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Newsletter

Daily Newsletter, Tuesday, 5/27/2014

Table of Contents

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

Market Wrap

Short Squeeze Monday

by Jim Brown

Click here to email Jim Brown
Tuesday was Monday this week and the short squeeze appeared as expected.

Market Statistics

The S&P gapped to 1,911 at the open and that is exactly where it closed after investors failed to chase stocks higher. The short squeeze came after overseas markets reacted to the positive outcome from the Ukraine elections. The good guy won the election, Putin is backing off and Europe said it was going to postpone new sanctions against Russia. The markets celebrated as shorts fearing the worst in Ukraine were forced to cover but that is as far as it went. There was no follow through and the S&P, Dow and Russell 2000 closed where they opened or slightly lower.

The Nasdaq was the exception with a strong spike higher at the close. I suspect traders in the Nasdaq momentum stocks were the most short after their big gains last week. However, the gains today pushed the Nasdaq 100 right to major resistance.


Today was a busy day for economics and while the results were mixed there was a slight positive bias. The Durable Goods orders for April rose +0.8% compared to +3.6% in March and +2.6% in February. The slightly positive number was better than the consensus estimate for a decline of -0.5% and the Moody's estimate for a decline of -1.4%. This is another one of those numbers where bad news was priced in and even a weak gain was a positive surprise.

Excluding transportation orders (planes, trains, autos) the rise was only +0.1%. Excluding defense the new orders actually fell -0.8%. Machinery orders declined -1.4%. Defense orders rose +39.3% after a gain of +18.8% in March.

The Richmond Fed Manufacturing Survey for May came in at 7 and the same as April. The headline activity flattened but the components were mixed. New orders declined from 10 to 3 but backorders rose from -9 to +1. The employment component rose sharply from 4 to 10 and the average workweek rose slightly from 2 to 3. Wage increases spiked from 6 to 22. Those components suggest manufacturers have a brighter outlook for the future if they are willing to hire and pay more.

The Services survey roared higher from 1 to 13 thanks to surging retail sales. Excluding retail the headline number would drop to 7. However, the employment index declined from 6 to 4 as a result of the retail component falling from 20 to 10. Excluding retail it would have risen from 1 to 3. The expected demand for the next six months spiked from 3 to 20 for retail and 11 to 13 excluding retail.

The surge in retail can't be emphasized enough. This suggests the consumer is improving and that is the driver for the entire economy. It remains to be seen if this will be reflected all across the country or if this is just a winter weather snapback in the Richmond area.


The Texas Manufacturing Outlook Survey declined from 11.7 to 8.0 for May. The net percentage of positive responses did decline in May from April levels. The internal components were not as positive. The new orders component declined from 21.3 to 3.8 and inventories fell from 5.6 to -1.0. Backorders dropped from 3.1 into contraction territory at -8.1. The average workweek fell from 13.9 to 2.8. Prices paid nearly tripled from 10.2 to 26.3. The manufacturing outlook for Texas remains positive but there was a definite weakening in the components.

Consumer Confidence for May rose slightly from the downwardly revised 81.7 to 83.0 but below the Moody's forecast at 84.4. April was revised lower from 82.3 to 81.7. The present conditions component rose from 78.5 to 80.4 and the expectations component eased up from 83.9 to 84.8. Those respondents planning on buying a home declined from 5.6% to 4.9%. Auto buyers increased from 10.6% to 11.3% and appliance buyers declined from 45.9% to 45.1%.

Those that thought jobs were plentiful rose from 13.0% to 14.1% and those expecting a higher income jumped from 16.8% to 18.3%. However, those expecting a drop in income rose from 12.9% to 14.5% for an interesting conflict in trends.


There is nothing on the economic calendar for Wednesday that will move the market. The next important report is the Q1-GDP revision on Thursday. There is a wide range of estimates from -0.8% to +1.5% so it would be hard to produce a surprise. However, a negative reading could promote some selling by those expecting positive growth. Some people simply refuse to believe the negative factors and they could be shocked by a decline.

I think everyone should have adjusted to the "weather ate the economy" excuse for sharply lower GDP readings and earnings. However, the expectations for Q2 are rapidly getting out of hand. Earnings growth is now expected to rise more than 7% in Q2 and GDP growth is being quoted as high as 5%. Those are some big estimates to live up to and reality is likely to be somewhat different.


Stock news was pretty muted with everyone still mentally on vacation. The headline for the day was the $6.4 billion offer for Hillshire Brands (HSH) by Pilgrim's Pride (PPC) that could upset the Hillshire $4.23 billion offer for Pinnacle Foods (PF). Pilgrim is the world's second largest poultry producer behind Tyson Foods (TSN).

Hillshire makes Jimmy Dean sausage, Ball Park hot dogs, Hillshire Farms lunch meats and Sara Lee brand frozen baked goods. The Pilgrim CEO said the combination of Hillshire and Pilgrim would create "the most powerful branded combo of meat products in the industry." Analysts expect Hillshire to resist the offer. Hillshire shares spiked +22%, Pilgrim shares were up slightly and Pinnacle shares fell -5% on worries Hillshire would pull the bid for Pinnacle. Pilgrim said they would pay the $163 million termination fee owed Pinnacle if Hillshire terminates its offer.



Expedia (EXPE) shares rallied +3% after FBR said they experienced a sharp uptick in room volume in April. FBR said the weakness in Q1 bookings was due more to weather and the Easter calendar than weakness in the sector. Last week Cantor Fitzgerald raised their price target from $80 to $82 citing strong click volume for April that indicated hotel spending was increasing. Also, David Tepper started a new position in Expedia in Q1. Expedia shares gained +3% on the news.

In the same sector Booking.com, owned by Priceline (PCLN), was the recipient of a legal complaint filed by French Economic Minister Arnaud Montebourg claiming the contracts between hotels and Booking.com were unfair. He said the contracts prevent the hotels from renting a room at a price lower than the Booking.com price even if the customer did not come from Booking.com. There was a similar complaint against Expedia that resulted in fines in 2013.

Obviously Booking.com does not want customers surfing prices and availability online and then calling the hotel directly trying to get a lower price without paying the commission to Booking.com. Apparently investors thought the complaint demonstrated Booking.com's control of the marketplace and they immediately piled into Priceline shares for a +5% gain. Priceline rebounded off the 200-day average last week and closed just above resistance on Friday. This was probably as much short covering as anything else.


Autozone (AZO) shareholders got a nasty surprise when shares declined -4% after a decent earnings report. AZO said revenue rose +6.2% to $2.3 billion. Earnings rose +16.4% to $8.46 on a 52% gross margin compared to estimates for $8.44 per share. Same store sales rose +4%. They repurchased $420 million in shares. They have increased earnings per share by 10% or more for 31 consecutive quarters. Sounds like a great earnings report but investors keyed in on the +12% rise in inventory and they sold the stock. That has to be frustrating for the CEO to produce such a good quarter and get punished for one line item. I suspect some of the decline was related to investors getting out of the stock after it failed to break through resistance from February. They were hoping earnings would do it but when the selling started everybody piled on.


Biotech stocks were up strongly after multiple companies released announcements about drugs in process ahead of the ASCO meeting that starts on Friday. The sector was seriously oversold earlier this year but several of the most beaten down companies are now in rally mode. Stocks in this sector are either feast or famine depending on their latest press release. This is a very volatile sector but one where the rewards can be great if you pick the right company ahead of important drug news.

Biotechs were a major supporter of the Nasdaq rally today.


After the bell cloud computing company Workday (WDAY) reported a loss of 13 cents compared to estimates for a loss of 15 cents. Revenue rose +74% to $160 million compared to estimates of $152 million. They also issued guidance for the current quarter for revenue between $173-$178 million and analysts were expecting $172 million. Shares rallied $5 in afterhours trading.


Qihoo 360 (QIHU) posted earnings after the close of 54 cents compared to estimates of 34 cents. Revenue increased +141% to $265 million. The number of PC users rose +5% but smartphone users almost doubled. QIHU is a network security company in China. Daily clicks on the QIHU website rose +58%. The company issued guidance for revenue of $300 million or more in the current quarter compared to analyst estimates for $270 million. Shares rallied $5 in afterhours.


In geopolitical news the good guy won in Ukraine and Putin agreed to support the winner. Ukraine forces launched a violent attack against the remaining separatists and made it clear they were going to retake the country at any cost. It is not a good time to be a rebel this week. Europe said they were going to postpone any new sanctions against Russia. Assuming Russia does not bring back its troops and invade Ukraine this news story is over as far as the market is concerned.

Iran appears to have backed out of the nuclear discussions and they are not just over but the country has returned to its hard line roots. Iran's supreme leader, Ayatollah Ali Khamenei, all but said on Sunday that negotiations over the country's illicit nuclear program are over and that the Islamic Republic's ideals include destroying America. "Those Iranians who want to promote negotiation and surrender to the oppressors and blame the Islamic Republic as a warmonger in reality commit treason," Khamenei told a meeting of members of parliament. Khamenei emphasized that without a combative mindset, the regime cannot reach its higher Islamic role against the "oppressor's front" led by America.

"The reason for continuation of this battle is not the warmongering of the Islamic Republic. Logic and reason command that for Iran, in order to pass through a region full of pirates, needs to arm itself and must have the capability to defend itself." In response to a question by a parliamentarian on how long this battle will continue, Khamenei said, "Battle and jihad are endless because evil and its front continue to exist. This battle will only end when the society can get rid of the oppressors' front with America at the head of it. This requires a difficult and lengthy struggle and need for great strides." And, "The accelerated scientific advancement of the last 12 years cannot stop under any circumstances," he said, referring to the strides the regime has made toward becoming a nuclear power.

Iran presented new "red lines" to the negotiators at the P5+1 talks in Vienna. Those red lines that could not be crossed, including the expansion of the country's research and development for its nuclear program, the need of the country to continue enrichment, and the fact that the country's ballistic missile program — despite U.N. sanctions — is not up for negotiation.

Apparently the new openness towards negotiation and the permanent removal of sanctions has faded. Nearly every military analyst has warned for the last year that the six month agreement that ends in July was just a plan by Iran to secure the release of the $6 billion that was being held plus an opportunity to buy needed spare parts for their military and commercial equipment. After that six-month window opened they traded furiously with everyone possible and now they are ready to go back to work on their nuclear program and to heck with the sanctions.

Iran also failed to complete the seven "transparency steps" agreed on to occur by May 15th. Those included resolving IAEA questions on Iran's work on nuclear detonators and disclosure of Iran's secret nuclear sites and capabilities. Did anyone really expect that to happen?

This does not bode well for the Obama administration's goal to be able to claim a win in Iran ahead of the midterm elections. Al Qaeda is not dead and Iran is still on the path to nuclear weapons.

U.S. security firm FireEye (FEYE) reported last week that the Iranian Ajax Security Team was targeting U.S. defense companies in a cyber-espionage campaign that showed increasing sophistication by hackers in Iran. FireEye discovered the campaign and 77 victim companies in the course of analyzing malicious code disguised as anti-censorship tools. The Ajax team dates back to 2009 when it appeared on popular Iranian hacking forums.

Don't think that Iran is not going to be a problem in the future. They are growing stronger in their technical capabilities and they will acquire a bomb unless the deterrent methods used against them increase in severity and number.

China began to pressure companies to replace IBM servers with a local brand due to fears over spying. Since the spying scandal broke thanks to Snowden, IBM has been having trouble selling servers overseas. There are repeated rumors that the NSA has intercepted shipments of servers, routers and network hardware and installed tracking chips and software that give the NSA backdoor access into the boxes wherever they are installed. Cisco routers have been modified by the NSA in the past in the Tailored Access Operations (TAO) unit where they are intercepted in transit and "upgraded" with Trojan horse firmware. A NSA manager said the TAO operations were "some of the most productive operations because they preposition access points into hard target networks around the world." That is now backfiring against U.S. technology firms because of declining sales overseas and especially in Asia.

Markets

Short covering pushed the S&P to a new high well over the 1,900 close on Friday but there was no follow through. The real question today is what will happen on Wednesday. We have had a lot of bears come out of the woodwork suggesting we are going to see a correction in the near future. So far that has not happened. When those bearish projections are so prevalent it scares the weak holders out of the market. They can actually produce a stealth correction because the fear of a drop forces selling and that allows new investors to take positions.

I am not going to claim the S&P is headed higher because we really don't know. In theory there are plenty of shorts that have not covered. They are convinced the anticipated correction will occur and are willing to wait for it. However, as I warned last week the "correction anticipation" trade has been in play for several weeks. When so many people are expecting the market to go in one direction it rarely occurs.

Bank of America said that over the last two weeks speculators exited S&P longs at the fastest rate in two years. They are now net short the S&P. Another survey of 1,200 fund managers showed they had reduced longs and raised cash in anticipation of a large decline in July and August. To summarize there are a lot of investors expecting a decline and it is not happening.

That means if the market slowly grinds higher those same fund managers will be forced to chase prices because they can't afford to lag the other funds in performance. Managers live and die on their performance relative to other funds. That is how they attract new money is by bragging about their outstanding performance.

Since nearly everyone is expecting a correction that means almost everyone is positioned for a decline with shorts in their portfolio. If the S&P rises a few more points that should weaken the resolve of the short community. If the market does not decline on Wednesday we could see that resolve begin to fade.

However, there are no major events on the calendar to push the market in either direction. That means we could languish here for several days without a big move as traders try to read the technical tea leaves for market direction. Without any material news I think the trend is to grind higher.

For the S&P the new resistance target is the converging resistance at 1,925. Support is now 1,900 and 1,885.


The Dow has been the laggard over the last week. The gap open to 16,688 was the high for the day with the close at 16,675. There was very little movement after the opening spike indicating no follow through by new money. It was pure short covering.

The Dow's historic closing high was 16,715 and until the Dow joins the S&P at new highs the bullish market sentiment will not be complete. We already have the transports at new highs so once the Dow breaks out again the trio can lead higher. Interim support should be 16,650 followed by 16,600.



The Nasdaq 100 has stretched its breakout gains to close right at the resistance band from 3,720 to 3,740. These are the big cap tech stocks that have been leading the Nasdaq rally higher. If they can punch through to 3,750 we could have a real breakout on our hands with all the indexes surging to new levels. Just remember that Apple shares are a big contributor and they have a 7:1 split next week. That could cause some serious volatility if the post split depression occurs on schedule.


The Nasdaq Composite clearly exploded higher on short covering. The gap open to 4,225 was well over resistance at 4,183. In theory there should be more shorts left to cover followed by some price chasing by fund managers. However, the composite has a long way to go before making a new high at 4,357.

Support should be 4,183 and 4,150.



The Russell 2000 mirrored the Nasdaq with a strong +1.4% gain and breakout over downtrend resistance. The next hurdle for the Russell is resistance at 1,150 and 1,165. The Russell and the Nasdaq are both becoming a little over extended and should be due for a rest even if they are going to continue higher.


The markets could be positioned to grind slowly higher until the Dow breaks out to a new high. If that happens we could see the gains accelerate. We are not out of the woods for a potential summer correction but with the S&P over 1,900 the lure of a bullish breakout is in play. I am sure there are a lot of bullish investors laser focused on that breakout and poised to pull the trigger if it moves higher. There are probably just as many bears looking for any hint of failure to reopen their shorts.

Volume was light at 5.5 billion shares so despite the new highs there was no conviction.

Enter passively, exit aggressively!

Jim Brown

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New Option Plays

Financials Showing Strength

by James Brown

Click here to email James Brown


NEW DIRECTIONAL CALL PLAYS

Capital One Financial - COF - close: 77.75 change: +0.56

Stop Loss: 74.95
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Time Frame: 8 to 12 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
COF is in the financial sector. The company provides financial services and products in the United States, United Kingdom and Canada. They're probably best known for the Capital One credit cards.

The financial sector took a leadership role in today's widespread market rally. The group has been lagging the big cap indices the last few weeks. If financials resume their up trend it's going to be a rising tide that helps lift shares of COF to new highs.

Financials should also benefit from the big picture view that interest rates will rise. Some of the federal reserve governors have been hinting that the Fed may have to raise rates sooner than expected. If rates do start rising then investors could start buying financials ahead of this trend.

Credit card companies are also showing strength in their loan quality. COF said their charge off rates have been dropping (losses from unpaid loans).

Technically shares of COF have a long-term bullish trend of higher lows and it's about to breakout past resistance and hit new multi-year highs. The point & figure chart is already bullish and suggesting an $83 target.

The January 2014 high was $78.49. We are suggesting a trigger to buy calls at $78.75.

Trigger @ $78.75

- Suggested Positions -

Buy the Sep $80 call (COF140920C80) current ask $1.97

Option Format: symbol-year-month-day-call-strike

Annotated Chart:

Weekly Chart:

Entry on May -- at $---.--
Average Daily Volume = 3.0 million
Listed on May 27, 2014



In Play Updates and Reviews

Another Round of Widespread Gains

by James Brown

Click here to email James Brown

Editor's Note:

Broad-based gains in Europe helped fuel strong gains in U.S. stocks this morning. The S&P 500 ended the session at another new record high.

BBH and MA hit our entry triggers.
Bearish plays ATHN, GTLS, and LL hit our stop loss.


Current Portfolio:


CALL Play Updates

Biotech ETF - BBH - close: 90.80 change: +2.16

Stop Loss: 85.75
Target(s): to be determined
Current Option Gain/Loss: -22.5%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
05/27/14: Biotechs were in rally mode today. The group outperformed the major indices. The BBH added +2.4% and broke through the $90.00 level. Our suggested entry point was hit at $90.25.

Correction: the weekend newsletter had the $90 option symbol, not the $95 strike.

Earlier Comments:
Last year the biotech industry doubled the market's growth with +60% gains in the BBH. The rally continued into January and February with almost another +20%. Then sentiment reversed. Suddenly traders did not want to own the momentum names or the high-growth names. News articles and debates about the extremely high costs of some biotech treatments like Sovaldi helped feed the sell-off. Biotech experienced 20 percent correction (actually -22.6%) in less than two months.

Now it appears that investors are losing their fear over the growth names again. The BBH has been consolidating sideways the last several weeks. Many believe the correction in biotech is providing a great entry point. There are plenty of high-profile biotech firms with low multiples. A lot of the big names have high-quality pipelines. The group could see more M&A activity as older firms seek to buy up younger rivals.

We want to be ready to buy calls if the BBH can breakout from this consolidation phase. Currently shares of this ETF are testing resistance near $90.00 and its 50-dma and 150-dma. I am suggesting a trigger to buy calls at $90.25.

Bear in mind that biotech stocks can be volatile. The BBH does not see a lot of volume and the option spreads are wide. Add it all up and I would label this a more aggressive, high-risk/high-reward trade. Investors may want to start with small positions.

- Suggested Positions -

Long Sep $95 call (BBH140920C95) entry $3.55*

05/27/14 triggered @ 90.25
*option entry price is an estimate since the option did not trade at the time our play was opened.
Option Format: symbol-year-month-day-call-strike

Entry on May 27 at $90.25
Average Daily Volume = 119 thousand
Listed on May 22, 2014


CVS Caremark Corp. - CVS - close: 77.17 change: +0.05

Stop Loss: 74.65
Target(s): to be determined
Current Option Gain/Loss: - 8.6%
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
05/27/14: CVS delivered a quiet session on Tuesday. Shares bounced along short-term support at the $77.00 level. I do not see any changes from my prior comments.

I would still consider new bullish positions at current levels. If you're concerned about a market pullback then consider waiting for CVS to dip into the $75-76 zone as an alternative entry point.

Earlier Comments:
CVS is in the services sector. The company provides integrated pharmacy healthcare services in addition to running a drug store chain with over 7,600 locations. CVS' largest rival is Walgreen's with 8,650 locations.

The company's most recent earnings report was mixed. CVS delivered a profit of $1.02 per share. That missed estimates by a penny. Revenues came in above expectations at $32.69 billion in the first quarter. Wall Street appears to have accepted CVS's "blame it on the weather" excuse. Last month CVS also disclosed they had finalized a settlement with the SEC over events dating back to 2009 that stemmed from its acquisition of Longs Drug Stores in 2008. In the settlement CVS did not have to admit any wrongdoing and does not have to restate any earnings reports. They're happy to put the ordeal behind them and for investors it's old news.

More importantly the company is seeing strong growth in its PBM business. Its pharmacy services segment saw revenues climb +10.3% to $20.2 billion in the second quarter. Management said CVS is "beginning to develop integrated products for both hospitals and health plans."

They're also growing into a broader healthcare provider with the retail-based clinic subsidiary MinuteClinic. According to CVS' website, "MinuteClinic launched the first retail medical clinics in the United States in 2000 and now has more than 800 locations in 28 states. MinuteClinics are staffed by nurse practitioners and physician assistants who utilize nationally recognized protocols to provide treatment for common family illnesses, skin conditions and injuries, administer vaccinations, conduct physicals and wellness screenings, and offer monitoring for chronic conditions seven days a week without an appointment, including evenings and holidays."

American's growing acceptance of the MinuteClinic for quick healthcare services will grow. Long-term CVS will benefit from an aging population more dependent on their prescriptions. Plus, CVS will benefit from the growing number of new Americans being covered under Obamacare. Payments for these services will be covered by health care plans, Medicaid, and now the Affordable Care Act mandate.

Wall Street is happy with its steady growth. The most recent earnings report showed profits rising 18% year over year for the fifth consecutive quarter of double-digit earnings growth.

We're not setting a bullish exit target yet but the Point & Figure chart for CVS is bullish with a $102 target.

- Suggested Positions -

Long Aug $80 call (CVS140816C80) entry $1.04

05/22/14 triggered @ 77.25
option format: symbol-year-month-day-call-strike

Entry on May 22 at $77.25
Average Daily Volume = 5.1 million
Listed on May 21, 2014


Express Scripts Holding - ESRX - close: 70.65 change: +0.51

Stop Loss: 66.90
Target(s): to be determined
Current Option Gain/Loss: +20.4%
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
05/27/14: ESRX extended its rally another session with a +0.7% gain. The stock is testing potential resistance at its simple 150-dma. The top of the April 29th gap (it closed at $71.01) could also be short-term resistance. I would not be surprised to see ESRX stall here for a bit.

Earlier Comments:
ESRX is in the healthcare sector. The company provides pharmacy benefit management (PBM) services in the U.S. and Canada. Both the NASDAQ and shares of ESRX peaked in early March. It would appear that investors considered ESRX one of the higher-growth, momentum names since it has been sinking with that group over the last couple of months.

That big drop you see on ESRX's daily chart was market reaction to its latest earnings news. The results were disappointing. You could call it a trifecta of bad news. ESRX missed Wall Street's estimates on both the top and bottom line. Management guided lower for 2014. Plus they disclosed three separate subpoenas from different state authorities as the company is investigated for its relationship with drug makers.

Investors already had lowered expectations for ESRX's earnings because the company lost UnitedHealth Group (UNH) as a client last quarter. The loss of UNH accounted for about half of ESRX's lost revenues. ESRX complained that a lot of expected new enrollments had been postponed. They didn't see quite the impact from the new Obamacare exchanges previously expected.

It sounds like plenty of bad news for ESRX. Yet here's the interesting part. The stock lost -6% following its earnings report but there was no follow through lower. Investors have been buying the dip. Shares are up two weeks in a row and slowing chewing through resistance. With a drop from $79 to $65 (-17.7%) it is possible that all the bad news is already priced into ESRX stock price. The long-term trend for ESRX is still higher. As the new affordable healthcare policy changes gain momentum it should mean more enrollments for ESRX.

- Suggested Positions -

Long Aug $70 call (ESRX140816C70) entry $2.45*
option format: symbol-year-month-day-call-strike
05/21/14 triggered @ 69.50
*option entry price is an estimate since the option did not trade at the time our play was opened.
05/19/14 adjust entry trigger from $70.50 to $69.50
adjust the strike price to the August $70s.

Entry on May -- at $---.--
Average Daily Volume = 6.5 million
Listed on May 17, 2014


Facebook, Inc. - FB - close: 63.48 change: +2.13

Stop Loss: 59.45
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Time Frame: 8 to 12 weeks
New Positions: Yes, see below

Comments:
05/27/14: The rally in FB accelerated on Tuesday with a +3.4% gain. The stock is nearing potential resistance at the $64.00 level. We are looking for a bullish breakout higher. There is no change from the weekend newsletter's new play description.

Earlier Comments:
FB is in the technology sector. The company operates the largest social network on the planet with monthly active users up +15% year over year to 1.28 billion as of March 31st, 2014. Mobile monthly users were up +34% to 1.01 billion.

When investors started selling the momentum stocks and high-growth names in March shares of FB were not immune. The stock corrected from $72 to $55, a -23.6 percent correction. We suspect when investors return to the high-growth names they will flock to FB.

The company is firing on all cylinders with a strong Q1 report. Analysts were expecting a profit of 24 cents a share on revenues of $2.35 billion. FB delivered a Q1 profit of 34 cents with revenues soaring +71.6% year over year to $2.5 billion. Advertising revenues were up +82% from the same quarter a year ago. Mobile advertising has increased from 30% of ad revenues to 59% of ad revenues.

Wall Street is pretty bullish on shares of FB. Many analysts have price targets in the $75-85 zone. David Tepper's Appaloosa Management initiated a new position in FB last quarter. ITG Research recently offered positive comments on FB suggesting the current quarter could also come in ahead of estimates.

Technically the stock has been consolidating sideways in the $55-64 zone for almost two months. Friday's gain was a bullish close above the 50-dma for the first time in weeks. More aggressive traders may want to launch positions above $62.50. We are suggesting investors wait for FB to trade at $64.25 as our trigger to buy calls. The point & figure chart is bearish but a move above $64.00 would produce a new P&F chart buy signal.

Trigger @ $64.25

- Suggested Positions -

Buy the Sept $70 call (FB140920C70) current ask $3.15

Option Format: symbol-year-month-day-call-strike

Entry on May -- at $---.--
Average Daily Volume = 62 million
Listed on May 24, 2014


Gilead Sciences - GILD - close: 82.16 change: +1.22

Stop Loss: 77.90
Target(s): to be determined
Current Option Gain/Loss: +62.7%
Time Frame: 4 to 8 weeks
New Positions: see below

Comments:
05/27/14: Thanks to a widespread rally in biotech stocks today there was no follow through on GILD's bearish move last Friday. Shares bounced near their 10-dma with a +1.5% gain.

I am not suggesting new positions at this time.

NOTE: since we only have June calls, readers may want to take some money off the table now.

- Suggested Positions -

Long Jun $80 call (GILD1421F80) entry $2.12

05/15/14 new stop @ 77.90, readers may want to exit now to lock in potential gains.
05/10/14 new stop @ 75.75
05/01/14 new stop @ 74.45
04/30/14 triggered @ 77.00

Entry on April 30 at $77.00
Average Daily Volume = 23 million
Listed on April 29, 2014


LyondellBasell Industries - LYB - close: 98.47 change: -0.31

Stop Loss: 93.75
Target(s): to be determined
Current Option Gain/Loss: +21.5%
Time Frame: 6 to 9 weeks
New Positions: see below

Comments:
05/27/14: LYB spiked to new all-time highs before reversing. I have been warning readers that the $100 level could be overhead resistance. I am not suggesting new positions at this time.

Earlier Comments:
The Point & Figure chart for LYB is bullish with a $110 target.

- Suggested Positions -

Long Sep $100 call (LYB140920C100)* entry $2.55**

05/15/14 new stop @ 93.75
05/12/14 LYB gapped open higher at $96.20 (+75 cents)
**option entry price is an estimate since the option did not trade at the time our play was opened.
*I've provided the more standardized option symbol format.
symbol-year-month-day-call-strike

Entry on May 12 at $96.20
Average Daily Volume = 3.1 million
Listed on May 10, 2014


MasterCard Inc. - MA - close: 77.03 change: +0.58

Stop Loss: 72.35
Target(s): To Be Determined
Current Option Gain/Loss: -3.5%
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
05/27/14: Our brand new play on MA is open. The stock received a lot of positive analysts' comments this morning. Shares gapped open higher at $76.88 before spiking up towards $78. Our suggested entry point was hit at $77.25. I do not see any changes from the weekend newsletter's new play description.

Earlier Comments:
MA is in the financial sector. The company provides transaction processing and payment-related services. Globally cash is still the most dominant method of payment. That may not be true in the most developed countries but worldwide there is a long-term trend with consumers moving away from cash more toward cards and electronic payments, which will benefit MasterCard.

MA's latest earnings on May 1st was positive. The company beat Wall Street's estimates on both the top and bottom line. The company said a 14% increase in transactions, on a local currency basis, hit $1.0 trillion. They also saw a +14% jump in processed transactions. Cross border volumes were up +17%.

MA's CEO and President Ajay Banga said the company signed new deals with Wal-Mart (WMT), Sam's Club, and Target (TGT). WMT and Sam's will move their co-brand portfolios to MasterCard. TGT will also shift its co-brand cards to MasterCard and use MA's chip and PIN technology to upgrade their security. Banga said MA will, "continue to invest in technology and acquisitions that will speed our development of mobile and online solutions."

Both Visa and MA were caught up in the sanction backlash between Russia and Europe and the U.S. The two companies were not singled out but new legislation in Russia was going to force the two American companies out of the country. Working with Russian officials MA and Visa have found a way to sidestep the issue by creating a domestic (Russian) payment system within six months and create a Russian company to handle domestic transactions.

Technically shares of MA saw a -20% correction on an intraday basis from its January 2014 highs to the April intraday lows. The stock bounced near its long-term up trend. Now MA appears to be breaking out past resistance near $76, resistance at its 100-dma and 150-dma, and resistance at its five-month trend of lower highs. We're not setting an exit target yet but the point & figure chart is bullish with an $87 target.

- Suggested Positions -

Long Oct $80 call (MA141018C80) entry $2.85*

05/27/14 triggered @ 77.25
*option entry price is an estimate since the option did not trade at the time our play was opened.
Option Format: symbol-year-month-day-call-strike

Entry on May 27 at $77.25
Average Daily Volume = 5 million
Listed on May 24, 2014


3M Company - MMM - close: 141.44 change: +0.30

Stop Loss: 138.75
Target(s): to be determined
Current Option Gain/Loss: -25.2%
Time Frame: 4 to 8 weeks
New Positions: see below

Comments:
05/27/14: MMM posted another gain today but shares lagged behind the major indices with its +0.2% gain.

Readers may want to wait for a rally past $142.00 before considering new positions.

If you do choose to open new positions I the July or October calls.

- Suggested Positions -

Long Jun $140 call (MMM1421F140) entry $3.45*

05/24/14 if you open new positions, use the July or October calls
05/20/14 adjust stop loss to $138.75 due to the dividend
05/15/14 new stop @ 139.49
05/08/14 triggered @ $142.00

Entry on May 08 at $142.00
Average Daily Volume = 2.65 million
Listed on May 07, 2014


Potasch Corp. of Saskatchewan - POT - close: 36.18 change: -0.14

Stop Loss: 35.75
Target(s): to be determined
Current Option Gain/Loss: -21.8%
Time Frame: 3 to 4 months
New Positions: see below

Comments:
05/27/14: POT is not cooperating. The stock's attempt to follow through on Friday's rebound failed at its simple 20-dma. POT underperformed the market with a -0.38% decline.

We are turning more defensive and raising our stop loss to $35.75.

- Suggested Positions -

Long Sept $35 call (POT1420i35) entry $2.65

05/27/14 new stop @ 35.75
05/15/14 new stop @ 34.90
05/02/14 triggered @ 36.50

Entry on May 02 at $36.50
Average Daily Volume = 5.0 million
Listed on April 26, 2014


United Parcel Service - UPS - close: 103.17 change: +0.44

Stop Loss: 97.75
Target(s): to be determined
Current Option Gain/Loss: + 96.9%
Time Frame: 4 to 8 weeks
New Positions: see below

Comments:
05/27/14: The transportation average continues to hit new highs and UPS posted another gain hitting new relative highs.

The next area of resistance appears to be the $105 level.

More conservative traders may want to raise their stop loss but I would keep it below $100.

We're not setting an exit target yet but the Point & Figure chart for UPS is bullish with a $114 target.

- Suggested Positions -

Long Jul $100 call (UPS140719C100)* entry $1.98

05/12/14 triggered @ 100.25
*I've provided the more standardized option symbol format.
symbol-year-month-day-call-strike

Entry on May 12 at $100.25
Average Daily Volume = 2.9 million
Listed on May 10, 2014




PUT Play Updates

Whole Foods Market, Inc. - WFM - close: 38.65

Stop Loss: 40.25
Target(s): to be determined
Current Option Gain/Loss: -29.7%
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
05/27/14: Today's bounce in WFM was all market related. Shares spiked higher at the open as shorts covered positions. WFM settled with a +2.3% gain. Look for resistance near $40.00.

Earlier Comments:
WFM is in the services sector. The company runs a grocery chain focused on natural and organic foods. As of May 2014 they had 379 stores. Unfortunately their success in the higher-margin organic foods has fueled significant competition.

The stock has been sinking for months as investors worried about growing competition. WFM's recent earnings report confirmed their fears. The stock crashed -19% after WFM missed estimates on both the top and bottom line and confessed they were facing tougher rivals. Management then lowered their 2014 guidance.

WFM said revenues still grew +10% and their same-store comparable sales were up +4.5%. Unfortunately profits were relatively flat and margins are getting squeezed with higher cost of goods sold and rising capex.

WFM is facing competition on all sides. Sprouts Farmers Market (SFM), The Fresh Market (TFM), Kroger (KR), Wal-mart (WMT), and regional competitors like HEB and Trader Joe's are all jumping on the organic and natural food bandwagon.

- Suggested Positions -

Long Aug $35 PUT (WFM140816P35) entry $1.01

05/19/14 trade begins. WFM opens at $37.89

Entry on May 19 at $37.89
Average Daily Volume = 9.2 million
Listed on May 17, 2014


CLOSED BEARISH PLAYS

Athenahealth, Inc. - ATHN - close: 125.96 change: +5.04

Stop Loss: 124.05
Target(s): to be determined
Current Option Gain/Loss: Jun$100put -80.4% & Sep100put: -40.5%
Time Frame: 4 to 12 weeks
New Positions: see below

Comments:
05/27/14: The biotech stocks produced big gains on Tuesday. This sparked more short covering in ATHN, which surged +4% and rallied through resistance. Our stop loss was hit at $124.05.

Earlier Comments:
The plan was to keep our position size small to limit our risk.

*small positions* - Suggested Positions -

Jun $100 PUT (ATHN140621P100) entry $2.05** exit $0.40*** (-80.4%)

- or -

Sep $100 PUT (ATHN140920P100) entry $6.90** exit $4.10*** (-40.5%)

05/27/14 stopped out
***option exit price is an estimate since the option did not trade at the time our play was closed.
05/22/14 more conservative traders may want to exit immediately!
05/15/14 trade opened on gap down at $115.66
**option entry price is an estimate since the option did not trade at the time our play was opened.
*I've provided the more standardized option symbol format.
symbol-year-month-day-put-strike

chart:

Entry on May 15 at $115.66
Average Daily Volume = 1.5 million
Listed on May 14, 2014


Chart Industries - GTLS - close: 75.20 change: +0.48

Stop Loss: 75.55
Target(s): to be determined
Current Option Gain/Loss: - 71.1%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
05/27/14: I cautioned readers in the weekend newsletter that we might see GTLS test resistance at its 50-dma. That's were the rally stalled today, at the 50-dma. The intraday high was $75.75, which was enough to stop us out.

Our play is closed but readers may want to keep GTLS on their watch list as a bearish candidate

- Suggested Positions -

Jun $70 PUT (GTLS140621P70) entry $2.25 exit $0.65* (-71.1%)

05/27/14 stopped out
*option exit price is an estimate since the option did not trade at the time our play was closed.
05/16/14 trade begins. GTLS opened at $72.34
I've provided the more standardized option symbol format.
symbol-year-month-day-put-strike

chart:

Entry on May 16 at $72.34
Average Daily Volume = 652 thousand
Listed on May 15, 2014


Lumber Liquidators - LL - close: 84.37 change: +3.32

Stop Loss: 84.05
Target(s): to be determined
Current Option Gain/Loss: -44.4%
Time Frame: 6 to 9 weeks
New Positions: see below

Comments:
05/27/14: The stock market's widespread rally sparked some new short covering in LL and the stock surged +4.1%. Today's rebound broke through some technical resistance and hit our stop loss at $84.05.

Earlier Comments:
I do consider a more aggressive trade because of LL's short interest. The most recent data listed short interest at 25% of the small 24.3 million share float, which raises the risk of a short squeeze.

*small positions* - Suggested Positions -

Aug $75 PUT (LL140816P75) entry $4.50* exit $2.50** (-44.4%)

05/27/14 stopped out
**option exit price is an estimate since the option did not trade at the time our play was closed.
05/15/14 triggered @ 79.75
*option entry price is an estimate since the option did not trade at the time our play was opened.
I've provided the more standardized option symbol format.
symbol-year-month-day-call-strike

chart:

Entry on May 15 at $79.75
Average Daily Volume = 888 thousand
Listed on May 14, 2014