Option Investor

Daily Newsletter, Wednesday, 11/21/2012

Table of Contents

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

Market Wrap

Quiet Markets Ready For Turkey

by Thomas Hughes

Click here to email Thomas Hughes
Trading today was very light, the holiday and a huge round of impending news gave reason for many to sit on the sidelines. Next week promises to bring market moving news on three fronts.


Trading today, and this week, were very light. Nothing unexpected there, the holiday and the pre-holiday week are always a good time for traders to take much needed vacation time. This year is no different but what is different is the nature of the news we are expecting the week following the holiday. Usually the markets are braced for reports of sales from all the major retailers following the so called Black Friday shopping weekend. Over the last few years the importance of Cyber Monday has also grown but is only another face of the usual post Thanksgiving pre-Christmas shopping season hoopla. The news on its own would likely move the markets to the positive unless sales are just so dismal that there is no hope of retailers making money.

However, this year we also have the Fiscal Cliff to consider. The looming fiscal fiasco that congress and the president have led us to add another twist to the equation. Signs are good for a compromise, both sides have indicated that they are willing to work to bring the issue to a successful conclusion. So far remarks have led traders to believe that there will be a swift and positive resolution. The talks paused last week on Friday and will not resume until next week. As long as news on this front remains positive it should continue to support the markets in the short term.

There is also Europe and Greece to consider. While not directly linked to our markets a deal for Greek financial aid could help support European markets and in turn help the rest of the world. Greece by itself is small and basically not a threat to us or our markets but it is a threat to Europe and the EU. Getting past the current need for aid will help stabilize the region and could lift European markets. The Greece deal, which concerns the need for immediate financing, was pushed off until Monday (kick,kick …) but there are hints that a solution is close at hand. Germany's Merkel had remarks to the effect that a deal could be reached very soon. The money is there, they just need to reach an agreement on the details. We can only hope that they will reach an agreement.

The Economy

The regular releases of economic data, particularly the unemployment data, was moved up because of tomorrow's holiday. The initial claims came in at the consensus of 410,000. I feel like we should give the analysts a hi-five for getting it right but maybe I'll wait until next weeks revisions. This weeks number is down 41,000 from an upwardly revised 451,000. The data is still showing volatility associated with Hurricane Sandy. The revision to last weeks data added 12,000 and I expect a hefty revision to this week.

The four week moving average of initial claims rose this week. The average gained 9,500 to reach 396,250. This number, while at a 12 month high is still below the 400,000 level that economists believe shows an expansion in the job market. A rise in the 4-week average of initial claims above 400,000 would indicate contraction in the job market.

Continuing claims also fell in this weeks data, by 30,000, to 3.337 million. This number is also elevated due to the Hurricane but is still down significantly over the last 12 months. The total number of Americans on unemployment reported today was 5.241 million, a gain of nearly 250,000. This is also elevated due to Hurricane displacement but also still down sharply over the last twelve months. The total number of claims for the same period last year was well over 6.5 million, which makes this weeks number a 22% decrease. So, at this time it doesn't look like Sandy will take that big a bit out of the jobs market but we'll have to keep an eye on how claims data progresses. The spike in unemployment claims could impact total unemployment figures for November.

The reading on the Index of Leading Indicators was also release today. The indicators gained 0.2%, inline with expectations and a drop from last months 0.5% increase. Last month was revised down by 0.1% from 0.6%. The leading indicators are not showing me anything definitive at this time.

Bernanke continued to take the politicians to task today. In prepared statements delivered this morning to the Economic Club he mentions that economic recovery is “disappointingly slow” and that the fiscal cliff is still a “substantial threat” to that recovery. He also failed to make any comments indicating further stimulus and actually indicated that there would not be any despite the sluggishness in growth. The dollar should get a boost from the indicated lack of further easing.

Around The World

Not much new is going on in Europe that I haven't already mentioned so I'll leave that region on this note. European markets drifted higher in today's session with the FTSE gaining 0.07% and the Xetra Dax gaining 0.16%.

The big story in Asia today was Japan. The island nation's trade deficit, with new data released today, is at the highest level in over 30 years. This figure merely underscores the economic troubles Japan has been facing. The LDP party, which is widely believed to be the victor in upcoming elections, has already vowed to do whatever it takes to reduce inflation and stimulate growth for the country. Statements made by Shinzo Abe, the potential next Prime Minister, last week helped to drive the value of the yen down. This week the LDP party went on to state an inflation target of 2% and to reiterate last weeks calls for unlimited easing to get the economy back in line. This stance has sent the yen sliding versus the dollar, a slide that could continue should the unlimited printing of yen takes place.

Oil And Gold

The rising hostilities in the middle east have been driving oil prices lately. Despite the escalating violence and its possible implications for supply disruptions (which are minimal) oil prices remain in a tight range between $85 and $90. Prices even remained steady after today's inventory report showed a surprise 1.47 million barrel decline in crude stocks. The Oil Index has been moving up over the last few days in response to the mid east situation. Speculation that mid east tensions will raise oil prices is also lifting oil stocks. However, oil prices are unlikely to remain high for long based on the violence unless it does escalate further. The fear is that war between Israel and Gaza will spread throughout the region and impact world supply. Out right war has been avoided for a long time, lets pray that it stay's that way for a longer time. The Index very nearly touched my downside target before making its way back up to the 1200 level and the mid-point of the long term trading range. The index could continue to trend up in the near term but faces resistance around 1225 where it will run into the long and short term moving averages.

The Oil Index, daily

Gold prices have been holding fairly steady over the last six weeks. The metal has basically been trading between $1700 and $1735 in that time. The fiscal cliff, all the QE we've had this year, the possibilities of further easing from players such as the ECB, BOC and BOJ and mid east tensions are all keeping the metal in demand. The Gold Index has not been trading in a similar range. The index had been sitting on support but fell through unexpectedly (to me anyway) last week. The index is now moving back up but faces long term resistance around the 200 level. Gold prices have been elevated, if not near the actual highs, for a long time and I am expecting to see some good profits reports from the miners. The stochastic indicator is diverging from the recent low and suggests that there is still long term support for this index. I'm targeting the 200 level for the short term and will watch how the index moves along that line for further clues.

The Gold Index, daily

Story Stocks

Earnings reports are light this week but there are still some companies reporting. One surprise this morning was an earnings miss by Deere and Co. This company reported a miss on profits and a beat on revenue, the opposite of the trend I a have been following this earnings season. Analysts had been expecting earnings of $1.88 per share, Deere reported $1.75 on revenues that fell well short of the consensus. The company stated that demand for equipment remained strong and that they expected to see sales increases in the range of 5%. The company's full year guidance also fell short of the consensus. The stock responded by dropping more than 4% and falling below a long term support level.

Deere & Co

SalesForce reported yesterday after the bell and pleased investors with results and prospects. The cloud computing company reported a 35% increase in revenues and is expecting similar results next year. On a GAAP basis SalesForce posted a loss but excluding one time items the company beat top and bottom line expectations. As for the fourth quarter, SalesForce is predicting adjusted earnings in line with estimates. The stock jumped nearly 8% on the news but is still trading beneath long term resistance.


Wal Mart may be consolidating for another leg downward. The stock has been trending down for 4 weeks, gapping down below the long term moving average and is now forming a potential bear pennant. MACD is consistent with a continuation of the down trend and this weeks news story could help with that. Wal Mart is well known for bad press and poor relations with some of it's employees. Now, the retailer is facing mass protests that may impact their black friday sales. Today the National Labor Relations Board said it won't act to stop protests in front of Wal Mart stores before Friday. Just how widespread this will be and how it will affect sales is not known but I think it will be minimal. I think the biggest worry will be the bad press but that probably won't stop anyone from going there to shop.

Wal Mart, daily

Sector Watch

Looking at the markets sector by sector can be a great way to find trades you might not ordinarily see. A great way to do this is with the Sector Spyder Heat Map. The map gives you several options for viewing the S&P 500 as it is broken down by its composite sectors. Sectors that are particularly hot or cold are good places to look for trending stocks and those that may be about to break out. The map shows that over the last 5 days the hottest sectors are consumer discretionary, materials and the financials. What it also shows is that year-to-date the same three sectors are also the hottest, but in reverse order. What is important to note that the three sectors that have been hottest all year during the rally are also the hottest right now during this pre-holiday support bounce. Should the markets decide to rally onward from here these sectors could see the strongest gains. Likewise, should the markets fall from here these sectors could also see the largest losses.

S&P with XLY, XLB and XLF- comparative percent movement

The Indexes

The markets opened today with some strength even with a lack of volume. The advance/decline ratio hovered around 2 : 1 all day. The fighting between Israel and Gaza and their potential cease fire agreement provided some minimal volatility and I mean minimal. The S&P traded in a very tight range, moving less than five points all day.

The MACD poked its head up above the signal line into bullish territory today but it could just be a head fake at this point. The recent series of deeper dips into bearish territory, convergent with the series of lower lows in the index, suggests that the SPX will at least retest the recent lows. When that retest will happen is my question. At least two of my big three market movers for next week (fiscal cliff, black Friday results and the Greece deal) have a potential to send the markets up or down. Monday we can expect (maybe) a deal for Greece; Not a market mover for us but it sure wouldn't hurt to get some good news out of Europe. We can also expect some early tallies of Black Friday sales results, which is a potential market mover for us. Maybe Monday but probably later in the week will come updates on fiscal cliff negotiations. At this time I see more chance for upside than downside on the daily charts but there is still resistance ahead.

S&P 500, daily with MACD

S&P 500, daily with Stochastic

Longer term the charts and indicators are still consistent with an up trending market. This up trend is still weak and weakening but an up trend it is. Until the trend lines are broken I have to remain bullish in the long term but that bullishness is tinged with neutrality and a touch of bearishness. There is a lot of resistance moving forward, 1400, 1430 and 1465 are all significant resistance points and could combine with changing sentiment, politics or economic conditions to provide a ceiling for equity prices. Assuming the index does move higher if the index does not surpass the most recent high around 1465 a topping action could be in play. Looking even further out than that, should the S&P rally and make new highs, it still won't be clear sailing. There are several resistance areas before the index could retest the all time closing high of 1565.

S&P 500, weekly

The VIX is back down near long term lows and the bottom end of the calm zone. A VIX at this level reveals a calm market and one with little fear of bearishness. With the VIX so low the possibility of the current S&P bounce moving higher increases. The downside is that the VIX is also very near to bullish extremes that could precede a sharp drop in equity prices. At this time it looks though like the markets are calming down, the fiscal cliff isn't as looming as it was at first glance and we're all getting ready to eat some turkey and buy some Christmas gifts.

The VIX, daily

We are open for business on Friday and by that I mean the stock markets and trading. Volume should continue to be light and remain in a tight range like we have seen today. Monday we get back to real business as usual. Perhaps we will get a continued bounce and a Santa Rally (yes, I said it). Holiday shopping could be robust this year according to some recent analysts and Monday will be the first look at just how robust it is. Until then enjoy the holiday!

Thomas Hughes

New Plays

Credit Services

by James Brown

Click here to email James Brown


CIT Group - CIT - close: 36.45 change: -0.35

Stop Loss: 37.05
Target(s): 33.25
Current Gain/Loss: unopened

Entry on November xx at $ xx.xx
Listed on November 21, 2012
Time Frame: 3 to 6 weeks
Average Daily Volume = 1.5 million
New Positions: Yes, see below

Company Description

Why We Like It:
CIT is in the financial sector. The stock has been underperforming the market these last few days. Shares look ready to breakdown under significant support at the $36.00 level. I am suggesting we use a trigger at $35.90 to launch small bearish positions. Our target is $33.25.

Trigger @ 35.90

Suggested Position: short CIT stock @ (trigger)

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

buy the 2013 Jan $35 PUT (CIT1319m35) current ask $0.85

Annotated chart:

In Play Updates and Reviews

A Quiet Pre-holiday Session

by James Brown

Click here to email James Brown

Editor's Note:
Stocks delivered a relatively quiet pre-holiday trading session on Wednesday.

The U.S. markets will be closed for the Thanksgiving holiday tomorrow and they will only be open half a day on Friday.

We did see our new BANR trade opened.

Current Portfolio:

BULLISH Play Updates

Banner Corp. - BANR - close: 30.00 change: +0.51

Stop Loss: 28.90
Target(s): 34.00
Current Gain/Loss: - 1.6%

Entry on November 21 at $30.49
Listed on November 20, 2012
Time Frame: 8 to 10 weeks
Average Daily Volume = 157 thousand
New Positions: see below

11/21/12: Sometimes the trading gods are cruel. Last night we listed BANR as a new candidate to open bullish positions at $30.15 or higher. However, I said we would not open positions if BANR gapped above $30.50 or higher. The stock gapped higher at $30.49 this morning. The rally ran out of steam at $30.77.

This does not mean I am not bullish on BANR. This dip to $30.00 can be used as a new entry point to launch positions but our entry point this morning could have been better.

NOTE: BANR doesn't move very fast. This trade could take a couple of months.

*Small Positions*

current Position: Long BANR stock @ $30.49

11/21/12 out trade opened on the gap higher.

Ball Corp. - BLL - close: 44.61 change: -0.14

Stop Loss: 42.55
Target(s): 48.00
Current Gain/Loss: + 1.7%

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

11/21/12: BLL spent the day consolidating sideways. Readers may want to wait for a new dip near $44.00 before considering new positions.

current Position: Long BLL stock @ $43.85

11/17/12 new stop loss @ 42.55
11/06/12 triggered @ 43.85

Georgia Gulf - GGC - close: 45.00 change: +1.60

Stop Loss: 40.90
Target(s): 47.50
Current Gain/Loss: + 6.7%

Entry on November 19 at $42.18
Listed on November 13, 2012
Time Frame: 6 to 9 weeks
Average Daily Volume = 773 thousand
New Positions: see below

11/21/12: GGC continues to show relative strength. The stock surged +3.6% to set another new multi-year high. Mor conservative traders may want to start taking profits now. GGC is arguably short-term overbought and could see a pullback to the 10-dma again all the way down near $41.15. I am adjusting our stop loss to $40.90.

FYI: The Point & Figure chart for GGC is bullish with a quadruple top breakout buy signal and a long-term $73 target.

current Position: Long GGC stock @ $42.18

11/21/12 new stop loss @ 40.90
11/19/12 triggered on gap open higher at $42.18. trigger was 41.50
adjusted our exit target ot $47.50
11/17/12 adjust the stop to $39.15

McMoRan Exploration - MMR - close: 12.55 change: +0.05

Stop Loss: 11.90
Target(s): 15.00-16.00 zone
Current Gain/Loss: - 3.5%

Entry on November 12 at $13.01
Listed on November 10, 2012
Time Frame: 6 to 8 weeks
Average Daily Volume = 2.3 million
New Positions: see below

11/21/12: MMR continues to falter at its 100-dma. Readers will want to seriously consider an early exit out of this trade soon. I am not suggesting new positions at this time.

current Position: Long MMR stock @ $13.01

Splunk, Inc. - SPLK - close: 28.67 change: +0.28

Stop Loss: 27.30
Target(s): 31.50
Current Gain/Loss: + 4.1%

Entry on November 16 at $27.55
Listed on November 15, 2012
Time Frame: exit prior to earnings on Nov. 29th
Average Daily Volume = 1.0 million
New Positions: see below

11/21/12: SPLK spiked up to its 30-dma before paring its gains. I am raising our stop loss to $27.30 so it's just under the 10-dma. I am not suggesting new positions. We want to exit prior to the Nov. 29th earnings report.

Right now we are aiming for $31.50 but more conservative traders may want to take profits early near the $30.00 level instead.

Earlier Comments:
SPLK could see a short squeeze. The most recent data listed short interest at 19% of the 54.1 million share float.

*small positions*

current Position: Long SPLK stock @ $27.55

11/21/12 new stop loss @ 27.30
11/20/12 new stop loss @ 26.95
11/17/12 new stop loss @ 26.75
11/16/12 triggered @ 27.55

Tesla Motors - TSLA - close: 32.47 change: -0.53

Stop Loss: 30.40
Target(s): 34.90
Current Gain/Loss: + 2.3%

Entry on November 19 at $32.25
Listed on November 15, 2012
Time Frame: 6 to 8 weeks
Average Daily Volume = 1.0 million
New Positions: see below

11/21/12: The lunchtime rally in TSLA today failed and the stock underperformed with a -1.6% decline on Wednesday. For now the $32.00 level should be support. If that level fails look for a dip toward $31.00.

Earlier Comments:
There is a good chance that TSLA could see a short squeeze. The most recent data listed short interest at 62% of the 76 million-share float.

current Position: Long TSLA stock @ $32.25

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

Long Dec $33 call (TSLA1222L33) entry $0.90

Taiwan Semiconductor - TSM - close: 16.26 chagne: +0.01

Stop Loss: 15.75
Target(s): 18.50
Current Gain/Loss: + 0.7%

Entry on November 13 at $16.15
Listed on November 10, 2012
Time Frame: 6 to 9 weeks
Average Daily Volume = 10.3 million
New Positions: see below

11/21/12: I am tempted to drop TSM for lack of movement. Shares just aren't moving very fast. The overall trend is still up. I remain cautiously bullish here.

current Position: Long TSM stock @ $16.15

11/17/12 new stop loss @ 15.75
11/13/12 triggered @ 16.15
11/12/12 adjust trigger to $16.15

ValueClick, Inc. - VCLK - close: 18.66 change: +0.14

Stop Loss: 17.45
Target(s): 20.75
Current Gain/Loss: + 2.5%

Entry on November 20 at $18.20
Listed on November 19, 2012
Time Frame: 4 to 6 weeks
Average Daily Volume = 666 thousand
New Positions: see below

11/21/12: VCLK spiked to a new multi-month high at $18.86 before trimming its gains. I don't see any changes from my prior comments. Broken resistance near $18.00 should become new support.

Earlier Comments:
I will point out that VCLK could see potential resistance at $19.50 and the $20.00 mark. I would keep our position size small. VCLK has been volatile in the past.

current Position: Long VCLK stock @ $18.20

Virgin Media, Inc. - VMED - close: 33.72 change: +0.04

Stop Loss: 31.70
Target(s): 34.85
Current Gain/Loss: + 2.6%

Entry on November 19 at $32.85
Listed on November 15, 2012
Time Frame: 6 to 8 weeks
Average Daily Volume = 3.5 million
New Positions: see below

11/21/12: Wednesday's session in VMED was definitely forgettable. The stock drifted sideways. Look for support near $33.00. Readers may want to start inching up their stops. At the moment we're only aiming for $34.85 but more aggressive traders may want to aim higher.

*small positions*

current Position: Long VMED stock @ $32.85

BEARISH Play Updates

Crocs, Inc. - CROX - close: 12.40 change: +0.07

Stop Loss: 12.75
Target(s): 10.25
Current Gain/Loss: + 0.0%

Entry on November 07 at $12.40
Listed on November 6, 2012
Time Frame: 6 to 8 weeks
Average Daily Volume = 2.4 million
New Positions: see below

11/21/12: It's been several days and we are right back to where we started with CROX. More conservative traders may want to abandon ship.

Earlier Comments:
Remember that we want to keep our position size small to limit our risk.

*Small Positions*

Suggested Position: short CROX stock @ $12.40

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

Long Dec $12 PUT (CROX1222x12) Entry $0.55

11/17/12 new stop loss @ 12.75
11/07/12 triggered @ $12.40

Imperva Inc. - IMPV - close: 28.70 change: +0.66

Stop Loss: 30.65
Target(s): 25.50
Current Gain/Loss: + 3.0%

Entry on November 13 at $29.60
Listed on November 12, 2012
Time Frame: 6 to 8 weeks
Average Daily Volume = 221 thousand
New Positions: see below

11/21/12: Hmm... IMPV managed a bounce off yesterday's low. Has IMPV found a short-term bottom? We can watch for resistance at the 10-dma near $29.35 and at $30.00. I am not suggesting new positions at this time.

Earlier Comments:
We want to keep our position size small because IMPV can be a volatile stock. Our target is $25.50. FYI: The Point & Figure chart for IMPV is bearish with a $25.00 target.

current Position: short IMPV stock @ $29.60

11/19/12 new stop loss @ 30.65

Netgear Inc. - NTGR - close: 33.68 change: +0.04

Stop Loss: 35.15
Target(s): 30.25
Current Gain/Loss: + 2.4%

Entry on November 07 at $34.50
Listed on November 3, 2012
Time Frame: 6 to 8 weeks
Average Daily Volume = 381 thousand
New Positions: see below

11/21/12: NTGR was content to just churn sideways under the $34.00 level today. I remain cautious on this trade. No new positions at this time.

current Position: short NTGR stock @ $34.50

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

Long DEC $33 PUT (NTGR1222x33) entry $1.00

11/14/12 new stop loss @ 35.15
11/13/12 caution, CSCO's earnings could have an impact on NTGR tomorrow
11/07/12 triggered @ 34.50

Vistaprint N.V. - VPRT - close: 29.09 change: +0.19

Stop Loss: 30.25
Target(s): 25.25
Current Gain/Loss: - 1.4%

Entry on November 15 at 28.68
Listed on November 14, 2012
Time Frame: 4 to 6 weeks
Average Daily Volume = 364 thousand
New Positions: see below

11/21/12: VPRT displayed a little bit of relative strength today. That's three days in a row where traders have bought the intraday dip. VPRT looks poised to test resistance at the 10-dma again soon. I'm not suggesting new positions at this time.

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

current Position: short VPRT stock @ $28.68