Option Investor
Newsletter

Daily Newsletter, Wednesday, 7/23/2014

Table of Contents

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

Market Wrap

A Slow Summer Day

by Keene Little

Click here to email Keene Little
The week has been holding positive for the bulls but there hasn't been much excitement. Today was no different and about the only good thing to say is that the bears continue to hide from the bulls but the market needs a catalyst to get it moving.

Wednesday's Market Stats

The table above about says it all -- a mixed day that was generally positive, except for the DOW, but not real excitement. It was a typical summer day and one where the bulls are tired and the bears are hibernating (or killed off, not sure which). The day was good for the big-cap techs while not so good for the DOW's blue chips.

Trading volume has been getting lighter as the year progresses, as can be seen for SPY below, but the drastic drop in volume since the July 17th low should be very worrisome for the bulls. There's just no excitement in the new rally attempt and the drop in volume coincides with a significant bearish divergence we're seeing in the momentum indicators, all of which points to the idea that the rally in the past week could very well be the last one before we get at least a more significant pullback/consolidation. There's potential for SPY to rally up to its trend line along the highs from January-March 2014, near 200, but considering the lack of strength in the current rally that looks like a trade with a small reward:risk ratio.

S&P SPDR ETF, SPY, Daily chart

Hurting the DOW today was Big Air (BA), otherwise known as Boeing. Following its earnings last night the stock cratered this morning and then ran sideways for the rest of the day. It finished down -2.3% and a few others didn't help the DOW -- CAT -1.5%, CSCO and UTX each down -1% and the combination of these, with no strong performers to counteract them, kept the DOW in the red all day.

On the other end were big-cap tech stocks, which did well today (except CSCO). NDX was well ahead of the others and finished +0.6%. But as I'll show later, the semiconductors were not participants in today's tech rally and that's always a warning flag. I think the mixed performances by the indexes is all part of the daily rotation between sectors as fund managers attempt to stay away from what they perceive as weak sectors and it's what's part of a topping process (often defined by a messy rolling top as compared to a sharp v-bottom reversal).

Have we found the mother of all signals for a top? The chart below was shown my Art Cashin last week and it shows market highs that have coincided with Rupert Murdoch's major acquisitions. At the 2000 high he purchased Christ-Craft (recreation boats) for $5.3B and then at the 2007 high he purchased Dow-Jones for $5.6B. Now at the all-time high in 2014 he's trying to purchase Time Warner for $80B. Batten down the hatches, we're going down.

Rupert Murdoch tops, chart courtesy Financial Insyghts

Tonight I'll start with a top-down look at NDX since it has now rallied up to a target price I've been watching for. What it does from here could be important. The weekly chart below shows a price projection at 3973.24, which is where the 5th wave in the rally from November 2012 is equal to the 1st wave. That level was achieved (and exceeded) today and it has also popped above the trend line along the highs from April 2012 - March 2014, near 3960. How the NDX closes on a weekly basis will be important and if we get a little throw-over finish followed by a weekly close below 3960 it would create a sell signal.

Nasdaq-100, NDX, Weekly chart

The daily chart below is shown using the arithmetic price scale vs. the log scale used on the weekly chart above. This lowers the April 2012 - March 2014 trend line so this week's rally is more significant by this measure. But it rallied up to the top of a parallel up-channel from April, near today's high at 3991, and the bearish divergence at the highs since July 3rd, unless negated, is a strong indication that resistance is going to hold. We could see a little higher but the bulls could be asking for trouble here if they push their luck on the long side.

Nasdaq-100, NDX, Daily chart

Key Levels for NDX:
- bullish above 3960
- bearish below 3866

The leg up from July 17th has created a rising wedge up to the top of its parallel up-channel from April, as shown on the 30-min chart below. This raises the probability for an ending move here but we can't yet know whether it will end or what kind of top it would be (short term or long term) but this is the first setup since the July 15th high that has me interested in trying the short side again. The bears have a lot of work to do to convince us a top is in place but the only thing I'm currently doing is looking for setups for a possible reversal and then test it with a small short position and careful risk management. As a buyer of puts I prefer to buy on the way up near resistance instead of trying to get in on the way down (it's cheaper at the same index price on the way up).

Nasdaq-100, NDX, 30-min chart

It's worth reviewing the weekly chart of SPX as well since there's an important price projection at 1990 that has remained resistance. The July 3rd high was almost 1986 was followed by the July 16th high near 1984 and now this week's high (today's) was 1989. As noted on the chart, the 1990 projection is where the c-wave in the move up from October 2011 equals 162% of the a-wave (a common wave relationship). This is the 2nd 3-wave move in a double 3-wave move (double zigzag) up from 2009. When this leg completes it will very likely be the completion of the rally from 2009 (that's the setup anyway). While battling this 1990 projection it's also been battling with the top of the parallel up-channel from October 2011 (light green line). Weekly MACD is threatening to roll over.

S&P 500, SPX, Weekly chart

The daily chart shows a closer view of the price oscillations around the green line (top of the parallel up-channel from October 2011) and a price projection to the 2000 area to hit the trend line along the highs from May-December 2013, which is where the July 3rd rally stopped. The projection I'm showing is for a final high by early next week. That's obviously a guess and I think the risk for the bulls is that the high expectation by most for SPX to reach 2000 might in fact not happen (too many could start to take profits before that level is achieved)

S&P 500, SPX, Daily chart

Key Levels for SPX:
- bullish above 1984
- bearish below 1955

The DOW also shows a little more upside potential to reach the trend line across the highs from March-June and a shorter-term one from July 3rd, both of which cross near a price projection at 17217 next Monday (based on a wave relationship in the leg up from June 26th. Above 17220 would be bullish for a possible run up to the 17350 area but a drop below the July 17th low at 16966 would indicate the top is likely in place.

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- bullish above 17,220
- bearish below 16,966

The daily chart above shows a large rising wedge pattern for the rally from April and the 60-min chart below shows additional rising wedge patterns inside the bigger one. The top of the wedges coincide in the 17200-17217 area next Monday and it would make for a very interesting reversal setup to watch for if it plays out as depicted.

Dow Industrials, INDU, 60-min chart

The RUT has been weaker than the other indexes since its double-top high on July 1st. The bounce off its July 17th low could make it higher but so far it's only been able to retrace 38% of its decline at 1162.79 (it missed it by less than a point with today's high at 1161.99). This will continue to be our canary, which has been sucking air for a while now but hasn't fallen off its perch yet.

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- bullish above 1175
- bearish below 1140

With the techs looking relatively strong today I was surprised to see the semiconductor sector weak. The SOX was down -2.3% today and the weakest sector in the list I track. The daily chart could be putting in a rolling top since peaking on July 3rd and the weekly chart below shows MACD crossing back down. Its July 22nd high at 652 was only 4 points shy of the projection to 656 where a large A-B-C bounce off its November 2008 low has two equal legs up. Not shown on the chart is the 38% retracement of the 2000-2008 decline, which is near 624. We'll only know in the future if this is the setup for THE high for the 2008-2014 rally but that's the setup here (the next move is a larger c-wave down to a low below the 2008 low at 167.55 to complete a large 3-wave pullback from 2000.

Semiconductor index, SOX, Weekly chart

The banking index, BKX, also appears as though it's putting in a rolling top, this one starting from January, which also fits as the left shoulder of a small H&S topping pattern. The March high, at 73.90, was only a small pop above the projection at 73.64 for two equal legs up from 2009 and so far the best the BKX has done since then is the July 3rd high at 72.55 and a test of that high on July 16th to 72.31. Last week's sharp selloff has been followed by a choppy sideways/up correction and looks ready to continue lower. A break of its 50-dma, near 70.25, would create a stronger sell signal (it bounced off the 50-dma last week). The bearish divergence since July 2013 shows the banks have been slowly losing momentum as it struggles to keep up with the broader indexes.

KBW Bank index, BKX, Weekly chart

The TRAN is also poking up against what could be strong resistance. A trend line along the highs from May 2010 - July 2011 has been resistance since early June, as has a shorter-term trend line along the highs from May 2013 - January 2014 (grey line on the weekly chart below). Its bounce off the 2009 low consists of two 3-wave moves and the 2nd one is the move up from October 2011. For this a-b-c move the c-wave is 162% of the a-wave at 8547. Today's high, which was quickly followed by selling (which created a bearish daily candlestick), was at 8515 so 32 points shy of its projection. That might be all we'll see but keep that projection in mind if the TRAN works its way a little higher in the next few days. Following the 5-wave move up from November 2012 (for wave-c), this is ripe for a finish.

Transportation Index, TRAN, Weekly chart

Not much to add to the commentary I've had about the U.S. dollar for the past year. It remains range bound between 79 and 81.50 since October 2013 and we're waiting for a break of it. My expectation is for a break to the north but price is king and we wait for confirmation.

U.S. Dollar contract, DX, Weekly chart

Gold got hit hard at the beginning of last week and is currently bouncing between support at its 50-dma, near 1294, and resistance at its 20-dma, near 1317. I think there's a good chance we'll see gold bounce a little higher, up to its downtrend line from August 2013 (top of sideways triangle from that high) before starting another leg down. But with it currently doing battle with the top of a parallel down-channel for its decline from 2011 there is the possibility it's going to head lower sooner rather than later. A break below its June 3rd low near 1240 would indicate the stronger decline has started. Above 1393 would negate the bearish sideways triangle and point to at least a higher bounce.

Gold continuous contract, GC, Weekly chart

Oil has been chopping its way higher since the low in January and it looks like bounce failure waiting to happen. But it also fits as the final wave in a 5-wave ending diagonal (rising wedge) for the c-wave of an A-B-C move up from January 2009. The c-wave would be 50% of the a-wave at 115.76 and that's the upside target I'm sticking with until proven otherwise. The first "otherwise" would be a drop below 95.

Oil continuous contract, CL, Weekly chart

It's a slow week for economic reports and the only one of significance tomorrow will be the New Homes Sales report, which is expected to show a continuation of the slowdown in the housing market, which wasn't supposed to happen according to the economist but it's following the longer-term pattern calling for another leg down in the big bad housing bear market (along with the stock market).

Economic reports and Summary

The bulls have been doing just enough to keep the bears away and that has kept the market bullish. Nothing has changed this week and I see the potential for the market to push at least a little higher into next Monday where some of the indexes could run into strong resistance at the same time as it will be finishing longer-term wave counts. As with so many reversal setups in the past, all I can do is show the potential for the reversal but price is king and we need to defer to it. Lines and price projections don't mean squat if price simply pushes them aside.

But the setups that I've shown on the charts are good ones for major reversals and for that reason it will be worth watching very closely to both protect long positions and play the short side. We've again reached the point where upside potential is dwarfed by downside risk. The market is vulnerable here and it won't take much of a scare to get traders to hit the sell button. Most have been conditioned to buy the dips (it works!) but when the real selloff begins, those buyers will be the panic sellers and it's one of the things that starts runaway selling (where the market goes begging for buyers). Trading should be a daily business from here -- read and react -- since overnight holds could be dangerous to your financial health.

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

Big Earnings Parade

by James Brown

Click here to email James Brown

Editor's Note:

The U.S. stock market remains resilient. Today's gain in the S&P 500 is an all-time high and bumps its year to date gains to +7.3%. The NASDAQ is hot on its heels with a +6.69% gain this year and is on the verge of a new 14-year high.

Thus far the tone of Q2 earnings season has been positive. That is good news for the rally since stock prices are supposed to be driven by earnings.

Tomorrow is a huge day for the Q2 earning season with over 250 companies reporting their quarterly results.

We want to wait for the post-earnings dust to settle before adding new candidates.

(No new trades tonight.)




In Play Updates and Reviews

All About Earnings

by James Brown

Click here to email James Brown

Editor's Note:

A drop in shares of Boeing (BA) weighed on the Dow Industrials but the S&P 500 closed at a record high.

The headlines today were all about earnings.


Current Portfolio:


CALL Play Updates

Ameriprise Financial - AMP - close: 122.63 change: -0.10

Stop Loss: 117.75
Target(s): To Be Determined
Current Option Gain/Loss: +38.8%
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
07/23/14: Wednesday proved to be a quiet session for shares of AMP with the stock moving in a narrow range.

FYI: AMP is scheduled to report earnings on July 29th.

Earlier Comments: June 18, 2014:
AMP is in the financial sector. The company, and its subsidiaries, provides a range of financial products including advice and wealth management. The company had a record year in 2013 and it looks like the momentum has continued into 2014. The company' last earnings report was its Q1 results, reported on April 28th. Wall Street was expecting a profit of $1.88 per share on revenues of $2.84 billion. AMP delivered $2.04 with revenues rising +11% to $3 billion.

AMP's Q1 results were a +19% improvement from a year ago. Furthermore both revenues and margins are improving. AMP raised its dividend 12 percent to 58 cents (currently at a 2.0% yield) and announced a $2.5 billion stock buy back program.

Technically shares of AMP are in a long-term up trend and just recently broke out from a five-month consolidation. Traders have already jumped in to buy the dip at prior resistance near $115.00.

- Suggested Positions -

Long Sep $120 call (AMP140920c120) entry $3.60

07/22/14 new stop @ 117.75
07/10/14 new stop @ 115.75
06/20/14 triggered @ 118.80
Option Format: symbol-year-month-day-call-strike

Entry on June 20 at $118.80
Average Daily Volume = 823 thousand
Listed on June 18, 2014


Avago Technologies - AVGO - close: 73.63 change: -1.76

Stop Loss: 71.49
Target(s): To Be Determined
Current Option Gain/Loss: -31.9%
Average Daily Volume = 1.58 million
Entry on July 22 at $75.75
Listed on July 21, 2014
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
07/23/14: Ouch! After yesterday's intraday reversal shares of AVGO continued to sink today with a -2.3% decline. This might be a reaction to AAPL's earnings last night where the company lowered guidance. AVGO is a component supplier to AAPL.

I am concerned with AVGO because the drop has been very steady for the last three dollars. The $72.00-72.50 zone should offer some support.

I am not suggesting new positions at this time.

Earlier Comments: July 21, 2014:
Avago Technologies is a leading designer, developer and global supplier of a broad range of analog, digital, mixed signal and optoelectronics components and subsystems with a focus in III-V compound semiconductor design and processing Backed by an extensive portfolio of intellectual property, Avago products serve four primary target markets: wireless communications, wired infrastructure, enterprise storage, and industrial and other (source: company website and press releases).

The company's products are everywhere. They make components for the industrial, automotive, solid state lighting, communications, consumer electronics and appliances, the military, and medical. A couple of months ago AVGO completed their $6.6 billion acquisition of LSI. Management believes they can wring out $200 million in annual synergies by the end of 2015. One analyst suggested that AVGO should benefit from China's rollout of a 4G wireless network. Plus the LSI acquisition could boost AVGO's margins.

Speaking of margins, AVGO continues to show margin improvement. The company last reported earnings on May 29th and said gross margins improved to 54% when they were only expecting 51.5-53.5%. Management then guided higher for the third quarter and expects margins to rise to the 54-56% range. Earnings were also better than expected. Wall Street wanted to see a profit of 77 cents a share. AVGO delivered 85 cents. Revenues surged +24.7% to $701 million, which was better than the $678 million estimate. LSI is scheduled to report earnings next in late August (27-28th).

There are a rising number of bulls on this stock. The number of mutual funds that own shares has risen from 856 to 981 in the last year. Multiple firms have price targets in the $85 region. Citigroup just raised their price target to $90.

Shares of AVGO look poised to breakout from its $72.00-75.50 trading range. The July 7th high was $75.55. We are suggesting a trigger to buy calls at $75.75. The July 18th low was $71.66 so we'll start with a stop loss at $71.49.

- Suggested Positions -

Long Oct $80 call (AVGO141018C80) entry $2.35*

07/22/14 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


Emerge Energy Services LP - EMES - close: 116.95 change: +3.98

Stop Loss: 107.90
Target(s): To Be Determined
Current Option Gain/Loss: +26.1%
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
07/23/14: The rally in EMES accelerated with a +3.5% gain and a new all-time high. Shares are nearing what could be round-number resistance at the $120.00 mark. Tonight I am moving our stop loss to $107.90.

Earlier Comments: July 15, 2014:
The shale energy rush in America continues. Widespread hydraulic fracturing wells means big demand for sand. The process of hydraulic fracturing or "fracking" happens deep underground. Oil and natural gas drillers reach deep into the shale formation. Then they pump tons of water and proppants (usually sand) into the formation to fracture the rock and allow the oil and natural gas to escape and be pumped up to the surface.

Drillers use sand to prop open the tiny cracks in the shale rock formation, which allows for a better flow and larger output from the well. The demand for fracking sand is expected to grow +10% a year for the next 8 years. Drillers have figured out how to boost their production. Instead of fracturing the well just once they could do it up to 40 times. The amount of proppant used has jumped from 2,500 tons to 8,000 tons per well.

According to the EMES website, Emerge Energy Services is a diversified energy services company that operates in two key segments of the energy industry: Sand Production and Fuel Processing and Distribution. Through its subsidiaries, Emerge Energy Services provides critical products and services to both the upstream and midstream energy segments.

Emerge Energy Services' sand subsidiary produces silica sand that is a key input for the hydraulic fracturing of oil and gas wells. While the Company is able to produce sand suited for the stimulation of both oil and gas wells, the Company has developed a strong reputation in the industry for producing sand that meets the strict requirements for use in oil wells.

Emerge Energy Services' Fuel Processing and Distribution ("FP&D") segment is primarily focused on acquiring, re-refining and selling transportation mixture ("transmix"). Transmix is received by the business from a number of common carrier pipelines that include the Explorer, Plantation, and Colonial pipelines, as well as via truck and private pipeline from independent refinery and terminal operators. Additionally, the FP&D division includes wholesale, terminal and biodiesel operations.

EMES last reported earnings on May 5th. It was their Q1 results, which came in at 77 cents a share. Wall Street was expecting 69 cents. EMES' revenues soared +80% to $274 million, surpassing estimates of $261 million. EMES' Chairman of the Board said it was the company's strongest quarter as a public company. The Chairman also said, "even with an industry wide shortage of railcars, we sold a company record 882,000 tons of sand, while our fuel division continues to outperform our expectations." Analysts have forecasted EMES' 10-year earnings growth at 33%.

The company is investing over $100 million into two new sand mines that are expected to be ready for production by the end of next year. This will add 5 million tons of sand capacity, which would make EMES the largest fracking sand producer in the country.

I will note the stock's gap down on June 20th. That was a reaction to a secondary offering of 3.5 million units at $109.06 a share. Fortunately there was no follow through on the drop and shares of EMES have been drifting higher. Currently shares are hovering just below resistance at $110.00. We are not setting an exit target tonight but the Point & Figure chart is forecasting at $133 target. More than one Wall Street firm has a $120 price target on EMES.

Tonight we are suggesting a trigger to open bullish positions at $110.25.

Investors should note that shares of EMES can be volatile. We love the story and the bullish outlook but I would probably label this an aggressive, higher-risk trade due to the stock's volatile moves.

- Suggested Positions -

Long Sep $115 call (EMES140920C115) entry $6.50*

07/23/14 new stop @ 107.90
07/16/14 triggered @ 110.25
Option Format: symbol-year-month-day-call-strike

Entry on July 16 at $110.25
Average Daily Volume = 586 thousand
Listed on July 15, 2014


Golar LNG Ltd. - GLNG - close: 61.38 change: -0.15

Stop Loss: 58.75
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 1.3 million
Entry on July -- at $---.--
Listed on July 22, 2014
Time Frame: 8 to 12 weeks
New Positions: Yes, see below

Comments:
07/23/14: Shares of GLNG tested resistance near $62.00 and stalled. I do not see any changes from last night's new play description.

Earlier Comments: July 22, 2014:
GLNG describes themselves as, "one of the world's largest independent owners and operators of LNG carriers with over 30 years of experience. We developed the world's first Floating Storage and Regasification Unit (FSRU) projects based on the conversion of existing LNG carriers. We lead the industry with committed projects. We are progressing plans to grow our business further upstream via Floating liquefaction (FLNG). Our strategic objective is to become an integrated midstream player in the LNG industry."

The big picture play here is LNG exports. The shale-gas industry in the United States is booming so there has been a surge in supply. Meanwhile demand remains strong globally and the price of natural gas in Europe is double what is in the U.S. and the price is triple in Asia. Seeing an opportunity the American gas industry is planning on exporting more natural gas. The problem is that natural gas has to be liquefied before it can be transported. Turning natural gas to liquefied natural gas means cooling the material to -259 degrees Fahrenheit. Creating an LNG export terminal is a multi-year, multi-billion project. The U.S. is currently building several LNG export terminals to be completed in the next few years.

At the same time there has been a rise in the number of LNG transport ships to move all of this natural gas. Unfortunately the timing is a bit off. At the moment there is more LNG transport ships than really needed. The current global LNG fleet is about 365 vessels. That number is supposed to grow by another 29 ships this year but several of them have been delayed. However, by 2017-2018 it looks like there could be a shortage of LNG transport ships, which will drive rates higher for the shipping companies.

GLNG has about a dozen ships. They should take deliver of several more in the next 12 to 18 months. Instead of scrapping their older ships the company has decided to turn some of them into floating storage & regasification units (FSRU). They are also working on a floating liquefaction (FLNG) project.

Long-term the company looks poised to capitalize on the natural gas transport market. Investors have taken notice with a strong rally this year. Of course a +3.2% dividend yield doesn't hurt either.

Shares of GLNG have been consolidating sideways in the $57.50-62.00 zone for the last few weeks. Today GLNG is on the verge of breaking out from this trading range. We want to be ready if it does.

We are suggesting a trigger to buy calls at $62.25. Earnings are coming up in late August (potentially around the 27th) and we will likely exit prior to the announcement.

Trigger @ $62.25

- Suggested Positions -

Buy the Sep $65 call (GLNG140920C65)

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


Harman Intl. Industries - HAR - close: 114.66 change: +0.35

Stop Loss: 109.90
Target(s): To Be Determined
Current Option Gain/Loss: -30.0%
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
07/23/14: HAR traded above short-term resistance near $115.00 on an intraday basis but pared its gains by the close. I find today's performance a bit troubling and would hesitate to launch new positions.

Earlier Comments: July 12, 2014:
Automobile sales in the U.S. have been strong this year. Instead of playing the carmakers, which run the risk of announcing yet another recall, consider a derivative play. HAR makes speakers and electronics that are part of the growing "connected car" trend (a.k.a. infotainment systems).

HAR is developing a very bullish trend of beating Wall Street's earnings estimates. Their last two reports were both upside surprises in January and May. Both times HAR not only beat estimates on the top and bottom line but management also guided earnings higher.

The most recent report was May 21st. Analysts were expecting a profit of $1.00 a share on revenues of $1.27 billion. HAR delivered $1.12 a share with revenues hitting $1.4 billion. HAR said recovering demand in European luxury cars and growing demand in China helped fuel their gains.

Management explains that consumers want the connected car experience. The HAR teams says there is pent up demand in Europe that will likely stabilize soon. Meanwhile their business in China is surging. China is now the largest automobile market in the world and HAR's sales surged +60% in China last quarter.

Looking at that last quarter HAR reported revenues were up +32% from a year ago to $1.4 billion. Their bottom line EPS grew +41% to $1.12. They expect to end their fiscal year 2014 with revenues of $5.275 billion, up +23% from the year before.

HAR has also been making acquisitions. They recently announced a $365 million deal to buy AMX LLC, which is an enterprise control and automation system company. HAR plans to roll that up into their professional division. HAR also bought Yurbuds last month. Yurbuds is the number one brand of sports headphones in the U.S.

Last month HAR announced they were raising their quarterly dividend from 30 cents to 33 cents a share.

Technically shares have broken out from a five-month consolidation phase in the $100-115 zone. Shares have weathered the market's recent weakness pretty well. Friday's close at $116.51 is a new seven-year high. I suspect HAR can rally into the $125-130 zone, which has been resistance in the past. The Point & Figure chart is more bullish and currently projecting at $146 target.

Tonight I'm suggesting a trigger to buy calls at $117.25. More patient investors may want to use a different strategy and buy a dip or a bounce from the $114.00 level, which looks like it could be short-term support.

We'll start with a relatively wide stop loss at $109.90.

- Suggested Positions -

Long OCT $120 call (HAR141018c120) entry $6.00*

07/14/14 triggered @ 117.25
*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 July 14 at $117.25
Average Daily Volume = 715 thousand
Listed on July 12, 2014


Cheniere Energy, Inc. - LNG - close: 76.00 change: +1.50

Stop Loss: 69.90
Target(s): To Be Determined
Current Option Gain/Loss: +36.2%
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
07/23/14: The rally in LNG continues with the stock up four days in a row and setting new record highs.

We will move the stop loss to $69.90. More conservative investors may want to move their stop closer to $72.00 instead.

Earlier Comments: June 28, 2014:
According to LNG's website, Cheniere Energy, Inc. is a Houston-based energy company primarily engaged in LNG-related businesses, and owns and operates the Sabine Pass LNG terminal and Creole Trail Pipeline in Louisiana. Cheniere is pursuing related business opportunities both upstream and downstream of the Sabine Pass LNG terminal. Through its subsidiary, Cheniere Energy Partners, L.P., Cheniere is developing a liquefaction project at the Sabine Pass LNG terminal adjacent to the existing regasification facilities for up to six LNG trains, each of which will have a design production capacity of approximately 4.5 mtpa ("Sabine Pass Liquefaction Project"). Cheniere has also initiated a project to develop liquefaction facilities near Corpus Christi, Texas. The Corpus Christi Liquefaction Project is being designed and permitted for up to three LNG trains, with aggregate design production capacity of up to 13.5 mtpa of LNG and which would include three LNG storage tanks with capacity of approximately 10.1 Bcfe and two berths.

Why is Cheniere's ability to turn natural gas into liquefied natural gas (LNG) important? Natural gas has to be turned into LNG to be transported. The oil and natural gas boom in the United States thanks to technology and hydraulic fracturing rigs that access tight oil in shale rock formations has generated a huge supply. Right now the price of natural gas in the U.S. is less than $5.00 per million British thermal units (BTUs) or mmbtu. In Europe the cost per mmbtu is over $10.00 and in Japan the cost is almost $16 per mmbtu. There is a huge opportunity if producers can export natural gas to these markets. Unfortunately, building an LNG terminal that can export natural gas is a massive undertaking. It takes years to build them and there is a very long permit process from the government. Cheniere is quickly becoming the major player in this space in the U.S.

Cheniere recently moved one step closer to a FERC approval on the Corpus Christi LNG facility. The Federal Energy Regulatory Commission draft review said the project will result in the permanent loss of more than 25 acres of wetlands, but measures Cheniere plans to take will minimize any further disturbance. FERC will take public comments until August 4th and then issue a final review by Oct 8th.

They are building the largest LNG facility in the U.S. and it takes time. They are building six trains with annual production of 4.5 million tons per annum each (MTPA). Trains 1&2 began in August 2012 and are 63% complete. First production is expected in late 2015. Trains 3&4 began construction in May 2013 and are 27% complete. First production is expected in late 2016, early 2017. Purchase orders for 7.7 MTPA have been received for trains 1&2 and another 8.3 MTPA for trains 3&4. Trains 5&6 are still in permit mode with 3.75 MTPA of purchase agreements already being approved to Free Trade Agreement (FTA) countries and the non FTA authorization is pending. Trains 1-4 already have that authorization.

The three trains to be constructed in Corpus Christi for 13.5 MTPA are nearing the end of the permit approval process. Full approvals are expected not later than January 6th 2015. Purchase agreements for 5.53 MTPA have already been signed and the DOE has approved 767 Bcf per year for export to FTA countries with the authorization for non FTA countries still pending.

You might be wondering, "what is an LNG train?" According to Cheinere, The LNG industry has adopted the analogy of a "train" meaning the series of processes and equipment units that individually remove elements from raw inlet natural gas that would otherwise plug or freeze the small passages in the downstream heat exchangers that in a cascade fashion reduces the temperature from ambient to -260 F. Each of these processes and equipment units are sequentially arranged, similar to cars of a railroad train.

Just a couple of days ago the House of representatives voted to fast track more LNG export projects, which if signed into law, should be beneficial for Cheniere's current projects under review.

Technically shares of LNG have been consolidating sideways the last few weeks after the sharp end of May rally. That big pop at the end of May was market reaction to news that the U.S. Department of Energy proposed new rules to streamline their approval process and focus on projects with the best chance of actually getting built. That was good news for LNG and the company is on track to be the first to export LNG produced in the U.S.

- Suggested Positions -

Long Sep $75 call (LNG140920C75) entry $3.45

07/23/14 new stop @ 69.90
07/22/14 new stop @ 69.40
07/10/14 new stop @ 66.40
06/30/14 triggered @ 70.25
Option Format: symbol-year-month-day-call-strike

Entry on June 30 at $70.25
Average Daily Volume = 3.0 million
Listed on June 28, 2014


Sanderson Farms, Inc. - SAFM - close: 101.04 change: -1.13

Stop Loss: 97.25
Target(s): To Be Determined
Current Option Gain/Loss: -31.0%
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
07/23/14: SAFM erased a good chunk of yesterday's gains with today's -1.1% decline. Watch for a bounce near the $100.00 mark before considering new bullish positions.

Earlier Comments: July 12, 2014:
Sanderson Farms actually started out as a farm supply business back in 1947. A few years later they started raising chickens. Today they are the third largest chicken ranch in the United States processing more than 9.3 million chickens a week.

If you have been shopping for a little backyard BBQ this summer then you already know that meat prices are high. A long, widespread drought has been plaguing cattle ranchers for months and beef prices are soaring. At the same time disease has killed millions of pigs this year reducing the supply of pork. This has fueled a surge in beef and pork prices. Chicken has been on the rise as well but consumers appear to be buying more chicken as an alternative to pricier meats.

SAFM has developed a very strong trend of beating Wall Street's earnings estimates. They have beat analysts' estimates the last two quarters in a row by a very wide margin. Consensus estimates for the first quarter of 2014 was 85 cents. SAFM reported $1.25. Analyst estimates for the second quarter was $1.75. SAFM smashed that with a profit of $2.21 a share. Revenues have also beaten expectations. For the whole year SAFM's earnings are expected to rise +68%.

Summer is the peak season for chicken demand. Investors could start to bid up shares of SAFM ahead of its next earnings report in late August. Meanwhile SAFM could provide a floor in the stock price. Earlier this year management extended their stock buyback program to buy up to 1.0 million shares. That is almost five percent of the stock's 20.3 million share float. They have 23.0 million shares outstanding.

It is also worth noting that SAFM could be a buyout target. Back in May this year shares of Hillshire Brands Co (HSH) soared from $37 to $45 on a takeover bid. Suddenly a bidding erupted and three weeks later HSH had popped to $62 a share. Bloomberg thinks that SAFM could also be a takeover target as the meat industry continues to consolidate.

A takeover would be bad news for all the shorts in SAFM. The most recent data listed short interest at 17% of the float. The current breakout to new highs and the rally past round-number resistance at $100.00 could fuel more short covering.

Friday's high was $102.28. I am suggesting a trigger to buy calls at $102.55. More nimble traders might want to consider waiting for a potential dip into the $100.00-100.50 zone instead as an alternative entry point. The low on Friday was $99.90. We're not setting an exit target yet but do plan to exit prior to earnings in late August.

- Suggested Positions -

Long NOV $110 call (SAFM141122C110) entry $5.80

07/17/14 today's move breaks short-term support. More conservative investors may want to exit early now.
07/14/14 triggered @ 102.55
Option Format: symbol-year-month-day-call-strike

Entry on July 14 at $102.55
Average Daily Volume = 305 thousand
Listed on July 12, 2014


U.S. Silica Holdings - SLCA - close: 60.22 change: +0.30

Stop Loss: 56.45
Target(s): To Be Determined
Current Option Gain/Loss: +106.3%
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
07/23/14: SLCA continues to rally with a close above potential resistance at the $60 level.

The company is scheduled to report earnings next Tuesday on July 29th. We will most likely choose to exit prior to the announcement.

Tonight we'll move the stop loss to $56.45.

Earlier Comments: June 14, 2014:
There is a new gold rush going on for sand! America's shale oil and gas boom has created another boom for sand producers. Energy companies use hydraulic fracking to mine oil and gas out of tight shale formations. This fracking technique blasts millions of gallons of water at high pressure into shale rock where the oil and gas is trapped. These wells can cost between $4 million and $12 million each. In order to maximize their returns drillers use proppants to help "prop" open these minute cracks in the shale rock to help the oil and gas escape to the surface.

The cheapest and one of the most effective proppants has been fine sand. SLCA has been providing sand for industrial use for over 100 years. The company currently has 297 million tons in reserve. Oil and gas industry demand for proppants is expected to rise +30% between 2013 and 2016. That might be underestimated. The energy industry consumed 56.3 billion pounds of sand for fracking in 2013. That's up 25% from 2011.

According to SLCA they saw a +45% increase in demand for their sand. SLCA's CEO reported that some hydraulic fracking wells have doubled their use of sand from 2,500 tons per well to 5,000 tons. There are some wells using up to 8,000 tons.

Demand has been so strong that SLCA is actually sold out of some grades of sand and they're raising prices (about +20%) on non-contracted silica. SLCA believes demand for their products will rise another 25% this year alone.

Wall Street has taken notice of the dynamics of the sand industry and shares of SLCA have soared from their February 2014 lows. It may not be a coincidence that the stock was added to the S&P 600 smallcap index in February this year.

We are not setting an exit target tonight but Point & Figure chart for SLCA is bullish with a $69 target.

- Suggested Positions -

Long Sep $55 call (SLCA140920C55) entry $3.15*

07/23/14 new stop @ 56.45
07/22/14 new stop @ 54.90
traders may want to take some money off the table now that our option has doubled
07/16/14 new stop @ 53.25
SLCA buys a Texas-based sand producer for $98 million
07/01/14 new stop @ 49.25
06/17/14 triggered @ 52.15
*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 17 at $52.15
Average Daily Volume = 1.2 million
Listed on June 14, 2014


Energy SPDR ETF - XLE - close: 100.49 change: +0.64

Stop Loss: 97.95
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Time Frame: 8 to 12 weeks
New Positions: Yes, see below

Comments:
07/23/14: The price of natural gas (in the U.S.) continues to sink while crude oil is inching higher. Thus far the weakness in natural gas is not impacting the bullish trend in the XLE. Currently the XLE is bouncing from the bottom of its bullish channel and is poised to breakout past short-term resistance near $100.50.

Our trigger to buy calls is at $100.75. I will remind investors that August is not normally a bullish time of year for crude oil (and thus energy stocks) but this year might be an exception.

Earlier Comments: July 5, 2014:
Energy stocks are some of the stock market's best performers this year. The S&P 500 index is up +7.4% year to date. The XLE is up +13.4%. Earlier in the year a harsh winter helped drive demand for heating fuels. Now the industry is boosted by rising geopolitical events between Ukraine & Russia and more recently a Sunni jihadist uprising that is pushing Iraq toward a civil war.

Iraq is the third largest oil producer in the Organization of Petroleum Exporting Countries (OPEC). The country produces about three million barrels of oil a day. Iraq also accounted for over half of OPEC's recent production growth. Today the world is concerned that a civil war between hard-line Sunni Muslims in the north and northwest of Iraq and the Shia Muslim government in the south and southeast could damage or severely handicap Iraq's oil production. Meanwhile the Kurds will carve out their own independent nation at the very northern tip of Iraq.

Why should we care about a civil war in Iraq and its three million barrels of oil production a day? We should care because the difference between global oil demand and global oil supply is very tight. The U.S. Energy Information Administration (EIA) estimates that global oil demand will be in the 92 and 93 million barrels a day (mb/d) range in 2014-2015. Furthermore demand will rise 1.2 mb/d both in 2014 and 2015. The Paris-based International Energy Agency (IEA), from the latest data in June 2014, estimates global demand will rise 1.3 mb/d in 2014 to a total of 92.8 mb/d. Yet global supplies are only at 92.6 mb/d.

The world is already falling behind on oil supplies. People often forget that once you drill an oil well production is always declining as there is less and less oil in that well. Eventually wells run dry. Globally this lost production is between -3% and -5% a year. Not only do we need to discover, drill, and produce another +1.3 mb/d to meet growing demand we also have to replace the -3.6 mb/d we're losing every year due to maturing wells. That's almost 5 million barrels of oil a day!

You can see now why Iraq's 3 mb/d production is a focus for the equity markets. We've been lucky so far that nearly all of the fighting in Iraq has been in the northern half while most of the country's oil production and infrastructure is in the southern half. Thus far Iraq's production has not been seriously damaged. There is no guarantee the fighting will stay contained to the north. What happens if Baghdad falls or if the country is permanently divided? Terrorist could target Iraq's production facilities and pipelines.

Fortunately oil production in the U.S. is booming. America just hit 11 million barrels a day. That makes the U.S. the biggest single producer in the world. Current forecast put U.S. production hitting a peak of 13.1 mb/d in 2019. Unfortunately global demand might rise by another 5 or 6 mb/d by then (let's not forget the lost production from declining wells).

Oil prices will most likely remain elevated for an extended period of time. That should mean good news for all the energy companies, up stream, down stream, and everyone in between. A good way to play this strength in energy demand is the XLE, the Energy Select SPDR Exchange Trade Fund (ETF).

The XLE is a basket of over 40 of the biggest names in the energy space from production, to drilling, oil services, and refining. The XLE's top ten components are:

Exxon Mobil (XOM)
Chevron Corp. (CVX)
Schlumberger Ltd. (SLB)
ConocoPhillips (COP)
EOG Resources (EOG)
Pioneer Natural Resources (PXD)
Halliburton Co (HAL)
Occidental Petroleum (OXY)
Anadarko Petroleum (APC)
The Williams Companies Inc. (WMB)

As the violence in Iraq worsened last month we saw the XLE sprint higher in the first three weeks of June. When the stock market experienced some widespread profit taking on June 24th traders rushed into to lock in profits on the XLE. Since then the ETF has been slowly drifting higher.

We believe the up trend continues. The July 1st high was $100.66. Tonight we're suggesting a trigger to buy calls at $100.75. We'll start this trade with a stop loss at $97.95.

Trigger @ $100.75

- Suggested Positions -

Buy the Oct $105 call (XLE141018C105) current ask $0.81

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

Entry on July -- at $---.--
Average Daily Volume = 8.8 million
Listed on July 05, 2014




PUT Play Updates

Fossil Group, Inc. - FOSL - close: 100.96 change: +0.93

Stop Loss: 100.65
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Time Frame: Exit PRIOR to earnings on Aug 12th
New Positions: Yes, see below

Comments:
07/23/14: The $100 area is support so FOSL is trying to bounce. Shares managed a +0.9% gain today but the rally failed at its 10-dma again.

I do not see any changes from the weekend newsletter's new play description.

Earlier Comments: July 19, 2014:
Fossil Group Inc. (FOSL) is a giant in the multi-billion global watch industry. They started in 1984 and have grown to over 400 retail locations, 4,000 wholesale locations, and annual revenues of more than $3 billion. They own the Watch Station line of stores. A couple of years ago FOSL purchased the Denmark brand Skagen. They also own or market Michele, Zodiac, Relic, Burberry, Emporio Armani, Michael Kors, DKNY, Karl Lagerfeld, Tory Burch, Diesel, Armani Exchange, and adidas Originals brands. Altogether FOSL has about 45% market shares of the U.S. fashion market.

FOSL also sells jewelry, handbags, wallets, belts, sun glasses and clothing. While FOSL has done a pretty good job of growing sales, they are seeing rising expenses. Lately it has become a very competitive market for the higher-end luxury goods industry. Just look at stocks like Coach (COH) and Michael Kors (KORS). Granted COH and KORS are more leather goods and hand bags but they cater to the same customer.

FOSL is also facing the smart watch revolution. Smart phones have become ubiquitous and replaced their older rivals. Could investors be worried that smart watches will do the same to traditional watches? Currently Samsung has 78% of the smart watch market. A smaller, newer company named Pebble has 18%. At the moment the smart watch market is small and still dwarfed by the traditional watch market. Current estimates put the smart watch/wearable devices market at $2.5 billion in 2013. That's expected to surge to $13 billion by 2017. It will obviously be a growth area for the accessories industry.

Back in March Google announced it was partnering with HTC, LG, Motorola, Samsung and Fossil to promote its Android wearable products. It seemed like a natural fit to include Fossil given the company's dominant market share in the watch industry. Yet when Google held its I/O conference a few weeks ago there wasn't any news on FOSL and any upcoming smart watch launch. That might be troubling news. Apple is rumored to have their own smart watch (dubbed iWatch) to be coming out later this year.

Looking at the earnings picture FOSL last reported in May and issued an earnings warning for the second quarter that send shares lower. Consumer spending has not been as robust as many had hoped. Investors could be worried that FOSL will disappoint again when they report earnings in mid August.

In summary, FOSL is strong in the traditional watch market but the overall retail environment remains challenging. Plus, FOSL could be facing really tough competition in the growing wearable devices/smart watch industry.

Technically shares are in a bearish trend of lower highs and lower lows. FOSL is about to breakdown under its May low of $98.53. The Point & Figure chart is bearish and suggesting at $90.00 target.

We are suggesting a trigger to open bearish positions at $98.40. Plan on exiting prior to earnings in mid August.

Trigger @ $98.40

- Suggested Positions -

Buy the Aug $95 PUT (FOSL140816P95)

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

Entry on July -- at $---.--
Average Daily Volume = 548 thousand
Listed on July 19, 2014


Ross Stores Inc. - ROST - close: 63.00 change: +0.40

Stop Loss: 64.15
Target(s): To Be Determined
Current Option Gain/Loss: + 5.7%
Time Frame: 4 to 8 weeks
New Positions: see below

Comments:
07/23/14: ROST was also showing relative strength today with a +0.6% gain. I am not suggesting new positions at this time.

Earlier Comments: July 14, 2014:
According to the company website, Ross Stores, Inc. is an S&P 500, Fortune 500 and Nasdaq 100 (ROST) company headquartered in Dublin, California, with fiscal 2013 revenues of $10.2 billion. The Company operates Ross Dress for Less ("Ross"), the largest off-price apparel and home fashion chain in the United States with 1,146 locations in 33 states, the District of Columbia and Guam at fiscal 2013 year end.

Ross offers first-quality, in-season, name brand and designer apparel, accessories, footwear and home fashions for the entire family at everyday savings of 20% to 60% off department and specialty store regular prices. The Company also operates 130 dd’s DISCOUNTS in ten states.

The retail sector has had a rough year. 2014 started off with a harsh winter that kept consumers at home. Just about everyone blamed the terrible weather on terrible sales numbers in the first quarter. ROST joined the crowd when they reported earnings in February and lowered guidance. The first quarter has been followed by a tough Q2 as well.

Winter seemed like it would never go away. When spring finally showed up retailers were fighting for every consumer dollar. The apparel stores are facing a very competitive and highly promotional environment. There have been warnings and bearish commentary from all sort of retail players including Family Dollar, The Container Store, Rent-A-Center, and retail giant Wal-Mart.

This year the consumer has had to suffer through elevated gasoline prices at the pump and a sharply rising food prices. Everything from beef, pork, vegetables, and eggs have been rising. Every dollar spent on groceries and gas is another dollar that doesn't make it into the discretionary items.

ROST has been no exception. The company's most recent same-store sales figures had fallen to just +1% growth. Wall Street is concerned as well. There is a growing worry that ROST's sales growth will remain stuck in low single digits. Margins are also under pressure and will likely be flat to down. It's no surprise

Technically ROST's bearish trend of lower highs and lower lows has pushed the stock to key support near $65.00. This is where the stock bounced back in February. The intraday February 2014 low was $65.15. Today ROST dipped to $64.96 intraday.

I am suggesting a trigger to buy puts at $64.75. If triggered our short-term target is $60.00. Earnings are coming up on August 21st. We may choose to exit prior to the earnings announcement.

I am listing the November puts but you might want to use the August puts, which have more volume.

- Suggested Positions -

Long Nov $62.50 PUT (ROST141122P62.5) entry $2.60*

07/19/14 new stop @ 64.15
07/16/14 new stop @ 65.65
07/16/14 triggered on gap down at $64.57, suggested entry point was $64.75
*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 July 16 at $64.57
Average Daily Volume = 1.4 million
Listed on July 14, 2014