Option Investor

Daily Newsletter, Wednesday, 11/21/2012

Table of Contents

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

Market Wrap

Quiet Markets Ready For Turkey

by Thomas Hughes

Click here to email Thomas Hughes
Trading today was very light, the holiday and a huge round of impending news gave reason for many to sit on the sidelines. Next week promises to bring market moving news on three fronts.


Trading today, and this week, were very light. Nothing unexpected there, the holiday and the pre-holiday week are always a good time for traders to take much needed vacation time. This year is no different but what is different is the nature of the news we are expecting the week following the holiday. Usually the markets are braced for reports of sales from all the major retailers following the so called Black Friday shopping weekend. Over the last few years the importance of Cyber Monday has also grown but is only another face of the usual post Thanksgiving pre-Christmas shopping season hoopla. The news on its own would likely move the markets to the positive unless sales are just so dismal that there is no hope of retailers making money.

However, this year we also have the Fiscal Cliff to consider. The looming fiscal fiasco that congress and the president have led us to add another twist to the equation. Signs are good for a compromise, both sides have indicated that they are willing to work to bring the issue to a successful conclusion. So far remarks have led traders to believe that there will be a swift and positive resolution. The talks paused last week on Friday and will not resume until next week. As long as news on this front remains positive it should continue to support the markets in the short term.

There is also Europe and Greece to consider. While not directly linked to our markets a deal for Greek financial aid could help support European markets and in turn help the rest of the world. Greece by itself is small and basically not a threat to us or our markets but it is a threat to Europe and the EU. Getting past the current need for aid will help stabilize the region and could lift European markets. The Greece deal, which concerns the need for immediate financing, was pushed off until Monday (kick,kick …) but there are hints that a solution is close at hand. Germany's Merkel had remarks to the effect that a deal could be reached very soon. The money is there, they just need to reach an agreement on the details. We can only hope that they will reach an agreement.

The Economy

The regular releases of economic data, particularly the unemployment data, was moved up because of tomorrow's holiday. The initial claims came in at the consensus of 410,000. I feel like we should give the analysts a hi-five for getting it right but maybe I'll wait until next weeks revisions. This weeks number is down 41,000 from an upwardly revised 451,000. The data is still showing volatility associated with Hurricane Sandy. The revision to last weeks data added 12,000 and I expect a hefty revision to this week.

The four week moving average of initial claims rose this week. The average gained 9,500 to reach 396,250. This number, while at a 12 month high is still below the 400,000 level that economists believe shows an expansion in the job market. A rise in the 4-week average of initial claims above 400,000 would indicate contraction in the job market.

Continuing claims also fell in this weeks data, by 30,000, to 3.337 million. This number is also elevated due to the Hurricane but is still down significantly over the last 12 months. The total number of Americans on unemployment reported today was 5.241 million, a gain of nearly 250,000. This is also elevated due to Hurricane displacement but also still down sharply over the last twelve months. The total number of claims for the same period last year was well over 6.5 million, which makes this weeks number a 22% decrease. So, at this time it doesn't look like Sandy will take that big a bit out of the jobs market but we'll have to keep an eye on how claims data progresses. The spike in unemployment claims could impact total unemployment figures for November.

The reading on the Index of Leading Indicators was also release today. The indicators gained 0.2%, inline with expectations and a drop from last months 0.5% increase. Last month was revised down by 0.1% from 0.6%. The leading indicators are not showing me anything definitive at this time.

Bernanke continued to take the politicians to task today. In prepared statements delivered this morning to the Economic Club he mentions that economic recovery is “disappointingly slow” and that the fiscal cliff is still a “substantial threat” to that recovery. He also failed to make any comments indicating further stimulus and actually indicated that there would not be any despite the sluggishness in growth. The dollar should get a boost from the indicated lack of further easing.

Around The World

Not much new is going on in Europe that I haven't already mentioned so I'll leave that region on this note. European markets drifted higher in today's session with the FTSE gaining 0.07% and the Xetra Dax gaining 0.16%.

The big story in Asia today was Japan. The island nation's trade deficit, with new data released today, is at the highest level in over 30 years. This figure merely underscores the economic troubles Japan has been facing. The LDP party, which is widely believed to be the victor in upcoming elections, has already vowed to do whatever it takes to reduce inflation and stimulate growth for the country. Statements made by Shinzo Abe, the potential next Prime Minister, last week helped to drive the value of the yen down. This week the LDP party went on to state an inflation target of 2% and to reiterate last weeks calls for unlimited easing to get the economy back in line. This stance has sent the yen sliding versus the dollar, a slide that could continue should the unlimited printing of yen takes place.

Oil And Gold

The rising hostilities in the middle east have been driving oil prices lately. Despite the escalating violence and its possible implications for supply disruptions (which are minimal) oil prices remain in a tight range between $85 and $90. Prices even remained steady after today's inventory report showed a surprise 1.47 million barrel decline in crude stocks. The Oil Index has been moving up over the last few days in response to the mid east situation. Speculation that mid east tensions will raise oil prices is also lifting oil stocks. However, oil prices are unlikely to remain high for long based on the violence unless it does escalate further. The fear is that war between Israel and Gaza will spread throughout the region and impact world supply. Out right war has been avoided for a long time, lets pray that it stay's that way for a longer time. The Index very nearly touched my downside target before making its way back up to the 1200 level and the mid-point of the long term trading range. The index could continue to trend up in the near term but faces resistance around 1225 where it will run into the long and short term moving averages.

The Oil Index, daily

Gold prices have been holding fairly steady over the last six weeks. The metal has basically been trading between $1700 and $1735 in that time. The fiscal cliff, all the QE we've had this year, the possibilities of further easing from players such as the ECB, BOC and BOJ and mid east tensions are all keeping the metal in demand. The Gold Index has not been trading in a similar range. The index had been sitting on support but fell through unexpectedly (to me anyway) last week. The index is now moving back up but faces long term resistance around the 200 level. Gold prices have been elevated, if not near the actual highs, for a long time and I am expecting to see some good profits reports from the miners. The stochastic indicator is diverging from the recent low and suggests that there is still long term support for this index. I'm targeting the 200 level for the short term and will watch how the index moves along that line for further clues.

The Gold Index, daily

Story Stocks

Earnings reports are light this week but there are still some companies reporting. One surprise this morning was an earnings miss by Deere and Co. This company reported a miss on profits and a beat on revenue, the opposite of the trend I a have been following this earnings season. Analysts had been expecting earnings of $1.88 per share, Deere reported $1.75 on revenues that fell well short of the consensus. The company stated that demand for equipment remained strong and that they expected to see sales increases in the range of 5%. The company's full year guidance also fell short of the consensus. The stock responded by dropping more than 4% and falling below a long term support level.

Deere & Co

SalesForce reported yesterday after the bell and pleased investors with results and prospects. The cloud computing company reported a 35% increase in revenues and is expecting similar results next year. On a GAAP basis SalesForce posted a loss but excluding one time items the company beat top and bottom line expectations. As for the fourth quarter, SalesForce is predicting adjusted earnings in line with estimates. The stock jumped nearly 8% on the news but is still trading beneath long term resistance.


Wal Mart may be consolidating for another leg downward. The stock has been trending down for 4 weeks, gapping down below the long term moving average and is now forming a potential bear pennant. MACD is consistent with a continuation of the down trend and this weeks news story could help with that. Wal Mart is well known for bad press and poor relations with some of it's employees. Now, the retailer is facing mass protests that may impact their black friday sales. Today the National Labor Relations Board said it won't act to stop protests in front of Wal Mart stores before Friday. Just how widespread this will be and how it will affect sales is not known but I think it will be minimal. I think the biggest worry will be the bad press but that probably won't stop anyone from going there to shop.

Wal Mart, daily

Sector Watch

Looking at the markets sector by sector can be a great way to find trades you might not ordinarily see. A great way to do this is with the Sector Spyder Heat Map. The map gives you several options for viewing the S&P 500 as it is broken down by its composite sectors. Sectors that are particularly hot or cold are good places to look for trending stocks and those that may be about to break out. The map shows that over the last 5 days the hottest sectors are consumer discretionary, materials and the financials. What it also shows is that year-to-date the same three sectors are also the hottest, but in reverse order. What is important to note that the three sectors that have been hottest all year during the rally are also the hottest right now during this pre-holiday support bounce. Should the markets decide to rally onward from here these sectors could see the strongest gains. Likewise, should the markets fall from here these sectors could also see the largest losses.

S&P with XLY, XLB and XLF- comparative percent movement

The Indexes

The markets opened today with some strength even with a lack of volume. The advance/decline ratio hovered around 2 : 1 all day. The fighting between Israel and Gaza and their potential cease fire agreement provided some minimal volatility and I mean minimal. The S&P traded in a very tight range, moving less than five points all day.

The MACD poked its head up above the signal line into bullish territory today but it could just be a head fake at this point. The recent series of deeper dips into bearish territory, convergent with the series of lower lows in the index, suggests that the SPX will at least retest the recent lows. When that retest will happen is my question. At least two of my big three market movers for next week (fiscal cliff, black Friday results and the Greece deal) have a potential to send the markets up or down. Monday we can expect (maybe) a deal for Greece; Not a market mover for us but it sure wouldn't hurt to get some good news out of Europe. We can also expect some early tallies of Black Friday sales results, which is a potential market mover for us. Maybe Monday but probably later in the week will come updates on fiscal cliff negotiations. At this time I see more chance for upside than downside on the daily charts but there is still resistance ahead.

S&P 500, daily with MACD

S&P 500, daily with Stochastic

Longer term the charts and indicators are still consistent with an up trending market. This up trend is still weak and weakening but an up trend it is. Until the trend lines are broken I have to remain bullish in the long term but that bullishness is tinged with neutrality and a touch of bearishness. There is a lot of resistance moving forward, 1400, 1430 and 1465 are all significant resistance points and could combine with changing sentiment, politics or economic conditions to provide a ceiling for equity prices. Assuming the index does move higher if the index does not surpass the most recent high around 1465 a topping action could be in play. Looking even further out than that, should the S&P rally and make new highs, it still won't be clear sailing. There are several resistance areas before the index could retest the all time closing high of 1565.

S&P 500, weekly

The VIX is back down near long term lows and the bottom end of the calm zone. A VIX at this level reveals a calm market and one with little fear of bearishness. With the VIX so low the possibility of the current S&P bounce moving higher increases. The downside is that the VIX is also very near to bullish extremes that could precede a sharp drop in equity prices. At this time it looks though like the markets are calming down, the fiscal cliff isn't as looming as it was at first glance and we're all getting ready to eat some turkey and buy some Christmas gifts.

The VIX, daily

We are open for business on Friday and by that I mean the stock markets and trading. Volume should continue to be light and remain in a tight range like we have seen today. Monday we get back to real business as usual. Perhaps we will get a continued bounce and a Santa Rally (yes, I said it). Holiday shopping could be robust this year according to some recent analysts and Monday will be the first look at just how robust it is. Until then enjoy the holiday!

Thomas Hughes

New Option Plays

Weakness in REITs

by James Brown

Click here to email James Brown

Editor's Note:

In addition to EQR tonight readers may want to check out shares of AVB again. AVB's bounce has rolled over and the stock looks like another bearish candidate.


Equity Residential - EQR - close: 54.06 change: -0.54

Stop Loss: 55.10
Target(s): 50.05
Current Option Gain/Loss: Unopened
Time Frame: 3 to 6 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
Many of the REIT stocks have turned sharply lower in November. That might be due to investors selling these normally higher-dividend stocks ahead of higher taxes in 2013. Shares of EQR are currently hovering near support at $54.00. More aggressive traders may want to buy puts now. I am suggesting small bearish positions if EQR trades at $53.65 or lower. Our short-term target is $50.05. You may want to aim lower but I am expecting $50 to offer some psychological support.

Trigger @ 53.65

- Suggested Positions -

buy the 2013 Jan $55 PUT (EQR1319m55) current ask $2.60

Annotated Chart:

Entry on November xx at $ xx.xx
Average Daily Volume = 1.69 million
Listed on November 21, 2012

In Play Updates and Reviews

Just Drifting Higher

by James Brown

Click here to email James Brown

Editor's Note:

The stock market is just drifting higher as investors ignore the markets and focus more on this week's holiday.

The U.S. markets will be closed for the Thanksgiving holiday tomorrow and they will only be open half a day on Friday.

We did see our AWI and IOC trades triggered. DIA and LMT were stopped out.

Current Portfolio:

CALL Play Updates

Armstrong World Industries - AWI - close: 50.22 change: +0.87

Stop Loss: 49.25
Target(s): 54.50
Current Option Gain/Loss: -30.0%
Time Frame: 3 to 6 weeks
New Positions: see below

11/21/12: AWI continued to rally as we expected. Shares broke out past resistance at $50.00 and hit our trigger to buy calls at $50.25.

NOTE: it would appear the spread on our option suddenly widened on us. Hopefully it will return to normal when traders and volume return next week after the holiday.

Earlier Comments:
Shares could see another short squeeze. The most recent data listed short interest at 20% of the small 26.4 million share float.

- Suggested Positions -

Long DEC $50 call (AWI1222L50) entry $1.65

Entry on November 21 at $50.25
Average Daily Volume = 685 thousand
Listed on November 20, 2012

Dillard's Inc. - DDS - close: 86.00 change: +0.37

Stop Loss: 82.75
Target(s): 89.75
Current Option Gain/Loss: + 0.0%
Time Frame: 3 to 4 weeks
New Positions: see below

11/21/12: DDS spent the day hovering under the $86.00 level. Readers may want to wait for a dip and then buy a bounce when DDS rebounds.

- Suggested Positions -

Long Dec $90 call (DDS1222L90) entry $1.05

Entry on November 20 at $85.05
Average Daily Volume = 489 thousand
Listed on November 19, 2012

Dover Corp - DOV - close: 63.12 change: +0.00

Stop Loss: 59.85
Target(s): 67.50
Current Option Gain/Loss: + 7.1%
Time Frame: 3 to 6 weeks
New Positions: see below

11/21/12: It was a quiet day for DOV. The stock consolidated sideways and closed unchanged on the session. Readers may want to wait for a dip back toward $62.00 as a new entry point.

- Suggested Positions -

Long 2013 Mar $65 call (DOV1316c65) entry $2.10

11/19/12 triggered @ 62.30

Entry on November 19 at $62.30
Average Daily Volume = 1.7 million
Listed on November 17, 2012

Netflix, Inc. - NFLX - close: 83.00 change: +0.60

Stop Loss: 79.25
Target(s): 89.75
Current Option Gain/Loss: - 19.5%
Time Frame: 3 to 4 weeks
New Positions: see below

11/21/12: NFLX continues to slowly drift higher. Shares are nearing the next level of resistance at $85.00 and its 300-dma.

We're still waiting for the temporary short squeeze to show up.

Earlier Comments:
NFLX could see a short squeeze. The most recent data listed short interest at 31% of the 54.1 million share float. NFLX can be volatile so I am suggesting small positions to limit our risk.

- Suggested Positions -

Long DEC $85 call (NFLX1222L85) Entry $4.60

11/20/12 new stop loss @ 79.25
11/16/12 triggered @ 82.25

Entry on November 16 at $82.25
Average Daily Volume = 6.5 million
Listed on November 15, 2012

O'Reilly Automotive - ORLY - close: 91.55 change: +0.18

Stop Loss: 89.95
Target(s): 95.75
Current Option Gain/Loss: -13.1%
Time Frame: 3 to 4 weeks
New Positions: see below

11/21/12: ORLY churned between $90.50 and $92.00 today. I would wait for a new rally past $92.00 before considering new bullish positions. Our target is $95.75 but more aggressive traders may want to aim for the $99-100 zone instead.

- Suggested Positions -

Long DEC $95 call (ORLY1222L95) entry $1.90

Entry on November 20 at $92.05
Average Daily Volume = 1.8 million
Listed on November 19, 2012

Pharmacyclics Inc. - PCYC - close: 52.00 change: +0.18

Stop Loss: 49.65
Target(s): 56.50
Current Option Gain/Loss: - 38.8%
Time Frame: 3 to 4 weeks
New Positions: see below

11/21/12: The early morning rally attempt in PCYC failed. The sideways consolidation seems to be narrowing. I remain cautious here.

Earlier Comments:
I do consider this a more aggressive, higher-risk trade. Anytime you trade a biotech stock it can be a high-risk trade since you never know when a negative headline could send the stock crashing. Our target is $56.50. More aggressive traders could aim for the $59-60 zone instead.

- Suggested *Small* Positions -

long Dec $55 call (PCYC1222L55) entry $3.60

11/20/12 new stop loss @ 49.65
11/19/12 trade opened with PCYC's gap open higher @ 52.21

Entry on November 19 at $52.21
Average Daily Volume = 1.0 million
Listed on November 17, 2012

PUT Play Updates

Carpenter Tech. - CRS - close: 46.07 change: +0.34

Stop Loss: 48.05
Target(s): 42.50
Current Option Gain/Loss: - 4.3%
Time Frame: 3 to 6 weeks
New Positions: see below

11/21/12: CRS has spent the last three days churning sideways along the $46.00 level. Readers may want to start tightening their stop losses lower.

We still have half a position open. I am not suggesting new positions at this time.

Earlier Comments:
Our multi-week target is $42.50. CRS can be somewhat volatile so readers may want to limit their position size to reduce risk.

- Suggested Positions -

Long Dec $45 PUT (CRS1222x45) Entry $1.15

11/19/12 sold half at the open. unfortunately CRS gapped open higher at $45.94
exit half @ 45.95, option @ $1.20 (+4.3%)
11/17/12 new stop loss @ 48.05, sell half of our position on Monday morning
11/14/12 new stop loss @ 49.05

Entry on November 12 at $48.23
Average Daily Volume = 460 thousand
Listed on November 10, 2012

InterOil Corp. - IOC - close: 59.34 change: -0.65

Stop Loss: 61.05
Target(s): 50.50
Current Option Gain/Loss: -18.5%
Time Frame: 3 to 5 weeks
New Positions: see below

11/21/12: IOC continues to show relative weakness. The stock spiked down this morning and hit our trigger at $58.50 on its way to $57.41. The stock did bounce but remains under the $60 level for now. I want to remind readers that this is a more aggressive, higher risk trade. IOC is volatile and has a high amount of short interest.

*Small positions* - Suggested Positions -

Long DEC $55 PUT (IOC1222x55) entry $2.70

Entry on November 21 at $58.50
Average Daily Volume = 790 thousand
Listed on November 20, 2012

iShares Russell 2000 ETF - IWM - close: 79.68 change: +0.42

Stop Loss: 80.15
Target(s): 75.50
Current Option Gain/Loss: -33.9%
Time Frame: 4 to 6 weeks
New Positions: see below

11/21/12: The IWM is still drifting higher. The small cap index and ETF is nearing what should be significant resistance at $80.00. We have a stop loss at $80.15. More aggressive traders may want to use a wider stop loss. It's always possible that the IWM dances across the $80 level intraday only to reverse lower. I am not suggesting new positions at this time.

- Suggested Positions -

Long 2013 Jan $75 PUT (IWM1319m75) entry $1.53

11/17/12 the IWM looks poised to bounce
11/14/12 new stop loss @ 80.15
11/13/12 new stop loss @ 81.05

Entry on November 08 at $79.85
Average Daily Volume = 36 million
Listed on November 7, 2012

Vornado Realty - VNO - close: 74.88 change: +0.11

Stop Loss: 75.25
Target(s): 72.50
Current Option Gain/Loss: Dec75p: - 3.5% & 2013Jan$75p: + 2.6%
Time Frame: 3 to 6 weeks
New Positions: see below

11/21/12: VNO has reached round-number resistance at $75.00. Has the oversold bounce been satisfied or will the rebound continue higher? If VNO trades much higher it will hit our stop at $75.25. I am not suggesting new positions.

- Suggested Positions -

Long DEC $75 PUT (VNO1222x75) entry $1.40*

- or -

Long 2013 Jan $75 PUT (VNO1319m75) entry $1.90*

11/16/12 sold half of our position to lock in gains.
1/2 exit Dec $75 put @ $2.55 (+82.1%)
1/2 exit 2013 Jan $75 put @ $3.10 (+63.1%)
adjust the stop loss down to $75.25
11/15/12 SELL HALF of our positions to lock in gains tomorrow morning,
move the stop loss down to $76.25 for the rest
11/14/12 readers may want to start taking profits now
new stop loss @ 78.05
11/12/12 trade opened on gap down at $76.89
*option entry price is an estimate since the option did not trade at the time our play was opened.

Entry on November 12 at $76.89
Average Daily Volume = 1.1 million
Listed on November 10, 2012


Dow Jones Industrial Average (ETF) - DIA - close: 128.15 change: +0.44

Stop Loss: 128.15
Target(s): 125.25
Current Option Gain/Loss: -33.5%
Time Frame: 3 to 4 weeks
New Positions: see below

11/21/12: DIA pushed above the $128.00 level and hit our stop loss at $128.15. I would keep an eye on this ETF. The $130 level and the 200-dma are both overhead and both look like potential resistance. We might see another bearish opportunity soon.

- Suggested Positions -

DEC $125 PUT (DIA1222x125) entry $1.79 exit $1.19 (-33.5%)

11/21/12 stopped out at $128.15
11/17/12 new stop loss @ 128.15
11/14/12 new stop loss @ 129.15
11/13/12 new stop loss @ 130.15
11/08/12 new stop loss @ 130.60


Entry on November 08 at $129.18
Average Daily Volume = 5.3 million
Listed on November 7, 2012

Lockheed Martin Corp. - LMT - close: 90.51 change: +0.33

Stop Loss: 90.65
Target(s): 84.25
Current Option Gain/Loss: -62.5%
Time Frame: 3 to 4 weeks
New Positions: see below

11/21/12: LMT gapped open higher and then spent the rest of the day inside a 50-cent range. Our stop loss was hit at $90.65.

Earlier Comments:
We do want to keep our position size small because LMT has produced a new breakdown on its daily chart but it has not yet broken below potential support on the weekly chart. It is possible the stock could bounce off the trend line displayed on the weekly chart but I doubt it given the market's broader weakness.

- Suggested *Small* Positions -

Dec $85 PUT (LMT1222x85) Entry $1.60 exit $0.60 (-62.5%)

11/21/12 stopped out at $90.65


Entry on November 15 at $88.02
Average Daily Volume = 1.6 million
Listed on November 14, 2012