Option Investor

Daily Newsletter, Thursday, 1/30/2014

Table of Contents

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

Market Wrap

GDP Slows, Markets Rise

by Thomas Hughes

Click here to email Thomas Hughes
Earnings and economic data wrestle for dominance in wake of FOMC taper.


The not-unexpected taper delivered by the FOMC caused a further correction of the U.S. and global indices yesterday. Today, economic data and earnings competed for dominance and sent the markets higher. The early part of the day was filled with news about jobs, early estimates for 4th quarter GDP and earnings from high profile names like Facebook and Visa. The data was firmly OK, not great, not bad and not unexpected. The earnings continue to be more impressive than expected with the bitter aftertaste of weak 2014 outlook/guidance. It seems as if earnings in the fourth quarter were in general better than expected but the 2014 outlook keeps disapointing. Keep in mind however the low bar set by most analysts and corporations in the recent previous quarters, it could be happening again. If this is the case then next quarters earnings could be better than expected as well.

Asian and European markets traded mostly to the downside in the overnight sessions. Weak expectation in China, a surging yen, emerging market turmoil centered currently on Turkey and other factors helped to weigh on equity prices. In the U.S. futures trading in the early part of the morning was light and to the upside. There was a slight pick up in trading activity just ahead of the economic releases at 8:30AM and then following the announcements a modest rise in prices. The S&P future was up around +7 points at 9AM. The positive spin on U.S. trading helped to lift European indices which moved into the green before their trading day closed.

Traders obviously saw some good news in today's data. At the open the modest rise indicated by futures trading was doubled almost immediately for a gain of about +15 from yesterday's closing price. After the open the market momentum carried the indices even higher, the S&P moving more than 1% higher from yesterday's close. The markets fell back a little just before the close but not much. After the bell a big miss by Amazon, and a smaller miss from Google, dominated the news and will be a big impact on trading tomorrow.

The Economic Data

The advance estimate for 4th quarter GDP is for growth of 3.2%. This is about 4 tenths below the estimates but I would not worry about that too much right now. The unexpected 3rd quarter strength (revealed in revisions) caused a lot of estimates to be revised lower, and this figure will get revised twice as well. Within the report areas of strength includeed PCE and private industry investment. Negatives included a drop in government spending and a rise in imports. Residential and non-residential segments of the real estate market were mentioned as n or negative or positive respectively. Looking back over the past fews years it appears as GDP is stable and above average but coming off a peak.

Bureau of Economic AnalysisReport On GDP

“The deceleration in real GDP in the fourth quarter (2014) reflected a deceleration in private inventory investment, a larger decrease in federal government spending, a downturn in residential fixed investment, and decelerations in state and local government spending and in nonresidential fixed investment that were partly offset by accelerations in exports and in PCE and a deceleration in imports.”

Initial claims spiked up again today, adding to my concern over job growth and labor market stability. Claims jumped 19,000 from a 3,000 claim upward revision for a net gain of 22,000. This weeks intitial claims figure was 348,000, a new 6 week high. This is still below the 350,000 mark but I think puts to rest any thoughts of a downtrend in initial claims at this time. It is possible that this figure will be affected by the expiration of long term unemployment benefits as people try to place in good work positions. In any event, it seems as if labor trends, at least in this data, may be stalling. The four week moving average of claims gained 750 from a slight revision to hit 333,000, the first uptick in 5 weeks. Looking at the state by state data it appears as if claims should be falling. 29 states reported a drop in claims greater than 1,000 for a net total close to -100,000. There were only 2 states reporting a gain greater than 1,000 for a net net total of +12,847 and yet claims gained +19K, seasonal adjustment is at work.

Continuing and total claims both fell this week. Continuing claims fell by -16,000 from a downwardly revised 3.007 million for a net drop close to 50,000. This weeks number of continuing claims, 2.991 milllion, is still elevated but below the 3 million mark crossed during last falls growth in jobs. Based on this weeks initial claims I would not be surprised to see continuing claims move back above 3 million next week and into the near future. Initial claims fell by over 120,000, the second week of large drops that I suspect are due to expiring long-term benefits extensions, not an improvement in jobs. Total claims hit 3.583 million, 39.4% lower than a year ago. This does mark an explosive drop in claims but as I said, is most likely not due to job growth. Because of this I am having a hard time being real bullish on job growth at this time. We could be in or entering a dip in growth but it is definitely a time to be cautious of the labor trend.

There is a lot of data coming out over the next week. It is the end of the month and the release of NFP, ADP, Unemployment and many other potentially market moving bits of data are in the works. For that fact alone the next week may be a time to wait and see what happens.

Gold Index

Gold prices fell today by roughly $20 or 1.5%. One of the headlines I saw blamed it on a drop in Chinese retail purchases of the metal going into their New Year holiday. FOMC tapering may have something to do with it as well. The price of gold has been volatile of late as it met with resistance aroung the $1250-$1270 level. Today's drop has brought gold prices back below the $1250 mark for the first time since breaking through last week. Longer term the trend in gold is down, although it has made a nice retracement of the bear market to date. The $1200 level could be a bottom for gold but I think it is still too soon to call that one. Near to short term prices may hold steady or move lower to support targets near $1225 and $1200. The Gold Index has been able to maintain levels elevated above the long term low set last month but they have not been able to break through or even meet the long term down trend line. The indicators are very weak and inline with a continuation of the downtrend, the bullish momentum has peaked and is in decline, stochastic has entered overbought and is rolling over. I would expect to see some form of retest of support in the least if not a test of the most recent long term low. Closest support is at the $90 round number and the long term low near $82.50. If gold prices can recover, and recover enough to add a boost to the Gold Index, it could move up to test the trend line around the $95 level.

The Oil Index

Oil prices climbed to a one month high near $98.50 on an intra-day basis today. This is the third day of gains since the price bounced off of support near $95. The gains must be driven on the cold weather because supply and demand concerns are relatively low at this time. There is some disruption to U.S. shale fields but reports I have seen so far do not indicate any major shut downs. The Oil Index, which blew through my support target, has been trading counter to the rise in oil prices. The index is trading at a one month low and the bottom of what is emering as a possible trading range between 1425 and 1510. The indicators are bearish but not very strong, there possibility of support is at least as strong as the possibility of the index breaking through. If support holds upside target is the top of the range, if not then downside target is aroung the 1375 level or a little lower. The resistance level of 1510 was set during the 2008 market reversal and could hold the index at the current level.

Exxon Mobil reported earnings today that came just a penny short of the expected $1.92. This is 16% lower than last year at this time, caused by a cut in production and higher margins. Refining was one area of notable weakness, reporting a drop in earnings of 48%. Shares of XOM continued their recent drop in price falling another 1% today. Today's action has created a nice doji so the next couple of day's trading could be fairly important over the short to long term. The indicators are bearish, the stock is oversold and it is sitting just above a potential support zone.

The Dollar

The dollar gained some strength versus the euro and the yen today. The Dollar Index itself making a nice bullish move back above the support/resistance line at the 81 level. This line has provided resistance multiple times over the last couple of months and could do so again. The indicators are mixed, weak and inconsistant with a trending market.

The USD/JPY moved up from support today, showing strength in the dollar. The pair has been under a lot of bearish pressure over the last week, ever since the BOJ expressed such faith in the strength and success of Abenomics. At this time the pair is beneath long term support and the short term moving average but also above a support that could hold. BOJ policy and Abenomics are still in place so the long term trend of yen devaluation should continue in the longer term. Shorter term the pair could remain trapped between support and resistance until something emerges to break it out. Current support is around 101.70 with resistance just above near the 103.50 level.

The EUR/USD broke support today, showing strength in the dollar. The pair has been trading around the 1.36250 level all month since dropping from long term resistance at the first of this year. The indicators are weak and could be pointing to sideways trading or some kind of wind up. Today's action brought the pair down significantly and almost to the next support target around the 1.3500 level. The euro could see strengthening if the EU keeps recovering but at the same time the dollar should strengthen, or at least firm, against other currencies as the taper unwinds. If the current levels don't hold this pair could move toward the bottom of the longer term range near 1.3000-1.2750 with other shorter term support levels along the way.

Story Stocks

Facebook popped today on after reporting earnings that surpassed market expectations. The company reported a sharp rise in ad revenue, particular mobile ad revenue, that helped to drive the results. Total revenue jumped over 60% with more than 50% of that made from mobile. The stock jumped about 15% but was capped by a projected resistance from a previously broken up trend line. The announcement came after the bell yesterday and caused the stock to gap open today. There could be some volatility in the stock over the next few weeks but it looks like we can expect more earnings growth from Facebook in the future.

The Indices

The SPX made a strong move up from support today. This support is two fold as it is near the convergence of the top of a rising wedge and the long term trend line. Once again the FOMC and the taper has caused a correction only to have a rally ensue just after. However, some follow through would be nice, until then I remain cautious. There is resistance ahead, on the charts and on the calendar. Next week is a big one for data. It is the first of the month which means the monthly releases of housing, sales and most importantlys, jobs creation data. On the charts the index is facing resitance around 1815, just under the Holiday support zone I was tracking in previous wraps.

There are reasons for caution. Last months jobs number was a shocking surprise to the downside. This month could be the same and unemployment claims certainly aren't making me feel like jobs creation has expanded. Other recent data has shown that December and January saw a decline in economic activity. At the same time, although a lot of the earnings reports are better than expected most of the guidance is poor.

Today's bounce in the index could be the first move in the next bullish wave higher, or it could just be the market treading water until it breaks to the downside. For now, the index is bouncing from the long term trend line, in line with the long term bullish trend so I maintain a bullish but cautious stance. I will be watching the long term trend line and the indicators very closely for signs of strength or weakness. I will also be watching resistance levels for reversals, until resistance is broken any chance of a long term rally is in question.

The Dow Jones Industrials also bounced from support today though this index is still far above it's long term trend line. Support today is coincident with the top of the trading range that contained the index for the second half of last year. As with the SPX momentum is bearish but has peaked and stochastic is moving lower in the range but may be about to rollover. Data next week will play a big role in helping to determing whether support holds. I think the economy needs to support the idea that 2014 will be better than current guidance is leading us to believe.

The Transports actually had to bust up through resistance today. This index broke support on last weeks big drop. The indicators here suggest that there could be some more downside. The index is still trading above the long term trend line but another 3.3% drop would do it. This index has already fallen about 3.3% from its peak reached just last week. A break below the trend line would have longer term outlook with targets around 7,000 and 6,750.

The Nasdaq also had to bust back up through resistance and only barely made it. The index was halted at the 30 bar EMA. That would be my line to watch going into tomorrow. If the index can not get above this level it could fall back to support while we wait on the data next week. After the bell today the earnings from Amazon and Google had a negative affect on the market. Google made a notable miss on earnings while they did beat on revenues. Googles earnings were just a penny shy of estimates while revenue was slightly ahead. Zynga pre-released earnings today, surprising the markets and announcing better than expected revenues and a smaller loss. Amazon however, did not do very well. The online retailer missed on revenues and earnings sending the stock down by nearly 10% in after hours trading. Zynga shares surged higher on its results and were halted for a brief time.

It comes down to the Fed, the Data and the Earnings. The Fed says the economy is strong enough to support itself, therefore it is tapering ahead. So far the data shows that the economy is strong, not hot and a little slower than last quarter but still strong. The earnings are good but guidance is weak. The picture is very unclear, more data and information is needed. Next week we have another big week for earnings, a large number of companies will be reporting. We also have a lot of major economic releases. Both have the power to move the markets. If the labor market or other key areas appear to be slowing and that the guidance may be right the correction could continue.

Until then, remember the trend!

Thomas Hughes

New Option Plays

On The Verge Of New Highs

by James Brown

Click here to email James Brown


SBA Communications - SBAC - close: 92.29 change: +1.72

Stop Loss: 89.90
Target(s): 99.50
Current Option Gain/Loss: Unopened
Time Frame: Exit PRIOR to earnings on February 25th
New Positions: Yes, see below

Company Description

Why We Like It:
SBAC is in the services sector. The company operates wireless communication towers across Northern and Central America. SBAC's stock peaked near $92.00 back in November last year. The stock corrected down toward its 50-dma and the $85.00 level. After basing sideways for a while the prior long-term up trend resumed. Investors have been buying the dips and currently SBAC is outperforming the broader market with a +2% gain in 2014.

The current bounce has SBAC pushing against resistance at its all-time highs in the $92.50 area. If SBAC can breakout there is a good chance it will run toward the $100 level. I am suggesting a trigger to buy calls at $93.05. If triggered our target is $99.50.

FYI: The Point & Figure chart for SBAC is bullish with a $107 target. A move above $93.00 would produce a new buy signal.

Trigger @ 93.05

- Suggested Positions -

Buy the MAR $95 call (SBAC1422C95) current ask $1.70

Annotated Chart:

Weekly Chart:

Entry on January -- at $---.--
Average Daily Volume = 1.3 million
Listed on January 30, 2014

In Play Updates and Reviews

Stocks Reverse Higher On Thursday

by James Brown

Click here to email James Brown

Editor's Note:

After a disappointing session on Wednesday the U.S. market managed a bullish reversal higher on Thursday. Disappointing earnings reports after the closing bell tonight could weigh on the market tomorrow.

BBH and ENOC hit our entry triggers.

Current Portfolio:

CALL Play Updates

Biotech ETF - BBH - close: 98.23 change: +2.67

Stop Loss: 93.75
Target(s): 109.00
Current Option Gain/Loss: - 3.2%
Time Frame: 6 to 7 weeks
New Positions: see below

01/30/14: Our new trade on BBH is off to a strong start. The plan was to buy calls at $97.25 but this ETF gapped open higher at $97.49. Shares ended today's session by outperforming the broader market with a +2.79% gain.

Earlier Comments:
We're listing the March calls. You may want to consider the June calls. The Point & Figure chart for BBH is bullish with a $111.00 target.

Caution: The BBH does not see a lot of option volume. Traders may want to use small positions to limit their exposure.

- Suggested Positions -

Long MAR $100 call (BBH1422C100) entry $3.10*

01/30/14 triggered on gap open higher at $97.49. suggested trigger was $97.25
*option entry price is an estimate since the option did not trade at the time our play was opened.

Entry on January 30 at $97.49
Average Daily Volume = 164 thousand
Listed on January 29, 2014

Chicago Bridge & Iron - CBI - close: 76.13 change: -0.22

Stop Loss: 73.15
Target(s): 82.50
Current Option Gain/Loss: - 8.8%
Time Frame: Exit PRIOR to CBI's earnings report in February
New Positions: see below

01/30/14: Hmm... the action in shares of CBI today is a bit concerning. The stock market produced a widespread rally and yet CBI did not participate. This could be viewed as a warning signal. I am not suggesting new positions at this time.

Broken support near $80.00 and the 50-dma could be overhead resistance.

- Suggested Positions -

Buy the Mar $80 call (CBI1422C80) entry $1.70

01/30/14 CBI not performing well today. This could be a warning signal.
01/28/14 new stop loss @ 73.15

Entry on January 27 at $76.17
Average Daily Volume = 1.5 million
Listed on January 25, 2014

EnerNOC, Inc. - ENOC - close: 22.90 change: +0.25

Stop Loss: 21.49
Target(s): 25.75
Current Option Gain/Loss: -13.5%
Time Frame: EXIT PRIOR to earnings on February 13th
New Positions: see below

01/30/14: The market's widespread rally helped push ENOC to new relative highs. Shares opened at $23.05 this morning and hit $23.45 before paring their gains. Our suggested entry point was hit at $23.10 this morning.

Earlier Comments:
We will plan to exit prior to ENOC's earnings report on February 13th. FYI: The Point & Figure chart for ENOC is bullish with a $28 target.

- Suggested Positions -

Long MAR $22.50 call (ENOC1422C22.5) entry $1.85*

01/30/14 triggered at $23.10
*option entry price is an estimate since the option did not trade at the time our play was opened.

Entry on January 30 at $23.10
Average Daily Volume = 485 thousand
Listed on January 28, 2014

General Dynamics - GD - close: 100.49 change: +1.48

Stop Loss: 97.75
Target(s): 107.00
Current Option Gain/Loss: - 5.0%
Time Frame: 4 to 6 weeks
New Positions: see below

01/30/14: GD managed to outperform the S&P 500 with a +1.49% gain. Today's bounce was almost enough to erase yesterday's losses. The next challenge for the bulls is short-term resistance near the $102.00 level.

- Suggested Positions -

Long Mar $100 call (GD1422C100) entry $3.00*

01/28/14 triggered @ 100.50
*option entry price is an estimate since the option did not trade at the time our play was opened.

Entry on January 28 at $100.50
Average Daily Volume = 2.6 million
Listed on January 27, 2014

iShares Russell 2000 ETF - IWM - close: 113.00 change: +1.66

Stop Loss: 108.85
Target(s): 118.00
Current Option Gain/Loss: Unopened
Time Frame: 6 to 8 weeks
New Positions: Yes, see below

01/30/14: The stock market has seen an increase in volatility this week. Yet in spite of all the movement the IWM has still not hit one of our suggested entry points. There is no change from my prior comments.

Earlier Comments:
Currently we have two different entry point triggers listed. One is a buy-the-dip trigger to buy calls at $110.30 with a stop loss at $108.65 (was 108.85). We also have an alternative entry point listed to buy calls at $114.15 with a stop at $109.90.

Buy the Dip Trigger @ $110.30, stop loss 108.65

- or - Buy Trigger @ $114.15, stop loss @ 109.90.

- Suggested Positions -

Buy the Mar $115 call (IWM1422C115) current ask $1.80

01/29/14 adjust stop on buy-the-dip entry point to 108.65
01/28/14 add a secondary entry point to buy calls at $114.15
01/27/14 adjust the entry point trigger to $110.30 and move the stop loss to $108.85.

Entry on January -- at $---.--
Average Daily Volume = 31.7 million
Listed on January 25, 2014

NASDAQ-100 ETF - QQQ - close: 86.50 change: +1.57

Stop Loss: 83.90
Target(s): 92.00
Current Option Gain/Loss: -12.5%
Time Frame: 6 to 8 weeks
New Positions: see below

01/30/14: The big cap NASDAQ stocks were showing relative strength. The QQQ gapped open higher near $86 and rallied to a +1.8% gain by the close. More conservative traders may want to start raising their stop loss.

*small positions* - Suggested Positions -

Long Mar $87 call (QQQ1422C87) entry $1.60

01/27/14 adjust stop loss to $83.90
01/27/14 triggered at $86.00

Entry on January 27 at $86.00
Average Daily Volume = 29 million
Listed on January 25, 2014

PUT Play Updates

Philip Morris Intl. - PM - close: 79.09 change: -0.35

Stop Loss: 81.55
Target(s): 75.25
Current Option Gain/Loss: +30.0%
Time Frame: Exit PRIOR to earnings on Feb 6th
New Positions: see below

01/30/14: Headlines out last night that PM is restructuring its Egyptian business did not have much influence on the stock price. PM is currently the largest international tobacco company in Egypt with almost 23% of the market.

Shares of PM continued to sink with a -0.44% decline today. Don't forget that we have less than one full week for this trade to play out.

Earlier Comments:
Our short-term target is $75.25. Please note that this is a short-term trade. PM is due to report earnings on February 6th and we do not want to hold over the report.

- Suggested Positions -

Long Feb $80 PUT (PM1422N80) entry $1.43

01/29/14 triggered @ 79.85

Entry on January -- at $---.--
Average Daily Volume = 5.9 million
Listed on January 27, 2014

Restoration Hardware - RH - close: 56.39 change: +1.43

Stop Loss: 60.25
Target(s): 51.00
Current Option Gain/Loss: -11.6%
Time Frame: 4 to 6 weeks
New Positions: see below

01/30/14: I cautioned readers last night that RH might see a bounce from the $55 level. Sure enough, with a positive market to help it, RH managed to recoup over half of yesterday's losses. Look for short-term resistance near its 10-dma (near 57.75.

Earlier Comments:
Please note that I do consider this a somewhat more aggressive, higher-risk trade because RH does have above average short interest (about 10% of the 34 million-share float). Our multi-week target is $51.00. More aggressive traders could aim lower. The Point & Figure chart for RH is bearish with a $43 target.

*Small Positions* - Suggested Positions -

Long MAR $55 PUT (RH1422o55) entry $3.00*

01/29/14 trade opened this morning. RH gapped down at $56.47.
*option entry price is an estimate since the option did not trade at the time our play was opened.

Entry on January 29 at $56.47
Average Daily Volume = 981 thousand
Listed on January 28, 2014

Sears Holding - SHLD - close: 36.50 change: +0.14

Stop Loss: 38.55
Target(s): 30.25
Current Option Gain/Loss: Unopened
Time Frame: exit PRIOR to earnings in late February
New Positions: Yes, see below

01/30/14: Thursday ended up a quiet session for shares of SHLD. The stock managed an intraday bounce from short-term support near $36.00. There is no change from our Wednesday night new play description.

Earlier Comments:
I do consider this a more aggressive trade because there is so much short interest. The shorts are probably right on this stock but SHLD could still see short-term spikes if some of the weaker shorts rush to cover on any unexpected good news. The most recent data listed short interest at 54% of the 50.7 million share float.

I am suggesting a trigger to buy puts at $35.85. If triggered our target is $30.25. More aggressive traders could aim lower since the Point & Figure chart for SHLD is bearish with a $20 target. However, I would not hold over the earnings report expected in late February.

Trigger @ 35.85

- Suggested Positions -

Buy the MAR $30 PUT (SHLD1422o30) current ask $1.56

Entry on January -- at $---.--
Average Daily Volume = 2.6 million
Listed on January 29, 2014