Option Investor

Daily Newsletter, Thursday, 8/29/2013

Table of Contents

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

Market Wrap

Where's The Volume?

by Thomas Hughes

Click here to email Thomas Hughes

Light market volume remains in many of the headlines. The Labor Day Holiday and the upcoming FOMC Taper-Meeting have given many traders and investors reason to sit on the sidelines, or just on the beach. I concur with the sentiment and expect tomorrow and the first part of next week to be quiet as well. Later in the week we may start to see a pick up in trading volumes as the unofficial start of the fall trading season commences. Monday the markets will be closed for the Labor Day Holiday but after that it will be a data, data, data. Not only that it will also be a mere two weeks until the next FOMC meeting.

International markets were mixed this morning when I first checked the news. The Nikkei finished the day up about 1% while mainland Chinese indices closed in the red. European shares were initially in the red as well but moved into positive territory before the close of their trading day. The danger in Syria is taking its toll on the markets overseas but a delay in any strike against them have relieved some of the pressure. In other news impacting the European markets a possible deal between Vodafone and Verizon helped to boost positive sentiment. Oil and gold both lost some of the ground they recently gained but remain near the recent highs.

Better than expected economic data here at home at first seemed to have no affect on the markets. Futures trading this morning was mildly positive going into the release of GDP and jobless claims figures. After the announcements, both good, futures gave up the gains and even dipped into negative territory. This turned out to be a pretty good buying opportunity for the day traders because the indices all moved higher going into the early part of the day. The data also helped to firm up the dollar and send the dollar index higher.

The Data

The data today was much better than expected and leads to two things; a growing economy and tapering. The first bit of data we received today was the first revision to 2nd quarter GDP. This number was revised up to 2.5% from 1.7%. This is much better then expected and much better than what was forecast way back at the beginning of the year. If this number holds up and the economy continues to improve into the end of the year the second half could be much better than expected as well. Exports and inventory growth are two of the biggest drivers of the revision.

Initial claims for unemployment benefits also fell unexpectedly. Analysts had been expecting the number to hold steady at or near last weeks 336,000. This week claims fell by 7,000 to 331,000, just off the 5 year low. The four week moving average gained 750 but remains low at 331,250. I wouldn't call it a down trend yet but it looks as initial claims is edging lower. Ford's announcement this morning that it was hiring 1,400 more workers in order to maintain inventory levels is one positive sign the jobs market is improving and that claims could continue lower. North Carolina was the only state reporting a decline in claims greater than 1,000. California, ever the volatile state for jobs, added 5,867 new claims this week, followed by Missouri with 1,757.

Continuing claims edged lower by 14,000 to just below the 3 million mark. This figure has been holding steady for the last couple of months, trending just over and under 3 million. If initial claims is moving lower then we should see another tick down in the continuing claims numbers soon as well. Total claims moved slightly higher but remain near the long term multi year low. Total claims for unemployment climbed 28,918 to 4.467 million. Total claims also appears to be fairly stable over the last few months, discounting the one spike in July. It doesn't look like the jobs data or unemployment figures scheduled for release next Friday will be too robust. Initial claims is down over the last month but total unemployment does not appear to be decreasing at this time.

We are entering a hot period for economic data. Tomorrow look out for Personal Income and Spending, Chicago PMI and Michigan Sentiment. Next week we'll get the jobs bundle including the ADP report, Challenger lay offs, jobless claims, Non-Farm Payrolls and U.S. unemployment. We will also get construction spending, auto and truck sales, the Feds Beige Book and a handful of lesser reports. Each piece will be heavily scrutinized for indications of taper/no-taper until the big event (FOMC meeting) scheduled for September 17-18th. Before that expect to hear from the BOJ next week and the ECB the week after.

The Dollar

The dollar got a boost from today's data. The dollar index climbed more than 0.75% today and broke above the 30 and 150 day EMA's and the long term support/resistance of 82. The index has been volatile over the past few months but is now near the bottom end of the 7 month range. The indicators are bullish and stochastic is showing mounting support at the current levels.

The euro fell sharply versus the dollar. This pair fell nearly a full percent on the stronger than expected U.S data. Adding to the downward pressure are new concerns over additional bail out needs in Greece.

The yen fell versus the dollar in today's trading as well. This pair is still winding up into the point of a potentially bullish triangle. The question is who will be stronger? The Government and Bank Of Japan or the currency market? A break above the down sloping resistance line has a target of 110, 5 handles higher than the current high set in May.

The Oil Index

Oil cut some of its gains today as the threat of a strike on Syria receded. Oil prices fell about 80 cents from just over $110 to $109.20. Even with today's near 1% drop oil prices are still up close to 4% this week. This puts oil prices at or near multi-year highs. The Oil Index has seen some gains in response to the increase in oil prices as well. The index is still moving higher after bouncing off its long term up trend line and is now trading above the short term 30 day moving average as well. The rise in oil prices could translate in higher index prices as short term traders try to bank on increased profits for the oil companies. The index is indicated up at this time but faces long term resistance around the 1,400-1,425 level.

The Gold Index

Gold prices cooled off a little today on the strong economic data and reduced threat of an imminent attack on Syria. Gold prices have been on a tear of late, crossing back above the $1400 level for the first time since early June. Gold is nearing the point of being called an “official” bull market but still faces significant technical resistance. The $1400 level was hotly contested this spring with the market making big swings above and below that level before finally succumbing to the selling pressure. Gold may have broken the long term down trend but I still think it is too early to take a strongly bullish stance. The Gold Index may be telegraphing the same caution. This index failed to hold its recently gained Fibonacci Support line and may be heading down. The index made a short term double top after breaking above the Fibonacci Retracement, subsequently moved back below it and is currently indicated down. Today's move puts the index just above the 30 day moving average which may provide support tomorrow. With the holiday weekend upon us a wait and see approach may be the best.

The Semiconductors Index

I thought today would be a good day to take a look at the Semiconductor Index as it is not one I review regularly. Today we find this index trading near the four month low and long term support zone. Bearish MACD is decreasing and appears to be confirming the support zone. The stochastic is in extreme oversold levels and echoing confirmation of support with a bullish signal. Price action is currently moving up with mildly bullish candle formation as well. This index looks like it may trade toward the upper end of its trading range in the near term. Support exists at the 450 level, a break below here would be bearish for this index. Resistance is around 475.

The Dow Transportation Average

The Dow Transports have retreated to support and the long term trend set at the end of the 2012. My new trend line, drawn today, connects the low in November 2012 with the bounce from the 150 day EMA this past June. This line just happens to coincide with this weeks sell-off and today's rebound. Indicators are currently bearish but indicate support at these levels over the longer term. While volume remains light the index may continue to fall until reaching the 150 day EMA which is currently coincident with the bottom of the four month range. This range is could remain intact until trading volumes return or the FOMC meeting next month, whichever comes soonest.

The S&P 500

I thought today started out a little weird. The data was much better than expected and should have sent index futures higher but the reverse is true. After the release of GDP and claims data the indexes fell into negative territory. The light trading volume is most likely to blame, without the strength and support of the full market traders who are present can be swayed by any old wind that blows. Today there are quite a few breezes swirling through the market. Of course tapering is on everyone's mind, at this point they should just do it so we can move past this psychological barrier. Other winds blowing through the market include Syria and what we might do and how that might affect oil supplies etc. This is important but likely a short term impact, unless it escalates. Chemical weapons are serious and can't be put up with. The Debt Ceiling has started to eddy through the market as well. Just as soon as we get past the Taper-Meeting hurdle we'll have to sit through intense haggling and political posturing over how much debt the U.S. will be allowed. After opening a little weak the S&P 500 traded higher throughout the day.

At this time it is hard to say which way the market is moving because each of these head winds has the ability, and has proven it time and again, to move the market. With volumes so light those day to day breezes create movements in the market that may not show the true underlying trend. Next week may prove to be an important week simply because of trading volume. I expect at least some increase in volume beginning next week. Until then the S&P, like many of the other major indices, has retreated back to the long term bull trend. The index is extremely oversold and MACD divergences are coincident with the support offered by the trend line. Recent weakness in the index could persist tomorrow but for now the trend is still up.

Next week may be a big week for U.S. and global markets. Not only are trading volumes expected to pick up with the start of the fall trading season but it is also a big data week. As I mentioned before next week is the monthly release of the employment reports including ADP, Challenger, NFP and Unemployment. It is also the last round of employment data before the next FOMC meeting. Internationally we can also expect meetings and possible policy changes from the likes of the BOJ and ECB next week and the week after. For now expect light volume to continue into the weekend and perhaps even the start of next week. By next Thursday I expect things will have begun to change.

Until then, remember the trend!

Thomas Hughes

New Option Plays

Offshore Drilling

by James Brown

Click here to email James Brown

Editor's Note:

In addition to tonight's new candidate(s), consider these stocks as possible trading ideas and watch list candidates. Some of these stocks may need to see a break past key support or resistance:

(bullish ideas)


Diamond Offshore Drilling - DO - close: 64.17 change: -1.10

Stop Loss: 66.01
Target(s): 57.50
Current Option Gain/Loss: Unopened
Time Frame: 3 to 6 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
DO is an offshore oil and gas drilling contractor. They're actually a subsidiary of Loews Corp. (symbol: L). Shares of DO have not been tracking with the rise in oil prices. Instead DO has been underperforming oil and the energy sector. Thus, if oil does spike on a potential U.S. strike on Syria, it seems less likely that DO would react.

Currently shares have fallen toward significant support near $64.00. A breakdown here could spark the next leg lower. I am suggesting a trigger to buy puts at $63.75. If triggered our target is the $57.50 level. I would not be surprised to see a temporary bounce near the $60.00 mark.

Trigger @ 63.75

- Suggested Positions -

Buy the Oct $60 PUT (DO1319v60) current ask $0.77

Annotated Chart:

Weekly Chart:

Entry on August -- at $---.--
Average Daily Volume = 1.0 million
Listed on August 28, 2013

In Play Updates and Reviews

Better GDP Overshadowed Syria

by James Brown

Click here to email James Brown

Editor's Note:

A better than expected Q2 GDP estimate this morning helped overshadow worries about Syria. Keep in mind that stronger economic data would support the Federal Reserve's desire to begin tapering their QE program earlier rather than later.

Current Portfolio:

CALL Play Updates

Sturm, Ruger & Co. Inc. - RGR - close: 53.15 change: +0.40

Stop Loss: 49.95
Target(s): 57.50
Current Option Gain/Loss: - 3.2%
Time Frame: 4 to 6 weeks
New Positions: see below

08/29/13: Traders bought the dip again this morning and RGR produced a +0.75% gain. More conservative traders may want to tighten their stops closer to the $51 or $52 levels.

Earlier Comments:
If this rally continues it could spark a short squeeze. The most recent data listed short interest at 30% of the very small 18.8 million share float.

- Suggested Positions -

Long Oct $55 call (RGR1319j55) entry $1.24

08/28/13 trade opened on gap higher at $53.45. Trigger was 52.65

Entry on August 28 at $53.45
Average Daily Volume = 341 thousand
Listed on August 27, 2013

PUT Play Updates

DaVita HealthCare - DVA - close: 108.02 change: -0.00

Stop Loss: 110.51
Target(s): 105.25
Current Option Gain/Loss: + 40.9%
Time Frame: 3 to 4 weeks
New Positions: see below

08/29/13: DVA saw a midday rally but the bounce failed under resistance near $110.00 and the stock reversed to close unchanged on the session. This stock should also find overhead resistance at its simple 10-dma, which has fallen to $110.17. Tonight we are moving our stop loss down to $110.51.

Earlier Comments:
Our short-term target is $105.25. More aggressive traders could aim lower since the Point & Figure chart for DVA is bearish with a $96 target.

FYI: Investors should note that DVA does have a 2-for-1 split coming up on September 9th.

- Suggested Positions -

Long Sep $110 PUT (DVA1321u110) entry $2.20*

08/29/13 new stop loss @ 110.51
08/27/13 trade opens on gap down at $109.95
*option entry price is an estimate since the option did not trade at the time our play was opened.

Entry on August 27 at $109.95
Average Daily Volume = 833 thousand
Listed on August 26, 2013

eBay Inc. - EBAY - close: 50.99 change: +0.56

Stop Loss: 51.75
Target(s): 46.00
Current Option Gain/Loss: Unopened
Time Frame: exit PRIOR to September option expiration
New Positions: Yes, see below

08/29/13: Bulls are not giving up on EBAY and buy-the-dip traders did buy EBAY this morning near round-number support at $50.00. The stock bounced but the rally failed near its 10-dma. Shares still closed up +1.1% and today's move is technically a bullish engulfing candlestick reversal pattern. At the moment I don't see any changes from my earlier comments.

We are suggesting a trigger to buy puts at $49.75. If triggered our target is $46.00. More aggressive traders may want to aim lower.

NOTE: We are listing the September puts, which expire in less than four weeks. You might want to play the Octobers instead.

Trigger @ 49.75

- Suggested Positions -

Buy the Sep $50 PUT (EBAY1321u50)

Entry on August -- at $---.--
Average Daily Volume = 8.2 million
Listed on August 28, 2013

iShares Russell 2000 ETF - IWM - close: 101.97 change: +1.01

Stop Loss: 105.25
Target(s): 99.00
Current Option Gain/Loss: -14.1%
Time Frame: 3 to 6 weeks
New Positions: see below

08/29/13: The small caps outperformed the larger cap stocks. The market chose to ignore worries over Syria and instead focus on the better than expected Q2 GDP estimate. The IWM added +1.0% but still has a short-term trend of lower highs. Readers may want to lower their stop back down toward the $104.00 level.

- Suggested Positions -

Long Sep $100 PUT (IWM1321u100) Entry $1.48

08/27/13 adjust exit target to $99.00
08/24/13 new stop loss @ 105.25
08/19/13 new stop loss @ 104.25
08/15/13 adjust exit target from $97.00 to $98.50
08/03/13 readers may want to consider an early exit

Entry on July 30 at $103.69
Average Daily Volume = 31 million
Listed on July 29, 2013

ManpowerGroup Inc. - MAN - close: 65.98 change: +0.58

Stop Loss: 67.05
Target(s): 61.00
Current Option Gain/Loss: -20.5%
Time Frame: 3 to 4 weeks
New Positions: see below

08/29/13: MAN bounced for a second day in a row. It does look like the bounce reversed intraday once MAN came close to filling the gap from the 27th of August.

- Suggested Positions -

Long Sep $65 PUT (MAN1321u65) entry $1.70

Entry on August 27 at $65.75
Average Daily Volume = 530 thousand
Listed on August 21, 2013

Sherwin-Williams Co. - SHW - close: 172.05 change: +2.68

Stop Loss: 170.25
Target(s): sell half at 161.00, then exit the rest at $156.00
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

08/29/13: SHW also rebounded for the second day in a row. Shares are now back above potential round-number resistance at $170.00 and above its 200-dma (near $170). Yet SHW still has a bearish trend of lower highs, at least for now. We remain on the sidelines waiting for a new relative low.

Earlier Comments:
SHW's long-term up trend is in serious jeopardy. The Point & Figure chart has turned bearish and is forecasting a $136 target.

The recent lows are near $166.00. We are suggesting a trigger to buy puts at $165.90. If triggered you could target a drop toward $160.00 and its 300-dma. I am suggesting we plan on exiting half of our position at $161.00. We'll plan on exiting the remain of our position at $156.00.

Trigger @ 165.90

- Suggested Positions -

Buy the Sep $160 PUT (SHW1321u160)

Entry on August -- at $---.--
Average Daily Volume = 781 thousand
Listed on August 27, 2013

Time Warner Cable - TWC - close: 107.63 change: -0.40

Stop Loss: 110.55
Target(s): 105.00
Current Option Gain/Loss: -25.5%
Time Frame: 3 to 4 weeks
New Positions: see below

08/29/13: TWC continues to churn sideways. The majority of the last three days have been inside the $107.50-108.50 zone. I am concerned about the lack of downward momentum. We are moving our stop loss lower to $110.55.

Earlier Comments:
We do want to keep our position size small. There is potential support at $108.00. The next level of support is $104.00. If we are triggered at $109.50, our target is $105.00.

- Suggested Positions -

Long Sep $105 PUT (TWC1321u105) entry $2.35

08/29/13 new stop loss @ 110.55

Entry on August 16 at $109.50
Average Daily Volume = 2.3 million
Listed on August 15, 2013

Longer-Term Play Updates

Chicago Bridge & Iron - CBI - close: 60.70 change: -0.27

Stop Loss: 55.75
Target(s): 74.50
Current Option Gain/Loss: -17.4%
Time Frame: 4 to 6 months
New Positions: see below

08/29/13: It was a quiet day for CBI with shares trading inside a 52-cent range. There is no change from my earlier comments.

*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

Vanguard FTSE Europe ETF - VGK - close: 51.57 change: -0.15

Stop Loss: 51.25
Target(s): 58.50
Current Option Gain/Loss: Unopened
Time Frame: exit PRIOR to 2013 December option expiration
New Positions: Yes, see below

08/29/13: The VGK gapped down at the open again. Traders did buy the dip but the intraday rally failed. If this correction continues we might see the VGK retrace lower toward the $50.00 level and its simple 200-dma (also near $50.00). Coincidentally a 50% retracement of the rally from its June lows to the August highs would be near the $50.00 mark.

Currently we are waiting for a new relative high (see below) but we might re-evaluate our entry point strategy if we see the VGK test what should be support near $50.00.

Earlier Comments:
We are taking a multi-month time frame with this trade. I am suggesting we wait for the VGK to close above $53.50 and then buy calls the next morning. If we are triggered our target is $58.50 but we'll adjust it as the trade progresses.

FYI: The Point & Figure chart for VGK is bullish with a $63 target.

Trigger: Wait for a close above $53.50,
then buy calls the next morning.

- Suggested Positions -

Buy the 2014 Mar $55 call (VGK1422L55)

08/24/13 adjust the option strike from 2013 Dec $55 to $2014 Mar $55.

Entry on August -- at $---.--
Average Daily Volume = 3.0 million
Listed on August 10, 2013