Option Investor

Daily Newsletter, Wednesday, 6/25/2014

Table of Contents

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

Market Wrap

Bad News Is Good News

by Keene Little

Click here to email Keene Little
In our Bizarro world where bad news is good news, the disappointing economic numbers continue to give traders hope that the Fed will be forced to stop their taper program and support the market.

Wednesday's Market Stats

Equity futures reacted negatively this morning on the release of the GDP and Durable Goods numbers, both of which were very disappointing, but as soon as the cash market opened there were some buy programs to scare the bears away. The bounce then continued through the day as traders started to believe the bad news was actually good news for the stock market. Perhaps it means the Fed will have to back away from their taper program and continue to support the market, OK, economy.

The 3rd estimate for GDP was expected to show a decline to -1.8% from the last estimate of -1.0% (which itself had declined from the 1st estimate) but was in fact -2.9% and much worse than even the most pessimistic of dozens of economists that were polled by Bloomberg. It's also the weakest number since early 2009, which was at the bottom of the stock market crash, and the third-worst quarter in the past 50 years. The reversal from +2.6% for Q4, 2013 to -2.9% for Q1, 2014 is quite significant.

And here we are at the top of a strong rally and the market rallied today on the news! Seems to be a slight disconnect here somewhere (certainly an ignorance of a fast-slowing economy). There's a lot of hope out there that it was weather related and "can only get better from here." There's likely a lot of hope being pinned on the Fed's ability to step in and save the day. Any minute now the Fed is going to tell us they're going to stop their taper program, I just know it...stand by...hellooo, anyone there?

What's significant here is the sentiment. There's a lot of hope that the market will survive these "temporary" negative signals. And since the market is holding up on sentiment, which is the weakest reason for it to hold up (as compared to fundamentals), it's also the most dangerous time for the market since sentiment can turn on a dime from greed to panic. Whether it's a Black Swan event or just selling begetting more selling, it typically doesn't take much to turn sentiment on its heels and all the justifications in the world for a higher stock market will not amount to a hill of beans.

The market has been irrational for quite some time, thanks to the Fed stoking those irrational feelings. The summer and fall of 2013 saw a market rally that was predicated on expected SPX earnings improvements, which did not happen. The market kept rallying anyway. The first estimate for Q1 GDP, back at the end of April, was +0.1% and a drop from +2.6% in Q4. SPX earnings estimates continued to drop. It was all "weather related" (even though the GDP slowdown had more to do with inventory and other non-weather-related activities) so the market rallied.

Today's excuse for the slowing GDP was a downward revision to health-care spending that resulted from the implementation of Obamacare. Hmm, that seems like something we've known was coming. Isn't that what economists are supposed to incorporate into their models? It's simply a continuation of the age-old problem where economists consistently get it wrong in their predictions. Someone really needs to write them a new model for forecasting. The changes in health-care spending should have been expected and incorporated. Let's try another excuse.

Even though many are saying the GDP number is old news, the economists have not been correct for each of their 3 estimates. It's not old news; it's just ignored news. Today's market rally is further evidence that bad news is somehow good and that all the bad numbers will reverse. We just know it; don't ask how we know it but we're confident that it will. The Fed will protect us. OM...

The other disappointing economic news this morning was the Durable Goods number for May, which came in at -1.0%, a drop from +0.8% in April and well below expectations for +0.4%. It's further confirmation that the economy is slowing down and significantly so. The market rallied anyway. It's the Bizarro world where the Fed controls the sentiment dials and hopes no one looks behind the curtain.

What this is all amounting to is a continuation of irrational behavior of fund managers continuing to buy into the rally and looking to buy any and all dips. Despite the reasons for why the market should be dropping the buying continues and prior occasions when we've seen this happening it hasn't ended well for those who stick around when they should have exited.

When you look at how the market has typically reacted to slowing GDP you can see how the market "forecasts" the slowdown by peaking ahead of it. This is why we've heard so many times that the market predicts the economy about 6 months out. Now we have a slowing, and negative, GDP but the stock market completely ignores it. This is highly unusual behavior and can only be attributed to an unhealthy expectation that the Fed can continue to distort reality. When the real reality hits investors it's likely to come as a great shock to the system.

We're also seeing a return to liar loans and auto-loan securitizations, all the same kind of behavior that we saw leading up to the 2007 high. Student loan defaults have now been added to the list. Homeowners are once again tapping their home equity. It's deja-vu all over again and this time the Fed has made it even worse, which is a reason to believe the next leg of the bear market is going to be much worse than the 2007-2009 decline. Are you ready for it?

I'll start tonight's review with a top-down look at SPX again and show a couple of different perspectives of where this rally has taken us to. Some of it is interesting while other parts are warnings. Based on a number of technical signals, along with the over-the-top bullish sentiment and low VIX, I'm leaning to the downside currently but clearly the upside for this market needs to be respected by the bears. Regardless of the reason, this market has shown an amazing ability to rally in the face of many reasons why it shouldn't (both technical and fundamental). We have very early signs of a reversal but what can't be known yet is whether or not it will be just another small pullback before heading higher again. Today's bounce certainly has many bears wondering if this market will ever go down.

The chart below is a monthly view to show how SPX is bumping up against a long-term broken uptrend line from 1990-2002. Following the reactionary price action around the 1987 market crash and recovery, the 1990 low provides the first good pullback and the start of the roaring 90s. I also show an uptrend line from 1994-2002 (grey) since that's also an important trend line. One could easily argue the parabolic portion of the rally in the 1990s started from the 1994 low. In 2011 and 2012, especially with the bearish divergence following the highs in those years, as price bumped up against the 1994-2002 uptrend line, I thought a top of significance was forming. And then from the November 2012 low, thanks to a little help from the Fed, the market shot higher and now price sits just below the 1990-2002 uptrend line. Both of those trend lines were broken in the 2008 market crash and it's taken more than 5 years to get back up to the broken 1990-2002 uptrend line for a possible bearish back test.

S&P 500, SPX, Monthly chart, 1994-present

The price projection at 1966 shown on the above chart is a projection based on a 3-wave move up from the 2002 low (an expanded flat correction where the b-wave pullback drops below the a-wave low). The 2009-2014 rally is 162% projection of the 2002-2007 rally. Tuesday's high was 1968. Close enough for government work, especially with the market overbought on all time frames and a DeMark sell signal on daily, weekly, monthly and soon-to-be quarterly time frames.

The next weekly chart below shows some time relationships between prior highs based off the time between the June 2010 and August 2011 lows. You can see the Fibonacci relationships to the highs along the way to the current one. The 261.8% time projection is next week but as you can see at the previous highs, they were either one week early or right on the money (May 2013). Between the chart above, showing price resistance, and the one below, showing time resistance, it's a time for the bulls to be very careful here (that goes without saying for the bears). Throw in sentiment and there's a lot stacked against the bulls here.

S&P 500, SPX, Weekly chart, time relationships 2010-present

Moving in a little closer, but still with a weekly chart, I'm showing a wave count that calls the rally from April as the final 5th wave of the rally from November 2012 (the Fed-inspired rally that jumped back above the broken uptrend line from 1994-2002 discussed above). This fits as the completion of a larger corrective wave count for the entire rally from 2009. So the wave count supports the longer-term price/time relationship that suggests great caution by the bulls. SPX is also up against the top of the green parallel up-channel from the October 2011 low and showing the kind of bearish divergence I would expect to see for the final 5th wave. All the pieces are in place for a top -- time for the Fed to launch QE4.

S&P 500, SPX, Weekly chart

There are a couple of up-channels at play for SPX, in addition to the longer-term one from October 2011, shown a little closer with the daily chart below. The top of an up-channel from February will be near 2020 by the middle of next week so if the market continues to rally into month/quarter end and then the first two days of the new month (and in front of a holiday weekend, typically bullish) we could see that happen. A little lower, near 1984 on Friday, is the top of an up-channel from April. A rally above Tuesday's high near 1968 would open the door to either of those projections. But in the meantime, the setup for a reversal was a good one on Tuesday and the afternoon decline now has us on a short-term sell signal against that high (1968). We can only know in hindsight how important Tuesday's high will be but it has the potential to be a significant one.

S&P 500, SPX, Daily chart

Key Levels for SPX:
- bullish above 1968
- bearish below 1925

Coming into this morning I thought we'd see a minor new low and then a bounce that would take the whole day and make it up to the 1958-1959 area to correct a portion of Tuesday's decline. That played out and as of the end of the day it was another good setup for the bears to short the bounce. SPX bounced back up to its broken uptrend line from May 20th and the top of its parallel up-channel from October 2011. Those lines crossed near 1958 today and I thought it would hold as resistance. The bounce made it up to almost 1961 so at the moment it's a little overshoot but the bears need to see the market decline immediately out of the gate to support the bearish setup. At most the short-term pattern would tolerate a bounce up to 1962-1963 before dropping but any higher than 1964 would likely mean new highs are coming.

S&P 500, SPX, 60-min chart

The DOW's highs last Friday and yesterday were more tests of the trend lines across the highs from May 2011 - May 2013 and from March 7 - April 4. Both left bearish divergence against its June 9th high and it was a good setup for a reversal. Tuesday's selloff has us on a short-term sell signal but not surprisingly it found support at its 20-dma yesterday, as it did June 12-18 and the bulls certainly hope it will provide support for the start of the next leg up, which might have started today. But the bounce pattern looks corrective and more like a correction to Tuesday's decline instead of something more bullish. As with SPX, it looks like a bounce to short rather than a dip to buy. Confirmation for the bears that a top of significance could be in place will come with a decline below 16700 to get it back below its 2000-2007 trend line and the June 12th low at 16703.

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- bullish above 17,000
- bearish below 16,700

NDX has retraced the greatest portion of Tuesday's decline -- a little more than 78.6%. Tuesday's strong reversal has also been a reversal so will the real reversal please stand up. Into Tuesday's high I had been looking for NDX to potentially get turned around at its 127% extension of the March-April decline, near 3827, which is a common reversal Fib level to watch carefully. It rallied a little higher on Tuesday but the bulls then got kicked to the curb and the lower close produced an outside down day at that Fib level. Today's rally brought it back up to that level for a potential back test but it means the bears need to step back in immediately Thursday morning. This one can't tolerate even a little higher without opening the door to higher highs (at least the 3850 area). Another failure to hold above the trend line along the highs from March 7 - June 9 would also be bearish but the bears need to see NDX below its June 18th low at 3764 to prove a high of significant is in place.

Nasdaq-100, NDX, Daily chart

Key Levels for NDX:
- bullish above 3850
- bearish below 3764

I don't normally show intraday charts below a 30-min time frame in a market wrap because it gets a little too much into the day trader's territory but the NDX pattern that I was watching during the day deserves a mention only because it was a setup for a reversal at the end of the day, with a tight stop just above Tuesday's high. If the setup is correct we'll see an immediate drop lower on Thursday (to at least match Tuesday's decline but potentially much more). The bounce off yesterday's low looks like a double zigzag correction (two a-b-c's separated by an x-wave) and there are two price projections that correlate nicely near 3832, which are shown on the 2-min chart below. NDX stopped just short of the projection and started to roll over into the close. The setup calls for an immediate drop below its uptrend line from the morning, near 3826, and if that happens then the stop on the play can be lowered to 3832 (keeping it tight until we've got a confirmed reversal back down).

Nasdaq-100, NDX, 2-min chart

The RUT came close testing its uptrend line from May 15th and its price-level S/R line near 1165. A drop below 1165 would be bearish and a drop below its June 13th low at 1154 would confirm a top is in place. But its up-channel from May is still holding so it would continue to be bullish with a rally above Tuesday's high at 1194.

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- bullish above 800
- bearish below 778

When the equity futures sold off on this morning's economic news the bond market rallied, which drove yields back down. This has TNX looking like it might roll over at resistance at its downtrend line from December, as well as its longer-term downtrend line from 2007-2011. But it's not a clear short-term pattern and I could also argue it's consolidating beneath resistance and getting ready for the next rally leg that was started off the May 29th low. A break above last 2.66% would be bullish but at the moment it's leaning bearish.

10-year Yield, TNX, Weekly chart

I'm watching the banks carefully here (follow the money) to see what happens now that it's back-testing its broken uptrend line for the leg up from June 2012. BKX broke below the line in early April and is now back up for a back test. All the bears need now is a bearish smooch goodbye. A drop back below its June 16th low at 70 would be the first sign of trouble for the bulls and then below its 50-week MA at 67.53 would be stronger confirmation that an important high is in place.

KBW Bank index, BKX, Weekly chart

Since the end of May I've been looking for the U.S. dollar to pull back to correct its rally off the May 8th low and we're slowly getting the correction. So far it has retraced 38% of the rally and I'm showing a depiction for about a 50% retracement and back test of its broken downtrend line from January, perhaps down to about 79.90 in early July, before starting another rally leg.

U.S. Dollar contract, DX, Daily chart

Gold has been struggling underneath its downtrend line from October 2012 - March 2014, currently near 1323, which was tested again today. A drop back down would continue to support its larger bearish pattern but if it rallies from here we could see a test of the 1350 area before pulling back to retrace a portion of the rally from June 3rd and then continue higher. It could be in a large sideways triangle pattern since the June 2013 low so even a rally up to 1350 would not necessarily be longer-term bullish. I'll review the potential if and when it breaks the current downtrend line.

Gold continuous contract, GC, Daily chart

On June 12th oil broke above the top of a sideways triangle that started from March 3rd, near 105, in a 1-day spurt higher (short covering as stops just above the top of the triangle were hit) and has consolidated for the past 8 trading days. It's bullish that it's hanging above 105 but would turn bearish again if it drops back below 105. There's additional upside potential at least to the shallow downtrend line from May 2011, shown on the weekly chart below. The line is currently near 111 and it would become much more bullish above that level. It's possible it will complete a bounce in a very bearish longer-term pattern but we'll have to see how it looks if and when it reaches 111.

Oil continuous contract, CL, Weekly chart

Tomorrow we'll see how the consumer is doing in this age of "contained inflation" when we get the Personal Spending and Income numbers. As long as the income stays ahead of the spending it keeps things positive. Increasing consumer debt, through greater spending than income, would continue to make the consumer a potential liability for the economy.

Economic reports and Summary

We had a good setup for a downside reversal on Tuesday and by the end of the day many of the indexes were sporting a key outside down day for a reversal pattern. The sharp decline on Tuesday looked impulsive and that was confirming the reversal signal. The expectation for today was for a bounce to correct a portion of Tuesday's decline and today's bounce fits the bill. If the reversal pattern is correct we should see the market head lower on Thursday, ideally right out of the gate.

Today's rally, brought to us courtesy of a slowing economy (don't ask), might have had some "assistance." There have been many stories recently about the central banks of the world looking for yield just like everyone else and they're finding it in the stock market. When we say the central banks are supporting the stock market we mean literally and they're doing it with money printed out of thin air. There's got to be something illegal in that. Be that as it may, the central banks have a personal interest in keeping the market up and the negative futures reaction to this morning's economic news was met with some buy programs out of the gate this morning. A little help from our friends?

But the market is much bigger than the central banks and therefore depending on them to hold the market up in the face of deteriorating economics and nervous investors, it won't take much to run them over. And when that happens (not if), it will likely happen at a very fast pace. As I've been saying for a while now, upside potential is dwarfed by downside risk and I would trade accordingly.

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

Don't Buy It. Rent It.

by James Brown

Click here to email James Brown


United Rentals, Inc. - URI - close: 105.58 change: +1.87

Stop Loss: 101.80
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:
URI is the 800 pound gorilla in the rental space. With almost $5 billion in annual sales they have become the largest equipment rental company in the world. URI offers 3,100 categories of construction and industrial equipment for rent, including a number of specialty equipment. They have over 870 locations in 49 U.S. states and 10 Canadian provinces.

URI claims a diverse customer base that includes construction and industrial companies, utilities, local municipalities, government agencies and independent contractors.

Business must be good because URI is developing a trend of beating analysts' estimates. Their most recent earnings report in April was 90 cents a share on revenues of $1.18 billion. Wall Street was only looking for 76 cents a share on revenues of $1.17 billion. Management reaffirmed their full year outlook. Last year URI delivered earnings growth of 30 percent. They're on track to hit almost 32% EPS growth this year.

If you believe the economy is improving then URI should continue to benefit as construction picks up. The relatively slow growth the U.S. has seen so far has promoted a more cautious stance on companies in the construction and industrial space. That means more of them have chosen to just rent equipment instead of buying it. This has fueled strong time utilization rates for URI.

URI reported they spent $43 million of their $500 million stock buyback program in the first quarter. They expect to complete the program by April 2015.

Technically shares of URI are in a long-term up trend as investors continue to buy the dips. Tonight we are suggesting a trigger to open bullish positions at $106.70. We are not setting an exit target tonight but the point and figure chart is bullish with a $114.00 target.

Trigger @ $106.70

- Suggested Positions -

Buy the Sep $110 call (URI140920C110) current ask $4.40

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

Annotated Chart:

Weekly Chart:

Entry on June -- at $---.--
Average Daily Volume = 1.6 million
Listed on June 25, 2014

In Play Updates and Reviews

HBI Soars On M&A Deal

by James Brown

Click here to email James Brown

Editor's Note:

Shares of our HBI trade soared to new highs following news of an acquisition this morning. We want to exit our HBI trade tomorrow morning.

SAVE hit our stop loss today.

Current Portfolio:

CALL Play Updates

Ameriprise Financial - AMP - close: 119.24 change: +0.74

Stop Loss: 114.40
Target(s): To Be Determined
Current Option Gain/Loss: + 8.3%
Time Frame: 8 to 12 weeks
New Positions: see below

06/25/14: AMP bounced off short-term support at its rising 10-dma and recovered most of yesterday's losses. The stock is once again poised to breakout past the $120.00 mark.

Earlier Comments: June 18, 2014:
AMP is in the financial sector. The company, and its subsidiaries, provides a range of financial products including advice and wealth management. The company had a record year in 2013 and it looks like the momentum has continued into 2014. The company' last earnings report was its Q1 results, reported on April 28th. Wall Street was expecting a profit of $1.88 per share on revenues of $2.84 billion. AMP delivered $2.04 with revenues rising +11% to $3 billion.

AMP's Q1 results were a +19% improvement from a year ago. Furthermore both revenues and margins are improving. AMP raised its dividend 12 percent to 58 cents (currently at a 2.0% yield) and announced a $2.5 billion stock buy back program.

Technically shares of AMP are in a long-term up trend and just recently broke out from a five-month consolidation. Traders have already jumped in to buy the dip at prior resistance near $115.00.

- Suggested Positions -

Long Sep $120 call (AMP140920c120) entry $3.60

06/20/14 triggered @ 118.80
Option Format: symbol-year-month-day-call-strike

Entry on June 20 at $118.80
Average Daily Volume = 823 thousand
Listed on June 18, 2014

Anadarko Petroleum - APC - close: 109.57 change: +2.18

Stop Loss: 99.90
Target(s): To Be Determined
Current Option Gain/Loss: + 54.1%
Time Frame: 8 to 12 weeks
New Positions: see below

06/25/14: Energy stocks were underperforming the market yesterday. Today they were back to outperforming the major indices. APC bounced with a +2.0% gain.

Earlier Comments: June 10, 2014:
APC is in the basic materials sector. The company is a very active oil and natural gas producer. They have assets in the Rocky Mountains, the Southern U.S., the Gulf of Mexico, and Alaska. Plus, APC is active internationally with assets in Algeria, Brazil, China, Colombia, Ghana, Liberia, Mozambique, New Zealand, Sierra Leone, and South Africa. Altogether APC has a strong onshore and off-shore portfolio.

The company's latest earnings report on May 5th was better than expected. Wall Street was expecting $1.14 per share. APC delivered $1.26. APC said they set record volumes in the quarter at 819,000 barrels of oil equivalent (BOE) per day. Management went on to raise their full-year sales-volume. A week later they increased their dividend by 50% from 18 cents to 27 cents per share.

APC could end up a big liquefied natural gas (LNG) producer with their assets in Mozambique (Southeast Africa). Last year APC drilled two natural gas off-shore wells. This year they could drill up to eight new wells. The company recently upgraded their view on how much recoverable gas in their northern Mozambique assets to 50 trillion to 70 trillion cubic feet. APC is developing an LNG project and plan to deliver their first LNG cargo in 2018.

One of the biggest headlines for APC has been its settlement over the TROX litigation. This refers to a large lawsuit over the bankrupt Tronox company, which was spun-off from APC's Kerr-McGee division. Previously the estimated penalty range for this TROX lawsuit was in the $5.15 billion to $14.17 billion with many analysts estimating the final results would probably be around $10 billion. On April 3rd this year APC reported they would settle this for $5.15 billion, the very low end of the range and the stock exploded higher. Getting past this TROX liability has removed a very dark cloud for the company and the stock price.

It is worth noting that APC still has potential legal risk from the April 2010 Macondo well blow out. BP Plc was the operator and majority owner of the well but APC did own 25% of it. The U.S. judges are arguing that APC will be held responsible for its 25% of the penalties. The final numbers could be huge. The U.S. Clean Water Act allows the government to fine the companies $1,100 per barrel of oil spilled into the Gulf. Plus, they could add another $4,300 penalty per barrel for gross negligence. Right now BP is arguing with the courts over how much oil was spilled. The U.S. is claiming 4.2 million barrels of oil escaped into the Gulf of Mexico. BP estimates only 2.45 million barrels. APC management has suggested they may not be fined for any gross negligence penalties since they did not have any direct operational involvement. The penalty phase for this lawsuit is scheduled for January 2015. This issue is clearly not stopping the rally in shares of APC today.

Technically shares of APC have been consolidating sideways under resistance near $105 with a bullish trend of higher lows. Now the stock is on the verge of breaking out.

- Suggested Positions -

Long NOV $110 call (APC141122C110) entry $4.80*

06/11/14 APC hit our trigger at $105.25
rumors this morning that XOM might buy APC.
*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 11 at $105.25
Average Daily Volume = 2.8 million
Listed on June 10, 2014

Capital One Financial - COF - close: 82.33 change: -0.12

Stop Loss: 74.95
Target(s): To Be Determined
Current Option Gain/Loss: + 67.3%
Time Frame: 8 to 12 weeks
New Positions: see below

06/25/14: As expected COF dipped to short-term support near $82.00 and its 10-dma. The only disappointment was the stock's anemic bounce from this level.

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

Demandware, Inc. - DWRE - close: 67.19 change: +0.11

Stop Loss: 59.85
Target(s): To Be Determined
Current Option Gain/Loss: -10.4%
Time Frame: 8 to 12 weeks
New Positions: see below

06/25/14: DWRE flirted with a breakdown below its 10-dma before rebounding. I am not convinced the pullback in this stock is over. Look for support near $65.

Earlier Comments: June 17, 2014:
DWRE provides cloud-based digital commerce solutions. They first introduced their platform in 2004. According to DWRE's website they "power more than 200 retail brands across more than 800 sites around the globe."

The stock was hammered lower this spring as investors sold everything that might be considered high-growth or a momentum-stock. DWRE corrected from $80 to $45 but shares have since rebounded.

Earnings have been strong. The company reported Q4 numbers in February that beat estimates and DWRE management raised their Q1 and 2014 guidance. DWRE reported their Q1 numbers on May 6th. Wall Street was expecting a loss of 9 cents per share on revenues of $29.0 million. DWRE delivered a loss of 7 cents. Revenues were up +57% to $32.2 million. DWRE's CEO said their momentum from 2013 carried over into 2014. The first quarter this year saw record subscription revenues.

Technically shares of DWRE have broken through resistance in the $60-65 zone and all of its major moving averages. The stock also has short interest that is about 8.5% of the small 31.8 million share float. New relative highs could spark more short covering. Currently the point & figure chart is bullish and suggesting a long-term target of $99.00.

I would consider a more aggressive, higher-risk trade. DWRE can be volatile and the options are not cheap. I'm suggesting small positions to limit our risk.

*small positions* - Suggested Positions -

Long Oct $70 call (DWRE141018c70) entry $6.92

06/18/14 triggered @ 66.75
Option Format: symbol-year-month-day-call-strike

Entry on June 18 at $66.75
Average Daily Volume = 705 thousand
Listed on June 14, 2014

Hanesbrands Inc. - HBI - close: 96.72 change: +8.18

Stop Loss: 81.75
Target(s): To Be Determined
Current Option Gain/Loss: +189.1%
Time Frame: 8 to 12 weeks
New Positions: see below

06/25/14: Wall Street loves M&A. This morning HBI announced a deal to buy France's DBApparel company for $545 million. The acquisition will add 25 cents to HBI's earnings in 2015.

Shares of HBI gapped open higher at $94.85 and spiked to $98.70, up more than $10.00, before trimming its gains. HBI ended the session up +9.25.

We are suggesting an immediate exit to lock in potential gains. Our October $90 call ended with a bid/ask spread of $8.50/9.80.

- Suggested Positions -

Long Oct $90 call (HBI141018C90) entry $2.94

06/25/14 prepare to exit tomorrow morning
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

Martin Marietta Materials - MLM - close: 130.93 change: -0.46

Stop Loss: 129.75
Target(s): To Be Determined
Current Option Gain/Loss: -35.3%
Time Frame: 8 to 12 weeks
New Positions: see below

06/25/14: MLM delivered another disappointing session. Shares underperformed the market and closed in negative territory. The stock is still above potential support at the $130.00 mark. I am not suggesting new positions at this time.

Earlier Comments: June 21, 2014:
96 percent of all paved roads in the United States are covered in asphalt. The material is a combination of asphalt oil, sand, and gravel. A lot of those materials come from MLM. The company also supplies stone, sand, gravel and concrete. They have over 300 quarries and distribution centers. They plan on growing as MLM is currently in the process of acquiring Texas Industries (symbol: TXI), which will immediately give MLM a strong presence n California and boost its cement business.

The U.S. economy has been struggling to maintain a +2% growth rate but the outlook seems to be improving. As the U.S. grows it's going to see improvement in the residential and non-residential construction. MLM expects sales to the residential market to grow at more than 10% in 2014.

MLM management has noted that historically low mortgage rates and slowly improving employment trends has been a boost for the residential construction market. Annual housing starts are expected to come in at more than one million homes for the first time since 2007.

Meanwhile non-residential is expected to grow in the high-single digits this year. The sector is seeing stronger fundamentals thanks to rising rents and occupancy rates. Rising property values has helped boost commercial real estate lending and that fuels construction.

MLM is also a major player in materials for roads and highways. Government contracts for highway construction and repair were up +14% for the year through last December. This year both the democrats and the republicans have voiced support for a new highway bill, which could mean more business for MLM.

Margins are improving. MLM said their prior quarter saw margins on its aggregates business improve 400 basis points. MLM plans to raise prices by 3% to 5% this year while production costs are expected to decline. That should further boost MLM's margins.

Investors should be aware that the U.S. Department of Justice is looking into MLM's acquisition of TXI but management does not expect any issues. They're suggesting it's just a review but if the DOJ were to block the deal it could rattle the stock.

Technically shares of MLM have been showing relative strength. The stock recently broke out past significant resistance near $130 and closed the week at multi-year highs. If this strength continues MLM could see more short covering. The most recent data listed short interest at 22% of the relatively small 46 million-share float.

- Suggested Positions -

Long Oct $140 call (MLM141018C140) entry $6.50*

06/23/14 triggered on gap higher at $135.97, suggested entry point was $135.25
*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 June 23 at $135.97
Average Daily Volume = 419 thousand
Listed on June 21, 2014

PPG Industries - PPG - close: 204.47 change: +1.44

Stop Loss: 200.75
Target(s): To Be Determined
Current Option Gain/Loss: - 4.1%
Time Frame: 8 to 10 weeks
New Positions: see below

06/25/14: PPG erased yesterday's losses but shares are still struggling to push past resistance near $206.00. Investors may want to wait for a breakout past $206 before considering new positions.

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*

06/19/14 new stop @ 200.75
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

Starbucks Corp. - SBUX - close: 78.12 change: +0.69

Stop Loss: 71.75
Target(s): To Be Determined
Current Option Gain/Loss: +38.5%
Time Frame: 8 to 12 weeks
New Positions: see below

06/25/14: SBUX gapped down at the open but spent the rest of the day in a steady climb higher. The stock is nearing potential resistance at its March 2014 peak at $78.64.

I am not suggesting new positions at the moment.

Earlier Comments: June 14, 2014:
The twin-tailed siren of Stabucks could be ready to sing for investors again. The company is named after the first mate in Herman Melville's Moby Dick. According to company literature their mission is "to inspire and nurture the human spirit - one person, one cup and one neighborhood at a time."

Notice it didn't say one cup of coffee at a time. Make no mistake. Coffee is big business. According to Business Insider coffee is worth about $100 billion globally and planet earth drinks about 500 billion cups of coffee every year. Quite a few of those cups are consumed at Starbucks' ubiquitous coffee chain, which now has over 10,000 company-run stores and over 9,500 licensed stores.

Believe it or not but tea is a bigger market. Tea producers churn out more than 4 billion kilograms of tea every year. Tea is the second-most consumed beverage behind water. Several months ago SBUX purchased the Teavana chain for $620 million. Now they're planning to update and expand the brand into 1,000 tea bars in the next five years.

SBUX recently said that food remains a big opportunity and currently food sales are only 22% of its U.S. business. SBUX purchased the French bakery chain "La Boulange" in 2012 and they've started distributing some of the bakery's products in more than 6,000 Starbucks stores. These should reach all of their coffee stores by the end of this year. They're also testing lunch items and testing alcohol sales in certain states. That means Malbec wines and bacon-wrapped dates could be available at a Starbucks store near you soon. The company said that adding food items has increased purchases and boosting ticket growth.

This past week SBUX said they're going to roll out wireless charging mats for smartphones in some of their stores soon.

Put it altogether and the company has big plans. Their latest earnings report in late April was mixed. Profits were in-line with estimates but revenues were a miss although same-store sales came in above expectations. SBUX management raised their Q4 guidance and 2014 guidance following its results.

- Suggested Positions -

Long OCT $80 call (SBUX141018c80) entry $1.66

06/17/14: triggered @ 75.65
Option Format: symbol-year-month-day-call-strike

Entry on June 17 at $75.65
Average Daily Volume = 3.5 million
Listed on June 14, 2014

U.S. Silica Holdings - SLCA - close: 53.87 change: +1.45

Stop Loss: 48.40
Target(s): To Be Determined
Current Option Gain/Loss: + 7.9%
Time Frame: 8 to 12 weeks
New Positions: see below

06/25/14: Traders bought the dip near SLCA's 10-dma and 20-dma again this morning. The stock's rebound erased yesterday's pullback. Now SLCA faces resistance near $55.00.

Earlier Comments: June 14, 2014:
There is a new gold rush going on for sand! America's shale oil and gas boom has created another boom for sand producers. Energy companies use hydraulic fracking to mine oil and gas out of tight shale formations. This fracking technique blasts millions of gallons of water at high pressure into shale rock where the oil and gas is trapped. These wells can cost between $4 million and $12 million each. In order to maximize their returns drillers use proppants to help "prop" open these minute cracks in the shale rock to help the oil and gas escape to the surface.

The cheapest and one of the most effective proppants has been fine sand. SLCA has been providing sand for industrial use for over 100 years. The company currently has 297 million tons in reserve. Oil and gas industry demand for proppants is expected to rise +30% between 2013 and 2016. That might be underestimated. The energy industry consumed 56.3 billion pounds of sand for fracking in 2013. That's up 25% from 2011.

According to SLCA they saw a +45% increase in demand for their sand. SLCA's CEO reported that some hydraulic fracking wells have doubled their use of sand from 2,500 tons per well to 5,000 tons. There are some wells using up to 8,000 tons.

Demand has been so strong that SLCA is actually sold out of some grades of sand and they're raising prices (about +20%) on non-contracted silica. SLCA believes demand for their products will rise another 25% this year alone.

Wall Street has taken notice of the dynamics of the sand industry and shares of SLCA have soared from their February 2014 lows. It may not be a coincidence that the stock was added to the S&P 600 smallcap index in February this year.

We are not setting an exit target tonight but Point & Figure chart for SLCA is bullish with a $69 target.

- Suggested Positions -

Long Sep $55 call (SLCA140920C55) entry $3.15*

06/17/14 triggered @ 52.15
*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 17 at $52.15
Average Daily Volume = 1.2 million
Listed on June 14, 2014

PUT Play Updates

Tractor Supply Co. - TSCO - close: 62.26 change: -0.31

Stop Loss: 64.10
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Time Frame: 8 to 12 weeks
New Positions: Yes, see below

06/25/14: TSCO continues to underperform the U.S. market and fell another -0.48% today. Shares are nearing support at $62.00 and its February low.

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

Earlier Comments: June 24, 2014:
TSCO has everything from cowboy boots to chicken coops and everything you might possibly need on the farm. The company has over 1,300 stores in 48 states. This specialty retailer is focused on the "lifestyle needs of recreational farmers and ranchers and others who enjoy the rural lifestyle, as well as tradesmen and small businesses."

A lot of things are on the rise for TSCO. They have rising sales, a rising dividend, rising stock buyback program. What is not rising is their stock price. Shares peaked in January this year after surging to all-time highs in 2013. The company has been raising its dividend, now up to 16 cents a share. They also recently announced another $1 billion to their stock buyback program. Unfortunately these do not seem to be helping the share price.

Their last earnings report was April 23rd. TSCO reported Q1 earnings of 35 cents a share on revenues of $1.18 billion. That missed estimates of 37 cents on revenues of $1.21 billion. To be fair the terrible weather in the first quarter really did affect their sales, given their farm and rancher focus. Management believes these sales will return as the weather improves. TSCO reaffirmed their 2014 sales guidance of $5.62 billion to $5.7 billion and same-store sales of 2.5% to 4%. The company plans to open over 100 new stores this year.

Not everyone on Wall Street believes TSCO is a buy. The company was recently downgraded thanks to its high valuation (over 26 times its 2014 earnings estimates) and weaker gross margins. TSCO also seems to be suffering from slowing same-store sales. Last year their average same-store sales growth was +4.8%. The fourth quarter's was +3.5%. The first quarter of 2014 it was down to +2.2%. Again, you could blame that on the weather but it's not a good trend.

Technically shares of TSCO are in a bearish pattern of lower highs and soon to be lower lows. The February low was $62.06. We are suggesting a trigger to buy puts at $61.90. We are not setting an exit target tonight. It is worth noting that the point & figure chart is bearish and suggesting a $46 target.

Trigger @ $61.90

- Suggested Positions -

Buy the Oct $60 PUT (TSCO141018P60) current ask $2.50

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

Entry on June -- at $---.--
Average Daily Volume = 871 thousand
Listed on June 24, 2014


Spirit Airlines - SAVE - close: 62.83 change: +0.31

Stop Loss: 61.90
Target(s): To Be Determined
Current Option Gain/Loss: -30.4%
Time Frame: 8 to 12 weeks
New Positions: see below

06/25/14: SAVE ended the session with a bounce but not before piercing short-term support near $62.00. The stock hit our stop loss at $61.90 intraday.

We are still longer-term bullish on SAVE. Readers may want to keep this stock on their watch list for a breakout past $65.00 as a potential entry point.

- Suggested Positions -

Sep $65 call (SAVE140920C65) entry $4.10* exit $2.85** (-30.4%)

06/25/14 stopped out
**option exit price is an estimate since the option did not trade at the time our play was closed.
06/23/14 triggered @ 64.75
*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 June 23 at $64.75
Average Daily Volume = 898 thousand
Listed on June 21, 2014