Option Investor

Daily Newsletter, Thursday, 3/27/2014

Table of Contents

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

Market Wrap

Waiting For Data

by Thomas Hughes

Click here to email Thomas Hughes
Once again we approach the end of the month, and the end of a quarter, so the markets are waiting for the onslaught of data.


The day started rather quietly. Asian markets were mixed, data and news from that sector was light. The Nikkei led with a 1% gain but other markets were mostly in the red. European markets were also mixed but mostly in the red. The DAX was the notable index from that sector closing with mild gains after a choppy session. The early futures trade here at home was also mixed. The major indices tread water, holding around the break even point from yesterday's close. Then the weekly data was released and for some reason the markets began to soften. The final revision for 4th Quarter GDP was higher than last time and jobless claims continue to decline.

After the 8:30 release S&P futures, which had been around -2, dropped a few more points. At the open action was moderate and the indices held break even for a few minutes before falling off to hit the daily low about -10 points for the SPX. At that time support kicked in and sent the index back up above support and into positive territory for a brief time. The rest of the day saw the index move back and forth in a tight range testing the 1850 support/resistance line until the close. The other indices behaved in much the same way, trading in a tight range just below the previous day's closing prices.

With the end of the month and the end of the quarter at hand eyes are on data scheduled to be released over the next week. Tomorrow things kick off with monthly personal income and spending data followed by Michigan Sentiment. Then the barrage really kicks in on Monday with the Chicago PMI followed by mortgage, housing, auto and truck sales, ISM, construction spending, factory orders and the all important bundle of jobs data including ADP, Challenger, jobless claims, NFP and unemployment rate.

The Economy

Fourth quarter GDP final revision was moved up by 0.2%. This is in line with the expectations. First estimate for 1st quarter GDP will be released at the end of this month.

Initial claims for unemployment assistance dropped by 10,000 from a mild upward revision for a net drop of -11,000 from last weeks reported figures. The four week moving average also fell by nearly -10,000 from a mild upward revision. The initial claims headline number for the week ending March 22 was 311,000. The four week moving average, 317,750. This is a continuation of the recent trend of declining initial claims and brings this number down near the long term low set last September. Keep in mind though that that low was caused by the glitch in California/Nevada reporting. The down turn in initial claims may have an impact on overall unemployment for the month of March and could be a sign that jobs creation was strong. On a state by state basis there were 7 states with declines in claims greater than 1,000 for a total just over -11,000. Only 2 states had an increase in claims greater than 1,000 for a total near +4,000. On an unadjusted basis initial claims shed -12,500 falling to 273,411.

Continuing claims fell too, by about -53,000. Last weeks figure was revised lower by a few thousand as well. This is the 11th week of steady declines in this figure since hitting a peak in mid January. This number also indicates that some improvement in the labor market is happening, whether or not it is jobs creation is yet to be revealed. The total claims also dropped this week. Total claims fell by -43,157 to hit 3.306 million. This is a new long term low in total claims and yet another sign that improvements could be happening in labor.

Pending home sales for February fell more than expected. Weather was not mentioned in the report but likely had some impact, at least on a regional basis. Sales fell by -0.8% versus the expected -0.2% to the lowest level since October of 2011. The current rate of pending sales is 10.5% lower than this time last year. January was revised lower as well. One bright spot within the report were statements to the effect that part of the reason for the decline is the lack of available homes to buy. This could lead to increases in both real estate sales and home building in the future.

The Oil Index

Oil prices surged today buy more than 1% on an intra day basis on renewed signs of life in the economy and tensions in the Ukraine. WTI climbed by over a dollar to trade above the $101 level while Brent traded near $108. The Oil Index, boosted by higher oil prices, looks like it could be getting ready to pop. The long term up trend in the index has been fighting with long term resistance set way back in 2008. The index has been edging higher along the trend line and is now displaying a pretty nice stochastic signal while at the same time momentum is shifting from the bears to the bulls. I'll be looking for a break above resistance which is just above the $1,500 level. A quick look at the XLE Energy Spyder shows a very similar picture making the oil sector a good place to look for some potential bullish trades.

The Gold Index

Gold prices are still falling. The improving economic picture, the new information we have on when the taper would end and when interest rate hikes would begin have taken their toll on the metal. Today gold fell about -$10, breaking below $1300 and flirting with $1290. At this time I don't see a reason for gold to snap back, unless some economic event reverses the expectations of rate hikes. The Gold Index has been responding as expected and tracking the decline in gold with declines of it's own. The brief touch of the 78.6% retracement level last week looks like a confirmation of the longer term down trend in this index. Indicators are currently bearish with momentum increasing. The first possible support I see is at the $90 level with next support along the top of the long term down trend line.

The Dollar

The dollar strengthened some today versus the euro and the yen. In Europe speculation of ECB QE and in the U.S. improving economic data combined to push the pair lower. The EUR/USD dropped below the the 30 day EMA and near term support at 1.3750 with bearish indicators. Next support is at the 1.36250 level. The next week could have a positive impact on the dollar, depressing this pair further, if the data continues to show improvements.

The yen is...doing something. This pair is winding up on a variety of factors. Most recently the flight to safety driven by Russia's annexation of the Ukraine. Longer term are the combined forces of Abenomics, U.S. QE and the taper. At hand is the long expected increase in usage tax scheduled to begin in Japan April 1st, their first tax hike in 17 years. There has already been expectation for the BOJ to increase it's QE due to a slower than expected recovery, now that the tax hike is here those expectations will grow. The next BOJ meeting is in less than two weeks. The USD/JPY has been caught between long term support and the top of a pennant formation, supported by both the short and long term moving averages. Now, there is almost no where for the pair to go. I still have a long term bullish view for this pair and the indicators are coincident with support at these levels but with all the factors in play I think waiting for the BOJ may be in order.

Story Stocks

Citigroup made headlines by not passing it's stress test. The banks capital plan was rejected, putting an end to the expected capital returns to shareholders. In the wake of the test results Citigroup received at least two downgrades from high profile analysts. Shares of the stock dropped in the after market hours, gapping lower this morning at the open. Shares lost about 5.5% but seemed to find support along the $47.50 level. Volume was very high today, more than 5 times daily average. In light of bullish expectations for the banks this could be an entry into Citigroup. The bank isn't failing, it's just not ready to give back money to shareholders, at least according to the stress test.

Lululemon reported earnings today, beating expectations but providing a mixed report nonetheless. Although revenue was up 7% earnings for the quarter were unchanged from the year ago period. The reported EPS was 3 cents ahead of the expected $0.72. Next quarter guidance was weak; revenue and earnings are both below current consensus. Shares of the stock were first down, and then up, in the premarket hours. The stock gapped open and moved higher, testing resistance around $53.25. Volume in this stock was also high, more than 4 times average daily.

RedHat Inc reported fourth quarter and full year earnings after the bell. This means that the start of earnings season is just around the corner. We can expect to start hearing from the big banks in about 4 weeks. For now, RedHat is a provider of open source linux based software solutions for personal, business and enterprise. The company was expected to report earnings of $0.26 per share but beat estimates with adjusted earnings of $0.39 for the quarter. On a yearly basis revenues, earnings, subscriptions and total free cash flow are all up double digits. The stock had sold off hard yesterday and was barely holding to break even today, until the report was released. In the after market hours shares of RedHat surged 4%.

The Indices

The markets were relatively calm today. Trading was to the downside but marginally. Even with today's action prices for the S&P 500 are still above the all time highs set in December/January of this year. The long term trends are still up and there is no sign at this time of market reversal that I can see. The index appears to be pausing, gearing up maybe for next weeks economic rodeo. With the quarter coming to an end there may be some amount of profit taking, sector rotation or other consolidating activities going on as well.

The SPX has been moving sideways for all of March and has weathered the data, the Ukraine, the Fed meeting and other events pretty well. If current near term support around the 1850 level doesn't hold the next support target would be the long term trend line just below. I am still bullish on the index and the economy and I expect the data to reveal some amount of renewed growth. For these reasons I am still looking to buy on the dips. For tomorrow I am keeping a close eye on the current support level for signs of a break or bounce.

The Dow chart is starting to look promising. This weeks action has confirmed what I have labeled strong support and the indicators are beginning to indicate a trend following buy signal. The index retested support at the 16,200 level today and was once again held there. This level is coincident with the short term moving average and confirmed by the longer term stochastic and MACD analysis. There is resistance ahead at 16,500 and just above that at the current all time highs.

The Dow Transports are sitting on the long term trend line with mildly bearish indicators. In light of the long term trends I view this as a possible entry point for the index provided that support along the trend line holds. This sector will be heavily impacted by data over the next week. In terms of Dow Theory this index has made another new high since the last time it and the Dow Industrials made a new high. If the Industrials follows the lead of the Transports then we can expect to see another new high in the Dow as well.

Even the Nasdaq doesn't look that bad. The tech heavy index was a loss leader today but it too is still above longer term, strong support. The trend in the index is up and with conditions reaching oversold levels could be offering up another long term entry point. The 4125 level will be important to watch over the next week and maybe into the end of the month as data is released and we enter the next round of earnings.

Once again we're at the turning of a new month and quarter. Economic data will start to come out revealing how March and the first quarter were and what we can expect in the next. Economic trends are still up in the longer term and beginning to improve in the nearer term. Jobless claims are edging lower and jobs creation may be improving. So long as the data next week support these views then I expect to see the long term trends in the markets continue. On the horizon is earnings season. The big banks will begin reporting in just two weeks, preceded by the release of Alcoa's earnings on Tuesday, April 8th. Expectations are not high for this round but it will be the future guidance that leads stock prices.

Until then, remember the trend!

Thomas Hughes

New Option Plays

About To Break Down

by James Brown

Click here to email James Brown


Charter Communications - CHTR - close: 121.26 change: -1.85

Stop Loss: 122.55
Target(s): 110.25
Current Option Gain/Loss: Unopened
Time Frame: Exit prior to April expiration
New Positions: Yes, see below

Company Description

Why We Like It:
CHTR is a cable-TV service. Investors seem to have soured on CHTR after Time Warner Cable (TWC) chose Comcast instead of CHTR as a merger partner. It's also worth noting that stocks for all three companies have been falling lately.

Shares of CHTR recently broke down below support near $125 and now they're testing support near $120 and their late February lows. If this level breaks the next support level is $110. That just happens to coincide with the bearish price target on CHTR's bearish point & figure chart.

Tonight we are suggesting a trigger to open small bearish positions at $119.75. If triggered our target is $110.25. More conservative traders may want to wait for CHTR to trade below the August 2013 low at $119.00 or below the simple 300-dma (at $118.70) before initiating positions.

Trigger @ 119.75 *small positions*

- Suggested Positions -

Buy the Apr $120 PUT (CHTR1419P120) current ask $2.45

Annotated Chart:

Weekly Chart:

Point & Figure chart

Entry on March -- at $---.--
Average Daily Volume = 1.2 million
Listed on March 27, 2014

In Play Updates and Reviews

Higher GDP Fails To Lift Stocks

by James Brown

Click here to email James Brown

Editor's Note:

An upward revision in the U.S. Q4 GDP estimate failed to lift the equity market on Thursday.

AGN hit our entry trigger.

Current Portfolio:

CALL Play Updates

ASML Holdings - ASML - close: 91.97 change: -0.31

Stop Loss: 89.75
Target(s): 99.50
Current Option Gain/Loss: -28.9%
Time Frame: exit prior to earnings on April 16th
New Positions: see below

03/27/14: The stock market continues to sink and ASML dipped toward the $92 level. Shares spent the rest of the day hugging $92. I am not suggesting new positions at this time.

FYI: The Point & Figure chart for ASML is bullish with a $104 target.

- Suggested Positions -

Long Apr $95 call (ASML1419D95) entry $1.90*

03/19/14 triggered @ 92.25
*option entry price is an estimate since the option did not trade at the time our play was opened.

Entry on March 19 at $92.25
Average Daily Volume = 1.6 million
Listed on March 18, 2014

Chicago Bridge & Iron - CBI - close: 83.68 change: +0.20

Stop Loss: 81.30
Target(s): 94.75
Current Option Gain/Loss: -51.7%
Time Frame: 4 to 6 weeks
New Positions: see below

03/27/14: CBI saw some volatility this morning. Shares spiked down to $82.21 and then bounced more than $2.50 before fading lower again. CBI has some support in the $81.50 area, which is why our stop is at $81.30 but readers may want to raise their stop closer to $82.00.

Earlier Comments:
Our target is $89.50. More aggressive investors could aim higher since the Point & Figure chart for CBI is bullish with a $111 target.

- Suggested Positions -

Long Apr $85 call (CBI1419D85) entry $2.80

03/26/14 new stop @ 81.30
03/18/14 adjust exit target from $89.50 to $94.75
03/04/14 triggered @ 84.50

Entry on March 04 at $84.50
Average Daily Volume = 1.16 million
Listed on March 01, 2014

CVS Caremark - CVS - close: 74.13 change: -1.17

Stop Loss: 73.45
Target(s): 79.75
Current Option Gain/Loss: -35.4%
Time Frame: 4 to 8 weeks
New Positions: see below

03/27/14: Yesterday's afternoon decline continued for the first half of trading today. CVS found support near $74.00 and spent the rest of the session drifting sideways. More conservative traders could move their stops closer to $74.00. Today's low was $74.01.

- Suggested Positions -

Long May $75 call (CVS1417E75) entry $2.23

03/26/14 triggered on gap higher at $75.78, suggested trigger was $75.10

Entry on March 26 at $75.78
Average Daily Volume = 5.4 million
Listed on March 24, 2014

Lockheed Martin - LMT - close: 158.88 change: -0.76

Stop Loss: 156.95
Target(s): to be determined
Current Option Gain/Loss: Apr$160c: -34.3% & Jun$165c: -19.1%
Time Frame: 4 to 8 weeks
New Positions: see below

03/27/14: Bloomberg reported earlier today that the U.S. State Department had halted all defense-related exports to Russia. Companies like LMT, Boeing (BA), BAE Systems (BAESY), General Dynamics (GD), Northrop Grumman (NOC), Raytheon (RTN), and United Technologies (UTX) could be affected by this decision.

Shares of LMT dipped to technical support at its simple 50-dma (near $158) this morning. I am not suggesting new positions at this time.

- Suggested Positions -

Long Apr $160 call (LMT1419D160) entry $3.20

- or -

Long Jun $165 call (LMT1421F165) entry $3.40*

03/25/14 triggered @ 160.75
*option entry price is an estimate since the option did not trade at the time our play was opened.

Entry on March 25 at $160.75
Average Daily Volume = 2.0 million
Listed on March 24, 2014

3M Company - MMM - close: 132.84 change: -0.25

Stop Loss: 131.40
Target(s): to be determined.
Current Option Gain/Loss: -38.9%
Time Frame: Exit PRIOR to earnings on April 24th
New Positions: Yes, see below

03/27/14: MMM dipped to short-term support near $132.00 and its 50-dma before bouncing. The stock managed to pare its loss to just 25 cents. I would hesitate to launch new bullish positions.

- Suggested Positions -

Long May $135 call (MMM1417E135) entry $2.95*

03/26/14 triggered @ 134.66, suggested entry was $134.65
*option entry price is an estimate since the option did not trade at the time our play was opened.

Entry on March 26 at $134.65
Average Daily Volume = 3.0 million
Listed on March 25, 2014

Cimarex Energy Co. - XEC - close: 116.72 change: +1.98

Stop Loss: 113.75
Target(s): 128.50
Current Option Gain/Loss: Apr$120c: -39.8% & Jun$125c: -22.2%
Time Frame: 4 to 8 weeks
New Positions: see below

03/27/14: XEC produced a nice bounce (+1.7%) with traders buying the dips most of the afternoon. I am raising our stop loss to $113.75.

I am no suggesting new positions at the moment.

We have our stop loss at $112.45, which is just below last Thursday's low.

- Suggested Positions -

Long APR $120 call (XEC1419D120) entry $3.49

- or -

Long JUN $125 call (XEC1421F125) entry $5.40

03/27/14 new stop @ 113.75
03/21/14 triggered @ 118.25

Entry on March 21 at $118.25
Average Daily Volume = 1.3 million
Listed on March 20, 2014

PUT Play Updates

Aegerion Pharmaceuticals - AEGR - close: 43.65 change: -1.36

Stop Loss: 48.25
Target(s): 40.25
Current Option Gain/Loss: +81.8%
Time Frame: exit PRIOR to April expiration
New Positions: see below

03/27/14: Good news! AEGR continues to show relative weakness with a -3.0% decline today. The stock also closed below potential support at the $45.00 level. We are moving our stop loss down to $48.25. I am not suggesting new positions at this time.

Earlier Comments:
I am suggesting small positions because biotech stocks can be volatile and AEGR already has short interest nearing 20% of its small 28.3 million share float. The Point & Figure chart for AEGR is bearish with a $41 target.

*small positions to limit risk*

Long Apr $45 PUT (AEGR1419P45) entry $2.20*

03/27/14 new stop @ 48.25
03/24/13 triggered @ 46.90

Entry on March 24 at $46.90
Average Daily Volume = 1.3 million
Listed on March 22, 2014

Allergan Inc. - AGN - close: 120.53 change: -1.81

Stop Loss: 125.20
Target(s): 116.20
Current Option Gain/Loss: + 0.0%
Time Frame: exit PRIOR to April expiration
New Positions: see below

03/27/14: Our brand new trade on AGN is open. The plan was to buy puts at $121.90. AGN gapped down at $121.91 and then dropped to potential support at the $120 level.

- Suggested Positions -

Long Apr $120 PUT (AGN1419P120) entry $3.60

03/27/14 triggered @ 121.90

Entry on March 27 at $121.90
Average Daily Volume = 2.5 million
Listed on March 26, 2014

Monster Beverage - MNST - close: 68.56 change: +0.38

Stop Loss: 70.10
Target(s): 63.00
Current Option Gain/Loss: -41.1%
Time Frame: exit prior to April expiration
New Positions: see below

03/27/14: I am growing concerned with our MNST trade. The intermediate trend is bearish but the last few days MNST has been moving sideways while the broader market declines. Has the stock found new support?

I am not suggesting new positions. We will adjust our stop loss down to $70.10.

Earlier Comments:
Our target is $63.00 (just above the 200-dma). More conservative traders may want to exit near $65.00, which could be new support. FYI: The Point & Figure chart for MNST is bearish with a $64 target.

- Suggested Positions -

Long APR $65 PUT (MNST1419P65) entry $0.85

03/27/14 new stop @ 70.10
03/22/14 new stop @ 71.10
03/20/14 triggered @ 69.00

Entry on March 20 at $69.00
Average Daily Volume = 1.7 million
Listed on March 19, 2014

Target Corp. - TGT - close: 59.74 change: +0.54

Stop Loss: 60.20
Target(s): 55.15
Current Option Gain/Loss: -36.3%
Time Frame: exit PRIOR to April expiration
New Positions: see below

03/27/14: I am also growing concerned with our TGT trade. There was a story out this morning in the Wall Street Journal that said the fraud seen from the Target data breech has been a lot smaller than expected. That might mean TGT's liability will be lower than estimated. The stock bounced. Shares did reverse near resistance in the $60 area but TGT did close up on the day. Relative strength in one of our bearish candidates is not a good sign.

More conservative traders will want to seriously consider an early exit now. Today's intraday high was $60.14. I am adjusting our stop down to $60.20.

- Suggested Positions -

Long Apr $60 PUT (TGT1419P60) entry $1.68

03/27/14 new stop @ 60.20
03/25/14 triggered @ 58.80

Entry on March 25 at $58.80
Average Daily Volume = 6.9 million
Listed on March 22, 2014

Twitter, Inc. - TWTR - close: 46.32 change: +1.89

Stop Loss: 47.35
Target(s): 41.85
Current Option Gain/Loss: +161.1%
Time Frame: 3 to 5 weeks
New Positions: see below

03/27/14: We warned readers last night that TWTR could bounce today. Shares saw an early morning spike down to $43.31 and then rebounded. The stock spent the rest of the session on either side of the $46.00 level with resistance near $46.40. More conservative traders may want to take profits now.

Earlier Comments:
TWTR currently has 544.7 million shares outstanding. There is a major lock up expiring on May 6th when another 474 million shares will come available for sale by insiders. It seems unlikely that TWTR is going to rally ahead of such a massive lock up expiration.

TWTR can be a volatile stock. Therefore we are suggesting small positions to limit risk.

- Suggested Positions -

Long Apr $50 PUT (TWTR1419P50) entry $1.80

03/26/14 new stop @ 47.35
03/25/14 new stop @ 53.55
03/24/14 new stop @ 54.15
03/20/14 new stop @ 55.15
03/18/14 adjust the exit target from $46.50 to $41.85
03/15/14 adjust exit target from $50.25 to $46.50
03/12/14 trade opens at $54.25

Entry on March 12 at $54.25
Average Daily Volume = 11.4 million
Listed on March 11, 2014