Option Investor

Daily Newsletter, Saturday, 1/29/2011

Table of Contents

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

Market Wrap

Egypt and Earnings Push Markets Lower

by Jim Brown

Click here to email Jim Brown

The Dow snapped an eight-week winning streak and suffered its worst one-day loss in more than two months. The Nasdaq lost -2.5% for the biggest daily loss in five months.

Market Statistics

When markets want to go down they will find a reason. On Friday they had no trouble finding a reason with the three Es of Egypt, earnings and economics all providing an excuse to sell. The biggest blame was placed on Egypt and the civil unrest currently attempting to force changes in the government. The turnover in Tunisia a couple weeks ago was seen as a trigger for the riots in Egypt. Protestors seeking reform turned out in force and were greeted by police and military and the protests turned ugly.

Egypt has been an ally of the U.S. and helped to provide security for Israel for 30 years. It receives the second largest amount of foreign aid on an annual basis from the USA. The U.S has supplied F16s, tanks, personnel carriers, advanced missile systems and many other forms of military equipment. If the country was to fall under jihadist rule and it would be a very bad thing for Israel and for the U.S. since we have treaties with other Middle East countries. Egypt is the big dog on the block and should the country move in the wrong political direction it could be a serious challenge. If Egypt was forced into a government turnover like Tunisia, analysts fear it could lead to similar events in other Middle East countries and throw the entire area into a morass of instability that could ferment terrorist activity.

Egyptian leaders normally come out of the military and have the support of the military, which is strong and capable. A new leader to replace Mubarak would likely come from a military background and not result in too much change in administration. Late Friday Mubarak dismissed the entire Egyptian government and promised to rebuild with some changes wanted by demonstrators. Dismissing the government was not what the protestors wanted. They wanted Mubarak to step down and let someone else take over.

The Egyptian uprising had a serious impact on the market not specifically because of the possibility of a government turnover in Egypt but the possibility of the contagion spreading to other countries. Regardless of the outcome in Egypt there is the risk of another uprising elsewhere in the region. Saudi Arabia already has a lot of civilian unrest that is always bubbling just under the surface. If this kind of problem rose in Saudi Arabia the U.S. would be drawn into the picture in order to protect Saudi from outside influences, protect the royal family and protect the oil fields and facilities. This worry over Saudi being drawn into the fray is the real problem for the U.S. markets.

Egypt has 80 million people and more than 30% are illiterate. Inflation is over 11% and inflation in food is over 17%. The Egyptian markets had fallen -18% in the last week and -11% on Thursday alone as the unrest began to spread.

(Saturday afternoon update) Egyptian president Mubarak named 74-yr old Omar Suleiman as vice president, a position that has been vacant for 30 years. Analysts claim this is purely a figurative move given the man's age. Suleiman was planned to be successor for Mubarak and then pass the title to Mubarak's son Gamal as a method of keeping the presidency in the family. This was not received well when it was in the planning stages. The crisis appears to have interrupted those plans permanently. Gamal was seen as a continuation of policies associated with his father. Citizens believe the country has been looted by the ruling family and its inner circle while inflation rockets out of control and pushes them farther into poverty.

Mubarak also appointed Ahmed Shafiq as the new prime minister. Shafiq was in the air force and worked directly under Mubarak in the past. He was named head of civilian aviation in 2002 so his name is known to the public. He has been tasked with rebuilding the government.

According to Stratfor Mubarak is no longer in charge despite his title as president. Apparently the military has taken over and is choreographing the change in command so that it still looks like Mubarak is in control and ceding power gracefully according to the will of the people. The military has gone to great pains not to engage with the protestors but to show force and let the police handle the actual confrontations. The military does not want any negative publicity as their manipulation of the command structure is completed. The police force is severely hated because of its historical brutality. Eighteen police stations were burned on Friday.

Stratfor is also reporting the Egyptian Muslim Brotherhood (MB) appears to be working with Hamas to increase the level of violence in an attempt to seize control or manipulate the change in government to give the MB a greater say in the future. The Egyptian police are no longer patrolling the border with Gaza and large numbers of armed Hamas men have been crossing the border into Egypt. The MB has fully involved itself in the demonstrations and they are insisting on a new cabinet that does not include any members of the ruling National Democratic Party. Security forces in plainclothes are reportedly engaged in destroying public property in order to give the impression that many protestors represent a public menace. The MB is forming people's committees to protect public property and to coordinate demonstrators activities including supplying them with food, beverages and first aid.

The situation as of late Saturday appears to be worsening although demonstrations in Egypt have calmed. Protests flared up in Yemen and quickly turned violent. With Egypt on one side of Saudi Arabia and Yemen bordering on the south the odds are good some of this revolutionary feeling could blossom in Saudi. King Abdullah of Saudi Arabia strongly criticized the demonstrations in Egypt and Yemen and voiced support for Mubarak. I believe betting on a lame horse like Mubarak and making comments critical of the demonstrations is risky business. Saudi's stock market fell -6.4% on Saturday.

With the outbreak of violence in Yemen and the rapid influx of Hamas supporters from Gaza I fear this story has farther to run and the odds of a Saudi infection are growing. That would be VERY market negative in the USA.

Another event in this rapidly moving story was news China had blocked any searches for "Egypt" on its twitter-like service on Sina.com. Reportedly the news agencies have been told not to cover the protests and news of the event has been given only a couple paragraphs buried inside a few websites. China reportedly has a high level of unrest because of the rapidly rising inflation and citizen exposure with the free world thanks to the Internet and smartphones. If demonstrations begin to form in China our markets could be in a world of trouble.

Back home in the U.S. the GDP report for Q4 came in lower than expected and put a damper on trader spirits. The headline number showed growth of +3.2% compared to estimates of +3.6%. This was still an improvement over the +2.6% growth in Q3. The biggest drag on growth was a giant decline in inventories that removed -3.7% from the GDP number.

Without the drag from inventories the GDP number would have been a blowout. Ex-inventory or final sales of domestic products the GPD would have come in at 7.1%. This is the largest gain since 1984 when the economy was coming out of the early 80s economic distress. Personal consumption expenditures rose at a 4.4% rate after a 2.4% growth in Q3. Business investment rose +4.2% in Q4 compared to only a 1.5% gain in Q3. This was the sixth consecutive quarter of positive GDP growth.

Despite the lower than expected headline number this was a VERY strong GDP report. Unfortunately traders focus on the headlines rather than the internals. The internals in this report suggest we could see something in the low 4% range for Q1 and that would be much stronger than analysts previously thought. The payroll tax cut will stimulate additional spending and businesses are already ramping up capital spending because of the 100% depreciation available as a result of the tax deal. Corporations are going to be unable to keep up with the spike in business without hiring additional employees. Those new paychecks will be immediately spent and that will further stimulate the economy.

GDP Chart

The final update for January Consumer Sentiment showed a +1.5 point increase to 74.2 from the preliminary reading of 72.7. This was still a -0.03 decline from December but was seen as a non-event by traders. Sentiment rebounded as consumers started seeing a smaller tax bite in their January paychecks.

Consumer Sentiment Chart

The economic calendar for next week is dominated by manufacturing reports and payroll news. There are four ISM reports with the national ISM for manufacturing on Tuesday. That is the most important of the ISM releases.

The payroll reports are led by the ADP report on Wednesday that will predict the jobs added in the Non-Farm Payroll report on Friday. The Non-Farm Payrolls is the biggest report of the week and estimates are for a gain of 146,000 jobs. Recent economic reports have shown an increase in the employment components so the whisper numbers are higher than the 146K. The spike in the jobless claims last week will not impact this report because the survey period ended before that layoff week. Could there be some limited impact? Yes, but analysts believe the broader trend in hiring will offset the temporary declines.

Economic Calendar

The earnings calendar slows significantly in frequency and importance next week as we begin the decline from last week's earnings peak. The ones I believe are the most important are Visa, MasterCard, UPS and YRCW. Visa and MC will give us a consumer update by releasing the latest delinquency numbers. UPS and YRC Worldwide will tell us how the shipping business is growing or declining. This is the last week for material earnings other than HPQ, Cisco and Dell.

Earnings Calendar

Friday's decline was not all based on Egypt. Some high profile earnings misses were also creating havoc. Amazon reported earnings on Thursday night and declined 9% intraday to $166 before ending the day with a 7% loss. Amazon represents 2.1% of the Nasdaq 100 and while that is far less than Apple's 18% the big drop in Amazon was a major hit to sentiment for tech stocks.

Another highflying tech stock that crashed was SanDisk (SNDK). SanDisk reported earnings of $1.27 per share and analysts were only expecting $1.09. SanDisk raised guidance to $5.44 per share for the full year compared to estimates of $4.83. However, SNDK shares fell -9% to $46.79 on worries profit margins were shrinking as competition increases. SanDisk is benefiting from the rise in smartphones and tablets. The race to lower prices on the end user products is forcing manufacturers to pressure suppliers for lower prices.

Microsoft has a 4.5% weighting in the Nasdaq and the stock lost -4% on Friday after posting earnings that left many traders uninspired. The fall off in Windows Seven sales was a worry since a new release won't be coming down the chute until late 2012.

NetFlix was one of the few companies bucking the -68 point slide in the Nasdaq. NFLX shares rose strongly for the second day after earnings and posted a $7 gain. The worries over an early demise of NetFlix due to increased content costs seem to have been premature.

Commodities, especially gold, silver and oil, rallied strongly on the Egyptian violence. Gold and silver rallied on the safe haven play so common whenever a geopolitical event unfolds. Gold had declined to 1310 but rebounded +20 on Friday. Silver was a big winner with a +3.4% spike.

Crude oil had plunged to just over $85 on worsening supply fundamentals on Wednesday but rebounded +4.5% or +3.85 on Friday to close at $89.31. Egypt is an oil producer with daily production of 662,000 barrels but that was not the problem. Egypt is in control of the Suez Canal and 1.8 mbpd of oil flows through that canal. If the unrest grew and the crowds of protestors somehow halted the flow of ships through the canal it would be a major problem for world oil supplies. If ships cannot use the canal it adds 6,200 miles and several weeks to the journey by going around the coast of Africa. It would require more tankers and take significantly longer to deliver the same production. The cost would also be significantly higher.

I personally don't see the canal being blocked. The Egyptian military would not let it happen. They may be going easy on the hundreds of thousands of protestors in the streets but should they head for the canal I am sure they have orders to prevent that at all costs. It could escalate the violence significantly. Since unarmed protestors don't do well against troops with live ammunition I seriously doubt the canal is in danger.

Crude prices spiked so sharply because the short interest was very high going into Thursday's close. Prices were dipping to $85.15 and threatening to go lower when suddenly the news broke and triggered the rebound and massive short squeeze. Once the situation cools I believe we will see $85 again.

Crude Oil Chart

When I started writing this commentary on Friday afternoon I thought the Egypt story was something that would blow over and the markets would rebound after a follow through dip on Monday. I am far less certain of that on Saturday afternoon. There are some serious risks of other countries going down the same path and the consequences would be negative for the global economy. If it spreads to Saudi Arabia with production of 10 million barrels of oil per day there would be an opportunity for production to slow. Al Qaeda has been targeting Saudi oil facilities for years and a general uprising would give Al Qaeda cover to mount new attacks. Saudi Arabia's ruling family would not go down as passively as Tunisia or Egypt. There would be a much more hard line response against protestors. That may actually work in Saudi's favor because the people know the demonstrations would be dealt with harshly.

The entire Middle East region is on alert this weekend. There is no telling if, when or where this contagion will spread. For that reason I am cautious about the market for next week.

The S&P declined -23 points to secondary support at 1275. A break there threatens to retest 1265. Followed by the 50-day average at 1250. The S&P was due for a correction and the source of the event is immaterial in the long run. The market will always find an excuse when it is ready to decline.

S&P-500 Chart

The Dow declined to initial uptrend support at 11800 as the news flow became a constant stream of Egypt protest video late in the day. This was a reactionary decline that triggered stop losses all along the way. After two months in rally mode and eight consecutive weeks of Dow gains I am surprised the damage was not worse.

If the Dow breaks below 11800 the next logical target is 11600. This is where I would expect investors to step back and reconsider why they are selling. Does this really impact me? Do I really care if Mubarak steps down? Should I be buying this dip? The answers to those questions should be evident by late Monday morning and the reaction selling will morph into whatever follows, be it up or down.

Resistance remains 12000 but I seriously doubt we will be worrying about that again next week.

Dow Chart

The Nasdaq was crushed by major declines in big name stocks including MSFT, AMZN, GOOG, PCLN, AAPL and ISRG. The -68 point decline was the biggest one-day drop in five months. The index came close to testing support at 2675. It also posted a lower high and a lower low since the mid January high. Obviously this was event driven by multiple events but it is still technically bearish. A break below 2675 targets 2640 and the 50-day average. If the events get out of hand in the Middle East we could easily see 2500 very quickly.

It is not that the Middle East is that material to tech stocks but those stocks are what investors just acquired to add risk to their portfolios. This may be more risk than they bargained for. If the violence continues or worse spreads then investors will be looking to shed risk rather than embrace it.

Nasdaq Chart

We should be encouraged the Russell did not fall any further than it did. The Russell stocks have more risk than the Nasdaq stock so the Russell could have easily declined significantly more. I believe the news caught fund managers off guard and most of them were still in buy the dip mode. We really did not have the full picture on Egypt until late in the day. By then many managers may have been hoping for an end of day rally to sell into.

The Russell has critical support at 773 and 765 and assuming we don't gap below that on Monday I think managers will be thinking twice about buying or selling a touch of those levels.

Russell Chart

For three days last week the market tried to breakout to new highs without success. Each failed attempt increased the bears aggressiveness and conviction. The Amazon earnings miss and the Egypt event was what they had been waiting for over the last six weeks. They piled on the shorts and longs were getting blown out of positions as stop losses were hit.

Monday will be different. Traders and investors alike will have had the entire weekend to decide if the Egypt event is material to our markets and whether or not it might spread to Saudi Arabia or others. The market will open with an informed trading public rather than a Friday surprise.

Given a sudden market event there was a very strong urge to exit positions before the weekend simply because of the rising unknowns and the need to take profits in a suddenly volatile market. For those who were either not paying attention, away from the market or were in a state of massive confusion there will probably be another sell cycle at the open on Monday. It will be a knee jerk reaction to Friday's market loss and the events of the weekend.

Is that dip going to be a buying opportunity or a prelude to the next flash crash? Unfortunately I can't answer that today because we don't know what events will transpire before Monday's open. However, I do know the Fed's Plunge Protection Team (PPT) is alive and well and they could easily decide to enter the market on the dip to avoid having their carefully orchestrated rally since September destroyed like the crash of a Jinga tower.

Jinga Collapse

Volume was heavy at 9.9 billion shares on Friday with down volume 6:1 over up volume. That is NOT a capitulation statistic. A capitulation day is typically 10:1 or higher. Yes, stocks sold off but the internals were not as bad as the talking heads would have you believe.

We never know in advance what event will pop up to cause a serious market decline. We do know that these declines are not permanent and a quick resolution in Egypt could fade from the headlines just as quickly.

Nothing has changed with QE2. The Fed is still going to pour additional hundreds of billions of dollars into the market over the next five months. The market will recover from any short-term event related decline. The only question is how long before that recovery begins?

As investors we should always be ready to take advantage of events in the market rather than run from them like our hair is on fire.

I believe we should take a careful look at the market about 10:AM on Monday and make a rational decision on whether we should be buying puts or buying the dip.

Jim Brown

Send Jim an email

An eye for eye only ends up making the whole world blind. - M.K. Gandhi

New Plays

Semiconductors, Networking, and Media

by James Brown

Click here to email James Brown

Editor's Note:

It looks like the stock market has finally found a top with Friday's bearish reversal. Volume was very strong on the sell-off, which is bearish. This move does need to see some follow through to confirm it but if the correction has begun it could be sharp and fast!

In addition to tonight's new candidates here's a list of stocks on my watch list. Be sure to check for upcoming earnings before initiating any trades. I still don't want to hold over a report. My list of potential bearish plays: WRC, AGCO, TKR, ALGT, DAL, ARB, IPCM, PM, MO, and NTGR.

Instead of stocks you could try and capture this pull back in the market with ultra-ETFs that move twice as fast. Of course that probably doubles the risk on these trades! For example, you could buy the QID (NASDAQ-100 ultra-short), DXD (DJIA ultra-short), SDS (S&P 500 ultra-short), or the TWM (Russell 2000 ultra-short). You could short the QLD (NASDAQ-100 ultra-long), DDM (DJIA ultra-long), SSO (S&P 500 ultra-long), and UWM (Russell 2000 ultra-long). Call and put options should be available for all of these ETFs.

- James


Hittite Microwave Corp. - HITT - close: 59.52 change: -1.58

Stop Loss: 62.05
Target(s): 56.15, 53.50
Current Gain/Loss: + 0.0%
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
After weeks of consolidating sideways under the $63 level shares of HITT had already begun to breakdown before Friday's market decline. When the market starts to sink it should accelerate the profit taking in HITT. Keep an eye on the SOX semiconductor index since this is a chip company.

I am suggesting bearish positions now. Our targets are $56.15 and $53.50. Readers should note that the most recent data listed short interest in HITT at 4% of the 28.2 million-share float. That's a very small float and raises our risk of a short squeeze. FYI: The Point & Figure chart for HITT has turned bearish.

Editor's note: The options on HITT have relative wide spreads making them a significantly higher-risk trade for us.

Suggested Position: short HITT stock @ current levels

- or -

Buy the 2011 March $55 PUTS (HITT1119O55) current ask $1.65

Annotated chart:

Entry on January 31 at $xx.xx
Earnings Date 02/17/11 (confirmed)
Average Daily Volume: 166 thousand
Listed on January 29th, 2010

Riverbed Technology - RVBD - close: 35.53 change: +0.62

Stop Loss: 38.15
Target(s): 31.75, 28.00
Current Gain/Loss: + 0.0%
Time Frame: 2 to 3 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
Better than expected profits and revenues and some positive comments from management helped push RVBD toward the $38 level on Friday morning. Unfortunately traders sold the news as the wider market collapsed. Now that the earnings news is out, shares of RVBD could see a post-earnings depression. I'm suggesting bearish positions now with a stop loss at $38.15. Our targets for RVBD are $31.75 and $28.50. This is an aggressive, higher-risk trade. Keep your position size small.

Readers need to know that the latest data listed short interest at 7.6% of the 135 million share float. That's relatively high short interest and raises the risk on this trade. You may want to buy put options instead. FYI: The Point & Figure chart for HITT has turned bearish.

- Small Positions to Limit our Risk -

Suggested Position: Short RVBD stock @ current levels

- or -

Buy the 2011 Feb. $35 puts (RVBD1119N35) current ask $1.25

- or -

Buy the 2011 Mar. $35 puts (RVBD1119O35) current ask $2.00

Annotated chart:

Entry on January 31 at $xx.xx
Earnings Date 01/27/11
Average Daily Volume: 5.1 million
Listed on January 29th, 2010

Virgin Media, Inc. - VMED - close: 24.93 change: -0.81

Stop Loss: 26.15
Target(s): 22.25
Current Gain/Loss: + 0.0%
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
The rally appears to have run its course in VMED. Shares produced a bearish double top near the $28 level. Now the stock is correcting and the oversold bounce from $24 failed under $26 and its 50-dma. Friday's move looks like an entry point to open bearish positions. Our target is the $22.25 mark, since the simple 200-dma could be technical support. Readers need to know that the most recent data listed short interest at 9.7% of the 298 million-share float. That's a lot of short interest and definitely raises the risk of a short squeeze. You might want to buy the puts instead of shorting the stock.

Suggested Position: short VMED stock @ current levels

- or -

Buy the 2011 Feb. $24 puts (VMED1119N24) current ask $0.55

- or -

Buy the 2011 Mar. $22.50 puts (VMED1119O22.5) current ask $0.45

Annotated chart:

Entry on January 31 at $xx.xx
Earnings Date 02/17/11 (unconfirmed)
Average Daily Volume: xxx million
Listed on January 29th, 2010

In Play Updates and Reviews

Exit Early

by James Brown

Click here to email James Brown

Editor's Note:
We're seeing a lot of bearish reversals across the market. If the market sees any follow through lower it's going to be painful for the bulls. I am suggesting an early exit in several candidates tonight.


Current Portfolio:

BULLISH Play Updates

Walt Disney Co. - DIS - close: 38.85 change: -0.61

Stop Loss: 37.85
Target(s): 39.90, 42.50
Current Gain/Loss: + 1.5%
Time Frame: 10 to 12 weeks
New Positions: see below

01/29 update: Readers might want to exit our DIS play early. The company is due to report earnings on February 8th, after the closing bell. That gives us seven trading days since we do not want to hold over the earnings announcement. The next seven trading days are likely to be troublesome for the market. While DIS should have support near $38.00 there is no guarantee it will hold. Thus readers might want to exit all of their positions now.

Speaking of exiting positions the newsletter will close the February $40 call and April $40 call positions now. I am not suggesting new positions at this time.

- Current Positions -

Long DIS stock @ 38.25

- or -

2011 February $40 calls (DIS1119B40) Entry @ $0.45, Exit @ 0.38 (-15.5%)

- or -

2011 April $40 calls (DIS1116D40) Entry @ $1.10, Exit @ 1.02 (-7.2%)

01/29: Exit call positions. Feb call @ 0.38 (-15.5%) April call @ 1.02 (-7.2%)
01/19: Consider an early exit from the option positions.
01/15: New stop loss @ 37.85
01/05: 1st Target Hit. Stock @ 39.90 (+4.3%)
01/05: 1st Target Hit. Feb. call @ $1.20 (+166%). April call @ 1.80 (+63.6%)
01/05: new stop loss @ 37.49
01/04: Play triggered @ 38.25


Entry on January 4 at $38.25
Earnings Date 02/08/11 (confirmed)
Average Daily Volume: 8.6 million
Listed on December 25th, 2010

FLIR Systems Inc. - FLIR - close: 30.63 change: -0.01

Stop Loss: 29.75
Target(s): 30.90, 33.00
Current Option Gain/Loss: + 5.2%
Time Frame: 10 to 12 weeks
New Positions: see below

01/29 update: Target achieved. FLIR spiked to $31.20 on Friday but eventually gave back all of its gains. Our first target to take profits was hit at $30.90. The April $30 calls were trading near $2.00 at the time. I am suggesting we go ahead and completely exit any remaining call positions now (currently bidding $1.80 +12.5%). We'll maintain the remainder our stock position but raise our stop loss to $29.75. This gives the $30.00 level a chance to act as support.

Current Position: Long FLIR stock @ $29.10

- or -

2011 April $30 calls (FLIR1116D30) Entry @ $1.60, exit @ 1.80 (+12.5%)

01/29 Exit remaining call positions. option @ 1.80 (+12.5%)
01/29: New stop loss @ 29.75
01/28: 1st Target Hit @ 30.90 (+6.1%), option @ $2.00 (+25%)
01/25: New stop @ 28.90
01/19: Consider an early exit from the option position (bid $1.30)
01/15: New stop loss @ 28.49
01/10: FLIR provided another entry point near $28.50
01/08: New stop loss @ 27.90


Entry on December 22 at $29.10
Earnings Date 02/09/11 (confirmed)
Average Daily Volume: 1.6 million
Listed on December 18th, 2010

Hansen Natural Corp. - HANS - close: 55.15 change: -0.50

Stop Loss: 53.40
Target(s): 59.50
Current Gain/Loss: - 0.7%
Time Frame: 6 to 8 weeks
New Positions: see below

01/29 update: HANS garnered some positive analyst comments on Friday and received a $71 price target. Yet the early morning spike in HANS faded and shares closed in the red. Even the strongest stock can turn lower if the market is in correction mode. Just to be safe I want to exit our call positions now to limit our losses. I am not suggesting new positions at this time. More conservative traders may want to exit their stock positions too. Small positions only to limit our risk.

- Small Positions to limit our risk -

Current Position: HANS stock @ $55.54

- or -

March $60 calls (HANS1119C60) Entry @ $1.50, Exit @ $1.15 (-23.3%)

01/29 Exit call positions early. @ $1.15 (-23.3%)
01/26 the CBOE listed the MAR $60 call's open @ $1.50


Entry on January 26 at $55.54
Earnings Date 02/24/11 (unconfirmed)
Average Daily Volume: 654 thousand
Listed on January 25th, 2010

Oracle Corp. - ORCL - close: 32.00 change: -0.92

Stop Loss: 31.40
Target(s): 34.90
Current Gain/Loss: - 1.9%
Time Frame: 6 to 8 weeks
New Positions: see below

01/29 update: Warning! ORCL produced a bearish engulfing (reversal) candlestick pattern on Friday. The stock should have some support near $31.50 but I am not suggesting new positions at this time. More conservative traders will want to exit their call positions now just to be safe and limit losses. No new positions at this time. Let's see if ORCL confirms this bearish reversal or not.

Our target on ORCL is the $34.90 mark since $35.00 looks like the next level of resistance.

small positions

Current Position: ORCL stock @ $32.62

- or -

Long the 2011 March $33 calls (ORCL1119C33) Entry @ $0.80

01/29 Consider an early exit, especially the calls.
01/27 The CBOE listed the open for our calls at $0.80


Entry on January 27 at $32.62
Earnings Date 03/24/11 (unconfirmed)
Average Daily Volume: 27 million
Listed on January 26th, 2010

UnitedHealth Group - UNH - close: 40.93 change: -1.36

Stop Loss: 40.45
Target(s): 44.75
Current Gain/Loss: - 0.5%
Time Frame: 8 to 10 weeks
New Positions: see below

01/29 update: Warning! UNH has reversed sharply with Friday's -3.2% loss. Shares hit our newly adjusted buy-the-dip entry point at $41.15. Yet given the market's sell-off on Friday I'm not sure we want to be long any more. The trade is open and we have a stop loss at $40.45 but I am not suggesting new positions at this time. I would strongly encourage readers to exit their call positions even though we just opened them. Odds are good we could get stopped out on Monday.

Current Position: UNH stock @ $41.15

- or -

Long the 2011 March $42 calls (UNH1119C42) Entry @ $1.20


Entry on January 28 at $41.15
Earnings Date 01/20/11 (unconfirmed)
Average Daily Volume: 5.9 million
Listed on January 20th, 2010

BEARISH Play Updates

Endo Pharmaceuticals - ENDP - close: 33.53 change: -0.79

Stop Loss: 35.75
Target(s): 31.00, 30.10
Current Gain/Loss: - 2.8%
Time Frame: 3 to 4 weeks
New Positions: see below

01/29 update: ENDP gave up -2.3% after failing at the $34.50 level. I would still consider new bearish positions now. More conservative traders might want to consider a tighter stop loss. I am adding a secondary target at $30.10. Our first target is $31.00.

Current Position: Short ENDP stock @ 34.50

- or -

Long the 2011 February $35 PUT (ENDP1119N35) Entry @ $1.30


Entry on January 27 at $34.50
Earnings Date 02/22/11 (unconfirmed)
Average Daily Volume: 1.3 million
Listed on January 24th, 2010

Reliance Steel - RS - close: 52.19 change: -1.21

Stop Loss: 55.05
Target(s): 45.05
Current Gain/Loss: + 1.5%
Time Frame: 3 to 4 weeks
New Positions: see below

01/29 update: RS has failed three days in a row at the $54.00 level. I am suggesting new bearish positions now at current levels. More conservative traders may want to move their stop loss closer to the $54 mark. There is potential support near $48 but I'm targeting a drop toward the $45 level and its 200-dma. We do not want to hold over the earnings in mid February.

Current Position: Short RS stock @ $51.41

- or -

Long the February $50 PUT (RS1119N50) Entry @ $1.35

01/29 New entry point for bearish positions.
01/24 CBOE listed the $50 PUT opening price at $1.35


Entry on January 24 at $51.41
Earnings Date 02/17/11 (unconfirmed)
Average Daily Volume: 654 thousand
Listed on January 22nd, 2010


Ann Taylor Stores Corp. - ANN - close: 21.85 change: -0.45

Stop Loss: 20.80
Target(s): 24.00, 25.00
Current Gain/Loss: - 3.8%
Time Frame: 2 to 3 weeks
New Positions: see below

01/29 update: The RLX retail index has reversed from a bullish breakout to a bearish breakdown. If we're not going to see support from the sector then we don't want to own ANN. This stock still has support near $21 and its 200-dma but I'm betting it will fail. You can keep ANN on your watch list for a drop toward the $18 area. I'm suggesting an early exit now. It was our plan to keep your position size small to limit our risk. This was a higher-risk trade.

Small Bullish Positions

Closed Position: ANN stock @ $22.73, exit @ $21.85 (-3.8%)

- or -

2011 February $24 calls (ANN1119B24) Entry @ $0.50, exit @ 0.20 (-60%)

01/29 Exit early. ANN @ 21.85 (-3.8%) option @ 0.20 (-60%)
01/27 Entry point at $22.73, gap open on broker upgrade.


Entry on January 27 at $22.73
Earnings Date 03/11/11 (unconfirmed)
Average Daily Volume: 2.5 million
Listed on January 26th, 2010

BE Aerospace Inc. - BEAV - close: 38.24 change: -1.46

Stop Loss: 37.75
Target(s): 43.40
Current Gain/Loss: - 1.6%
Time Frame: 6 to 8 weeks
New Positions: see below

01/29 update: We want to exit our BEAV trade early. Shares were struggling with the $40 level and Friday's market drop pulled BEAV back down to recent support near $38.00. We only have a few days left before BEAV reports earnings on Feb. 3rd so I'm suggesting an early exit now.

- (small positions to limit risk) -

Closed Position: BEAV stock @ $38.89, exit @ 38.24 (-1.6%)

- or -

2011 Feb. $40 calls (BEAV1119B40) Entry @ $1.35, Exit @ 0.65 (-51.8%)

01/29: Exit Early. BEAV @ 38.24 (-1.6%), option @ 0.65 (-51.8%)
01/15: new stop loss @ 37.75


Entry on January 11 at $38.89
Earnings Date 02/01/11 (unconfirmed)
Average Daily Volume: 542 thousand
Listed on January 10th, 2010

Microchip Technology - MCHP - close: 36.89 change: -1.00

Stop Loss: 35.95
Target(s): 39.95
Current Gain/Loss: -0.3%
Time Frame: 2 weeks
New Positions: see below

01/29 update: It's time to abandon ship. MCHP spiked higher to $38.25 on Friday morning but the stock could hold it and reversed (On Thursday I warned you $38.25 was resistance). Shares have produced a bearish reversal on both the daily and weekly charts. The low was $36.65. I am suggesting an early exit now.

small bullish positions

Closed Position: MCHP stock @ $37.00, exit @ 36.89 (-0.3%)

- or -

2011 February $38 call (MCHP1119B38) Entry @ $0.55, exit 0.25 (-54.5%)

01/29 Exit Early. MCHP @ 36.89 (-0.3%) Option @ 0.25 (-54.5%)
01/27 MCHP unexpectedly reports earnings
01/25 The CBOE listed the call option's open at $0.55


Entry on January 25 at $37.00
Earnings Date 01/27/11 (confirmed)
Average Daily Volume: 1.6 million
Listed on January 24th, 2010

NASDAQ OMX Group - NDAQ - close: 24.50 change: -0.71

Stop Loss: 23.85
Target(s): 26.50
Current Gain/Loss: + 2.0%
Time Frame: 3 to 4 weeks
New Positions: see below

01/29 update: Watch out! NDAQ completely reversed Thursday's big gains. The overall trend is still up but I'm suggesting an early exit anyway. NDAQ is due to report earnings on Feb. 2nd and we don't want to hold over the announcement. Let's exit now. It was our plan to keep positions very small to limit our risk.

closed Position: Long NDAQ stock @ $24.00, exit @ 24.50 (+2.0%)

01/29: Exit early @ $24.50 (+2.0%)
01/27: New stop loss @ 23.85
01/22: New stop loss @ 23.49


Entry on January 19 at $24.00
Earnings Date 02/02/11 (confirmed)
Average Daily Volume: 1.5 million
Listed on January 18th, 2010

SXC Health Solutions - SXCI - close: 46.79 change: -1.75

Stop Loss: 43.40
Target(s): 49.00
Current Gain/Loss: + 5.6%
Time Frame: 8 to 9 weeks
New Positions: see below

01/29 update: The market's sell-off on Friday cut our SXCI gains almost in half. Shares spiked to $49.00 Friday morning but only made it to $48.92 before reversing. Our target to exit was $49.00. Unfortunately, I'm giving up and suggesting an early exit now. On Thursday I suggested an early exit on the call option position. It looks like they opened at $4.00 on Friday.

NOTE: Buying the options is a higher-risk trade. The calls on SXCI have wider than normal spreads put option traders at a disadvantage here.

Closed Positions: Long SXCI stock @ $44.31, exit $46.79 (+5.6%)

01/29: Exit early. SXCI stock @ 46.79 (+5.6%)
01/27: Exit Calls Now! Currently bid @ $3.50 (+143%)
01/27: New stop loss @ 44.90
01/22: New stop loss @ 43.40, Consider an early exit.
01/19: New stop loss @ 42.65


Entry on January 10 at $44.31
Earnings Date 03/03/11 (unconfirmed)
Average Daily Volume: 292 thousand
Listed on January 8th, 2010

WellCare Health Plans, Inc. - WCG - close: 30.06 change: -1.18

Stop Loss: 29.85
Target(s): 33.75, 37.75
Current Gain/Loss: - 2.2%
Time Frame: 10 to 12 weeks
New Positions: see below

01/29 update: I am suggesting an early exit out of our WCG play. Shares briefly dipped under support at $30.00 but only hit $29.91 intraday. The $30.00 level could still hold as support but I doubt it. Shares have arguably formed a bearish head-and-shoulders pattern over the last four weeks. Let's cut our losses now.

Closed Position: WCG stock @ $30.75, exit @ 30.06 (-2.2%)

- or -

2011 March $35 calls (WCG1119C35) Entry @ $0.60, Exit @ 0.35 (-41.6%)

01/29: Early Exit @ 30.06 (-2.2%), option @ 0.35 (-41.6%)
01/15: new stop loss @ 29.85
01/06: Play triggered @ 30.75.


Entry on January 6 at $30.75
Earnings Date 02/17/11 (unconfirmed)
Average Daily Volume: 410 thousand
Listed on January 4th, 2010