Option Investor

Daily Newsletter, Saturday, 5/24/2014

Table of Contents

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

Market Wrap

Tuesday Could Be Exciting

by Jim Brown

Click here to email Jim Brown

The S&P closed at a new high by 3 points at 1,900 on very low volume.

Market Statistics

The new high at the close on very low volume on a Friday before a holiday weekend could cause a major market move at the open on Tuesday. Professional traders and institutional investors were not in the market last week and they are going to have to make some hard decisions at the open on Tuesday. Do they follow the +32 point rebound over the last three days or do they hit the sell button and exit at the highs ahead of the seasonally weak summer period?

Existing shorts will be fretting all weekend given the high close right at very strong resistance. They will be hoping for a negative open and a resurgence of the weakness from the prior week. If the markets open higher we could have another short squeeze Monday even though it will be Tuesday. Monday's are known for massive short squeezes and next week Tuesday will be Monday as the first day of trading.

About the only thing I don't expect for Tuesday is another calm day. I expect a major move and assuming there are no headlines to upset market sentiment that move could be higher. There are simply too many shorts that are going to be forced to cover on any further gains. Hedge funds know this and they can pull the trigger on a buy program or two at the open to force those shorts to cover. Tuesday should be exciting one way or the other.

New home sales for April helped set the stage for Friday's continued rally. Sales rebounded from 407,000 to 433,000 annualized units, a +6.4% gain. March sales were revised higher from 384,000 to 407,000. April was still the second lowest month in more than a year.

Home sales in the Northeast fell by -26.7% to 22,000, the west was flat at 92,000. Sales in the south rose +3.1% to 235,000 but the Midwest was the huge winner with a +47.4% gain to 84,000. Months of supply declined from 5.6 to 5.3 and the median home price fell -3.1% to $270,800. New single family homes for sale totaled 192,000, flat with March but up +19% from April 2013.

The two biggest reports for next week are the Durable Goods on Tuesday and GDP revision on Thursday. Durable goods orders are expected to have weakened from +2.6% in March to -1.4% in April. If this is true it will negatively impact the Q2 GDP, which some people are expecting to be over +4.0% growth.

The Q1-GDP revision due out on Thursday is expected to decline from the +0.1% growth in the first estimate to a -0.8% contraction according to Moody's. The general consensus is for an uptick to +1.3% growth but almost nobody with any economics background is expecting that large a print. It will be interesting to see how the market reacts to a negative number and how the Q2 estimates are revised after this report.

Analysts seem to believe that we are going to get a monster snapback from the weather related low in Q1. While we won't get that Q2 number for another two months the estimate revisions are constant and ongoing.

The manufacturing and services data from the Richmond Fed on Tuesday will also be relative to the market since these numbers are for May. Expectations are for a slight gain from 7.0 to 9.0 on the manufacturing component.

One important economic item did not come from a report. I monitor the Baltic Dry Index as an indicator of the number of global shipments of dry goods. Rates slipped to post recession lows at $647 per day in 2012 as the global shipment of goods slowed to a crawl. In late 2013 the price to ship dry goods nearly quadrupled to $2,337 per day in December. Since then the prices have declined sharply to $964 on Friday with far more available ships than cargoes. This is a symptom of slowing global demand. We should not get too excited by analysts claiming a global recovery in progress.

China is slipping to the slowest growth in more than a decade. Europe is in danger of a recession. The ECB is likely to launch a new stimulus program on June 5th to avoid deflation. The sanctions against Russia are going to further slow European commerce. The tensions between Japan, Vietnam and China are continuing to build. The entire Middle East and Northern Africa is in turmoil. These are not events that stimulate global commerce but instead impair it. Read between the lines if somebody is claiming a global recovery.

Hewlett Packard (HPQ) reported its 11th consecutive quarter of declining sales on Thursday evening. The declining revenues forced CEO Meg Whitman to announce up to 16,000 additional layoffs in addition to the 34,000 previously announced. This will leave Hewlett with about 300,000 employees worldwide. The company said consumers are buying fewer PCs and printers but more smartphones and tablets. The average smartphone today has more computing power than a regular PC just 10 years ago.

Earnings came in at 88 cents and in line with estimates. Revenue fell -1% to $27.3 billion and slightly below estimates for $27.4 billion. Revenue has declined every quarter since 2011. IDC said quarterly shipments of PCs fell -4.4% in Q1 to 73.4 million units. Hewlett Packard had a 16% share of the market making it number 2 behind Lenovo.

Whitman was as upbeat as possible about HP's future stating the continued layoffs would lead to greater profitability. HP is restructuring its product lines to reduce its offerings and streamline production. They are planning on introducing a 3D printer that they believe will capture significant share in the market later this year.

HP shares dropped sharply in afterhours trading on Thursday but rebounded +6% on Friday. Apparently somebody was excited about Whitman's forecast.

Foot Locker (FL) reported earnings on Friday of $1.11 that beat estimates by 5%. Revenue rose +14% to $1.87 billion and easily beat estimates of $1.79 billion. Same store sales rose +7.6%. There was no impact from severe weather here. They opened 27 new stores bringing their total to 3,464 in 27 countries. The company said overall sales were up in the mid single digits so far in May and sales growth for children's products were up in the high teens. They are going to be opening new Kids Foot Locker stores in some markets. Shares rallied +1.5% on the news to close right at a new high.

Earnings for next week are highlighted by Autozone, Michael Kors, Toll Brothers, Abercrombie & Fitch and Costco. There are a few other companies you might recognize but overall the Q1 earnings cycle is trickling to a close.

Friday was the lowest volume of the year at 4.5 billion shares. The S&P closed at a new high but right at round number resistance at 1,900. Investors can make money in a low volume market but the lower the volume the bigger the risk. When volume returns it may not be on the same side of the tape. Note in the chart below how the volume has been declining since early May. The 30-day volume average is trending lower.

The Volatility Index ($VIX) closed at a one-year low at 11.36. This, like the low volume, is a definite warning signal. This is only .06 points away from a seven-year low. On March 15th 2013 it closed at 11.30 and you have to go back to February 2007 for a lower reading when it closed at 10.02. Whenever the VIX moves under 12 it is typically followed by a significant spike in volatility and decline in the equity markets.

While the VIX is not infallible it comes pretty close. I am sure you have seen these comparisons charts before but bear with me. Over the last year the VIX has been close to 12 four times. Only the dip in November did not result in an immediate decline in equities. On that occasion the volatility spiked back to 16 in the weeks to follow but equities only declined about 50 S&P points.

I view the VIX as one more warning signal to be coupled with things like the weakness in small caps and mixed economics as valid reasons to be cautious on equities next week. This is especially true with the S&P at record highs and the VIX at 7 year lows.

Another way of looking at it in this chart tweeted by @Not_Jim_Cramer using the macro implied volatility.

The three major indexes are trading in their tightest range for May since 1987. That is another clue that a major move may be just ahead. Over the last three months the spread between the S&P 500’s intraday high and low has been less than 5%. To find a three month range where the S&P 500 traded in a narrower range over a three month period, you have to go eight years back all the way to October 2006. Since 1984 there has only been six other periods where the S&P traded in a narrower range. The average spread between the S&P 500's intraday high and intraday low over a three month period is 13.2%, or more than 2.5 times the current three month high-low spread. (Data from Bespoke)

Over the last four years the week after Memorial Day has been down an average of -2%. Memorial Day is considered the start of summer and a period typically weak for the markets. The major Q1 earnings are over and there is little in the way of news from corporations to move the markets.

Hedge funds are having a really hard time so far in 2014. The S&P is up +2.83% as of Friday's close, the Dow and Nasdaq are flat and the Russell is down -3.2%. The average hedge fund is flat for the year and it has been a battle just to remain even. If you think you are having a tough year in the market you are not alone. People that are paid millions to pick stocks are struggling to break even. That is how confusing this market has been.

The AAII Sentiment Survey for the week ended on 5/21 had 30.4% bulls, 26.4% bears and a whopping 43.2% neutral. This is the most neutral the survey has been in nine years. Investors don't know what to do so they are doing nothing.

On the bullish side the market has handled a lot of bad news in 2014 and it is still setting new highs. The Ukraine problem has come and is fading. The polar vortex killed commerce in Q1 but companies still beat those lowered earnings. Economics suffered some pretty sharp declines in some cases. The Q1 GDP is probably going to be negative. The treasury market is forecasting serious economic weakness and a sharp decline in equities with the yield on the ten-year hitting a 52-week low at 2.47% in the prior week. The Fed is removing stimulus at $10 billion a month and since that taper started the equity markets have basically been flat. When it ends the markets are not likely to rise in celebration but probably decline without the steady drip of cash into the system. The Russell 2000 dipped to correction territory and the big caps failed to follow for the first time in 36 Russell corrections.

All things considered it is somewhat bullish that stocks are still at new highs. We all know this slow melt up is not going to last forever. Something we don't yet know about is going to pop up to trigger a drop of 10-15% in the S&P. It may not be next week or next month but it will eventually happen. The bulls all hope the correction will appear after we have risen another 10-15% and they have pocketed another round of gains. The bears want it to start next week from that nice round number at 1,900 on the S&P. Neither group is likely to get their wish.

Another way to look at the recent market is a stealth correction. We don't have to have a sudden downdraft that goes on for weeks to have a correction. You can also have a correction or consolidation in place. Since March 4th the S&P has been moving repeatedly on both sides of 1,865 without moving too far from that center line. Every little blip was sold and every dip bought. It has been that way for 3 months. The Friday close pushed the S&P gains for the year to 2.82% and 1.21% of that gain was last week. That could be a sign the consolidation is over and the markets are going to move higher.

Last week I speculated the "correction anticipation" trade was overdone and that was bullish on a contrarian basis. When so many analysts are expecting a particular market event the odds of that event happening actually diminishes. While we won't know for weeks if the correction call was right we do know that any further gains are going to cause serious pain for all those traders still short.

However, and you knew there was a however, the market breadth is still terrible. More than 47% of S&P stocks are down more than -7%. More than 35% are down more than 10% and more than 50% of the Russell 2000 stocks are down more than 16%.

Only 74% of the S&P 500 stocks have a buy signal on the Point & Figure charts. With the S&P at a new high you would think there would be more bullish stocks. Only 65% of the S&P stocks are above their short term 50-day average. That is the lowest ratio at a new high since 2007.

Percentage of Stocks with P&F Buy Signal

Percent of S&P 500 Stocks Above the 50-Day Average

One of two things can happen. Either the breadth is going to improve and push us significantly higher, or that breadth is going to continue to deteriorate and eventually sink the market.

This is still a big cap rally despite the rebound on the Russell 2000. Remember this chart from my Tuesday commentary? We got the breakout by the Nasdaq big caps and now the next challenge is the old resistance highs from 3,720-3,740.

If we look at a different set of 100 big cap stocks using the S&P-100 ($OEX) it is also approaching strong resistance. This is the biggest of the S&P stocks and with the exception of 4 days in April they have been in a steady uptrend since the January decline. However, that drop in January should serve to remind us that selloffs do happen even to the bluest of the blue chips.

The S&P made a new closing high by +3 points but missed making a new intraday high, which is 1,902.17. The low volume melt-up concerns me but there is a strong chance of a major short covering bounce on Tuesday. That will fade if something happens overseas to push the futures lower. The presidential vote in Ukraine is this Sunday but it appears Putin is relaxing his posture by sending some troops back to their bases. This does not mean there won't be violence at the polls or after the election. It just means a big flare up is less likely. As of late Saturday the election violence appears to be accelerating so there could be market risk due to post election headlines on Tuesday.

That is the only real global trouble spot that could negatively impact our markets on Tuesday. Unfortunately the headlines that do the most market damage are the ones we don't see coming.

The +32 point S&P rebound from the 1,868 low on Tuesday is rapidly reaching overbought territory. However, the big drop on the 15th probably cleared a lot of weak holders so the S&P could have room to run if the shorts get squeezed.

Support is well below at 1,870 and we are at resistance at 1,900. If the shorts get squeezed the next material resistance is 1,925 where two levels of resistance converge. If we did reach that level it would be a 57 point rebound and definitely into overbought territory.

The Dow did not set a new high but it did close just over strong resistance at 16,600. The Dow lagged the S&P in what could be a signal money is rotating back out of the blue chips that were in favor and being redistributed into those stocks with better outlooks and back into the small caps. A 63 point gain on a holiday Friday is not bad but the pace of gains over the last two days has slowed.

The Dow's record high close from the prior week was 16,735 and that means there is roughly 129 points before the Dow hits that resistance. Short covering could lift the Dow that high on Tuesday and then reality return on Wednesday with that resistance level sold. Initial support is 16,540.

The Nasdaq Composite closed just 5 points over what I had labeled as critical resistance at 4,180. I went back this weekend and examined those prior levels again and it was actually a 4,183 close on January 14th and April 9th so I had it labeled wrong. That puts Friday's close right at that critical resistance level.

The Nasdaq actually had stronger momentum over the last three days and those tech stocks out of favor just a week ago are back on the momentum highway. Note the top 7 stocks in the winners list below. I view this as a positive change in sentiment and any further move over that 4,183 level should trigger significant short covering.

The Russell 2000 rebounded strongly last week to close at 1,126 and +40 points above the May 15th lows. The Russell gained +2% for the week and most of that was in the last two days. The Russell hit correction territory at 1,087 and the February lows at 1,082 on the 15th and apparently that was good enough for small cap investors. However, it has a long way to go to catch up with its big cap brothers. The closing high back in March was 1,208 and that means another 78 points before it hits a new high.

Along the way there are multiple levels of strong resistance with 1,165 the toughest test. I am encouraged by the dip buying in the Russell but I am far from convinced it will make a new high in the near future. The odds are much stronger it will fail again somewhere in the rebound and we will make a new low this summer.

The Stock Trader's Almanac, keeper of all things seasonal, published this composite chart of the last 36 years of Russell 2000 performance by month compared to the blue chips. Small cap shares are typically weak from June to November and strong from November to March.

The Dow Transports ($TRAN) have broken out not just to a new high but to blue sky territory. This is positive for market sentiment because a bullish transport sector is supposed to mean a booming economy. I reported the prior week that rail car loadings were rising sharply and truck traffic was at new highs. With summer upon us the airlines will be booked solid and the three major components, truck, rail and airline, are now in rally mode because of improving fundamentals not simply bullish investors.

Another sign the economy is improving is a record high in gasoline production. In April the API said the U.S. refiners produced an average of 9.79 million bpd. That is a +9.2% rise over 2013 levels. Distillate fuels that include diesel and jet fuel rose +12% to 4.95 mbpd, a record for April. Gasoline consumption rose +2.7% to 9.0 mbpd. Distillate demand rose +8.8% to 4.21 mbpd and the most for April since 2007. Refiners processed 16.1 mbpd and a record for April. Last week U.S. oil production rose to 8.434 mbpd and the highest level since 1988. The sharp rise in U.S. production is keeping our gasoline prices in check even though WTI prices are now over $104. Without this level of production the global price for oil would be well over $110 where it is today.

There are positive signs the economy could be growing but it may be another couple of months before it will show up in all the reports. The economy is millions of people all growing and producing at different rates in different local economies but eventually the hot spots will spread and a real recovery will begin. At least that is what the major analysts are saying.

On the flip side of the economic argument the Bloomberg Consumer Comfort Index for May worsened. The expectations gauge that tracks where the economy is heading declined from 49.0 to 42.5. The share of respondents who said the economy was getting worse rose to the highest level this year. The weekly sentiment measure declined from 34.9 to 34.1 and the third consecutive weekly drop. More than 37% of respondents said the economy was worsening, up from 31% in April. The buying-climate component, which asks consumers whether this is a good time to make purchases, fell from 32.2 to a six-week low of 30.9.

Random Thoughts

If you can't produce economic growth using regular methods you can always add in not so normal sources of income. For instance Italy is so desperate to show GDP growth they have decided to add in prostitution and illegal drug sales into their GDP calculations for 2014. Just so they can compare apples to apples they will go back and add those sectors into the GDP for prior years as well. Italy has suffered four recessions in the last 13 years and the current GDP is -2% lower than it was in 2001. They currently have a deficit that is 2.6% of GDP and right at the EU allowed deficit limit. By adding illegal drugs and prostitution into the calculation the GDP will rise significantly and allow the government to spend more money and still stay within the deficit limits. It is amazing what lengths government officials will go to in order to maintain their spending habits.

Tuesday was the 141st birthday of the Levi's 501 jeans. CEO Chip Bergh said "We are the ultimate in sustainable apparel. If you buy our jeans they will last a lot longer than most people's waistlines will."

The Wall street Journal reported that investors were "piling into the shares of small, risky companies at the fastest clip on record, in search of investments that promise a chance of outsized returns." They compare this trend to lottery tickets where the chance of a reward is negative but the amount of the reward if it does come is extremely large. "The behavioral explanation is that some people are willing to risk a known sum in exchange for the possibility, remote though it may be, of becoming humongously rich next week." People that invest in penny stocks don't really expect a return unless they win the stock lottery.

U.S. retailers missed earnings estimates by the widest margin in 13 years according to Bloomberg. Chains were missing projections by an average of -3.1% with 87 retailers or roughly 70% already reported. You have to go back to Q4-2000 for a larger miss at -3.3%. Over the long term chains normally beat by +3%. Analysts blamed the severe weather that forced store closings and keep shoppers at home. That was actually bullish for online retailers that saw their business increase as shoppers elected to buy online rather than fight the weather.

Investors withdrew $8.2 billion from equity funds for the three weeks ending on May 14th. There were $3.2 billion withdrawn in the latest week. Bond funds saw inflows of $10.4 billion over the last three weeks. Stocks may be at record highs but many investors are heading for the safety of treasuries.

The World Trade Organization (WTO) ruled against China in a complaint on imported autos. The WTO said China improperly imposed tariffs on imported vehicles, including those made by GM and Chrysler. China began adding the duties in 2011 after the U.S. government bailed out the automakers during the global financial crisis. The duties were eliminated in December after they saw where the WTO was headed. The duties were as high as 21.5% on U.S. cars and SUVs. China claimed the vehicles benefitted from government subsidies and were sold in China for prices below market value, known as "dumping." The vehicles sold in China in 2013 totaled about $5.1 billion. A 21% duty netted China more than $1 billion a year.

The S&P's current bull market streak of 963 days is nearly twice the average number of days without a correction. Ice Cap Asset Management says it has been 1,277 days since a -20% correction.

The energy sector has been leading the market. Click the advertisement below for a free trial to the OilSlick.com newsletter.

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

"Bear markets don't act like a medicine ball rolling down a smooth hill. Instead, they behave like a basketball bouncing down a rock-strewn mountainside; there's lots of movement up and sideways before the bottom is reached."

Daniel Turov, Barron's May 21st, 2001


Index Wrap

Tech Heavy Nasdaq Again Leads the Way Higher

by Leigh Stevens

Click here to email Leigh Stevens

With the Nasdaq breaking out above down trendlines, traders remained relatively cautious to bearish on the S&P. Good time to 'fade' (trade against) this viewpoint as the 2-year uptrend continues.

As I wrote last week: "I only have to look at the charts and it remains that there's more upside potential suggested technically at this point than down." I did think the Dow would be stronger than it's been this past week but it has gone to a new weekly high.

I also have noted that S&P volatility index (VIX) readings under 12 (Friday: 11.36) has periodic correlations with tradable tops in the Market. However, this is not always true and I can point to March 2013 when VIX hit 11.3 and the S&P 500 (SPX) was at 1560. By May SPX got up to around 1670 before a downside correction set in; i.e., back to the 1570 area.

A key Market event chart wise was the advance in the Nasdaq Composite (COMP) above a line of prior resistance at 4150 (Friday Close: 4185), although the initial technical 'breakout' was above COMP's down trendline at 4135. The apparent(early-Feb/mid-May)double bottom in COMP made in the 3970 area now looks increasingly 'solid'.

In the Nas 100 (NDX), the Index pierced its down trendline initially in mid-May (5/12, at 3615), pulled back, then ran back above NDX's down trendline a few days later and has rallied since then to a Friday Close of 3677.

Even the laggard Russell 2000 (RUT) has followed the Nasdaq to a minor breakout Friday of its down trendline and managed to rally to above its 200-day moving average. Traders had seemed to be 'mesmerized' by its steady relentless March to mid-May decline. Seemingly not noticing that RUT also formed an apparent double bottom relative to its February low.

As I've been saying for awhile now, I'm mildly, not wildly, bullish as the direction of least resistance appears to be up for now.



The S&P 500 (SPX) Index has resumed its bullish intermediate-term uptrend as SPX has pushed above its prior line of resistance. As I note on the daily chart below, a SUSTAINED advance above 1897-1900 suggests a possible next up leg that could take the Index up toward the upper end of SPX's broad uptrend price channel.

SPX is approaching a near-term 'overbought' condition but could nevertheless press on and reach resistance around 1920 before a next pause or dip; conversely, SPX could dip back to near support around 1880 before attempting another advance above 1900. Intermediate support begins at 1860 and extends to 1840. I've pegged near resistance at 1920, then next around 1940.

The S&P in terms of the 13-day Relative Strength Index (RSI) is more or less at a 'mid-range' reading so I can't point to an overbought extreme on a 2-3 week timeframe. My sentiment indicator is bullish in that prices were advancing this week but without enough daily volume in index calls, relative to puts, to suggest that traders really 'believed' that the S&P was NOT going to top out again in the area of prior highs.


The S&P 100 (OEX) has resumed its bullish chart pattern, whereas OEX had been in a more or less 'mixed', sideways, trend; although the Index did have an overall bullish pattern of HIGHER relative pullback lows and importantly, rallied from its 50-day moving average on every recent dip.

Next OEX resistance now looks like 850, extending to 860. Very near support comes in at 830-826, with next support suggested in the 820-817 area.

OEX, like SPX, at its last low retraced approximately 50 per cent of its early-February to early-April advance, which is a 'nominal' pullback only. In very strong trends, retracements might be only a third or so (38%) of the prior advance, but a one-half giveback is also common in uptrends.


The Dow 30 Average (INDU) is lagging the broader S&P indexes in that INDU is still well below its prior recent highs. I thought that the 30 Dow stocks had more bullish potential than seen this past week given my analysis for further upside potential in up to 2/3rds of the 30 Dow stocks.

Instead the big name Dow stocks aren't attracting the buying going back into sexy tech. Dow bellwethers like General Electric (GE) are not re-igniting their prior long-term up trends. Plus, the two Dow oil stocks (CVX and XOM) look like they may have topped out for now. Thank goodness if we don't have to face $5 a gallon regular gas just yet!

In terms of the 'mainstream' market, I'd be involved in bullish plays in the big cap OEX, versus the staid current Dow 30. INDU will be 'pulled' higher on further advances in the S&P and Nasdaq, but the Dow isn't taking a bullish lead role.


The Nasdaq Composite Index (COMP) has resumed a bullish advance in that COMP has at least pierced its March-May down trendline as is highlighted on the chart. How much upside there is ahead is hard to tell. More will be known when COMP is not rebounding from an oversold extreme. There has been bargain hunting buying going on from the point at which COMP made an apparent double bottom low and got to an oversold extreme such as seen with the RSI.

Given the present upside momentum, although COMP could face a short-term pullback in the near-term, the Index could reach the 4250-4275 zone in this current up leg.

Near support is suggested at 4100, then around 4066 and lastly in the 4025 area and COMP's 200-day moving average.

Bullish Market sentiment has been moderate of late even though Nasdaq was having a decent recovery rally. This dynamic, from a contrary opinion perspective, tends to keep me on the bullish side of things. I much prefer trading against bullish caution or outright bearishness among traders, when chart patterns are at least looking modishly bullish again.


The Nasdaq 100 (NDX) has resumed strong bullish upside momentum again and has retraced 80 percent of its prior major down leg since making NDX's likely double bottom low (I could now probably take out the 'likely' modifier).

If you didn't 'believe' the double bottom low and were holding off on bullish plays because you didn't want to risk a short-term shakeout, let me know how that has worked out for you. Double bottom lows, coupled with an oversold RSI extreme (WITHIN a bull market), have a favorable risk to reward for taking on bullish strategies. I especially like having a 'defined' risk point in calls, which is to exit on a dip below the second low.

Speaking of 'waiting' for a pullback, the Nas 100 is now 'overbought' on a short-term basis, with potential for a sideways to lower dip.

Near support in NDX is at 3615, extending to 3600 and then to the 3555 area. Near resistance comes in at 3700-3706, extending to the prior intraday high at 3738.


The Nasdaq 100 tracking stock (QQQ) has come roaring back with strong upside momentum like NDX of course; coupled with a fair amount of 'disbelief' in the staying power of this recent advance and upside acceleration. The disbelief I'm referring to can be seen on the chart in the very low daily volume on this recent rally. Not like company stock chart where we expect 'confirming' volume expansion on rallies. A perfect situation for the bulls: where the bears are over-confident so to speak.

Speaking of volume 'confirmations' or not relative to price action, the key volume measure with the Q's is On Balance Volume (OBV), which has been trending strongly higher.

Near support is seen at 88.6-88.5, then at the juncture of the two key moving averages coming in around 87.6.


The Russell 2000 (RUT) chart is bearish but with potential for the last low to form a key double-bottom. Short-term upside momentum is seen with the recent advance above the lower down trendline highlighted on the chart. I don't generally favor jumping in with bullish plays on laggard sectors because they are the last to move and may seem 'cheap'.

However, RUT is back above its 200-day moving average and could well get pulled higher as long as Nasdaq continues to rally.

Near support is highlighted in the 1116 area, extending to 1100-1095. Near resistance is suggested at 1140, with probably more stubborn resistance at the upper down trendline, currently intersecting at 1161.

I think we can figure that RUT has formed a key double bottom and I may next remove (after another week) the 'possible' double bottom notation.


New Option Plays

Social Networking and Financial Transactions

by James Brown

Click here to email James Brown


Facebook, Inc. - FB - close: 61.35 change: +0.83

Stop Loss: 59.45
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Time Frame: 8 to 12 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
FB is in the technology sector. The company operates the largest social network on the planet with monthly active users up +15% year over year to 1.28 billion as of March 31st, 2014. Mobile monthly users were up +34% to 1.01 billion.

When investors started selling the momentum stocks and high-growth names in March shares of FB were not immune. The stock corrected from $72 to $55, a -23.6 percent correction. We suspect when investors return to the high-growth names they will flock to FB.

The company is firing on all cylinders with a strong Q1 report. Analysts were expecting a profit of 24 cents a share on revenues of $2.35 billion. FB delivered a Q1 profit of 34 cents with revenues soaring +71.6% year over year to $2.5 billion. Advertising revenues were up +82% from the same quarter a year ago. Mobile advertising has increased from 30% of ad revenues to 59% of ad revenues.

Wall Street is pretty bullish on shares of FB. Many analysts have price targets in the $75-85 zone. David Tepper's Appaloosa Management initiated a new position in FB last quarter. ITG Research recently offered positive comments on FB suggesting the current quarter could also come in ahead of estimates.

Technically the stock has been consolidating sideways in the $55-64 zone for almost two months. Friday's gain was a bullish close above the 50-dma for the first time in weeks. More aggressive traders may want to launch positions above $62.50. We are suggesting investors wait for FB to trade at $64.25 as our trigger to buy calls. The point & figure chart is bearish but a move above $64.00 would produce a new P&F chart buy signal.

Trigger @ $64.25

- Suggested Positions -

Buy the Sept $70 call (FB140920C70) current ask $2.47

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

Annotated Chart:

Weekly Chart:

Entry on May -- at $---.--
Average Daily Volume = 62 million
Listed on May 24, 2014

MasterCard Inc. - MA - close: 76.45 change: +0.70

Stop Loss: 72.35
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Time Frame: 8 to 12 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
MA is in the financial sector. The company provides transaction processing and payment-related services. Globally cash is still the most dominant method of payment. That may not be true in the most developed countries but worldwide there is a long-term trend with consumers moving away from cash more toward cards and electronic payments, which will benefit MasterCard.

MA's latest earnings on May 1st was positive. The company beat Wall Street's estimates on both the top and bottom line. The company said a 14% increase in transactions, on a local currency basis, hit $1.0 trillion. They also saw a +14% jump in processed transactions. Cross border volumes were up +17%.

MA's CEO and President Ajay Banga said the company signed new deals with Wal-Mart (WMT), Sam's Club, and Target (TGT). WMT and Sam's will move their co-brand portfolios to MasterCard. TGT will also shift its co-brand cards to MasterCard and use MA's chip and PIN technology to upgrade their security. Banga said MA will, "continue to invest in technology and acquisitions that will speed our development of mobile and online solutions."

Both Visa and MA were caught up in the sanction backlash between Russia and Europe and the U.S. The two companies were not singled out but new legislation in Russia was going to force the two American companies out of the country. Working with Russian officials MA and Visa have found a way to sidestep the issue by creating a domestic (Russian) payment system within six months and create a Russian company to handle domestic transactions.

Technically shares of MA saw a -20% correction on an intraday basis from its January 2014 highs to the April intraday lows. The stock bounced near its long-term up trend. Now MA appears to be breaking out past resistance near $76, resistance at its 100-dma and 150-dma, and resistance at its five-month trend of lower highs.

Tonight we're suggesting a trigger to buy calls at $77.25. We're not setting an exit target yet but the point & figure chart is bullish with an $87 target.

Trigger @ $77.25

- Suggested Positions -

Buy the Oct $80 call (MA141018C80) current ask $2.61

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

Annotated Chart:

Weekly Chart:

Entry on May -- at $---.--
Average Daily Volume = 5 million
Listed on May 24, 2014

In Play Updates and Reviews

Stocks End Week On Up Note

by James Brown

Click here to email James Brown

Editor's Note:

The U.S. market ended the week on an up note. It looks like shorts were covering positions ahead of the long weekend.

We closed our PCRX trade on Friday morning.

The U.S. market will be closed on Monday for Memorial Day.

Current Portfolio:

CALL Play Updates

Biotech ETF - BBH - close: 88.64 change: -0.28

Stop Loss: 85.75
Target(s): to be determined
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

05/24/14: The rally in biotechs paused on Friday. The BBH slipped -0.3%. Shares still look poised to breakout higher. I do not see any changes from our Thursday night newsletter's new play description.

Earlier Comments:
Last year the biotech industry doubled the market's growth with +60% gains in the BBH. The rally continued into January and February with almost another +20%. Then sentiment reversed. Suddenly traders did not want to own the momentum names or the high-growth names. News articles and debates about the extremely high costs of some biotech treatments like Sovaldi helped feed the sell-off. Biotech experienced 20 percent correction (actually -22.6%) in less than two months.

Now it appears that investors are losing their fear over the growth names again. The BBH has been consolidating sideways the last several weeks. Many believe the correction in biotech is providing a great entry point. There are plenty of high-profile biotech firms with low multiples. A lot of the big names have high-quality pipelines. The group could see more M&A activity as older firms seek to buy up younger rivals.

We want to be ready to buy calls if the BBH can breakout from this consolidation phase. Currently shares of this ETF are testing resistance near $90.00 and its 50-dma and 150-dma. I am suggesting a trigger to buy calls at $90.25.

Bear in mind that biotech stocks can be volatile. The BBH does not see a lot of volume and the option spreads are wide. Add it all up and I would label this a more aggressive, high-risk/high-reward trade. Investors may want to start with small positions.

Trigger @ $90.25

- Suggested Positions -

Buy the Sep $95 call (BBH140920C90) current ask $3.50

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


Entry on May -- at $---.--
Average Daily Volume = 119 thousand
Listed on May 22, 2014

CVS Caremark Corp. - CVS - close: 77.12 change: -0.09

Stop Loss: 74.65
Target(s): to be determined
Current Option Gain/Loss: - 5.7%
Time Frame: 8 to 12 weeks
New Positions: see below

05/24/14: Shares of CVS briefly touched a new all-time high on Friday before paring its gains. The stock essentially closed unchanged for the session. I would still consider new bullish positions at current levels. If you're concerned about a market pullback then consider waiting for CVS to dip into the $75-76 zone as an alternative entry point.

Earlier Comments:
CVS is in the services sector. The company provides integrated pharmacy healthcare services in addition to running a drug store chain with over 7,600 locations. CVS' largest rival is Walgreen's with 8,650 locations.

The company's most recent earnings report was mixed. CVS delivered a profit of $1.02 per share. That missed estimates by a penny. Revenues came in above expectations at $32.69 billion in the first quarter. Wall Street appears to have accepted CVS's "blame it on the weather" excuse. Last month CVS also disclosed they had finalized a settlement with the SEC over events dating back to 2009 that stemmed from its acquisition of Longs Drug Stores in 2008. In the settlement CVS did not have to admit any wrongdoing and does not have to restate any earnings reports. They're happy to put the ordeal behind them and for investors it's old news.

More importantly the company is seeing strong growth in its PBM business. Its pharmacy services segment saw revenues climb +10.3% to $20.2 billion in the second quarter. Management said CVS is "beginning to develop integrated products for both hospitals and health plans."

They're also growing into a broader healthcare provider with the retail-based clinic subsidiary MinuteClinic. According to CVS' website, "MinuteClinic launched the first retail medical clinics in the United States in 2000 and now has more than 800 locations in 28 states. MinuteClinics are staffed by nurse practitioners and physician assistants who utilize nationally recognized protocols to provide treatment for common family illnesses, skin conditions and injuries, administer vaccinations, conduct physicals and wellness screenings, and offer monitoring for chronic conditions seven days a week without an appointment, including evenings and holidays."

American's growing acceptance of the MinuteClinic for quick healthcare services will grow. Long-term CVS will benefit from an aging population more dependent on their prescriptions. Plus, CVS will benefit from the growing number of new Americans being covered under Obamacare. Payments for these services will be covered by health care plans, Medicaid, and now the Affordable Care Act mandate.

Wall Street is happy with its steady growth. The most recent earnings report showed profits rising 18% year over year for the fifth consecutive quarter of double-digit earnings growth.

We're not setting a bullish exit target yet but the Point & Figure chart for CVS is bullish with a $102 target.

- Suggested Positions -

Long Aug $80 call (CVS140816C80) entry $1.04

05/22/14 triggered @ 77.25
option format: symbol-year-month-day-call-strike


Entry on May 22 at $77.25
Average Daily Volume = 5.1 million
Listed on May 21, 2014

Express Scripts Holding - ESRX - close: 70.14 change: -0.11

Stop Loss: 66.90
Target(s): to be determined
Current Option Gain/Loss: +6.9%
Time Frame: 8 to 12 weeks
New Positions: see below

05/24/14: After ESRX's two-month correction lower the stock's rebound continued last week. Shares are now up three weeks in a row. This past week saw ESRX break through resistance near its 200-dma and the $70 level.

Nimble traders may want to look for a dip near its 200-dma (about $69.00) as an alternative entry point to launch new positions.

Earlier Comments:
ESRX is in the healthcare sector. The company provides pharmacy benefit management (PBM) services in the U.S. and Canada. Both the NASDAQ and shares of ESRX peaked in early March. It would appear that investors considered ESRX one of the higher-growth, momentum names since it has been sinking with that group over the last couple of months.

That big drop you see on ESRX's daily chart was market reaction to its latest earnings news. The results were disappointing. You could call it a trifecta of bad news. ESRX missed Wall Street's estimates on both the top and bottom line. Management guided lower for 2014. Plus they disclosed three separate subpoenas from different state authorities as the company is investigated for its relationship with drug makers.

Investors already had lowered expectations for ESRX's earnings because the company lost UnitedHealth Group (UNH) as a client last quarter. The loss of UNH accounted for about half of ESRX's lost revenues. ESRX complained that a lot of expected new enrollments had been postponed. They didn't see quite the impact from the new Obamacare exchanges previously expected.

It sounds like plenty of bad news for ESRX. Yet here's the interesting part. The stock lost -6% following its earnings report but there was no follow through lower. Investors have been buying the dip. Shares are up two weeks in a row and slowing chewing through resistance. With a drop from $79 to $65 (-17.7%) it is possible that all the bad news is already priced into ESRX stock price. The long-term trend for ESRX is still higher. As the new affordable healthcare policy changes gain momentum it should mean more enrollments for ESRX.

- Suggested Positions -

Long Aug $70 call (ESRX140816C70) entry $2.45*
option format: symbol-year-month-day-call-strike
05/21/14 triggered @ 69.50
*option entry price is an estimate since the option did not trade at the time our play was opened.
05/19/14 adjust entry trigger from $70.50 to $69.50
adjust the strike price to the August $70s.


Entry on May -- at $---.--
Average Daily Volume = 6.5 million
Listed on May 17, 2014

Gilead Sciences - GILD - close: 80.94 change: -1.96

Stop Loss: 77.90
Target(s): to be determined
Current Option Gain/Loss: +38.6%
Time Frame: 4 to 8 weeks
New Positions: see below

05/24/14: We have been warning readers that GILD could find resistance in the $84-85 zone. Shares definitely saw some profit taking on Friday ahead of the long weekend with a -2.3% pullback.

After a six-week rally GILD is probably due for a pullback. I would not be surprised to see GILD dip into the $78-80 zone before moving higher again.

I am not suggesting new positions at this time.

NOTE: since we only have June calls, readers may want to take some money off the table now.

- Suggested Positions -

Long Jun $80 call (GILD1421F80) entry $2.12

05/15/14 new stop @ 77.90, readers may want to exit now to lock in potential gains.
05/10/14 new stop @ 75.75
05/01/14 new stop @ 74.45
04/30/14 triggered @ 77.00


Entry on April 30 at $77.00
Average Daily Volume = 23 million
Listed on April 29, 2014

LyondellBasell Industries - LYB - close: 98.78 change: +1.08

Stop Loss: 93.75
Target(s): to be determined
Current Option Gain/Loss: +25.4%
Time Frame: 6 to 9 weeks
New Positions: see below

05/24/14: LYB continues to show relative strength with a +1.1% gain on Friday and a new all-time high.

Shares are approaching what could be round-number, psychological resistance at the $100.00 level. I am not suggesting new positions at this time.

Earlier Comments:
The Point & Figure chart for LYB is bullish with a $110 target.

- Suggested Positions -

Long Sep $100 call (LYB140920C100)* entry $2.55**

05/15/14 new stop @ 93.75
05/12/14 LYB gapped open higher at $96.20 (+75 cents)
**option entry price is an estimate since the option did not trade at the time our play was opened.
*I've provided the more standardized option symbol format.


Entry on May 12 at $96.20
Average Daily Volume = 3.1 million
Listed on May 10, 2014

3M Company - MMM - close: 141.14 change: +0.83

Stop Loss: 138.75
Target(s): to be determined
Current Option Gain/Loss: -28.4%
Time Frame: 4 to 8 weeks
New Positions: see below

05/24/14: MMM is still holding support near the $140 level. If the market continues to push higher we could see MMM resume its up trend as well. Readers may want to wait for a rally past $142.00 before considering new positions.

If you do choose to open new positions I the July or October calls.

- Suggested Positions -

Long Jun $140 call (MMM1421F140) entry $3.45*

05/24/14 if you open new positions, use the July or October calls
05/20/14 adjust stop loss to $138.75 due to the dividend
05/15/14 new stop @ 139.49
05/08/14 triggered @ $142.00


Entry on May 08 at $142.00
Average Daily Volume = 2.65 million
Listed on May 07, 2014

Potasch Corp. of Saskatchewan - POT - close: 36.32 change: +0.02

Stop Loss: 34.90
Target(s): to be determined
Current Option Gain/Loss: -17.3%
Time Frame: 3 to 4 months
New Positions: see below

05/24/14: POT encountered some profit taking on Thursday but traders bought the dip near the $36.00 level on Friday. The pullback might not be over yet. Investors may want to look for a dip near the 50-dma (about 35.45) or the $35.00 level as an alternative entry point to buy calls.

- Suggested Positions -

Long Sept $35 call (POT1420i35) entry $2.65

05/15/14 new stop @ 34.90
05/02/14 triggered @ 36.50


Entry on May 02 at $36.50
Average Daily Volume = 5.0 million
Listed on April 26, 2014

United Parcel Service - UPS - close: 102.73 change: +1.07

Stop Loss: 97.75
Target(s): to be determined
Current Option Gain/Loss: + 81.8%
Time Frame: 4 to 8 weeks
New Positions: see below

05/24/14: The Dow Jones Transportation Average ended the week at new all-time highs. This helped give shares of UPS a boost. UPS managed a +1.0% gain on Friday and closed at new four-month highs.

The next area of resistance appears to be the $105 level.

More conservative traders may want to raise their stop loss but I would keep it below $100.

We're not setting an exit target yet but the Point & Figure chart for UPS is bullish with a $114 target.

- Suggested Positions -

Long Jul $100 call (UPS140719C100)* entry $1.98

05/12/14 triggered @ 100.25
*I've provided the more standardized option symbol format.


Entry on May 12 at $100.25
Average Daily Volume = 2.9 million
Listed on May 10, 2014

PUT Play Updates

Athenahealth, Inc. - ATHN - close: 120.92 change: +3.35

Stop Loss: 124.05
Target(s): to be determined
Current Option Gain/Loss: Jun$100put -58.5% & Sep100put: -21.7%
Time Frame: 4 to 12 weeks
New Positions: see below

05/24/14: Some short covering ahead of the long weekend helped fuel gains in ATHN. Shares are back above their 20-dma and now above potential resistance at the $120 level. More conservative traders may want to exit immediately. We labeled this an aggressive, higher-risk trade. If this bounce continues on Tuesday we could see ATHN hit our stop loss.

Earlier Comments:
The plan was to keep our position size small to limit our risk.

*small positions* - Suggested Positions -

Long Jun $100 PUT (ATHN140621P100) entry $2.05**

- or -

Long Sep $100 PUT (ATHN140920P100) entry $6.90**

05/22/14 more conservative traders may want to exit immediately!
05/15/14 trade opened on gap down at $115.66
**option entry price is an estimate since the option did not trade at the time our play was opened.
*I've provided the more standardized option symbol format.


Entry on May 15 at $115.66
Average Daily Volume = 1.5 million
Listed on May 14, 2014

Chart Industries - GTLS - close: 74.72 change: +2.69

Stop Loss: 75.55
Target(s): to be determined
Current Option Gain/Loss: - 62.2%
Time Frame: 4 to 6 weeks
New Positions: see below

05/24/14: GTLS was another big performer on Friday with a +3.7% bounce. The stock is testing resistance near a trend line on its daily chart (near its 40-dma).

The long-term trend is down but that doesn't mean GTLS can't see a short-term rebound. Currently our stop loss is at $75.55. More aggressive traders may want to move their stop above the 50-dma (currently at 76.12).

I am not suggesting new positions at this time.

- Suggested Positions -

Long Jun $70 PUT (GTLS140621P70) entry $2.25

05/16/14 trade begins. GTLS opened at $72.34
*I've provided the more standardized option symbol format.


Entry on May 16 at $72.34
Average Daily Volume = 652 thousand
Listed on May 15, 2014

Lumber Liquidators - LL - close: 81.05 change: +0.54

Stop Loss: 84.05
Target(s): to be determined
Current Option Gain/Loss: -24.4%
Time Frame: 6 to 9 weeks
New Positions: see below

05/24/14: LL has spent the majority of the last three days inside the $79.00-82.00 zone. Shares still look poised for a breakdown.

The late April low was $78.92. I would wait for LL to trade below this level before initiating new bearish positions.

Earlier Comments:
I do consider a more aggressive trade because of LL's short interest. The most recent data listed short interest at 25% of the small 24.3 million share float, which raises the risk of a short squeeze. I am not setting a target yet. The P&F chart is bearish and forecasting at $72 target.

*small positions* - Suggested Positions -

Long Aug $75 PUT (LL140816P75) entry $4.50**

05/15/14 triggered @ 79.75
**option entry price is an estimate since the option did not trade at the time our play was opened.
*I've provided the more standardized option symbol format.


Entry on May 15 at $79.75
Average Daily Volume = 888 thousand
Listed on May 14, 2014

Whole Foods Market, Inc. - WFM - close: 37.78

Stop Loss: 40.25
Target(s): to be determined
Current Option Gain/Loss: - 7.9%
Time Frame: 8 to 12 weeks
New Positions: see below

05/24/14: Shares of WFM's smaller rival TFM gapped open higher on Friday morning in reaction to its earnings report. WFM also gapped on TFM's news but the rally faded for TM while WFM slowly drifted higher.

I don't see any changes from my earlier comments.

Earlier Comments:
WFM is in the services sector. The company runs a grocery chain focused on natural and organic foods. As of May 2014 they had 379 stores. Unfortunately their success in the higher-margin organic foods has fueled significant competition.

The stock has been sinking for months as investors worried about growing competition. WFM's recent earnings report confirmed their fears. The stock crashed -19% after WFM missed estimates on both the top and bottom line and confessed they were facing tougher rivals. Management then lowered their 2014 guidance.

WFM said revenues still grew +10% and their same-store comparable sales were up +4.5%. Unfortunately profits were relatively flat and margins are getting squeezed with higher cost of goods sold and rising capex.

WFM is facing competition on all sides. Sprouts Farmers Market (SFM), The Fresh Market (TFM), Kroger (KR), Wal-mart (WMT), and regional competitors like HEB and Trader Joe's are all jumping on the organic and natural food bandwagon.

- Suggested Positions -

Long Aug $35 PUT (WFM140816P35) entry $1.01

05/19/14 trade begins. WFM opens at $37.89


Entry on May 19 at $37.89
Average Daily Volume = 9.2 million
Listed on May 17, 2014


Pacira Pharmaceuticals - PCRX - close: 76.22 change: +1.47

Stop Loss: 69.95
Target(s): to be determined
Current Option Gain/Loss: - 31.4%
Time Frame: 6 to 8 weeks
New Positions: see below

05/24/14: We were growing concerned with PCRX's performance midweek and decided in the Thursday newsletter to exit positions on Friday morning.

The stock opened at $74.70 before outperforming the market with a +1.9% gain.

- Suggested Positions -

Aug $80 call (PCRX1416H80) entry $7.00 exit $4.80* (-31.4%)

05/23/14 planned exit
*option exit price is an estimate since the option did not trade at the time our play was closed.
05/22/14 prepare to exit tomorrow morning
05/21/14 caution! today's move looks like a potential reversal lower.
05/06/14 triggered on gap higher at $75.32, suggested entry was $74.25


Entry on May 06 at $75.32
Average Daily Volume = 602 thousand
Listed on May 05, 2014