Option Investor

Daily Newsletter, Thursday, 5/23/2013

Table of Contents

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

Market Wrap

S&P Shakes Off Global Fears

by Thomas Hughes

Click here to email Thomas Hughes

Asian markets were already reeling from the sharp drop seen in the U.S. markets yesterday when new manufacturing data from China was released. The flash PMI reading for China fell to 49.6, mildly contracting, from the previous 50.4. Following the release Asian stocks, led by Japan with a +7% fall, dropped. Chinese stocks were down as much as 3% intra day before finding some support going into the close. European stocks fared no better and fell as well. The expectation and fear of FOMC unwinding policy was reason enough to fear without speculation over the EU's biggest trading partner's slowing economy getting thrown in the mix.

Our own economic data is causing more than one technical analyst to shake his (or her) head. The data, though not robust, is still good enough to support the idea of a steadily improving and stabilizing economy. This trend in data, in normal times, would support a bullishness but with the thought of Fed policy tapering now on the table good data may not be good for the market. Yesterday the existing homes sales figures grew at a better than expected rate and hit a new high. Today's new home sales figures echoed those of the existing home sales and were reported much better than expected.

In the end what did Bernanke really say? I heard him say might, maybe, could and possibly many many times. Neither he, nor the FOMC minutes, said tapering or policy changes were eminent. In fact, based on what I heard I would estimate changes to come no sooner than late summer, of course now that I am on the record they are likely to come at the next meeting. My point is that nothing new is on the table. We know tapering to QE is coming, we know it is likely going to be this year and we know that Ben has said the FOMC is focused on transparency so that business and market participants can plan and prepare. Yesterday's statements are a hint, possibly a calculated one, that the tapering we are all expecting is still coming down the pipe.

By the end of the day the markets had digested the data, the statements and the earnings coming to much the same conclusion I did. Nothing is new and nothing has changed. The indexes recovered early losses and traded up to hover around flat line for most of the after noon. The S&P managed to hold the 1650 level going into the close, down -4.67 for the day after opening down more than 15 points.

Today's Data

Today's data is totally in line with the recent trends in unemployment claims and housing recovery. Although there was not much reaction to the numbers when they were being released they did help the markets shake off the Bernanke Scare from yesterday. Initial claims for unemployment fell this week by 23,000 and are once again below the 350,000 level. The previous weeks data was revised up by 3,000 for a net drop of 20,000 from last week. The four week moving average also fell from a mild upward revision to reach 339,500. Aside from the random peak in claims this figure is still edging down. We are now in a period of less seasonal fluctuation, the next calendar event to watch in claims is the end of summer lay-off's from the auto sector. This year may not have as much impact due to recent reports that Ford was going to keep its North American plants open an extra week in order to build up inventory. No states reported declines in claims greater than 1,000. California led the charge in new claims, adding more than 15,000.

Continuing claims and total claims both fell and hit new lows, a fact that the media failed once more to report on. Continuing claims for the previous week were revised up to 3.024 form 3.097 making this weeks drop of 112,000 come to 2.912 million. This is the lowest level in over five years and a significant dip in the current downtrend. The overall decline in continuing claims may be accelerating. The total claims figure fell by close to 100,000 to reach 4.745 million, a new low and the 9th week of declines. This figure is also more than 23% lower than at this time last year, a slightly faster pace of decline than what we have seen over the last few months. The official U.S. unemployment rate is likely to decline again in light of these trends in claims. Further, if housing keeps gaining and stimulates jobs and spending then these numbers (jobless claims and unemployment) could keep coming down.

On the housing front median home prices and New Home Sales were released today. The median price for a home is up 13% year over year and at the highest level since 1993. New Home sales also gained more than expected, rising 2.3%. This is the second highest level since 2008, just below the post recession high set last January. Tomorrow there is only one report on my calendar, Durable Goods.

The USD And The JPY

I think most of Japan's -7.2% drop can be laid at the feet of the yen. More specifically the policy of Shinzo Abe, Kuroda and their yen depreciation policy. They have artificially inflated the value of the Nikkei, in effect putting free money on the table. It is no wonder that the market decided to take it off. Ben Bernanke gave them an excuse to start selling and then Chinese PMI turned up the heat. The yen dropped in tandem with the Nikkei versus major world currencies including the dollar and the euro. Several recent events have helped to set up this sell off starting with comments last weekend from a Japanese finance minister to the effect that the yen had already depreciated enough. Then, statements and policy announcements from the BOJ revealed no changes to policy and an upgrade to the economic outlook. Taken together this could be signaling a top in the recent USD/JPY bull trend. The pair fell to a two week low in overnight trading, finding support in the early part of today's U.S. session. Divergence in MACD points to a potential top forming as well but the trend is still up at this time. Long term indicators are still bullish but also divergent and weakening. Upside resistance is around 103.50, first support is at 100.


Gold Lifted By Falling Stocks

The price of gold bounced from the $1350 level this week, trading around $1380-$1390 today. Spot prices climbed more than $20 today but to break through the $1400 level for me to expect any higher prices. The Gold Index remains bearish in the long and short term. Prices are currently above the $112 level but could move lower. Bearish momentum is still strong in the long term and the weight of the down trending 30 day EMA is adding its pressure too. Near term prices for gold, and in extension the Gold Index, may trade higher this week while the Bernanke Scare is still fresh but I am still bearish on gold and the index. A break below $112 could result in a full retracement of the '08-'11 bull market in the gold and the gold index.

The Gold Index

Oil Falls Again

Oil prices fell again after hitting a near term top on Monday. The price of crude fell more than 1% in intraday trading to trade around $93 a barrel. The Oil Index fell this morning as well, gapping down to below 1,400. The index seemed to find support and traded up on the day after hitting bottom near the 30 day moving average. The average is currently just above the support of previous resistance and could hold prices, at least into the nearer term. Bullish momentum since the break above resistance is strong and indicates a high likelihood of higher prices. The Bernanke statements and FOMC minutes put a hurting on oil demand expectations but have done nothing to alter that demand outlook out right. The economic data is supportive of a moderately growing economy which should be supportive of oil prices.

The Oil Index

Story Stocks

Earnings are still trickling in. Today there were about 60 or so reports and if pressed to estimate I would say about 50-60% of those were retailers of some sort. The list was topped by names like Aeropostale, Cato, Dollar Tree, Gap, Perry Ellis, Ralph Lauren, Shoe Carnival, Stein Mart and others. No one report really stood out from the rest, there were some earnings beats and a miss or two. A few increased revenue, some fell short of expectations. Dollar Tree was one that was able to increase earnings and revenue, beating analysts expectations. The company says that traffic is strong and have issued guidance in the range of $2.61-$2.77 per share for the year. The stock has been trending up for the last few months to the top of a now evident range. Indicators are neutral and point to a market with no underlying direction. The stock reach the top of the range last week, tested the new multi-month highs and retreated to form a textbook doji. Volume over the last two days has been twice average daily over the last 2 months.

Dollar Tree

The Retail Spyder, which was a market leader according my note from last month, opened down today with the rest of the markets. Later, the Spyder was able to regain all of its daily losses to end the day in the green. Short term indicators are bullish but in decline, I don't see any sign of weakness or reversal yet. The candles are indicating a possible near term trading range that may turn into a consolidation. The retail sector for one is in good position to benefit from increased jobs creation and lower unemployment.

Retail Spyder

Hormel reported earnings that fell short of last years on increased revenue. Analysts had been expecting an increase in both, and a much larger increase in revenue. Some of the reduction of profits was due to higher acquisition costs. Hormel reiterated its full year guidance. The stock fell from a top it found recently to find support at the 30 day EMA. Indicators and volume are neutral on the daily and weekly charts so I don't see much chance of this one breaking out to new highs soon. Hormel may have entered a range with a potential bottom around $40 and a top at the recent highs around $43.15.


The Dow Transports

The last time I touched base with this index it was winding up inside what I thought could be widening pattern or a triangle. It turns out the index was in a triangle and it broke out to the upside. This is a bullish development with highly projectable targets. Bullish indicators on the long and short term charts add to the significance of the break out and also point to higher prices. All other considerations aside I am bullish on the markets because I am bullish on this chart. Measuring the height of the rally from its start in mid November 2012 to the top it reached prior to consolidation is nearly 1,500 points. It is not unreasonable to project that 1,500 points upward from the point of break out as a long term target. Nearer term targets can also be projected using the height of the triangle (500 pts) and the height of the rally from its start to the base of the triangle (1000 points) these give us shorter term targets around 6,750 and 7,250. Another plus to this bull picture is the support of the short term moving average and the up trend line drawn from the start of aforementioned rally.

The Dow Transports

The S&P 500

Yesterday the market's got a big scare. The statements by Bernanke and the FOMC minutes caused a huge knee jerk reaction. Yesterday's candle is a Dark Cloud Cover, Bearish Engulfing Patter with Pin Bar implications. A glance at the SPY for reference will show a volume spike to accompany the signal. Today the markets opened down which was to be expected. However, support kicked in far sooner than I and many others may have suspected. A note I made to myself early this morning reads like this “fundamentals have not changed...drop could be a buying opportunity”. A report I heard later in the day confirms that suspicion. CNBC reported Goldman Sachs says today was the single biggest day for stock buy-backs this year and accounts for about 80% of the volume to date. What this means is that billions of dollars of corporate money earmarked for buy backs entered the market today. It also means that the strategists and executives at these companies think this is the right time to be buying. If this is the right time for them to be buying does this mean they think prices are not going to go down?

SPX hourly

Looking at the charts of daily candles the dark cloud cover with long upper wick that formed yesterday is plainly visible. My first target of support was the 30 bar EMA which is currently just below an area of intraday support I have identified on a chart of hourly bars. Neither of these levels were reached before support stepped in to drive prices back up. There is still a chance of some more downside on the daily charts but I don't think it is going to be too severe. If prices do decline I expect to find support step in again around the 1630 and 1620 levels.

SPX daily

Long term the index is bullish. Indicators are strong and rising. This could be the start of a correction, reversal or bear market but I just don't see it. The daily candles show volatility and indicate indecision when viewed on the weekly charts. Keep in mind that this weekly signal is not finished forming so tomorrow could bring a big change. Today however the weekly candle is indecisive. The index is at all time highs with no past price action to dictate where resistance should be. Bernanke gave the market an excuse yesterday and profits were taken.

SPX weekly

Tomorrow could see some more selling. Savvy traders will likely wait to see just where the market is heading. Without much data or earnings on the schedule of events Bernanke, the FOMC minutes and tapering will on the top of the list of things to move the markets.

Until then, remember the trend!

Thomas Hughes

New Option Plays

Bucking The Trend

by James Brown

Click here to email James Brown


The Boeing Co. - BA - close: 99.75 change: +1.82

Stop Loss: 97.75
Target(s): 104.50
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
It was a buy-the-dip kind of day for Boeing traders. Shares gapped down along with most of the market this morning. Yet traders jumped in at short-term technical support on its rising 10-dma. BA displayed impressive relative strength with a +1.8% gain and a new multi-year closing high. What was even more impressive was the above average volume on the rebound. The stock may have gotten a boost from an analyst upgrade this morning and a new $120 price target.

Right now BA is poised to breakout past round-number resistance at the $100.00 level. We are suggesting small bullish positions if BA can trade at $100.25 or higher. Our target is $104.50.

Trigger @ 100.25 *Small Positions*

- Suggested Positions -

buy the Jun $100 call (BA1322F100) current ask $2.39

Annotated Chart:

Entry on May -- at $---.--
Average Daily Volume = 5.0 million
Listed on May 23 2013

In Play Updates and Reviews

AGN Hits Our Bearish Target

by James Brown

Click here to email James Brown

Editor's Note:

Shares of Allergan (AGN) hit our bearish target today. Overall it was a rough morning for the U.S. market. We saw a few trades get stopped out.

KORS, MLM, OXY, and XLE were stopped out.

Current Portfolio:

CALL Play Updates

Ecolab Inc. - ECL - close: 87.19 change: -0.24

Stop Loss: 87.95
Target(s): 98.50
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

05/23/13: Thursday was a relatively quiet session for ECL. The stock did gap down this morning but the selling wasn't that bad. We'll give it another day to see how shares perform tomorrow and then re-evaluate. Currently, we are suggesting a trigger at $90.25. If triggered our target is $98.50.

I am encouraging traders to keep their position size small to limit risk since ECL does look a bit over extended here.

Trigger @ 90.25 *Small Positions*

- Suggested Positions -

buy the Jun $90 call (ECL1322F90)

Entry on May -- at $---.--
Average Daily Volume = 1.0 million
Listed on May 21 2013

Lockheed Martin - LMT - close: 106.30 change: -0.19

Stop Loss: 103.45
Target(s): 109.00
Current Option Gain/Loss: +141.1%
Time Frame: 3 to 6 weeks
New Positions: see below

05/23/13: LMT weathered the market weakness this morning pretty well. The stock did gap open lower at $105.68 but shares managed to pare their gains significantly. I am not suggesting new positions. More conservative traders may want to raise their stops closer to $105.00.

- Suggested Positions -

Long Jun $105 call (LMT1322F105) Entry $0.85

05/18/13 new stop loss @ 103.45. More conservative traders may want to take profits now with the bid on our call at more than $2.00

Entry on May 15 at $103.05
Average Daily Volume = 1.7 million
Listed on May 14 2013

MEDNAX, Inc. - MD - close: 93.01 change: +0.80

Stop Loss: 90.75
Target(s): 98.50
Current Option Gain/Loss: +16.6%
Time Frame: 4 to 8 weeks
New Positions: see below

05/23/13: MD displayed some relative strength today which is somewhat surprising given yesterday's ugly reversal candlestick. Traders bought the dip twice this morning near $91.30. MD managed to rebound to a +0.8% gain.

Earlier Comments:
I am suggesting we keep our position size small. MD doesn't trade a lot of volume and the options do not see a lot of volume either.

*Small Positions* - Suggested Positions -

Long Jun $95 call (MD1322F95) entry $0.90

05/22/13 caution: today's session has created a bearish reversal candlestick pattern
05/20/13 new stop loss @ 90.75

Entry on May 14 at $91.15
Average Daily Volume = 242 thousand
Listed on May 11 2013

Panera Bread Co. - PNRA - close: 189.91 change: +0.25

Stop Loss: 199.00
Target(s): 183.95
Current Option Gain/Loss: +11.1%
Time Frame: 3 to 4 weeks
New Positions: see below

05/23/13: Lots of stocks gapped open lower today. PNRA was one of them with an open at $188.37. Traders did buy the dip at $187.45 and PNRA eked out a small gain. I would not launch new positions here.

FYI: The Point & Figure chart for PNRA is bullish with a $234 target.

*Small Positions* - Suggested Positions -

Long Jun $190 call (PNRA1322F190) entry $3.60

Entry on May 20 at $187.00
Average Daily Volume = 558 thousand
Listed on May 18 2013

Western Digital - WDC - close: 62.26 change: +1.86

Stop Loss: 58.95
Target(s): 64.75
Current Option Gain/Loss: +41.1%
Time Frame: 3 to 4 weeks
New Positions: see below

05/23/13: An upgrade for rival STX and bullish comments on WDC this morning helped shares of WDC outperform the market. Traders bought the dip near short-term support at $60.00 and its 10-dma. The stock surged to a +3.0% gain and another new high.

*small positions* - Suggested Positions -

Long Jun $60 call (WDC1322F60) entry $2.55

Entry on May 21 at $60.65
Average Daily Volume = 3.3 million
Listed on May 18 2013

PUT Play Updates

Facebook, Inc. - FB - close: 25.06 change: -0.10

Stop Loss: 26.05
Target(s): 21.50
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

05/23/13: Hmm... it was an interesting session for shares of FB. The stock gapped open lower thanks to the market's widespread weakness. Yet a few minutes later FB surged higher. The rally didn't last long and FB rolled over underneath its short-term trend of lower highs. Shares closed right on technical support at its simple 200-dma.

The low today was only $24.77. We are suggesting a trigger to buy puts at $24.65. If triggered our target is $21.50.

Trigger @ $24.65

- Suggested Positions -

buy the Jun $25 PUT (FB1322R25) current ask $0.83

Entry on May -- at $---.--
Average Daily Volume = 38 million
Listed on May 22 2013

iShares Russell 2000 - IWM - close: 97.90 change: +0.12

Stop Loss: 102.25
Target(s): 95.25
Current Option Gain/Loss: +61.6%
Time Frame: 2 to 3 weeks
New Positions: see below

05/23/13: As the market reacted to stock market weakness overseas the major U.S. indices spiked lower at the open. The IWM dipped to $96.51 before bouncing back. I suspect we will see the IWM's rebound fail in the $98.00-99.00 zone and nimble traders could launch new positions in that area. More conservative investors may want to tighten their stops closer to yesterday's high ($100.38).

Earlier Comments:
Readers may want to keep their position size small since this is a riskier entry point.

- Suggested Positions -

Long Jun $95 PUT (IWM1322R95) entry $0.60

05/22/13 triggered @ 99.75
05/21/13 added a secondary entry trigger at $98.75
05/18/13 adjust entry trigger to $99.75
adjust the stop loss to $102.25, adjust the exit target to $95.25.

Entry on May 22 at $99.75
Average Daily Volume = 41.8 million
Listed on May 16 2013


Michael Kors - KORS - close: 59.81 change: -0.65

Stop Loss: 59.65
Target(s): 64.75
Current Option Gain/Loss: -44.1%
Time Frame: exit PRIOR to earnings on May 29th
New Positions: see below

05/23/13: The stock market's weakness this morning produced a sharp gap down in shares of KORS. The stock opened at $59.02. Our stop loss was $59.65 so the trade was closed immediately.

- Suggested Positions -

Jun $62.50 call (KORS1322F62.5) entry $3.40 exit $1.90 (-44.1%)

05/23/13 stopped out on gap down at $59.02
05/22/13 new stop loss @ 59.65
05/21/13 new stop loss @ 58.95
05/13/13 trade triggered on gap open higher at $61.55
trigger was $60.65


Entry on May 13 at $61.55
Average Daily Volume = 3.5 million
Listed on May 11 2013

Martin Marietta Materials - MLM - close: 108.24 change: -0.43

Stop Loss: 107.45
Target(s): 118.50
Current Option Gain/Loss: -41.9%
Time Frame: 4 to 6 weeks
New Positions: see below

05/23/13: MLM gapped open lower this morning at $107.14. That was below our stop loss at $107.45 so the play was closed immediately.

- Suggested Positions -

Jun $110 call (MLM1322F110) entry $3.10

05/23/13 stopped out on gap down at $107.14
05/22/13 caution: today's move looks like a bearish reversal.


Entry on May 16 at $110.25
Average Daily Volume = 378 thousand
Listed on May 15 2013

Occidental Petroleum - OXY - close: 90.53 change: -0.57

Stop Loss: 89.75
Target(s): 98.50
Current Option Gain/Loss: -46.1%
Time Frame: 4 to 8 weeks
New Positions: see below

05/23/13: Shares of OXY also gapped open lower as the U.S. market plunged this morning following weakness overseas. OXY opened at $90.00 and quickly hit our stop loss at $89.75.

- Suggested Positions -

Jun $92.50 call (OXY1322F92.5) entry $1.95 exit $1.05 (-46.1%)

05/23/13 stopped out
05/18/13 new stop loss @ 89.75


Entry on May 14 at $90.75
Average Daily Volume = 6.3 million
Listed on May 13 2013

Energy ETF - XLE - close: 82.19 change: +0.04

Stop Loss: 80.95
Target(s): 89.00
Current Option Gain/Loss: Jun85c: -59.5% & Sep85c: -13.8%
Time Frame: 4 to 8 weeks
New Positions: see below

05/23/13: Energy stocks were not spared from the market's weakness this morning. The XLE gapped open lower at $81.12 and dipped just low enough to hit our new stop loss at $80.95 before rebounding. Our trade is closed but investors may want to keep an eye on the XLE for a dip to what should be decent support near $80.00 as a potential entry point.

- Suggested Positions -

Jun $85 call (XLE1322F85) entry $0.42 exit $0.17 (-59.5%)

- or -

Sep $85 call (XLE1321i85) entry $1.80 exit $1.55 (-13.8%)

05/23/13 stopped out
05/22/13 new stop loss @ 80.95
05/20/13 new stop loss @ 80.50


Entry on May 17 at $81.55
Average Daily Volume = 13.0 million
Listed on May 14 2013


Allergan Inc. - AGN - close: 97.96 change: +0.23

Stop Loss: 102.25
Target(s): 97.00
Current Option Gain/Loss: +89.1%
Time Frame: 3 to 4 weeks
New Positions: see below

05/23/13: Target exceeded.

The stock market's weakness this morning played into our favor. Our exit target was $97.00 but shares of AGN gapped open lower at $96.93, providing a slightly better exit point. Unfortunately the option didn't really react this morning.

I would be careful here since AGN could bounce from its early May low.

- Suggested Positions -

Jun $100 PUT (AGN1322R100) entry $1.85 exit $3.50 (+89.1%)

05/23/13 target exceeded on gap down
05/20/13 new stop loss @ 102.25, readers may want to take profits now
05/16/13 new stop loss @ 104.25, adjust exit target to $97.00


Entry on May 09 at $103.46
Average Daily Volume = 2.4 million
Listed on May 08 2013