Option Investor
Newsletter

Daily Newsletter, Monday, 7/20/2015

Table of Contents

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

Market Wrap

A Rally That's Running Out of Steam

by Keene Little

Click here to email Keene Little
Title: Teaser: Today's rally was showing continuing weakness as the advance-decline line and volume showed another effort to rally on the backs of fewer stocks. With indexes pushing up against resistance and showing waning momentum it's looking like we should expect at least a larger pullback.

Wednesday's Market Stats

As can be seen in the table above, decliners finished 2:1 over advancers, the same as Friday, and even when the indexes were rallying (except for the RUT both days) it's another warning sign for bulls to heed. This is a strong warning sign that the rally is on its last legs as the rally is on the backs of fewer and fewer stocks following a rally that has gone too far too fast.

The next two days will be important to see if we have a repeating pattern in progress. In early December there was a sharp selloff and then large rally days with high volume. That was then followed by five more days to the upside but with waning momentum and volume. The same pattern calls for two consecutive down days, which would confirm a top is in place (for at least a larger pullback).

Another interesting timing aspect shows the market has topped between the 20th – 27th in each of the past five months without exception. We are of course now into that same timing window. With waning momentum, lousy market internals for what looks like a strong rally, the non-participation by the small caps and indexes at or approaching previous highs and trendline resistance, it would appear the bears may get their turn soon. Add in a low VIX reading and it makes sense to at least buy some downside protection (puts).

IBM reported after the bell and investors were not happy with the report (IBM missed on revenue). With its pre-earnings run there could be some disappointment tomorrow. The same thing typically happens to AAPL, which reports after the bell tomorrow. Following IBM's negative reaction the futures don't seem to be phased by it and that could be in anticipation for a stronger earnings report from AAPL.

Earnings so far have come in better than expectations but the expectations game is hardly an accurate picture. While 70% have reported earnings above analyst expectations, which is better than the average 63% beat rate since 1994, earnings are expected to show a decline of -2.1% for the quarter. This would be a minor improvement to the July 1st expectations of -3%. But on the flip side, typically we've seen 61% of earnings beat expectations since 2002 but so far that number is 55%. And expectations for sales by U.S. companies are expected to see their worst decline in nearly six years for Q2. The U.S. dollar is getting the blame, even though the dollar had been high since the end of 2014.

There was very little news from overseas (except for Iran balking at the nuclear agreement) and no major economic reports and futures were up marginally from Sunday night. The indexes started off positive but were unable to hold onto their small gains late in the day. The RUT was again relatively weak while the others closed only marginally in the green.

NDX has been stronger than the other indexes and I'll start tonight's review with a top-down look at its charts. The weekly chart below shows its rally since August-September 2014 has repeatedly seen highs along the top of a parallel up-channel for its rally from 2010. At the same time there is a long-term bearish divergence since the high in November 2014. The top of the channel is currently near 4760, not much below its March 2000 high at 4816. That's the upside potential if the bulls can keep this rally alive. But a trend line along the highs from November 2014 - April 2015, which can more easily be seen on the daily chart further below, is where NDX has now made it up to. There might be a little more upside potential but I don't think that little bit of potential is worth the downside risk.

Nasdaq-100, NDX, Weekly chart

The NDX rally has been mostly due to a couple of stocks, such as NFLX and GOOG last week. But at the moment it's looking a bit like a blow-off top following its July 7th low. Reaching its trend line along the highs from November 2014 – April 2015 in front of earnings reports this week will either gap NDX up and over resistance or it's forming a top here. RSI is now as overbought as it was at the end of February so it's an interesting setup for the bears. One could argue the rally has gone too far too fast and getting up and over resistance could be a challenge. But a rally above 4700 that stays above that level (such as using the trend line for support on a back-test) would be more bullish. For those who are interested in shorting the NDX (QQQ) you at least have a tight stop (one way to be sure an intraday high doesn't spike you out is to use an end-of-day stop, but that's obviously riskier, which can be controlled by position size.

Nasdaq-100, NDX, Daily chart

Key Levels for NDX:
- bullish above 4700
- bearish below 4560

The 60-min chart shows the steep climb since the July 9th low, rallying about 350 points in 8 trading days (about 44 points a day). It's obviously bullish until proven otherwise but a break of its uptrend line from July 9th, near 4660, would be the first sign of trouble for the bulls.

Nasdaq-100, NDX, 60-min chart

IBM's after-hours earnings report was not received well (they missed on revenue) and their price dropped about $9 (-5%) after the bell. The stock recovered some before it closed its after-hours session but it's going to be depressing for NDX (and the broader market) if IBM sells off tomorrow. AAPL will be reporting its earnings after the bell tomorrow and considering where price is currently I'd say bulls need to see nothing but a positive response. It obviously will also have a large impact on what NDX does. AAPL is currently back up to its February 23rd high at 133 (with today's high at 132.97), which was also tested in April and May. Only slightly higher, near 134.25, it would back-test its broken uptrend line from April 2014 - January 2015, which was broken in mid-June and back-tested on June 24th before selling off down near its 200-dma on July 9th. The strong rally since then has it back up to resistance and it could be tough to break through. Will the earnings be good enough and will that propel both it and NDX up over resistance? It will make for an interesting bet Tuesday before the close.

Apple Inc., AAPL, Daily chart

The daily chart of SPX shows Friday's doji at its downtrend line from May-June, near 2125, and today's spinning top doji just above the line. A decline on Tuesday would leave a reversal candlestick pattern but the bears need to see a drop below 2118 to confirm a likely top is in place. A pullback less than that could be just a correction to the rally, to be followed by another leg up to the 2150-2160 area before topping out.

S&P 500, SPX, Daily chart

Key Levels for SPX:
- bullish above 2135
- bearish below 2118

The 60-min chart is showing bearish divergence on MACD since July 13th but if the broken downtrend line from May-June acts as support for a pullback it will remain bullish. A drop back below the line, near 2125, would be a bearish heads up (leaving a head-fake breakout attempt) but as mentioned above, the bears need a break below 2118 to more convincingly tell us a top of significance is likely in place.

S&P 500, SPX, 60-min chart

The DOW also poked above its downtrend line from May-June and is holding above the line after back-testing it today. That's bullish if it continues to hold. Bears need to see a firm break of its 50-dma and then below a price projection at 17975 (for a possible a-b-c pullback from last Thursday's high). As long as it holds above that level there remains the potential for a rally to price-level resistance near 18290, which includes its March and May highs.

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- bullish above 18,290
- bearish below 17,975

The RUT has been relatively weak for the past few days and that's been a bearish warning, especially since the RUT has been a leader in reversals. On Friday it held support at its 20-dma but broke it today. It held its 50-dma at today's low and therefore there's still the potential for another rally leg to at least test its April high near 1279 and close its June 29th gap down at 1279.79. Another run up to its broken uptrend line from October 2014 - May 2015, near 1290 by the end of the month, is the bullish potential. But a drop lower tomorrow would be back into its gap up on July 13th, which would be closed at 1251.81. Below its July 7th high near 1249 would be a strong indication that the July 7th low near 1226 will break.

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- bullish above 1280
- bearish below 1249

The banking index, BKX, is not quite as stretched as NDX but it too has reached trendline resistance near 79.80 (today's high), which is the trend line along its highs from June-December 2014. Other than minor pokes above the line last month it has held as resistance and that's what bears want to see happen again. A blow-off move for BKX could take it up to the top of a parallel up-channel from January, which will be near 82 at the end of this month. But a test of the trend line, as well as its previous highs at 79.85 on June 23rd and last Thursday's high at 79.84, could be tough resistance after its strong rally from July 8th. It could be forming a double top, especially since it's showing bearish divergence against the June high.

KBW Bank index, BKX, Daily chart

On Friday the TRAN made it up to its downtrend line from April and the rejection from there looks bearish. If it makes a little higher we could see it make it up to the top of a parallel down-channel, near 8430, but it's not the way I'd trade the trannies (such as IYT) here. Another leg down, for a 5th wave in the move down from February, targets the 7800 area in early August.

Transportation Index, TRAN, Daily chart

The weekly pattern I've been tracking for gold has for a long time suggested it will drop below $1000. But the one bullish setup that I see is this morning's poke below the bottom of a shallow descending wedge pattern, the bottom of which is the trend line along the lows from December 2013 – November 2014 and is currently near 1090. This is also the 50% retracement of the 2001-2011 rally and should therefore be strong support. It's possible this morning's bounce off the 1080 low will lead to a much stronger rally back up to the 1400 area before starting back down later this year/next year (dashed lines on the weekly chart). But the bearish wave count suggests we'll see a continuation lower to at least 1000 (price-level support from 2008-2009) and likely down to the 890 area by the end of the year (62% retracement of the 2001-2011 rally).

Gold continuous contract, GC, Weekly chart

Commodities in general have been in decline for a long time but as suggested for gold, we could be nearing the point where we're going to see a big oversold bounce. Lining up with the chart pattern is a very bearish sentiment for commodities, as shown below. This chart by Sentix shows the CRY index vs. sentiment since 2004 with sentiment more bearish than it's been during the past 11+ years, including the commodities low in 2009, and that sets it up for a big reversal. So while I see lower lows for gold (and silver), I'd keep a tight stop on short positions in commodities in general.

Commodities Sentiment, 2004-July 2015, chart courtesy Sentix

Today there we no major economic reports and the same will be true tomorrow. On Wednesday we'll get some more housing data, but the breakdown in housing stocks (in spite of the broader market rally) and its longer-term pattern already tells us the futures is not bright). Now that Greece is behind us the market is paying more attention to earnings.

Economic reports and Summary

Conclusion

The market has been on a tear to the upside for the past two weeks, some of which was based on hope for improved earnings but mostly to relief over Greece not tearing the EU apart. The Iran agreement, which has not been signed off yet by Iran or U.S. Congress, might have been a contributing factor. At the very least it looks like the rally has gone too far too fast and looks to be a lot of short covering in there. The weakness of the rally, especially in the declining number of stocks participating in the rally, indicates strong resistance is likely to hold and that we should therefore be looking for a reversal soon. Playing the long side here seems far riskier than looking to play the short side. It might be good for just a multi-day pullback but we'll get a better sense of that once the pullback/decline begins.

Good luck and I'll be back with you on Thursday and hopefully a clearer idea for what we should expect into the end of the month.

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

Extremely Narrow Leadership

by James Brown

Click here to email James Brown


NEW DIRECTIONAL PUT PLAYS

PowerShares QQQ ETF - QQQ - close: 113.98 change: +0.39

Stop Loss: To Be Determined
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 27.5 million
Entry on July -- at $---.--
Listed on July 20, 2015
Time Frame: 4 to 6 weeks
New Positions: Yes, see below

Company Description

Trade Description:
Big cap technology stocks have been strong performers this year and that has boosted the NASDAQ-100 index ($NDX) to new all-time highs. The $NDX is also outperforming the broader market with a +10% gain year to date versus a +3.4% gain in the S&P 500 index. The long-term up trend for the $NDX is still intact and yet we are short-term bearish on the $NDX. It's move too far, too fast, and on very, very narrow leadership. One way for us to play the $NDX is options on the QQQ ETF that tracks the index.

The QQQ is one of the largest and most liquid exchange traded funds. This particular ETF tracks the NASDAQ-100 index, which includes 100 of the largest non-financial stocks on the NASDAQ (lots of technology stocks). AAPL, MSFT, AMZN, GOOG, GOOGL, FB, GILD, INTC, CMCSA, CSCO and AMGN are its top holdings. You can see a list of the top twenty five holdings here.

The lack of leadership in the NASDAQ-100 (and QQQ) has been exceptionally narrow. That's a bearish sign.

On Friday the QQQ surged to new highs even though three stocks declined for every two advancing stocks in the QQQ. Today there were two declining stocks for every one stock that advanced (on the NASDAQ composite). More than 50% of the NASDAQ-100 components are actually negative for the year. So how is the index (and the Qs) at a new record high? The answer is because the $NDX is a market-cap weighed index.

The rally in the QQQ has been fueled by just four stocks with huge market caps. Here are the four stocks driving the QQQ (and their July gains):

Google (GOOG/GOOGL) +29%
Amazon.com (AMZN) +11%
Facebook (FB) +10%
Apple (AAPL) +3%
Those are some impressive numbers in just the last three weeks.

Now consider their market cap and their impact on the QQQ. AAPL's weighting in the QQQs is 13.9%. GOOG is 4.3% while GOOGL is 3.75%. AMZN is 4.19% and FB is 3.9%. For the record Microsoft (MSFT) is 7.0% of the QQQ.

The NASDAQ-100 index has a market cap of $5.4 trillion. If we combine the market cap of AAPL, AMZN, FB, and GOOG they are worth $1.7 trillion. These four stocks are almost 31% of the $NDX market cap. So what happens to the QQQ when these four stocks start to see some profit taking after those big July gains?

Cable television business and stock market channel CNBC noted the above observations on air today. They also posted an article regarding this interesting situation on their website. You can read the CNBC article here.

CNBC also noted that the NASDAQ-100 index is more than three standard deviations above its simple 50-dma. That almost never happens. It's so rare it's only happened nine times in the last 35 years. While that is not a big sample size the $NDX was down the following week 8 out of 9 times.

There are no guarantees in the market. However, odds are good that the QQQ is due for a pullback that should happen soon. The lack of leadership driving the $NDX higher makes the rally very fragile.

There is one big caveat here. Apple (AAPL), the biggest component in the $NDX, is scheduled to report earnings on Tuesday evening, after the closing bell. AAPL tends to beat Wall Street's earnings estimates 90% of the time. Thus expectations tend to be pretty bullish for AAPL's results. If they disappoint it could have a significant negative impact on the QQQ. Since expectations are already bullish for AAPL's quarter they probably need to really blow the doors off and crush the estimate to move the QQQ. It's possible but it seems unlikely that AAPL will singlehandedly lift the QQQ on Wednesday.

We suspect the market could start to see some profit taking tomorrow. Therefore we are suggesting traders buy QQQ puts at the opening bell tomorrow morning (Tuesday, July 21st). If you're worried about AAPL's earnings you could wait until Wednesday morning to buy puts. That way you could hear the results and see how the markets is reacting to AAPL's numbers after hours and pre-market on Wednesday.

Please note we are not setting a stop loss for this trade yet. We'll add a stop in the Wednesday evening newsletter.

Buy puts at the opening bell (on July 21st)

- Suggested Positions -

Buy the SEP $112 PUT (QQQ150918P112) current ask $1.88
option price is a current quote and not a suggested entry price.

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

Daily Chart:



In Play Updates and Reviews

Stocks Inch Higher

by James Brown

Click here to email James Brown

Editor's Note:

After last week's sprint higher the major indices slowed down on Monday but still managed to end the day with a gain. Commodities were underperformers today with gold and oil hitting new relative lows.

Tonight we have added an exit target on the Facebook (FB) trade.

We have also updated stops on all of our put plays.


Current Portfolio:


CALL Play Updates

Advance Auto Parts Inc. - AAP - close: 168.69 change: -1.01

Stop Loss: 164.85
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 1.0 million
Entry on July -- at $---.--
Listed on July 18, 2015
Time Frame: Exit PRIOR to earnings on August 13th
New Positions: Yes, see below

Comments:
07/20/15: Monday was a quiet day for shares of AAP. The stock churned sideways inside the $168-170 zone. I don't see any changes from the weekend new play description. Our suggested entry point is $170.25.

Trade Description:
If you listen to financial media long enough you will eventually hear pundits talk about "bulletproof stocks". AAP just might be a bulletproof stock. The company has lowered its earnings guidance three quarters in a row and yet traders continue to buy the stock. Today AAP is hovering at all-time, record highs.

AAP is part of the services sector. According to the company, "Headquartered in Roanoke, Va., Advance Auto Parts, Inc., the largest automotive aftermarket parts provider in North America, serves both the professional installer and do-it-yourself customers. As of January 3, 2015, Advance operated 5,261 stores and 111 Worldpac branches and served approximately 1,325 independently owned Carquest branded stores in the United States, Puerto Rico, the U.S. Virgin Islands and Canada. Advance employs approximately 73,000 Team Members."

There seems to be a divergence in the U.S. We are half way through 2015 and new car sales are surging. Dealers have already sold more than 8.5 million vehicles and the industry is on pace to challenge the all-time record of 17.4 million autos in one year. Yet the age of the average car on the road continues to climb. Next time you're stuck in traffic and all you see is a river of cars, bear in mind that the average car is now 11.4 years old. It's forecasted to 11.7 years old by 2019. Americans are keeping their car longer and longer (because most can't afford a new car). That's really good news for car part sales.

I mentioned AAP's earnings guidance earlier. AAP has actually missed Wall Street's bottom line estimates the last two quarters in a row. They have lowered their guidance three quarters in a row. On May 21st AAP reported its Q1 results of $2.39 per share. Revenues were up +2.3% to $3.04 billion. They lowered their fiscal year 2015 earnings guidance from $8.35-8.55 per shares down to $8.10-8.30. Analysts were expecting $8.51. AAP seems to be having a few issues digesting its acquisition of General Parts International, which took place in 2014.

Normally when a company lowers guidance the stock gets crushed. Yet traders keep buying the dips in AAP. Looking at the AAP's recent announcements there is an knee-jerk reaction gap down in their stock price and then shares of AAP immediately rebound. It's happened multiple times. You have to like that kind of resilience. You could say AAP is almost bulletproof.

The stock has been trading off technical support as it climbed from its May 2015 lows. Last week's breakout past resistance near $165.00 is very bullish. The point & figure chart is forecasting at $193.00 target. Odds are AAP will rally up to its earnings report on August 13th. We want to exit prior to the announcement.

Trigger @ $170.25

- Suggested Positions -

Buy the AUG $175 CALL (AAP150821C175)

Entry disclaimer: To avoid an unfavorable entry point, we will not launch a new play if the stock gaps open more than $1.00 past our suggested entry point.

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


Adobe Systems Inc. - ADBE - close: 82.09 change: -0.01

Stop Loss: 78.85
Target(s): To Be Determined
Current Option Gain/Loss: -12.9%
Average Daily Volume = 2.64 million
Entry on July 16 at $82.65
Listed on July 14, 2015
Time Frame: Exit PRIOR to earnings in September
New Positions: see below

Comments:
07/20/15: ADBE saw a small spike lower at the opening bell and spent the rest of Monday's session drifting higher before closing virtually unchanged on the day. I don't see any changes from my prior comments.

If the market dips in the week ahead we might see ADBE trade near support at $80.00 and its 50-dma, which could be an alternative entry point if you are willing to be patient.

Trade Description: July 14, 2015:
ADBE appears to have successfully completed its transition from a traditional pay up front software sales model to a subscription based pay-as-you-go model for its industry leading creative software.

ADBE is in the technology sector. They are part of the software industry. According to the company, "Adobe is changing the world through digital experiences. Content built and optimized with Adobe products is everywhere you look — from websites, video games, and smartphones to televisions, tablets, and beyond. Adobe Creative Cloud software offers the most innovative tools for creating digital media, while Adobe Marketing Cloud delivers groundbreaking solutions for data-driven marketing. Our leadership in these two emerging categories, Digital Media and Digital Marketing, provides our customers with a real competitive advantage, positioning Adobe for continued growth well into the future. As one of the largest software companies in the world, Adobe achieved revenue of more than US$4 billion in 2013."

Looking at the last couple of earnings reports ADBE has beaten Wall Street's bottom line estimate. They reported their Q1 report on March 17th. Earnings were up +46% from a year ago to $0.44 per share. It was their best quarterly earnings growth in four years and above analysts' estimates. Revenues were up almost +11% to $1.11 billion.

During the first quarter they added 517,000 customers to their subscription service. While that was up +28% from a year ago it missed expectations. Jumping to the second quarter ADBE said they added +639,000 new subscribers, which was well above estimates for +575K.

The company announced their Q2 earnings on June 16th. Earnings were up +30% to $0.48 per share, which beat estimates. Revenues hit a record of $1.16 billion, which was in-line with expectations.

Shantanu Narayen, Adobe's president and CEO, commented on the quarter, "Strong execution against our Creative Cloud, Document Cloud and Marketing Cloud businesses drove record revenue. We are accelerating the pace of innovation in our Cloud offerings and are thrilled to be launching our best Creative Cloud release to date, which includes Adobe Stock - our new stock content service." ADBE's executive vice president and CFO, Mark Garrett, said, "With our business model transition largely behind us, the positive financial benefits are now reflected in our P&L. We are driving more profit, earnings per share, cash flow and deferred revenue and unbilled backlog."

Management did lower their Q3 and 2015 forecast on both the top and bottom line. Yet investors seemed to ignore this earnings warning because it was all due to foreign currency exchange headwinds. ADBE is expecting their Adobe Marketing Cloud sales to grow more than +20% year over year.

Mr. Narayen, CEO, mentioned their new Adobe Stock service. This is a multimedia marketplace where users can buy and sell images. Analysts think this could add a significant revenue boost by 2017 (up to $1 billion a year).

Multiple analysts have upgraded their price target on ADBE since its earnings report. The most recent was on July 6th where ADBE garnered a new price target at $103.00. Currently the point & figure chart is only forecasting at $92.00 target.

Shares of ADBE broke out past major resistance near $80.00 in mid June. Then the market reversed lower in the last several days of June and shares of ADBE sank back toward prior resistance and now new support in the $80.00 region. The intraday low was $78.94 on July 7th where ADBE bounced off technical support at its rising 50-dma.

Investors have started buying the dip again and this bounce from support near $80.00 is a bullish entry point. We are suggesting a trigger to buy calls at $82.50.

- Suggested Positions -

Long OCT $85 CALL (ADBE151016C85) entry $2.80

07/16/15 triggered @ $82.65 (gap open)
Option Format: symbol-year-month-day-call-strike


AMC Networks Inc. - AMCX - close: 85.64 change: -0.14

Stop Loss: 83.75
Target(s): To Be Determined
Current Option Gain/Loss: -40.6%
Average Daily Volume = 573 thousand
Entry on July 17 at $86.55
Listed on July 16, 2015
Time Frame: Exit PRIOR to earnings on August 6th
New Positions: see below

Comments:
07/20/15: AMCX also spent the day meandering sideways.

I would wait for a new rise to $86.60 before initiating new positions.

Trade Description: July 16, 2015:
AMC Networks is probably best known for hit TV shows like "Breaking Bad", "The Walking Dead", and "Mad Men". Their "Breaking Bad" and "Mad Men" series are over but AMCX is still knocking it out of the park with its content. Lately Wall Street lows content makers. Earlier this year Piper Jaffray describes AMCX as "one of the best content plays in the media space". AMCX solidified its position as one of the best studios by winning 28 Emmy award nominations for the 67th Annual Primetime Emmy Awards.

AMCX is in the services sector. According to the company "Dedicated to producing quality programming and content for more than 30 years, AMC Networks Inc. owns and operates several of the most popular and award-winning brands in cable television. AMC, IFC, SundanceTV, WE tv, and IFC Films produce and deliver distinctive, compelling and culturally relevant content that engages audiences across multiple platforms. The company also operates BBC America through a joint venture with BBC Worldwide. In addition, the company operates AMC Networks International, its global division."

Earnings have improved in the last few quarters. Looking at the last three quarters AMCX has beaten Wall Street estimates on both the top and bottom line. The last two quarters have beaten estimates by more than 10%. On November 6th, 2014 AMCX said their Q3 revenues were up +31%. On February 26th they announced their Q4 results with revenues up +40%.

AMCX reported their Q1 results on May 4th. Analysts were expecting a profit of $1.44 per share on revenues of $654 million. The company delivered earnings of $1.66 per share, which is a +69% improvement from a year ago. Revenues were up +27.5% to $668.6 million, another beat.

After seven years AMCX aired their final "Mad Men" episode in May. While Mad Men got a lot of press their Walking Dead franchise is significantly larger. The Walking Dead is actually the most watched show on television. It's bigger than Sunday Night Football. Now the company is about to launch a Walking Dead spin-off called "Fear the Walking Dead". Plus they have seen early success with "Better Call Saul", which is a spin-off from its "Breaking Bad" series.

Technically shares have been building a bullish pattern of higher lows and higher highs. Shares spent a couple of weeks consolidating sideways in the $81-84 zone but broke out higher on July 13th. The point & figure chart is bullish and forecasting at $100.00 target. We want to hop on board if this rally continues. Tonight we're suggesting a trigger to buy calls at $86.55.

- Suggested Positions -

Long AUG $90 CALL (AMCX150821C90) entry $1.60

07/17/15 triggered @ $86.55
Option Format: symbol-year-month-day-call-strike


The Walt Disney Co. - DIS - close: 119.58 change: +0.72

Stop Loss: 115.85
Target(s): To Be Determined
Current Option Gain/Loss: +139.1%
Average Daily Volume = 5.7 million
Entry on June 18 at $112.25
Listed on June 17, 2015
Time Frame: Exit PRIOR to earnings on August 4th
New Positions: see below

Comments:
07/20/15: The relative strength in DIS continues with the stock up +0.6% on a relatively quiet day for the stock market. Shares almost hit potential round-number resistance at $120.00 today. I'm worried the stock is overbought and due for a pullback.

Investors may want to take some money off the table.

No new positions at this time.

Trade Description: June 17, 2015:
Disney is an American icon. The company is over 90 years old. They have grown into a massive content generating giant. Today DIS runs five business segments. Their media networks include broadcast, cable, radio, publishing, and digital businesses headlined by their Disney/ABC television group and ESPN Inc. DIS' parks and resort business includes Disneyland, Disneyworld, plus theme parks in Tokyo, Paris, Hong Kong, Shanghai, and a cruise line.

The company's products division licenses the company's horde of names, characters, and intellectual property to a wide range of products. They've also jumped into the online world with their Disney Interactive division. Last but not least is the Walt Disney Studios segment. Disney started making movies 90 years ago. Today their studio business includes Disney animation, Pixar Animation, Disneynature, Disney Studios Motion Pictures, Disney music group, Touchstone Pictures, and Marvel Studios.

Their movie business has been a money maker over the years with huge hits like the Pirates of the Caribbean franchise, Tangled, Wreck-it Ralph. In 2013 they released the animated film "Frozen", which has turned into the largest grossing animated movie of all time. Pixar has a stable of successful movies that have grossed almost $9 billion. DIS is also mining gold in Marvel Entertainment's library of over 8,000 characters of comic book history. Marvel had two big hits in 2014 Captain America: Winter Soldier and Guardians of the Galaxy. Their 2015 Avengers: Age of Ultron was also a big winner at the box office grossing more than $1.3 billion worldwide. Of course not every Disney movie crushes it. Their recent Tomorrowland was a big disappointment and they could lose more than $100 million on the film.

Back in 2012 Disney purchased Lucasfilm and all the Star Wars properties from George Lucas for $4 billion. The company is busy filming the next three episodes of the Star Wars franchise. The next Star Wars film it titled "The Force Awakens." It will be episode seven in the franchise. The movie doesn't hit theaters until December 2015 but analysts are already predicting that "The Force Awakens" will generate $1.2 billion at the global box office.

DIS management loves movie franchises because they can fuel years of sequels, park rides, and merchandise. The approach seems to be working. Revenues and net income have hit all-time highs for five consecutive quarters. Their 2015 Q1 results saw earnings per share up +23% to $1.27. Their Q2 results saw earnings grow +14% to $1.23 per share. Their domestic theme parks showed a strong surge in both attendance and in customer spending. Analysts are forecasting DIS earnings to grow +17% this year.

The stock surged to new all-time highs back in early May after its Q2 earnings report. Shares have since spent the last six weeks digesting gains in a sideways consolidation that has ignored much of the broader market's volatility. More recently DIS has started to rebound and is now at the top of its trading range. A breakout here could signal the next leg higher.

The point & figure chart is bullish and forecasting at long-term target of $154.00. I personally suspect that DIS could rally toward $120-125 before its next earnings report in August. Credit Suisse recently upped their price target to $130. Tonight we are suggesting a trigger at $112.25 to buy calls.

- Suggested Positions -

Long AUG $115 CALL (DIS150821C115) entry $2.30

07/16/15 Our call option has more than doubled in value. Traders may want to take some money off the table here.
07/14/15 new stop @ 115.85
06/27/15 new stop @ 112.25
06/18/15 triggered @ $112.25
Option Format: symbol-year-month-day-call-strike


Facebook, Inc. - FB - close: 97.91 change: +2.94

Stop Loss: 95.95
Target(s): $99.50
Current Option Gain/Loss: +227.5%
Average Daily Volume = 24.5 million
Entry on July 06 at $88.15
Listed on July 04, 2015
Time Frame: Exit PRIOR to earnings on July 29th
New Positions: see below

Comments:
07/20/15: Shares of FB saw their price target upgraded again, this time to $117 this morning. The stock reacted with a gap open at $95.85 and a +3.0% surge to new highs. This is on top of Friday's $4.00 gain.

More conservative traders may want to take profits now. Tonight we are listing an exit target to close this trade at $99.50. Just in case FB reverses lower before hitting $99.50 we'll raise the stop loss to $95.95.

No new positions at this time.

Trade Description: July 4, 2015:
Facebook probably needs no introduction. It's the largest social media platform on the planet. As of March 31st, 2015 the company reported 1.44 billion monthly active users and 936 million daily active users. If FB were a country that makes them the most populous country on the planet. China has 1.35 billion while India has 1.25 billion people.

Earlier this year (March) the company announced a new mobile payment service through FB's messenger app. The new service will compete with similar programs through PayPal, Apple Pay, and Google Wallet.

Meanwhile business at FB is great. According to IBD, FB's Q4 earnings were up +69% from a year ago. Revenues were up +49%. Q1 results were out on April 22nd. Earnings were up +20% to $0.42 per share, which beat estimates. Revenues were up +41.6% to $3.54 billion in the first quarter. Wall Street is expecting FB's profit to rise +12% in 2015 and +32% in 2016.

FB continues to see growth among its niche properties. The company bought Instragram for $1 billion in 2012. Last late year Instragram surpassed Twitter with more than 300 million active users. FB is also a dominate player in the messenger industry with more than 600 million users on WhatsApp and 145 million users on Facebook Messenger. FB has not yet started to truly monetize its WhatsApp and Messenger properties. It's just now starting to include ads in Instagram. Eventually, with audiences this big, FB will be able to generate a lot of cash through additional advertising.

Speaking of advertising, FB has jumped into the video ad game with both feet and it's off to a strong start. FB claims that it's already up to four billion video views a day. They had 315 billion video views in Q1 2015. That's pretty significant. YouTube had 756 billion video views in Q1 but YouTube has been around for ten years (FYI: YouTube is owned by Google). FB has only recently focused on video.

Wall Street is growing more optimistic as FB develops its blooming video ad business and its Instagram and messaging properties. In the last few weeks the stock has seen a number of price target upgrades. Bank of America upped their FB price target from $95 to $105. Cantor Fitzergerald upped theirs to $100. Brean Capital raised theirs to $108. Piper Jaffray upgraded their FB target to $120. Currently the point & figure chart is bullish with a $113.00 target.

Technically FB was stuck in a trading range for months while still working on a long-term, slow moving up trend of higher lows. That changed a couple of weeks ago with a bullish breakout to new highs. The recent pullback is an opportunity. If traders continue to buy this dip we want to jump on board. Tonight we are listing an entry point to buy calls at $88.15.

- Suggested Positions -

Long AUG $90 CALL (FB150821C90) entry $2.84

07/20/15 new stop @ 95.95, exit target is $99.50
07/18/15 new stop @ 93.45
07/16/15 new stop @ 89.35
07/06/15 triggered @ $88.15
Option Format: symbol-year-month-day-call-strike


Fiserv, Inc. - FISV - close: 88.14 change: +0.10

Stop Loss: 85.85
Target(s): To Be Determined
Current Option Gain/Loss: +25.0%
Average Daily Volume = 1.0 million
Entry on July 10 at $85.41
Listed on July 07, 2015
Time Frame: Exit PRIOR to earnings on July 29th
New Positions: see below

Comments:
07/20/15: FISV briefly tagged a new high before gains faded toward unchanged on the day.

There is no change from my prior comments. Readers may want to inch their stop higher again. No new positions at this time.

Trade Description: July 7, 2015:
Apple isn't the only one with a mobile payments platform. Last year AAPL launched its Apple Pay service, which allows people to use their smart phones (and now smart watches) to pay for stuff at the register. FISV also jumped into the mobile pay industry late last year. That's on top of a growing business of its traditional payment systems.

FISV is part of the services sector. According to the company, "Fiserv, Inc. (FISV) enables clients to achieve best-in-class results by driving quality and innovation in payments, processing services, risk and compliance, customer and channel management, and business insights and optimization."

Earnings have been relatively on track the last couple of quarters. FISV most recent report was announced on May 5th. They reported earnings of $0.89 per share. That was up +8.5% from a year ago and above Wall Street estimates. Revenues were up +3.4% and slightly behind expectations. The company spent $290 million buying back 3.8 million shares last quarter.

Shares of FISV had been slowly drifting higher in the $75-80 zone from February to June. Suddenly things changed. The market's big rally on June 18th helped FISV breakout from its trading range. The next day the stock was upgraded to an "outperform" and given at $95 target. This launched FISV's stock toward $85.00.

Shares have been trading technically and slowly faded back toward its mid-June breakout high. Once FISV had filled the gap it began to rally again. The stock held up well this morning during the market sell-off. When the major indices reversed higher FISV outperformed them with a +0.77% gain. We want to hop on board if FISV can rally past $85.00. Tonight we're suggesting a trigger to buy calls at $85.15. Plan on exiting this trade prior to their earnings report on July 29th.

- Suggested Positions -

Long AUG $85 CALL (FISV150821C85) entry $3.20

07/14/15 new stop @ 85.85
07/10/15 triggered on gap open at $85.41, trigger was $85.15
Option Format: symbol-year-month-day-call-strike


INSYS Therapeutics - INSY - close: 41.97 change: +0.48

Stop Loss: 38.85
Target(s): To Be Determined
Current Option Gain/Loss: +11.8%
Average Daily Volume = 607 thousand
Entry on July 01 at $36.30
Listed on June 30, 2015
Time Frame: Exit PRIOR to earnings in August
New Positions: see below

Comments:
07/20/15: INSY displayed relative strength today with a +1.15% gain. The stock was up +3.8% intraday and hit new multi-year highs before paring its gains.

There is no change from my prior comments. I'm concerned that INSY is short-term overbought and due for a dip. No new positions at this time.

Trade Description: June 30, 2015:
INSY is probably best known for its synthetic cannabinoid drugs that use THC, the same ingredient in marijuana. Yet it is the company's Subsys treatment, a painkiller several times stronger than morphine, that generates the most revenues for INSY. The marketing practices behind Subsys have generated some scandal-worthy headlines but nothing seems to be slowing down the stock's long-term rally.

INSY is in the healthcare sector, more specifically the biotech industry. According to the company, "Insys Therapeutics is a specialty pharmaceutical company that develops and commercializes innovative drugs and novel drug delivery systems of therapeutic molecules that improve the quality of life of patients. Using our proprietary sublingual spray technology and our capability to develop pharmaceutical cannabinoids, Insys addresses the clinical shortcomings of existing commercial products. Insys currently markets two products: Subsys, which is sublingual Fentanyl spray for breakthrough cancer pain, and a generic version of Dronabinol (THC) capsules. The Company's lead product candidate is Dronabinol Oral Solution, a proprietary, orally administered liquid formulation of dronabinol that Insys believes has distinct advantages over the current formulation of dronabinol in soft gel capsule. Insys is developing a pipeline of sublingual sprays, as well as pharmaceutical cannabidiol."

The company's earnings growth has been impressive. They have consistently beaten Wall Street's bottom line earnings estimates the last six quarters in a row. They normally beat the revenue estimate as well. Looking at the last three quarters INSY has seen its revenues jump +99.7%, +65.4%, and +70.2%. Most of that has been on strong Subsys sales, which were up +69% in the fourth quarter and up +74% in the first quarter.

INSY management is very optimistic and expects to complete four Phase III clinical trials in 2015. If successful it will significantly broaden their product line. The company just recently announced a New Drug Application (NDA) for its "proprietary Dronabinol Oral Solution for anorexia associated with weight loss in patients with AIDS; and nausea and vomiting associated with cancer chemotherapy in patients who have failed to respond adequately to conventional antiemetic treatments. Dronabinol Oral Solution is an orally administered liquid formulation of the pharmaceutical cannabinoid dronabinol, a synthetic version of tetrahydrocannabinol (THC)."

INSY's stock has been a strong performer since the company's IPO in 2013. Shares saw a 3-for-2 split in 2014. They just completed a 2-for-1 split on June 5th.

Before I continue I want to remind traders that biotech stocks can be tough to trade. Normally stocks in this group can be volatile with lots of headline risk. The right headline about a successful test or clinical trial or FDA approval can send shares soaring. The wrong headline could see a biotech stock crash or even gap down several points.

It is important to note that not all the news is good for INSY. In late 2014 the Wall Street Journal (WSJ) ran a story about some shady marketing practices for INSY's Subsys painkiller. This is an under-the-tongue spray version of the painkiller fentanyl. Subsys has a very high risk of dependency and is currently only approved for cancer patients. Yet strangely enough only 1% of prescriptions last year were written by oncologists. Several doctors with the biggest number of Subsys prescriptions have also been under review or disciplined. The WSJ noted that the Office of the Inspector General of the U.S. Department of Health and Human Services and the U.S. Attorneys in the Central District of California and Massachusetts are all looking into the matter. This is significant because Subsys accounts for the vast majority of INSY's revenues.

Thus far the stock market has managed to ignore the shadow cast by Subsys and how the drug is prescribed and INSY's financial relationship with the doctors who prescribe it.

Last week saw biotech stocks retreat. The IBB biotech ETF had broken out in mid June and rallied to new record highs. The group reversed lower last week with a sharp correction. INSY followed its peers lower with a painful drop from $42 to $34 in about three days. Currently the $34.00 level is holding up as support. If INSY can bounce from current levels the move could be big.

A rally from here could spark a short squeeze. The most recent data listed short interest at 68% of the small 23.6 million share float. Tonight we are suggesting a trigger to buy calls at $36.30.

*Small positions to limit risk* - Suggested Positions -

Long AUG $40 CALL (INSY150821C40) entry $3.40

07/16/15 new stop @ 38.85
07/14/15 new stop @ 36.35
07/01/15 triggered @ $36.30
Option Format: symbol-year-month-day-call-strike


Jack In The Box Inc. - JACK - close: 92.84 change: +0.50

Stop Loss: 90.85
Target(s): To Be Determined
Current Option Gain/Loss: +37.5%
Average Daily Volume = 600 thousand
Entry on July 13 at $90.25
Listed on July 11, 2015
Time Frame: Exit PRIOR to earnings
New Positions: see below

Comments:
07/20/15: JACK rebounded on Monday and essentially erased Friday's decline. Shares remain in the $92-93 region. JACK did tag a new two-month high today ($93.37). I would use a rally past today's high as a new entry point.

I am suggesting readers wait for a breakout past $93.25 before considering new positions. More conservative traders may want to raise their stop closer to the 100-dma.

Trade Description: July 11, 2015:
It's a burger-eat-burger world out there in the fast-food business. Jack in the Box is small fries compared to its larger rivals like McDonalds (36,258 locations) and Wendy's (6,515 locations). Let's not forget heavy weights like Taco Bell, Burger King, Subway, Dairy Queen, and a handful of pizza chains. JACK only has about 2,200 restaurants but it also has a secret weapon and that is the Qdoba Mexican Grill, a fast-casual restaurant with about 600 locations. Fast-casual restaurant rival Chipotle Mexican Grill has almost 1,800 locations.

Some of that intense competition being felt by McDonalds and Chipotle Mexican Grill is coming from Jack in the Box and its Qdoba brand, which is growing sharply. A majority of their Qdoba franchisees own multiple stores with 10, 20 even 40 stores common. Enterprising business owners don't open additional stores if the original stores are not working. To have so many owners with high numbers of stores suggests the franchise is consistently profitable.

To be profitable they need solid customer traffic, good food and decent margins. Shares of JACK have been one of the best performers on the S&P over the last couple of years because the company has been posting solid earnings and growth.

With analysts cutting earnings estimates for McDonalds and Chipotle, earlier this year, because of competition in the sector it makes sense to look at what has happened at JACK. Over the last quarter and the last year not a single analyst has lowered their earnings estimates for JACK. According to Zacks, analysts are expecting JACK to grow earnings +11.7% in the current quarter and +22% for 2015.

Customers are trending towards healthier foods and away from the mass produced burgers and fries at McDonalds. Did you know there are 19 ingredients in McDonalds fries? Surely you didn't think they were just potatoes and grease? This trend may not help the Jack in the box brand but it's good news for Qdoba. Restaurants like Qdoba and Chipotle are capitalizing on the healthy food craze.

The company plans to open 15 new Jack in the Box stores in 2015. They're also cashing in on Qdoba's success and planning to open 50 to 60 new Qdoba locations. That compares to just 12 new Jacks and 38 new Qdobas in 2014.

Management is trying to be shareholder friendly. They have an active share buyback program and they reduced the share count by 10% over the last few quarters. In their most recent earnings report (May 13th) the company raised their quarterly dividend by +50%.

JACK reported its Q1 2015 earnings on February 17th. Analysts were expecting a profit of $0.87 a share on revenues of $461.2 million. JACK delivered earnings of $0.93 a share. That's a +24% improvement from a year ago. Revenues were up +4.1% to $468.6 million, above estimates. Their operating margins improved 1% to 19.3%. Management raised their 2015 guidance.

The company did it again in May with their Q2 report. Estimates were for $0.66 per share on revenues of $356 million. JACK reported $0.69 per share with revenues up +5.0% to $358 million. That is a +35.2% earnings improvement from a year ago. Their consolidated restaurant operating margins improved 210 basis points to 20.6%. Plus, management raised their 2015 guidance again.

The stock has ignored a lot of the market's recent volatility. Shares of JACK seem to be marching to the beat of their own drummer. You can see the market reaction to its Q1 earnings report in February with the big surge higher. The rally reversed in late March and shares found support near $86.00. The stock has been bouncing along the 486.00 level for more than two months. Its consolidation has narrow over the last few weeks. It used to be the $86-90 range. The last few days the consolidation has been in the $88-90 zone. JACK looks like it could breakout past $90.00 soon.

We want to be ready if JACK does breakout. Tonight we're suggesting a trigger to buy calls at $90.25. Plan on exiting prior to earnings in early August.

- Suggested Positions -

Long AUG $95 CALL (JACK150821C95) entry $1.60

07/16/15 new stop @ 90.85
07/14/15 new stop @ 89.75
07/13/15 triggered @ $90.25
Option Format: symbol-year-month-day-call-strike


Molina Healthcare - MOH - close: 72.98 change: -0.45

Stop Loss: 69.95
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 890 thousand
Entry on July -- at $---.--
Listed on July 15, 2015
Time Frame: Exit PRIOR to earnings on July 30th
New Positions: Yes, see below

Comments:
07/20/15: MOH still looks like it's coiling for a bullish breakout higher. Yet if shares don't start to show some strength soon we may drop it as a candidate.

Our suggested entry point to buy calls is at $74.05. Don't forget that this is a short-term trade!

Trade Description: July 15, 2015:
One of the biggest impacts that the Affordable Care Act (ACA) has had on the healthcare insurance business is boost the Medicaid and Medicare programs. That's a shift that plays to MOH's strengths.

MOH is in the healthcare sector. According to the company, "Molina Healthcare, Inc., a FORTUNE 500 company, provides managed health care services under the Medicaid and Medicare programs and through the state insurance marketplaces. Molina serves more than 3 million members through locally operated health plans in 11 states across the nation and in the Commonwealth of Puerto Rico. Doctor C. David Molina founded the company in 1980 as a provider organization serving low-income families in Southern California. Today, the company continues his mission of providing high-quality and cost-effective health care to those who need it most."

The company's earnings have soared. The big rally in MOH's stock this February was a reaction to its Q4 earnings results. Q4 EPS was $0.69 per share, which beat estimates by 8 cents. Revenues were up +64% to $2.8 billion. A couple of days later MOH management raised their 2015 earnings and revenue guidance significantly above Wall Street estimates.

The Q1 earnings report sparked the big rally in May. Analysts were expecting a profit of $0.49 per share. MOH delivered $0.71, which is a +163% improvement from a year ago. Revenues were up +53% to $3.17 billion, above expectations.

J. Mario Molina, M.D., chief executive officer of Molina Healthcare, Inc., commented on his company's quarter, "We are very pleased with our first quarter results, which represent a down payment on the improved profitability we committed to at our investor day this past February. We are off to a very good start in 2015, and remain confident that we can deliver both top-line and bottom-line growth in 2015."

On June 17th UBS initiated coverage on MOH with a "buy" and an $80 price target. The point & figure chart is bullish and forecasting a $103 target. Currently MOH has rallied toward its May highs near $74.00. A breakout past $74.00 could spark some short covering. The most recent data listed short interest at 20% of the small 33.3 million share float.

We are suggesting a trigger to buy calls at $74.05. Keep in mind that this is a short-term trade. We plan on exiting prior to the company's earnings report on July 30th. However, after seeing the reaction to the last couple of earnings announcements, I'm tempted to hold over the report.

Trigger @ $74.05

- Suggested Positions -

Buy the AUG $75 CALL (MOH150821C75)

Entry disclaimer: To avoid an unfavorable entry point, we will not launch a new play if the stock gaps open more than $1.00 past our suggested entry point.

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




PUT Play Updates

Barracuda Networks, Inc. - CUDA - close: 29.75 change: -0.48

Stop Loss: 30.60
Target(s): To Be Determined
Current Option Gain/Loss: +26.5%
Average Daily Volume = 512 thousand
Entry on July 17 at $29.75
Listed on July 13, 2015
Time Frame: Exit PRIOR to August expiration
New Positions: see below

Comments:
07/20/15: CUDA accelerated lower on Monday with a -3.6% drop to new 2015 lows. Tonight we are adjusting our stop loss down to $30.60.

Trade Description: July 13, 2015:
Cyber-security is a hot industry right now. We constantly hear about hackers stealing information from major corporations. There has also been a high-profile attack on U.S. government employee data. This has driven gains for a number of cyber security stocks. Yet one security firm is underperforming its peers. That is CUDA.

CUDA is in the technology sector. According to the company, "Barracuda (CUDA) provides cloud-connected security and storage solutions that simplify IT. These powerful, easy-to-use and affordable solutions are trusted by more than 150,000 organizations worldwide and are delivered in appliance, virtual appliance, cloud and hybrid deployments. Barracuda's customer-centric business model focuses on delivering high-value, subscription-based IT solutions that provide end-to-end network and data security."

They reported their 2016 Q1 earnings on July 9th. Earnings rose +39% from a year ago to $0.09 per share. That beat estimates of $0.08. Revenues were up +17.8% to $78 million, also above expectations. Their subscribers grew +18% to 252,000 and their subscription revenue was up +19.6%.

It looks like a pretty good report. So why did the stock plunge -19% on Friday? That's because Wall Street was not happy with CUDA's gross billing number or its soft Q2 guidance.

CUDA reported their Q1 gross billings were up +7.6% to $94.3 million. Yet that was below expectations in the $103 million region. Management also guided Q2 revenue estimates into the $78-79 million range. That's below estimates of $80.4 million.

Shares were crushed on Friday and there was no oversold bounce today. CUDA continued to underperform with a -3.8% drop in spite of the market's widespread rally today. The point & figure chart is now bearish and forecasting a $26.00 target. We think CUDA could drop toward $25.00. However, I will warn you that CUDA does have potential support in the $29.50-30.00 range.

Tonight we are suggesting small bearish positions to buy puts at $29.75. More conservative traders may want to sit this one out or wait for a drop below $29.00 as an alternative entry point. I consider this a higher-risk, more aggressive trade.

*small positions to limit risk* - Suggested Positions -

Long AUG $30 PUT (CUDA150821P30) entry $1.70

07/20/15 new stop @ 30.60
07/17/15 triggered @ $29.75
Option Format: symbol-year-month-day-call-strike


Concho Resources - CXO - close: 102.65 change: -2.39

Stop Loss: 107.05
Target(s): To Be Determined
Current Option Gain/Loss: +21.7%
Average Daily Volume = 1.4 million
Entry on July 07 at $106.90
Listed on July 06, 2015
Time Frame: Exit PRIOR to earnings on July 29th
New Positions: see below

Comments:
07/20/15: Crude oil sank to new relative lows today. That helped keep the downdraft alive in the energy stocks. CXO lost -2.2% and set a new multi-month closing low today.

We are moving our stop loss down to $107.05. No new positions at this time.

Trade Description: July 6, 2015:
It has been a bumpy ride for energy stock traders over the last year. That's especially true for CXO investors. The stock fell from $148 to $80 in less than five months last year. CXO bottomed in December 2014. The stock managed a big bounce from $80 to $130 in the next five months but that rally is over with a big reversal on the company's Q1 earnings report in early May.

CXO is in the basic materials sector. According to the company, "Concho Resources Inc. is an independent oil and natural gas company engaged in the acquisition, development and exploration of oil and natural gas properties. The Company's operations are primarily focused in the Permian Basin of southeast New Mexico and west Texas."

The last couple of quarters have seen CXO's revenues decline. They reported their 2014 Q4 results on February 25th. Earnings were 88 cents a share, which was four cents above estimates. Yet revenues fell -6.0% to $594 million, way below estimates. Their 2015 Q1 results were announced on May 4th. Earnings per shares was $0.06. That was 17 cents worse than expected. CXO's revenues plunged -37.4% to $413.5 million, another big miss. The stock reacted to this news with a spike higher that quickly reversed.

Today the oil stocks are suffering as the commodity sinks due to oversupply concerns. The weekly Baker Hughes active rig count just turned positive two weeks in a row after a 28-week decline. This would suggest the pullback in the industry is over and the market has found a temporary equilibrium that will allow domestic companies to start launching new oil and gas rigs again. This will continue to boost supply and pressure prices lower.

A bigger problem could be the Iran nuclear negotiations. If Iran does sign a deal with the West then sanctions could be lifted that would allow Iran to sell up to one million barrels of oil per day on the global market. Sources suggest Iran already has dozens of crude oil tankers filled up and ready to go if the sanctions are lifted. This is one reason crude oil has been plunging the last few days. The current deadline (and there have been many) is tomorrow, July 7th. If Iran signs a deal then oil will likely drop again. If they don't then oil could bounce. If talks are postponed again then I suspect the prevailing trend, which is down, will remain in effect for oil and the oil stocks.

CXO has technically broken down below support near $110 and its 200-dma. The point & figure chart looks very bearish and is currently forecasting an $89 target. Tonight we're suggesting a trigger to buy puts at $106.90.

- Suggested Positions -

Long AUG $105 PUT (CXO150821P105) entry $4.60

07/20/15 new stop @ 107.05
07/18/15 new stop @ 110.05
07/07/15 triggered @ $106.90
Option Format: symbol-year-month-day-call-strike


SM Energy Company - SM - close: 34.94 change: -1.77

Stop Loss: 38.05
Target(s): To Be Determined
Current Option Gain/Loss: +239.4%
Average Daily Volume = 1.6 million
Entry on June 19 at $44.49
Listed on June 13, 2015
Time Frame: Exit PRIOR to earnings on July 28th
New Positions: see below

Comments:
07/20/15: SM is another energy stock that is getting crushed. Today's -4.8% drop is the fourth decline in a row.

We are moving our stop loss down to $38.05. Readers may want to consider taking some money off the table.

No new positions at this time.

Trade Description: June 13, 2015:
SM has been around a long time. They were founded back in 1908. The company was formerly known as St. Mary Land & Exploration Company but they changed their name to SM Energy Company about five years ago.

SM is in the basic materials sector. According to the company, "SM Energy Company is an independent energy company engaged in the acquisition, exploration, development, and production of crude oil, natural gas, and natural gas liquids in onshore North America."

SM operates in the Rocky Mountain region including the Bakken and Three Forks formations. Further south, they drill in the Haynesville and Woodford shales of Texas and Oklahoma. SM also operates in the Permian region of Texas and New Mexico. Even further south SM drills in the South Texas area with the Eagle Ford shale formation.

Crude oil's plunge in late 2014 crushed the oil sector and shares of SM followed it lower. Yet SM appeared to be having trouble before the big drop in oil prices. The company has missed Wall Street's earnings estimates the last four quarters in a row.

The huge drop in oil sparked significant cutbacks across the oil and gas industry with most major exploration companies reducing their capital spending plans. When SM reported their Q4 earnings in February 2015 they missed the EPS number by five cents and revenues were down -6.4% from a year ago. Management also slashed their 2015 investment plans by -44% from $1.9 billion to $1.0 billion.

SM reported its 2015 Q1 numbers on May 5th. Analysts were expecting a profit of $0.29 per share on revenues of $543.1 million. SM delivered a profit of $0.21 as revenues plunged -42% to $365.9 million.

Citigroup issued a research report last month that suggested U.S. oil producers will still be able to profit with oil at depressed prices. Here's a quote from a Bloomberg article, "belt-tightening across the industry and more strategic drilling in prolific areas would deliver ample profits even at $50 crude. The improvement is driven by costs that are expected to fall by 20 to 30 percent and techniques that allow rigs to wring 30 percent more oil or natural gas from each well compared with a year ago." That definitely seems like ammunition for the bulls to be buying some of the oil producers. Yet the group continues to lag. They are facing some stiff headwinds.

Crude oil has produced a +25% bounce off its March 2015 lows. Yet the rally in oil has stalled the last few weeks with the commodity churning sideways. The recent OPEC meeting showed that the Middle East shows no signs of slowing down their production. The world is temporarily facing a small oil glut.

Meanwhile currencies could play an issue here. It is widely accepted that the long-term trend for the U.S. dollar is now higher. The Federal Reserve will eventually raise rates, either later this year or early next year. When they start raising rates it should boost the dollar. At the same time central banks around the world (like Japan and Europe) are in the middle of huge QE programs that will drive their currencies lower. Naturally this will lift the dollar even higher. A rising dollar pushes commodities lower.

Technically shares of SM have been very weak. The broke down from a bullish channel a couple of weeks ago. The stock has also sliced through some psychological support levels. The point & figure chart is currently forecasting at $40.00 target. You could argue that SM is already oversold. However, the path of least resistance is lower. Tonight we are suggesting a trigger to buy puts at $44.90 with a wide stop loss at $50.25 just in case SM does see a little oversold bounce.

- Suggested Positions -

Long AUG $40 PUT (SM150821P40) entry $1.65

07/20/15 new stop @ 38.05
07/18/15 new stop @ 40.05
07/16/15 new stop @ 41.55
07/06/15 new stop @ 45.25
06/23/15 new stop @ 48.75
06/19/15 triggered on gap down at $44.49, suggested entry was $44.90
Option Format: symbol-year-month-day-call-strike