7:30pm (EST)
1. Market Summary
2. Nanometrics (NANO) – Ready to Move
3. Five Star Quality Care (FVE) – Long-Term Buy
4. Earnings
5. Weekly Wrap Portfolio Update
6. Week Ahead
(To view the charts, please log into the Members Area and go to the Weekly Wrap Premium section)
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1. Market Summary
Second Quarter Earnings Take Center Stage
Despite a hectic Friday, the bulls were able to hold onto their weekly gains as they recouped half of the losses off the lows and held key support levels in the process. It was short week following Monday’s holiday but the economic news was flowing as the market moved higher throughout the week in anticipation of a good jobs report.
We mentioned on Thursday if we could get a figure under 9% then we could see a blow-off rally. Well, that didn’t happen as June non-farm payrolls rose by only 18,000 versus expectations for 105,000. The unemployment rate came in at 9.2%, up from 9.1%. Futures were flat ahead of the news but went south once the headlines came out.
We weren’t too shocked, which is why we took a 300% win on a call option trade on Thursday in case the jobs report was bad – but Wall Street and the talking heads were astonished. They jumped on their bears back and stated selling stocks in the pre-market and into the opening bell.
The good news is we do chart work and they don’t. The business world continues to question the rally and the headline news is still mixed but it basically comes down to this. We are at the top of a trading range and we either hit new highs of we fall back to the middle or bottom (or worse) of it.
The Dow dropped 62 points on Friday to finish at 12,657. The blue-chips fell to a low of 12,567 which was just below prior resistance at 12,600 (blue line, red circles) which is now trying to hold as support. The index traded into the 12,7’s on Thursday which is just below the next level of resistance at 12,800-12,850 (orange line). If these levels are broken we could see Dow 13,000 in July. Further support is at 12,350 (black line) if the bears can get back under 12,600. For the week, the Dow added 74 points, or 0.6%, and is up 9.3% YTD.
The S&P 500 slipped 9 points and closed at 1,343. The index dropped down to 1,333 (blue line, red circles) on Friday which was also prior resistance and is trying to act as short-term support. The level represents a double off the March 2009 lows. We have been looking for a run past 1,350 and we got that on Thursday as the S&P reached a high of 1,356. The next area of resistance will come in at 1,375 (orange line) but if cleared could pave the way to 1,400. However, if the bears can get back under 1,325 then 1,300 (black line) would come into play again. For the week, the S&P gained 4 points, or 0.3%, and is up 6.9% for 2011.
The Nasdaq declined 13 and settled at 2,859. Tech slipped below 2,850 (blue line, red circles) which is now support/ prior resistance after falling to a low of 2,831 on Friday. The bears will target a break back below 2,825 and then 2,800 (black line) but if the bulls can keep the momentum going then they will target the 52-week high of 2,887 (orange lines) and then 3,000. For the week, the Nasdaq advanced 43 points, or 1.6%, believe it or not and is up 7.8% for the year.
The Russell 2000 gave back 6 points and ended at 852. The index cleared 850 (blue line, red circles) on Wednesday which was prior resistance and is now short-term support after reaching a high of 860. We said last week if the Russell cleared this level it could make a run at its 52-week high of 868 (orange line). Above that 875-900 could come into play. Support will come in at 825 and then 800 (black line) if there is a pullback. For the week, the Russell 2000 added 12 points, or 1.5%, and is up 8.8% YTD.
As far as the S&P Volatility Index (VIX, 15.95, flat) it was unchanged on Friday and pretty much for the week (red circle). The VIX remained below 20 after dropping 25% the prior week, a key level we have been outlining for weeks. For the newbies, a reading under 20 indicates calmness and confidence while a print above 30 indicates fear and panic. We said the VIX could trade down to 13-14 (black line) on a continued rally. It will get interesting if the VIX touches these levels.
This week is the start of 2Q earnings season. We wish there were a bigger name other than Alcoa (AA, $16.26, down $0.23) who holds the title of “unofficially kicking off the season” which gets underway on Monday after the market closes. Shares of Alcoa were flat for the week and dropped $1 after announcing 1Q earnings in April when revenue came in below expectations.
If the company can beat earnings and raise guidance in the same breath then it could be a good sign for the bulls. Of course, Alcoa won’t be the company that makes or breaks the bulls run to resistance and a possible jailbreak to new highs, it will be Tech and the Banking stocks. If these sectors can impress, then the bears will have trouble holding back the stampede.
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Key of Technicals Used In Upcoming Two Articles
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2. Nanometrics (NANO) – Ready to Move
Nanometrics (NANO, $20.41, down $0.35) is a leading provider of advanced process control metrology systems primarily used in the fabrication of semiconductors, high-brightness LEDs, data storage devices, and solar photovoltaics. Its systems enable manufacturers to improve yields, increase productivity, and lower costs. The company releases 2nd quarter earnings after market close on July 28th. Consensus estimates are for earnings of $0.45 on $64.15 million. For the 3rd quarter, analysts estimate earnings of $0.43 on $61.80 million. Below are revenue and earnings graphs with the 2nd and 3rd quarter estimates included.
Analysts are predicting lower revenue and earnings growth for the 2nd quarter from the 1st quarter. But for the year, they see 2nd quarter revenue growth slowing and 2nd quarter earnings growth falling from 2nd quarter 2010. Analysts see earnings growth in the 3rd quarter to remain flat from the 2nd quarter but decrease 3rd quarter 2010.
Minus the analysts’ estimates, the quarter-over-quarter revenue chart looks bullish, but the earnings chart looks bearish. Earnings seem to be leveling off, which could be factored into analysts estimates. On July 8th, Oppenheimer downgraded the stock. However, the 4 analysts recorded by Thomson/First Call seem generally bullish on the stock over the next 12 months, giving it an average rating of 1.8, up from 2.0 a week ago. 1.0 is a strong buy, and 5.0 is a strong sell. Mean target is $22.75, implying an 11% upside. Median target is $21.50. High target is $28.00. And low target is $20.00. Number of buys and sells has stayed the same over the past three months.
Over the next 12 months, they are probably right considering the industry LED, solar, and storage industries are expected to be in demand so let’s look at the chart.
The technical graph shown below says that the shares are at the short-term resistance line. All technicals are near or in overbought territory. The Stochastic %K and %D also shows a bearish cross. When all the technicals were at similar levels, as indicated by the purple lines, the stock was either sideways or fell. The 200-day moving average forms a support level. It is unlikely that the stock will fall below this line.
Two catalysts could hinder or increase the stock’s pullback: its earnings report and what management says at the third annual CEO Investor Summit on Wednesday.
If the stock shows signs of stumbling and falling back towards its 200-day moving average of $15-ish, then we might take a look at the August 18 puts (NANO110820P00018000, $0.55, up $0.05) puts. If the stock breaks above its 52-week high of $21, watch the August 22 calls (NANO110820C00022000, $0.75, down $0.20).
These two options could be used a strangle options trade but we would need shares to move 10% in either direction to offset one side of the trade. It’s highly possible given the fact shares surged from $13.45 to $17.32 in January after Nanometrics announced better-than-expected results.
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3. Five Star Quality Care (FVE) – Long-Term Buy
Five Star Quality Care (FVE, $6.08, up $0.13) is an operator of senior living communities and nursing facilities in the United States. The company has a market cap of $219 million and will release 2nd quarter earnings after market closes on July 25th. Consensus estimates are for earnings of $0.22 on $315.05 million. For the 3rd quarter, analysts estimate earnings of $0.16 on $326.06 million. Below are revenue and earnings graphs with the 2nd and 3rd quarter estimates included.
Analysts seem very bullish on revenues, predicting large increases even after revenue fell in the 1st quarter. But based on the 1st quarter year-over-year revenue growth, they might be right. Second quarter revenue growth is estimated to be much slower than that of the 1st quarter while 3rd quarter revenue growth is about the same as that experienced in the 1st quarter.
As for earnings, analysts seem to follow the trend the company had over the past five quarters. And the year-over-year graph shows that the 2nd and 3rd quarter estimates for earnings growth is similar to that of 1st quarter. Note that this is an industry that has similar growth rates regardless of which quarter it is.
According to Thomson/First Call, two analysts give the stock an average rating of 3.0 with 1.0 is a strong buy, and 5.0 is a strong sell. Mean 12-month price target is $7.00. Median target is $7.25. High target is $7.50. Over the last three months, both analysts had a hold on the stock before upgrading their recommendations.
Although the current selloff has produced a lower entry point and analysts’ bullish estimates, there are still red flags. The current ratio is 1.01, meaning the company barely has enough current assets to cover its current liabilities. But moreover, all the technicals shown on the graph on the next page are near or in overbought territory. The vertical purple line shows that when all the technicals were at similar levels the stock fell. But the vertical brown line shows that when all the technicals at similar levels the stock rose before falling. The 200-day moving average seems to be reversing direction downward, a bearish trend. And the 50-day moving average is already heading downward.
One indicator that gives a bullish signal, contrary to the other technicals, is that the upper Bollinger Band, 50-day moving average, and 200-day moving average all converge at $6.90.
Once the negatives seem to out-weigh the positives, we would like to see a pullback to $5 before making this a covered call trade because we do like the company’s future prospects and expansion plans. Five Star Quality recently did a secondary offering at $5 for 10 million shares to raise cash so let’s see if there is a retest down to these levels before jumping in.
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4. Earnings
The companies in BOLD, we are looking at as possible trades and we may list call or put options on them in our Daily Newsletter. If they become official recommendations, we sent out Trade Alerts or include them in our 9am and 1pm updates that come out during the week (Quotes are as of Friday’s close, 7/8/11).
MONDAY
Alcoa (AA, $16.38, down $0.11), Audiovox (VOXX, $7.65, down $0.09), CCA Industries (CAW, $6.07, down $0.10), Fidelity Southern (LION, $6.81, down $0.07), Joe’s Jeans (JOEZ, $0.86, up $0.01), Material Sciences (MASC, $7.35, down $0.05), Miller Energy Resources (MILL, $7.06, down $0.02), National Beverage (FIZZ, $14.76, down $0.26), Novellus Systems (NVLS, $35.97, down $0.84), Value Line (VALU, $13.30, down $0.17), Weis Markets (WMK, $41.75, down $0.02)
TUESDAY
Fastenal (FAST, $36.63, up $0.08), Infosys (INFY, $67.21, down $1.04), Life Partners Holdings (LPHI, $3.80, down $0.22), NASB Financial (NASB, $9.55, up $0.05), Schmitt Industries (SMIT, $3.67, up $0.14), Wolverine World Wide (WWW, $42.69, down $0.12)
WEDNESDAY
Adtran (ADTN, $41.95, down $0.60), ASML Holding (ASML), Bank of the Ozarks (OZRK, $53.23, down $0.48), Elmira Savings Bank (ESBK, $17.12, up $0.09), iGate (IGTE, $16.50, down $0.28), Marriott International (MAR, $37.17, down $0.38), Nevada Gold & Casinos (UWN, $1.47, up $0.04), Yum Brands (YUM, $55.61, up $0.02).
THURSDAY
Alliance Financial (ALNC, $31.10, down $0.63), AngioDynamics (ANGO, $14.52, up $0.04), Biostar Pharmaceuticals (BSPM, $1.24, up $0.02), Bridgford Foods (BRID, $10.68, up $0.10), Cubist Pharmaceuticals (CBST, $36.60, down $0.32), Fairchild Semiconductor (FCS, $17.46, down $0.05), Google (GOOG, $531.99, down $14.61), J B Hunt Transport Services (JBHT, $48.62, down $0.48), JPMorgan Chase (JPM, $40.74, down $0.58), National Bankshares (NKSH, $25.04, down $0.24), Resources Connection (RECN, $12.57, down $0.12), Texas Industries (TXI, $40.45, down $1.33), Washington Federal (WSFL, $16.77, down $0.14)
Friday
Citigroup (C, $42.03, down $0.60), Emerson Radio (MSN, $2.00, up $0.03), First Horizon National (FHN, $9.42, down $0.16), Genuine Parts (GPC, $57.25, down $0.12), Mattel (MAT, $27.65, down $0.35), Webster Financial (WBS, $21.37, down $0.28)
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5. Weekly Wrap Covered Call Portfolio Update (Closing prices as of 7/8/11)
WEEKLY WRAP CLOSED TRADES for 2011: DNDN +9%, PCX +13%, SGEN +26%, TIVO +34%, REDF +11%.
Patriot Coal (PCX, $22.98, down $0.22)
July 21 calls (PCX110716C00021000, $1.70, down $0.10)
Original Entry Price: $20.60 (6/23/11)
Lowered Price from Selling Options: $19.65
Exit Target: $22+
Return: 17%
Stop Target: None
Action: Support is just above $22 which was prior resistance/ support (black line, green circles) and the next area of resistance is at $24 (red line). Shares were just under $21 when we recommended the trade and we will likely get called away this week with the stock 9% over the strike price.
We recommended buying the stock at $20.60 on 6/23/11 and for every 100 shares to sell the July 21 calls for 95 cents. This lowered the cost basis to $19.65.
If shares are called away by mid-July at $21 the trades makes 7% in 3 weeks.
Symantec (SYMC, $19.73, down $0.13)
July 19 calls (SYMC110716C00019000, $0.75, down $0.10)
Original Entry Price: $18.77 (6/8/11)
Lowered Price from Selling Options: $18.17
Exit Target: $20+
Return: 9%
Stop Target: None
Action: We have been mentioning the $19.65 (black line, red circles) level as a pivot area for shares of Symantec which held last week. The 52-week high is $20.50 and these options will probably be called away if short-term support holds. If so, we may look to establish another position next week.
We are expecting shares to run up to $22+ by mid-October and we also have a current ongoing trade for our Daily publication using October calls.
We recommended buying the stock at $18.77 on 6/8/11 and for every 100 shares to sell the July 19 calls for 60 cents. This lowered the cost basis to $18.17.
If shares are called away by mid-July at $19 the trades makes 5% in 5 weeks.
Rare Element Resources (REE, $10.45, down $0.17)
July 12 calls (REE110716C00012000, $0.05, flat)
Original Entry Price: $12.38 (5/31/11)
Lowered Price from Selling Options: $11.23
Exit Target: $10+
Return: -7%
Stop Target: None
Action: Support is at $10 (black line, orange circles) and it’s 50/50 on if we get called away on this trade. A break over $11 could lead to run to $12 (green line) and the stock is capable of big moves. However, it looks like a safe bet we will be writing another call option on this trade next week.
Vivus (VVUS, $8.41, down $0.05)
August 9 calls (VVUS110820C00009000, $0.30, down $0.05)
Original Entry Price: $7.93 (5/11/11)
Lowered Price from Selling Options: $7.13
Exit Target: $10+
Return: 18%
Stop Target: None
Action: The break above $8 (black line, red circle) that occurred at the end of June was very bullish and should act as short-term support. We would like to see a run up to $9 (blue line) which would be indicating, to us at least, that Vivus has a good shot of getting its obesity drug, Qnexa, approved sometime down the road. If not, shares could at least be setting up for a higher trading range (green circle).
Vivus may have a winner with Qnexa on two other fronts as well which is what most analysts are forgetting. Qnexa is hoping to gain approval to treat diabetes and obstructive sleep apnea as well. It would be incredible if the company can pull out off a hat trick for Wall Street and its shareholders but more importantly Qnexa would help a lot of overweight people feel better about their lives. 
We recommended buying the stock at $7.93 on 5/11/11 and for every 100 shares to sell the June 8 calls for 50 cents. This lowered the cost basis to $7.43.
On 7/1/11 we recommended selling the August 9 call option for $0.30 which lowered the cost basis to $7.13. If shares are called away by mid-August the trade makes 26%.
AKS Steel Holding (AKS, $16.22, down $0.39)
August 16 calls (AKS110820C00016000, $1.00, down $0.25)
Original Entry Price: $15.93 (5/2/11)
Lowered Price from Selling Options: $14.58
Exit Target: $20+
Return: 11%
Stop Target: None
Action: AKS made a strong move to resistance at $16 (red line, green circles) which is holding up well as short-term support. We sold the August 16’s on strength and shares are looking good for a possible move up to our target of $17-$18 (orange line).
We recommended buying the stock at $15.93 on 5/2/11 and for every 100 shares to sell the May 16 calls for 50 cents. This lowered the cost basis to $15.43.
On 7/1/11 we recommended selling the August 16 call option for $0.85 which lowered the cost basis to $14.58. If shares are called away by mid-August the trade makes 10%.
American Capital (ACAS, $10.10, down $0.15)
August 10 calls (ACAS110820C00010000, $0.55, down $0.05)
Original Entry Price: $9.73 (4/19/11)
Lowered Price from Selling Options: $8.68
Exit Target: $15+
Return: 16%
Stop Target: None
Action: Short-term support is $10 (black line, green circles) with further support at $9 (red line, blue circles). Shares were challenging their 52-week high of $10.85 (orange line) which is the next wave of resistance.
We recommended buying the stock at $9.73 on 4/19/11 and for every 100 shares to sell the June 10 call for 50 cents. This lowered the cost basis to $9.23.
On 7/1/11 we recommended selling the August 10 call option for $0.55 which lowered the cost basis to $8.68. If shares are called away by mid-August the trade makes 15%.
Cisco Systems (CSCO, $15.74, down $0.16)
Original Entry Price: $17.14 (3/17/11)
Lowered Price from Selling Options: $16.58
Exit Target: $20+
Return: -5%
Stop Target: None
Action: Cisco made a run up to $16 on Thursday which is just below resistance (black line, red circle). There is strong support down to $15 and the August 16 calls (CSCO110820C00016000, $0.50, down $0.10) didn’t move much last week. We could sell a September call but we will wait for a break above $16 before we do so.
We recommended buying the stock at $17.14 on 3/17/11 and for every 100 shares to sell the May 18 call for 56 cents. This lowered the cost basis to $16.58.
Spreadtrum Communications (SPRD, $16.64, down $0.21)
Entry Price: $23.45 (2/7/11)
Lowered Price from Selling Options: $21.48
Exit Target: $30
Return: -23%
Stop Target: None
Action: As you can see, Spreadtrum was turned away at resistance at $18 (red line, blue circles) despite inking a deal with China Mobil. Due to the recent volatility, we will still list support at $12 (black line, green circles) but we are expecting a breakthrough of $18 at some point down the road.
Shares opened at $23.43 on 2/7/11 and the March calls could have been sold for 95 cents. This lowered the cost basis to $22.48.
On 4/11/11 we recommended selling the May 22.50 call option for $1.00 which lowered the cost basis to $21.48.
DryShips (DRYS, $4.14, down $0.06)
January 2012 7.50 call (DRYS120121C00007500, $0.10, flat)
Entry Price: $5.25 (1/03/11)
Lowered Price from Selling Options: $4.60
Exit Target: $8
Return: -10%
Stop Target: None
Action: DryShips cleared resistance at $4 (red line, green circles) a few weeks ago which was prior support. If shares can hold this level then look for a run back to $4.50-ish (black line, orange circles) which is the next are of resistance.
DryShips opened at $5.37 on 1/3/11 and shares were at $5.25 shortly after the bell. The January call options could have been sold for 65 cents which lowered the cost basis to $4.60.
If shares are over $7.50 by January 2012, the stock will be “called away” and the trade will make over 60%.
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6. Week Ahead
Monday will be quiet on economic news and Tuesday is light with the May Trade Balance the only report due out before the bell.
Wednesday we wake up to the MBA Mortgage Index and the Purchase Index at 7am followed by the Import/Export Prices for June an hour before the bell. Once trading begins, the market will get its weekly Crude Inventories update and will look ahead to the afternoon. At 2pm (EST) the Federal Open Market Committee (FOMC) Minutes will hit the Street along with the Treasury budget.
Thursday is packed with Initial Claims and Continuing Claims before the open as well as Retail Sales and the Producer Price Index (PPI) and Core PPI figures for June. After the open, Business Inventories will be released.
We end the week with the Consumer Price Index (CPI) and Core CPI reports for June, the Empire State Manufacturing Index numbers, and the Industrial Production and Capacity Utilization updates – all before the start of trading. The Reuters/University of Michigan Sentiment index for July is due out 25 minutes afterwards.
Rick Rouse
Chief Options Strategist
Rick@MomentumOptionsTrading.com
“What Are You Doing TODAY to become a millionaire TOMORROW?”
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