Option Investor

Daily Newsletter, Thursday, 4/3/2014

Table of Contents

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

Market Wrap

Waiting For Data

by Thomas Hughes

Click here to email Thomas Hughes
Another day of important data helps to set the stage for tomorrow's Non-Farm Payrolls report.


The markets were quiet this morning as traders assessed new developments in both Asia and Europe. Asian markets ended their day mixed following yesterday's rally and the announcement of new QE measures being undertaken by China. Chinese officials announced an increase in spending on infrastructure such as railways and housing and also additional tax breaks for small business. The Nikkei and the Hang Seng both closed in the green while the mainland Chinese Shanghai Composite ended in the red. Additionally, the ECB meeting, policy announcement and ensuing press conference with Mario Draghi also had an impact on early trading. European shares were down in the early part of the session and then regained positive territory following the Draghi press conference and release of U.S. economic data.

Futures trading was fairly calm this morning. The S&P was indicated flat going into the 8:30 release of jobless data and only moved marginally higher after. This weeks report revealed a jump in first time claims but also that long term unemployment is still on the decline. This is in line with yesterday's release of ADP and an earlier release today from Challenger, Grey & Christmas concerning plan lay offs in March. After the 8:30 release futures trading moved slightly higher, indicating and S&P open about 2-3 points above yesterday's close and held that level into the open. Once trading was open in earnest the major indices held just above flat line for the first 45 minutes, setting new intra-day highs, before dipping down into the red.

The rest of the day was spent in negative territory for most of the indices. The S&P dipped down to about a negative 6 for the day before bouncing back to near break even just before the close. The Dow was able to make it's way into positive territory briefly. It was still unable to set a new all time high and closed in the red. The NASDAQ was the big loser for today, dropping more than 1% during the day and closing near the day's low. Action today was tepid, a few stories managed to move the indices but with all eyes on tomorrow's releases of NFP, unemployment and the final read on 4th quarter GDP there really wasn't a lot of movement. Not to mention that earnings season starts next Tuesday so there is another reason for caution going into tomorrow, the weekend and next week.

The Economy

There was a lot of data today and this week but the most important piece I think is still to come. Tomorrow is the monthly release of Non-Farm Payrolls and U.S. Unemployment. The current expectation is for jobs to grow in the 200K range and signs are good that we may get it. Yesterday ADP reported an increase in private sector jobs of 191,000, a little below expectations. The previous month was also revised up which cancels out any short fall in the current month. Challenger added another insight into the labor market this morning as well. They reported that planned lay-offs in March declined by 18% from February to a total of 34,399 in March. This is the second lowest reported number of planned lay offs since January of 2013 and that the first quarter of 2014 saw the lowest number of planned lay offs in 19 years.

Initial claims for unemployment jumped unexpectedly by 16,000 from a mild downward revision to last weeks report to come in at 326,000. Last weeks figures were revised down by -1,000. The four week moving average climbed by 250 to reach 319,500. Keep in mind that this weeks report reflects the annual revision to the seasonal adjustment factors. On an unadjusted basis initial claims climbed by just over 15,000 to 289,535. This weeks figures are basically in line with the recent trends. Initial claims are off of the recent low but still down for the year. On a state by state basis only two states had an increase in claims greater than 1,000 and only two had a decrease greater than 1,000. Texas and Florida reported increases totaling 4,122. California and Nebraska reported declines totaling -9,841.

Continuing claims gained this week as well. Claims rose by 22,000 from 2.814 to a seasonally adjusted 2.836 million. Looking at this table it is also a marginal increase and a wash from last weeks downward revision. On a long term basis continuing claims are still on the decline. Total claims actually fell this week, by over 100,000. This weeks total number of claims for unemployment is 3.201 million, a new low.

The trade deficit expanded in March. Analysts had been expecting the deficit to shrink to $38.5 billion from last months upward revision to $39.3 billion. The actual figure is $42.3 billion. Exports in March totaled $190.4 billion versus imports of $237.7 billion. ISM non-manufacturing was also reported today. The Institute of Supply Management gauge of non-manufacturing businesses came in at 53.1 versus the expected 53.3.

The Oil Index

Oil prices hovered around the $100 mark today for WTI while Brent fell to a 5 month low in early trading. An expected deal between Libyan leaders and rebel factions is expected soon helped to depress prices. Brent fell in early trading to near $104.50 before a late rebound sent it and WTI higher. The current stalemate in Libya goes back at least 8 months and has reduced production levels drastically. An agreement to reopen supply and shipping ports has been in the works for some time but doubts linger as to when or even whether an accord can be made. A recent statement from the Libyan government suggest a deal could be reached in a day or two.

Since last week the Oil Index has followed through on the bullish signal I described last week. The index gapped up from last Thursday into Friday, then continued higher into this week, breaking the long term resistance line it has been struggling against since last November. The index is moving higher and today's move up suggests that momentum could be building. A quick peek at the longer term chart of weekly prices shows a similar bullish signal as the daily chart so I think we can expect to see this index move higher in the longer term. In the short term there may be some consolidation, pullback or retest of support before moving higher provided fundamentals remain the same.

The Gold Index

Gold prices softened some again today after making a small rebound yesterday. The prices of gold have been falling steadily ever since the time line for interest rate hikes began solidifying last month. Today prices fell about $5-$10 on an intra-day basis, halting just above the current 6 week low. Economic data released today and this week is in line with the current taper/rate hike outlook and may continue to push gold prices lower.

The Gold Index has been falling in response to the sharp drop in gold prices. It has fallen over 13% since retesting the 78.6% Fibonacci retracement 3 weeks ago. Over the last week the index has managed to maintain relative levels but appears to be making a bearish flag pattern at this time. This flag pattern has a target along the long term down trend line around the $85 level. This level is coincident with the previous long term lows set in December of last year and the potential targets I discussed last week.

The Dollar Index

The dollar has gained some strength today. Today's data, the ECB decision and more importantly the comments made by Mario Draghi had a lot to do with it. The Dollar Index moved up by more than 30% today, this move follows a near 2 week consolidation and comes with only mildly bullish indicators. Current support is along the $80 dollar level with resistance just above at the top of the 6 month trading range near $81.25.

The Euro lost ground to the dollar. The eur/usd pair had been moving higher in the early part of the day but following the ECB release and comments from the chairman the pair reversed and moved lower. The ECB decided to leave their rates unchanged but have reiterated their commitment to act if necessary. Recent inflation data suggests that inflation in the EU is still in decline and could force the ECB to act. Draghi says the bank will “act swiftly if needed”, comments that are not much different from what he has been saying for the last year. He also revealed that the ECB members had discussed additional QE measures to include possible security purchases and other “non-conventional” methods. Following the statements the pair set a new 4 week low.

The yen continued its move higher today. After winding up on the Ukraine situation traders have now returned their focus to the fundamentals driving this trade; Abenomics and Tapering. Economic data and Tapering are strengthening the dollar at the same time that Abenomics is trying to weaken the yen. At this time eyes are on the BOJ, scheduled to meet in the first half of next week. There has been mounting expectations for them to increase QE but as yet nothing has materialized. The usage tax hike went into effect this week which may force their hands. In my view however the BOJ will not make a move until after at least a month of data, unless they have been planning all along to do something in tandem with the tax hike. The usd/jpy pair has been moving strongly higher since last Thursday. Now the pair is moving into a resistance zone marked by a previous and the current long term highs. The pair could move up to test the current highs ahead of the BOJ meeting.

Story Stocks; Earnings

Earnings season is upon us again. I know I am a tad early but it's important to keep it in mind when forming a current analysis for the indexes. Today earnings were very light, today only 10 reports came out, tomorrow is even lighter with only 3 reports. Next week is when things start to get interesting again. Tuesday the official start to the season begins with the release of Alcoa before the bell. The aluminum giant is expected to earn in line with the previous quarter but it will be the outlook for world aluminum demand that will carry more weight. Shares of Alcoa have been trending up steadily over the past 6 months and look good to continue that trend, having set a new long term high this week. Indicators are bullish and have room to move higher. There may be some volatility over the next week, support will be along the up trend line with resistance at the current long term high.

If Alcoa is on deck that means the big banks, led by JP Morgan and Wells Fargo are right behind. JPM and Wells both report on Friday, before the bell, with the bulk of the big banks and the banking sector in general reporting the following the week. JP Morgan for one has weathered a host of storms this year and is not completely out of the woods. Most recently the bank has been suffering from executive turn around, either a symptom or solution to other problems. JPM is expected to report earnings of $1.44 per share, slightly ahead of the previous quarter. Shares of JPM are trading near the recently set long term high with bullish/neutral indicators. The long term trend is up but the last year has been choppy. The banks are expected to keep improving along with the economy, so long as the data supports growth outlooks then JPM should be OK as a business.

The Indices

The indices began the day in the green at least. The S&P 500 set a new all-time intra-day high within minutes of the open before falling back to neat term support. The broad index, despite today's decline, is in mid bounce with bullish indicators. Today's declines are most likely due to tomorrow's release of NFP. Not that traders are expecting a bad number, just that they are waiting for the number. At this time both MACD and stochastic are indicating a trend following buy signal on the daily charts that is almost confirmed on the weekly charts. I say almost because the momentum has yet to turn bullish on the weekly chart but it is very close. The NFP release could be the catalyst to send the index to new highs, or the reason for traders to pause and wait for earnings season, or a combination of both.

The Dow Jones Industrials is trying to set a new all time high for 2014 but so far just can't quite seem to make it. Yesterday the index tickled a new intra-day high but failed to hold it, today the index fell back a little more. The indicators on this chart are also indicating a trend following buy but caution is due until the index can actually break above resistance. As with the S&P, the NFP numbers could be the catalyst to do this. If the index fails to break through nearest support is along the 16,250 level and the area of strong support I labeled a few weeks ago. The long term trend is up but if the index can not break to a new high it will be in danger of potential reversal. I do not see a reason for a major correction at this time but if one were to come a 7.5% drop would take the Dow back to the long term trend line.

The NASDAQ was the loss leader today, dropping more than 1%. It looks like the NASDAQ has entered a trading/consolidation range with a bottom around 4,100. The MACD and stochastic both suggest that support can be found at this level. The long term trend is up but this index may be range bound in the nearer to short term.

The markets are waiting for the NFP report, and for earnings season. The NFP is the capstone of the monthly economic release schedule and expected to confirm the expected, impending and possibly occurring increase in economic activity this spring. The earnings will be more of a rear look at how things were during the winter slump but the guidance for the next quarter and for the rest of 2014 will be crucial. For now the long term trends are up. On an individual basis the near and short term trends in the indices are up to sideways, depending on which one you look at. I expect the NFP to be bullish for the market but also for earnings season, at least the first week or so, to give traders a reason to pause. There is also the chance of some sector rotation to occur, adding to the chances of sideways trading over the next few weeks. Technology has been pretty hot over the past 6 months to a year, with the global economy possibly set to expand it may be time to look into other sectors as well.

Until then, remember the trend!

Thomas Hughes

New Plays

Shrinking Margins

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)


Catamaran Corp. - CTRX - close: 43.76 change: -1.47

Stop Loss: 45.55
Target(s): to be determined
Current Gain/Loss: unopened

Entry on April -- at $--.--
Listed on April 03, 2014
Time Frame: 6 to 8 weeks
Average Daily Volume = 2.4 million
New Positions: Yes, see below

Company Description

Why We Like It:
CTRX is in the technology sector. The company provides pharmacy benefit management services and healthcare information technology. It looks like the bull market in shares of CTRX is over. The stock peaked near $58 back in August 2013. It's been a volatile stock over the last couple of years. Shares plunged on February 27th following the company's earnings report. CTRX beat estimates on both the top and bottom line but guided lower for 2014. Shares have failed to see much of a bounce as analysts worry about CTRX's shrinking margins.

The $43.50-44.00 level is significant support. The December 2013 low was $43.49. Today's low is $43.63. I am suggesting a trigger to open bearish positions at $43.40. Plan on exiting prior to CTRX's earnings report in early May.

Trigger @ 43.40

Suggested Position: short CTRX stock @ (trigger)

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

Buy the May $45 PUT (CTRX1417Q45) current ask $2.65

Annotated chart:

Weekly chart:

In Play Updates and Reviews

Chinese Stimulus Fails To Stimulate U.S. Stocks

by James Brown

Click here to email James Brown

Editor's Note:
News that China would launch a new stimulus package failed to lift the U.S. stock market.

AMAT and TXTR hit our entry triggers. WFC has been removed.

Current Portfolio:

BULLISH Play Updates

Applied Materials - AMAT - close: 20.84 change: +0.05

Stop Loss: 19.75
Target(s): to be determined
Current Gain/Loss: - 0.0%

Entry on April 03 at $20.85
Listed on April 01, 2014
Time Frame: exit PRIOR to earnings on May 15th
Average Daily Volume = 14.8 million
New Positions: see below

04/03/14: AMAT hit new multi-year highs and our suggested entry point at $20.85 today. The sharp pullback from its morning rally is a bit worrisome since it looks like a possible top. Investors may want to wait a day and see how AMAT shares perform tomorrow before initiating positions.

Plan on exiting positions prior to earnings on May 15th.

current Position: Long AMAT stock @ $20.85

04/03/14 triggered @ 20.85

Bob Evans Farms - BOBE - close: 50.40 change: -1.42

Stop Loss: 49.90
Target(s): 58.50
Current Gain/Loss: unopened

Entry on April -- at $--.--
Listed on April 02, 2014
Time Frame: 8 to 10 weeks
Average Daily Volume = 459 thousand
New Positions: Yes, see below

04/03/14: BOBE did not see any follow through on its recent bounce. Today's move looks like a failure at resistance. If BOBE doesn't recover soon we will drop it as a candidate.

Currently, we are suggesting a trigger to open bullish positions at $52.25. If triggered our multi-week target is $58.50.

Trigger @ $52.25

Suggested Position: buy BOBE stock @ $52.25

Delta Air Lines - DAL - close: 35.37 change: -0.33

Stop Loss: 32.80
Target(s): to be determined
Current Gain/Loss: + 2.2%

Entry on March 28 at $34.60
Listed on March 27, 2014
Time Frame: exit PRIOR to earnings on April 23rd
Average Daily Volume = 11.6 million
New Positions: Yes, see below

04/03/14: I cautioned readers yesterday to look for a dip toward $35.00. Shares fell to $34.97 and bounced today.

We will plan to exit prior to DAL's earnings report on April 23rd.

current Position: long DAL stock @ $34.60

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

Long May $35 call (DAL1417E35) entry $1.55*

03/28/14 triggered @ 34.60

Genworth Financial - GNW - close: 18.23 change: +0.00

Stop Loss: 16.90
Target(s): 20.00
Current Gain/Loss: + 2.4%

Entry on April 01 at $17.81
Listed on March 31, 2014
Time Frame: exit PRIOR to earnings on April 30th
Average Daily Volume = 7.4 million
New Positions: see below

04/03/14: GNW displayed some volatility today. Shares fell to short-term technical support at their 10-dma midday only to bounce. The rebound pushed GNW to new relative highs before the stock returned to close unchanged on the session. I am not suggesting new positions at this time.

Our short-term target is $20.00. More aggressive investors may want to aim higher. The Point & Figure chart for GNW is bullish with a $23.25 target.

current Position: long GNW stock @ $17.81

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

Long MAY $18 call (GNW1417E18) entry $0.70*

04/01/14 trade opens at $17.81
*option entry price is an estimate since the option did not trade at the time our play was opened.

Quanta Services, Inc. - PWR - close: 36.83 change: -0.17

Stop Loss: 35.75
Target(s): 39.85
Current Gain/Loss: + 2.2%

Entry on March 06 at $36.05
Listed on March 04, 2014
Time Frame: 6 to 8 weeks
Average Daily Volume = 2.0 million
New Positions: see below

04/03/14: The upward momentum in PWR is fading. Shares have been churning sideways near $37.00 for a few days now. We may want to exit soon. I am not suggesting new positions at this time.

current Position: Long PWR stock @ $36.05

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

Long Apr $35 call (PWR1419D35) entry $1.70*

03/27/14 new stop loss @ 35.75
03/22/14 new stop loss @ 35.45
03/13/14 new stop loss @ 34.85
03/06/14 triggered @ 36.05
*option entry price is an estimate since the option did not trade at the time our play was opened.

BEARISH Play Updates

Textura Corp. - TXTR - close: 23.35 change: -1.95

Stop Loss: 25.55
Target(s): 20.25
Current Gain/Loss: + 5.1%

Entry on April 03 at $24.60
Listed on March 29, 2014
Time Frame: 4 to 8 weeks
Average Daily Volume = 386 thousand
New Positions: see below

04/03/14: TXTR was one of the market's worst performers today with a -7.7% plunge and a breakdown below support. Our suggested entry point was hit at $24.60. I am moving our stop loss to $25.55.

Earlier Comments:
NOTE: Traders may want to use put options to limit their risk instead of shorting the stock.

*small positions*

current Position: short TXTR stock @ $24.60

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

Long JUN $22.50 PUT (TXTR1421R22.5) entry $2.35*

04/03/14 new stop @ 25.55
04/03/14 triggered @ 24.60


Wells Fargo & Co. - WFC - close: 49.83 change: +0.07

Stop Loss: 48.75
Target(s): to be determined
Current Gain/Loss: unopened

Entry on March -- at $--.--
Listed on March 29, 2014
Time Frame: exit PRIOR to earnings on April 11th
Average Daily Volume = 17.6 million
New Positions: see below

04/03/14: WFC is still hovering below resistance at the $50.00 level.

This stock continues to look bullish. However, on a short-term basis we're running out of time. WFC is due to report earnings on April 11th and we do not want to hold over the announcement.

Our trade has not opened yet so we're removing WFC as an active candidate. We'll look at it again in a couple of weeks after it has reported earnings.

Trade did not open.

04/03/14 removed from the newsletter, suggested entry was $50.15