Option Investor

Daily Newsletter, Thursday, 4/10/2014

Table of Contents

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

Market Wrap

Good Data Bad Day

by Thomas Hughes

Click here to email Thomas Hughes
Jobless claims fall to a near 7 year low but the news wasn't enough to support stock prices.


International markets were mixed in the early hours this morning. Asian shares ended higher after a rough session influenced by weaker than expected trade data. Chinese exports and imports had been expected to rise in this months data but both figures actually declined. Despite the news the Shanghai and Hang Seng indices both climbed by more than 1% while the Nikkei, held back by this weeks BOJ meeting, only managed to post a meager 0.01% increase. In Europe shares ended mostly lower as Ukraine/Russia driven fear remains. The declines in Europe were exacerbated by the steep declines in our indices. Futures trading was only modestly lower this morning before the 8:30AM release of economic data. The initial jobless claims was reported near a 7 year low, after which the futures trade moved higher but never above break even.

Once the markets opened trading was light and hovered around break even for the first 45 to an hour. At that point the indices began to move lower and were down about 12 points for the S&P 500 by 11:30 and 24 points by 12:30. The decline was lead by the Nasdaq and the techs/biotechs sectors with a near 100 point drop at mid day. After lunch the selling accelerated sending the S&P 500 down more than 40 points and the Nasdaq by more than 120.

Earnings season is at hand and traders are awaiting what it will bring. The Tuesday release of Alcoa earnings was a nice surprise and an early indication of how the rest of the season may go. Tomorrow the big banks begin to report led by JP Morgan and Wells Fargo before the bell but there is not much expectation for robust growth. Next week the rest of the big banks and a large portion of the regional banks will be reporting among other important names.

The Economy

U.S. import and export prices both rose in the month of March. Import prices climbed by 0.3%, slightly slower than export prices which rose by 0.5%.

Initial claims for unemployment was a surprising 300,000. This is down -32,000 from last weeks upward revision of 6,000 for a net drop of -38,000. This is near a 7 year low set in May 2007, about 6 months before the start of the last recession. Keep in mind that this new low is based on last weeks adjustments to seasonal factors and recalculation of historic data. Regardless of the new low the drop in claims is significant and another sign that labor trends are improving. The four week moving average of claims fell by -4,750 to 316,250, the second lowest level since the end of the recession. On an unadjusted basis claims were 298,393, up 3,531 from last week. On a state by state basis two states reported a decline in claims greater than 1,000; Pennsylvania and Texas with -2,007 and -1,821 respectively. Four states had an increase greater than 1,000; California, Oregon, Ohio and Kentucky for a total near +22,000.

Continuing claims and total claims both also declined in this weeks report. Continuing claims fell by -62,000 to hit 2.78 million. Last weeks number was revised up by 2,000 to 2.838. This is just off of the long term low in this figure set early this year. Total claims fell by -37,301 to hit 3.164 million, a new long term low. Based on the continuing decline in all three of these data points it I expect to see other signs of life in the labor markets and other data over the next few weeks.

The Gold Index

Gold prices caught a bid this week after the FOMC revealed they had held a secret meeting in which the committee lowered its unemployment target thresh hold. This revelation did two things. One, it completely killed the Fed's credibility in terms of transparency. Two, it alleviated somewhat the thought of increased interest rates brought on by Janet Yellen over the past month or two. I can't say that the markets are rigged but manipulated is another story. In any event, gold prices gained about $15 or so on an intra-day basis, climbing back above the $1300 resistance level. Some sellers entered the market around the $1320 level but not enough to push prices down very far. Afternoon trading saw gold prices hover around $1312-$1315 level before moving a little higher in the later part of the day.

The Gold Index also trade to the upside today but was met with stronger resistance than the physical metal. The index lost close to a full percent today, falling back from the $100 level. The bearish flag I suggested last week still looks bearish although it may take another week or more for it to wind up. When I went looking at some of the individual stocks in the sector they all looked fairly bearish as well. Some of the smaller miners have already reported but the big players such as Barrick, RandGold and Royal Gold all report at the end of the month and in the first week of May. Until those reports come out the index will likely be heavily influenced by gold prices, economic data and interest rate speculation.

The Oil Index

Oil prices fell today on the weak Chinese trade data. Exports and imports in the country had been expected to rebound somewhat from the previous month's sharp decline but investors were met with more declines. Exports had been expected to climb by 2.4% but fell by 11.3%. Imports had been expected to climb by 4% but fell by 6.6%. The news had little affect on Chinese stocks and in the end only sent prices for WTI and Brent down by about 0.2%.

The Oil Index opened lower than yesterday's close, moved higher just after the open and then reversed and moved lower in the afternoon hours. The long term charts still look bullish but my concern for the nearer term remains. The index peaked last Friday, just after I voiced concern over a possible divergence forming in the MACD. The divergence did not lie, prices are lower than last weeks peak but still above the long term resistance now turned support. The index may move lower to retest support but the long term trend is still up at this time. Earnings season will have an impact on longer term direction, the big players in this sector report earnings in the last week of this month. Until then the Oil Index has support around $1500 and resistance just above $1550.

The Dollar Index

Gold wasn't the only trade “manipulated” by the Fed's choice to hold a secret meeting, secretly change their data thresh hold and then not tell us for a month. The dollar was also affected. The dollar weakened significantly against the other major world currencies following the release of minutes and is now trading once again near the bottom of the now 7 month trading range. The decline was aided by the BOJ's lack of action on Tuesday and their firm stance that no more QE was needed in Japan.

I didn't expect the BOJ to make a policy change this soon after the start of the new tax hike but I also didn't expect them to be so firm in their stance of not needing QE. They have effectively taken more QE off the table for now, at least until data shows whether or not the Japanese economy is improving and that the tax hike is or isn't hurting it. The pair is now trading along 101.50 support line and beneath/within the previously broken wedge pattern begin in January. Stochastic still shows strong support along this level but the pair may be stuck in the current range for the near to short term. The Japanese are still printing yen and we are still on track for Taper to end this year so I am sticking to my long term bullish out look on the pair, with an eye of caution on support.

Earnings Spotlight

The banking sector is in the spot light this week as the big banks, the regional banks and the small banks are set to begin reporting tomorrow. First up is JP Morgan and Wells Fargo. The consensus estimates have both banks earning basically in line with the previous quarters results. Today traders got ready for the announcement by driving prices down to the $57.50 support line on slightly above average volume. Stochastic is still showing support along this level but that could break down if the report is not good. Important factors will be the impact of the fees, fines and charges that JPM has had to pay, outlook on the changing regulatory environment and projections for 2014 business. If support is broken next support is around $55.

Wells Fargo is expected to earn slightly less than last quarter providing the opportunity for the bank to beat expectations. Wells has been insulated from most of the housing bubble fall out, did not have a whale disaster and has not been paying billions to settle with federal regulators. This puts WFC in much better shape than JPM and it shows in the charts. While JPM has been trending up over the past 12 months it has been very choppy, jerky and barely more than sideways action. Wells Fargo has actually been moving higher steadily, if slowly. Today's action brought the stock down, piercing the short term 30 day moving average and creating a potentially bearish candle pattern. However, the stock is still trading above support at the $47.50 level indicated by a congestion band formed last month.

The Banking Index fell about 2.5% today, forming a bearish continuation candle pattern in confirmation of a short term double top. This pattern has a target around the $65.75 area, just above a longer term support zone. The indicators are bearish and moving lower, pointing to possible continued weakness in this sector. The tier 1 capital requirements of Basel III for the biggest banks are impacting their ability to grow and produce returns. Those requirements are still changing, making it very difficult for the banks to make long term capital plans. The banks could be suffering from profit taking/sector rotation to better growth potential and/or higher yielding dividends.

The Indices

Earnings season has brought a correction with it. Today's action brought the SPX down hard against the long term trend line and may break it tomorrow or the next. Trading over the next few days could get vigorous since the index is not only sitting on the trend line it is also within the support zone set during the December/January period and previous all time highs. If the trend line breaks I would look next to the support zone for support. Looking at the indicators, assuming that the long term trend is still intact and it is until broken and confirmed, there is support at the current level. In the longer term stochastic is trending higher over the course of the last two trend line bounces and in the nearer term also confirming support at the current level. Until the candles and price action confirm that indicated support we have to assume that there will be more weakness and a potential break of the trend line. 1815 and 1800 are my next targets for possible support.

The Dow fell by more than 200 points today, making it the day's winner in terms of % decline. The blue chips fell by about 1.5% compared to the S&p 500's +2% and the Nasdaq's +3% declines. The Dow is now at a three week low and sitting on the area I marked as strong support a few weeks ago. This area is still indicated as support buy it may break under the current round of selling, particularly if the bank earnings are not acceptable to the market. If so my next targets here for support are around the 15,750 and 15,500 levels. A decline of that magnitude would be about 7% of the value from the Dow's most recent high and still above the long term trend line. The long term trend is still up so I am still in the mindset of buy-on-the-dips. The question now is, how big is this dip going to be?

The Nasdaq was today's loss leader, again. The techs, bio techs and momentum plays that have been under pressure of late were the root cause again. The nature of the decline, techs/momentum stocks, is one reason I suspect that we may be in a sector rotation of some sort. The techs led the markets for the second half of 2013, have advanced more than double the advance of the Dow and close to 50% farther than the S&P making it the best choice for profit taking at this time. As with the other two indices there is some sign of support in the indicators at the current level. Stochastic is trending sideways, above the lower signal line, and the MACD is creating a Head & Shoulders pattern. I don't often see these types of patterns in the MACD but they do appear and they are, or I should say can be, valid analysis. Next support for the Nasdaq is about 50 points lower along the 4,000 level and then another 250 points below that along the long term trend line around 3,750.

Near and short term direction for the markets are now in the hands of earnings season. The long term trends in stocks, and the economy, are up so I still think that the markets are moving higher. In the nearer term there is earnings, earnings growth and earnings guidance to consider. I don't expect a whole lot from the banks in terms of earnings growth but I do expect to see some signs of improvement or expectations of improvement in the guidance. It makes sense, if the economy and business are getting better then banks should be getting better too, right?

What I really expect to see this earnings season, in more of a general kind of way, is the same thing we have been seeing for the last 8 or more quarters. Slow, moderate growth, a few high profile earnings misses with most companies performing as expected or near enough to keep hopes up. It won't be enough to spark any wild rallies but I think it will be enough to keep the long term trends intact. In the meantime the markets are likely going to tread water at best, or move lower at worst, until the season is well underway and we have a decent idea of how earnings in the 2nd quarter and the rest of the year are going to be.

Until then, remember the trend!

Thomas Hughes


New Option Plays

Specialty Retail & Aerospace

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:

(bearish ideas)


Advance Auto Parts - AAP - close: 118.61 change: -2.97

Stop Loss: 120.25
Target(s): 110.50
Current Option Gain/Loss: Unopened
Time Frame: exit PRIOR to earnings on May 15th
New Positions: Yes, see below

Company Description

Why We Like It:
AAP is in the services sector. The company is considered a specialty retailer of automobile aftermarket parts, accessories, batteries, and maintenance items. They have over 4,000 locations.

The company reported earnings back in February and beat the bottom line estimate and raised their guidance. This produced a pretty good one-day pop on AAP shares. Unfortunately there wasn't much follow through higher. The rally in AAP ran out of gas under the $130 level. Shares have been meandering sideways for weeks until the recent breakdown below technical support at the 50-dma.

Today's move has produced a new failed rally bearish reversal pattern at the 50-dma. More aggressive traders may want to buy puts immediately. I am suggesting a trigger to buy puts at $117.25, which is below Tuesday's low of $117.39. If triggered our target is $110.50.

Trigger @ 117.25

- Suggested Positions -

Buy the May $115 PUT (AAP1417Q115) current ask $3.40

Annotated Chart:

Entry on April -- at $---.--
Average Daily Volume = 752 thousand
Listed on April 10, 2014

Lockheed Martin Corp. - LMT - close: 155.43 change: -3.40

Stop Loss: 158.25
Target(s): 146.00
Current Option Gain/Loss: Unopened
Time Frame: exit PRIOR to earnings on April 22nd
New Positions: Yes, see below

Company Description

Why We Like It:
LMT is in the industrial goods sector. The company is a major player in the aerospace and defense industries. The defense stocks delivered impressive gains last year. It looks like momentum has stalled in 2014. LMT produced a bearish double top in February and early March. The recent failure near $165 was a lower high. Now the oversold bounce has reversed under resistance at the 50-dma.

This week's low was $154.75 on Tuesday. I am suggesting a trigger to buy puts at $154.50. If triggered our target is $146.00. However, this is a short-term trade. LMT is scheduled to report earnings on April 22nd and we do not want to hold over the announcement.

Trigger @ 154.50

- Suggested Positions -

Buy the May $150 PUT (LMT1417Q15) current ask $2.20

Annotated Chart:

Entry on April -- at $---.--
Average Daily Volume = 1.7 million
Listed on April 10, 2014

In Play Updates and Reviews

Market Bounce Erased

by James Brown

Click here to email James Brown

Editor's Note:

The market's two-day bounce has been completely erased by Thursday's widespread sell-off.

Equities started to weaken in overnight trading and the U.S. indices delivered a day-long decline. Biotechs and momentum names led the way lower again.

The whipsaw with big gains and big losses makes this a challenging environment for short-term traders.

WDC and CME both hit our stop loss.

Current Portfolio:

CALL Play Updates

Caterpillar Inc. - CAT - close: 102.26 change: -0.73

Stop Loss: 99.75
Target(s): 109.00
Current Option Gain/Loss: +00.0%
Time Frame: exit PRIOR to earnings on April 24th
New Positions: see below

04/10/14: CAT actually held up reasonably well today. The stock broke out to new relative highs this morning before reversing and succumbing to the market's weakness. CAT only lost -0.7% versus -2.0% in the S&P 500. More conservative traders may want to raise their stop loss closer to the simple 10-dma near 101.40. I am not suggesting new positions at this time.

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

QUALCOMM Inc. - QCOM - close: 78.07 change: -1.86

Stop Loss: 77.40
Target(s): to be determined
Current Option Gain/Loss: - 25.1%
Time Frame: Exit PRIOR to earnings on April 23rd
New Positions: see below

04/10/14: QCOM got hammered along with the rest of the technology sector. The NASDAQ fell -3.1% and QCOM gave up -2.3%. Today's move produced another bearish reversal type of candlestick. If there is any follow through lower tomorrow we could see QCOM hit our stop at $77.40.

Earlier Comments:
Prepare to exit prior to QCOM's earnings report on April 23rd.

- Suggested Positions -

Long MAY $80 call (QCOM1417E80) entry $1.87

04/09/14 opened on Wednesday morning.

Entry on April 09 at $79.26
Average Daily Volume = 2.0 million
Listed on April 08, 2014

Visa Inc. - V - close: 201.55 change: -5.99

Stop Loss: 199.95
Target(s): to be determined
Current Option Gain/Loss: -39.8%
Time Frame: exit PRIOR to earnings on April 24th
New Positions: Yes, see below

04/10/14: It was an ugly day for the markets and Visa was no exception. Shares erased yesterday's +$5.00 gain with a -$6.00 drop today. The stock actually gapped open higher at $208.26 before reversing at its simple 10-dma and plunging back toward round-number support at $200.00. The low today was $200.15. Today's move does mark a close under technical support at the simple 200-dma. Our stop loss is at $199.95 and if Visa sees any follow through lower tomorrow we will be stopped out.

- Suggested Positions -

Long May $210 call (V1417E210) entry $5.90

04/10/14 Trade opens. Visa gapped higher at $208.26

Entry on April 10 at $208.26
Average Daily Volume = 3.8 million
Listed on April 09, 2014

PUT Play Updates

Currently we do not have any active put trades.


Western Digital Corp. - WDC - close: 88.17 change: -3.08

Stop Loss: 88.80
Target(s): to be determined
Current Option Gain/Loss: - 30.2%
Time Frame: Exit PRIOR to earnings on April 30th
New Positions: see below

04/10/14: It looks like we should have kept our entry trigger at $92.10. We thought the bounce might have more legs so last night we moved the entry trigger to $91.60. WDC hit our trigger this morning, failed at $91.91, and then reversed into a -3.3% drop. Technology stocks were big underperformers today with the NASDAQ down -3.1%.

- Suggested Positions -

MAY $95 call (WDC1417E95) entry $2.58* exit $1.80* (-30.2%)

04/10/14 stopped out @ 88.80
*option entry price and exit price is an estimate since the option did not trade at the time our play was opened or closed
04/10/14 triggered @ 91.60
04/09/14 adjust entry trigger from $92.10 to $91.60


Entry on April 10 at $91.60
Average Daily Volume = 2.0 million
Listed on April 08, 2014


CME Group Inc. - CME - close: 69.53 change: +0.40

Stop Loss: 70.25
Target(s): 62.50
Current Option Gain/Loss: -13.9%
04/10/14: There is no explanation for the mid morning rally in CME. The market was already sinking before CME started to rally and trade up above resistance at $70.00. The intraday high was $70.26. Last night we lowered our stop loss to $70.25.

Our play is closed even though today's move looks like a new bearish entry point.

- Suggested Positions -

May $70 PUT (CME1417Q70) entry $2.15* exit $1.85** (-13.9%)

04/10/14 stopped out
**option exit price is an estimate since the option did not trade at the time our play was closed.
04/09/14 new stop @ 70.25
04/07/14 new stop @ 71.25
04/07/14 triggered at $69.75
*option entry price is an estimate since the option did not trade at the time our play was opened.


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