Option Investor

Daily Newsletter, Saturday, 11/28/2009

Table of Contents

  1. Leaps Trader Commentary
  2. Portfolio
  3. New Plays
  4. Play Updates
  5. Watch

Leaps Trader Commentary

Please Fasten Your Seatbelts

by James Brown

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"Please fasten your seatbelts and make sure your tray tables are stored in the upright position. This is your captain speaking and I regret to inform you that we could start experiencing some turbulence. Please try to stay in your seats but take a moment to locate the nearest exit door." Many of us have experienced a bumpy plane ride before and it makes a great analogy for where the market could be headed. The S&P 500 is flying high up 60% off its lows and now it's struggling to gain altitude with resistance near 1,110 and some long-term trendlines directly overhead.

Fund managers working on a calendar year could be nervous about protecting gains, their bonus, and possibly their jobs as they face the last few weeks of the year. I mentioned last week how money was flooding into short-term treasury bonds with almost no yield because it was a "safe" place to put your money. The trend of looking for safe havens could continue now that investors are once again facing a potential sovereign default with Dubai World in trouble. Analysts are worried that Dubai could have a domino effect and we end up facing another crisis like the Russian meltdown in the 1990s or the Argentina fiasco in the early 2000s.

I'm not going to spend a lot of time discussing the Dubai World news and the potential disaster. While Dubai's liabilities are estimated in the $60-90 billion range odds are good that there will be a bailout and nerves will calm down before the market opens on Monday. The selling pressure in the U.S. wasn't that bad. A 2% pull back in the S&P 500 after closing near its 2009 highs is nothing. Some of the Chinese markets dropped 5% and Europe, which holds most of the Dubai debt, only fell 3% although some of the banks fell a lot more.

Don't get me wrong here. I'm not saying ignore the Dubai news but it's just one factor in a storm of bearish headwinds that thus far the U.S. stock market has been able to ignore. You already know that I'm concerned the U.S. economy will see a double-dip recession probably happening in the second half of 2010. Unemployment is going to continue to inch higher and the foreclosure plague still has a couple of more years before it finally runs its course. I'd like to be more optimistic but rising U.S. debts and deficits (and probably taxes) are not a solution to fixing our problems. We're facing risk of falling into deflation or steep inflation if we're not careful. Japan has already fallen back into deflation. The plunging U.S. dollar may help the U.S. government but it doesn't help the U.S. consumer. Meanwhile there has been no uptick in business inventories. Although I'm hopeful that this holiday season will benefit from pent up demand and easy comparisons to last year's horrible holiday shopping results. Any gains in the retailers could end up being temporary.

Last week's initial jobless claims looked good at first glance with a drop to 466,000 new claims. Yet that's the seasonally adjusted number. Unadjusted claims were 543,900 new workers seeking unemployment. Next week could be crucial to keeping this rally alive. If the ISM report comes in strong and the non-farm payroll data due out on Friday is better than expected then this market could surge to new highs. Maybe 1200 or 1250 on the S&P 500 is not out of reach. Just the opposite could happen if these reports disappoint. Stocks are arguably overbought. A normal 38.2% retracement in the S&P 500 would bring us down to the 950 level. It would not surprise me at all to see the market holding its breath until these economic numbers are announced.

In summary this is not a buy and hold market. As LEAPS option traders we have to be very careful when it comes to our entry point and right now, with the market looking vulnerable, it is not a very enticing market to launch new positions. We're looking for investments we can hold for 6 to 18 months. With that in mind what do you buy if the economy is likely to bounce for another quarter or two and then roll over? It's too early for long-term bearish trades. Investors will probably do well to take a short-term perspective on their investments as conditions are likely to change. Said another way the market could see some turbulence and readers will want to double check where their stop losses (exit doors) are located on any current investments.

Short-term I would turn bearish if the S&P 500 falls under the 1,080 level. If that level breaks we'll probably see a drop toward the early November lows around 1,030. You can see on the chart below that a normal Fibonacci retracement of 38.2% would pull the S&P 500 down toward the 950 level. Right now I'm more concerned about the small caps, which continue to underperform and have created a new trend of lower highs and lower lows.

Chart of the S&P 500 Index:

Weekly Chart of the S&P 500 Index:

2nd Weekly Chart of the S&P 500 Index:

Chart of the Russell 2000 Index:


Previous Comments on my Long-Term Outlook:

My long-term outlook has not changed. I still expect the economy to see a double-dip, "W"-shaped rebound with the second dip in 2010 (some analysts are predicting it will not show up until 2011). Lousy consumer spending, rising foreclosures, and lagging job growth will be the main culprits. Several weeks ago there were some comments out of the U.S. Treasury concerning foreclosures. The Obama administration's HAMP loan modification program can only help a certain number of homeowners and one official said that even if the HAMP program was a total success we should still expect millions of new foreclosures. This only reinforces my own belief that we will see another tidal wave of foreclosed homes in 2010 and 2011. Some analysts are forecasting upwards of six million foreclosures in the next three years. What is that going to do to consumer confidence and consumer spending? It's not going to help! You can review my long-term outlook here. It's the second half our my "Two Months Left" commentary.

~ James Brown


Portfolio Update

by James Brown

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Current Portfolio

Portfolio Comments:

Stocks are having a hard time keeping the upward momentum alive. The U.S. dollar sank to new lows for the year midweek, which was boosting some of the commodity stocks but that reversed on Friday. The Dubai news sent money surging into the dollar as a safety play. This could be temporary.

I remain very concerned with the bearish head-and-shoulders forming on several of the coal stocks. Plus, the NASDAQ and the Russell 2000 are under performing the rest of the market.

Investors should stay cautious as we head toward year end.

Disclaimer: At any given time the author may have positions in any or all of any companies mentioned in the Leaps Newsletter.

--Position Summary Table--
Table lists Directional CALL or PUT/LEAPS only.
Insurance puts, if applicable, are not shown.

Red symbol/name represents a dropped play this week.

Jim's portfolio and updates has been included in the normal play updates section.

New Plays

Scaling Back

by James Brown

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Upward Trend Looks Fragile

Editor's Note:

We are not adding any new LEAPS trades tonight. In tonight's commentary and in the watch list I discuss how the market looks vulnerable to more selling pressure and our long-term (12-24 month) outlook is not that bullish.

Investors may need to take a more short-term approach to their trades and it might be time to ratchet up your stop losses or scale back on your position size to reduce risk.

I'm not giving up on new LEAPS trades but we might start taking profits sooner.

Play Updates

Stocks Struggle

by James Brown

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Editor's Note:

The market struggles to keep the upward momentum alive. Nervous investors are feeling even more wary with the Dubai news.

Closed Plays


Play Updates

ACI $21.12 -0.59 -- Arch Coal Inc.

The pain in shares of ACI continued last week. The stock bounced from its exponential 200-dma on Tuesday but overall the bearish head-and-shoulders pattern has only gotten worse. ACI is nearing what should be important support near $20.00. I'm repeating my comments from last week. More conservative traders may want to consider an early exit now. We have a long-term target on this stock so we're going to try and weather the volatility but if ACI breaks $20 we'll probably get stopped out at $19.40. More aggressive traders might want to put their stop loss under the simple 200-dma near $18.00.

I am not suggesting new bullish positions at this time. Our long-term target is the $30 region.

May 14th, 2009 - entry price on ACI @ 16.00, option @ 2.40
symbol: OSE-AF, 2011 JAN $30 LEAP call - current bid/ask $1.80/2.05
-stop loss on ACI @ 19.40

Chart of ACI:

ANR $37.40 -1.94 - Alpha Natural Resources, Inc.

Last week was an ugly week for ANR too. Shares continued to reverse lower after the failed rally near $42.00. On Friday the stock broke short-term support near $38.00. We can expect a dip toward the $35-33 zone now. I'm not suggesting new bullish positions at this time.

Our long-term target is the $50-60 zone.

Aug. 25th, 2009 - entry price on ANR @ 34.00, option @ 7.00
symbol: VJV-AH, 2011 JAN $40 LEAP call - current bid/ask $8.00/8.70
-stop loss on ANR @ 32.40
bought 1/2 LEAP position on 08/25/09 (option price @ 7.00)

Chart of ANR:

BAC $15.47 -0.48 - Bank of America Corp.

Friday's move lower in BAC doesn't bode well. The stock had been consolidating sideways under its 50-dma. As a major bank investors naturally sold it on Friday. The markets were unclear over which banks had exposure to the potential Dubai World default. Now we know that most of the exposure lies with European banks.

Technically Friday's action is bearish and more conservative traders may want to exit early now. An alternative might be to put a stop loss on your LEAP option at breakeven (or higher). I'm not suggesting new positions at this time. Our long-term target is the $25-30 zone.

Jan 25th, 2009 - entry price on BAC @ 6.24, option @ 2.38
symbol: VBA-AB, JAN 2011 $10 LEAP call - current bid/ask $4.60/4.90
-stop loss on BAC @ 11.90

10/31/09 Sell Half -- option at $6.00 (+152%)

Chart of BAC

BQI $1.24 +0.10 -- Oilsands Quest Inc.

BQI almost hit our trigger to buy the stock on Tuesday last week but shares bounced at $1.06. It was Friday's decline that finally pushed BQI to our trigger to open long-term positions. Shares gapped open lower at $1.06 and hit $1.05 before soaring higher.

BQI was on our watch list with a trigger to buy the stock at $1.05 and a stop loss at $0.89. Now that the play is open our long-term goal is $2.90.

Nov 27th, 2009 - entry price on BQI @ 1.05, (buy the stock)
-stop loss on BQI @ 0.89

Chart of BQI:

CHK $23.03 -0.35 -- Chesapeake Energy Corp.

The intermediate trend in CHK is still down but shares appeared to find some support near $22.75 in the last several days. The real story here could be natural gas, which appears to have found a bottom (for now). If natural gas can rally from these levels it will really help shares of CHK.

More aggressive traders may want to keep their stops under $20.00, which should be psychological round-number support. I'm not suggesting new long-term positions at this time. Our long-term target is $40.00.

Oct 30th, 2009 - entry price on CHK @ 24.00, option @ 4.70
symbol: VEC-AE, JAN 2011 $25 LEAP call - current bid/ask $4.15/4.25
-stop loss on CHK @ 20.95

Chart of CHK:

CNX $45.89 -1.57 -- Consol Energy Inc.

The selling pressure in CNX last week wasn't that bad. Friday's market weakness was not enough to break the recent lows. However, bulls are still in danger here. CNX still has a bearish head-and-shoulders pattern forming.

Last week we raised the stop loss to $41.00 since the $42.00 level should be support. More aggressive traders will want to keep their stops under the $40.00 mark. More conservative traders may want to exit early right now! I'm not suggesting new positions. CNX has already hit our first target at $48.50. We will plan to sell the second half or our position at $57.50.

Sep 1st, 2009 - entry price on CNX @ 36.50, option @ 7.80(estimate)
symbol: VTL-AH, 2011 JAN $40 LEAP call - current bid/ask $12.30/13.20
-stop loss on CNX @ 41.00

Target hit 09/16/09 @ 48.50, option price $15.40 (+97%)

Chart of CNX

DE $52.36 -1.34 -- Deere & Co.

DE rallied to a new 2009 high last week on its earnings report. Yet gave back a big chunk on Friday's market weakness. I remain bullish on the stock with DE above $50 and considering our long-term time line we could still open positions now but if you're patient we'll probably get a better entry point closer to $50.00. If the S&P 500 breaks down under 1180 I would hesitate to launch new trades. You could always start with a small position that you can add to over time once the market looks a little stronger.

Our long-term target on DE is $69.50. The Point & Figure chart is bullish with a $66 target. FYI: Readers will want to note that DE is due to report earnings around November 25th. The results could produce some volatility. More cautious traders might want to consider some put protection.

Nov 18th, 2009 - entry price on DE @ 51.00, option @ 8.75(estimate)
symbol: VER-AJ, 2011 JAN $50 LEAP call - current bid/ask $ 9.10/ 9.30
-stop loss on DE @ 44.00

Chart of DE:

EMR $41.50 -0.82 -- Emerson Electric Co.

EMR had been holding up reasonably well and the selling on Friday wasn't that bad. The trend is up but I'd probably wait for a dip near $38.00 or its 100-dma before considering new long-term positions. Our target is $47.50.

Sept. 8th, 2009 - entry price on EMR @ 38.00, option @ $4.50
symbol: VHH-AH, 2011 JAN $40 call - current bid/ask $5.70/6.00
-stop loss on EMR @ 33.50.

Chart of EMR:

FSLR $120.30 - 0.67 -- First Solar

Nothing has changed for us with FSLR. The stock continues to hover around the $120 level. I would focus on potential support at its September 2009 lows near $112. If that fails I'd look for possible support near $100.

We're not suggesting new positions at this time. Currently we are long the 2010 January $100 put and we have a covered call play that should be fine if FSLR stays above $90.

Covered Call position:

Long 100 shares of FSLR @ $128.00
Short 2010 $150 LEAPS Call LZL-AA @ $40.70
Profit if called is $40.70 in option premium + $22 in stock (+49%) if FSLR is above $150.00.

Put Spread position:

Long 2010 $100 LEAPS Put LQM-MT @ $32.90
Short 2010 $250 LEAPS Put LZL-MJ @ $135.70, net credit $103

- Update 08/15/09 -
Cover the 2010 $250 Put at $109.40. Keep the $100 put.

Currently the 2010 Jan. $100 put is worth (bid) $2.61.
If you're curious the 2010 Jan. $150 call is at $ 1.56.

Chart of FSLR

FST $18.50 -0.57 -- Forest Oil Corp.

FST managed to post a gain for the week in spite of a 3% sell-off on Friday. Shares tested technical support at their 200-dma and bounced. Wednesday's breakdown in the dollar really helped the commodity-related stocks. Unfortunately Friday's sudden reversal higher in the dollar is worrisome. If the market was any stronger I'd be tempted to buy LEAPS right here on the bounce. Unfortunately with the S&P looking vulnerable I would hesitate to launch new positions now. Our long-term target is $37.50.

Oct 15th, 2009 - entry price on FST @ 23.85, option @ 7.40
symbol: OJG-AD, 2011 $20 LEAP call - current bid/ask $3.40/4.10
-stop loss on FST @ 16.85

Chart of FST:

GHM $18.78 -0.83 -- Graham Corp.

The November rally in GHM has been so steep that Friday's 4.2% decline doesn't look that bad. Shares were due for some profit taking Look for support near $17.00.

Our target is $24.00. Our stop is at $12.40.

Oct 26th, 2009 - entry price on GHM @ 15.15, option @ 2.65
symbol: GHM-FC, 2010 JUNE $15 call - current bid/ask $4.10/6.40
-stop loss on GHM @ 12.40

- or -

Oct. 26th 2009 - entry price on GHM (the stock) @ 15.15
- stop loss on GHM @ 12.40

Chart of GHM:

GNK $22.99 -1.65 -- Genco Shipping

GNK spent most of last week testing support near $24.00 and holding it. Unfortunately Friday's action was painful. The shipping stocks were hammered and GNK lost 6.6%. The stock should find some support near $22.00 and again near $20.00. At this point I would want to see a pretty convincing bounce before launching new positions.

Our plan was to use small positions to keep our risk limited. Our long-term target is $39.00.

Nov 21st, 2009 - entry price on GNK @ 25.46, option @ 5.00
symbol: OKJ-AF, 2011 $30 LEAP call - current bid/ask $3.30/4.00
-stop loss on GNK @ 19.65

Chart of GNK:

INTC $19.11 -0.23 -- Intel Corp.

Friday's selling pressure in INTC was relatively mild. Although the close under the 100-dma is bearish. I'm still concerned that INTC could be forming a large, rounded top formation.

More conservative traders may want to start taking some money off the table now. I would seriously consider closing all or part of the trade if INTC closes under $18.00 but I've been predicting that the stock will eventually fill the gap near $17.00. Shares should have support near the 200-dma and the $16.00 level.

An alternative stop loss strategy would be to put a stop on your LEAPS option instead of focusing on shares of Intel. If you choose this route I'd put the stop at breakeven. I am not suggesting new long-term positions at this time. Our long-term target is the $24-26 zone.

FYI: Shares of Intel don't move very fast. Readers might want to consider turning this play into a calendar or diagonal spread to further maximize your gains.

June 13th, 2009 - entry price on INTC @ 16.31, option @ 1.36
symbol: VNL-AD, 2011 LEAP $20 call - current bid/ask $2.07/2.11
-stop loss on INTC @ 15.90.

Chart of INTC:

MTW $ 9.90 -0.39 -- Manitowoc Inc.

Shares of MTW had continued to weaken even before Friday's market decline. The stock is now under its 50-dma and under one of its trendlines of higher lows. The short-term trend has turned bearish. The question now is how deep will this correction be? MTW should find additional support near $9.00, at its 100-dma near $8.50, and again at $8.00. I'm not suggesting new positions at this time. Our long-term target is $17.00.

Oct 30th, 2009 - entry price on MTW @ 9.10, option @ 2.61
symbol: VMT-AB, 2011 JAN $10 call - current bid/ask $2.80/3.10
-stop loss on MWT @ 7.90

- or -

Oct. 30th 2009 - entry price on MTW (the stock) @ 9.10
- stop loss on MTW @ 7.90

Chart of MTW:

PBR $51.33 -1.68 -- Petroleo Brasiliero

PBR remains one of the strongest looking energy stocks in the market. Shares had rallied to new 2009 highs before the Dubai sell-off. Short-term direction will probably depend on movement in the dollar. If the dollar continues lower then oil should stay strong and PBR can maintain its up trend.

NOTE: I want to repeat some earlier comments. We only have a few weeks left with our options expiring in January 2010. More conservative traders may want to exit early right now to avoid potential losses. I would continue to look for support in the $46-45 zone. I'm not suggesting new bullish positions at this time.

I'm suggesting we sell half our position at $54.50. We'll sell the second half at $59.50.

Apr. 4th, 2009 - entry price on PBR @ 35.10, option @ $2.80
symbol: PMJ-AJ, 2010 $50.00 LEAP call - current bid/ask $3.45/3.55
-stop loss on PBR at $44.40

Chart of PBR:

PEP $62.30 -0.89 -- PEPSICO Inc.

PEP is another stock that had broken out to new 2009 highs on Wednesday only to give back all of its gains on Friday's market sell-off. The trend is still up. The bottom of the bullish channel has risen to $61.00. More conservative traders might want to tighten their stops. I am not suggesting new bullish positions at this time. Our exit target is the $69.90 mark.

July 7th, 2009 - entry price on PEP @ 57.25, option @ $4.50(estimate)
symbol: VP-AL, 2011 $60.00 LEAP call - current bid/ask $6.20/6.50
-stop loss on PEP at $54.95

Chart of PEP:

RAI $51.32 -0.05 -- Reynolds American Inc.

The action in RAI was unusual. Shares did gap down on Friday morning but the stock managed to hit a new 2009 high intraday on Friday. The trend is up and RAI's position as a defensive stock should protect it from too much profit taking. Broken resistance at $50.00 should be new support. I'm not suggesting new positions at this time.

Our second and final target is $57.50.

July 24th, 2009 - entry price on RAI @ 42.50, option @ $4.50(estimate)
symbol: OWO-AH, 2011 JAN $40.00 LEAP call - current bid/ask $ 9.10/13.50
-stop loss on RAI at $43.40

Sold Half on 10/19 @ 49.50, option @ $8.90 (+97%)

Chart of RAI:

RGLD $53.31 -1.77 -- Royal Gold Inc.

Investors panicked on the Dubai news and rushed their money into "safety" plays like the U.S. dollar and treasury bonds. The sudden rise in the dollar pushed commodities lower. Gold was not immune but the overnight $50 drop in gold had been pared down to just a $10 decline before Friday's market closed. The gold miners suffered bigger declines than gold but the overall trend is still positive. I would still consider new long-term positions on dips near $50.00. More conservative traders may want to tighten their stops.

The Point & Figure chart has a new buy signal with a $72 target. Our target to exit is $64.50.

Nov. 7th, 2009 - entry price on RGLD @ 50.70, option @ 7.50
symbol: ZMO-AL, 2011 JAN $60 LEAP call - current bid/ask $7.40/8.20
-stop loss on RLGD @ 41.95

Chart of RGLD

TEX $18.98 -0.93 -- Terex Corp.

As we expected the correction in shares of TEX continued. The stock appears to be headed for the $18.00 level. Shares should find some support near the rising 100-dma or the $18.00 mark. At this point I would want to see a convincing bounce before launching new positions and I would still hesitate to buy anything if the S&P 500 breaks down under the 1080 level. Our final target is $29.50.

Sept. 11th, 2009 - entry price on TEX @ 18.25, option @ 4.10
symbol: VXQ-AD, JAN 2011 $20 LEAP call - current bid/ask $4.20/4.80
-stop loss on TEX @ 17.75

Sell half (10/24/09), option at $7.50 (+82.9%)

Chart of TEX:

UYG $5.38 -0.30 - ProShares Ultra Financials (2x) ETF

Bullish investors could be in serious trouble with the UYG. Up until Friday this financial ETF had continue to trade sideways. Friday's sell-off produced a drop toward technical support at its 100-dma, which held. Yet shares closed under their long-term trendline of higher lows (dating back to the March 2009 lows).

I am repeating my comments that more conservative traders may want to exit early now. If the selling continues the UYG should have some support near $5.00 and if not we have our stop loss at $4.80.

I am not suggesting new positions at this time. Our second and final target is $9.50.

FYI: The UYG trades off the DJUSFN index.

Our strategy called for buying the ETF instead of the options.

Current position in the UYG = $1.50 entry (stop loss: 4.80)

10/14/09 Exit - Sell Half @ 6.31 (gap open exit, +320%)

Chart of UYG:


A Shrinking Watch List

by James Brown

Click here to email James Brown

New Watch List Entries


Active Watch List Candidates

DSX - Diana Shipping Inc.

ESV - ENSCO Intl. Inc.,

Dropped Watch List Entries

BQI graduated to our play list.

New Watch List Candidates:

Editor's Note:

I have been very reluctant to add new stocks to the watch list. Upward momentum in the market has stalled. The technical indicators continue to deteriorate. Leadership is narrowing, which is another way of saying more and more sectors are beginning to roll over or breakdown.

Over the last few months corrections in the S&P 500 have been in the 3-5% range. However, a real correction or retracement would be a pull back toward the 950 level (although secretly I hope for stronger support at the 1,000 level).

Another challenge when it comes to looking for bullish candidates is time frame. The newsletter's goal is to provide 6-month to 18-month trades. Yet I am worried that the economy will fall into a double-dip recession in 2010, which could be terrible for the stock market.

I haven't given up yet on finding new candidates. To borrow a popular phrase, "there is always a bull market somewhere". We just have to find it and then wait for the right entry point. There are no new candidates tonight. Hopefully we have a clearer picture on where the market is headed a week from now.

Active Watch List Candidates:

DSX $15.96 -0.39 - Diana Shipping Inc.

Last week was not a great one for DSX. We were expecting a correction but shares went so far as to produce a bearish reversal on both the daily and weekly charts. I'm still expecting support in the $14-12 zone so our plan is still active.

We want to use a dip at $14.50 as an entry point to buy LEAPS. If we're triggered at $14.50 I'm setting our long-term target at $24.00. We'll use a stop loss at $11.85.

Buy-the-Dip trigger: $14.50

BUY the 2011 January $15.00 LEAPS (symbol: XDJ-AC)

Chart of DSX:

ESV $44.50 -1.28 -- ENSCO Intl. Inc.

ESV is slowly correcting lower. The stock should have support near $42.00 and its 100-dma. That's also where you'll find the trendline off its 2009 lows. We have a trigger at $42.50. If triggered at $42.50 we'll use a stop at $37.25. Our target is the $55-60 zone.

Buy-the-Dip trigger: $42.50

BUY the 2011 January $45 call (VKS-AI)

Chart of ESV: