Option Investor

Daily Newsletter, Thursday, 12/13/2012

Table of Contents

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

Market Wrap

World Banks Grease Global Economy

by Thomas Hughes

Click here to email Thomas Hughes

World banking leaders are in the process of re-greasing the wheels of global economy. Yesterday the FOMC announced plans to continue Operation Twist into the new year, the ECB has released funds to Greece and Japans expected new prime minister is set to continue easing. Despite all this the Fiscal Cliff still looms in everyone's minds. The stage is set for economic expansion but it is possible the financial leaders have done all they can. What else can they do, print more money?

What we really need is a catalyst to spur business investment and drive consumer demand. The Fed is maintaining the status quo as far as fiscal policy goes; their bazooka has run dry and we can't expect much more from that quarter. The economic data supports a stable and mildly growing economy, without signs of decline Ben and the FOMC are unlikely to act. Economic data released today shows an economy that, if not growing, is at least solidly stable. With things as they are the Fed is unlikely to act any further.

Headlines this mornings stated that Fiscal Cliff talks had started to turn negative. After looking through several reports I could find that little had changed even with new statements today. Rep. Boehner came out this morning and repeated what we already knew; He feels the republican plan is on track and the Presidents is not. The talks drag on and are still snagged on the issues of revenue and spending cuts. Even though nothing has changed the markets still decided it was reason enough to sell off.

I keep hearing and reading about cutting the mortgage interest deduction and all I have to say about that is please don't do it. Regardless, there is going to be some higher taxes and less spending, lets just get it done so the markets and our corporations can return their focus to actual business.

With all this to consider the futures were able to hold yesterday's close in overnight trading. The futures trade was just under flat line before the jobless data and turned slightly positive following the release. 1430 is proving to be resistance on the S&P, the index failed to maintain that level yesterday and fell from it today.

Around The World

Asian markets closed the day mixed. The Asian Indexes hovered around the break even point from the previous days trading except for two notable exceptions. Korea and Japan both moved up by more than 1.5%. Korea's move is linked to the announcement of holding key interest rates steady. Japans move higher is being driven by a weakening yen. The yen continued its slide versus the dollar today in anticipation of the elections being held on Sunday. The expected incoming prime minister Shinzo Abe and the Liberal Democratic Party are expected to hold good on their promises of “unlimited easing”. The LDP is also planning on implementing a new round of public works projects in its efforts of stimulating the economy. The Nikkei reached a new 8 month high and crossed technical resistance at 9,700.

Europe, the Eurozone and the ECB are making big moves to get their house in order. The most pressing issue, Greece, may have finally, once again, be put to rest. The country has finally been given its 34.3 billion euro bail out package. There was a little question in the air if it would come through after Greece's bond buyback missed its target. Never the less the deal was completed and now the ECB is turning to longer term measures to strengthen the EU and the euro.

The EU and the ECB announced plans today for a more centralized banking system that could be in place as soon as next year. The ECB would become the regions top banking supervisor and would have direct oversight of more than 150 of Europe's banks. This move should boost confidence in the EU and the euro over the long term and could be a sign of real recovery. The European markets had been trading to the downside and extended their losses following the remarks by Rep. Boehner this morning.

The Economic Data

Jobless claims have returned to pre Sandy levels as the northeast recovery continues. Initial claims for unemployment fell to the second lowest level seen this year and for the last several. Claims were reported as dropping more than 29,000 to an adjusted 343,000. This is the fifth week since the storm and the fourth week of data. The previous weeks data was revised up by 2,000. The four week moving average of claims also fell but held above the levels seen in the weeks preceding the storm. The average fell by 27,000 to 381,500.

Continuing claims also fell in this weeks data. The number of people filing for a second week of benefits dropped by 23,000 to 3.19 million, 25% lower than last year at this time. Continuing claims are also at their second lowest level this year, the lowest number was in the week preceding Hurricane Sandy.

Total claims posted a surprise jump this week, climbing by nearly 700k to hit 5.643 million. This is the highest level since July but is still about 25% lower than last year. This spike is probably Sandy related, I am expecting total claims to return to its low levels next week or the week after. Jobless claims and unemployment are trending down but as Jim mentioned earlier in the week the number of people in the workforce is in decline. If people keep dropping out total claims and unemployment figures could retreat to the FOMC's target without any improvement in the economy.

What I want to know is how many people that are so-called dropping out are actually not working. Can these people actually survive without jobs? Are these drop outs spouses of primary bread winners? How many are creating their own work or businesses? Small business is a pillar of our economy, if these drop outs are creating their own jobs won't that help the recovery? These questions and more are begging to be answered...I have been looking for some data on the subject but as of yet have not found any. I welcome any insights into the subject.

Other data released today also shows signs of improving conditions and a resurgence of the consumer. The PPI data for November shows that headline prices declined by -0.8%. This was slightly more than economists had been expecting and a good sign for profit margins and consumer level inflation. Ex-food and energy prices increased by a smaller than expected 0.1%. Energy prices led the decline in overall PPI, dropping by -4.6%, the largest decline since 2009. Lower prices are a good thing for business and consumers. Lower prices for raw materials and the energy that is needed to create them will help increase profit margins that we already saw expanding in third quarter earnings data.

Conversely, retail sales increased in November by 0.3%. This gain was slightly above expectations and were off set by a big decline in energy sales. The lower cost of gas and other fuels impacted the gain in retail sales by nearly a half percent. Ex-gas and autos retail sales increased by 0.7% led by consumer goods. Increasing sales and lower producer prices lead me once again to speculate on the possibility of fourth quarter earnings surprises. Low expectations and lowered guidance for corporate profits have the bar set pretty low to start with. Add to that the trend of improving margins we saw last quarter and the possibility of that trend continuing in the fourth quarter makes it very possible for businesses to beat those expectations.

Gold and Oil

Gold traded lower today, dropping below $1700 during the morning session. Gold has returned to lower end of its two month trading range, weighed down by Fiscal Cliff politics and global outlook. Gold found support last week around $1690, a break below this could be bearish for the metal long term. The Gold Index found support last week before reaching the 78% retracement of the most recent bull movement. The index has since regained the 61% level and is now retesting that support. On the daily charts momentum is still bearish but has now diverged from the recent low suggesting that the last low was at or very near the long term support. Low gold prices will probably not be a catalyst for gold stocks, based on that I am expecting the Gold Index to remain range bound. I will be watching $180 very closely as support and the lower end of the range.

The Gold Index, daily

Oil is also trading at the lower end of it's recent range between $85 and $90. Oil has been bouncing between these two levels driven by mid east tensions, Fiscal Cliff politics, global outlook, OPEC and current demands. A break above or below this range would be significant. At this time I see more chance of a downside break than one to the upside. The Oil Index has been trading toward the top of its range, opposite of the underlying commodity. The index has bounced from support but was capped at a long term resistance line around 1250. Momentum on the daily charts is converging with the upward price movement and suggests that the resistance could be broken. A move above 1250 would encounter new resistance at 1275 and 1300.

The Oil Index, daily

Story Stocks

Story stocks today encompass buyouts, earnings and dividends. Two companies have buyout offers on the table, one tech stock is set to run and one retailer is boosting shareholder value. Best Buy is expecting a buyout offer from its founder Richard Schultze worth $5-$6 billion. This is not unexpected and has been a possibility for several months. The stock gapped up strongly today with the conviction of more than 5 times average daily volume. The move has created an island and potential reversal in the stock but I don't know how far it will get with plans to take the company private.

Best Buy, daily

Sprint has announced plans to buy Clearwire pending approval. Sprint already owns the majority share in Clearwire and is seeking to purchase the remaining 49%. The offer currently stands at $2.90 a share, or about $2 billion dollars. This is a premium over yesterday's prices but the news sent the stock well over $3 in trading today.

Clearwire, daily

Adobe released earnings today. The company is expected to beat estimates of $0.46 a share based on strong sales during the quarter. The caveat is that another article I read cited they expected them to miss expectations of $0.56 per share. This shows how important it is to get more than one opinion. Trading in Adobe was volatile today with the stock making a very bearish candle signal should it be confirmed. The actual results reported by the company were profits of $0.44 per share on revenues of $1.153 billion. The results are a record for the company on a quarterly and annual basis. The stock traded to the upside in after hours trading following the release.

Adobe, daily

CVS made some very nice announcements today. The company is expecting next year to be a good one and it is returning some of the expected good fortune to its shareholders. The company is raising the its dividend by 38% to $0.225 per share and is moving forward with plans to buy back $4 billion in stock. CVS is expecting full year earnings in the range of $3.84-$3.98 versus the consensus median estimate of $3.79. The stock gapped up on heavy volume but the move faded throughout the day. The stock did remain above resistance and maintained a +1.5% gain on the day.

CVS, daily

The Indexes

The S&P fell today from resistance at 1430. This level marks the lower end of the range formed by the short term reversal we saw in September/October and could provide a substantial barrier to prices. Fiscal Cliff driven selling could return before the end of the year and 1430 is a good technical level to do that. Today's selling brought the index below the 1420 level where support began to kick in. Late day buying that began just above the short term moving average brought the S&P back above that line but failed to hold it into the close. On the chart of 30 minute closing you can the attempt and failure to cross back above 1420. I'll need to see a close above 1420 to regain short term bullishness.

S&P 500 30 minute closings

The anticipation of FOMC QE helped to inflate the indexes, bringing the S&P up to 1430. Worry over the Fiscal Cliff capped the move once the markets got what they wanted from the Fed. Political stumping and pot shots will continue to drive short term price fluctuations while the negotiations stall. In the long term potentials for corporate profits should regain the upper hand in the minds of traders and investors but this won't happen until the cliff is out of the way.

The long term charts of the S&P show a market in great indecision. The series of small bodied candles with long wicks is forming the pattern called spinning tops and marks a period of potential change. A drop from this level could bring the index back down to 1350, a move supported by indicators on the daily charts.

S&P 500 weekly closings

The convergence of MACD and price peaks in the S&P during the October/November sell off suggests that the market will return to retest the lowest levels. A move back down to 1350 over the next couple of weeks would bring the S&P to its long term trend line.

S&P 500 daily closings

As the Magic Eight Ball would say, things are hazy at this time. The market could go either way. The trend is still up and there is still no evidence of a reversal. However, if the market does move down from here to retest the previous lows a potential reversal would then be on the table. Important support at this time for the S&P 500 is at 1420,1410 and 1400. On the upside resistance is at 1430 and 1465. 1410-1430 may prove to be the range of trading over the next few days or until a new development in Fiscal Cliff negotiations.

There is not a whole lot on the economic front over the next week that I see as a market mover. Tomorrow CPI data is released and early next week new information from the housing sector. Thursday comes the next round of unemployment figures and Friday brings us the final revision for 3rd quarter GDP.

As I finish the wrap and get ready to publish I see that Boehner and Obama are about to meet in the White House. Maybe we'll get some new developments. Until then,

Thomas Hughes

New Plays

New 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) BGS, CBI, OAK, MOH, JNPR, PAY, SAFM


Gulfport Energy - GPOR - close: 38.90 change: +0.59

Stop Loss: 37.40
Target(s): 44.00
Current Gain/Loss: unopened

Entry on December xx at $ xx.xx
Listed on December 13, 2012
Time Frame: 6 to 8 weeks
Average Daily Volume = 1.0 million
New Positions: Yes, see below

Company Description

Why We Like It:
Most of the energy sector was hit with profit taking today but GPOR displayed relative strength with a +1.5% gain. The stock has spent the last week and a half digesting its late November gains. Now GPOR is hitting new all-time record highs.

I am suggesting we use a trigger to open bullish positions at $39.25. If triggered we will target the $44.00 level. More conservative traders may want to wait for GPOR to rally past $40.00 since the $40 level could be round-number resistance.

Trigger @ 39.25

Suggested Position: buy GPOR stock @ (trigger)

Annotated chart:

In Play Updates and Reviews

Widespread Declines

by James Brown

Click here to email James Brown

Editor's Note:
The market is starting to see some profit taking but so far the pullback is pretty mild.

Current Portfolio:

BULLISH Play Updates

Bank of America - BAC - close: 10.54 change: -0.07

Stop Loss: 9.89
Target(s): 11.50
Current Gain/Loss: + 4.4%

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

12/13/12: BAC continues to churn sideways just above the $10.50 level. If this short-term support breaks I would expect a dip back toward $10.00.

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

12/08/12 new stop loss @ 9.89

Banner Corp. - BANR - close: 30.25 change: +0.26

Stop Loss: 28.90
Target(s): 34.00
Current Gain/Loss: - 0.8%

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

12/13/12: Good news! It looks like BANR is starting to edge higher. That might suggest that the breakout will resume the longer-term up trend. Readers could use a close above $30.50 as a new bullish entry point.

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: 44.55 change: +0.08

Stop Loss: 43.45
Target(s): 48.00
Current Gain/Loss: + 1.6%

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

12/13/12: Hmm... BLL rallied right to resistance near $45.00 and reversed again. The larger trend is up but BLL is definitely struggling here. I am not suggesting new positions.

current Position: Long BLL stock @ $43.85

12/12/12 new stop loss @ 43.45
11/24/12 new stop loss @ 43.25
11/17/12 new stop loss @ 42.55
11/06/12 triggered @ 43.85

Cree, Inc. - CREE - close: 33.51 change: -0.70

Stop Loss: 31.49
Target(s): 39.00
Current Gain/Loss: - 0.7%

Entry on December 11 at $33.75
Listed on December 10, 2012
Time Frame: 6 to 8 weeks
Average Daily Volume = 1.3 million
New Positions: see below

12/13/12: Cautious analyst comments may have exaggerated the pullback in CREE today. I cautioned readers to look for a dip near the $33.50 area. A bounce from here can be used as a new bullish entry point.

Earlier Comments:
If this rally continues CREE could see a short squeeze. The most recent data listed short interest at 17% of the 113 million-share float. If triggered our multi-week target is $39.00. FYI: The Point & Figure chart for CREE is bullish with a $42 target.

current Position: long CREE stock @ $33.75

Electronic Arts - EA - close: 15.25 change: -0.08

Stop Loss: 14.49
Target(s): 17.50
Current Gain/Loss: + 3.6%

Entry on December 10 at $14.72
Listed on December 08, 2012
Time Frame: 6 to 8 weeks
Average Daily Volume = 4.5 million
New Positions: see below

12/13/12: The rally in EA stalled a bit today. I would not be surprised to see a dip back to $15.00 or even the 10-dma. I am not suggesting new positions at this time.

Earlier Comments:
More conservative traders might want to wait and look for a rally past $15.00 before initiating positions. EA can be volatile so we'll keep our position size small to limit our risk. We will target a move to $17.50 over the next few weeks. FYI: The Point & Figure chart for EA is bullish with a $21 target.

*Small Positions*

current Position: Long EA stock @ $14.72

12/12/12 new stop loss @ $14.49

ITT Educational Services - ESI - close: 19.59 change: +0.16

Stop Loss: 18.99
Target(s): 24.75
Current Gain/Loss: unopened

Entry on December xx at $ xx.xx
Listed on December 12, 2012
Time Frame: 2 to 6 weeks
Average Daily Volume = 500 thousand
New Positions: Yes, see below

12/13/12: ESI continues to creep higher but it remains under major resistance at the $20.00 level. There is no change from my earlier comments.

Earlier Comments:
A breakout past this level could spark a significant short squeeze. The most recent data listed short interest at almost 200% of the very small 14.9 million share float. Yes, you read that right, 200% of the float. You'll notice the rally in early September. That looks like a short squeeze. We'd like to catch the next one.

I am suggesting a trigger to open small bullish positions at $20.15. If triggered our target is $24.75. I do consider this a more aggressive, higher-risk trade.

Trigger @ 20.15 *Small positions*

Suggested Position: buy ESI stock @ (trigger)

Granite Construction - GVA - close: 31.64 change: -0.19

Stop Loss: 29.90
Target(s): 34.50
Current Gain/Loss: + 1.3%

Entry on December 10 at $31.23
Listed on December 08, 2012
Time Frame: 6 to 8 weeks
Average Daily Volume = 240 thousand
New Positions: see below

12/13/12: Technically today's decline is confirmation of yesterday's bearish reversal candlestick pattern. Yet I am still looking for support near the $31.00 level. Wait for a dip to and bounce off $31.00 or the 10-dma before considering new positions.

Our multi-week target is $34.50. FYI: The Point & Figure chart for GVA is bullish with a long-term $43.50 target.

Suggested Position: buy GVA stock @ (the open)

Pegasystems Inc. - PEGA - close: 21.77 change: -0.33

Stop Loss: 20.49
Target(s): 24.00
Current Gain/Loss: + 2.4%

Entry on December 10 at $21.25
Listed on December 04, 2012
Time Frame: 6 to 8 weeks
Average Daily Volume = 257 thousand
New Positions: see below

12/13/12: I cautioned readers that the 50-dma could be overhead resistance for PEGA. Look for a dip into the $21.50-21.00 zone.

current Position: Long PEGA stock @ $21.25

12/12/12 new stop loss @ $20.49

Stamps.com Inc. - STMP - close: 25.17 change: -0.32

Stop Loss: 24.95
Target(s): 29.50
Current Gain/Loss: unopened

Entry on December xx at $ xx.xx
Listed on December 11, 2012
Time Frame: 4 to 8 weeks
Average Daily Volume = 250 thousand
New Positions: Yes, see below

12/13/12: STMP retreats for a second day. If the stock doesn't bounce off the $25.00 level we might drop it. There is no change from my earlier comments.

I am suggesting a trigger to open bullish positions at $26.25. As you can tell from the chart, STMP is a volatile stock. Therefore I am suggesting we keep our position size small to limit our risk.

Trigger @ 26.25 *Small Positions*

Suggested Position: buy STMP stock @ (trigger)

Tenneco Inc. - TEN - close: 32.40 change: -0.48

Stop Loss: 31.45
Target(s): 37.00
Current Gain/Loss: - 2.3%

Entry on December 12 at $33.15
Listed on December 04, 2012
Time Frame: 6 to 8 weeks
Average Daily Volume = 517 thousand
New Positions: Yes, see below

12/13/12: After yesterday's intraday reversal today's pullback is not very encouraging. Traders did buy the dip near $32.00 midday but the close under its 10-dma is short-term bearish. Wait for a new rally past $33.15 before considering positions.

Earlier Comments:
If triggered our multi-week target is $37.00. This trade could take weeks.

*Small positions*

current Position: Long TEN stock @ $33.15

ValueClick, Inc. - VCLK - close: 19.17 change: -0.11

Stop Loss: 18.75
Target(s): 19.85
Current Gain/Loss: + 5.3%

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

12/13/12: VCLK tried to bounce but traders sold the rally this morning. There is no change from my prior comments. Readers may want to exit now or raise their stop closer to $19.00. I am not suggesting new positions. Our stop remains at $18.75.

Earlier Comments:
I would keep our position size small. VCLK has been volatile in the past.

current Position: Long VCLK stock @ $18.20

12/11/12 new stop loss @ 18.75
12/08/12 new stop loss @ 18.45, adjust target down to $19.85
11/28/12 new stop loss @ 17.85

BEARISH Play Updates

Chesapeake Granite Wash Trust - CHKR - close: 17.35 change: -0.27

Stop Loss: 18.25
Target(s): 16.40
Current Gain/Loss: + 3.1%

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

12/13/12: CHKR's bounce failed at resistance near $18.00 and its 20-dma. Overall I don't see any changes from my earlier comments. I am not suggesting new positions at this time.

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

*Small Positions*

current Position: short CHKR stock @ $17.90

12/10/12 new stop loss @ 18.25

MICROS Systems - MCRS - close: 40.93 change: -1.05

Stop Loss: 43.05
Target(s): 40.25
Current Gain/Loss: + 4.5%

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

12/13/12: MCRS is definitely cooperating. The stock underperformed the market with a -2.5% decline and a breakdown from its recent sideways trading range. Our exit target is $40.25. I am lowering our stop loss to $43.05.

current Position: short MCRS stock @ $42.85

12/13/12 new stop loss @ 43.05
12/08/12 adjust exit target to $40.25
12/03/12 triggered at $42.85

Stone Energy Corp. - SGY - close: 20.05 change: -0.47

Stop Loss: 21.35
Target(s): 16.00
Current Gain/Loss: - 1.3%

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

12/13/12: As expected the bounce is rolling over. SGY displayed relative weakness with a -2.2% decline. The stock is nearing prior support at $20.00. Readers can use a new drop under $20 as a bearish entry point.

current Position: short SGY stock @ $19.80

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