Option Investor
Newsletter

Daily Newsletter, Wednesday, 8/5/2015

Table of Contents

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

Market Wrap

Big Price Swings, No Follow Through

by Keene Little

Click here to email Keene Little
We're getting decent price swings (with relatively low VIX readings for all the price volatility) but we're stuck waiting for something. We're all here and ready to trade but the market is making us wait to see if there will be any follow through either up or down. So far there's been no answer from the market.

Today's Market Stats

The market started off strong this morning after an overnight rally in equity futures due to encouraging economic news out of Europe and Asia and then the pre-market ADP report that was weaker than expected -- yes, weak is good since it keeps the Fed off the raise-rates button. The DOW was relatively weak, thanks to Disney, while the others were doing well. SPX was the middle of the road, while techs were strong, but after being up nearly 20 points this morning, the sellers took over, driving SPX back down about 13 points to close +6 in the green. The DOW finished -10 points in the red. We continue to wait for direction.

Before this morning's open we received the ADP Employment report, which came in at 185K, weaker than the expected 220K and a drop from June's 229K (which had been revised lower from the originally reported 237K). After more worry about the Fed kicking off its rate-raising campaign (one of the reasons for yesterday's rally), the weak ADP report, and what it might mean for this Friday's NFP report, had traders feeling more bullish about the Fed being forced to back away.

After this morning's open we received the ISM Services report and it was strong than expected. At 60.3 it was better than the 56.3 the market expected and a big jump up from June's 56.0. It's also the highest it's been since August 2005. Hmm, maybe the Fed will pick up on that as a reason to justify a rate increase. I'll believe a rate increase when I see one.

Other than the two economic reports and some earnings reports, which knocked indexes around but left them bifurcated, there apparently wasn't much to keep the buyers coming in. That suggests the rally may have been more short covering than real buying and any weakness tomorrow would suggest the market is weaker than it is strong. But Thursday could continue to chop sideways as it waits to get through Friday morning's NFP report

With the choppy sideways move this year it's been difficult getting a sense of direction, other than sideways, and putting trend lines around it has been challenging to say the least. What typically works in a sideways market is price-level S/R but even that hasn't worked very well. One of the trend lines that appears to be in play is the longer-term uptrend line from October 2011 - October 2014, currently near 17735. The DOW poked above this line last week but was unable to close above it with the important weekly closing price. On a weekly chart, intraweek breaks of S/R are not as important as the week's closing price (same as intraday breaks not being as important as the daily close). If the DOW drops back down near last week's low at 17553 it would be a test of the bottom of a parallel up-channel from February and a trend line along the lows from March 26 - July 7. A little lower, near 17270 is the trend line along the highs from 2000-2007, which it broke above in October 2014 and back-tested in February. There is still the potential for that trend line (purple on the weekly chart below) to hold as support but below that level and then its February 2nd low at 17037 would be confirmation we've seen THE high. Until that happens, especially in this choppy market, it could go either way, or should I see one of 3 ways -- up, down or sideways (or any combination of those possibilities). I've highlighted the MACD break below the zero line, which is bearish since bullish consolidations generally see MACD hold above the zero line (coming back to the zero line and turning back up is typically a good buy signal).

Dow Industrials, INDU, Weekly chart

Thanks to Disney (DIS) and its disappointing earnings report after the bell yesterday, it held the DOW back today, which made it one of the weaker indexes in today's rally attempt. DIS finished down -11 (-9%) and single-handily had the DOW finishing in the red today while the others stayed in the green. Last week the DOW tried 3 times to get through its broken 200-dma, only to be rejected each time. Friday's red candle followed a bearish dragonfly doji on Thursday and that gave us a 3-candle reversal pattern at resistance. Monday followed with a down day and a confirmed failure to climb back above its uptrend line from 2011-2014. This morning's high was a back-test of its broken uptrend line from October 2014 through the July 7th low, currently near 17660. Of all the indexes, the DOW best supports a very bearish wave count, which is a series of 1st and 2nd waves to the downside off the May high. The series of 1st and 2nd waves could be just a corrective pullback, which in this case would mean a correction to the longer-term rally that will be followed another rally. But keep in mind that market crashes come out of bearish wave counts like this, as well as oversold condition, and therefore the potential for a huge downside move needs to be respected.

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- bullish above 17,784
- bearish below 17,399

Those who trade the Dow Industrial index, such as through the Diamonds (DIA), were likely watching the downtrend line from July 20-31 and maybe even the uptrend line from October 2014 through the July 7th low, both of which crossed today near 17660. The first thing the bulls need to do is rally the DOW above that level. But in the land of chop we wouldn't know if that would lead to a bigger bullish move or just more of the same 3-wave moves that lead to reversals.

Dow Industrials, INDU, 60-min chart

Unlike the DOW, SPX has been chopping more sideways than in a choppy downtrend. This morning's rally had it popping above its downtrend line from July 20th, near 2108, but it was unable to hold above, which left a bearish failure. The large tail above today's candle body is a clear sign of a failure to rally and is bearish. It also closed below both its 20-dma (near 2100) and its 50-dma (near 2098), also not bullish. If it does drop lower from here we could see a decline to about 2073-2076, where it would meet its uptrend line from July 7th and its 200-dma. The last time it touched the 200-dma, on July 27th, it led to a 50-point rally in 4 trading days. But it would be the 3rd test of that support in about a month and might not stand up to another test. However, the bottom line right now is that we do not have enough clues to help determine which way this is going to break. But whichever way it does break it's likely going to be a big move.

S&P 500, SPX, Daily chart

The techs were the stronger sectors today, thanks to a few high-flyers, but they too failed to hold their rallies. As can be seen on the Nasdaq's chart below, today's candle is a shooting star. The good news is that it closed 7 points above price-level resistance at 5132. The bad news is that the bearish candlestick is basically still at resistance. If the Nasdaq continues to rally this week I'd watch for the possibility that it will close the July 22nd gap down, near 52.08. Two equal legs up, for just an a-b-c bounce off its July 28th low, points to about 5210 so we've got an upside target at 5208-5210 and it would be bullish above that level. But a drop back below its 50-dma, near 5082, would be a bearish move.

Nasdaq Composite index, COMPQ, Daily chart

Key Levels for COMPQ:
- bullish above 5132
- bearish below 5025

Looking at the RUT's daily chart reminded me of the children's way of picking between something -- Eeny meeny miny mo, pick an animal by the toe, if he hollers let him go ... If the animal whose toe you pick is either a bull or a bear I think your chances of getting mauled are quite high. The same could be said for picking a direction on the RUT. Price has been oscillating the past 4 days around its H&S neckline (uptrend line from May-July) and today it closed on the line with a doji (albeit a slightly bearish one). The 20-dma is about 12 points above the line and the 200-dma is about 13 points below the line. Flip a coin since a trade has a 50/50 chance of going your way here, which of course means you should take a pass and not enter a new trade here. Entering a trade here is gambling, not trading. However, if it continues to chop sideways for a couple more days then I would see that as a bullish consolidation. Friday's NFP report could prevent any consolidation beyond Friday morning.

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- bullish above 1263
- bearish below 1205

I've been watching Treasuries because they've been showing strength (yields dropping) while the stock market has been holding up (other than the DOW with its shallow choppy decline). This could be a message from the bond market that says the Fed will not be raising rates anytime soon, which has helped the stock market at least stay afloat. But yields and stock prices follow each more than they do not and the decline in yields since the high at the end of June suggests stock prices could be on borrowed time here. As the TYX (30-year yield) daily chart below shows, the decline from last week broke the uptrend line from January-April, near 2.94% at the time, and today's rally has brought it back up to the broken trend line, near 2.96%. It's also testing its downtrend line from July 13th. A rally above the July 29th high at 3.025 would be a bullish move but at the moment we could see a bearish kiss goodbye at resistance, in which case a test of its 200-dma, near 2.82, would likely be next. The further yields drop I think the more pressure we'll see on stock prices.

30-year Yield, TYX, Daily chart

The banking index, BKX, has been struggling to hold near its high since the latter part of June. The June highs and the July 23rd high were tests of the top of a parallel up-channel for price action since October 2013, which is currently near 80.60. Next week the top of the channel will cross the broken uptrend line from March 2009 - October 2011 at the 61.8% retracement of the 2007-2009 decline, at 80.87. The July 23rd high tagged this retracement level to the penny. On an intraday chart it looks like an impulsive decline from the July 23rd high and so far a corrective bounce that has retraced 62% of the July 23-28 decline and therefore it could be ready to start the next leg down. It could achieve at least a minor new high but with bearish divergence I would expect nothing more than a 3-drives-to-a-high topping pattern.

KBW Bank index, BKX, Weekly chart

The TRAN got a strong rally off its July 27th low but after two days it stopped. It was still looking bullish with the sideways consolidation following the rally and it looked like today we'd get the follow through. But a 113-point rally was given back and it closed only about 10 points in the green. The resulting shooting star (or a more bearish version called a gravestone doji) at resistance does not look promising for the bulls. The line of resistance is price-level S/R near 8515 and today's high was 8530. Today's strong rejection at resistance looks like a back-test followed by a bearish kiss goodbye and a short position with a stop just above today's high looks like a good setup.

Transportation Index, TRAN, Daily chart

The U.S. dollar has made it up to a downtrend line off the two highs in March-April, currently near 98.20 (today's high was 98.33) and is showing some bearish divergence against its July 20th high. Not shown on the weekly chart below, it's also back up for another back-test of its broken uptrend line from June 18th and therefore it's possible the dollar's bounce off its May low will end here and we'll see the start of another pullback inside what I believe will become a large sideways triangle consolidation pattern through the rest of this year. I see the potential for a little higher for the dollar, perhaps near 99, but at this point I think the long side for the dollar is the riskier side.

U.S. Dollar contract, DX, Weekly chart

Since gold dropped to Fib support at 1090, on July 20th, it's been consolidating in more or less a sideways triangle pattern, which is a bearish continuation pattern. It suggests support at 1090, which is the 50% retracement of its 2001-2011 rally, will soon break. It would be short-term bullish above the July 31st high at 1103 but the bulls need to see gold back above price-level resistance at 1141, which was a shelf of support from November 2014 through July. In the meantime, the next downside target for gold is near 1000.

Gold continuous contract, GC, Weekly chart

Watching silver for some clues, especially since it's currently showing bullish divergence on its weekly chart, I'm not yet seeing anything that says I should be looking for a rally. It's consolidating like gold and a weekly close below 14.65, which is price-level S/R from back in 2006-2010, would likely indicate the next leg down has started. Until I see evidence to the contrary I continue to look for silver to drop down to the $12 area before potentially setting up a very good buying opportunity.

Silver continuous contract, SI, Weekly chart

In the beginning of the year I started showing an idea for sideways triangle consolidations for the dollar and oil. Oil I'm a little less sure about since it looks like we get a minor new low (no lower than 40) to finish a 5-wave decline from August 2013, which could set up a big bounce or a big sideways choppy consolidation. For now I'm leaning toward a sideways triangle similar to the dollar and the projection I've had for it since the May high has been back down to near 44 and it's now nearing that level (today's low was 44.83). The bullish divergence shown on the weekly chart suggests caution by those who are short oil. I wouldn't try catching falling knives here but nor would I be looking to short it this close to possible support. If oil consolidates near support for a few weeks then I'd be looking for another leg down to finish the decline, probably above 40. But if it just keeps selling off below 44 then we could be looking for a test of the January 2009 low at 33.20.

Oil continuous contract, CL, Weekly chart

Tomorrow's economic reports include the Challenger Job Cuts, which could add to the angst about what Friday's NFP report might look like. Just keep in mind that the reaction to the NFP report will likely be backwards -- what's bad is good and good is bad. Any confirmation of weakness in the jobs market will force the Fed to sit on their hands.

Economic reports and Summary

Conclusion

Know when to trade and when to sit on the sidelines. I've been seeing that recommendation from more trading analysts and I think it's good advice (the secret to Jesse Livermore's success, when he was successful). We have a choppy and whippy market and there continues to be lack of follow through in both directions. Active traders, which most of you are, hate sitting on the sidelines since you feel like you're wasting your time. Time is money and when money is not on the line it's not making any. The trouble is most traders lose money in this kind of environment so if you're one of those then you need to stand up, take a big breath of clean air, grab both of your butt cheeks and sit down while holding them. It's the best way to keep your hand off the mouse and it helps keep you out of trouble. Boring, yes, but right now capital preservation is more important than capital appreciation.

If you can't help yourself and you must trade, try paper trading some new ideas. Trade light and trade quick and see how quickly base hits can compound into big gains. Making $100 on a trade might not be as satisfying (from an instant gratification perspective) as making $1000 or $5000 but losing $100 sure feels a lot safer than losing $1000. Read and research your next trading ideas so that you're ready for the next big move. The market has been chopping sideways and many are expecting an upside breakout, which is a typical expectation when the consolidation follows a rally leg. The rally will likely be big if it breaks out to the upside (always be careful about a head-fake breakout) since the spring is getting wound tight. But if the market breaks down instead, which I think it will, a failed bullish pattern typically leads to a strong bearish move. In other words, we'll have plenty of opportunities to make some good money in a big move. But that will only happen if you've still got some capital to trade. So if you're bored and feeling like you need to trade, just keep the bigger move that's coming in mind and "save yourself" for that special move.

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

Knee-jerk Reaction = Opportunity

by James Brown

Click here to email James Brown


NEW DIRECTIONAL CALL PLAYS

The Walt Disney Co - DIS - close: 110.53 change: -11.16

Stop Loss: 106.85
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 5.9 million
Entry on August -- at $---.--
Listed on August 05, 2015
Time Frame: Exit PRIOR to earnings
New Positions: Yes, see below

Company Description

Trade Description: Disney on Sale, Buy Now

Disney (Nyse:DIS) reported earnings last night and beat the street with earnings of $1.45 compared to estimates for $1.42. Today shares are down -$11 to $110 and erasing 85 points off the Dow. This is a major buying opportunity.

Disney posted $13.1 billion in revenue compared to estimates for $13.2 billion. That minor miss was not the reason for the huge decline in the stock. Disney said revenues in its cable products rose +5% BUT they had seen some pressure from online streaming. Subscription growth to the ESPN cable bundle had slowed, not declined, just slowed.

There are multiple reasons. There are no major sporting events this summer like the World Cup, Olympics, etc. Some consumers are cutting the cord to cable because they are now getting their TV programming from Netflix, Hulu, etc. Cable is expensive compared to the streaming options. The drop off in ESPN growth is not related specifically to Disney. CEO Bob Iger said subscriptions would pick back up in 2016 and expand sharply in 2017 thanks to a flood of sporting events due to come online next year.

Disney has already purchased the rights to nearly every sporting event available in the next five years but the old contracts with the prior rights holders have yet to expire. As those contracts expire and the new Disney contracts begin the content on ESPN will surge.

This slowdown in ESPN growth should be ignored. This is just a small part of the Disney empire and everything else is growing like crazy. Parks and resorts revenue rose +4%. Consumer products revenue rose +6% thanks to Frozen, Avengers and Star Wars merchandise. The only weak spot was interactive gaming, which declined -$58 million to $208 million. Disney expects that to rebound in Q4 as new games are released and holiday shopping begins.

The real key here is the theme parks, cruises and most of all the movie franchises. They have five Star Wars movies in the pipeline and the one opening this December is expected to gross $2.2 billion and provide Disney with more than $1 billion in profits. This is just one of the blockbusters they have scheduled.

Analysts are claiming Disney shares could add 25% before the end of December because of their strong movie schedule and coming attractions. The Avengers movie in April was a hit and added greatly to their Q2 earnings. However, that will just be a drop in the bucket compared to the money they are going to make on the Star Wars reboot in December. That is the first of five Star Wars movies on the calendar. Remember, Disney now has Marvel, Pixar and Star Wars (Lucasfilm) all under the same roof.

Disney Movie Schedule (partial)

Dec. 18, 2015 - "Star Wars: Episode VII - The Force Awakens"
2016 - "The Incredibles 2"
2016 - "Frozen" sequel
April 29, 2016 - "Captain America: Civil War"
June 17, 2016 - "Finding Dory"
Dec. 16, 2016 - "Star Wars Anthology: Rogue One"
May 26, 2017 - "Star Wars: Episode VIII"
June 16, 2017 - "Toy Story 4"
Late 2017 - "Thor: Ragnarok"
May 4, 2018 - "Avengers: Infinity War - Part I"
2018 - "Untitled Star Wars Anthology Project"
May 3, 2019 - "Avengers: Infinity War - Part II"
2019 - "Star Wars: Episode IX"

Disney was recently upgraded with a new price target of $150. The drop to $110 on Wednesday is a buying opportunity. Shares have risen from $90 in February to $122 on Tuesday. The $110 level is major support and should be bought. This is right at the 100-day average.

Tonight we are suggesting a trigger to buy calls at $111.65 with an initial stop loss at $106.85.

Trigger @ $111.65

- Suggested Positions -

Buy the OCT $115 CALL (DIS151016C115) current ask $2.02
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 Snap Losing Streak But Gains Fade

by James Brown

Click here to email James Brown

Editor's Note:

The S&P 500 index snapped a three-day losing streak but the rally faded from its midday highs. Investors are still concerned about the plunge in crude oil, which fell again today. Plus we have the jobs report coming out on Friday morning, which could keep traders on the sidelines.

WCC hit our bearish entry trigger.


Current Portfolio:


CALL Play Updates

Advance Auto Parts Inc. - AAP - close: 175.27 change: +0.17

Stop Loss: 169.75
Target(s): To Be Determined
Current Option Gain/Loss: +42.9%
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:
08/05/15: There were dueling analyst opinions on AAP today. One firm downgraded the stock to a hold. Another reiterated their buy rating and raised their price target to $200.00. Shares of AAP didn't move much and just churned sideways on either side of the $175.00 level.

I am not suggesting new positions at this time.

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

08/01/15 new stop @ 169.75
07/25/15 new stop @ 165.85
07/23/15 triggered @ $170.25
Option Format: symbol-year-month-day-call-strike


Accenture plc. - ACN - close: 104.50 change: +1.08

Stop Loss: 99.85
Target(s): To Be Determined
Current Option Gain/Loss: +21.9%
Average Daily Volume = 2.3 million
Entry on July 31 at $103.35
Listed on July 30, 2015
Time Frame: Exit PRIOR to September option expiration
New Positions: see below

Comments:
08/05/15: ACN displayed relative strength today with a +1.0% gain. The stock gapped open higher and briefly traded above $105.00 before paring its gains.

I am not suggesting new positions at this time.

Trade Description: July 30, 2015:
Sometimes slow and steady wins the race. Patient investors have been rewarded in ACN. The stock is up +290% from its 2009 lows. Sales and earnings have also improved. From 2010 to 2014 ACN has seen revenues rise +38% and net income soar +54%. Year to date ACN is up +14%. The S&P 500 index is only up +2.4%.

ACN is in the technology sector. They're considered part of the information technology services industry. According to the company, "Accenture is a global management consulting, technology services and outsourcing company, with more than 336,000 people serving clients in more than 120 countries. Combining unparalleled experience, comprehensive capabilities across all industries and business functions, and extensive research on the world's most successful companies, Accenture collaborates with clients to help them become high-performance businesses and governments. The company generated net revenues of US$30.0 billion for the fiscal year ended Aug. 31, 2014."

A recent article on Investopedia.com noted that ACN is on a buying spree. "Since the beginning of 2015, Accenture has acquired nine other companies: smart grid company Structure, supply chain analytics company Gaspo, strategy consulting companies Axia and Javelin, Salesforce consulting services provider Tquila UK, digital design company Reactive Media, and digital solutions companies Agilex, Brightstep, and PacificLink Group. All of these acquisitions should strengthen Accenture's position in IT services against rivals like IBM and Infosys."

Last year ACN's earnings progress seemed to slow. Last September they reported their Q4 results that missed estimates by two cents. They beat the revenue number but guided lower. In December they beat analysts' estimates on both the top and bottom line but guided lower again. Guidance improved somewhat with ACN's 2015 Q2 report in March where the company beat estimates and guided in-line.

Their most recent report was June 25th when the company announced its 2015 Q3 results. Earnings were $1.30 per share, which was seven cents above estimates. Revenues were relatively flat (+0.4%) at $7.77 billion but that was significantly above expectations. New bookings last quarter were $8.5 billion. North American sales rose +12% on a local currency basis. Europe sales were up +7% while the rest of the world saw sales rise +13%. Management reaffirmed their fiscal year 2015 guidance and expect new bookings to be $33-to-$35 billion for the year.

The stock has been popping on its recent earnings reports. Then shares fade lower until they hit the long-term up trend and investors buy the dip. The up trend seems to be getting stronger. ACN recently broke out past round-number resistance at $100.00 and managed to hold this level during last week's market sell-off. Now ACN is poised to hit new highs. Tonight we're suggesting a trigger to buy calls at $103.35.

- Suggested Positions -

Long SEP $105 CALL (ACN150918C105) entry $1.60

07/31/15 triggered @ $103.35
Option Format: symbol-year-month-day-call-strike


Stryker Corp. - SYK - close: 103.12 change: +1.64

Stop Loss: 99.85
Target(s): To Be Determined
Current Option Gain/Loss: +6.2%
Average Daily Volume = 1.1 million
Entry on July 29 at $102.15
Listed on July 28, 2015
Time Frame: Exit PRIOR to September option expiration
New Positions: see below

Comments:
08/05/15: Bullish analyst comments this morning helped push SYK to a +1.6% gain. The stock was reiterated as a buy and given a new price target of $120.

SYK ended the day at a new all-time closing high. No new positions at this time.

Trade Description: July 28, 2015:
The healthcare sector has consistently delivered a strong bullish performance for the last three years in a row. When you think of healthcare you might think health insurance providers. They are not the only healthcare stocks in rally mode. Tonight's candidate is in the medical equipment and supplies industry.

According to the company, "Stryker is one of the world's leading medical technology companies and together with our customers, we are driven to make healthcare better. The Company offers a diverse array of innovative products and services in Orthopaedics, Medical and Surgical, and Neurotechnology and Spine, which help improve patient and hospital outcomes. Stryker is active in over 100 countries around the world."

Late last year the company's earnings growth was lackluster at best but the company has turned things around the last couple of quarters. SYK reported their Q1 results on April 21st. They beat the bottom line estimate. Revenues were only in-line with estimates. Yet management raised the low-end of their 2015 sales and earnings guidance. You can see the reaction to the stock price in April.

Their most recent earnings report was July 23rd. Wall Street was expecting Q2 earnings of $1.17 per share on revenues of $2.41 billion. SYK beat both estimates with earnings growth of +11% to $1.20 per share. Revenues were up +2.9% to $2.43 billion. On a constant currency basis their sales were up +7.6%.

SYK management raised their organic growth forecast to +5.5% to +6.5%. They raised both their Q3 and 2015 earnings forecast above analysts' estimates. SYK now expects full year earnings in the $5.06-5.12 range versus consensus estimates at $5.03 per share. Analyst reaction has been positive with several price target upgrades into the $107-110 range. The point & figure chart is bullish and currently forecasting at $111.00 target.

We like how SYK displayed relative strength last week and resisted most of the market's sell-off (prior to their earnings report). The better than expected Q2 results launched SYK to new all-time highs. Traders bought the dip this morning and today is a new all-time closing high for SYK. Tonight we are suggesting a trigger to buy calls at $102.15.

- Suggested Positions -

Long SEP $105 CALL (SYK150918C105) entry $1.13

08/01/15 new stop @ 99.85
07/29/15 triggered @ $102.15
Option Format: symbol-year-month-day-call-strike


Teva Pharmaceuticals - TEVA - close: 71.19 change: +0.50

Stop Loss: 67.45
Target(s): To Be Determined
Current Option Gain/Loss: +21.8%
Average Daily Volume = 5.4 million
Entry on August 04 at $70.25
Listed on August 03, 2015
Time Frame: Exit PRIOR to September option expiration
New Positions: see below

Comments:
08/05/15: TEVA was upgraded from a "sell" to a "hold" but it doesn't seem like this news had much effect. Shares of TEVA kept pace with the broader NASDAQ composite today (+0.7%)

Trade Description: August 3, 2015:
The combination of M&A news and improving earnings results has been a win-win for shares of TEVA. The stock recently soared to new all-time highs on some key headlines in the last several days.

TEVA is in the healthcare sector. They're part of the drug manufacturing industry. According to the company, "Teva Pharmaceutical Industries Ltd. is a leading global pharmaceutical company that delivers high-quality, patient-centric healthcare solutions to millions of patients every day. Headquartered in Israel, Teva is the world's largest generic medicines producer, leveraging its portfolio of more than 1,000 molecules to produce a wide range of generic products in nearly every therapeutic area. In specialty medicines, Teva has a world-leading position in innovative treatments for disorders of the central nervous system, including pain, as well as a strong portfolio of respiratory products. Teva integrates its generics and specialty capabilities in its global research and development division to create new ways of addressing unmet patient needs by combining drug development capabilities with devices, services and technologies. Teva's net revenues in 2014 amounted to $20.3 billion."

TEVA's most recent earnings report was July 27th. Analysts were expecting a profit of $1.29 per shares for TEVA's Q2 results. The company delivered $1.43 per share. Revenues fell -1.5% to $4.97 billion but that was actually better than expected. TEVA's management then raised their 2015 guidance from $5.05-5.35 per share to $5.15-5.40 compared to Wall Street's estimate at $5.21.

If beating earnings and raising guidance wasn't enough to drive the stock higher TEVA also announced major acquisition news. TEVA had been trying to buy British drug firm Mylan (MYL) with an unsolicited bid. Meanwhile MYL is trying to buy Perrigo (PRGO). MYL didn't seem interested in being acquired by TEVA and actually adopted a poison pill strategy to make it less attractive to hostile takeovers.

On July 27th TEVA announced they had dropped their bid for MYL and instead announced a deal to buy Allergan's (AGN) generic drug business for $40.5 billion. TEVA will pay $33.75 billion in cash and $6.75 billion in stock, giving AGN a 10% stake in TEVA. They expect the deal to close in the first quarter of 2016.

According to a Reuters article, "Teva, which will gain a portfolio of more than 1,000 products, forecast a double-digit boost to adjusted earnings per share in 2016 and a more than 20 percent benefit in years two and three after closing the deal. It expects cost synergies and tax savings of $1.4 billion annually by the third anniversary from efficiencies in operations, manufacturing, and sales and marketing."

Wall Street applauded the deal with AGN and shares of TEVA soared from $62 to $72 in a single day.

TEVA has continued its M&A with another story out today. This morning, before the opening bell, TEVA announced it will purchase a 51% stake in a privately-held, genomic-analysis company, Immuneering Corporation. According to the press release "Immuneering uses advanced proprietary techniques to identify hidden signals and biological insights across an array of genetic, genomic, and proteomic data that can direct research for enhanced discovery, development and clinical success." The two companies have worked together before. Financial terms were not disclosed.

The AGN deal has gotten Wall Street's seal of approval. Several analyst firms have upgraded TEVA since then with multiple price target upgrades including: $82 from Deutsche Bank, $82 from Argus, $85 from RBC, $85 from Morgan Stanley, $86 from Citigroup. Just today J.P.Morgan restarted coverage on TEVA with an "overweight" and an $82 target. The point & figure chart is bullish and forecasting a long-term target of $98.00 for TEVA.

Shares of TEVA saw a $4.00 pullback but traders have started buying the dip. We want to hop on board if this bounce continues. Tonight we're suggesting a trigger to buy calls at $70.25.

- Suggested Positions -

Long SEP $70 CALL (TEVA150918C70) entry $2.02

08/04/15 triggered @ $70.25
Option Format: symbol-year-month-day-call-strike


Under Armour, Inc. - UA - close: 101.04 change: +1.69

Stop Loss: 94.65
Target(s): To Be Determined
Current Option Gain/Loss: +57.9%
Average Daily Volume = 2.3 million
Entry on July 28 at $97.55
Listed on July 27, 2015
Time Frame: Exit PRIOR to September option expiration
New Positions: see below

Comments:
08/05/15: The rally continues in UA. Shares displayed relative strength with a +1.7% gain. More importantly the stock has broken through round-number resistance at the $100.00 level.

More conservative traders may want to raise their stop loss again. No new positions at this time.

Trade Description: July 27, 2015:
UA is in the consumer goods sector. They make shoes and athletic wear. According to the company, "Under Armour (UA), the originator of performance footwear, apparel and equipment, revolutionized how athletes across the world dress. Designed to make all athletes better, the brand's innovative products are sold worldwide to athletes at all levels. The Under Armour Connected Fitness platform powers the world's largest digital health and fitness community through a suite of applications: UA Record, MapMyFitness, Endomondo and MyFitnessPal."

The athletic shoe and athletic apparel business is very competitive. Nike (NKE) has dominated the space for years. UA is about 10% the size of NKE but it's actively fighting for market share and recently overtook Adidas as the second biggest athletic wear brand inside the United States. Nike had sales of $27.8 billion in 2014. UA is a fraction of that with 2014 sales of $3.08 billion but they saw growth of +32%.

UA has been firing on all cylinders with its earnings results. Most of last year saw the company not only beating Wall Street's estimates but also raising guidance. UA reported their 2014 Q4 results on February 4th. The company reported a profit of $0.40 a share with revenues climbing +31% to $895 million, which was above estimates for $849 million. UA's CEO Kevin Plank, in a recent interview, said his company will grow at 20%-plus in 2015. The company's current estimates are $3.76 billion in sales for the year.

There was a steady stream of analysts raising their price targets on UA after its February earnings report. The company's most recent earnings report was April 21st when UA announced Q1 results. After raising guidance back in February the company reported earnings of $0.05 per share, which was in-line with Wall Street's new estimates. Revenues were up +25.4% to $804.9 million, which beat expectations.

UA management raised their outlook again. They expect 2015 operating income to improve +13-to-15%. UA expects 2015 revenues to rise +23% to $3.78 billion.

The company delivered a repeat performance when they did it again with their Q2 earnings on July 23rd. Analysts were expecting a profit of $0.05 per share on revenues of $761.7 million. UA beat both estimates with a profit of $0.07 per share. Revenues were up +28.5% to $783.5 million. Management raised their 2015 revenue guidance from $3.78 billion to $3.84 billion. That's above analysts' estimates of $3.83 billion.

Wall Street reacted to UA's Q2 report with a wave of price target upgrades. Several firms upped their target on UA into the $105-114 range. Naturally the stock rallied on this bullish earnings report and the analyst outlook. The stock soared past resistance near $90.00. More importantly UA has managed to maintain these gains in the face of a widespread market sell-off. We like that kind of relative strength.

Tonight we are suggesting a trigger to buy calls at $97.55. We'll try and limit our risk with an initial stop loss at $93.65.

- Suggested Positions -

Long SEP $100 CALL (UA150918C100) entry $2.66

08/01/15 new stop @ 94.65
07/28/15 triggered @ $97.55
Option Format: symbol-year-month-day-call-strike




PUT Play Updates

Bed Bath & Beyond Inc. - BBBY - close: 64.06 change: -0.38

Stop Loss: 66.25
Target(s): To Be Determined
Current Option Gain/Loss: +37.3%
Average Daily Volume = 2.0 million
Entry on July 24 at $66.80
Listed on July 23, 2015
Time Frame: Exit PRIOR to earnings in late September
New Positions: see below

Comments:
08/05/15: BBBY sank to new 2015 lows with today's -0.58% decline. The path of least resistance is definitely lower and shares ignored the broader market's push higher today.

Trade Description: July 23, 2015:
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.

- Suggested Positions -

Long NOV $65 PUT (BBBY151120P65) entry $2.55

08/01/15 new stop @ 66.25
07/25/15 new stop @ 67.65
07/24/15 triggered @ $66.80
Option Format: symbol-year-month-day-call-strike


Hess Corp. - HES - close: 55.92 change: -1.63

Stop Loss: 60.25
Target(s): To Be Determined
Current Option Gain/Loss: +42.9%
Average Daily Volume = 2.8 million
Entry on August 03 at $58.21
Listed on August 01, 2015
Time Frame: Exit PRIOR to September option expiration
New Positions: see below

Comments:
08/05/15: Crude oil fell to new relative lows today. This undermined the energy stocks. HES underperformed with a -2.8% drop to new multi-year lows. Tonight we will adjust the stop loss down to $60.25.

Trade Description: August 1, 2015:
The price of crude oil has fallen more than 50% in the last year. It's wreaking havoc on energy company earnings and revenues. Unfortunately the outlook is not very bullish. The global economy is stalling. China, the biggest buyer of commodities, is growing at multi-year lows. The U.S. is creeping along at +2% GDP growth while oil inventories in the U.S are near 80-year highs. The Middle East OPEC cartel is pumping a high-volume of oil, regardless of price declines, to maintain market share. OPEC is hoping to pressure the U.S. fracking industry out of business but it's not working. U.S. production remains resilient and near record highs.

If that wasn't enough the Federal Reserve is desperate to raise interest rates and would like to raise in September. Rising interest rates usually boost a country's currency. If the Fed does raise rates the U.S. dollar should rally even further. A rising dollar puts downward pressure on commodity prices. This paints a bearish picture for crude oil prices.

Given this outlook for crude we're adding a bearish play in the energy industry. HES is part of the basic materials sector. They explore and produce crude oil, NGL, and natural gas. The company operates in the United States, Denmark, Equatorial Guinea, Malaysia/Thailand, and Norway.

The plunge in oil prices has killed HES' revenues. They reported their 2014 Q4 results on January 28th this year and revenues were down -18.7%. Their Q1 report came out on April 29th and revenues fell -40%. On July 29th HES reported their Q2 results. Wall Street was expecting a loss of ($0.72) per share. HES came in better than expected with a loss of ($0.52) but that was a big drop from a profit of $1.38 a year ago. Revenues plunged -46% from $3.58 billion down to $1.93 billion.

The company is seeing strong production gains. Their Q2 production came in better than analysts expected at 391,000 barrels of oil equivalent per day. Yet this positive news couldn't outmatch the revenue declines. The oversold bounce in HES' stock failed pretty quickly. The long-term trend is down and the point & figure chart is forecasting at $52.00 target. We suspect HES is about to start on another leg lower. Tonight we're suggesting a trigger to buy puts at $58.65.

- Suggested Positions -

Long SEP $57.50 PUT (HES150918P57.50) entry $2.31

08/05/15 new stop @ 60.25
08/03/15 triggered on gap down at $58.21, trigger was $58.65
Option Format: symbol-year-month-day-call-strike


WESCO Intl. - WCC - close: 58.63 change: -0.07

Stop Loss: 61.65
Target(s): To Be Determined
Current Option Gain/Loss: -26.3%
Average Daily Volume = 592 thousand
Entry on August 05 at $58.40
Listed on August 04, 2015
Time Frame: Exit PRIOR to September option expiration
New Positions: see below

Comments:
08/05/15: WCC ignored the market's rally and continued to sink. Shares managed to hit a new low and tag our entry trigger at $58.40 before paring its loss.

Our trade is open but investors may want to wait for a new decline under $58.40 before initiating new positions.

Trade Description: August 4th, 2015:
The combination of currency headwinds and a slowing global economy has created a rough environment for WCC's business. Revenues are falling and the strong dollar only makes it worse.

WCC is in the services sector. According to the company, WESCO International, Inc. (WCC), a publicly traded Fortune 500 holding company headquartered in Pittsburgh, Pennsylvania, is a leading provider of electrical, industrial, and communications maintenance, repair and operating ("MRO") and original equipment manufacturers ("OEM") products, construction materials, and advanced supply chain management and logistic services. 2014 annual sales were approximately $7.9 billion. The Company employs approximately 9,400 people, maintains relationships with over 25,000 suppliers, and serves over 75,000 active customers worldwide. Customers include commercial and industrial businesses, contractors, government agencies, institutions, telecommunications providers and utilities. WESCO operates nine fully automated distribution centers and approximately 485 full-service branches in North America and international markets, providing a local presence for customers and a global network to serve multi-location businesses and multi-national corporations.

Looking at some recent earnings reports from WCC the company has missed Wall Street's bottom line estimate three times in a row. Prior to their Q4 earnings report (January 29th), the company issued an earnings warning for their fiscal 2015 on December 17th.

WCC's Q1 report was April 23rd. They missed the EPS number by 10 cents. Revenues were only up +0.3% to $1.82 billion but that missed estimates. Mr. John J. Engel, WESCO's Chairman and Chief Executive Officer, stated, "We had a challenging start to the year where reduced demand in the industrial market, winter weather impacts, and foreign exchange headwinds weighed heavily on our results in the first quarter. While organic sales per workday grew 3%, sales momentum decelerated through the quarter. Gross margin was down versus prior year but was flat sequentially."

Following their Q1 report WCC management lowered their 2015 guidance again from $5.20-5.60 a share down to $5.00-5.40 per share.

The situation worsened in the second quarter. WCC reported its Q2 numbers on July 23rd. Analysts were expecting a profit of $1.15 per share on revenues of $1.97 billion. WCC only delivered $1.00 per share (a -15 cent miss) and revenues plunged -4.4% to $1.92 billion. The company said their normalized organic sales fell -3.0% and foreign exchange hit them for another -3.0%. They also suffered from falling margins while expenses rose. That's not a good recipe.

Following the Q2 numbers, Mr. Engel, stated, "Our second quarter sales declined 4% reflecting continued foreign exchange headwinds and weakness in the industrial market as well as a slow seasonal start in the non-residential construction market." Management lowered their 2015 forecast yet again. This time from $5.00-5.40 down to $4.50-4.90.

The forecast for WCC is bearish and the stock is getting hammered. Shares are trading at two-year lows. It's hard to say where the next support level is. The point & figure chart is forecasting at $44.00 target. Tonight we are suggesting a trigger to buy puts at $58.40.

- Suggested Positions -

Long SEP $55 PUT (WCC150918P55) entry $0.95

08/05/15 triggered @ $58.40
Option Format: symbol-year-month-day-call-strike