Option Investor

Daily Newsletter, Wednesday, 6/4/2014

Table of Contents

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

Market Wrap

ECB Run-Up

by Keene Little

Click here to email Keene Little
The market has been anticipating an accommodative ECB to help fill the gap from a tapering Fed. The market doesn't care where it gets its drugs, as long as someone is printing money. But now one must wonder if the market will respond to Thursday's ECB announcement with a sell-the-news reaction.

Wednesday's Market Stats

As measured by the S&P 500 we've seen the market work its way higher since May 15th, with only minor pauses on 3 of the past 13 trading days, but it's been doing so on slowing volume, waning momentum (bearish divergence) and deteriorating market breadth. If the market has been rallying on expectations of good news from Thursday's ECB rate announcement, and perhaps Friday's Payrolls report, we could be setting up for a sell-the-news reaction.

The ECB's head, Mario Draghi, has been attempting tojawbone the markets higher, taking over from the Fed, by hinting that they're ready to be more accommodative. A reduction in the policy rate by at least 0.10% (wow, that would sure make me want to get a loan) is expected but the real consequence is that it drives savings rates into negative territory. Banks will have to pay the Central bank to hold its cash, with the hope that banks will want to lend the money to customers instead of holding onto it. The trouble is customers don't want loans and a drop of 0.10% is not going to make a difference.

The Fed, ECB and all the other central banks are pushing on a string in their attempts to get more people to go more into debt. It's an effort that has failed miserably over the years and yet they keep trying the same thing, only getting themselves into more debt buying up worthless paper. But what the market really wants to hear is how accommodative the ECB intends to be. What does "whatever it takes" really mean? The market expects to hear concrete steps the ECB is going to take to help "improve" the credit market, seemingly not understanding the problem right now is too much credit.

Ideas being discussed include direct loan financing to banks, purchasing asset-backed securities, buying short-term loans and offering longer-term loans in their place. The ECB rate announcement will be at 7:45 AM EDT so we'll see a pre-market reaction to the news. Draghi will then hold a press conference to discuss his ideas about how the ECB will become more accommodative. If the market doesn't hear specific plans and dates you can bet it's going to sell off. If there are specific plans we could see a positive reaction out of the gate Thursday morning.

But how much of the "good" news has already been priced in? I see the potential for a quick positive reaction and then nothing to follow. We're already seeing signs of distribution in the market and a morning rally could see many fund managers selling into it. This could result in a sell-the-news reaction and a high gets put in on a news event, which is a typical way highs occur. That's just speculation of course but we've got some chart patterns that support that idea.

Today's economic reports were filled with more bad news about the economy and yet the market rallied anyway (not much but still more new "all-time" highs). It's one more sign that the market only cares about central bank QE efforts and not fundamentals. I never thought I'd say I'll be glad when fundamentals matter again. The ADP employment report showed less-than expected hiring in May, with 179K jobs added vs. 210K expected and less than the downwardly revised 215K (from 220K) in April. There should be some fear in the market about what the NFP report Friday morning might have. The only fear I see is the VIX slowly making its way higher even though the indexes keep tacking on a few more points.

The Trade Balance came in worse than expected, with a -$47.2B deficit vs. expectations for -$41.3B and more than March's -$44.2B (revised from -$40.4B). We're not exporting as much and this reflects a slower global economy). The real goods trade deficit was the largest we've seen in more than 6 years and that has economists lowering their GDP estimates. The market doesn't care (yet)

From a labor perspective the news wasn't good either -- productivity for Q1 was revised lower to -3.2% from the previously reported -1.7% and worse than the expected -2.5%. Labor costs for Q1 increased +5.7%, a jump up from +4.2% in Q4 and a larger than the expected +4.8%. This will result in lower profit margins for businesses, which in turn will make it difficult to support the high P/E ratios the market now has. The market doesn't care (yet).

At least the ISM Services, at 56.3, came in a little better than the expected 55.5 and an improvement over April's 55.2. But overall we continue to get more results showing the economy is slowing and companies are going to be less profitable. We've also been getting signs of a slowing housing market and later I'll show why I think it will continue to slow further. With such a large impact on our economy, a slowing housing market will simply amplify the slowdown and GDP revisions will likely continue to get ratcheted lower. The market doesn't care (yet).

Kicking off tonight's chart review, I'm going to start with a top-down look at NDX since it's got an interesting setup surrounding the news events due Thursday morning (ECB) and Friday morning (Payrolls). There's also AAPL's split on Monday and we've had an old-fashioned pre-split run in the stock and for those who remember the good ol' days of pre-earnings and pre-split days (late 1990s), tech stocks in particular used to be great call option plays but you needed to get out of the position just before the earnings/split since volatility premium would collapse post earnings/split as well as the price would decline. If you're trading AAPL to the upside I'd get out NLT Friday's close.

The NDX monthly chart below shows an uptrend line from 1990-2002, which was broken in 2008. The rally from 2009 has been riding up underneath this broken uptrend line (with small breaks back above) and while this could continue longer, it's usually a sign that the trend line is going to hold as resistance and more importantly, when it does break down it's likely to drop hard. The line is currently near 3675.

Nasdaq-100, NDX, Monthly chart

The weekly chart below shows one idea for a wave count, which says the rally from April 15th is the 5th wave of the move up from November 2012. I've been playing with different wave counts and had been looking at this differently but with the blue chips making new highs I think this idea keeps it in synch with the broader market. There's a price projection near 3760 where the 5th wave would be 62% of the 1st wave, about 10 points above today's high. Currently NDX is up against its trend line along the highs from February 2011 - April 2012 and a little higher, near 3788, is its broken uptrend line from June 2013 - February 2014.

Nasdaq-100, NDX, Weekly chart

The leg up from April 15th is shown on the daily chart below and at the moment I'm looking at it as an ending diagonal (rising wedge) pattern. The final leg of the pattern is the rally from this morning's low and at the moment I'm projecting a move up to 3760-3766 to complete its rally. That would accomplish the 3760 price projection shown on the weekly chart above as well as a 3766 projection shown on the 60-min chart following the daily chart below. This is also where the broken uptrend line from October 2013 - February 2014 and the trend line along the highs from April 24th are both located. So from an EW pattern, Fib projections and trendline perspective, the 3760-3766 is a good target zone. Above 3770 would therefore be bearish (short against that level) and below 3700 would confirm the top is in place.

Nasdaq-100, NDX, Daily chart

Key Levels for NDX:
- bullish above 3770
- bearish below 3700

From an EW perspective it's questionable what the April 25 - May 15 triangle consolidation pattern is but for now the important leg is the rally from the end of the consolidation, which is the May 15th low. I'm looking at it as a 5-wave move and the little triangle from last Friday to this morning's low fits well as a 4th wave, which means only one more leg up to complete the rally. The 5th wave would be 62% of the 1st wave near 3766 and then it would equal the 1st wave near 3797. The price objective out of the little sideways triangle off last Friday's high is to 3766, coincidentally the same as the lower Fib projection.

Nasdaq-100, NDX, 60-min chart

On the above chart I depict a rally for NDX up to the 3797 projection but it's important to understand the 5th wave can be considered complete at any time now. Playing the upside is very risky when considering the downside potential. I can see the upside target being met if the market reacts favorably to the ECB and Friday's Payrolls report. After that there's not likely to be anything bullish and it would be timed well with the completion of the 5th wave. But there's the risk that we might see a positive reaction to the ECB, get the gap up, make a new high and then close below today's low, which would give us a key reversal day. Play the short side if that happens.

As the rally has progressed the trading volume has declined, which is not a bullish sign. It fits with the idea that we're looking at an ending pattern and that's where the EW pattern helps identify where and when it might occur. It provides us setups but obviously price is king and the market often makes mincemeat out of bearish setups. But the QQQ chart below, like SPY, shows a steady decline in trading volume since the April low and you can see the rally is simply running out of energy. The last runner (AAPL?) is barely able to cross the finish line on its hands and knees.

QQQ, Daily chart

SPX has broken out the top of a rising wedge from the April 11th low, the top of which has been tested and held for the past 4 days. That's bullish. The top of the larger rising wedge, which is the trend line along the highs from May 2011 - December 2013, is currently near 1927 and today SPX closed above it. That's again bullish if it can hold above it but bearish if today's finish was a small throw-over above the top of the wedge and then it drops back below it tomorrow following the ECB announcement. A better finish would actually be a quick pop higher Thursday morning on some "good" news from the ECB and then drop below today's low at 1918.60. That would provide the bears a reversal signal to get short against the high.

S&P 500, SPX, Daily chart

Key Levels for SPX:
- bullish above 1927
- bearish below 1897

If the bulls can keep this rally going there's upside potential to 1933 and then 1942, where the 5th wave of the move up from May 15th would be 62% and 100% of the 1st wave, resp. Currently the rally is up against the trend line along the highs from May 2011 - December 2013. It's important to note that this trend line stopped the rallies in March and April and the bearish divergence seen on the 60-min chart below suggests the trend line might hold again. But a trend line drawn across the highs since December 2013 is a little higher, near 1940, so with the price projections for the 5th wave and that upper trend line I see some upside potential from here. But again, once the 5th wave of the move up from May 15th completes it could be a steep drop that follows so the upside potential is dwarfed by the downside risk, which is why the long side is not the way you want to trade here.

S&P 500, SPX, 60-min chart

The DOW's new high above its May high has now given us a clean rising wedge pattern off the February low. It needs to be a 5-wave move and the leg up from May 15th fits as the 5th wave, and it's giving us typical wave relationships inside the ending diagonal. The 3rd wave was 62% of the 1st wave at 16735, which was the high on May 13th, and the 5th wave would be 62% of the 3rd at 16786. Slightly higher, near 16818 on Thursday, is the top of its rising wedge. A rally up to that level would be enough to hit stops parked a little above the 2000-2007 trend line, which has stopped rallies since December and is currently near 16725, and then set a bull trap. Don't get sucked into buying any rally from here unless you're watching carefully and can pull the plug immediately.

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- bullish above 16,810
- bearish below 16,480

The RUT has been struggling underneath its broken 50-dma since first back-testing it on May 27th, as well as its downtrend line March 21 - May 27. They're currently near 1132 (which it tested into the close today) and 1134, respectively, and therefore the bulls would be in better shape if they can get the RUT above 1134 and keep it above that level. Watch out for the possibility of an intraday break of resistance to tag stops and then a collapse back down. The upside potential is to 1152-1156 to meet some price projections based on a 3-wave bounce pattern off the April 15th low and a 5-wave move up from May 15th. But if it drops below yesterday's low near 1118 it will negate the bullish pattern and suggest a stronger selloff to follow.

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- bullish above 1156
- bearish below 1116

Bonds have been on a tear since last Thursday, as in being torn down. They've sold off sharply the past 5 days, which has driven yields back up, but it's not clear yet whether we've had a change in the up trend for bond prices or just a sharp correction to the rally. TLT, the 20+ year bond ETF, is shown below and you can see that the pullback is to support at the bottom of its up-channel from December 31st as well as almost down to its 50-dma, currently at 111.17 (0.10 below today's low). It's short-term oversold and therefore I suspect support is going to hold and whether it holds longer-term or not will tell us whether the 5-month uptrend will remain intact. The selling in bonds might have been one factor holding the stock market up so if bonds start to rally again from here it could take money away from the stock market. Both a stock market decline and bond market rally is the way it appears to be setting up.

20+ Year Treasury ETF, TLT, Daily chart

Coming into this week we have an interesting setup on the TRAN, which has been one of the stronger indexes. But its rally to new highs has not been accompanied by the DOW (although I suppose we could count the series of 10-point gains as following the TRAN, cough) and that has given us a bearish non-confirmation so far. The weekly chart of the TRAN shows an wave count that fits well and the a-b-c move up from October 2011, once complete, will complete the larger 3-wave move up from March 2009. The c-wave of the a-b-c rally from October 2011, which is the leg up from November 2012, needs to be a 5-wave move, which it is and the 5th wave is the rally from April 14th. A trend line along the highs from May 2013 - Jan 2014 is now being tested and a longer-term trend line along the highs from April 2010 - July 2011 is a little higher, near 8268. Once the 5th wave completes it's a setup for the completion of the entire rally off the 2009 low.

Transportation Index, TRAN, Weekly chart

The daily chart of the TRAN below shows the reversal off Monday's high and today it consolidated sideways, which has it looking like it's going to drop lower. IYT is one way to play the Trannies and at the moment short against Monday's high looks like a good play. How the pattern develops over the next few days should tell us more about whether or not the high is THE high or just another in a series of them. With the daily chart showing overbought and turn over and the weekly chart showing bearish divergence, it's not a time to be thinking long this index.

Transportation Index, TRAN, Daily chart

One sign of economic health that I keep a close eye on is the housing sector. The home market is such an important part of our economy, especially with all the ancillary components (furniture, appliances, plumbers, electricians, etc.) that it's important to see how it's doing. It's truly one of the canaries.

The home builders index, DJUSHB, hasn't done a whole lot in a while and has been able to hold price-level support near 460, last tested in April. One could even view the pattern since January 2013 as an inverse H&S pattern, which in its location would be considered a bullish continuation pattern (since the pattern is near the high, not the low). A break above its February 2014 high at 540 would be a bullish move and that in turn would be a good sign for our economy. But a break below 460 would likely lead to stronger selling and that would be the canary falling off its perch.

DJ Home Construction index, DJUSHB, Weekly chart

Another index to watch, to see how the home builders might go (since it's the middle of no-trader's land and not easy to figure out which way it might go) is to watch lumber prices. Obviously the more homes that are built the greater the need for lumber. Higher prices for lumber would therefore be a good sign that home builders should do well. Unfortunately it's looking like the canary is sucking hard for air.

Lumber continuous contract, LB, Weekly chart

On May 20th LB broke longer-term support at its uptrend line from January 2009 - September 2011, which was last tested in May 2013. The break is likely an indication that the bounce correction off the 2009 low has completed and prices should return to at least test that low (137.90, less than half its current value). This is a heads up that the home builders are going to break down and in turn a signal that the economy is slowing, which for anyone paying attention is a "duh."

The U.S. Dollar has been struggling the past week to get back above its broken uptrend line from May 2011 - December 2013, currently near 80.65. It's also fighting to hold above its recovered 200-dma at 80.47. Today's trading range was 80.51 to 80.71 and closed at its high. The nod goes to the dollar bulls but I see the possibility for a consolidation before pressing higher again.

U.S. Dollar contract, DX, Daily chart

Gold has been consolidating its loss since last Friday but it's looking like a bearish continuation pattern. It should soon be giving us a stronger bounce but in a pattern that should lead to lower prices, with the first downside projection near 1189 still on my radar.

Gold continuous contract, GC, Daily chart

Oil dropped sharply this morning and gave up more than a dollar by this afternoon. The longer-term pattern remains unclear but the shorter-term pattern continues to look like a sideways triangle, the bottom of which is the uptrend line from March 17th, currently near its 200-dma at 100.19. A break below 100 would be more bearish but it's got potential support at its 20- and 50-dma's and an uptrend line from January-April, near 101.34.

Oil continuous contract, CL, Daily chart

The big "economic" report tomorrow comes from the ECB tomorrow morning before our market opens. The markets are hoping to hear how accommodative Mario Draghi's "whatever it takes" really means. The market is expecting a drop in rates by 0.15% (yawn) but more importantly it wants to hear more about some QE efforts the ECB is ready to do. With the Fed tapering their QE it's hoped the ECB will pick up the slack in providing some more global stimulus (since the theory is that money from nothing in Europe will buy something in the U.S.). With Draghi talking up the markets it's doubtful he'll disappoint and a positive reaction by the market Thursday morning could lead to a sell-the-news reaction so watch the morning action carefully.

Economic reports and Summary

If the ECB report Thursday morning doesn't do much for the market, or it rallies and holds onto its rally, the next potential problem will be the Non-farm Payrolls (NFP) report Friday morning. Expectations are for a decline from April but still well above 200K. After a disappointing ADP report this morning the market might have its sights set too high and a number below 200K could spark a selloff. At least the price patterns suggest that could happen if we don't get a selloff Thursday. Or perhaps a selloff on Thursday, big bounce Friday morning and then another selloff. In any case, be careful of some volatility around these announcements the next two mornings.

The VIX has been on the rise since Friday even as the market indexes chop their way higher, an indication that some have been edging their way into some put protection if not speculation. It's usually a good sign the rally is finishing. Trading margin debt is on the decline, which typically happens ahead of a market top (when traders start backing away it leaves fewer and fewer suckers, I mean traders to continue pushing prices higher). The declining trading volume is another sign of traders backing away. Oftentimes market tops happen simply because there are no more buyers to push it higher, not necessarily because of a big selling event (Black Swan).

When the buying stops and selling begins it will usually start tripping stops and selling begets more selling. Tops are often no more complicated than that and we're getting many of those signals now. Listening to the market tells us now is a risky time to be thinking long. Whether playing the short side is hour, days or weeks from now, we can't know for sure. I like the setups I'm seeing on the charts for an important high, which could be today's or it could be Friday's. But in any case I think it's that close. Trade carefully over the next few days since we're due for some greater volatility.

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 Option Plays

To Ease Or Not To Ease?

by James Brown

Click here to email James Brown

Editor's Note:

Investors around the globe have been expecting ECB President Mario Draghi to announce some sort of monetary easing or stimulus program at tomorrow's meeting.

There seem to be two camps. One camp believes any news from the ECB is already baked into equity markets and thus we could see a sell-the-news reaction. The other camp has been expecting Mario to disappoint. So if they're expecting to be disappointed and Mario does deliver on his promise of monetary easing what is their reaction? Could it be bullish?

The ECB decision on interest rates will come out before the U.S. market's opening bell. Odds are good we could see U.S. stocks gap open up or down.

We're not adding any new trades tonight.

S&P 500 Daily Chart:

In Play Updates and Reviews

Stocks Inch Higher Ahead Of ECB

by James Brown

Click here to email James Brown

Editor's Note:

The U.S. stock market inched higher ahead of tomorrow's highly anticipated ECB meeting. The European news will hit before the U.S. opening bell.

HBI hit our bullish entry trigger today.

Current Portfolio:

CALL Play Updates

The Boeing Company - BA - close: 135.33 change: -0.55

Stop Loss: 129.90
Target(s): To Be Determined
Current Option Gain/Loss: - 4.8%
Time Frame: 8 to 12 weeks
New Positions: see below

06/04/14: BA hit some profit taking this morning. Shares did see a midday spike down to $134.60 but the weakness didn't last very long. Shares were rebounding toward the closing bell. If the market sees any pullback on Thursday or Friday I would watch for BA to find support at $134 or $132.

NOTE: More conservative investors might want to wait for BA to close above $136.50 as an alternative entry point since the top of the January 2014 gap down could be resistance (near $136.00-136.50).

Earlier Comments:
BA is in the industrial goods sector. The company is a major manufacturer for aerospace, aviation, and a defense contractor. The company last reported earnings on April 23rd and held an analyst day in mid May. Earnings results were strong. Wall Street expected a profit of $1.56 per share on revenues of $20.21 billion. BA delivered $1.76 per share with revenues rising to $20.46 billion for the quarter.

BA said their total company backlog had ended the first quarter at $440 billion. That's up from $390 billion a year ago. About $374 billion is for commercial airplanes and the rest is defense and space related. This represents about 5,100 aircraft orders and several years worth of production. BA recently reaffirmed their 2014 guidance and their airplane delivery scheduled.

Analysts have been positive and raising their price targets and earnings estimates thanks to BA's strong Q1 results, their improving margins, and BA's stock buyback program. Margins are a big deal. BA has been slowly growing its margins over the last couple of years and suggested they will continue to see margin improvement in 2014.

There has been some concern that the U.S. defense budget might be cut again and that could impact BA's defense sales. Yet the New York Times recently reported that BA is close to signing another multi-billion deal with the U.S. Navy for 47 more fighter jets. This deal is expected to close over the summer.

BA has also seen strong growth overseas with international sales accounting for 30% of its backlog. China is expected to grow into the largest aircraft market by 2032. BA is strengthening its position in China with another big sale of fifty 737 jets to a new Chinese budget airline. The retail price on this deal is estimated to be in the $3.8 to $5.5 billion. BA's China president said the company will deliver 140 aircraft to China this year following 143 deliveries in 2013.

Asia will also be a growing market for BA's defense and security business. A recent Bloomberg article mentions how territorial disputes in Asia are getting worse and there will be rising demand for maritime and aerial surveillance systems. BA's defense business chief believes aerial surveillance equipment and machines will continue to grow steadily for the "foreseeable future."

Technically shares of BA are on the up swing after spending more than three months consolidating in the $120-132 area. The recent strength has pushed BA through resistance and the stock closed at new four-month highs.

The point & figure chart is bullish and forecasting at $160 target. I do expect BA to see some resistance at its 2014 high near $145.00.

- Suggested Positions -

Long Aug $140 call (BA140816C140) entry $2.25*

06/02/14: Triggered @ 135.55
*option entry price is an estimate since the option did not trade at the time our play was opened.
Option Format: symbol-year-month-day-call-strike

Entry on June 02 at $135.55
Average Daily Volume = 2.95 million
Listed on May 31, 2014

Biotech ETF - BBH - close: 92.84 chang6: +1.17

Stop Loss: 85.75
Target(s): to be determined
Current Option Gain/Loss: + 4.2%
Time Frame: 8 to 12 weeks
New Positions: see below

06/04/14: Biotech stocks continued to show relative strength this week with another widespread rally on Wednesday. The BBH added +1.2% and closed near its highs for the session. Traders may want to start raising their stop loss!

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.

- Suggested Positions -

Long Sep $95 call (BBH140920C95) entry $3.55*

05/27/14 triggered @ 90.25
*option entry price is an estimate since the option did not trade at the time our play was opened.
Option Format: symbol-year-month-day-call-strike

Entry on May 27 at $90.25
Average Daily Volume = 119 thousand
Listed on May 22, 2014

Capital One Financial - COF - close: 79.18 change: +0.40

Stop Loss: 74.95
Target(s): To Be Determined
Current Option Gain/Loss: + 4.7%
Time Frame: 8 to 12 weeks
New Positions: see below

06/04/14: COF drifted higher again today and shares are testing last week's highs near $79. If stocks keep the market rally alive we could see COF testing round-number resistance at $80.00 soon.

Earlier Comments:
COF is in the financial sector. The company provides financial services and products in the United States, United Kingdom and Canada. They're probably best known for the Capital One credit cards.

The financial sector took a leadership role in today's widespread market rally. The group has been lagging the big cap indices the last few weeks. If financials resume their up trend it's going to be a rising tide that helps lift shares of COF to new highs.

Financials should also benefit from the big picture view that interest rates will rise. Some of the federal reserve governors have been hinting that the Fed may have to raise rates sooner than expected. If rates do start rising then investors could start buying financials ahead of this trend.

Credit card companies are also showing strength in their loan quality. COF said their charge off rates have been dropping (losses from unpaid loans).

Technically shares of COF have a long-term bullish trend of higher lows and it's about to breakout past resistance and hit new multi-year highs. The point & figure chart is already bullish and suggesting an $83 target.

- Suggested Positions -

Long Sep $80 call (COF140920C80) entry $2.30*

05/28/14 triggered @ 78.75
*option entry price is an estimate since the option did not trade at the time our play was opened.
Option Format: symbol-year-month-day-call-strike

Entry on May 28 at $78.75
Average Daily Volume = 3.0 million
Listed on May 27, 2014

CVS Caremark Corp. - CVS - close: 78.16 change: +0.45

Stop Loss: 74.65
Target(s): to be determined
Current Option Gain/Loss: +18.2%
Time Frame: 8 to 12 weeks
New Positions: see below

06/04/14: CVS' rival, Walgreens (WAG), saw its stock soar today. WAG ended the session up +4.1% after the company said its same-store sales increased +4.4% in May, beating estimates for +4.1% improvement. CVS dipped to its simple 10-dma and bounced.

I am not suggesting new positions at this time.

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: 70.49 change: +0.90

Stop Loss: 66.90
Target(s): to be determined
Current Option Gain/Loss: +13.0%
Time Frame: 8 to 12 weeks
New Positions: see below

06/04/14: After a two-day pullback shares of ESRX are rebounding thanks to some bullish analyst comments this morning. Shares still face potential resistance at the 50-dma near $71.00.

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*

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.

option format: symbol-year-month-day-call-strike

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

Facebook, Inc. - FB - close: 63.34 change: +0.47

Stop Loss: 59.45
Target(s): To Be Determined
Current Option Gain/Loss: -15.2%
Time Frame: 8 to 12 weeks
New Positions: see below

06/04/14: Traders bought the dip in FB near $62.00 again this morning. That's the second time in three days. If the market cooperates tomorrow FB looks poised to rally. I'd be tempted to buy calls here but I'm worried about how the market might react to the ECB news on Thursday.

Earlier Comments:
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.

Update on the P&F chart: The recent rise above $64.00 has created a new P&F chart buy signal with a $79.00 target.

- Suggested Positions -

Long Sept $70 call (FB140920C70) entry $3.42

05/29/14 triggered @ 64.25
Option Format: symbol-year-month-day-call-strike

Entry on May 29 at $64.25
Average Daily Volume = 62 million
Listed on May 24, 2014

Gilead Sciences - GILD - close: 83.02 change: +0.47

Stop Loss: 77.90
Target(s): to be determined
Current Option Gain/Loss: +69.8%
Time Frame: 4 to 8 weeks
New Positions: see below

06/04/14: Strength in biotech stocks gave GILD a boost today. The stock is nearing prior resistance near $84.00. More conservative traders may want to consider taking profits soon.

Earlier Comments:
We have less than three weeks left on our June calls.

I am not suggesting new positions at this time.

- 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

Hanesbrands Inc. - HBI - close: 85.10 change: +0.41

Stop Loss: 81.75
Target(s): To Be Determined
Current Option Gain/Loss: - 6.4%
Time Frame: 8 to 12 weeks
New Positions: see below

06/04/14: Our HBI trade is open. Shares were initially weak this morning with a spike down to $83.11 in the first 15 minutes of trading. HBI quickly recovered and hit new highs this afternoon. Our trigger to buy calls was hit at $85.25.

Earlier Comments:
HBI is in the consumer goods sector. The company designs and manufacturers apparel. You wouldn't normally think of basic apparel maker as a momentum stock but HBI has been outperforming. Shares just ended the week at a new all-time high.

The company has delivered on its earnings results. When HBI last reported in January and April this year the company beat Wall Street's estimates both times and raised their guidance both times.

Think about that. HBI is not a retailer but their products are sold through retailers. Most of retail got hammered in the first quarter due to lousy winter weather. Yet HBI managed to beat estimates and then raised its guidance.

Jim Cramer has pointed out what many analysts are saying on the company. HBI has strong brand names like Hanes, Champion, Playtex, and Bali. HBI owns most of their supply chain, which allows them to keep and improve their strong margins. Their first quarter saw margins increase 180 points. Most of Wall Street is bullish on HBI's recent acquisition of Maidenform. HBI believes they can generate significant margin improvement in the Maidenform brand by 2016.

The Point & Figure chart for HBI is bullish with a $92 target.

- Suggested Positions -

Long Oct $90 call (HBI141018C90) entry $2.94

06/04/14 triggered @ 85.25
Option Format: symbol-year-month-day-call-strike

Entry on June 04 at $85.25
Average Daily Volume = 690 thousand
Listed on May 31, 2014

LyondellBasell Industries - LYB - close: 100.13 change: +0.24

Stop Loss: 94.75
Target(s): to be determined
Current Option Gain/Loss: +56.8%
Time Frame: 6 to 9 weeks
New Positions: see below

06/04/14: LYB dipped toward its 10-dma before bouncing midday. Shares have spent the last few sessions consolidating sideways near round-number resistance at the $100.00 mark.

I am not suggesting new positions.

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

- Suggested Positions -

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

06/03/14 new stop @ 94.75
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

MasterCard Inc. - MA - close: 76.32 change: -0.03

Stop Loss: 72.35
Target(s): To Be Determined
Current Option Gain/Loss: -16.4%
Time Frame: 8 to 12 weeks
New Positions: see below

06/04/14: MA announced a new deal with Sam's Club. Sam's will offer new credit cards with MA's new in-card chip security technology. The headlines failed to move shares of MA and shares look like they're headed toward what should be support near $75.00.

Earlier Comments:
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. We're not setting an exit target yet but the point & figure chart is bullish with an $87 target.

- Suggested Positions -

Long Oct $80 call (MA141018C80) entry $2.85*

05/27/14 triggered @ 77.25
*option entry price is an estimate since the option did not trade at the time our play was opened.
Option Format: symbol-year-month-day-call-strike

Entry on May 27 at $77.25
Average Daily Volume = 5 million
Listed on May 24, 2014

3M Company - MMM - close: 142.26 change: -0.63

Stop Loss: 138.75
Target(s): to be determined
Current Option Gain/Loss: -14.7%
Time Frame: 4 to 8 weeks
New Positions: see below

06/04/14: Hmm... MMM erased yesterday's gains. A sharp pullback here would look like a potential bearish double top at the $143 level. We have less than three weeks left on our June calls. More conservative traders may want to exit early.

- 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

PPG Industries - PPG - close: 203.86 change: +2.14

Stop Loss: 192.90
Target(s): To Be Determined
Current Option Gain/Loss: + 9.5%
Time Frame: 8 to 10 weeks
New Positions: see below

06/04/14: PPG spiked lower this morning but the stock rebounded sharply off support at the $200 level and surged to new all-time highs.

Yesterday I suggested readers use a dip near $200 as an entry point.

Earlier Comments:
Big cap industrial names have been leading the market higher. PPG is one of them. The company is in the basic materials sector. PPG manufacturers coatings, specialty materials, and glass products.

PPG has developed a strong trend of beating Wall Street's earnings estimates. They just did it again when they reported earnings on April 17th with EPS coming in 10 cents above estimates. Revenues were up +17% year over year to $3.64 billion. Earnings were up +33% from a year ago at $1.98 per share. The company is also seeing margin improvement.

Last month PPG's management announced a $2 billion stock buyback program and raised their dividend by +10% to $0.61 per share. PPG's CEO said that his company saw volumes improve in Europe for the first time in ten quarters. The tough winter in the U.S. did not hurt them. Thus far PPG has been able to pass along small price increases to offset rising commodity costs.

Technically the stock is in a long-term up trend. Shares have spent the last three months consolidating below the $200 level. Now the bullish pattern of higher lows is about to push PPG through major resistance near $200-201.

The Point & Figure chart is bullish and forecasting at $222.00 target.

- Suggested Positions -

Long Aug $210 call (PPG140816C210) entry $3.65*

05/30/14 triggered @ 202.00
*option entry price is an estimate since the option did not trade at the time our play was opened.
Option Format: symbol-year-month-day-call-strike

Entry on May 30 at $202.00
Average Daily Volume = 552 thousand
Listed on May 29, 2014

United Parcel Service - UPS - close: 102.97 change: -0.46

Stop Loss: 97.75
Target(s): to be determined
Current Option Gain/Loss: + 76.7%
Time Frame: 4 to 8 weeks
New Positions: see below

06/04/14: UPS was down again today, off two days in a row. Traders did appear to start buying the dip near its mid-May high around $102.60.

Readers may want to adjust their stop loss higher.

Earlier Comments:
I am concerned that the $105 level could be resistance. More conservative traders may want to start taking profits now or closer to $105.00.

We're not setting an exit target yet but the Point & Figure chart for UPS is bullish with a $123 target (up from $114 a few weeks ago).

- Suggested Positions -

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

05/29/14 more conservative investors may want to start taking profits now or as UPS gets closer to potential resistance at the $105 level.
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

Bally Technologies - BYI - close: 56.94 change: -0.07

Stop Loss: 60.35
Target(s): To Be Determined
Current Option Gain/Loss: - 6.0%
Time Frame: 8 to 12 weeks
New Positions: see below

06/04/14: BYI didn't move much today but shares did continue to underperform the broader market indices. I would still consider new bearish positions now at current levels.

Earlier Comments:
BYI is in the services sector. The company designs, manufactures, and sells gaming equipment (gambling type games, slot machines, etc.). After an incredible run in 2013 shares of BYI have reversed sharply and is in a bear market with a -29.9% drop from its January 2014 highs.

Looking at the earnings news you would think BYI should be doing better. They raised guidance after their Q4 report and offered bullish guidance again when they reported earnings on May 1st. Their most recent results missed Wall Street estimates by two cents with a profit of $1.10 per share but revenues came in better than expected. Revenues were up +30% thanks to its acquisition of SHLF entertainment. In spite of this news investors were not happy with the results and have continued to sell BYI.

It would appear that the game-making business is facing industry-wide headwinds. BYI is considered one of the biggest and strongest in the industry but the big names are losing market share with new comers making an already competitive business even worse. Casino operates are delaying or cutting back on upgrading new machines. Expectations on how many slot machines Vegas is going to replace in 2014 has been downgraded.

A number of analyst firms have been downgrading their price targets on BYI over the last few months. News of a new CEO came as a shock. After less than a year and a half on the job BYI announced they were replacing their CEO with its former CEO effective May 23rd. This was a surprise. As one analyst put it, "You don't change CEOs when things are going well."

FYI: The Point & Figure chart for BYI is bearish with a $50 target.

- Suggested Positions -

Long Oct $55 PUT (BYI141018P55) entry $3.30

06/03/14 triggered @ 57.25
Option Format: symbol-year-month-day-call-strike

Entry on June 03 at $57.25
Average Daily Volume = 697 thousand
Listed on June 02, 2014

Intl. Business Machines - IBM - close: 184.37 change: -1.32

Stop Loss: 187.50
Target(s): To Be Determined
Current Option Gain/Loss: -15.5%
Time Frame: 8 to 10 weeks
New Positions: see below

06/04/14: Shares of IBM didn't see a lot of movement today but they remain under their 200-dma.

The war of words between China and the U.S. regarding technology companies is escalating. That doesn't bode well for the major U.S. tech firms that do a lot of business in China.

Earlier Comments:
IBM is in the technology sector. The company has grown from a massive hardware manufacturer into a global information technology services company.

The company reported earnings on April 17th. Results were in-line with Wall Street estimates on the bottom line at $2.54 per shares. Revenues fell -3.9% and missed estimates by a wide margin. Management reaffirmed their 2014 guidance. This was the fifth quarter in a row that IBM missed analysts' revenue estimates and its eight quarter in a row of revenue declines. Shares plunged from $196 to $187 on this earnings news. Since its quarterly report IBM's stock has rallied just high enough to fill the gap and then reverse lower.

The company is currently facing a new problem and that's China pressuring local companies to stop using U.S. technology. Actually it's not a new problem. This has been trending for a couple of years and the issue was exacerbated after the Edward Snowden scandal. Now many foreign governments distrust any tech hardware from big name U.S. corporations for fear there could be U.S. spying malware on it.

This tension between China and U.S. has escalated following America's recent allegations of five Chinese military officers hacking American businesses. In response the story now is China's government is pressuring large state-run banks to stop using IBM servers and replace them with local domestic hardware. Chinese officials are arguing that using IBM machines could be a national security threat. The Chinese market accounts for about 5.5 percent of IBM's total sales.

This political pressure to stop buying U.S. technology could last a while, especially as China takes a more belligerent pose against the west and its neighbors.

Technically shares of IBM are underperforming. The stock just broke down below support near $185.00 and technical support at its simple 200-dma. There appears to be significant support near $172.00. Coincidentally the point & figure chart is bearish and forecasting a $172 target.

We're not setting a target but $175-172 is a good spot to aim. I wouldn't be surprised to see a short-term bounce at $180.

- Suggested Positions -

Long Aug $180 PUT (IBM140816P80) entry $4.50*

05/29/14 trade begins. IBM gapped higher at $183.64
*option entry price is an estimate since the option did not trade at the time our play was opened.
Option Format: symbol-year-month-day-call-strike

Entry on May 29 at $183.64
Average Daily Volume = 3.2 million
Listed on May 28, 2014

Whole Foods Market, Inc. - WFM - close: 38.38 change: +0.67

Stop Loss: 40.25
Target(s): to be determined
Current Option Gain/Loss: -26.7%
Time Frame: 8 to 12 weeks
New Positions: see below

06/04/14: WFM bounced on Wednesday with a +1.7% gain. I didn't see any company specific news that might account for today's relative strength. More conservative investors may want to consider a lower stop loss. I am not suggesting new positions at this time.

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