it expects revenue in the current quarter to come in as low as $10.64 billion while analysts had been forecasting $10.95 billion.

To top all of that off, Cisco CEO John Chambers, a man whose every word tech investors hang on every quarter, was less than cheery in his outlook for the economy. While Chambers did say Cisco did some hiring last quarter and expects to continue doing so, he added that his company is seeing ''unusual uncertainty'' and ''mixed signals'' about the strength of the economy.

Oppenheimer & Co. cut its rating on Cisco to ''perform'' from ''outperform,'' helping the shares lose almost 10% on the day. Cisco traded as low as $21 today, just 32 cents away from the 52-week low. Rival Juniper Networks (JNPR) tumbled almost 7% and JDS Uniphase was skewered to the tune of almost 6%.

Cisco Chart

The retail sector was also done in by the slack economic data and some troubling profit reports of its own. Proving that the stock market really is a game of not what did you for me yesterday, but what will you do for me tomorrow, we have Kohl's (KSS). The Wisconsin-based retailer that is more along the lines of a Target (TGT) than a Nordstrom (JWN) said its second-quarter profit rose 14% to $260 million, or 84 cents a share, from $229 million, or 75 cents a share, a year earlier. Analysts had been expecting a profit of 82 cents a share.

Unfortunately, Kohl's committed the big no-no in this market environment and that is to cut its full-year outlook. Kohl's pared the high end of its annual outlook because of sluggish sales growth and the uncertain economy. The company is now forecasting 2010 profit of $3.57 to $3.70 a share compared with previous guidance of $3.57 to $3.75 a share. Analysts were expecting $3.76 a share. The news sent Kohl's shares lower by $1.28, or almost 3%, to close at $46.50, but the stock traded as low as $45.57, just 28 cents off the 52-week low. Volume was more than triple the daily average.

Kohl's Chart

You might be wondering why I brought up Nordstrom in comparison to Kohl's. Here's why: The Seattle-based luxury department store operator delivered second-quarter results after the market closed today and said profit jumped 39% to $146 million, or 66 cents a share, from $105 million, or 48 cents a share, a year earlier. Revenue surged 13% to $2.5 billion. Those numbers were basically in line with Wall Street estimates and that is not going to be enough to excite investors in this environment.

Nordstrom did not do itself or its shareholders any favors by maintaining full-year guidance of $2.50 to $2.65 a share. Analysts are forecasting a profit of $2.62 a share. Reading between the lines here, it is reasonable to surmise that if Nordstrom is not boosting its outlook, then even the most affluent consumers are either tightening their own purse strings, feeling the pinch of the lethargic economy along with the rest of us or both. Nordstrom shares are down $1.45, or 4.34%, to $31.99 in the after-hours session.

Nordstrom Chart

Highlighting the fact that even the bluest of the blue chips are not safe places to hide these days, industrials slipped 0.8% as a group, good for the second-biggest loss in the S&P 500 behind technology issues. Aerospace giant Boeing (BA) lost just over 1% and has slid 4% in the past week, that is worse than the S&P 500's 3% swan dive.

Mr. Market has been even less kind to another Dow component, Caterpillar (CAT), the world's largest maker of mining and construction equipment. The shares were off nearly 2% today and have shed 5% in the past week. Caterpillar announced that it is building a new plant in Texas today and on a day when the employment picture, or lack thereof, continued to hamper stocks, this should have been good news.

Caterpillar did not say how many jobs it would create, but the facility is going to be 600,000 square feet and will take until mid-2012 to complete, so it is reasonable to assume a decent amount of new jobs will be needed to build the plant and then operate it once it is ready for production. In addition, Caterpillar said it would double the number of workers in the U.S. building excavators, but even that was not enough to salvage a winning day for a stock that now has an ugly chart.

Caterpillar Chart

I am reluctant to call any major U.S. bank not named Goldman Sachs (GS) a blue chip name, but if nothing else, Bank of America (BAC) is the largest U.S. lender by assets, a Dow component and one of the most widely held stocks out there. I bring up Bank of America because there has been plenty of chatter from various pundits lately about the fact that financials have been conspicuously absent from the most recent rally.

Bank of America is the poster child for that thesis. A flatter yield curve is becoming an issue for banks as yields for short- and long-term Treasuries drifter closer to each other. That is bad news for bank profits and their stocks. Bank of America touched another 52-week low today and the shares have shed 7% in the past week.

BofA Chart

Taking a look at the charts, support at 1100 for the S&P 500 did not hold today and I would point to old support at 1085 as the next support level, but sell-off helped the index violate that area as well. That brings 1060 back into play. On the upside, the S&P 500 will now have to make its way back above 1100 before dealing with the 1125 area again.

S&P 500 Chart

The Dow is having similar issues. The 200-day moving average didn't act as support yesterday and the Dow came within just three points touching the 50-day line today. Support was supposed to be 10,500, but that did not hold. I am not a big fan of relying on a collection of just 30 stocks for trading indicators, but with the Dow below 10,500, a return to the 10,100 neighborhood is not out of the realm of possibilty.

Dow Chart

Tech's historical weakness in August has been widely documented, so the Nasdaq's bearish ways are not altogether surprising, but there is something to worry about. The period Cisco delivered earnings for yesterday is usually the company's BEST quarter. The quarter the company is now in is usually the WORST. Support for the Nasdaq did not hold at 2200 and a break of 2100 could take the Nasdaq back to the 2065 area.

Nasdaq Chart

Simply put, this is a challenging time for small-caps and the Russell 2000 reflects that sentiment. The index has plunged through the 200-day moving average around 640 and with a pattern of lower highs evident, it might be best just to take a pass on small-caps at this juncture.

Russell Chart

I understand the urge to be involved in the market, but if you are shopping for stocks in the next few days, window shopping may be the way to go because August is only half over. Better prices could and probably should become available before Labor Day. Do not buy just for the sake of buying.

New Option Plays

Long Biotech Play

by Scott Hawes

Click here to email Scott Hawes

Human Genome Sciences - HGSI - close 26.28 change +0.04 stop 24.65

Company Description:
Human Genome Sciences is a commercially focused biopharmaceutical company. The Company has three products in late-stage clinical development: BENLYSTA for systemic lupus erythematosus (SLE), ZALBIN for chronic hepatitis C, and raxibacumab for inhalation anthrax. In July and November 2009, the Company reported that BENLYSTA successfully met its primary endpoints in two Phase III clinical trials in patients with systemic lupus. In March 2009, the Company reported that ZALBIN successfully met its primary endpoint in the second of two Phase III clinical trials in chronic hepatitis C. HGS submitted a biologics license application (BLA) for ZALBIN in the United States in November 2009, and Novartis submitted a marketing authorization application (MAA) under the brand name JOULFERON in Europe in December 2009.

Target(s): 27.20, 28.20, 29.20
Key Support/Resistance Areas: 29.80, 28.24, 27.80, 26.80, 25.00
Time Frame: Several weeks

Why We Like It:
We're back for another long play in HGSI which produced a winner for us a few weeks ago. The biotech sector has been a relative strong performer recently as it has maintained its upward trend line from the 7/1 lows while the broader market has not. I like HGSI and I suggest we initiate long positions now. The stock is trading in an upward channel and bounced nicely today at the bottom of the channel. HGSI is above its 20-day and 50-day SMA's and looks poised to make another higher high. I'm looking to make $1.50 to $3.00 on this trade. We'll use a stop at $24.65 which is below the 50-day SMA.

Suggested Position: Buy September $28.00 CALL, current ask is $0.98

Annotated Chart:

Entry on August xx
Earnings Date N/A (unconfirmed)
Average Daily Volume: 2.9 million
Listed on August 12, 2010

In Play Updates and Reviews

Big Winner Closed

by Scott Hawes

Click here to email Scott Hawes

Editor's Note:
Good evening. DIA puts were closed today for nice +81% gain. All of our other positions are currently positive. Feel free to email me with any questions.

Current Portfolio:

CALL Play Updates

SPDR Gold Trust - GLD - close 118.77 change +1.43 stop 112.50

Target(s): 121.60, 123.00, 125.00
Key Support/Resistance Areas: 123.00, 119.10, 116.50, 113.50
Current Gain/Loss: +5%
Time Frame: Several weeks
New Positions: Yes

8/12: GLD gained +1.43% today. Unfortunately for us, the gains came overnight so we did not get filled at a better price. Nonetheless, gold is gaining momentum and if it trades above $119.15, which is near the July highs, GLD should be on the fast path to retest its YTD highs and possibly print new highs. We may see a pullback to close the gap higher today, and if it does it will present another opportunity to get in if readers aren't already in.

8/11: I'm not necessarily a longer term bull on gold, but if the Fed is going to monetize our country's debt gold is going to catch a bid, and I believe now is a perfect time to get in via GLD. Considering the events of the past few days gold and gold miners should catch a bid here and act as a defensive play. From a technical perspective GLD bounced perfectly off of its upward trend line from its lows on 8/17 to 2/5 to 7/28. And I think GLD will print new all time highs within the next several of weeks. I suggest readers enter long positions now. I've provided three realistic targets that will produce good winning trades if reached. Our stop is below the 200-day SMA at 112.50.

Current Position: Long September $120.00 CALL, entry was at $1.80

Entry on August 12, 2010
Earnings Date N/A (unconfirmed)
Average Daily Volume: 12.4 million
Listed on August 10, 2010

Volatility Index - VIX - close: 25.73 change: +0.34 stop: 19.60

Target(s): 25.95 (hit), 27.20, 28.00, 31.50, 35.00
Key Support/Resistance Areas: 20.00, 22.00, 24.00, 26.00, 28.00
Current Gain/Loss: +15%
Time Frame: 1 week
New Positions: Yes, on weakness

8/12: The VIX came within 9 cents of hitting our second target so I am going to lower the target to $27.20. If we get further weakness in the S&P 500 prior to a bounce the VIX may spike up to our targets and then retreat like it did today. Therefore, taking profits or tightening stops if that happens is the smart play. If the market finds its legs and bounces from here we will need to exhibit some patience with the trade.

8/11: I spoke too soon thinking we caught a break yesterday when the VIX traded to within 1 penny of our trigger before backing off. It turns out it was a bad break as the SPX gapped lower today and hence the VIX gapped higher. So we would have gotten a better a fill yesterday had we been triggered. Nonetheless, it appears the market has spoken and this trade has some potential. We are long September 30 calls at $2.95. The VIX is now almost at its 50-day SMA and actually hit our first target this afternoon. Considering the massive sell-off today this trade is shaping up to be quicker than I thought.

8/10: VIX came within 1 penny of triggering our entry to buy calls. And it's a good thing we didn't get triggered because just after the FOMC announcement stocks took off and the VIX plummeted, so we caught a break on this one. Last night I mentioned aggressive traders may consider entering at current levels. But I just wasn't ready to officially make any changes to the play due to the FOMC announcement today. However, I'm suggesting we take advantage of any further weakness in the VIX which should happen if stocks rally from here. We may get a little further upside but the fact is we are in overbought conditions and the market is complacent, not to mention the seasonality. And it is not uncommon for stocks to reverse course from the initial FOMC reaction. In fact, on June 23rd the S&P 500 bounced hard intraday just like today, but then proceeded to sell off -80 points over the ensuing week. I realize the circumstances are completely different now but look at the daily S&P 500 chart. Currently we are just above the same levels as June 23rd and are also coming off of a strong rally. I suggest we enter positions now and look for a bounce up to its 50-day SMA which is above our first target of $25.95. We'll use a stop of $19.60 and if the market rolls over I suggest traders trail their stops. I've adjusted the targets.

NOTE: September VIX options expire on Wednesday, Sept. 15th, not Friday

Current Position: Long VIX September $30 CALL, entry was at $2.95

Entry on August 11, 2010
Earnings Date N/A
Average Daily Volume N/A
Listed on August 7, 2010

PUT Play Updates

Leggett & Platt - LEG - close 19.90 change -0.25 stop 21.75

Target(s): 19.85(hit), 19.40, 18.70
Key Support/Resistance Areas: 21.50, 20.50, 19.80, 19.00, 18.50
Current Gain/Loss: +33%
Time Frame: 1 to 2 weeks
New Positions: Yes, on strength

8/12: LEG hit our first target today and we now have a +33% gain in the position. The stock is finding support at the 7/19 and 7/20 lows which were just below $19.80. This is why my first target was $19.85. If it breaks here it should be a vacuum down to the $19.40 area which is our second target (raised 5 cents). This target should give us a +65% gain so I suggest either taking profits or tightening stops to protect gains if we get there.

8/11: LEG PUTS were initiated at the open for 75 cents as the stock traded below yesterday's low. LEG drifted down all day long and we currently have gain of +20%. Our targets are approaching which are near support areas so I suggest trailing or tightening stops on the way down to protect profits.

8/10: We are back with a short play in LEG. LEG is in the furniture & fixtures industry and purchases of these types of items are not on the minds of consumers. The stock continues to make lower highs on a descending trend line that began on 4/30 and is now on the verge of breaking an upward trend line that began 7/6. On its daily chart LEG closed below all of its moving averages today and if the broader market gets moving to the downside LEG should be one of the first to go. I suggest we enter short positions if LEG trades to $21.20 (below today's highs and the 50-day SMA) or to $20.70 (below today's low), whichever occurs first. We have realistic targets that are easily achievable and will produce a good winning trade if they are reached.

Current Position: Long September $20.00 PUT, entry was at $0.75

Entry on August 11, 2010
Earnings: 10/21/10 (unconfirmed)
Average Daily Volume: 1.45 million
Listed on August 10, 2010

Occidental Petrol. - OXY - close: 76.46 change: +0.12 stop: 81.05

Target(s): 70.50, 66.00
Key Support/Resistance Areas: 75-74.00, 70.00, 65.00
Current Gain/Loss: N/A
Time Frame: Several Weeks
New Positions: Yes, trigger at $77.50 or $73.90

8/12: OXY came within 25 cents of our trigger to enter short positions. I think this is a good entry and there is a lot of overhead resistance to keep any additional strength in check. My comments from below remain the same.

8/11: Considering today's broad based sell off I am inclined to suggest we take advantage of any strength in OXY to initiate short positions. The S&P 500 closed above its 50-day SMA today so we could get a bounce in equities before the selling continues. OXY's high on 8/10 was $78.14. All of the stock's major moving averages are also overhead and a downward trend line that started on 6/21. I am suggesting we use a bounce to $77.50 or on weakness to $73.90 as a trigger to enter short positions, whichever occurs first.

8/10: OXY doesn't seem ready to break down just yet as the stock gained +1.12% today on a weak tape. The stock is approaching all of its major SMA's from below and a down trend line near the $80 level. This sets up a good short entry as opposed to waiting for a break down. I'm assessing this option and may change the trigger in the coming days.

Suggested Position: Buy September $70.00 PUT, current ask $1.14

Entry on August XX
Earnings Date 10/21/10 (unconfirmed)
Average Daily Volume = 4.4 million
Listed on August 7th, 2010

Procter & Gamble - PG - close: 59.99 change: -0.28 stop: 63.26

Target(s): 59.50, 59.05, 58.05, 57.25
Key Support/Resistance Areas: 59.00, 61.00
Current Gain/Loss: +44%
Time Frame: 2 to 3 weeks
New Positions: Yes, on strength

8/12: This morning PG came within 8 cents of reaching our 1st target before reversing with the market. Positions could have exited for a +60%. So I've raised that target 20 cents to $59.50 should PG retest this area. PG chart looks good to the short side but there is support near $59.00. Tomorrow we get CPI and retail sales data and this could spark selling if the reports are bad. If PG gets down to $59.50 again it may break through this support. There is more support $59.00 which are the January and July lows. PG bounced hard at these levels so I've added $59.05 as a target as well. I would be inclined to take profits or at least tighten stops as PG approaches these levels. We now have a +44% gain so protect profits if the weakness continues.

8/11: PG is a defensive stock so it did not suffer like the broader market today. I think we will see $59.30 and possibly lower in this stock in the next couple of weeks. We've made 11 cents on our 36 cents option so we have a nice gain already. Protect profits if the weakness in PG continues.

8/10: PG triggered our higher target to enter positions at $60.69. We are long $57.50 PUTS at 36 cents. This is a cheap out of the money option that shouldn't move too much with underlying price of PG. But if we get PG to retest its recent lows, which are below our first target of $59.30, we should easily make 25 cents on the position. This would represent a +69% gain. As such, I've removed the $55.00 target and added three closer targets that are very easily achievable.

Current Position: Long September $57.50 PUT, entry was at $0.36

Entry on August 10, 2010
Earnings Date 10/28/10 (unconfirmed)
Average Daily Volume 2.5 million
Listed on August 7th, 2010


SPDR DJIA ETF - DIA - close 103.45 change -0.68 stop 104.85

Target(s): 105.40(hit), 104.75(hit), 103.65(hit), 103.05(hit)
Key Support/Resistance Areas: 108.00, 107.00, 105.90, 104.75, 104.20, 103.50
Final Gain/Loss: +81.48%
Time Frame: 1 week
New Positions: Closed

8/12: DIA gapped lower to its 50-day SMA which was just below our final target so positions were closed at the open. We have nice gain of +81% on the trade. I'll be looking for more short entries on the indexes on strength, perhaps up to their moving averages overhead, or gap fills.

8/11: DIA fell out of the rising wedge pattern and tanked lower today, hitting two targets. We now have a +46% gain which needs to be protected. I've lowered the stop to $104.85 which is above the intraday congestion area from today and the 20-day SMA. This should provide enough resistance to keep any bounces in check. I suspect DIA may head towards its 50-day SMA which is just below $103. We have two more targets: $103.65 which just above the low on 7/30, and $103.05 which is just above the 50-day SMA. These are the areas I suggest taking profits or tightening stops. If we get stopped out our gain should still be +30%.

8/10: DIA keeps getting close to hitting our target but the market keeps getting saved. Today in early trading this position could have been closed for a +10% gain but stocks rallied. I suspect we may have a spike in the markets over the next day or two but I do believe we will get a meaningful correction that could happen at anytime within the next week, and it could happen fast. DIA is forming a bearish rising wedge pattern and if it lets go we should see a $2 or $3 drop relatively quick. This is what we are positioned for and should the drop happen I suggest readers begin to tighten stops as our targets approach to protect capital and against a reversal.

Closed Position: Long September $106.00 PUTS at $4.90, entry was at $2.70

Annotated chart:

Entry on August 3, 2010
Earnings: N/A (unconfirmed)
Average Daily Volume: 14 million
Listed on August 2, 2010