Option Investor

Daily Newsletter, Thursday, 1/23/2014

Table of Contents

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

Market Wrap

Weak Data Spooks Markets

by Thomas Hughes

Click here to email Thomas Hughes

The markets dropped today as investors weighed the weak PMI data from China. Chinese manufacturing data has now fallen below the 50 mark, confirming some fears of slow down in the region. Asian indices, particularly the main land Hand Seng Index, fell on the news early this morning when it was released. European indices responded in similar fashion and shed about a half percent.Our own markets fell steadily throughout the day before making a small bounce in the late afternoon. Data and the economy was the focus of the morning hours, earnings more so after the bell.

Futures trading on the U.S. indices was in the red slightly ahead of today's economic releases. The S&P 500, Dow and Nasdaq were all indicated lower by around 0.3%. After the unemployment claims came out futures trading doubled the earlier losses. The 9AM release of the FHFA Housing Price index did little to support the market. Home Prices, while rising, have slowed their rate of increase. Likewise, other indicators of the economy released at 10AM were much the same. The economy is still growing but not as much as it was last month. The S&P opened about 8 points lower than yesterdays close and then kept moving lower through lunch time. By noon the index had hit a low near -20 from yesterday's close but failed to break support. Today's trading was knee jerk reaction to news that although was not as good as expected is still good. I think eyes are really on the FOMC meeting and what they do with the taper. On the charts of hourly prices we can see that the S&P at least is still well within the range set at the end of 2013. As a point of reference, the FOMC announcement is four trading days away.

Hourly Price Chart SPX

The Data

Chinese PMI, expected to remain above the expansionary 50 level, fell to 49.6. The is not the official reading, it is only the flash reading of the HSBC index but it does offer an insight into the country. China did not slow as much as first thought last year but signs are pointing to more softness in that economy this year. Other factors involved include the recent New Year holiday, which may have caused a lower than usual reading.

On a net basis first time unemployment claims are unchanged. The headline was a drop of -1,000 from last weeks revised number. This week number 326,000, last weeks was 326,000, revised down to 325,000. This number is OK but not too exiting. It is consistent with the longer term trend and indicative of a firmer if not firming labor market. However, with the recent fluctuations and the questions raised by seasonal adjusting I would like to see this number move down, and even more importantly see the longer term total claims number come down. The four week moving average was also revised down for last week by 250 claims. This week the average fell again from the recent high to 331,500 and a 6 week low.

Continuing claims continued to rise this week despite downward revisions and declining total claims. Continuing claims increased by over 35K to hit a new 6 month high of 3.056 million. Last weeks figures were revised lower by a few thousand to 3.022 million. The increasing level of continuing claims is also raising my level of concern. It could be carry over from the December spike in initial claims or it could be something else. 2014 is a new year with new legislation for business and employers to deal with, it could be impacting hiring. On a more positive note, the rise in continuing claims could be linked to the trend of under-qualified or mis-qualified workers in the work force I have been hearing about, which is still a problem but one less ominous and more easily fixed. Regardless of the cause this number needs to be watched closely.

Total claims figures was a big surprise and one that I am surprised was not discussed more in the news. The total number of Americans fell by over 1 million (1,000,000) to hit a new low not seen since before the 2008 crisis. My first reaction is whoa, that's good news, but then if you consider the fact that unemployment benefits extensions ran out beginning January 1st, and this data is for the week ending January 4th, then it looks more like the drop is based on people falling off the roster than it does anything else. There could be more volatility in this and other employment claims numbers over the next few weeks at least.

The FHFA Housing Price Index, the index of home prices purchased through Fannie or Freddie, gained 0.1% in November. This is down slightly from October's increase of 0.5%. While this number shows some slowing in the housing market it is also two months old. Existing home sales also gained by 0.1%. This data is for December and wraps up 2013. The total number of existing homes sold in 2013 hit a 6 year high of just over 5.09 million.

Markitt, an independent data firm, released it's flash PMI reading for the U.S. today as well. The reading fell from the previous reading of 55 in December to 53.7 for January. A fall in out put and new order growth were blamed for the drop this month. While showing some slowing, this number is expansionary and shows growth in the U.S. manufacturing industry.

The Leading Indicators was a little weaker than expected but still expansionary. It too gained 0.1% in the most recent data release pointing toward slow growth, but growth, for January. Within the release are included several statements to the effect that signs are pointing to a good 2014, but “uncertainties remain” and that “business caution and concern ….still exist”.

The Gold Index

Gold trading had been to the upside in the earliest part of today's session. The $1250 resistance level held until just after the 8:30AM time frame. At that time, a combination of weak Chinese data, tepid unemployment claims and other factors drove the trade through $1250 to reach a 6 week high near $1265. The FOMC meeting next week is the next really important economic event that could move gold prices, until then prices could keep moving higher. Longer term the gold market is still showing signs of weakness, if it is putting in a bottom there will be a retest of support before I get too bullish on it. Current support for gold is around $1200 with next resistance around $1300. The Gold Index has also been moving higher, extending if slightly its gains above the 30 day moving average. However, looking at this chart in terms of the down trend it is looking weak. The indicators are not strong, stochastic is rolling over even before crossing into the over bought zone and MACD is very weak. At the same time the index is approaching the long term down trend line. Rising gold prices could help to lift the Gold Index and gold stocks in general over the next week, until the FOMC meeting. A failure to break above and hold the long term trend line could result in the index moving down to retest the recent lows around $82.50.

The Oil Index

Oil prices have been moving higher since hitting a 6 month low last week. Supply fears, which should be diminishing in the wake of weaker than expected Chinese data, did not abate in today's trade. Oil prices continued the bounce begun last week and added another half percent today. The price is now holding just below the $97 level, which could become resistance if demand growth expectations are lowered. The Oil Index has been trending sideways since last week but made a big move lower today, toward the bottom of the two week range. The indicators are bearish but already showing signs of support. The index is just above the long term trend line which is the most likely area to find buyers at this time. A few oil companies have reported so far but the bulk of them release earnings at the end of next week, just after the FOMC meeting. The long term trend is still up so I am still bullish on the oil sector in general but there is at least one thing to be wary of, long term resistance. The resistance level just above $1,500 is coincident with key levels of the 2008 market reversal.

The Dollar

The dollar weakened today against yen and the euro. Better than expected data from the EU and Germany helped the euro gain strength while the BOJ's lack of movement on QE policies helped to strengthen the yen. German flash PMI came in at just over 56, ahead of the expected 54.3 while at the same time the current account balance for the EU rose unexpectedly. Even French manufacturing recovered somewhat and grew to 48.8. The euro got a big boost from the improvement sending the EUR/USD back up above its 30 day EMA and a previous support/resistance level.

The yen got a boost today from BOJ statements. Governor Kuroda does not think any more stimulus is needed and that the target monetary base is still good and that inflation targets will be met. The yen strengthened and the USD/JPY moved sharply lower on the news. This may be bearish for the pair in the shorter term but longer term the trend is still up. Even without further stimulus there is still stimulus. The current target is still over a year out, in that time the BOJ will keep printing money while the FOMC stops printing it. Today's move brought the pair below support and the short term moving average. The 103.75 level will be important to watch going into next week and the FOMC. Next support is at 102.50 with resistance at the current level and next at 105.

Story Stocks

Netflix was one of the very few bright spots in the market today. Streaming content provider wowed investors with results that were way ahead of the expectations. Profits were up in the range of 500%, revenue in the range of 25% and total subscribers crossed the 4 million mark. The company has proven the momentum is still building and has some room to grow. Share prices surged at least 15% in the after hours yesterday, when the report was released. Today the stock opened at those levels, above the previous up trend line, and held them into the close.

McDonalds released this morning, its report was not so great. The company reported profits and earnings that were flat from the previous year. A slight decline in comp sales plus a slight rise in costs off set each other in the quarter. The full year results were not much better. Revenue increase about 2% for the year while profits increased only about 4%. Today the stock actually moved higher on the news, bouncing off of a long term support line. On the weekly charts the indicators are weak but suggest there is some support at the current level which is echoed on the daily charts.

The Indices

The weak Chinese PMI was the catalyst for today's sell-off. It is the same thing as when the NFP came out. The market is trading in a range awaiting the FOMC meeting next week and is reacting to the data that could impact their decisions as well as the global growth outlook. Looking back to Monday the 13th , the first trading day following the last NFP report, the market sold off hard and hit support at what I have termed the Pre-Holiday Support Level. Today the same thing happened, the market(the S&P 500) got some bad news, unexpected news, and sold off to the Pre-Holiday Support Level. Support is the key word here for right now. The support level is still good and the trend is still up. A break below the current support level around 1818 could take the market lower to the next support target at the long term trend line.

The Dow is in a similar position. One notable difference is that where the S&P 500 is forming more of a sideways consolidation or rectangle pattern, the Dow is making a triangle. The Dow also fell to test it's pre-Holiday support. It appears as if the triangle is focused on the FOMC meeting, reinforcing my idea that the financial markets in general are focusing on the Fed and what it will be doing. A break out of this pattern to either side could take the Dow as much as 600-800 points in the short term. The long term trend is still up and the index is about 4.5% above my trend line.

The Transports led the market today and even poked its head into positive territory before the close, making a new all-time intra-day high. The transports have already broken out of its Holiday trading range and has moved higher by over 250 points, or +4%. This index has been leading the Industrials higher, if it continues to do so we can expect the Dow is going to be making its break to the upside next week. At this time the indicators on the daily charts are bullish and on the rise. On the long term weekly charts also bullish and ticking up.

The long term trends in the stock markets are up. The long term trends in the economic data are up. These two things go hand in hand. At this time the data still points to long term economic growth, but for some reason the market seems to want Fed permission to believe it. Based on past performance, the Fed thinks that the economy is doing OK, there are still reasons to be wary but things are good enough to bring QE to an end. Until the fed tells us what it thinks, we'll just have to keep guessing, using the data as our guide. Plus, there is the whole Janet Yellen issue to contend with, she'll be in charge starting next week. There are no economic announcements tomorrow so earnings will be the talk of the day. Earnings season as also added some churn to the markets. The reports have been a mixed bag, nothing surprising after the last year of reporting. Some are doing well, some are not so good. After the bell today Microsoft and Starbucks both released. Microsoft made a big splash with a positive surprise of $0.78 versus the expected $0.68. Starbucks also beat but not be as big a margin.

Until then, remember the trend!

Thomas Hughes

New Plays

Sinking Specialty Retailer

by James Brown

Click here to email James Brown


Vitamin Shoppe, Inc. - VSI - close: 46.24 change: -2.49

Stop Loss: 48.05
Target(s): 41.00
Current Gain/Loss: unopened

Entry on January -- at $--.--
Listed on January 23, 2014
Time Frame: 4 to 5 weeks
Average Daily Volume = 535 thousand
New Positions: Yes, see below

Company Description

Why We Like It:
VSI is in the services sector. The company runs a specialty retail chain of more than 600 stores in addition to its direct marketing business. The stock has been sinking since November last year. It looked like VSI may have found a bottom in the $46-47 zone over the last couple of weeks. The support near $46 could soon be tested. VSI underperformed the market today with a -5.1% decline thanks to an analyst downgrade this morning. The analyst is concerned that Amazon.com is a growing competitor for VSI and pressuring VSI's margins. VSI could be suffering from the same phenomenon that Best Buy (BBY) did with customers using VSI as a showroom to look at products and then go home and buy them online cheaper.

I do consider this a slightly more aggressive trade. The most recent data listed short interest at almost 15% of the 27.5 million share float. Therefore I'm suggesting small positions to limit our risk. use a trigger at $45.85 to launch bearish positions. If triggered our target is $41.00 since the $40.00 level looks like potential support.
FYI: The Point & Figure chart for VSI is bearish with a $38 target.

NOTE: Option traders may want to use the May puts to give them more time.

Trigger @ 45.85 *small positions*

Suggested Position: short VSI stock @ (trigger)

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

Buy the Feb $45 PUT (VSI1422N45) current ask $1.65

Annotated chart:

In Play Updates and Reviews

Equities Stumble Worldwide

by James Brown

Click here to email James Brown

Editor's Note:
Stock markets around the world produced a knee-jerk reaction lower to disappointing economic data out of China.

CLDX, HGR, P, and TAN all hit our stop losses.

We are listing a new entry point on KWEB.

Current Portfolio:

BULLISH Play Updates

Avis Budget Group, Inc. - CAR - close: 40.07 change: -1.08

Stop Loss: 39.85
Target(s): 45.00
Current Gain/Loss: - 1.9%

Entry on January 15 at $40.85
Listed on January 14, 2014
Time Frame: Exit PRIOR to earnings in mid February
Average Daily Volume = 1.3 million
New Positions: see below

01/23/14: The market's generally widespread sell-off today pushed CAR toward round-number support at the $40.00 mark. A bounce from here could be used as a new entry point.

current Position: Long CAR stock @ $40.85

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

Long Feb $40 call (CAR1422B40) entry $2.50*

01/15/14 new stop loss @ 39.85, triggered at $40.85
*option entry price is an estimate since the option did not trade at the time our play was opened.

Cognex Corp. - CGNX - close: 38.46 change: -0.24

Stop Loss: 37.35
Target(s): 43.50
Current Gain/Loss: unopened

Entry on January -- at $--.--
Listed on January 22, 2014
Time Frame: exit PRIOR to earnings on February 13th
Average Daily Volume = 465 thousand
New Positions: Yes, see below

01/23/14: It was a quiet day for shares of CGNX, which drifted sideways inside a narrow range. I don't see any changes from last night's new play description.

Earlier Comments:
CGNX has been relatively resilient to any market declines in 2014. Investors bought the minor pullback and the following bounce has now pushed CGNX to new all-time highs.

I am suggesting a trigger to open bullish positions at $39.00. If triggered our target is $43.50. I would be tempted to aim higher but we will plan to exit prior to earnings on February 13th.

Trigger @ 39.00

Suggested Position: buy CGNX stock @ $39.00

EMC Corp. - EMC - close: 26.22 change: +0.16

Stop Loss: 25.70
Target(s): TBD, exit prior to earnings
Current Gain/Loss: - 0.9%

Entry on January 21 at $26.45
Listed on January 18, 2014
Time Frame: Exit PRIOR to earnings on January 29th
Average Daily Volume = 23 million
New Positions: Yes, see below

01/23/14: It was another close call for our EMC trade. This stock followed the market lower this morning. Shares hit an intraday low of $25.72 before bouncing back into positive territory. Our stop loss is at $25.70. The relative strength on the rebound is encouraging but we're almost out of time on this trade. I am not suggesting new positions.

We will plan on exiting prior to EMC's earnings report on January 29th.

current Position: long EMC stock @ $26.45

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

Long Feb $27 call (EMC1422B27) entry $0.53

01/21/14 triggered @ 26.45

Hewlett-Packard Co. - HPQ - close: 29.37 change: -0.47

Stop Loss: 28.95
Target(s): 34.50
Current Gain/Loss: unopened

Entry on January -- at $--.--
Listed on January 18, 2014
Time Frame: exit PRIOR to earnings on Feb. 20th
Average Daily Volume = 13.2 million
New Positions: Yes, see below

01/23/14: HPQ is still retreating from round-number resistance near $30.00. The $28.70 level was prior resistance and thus should be support. We may want to consider buying a dip or a bounce near $28.70 and we'll make that decision if we see an entry point. At the moment we're still waiting for a breakout and a trigger to launch bullish positions at $30.15. Please note that I'm adjusting our current stop (if triggered) to $28.95.

Earlier Comments:
HPQ is now testing major resistance near the $30.00 mark. A breakout here could inspire more buying pressure. I am suggesting a trigger to launch bullish positions at $30.15. If triggered our target is $34.50. However, that might be a little optimistic since we plan to exit prior to HPQ's earnings report in late February. FYI: The Point & Figure chart for HPQ is bullish with a long-term $47 target.

Trigger @ 30.15

Suggested Position: buy HPQ stock @ (trigger)

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

Buy the Feb $30 call (HPQ1422B30)

01/23/14 new stop @ 28.95
Nimble traders may want to look for support near $28.70 as an alternative entry point.

China Internet ETF - KWEB - close: 34.09 change: -1.76

Stop Loss: 33.45
Target(s): 39.75
Current Gain/Loss: unopened

Entry on January -- at $--.--
Listed on January 22, 2014
Time Frame: 6 to 8 weeks
Average Daily Volume = 91 thousand
New Positions: Yes, see below

01/23/14: Disappointing economic data out of China today sparked a widespread sell-off in equities in Asia, Europe, and the U.S. The KWEB gapped open lower at $34.55 and closed with a -4.9% decline. We suspect that today's move in KWEB is an overreaction. Therefore we want to take advantage of today's decline and launch positions at the opening bell tomorrow morning. We will adjust our stop loss to $33.45. We still want to keep our position size small to limit our risk.

*small positions*

Suggested Position: BUY KWEB @ (at the opening bell)

01/23/14 Today's -4.9% decline looks like an overreaction. Adjust strategy to launch positions tomorrow morning with a new stop loss at $33.45

BEARISH Play Updates

Ecopetrol SA - EC - close: 34.70 change: -0.20

Stop Loss: 36.25
Target(s): 31.00
Current Gain/Loss: + 7.1%

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

01/23/14: Shares of EC tried to rally intraday but failed close to short-term resistance near its simple 10-dma. The stock closed near its low for the session with a -0.5% loss. I am not suggesting new positions.

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

01/14/14 new stop loss @ 36.25
01/08/14 new stop loss @ 38.25
01/06/14 triggered @ 37.35


Celldex Therapeutics - CLDX - close: 29.18 change: -0.33

Stop Loss: 27.90
Target(s): 36.00
Current Gain/Loss: - 7.5%

Entry on January 22 at $30.15
Listed on January 21, 2014
Time Frame: exit PRIOR to earnings in late February
Average Daily Volume = 2.0 million
New Positions: see below

01/23/14: I cautioned readers that this was an aggressive, higher-risk trade but I honestly wasn't expecting a -7% drop this morning. The stock market was weak this morning and traders decided to hit the sell button on CLDX. The plunged toward its simple 10-dma erased about four days of gains. CLDX did bounce and pared its loss to just -1.1% by the closing bell. Unfortunately our stop was hit at $27.90.

Earlier Comments:
Biotechs can be volatile and I am labeling this an aggressive, higher-risk trade.

*small positions*

closed Position: Long CLDX stock @ $30.15 exit $27.90 (-7.5%)

01/23/14 stopped out
01/22/14 triggered @ 30.15


Hanger, Inc. - HGR - close: 39.52 change: -0.95

Stop Loss: 39.45
Target(s): 44.50
Current Gain/Loss: - 3.1%

Entry on January 21 at $40.70
Listed on January 16, 2014
Time Frame: 4 to 5 weeks
Average Daily Volume = 159 thousand
New Positions: see below

01/23/14: The market's drop this morning pushed HGR below the $40 level. Our stop was hit at $39.45. Nimble traders might want to consider buying a dip near its 40-dma or 50-dma with a tight stop loss since HGR has a trend of bouncing near those moving averages.

closed Position: Long HGR stock @ $40.70 exit $39.45 (-3.1%)

01/23/14 stopped out
01/21/14 triggered @ $40.70


Pandora Media - P - close: 34.64 change: +0.02

Stop Loss: 33.75
Target(s): 39.50
Current Gain/Loss: - 2.3%

Entry on January 15 at $34.55
Listed on January 14, 2014
Time Frame: exit PRIOR to earnings on February 5th
Average Daily Volume = 9.6 million
New Positions: see below

01/23/14: Pandora actually held up reasonably well today. Unfortunately during the market's volatile spike lower this morning shares of P briefly traded below support near $34.00 and its 10-dma. Our stop was hit at $33.75.

I am longer-term bullish on Pandora so I would keep this stock on your watch list for a new entry point down the road.

closed Position: long P stock @ $34.55 exit $33.75 (-2.3%)

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

Feb $35 call (P1422B35) entry $2.55* exit $2.24 (-12.1%)

01/23/14 stopped out
01/16/14 new stop loss @ 33.75
01/15/14 triggered @ 34.55
*option entry price is an estimate since the option did not trade at the time our play was opened.


Solar ETF - TAN - close: 40.35 change: -1.34

Stop Loss: 39.75
Target(s): 48.50
Current Gain/Loss: - 5.9%

Entry on January 16 at $42.25
Listed on January 14, 2014
Time Frame: 6 to 8 weeks
Average Daily Volume = 442 thousand
New Positions: see below

01/23/14: Solar stocks were not immune to the market's widespread weakness this morning. The TAN gapped open lower at $40.93 and spiked down to $39.75 before paring its losses. Our stop loss just happens to be $39.75.

Earlier Comments:
Our plan was to use small positions to limit our risk.

*small positions*

closed Position: long TAN @ $42.25 exit $39.75 (-5.9%)

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

April $45 call (TAN1419D45) entry $2.25* exit $1.05**(-53.3%)

01/23/14 stopped out
**option exit price is an estimate since the option did not trade at the time our play was closed.
01/18/14 Caution: Friday's move has created a candlestick reversal pattern but it needs to see confirmation
01/16/14 triggered at $42.25 (thanks to SCTY's +12% rally)
*option entry price is an estimate since the option did not trade at the time our play was opened.