Option Investor

Daily Newsletter, Tuesday, 11/6/2012

Table of Contents

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

Market Wrap

Election Day, Earnings And A Rally

by Thomas Hughes

Click here to email Thomas Hughes
Yesterday's late afternoon rally carried into overnight futures trading and through this mornings opening. Speculation over the election, the effects of the results and even whether or not we would know who wins tomorrow was the talk of the day. In the back drop a slew of earnings reports came out today, more than 330 in total. Many were surprisingly good, helping add a more positive light to this years earnings season and driving the markets higher.

Aside from the election the economic data for the week is fairly light. No reports were released today and tomorrows big headline will be the Presidential election results. The regular weekly reports are still due; Oil inventories on Wednesday, jobless claims on Thursday and then a few monthly readings on Friday.

Economic Calendar

Around The World

European shares ended their trading higher amidst a new round protests in Greece. The country is voting on austerity plans Wednesday targeted at resolving portions of the ever unfolding Eurozone debt drama. At the same time the French governments new plan to stimulate business was met with disdain. The French are going to issue 30 billion Euros in tax credits as well as another 10 billion euros in combined tax cuts. To balance the cuts they are also raising taxes in other areas by 10 billion euros. The main argument was that the cuts did little to improve competitiveness for French corporations.

The major European exchanges gained around 0.75% today. Events here at home and those developing around China's regime change are keeping volume low around the globe, including Europe. Despite a lull in reported volume a positive string of earnings from European based corporations helped to drive the markets higher.

China is expecting a big change in leadership Thursday. Xi Jinping, the man reported to be the front runner for the position of Leader of the Communist Party, is an unknown factor that will have long lasting effects on the Chinese economy. Asian shares ended the day down, but basically flat. The Shanghai Composite Index is trading near the years lows now.

Gold and Oil

Gold traded up today but remains near a 2-3 month low. Gold gained nearly 1% in intra-day trading, putting on about $15 and flirting with the $1700 line. Despite the recent drop in prices gold is still trading well off this years lows which bodes well for profits among the miners.

The Gold Index traded up today in response to the rise in gold prices. The index has been consolidating above the neckline of its H&S reversal from the summer but has already failed to follow through on one continuation signal. The index is now sitting on and moving up from the long term support at $200 but bears close watching. The presidential results could be a big factor in gold prices and profits moving forward.

The Gold Index, daily closes

Oil also traded up today, gaining nearly 2% in intra-day trading. A host of factors are driving oil prices including mid-east politics, supply/demand hiccups related to the Sandy and the Election. Added to that the impending change of power in China has many people speculating on increased demand. The oil index spiked today in response to the increase in prices. The index, which I have been watching with a downside target, made a significant bounce today from its long term moving average and broke above the current resistance level. At the same time momentum has turned bullish; it looks like the Oil Index could move higher. If the 1250 holds then my upside target will around 1350; If 1250 fails to hold as support my target of 1150 is still in play.

The Oil Index, daily closes


If not for the election earnings would have been the story of the day. Over 330 announcements were released today with the general run of corporations reporting ok-to-good earnings. AOL was the big story early on. The online giant reported its strongest gain in ad growth for over 7 years. This growth helped drive results to beat expectations on the top and bottom line. At the same time declines in subscriptions also moderated more than expected, another bonus for the bottom line. AOL reported earnings of $0.22 per share versus the expected $0.17 and last years same quarter loss of -$0.02. The stock responded favorably to the results and gained over $5, or 15%, to reach a new high.

AOL, daily closes

CVS Caremark was another ray of sunshine this morning. The drug store chain reported earnings ahead of estimates and raised its full year guidance. The company reported profits of $0.79 per share versus the expected $0.65 on revenue of $1.01 billion. CVS has improved same store sales by 4.5% and increased pharmacy clientele by more than 5%. The strong results prompted the company to raise guidance to above the previous range. The stock jumped in early trading to come close to long resistance and then sold off throughout the day.

CVS Caremark, daily closes

NYSE Euronext reported earnings that echoed the results of corporations earlier in the season. They reported profits that beat expectations on revenue that fell short. The street was expecting earnings per share of $0.41, the company posted $0.44 but the number is still down sharply from last year. The drop in revenues was blamed on lower average trading volumes over the last year and a drop in volatility over the same quarter in the previous year. The stock opened lower and traded down into the close.

NYSE Euronext, daily closes

Marathon Oil reported an 11% jump in profits, earning $0.63 per share versus the $0.53 earned last year. The gains are lower than the consensus estimates. One positive surprise in the report was better than expected production levels across the companies portfolio. The stock gained nearly 4% and reached a new 9 month high.

Marathon Oil, daily closes

Office supply retailer Office Depot swung to a loss on restructuring charges but beat estimates on an adjusted basis. The company was expected to post earnings of (adjustes) $0.01 per share but beat with eps of $0.05. Sales dropped 5% in the quarter, more than expected. The stock broke out of a pennant formation following the announcement and reached a seven month high.

Office Depot, daily closes

Competitor Office Max also beat Wall Street expectation. On an adjusted based the company's results from operations were a profit of $0.27 per share versus the expected $0.25. This stock also broke out of a pennant formation to reach a new high.

Office Max, daily closes

The Indexes

Today the markets continued the bullish push started yesterday afternoon. Futures were positive this morning and into the open. The indexes kept up the bullish sentiment throughout the day and advanced more than 14 pts (S&P) in intra-day trading. By late afternoon the rally had lost a little steam but still managed to maintain an 11 pt gain for the day.

The election, the economy and earnings are all fighting for dominance in the eyes of traders and investors. The economy is what I think will win out. The election will ultimately affect the economy and earnings but as a stimulus for growth it is slow moving. If Obama wins things will continue as is, slow and sluggish; If Romney wins things will continue as is until he can get sworn in and enact some policy, several months from now.

The economy is in better shape than it has been in years. Yes GDP growth is slow and unemployment is still high but the underlying trend is one of improvement. Unemployment, though high, is at four year lows. Job creation, while not at robust levels, is moderate and enough to outpace layoffs. Revenue is low but profits and margins are up.

Corporate revenues were a little off this quarter but that was expected. The fact that they weren't way off should be taken in good light. The other good thing coming out of earnings season that I think got brushed aside was that nearly every company was able to improve margins and improve profitability to some extent. Many pundits think the third quarter is an earnings trough and I tend to agree with them. The steadily stabilizing economic data and improved margins are a combination that can only help business. The tone of many of this quarters earnings guidance may be overly cautious and could lead to surprises later in the year. With this said lets turn to the election.

The presidential election is seen by many as a turning point for the equities markets and they may be right. The markets, especially the S&P 500, are at a critical point on their charts. The markets will either go up, down or sideways. The S&P 500 is currently consolidating above an important support level and one that, if broken, will be hard to overcome. 1400 is emerging as a critical support for the S&P 500.

S&P 500, daily closings

Looking at the charts of the S&P 500 daily closings we can see trading in the index change as it approached 1400 in early August. The index had been moving up in choppy trading with medium to long candles and then suddenly the bars changed from long white and black candles to spinning tops as it crossed above 1400. Then, after nearly a month of sideways trading, the longer candle formations appear again, taking the index up to 1466.

1400 is exactly the middle of the previous resistance zone I was tracking over the summer. Declining long term momentum and other factors led me to believe a top was near and that 1380-1420 was going to be it. The 1380-1420 zone was coincident with numerous support/resistance zones dating back to and including the 2008 bear market. Within the zone we can find a 78.6% retracement of the 2008 bear market and support/resistance lines dating from the head & shoulders reversal leading up to the 2008 declines. Now the 150 day EMA has come into the picture, adding its support to the index. In the mid and long term the index has been trending up and is still above the rising trend line, another factor lending support to the index.

S&P 500, weekly closings

In the shorter term the index has experienced some choppy trading. The advance from 1400 to the four year highs was met with resistance and fell back, breaking short term supports but not falling all the way back to 1400, not yet. MACD on the daily charts shows that bearish momentum is increasing with each drop from resistance. This is not concerning so long as the index is still within the trading range of 1400-1466. If the index retests support (at 1400) and breaks through then the increasing bearish momentum will become a problem for bullish traders.

S&P 500, daily with MACD

The Dow is in similar position. It is sitting on a significant long term support/resistance level, the bearish MACD is on the rise inside the trading range and its long term EMA and rising up trend line are near coincident with the same support. The index needs to hold this support in order to remain bullish. A drop below here would be significant and could indicate further declines over the next few weeks and months.

Dow Jones Index, daily closings

There is a lot to consider when looking at the markets and speculating their direction at this time. The economy, corporate earnings and political change are at the top of the list. The markets are sitting on support but a support that could easily be broken. The results of the election tomorrow will be a relief for the markets and allow it to move forward with a clearer picture of what to expect.

Whether or not the markets are going to rally and retest recent highs or break support and slide to new lows is already in the cards. The election of one candidate or the other can not prevent that. The markets are very close to key support levels, even with today's advance, and could easily fall through. If the markets break through I will be looking to volume and how the candles unfold along my support and trend lines for clues to how far the fall may be.

There could be some choppy trading over the next couple of days as election based trades are unwound. It will be important to carefully watch key supports and be ready with bullish and bearish trades.

Happy election and remember the trend!

Thomas Hughes

New Plays

Financials & Footwear

by James Brown

Click here to email James Brown


Bank of America - BAC - close: 9.94

Stop Loss: 9.65
Target(s): 11.25
Current Gain/Loss: unopened

Entry on November xx at $ xx.xx
Listed on November 6, 2012
Time Frame: 6 to 8 weeks
Average Daily Volume = 2.4 million
New Positions: Yes, see below

Company Description

Why We Like It:
BAC, a major bank, has been showing relative strength versus the market. Shares had been consolidating in a bullish wedge-shaped pattern for weeks. There was a false breakout lower that quickly reversed. Now BAC is hitting new multi-month highs and is testing major resistance near the $10.00 level.

The March 2012 high was $10.10. I am suggesting a trigger to open bullish positions at $10.15. If triggered our target is $11.25 over the next several weeks. FYI: The Point & Figure chart for BAC is bullish with a long-term $20.50 target.

Trigger @ 10.15

Suggested Position: buy BAC stock @ (trigger)

- (or for more adventurous traders, try this option) -

buy the 2013 Jan $10 call (BAC1319a10) current ask $0.60

Annotated chart:


Crocs, Inc. - CROX - close: 12.63 change: -0.48

Stop Loss: 13.05
Target(s): 10.25
Current Gain/Loss: unopened

Entry on November xx at $ xx.xx
Listed on November 6, 2012
Time Frame: 6 to 8 weeks
Average Daily Volume = 2.4 million
New Positions: Yes, see below

Company Description

Why We Like It:
The oversold bounce in CROX is failing. Shares look poised to begin a new leg lower. The stock was crushed back in October on its earnings report. CROX reported earnings of 49 cents a share. That was six cents better than expected yet revenues were a miss. Then management followed that news up with lowered guidance for the fourth quarter. Shares of CROX reacted by gapping down and plunging from $16 to under $13.

Today the stock reversed sharply and the oversold bounce appears to have run out of steam. I am suggesting a trigger to open small bearish positions at $12.40. If triggered our target is $10.25.

Trigger @ 12.40

Suggested Position: short CROX stock @ (trigger)

- (or for more adventurous traders, try this option) -

buy the Dec $12 PUT (CROX1222x12) current ask $0.50

Annotated chart:

In Play Updates and Reviews

Stocks Post Widespread Gains

by James Brown

Click here to email James Brown

Editor's Note:
Stock market gains were widespread on Tuesday ahead of the U.S. election results.

Our BLL trade and the TROX trade were both triggered today.

Current Portfolio:

BULLISH Play Updates

Ball Corp. - BLL - close: 43.21 change: -0.17

Stop Loss: 42.40
Target(s): 48.00
Current Gain/Loss: + 0.4%

Entry on November 06 at $43.85
Listed on November 3, 2012
Time Frame: 6 to 8 weeks
Average Daily Volume = 687 thousand
New Positions: see below

11/06/12: Yesterday's rebound in BLL definitely picked up speed today with a strong +1.8% gain and a bullish breakout to new highs. Our trigger to open bullish positions was hit at $43.85. I would still consider new positions now.

Our multi-week target is $48.00.

current Position: Long BLL stock @ $43.85

11/06/12 triggered @ 43.85

Ryland Group - RYL - close: 34.72 change: -0.13

Stop Loss: 32.90
Target(s): 39.50
Current Gain/Loss: + 0.6%

Entry on October 31 at $34.50
Listed on October 27, 2012
Time Frame: 6 to 8 weeks
Average Daily Volume = 1.3 million
New Positions: see below

11/06/12: RYL continues to churn sideways within Friday's big bearish range. The long-term trend is up but short-term the stock looks vulnerable. I am not suggesting new positions at this time.

If we do get stopped out, watch for a dip toward $30 and its 50-dma, which may be a new bullish entry point.

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

current Position: Long RYL stock @ 34.50

11/02/12 RYL has produced a potential bearish reversal pattern
11/01/12 new stop loss @ 32.90
10/31/12 triggered @ 34.50

Symantec Corp. - SYMC - close: 18.85 change: +0.14

Stop Loss: 17.99
Target(s): 19.95
Current Gain/Loss: + 0.0%

Entry on November 2 at $18.85
Listed on November 1, 2012
Time Frame: 3 to 6 weeks
Average Daily Volume = 8.6 million
New Positions: see below

11/06/12: SYMC essentially kept pace with the S&P 500 and closed up +0.74%. At the moment I am not suggesting new positions. A rally past the Oct. 25th high (19.09) could definitely spark more short covering.

Earlier Comments:
I do consider this a slightly more aggressive trade so we will want to limit our position size.

*Small Positions*

current Position: Long SYMC stock @ $18.85

- (or for more adventurous traders, try this option) -

Long DEC $19 call (SYMC1222L19) entry $0.71

11/02/12 SYMC gapped open at $18.85 (our entry point)

BEARISH Play Updates

Cohen & Steers Inc. - CNS - close: 27.50 change: -0.18

Stop Loss: 29.25
Target(s): 25.15
Current Gain/Loss: + 1.0%

Entry on November 06 at $27.78
Listed on November 5, 2012
Time Frame: 3 to 6 weeks
Average Daily Volume = 182 thousand
New Positions: see below

11/06/12: The early morning rally attempt in CNS failed under its 10-dma as expected. Shares underperformed the market with a -0.6% decline. I would still consider new bearish positions now.

Earlier Comments:
Our target is $25.15. FYI: The Point & Figure chart for CNS is bearish with a $19.00 target.

*Small Positions*

current Position: short CNS stock @ $27.78

Hewlett-Packard - HPQ - close: 14.40 change: +0.39

Stop Loss: 14.51
Target(s): 11.50
Current Gain/Loss: - 3.7%

Entry on November 01 at $13.88
Listed on October 31, 2012
Time Frame: exit prior to the Nov. 20th earnings report
Average Daily Volume = 35.7 million
New Positions: see below

11/06/12: Monday's bounce in HPQ continued and shares actually accelerated higher with a +2.7% gain on Tuesday. The stock hit $14.48 intraday. If there is any follow through tomorrow then HPQ will hit our stop loss at $14.51. More conservative traders may want to try and exit early now. I am not suggesting new positions at this time.

current Position: Short HPQ stock @ $13.88

- (or for more adventurous traders, try this option) -

Long DEC $13 PUT (HPQ1222x13) Entry $0.47

11/06/12 HPQ is showing strength. Readers may want to exit early now!

Netgear Inc. - NTGR - close: 35.61 change: +0.31

Stop Loss: 36.05
Target(s): 30.25
Current Gain/Loss: unopened

Entry on November xx at $ xx.xx
Listed on November 3, 2012
Time Frame: 6 to 8 weeks
Average Daily Volume = 381 thousand
New Positions: see below

11/06/12: NTGR gapped open higher but spent the rest of the day churning sideways. The larger trend still looks bearish and I am expecting NTGR to breakdown.

The October 26th low was $34.60. I am suggesting a trigger to open bearish positions at $34.50. Our target is $30.25.

Trigger @ 34.50

Suggested Position: short NTGR stock @ (trigger)

- (or for more adventurous traders, try this option) -

buy the DEC $33 PUT (NTGR1222x33)

Tronox Inc. - TROX - close: 19.92 change: -0.31

Stop Loss: 20.75
Target(s): 18.05
Current Gain/Loss: - 0.9%

Entry on November 06 at $19.75
Listed on November 3, 2012
Time Frame: exit on Nov. 9th to avoid the earnings report
Average Daily Volume = 838 thousand
New Positions: see below

11/06/12: TROX continues to underperform the market. The stock broke down under major support at $20.00 and fell to $19.51 intraday. Our trigger to open bearish positions was hit at $19.75. Unfortunately the stock bounced but failed to close back above the $20.00 mark. Readers may want to wait for a new drop under $19.75 before initiating new positions.

Earlier Comments:
This is going to be a short-term trade. TROX is due to report earnings on November 12th and we do not want to hold over the report (more aggressive traders may want to reconsider and hold over the announcement). If our trade is still open, we'll plan to exit on Nov. 9th at the closing bell.

*Small Positions*

current Position: short TROX stock @ $19.75