Option Investor

Daily Newsletter, Thursday, 8/26/2010

Table of Contents

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

Market Wrap

Bad News, Bad Market Theme Continues

by Todd Shriber

Click here to email Todd Shriber
Disappointing economic data continued to weigh on stocks on Thursday, keeping with a theme that has been present for much of August. That theme has the S&P 500 lower by more than 4% on the month and the latest batch of weak data sent the index lower by 8.1 points to a close at 1047.22. After shedding 74 points, the Dow Jones Industrial Average settled at 9985, its first close below 10,000 in seven weeks. Tech continues to be pathetic as the Nasdaq lost almost 23 points to settle just below 2119. The Russell 2000 lost more than points to close below round-number support at 600.

Stats Table

On Wednesday, the market was doomed by weak durable goods and new home sales data. Today it was jobless claims. Actually, the number came in a bit better than expected, falling by 31,000 to 473,000 for the week ended August 21. When the number came out before the market opened, futures soared and it looked stocks may be headed for at least small gains on the day. The pre-market positivity was never really solidified and small gains wilted by early afternoon, sending stocks lower.

Even though jobless claims were supposedly ''better'' than they have been, the reality is the few traders that were at their desks today and not in the Hamptons were able to take advantage of the notion that ''less bad'' just is not going to cut it when it comes to economic data. Stocks have become so beholden to economic data points recently that the data needs to be good, great, positively surprising or some derivative thereof to jolt stocks higher and that just is not happening.

Jobless Claims

Speaking of data, tomorrow should be an interesting with the first revision to second-quarter GDP being released before the before. When the initial reading was released last month, the number came in at 2.4%, certainly nothing that would confuse the U.S. with China or India, but worse yet, that number would not even confuse the U.S. with Sweden.

Do not expect that 2.4% growth figure to hold. Looking at the chart below, you will see that economists have been steadily paring their estimates and 1.4% growth may even be too much to hope for.

GDP Estimates

Another chart (below) shows that most economists have stuck to an estimate of 1.5% and while only a small number are really bearish, forecasting a reading of 1% or less and an equally small number are bullish, if it can be called that, expecting the number to stay above 2%. It bears noting that almost all of the recent data releases that have punished stocks have missed estimates by wide margins, which says the economists that are being polled in these surveys are less accurate than your local weatherman.

GDP Estimates #2

Speaking of forecasts that probably need to be revised to the downside, it seems like only yesterday that I wrote in a couple of market wraps that said analysts might need to boost their year-end forecasts for the S&P 500. Well, it was not yesterday, it was several months ago, but things change in the market and now it would appear forecasts calling for S&P 500 1275-1300 by the end of the year may need to be scaled back.

You may have heard about the strategist from French bank Societe Generale that said the S&P 500 could plunge all the way to 450. That might a wee bit aggressive, but it is worth noting that Birinyi Associates trimmed its year-end forecast on the index by 7.5% to 1225 on concerns that stocks like Procter & Gamble (PG) and Wal-Mart (WMT) will not stem their declines this year, Bloomberg News reported.

Along the lines of stocks that need to get things headed in the right direction but may be challenged to do so there is denim and apparel retailer Guess (GES). Guess issued an earnings report that missed estimates yesterday after the market closed. Making matters worse, the company's outlook for the rest of year was less than encouraging as the company cited uncertainty about the global economic recovery. The result was a decline of nearly 11% for Guess shares on volume that was roughly five times the daily average.

Guess Chart

If you're looking for tomorrow's victim in the preppy retail space, look no further than Obama family favorite J. Crew (JCG). The company reported second-quarter earnings today after the close, but forget those results. J. Crew lowered its third-quarter guidance to 55 cents to 60 cents a share, well below the consensus estimate of 71 cents. For the full year, J. Crew expects a profit of $2.25 to $2.35 a share, below previous guidance of $2.35 to $2.45 a share. The Street was expecting $2.46. Like Guess, J. Crew cited uncertainty in the global economy. Whatever the reason for the downbeat guidance, investors are not happy and the shares are down 7.3% in the after-hours session as of this writing.

J. Crew Chart

It is hard to find happy investors on the long side these days, but if you are long data storage firm 3Par (PAR), these are fun times. Dell (DELL) made an initial bid for 3Par earlier this week, only to be trumped by rival Hewlett-Packard (HPQ). HP offered $24 a share for 3Par and Dell countered this morning with a $1.6 billion bid that values 3Par at $24.30 a share.

A mere 30-cent increase probably had HP chuckling. HP knows that it has the better balance sheet and used that strength to trump Dell one more time with a $1.8 billion counter offer. That values 3Par at $27 a share. 3Par said on Thursday morning that it had agreed to the Dell offer, so it will be interesting to watch this saga continue to unfold, but the reality is HP is the likely victor here.

3Par will give its eventual acquirer access to the booming cloud computing craze and that is the reason why Dell and HP are willing to pay up for 3Par. Regardless of who wins 3Par, a company that has hardly been profitable since it was born 11 years ago, the real winners are 3Par shareholders because this stock traded for less than $10 two weeks ago.

3Par Chart

There was more acquisition news out of Silicon Valley today. HP said it would acquire cloud computing firm Stratavia and Cisco (CSCO) said it would acquire online video software maker ExtendMedia. The news impressed no one as HP finished down on the day and Cisco touched a new 52-week low.

Cisco Chart

Looking at the charts, 1050 did not hold on the S&P 500 and the index is now threatening to violate support at 1040. That downside move could occur as early as tomorrow if the GDP news really disappoints and it probably will. A move below 1040 could easily bring 1010-1015 into play. The 1060 area looks to be the next resistance zone.

S&P 500 Chart

Psychological support at 10,000 did not work for the Dow and the blue chip index has now plunged almost 800 points from its August 9 peak. If 9900 does not act as support the next target would be 9800. Even if the Dow can reclaim 10,000, it will have to contend with resistance at 10,100.

Dow Chart

There is simply nothing nice to say about the Nasdaq. The index cannot even get any help from 3Par because that stock trades on the NYSE. Even it was a Nasdaq stock, it would not be enough to rewrite what is obviously a broken story. Even if the Nasdaq could string together a couple of positive days, it would bump into resistance almost immediately at 2140, but support at 2063 looks like the safer bet.

Nasdaq Chart

The Russell 2000 has bounced off support at 590 a couple of times, but a close just below 600 has put the index in position to retest that support level and one has to wonder how long 590 will hold. If it breaks, 550 could be the next stopping point.

Russell 2000 Chart

Betting on oversold bounces has become a fool's game at this point because the data supports the bears and the weak summertime volume makes matters worse for the bulls. A bet on a post-Labor Day bounce may prove to be a dud as well because September is another ugly month on the calendar for equities. Volume should pick up after the holiday, but the question is will sentiment?

New Option Plays

Awaiting GDP & Bernanke's Speech

by Scott Hawes

Click here to email Scott Hawes
Editor's Note:
Good evening. I am going to refrain from releasing new plays tonight. Tomorrow is shaping up to be quite day. The GDP data released in the pre-market is sure to set the tone early, however, all eyes will be on Ben Bernanke's speech at 10:AM EST. Who knows what he will say but I recall the saying "unusual uncertainty" in a recent speech to congress which sent the markets spiraling. The bottom line is that we are at critical support level and the market is hungry for information that we may not get. I seriously doubt there will be any groundbreaking changes in monetary policy, rather he will try to instill confidence which may be short of expectations.

We currently have 10 open positions in the model portfolio. If we get a big move tomorrow any of these positions may give readers a more favorable entry point than we currently have. I will also add that if we breakdown tomorrow it could be ugly and quick. On the contrary, good news could spark a short covering rally that could last a few days. We have positions on both sides of the market to take advantage of the moves. If we go lower I suggest being ready to take profits on short positions as our targets approach. We are already in oversold conditions and are nearing support levels which could spark an oversold bounce that turns into quite a reversal. We've seen it in the past and nothing tells me it can't happen again. Stay nimble and please email me with any questions.

In Play Updates and Reviews

Looking to Take Profits

by Scott Hawes

Click here to email Scott Hawes

Editor's Note:
Tomorrow should give us a chance to take some profits, regardless of market direction. I suggest booking them.

Current Portfolio:

CALL Play Updates

Cameron International - CAM - close 36.28 change -0.05 stop 35.45

Target(s): 36.95, 37.85, 38.40,
Key Support/Resistance Areas: 45.00, 42.50, 41.00, 38.75, 36.00
Current Gain/Loss: -68%
Time Frame: Several weeks
New Positions: Yes

8/26: It looked like CAM was headed higher today but the stock reversed and posted a minor loss. It outperformed the broader market signaling relative strength but it can't keep bucking the trend. My suggestion remains the same which is to use strength in the stock and consider exiting positions as time decay is starting to affect the option premium. CAM printed $37.15 today which is 87 cents higher than the closing price. $36.95 is a logical target to cut losses or tighten stops.

8/25: CAM came close to hitting our stop this morning but reversed. My comments haven't changed much. I suggest readers use strength in the stock and consider exiting positions as time decay will start to affect the option premium. Our targets were adjusted yesterday and remain the same except I have lowered the first target by 10 cents.

Current Position: Long September $40.00 CALL, entry was $0.95

Entry on August 16, 2010
Earnings Date 11/3/2010 (unconfirmed)
Average Daily Volume: 4.6 million
Listed on August 14, 2010

FMC Technologies, Inc - FTI - close 61.77 change -0.02 stop 58.25

Target(s): 65.25 (hit), 67.00, 68.75
Key Support/Resistance Areas: 69.00, 65.50, 62.40, 59.00
Current Gain/Loss: -22%
Time Frame: Several weeks
New Positions: Yes, with a tight stop

8/26: FTI closed just about flat on the day which is much better than the broader market. The bad news is FTI closed $1.50 off of its highs. The stock was up +2.5% early before imploding the remainder of the day. If the market breaks down tomorrow nimble traders may want to exit FTI early to preserve capital. Our official stop is below the 50 and 200-day SMA's but a tighter stop could be placed just under the lows of from Tue and Wed, perhaps at $59.90 which is also below the 50-day SMA. My concern with this is if we get a quick spike down stocks could just as easily reverse after they have taken out a bunch of stops.

8/25: FTI made a double bottom with Tuesday's lows and closed near its highs of the day. Broader market strength will do wonders for our position and the fact that crude oil gained today on bearish inventory data should be good for FTI. But now we need follow through. This is not a bad spot to open new positions with tight stops.

Current Position: Long October $70.00 CALL, entry was at $1.10

Entry on August 16, 2010
Earnings 10/27/2010 (unconfirmed)
Average Daily Volume: 1.5 million
Listed on August 14, 2010

Panera Bread Co. - PNRA - close: 79.15 change: +0.22 stop: 72.40

Target(s): 77.00, 78.50
Key Support/Resistance Areas: 73.00, 76.00, 80.00, 85.00, 88.50
Current Gain/Loss: N/A
Time Frame: 2 to 3 weeks
New Positions: Yes, trigger $74.75

8/26: PNRA is hanging tough in a bad tape. Nimble traders could buy the stock a breakout at $80.75 but I would prefer to get it on weakness should there be larger sell-off in the broader market. We'll keep the trigger at $74.75.

8/25: I suggest we change the strategy on this play and initiate long positions in PNRA on weakness rather than strength. There is no doubt PNRA is a relative strong performer but trading it against the broader market trend on a break out is higher risk. I suggest we keep this active into next week and use a trigger of $74.75 to initiate long positions. This is near the 200-day SMA and we could easily get there if the market sells off in the coming days. I've also updated the suggested option to October. More nimble traders could consider a position on a breakout but I like the risk/reward set-up better on weakness for a swing trade.

8/21: This is a relative strength play. PNRA has been out performing the market the past few days. Now the stock is testing resistance near $80.00. The high on Aug. 18th was $80.56. I am suggesting we buy calls at $80.75 and target a move toward resistance at $85.00 (exit target $84.90). This should be a relatively short-term play if we are triggered.

Suggested Position: Buy October $80.00 CALL, estimated ask at entry $1.75

Entry on August XX
Earnings Date 10/27/10
Average Daily Volume 562,000
Listed on August 21, 2010

Rackspace Hosting, Inc - RAX - close 19.34 change -0.21 stop 17.95

Target(s): 20.75, 21.30, 23.00
Key Support/Resistance Areas: 23.50, 21.40, 20.00, 19.00, 18.00
Current Gain/Loss: -15%
Time Frame: 3 to 5 weeks
New Positions: Yes

8/26: RAX printed highs not seen since April and briefly broke out of its ascending triangle. My comments from the play release remain the same. Let's stick with the plan. Readers might want to consider new positions if RAX prints $19.00.

8/25: M&A activity is heating up in the tech sector. Dell and Hewlett-Packard are in a bidding war over a 3Par at a huge 160% premium over its closing price just a couple of weeks ago. Whoever loses the bid will most likely be looking for a similar firm to acquire and there seems to be none better than RAX. Regardless of whether RAX fits the bill for an acquisition they are in the red hot cloud computing industry which is outperforming the broader market. I suggest we take advantage of the momentum and initiate long positions now. Technically, RAX is above all of its moving averages and is forming an ascending triangle. Our stop will be $17.95 and I have three targets with the most aggressive being the YTD highs near $23.00. I envision this trade lasting several weeks or more but if the stock surges we won't hesitate to book profits.

Current Position: Buy December $21.00 CALL, entry was at $1.40

Entry on August 25, 2010
Earnings 11/9/2010 (unconfirmed)
Average Daily Volume: 1.75 million
Listed on August 25, 2010

UnitedHealth Group Inc - UNH - close 31.85 change -0.11 stop 31.33 *NEW*

Target(s): 31.50 (hit), 31.90 (hit), 32.25, 33.15
Key Support/Resistance Areas: 35.00, 34.40, 33.50, 31.50
Current Gain/Loss: -30%
Time Frame: 1 to 2 weeks
New Positions: No

8/26: UNH came within 6 cents of reaching our $32.45 target so it has been lowered to $32.25. Regardless of the target I think the best strategy with UNH is to exit at the open tomorrow. I am cautious of holding this position through the weekend and would rather preserve capital. If you are a more nimble trader who can monitor the position, I suggest keeping a tight stop to see if UNH moves higher tomorrow.

8/25: UNH made a comeback today gaining nearly +3%. I'm still looking for an exit and have tightened the stop to $31.33. I've also narrowed our next target to $32.45 and would be inclined to exit if it is hit. This should get us to breakeven or better on the trade.

Current Position: Long September $32.00 CALL, entry was at $1.25

Entry on August 17, 2010
Earnings Date 10/19/2010 (unconfirmed)
Average Daily Volume: 8.5 million
Listed on August 16, 2010

PUT Play Updates

Abercrombie & Fitch - ANF - close 35.25 change -0.35 stop 38.40

Target(s): 33.25, 31.50
Key Support/Resistance Areas: 38.20, 37.25, 32.75, 34.00, 30.50
Current Gain/Loss: -5%
Time Frame: Several weeks
New Positions: Yes

8/26: ANF traded in a tight range today so there is not much to report. Our plan remains the same except I have raised the first target to $33.25.

8/25: We are short ANF and I am expecting a move down to $33.00 and eventually $31.50. The broader market needs to cooperate and I think any bounces will be will be short lived. ANF has a lot of overhead resistance to keep bounces in check. My comments below remain valid.

8/24: We are back with a consumer name in the retail space. Retailers are weak and ANF looks ready for a drop if the broader market cooperates. This company is one of the more bloated retail names out there and trades at high PE ratio of 26. Technically the stock has broken out of a bear flag that formed in July and August off of the decline from its April highs. ANF is also consolidating below its broken trend line from the 11/08 lows (see dashed line) and volume is picking up which indicates sellers are overwhelming buyers. I suggest we initiate short positions now or on any strength in the stock. We'll use stop of $38.40. Our targets are $33.00 and $31.50.

Current Position: Long October $34.00 PUT, entry was at $2.10

Entry on August 25, 2010
Earnings: 11/11/10 (unconfirmed)
Average Daily Volume: 3.5 million
Listed on August 24, 2010

Apple, Inc - AAPL - close 240.28 change -2.61 stop 256.50

Target(s): 240.00 (hit), 233.00, 226.00
Key Support/Resistance Areas: 266, 258, 256, 246, 240, 231, 235
Current Gain/Loss: +10%
Time Frame: Several weeks
New Positions: Yes

8/26: AAPL gapped higher at the open today and filled its gap lower from Tuesday as I suspected in yesterday's updates. The stock was immediately sold the entire day and closed more than $5 off of its high. Sellers are clearly overwhelming the buyers right now. Our targets are in the right place and AAPL could hit them fast if we get a sell off in the broader market. Be ready to take profits or tighten stops to protect them.

8/25: If the broader market bounces here AAPL will most likely rally up to fill the gap down from yesterday. But I think bounces will be short lived so I suggest we be patient and be ready to take profits when AAPL approaches our targets.

Current Position: Long October $230.00 PUT, entry was at $6.90

Entry on August xx
Earnings: 10/21/10 (unconfirmed)
Average Daily Volume: 23 million
Listed on August 14, 2010

FASTENAL Co. - FAST - close: 45.49 change: -0.41 stop: 50.40

Target(s): 44.80, 43.50, 41.00
Key Support/Resistance Areas: 50.00, 48-47, 200-dma, 40.00
Current Gain/Loss: +14%
Time Frame: 3 to 4 weeks
New Positions: Yes

8/26: FAST gapped higher today as well but the strength was sold into the entire day. Our first two targets are the primary targets where I suggest taking profits, or tightening stops to protect them, especially if the stock heads lower prior to bouncing.

8/25: FAST closed down despite a rally off of the lows in the broader market. This is relative weakness and when things turn back down FAST should approach our targets quickly.

8/24: Our short positions were triggered at $46.50 in FAST this morning. The stock is well below its 200-day SMA and may bounce to retest it from below. This may provide another entry point. I've added $44.80 as a near term target and is an area to consider taking profits or tightening stops to protect them.

Current Position: Long November $45.00 PUT, entry was at $2.50

Entry on August 24, 2010
Earnings Date 10/12/10
Average Daily Volume = 839,000
Listed on August 19, 2010

NUCOR Corp. - NUE - close 36.38 change -0.30 stop 40.55

Target(s): 36.05 (hit), 35.25, 31.90
Key Support/Resistance Areas: 43.00, 40.30, 37.00, 35.00
Option Current Gain/Loss: +38%
Time Frame: 4 to 6 weeks
New Positions: Yes

8/26: Yet another stock that gapped higher and was sold into the entire day. NUE traded to $35.71 on Tuesday and if the stock heads down to this level it could be viewed as a double bottom and bounce. Readers may want to consider taking profits at this level or tightening stops to protect them.

8/25: NUE opened lower and quickly traded to our $36.05 target. Positions could have been closed at $1.55 which would have been a +60% gain. NUE printed another 52-week low and continues to look vulnerable so I stick with the plan and give this some time to work, but we may have to be patient.

8/24: NUE closed at a new 52-week low today and looks vulnerable. We now have a +33% gain so protecting profits is suggested. Ultimately NUE looks headed towards our $35.25 target but taking profits on the way is a good idea. I'm going to add $36.05 as an immediate target.

Current Position: Long October $35.00 PUT, entry was at $0.96

Entry on August 20, 2010
Earnings Date 10/21/10
Average Daily Volume = 2.9 million
Listed on August 19, 2010

Occidental Petrol. - OXY - close: 72.23 change: -0.67 stop: 78.51

Target(s): 71.60, 70.25, 67.50
Key Support/Resistance Areas: 75-74.00, 70.00, 65.00
Current Gain/Loss: +9%
Time Frame: Several Weeks
New Positions: Yes, on strength

8/26: OXY looks weak but it also looks oversold. $71.60 is prior resistance level from June 2009 and a prior support level from August 2009. That's why I have this target. Exiting positions at this level should produce a +20% gain. I've also added $70.25 as a target which is a support area from August 2008 and also happens to be the stock's 100-week SMA. I'm cautious on squeezing too much out of an oversold stock and suggest readers be defensive to protect gains.

8/25: Finally, OXY triggered our entry. I suggest we keep our target relatively tight on this trade and exit positions or tighten stops to protect profits if OXY hits our first target of $71.60. This is just above the 52-week low and the stock could bounce. I have also heard many of the talking heads on TV mention OXY as a buy, however, the sellers are in control right now. But the lower the stock goes it may interest buyers and I don't want to caught shorting a potential bottom.

8/23 & 8/24: We are waiting for the adjusted strategy from the weekend to trigger our entry. All of the comments below remain the same. 8/21: There is no change from Thursday's update. Oil and the oil sector continue to look weak. Odds are growing that OXY will breakdown. We have two entry points. One possible entry is at $77.50. Another is at $73.50. If triggered at $73.50 we'll change the stop loss to $78.51. Plus we'll change the targets to $70.25 and $66.00 if triggered on the breakdown.

Current Position: Long OXY November $70.00 PUT, entry was at $3.45

Entry on August 25, 2010
Earnings Date 10/21/10 (unconfirmed)
Average Daily Volume 4.4 million
Listed on August 7th, 2010

Procter & Gamble - PG - close: 59.54 change: -0.14 stop: 63.26

Target(s): 59.50 (hit), 59.20, 58.75, 58.05
Key Support/Resistance Areas: 59.00, 61.00
Current Gain/Loss: -15%
Time Frame: 2 to 3 weeks
New Positions: Yes, with November options

8/26: Nothing much has changed with PG. The stock refuses to breakdown. We are near breakeven on the trade and I still suggest looking for an exit to prevent accelerating time decay. If we get a sell-off tomorrow that will be our opportunity. Otherwise, I suggest we close this position at the close. I've added $58.75 as a target on sell-off. This is near prior resistance from September and October 2009.

8/24 & 8/25: My comments from below remain the same. I suggest readers begin exit PG to prevent time decay from accelerating. Another strategy would be to roll current positions into the November strikes and give this time to work.

8/23: PG has a lot of support at $59.00 and our options will begin to suffer from time decay. PG looks like it has further room to the downside but time is not on our side. As such, I suggest readers begin to look for an exit using the targets listed above. Another strategy would be to roll current positions into the November strikes and give this time to work.

8/19: Shares of PG have been forming a top for over eight months now. If the stock breaks down under support near $59.00 it would forecast a drop toward $54.00. Readers can choose to open positions near $61-62 but I would prefer to see a breakdown under $59.00. Please note I have adjusted our exit targets to $58.05 and $55.25. FYI: If you launch new positions I would buy the Novembers.

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