Option Investor
Newsletter

Daily Newsletter, Wednesday, 7/23/2014

Table of Contents

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

Market Wrap

A Slow Summer Day

by Keene Little

Click here to email Keene Little
The week has been holding positive for the bulls but there hasn't been much excitement. Today was no different and about the only good thing to say is that the bears continue to hide from the bulls but the market needs a catalyst to get it moving.

Wednesday's Market Stats

The table above about says it all -- a mixed day that was generally positive, except for the DOW, but not real excitement. It was a typical summer day and one where the bulls are tired and the bears are hibernating (or killed off, not sure which). The day was good for the big-cap techs while not so good for the DOW's blue chips.

Trading volume has been getting lighter as the year progresses, as can be seen for SPY below, but the drastic drop in volume since the July 17th low should be very worrisome for the bulls. There's just no excitement in the new rally attempt and the drop in volume coincides with a significant bearish divergence we're seeing in the momentum indicators, all of which points to the idea that the rally in the past week could very well be the last one before we get at least a more significant pullback/consolidation. There's potential for SPY to rally up to its trend line along the highs from January-March 2014, near 200, but considering the lack of strength in the current rally that looks like a trade with a small reward:risk ratio.

S&P SPDR ETF, SPY, Daily chart

Hurting the DOW today was Big Air (BA), otherwise known as Boeing. Following its earnings last night the stock cratered this morning and then ran sideways for the rest of the day. It finished down -2.3% and a few others didn't help the DOW -- CAT -1.5%, CSCO and UTX each down -1% and the combination of these, with no strong performers to counteract them, kept the DOW in the red all day.

On the other end were big-cap tech stocks, which did well today (except CSCO). NDX was well ahead of the others and finished +0.6%. But as I'll show later, the semiconductors were not participants in today's tech rally and that's always a warning flag. I think the mixed performances by the indexes is all part of the daily rotation between sectors as fund managers attempt to stay away from what they perceive as weak sectors and it's what's part of a topping process (often defined by a messy rolling top as compared to a sharp v-bottom reversal).

Have we found the mother of all signals for a top? The chart below was shown my Art Cashin last week and it shows market highs that have coincided with Rupert Murdoch's major acquisitions. At the 2000 high he purchased Christ-Craft (recreation boats) for $5.3B and then at the 2007 high he purchased Dow-Jones for $5.6B. Now at the all-time high in 2014 he's trying to purchase Time Warner for $80B. Batten down the hatches, we're going down.

Rupert Murdoch tops, chart courtesy Financial Insyghts

Tonight I'll start with a top-down look at NDX since it has now rallied up to a target price I've been watching for. What it does from here could be important. The weekly chart below shows a price projection at 3973.24, which is where the 5th wave in the rally from November 2012 is equal to the 1st wave. That level was achieved (and exceeded) today and it has also popped above the trend line along the highs from April 2012 - March 2014, near 3960. How the NDX closes on a weekly basis will be important and if we get a little throw-over finish followed by a weekly close below 3960 it would create a sell signal.

Nasdaq-100, NDX, Weekly chart

The daily chart below is shown using the arithmetic price scale vs. the log scale used on the weekly chart above. This lowers the April 2012 - March 2014 trend line so this week's rally is more significant by this measure. But it rallied up to the top of a parallel up-channel from April, near today's high at 3991, and the bearish divergence at the highs since July 3rd, unless negated, is a strong indication that resistance is going to hold. We could see a little higher but the bulls could be asking for trouble here if they push their luck on the long side.

Nasdaq-100, NDX, Daily chart

Key Levels for NDX:
- bullish above 3960
- bearish below 3866

The leg up from July 17th has created a rising wedge up to the top of its parallel up-channel from April, as shown on the 30-min chart below. This raises the probability for an ending move here but we can't yet know whether it will end or what kind of top it would be (short term or long term) but this is the first setup since the July 15th high that has me interested in trying the short side again. The bears have a lot of work to do to convince us a top is in place but the only thing I'm currently doing is looking for setups for a possible reversal and then test it with a small short position and careful risk management. As a buyer of puts I prefer to buy on the way up near resistance instead of trying to get in on the way down (it's cheaper at the same index price on the way up).

Nasdaq-100, NDX, 30-min chart

It's worth reviewing the weekly chart of SPX as well since there's an important price projection at 1990 that has remained resistance. The July 3rd high was almost 1986 was followed by the July 16th high near 1984 and now this week's high (today's) was 1989. As noted on the chart, the 1990 projection is where the c-wave in the move up from October 2011 equals 162% of the a-wave (a common wave relationship). This is the 2nd 3-wave move in a double 3-wave move (double zigzag) up from 2009. When this leg completes it will very likely be the completion of the rally from 2009 (that's the setup anyway). While battling this 1990 projection it's also been battling with the top of the parallel up-channel from October 2011 (light green line). Weekly MACD is threatening to roll over.

S&P 500, SPX, Weekly chart

The daily chart shows a closer view of the price oscillations around the green line (top of the parallel up-channel from October 2011) and a price projection to the 2000 area to hit the trend line along the highs from May-December 2013, which is where the July 3rd rally stopped. The projection I'm showing is for a final high by early next week. That's obviously a guess and I think the risk for the bulls is that the high expectation by most for SPX to reach 2000 might in fact not happen (too many could start to take profits before that level is achieved)

S&P 500, SPX, Daily chart

Key Levels for SPX:
- bullish above 1984
- bearish below 1955

The DOW also shows a little more upside potential to reach the trend line across the highs from March-June and a shorter-term one from July 3rd, both of which cross near a price projection at 17217 next Monday (based on a wave relationship in the leg up from June 26th. Above 17220 would be bullish for a possible run up to the 17350 area but a drop below the July 17th low at 16966 would indicate the top is likely in place.

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- bullish above 17,220
- bearish below 16,966

The daily chart above shows a large rising wedge pattern for the rally from April and the 60-min chart below shows additional rising wedge patterns inside the bigger one. The top of the wedges coincide in the 17200-17217 area next Monday and it would make for a very interesting reversal setup to watch for if it plays out as depicted.

Dow Industrials, INDU, 60-min chart

The RUT has been weaker than the other indexes since its double-top high on July 1st. The bounce off its July 17th low could make it higher but so far it's only been able to retrace 38% of its decline at 1162.79 (it missed it by less than a point with today's high at 1161.99). This will continue to be our canary, which has been sucking air for a while now but hasn't fallen off its perch yet.

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- bullish above 1175
- bearish below 1140

With the techs looking relatively strong today I was surprised to see the semiconductor sector weak. The SOX was down -2.3% today and the weakest sector in the list I track. The daily chart could be putting in a rolling top since peaking on July 3rd and the weekly chart below shows MACD crossing back down. Its July 22nd high at 652 was only 4 points shy of the projection to 656 where a large A-B-C bounce off its November 2008 low has two equal legs up. Not shown on the chart is the 38% retracement of the 2000-2008 decline, which is near 624. We'll only know in the future if this is the setup for THE high for the 2008-2014 rally but that's the setup here (the next move is a larger c-wave down to a low below the 2008 low at 167.55 to complete a large 3-wave pullback from 2000.

Semiconductor index, SOX, Weekly chart

The banking index, BKX, also appears as though it's putting in a rolling top, this one starting from January, which also fits as the left shoulder of a small H&S topping pattern. The March high, at 73.90, was only a small pop above the projection at 73.64 for two equal legs up from 2009 and so far the best the BKX has done since then is the July 3rd high at 72.55 and a test of that high on July 16th to 72.31. Last week's sharp selloff has been followed by a choppy sideways/up correction and looks ready to continue lower. A break of its 50-dma, near 70.25, would create a stronger sell signal (it bounced off the 50-dma last week). The bearish divergence since July 2013 shows the banks have been slowly losing momentum as it struggles to keep up with the broader indexes.

KBW Bank index, BKX, Weekly chart

The TRAN is also poking up against what could be strong resistance. A trend line along the highs from May 2010 - July 2011 has been resistance since early June, as has a shorter-term trend line along the highs from May 2013 - January 2014 (grey line on the weekly chart below). Its bounce off the 2009 low consists of two 3-wave moves and the 2nd one is the move up from October 2011. For this a-b-c move the c-wave is 162% of the a-wave at 8547. Today's high, which was quickly followed by selling (which created a bearish daily candlestick), was at 8515 so 32 points shy of its projection. That might be all we'll see but keep that projection in mind if the TRAN works its way a little higher in the next few days. Following the 5-wave move up from November 2012 (for wave-c), this is ripe for a finish.

Transportation Index, TRAN, Weekly chart

Not much to add to the commentary I've had about the U.S. dollar for the past year. It remains range bound between 79 and 81.50 since October 2013 and we're waiting for a break of it. My expectation is for a break to the north but price is king and we wait for confirmation.

U.S. Dollar contract, DX, Weekly chart

Gold got hit hard at the beginning of last week and is currently bouncing between support at its 50-dma, near 1294, and resistance at its 20-dma, near 1317. I think there's a good chance we'll see gold bounce a little higher, up to its downtrend line from August 2013 (top of sideways triangle from that high) before starting another leg down. But with it currently doing battle with the top of a parallel down-channel for its decline from 2011 there is the possibility it's going to head lower sooner rather than later. A break below its June 3rd low near 1240 would indicate the stronger decline has started. Above 1393 would negate the bearish sideways triangle and point to at least a higher bounce.

Gold continuous contract, GC, Weekly chart

Oil has been chopping its way higher since the low in January and it looks like bounce failure waiting to happen. But it also fits as the final wave in a 5-wave ending diagonal (rising wedge) for the c-wave of an A-B-C move up from January 2009. The c-wave would be 50% of the a-wave at 115.76 and that's the upside target I'm sticking with until proven otherwise. The first "otherwise" would be a drop below 95.

Oil continuous contract, CL, Weekly chart

It's a slow week for economic reports and the only one of significance tomorrow will be the New Homes Sales report, which is expected to show a continuation of the slowdown in the housing market, which wasn't supposed to happen according to the economist but it's following the longer-term pattern calling for another leg down in the big bad housing bear market (along with the stock market).

Economic reports and Summary

The bulls have been doing just enough to keep the bears away and that has kept the market bullish. Nothing has changed this week and I see the potential for the market to push at least a little higher into next Monday where some of the indexes could run into strong resistance at the same time as it will be finishing longer-term wave counts. As with so many reversal setups in the past, all I can do is show the potential for the reversal but price is king and we need to defer to it. Lines and price projections don't mean squat if price simply pushes them aside.

But the setups that I've shown on the charts are good ones for major reversals and for that reason it will be worth watching very closely to both protect long positions and play the short side. We've again reached the point where upside potential is dwarfed by downside risk. The market is vulnerable here and it won't take much of a scare to get traders to hit the sell button. Most have been conditioned to buy the dips (it works!) but when the real selloff begins, those buyers will be the panic sellers and it's one of the things that starts runaway selling (where the market goes begging for buyers). Trading should be a daily business from here -- read and react -- since overnight holds could be dangerous to your financial health.

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 Plays

Uncharted Territory

by James Brown

Click here to email James Brown

Editor's Note:

The S&P 500 is in uncharted territory with its 26th record high this year. Earnings headlines continue to fuel the rally.

High-profile earnings from Apple (AAPL) was big news last night. AAPL stock rallied in spite of the company lowering its revenue guidance. Meanwhile tonight Facebook (FB) beat Wall Street's estimates on both the top and bottom line. Shares of FB are hitting all-time highs after hours this evening.

The tone of Q2 earnings season has been positive. That is good news for the rally since stock prices are supposed to be driven by earnings.

Tomorrow is a huge day for the Q2 earning season with over 250 companies reporting their quarterly results.

We want to wait for the post-earnings dust to settle before adding new candidates.

(No new trades tonight.)




In Play Updates and Reviews

Indices Push Higher

by James Brown

Click here to email James Brown

Editor's Note:
The S&P 500 managed a new all-time high and the small cap Russell 2000 continued to bounce on Wednesday.


Current Portfolio:


BULLISH Play Updates

Hewlett-Packard Co. - HPQ - close: 34.98 change: -0.17

Stop Loss: 33.20
Target(s): To Be Determined
Current Option Gain/Loss: -1.0%
Listed on July 19, 2014
Entry on July 23 at $35.35
Time Frame: 8 to 12 weeks
Average Daily Volume = 8.9 million
New Positions: see below

Comments:
07/23/14: HPQ rallied just enough this morning to tag our suggested entry point at $35.35. Shares spent the rest of the day hovering near the $35.00 level. If the intraday chart is any guide then HPQ might be headed for the $34.50 area. At the moment I would wait for a new rally past $35.35 before initiating new positions.

Earlier Comments: July 22, 2014:
Hewlett-Packard was famously started by two Stanford University students back in 1939 in a rented garage. The business that started inside a one-car garage has grown into a massive $65 billion company. Today the company makes printers, personal computers, software, IT services and infrastructure.

It has been a good year for old school technology companies. Microsoft (MSFT) is up +19.8% this year. Intel (INTC) is up +31.2%. HPQ is currently up +23.3%. All three of them are outperforming the major U.S. indices. What's also noteworthy is that all three appear to be benefitting from MSFT's decision to discontinue technical support for its Windows XP operating system.

In April this year Microsoft announced they would stop providing support for XP after 13 years. Instead of upgrading their software the data suggests that many consumers and business have chosen to upgrade their entire computer. Why is that significant? As of April over 25% of computers connected to the Internet were still using XP.

This upgrade cycle was definitely a boon for Intel (INTC). INTC recently reported significantly better than expected earnings and a lot of that was due to stronger PC sales, especially from business clients. This same story will probably be bullish for HPQ as well.

Shares of HPQ have been slowly marching higher and currently sit at two and a half year highs. The stock looks poised to breakout past its mid-June peak. Today's high was $35.29. We are suggesting a trigger to open bullish positions at $35.35.

The Point & Figure chart is forecasting a long-term target of $47.00. We probably won't hold on to HPQ that long since the company is scheduled to report earnings on August 20th.

- Suggested Positions -

Long HPQ stock @ $35.35

- or -

Long Sep $35 call (HPQ140920C35) entry $1.49*

07/23/14 triggered @ 35.35
*option entry price is an estimate since the option did not trade at the time our play was opened.
Option Format: symbol-year-month-day-call-strike


SoftBank Corp. - SFTBY - close: 37.43 change: -0.56

Stop Loss: 35.35
Target(s): To Be Determined
Current Gain/Loss: +2.0%

Entry on June 17 at $36.68
Listed on June 16, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 499 thousand
New Positions: see below

Comments:
07/23/14: SFTBY underperformed today with a -1.4% decline. I don't see any company-specific news to account for today's relative weakness. The Japanese market was only fractionally lower (almost unchanged). SFTBY's drop is likely a reaction to earnings from a rival but they have their hands in some many business it could be tough deciphering which rival may have drug SFTBY lower today.

SFTBY remains underneath resistance near $38.50.

Keep in mind that Alibaba is still expected to IPO this summer. There has been some speculation it could happen later this month. Others believe Alibaba wants to IPO on the "lucky" date of August 8th. The number eight is considered a lucky number is Chinese culture. However, there has been new speculation that Alibaba may not IPO until after Labor Day (September 1st). Bloomberg news also reported that Alibaba will not IPO until September.

Earlier Comments: June 16, 2014:
SoftBank Corp. has been referred to as the Warren Buffet of Technology although a better comparison is probably to Buffet's Berkshire Hathaway. They are a holding company with hundreds of businesses. According to the company website SFTBY has 235 subsidiaries and 108 affiliates (including 150 consolidated subsidiaries and 83 equity method companies). SoftBank Group possesses both advanced infrastructure and diverse services and content, and invests in promising companies working in the Internet field.

SFTBY owns 80.2% of Sprint Corp., 33.3% of eAccess Ltd., 100% of WILLCOM, Inc., 33.3% of Wireless City Planning Inc., 58.5% of GungHo Online Entertainment, and 42.5% of Yahoo Japan Corp. They also own 34% of Renren Inc., which is considered the Chinese version of Facebook. They also own 36.7% of Alibaba Corp., which is a much larger and more profitable version of Amazon.com. That's on top of owning SoftBank Telecom, SoftBank BB Corp. and SoftBank Mobile.

SFTBY's combined telecom assets makes the company one of the largest telecom/wireless players in Japan. In 2013 they added 4.1 million new subscribers and more than double the 1.19 million subscriber gain by NTT DoCoMo and 2.8 million for AU, which is owned by KDDI. Softbank added 47% of the Android phones activated in Japan and 39% of the iPhone 4s and 5c models. Both metrics are the largest in Japan and shows how Softbank is gaining market share.

Their Renren investment could be a big. China already has the largest Internet audience on the planet and it's only going to get bigger. Currently Renren has about 200 million users. This will grow. Like Facebook, Renren is developing its mobile platform. Renren is currently valued at about $8 per user but this seems extremely low considering what Facebook paid for WhatsApp.

SFTBY's majority stake in Sprint is starting to pay off. Sprint has had a rough few years working through its merger with Nextel. Sprint later acquired Clearwire. It looks like Sprint is now in recovery mode after adding +477,000 subscribers in Q4 2013 versus losing -337,000 in Q4 2012. SFTBY wants to acquire T-Mobile and combine it with Sprint. Currently 75% of U.S. customers are on AT&T or Verizon. SFTBY calls them an American duopoly but they believe by combining Sprint, the third largest carrier, with T-Mobile, the fourth largest, the combined company could compete with AT&T and Verizon, which would be good for competition and ultimately consumers.

Today the real allure of SFTBY is its 37% ownership of Alibaba. Amazon.com (AMZN) is an Internet powerhouse with sales of $86 billion in 2013 and a net profit of $274 million. Alibaba dwarfs AMZN with 2013 sales of $160 billion and a profit of $2.16 billion. Right now it looks like Alibaba will IPO this summer. Analysts have been estimating they could be the biggest IPO in history with a value of $160 to 185 billion.

There were new numbers out on Alibaba today with the company stating that its Q4 revenues only rose +39% to $1.9 billion. That's down from 62% growth in Q3. Margins retreated from 51.3% to 45.3% on higher marketing costs. This spooked investors today into thinking that maybe the valuation may not be in the $160-185 billion range.

We believe that SFTBY's shares are very undervalued and when the Alibaba IPO does hit this stock could soar. Tonight we're suggesting investors launch positions tomorrow morning at current levels. Depending on your trading style this could be an aggressive entry point. Technically SFTBY still has resistance in the $38-39 zone. More conservative investors may want to wait for SFTBY to close above $39.00 before initiating new positions. The risk of not launching positions now is that we do not know when Alibaba is going to announce its IPO. It could be any day and likely in the next few weeks. We will plan on exiting after Alibaba's first day of trading.

Current Position: Long SFTBY stock @ $36.68

07/11/14 News hits that SFTBY might buy T-Mobile soon.
06/30/14 new stop $ 35.35
06/17/14 trade opens. SFTBY gapped down at $36.68
note: SFTBY does not have options.



BEARISH Play Updates

DSW Inc. - DSW - close: 27.49 change: -0.17

Stop Loss: 28.25
Target(s): To Be Determined
Current Gain/Loss: - 2.2%

Entry on July 16 at $26.90
Listed on July 12, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 1.5 million
New Positions: see below

Comments:
07/23/14: Good news! It looks like DSW's bounce might finally be rolling over. I would be tempted to launch new bearish positions on a drop below $27.25.

Earlier Comments: July 12, 2014:
DSW Designer Shoe Warehouse runs over 400 company-owned stores. They also participate in hundreds of other shoe departments in regional department stores through their Affiliated Business Group.

There appears to be a bear market in designer shoes. At least that is the picture if you're looking at shares of DSW Inc. The stock has actually been a big winner for investors if you have owned it the past few years. On a post 2-for-1 split adjusted basis DSW traded down to $3.33 in 2009. It peaked in 2013 with a close at $47.22 in November last year. That's a huge run (more than 1,400%). Unfortunately last November was indeed the peak. DSW has been stuck in a bearish trend of lower highs and lower lows since then.

DSW lowered its earnings guidance back in February 2014. Of course back then just about all of the retail companies were warning about lack of sales and blaming it on the extremely cold winter weather. That was after weeks of worry over the 2013 holiday shopping season.

The U.S. economy is slowly recovering but consumer spending has not. There are still large chunks of the consumer who continue to struggle. The sharp rise in food prices this year combined with elevated gasoline prices has not helped. There seems to be a bifurcation in the consumer spending. There has been strong demand for big ticket items like housing and cars. Yet smaller discretionary spending is just not there.

The overall retail industry saw some improvement in May. There was hope that June same-store sales would come in better than expected. Analysts and investors were a bit disappointed when the retail industry delivered June numbers that were only in-line with estimates.

Meanwhile DSW continues to struggle. The company reported earnings on May 28th. Wall Street was expecting a profit of $0.48 per share on revenues of $622.9 million. DSW announced earnings of 42 cents on revenues of $599 million. A miss on both counts. Management then lowered their 2015 guidance. The company blamed the weather (again) and said they were facing an intense promotional retail environment. The Container Store (TCS) has a completely different product mix but recently mirrored DSW's troubles and said they were experiencing a retail "funk" (i.e. lack of sales).

Shares of DSW dropped from $32.50 to $23.60 on its earnings miss and earnings warning late May. Since then the stock has bounced but it has found new resistance in the $28.50 area. Now DSW looks like it is rolling over again.

Friday's low was $27.20. I am suggesting a trigger to open bearish positions at $26.90. If triggered I'm expecting DSW to at least test its May lows if not breakdown to new lows.

We will plan on exiting prior to DSW's late August earnings report.

current Position: short DSW stock @ $26.90

- (or for more adventurous traders, try this option) -

Long OCT $25 PUT (DSW141018P25) entry $1.05

07/18/14 new stop @ 28.25
07/16/14 triggered @ 26.90
Option Format: symbol-year-month-day-call-strike



Five Below, Inc. - FIVE - close: 35.56 change: -0.43

Stop Loss: 36.10
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Time Frame: 8 to 12 weeks
Entry on July -- at $---.--
Average Daily Volume = 1.0 million
Listed on July 21, 2014
New Positions: Yes, see below

Comments:
07/23/14: FIVE did not see any follow through on yesterday's upgrade-inspired rally. Shares instead underperformed the market with a -1.1% decline. We are waiting for a new relative low.

Earlier Comments: July 21, 2014:
Five Below is a rapidly growing specialty value retailer offering a broad range of trend-right, high-quality merchandise targeted at the teen and pre-teen customer. We offer a dynamic, edited assortment of exciting products, all priced at $5 and below, including select brands and licensed merchandise across a number of our category worlds: Style, Room, Sports, Media, Crafts, Party, Candy and Seasonal (which we refer to as "Now"). We believe we are transforming the shopping experience of our target demographic with a unique merchandising strategy and high-energy retail concept that our customers consider fun and exciting. Based on management's experience and industry knowledge, we believe our compelling value proposition and the dynamic nature of our merchandise offering has fostered universal appeal to teens and pre-teens, as well as customers across a variety of age groups beyond our target demographic (source: company website).

FIVE has been suffering from a multi-year trend of lower same-store sales growth. The first quarter of 2014 broke that down trend with same-store sales growth of +6.2%. Management had previously guided in the 3-4% range and analysts were only expecting +3.8%. Meanwhile total sales surged +31.8% to $126 million, beating estimates of $121.9 million. The overall sales growth was a combination of adding new stores and the better same-store sales. Unfortunately FIVE guided lower in its Q1 report (June 4th). Management also guided for full-year 2014 same-store sales growth of just 4%.

FIVE opened 19 new stores in the first quarter bumping its total to 323 stores. Their long-term plan is 2,000 stores. That might be a warning signal. The FIVE co-founders have tried retail before with the Zany Brainy chain that sold toys and games. Zany Brainy eventually went bankrupt and one of the reasons blamed for the failure was growing too fast.

There have been plenty of bears claiming that shares of FIVE are too rich. The company's P/E is about 55. That is pretty expensive but growth names tend to carry high valuations. They are seeing strong revenue growth. That growth could face tough competition.

Wal-Mart (WMT) unveiled plans to start building smaller "neighborhood" stores in an effort to win back some market share. WMT plans to boost these smaller stores from 346 in 2014 to over 500 in 2015. Given WMT's strength in this industry they could squeeze FIVE's margins.

Shares of FIVE has been underperforming the major indices. The stock peaked near $55 a share back in November 2013. Since then investors have been selling the rallies and FIVE now has a bearish trend of lower highs. Today shares of FIVE are hovering above major support near $34.00. A breakdown could launch the next leg lower. The Point & Figure chart is currently bearish and forecasting at $28 target.

The February 2014 low was $33.94. We are suggesting a trigger to open bearish positions at $33.75.

Trigger @ $33.75

- Suggested Positions -

short FIVE stock @ (trigger)

- or -

buy the Nov $30 PUT (FIVE141122P30)

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


Fiesta Restaurant Group Inc. - FRGI - close: 43.00 change: +0.84

Stop Loss: 45.75
Target(s): To Be Determined
Current Gain/Loss: +1.7%

Entry on July 21 at $43.75
Listed on July 19, 2014
Time Frame: Exit PRIOR to earnings on Aug 5th
Average Daily Volume = 271 thousand
New Positions: see below

Comments:
07/23/14: After three days of declines FRGI found support at its exponential 200-dma and bounced. The stock's rebound produced a +1.99% gain for the day. Watch for resistance near $44.00 and its simple 200-dma.

Earlier Comments: July 19, 2014:
Fiesta Restaurant Group, Inc. (FRGI) specializes in fast-casual, ethnic restaurant brands. They currently own, operate, and franchise the Taco Cabana and Pollo Tropoical brands with more than 300 locations across the southern United States, the Caribbean, Central and South America. Most of their stores are located in Florida.

FRGI was the best performing restaurant stock last year with a gain of 240%. Yet shares have been seriously underperforming this year with a -15.5% decline and that's after the eight-week rally from its May 2014 lows.

The company is growing. They're expected to boost their store growth by 17 percent this year. Their latest earnings report was mixed. FRGI delivered a profit of 33 cents per share when Wall Street was looking for 30 cents. Revenues were up +8.8% year over year to $145.4 million. That's nice growth but analysts were expecting revenues of $147.5 million.

Same-store sales and traffic were up +6.3% and 4.6%, respectively at the Pollo Tropical brand. Yet the Taco Cabana brand only saw +0.8% sales growth and traffic was negative.

The U.S. restaurant industry saw first quarter traffic decline. It looks like the trend continues in the second quarter. Industry wide traffic declined -1.7% in June. That's the 19th consecutive month of negative traffic. Now FRGI does seem to be outperforming its peers in the restaurant industry but it does seem to be swimming up stream against a cautious consumer spending environment.

The rally off FRGI's May lows appears to be breaking down. FRGI has been consolidating sideways the last few days and looks poised to break support at its simple 200-dma soon.

We think it will break down. I would consider this more of a short-term technical trade than a bearish call on FRGI's fundamental business. The $35-37 area looks like it could be significant support. We'd like to try and capture the drop.

Tonight I'm suggesting a trigger to open bearish positions at $43.75 with a stop loss at $45.75.

FRGI is scheduled to report earnings on August 5th and we do not want to hold over the announcement.

Current Position: short FRGI stock @ $43.75

07/21/14 triggered @ 43.75