Option Investor

Daily Newsletter, Tuesday, 11/6/2012

Table of Contents

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

Market Wrap

Election Day, Earnings And A Rally

by Thomas Hughes

Click here to email Thomas Hughes
Yesterday's late afternoon rally carried into overnight futures trading and through this mornings opening. Speculation over the election, the effects of the results and even whether or not we would know who wins tomorrow was the talk of the day. In the back drop a slew of earnings reports came out today, more than 330 in total. Many were surprisingly good, helping add a more positive light to this years earnings season and driving the markets higher.

Aside from the election the economic data for the week is fairly light. No reports were released today and tomorrows big headline will be the Presidential election results. The regular weekly reports are still due; Oil inventories on Wednesday, jobless claims on Thursday and then a few monthly readings on Friday.

Economic Calendar

Around The World

European shares ended their trading higher amidst a new round protests in Greece. The country is voting on austerity plans Wednesday targeted at resolving portions of the ever unfolding Eurozone debt drama. At the same time the French governments new plan to stimulate business was met with disdain. The French are going to issue 30 billion Euros in tax credits as well as another 10 billion euros in combined tax cuts. To balance the cuts they are also raising taxes in other areas by 10 billion euros. The main argument was that the cuts did little to improve competitiveness for French corporations.

The major European exchanges gained around 0.75% today. Events here at home and those developing around China's regime change are keeping volume low around the globe, including Europe. Despite a lull in reported volume a positive string of earnings from European based corporations helped to drive the markets higher.

China is expecting a big change in leadership Thursday. Xi Jinping, the man reported to be the front runner for the position of Leader of the Communist Party, is an unknown factor that will have long lasting effects on the Chinese economy. Asian shares ended the day down, but basically flat. The Shanghai Composite Index is trading near the years lows now.

Gold and Oil

Gold traded up today but remains near a 2-3 month low. Gold gained nearly 1% in intra-day trading, putting on about $15 and flirting with the $1700 line. Despite the recent drop in prices gold is still trading well off this years lows which bodes well for profits among the miners.

The Gold Index traded up today in response to the rise in gold prices. The index has been consolidating above the neckline of its H&S reversal from the summer but has already failed to follow through on one continuation signal. The index is now sitting on and moving up from the long term support at $200 but bears close watching. The presidential results could be a big factor in gold prices and profits moving forward.

The Gold Index, daily closes

Oil also traded up today, gaining nearly 2% in intra-day trading. A host of factors are driving oil prices including mid-east politics, supply/demand hiccups related to the Sandy and the Election. Added to that the impending change of power in China has many people speculating on increased demand. The oil index spiked today in response to the increase in prices. The index, which I have been watching with a downside target, made a significant bounce today from its long term moving average and broke above the current resistance level. At the same time momentum has turned bullish; it looks like the Oil Index could move higher. If the 1250 holds then my upside target will around 1350; If 1250 fails to hold as support my target of 1150 is still in play.

The Oil Index, daily closes


If not for the election earnings would have been the story of the day. Over 330 announcements were released today with the general run of corporations reporting ok-to-good earnings. AOL was the big story early on. The online giant reported its strongest gain in ad growth for over 7 years. This growth helped drive results to beat expectations on the top and bottom line. At the same time declines in subscriptions also moderated more than expected, another bonus for the bottom line. AOL reported earnings of $0.22 per share versus the expected $0.17 and last years same quarter loss of -$0.02. The stock responded favorably to the results and gained over $5, or 15%, to reach a new high.

AOL, daily closes

CVS Caremark was another ray of sunshine this morning. The drug store chain reported earnings ahead of estimates and raised its full year guidance. The company reported profits of $0.79 per share versus the expected $0.65 on revenue of $1.01 billion. CVS has improved same store sales by 4.5% and increased pharmacy clientele by more than 5%. The strong results prompted the company to raise guidance to above the previous range. The stock jumped in early trading to come close to long resistance and then sold off throughout the day.

CVS Caremark, daily closes

NYSE Euronext reported earnings that echoed the results of corporations earlier in the season. They reported profits that beat expectations on revenue that fell short. The street was expecting earnings per share of $0.41, the company posted $0.44 but the number is still down sharply from last year. The drop in revenues was blamed on lower average trading volumes over the last year and a drop in volatility over the same quarter in the previous year. The stock opened lower and traded down into the close.

NYSE Euronext, daily closes

Marathon Oil reported an 11% jump in profits, earning $0.63 per share versus the $0.53 earned last year. The gains are lower than the consensus estimates. One positive surprise in the report was better than expected production levels across the companies portfolio. The stock gained nearly 4% and reached a new 9 month high.

Marathon Oil, daily closes

Office supply retailer Office Depot swung to a loss on restructuring charges but beat estimates on an adjusted basis. The company was expected to post earnings of (adjustes) $0.01 per share but beat with eps of $0.05. Sales dropped 5% in the quarter, more than expected. The stock broke out of a pennant formation following the announcement and reached a seven month high.

Office Depot, daily closes

Competitor Office Max also beat Wall Street expectation. On an adjusted based the company's results from operations were a profit of $0.27 per share versus the expected $0.25. This stock also broke out of a pennant formation to reach a new high.

Office Max, daily closes

The Indexes

Today the markets continued the bullish push started yesterday afternoon. Futures were positive this morning and into the open. The indexes kept up the bullish sentiment throughout the day and advanced more than 14 pts (S&P) in intra-day trading. By late afternoon the rally had lost a little steam but still managed to maintain an 11 pt gain for the day.

The election, the economy and earnings are all fighting for dominance in the eyes of traders and investors. The economy is what I think will win out. The election will ultimately affect the economy and earnings but as a stimulus for growth it is slow moving. If Obama wins things will continue as is, slow and sluggish; If Romney wins things will continue as is until he can get sworn in and enact some policy, several months from now.

The economy is in better shape than it has been in years. Yes GDP growth is slow and unemployment is still high but the underlying trend is one of improvement. Unemployment, though high, is at four year lows. Job creation, while not at robust levels, is moderate and enough to outpace layoffs. Revenue is low but profits and margins are up.

Corporate revenues were a little off this quarter but that was expected. The fact that they weren't way off should be taken in good light. The other good thing coming out of earnings season that I think got brushed aside was that nearly every company was able to improve margins and improve profitability to some extent. Many pundits think the third quarter is an earnings trough and I tend to agree with them. The steadily stabilizing economic data and improved margins are a combination that can only help business. The tone of many of this quarters earnings guidance may be overly cautious and could lead to surprises later in the year. With this said lets turn to the election.

The presidential election is seen by many as a turning point for the equities markets and they may be right. The markets, especially the S&P 500, are at a critical point on their charts. The markets will either go up, down or sideways. The S&P 500 is currently consolidating above an important support level and one that, if broken, will be hard to overcome. 1400 is emerging as a critical support for the S&P 500.

S&P 500, daily closings

Looking at the charts of the S&P 500 daily closings we can see trading in the index change as it approached 1400 in early August. The index had been moving up in choppy trading with medium to long candles and then suddenly the bars changed from long white and black candles to spinning tops as it crossed above 1400. Then, after nearly a month of sideways trading, the longer candle formations appear again, taking the index up to 1466.

1400 is exactly the middle of the previous resistance zone I was tracking over the summer. Declining long term momentum and other factors led me to believe a top was near and that 1380-1420 was going to be it. The 1380-1420 zone was coincident with numerous support/resistance zones dating back to and including the 2008 bear market. Within the zone we can find a 78.6% retracement of the 2008 bear market and support/resistance lines dating from the head & shoulders reversal leading up to the 2008 declines. Now the 150 day EMA has come into the picture, adding its support to the index. In the mid and long term the index has been trending up and is still above the rising trend line, another factor lending support to the index.

S&P 500, weekly closings

In the shorter term the index has experienced some choppy trading. The advance from 1400 to the four year highs was met with resistance and fell back, breaking short term supports but not falling all the way back to 1400, not yet. MACD on the daily charts shows that bearish momentum is increasing with each drop from resistance. This is not concerning so long as the index is still within the trading range of 1400-1466. If the index retests support (at 1400) and breaks through then the increasing bearish momentum will become a problem for bullish traders.

S&P 500, daily with MACD

The Dow is in similar position. It is sitting on a significant long term support/resistance level, the bearish MACD is on the rise inside the trading range and its long term EMA and rising up trend line are near coincident with the same support. The index needs to hold this support in order to remain bullish. A drop below here would be significant and could indicate further declines over the next few weeks and months.

Dow Jones Index, daily closings

There is a lot to consider when looking at the markets and speculating their direction at this time. The economy, corporate earnings and political change are at the top of the list. The markets are sitting on support but a support that could easily be broken. The results of the election tomorrow will be a relief for the markets and allow it to move forward with a clearer picture of what to expect.

Whether or not the markets are going to rally and retest recent highs or break support and slide to new lows is already in the cards. The election of one candidate or the other can not prevent that. The markets are very close to key support levels, even with today's advance, and could easily fall through. If the markets break through I will be looking to volume and how the candles unfold along my support and trend lines for clues to how far the fall may be.

There could be some choppy trading over the next couple of days as election based trades are unwound. It will be important to carefully watch key supports and be ready with bullish and bearish trades.

Happy election and remember the trend!

Thomas Hughes

New Option Plays

Industrial Goods & Banks

by James Brown

Click here to email James Brown


Honeywell Intl. - HON - close: 63.53 change: +0.73

Stop Loss: 61.75
Target(s): 68.00
Current Option Gain/Loss: + 0.0%
Time Frame: 3 to 6 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
HON has been consistently working its way higher. Today's show of relative strength is significant because it's a bullish breakout past resistance near $63.00 and its mid October highs near $63.50.

I am suggesting new bullish positions at the open tomorrow but more nimble traders could try and wait and jump in on a dip near $63.00, which should now be short-term support.

Our multi-week target is $68.00. FYI: The Point & Figure chart for HON is bullish with a $84 target.

NOTE: HON stock will begin trading ex-dividend on November 16th, 2012. The cash dividend should be about 41 cents so HON stock will open lower by at least 41 cents on that session.

- Suggested Positions -

buy the DEC $65 call (HON1222L65) current ask $0.93

Annotated Chart:

Entry on November xx at $ xx.xx
Average Daily Volume = 3.8 million
Listed on November 6, 2012

M&T Bank Corp. - MTB - close: 104.70 change: +1.48

Stop Loss: 103.25
Target(s): 109.75
Current Option Gain/Loss: Unopened
Time Frame: 3 to 6 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
MTB is a regional bank. The stock soared to new multi-year highs following its bullish earnings report back in October. Since then MTB has been digesting gains and consolidating under resistance near the $105.00-105.50 level.

The October 18th high was $105.33. I am suggesting a trigger to buy calls at $105.50. Our target is $109.75. More aggressive traders could aim higher. FYI: The Point & Figure chart for MTB is bullish with a $132 target.

Trigger @ 105.50

- Suggested Positions -

buy the DEC $105 call (MTB1222L105) current ask $2.30

Annotated Chart:

Entry on November xx at $ xx.xx
Average Daily Volume = 1.0 million
Listed on November 6, 2012

In Play Updates and Reviews

Monday's Bounce Continues

by James Brown

Click here to email James Brown

Editor's Note:

Monday's bounce in stocks continued on Tuesday and actually picked up speed. Yet the S&P 500 remains under technical resistance at the simple 50-dma.

Our SPW trade was triggered. SLB was stopped out.

Current Portfolio:

CALL Play Updates

EV Energy Partners - EVEP - close: 65.62 change: +0.61

Stop Loss: 63.95
Target(s): 69.85
Current Option Gain/Loss: - 12.2%
Time Frame: exit prior to the Nov. 8th earnings report
New Positions: see below

11/06/12: EVEP continues to bounce but shares remain under resistance near $66.00. EVEP looks poised to breakout again but we're almost out of time. I am not suggesting new positions at this time.

We want to exit prior to the Nov. 8th earnings report. Right now our exit will be on Nov. 8th at the closing bell.

- Suggested Positions -

Long NOV $65 call (EVEP1217k65) entry $2.85

11/05/12 prepare to exit on Nov. 8th at the close to avoid earnings
11/05/12 EVEP traded ex-dividend today ($0.776).

Entry on November 02 at $66.25
Average Daily Volume = 111 thousand
Listed on October 27, 2012

Green Mountain Coffee Roasters - GMCR - close: 25.28 change: +0.13

Stop Loss: 23.90
Target(s): 29.50
Current Option Gain/Loss: - 40.0%
Time Frame: 3 to 4 weeks
New Positions: see below

11/06/12: It was a relatively quiet day for GMCR with shares consolidating sideways above the $25.00 level. Today's high was $25.57. Readers may want to wait for a rise past $25.60 as a new entry point. More conservative traders might want to consider raising their stops closer to $25.00.

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.

*Small Positions* - Suggested Positions -

Long NOV $27 call (GMCR1217k27) entry $0.85

11/01/12 triggered @ 25.50

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

Harley-Davidson - HOG - close: 47.61 change: +0.27

Stop Loss: 45.40
Target(s): 52.25
Current Option Gain/Loss: - 7.3%
Time Frame: 3 to 6 weeks
New Positions: see below

11/06/12: HOG drifted higher on Tuesday but gains were mild. I am not suggesting new positions at this time.

Earlier Comments:
The $50.00 level could be round-number resistance and conservative traders may want to exit near $50.00. I am setting our exit target at $52.25 instead.

- Suggested Positions -

Long DEC $50 call (HOG1222L50) entry $0.82

11/01/12 triggered at $47.50

Entry on November 01 at $47.50
Average Daily Volume = 2.5 million
Listed on October 31, 2012

L-3 Communications - LLL - close: 77.46 change: +1.61

Stop Loss: 74.75
Target(s): 79.75
Current Option Gain/Loss: +55.0%
Time Frame: 3 to 6 weeks
New Positions: see below

11/06/12: LLL continues to show relative strength. The stock soared to new 2012 highs with a +2.1% rally today. I am raising our stop loss to $74.75.

- Suggested Positions -

Long Dec $75 call (LLL1222L75) entry 2.00*

11/06/12 new stop loss @ 74.75
11/05/12 triggered @ 75.25
*option entry price is an estimate since the option did not trade at the time our play was closed.

Entry on November 05 at $75.25
Average Daily Volume = 423 thousand
Listed on November 3, 2012

SPX Corp. - SPW - close: 71.21 change: +1.34

Stop Loss: 68.35
Target(s): 74.75
Current Option Gain/Loss: +13.0%
Time Frame: 3 to 4 weeks
New Positions: see below

11/06/12: The rebound in SPW continues and shares broke through resistance near $70 and its 200-dma. Our trigger to buy calls was hit at $70.25. If you missed it consider waiting for a dip back toward $70.00 as our next entry point.

- Suggested Positions -

Long Dec $75 call (SPW1222L75) entry $1.15

11/06/12 triggered @ 70.25

Entry on November 06 at $70.25
Average Daily Volume = 500 thousand
Listed on November 5, 2012

Stericycle, Inc. - SRCL - close: 94.81 change: +0.29

Stop Loss: 93.60
Target(s): 99.75 or $104.00
Current Option Gain/Loss: - 26.6%
Time Frame: 3 to 6 weeks
New Positions: see below

11/06/12: SRCL gapped open higher this morning and then spent most of the day drifting sideways. Shares seem to be stuck in this $94-96 range.

Earlier Comments:
Please note that I am setting two exit targets. Our conservative exit target is $99.85 since the $100.00 level could be round-number, psychological resistance. Our more aggressive, longer-term target is $104.00.

- Suggested Positions -

Long DEC $100 call (SRCL1222L100) Entry $0.75

Entry on November 2 at $95.98
Average Daily Volume = 509 thousand
Listed on November 1, 2012

PUT Play Updates

The Mosaic Co. - MOS - close: 53.64 change: +1.10

Stop Loss: 54.25
Target(s): 48.00
Current Option Gain/Loss: -34.2%
Time Frame: 3 to 6 weeks
New Positions: see below

11/06/12: Our MOS trade looks like it's in trouble. There was no follow through on Friday's bearish reversal. Now MOS has produced a two-day bounce. Shares are testing short-term resistance near $54.00 and its 150-dma. If there is any follow through tomorrow then MOS will likely hit our stop loss at $54.25. I am not suggesting new positions at this time.

- Suggested Positions -

Long NOV $55 PUT (MOS1217w55) entry $2.60

10/27/12 new stop loss @ 54.25
10/23/12 triggered @ 53.45

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

Oil States Intl. - OIS - close: 70.00 change: -0.88

Stop Loss: 72.25
Target(s): 65.25
Current Option Gain/Loss: -17.2%
Time Frame: 3 to 6 weeks
New Positions: see below

11/06/12: Good news! There was no follow through on yesterday's bounce in OIS. Shares underperformed the market today but they closed right on round-number support at $70.00. The recent lows have been near $69.60. Readers may want to wait for a drop below $69.50 as a new bearish entry point to buy puts.

- Suggested *Small* Positions -

Long DEC $65 PUT (OIS1222x65) entry $1.45

Entry on November 05 at $69.80
Average Daily Volume = 589 thousand
Listed on November 3, 2012


Schlumberger Ltd. - SLB - close: 71.15 change: +1.20

Stop Loss: 71.05
Target(s): 65.25
Current Option Gain/Loss: -45.8%
Time Frame: 3 to 4 weeks
New Positions: see below

11/06/12: The bounce in SLB continues and shares pushed past the $71.00 level. Our stop loss was hit at $71.05.

- Suggested Positions -

NOV $70 PUT (SLB1217w70) entry $1.70 exit $0.92 (-45.8%)

11/06/12 stopped out at $71.05
11/01/12 warning, today could be a bullish reversal
10/31/12 triggered @ 69.65


Entry on October 31 at $69.65
Average Daily Volume = 5.3 million
Listed on October 25, 2012