Option Investor
Newsletter

Daily Newsletter, Wednesday, 8/20/2014

Table of Contents

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

Market Wrap

Slow-Volume Melt-Up

by Keene Little

Click here to email Keene Little
This week's rally has been on slow and slowing volume and showing lots of negative divergences in market breadth and momentum. It should be reversing to the downside but the bulls apparently didn't get the memo.

Wednesday's Market Stats

When you look under the hood to see how the market looks it's not a pretty picture. Whether it's fast-slowing volume, deteriorating advance-decline line or bearish divergences on momentum indicators you could be forgiven for feeling bearish about the stock market. But if you look at just price, which is of course the most important indicator, you see bullishness and that's what keeps the buyers coming. But now throw in an overbought market and there are plenty of reasons why bulls need to again be cautious here. It might be time for the bears to get another turn at the feeding trough.

The market started with a gap down this morning, which was different than Monday and Tuesday, but the dipster crowd saw it as a buying opportunity and they pushed the indexes to new trading highs. The one fly in the bull's ointment today (and somewhat yesterday) was the fact that the RUT was not participating in the rally. It's flashing a warning sign but I'm not sure there are many bulls paying much heed. The dip following the FOMC minutes this afternoon was just another dip to be bought. Thursday we'll find out if those buyers might get a little buyer's remorse.

Other than the FOMC minutes this afternoon, letting us know how the last meeting went, there wasn't much in the way of economic reports to jolt the market one direction or the other. The geopolitical news was relatively quiet and that provided a benign environment for the market to continue floating higher into the FOMC minutes. The market finished mostly on a high note for the day other than a brief bout of profit taking in the final 15 minutes. But as I'll review in tonight's charts, that selling might have been the kickoff to what could become more severe selling in the coming weeks. How the market pulls back (impulsive vs. corrective) will provide the clues we'll need to figure out the odds for higher prices into September vs. the start of a more significant decline. For now I urge caution by both sides but feel the bears are getting ready to take control of the ball.

As for the Fed's FOMC minutes for the meeting held three weeks ago, it appears there is more of a shift in the bias toward removing policy accommodations at a faster rate. The feeling is that the employment picture is improving and inflation is ticking higher toward their 2% goal. There is no change of plans to wind down the latest QE program with the elimination of bond purchases after the October meeting.

What's interesting about all this is how well the stock market is taking this. There is a general feeling (acceptance) that the economy is improving, inflation is ticking higher and that both of these are good for the stock market. But what's been good for the stock market is the Fed being highly accommodative and without their monthly priming the pump I'm surprised the stock market isn't more worried. Removing liquidity is likely to cause more problems than the market is currently expecting.

Ironically, the Fed and BOE are moving closer to providing less accommodation and raising rates while the rest of the world (except Europe?) starts tightening the excess credit creation. The BOE reported this morning that some members are dissenting about keeping rates at zero and instead want to raise rates to 0.25% now, not later. Japan's monetary expansion is virtually on hold and China is aggressively reining in it credit expansion program. The world may be much closer to a deflationary cycle than an inflationary one.

So ironically, while the Central Banks of many of the developed countries start removing accommodation they could be doing so at the beginning of a deflationary cycle that will be the first one in 80 years. They could in fact trip the world economies into an unintended slowdown (you mean the Yale-educated economists could make an error of that magnitude? Say it isn't so) just at a time when they should be starting an accommodation program instead of ending one. The only thing I wonder is how quickly the Fed will reverse itself and start up QE5 (or whatever number we're up to).

Looking at the stock market's indexes, the broader averages, and most of the sector averages, have not made new highs yet above their July highs. The banking index hasn't made a new high above its March high, let alone its July high. The techs are out in the lead and that has most everyone feeling bullish again but we have to wonder if it's deja vu all over again, similar to what happened at the October 2007 high where the techs went on to make new highs into the end of the month while most other indexes made lower highs compared to their highs earlier in the month. SPX is the closest to making a new high, having missed by only 3 points today and it will only take a minor bump higher for it to join the techs. That would be important for the bulls to continue here but what a cruel joke on the bulls if today's high was it.

For indexes other than the techs it's still possible to call the bounce off the August lows a correction to the decline off the July highs. That would be a setup for a strong decline to follow, which makes this a very important inflection point for the market. And unless a strong catalyst enters the picture for the bulls to grab hold of and start buying with more enthusiasm I think the rally leg from the August lows is the final one. It has all the signs of being in a termination phase. How high it can continue to melt up with deteriorating market breadth is the big question at the moment. So let's see what the charts are telling us.

Kicking off tonight's chart review with the SPX weekly chart, the past three weeks have brought it back up near its July 24th high at 1991.39, only 3 points above today's high at 1988.57. The July rally attempted to punch up through the trend line along the highs from April 2010 - May 2011, but it was unable to hold even marginally above it. If SPX does push higher, it will again have to deal with the 2010-2011 trend line, currently near 2005. Other than a head-fake break above 2005, it would obviously be more bullish above that level but if it rolls over from anywhere in the current price region it will leave a significant bearish divergence on the weekly chart and likely a double-top completion to its rally.

S&P 500, SPX, Weekly chart

At the August 7th low, at 1904.78, SPX came within about 5-10 points of its uptrend line from October 2011 - November 2012 (using the log price scale and depending on how it's drawn). Most were watching the uptrend line from November 2012 - February 2014, using the arithmetic price scale, which is where SPX found support. Now a drop below the August 7th low would also be a break of the longer-term uptrend line from October 2011 - November 2012, which obviously would be an important clue about the longer-term pattern. In the meantime the uptrend continues to hold and any short plays are therefore by definition counter-trend plays and require greater caution. I like to look for reversal setups, which I'm seeing here, but the risk in catching rising knives should be obvious.

The daily chart below shows the trend line along the highs from April 2010 in gray and another one along the highs from March-May. In case this market is going to rally into September I wanted to see where SPX might be headed to. The first target is near 1995, where the 5th wave of the move up from February would be 62% of the 1st wave (the February-March rally). This would result in SPX making a final high as a double top (like the RUT did at its July high). But if the final 5th wave is to achieve equality with the 1st wave then as depicted on the chart, we could see a rally up to 2050 by mid-September where the projections crosses the trend line along the highs from March-May.

S&P 500, SPX, Daily chart

Key Levels for SPX:
- bullish above 1995
- bearish below 1941

Because SPX has not made a new high yet above its July 24th high, there is still the possibility that the leg up from August 7th is a correction to the decline and not the completion of the rally. This is potentially important because a correction would be followed by a steep and strong decline in a 3rd wave. The DOW easily supports this interpretation and it makes it a dangerous time to be long the market because of this downside risk.

We can't know yet whether or not we'll get new highs into September or a steep decline instead. The next pullback/decline will be needed to help provide some clues. If the bounce off the August 7th low is a correction to the 1st wave down from July then the next decline will start to kick into high gear and it will be impulsive (sharp decline, small corrections) as the 3rd wave unfolds. But if we get a corrective pullback (choppy, overlapping highs and lows) then it will look like a correction to the rally off the August 7th low and point higher once the pullback is finished. While I lean short the market here, price is king and it will tell us after the next pullback/decline gets started whether to be looking higher or lower.

This week's rally for the DOW has it back above its uptrend line from November 2012 - February 2014, currently near 16825, and that's obviously bullish. But the trend line, using either the arithmetic or log scale, didn't seem to have the same influence as it did for SPX. So at the moment I don't consider it all that relevant. As can be seen on its daily chart below, the uptrend line from October 2011 - November 2012 (green) basically held on August 5th and 6th but then the August 7th close was a break below it. But it was only a 1-day break, which turned into a head-fake break, and there's been a strong recovery since. It closed slightly above price-level resistance near 16970 and 5 points below the 78.6% retracement of its July 17 - August 7 decline, at 16984, after trying to break through both this afternoon. The close correlation here requires close attention to see if it will turn the DOW back down on Thursday.

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- bullish above 16,985
- bearish below 16,575

Looking a little closer at the DOW, the 60-min chart below shows the bounce pattern. The wave count suggests the August 6th low was the completion of its decline and it's been in a correction of the decline since then. For followers of EW counts, I have a double zigzag for the bounce, which consists of two a-b-c's separated by an x-wave. The second a-b-c is the move up from August 12th and the c-wave would be 162% of the a-wave at 16991. Using the August 6th low as the completion of the decline raises the 78.6% retracement of the decline to 16985. Again, close correlation at this level means it could be trouble for the bulls. Between the daily and 60-min patterns we have a potential resistance zone at roughly 16970-16992. Today's high was 16994.89 but it closed at 16979. The DOW has been hugging the top of its up-channel from the August 7th low, which is usually an indication it's in its final leg and the breakdown, when it happens, is usually quick.

Dow Industrials, INDU, 60-min chart

The tech indexes have made new highs, unconfirmed so far by the other indexes. At the moment we're left to wonder if the techs will drag the other indexes higher (SPX being the closest to doing so) or if instead we'll have a repeat of the October 2007 high where the techs made new highs at the end of October after the blue chips topped out on October 11th. The bearish divergence at the current high vs. the July high, as can be seen on the NDX daily chart below, suggests the wave count on the chart is correct. The leg up from August 7th fits well as the 5th wave in the rally from April and it equals the 1st wave at 4044.29 and that was achieved with today's high at 4046.97 before dropping a little into the close, at 4040.70. This level also coincides with the broken uptrend line from June 2013 - February 2014 (an internal trend line that was first broken in April) and the trend line along the highs from March-July. There's good correlation here for a top of significance.

Nasdaq-100, NDX, Daily chart

Key Levels for NDX:
- bullish above 4050
- bearish below 3950

The RUT's weekly chart is shown below to point out the importance of its August low as well -- like SPX, it bounced off its longer-term uptrend line but this one is from March 2009 - October 2011 (log scale). This is the line that defines the bull market since the 2009 low and a break of it would be a strong signal that the bull market has completed and the next bear market has started, especially since the wave count looks complete at its July 1st high. The trend line is still holding and therefore trend followers rightly suggest staying long but a drop below its August 1st low at 1107 would be confirmation of a trendline break (as well as its 50-week MA), in which case the trend will have reached the "bend at the end." Yesterday it was starting to telegraph greater weakness than the other indexes and that was further amplified today.

Russell-2000, RUT, Weekly chart

On the RUT's daily chart below I've added the uptrend line from October 2011 - November 2012, which is a little lower and currently near 1109. I have a key level to the downside at 1127 since that would be a break below the August 12th low at 1129 and the 2009-2011 uptrend line. That would be a good indication the bounce pattern completed and the next leg down is in progress. As I mentioned before, confirmation of a breakdown doesn't come until the RUT drops below its August 1st low at 1107.

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- bullish above 1173
- bearish below 1127

Watching the tech indexes head higher this month, I've been curious why the semiconductors haven't been keeping up. With semiconductors in just about every product used today it's a very good economic indicator. If the techs were doing well, so too should the semis. But they haven't kept up and the SOX only today got above its 62% retracement of its decline from July. This is more bearish non-confirmation for the new highs for tech indexes. As can be seen on its weekly chart below, it's been cycling around the 38% retracement of its 2000-2008 decline, which is at 624. The August 7th low was near 598 and today's high was 636. The SOX is still holding inside its parallel up-channel from November 2012, the bottom of which is now near 620, so the uptrend is holding and it might make another stab at the price projection at 656.57. This is the projection for two equal legs up for an A-B-C bounce off the 2008 low and was just missed with the July 16th high at 652. But at the moment I'm thinking the high is in place and the bounce off the August 7th low is a correction to the 1st wave down.

Semiconductor index, SOX, Weekly chart

The banking index, BKX, made a lower high in July vs. its high in March and so far another lower high in August vs. its July high. That defines a downtrend but so far it's not clear what the longer-term pattern is telling us. As drawn on its daily chart below, we could be getting a bullish sideways triangle continuation pattern (the rally into it suggests it's a bullish pattern). Needless to say, this should make bears uncomfortable since a rally in the banks would surely be good for the other indexes as well. The bearish interpretation of the pattern is that it's not a triangle but instead a 1-2, 1-2 wave count to the downside and the next leg down will be a strong 3rd of a 3rd wave and then stair-step lower after that. A break below the triangle would leave a failed bullish pattern and failed patterns tend to fail hard. The bulls want to see a break above the July 3rd high at 72.55. If it is a bullish sideways triangle we'll see price consolidate inside it until at least October before it breaks out to the upside so we've got plenty of time to evaluate its bullish potential.

KBW Bank index, BKX, Daily chart

At its July 23rd high the TRAN did a little throw-over above its trend line along the highs from April 2010 - July 2011 and then declined sharply after that, leaving a head-fake breakout attempt. Now it looks like it wants to at least back-test that trend line again, currently near 8494, which is close to its July 23rd high at 8515. The closing highs around that date were near 8468 and a back-test of this high and the trend line could be too much to break through in an overbought market.

Transportation Index, TRAN, Daily chart

Yesterday we got some good news from the home-building sector with the better-than-expected new starts and permits. And the home builders have enjoyed a strong rally off the August 7th low. As can be seen on the daily chart below, the DJ US Home Construction index (DJUSHB) has made it back up to its 50-dma near 483 and only slightly higher is its broken uptrend line from August-September 2013, near 487. So we've got a setup here for a reversal in the home construction stocks.

DJ US Home Construction index, DJUSHB, Daily chart

The strong home building that was reported yesterday might be a bit of a "build it and they will come" hope and since the chart above suggests we could see a sharp reversal of the high bounce this month I'm wondering if the hope will soon turn to disappointment. The idea of building it with the hope "they" will come hasn't worked too well in China as entire cities remain unoccupied. The chart below shows the steady decline in homeownership rates since 1995 and the decline since 2005 is not encouraging for home owners and builders. Much of the decline in homeownership rates has to do with many Americans opting to rent instead of buy (some by choice, others having been forced into it). Ownership rates have returned to the level last seen in Q3, 1995. Like China, we could end up with a lot of inventory but not enough demand, which will of course depress prices (something I expect to see anyway). I see a fundamental and technical link here that does not bode well for the prices of home construction stocks nor for home prices.

Quarterly Homeownership rates, 1995-July 2014, chart courtesy BusinessInsider.com

The U.S. Dollar has confirmed its breakout from the trading range it was in since October 2013 by firmly breaking above 81.50 this week. It might pull back and test 81.50 but it now looks good for at least a run up to the downtrend line from June 2010 - July 2013, currently near 83.40. I think it will head higher into the end of the year but we'll first have to see how it does with the downtrend line.

U.S. Dollar contract, DX, Weekly chart

Gold is acting weak (the dollar's rally is not helping) and I'm wondering if it will break down from here or after a bump higher. I've been showing an expectation for a bump up to the top of its sideways triangle that has formed since the June 2013 low, which is currently near 1358, before heading lower but a drop below its June low at 1240 would confirm the next leg down is already in progress. One indicator that tells me gold is going to decline from here is the fact that I've been emailed offers in the past week to buy China 1/10-oz gold coins at spot price. This tells me they're trying to offload inventory and it's a good sign prices are heading lower. That's said somewhat tongue-in-cheek but there's probably an element of truth in it.

Gold continuous contract, GC, Weekly chart

I thought oil would hold its uptrend line from June 2012 but it has now been decisively broken with more than a head-fake break. This suggests we'll likely see a test of the January low at 91.24 sooner rather than later. That should be good for a bounce but the pattern has turned bearish for the longer term (sooner than I expected).

Oil continuous contract, CL, Daily chart

We have a couple of reports after the opening bell tomorrow that could move the market. Existing home sales will be an important message following the improved housing starts and building permits. The Philly Fed and Leading indicators will give us some more data points about the economy.

Economic reports and Summary

This week has been bullish in price but bearish in market breadth and momentum, which is usually not a good combination when it comes to the longevity of the rally. Volume picked up significantly with the selling in July and down to the August low but it's been drying up as the rally has progressed. That by itself is not a rally killer; all the rally needs is for the sellers to stay away. Bears are very discouraged and bullish sentiment is again high, just as I had said would happen before the rally off the August 7th low got started. The pieces are now in place for the bulls to get sucker punched and dash their hopes and dreams for a higher stock market. We could still get higher prices but there are a lot of cracks in the dyke and not enough fingers to plug the leaks. And just in time, the central banks are causing some waves that are going to put even more pressure on the dams holding back the water. 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

The Correction Appears To Be Over

by James Brown

Click here to email James Brown


NEW DIRECTIONAL CALL PLAYS

Schlumberger Limited - SLB - close: 109.85 change: +0.43

Stop Loss: 107.45
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 5.5 million
Entry on August -- at $---.--
Listed on August 20, 2014
Time Frame: 8 to 12 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
Consistent earnings growth is what investors like to see. SLB has done it eleven quarters in a row. The company is considered best in breed for the oil services industry. This past weekend Barron's ran a story on SLB and suggested the stock has +50% upside (or more) from current levels. That's because SLB has made several acquisitions in North America and is now a major player in the U.S. hydraulic fracking boom.

According to the company's website, "Schlumberger is the world's leading supplier of technology, integrated project management and information solutions to customers working in the oil and gas industry worldwide. Employing approximately 126,000 people representing over 140 nationalities and working in more than 85 countries, Schlumberger provides the industry's widest range of products and services from exploration through production."

As mentioned above SLB has beaten Wall Street's bottom line earnings estimates eleven quarters in a row. Their most recent earnings report was July 17th. Analysts were expecting a profit of $1.35 a share on revenues of $11.95 billion. The company reported a profit of $1.37 a share, up +19% from a year ago, with revenues up +7.8% to $12.05 billion for the quarter.

Management noted margin improvement. SLB said every geographic area saw growth. On the conference call SLB's CEO said, "Our second quarter results were strong and fully in line with our expectations as international activity rebounded in Russia, Norway and Australia and North American activity grew in both offshore in the U.S. Gulf of Mexico and on land in spite of the Canadian spring breakup."

Looking ahead the company issued a mixed outlook. Management said, "Turning our focus back to the remaining part of 2014, we continue to see a relatively constant mix of headwinds and tailwinds in the global economy and in our industry, which leads us to maintain our already established outlook for the year. The slow and steady recovery in the global economy is continuing and the global oil market remains relatively tight with a solid demand outlook, continued supply uncertainty related to geopolitics and with Brent prices holding steady above $100 per barrel, which should encourage oil directed investments in both the North American and international markets."

Their relatively cautious outlook and falling oil prices in the last several weeks have sparked some profit taking in SLB's stock price. The pullback could be a significant entry point. Long-term SLB is forecasting almost +20% earnings (compound annual growth rate) through 2017.

Wall Street has been very bullish the last couple of months. Several firms have upgraded their price targets on SLB with a few recent upgrades coming in at $132, $138, $140 and $150 a share for SLB.

SLB did make headlines earlier this month regarding Russia. The U.S. and the EU have leveled sanctions against Russia. This is impacting international companies like SLB who do business in Russia and with Russian companies. Fortunately, SLB estimates that any impact from the sanctions will be limited. Management expects a decline of 3 cents per share due to the sanctions. Wall Street hates uncertainty so having SLB actually come out and offer some guidance on the sanctions impact is bullish.

Another potential challenge could be Iraq. SLB does a lot of business in Iraq but most of the oil production is in southern Iraq. Right now the hot zones with fighting between ISIS, the Iraq military and the Kurds, are all in the northern half of Iraq. As long as the violence stays in the northern half of Iraq then the Islamic State terrorists are unlikely to impact SLB's operations in the country.

Shares of SLB hit all-time highs in late June. Since then the stock experienced a six-week correction from $118 to $105. That's a -11% pullback. The stock has begun to bounce and looks poised to break through resistance near $110. Tonight we are suggesting a trigger at $110.55. More conservative investors may want to wait for SLB to rally past its 50-dma before initiating positions (50-dma is currently at $111.30).

Trigger @ $110.50

- Suggested Positions -

Buy the NOV $115 call (SLB141122C115) current ask $1.98

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

Annotated Chart:

Weekly Chart:



In Play Updates and Reviews

Nearing Resistance

by James Brown

Click here to email James Brown

Editor's Note:

The NASDAQ broke out past resistance this week. Can the S&P 500 do the same? The big cap S&P 500 index is nearing resistance at its 2014 and all-time highs.

If you think the market might retreat from this area then consider raising your stops or take some money off the table.


Current Portfolio:


CALL Play Updates

BioMarin Pharmaceutical Inc. - BMRN - close: 70.66 change: +1.56

Stop Loss: 64.75
Target(s): To Be Determined
Current Option Gain/Loss: +52.9%
Average Daily Volume = 1.26 million
Entry on August 14 at $66.55
Listed on August 11, 2014
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
08/20/14: BMRN displayed new relative strength on Wednesday with a +2.25% gain. The stock has also closed above what could be round-number resistance at $70.00.

Tonight we'll raise the stop loss to $64.75.

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.

- Suggested Positions -

Long Oct $70 call (BMRN141018C70) entry $2.55*

08/20/14 new stop @ 64.75
08/14/14 triggered @ 66.55
*option entry price is an estimate since the option did not trade at the time our play was opened.
Option Format: symbol-year-month-day-call-strike


Concur Technologies - CNQR - close: 100.62 change: +0.63

Stop Loss: 96.90
Target(s): To Be Determined
Current Option Gain/Loss: -10.8%
Average Daily Volume = 576 thousand
Entry on August 19 at $100.50
Listed on August 16, 2014
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
08/20/14: The rally in CNQR stalled a bit today with shares churning sideways. On a positive note the stock did bounce twice in the $99.75-100.00 zone.

If you're worried about a dip look for support near $98.00.

Earlier Comments: August 16, 2014:
CNQR is in the technology sector. The company provides travel and expensive management solutions. The company was founded back in 1993. Their focus is helping companies control travel costs. The business has been growing over 23,000 customers and over 25 million users.

The company press release describes Concur as "the leading provider of spend management solutions and services in the world, helping companies of all sizes transform the way they manage spend so they can focus on what matters most. Through Concur's open platform, the entire travel and expense ecosystem of customers, suppliers, and developers can access and extend Concur's T&E cloud. Concur's systems adapt to individual employee preferences and scale to meet the needs of companies from small to large."

There is no denying that it has been a rocky year for CNQR investors. The stock struggled with resistance near $130.00 for over a month earlier this year. When the momentum names corrected lower in March shares of CNQR were crushed. The stock produced a two-month retreat down to $75.00.

Meanwhile earnings continued to improve. When CNQR reported earnings on April 29th they beat estimates by six cents and guided higher for the second quarter. Their most recent earnings report was August 4th. Wall Street expected a profit of $0.16 on revenues of $175.1 million. CNQR delivered a profit of $0.25 with revenues rising +28.6% to $178.4 million. Management also raised their 2014 guidance.

Stocks analysts are starting to notice and a few of them have upgraded their price targets on CNQR into the $110-115 region. If shares of CNQR can breakout past resistance near $100 and its 200-dma then it might sprint towards $110. That's because the stock has a significant chunk of short interest.

The most recent data listed short interest at 12.2% of the relatively small 55.5 million share float. Since the $100 mark is significant resistance a breakout could definitely spark some short covering. The point & figure chart is already bullish and projecting at $108 target.

Tonight we are suggesting a trigger to buy calls at $100.50.

- Suggested Positions -

Long NOV $105 call (CNQR141122C105) entry $5.05*

08/19/14 triggered @ 100.50
*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


CVS Caremark Corp. - CVS - close: 79.61 change: +0.08

Stop Loss: 77.25
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 4.1 million
Entry on August -- at $---.--
Listed on August 19, 2014
Time Frame: 8 to 12 weeks
New Positions: Yes, see below

Comments:
08/20/14: CVS delivered a quiet session. Shares only drifted higher and eked out a gain today. The stock remains under potential resistance at the $80.00 mark. Our suggested entry point is $80.25.

Earlier Comments: August 19, 2014:
Where can a company lose $2 billion in annual sales, voluntarily, and be rewarded for it? Evidently the answer is CVS Caremark Corp. Back in February 2014 the company announced they would stop selling cigarettes in all of their 7,700 stores by October this year. That accounted for $2 billion in sales a year. Management felt selling cigarettes didn't line up with the company's mission - to help people with their health.

It makes sense. About 480,000 people die from smoking every year in the United States. 16 million people already have at least one disease from smoking. Investors may have been concerned initially but CVS' most recent earnings report should remove any worries. CVS is focusing on building out their MinuteClinic busniess, their specialty pharmacy services, and capturing their share of the millions of new healthcare members through Obamacare. It seems to be working. CVS' MinuteClinic sees four million visitors a year. The company has 64 million pharmacy benefit plan members.

According to a company press release, "CVS Caremark is dedicated to helping people on their path to better health as the largest integrated pharmacy company in the United States. Through the Company's more than 7,700 retail pharmacy stores; its leading pharmacy benefit manager serving nearly 65 million plan members; and its retail health clinic system, the largest in the nation with more than 860 MinuteClinic locations, it is a market leader in mail order, retail and specialty pharmacy, retail clinics, and Medicare Part D Prescription Drug Plans. As a pharmacy innovation company, CVS Caremark continually strives to improve health and lower costs by developing new approaches such as its unique Pharmacy Advisor program that helps people with chronic diseases such as diabetes obtain and stay on their medications.

CVS is in a good position if you consider the demographics of the U.S. Right now there are 10,000 people a day turning 65 years old. An older population needs more healthcare services and more prescriptions. CVS plans to capitalize on this growing trend.

The company's most recent earnings report was August 5th. Analysts were expecting a profit of $1.10 a share on revenues of $33.52 billion. CVS reported earnings of $1.13 a share. That beat estimates and represents +16.5% growth from a year ago. Revenues were up +11% to $34.6 billion. Same-store sales in the second quarter were +3.3%, which beat rival Walgreen's (WAG) +2.2% growth. CVS management sees this bullish momentum continuing and raised their 2014 earnings guidance.

In their earnings press release CVS was pretty optimistic:

President and Chief Executive Officer Larry Merlo stated, "I'm extremely pleased with our strong performance this quarter. With Adjusted EPS increasing 16.5%, we came in two cents above the high end of our expectations. This was fueled by solid results across the enterprise, as both the PBM and retail businesses exceeded revenue expectations while delivering strong gross margins. Operating profit in the PBM increased 30%, exceeding expectations, while operating profit in the retail business grew 6.5%, at the high end of our expectations." Mr. Merlo continued, "Additionally, we have generated significant free cash flow through the first half of this year. Between dividends and share repurchases, we have returned $2.6 billion to our shareholders year-to-date, and remain on track to achieve our goal of returning more than $5 billion in 2014."

Following this earnings report Wall Street applauded. Several firms updated their outlook on the stock. Many were raising their CVS price targets in the $85, $86 and $88 range. The point & figure chart is a lot more optimistic and currently forecasting a $102.00 target.

Currently shares of CVS are hovering just below resistance at $80.00. We are suggesting a trigger to buy calls at $80.25.

Trigger @ $80.25

- Suggested Positions -

Buy the NOV $80 call (CVS141122C80) current ask $2.09

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


Expedia Inc. - EXPE - close: 86.15 change: -0.19

Stop Loss: 81.80
Target(s): To Be Determined
Current Option Gain/Loss: - 9.0%
Average Daily Volume = 2.3 million
Entry on August 18 at $86.25
Listed on August 16, 2014
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
08/20/14: EXPE has seen its rally pause the last couple of sessions. Shares are hovering near prior resistance at the $86.00 level. Nimble traders may want to try and buy calls on a dip near the simple 10-dma (currently approaching $85.00).

Earlier Comments: August 16, 2014:
EXPE is in the services sector. The company is in the super competitive online travel industry with rivals like Priceline.com (PCLN) and Orbitz Worldwide (OWW).

EXPE is developing a serious trend of beating analysts' estimates with strong profit and revenue growth. EXPE last reported earnings on July 31st. Analysts were expecting a profit of $0.75 a share on revenues of $1.44 billion. EXPE blew those numbers away with a profit of $1.03 a share. Revenues soared +24.0% to $1.49 billion. That's up from $1.2 billion the prior quarter. EXPE has now delivered double-digit year over year revenue growth for six quarters in a row.

EXPE's bookings continue to soar. Gross bookings were up +29%. Domestic gross bookings were up +35% and international gross bookings rose +21%. Both hotel revenues and air travel revenues were up more than +20% each.

Last time we traded EXPE we noted that Billionaire hedge fund manager David Tepper's Appaloosa Management is also bullish on EXPE. The latest 13F filing showed that Appaloosa had initiated a new stake in EXPE in the first quarter of 2014. In the second quarter Appaloosa added another 201,000 shares of EXPE.

The stock popped on its earnings results but have since spent the last two weeks digesting gains in a sideways consolidation. Now it looks like EXPE is poised to breakout and could make a run towards the $95-$100 area. The point & figure chart is bullish and forecasting at $105 target.

Tonight we are suggesting a trigger to buy calls at $86.25.

- Suggested Positions -

Long NOV $90 call (EXPE141122C90) entry $4.40

08/18/14 triggered @ 86.25
Option Format: symbol-year-month-day-call-strike


Gilead Sciences, Inc. - GILD - close: 100.79 change: -0.49

Stop Loss: 93.45
Target(s): To Be Determined
Current Option Gain/Loss: +110.8%
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:
08/20/14: GILD spiked to a new record high above $102.00 intraday before reversing. The stock underperformed the major indices and the biotech index with a -0.4% loss. The stock has been short-term overbought and due for a dip. This could be the beginning of a pullback.

Readers may want to consider taking some money off the table here. I am not suggesting new positions at this time.

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*

08/16/14 new stop @ 93.45
Investors will want to seriously consider taking profits now with GILD testing potential resistance at the $100.00 mark.
08/14/14 new stop @ 89.95
Investors may want to consider taking money off the table as GILD nears the $99-100 zone.
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: 35.28 change: -0.43

Stop Loss: 31.85
Target(s): To Be Determined
Current Option Gain/Loss: -14.6%
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:
08/20/14: ISIS is still retreating from its recent high near $37.00. Thus far traders have been buying dips near $35.00. Unfortunately today's close is suggesting ISIS is about to breakdown under $35 soon. If that occurs we can look for potential support in the $33-34 zone. The 50-dma is near $33.

I would hesitate to launch new positions.

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: 151.60 change: +0.79

Stop Loss: 144.75
Target(s): To Be Determined
Current Option Gain/Loss: +32.6%
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:
08/20/14: The transportation stocks continue to show relative strength and the IYT added +0.5% on Wednesday.

This ETF is nearing what could be resistance at its July highs near $152.35. After a sharp bounce from its August low I would expect a pullback once the IYT tags its old high.

Tonight we'll move the stop loss to $144.75. More conservative investors may want to raise their stop higher. 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

08/20/14 new stop @ 144.75
08/11/14 trade begins. IYT gaps higher at $146.03
Option Format: symbol-year-month-day-call-strike


LyondellBasell Industries - LYB - close: 112.17 change: -0.03

Stop Loss: 107.40
Target(s): To Be Determined
Current Option Gain/Loss: +10.0%
Average Daily Volume = 2.5 million
Entry on August 15 at $110.50
Listed on August 04, 2014
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
08/20/14: LYB managed to tag new highs on an intraday basis but the stock spent most of the session churning sideways inside the $112.00-112.50 zone. Investors may want to start raising their stop loss.

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.

- Suggested Positions -

Long DEC $115 call (LYB141220C115) entry $2.50*

08/15/14 triggered @ 110.50
*option entry price is an estimate since the option did not trade at the time our play was opened.
08/14/14 adjust the stop loss to $107.40 (trade not open yet)
08/14/14 LYB almost hit our trigger but failed at $110.49
Option Format: symbol-year-month-day-call-strike


Palo Alto Networks, Inc. - PANW - close: 84.97 change: -0.42

Stop Loss: 79.90
Target(s): To Be Determined
Current Option Gain/Loss: +28.1%
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:
08/20/14: PANW struggled to keep pace with the broader market today. The stock bounced twice near $84.00, which isn't surprising since $84 was prior resistance.

More conservative traders may want to raise their stop loss. I am not suggesting new positions at this time.

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


U.S. Silica Holdings, Inc. - SLCA - close: 63.32 change: +1.19

Stop Loss: 57.95
Target(s): To Be Determined
Current Option Gain/Loss: +7.1%
Average Daily Volume = 1.42 million
Entry on August 19 at $62.05
Listed on August 13, 2014
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
08/20/14: SLCA displayed relative strength today. The stock outperformed the market with a +1.9% gain. This is also a new all-time high and confirms the breakout past recent resistance near $62.00.

Earlier Comments: August 13, 2014:
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.

- Suggested Positions -

Long DEC $65 call (SLCA141220C65) entry $4.20*

08/19/14 triggered @ 62.05
*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 Rentals, Inc. - URI - close: 116.70 change: +1.29

Stop Loss: 109.45
Target(s): To Be Determined
Current Option Gain/Loss: -1.7%
Average Daily Volume = 1.0 million
Entry on August 19 at $115.25
Listed on August 18, 2014
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
08/20/14: The rally in URI continues with a +1.1% gain and a new all-time closing high.

Earlier Comments: August 18, 2014:
URI is a company that is gaining market share. Traditionally equipment rental has been a very fragmented industry with a lot of mom and pop stores. URI has decided that being the biggest offers a better selection to their clients. Today URI is the biggest equipment rental company in the world.

Twenty years ago commercial construction clients only accounted for about 15% of the equipment rental market. Today that number is closer to 50%. The last few years have seen a strong trend of construction companies choosing to rent equipment instead of buy new equipment due to an uncertain economic outlook.

According to URI's website they were founded in 1997 and have grown into a network of 832 rental locations in 49 states and 10 Canadian provinces. Their rental fleet includes 3,100 classes of equipment.

Earnings are improving. URI's most recent earnings report was July 16th. Wall Street was looking for a profit of $1.50 a share on revenues of $1.36 billion. URI delivered $1.65 a share with revenues hitting $1.399 billion. URI's earnings results were up +47% from a year ago. Margins hit a second quarter record at 47.4%. URI management then raised their 2014 guidance.

In URI's earnings press release their CEO offered a bullish outlook:

Michael Kneeland, chief executive officer of United Rentals, said, "Our strong performance in the quarter reflects significantly more equipment on rent at better margins than a year ago, resulting in a new high water mark for second quarter EBITDA margin. The rebound in non-residential construction is continuing to drive up demand, particularly in the energy and commercial sectors. Given the vigorous activity we're seeing, and the benefit of secular penetration, we've raised our full year outlook - and we concur with the forecasts that show multiple years of healthy industry growth beyond 2014."

URI said their rental revenue was up +16.8% for the quarter. They're also see super growth in their specialty segment. Their trench safety rentals were up +21%. Their power and HVAC rentals were up +54%. URI purchased National Pump on April 1st this year. Now they've renamed it United Rentals Pump Solutions and they're using it as an opportunity to cross sell pumps to their broader customer base.

URI is also on track with their stock buyback program. In October 2013 they announced at $500 million repurchase program that's expected to be completed by April 2015. Thus far URI has bought back $228 million in common stock this year ($185 million of that was in the second quarter).

Technically the post-earnings depression for URI is over. Traders bought the dip near its long-term up trend of higher lows. Now URI is testing resistance at its all-time highs and resistance at the $115.00 level.

We are suggesting a trigger to buy calls at $115.25.

- Suggested Positions -

Long DEC $120 call (URI141220C120) entry $5.60*

08/19/14 triggered @ 115.25
*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




PUT Play Updates


Currently we do not have any active put trades.