Option Investor

Daily Newsletter, Thursday, 10/25/2012

Table of Contents

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

Market Wrap

Data Good, Revenue Not So Much

by Thomas Hughes

Click here to email Thomas Hughes

You couldn't tell by revenue reports or by future guidance but the signs are still pointing to a fourth quarter up tick in GDP. For the most part corporations have had a weak quarter so far as revenue is concerned and that is what fourth quarter guidance is being based on. As an outside observer, it looks to me like the fourth quarter is going to be better than what these corporations and CEO's are forecasting. If this is the case, and operating margins remain the same or continue improving, the fourth quarter earnings season could see a number of upside surprises.

Futures were up this morning following a round of economic data that supports stability and global improvements. The United Kingdom grew at a faster pace than expected, joblessness is still declining, orders for durable goods improved and the housing market is improving.

The Economy

Initial claims for unemployment, while still at elevated levels, were in-line with market estimates. Initial claims fell by 23,000 to an adjusted 369,000 for the week ending 10/19. The previous week was revised up by 4,000 to 392,000. Last weeks revised data tied with data points in April and June for the highest rate of first time claims this year. The four week average also climbed in this latest round of data, gaining 1,500 to reach a three week high. Despite the jump in claims last week and the upward revision initial claims are still lower than they were in the middle portion of this year and trending down.

Continuing claims and total claims for unemployment both fell in the current release. Continuing claims fell by 2,000 to 3.25 million, basically inline with the previous week. Continuing claims are at their lowest level in two months and near 12 month lows. Total claims fell by a much larger 85,000 to 4.92 million. This marks 14 weeks of declines since the mild increase in claims we saw in July. Based on the drop in unemployment last month I have to assume that these people who are no longer receiving benefits have found jobs. If this is true we should see a further decline in unemployment this month.

Other data released today was also positive. Durable goods orders jumped more than expected on strength in the aircraft industry. Economists had been expecting an increase of 8.3% and were pleasantly surprised by a gain of 9.9%. Also, pending home sales increased by .3%. This number is basically flat from last month and is up by 14.5% over last year. The mild gain is not a strong sign of improvement but does show that the housing market is at least stable and that is good enough for now. Adding Wednesday's new home sales data, which gained 5.7%, the housing sector looks pretty good compared to where we were just a year ago. The pending sales data did show strength and weakness on a regional level with some areas growing rapidly while others were in decline.

Tomorrow we will get the eagerly anticipated, at least by me, Advance GDP figures. The number is widely expected to be above previous expectations due to improvements in many areas of the economy. It is possible that the market is expecting this and that the number could be a disappointment if it is not better enough.

Around The World

Asian shares extended their rally to ten days following Chinese PMI data. The numbers show that Chinese manufacturing is closer than ever to expansion. The gains in PMI over the last two months are based primarily on new orders and is expected to keep further stimulus from the Chinese central bank off the table for the near term. The data also supports the soft-landing scenario for the Chinese economic slowdown.

In Europe stocks ended the day mixed with most of the major indexes hovering around the flat line. The UK's release of GDP data, which was surprisingly good, failed to spark a rally. The UK's GDP was reported at 1%, nearly a half point higher than expected. This marks and end to the recent 3-quarter recession experienced by the country.

Gold and Oil

Gold bounced back from hitting its seven month lows yesterday. The metal gained close to 1% percent today on hopes of stimulus from Japan. The Bank Of Japan meets next week and has already stated that it is considering further stimulus for the country. The Gold Index also rallied, moving up from support and the 150 day EMA. The long term EMA is currently coincident with an important support/resistance line, adding to the significance of each. The index has cooled off some since breaking out of its reversal earlier this year but should continue its march upward. In the short term bearish momentum is subsiding and is divergent from price action. My current targets for the index are $225 in the short term and $250 further out. The 200 level will be key for the index over the next few days and weeks, if the index falls below my downside target will be $190 and then $175.

The Gold Index, daily

Black Gold gained in early trading as investors bought into the commodity on hopes of rising demand. The current economic data is supporting growth in the fourth quarter and this is what is leading some to speculate on increased oil consumption. The early rally did not have a lot of support and quickly sold off to near yesterday's closing price. While lower prices are great for the economy and business in general it is not good for expectations of future profits in the oil industry. It will take some time though for the analysts to figure out if the lower cost of fuel for the oil companies will out pace declining revenue from lower prices.

The oil index gapped up at the open, crossing above the 150 day EMA. The index has been trading to the downside for five days running and is now forming a potential bear flag. My previous downside target of 1150 still stands but the move downward will probably not come in a straight line.

Oil Index, daily


Prices for ten and thirty year US Treasuries both fell today, approaching 6 month lows. The rate on the ten year note climbed to 1.829% while the 30 bond climbed to 2.9795%. Both rates have been on the rise in recent weeks and now they both look good for further increases. The chart of 30 year bond rates shows the long term 150 day EMA crossing over the shorter term 30 day EMA, a potentially bullish scenario, especially with the rate pushing up against long term resistance.

30 Year Bond Rates

Story Stocks

The story in stocks is still earnings. Earnings and revenue. The trend I have noted of corporations earning more on lower revenue continued today. Proctor & Gamble reported this morning, meeting analyst expectations for revenue (more or less) but posting profits fully 10 cents above projections. P&G was able to do this by lowering their costs and improving margins. Once again I am seeing an improvement in operations and margins, a trend that leads me to believe more and more in the possibilities of calendar fourth quarter upside earnings surprises. The stock responded favorably, gapping up by 3% on heavy volume to hit four year highs and the highest level since the 2008 bear market.

Proctor & Gamble, daily

Colgate Palmolive also reported today. The consumer products company reported an increase in profits that was in line with estimates on a reduction in revenue (sound familiar). Colgate earned an adjusted $1.38 per share and improved margins by 180 basis points. They are also planning a reduction in labor that is scheduled for 2014. The stock, which has been trending up all year, tanked on the report, dropping more than 2%. The decline was halted at the 150 day EMA.

Colgate Palmolive, daily

Ford came out today with an earnings warning ahead of their release next week. Management expanded guidance for expected lossed in the European division, they also announced the closing of plants in the UK and Belgium. The restructuring would cut their European workforce by roughly 18% and is expected to be a long term driver of lower costs. In the statement Ford also said that it expects earnings in the most recent quarter to exceed the previous and Wall Street predictions. The stock gapped up at open, crossing over the 150 day EMA. The stock sold off during the day but maintained support at the long term average.

Ford, daily

Apple and Amazon both reported after the bell, which is probably why trading was so mellow today. Apple was expected to earn $8.85 per share, a drop from the last quarter. The actual report showed a 24% increase in earnings but the gains fell short of the expectation. Actual EPS came in at $8.67 per share and the guidance for the next quarter was reduced significantly. The stock gained a few dollars in after hours trading but after the release the stock was halted due to heavy downside volume. Once after hours trading resumed the stock price quickly dropped below the $600 mark; trading was fierce and share price regained $600 but is still down from the close of regular trading.

Apple, daily

Amazon was expected to produce a loss this quarter of -$0.08 per share. Actual results were far worse than expected and sent the stock tumbling 10% in after market trading. The stock has been trading down ever since making a reversal earlier this year and I think it will probably keep going down.

Amazon, daily

The Indexes

The major indexes traded around flat line today following the recent selling. The SPX broke down through one of its support lines on Tuesday and has since held that level. The breakdown through support is troubling for the bulls in the short term as it may bring on some more technical selling. On the daily charts bearish momentum is increasing with each round of selling but so far the long term up trend has not been broken.

SPX, daily closes

On the longer term charts showing weekly closes momentum has turned bearish but is still very weak.

SPX, weekly closes

The VIX has retreated from its peak earlier this week but is still above the long term EMA. The volatility index looks poised for more gains and those gains could come tomorrow due to Amazon and Apple.

The VIX, daily

The Dow charts show that short term support has failed. The index is now sitting on a longer term support level (right around 13,000) with bearish momentum on the rise. I think that the index will hold this level provided there are no truly surprising developments in earnings or the economy. The caveat is that Apple and Amazon are going to spark some volatility tomorrow and the current market levels could continue to break down.

Dow Jones Index, daily

Today the Nasdaq Composite Index fell to close below the 150 day EMA for the second day in a row. This in itself isn't troubling until the index makes a move down from the EMA. While it holds around the long term average we can assume that institutional investors are using the weakness as an entry point. This index is in similar straits as the other two indexes but the technical indicators on the daily charts show that the bearishness is in decline and diverging from price. However, today's announcements after the bell from Amazon and Apple could send the index sharply lower tomorrow.

Nasdaq Composite, daily

Earnings seasons jitters will likely come out in full force tomorrow. Amazon and Apple are two very high profile companies to report earnings shortfalls and the selling could be fierce. On top of that the Advance GDP report could add fuel to the fire if it does not satisfy the markets expectations. We'll have to watch carefully to see if and when support kicks in. The impending up tick in GDP I am expecting for the fourth quarter should provide support for the indexes, if not then my upside targets for this year will fly right out the window.

Be vigilant, trade conservatively and remember the trend.

Thomas Hughes

New Option Plays

Energy Stocks

by James Brown

Click here to email James Brown

Editor's Note:

In addition to tonight's new candidate(s), consider these stocks as possible trading ideas and watch list candidates. Many of these need to see a break past key support or resistance:

(bullish ideas) KSU, LMT, EVEP, CYT

(bearish ideas) RHT,


Sempra Energy - SRE - close: 68.65 change: +0.99

Stop Loss: 66.95
Target(s): 72.00
Current Option Gain/Loss: + 0.0%
Time Frame: Exit prior to the Nov. 6th earnings report
New Positions: Yes, see below

Company Description

Why We Like It:
SRE is an energy services company, involved mostly with natural gas. After bottoming in late September shares have turned higher. SRE now has a bullish trend of higher lows and higher highs. Today saw SRE breakout to a new multi-week high.

We want to hop on board and buy calls tomorrow morning. We'll use a stop loss at $66.95. Our target is $72.00.

- Suggested Positions -

buy the DEC $70 call (SRE1222L70) current ask $0.70

Annotated Chart:

Entry on October xx at $ xx.xx
Average Daily Volume = 939 thousand
Listed on October 25, 2012


Schlumberger Ltd. - SLB - close: 70.74 change: +0.65

Stop Loss: 71.05
Target(s): 65.25
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
SLB doesn't look to hot. Shares of this oil services stock have been declining since the company reported earnings on the 19th of October. Now SLB is in danger of breaking key support near $70.00. You could also argue that SLB has created a bearish head-and-shoulders pattern over the last three months.

Yesterday's low was $69.75. I am suggesting a trigger to open bearish positions at $69.65. Our target is $65.25. FYI: The Point & Figure chart for SLB is bearish with a $64 target.

Trigger @ 69.65

- Suggested Positions -

buy the NOV $70 PUT (SLB1217w70) current ask $1.48

Annotated Chart:

Entry on October xx at $ xx.xx
Average Daily Volume = 5.3 million
Listed on October 25, 2012

In Play Updates and Reviews

Midday Bounce

by James Brown

Click here to email James Brown

Editor's Note:

Stocks produced a midday bounce off their lows and most of the market closed in positive territory. Is the correction over with the S&P 500 near support at 1400?

Meanwhile on our play list today RVBD hit our stop loss.

Current Portfolio:

CALL Play Updates

Peabody Energy - BTU - close: 28.03 change: +0.55

Stop Loss: 25.60
Target(s): 31.50
Current Option Gain/Loss: Unopened
Time Frame: several weeks
New Positions: Yes, see below

10/25/12: Traders bought the dip in BTU near its simple 200-dma this morning. More aggressive traders might want to consider positions here. I still think BTU will see a dip to its simple 10-dma, which is currently near $27.00. I am suggesting we buy calls on a dip at $27.25. More conservative traders may want to wait for a deeper pullback, maybe $27.00 or even in the $27.00-26.50 area. Our multi-week target is $31.50.

Trigger @ 27.25

- Suggested Positions -

buy the 2013 Jan $30 call (BTU1319a30)

Entry on October xx at $ xx.xx
Average Daily Volume = 10.6 million
Listed on October 23, 2012

Deere & Co - DE - close: 84.69 change: +0.38

Stop Loss: 84.25
Target(s): 89.90
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

10/25/12: DE pierced support at the $84.00 level intraday but shares managed a rebound. After a week-long consolidation I suspect DE is ready to bounce. Please note that I am adjusting our entry trigger down to $85.55. I'll move the stop loss to $84.25.

Trigger @ 85.55

- Suggested Positions -

buy the NOV $87.50 call (DE1217k87.5)

10/25/12 adjust the entry trigger to $85.55, stop to $84.25

Entry on October xx at $ xx.xx
Average Daily Volume = 3.3 million
Listed on October 22, 2012

Green Mountain Coffee Roasters - GMCR - close: 24.41 change: +0.10

Stop Loss: 23.90
Target(s): 29.50
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

10/25/12: GMCR managed a gain today but failed to hit new relative highs. There is no change from my prior comments.

Earlier Comments:
GMCR could see a short squeeze. The most recent data listed short interest at 37% of the 127 million-share float. There is short-term technical resistance at the 50-dma. I am suggesting we open small bullish positions if GMCR trades at $25.50 or higher. If triggered our target is $29.50.

Trigger @ 25.50 *Small Positions*

- Suggested Positions -

buy the NOV $27 call (GMCR1217k27)

Entry on October xx at $ xx.xx
Average Daily Volume = 6.0 million
Listed on October 24, 2012

Medivation, Inc. - MDVN - close: 54.25 change: +0.61

Stop Loss: 49.95
Target(s): 57.00
Current Option Gain/Loss: +33.0%
Time Frame: 3 to 4 weeks
New Positions: see below

10/25/12: MDVN continues to drift higher and added another +1.1% today. More conservative traders may want to start adjusting their stop loss higher.

Earlier Comments:
We will plan to exit prior to the early November earnings report.

- Suggested Positions -

Long Nov $55 CALL (MDVN1217K55) Entry $2.00

10/20/12 Friday's bounce looks like a new entry point.
10/17/12 MDVN is not cooperating and closed under the 50-dma, readers may want to exit immediately.
10/15/12 triggered @ 52.50

Entry on October 15 at $52.50
Average Daily Volume = 780 thousand
Listed on October 12, 2012

PUT Play Updates

Garmin Ltd. - GRMN - close: 39.26 change: -0.03

Stop Loss: 40.10
Target(s): 36.00
Current Option Gain/Loss: - 1.6%
Time Frame: exit prior to the Oct. 31st earnings report
New Positions: see below

10/25/12: GRMN's rally attempt this morning failed at round-number resistance near the $40.00 mark. Readers could use today's reversal as a new bearish entry point. Just remember our time frame and plan to exit before earnings on Oct. 31st.

Earlier Comments:
We want to limit our position size since the most recent data listed short interest at 16% of the 123 million share float. We will plan to exit prior to the October 31st earnings report.

- Suggested *Small* Positions -

Long NOV $40 PUT (GRMN1217w40) Entry $1.85

10/23/12 lack of downward movement today is trouble. Readers may want to exit now. New stop loss @ 40.10

Entry on October 18 at $39.51
Average Daily Volume = 787 thousand
Listed on October 17, 2012

The Mosaic Co. - MOS - close: 53.25 change: +0.04

Stop Loss: 55.05
Target(s): 48.00
Current Option Gain/Loss: - 3.8%
Time Frame: 3 to 6 weeks
New Positions: see below

10/25/12: MOS spent the day consolidating sideways.

Honestly, I am surprised that MOS did not see more movement. This morning its rival POT reported earnings that beat by two cents. Yet POT also issued an earnings warning. Neither POT or MOS saw much movement.

- Suggested Positions -

Long NOV $55 PUT (MOS1217w55) entry $2.60

10/23/12 triggered @ 53.45

Entry on October 23 at $53.45
Average Daily Volume = 3.9 million
Listed on October 20, 2012


Riverbed Technology - RVBD - close: 22.82 change: -0.92

Stop Loss: 22.49
Target(s): 29.00
Current Option Gain/Loss: -44.3%
Time Frame: several weeks
New Positions: see below

10/25/12: RVBD is seeing too much volatility. An intraday spike over resistance at $24.00 hit our entry trigger yesterday but there was no follow through. Today shares hit our stop loss at $22.49 before bouncing off its lows.

Earlier Comments:
I do consider this an aggressive, higher-risk trade.

- Suggested Positions -

2013 Jan $25 call (RVBD1319a25) Entry $1.85 exit $1.03 (-44.3%)

10/25/12 stopped out at $22.49


Entry on October 24 at $24.20
Average Daily Volume = 5.1 million
Listed on October 23, 2012