Option Investor

Daily Newsletter, Monday, 10/25/2010

Table of Contents

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

Market Wrap

Fed Easing Hopes Boost Stocks Again

by Todd Shriber

Click here to email Todd Shriber
With economic growth coming in fits and starts, the Federal Reserve will not be shy about doing what it can to prop up the economy. The printing presses are working overtime so the Fed can inject more money into the economy and purchase even more Treasuries. All of this is good news for stocks, at least in the near-term, as speculation that the Fed wants to add to its Treasury holdings helped stocks manage some small gains on Monday. The S&P 500 extended three consecutive weekly gains by adding 0.2% today.

Stats Table

The big economic data point that was out today was September existing home sales, which showed a surprise 10% increase, according to the National Association of Realtors. Since the July low at 3.84 million units, existing home sales have jumped 18% since then and inventory has been whittled down to just under 11 months.

Sounds good, right? Well, even with the 10% gain, single-family home sales are still almost 20% below where they were a year ago. Prices are down more than 3% since and as the charts below illustrate, the real estate market in the U.S. has been in a tailspin for several years with only artificial help in the form of help from Uncle Sam keeping the situation from being much worse.

Home Sales Chart

Home Inventory Chart

The G-20 wrapped up its meeting and in what cannot be described as a surprise, the U.S. Dollar Index was up to its old tricks and that is moving lower. The index is down more than 7% since August, which has helped the S&P 500 gain 13% in the same time frame. Adding to the anecdotes that illustrate just how weak the greenback is, it fell to a 15-year low against the yen today, according to Bloomberg News.

What is happening is that the rest of the world is expecting the Fed, the Bank of England and the Bank of Japan to engage in some more quantitative easing, you know, because the first go round was successful. For now that means it is safer to be long stocks and commodities and short the dollar.

Here is another shocker and I hope you can sense the sarcasm. Financials were again the worst performers in the S&P 500 today. Save for a 2.4% jump in Citigroup (C), the third-largest U.S. bank, which came at the hands of Goldman Sachs adding to Citi to the widely followed conviction buy list, the rest of the group was pretty ugly.

Bank of America (BAC) shed 2.45% and touched a new 52-week low today. The stock now trades at 0.53x book value. JPMorgan Chase gave up 1.7% and is within earshot of a new 52-week low. The shares trade at less than 1x book value. Wells Fargo (WFC) dropped 1.5%. At least that name trades for 1.22x book value. Believe it or not, Citi may be one of the more compelling options in the sector. The bank has yet to be tied to the foreclosure mess and its international exposure is another point in the stock's favor.

Citigroup Chart

It was a quiet day on the mergers and acquisitions front, especially for a Monday. The big deal of the day was news that private equity giant Carlyle Group is in talks to acquire CommScope (CTV), a telecom equipment maker, for $3 billion. That news sent shares of North Carolina-based CommScope up by more than 30%. Carlyle's $31.50 per share offer values CommScope at a 36% premium to where the stock closed on Friday.

What is important here is not so much that CommScope is being acquired, which is only important to those that are long the stock, but the fact that private equity is back and back in a big way. The financial crisis spelled doom for leveraged buyouts and while that style of M&A is not back to its 2005-2006 levels, private equity firms have committed $133 billion to new deals thus far in 2010, more than double the sum at this time last year, according to Bloomberg data.

While there have been 14 deals of over $1 billion in the telecom space over the past five years, according to Bloomberg data, CommScope cautioned that no official deal has been reached and there can be no assurances that the talks with Carlyle will result in an official takeover.

CommScope Chart

Staying in the tech sector, Texas Instruments (TXN) delivered third-quarter results after the market closed, saying that net income jumped 60% as post-recession demand picked up. The company said it earned $859 million, or 71 cents a share, compared with $538 million, or 42 cents a share, a year earlier. Revenue surged 30% $3.74 billion. Analysts were expecting a profit of 69 cents a share on revenue of $3.69 billion.

Analog chips, which are used in mobile phones and other electronic devices, as usual were the big driver for TI in the third quarter, accounting for $1.581 billion in sales, up 35% from a year earlier. Sales of chips used in cars and communications surged 47% to $579 million.

All would seem well with those results, but TI warned that fourth-quarter results would not be as rosy. The fourth quarter is usually the weakest time of the year for tech companies and TI does not expect this year will be any different, citing weak consumer demand.

For the current quarter, TI expects to earn 59 cents to 67 cents a share on revenue of $3.36 billion to $3.64 billion. Analysts were forecasting a profit of 63 cents a share on sales of $3.51 billion. That news had TI shares down by just over 1% in after-hours trading.

Texas Instruments Chart

Looking at the charts, the S&P 500 got off to a fine start this morning, easily making its way beyond resistance at 1185 to trade as high as 1196, but when all was said and done, the index closed less than a point above its intractably low to finish just barely above 1185. Even when 1185 is taken care of the, S&P 500 will face resistance again at 1195. The 1175 area should be support.

S&P 500 Chart

A similar pattern was seen with the Dow as the blue-chip index easily made its way above resistance at 11,200 early in the trading session only to give up those gains as the day went along. After trading as high as 11,247, the Dow's close at 11,164 can certainly be considered a disappointment.

There are plenty of Dow components reporting earnings this week with DuPont (DD) kicking the week's reports off tomorrow. Procter & Gamble (PG) follows on Wednesday and three Dow components follow on Thursday. In other words, this would be an ideal week for the Dow to close above that resistance at 11,2000.

Dow Chart

The Nasdaq is facing significant resistance at 2520 and was able to trade above 2500 for a little while today, but it may be a source of concern that the index closed barely above its low of the day and actually closed below its opening level. Looking at some of the rapid price appreciation recently seen among the Nasdaq's most important constituents, it would not be surprising to see some profit taking here. If the index fails to make its way to 2520, a decline to 2450 would not be unreasonable.

Nasdaq Chart

It was a ho-hum day for small caps as the Russell 2000 did what the other indexes and that is to tantalize us with a move an important resistance level only to close below that area. In this case, the Russell 2000 traded as high as 714, above resistance at 710, but could only muster a close just below 708. The Russell 2000 has bumped into 710 a couple of times and if it can clear that level, that would be a fresh buy signal because next resistance looms a long way off at 740.

Russell 2000 Chart

It would not be surprising to see stocks take a knee this week and just trade in a tight range heading into Election Day and the Fed meeing on November 3. The best case scenario for the election's outcome is probably priced in as highlighted by the fact that if you want to head over to Intrade and bet on the Republicans taking the House, you will not make much money as those contracts are showing the chances of the Republicans controlling the House are 90%.

Once we get into next week, it becomes a matter of QE2. If the Fed goes back for more of this dubious policy, then stocks will continue to rally. If not, the result could be painful.

New Plays


by Scott Hawes

Click here to email Scott Hawes


Citigroup Inc - C - close 4.21 change +0.10 stop 3.60

Target(s): 4.60, 4.75, 4.90
Key Support/Resistance Areas: 4.30, 4.00
Current Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see entry point below

Company Description:
Citigroup Inc. (Citigroup) is a global diversified financial services holding company. The Company provides consumers, corporations, governments and institutions with a range of financial products and services. As of December 31, 2009, Citigroup had approximately 200 million customer accounts and did business in more than 140 countries. Citigroup operates through two primary business segments: Citicorp, consisting of its Regional Consumer Banking (RCB) businesses and Institutional Clients Group (ICG), and Citi Holdings, consisting of its Brokerage and Asset Management (BAM), Local Consumer Lending (LCL), and Special Asset Pool (SAP). (source: company press release or website)

Why We Like It:
C is trading very well in comparison to its peers (BAC, JPM) and has been a relative out performer. I think the stock is poised to break over $4.30 and there is limited resistance overhead. I suggest readers initiate long positions on a dip or a breakout. We'll use a trigger of $4.11 on a dip and $4.34 on a breakout. Our initial stop will be $3.60 and it will be adjusted once the position is opened.

Trigger: $4.11 or $4.34 Suggested Position: Long C stock
Options Traders: Buy December $4.00 CALL, current ask $0.31

Annotated chart:

Entry on October xx
Earnings Date More than two months (unconfirmed)
Average Daily Volume: 523 million
Listed on October 25, 2010

In Play Updates and Reviews

All Positions Positive

by Scott Hawes

Click here to email Scott Hawes
Current Portfolio:

BULLISH Play Updates

Boyd Gaming - BYD - close 8.38 change +0.39 stop 7.42 *NEW*

Target(s): 8.65, 8.95, 9.20
Key Support/Resistance Areas: 9.60, 9.25, 8.75, 8.00, 7.40
Current Gain/Loss: +2.20%
Time Frame: 1 to 2 weeks
New Positions: Yes

10/25: Investors liked BYD's earnings report this morning and the stock surged +4.8% higher. $8.00 should now act as support on any dips. Our first target is 12 cents above today's high. Ultimately, I think BYD makes a higher high and trades up towards $8.95, however, a broader market correction could provide some dips which I would view as buying opportunities.

10/23: BYD has continued to bounce after finding support at its 20-day SMA and key long term support/resistance level in the $7.40 to $7.60 area. BYD gained almost +4% on Friday. Resistance is at $8.00 and also keep an eye on the 100-day SMA near $8.30. Let's raise the stop to $7.42.

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: 37.09 chg: +0.78 stop: 34.75

Target(s): 39.00
Key Support/Resistance Areas: 35.25, 36.50, 39.00
Current Gain/Loss: +0.93%
Time Frame: 4 to 6 weeks
New Positions: Yes

10/25: CBD has found support at its 20-day SMA and regained all of Friday's losses. However, the stock may be in a bear flag and if the broader market corrects CBD may trade down $35.25 which I view as buying opportunity. Tighter stops could be considered at $35.90 which is below Friday's low.

10/23: CBD has been drifting lower since the stock split on Monday. The stock has support near current levels and down to the $35.00 level. I would view dips as buying opportunities.

10/16: (James) 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 Premier Investor 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: 51.59 change: -0.09 stop: 46.90

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

10/25: We need to remain patient and use dips as buying opportunities. $49.25 could also be considered an entry point. This is near the swing low on 10/19 after HANS broke out higher. If readers are considering call positions on a dip I suggest buying the December strikes. I've also raised the stop to $46.90.

10/21 & 10/23: 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. I would not chase the stock at current levels. Let's be patient.

10/16: (James) 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 December $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 62.62 change +1.91 stop 58.45

Target(s): 63.00, 64.00, 65.00, 66.00
Key Support/Resistance Areas: 66.00, 64.00, 63.00, 60.50, 59.00, 57.00
Current Gain/Loss: +3.93%
Time Frame: 1 to 3 weeks
New Positions: Yes

10/25: ITRI surged +3.15% higher today. I could not find any news to cause the spike but I'm not complaining. The stock now needs to contend with the $63.00 resistance level and considering the broader market's overbought conditions ITRI could experience a pullback. There is support in the $60.50 to $61.00 area.

10/23: ITRI is struggling at its 20-day and 100-day SMA's. A dip towards the 50-day SMA ($59.00 area) is not out of the question. I continue to view dips as buying opportunities. We are targeting a move back up to its recent highs at $63.00 with incremental $1 moves higher from there, possibly all the way up to $66.00.

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

Jeffries Group, Inc - JEF - close 24.03 change +0.20 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: +0.25%
Time Frame: 3 to 4 weeks
New Positions: Yes

10/25: JEF bounced back today but is struggling at its 200-day SMA. $23.50 offers solid support. My comments from the weekend remain valid.

10/23: JEF printed a bearish engulfing candlestick on Friday and I doubt the stock will be able to swim against the current of a broader market correction, should a correction happen. The stock gapped higher on Thursday and then Friday it retraced the gain and closed the gap. The 50-day SMA and prior resistance is just below near $23.50. The stock and price action look good to me but we are likely going to need the market to continue its march higher. For now, I continue to view dips as buying opportunities.

10/19: 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 $23.91
Options Traders: Buy December $24.00 CALL, current ask $1.10

Entry on October 21, 2010
Earnings Date 1/20/11 (unconfirmed)
Average Daily Volume: 1.1 million
Listed on October 19, 2010

Mylan Inc. - MYL - close: 19.65 change: +0.27 stop: 18.65 *NEW*

Target(s): 19.80 (hit), 20.40, 21.00, 22.00
Key Support/Resistance Areas: 18.50, 19.25, 19.80, 20.50
Current Gain/Loss: +2.08%
Time Frame: 4 to 6 weeks
New Positions: Yes, on pullbacks

10/25: MYL continued higher today and reached our first target of $19.80. There is resistance at $19.80 and I would not be surprised to see the stock pullback if the broader market corrects. The 200-day SMA and prior resistance at $19.25 should now act as support on dips. MYL is bullish as long as the stock remains above its rising 20-day SMA and upward trend line. I've raised the stop to $18.65.

10/23: MYL closed above its 200-day SMA and at a new high not seen since 5/28. Everything looks good here but we need to see follow through. We several targets and will begin to tighten stops as they approach.

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.

Note: 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 23.61 change +0.18 stop 22.32 *NEW*

Target(s): 23.60 (hit), 23.90, 24.40
Key Support/Resistance Areas: 25.40, 24.40, 23.30, 22.50, 22.15
Current Gain/Loss: +2.21%
Time Frame: 1 to 2 weeks
New Positions: Yes

10/24: PKI reached our first target today. The stock needs to take out today's high or it could pullback as a bearish double top pattern may be forming. There is support at $23.30, the rising 20-day SMA and upward trend line. Tighter stops could be considered near $22.75. I continue to view dips as buying opportunities.

10/23: PKI has bounced back nicely after the sell-off early last week. The stock close above a long term support/resistance level of $23.30 and is now dealing with a two month long congestion area (b/w $23.30 and $24.45) from March/April. I've adjusted the targets and suggest readers use strength as an opportunity to exit positions or tighten stops to protect profits. We've moved the stop up to $22.32.

10/21: PKI came within 6 cents of our first target. If the broader market holds up we should have no issues reaching our targets. Our stop is below the 200-day SMA and two support levels.

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

TJX Companies - TJX - close 45.69 change +0.83 stop 44.10 *NEW*

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 :
10/25: TJX broke out of the ascending triangle today and hit our trigger to launch bullish positions. Let's raise the stop $44.10 and keep a tight leash on this in case a more meaningful broader market correction occurs. Our first target is $46.95.

10/21 & 10/23: $45.40 has acted like a brick wall in TJX since late September. If the stock breaks above the high and tight bullish ascending triangle it should move higher quickly. We are playing the breakout with a trigger of $45.52.

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

Leggett & Platt, Inc. - LEG - close 20.29 change -0.72 stop 21.75 *NEW*

Target(s): 19.80, 19.20
Key Support/Resistance Areas: 22.00, 21.70, 21.50, 21.30, 20.55, 19.70, 19.00
Current Gain/Loss: +0.98%
Time Frame: 1 to 3 weeks
New Positions: Yes, see trigger

10/25: LEG triggered our entry for bearish positions at 20.49 as the selling continued and the stock broke below Friday's low. We are looking for a quick move towards the July and August lows. I've lowered the stop $21.75 and raised our targets by 10 cents each. My comments from the play release are below.

10/23: Shareholders of LEG have been taken on a wild ride as of late. After plummeting -24% from its May highs to August lows, the stock went up in a straight line until 10/13, gaining +26% along the way. On Thursday after the bell the stock reported earnings and they were terrible. The company missed earnings, missed revenues, and lowered guidance. The company said that "certain markets primarily related to residential furnishings, weakened noticeably in the third quarter and as a result, third quarter sales were lower than those in the second quarter, which rarely occurs." The stock lost -8% on Friday and I do not believe the selling is done. I suggest we capitalize on the momentum and initiate short positions if LEG trades to $21.46 (above Friday's high and near the 200-day SMA) or breaks below $20.49 (below Friday's low). Conservative traders may want to wait for the break down. All of the moving averages are overhead and I suspect there are still many unhappy investors looking to dump the stock. We'll place a tight initial stop overhead at $22.05.

Trigger: $21.46 or $20.49

Suggested Position: Short LEG stock
Options Traders: BUY the December $20.00 PUT, current ask $0.75

Entry on October 25, 2010
Earnings Date: More than two months (unconfirmed)
Average Daily Volume: 1.5 million
Listed on October 23, 2010

Pulte Group, Inc - PHM - close 8.11 change -0.13 stop 8.66 *NEW*

Target(s): 7.75, 7.30, 7.00
Key Support/Resistance Areas: 9.00, 8.00, 7.00, 6.50
Current Gain/Loss: +0.49%
Time Frame: 1 to 3 weeks
New Positions: Yes

10/25: PHM saw a quick spike higher this morning but the sellers showed up and the stock collapsed towards Friday's lows, losing -1.58% on the day. I've added a target of $7.75 and adjusted the remaining targets. I suggest readers tighten stops or exit positions if PHM trades down towards $7.75. This produce nearly A +5% gain.

10/23: PHM is consolidating below all of its moving averages and feels like it is ready to take a nose dive. On the intraday charts the stock is forming a symmetrical triangle in that prices are coiling for a break out, which in reality could be higher or lower. I expect it to be lower as we are due for healthy broader market correction. However, I've lowered the stop to $8.66 in case we are wrong. $7.70 is an area readers may want to consider exiting positions or tightening stops if PHM gets there.

Note: We will most likely experience some volatility in this trade so please use appropriate position size to manage risk. I also like an option play here so that your risk is better defined.

Current Position: Short PHM stock, entry was at $8.15 Option Traders: Long December $8.00 PUT

Entry on October 21, 2010
Earnings Date 11/3/10 (unconfirmed)
Average Daily Volume: 4.5 million
Listed on October 16th, 2010