Option Investor

Daily Newsletter, Tuesday, 4/8/2014

Table of Contents

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

Market Wrap

Pause to Reload

by Jim Brown

Click here to email Jim Brown

The gain in the indexes today was simply an oversold bounce on low volume. Don't get your hopes up.

Market Statistics

The indexes dipped at the open with the Dow and S&P setting new lows for the month while the Nasdaq and Russell 2000 barely avoided a retest of Monday's low. There was nothing positive or negative about today's move because it was simply a minor bout of short covering in an oversold market.

The volume was mediocre and internals mixed and the news flow was quiet. I believe it was a pause to determine market direction. The charts are bearish but there are external factors.

The sell off on Friday was a major sell program and Monday's decline was an aftershock prompted by fear of the unknown and margin selling. Today was a "wait and see" day. Investors want to believe we will return to test Friday's highs but they are gun shy because of the speed and severity of the drop. The charts suggest we are poised to move in either direction with equal ease so investors are waiting for a direction to appear.

The economic reports did not provide any motive power to the market despite some better than expected numbers. The actual reports themselves are not normally market movers so the results were ignored.

The NFIB Small Business Optimism Index rose slightly from 91.4 to 93.4 for March. The bounce recovered some of February's losses and the drop from 94.1. The component responsible for pushing the index higher was the sales expectations over the next six months, which jumped from 3% to 12%. However, the expectations for the economy to improve only gained +1 point to -18%. Earnings trends rose +3 points from -27% to -24% and still not encouraging. More than 8% of businesses had trouble getting credit over the last three months and 7% believe it will be even harder over the next six months.

Most frustrating for the Fed was the pricing component. Only 19% plan to raise prices in the next six months compared to 23% in February. The lack of price inflation is a continued concern as it suggests excess capacity and lack of demand are still a problem.

Given the weather improvement in March you would have expected small businesses to be more optimistic for the future. The minor gain was lackluster and suggests the economy is still tough to navigate.

The Job Openings and Labor Turnover Survey (JOLTS) for February was also disappointing. The number of job openings did increase from 3.874 million to 4.173 million but the percentage increase from the same period last year declined from 4.9% in January to +3.9% in February. The rise in openings was seasonal and not due to an economic surge. Hires, quits, layoffs and discharge rates were basically unchanged from January. Apparently weather was not a factor. This is a lagging report for February and was ignored.

The California Manufacturing Survey for Q2 was slightly upbeat with manufacturers expecting a minor gain in activity. The headline number rose from 56.2 to 58.5. There were minor gains in both durable and non-durable goods expectations. However, employment expectations declined from 55.6 to 53.3. A reading above 50 indicates expansion. Overall the report showed a minor improvement in expectations for Q2. This survey is normally ignored because it asks managers what they think will happen in the coming quarters rather than reporting what is currently happening. Investors want to know facts not optimism.

The calendar for Wednesday is headlined by the FOMC minutes and of course that will produce afternoon volatility. Nobody expects any smoking guns hidden in the minutes but you never know for sure until they are released.

The most important events for the week are probably the Wells Fargo and JP Morgan earnings on Friday. These are the first earnings of the financial sector and there will probably be some more charges for litigation and settlements. Ned Davis Research claims the financial sector will always show trouble before any other sector.

The analysis of the payroll report from Friday continues to evolve. Barry Habib (Thanks to Art Cashin for the tip) pointed out that the internal numbers were really ugly. Part time jobs outpaced full time jobs 2:1. More than 200,000 jobs were created for those between ages 16-19 and 369,000 for individuals over 65. That lowered the unemployment rate for those over 65 to 4%, down from 5.9%. Jobs for the broadest age group of 20-64 declined -100,000.

There were 72,000 jobs created for workers without a high school diploma, 314,000 for those with a diploma and 28,000 for those with some college. However, there was a decline of -345,000 jobs for workers with a bachelor's degree or better.

To put this in perspective the only jobs being created are part time for low skilled workers or those already over 65 and willing to work for minimum wages. The skilled and educated worker saw a substantial drop in available jobs. Fast food counter help and Walmart greeters and checkers found jobs but engineers and high tech workers did not.


After the bell former Dow component Alcoa (AA) reported adjusted earnings of 9 cents on $5.45 billion in revenue. Analysts were expecting 5 cents and $5.55 billion in sales. Alcoa was challenged by an 8% decline in the price of aluminum and charges of $276 million related to the shutdown of excess capacity. They plan to close another 274 tons of smelting capacity in May to bring the total shutdown to 1.2 million tons or 28% of capacity since 2007. Meanwhile downstream profitability hit a record high while midstream profits nearly tripled. The CEO was very positive on the pace of the restructuring and expects demand to increase as a result of the boom in the aircraft industry. Shares rallied +30 cents after the report. Alcoa is up +52% since being taken out of the Dow last September.

WD40 (WDFC) reported earnings of 67 cents on revenue of $94.2 million. Analysts were looking for 68 cents and $92 million. Revenues rose +8% and gross margins were 51%. The company reaffirmed guidance for 2014 saying earnings would be between $2.65-2.80 compared to consensus estimates for $2.76. Revenues were projected to be $383-398 million compared to estimates for $387.66 million. Shares declined -1.30 after the news.

The earnings estimates for Q1 have declined from +5.1% at the beginning of the quarter to +0.31% today. Revenue is expected to rise +3.7%. Q2 estimates are currently for a whopping +8.5% earnings growth and +3.9% revenue growth. The huge estimates for Q2 are at risk if the guidance given with Q1 earnings is weak. If that consensus estimate begins to decline sharply the markets are sure to react negatively. Expect the "weather ate my earnings" excuse on a daily basis.

Tesla (TSLA) shares rallied +$8 after the company said it was starting a corporate leasing program. The company already has a Resale Value Guarantee (RVG) that allows regular customers to acquire attractive lease rates with that "put" a comfort to leasing companies. Tesla already provides financing that factors in the RVG. Buyers also qualify for a federal rebate of $7,500 plus various state rebates for buying electric cars.

The lease program announced today is for "small to medium sized businesses" that prefer to deduct the monthly lease payments rather than buy the cars and have the payments not be deductible. Tesla expects sales in 2014 to rise to 35,000 units compared to 22,450 in 2013.

Also weighing on the market today were rising tensions in the Ukraine. Russian speaking demonstrators took over buildings, temporarily took hostages, protested in the streets and started fires. They are demanding a referendum on Ukraine joining Russia. Nearly every analyst, politician and diplomat claims these demonstrators are paid and directed by Russia. John Kerry said "these efforts are as ham-handed as they are transparent" and Russia is working to "create a contrived crisis with paid operatives across an international boundary."

Putin warned that Russian people in Ukraine must be protected or he would be forced to rescue them as he did in Crimea. Clearly he has been setting up for this situation with up to 100,000 troops and tanks poised on the Ukraine border along with huge depots with supplies ready for a long term occupation.

The U.S. warned Putin that any further actions of aggression towards the Ukraine would be met with additional sanctions of increasing severity and I am sure Putin got a good laugh from that.

If Putin wants the Ukraine there is nothing the U.S. or Europe can do to stop him. By orchestrating the protests in the Ukraine he has given himself cover with the rest of the international community. If he does take over Ukraine, which appears to be almost a given at this point, it will raise the stakes for the rest of his neighbors. NATO will be forced to significantly increase its forces and the U.S. will have to ratchet up its involvement all over Europe.

The market may experience some additional volatility but Ukraine has no direct impact on the U.S. markets. It will simply be investor confusion rather than a direct impact.

However, the rising tensions pushed oil prices up +1.93 to a four-week high at $102.50. This comes only one day after Libya regained control of four ports and will begin exporting oil again soon. Exports of light sweet crude have been in the range of only 200,000 bpd and more than one million barrels a day below capacity. Crude prices dipped on Monday when this news broke.

The market action was listless after the initial opening dip. It was a low volume tug of war as the oversold bounce ran out of steam around lunch time. Advancers beat decliners by more than 2:1 but the gains on the Dow and S&P were minimal. The Dow gained +10 and the S&P +7. The Nasdaq and Russell 2000 were the most oversold so their rebounds were stronger. The Nasdaq gained +33 and the Russell +8.

We can't point to the gains for the day and claim we are headed higher. Support at 1,840 held despite a one candle dip to 1,837. That 1,840 level is critical and that is where we expected buyers to appear and shorts to bail with their gains.

The S&P is still locked in its range from 1,840-1,880 that began back on February 14th. With the S&P ending close to the highs for the day at 1,852 instead of on the lows I would expect a continued attempt to rally them at the open on Wednesday. Once past that opening move it is a coin toss ahead of the FOMC minutes in the afternoon.

We need to focus on that critical 1,840 support level as our directional indicator. The next support point would be the 100-day average at 1,826 but if we break through 1,840 I doubt that average will stop the decline.

The Dow declined to decent support at 16,200 at the open and rebounded sharply. Unfortunately that rebound stalled at 16,285 and held below that level for the rest of the day. A $2 decline in Goldman, -$1.50 in Boeing and -$1.25 in IBM kept the Dow in check. The majority of the components were up only fractionally.

The Dow has risk to 16,050 but a breakdown there could accelerate significantly lower. As long as we can avoid major headlines from the FOMC minutes and the initial earnings are not a disaster we could see a rebound but I think the top is in for April. I would love to be wrong but that is what the charts are telling me.

The Nasdaq broke below support at 4,100 on Monday and dipped below it again today before moving higher with a +33 point gain. The break of that support by a whopping 50 points on Monday created some serious damage. Despite the decent rebound today I think we now have risk to 4,000.

The momentum stocks recovered slightly today but considering their recent declines this was just a dead cat bounce.

Resistance is well above at 4,200 and 4,285 and I don't that that will be a factor. We need to be worried about another decline and close below 4,100.

The Russell 2000 was even worse. The index broke and closed under major support at 1,146 for two consecutive days and that suggests we could see a retest of 1,096. Today was a weak rebound considering the amount we were oversold. A move below today's low at 1,131 is a strong sell signal.

I want to be bullish but the charts are showing a bearish setup. Today's lackluster bounce may evolve into a failed rebound followed by lower lows. Nobody can predict what will happen but we can see the signs if the market moves in a certain direction. If the S&P falls below 1,840, Russell 1,130 and Nasdaq 4,065 we are in trouble.

We have the potential for earnings to provide a temporary lift but I am not holding my breath.

Enter passively, exit aggressively!

Jim Brown

Send Jim an email


New Option Plays

Mobile Chips & Storage Devices

by James Brown

Click here to email James Brown


QUALCOMM Inc. - QCOM - close: 78.89 change: +0.81

Stop Loss: 77.40
Target(s): to be determined
Current Option Gain/Loss: Unopened
Time Frame: Exit PRIOR to earnings on April 23rd
New Positions: Yes, see below

Company Description

Why We Like It:
QCOM is in the technology sector. They make digital communication technology and mobile phone chipsets. The stock has been garnering bullish analyst comments in recent weeks and did so again this morning. This time it was BMO Capital Markets who raised their price target on QCOM to $90.00. Their analysts believes Q1 trends looked strong for the industry.

Technically the pullback in QCOM only lasted two days and traders jumped in to buy the dip today. We are suggesting readers buy this bounce and buy calls tomorrow morning (no trigger). We'll place our stop loss at $77.40, just under today's low. Prepare to exit prior to QCOM's earnings report on April 23rd.

*Buy calls now at the open tomorrow*

- Suggested Positions -

Buy the MAY $80 call (QCOM1417E80) current ask $1.78

Annotated Chart:

Entry on April -- at $---.--
Average Daily Volume = 2.0 million
Listed on April 08, 2014

Western Digital Corp. - WDC - close: 90.98 change: +1.38

Stop Loss: 88.80
Target(s): to be determined
Current Option Gain/Loss: Unopened
Time Frame: Exit PRIOR to earnings on April 30th
New Positions: Yes, see below

Company Description

Why We Like It:
WDC is in the technology sector. The company makes digital storage devices. Shares had been showing relative strength prior to Friday's profit taking with a drop from $95 to support near $90.00. After a two-day pullback traders are already buying the dip. We did notice that the bounce today stalled near its 10-dma. Therefore we are suggesting a trigger to buy calls at $92.10. If triggered we will plan on exiting positions prior to WDC's earnings report on April 30th.

Trigger @ $92.10

- Suggested Positions -

buy the MAY $95 call (WDC1417E95) current ask $2.53

Annotated Chart:

Entry on April -- at $---.--
Average Daily Volume = 2.0 million
Listed on April 08, 2014

In Play Updates and Reviews

Stocks Snap Three-Day Sell-off

by James Brown

Click here to email James Brown

Editor's Note:

The U.S. market's major indices snapped a three-day sell-off with a bounce on Tuesday.

ASML was closed this morning. MMM was stopped out.
CAT and CHTR hit our entry triggers.

Current Portfolio:

CALL Play Updates

Caterpillar Inc. - CAT - close: 102.39 change: +1.28

Stop Loss: 99.75
Target(s): 109.00
Current Option Gain/Loss: + 3.9%
Time Frame: exit PRIOR to earnings on April 24th
New Positions: see below

04/08/14: Just as we expected shares of CAT bounced today. The stock hit our suggested entry point at $102.35 and outperformed the major indices with a +1.26% gain. The next hurdle for the bulls appears to be potential resistance in the $103.25-103.50 zone.

Earlier Comments:
Our exit target is $109.00. However, we do not have much time for CAT to perform. The company is scheduled to report earnings on April 24th and we do not want to hold over the announcement.

- Suggested Positions -

Long MAY $105 call (CAT1417E105) entry $1.52

04/08/14 triggered @ 102.35

Entry on April 08 at $102.35
Average Daily Volume = 5.9 million
Listed on April 07, 2014

PUT Play Updates

Celgene Corp. - CELG - close: 138.22 change: -0.94

Stop Loss: 143.15
Target(s): 127.00
Current Option Gain/Loss: -18.7%
Time Frame: Exit PRIOR to earnings on April 24th
New Positions: see below

04/08/14: After a big bounce yesterday the biotech stocks did not participate in the market's rebound today. CELG failed at short-term resistance near $140.00 again and closed with a -0.6% decline.

Readers may want to wait for a drop below yesterday's low $135.50 before considering new positions.

Earlier Comments:
Biotech stocks can be volatile so I am labeling this trade an aggressive, higher-risk trade. We want to use small positions to try and limit our risk.

*small positions* - Suggested Positions -

Long May $130 PUT (CELG1417Q130) entry $4.00*

04/07/14 triggered @ 136.40
*option entry price is an estimate since the option did not trade at the time our play was opened.

Entry on April 07 at $136.40
Average Daily Volume = 4.3 million
Listed on April 05, 2014

Charter Communications - CHTR - close: 121.15 change: +2.21

Stop Loss: 122.25
Target(s): 110.50
Current Option Gain/Loss: -60.3%
Time Frame: exit PRIOR to earnings on April 28th
New Positions: see below

04/08/14: CHTR is not cooperating. Shares followed the market lower this morning and hit our suggested entry point at $118.25. However, when the stock market rebounded off its 10:30 a.m. low, shares of CHTR outperformed and surged to close up +1.85% (+3.3% from its low today).

The close back above $120.00 is technically bullish. Our stop is at $122.25 and if CHTR sees any follow through higher tomorrow odds are we will be stopped out.

NOTE: Our entry price at $5.80 seems a bit excessive. Yesterday the option closed with a bid/ask of $3.10/3.50. A 70-cent drop should not have lifted the option price more than $2.00.

Earlier Comments:
The Point & Figure chart for CHTR is bearish with a $110 target.

- Suggested Positions -

Long May $115 PUT (CHTR1417Q115) entry $5.80

04/08/14 triggered at $118.25
Entry price at $5.80 seems excessive.

Entry on April 08 at $118.25
Average Daily Volume = 995 thousand
Listed on April 07, 2014

CME Group Inc. - CME - close: 69.13 change: +1.54

Stop Loss: 71.25
Target(s): 62.50
Current Option Gain/Loss: +11.6%
Time Frame: Exit PRIOR to earnings on May 1st.
New Positions: see below

04/08/14: CME was making headlines this morning. Their futures market was suffering some technical issues. CME halted about two dozen contracts on its Globex futures and options exchange, including futures on corn, wheat, lean hog futures, feeder cattle, live cattle, and some milk contracts. CME said they had the problem fixed by 2:30 p.m.

Meanwhile shares of CME bounced and recovered half of yesterday's losses. Watch for potential resistance at the $70.00 level.

Earlier Comments:
Our target is $62.50. More aggressive traders could aim lower since the Point & Figure chart for CME is bearish with a $60 target.

- Suggested Positions -

Long May $70 PUT (CME1417Q70) entry $2.15*

04/07/14 new stop @ 71.25
04/07/14 triggered at $69.75

Entry on April 07 at $71.25
Average Daily Volume = 1.9 million
Listed on April 05, 2014


ASML Holdings - ASML - close: 89.97 change: -0.85

Stop Loss: 89.75
Target(s): 99.50
Current Option Gain/Loss: -71.0%
Time Frame: exit prior to earnings on April 16th
New Positions: see below

04/08/14: We decided in last night's newsletter to exit our ASML trade this morning. That appeared to be the right move with ASML underperforming the market today. Shares opened at $89.91 this morning.

- Suggested Positions -

Apr $95 call (ASML1419D95) entry $1.90* exit $0.55** (-71.0%)

04/08/14 planned exit this morning.
**option exit price is an estimate since the option did not trade at the time our play was closed.
04/07/14 prepare to exit tomorrow morning
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

3M Company - MMM - close: 134.84 change: -0.44

Stop Loss: 133.85
Target(s): to be determined.
Current Option Gain/Loss: -16.9%
Time Frame: Exit PRIOR to earnings on April 24th
New Positions: Yes, see below

04/08/14: The stock market's dip in the first 90 minutes of trading today was too much for MMM. Shares followed the market lower, hitting our stop loss at $133.85, and then followed the market higher.

- Suggested Positions -

May $135 call (MMM1417E135) entry $2.95* exit $2.45** (-16.9%)

04/08/14 stopped out
04/05/14 new stop @ 133.85
04/01/14 new stop @ 131.90
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