Option Investor

Daily Newsletter, Thursday, 9/20/2012

Table of Contents

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

Market Wrap

Economic Reality Back In Focus

by Thomas Hughes

Click here to email Thomas Hughes
Economic data and corporate earnings are back in focus. The world markets got a taste of reality last night as Markitt released its flash PMI readings for China and the Eurozone, continued slowing in the two regions was matched by stagnate growth here at home. The FOMC driven QE we received last week was what the market wanted but is it enough to drive the markets higher in the face of deteriorating global economic conditions.

The Asian and European markets both closed lower after flash PMI readings showed that both regions were still contracting. The China Flash PMI was below the median 50 for the 11th straight month. The flash reading for September, which is subject to revisions, came in 47.8, showing accelerated contraction but slightly less than last month. The August reading was 47.6. Stocks in Shanghai and Hong Kong sank to multi-year lows and led to a general decline in Asian stocks as a whole.

The story in Europe was no better. The Eurozone flash PMI sank to 45.9 from the previous 46.3. The drop bucked the improvement expected by analysts and forecasters. Numbers within the data revealed that there was a slight pick-up in manufacturing but it was more than offset by declines in services. The Eurozone is expected to have already entered a recession and this new data reinforces the argument. The troubles in Europe are far from over, a statement I am personally tired of hearing and writing. Hopefully the latest round of global QE will get the ball rolling again. I still expect to hear from Spain, Italy and Greece regarding bail out funding so be on the look out.

Our own economic data shows that the decision to increase QE was right. Jobs and job creation remain weak and sluggish, manufacturing is stagnant and the future outlook is still deteriorating. Initial jobless claims data was basically unremarkable, except that it is still high and that was not a surprise to the markets. Futures barely moved this morning on the news because they were already down on the news from China and Europe. Initial claims fell 3,000 to an adjusted 382,000. This drop follows an upward revision to last weeks data of 3,000 claims, which basically makes the two weeks data a wash. The number is elevated for the year an has been rising. The four week moving average also climbed this week and shows that the underlying trend in jobless claims is on the rise. This week the average reached ten week high. A spokesman for the Labor Dept said that the data had “no hurricane influence”. My first thought was “really?!?” All those businesses and homes and jobs that got flooded out during the hurricane are back. Somehow I don't think so.

Continuing claims edged downward and made a new four month low. The number of people filing for the second week of benefits fell to 3.27 million. Despite the drop the number has remained fairly stable all summer and has not been affected by the volatility induced by the auto industry or the hurricane. Total claims also fell by a marginal amount to 5.17 million. Total unemployment has been in decline for quite some time and has now reached a new low. Last year at this time there were 6.89 million people on unemployment, today's figures mark a 25% drop since then. The problem is that GDP growth is roughly equal to this time last year and total unemployment has only dropped by a margin of 10% from last year. If the 25% less people on unemployment had found work I think that GDP should be higher and unemployment lower. This suggests to me that not only are folks dropping of the rolls and not looking for work but that the number of them may be increasing.

Our own PMI remained unchanged at 51.3 and marks the lowest levels since 2009. A decline in output was offset by an increase in new orders. The average PMI for the third quarter is a low 51.5, a decline from the second quarters average 54.2. The Philladelphia Fed survey of manufacturing was also negative, coming at -1.9. This is an improvement over last months reading of -7.1 and the fifth month of contraction in mid-Atlantic manufacturing.

To add to the impending gloom the index of leading indicators also fell to negative levels. This is the second time in three months for the index to turn negative and signals more weakness to come. Unsurprisingly I also saw several mentions of lower guidance and missed earnings as I was reading the news today. Ben Bernanke was also mentioned making a statement on Capitol Hill. He continued to warn of the “fiscal cliff” and potential harm to economic recovery should the tax cuts not be extended.

The data still shows that the world economy is slowing. There are no signs of stabilization that I can see, even the recent housing data is suspect. There are just too many negatives to have much real hope for earnings growth and yet the market rallies on. Oil on the other hand may have reversed for the short term. The last couple of days have seen some seemingly unexpected downward movement in the commodity. Looking at the chart of the Oil Index it looks like it was a purely technical sell off. The price of oil and the index moved to a technical resistance level and sold off, retreating into its trading range. The long term trend of the index is going up. However it looks like it will hold steady or come down some in the short to mid terms. Once the global economy gets back on track oil will surely climb to retest its highest prices.

Oil Index, weekly

Gold lost a little today but has made a nice move up over the last week. The financial shenanigans (QE) of the central bankers around the world are making more money available to swell the price of the worlds most important commodity. The Gold Index has made a strong move upward, breaking out of a bottom with a bullish candle and good momentum. The index is now forming a potential flag, one that could potentially take the index up another 50 points. By now I'm sure the index breakout has caught the attention of the really short term traders and speculators who will surely add to the move up.

Gold Index, daily

Bond yeilds fell today but did move up from support along the short term moving average. The safety of US backed debt was tempting in the face of all the economic negativity. The yield on the ten year treasury fell back from last weeks resistance level and is now bouncing on the short term moving average. Looking back over the daily charts you can see that the yield has a tendency toward volatility when it gets near the moving average and can open some big gaps.

Ten Year Bond Yield, daily

The earnings rotation is beginning to heat up again. A few notable misses have already been reported, confirming the deteriorating business conditions. Carmax missed its earnings estimate by $0.04 today and dropped more than 4% in trading. Rising costs and offset weak revenue growth and cut into profit expectations. The future guidance added to the stocks decline. Carmax fell to a recent and long term support level on heavy volume.

Carmax, daily

Scholastic, publisher of “The Hunger Games”, reported a net loss and gained a full percent. The loss was less than expected and came on weaker revenue. The company is sticking to its 2013 guidance which puts full year earnings in a range well ahead of the consensus estimate. Perhaps sales of books will increase as more Hunger movies come out. The stock is trending up weakly and could move to the top of its range.

Scholastic, daily

Oracle, an important and well known benchmark in the software and networking sector reported after the bell today. Analysts had been expecting earnings in the range of $0.52-$0.55 per share on revenue around $8.4 billion. The stock has been trending up for the last several months but traded down today in anticipation of earnings. The retreat over the last three days is a weak bounce from long term resistance and has only served to take some heat out of the market. The release was a mild disappointment, Oracle fell short on revenue but hit the target on profits, posting $0.53 per share. The stock Oracle, daily

ConAgra gave a stellar report, far surpassing estimates and guiding higher for the full year. The growth and branding strategy has catapulted the company into high gear. The stock jumped 6.5% on high volume today and pierced a new 5 year high and a long term resistance level.

ConAgra, daily

Starbucks begins selling its version of the single shot coffee machine and coffee packs. The move has been heavily anticipated as Starbucks and investors waited out the patent period on Green Mountains Keurig K-Cup system. Starbucks moved up from the short term moving average today and looks like it is gathering strength around a crucial pivot point. Green Mountain lost 8% on the news. Green Mountain has lost a lot of ground over the last year, no amount of performance can overcome the expected loss of business to Starbucks. Not only is Starbucks now in direct competition with Green Mountain, Green Mountain has also lost the business of producing Starbucks branded K-Cups.

Starbucks, daily

Green Mountain, daily

In other business news Wal-Mart has announced that it will no longer sell Amazons Kindle tablets in its stores. It only makes sense, why should Wal-Mart sell a device that links users to its competition. Now shoppers will have to go to the other number one place to buy things which ironically is Amazon. Both stocks have been trending upward but the news failed to move either one significantly today.

Wal Mart, daily

Amazon, daily

Retailers Bed Bath & Beyond and JC Penny both lost share value today. The first dropped after reporting dissapointing earnings yesterday the second on a second half sales weakness warning. Bed Bath & Beyond gapped down, dropping nearly 10% on high volume. JC Penny also gapped down on high volume and crossed below the short term moving average.

Bed Bath & Beyond, daily

JC Penny, daily

The early weakness in this mornings futures trading continued into the markets open. In the first few hours of trading the major indexes slid downward, the S&P 500 moved as low as +10 points lower. The global downturn overnight and our own data did cause some selling but the buyers stepped in, bringing the indexes back near break-even by the days close. The S&P found its intra-day support at 1450, a significant number because it is just above the mid-point of the second long white candle in last weeks continuation signal and another sign of near-term trend continuation.

S&P 500, daily

The data and markets are not telling the same story. The data says slowing, less growth, less profit. The market says trending up, continuing up, going up. The market also says it is out of breath. Momentum is still divergent and declining, a symptom we have all been observing for some time now. The market is also approaching the pre-2008 highs, this is only about 100 points away for the S&P. This will be another significant resistance level and may prove too much for this weak and extended market to breach. When the S&P hits the 1550 level all the people who have been holding their stock for the last four years can get out at break-even and all the people who have been winners for the last three years can also get out, but with a nice profit. Even for traders who've been long for only two years, or one year there have been some nice gains and the market top near 1560 is an attractive place to get out. Momentum is already weak and volume is at historically low levels, who will be there to buy the stocks then?

S&P 500, weekly

The VIX moved down today and flirted with some long term lows. The index has been trending at this level for several weeks now and is starting to form the early signs of the possibility of a bottom forming. The downward momentum is diminishing and divergent from the new lows. The VIX could continue at this level for some time but a spike is due in the near term. Any unexpected shocks to the global economy or substantial worsening of the European debt crisis could send the VIX higher.

VIX, daily

There isn't much on the horizon tomorrow for earnings, KB Homes is the only one of note. The economic calendar is also empty until next week, a surprise and a much needed breather for us all. The trend remains up at this point despite what I see as an impending correction and there is still room to go higher. The next resistance is the range topped by the all time highs around 1570.

Look forward, be prepared, trade well and remember the trend.

Thomas Hughes

New Option Plays

Industrial Goods

by James Brown

Click here to email James Brown


SPX Corp. - SPW - close: 68.88 change: +1.18

Stop Loss: 66.45
Target(s): 74.50
Current Option Gain/Loss: Unopened
Time Frame: 4 to 5 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
SPW is in the industrial goods sector. Shares have been consolidating after failing at resistance near $70.00 a few days ago. Since then SPW appears to have been building a bull-flag pattern. Traders just bought the dip at technical support near its converging 10-dma, 100-dma, and 200-ema.

I want to see a little bit more confirmation of this rebound so I am suggesting a trigger to buy calls at $69.25 with a stop loss at $66.45, which is just under today's low. More conservative traders may want to wait for SPW to breakout past $70.00 or past the September high at $70.43 before initiating positions.

Our target is $74.50. The Point & Figure chart for SPW is bullish with an $85 target.

Trigger @ 69.25

- Suggested Positions -

buy Oct $70 call (SPW1220j70) current ask $1.75

Annotated Chart:

Entry on September xx at $ xx.xx
Average Daily Volume = 622 thousand
Listed on September 20, 2012

In Play Updates and Reviews

Stocks Recover from Poor Economic Data

by James Brown

Click here to email James Brown

Editor's Note:

Disappointing PMI results from Europe sparked some profit taking this morning but U.S. equities managed a bounce off the intraday lows.

Traders should bear in mind that tomorrow (Friday) is quadruple-witching expiration. Equity stock options, index options, index futures and single-stock futures all have expirations tomorrow (or after tomorrow's close).

Current Portfolio:

CALL Play Updates

Alexion Pharma. - ALXN - close: 113.73 change: -0.24

Stop Loss: 109.40
Target(s): 118.50
Current Option Gain/Loss: +30.7%
Time Frame: 3 to 6 weeks
New Positions: see below

09/20/12: ALXN spent Thursday's session consolidating sideways. If the stock were to correct we could look for short-term support at the 10-dma near $111 and the $110 level. Please note that I am raising our stop loss to $109.40. I am not suggesting new positions at current levels.

Our multi-week target is $118.50. FYI: The Point & Figure chart for ALXN is bullish with a $124 target.

- Suggested Positions -

Long Oct $115 call (ALXN1220j115) Entry $2.83

09/20/12 new stop loss @ 109.40
09/15/12 new stop loss @ 107.75

Entry on September 10 at $110.72
Average Daily Volume = 905 thousand
Listed on September 08, 2012

Concur Technologies - CNQR - close: 74.54 change: -0.22

Stop Loss: 73.40
Target(s): 74.75 (Sept calls), $77.50 (Nov calls)
Current Option Gain/Loss:(Sep75c: +40.0%) & Nov75c: + 8.3%
Time Frame: 3 to 4 weeks
New Positions: see below

09/20/12: CNQR has been slowly drifting lower all week but the stock remains inside its $74-76 trading range.

I am not suggesting new positions at this time.

Earlier Comments:
Our plan was to exit the September $75 calls when CNQR hits $74.75. That target was hit on Thursday, Sept. 6th. Our target to exit the November calls is at $77.50.

- Suggested Positions -

(target hit for Sept calls @ 74.75 on CNQR)
Sep $75 call (CNQR1222i75) Entry $1.25 exit $1.75 (+40.0%)

- or -

Long Nov $75 call (CNQR1217j75) Entry $3.60

09/15/12 new stop loss @ 73.40
09/12/12 new stop loss @ 72.45
09/06/12 target hit for the Sept. calls @ 74.75
09/06/12 new stop loss @ 71.70
09/04/12 adjust exit target for Sept. calls to $74.75
adjust exit target for Nov. calls to $77.50
+ new stop loss @ 71.25
08/21/12 new stop loss @ 69.75
08/16/12 new stop loss @ 68.75
08/15/12 triggered at $70.25

Entry on August 15 at $70.25
Average Daily Volume = 577 thousand
Listed on August 13, 2012

Commvault Sys. - CVLT - close: 56.47 change: +0.13

Stop Loss: 53.90
Target(s): 59.85
Current Option Gain/Loss: -11.2%
Time Frame: 3 to 4 weeks
New Positions: see below

09/20/12: Today looks a lot like yesterday with a tiny bit of volatility at the open and then a sideways churn. Traders did buy the dip at its rising 10-dma. Bigger picture I remain bullish here and would use the intraday bounce as a new bullish entry point to buy calls.

Our exit target is $59.85. More aggressive traders could aim higher.

- Suggested Positions -

Long Oct $60 Call (CVLT1220j60) Entry $1.24

Entry on September 20 at $56.07
Average Daily Volume = 427 thousand
Listed on September 19, 2012

Flowserve Corp. - FLS - close: 132.53 change: -0.22

Stop Loss: 129.75
Target(s): 139.50
Current Option Gain/Loss: -13.9%
Time Frame: 4 to 6 weeks
New Positions: see below

09/20/12: FLS gapped down at the open this morning but there wasn't much follow through. The stock bounced off its intraday low of $131.00. Readers can use this dip as a new entry point.

There is potential resistance in the $135 area but we are aiming for $139.50. The Point & Figure chart for FLS is bullish with a $151 target.

- Suggested Positions -

Long Oct $135 call (FLS1220j135) Entry $2.15

09/18/12 triggered at $132.25

Entry on September 18 at $132.25
Average Daily Volume = 521 thousand
Listed on September 15, 2012

McDonald's Corp. - MCD - close: 93.15 change: +0.32

Stop Loss: 89.90
Target(s): 98.00
Current Option Gain/Loss: -11.5%
Time Frame: 3 to 6 weeks
New Positions: see below

09/20/12: MCD is holding up reasonably well. The company had good news for shareholders today. MCD is raising its quarterly cash dividend by +10% to 77 cents a share.

I don't see any changes from my prior comments. I suspect MCD could see a dip toward $92 soon. Readers may want to wait for a dip into the $92-90 zone as their entry point instead.

This is an aggressive, higher-risk trade. There is still additional resistance at the simple 200-dma, the $94.00 level, and another trend line of lower highs. We want to use small positions to limit our risk.

- Suggested (SMALL) Positions -

Long Oct $92.50 call (MCD1220j92.5) entry $2.00

Entry on September 19 at $93.24
Average Daily Volume = 4.7 million
Listed on September 18, 2012

The Ultimate Software Group - ULTI - close: 100.06 change: -0.19

Stop Loss: 97.85
Target(s): 106.00 or 109.50
Current Option Gain/Loss: -46.9%
Time Frame: 3 to 6 weeks
New Positions: see below

09/20/12: Today was rather boring for ULTI. Shares just churned sideways on either side of support/resistance at the $100.00 mark. Readers may want to wait for a new rally past $101.00 before considering new bullish positions.

I am setting two different targets. Our conservative target is $106.00. Our aggressive target is $109.50.

- Suggested Positions -

Long Oct $105 call (ULTI1220j105) Entry $2.45

09/19/12 new stop loss @ 97.85

Entry on September 17 at $100.75
Average Daily Volume = 169 thousand
Listed on September 15, 2012

Vertex Pharma. - VRTX - close: 58.13 change: +0.23

Stop Loss: 54.75
Target(s): 59.90
Current Option Gain/Loss: - 5.2%
Time Frame: 3 to 6 weeks
New Positions: see below

09/20/12: There is no change from my prior comments on VRTX. The stock is still struggling with resistance near $58.00 as it consolidates sideways. Our target is $59.90 but more aggressive traders may want to aim higher.

Earlier Comments:
This is a higher-risk trade. You can see from the chart that VRTX has been very volatile over the last few months. We want to limit our position size to reduce our risk.

- Suggested Positions -

Long Oct $57.50 call (VRTX1220j57.5) Entry $3.80

09/15/12 adjust exit target to $59.90
09/13/12 new stop loss @ 54.75
09/06/12 new stop loss @ 54.25
09/06/12 triggered @ 55.75

Entry on September 06 at $55.75
Average Daily Volume = 1.4 million
Listed on September 05, 2012

Watson Pharmaceuticals - WPI - close: 84.22 change: +0.49

Stop Loss: 82.75
Target(s): 88.50
Current Option Gain/Loss: - 6.4%
Time Frame: 3 to 6 weeks
New Positions: see below

09/20/12: Our new trade on WPI has been triggered. Shares broke out from their $81-84 trading range and hit our entry point to buy calls at $84.25. I would still consider new positions now.

FYI: The Point & Figure chart for WPI is bullish with a long-term $105 target.

- Suggested Positions -

Long Oct $85 call (WPI1220j85) Entry $1.55

Entry on September 20 at $84.25
Average Daily Volume = 1.0 million
Listed on September 19, 2012

PUT Play Updates

Cerner Corp. - CERN - close: 73.61 change: +0.36

Stop Loss: 71.25
Target(s): 65.00
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

09/20/12: CERN is still bouncing. Shares are testing resistance near $74.00 and its simple 50-dma. If shares close over $74.00 we'll probably drop it as a bearish candidate. Right now I am suggesting a trigger to buy puts at $69.65. We will aim for $65.00.

Trigger @ 69.65

- Suggested Positions -

buy the Oct $70 PUT (CERN1220v70)

Entry on September xx at $ xx.xx
Average Daily Volume = 1.0 million
Listed on September 17, 2012

O'Reilly Automotive - ORLY - close: 84.08 change: +1.60

Stop Loss: 81.55
Target(s): 75.00
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

09/20/12: The bounce in ORLY continues with its fourth gain in a row. The stock is nearing what should be resistance in the $85 area. If shares clear $85 we'll probably drop it as a candidate. Currently we are waiting for a bearish breakdown under support. I am suggesting a trigger to buy puts at $79.75. If triggered our target is $75.10.

Trigger @ 79.75

- Suggested Positions -

buy the Oct $75 PUT (ORLY1220v75)

Entry on September xx at $ xx.xx
Average Daily Volume = 1.5 million
Listed on September 17, 2012

Transocean Ltd. - RIG - close: 46.38 change: +1.11

Stop Loss: 46.80
Target(s): 42.00
Current Option Gain/Loss: -22.4%
Time Frame: 4 to 8 weeks
New Positions: see below

09/20/12: Many of the big oil stocks were up today. Shares of RIG outperformed the market with a +2.4% bounce. This may have been a reaction to news that Brazilian oil giant Petrobras is helping RIG in a legal battle against the Brazilian government. The Brazilians found RIG to be at fault on a recent oil spill. The government has banned RIG from operating in the country. It was a serious blow for RIG and one of the reasons we added it as a bearish candidate. However, today Petrobras announced it was using its legal team to help RIG overturn the ban since seven of RIG's ten drilling units are currently being leased to Petrobras. Some have claimed the "ban" on RIG was a grandstanding political move by current leaders to look tough for an upcoming midterm election.

If there is any follow through higher in RIG tomorrow it will likely hit our stop loss at $46.80.

- Suggested Positions -

Long Nov $45 PUT (RIG1217w45) Entry $2.45

09/18/12 triggered at $45.40

Entry on September 18 at $45.40
Average Daily Volume = 3.1 million
Listed on September 13, 2012