Option Investor

Daily Newsletter, Monday, 11/28/2011

Table of Contents

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

Market Wrap

Black Friday Bounce

by Todd Shriber

Click here to email Todd Shriber
Following the worst Thanksgiving week since 1932, the S&P 500 surged nearly 3% today and the other major U.S. indexes took part in the good cheer as record Black Friday sales and some less bad news out of Europe helped the S&P 500 snap a seven-day skid. The Nasdaq added 3.2% and the Russell 2000 notched its best day in weeks with a gain of nearly 4.8%.

Stats Table

While shoppers headed to stores in droves over Black Friday, which actually is counted as four days not one, one place folks still are not spending much money is in the real estate market. The Commerce Department said new home sales rose 1.3% in October to to a seasonally adjusted annual rate of 307,000, but the September reading was revised down to 303,000. No matter how you slice the September and October readings, they are both well below the 700,000 sales economists view as necessary for the housing market to be considered healthy.

The median sales price fell to $213,200. That is the lowest level since October 2010. The National Association of Realtors said there is 6.3 months worth of excess supply on the market today.

As I mentioned at the start, Black Friday 2011 was a banner one for U.S. retailers as consumers spent an estimated $52.4 billion during the four-day weekend, up from $45 billion last year, according to the National Retail Federation. Even with that big number, SPDR S&P Retail ETF(XRT) did not offer much intraday follow through after a small gap up at the open.

XRT Chart

While it really was not a Merger Monday, it is Cyber Monday today. I was reading the Los Angeles Times over the weekend and there was an interesting anecdote about Cyber Monday in there. Back in 2006, Cyber Monday was merely 12th-largest online spending day of the year. Last year, it was tops with $1 billion in sales. Some analysts forecast a jump to $1.2 billion this year.

That is good news for a stock like Amazon (AMZN) and could easily explain why that stock soared 6.4% today on above average volume. Morgan Stanley was out with a note today, rating Amazon ''overweight'' with a $260 price target. That is some excellent upside from $194.15 where Amazon closed today.

The shopping procrastinators among us ''will likely have to turn to a retailer that can provide guaranteed delivery as late as possible. With December 24 falling on a Saturday, only those retailers with the best logistics systems will be able to fulfill orders that Friday, December 23,'' Morgan Stanley said in a note.

Amazon Chart

In case you did not hear or you are not a big sports fan, the NBA owners and players reached a tentative labor agreement over the weekend that will end the league's 149-day work stoppage. The NBA's regular season normally starts with games on or around Halloween, but the labor strife will lead to training camp starting next week with the first games scheduled for Christmas Day. A normal NBA regular season is 82 games, but 66 will be played this year if the deal is ratified as soon as expected.

I mention this because the news did have an impact on select stocks. Sure, shares of Nike (NKE) and Under Armour (UA) were on the move because of Black Friday results and Foot Locker for the same reason and an analyst upgrade. However, it would be foolish to under estimate the impact the return of the NBA on these stocks. Dow component Walt Disney (DIS) was up 1.7% and I will go out on a limb and say most of that gain was attributable to the NBA news.

If you need further convincing the NBA news moved some stocks higher, check out the chart of Madison Square Garden (MSG), the company that owns the famous arena and the New York Knicks.

MSG Chart

Moving away from discretionary and retail names, it was no surprise to see high-beta energy and materials names contributing to Monday's rally in a big way. Shares of Molycorp (MCP), the largest U.S-based rare earths miner, screamed higher by nearly 14% after the company signed a deal with Japan's Daido Steel Co and Mitsubishi to produce and sell high-powered rare earth magnets. Colorado-based Molycorp will have a 30% stake in the venture.

First production will take place in Japan and Molycorp did say in a statement that some production could be seen here in the U.S. at a later date. At the very least, the news provided beleaguered Molycorp investors with a reason to smile today.

Molycorp Chart

As you could see in the stats table, it was a fine day for oil futures, which boosted oil equities as well. One of the big movers in that group was Anadarko Petroleum (APC). The second-largest U.S. independent oil and natural gas producer said one of its wells off the coast of the African nation of Mozambique might hold more gas than previously expected. A lot more. Try 15 trillion to 30 trillion cubic feet.

One analyst opined that this might mean that Anadarko might look for a partner to help harvest this bounty of natural gas. Still, the headlines sent the stock up by almost 5.5%. I get the feeling I have written about Anadarko a lot lately. I also get the feeling that it is almost always good news. Maybe there is something to that.

Anadarko Chart

The big news after hours once again came courtesy of one of Big Three ratings agencies. Fitch said today that it will maintain a AAA rating on Uncle Sam's long-term debt obligations, but Fitch also pared its outlook on the U.S. to negative from stable. Fitch said the switch to a negative outlook meant the credit agency believed there was slightly greater than a 50 percent chance it would downgrade long-term U.S. debt in the next two years, according to the Associated Press.

Fitch said what most of us already: The failure of Congress to make substantive spending cuts until after next year's elections means cuts will just be that much harder to when Congress actually gets around to them.

Looking at the charts, the S&P 500's big jump today brings the index within earshot of resistance in the 1195-1200. From there, it could be a slow grind higher in increments of 10-15 points. Or we could get another day like today and that would have the S&P 500 sniffing 1250 sooner rather than later. In the even of another pullback, it would be encouraging to see 1185 hold as support this time.

S&P 500 Chart

The Dow Jones Industrial Average has a chart that is only moderately more attractive than the S&P 500's and to the Dow's credit, it never challenged support at 10,600 during the November slide. Of course the good news is the Dow ran through resistance at 11,400 with ease today and with the close above 11,500, we can start talking about resistance at 11,600. My reservation regarding the Dow, particularly in the case of a stock like CVX, is that we are seeing an oversold rally and nothing else.

Dow Chart

The Nasdaq is another case of an index that easily sliced through resistance today. The tech-heavy index ran through resistance at 2475 and round-number resistance at 2500 and could make at a run at 2535 on Tuesday. Even with the big gains today for AMZN and AAPL, those two Nasdaq darlings are still well off their highs and well below the lofty price targets some analysts have on the stocks. Maybe tech is starting to offer some value in what is supposed to be the best time of the year to be involved with tech stocks.

Nasdaq Chart

I am usually skeptical of, well, just about anything and I feel the same way about Monday's rally. Still, it is a happy time of year and Monday's action certainly is conducive to a Santa Claus rally. Then again, hopes for that rally depend largely on Europe and Friday's jobs report. I did some buying today, starting a small position in a tech ETF, but I did not make a large bet and I am not sure when I will.

Todd Shriber

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New Plays

Level Up

by James Brown

Click here to email James Brown


Activision Blizzard, Inc. - ATVI - close: 12.16 change: +0.41

Stop Loss: 11.59
Target(s): 13.45
Current Gain/Loss: unopened
Time Frame: 4 to 8 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
It looks like video game giant ATVI may have found a bottom. Last week when the market was hitting new relative lows shares of ATVI were consolidating sideways between resistance at $12.00 and support at the 200-dma near $11.60. Today's market-wide surge higher has fueled a bullish breakout in ATVI.

If the market continues to rally I suspect ATVI will outperform. Shares certainly outperformed today with a +3.4% gain. I am suggesting small bullish positions tomorrow morning but only if both ATVI and the S&P 500 open positive. If the S&P 500 opens flat then we'll base our entry on the move in ATVI alone. I am suggesting a stop loss at $11.59. We will set our target for $13.45.

*See Entry Details Above*

Suggested Position: buy ATVI stock @ the open tomorrow

- or -

buy the FEB $13 call (ATVI1218B13) current ask $0.43

Annotated chart:

Entry on November xx at $ xx.xx
Earnings Date 02/09/12 (unconfirmed)
Average Daily Volume = 14.9 million
Listed on November 28, 2011

In Play Updates and Reviews

Opened Trades

by James Brown

Click here to email James Brown

Editor's Note:
The U.S. market's oversold bounce today helped open three of our new trades. BRCD, NILE, and STMP are all open now.


Current Portfolio:

BULLISH Play Updates

AutoNation Inc. - AN - close: 35.23 change: +1.17

Stop Loss: 32.45
Target(s): 39.50
Current Gain/Loss: + 2.2%
Time Frame: 6 to 8 weeks
New Positions: see below

11/28 update: The stock market's big surge this morning pushed AN to hit resistance near $36.00 this morning. The gains faded but AN settled with a +3.4% advance. More conservative traders might want to consider inching up their stop loss. If you are looking for an entry point I'd wait for a dip near $34.50.

Earlier Comments:
Our multi-week target is $39.50. More conservative traders may want to exit in the $37.75 region instead.

current Position: Long AN stock @ $34.45

- or -

Long Jan $35 call (AN1221A35) Entry $1.95

Entry on November 22 at $34.45
Earnings Date 02/02/12 (unconfirmed)
Average Daily Volume = 1.3 million
Listed on November 21, 2011

Brocade Communications - BRCD - close: 5.29 change: +0.18

Stop Loss: 4.75
Target(s): 6.45
Current Gain/Loss: + 0.7%
Time Frame: 8 to 12 weeks
New Positions: see below

11/28 update: Thankfully we didn't have to wait very long for BRCD to hit our trigger. Shares gapped higher at $5.23 and quickly hit our trigger to open bullish positions at $5.25. I would still consider new positions now. If you're feeling cautious then wait for a bounce off the $5.00 level.

Earlier Comments:
Keep in mind that the simple 200-dma near $5.40 could still be technical resistance. I expect this trade to take many weeks to play out but we're aiming for $6.75. We'll make adjustments to our exit strategy as needed.

current Position: Long BRCD stock @ $5.25

- or -

Long 2012JAN $5.50 call (BRCD1221A5.5) Entry $0.37

Entry on November 28 at $5.25
Earnings Date 02/16/12 (unconfirmed)
Average Daily Volume = 8.6 million
Listed on November 26, 2011

Hi Tech Pharmacal Co. - HITK - close: 40.41 change: +2.41

Stop Loss: 36.75
Target(s): 44.00
Current Gain/Loss: + 6.7%
Time Frame: 2 to 3 weeks
New Positions: see below

11/28 update: The market's strength today helped fuel a +6.3% rally in HITK. The stock has broken out past the $40.00 level and closed at new highs. I wouldn't chase it here. We will raise our stop loss to $36.75.

Earlier Comments:
The stock could see a short squeeze. The most recent data listed short interest at 14% of the very small 9.9 million-share float. The $40.00 level might be resistance but if HITK does see a short squeeze I am expecting a much bigger move. FYI: The Point & Figure chart for HITK is bullish with a $58.00 target. NOTE: We do not want to hold over the December earnings report so we only have two or three weeks.

current Position: Long HITK stock @ $37.84

- or -

Long DEC $40 call (HITK1117L40) Entry $1.65

11/28/11 new stop loss @ 36.75

Entry on November 22 at $37.84
Earnings Date 12/08/11 (unconfirmed)
Average Daily Volume = 180 thousand
Listed on November 21, 2011

Kodiak Oil & Gas - KOG - close: 8.24 change: +0.50

Stop Loss: 7.49
Target(s): 9.75
Current Gain/Loss: + 9.7%
Time Frame: two to three months
New Positions: see below

11/28 update: KOG outperformed the market today with a +6.4% gain. This also happens to be a bullish breakout from its recent pattern of lower highs and higher lows. I am raising our stop loss to $7.49.

I am not suggesting new positions at this time. More conservative traders may want to exit now to lock in a gain.

Earlier Comments:
Our multi-month target is $9.75. FYI: The Point & Figure chart for KOG is bullish with a $13.75 target. KOG is a potential takeover target.

current Position: Long the stock @ 7.51

- or -

Long 2012 MAR $7.50 call (KOG1217C7.5) Entry $1.25

11/28 new stop loss @ 7.49
11/23 new stop loss @ 7.38
11/15 gap down at 7.41 and hit 7.21 before bouncing.
11/14 new stop loss @ 7.20
11/14 KOG announces plans to sell an additional 37.5 million shares of new stock
11/08 trade opened at $7.51.

Entry on November 08 at $ 7.51
Earnings Date 03/05/12 (unconfirmed)
Average Daily Volume = 6.6 million
Listed on November 5, 2011

Blue Nile Inc. - NILE - close: 34.53 change: +1.02

Stop Loss: 31.70
Target(s): 39.75
Current Gain/Loss: - 0.4%
Time Frame: 4 to 8 weeks
New Positions: see below

11/28 update: All the positive headlines regarding weekend retail sales and the hype about Cyber Monday helped contribute to NILE's gap open higher at $34.67. That was above our trigger to open small positions at $34.60 so our trade was opened first thing this morning. NILE's rally ran out of steam at $35.46 and shares slowly faded lower to settle with a +3.0% gain. I would still consider new positions now. More conservative traders may want to adjust their stop loss higher.

Earlier Comments:
Readers should consider this an aggressive, higher-risk trade. If triggered our target is $39.75. More conservative traders may want to exit at the 50 or 100-dma instead.

(small positions)

current Position: Long NILE stock @ 34.67

- or -

Long 2012Jan $35 call (NILE1221A35) Entry $2.90

11/28/11 NILE gapped higher at $34.67, which was above our entry trigger at $34.60

Entry on November 28 at $34.60
Earnings Date 02/09/12 (unconfirmed)
Average Daily Volume = 491 thousand
Listed on November 22, 2011

Stamps.com - STMP - close: 26.89 change: +1.50

Stop Loss: 24.75
Target(s): 32.50
Current Gain/Loss: + 2.7%
Time Frame: 6 to 8 weeks
New Positions: see below

11/28 update: Our STMP trade is finally open. Shares gapped higher at $26.16 and rallied to their 30-dma near $27.50 before paring its gains. STMP still settled with a +5.9% gain, clearly outpacing the broader market. This is an aggressive trader but I would still consider new positions now or you could wait for a rally past $27.50. The $30.00 level is resistance but we're aiming for $32.50.

Earlier Comments:
NOTE: STMP could see a short squeeze if the market bounces. The most recent data listed short interest at more than 10% of the very small 12.3 million-share float.

current Position: Long STMP stock @ $26.16

- or -

Long Feb $30 call (STMP1218C30) Entry $2.00

11/28 trade opened. STMP gapped higher at $26.16
11/26 No change in our strategy. Trade not open yet. Readers may want to consider alternatives listed in tonight's update.
11/23 STMP gapped down again. Trade not open.
11/22 trade did not open. STMP opened lower by one cent.
11/21 trade not open. try again. Move stop loss to $24.75

Entry on November 28 at $26.16
Earnings Date 02/09/12 (unconfirmed)
Average Daily Volume = 646 thousand
Listed on November 19, 2011

BEARISH Play Updates

AFLAC Inc. - AFL - close: 40.74 change: +1.69

Stop Loss: 42.05
Target(s): 38.00
Current Gain/Loss: + 3.2%
Time Frame: 6 to 8 weeks
New Positions: see below

11/28 update: AFL was due for an oversold bounce. The market's huge move higher today probably boosted AFL's move (+4.3%). The stock gapped open higher and closed over resistance near $40.00 and its 50 and 100-dma. This is short-term bullish. More conservative traders may want to consider an early exit now. I am not suggesting new positions at this time.

Earlier Comments:
The plan was to keep our position size small to limit risk.

(Small Positions)

current Position: Short AFL stock @ 42.12

- or -

Long DEC $40 PUT (AFL1117x40) Entry $1.52

11/26 new stop loss @ 42.05, new exit target at $38.00
More conservative traders may want to take profits now
11/23 new stop loss @ 43.55
11/21 new stop loss @ 44.05

Entry on November 18 at $42.12
Earnings Date 02/01/12 (unconfirmed)
Average Daily Volume = 4.3 million
Listed on November 17, 2011

Forest Labs Inc. - FRX - close: 29.15 change: +0.52

Stop Loss: 30.55
Target(s): 25.25
Current Gain/Loss: - 0.6%
Time Frame: 9 to 12 weeks
New Positions: see below

11/28 update: FRX was also due for an oversold bounce. The stock gapped higher but failed to breakout past the first level of technical resistance at the 10-dma. Shares only gained +1.8%. If we see FRX roll over in the $29.50-30.00 zone then readers can use it as a new entry point for bearish positions.

Earlier Comments:
Our multi-week target is $25.25. FRX doesn't move very fast so we have to give it some time. FYI: The Point & Figure chart for FRX is bearish with a $19 target.

NOTE: You may want to trade the options instead of the stock to limit risk. FRX has about 6 or 7 days worth of short interest (approximately 9% of the float). Looking at the chart you can see the super sharp bounces caused by short covering.

current Position: short FRX stock @ 28.95

- or -

Long FEB $30 put (FRX1218N30) Entry $2.25

Entry on November 21 at $28.95
Earnings Date 01/17/12 (unconfirmed)
Average Daily Volume = 2.5 million
Listed on November 19, 2011

Nexen Inc. - NXY - close: 14.77 change: +0.44

Stop Loss: 16.05
Target(s): 10.25
Current Gain/Loss: + 0.6%
Time Frame: 6 to 9 weeks or more
New Positions: see below

11/28 update: NXY gapped open higher at $14.87 but the rebound ran out of steam near the $15.00 level. Shares saw their gains fade to +3.0% at the closing bell. I would still consider new positions here or you could look for a failed rally near its 10-dma or the $15.50 level.

Earlier Comments:
The 2008 lows near $11.50 could be support but we will tentatively put our multi-week (month?) exit target at $10.25.

Suggested Position: short NXY stock @ $14.87

- or -

Long JAN $14 PUT (NXY1221M14) Entry $0.85

- or -

Long MAR $12 PUT (NXY1217o12) Entry $0.80

11/28/11 NXY gapped open higher at $14.87

Entry on November 28 at $14.87
Earnings Date --/--/-- (unconfirmed)
Average Daily Volume = 3.0 million
Listed on November 26, 2011

AT&T Inc. - T - close: 27.95 change: +0.54

Stop Loss: 28.55
Target(s): 24.25 or 22.75
Current Gain/Loss: unopened
Time Frame: 6 to 9 weeks or more
New Positions: Yes, see below

11/28 update: Hmm... investors don't see too worried yet about a potential breakout over AT&T's attempted merger with T-Mobile. The stock gapped open higher this morning. If the merger fails then AT&T has to pay T-Mobile's parent company, Deutsche Telekom, a $4 billion breakup fee.

I don't see many changes from my earlier comments although nimble traders might want to consider bearish positions on a failed rally near $28.50ish.

Earlier Comments:
AT&T has significant support in the $27.20-27.50 zone. Currently we are suggesting a trigger to open bearish positions at $27.15. More conservative traders may want to use a trigger under $27.00 instead as their entry point for bearish positions. If we are triggered at $27.15 our multi-month target is $22.75, however, more conservative traders may want to exit near $24.00 instead. I have listed to targets (24.25 and 22.75) above depending on your risk tolerance. The $24.00 level was significant support back in 2010. Unfortunately for AT&T shareholders the stock has produced a huge (bearish) head-and-shoulders pattern over the last several months. A breakdown under $27.00 would signal a drop toward the $22.50 area (see weekly chart).

Trigger @ $27.15

Suggested Position: short T stock @ 27.15

- or -

buy the 2012Jan $25 PUT (T1221M25)

- or -

buy the Mar $25 PUT (T1217O25)

Entry on November xx at $ xx.xx
Earnings Date 01/26/12 (unconfirmed)
Average Daily Volume = 23.4 million
Listed on November 26, 2011