Option Investor

Daily Newsletter, Thursday, 4/1/2010

Table of Contents

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

Market Wrap

Market Closed On Friday

by Jim Brown

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Since the market is closed on Friday the normal Thursday night market wrap by Keene will be produced in the weekend newsletter along with the update for the Non-Farm Payrolls on Friday morning.

The newsletter tonight is an abbreviated form and the full newsletter will be published on Saturday as normal.

Jim Brown

New Plays

Friday Morning Jobs

by James Brown

Click here to email James Brown

Editor's Note:

Readers know I have been cautious on the markets. Stocks are very overbought with the rally off the February lows. Fund managers were feeling the pressure to post gains for the quarter and there was a distinct lack of selling as we neared the quarter end. A market correction here would be both normal and healthy. However, there is no rule that says the market has to correct. As a matter of fact the S&P 500 actually looks ready to breakout higher again after nearly two weeks of consolidating sideways. Imagine the short covering we would see if that were to happen. The NASDAQ and the Russell 2000 don't look quite as strong as the S&P 500 but they also saw bigger gains from their February lows. The transports and the railroads look similar to the S&P 500 (bullish) while the banks act like they want to move higher even though the failed rally on March 25th still looks like a top for the financials.

I would prefer to open bullish positions after the market has corrected but that may not happen. Everything will hinge on the jobs report this Friday. Economists are expecting the U.S. to see a gain of 180,000-190,000 new jobs. If the results are too low or too high we're going to see a big move in stocks on Monday. It's quite possible that investors end up selling the news anyway and that makes adding new plays this weekend, without seeing the market's reaction to the jobs report a guessing game. We will add new candidates in the weekend newsletter but readers may want to wait and see how the market moves on Monday before putting new capital to work.

In Play Updates and Reviews

Commodities Rally on Manufacturing Data

by James Brown

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Editor's Note:

I remain cautious on the market. The manufacturing data out on Thursday morning is very positive but stocks are still very overbought. The jobs report on Friday could be the pivotal event to push us higher or spark the sell-off.

Current Portfolio:

BULLISH Play Updates

Broadcom Corp. - BRCM - close: 33.15 change: -0.05 stop: 31.75

Thursday turned out to be a volatile and disappointing session for BRCM. The stock shot higher this morning thanks to strength in the semiconductor sector. The SOX index spiked to a new 52-week high only to roll over and reverse course minutes later. Shares of BRCM followed suit. The stock rallied toward its recent highs and reversed. This is very short-term bearish. More conservative traders may want to consider an early exit now. I am not suggesting new bullish positions at current levels. Wait for a bounce from $32.00 before considering new positions. Our first target is $34.95. Our second, more aggressive target is $37.40 with a time frame of several weeks.

Current Position: BRCM stock @ 32.66

Entry on March 11 at $32.66
Earnings Date 04/21/10 (unconfirmed)
Average Daily Volume: 8.0 million
Listed on March 10th, 2010

Linear Tech. - LLTC - close: 28.41 change: +0.16 stop: 27.70

LLTC is another semiconductor stock that turned in a volatile session. While the SOX managed to hit a new 52-week high shares of LLTC could not hit a new relative high and that should make traders cautious. More conservative traders may want to exit early minimize or avoid any losses. I am not suggesting new bullish positions at this time. Keep an eye on the simple 30-dma for potential support. Our first target is $29.95. Our second target is $30.95.

Current Position: LLTC stock @ 28.25

Option Traders:
Current Position: CALL APR 28.00 (LLTC 10D28.00) @ $1.00

Entry on March 16 at $28.25
Earnings Date 04/13/10 (unconfirmed)
Average Daily Volume: 3.9 million
Listed on March 11th, 2010

Palomar Medical Tech. - PMTI - close: 10.88 change: +0.01 stop: 10.60

Volume was very light today but the trading action was encouraging. Traders bought the dip several times near the $10.75 level. PMTI may have found new support. Yet I hesitate to launch new positions. Aggressive traders may want to consider new positions here but if you do I would use a very tight stop loss.

PMTI has already hit our first target at $11.45. Our second and final target is $12.75. We expect to see resistance and probably a pullback near $12.00 and its 200-dma.

Current Position: PMTI stock @ 10.55

1st Target Hit (03/22/10) @ 11.45

Entry on March 16 at $10.55
Earnings Date 04/29/10 (unconfirmed)
Average Daily Volume: 132 thousand
Listed on March 13th, 2010

UltraShort Russell2000 ETF - TWM - close: 20.22 change: -0.39 stop: 19.65

The small caps are churning sideways and today's failure to rally past yesterday's high looks like a bearish clue that the sector is fragile. I do not see any changes from yesterday's update. We want to use a trigger at $20.85 to open bullish positions on the TWM, which is a bearish bet on the small caps. Our first target is $23.95 since the $24.00 level was support in the past it could be resistance now.

Trigger to buy the TWM at $20.85

Suggested Position: BUY TWM stock @ $20.85 (unopened)

Entry on March xx at $xx.xx
Earnings Date --/--/-- (unconfirmed)
Average Daily Volume: 4.5 million
Listed on March 27th, 2010

BEARISH Play Updates

Corrections Corp. of America - CXW - close: 19.80 chg: -0.06 stop: 21.05

CXW is providing a new entry point for bearish positions. The stock briefly rallied past the $20.00 level and failed, which also coincided with a failed rally at the descending 50-dma. I would consider new bearish positions right here. Our target is $18.00. The low in February 2010 was $17.50.

Current Position: SHORT CXW stock @ 19.90

Entry on March 19 at $19.90
Earnings Date 05/06/10 (unconfirmed)
Average Daily Volume: 1.1 million
Listed on March 17th, 2010

EastGroup Properties - EGP - close: 37.70 change: -0.04 stop: 39.55

EGP opened higher at $37.83 and then failed near the $38.00 level. Shares under performed the broader market. Readers can choose to open positions now or look for a bounce/failed rally near the $38.50 level.

There is a handful of moving averages all converging near the $37 level so I would not be surprised to see EGP bounce near this area but any bounce should be temporary with the sector already beginning to correct. I would consider this trade somewhat aggressive since the most recent data listed short interest around 5% of the very small 25.8 million-share float. That's about eight days worth of short interest. Our target is the $34.00 level.

Current Position:(SHORT) EGP stock at $37.83

Entry on April 01 at $37.83
Earnings Date 04/28/10 (unconfirmed)
Average Daily Volume: 137 thousand
Listed on March 31st, 2010

MACERICH Co. - MAC - close: 38.77 change: +0.46 stop: 41.51

Shares of MAC managed a bounce from the $38.00 level today. Look for any rebound to roll over in the $39.00-40.00 zone and use it as a new bearish entry point. Our target is the $35.15 level. Keep in mind the 50-dma nearing $35.00 could offer some technical support. I do consider this somewhat aggressive. The most recent data listed short interest at 10% of the float, which is above average and raises our risk of a short squeeze. Plus, the Point & Figure chart is still bullish. I would keep positions small.

Current Position: SHORT MAC stock at $38.80

Entry on March 31 at $38.80
Earnings Date 05/04/10 (unconfirmed)
Average Daily Volume: 1.6 million
Listed on March 30th, 2010

MAXIMUS Inc. - MMS - close: 60.88 change: -0.05 stop: 62.11

MMS continues to bounce around the $60-62 zone. There is no change from my Wednesday night comments.

I am suggesting a trigger at $59.80 to open bearish positions and we will use a stop loss at $62.11. If triggered our target is $55.25. I do need to label this trade somewhat aggressive since we normally do not trade stocks with average volume under 250K a day.

Trigger for bearish positions at $59.80

Suggested Position: (SHORT) MMS stock at $59.80 (unopened)

Entry on April xx at $59.80 (unopened)
Earnings Date 05/06/10 (unconfirmed)
Average Daily Volume: 83 thousand
Listed on March 31st, 2010

Warner Chilcott - WCRX - close: 25.60 change: +0.08 stop: 26.26

WCRX is still trying to bounce but can't seem to make any progress. There is no change from my prior comments. I am suggesting we use a trigger to open bearish positions at $24.80. If triggered our first target is $22.60. The 200-dma is nearing the $22.50 region and could offer technical support. Our second, more aggressive target is the $20.25 mark.

Trigger to open bearish positions @ 24.80

Suggested Position: SHORT WCRX stock at $24.80 (unopened)

Option Traders:
BUY the April $25.00 PUT (WCRX 10P25.00) current ask $0.50

Entry on March xx at $xx.xx
Earnings Date 05/11/10 (unconfirmed)
Average Daily Volume: 1.5 million
Listed on March 29th, 2010


UltraShort Basic Materials - SMN - close: 6.78 change: -0.29 stop: 6.90

I am dropping the SMN as a bullish candidate. Manufacturing data from around the world (China, Europe, Britain, and the U.S.) all came in stronger this morning. If manufacturing is rising then demand for resources will rise. The commodity sector rallied and that pushed the SMN to a new relative low. I am dropping this ETF as a bearish candidate. Shares never hit our trigger to open positions at $7.45.

Trade Never Opened

Trigger to buy the SMN at $7.45

Suggested Position: BUY SMN stock @ 7.45 (unopened)


Entry on March xx at $xx.xx *never opened*
Earnings Date --/--/--
Average Daily Volume: 3.3 million
Listed on March 27th, 2010