Option Investor

Daily Newsletter, Thursday, 8/29/2013

Table of Contents

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

Market Wrap

Where's The Volume?

by Thomas Hughes

Click here to email Thomas Hughes

Light market volume remains in many of the headlines. The Labor Day Holiday and the upcoming FOMC Taper-Meeting have given many traders and investors reason to sit on the sidelines, or just on the beach. I concur with the sentiment and expect tomorrow and the first part of next week to be quiet as well. Later in the week we may start to see a pick up in trading volumes as the unofficial start of the fall trading season commences. Monday the markets will be closed for the Labor Day Holiday but after that it will be a data, data, data. Not only that it will also be a mere two weeks until the next FOMC meeting.

International markets were mixed this morning when I first checked the news. The Nikkei finished the day up about 1% while mainland Chinese indices closed in the red. European shares were initially in the red as well but moved into positive territory before the close of their trading day. The danger in Syria is taking its toll on the markets overseas but a delay in any strike against them have relieved some of the pressure. In other news impacting the European markets a possible deal between Vodafone and Verizon helped to boost positive sentiment. Oil and gold both lost some of the ground they recently gained but remain near the recent highs.

Better than expected economic data here at home at first seemed to have no affect on the markets. Futures trading this morning was mildly positive going into the release of GDP and jobless claims figures. After the announcements, both good, futures gave up the gains and even dipped into negative territory. This turned out to be a pretty good buying opportunity for the day traders because the indices all moved higher going into the early part of the day. The data also helped to firm up the dollar and send the dollar index higher.

The Data

The data today was much better than expected and leads to two things; a growing economy and tapering. The first bit of data we received today was the first revision to 2nd quarter GDP. This number was revised up to 2.5% from 1.7%. This is much better then expected and much better than what was forecast way back at the beginning of the year. If this number holds up and the economy continues to improve into the end of the year the second half could be much better than expected as well. Exports and inventory growth are two of the biggest drivers of the revision.

Initial claims for unemployment benefits also fell unexpectedly. Analysts had been expecting the number to hold steady at or near last weeks 336,000. This week claims fell by 7,000 to 331,000, just off the 5 year low. The four week moving average gained 750 but remains low at 331,250. I wouldn't call it a down trend yet but it looks as initial claims is edging lower. Ford's announcement this morning that it was hiring 1,400 more workers in order to maintain inventory levels is one positive sign the jobs market is improving and that claims could continue lower. North Carolina was the only state reporting a decline in claims greater than 1,000. California, ever the volatile state for jobs, added 5,867 new claims this week, followed by Missouri with 1,757.

Continuing claims edged lower by 14,000 to just below the 3 million mark. This figure has been holding steady for the last couple of months, trending just over and under 3 million. If initial claims is moving lower then we should see another tick down in the continuing claims numbers soon as well. Total claims moved slightly higher but remain near the long term multi year low. Total claims for unemployment climbed 28,918 to 4.467 million. Total claims also appears to be fairly stable over the last few months, discounting the one spike in July. It doesn't look like the jobs data or unemployment figures scheduled for release next Friday will be too robust. Initial claims is down over the last month but total unemployment does not appear to be decreasing at this time.

We are entering a hot period for economic data. Tomorrow look out for Personal Income and Spending, Chicago PMI and Michigan Sentiment. Next week we'll get the jobs bundle including the ADP report, Challenger lay offs, jobless claims, Non-Farm Payrolls and U.S. unemployment. We will also get construction spending, auto and truck sales, the Feds Beige Book and a handful of lesser reports. Each piece will be heavily scrutinized for indications of taper/no-taper until the big event (FOMC meeting) scheduled for September 17-18th. Before that expect to hear from the BOJ next week and the ECB the week after.

The Dollar

The dollar got a boost from today's data. The dollar index climbed more than 0.75% today and broke above the 30 and 150 day EMA's and the long term support/resistance of 82. The index has been volatile over the past few months but is now near the bottom end of the 7 month range. The indicators are bullish and stochastic is showing mounting support at the current levels.

The euro fell sharply versus the dollar. This pair fell nearly a full percent on the stronger than expected U.S data. Adding to the downward pressure are new concerns over additional bail out needs in Greece.

The yen fell versus the dollar in today's trading as well. This pair is still winding up into the point of a potentially bullish triangle. The question is who will be stronger? The Government and Bank Of Japan or the currency market? A break above the down sloping resistance line has a target of 110, 5 handles higher than the current high set in May.

The Oil Index

Oil cut some of its gains today as the threat of a strike on Syria receded. Oil prices fell about 80 cents from just over $110 to $109.20. Even with today's near 1% drop oil prices are still up close to 4% this week. This puts oil prices at or near multi-year highs. The Oil Index has seen some gains in response to the increase in oil prices as well. The index is still moving higher after bouncing off its long term up trend line and is now trading above the short term 30 day moving average as well. The rise in oil prices could translate in higher index prices as short term traders try to bank on increased profits for the oil companies. The index is indicated up at this time but faces long term resistance around the 1,400-1,425 level.

The Gold Index

Gold prices cooled off a little today on the strong economic data and reduced threat of an imminent attack on Syria. Gold prices have been on a tear of late, crossing back above the $1400 level for the first time since early June. Gold is nearing the point of being called an “official” bull market but still faces significant technical resistance. The $1400 level was hotly contested this spring with the market making big swings above and below that level before finally succumbing to the selling pressure. Gold may have broken the long term down trend but I still think it is too early to take a strongly bullish stance. The Gold Index may be telegraphing the same caution. This index failed to hold its recently gained Fibonacci Support line and may be heading down. The index made a short term double top after breaking above the Fibonacci Retracement, subsequently moved back below it and is currently indicated down. Today's move puts the index just above the 30 day moving average which may provide support tomorrow. With the holiday weekend upon us a wait and see approach may be the best.

The Semiconductors Index

I thought today would be a good day to take a look at the Semiconductor Index as it is not one I review regularly. Today we find this index trading near the four month low and long term support zone. Bearish MACD is decreasing and appears to be confirming the support zone. The stochastic is in extreme oversold levels and echoing confirmation of support with a bullish signal. Price action is currently moving up with mildly bullish candle formation as well. This index looks like it may trade toward the upper end of its trading range in the near term. Support exists at the 450 level, a break below here would be bearish for this index. Resistance is around 475.

The Dow Transportation Average

The Dow Transports have retreated to support and the long term trend set at the end of the 2012. My new trend line, drawn today, connects the low in November 2012 with the bounce from the 150 day EMA this past June. This line just happens to coincide with this weeks sell-off and today's rebound. Indicators are currently bearish but indicate support at these levels over the longer term. While volume remains light the index may continue to fall until reaching the 150 day EMA which is currently coincident with the bottom of the four month range. This range is could remain intact until trading volumes return or the FOMC meeting next month, whichever comes soonest.

The S&P 500

I thought today started out a little weird. The data was much better than expected and should have sent index futures higher but the reverse is true. After the release of GDP and claims data the indexes fell into negative territory. The light trading volume is most likely to blame, without the strength and support of the full market traders who are present can be swayed by any old wind that blows. Today there are quite a few breezes swirling through the market. Of course tapering is on everyone's mind, at this point they should just do it so we can move past this psychological barrier. Other winds blowing through the market include Syria and what we might do and how that might affect oil supplies etc. This is important but likely a short term impact, unless it escalates. Chemical weapons are serious and can't be put up with. The Debt Ceiling has started to eddy through the market as well. Just as soon as we get past the Taper-Meeting hurdle we'll have to sit through intense haggling and political posturing over how much debt the U.S. will be allowed. After opening a little weak the S&P 500 traded higher throughout the day.

At this time it is hard to say which way the market is moving because each of these head winds has the ability, and has proven it time and again, to move the market. With volumes so light those day to day breezes create movements in the market that may not show the true underlying trend. Next week may prove to be an important week simply because of trading volume. I expect at least some increase in volume beginning next week. Until then the S&P, like many of the other major indices, has retreated back to the long term bull trend. The index is extremely oversold and MACD divergences are coincident with the support offered by the trend line. Recent weakness in the index could persist tomorrow but for now the trend is still up.

Next week may be a big week for U.S. and global markets. Not only are trading volumes expected to pick up with the start of the fall trading season but it is also a big data week. As I mentioned before next week is the monthly release of the employment reports including ADP, Challenger, NFP and Unemployment. It is also the last round of employment data before the next FOMC meeting. Internationally we can also expect meetings and possible policy changes from the likes of the BOJ and ECB next week and the week after. For now expect light volume to continue into the weekend and perhaps even the start of next week. By next Thursday I expect things will have begun to change.

Until then, remember the trend!

Thomas Hughes

New Plays

Clearly Underperforming

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. Some of these may need to see a break past key support or resistance:

(bullish ideas)

(bearish ideas)


Nuance Communications, Inc. - NUAN - close: 18.31 change: -0.19

Stop Loss: 19.05
Target(s): 15.15
Current Gain/Loss: unopened

Entry on August -- at $--.--
Listed on August 28, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 4.1 million
New Positions: Yes, see below

Company Description

Why We Like It:
NUAN is in the software industry. They're probably best known for their voice recognition, voice control, text to speech and speech to text solutions. The market seems unhappy with NUAN's recent decision to enact a "poison pill" amendment that prevents any one investor from owning more than 20% of NUAN shares without board of director approval. It looked like a move to head off activist investor Carl Icahn, who owned more than 15%.

The stock has been struggling since its April 30th sell-off after NUAN missed both top and bottom line earnings estimates. Shares have been bouncing around the $18-20 zone for months and now NUAN looks poised to breakdown below key support near $18.00. The August 7th low was $17.90. I am suggesting a trigger to open bearish positions at $17.80.

Trigger @ 17.80

Suggested Position: short NUAN stock @ (trigger)

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

Buy the Oct $18 PUT (NUAN1319v18) current ask $0.90

Annotated chart:

In Play Updates and Reviews

Lunchtime Peak

by James Brown

Click here to email James Brown

Editor's Note:
The morning rally peaked around lunchtime and stocks were paring their gains the rest of the session.

Current Portfolio:

BULLISH Play Updates

Halliburton Company - HAL - close: 48.54 change: -0.36

Stop Loss: 46.99
Target(s): 49.85
Current Gain/Loss: + 3.1%

Entry on August 19 at $47.10
Listed on August 17, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 9.0 million
New Positions: see below

08/29/13: Crude oil saw some profit taking today and the energy stocks followed oil lower. HAL gave up -0.7%. Watch for shares to find short-term support near its rising 10-dma, or the 20-dma if energy stocks really see stronger profit taking.

Earlier Comments:
Our target is $49.85. If you have a longer time frame you could aim higher.

current Position: long HAL stock @ $47.10

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

Long Oct $50 call (HAL1319j50) entry $0.69

08/24/13 new stop loss @ 46.99
08/22/13 new stop loss @ 46.40

J2 Global, Inc. - JCOM - close: 50.04 change: -0.04

Stop Loss: 49.40
Target(s): 57.50
Current Gain/Loss: - 1.9%

Entry on August 26 at $51.00
Listed on August 24, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 339 thousand
New Positions: see below

08/29/13: JCOM flirted with a breakdown under the $50.00 level but shares bounced near $49.80. If the market does see another down day I would not be surprised to see JCOM trade near its mid August lows around $49.50 and potentially hit our stop loss at $49.40.

Earlier Comments:
If JCOM resumes its up trend the stock should see some short covering. The most recent data listed short interest at 35% of the 41.6 million share float.

current Position: long JCOM stock @ $51.00

Constellation Brands Inc. - STZ - close: 54.57 change: -0.02

Stop Loss: 53.75
Target(s): 60.00
Current Gain/Loss: -1.4%

Entry on August 23 at $55.35
Listed on August 22, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 1.3 million
New Positions: see below

08/29/13: The midday rally in STZ failed near the $55.00 level. That doesn't bode well for the bulls. I am not suggesting new positions at this time.

current Position: Long STZ stock @ $55.35

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

Long Oct $60 call (STZ1319j60) entry $0.70

08/24/13 new stop loss @ 53.75

Waste Connections - WCN - close: 42.98 change: -0.35

Stop Loss: 42.99
Target(s): 48.00
Current Gain/Loss: unopened

Entry on August -- at $--.--
Listed on August 26, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 336 thousand
New Positions: Yes, see below

08/29/13: WCN displayed relative weakness with a -0.8% decline. The close under its 40-dma is short-term bearish but there is a good chance WCN will bounce near its 50-dma (currently near 42.72). More aggressive traders may want to consider buying a dip at the 50-dma and use a relatively tight stop loss.

We are suggesting a trigger to open bullish positions at $44.25. If triggered our multi-week target is $48.00.

Trigger @ 44.25

Suggested Position: buy WCN stock @ (trigger)

BEARISH Play Updates

Darden Restaurants - DRI - close: 46.55 change: +0.19

Stop Loss: 48.25
Target(s): 44.25
Current Gain/Loss: +1.3%

Entry on August 26 at $47.16
Listed on August 24, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 1.2 million
New Positions: see below

08/29/13: DRI produced a +0.4% bounce. Shares spent most of the day inside the $46.40-46.80 zone. If the bounce continues tomorrow, look for short-term resistance at the 10-dma near $47.10.

current Position: short DRI stock @ $47.16

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

Long Oct $45 PUT (DRI1319v45) entry $0.90

Fastenal Co. - FAST - close: 44.46 change: +0.42

Stop Loss: 45.01
Target(s): 40.25
Current Gain/Loss: unopened

Entry on August -- at $--.--
Listed on August 28, 2013
Time Frame: 3 to 6 weeks
Average Daily Volume = 1.5 million
New Positions: Yes, see below

08/29/13: FAST dipped toward yesterday's lows before bouncing this morning. It looks like the oversold bounce has stalled under round-number resistance at the $45.00 level. I don't see any changes from my Wednesday night new play comments.

Earlier Comments:
FAST looks poised to break down even further and the next level of support should be the $40.00 area. Tuesday's low was $43.75. I am suggesting a trigger to open bearish positions at $43.70. If triggered our target is $40.25. More aggressive traders may want to aim lower. The Point & Figure chart for FAST is bearish with a $37 target.

Trigger @ 43.70

Suggested Position: short FAST stock @ (trigger)

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

buy the Oct $40 PUT (FAST1319v40)

Mellanox Technologies - MLNX - close: 38.99 change: +1.15

Stop Loss: 41.00
Target(s): 35.25
Current Gain/Loss: + 1.3%

Entry on August 21 at $39.50
Listed on August 20, 2013
Time Frame: 3 to 6 weeks
Average Daily Volume = 713 thousand
New Positions: see below

08/29/13: The Israeli market was up more than +1% today. That might help explain the spike higher in MLNX this morning. Shares rebounded +3.0% but the bounce did stall under resistance near $40.00 and its 10-dma. It is worth noting that today's move has created a bullish engulfing candlestick reversal pattern. I am not suggesting new positions. More conservative traders might want to lower their stops closer to the $40.00 level.

Earlier Comments:
I would keep position small because MLNX does have above average short interest at 15% of the 37.5 million share float. FYI: The Point & Figure chart for MLNX is bearish with a $27.00 target.

current Position: short MLNX stock @ $39.50

08/22/13 warning! MLNX has produced a one-day bullish reversal pattern

Meritage Homes Corp. - MTH - close: 40.72 change: +1.62

Stop Loss: 40.25
Target(s): 35.25
Current Gain/Loss: unopened

Entry on August -- at $--.--
Listed on August 27, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 691 thousand
New Positions: Yes, see below

08/29/13: No one seemed to have any good explanations for the sudden rally in the homebuilding stocks today. MTH outperformed many of its peers with a =4.1% gain. The close over $40 and its 10-dma puts the short-term down trend in jeopardy. The intermediate trend still remains lower. If MTH sees any follow through on this rally we might drop it. Until then our plan is unchanged.

Earlier Comments:
We are suggesting a trigger to launch bearish positions at $38.40. If triggered our multi-week target is $35.25. FYI: The Point & Figure chart for MTH is bearish with a $31.00 target.

Trigger @ 38.40

Suggested Position: short MTH stock @ (trigger)

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

Buy the Oct $35 PUT (MTH1319v35)