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Newsletter

Daily Newsletter, Wednesday, 6/11/2014

Table of Contents

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

Market Wrap

Slowing Global Growth Spooks Investors

by Keene Little

Click here to email Keene Little
The World Bank announced a revision to their estimate for 2014 global growth and the revision was downward. This depressed European and U.S. stock markets as it's becoming harder to justify the 'P' in the P/E when the 'E' is coming down.

Wednesday's Market Stats

The market started off weak this morning following a drop in the futures overnight as European indexes turned down. As soon as the cash market opened NDX immediately got jammed back to the upside and closed the morning gap within the first 20 minutes. At that point it was easy to believe the morning gap down was just another dip to buy. But as the morning progressed the bounce looked weak and even though NDX stayed in the green (while the DOW remained close to -100) the bifurcated market and the choppy rise in NDX looked like the rally attempt was going to fail, which it did. However, the bears were thwarted once again as the bulls charged back in and drove the NDX back up near its high for the day. The other indexes didn't fare as well but the pullback is looking like new highs are coming.

There were no significant economic reports to sway the market this morning. The only report of significance came from the World Bank, which lowered its global economic forecast to +2.8% for the year, down from its previous forecast of +3.2%. I strongly suspect the 2.8% growth will be revised lower within the next 3 months and the actual result will probably be even lower. Next year's forecast will likely be negative as they keep ratcheting down their estimates (as economists continually do when they're trying to catch up with actual economic results).

The lower revision for growth means lower 'E' in the P/E equation and that will mean the stock market will have to factor in these lower expectations. The decline in Europe followed by the decline in the U.S. was very likely a reaction to this. But it doesn't mean a market top is in place yet. The stock market has long ignored the fundamentals, believing instead in the power of the central banks. Bad economic data? Woohoo, more stimulus from the CBs and that means more money for our party -- another round for my bullish buddies please.

Another chart that suggests there could be trouble ahead for stock prices if they start to reflect actual corporate profits. The chart below shows the sharp drop in adjusted corporate profits in 2014 and was discussed by Albert Edwards, a global strategist at Societe Generale SA. He measures profits a little differently and incorporates inventory values. As older inventory is depreciated there is an accounting charge that reduces the value of assets held by the company. Edwards uses these figures to adjust reported earnings to get "real" earnings and the chart below shows adjusted pretax earnings, which declined -9.8% in Q1.

Adjusted U.S. Corporate Profits, chart courtesy Societe Generale SA

The sharp decline in Q1 was the sharpest drop since Q4 2008 when profits dropped -26% in the middle of the 2008-2009 recession. Edwards' conclusion is that this measurement can be an early warning of a coming recession, something the majority of economists today believe is not even on the horizon (which alone is a good contrarian signal that one is a lot closer than believed). While corporate earnings have reportedly risen +5.8% in Q1, this was profit before inventory and depreciation adjustments. Against Edwards' report showing a -9.8% decline there's quite a split and the inventory write-off will also be a reduction to GDP.

The stock market has long made a mockery of fundamentals and has been disconnected from what's happening on Main Street for a long time. But one early indication of trouble for the stock market is the recent decline in margin debt. The market is obviously dependent on more money coming in to pay for higher prices and the increase in margin debt has been one of the things fueling the rally. But as can be seen on the chart below, market tops tend to follow a downturn in margin debt as traders start to get more nervous about the market and therefore decrease their exposure. One way to decrease that exposure is to reduce your use of margin. That in turn means more selling and less buying and a stock market top is born. Margin debt peaked in February and dropped in March and dropped again in April.

NYSE Margin Debt vs. SPX, chart source dshort.com

The chart above was last updated through the end of April and therefore does not reflect the spike higher in SPX since mid-May. I do not have the latest numbers for margin debt but if the stock market high is being made with a lower margin debt it's going to give us a topping signal like we had in 2000 and 2007. It's not a market-timing signal but it does offer us another warning sign (as if we need more).

Here's another warning sign, a chart I've show before, which uses the ratio of XLY to XLP. XLY is an ETF of consumer discretionary stocks and XLP is an ETF of consumer staples stocks. When people are feeling good about their financial position they'll buy more of the discretionary goods (with money left over after buying their staples). This is reflected in higher stock prices for the discretionary stocks, such as the larger holdings in XLY -- Disney, Comcast, Amazon, Home Depot and McDonald's. But when consumers are starting to live more paycheck to paycheck they'll back off on their discretionary spending and concentrate on the necessities. The top holdings in XLP include Proctor & Gamble, Coca-Cola, Philip Morris, Walmart and CVS. This group includes the stocks that tend to do better (at least relatively) in an economic downturn -- "if you can eat it, smoke it or drink it, buy it."

S&P 500 vs. XLY/XLP, Weekly chart

There are two takeaways from the above chart. The first is that SPX has rallied for the 3rd time up the top of its bearish rising wedge for the rally from 2009, the top of which held down the December and March rallies and was tested again with Monday's high at 1955. This creates a 3-drives-to-a-high topping pattern so the risk for bulls here is a turn down that won't be just a pullback (that bearish rising wedge pattern calls for a complete retracement).

The second takeaway from the chart above is that the XLY/XLP ratio has significantly underperformed SPX since the 2009 low, which indicates the consumer has not been as bullish as the stock market would suggest. We know there's been a disconnect between Wall Street and Main Street for a long time and this is a graphic portrayal of that. And recently it has barely lifted off its May low while SPX dashed higher, a clear bearish divergence. This is a clear indication that the stock market is out of touch with reality as the consumer digs in and goes into protection mode. The divergence is a clear warning and the price pattern says the warning is about to lead to a significant break to the downside.

Another sign of trouble is what we're seeing in the high-end retailers and the lower-end ones. The affluent continue to spend their money in places like Tiffany's, a company that had +9% higher revenue in Q1. In the meantime middle-class shopping in places like Sears and Walmart has declined precipitously. Walmart's Q1 revenue declined -5%. But at the other end from Tiffany's, stores like Dollar Tree, which cater to the real bargain shoppers, also saw a Q1 revenue increase of +7%. It's the middle that's getting squeezed and it's the middle that is the biggest chunk of consumer spending. And it is this reduced spending, especially on discretionary items, which poses a significant risk to our economy, a risk that the stock market is apparently not concerned about, yet.

Continuing with more charts of SPX, the weekly chart below is using the arithmetic scale to show the parallel up-channel from October 2011 (the 2nd leg of the 3-wave move up from 2009), which it has reached again after hitting the top of the channel in December and March. Another example of a 3-drives-to-a-high topping pattern. I show the potential for a throw-over finish (light green dashed line) but the higher-odds scenario is for a top to form here and now.

S&P 500, SPX, Weekly chart

One of the reasons why I show the potential for a throw-over finish on the weekly chart above is because of the parallel up-channel for the rally from February, the top of which is currently near 1997. A 3-wave move up from April (in case the EW count is corrective instead of impulsive as I've labeled it) would have the 2nd leg achieving 162% of the 1st leg at 2004. But two equal legs up from February points to 1960 and two equal legs up from April points to 1950, which is a reason why I've been thinking recently that we could see a top in the 1950-1960 area (and Monday's high at 1955 split the difference).

S&P 500, SPX, Daily chart

Key Levels for SPX:
- bullish above 1964
- bearish below 1925

SPX 1950-1960 is also the location of the top of the parallel up-channel from April, as well as the top of the up-channel from October 2011, as well as the top of its rising wedge from 2009. There's a lot here to say why the market should be topping here and now and I'm watching the shorter-term pattern for clues as to where that high will be. Notice too the increasing slopes of the up-channel since February, an indication the rally is going parabolic. Parabolic rallies never end well.

The decline from Monday's high looks corrective (choppy overlapping highs and lows within a down-channel that looks like a bull flag) and that suggests we've got higher prices ahead of us. As shown below, SPX found support where it closed Friday's gap at 1940.12 with a low of 1940.08. In a 5-wave count up from May 15th the 5th wave would equal the 1st wave at 1963.72, which is why I have 1964 as a key level for the bulls to break in order to keep the larger pattern bullish. That projection crosses the top of the up-channel from April on Friday, which just so happens to be a full moon as well. Is it lunacy to think we might have a high on a full moon? A drop below 1937, that stays below it, would be a break of its short-term down-channel, which would leave a failed bull flag pattern and would instead likely be followed by stronger selling.

S&P 500, SPX, 60-min chart

NDX spent much of the day in the green today but that didn't help the DOW, which spent most of its day down about -100. A big reason for its decline was Boeing and that was blamed on Republican House Majority leader Eric Cantor, who had the audacity to get defeated in the Virginia primary by a Tea-Party candidate. Apparently Cantor has been a big supporter of the Export-Import Bank, which assists in financing exports of U.S.-manufactured goods. For Boeing's big airplanes (hence BA) this is a big deal and its -2.3% decline today, starting with a gap down, put a big dent in the DOW.

The DOW's big red candle follows a test of the top of its parallel up-channel from April 11th and the trend line along the highs from March 7 - April 4. It looks like a great setup for lower prices and that's the risk for anyone thinking the market has higher prices yet to go. I show that potential on the chart, with a high near 17000 by Friday, but it's almost a coin toss here as to whether it will head immediately lower or only after a minor new high first. Today it found support at a trend line along the highs from April 4 - May 13 and therefore there's the potential for a bullish back-test and new high to follow.

Dow Industrials, INDU, Daily chart

As noted on the DOW's chart above, the wave pattern would turn more bullish if it rallies above 17062 since it would make the 3rd wave in the move up from February the shortest wave and that violates an EW rule. Therefore short against 17062 is a recommended position but flat or long above 17062 (I don't like the risk:reward on the long side but short would not be the right place to be above 17062).

Key Levels for DOW:
- bullish above 17,062
- bearish below 16,670

NDX has been in a flat trading range since last Friday and today it tested both sides of the range -- the top near 3404 and the bottom near 3784. Today's low was a slight break of its uptrend line from May 16th but it held with this afternoon's recovery. It's been pressing up against its broken uptrend line from June 2013 - February 2014, currently near 3404, and it could be doing a back test which will be followed by a bearish kiss goodbye. If it continues to chop up and down in a big sideways/down correction (light green dashed line) we could be looking at a boring month of June and then a final high in July. But at the moment I see the potential for a new high by the end of the week, to put in the final high, and then start a decline next week.

Nasdaq-100, NDX, Daily chart

Key Levels for NDX:
- bullish above 3827
- bearish below 3738

The projection shown on the chart above, at 3826.51, is the 127% extension of the previous decline, which is the March-April decline. This is a common reversal Fib so it makes a good upside target for the completion of its rally. But trading on the long side for that is not worth the risk in my opinion. Matching that 3826 projection is another projection shown on the 60-min chart below. For the 5-wave move up from May 9th the 5th wave would equal the 1st wave at 3824.77, giving us close correlation with the trend lines and why it could be an important top if achieved. The risk is an immediate breakdown.

Nasdaq-100, NDX, 60-min chart

There's an interesting setup on the semiconductor index (SOX) that's worth watching closely here. As go the semis so go the tech indexes and as go they so goes the broader market. At today's high, at 625.91, the SOX tagged the top of its parallel up-channel for the rally from 2013 (starting with a trend line drawn across the highs from February-July 2013 and attaching a parallel line to the August 2013 low). At the same time it met its price objective out of the sideways triangle that ran from the April 4th high -- taking the widest part of the triangle and projecting it from the breakout (on May 22nd) we get an upside price objective near 625. By the oscillators you can see the index is extremely overbought. It can stay overbought but considering it has reached the top of its up-channel following a pattern (sideways triangle) that called for a final leg up to complete the rally, it's a risky place to hold the semis long here. Today's spinning-top doji has the potential to be a reversal candlestick.

Semiconductor index, SOX, Daily chart

Following Monday's high I was thinking there was a good possibility it made a final high for its bounce off May 15th low. It came within 39 cents of achieving two equal legs up at 1180.23 for an a-b-c correction to its March-May decline and was a good setup for a reversal back down. But so far the decline from Monday has held inside a bull flag pattern, which looks more like a correction to the rally instead of something more bearish. It also held price-level support near 1165 and both keep the short-term pattern bullish. The RUT would be bullish above 1180 but with multiple resistance levels just above (bounce highs at 1194, 1205 and then its March 4th high near 1213) it would be a difficult trade to hang onto). The bottom of its short-term down-channel from Monday is currently near 1158 so a break below that level would leave a failed bullish pattern, which in turn would likely be followed by strong selling.

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- bullish above 1180
- bearish below 1118

There's also an interesting setup for a top to the banking index (BKX), which actually is the March 21st high where it met the price objective for two equal legs for its 3-wave move up from 2009. Following its decline into the May 15th low it has now bounced back up to its broken uptrend line from June 2012. It's a back test that should be followed by a bearish kiss goodbye if the top is in place. The bounce also fits as the right shoulder of a H&S topping pattern (it looks small on the weekly chart below).

KBW Bank index, BKX, Weekly chart

Like the broader indexes, the TRAN's pullback from Monday looks corrective and therefore suggests we could see another push higher into the end of this week. But the bigger picture is shown on its weekly chart below and like the other indexes, it's at an important point in its pattern here. The EW count can be considered complete at any time at the same time it has pushed up to trendline resistance near 8320-8330 (Monday's high was 8256). The trend line along the highs from May 2013 and the one along the highs from 2010-2011 create a barrier with an overbought market on the daily and weekly charts. This is a risky place to be thinking higher, even though there's at least a little more upside potential to the 8325 area.

Transportation Index, TRAN, Weekly chart

The U.S. dollar waffled a little bit in the past week, especially after the Euro did the same after the ECB announced again that they're ready to do "whatever it takes" to keep the stock markets, I mean economy flooded, I mean supplied with the financing that the banks, I mean companies need to keep their businesses growing. But the dollar bounced right back up on Monday and Tuesday and consolidated today. It remains on track for a strong rally this year but in reality we don't know which way it's going to go until it breaks out of the trading range it's been in (79-81.50) since last October.

U.S. Dollar contract, DX, Weekly chart

Gold has bounced off its June 3rd low but it looks like a correction to its decline, not something more bullish. It retraced 38% of its decline from May 22nd, which is the high I'm using as the completion of its sideways triangle consolidation pattern in April-May, and then turned back down today. It could progress a little higher but it needs to break its downtrend line from March 17th, currently near 1278 (this morning's high was 1265.50), before it would be more bullish. A continuation lower to at least 1155 is still my expectation.

Gold continuous contract, GC, Weekly chart

Oil is on the verge of breaking out of its sideways consolidation that it's been in since March 3rd high but so far has only managed intraday breaks above its shallow downtrend line from the March high, currently near 104.70. If it rallies above the March 3rd high at 105.22 (yesterday morning's high was 105.06) and then uses the downtrend line as support we'd likely see oil head up to its longer-term shallow downtrend line from May 2011, near 111. What's interesting about the sideways triangle pattern on the weekly chart below is that there's a very similar sideways triangle on the daily chart since the March high. The fractal pattern suggests a bullish break above 105.22 would likely lead to a break above resistance near 111 as well.

Oil continuous contract, CL, Weekly chart

If oil turns bullish here, it would likely have a negative impact on the fragile global economies. Usually higher oil prices are a reflection of a stronger economy but in this case something else is causing it and just as too-high interest rates can squash an economy, too-high oil prices could do the same.

There are a few more economic reports Thursday morning but not likely anything that will move the market. Friday's reports will include PPI numbers and could move the market if there's a significant change from what's expected. Otherwise we've got a quiet two days to finish the week.

Economic reports and Summary

The longer-term charts suggest we're in bear-infested waters here and at any moment one or more could take a big chunk out of the bull's hide. Price objectives, trend lines, EW counts and Fibs say there could be a little more to the upside into Friday and if that happens we might be looking at a negative opex week next week. If the market declines into Friday there's a good chance we'll get at least a bounce back up next week before tipping over stronger. I've been saying the past few days that the bears need to continue exercising patience while the bulls need to exercise extreme caution.

The risk:reward favors the short side but we could be a day or two away from a better short entry if the market does give us new highs. A new high by Friday would also give us a high on a full moon, which would make for an interesting setup. As for when the market would turn more bullish, I'm using the DOW for now to see if it can rally above 17062, in which case the bears would need to back off and let the bulls take this to an even more overstretched market and wait until the rubber band snaps.

Good luck and I'll be back with you next Wednesday.

Keene H. Little, CMT

In the end everything works out and if it doesn't work out, it is not the end. Old Indian Saying


New Option Plays

Across The Board

by James Brown

Click here to email James Brown

Editor's Note:

The major U.S. stock market indices were down across the board on Wednesday (S&P 500, NASDAQ Composite, Russell 2000, Dow Jones Industrial Average).

The Dow Jones Industrial Average snapped a five-day winning streak. Meanwhile the S&P 500 large cap index and the Russell 2000 small cap index, both of which were down a little yesterday, continued to pullback today.

Stocks were short-term overbought and due for a pullback so this move is healthy. However, the decline may not be over yet.

We are not adding any new trades tonight.




In Play Updates and Reviews

Two Triggered Plays

by James Brown

Click here to email James Brown

Editor's Note:

The market's major indices produced minor declines today but we still saw two bullish candidates hit our entry triggers today.

APC and EXPE both displayed relative strength and hit our entry trigger.


Current Portfolio:


CALL Play Updates

Anadarko Petroleum - APC - close: 108.32 change: +4.40

Stop Loss: 99.90
Target(s): To Be Determined
Current Option Gain/Loss: + 47.9%
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
06/11/14: We were expecting a bullish breakout in APC but today's move was better than expected. According to Bloomberg, this morning rumors started circulating that Exxon Mobil (XOM) might buy APC and that sparked the big rally today (+4.2%).

Our suggested entry point to buy calls was hit at $105.25.

Earlier Comments: June 10, 2014:
APC is in the basic materials sector. The company is a very active oil and natural gas producer. They have assets in the Rocky Mountains, the Southern U.S., the Gulf of Mexico, and Alaska. Plus, APC is active internationally with assets in Algeria, Brazil, China, Colombia, Ghana, Liberia, Mozambique, New Zealand, Sierra Leone, and South Africa. Altogether APC has a strong onshore and off-shore portfolio.

The company's latest earnings report on May 5th was better than expected. Wall Street was expecting $1.14 per share. APC delivered $1.26. APC said they set record volumes in the quarter at 819,000 barrels of oil equivalent (BOE) per day. Management went on to raise their full-year sales-volume. A week later they increased their dividend by 50% from 18 cents to 27 cents per share.

APC could end up a big liquefied natural gas (LNG) producer with their assets in Mozambique (Southeast Africa). Last year APC drilled two natural gas off-shore wells. This year they could drill up to eight new wells. The company recently upgraded their view on how much recoverable gas in their northern Mozambique assets to 50 trillion to 70 trillion cubic feet. APC is developing an LNG project and plan to deliver their first LNG cargo in 2018.

One of the biggest headlines for APC has been its settlement over the TROX litigation. This refers to a large lawsuit over the bankrupt Tronox company, which was spun-off from APC's Kerr-McGee division. Previously the estimated penalty range for this TROX lawsuit was in the $5.15 billion to $14.17 billion with many analysts estimating the final results would probably be around $10 billion. On April 3rd this year APC reported they would settle this for $5.15 billion, the very low end of the range and the stock exploded higher. Getting past this TROX liability has removed a very dark cloud for the company and the stock price.

It is worth noting that APC still has potential legal risk from the April 2010 Macondo well blow out. BP Plc was the operator and majority owner of the well but APC did own 25% of it. The U.S. judges are arguing that APC will be held responsible for its 25% of the penalties. The final numbers could be huge. The U.S. Clean Water Act allows the government to fine the companies $1,100 per barrel of oil spilled into the Gulf. Plus, they could add another $4,300 penalty per barrel for gross negligence. Right now BP is arguing with the courts over how much oil was spilled. The U.S. is claiming 4.2 million barrels of oil escaped into the Gulf of Mexico. BP estimates only 2.45 million barrels. APC management has suggested they may not be fined for any gross negligence penalties since they did not have any direct operational involvement. The penalty phase for this lawsuit is scheduled for January 2015. This issue is clearly not stopping the rally in shares of APC today.

Technically shares of APC have been consolidating sideways under resistance near $105 with a bullish trend of higher lows. Now the stock is on the verge of breaking out.

- Suggested Positions -

Long NOV $110 call (APC141122C110) entry $4.80*

06/11/14 APC hit our trigger at $105.25
rumors this morning that XOM might buy APC.
*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 June 11 at $105.25
Average Daily Volume = 2.8 million
Listed on June 10, 2014


The Boeing Company - BA - close: 134.10 change: -3.15

Stop Loss: 129.90
Target(s): To Be Determined
Current Option Gain/Loss: -27.1%
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
06/11/14: Shares of BA weighed on the Dow Industrials after RBC Capital Markets downgraded the stock on valuation concerns. The analyst did leave their price target unchanged at $145.

The market reacted with BA gapping lower and closing on its 20-dma with a -2.29% decline. I am not suggesting new positions at this time.

Earlier Comments:
BA is in the industrial goods sector. The company is a major manufacturer for aerospace, aviation, and a defense contractor. The company last reported earnings on April 23rd and held an analyst day in mid May. Earnings results were strong. Wall Street expected a profit of $1.56 per share on revenues of $20.21 billion. BA delivered $1.76 per share with revenues rising to $20.46 billion for the quarter.

BA said their total company backlog had ended the first quarter at $440 billion. That's up from $390 billion a year ago. About $374 billion is for commercial airplanes and the rest is defense and space related. This represents about 5,100 aircraft orders and several years worth of production. BA recently reaffirmed their 2014 guidance and their airplane delivery scheduled.

Analysts have been positive and raising their price targets and earnings estimates thanks to BA's strong Q1 results, their improving margins, and BA's stock buyback program. Margins are a big deal. BA has been slowly growing its margins over the last couple of years and suggested they will continue to see margin improvement in 2014.

There has been some concern that the U.S. defense budget might be cut again and that could impact BA's defense sales. Yet the New York Times recently reported that BA is close to signing another multi-billion deal with the U.S. Navy for 47 more fighter jets. This deal is expected to close over the summer.

BA has also seen strong growth overseas with international sales accounting for 30% of its backlog. China is expected to grow into the largest aircraft market by 2032. BA is strengthening its position in China with another big sale of fifty 737 jets to a new Chinese budget airline. The retail price on this deal is estimated to be in the $3.8 to $5.5 billion. BA's China president said the company will deliver 140 aircraft to China this year following 143 deliveries in 2013.

Asia will also be a growing market for BA's defense and security business. A recent Bloomberg article mentions how territorial disputes in Asia are getting worse and there will be rising demand for maritime and aerial surveillance systems. BA's defense business chief believes aerial surveillance equipment and machines will continue to grow steadily for the "foreseeable future."

Technically shares of BA are on the up swing after spending more than three months consolidating in the $120-132 area. The recent strength has pushed BA through resistance and the stock closed at new four-month highs.

The point & figure chart is bullish and forecasting at $160 target. I do expect BA to see some resistance at its 2014 high near $145.00.

- Suggested Positions -

Long Aug $140 call (BA140816C140) entry $2.25*

06/02/14: Triggered @ 135.55
*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 June 02 at $135.55
Average Daily Volume = 2.95 million
Listed on May 31, 2014


Biotech ETF - BBH - close: 93.55 chang6: -0.26

Stop Loss: 85.75
Target(s): to be determined
Current Option Gain/Loss: + 9.8%
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
06/11/14: The BBH is still consolidating sideways near $94 and its 100-dma. If the market does see a pullback I would expect the BBH to retest the $90.00 level.

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


Capital One Financial - COF - close: 80.83 change: -0.88

Stop Loss: 74.95
Target(s): To Be Determined
Current Option Gain/Loss: +36.9%
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
06/11/14: The market's widespread profit taking today weighed on COF and shares gave up -1.0%. Look for short-term support near $80.00 and its 10-dma.

Earlier Comments:
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.

- Suggested Positions -

Long Sep $80 call (COF140920C80) entry $2.30*

05/28/14 triggered @ 78.75
*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 28 at $78.75
Average Daily Volume = 3.0 million
Listed on May 27, 2014


CVS Caremark Corp. - CVS - close: 77.32 change: -0.70

Stop Loss: 74.65
Target(s): to be determined
Current Option Gain/Loss: -18.2%
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
06/11/14: This has not been a good week for CVS with shares down three days in a row. The stock fell -0.89% to close near its 20-dma today. If this pullback continues the next level of support is probably the $76 area.

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


Delphi Automotive - DLPH - close: 69.24 change: -0.71

Stop Loss: 67.75
Target(s): To Be Determined
Current Option Gain/Loss: - 43.0%
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
06/11/14: DLPH is another stock that has been down every day this week. Shares have broken down through what should have been support near $70.00. DLPH should find additional support at its early June lows near $68.30. I am not suggesting new positions at this time.

Earlier Comments:
DLPH is a British company. They're also one of the largest auto parts suppliers on the planet. The stock has been a strong and steady performer for bullish investors.

The recovery in the U.S. auto market and the booming growth in the Chinese auto market has been a boon for DLPH. Wall Street analysts believe that DLPH benefits from its product mix that are focused on fuel economy, car safety, and automotive electronics. U.S. regulators are demanding a significant upgrade in fuel economy from American carmakers, which should be a tailwind for DLPH. The future of automobiles is more and more electronics, which is bullish for DLPH as well.

China will prove to be a big market for DLPH. The Wall Street Journal reports that DLPH believes its business in China could double to almost $5.5 billion by 2016.

DLPH's Q1 earnings report was strong. Analysts were expecting a profit of $1.08 per share on revenues of $4.29 billion. DLPH delivered $1.20 per share with revenues rising more than 6% to $4.28 billion. The company issued generally bullish guidance for 2014's profit and revenue estimates. DLPH also bought back 2.38 million shares of its own stock in the first quarter of 2014.

Wall Street analysts are bullish with price targets in the $84-90 range. The Point & Figure chart is bullish and forecasting at $81 target.

- Suggested Positions -

Long Aug $72.50 call (DLPH140816C72.50) entry $1.93

06/06/14 triggered @ 71.15
Option Format: symbol-year-month-day-call-strike

Entry on June 06 at $71.15
Average Daily Volume = 1.4 million
Listed on June 05, 2014


Express Scripts Holding - ESRX - close: 71.56 change: -0.09

Stop Loss: 66.90
Target(s): to be determined
Current Option Gain/Loss: +34.6%
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
06/11/14: ESRX delivered its third day in a row of trading sideways. In spite of today's minor decline the option values continued to rise. I am not suggesting new positions at this time.

More conservative investors might want to move their stop loss closer to the 200-dma (currently at 69.35).

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*

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.

option format: symbol-year-month-day-call-strike

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


Expedia Inc. - EXPE - close: 75.98 change: +0.89

Stop Loss: 71.45
Target(s): To Be Determined
Current Option Gain/Loss: - 1.2%
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
06/11/14: EXPE managed to buck the market's down trend today with a +1.1% gain. Shares have broken out past resistance near $75.00 and hit our suggested entry point to buy calls at $75.75.

The company was making headlines today with news they will now accept Bitcoins as payment for hotel bookings online.

Earlier Comments: June 9, 2014:
EXPE is in the services sector. The company is in the super competitive online travel industry with rivals like Priceline.com (PCLN) and Orbitz Worldwide (OWW).

EXPE is developing a trend of beating analysts' estimates with strong profit and revenue growth. This past quarter EXPE reported revenues of $1.2 billion. That is the fifth quarter in a row that EXPE has delivered double-digit year over year revenue growth. The company has also seen surging growth in its bookings. Q3 2014 saw 15% bookings growth. Q4 2014 was +21%. Q1 2014 was +29%.

Analyst firm Cantor Fitzgerald recently offered bullish comments on EXPE and raised their price target. The company is having success with its Expedia Traveler Preference program. In Q3 2013 there were about 35,000 hotels in the program. By Q1 2014 that has grown to 51,000 hotels. As more hotels join it will boost EXPE's room nights metric and sales.

Billionaire hedge fund manager David Tepper's Appaloosa Management is also bullish on EXPE. The latest 13F filing showed that Appaloosa had initiated a new stake in EXPE in the first quarter of 2014.

Bears could argue that EXPE, PCLN and OWW could face competition from companies like Google and Facebook as they seek to boost their ad revenues to their large audiences. Reuters has reported that Google is experimenting with some programs with a few hotels. This threat is probably a few years away and could eventually make EXPE as potential takeover target.

Technically EXPE experienced a correction from $81 to $67 earlier this year. The stock found support in the $67 area and just recently EXPE has broken out past some key resistance.

At the moment shares of EXPE are flirting with a breakout past potential round-number resistance at the $75.00 mark. The Point & Figure chart is bullish and forecasting at $90.00 target. I do expect the $80.00 area to offer some overhead resistance. We will choose a target later as the play progresses.

- Suggested Positions -

Long Oct $80 call (EXPE141018C80) entry $4.15*

06/11/14 triggered @ 75.75
*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 June 11 at $75.75
Average Daily Volume = 1.6 million
Listed on June 09, 2014


Hanesbrands Inc. - HBI - close: 85.81 change: -0.44

Stop Loss: 81.75
Target(s): To Be Determined
Current Option Gain/Loss: - 1.3%
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
06/11/14: It was another quiet day for shares of HBI. The stock looks like it might test the $85.00 level and its 10-dma soon. I don't see any changes from my prior comments.

Earlier Comments:
HBI is in the consumer goods sector. The company designs and manufacturers apparel. You wouldn't normally think of basic apparel maker as a momentum stock but HBI has been outperforming. Shares just ended the week at a new all-time high.

The company has delivered on its earnings results. When HBI last reported in January and April this year the company beat Wall Street's estimates both times and raised their guidance both times.

Think about that. HBI is not a retailer but their products are sold through retailers. Most of retail got hammered in the first quarter due to lousy winter weather. Yet HBI managed to beat estimates and then raised its guidance.

Jim Cramer has pointed out what many analysts are saying on the company. HBI has strong brand names like Hanes, Champion, Playtex, and Bali. HBI owns most of their supply chain, which allows them to keep and improve their strong margins. Their first quarter saw margins increase 180 points. Most of Wall Street is bullish on HBI's recent acquisition of Maidenform. HBI believes they can generate significant margin improvement in the Maidenform brand by 2016.

The Point & Figure chart for HBI is bullish with a $92 target.

- Suggested Positions -

Long Oct $90 call (HBI141018C90) entry $2.94

06/04/14 triggered @ 85.25
Option Format: symbol-year-month-day-call-strike

Entry on June 04 at $85.25
Average Daily Volume = 690 thousand
Listed on May 31, 2014


Lockheed Martin Corp. - LMT - close: 164.53 change: -2.81

Stop Loss: 163.95
Target(s): To Be Determined
Current Option Gain/Loss: -35.1%
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
06/11/14: Widespread market profit taking and a downgrade for rival BA helped push shares of LMT lower. As expected LMT found support near $164.00. Our stop is at $163.95. If the market continues to sink tomorrow we'll likely see LMT hit our stop loss. If that occurs more nimble traders may want to try and buy calls on a bounce near its 100-dma near $160.00 as a new entry point. I'm not suggesting new positions at this time.

Earlier Comments: June 7, 2014:
LMT is in the industrial goods sector. The company is a major players in aerospace technology and the defense industry. Business has been booming for this defense contractor. Q4 earnings came in better than expected on both the top and bottom line. The trend continued when LMT reported its Q1 results on April 22nd. Wall Street expected a profit of $2.53 a share on revenues of $10.89 billion. LMT beat the bottom line estimate with $2.87 per share but missed the revenue estimate at $10.65 billion for the quarter. However, management gave an optimistic outlook and raised their 2014 guidance on both net profits and revenues.

Zacks had some interesting numbers on LMT's Q1 results. LMT's operating margins were at record highs and the first quarter of 2014 saw LMT's free cash flow hit a record $2.0 billion. LMT spent $1.1 billion buying back 7.0 million shares of stock and another $500 million on dividends.

It's not surprising to hear LMT management raising guidance. The company has been on a huge roll with a series of big contract wins from the U.S. Department of Defense. Just this past week LMT beat out Raytheon Company (RTN) for a $915 million contract to build a "space fence" for the U.S. Air Force. This "fence" is actually a radar system that will track and categorize up to 500,000 pieces of space junk orbiting the earth.

LMT is also seeing strong business overseas. Right now they're rumored to be the top pick for Canada to buy 65 new fighter jets. Canada's decision is expected in the new few weeks. Right now they're reviewing bids from LMT's rivals. Russia recent actions may have also generated more business for LMT. Since Russia invaded and annexed Crimea earlier this year LMT said they've seen a lot more interest from European countries looking to upgrade their defenses.

Technically shares of LMT are in a long-term up trend. They have spent the last three months consolidating gains and building a new base. A breakout past its recent highs could launch the next leg higher.

The Point & Figure chart for LMT is bullish with an $188 target.

- Suggested Positions -

Long Sep $175 call (LMT140920C175) entry $2.70*

06/09/14 triggered @ 168.55
*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 June 09 at $168.55
Average Daily Volume = 1.2 million
Listed on June 07, 2014


LyondellBasell Industries - LYB - close: 99.20 change: -0.75

Stop Loss: 98.45
Target(s): to be determined
Current Option Gain/Loss: +29.4%
Time Frame: 6 to 9 weeks
New Positions: see below

Comments:
06/11/14: LYB gave back most of yesterday's rally. We are not suggesting new positions at this time.

If today's market pullback continues tomorrow I would not be surprised to see LYB hit our stop loss at $98.45.

- Suggested Positions -

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

06/07/14 new stop @ 98.45
06/03/14 new stop @ 94.75
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: 76.87 change: -0.49

Stop Loss: 75.75
Target(s): To Be Determined
Current Option Gain/Loss: -14.0%
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
06/11/14: MA spent most of Wednesday inside yesterday's trading range. Overall it was a mild session. Investors may want to wait for a rally past $78.00 before considering new positions.

Earlier Comments: May 24, 2014:
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*

06/09/14 new stop @ 75.75
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


PPG Industries - PPG - close: 205.60 change: -0.20

Stop Loss: 192.90
Target(s): To Be Determined
Current Option Gain/Loss: +17.8%
Time Frame: 8 to 10 weeks
New Positions: see below

Comments:
06/11/14: PPG recovered from its morning lows and tried to breakout past $206.00 again. This level has been short-term resistance the last few days.

Earlier Comments:
Big cap industrial names have been leading the market higher. PPG is one of them. The company is in the basic materials sector. PPG manufacturers coatings, specialty materials, and glass products.

PPG has developed a strong trend of beating Wall Street's earnings estimates. They just did it again when they reported earnings on April 17th with EPS coming in 10 cents above estimates. Revenues were up +17% year over year to $3.64 billion. Earnings were up +33% from a year ago at $1.98 per share. The company is also seeing margin improvement.

Last month PPG's management announced a $2 billion stock buyback program and raised their dividend by +10% to $0.61 per share. PPG's CEO said that his company saw volumes improve in Europe for the first time in ten quarters. The tough winter in the U.S. did not hurt them. Thus far PPG has been able to pass along small price increases to offset rising commodity costs.

Technically the stock is in a long-term up trend. Shares have spent the last three months consolidating below the $200 level. Now the bullish pattern of higher lows is about to push PPG through major resistance near $200-201.

The Point & Figure chart is bullish and forecasting at $222.00 target.

- Suggested Positions -

Long Aug $210 call (PPG140816C210) entry $3.65*

05/30/14 triggered @ 202.00
*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 30 at $202.00
Average Daily Volume = 552 thousand
Listed on May 29, 2014


Thermo Fisher Scientific, Inc. - TMO - close: 120.21 change: +0.92

Stop Loss: 115.90
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Time Frame: 8 to 12 weeks
New Positions: Yes, see below

Comments:
06/11/14: TMO held up pretty well today. The stock was breaking out past resistance near $120.00 just before the closing bell. TMO looks like it could hit our suggested entry point at $120.50 tomorrow.

Earlier Comments:
TMO is in the healthcare sector. The company makes analytical instruments, equipment, reagents and consumables. Plus they provide software, and services for research, manufacturing, analysis, discovery, and diagnostics in the United States and abroad. The story looks pretty simple. TMO is executing its business well. The company is developing a trend of beating analysts' estimates on both the top and bottom line and raising guidance. They've done it two quarters in a row.

TMO reported its Q1 results on April 23rd. Analysts were expecting a profit of $1.40 per share on revenues of $3.78 billion. TMO delivered $1.53 per share and revenues grew +22.3% from a year ago to $3.9 billion. How many companies are growing that fast? Shares did see a pullback when the markets were selling all the high-growth names in March and April. Investors have stepped up to buy the pullback.

At its Q1 earnings announcement TMO's management also raised their 2014 guidance on both the top and bottom line. A few weeks later at least one analyst firm issued bullish comments on TMO stating their opinion that TMO's management is being too conservative, even with their raised guidance.

Wall Street seems pretty happy with TMO's recent acquisition of Life Technologies for $13.6 billion. The deal is accretive to TMO's bottom line and should generate significant synergies. The new, combined company is seeing strong growth in Asia, especially in China. TMO is currently aiming to generate 25% of its annual revenues from China by 2016.

Technically shares of TMO are bouncing from its long-term up trend. They have also just recently broken out from its three-month consolidation and down trend of lower highs. Right now TMO is trading just below $120.00. We're suggesting a trigger to buy calls at $120.50.

Trigger @ $120.50

- Suggested Positions -

Buy the Sept $125 call (TMO140920C125) current ask $3.10

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

Entry on June -- at $---.--
Average Daily Volume = 1.7 million
Listed on June 07, 2014


United Parcel Service - UPS - close: 102.50 change: -0.41

Stop Loss: 97.75
Target(s): to be determined
Current Option Gain/Loss: + 56.5%
Time Frame: 4 to 8 weeks
New Positions: see below

Comments:
06/11/14: The pullback in UPS continued with a -0.39% decline. Shares are nearing what should be support in the $101.75-102.00 area. Below that the $100 level should be support.

I am not suggesting new positions in UPS.

Earlier Comments:
I am concerned that the $105 level could be resistance. More conservative traders may want to start taking profits now or closer to $105.00.

We're not setting an exit target yet but the Point & Figure chart for UPS is bullish with a $123 target (up from $114 a few weeks ago).

- Suggested Positions -

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

05/29/14 more conservative investors may want to start taking profits now or as UPS gets closer to potential resistance at the $105 level.
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

Currently we do not have any active put trades.