Option Investor

Daily Newsletter, Monday, 4/22/2013

Table of Contents

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

Market Wrap

Monday Blues Don't Last

by Thomas Hughes

Click here to email Thomas Hughes

The global markets opened with relative quiet today. Not much news of note came from Asia or Europe save expectations for U.S. economic data and earnings. The U.S. futures trading was mildly to the positive all morning but started moving lower about 30 minutes before the open. After the bell the S&P lost a point or two in the opening minutes and held that level through the 10 AM hour and the release of the existing home sales figures. The figures were disappointing to say the least but did not impact the market. In fact, the market seemed to shrug it off without even a second glance. Eyes immediately turned to potential positives within the number that could lead to more activity the housing market.

This week is big for data, the hard part about today is it is the first day of the week. We can take a look at what is on the schedule, get an idea of what we think is going to happen but then we have to wait and see. Today was light on the economic front but packed a punch with earnings. Tomorrow the data flow increases with new home sales and a reading of the housing price index. The big event on the economic calendar happens on Friday. We get the first estimate of Q1 GDP. Estimates range from the mid 2% to the low 3% range. I am leaning toward the high end of that range due to the Q1 economic trends. Joblessness was down and housing was up. Remember that the weakness we have been seeing the last few weeks happened in the 2nd quarter.

Earnings reports were strong today and will remain strong today. What banks and financial institutions that have not yet reported are most likely reporting this week as well as international giants like Caterpillar who reported today. Caterpillar failed to meet expectations and guided their stock lower but was still able to pull off a pretty decent day. The stock has been trading around a level that had potential to provide support. In a down trending market the earnings report would have sent the stock through that support. However, evidence in the report, company outlook and the CEO's statements suggest a bottom is or is about to be reached by Caterpillar. Not only did CEO Oberhelman state a bottom was forming in the mining side of the business he went on to say that he was the most optimistic he's been in over two years. All this combined to boost CAT shares by over 3%. MACD and stochastic support the possibility of a bottom but confirmation is required. Ingersoll Rand reports tomorrow and is expected to report $0.41 per share versus $0.76 in the previous quarter.


Existing home sales, expected to rise by about 1%, dropped -0.6% in March. This unexpected drop, like I mentioned, did not have the expected impact on the market. A string of bad reports over the last month are blamed on the recent correction in the market and yet this number barely moved the S&p a full point after its release. In fact, you could say that the market found it's bottom for today's trading right after the release. The reason for the drop in sales is being blamed on the lack of inventory. Less homes for sale less homes being sold. The tight market is also causing prices to rise, another reason for the decline in sales. The general consensus of opinion from internet and TV articles is that this is good, or at least potentially good. If it leads to renewed activity in the housing market it is good. If it leads to a slowdown in housing then it is something else. The Homebuilders Spyder traded to the upside today but was capped below the 30 day moving average. The ETF is still trading above the longer term trend and has potential to move higher. A break above the moving average could take it above the long term resistance near $31. Housing data tomorrow and Wednesday, jobless claims and GDP on Friday will either help this market break out or provide resistance going into the near term.

Homebuilder Spyder

Halliburton reported an earnings beat and the stock jumped 3%. The consensus estimates were for EPS around $0.57, the actual results were for adjusted earnings of $0.67. Along with the good number was positive guidance for the rest of the year. Company executives are expecting earnings growth in the low double digits relative to the previous year. The stock had reached and possibly breached a long term support/resistance line Friday, today's move is a confirmation of the existence of support near $37.50. The jump was met with resistance at the short term moving average. At best Halliburton is moving up towards the top a trading range, at worst it will retest support at $37.50. MACD and stochastic indicator some support exists at $37.50, the volume spike today agrees. There is a lot of resistance ahead for this stock, the bounce may not go far.


Some buyers came into the oil market today. The price of crude rose by more than 1%. Brent also benefited from the bounce but natural gas dropped by over 3%. The oil index climbed in today's trading as well but is indicated down for the short term. Convergences of MACD peaks suggest the index will at least retest the recent lows. This may form a bottom but it is way to early to tell that. Economic data will have to improve with real signs of jobs and consumers, globally, for there to be a real marked improvement in oil demand or prices. The Oil Index looks good to return to support around 1250 where it may enter a range until further developments in oil demand and profit outlook for oil companies.

Oil Index

Apple is on the list for earnings tomorrow. This is the most poo pooed stock on the exchange today. The run up to $700 and drop to $400 was a stunning thing to watch. Tomorrow the company is expected to report earnings around $10.30 per share, well below the previous quarters $13.81. Expectations are super low and perhaps an easy mark for Apple to beat. This is Apple we're talking about. Just because the iPhone 5 is not as big a hit as expected Apple still makes the best devices and has the best operating system. I think Apple could surprise the markets and beat estimates. Even if Apple only comes in line with estimates it will still be a relief to Apple investors. Earnings are reported after the bell Tuesday and could lead to a short term relief rally in Apple.


The Indexes Today

I tend to watch the S&P 500 most closely. It is the index I like and the one I trade. This does not make it the only index I should watch and I am reminded of this weekly when I read the market wraps of Linda and the others. I know Linda is a Russel follower and focuses on that market for her wraps so that is what I will do today as well. For a personal point of reference I will start with a quick update of the S&P. After the opening the index fell a few points, hit the morning low after the existing home sales figures and then rallied into the afternoon. Once the day's high was hit the index trade sideways into the close. Today's candle formed above the short term moving average and continues the bounce that began last Friday. Last week, Thursday and Friday, the S&P hit two week lows that brought it very close to touching the long term up trend line. Friday's action turned positive and moved up from that trend line but did not regain the upside of the moving average. The fact Friday was an up day was bullish but the failure to regain the moving average was a negative. That negative was removed today with a move and close above the average.

S&P 500

Where is the S&P now? Now the S&P is in a mild bounce from the long term trend. It is making this bounce very close to the resistance of all-time high territory but a bounce it is. The potential is high for a reversal pattern to form at the current level but it is not forming yet. The most recent low was a little lower than the previous low and perhaps a precursor to other indications. A move back above 1572 would be a good sign for the bulls.

The Russel 2K performed a little differently and is in a little different position than the S&P. The S&P is still trending up and may have entered a reversal zone, the Russel broke trend over a month ago and may already be confirming a reversal. My first line suggested a head and shoulders may have been forming but this line did not take into account the lower low. Moving my line up to the bottom of the highest low it now looks like the RUT could be breaking down from a double top. There is currently support around 900 but a break below that support could bring this index down to the long term trend around 850-865.

Russel 2K daily

Even with the double top in play the long term trend in the RUT is still up. If the top plays out to its full extent the downside targets are 50 points below the current level, in line with the long term trend and a good place for potential support bounces to take place. MACD and stochastic on the long term charts are bearish and indicating down at this time but again, strong support exists just below the current levels. The long term 150 day moving average and the long term up trend line are strong areas of support for the RUT, especially when they coincide with each other. The RUT may experience more weakness in the coming weeks if support at 900 does not hold. For the long term, the trend remains up and I am in the buy-the-dip crowd until the long term trend is broken.

Russel, weekly

The transports are also confirming a short term top. The double top I pointed out in a Thursday wrap a few weeks ago has been confirmed since with a lower high and a move below the short term moving average. There has also been a move below the base line of the chart pattern but so far it has not held. The difference in the most recent break and the previous is that this time it also broke the up trend. This has some short term bearish potential at least. Indicators on the daily charts are neutral, longer term they are bearish. At this time the transports look like it is in a range with a potential top around 6,250 and bottom around 5,750.

Transportation Average

The week ahead is going to be a full one. There are a lot of earnings releases to sort through and some very important economic data. Will they be enough to lift the indexes back up to the recent highs? It is possible and even likely. The RUT and the Transports may have begun their reversal but the S&p has not. It is likely it will work its way up to retest the all time highs set two weeks ago before beginning any serious retreat. Earnings fro the likes of Texas Instruments, who beat estimates, will impact early trading tomorrow. Other early market events include China and European PMI numbers.

Until then, remember the trend!

Thomas Hughes

New Option Plays

New Relative Lows

by James Brown

Click here to email James Brown


Cubic Corp - CUB - close: 40.90 change: -0.51

Stop Loss: 41.60
Target(s): 37.15
Current Option Gain/Loss: Unopened
Time Frame: exit PRIOR to earnings in early May
New Positions: Yes, see below

Company Description

Why We Like It:
CUB is in the technology sector. One of their main customers is the U.S. military. The stock has been consistently underperforming the broader market and shares just fell to new 52-week lows today on another analyst downgrade. We do se e potential support at the $40.00 mark so I am suggesting a trigger to buy puts at $39.90.

We want to keep our position size small to limit our risk. Shares of CUB do not trade with a lot of daily volume and that could make the stock prone to more volatility.

If triggered at $39.90 our target is $37.15 near its 2011 lows.

Trigger @ 39.90 *Small Positions*

- Suggested Positions -

buy the Jul $40 PUT (CUB1320S40) current ask $1.75

Annotated Chart:

Weekly Chart:

Entry on April -- at $---.--
Average Daily Volume = 112 thousand
Listed on April 22 2013

In Play Updates and Reviews

A Widespread Advance

by James Brown

Click here to email James Brown

Editor's Note:

The Japanese NIKKEI index helped lead equities higher. The German DAX followed. The S&P 500 lagged behind with a +0.4% gain.

It was a relatively quiet day for our current trades.

Current Portfolio:

CALL Play Updates

American Tower Corp. - AMT - close: 81.02 change: -0.03

Stop Loss: 78.75
Target(s): 84.75
Current Option Gain/Loss: + 0.0%
Time Frame: Exit prior to earnings on May 1st
New Positions: see below

04/22/13: We've been in this AMT trade for over a week and while the stock has managed to tag new all-time highs the option isn't moving much. AMT spiked to another high this morning before paring its gains and closing virtually unchanged on the session. I am not suggesting new positions.

Our target is $84.75. More aggressive traders could aim higher. FYI: The Point & Figure chart for AMT is bullish with a $94 target.

- Suggested Positions -

Long May$80 call (AMT1318E80) entry $2.05

Entry on April 11 at $80.25
Average Daily Volume = 2.2 million
Listed on April 09 2013

Clorox Co. - CLX - close: 89.25 change: +0.36

Stop Loss: 87.95
Target(s): 94.00
Current Option Gain/Loss: Unopened
Time Frame: exit PRIOR to earnings on May 1st
New Positions: Yes, see below

04/22/13: CLX began trading ex-dividend this morning. Shares recovered from their morning lows and managed to keep pace with the S&P 500 index. We are still on the sideline waiting for a breakout past $90.00.

This is going to be a short-term trade. We may not have time for CLX to make it to $100. The company is due to report earnings on May 1st and we do not want to hold over the announcement. There is too much risk that investors could sell the news after CLX's impressive rally.

Friday's high was $90.10. I am suggesting a trigger to buy calls at $90.25. If triggered our short-term target is $94.00.

Trigger @ 90.25

- Suggested Positions -

buy the May $90 call (CLX1318E90) current ask $1.40

Entry on April -- at $---.--
Average Daily Volume = 738 thousand
Listed on April 20 2013

Gilead Sciences - GILD - close: 54.05 change: +0.88

Stop Loss: 49.75
Target(s): 56.50
Current Option Gain/Loss: +48.9%
Time Frame: Exit PRIOR to earnings on May 2nd
New Positions: see below

04/22/13: GILD had two analyst firms raise their price targets on this stock. Shares gapped open higher. The initial pop actually faded but traders bought the dip and GILD managed to outperform the market with a +1.6% gain. Readers may want to raise their stop loss.

Earlier Comments:
I do consider this a more aggressive entry point. More conservative traders may want to wait for a pullback near the $50.50-50.00 zone as an alternative entry point. Our target is $56.50 but we'll plan on exiting prior to the May 2nd earnings report.

- Suggested Positions -

Long May $52.50 call (GILD1318e52.5) entry $1.94

Entry on April 15 at $52.25
Average Daily Volume = 11.7 million
Listed on April 13 2013

PUT Play Updates

Atlas Air Worldwide - AAWW - close: 38.32 change: +0.25

Stop Loss: 40.05
Target(s): 33.50
Current Option Gain/Loss: -26.4%
Time Frame: exit PRIOR to earnings in early May
New Positions: see below

04/22/13: AAWW initially spiked lower this morning and hit a new 52-week low near $37 before reversing. I couldn't find any news to account for the sudden reversal. Shares outperformed the broader market with a +0.6% gain. More conservative traders might want to lower their stop loss. I would not be surprised to see a bounce toward the simple 10-dma or the $39.00 level.

Our target is $33.50 but more conservative traders could exit early near $35.00 instead. FYI: The Point & Figure chart for AAWW is bearish with a $29 target.

- Suggested Positions -

Long May $37.50 PUT (AAWW1318Q37.5) entry $1.70

Entry on April 17 at $38.00
Average Daily Volume = 262 thousand
Listed on April 16 2013

FedEx Corp. - FDX - close: 92.50 change: +0.11

Stop Loss: 95.25
Target(s): 86.50
Current Option Gain/Loss: - 0.8%
Time Frame: 3 to 4 weeks
New Positions: see below

04/22/13: FDX rebounded from its early morning lows but struggled to make it back into positive territory. I don't see any changes from my weekend comments. Nimble traders could watch for a failed rally near $94.00 and its 200-dma as an alternate entry point to buy puts. I am adjusting our stop loss down to $95.25.

- Suggested Positions -

Long May $92.50 PUT (FDX1318Q92.5) entry $2.12

04/20/13 new stop loss @ 95.25
04/18/13 trade opened on gap down at $93.18, trigger was $93.50

Entry on April 18 at $93.18
Average Daily Volume = 3.3 million
Listed on April 15 2013

Dow Jones Transportation ETF - IYT - close: 107.57 chg: +0.13

Stop Loss: 107.05
Target(s): 100.25
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

04/22/13: Currently we are waiting for a bearish breakdown in the IYT with a trigger to buy puts at $104.75. However, nimble traders could look for a failed rally near the trend of lower highs (near the 109.00-109.50 area) as an alternative entry point for bearish positions. Just be sure you use a tight stop loss.

Trigger @ 104.75

- Suggested Positions -

buy the May $105 PUT (IYT1318Q105)

Entry on April -- at $---.--
Average Daily Volume = 904 thousand
Listed on April 17 2013

SINA Corp. - SINA - close: 46.30 change: +0.04

Stop Loss: 48.25
Target(s): 42.00
Current Option Gain/Loss: -5.9%
Time Frame: exit PRIOR to earnings in mid-May
New Positions: see below

04/22/13: SINA fell to a new relative low this morning and then immediately bounce. It was a common occurrence today. Fortunately the bounce didn't get very far and SINA found resistance near the $47.00 level this afternoon. I would still consider new bearish positions now but traders may want to wait for a new relative low (under $45.50) before initiating put positions.

Earlier Comments:
Investors should be aware that SINA's stock could be influenced by earnings results from its rivals. BIDU is scheduled to report earnings on April 25th. SOHU is due on April 29th. NTES should report earnings in mid-May.

- Suggested Positions -

Long May $45 PUT (SINA1318Q45) entry $2.20

Entry on April 22 at $46.26
Average Daily Volume = 1.7 million
Listed on April 20 2013

S&P500 ETF - SPY - close: 156.17 change: +0.69

Stop Loss: 155.65
Target(s): 149.00
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

04/22/13: The oversold bounce in the SPY continued on Monday but it failed to push through all of its key moving averages. The 10-dma is still short-term overhead resistance.

Currently we are waiting for a breakdown and our suggested entry point is $153.40. However, we might see the SPY bounce back toward its recent highs. If that happens we want to be nimble enough to launch bearish positions on a failed rally near resistance. We may end up adjusting our entry strategy if the opportunity presents itself.

Trigger @ 153.40

- Suggested Positions -

buy the May $150 PUT (SPY1318Q150)

Entry on April -- at $---.--
Average Daily Volume = 130 million
Listed on April 18 2013

Vulcan Materials - VMC - close: 46.67 change: +0.62

Stop Loss: 47.55
Target(s): 40.25
Current Option Gain/Loss: Unopened
Time Frame: exit PRIOR to earnings in early May
New Positions: Yes, see below

04/22/13: The market produced a relatively widespread bounce today and VMC outperformed the major indices with a +1.3% gain. Yet the overall trend is still bearish. We are waiting for a breakdown.

Earlier Comments:
Shares of VMC are in a bearish trend of lower highs and lower lows and recently broke down below its simple 200-dma. The stock is currently testing potential support at its simple 300-dma. Monday's low was $45.42. I am suggesting a trigger to buy puts at $44.90. If triggered our target is $40.25. However, keep in mind that VMC is scheduled to report earnings in early May (not date yet) and we will plan to exit prior to the announcement.

Trigger @ 44.90

- Suggested Positions -

buy the May $45 PUT (VMC1318Q45)

Entry on April -- at $---.--
Average Daily Volume = 581 thousand
Listed on April 18 2013

Longer-Term Play Updates

Chicago Bridge & Iron Co. - CBI - close: 52.27 change: +0.89

Stop Loss: 49.25
Target(s): 62.50
Current Option Gain/Loss: July's: +2.2% or Jan's: +0.0%
Time Frame: 3 to 4 months
New Positions: see below

04/22/13: Our new CBI trade is off to a good start.
Please review our original play description at the bottom of this page

- Suggested Positions -

Long 2013 Jul $55 call (CBI1320G55) Entry $2.20*

- or -

Long 2014 Jan $60 call (CBI1418A60) Entry $2.90*

*option entry price is an estimate since the option did not trade at the time our play opened.

Entry on April 22 at $51.53
Average Daily Volume = 2.5 million
Listed on April 20 2013