Option Investor
Newsletter

Daily Newsletter, Wednesday, 7/30/2014

Table of Contents

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

Market Wrap

Continued Chop

by Keene Little

Click here to email Keene Little
The stock market has been consolidating near its highs for a month, which appears bullish. But the bearish interpretation is a rolling top. In either case we should get a break of the log jam soon.

Wednesday's Market Stats

The blue chips were weaker than the techs and small caps yesterday and today and interestingly, the RUT's relative strength yesterday, as the other indexes dropped lower into the close, provided a bullish heads up for how today might go. It didn't help the DOW stay in the green today while SPX struggled to stay in the green, closing up only +0.12. As can be seen in the numbers in the table above, it was a mixed but neutral day today. The RUT and techs again showed relative strength and that supports the bulls for now but the overall structure of the market is looking weak. The month-long consolidation should soon break and the only question is what will provide the spark.

Today's economic reports included the Q2 GDP-Advance look and it came in better than expected. Following Q1's disappointing -2.9% there's been a lot of positive expectation for how Q2 will do and the estimate coming into today was +3.2% so the +4.0% was a nice surprise. Q1 was also revised up to -2.1%. Futures reacted positively following the 8:30 AM report but then started to pull back and the cash market sold off some after it opened. Keep in mind that a strong GDP number gives the Fed a lot more room to remove their stimulus

In actuality the GDP numbers are not all that helpful since it doesn't give us a true measure of how the economy is doing. Like so many other government reports, many simply don't trust the numbers anymore. There's been too much manipulation of employment, inflation and other economic data and the stock market doesn't really respond well to the data anyway. It's much more about emotions and risk tolerance and what the Fed has been able to accomplish all these years is to increase investors' risk tolerance.

An acceptance of greater risk is why we see such low volatility and now a stronger interest in the stock market by individual investors. "The Fed has our back" has been the rallying cry. The stock market has rallied in spite of bad economic and employment data (the disconnect between Wall Street and Main Street) and it will likely sell off when we're getting better economic data. Many will bemoan the fact that the market is selling on good news. It's a repetitive pattern and there's no reason to believe that pattern has been negated.

We received some more employment data today with the ADP number this morning, coming in at 218K and in line with expectations for 215K. It's a drop from the 281K in June but a lot of that might be summer related -- it's often harder to find a job in the summer when hiring managers are taking their vacations. Friday's Nonfarm Payrolls (NFP) is expected to show a gain of 220K, which would be a decline from June's 288K.

The big report today was the FOMC announcement, although there were no expected changes from the Fed. Regardless, everyone listens carefully for what word was changed, where they placed a period instead of a comma, and then how to interpret what Yellen said vs. what she meant to say and wonder if we heard what she didn't say while trying to understand what she actually said. The bottom line though is that the market needs to decide whether it wants worse economic numbers, for a more accommodative Fed, or better economic numbers and a less accommodative Fed. Actually it hasn't mattered much since the market has been rallying no matter what the news.

One indication of investors' desire to own more stock is the climbing margin debt. Following a peak in February it was declining but since April it's been climbing back up. When I last discussed margin debt a few months ago, when it was reaching all-time highs with the stock market, I had mentioned it as another sign of bullish enthusiasm for the stock market. Buying more and more on greater amounts of margin is a positive sign for the market but not when it becomes excessive. It can provide a warning when there are too many bulls running over to one side of the boat.

As I had mentioned a few months ago, the pattern of previous market highs shows price peaks occurred a few months after the peak in margin debt. We might be there and it's a warning sign for the bulls because the market is pulling in less money to support higher prices.

The chart below is the one I showed last time, which has been updated by Doug Short (dshort.com), and you can see the higher price since margin debt peaked in February. Notice the similar pattern at previous market highs in 2000 and 2007. Also interesting is a view of SPX in constant dollars (adjusted for inflation). Everyone has been so excited about the new all-time highs since 2013 but in reality all we're seeing is a test of the 2000 high (with a lower high so far). It's looking like we could end up with a massive double top.

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

The other important point about the above chart is the faster growth in margin debt during each of the past 3 bull markets (in both dollars and percentage growth). In constant dollars the 2007 high was a lower high compared to 2000 and the current high is still below the 2000 high and yet each rally produced higher highs for margin debt. Similar to the banking industry, traders have taken on even more debt and in turn have become even more vulnerable to a downside disconnect. Some try to explain this away by saying it's because we have more hedge funds getting into the game with heavy use of margin. My response is "and your point is?" Do you think hedge fund managers will sit in their positions waiting for a margin call or will they be quick sellers? I suspect the latter and that means we're sitting on a lot of "long interest" that could suddenly collapse when the selling starts.

Individual traders in particular have been thoroughly conditioned to believe they should hold on during any downturn because the market "always comes back," especially since the Fed has our back. That will be proven to be one of the greatest false beliefs that market participants will have ever had. The time they'll realize what kind of trouble they're in will be when the margin calls come pouring in, sparking further selling and in the process wiping out the majority who used too much margin and held on too long.

Another way of looking at this is with another of Short's charts, this one showing an inverted SPX (blue line) against a measure of investor credit balance. When investor credit balance reached a large negative position in February 2000 the stock market started to get choppy as it put in a final high in March 2000 and then tested it in August 2000, which coincided with a higher low in the negative credit balance. You can see the opposite at major stock market lows (SPX highs when looking at the inverted line below) -- the credit balance made lower highs while SPX made lower lows (higher highs since it's inverted). This year we've had a low in the negative credit balance in February and now a test of that low in July with a higher high in price (lower low since it's inverted). This doesn't tell us the market will reverse here and now but it should be telling the bulls to be afraid, be very afraid.

NYSE Investor Credit vs. SPX (inverted), chart courtesy dshort.com

We're also seeing investors piling back into stocks again, convinced this is now a bull market worth investing in. Unfortunately for these late-comers, they'll very likely, again, catch the top of the rally. When everyone jumps in it leaves few to continue pushing the market higher (and when combined with lower usage of margin it significantly reduces the demand for stock). It's really just a Ponzi scheme that's not been outlawed. We've got a stock market that has continued to further disconnect from what's happening on Main Street and the yawning difference will soon be corrected and I highly doubt it will be Main Street catching on fire to join the stock market.

About $100B has been plowed into equity mutual funds and ETFs by individual investors in the past year. June saw almost $10B in positive flow and 8 of the past 10 months has seen a positive flow of cash into the stock market by individual investors. The low volatility and slow but steady progress to new highs has lulled investors into a false sense of security. Low volatility leads to high volatility and usually a lot faster than investors are ready for. Professional money managers start to get worried when they see individual investors arriving en masse to the stock market. These investors do this when they see only the rewards of higher prices and forget about the risks. It's very often a sign of the end of the trend when most everyone finally recognizes it. This is what makes the above charts so compelling right now -- it's a dangerous time to be complacent about the upside.

But as always, price is king and that's why we evaluate chart patterns. These patterns reflect the aggregate trader mood and we can often get a heads up through technical analysis when things start to change. At the moment there are only hints of change but the longer-term trend is still up (depending on the index). Starting with a week view of SPX you can see the month-long consolidation near the highs. A consolidation following a rally is typically a bullish continuation pattern and that potential clearly exists here. It could result in another big run higher, potentially above 2100. That's hard to see at the moment and I'm thinking instead we're seeing an ending pattern.

SPX has been stalled at the price projection near 1990 for the past month and MACD has crossed down out of overbought. It's not hard to see this as potentially bearish even though the consolidation looks bullish. Keep in mind that if a bullish continuation pattern fails, as the bearish interpretation here suggests could happen, it tends to fail hard as too many traders get caught leaning the wrong way and suddenly start to bail out together. This is why the charts above are potentially important.

S&P 500, SPX, Weekly chart

The daily chart below shows the potential for at least a little higher to the 2000 area, an upside target I've been mentioning for more than a month. For a 5-wave ending diagonal starting from the July 10th low I see this as a good possibility. Today's price action put a dent in that expectation but the bulls aren't done yet. There's been a break of the uptrend line from April-May, near 1974 Thursday (about a point below its broken 20-dma near 1975), and if that's not recovered quickly it will be an indication that a breakdown has started.

S&P 500, SPX, Daily chart

Key Levels for SPX:
- bullish above 1985
- bearish below 1955

As can be seen on the 60-min chart below, the decline from last week is so far just a 3-wave correction to the rally. As long as SPX stays above its July 17th low near 1955 it stays potentially bullish. At the moment it's potentially bearish because of the break of the April-May uptrend line and the back-test this afternoon. The bearish wave count calls for a strong decline on Thursday in a small-degree 3rd of a 3rd wave down, something that would likely drop SPX quickly to the next support level near 1940 (uptrend line from February-April). The bulls need to step on the gas quickly Thursday morning to prevent this from turning bearish.

S&P 500, SPX, 60-min chart

The dominant pattern for the DOW is its rising wedge from April. The wave count for this pattern actually starts from the February low and it had the requisite 5-wave move up that consists of corrective wave structures. Yesterday's break below the bottom of the wedge, near 16970, followed by only a back-test of the bottom this morning, is a bearish sign. It broke its 50-dma on an intraday basis but was rescued this afternoon to close just above it near 16874. A further break is likely if the top is in place but I see the potential for a higher bounce for another back-test of both the broken uptrend line and 20-dma, near 17K.

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- bullish above 17,060
- bearish below 16,760

One way to play the DOW from here is to watch for a bounce that gets RSI up for a back-test of its broken uptrend line (a confirming indication the trend is ending or will end after only one more new high). Many times a back-test and lower high will occur with a new price high and that's usually a high-odds setup for a reversal that you can play (short in this case). Price might break down from here instead but it's something to watch for if the RSI back-test happens.

Nasdaq-100, NDX, Daily chart

Key Levels for NDX:
- bullish above 4000
- bearish below 3866

I like the RUT's weekly chart to show a clean wave count that strongly suggests THE high is in place. If you don't care much for EW (Elliott Wave) stuff you can skip over this part. The RUT's bounce off the 2009 low is a big 3-wave move up that and each of the 2 legs up is itself a 3-wave move. The 2nd leg up is the one shown on the weekly chart below and starts from the October 2011 low. The first leg of the 3-wave move up from October 2011 is a 3-wave move and is labeled wave-A. The pullback into the June 2012 low is wave-B. Based on this interpretation I've been expecting wave-C, the move up from June 2012 to end much earlier than it has. It's been stretched in time and price by "support" for the market.

Regardless of how long the c-wave has taken it still fits the pattern for it -- a 5-wave move up that stayed inside a parallel up-channel. The 5th wave, which is the leg up from May, is equal to the 1st wave at 1221.28 (shown on the chart) and the high on July 1st was 1213.55, which was essentially a test of the 3rd wave high on March 4th. The 5th wave stopped at the mid-line of the up-channel, which is common, and it shows bearish divergence against the 3rd wave, which is very common. It could rally higher and extend the 5th wave, which is not common when the 3rd wave extends, as this one did, and therefore the expectation here is for a continuation lower after putting in THE high on July 1st. This chart has SELL! written all over it.

Russell-2000, RUT, Weekly chart

The daily chart shows the wave count for how the 5th wave finished (a nice 5-wave count for the move up from May) and that was followed by an impulsive decline to the July 17th low. The impulsive decline says the trend has changed to the downside. The choppy bounce pattern following the July 17th low suggests another stronger decline once the bounce correction completes. At the moment I can argue for a higher bounce, perhaps up to the 1165 area but so far the leg up from Monday is very choppy and it looks like it will complete with a lower high. That in turn would set the pattern up for a stronger decline in a small-degree 3rd of a 3rd wave down, something that would likely drop the RUT quickly to its uptrend line form October 2011 - November 2012, currently near 1100. This says the recent relative strength in the RUT is a head fake so be careful chasing it higher.

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- bullish above 1185
- bearish below 1120

Many of the sector indexes look similar to the broader averages. One that is a little difference, and weaker, is the homebuilder index (DJUSHB). As can be seen on its weekly chart below, price has now dropped marginally below support near 460. It's only minor and could easily recover. The weekly closing price will be important. The longer-term price pattern calls for another leg down to at least test, and probably break, its 2008 low at 130. The slowdown in the housing market is something I've been suggesting will happen for a long time now and I believe this index will soon reflect the disappointment in the homebuilding stocks.

DJ Home Construction index, DJUSBH, Weekly chart

Another index that suggests the top could already be in place is the TRAN. The 5th wave of its rally from November 2012 is the leg up from April and its 5th wave is the leg up from June 12th. Yesterday the TRAN dropped below the up-channel for this final 5th of the 5th wave and that suggests the whole thing is now complete. Today's bounce was a back-test of the bottom of its broken up-channel and almost reached back up to its broken 20-dma, at 8319. It would turn more bearish with a close below its 50-dma, near 8195 on Thursday. The decline from July 23rd looks impulsive while the bounce off yesterday's low looks corrective and that keeps things bearish for now, even if we get a higher bounce before heading lower.

Transportation Index, TRAN, Daily chart

The U.S. Dollar and the metals have continued to chop sideways in their month's-long consolidation and until they break out and we see something worth looking at more closely I'll keep using their weekly charts to show the bigger pictures for them. The dollar has rallied strong the past month and has now made it up to the top of its sideways trading range that it's been since its October 2013 low. There was a minor intraday break above resistance at 81.50 but that's where it closed. It's overbought as it tests the top of its range and I'd say there's a good chance we'll see a pullback. If it's just a minor pullback that lasts only about a week I see the potential for a run up to at least 81.90 where the rally off the May low would have two equal legs up. I show a lot more potential for a strong rally this year, up to the 87 area but one step at a time to see how the bulls hold up here.

U.S. Dollar contract, DX, Daily Weekly

The big sideways triangle for gold is still in play and my expectation is for higher prices for the triangle to finish near 1360 later this summer before starting back down toward 1000. The triangle is currently about 1260-1360 and what happens inside that 100-point range doesn't mean a hill of bean to the larger pattern. We have to wait for the break before knowing what will happen next. I lean short gold but see the potential for a rally to 1360 before trading that way.

Gold continuous contract, GC, Weekly chart

I see oil in an ending diagonal pattern (shallow rising wedge shown on its weekly chart below) and that calls for one more rally up to the115-116 area before collapsing back down. If oil drops below 96 first (maybe peace will break out all over the world), it would then turn bearish earlier than I'm projecting.

Oil continuous contract, CL, Weekly chart

Tomorrow's economic reports include unemployment data and more importantly the Chicago PMI (shortly after the market opens). The PMI is expected to drop a little from June's reading but as long as it hits close to its expected 61.8 there should not be much of a reaction. Friday's economic numbers will be market moving so be careful about what positions you're holding over Thursday night.

Economic reports and Summary

The stock market has been waiting for something for well over a month now and it's difficult to tell which direction it will break out of the consolidation. I suspect a breakout to the north would be short-lived and turn into one giant head fake, especially if SPX tags 2000+ and then fails to hold it. But I've seen too many important market tops get put in with what looked like bullish continuation patterns. They're instead little rolling tops and when price chops its way higher, especially in rising wedges like we're seeing, it's most often a warning sign that the rally is ending.

We've got a plethora of signals that show the higher index prices are not being met with stronger market internals. Quite the opposite actually. One indication of market strength has been discussed recently by Mark Cook, who was profiled in Jack Schwager's book "Stock Market Wizards." When someone like him talks we should definitely be listening. At the moment he is also very cautious about the upside. His proprietary indicator that he developed in 1986, the "Cook Cumulative Tick," has reliably warned him about previous major highs and lows.

Cook's indicator alerted him to the 1987, 2000 and 2007 market highs and the following crashes and his indicator is now warning him of another one coming. He was also able to identify the 2009 low with his indicator. If ever there was a good crystal ball this sounds like a good one. Basically the indicator is showing him the higher index prices are not being supported by stronger tick readings. His analogy is a dam with minor cracks that look harmless but the weakening of the structure that you don't see is the unseen problem and it's a warning that the dam could suddenly and catastrophically burst.

As Cook says, "It's like being in the Twilight Zone. Imagine going outside when it's raining and getting sunburned. That's the environment we're in right now. Some people might say it's 'different this time,' but it never is. Could the market go higher? Yes, it could, but the extension of time will create an even greater divergence that has to be snapped back together."

Respect the upside but don't get complacent about it. And stay aware that when the dam breaks there will likely be a flood of water (sell orders) and this market has already proven it can't handle too many sell orders at once (bids disappear). Be careful out there...

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

Adding Customers At A Record Pace

by James Brown

Click here to email James Brown


NEW DIRECTIONAL CALL PLAYS

Palo Alto Networks, Inc. - PANW - close: 84.21 change: +2.11

Stop Loss: 79.65
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 1.3 million
Entry on July -- at $---.--
Listed on July 30, 2014
Time Frame: Exit PRIOR to earnings on Sept. 9th
New Positions: Yes, see below

Company Description

Why We Like It:
Customer data mining is big business. It doesn't matter of the company is online or a bricks and mortar store they want to know all they can about you. Who are you? How old are you? What zip code do you live? They track your purchases and store your credit card data.

Last year retail giant Target (TGT) disclosed a cyber breach that affected up to 110 million customers to potentially having their credit card data stolen. Months later, Target's president and CEO resigned over the fiasco. Target isn't the only one being targeted. The University of Maryland recently disclosed an online security breach. The number of cyber attacks on small business doubled last year.

Sadly it's only getting worse. The Justice Department called the online landscape for cyber threats and hacking extremely dangerous. They used the term "pre-9/11 moment" suggesting that any day now someone could launch a massive cyber attack. The government is worried about protecting our infrastructure and electrical grid. Corporate America wants to protect their data (and your data). That's why cyber security is big business and getting bigger.

PANW is making a splash in the security world. The stock IPO'd in 2012 and while it has been a rocky ride so far the company seems to have found its groove. Founded in 2005 and headquartered in Santa Clara, California, PANW describes their company as, "leading a new era in cybersecurity by protecting thousands of enterprise, government, and service provider networks from cyber threats. Unlike fragmented legacy products, our security platform safely enables business operations and delivers protection based on what matters most in today's dynamic computing environments: applications, users, and content."

More than 70 of the Fortune 100 companies use PANW's products and services. In 2013 PANW saw revenues grow +55% year over year, outpacing their rivals. They have added more than 1,000 customers per quarter for the last ten quarters in a row. PANW most recently reported earnings on May 28th and said it was their "highest rate of new customer acquisition in our history and now serve more than 17,000 customers."

Another important event last quarter was the settlement of a three-year patent lawsuit with rival Juniper Networks (JNPR). Resolving this issue has removed a significant black cloud over PANW.

Wall Street has noticed. The last few weeks have seen a number of price target upgrades. Deutsche Bank upped their PANW price target to $95.00. Goldman Sachs raised their price target to $97.00. Morgan Stanley is forecasting at PANW price target of $105.00.

Shares of PANW have rallied back toward their all-time highs set just five weeks ago. A bullish breakout appears imminent. Tonight we're suggesting a trigger to buy calls at $84.55. More conservative investors might want to consider waiting for a new high above $85.80.

Keep in mind that PANW is scheduled to report earnings on September 9th and we will likely exit prior to the announcement.

Trigger @ $84.55

- Suggested Positions -

Buy the SEP $90 (PANW140920C90) current ask $3.10

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

Annotated Chart:

Weekly Chart:



In Play Updates and Reviews

Stocks Churn In Spite Of GDP Number

by James Brown

Click here to email James Brown

Editor's Note:

The U.S. market churned sideways in spite of a better than expected Q2 GDP number this morning.

LNG was closed today. SAFM was stopped out. PLL was triggered.


Current Portfolio:


CALL Play Updates

Gilead Sciences, Inc. - GILD - close: 93.79 change: +0.80

Stop Loss: 87.99
Target(s): To Be Determined
Current Option Gain/Loss: +18.9%
Average Daily Volume = 14.1 million
Entry on July 29 at $92.25
Listed on July 28, 2014
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
07/30/14: GILD is still pressing higher but spent much of today hovering just below the $94.00 level. With a $5.00 run from Friday's intraday low I would not be surprised to see a dip soon. Look for short-term support near $92.00.

Earlier Comments: July 28, 2014:
GILD seems to be everyone's favorite biotech stock. I only hear bullish opinions about the future of the company, and for good reason. They have some pretty amazing treatments with products for HIV/AIDS, liver diseases, oncology, cardiovascular, respiratory, and more. GILD has essentially revolutionized how we treat major diseases like HIV and Hepatitis C.

According to the company website, "Gilead Sciences, Inc. is a research-based biopharmaceutical company that discovers, develops and commercializes innovative medicines in areas of unmet medical need. We strive to transform and simplify care for people with life-threatening illnesses around the world. Gilead's portfolio of products and pipeline of investigational drugs includes treatments for HIV/AIDS, liver diseases, cancer and inflammation, and serious respiratory and cardiovascular conditions."

This year everyone has been raving over GILD's hepatitis C treatment called Sovaldi. Hepatitis C is a form of viral hepatitis that causes chronic inflammation of the liver. About 185 million people currently suffer with hepatitis C. Previously the most common treatment for hepatitis C had serious side effects and was less than 50% successful. GILD changed that with their Sovaldi drug that not only treats the symptoms but actually cures the patient. The company has drawn some negative publicity over the cost since GILD charges $84,000 for a 12-week course of Sovaldi in the United States. The fact that 80% to 90% of patients who take Sovaldi are cured is a major milestone.

The Financial Times noted that before Sovaldi the impact of hepatitis C in the U.S. took a heavy toll on the healthcare system. The disease can lead to liver failure and cancer, both of which cost significantly more than Sovaldi's $84,000 price target. Hepatitis C is the leading cause for liver transplants in the U.S., which can cost a minimum of $145,000. One consulting firm estimated that the annual cost of hepatitis C to the U.S. healthcare system was going to surge from $30 billion to $85 billion in the next twenty years. Sovaldi has the potential to change. that.

Stocks move on earnings and GILD has plenty of them. They company last reported on July 23rd. Wall Street was expecting a profit of $1.80 a share on revenues of $5.86 billion for the second quarter. GILD delivered a profit of $2.36 a share with revenues soaring +136% to $6.53 billion. Last quarter Sovaldi accounted for $3.5 billion in sales. Management issued bullish guidance on revenues and margins.

GILD has also had good news with both the FDA and the European Committee for Medicinal Products for Human Use approving GILD's Zydelig treatment for chronic lymphocytic leukemia and follicular lymphoma. The European committee's decision will now be sent to the full European Commission and if approved will open up Zydelig to all 28 countries in the EU.

The outlook is pretty bullish for GILD. Traders just bought the dip and shares closed at all-time highs. Today's intraday high was $91.73. We are suggesting a trigger to buy calls at $92.25. We are not setting an exit target tonight but I will point out the point & figure chart is bullish with a $106.00 target. I am concerned that the $100.00 level could be temporary resistance for GILD. We'll have to wait and see.

- Suggested Positions -

Long Oct $95 call (GILD141018C95) entry $3.70*

07/29/14 triggered @ 92.25
*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


Golar LNG Ltd. - GLNG - close: 62.93 change: -0.45

Stop Loss: 59.65
Target(s): To Be Determined
Current Option Gain/Loss: + 2.4%
Average Daily Volume = 1.3 million
Entry on July 25 at $62.25
Listed on July 22, 2014
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
07/30/14: GLNG's early gains faded. The stock closed down -0.7%. Traders may want to wait for another dip near the 20-dma or the $60.00 level as an alternative entry point.

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 delivery 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.

- Suggested Positions -

Long Sep $65 call (GLNG140920C65) entry $3.32

07/29/14 new stop @ 59.65
07/25/14 triggered @ 62.25
Option Format: symbol-year-month-day-call-strike


Harman Intl. Industries - HAR - close: 112.90 change: +0.31

Stop Loss: 111.90
Target(s): To Be Determined
Current Option Gain/Loss: -43.3%
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
07/30/14: HAR continues to find support near $112.00. Unfortunately the stock is also building a short-term, three-week trend of lower highs, which is bearish. I am not suggesting new positions at this time.

FYI: Earnings are coming up on August 7th.

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*

07/26/14 new stop @ 111.90
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


JB Hunt Transport - JBHT - close: 78.50 change: +0.44

Stop Loss: 77.75
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 1.0 million
Entry on July -- at $---.--
Listed on July 26, 2014
Time Frame: 8 to 12 weeks
New Positions: Yes, see below

Comments:
07/30/14: The transports managed a bounce after a four-day loss. JBHT bounced from support near $78.00. Currently we're on the sidelines waiting for a breakout higher. Our suggested entry point is $80.25.

Earlier Comments: July 26, 2014:
According to JBHT's website the company describes themselves as, "one of the largest transportation logistics companies in North America, provides safe and reliable transportation services to a diverse group of customers throughout the continental United States, Canada and Mexico. Utilizing an integrated, multimodal approach, we provide capacity-oriented solutions centered on delivering customer value and industry-leading service."

"Our service offerings include transportation of full truckload freight, which we directly transport utilizing our company-controlled revenue equipment and company drivers or independent contractors. We also have arrangements with most of the major North American rail carriers to transport truckload freight in containers and trailers. We also provide customized freight movement, revenue equipment, labor and systems services that are tailored to meet individual customers' requirements and typically involve long-term contracts. Our customer base is extremely diverse and includes a large number of Fortune 500 companies."

Just before Q2 earnings season started Barclays upgraded their view on the transportation sector. The analyst firm felt that an improving economic picture in the U.S. would fuel significant earnings growth for the transport industry. It appears to be a good call with the transportation sector leading the market higher. The Dow Jones Transportation Average is up +13.8% year to date and hitting all-time highs.

JBHT is only up +2.5% year to date but it too is near all-time highs and looks poised to run. JBHT reported earnings on July 15th. Wall Street was looking for earnings of 79 cents a share on revenues of $1.54 billion. JBHT delivered a profit that was in-line with estimates while revenues rose +11.9% to beat estimates at $1.55 billion.

Some of the standout performances for JBHT were their DCS and ICS segments. The Dedicated Contract Services (DCS) business saw revenues up +15% in the second quarter over a year ago. Their Integrated Capacity Solutions (ICS) business reported revenue growth of +31% from a year ago. Management guided their full-year 2014 revenues in the $6.14-6.25 billion range. That's a +10% to 12% rise for the year.

JBHT's President and CEO John N. Roberts III offer this perspective on the quarter, "The slowdown in train velocity and the difficult driver recruiting environment has challenged our growth in JBI. We are pleased we were able to maintain profitability levels despite these obstacles. The worsening driver supply conditions will continue to be a headwind for DCS and JBT as well. The planned improvement in JBT is ahead of schedule and though there is more to do, we are extremely pleased with the progress thus far."

JBHT bought back 990,000 shares of its stock during the second quarter for $75 million. They still have about $263 million left in their buyback program. As of June 30, 2014 JBHT had 117 million shares outstanding.

JBHT's earnings report earned some upgrades with two firms raising their outlook on the stock. One of them was Credit Suisse who raised their price target on JBHT from $78 to $86. The Credit Suisse analyst also adjusted their earnings growth from 7% today to +22% in 2015.

Currently shares of JBHT are hovering just below major resistance at $80.00. If the stock breaks out it could see a run towards $90 or higher. The Point & Figure chart is forecasting at $95.00 target.

We are suggesting a trigger to buy calls at $80.25.

Trigger @ $80.25

- Suggested Positions -

Buy the Nov $80 call (JBHT141122C80)

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


Energy SPDR ETF - XLE - close: 98.76 change: -0.59

Stop Loss: 97.95
Target(s): To Be Determined
Current Option Gain/Loss: -50.5%
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
07/30/14: Warning! Today's drop is pushing the XLE just below the bottom edge of its bullish channel. This ETF should still have support near $98.00 and its simple 50-dma but technically the channel pattern appears to be breaking down today.

I am not suggesting new positions at this time.

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.

- Suggested Positions -

Long Oct $105 call (XLE141018C105) entry $0.84

07/24/14 triggered @ 100.75
Option Format: symbol-year-month-day-call-strike

Entry on July 24 at $100.75
Average Daily Volume = 8.8 million
Listed on July 05, 2014




PUT Play Updates

Pall Corp. - PLL - close: 79.69 change: +0.03

Stop Loss: 81.05
Target(s): To Be Determined
Current Option Gain/Loss: -13.4%
Average Daily Volume = 437 thousand
Entry on July 30 at $79.45
Listed on July 29, 2014
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
07/30/14: Our new trade on PLL is now open. Shares continued to sink this morning and hit our suggested entry point at $79.45. The intraday bounce is a bit frustrating so we'll need to keep a watch on what should be short-term resistance at $80.00 and its simple 10-dma at $80.70.

Earlier Comments: July 29, 2014:
PLL is in the industrial goods sector. It is considered part of the diversified machinery industry. They market to a lot of different customers around the world. PLL operates in the aerospace and defense industry, the animal health, biopharma, food and beverage, fuels and chemicals, graphic arts, laboratories, machinery and equipment, medical, microelectronics, power generation, and water treatment.

The company describes themselves as, "Pall Corporation is a filtration, separation and purification leader providing solutions to meet the critical fluid management needs of customers across the broad spectrum of life sciences and industry. Pall works with customers to advance health, safety and environmentally responsible technologies. The company's engineered products enable process and product innovation and minimize emissions and waste."

PLL's latest earnings report on May 29th was a disappointment. Wall Street was expecting a profit of $0.83 a share. PLL delivered 81 cents. Revenues did come in better than expected. Guidance was only in-line with prior estimates. The results failed to generate any investor excitement for the stock.

Quite the opposite seems to have happened. PLL produced what appears to be a triple-top pattern from late May through June. Then in July the stock has collapsed through several layers of support. Today we are seeing PLL breakdown under significant support at the $80.00 mark, support at its 300-dma, and support at its long-term trend line of higher lows (see weekly chart below).

Today's intraday low was $79.65. Tonight we're suggesting a trigger to buy puts at $79.45. We're not setting an exit target yet but I will point out that the point & figure chart is bearish and forecasting at $72.00 target.

Keep in mind that PLL is scheduled to report earnings again in very late August. There is no confirmed date yet. We will likely exit prior to the announcement.

- Suggested Positions -

Long Sep $80 PUT (PLL140920P80) entry $2.60*

07/30/14: triggered @ 79.45
*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


United Natural Foods, Inc. - UNFI - close: 59.35 change: +0.53

Stop Loss: 62.05
Target(s): To Be Determined
Current Option Gain/Loss: -8.2%
Average Daily Volume = 443 thousand
Entry on July 28 at $59.00
Listed on July 26, 2014
Time Frame: exit PRIOR to earnings in mid September
New Positions: see below

Comments:
07/30/14: UNFI tagged a new low for the year this morning. Yet the stock bounced and managed to outperform the market with a +0.9% gain. Is this a bullish reversal? UNFI's biggest customer, Whole Foods (WFM), reported earnings after the closing bell. WFM beat bottom line estimates by 2 cents, revenues were in-line. Yet WFM guided lower for the next quarter. WFM's bearish guidance should be negative for shares of UNFI. However, I am not seeing any after hours weakness in UNFI at the moment.

Earlier Comments: July 26, 2014:
Natural and organic foods are a growing business today. The consumer is choosing healthier and typically more expensive foods, which had driven long-term gains for companies like UNFI and Whole Foods (WFM). Yet all of this growth has caught the attention of competitors.

According to UNFI's website the company, "is the leading independent national distributor of natural, organic and specialty foods and related products including nutritional supplements, personal care items and organic produce, in the United States. In addition to excellent distribution services, we provide a range of innovative, value-added services for our customers and suppliers, to foster mutual success and growth. Our services include marketing and promotional tools, merchandising, category management and store support services."

UNFI's business also includes a chain of retail stores with their Earth Origins Market brand. They also do a lot of importing and processing of nuts, seeds, and fruits with their Woodstock Farms company. UNFI just recently announced the acquisition of Tony's Fine Foods.

The challenge is that grocery and food products are normally a low-margin business. The organic and natural niche has enjoyed bigger margins but those margins are contracting as more and competition tries to hop on the natural and organic bandwagon. Large regional food chains and nationwide titans like Wal-mart and Target could steal market share. It has been a serious problem for Whole Foods (WFM) and that makes it a problem for UNFI because WFM is UNFI's biggest customer. WFM accounts for over one third of the company's revenues.

If growing competition wasn't enough the grocers and processors like UNFI also face rising input costs as suppliers raise prices. Margins are getting squeezed from both sides.

Now UNFI's latest earnings report wasn't that bad. The company announced earnings on June 11th. Results were in-line with Wall Street estimates. Sales improved +13.8% from a year ago. Yet gross margins inched down from 16.8 percent to 16.7 percent. That doesn't seem like much but it confirms the trend. Furthermore, while the prior quarter's sales were up +13.8% UNFI is only expecting full-year revenues to grow 11.0%-11.6% this year.

You can see on the chart where UNFI plunged in early June on its earnings report. The oversold bounce failed near $67.00 and the stock has gone almost straight down since then. Today UNFI is flirting with a breakdown near support in the $60.00 area. Last week the stock bounced at $59.25 and $59.30. We are suggesting a trigger to buy put options at $59.00.

Please note that Whole Foods (WFM) is scheduled to report earnings Wednesday, July 30th, after the closing bell. WFM's results and their guidance will have an influence on shares of UNFI. More conservative investors may want to wait until after we see how the market reacts to WFM's results before initiating positions on UNFI.

- Suggested Positions -

Long NOV $55 PUT (UNFI141122P55) entry $2.07

07/28/14 triggered @ 59.00
Option Format: symbol-year-month-day-call-strike



CLOSED BULLISH PLAYS

Cheniere Energy, Inc. - LNG - close: 73.40 change: -1.06

Stop Loss: 71.95
Target(s): To Be Determined
Current Option Gain/Loss: -29.5%
Time Frame: Exit PRIOR to earnings on July 31st
New Positions: see below

Comments:
07/30/14: LNG's recent fade lower accelerated a bit today and the stock lost -1.4%. Our plan was to exit today at the closing bell to avoid holding over the earnings report due tomorrow.

We still like the story on LNG but do not want the risk of holding a position over the announcement. We'll re-evaluate a potential play after the post-earnings dust clears.

- Suggested Positions -

Sep $75 call (LNG140920C75) entry $3.45 exit $2.43 (-29.5%)

07/30/14 planned exit at the close
07/29/14 prepare to exit tomorrow (July 30th) at the close
07/28/14 new stop @ 71.95, prepare to exit before July 31st
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

chart:

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


Sanderson Farms, Inc. - SAFM - close: 96.35 change: -4.15

Stop Loss: 98.90
Target(s): To Be Determined
Current Option Gain/Loss: -53.4%
Time Frame: exit PRIOR to earnings on Aug. 26th
New Positions: see below

Comments:
07/30/14: SAFM was pummeled with a double-whammy today. Last night Russia decided to fire back in the sanction war it's having with the west. Russia announced that it might ban chicken imported from the U.S. If that wasn't enough bad news for SAFM the stock was also downgraded this morning by an analyst firm. Together these headlines pushed SAFM to a -4.1% drop.

Our stop loss was hit at $98.90.

- Suggested Positions -

NOV $110 call (SAFM141122C110) entry $5.80 exit $2.70 (-53.4%)

07/30/14 stopped out at $98.90
07/26/14 new stop @ 98.90
07/24/14 new stop @ 97.75
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

chart:

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