Option Investor

Daily Newsletter, Thursday, 8/26/2010

Table of Contents

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

Market Wrap

Bad News, Bad Market Theme Continues

by Todd Shriber

Click here to email Todd Shriber
Disappointing economic data continued to weigh on stocks on Thursday, keeping with a theme that has been present for much of August. That theme has the S&P 500 lower by more than 4% on the month and the latest batch of weak data sent the index lower by 8.1 points to a close at 1047.22. After shedding 74 points, the Dow Jones Industrial Average settled at 9985, its first close below 10,000 in seven weeks. Tech continues to be pathetic as the Nasdaq lost almost 23 points to settle just below 2119. The Russell 2000 lost more than points to close below round-number support at 600.

Stats Table

On Wednesday, the market was doomed by weak durable goods and new home sales data. Today it was jobless claims. Actually, the number came in a bit better than expected, falling by 31,000 to 473,000 for the week ended August 21. When the number came out before the market opened, futures soared and it looked stocks may be headed for at least small gains on the day. The pre-market positivity was never really solidified and small gains wilted by early afternoon, sending stocks lower.

Even though jobless claims were supposedly ''better'' than they have been, the reality is the few traders that were at their desks today and not in the Hamptons were able to take advantage of the notion that ''less bad'' just is not going to cut it when it comes to economic data. Stocks have become so beholden to economic data points recently that the data needs to be good, great, positively surprising or some derivative thereof to jolt stocks higher and that just is not happening.

Jobless Claims

Speaking of data, tomorrow should be an interesting with the first revision to second-quarter GDP being released before the before. When the initial reading was released last month, the number came in at 2.4%, certainly nothing that would confuse the U.S. with China or India, but worse yet, that number would not even confuse the U.S. with Sweden.

Do not expect that 2.4% growth figure to hold. Looking at the chart below, you will see that economists have been steadily paring their estimates and 1.4% growth may even be too much to hope for.

GDP Estimates

Another chart (below) shows that most economists have stuck to an estimate of 1.5% and while only a small number are really bearish, forecasting a reading of 1% or less and an equally small number are bullish, if it can be called that, expecting the number to stay above 2%. It bears noting that almost all of the recent data releases that have punished stocks have missed estimates by wide margins, which says the economists that are being polled in these surveys are less accurate than your local weatherman.

GDP Estimates #2

Speaking of forecasts that probably need to be revised to the downside, it seems like only yesterday that I wrote in a couple of market wraps that said analysts might need to boost their year-end forecasts for the S&P 500. Well, it was not yesterday, it was several months ago, but things change in the market and now it would appear forecasts calling for S&P 500 1275-1300 by the end of the year may need to be scaled back.

You may have heard about the strategist from French bank Societe Generale that said the S&P 500 could plunge all the way to 450. That might a wee bit aggressive, but it is worth noting that Birinyi Associates trimmed its year-end forecast on the index by 7.5% to 1225 on concerns that stocks like Procter & Gamble (PG) and Wal-Mart (WMT) will not stem their declines this year, Bloomberg News reported.

Along the lines of stocks that need to get things headed in the right direction but may be challenged to do so there is denim and apparel retailer Guess (GES). Guess issued an earnings report that missed estimates yesterday after the market closed. Making matters worse, the company's outlook for the rest of year was less than encouraging as the company cited uncertainty about the global economic recovery. The result was a decline of nearly 11% for Guess shares on volume that was roughly five times the daily average.

Guess Chart

If you're looking for tomorrow's victim in the preppy retail space, look no further than Obama family favorite J. Crew (JCG). The company reported second-quarter earnings today after the close, but forget those results. J. Crew lowered its third-quarter guidance to 55 cents to 60 cents a share, well below the consensus estimate of 71 cents. For the full year, J. Crew expects a profit of $2.25 to $2.35 a share, below previous guidance of $2.35 to $2.45 a share. The Street was expecting $2.46. Like Guess, J. Crew cited uncertainty in the global economy. Whatever the reason for the downbeat guidance, investors are not happy and the shares are down 7.3% in the after-hours session as of this writing.

J. Crew Chart

It is hard to find happy investors on the long side these days, but if you are long data storage firm 3Par (PAR), these are fun times. Dell (DELL) made an initial bid for 3Par earlier this week, only to be trumped by rival Hewlett-Packard (HPQ). HP offered $24 a share for 3Par and Dell countered this morning with a $1.6 billion bid that values 3Par at $24.30 a share.

A mere 30-cent increase probably had HP chuckling. HP knows that it has the better balance sheet and used that strength to trump Dell one more time with a $1.8 billion counter offer. That values 3Par at $27 a share. 3Par said on Thursday morning that it had agreed to the Dell offer, so it will be interesting to watch this saga continue to unfold, but the reality is HP is the likely victor here.

3Par will give its eventual acquirer access to the booming cloud computing craze and that is the reason why Dell and HP are willing to pay up for 3Par. Regardless of who wins 3Par, a company that has hardly been profitable since it was born 11 years ago, the real winners are 3Par shareholders because this stock traded for less than $10 two weeks ago.

3Par Chart

There was more acquisition news out of Silicon Valley today. HP said it would acquire cloud computing firm Stratavia and Cisco (CSCO) said it would acquire online video software maker ExtendMedia. The news impressed no one as HP finished down on the day and Cisco touched a new 52-week low.

Cisco Chart

Looking at the charts, 1050 did not hold on the S&P 500 and the index is now threatening to violate support at 1040. That downside move could occur as early as tomorrow if the GDP news really disappoints and it probably will. A move below 1040 could easily bring 1010-1015 into play. The 1060 area looks to be the next resistance zone.

S&P 500 Chart

Psychological support at 10,000 did not work for the Dow and the blue chip index has now plunged almost 800 points from its August 9 peak. If 9900 does not act as support the next target would be 9800. Even if the Dow can reclaim 10,000, it will have to contend with resistance at 10,100.

Dow Chart

There is simply nothing nice to say about the Nasdaq. The index cannot even get any help from 3Par because that stock trades on the NYSE. Even it was a Nasdaq stock, it would not be enough to rewrite what is obviously a broken story. Even if the Nasdaq could string together a couple of positive days, it would bump into resistance almost immediately at 2140, but support at 2063 looks like the safer bet.

Nasdaq Chart

The Russell 2000 has bounced off support at 590 a couple of times, but a close just below 600 has put the index in position to retest that support level and one has to wonder how long 590 will hold. If it breaks, 550 could be the next stopping point.

Russell 2000 Chart

Betting on oversold bounces has become a fool's game at this point because the data supports the bears and the weak summertime volume makes matters worse for the bulls. A bet on a post-Labor Day bounce may prove to be a dud as well because September is another ugly month on the calendar for equities. Volume should pick up after the holiday, but the question is will sentiment?

New Plays

Sitting on Hands Ahead of Weekend

by Scott Hawes

Click here to email Scott Hawes
Editor's Note:
Good evening. I am going to refrain from releasing new plays tonight. Tomorrow is shaping up to be quite day. The GDP data released in the pre-market is sure to set the tone early, however, all eyes will be on Ben Bernanke's speech at 10:AM EST. Who knows what he will say but I recall the saying "unusual uncertainty" in a recent speech to congress which sent the markets spiraling. The bottom line is that we are at critical support level and the market is hungry for information that we may not get. I seriously doubt there will be any groundbreaking changes in monetary policy, rather he will try to instill confidence which may be short of expectations.

We currently have 10 open positions in the model portfolio. If we get a big move tomorrow any of these positions may give readers a more favorable entry point than we currently have. I will also add that if we breakdown tomorrow it could be ugly and quick. On the contrary, good news could spark a short covering rally that could last a few days. We have positions on both sides of the market to take advantage of the moves. If we go lower I suggest being ready to take profits on short positions as our targets approach. We are already in oversold conditions and are nearing support levels which could spark an oversold bounce that turns into quite a reversal. We've seen it in the past and nothing tells me it can't happen again. Stay nimble and please email me with any questions.

In Play Updates and Reviews

Small Winner Closed

by Scott Hawes

Click here to email Scott Hawes
Current Portfolio:

BULLISH Play Updates

Athenahealth, Inc. - ATHN - close 27.81 change -0.53 stop 26.90

Target(s): 28.75 (hit), 29.50, 31.50 (hit), 32.95, 34.00
Key Support/Resistance Areas: 34.25, 31.75, 30.00, 28.25, 25.75
Current Gain/Loss: -8.07%
Time Frame: 1 to 2 weeks
New Positions: No

8/26: ATHN hit our lowered target of $28.75 but sold off and gave back all of yesterday's gains. The stock is still above the lows from Tuesday so I am sticking with it here to see if things reverse higher. I want to caution readers that if we get weakness in the broader market tomorrow we could get stopped out.

8/25: We are moving in the right direction with ATHN. Let's see where this bounce takes the stock, however, the broader market is weak so readers may want to consider looking for an exit using the above targets.

8/24: The sell-off in ATHN continued today and we are getting very close to being stopped out. The stock closed below its upward trend line from the 7/22 lows today, while also closing below its 20-day and 100-day SMA's. The 50-day SMA is below our stop and it appears ATHN may visit this level near $26.00. The stock has retraced just about 50% of its gains from the 7/22 low and there is support at current levels, so this is a logical place for ATHN to bounce. However, the broader market is weak so readers may want to consider looking for an exit. $28.75 and 29.50 are intraday resistance levels and should be considered as areas to selling positions or tightening stops to protect capital.

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

The Andersons, Inc - ANDE - close 36.55 change -0.69 stop 34.45

Target(s): 38.90, 40.50, 41.50
Key Support/Resistance Areas: 41.50, 40.50, 39.20, 38.00, 35.50
Current Gain/Loss: -1.27%
Time Frame: 1 to 3 weeks
New Positions: Yes

8/26: AND is bouncing perfectly off of its upward trend line and 30-day SMA and it did again today. My comments from the past few days remain valid.

8/25: ANDE is hanging tough and if it breaks above $37.50 to $38.00 our targets should easily be reached.

8/24: ANDE surged +3.44% higher today on a very weak tape in the broader market. We are just about break-even on this trade but I urge readers to be cautious as ANDE can't buck the broader market trend forever. However, if the market bounces from here ANDE should head towards our first target of $38.90 (lowered 25 cents). I want to raise the stop up to $34.45 which is below the 50-day SMA and well below the recent congestion area and key resistance level of $35.50. This should protect us from a head fake lower and protect against a hard reversal.

Current Position: Long ANDE stock, entry was at $37.02

Options Traders: Buy December $40.00 Calls, current ask $2.10

Entry on August 19, 2010
Earnings 10/28/2010 (unconfirmed)
Average Daily Volume: 180,000
Listed on August 18, 2010

Newmont Mining Corp - NEM - close 59.44 change +1.62 stop 56.40

Target(s): 59.30 (hit), 59.85, 60.50
Key Support/Resistance Areas: 62.00, 59.50, 58.16, 55.00, 54.30, 52.30
Current Gain/Loss: +4.74%
Time Frame: Several weeks
New Positions: Yes

8/26: NEM is back at our first target and it is time to consider taking profits. This is more of a defensive play so I am comfortable leaving this open to see if we can get more out of the position. I want to raise our stop $58.20 which will lock in a gain on the position. NEM is forming a bull flag on its hourly chart and if it breaks higher our final targets could get hit quickly. I've changed the final target to $60.50. Readers who want to try to get more than this out of the position might want to consider $61.90 which is near the highest all time closing price. I'd rather get out ahead of that.

8/25: NEM is heading back up towards our $59.30 target. I suggest not letting this reverse again. Protect profits.

8/24: NEM gapped lower but was immediately bought and closed well off of its lows. This is more of a defensive play that can do well in broader market weakness. I've adjusted the 2nd target and suggest we take profits this time if they are reached. $59.30 was hit last week and still remains a valid target.

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

Rackspace Hosting, Inc - RAX - close 19.34 change -0.21 stop 17.95

Target(s): 20.75, 21.30, 23.00
Key Support/Resistance Areas: 23.50, 21.40, 20.00, 19.00, 18.00
Current Gain/Loss: -15%
Time Frame: 3 to 5 weeks
New Positions: Yes

8/26: RAX printed highs not seen since April and briefly broke out of its ascending triangle. My comments from the play release remain the same. Let's stick with the plan. Readers might want to consider new positions if RAX prints $19.00.

8/25: M&A activity is heating up in the tech sector. Dell and Hewlett-Packard are in a bidding war over a 3Par at a huge 160% premium over its closing price just a couple of weeks ago. Whoever loses the bid will most likely be looking for a similar firm to acquire and there seems to be none better than RAX. Regardless of whether RAX fits the bill for an acquisition they are in the red hot cloud computing industry which is outperforming the broader market. I suggest we take advantage of the momentum and initiate long positions now. Technically, RAX is above all of its moving averages and is forming an ascending triangle. Our stop will be $17.95 and I have three targets with the most aggressive being the YTD highs near $23.00. I envision this trade lasting several weeks or more but if the stock surges we won't hesitate to book profits.

Current Position: Long RAX stock, entry was at $19.65

Options Traders: Long December $21.00 CALL

Entry on August 25, 2010
Earnings 11/9/2010 (unconfirmed)
Average Daily Volume: 1.75 million
Listed on August 25, 2010

UltraShort Semiconductor ETF - SSG - close: 19.62 change: +0.65 stop: 18.40

Target(s): 20.40, 21.45, 22.00
Key Support/Resistance Areas: 22.00, 20.00, 19.00, 17.00
Current Gain/Loss: -0.15%
Time Frame: 4 to 6 weeks
New Positions: Only Nimble Traders

NOTE: This is a bearish trade using a long position in an inverse ETF. Since we are bullish on the inverse ETF it is listed as a bullish trade.

8/26: SSG bounced back today gaining +3.4%. If there is market weakness tomorrow it could get ugly and be quick. On the other hand if we bounce it could spur short covering (bad for SSG) and we could get stopped out. Our initial plan was for this trade to last several weeks but the market is oversold and we are approaching support levels. If we go lower it could be quick with a swift reversal and I would rather be selling SSG on strength rather than weakness. I've offered two additional targets for readers looking to book nice gains if there is weakness. Our stop is in the right place.

8/25: Unfortunately, we were triggered at $19.65 as opposed to the pullback to $17.80. We have tight stop so if the Semi's bounce much more there is good chance we will get taken out. I like this ETF on weakness but will suggest stepping aside and possible entering at a lower price if our stop is hit.

8/24: SSG looks on the verge of breaking out and hitting our trigger to buy positions at $19.65. I think pullbacks in SSG can be bought as well so I would like to add a trigger of $17.80 to buy positions which is just above the 200-day SMA and upward trend line from the 7/27 lows. If triggered at $17.80 we'll use a stop loss at $16.45.

8/21: Semiconductor companies that supply materials to the smart phone market have been doing better than their peers that provide chips for the PC market. Yet the chip sector in general has been underperforming. The SOX index broke down under significant support a few days ago and looks ready to begin a new leg lower. I am suggesting we take advantage of this weakness with a bullish position on the SSG.

The plan is to buy the SSG when it breaks out past the July high and hits $19.65. Our multi-week target is $22.00. More nimble traders may want to cross their fingers and hope for a pull back toward $17.25-16.75 as an alternative entry point but if you do buy the dip I would use a relatively tight stop loss. FYI: This is a double, inverse ETF. Expect volatility!

Suggested Position: Long SSG stock/ETF if trades to $19.65 or $17.80

Entry on August XX
Earnings Date: N/A
Average Daily Volume: 178,000
Listed on August 21, 2010

BEARISH Play Updates

Automatic Data Processing - ADP - close: 38.75 change: -0.18 stop: 41.26

Target(s): 37.25, 36.50, 34.00
Key Support/Resistance Areas: 41.00, 39.00, 37.30
Current Gain/Loss: +0.00%
Time Frame: Several weeks
New Positions: Yes

8/26: We are right back to where we started with ADP. The stock continues to look vulnerable and ready to break. If the broader market is weak ADP should follow.

8/25: ADP continues to look vulnerable but we may need to be patient until the broader market finishes this bounce which should be short lived. There is plenty of overhead resistance.

8/24: We were triggered on our short entry in ADP at $38.75. This is the lowest close since 10/8 and the stock looks vulnerable. I've added $37.25 as a first target because it is near a long term upward trend line and prior swing low from 9/3/09.

Current Positions: Short ADP stock, entry was at $38.75

Option Traders: Long November $37.00 puts

Entry on August 24, 2010
Earnings Date 10/28/10 (unconfirmed)
Average Daily Volume: 3.2 million
Listed on August 19, 2010

Chesapeake Energy - CHK - close 20.07 change +0.03 stop 22.10

Target(s): 19.70 (hit), 19.10, 18.25
Key Support/Resistance Areas: 22.50, 21.60, 20.30, 19.65, 18.75, 18.00
Current Gain/Loss: +3.56% Time Frame: 1 to 2 weeks
New Positions: Yes

8/26: Natural gas inventories continue to be bearish and the early strength in CHK was sold right into. The stock printed a nasty candlestick, closing at its lows for the day. However, if this candlestick is violated it is a bullish signal so I want to tighten the stop to $21.60. I am still bearish on CHK but want to protect against a hard reversal. The stop is also quite a bit higher and above the recent downtrend line and 20-day SMA. I wouldn't want to be involved if CHK trades this high. I am also adjusting the 2nd and 3rd target slightly higher.

8/25: CHK traded right down to its 52-week low which was the target I suggested taking profits at last night. CHK still looks weak but I believe the stock may bounce here with the broader market. If things turn back down CHK should break these levels.

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: 27.20 change: +0.02 stop: 31.55

Target(s): 28.25, 26.75, 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 29.20

8/25 & 8/26: My comments remain the same from below. Let's see if CNW gives us an entry on a bounce in the coming days.

8/24: CNW managed to gain +1.33% to close at $27.52. This stock is shortable on strength but we are still waiting on our trigger. The plan is to initiate bearish positions if CNW can bounce to $29.20. The stock is still very oversold with its recent decline from $35.00. A normal 38.2% Fibonacci retracement and the declining 20-day SMA are near $29.80. If the stock can manage to bounce to $29.20 I would be short seller.

Suggested Position: Short CNW stock if it trades to $29.20

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

HNSI, Inc - HNSI - close 26.90 change -0.34 stop 29.11

Target(s): 25.05, 23.50, 22.25
Key Support/Resistance Areas: 28.90, 27.25, 25.80, 200-SMA, 23.50, 22.00
Current Gain/Loss: +1.10%
Time Frame: 1 to 2 weeks
New Positions: Yes

8/26: The early rally in HSNI was sold into and the stock closed near its lows of the day. I am looking for a breakdown towards its 200-day SMA.

8/25: HSNI hit our target on the late day rally so we are short the stock. I believe this rally will be short lived and the stock should turn back lower in the coming days. My comments from the pay release are below.

8/24: Retailers are weak and HSNI looks like it is headed to test its 200-day SMA and possibly its recent swing lows. The stock has made a great comeback off of its 2009 lows but the selling has picked back up in recent weeks. The stock lost -5.3% today on strong volume and I expect it to continue if the broader market cooperates. I would like to see a retracement of some of today's gains to initiate short positions but if the stock breaks down I also suggest initiating short positions. Let's use triggers on a bounce to $27.20 or a breakdown to $25.69. More nimble traders can initiate positions now. We'll keep a tight stop at $29.11 which is above the downtrend line and Monday's high. If we get filled at $27.20 our first target is nearly 8% lower and above the 200-day SMA. HSNI closed below its 20, 50, and 100 day SMA's today.

Current Position: Short HSNI stock, entry was at $27.20

Options Traders: Long October $25.00 PUTS

Entry on August xx
Earnings: 11/11/2010 (unconfirmed)
Average Daily Volume: 495,000
Listed on August24, 2010

Starbucks Corp. - SBUX - close: 23.27 change: -0.09 stop: 25.05

Target(s): 22.20, 21.30, 20.00
Key Support/Resistance Areas: 25.00, 23.50, 22.00, 21.00, 20.00
Current Gain/Loss: +0.13%
Time Frame: Several weeks
New Positions: Yes

8/26: SBUX filled the gap I referred to yesterday and it was immediately sold into. Now we need follow through and weakness in the broader market should get things moving lower in earnest. I've adjusted our first target up 10 cents. This is prior resistance form last fall which should provide support. If we breakdown before bouncing I would be taking profits or tightening stops to protect them at this level.

8/25: The rally in SBUX may have been short covering today and the stock could fill the gap down from yesterday before the selling resumes. There is plenty of overhead resistance to keep bounces in check.

8/24: We were triggered in SBUX at the open this morning and the stock sold off the remainder of the day. I've adjusted our targets and suggest readers begin to tighten stops or take profits as they are reached.

Current Position: Short SBUX stock, entry was at $23.30

Options Traders: Long October $23.00 puts

Entry on August 24, 2010
Earnings Date 11/04/10 (unconfirmed)
Average Daily Volume: 8.0 million
Listed on August 19, 2010

SPDR Retail ETF - XRT - close 36.52 change -0.46 stop 38.62

Target(s): 36.00, 35.25, 34.65
Key Support/Resistance Areas: 39.00, 38.00, 37.60, 36.50, 35.80, 35.00
Current Gain/Loss: +2.67%
Time Frame: 1 to 2 weeks
New Positions: Yes

8/26: The selling resumed in XRT today and there is plenty of resistance overhead. $36.00 is still a valid target and I would be protecting profits if XRT gets down there again.

8/25: XRT printed a bullish engulfing candlestick today and closed the gap lower from yesterday. In this case I believe the selling will resume. My comments from below remain the same.

8/24: XRT hit our first target of $36.00 this morning and bounced. I see no reason the ETF won't trade down to its July lows which are just below our second target of $35.25. Let's move our stop down to $38.62.

Current Position: Short XRT stock, entry was at $37.52

Options Traders: Long September $36.00 PUTS

Entry on August 17, 2010
Earnings: 11/2/2010 (unconfirmed)
Average Daily Volume: 12 million
Listed on August 16, 2010


Oceaneering International - OII - close 50.75 change +0.18 stop 47.80 *NEW*

Target(s): 50.75 (hit), 51.75, 53.00
Key Support/Resistance Areas: 57.50, 54.50, 53.40, 49.00
Final Gain/Loss: +3.15%
Time Frame: 1 to 2 weeks
New Positions: Closed

8/26: OII reached our $50.75 target today and we have closed the position for a +3% gain. I listed this as a target on Tuesday and suggested we protect profits at this level. The stock printed a topping tail candlestick off of the 20-day SMA and a downtrend line. If readers are still in positions I would suggest tightening your stop to $47.80 and exiting positions on strength. OII has some potential, but I'm cautious of further declines in the broader market and booking the gain was the smart thing to do.

8/25: OII gained +1.5% today and is heading towards our targets. My comments below remain unchanged.

8/24: OII is hanging tough and is maintaining its upward trend line from the 6/1 lows. Let's stick with the set-up and see if the stock bounces from here. I've added a lower target of $50.75 which will produce a small +3% gain if reached. Readers should consider tightening stops or taking profits as the targets are reached.

Closed Position: Long OII stock at $50.75, entry was at $49.20

Annotated chart:

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