Option Investor

Daily Newsletter, Tuesday, 10/19/2010

Table of Contents

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

Market Wrap

Happy Anniversary

by Jim Brown

Click here to email Jim Brown
October 19th is the 23rd anniversary of the 1987 market crash where the Dow lost -508 points for a -23% drop in a single day.

Market Statistics

Today's -165 drop can't compare with the 1987 drop of -23%. Today was only a blink compared to the 1987 heart attack. That does not make today's decline any less painful if you were long going into the open. Numerous earnings reports left investors with an anticipation hangover and the Dow with a -160 point drop at the open.

The Dow drop was fueled by a -$5 decline in IBM. In addition to IBM the drop in oil prices caused a significant decline in CVX and XOM, also Dow components. The Dow was not the only big loser at the open with the Nasdaq tanking on a big drop in Apple, Google, Priceline and Amazon. This is not the way traders were hoping the Q3 earnings cycle would play out.

There was only one economic report of note and that was the New Residential Construction for September. Starts came in stronger than expected with a +.3% gain to an annualized rate of 610,000 units. Starts are up +4% year over year. Unfortunately permits declined by -5.6% month-to-month and -10.9% year over year.

The most important report for the week will be the Fed Beige Book on Wednesday.

Economic Calendar

Economics were not the problem today although currencies were a major weight on the markets. China announced it was raising interest rates by 25 basis points. This was the first rate hike since 2007. China is poised to release its Q3 GDP numbers on Thursday and they are expected to be near 10%. China's growth has caused some serious inflation problems in China. Consumer prices rose +3.5% in August with food prices spiking +7.5%. Real estate prices rose +9.1% in September.

China's action shook financial markets around the world sending equities and commodities sharply lower. The announcement came after China's market closed so the real hit will come tonight when those markets open. The timing of the rate hike should have been no surprise with the G20 meeting this weekend. China's low currency has been a source of concern and the U.S. stopped just short of labeling them a currency manipulator last week. Hiking rates boost your currency value so China will be able to go into the meeting claiming they are working on the problem of a cheap yuan.

The hike in rates prompted a serious round of short covering in various currencies and the U.S. dollar was one currency that was extremely oversold. The short covering prompted a +1.7% rally in the dollar index. That is a massive move in currency terms. That would be equivalent to about a 1,000 point move in the Dow.

Dollar Index chart

The spike in the dollar crushed commodity prices as the stops were hit on the very crowded trade of "short dollar, long commodities." Crude prices fell -4.5% on the increase in the dollar and the worries that China's rate hike signaled a new round of tightening for the Chinese economy. We closed a very nice short in the OilSlick newsletter today that was entered in expectations for a rebound in the dollar.

Register for my OilSlick.com newsletter and receive free daily updates and commentary on the energy sector. Register here

Crude Oil Chart

Gold Chart

Copper Chart

A story that was under reported was a halt by China of exports of rare earth minerals to the USA. For the last month China halted shipments to Japan as the two countries fought over jurisdiction of some disputed ocean real estate. Today three industry officials said China had halted shipments to the USA. Our administration needs to be careful what fights they pick with China over currency and trade issues.

You may remember last week that our 30-year treasury auction went badly for lack of demand. That lack of demand was reportedly a lack of Chinese demand for our bonds. They are the largest buyers and a sudden halt to bidding could drive our yields/rates higher very quickly.

The mineral halt was announced on Sunday night to protest U.S. trade actions. American trade officials announced last Friday they would investigate China's violation of international trade rules by subsidizing clean energy industries. The inquiry claims China has been steadily reducing exports in rare earth quotas since 2005 and adding steep export taxes on rare earths. China announced in July it was cutting export quotas by 72% for 2010 and as much as another 30% in 2011. Officials claim this is an illegal effort to force companies to manufacture more of their high tech goods in China. China mines 95% of the world's rare earth minerals. These minerals have very broad commercial and military applications and are vital to the production of things like wind turbines, guided missiles, batteries, semiconductors, etc.

U.S. officials need to be very careful when they pick fights with the sleeping bear. If he wakes up in a bad mood it will be bad for everyone.

Earnings are really the key this week and several big names on Monday night caused havoc in Tuesday's market. Apple reported strong earnings but iPad sales disappointed and profit margins fell to 36.9% from 38.2%. BMO Capital estimated that iPhone margins fell to 45% from 55% in the quarter. Research firm iSupply said the components costs for an iPhone 4 rose to $187.51 from $170.80 for the previous model. Apple shares closed down -$8.51 or $2.7% on the disappointment.

Analysts said the growing competition for the iPhone would probably force some additional price discounting that would impact margins in future quarters. The same problem is true with the iPad, which is being aggressively priced in an effort to control the market ahead of a dozen or so competitors going on sale over the next few months.

Apple Chart

Dow component IBM reported earnings that beat the street and raised full year guidance but plunged more than $6 intraday after service contract signings fell by -7% to $11 billion in Q3. Sales were brisk on hardware and software but corporations were holding back on large contracts until the economic outlook improves.

IBM said one deal worth $1.8 billion with ABN Amro slipped until October 8th and would have pushed the services total to $12.7 billion and higher than expected. Investors were already running for cover and ignored the excuse.

IBM Chart

Bank of America reported earnings of $3.1 billion or 27-cents per share before the open and that was well ahead of analyst estimates of 16-cents. After a list of charges relating to the new federal regulations that limit fees and some other items BAC lost $7.3 billion. This came from a $10.4 billion write-down in the value of its bankcard unit. The bank said credit quality improved significantly in the quarter. This allowed them to set aside only $5.4 billion for credit losses and $2.7 billion less than the prior quarter. It was $6.3 billion below the reserves for the same quarter last year.

BAC shares did ok at the open but took a sizeable tumble to lead the market down after news broke that Blackrock, Pimco and the NY Federal Reserve was preparing to sue BAC to buy back $47 billion in mortgage securities. The news sent BAC to a new 52-week low and the Dow to a -230 point intraday loss late at 3:30 PM.

Bank of America (Countrywide) sold roughly $750 billion in mortgage-backed securities between 2004-2008. Of that total $3.9 billion have been involved in repurchase requests for various reasons. $500 million were declined and $1 billion have been approved for repurchase with $1 billion still outstanding. Those are manageable numbers. If the $47 billion action now underway is the first of a new wave of repurchase actions then BAC and other banks like JPM, WFC, etc could be in trouble. This was a major weight on the market.

A bank can be forced to repurchase the loans if the purchaser can prove they were misrepresented in the original sale. This is covered by the representations and warranties clauses in the contracts. For instance if the bank represented the average credit score was 725 and it was found out later to be 685 they could be forced to repurchase. If the homes were represented to be owner occupied and later investigations found that many were actually rented they could be forced to buy back the loans. With the number of RMBS loan defaults the purchasers of these mortgages are trying every conceivable way to force a buyback. They have hired auditing firms to investigate tens of thousands of loans/properties in hopes of finding a pattern of misrepresentation that will give them a reason to go to court.

The action in progress by Pimco, Blackrock and the NY Fed is alleging that Countrywide failed to service the loans properly. Bank America and Countrywide collectively service more than 14 million mortgages worth more than $2.1 trillion. About half are owned by Fannie and Freddie and 30% are owned by institutions. Bank America said it would resume foreclosures in 23 states this week and the rest of the states next week.

Bank of America owns 34% of Blackrock so it is suing itself in a sense.

Goldman Sachs reported earnings of $1.74 billion and easily beat analyst estimates. Debt underwriting rose +59% during the quarter but trading revenue fell -40% from earlier in the year. The $2.98 per share in earnings from $3.03 billion and $5.25 per share during the same period in 2009. The decline was due in part to large dividend/compensation reserves for shareholders and employees. Goldman set aside $3.83 billion and benefits during the quarter. That brings the set aside for year-end compensation to $13.12 billion for the first nine months.

Goldman's CFO said trading revenue was down because of lower volatility and traders were skittish since the flash crash and worried about economics.

Goldman Sachs Chart

Harley Davidson (HOG) reported earnings of 40-cents that missed the street estimates of 44-cents due to a 7.7% drop in sales. Harley CEO Keith Wandell said "the economy as yet to turn around in a convincing way and many consumers remain on the sidelines." Harley narrowed its forecast for 2010 shipments. Shares of HOG gave up -7% on the news.

Harley Davidson Chart

Juniper Networks reported earnings that matched street estimates but revenue was light. The stock declined -10% in after hours before positive comments on the conference call produced a rebound. Juniper spokesmen said the company was on track for a revenue growth rate of 20% or higher for the full year and predicted higher than expected revenue in Q4. The CEO said global economic growth recovery was still patchy and slow but was very encouraged by recent discussions with large service providers. After closing at $30.54 shares briefly touched $27 before the conference call news.

EMC posted strong earnings that rose +58% due mostly by a surge in cloud computing. EMC is the majority owner of VMWare and VMW reported earnings that doubled. The U.S., Asia and Latin America markets saw sales increases over 20% while Europe lagged with a 14% increase. Earnings of 30-cents matched analyst estimates but EMC did not decline as other reporters today. EMC posted a fractional gain but it was a gain in a bad market. EMC said they were hiring again and added 1,700 people in the quarter.

Yahoo reported earnings after the close and earnings doubled. Unfortunately it was due to the sale of HotJobs.com and not a significant improvement in advertising revenue. Without the HotJobs sale earnings were 16-cents and only a penny above analyst estimates. Revenue was $1.6 billion, an increase of only 2%. You may remember Google posted a 23% increase in revenue. It appears Yahoo may not be spiraling down the drain but it is definitely takeover bait. CEO Bartz has had two years to turn the company around with not much luck. Google and Bing have passed Yahoo by and captured the search market. Yahoo's search revenues fell -7% for the quarter. After some serious volatility YHOO closed flat in after hours.

Major earnings reports due out on Wednesday include Boeing, Ebay, Morgan Stanley and Wells Fargo.

Earnings Calendar

The volatility today was nowhere near that seen on Oct 19th 1987 but it was still ugly. The Dow declined -230 at its lows and the Nasdaq was off -59 points. The Dow closed back below 11,000 but just barely.

The negative earnings, currency challenges and the Bank America mortgage problem were too much for the dip buyers to overcome. I believe they are still there but reeling from the morning body blow.

Wednesday will be a key inflection point. If the dip buyers return then it is back to business as usual with QE2 in the headlights but we are rapidly approaching that November 3rd FOMC meeting and analysts are starting to express skepticism.

There could be too many "perhaps, could and might" words in the recent speeches. Maybe the Fed is getting cold feet about charging off on another stimulus venture despite what the market thinks.

You may remember 2-3 weeks ago when the subject first appeared. Market pundits were talking $500B to $5T in future QE purchases. That is an amazing amount of money to float the economy and the market raced higher in anticipation. Now we are hearing numbers like $100 billion in an initial buy sometime in January. That is a drop in the bucket and 90 days away. The market is beginning to second-guess itself and we could see some backing and filling while we wait for the actual FOMC announcement.

That means the onward and upward market may turn into more of a trading range over the next two weeks.

The earnings parade has done little to power us higher other than the Google earnings last week. That pushed the Nasdaq higher but the Dow lagged in negative territory. Without any really key Nasdaq earnings other than Ebay and Amazon left this week there is little to create excitement.

We also have the Fed Beige Book economic update on Wednesday. That has the power to heal or kill the market. If conditions have improved the markets will not be so dependent on QE2. If conditions declined we will be entirely dependent on news of QE2. That 2:PM report will be critical.

The S&P pulled back to support at 1160 and saw a decent rebound on short covering just before the close. Volume was strong today at 9.65 billion shares but heavily skewed to the downside as stop losses were hit in volume. Resistance is now 1185 and real support 1150. That gives us a wide range to wander until November 3rd.

S&P-500 Chart

The Dow tried to push over 11,100 for a week and failed to hold its gains. The expectations for strong earnings did not last and the weakness in the financial sector weighed it down.

On the positive side the uptrend resistance from June (blue dashed line) has turned into support. The trend is intact as long as that support holds. A break there targets 10,700 and that would be a serious decline on top of our 165-point loss today.

Seven Dow stocks lost more than a buck with IBM -4.80, CAT -1.69, CVX -1.69, BA -1.18 and XOM -1.16 the biggest decliners. I doubt IBM will continue its decline and crude prices should recover when the dollar loses traction. That will give the Dow some support but other than short covering I don't see any big market moving events pushing it higher. Earnings from Dow components BA, AXP, MCD, HON and VZ will not have the same dynamic pop for the Dow as BAC, JPM and IBM.

Dow Chart

A -44 point loss on the Nasdaq is a lot but we should look at the glass as half full and be thankful prior resistance at 2435 returned as support for the third time in the last five days. We should view that as initial support and 2400 as the next level to test.

With the major big cap techs all severely negative we should be glad that 2435 held. Unfortunately there are not a lot of high profile tech earnings left this week. We need the dip buyers to come in at the open and then hope for positive news from Ebay, SanDisk, Amazon and a couple others to keep the rally alive.

Personally the way the big caps have been pummeled on various aspects of their fairly decent earnings does not give me much hope that scenario will come true. I would like to believe the QE2 story will overcome various deficiencies in future earnings but this week has not been a prime example of that thesis. I believe a break back below 2400 could lead to a significant decline.

Nasdaq Chart

In summary I believe market sentiment took a serious blow this week. The shorts are probably recovering some of their confidence while the dip buyers are questioning the reasoning of buying the QE2 rumor. Today's decline was steep but it was not a major problem. This rally has overcome several major declines in its six weeks of gains.

The market was severely overbought and needed a good face slap to wake it up. It depends now on whether traders decide enough is enough and start taking profits or they suck it up and race back in to buy the dip. Time will tell. I am still a dip buyer today but a further material decline on Wednesday could quickly change my mind.

Jim Brown

New Plays

Breakout Candidate

by Scott Hawes

Click here to email Scott Hawes


Jeffries Group, Inc - JEF - close 23.54 change +0.02 stop 22.75

Target(s): 25.10, 25.75
Key Support/Resistance Areas: 25.85, 25.25, 24.25, 23.50, 23.00
Current Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see entry point below

Company Description:
Jefferies Group, Inc. and its subsidiaries operate as global securities and investment banking firm serving companies and their investors. The Company provides investors fundamental research and trade execution in equity, equity-linked and fixed income securities, including investment grade corporate bonds, high yield and distressed securities, government and agency securities, asset-backed securities, municipal securities, bank loans, leveraged loans, and emerging markets debt, as well as derivatives and engage in securities financing and commodities derivative trading activities. It offer capital markets, merger and acquisition, restructuring and other financial advisory services. (source: company press release or website)

Why We Like It:
Investment Banks are beginning to trade well, especially those that have little risk exposure to mortgage backed securities like many of the money center banks. JEF should do well in this era of corporate advisory services and M&A activity. JEF could even be a takeover candidate themselves. I like JEF to trade higher as long as the stock breaks out above today's highs. Technically, the volume patterns look good and JEF has closed above short term resistance from the past couple of weeks at $23.50 for two consecutive days. I suggest we enter long positions if the stock trades to $23.91 which is above today's highs. Our stop will be $22.75 and our targets are near the September and August highs, which are +5% and +7.5% from our trigger.

Suggested Position: Long JEF stock if it trades to $23.90
Options Traders: Buy December $24.00 CALL, current ask $1.10

Annotated chart:

Entry on October xx
Earnings Date 1/20/11 (unconfirmed)
Average Daily Volume: 1.1 million
Listed on October 19, 2010

In Play Updates and Reviews

Winner Closed, Three Positions Opened

by Scott Hawes

Click here to email Scott Hawes

Editor's Note: Good evening. I am expecting quite a bit of volatility in the coming days/weeks on both the upside and downside. Often times volatility signals an important turning point (or at least reflection point) in the current trend. It is going to take a monumental effort by the bears to do significant damage to the rally over the past six weeks. I do think we could see more selling but I also believe the dips will get bought. Our new plays this week have been break-out candidates which keeps things more conservative, i.e. entering positions when the stock is moving in the right direction as opposed to picking a top or bottom, which has been extremely challenging over the past six months. Staying nimble is key and working both sides of the market can be lucrative. I would view weakness as opportunities to tighten stops or take profits on short positions, while also considering launching new long positions with tighter stops. Please email me with any questions.

Current Portfolio:

BULLISH Play Updates

Boyd Gaming - BYD - close 7.61 change -0.20 stop 7.28

Target(s): 8.95, 9.20, 9.50
Key Support/Resistance Areas: 9.60, 9.25, 8.75, 8.00, 7.40
Current Gain/Loss: -7.20%
Time Frame: 1 to 2 weeks
New Positions: Neutral

10/19: BYD looked promising this morning but completely lost it in the afternoon. I suggest we keep our stop in place for now and not panic out of the position. BYD is still above the 20-day and 50-day SMA's and has support near current levels.

10/18: I do not see many changes from James' comments below. BYD experienced a relief rally after the Thursday/Friday sell-off. Broken support near $8.00 was a key level that BYD will have to contend with on bounces. Readers may want to consider exiting positions early or tightening stops to the $7.45 area to protect capital, especially considering the overbought broader market conditions.

10/16 (James): Uh-oh! BYD was showing some relative weakness on Friday. We were expecting a pull back but the $8.00 level should have offered stronger support. While I do think BYD has put in a bottom with the September low, I am somewhat concerned that shares are seeing above average volume lately. Normally above average volume on the rally, like we saw in early October, is bullish but we're also seeing strong volume on the pullback, which can be bearish. On a short-term basis I would expect BYD to hit support near $7.50 and its 50-dma. Readers may want to wait for a bounce from the $7.50 level before considering new bullish positions.

Current Position: Long BYD stock, entry was at $8.20

Entry on October 14, 2010
Earnings 10/27/10 (unconfirmed)
Average Daily Volume: 1.8 million
Listed on October 9, 2010

Companhia Brasileira de Distribuicao - CBD - cls: 37.26 chg: -0.35 stop: 37.45

Target(s): 39.00
Key Support/Resistance Areas: 35.00, 36.50, 39.00
Current Gain/Loss: +1.39%
Time Frame: 4 to 6 weeks
New Positions: Yes

10/19: CBD traded right down to our trigger of $36.75 and bounced nicely. The comments below all remain valid.

10/18: We are waiting to be triggered at $36.75 which I expect to happen in the coming days. This is a prior long term resistance area which should now be support. The comments from the play release below remain the same.

10/16: Shares of Brazilian grocery food chain CBD appear to be in breakout mode. The Brazilian economy continues to grow and the surging middle class likes to spend. This has pushed CBD toward all-time highs. Now normally I wouldn't list a stock in the $70s as a PremierInvestor play. However, CBD will see a 2-for-1 split on Monday morning (Oct. 18th). The stock should open around $38.20. I am suggesting we look to buy CBD on a pull back. Broken resistance near $73.50 (post-split will be $36.75) should be new support. Thus, use a trigger at $36.75 to open bullish positions. We'll use a stop loss at $34.75 since the $70 level (post-split: $35) should be additional support.

If triggered our first target is $39.00 (pre-split $78.00). Our second, longer-term target is $42.00. The inverse (bullish version) head-and-shoulders pattern would suggest a bullish target of $88 (post-split would be $44). The Point & Figure chart is very bullish with a price target of $101.00 (post-split $50.50).

Current Position: Long CBD stock, entry was at $36.75

Entry on October 19, 2010
Earnings Date 11/10/10 (unconfirmed)
Average Daily Volume: 545,000
Listed on October 16th, 2010

Hansen Natural Corp. - HANS - close: 49.73 change: -0.27 stop: 44.95

Target(s): 50.00, 52.50,
Key Support/Resistance Areas: 45.00, 47.50, 50.00, etc.
Current Gain/Loss: Unopened
Time Frame: 4 to 6 weeks
New Positions: Yes, see below for details

10/18 & 10/19: We are waiting for our trigger at $48.25. I like the set-up and suggest we remain patient. We could get a pullback in the coming days and using the dips as buying opportunities is the right strategy.

10/16: HANS is probably best known for their Monster brand energy drinks. The stock has been a monster in its own right and shares have been a popular momentum trade over the years. Well once again shares of HANS are surging higher. We'd like to hop on board but we don't want to chase it at these levels. I'm suggesting a trigger to buy the stock (or call options) at $48.25 since broken resistance at $48.00 should be new support. I'm suggesting a stop loss at $44.95 but we may want to raise the stop closer to the rising 50-dma (technical support) currently near 46.20.

If triggered at $48.25 our first target is $51.00. Our second target is $52.50. FYI: The point & figure chart is very bullish and is forecasting a long-term target of $78.

Suggested Position: BUY the stock at $48.25

- or -

BUY the November $50.00 calls (on a dip at $48.25).

Entry on October xx
Earnings Date 11/04/10 (unconfirmed)
Average Daily Volume: 4.5 million
Listed on October 16, 2010

Itron, Inc - ITRI - close 60.37 change -2.33 stop 57.45

Target(s): 63.00, 64.00, 65.00, 66.00
Key Support/Resistance Areas: 66.00, 64.00, 60.50, 59.00, 57.00
Current Gain/Loss: +0.20%
Time Frame: 1 to 3 weeks
New Positions: Yes

10/19: The correction came a little faster than I anticipated but ITRI hit our trigger of $60.25 to enter long positions. I am a little concerned about the strength of today's sell-off and we may need to exhibit some patience in the coming days. Tighter stops could be considered at $58.45. When the selling subsides ITRI should move back to the $63.00 level with ease and I would target incremental $1 moves higher from there, possibly all the way up to $66.00. I would view any further dips as buying opportunities with tighter stops.

10/18: Let's keep the strategy below as our trigger. My guess is ITRI will print $60.25 in the coming days as the broader market also corrects.

10/14 (James): So far we're still waiting on an entry point in ITRI. Shares held up pretty well with bulls immediately buying the dip this morning near $61.60. The trend is up but the stock is struggling with resistance near $63.00 and its exponential 200-dma. If you don't mind I would like to adjust our entry point strategy. Let's plan on buying the dip at $60.25, not 61.00 and if triggered at $60.25 we'll move the stop loss to $57.45.

Plus, just in case ITRI does not correct, I'd like to use a trigger to buy a breakout at $63.55. If this trigger is hit we'll move the stop loss to $59.49. The 200-dma near $65 is probably overhead resistance but I would aim for resistance near $67.50.

Current Position: Long ITRI stock, entry was at $60.25

Entry on October 19, 2010
Earnings 10/27/2010 (unconfirmed)
Average Daily Volume: 412,000
Listed on October 4, 2010

Mylan Inc. - MYL - close: 18.83 change: -0.11 stop: 18.45

Target(s): 19.80, 20.45, 21.00, 22.00
Key Support/Resistance Areas: 18.50, 19.00, 20.00, 20.50
Current Gain/Loss: -2.18%
Time Frame: 4 to 6 weeks
New Positions: No

10/19: I could not find any follow-up news my 10/18 comments. MYL is hanging tough and is holding onto its upward trend line that began on 8/31 and its 20-day SMA. I've adjusted the targets slightly.

10/18: MYL got hit hard today on news that a preliminary injunction against GlaxoSmithKline and Apotex pertaining to the generic drug Paxil CR was denied in US District Court of New Jersey. After the initial reaction the selling subsided and MYL bounced after the company said they are appealing the decision. Regardless of the outcome, this is a new development and readers should use caution, especially considering the overbought broader market conditions. Our stop is in the right place if MYL breaks lower as this will signal a break in trend.

10/16: (James) MYL is a short squeeze candidate. Bigger picture the generic drug makers are facing a potential boom for the next few years as more brand name drugs lose their patent protection. On a short-term basis MYL just broke out over heavy resistance at $19.00 and its 200-dma following news the FDA has approved to generic versions of Merck's Hyzaar and Cozaar blood pressure drugs. Now don't get too excited here since TEVA has already begun selling generic versions of these drugs months ago but it does mean MYL can try and grab its slice of the pie. Technically MYL is seeing a bullish breakout and could see a short squeeze. The most recent data available listed short interest at almost 29% of the 260 million-share float.

I do consider this an aggressive trade so keep your positions somewhat smaller. Buy the stock now (or the calls) and target a move to $20.00, $21 and beyond. FYI: The P&F chart is forecasting at $33 target.

Current Position: Long MYL stock, entry was at $19.25
Options Traders: Long November $20.00 calls

Entry on October 18, 2010
Earnings Date 10/28/10 (unconfirmed)
Average Daily Volume: 4.5 million
Listed on October 16, 2010

PerkinElmer, Inc - PKI - close 22.79 change -0.81 stop 22.05 *NEW*

Target(s): 23.60, 24.25, 24.85
Key Support/Resistance Areas: 25.40, 24.40, 23.30, 22.50
Current Gain/Loss: -1.34%
Time Frame: 1 to 2 weeks
New Positions: Yes, on pullbacks

10/19: Our +2% gain in PKI has turned into a loss with today's -3.4% decline. PKI has broken through its upward trend line from the July lows and its 20-day SMA, so now we have to turn to support levels. The stock has support at $22.50 and the rising 50-day and 200-day SMA's at $22.30 and $22.13. I suggest we protect the trade here and lower our stop $22.05 as PKI may be headed to test one of the SMA's just below. If support is not found at one of the three aforementioned levels the new stop still keeps losses relatively small while giving the trade room to work. Conservative traders may want to consider exiting positions now.

10/18: PKI regained all of Friday's losses and closed at new multi-month closing highs that haven't been seen since early May. However, the broader market is overbought so readers should use caution. Tighter stops in the $22.75 area could be considered to limit downside risk. James' comments below remain valid.

10/16 (James): There hasn't been any news on PKI lately and shares aren't moving much as they consolidate sideways. Traders bought the dip again at short-term technical support near the 10-dma and 20-dma on Friday. The trend is up but stochastics are suggesting this rally is losing steam. Yet that doesn't mean PKI can't keep climbing. Cautious traders might want to tight stops closer to the $22.50 level. I am a little concerned that PKI appears to be forming a bear-wedge pattern. Readers may want to keep their position size small. FYI: This company is due to report earnings on Nov. 4th. Analysts are estimating a profit of 29 cents a share.

Current Position: Long PKI stock, entry was at $23.10

Entry on October 12, 2010
Earnings 11/4/10 (unconfirmed)
Average Daily Volume: 1.4 million
Listed on October 11, 2010

Thompson Creek Metals - TC - close 10.76 change -0.82 stop 10.45

Target(s): 11.10, 11.75 (hit), 12.40
Key Support/Resistance Areas: 12.60, 11.80, 11.00, 10.55
Current Gain/Loss: -3.50%
Time Frame: 1 to 3 weeks
New Positions: Yes, on pullbacks

10/19: Ouch, the profit taking we feared came in full force today and our gain in TC was reversed into a loss. The Peoples Bank of China unexpectedly rose interest rates which caused the US Dollar to surge higher, and the whole commodity sector took a lambasting. It is too early to tell whether today's sell-off in commodities is the start of a bigger decline or a knee jerk reaction. Only time will tell but readers should use caution. TC found support at $10.64 today and also has support at $10.55. Our stop is just below these levels. I've added a lower target of $11.10 where readers should consider exiting positions or tightening stops on bounces.

10/18: TC drifted sideways in a fairly tight range on Monday. The stock closed near its highs and continues to look bullish, however, be aware of some possible profit taking in the coming days which I would use an opportunity to launch new positions. If TC breaks above last week's highs there is little resistance until the $12.50 area which is just above our final target. Tighter stops could be considered in the $10.80 area to limit downside risk.

10/16 (James): There is no change from my Thursday comments on TC. The stock saw a little volatility on Friday morning but consolidated sideways into the weekend. A pull back toward the $11.15-11.00 zone should be a new bullish entry point.

10/13: TC hit our first target at $11.75.

Current Position: Long TC stock, entry was at 11.15

Options Traders: Long November $11.00 CALL

Entry on October 12, 2010
Earnings 10/4/2010 (unconfirmed)
Average Daily Volume: 1.7 million
Listed on October 9, 2010

TJX Companies - TJX - close 44.56 change -0.64 stop 43.35

Target(s): 46.95, 48.20
Key Support/Resistance Areas: 48.50, 47.00, 45.40, 43.50
Current Gain/Loss: Unopened
Time Frame: 2 to 4 weeks
New Positions: Yes, see entry point below

Comments :
10/19: I suggest we play this conservative and keep the set-up in place with a breakout trigger of $45.52. A dip towards $43.75 would catch my eye as another possible bullish entry point.

10/18: TJX has been consolidating above its rising 20-day SMA for the past couple of weeks and is forming an ascending triangle along the way. Resistance is $45.40 and I suggest readers use a breakout to enter long positions. Let's use a trigger of $45.52 and target a move back towards the stock's 52-week highs. Our targets are $46.95 and $48.20 and our stop is $43.35. More nimble traders may want to try to time an entry on a pullback in the $44.50 area.

Suggested Position: Long TJX stock if it trades to $45.52

Entry on October xx
Earnings Date 11/16/10 (unconfirmed)
Average Daily Volume: 3 million
Listed on October 18, 2010

BEARISH Play Updates

FLIR Systems - FLIR - close 25.06 change -0.70 stop 27.05

Target(s): 24.40, 23.70, 21.60
Key Support/Resistance Areas: 28.00, 27.00, 26.50, 25.50, 24.00
Current Gain/Loss: +2.91%
Time Frame: 4 to 6 weeks
New Positions: Yes, see below

10/19: FLIR continues to look vulnerable and if the correction continues our first two targets could be hit relatively quick. I suggest being ready to take profits or tighten stops to protect them as they approach. I've made some adjustments to the targets.

10/18: FLIR has rallied right into resistance (prior support from February) which also happens to be its 20-day SMA. FLIR also has a downtrend line and its declining 50-day SMA just overhead in the $25.25 area. I like new positions here and suggest playing for a pullback of $1.50 to $2.50.

10/16 (James): On Thursday night I adjusted our entry point to launch bearish positions immediately. FLIR gapped open higher on Friday morning at $25.81 (Thursday's high and our new entry point). The rally failed at $26.00 but FLIR still managed a +0.9% gain, showing some relative strength. I still think this is just an oversold bounce and the overall trend is down. I would still launch positions at current levels. More conservative traders could wait and watch for a failed rally near the 50-dma instead as their entry point. FYI: FLIR is due to report earnings on Oct. 21st, before the opening bell. Analysts are expecting a profit of 38 cents a share. We normally don't like to hold over earnings. Readers may want to adjust their stops prior to the report.

Current Position: Short FLIR stock, entry was at $25.81

Entry on October 15, 2010
Earnings Date 10/21/10 (unconfirmed)
Average Daily Volume: 1.7 million
Listed on October 2nd, 2010

Xilinx, Inc. - XLNX - close 26.33 change -0.00 stop 27.42

Target(s): 25.35, 25.00, 24.60
Key Support/Resistance Areas: 26.75, 26.00, 25.30, 25.00, 24.00
Current Gain/Loss: -2.05%
Time Frame: 1 to 2 weeks
New Positions: Yes

10/19: This is turning out to be a frustrating trade as the dips in XLNX keep getting bought. The company reports earnings tomorrow after the bell so if you are not comfortable holding positions close them tomorrow. I've adjusted the targets and suggest readers use weakness to consider exiting positions. My comments below have not changed.

10/18: XLNX was down nearly -2.5% in early trading today but the stock found support at its 50/200 day SMA and drifted higher into the close, regaining most of those losses. XLNX has not performed as well as the broader market since its April highs and is at resistance levels. If the broader market corrects here XLNX and the Semi's could fall hard and this is when readers should exit positions and book profits. If XLNX takes out today's lows I believe the selling could quickly gain momentum.

10/16 (James): I am still neutral on XLNX as a bearish trade. The semiconductor index is still trying to dig its way out of a bearish trend. Bigger picture XLNX actually has a more bullish posture than the SOX index. Depending on your time frame and bias XLNX is rising in a new bullish channel or consolidating in a bear flag pattern. It is true that the 50-dma just crossed under the 200-dma (a "death cross), which is normally a very bearish development. I'll repeat my comments from Thursday: If you're going to launch new bearish positions consider using a very tight stop loss!

10/14 (James): I am somewhat neutral on XLNX at the moment. I do see plenty to worry about. The MACD is about to roll over into a new sell signal. The simple 50-dma is about to perform a "death cross" and slip under the 200-dma, which is normally a very bearish event. RSI is rolling over. On Wednesday the stock produced a failed rally at $27.00. However, at the same time XLNX has a bullish trend of higher lows dating back to late August. If you're going to launch new bearish positions consider using a very tight stop loss!

Current Position: Short XLNX stock, entry was at $25.80

Options Traders: Long November $25.00 PUT

Entry on October 7, 2010
Earnings: 10/20/10 (unconfirmed)
Average Daily Volume: 7.3 million
Listed on October 6, 2010


SanDisk Corp - SNDK - close 38.13 change -0.78 stop 42.20

Target(s): 38.25, 37.55 (hit), 35.60
Key Support/Resistance Areas: 41.00 to 40.00, 38.00, 36.00
Final Gain/Loss: +7.49%
Time Frame: 1 to 2 weeks
New Positions: Closed

10/19: Per last night's comments, we took profits on SNDK for a much needed +7.5% gain when the stock hit our $37.55 target. We are flat the position. Readers who may still have positions should protect profits and refer to the comments below as they remain valid.

10/18: After gapping higher SNDK sold off the entire day. Our gain is currently more than +4% and I expect to see more selling in the coming days. The stock has a lot of overhead resistance and considering the broader market's overbought conditions SNDK could fall fast. However, James' comments regarding M&A activity in the space should not be ignored. As such, I suggest readers use weakness to take profits or tighten stops to protect them. SNDK is down nearly -1.50% in the after hours as of this writing. Therefore, our first target of $38.25 (raised 10 cents) is likely to get hit tomorrow morning. I've also adjusted the 2nd target up to $37.55 and will close positions if this is reached.

10/16 (James): Some of the storage device stocks have been rising on buyout rumors. SNDK hasn't been mentioned lately as a target but the M&A rumors in the sector could lift shares anyway. I don't see any changes from my comments on Thursday. There are a lot of conflicting signals and cross currents with SNDK so we're not suggesting new positions at this time. However, the $40.00 level should be significant resistance and more aggressive traders can look for failed rallies in this area as possible entry points. FYI: SNDK is due to report earnings on Oct. 21st. The street expects a profit of $1.05 a share.

Closed Position: Short SNDK stock at $37.55, entry was at $40.59

Annotated chart:

Entry on October 13, 2010
Earnings: 10/21/10 (unconfirmed)
Average Daily Volume: 11 million
Listed on October 12, 2010