Option Investor

Daily Newsletter, Monday, 2/25/2013

Table of Contents

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

Market Wrap

Politics and Economics Funnel into Tornadic Winds

by Linda Piazza

Click here to email Linda Piazza
Market Internals


Political and economic influences swirled into funnels that pushed currencies today. The currency moves snapped an early attempt to push equities higher and shoved equity indices to several-month lows.

Speculation that the Bank of Japan could soon be head by a proponent of aggressive monetary easing funneled into pressures on the yen. Italy's election and its effect on the euro constituted another such instance of politics and economics swirling into funnels that threatened equity markets.

EUR/USD Moves, Chart by Forex Factory:

The orange and red rectangles grouped at the right side of the chart outline the period when the EUR/USD peaked just before Italy's exit poll results began to be released. Subsequent results drove the pair ever lower as it became clear that there might not be a clear winner.

Impending U.S. sequestration talks and testimony by FOMC chairman Ben Bernanke later in the week threaten to whip the currency markets even more. Coming into today's trading, equity traders and investors had to decide how to position their trades ahead of tomorrow's testimony, and they decided to wait out that testimony at what might be support. Then, late in the day, the floor fell out of SPX 1500 and RUT 900 support, with those indices and others tumbling into the close.

The SPX lost 1.83 percent; the Dow, 1.55 percent; and the NDX, 1.33 percent. The RUT outdid itself, plunging 2.22 percent, and the SOX, fell 1.96 percent. The $DJT, which had been one of the momentum leaders to the upside, dropped nearly as much as the RUT, falling 2.16 percent. The volatility indices jumped.

While U.S. equities tumbled, gold and silver futures bounced off last week's lows. Gold was again viewed as a safe haven. April gold futures settled at $1,586.60 an ounce. Some articles this weekend and today mentioned massive short positions in gold that could result in a short-covering rally. The short position showed up when the Commitment of Traders report appeared last week. We don't often see big jumps in gold and silver when the dollar is also rising, but some market watchers theorized that the dollar's rise kept short-covering from fueling an even stronger rise in gold and silver.

Monday's Developments

Last night, China's HSBC Flash Manufacturing PMI fell to 50.4, an unexpectedly disappointing result. That result dropped this PMI back to the same 50.4 seen in November. The four-month low in the headline number was echoed by a four-month low in the Manufacturing Output Index, measuring 50.9. New exports orders decreased, changing direction, as did stocks of purchases. Output, new orders, employment, input prices and quantity of purchases increased, but at a slower rate than they had previously.

The Nikkei 225 had jumped higher on its open as the yen weakened in expectation of that more aggressive easing. Asian bourses turned in gains, although the performances were mixed. The Shanghai Composite coiled in positive territory, in seeming indecision. It ended the day in the middle of its trading range, up 0.50 percent. The Nikkei 225 percent gained a whopping 2.43 percent; the Hang Seng, a smaller 0.17 percent; and the Straits Times, a flattish 0.02 percent. The Nikkei's close was its highest close in four years. That's what currency moves can do for an equity index if the currency moves in a beneficial way. As we're to see when we look at U.S. indices, the effects weren't so beneficial.

After Japan's markets closed, a 6.2 earthquake hit the eastern part of the country. Although the earthquake was strong enough that people had difficulty staying on their feet, no extensive damage was reported.

European bourses traded most of the day today awaiting the final results from this weekend's election in Italy. Going into the election, market pundits thought the best hopes for market stability would be a clear win from Mario Monti or perhaps a win that would force a coalition between Mario Monti and the center-left leader Pier-Luigi Bersani. Note that this is not a comment on what might be best for the country or the wellbeing of its citizens and is not a politically motivated comment. It's merely reporting on what pundits thought preferable for market stability. It was felt that either outcome would perhaps prevent a hung parliament and continue the policies that Prime Minister Monti's administration has put into effect. However, that wasn't what happened.

By yesterday, some pundits were already suggesting that Bersani might pull in the victory and former Prime Minister Silvio Berlusconi and comedian Beppe Grillo and might turn in strong performances, too. Former Prime Minister Berlusconi's administration is blamed by some for the debt crisis, and the former prime minister has been making promises to return to some of those policies. He also has offered to tax evaders a remission on penalties. Too strong a performance by either Grillo or Berlusconi could fuel a storm that could sweep through markets, some felt, and that's what happened as the first exit polls began appearing.

The first exit polls began appearing shortly after the U.S. open, showing Bersani leading, with Berlusconi second. U.S. markets dropped from their early morning highs. European indices had started out in the green. Although the FTSE 100 didn't appear much impacted when those exit polls first began appearing, that wasn't true of the other bourses. Other European bourses dropped from their highs as the funneling political and economic developments heightened concerns about the Eurozone.

The situation in Italy is still developing and may change by the time you read these words. However, by the end of our market day, experts predicted that Italy's Chamber of Deputies could see a three-way tie in the Chamber of Deputies between the parties of front-runner Bersani, Berlusconi and Grillo, with Bersani's party. Bersani and Berlusconi's parties projected to nearly tie in the Senate. Articles across varied news sources warned of potential political gridlock, the most dreaded result of the elections.

With so much uncertainty about those elections, it might appear puzzling that the European bourses started the day with such gains. Even the FTSE 100 had moved sharply higher after the U.K. received its first downgrade of its sovereign debt from Moody's on Friday. Perhaps the European equity markets' reactions can be explained by the hope that Britain's Prime Minister George Osborne might be forced to lighten up on austerity measures. His administration denied that there would be a change.

In addition, last night some European bourses appeared to escalate their gains and some currencies change direction about the time that the February 2013 National Association for Business Economics (NABE) Outlook Survey report appeared. It's difficult to piece out whether there was any cause/effect relationship, although one section of the report addressed issues in Europe.

This survey reports the consensus opinions of 49 professional forecasters, NABE says. Almost sixty percent of NABE forecasters believe that sequestration will happen in either full or partial form. Today, President Obama again urged Congress to reach a compromise that will avoid the most deleterious cuts and the GOP urged President Obama to do the same, so we wait to see whether those forecasters were right.

The forecasters believe that issues related to the debt ceiling and U.S. fiscal imbalances will negatively affect real GDP growth this year. They predict real GDP growth of 2.4 percent from Q4 2012 to Q4 2013, and 3.0 percent the next twelve-month period. They forecast a one-percent drop in government consumption expenditures and gross investments.

Those forecasters believe that civilian unemployment will improve both years, and home prices, residential investment and housing starts will show strong growth. They believe inflation remains a tame level around two percent.

They also predicted that several European countries would need bailout packages. That's not news to us, but about a third of the forecasters suggested that Spain will require more money than was previously thought. Of course, the obverse of that seemingly dire prediction is that about two-thirds did not think Spain would require more than was previously predicted. Only fourteen percent believe that Greece will break away from the euro this year.

All those swirling political and economic winds pushed European and U.S. bourses off their highs. The FTSE 100 gained 1.01 percent; the DAX, 1.45 percent; and the CAC 40, 0.41 percent. However, the DAX's high of the day was 7860.57, and it closed at 7773.19, well off that high, leaving a long upper wick or shadow on its daily candle. Spain's IBEX 35 closed higher by 0.67 percent, but its 8233.40 close was well off its 8343.80 high. As exit polls began appearing, Italy's FTSE MIB dropped from its high of 16,883.31 to an intraday low of 16,132.54. An EOD bounce closed it at 16,351.99, up 0.73 percent but still well off its day's high.

Today's most important U.S. economic release were the January Chicago Fed National Activity Index, released premarket, and the Dallas Fed Manufacturing Survey, released after the market open. The Chicago Fed National Activity Index swept lower, reported at -0.32. That was well below the revised prior 0.25. The three-month moving average, however, rose to 0.30 from the revised prior 0.23.

The Chicago Fed characterized the nation's growth as below trend. Housing and consumption led the decline, but production was also negative. Employment gained but gained less than it had in the prior month. Components showing strength were sales/orders/inventories and the three-month average. The Chicago Fed felt that the improvement in the three-month average showed that "the trend for economic growth is still above average," even if the current month's report was below that trend.

A little later in the morning, the Dallas Fed Manufacturing Survey, a regional rather than a national survey, was released. The headline number was expected to measure 3.0-5.5, but measured a lower 2.2 instead. The production component measured 6.2, down from the prior 12.9. The accompanying summary pointed to that 6.2 production component, calling it "one of the more positive regional reports on manufacturing." The general outlook was one of slower growth for this report.

For example, the new order component was positive, but it tumbled from 12.2 to 2.8. Similarly the capacity utilization and shipments components both tumbled while staying in positive territory. Other components such as the general business activity, company outlook, future manufacturing activity, and employment indices showed similar patterns. However, the average workweek measured -3.0, not positive at all. To balance out that negative, future general business activity climbed to 10.8 from the prior 9.2.

Story stocks today included Barnes & Noble (BKS, 15.05, up 1.55 or 11.47 percent). The company confirmed speculation that it was considering the sale of its retail business. Founder and chairman Leonard Riggio is the want-to-be buyer.

Lowe's (LOW, 35.86, down 1.81 or 4.80 percent) reported earnings that beat expectations, raising guidance in the process. The company reported EPS of $0.26/share, better than the expected $0.23/share. Sales beat expectations, too, but only because they dropped less than expected. They fell to $11.05 billion, but experts had predicted only $10.84 billion in sales. Same-store sales rose. The company reported that its makeover efforts to close some stores and improve customer service and product selection were at least partially responsible for the results, while also pointing to rebuilding after Hurricane Sandy. Store workers have been given AAPL iPhones so that they can better research products for customers and store managers, iPads so that they can be on the floor and not in offices.

3D Systems (DDD, 34.55, down 3.42 or 9.00 percent) reported earnings with a miss on the revenue. The revenue was $101.6 million, but the forecast had been $103.9 million. Dillard's (DDS, 34.55, down 3.42 or 9.00 percent) missed expectations. Revenue of $2.11 billion beat expectations of $2.09, but the EPS of $2.87/share fell short of expectations for $2.89/share.

Affymax (AFFY, 2.42, down 14.10 or 85.35 percent) has to be included among story stocks, and what a sad story it was as far as investors were concerned. Patients were reporting severe allergic reactions to its drug for anemia, and the company withdrew the drug.

When negotiations between prosecutors and BP PLC (BP, 40.40, down 1.43 or 3.42 percent) fell apart this weekend ahead of a civil trial related to the Gulf oil spill, pundits speculated that BP would rather go to trial and pay penalties instead of paying fines to avoid trial. Penalties are tax deductible; fines are not. The trial began today.

Automaker GM (GM, 26.33, down 0.77 or 2.84 percent) has decided that 2014 models will have 4G internet access both on the center console and in the backseat.

Samsung Electronics announced a March 14 event in New York City, one in which it will likely reveal the newest version of the Galaxy smartphone. This weekend in Spain, Samsung unveiled a new addition to its Galaxy Note line. Some market watchers say that put Samsung a step ahead of Apple (AAPL, 442.80, down 8.01 or 1.78 percent), not due to unveil its next iPhone until the summer.

After hours, Autodesk Inc. (ADSK, 36.62, down 1.29 or 3.40 percent) dropped another $1.32 as this report was prepared. The company reportedly dropped on a weak outlook.

Let's look at daily charts. What we'll find is that, although those funneled political and economic concerns pushed markets around, they were vulnerable to being pushed.


Those new to my Monday Wraps might find the following introductory paragraphs useful when interpreting my charts. Those who have read the Wraps can skip straight to the charts. I set up nested Keltner channels on my charts. It's a run-of-the-mill channeling system like the more familiar Bollinger Bands. As with those more familiar BB's, channel boundaries are often targets for upside or downside moves. They also mark levels where prices might find support or resistance on closes. When several channel lines converge, that potential resistance or support might appear stronger, just as it would if 20-, 50- and 100-sma's all converge in one spot.

For the benefit of subscribers, I mark potential upside and downside target/support/resistance levels with ovals, usually green for upside and red for downside. Orange ovals are sometimes used when the darker-colored ones would not allow for a clear examination of the next target. From now on, I will mention the nearest potential support or resistance level in the discussion on the chart, but not the further-out ones. They can be located on the charts if price breaks through the nearest levels on consistent daily closes. If an interpretation such as "support levels appear stronger than resistance, so up looks more likely than down" is possible, I'll tell you. Often we traders must be able to defend our trade against a move in either direction.

As with any type of potential support or resistance, those with profits should be protective of those profits as support or resistance is tested. If prices find support and climb, look to the next higher oval, even one just broken through, as potential resistance. Do the reverse when resistance is breached. Hopefully, this format provides you with the information you need without requiring all night to read as happens when I list each potential support or resistance level individually.

Annotated Daily Chart of the SPX:

The last Monday Wrap two weeks ago had again warned that the SPX was overdue for a test of the lower boundary of the smallest (grey) Keltner channel. Overdue or not, that test was delayed until last week. The Monday Wraps have been suggesting that when such a lower-boundary test occurred, a bounce from that support might be anticipated. Market participants might then watch how the SPX behaved when it bounced up to retest the red 9-ema from the underside, the Wrap suggested. Such a test might help them gain some understanding of whether the drop had been just a normal retest of the channel's support, part of the regular behavior in a rally, or something else.

That last Monday Wrap had suggested that, if the SPX's bounce found resistance on daily closes at or below the 9-ema, market participants might reserve judgment about the next direction. Resistance found there suggested they might be alert to rollover potential.

Friday, the SPX jammed up against the 9-ema at the close. Today, the SPX punched through the 9-ema and all the way up to next Keltner resistance in the morning, but the SPX didn't end the day there. Resistance held and the SPX rolled back down to deeper potential support, barreling through round number support at 1500. I had initially begun annotating and writing commentary earlier in the day and had commented that traders now must factor in the possibility that the SPX might fall again to test the 1487-1497 range. That came to pass before the end of the day.

What next? We know to watch how the SPX behaves with respects to red 9-ema retests on the way up. Now it's time to watch how it acts with respect to bounces up to the red 9-ema on the way down. This will help us gauge strength versus weakness. It seemed that the SPX was due for a few days of coiling behavior before next direction was decided, but just fell through support. It may be that the SPX coils now, mostly between 1487 and 1509-1512. The SPX would have to maintain daily closes above about 1530 before it resets a new upside target, marked by the green rectangle.

The danger is that the SPX falls through the 1487 level on consistent daily closes. That sets a much lower potential downside target, as outlined by the red rectangle near 1450.

Annotated Daily Chart of the Dow:

The Dow's behavior late last week differed from the SPX's. The Dow did spring back above the red 9-ema after its test of the lower channel boundary of its smallest (grey) Keltner channel. Round-number and grouped Keltner resistance stopped it on Friday, however, not too far from last week's high, and, obviously, the Dow could not maintain daily closes above the red 9-ema.>[? Today early morning bounce widened that broadening channel in which the Dow has been coiling. When it was knocked back this afternoon, was it just widening the channel to the downside? These widening formations prove treacherous because what looks like a breakout is nothing more than a widening of the broadening formation.

The Dow has now set a potential next downside target 13700, but that broadening formation questions whether we should believe that the Dow broke down or only widened the formation. Be prepared for a possible drop to the 13700 level, but if the Dow bounces instead, watch for potential resistance on daily closes at the red 9-ema. We'll want to use that average to help us decide whether the Dow is beginning a true downtrend or just was jolted a little deeper than expected by the unanticipated currency moves.

The Dow needs to break back above today's high on sustained daily closes before a new upside target is set. If it produces consistent daily closes beneath the 13700 level, it will have set a potential downside target at the next red rectangle.

Annotated Daily Chart of the NDX:

If the Dow performed better on Friday than the SPX with respect to its rebound and the 9-ema, the NDX performed worse, so perhaps it's no surprise that it performed worse today on a Keltner basis, dropping all the way to its 120-ema.

Glancing at that chart, one can see another broadening formation. The Nov-Dec one broke to the upside, only to immediately begin coiling again. This is a sign of instability and unpredictability. Was today's action a breakdown out of that broadening formation or only a further widening?

I don't think we know yet. We do know from recent observations that the NDX hasn't been able to maintain the kind of clean rally pattern that we saw on other indices. It was chopping back and forth across the 9-ema. That rendered its behavior with respect to the 9-ema less helpful than with other indices. It did show us that the NDX never was really trending as much as sort of chopping higher in a pattern known for its instability.

The NDX appears to have settled today near gap, Keltner and round-number support. If it can't find support on consistent daily closes and bounce from here, it sets a next potential downside target near 2640. If it can sustain daily closes back above the red 9-ema, then it sets a tentative upside target at the nearest green rectangle. However, that broadening formation renders all such predictions more guesswork than prediction.

Annotated Daily Chart of the RUT:

Knowing how the RUT tends to overrun boundaries, it's not so surprising that the RUT punched through the lower boundary of its smallest (grey) Keltner channel on Thursday and only managed a close at or above it because the hard decline had turned that channel boundary lower. What should have been a bit surprising, however, was that the RUT did no better at punching up through and closing above the red 9-ema on Friday's close than the SPX had. Resistance held on the daily close. The RUT did punch up through the 9-ema today, but then it rolled over and rolled over hard.

My first iteration of this chart description included the warning that the RUT was setting a potential downside target at the lowest orange rectangle. Obviously, the RUT dropped into that rectangle, although not quite all the way through to potential Keltner support on daily closes at about 890. As long as the RUT is maintaining daily closes below that descending red 9-ema, traders must now consider the possibility that the RUT will drop down to test that level. As with the SPX, the chart setup supported the idea that the RUT might coil for a few days, and it's still possible that it coil between the 890-912 zone before we know final direction. If the RUT breaks through 890 on daily closes, it sets a new downside target marked by a red rectangle.

In case of sustained daily closes above about 920, the next potential target is marked.

Annotated Daily Chart of the Dollar:

If currency moves are at least partly responsible for what's going on in the equity markets, we should certainly look at the dollar's chart. On 2/18, the dollar broke above a descending trendline off the 11/16 intraday high of 81.515 and then confirmed the breakout by climbing above that value. With Keltner resistance being tested and in the normal course of breakout behavior, we should perhaps expect a pullback to retest the sharply rising (red) 9-ema as well as that 11/16 intraday high. As long as the dollar maintains most daily closes above that 11/16 intraday high of 81.515, it's in breakout mode and maintains a potential upside target near 83.44. What will be difficult to predict is how FOMC Chairman Bernanke's testimony tomorrow will impact the dollar with Japan also scrambling to keep the yen low against other currencies and Italy doing all it can to depress the euro, too.

Tomorrow's Economic and Earnings Releases

Atlanta Federal Reserve Bank President Dennis Lockhard speaks tonight in Knoxville, Tennessee, addressing the economic outlook. The economic releases and important events for the rest of the week can be seen below, carried forward from Jim Brown's Wrap this weekend. With FOMC Chairman Ben Bernanke poised to begin two days of testimony in Washington, D.C. tomorrow, and with the reaction to the FOMC's last Minutes so pronounced, it's possible that the Atlanta president's speech will be parsed for clues tonight as futures traders decide how to position portfolios ahead of FOMC President Bernanke's testimony.

Other events that could impact currency movements and, therefore, our markets, too, include a speech by ECB President Mario Draghi at 12:30 pm EST on Wednesday. The ECB President will be speaking in Bayern at the Katholische Akademie. We all know that, as riveted as we might be on what FOMC Chairman Bernanke has to say on Wednesday, the ECB President has been known for producing market-turning headlines of his own. He is known for using public addresses to hint at future monetary policy. Many of the market moves over the last couple of weeks have been led by or accompanied by big moves in the currency markets, so the time has come when we must pay attention again to what's happening in Europe and Asia.

What about Tomorrow?

Annotated 30-Minute Chart of the SPX:

The SPX overran its downside target on this chart. Doing so moved the SPX into breakdown mode on this chart. When I roll up to a 60-minute chart to obtain a next potential target, I find a reading of 1480 as a potential next downside target (and support on 60-minute closes) if momentum carries the SPX lower first thing tomorrow morning.

However, it's possible that calmer minds will prevail overnight and shorts might fear what will be said in the FOMC chairman's testimony. If the SPX bounces, potential resistance zones are marked. Sustained 30-minute closes beneath a rolling-lower red 9-ema means that nothing has changed and the tenor from today remains. Breakouts above the red 9-ema may not be quite as predictive. We'll be hit at some point by a short-covering rally, and those are unpredictable. I could easily see such a short-covering rally carrying the SPX right back up to 1505-1510. That's not a prediction but a possibility. Right now, we've had a first jolt lower, and we don't know what to predict next until we see what the reaction will be.

Annotated 30-Minute Chart of the Dow:

The Dow stopped just short of potential Keltner support on 30-minute closes and just ahead of its Thursday low. If the downside momentum should carry through first thing tomorrow morning, the 60-minute chart sets a potential next downside target at about 13660. If the Dow bounces, it should be no surprise that potential resistance might be found near 13825-13850. You don't need to be able to parse Keltner charts to tell that. Watch for rollover potential if that level is reached. Further potential targets and resistance levels are marked. As long as most 30-minute closes are beneath the rolling-lower 9-ema, nothing has changed in the tenor.

Annotated 30-Minute Chart of the NDX:

Like the Dow, the NDX stopped today's drop near potential Keltner resistance and last week's low. In addition, there's round-number support, although the SPX's 1500 supposed round-number support was no support today. If the momentum carries the NDX lower first thing tomorrow morning, the 60-minute chart projects a next potential target near 2675. If the NDX bounces, potential next upside target and resistance zones on 30-minute closes are marked on the chart. As long as most closes remain at or below the rounding-lower red 9-ema, the tenor has not changed.

Annotated 30-Minute Chart of the Russell 2000:

As is typical of the RUT, it overran its potential stopping place, dropping through round-number 900 support, last week's low, and potential Keltner support. It dropped almost all the way to the next target on the 60-minute chart, too, with that target at 890-893. If the momentum sends the RUT deeper first thing tomorrow morning, watch for the possibility that potential support kicks in there. On a bounce, watch for potential resistance at the levels marked. Remember that if a climb is too rapid, it's going to push those dynamic lines higher. Watch the 9-ema (or the 10-sma or whatever your preferred short-term guidepost might be). Consistent 30-minute closes beneath a turning lower red 9-ema means nothing about the tenor has changed.

I had thought the indices were going to drop to the places they dropped. Early today, I had begun annotating charts and had marked them for you, to warn you that those were potential new targets. I just didn't expect indices to drop there today. Since tornadic currency movements pushed indices lower and since we have the prospect of FOMC Chairman Bernanke calming fears of a sooner-rather-than-later end of easing, I thought a limit would be put on how far indices would drop today.

What's next? As I cautioned before the decline began, in the event of a decline, we need to see the kind of behavior that was seen in late December and early January if the rally is to resume. This was when indices dropped to the bottom of their pushed-lower smallest Keltner channels and then rebounded quickly and strongly up through the grouped resistance overhead. Otherwise, there's the threat of lower lows.

We may see a few days of coiling before we know what happens next, although that's not a prediction. What is certain is that bulls don't want to see daily closes break through the marked levels hit or approached today, as indices could then jolt lower as surprised new bulls face their first episode in the ring.

New Option Plays

Consumer Goods & Agriculture

by James Brown

Click here to email James Brown


Fossil, Inc. - FOSL - close: 98.65 change: -2.49

Stop Loss: 103.30
Target(s): 93.25
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
You could certainly argue that the payroll tax and higher gas prices may negative impact FOSL's sales. Technically the stock has been reversing for almost two weeks. Today saw a breakdown below support at its 50-dma and the $100.00 mark.

I am suggesting put options at the open. We'll use a stop loss above today's high. Our target is $93.25.

- Suggested Positions -

buy the Mar $95 PUT (FOSL1316o95) current ask $1.95

Annotated Chart:

Entry on February 26 at $---.--
Average Daily Volume = 1.1 million
Listed on February 25, 2012

Monsanto Company - MON - close: 98.09 change: -1.89

Stop Loss: 100.65
Target(s): 92.50
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
MON is a giant in the agricultural chemical business. It looks like the stock produced a bearish double top with the peak in January and recently in February. After falling to its 50-dma, MON tried to bounce. Yet today's session has created a new bearish reversal near resistance at $100 and its 40-dma.

Last week's low was $97.90. I am suggesting a trigger to buy puts at $97.80. If triggered our target is $92.50.

Trigger @ 97.80

- Suggested Positions -

buy the Mar $95 PUT (MON1316o95) current ask $1.04

Annotated Chart:

Entry on February -- at $---.--
Average Daily Volume = 2.5 million
Listed on February 25, 2012

In Play Updates and Reviews

Monday's Market Meltdown

by James Brown

Click here to email James Brown

Editor's Note:

The U.S. market initially rallied on Monday but equities reversed into a sharp, widespread sell-off.

We have removed CAM as a trade.
KMB was closed to lock in gains.
MMM, PNRA, VAR were stopped out.
We want to exit our EVEP trade at the open tomorrow.

Current Portfolio:

CALL Play Updates

Check Point Software Tech. - CHKP - close: 51.94 change: -0.29

Stop Loss: 50.75
Target(s): 54.50
Current Option Gain/Loss: +21.0%
Time Frame: 3 to 6 weeks
New Positions: see below

02/25/13: CHKP held up pretty well today. The stock tagged a new relative high at $52.76 before fading lower. Shares only lost -0.5% versus the -1.4% in the NASDAQ. However, if the market sell-off continues CHKP will likely follow. More conservative traders may want to exit early now to avoid a loss. I am not suggesting new positions at this time.

*Small Positions* - Suggested Positions -

Long Mar $50 call (CHKP1316c50) entry $1.90

02/25/13 market looks weak, readers may want to exit now
02/20/13 new stop loss @ 50.75
02/16/13 CHKP looks poised to dip back toward support at $50.00
02/13/13 new stop loss @ 49.90
02/06/13 new stop loss @ 49.40

Entry on February 01 at $50.25
Average Daily Volume = 2.7 million
Listed on January 31, 2012

Canadian Pacific Railway - CP - close: 117.22 change: -1.09

Stop Loss: 116.60
Target(s): 124.75
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

02/25/13: Bullish analyst comments helped keep CP afloat for a little while today. Eventually the stock succumbed to the market's widespread sell-off. Aggressive traders might consider buying a dip or a bounce near the rising 20-dma with a tight stop loss. Overall I don't see any changes from my prior comments.

I am suggesting a trigger to buy calls at $120.25. Our short-term target is $124.75. More aggressive traders could aim higher.

FYI: On Friday CP announced a quarterly dividend of 35 cents (Canadian$) payable on April 29, 2013 to shareholders of record on March 28th.

Trigger @ 120.25

- Suggested Positions -

buy the Mar $120 call (MAR1316c120)

Entry on February -- at $---.--
Average Daily Volume = 795 thousand
Listed on February 23, 2012

McDonald's - MCD - close: 96.14 change: +0.89

Stop Loss: 93.25
Target(s): 99.75
Current Option Gain/Loss: +39.7%
Time Frame: 3 to 6 weeks
New Positions: see below

02/25/13: Dow-component MCD managed to shrug off the market's sell-off. The stock continues to show relative strength and hit a new relative high before trimming its gains.

FYI: The Point & Figure chart for MCD is bullish with a $115 target.

- Suggested *Small* Positions -

Long Apr $95 call (MCD1320d95) entry $1.66

Entry on February 25 at $95.38
Average Daily Volume = 4.9 million
Listed on February 23, 2012

CBOE Volatility Index - VIX - close: 18.99 change: +4.82

Stop Loss: 11.45
Target(s): 19.90
Current Option Gain/Loss: +34.2%
Time Frame: 8 to 9 weeks
New Positions: see below

02/25/13: We are finally seeing the big surge higher in the VIX that we've been expecting. The volatility index soared +34% today. We are adjusting our exit target down to 19.90. More aggressive trades may want to aim higher (maybe somewhere in the 22-25 range).

- Suggested Positions -

Long Apr $16 call (VIX1317D16) entry $1.90

02/25/13 adjust exit target to 19.90

Entry on February 10 at $13.37
Average Daily Volume = n/a
Listed on February 09, 2012

PUT Play Updates

Capital One Financial - COF - close: 50.80 change: -1.48

Stop Loss: 54.55
Target(s): 48.50
Current Option Gain/Loss: +85.3%
Time Frame: 3 to 4 weeks
New Positions: see below

02/25/13: COF underperformed the market with a -2.8% decline to new multi-month lows. Traders might want to consider an early exit now since the put option value has risen +85%, especially since the $50.00 level could be round-number, psychological support. The newsletter is going to keep our exit target at $48.50.

- Suggested Positions - *Small Positions*

Long Mar $52.50 PUT (COF1316o52.5) entry $1.23

02/23/13 be careful here. COF is holding support at the $52 level. Shares could be poised to bounce.

Entry on February 20 at $52.25
Average Daily Volume = 5.9 million
Listed on February 19, 2012

EV Energy Partners - EVEP - close: 55.11 change: +0.48

Stop Loss: 56.15
Target(s): 50.50
Current Option Gain/Loss: -20.5%
Time Frame: exit prior to earnings on Mar 1st.
New Positions: see below

02/25/13: It's time to hit the eject button and exit our EVEP trade. The stock did not participate in the market's widespread decline today. Instead shares rallied +0.8% and broke through short-term technical resistance at the simple 10-dma. I am suggesting we exit immediately at the opening bell tomorrow.

- Suggested Positions -

Long Mar $55 put (EVEP1316o55) entry $3.65

02/25/13 prepare to exit at the opening bell tomorrow
02/23/13 new stop loss @ 56.15, prepare to exit on Feb. 28th or sooner.

Entry on February 11 at $54.75
Average Daily Volume = 300 thousand
Listed on February 09, 2012

Time Warner Cable Inc. - TWC - close: 86.61 change: +0.22

Stop Loss: 86.30
Target(s): 80.25
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

02/25/13: If TWC doesn't start to cooperate soon we'll probably drop it as a bearish candidate. The stock did not participate in the market's sharp sell-off today. That doesn't mean the stock looks bullish. The rally stalled near its simple 10-dma.

I am suggesting we launch small bearish positions at $84.50. If triggered our short-term target is $80.25. We do want to keep our position size small because TWC is arguably already oversold.

FYI: The Point & Figure chart for TWC is bearish with a $70 target. Plus, you may also want to note that TWC has a 65-cent dividend coming up soon and the ex-dividend date is Feb. 26th.

Trigger @ 84.50 *Small Positions*

- Suggested Positions -

buy the Mar $82.50 PUT (TWC1316o82.5)

Entry on February -- at $---.--
Average Daily Volume = 3.6 million
Listed on February 21, 2012


Cameron Intl. - CAM - close: 61.98 change: -1.97

Stop Loss: 64.75
Target(s): 69.75
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: see below

02/25/13: The market is reversing lower and CAM is reversing as well with a failed rally this morning. Our trade has not opened yet. I am removing CAM as a candidate. Shares are unlikely to hit our suggested entry point any time soon.

trade did not open.

02/25/13 removed from the newsletter


Entry on February -- at $---.--
Average Daily Volume = 3.0 million
Listed on February 14, 2012

Kimberly-Clark Corp. - KMB - close: 94.24 change: -0.26

Stop Loss: 89.25
Target(s): 94.75
Current Option Gain/Loss: Mar$90c:+165.9% & Apr95.5c:+168.1%
Time Frame: 4 to 8 weeks
New Positions: see below

02/25/13: Over the weekend we suggested everyone lock in gains and exit on Monday morning. KMB was kind enough to gap open higher at $94.61. The rally continued with a surge toward $96.00 before reversing.

- Suggested Positions -

Mar $90 call (KMB1316c90) entry $1.88 exit $5.00 (+165.9%)

- or -

Apr $92.50 call (KMB1320c92.5) entry $1.10 exit $2.95 (+168.1%)

02/25/13 exit at the open this morning
02/23/13 prepare to exit on Monday morning Feb. 25th


Entry on February 18 at $91.33
Average Daily Volume = 2.2 million
Listed on February 16, 2012

3M Company - MMM - close: 101.75 change: -1.79

Stop Loss: 101.85
Target(s): 104.85
Current Option Gain/Loss: - 8.4%
Time Frame: 3 to 4 weeks
New Positions: see below

02/25/13: MMM got caught up in the market's meltdown on Monday. Shares hit our stop loss at $101.85.

Earlier Comments:
I am suggesting we keep our position size small to limit our risk.

- Suggested Positions - *Small Positions*

Mar $100 call (MMM1316c100) entry $2.95 exit $2.70 (-8.4%)

02/25/13 stopped out
02/19/13 new stop loss @ 101.85, adjust exit target to $104.85
02/16/13 new stop loss @ 101.30


Entry on February 06 at $102.25
Average Daily Volume = 3.0 million
Listed on February 05, 2012


Panera Bread - PNRA - close: 157.47 change: +0.30

Stop Loss: 158.05
Target(s): 141.00
Current Option Gain/Loss: -54.3%
Time Frame: 3 to 4 weeks
New Positions: see below

02/25/13: The stock market actually rallied early this morning before reversing lower. That early strength helped shares of PNRA push past its 200-dma and the stock hit our stop loss at $158.05.

- Suggested Positions -

Mar $150 PUT (PNRA1316o150) entry $2.30 exit $1.05 (-54.3%)

02/25/13 stopped out at $158.05


Entry on February 21 at $154.00
Average Daily Volume = 731 thousand
Listed on February 20, 2012

Varian Medical Sys. - VAR - close: 69.21 change: -0.91

Stop Loss: 71.00
Target(s): 66.00
Current Option Gain/Loss: -44.4%
Time Frame: 3 to 4 weeks
New Positions: see below

02/25/13: Sometimes the market or a stock is just too volatile. VAR sold off -1.29% and looks poised for more weakness. Today's session looks like a new bearish reversal and failed rally at its 20-dma. Unfortunately, the market's early morning strength helped push VAR to $71.00 and hit our stop loss before reversing.

This play is closed for the newsletter but readers may want to try again with a stop above today's high.

- Suggested Positions -

Mar $70 PUT (VAR1316o70) entry $1.80 exit $1.00 (-44.4%)

02/25/13 stopped out at $71.00


Entry on February 21 at $69.50
Average Daily Volume = 874 thousand
Listed on February 20, 2012