Option Investor
Newsletter

Daily Newsletter, Wednesday, 7/25/2012

Table of Contents

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

Market Wrap

Market Holding Up On Hope

by Keene Little

Click here to email Keene Little
After a one-two punch on Tuesday and Wednesday the market is holding up well. Hope that Bernanke will do something next week is credited for the lack of a selloff.

Market Stats

Tuesday the market was clobbered with more bad news out of Europe and bad economic news. Wednesday the market had to deal with bad news out of AAPL and a few other bad earnings reports. More bad news from other tech stocks was an opportunity for the bears to take advantage of the negative sentiment but they couldn't do much. With all the bad news knocking the stock market off its feet it's refusing to go down and a lot of credit for the lack of a selloff has to do with the hope that the Fed will sprinkle some more pixie dust over the market next week and pull another QE program out their hat. Hope springs eternal but there could be trouble if Bernanke doesn't give the market something.

New home sales were reported this morning and the number was terrible. It's getting harder and harder for the National Association of Realtors (NAR) to spin the numbers to make them look good. The sales number declined -8.4% to 350K from last month's 382K and worse than the expected 375K. There's been a lot of hope and bullish expectations for the housing market over the last few months but the data is not supporting that hope. With another downturn in the housing market there is going to be a significant drag on the economy (again).

Helping the DOW outperform to the upside today were earnings reports from Caterpillar (CAT) and Boeing (BA), both showing improvement with better than expected earnings and guidance. Unfortunately auto sales are not keeping up and Ford (F) disappointed as they reported a slowdown in European sales (and that was a surprise?). F has now closed below its October 2011 low at 9.05 with a closing price of 8.97 today. Our very own auto company (since we own stock), GM, also closed down and also below its October and December 2011 lows at 19.05 and 19.00, resp., with a closing price of 18.80 today. Sure wish we could have had a stop order for our shares. The government makes a lousy investor (among other things). Our "investment" is now half what we put into the company. Well, at least the unions were taken care of.

There's not a lot to discuss about what's going on in the market right now. European problems with debt and economic contraction continue, earnings have been all over the board but generally weak, economic conditions continue to deteriorate and basically there's no reason why the market should rally. In fact it should be selling off hard instead of hanging near the highs, especially when you compare the U.S. indexes to the rest of the world and to commodity indexes. Something is out of whack and that something is called the Fed. Promises of more free money that will make its way into the stock market is the hope and that hope is keeping the bears away and it has the bulls buying in anticipation of the Bernanke put working. We'll have to wait until we get through next week's FOMC meeting to see if B-B-B-Benny and the Feds bless us with another QE program (I'm still on record as saying he will not).

Between here and next week at this time I could argue both a bullish and bearish case for the indexes. I see a very vulnerable setup that only requires one spark to blow things sky high and crash the market. But with all the choppy and whippy price action, along with key support levels holding (in most cases), I can see the potential for a rally into early August before the bottom falls out. Both scenarios are bearish but the question is timing.

I'm going to start off tonight's review of the charts with a look at the NYSE. We've got an interesting fractal pattern that's playing out and I think it could be important for the longer-term pattern. Many don't like to use the NYSE for analysis because it includes a lot of foreign indexes (ADRs) and therefore isn't as representative of the U.S. market as say the SPX. But my response is that the foreign representation may be the key to evaluating more of a global market rather than just the U.S. indexes, which have been holding up stronger than most global indexes and diverging with other important indexes. The NYSE has been the weaker major index and that's providing a heads up for us. It appears the U.S. indexes are out of synch with the rest of the world and that should be concerning to the bulls. Instead they would rather disqualify the NYSE as "irrelevant." Whenever I hear that I look for what they don't like and therefore are ignoring.

So with that let's take a top-down approach to the index to see this multiple-degree fractal pattern. Basically they're H&S patterns, starting with a big one from the left shoulder formed in 2000. The head is the high in 2007 and the right shoulder is the high in 2011. The height of the head above the neckline says the next decline will drop the index into negative territory and that we'll play submarine for a number of years. Call me a Doubting Thomas but I don't think that will happen. But for an A-B-C decline from 2007, with the A-wave the low in March 2009 and the B-wave the bounce into the 2011 high, a C-wave that matches the A-wave in percentage terms would mean another 60% decline from the May 2011 high. That would target the 3500 area, about 700 points below the March 2009 low. The move down from 2011 should be a 5-wave move.

NYSE Composite index, NYA, Monthly chart

Notice also the trend line through the middle of the price swings since the 2000 high. Sometimes these internal trend lines can measure the "balance" of the market and it's interesting to see how many times it's acted as support/resistance. At the July 3rd high, 7903, it missed tagging the line by less than 30 points. If the bulls aren't quite finished with the bounce off the June 4th low we could see a test of that mid-trend line as well as the downtrend line from 2007, near 8100 in early August.

Getting in a little closer with the weekly chart below, you can see a little more clearly how many times that internal trend line from 2000 has been tested. The rally from March 2009, which created the right shoulder at the May 2011 high, shown on the monthly chart above, has also created a H&S topping pattern. The left shoulder is the first high in April 2010, the head is the May 2011 high and the right shoulder is the March 2012 high. And now at one lesser degree of the wave count we've got another H&S topping pattern for the right shoulder. So at this point we have a H&S topping pattern for the right shoulder of the large H&S pattern on the monthly chart and another H&S topping pattern for the right shoulder of the right shoulder, hence the fractal pattern. If all these H&S patterns are correct, it's going to be a painful time for the bulls in the years ahead as all of these play out to the downside.

NYSE Composite index, NYA, Weekly chart

Now we get in even closer with the daily chart and look at the price action since the June low, which is the very small bounce on the right side of the weekly chart above (the smaller right shoulder). It has formed yet another H&S pattern for an even smaller-degree 2nd wave (labeled wave-ii at the current high on the chart above and wave-(ii) on the daily chart below). From a short-term perspective I see the potential for a bounce back up to the broken uptrend line from June 4th, where it could also back test its 200-dma, near 7723, and its 20-dma in a couple of days. But it's currently struggling to get back over its 50-dma at 7614 and could drop lower from here.

NYSE Composite index, NYA, Daily chart

So we've got several degrees of the wave pattern, from monthly down to daily, showing very similar topping patterns at major reversal points, including the one for the bounce off the June 4th low. These fractals are often a very good guide to follow and right now it's telling us the market is at risk for dropping hard at any moment. The short-term question is whether or not we've got one more bounce before it lets go.

Using the SPX chart I am making the argument that we'll see another rally into early August before the bounce off the June 4th low tops out. Just keep in mind that this is only a possibility that's losing potential as the market works its way lower, especially if it stays below its broken uptrend line from June 4th. Keep in mind that a 5-wave move down from April has been followed by what can easily be seen as a very choppy rally (overlapping highs and lows, unlike the decline into the June low). An impulsive move down followed by a corrective move up will be followed by at least one more impulsive move down (below the June low). The only question right now is whether or not we get one more new high as depicted, or just a bounce to a lower high before dropping, or no bounce and drop from here. But drop it will. If the bulls can manage a new high I like the overlapping price projections (based on the wave relationships within the bounce pattern) in the 1392 area. If that were to happen on a post-FOMC rally I'd be all over it like a bear into honey and get myself a big short position up at that target.

S&P 500, SPX, Daily chart

Key Levels for SPX:
- bullish above 1380 but likely only to 1390-1405
- bearish below 1320

On the 60-min chart below I'm showing the very bearish wave count that calls for hard down right from here. With a (i)-(ii), i-ii wave count to the downside from the July 19th high, it's calling for a 3rd of a 3rd wave down, which is typically a very strong move. A fast drop (1 to 2 days) to 1270 before consolidating would be typical and all it needs is a match to set off this tinderbox. While I recognize the risk and would not want to be long here, I'm thinking a crash scenario is going to wait until at least after next week's FOMC meeting. Just keep it in mind -- if the market starts to sell off strongly from here there will be very few bounces and only little ones.

S&P 500, SPX, 60-min chart

The DOW's pattern shows the same setup as SPX. It was a stronger index today (thanks to CAT and BA) and yesterday it successfully tested its 200-dma and closed on its 50-dma. Today it closed above its 50-dma and back above its broken uptrend line from June 4th. Yesterday's low was also a test of the bottom of a parallel up-channel from the first pullback following the June 4th low, on June 11th. It's a very corrective wave pattern for the past two months and I'm just waiting for confirmation that the bounce is over (with a break below 12490). One more trip back up to the top of the channel would also be a monster shorting opportunity.

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- bullish above 12,960
- bearish below 12,490

Some big tech stocks got slammed today and considering the damage I'm surprised NDX lost "only" -18 (-0.7%) today. AAPL was of course one of the culprits, finishing down -25.95 (-4.3%). PCLN got slammed lower and finished down -34.54 (-5.2%) and NFLX got annihilated with a loss of -20.11 (-25%) and it closed below its June lows. AMZN did relatively well losing only -5.99 (-2.7%). So for NDX to lose only -0.7% it was quite an achievement.

NDX formed a doji today, as did SPX and it formed it right on its uptrend line from June 4th. But it only back tested its broken 50-dma near 2564 today, after it did the same to its 20-dma on Monday and Tuesday so price action around its MAs is bearish so far. It has support at its uptrend line from March 2009, near 2525 (log price scale), and then its 200-dma near 2507. Needless to say, a break below all of its MAs and uptrend lines, confirmed with a drop below 2500, would be bearish. But there remains the possibility for one more new high into next week so bears be careful too.

Nasdaq-100, NDX, Daily chart

Key Levels for NDX:
- bullish above 2618
- bearish below 2500

The RUT also looks bearish now that it has broken below its 50- and 200-dma "bowtie" near 775. As long as it stays below 775 I think the bears stay in control and the downside projection shown on its chart is for the next 5-wave move down. The downside projection for now is back down to its June low by mid-August (potentially much faster and deeper). Two equal legs down from its July 5th high is at 766.63, which is holding and could indicate it's just an a-b-c pullback that will be followed by another push higher (green dashed line). I don't count the bulls out but they can't waste any time getting going here.

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- bullish above 809
- bearish below 765

Tonight I'll look at the bond price instead of the yield. A look at the daily pattern of ZB, the 30-year emini futures, I see the possibility that it might have topped last night. It hit a new high at 153'11 and pulled back sharply from that high in the overnight session (mirroring the rally in equity futures) before bouncing back up during the day to a lower high (so far). The move up from June 29th counts well as a 5-wave move which does a nice job completing the 5th wave of the move up from March, which in turn completes an A-B-C rally off the April 2011 low.

As shown on the weekly chart below, the new high following the September 2011 high is showing bearish divergence and it has reached the trend line along the highs from August 2010. There's still a little more upside potential to hit a Fib projection where wave-C would equal 62% of wave-A at 153.81 (153'26) and the upper trend line from August 2010 is currently near 155'00. A drop below the July 19th low at 150'11 would signify the top is in place (bottom for yields).

30-year bond price (emini futures), ZB, Weekly chart

If bonds are ready to start down we could see stock prices head higher for at least a while. I suspect bonds and stocks will get in synch to the downside but that switch hasn't been made yet. For a number of years they've been counter-trend and therefore a decline in the bond market could still be accompanied by a rally in the stock market. I'll be watching this carefully for clues.

Banks are right on the edge of letting go. BKX is trying to hold above its 50-dma at 44.37 but has remained trapped this week below its broken uptrend line from October-November, currently near 44.75. I see the potential for a higher bounce to the 45.77 area if it doesn't drop from here.

KBW Bank index, BKX, Daily chart

On Tuesday the U.S. dollar ran up to the trend line along the highs from January-May and today pulled back substantially. It could be a high for a while and one pattern calls for a sharp decline to the 80.55 area before starting the next rally leg. A break below the July 19th low would improve the chances of that happening but until then we can see the dollar is clearly in an uptrend. If the dollar does pull back as shown, it would support a stock market rally.

U.S. Dollar contract, DX, Daily chart

Every once in a while I like to show the bigger picture of the dollar so that we keep things in perspective. I've been showing an expectation for a large sideways triangle that plays out from 2008 to about 2017 before heading lower, as shown on the monthly chart below. This is obviously speculation but with the corrective price action and the larger wave pattern it fits nicely. It would also mean fiat currencies are basically toast by the time we make it into the 2020s. But that's a long ways off (wink).

U.S. Dollar contract, DX, Monthly chart

Speaking of triangles, if the bearish wave count that I've been carrying on the gold chart is correct it should be ready for another leg down soon. There are some smarter people than I who are predicting a gold rally and I am therefore very nervous about calling for a decline. But I'll let price prove me wrong, first with a rally above 1643, and then above its downtrend line from September 2011, near 1675. Otherwise the sideways triangle pattern suggests another leg down and a drop below 1530 would indicate a strong decline is coming (down to at least 1350 in the next month or two).

Gold continuous contract, GC, Daily chart

Oil has finished a 3-wave bounce (a-b-c) last week and that could be all the correction of the March-June decline that we'll see. It was a 50% retracement that also back tested its broken uptrend line from 1998-2001. The next big move should be a decline at least equal to the March-June decline (which would target the $60 area). But there are still a couple of bounce ideas that could play out so I want to see an impulsive decline to help determine that the trend has switched back to the downside.

Oil continuous contract, CL, Daily chart

Tomorrow's economic reports include durable goods orders, which are not expected to improve from last month, and pending home sales. One of the problems with pending sales is that many of them fall through due to lack of funding. So I consider that number rather worthless.

Economic reports, summary and Key Trading Levels

AAPL hurt the techs by falling on its face yesterday after the close and it finished down almost -26 (-4.3%) today. After the bell today Facebook (FB) did another face plant and got pummeled after the close, dropping about $3 (-10%) before rebounding slightly. Did earnings leak early? It's not due to report until tomorrow, with a conference call after the bell. But today's after-hours plunge says somebody knows something. The after-hours low broke its July 17th low at 27.15 with a low of 26.50 but it looks like the previous low is going to hold. That would create a bearish 5-wave move down from its June 22nd high and while it would be a setup for another bounce it should be to a lower high and then look out below. It's too hard to say whether FB will have much of an effect on the broader market. Sentiment is already pretty sour and hope for a Fed rescue is about the only thing holding it up.

Going into today's close I mentioned it was pretty much a coin toss for tomorrow but if forced to choose I would rather be long. It's as much a gut feel as anything else -- I don't see a bad news event acting as a bearish catalyst before the FOMC meeting next week. But I'm fully aware of the significant downside risk from right here. I might prefer to be long but it would take very little to flip me around into a raging bear.

The intermediate (weeks to months) and longer-term (months to years) patterns are bearish and from that perspective I'd rather be short the market and just ignore the noise and the possibility for one more new high. But in an effort to help pinpoint a bearish entry, using short-term (days to weeks) patterns, I have to respect the potential for another new high in the next week or two. If we get the new high I'll be growling enough for everyone to hear me. If the market plunges instead I'll be looking for just small bounces to get short. Playing the upside from here is risky, especially if you can't watch the market every day and during the day.

It's been a very choppy and whippy market and could continue through at least next week. Trade lightly, if at all, and just know that this last two-month period had been one of the more difficult periods but it will get easier again (and very likely to the downside so pick out your favorite bearish play and be ready).

Good luck and I'll be back with you next Thursday since Tom and I have switched writing days next week.

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 Plays

Potential Short Squeeze & New Record Lows

by James Brown

Click here to email James Brown


NEW BULLISH Plays

Sturm Ruger & Co - RGR - close: 43.76 change: +0.14

Stop Loss: 43.45
Target(s): 49.00
Current Gain/Loss: unopened
Time Frame: exit prior the Aug. 1st earnings report
New Positions: Yes, see below

Company Description

Why We Like It:
Gun sales are surging following the recent tragedy in Aurora, CO. Citizens are buying firearms on fears that we will see tougher gun laws in 2013. RGR has already told investors that the company is a huge backlog of orders for the rest of 2012. The upcoming Q2 earnings report should be very strong. That's why I am surprised at how much short interest RGR has.

The most recent data listed short interest at 30% of the small 17.4 million share float. RGR could definitely see a short squeeze if the stock breaks out past resistance near $45.00. The question is will RGR see a rally into its earnings report or will investors just sit on the sidelines and wait for the results, which are due out on August 1st?

This is a short-term trade. We do not want to hold over the earnings announcement. If expectations are already high there is a risk RGR could disappoint. I am suggesting a trigger to launch bullish positions at $45.10. Our target is $49.00. We'll use a stop loss at $43.45.

FYI: RGR reports earnings on Aug. 1st, after the closing bell.

Trigger @ 45.10

Suggested Position: buy RGR stock @ (trigger)

- or -

buy the Aug $45 call (RGR1218H45) current ask $2.20

Annotated chart:

Entry on July xx at $ xx.xx
Earnings Date 08/01/12 (confirmed)
Average Daily Volume = 479 thousand
Listed on July 25, 2011


NEW BEARISH Plays

General Motors - GM - close: 18.80 change: -0.22

Stop Loss: 19.65
Target(s): 17.00
Current Gain/Loss: unopened
Time Frame: exit prior to the Aug. 2nd earnings report
New Positions: Yes, see below

Company Description

Why We Like It:
The pace of vehicle sales in the U.S. has been slowing for months now. GM's bearish trend has finally pushed the stock under support near $19.00. This is a new record low for the company's stock since it went public again in 2010.

I am suggesting new bearish positions now at current levels with a stop loss at $19.65, which is just above the 10-dma. More conservative traders may want to wait for GM to drop under $18.70 before initiating positions. Our target is only $17.00 because this is a short-term trade. Knowing that car sales have been weak it would be tempting to hold over GM's earnings report but we are going to plan on exiting prior to its announcement. If you're willing to hold over the report I would consider aiming lower.

FYI: GM reports earnings on Aug. 2nd, before the opening bell.

Suggested Position: short GM stock @ (the open)

- or -

buy the Aug $18 PUT (GM1218T18) current ask $0.44

Annotated chart:

Entry on July xx at $ xx.xx
Earnings Date 08/02/12 (confirmed)
Average Daily Volume = 8.7 million
Listed on July 25, 2011



In Play Updates and Reviews

Disappointing New Home Sales Send Builders Lower

by James Brown

Click here to email James Brown

Editor's Note:
The June New Home sales number was disappointing and sparked a sell-off across the builder industry.

Our LEN trade was stopped out. Plus, we closed our PZZA trade as planned.

Current Portfolio:


BULLISH Play Updates

Extra Space Storage - EXR - close: 31.51 change: +0.14

Stop Loss: 30.75
Target(s): 33.50
Current Gain/Loss: + 1.2%
Time Frame: exit prior to the July 30th earnings report
New Positions: see below

Comments:
07/25/12 update: It was another quiet day for EXR. Traders seem to be buying the dips but the stock continues to struggle trying to get past the simple 10-dma. We don't have much time left. We want to exit prior to the July 30th earnings report.

Suggested Position: Long EXR stock @ $31.15

07/21/12 new stop loss @ 30.75
07/09/12 triggered @ 31.15

Entry on July 09 at $31.15
Earnings Date 07/30/12 (confirmed)
Average Daily Volume = 1.5 million
Listed on July 07, 2011


BEARISH Play Updates

CNH Global NV - CNH - close: 35.45 change: +0.92

Stop Loss: 36.05
Target(s): 30.25
Current Gain/Loss: unopened
Time Frame: exit prior to the Aug. 1st earnings report
New Positions: Yes, see below

Comments:
07/25/12 update: Hmm... we might want to abort this new bearish play on CNH if CAT's earnings are a sign of things to come. I cautioned readers that Caterpillar's report could have a big impact on shares of CNH. This morning CAT reported earnings that beat estimates on both the top and bottom line. Plus, CAT's management raised their 2012 guidance. This news helped push CNH toward $37 but the rally began to fade. Both CAT and CNH saw traders selling into the news.

Currently our plan is unchanged. We're waiting for a new relative low but if CNH doesn't see any follow through lower tomorrow we might drop it.

I am suggesting a trigger to open bearish positions at $34.25. If triggered our target is $30.25. FYI: The Point & Figure chart for CNH is bearish with a $26.00 target.

Trigger @ 34.25

Suggested Position: short CNH stock @ (trigger)

Entry on July xx at $ xx.xx
Earnings Date 08/01/12 (confirmed)
Average Daily Volume = 528 thousand
Listed on July 24, 2011


Focus Media Holdings - FMCN - close: 18.54 change: -0.38

Stop Loss: 20.10
Target(s): 15.25
Current Gain/Loss: - 0.8%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
07/25/12 update: FMCN has been churning sideways for the last six days in a row. I am still expecting new lows but I would look for a new drop under $18.25 as another entry point for bearish positions.

Readers will want to consider limiting the size of their positions since FMCN can be such a volatile stock (or just use the options to limit how much capital you have exposed).

current Position: short FMCN stock @ $18.40

- or -

Long Aug $18 PUT (FMCN1218T18) Entry $1.50

Entry on July 17 at $18.40
Earnings Date 05/29/12
Average Daily Volume = 2.2 million
Listed on July 16, 2011


Groupon, Inc. - GRPN - close: 7.24 change: -0.00

Stop Loss: 9.05
Target(s): 6.25
Current Gain/Loss: +13.8%
Time Frame: exit prior to the Aug. 13th earnings report
New Positions: see below

Comments:
07/25/12 update: It was another quiet day for GRPN. The stock closed unchanged on the session. Yet if you look at an intraday chart and view the last few days you'll notice that the intraday highs are getting lower. Traders are selling into strength. A breakdown past short-term support near $7.00 could see GRPN accelerate lower again.

I am not suggesting new positions. More conservative traders may want to take profits now. We are aiming for $6.25.

*Small Positions*

current Position: short GRPN stock @ $8.40

- or -

Long Aug $8.00 PUT (GRPN1218T8) Entry $0.80

07/18/12 readers may want to start taking some money off the table
our GRPN trade is up +15.8%
07/12/12 new stop loss @ 9.05

Entry on July 09 at $8.40
Earnings Date 08/13/12 (confirmed)
Average Daily Volume = 8.1 million
Listed on July 07, 2011


Home Inns & Hotels Management - HMIN - close: 17.20 change: +0.19

Stop Loss: 20.25
Target(s): 18.00 & 15.50
Current Gain/Loss: +12.2%
Time Frame: exit prior to the Aug. 9th earnings report
New Positions: see below

Comments:
07/25/12 update: HMIN bounced again. This oversold bounce is now two days old. So far the rebound has been pretty minor. There is no change from my prior comments. The $18.00 level should be the next overhead resistance.

We are aiming for $15.50 but more conservative traders may want to take profits now. I am not suggesting new positions at this time.

HMIN hit our first target at $18.00 on July 12th. Our second target is $15.50.

Earlier Comments:
Readers may want to keep their position size small or use the options to limit their risk. The most recent data listed short interest at 17% of the 24.2 million share float.

Suggested Position: short HMIN stock @ $19.60

- or -

Long Aug $20 PUT (HMIN1218T20) Entry $1.70

07/12/12 new stop loss @ 20.25
07/12/12 1st target hit @ 18.00 (+8.2%)
1st target hit @ 18.00, option bid @ $2.50 (+47.0%)*
(option exit price is an estimate since the option did not trade at the time our first target was hit)
07/10/12 triggered @ 19.60

Entry on July 10 at $19.60
Earnings Date 08/09/12 (confirmed)
Average Daily Volume = 284 thousand
Listed on July 09, 2011


Harley-Davidson - HOG - close: 42.07 change: -0.32

Stop Loss: 45.25
Target(s): 40.25
Current Gain/Loss: + 4.1%
Time Frame: exit prior to the Aug. 1st earnings
New Positions: see below

Comments:
07/25/12 update: HOG spent Wednesday's session hovering near support at $42.00 and its simple 300-dma. If the market bounces then HOG might rebound to test overhead resistance near $43.00 or near the $44.00 mark (both levels were prior support). I am not suggesting new positions at this time.

FYI: The Point & Figure chart for HOG is bearish with a $35.00 target.

current Position: short HOG stock @ $43.86

- or -

Long Aug $42 PUT (HOG1218T42) Entry $1.62

Entry on July 16 at $43.86
Earnings Date 08/01/12 (confirmed)
Average Daily Volume = 2.2 million
Listed on July 14, 2011


Hewlett Packard - HPQ - close: 17.78 change: -0.21

Stop Loss: 20.15
Target(s): 16.50
Current Gain/Loss: + 3.3%
Time Frame: exit prior to the Aug. 22nd earnings report
New Positions: see below

Comments:
07/25/12 update: HPQ continues to underperform. Shares tagged another new multi-year low. Readers may want to start adjusting their stop loss lower.

Our target is $16.50 but more aggressive traders could aim lower but the 2004 low was $16.08 so the $16.00 level could be support. FYI: The Point & Figure chart for HPQ is bearish with a $7.00 target.

Suggested Position: short HPQ stock @ 18.38

- or -

Long Aug $18 PUT (HPQ1218T18) Entry $0.54

07/23/12 trade opened on gap down at $18.38. Trigger was $18.40

Entry on July 23 at $18.38
Earnings Date 08/22/12 (unconfirmed)
Average Daily Volume = 18.0 million
Listed on July 21, 2011


Kellogg Co. - K - close: 46.51 change: -0.02

Stop Loss: 48.55
Target(s): 44.25
Current Gain/Loss: + 2.6%
Time Frame: exit prior to Aug. 2nd earnings
New Positions: see below

Comments:
07/25/12 update: Wednesday was a non-event for shares of K. The stock churned sideways in the $46.50-47.00 zone. The stock is oversold so the fact that shares did not see a strong oversold bounce is a positive sign for the bears.

I am not suggesting new positions. Readers will want to seriously consider taking profits on our August put right here (current bid $1.40, that's +64%).

current Position: short K stock @ $47.75

- or -

Long Aug $47.50 PUT (K1218T47.5) Entry $0.85

07/25/12 readers may want to consider taking profits early on the August put. Current bid is $1.40
07/20/12 triggered @ 47.75

Entry on July 20 at $47.75
Earnings Date 08/02/12 (confirmed)
Average Daily Volume = 1.6 million
Listed on July 19, 2011


MGM Resorts - MGM - close: 9.20 change: -0.20

Stop Loss: 10.51
Target(s): 8.10
Current Gain/Loss: + 5.1%
Time Frame: exit prior to the Aug. 7th earnings report
New Positions: see below

Comments:
07/25/12 update: MGM underperformed the market again. Wednesday's session produced a -2.1% drop and a new low for 2012. I am repeating my warning that the $9.00 level could be support. If you're trading the August puts you might want to take some money off the table as MGM gets closer to the $9.00 mark.

Earlier Comments:
Looking at a weekly chart you will see significant support near $9.00. Yet 2011 saw a spike down to $7.40 and the Point & Figure chart for MGM is bearish with a $5.00 target. We are aiming for $8.10.

current Position: short MGM stock @ $9.69

- or -

Long Aug $9.00 PUT (MGM1218T9) Entry $0.27

07/23/12 triggered @ 9.69

Entry on July 23 at $9.69
Earnings Date 08/07/12 (confirmed)
Average Daily Volume = 8.9 million
Listed on July 21, 2011


Red Robin Gourmet Burgers - RRGB - close: 28.09 change: -0.56

Stop Loss: 31.05
Target(s): 26.00
Current Gain/Loss: + 5.9%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
07/25/12 update: The sell-off in RRGB continues and shares hit new six-month lows. The close under the June low is definitely bearish but it's worth noting that RRGB is starting to look a little short-term oversold here. I would not be surprised to see a bounce soon. Readers may want to adjust their stops closer to $30.00.

FYI: The Point & Figure chart for RRGB is bearish with a $22.00 target.

current Position: short RRGB stock @ $29.85

- or -

Long Aug $30 PUT (RRGB1218T30) Entry $1.60

Entry on July 24 at $29.85
Earnings Date 08/09/12 (unconfirmed)
Average Daily Volume = 170 thousand
Listed on July 23, 2011


CLOSED BULLISH PLAYS

Lennar Corp. - LEN - close: 29.04 change: -1.22

Stop Loss: 29.49
Target(s): 34.50
Current Gain/Loss: - 6.1%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
07/25/12 update: The government said new home sales in June fell -8.4% from May. The pace of sales fell to an annual rate of 350,000 when analysts had been expecting 370,000. This news sparked a sell-off across the homebuilders. Shares of LEN broke down from their trading range and hit our stop loss at $29.49.

closed Position: Long LEN @ $31.40 exit $29.49 (-6.1%)

- or -

Aug $32 call (LEN1218H32) Entry $1.57 exit $0.45 (-71.3%)

07/25/12 stopped out
07/13/12 triggered @ 31.40

chart:

Entry on July 13 at $31.40
Earnings Date 09/12/12 (unconfirmed)
Average Daily Volume = 7.2 million
Listed on July 12, 2011


Papa John's Intl. Inc. - PZZA - close: 50.84 change: +1.17

Stop Loss: 48.90
Target(s): 54.75
Current Gain/Loss: - 1.3%
Time Frame: exit prior to the July 31st earnings report (unconfirmed)
New Positions: see below

Comments:
07/25/12 update: PZZA outperformed the market today with a +2.3% bounce. The sharp rally this morning looks like a move on an analyst upgrade but it wasn't PZZA that got upgraded today. It was rival Dominos (DPZ) that was added to Goldman Sach's (GS) conviction buy list.

We had already decided to exit PZZA at the open this morning due to yesterday's breakdown under what should have been support at $50.00. PZZA gapped higher at $50.06.

closed Position: Long PZZA stock @ $50.70 exit $50.06 (-1.3%)

- or -

Aug $55 call (PZZA1218H50) Entry $0.55 exit $0.25 (-54.5%)

07/25/12 closed at the open this morning
07/24/12 prepare to exit at the open tomorrow morning
07/21/12 new stop loss @ 48.90. More conservative traders may want to raise their stop even higher.

chart:

Entry on July 18 at $50.70
Earnings Date 07/31/12 (unconfirmed)
Average Daily Volume = 115 thousand
Listed on July 17, 2011