Option Investor

Daily Newsletter, Thursday, 9/30/2010

Table of Contents

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

Market Wrap

Stellar September Ends With A Whimper

by Todd Shriber

Click here to email Todd Shriber
Not even some decent economic news could keep stocks from booking losses today, but with September now in the books it should be noted that stocks did notch their best September performance since 1939. All three major U.S. indexes suffered small losses with the S&P 500 and the Nasdaq each losing about 0.3% on the day.

Stats Table

Obviously today is Thursday and that means another jobless claims update. Initial claims fell by 16,000 to 443,000 and that more than reverses last week's uptick. The four-week moving average dropped by 6250 claims to 458,000. Continuing claims data was also fairly positive as that number dropped by 83,000 to 4.489 million. Continuing claims have dropped by 1.553 million, or almost 26%, from a year earlier. Another slightly positive sign may be that the number of folks receiving extended unemployment benefits fell last week by 293,000 to 4.879 million. Still, that number is up 22.3% in the past year.

Unemployment Claims

The Bureau of Economic Analysis also chimed in with a positive revision to the second-quarter GDP estimate, revising that number upward to growth of 1.7%, barely higher than the previous reading of 1.6%. That is still well below the original estimate of 2.4% and the second-quarter number represents the third-slowest quarter of growth since the fourth quarter of 2009.

On the bright side, business investment contributed 0.13% to the growth and consumer spending chipped in 0.16%. Bottom line: A small upward revision is better than a negative revision.

GDP Chart

While the economic news provided only minimal help to equities, oil was sure on the receiving end of some bullish trade. NYMEX-traded crude for November delivery jumped 2.7% to $79.97 a barrel, the best closing price in seven weeks. Today's rally in oil also may have been some follow through on Wednesday's news from the Department of Energy that oil inventories declined by 500,000 barrels last week. Friday's Institute for Supply Management manufacturing number could be the next catalyst to push oil above resistance at $80.

Oil Chart

In stock-specific news, Caterpillar (CAT), the world's largest maker of construction and mining equipment, was the biggest loser in the Dow today, tumbling 1.64% after leading the blue chip index with a gain of over 20% in September. The biggest news on Caterpillar today was the company's announcement that it will raise product prices as much as 2% next year.

As I have lamented many times before when talking about Caterpillar, the company's products, new or used, are not cheap to begin with and this is one shining example of a company that would not raise prices if it was not sure it could still move product at those elevated price points. In other words, this should have been good news for the stock.

In some regions, Caterpillar will raise prices by as much as 6%, but the stock still slipped on volume that was almost 4 million shares above the daily average. There have been a few reports out recently questioning the fact that Caterpillar is within striking distance of its all-time high set at the height of the commodities boom a couple of years ago. For what it is worth, Credit Suisse recently slapped a $95 price target on Caterpillar and if you like point & figure charts, you will like the fact that Caterpillar's point & figure says the stock is going to $113.

Caterpillar Chart

American International Group (AIG) was back in the news today. The former Dow component jumped by more than 4% on news that the company is drawing closer to ending its relationship with the Treasury Department and that the company's plan to do so may cut the cost of the government's bailout package by 50% to less than $50 billion.

The plan to convert Treasury's preferred shares in AIG to common stock could net a profit of $16.5 billion compared to a previous estimate that called for a loss of $45 billion, Reuters reported. Based on an actual cash cost of $47.5 billion, the Treasury Department's breakeven price on AIG shares is around $28.70, according to Reuters. That is more than $10 below where the shares closed today.

Of course the rub is that if AIG reverses its recent bullish ways and starts to decline, that would weigh on Uncle Sam's profits. Making it even harder to assess the government's profit potential here is the fact that the Treasury Department will not start selling its AIG stake until 2011.

AIG executives are touting the repayment plan as a sign of the company's strength and I heard someone on CNBC make an interesting point about AIG earlier this week. Paraphrasing, the gentleman said that for years AIG was an excellent stock and the company was brought to the brink by a small group of people that represented only a small part of the company's business.

That could mean AIG will once again be a solid name. On the other hand, the company is having to part with some attractive assets to raise cash and the overhang from the government selling the stock will probably depress AIG's share price once those share sales start. Uncle Sam is just like any other trader or investor: He wants the best price and is willing to wait to get it.

Ongoing government sales of Citigroup shares have depressed that stock's price to some degree and that scenario could play out again with AIG. Remember, the government is not hasty about selling its stakes in these companies either. Citi was 27% owned by the government in November 2008 and that stake is 18% today, according to the Wall Street Journal. Taking almost two years to dump 9% is certainly a slow process when the government is involved.

AIG Chart

There were plenty of headlines after the market closed as well. I will start with the less marquee name that is seeing some unusual after-hours action. Gymboree (GYMB), the specialty retailer that focuses on apparel for kids, is trading higher by almost 21% as of this writing after the company said it is exploring a sale. The Wall Street Journal is reporting that Gymboree is looking for a private equity buyer and that the company's bankers are weighing interest from potential bidders, though the auction process has yet to commence.

Gymboree Chart

The big after-hours news has to do with Dow component and tech titan Hewlett-Packard (HPQ) and no, it does not involve another acquisition for the world's largest computer maker. HP announced that Leo Apotheker will become the company's new CEO. This is a curious choice to say the least as most analysts and investors that closely follow HP were expecting the company to select an internal candidate.

The market did not react positively to announcement as the shares are down more than 3% as of this writing. There might be something to that negative reaction. Apotheker, 57, was most recently the CEO of SAP (SAP), the German software giant. He was appointed to that post in April 2008, but lasted less than two years on the job.

Pehaps the biggest executive news out of HP is not the hiring of Apotheker, but the appointment of Ray Lane to the roll of non-executive chairman. Lane is well-known in Silicon Valley as he is partner at the venture capital firm Kleiner Perkins. Lane joining HP may be the latest episode in what is becoming an interesting little spat between HP and rival Oracle (ORCL).

Lane helped Oracle deal with a big accounting scandal a while back, but Oracle founder and CEO Larry Ellison still sent Lane packing ten years ago. Of course, Oracle is where former HP CEO Mark Hurd now calls home.

Hewlett-Packard Chart

Looking at the charts, anyone that missed the September rally may be hoping for the S&P 500 to dip all the way back to 1100, but I think a down move, if it happens, will not be that dramatic and merely take the index back into the 1120-1130 range. The S&P 500 closed below 1150 today, so it needs to reclaim that level before it can go after resistance at 1170.

S&P 500 Chart

Not much has changed on the Dow as the index has been chopping around this week. Resistance remains in place at 10,870 and 10,900. The Dow could easily move higher if constituents beyond Caterpillar and DuPont (DD) would lend a hand.

Dow Chart

The 2380 area continues to be a thorn in the side of the Nasdaq. If the index can move beyond that level, next resistance is 2425 and then the April highs, but I get the sense tech may be a bit vulnerable to a small pullback after stocks like Amazon (AMZN) and Apple (AAPL) moved up in almost straight-line fashion in September.

Nasdaq Chart

The Russell 2000 could not build on Wednesday's move to a three-month high, but the index did close above the all-important 675 level on Thursday, a bullish sign. Watch for 700 and 725 to act as resistance and 650 to be support.

Russell 2000 Chart

September defied its historical precedent and now it is October's turn to do the same. Beyond earnings season, which starts in a couple of weeks, and the obvious catalysts that come from economic data, politics will play a heavy hand in October's performance. If it becomes more apparent as we get deeper into October that a change in power is coming at least in the House, then stocks should move higher. Keene should be back with you next Thursday.

New Option Plays

Stocks Close Near Monthly Highs

by Scott Hawes

Click here to email Scott Hawes
Editor's Note:
Good evening. It appears the broader market is on the verge of a much needed healthy pullback, but we need to see follow through in the coming days to take advantage it. The market left us hanging today as the end of Q3 window dressing prevented a larger decline. The economic calendar is stacked tomorrow so this will likely create a volatile trading session which could cause a break higher or lower. Regardless of what happens, the odds of a correction (which I think will get bought) at this point far outweigh any significant breakouts. Even if we break higher tomorrow I think the spike will be short lived and will provide better opportunities to initiate short positions at a better price. In light of the economic data due out tomorrow, I do not have new plays to release tonight. We have positions on both sides of the market to take advantage of a bigger move. Please email me with any questions/comments.

Trade Idea:
QQQQ - I like short positions in the NASDAQ 100 ETF - QQQQ. I believe there will be a rotation out of larger cap stocks into smaller cap stocks as Q4 takes shape. The immediate target is the $47 area which is about -4% lower than current levels.

In Play Updates and Reviews

Nice Winner Closed

by Scott Hawes

Click here to email Scott Hawes

Editor's Note:
We had solid movement today in our positions. RIG was closed for a healthy +86% gain. Short positions were opened in DIA and PNC. Our portfolio is leaning more bearish than bullish so we are looking to take advantage of a healthy market correction.

Current Portfolio:

CALL Play Updates

Petroleo Brasileiro - PBR - close 36.27 change +0.55 stop 33.70

Target(s): 37.40, 38.65
Key Support/Resistance Areas: 39.00, 37.50, 36.60, 34.00
Current Gain/Loss: +8%
Time Frame: 1 to 2 weeks
New Positions: Yes

9/30: PBR gapped higher, sold off, and surged higher into the close as the broader market headed lower. The stock has now broken and closed above its primary downtrend line from its December highs and is above all of its moving averages. Today's rally off of the stock's lows is encouraging but I am concerned of a broader market correction. The remainder of my comments below remain the same.

9/29: PBR is hanging tough but I am concerned of a broader market pullback, which readers may want to consider as a buying opportunity. I believe our stop is in the right place but we may have to exhibit some patience if there is a pullback. Tighter stops could be considered in the $34.35 to $34.65 area.

9/28: PBR consolidated yesterday's gains, closing marginally lower. We are looking for the short interest to unwind which should cause the stock to spike higher. Be prepared to take profits or tighten stops to protect them as our target approach.

9/25: PBR gapped lower on Friday which improved our entry price into the position. All reports indicate the secondary offering was a success and was priced near the market. We are looking for the short interest to unwind which should cause a quick pop in the stock. Our stop is in place if we are wrong.

Suggested Position: Long November $37.00 CALL, entry was at $1.25

Entry on September 25, 2010
Earnings 11/11/2010 (unconfirmed)
Average Daily Volume: 13 million
Listed on September 23, 2010

STEC, Inc. - STEC - close 12.45 change -0.27 stop 12.05

Target(s): 14.15, 14.65
Key Support/Resistance Areas: 14.80, 14.15, 13.45, 12.15
Current Gain/Loss: -34%
Time Frame: 1 to 2 weeks
New Positions: Neutral (only with a tight stop)

9/30: STEC bounced on an upward trend line that started on 8/31 and closed near its rising 20-day SMA. However, there is no doubt our position is in trouble, especially if the broader market corrects. STEC has to deal with resistance at $13.40 and its declining 50-day SMA. Readers should use caution and consider exiting the trade on strength if our stop is not hit first.

9/28 & 9/29: STEC has pulled back from big gains late last week. We may need to exhibit patience as the broader market determines its next direction. I like new positions at current levels.

9/25: The storage sector has been beaten down and is due for a comeback if the broader market cooperates. STEC bounced hard off of its 20-day SMA on Thursday and is forming an ascending triangle on its daily chart. I suggest readers initiate long positions if STEC pulls back to $13.10 or breaks higher to $13.50, whichever occurs first. We are targeting a move up to its congestion areas from April and June. If triggered at $13.10, our profit target on option positions is +50% to +75%.

Current Position: Long November $14.00 CALL, entry was at $0.96

Entry on September XX
Earnings 11/03/2010 (unconfirmed)
Average Daily Volume: 1.8 million
Listed on September 25, 2010

iPath S&P 500 VIX ST Futures - VXX - close 17.29 change +0.36 stop 16.23

Target(s): 17.55, 18.45, 19.25
Key Support/Resistance Areas: 17.50, 19.75, 20.60
Current Gain/Loss: +8%
Time Frame: 1 to 2 weeks
New positions: Yes

NOTE: I view this as an aggressive trade so small position size is recommended. Long VXX is a bearish play on equities, however, it is listed as long play because we are long the underlying instrument.

9/30: As the market spiked higher this morning volatility never really budged which was a signal the spike could fail, and it did. The question now is whether or not there will be follow through lower in the coming days. I believe there will be but I also think trading could be choppy which may fake traders out of positions. If we are patient our targets should be reached as the market is need of healthy correction. I suggest readers use further spikes in VXX as opportunities to take profits or tighten stops to protect them. My primary targets are $18.45 and $19.25. Our stop is in place.

9/29: Volatility broke an intraday downtrend line but still need to get above Wednesday's highs, which will come if there is broader market weakness. My comments below remain the same.

9/28: Volatility carried into this morning but reversed lower as the bulls stepped in pushing stocks back toward their highs. I want to add a target of $17.55 which should be considered as a place to take profits or tighten stops to protect them. We have a tight stop which will most likely get hit if the broader market continues higher in the coming days.

Current Position: Long November $18.00 CALL, entry was at $1.25

Entry on September 22, 2010
Earnings N/A (unconfirmed)
Average Daily Volume: 21 million
Listed on September 21, 2010

PUT Play Updates

Archer Daniels Midland - ADM - close 31.92 change -0.65 stop 33.20

Target(s): 32.20 (hit), 31.50, 31.00
Key Support/Resistance Areas: 33.50, 31.00, 29.80
Current Gain/Loss: -0.00%
Time Frame: 1 to 2 weeks
New Positions: Yes

9/30: ADM collapsed -2% today and has now made a lower high, which was confirmed with a lower low today. The stock lost -2% and I believe there could be more downside to come, especially if the market corrects. ADM often moves without the broader market so it could correct anyway. Our position is back to breakeven but I'm looking for a small gain. Our remaining targets are $31.50 and $31.00 (raised 15 cents to account for the rising 50-day SMA). I think we will see these levels in the coming days. Readers should continue to look for an exit as time decay is starting to affect our option premium.

9/29: ADM turned lower right where it should have today. I am looking for more downside especially if the broader market pulls back which will likely determine how far this goes. I suggest exiting on weakness in the stock as time decay is going to start to eat away at our premium. $33.20 is our stop. Readers should use caution. My comments below remain the same.

9/28: ADM is testing the backside of a broken intraday upward trend line and a downward trend line (which remains in tact). This is the logical spot for the stock to head lower and make another lower low. $32.20 is still a valid target, although $31.50 (raised 20 cents) looks very doable if the broader market pulls back.

Current Position: Long October $32.00 PUT, entry was at $0.82

Entry on September 20, 2010
Earnings: 11/2/2010 (unconfirmed)
Average Daily Volume: 6 million
Listed on September 18, 2010

SPDR DJIA ETF - DIA - close 107.91 change -0.40 stop 110.55

Target(s): 106.55, 105.40
Key Support/Resistance Areas: 112.00, 110.00, 107.30, 106.40, 105.00
Current Gain/Loss: +20%

Time Frame: 1 to 3 weeks
New Positions: Yes

9/30: Well, I guess sticking with the higher entry was the right call, but nonetheless, I still like our entry as we have already gained +20% on our position. My comments from the play release on 9/28 remain the same.

9/29: Let's lower the trigger to $108.80 in DIA. My comments below have not changed.

9/28: Stocks have been flowing into large caps and I believe they are due for a decline after the quarter ends which is Thursday. I also think the broader markets may see a false breakout tomorrow which will head fake late comers to the party into long positions. I suggest readers enter long positions if DIA trades to $108.85 (updated), which is near the highs DIA printed after the flash crash before the DJIA plunged more than -1,000 points. If triggered, our profit targets on options positions are +50% to +75%.

Current Position: Long November $105.00 PUT, entry was at $1.75 $1.70

Entry on September 30, 2010
Earnings: N/A (unconfirmed)
Average Daily Volume: 6.5 million
Listed on September 25, 2010

PNC Financial - PNC - close 51.91 change +0.10 stop 54.62

Target(s): 49.50, 48.75, 47.25
Key Support/Resistance Areas: 54.50, 53.50, 50.50, 49.50, 48.75, 47.00
Current Gain/Loss: +4%
Time Frame: 1 to 2 weeks
new Positions: Yes

9/30: We are long November $48 PUTS as of today's open. We are looking for a $2 to $3 move lower in the stock. Our stop is above resistance in the $53 to $54 level. My comments below have not changed.

9/29: Financials continue to trade terrible and PNC looks ready for quick spike lower as the broader market pulls back. The stock has formed a bear flag over the past 5 days and is trading below its 20-day SMA. I suggest readers initiate short positions at current levels. The primary target is $48.75 which is a $3 move lower. If reached, the profit target on our option position is approximately +65%. I suggest keeping a loose initial stop on the position to account for volatility as the quarter winds down.

Current Position: Long November $48.00 PUT, entry was at $1.26

Entry on September 30, 2010
Earnings: 10/20/2010 (unconfirmed)
Average Daily Volume: 5 million
Listed on September 29, 2010

Charles Schwab - SCHW - close 13.90 change -0.05 stop 14.42

Target(s): 13.45, 13.10, 12.85
Key Support/Resistance Areas: 14.10, 13.35, 13.05, 12.65
Current Gain: -40%
Time Frame: 1 to 3 weeks
New Positions: Yes

9/30: SCHW held up relatively well today and closed down only 5 cents. The good news is that our stop is in the right place as SCHW traded up to $14.40 and collapsed -50 cents (-3.4%), closing near its lows of the day. This could be the start of a multi-day decline which should get our position back in positive territory.

9/29: SCHW backed off of its 50-day SMA and closed down -1.70% on the day. The stock now needs break down through its 20-day SMA which should catapult the stock towards our first target. If the broader market corrects it should easily happen. There were also more than 5,000 March 2011 puts purchased at the $13 strike today so it appears someone with deep pockets thinks the stock is due for a decline. We just need it to happen sooner rather than later.

9/28: SCHW traded up to its 50-day SMA today and closed just below it. We are very close to being stopped out which will probably happen if there is broader market strength. I've adjusted the targets and suggest readers begin to exit positions on weakness if the stock turns lower from here.

Current Position: Long November $13.00 PUT, entry was at $0.50

Entry on September 23, 2010
Earnings: 10/14/2010 (unconfirmed)
Average Daily Volume: 11 million
Listed on September 22, 2010


Transocean Ltd - RIG - close 64.29 change -0.84 stop 63.90

Target(s): 62.95 (hit), 64.40 (hit), 65.65 (hit), 66.50
Key Support/Resistance Areas: 55.50, 58.25, 63.90, 64.90
Final Gain/Loss: +86.67%
Time Frame: 2 to 4 weeks
New Positions: Closed

9/30: Per last night's updates RIG traded to $65.65 which is where we took profits for a healthy +86% gain. The stock has had an incredible +18% run since it broke higher on 9/10. The candle pattern printed today is called a dark cloud cover which indicates a decline is imminent so I urge readers who still have positions to protect profits. RIG is probably another buy in the $60 to $62 area.

9/29: RIG surged another +3% today and it is time to fiercely protect profits as we currently have a +70% gain. Let's move the stop all the way up $63.90. I've also added a target of $65.65 which is where I highly suggest taking profits or tightening stops to protect them.

Current Position: Long November $65.00 CALL $4.20, entry was at $2.25

Annotated chart:

Entry on September 13, 2010
Earnings 11/3/10 (unconfirmed)
Average Daily Volume: 8 million
Listed on September 11, 2010