Option Investor

Daily Newsletter, Thursday, 5/1/2014

Table of Contents

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

Market Wrap

May Day Markets

by Thomas Hughes

Click here to email Thomas Hughes
Markets drift during light May Day trading as traders await the ever important Non-Farm Payroll report.

International markets were mixed on this Thursday May 1st. Some Asian and European markets were closed in honor of the May Day holiday. In China, a slightly weaker than expected flash PMI reading also had a mildly negative effect on trading. The HSBC flash reading of Chinese PMI was 50.4 versus the expected and 50.5 and the previous 50.3. The miss is negligible, the reading still positive. In Japan the Nikkei rallied on earnings driven by Abenomics. Unfortunately for President Abe his policies are coming under fire due to the lackluster results. In Europe both the DAX and the CAC were both closed but the FTSE 100 pushed higher on earnings and a $17 billion dollar bail out for the Ukraine from the IMF.

Here at home the early trade was dominated by yesterday's FOMC meeting, the GDP results and today's new data and earnings reports. The FOMC kept up with the previous pace of taper, $10 billion, as expected. This keeps the fed on track to end the taper in October with a $15 billion cut, also as many expect. The fed outlook for the economy is positive and the current estimates for interest rate hikes stands. As for the GDP, traders have mostly shrugged it off as a backward looking view of a period we already knew wasn't so great. Not to mention that there will be 2 revisions to the number. More importantly is the current data which has been mixed. Today's data was no different, initial claims rose more than expected and consumer spending also rose more than expected. Other employment data released today, Challenger report, remains tame. Construction spending was lighter than expected, ISM better than expected; tomorrow's NFP will be the make or break data point of the week I think.

After the 8:30 AM reports index futures traded around break even from yesterday's close up until the open. At the open the markets drifted flat to slightly positive before a dip down into negative territory. The S&P found its support along the 1880 level and was able to push back into the green by 11AM. Going into the lunch time period the S&P was up about 3.5 points and the DOW about 6.5 points, setting a potential new closing high. The Nasdaq remains the laggard of the big three indices, trading down along support rather rather than up against resistance. The rest of the day saw the indices continue to drift, moving lazily up and down within the days range.

The Economy

This week is the monthly release of what I call the Employment Bundle. Quickly touching base, yesterday the ADP report was slightly above consensus at 220,000. This is a good number, not a great strong number but a good one. This is the third month of gains for the ADP and a good sign that labor is picking up. Extending this out to the NFP tomorrow expectations are high for a number above 200,000, maybe even well above 200,000. Economists like to see ADP and NFP in the 250,0000 for a really strong economy.

Today Challenger, Grey & Christmas reported that the pace of planned layoffs in April had grown 17% from the previous month. The increase is no shock following last months sharp 30.2% decline. Regardless of this months increase Challenger also reports that the 2014 year to date pace of layoffs, 161,639, is the lowest level since 1997.

Initial claims for unemployment rose more than expected, adding to 14,000 to reach 344,000. This is a 2 month high, last weeks number was revised upward by 1,000. The four week moving average of claims also rose, gaining 3,000 to reach 320,000. On an unadjusted basis claims climbed by 18,000. Nine states reported a drop in claims greater than 1,000 for a total near -17,000. Only two states reported a drop in claims greater than 1,000 for a total of +8,725. The consensus, me included, was for a drop in claims. Analysts had been expecting a drop near -15,000. The increase this week is a small concern, especially with the NFP tomorrow. It casts a small shadow of doubt on the expectations for job creation. Looking at the table provided by the BLS it appears as if initial claims has bounced off a bottom and is potentially ranging with 350,000 as the top.

Adjusted Claims

Unadjusted Claims

Continuing claims also climbed this week. Claims rose by 97,000 to an adjusted 2.771 million. This is slightly above the consensus estimates near 2.725 million. The previous weeks figure was revised lower. Total claims bucked the trend and fell by close to -100,000 to reach a new low. Total claims totaled 2.822 million in this weeks data. The continued decline in total claims is the most important factor of the three unemployment claims figures in my opinion. Initial claims is a sign of turnover while total claims is more indicative of the number of people actually out of work. Adding it all up, trying to handicap the NFP this is what it looks like to me; ADP good and trending higher, Challenger OK in the near term and good in the long term, initial claims trending sideways, total claims declining and trending lower. I don't see any reason why the expectation near 210,000 won't be met.

Consumer spending rose more than expected. Spending rose by 0.9%, nearly double the previous months reading of 0.5% and above the expected 0.6%.

10AM data included construction spending and ISM manufacturing. Construction spending gained 0.2%, below the expected 0.5%. The previous was revised lower from 0.1% to -0.2%.

ISM manufacturing rose more than expected. The actual is 54.9, the expected was 54.6. This is also above the previous reading of 53.7. Within the report the employment segment also gained more than expected, rising to 54.7 from the prior reading of 52.1.

On the horizon, tomorrow is the NFP and the unemployment report. Also up tomorrow is Factory orders. Next week is light on macro data but full of the usual weekly reports. Mortgage index, crude and natural gas inventory and jobless claims included.

The Gold Index

The fed growth outlook, the continuation of the taper and current economic data trends have reinforced the expected time line for interest rate hikes. The fed went ahead with the taper yesterday and are on track to be finished with it this year. This means that if Janet Yellen's estimates that a hike could happen in the 6 month post taper range that means we could see an increase next April. Gold price fell on the news in the overnight trading sessions and held low levels just above $1280 today. Tomorrow the NFP could help move gold either direction, depending on whether the number is acceptable to the market.

The Gold Index also fell today, dropping by about 1.5%. The index is trading near the bottom of the near term range and consolidation zone I pointed out last week. In the near term support exists around $93 with indeterminate indicators. Both stochastic and MACD are very weak and in line with a nuetral and trendless market. The gold sector is awash with earnings this week and could provide a catalyst for the index other than gold prices. Yesterday Barrick Gold reported earnings slightly above estimates driven primarily by lower all in sustaining costs. Barrick reported a drop in cost per ounce of $100. This is good and will surely help the company when prices go back up but at this time there is not much expectation for earnings growth in the future. Two more gold companies reported today.

Royal Gold reported earnings of $0.31 per share. This is about 50% better than the expected $0.22 and 3 times better than the $0.10 reported in the same quarter last year. The results were positively affected by increased activity at some of the companies operations as well as acquisitions. Negative impacts were a 21% drop in realized prices for sales of gold and a 2% drop in total production. The results and report were not satisfactory, sending the stock down by nearly 3% and dropping below the 30 day EMA. The indicators are also very neutral on this stock, tipping to bearish with today's action. The stock is above support at the $62 level. A break below this level could send the stock down to the $55 level; gold prices will have a lot to do with this.

Goldcorp also reported earnings well above expectations. Goldcorp reported earnings of $0.26 per share on revenue of $1.2 billion. This is above the estimates of $0.14 per share but below last years results. This quarters surprise was also driven on a reduction in all-in costs per ounce of 26%. Shares of GG traded up today, gaining about a quarter percent but halting at resistance. Indicators are on the bullish side but weak and consistent with a ranging stock. Goldcorp has been trading in a pretty wide range over the past year between $21 and $31. Today's action as the stock trading near the middle of that range and beneath resistance. Improvements to operations are good but without higher average gold prices earnings growth is questionable.

The Oil Index

Oil prices fell again today, by about a quarter percent, trading near the $99.40 levels. The weak China PMI, impending increase in Libyan supply output, increasing US inventory and the diminishing affect of the Ukraine situation on the market are all helping to pressure oil prices lower. Today the energy agency reported a build in nat gas greater than expected that helped to lower prices for that fuel as well.

The Oil Index traded to the downside today, shedding about a tenth of a percent. The index is trading just below the resistance of the current all-time index price near 1,625. The index is trending up with bullish indicators, stochastic looking strongly bullish over the past 2 months while MACD is still diverging. There is support for the oil complex over the short to long term but whether or not it is enough to break out to new highs is another question. The longer term charts are more strongly bullish and suggest that a break out is on the way; the shorter term daily charts looks like a pull back and possible test of support could happen first. This week the index will be more directly affected by earnings. Exxon reported today, Chevron reports tomorrow.

Exxon reported before the bell a drop in profits from the same quarter in the previous year. This year Exxon reported EPS of $2.10, 2 cents below last year but $0.22 ahead of the expectations on revenue of $9.1 billion. The surprise earnings helped by an increase in upstream earnings and a decline in exploration costs. Revenue in the quarter fell short of expectations. The stock opened lower, tried to regain yesterday's closing price above resistance but was unable to hold that level. The stock fell back and is now trading below long term resistance. Momentum is bullish at this time but highly divergent while stochastic is overbought and helping to confirm resistance at the current level.

The Indices

The markets were very quiet today. There is a lot of information for the market to digest this week and the biggest piece of puzzle is coming out tomorrow. Depending on where you look the market is either pushing up against resistance as in the SPX and the Dow or trading just above support as with the Nasdaq and Russell 2000. Provided the SPX closes at or near the current levels tomorrow this would be the 9th week of alternating higher and lower closes for the index. Over the past 9 weeks or so the index has been trending sideways, testing support and bouncing from the long term trend line while being capped by the current all time high set two months ago at the peak of the last trend line bounce.

SPX one hour candles

Today's action shows that near term support for the index is around the 1880 level. The index moved down to that level multiple times today and bounced back from it each time. On the daily charts the index is bullish and trending up, though in need of a break to new highs in the near future to stay that way. The indicators are also bullish though momentum is still weak. Stochastic is moving firmly higher and is about to cross the upper signal line, an event that could bring momentum and trend traders into the market. The NFP could be the ticket the bulls are looking for. Today's speculation even considered that a bad number would still be good for the market because it could mean the fed would hold back on the taper next round. A failure to move higher could bring the index back to support at the long term trend line around the 1850 level or lower. A drop below the long term trend line puts the index in position to possibly form a double top.

SPX One Day Candles

The Dow traded up for a good portion of the day before falling back near the end. The index set a potential new closing high but not an intaday high, just below the resistance of the current all time intra-day high. While the Dow has set a new closing high yesterday it is a pretty weak one and still below what I consider to be resistance. The indicators are similar to the SPX, momentum is bullish but very weak with stochastic moving higher and crossing the upper signal line. This set up is indicative of potential higher prices providing the index can break above resistance. However, the set up is also indicative of a trading range, such as the range the Dow has been in the past five months. Without a firm break above resistance the index could correct back to 16,250, 16,000 or further.

The Nasdaq is trading down near support and confirming support with recent price action. The correction in tech stocks has brought the index down to the 4,000 where it began to show the first signs of support and since then has bounced and retested at a higher level. The index is now trading above a support level that is emerging as a possible candidate for a long term bounce. The indicators are both bullish and in line with higher prices providing it can get past the 30 day EMA. Today's action brought the index up to test the short term 30 day moving average and was held back but as with the other indices, the NFP could be the catalyst to push this index higher.

The RUT is near identical to the Nasdaq. The index has come down to support, bounced and retested at a higher level. Indicators are supportive and there is room for it to move higher before meeting resistance.

What will it be? A move higher in the markets with new all time highs for the Dow and the SPX? Only tomorrow will tell. The NFP is the number traders are hanging on and could provide a surprise either way. A good number is good, supports the fed outlook, the taper and eventually higher interest rates. It also means a better economy and better times for Americans. A bad number could also be good. Less than expected could lead the market to think the fed may hold off on the taper for a while but I don't think they would without real cause.

Until then, remember the trend!

Thomas Hughes


New Option Plays

Are Traders Nervous About Jobs?

by James Brown

Click here to email James Brown

Editor's Note:

Stocks did not perform well today. Yesterday's post-FOMC meeting bounce did not see any follow through. The monthly jobs report comes out tomorrow morning and stocks could be volatile as investors digest the news. We are also approaching the weekend and traders could be fearful of holding over the weekend since the situation with Ukraine and Russia remains tense.

We are not adding any new trades tonight.

I did see a number of stocks that caught my eye. I would keep these on your watch list as potential bullish candidates.

(bullish ideas)

In Play Updates and Reviews

Stocks Languish Ahead Of Jobs Report

by James Brown

Click here to email James Brown

Editor's Note:

Not surprisingly the market did not see a lot of movement ahead of tomorrow's jobs report.

VTR hit our bullish entry point.

QIWI and TM hit our stop loss.

Current Portfolio:

CALL Play Updates

Adobe Systems - ADBE - close: 62.59 change: +0.90

Stop Loss: 59.45
Target(s): to be determined
Current Option Gain/Loss: -27.8%
Time Frame: 8 to 12 weeks
New Positions: see below

05/01/14: The bounce in ADBE continued for a third day and shares added another +1.4%. I am not suggesting new positions at this time. The $65 level and the 50-dma remain potential overhead resistance.

- Suggested Positions -

Long Jul $65 call (ADBE1419G65) entry $3.20

04/21/14 ADBE opened at $64.00

Entry on April 21 at $64.00
Average Daily Volume = 4.8 million
Listed on April 19, 2014

Diamondback Energy, Inc. - FANG - close: 71.27 change: -0.67

Stop Loss: 69.25
Target(s): to be determined
Current Option Gain/Loss: -44.1%
Time Frame: exit PRIOR to earnings in May
New Positions: see below

05/01/14: FANG ricocheted between short-term support near $70 and short-term resistance at its 10-dma. The stock eventually underperformed with a -0.9% decline. I am not suggesting new positions.

Earlier Comments:
FANG could see some short covering. The most recent data listed short interest at 37% of the small 32.5 million share float. That's plenty of fuel for a short squeeze. FYI: The Point & Figure chart for FANG is bullish with an $85 target.

- Suggested Positions -

Long May $75 call (FANG1417E75) entry $1.70*

04/25/14 adjust stop to $69.25
04/21/14 new stop @ 69.45
04/19/14 new stop @ 68.75
04/16/14 triggered @ 71.25
*option entry price is an estimate since the option did not trade at the time our play was opened.

Entry on April 16 at $71.25
Average Daily Volume = 948 thousand
Listed on April 14, 2014

Gilead Sciences - GILD - close: 79.02 change: +0.53

Stop Loss: 74.45
Target(s): to be determined (potentially $85.00)
Current Option Gain/Loss: +41.5%
Time Frame: 4 to 8 weeks
New Positions: see below

05/01/14: The rally in GILD continued and shares challenge resistance near $80.00 today. I would not be surprised to see GILD retreat here and dip back toward the $76 area before moving higher. We are moving the stop loss to $74.45.

Earlier Comments:
If triggered our temporary target is $84.75. We'll re-evaluate our exit strategy as the trade progresses.

- Suggested Positions -

Long Jun $80 call (GILD1421F80) entry $2.12

05/01/14 new stop @ 74.45
04/30/14 triggered @ 77.00

Entry on April 30 at $77.00
Average Daily Volume = 23 million
Listed on April 29, 2014

Potasch Corp. of Saskatchewan - POT - close: 36.25 change: +0.09

Stop Loss: 34.45
Target(s): to be determined
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 months
New Positions: Yes, see below

05/01/14: Traders bought the dip in POT at the $36.00 level midday. The rebound managed to produce a minor gain by the closing bell. Yet POT is still trading under resistance near $36.50. If shares see any follow through higher tomorrow we could see POT hit our entry point.

Earlier Comments:
(some of my earlier comments) The March high in POT's share price was $36.29. We are suggesting a trigger to buy calls at $36.50. We're not setting an exit target just yet. We'll start with a stop at $34.45.

FYI: rival potash producers Agrium (AGU) and Mosaic (MOS) both report earnings on May 6th. Their results and guidance could influence trading in POT.

Trigger @ $36.50

- Suggested Positions -

Buy the Sept $35 call (POT1420i35) current ask $2.53

Entry on April -- at $---.--
Average Daily Volume = 5.0 million
Listed on April 26, 2014

Ventas, Inc. - VTR - close: 66.64 change: +0.56

Stop Loss: 64.75
Target(s): to be determined
Current Option Gain/Loss: +3.6%
Time Frame: 3 to 4 weeks
New Positions: see below

05/01/14: VTR hit our entry point. The stock pushed to new six-month highs and outperformed the broader market with a +0.8% gain. Our trigger to buy calls was hit at $66.35.

- Suggested Positions -

Long Aug $65 call (VTR1416H65) entry $2.75

05/01/14 triggered @ 66.35

Entry on May 01 at $66.35
Average Daily Volume = 1.6 million
Listed on April 28, 2014

PUT Play Updates

ASML Holdings - ASML - close: 81.35 change: -0.05

Stop Loss: 82.05
Target(s): to be determined
Current Option Gain/Loss: Unopened
Time Frame: 6 to 8 weeks
New Positions: Yes, see below

05/01/14: ASML did not see a lot of movement today. That's not surprising as many investors are probably waiting on the jobs data tomorrow.

I don't see any changes from our Wednesday night new play description on ASML.

Earlier Comments:
More aggressive traders could buy puts here. I am suggesting a trigger to buy puts at $79.85. That's just under the April 16th low of $79.94. I will point out that ASML might have some support near $75.00, which is near a long-term trend line of higher lows. However, the Point & Figure chart for ASML is bearish with a $67.00 target.

Trigger @ 79.85

- Suggested Positions -

Buy the Jun $80 (ASML1421F80)

Entry on April -- at $---.--
Average Daily Volume = 1.4 million
Listed on April 30, 2014

Ralph Lauren Corp. - RL - close: 153.40 change: +2.03

Stop Loss: 155.10
Target(s): to be determined
Current Option Gain/Loss: - 8.1%
Time Frame: exit PRIOR to earnings on May 9th
New Positions: see below

05/01/14: I don't see any company specific news to account for today's relative strength (+1.3%) in shares of RL. More conservative traders may want to consider an early exit. We are moving the stop; loss down to $155.10.

Earlier Comments:
If you are patient enough traders could aim for a drop toward $140. The Point & Figure chart is actually very bearish and forecasting at $112 target. We're not setting an exit target yet but plan on exiting positions prior to RL's next earnings report on May 9th.

- Suggested Positions -

Long May $150 PUT (RL1417Q150) entry $3.70

05/01/14 new stop @ 155.10
04/26/14 new stop @ 156.15
04/24/14 triggered @ 152.45

Entry on April 24 at $152.45
Average Daily Volume = 891 thousand
Listed on April 21, 2014


QIWI Plc - QIWI - close: 29.69 change: +0.76

Stop Loss: 30.25
Target(s): to be determined
Current Option Gain/Loss: -45.6%
Time Frame: 3 to 6 weeks
New Positions: see below

05/01/14: QIWI is not cooperating with a bounce above what should have been resistance at $30.00 and its 10-dma. Our stop loss was hit at $30.25. The overall trend for QIWI is still bearish. Readers may want to keep QIWI on their watch list for a new bearish entry point.

Earlier Comments:
I suggest small positions to limit risk.

*Small Positions* - Suggested Positions -

Jun $25 PUT (QIWI1421R25) entry $2.50 exit $1.36 (-45.6%)

05/01/14 stopped out @ 30.25
04/28/14 trade opened. QIWI gapped down at $27.37


Entry on April 28 at $27.37
Average Daily Volume = 657 thousand
Listed on April 26, 2014

Toyota Motor Corp. - TM - close: 109.73 change: +1.31

Stop Loss: 109.25
Target(s): 100.50
Current Option Gain/Loss: -69.3%
Time Frame: 3 to 4 weeks
New Positions: see below

05/01/14: Earnings are still not expected for several days but TM did release its April sales data today. The company said April 2014 auto sales surged +9% from a year ago. This better than expected news produced a gap higher this morning and shares of TM opened at $110.02. Our stop loss was at $109.25 so our trade was immediately closed.

It is worth noting that the bounce stalled at round-number resistance near $110 and under technical resistance at its 50-dma. The long-term trend from its 2013 highs is still lower.

- Suggested Positions -

May $105 PUT (TM1417Q105) entry $1.11 exit $0.34 (-69.3%)

05/01/14 stopped out on gap higher at $110.02
04/26/14 new stop @ 109.25
04/23/14 TM opens at $108.28


Entry on April 23 at $108.28
Average Daily Volume = 602 thousand
Listed on April 22, 2014