Option Investor

Daily Newsletter, Monday, 8/6/2012

Table of Contents

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

Market Wrap

Busy Weekend

by Linda Piazza

Click here to email Linda Piazza
Market Internals


Last night, Asian bourses rocketed higher while our futures dallied a distance behind them. The Nikkei 225 gained 2 percent; the Hang Seng, 1.69 percent; the Straits Times, 0.67 percent; and the Shanghai Composite, 1.04 percent. Our futures started higher with them but then dawdled behind with only small gains in the pre-market session. After Friday's monster rally, would this day be a day for our markets to take a rest? That's an often-seen pattern of a small-range day following a large-range day. Was the buying frenzy exhausted?

Thirty minutes before the market opened, FOMC Chairman Ben Bernanke spoke via recorded video to the 32nd General Conference of the International Association for Research in Income and Wealth. Equity futures did not appear to react to this recorded presentation. Whether that was another sign that market participants were too exhausted or wary to slice and dice the speech or just a measure of the speech's tight focus on economic measurement tools remained to be seen.

At first, indices shot higher on the cash open. Their early morning doldrums seemed just that, something soon shaken off in the bright sunshine of day. By the end of the day, many had closed at three-month highs. However, that doesn't tell the entire story.

Round-number and psychological resistance had been tested on many indices. Sellers were waiting, and buyers were indeed tired. They could push prices through round-number resistance in some cases, but they couldn't make them stick. The SPX ended the day at 1394.23; the Nasdaq, 2989.91; the Dow, 13117.51; and the RUT, 794.35. All climbed, but the candles produced today were indeed small-bodied candles with upper shadows or wicks. Indecision reigned.

The dollar was certainly exhausted, although it bounced off its low by the end of the day. Crude benefited from the weak dollar, as did other commodities such as gold.

Monday's Developments

If exhaustion seemed a possibility in the pre-market hours Monday morning, executives at Knight Capital (KCG) probably suffered more than the rest of the market participants. After losing most of its capital in a trading glitch last week, the software and market-making firm scrambled this weekend to find a buyer or rescuer by today's open.

A group of investors that includes private equity firm Blackstone Group, Chicago market-maker Getco (an automated trading firm backed by General Atlantic), brokerages TD Ameritrade Holding Corp. and Stifel Nicolas, and investment banks Jefferies Group Inc. and Stephens Inc. reportedly received shares of convertible preferred stock in exchange for a capital lifeline of $400 million. After the 2 percent preferred shares are converted into common stock, the rescuers will own about 70-75 percent of Knight. The deal was termed "customer financing" by the media since some of those rescuers were also clients.

While some market participant may have breathed a sigh of relief, Knight's existing shareholders likely didn't since they lost in the deal. The company survived, at least long enough to determine if it would be best to split it up into pieces, as some speculate will happen. Many market watchers thought either this step or an outright purchase was necessary before KCG could open its doors this morning. Additionally, KCG had a big bill to pay back to Goldman Sachs Group Inc. by the close of business today. Last week, when Knight could not get the erroneous trades busted, GS bought Knight out of trading positions acquired due to that computer glitch. To underline the urgency or fear associated with a breakup of Knight, the cash infusion was more than the company's $398 million value as of August 3.

Some potential buyers of KCG stepped back when U.S. securities regulators announced on Friday that government attorneys were investigating whether Knight failed to adhere to a new rule. That SEC market access rule requires brokers to institute risk control systems that protect markets against algorithmic computer trading programs gone rogue. One potential buyer admitted that it didn't have time to perform due diligence and determine the risks associated with the investigation.

Iran was also busy all weekend and could not "give it a rest." An Iranian warning that any Western interference in Syria would lead to "consequences" for Israel was backed up by a reported test firing of a missile. Iran characterizes the missile as capable of hitting both land and sea targets.

We're all exhausted by our attempts to trade through market shocks, both upside and downside, delivered by news out of Europe. Determining what will or should or has just happened proves difficult. Today, we woke to competing headlines: "Mario Draghi Cannot Save the Euro," a Bloomberg opinion piece by Simon Johnson, author and a professor at the MIT Sloan School of Management, and "Venetian cunning of Draghi-Monti masterplan may save the euro for now," an Ambrose Evans-Pritchard article found in The Telegraph. Evans-Pritchard is International Business Editor of The Daily Telegraph. He describes the current situation as a standoff. Spain refuses to sign the required memorandum and request a full sovereign rescue from the EFSF, the EU bailout fund, until Spain knows what the exact terms will be, and the ECB refuses to help until Spain does so. Although Evans-Pritchard acknowledges that the Draghi plan can still implode, he characterizes the ECB President Draghi's moves over the last couple of weeks as a radical shift, irrespective of the Bundesbank's Jens Weidmann's "ideological preening." However, Evans-Pritchard is no fan of the eurozone. Hence the "for now" part of the title. He calls the eurozone a "failed monetary union." Simon Johnson obviously disagrees with the potential of the Draghi plan and thinks it will be that plan that will increase the risk that the eurozone will fail.

I don't know the relative importance of these two commentators, but the disparate headlines illustrated the difficulty the average retail investor has in determining what the true situation and risks might be. Whatever Johnson's and Evans-Pritchard's views, the stalemate appears to continue, although Spanish investors reacted today with a little more hope than a standoff would warrant, making me alert to the possibility that there's something we don't yet know about the situation.

Today, Germany's central bank reaffirmed to Dow Jones Newswires its opposition to buying government bonds on the secondary market. Taking a different stance, the German government today held a press conference, stressing the belief that "politicians have primacy in the euro crisis" and that ECB President Draghi has supported that view. Under those conditions, the government appear to sign on to the plan to buy bonds, as long as countries needing help would be required to apply for that help and agree to the conditions that would be set.

At this point, it's difficult to sort through articles and ascertain if there's any new information or change in stance or rather just a restatement of prior information. Other headlines popped up, other officials spoke. I am preparing my trades to withstand the volatility we've been having at the open many days, and I urge you to do the same. One danger for us options traders is trades that go wrong before options trading opens and we can react to hedge our trades.

For now, Spanish bond yields are demonstrating at least a willingness on the part of market participants to take a wait-and-see approach. Those yields have pulled back from their pre-Draghi-plan highs, although remaining well above complacency levels. Today, yields on ten-year Spanish, Italian and German bonds dropped, and the yields on the Spanish bonds closed at 6.738, down 0.11000 or 1.61 percent. Equities climbed, with the FTSE 100 adding 0.37 percent; the DAX, 0.77 percent; the CAC 40, 0.81 percent; and the IBEX 35, up a whopping 4.41 percent.

Best Buy (BBY, 19.99, up 2.35 or 13.32 percent) founder Richard Schulze grew tired this weekend, too. He grew tired of watching the company's direction. Schulze announced to the board his intention to offer $24-26 per share for all the shares, amounting to an offer for as much as $8.8 billion. That was a premium of 36-47 percent to Friday's closing price. His letter mentioned that he will contribute $1 billion of his own money and that several former senior executives and private equity firms might be interested in participating in the purchase. He mentioned his deep concern that any delay in accepting his offer would result in a loss of talent and value. He wants to take bold action. S&P cut BBY's ratings to junk status as a result of the buy-out offer, saying the company could face an added debt burden as a result of that offer.

Story stocks today included Facebook Inc. (FB, 21.92, up 0.83 or 3.94 percent). A Bloomberg article detailed the profits raked in by European investors who bought put warrants on FB. Warrants are usually sold by banks, not traded on an exchange.

Apple (AAPL, 622.55, up 6.85 or 1.11 percent) made news after the close. The company will not include a pre-packaged YouTube app in its new mobile software. This is a change from the past, when this app was among those pre-loaded onto AAPL's mobile devices. As this report was typed, the stock was down to $621.80, down $0.75 from the closing price.

Tyson Foods (TSN, 14.17, down 1.23 or 7.99 percent) reported earnings today. The company reported Q3 earnings of $0.50 per share, excluding items, below the consensus of $0.55 per share. TSN lowered guidance for FY2012, mentioning the drought and subsequent high cost of grains as a pressure that will likely continue until 2013. The company kept earnings for 2013 in line with expectations, however.

EBay (EBAY, 44.77, up 0.27 or 0.61 percent) announced eBay Now in a limited area and said it is testing a same-day delivery service. It will do so in conjunction with big retailers such as BBY, Target and Toys "R" Us, Inc. in a move to compete with Amazon (AMZN, 233.99, down 0.98 or 0.42 percent). EBAY gained another $0.19 in afterhours trading.

Leap Wireless (LEAP, 5.52, up 0.30 or 5.75 percent) reported after the close. Expectations were for a loss of $0.50 a share with revenue of $836.80 million. Instead the company reported a loss of $0.54 a share. Immediately after the report, LEAP was down $0.74 from the day's close to 4.78, 13.41 percent off the day's close, but had bounced a few cents as the report was edited.

Chesapeake Energy (CHK, 17.70, down 0.19 or 1.06 percent) also reported after the close. Analysts expected Q2 earnings of $0.08 a share with sales of $2.5 billion. The company disappointed on this score, with earnings at $0.06, but revenue was a beat at $3.39 billion. Production rose four percent quarter over quarter, and 15 percent year over year. As this report was prepared, the price was $18.18, up $0.48 or 2.71 percent from the day's close.

Subsidiaries of Standard Chartered PLC in New York and the U.K. made the kind of news they didn't want to make. Today, the New York State Department of Financial Services filed an order against the company, accusing the company of hiding transactions with Iran's government. They accused the company of carrying on this action for more than a decade through operations called "Project Gazelle," allegedly with the knowledge of bank executives.

In welcome news, a quarterly survey of senior loan officers released today indicated that U.S. banks were easing terms on auto and commercial real estate loans as well as credit cards. Mortgage loan officers responses shows that while demand for prime mortgages increased, lending standards did not change much and in fact tightened for "nontraditional" mortgages. At foreign banks, lending has been tightening. Of particular interest to us when looking at the RUT's chart in comparison to that of the other indices is that the survey showed that loan standards to small businesses didn't change much while they were being eased for medium- and large-sized companies.


If you've been reading my Monday articles for a while, you can skip this charting description and go straight to the charts. If you're new to my Monday Wraps, you might want to read it. I set up nested Keltner channels on my charts. It's a run-of-the-mill channeling system like the more familiar Bollinger Bands. As with those more familiar BB's, channel boundaries are often targets for upside or downside moves. They also mark levels where prices might find support or resistance on closes. When several channel lines converge, that potential resistance or support might appear stronger, just as it would if 20-, 50- and 100-sma's all converge in one spot.

For the benefit of subscribers, I mark potential upside and downside target/support/resistance levels with ovals, usually green for upside and red for downside. Orange ovals are sometimes used when the darker-colored ones would not allow for a clear examination of the next target. From now on, I will mention the nearest potential support or resistance level in the discussion on the chart, but not the further-out ones. They can be located on the charts if price breaks through the nearest levels on consistent daily closes. If an interpretation such as "support levels appear stronger than resistance, so up looks more likely than down" is possible, I'll tell you. Often we traders must be able to defend our trade against a move in either direction.

As with any type of potential support or resistance, those with profits should be protective of those profits as support or resistance is tested. If prices find support and climb, look to the next higher oval, even one just broken through, as potential resistance. Do the reverse when resistance is breached. Hopefully, this format provides you with the information you need without requiring all night to read as happens when I list each potential support or resistance level individually.

Annotated Daily Chart of the SPX:

It's fitting that we begin with the SPX since SPX 1400 was a much-watched and much hoped-for level today. The SPX never quite got there. The Keltner setup suggests that resistance on daily closes is strong near 1409-1414, too, but homage must be given to psychological, round-number and other resistance near 1400. An examination of the chart shows that the SPX was also testing small-channel Keltner resistance that has held on daily closes the last four market peaks, preventing the SPX from touching the top of the rising price channel the last three peaks.

It could again prevent the SPX from reaching higher, but that remains to be seen and, for now, it has held on another daily close. Sustained daily closes above that Keltner channel line target that 1409-1414 level, where resistance on daily closes appears stronger.

If the SPX is to establish a strong rally, it tends to find support on pullbacks on a rising (red) 9-ema. Bulls will want to see sustained support there on pullbacks. A failure to find support at the 9-ema on daily closes means that the SPX is not trending up as it does in its strongest trends. Furthermore, such action sets a potential downside target at the bottom of the rising channel.

We'll see in the next chart that the Dow's chart echoes the SPX's. However, the Dow's sister index, the Dow Jones Industrials, does not. Exhaustion could describe that chart, as the transports have been printing lower swing highs rather than higher ones. Today, the transports dropped 3.95 points rather than rising with other indices. Traditionally, the transports have been important in confirming price action, sending a warning when they don't. Therefore, we need to keep that non-confirmation in mind when interpreting the Dow's chart, and to some extent, the SPX's, too.

Annotated Daily Chart of the Dow:

Similar setup here. We see the same benchmarks--potential small-channel resistance that has held on daily closes for the last four swing highs, a marked next target at Keltner and then upper-channel resistance, potential support at the rising 9-ema now near 12980, and a price target at the bottom of the channel if that support doesn't hold on daily closes.

The Dow punched up to test that Keltner potential resistance and pulled back. The close marked closing high not seen since early May, but it left a long upper shadow on the candle, indicating that when all was said and done, sellers overwhelmed buyers at the end of the day. What happens next remains to be seen because all this proves as yet is that there was indecision today.

Ditto the NDX, showing that there perhaps has been some program buying and selling across the indices.

Annotated Daily Chart of the NDX:

The NDX faces psychological, round-number and small-Keltner-channel potential resistance, with a new upside target in a range near 2730 and then 2750 if it can break through that resistance. If the NDX instead pulls back, bulls want to see support found at the rising (red) 9-ema. Failure to find support there targets the bottom of the NDX's drawn-in rising price channel, just above 2600, where support might be found on daily closes. However, on some trips to the bottom of the channel, the NDX has dropped all the way to the small-Keltner-channel support before bouncing. Therefore, I would not consider an NDX breakdown confirmed unless the NDX were sustaining daily closes below about 2575. That small Keltner channel's lower boundary would probably get pushed that low on any declines. The next potential downside target is marked on the chart if that support should fail.

The RUT's chart looks nothing like those others. That fact sounds the same warning that the behavior of the transports does. We can't deny and nor should we ignore that these previous indices' prices have been contained in rising price channels, but that's not true of the RUT. It is possible to argue that the RUT has established a new descending price channel.

Annotated Daily Chart of the RUT:

For chartists, it's also possible to describe the RUT as trading in a narrowing triangle since late June. Either way, the upper trendline is the same, and the RUT attempted to break through it today. The RUT punched through the trendline but then fell back by the close, showing that it held as resistance, at least for today.

Like the other indices, the RUT has the siren of round-number and historical levels both beckoning and threatening to do it harm, too, with that level the 800-804 level for the RUT. Remember that it's possible to draw the RUT's price channel slightly differently.

If that resistance should repel the RUT more strongly than it did today, sending the RUT lower again, potentially strong support on daily closes converges near 785. The RUT would have to break strongly through that to set a new downside target, first near 767-774 and then at the next marked potential target.

With European markets momentarily reassured and sovereign bonds moving higher in Europe, the U.S. dollar has lost some of its safe-haven luster. The U.S. dollar drew back sharply on Friday and continued the decline today. However, by the end of the day, it had bounced slightly off approached support.

Annotated Daily Chart of the Dollar:

Although the various market relationships shift and cannot be used as market-timing tools, U.S. equities have lately mostly moved in opposition to the dollar's moves. The U.S. dollar approached potential price channel support today and then bounced. The Keltner setup suggests that it could drop further, at least toward 81.80, before it finds firmer support, but the dollar sometimes tends to follow trendline support more than Keltner levels, and today's candle shape is one often seen preceding reversals. Therefore, equity traders should be alert to the possibility that the dollar is finding support and will bounce. It bears watching. In contrast, those who want equity pullbacks should be aware that further drops in the U.S. dollar could be supportive of equity gains.

Volatility indices such as the VIX and RVX stayed low today, but both were showing some attempts at reversals by the close. Both are at levels from which they often reverse. Care should be taken in case that happens as a bounce in the volatility indices is often accompanied by declining equity prices.

In the mid-2000's, we saw seeming support levels for the volatility indices approached and then broken as volatility indices stayed low for prolonged periods. That is of course a possibility, but care is always warranted when they approach these levels.

Tomorrow's Economic and Earnings Releases

FOMC Chairman Ben Bernanke will speak in Washington, D.C., addressing the need for personal financial education. The prepared portion of his speech is usually released a few minutes before the speech, so expect volatility as the prepared portion is received and scrutinized if he has anything to say that might impact markets. A Q&A session is expected, and it's during those Q&A sessions that we often see the most volatility, however. In an election year, expect those from both sides of the aisle to try to elicit the chairman's support for their favored policies, but FOMC Chairman Ben Bernanke attempts to remain as politically neutral as possible.

Earnings have wound down with most important companies having reported. Tuesday's earnings will include CVS (BMO), Daewoo Shipbuilding & Marine Engineering Co. Ltd., EMR (BMO), ODP (BMO), and DIS (AMC), among others.

What about Tomorrow?

The SPX's 60-minute 9-ema may now be used as a benchmark. At the close this afternoon, that moving average was violated, but only by a small amount. Such moves at the beginning of the trading day or at the end are not always trustworthy, so that we would need to see sustained closes below that moving average to say that it has been violated. For now, let's consider it tested with the outcome slanting more toward weakness than strength. That could change by the time you wake.

Sixty-minute closes above the moving average mean that nothing has changed since Friday morning. Sustained 60-minute closes below it means the tenor has changed, and we must now consider that a possibility. Zigzags back and forth across it means the market participants are undecided.

Although I do not count too heavily on any short-term move right at the close as being predictive of the next day's action, the SPX has tentatively set a downside target near 1390-1391. That 1400 level is such a siren call, however, I could see prices just as easily being run back up to 1400 tomorrow morning. If we go on charts alone, 1390-1391 is more likely than 1400 first thing tomorrow morning, but we know it's not about what's logical or set up on intraday charts right now.

Annotated 60-Minute Chart of the SPX:

If the SPX jumps higher again and sustains 60-minute closes above that (red) 9-ema, that action suggests that this afternoon's late-day decline was meaningless and that tenor since Friday morning has yet changed. Declines below it that are strong enough to turn it lower again or also sustain closes beneath the smallest Keltner channel's lower boundary suggest waning strength. Such closes set the next downside target, marked on the chart. If the SPX begins zigzagging back and forth across that 9-ema, the moving average loses its relevance in predicting next direction until the SPX again establishing a pattern of finding either support on climbs or resistance on declines at that moving average.

On upside breakouts sustaining values above the top Keltner channel line, look to the daily chart for next potential targets.

Again, the Dow's setup appears similar to the SPX's.

Annotated 60-Minute Chart of the Dow:

The Dow violated that 9-ema more severely at the close than did the SPX and indeed almost reached the downside target analogous to the SPX 1390-1391 one. Bulls want to see the Dow jump right back up above that 9-ema early tomorrow morning and sustain 60-minute closes above a rising 9-ema and the further potential resistance grouped just above it at the marked highest orange oval. If bulls get that wish, they can then look to the upper Keltner channel target marked on the chart as a potential next resistance level, too. If the Dow sustains 60-minute closes at new breakout levels above that upper Keltner channel line, look to the daily chart for next upside targets.

However, the Dow's behavior more clearly signals pullback, and that 9-ema and other grouped lines converging at the top orange oval could now serve as resistance on 60-minute closes. If the Dow fails to hold both the 9-ema and the lower Keltner channel boundary near 13100 on 60-minute closes, look to the next lower target marked on the chart as a downside possibility. Additional lower potential targets are also marked if succeeding targets are breached to the downside.

The NDX's setup looks similar to the others, except that the NDX hit the upper Keltner channel boundary by midday today, and it did hold at the 9-ema at the close.

Annotated 60-Minute Chart of the NDX:

The NDX tested breakout levels today. So far, that resistance held on 30-minute closes. If the NDX can maintain 60-minute closes above the breakout zone marked by the top orange oval tomorrow morning for more than a couple of hours, look to the daily chart for next potential upside targets. If, instead of climbing or after attempting a climb, the NDX pulls back, bulls want to see the NDX finding support on 60-minute closes somewhere in the 2680-2690 zone. If the NDX can't maintain closes above that potential support zone, it sets a next downside target at the level marked by the top red oval.

The RUT has appeared weaker than the other indices on the daily chart, but it, like the NDX managed to hold at the 60-minute 9-ema's support. Let's look at similarities and differences on the intraday chart.

Annotated 60-Minute Chart of the Russell 2000:

As with the other indices, the RUT has broken out of one Keltner channel and set a potential upside target at the top of the next-wider one. Intervening between that Keltner channel and the current RUT price, however, is potential trendline resistance now just above 800. While other indices flirted quite a long time with their round-number levels or even surpassed them for a time, as in the case of the NDX, the RUT doesn't appear to have approached its 800 level as closely as others approached their round-number and psychologically important levels when it's viewed on this chart.

If the RUT finds resistance too strong at this or another level, bulls would like to see it find support on 60-minute closes from about 790-794. If it falls through that potential support zone on consistent 60-minute closes, it sets the next potential downside target marked by the top red oval.

As far as I'm concerned, resistance held today, with this resistance generally at the top of the smallest Keltner channel on most charts as well as at round-number and psychologically important resistance. The SPX, Dow and NDX indeed produced the kind of small-bodied candles with upper wicks that suggest that buyers were a bit exhausted today without enough strength to overcome waiting sellers.

That doesn't mean that they can't come back after a rest. This was the expected small-bodied candle or small-range trading day after a large-range day. It's a day needed to consolidate gains and decide on next direction. It indicates indecision. Since markets are undecided, I can't relate to you the next direction, but I can and have shown you both upside and downside targets. In these market conditions, prepare your trades so that you know what to do if either upside or downside targets are hit.

I can tell you that the daily Keltner setups are similar to those seen on the last three or four market peaks, depending on the index observed. The danger exists that the indices will roll pull back now, and that's the way that all but the most cautious shorts will be betting now. We have all seen what can happen if shorts are surprised and indices head where they weren't expected to go, so these moments of indecision and potential reversals prove dangerous for both bulls and bears. As I mentioned earlier, as the day closed, volatility indices were showing some signs of life. The VIX was up slightly, and the RVX was well off its day's low. Watch their trend tomorrow.

New Option Plays

Potential Bottom In Place

by James Brown

Click here to email James Brown


Caterpillar - CAT - close: 86.35 change: +1.33

Stop Loss: 84.90
Target(s): 91.50
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
In spite of concerns over a slowing global economy investors are buying shares of this industrial giant. CAT makes all manner of heavy duty equipment. It looks like the stock is turning higher after finding support in the $80-79 area. Shares are back above their 50-dma and challenging the late July high near $87.00.

I do consider this somewhat aggressive. CAT's recent earnings were strong and the company raised guidance but its stock price is probably still vulnerable to negative economic headlines. Furthermore the $90.00 level might be round-number resistance.

I am suggesting a trigger to buy calls at $87.25. Let's keep position size small. We'll use a stop loss at $84.90. Our target is $91.50 or the 100-dma.

Trigger @ 87.25

- Suggested Positions -

buy the Sep $90 call (CAT1222I90) current ask $1.60

Annotated Chart:

Entry on August xx at $ xx.xx
Average Daily Volume = 8.6 million
Listed on August 6, 2012

In Play Updates and Reviews

Friday's Bounce Continues

by James Brown

Click here to email James Brown

Editor's Note:

Stocks continued to rise on Monday following Friday's short squeeze higher.

We are removing MOS as a candidate. I've adjusted the trigger on QCOM and FB. We've also made some minor adjustments to our stops.

Current Portfolio:

CALL Play Updates

BRCM - Broadcom - close: 33.90 change: -0.11

Stop Loss: 32.45
Target(s): 38.50
Time Frame: 4-6 weeks
New Positions: Yes, see below

08/06/12 update: It was a very quiet day for shares of BRCM. The stock hovered just under the $34.00 level most of the session. I don't see any changes from our prior comments.

The plan is to wait for shares of BRCM to hit our trigger to buy calls at $34.75. We'll buy the November $36 call.

Please note I am adjusting the stop loss to $32.45.

Trigger: Enter only with a BRCM trade at $34.75

- Suggested Positions -

Position: Buy Nov $36.00 Call (BRCM1217K36)

08/06/12 adjust stop loss to $32.45

Entry on UNOPENED xx at $ xx.xx
Average Daily Volume = 10 million
Earnings Oct-23rd
Listed on Aug 4, 2012

Dollar Tree - DLTR - close: 50.99 change: -0.13

Stop Loss: 49.45
Target(s): 54.50
Time Frame: exit prior to earnings on Aug. 16th
New Positions: Yes, see below

08/06/12 update: Unfortunately we haven't seen any follow through on Friday's pop in DLTR. Shares seem stuck in the six-week trend of lower highs. Friday's high was $51.53. Readers might want to consider waiting for a rise past $51.55 before launching positions, or nimble traders could buy a bounce near $50.00.

Please note I am adjusting the time frame and stop loss. We do not want to hold over the earnings report on August 16th. I am adjusting our stop loss to $49.45.

- Suggested Positions -

Position: Long Sept $52.50 Call (DLTR1222I52.5) @ $1.90

08/06/12 new stop loss @ 49.45, adjust time frame to exit prior to Aug. 16th earnings report

Entry on Aug 3rd at $ 51.42 (gap open)
Average Daily Volume = 1.5 million
Listed on Aug 2, 2012

Hess Corp. - HES - close: 48.28 change: +0.57

Stop Loss: 45.35
Target(s): 49.85
Time Frame: 3 to 6 weeks
New Positions: see below

08/06/12 update: Oil stocks were a little mixed today but HES was showing some relative strength with a +1.1% gain. The stock tagged potential technical resistance at its simple 100-dma this morning and then retreated. Readers may want to wait for a rally past $49.00 before launching new positions.

- Suggested Positions -

Long AUG $47.50 call (HES1218H47.5) Entry $1.05

- or -

Long SEP $47.50 call (HES1222I47.5) Entry $2.02

07/26/12 triggered on gap open higher at $46.65

Entry on July 26 at $46.65
Earnings Date 07/25/12
Average Daily Volume = 4.3 million
Listed on July 25, 2012

Qualcomm - QCOM - close: 60.13 change: -0.11

Stop Loss: 57.75
Target(s): 64.50
Time Frame: 4-6 weeks
New Positions: Yes, see below

08/06/12 update: QCOM came close but did not breakout past resistance. Shares have converging resistance near $60.50 with its 100-dma, its 150-dma, and the $60.50 level itself. Over the weekend Jim suggested buying calls on a breakout past $60.50 or on dip at $59.50. Today QCOM actually hit $60.50 but didn't break it. At this point odds favor a dip. We will keep our dip entry at $59.50 but readers might want to consider adjusting their dip entry closer to $59.00 instead.

Trigger: Enter with a QCOM trade at $59.50
-or- a breakout over the 100-day at $60.51.

- Suggested Positions -

Position: Buy Oct $62.50 Call (QCOM1222J62.5)

Entry on UNOPENED xx at $ xx.xx
Average Daily Volume = 1.5 million
Listed on Aug 4, 2012

PUT Play Updates

Akamai Technologies - AKAM - close: 35.82 change: +0.34

Stop Loss: 36.75
Target(s): 32.00
Time Frame: 2-4 weeks
New Positions: Yes, see below

08/06/12 update: The bounce in AKAM continued on Monday but bulls had trouble keeping AKAM above resistance near $36.00. Readers may want to wait for a new drop under $35.00 before launching new bearish positions. More conservative traders may want to consider a stop loss closer to $36.25. Our stop is at $36.75.

- Suggested Positions -

Position: Long Sept $34 PUT (AKAM1222U34) @ $1.53

08/02/12 triggered @ $34.85

Entry on Aug 2nd at $ 34.85
Average Daily Volume = 3.0 million
Listed on July 30, 2012

FB - Facebook - close: 21.92 change: +0.83

Stop Loss: 23.25
Target(s): 17.00
Time Frame: 2-4 weeks
New Positions: Yes, see below

08/06/12 update: The oversold bounce in FB continued on Monday. Shares never traded in the negative column today. It is worth noting that FB seemed to struggle with the $22.00 level today.

We are adjusting our entry point strategy to buy puts at $20.95.

Earlier Comments:
Facebook has turned into the stock everyone loves to hate. Facebook has 674 million shares outstanding as of Friday. On August 15th another 268 million shares will see their lockup expire and become available for trading. That is 40% additional shares. If you were an investor or employee and you watched your shares decline from $35 to $20 ahead of your lockup expiration you are probably just waiting for an opportunity to sell. Another factor is that taxes are due on the awarded shares regardless of whether they are sold. That means employees have a big tax bill and they have not been able to sell those shares to pay the taxes. That is an additional incentive to pull the trigger on at least part of their position on August 15th.

Facebook has hundreds of detractors and they seem to be racing each other trying to put a lower price target on the stock. Mark Hulbert was on CNBC on Friday with a $13.80 price target based on a bunch of different metrics.

Facebook also has the various lawsuits over the IPO including the valuation and the various claims made about users and revenue in the days leading up to the IPO. There are plenty of clouds and no real catalysts to pump up the stock.

Facebook said expenses grew by 60% in Q2 and they would grow faster in Q3/Q4. That means earnings will decline.

I am recommending a September option with plans to exit (some time) after the August 15th share expiration.

Entry Trigger: buy puts at $20.95

Suggested Positions

Buy Sept $20 PUT (FB1220U20)

08/06/12 adjust entry trigger to $20.95

Entry on Unopened XX at $ XX.XX
Average Daily Volume = 80.0 million
Listed on August 5, 2012

iShares Russell 2000 ETF - IWM - close: 79.22 change: +0.61

Stop Loss: 81.25
Target(s): 75.75
Time Frame: 2-4 weeks
New Positions: Yes, see below

08/06/12 update: Friday's short squeeze saw some carry over today. The IWM shot higher this morning but was struggling with resistance midday. I don't see any changes from our earlier comments.

Earlier Comments:
We are reinitiating the IWM put because I think the short squeeze gains are unsustainable. The Russell has the worst chart of the major indexes and has rebounded the least on a relative basis. If we don't get any bullish follow through on Monday then I think we will retest Thursday's lows.

You can read the prior play description HERE

Entry Trigger: buy puts at $78.45

- Suggested Positions -

Buy Oct $78 PUT (IWM1220V78)

Entry on Unopened XX at $ XX.XX
Average Daily Volume = 60.0 million
Listed on August 5, 2012


Mosaic - MOS - close: 57.34 change: -0.03

Stop Loss: 57.50 (Unopened)
Target(s): 67.00
Time Frame: 4-6 weeks
New Positions: see below

08/06/12 update: MOS did not truly participate with the market's rally today. Shares are hovering in the $58-56 level and it could be a while before shares finally breakout past resistance near $60.00. Our plan was to buy calls at $60.25 but we're dropping MOS as a candidate tonight. We'll keep it on our potential watch list if shares rally past $60 down the road.

Trade did not open.

08/06/12 removed from the newsletter. trade did not open.

MOS Chart

Entry on UNOPENED xx at $ xx.xx
Average Daily Volume = 3.0 million
Listed on Aug 1, 2012