Option Investor

Daily Newsletter, Monday, 8/16/2010

Table of Contents

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

Market Wrap

Slow Going On Monday

by Todd Shriber

Click here to email Todd Shriber
Stocks were afflicted with a case of the weak volume blues on Monday as just 5.8 billion shares changed on the American Stock Exchange, Nasdaq and New York Stock Exchange combined. The Dow Jones Industrial Average was in positive territory for part of the day, but closed lower by one point to settle at 10302.01, extending its losing streak to five days. The S&P 500 finished the day higher by a scant 0.13 points to close at 1079 while the Nasdaq led the way among the major indexes, adding 8.4 points to settle at 2181.87. By comparison, the Russell 2000 was impressive, adding almost six points to close at 615.10.

Stats Table

Overall, it was a boring day for equities, but the same cannot be said for metals futures and the materials sector. Disappointing growth data from Japan and lingering concerns about a double-dip recession and U.S. growth propelled gold to a six-week high. Gold was also helped by a slumping U.S. Dollar. The U.S. Dollar Index, which measures the greenback's strength against six other major currencies, traded down by as much as 0.9%, ending a five-day winning streak. That helped gold trade in a range of $1216.20 to $1229.5 an ounce before settling at 1226.20 an ounce, up $9.60 for the day.

Gold Chart

Copper, like gold, was buoyed by the weaker dollar as the red metal finished higher in both the London and New York sessions. For the all the concerns about the global economic recovery, copper has been resilient as of late and demand apparently is not drying up as highlighted by a Bloomberg report that said orders to draw copper from stockpiles surged the most in two months today.

Positive comments on commodities from Goldman Sachs (GS) did not hurt the metals complex today. Goldman said rising demand from emerging markets and limited supply growth will prop up commodities prices through the end of 2010. In its forecast, Goldman favored copper, gold, oil, platinum and zinc in alphabetical order.

Goldman has an ''overweight'' weighting on commodities and expects gold to rise to $1260 an ounce in three months and to $1300 an ounce in six months. The bank thinks oil will be trading at $92 a barrel in three months. Goldman put a six-month price target of $7925 a ton on copper and that was good enough to lift the red metal today.

Copper Chart

The Goldman commodities outlook helped most mining and materials to some fair gains on Monday. Freeport McMoRan (FCX), the largest publicly traded copper producer in the world, added 0.8%, but volume was less than half the daily average. BHP Billiton (BHP), the world's largest mining company, gained almost 1%, but again, volume was less than half the daily average. Gold miner Newmont Mining (NEM) added nearly 2%, but it is hard to get excited about that when the stock traded just 3.5 million shares compared to average daily volume of almost 8.6 million shares.

Nemont Mining Chart

Tech stocks saw a bit of relief on Monday and in testament to how lethargic the action was on Wall Street today, tech was the top-performing sector among the industry groups tracked by the S&P 500, gaining a mere 0.4%. Cisco (CSCO) was the Dow's biggest winner, adding 2.6%, representing only a slight rebound from last week's big tumble. Ebay (EBAY) also jumped 2.6% on news that its PayPal electronic payments unit is in discussions to have its services added to Google's (GOOG) Android smartphone platform. Android users would be able to use PayPal to pay for new apps.

None of that news is particularly exciting, nor is an acquisition of just $1.15 billion, but that is the news that Dell (DELL), the third-largest maker of personal computers, graced investors with today. Between Apple's (AAPL) dominance, the management shakeup at Hewlett-Packard (HPQ) and Cisco's earnings disappointment, it has been easy to forget about Dell lately. Well, there have been multiple to reasons to have ignored Dell for months, if not longer, but that is a conversation for another day.

On Monday, Dell said it would purchase data-storage firm 3Par (PAR) for $1.15 billion, paying $18 per share in cash, a whopping 86% premium to where 3Par closed on Friday. Dell is using the deal to bolster its footprint in the corporate technology market. Including the 3Par purchase, Dell has made five acquisitions this year in an effort to move away from PCs. The 3Par buy certainly helps Dell in that effort, but analysts speculated that the deal will only have a negligible impact on Dell's bottom line and that the Texas-based company is paying a steep price for 3Par.

3Par has reported three consecutive quarterly losses and one analyst said that Dell needs to integrate its acquisitions in more expeditious fashion, but the 3Par deal is not likely to result in speedy integration. In others, there is not much to be excited about when it comes to Dell.

Dell Chart

In other news from the world of large-caps that have seen better days, Lowe's (LOW), the second-largest home improvement retailer, said its second-quarter profit jumped 10% to $832 million, or 58 cents a share, from $759 million, or 51 cents a share, a year earlier. Revenue increased 4% to $14.36 billion, but that fell short of the company's estimate. Analysts were expecting Lowe's to post a profit of 59 cents a share on sales of $14.52 billion.

North Carolina-based Lowe's raised the low end of its full-year guidance, but trimmed the top end, saying it now expects to earn $1.38 to $1.45 a share this year, compared with previous guidance of $1.37 to $1.47 a share. The company also pared its revenue outlook to growth of 4% from growth of 5% to 7%. That would equal sales of $49.11 billion compared with previous guidance of $49.58 billion to $50.53 billion. Analysts are currently forecasting a full-year profit of $1.42 a share on sales of $49.57 billion.

Despite those cuts to the full-year outlook, Lowe's was able to muster a small gain on the day on strong volume, but I would expect Home Depot's (HD) earnings on Tuesday to be a similar non-event.

Lowe's Chart

As I have mentioned a couple of times already, it was a slow day for stocks, but one glaring exception would be for-profit education providers. Companies like Career Education (CECO), Corinthian Colleges (COCO), Strayer Education (STRA) and Washington Post (WPO), which owns Kaplan, were hammered on that students are not repaying their federal student loans.

According to Bloomberg News, Corinthian, Career Education and Washington Post manage campuses where less than 20% of federal student loans have been repaid. The national repayment average at traditional public and private universities is 55%, but at for-profit schools, that number dips to just 36%. Washington Post shares slumped more than 8% on the news and Career Education finished the day lower by by more than 6%.

Those losses seem tame in comparison to the more than 18% drop suffered by Strayer. Nearly 2.7 million shares changed hands in that name compared with average daily trade of less than 194,000 shares. The biggest loser in the group was Corinthian, which slid by almost 22% on volume that was roughly 11 times the daily average. Barclays downgraded the stock to ''equal weight'' from ''overweight'' while BMO Capital Markets trimmed its rating to ''market perform'' from ''outperform.''

Corinthian Colleges Chart

Looking at the charts, not much has changed since Friday. The S&P 500 still needs to deal with resistance at 1087, also the 50-day moving average, before1100 and the 200-day line at 1115 can be discussed. On the downside, 1050 remains the support area to watch, and from there things get dicey with a drop to the 1015 area a possibility if 1050 is violated.

S&P 500 Chart

The Dow traded below its 50-day line at 10,273 today with an intraday low of 10,209, but index was able to close above that moving average, but still needs to contend with resistance at 10,350. Volume is so anemic that it is tough to be bullish on the Dow and if financials do not start showing some signs of like sooner rather than later, we could be looking at 10,100 if 10,300 does not hold as support.

Dow Chart

Despite today's ''rebound,'' there is still little reason to be involved with tech. Research In Motion (RIMM) shed 5% today on news of weak Torch sales. Semiconductor names have been hammered and Cisco failed to impress last week. The Nasdaq lost more than 5% last and could not reclaim even a half percent of that on Monday. Resistance lies around 2227, also the 50-day moving average. Support is 2140.

Nasdaq Chart

Like the Nasdaq, the Russel 2000 suffered a major loss last week (6.3%), so Monday's small gain is nothing to get excited about. The Russell 2000 would probably need to move back above 640, which is in between the 50- and 200-day moving averages before there is any reason to be constructive on small-caps. If support at 590 does not hold, then 550 could be retested and that neighborhood has not been seen since late 2009.

Russell 2000 Chart

In the hunt for strong sectors, I keep finding my way back to materials, but I wonder how long that party can last on weak volume. The reality is materials stocks are not setting the world on fire, they are merely booking small gains when other sectors decline. With financials and tech being slammed, I would not be rushing into any long positions because those two sectors account for more than a third of the S&P 500's weight. The broader market is not going higher without help from at least one of those sectors, but both will need to get their respective acts to boost the market in the fourth quarter.

New Plays

Short Play in Retail

by Scott Hawes

Click here to email Scott Hawes


SPDR Retail ETF - XRT - close 36.97 change +0.09 stop 39.28

Company Description:
SPDR S&P Retail ETF (the Fund) seeks to replicate as closely as possible the performance of the S&P Retail Select Industry Index (the Index). The Index is an equal weighted market cap index. The Index represents the retail sub-industry portion of the S&P Total Market Index. The Fund invests in industries, such as apparel retail, automotive retail, food retail, department stores, Internet retail, general merchandise stores, drug retail, and hypermarkets and super centers.

Target(s): 36.00, 35.25, 34.65
Key Support/Resistance Areas: 39.00, 38.00, 37.60, 36.50, 35.80, 35.00
Time Frame: 1 to 2 weeks

The retail sector is facing many headwinds from a weak consumer and many analysts are already pointing to a dismal back to school season. In addition, retailers are going to have offer deeper discounts than they are currently just to get consumers into stores to buy things. This will negatively affect earnings and if retailers begin to warn investors by lowering guidance XRT will suffer. I've chosen the ETF as opposed to individual names to filter out some of the earnings noise being reported this week by many major retailers. I do expect a bounce in the overall market in the coming days and suggest readers initiate short positions on any strength. We'll use $37.35 as a trigger to enter short positions in XRT. Our stop will be $39.28 which is above two downtrend lines and the 20, 50, and 200-day SMA's. If triggered, our first two targets are -3.5% and -5.5% away, respectively.

Suggested Position: Short XRT if it trades to $37.35

Options Traders: Buy September $36.00 PUTS, current ask $1.05, estimated ask at entry $0.92

Annotated chart:

Entry on August xx
Earnings: 11/2/2010 (unconfirmed)
Average Daily Volume: 12 million
Listed on August 16, 2010

In Play Updates and Reviews

Healthcare Play Surges

by Scott Hawes

Click here to email Scott Hawes
Current Portfolio:

BULLISH Play Updates

Athenahealth, Inc. - ATHN - close 31.13 change +1.67 stop 25.50

Target(s): 31.50, 33.25, 34.00
Key Support/Resistance Areas: 34.25, 31.75, 30.00, 28.25, 25.75
Current Gain/Loss: +2.91%
Time Frame: 1 to 2 weeks
New Positions: Yes, preferably on weakness

8/16: ATHN had a huge day closing +5.67% on the day. The stock was having a fabulous day and this afternoon the company received an upgrade which helped add to the gains. Our lower target to enter positions was missed by 37 cents so positions were entered on strength at $30.25. ATHN is finding a little resistance at $31.50 which is just below the July 2009 lows. There could be a pullback here which will provide a second chance entry point. If we break above today's highs ATHN has some clear air up towards our more aggressive targets. I've added $33.25 as our second target.

8/14: ATHN is in the business of automating health care records and billing. I like ATHN as a long defensive play that should thrive as healthcare regulation takes form. Technically ATHN had a huge gap down after they missed earnings estimates in late April. Since then the stock has formed a nice cup and handle pattern which signals the "changing of the guard" from sellers to buyers. The company reported earnings in late July that beat estimates and the stock is now gaining momentum. On Friday, ATHN closed right on a downward trend line from January but I think it is only a matter of time before this is broken, which is typical of a cup and handle formation. Ideally, I suggest traders initiate long positions on any weakness, but a break out is another strategy. Let's use $28.50 as a trigger on weakness and $30.25 as a trigger on strength. ATHN has a big gap to fill all the way up near $34.00 which is our most aggressive target. Our near term target is $31.50. Our initial stop is $25.50 which is below its upward trend line and the rising 20-day SMA.

Current Position: Long ATHN stock, entry was at $30.25

Options Traders: Long September $31.00 CALL

Entry on August 16, 2010
Earnings 10/28/2010 (unconfirmed)
Average Daily Volume: 767,000
Listed on August 14, 2010

Intrepid Potash - IPI - close 23.96 change +0.41 stop 22.25

Target(s): 25.35, 26.30, 27.20
Key Support/Resistance Areas: 27.40, 26.50, 24.45, 22.65
Current Gain/Loss: +1.14%
Time Frame: 1 to 2 weeks
New Positions: Yes

8/16: IPI gained +1.74% today and closed above its 20-day SMA. We need the stock to break above $24.45 which Thursday's high and 100-day SAM. This get things moving towards our targets and produce a winning a trade.

8/14: We caught a break with IPI as it gapped lower on Friday enabling us to get a good fill. The stock traded within yesterday's range so there is not much to report. I'm looking for this stock to bounce this week and suggest tightening stops on the way up to protect profits.

8/12: The agriculture market is heating up, literally. Heat waves and fires are causing a shortage of agriculture commodities and it is causing prices to spike. Farmers want and need to grow more crops and they need fertilizers to do it. So we are back with a play in IPI which was a dropped play a few weeks ago because we did not get triggered. Technically IPI has retraced about 50% of the +35% spike off of its 52 week low that was printed on 7/1. Today the stock bounced hard just above its 50-day SMA, gaining +4% and printing a bullish engulfing candlestick in the process. This appears to be the higher low that will lead to new highs. I suggest we use one of two triggers to enter positions which should happen tomorrow. If IPI trades to $24.42 (above today's high) or on any weakness to $23.90. The stock is up 23 cents in the after hours so we may get filled at the higher price. Regardless, the momentum is building and I think IPI will re-test its recent highs or print new highs. I've offered a near term target for readers looking for a quicker exit but I'm ultimately looking for the stock to head up to $26 to $27.

Suggested Position: Long IPI stock, entry was at $23.69

Options Traders: Long September $25.00 CALL

Entry on August 13, 2010
Earnings 11/4/2010 (unconfirmed)
Average Daily Volume: 937,000
Listed on August 12, 2010

Newmont Mining Corp - NEM - close 57.71 change +0.99 stop 52.20

Target(s): 59.30, 60.50, 61.50
Key Support/Resistance Areas: 62.00, 59.50, 58.16, 55.00, 54.30, 52.30
Current Gain/Loss: +1.69%
Time Frame: Several weeks
New Positions: Yes

8/16: NEM gained +1.75% and is consolidating above its 100-day SMA and below its 50-day SMA's. We need a break above Thursday's high and the 50-day SMA to get NEM moving towards our targets. I am expecting strength in the broader market which should help our cause.

8/14: We are in NEM at $56.75 per last night's updates. The stock is consolidating below its 50-day SMA and any broader market strength or strength in gold should catapult NEM up towards our targets.

8/12: NEM gapped higher this morning and closed +3% on the day. The broader market gapped lower and couldn't get into positive territory. This confirms my thoughts that gold miners and gold are back as a defensive play that should do well in this environment. Unfortunately it doesn't appear we are going to filled at our ideal price but I suggest we take advantage of any weakness in the coming days. On the hourly chart NEM has an upward trend line near the $56.50 level which will be hit on Tuesday into Wednesday. This is also near a prior resistance level from last week and near today's opening print. Let's use a trigger of $56.75 to enter long positions. I think we'll get filled and if we are patient and it should pay off.

8/11: NEM is approaching a long term upward trend line that began with its November 2008 lows to February 2009. The stock has also broken out above a key pivot level in the $55 to $56 area dating back to 2007. NEM has now turned back to test the pivot level and I suggest we take advantage of the weakness. In addition, if the Fed is going to monetize the country's debt then gold and gold miners should do well and act as a defensive play. I looking for NEM to reverse to the $55.05 to $54.40 level. We will use $54.40 as a trigger to enter long positions but aggressive traders may consider $55.05. Our stop will be $52.20 which is below the 200-day SMA and the long term upward trend line. I am looking for NEM to bounce up to possibly retest its YTD highs.

Current Position: Long NEM stock, entry was at $56.75

Entry on August 13, 2010
Earnings 11/3/2010 (unconfirmed)
Average Daily Volume: 7.7 million
Listed on August 10, 2010

Oceaneering International - OII - close 49.65 change +0.17 stop 46.60

Target(s): 53.00, 54.40, 57.00
Key Support/Resistance Areas: 57.50, 54.50, 53.40, 49.00
Current Gain/Loss: +0.91%
Time Frame: 1 to 2 weeks
New Positions: Yes

Why We Like It:
8/16: Long positions in OII were initiated at the open at $49.20. The stock finished the day strong closing +0.34% higher. We need OII to break above its 20-day SMA at $50.19 and the stock should re-test its recent swing high just above our first target of $53.00.

8/14: With the recent oil leak in the Gulf of Mexico the oil services industry is being turned upside down with regulations and drilling moratoriums. I think OII will benefit because the new rules in the gulf point to more underwater robotic contracts. And it just so happens that OII recently raised their guidance because of it. This past week's dip has come right into an upward trend line and a prior resistance level which should now act as support. This is a buying opportunity in OII. I suggest readers enter long positions now. Our stop is $46.60 which is below OII's recent swing low and its rising 50-day SMA. We have three realistic near term targets that will produce a winning nice trade if they are reached.

Current Position: Long OII stock, entry was at $49.20

Options Traders: Long September $50.00 CALL

Entry on August 16, 2010
Earnings 10/28/10 (unconfirmed)
Average Daily Volume: 807,000
Listed on August 14, 2010

BEARISH Play Updates

Chesapeake Energy - CHK - close 20.93 change +0.15 stop 22.85

Target(s): 19.70, 18.80, 18.05
Key Support/Resistance Areas: 22.50, 21.60, 20.30, 19.65, 18.75, 18.00
Current Gain/Loss: -0.58% Time Frame: 1 to 2 weeks
New Positions: Yes

8/16: We are short CHK as of the open at $20.81. CHK looks vulnerable but the stock could bounce with the market so we may need to exhibit some patience. CHK has trend lines, moving averages, and resistance levels overhead to keep bounces in check. My comments from below have not changed.

8/14: CHK is a good company but it is facing significant headwinds. There is increasing pressure to ban drilling in the Marcellus shale. Pennsylvania is considering a year long moratorium so they can study fracturing problems and its impact on drinking water. If the process is halted in the Marcellus shale then it will probably be halted in the Haynesville and Barnett shale plays, which are the primary assets of CHK. Technically, CHK looks like it is about ready to lose it. The stock is trading in a wide downward channel and on Friday it closed below an upward trend line. It would be nice to short CHK on a bounce but I'm not sure it will happen. I suggest we initiate short positions now. Our most aggressive target right now is to test the July 2009 lows near $18.05. Our stop is $22.85 which is above the recent swing high and several moving averages.

Current Position: Short CHK stock, entry was at $20.81

Options Traders: Long October $20.00 PUTS

Entry on August 16, 2010
Earnings: 11/2/2010 (unconfirmed)
Average Daily Volume: 10 million
Listed on August 14, 2010

Con-way Inc. - CNW - close: 26.72 change: +0.02 stop: 34.05

Target(s): 28.75, 28.25, 25.50
Key Support/Resistance Areas: 25.00, 28.00, 32.00
Current Gain/Loss: N/A
Time Frame: Several Weeks
New Positions: Yes, trigger 29.80

8/16: CNW can't seem to catch a bid. I suggest we remain patient here and see if CNW bounces with the market up to our trigger to enter short positions at $29.80. My comments from below have not changed.

8/14: The sellers are obviously overwhelming the buyers in CNW and the stock has run away from us, closing -4.30% on Friday. I do not suggest chasing it down here. I am going to leave this play open and see if CNW manages to bounce back up to fill some of these recent gaps. I'm going to lower the trigger to $29.80. If anyone caught it short it has been a good play, but unfortunately our trigger wasn't hit.

8/12: CNW gapped down below the $28.00 support I mentioned yesterday and then rallied right up to it, closing +3% off of its lows. The break of support was probably a head fake so I expect CNW to bounce a little further here. I suggest we be patient and keep our trigger at $29.95 to enter short positions.

Suggested Position: Short CNW stock if it trades to $29.80

Entry on August xx
Earnings Date 11/03/10 (unconfirmed)
Average Daily Volume: 1.0 million
Listed on August 7, 2010