Option Investor

Daily Newsletter, Thursday, 1/3/2013

Table of Contents

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

Market Wrap

Markets Digest Data And Minutes

by Thomas Hughes

Click here to email Thomas Hughes

The markets felt a huge surge of relief when the Fiscal Cliff was narrowly averted earlier this week. The euphoria, while still bubbling just below the surface, waned a bit today as traders and investors turned their focus onto new data. It seems as though trading will be driven by business-as-usual in the short term but the next phase of budget debates will be affecting longer term outlooks.

As for today, the markets had a truck load of economic data dumped on it today. The end of the month, the end of the year, the Fiscal Cliff and the holiday week combined to provide us with three major data bundles; employment/jobs, retail sales/earnings guidance and US auto sales. On the business front there were also a few refreshingly normal (non-Fiscal Cliff driven) points of interest. Hormel, maker of Spam and other house hold brands, announced that it is buying Skippy Peanut Butter. This is being viewed as a good move for the company by the pundits and is expected to be a good entry into the Chinese markets for Hormel. Starbucks also announced planned expansion into the Asian marketplace. The coffee giant is now planning on opening stores in Viet Nam which is a fast growing emerging market.

Futures trading this morning was only mildly negative after yesterday's remarkable run up. The opportunity for profit taking was there, the S&P has moved up over 60 points in the last week, but I think traders are expecting more upside. Today's data did little to phase the futures which carried over into the start of regular trading. The S&P moved marginally lower in the early hours, crossing briefly beneath 1460, but then reversed and moved into positive territory by lunch time. The lack of selling pressure is a good sign for the bulls, especially and most importantly if it holds through the close of trading tomorrow. The markets are consolidating at pre-holiday levels in preparation for the coming year, the next few days or weeks will be important for my long term targets. 1465 is the important line on the S&P charts for me at this time.

The Economic Data

Unemployment claims were brushed aside this week in favor of the ADP Employment report. This report is usually released the day before the unemployment figures and is the precursor to Friday's ever important Non-Farm Payrolls report from the Labor Department. I think everyone was surprised with the reported 215,000 increase in jobs reported by ADP. This is a strong number but should be taken with a grain of salt. The ADP numbers have historically been skewed from the Non-Farm figures and they have recently changed their methodology. Regardless, this jump in claims supports the sluggishly growing yet somewhat stable labor market I have been seeing in other data. Analysts had been expecting a rise of 149,000. ADP also revised the November estimates up by 30K to 148,000. Estimates for tomorrows NFP figures are looking for a gain of 153,000, a gain of only about 4,000 compared to the massive 67,000 increase in ADP. There is the possibility that NFP will positively surprise the markets.

Initial jobless claims rose by 10,000 this week to an adjusted 372,000. This was basically in line with estimates and reflects the first rounds of post holiday lay-offs. The four week average of claims gained 250, holding above the long term low of 350,000. Lay-offs have been holding steady over the last 12 months with only minor fluctuations. New higher tax rates on employees may spur some accelerated firing in the first part of this year so I will be watching out for this. On the expected lay-offs front Challenger reported that planned job cuts fell by over 22%.

Continuing claims also gained this week, adding +40,000. This figure lags the initial claims by one week so this jump reflects people laid off in the first half of December. Despite the rise the number of continuing claims is still low compared to the last 12 months and trending down. Total claims for unemployment fell this week by about 50,000 to 5.4 million. Even with this claims the total number of Americans on unemployment has been elevated above 6 month lows for four weeks.

This rise in total unemployment does not bode well for the unemployment number also being released tomorrow. Last month the unemployment fell to multi-year low of 7.7%, tomorrow's number is expected to hold steady and remain flat at 7.7%. The unemployment rate is affected on the front side by the number of unemployed Americans and on the backside by the number of Americans in the workforce. If the number of Americans holds steady and the number of workers in the workforce drops then the unemployment rate drops. The total number of Americans in the work force has been in decline for several quarters which is attributed to much of the drop in the unemployment rate.

Retail Sales Beat, Guidance Mixed

This morning also saw the release of retail sales. Just as a reminder, there are hundreds of retail companies and only about 20 or so (the number drops regularly) actually participate in the release of monthly sales figures. For the most part December retail sales were better than expected. The storms that raged across the northeast and mid-west during the month did have some impact on the sector and caused 7 retailers to modify guidance, guide lower or offer some form of earnings warning. On the comp store front the word of the day was beat-the-street. At least 8, I lost count, of the reporting companies beat expectations. Macy's, Gap, Target, Kohl's, Nordstrom, Ross, TJ Maxx and Costco are all on that list. Nordstrom beat by more than 5% posting comp store gains of over 8%. The Retail Spider, XLY, continued its bounce up from the short term moving average. This index is breaking out to new highs but has also left a gap behind on the daily charts. This gap may not be as significant as others because it occurred following the holidays when volumes were low and the markets were being affected by Fiscal Cliff hoopla. Looking at the charts of weekly closings the index is making a nice move up from the 150 day moving average and reaching new all time highs.

XLY, weekly

US Auto Sales Above Expectations

Ford, Chrysler and GM all beat expectations with Chrysler leading the pack with a double digit jump in December sales. Fords sales for the increased by 1.9%, ahead of expectations, and reached a 6 year high. GM increased its December sales by 4.9%, a full 3% better than estimates. The real gem of the sector was Chrysler, who was able to increase sales by 10% over the same period last year and their 33rd consecutive monthly increase. The news helped to drive Ford to a new high today, confirming a break above resistance and setting sights on a $15 target. On the long term charts Ford has MACD convergence, Stochastic crossing over the upper signal line and an increase in volume to support this move.

Ford, daily

Asia Mixed On China Hopes And Profit Taking

Data from China, most recently services sector increases, is still supporting the hopes of a continuing Chinese economic expansion growth. At the same time profit taking and concerns over US budget talks kept the Asian markets that were open in check today. China and Japan are still closed due to the New Year Holiday but will be reopening tomorrow. The yen, however, is still trading in world markets. The yen is still on its way to Shinzo Abe's target of $90 and has about 2.50 to go. Today's candle could potentially be a hanging man but with the support of Abe and the BOJ behind it the yen's slide to 90 is still in play.

USD/JPY, daily

European Markets At 18 Month Highs

The European markets ended the day mixed following the Wednesday rally. The Swiss markets were the one exception but they were just playing catch up after being closed yesterday. The European markets are focused on budget concerns at home and here in the US. Portugal and Spain are both facing legislative review of their plans and may encounter more resistance to austerity. The Euro had been holding steady against the dollar in early trading but the release of FOMC minutes at 2 pm sent the pair crashing down through support. The FOMC has hinted at a possible end to QE sometime this year. The possibility of the Fed support of US interest rates disappearing also sent US equities back down to the days lows.


Bonds Respond To The Fed

The rates on US treasuries responded to the FOMC minutes by extending yesterday's gains. The rate on the ten year treasury gained more than 3%, climbing to 1.899. The move takes the rates on the ten year to new 8 month high and above resistance. At the same time another bullish sign for rates has appeared, the short term EMA is crossing over the short term EMA to the up side for the first time in over 9 months. Other technicals remain weak but could be signaling a breakout in bond rates. MACD has turned bullish and is rising at this point and the stochastic shows a market with mounting support. The caveat is that the move is based on the FOMC minutes and conversations held between the Fed governors, not actual policy or events. This move could fade in the near term until more concrete evidence of the end of QE is presented.

Ten Year Treasury Yield, daily

Oil And Gold

Oil traded in a tight range today, bound on all sides by supply concerns, the US budget talks and the FOMC minutes. The price of crude remained above $92.50 and short term support/resistance. A consolidation here would have an upside price target of $100. The Oil Index traded up in early trading today but met the resistance of a down angled trend line connecting peaks in 2011 and 2012. Technical indicators on the daily charts are bullish and pointing to a possible break out of this index. A move above 1278 with a confirmation will provide a target of 1350.

Oil Index, daily

Gold traded to the downside today on mild profit taking but took a big hit at 2 pm when the FOMC minutes were released. In total, the metal shed around 1.5% today, continuing its drop from resistance at $1700 begun yesterday afternoon. The gold index made a similar move to the downside. The index dropped more than 3% today and remains trapped in its two month trading range. The gold trade is likely to remain trapped between those hoping for more QE and the new thought that QE could be ending for the near term at least.

Gold Index, daily

The Indexes

The indexes held support today. Yesterday's move was very significant and based on the market action over the last few weeks and sharp drop today would not have been out of place. However, we must remember that because of the holiday's and the Fiscal Cliff the last few weeks and months have been dominated by a fear driven knee-jerk market and very light volumes. Because of this I see yesterday's move as more of a return to reality than an actual rally. Now, we're back at the highs we saw just prior to the Presidental election and signs are looking good for a continuation of the long term up trend and a retest of the all time highs.

S&P 500 daily

On the daily charts it looks like support is forming just above the December highs around 1450 with resistance at 1465. When we zoom in to the chart of 30 minute closings we can see that 1450 proved to be support yesterday during the mid-day pullback. We can also see that 1465 provided resistance today that was confirmed with the release of FOMC minutes. The S&P dropped from this level precisely at 2 PM. This range is very important, especially the lower boundary. The market will need to maintain that level tomorrow and into Monday for the bulls to be really happy. A drop below 1450 could bring out the bears and drive prices back down to 1400.

S&P 500 30 minute

Indicators on the daily and the weekly charts are all bullish or about to turn bullish. Bearish MACD on the long term charts is just about to turn bullish and Stochastic is providing a long term buy signal. It seems likely that this index will at least make a break out but it could still turn into a bull trap. The long term trend is weakening and a top could begin forming at any time. A failure to cross and hold the 1465 level brings the downside of 1350 back into the picture as the most recent long term low.

S&P 500 weekly

The VIX remains at long term lows. The volatility index has been at or near these lows for more than 7 months. This is the longest time in the last few years that the index has been down in the calm range. The index is pointing to a general lack of fear in the markets which makes a sort of sense. With the Fiscal Cliff averted, taxes raised but not as much as we thought and business/economic conditions stable and improving there is little reason to fear, or at least fear as much as we have, and that is kinda scary in itself.

The VIX, daily

Tomorrow is going to be a big day regardless of how much the indexes move. Tomorrow is the first Friday of the new year and the first Friday following yesterday's rally. In order to remain bullish going into the weekend, next week and the first part of this year I need to see the S&P 500 remain above 1450. Tomorrow also brings us some more important data; non-farm payrolls, unemployment, ISM, manufacturing data and petroleum inventories.

Until then happy trading and remember the trend!

Thomas Hughes

New Option Plays


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) GS, CYT, GHL, AN, BDX, DSW, JAZZ, CNQR, WFM, FISV


OpenTable, Inc. - OPEN - close: 52.21 change: +0.83

Stop Loss: 49.40
Target(s): 58.00
Current Option Gain/Loss: + 0.0%
Time Frame: 4 to 6 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
Shares of OPEN displayed relative strength today. The stock has been consolidating under major resistance at the $50.00 level for months. On the weekly chart it looks like a significant bottom for OPEN. The current bullish breakout past $50.00 could spark a short squeeze. The most recent data listed short interest at 42% of the very small 19.4 million share float.

I am suggesting new bullish positions now with a stop loss at $49.40. However, I would seriously consider waiting for a dip into the $51.50 area as a better entry point before launching positions.

Our multi-week target is $58.00. FYI: The Point & Figure chart for OPEN is bullish with a $73 target.

- Suggested Positions -

buy the Feb $55 call (OPEN1316B55) current ask $2.40

Annotated Chart:

Entry on January xx at $ xx.xx
Average Daily Volume = 361 thousand
Listed on January 03, 2012

In Play Updates and Reviews

Where is the Follow Through?

by James Brown

Click here to email James Brown

Editor's Note:

Was yesterday's fiscal-cliff deal rally just a one-day wonder? Where is the follow through? Traders should be careful here.

Current Portfolio:

CALL Play Updates

Akamai Tech. - AKAM - close: 40.95 change: -1.21

Stop Loss: 39.95
Target(s): 44.90
Current Option Gain/Loss: - 75.0%
Time Frame: 3 to 4 weeks
New Positions: see below

01/03/13: AKAM is losing altitude after yesterday's deal-induced pop. Shares should find support at $40.00. Nimble traders could buy calls on a dip or a bounce near $40.00.

our target is $44.90. More aggressive traders could aim higher. FYI: The Point & Figure chart for AKAM is bullish with a $54 target.

- Suggested Positions -

Long 2013 Jan $45 call (AKAM1319a45) entry $0.20

Entry on January 02 at $42.05
Average Daily Volume = 3.1 million
Listed on December 22, 2012

Canadian Pacific Railway - CP - close: 106.27 change: +0.67

Stop Loss: 101.75
Target(s): 109.00
Current Option Gain/Loss: + 96.0%
Time Frame: 3 to 6 weeks
New Positions: see below

01/03/13: CP continues to rally but shares seemed to lose momentum as they neared yesterday's high. I am not suggesting new positions at this time. More conservative traders may want to raise their stops again. Or readers could start taking profits now.

Our plan was to use small positions to limit our risk.

- Suggested *SMALL* Positions -

Long Jan $105 call (CP1319a105) entry $1.25

01/02/13 new stop loss @ 101.75
12/21/12 trade opened on gap down at $101.46

Entry on December 21 at $101.46
Average Daily Volume = 961 thousand
Listed on December 20, 2012

Monsanto Co. - MON - close: 95.34 change: -0.81

Stop Loss: 92.45
Target(s): 99.50
Current Option Gain/Loss: + 68.0%
Time Frame: exit prior to Jan 8th.
New Positions: see below

01/03/13: MON hit some profit taking today. Readers may want to start taking profits now since we don't have much time left. We do not want to hold over the January 8th earnings report. I am not suggesting new positions.

Earlier Comments:
Our plan was to keep our position size small.

*Small Positions*

- Suggested Positions -

Long 2013 Jan $95 call (MON1319a95) entry $1.25

01/02/13 new stop loss @ 92.45
12/24/12 triggered @ 93.05

Entry on December 24 at $93.05
Average Daily Volume = 2.2 million
Listed on December 19, 2012

iShares Silver ETF - SLV - close: 29.18 change: -0.74

Stop Loss: 27.45
Target(s): 33.50
Current Option Gain/Loss: - 5.2%
Time Frame: 6 to 8 weeks
New Positions: see below

01/03/13: The FOMC minutes had an effect on precious metal prices today. The minutes suggested that Fed members believe the Federal Reserve's QE programs could slow down in 2013. That was bullish for the dollar and the U.S. dollar produced a hefty rally today. The dollar rally helped push silver prices lower. The SLV has now filled the gap and is testing short-term support near $29.00. I would wait for a bounce before considering new bullish positions.

- Suggested Positions -

Long March $30 call (SLV1316c30) entry $0.95

Entry on December 31 at $29.07
Average Daily Volume = 11.6 million
Listed on December 29, 2012

Snap-on Inc - SNA - close: 80.58 change: -0.28

Stop Loss: 78.90
Target(s): 84.50
Current Option Gain/Loss: - 31.2%
Time Frame: 2 to 3 weeks
New Positions: see below

01/03/13: SNA didn't see much follow through on yesterday's rally. The stock hovered around $81 most of the day and then began to fade lower. Readers can use another bounce off the $80.00 level as a new bullish entry point.

Earlier Comments:
I consider this a short-term trade. It will probably only last a few days. Our target is $84.50. I would use small positions!

- Suggested Positions - (Keep positions small)

Long Feb $85 call (SNA1316B85) entry $0.80

Entry on January 03 at $80.90
Average Daily Volume = 239 thousand
Listed on January 02, 2012

Sohu.com - SOHU - close: 47.75 change: -0.24

Stop Loss: 43.45
Target(s): 49.25
Current Option Gain/Loss: +39.0%
Time Frame: 3 to 6 weeks
New Positions: see below

01/03/13: Shares of SOHU didn't see much movement today. The stock hovered around the $48.00 level all day. I would expect a dip back toward $46.00 if the market declines tomorrow. I am not suggesting new positions.

Earlier Comments:
SOHU can be a volatile stock so we want to limit our position size to reduce our risk. If triggered our target is $49.75. More aggressive traders may want to aim higher since SOHU seems to have built a decent bottom over the last several months. With enough time you could aim for the $55-60 zone. FYI: The Point & Figure chart for SOHU is bullish with a $66 target.

- Suggested Positions -

Long Feb $47.50 call (SOHU1316b47.5) entry $2.05

01/02/13 adjust exit down to $49.25
SOHU almost hit our target at $49.75 but the high today was only $49.70. We don't want that to happen again.
12/29/12 new stop loss @ 43.45

Entry on December 27 at $45.20
Average Daily Volume = 606 thousand
Listed on December 26, 2012

Trimble Navigation - TRMB - close: 61.25 change: -0.27

Stop Loss: 59.75
Target(s): 64.75
Current Option Gain/Loss: - 32.3%
Time Frame: 2 to 3 weeks
New Positions: see below

01/03/13: TRMB rallied to another relative high near $62 and then pulled back. I would not be surprised to see the stock dip toward support near $60 if the market declines. I would still consider new positions now but more nimble traders may want to try and launch positions on a dip.

We are aiming for $64.75 but more aggressive traders could aim higher. We do want to keep our position size small to limit our risk.

- Suggested Positions - (Keep positions small)

Long Jan $60 call (TRMB1319a60) entry $2.25

Entry on January 03 at $61.32
Average Daily Volume = 750 thousand
Listed on January 02, 2012

PUT Play Updates

Range Resources - RRC - close: 63.40 change: +1.35

Stop Loss: 64.25
Target(s): 55.50
Current Option Gain/Loss: - 43.9%
Time Frame: 4 to 6 weeks
New Positions: see below

01/03/13: RRC is not cooperating with us. Neither oil prices or the energy sector really showed any strength today. Yet shares of RRC surged +2.1% and is now hovering just under resistance near $64.00. If there is any follow through tomorrow we could see RRC hit our stop loss.

Earlier Comments:
Readers may want to keep their position size small. There has been rumors this past year that RRC might be a takeover candidate.

*Small Positions* - Suggested Positions -

Long Feb $60 PUT (RRC1316n60) Entry @ $2.41

Entry on December 31 at $61.65
Average Daily Volume = 1.5 million
Listed on December 29, 2012