Option Investor

Daily Newsletter, Wednesday, 10/27/2010

Table of Contents

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

Market Wrap

QE2 Too Small?

by James Brown

Click here to email James Brown

Market Stats

The stock market stumbled out of the gate this morning as investors reacted to a bounce in the U.S. dollar, commodity weakness, and concerns over the Fed's expected quantitative easing next week. The economic data today was mixed with the durable goods orders suggesting the manufacturing sector in our economy is starting to lose momentum. New home sales were better than expected. At the end of the day a string of better than expected earnings results from the technology sector helped buoy the markets and lift the NASDAQ and the semiconductor index (SOX) into positive territory.

Everyone expects the Federal Reserve to launch a new round of quantitative easing (QE2 for short) at the FOMC meeting next week. These expectations are so big they have been powering the stock market rally for several weeks now and pushing the U.S. dollar lower. Bank of America is forecasting the Fed to announce a $1 trillion QE program. The minds at Goldman Sachs believe the Fed will embark on a $2 trillion program but most estimates seem to fall in the $500 billion to $1 trillion range. Thus investors were a little uncomfortable this morning when the Wall Street Journal released their opinion that the Federal Reserve will be much more timid in their QE2 plans. Instead of announcing some huge "shock and awe" number (in the trillions) the WSJ is suggesting the Fed will only announce a $250 billion program as the first step. This way the Fed can slowly roll out $250 billion chunks if they feel the need to and at the same time they can end the program when the economy improves.

Honestly today's opinion by the WSJ and market reaction to it could be a good thing. I have been concerned that expectations are so big for the Fed's QE2 announcement that the market would likely correct sharply in a typical sell-the-news sort of move no matter what the Fed says. Now the WSJ has helped adjust investors expectations (a little) that the QE2 news next week may not be the panacea we've been expecting. Of course the real impact of more QE was always open for debate. The WSJ report today had an impact on the dollar, commodities, and the bond market.

Weekly Chart of the UUP (U.S.dollar) ETF:

Chart of the UUP (U.S.dollar) ETF:

Chart of the GLD gold ETF:

The dollar saw a decent bounce as traders reacted to the WSJ report. If the QE2 program isn't big enough then the dollar has probably been oversold. The dollar bounce sparked additional profit taking in commodities and commodity-related stocks. Gold futures lost $16.00 to close near $1,322 an ounce. Silver prices retreated -1.79% to $23.40 an ounce. Copper prices slipped from 27-month highs with a -2.4% pull back. Crude oil also felt the dollar's gain as oil prices dropped -0.74% to close under $82.00 a barrel. The weekly EIA oil inventory numbers also contributed to oil weakness. Economists were expecting a one-million barrel gain in inventories and the EIA said oil supplies jumped five million barrels.

Reaction to QE expectations and the dollar's strength was also evident in the U.S. bond market. Bond yields move higher as bond values decline and the 10-year treasury bond fell for the sixth day in a row - the longest decline in two years. Yields on the 30-year treasury note closed above 4% for the first time in several weeks. The 10-year yield hit 2.71%, which is a big move from the 52-week low of 2.33% just over two weeks ago. Comments from the very influential Bill Gross of PIMCO definitely made headlines today. Mr. Gross manages PIMCO's Total Return Fund, the largest mutual fund in the world with assets of more than $255 billion. In his comments released this morning Gross suggested that the Fed's QE2 will probably end the 30-year bull market in bonds. If the Federal Reserve is going to print trillions of dollars to pay for this QE then it will definitely create inflation. Gross actually called the Fed's QE2 program "somewhat of a Ponzi scheme". Investors are growing more worried about inflation and the recent 5-year TIPS auction of inflation-protected securities, actually sold with a negative yield this week.

Chart of the Yield on the 10-year U.S. Bond:

Markets overseas were generally lower today. The drop in commodity prices fueled profit taking across Asia. The Chinese Shanghai index lost -1.4% and the Hong Kong Hang Seng fell -1.85%. The Japanese NIKKEI managed to close in positive territory thanks to the dollar's bounce against the yen. Gains in Japan were limited by weakness in the banking sector.

The major European markets were down across the board. Stocks rallied from their morning lows but the lunchtime gains faded into losses and Wednesday delivered the biggest drop they've seen in weeks. Market weakness was accelerated by the disappointing durable goods data in the U.S. and the WSJ report on QE2. Earnings disappointments from large European companies like SAP and Heineken didn't help. The Greek market lost -1.9% after the country's Finance Minister said their review of the 2009 budget showed Greece's deficit was actually higher than 15% of their GDP. At the end of the day the German DAX slipped -0.69%. The French CAC-40 fell -0.9% and the English FTSE lost -1.07%.

There were two economic reports out this morning, the Durable Goods orders and the new home sales data. The Commerce Department said durable goods orders rose +3.3% but that was fueled by big gains in civilian aircraft demand. Economists were only expecting a +2% rise. Yet excluding +15.7% jump in transportation the durable goods orders actually fell -0.6%, which follows a +4.8% rise in August. This is another sign that the manufacturing sector in the U.S. is slowing down. Looking at the details in the report the shipments of durable goods dropped -0.4% after a -1.4% decline in August. Inventories continue to climb and September saw inventories grow +0.5% for the ninth monthly gain in a row. The very volatile transportation sector jumped +15.7% in September following a -8.8% decline in August. Drilling down even further most of that move was fueled by a +105% increase for civilian aircraft last month. Overall it was a disappointing report since the manufacturing sector had been a bright spot in the economy the last several months.

Economists were expecting September new home sales to grow +4.1% from 288,000 in August to 300,000 in September. The Commerce Department announced that sales actually hit an annual pace of 307,000 last month (+6.6%). While it is improvement we're still very low and close to the all-time low of 282,000 set back in May. Demand for homes has crashed following the expiration of the new buyer tax credit. Back in April new home sales were at the 414,000 pace. Sales prices did improve +1.5% from August and up +3.3% from a year ago with the average new home at $223,800. Unfortunately the uptick in bond yields will put pressure on mortgage rates, which have been sitting near all-time lows. Rising rates won't help the housing market heal. Honestly, I'm not sure why anyone even bothers with this report since the margin of error is plus or minus almost 17%.

We are still in the middle of Q3 earnings season and corporate rules played a big part in today's market. Technology names continue to perform very well and buoyed the NASDAQ throughout the session. There were several companies reporting after the closing bell last night that saw big moves today and then a number of big reports this morning. I'll try and touch on them briefly. Aflac Inc (AFL) was up +2.1% to a new six month high after beating earnings by seven cents last night. Education stock DeVry Inc. (DV) soared +7% following its earnings beat last night. Jones Lang LaSalle (JLL) crashed -11% when the company missed estimates by 11 cents but beat on revenues. Broadcom (BRCM) soared +11.6% to new multi-year highs after reporting earnings last night that beat the street by five cents. BRCM management guided Q4 higher. Compellent Technologies (CML) rallied to a new three year high (+32% today) after reporting earnings yesterday that beat estimates by 11 cents.

Keeping the tech streak alive was F5 Networks (FFIV), which skyrocketed +14.6% to a new all-time high. FFIV reported earnings 7 cents better than expected and guided Q1 higher. FFIV management also announced a $200 million stock buyback program. JDA Software Group (JDAS) sprinted to its 200-dma before paring its gains to close up +12.9% following its better than expected earnings last night. NetGear Inc. (NTGR) rallied +12% to new two years highs after beating the street on profits and revenues and guiding higher. RF Microdevices (RFMD) closed at a new three-year high with a +15% gain following yesterday's earnings report where the company beat estimates on both earnings and revenues.

This morning investors were digesting earnings from Sprint, ConocoPhillips, Procter & Gamble, Northrop Grumman, and Whirlpool. Energy giant Conoco (COP) reported a profit of $1.50 a share, besting estimates of $1.46 but the stock dropped -1.2% likely due to oil's weakness today. Procter & Gamble (PG) eked out a very minor gain following its earnings of $1.02, which beat the street by two cents. PG's revenues were a minor miss at $20.12 billion but the company offered relatively bullish guidance for 2011. Defense contractor Northrop Grumman (NOC) closed virtually unchanged on the session near its 200-dma after reporting earnings of $1.64 a share. This beat Wall Street's estimates by 18 cents with NOC's revenues rising to $8.71 billion versus estimates of $8.56 billon. Sprint (S) saw its stock plunge nearly -10% after missing estimates by two cents with a net loss of -$0.30 a share. Whirlpool (WHR) spiked lower this morning but pared its losses to just -4% in spite of crushing the earnings number. Wall Street was looking for WHR to deliver 88 cents on $4.49 billion in revenues. WHR reported $1.02 in profits on $4.52 billion in revenues.

Looking at the market's major indices it appears that upward momentum is slowing fading. In truth I agree with Jim's assessment last night. There are only two trading days left in the month of October and yearend for many mutual funds. The market will likely drift sideways letting stocks close near their five-month highs, which will make your mutual fund statements look good and help ensure some yearend bonuses for fund managers.

On a very short-term basis the S&P 500's failed rally on Monday looks like a potential short-term top. Yet at the same time the S&P 500 saw a mini (bullish) double bottom today near 1172. The 1172-1173 zone was prior resistance. Take a step back and the S&P 500 still has a steady trend of higher lows and higher highs over the last several weeks. Yet if you step back even further the rally is slowing as it nears potential technical resistance at the 200-week moving average (see weekly chart below).

Short-term, if the 1172 level fails we can look for support near 1160. Overhead the S&P 500 probably has resistance near 1200 and then the 1220 level.

Daily Chart of the S&P 500 index:

Intraday Chart of the S&P 500 index:

Weekly Chart of the S&P 500 index:

The tech-heavy NASDAQ continues to rally thanks to a very strong earnings season. The NASDAQ Composite index has managed to rally toward round-number, psychological resistance near 2500. I wouldn't be surprised to see a last gasp spike toward the 2010 highs near April's close of 2530. You already know the NASDAQ and the NASDAQ-100 index (NDX) are very overbought and way overdue for a correction. On a short-term basis we can look for the NASDAQ Composite to find resistance near 2525-2530 and support near 2450 and 2400.

Chart of the NASDAQ index:

The small cap Russell 2000 index ($RUT) has stalled under resistance near the 710 level. The eight-week trend is still higher but momentum has clearly paused. For the moment the $RUT still has a bullish trend of higher lows. Small caps tend to be more volatile than the big caps so when the market does correction I would expect a pull back toward prior resistance near 670.

Chart of the Russell 2000 index:

I also want to point out that the Dow Jones Transportation index has rallied to resistance at its 2010 highs near 4800. Meanwhile the SOX semiconductor index has continued to rally with a strong move today (+3%) thanks to better than expected earnings news in the sector. The SOX is now testing resistance near 370 and is close to breaking the bearish trend of lower highs.

Chart of the Dow Jones Transportation index:

Chart of the SOX semiconductor index:

In summary, the market's trend is still up but momentum has slowed significantly. Money managers have already placed their bets ahead of the midterm elections and the FOMC meeting next week. We only have two trading days left until the fiscal year ends for most fund managers. Plus we only have four trading days until the elections and five trading days until the conclusion of the next FOMC meeting. The announcement on QE2 is expected around 2:00 p.m. on Tuesday, November 5th. You can bet we'll see some market volatility that afternoon and the following day. Until we get to November 5th I would expect stocks to slowly drift sideways.


New Plays


by Scott Hawes

Click here to email Scott Hawes


Mechel OAO - MTL - close 23.14 change -0.24 stop 24.47

Target(s): 22.30, 21.25, 20.25
Key Support/Resistance Areas: 24.25, 24.00, 23.60
Current Gain/Loss: Unopened
Time Frame: 1 to 3 weeks
New Positions: Yes, see trigger

Company Description:
Mechel OAO is an integrated steel, mining, ferroalloys and power company. The Company operates in four segments: mining, steel, ferroalloys and power. Its steel segment produces and sells semi-finished steel products, carbon and specialty long products, carbon and stainless flat products and value-added downstream metal products, including wire products, stampings and forgings. Its mining segment produces coking and steam coal, as well as iron ore and iron ore concentrate. The mining segment consists of coal and iron ore mines in Russia and the United States. Its ferroalloys segment produces and sells low-ferrous ferronickel, ferrochrome and ferrosilicon. Its power segment produces and sells electricity to internal and external customers. (source: company press release or website)

Why We Like It:
The steel sector has come under pressure as earnings and guidance have failed to impress investors. MTL finds itself in a bear flag and is consolidating under its 200-day SMA, while its 50-day and 20-day SMA's are just overhead. Conservative traders will want to see the stock break below $22.25 before launching bearish positions. However, considering the overbought broader market conditions initiating positions on a bounce sets up a very good risk reward trade. There is solid resistance in the $23.60 to $24.20 area so I suggest launching bearish positions at $23.55. Our stop will be above the 20-day SMA at $24.47 (which is rolling over and declining). If triggered our first two targets are -5% and -9% lower.

Trigger: $23.55

Suggested Position: Short MTL stock
Options Traders: BUY the December $23.00 PUT, current ask $1.50, estimated ask at entry $1.30

Annotated chart:

Entry on October XX
Earnings Date: More than two months (unconfirmed)
Average Daily Volume: 2.1 million
Listed on October 27, 2010

In Play Updates and Reviews

Generic Drug Play Surges Higher

by Scott Hawes

Click here to email Scott Hawes
Current Portfolio:

BULLISH Play Updates

Boyd Gaming - BYD - close 8.26 change -0.01 stop 7.42

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: +0.73%
Time Frame: 1 to 2 weeks
New Positions: Yes

10/27: BYD was up more than +4% in early trading but the sellers stepped in pushing the stock lower to close virtually unchanged. Our first target was missed by 4 cents. $8.00 and the rising 20-day SMA (just below $8) should offer solid support and any dips. $8.65 and $8.95 are the primary targets. All of my comments below remain valid.

10/26: BYD traded within yesterday's range and is consolidating near its 100-day SMA. I am looking for a continued move higher and view dips as buying opportunities. There is solid support near $8.00.

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.

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

Citigroup Inc - C - close 4.17 change -0.01 stop 3.78

Target(s): 4.60, 4.75, 4.90
Key Support/Resistance Areas: 4.30, 4.00
Current Gain/Loss: +0.24%
Time Frame: 3 to 4 weeks
New Positions: Yes

10/27: We are long C as of today's open at $4.16. The stock should find support at its rising 20-day SMA which is currently at $4.12, or at $4.00 if that is breached. I view dips as buying opportunities.

10/26: I suggest we open positions in C at current levels tomorrow. Conservative traders may want to wait for a close above $4.30 before launching positions. However, I am comfortable getting the nearly 3% discount at current levels. We'll raise the stop to $3.78. Use small position size to manage risk.

10/25: 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.

Suggested Position: Long C stock
Options Traders: Buy December $4.00 CALL, current ask $0.30

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

Companhia Brasileira de Distribuicao - CBD - cls: 36.72 chg: -0.09 stop: 34.75

Target(s): 39.00
Key Support/Resistance Areas: 35.25, 36.50, 39.00
Current Gain/Loss: +0.16%
Time Frame: 4 to 6 weeks
New Positions: Yes

10/27: CBD is finding support at $36.50 and its rising 20-day SMA. I am concerned the stock could break lower with a broader market correction. The next level of support is near $35.25 and its 50-day SMA. I would view dips as buying opportunities.

10/25 & 10/26: 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.

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: 50.90 change: -0.52 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

10/27: 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.

10/16: (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

Jeffries Group, Inc - JEF - close 23.86 change +0.19 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: -0.46%
Time Frame: 3 to 4 weeks
New Positions: Yes

10/27: JEF is finding support at its 50 & 100-day SMA's which is the first time the stock has tested these since breaking higher last week. This is a logical spot for JEF to bounce to another high. Our first target is $25.10 but readers may also want to consider $24.65 as a possible exit point. This should produce almost a +3% gain.

10/26: After breaking out on 10/20 JEF has retraced all of the gains and is finding support near its 50-day SMA, which is also at a support level of $23.50. I view this dip as a buying opportunity with a tight stop below. The pullback over the past three days looks like a bull flag to me.

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.

Current Position: Long JEF stock at $23.97
Options Traders: Long December $24.00 CALL

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: 20.24 change: +0.64 stop: 18.65

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: +5.14%
Time Frame: 4 to 6 weeks
New Positions: Yes, on pullbacks

10/27: MYL made a remarkable +5.7% recovery from its lows today and gained +3.3% on the day. Our current gain is better than 5%. If MYL heads higher before pulling back readers should consider taking profits and possibly re-entering positions on a pullback. $19.80 should offer solid support on dips.

10/26: I do not see many changes from my comments last night. MYL is consolidating near its highs. If the stock can break above $19.80 there is little resistance until $20.50. If our second target of $20.40 is reached I suggest readers use the strength to book gains or tighten stops to protect them.

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

Patriot Coal - PCX - close 13.48 change -0.20 stop varies

Target(s): 15.25, 15.95
Key Support/Resistance Areas: 15.30, 14.15, 13.00, 12.50
Current Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see entry point below

10/27: We are playing for a breakout in PCX with a trigger of $14.17. However, I think readers should consider bullish positions if there is a sell-off in the stock to $12.70, which I am adding as a second trigger. If we are triggered at $12.70 we'll use a stop of $11.80.

10/26: As signs of inflation begin to build momentum so are resource stocks. Many coal stocks have lagged compared to other names in the commodities space, but they are showing signs of momentum. PCX is forming a bullish cup and handle pattern and its volume patterns point to building bullish momentum. The stock surged higher on heavy volume in early October and pulled back on lighter volume. Now the stock is finding support at its rising 20-day SMA. I suggest readers use a trigger of $14.17 to enter bullish positions on a breakout. If the stock pulls back prior to breaking out we may consider a lower entry, perhaps near support at $13.00. We are looking for a move up towards the stock's 200-day SMA, or about $1.00 to $1.75 higher than our current trigger.

Note: I consider this an aggressive trade and readers should expect volatility. Please use proper position size to manage risk.

Trigger: $14.17 (stop = $12.90) - or - $13.70 (stop = $11.80)

Suggested Position: Long PCX stock at at the above triggers
Options Traders: Buy December $14.00 CALL

Entry on October xx
Earnings Date More than two months (unconfirmed)
Average Daily Volume: 3.6 million
Listed on October 26, 2010

PerkinElmer, Inc - PKI - close 23.34 change +0.03 stop 22.32

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: +1.04%
Time Frame: 1 to 2 weeks
New Positions: Yes, on pullbacks

10/26 & 10/27: PKI has found resistance at $23.75 with a possible bearish double top with the highs on 10/13. There is long term support at current levels, the rising 20-day SMA and upward trend line just below (both near $23.15). If our second target of $23.90 is reached I suggest readers use the strength to book gains or tighten stops to protect them.

10/25: 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.

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 46.28 change +0.17 stop 44.10

Target(s): 46.70, 47.20, 47.95
Key Support/Resistance Areas: 48.50, 47.00, 45.40, 43.50
Current Gain/Loss: +1.67%
Time Frame: 2 to 4 weeks
New Positions: Yes, on pullbacks

Comments :
10/27: after a pullback to support at $45.40 this morning, TJX closed near the highs from yesterday. The stock continues to look bullish but I am concerned of about the broader market overbought conditions. $46.70 and $47.20 are my primary targets and suggest readers consider taking profits and/or tightening stops if they are reached.

10/26: The breakout continued in TJX today as the stock gained nearly +1%. I don't think we should get too greedy with this trade, rather book a decent gain. As such, I've adjusted the targets slightly and suggest readers consider taking profits and/or tightening if they are reached.

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 20.45 change +0.01 stop 21.75

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: +0.20%
Time Frame: 1 to 3 weeks
New Positions: Yes

10/26 & 10/27: LEG is consolidating near its lows the after post-earnings sell off. Any broader market weakness should send the stock towards our targets in a hurry. I still like new short positions, especially on bounces.

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 7.94 change -0.03 stop 8.15 *NEW*

Target(s): 7.85, 7.30, 7.00
Key Support/Resistance Areas: 9.00, 8.00, 7.00, 6.50
Current Gain/Loss: +2.58%
Time Frame: 1 to 3 weeks
New Positions: Yes

10/27: This is the lowest close PHM has printed since 8/26. The stock looks like it could crater towards $7.30 but there is support at $7.70 and the housing data is not getting worse, which may be the signs of a bottoming process. I suggest readers protect profits and begin looking for an exit. I've raised the target to $7.85 and suggest we book the small gain if we get there. I'm also going to lower the stop to breakeven at $8.15 and suggest we get out of the way if PHM bounces from here.

10/26: PHM lost -1.73% today and closed below $8.00 for only the second time in past 2 months. Tomorrow before the bell we get a report on new home sales which may end up determining our fate in this trade. If PHM trades down to our first target at $7.75 I suggest readers consider booking the gain, or at least tightening stops to see how much more we can get out of trade. If the stock surges higher our stop is in place. Tighter stops could be considered at $8.25 and $8.40.

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 will 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