Option Investor
Newsletter

Daily Newsletter, Wednesday, 8/13/2014

Table of Contents

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

Market Wrap

Opex Bounce

by Keene Little

Click here to email Keene Little
Last week's pullback into Thursday's low was once again a good setup to slingshot the market back up into opex week. It's a formula that keeps working. What happens after opex will be more important.

Wednesday's Market Stats

The game plan to pull the market down into a low on the Thursday prior to opex, followed by a short-covering rally into opex is again playing out. It's a pattern that has played out repeatedly and this opex appears no different. But the larger price pattern suggests there could be trouble following this week's bounce so don't get complacent about the long side.

Yesterday's choppy decline was followed by another rally leg this morning, which keeps the bulls in control for now. There's higher potential into Friday but a bounce to a lower high that looks like a correction to the decline should lead to a stronger selloff next week, which I'll lay out in tonight's charts. I'll also identify the key levels to the upside, which if broken by the bulls will tell us new highs are coming.

This morning's economic numbers were not market moving, although the disappointing retail sales numbers were a little disappointing. Retail sales were expected to stay roughly flat with June's +0.2% but instead dropped to zero growth. Sales excluding the auto component were expected to drop marginally from June's +0.4% to +0.37% but instead dropped to only +0.1%, just barely above zero growth. So it would appear the consumer is pulling back and that of course is not a good sign for the economy, which remains so dependent on strong consumer spending.

One of the more worrisome things throughout the 5-year bull market that we had (I'm assuming it finished with the July high until proven otherwise) is the fact that it's been so disconnected from reality. I've spilled a lot of virtual ink on the separation between Wall Street and Main Street. And now the slowdown in consumer spending is further aggravation of the split. One example of the slow recovery in consumer spending, labeled Personal Consumption Expenditures (PCE) is shown on the chart below. The red line is the current recovery from the trough and is compared to average fast and average slow recoveries. The current recovery is much worse than even the average slow recovery.

Personal Consumption Expenditures recoveries from recessions

Another way to look at this is to see how much the PCE declined during the last recession and the recovery since the bottom in 2009. The decline was much steeper than past recessions and the recovery after 5 years is only about half the loss.

Declines and recoveries in Personal Consumption Expenditures

I suppose one could look at the above charts and say, "The trend is up!" and that's true. But is it supportive enough of a stock market that has blown past the 2007 highs? The answer has been yes for many years because of the belief in the Fed's almighty powers to prop up the stock market. But all they've accomplished is propping up a risk-taking attitude. There's a huge disconnect between the market prices and reality. Bullish sentiment has created a worse bubble than we had in 2000 or 2007. The correction of this disconnect will not be pretty.

And just in time, the retail trader has bought into the rally, literally. A recent AAII Asset Allocation Survey of retail investors shows cash levels in July dropped to the lowest level since 1999 at only 15.8%. The chart below shows retail trader cash positions since 1996 and you can see how the peaks and valleys in cash positions have been closely aligned with important tops and bottoms. It's not a perfect timing method but it's certainly another warning sign.

Retail Investor Cash Allocation, 1996-July 2014, chart courtesy shortsideoflong.com

I'll start off tonight's chart review with the NDX since it's showing a relatively clean price pattern and the potential for a reversal after today's rally. The blue chips suggest higher prices into the end of the week (and there's the same potential for NDX) so the short-term picture is a little muddy but it's important to keep the bigger picture in mind. Because the larger pattern suggests the July highs are important highs (potentially THE highs for the 5-year bull market) I think it's important to stay aware now of the downside risk.

Starting off with the NDX weekly chart, it's showing a good wave relationship that helps confirm the wave count, which is what I look at to help confirm when it's time to look for reversals. The rally from November 2012 is a 5-wave move and the completion of it suggests at least a larger pullback correction or more bearishly, the start of the next multi-year bear market. I have the price projections for the 3rd and 5th waves, which are based off the size of the 1st wave, which is the leg up from November 2012 to the May 2013 high (labeled wave-(i) on the chart). The 3rd wave is often 162% of the 1st wave, which is the projection near 3730 and the high was 3938. When the 3rd wave is 162% of the 1st wave it's common to see the 5th wave the same size as the 1st wave, which is the projection near 3973 and the high was 3997. Between July 23rd and July 30th there were only 3 days that managed to close above 3973.

Nasdaq-100, NDX, Weekly chart

The July high for NDX was also up against the trend line along the highs from April 2012 - March 2014. The turn down from this trend line and the price projection for the completion of the 5-wave move up from November 2012 is what had me feeling bearish about the July high. That was then followed by a 5-wave move down into last week's low, which is the first short-term indication we've seen a trend change. It's possible we saw a larger pullback correction from the July 3rd high so further upside still needs to be respected. The proof the bears need to confirm a top of importance is in place is for the current bounce to make a lower high and then have it followed by a break below last week's low. Hence the key level to the downside at 3845, shown on the daily chart below.

Nasdaq-100, NDX, Daily chart

Key Levels for NDX:
- bullish above 3965
- bearish below 3845

Today the NDX was bullish and was able to jump up over its broken 20-dma, near 3924 today. But it has run into its broken uptrend line from April-May, near 3946, with a high at 3948.70. This was also a test of the top of its gap down on July 31st, at 3948.90. It pulled back a little but then chopped its way higher this afternoon and kept itself pressed up against the trend line, which looks like a small ending pattern and it had me thinking short for Thursday morning to see what kind of pullback/decline we get.

Nasdaq-100, NDX, 60-min chart

This is opex week and I've been looking for ways the pattern would support a higher bounce into the end of this week. Based on the start of the bounce pattern off the August 6th low (as opposed to the lower low on August 7th) I think there's a good chance NDX will pull back and then head higher into Friday, as I've depicted on the chart above. It would stay trapped below its broken uptrend line from April-May but make it up to its 78.6% retracement (a very popular retracement level for years now) at 3965 by next Monday morning. This is obviously a guess but it's something I'll be tracking this week.

Last week's low for SPX held support at the important uptrend line from November 2012 - February 2014, near 1904 at the time. That is a trend line the bulls must defend and any break of it, currently near 1910, confirmed with a break below last Thursday's low at 1904.78, would be a strong reason to be short (certainly a reason to exit long positions). A 3rd wave down is expected to be the next leg down (assuming we'll get it and not a new high from here) and it will very likely be accompanied by strong selling.

S&P 500, SPX, Daily chart

Key Levels for SPX:
- bullish above 1973
- bearish below 1904

I have the key level to the upside for the bulls to break above at 1973 because that would get it through several levels of resistance. The broken uptrend line from April-May is near price-level resistance at 1955 (the shelf of support in July) and the 20- and 50-dma's surround this level at about 1952 and 1956, resp. The 62% retracement of its decline is near 1958. Two equal legs up for an a-b-c bounce off the August 6th low points to 1961.74. It would close its July 31st gap down at 1970.19. And then finally, the 78.6% retracement is at 1972.30. So if the bulls can get through all that, we'll be heading for new highs. I'll believe it when I see it happen.

S&P 500, SPX, 60-min chart

The DOW's pattern is the same as SPX except I'm starting its bounce projections from the August 7th low. There's a subtle difference in the wave count for each on the way down and when I look at its bounce off the August 7th low I get a higher projection for two equal legs up, which is just above 16800. This coincides with its broken uptrend line from November 2012 - February 2014 (log price scale) and its 2000-2007 trend line, both of which cross tomorrow near 16785. The bulls would be in trouble with a drop below yesterday's low at 16518 and it would be confirmed bearish below last week's low near 16330.

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- bullish above 16,880
- bearish below 16,330

The RUT does not have a clear pattern at the moment and that leaves too many options on the table. The decline into the August 1st low looks like a 3-wave pullback and suggests higher prices (or maybe it will be stuck in a large sideways consolidation into October/November before it will be ready to rally again). A rally above its July 24th high near 1164 would leave a confirmed 3-wave pullback and I'd be looking at it more bullishly, especially since it would be a recovery back above its broken 50-dma near 1160. The bearish interpretation of its decline is a 1-2, 1-2 wave count to the downside and the next leg down will be as if the bottom dropped out in a 3rd of a 3rd wave decline. Take a break below the August 1st low near 1107 seriously if it happens.

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- bullish above 1164
- bearish below 1107

I've been watching the banks the past few weeks to see if they support one side or the other but the pattern has remained unclear. I could easily argue a bearish case based on a 1-2, 1-2 wave count to the downside since the July 3rd high, which portends further selling, but it's not clear enough to feel strongly about it. If we have started a new bear market I would expect the banks to be one of the sectors to lead the way down. The weekly chart below shows a rounding topping pattern and especially with the break of the up-channel from 2012, back in April, followed by a bounce back up to back-test the bottom of the channel, into the July 3rd high, it's not hard to argue the bearish case here. Stronger evidence of a top would come with a break below price-level support at 66-67, followed by a break of its uptrend line from 2009-2011, currently down near 64. But as long as 66-67 holds as support, the "resetting" of MACD back down to zero while the index trades sideways can be viewed as bullish. So I'm waiting for the banks to show some leadership.

KBW Bank index, BKX, Weekly chart

At today's high at 8236 the TRAN retraced 50% of its decline from July 24th, on the nose at 8236. At the same time it is now back-testing its 20- and 50-dma's, as can be seen on its daily chart below. The risk for bulls is a turn back down from here and the start of the 3rd wave down, which would likely take it down quickly for at least a test of its 200-dma, currently near 7615. If we've got a bearish move down we'll likely see the 200-dma only become a speed bump on the way down to the April low at 7346. But for this week, if it holds up bullish, two equal legs up from last week points to 8380, which is a little shy of the 78.6% retracement of its decline, near 8395.

Transportation Index, TRAN, Daily chart

The U.S. Dollar is working hard to break out of its sideways trading range by getting above 81.50. It's still not clear if we'll get another pullback inside the range before breaking out but at least for now the dollar's pattern remains bullish.

U.S. Dollar contract, DX, Weekly chart

Gold has been chopping around for the past two weeks and hasn't strayed far from $1300. In fact it hasn't strayed far from that level since first dropping below it in June 2013. I'm still looking for a minor push higher in the coming month, up to about 1350, to complete a sideways triangle consolidation pattern since June 2013 low. That should then lead to lower prices for the shiny metal. Based on this pattern it could be the end of the year or early 2015 before we'll have a good buying opportunity for the metals.

Gold continuous contract, GC, Weekly chart

Oil has been chopping sideways since its hard drop at the end of July and has so far created a little star doji this week at trendline support (uptrend line from June 2012) and its 200-week MA. As long as it holds above 96 I'm expecting another rally leg up to the 113-115 area before it will be ready for a stronger decline. At 113.05 it would have two equal legs up from January and a little throw-over above the top of its rising wedge pattern would get it close to its May 2011 high at 114.83.

Oil continuous contract, CL, Weekly chart

One headwind for oil is the lack of demand by the U.S., which in turn could lower global prices further from here. The chart below shows how much the U.S. has imported, in Mbbl/day, since 1920. It peaked in 2008 near 11 Mbbl/day and since then a lackluster economy combined with new domestic supplies has dropped the number to about 7.2 Mbbl/day, which is the lowest number we've seen for the past 19 years (1995). U.S. consumption is currently 20.3 Mbbl/day and is well below pre-recession consumption levels.

U.S Oil Imports, chart courtesy BusinessInsider.com

There will be nothing from tomorrow's economic reports to drive the market one way or the other so it will be left to react to geopolitical news.

Economic reports and Summary

I tend not to pay too much attention to historical averages or patterns for the stock market because they're not reliable enough to trade. With that said, there is one pattern that supports the idea that we're about to get another leg down for the market following this week's bounce. The chart below was published by Tom McClellan and it shows the average pattern for stock price in the 2nd year of a 2nd term president, which is what 2014 is. As you can see, it's not a pretty picture as the average decline is back to the beginning of the year, which for SPX is down near 1750. A 200-point drop from about 1950 would be a 10% "correction."

Average Performance of SPX During 2nd Year of 2nd Presidential Term, chart courtesy mcoscillator.com

The EW (Elliott Wave) pattern suggests this week's bounce is a correction to the previous decline from the July highs and therefore it's a good opportunity to short the bounce. The big question, as always, is where the bounce will end. My crystal ball is a little cloudy but I could argue the NDX and a couple of other indexes up against resistance for a back-test are ready to start down now. But I also see the potential for a continuation higher (maybe after a pullback Thursday morning) into the end of the week. Considering this is opex week I am also inclined to give the bulls the benefit of the doubt that I have here.

The bottom line is that the long side seems particularly vulnerable right here but the short side could be painful for a couple more days. If we get a sharp decline, and especially if last week's lows are broken, short the bounces. In the meantime, give the market a little more room to the upside this week and then look for a rollover to short.

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

Materially Higher

by James Brown

Click here to email James Brown

Editor's Note:

In addition to tonight's new candidate(s), consider these stocks as possible trading ideas and watch list candidates. Some of these stocks may need to see a break past key support or resistance:

(bullish ideas)
UNH, COO, XBI, IBB, JLL, BCR, AVB, PSA, LAD, PCYC, GWPH, CELG,



NEW DIRECTIONAL CALL PLAYS

U.S. Silica Holdings, Inc. - SLCA - close: 61.15 change: +1.56

Stop Loss: 57.95
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 1.42 million
Entry on August -- at $---.--
Listed on August 13, 2014
Time Frame: 8 to 12 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
We are bringing SLCA back after some post-earnings volatility.

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.

SLCA's most recent earnings report was July 29th. Wall Street expected a profit of $0.47 a shares on revenues of $189.7 million. SLCA beat estimates with a profit of $0.55 and revenues soaring +58.5% from a year ago to $205.8 million.

The company said sales were up sharply both from a year ago and from the first quarter. Management raised its 2014 earnings guidance.

Currently shares of SLCA are hovering just below resistance in the $61.75 area. Tonight we're suggesting a trigger to buy calls at $62.05. We are not setting an exit target tonight but Point & Figure chart for SLCA is bullish with a $69 target.

Trigger @ 62.05

- Suggested Positions -

Buy the DEC $65 call (SLCA141220C65) current ask $4.10

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

Annotated Chart:



In Play Updates and Reviews

Market Bounce Continues

by James Brown

Click here to email James Brown

Editor's Note:

Widespread gains in Europe helped fuel another day of gains in the U.S. on Wednesday.

Our new play on ISIS is open.


Current Portfolio:


CALL Play Updates

BioMarin Pharmaceutical Inc. - BMRN - close: 65.81 change; +1.40

Stop Loss: 61.95
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 1.26 million
Entry on August -- at $---.--
Listed on August 11, 2014
Time Frame: 8 to 12 weeks
New Positions: Yes, see below

Comments:
08/13/14: BMRN soared from the $64.00 level this morning and briefly traded above resistance near $66.00. Yet the rally stalled near its 200-dma. BMRN did outperform the market with a +2.1% gain but failed to hit our suggested entry point at $66.55.

If this rally has any follow through tomorrow we could see our play open.

Earlier Comments: August 11, 2014:
BMRN is in the healthcare sector, specifically the biotech industry. According to the company's press release they "develop and commercialize innovative biopharmaceuticals for serious diseases and medical conditions. The company's product portfolio comprises five approved products and multiple clinical and pre-clinical product candidates."

The company's strategy is "providing first-in-class or best-in-class treatments for patients with serious unmet medical needs, optimizing powerful biology with demonstrated potential and development clarity, accelerating approval process, strategic pipeline development."

BMRN's current product portfolio looks like this: VIMIZIM™ for Morquio A syndrome (MPS IVA), Naglazyme® for MPS VI, Aldurazyme® for MPS I, Firdapse™ (currently approved in the EU only) for LEMS, KUVAN® Tablets for PKU.

BMRN lists their current clinical pipeline as follows: PEG PAL for PKU, BMN 673 for genetically defined cancers, BMN 701 for Pompe disease, BMN 111 for achondroplasia, BMN 190 for late-infantile neuronal ceroid lipofuscinosis (CLN2), a form of Batten Disease, BMN 270 for hemophilia A and BMN 250 for Sanfilippo Syndrome or MPS IIIB.

The company is developing a trend of beating Wall Street's earnings estimates. Back in February they reported results that bested analysts' estimates by a wide margin. They did it again in May. Wall Street was looking for a loss of 44 cents on revenues of $145.1 million. BMRN reported a loss of just 1 cent with revenues rising +18.5% to $151.6 million. Their most recent earnings report was July 30th. Analysts were expecting a loss of 41 cents on revenues of $159.2 million. BMRN announced a loss of 23 cents with revenues soaring +40.1% to $191.7 million. Furthermore BMRN management raised their 2014 guidance following the July 30th report.

The stock peaked back in February this year. When the market corrected in March most of the high-growth and momentum names were crushed. BMRN was in that group that saw their stock hammered lower. Shares fell from almost $85 to $55.00. Fortunately the $55.00 level has been solid support. Shares have been building a significant base in the $55-65 zone for over three months.

Currently the rebound from its July lows is pushing the stock up against major resistance in the $65.00-66.00 area. This is where BMRN has resistance with its simple 200-dma and its trend line of lower highs. If the stock breaks out it could spark a significant move higher.

Tonight we're suggesting a trigger to buy calls at $66.55. We're not listing an exit target tonight but I will share that the point & figure chart is bullish with a $77.00 target.

Trigger @ $66.55

- Suggested Positions -

buy the Oct $70 call (BMRN141018C70) current ask $2.45

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


Cummins Inc. - CMI - close: 141.97 change: +0.93

Stop Loss: 138.90
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 1.6 million
Entry on August -- at $---.--
Listed on August 09, 2014
Time Frame: 10 to 14 weeks
New Positions: Yes, see below

Comments:
08/13/14: CMI managed to keep pace with the S&P 500 and rally +0.65% today. The stock remains under short-term resistance. I do not see any changes from our weekend newsletter's new play description below.

Earlier Comments: August 9, 2014:
Sometimes investors overreact to news and the stock reaction can generate an opportunity. That's what we are seeing in CMI today.

Cummins Inc. was founded back in 1919 by its namesake Clessie Lyle Cummins. The company has four businesses: engines, power generation, components, and distribution. They're headquartered in the state of Indiana with about 48,000 employees worldwide. They do business in 190 countries.

According to the company website CMI describes themselves as "a corporation of complementary business units that design, manufacture, distribute and service diesel and natural gas engines and related technologies, including fuel systems, controls, air handling, filtration, emission solutions and electrical power generation systems."

CMI reported Q1 earnings on April 29th. They crushed the earnings number and beat the revenue estimates with revenues up +12.3% for the quarter. CMI management raised their 2014 guidance by +6% to +10% (about $18.3-19.0 billion).

When CMI reported Q2 earnings on July 28th Wall Street was expecting a profit of $2.39 a share on revenues of $4.82 billion. CMI beat those numbers with a profit of $2.43 on revenues of $4.84 billion. Profits were up +10.5% from a year ago. Management raised their 2014 guidance again. This time they see revenues up +8% to +11% in 2014. That's about $18.7-19.2 billion.

CMI's Chairman and CEO Tom Linebarger said, "Demand is growing in on-highway markets in North America this year as the economy improves and we have gained market share in medium duty truck and bus markets." Their North American sales surged +14% last quarter versus a -1% pullback in international sales.

That's two quarters in a row that CMI has beat Wall Street's top and bottom line estimates and raised guidance. Yet the stock was crushed following the July earnings number. It appears the upgraded revenue guidance wasn't good enough and analysts were expecting more.

CMI reported sales of $17.3 billion in 2013. Now they're approaching $19 billion. They've already approved a $1 billion stock buyback program to replace their current $1 billion buyback program once it's complete. They have also raised their dividend this year.

The company has rising sales, rising market share, rising profits, and rising dividends. It has a trailing P/E of 17 and a forward P/E of 12.8. That sounds like a pretty good combination.

Technically the stock has fallen to its long-term trend line of support (see the weekly chart below). Last week shares have started to rebound from this trend. However, on a short-term basis the breakdown under its 200-dma looks pretty ugly. The bounce last week failed near $144.00 and its 10-dma. Therefore tonight we are suggesting a trigger to buy calls at $144.25.

FYI: Investors should note that Deere (DE) reports earnings on August 13th. While not exactly in the same business as CMI their results might influence CMI's performance.

Trigger @ $144.25

- Suggested Positions -

Buy the 2015 Jan $150 call (CMI150117C150)

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


Gilead Sciences, Inc. - GILD - close: 93.98 change: +0.62

Stop Loss: 87.99
Target(s): To Be Determined
Current Option Gain/Loss: +4.0%
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:
08/13/14: Biotech stocks were showing relative strength today. The BTK index rallied +2.1%. GILD only gained +0.66% as shares struggled with its late July highs. I would be tempted to buy calls again at current levels.

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


Isis Pharmaceuticals - ISIS - close: 35.84 change: +1.44

Stop Loss: 31.85
Target(s): To Be Determined
Current Option Gain/Loss: -2.4%
Average Daily Volume = 1.5 million
Entry on August 13 at $35.25
Listed on August 12, 2014
Time Frame: 12 to 15 weeks
New Positions: see below

Comments:
08/13/14: Our new play on ISIS is open. Biotech stocks were some of the market's best performers today. ISIS outpaced its peers with a +4.1% gain. Our suggested entry point to buy calls was hit at $35.25.

Earlier Comments: August 12, 2014:
Science has discovered that some diseases are caused by certain proteins. Some biotech firms are using RNA-targeted technology to focus on those proteins and find a treatment. ISIS is one such company.

According to their website, ISIS is "the leading company in antisense drug discovery and development, exploiting a novel drug discovery platform we created to generate a broad pipeline of first-in-class drugs. Antisense technology provides a direct route from genomics to drugs. With our highly efficient and prolific drug discovery platform we can expand our pipeline and our partners' pipelines with antisense drugs that address significant medical needs. Our strategy is to do what we do best—to discover unique antisense drugs and develop these drugs to key clinical value inflection points."

The company has a significant number of drugs in development. You can see a list of ISIS' pipeline on this webpage. They currently have over 30 drugs in progress. The depth and scale of their pipeline makes ISIS a potential takeover target from bigger drug or biotech firms. Gilead Sciences and Biogen Idec have been rumored as potential suitors.

Lately the headlines have been full of the world's worst Ebola outbreak in history. Biotech stocks are grabbing investor attention as companies search for a treatment. Whenever one biotech firm makes positive headlines it tends to create a halo effect that buoys the rest of the group.

The stock peaked back in February this year after ISIS reported positive results on a treatment for children with spinal muscular atrophy. After soaring from $8.00 in the prior 18 months traders sold this news near $60.00. A few days later in March all the high-growth and momentum names were crushed. The correction was exceptionally tough on ISIS. The stock plunged from $60 in February to $23 in May. Their Q1 results in early May didn't help. Results were in-line but revenues were down 35% from a year ago to $28.2 million. Their most recent earnings report on August 4th was much better. ISIS missed Wall Street's estimate for a loss of 10 cents a share by 1 cent. However, revenues soared +49.8% to $57.1 million, which was significantly above expectations.

ISIS explained that the big swings in their revenues are normal. According to their press release, "Isis' revenue fluctuates based on the nature and timing of payments under agreements with its partners and consists primarily of revenue from the amortization of upfront fees, milestone payments and license fees. Isis' revenue from the amortization of payments from its partners was $31.4 million in the first half of 2014, compared to $19.2 million for the same period in 2013." You can see they made significant improvement from 2013 to 2014.

ISIS is getting closer to several drugs completing their final Phase 3 clinical trials before being approved for market. The company said,

We have initiated the Phase 3 program for ISIS-SMNRx to treat patients with spinal muscular atrophy. Our Phase 3 clinical study of ISIS-TTRRx in patients with the polyneuropathy form of transthyretin amyloidosis is enrolling well and patients who have completed the controlled portion of the study can continue to receive treatment in our open-label extension study. Also this year, we plan to initiate the Phase 3 program for ISIS-APOCIIIRx to treat patients with severely elevated triglyceride levels with the first study starting very shortly," said B. Lynne Parshall, chief operating officer of Isis. "By the end of the year, we plan to be conducting Phase 3 programs on a number of different drugs to treat important genetically driven diseases for which antisense may offer a unique therapeutic approach."

It looks like the stock has made a bottom in July. Shares have pushed through several key moving averages in the last couple of weeks. If this continues ISIS could see some short covering. The most recent data listed short interest at 10% of the 117.9 million share float. The Point & Figure chart is bullish and forecasting at $46.00 target.

Tonight we are suggesting a trigger to open bullish positions at $35.25. If triggered we'll try and limit our risk with a stop loss at $31.85. I will point out that ISIS does have resistance in the $37.50 area including its simple 200-dma. We're expecting the stock to break through it. More conservative investors might want to wait for ISIS to close above $38.00 before considering new positions.

- Suggested Positions -

Long 2015 Jan $40 call (ISIS150117C40) entry $4.10

08/13/14 triggered @ 35.25
Option Format: symbol-year-month-day-call-strike


Transportation ETF - IYT - close: 146.99 change: +1.01

Stop Loss: 141.90
Target(s): To Be Determined
Current Option Gain/Loss: -6.5%
Average Daily Volume = 276 thousand
Entry on August 11 at $146.03
Listed on August 09, 2014
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
08/13/14: The IYT also kept pace with the S&P 500 with a +0.69% gain. The rally today struggled with the 20-dma and 50-dma.

I am not suggesting new positions at this time.

Earlier Comments: August 9, 2014:
In tonight's market commentary Jim pointed out the bounce in the Dow Jones Transportation Average ($TRAN). The transportation group has been leading the market higher for months with a series of new all-time highs. The group was hit with some profit taking in the last two and a half weeks. Even with a 500-point (about -6%) pullback in the $TRAN index it's still up +9.3% for the year. Now that group is bouncing.

One way to play the transports is the iShares transportation ETF (symbol: IYT). This ETF tries to mimic the performance of the Dow Jones Transportation Average. The top ten holdings in this ETF are:

(FDX) FedEx - delivery services
(KEX) Kirby Corp. - marine transportation
(KSU) Kansas City Southern - railroads
(UPS) United Parcel Service - delivery services
(NSC) Norfolk Southern - railroads
(UNP) Union Pacific Corp. - railroads
(CHRW) C.H. Robinson Worldwide - trucking
(R) Ryder System Inc. - transportation services
(CNW) CON-WAY Inc. - trucking
(JBHT) J.B. Hunt Transport Services - trucking

If the U.S. economy continues to improve as so many expect it will then the transports should be a major beneficiary. We should take advantage of this pullback in the transports and buy this bounce from support.

The IYT has been bouncing from technical support at its rising 100-dma for months. It bounced off the 100-dma in October 2013, February 2014, April 2014, and almost hit it again on Friday morning before bouncing.

Tonight we're suggesting traders buy calls now following Friday's bouncing with a stop loss at $141.90, just under the 100-dma. More conservative traders may want to consider an alternative entry point and wait for a rise past $146.25 instead.

- Suggested Positions -

Long 2015 Jan $150 call (IYT150117C150) entry $4.60

08/11/14 trade begins. IYT gaps higher at $146.03
Option Format: symbol-year-month-day-call-strike


LyondellBasell Industries - LYB - close: 109.85 change: +0.96

Stop Loss: 105.99
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 2.5 million
Entry on August -- at $---.--
Listed on August 04, 2014
Time Frame: 8 to 12 weeks
New Positions: Yes, see below

Comments:
08/13/14: LYB is getting a lot closer to a bullish breakout. The stock flirted with a rally through resistance near $110.00 but only hit $110.14 before paring its gains. Our trigger to buy calls is at $110.50.

Earlier Comments: August 4, 2014:
One way to play the shale-gas boom in the U.S. is plastics. The bloom of natural gas production has been a huge blessing for LYB. According to the company's website, "We participate in the entire petrochemical value chain, from refining to specialized petrochemical product end uses. We are the largest producer of polypropylene and polypropylene compounds; a leading producer of propylene oxide, polyethylene, ethylene and propylene; a global leader in polyolefins technology; and a producer of refined products, including biofuels. Additionally, LyondellBasell is a leading provider of technology licenses and a supplier of catalysts for polyolefin production."

The recent spike in LYB's stock price was a reaction to better than expected earnings results. Wall Street was looking for LYB to deliver a profit of $1.93 a share on revenues of $11.5 billion. LYB surpassed expectations with a profit of $2.22 a share with revenues rising +9.1% to $12.12 billion.

The stock has been an earnings machine with rising earnings the last four years in a row. Analysts are now estimating LYB will see earnings rise 11% in 2014 and 16% in 2015. Jefferies recently raised their price target on LYB from $120 to $125 as they upgraded their EPS estimates on the company.

After a strong rally from $100 to $110 in mid July the stock was short-term overbought and due for a pullback. Traders jumped in to buy the dip near LYB's simple 10-dma last week. Now LYB is rebounding higher.

More aggressive traders may want to buy the bounce today. We are suggesting a trigger to buy calls at $110.50 since the July high is $110.38.

FYI: For more background on the LYB story Forbes.com has a great article that you might find interest. You can read it here.

Trigger @ $110.50

- Suggested Positions -

Buy the DEC $115 call (LYB141220C115) current ask $2.60

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


Palo Alto Networks, Inc. - PANW - close: 84.79 change: +3.53

Stop Loss: 79.90
Target(s): To Be Determined
Current Option Gain/Loss: +50.0%
Average Daily Volume = 1.3 million
Entry on August 04 at $80.50
Listed on July 30, 2014
Time Frame: Exit PRIOR to earnings on Sept. 9th
New Positions: see below

Comments:
08/13/14: This morning Piper Jaffray slapped a $100 price target on PANW. Then during the day Jim Cramer, on CNBC, also reiterated the $100 price target. Shares of PANW surged at the open and briefly traded at an all-time high above $86.00 before trimming its gains (+4.3%).

Tonight we'll move the stop loss to $79.90.

Earlier Comments: July 30, 2014:
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.

- Suggested Positions -

Long SEP $85 (PANW140920C85) entry $3.20*

08/13/14 new stop @ 79.90
08/04/14 triggered @ 80.50
*option entry price is an estimate since the option did not trade at the time our play was opened.
08/02/14 Strategy update: Move the entry trigger from $84.55 to $80.50 and move the stop loss from $79.65 to $76.75.
Adjust the option strike from Sep $90 call to Sep $85 call
Option Format: symbol-year-month-day-call-strike




PUT Play Updates

Pall Corp. - PLL - close: 79.37 change: +0.08

Stop Loss: 80.35
Target(s): To Be Determined
Current Option Gain/Loss: -9.6%
Average Daily Volume = 437 thousand
Entry on July 30 at $79.45
Listed on July 29, 2014
Time Frame: Exit PRIOR to earnings on August 28th
New Positions: see below

Comments:
08/13/14: PLL underperformed the market today, which is what we want to see in our bearish candidates. The stock is hovering just below resistance at $80.00.

More aggressive traders could launch bearish positions now. I'd prefer to see some follow through lower on today's intraday reversal. A drop under $79.00 could be used as an alternative entry point.

Please note that our time frame has changed. PLL is scheduled to report earnings on August 28th. We do not want to hold over the announcement.

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*

08/09/14 updated time frame. PLL scheduled to report earnings on Aug 28
08/06/14 new stop @ 80.35
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