Option Investor

Daily Newsletter, Thursday, 7/25/2013

Table of Contents

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

Market Wrap

Earnings This Week, Data Next Week

by Thomas Hughes

Click here to email Thomas Hughes

Futures traded to the negative this morning despite a flurry of better than expected earnings reports. This week nearly a third of all S&P 500 companies report and today may have been the biggest day of the week. Before the bell at least a dozen high profile names reported earnings that beat Wall Street estimates. Some of the reports, such as 3M, beat estimates due to previously cut earnings guidance. Others, such as GM and Dow Chemical, were able to increase business at home and abroad. The futures trade remained very steady throughout the morning. The S&P opened about 5-6 points in the red with the Dow down about -70 and the Nasdaq barely in the green. By 10AM the S&P had crept up to break even with the Dow not far behind. Mixed trading throughout the day ended with a positive close.

Economic data was fairly light today. Jobless claims and Durable Goods both came out at 8:30 AM. Jobless claims remain flat but durable goods orders increased more than expected. The good news failed to lift futures and to even capture the attention of the media. All eyes were on earnings. Tomorrow there is only one economic release, Michigan Sentiment. Next week things really heat up. There are at least 30 macro economic events on the schedule including the FOMC meeting, 2nd quarter GDP first estimate, ADP/Challenger/Non Farm Payrolls and the U.S. Unemployment Rate.

The international markets appear to be focused on U.S. earnings as well. Asian markets ended the day lower led by Japan and mainland China. Japan is still in the throes of it's policy driven recovery. Signs are emerging that Abe's plan is working; elections earlier this week will aid this. China is simmering on potential bubbles and newly emerging speculation that it will begin a new round of stimulus. China relaxed taxes on small business and other strictures as recently as this week. In Europe business sentiment is on the rise. The Business Climate Index in Germany rose for the third straight month on gains in manufacturing and services. European indexes traded in the red today as well, led by Germany's DAX -1% decline.

Today's Data

Today's data hit the wires, was read and then was quickly discarded. All eyes were truly on the earnings environment. Jobless claims and durable goods are important but only small pieces of the macro puzzle, easily overshadowed by the glut of earnings and next weeks expected slate of uber-important economic events. The initial jobless claims figure rose marginally but remain below the 350,000 level. Claims rose 7,000 to 343,000 from a 2,000 claim upward revision to last week for a net gain of 9,000. The four week moving average of claims fell by -1,250 to 345,250 from a mild upward revision of last weeks data. Initial claims continue to hold steady near the lower end of the 12 month range. Based on this metric alone it is hard to say that the jobs market is improving.

Continuing claims made a sharp drop from last weeks peak. The number of continuing claims fell by -119,000 to 2.997 million. This brings the number of continuing claims back below 3 million and close to the five year low. The total number of unemployment claims rose by over 300,000 to reach a 5 month high. This spike is mildly alarming but could be a one off driven by a similar spike in initial claims two weeks ago and in continuing claims last week. I am going to hold off on judgment here until I see next weeks ADP, Challenger, NFP, Unemployment and participation rate figures next week.

Michigan topped the list of states with declines in jobless claims. The state shed more than -11,000 claims, led by the manufacturing industry. The drop could be related to the expected halt of summer lay-offs indicated by the big three car manufacturers. All three have reported that they will not shut down for the usual summer break in order to build inventory for the second half of the year.

Rounding out today's economic calendar was the Durable Goods figures. Orders climbed more than twice what economists had been expecting. The previous months orders was also revised up. Durable good orders increased by 4.2% versus the expected consensus of 1.8%. Transportation led the gains followed by manufacturing. The unexpected pick up in demand could signal an impending pick up in manufacturing and jobs for the second half.

The Gold Index

Gold has hit resistance following its break above $1300. The metal peaked out at $1350 earlier this week before falling back to the $1320 level yesterday. Today gold traded in a tight range, mostly in the red, before climbing by about $6 later in the day. At this time gold appears to be moving up but faces resistance going into next week. The economy, the FOMC and the data will have a big impact on gold value. In the meantime, the Gold Index has climbed above the near term resistance of the $100 level and slammed right into the longer term Fibonacci resistance. The index fell back from the 78.6% retracement level, the same level that provided previous support in the early part of the summer. Indicators on the daily charts are bullish but with the long term down trend in place I am not ready to call a bottom here. On the weekly charts indicators are just turning bullish but again, no bottom is indicated yet. At best I think this is a relief rally on golds retracement above $1300. A break above $110 could be bullish but caution is required, especially with the FOMC meeting next week.

Gold Index

Goldcorp reported results today and they missed by a mile. The company was expected to earn $0.28 per share and posted half that. Revenue fell sharply due to low gold prices while costs of production rose. Looking past the headlines the reported cost of producing an ounce of gold in the quarter was $1,279.41, very nearly the price of gold for the quarter. The stock fell in today's trading but is still above the short term moving average. At the current levels, just under long term resistance, the stock is overbought with declining momentum. The July low may be the bottom for this stock but the MACD analysis points to a retest of those lows.


The Oil Index

The price of oil has remained high over the past two weeks. Oil lost about a half percent today but is still trading around the $105 mark. Weaker Chinese demand expectations and strong U.S. output were blamed for today's decline. The Oil Index benefited from oil's gain but has begun to retreat from resistance in tandem with oil's retreat from the near term peak set last week. The index climbed today but only a small amount compared to yesterday's near 20 point drop. The daily charts are bullish but both MACD and stochastic have peaked and are showing early signs of topping. Long term resistance exists in the 1418-1430 range.

Oil Index

Dollar Weakens

The Dollar weakened today but held support at the 82 line. This line may become a stronger area of support but bears close watching. Indicators are bearish but momentum is weak and stochastic is in oversold territory. Longer term the indicators are near what I would call equilibrium. Momentum peaks to either side of zero are small while stochastic is near flat line in the center of the range. The FOMC meeting next week will likely provide a catalyst for this chart, I expect action here to be light until then.

Dollar Index

The euro gained on the dollars weakness. The EUR/USD has climbed above resistance and is indicated higher on the daily and weekly charts. Indicators on the daily charts are weak, next resistance is close at 1.3320. This pair could climb higher ahead of the FOMC meeting.


The yen is being squeezed between the 30 day moving average and the 100 resistance level. Elections over the weekend solidified support for Abe in the Japanese government. Stimulus plans set in place by Shinzo Abe are more likely to continue than ever so I think 100 will fall soon. A break above 100 would be very bullish and likely to take the pair back up to the recent highs around 104.75.


Earnings Before The Bell

Today earnings can be seperated into before and after the trading day. Early trading was influenced by a host of earnings reports which beat estimates. GM beat estimates by 7 cents on better than expected earnings. The worlds number one auto maker brought in $.84 EPS versus the expected $0.75. Revenue for the quarter was also ahead of expectations, $39.1 billion vs $38.7 expected. This comes just one day after Ford posted comparable results. Ford's report revealed some stirrings of recovery in the European markets as well as strength in domestic markets. GM's report followed suit but bested Ford's gains overseas. GM's gross margins also improved, growing to near 6% with company executives indicating an expectation for that to continue to grow. Today both Ford and GM traded to the downside. GM has been trending up strongly over the past few months so some profit taking is to be expected. Longer term GM is bullish but may be at a top of some sort. Short term, on the daily charts, resistance is indicated around $37.50, very close to GM's post restructuring highs. Nearest support is $35.

General Motors

United Continental beat earnings by a few cents on $10 billion in revenue. Earnings were 38% higher than in the same period last year. During the same period passenger revenue declined while cargo revenue increased by 10%. This stock also dropped in today's trading, falling sharply from resistance and a pin bay formed yesterday.

United Continental

3M beat the low expectations set by it's previously reduced guidance figures. The company barely surpassed earnings guidance on slightly weaker revenue and reaffirmed full year guidance. Earnings grew by 3% on a year over year basis. Executive were pleased with the results which include organic growth across 80% of 3M's businesses. The stock dropped in early trading but found support at the $115 level intr-day. By the end of today's trading the stock had recovered all of the daily loss and managed to post a small gain. Indicators on the daily chart are bullish but rolling over, longer term the chart looks good to move higher but it may be in for a period of consolidation.


Dow Chemical also beat estimates, by a penny. Revenue was flat but the business is showing signs of improvements in Latin American markets, something we also saw in Monsanto's report. Volume grew over 2% across the company with emerging markets leading with a 9% gain. There was a drag on earnings due to foreign exchange but also a one time gain due to arbitration. The stock jumped in early trading, buckled under early pressure before regaining today's high just under resistance. Indicators on the weekly and daily charts are at odds with each other. A move above $35 could be bullish, first support is around $34. Dow

Earnings After The Close

A few big names reported after the bell today. Zynga, Amazon and Starbucks are top on my list. Zynga got a big boost during the day from the stellar report from Facebook. Facebook's ability to capitalize on mobile is a big step for online businesses. Zynga jumped 8% from the short term moving average to halt at long term resistance. After the bell, the report was better than expected failed to carry the stock over resistance. Earnings of ($0.01) were beat the expected loss of ($0.04).


Amazon was expected to earn $0.04 per share and the reported loss of -$0.02 shocked the market. During the day the stock sold off initially but then reversed, adding over 1% to yesterday's closing price. After the release the stock dropped sharply, falling 4% almost instantly. Support was apparently building around the $300 level but this was broken after hours.


Starbucks was expected to report $0.53 per share. During the day the stock found support at the 30 day moving average. It looks ready to make a retest of recent highs with the chance of moving higher. Today's report of $0.55 beat estimates and sent the stock shooting up in after hours trading. Revenue was a little better than expected with global comps up over 8%. The company also raised full year guidance.


The S&P 500

This weeks round of earnings reports reminded my just how much of a stock pickers market we are in. There are businesses in every sector benefiting from the stabilizing world economy. There are also businesses in every sector that are not performing as expected. The good news is, for now, that more businesses are beating expectations than missing. Some are beating low expectations and lowered expectations but that is still OK, things are not as previously thought. What this means for the S&P and the other major indexes is a time of consolidation, potentially, as under performing stocks are replaced by over performing ones.

On the daily charts the S&P looks strongly bullish. Stochastic is in the top end of the range, MACD is making an extreme bullish peak, the 150 bar and 30 bar EMA's are both pointing up, the index is back above the long term trend line and it has just crested a new high. All of this adds up to a market that is moving higher. The caveat at this time is that the market also looks like the current leg up has paused. Bullish momentum is waning, nearing the zero line. Stochastic is overbought with both lines pointing down. This set up could precede a major correction but since we just had one last month I don't think that is likely. A drop below the current level would find strong support about 20 points lower at the up trend line.

S&P 500 Daily

The weekly charts are still showing me a weak buy signal. MACD is turning positive and stochastic made a bullish crossover in convergence with the index making a new all time high. This helps give strength to the support identified on the daily charts and the idea that any correction at this time will be more of a sideways consolidation than a pull back or sell-off.

S&P 500 Weekly

Ben Bernanke is casting a shadow of doubt over my bullish analysis. What will the FOMC do next week? What will he say and how will the market take it? I think tapering is baked into the cake. We've been wrestling with the idea for months now and experienced at least one correction attributable to the “taper tantrum”. We need the economy to stand on its own two feet. Quantitative easing has to end soon. Tapering is a sign from the Fed that they believe the economy can do it. Therefore, tapering should be a good sign for the market. I am expecting to here more about the subject next week and get my clues from the market's reaction. Fear of tapering may add volatility but earnings and economic data should carry the day.

Until then, remember the trend!

Thomas Hughes

New Option Plays

New 10-Year Highs

by James Brown

Click here to email James Brown


Xilinx Inc. - XLNX - close: 46.43 change: +0.92

Stop Loss: 44.99
Target(s): 49.85
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
July has been a very good month for semiconductor stock XLNX. Shares rallied the two weeks in front of its earnings report. The company reported on July 17th and beat estimates. Management then raised their revenue guidance. This positive news sent shares soaring the next day. Since then XLNX has been digesting gains in a sideways consolidation but with today's bounce the stock looks poised to breakout again.

We are suggesting a trigger to buy calls at $46.65. If triggered our target is $49.85. I would keep our position size small since bears could argue that XLNX is overbought with a significant five-week rally already underway.

Trigger @ 46.65 *small positions*

- Suggested Positions -

buy the Aug $46 call (XLNX1317H46) current ask $1.08

Annotated Chart:

Entry on July -- at $---.--
Average Daily Volume = 3.5 million
Listed on July 25, 2013

In Play Updates and Reviews

Buying The Dip Again

by James Brown

Click here to email James Brown

Editor's Note:

It looks like market participants are buying the dip again although it wasn't a very big dip. The major U.S. indices all rebounded off their intraday lows today and look poised to keep climbing tomorrow.

HAIN hit our entry trigger today.
We want to exit our EMN trade tomorrow at the close.

Current Portfolio:

CALL Play Updates

Eastman Chemical Co. - EMN - close: 75.47 change: +0.43

Stop Loss: 73.75
Target(s): 79.75
Current Option Gain/Loss: - 9.8%
Time Frame: exit PRIOR to earnings on July 29th
New Positions: see below

07/25/13: EMN managed a bounce (+0.5%) but we're almost out of time. We are planning to exit positions tomorrow (Friday) at the closing bell to avoid holding over earnings on Monday.

- Suggested Positions -

Long Aug $75 call (EMN1317H75) entry $2.55

07/25/13 prepare to exit tomorrow at the close
07/24/13 new stop loss @ 73.75

Entry on July 17 at $75.25
Average Daily Volume = 1.3 million
Listed on July 11, 2013

The Hain Celestial Group, Inc. - HAIN - close: 74.79 change: +1.99

Stop Loss: 71.95
Target(s): 79.50
Current Option Gain/Loss: + 3.3%
Time Frame: exit PRIOR to August expiration
New Positions: see below

07/25/13: Shares of HAIN shot higher today and outperformed the market with a +2.7% gain. Shares also hit our entry trigger to buy calls at $74.40. More conservative traders may want to wait for the stock to rally past $75.00 before initiating positions.

Earlier Comments:
The most recent data listed short interest at 20% of the relatively small 38.6 million share float. The shorts might be ready to cover again. I am suggesting a trigger to launch small bullish positions at $74.40. If triggered our target is $79.50. FYI: The Point & Figure chart for HAIN is bullish with a $99 target.

- Suggested Positions -

Long Aug $75 call (HAIN1317H75) entry $1.50

Entry on July 25 at $74.40
Average Daily Volume = 420 thousand
Listed on July 22, 2013

Harman Intl. Industries - HAR - close: 58.66 change: +0.83

Stop Loss: 55.90
Target(s): 59.50
Current Option Gain/Loss: +55.5%
Time Frame: Exit PRIOR to earnings on August 6th
New Positions: see below

07/25/13: HAR is still showing relative strength. Shares rallied to another new multi-year high. If this keeps up we could see HAR hit our exit target at $59.50 soon. I am raising our stop loss to $55.90.

Don't forget that we will plan on exiting positions prior to the company's earnings report on August 6th. FYI: The Point & Figure chart for HAR is bullish with a long-term $81 target.

- Suggested Positions -

Long Aug $57.50 call (HAR1317H57.5) entry $1.80*

07/25/13 new stop loss @ 55.90
07/23/13 new stop loss @ 55.40, adjust the exit target to $59.50
*option entry price is an estimate since the option did not trade at the time our play was opened.

Entry on July 18 at $56.10
Average Daily Volume = 785 thousand
Listed on July 13, 2013

PUT Play Updates

Accenture Plc - ACN - close: 73.14 change: -0.58

Stop Loss: 75.21
Target(s): 70.25
Current Option Gain/Loss: + 5.8%
Time Frame: 3 to 4 weeks
New Positions: see below

07/25/13: ACN continues to sink. Shares confirmed the bearish breakdown below the 200-dma today. The next level of support should be the $70.00 area.

FYI: The Point & Figure chart for ACN is bearish with a $54 target.

- Suggested Positions -

Long Aug $72.50 PUT (ACN1317T72.5) entry $0.85

Entry on July 24 at $73.80
Average Daily Volume = 4.9 million
Listed on July 23, 2013

Darden Restaurant - DRI - close: 48.39 change: +0.01

Stop Loss: 49.35
Target(s): 44.50
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

07/25/13: DRI is still flirting with a breakdown near significant support. Shares slipped to $47.76 midday before bouncing back to unchanged. That means we are still on the sidelines since our trigger to buy puts was $47.75. I don't see any changes from our new play description on Wednesday night.

We do want to keep our position size small. Bulls could argue that DRI is already short-term oversold and due for a bounce. If we are triggered at $47.75 our target is $44.50.

Trigger @ 47.75 *small positions*

- Suggested Positions -

Buy the Aug $50 PUT (DRI1317T50)

Entry on July -- at $---.--
Average Daily Volume = 1.3 million
Listed on July 24, 2013

The Mosaic Co. - MOS - close: 52.51 change: +0.13

Stop Loss: 54.65
Target(s): 50.25
Current Option Gain/Loss: +15.0%
Time Frame: 3 to 4 weeks
New Positions: see below

07/25/13: MOS sank to another new low for the year (51.71) before bouncing. If this bounce continues we can watch for potential short-term resistance near $53.00 and near the $54.00 levels.

I am surprised that MOS did not show more weakness today following news that its rival POT lowered their Q3 earnings guidance.

Earlier Comments:
The Point & Figure chart for MOS is bearish with a $45 target.

- Suggested Positions -

Long Aug $52.50 PUT (MOS1317T52.5) entry $1.40

Entry on July 24 at $52.95
Average Daily Volume = 4.0 million
Listed on July 23, 2013

SPDR S&P 500 ETF - SPY - close: 168.93 change: +0.41

Stop Loss: 172.75
Target(s): 165.25
Current Option Gain/Loss: +20.2%
Time Frame: 3 to 4 weeks
New Positions: see below

07/25/13: The S&P 500 index found support near the 1680 level twice today. The index could be setting up for a rebound back toward 1700. That means we could see the SPY testing the $170 level again soon. Readers may want to wait for a new bounce near $170 before initiating positions (or be patient and wait for a new failed rally near $170 instead).

NOTE: There are a lot of different option symbols for the SPY. Make sure you get the right one. We're choosing the regular August $170 put that expires on the 17th.

- Suggested Positions -

Long Aug $170 PUT (SPY1317T170) entry $1.98

07/24/13 trade opened with the SPY gapping higher at $169.79
07/23/13 adjust entry strategy. Do not wait for a trigger. Buy puts at the opening bell tomorrow.

Entry on July 24 at $169.79
Average Daily Volume = 123 million
Listed on July 22, 2013

Longer-Term Play Updates

Chicago Bridge & Iron - CBI - close: 60.82 change: -0.46

Stop Loss: 55.75
Target(s): 74.50
Current Option Gain/Loss: +13.7%
Time Frame: 4 to 6 months
New Positions: see below

07/25/13: Profit taking in CBI continues. Today the stock is flirting with a close below its simple 50-dma. Shares could be volatile next week. The company is due to report earnings on Tuesday, July 30th.

*Small Positions* - Suggested Positions -

Long 2014 Jan $65 call (CBI1418A65) entry $2.55

07/20/13 new stop loss @ 55.75
06/29/13 CBI might be poised to dip into the $57-55 zone again.
06/24/13 triggered @ 56.75
06/22/13 adjust entry trigger to $56.75
06/15/13 entry strategy change: change the breakout trigger at $65.25 to a buy-the-dip trigger at $56.50. Adjust the stop loss to $53.75.
Adjust the option strike to the 2014 Jan. $65 call

Entry on June 24 at $56.75
Average Daily Volume = 1.8 million
Listed on June 01, 2013