Option Investor
Newsletter

Daily Newsletter, Wednesday, 8/13/2014

Table of Contents

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

Market Wrap

Opex Bounce

by Keene Little

Click here to email Keene Little
Last week's pullback into Thursday's low was once again a good setup to slingshot the market back up into opex week. It's a formula that keeps working. What happens after opex will be more important.

Wednesday's Market Stats

The game plan to pull the market down into a low on the Thursday prior to opex, followed by a short-covering rally into opex is again playing out. It's a pattern that has played out repeatedly and this opex appears no different. But the larger price pattern suggests there could be trouble following this week's bounce so don't get complacent about the long side.

Yesterday's choppy decline was followed by another rally leg this morning, which keeps the bulls in control for now. There's higher potential into Friday but a bounce to a lower high that looks like a correction to the decline should lead to a stronger selloff next week, which I'll lay out in tonight's charts. I'll also identify the key levels to the upside, which if broken by the bulls will tell us new highs are coming.

This morning's economic numbers were not market moving, although the disappointing retail sales numbers were a little disappointing. Retail sales were expected to stay roughly flat with June's +0.2% but instead dropped to zero growth. Sales excluding the auto component were expected to drop marginally from June's +0.4% to +0.37% but instead dropped to only +0.1%, just barely above zero growth. So it would appear the consumer is pulling back and that of course is not a good sign for the economy, which remains so dependent on strong consumer spending.

One of the more worrisome things throughout the 5-year bull market that we had (I'm assuming it finished with the July high until proven otherwise) is the fact that it's been so disconnected from reality. I've spilled a lot of virtual ink on the separation between Wall Street and Main Street. And now the slowdown in consumer spending is further aggravation of the split. One example of the slow recovery in consumer spending, labeled Personal Consumption Expenditures (PCE) is shown on the chart below. The red line is the current recovery from the trough and is compared to average fast and average slow recoveries. The current recovery is much worse than even the average slow recovery.

Personal Consumption Expenditures recoveries from recessions

Another way to look at this is to see how much the PCE declined during the last recession and the recovery since the bottom in 2009. The decline was much steeper than past recessions and the recovery after 5 years is only about half the loss.

Declines and recoveries in Personal Consumption Expenditures

I suppose one could look at the above charts and say, "The trend is up!" and that's true. But is it supportive enough of a stock market that has blown past the 2007 highs? The answer has been yes for many years because of the belief in the Fed's almighty powers to prop up the stock market. But all they've accomplished is propping up a risk-taking attitude. There's a huge disconnect between the market prices and reality. Bullish sentiment has created a worse bubble than we had in 2000 or 2007. The correction of this disconnect will not be pretty.

And just in time, the retail trader has bought into the rally, literally. A recent AAII Asset Allocation Survey of retail investors shows cash levels in July dropped to the lowest level since 1999 at only 15.8%. The chart below shows retail trader cash positions since 1996 and you can see how the peaks and valleys in cash positions have been closely aligned with important tops and bottoms. It's not a perfect timing method but it's certainly another warning sign.

Retail Investor Cash Allocation, 1996-July 2014, chart courtesy shortsideoflong.com

I'll start off tonight's chart review with the NDX since it's showing a relatively clean price pattern and the potential for a reversal after today's rally. The blue chips suggest higher prices into the end of the week (and there's the same potential for NDX) so the short-term picture is a little muddy but it's important to keep the bigger picture in mind. Because the larger pattern suggests the July highs are important highs (potentially THE highs for the 5-year bull market) I think it's important to stay aware now of the downside risk.

Starting off with the NDX weekly chart, it's showing a good wave relationship that helps confirm the wave count, which is what I look at to help confirm when it's time to look for reversals. The rally from November 2012 is a 5-wave move and the completion of it suggests at least a larger pullback correction or more bearishly, the start of the next multi-year bear market. I have the price projections for the 3rd and 5th waves, which are based off the size of the 1st wave, which is the leg up from November 2012 to the May 2013 high (labeled wave-(i) on the chart). The 3rd wave is often 162% of the 1st wave, which is the projection near 3730 and the high was 3938. When the 3rd wave is 162% of the 1st wave it's common to see the 5th wave the same size as the 1st wave, which is the projection near 3973 and the high was 3997. Between July 23rd and July 30th there were only 3 days that managed to close above 3973.

Nasdaq-100, NDX, Weekly chart

The July high for NDX was also up against the trend line along the highs from April 2012 - March 2014. The turn down from this trend line and the price projection for the completion of the 5-wave move up from November 2012 is what had me feeling bearish about the July high. That was then followed by a 5-wave move down into last week's low, which is the first short-term indication we've seen a trend change. It's possible we saw a larger pullback correction from the July 3rd high so further upside still needs to be respected. The proof the bears need to confirm a top of importance is in place is for the current bounce to make a lower high and then have it followed by a break below last week's low. Hence the key level to the downside at 3845, shown on the daily chart below.

Nasdaq-100, NDX, Daily chart

Key Levels for NDX:
- bullish above 3965
- bearish below 3845

Today the NDX was bullish and was able to jump up over its broken 20-dma, near 3924 today. But it has run into its broken uptrend line from April-May, near 3946, with a high at 3948.70. This was also a test of the top of its gap down on July 31st, at 3948.90. It pulled back a little but then chopped its way higher this afternoon and kept itself pressed up against the trend line, which looks like a small ending pattern and it had me thinking short for Thursday morning to see what kind of pullback/decline we get.

Nasdaq-100, NDX, 60-min chart

This is opex week and I've been looking for ways the pattern would support a higher bounce into the end of this week. Based on the start of the bounce pattern off the August 6th low (as opposed to the lower low on August 7th) I think there's a good chance NDX will pull back and then head higher into Friday, as I've depicted on the chart above. It would stay trapped below its broken uptrend line from April-May but make it up to its 78.6% retracement (a very popular retracement level for years now) at 3965 by next Monday morning. This is obviously a guess but it's something I'll be tracking this week.

Last week's low for SPX held support at the important uptrend line from November 2012 - February 2014, near 1904 at the time. That is a trend line the bulls must defend and any break of it, currently near 1910, confirmed with a break below last Thursday's low at 1904.78, would be a strong reason to be short (certainly a reason to exit long positions). A 3rd wave down is expected to be the next leg down (assuming we'll get it and not a new high from here) and it will very likely be accompanied by strong selling.

S&P 500, SPX, Daily chart

Key Levels for SPX:
- bullish above 1973
- bearish below 1904

I have the key level to the upside for the bulls to break above at 1973 because that would get it through several levels of resistance. The broken uptrend line from April-May is near price-level resistance at 1955 (the shelf of support in July) and the 20- and 50-dma's surround this level at about 1952 and 1956, resp. The 62% retracement of its decline is near 1958. Two equal legs up for an a-b-c bounce off the August 6th low points to 1961.74. It would close its July 31st gap down at 1970.19. And then finally, the 78.6% retracement is at 1972.30. So if the bulls can get through all that, we'll be heading for new highs. I'll believe it when I see it happen.

S&P 500, SPX, 60-min chart

The DOW's pattern is the same as SPX except I'm starting its bounce projections from the August 7th low. There's a subtle difference in the wave count for each on the way down and when I look at its bounce off the August 7th low I get a higher projection for two equal legs up, which is just above 16800. This coincides with its broken uptrend line from November 2012 - February 2014 (log price scale) and its 2000-2007 trend line, both of which cross tomorrow near 16785. The bulls would be in trouble with a drop below yesterday's low at 16518 and it would be confirmed bearish below last week's low near 16330.

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- bullish above 16,880
- bearish below 16,330

The RUT does not have a clear pattern at the moment and that leaves too many options on the table. The decline into the August 1st low looks like a 3-wave pullback and suggests higher prices (or maybe it will be stuck in a large sideways consolidation into October/November before it will be ready to rally again). A rally above its July 24th high near 1164 would leave a confirmed 3-wave pullback and I'd be looking at it more bullishly, especially since it would be a recovery back above its broken 50-dma near 1160. The bearish interpretation of its decline is a 1-2, 1-2 wave count to the downside and the next leg down will be as if the bottom dropped out in a 3rd of a 3rd wave decline. Take a break below the August 1st low near 1107 seriously if it happens.

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- bullish above 1164
- bearish below 1107

I've been watching the banks the past few weeks to see if they support one side or the other but the pattern has remained unclear. I could easily argue a bearish case based on a 1-2, 1-2 wave count to the downside since the July 3rd high, which portends further selling, but it's not clear enough to feel strongly about it. If we have started a new bear market I would expect the banks to be one of the sectors to lead the way down. The weekly chart below shows a rounding topping pattern and especially with the break of the up-channel from 2012, back in April, followed by a bounce back up to back-test the bottom of the channel, into the July 3rd high, it's not hard to argue the bearish case here. Stronger evidence of a top would come with a break below price-level support at 66-67, followed by a break of its uptrend line from 2009-2011, currently down near 64. But as long as 66-67 holds as support, the "resetting" of MACD back down to zero while the index trades sideways can be viewed as bullish. So I'm waiting for the banks to show some leadership.

KBW Bank index, BKX, Weekly chart

At today's high at 8236 the TRAN retraced 50% of its decline from July 24th, on the nose at 8236. At the same time it is now back-testing its 20- and 50-dma's, as can be seen on its daily chart below. The risk for bulls is a turn back down from here and the start of the 3rd wave down, which would likely take it down quickly for at least a test of its 200-dma, currently near 7615. If we've got a bearish move down we'll likely see the 200-dma only become a speed bump on the way down to the April low at 7346. But for this week, if it holds up bullish, two equal legs up from last week points to 8380, which is a little shy of the 78.6% retracement of its decline, near 8395.

Transportation Index, TRAN, Daily chart

The U.S. Dollar is working hard to break out of its sideways trading range by getting above 81.50. It's still not clear if we'll get another pullback inside the range before breaking out but at least for now the dollar's pattern remains bullish.

U.S. Dollar contract, DX, Weekly chart

Gold has been chopping around for the past two weeks and hasn't strayed far from $1300. In fact it hasn't strayed far from that level since first dropping below it in June 2013. I'm still looking for a minor push higher in the coming month, up to about 1350, to complete a sideways triangle consolidation pattern since June 2013 low. That should then lead to lower prices for the shiny metal. Based on this pattern it could be the end of the year or early 2015 before we'll have a good buying opportunity for the metals.

Gold continuous contract, GC, Weekly chart

Oil has been chopping sideways since its hard drop at the end of July and has so far created a little star doji this week at trendline support (uptrend line from June 2012) and its 200-week MA. As long as it holds above 96 I'm expecting another rally leg up to the 113-115 area before it will be ready for a stronger decline. At 113.05 it would have two equal legs up from January and a little throw-over above the top of its rising wedge pattern would get it close to its May 2011 high at 114.83.

Oil continuous contract, CL, Weekly chart

One headwind for oil is the lack of demand by the U.S., which in turn could lower global prices further from here. The chart below shows how much the U.S. has imported, in Mbbl/day, since 1920. It peaked in 2008 near 11 Mbbl/day and since then a lackluster economy combined with new domestic supplies has dropped the number to about 7.2 Mbbl/day, which is the lowest number we've seen for the past 19 years (1995). U.S. consumption is currently 20.3 Mbbl/day and is well below pre-recession consumption levels.

U.S Oil Imports, chart courtesy BusinessInsider.com

There will be nothing from tomorrow's economic reports to drive the market one way or the other so it will be left to react to geopolitical news.

Economic reports and Summary

I tend not to pay too much attention to historical averages or patterns for the stock market because they're not reliable enough to trade. With that said, there is one pattern that supports the idea that we're about to get another leg down for the market following this week's bounce. The chart below was published by Tom McClellan and it shows the average pattern for stock price in the 2nd year of a 2nd term president, which is what 2014 is. As you can see, it's not a pretty picture as the average decline is back to the beginning of the year, which for SPX is down near 1750. A 200-point drop from about 1950 would be a 10% "correction."

Average Performance of SPX During 2nd Year of 2nd Presidential Term, chart courtesy mcoscillator.com

The EW (Elliott Wave) pattern suggests this week's bounce is a correction to the previous decline from the July highs and therefore it's a good opportunity to short the bounce. The big question, as always, is where the bounce will end. My crystal ball is a little cloudy but I could argue the NDX and a couple of other indexes up against resistance for a back-test are ready to start down now. But I also see the potential for a continuation higher (maybe after a pullback Thursday morning) into the end of the week. Considering this is opex week I am also inclined to give the bulls the benefit of the doubt that I have here.

The bottom line is that the long side seems particularly vulnerable right here but the short side could be painful for a couple more days. If we get a sharp decline, and especially if last week's lows are broken, short the bounces. In the meantime, give the market a little more room to the upside this week and then look for a rollover to short.

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

Technology Titan

by James Brown

Click here to email James Brown


NEW BULLISH Plays

Microsoft Corp. - MSFT - close: 44.08 change: +0.56

Stop Loss: 41.75
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Entry on August -- at $---.--
Listed on August 13, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 36 million
New Positions: Yes, see below

Company Description

Why We Like It:
Microsoft Corp. is a technology behemoth. The company was founded in 1975. They have grown into a massive company with 128,000 employees around the world. Their software is used by billions of people every day. They also offer technology services, tablets, X-box gaming platform, networking and server software, and their Nokia division. MSFT has jumped head first into the cloud computing industry. Altogether MSFT generated almost $87 billion in sales the past 12 months with a net income of $22 billion.

Investors worried about MSFT and how the death of the PC would slowly chip away at its core products - mainly the Windows operating system and Micosoft Office. However, this past summer there has been evidence that the PC market isn't dead. Intel reported stronger than expected chip sales for PCs, especially to enterprise customers. Meanwhile MSFT stopped supporting the Windows XP operating system. MSFT released the XP system back in 2001. Their decision to stop providing updates means the XP system could become less secure to viruses, malware, and hacking. One analyst estimated that 25% of the PCs currently connected to the Internet were still running XP. That's millions and millions of computers that will need to either upgrade their software or likely be scrapped and upgraded to a new computer with a newer version of MSFT's software. The upgrade cycle could last a while.

Investors have been pretty optimistic since Satya Nadella was crowned CEO of MSFT back in February this year. He has been focusing the company on the cloud and it seems to be working. MSFT's commercial cloud revenues soared +147% with sales on track to exceed $4 billion a year. Even Bing, MSFT's search engine rival to Google, is improving. Bing's ad revenues rose +40% last quarter and snatched almost 20% of the search engine market. MSFT expects their Bing division to turn profitable in 2016.

MSFT's most recent earnings report on July 22nd was mixed. They missed the bottom line estimate by 5 cents. Yet revenues came in ahead of expectations. Wall Street was looking for quarterly revenues of $22.99 billion. MSFT reported $23.38 billion. Several analyst firms upgraded their outlook on MSFT following the earnings report. Many of the new price targets are in the $50 area.

Technically shares of MSFT have a bullish trend of higher lows. The stock saw some post-earnings depression in the second half of July but now that's over and investors are buying the dip.

Tonight I am suggesting investors open bullish positions tomorrow morning. We'll try and limit our risk with a stop loss at $41.75.

- Suggested Positions -

Buy MSFT stock @ (the opening bell)

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

Buy the 2015 Jan $50 call (MSFT150117c50) current ask $1.66

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

Annotated Chart:

Weekly Chart:



In Play Updates and Reviews

The Rebound Continues

by James Brown

Click here to email James Brown

Editor's Note:
The U.S. market rebound from its August low continued on Wednesday.


Current Portfolio:


BULLISH Play Updates

Green Plains Inc. - GPRE - close: 42.38 change: +1.53

Stop Loss: 39.25
Target(s): To Be Determined
Current Option Gain/Loss: +3.9%
Entry on August 11 at $40.77
Listed on August 09, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 1.4 million
New Positions: see below

Comments:
08/13/14: GPRE did not see any follow through on yesterday's bearish reversal. Instead the stock reversed again and soared +3.74% to a new high. Tonight we are raising the stop loss to $39.25.

Earlier Comments: August 09, 2014:
GPRE has been a monster stock for investors over the last couple of years. Summer of 2012 the stock was trading for less than $5.00 a share. Today GPRE is trading at levels not seen since early 2006. The company is considered part of the basic materials sector. They're listed in the specialty chemicals industry. What they do is make ethanol and a lot of it.

According to the company website, "Green Plains is a vertically-integrated ethanol producer based in Omaha, Nebraska. We currently have an ethanol production capacity of approximately 1.0 billion gallons per year with our 12 plants." Another big part of their business is "Distillers grains are an important co-product of Green Plains’ ethanol production. At capacity our plants will produce approximately 2.9 million tons of distillers grains annually that will be used as a high-protein, high-energy animal fodder and feed supplement. Corn oil is also a co-product of ethanol production that is being extracted at all 12 of our plants."

Earlier this year GPRE made headlines when they purchased their own cattle-feed yard. Distiller's grain is a byproduct of the ethanol production process. Previously GPRE would try and sell it to ranchers as cattle feed. Sometimes that proved difficult to sell all of its distiller's grain. GPRE has decided a great way to handle the problem is buy their own cattle yard. They'll be able to raise their own cattle with the byproduct of their main business of ethanol production.

Of course ethanol is their main product and it could be a great year for GPRE. The company's input costs for their main ingredients of corn and natural gas have been falling in 2014. That's going to boost their ethanol margins. Piper Jaffray actually upgraded GBX in July on this dynamic and raised their price target on GPRE to $45.00.

It looks like the ethanol market is pretty healthy. The U.S. saw ethanol exports soar +56% in the first six months of 2014. Most of that went to Canada. Demand for ethanol could go up if some senators have their way. A handful of senators are pushing to boost the EPA's requirement on ethanol in our fuel. If they are successful it would raise the ethanol requirements by +40%.

The stock has displayed significant relative strength. The S&P 500 index is up +4.5% year to date. GPRE is up +108%. More and more mutual funds have been adding GPRE to their portfolio. Yet not everyone agrees with the bullish outlook on GPRE. Short interest is climbing as well. The most recent data listed short interest at 25% of the small 28.6 million share float. If this rally continues it could spark more short covering.

The last few days have seen GPRE consolidating sideways in the $39.50-40.60 zone. Tonight we are suggesting a trigger to open bullish positions at $40.75. We will try and limit our risk with a stop loss at $38.40.

We are not setting an exit target tonight but I will note that the point & figure chart is bullish and suggesting at $69.00 target.

- Suggested Positions -

Long GPRE stock @ $40.77

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

Long Dec $45 call (GPRE141220C45) entry $2.95*

08/13/14 new stop @ 39.25
08/11/14 trade opens on gap higher at $40.77, trigger was $40.75
*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


Hewlett-Packard Co. - HPQ - close: 35.30 change: +0.18

Stop Loss: 33.90
Target(s): To Be Determined
Current Option Gain/Loss: -0.1%
Listed on July 19, 2014
Entry on July 23 at $35.35
Time Frame: We will plan to exit prior to earnings on Aug. 20th
Average Daily Volume = 8.9 million
New Positions: see below

Comments:
08/13/14: HPQ seems stuck under resistance near $35.50 and we're running out of time before the company reports earnings on August 20th.

I would hesitate to launch 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*

08/12/14 new stop $33.90
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


Skyworks Solutions - SWKS - close: 54.01 change: +1.60

Stop Loss: 49.95
Target(s): To Be Determined
Current Option Gain/Loss: +2.6%
Entry on August 07 at $52.65
Listed on August 02, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 4.3 million
New Positions: see below

Comments:
08/13/14: Yesterday it looked like SWKS was poised for a breakout past resistance near $52.75. The stock delivered that breakout today with a +3.0% surge higher. SWKS is now approaching its July highs in the $54.45 area.

Tonight we're moving our stop loss to $49.95. More conservative investors may want to raise their stop even higher.

Earlier Comments: August 2, 2014:
The semiconductor stocks have led the market higher most of the year but the SOX semiconductor index has reversed sharply in the last couple of weeks. This correction in the SOX has shaved its year to date gains to +13.9%. Shares of SWKS have not seen the same pullback and this semiconductor stock is up +82% this year and looks poised to keep the rally going.

Who is SWKS? According to the company website, " Skyworks Solutions, Inc. is an innovator of high performance analog semiconductors. Leveraging core technologies, Skyworks supports automotive, broadband, wireless infrastructure, energy management, GPS, industrial, medical, military, wireless networking, smartphone and tablet applications. The Company's portfolio includes amplifiers, attenuators, circulators, demodulators, detectors, diodes, directional couplers, front-end modules, hybrids, infrastructure RF subsystems, isolators, lighting and display solutions, mixers, modulators, optocouplers, optoisolators, phase shifters, PLLs/synthesizers/VCOs, power dividers/combiners, power management devices, receivers, switches and technical ceramics. Headquartered in Woburn, Mass., Skyworks is worldwide with engineering, manufacturing, sales and service facilities throughout Asia, Europe and North America."

SWKS is probably best known for being a component supplier for Apple's iPhones. SWKS is also supplying components to Amazon.com for that company's new Fire Phone.

SWKS soared in mid July following a better than expected earnings report. Wall Street was looking for a profit of 80 cents after SWKS guided higher to 80 cents in June. They still managed to surprise with a bottom line profit of 83 cents a share. Revenues soared almost 35% to $587 million, which was better than the $570 million estimate, up from $535 before SWKS's June guidance. SWKS management also raised their guidance going forward.

Following SWKS's much better than expected report there was a wave of bullish analyst comments. Several firms raised their SWKS price targets into the $60-65 zone. SWKS's bullish guidance is probably due to Apple's new iPhone 6, which is expected to be unveiled in September. Odds are good that SWKS will rally into Apple's product launch in September.

Shares of SWKS were showing relative strength on Friday with a bounce from support near $50.00 and a bullish engulfing candlestick pattern. We are suggesting a trigger to launch bullish positions at $52.65.

- Suggested Positions -

Long SWKS stock @ $52.65

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

Long Nov $55 call (SWKS141122C55) entry $2.86

08/13/14 new stop @ 49.95
08/07/14 triggered @ 52.65
Option Format: symbol-year-month-day-call-strike




BEARISH Play Updates

Aaron's Inc. - AAN - close: 25.81 change: +0.01

Stop Loss: 27.10
Target(s): To Be Determined
Current Option Gain/Loss: +7.0%
Entry on July 30 at $27.75
Listed on July 29, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 809 thousand
New Positions: see below

Comments:
08/13/14: AAN's bounce has stalled at short-term resistance at its 10-dma. That's good news for the bears but it doesn't mean the bounce is over yet.

I am not suggesting new positions at this time. More conservative traders may want to take some money off the table now.

Earlier Comments: July 29, 2014:
Shares of AAN are down -3.7% for the year. Honestly, I'm surprised it's not down a lot more. The company is in the lease-to-own space for residential furniture, consumer electronics, home appliances and more. They have over 2,000 locations in the U.S. and Canada.

Back in February this year AAN reported earnings and guided lower. On April 15th AAN issued a new earnings warning and blamed it on the harsh winter weather. AAN reported earnings just a couple of weeks later and lowered guidance again. AAN issued yet another earnings warning on July 15th. Then when the company reported earnings on July 25th they lowered guidance yet again. With this many warnings I'm surprised investors have not left this stock like rats fleeing a sinking ship.

So why in the world were shares of AAN surging in May and June? Management has been battling with its second largest shareholder for months. In May they moved to declassify the board of directors. This means shareholders can remove all of the board members all at once if they choose to, on an annual basis. Naturally board members who want to keep their job tend to produce more shareholder friendly policies in a situation like this. I suspect this was the driving force behind the May-June rally.

Then the latest round of earnings warnings in July have completely erased all of their gains. Today shares of AAN are sitting near support at the $28.00 mark. The $27.85 level appears to be the level to watch. Tonight we're suggesting a trigger to launch bearish positions at $27.75.

I would consider this more aggressive trade. AAN is down significantly this month and could see another oversold bounce. Just because the path of least resistance is now down doesn't mean AAN can't ricochet higher once in a while.

NOTE: AAN does have options, which might be a way to limit your risk instead of shorting the stock. Unfortunately the option spreads look a bit too wide to actually trade them.

- Suggested Positions -

Short AAN @ $27.75

08/07/14 new stop @ 27.10
investors may want to take some money off the table now.
08/05/14 new stop @ 28.05
07/31/14 new stop @ 28.55
07/30/14 triggered @ 27.75


Cepheid - CPHD - close: 38.23 change: +0.22

Stop Loss: 40.25
Target(s): To Be Determined
Current Option Gain/Loss: +2.5%
Entry on July 28 at $39.20
Listed on July 26, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 680 thousand
New Positions: see below

Comments:
08/13/14: Hmm... CPHD did not see any follow through on yesterday's relative weakness.

Tonight we'll move the stop loss down to $40.25.

Earlier Comments: July 26, 2014:
CPHD is in the technology sector. If you look deeper the company operates in the scientific and technical instruments industry. According to the company's website, "Cepheid is a leading molecular diagnostics company that is dedicated to improving healthcare by developing, manufacturing, and marketing accurate yet easy-to-use molecular systems and tests. By automating highly complex and time-consuming manual procedures, the company's solutions deliver a better way for institutions of any size to perform sophisticated genetic testing for organisms and genetic-based diseases. Through its strong molecular biology capabilities, the company is focusing on those applications where accurate, rapid, and actionable test results are needed most, such as managing infectious diseases and cancer."

CPHD, like most of the U.S. stock market, had a great 2013. Unfortunately the rally peaked in February-March 2014. This stock set its all-time highs in the $55-56 zone. Market watchers already know that momentum and high-growth names were crushed during the March-April market pullback. CPHD was no exception. The stock corrected from $55 to $40. It looked like CPHD was on the path to recovery but then the stock collapsed again in the last two weeks.

The problem is CPHD's earnings. The company reported earnings on July 17th. Their adjusted results for the second quarter of 2014 was a loss of 10 cents a share. That was better than Wall Street's estimate for a loss of 13 cents a share. CPHD delivered pretty solid revenue growth. Sales in the second quarter surged +21.4% to $116.5 million. That came in better than analysts were expecting. Yet CPHD's net results were down -40% from a year ago.

Listening to the company's management paints an optimistic outlook. CPHD's CEO John Bishop said they sold a record-setting 1,084 of their GeneXpert systems last quarter. That's more than all of 2012. Gross margins improved as well with margins rising from 45% to 49%. So why did the stock fall?

Investors sold the stock on disappointing guidance. CPHD expects 2014 revenues in the 4452-461 million zone. That's relatively close to Wall Street's $459 million estimate. Yet CPHD is forecasting EPS of 10 cents to 13 cents. That is significantly lower than analysts' estimates of 20 cents. You can see the reaction in CPHD stock with the big drop on July 18th.

The post-earnings sell-off continues and now CPHD is breaking down under significant support at the $40.00 level. The next stop could be the $36-35 area or lower. Currently the point & figure chart is bearish and forecasting at $29.00 target.

I would consider this a more aggressive trade. The latest data listed short interest at 16.8% of the 68.9 million share float.

Friday's low was $39.26. We're suggesting a trigger to open bearish positions at $39.00.

- Suggested Positions -

Short CPHD stock @ $39.20

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

Long SEP $40 PUT (CPHD140920P40) entry $2.35

08/13/14 new stop @ 40.25
07/31/14 new stop @ 40.51
07/28/14 triggered @ 39.20
Option Format: symbol-year-month-day-call-strike



Deutsche Bank - DB - close: 33.16 change: +0.37

Stop Loss: 35.55
Target(s): To Be Determined
Current Option Gain/Loss: +0.9%
Entry on August 04 at $33.45
Listed on August 02, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 1.9 million
New Positions: see below

Comments:
08/13/14: The German stock market bounced again with a +1.4% gain. That may have boosted DB. This stock gapped open higher but the rally stalled at its 10-dma.

I am not suggesting new bearish positions in DB at this time. Keep an eye on the simple 30-dma near $35.00 as the level to watch.

Earlier Comments: August 2, 2014:
Banking scandals continue to plague the financials. Most of us are familiar with the mortgage loan scandal that has haunted the major U.S. banks for the last few years and finally seems to be fading away. Then some of the biggest international banks were hit with the Libor rate fixing scandal. Now some of the big banks are suffering with a dark pool trading scandal. Dark pools are essentially institutional trading that is concealed from the public markets.

If that wasn't bad enough Europe's economy is slowing down. The region was already struggling before the Ukraine-Russian conflict arose. Now with a growing list of sanctions against Russia the impact is starting to accelerate the economic slowdown in Europe. Plus the specter of financial stress in the European financial system has risen again with the recent collapse of Portugal's Banco Espirito Santo, which recently filed for creditor protection.

Add all of these factors together and you can see why shares of DB, one of Germany's biggest banks, might be struggling. The stock Broke down back in March this year and it's been sinking every since. The month of July saw shares consolidate sideways but DB has started to break out of this trading range. The Point & Figure chart is pretty ugly and suggesting a long-term $14 target.

Friday's intraday low was $33.69. I am suggesting a trigger to open bearish positions at $33.45.

- Suggested Positions -

Short DB stock @ $33.45

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

Long Oct $33 PUT (DB141018P33) entry $1.45*

08/07/14 new stop @ 35.55
08/04/14 triggered @ 33.45
*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


Fifth Third Bancorp - FITB - close: 19.65 change: +0.06

Stop Loss: 20.65
Target(s): To Be Determined
Current Option Gain/Loss: - 0.5%
Entry on August 06 at $19.55
Listed on August 05, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 10.2 million
New Positions: see below

Comments:
08/13/14: FITB is not cooperating with us. The downward momentum has stalled. Shares have been trading sideways for about six days in a row.

Investors may want to consider a lower stop loss. I am not suggesting new positions at this time.

Earlier Comments: August 5, 2014:
Fifth Third Bancorp started as the Bank of the Ohio Valley in Cincinnati back in 1858. According to the company's press release FITB is now "a diversified financial services company headquartered in Cincinnati, Ohio. The Company has $133 billion in assets and operates 15 affiliates with 1,309 full-service Banking Centers, including 102 Bank Mart® locations, most open seven days a week, inside select grocery stores and 2,619 ATMs in Ohio, Kentucky, Indiana, Michigan, Illinois, Florida, Tennessee, West Virginia, Pennsylvania, Missouri, Georgia and North Carolina. Fifth Third operates four main businesses: Commercial Banking, Branch Banking, Consumer Lending, and Investment Advisors. Fifth Third also has a 22.8% interest in Vantiv Holding, LLC. Fifth Third is among the largest money managers in the Midwest

The stock market's recent dip has reduced the S&P 500 index's 2014 gains to +4.9%. Yet the financial sector has been underperforming. The XLF financial ETF is only up +2.4%. Many of the banking stocks are weighing on the group. The regional banks have performed even worse with the KRE regional bank ETF down -6.9%. If you look at weekly chart of the KRE you'll notice a big bearish head-and-shoulders pattern that has formed over the last several months. This doesn't bode well for the group.

Banks have been struggling with little to no growth. Most are willing to lend but only to customers with the best credit ratings. Even if they do lend money the interest rates today are so low it's tough to make a profit. Housing prices continue to rise but the number of mortgages is shrinking.

FITB reported earnings on July 17th. Last quarter their mortgage banking revenues collapsed -67% from a year ago. FITB's profits plunged fro $591 million Q2 2013 to $439 million Q2 2014. The company did manage to beat Wall Street's estimates by 4 cents a share. Unfortunately FITB management lowered their revenue guidance.

Technically shares of FITB are bearish. They have broken the long-term bullish trend of higher lows (see the weekly chart). They have also recently broken below key support near $20.00.

Tonight we're suggesting bearish positions at current levels (no trigger). We'll try and limit our risk with a stop loss at $20.65.

- Suggested Positions -

Short FITB stock @ $19.55

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

Long Nov $20 PUT (FITB141122P20) entry $1.20*

08/06/14 trade begins. FITB gaps down at $19.55
*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


Financial Engines, Inc. - FNGN - close: 35.71 change: +0.60

Stop Loss: 36.60
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Entry on August -- at $---.--
Listed on August 11, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 663 thousand
New Positions: Yes, see below

Comments:
08/13/14: The stock market's widespread bounce today gave FNGN a lift. Shares rebounded +1.7% but stalled at short-term resistance near $36.00.

I do not see any changes from yesterday's new play description.

Earlier Comments: August 12, 2014:
FNGN is in the financial sector. They provide investment advice, retirement planning services and more. According to the company's press release they describe themselves as "America's largest independent investment advisor, is dedicated to making high-quality retirement help available to everyone — regardless of how much money they have. We’re proudly independent, which means we don’t sell products or earn commissions based on our investment recommendations. The companies that choose to work with us offer our services to their workers as a valuable employee benefit."

Shares of FNGN went public back in 2010 at $12.00. They opened at $15.00 on their first day of trading. Since then the stock has definitely had its ups and downs. Shares took off in July 2012 and soared to a high of $70 in December last year thanks to a very bullish stock market performance in 2013.

Unfortunately 2014 has been a very disappointing year as FNGN continues to frustrate investors. When FNGN reported earnings on February 20, 2014 they missed estimates by a penny, missed the revenue number, and guided lower for 2014. When FNGN reported earnings in May they missed by 2 cents, missed the revenue number, and guided lower for 2014. Their most recent earnings report was July 31st and FNGN managed to beat Wall Street's bottom line estimate by 2 cents. Revenues were in-line with (lowered) expectations. Yet FNGN management lowered their guidance for 2014. Is anyone picking up on a trend here?

The disappointing earnings results have fueled a six-month decline. Shares are now in a bear market. FNGN is currently testing support near the $35.00 level. The recent low was $34.88. Tonight we're suggesting a trigger to open bearish positions at $34.70.

I am tempted to label this a more aggressive, higher-risk trade because of the short interest. The most recent data listed short interest at 16.7% of the 50.8 million share float. That does raise the risk of a short squeeze. If you have noticed investors have been using the rallies to exit.

You could try and limit your risk with put options but the option spreads are pretty wide so we're not listing them here.

We are not setting an exit target tonight but I will point out that the Point & Figure chart is bearish and forecasting a $24.00 target.

Trigger @ $34.70

- Suggested Positions -

Short FNGN stock @ $34.70


Natural Grocers by Vitamin Cottage - NGVC - close: 19.11 change: -0.03

Stop Loss: 21.05
Target(s): To Be Determined
Current Option Gain/Loss: +1.7%
Entry on August 12 at $19.45
Listed on August 11, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 209 thousand
New Positions: see below

Comments:
08/13/14: NGVC failed to participate in the market's rally today. That's a good sign for the bears.

NGVC is testing its intraday lows from early June near $19.00.

Earlier Comments: August 11, 2014:
The last six to nine months have not been good for the natural food and organic-related retail chains. Whole Foods (WFM), The Fresh Market (TFM), Sprouts Farmers Market (SFM), and Natural Grocers have all underperformed the market by a wide margin.

According to NGVC's press release the company was "founded in Colorado by Margaret & Philip Isely in 1955, Natural Grocers was built on the premise that consumers should have access to affordable, high-quality foods and dietary supplements, along with nutrition knowledge to help them support their own health. The family-run store has since grown into a successful national chain with locations across Colorado, Texas, Utah, Wyoming, Oklahoma, Missouri, New Mexico, Montana, Kansas, Idaho, Nebraska, Arizona and Oregon, and employs over 2000 people. Although the company went public in July 2012, Isely family members continue to manage the company day to day, building on the foundation of their parents' business."

The good news is that the natural food and organic food craze is reaching a wider audience and more and more consumers are making healthier choices. The bad news is that this previously higher-margin business, in a notoriously low-margin industry, has drawn tons of competition. That has been the biggest challenge. Big players like Wal-mart and Target in addition to major regional grocery chains are all starting to offer more natural and organic wares. Meanwhile those already in the space are competing with each other as well. Margins are shrinking as competition heats up.

Shares of NGVC plunged back in May after the company lowered its same-store sales forecast for 2014. The stock dropped again on August 1st following its earnings report. Earnings were in-line with estimates but guidance was soft.

The path of least resistance is down and NGVG looks headed for its all-time lows in the $17.00 area.

The biggest risk with this bearish positions on NGVC is the crowd. There are a lot of investors already bearish on this stock. The most recent data listed short interest at 33.3% of the very, very small 5.1 million share float. That significantly raises the risk of a short squeeze.

We are suggesting bearish positions with a trigger to short NGVC at $19.45 but I am labeling this an aggressive, high-risk trade. NGVG does have options but most of the option spreads are too wide. We will try and limit our risk with a stop loss at $21.05.

*Aggressive Trade* Use small positions. - Suggested Positions -

short NGVC @ $19.45

08/12/14 triggered @ 19.45


Six Flags Entertainment - SIX - close: 36.66 change: -0.27

Stop Loss: 39.15
Target(s): To Be Determined
Current Option Gain/Loss: +0.7%
Entry on August 06 at $36.90
Listed on August 02, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 909 thousand
New Positions: see below

Comments:
08/13/14: SIX also underperformed the market today. Shares slipped -0.7% and look poised to retest their recent lows near $36.00.

Investors may want to start adjusting their stop loss lower.

Earlier Comments: August 4, 2014:
Everyone loves to have fun. The trend of stay-cations that started during the financial crisis of 2008-2009 has probably driven a lot of traffic toward domestic amusement parks. Shares of SIX have definitely performed well these last few years with a rally from its 2010 lows near $8.00 to 2014 highs near $43.00. Unfortunately the momentum may be slowing down.

According to the company website, "Six Flags Entertainment Corporation is the world's largest regional theme park company with $1.1 billion in revenue and 18 parks across North America. The company operates 16 parks in the United States, one in Mexico City and one in Montreal, Canada. For more than 50 years, Six Flags has entertained millions of families with world-class coasters, themed rides, thrilling water parks and unique attractions including up-close animal encounters, Fright Fest® and Holiday in the Park®."

The last earnings report was July 21st. SIX managed to beat bottom line estimates but revenues were a miss. Wall Street expected Q2 revenues of $396 million. SIX only reported $376.5 million. On the plus side SIX said that their amusement park guests were spending more once they got into the park. SIX also reported +9% growth in their season pass business. Unfortunately, attendance was down -8% in the second quarter. Oddly enough SIX blamed the harsh winter on slower Q2 attendance and some analysts were questioning that excuse. Goldman Sachs recently removed SIX from their buy list following the revenue miss. SIX is growing but it is not growing fast enough to justify its current valuations. The stock is trading with a P/E ratio near 32 compared to the S&P 500's P/E closer to 16.

Technically shares of SIX appear to have formed a bearish double top with the peaks in March and June. Now SIX is on the verge of breaking a long-term trend line of support (see weekly chart below).

The post-earnings reaction low was $37.12 on July 21st. We are suggesting a trigger to open bearish positions at $36.90.

FYI: SIX does have options but the spreads are so wide they are untradeable.

- Suggested Positions -

Short SIX stock @ $36.90

08/06/14 triggered @ 36.90


Yandex N.V. - YNDX - close: 29.03 change: +0.18

Stop Loss: 31.10
Target(s): To Be Determined
Current Option Gain/Loss: -0.5%
Entry on August 07 at $28.88
Listed on August 06, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 2.7 million
New Positions: see below

Comments:
08/13/14: YNDX's early morning gains faded as the stock struggled with resistance near its 10-dma. The stock did manage a +0.6% gain on the session.

More conservative investors might want to lower their stop closer to $30.00.

Earlier Comments: August 6, 2014:
Officially registered in Amsterdam, YNDX is actually headquartered in Moscow. They are one of the largest internet companies in Europe. They're also the dominant search engine in Russia with almost 62% of all search traffic.

The company's latest earnings report on July 29th looks bullish. Earnings were 30 cents a share versus the estimate of 29 cents. Revenues soared +32% to 12.2 billion Russian rubles ($361.5 million). That was above estimates for revenues in the $340-358 million range. Their Q2 search queries were up +21% from a year ago. Plus, YNDX reported their number of advertisers was up +25% from a year ago and up +6% from the prior quarter.

In spite of all the bullish numbers investors used the post-earnings rally to sell. The stock action is bearish. The trend of lower highs has now turned into a new pattern of lower lows. Today's drop of -2.3% not only underperformed the market but it broke recent support in the $29.50 area.

The current geopolitical risks between Ukraine and Russia could be pressuring YNDX. The U.S. and Europe have launched multiple sanctions against Russia and Russian companies as a penalty for Russia's support of Ukraine separatists. Yesterday stocks sank sharply on news that Russia was building up troops on the Ukraine border again. It would appear that Russian President Putin will not back down. There is speculation that instead of an actual "invasion" that Russia will send troops across the border as a "humanitarian effort" to protect people. If that does happen the global equity markets are not going to react well and Russian stocks could be hurt the worst.

Tonight we're suggesting bearish positions now at current levels. We will start with a stop loss at $31.10, above the 20-dma and 100-dma.

- Suggested Positions -

Short YNDX stock @ $28.88

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

Long NOV $28 PUT (YNDX141122P28) entry $2.40*

08/07/14 trade begins. YNDX opens at $28.88
*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