Option Investor

Daily Newsletter, Thursday, 12/6/2012

Table of Contents

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

Market Wrap

World Markets Rally, We Wait

by Thomas Hughes

Click here to email Thomas Hughes

The rhetoric remains the same in regards to White House and congressional posturing over the fiscal cliff. However, a new development in today's headlines points to dealings behind closed doors that may pave the way for a concrete solution. Senator ( R) Jim Demint announced today he was leaving the Senate in favor of the private sector. He is leaving to take charge of the conservative Heritage Foundation. Demint was seen as an obstacle to republican measures to reach a compromise. Earlier in the week Demint was critical of Speaker of the House John Boehner's proposals for increased tax revenue. Even though Demint was already planning on retirement there is already speculation that this move was arranged to help smooth the way for a quick end to the negotiations.

Stock markets around the world have rallied to new highs. Markets ranging from Germany to India, South Africa and Japan are reaching multi-month and multi-year highs. Investor confidence seems to be on the rise despite the gloomy outlooks put forth by world leaders and our own major corporations.

Economic Data

Futures were slightly negative this morning ahead of today's releases of economic data. As a whole the new numbers were mild and show a return to pre-Sandy conditions. On the jobless front it appears that Sandy has had little long term effect on unemployment. There is still some lingering effects on regional employment numbers but the overall impact has been negligible.

Initial claims dropped back to the 370,000 range we saw just before the storm came. This is a drop of 25,000 from the previous weeks upward revision and 10,000 below this weeks estimates. The four week moving average continued to climb, reaching a 14 month high. This new high in the average should be the peak unless we get a sudden jump in initial claims.

The Challenger report states that planned layoffs jumped more than 20% in November, a number that suggests we could see a spike in initial claims. However, this spike probably won't be enough to do any long term damage to the labor market. There are some seasonal factors to consider in this as well as the fact that lay offs are still down 30% from last November and 13% on a year to date basis. Most of the job cuts can be attributed to two factors, Hostess and HPQ. The most losses occurred in the food industry, led by Hostess going out of business. The sector with the second largest number of layoff's was the computer industry, led by HPQ and its restructuring plans.

Continuing claims and total claims for unemployment both fell to new low levels. The continuing claims fell by 100K to 3.21 million for the week ending 11/29. This is the fourth week of declines in this data since the storms and the second lowest weekly data point this year. Total claims for unemployment fell to a new multi-year low of 4.9 million. This is 224K lower than last week and the lowest levels since 2008. The total number of people on unemployment is about 25% lower than last year. Based on these two number I might expect to see unemployment fall despite the potential impact from hurricane Sandy. The November unemployment data is scheduled to be released tomorrow at 8:30AM. I have seen a couple of different estimates ranging from holding steady at 7.9% to an increase of as much as 0.2% to 8.1%

We also get new jobs data from the Labor Department. Yesterday ADP reported their data, showing a slight drop in jobs creation. The US data is expected to show a similar decline. The consensus estimates are ranging from 90,000-100,000, a drop of about 70,000 from last month.

Around The World

European markets climbed today with several reaching new highs in the face of even lower expectations. The ECB held their meeting this week and today announced their rated decision and outlook going into 2014. The rates were held steady at 0.75%, which was not unexpected. Draghi went on to say in the statements prepared by the ECB to say that the outlook remained weak going into 2013 and lowered the outlook once again. Now the ECB is expecting the Eurozone to grow at a rate of -0.9%-+0.3%, which to me is quite a large range and a sign of real uncertainty. They also lowered this years expectation by -0.1%. Looking forward the ECB expects the region to return to growth in late 2013 with 2014 showing GDP in the range of 0.2%-2.2%.

Asian indexes closed the day mixed with most hovering around flat line. The Heng Seng and Thai Set indexes both flirted with and/or made new highs. News from the region was tame, focusing primarily on business and earnings. Japan led the region with a gain of 0.81%, reaching a 14 month high. The impending election, depreciating yen and expected easing from the BOJ are driving this trade in the short term. Anyone trading Japan needs to keep a look out to next weeks elections as a possible turning point.

Oil And Gold

Today's new Eurozone statements, which really did not say anything new in my opinion, helped to send the price of oil down by around 2%. Oil remains trapped in this range between $85 and $90 and is now down near the lower end. This commodity, and gold as well, could remain range bound until the current fiscal issues are laid to rest. World growth and oil demand are in question and at this time the ol fiscal cliff is clouding the view.

The Oil Index has been trading sideways in similar fashion to the underlying commodity. The index has been consolidating between a support level and a convergence of moving averages. A break above could take the index to 1250-1275 while a break below could take it down to 1150 or lower. I am tending to think the index will move up rather than down in the short term but it will be affected by every bit of economic news.

The Oil Index, daily

Gold traded to the plus side today and regained the $1700 level. Gold has also been trading in a range over the last few months as world wide easing measures have taken effect. Gold could bounce back up to $1750 on weak European expectations and fiscal cliff worries.

The Gold Index continued its bounce downward over the last week. The thought of prolonged higher prices for gold was not enough to keep investors interested in the gold miners. The index is retracing the run up it made over the summer and is nearing the 78% level. Before reaching the 78% retracement the index will have to break the rising up trend line created by connecting the two dips of May and July 2012. If the index does reach the 78% level, breaking this trend line, a full retracement becomes probable. Momentum on the Gold Index is diverging from price. This suggests that the down leg is nearing its end and that the index could find support at the uptrend line.

The Gold Index, daily

Story Stocks

Well, its less than 30 days to the fiscal cliff and many corporations are racing to fight it. Another round of special dividends was announced today bringing the practice into sharper focus. I tried to find an etf or index that tracks dividend payers but couldn't find anything like what I wanted. If anyone knows of a good one please let me know. I heard of three today. Sirius XM, General Dynamics and Safeway FoodStores. Sirius upped the ante adding a $2 million stock buyback to the deal. Sirius XM jumped on the news, much like other stocks providing the special dividend, and then sold off during the day.

Sirius XM, daily

Apple had a $35 turnaround today. The stock opened under heavy selling pressure in continuation of yesterday's declines. After reaching bottom in mid morning trading the stock regained all its daily losses and then some of yesterday's. Today's candlestick is very bullish and supported by an increase in volume.

Apple, daily

Broadcom updated its guidance and sent shares of its stock higher. The company raised the lower end of its guidance range based on stronger than expected sales. Strength in mobile and wireless sales increased more than expected in the fourth quarter and will significantly impact revenue and earnings. The stock gained more than 2% in trading on average volume, moving up toward the middle of its 52 week range.

Broadcom, daily

Men's Warehouse reported that earnings were up 20% over last year but a disappointing outlook sent shares lower. The company now expects earnings to range from -5 cents per share to +1 cent per share. This is down from a previous estimate of +12 cents. The stock dropped sharply in pre market trading but the new low prices were met with enthusiasm. Buyers stepped in and drove prices up from the day's low of $27.50 to regain most of today's losses.

Men's Warehouse

Lululemon also reported earnings today. The company surprised investors with earnings and an 18% jump in comp store sales. The yoga/workout clothing retailer posted earnings of $0.39 per share, 2 cents above expectations. Revenue increased 37% in the quarter, also ahead of expectations. The company also issued fourth quarter guidance that was slightly below consensus estimates. The stock sold off after the open but quickly found support and regained yesterday's closing price on high volume.


The S&P 500

This morning the futures trade hung just under flat line. There was little movement ahead of and after the release of the economic data. The index has been trading in a tight range over the last two weeks, just above a support level confirmed by long and short term moving averages. This consolidation is a good sign following the support bounce of mid-November. The bounce was fueled in part by perceived fiscal cliff progress, and I use that term loosely, and is now awaiting further developments.

S&P 500 with consolidation, daily

I see two short term technical possibilities at this time. The first is that the index is making a flag formation following the bounce. This suggests that the bounce began last month is only half over and that the market will drift upward, maybe until we get a fiscal cliff solution. This could take the index up to the 1490-1500 level and significant resistance by the end of the year. This resistance dates back to the 2007 market reversal and 2008 bear market.

S&P 500 with flag formation, daily

The other is a short term rounding top. This top could bring the index back down to the recent lows, a move that is also being forecast by momentum indicators. As I have noted many times before the series of lower lows in the index from mid-October to mid-November are coincident with a series of lower peaks in bearish MACD. This coincidence suggests that the recent selling is not over and that a retest or at least an attempted retest of the November lows is in the cards.

S&P 500 with MACD, daily

Longer term the index is still in an uptrend and making a bounce from the long term trend line. This uptrend is weakening, as evidenced by declining peaks in momentum, and possibly nearing completion. The index is trading at/near resistance and faces more when it moves higher. At this time there are still no signs of long term topping or reversal in the S&P 500. The index looks good for another advance but faces resistance at 1465, 1500 and 1565.

S&P 500, weekly with MACD

It is without doubt that the fiscal cliff is important to us, our country and our future. However, I think that in the end it will only be a blip on the screen. The term Fiscal Cliff gives the situation an ominous name but one more ominous than may really be deserved. Something will be done to move past this just like every other time the national budget has been in question and we will move on.

It is possible the rest of the world is already moving on. China has had its transition for the year and is now focusing on the work at hand. Europe is getting its house in order; Spain requested aid and Greece got its funding package. The point is that much of what has been clouding the future is dissipating and world markets are responding to all this by reaching new high levels. Is it possible that a resolution will send our markets to new highs?

There is a lot to consider and it is all being clouded by fiscal cliff conjecture. The stagnant economy and weak global outlook is leading many to speculate on further fiscal easing from world central banks as well as our own. We may get some more insight into that next week when the FOMC makes their interest rate decision. However, the current budget negotiations are still in the way, preventing a clear view of 2013 and what our economy will need. Once the fiscal cliff is off the table, or at least shelved for a while, Ben and the FOMC will be able to make better estimates of our own needs.

As always, keep a close eye on your technicals and choose your underlying stocks with care. Look for stocks with liquid markets, tight bid/ask spreads and favorable technicals. We're in a stock pickers market and there are good plays out there for every trader.

Thomas Hughes

New Plays

Nearing Multi-Year Highs

by James Brown

Click here to email James Brown

Editor's Note:

Additional Trading Ideas:

In addition to tonight's new candidate(s), consider these stocks as possible trading ideas and watch list candidates. Many of these need to see a break past key support or resistance:

(bullish ideas) MAN, GME, DISH, KOS, VIP


Smith & Wesson - SWHC - close: 10.85 change: +0.27

Stop Loss: 10.15
Target(s): 12.85
Current Gain/Loss: unopened

Entry on December xx at $ xx.xx
Listed on December 06, 2012
Time Frame: 9 to 12 weeks
Average Daily Volume = 2.8 million
New Positions: Yes, see below

Company Description

Why We Like It:
2012 has been a banner year for SWHC. Shares have exploded higher as gun sales in the U.S. surge. Many citizens are worried that the White House will advance tighter gun control laws, which is driving record sales for the industry. Shares of SWHC are in a wide, bullish channel (see weekly chart). Shorter term the stock is bumping up against resistance near $11.00.

I am suggesting a trigger to open bullish positions at $11.05. More conservative traders could wait for a close over $11.25 instead as an alternative entry point. Our multi-week target is $12.85.

Trigger @ 11.05

Suggested Position: buy SWHC stock @ (trigger)

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

buy the 2013 Mar $12 call (SWHC1316c12) current ask $1.00

Weekly chart:

Annotated chart:

In Play Updates and Reviews

A Relatively Quiet Thursday

by James Brown

Click here to email James Brown

Editor's Note:
Thursday's session was pretty mild. Stocks did bounce off their midday lows.

AFFY has been closed. PKI removed. CLF stopped out.

Current Portfolio:

BULLISH Play Updates

Bank of America - BAC - close: 10.46 change: -0.01

Stop Loss: 9.65
Target(s): 11.50
Current Gain/Loss: + 3.5%

Entry on December 05 at $10.10
Listed on December 01, 2012
Time Frame: 6 to 8 weeks
Average Daily Volume = 150 million
New Positions: see below

12/06/12: It would have been normal to see some profit taking after yesterday's big rally higher. Yet traders bought the dip today and BAC closed virtually unchanged. Broken resistance at $10.00 should now be new support.

Earlier Comments:
If triggered our target is $11.50. More aggressive traders could aim for $12.00. This is a multi-week trade.

current Position: Long BAC stock @ $10.10

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

Long 2013 Jan $10 call (BAC1319a10) entry $0.51

Banner Corp. - BANR - close: 29.89 change: -0.45

Stop Loss: 28.90
Target(s): 34.00
Current Gain/Loss: - 2.0%

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

12/06/12: BANR underperformed the market with a -1.48% decline. Shares are back under the $30.00 level and look headed for the 30-dma near $29.25. I am not suggesting new positions at this time.

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: 44.19 change: +0.58

Stop Loss: 43.25
Target(s): 48.00
Current Gain/Loss: + 0.8%

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

12/06/12: We were about to give up on BLL but shares turned around on Thursday. The stock rallied off yesterday's lows and posted a +1.3% gain. I remain cautious.

current Position: Long BLL stock @ $43.85

11/24/12 new stop loss @ 43.25
11/17/12 new stop loss @ 42.55
11/06/12 triggered @ 43.85

Pegasystems Inc. - PEGA - close: 20.49 change: +0.12

Stop Loss: 19.90
Target(s): 24.00
Current Gain/Loss: unopened

Entry on December xx at $ xx.xx
Listed on December 04, 2012
Time Frame: 6 to 8 weeks
Average Daily Volume = 257 thousand
New Positions: Yes, see below

12/06/12: PEGA is still consolidating sideways between $20 and $21.

I am suggesting a trigger to launch positions at $21.25. If triggered our target is $24.00 although more conservative traders may want to exit as PEGA nears potential resistance at its simple 50-dma instead.

Trigger @ 21.25

Suggested Position: buy PEGA stock @ (trigger)

Tenneco Inc. - TEN - close: 32.49 change: +0.18

Stop Loss: 31.45
Target(s): 37.00
Current Gain/Loss: unopened

Entry on December xx at $ xx.xx
Listed on December 04, 2012
Time Frame: 6 to 8 weeks
Average Daily Volume = 517 thousand
New Positions: Yes, see below

12/06/12: Traders bought the dip in TEN near its rising 10-dma this morning. We are still waiting for a breakout past resistance.

Earlier Comments:
I am suggesting we keep our position size small to limit our risk. We will use a trigger to open bullish positions at $33.15. More conservative traders may want to wait for TEN to actually close above the $33.00 level and then open positions the next morning. If triggered our multi-week target is $37.00. This trade could take weeks.

Trigger @ 33.15 *Small positions*

Suggested Position: buy TEN stock @ (trigger)

ValueClick, Inc. - VCLK - close: 19.28 change: +0.16

Stop Loss: 17.85
Target(s): 20.75
Current Gain/Loss: + 5.9%

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

12/06/12: VCLK extended its gains and added another +0.8%. Readers may want to start raising their stop losses.

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

11/28/12 new stop loss @ 17.85

BEARISH Play Updates

Chesapeake Granite Wash Trust - CHKR - close: 17.10 change: -0.51

Stop Loss: 18.75
Target(s): 16.40
Current Gain/Loss: + 4.5%

Entry on December 04 at $17.90
Listed on November 26, 2012
Time Frame: 6 to 8 weeks
Average Daily Volume = 226 thousand
New Positions: see below

12/06/12: The sell-off in CHKR continues. The stock underperformed the market again with a -2.8% decline. Readers may want to start inching down their stops toward the 10-dma.

Earlier Comments:
Our initial target is $16.40 but we might reconsider and aim lower.

*Small Positions*

current Position: short CHKR stock @ $17.90

MICROS Systems - MCRS - close: 42.00 change: +0.39

Stop Loss: 44.05
Target(s): 40.10
Current Gain/Loss: + 2.0%

Entry on December 03 at $42.85
Listed on November 28, 2012
Time Frame: 3 to 6 weeks
Average Daily Volume = 542 thousand
New Positions: see below

12/06/12: After a multi-day decline MCRS finally produced a little oversold bounce. Look for resistance near broken support at $43.00.

current Position: short MCRS stock @ $42.85

12/03/12 triggered at $42.85

Pan American Silver Corp - PAAS - close: 18.05 change: -0.02

Stop Loss: 18.80
Target(s): 15.55
Current Gain/Loss: unopened

Entry on December xx at $ xx.xx
Listed on December 05, 2012
Time Frame: 3 to 4 weeks
Average Daily Volume = 1.6 million
New Positions: Yes, see below

12/06/12: The morning bounce attempt in PAAS ran out of steam. Shares fell back to support near $18.00.

The November low for PAAS was $17.79. I am suggesting a trigger to open small bearish positions in PAAS at $17.75. If triggered our target is $15.55 but more conservative traders may want to exit near $16.00 instead.

We want to keep our position size small to limit our risk.

Trigger @ 17.75 *Small Positions*

Suggested Position: short PAAS stock @ (trigger)

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

buy the 2013 Jan $17.50 PUT (PAAS1319m17.5)

Stone Energy Corp. - SGY - close: 20.45 change: -0.27

Stop Loss: 21.35
Target(s): 16.00
Current Gain/Loss: - 3.3%

Entry on December 04 at $19.80
Listed on December 03, 2012
Time Frame: 3 to 6 weeks
Average Daily Volume = 719 thousand
New Positions: see below

12/06/12: There was no follow through on yesterday's bounce in SGY. Readers could use a new drop under $20.00 as a new bearish entry point.

current Position: short SGY stock @ $19.80

12/05/12 SGY surges following M&A news with peers.


Affymax - AFFY - close: 23.25 change: +0.14

Stop Loss: 22.65
Target(s): 27.50
Current Gain/Loss: - 4.1%

Entry on November 26 at $24.10
Listed on November 21, 2012
Time Frame: 3 to 6 weeks
Average Daily Volume = 678 thousand
New Positions: , see below

12/06/12: AFFY has not been cooperating. Last night we decided to abandon ship and exit this morning. The stock opened at $23.11.

*Small Positions*

closed Position: long AFFY stock @ $24.10 exit $23.11 (-4.1%0

12/06/12 closed this morning
12/05/12 prepare to exit immediately at the open tomorrow


PerkinElmer Inc. - PKI - close: 30.89 change: -0.21

Stop Loss: 29.70
Target(s): 35.75
Current Gain/Loss: unopened

Entry on December xx at $ xx.xx
Listed on December 01, 2012
Time Frame: 6 to 9 weeks
Average Daily Volume = 661 thousand
New Positions: see below

12/06/12: PKI is moving the wrong direction. The stock created a bearish engulfing candlestick reversal pat tern on Dec. 3rd and it's been down every day since. Our trade has not opened yet. I am removing PKI as a candidate.

Trade did not open.

12/06/12 removed PKI from the newsletter



Cliffs Natural Resources - CLF - close: 29.19 change: -0.34

Stop Loss: 30.55
Target(s): 25.25
Current Gain/Loss: - 3.1%

Entry on November 28 at $29.62
Listed on November 27, 2012
Time Frame: 4 to 6 weeks
Average Daily Volume = 7.7 million
New Positions: see below

12/06/12: We labeled CLF as a more aggressive trade. Shares displayed some volatility this morning with a spike up to $30.65 before reversing lower. Our stop loss was hit at $30.55.

*small positions*

closed Position: short CLF stock @ $29.62 exit $30.55 (-3.1%)

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

DEC $30 PUT (CLF1222x30) entry $1.60 exit $1.15 (-28.1%)

12/06/12 stopped out
12/03/12 new stop loss @ $30.55
11/28/12 triggered on gap down at $29.62