MomentumOptionsTrading.com Weekly Wrap for 6/17/12

 

11:30pm  (EST)

1.  Market Summary 

2.  Complete Genomics (GNOM) Could be a Sleeper    

3.  Earnings

4.  Weekly Wrap Portfolio Update 

5.  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   

“Obviously, the Spain news has had a positive impact on futures and will likely lead to a huge pop on Wall Street for Monday’s open.  We expect the second layers of resistance we have charted to come into  play but something just doesn’t feel right.  While the bulls’ momentum has been strong, the bears’ bite was just as powerful during the prior week sell-off or did everyone forget?

It’s  hard to say the “trend” is up until the market breaks out past stronger resistance so let’s just say the rally could continue this week.  The bulls love to climb a wall of worry but the bears like to lay back and attack when you least expect it.” (from 6/10/2012 Weekly Wrap/ Monday Morning  Outlook)…

The bulls came into the week looking to extend their winning streak and got off to a  great start on news Spain was getting a $125 billion “loan” to help bail out  its banks.  We said the sugar high  wouldn’t last and the bears won Monday’s session. 

It would be  short-lived as news spread throughout the week that world leaders are ready to  throw the kitchen sink at Greece’s debt crisis, the market rallied right up to  the second layer of resistance levels.

With all  eyes on Greece, Wall Street is bracing for this week’s possible breakout or  breakdown.

The Dow gained  115 points, or 0.9%, to settle at 12,767 on Friday.  The blue-chips traded down to 12,398 on  Monday’s back test but held near-term support at 12,350.  We said the first wave of resistance would be  at the 12,600 level which was tested on Tuesday and Wednesday.  The bulls cleared this area on Thursday’s close which set up Friday’s run to 12,800.  We said a break above 12,800-13,000 could be a possible trend change which could easily carry the Dow to new highs for the year.  A 5% pullback, to start, would put the Dow  under 12,200 (to 12,129), if the market doesn’t like the Greece news.  The Dow was at 12,554 to start Monday’s session and advanced 213 points, or 1.7%, for the week.  For 2012, the blue-chips are up 550 points, or 4.5%.

 Longer-term  chart:

 

The  S&P 500 jumped 14 points, or 1%, to close at 1,342.  The index tested a low of 1,307 on Monday but  held 1,300 and tested 1,325 over the next two days before breaking through on  Thursday’s close of 1,329.  This set up  Friday’s pop to 1,350 as the index reached a peak of 1,343.  We said a move back above this level would  get 1,375-1,400 in play and a 5% pop would get the S&P to 1,409.  A 5% plunge the other way would put the index  at 1,275 which is a level we have said is crucial in holding if 1,300  failed.  The S&P 500 came into the  week at 1,325 and advanced 17 points, or 1.3%, by Friday’s close.  YTD, the index is showing a gain of 85  points, or 6.8%.

 Here is the  longer-term S&P 500 chart:

 

 The  Nasdaq surged 36 points, or 1.3%,  to close at 2,872.  Tech traded to a low of 2,806 at the beginning of the week and held the 2,800 level on Monday’s  drop.  We have been mentioning 2,850 as  the marquee battlefield which was cleared on Monday’s run to 2,883.  This area was tested on Tuesday, cleared on  Wednesday but not on the close, and tested again on Thursday.  We didn’t think the bulls had enough muscle  to clear 2,900 (which held) but a 5% move this week not only clears this level,  it would put the Nasdaq at 3,015.  We  have been saying that as long as 2,900 was in the picture, the bulls could push  3,000.  A 5% pullback would get the  Nasdaq back down to 2,729 and below crucial support at 2,750.  The index started Monday at 2,858 but Friday’s gains only lifted the index 14  points, or 0.5%, for the entire week.  For  the year, Tech is higher by 267 points, or 10.3%. 

 Here is a  30-month chart for Tech:    

 The Russell  2000 tacked-on 9 points, or 1.2%, to finish at 771.  The small-caps traded to a high of 776 to  start the week but tested 750 on Monday’s fade.  The bears broke through this level on Tuesday and Wednesday which was  bearish and would have brought 740-720 back into the mix.  However, the close above 750 both days kept a  run back to 780 alive but Friday’s high was only 772 which was below resistance  and below Monday’s top.  Our charts  outlined a break above 800 could lead to 830 and a 5% pop would but the Russell  2000 at 810.  A move of 5% the other way  would equate to 732.  The Russell 2000 was  at 769 before Monday’s opening bell but was only up 2 points, or 0.3%, after  all the noise.  The index is showing a  gain of 31 points for 2012, or 4.1%.

 

Here is a  longer-term chart of the Russell 2000:

 

 The S&P  Volatility Index ($VIX, 21.11, down 0.57) came into the week at 21.23 and  fell below 20 on Monday’s rush higher at the open.  By the end of the session, the VIX was back  above the 22.50 level after closing at 23.56, up 11%.  The index closed below 22.50 on Tuesday  (22.09) but what kept us bearish (and why we added 3 more trades last week to  our Daily) is the fact the index traded higher throughout the rest of the  week.  The VIX touched 23.90; 24.93; and  24.81 over the next 3 days before Friday’s pullback.

 

 Here is the  chart we showed you of the VIX last week:

 

This  past Monday was a negative close for the market and had it been positive, we  might have factored in a possible trend change as it would have been the  -straight positive Friday/ Monday close for the market.  Futures were showing a strong open last  Sunday night when we went to press but Monday ended with a 250-point swing on
the Dow after a nearly triple-digit gain at the open.

We  saw signs of the VIX tripping 25 which still has us feeling bearish and we  don’t believe the upcoming earnings cycle is going to be a good one. If  companies are going to miss expectations, the next 2 weeks will be the time  they confess.

We  also mentioned the week after June options expiration is extremely bearish,  historically, for the market and last week’s economic news was lousy.  There are a number of key events this week so  no matter where the market ends on Monday it will only be a start of something  better or worse to come.  The bulls will  need a lot of headlines to go their way to keep a sustained rally going while  the bears are hoping fundamentals take over.

The  news out of Greece is looking favorable for the bulls as the pro-bailout party,  led by Antonis Samaras, has won Greek’s parliamentary election.  This increases the likelihood the country  will remain in the Eurozone and the overseas markets are showing strong gains  as we go to press.

As  we head to press, futures are showing a higher open for Monday and look like this.  Dow futures are up 58 points to 12,768 while  the S&P 500 futures are higher by 6 points to 1,343.  The Nasdaq 100 futures are advancing 13 points  to 2,577.     

 

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2.  Complete Genomics (GNOM) Could be a Sleeper

 

Yes, yes, we all know that Europe is in chaos, and financial markets might fall off another cliff, dragging stocks down with them. Or perhaps it’s not all bad.  As we noted in last week’s article, the Europeans will probably still drink their beer.  Certain defensive sectors like food will always be in demand.  People need to eat regardless of the financial markets.  Drugs/biotech is another defensive sector, as people need medications and medical care. These stocks may be able to weather the turmoil.  Plus, a big boost for the sector is acquisitions.  Large pharmaceutical giants need to acquire smaller drug companies to either boost growth or find new blockbuster drugs to replace the lost revenues for those coming off patents.  Complete Genomics (GNOM, $1.96, down $0.06), with its DNA sequencing technology, may treat investors well.

DNA, the building blocks of life, might be the next big thing.  DNA contains genetic information or genes that code the development of specific proteins which are used in the function, growth, and reproduction of all modern living things.  The entire DNA sequence is the human genome.  Genome sequencing helps us understand how the genome affects human disease and how it affects response to growth. 

This technology is currently used mainly in cancer research.  Cancer is caused by mutations in the genome.  Accurate measurements of these mutations enable physicians to select the right therapy to treat the disease.  Moreover, the technology can spot the risk of the disease in patients with no family history of the disease, increasing early warning detection.

Complete Genomics combines its proprietary human genome sequencing technology with informatics and data management software to provide customers with data that is
ready to be used for genome-based research. The company went public in November 2010 as a venture company to make DNA sequencing faster and cheaper. Though its technology yields an industry-leading accuracy of 99.9998%, it has struggled with recurring losses since going public.

As can be seen, net income has been falling over the years, but revenue has been increasing, giving hope that the company may someday turn a profit.  Quarter over quarter, profit margin, revenue, and net income declined in 2011 and into this year but new contracts may change that.

Back in February, shares surged over 40% to close at $4.66 after it signed a contract with Mayo Clinic to be the sole provider of genome sequencing.  In late May, the company signed four new distributor agreements with GeneWorks of Australia, Cyagen Biosciences of China, AR Brown Company of Japan, and BML of Korea.

Earlier this month, Complete Genomics announced that it is laying off about 20% of its workforce in order to cut costs and has hired Jefferies & Company to assist it in exploring strategic alternatives, which could include a merger, business combination, equity investment, or sale.  The company also said it plans to focus on development of its whole human genome sequencing service, which is where growth is going, while continuing to provide high-quality genomes to research customers.  To date, it has over 125 customers.

Currently, Illumina (ILMN, $39.81, up $0.55) and Life Technologies (LIFE, $42.68, up $0.81) are the biggest providers of sequencing machines, which can decode human DNA in hours, giving massive amounts of information about inherited traits.  Complete Genomics has to break into this industry.

Source:  Numbers calculated from Yahoo Finance and
Nasdaq.com

Big red flags are that institutions and insiders are selling, the short interest is high, and the number of investors selling short is increasing.  The high short interest will put negative pressure on the stock, but any good news could cause shares to pop.

 

 

Analysts seem to think the stock will rise.  At $1.96, the stock is way below even its low target of $3.00 made by the 4 analysts recorded by Thomson/First Call.  Mean target is of $4.00, median target is $4.00, and high target is $5.00.  Using a scale of 1.0 as a strong buy and 5.0 as a sell, the average rating of the stock was 2.25, unchanged from
a week ago.

 

 

Current
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Last
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Two
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Strong
  Buy

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3

Buy

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2

Hold

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3

3

Underperform

0

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Sell

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3. 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, 6/15/12)

 

Monday

Hooker Furniture (HOFT, $11.13, up $0.456), IHS (HIS, $104.38, up $0.62), JDA Software Group (JDAS, $28.43, up $0.37)

 

Tuesday

Adobe Systems (ADBE, $32.39, up $0.72), Barnes &Noble (BKS, $15.60, up $0.45), Daxor (DXR, $8.96, up $0.06), Discover Financial Services (DFS, $32.99, up $0.62), FedEx (FDX, $87.63, up $0.79), Jabil Circuit (JBL, $19.13, up $0.65), Jefferies Group (JEF, $13.23, up $0.30), La-Z-Boy (LZB, $13.09, up $0.14), Perfumania Holdings (PERF, $8.15, up $0.03)

 

Wednesday

Actuant (ATU, $26.46, up $0.46), Apogee Enterprises (APOG, $15.01, down $0.03), Bed Bath & Beyond (BBBY, $72.67, up $0.66), CLARCOR (CLC, $49.58, up $0.35), Crown Crafts (CRWS, $5.52, Flat), Goodrich (GR, $126.69, up $0.29), Red Hat (RHT, $56.49, up $2.34), Rosetta Genomics (ROSG, $9.43, down $0.43), Sonic (SONC, $8.89, up $0.17), Steelcase (SCS, $8.41, up $0.18)

Thursday

American Software (AMSWA, $8.38, down $0.12), CarMax (KMX, $27.68, up $0.34), Cascade (CASC, $45.32, up $0.37), ConAgra Foods (CAG, $24.97, up $0.12), Kewaunee Scientific (KEQU, $8.15, Flat), Oracle (ORCL, $27.70, up $0.79)

Friday

Carnival (CCL, $34.76, up $0.20), Darden Restaurants, (DRI, $51.46, up $1.33)

 

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4.  Weekly Wrap Covered Call


 Portfolio Update
(Closing prices as of 6/15/12)

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, $12.51, up $0.26)

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

Lowered Price from Selling Options: $12.00    

Exit Target:  $15+

Return:  5%

Stop Target:  None

 Action:  The June 15 calls expired worthless so we will look to write a July or August call this week.  The next level of resistance comes in at $13 and if cleared, could lead to a run to $15.  Support has moved up to $11.50. 

 

 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.

  

Bank of America (BAC, $7.90, up $0.24)

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

Lowered Price from Selling Options and Dividends: $8.47  

Exit Target:  $15+

Return:  -7%

Stop Target:  None

 Action:  BofA traded to $7.22 to start the week and support has been strong around $7.  A break above $8 would be bullish and where we will look to sell another call
option.

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, $8.88, up $0.07)   

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

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

Exit Target:  $15+

Return:  -20%

Stop Target:  None

Action:  Shares traded above $9 to start the week but finished flat by Friday’s close.  Support has been strong at $8.25 and the low for the week was $8.34.  We would like to see a break above $9 this week and an eventual move towards $10 which is where we will look to write a call option.     

 

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

 

Pandora Media (P, $10.71, up $0.29

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

Lowered Price from Selling Options:  $10.18

Exit Target:  $12

Return:  5%

Stop Target:  None

Action:  The June 13 calls expired worthless on Friday.  Shares traded to $11.50 to start the week and ended positive on a rough Monday for Wall Street.  However, Pandora Media dropped below $10 by Wednesday on competition concerns before rebounding.  We may close this position into strength this week because we want to focus on less volatile plays but we will send out a Trade Alert if we sell another option, or if we do close the trade. 

 

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.

 

Arena Pharmaceuticals (ARNA, $8.40, up $0.32)  

July 3 calls (ARNA120723C00003000, $5.50, up $0.30)

Original Entry Price:  $1.88 (2/2/12)

Lowered Price from Selling Options:  $1.33

Exit Target:  $3+

Return:  509%

Stop Target:  None

Action:  We knew when Arena traded to a high of $7.23 on Monday it would clear the way for a run at $8.  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.  For those of you just joining us, the company will meet with the FDA on June 27.

 

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, $10.80, down $0.30) 

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

Lowered Price from Selling Options:  $12.67

Exit Target:  $15

Return:  -15%

Stop Target:  None

Action:  MGM traded to $11.67 before fading on Monday and testing $11 for the rest of the week.  Support at $10 has held up well and a break above the 200-day MA ($11.74) would be bullish.  A move above this level could lead to a test of the 50-day MA ($12.06) and where we would sell another call option.

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, $8.82, up $0.17)

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

Lowered Price from Selling Options and Dividends:  $9.14

Exit Target:  $11

Return:  -4%

Stop Target:  None

Action:  Alcoa made a run at $9 by week’s end and the 50-day MA is at $9.11.   A close below $8.40 would get the 52-week low of $8.21 back into the mix.  

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.

 

Trades on HOLD:  DryShips (DRYS, $2.08, up $0.06), AKS Steel Holding (AKS, $5.32, up $0.17),
Rare Element Resources (REE, $4.37, up $0.24), Newpark Resources (NR, $5.51, up $0.03), Rambus (RMBS, $6.09, up $0.75), Patriot Coal (PCX, $1.25, up $0.06), OCZ Technology Group (OCZ, $5.53, up $0.24), Pizza Inn (PZZI, $2.41, up $0.05), Bebe Stores (BEBE, $5.74, down $0.14)
 

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5. Week Ahead

The only scheduled event for Monday is the NAHB Housing Market Index numbers.  While this report shouldn’t impact the market there is a chance we hear news on the Healthcare bill which will have an impact once a ruling is rendered.  Microsoft could also announce a new tablet to compete with Apple.

For Tuesday, Housing Starts and Building Permits figures will hit the Street at 8:30am (EST).  The start of the FOMC meeting will be the main story.

Wednesday’s action kicks-off with the MBA Mortgage Index numbers at 7am followed by Crude Inventories after the bell (10:30am).  The big event will be the FOMC Rate Decision which is due out at 12:30pm.

Thursday is busy with Initial and Continuing Claims due out at 8:30am.  Existing Home Sales, the Philly Fed numbers, and Leading Indicators are due out at 10am.

There are no economic reports due out on Friday.