Option Investor

Daily Newsletter, Thursday, 1/9/2014

Table of Contents

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

Market Wrap

Earnings And The NFP

by Thomas Hughes

Click here to email Thomas Hughes
The market once again awaits the NFP.


The day started out with a drop in Asian markets caused by Chinese inflation data. Consumer inflation in the country fell to 2.5%, below the expected 2.7%, causing the mainland index to fall to a 5 month low. In Europe, trading was muted in the early part of the day as traders awaited the results of the ECB meeting and rate decision. The ECB held rates steady with no sign of a cut or other form of policy change despite some speculation to the contrary. Here at home the futures were positive ahead of the daily economic releases.

The U.S. equities markets were fairly quiet during the day, trading in a fairly narrow range near yesterday's closing prices. The S&P 500 began the day in positive territory, dipped into the red during the middle of the day before regaining ground and moving into positive territory by the close. The other major indices were much the same with the Nasdaq touching a new intraday high. The dollar index got an early boost from the ECB decision and statements but fell back before the close. Gold prices held steady around the $1225 level while WTI benchmark crude made a new low.

The monthly bundle of employment data continued with the Challenger survey of planned lay offs and the weekly release of employment claims. The data, like yesterday's ADP report, was positively surprising and in line with the economic trends of the past 12 months. Planned layoffs are at a 13 year low and unemployment claims are back down near the recent lows. The data supported the markets going into the open but did nothing to spur the bulls into rally mode, all eyes are on the Non Farm Payrolls data tomorrow and the start of earnings season which kicked off today, after the bell.

The Jobs Picture

Tomorrow is the all important cap to the monthly jobs picture. The Non Farm Payrolls number, largely expected to be in the rangeo of 185,000, could in fact be much stronger than expected. Yesterday's ADP report was the first sign of such a possibility. Despite some unexpectedl weak Decmeber unemployment claims data the ADP report showed that jobs creation in the private sector was in fact growing and not declining from the previous month. The average analyst expectation for ADP, also in the range of 185,000, was in fact 238,000, more than 50K above average estimate. This is the second month ADP jobs have increased by more than 200,000.

Today, Challenger, Gray and Christmas helped to tip the balance to the favor of those looking for a strong NFP number. The firm reported that layoffs planned in/for the month of December fell by 32% from the previous month to hit a 13 year low not seen since June of 2000. This is the second month of declines in expected layoffs, the previous month declined by 20%. Taken together I think that ADP jobs and planned lay offs point toward at least a stable, if not growing, need for employees, a need that could continue to lower the overall unemployment rate into the short term.

Also released today, weekly unemployment claims figures. This week first time claims fell by -15,000 from a revised 345,000 to reach a 5 week low. Last weeks figure was revised upward by 6,000 for net drop of 9,000 from the last reported data. The four week moving average also fell, losing nearly 10,000 claims. This drop is in line with expectation and also supported by and supportive of ADP/Challenger data. It could also be a signal that seasonal fluctuation and adjustments could be working themselves out of the system. Regardless, this data brings initial claims back down to about average for the past 6 months and to levels that have benefited overall employment rates in the past.

Continuing claims for unemployment was also in line with expectations. It gained 50,000 from a revised 2.815 million. Last weeks figure was revised lower making this weeks net gain from the last reported data about 30,000. Continuing claims are off of their long term lows but still near them and trending lower over the longer term. If today's initial claims remains at or near the current low level in revision and the next few weeks data continuing claims should come down as well which could lead to a reduction in overall unemployment in next month's data.

Total claims dropped by over a quarter million to hit a four week low. The total claims number is approaching the 4 million mark and could easily fall below that level provided other data trends such as declining first time claims and rising jobs creation. This figure is still reporting data from December so expiring benefits have not begun to impact this figure. State level data shows that employmet remains spotty by region. Nine states reported a drop in claims greater than 1,000 led by CA, TX and FL with -14,635, -6,723 and -3,738 respectively. Michigan, Pensnsylvania and New Jersey led the charge with new claims with a combined total over 33,000.

Even though it is the employment data bundle as a whole that is really important the market, as usual is waiting for the NFP and unemployment releases tomorrow. It is very likely that NFP could be stronger than expected. The ADP figure foreshadows the possibility while the other data helps to support the idea. The current expectation is for NFP of 185,000 and for unemployment to rise by a tenth to 7.1%. The actual results will fuel FOMC speculation and the possibilities of less, more or the same amount of tapering at the next meeting.

Gold And The Gold Index

Gold prices have retreated from resistance at $1250 since testing it the first part of this week. Gold prices are now sitting right on $1225 awaiting tomorrow's NFP and unemployment releases. The data will fuel Fed speculation which will fuel dollar speculation and valuation so I am expecting some volatility from gold tomorrow. The trend is still down but the metal could just as easily spike up to retest resistance or dip to test support. The Gold Index is also still trending down. The early part of the week saw the index retreat from the 30 day EMA in tandem with golds test of resistance at $1250. The long and short term indicators are bullish on the index but now that resistance is revealing itself the short term bull movement could be over or at least temporarily halted. The long term indicators also suggest that a bottom may be forming. There are significatn divergence forming in both the MACD and stochastic that indicate there is some longer term support at or near the current levels. Nearest support for the index is near the recent lows around the $82 level. A drop below this level would be bearish while a confirmation of support could indicate a correction to the long term down trend line near the $100 level. For now I am keeping an eye on gold prices and the $82 level.

Oil And The Oil Index

Oil prices traded in a tight range today. Global supply and demand concerns have been shifting and tomorrown's NFP will add to the speculation. Prices for WTI held steady around the $92.50 mark, the lowest levels seen since late November. The drop in oil prices is good for the economy but may be hurting oil companies, at least in the near to short term. The Oil Index, while trading near long term highs around the 1,500 level is possibly making a short term top. The index is now testing the level for the second time with weakening indicators. However, the index is also above potential support, trapped in a tight range between the long term highs and the combined support of the 30 day EMA and a previous high. The long term trend is up but the near to short term analysis is pointing to a potential correction that could bring down to the 1,450-1,425 level. Watch for a break or test of both support and resistance.

The Dollar

The dollar got a boost today, perhaps from Mario Draghi and the ECB. The ECB held its benchmark rate unchanged and then made comments that dampened bullish sentiment in the EU region. One comment effectively said that the only good sign the ECB sees at this time is that overly high unemployment levels seem to be stabilising, at those high levels. Another comment hurting EU outlook is “it's too early to declare a victory” and that there are still global risks to the “fragile recovery”. The Dollar Index tested new support in a continuation of a rally begun with the new year but failed to hold. The index closed below said support but still above the short term moving average.

The EUR/USD pair fell from a retest of resistance with bearish indicators. The pair, which fell below support last week, has been moving steadily sideways this week, with some volatility, making new lows 5 of the past 6 trading sessions. Long and short term indicators are bearish with potential support around the 1.3500 level.

The USD lost a little ground to the yen. This pair has been consolidating above previous resistance and is in mid-bounce. This pair has been trending up for the past 2 months and is still in an uptrend. Tapering/FOMC policy is strengthening the dollar while at the same time Abenomics/BOJ policy is aimed at weakening the yen. The current consolidation could continue until the next round of meetings from both central banks later this month. Until then economic data could cause volatility. Support is around the 103.75 level coincident with the previous resistance and the short term moving average.

The Ten Year Treasury fell back from the 3% yeild level today. The TNX has been flirting with 3% for about two weeks now and could continue to do so while tapering is in effect. The MACD and stochastic indicators are both consistent with range bound trading with 3% as the top of the range. If the range is confirmed yeilds could return to previous low levels near 2.75% or lower. A break above this level could take yeilds up as high as 3.25% or 3.5%.

Earnings Is Upon US

Earnings season begen today after the bell. Alcoa released earnings that negatively surprised the market. The company had been expected to earn $0.06 per share, down from the previous quarter's $0.11 but only posted $0.04. The company was able to beat on the top line but aluminum prices near their lowest levels in over a year and high supply levels combined to impact the bottom line. Today, shares traded to the downside on high volume but were halted at the $10.50 level. Shares of Alcoa were off as much as 2% more in the after market trading session, breaking support.

The Indices

The indices continued to tread water today. Even though the bulk of data is pointing to ongoing and possibly strengthening job growth the markets are awaiting the release of the NFP and possibly more importantly the unemployment number. The NFP and unemployment figures are more directly tied to GDP and the Fed decision on taper than the other data which may explain the waiting. Of course, the market action after the last FOMC meeting when the taper began may be evidence that it (the taper) doesn't matter, maybe the market was/is waiting for earnings.

The SPX made the second of what I am going to call spinning tops. The index is at an inflection point, sitting just above support with MACD momentum at 0 and crossing into bearishness. Stochastic, while still high in the overbought zone, is also pointing down and suggestive of near term market weakness. This combination of indicators, with the index at/on support, could be pointing to a near term extreme of bearishnesh, which would be a good entry point for directional positions. Or it could be the just the beginning of a longer bearish move. At this time the nearest support is at the 30 day EMA, which is currently coincident with what I have termed the “pre-holiday support level”, that is, the closing level of the market on the Friday before the Christmas holiday. If that level fails to hold the next target for support is around the long term trend line between 1750 and 1775.

The long term trend is still bullish if weak and weakening, nothing new. And, as has happened before the index is also at a level elevated above the long term trend line with softening indicators. The stochastic is high in the overbought range and pointing down following a bearish cross, the MACD is bullish but weakening and divergent in the shorter and longer term analysis of this chart. These indicators suggest that a dip/correction is or will occurr in the nearer term. With short term (daily chart) support in the 1820-1825 range that is the first place to watch for a test, a break below this would have longer term implication and could result in a correction to trend.

The Dow Jones Industrial Average made a similar spinning top/doji candle as the SPX. This index has been trading sideways in consolidation since the first of the year as well and also has softening indicators. However, at this time momentum has not yet reached 0 nor has stochastic begun to cross out of the OB zone. The decline in indicators suggests that more weakness could be on the way but at the same time tomorrow's NFP report could be the catalyst to provide the needed support to spring board the indices to new highs.

Pulling out to the longer term look of the weekly charts the DJI is also looking more bullish. The index is trading very close to the all time closing highs with indicators that suggest the nearer term bull run may not be over. There is a divergence in MACD over the past 24 months of rally but the near term peak is actually convergent with higher prices, if only mildly.

The NASDAQ actully opened at a new all time high today before pushing slightly higher and then falling back before the close. This index could be telegraphing bullish intent. Currently, indicators are a bit mixed in the short term. The momentum is bearish, but very weak, and stochastic is pointing down, but high in the OB range. Nearest support is the same as with the SPX and DJI, the closing level on the Friday before the Christmas break, about 4104. A break below this level could have targets as low as 4,000 before significant support kicks in.

Is the market awaiting the NFP/unemployment numbers for permission to rally? The data is still rolling in supportive of the long term trends of economic growth. It is possible that the NFP will be only a blip on the radar as the market turns it eyes on other things, such as earnings. The data is good and the taper has been accepted so earnings could take over the driver seat, at least until the next FOMC meeting in two weeks. Tomorrow, on top of the NFP effect, the market could begin the day down simply on the Alcoa news. There is only one earnings report tomorrow so not much happening there. Next week gets really hot with the big banks starting with JP Morgan and Wells Fargo on Tuesday then Bank Of American Wednesday and Citi and Goldman Sachs Thursday. In between be on the look out for dozens of small and regional banks.

Until then, remember the trend!

Thomas Hughes

New Plays

Relative Strength in Healthcare

by James Brown

Click here to email James Brown


Lannett Company, Inc. - LCI - close: 34.53 change: +1.11

Stop Loss: 32.75
Target(s): 39.50
Current Gain/Loss: unopened

Entry on January -- at $--.--
Listed on January 09, 2014
Time Frame: exit PRIOR to earnings in early February
Average Daily Volume = 261 thousand
New Positions: Yes, see below

Company Description

Why We Like It:
LCI is in the healthcare sector. The company makes generic drugs. The stock was a huge performer in 2013. The latest earnings report was bullish with better than expected results and management guiding higher for 2014. Now we see LCI hitting new highs after a two-week sideways consolidation. This could be our chance to catch the next leg higher.

Today's high was $34.94. I am suggesting a trigger to open bullish positions at $35.15. If triggered our target is $39.50. However, we will plan on exiting prior to LCI's earnings report in early February (no date confirmed yet).

Trigger @ 35.15

Suggested Position: buy LCI stock @ (trigger)

Annotated chart:

In Play Updates and Reviews

XLRN Hits Our Target

by James Brown

Click here to email James Brown

Editor's Note:
The U.S. market spent most of Thursday churning sideways as traders await tomorrow's nonfarm payrolls (jobs) report due out before the opening bell.

XLRN hit our bullish exit target.

MDCA hit our entry trigger. WNR was closed this morning.

Current Portfolio:

BULLISH Play Updates

TD Ameritrade Holding Corp. - AMTD - close: 31.09 change: +0.26

Stop Loss: 29.90
Target(s): 33.85
Current Gain/Loss: + 1.4%

Entry on December 31 at $30.65
Listed on December 21, 2013
Time Frame: exit PRIOR to earnings on January 21st
Average Daily Volume = 1.9 million
New Positions: see below

01/09/14: The slow and steady rise in AMTD continues with a +0.8% gain today. The close over short-term resistance at $31.00 is bullish and marks a new multi-year closing high for the stock.

current Position: long AMTD stock @ $30.65

01/04/14 new stop loss @ 29.90
12/31/13 triggered at $30.65

Caesars Entertainment - CZR - close: 23.03 change: +0.10

Stop Loss: 20.95
Target(s): 26.00
Current Gain/Loss: + 1.8%

Entry on January 06 at $22.62
Listed on January 04, 2014
Time Frame: 6 to 8 weeks
Average Daily Volume = 836 thousand
New Positions: see below

01/09/14: CZR continues to flirt with a bullish move past short-term resistance near $23.00. More conservative investors may want to raise their stop loss closer to $22.00.

FYI: The Point & Figure chart for CZR is bullish with a $27.00 target.

*small positions*

current Position: long CZR stock @ $22.62

01/06/14 trade opened on gap down at $22.62

Gigamon Inc. - GIMO - close: 29.71 change: -1.77

Stop Loss: 29.45
Target(s): 37.50
Current Gain/Loss: - 5.7%

Entry on January 09 at $31.49
Listed on January 07, 2014
Time Frame: 4 to 8 weeks
Average Daily Volume = 256 thousand
New Positions: see below

01/09/14: Wow! I cautioned readers that GIMO was volatile but today's move was definitely unexpected. Shares completely erased yesterday's rally with a -5.6% plunge. Furthermore today's display of relative weakness was not a reaction to any specific company news. Technically today's drop has painted a bearish engulfing candlestick reversal pattern.

The intraday low was $29.51. If there is any follow through tomorrow we will see GIMO hit our stop at $29.45. I am not suggesting new positions at this time.

Earlier Comments:
I do consider this a more aggressive, higher-risk trade. GIMO has clearly been volatile since it went public last year. I am suggesting small bullish positions.

*small positions*

current Position: long GIMO stock @ $31.49

Hyatt Hotels Corp. - H - close: 50.07 change: +0.12

Stop Loss: 48.95
Target(s): 54.75
Current Gain/Loss: - 0.4%

Entry on January 07 at $50.25
Listed on January 02, 2014
Time Frame: exit PRIOR to earnings in mid February
Average Daily Volume = 264 thousand
New Positions: see below

01/09/14: Tomorrow could be the turning point for our Hyatt play. As the market reacts to the jobs number we will likely see shares of H either breakout higher or reverse. Wait for a bullish breakout above $50.45 before launching new positions.

Earlier Comments:
Our target is $54.75. However, we will plan to exit prior to earnings in mid February. FYI: The Point & Figure chart for H is bullish with a $66.00 target.

*small positions*

current Position: Long H stock @ $50.25

01/07/14 triggered @ 50.25

MDC Partners Inc. - MDCA - close: 26.19 change: +0.14

Stop Loss: 24.45
Target(s): 28.50
Current Gain/Loss: + 0.0%

Entry on January 09 at $26.20
Listed on January 07, 2014
Time Frame: 6 to 8 weeks
Average Daily Volume = 215 thousand
New Positions: see below

01/09/14: MDCA hit our suggested entry point with a late day rally. I would consider new positions now at current levels but investors may want to wait and see how the market reacts to the jobs report tomorrow morning.

current Position: long MDCA stock @ $26.20

01/09/14 triggered @ 26.20

Yandex N.V. - YNDX - close: 44.22 chnage: +1.97

Stop Loss: 41.90
Target(s): 48.50
Current Gain/Loss: + 2.1%

Entry on January 02 at $43.31
Listed on December 31, 2013
Time Frame: exit PRIOR to earnings in mid February
Average Daily Volume = 2.7 million
New Positions: see below

01/09/14: Shares of YNDX surged to a +7.5% gain intraday as the market reacted to bullish analyst comments from Morgan Stanley. Gains in YNDX faded to +4.6% by the closing bell. The breakout past $44.00 is bullish but I am a bit hesitant to launch positions given the recent volatility.

Earlier Comments:
Our multi-week target is $48.50. We want to keep our position size small to limit our risk. FYI: The Point & Figure chart for YNDX is bullish with a $48.00 target.

*Small positions*

current Position: long YNDX stock @ $43.31

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

Long Feb $45 call (YNDX1422B45) entry $2.00*

01/08/14 new stop loss @ 41.90, warning! today looks like a potential bearish reversal pattern
01/07/14 new stop loss @ 41.75
01/02/14 trade opened on gap higher at $43.31.
*option entry price is an estimate since the option did not trade at the time our play was opened.

BEARISH Play Updates

Best Buy Co. - BBY - close: 37.53 change: -0.31

Stop Loss: 40.25
Target(s): 35.10
Current Gain/Loss: + 2.4%

Entry on January 08 at $38.47
Listed on January 07, 2014
Time Frame: 6 to 8 weeks
Average Daily Volume = 4.2 million
New Positions: see below

01/09/14: Disappointing earnings results and lowered guidance from BBBY and FDO weighed on the retail stocks today. Eleven companies lowered their guidance following the monthly same-store sales data released this morning. Meanwhile shares of BBY continued to sink with a -0.8% decline.

Earlier Comments:
Our target is $35.10. More aggressive traders could aim for technical support at the simple 200-dma, currently near $33.25 instead.

current Position: short BBY stock @ $38.47

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

Long Feb $38 PUT (BBY1422N38) entry $2.06

01/08/14 BBY opened at $38.47

Ecopetrol SA - EC - close: 35.41 change: -0.34

Stop Loss: 38.25
Target(s): 31.00
Current Gain/Loss: + 5.2%

Entry on January 06 at $37.35
Listed on December 30, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 716 thousand
New Positions: see below

01/09/14: EC continues so sink and closed at a multi-year low. I want to remind readers that the $35.00 level is potential round-number support. I would not be surprised to see a short-term bounce here.

Earlier Comments:
Our target is $31.00. Once it's below $37.50 the next level of support appears to be the $30.00 level.

current Position: short EC stock @ $37.35

01/08/14 new stop loss @ 38.25
01/06/14 triggered @ 37.35

Nationstar Mortgage Holdings - NSM - close: 34.25 change: +0.40

Stop Loss: 36.55
Target(s): 31.00
Current Gain/Loss: + 3.9%

Entry on January 06 at $35.65
Listed on December 30, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 1.0 million
New Positions: see below

01/09/14: NSM managed a rebound off its morning lows. Shares came close to erasing yesterday's decline. I am not suggesting new positions at this time.

Earlier Comments:
I am labeling this an aggressive, higher-risk trade. There is already a lot of bears in this trade. The most recent data listed short interest at 39% of the very small 20.4 million share float. That is a risk of a short squeeze. Thus I am suggesting small positions. Traders may want to use put options to limit their risk.

*small positions*

current Position: short NSM stock @ $35.65

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

Long Feb $35 PUT (NSM1422N35) entry $2.40*

01/08/14 new stop loss @ 36.55
01/06/14 triggered @ 35.65

Sears Hometown and Outlet Stores - SHOS - close: 22.81 change: -0.43

Stop Loss: 25.55
Target(s): 20.25
Current Gain/Loss: + 4.6%

Entry on January 07 at $23.90
Listed on January 06, 2014
Time Frame: 6 to 8 weeks
Average Daily Volume = 160 thousand
New Positions: see below

01/09/14: Disappointing same-store sales numbers and lowered guidance plagued the retail stocks today. Shares of SHOS continued to sink with a -1.85% decline. I am not suggesting new positions at current levels.

current Position: short SHOS @ $23.90


Western Refining, Inc. - WNR - close: 41.29 change: +0.35

Stop Loss: 39.75
Target(s): 46.00
Current Gain/Loss: - 0.6%

Entry on December 24 at $41.35
Listed on December 23, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 1.9 million
New Positions: see below

01/09/14: After a two-day drop in WNR we decided in last night's newsletter to exit positions. WNR saw a small gap open higher at $41.11 this morning.

*Small positions *

closed Position: Long WNR stock @ $41.35 exit $41.11 (-0.6%)

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

Mar $42 call (WNR1422c42) entry $2.70* exit $2.10** (-22.2%)

01/09/14 planned exit
**option exit price is an estimate since the option did not trade at the time our play was closed.
01/08/14 prepare to exit tomorrow morning
01/07/14 caution: today's session has produced a candlestick reversal pattern
12/31/13 new stop loss @ 39.75
12/24/13 trade opened this morning at $41.35
*option entry price is an estimate since the option did not trade at the time our play was opened.


Acceleron Pharma. - XLRN - close: 48.99 change: +7.73

Stop Loss: 37.65
Target(s): 47.50
Current Gain/Loss: +18.0%

Entry on January 06 at $40.25
Listed on January 04, 2014
Time Frame: 6 to 8 weeks
Average Daily Volume = 230 thousand
New Positions: see below

01/09/14: XLRN hit our bullish exit target today.

Too bad all of our trades can't be this easy. The upward momentum in XLRN accelerated with a +18.7% rally today. Our exit target was hit at $47.50.

FYI: Shares could fall tomorrow because after the bell this evening XLRN announced plans to sell more stock in a secondary offering.

Earlier Comments:
Remember, the plan was to use small positions to limit our risk. This is an aggressive, higher-risk trade.

*small positions*

closed Position: long XLRN stock @ $40.25 exit $47.50 (+18.0%)

01/09/14 target hit
01/06/14 triggered @ $40.25