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Newsletter

Daily Newsletter, Thursday, 7/23/2015

Table of Contents

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

Market Wrap

Some Disappointment from Earnings

by Keene Little

Click here to email Keene Little
The market has done very well ignoring signs of a global economic slowdown but some recent earnings disappointment has forced investors to question the high market valuation and that's causing some profit taking. But so far it's only profit taking and it's not hard to argue for the bullish case.

Wednesday's Market Stats

Earnings from the bigger companies continue to disappoint, including MMM, AXP and CAT, and that had the stock market selling off again. Each company missed on revenues and has lowered their forecast for the remainder of the year. The strength of the U.S. dollar is getting much of the blame but sales in general are slowing, another indication that the global economies are slowing. I think any discussion of an economic expansion for the U.S. is premature since even a short-term improvement in the U.S. (if it's improving) will not be able to stand by itself against a global slowing. The good news for tomorrow, if the after-hours reaction holds into tomorrow morning, is that we could see the selling get reversed.

While indexes are near their multi-year highs the earnings picture is not as bright as had been expected. Of the companies reporting so far, 75% beat expectations and that's better than the 63% beat rate since 1994. The trouble is earnings expectations have been ratcheted down and a beat rate is not necessarily a good metric. Meeting revenue forecasts is a better metric (but even those forecasts are usually understated so that they have a better chance at producing an upside surprise) and only 52% of the reporting companies have thus far beat their forecasts, which is below the 61% average beat rate since 2002. Earnings for the current quarter are expected to dip 1% and therefore the market's high prices doesn't appear to be factoring in, yet, this earnings decline.

Today was light on economic reports, with only the unemployment data as the highlight (non-market moving). The good news about unemployment claims is that the 255K initial claims was less than the 279K expected and more importantly is now at the lowest level in over 41 years (for you match challenged, that's back in 1974). Continuing claims came in at 2207K, which was also less than the 2213 expected. One of the reasons why these numbers are not market moving is because they lag the market so much. A trough in unemployment claims tends to follow a peak in the stock market. The drop in unemployment claims also has many thinking it will embolden the Fed to raise rates sooner rather than later so a September hike is getting more press time.

I'll jump right into the charts since they've quickly moved from resistance to potential support and what happens on Friday could tell us how next week will go. The DOW's weekly chart below shows it has dropped down near its uptrend line from October 2011 - October 2014, which was last tested July 7-9. On June 30th it also tested its 50-week MA and then again July 6-10. It's currently at 17646, about 60 points below today's low, and that coincides with the 2011-2014 uptrend line. Then below that is an uptrend line from the February low, near 17530, which could be the bottom of a bullish sideways triangle. Not until the DOW gets below the February low at 17037 would the pattern turn definitively bearish (telling us the top is in place) but in the meantime it's simply been way too choppy since February to get a good sense about the next big move.

Dow Industrials, INDU, Weekly chart

The choppy price action since February is much easier to see on the daily chart below and the important thing to remember in this kind of chop is that the price pattern tends to be 3-wave moves (or something a little more complex but "corrective"). It's the reason we've seen so little follow through to what appears at the time to be a sustainable move. Usually, just when one side feels we're getting started with a tradable move the sharp reversal catches both sides leaning the wrong way. We might not be out of that environment yet. Even though the DOW closed slightly below its 200-dma, near 17745, today, it could quickly recover with a morning rally. At the moment, with futures up, it's looking like that could happen.

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- bullish above 17,050
- bearish below 17,650

While the DOW is testing its 200-dma, having already broken its 50-dma on Tuesday, SPX is now testing its 50-dma, which is near 2102.50. It broke and closed below it today so the bulls need a quick recovery tomorrow to keep that support level alive. If it drops lower it would test its 20-dma and uptrend line from March-June, both near 2090. A close below 2090 would make it more bearish but at the moment the bulls could still pull a baby bull out of the hat and start another rally leg to new highs (potentially to the 2150 area). The bearish pattern calls for a choppy consolidation following today's decline and then another leg down before getting a larger bounce into the end of the month and then down hard in August. The jury is still out with their decision which it will be -- a rally to a new high in August or a test of the July low near 2044 instead (and probably lower).

S&P 500, SPX, Daily chart

Key Levels for SPX:
- bullish above 2115
- bearish below 2089

Yesterday SPX consolidated around price-level S/R near 2115 but lost the battle this morning to hold on. It dropped quickly to the next price-level S/R line near 2100 and at this point it's not hard to see the move down from Monday as a sharp 3-wave move down. A 3-wave move down to support is the reason bears need to be cautious here since it is possible the pullback from Monday is just a correction to the rally, which will continue from here. Until we get an impulsive 5-wave move down from Monday, which would indicate at least an intermediate-term trend change, neither side can claim any kind of ownership of this market.

S&P 500, SPX, 60-min chart

The Nasdaq looks bearish following its gap up last Friday and then the gap down on Wednesday, which leaves an island reversal at resistance (the top of a parallel up-channel from March). But it bounced off support at its March 2000 high at 5132 with today's low at 5137. There's a trend line along the highs since January 2004 - October 2007, near 5125, which the Naz has been cycling around since February and therefore a break below 5125 would be more bearish. But it has plenty of trendline support and its 20- and 50-dma's coinciding near 5070 and not until it gets below 5000 would it begin to look more strongly bearish. At the moment, as long as it holds above 5132, it remains bullish and that looks like no problem for tomorrow if the futures are any indication. NDX futures (NQ) have already retraced today's decline (thanks mostly to AMZN).

Nasdaq Composite Index, COMPQ, Daily chart

Key Levels for COMPQ:
- bullish above 5232
- bearish below 5132

While the RUT was showing some relative strength the past few days, which was indicating a possible bullish reversal, it sold off sharp midday with the rest of the market and finished weaker than the others. It's in a parallel down-channel for its decline from last week and hit the bottom of the channel with this afternoon's low. So it could be ready for a bounce within the down-channel, the top of which is currently near 1260 (about 3 points below this morning's high), but I don't see enough bullish divergence to suggest I should be switching to the long side. A rally above this morning's high near 1263 would however have been turning at least short-term bullish.

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- bullish above 1263
- bearish below 1249

The banks have remained relatively strong the past few days (although not today) while the broader indexes stalled, which is a result of more talk about a coming rate hike since higher rates make it more profitable for banks. But I strongly suspect the bank rally is premature and with inflation running low, if not negative, and so many signs of global slowing, I don't think the Fed will have what they need to justify starting to raise rates. The last thing they'd need is to raise rates and then turn around and lower them again. That would panic the market big time. Also, the chart suggests there might not be much more to the upside before the BKX runs into resistance. Where it's currently trading should be a reason for caution by the bulls and a reason to tighten up their stops.

The BKX weekly chart below shows the rally has now reached the 61.8% retracement of the 2007-2009 decline, at 80.86, with this morning's high at 80.87. Today's selloff following the morning high MIGHT have been the start of its reversal back down. I'd want to see it above the trend line along the highs from March-June, currently near 81.60, before thinking it's got much higher to go. Bearish divergence against the lower June high suggests resistance is going to hold and the larger pattern suggests the reversal could lead to a much larger decline than we've seen over the past two years.

KBW Bank index, BKX, Weekly chart

The Trannies had a bad day, down a little more than -2% and the big red candle on its daily chart shows the sharp reversal following the test of its downtrend line from April. It snapped its 20-dma, near 8186, with its close at 8127. I show a projection down to the 7800 area before it will set up a larger bounce correction next month but a rally above this morning's high at 8325 would be more immediately bullish (the same as for BKX).

Transportation Index, TRAN, Daily chart

The U.S. dollar has pulled back a little this week and today's low at 96.95 tested its uptrend line from June 18th. As long as that level holds as support we could get one more minor new high, near 98.40, to test its downtrend line from March-April, which is the line that I'm thinking will hold as the top of a sideways triangle for the dollar's consolidation this year. Above 98.40 would suggest another rally leg might be in the works instead.

U.S. Dollar contract, DX, Weekly chart

Commodity prices in general have dropped to lows not see since 2002 and the high dollar is getting the blame. But even as the dollar has consolidation since the high in March we've seen commodity prices slipping lower. It's part of the deflationary cycle and a reason I don't believe the Fed will be raising rates this year or next year. They're stuck in the corner into which they've painted themselves.

Gold also dropped lower this week (it got slammed lower on Monday) but there is the potential for at least a higher bounce if support at 1089-1090 holds. This is the 50% retracement of the 2001-2011 rally (1090) and the trend line along the lows since December 2013 (1089). The bearish wave pattern calls for gold to consolidate near this level and then head lower, probably down to about 1000 as it stair-steps lower. But if gold gets back above the previous shelf of support near 1141 we could see a much larger bounce/rally.

Gold continuous contract, GC, Weekly chart

On July 7th silver broke price-level support near 15.25, which was a shelf of support since last November. Now it's trying to hold support near 14.65, which is price-level S/R from 2006-2010. There are hints of bullish divergence showing up and support could hold here. If you're interested in trying to buy support you can at least keep your stop fairly tight (perhaps no lower than 14). A loss of support here could mean a continuation down to the $12 area. Silver would turn short-term bullish above its 50-day MA, currently near 15.95, but if it stays trapped between 14.50 and 15.25 it will stay bearish.

Silver continuous contract, SI, Weekly chart

Oil has continued its decline for 4 weeks running now and a little lower, near 44.33 it would again test its projection where the 2nd leg of the decline from 2005 is 62% of the 1st leg down. It would be part of a large sideways triangle if support there holds. At most I don't expect to see oil much below 40 before setting up a larger bounce.

Oil continuous contract, CL, Weekly chart

We'll get New Home Sales tomorrow morning, which is expected to improve slightly, but that will be the only report. Reaction to earnings is the bigger driver at the moment.

Economic reports and Summary

Conclusion

Visa (V), Amazon (AMZN) and AT&T (T) reported after the bell and AMZN gets the gold star for after-hour trading -- it's up +85 (+17.6%) to 567. Visa got a nice reaction as well, up +4.33 (+5.9%) to 75.99, while T jumped +0.76 (+2.1%) to 34.66. The after-hours reports had equity futures jumping higher, especially NQ, following the late-day rally and that might be pointing to an immediate bounce Friday morning. But futures started a bit of a pullback later in the evening and ES (SPX futures) was approaching the flat line (at its post-16:00 higher close) and the initial morning start is not guaranteed to be to the upside.

The decline from Monday looks sharp and therefore bearish but it's not hard to argue it's just a sharp 3-wave move down and as such it could be reversed from here. It's what this market has been doing to traders -- just as a move gets started and traders feel like they have a direction to trade they get slapped silly with a spike reversal. The choppy whippy price action since February has been full of this kind of price action and we don't know yet if it has ended or will continue into next month. A new high still can't be ruled out. But at the moment, until we see evidence of a reversal back up, the setup looks good for lower prices, perhaps after a consolidation on Friday. I'd stick with the short side (short the bounces) until it's proven that buying the dips is back in style.

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

Consistently Disappointing

by James Brown

Click here to email James Brown


NEW DIRECTIONAL PUT PLAYS

Bed Bath & Beyond Inc. - BBBY - close: 67.27 change: -0.36

Stop Loss: 69.05
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 2.0 million
Entry on July -- at $---.--
Listed on July 23, 2015
Time Frame: Exit PRIOR to earnings in late September
New Positions: Yes, see below

Company Description

Trade Description:
This year is not shaping up very well for bullish investors in BBBY. The stock is down -11.6% year to date. The trouble started with its earnings report back in January.

If you are not familiar with BBBY they are in the services sector. According to the company, "Bed Bath & Beyond Inc. and subsidiaries (the "Company") is a retailer selling a wide assortment of domestics merchandise and home furnishings which operates under the names Bed Bath & Beyond, Christmas Tree Shops, Christmas Tree Shops andThat! or andThat!, Harmon or Harmon Face Values, buybuy BABY and World Market, Cost Plus World Market or Cost Plus. Customers can purchase products from the Company either in store, online or through a mobile device.

The Company has the developing ability to have customer purchases picked up in store or shipped direct to the customer from the Company's distribution facilities, stores or vendors. The Company also operates Linen Holdings, a provider of a variety of textile products, amenities and other goods to institutional customers in the hospitality, cruise line, food service, healthcare and other industries.

Additionally, the Company is a partner in a joint venture which operates retail stores in Mexico under the name Bed Bath & Beyond. Shares of Bed Bath & Beyond Inc. are traded on NASDAQ under the symbol "BBBY" and are included in the Standard and Poor's 500 and Global 1200 Indices and the NASDAQ-100 Index. The Company is counted among the Fortune 500 and the Forbes 2000."

On January 8th BBBY reported its 2014 Q3 results. Earnings were in-line with estimates but revenues missed. Management lowered their same-store sales guidance. The stock plunged the next day. A few weeks later BBBY had managed to recover but the rally failed producing a bearish double top.

The trouble continued in April. BBBY had rallied up into its earnings report and then disappointed. Their 2014 Q4 results were in-line with estimates at $1.80 a share. Yet revenues missed estimates again. They lowered their Q1 guidance. The stock plunged the next day.

On June 24th BBBY reported earnings of $0.93 per share. That was down -1% from a year ago and a penny worse than expected. Revenues were only up +3% to $2.74 billion, which met expectations. Yet comparable store sales were +2.2% when Wall Street was expecting +2.5%. Management lowered their Q2 guidance. Guess what happened the next day? Yup, the stock dropped. Traders immediately sold the bounce and BBBY now has a clearly defined bearish trend of lower highs and lower lows. One has to wonder how bad would BBBY's Q1 results have been had the company not spent $385 million buying back stock last quarter?

In summary, BBBY has been missing Wall Street's revenue or earnings estimates the last three quarters in a row. They have warned twice and same-store sales are disappointing. Technically shares have broken down below multiple layers of support. The company is more of a home furnishing store so back to school season may not give them much of a boost. The point & figure chart is bearish and forecasting at $60.00 target. The last few days have seen some support near $67.00. We are suggesting a trigger to buy puts at $66.80.

Trigger @ $66.80

- Suggested Positions -

Buy the NOV $65 PUT (BBBY151120P65) current ask $2.40
option price is a current quote and not a suggested entry price.

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

Daily Chart:

Weekly Chart:



In Play Updates and Reviews

Stocks Continue To Suffer From Earnings Disappointments

by James Brown

Click here to email James Brown

Editor's Note:

Earnings expectations for the second quarter were pretty low. Thus far we are seeing too many companies fail to meet these lowered expectations. Traders are using the disappointing headlines as an excuse to sell.

CUDA hit our stop loss.

AAP and COST both hit our bullish entry triggers.

We want to exit the SM trade tomorrow at the closing bell.


Current Portfolio:


CALL Play Updates

Advance Auto Parts Inc. - AAP - close: 168.39 change: +0.17

Stop Loss: 164.85
Target(s): To Be Determined
Current Option Gain/Loss: -24.3%
Average Daily Volume = 1.0 million
Entry on July 23 at $170.25
Listed on July 18, 2015
Time Frame: Exit PRIOR to earnings on August 13th
New Positions: see below

Comments:
07/23/15: The market attempted a midday rally and AAP was outpacing the major indices and managed to rally past resistance near $170.00. Unfortunately, AAP, just like the rest of the market, turned lower this afternoon. AAP did hit our suggested entry point to buy calls at $170.25 but I am not suggesting new positions at current levels. Wait for another rally past $170.00.

Trade Description: July 18, 2015:
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.

- Suggested Positions -

Long AUG $175 CALL (AAP150821C175) entry $3.50

07/23/15 triggered @ $170.25
Option Format: symbol-year-month-day-call-strike


Adobe Systems Inc. - ADBE - close: 80.64 change: -0.09

Stop Loss: 79.65
Target(s): To Be Determined
Current Option Gain/Loss: -32.9%
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:
07/23/15: ADBE drifted lower but only lost nine cents (-0.1%) versus bigger declines among the major indices. I'm still expecting a dip toward $80.00 and/or its 50-dma (which is currently near $80.35).

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

07/22/15 new stop @ 79.65
07/16/15 triggered @ $82.65 (gap open)
Option Format: symbol-year-month-day-call-strike


Costco Wholesale - COST - close: 145.60 change: -0.78

Stop Loss: 142.75
Target(s): To Be Determined
Current Option Gain/Loss: -16.7%
Average Daily Volume = 2.0 million
Entry on July 23 at $146.85
Listed on July 22, 2015
Time Frame: Exit PRIOR to earnings on Sept. 30th
New Positions: see below

Comments:
07/23/15: Our new play on COST is open. The plan was to buy calls when COST traded at $146.75 but our trade opened this morning when COST gapped higher at $146.85. Unfortunately the rally didn't last. COST reversed at $147.00 and sank to a -0.5% decline. The $145.00 level should be short-term support. Nimble traders may want to consider buying calls if we see COST bounce near the $145 level. Otherwise I'd wait for a new rally above $146.50.

Trade Description: July 22, 2015:
Shares of COST are only up +3% year to date but they seem to have turned the corner after a three-month correction lower. The stock saw big gains in early February but that proved to be the peak. Shares fell almost $20 or -12% from its late March high to late June. Fortunately for the bulls the correction appears to be over.

If you're not familiar with COST they are in the services sector. The company runs a membership warehouse business that competes with the likes of Sam's Club (a division of Wal-Mart). According to the company, "Costco currently operates 672 warehouses, including 474 in the United States and Puerto Rico, 89 in Canada, 34 in Mexico, 26 in the United Kingdom, 20 in Japan, 11 in Korea, 10 in Taiwan, seven in Australia and one in Spain. The Company plans to open up to an additional 16 new warehouses (including one relocation to a larger and better-located facility) prior to the end of its fiscal year on August 30, 2015. Costco also operates electronic commerce web sites in the U.S., Canada, the United Kingdom and Mexico."

Earnings growth has been lackluster. Their most recent earnings report was May 28th. COST reported their Q3 earnings of $1.17 per share. That only beat estimates by a penny. Revenues were up +1.2% to $26.1 billion, which missed estimates. The company seems to be suffering from slow same-store sales.

COST's April same store sales fell -2.0% versus estimates for -0.3%. May same-store sales were flat (+0.0%). June's same-store sales were -1.0% against estimates for -0.1%. Analyst Charles Grom, with Sterne Agee CRT, says the headline number is not showing the whole picture.

According to Grom, COST's June same-store sales decline was only the second time since 2009 they were negative. If you remove currency headwinds and volatile gasoline prices from the mix then COST's sales are up +5.5% and traffic has been rising +4.0%.

Sterne Agee is not the only analyst firm bullish on COST. Piper Jaffray recently defended COST and reiterated their bullish "overweight" rating and $154 price target. A few days later Oppenheimer's analyst Brian Nagel upgraded COST from perform to outperform and gave the stock a $160 price target.

Shares of COST have definitely broken their three-month bearish trend of lower highs. COST has also rallied past technical resistance at its 50-dma, 200-dma, and the $145.00 level. We think the rally continues. Today's high was $146.48. We're suggesting a trigger to buy calls at $146.75.

- Suggested Positions -

Long OCT $150 CALL (COST151016C150) entry $3.00

07/23/15 triggered on gap open at $146.85, trigger was $146.75
Option Format: symbol-year-month-day-call-strike


The Walt Disney Co. - DIS - close: 118.80 change: -0.53

Stop Loss: 117.25
Target(s): To Be Determined
Current Option Gain/Loss: +108.7%
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:
07/23/15: The EU Antitrust team is at it again. Before the opening bell a news story surfaced that the EU Antitrust regulators had launched an investigation into DIS, Comcast (CMCSA) NBC Universal, Viacom's (VIAB) Paramount, Sony (SNE), 21st Century Fox (FOXA), Time Warner's (TWX) Warner Brothers, and British media company Sky UK back in January 2014. The allegation is that these media companies have restricted European viewers outside of Britain and Ireland from accessing paid content (here's a bit more on the story:
link.)

Shares of DIS didn't react much to this news and continued to churn sideways in the $118.50-119.50 zone.

More conservative traders may want to raise their stop loss again. 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

07/22/15 new stop @ 117.25
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


Fiserv, Inc. - FISV - close: 86.67 change: -1.30

Stop Loss: 85.85
Target(s): To Be Determined
Current Option Gain/Loss: -12.5%
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:
07/23/15: FISV displayed relative weakness today with a -1.4% decline versus the NASDAQ's -0.49% drop. Today's loss also left FISV below its 10-dma. The nearest support is the June high near $86.40 or the $86.00 level.

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: 44.25 change: +0.42

Stop Loss: 41.45
Target(s): To Be Determined
Current Option Gain/Loss: +47.1%
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:
07/23/15: INSY ignored the market's widespread weakness today and hit another new high. Shares closed with a +0.9% gain. Tonight I am raising the stop loss to $41.45.

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

07/23/15 new stop @ 41.45
07/22/15 new stop @ 40.85
07/21/15 new stop @ 39.30
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: 93.00 change: -1.96

Stop Loss: 91.75
Target(s): To Be Determined
Current Option Gain/Loss: +43.8%
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:
07/23/15: Ouch! I warned readers yesterday to expect JACK to dip today. The stock underperformed the broader market with a -2.0% loss.

I was expecting profit taking in CMG to weigh on JACK yet CMG closed unchanged today after huge gains yesterday. It looks like the market's reaction to McDonald's (MCD) earnings may have exacerbated the move in JACK today. JACK's Jack-in-the-box business is bigger than its Qdoba business so MCD's results probably have more influence.

No new positions at this time.

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

07/22/15 new stop @ 91.75
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




PUT Play Updates

Concho Resources - CXO - close: 105.62 change: +0.21

Stop Loss: 107.05
Target(s): To Be Determined
Current Option Gain/Loss: -13.0%
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:
07/23/15: The oversold bounce in CXO continued for a third day in a row. Yet the rebound failed at short-term technical resistance at the 10-dma. If shares reverse lower from here I would be tempted to launch new positions. Just keep in mind our plan to exit prior to earnings on July 29th.

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


PowerShares QQQ ETF - QQQ - close: 112.20 change: -0.42

Stop Loss: 114.50
Target(s): To Be Determined
Current Option Gain/Loss: +19.1%
Average Daily Volume = 27.5 million
Entry on July 21 at $114.02
Listed on July 20, 2015
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
07/23/15: The QQQ faded lower and settled with a -0.3% decline on the session. Odds are good this ETF will spike higher tomorrow thanks to Amazon.com (AMZN).

I warned readers last night that AMZN's earnings could move the QQQ on Friday. The company reported earnings tonight. Analysts were expecting AMZN earnings to be a loss of $0.14 per share. The company delivered a profit of $0.19 a share. Shares of AMZN have surged $83.00 to $565 a share after hours (a +17% move). This will definitely give the QQQ a boost in the morning. I would not be surprised to see the QQQ tag resistance near $114.00.

Trade Description: July 20, 2015:
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.

- Suggested Positions -

Long SEP $112 PUT (QQQ150918P112) entry $1.88

07/23/15 expect the QQQ to gap higher tomorrow in reaction to AMZN's earnings report tonight
07/22/15 new stop @ $114.50
07/21/15 trade begins. QQQ opened @ $114.02
Option Format: symbol-year-month-day-call-strike


SM Energy Company - SM - close: 35.29 change: +0.68

Stop Loss: 36.55
Target(s): To Be Determined
Current Option Gain/Loss: +215.2%
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:
07/23/15: Our SM trade is running out of time. Earnings are coming up on July 28th. I am suggesting we exit this trade tomorrow (Friday) at the closing bell. We'll move the stop loss down to $36.55 just in case SM bounces tomorrow.

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

07/23/15 new stop @ 36.55, Prepare to EXIT tomorrow at the close
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


Energy SPDR ETF - XLE - close: 70.87 change: -0.06

Stop Loss: 75.25
Target(s): To Be Determined
Current Option Gain/Loss: +9.2%
Average Daily Volume = 13.3 million
Entry on July 22 at $71.22
Listed on July 21, 2015
Time Frame: Exit PRIOR to September option expiration
New Positions: see below

Comments:
07/23/15: The sell-off in crude oil continued on Thursday. Yet the XLE didn't react to it. This ETF rebounded from its intraday lows to close virtually unchanged.

I am suggesting readers hesitate before launching new positions.

Trade Description: July 21, 2015:
The 2015 bounce in crude oil appears to be over. The price of crude oil was cut in half with a plunge that started in the second quarter of 2014 and didn't stop until early 2015. Oil managed a multi-week bounce off its March 2015 lows but the rally stalled in May and oil prices churned sideways for almost two months. Now the commodity has resumed its decline.

Today WTI crude oil is hovering near $50.00 a barrel, which is a three-month low. Oil consumption is rising but it's not outpacing oil production. The big drop last year was the market realizing we (temporarily) have more supply than demand.

The Iran deal over the country's nuclear program, if it doesn't get derailed again, will remove sanctions on Iran and allow the oil-producing country to sell more oil on the global market. That's more supply to a market that doesn't need it. Iran denies it but sources say the country has more than 50 million barrels of oil just sitting in oil tankers ready for transport.

Another problem for the energy sector is natural gas supplies. Last month the U.S. Energy Information Administration said natural gas inventories rose 132 billion cubic feet to 2.2 trillion cubic feet. That's more than 50% above last year's inventory levels and the largest surplus in 12 years. The Natural Gas Supply Association expects industry production to hit a new all-time record this summer.

One way to play this bearish supply/demand issue on oil and natural gas is the XLE.

The XLE is an exchange traded fund (ETF) designed to track the Energy Select Sector Index. This is a great way for investors to play the energy sector of the S&P 500 index, which includes oil, gas & consumable fuels, and energy equipment and services companies.

Top 10 Holdings (61.54% of Total Assets)
Company Symbol % Assets
Exxon Mobil Corporation XOM 15.79
Chevron Corporation CVX 12.46
Schlumberger N.V. SLB 7.68
Kinder Morgan, Inc KMI 4.48
EOG Resources, Inc. EOG 3.94
ConocoPhillips COP 3.76
Williams Companies, Inc. (The) WMB 3.67
Occidental Petroleum Corporation OXY 3.51
Pioneer Natural Resources PXD 3.15
Anadarko Petroleum Corporation APC 3.10
The market is well aware of the supply issues facing the energy sector and the XLE has been falling 11 out of the last 12 weeks. We don't see any catalyst that would reverse this momentum.

Currently the XLE has broken down to new multi-year lows and the nearest support levels could be down near $66 or $60. The point & figure chart is bearish and forecasting at $61.00 target. Tonight we are suggesting a trigger to buy puts at $71.25.

- Suggested Positions -

Long SEP $70 PUT (XLE150918P70) entry $1.84

07/22/15 triggered on gap down at $71.22, suggested entry was $71.25
Option Format: symbol-year-month-day-call-strike


CLOSED BEARISH PLAYS

Barracuda Networks, Inc. - CUDA - close: 30.08 change: +1.73

Stop Loss: 30.60
Target(s): To Be Determined
Current Option Gain/Loss: -35.9%
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:
07/23/15: Cyber-security stocks bounced today and CUDA surged +6%. The stock hit our stop loss at $30.60 midday.

*small positions to limit risk* - Suggested Positions -

AUG $30 PUT (CUDA150821P30) entry $1.70 exit $1.09 (-35.9%)

07/23/15 stopped out
07/20/15 new stop @ 30.60
07/17/15 triggered @ $29.75
Option Format: symbol-year-month-day-call-strike

chart: