Option Investor
Newsletter

Daily Newsletter, Wednesday, 7/29/2015

Table of Contents

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

Market Wrap

No Change, No Guidance, Market Rallies

by Keene Little

Click here to email Keene Little
The market has been rallying this week on expectations the Fed will back off on the timing of a rate increase. As expected, today's FOMC announcement was for no change to the rate (still a measly 0.25%) and no guidance for when a rate increase could happen. The market continued rallying on the no-news event.

Today's Market Stats

Some high-profile earnings reports prompted a rally this week, or it could have been nothing more than short covering following a test of supports levels, and there's been an expectation the Fed will back away from a rate increase in September. Economic reports have not been supportive of the stock market's high valuation but its main focus has been, and continues to be, on what the Fed is going to do. The rally into today's FOMC announcement could result in at least a pullback while traders digest this week's gains and news.

The Fed mentioned the economy is expanding at a "moderate pace" while inflation continues to remain under its long-term target of 2%. The labor market is described as healthy, which is an improvement over June's statement in which they said the labor market had "diminished somewhat." With an unemployment rate around 5.3% (we won't count all those people who have dropped off the unemployment lines and who continue to be unemployed or underemployed), the Fed is keeping the door open for a rate hike in September but most believe the conditions are not good enough for a rate hike at that time.

The Fed did say they wanted to see "some further improvement in the labor market" and watch for evidence that inflation is starting to tick back up before raising rates. The policy statement kept the language that risks are "nearly balanced," which suggests the Fed is still more concerned about further weakening in the economy rather than rising inflation.

Most economists believe economic growth will improve in the 2nd half of the year vs. the 1st half. Since most believe that then we know the opposite is going to happen. As the economy continues to sputter along there will be an increasing number of analysts calling for a rate increase in December instead of September. I continue to believe the Fed has successfully painted itself into a corner and will not be able to raise rates for years and instead will likely institute another round of QE next year.

On Tuesday we received the report on new home sales and they were disappointing, coming in at 482K vs. 555K expected and a drop from May's 517K (which had been revised down from the originally reported 546K). Today we received the pending home sales and they also were very disappointing -- down -1.8% vs. expectations for an increase by +1.0% and a drop from May's +0.6% (which had been revised down from the originally reported +0.9%). A slowing housing market is a bad sign for the economy since so many businesses are dependent on the home market. We're getting the same slowing evidence that we saw prior to the 2007 market peak. It's certainly not supportive of the majority of economists who predict stronger economic growth for the 2nd half of this year.

These reports have been ignored by the market since last Friday (ignore that man behind the curtain) and in general the market has been ignoring multiple signs of economic slowing. But that's apparent only in the major indexes. If you look under the hood of the market you'll see a worn fan belt, fluid levels below minimum and a multitude of other problems that suggest your car is not going to take you much further. In a word, market breadth sucks.

On Monday there was an article written by Julie Verhage at Bloomberg.com site (Julie Verhage) in which the author described signs supporting the idea that the stock market could be topping. They're the same things discussed many times here but how it's starting to make mainstream financial press. That's a sword that can swing both ways -- it could scare traders away and make the market even more vulnerable to a selloff or it could be just another wall of worry for bulls to climb over.

Verhage pointed out the fact that the rally in the S&P 500 index was primarily driven by just two sectors -- retail and health care -- and that's the weakest market breadth since the high in 2000. This year's rally has been driven primarily by just six stocks -- Amazon.com Inc., Google Inc., Apple Inc., Facebook Inc., Netflix Inc. and Gilead Sciences Inc. More than half of the $664B in value added this year to the Nasdaq, according to JonesTrading brokerage firm, has come from these six stocks. For SPX, all of its nearly $200B in gains in market cap this year has come from Amazon, Google, Apple, Facebook, Gilead and Walt Disney Co. Market breadth has been weak and it's getting weaker, which is not supportive of higher prices. Prices can go higher but if it does so on continued weakness in market breadth it simply becomes even more vulnerable to a downside disconnect.

Also noted in the article was a quote from Stephan Suttmeier, a technical analyst with BofA Merrill Lynch, referencing a similarity to the condition prior to the spike down in October 2011. The uptrend line from March 2009 through the October 2011 low is what was used to show the bull market but it broke in June. Referring to the 2011 pattern, this is from Suttmeier's report (bold face is mine for emphasis):

"The 2011 build-up in new 52-week lows preceded a breakdown from a top in the S&P 500 and a peak to trough decline of 19.4 percent on a daily closing basis (21.6 percent on an intra-day basis) into October 2011. [The] difference is that over 40 stocks in the S&P 500 have hit new 52-week lows now vs. under 20 prior to the August 2011 S&P 500 breakdown, meaning that the setup might be more bearish now than in 2011."

The deterioration of new 52-week highs while new 52-week lows have been on the rise is shown on chart below. While SPX has been chopping sideways to marginally higher this year, in a pattern many are calling a bullish consolidation, the deterioration in market breadth warns us that it's very likely a topping pattern instead. Even during yesterday's and today's strong rally the new lows beat out new highs.

SPX vs. New 52-week highs and lows

Another chart comparison below shows SPX vs. the advance-decline line, which clearly shows fewer advancing stocks vs. declining stocks. A rally that has gone this long without even a 10% pullback since October 2011, showing this kind of bearish market breadth, is fair warning to those who believe the market only knows how to go higher. A breakdown, when it comes, is likely to catch more than a few investors asleep at the wheel.

SPX vs. advance-decline

The SPX weekly chart is another reminder about the choppy price range we've been in since SPX first climbed above 2040 in the beginning of November and it first reached 2100 in February. That's nine months of a choppy sideways market so if you're feeling whipped by this market and that you're not gaining any traction as an investor you can see why. Traders have had plenty of opportunities to trade both directions but even they have had a tough time because of the many whipsaws and give-backs. The pattern is still not clear and I see an equal chance from here of making new highs or finally breaking down. Some cycle work by traders I respect show now through mid-August as the next timing window for an important high in the market. Knowing this, what I've been trying to figure out is whether it will be THE top or a lower high as part of a correction to a decline that has already started.

S&P 500, SPX, Weekly chart

As depicted on the chart above, the bullish path could take SPX up to its broken uptrend line from March 2009 - October 2011, which was broken near 2105 on June 4th. There were a couple of back-tests in June, each resulting in a spike back down, and now another back-test in mid-August would see it up near 2190 (the trend line is currently near 2170). The 50-week MA has been supporting SPX on a weekly closing basis and it's currently at 2056. A weekly close below that level would be a bearish heads up, especially if it wasn't recovered by the end of the following week. The bottom of a shallow parallel up-channel since the December 2014 high is currently near 2030 and there's price-level support near 2040. A break below both of those levels would confirm a bearish move and below the February low near 1981 would confirm THE top is in place. The bearish divergence shown on the oscillators continues to be a warning sign for bulls to slow down and stay awake since there's potential danger ahead.

Here's another look at the weekly chart that shows a rolling top pattern. Typical of these topping patterns is a lot of chop as the index tops and that's certainly what we've had. Assuming SPX is in fact topping, the question is whether we'll see a choppy decline over the next few months, to mirror what we've seen so far this year, or if instead it will start to spike down. I suspect the latter but obviously we can't know. Just be aware that SPX needs to rally strong above 2200 to negate this rolling top.

SPX weekly chart with rolling top pattern

The sharp rally off Monday's low is just another reversal of a sharp reversal that we've seen multiple times in the past six months. There's no telling whether this rally will any better follow through than the multiple sharp moves before it. From a short-term perspective it's looking like the rally from Monday is completing a 5-wave move up and therefore the minimum expectation from here is for a pullback before heading higher (depicted in green). The bearish possibility is that the rally is another 2nd wave correction, like the July 7-20 rally, and that it will be followed by a very strong decline in a 3rd of a 3rd wave down. Depending on how corrective (choppy) the next pullback is we'll then get some clues as to whether we should be looking for a continuation much lower or if instead we should be looking to get long for a ride higher into mid-August. Roughly between 2045 and 2032 I've labeled the "chop zone" since that's the risk for anyone taking a position.

S&P 500, SPX, Daily chart

Key Levels for SPX:
- bullish above 2115
- bearish below 2040

The 60-min chart simply looks a little closer at the price action since late June. Those are big whippy moves and great trading opportunities if you were able to time the reversals (a challenge to say the least). Monday's low at its 200-dma was a very good setup to catch the ride back up, helped by short covering. Above 2100 keeps it bullish but back below 2090 would be potential trouble for the bulls.

S&P 500, SPX, 60-min chart

While SPX bounced off its 200-dma on Monday the DOW had broken it last week and today's rally brought the DOW back up to it. Will it hold as resistance with a back-test and bearish kiss goodbye to follow? That's certainly what the bears are hoping to see. It's more bullish above the 200-dma, near 17765, but then the bulls will have to battle the 20-dma, near 17805, and then the 50-dma, near 17908. The bulls have their work cut out for them if they try to tackle those MA's without at least a pullback to relieve the short-term overbought indicators. Too much too fast always makes the market vulnerable to a spike reversal, just as the strong selloff into Monday's low led to a spike reversal. One note on the bearish wave count -- it's uber bearish with a series of 1st and 2nd waves to the downside. I always question the count when it develops a series of 1st and 2nd waves like this but the risk is present for an extremely strong decline (call it a crash). I'm not predicting it will happen but I am saying the potential is there.

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- bullish above 18,140
- bearish below 17,250

The Nasdaq poked below its 20- and 50-dma's on Monday but then rallied back above them yesterday and today. It's now approaching, again, its March 2000 high at 5132. The bearish pattern following the first test of this level back in April is a 3-drives-to-a-high topping pattern (essentially a triple top) around this 5132 level and now a back-test, if followed by a bearish kiss goodbye, would likely lead to stronger selling. But a climb back above 5132 could lead to yet another new high and we'd then have to see if it's got better participation than the previous efforts at new highs.

Nasdaq Composite index, COMPQ, Daily chart

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

Last week the RUT dropped below what fits as a H&S neckline, which is the uptrend line from May-July and is currently near 1231, a point below today's high. The RUT pulled back just enough into the close to finish just below the line. Here again we'll have to see if this is a back-test of support-turned-resistance that's followed by a bearish kiss goodbye. A selloff tomorrow would mean a short against today's high is a recommended position. It would be relatively tight stop with lots of downside potential. But it's possible we'll see just a test of Monday's low followed by a bigger bounce into the mid-August timeframe for a lower high in a cycle turn window. As long as the indexes remain inside the 6-month trading range I would stay cautious and don't get married to any positions.

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- bullish above 1263
- bearish below 1200

A market sentiment indicator that's not watched by many is a comparison of the performance of junk bonds (using HYG, the high-yield bond ETF) and Treasuries (using TLT, the 20+ year bond ETF). When HYG is outperforming TLT it's an indication traders are feeling more bullish about the market and want a better return from the riskier corporate bonds). But when traders start to get nervous and less bullish, if not bearish, they'll start to favor the safety of Treasuries vs. the riskier HYG. As can be seen in the daily chart below, the HYG:TLT measure had been in decline (from a high in December 2013) until the January 30th low. The daily chart doesn't show the decline from December 2013 but it formed a 5-wave move down. Since the January low we've seen a 3-wave bounce into the June 23rd high that is likely an A-B-C correction to the 2013-2015 decline. Following the rollover from June 23rd it broke its 200-dma on July 23rd, which it had used on May 29th and July 8th as support. Today's rally has it back up to its broken 200-dma and if turns out to be a back-test followed by a drop lower it would be a stronger sell signal and more evidence of traders shying away from risk. That in turn would support a bearish view of the stock market.

High Yield Corporate Bonds (HYG) vs. 20+ Year Treasury Bonds (TLT), daily chart

The TRAN had a strong rally the past two days, which obviously looks bullish, but the rally might be the completion of an a-b-c bounce off its July 8th low. It hit a price projection at 8402, with a high at 8432, and it poked above the top of a parallel down-channel based on an EW (Elliott Wave) pattern. This channel is created by drawing a line from the 1st wave (April 6th) to the 3rd wave (July 8th) and attaching a parallel line to the 2nd wave high (April 24th). The expectation is that the 4th wave should find resistance near the top of the channel, currently near 8380. If the wave count is correct then we'll see today's rally reversed and a drop back down to the bottom of the channel. If the 5th wave in the decline from February 25th achieves equality with the 1st wave we'll see the TRAN drop down to 7675 in August.

Transportation Index, TRAN, Daily chart

The choppy climb off the U.S. dollar's low back in May continues to support the idea that it's in a big sideways consolidation following the strong rally in 2014. There are several ways that consolidation could play out and the sideways triangle idea that I've been tracking is just one. It fits well as a correction pattern in its larger price pattern and I'll continue to track it until price tells me something else is playing out. There's a good chance the dollar will simply consolidate for the rest of the year before heading higher next year. This pattern suggests the Fed is on hold until next year, maybe December, when they might raise rates, in which case the dollar would strengthen against the foreign basket of currencies (the best of the lot but it's not saying much).

U.S. Dollar contract, DX, Daily chart

After gold broke below the price shelf of support near 1141, on July 17th, it then dropped down to support at 1090, which is the 50% retracement of its 2001-2011 rally. A bounce back up to the 1141 S/R line is possible but it doesn't turn at least short-term bullish until it gets back above that level. The weekly oscillators show no bullish divergence and that's another reason why gold bulls should not be too anxious to try to catch falling knives here. While the bounce could make a little higher, the longer it consolidates near 1090 support the more likely it is to break. A break below 1090 would point to a drop down to 1000, which is price-level S/R from 2008-2009. The bearish pattern for the year, which is looking for a 5-wave move down from January's high at 1307.80, targets 893 for an end to its decline, which would be a 62% retracement of its 2001-2011 rally. If that plays out I'd then be looking to be a long-term buyer of gold, but not yet (I might do a little buying at 1000). When I stop hearing about all the people buying gold (and silver) coins at new lows then I'll know it'll be my turn.

Gold continuous contract, GC, Weekly chart

Silver got a little bounce this week but as can be seen on the weekly chart below, it's not much in the larger pattern and so far it's just consolidating near support at 14.65, which was price-level S/R back in 2006-2010. I would not turn bullish silver until it gets back above shorter-term price-level S/R near 15.25, which was the shelf of support from November 2014 until it broke earlier this month. It's now resistance until proven otherwise and in the meantime the downside projection near 12 still holds. But silver bears can't get complacent here since last week's low could have been a successful test of the November 2014 low and the bullish divergence is a warning sign that support might hold here. If silver gets back above 15.25 I would also not want to be short gold since even a bounce correction could be significant.

Silver continuous contract, SI, Weekly chart

As with the dollar, my expectation for oil this year is a sideways consolidation before heading lower next year. But if oil does drop to a new low in the next few months I see the potential for a drop to about 40 and then the start of a much larger rally, maybe even back up to the $80 area early next year. Oil would become more immediately bullish above its May high at 62.58 but potentially choppy between 44 and 59.

Oil continuous contract, CL, Daily chart

We'll get the advance GDP report tomorrow morning before the bell and it could cause some market reaction if it doesn't come in near the expected 1.3%. Much more than that would be a good sign for the economy but a bad sign for Fed watchers. A stronger-than-expected GDP would prompt fears of a rate hike sooner rather than later. Other than that the market is still responding to some earnings reports but those will tend to be stock specific and not market moving now.

Economic reports and Summary

Conclusion

This week's rally has been brought to us via short covering and expectations for a helpful Fed (by staying on the sidelines with their silly talk of a rate increase). If the rally was mostly in anticipation of what the Fed would say then we don't have much more to drive the market higher. Combine that with another too far, too fast bounce and indexes up against lines of resistance, it's possible the flash-in-the-pan rally could be over and the bears will slide back in. The bullish wave pattern suggests we'll get just a pullback, perhaps retracing about 50% of this week's rally, and then another rally leg. The bearish wave pattern suggests this bounce correction is just one of many sharp bounces that we'll see in the "slope of hope" decline that has already started. If true then the next leg down could be rough on the bulls. It's a tricky spot right here and it will be the pattern of the next pullback/decline that will provide clues as to whether or not the bulls should be able to press the market up to new highs. Market breadth says they'll struggle to do that and the bears will pounce on any further signs of weakness. Trade carefully here.

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

Transitional Troubles

by James Brown

Click here to email James Brown


NEW BEARISH Plays

Autodesk, Inc. - ADSK - close: 50.09 change: -0.80

Stop Loss: 52.55
Target(s): To Be Determined
Current Gain/Loss: Unopened
Entry on July -- at $---.--
Listed on July 29, 2015
Time Frame: Exit PRIOR to earnings on August 27th (unconfirmed)
Average Daily Volume = 2.3 million
New Positions: Yes, see below

Company Description

Trade Description:
ADSK is in the midst of a business transition and analysts believe the process is going to be painful for the company's financials.

ADSK is in the technology sector. According to the company, "Autodesk helps people imagine, design and create a better world. Everyone-from design professionals, engineers and architects to digital artists, students and hobbyists-uses Autodesk software to unlock their creativity and solve important challenges." Unfortunately the corporate description doesn't tell you much. ADSK sells software. The biggest part of their income is selling 3D CAD (computer aided design) software.

The trend in the company's earnings guidance is not that encouraging. ADSK reported their Q3 2015 results on November 20th. The beat estimates on both the top and bottom line but they guided lower for Q4. The company did it again on February 26th with their Q4 results, which beat estimates on both the top and bottom line but management lowered guidance for Q1.

ADSK reported their 2016 Q1 results on May 19th. Earnings were $0.30 per share as revenues rose +9% to $646.5 million. These results beat estimates. Unfortunately, you guessed it, management lowered guidance. This time ADSK significantly lowered their Q2 earnings and sales guidance. They also lowered their full year 2016 earnings and revenue guidance.

There seems to be a growing number of analysts on Wall Street that feel this trend of earnings trouble will continue. It sounds like ADSK is trying to copy Adobe Systems's move from up-front license fees (or perpetual licenses) where the consumer pays one lump sum up front to a monthly subscription model.

One of the challenges for ADSK is that the company depends on resellers for a lot of its sales. This relationship could suffer if ADSK decides to do away with the middleman when they switch to the subscription model. This transition is expected to take a couple of years. Shares have recently received a couple of downgrades as analysts worry the next couple of years will see slowing growth and falling margins.

This concern and the fact that ADSK keeps lowering their earnings and revenue guidance has killed the long-term up trend in the stock. Shares have recently fallen into a bear market (-20% from its highs). Now ADSK is hovering just above major support at $50.00. A breakdown here would be bad news. The intraday low on June 30th was $49.84. I'm suggesting a trigger to launch bearish positions at $49.75. Please note this is a shorter-term trade. ADSK will likely report earnings at the end of August or early September. We will plan on exiting prior to the announcement but thus far the earnings date has not been confirmed.

Trigger @ $49.75

- Suggested Positions -

Short ADSK stock @ $49.75

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

Buy the SEP $45 PUT (ADSK150918P45) current ask $0.78
option price is a current quote and not a suggested entry price.

Entry disclaimer: To avoid an unfavorable entry point, we will not launch a new play if the stock gaps open more than $1.00 past our suggested entry point.

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

Daily Chart:

Weekly Chart:



In Play Updates and Reviews

The Rebound Continues

by James Brown

Click here to email James Brown

Editor's Note:
The oversold bounce in commodities continued on Wednesday. This helped provide support to another widespread market rally. Stocks did see a brief bout of volatility surrounding the FOMC statement this afternoon but thankfully the rally resumed.


Current Portfolio:


BULLISH Play Updates

Guidewire Software, Inc. - GWRE - close: 59.31 change: -0.23

Stop Loss: 56.90
Target(s): To Be Determined
Current Gain/Loss: +1.8%
Entry on July 23 at $58.25
Listed on July 21, 2015
Time Frame: Exit PRIOR to earnings on Sept. 1st
Average Daily Volume = 368 thousand
New Positions: see below

Comments:
07/29/15: I was surprised to see GWRE sit out today's market rally. Traders bought the dip again near short-term support in the $58.25 area. Yet GWRE failed to make any progress higher. Readers may want to wait for a breakout past $60.00 before considering new positions.

Trade Description: July 21, 2015:
The NASDAQ composite is up +10% year to date. GWRE is outperforming with a +13.3% gain. Shares spent three months, March-May, consolidating lower after the rally failed at resistance near $55.00. GWRE's direction changed after its latest earnings report.

GWRE is in the technology sector. According to the company, "Guidewire builds software products that help Property/Casualty insurers replace their legacy core systems and transform their business. Designed to be flexible and scalable, Guidewire products enable insurers to deliver excellent service, increase market share and lower operating costs. Guidewire InsuranceSuite provides the core systems used by insurers as operational systems of record. Additional products provide support for data management, business intelligence, anytime/anywhere access and guidance and monitoring. More than 180 Property/Casualty insurers around the world have selected Guidewire."

Last December GWRE reported its fiscal Q1 results that beat Wall Street estimates on both the top and bottom line. Management raised their Q2 guidance. On March 2nd GWRE reported earnings and revenues that beat analysts' estimates again. GWRE management then raised their fiscal year 2015 estimates. This earnings beat was not enough to lift the stock higher. Shares drifted lower for three months.

Shares of GWRE came alive again following its Q3 report on June 2nd. Earnings actually missed estimates by a penny with a profit of $0.04 per share. Revenues were only up +4% to $85.4 million, although that did beat expectations. The company provided lackluster Q4 guidance but guided for +20% revenue growth in fiscal 2016. The stock soared.

The rally off its June lows has pushed GWRE through multiple layers of resistance. Now the stock is setting new all-time closing highs. The point & figure chart is bullish and forecasting a long-term target of $80.00.

On a very short-term basis the $58.00 level appears to be resistance. We are suggesting a trigger to launch bullish positions at $58.25.

- Suggested Positions -

Long GWRE stock @ $58.25

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

Long OCT $60 CALL (GWRE151016C60) $2.80

07/25/15 new stop @ 56.90
07/23/15 new stop @ 56.40
07/23/15 triggered @ $58.25
Option Format: symbol-year-month-day-call-strike


The Kroger Co. - KR - close: 38.80 change: +0.08

Stop Loss: 36.95
Target(s): To Be Determined
Current Gain/Loss: Unopened
Entry on July -- at $---.--
Listed on July 28, 2015
Time Frame: Exit PRIOR to earnings on Sept. 11th
Average Daily Volume = 3.9 million
New Positions: Yes, see below

Comments:
07/29/15: The bounce in KR continued but shares stalled at $39.00.

Rival Whole Foods (WFM) reported earnings after the bell and shares are sinking. WFM continues to suffer from tough competition from the likes of KR.

I don't see any changes from my prior comments. Our suggested entry point on KR is $39.05.

Trade Description: July 28, 2015:
If you're looking for a company with consistent growth then look no further. KR appears to be the king of same-store sales and recently announced 46 quarters of consecutive same-store sales growth.

KR is in the services sector. According to the company, "Kroger, one of the world's largest retailers, employs nearly 400,000 associates who serve customers in 2,626 supermarkets and multi-department stores in 34 states and the District of Columbia under two dozen local banner names including Kroger, City Market, Dillons, Food 4 Less, Fred Meyer, Fry's, Harris Teeter, Jay C, King Soopers, QFC, Ralphs and Smith's. The company also operates 780 convenience stores, 327 fine jewelry stores, 1,342 supermarket fuel centers and 37 food processing plants in the U.S."

BusinessInsider ran an interesting article on KR that suggested the grocery chain is shaping up to be growing competition for the fast-food industry. A recent poll showed that 1 out of 4 consumers would choose Kroger instead of McDonald's. KR has become more attractive because they have been expanding their prepared-food selection.

Another interesting tidbit came from CNBC Mad Money's Jim Cramer who said KR has twice the growth of rival Whole Foods Market (WFM). KR's most recent quarterly results showed same-store sales growth of +5.7%, which easily outpaces its rivals.

Speaking of Whole Foods, KR is quickly catching up. WFM built its brand on organic and natural foods, which also happen to have better margins than traditional grocery items. Rivals took notice and KR jumped into organics with both feet. According to JPMorgan, KR is on track to surpass WFM as the biggest seller of organic foods within the next two years. (FYI: Costco actually sells more organic food than anyone else in the U.S. but they are not a traditional grocery story).

KR's most recent earnings report was June 18th. It was their 2016 Q1 report with earnings of $1.25 per share. That beat estimates of $1.22. Revenues were $33.05 billion, which actually missed estimates. The stock rallied anyway. KR management reaffirmed their fiscal year 2016 earnings forecast for $3.80-3.90 per share (essentially +10% growth).

Traders should like this stock since KR is very shareholder friendly. According to a company press release they have returned more than $1.1 billion to shareholders through share buybacks and dividends in the last four quarters. Management recently announced a new $500 million stock buy back program to replace their previous repurchase program, which had been exhausted. They also raised their dividend. On a post-split basis will pay 10.5 cents on per share on September 1st, 2015. KR should begin trading ex-dividend August 12th Speaking of splits, the stock just split 2-for-1 on July 13th. It was their fifth stock split since 1979.

Last week the U.S. stock market was plunging. KR managed to evade most of the damage and essentially traded down from $39.30 to $38.30. Shares did see a spike down on Monday this week but traders bought the dip . We think KR is poised to breakout to new all-time highs soon. Tonight we're suggesting a trigger to open bullish positions at $39.05. More conservative investors might want to actually wait for a new high and use a trigger at $39.40 instead.

Trigger @ $39.05

- Suggested Positions -

Buy KR stock @ $39.05

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

Buy the SEP $40 CALL (KR150918C40)

Entry disclaimer: To avoid an unfavorable entry point, we will not launch a new play if the stock gaps open more than $1.00 past our suggested entry point.

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


21Vianet Group, Inc. - VNET - close: 20.12 change: +0.15

Stop Loss: 18.85
Target(s): To Be Determined
Current Gain/Loss: -3.0%
Entry on July 23 at $20.75
Listed on July 22, 2015
Time Frame: Exit PRIOR to earnings on August 25th
Average Daily Volume = 996 thousand
New Positions: see below

Comments:
07/29/15: VNET filled the gap from Monday's decline then shares began to fade. It was a disappointing performance since the Chinese market delivered a pretty solid rally today. VNET gains settled at +0.75%.

No new positions at this time.

Trade Description: July 22, 2015:
Buckle your seatbelt. We are adding a fast-moving Chinese Internet stock to the play list tonight. This trade is not for the faint of heart. The Chinese market has been very volatile in recent weeks. This has been exacerbated by merger and acquisition news.

VNET is in the technology sector. According to the company, "21Vianet Group, Inc. is a leading carrier-neutral internet data center services provider in China. 21Vianet provides hosting and related services, managed network services, cloud services, content delivery network services, last-mile wired broadband services and business VPN services, improving the reliability, security and speed of its customers' internet infrastructure. Customers may locate their servers and networking equipment in 21Vianet's data centers and connect to China's internet backbone through 21Vianet's extensive fiber optic network. In addition, 21Vianet's proprietary smart routing technology enables customers' data to be delivered across the internet in a faster and more reliable manner. 21Vianet operates in more than 30 cities throughout China, servicing a diversified and loyal base of more than 2,000 customers that span numerous industries ranging from internet companies to government entities and blue-chip enterprises to small- to mid-sized enterprises."

The Wall Street Journal recently noted in June that seven U.S.-listed Chinese companies had been approached with offers to go private. That's a big spike in buyout offers. From January through May this year there had only been five such offers. One of the companies recently approached is VNET.

On June 10th VNET was approached with a preliminary non-binding proposal by Kingsoft Corp. and Tsinghua Unigroup International to go private for $23.00 per American depositary share ("ADSs"). That's the stock we can trade on the NASDAQ. Naturally the stock surged on this announcement. On June 16th VNET announced they had formed a special committee to review this proposal.

Unfortunately for shares of VNET and most Chinese stocks the Shanghai market in China had peaked in mid June and began to crash. The next three weeks saw a -30% plunge in the Shanghai market. The sell-off really accelerated in the first week of July. We can see the impact this market plunge was having on VNET with the big declines in early July.

Shares of VNET produced a huge bounce on July 9th when they announced the company had hired financial advisors and legal counsel to help them review the proposal to go private. In their press release they warned investors that "no decision has been made" nor is there any assurance that any "definitive offer will be made". This warning didn't stop the rally in VNET's stock which has continued to rise.

The Chinese government has thrown billions of dollars at their market to stop the crash and it seems to be working. The fever seems to have broken and this should provide a less dangerous environment for shares of VNET to trade in. We suspect VNET will continue to rally as the M&A talk heats up. However, this is an aggressive, higher-risk trade. There is no guarantee of a deal. Shares of VNET are clearly very volatile. I suggest small positions to limit risk.

NOTE: VNET does have options but the spreads are too wide to trade them.

*small positions to limit risk* - Suggested Positions -

Long VNET stock @ $20.75

07/27/15 The Chinese Shanghai index plunged -8.48%
07/23/15 triggered @ $20.75




BEARISH Play Updates

Best Buy Co., Inc. - BBY - close: 32.12 change: -0.01

Stop Loss: 33.80
Target(s): To Be Determined
Current Gain/Loss: -0.1%
Entry on July 27 at $32.10
Listed on July 25, 2015
Time Frame: Exit PRIOR to earnings in late August
Average Daily Volume = 4.3 million
New Positions: see below

Comments:
07/29/15: It is encouraging to see BBY not participate in the market's widespread rally yesterday and today. Shares closed flat, which is a good sign if you're bearish on the stock.

No new positions at this time.

Trade Description: July 25, 2015:
Tonight's candidate is almost 50 years old. They were founded under the name "Sound of Music" but changed their name to "Best Buy" in 1983. Today they have over 1,400 locations, employ more than 125,000 people, and generate more than $40 billion in sales annually.

BBY is part of the services sector. According to the company, "Best Buy is a leading provider of technology products, services and solutions. The company offers expert service at an unbeatable price more than 1.5 billion times a year to the consumers, small business owners and educators who visit our stores, engage with Geek Squad Agents or use BestBuy.com or the Best Buy app. The company has operations in the U.S. where more than 70 percent of the population lives within 15 minutes of a Best Buy store, as well as in Canada and Mexico, where Best Buy has a physical and online presence."

The company launched a massive turnaround campaign almost three years ago as they struggled with extremely tough competition from companies like Amazon.com. The biggest problem for BBY is something called "showrooming". This is when customers come into a Best Buy store, they look around at products, ask questions from Best Buy staff, and they compare quality and price. Then they go home and buy what they want online for a cheaper price and have it delivered to their door.

BBY is acutely aware of the showrooming phenomenon. It's hard to compete with someone like Amazon who doesn't have the big overhead for large retail locations. BBY has been trying to compete on service plus they have redesigned their own online e-commerce offerings and they are seeing growth in their own online sales. BBY management has also been slashing expenses.

The turnaround has worked to a point. BBY's focus on cutting expenses is obviously good for profits. Yet sales remain slow. Looking at BBY's last couple of earnings reports their bottom line results have beaten Wall Street estimates (thanks to slashing costs) but revenues have been disappointing.

BBY reported their Q4 results on March 3rd, 2015 and revenues were only up +1.3% to $14.2 billion, which missed expectations. Comparable store sales were only up +1.3%.

BBY's Q1 result was worse. This report was announced on May 21st. They beat the bottom line EPS estimate again but revenues fell -0.9% to $8.56 billion. On the plus side their comparable store sales improved from -1.3% a year ago to +0.6% but this too was disappointing.

Shares of BBY have been in a down trend since they peaked near $42.00 in March this year. The stock has been in a bearish pattern of lower highs and lower lows. It looked like BBY might break this trend and then the stock was downgraded on July 17th.

Bank of America analyst Denise Chai reduced her rating on BBY to the equivalent of a "sell". She believes the company will see a tough second half to 2015. There is no must have product or upgrade cycle to drive customers into the store later this year. Chai expects BBY's sales to turn negative (-1%) in the second half.

BBY's stock collapsed on this downgrade and has been unable to recover. Today shares are poised to breakdown to new 2015 lows. Tonight we are suggesting a trigger to launch bearish positions at $32.15.

FYI: I am listing the October put options. BBY does have September options but the option strikes are at odd prices thanks to a $0.51 special dividend BBY paid in March and the option markets haven't caught up with new (normal) strikes yet.

I also want to point out that the point & figure chart is currently bullish for BBY. If shares traded below $32.00 it should generate a new sell signal.

- Suggested Positions -

Short BBY stock @ $32.15

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

Long OCT $30 PUT (BBY151016P30) entry $1.28

07/27/15 triggered on gap down at $32.10, trigger was $32.15
Option Format: symbol-year-month-day-call-strike


Cabot Corp. - CBT - close: 35.39 change: +0.34

Stop Loss: 35.65
Target(s): To Be Determined
Current Gain/Loss: +2.8%
Entry on July 20 at $36.40
Listed on July 18, 2015
Time Frame: Exit PRIOR to earnings on August 4th
Average Daily Volume = 457 thousand
New Positions: see below

Comments:
07/29/15: Commodities continued to bounce. The rebound in oil fueled another rally in energy stocks. CBT rose +0.97%. The intraday high was $35.61. If there is any follow through tomorrow we could see CBT hit our stop at $35.65.

No new positions at this time.

Trade Description: July 18, 2015:
The last couple of years have been rough for CBT investors. The stock peaked near $60.00 a share back in 2014. Today CBT is down -38% from its high and down -16% year to date.

CBT is in the basic materials sector. According to the company, "Cabot Corporation is a global specialty chemicals and performance materials company, headquartered in Boston, Massachusetts. The company is a leading provider of rubber and specialty carbons, activated carbon, inkjet colorants, cesium formate drilling fluids, fumed silica, and aerogel."

CBT's business seems to be slowing down. That's the picture I get looking at their last four earnings reports. 2014 Q3 revenues were up +4.3%. That slowed down to just +1.7% in 2014 Q4. Revenues fell -9.6% in Q1 2015. The slowdown accelerated in the second quarter. CBT reported its Q2 earnings on April 29th and revenues fell -22.7% to $694 million, significantly below analysts' estimates for $824 million. Q2 earnings were $0.53 a share, which missed estimates by 10 cents.

Three of CBT's four business segments saw declining sales. Reinforcement materials saw the biggest drop in the second quarter. Performance chemicals and specialty fluids also saw sales declines. Their purification solutions reported a small rise in sales.

Cabot President and CEO Patrick Prevost commented on his company's results, "We experienced a challenging quarter as the macroeconomic and competitive environment negatively affected our Reinforcement Materials and Specialty Fluids segments. Our volumes held up relatively well on a global basis, but we experienced margin pressure in Reinforcement Materials from lower contract pricing and feedstock-related effects. Purification Solutions results improved as customer orders rose for our mercury removal products in anticipation of the Mercury and Air Toxics Standards (MATS) implementation."

The MATS regulation did not work out well for CBT. That big drop in the stock price on June 29th was a reaction to the U.S. Supreme Court ruling on the EPA's attempt to regulate coal-fired power plant emissions. The market is interpreting the court's decision to mean less demand for CBT's chemicals that help power plants curb mercury emissions.

Technically CBT is in a bear market. The oversold bounce from the late June sell-off just failed. Now CBT is breaking down to new multi-year lows. We want to hop on board since the next support level looks like it could be $32 or lower. Tonight we're suggesting a trigger to launch bearish positions at $36.40. We will plan on exiting prior to CBT's earnings report on August 4th.

- Suggested Positions -

Short CBT stock @ $36.40

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

Long AUG $35 PUT (CBT150821P35) entry $0.75

07/27/15 new stop @ 35.65
07/25/15 new stop @ 36.15
07/22/15 new stop @ 36.85
07/20/15 triggered @ $36.40
Option Format: symbol-year-month-day-call-strike


The Michaels Companies, Inc. - MIK - close: 24.77 change: +0.03

Stop Loss: 26.55
Target(s): To Be Determined
Current Gain/Loss: -0.1%
Entry on July 28 at $24.75
Listed on July 27, 2015
Time Frame: Exit PRIOR to earnings in late August
Average Daily Volume = 729 thousand
New Positions: see below

Comments:
07/29/15: MIK tried to rally but the rebound failed at round-number resistance near the $25.00 mark. MIK faded back toward its lows and closed relatively unchanged on the day. This is a victory for the bears.

I would still consider new positions now at current levels.

Trade Description: July 27, 2015:
It looks like investor sentiment on MIK has turned bearish. The stock produced big gains from its post-IPO lows near $15 in August 2014. The rally peaked in March this year near $30.00 after the company reported earnings.

If you're not familiar with MIK they are in the services sector. They're considered part of the specialty retail industry. According to the company, "The Michaels Companies, Inc. is North America's largest specialty retailer of arts and crafts (based on store count). As of May 2, 2015, the Company owns and operates 1,177 Michaels stores in 49 states and Canada and 118 Aaron Brothers stores, and produces 12 exclusive private brands including Recollections(R), Studio Decor(R), Bead Landing(R), Creatology(R), Ashland(R), Celebrate It(R), ArtMinds(R), Artist's Loft(R), Craft Smart(R), Loops & Threads(R), Imagin8(R) and Make Market(tm)."

The last couple of earnings reports have not been that exciting. MIK reported its 2015 Q4 results on March 19th. They beat estimates by a penny while revenues rose +3.4% to $1.6 billion, which was in-line with estimates. Unfortunately, MIK management lowered their guidance for Q1 and fiscal year 2016.

Even after lowering guidance MIK still missed estimates when they reported their Q1 results on June 4th. Earnings of $0.32 a share missed by a penny. Revenues were up +2.9% to $1.08 billion, which was in-line with estimates. Comparable store sales were up only +0.3%.

Looking at MIK's daily chart you can see that traders have been selling the rallies. Now MIK has a bearish pattern of lower highs. It recently broke down under support in the $26.00 area. Now MIK is testing round-number psychological support at $25.00 and technical support at its simple 200-dma. A breakdown here would definitely look bearish. Tonight we are suggesting a trigger to launch bearish positions at $24.75.

- Suggested Positions -

Short MIK stock @ $24.75

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

Long SEP $25 PUT (MIK150918P25) entry $1.45

07/28/15 triggered @ $24.75
Option Format: symbol-year-month-day-call-strike


Tessera Technologies - TSRA - close: 34.25 change: -0.33

Stop Loss: 35.55
Target(s): To Be Determined
Current Gain/Loss: +3.2%
Entry on July 16 at $35.40
Listed on July 09, 2015
Time Frame: Exit PRIOR to earnings on August 3rd
Average Daily Volume = 518 thousand
New Positions: see below

Comments:
07/29/15: TSRA did not participate in the market's broad-based rally today. That's great news if you're bearish. The stock underperformed with a -0.95% decline. Unfortunately we are running out of time on this trade. TSRA is scheduled to report earnings on August 3rd. We do not want to hold over the announcement. Prepare to exit this trade on Friday at the closing bell (July 31st).

I am not suggesting new positions at this time.

Trade Description: July 9th, 2015:
TSRA claims that their technology is in 100% of today's smartphones. The stock was a pretty big winner last year with a rally from $18 to almost $36 in 2014. Shares appear to have peaked in March this year.

TSRA is in the technology sector. They're considered part of the semiconductor industry. According to the company, "Tessera Technologies, Inc., including its Invensas and FotoNation subsidiaries, generates revenue from licensing our technologies and intellectual property to customers and others who implement it for use in areas such as mobile computing and communications, memory and data storage, and 3DIC technologies, among others. Our technologies include semiconductor packaging and interconnect solutions, and products and solutions for mobile and computational imaging, including our FaceTools, FacePower, FotoSavvy, DigitalAperture, LifeFocus, face beautification, red-eye removal, High Dynamic Range, autofocus, panorama, and image stabilization intellectual property."

TSRA is not a widely followed stock on Wall Street. Their most recent earnings report managed to beat the estimates for the few analysts that follow the stock. Revenues were above expectations at $79.85 million but sales fell -9.6% from a year ago. Management did guide higher for the second quarter but the market reaction to this news was muted.

Shares of TSRA had been stuck under resistance near $40 for weeks. Unfortunately for shareholders TSRA began to breakdown in the last few days, possibly due to weakness in the semiconductor stocks. The point & figure chart has turned bearish and is forecasting at $29.00 target.

Today TSRA is hovering above key support near $35.00 and its simple 200-dma. A breakdown here could signal a drop toward round-number support at $30.00. Tonight we're suggesting small bearish positions at $35.40. We want to limit our positions size because TSRA has seen some sharp one-day spikes in the past.

*small positions to limit risk* - Suggested Positions -

Short TSRA stock @ $35.40

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

Long Aug $35 PUT (TSRA150821P35) entry $1.20

07/29/15 Prepare to exit on Friday, July 31st, at the close
07/25/15 new stop @ 35.55
07/20/15 new stop @ $36.65
07/16/15 triggered @ $35.40
Option Format: symbol-year-month-day-call-strike