MomentumOptionsTrading.com Weekly Wrap for 6/3/12

 

11:30pm (EST)

 

1.  Market Summary 

2.  Arena Pharmaceuticals (ARNA) – First to Approval or First to Fail?

3.  Vivus (VVUS) – Is there room for Two Obesity Drugs?

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.  This was a holiday weekend so we didn’t post any new articles but we will be back next week with two stories to tell.)

 

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1.  Market Summary   

“While there is a chance for a continued rally into June, there doesn’t appear to be a whole lot of good news favoring the bulls as we enter the summer doldrums.  Most Wall Street pros feel they deserve a vacation even if they aren’t making their clients money so many of them “relax” during the summer months and take it easy.

The uptrend channels we have outlined in the charts and resistance levels will be hard to clear if there isn’t a MAJOR catalyst to drive the market higher.  The Fed appears to be all but dead but will meet again in late June and the next earnings cycle isn’t until July.  Given this backdrop, we are expecting a continued choppy to downside market over the next few months but we could see a continued rally this week and into next.” (from 5/28/2012 Weekly Wrap/ Tuesday Morning Outlook)…

The bulls got off to a great start on Tuesday as the shortened holiday week sparked some buying on Wall Street.  Much of the rally came on renewed hopes that Greece and Spain could remain in the eurozone but those dreams were dashed by Wednesday.

Trading was choppy on Thursday as the economic data here at home favored the bears but the bulls held support before bouncing back ahead of Friday’s nonfarm payrolls report.  They should have stayed on the mat.

Nonfarm Payrolls were a huge disappointment as only 69,000 new jobs were created versus expectations for a print of 150,000.  Unemployment rose from 8.1% to 8.2%.  Needless to say, the bears were happy and so were we as we were betting on a nasty number.  

The Dow got punished for 275 points, or 2.2%, to finish at 12,118 on Friday.  The blue-chips once again tested the 12,600 level on Tuesday, trading to a high of 12,611 but Spain got downgraded late in the day which knocked the session’s gains in half as the index ended at 12,580.  Wednesday’s action was our clue the rally on Tuesday was a “bear trap” as you can see from the bear flag we drew on the chart for you.  We also said to watch for a break below the 50-week and 200-day MA’s (12,225-12,250) which we said would lead to a test down to 12,000 then 11,800-11,750.  If these levels fail there could be a drop to 11,600 this week.  Resistance will be at 12,200-12,250 then 12,350 going forward which were prior support levels.  The Dow came into Monday standing at 12,454 and fell 336 points, or 2.7%, for the week.  For 2012, the Dow is now down 99 points, or 0.8%.

Here is the Dow’s chart from last week: 

The S&P 500 tumbled 32 points, or 2.5%, to settle at 1,278.  The index tested 1,334 on Tuesday on the break above 1,325 but failed the 1,350 level once again.  On Wednesday, we sent out this chart and said it would be crucial for the bulls to hold 1,295:

On Thursday, the index closed right on the 1,310 level which was Wednesday’s low.  Futures were lower Thursday night so all of these clues lead us to believe nonfarm payrolls were going to be lousy and that 1,275 could be tested.  Bingo.  Friday’s low was 1,277.25.  The break below the 50-week MA of 1,283 and the 200-day MA at 1,284 was not pretty and now brings 1,250 into play.  The breakeven point for the S&P is 1,257. 60 and is where the S&P started the year at.  If this level is taken out there could be a test down to 1,225-1,200.  The S&P 500 started Monday at 1,317 and tumbled nearly 40 points, or 3%, for the week.  For the year, the index is higher by 21 points, or 1.6%. 

Here is the S&P chart from last week:  

The Nasdaq got hammered for 80 points, or 2.8%, to close at 2,747.  Tech traded to a high of 2,882 to start the week and faced resistance at 2,900 but closed below the 2,850 level for the day.  Tuesday close at 2,825 lead us to believe 2,800 was going to fail on a bad jobs number.  We have highlighted the 2,750 area as crucial support over the past few weeks with the 50-week MA at 2,743 and the 200-day MA at 2,757 being key area to watch.  Friday’s low was 2,747.  If these levels crack, the bears will push 2,700-2,675 over the near-term with 2,600-2,550 a real possibility.  Tech started the year at 2,605 so you can see how this might play out.  The Nasdaq was at 2,837 to start Tuesday’s session and gave back 90 points, or 3.2%, over the next 4 days.  YTD, the Nasdaq is showing a gain of 142 points, or 5.5%.  

Here is what Tech looked like on May 25:     

The Russell 2000 got spanked for 24 points, or 3.2%, and went out at 737.  The small-caps kissed a high of 778 on Tuesday and we have been mentioning the brick wall at 780.  The close at 751 on Thursday was just above crucial support at 750 but we could tell it was shaky.  The prior week’s low was 748 and we have been calling for a test to 720 on further weakness if 740 did not stick.  The Russell was at 766 coming into the week and declined 29 points, or 3.8%, after all was said and done.  The index is now showing a loss of 3 points, or 0.5%, for 2012.

Here is the chart of the Russell 2000 from last week:   

The S&P Volatility Index ($VIX, 26.66, up 2.60) came into the week just under 22 and traded to a low of 20.99 on Monday’s rally.  By Wednesday, the index was back over 22.50 and made a move above 25 on Thursday which was also a great clue that volatility would be picking up.  We have been mentioning the VIX could test 30 on continued weakness.  If there is any rebound this week, look for 22.50 to hold.

Last week’s chart of the VIX:

The market got off to a rough start for June and May was a horrible month for the major indexes.  The Dow fell 820 points, or 6.2%, while the S&P tanked 87 points, or 6.3%.  The Nasdaq dropped 219 points, or 7.3%, for the month of May.

It was almost comical once the nonfarm payrolls came out on Friday as the talking heads seemed shocked and immediately started discussing the possibilities of QE3.  Believe it or not, some were saying we are at a capitulation moment.  Not yet.

We normally like to keep things simple with our charts and our explanations short and sweet.  As far as the technical jargon, a bear flag is the opposite of a bull flag, obviously, and occur after a significant move to the downside.  It is simply a bearish continuation pattern that talking heads and bullish analysts get excited about when there appears to be a rebound in the market which appeared to be the case on Tuesday and into Wednesday.  Usually, the consolidation (last week) happens on weak volume which we saw and heads higher before there is a second, significant sharp decline.

This week will be an important test for the bulls and next week will be even bigger.  The bulls will be looking for a Bernanke bailout but he will not be speaking until Thursday.  The FOMC meeting is the following week so he will need to say something positive ahead of this event to stop the bleeding.  However, the Fed Beige Book is due out on Wednesday, a day before Ben speaks, and the numbers will need to be good.

While there is a chance Bernanke introduces some kind of new “stimulus” package, the bottom line is that it will involve starting the printing presses once again which does not  help the financial cliff the U.S. is facing in 2013 but that is another story for another day.  This puts the pressure back on Europe to doing something in a hurry but we doubt that happens.

With so much headline risk out there to the downside, the bears could step on the gas, until Thursday which means it will be crucial for the bulls to hold support to start the week.  If the Europe news gets worse and Big Ben fails to connect on a Hail Mary pass then the U.S. and global markets will see a continued correction.

The technical targets for bear flag patterns are calculated by subtracting the height of the flag’s pole from the breakdown at support.  Some technicians use the highs of the flag to get the downside targets and over the last few weeks we have shown you there are many ways to read a chart, long-term and short-term.

Gold surged 4%, or $63, to close at $1,625 an ounce and we have been mentioning the yellow metal appeared to be bottoming.  The move back above $1,600 was bullish.

At some point, the market will be a buy again but the downside targets we have given you since early May should continue to come into play over the next month or two.   

As we head to press, futures are showing a lower open for Monday.  Dow futures are off 85 points to 12,018 while the S&P 500 futures are down 8 points to 1,266.  The Nasdaq 100 futures are declining 17 points to 2,438.      

 

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2.  Arena Pharmaceuticals (ARNA) – First to Approval or First to Fail?

 

By Michael Bryant

The month of June is a big one for the pharmaceutical industry and obesity/weight-loss drugs,  as San Diego based Arena Pharmaceuticals (ARNA, $6.40, down $0.29) awaits FDA decision on approval of its pill Lorcaserin.  If approved, it would be the first new weight-loss drug in 13 years.  Obviously, if the drug is approved, the stock could soar.  But if not approved, it could plunge.  And if it is delayed, the stock may or may not move much.   

The American Society of Clinical Oncology (ASCO) will be held from June 1st to 5th.  Although oncology is the study of tumors/cancer and Arena’s Lorcaserin is an obesity/weight-loss pill, shares may see a ripple effect among drug companies.  Many companies will present scientific papers dealing with oncology in an attempt to gain investor interest, share ideas and new information, and present research to the public.

Can its resubmission of a New Drug Application (NDA) finally get an FDA approval?  This time, on May 10, 2012, the panel voted 18-4 for approval.  Note that a panel approval does not guarantee an approval by the FDA but a panel rejection almost always leads to an FDA rejection.  Also, the current FDA seems to be highly safety-oriented.  We have seen this in the rejection of Orexigen Therapeutics’ (OREX, $3.26, down $0.08) obesity drug Contrave, despite the 11-8 panel approval vote.  The panel recommended a follow-up safety study, but the FDA wanted the safety study done before approval.

The safety, pharmacokinetics, and pharmacodynamics were tested in 19 clinical trials: seven Phase 1 trials, two Phase 2 trials, three Phase 3 trials, a bioavailability study, a mass balance study, an ECG/QT trial, two drug interaction trials, an abuse potential trial, and a study of energy intake and energy expenditure.  The most frequent side-effects were headache, nausea, dizziness, fatigue, and dry mouth, with headache being the only one with a 5% increase over the placebo.  Headaches happened in 18% of the trial participants compared to 11% of placebo participants.  Other side-effects included upper respiratory tract infection (14.8% vs. 11.9% for the placebo), inflammation of the nasal passages (13.4% vs. 12.0% for the placebo), sinuses inflammation (7.2% vs. 8.2% for the placebo), and nausea (7.5% vs. 5.4% for the placebo).  Although average weight-loss was only an average of 5.3%, responders who stayed on the drug for one year had average weight loss of 11%, or 25 pounds.  The top 25% of these responders lost an average of 35 pounds.

It gets better.  On May 27th, the European Medicines Agency (EMA) accepted to review its marketing authorization application (MAA) for Lorcaserin.  ARNA and partner Eisai are looking to get lorcaserin approved for weight management, including weight loss and its maintenance, in obese (Body Mass Index, or BMI, greater than 30) or overweight (BMI greater than 27) patients.  It expects approval later this year. 

Lorcaserin potential market is very large.  Obesity is a big problem with 80 million pre-diabetics and an estimated 25 million Type II diabetics in the United States.  Assuming a $2,000 cost/year, that alone could make it a $2 billion drug if it manages to capture a 1% market share.  Lorcaserin also can be combined with other drugs to increase effectiveness.  Further, it has shown potential to treat drug addiction, including nicotine addiction.

However, there is one potential reason why shares could dip before the FDA decision.  A letter sent April 27, 2012 notified of a meeting scheduled for June 15, 2012 where management will vote on increasing the number of authorized shares by 50%, from 250 million to 375 million.  This massive dilution could push the stock lower.

The surprising thing is that gross margin, the difference between revenue and cost divided by revenue, is positive.  Could this be an early indication of good things to come?  PEG, despite being negative since it still has negative earnings, is small and closer to zero than competitor VVUS.  Also, note that the current ratio, a measure of liquidity, says that the company has 7.75 times more current assets than current liabilities, more than enough to cover costs.  It is a pleasant sign that institutions see value in holding the stock, as noted by the 25.69% piece of the pie.  Also, a decent but low enough institutional holdings can be bullish, as it gives plenty of room for institutions to buy the stock and push the price up.  Finally, the short interest, those betting against the stock, is falling.  The high short interest could cause a short squeeze, propelling the stock higher.

The negatives point to a richly priced stock if the drug doesn’t gain approval.  Cash is relatively low compared to the two competitors listed.  It is also the only one with debt.  Price/sales and price/book are the highest among the three.  Arena is also a buyout candidate, but the low negative EV/EBITDA seems that such a buyout might be unlikely. 

Finally, there is a chance that FDA approval of lorcaserin may be delayed.  The company has not submitted its REMS (Approved Risk Evaluation and Mitigation Strategies) yet to the FDA.  REMS are designed to ensure that the benefits of a drug or biological product outweigh its risks.  However, the company already submitted a REMS back in 2009, so it may not be required to submit another one.  On the other hand, a delay may not affect the stock much.  The delay for VVUS’ drug caused only a minor pullback and consolidation phase.

We also like to look at biotech companies to see what other drugs are in their pipelines.  Arena’s are a long way off from approval but they have others in development.  Thus, pressure is on Lorcaserin.

Program  

Treatment

Development Status

APD811

Pulmonary arterial hypertension

Phase I

APD334

Autoimmune diseases, including multiple sclerosis and rheumatoid arthritis

Preclinical

APD371

Pain

Preclinical

GPR119

Type 2 diabetes

In research

Analysts seem to think the stock will rise.  At $6.40, the stock is below even its average target of $6.88 made by the 6 analysts recorded by Thomson/First Call.  Median target is of $7.50, low target is $2.25, and high target is $10.00.  Using a scale of 1.0 as a strong buy and 5.0 as a sell, the average rating of the stock was 2.5, unchanged from a week ago.

 

Current Month

Last Month

Two Months Ago

Three Months Ago

Strong Buy

2

0

0

0

Buy

2

0

1

1

Hold

5

8

7

7

Underperform

1

1

1

1

Sell

0

1

1

1

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3.  Vivus (VVUS) – Is there room for Two Obesity Drugs?

Another obesity/weight-loss drug maker that faces an upcoming FDA decision is Mountain View based Vivus (VVUS, $23.58, down $1.21).  We have covered the company for quite some time and we favor it more than Arena but we like both.

Vivus won a 20-2 vote for approval for their drug Qnexa from a FDA panel, two years after it was rejected due to concerns about dangerous side effects, including suicidal thoughts, abnormal heartbeats, memory loss, and birth defects.  Vivus’ PDUFA date is July 17 which is not long after ARNA’s, so if both get approved, Lorcaserin will have competition.   

Qnexa is actually a combination of two generic drugs, topiramate and phentermine.  Topiramate is used to treat chronic neurological disorders characterized by seizures in both children and adults.  It is also widely used to treat migraines due to its ability to widen blood vessels in the brain.  Most common side-effects include numbness and tingling, upper respiratory tract infection, weight loss, diarrhea, nausea, anorexia, and memory loss. 

Johnson & Johnson (JNJ, $61.78, down $0.65) initially studied Topiramate alone as a weight loss treatment but concluded the psychiatric side effects, such as memory loss and difficulty concentrating, were too significant. 

Phentermine is an appetite suppressant and stimulant of the amphetamine and phenethylamine class.  It is used as a short-term treatment for obesity.  After short term use, tolerance begins and can be followed by a rebound weight gain.  Most common side-effects include increased heart rate and blood pressure, restlessness, and insomnia.

In Phase 3 studies, Qnexa showed an average weight loss of 14.7% (37 pounds) in obese patients, better efficacy than that of Lorcaserin.  Weight loss of nearly 10% of most patients taking the drug over a year was the highest reduction reported with any recent diet pill.  However, what is concerning is that the FDA panel that gave the 20-2 approval vote stressed that it must be required to conduct a large, follow-up study of the pill’s effects on the heart.  Thus, we see Lorcaserin as the safer alternative for now.

We doubt that the FDA will approve a drug and then ask for a follow-up safety study.  The initial FDA decision date was in April, but it got pushed back to July due to the FDA needing more time to review data submitted too close to the April meeting.

Analysts seem to think the stock will rise.  At $23.58, the stock is below its average target of $30.18 made by the 11 analysts recorded by Thomson/First Call.  Median target is $30.00, low target is $9.00, and high target is $45.00.  Using a scale of 1.0 as a strong buy and 5.0 as a sell, the average rating of the stock was 2.2, unchanged from a week ago. 

 

Current Month

Last Month

Two Months Ago

Three Months Ago

Strong Buy

4

4

3

1

Buy

5

5

5

6

Hold

4

4

5

5

Underperform

0

0

0

0

Sell

1

1

1

2

 

 

Vivus also has other drugs in its pipeline and recently won approval for its good wood drug, Avanafil, which treats erectile dysfunction.  The company is also working on Qnexa being used in the treatment of diabetes as well as a sleep apnea which is what makes Vivus so compelling.

 

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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, 6/1/12) 

 

Monday

Conns (CONN, $17.71, up $0.22), Daxor (DXR, $8.96, up $0.10), Dollar General (DG, $48.62, down $0.29), Hooker Furniture (HOFT, $10.74, down $0.24), Hurco Companies (HURC, $20.55, down $1.51), JDA Software Group (JDAS, $27.37, down $0.31), Lakeland Industries (LAKE, $7.60, down $0.43), Quanex Building Products (NX, $15.95, down $0.56), Shuffle Master (SHFL, $14.81, down $1.05)

 

Tuesday 

Air T (AIRT, $9.47, up $0.37), American Woodmark (AMWD, $16.60, down $0.31), Bob Evans Farms (BOBE, $39.11, down $1.43), G-III Apparel Group (GIII, $24.17, down $0.54), Layne Christensen (LAYN, $18.59, down $0.16), Mattress Firm Holding (MFRM, $34.35, up $0.12), Mesabi Trust (MSB, $24.11, down $0.58), Mitcham Industries (MIND, $17.54, down $1.36), Oxford Industries (OXM, $43.77, down $2.28), Ulta Salon Cosmetics & Fragrance (ULTA, $86.55, down $2.82), United Natural Foods (UNFI, $48.26, down $2.44)

 

Wednesday

ABM Industries (ABM, $20.47, down $1.00), Analogic (ALOG, $64.24, down $1.70), Annie’s (BNNY, $37.85, down $2.30), Cyberonics (CYBX, $38.36, down $0.19), Greif (GEF, $42.99, down $0.75), Isle of Capri Casinos (ISLE, $5.19, down $0.16), Measurement Specialties (MEAS, $32.01, down $0.66), Men’s Wearhouse (MW, $34.56, down $1.43), Oil-Dri Corp. of America (ODC, $18.54, down $0.69), Pall (PLL, $54.39, down $1.27), Rosetta Genomics (ROSG, $14.39, up $0.64), Vail Resorts (MTN, $42.20, down $1.27), Verint Systems (VRNT, $27.71, down $1.01)

 

Thursday

Agilysys (AGYS, $7.25, down $0.03), Altera (ALTR, $32.28, down $1.13), Bio-Reference Laboratories (BRLI, $18.38, down $0.85), Cherokee (CHKE, $11.80, down $0.29), Comtech Telecommunications (CMTL, $28.95, up $0.07), Cooper Companies (COO, $82.87, down $2.31), Francesca’s Holdings (FRAN, $22.87, down $0.59), IDT (IDT, $8.02, down $0.26), J. M. Smucker (SJM, $74.82, down $1.74), Met-Pro (MPR, $9.33, down $0.15), Navistar International (NAV, $27.01, down $0.93), Orchard Supply Hardware Stores (OSH, $16.64, down $0.21), Pep Boys – Manny, Moe & Jack (PBY, $8.96, down $0.32), Rentrak Corporation (RENT, $15.68, down $0.52), Stewart Enterprises (STEI, $5.98, down $0.19), Titan Machinery (TITN, $29.63, down $1.22), UTi Worldwide (UTIW, $14.90, down $0.74)

 

Friday

Duckwall-ALCO Stores (DUCK, $8.39, up $0.17), KMG Chemicals (KMGB, $16.63, down $0.45), Oracle (ORCL, $26.00, down $0.47), Piedmont Natural Gas (PNY, $29.91, down $0.41), Rand Logistics (RLOG, $7.65, up $0.15)

 

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5.  Weekly Wrap Covered Call Portfolio Update (Closing prices as of 6/1/12)

 

Closed Trades for 2012 (19-0, overall):  BAC +26%, EFTC +8%, SZYM +55%, VVUS +38%, CALL +19%, BAC +20%, SYMC +16%, DAR +20%, TIVO +5%, MGM +22%, ZNGA +13%, SGMS +6%, VVUS +17%, F +8%, AA +7%, CLNE +27%, DNDN +18%, MGM +19%, ACAS +3%.   

 

Solazyme (SZYM, $10.48, down $0.43)

June 15 calls (SZYM120616C00015000, $0.05, flat)

Original Entry Price:  $12.40 (4/17/12)

Lowered Price from Selling Options: $12.00    

Exit Target:  $15+

Return:  -13%

Stop Target:  None

Action:  Shares jumped nearly $1 to start the week and we said a close above $10.50 would be bullish for a run back to $11.  Short-term support has been solid at $9.50 and is moving up.  The June options expire in less than 2 weeks.      

We recommended buying the stock at $12.40 on 4/17/2012 and for every 100 shares to sell the June 15 calls for 40 cents.  This lowered the cost basis to $10.18.

If shares are called-away by mid-June at $15 the trade makes 25%.

 

Bank of America (BAC, $7.15, up $0.01)

Original Entry Price:  $8.93 (4/17/12)

Lowered Price from Selling Options and Dividends:  $8.47  

Exit Target:  $15+

Return:  -17%

Stop Target:  None

Action:  BofA paid a penny dividend on Wednesday and shares were able to hold $7 until Friday as they dipped to a low of $6.94.  A close below $6.75 would be bearish and could lead to a test down to $6.25-$6.  Resistance is at $7.25 and we are waiting for shares to get near $8 before writing another call option.  This is our third BAC trade this year as we have been recommending shares near $5 since December.  The first 2 covered call trades made over 20%.

We recommended buying the stock at $8.93 on 4/17/2012 and for every 100 shares to sell the May 9 calls for 45 cents.  This lowered the cost basis to $8.48.

On 5/30/12 the company paid a 1 cent quarterly dividend which lowered our cost basis to $8.47.

 

Scientific Games (SGMS, $8.18, down $0.36)   

Original Entry Price:  $11.10 (3/20/12)

Lowered Price from Selling Options:  Waiting for shares to reach $10-$11

Exit Target:  $15+

Return:  -26%

Stop Target:  None

Action:  Shares traded to a low of $8.11 on Friday which is strong support.  There is now a chance shares test $7.50.  A close above $9 again would be bullish and could lead to a run up $9.50-$10 which is where we will look to sell a call option.     

We recommended buying the stock at $11.10 on 3/20/2012.

 

Pandora Media (P, $9.96, down $0.78)

June 13 calls (P120616C00013000, $0.05, flat)

Original Entry Price:  $10.58 (3/20/12)

Lowered Price from Selling Options:  $10.18

Exit Target:  $12

Return:  -2%

Stop Target:  None

Action:  Pandora fell 10% to start the week, closing Tuesday at $10.59.  There was a test down to $10.11 on Wednesday and we mentioned short-term support was at $10 which was tested on Friday.  Backup support is at $9.  Resistance is now $11 then $12 but it looks as though the calls will expire worthless which means we can write another option in a couple of weeks.

We recommended buying the stock at $10.58 on 3/20/2012 and for every 100 shares to sell the June 13 calls for 40 cents.  This lowered the cost basis to $10.18.

If shares are called-away by mid-June at $13 the trade makes 28%.

 

Arena Pharmaceuticals (ARNA, $6.40, down $0.29)    

July 3 calls (ARNA120723C00003000, $3.60, down $0.20)

Original Entry Price:  $1.88 (2/2/12)

Lowered Price from Selling Options:  $1.33

Exit Target:  $3+

Return:  364%

Stop Target:  None

Action:  Arena traded to a high of $6.74 on Thursday and we said resistance at $7 would be hard to clear.  We have a price target of $10+ if there is no delay with their obesity drug, Lorcaserin, which could go to market by the end of the year if all goes well.

We recommended buying the stock at $1.88 on 2/2/2012 and for every 100 shares to sell the July 3 calls for 50 cents.  This lowered the cost basis to $1.33.

If shares are called-away by mid-July at $3 the trade makes 117% so our gains will be capped.

 

MGM Resorts (MGM, $10.37, down $0.46) 

Original Entry Price:  $13.77 (2/2/12)

Lowered Price from Selling Options:  $12.67

Exit Target:  $15

Return:  -18%

Stop Target:  None

Action:  MGM traded to a high of $11.30 to start the week but fell over 4% on Friday to bring support at $10 back into play.  There is a chance $9 is tested if this level is taken out and where we might add to the position. 

We recommended buying the stock at $13.77 on 2/2/2012 and for every 100 shares to sell the March 15 calls for 45 cents.  This lowered the cost basis to $13.32.

On 3/20/12 we recommended selling the April 14 calls for $0.65 which lowered the cost basis to $12.67.

 

Alcoa (AA, $8.30, down $0.25)

Original Entry Price:  $9.65 (1/12/12)

Lowered Price from Selling Options and Dividends:  $9.14

Exit Target:  $11

Return:  -9%

Stop Target:  None

Action:  Alcoa paid a 3 cent dividend on May 10 which lowered our cost basis to $9.14.  Shares tested $9 at the beginning of the week but feel below short-term support at $8.50.  Friday’s lows could bring $7.50 into play.  Below is a 5-year chart weekly chart for the stock.  

We recommended buying the stock at $9.65 on 1/12/12.    

On 1/23/12 we recommended selling the March 11 calls for $0.25 which lowered the cost basis to $9.40.

On 2/1/12 the company paid a 3 cent dividend which lowered our cost basis to $9.37.

On 3/20/12 we recommended selling the April 11 calls for $0.20 which lowered the cost basis to $9.17.

On 5/10/12 the company paid a 3 cent quarterly dividend which lowered our cost basis to $9.14.

 

Newpark Resources (NR, $5.53, down $0.26) 

Original Entry Price:  $9.45 (7/27/11)

Lowered Price from Selling Options: $7.85

Exit Target: $10+

Return:  -30%

Stop Target: None

Action:  Shares traded to $5.50 on Friday which was our near-term target once $6 fell.  The 52-week low is at $5.19 and shares could test $5 on further weakness.  A close above $6.50 would be bullish but and we are waiting for a move back above $7 before writing another call option.

We recommended buying the stock at $9.45 on 7/27/11 and for every 100 shares to sell the August 10 calls for 50 cents.  This lowered the cost basis to $8.95.

On 9/15/11 we recommended selling the December 10 call option for $0.85 which lowered the cost basis to $8.10.

On 1/25/2012 we recommended selling the March 12.50 call at 25 cents which lowered our cost to $7.85. 

 

Trades on HOLD:  DryShips (DRYS, $2.12, down $0.09), AKS Steel Holding (AKS, $5.95, down $0.08), Rare Element Resources (REE, $4.07, flat), Rambus (RMBS, $4.82, up $0.01), Patriot Coal (PCX, $2.44, up $0.07), OCZ Technology Group (OCZ, $4.26, down $0.22), Pizza Inn (PZZI, $2.32, down $0.12), Bebe Stores (BEBE, $6.26, up $0.12)  

 

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6.  Week Ahead

This week will be a walk in the park compared to last week’s onslaught of economic news.  Monday is light with Factory Orders at 10am (EST) the only report due.

Tuesday is light as well with the ISM Services numbers taking center stage, also at 10am.

Wednesday is busy with the MBA Mortgage Index due out at 7am followed by Productivity and Unit Labor Costs at 8:30am.  After the open, Crude Inventories are due out at 10:30 with the Fed’s Beige Book wrapping things up at 2pm. 

Thursday’s weekly dose of Initial and Continuing Claims will hit the Street at 8:30am.  Consumer Credit figures will be released at 3pm.

Friday wraps up with the Trade Balance and Wholesale Inventory numbers due out at 10am.