Option Investor

Daily Newsletter, Saturday, 8/9/2014

Table of Contents

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

Market Wrap

Headline Short Squeeze

by Jim Brown

Click here to email Jim Brown

News of a Russian withdrawal from the Ukraine border and tactical airstrikes by the U.S. in Iraq overcame a slow news day to cause a major short squeeze.

Market Statistics

The market rallied on low volume as shorts covered their positions ahead of the weekend. This was a monster short squeeze as the expected invasion of Ukraine failed to materialize. Investors had been trading the market decline for the last two weeks in expectations for the Russian invasion, stronger sanctions and weaker economies in Europe. The news Russia had declared an end to its "military exercises" and was returning the men and equipment to their bases came at 1:PM and Dow spiked another +120 points on that news.

Strangely the massive short covering came on only a tweet from a Russian news agency rather than an entire story on the news wires. That shows how over shorted the market was and how concerned traders were about going into the weekend short.

The turnaround was significant after the S&P futures dipped -15 points overnight to 1890 before reversing course to trade at 1913 just before the cash market opened. You don't see a 23 point range in the S&P futures in an overnight session very often. This also proves the market was heavily shorted.

The yield on the ten-year treasury had declined to 2.37% early in the morning as the various war premiums were priced into the market. When the news broke at 1:PM about Russia ending the exercises the yield spiked back to 2.42% but that was still the lowest closing yield since June 19th 2013.

Elsewhere there was news of additional bombing strikes by U.S. and Iraqi aircraft against the Islamic State (IS). That suggests that once the campaign started it may end up being the beginning of the end for the Islamic State. The terrorists had pressed their gains and were moving towards Irbil, the capital city of Kurdistan, and putting the Kurdish people and many Americans and other nationalities at risk. Also, the IS had trapped up to 50,000 civilians of multiple religious backgrounds on a mountain in Northern Iraq. These civilians had fled from the approaching IS forces bent on genocide, rape and torture. Many of these people were Yazidis Christians that IS had sworn to kill and President Obama finally realized he had to act to head off a disaster.

In Israel the Hamas terrorists resumed their rocket attacks and the Israeli air force returned the fire with multiple attacks on the rocket launch facilities.

The economic news on Friday was minimal. The Wholesale Trade report for June showed inventories rose +0.3% and half the analyst estimate for +0.6% gain. May was revised lower from +0.5% to +0.3%. Durable goods inventories rose +0.7% while nondurable goods declined -0.2%. The report was ignored.

Productivity and costs for Q2 rose with output rising +2.5% compared to a -4.5% decline in Q1 as a result of the severe weather. Compensation rose +3.1% and significantly lower than the +6.8% rise in Q1. Unit labor costs slowed dramatically from an 11.8% rise in Q1 to only +0.6% in Q2. This report is positive for the Fed. They were concerned about the sharp rise in unit labor costs in Q1 and the potential for those costs to continue to rise.

Next week also has a light calendar with the Retail Sales and Industrial Production as the highlights. There is nothing on the calendar that should move the market.

The earnings calendar for next week has very few highlights. Priceline, Cisco Systems, Walmart, JC Penny and Applied Materials will be the most watched. This is the last major earnings week of the Q2 cycle.

Cereal maker Post Holdings (POST) probably wishes they could have announced earnings on Saturday when the markets were not open. The company lost 30 cents per share compared to a profit of 3 cents in the year ago quarter. In an effort to be less dependent on the low margin cereal business Post made 7 acquisitions since August 2013 and they announced another one with earnings. They said they were acquiring peanut butter maker American Blanching for $128 million. The loss came from trouble integrating all of those businesses into one company. Analysts worried they tried to grow too fast and the drag from the integration process could last significantly longer. Shares were down more than -20% intraday but rebounded to a -16% loss at the close.

Green Mountain Coffee (GMCR) reported a +21% rise in earnings to 99 cents that beat estimates of 87 cents and raised full year guidance. More than 81% of revenue came from sales of the single cup brewers and the K-cups to support them. Sales of K-cups rose +10% to $826.3 million on a 15% increase in volume. The company raised full year guidance from $3.63-$3.73 to $3.71-$3.78. Sales are expected to rise in the high single digits.

The earnings were strong but the stock was not. Their current quarter guidance was for 68-75 cents and analysts were expecting 86 cents. Shares of GMCR appear to be vulnerable below $113.

Nvidia (NVDA) posted adjusted earnings of 25 cents that rose +12.9% and beat estimates of 19 cents. Tegra processor revenues rose +200% thanks to automobile systems and mobile devices. Google recently selected the Tegra processor for its Project Tango tablet development. They upgraded guidance slightly on expectations for higher processor volume. Shares rallied +9% on the news.

The number of companies reporting has slowed dramatically and there was little in the way of reports on Friday. Despite the big gains in the market the volume was low at 5.5 billion shares. This was the lowest volume day of the week and this was a very volatile week. You would have expected a lot more volume given the volatility.

However, there are only three weeks left in the summer with Labor Day on Sept 1st normally seen as the last day of summer. Kids are going back to school already and any trader/investor still planning on a vacation is going to be taking it over the next three weeks.

If it were not for the Russian invasion cloud hanging over the market all week I doubt we would have seen any volatility and the volume would have been much lower. Assuming, the Russian military is being pulled back from the border the market could be very lackluster next week.

Not only has volume been low but most of it was leaving the market. Lipper reported outflows from stock funds of $15.8 billion for the week and the highest outflow in six months. Another $7.1 billion left high yield bond funds. That was the most in one week since records were started in 1992.

The S&P traded down to 1904 on Thursday followed by the futures trading down to 1890 overnight. These were critical levels that were begging for an oversold bounce. Add in the Russian short covering on Friday and the rebound was born.

A lot of long term rallies begin with a huge short squeeze. However, very few are started on a 5 billion share day. Volume is a weapon of the bulls and they were not expending any of that volume ammo on Friday.

James noticed an interesting point while researching plays on Friday. The stocks that rallied the most were the ones most shorted. That should not be a real surprise but he also noticed that the stocks that declined the least over the last two weeks barely moved on Friday and quite a few were actually down. This confirms the short squeeze theory and also points out that the rebound was very narrow in breadth. In a real rally you would expect the stocks with the best relative strength in a decline to be the biggest gainers when that decline is over. Clearly that did not happen on Friday.

An example would be IBM. The stock declined $12 over the last week and then rebounded sharply on Friday.

This suggests we should not expect the rebound to continue on Monday or at least not with a big gain. While I do believe that S&P 1900 level would be a great rebound point we do need to see some non headline confirmation. That means we need to see what the market is going to do without being headline driven.

If there is no follow through next week then the shorts will return and we could take another shot at that 1900 level. Resistance is now 1943.

The Dow gave us an example of a perfect support bounce. If the market was only the Dow then I would be telling everyone to load up with longs on Monday. The Dow declined to support and closed at 16,368 on Thursday. On Friday the opening low was only 16,364 indicating the support held and that could have energized the early morning rebound in the market. When clear support levels hold it is a sign for shorts to begin to cover.

The next hurdle for the Dow is going to be the 16,600 level where it tried to rebound and failed on August 4th.

The Nasdaq rebounded less than the Dow and remains stuck below strong resistance at 4371. The Nasdaq has vacillated around the prior support at 4344-4350 for the last week. There have been daily spikes to just below 4380 and daily dips to 4325 but it always seems to come back to center on that 4350 range. This is one reason we should not get too excited about the Friday gains. The short squeeze did not even reach the resistance highs from the last three days at 4380.

You will probably notice that the list of the top 25 point gainers below only has a handful of the big names you would normally expect to see in the list. GOOG and AMZN are there but the rest of the list is populated by an eclectic list of rarely seen tech stocks. For instance when have you seen FOSL gain $4 in one day? The stock has been in a steady downtrend since November. How about UEIC? Bet you don't know that company but an 11% gain got it on the list on Friday.

When the Nasdaq breaks back above 4400 I would be more inclined to bless the rebound. Until then I am going to be skeptical.

The Nasdaq 100 ($NDX) has the same pattern as the Composite index only less volatility. The uptrend support from March worked perfectly at 3850 but the rebound was lackluster. A decline below that 3850 level would turn market sentiment negative.

The Russell 2000 appears to be building its third bear flag since its decline from the recent highs. However, this time may be different. The Russell has shown stronger relative strength than the rest of the indexes over the last week. While the Dow, S&P and Nasdaq were making new lows on Thursday the Russell was resisting. When the short squeeze appeared on Friday the Russell closed at the high for the week. While that may be just another failed rally in progress it could also be the spark for a continued rebound next week.

The downside to the Russell daily chart is the impending cross of the 100 day average over the 200-day. While this cross is not watched as closely as the "death cross" of the 50-day below the 200-day it is still relative. The cross of the two longer term moving averages suggests a continuation of the trend to the downside. While the 50/200 cross is considered a shorter term trading signal pointing to a change in direction the 100/200 cross is seen as confirmation of the existing trend. In this case it would be a declining trend.

Obviously you can drive yourself crazy trying to match up all the various trend signals so I mention it only in passing. We should note it but not run out and sell every stock we own.

The key for me would be a Russell bounce back above those averages at 1144/1148. They will function as resistance and even more so since they are so close together. If we can move back over 1165 that would be a strong signal predicting a new high. However, for this week I would watch the bear flag and see if it breaks to the upside rather than downside. Three downside broken flags in a row would be negative.

The Russell 3000 also made a perfect goal line stand at the 1138 level and it has not relinquished its hold on the 100-day average. This is the seventh time it has tested that average since December 2012 and each time it dips just below only to rebound back to new highs. Let's hope this test follows the same pattern.

Lastly the Transports also made a perfect rebound off recent support at 8000. I wrote last week the transports should eventually return to their 100-day average, now at 7938 and they came close on Friday with a dip to 7959. I believe that is close enough and I would expect them to rally from here. That does not mean they won't retest it again but I think that support should hold.

While I believe Friday's rebound was just a monster short squeeze there were just enough positives in the charts above to suggest we may have found a bottom. The Transports, Russell 3000 and the Dow appear to be honoring decent support points. If we were to retest those support levels next week and rebound again I would be a buyer. I would be a reluctant buyer if we simply moved higher from here. I would want to see the Nasdaq and the Russell 2000 confirm the move with decent gains.

The market has been in a pattern of 3% declines and rebound to new highs for many months now. In this decline the Transports fell -6.5%, Dow -4.7%, S&P -4.4%, Nasdaq Composite -3.7%, Nasdaq 100 -3.8%, Russell 2000 -8.7% and Russell 3000 -4.8%. This has been a significant decline that was mostly headline driven. Even in the midst of this decline there were buyers. Once the headlines evaporate the fundamentals will come back into play. Overshadowed by the geopolitical events was a Q2 earnings cycle with 10% earnings growth, 5% revenue growth and +3.95% GDP growth. This growth will bring the Fed back into the picture with rate hikes sooner rather than later BUT we are still at least six months away from those hikes. The market has plenty of time to return to its highs before those rate hikes appear.

The S&P has not had a 10% correction since August 2011 but there have been nine mini declines of 3% or more. We are due for a 10% decline.

I am typically early with my calls on market direction and I am not saying we should rush into longs next week. However, we could be at a turning point and we should pay close attention to market direction early in the week. I would rather nibble at some longs in a positive market than be looking back 500 points from now and wishing I had bought something. Just be aware we could be at a turning point but cautious enough that a failed rebound does not cause a material loss of capital.

Next week is August options expiration and historically this is the strongest week of the month for August. Declines are normally early in the month and again at the end of the month.

Random Thoughts

The National Association of Active Investment Managers NAAIM Exposure Index has fallen to the lowest level since September. This means their exposure to equities is at an 11 month low. At the same time the AAII weekly investor sentiment survey found the most pessimism among respondents since August 2013 with 38.2% bearish and 30.9% bullish. However, over the last week the ProShares UltraShort S&P-500 ETF saw outflows of $50 million and the ProShares Ultra S&P 500 ETF has seen inflows of $592 million. Apparently investors are using the surge in volatility and the return to support as a reason to buy stocks while they are on sale.

The CBOE Equity Put/Call Ratio spiked up to 1.04 on Friday August 1st. That was the highest reading in three years and the 19th highest since 2003. This suggests traders were turning significantly bearish and buying millions of puts. It is also a contrarian indicator because it suggests everyone is betting on a declining market. Buy stocks when nobody else wants them.

However, Reuters claimed the spike was due to a "fat finger" trade where more than 700,000 put contracts were traded across a number of different stocks in 1,300 trade orders. The premium on the contracts was $8 million and they were for weekly options that expired at the end of the day. The trades were executed in less than a minute and the options expired 3 hours later. All of the major exchanges said they had no broken orders or illegitimate trades so whoever placed the orders ended up paying a lot of premium for nothing.

Goldman Sachs said the 3 biggest risks to the stock market were 1) geopolitical events, 2) China and 3) rising interest rates. With Ukraine tensions easing and the U.S. finally attacking ISIS the main geopolitical events would seem to be fading. China's economic reports have begun to improve and Goldman said the China risk is now "broadly balanced" rather than "skewed to the downside." That leaves bond yields and rising interest rates as the most likely cause of market volatility in the coming months.

China's trade surplus surged to a record in July as export growth surged +14.5% compared to estimates for 7% growth. Imports declined -1.6% leaving them with a trade surplus of $47.3 billion. Exports to the EU surged +17% and +12.3% to the USA. The decline in imports is somewhat related to the drop in commodity prices. Volume of commodity imports rose +18.1% but the average price fell -14.5%.

Recession, what recession? Over the past three months growth in credit card debt has exceeded wage growth in the USA. This is the first time since the Great Recession and suggests the consumer is once again confident enough to borrow more than they make and leverage themselves once again. For the last five years the consumer has been deleveraging and getting rid of debt. Now that trend is reversing. Is it because they are more confident or has the cost of gasoline and food grown to the point they have to charge groceries to eat?

Mark Faber, author of the Gloom, Boom and Doom report reiterated his call for a 10% to 20% correction this fall. His call has become so monotonous that nobody really believes him anymore. Eventually he will be right but even a stopped clock is right twice a day.

Italy's economy declined -0.2% last quarter and that put it into a technical recession for the third time since 2007. Actually Italy's economy has declined 11 of the last 12 quarters so in reality it is a depression more than a recession. The decline has wiped out the prior 14 years of growth. Italy's problem is excessive regulation. It is hard to start a business and once started you can't fire employees. If you hire somebody you better like them a lot because you are stuck with them until they quit.

The number of stocks in the S&P-500 trading above their 50-day average declined to 23% and the lowest reading in more than a year. The number rebounded to 35.4% at the close on Friday but that is still very low. This would suggest serious oversold conditions and indicate there could be a continued bounce in our future.

Malaysian Airlines is being sold to the Khazanah Nasional Bhd sovereign wealth fund for $429 million. The fund already owned all but 30.6% of the airline. It will now become a national airline after the loss of two planes back to back over a 4 month period. The fund said the airline will require substantial funding to rebuild it into an effective operational company. Passenger traffic has dropped significantly after the twin disasters.

McDonalds (MCD) same store sales declined -2.5% in July matching the largest decline in a decade. Sales in the U.S. fell -3.2% and -7.3% in Asia. McDonalds menu has been challenged by numerous competitors offering healthier food and a broader menu. Also burger joints like Smashburger and Five Guys are exploding across the country. McDonalds and YUM Brands both suffered in Asia after a common supplier was found to have shipped them out of date meat that forced the companies to remove some items from the menu until alternate suppliers could be found.

Apple products were dropped from the approved list for government buyers in China. Apple failed to submit documents that included a pledge not to violate state or public interests. The documents would also have required Apple to submit detailed product information such as engineering details, product components and schematics. China is concerned U.S. products have embedded security hacks that will allow the NSA to eavesdrop on electronic communications. Ten Apple products including iPads and Macs were dropped from the list.

Putin announced bans on food and agricultural products from the U.S. and EU in retaliation for the sanctions. Almost immediately border guards began turning back trucks from Lithuania and Estonia loaded with cheese, yogurt and meat. Along with Latvia and Poland the Baltic states are heavily reliant on exports to Russia with those exports accounting for almost 2.5% of their GDP. Russia received 19.8% of Lithuania's exports in 2013, Latvia 16.2%, Estonia 11.4%, Poland 5.3% and Finland 9.6%. The sudden surplus of food products means food prices are going to get a lot cheaper in those countries as the excess supplies are dumped into the market. That may be good news for consumers but bad news for farmers.

Ukraine is threatening to cut off oil and gas supplies headed to Europe from Russia. Ukraine is no longer receiving gas for use in the Ukraine since Russia stopped exports to Ukraine in June. However, there are multiple pipelines across Ukraine that transport oil and gas to Europe. The Ukraine is considering a partial or complete ban on the transit of "all resources" across its territory in retaliation for Russian support of the rebels and the ban on food imports from Ukraine. More than 86.1 billion cubic meters of natural gas and 15.6 million metric tons of oil were shipped across Ukraine in 2013. A halt of this magnitude would be severely damaging to the Russian economy. The country is also considering a ban of Russian airline flights over Ukraine territory.

The news coming out of Russia is of course the exact opposite of reality. Sergei Glazyev, an advisor to Putin, said the U.S. "hawks" are "setting the world ablaze" and "provoking a global conflict" with the "aim of establishing control not only in Europe but also in Russia."Glazyev has prepared a list of 15 proposals to "counter the attacks against Russia" after Putin invited the Ukraine and its 40 million citizens into a trading bloc to rival the EU. Russia can't go it alone against the U.S. and must create an "anti-war coalition" to check the "U.S. aggression."

Russian strategic nuclear bombers conducted at least 16 incursions into northwestern U.S. air defense identification zones over the past ten days. This was an unusually sharp increase in aerial penetrations according to U.S. defense officials. The unusual number of flights by Russian Bear bombers prompted the scrambling of U.S. jet fighters on several occasions. During one incursion near Alaska a Russian intelligence gathering jet was detected along with the bombers. These flights are a blunt warning by Putin for the U.S. to stay out of the Ukraine situation. Putin believes President Obama is weak and he is trying to intimidate him into inaction with these flights.

The IRS is missing emails from the seven people in charge of the approval of tax exempt status of conservative organizations. Reportedly each of their hard drives failed about the same time Congress began looking into complaints about harassment. The EPA also "lost" emails that were the target of a Congressional investigation. Last week we learned that the Health and Human Services (HHS) department in charge of the roll out of Obamacare told the House Oversight Committee that the emails on the roll out had been deleted. The claim by Marilyn Tavenner at 5:PM on Thursday came 10 months after those emails were subpoenaed by Congressional investigators. Adding in the missing emails from the HHS that means emails from more than 20 witnesses under subpoena by Congress have been "lost or destroyed." These emails are supposedly protected by Federal laws on records retention.

It defies logic that emails for so many key people have been accidentally lost or destroyed in violation of Federal law. In each of the cases the loss of the emails were not disclosed until months or even years after they were requested by Congress. Only after the witnesses could stall no longer did they disclose the emails were missing. That homework eating dog must be getting really fat on his new email diet.

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

"The only thing that stands between a man and what he wants from life is often merely the will to try for it and the faith to believe that it is possible."

Richard Devos


Index Wrap

Naw, It's Only a Correction!

by Leigh Stevens

Click here to email Leigh Stevens

No sooner than the Market had a 3-4 percent correction, after gaining 46% in the S&P 500 (SPX) from a mid-November 2012 Closing low, then there were some predictions of a Bear Market. Part of the problem is our media talking heads look at the Dow now being near unchanged for 2014 but a bit dumb as a predictor of much.

Now there has been a tremendous gain over the past two years and the aforementioned SPX is as 'overbought' by some measures as the Index was at the double tops of Sept. 2000 and October 2007. The bear markets that followed those tops took SPX down approximately 725 and 780 points respectively.

By the way, the predictions I saw of the U.S. heading into a bear market were made by 'technicians' based on such factors as certain bearish divergences at the last top, significant 'divergent' trends between major indices (S&P and Dow versus Nasdaq versus the Russell), and extreme bullish sentiment among investment advisors. I will respond more on such technical aspects in an upcoming Trader's Corner article.

A 'technical' point to be made here is that the last bear markets occurred after SPX formed the 'mother' of all technical indicators so to speak, a double top; not only a double top but one separated by a number of years which is the most potent of tops in the same area.

A 'fundamental' point to also be made is that bear markets occur in recessionary periods. They may START of course before an actual recession begins. But, if we look at what's out there on the horizon, it's hard to see how we would have conditions ahead like the economic downturn that 9/11 contributed to in 2001 for the 2000-2002 bear market or the 'great' recession after the mother of all bubbles in the 2007-2009 bear market.

I'm not going beyond sort of 'think about it' given cheap money, more or less steady job growth, a big upswing in M&A (Mergers and Acquisitions) in 2014, etc. as to WHAT is out there that would throw the U.S. into recession. Events not imagined ahead could do it of course. P/E multiples may be too high for small to moderate economic growth, but that's a matter of a Market correction and not something fueling a bear market.

Last, but not least, as a trader, I look at price swings that I can TRADE, end of story. And, so far the biggest retracement of its last upswing is seen in the small cap Russell 2000 (RUT) and, with a bear flag formation seen in the RUT daily chart, the Index looks likely to retrace ALL of its last run up; e.g., back to the 1080 area.

There's probably a lower low ahead on the S&P and Dow and also in the Nasdaq which has so far only retraced a 'minimal' 25% of its last advance, at least in the big cap Nas 100 (NDX). Another dip doesn't make for a bear market. A bear market IS in the cards no doubt sometime ahead sure as night follows day, but trading wise what we see now doesn't have to push traders into any paralysis. We need price movement and trends we can trade is all.

More on the trend picture, support and resistance and price objectives are noted in my index commentaries below.



The S&P 500 (SPX) Index is bearish on a short term basis; the intermediate trend would turn down on a break of the last big low just under 1820. What I tend to focus in corrections is how much is the retracement of the last advance; e.g., is it a 'minimal' 25-38%, a fairly 'normal' 50% correction or a deeper 62-66% give back. Any of the foregoing retracements, coupled with an oversold condition, an increase of bearishness and reversal type price action, could suggest a bullish play.

So far SPX has retraced just shy of 50% of its April-July advance and reached an oversold extreme basis its daily chart. Worst case in my mind is another leg down equal to the first with SPX dipping to 1840 or a bit lower. At this point I see further downside potential to the 1900-1880 zone only. Moreover, bearish sentiment got extreme a week ago Friday. Traders are still mostly bullish but are more nervous, especially in our summer period of lower volumes. We could see another bearish scare and that's helpful if looking for this as part of a marker for a low.

Near support is suggested in the 1920 area, then at 1900, extending to the 1880 area. Near resistance at 1940; next resistance comes in around 1960.


The S&P 100 (OEX) is bearish on a short-term basis after the break of the steep mid-April to late-July up trendline as highlighted still on my chart. OEX's retracement of the advance during this period to date has been just shy of half of that run up. In fact I've suggested as a first technical support, a retreat to the 50% retracement line, in the 845 area. Next support is projected at OEX's longer-term up trendline, currently intersecting in the 833 area.

I can't point to specific indicator or pattern but my hunch is that after a further rally attempt, OEX will go to a lower low for the move. It depends also on what happens at resistance, first at 860 an then 10 points higher, at 870. A sustained move back above the 50-day moving average, currently at 866, would be a bullish plus.

OEX got oversold 'enough' and retraced enough to set up a next rally, but I'm taking a wait and see on any trade action.


The Dow 30 Average (INDU) rebounded strongly on Friday and right from its 200-day moving average, which is a bullish development in looking for a possible quick end to the current correction. INDU was alone in falling as far as to this longer-term average, which is well watched in the investment community. Moreover, the Dow rebounded back above its longer-term up trendline in another bullish plus for the chart; well, assuming the Average can now stay above this prior technical support.

You may recall that as the narrow trading range went on between 17000 and 17130 in INDU, up to and during this period I noted that there were fewer and fewer of the 30 Dow stocks in strong uptrends; and a type of technical 'divergence'. It's relatively easy to set up weekly charts of the 30 Dow stocks and quickly peruse them on a weekly basis. Doing so can offer some key insights as to the potential for a counter-trend move.

Key near resistance is at 16600. Next resistance comes in at 16800 and a bit above; resistance implied by the 50-day average comes in at 16860 currently.

Near INDU support is highlighted at 16350 and extends to around 16240; 16242 represents what would be a 50% retracement of the February to July advance. As the Dow was not holding up as well as the other major indices, I looked at the retracement picture for a longer time horizon; I used retracements in the S&P dating from their April lows. The bullish or bearish outlook-tally of the individual 30 stocks of the Dow is too mixed to give a meaningful evaluation of how many look to be bottoming or could fall further. Stay tuned!


The Nasdaq Composite Index (COMP) turned bearish after forming a (relatively) minor double top. COMP's steeper up trendline was pierced an the recent sideways consolidation could be a bear flag formation, with another downswing ahead that would take the Index down further, even back to ITS 200-day moving average. This is one scenario. Another is a decisive upside penetration of 4400. Next resistance then is seen at 4450.

On the bearish side, a break of 4300 could lead to at least a retest of potential support at 4250, extending to the low-4200 area; 4215 represents a 50% retracement of COMP's prior advance.

COMP did not fall to a 'fully' oversold reading in the 13-day Relative Strength Index or RSI, which it might yet, assuming there's another down leg to come. Trader 'sentiment' might see another fall in bullishness, pulling my CPRATIO line down to what I consider to be a different type of 'oversold' extreme.


The Nasdaq 100 (NDX) chart continues to have a short-term bearish pattern. Key near support is at 3850 and represents a very 'minimal' 25% retracement of NDX's April-July advance. I can envision another dip that would test trendline support in the 3770 area.

Conversely, a sustained move back above 3900 resistance would put the big cap Nas 100 back in position to retest its 3950 'breakdown' point.

I'm unconvinced that the 50-day moving average will continue to 'act as' as a key support as it has done just recently. NDX presents a still-mixed picture. There may be some further selling pressure in tech, which would then likely cause more put activity by traders and 'set up' a next rally. One leg down in NDX, not a second shoe to fall? Maybe, but not predictable just yet.


The Nasdaq 100 tracking stock (QQQ) has a slightly different pattern in that a key support/up trendline that has been traced out in the QQQ tracking stock is such that recent action has pierced that line. 94 is showing up as a key support but I'm not convinced that the Q's are out of the bearish woods. There's significant complacency by traders/investors regarding the further upside potential for big cap Nasdaq stocks.

Very near resistance is at 95.1, at the previously broken up trendline and not far under the 21-day moving average (at 95.7). Consider next upside resistance as 95.7-96.0

Bearishness and daily trading VOLUME will likely spike if there's a decisive downside penetration of 94, which is now established in traders' minds as support. I have rarely seen key upside turnarounds in this EFT if there was NOT a volume 'climax' or a noticeable jump in volume relative to prior average volume numbers.

The key volume indicator for me, represented by the On Balance Volume (OBV) line, keeps falling as prices trend sideways offering a possible further example of diverging chart (price) action versus other technical aspects.


The Russell 2000 (RUT) chart continues bearish and RUT has recently traced out a 'picture perfect' (straight out of my technical analysis book for sure!) 'bear' flag. I'll be surprised if RUT doesn't take another dive based on that pattern, with a move down to 1100 support. If the Index falls to this area it would almost be surprising if RUT didn't also re-test its prior low in the 1083 area.

I'm wrong about the bearish 'flag' pattern if RUT instead climbs back above 1140 and finds support in this area subsequently. RUT initially fell well below its 200-day average and if this pattern continues it reinforces the ideal that the small cap investment 'theme' is not in favor this year. Next resistance is highlighted at 1160, which was a bearish 'breakdown' point on the initial attempt for the Russell to regain its 50-day moving average.


New Option Plays

Using The Pullback

by James Brown

Click here to email James Brown


Cummins Inc. - CMI - close: 141.39 change: +2.02

Stop Loss: 138.90
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 1.6 million
Entry on August -- at $---.--
Listed on August 09, 2014
Time Frame: 10 to 14 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
Sometimes investors overreact to news and the stock reaction can generate an opportunity. That's what we are seeing in CMI today.

Cummins Inc. was founded back in 1919 by its namesake Clessie Lyle Cummins. The company has four businesses: engines, power generation, components, and distribution. They're headquartered in the state of Indiana with about 48,000 employees worldwide. They do business in 190 countries.

According to the company website CMI describes themselves as "a corporation of complementary business units that design, manufacture, distribute and service diesel and natural gas engines and related technologies, including fuel systems, controls, air handling, filtration, emission solutions and electrical power generation systems."

CMI reported Q1 earnings on April 29th. They crushed the earnings number and beat the revenue estimates with revenues up +12.3% for the quarter. CMI management raised their 2014 guidance by +6% to +10% (about $18.3-19.0 billion).

When CMI reported Q2 earnings on July 28th Wall Street was expecting a profit of $2.39 a share on revenues of $4.82 billion. CMI beat those numbers with a profit of $2.43 on revenues of $4.84 billion. Profits were up +10.5% from a year ago. Management raised their 2014 guidance again. This time they see revenues up +8% to +11% in 2014. That's about $18.7-19.2 billion.

CMI's Chairman and CEO Tom Linebarger said, "Demand is growing in on-highway markets in North America this year as the economy improves and we have gained market share in medium duty truck and bus markets." Their North American sales surged +14% last quarter versus a -1% pullback in international sales.

That's two quarters in a row that CMI has beat Wall Street's top and bottom line estimates and raised guidance. Yet the stock was crushed following the July earnings number. It appears the upgraded revenue guidance wasn't good enough and analysts were expecting more.

CMI reported sales of $17.3 billion in 2013. Now they're approaching $19 billion. They've already approved a $1 billion stock buyback program to replace their current $1 billion buyback program once it's complete. They have also raised their dividend this year.

The company has rising sales, rising market share, rising profits, and rising dividends. It has a trailing P/E of 17 and a forward P/E of 12.8. That sounds like a pretty good combination.

Technically the stock has fallen to its long-term trend line of support (see the weekly chart below). Last week shares have started to rebound from this trend. However, on a short-term basis the breakdown under its 200-dma looks pretty ugly. The bounce last week failed near $144.00 and its 10-dma. Therefore tonight we are suggesting a trigger to buy calls at $144.25.

FYI: Investors should note that Deere (DE) reports earnings on August 13th. While not exactly in the same business as CMI their results might influence CMI's performance.

Trigger @ $144.25

- Suggested Positions -

Buy the 2015 Jan $150 call (CMI150117C150) current ask $4.80

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

Weekly Chart:

Annotated Chart:

Transportation ETF - IYT - close: 144.93 change: +1.83

Stop Loss: 141.90
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 276 thousand
Entry on August -- at $---.--
Listed on August 09, 2014
Time Frame: 8 to 12 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
In tonight's market commentary Jim pointed out the bounce in the Dow Jones Transportation Average ($TRAN). The transportation group has been leading the market higher for months with a series of new all-time highs. The group was hit with some profit taking in the last two and a half weeks. Even with a 500-point (about -6%) pullback in the $TRAN index it's still up +9.3% for the year. Now that group is bouncing.

One way to play the transports is the iShares transportation ETF (symbol: IYT). This ETF tries to mimic the performance of the Dow Jones Transportation Average. The top ten holdings in this ETF are:

(FDX) FedEx - delivery services
(KEX) Kirby Corp. - marine transportation
(KSU) Kansas City Southern - railroads
(UPS) United Parcel Service - delivery services
(NSC) Norfolk Southern - railroads
(UNP) Union Pacific Corp. - railroads
(CHRW) C.H. Robinson Worldwide - trucking
(R) Ryder System Inc. - transportation services
(CNW) CON-WAY Inc. - trucking
(JBHT) J.B. Hunt Transport Services - trucking

If the U.S. economy continues to improve as so many expect it will then the transports should be a major beneficiary. We should take advantage of this pullback in the transports and buy this bounce from support.

The IYT has been bouncing from technical support at its rising 100-dma for months. It bounced off the 100-dma in October 2013, February 2014, April 2014, and almost hit it again on Friday morning before bouncing.

Tonight we're suggesting traders buy calls now following Friday's bouncing with a stop loss at $141.90, just under the 100-dma. More conservative traders may want to consider an alternative entry point and wait for a rise past $146.25 instead.

*buy calls on this bounce, no trigger*

- Suggested Positions -

Buy the 2015 Jan $150 call (IYT150117C150) current ask $4.20

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

Annotated Chart:

Weekly Chart:

In Play Updates and Reviews

The Bulls Return On Friday

by James Brown

Click here to email James Brown

Editor's Note:

After a choppy week full of negative headlines the dip-buyers returned on Friday.

Our PVH trade was stopped out.

Current Portfolio:

CALL Play Updates

Gilead Sciences, Inc. - GILD - close: 92.45 change: +0.40

Stop Loss: 87.99
Target(s): To Be Determined
Current Option Gain/Loss: + 0.0%
Average Daily Volume = 14.1 million
Entry on July 29 at $92.25
Listed on July 28, 2014
Time Frame: 8 to 12 weeks
New Positions: see below

08/09/14: GILD has bounced three times in the last several days near $91.00. The stock rebounded off that area on Friday morning to close up +0.4%. This marks the eighth weekly gain in a row for GILD. There is short-term resistance near $93.00. Investors might want to wait for a close above $93.00 before considering new positions.

Earlier Comments: July 28, 2014:
GILD seems to be everyone's favorite biotech stock. I only hear bullish opinions about the future of the company, and for good reason. They have some pretty amazing treatments with products for HIV/AIDS, liver diseases, oncology, cardiovascular, respiratory, and more. GILD has essentially revolutionized how we treat major diseases like HIV and Hepatitis C.

According to the company website, "Gilead Sciences, Inc. is a research-based biopharmaceutical company that discovers, develops and commercializes innovative medicines in areas of unmet medical need. We strive to transform and simplify care for people with life-threatening illnesses around the world. Gilead's portfolio of products and pipeline of investigational drugs includes treatments for HIV/AIDS, liver diseases, cancer and inflammation, and serious respiratory and cardiovascular conditions."

This year everyone has been raving over GILD's hepatitis C treatment called Sovaldi. Hepatitis C is a form of viral hepatitis that causes chronic inflammation of the liver. About 185 million people currently suffer with hepatitis C. Previously the most common treatment for hepatitis C had serious side effects and was less than 50% successful. GILD changed that with their Sovaldi drug that not only treats the symptoms but actually cures the patient. The company has drawn some negative publicity over the cost since GILD charges $84,000 for a 12-week course of Sovaldi in the United States. The fact that 80% to 90% of patients who take Sovaldi are cured is a major milestone.

The Financial Times noted that before Sovaldi the impact of hepatitis C in the U.S. took a heavy toll on the healthcare system. The disease can lead to liver failure and cancer, both of which cost significantly more than Sovaldi's $84,000 price target. Hepatitis C is the leading cause for liver transplants in the U.S., which can cost a minimum of $145,000. One consulting firm estimated that the annual cost of hepatitis C to the U.S. healthcare system was going to surge from $30 billion to $85 billion in the next twenty years. Sovaldi has the potential to change. that.

Stocks move on earnings and GILD has plenty of them. They company last reported on July 23rd. Wall Street was expecting a profit of $1.80 a share on revenues of $5.86 billion for the second quarter. GILD delivered a profit of $2.36 a share with revenues soaring +136% to $6.53 billion. Last quarter Sovaldi accounted for $3.5 billion in sales. Management issued bullish guidance on revenues and margins.

GILD has also had good news with both the FDA and the European Committee for Medicinal Products for Human Use approving GILD's Zydelig treatment for chronic lymphocytic leukemia and follicular lymphoma. The European committee's decision will now be sent to the full European Commission and if approved will open up Zydelig to all 28 countries in the EU.

The outlook is pretty bullish for GILD. Traders just bought the dip and shares closed at all-time highs. Today's intraday high was $91.73. We are suggesting a trigger to buy calls at $92.25. We are not setting an exit target tonight but I will point out the point & figure chart is bullish with a $106.00 target. I am concerned that the $100.00 level could be temporary resistance for GILD. We'll have to wait and see.

- Suggested Positions -

Long Oct $95 call (GILD141018C95) entry $3.70*

07/29/14 triggered @ 92.25
*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


LyondellBasell Industries - LYB - close: 108.37 change: +0.44

Stop Loss: 105.99
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 2.5 million
Entry on August -- at $---.--
Listed on August 04, 2014
Time Frame: 8 to 12 weeks
New Positions: Yes, see below

08/09/14: Last week shares of LYB were slowly climbing up its rising 10-dma. The stock settled on this short-term support on Friday. There is still overhead resistance in the $110.00 area. Our trigger to buy calls is at $110.50.

Earlier Comments: August 4, 2014:
One way to play the shale-gas boom in the U.S. is plastics. The bloom of natural gas production has been a huge blessing for LYB. According to the company's website, "We participate in the entire petrochemical value chain, from refining to specialized petrochemical product end uses. We are the largest producer of polypropylene and polypropylene compounds; a leading producer of propylene oxide, polyethylene, ethylene and propylene; a global leader in polyolefins technology; and a producer of refined products, including biofuels. Additionally, LyondellBasell is a leading provider of technology licenses and a supplier of catalysts for polyolefin production."

The recent spike in LYB's stock price was a reaction to better than expected earnings results. Wall Street was looking for LYB to deliver a profit of $1.93 a share on revenues of $11.5 billion. LYB surpassed expectations with a profit of $2.22 a share with revenues rising +9.1% to $12.12 billion.

The stock has been an earnings machine with rising earnings the last four years in a row. Analysts are now estimating LYB will see earnings rise 11% in 2014 and 16% in 2015. Jefferies recently raised their price target on LYB from $120 to $125 as they upgraded their EPS estimates on the company.

After a strong rally from $100 to $110 in mid July the stock was short-term overbought and due for a pullback. Traders jumped in to buy the dip near LYB's simple 10-dma last week. Now LYB is rebounding higher.

More aggressive traders may want to buy the bounce today. We are suggesting a trigger to buy calls at $110.50 since the July high is $110.38.

FYI: For more background on the LYB story Forbes.com has a great article that you might find interest. You can read it here.

Trigger @ $110.50

- Suggested Positions -

Buy the DEC $115 call (LYB141220C115)

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


Palo Alto Networks, Inc. - PANW - close: 80.19 change: +0.23

Stop Loss: 76.75
Target(s): To Be Determined
Current Option Gain/Loss: -10.9%
Average Daily Volume = 1.3 million
Entry on August 04 at $80.50
Listed on July 30, 2014
Time Frame: Exit PRIOR to earnings on Sept. 9th
New Positions: see below

08/09/14: PANW spent last week churning sideways near its 50-dma and the $80.00 level. You can see on the daily chart that the 10-dma has become short-term overhead resistance. Thursday's intraday high was $80.97. Traders may want to wait for a rise past $81.00 before considering new positions. Keep in mind that we will likely exit prior to PANW's earnings report on September 9th.

Earlier Comments: July 30, 2014:
Customer data mining is big business. It doesn't matter of the company is online or a bricks and mortar store they want to know all they can about you. Who are you? How old are you? What zip code do you live? They track your purchases and store your credit card data.

Last year retail giant Target (TGT) disclosed a cyber breach that affected up to 110 million customers to potentially having their credit card data stolen. Months later, Target's president and CEO resigned over the fiasco. Target isn't the only one being targeted. The University of Maryland recently disclosed an online security breach. The number of cyber attacks on small business doubled last year.

Sadly it's only getting worse. The Justice Department called the online landscape for cyber threats and hacking extremely dangerous. They used the term "pre-9/11 moment" suggesting that any day now someone could launch a massive cyber attack. The government is worried about protecting our infrastructure and electrical grid. Corporate America wants to protect their data (and your data). That's why cyber security is big business and getting bigger.

PANW is making a splash in the security world. The stock IPO'd in 2012 and while it has been a rocky ride so far the company seems to have found its groove. Founded in 2005 and headquartered in Santa Clara, California, PANW describes their company as, "leading a new era in cybersecurity by protecting thousands of enterprise, government, and service provider networks from cyber threats. Unlike fragmented legacy products, our security platform safely enables business operations and delivers protection based on what matters most in today's dynamic computing environments: applications, users, and content."

More than 70 of the Fortune 100 companies use PANW's products and services. In 2013 PANW saw revenues grow +55% year over year, outpacing their rivals. They have added more than 1,000 customers per quarter for the last ten quarters in a row. PANW most recently reported earnings on May 28th and said it was their "highest rate of new customer acquisition in our history and now serve more than 17,000 customers."

Another important event last quarter was the settlement of a three-year patent lawsuit with rival Juniper Networks (JNPR). Resolving this issue has removed a significant black cloud over PANW.

Wall Street has noticed. The last few weeks have seen a number of price target upgrades. Deutsche Bank upped their PANW price target to $95.00. Goldman Sachs raised their price target to $97.00. Morgan Stanley is forecasting at PANW price target of $105.00.

Shares of PANW have rallied back toward their all-time highs set just five weeks ago. A bullish breakout appears imminent. Tonight we're suggesting a trigger to buy calls at $84.55. More conservative investors might want to consider waiting for a new high above $85.80.

Keep in mind that PANW is scheduled to report earnings on September 9th and we will likely exit prior to the announcement.

- Suggested Positions -

Long SEP $85 (PANW140920C85) entry $3.20*

08/04/14 triggered @ 80.50
*option entry price is an estimate since the option did not trade at the time our play was opened.
08/02/14 Strategy update: Move the entry trigger from $84.55 to $80.50 and move the stop loss from $79.65 to $76.75.
Adjust the option strike from Sep $90 call to Sep $85 call
Option Format: symbol-year-month-day-call-strike


Western Digital Corp. - WDC - close: 101.30 change: -0.30

Stop Loss: 99.35
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 2.0 million
Entry on August -- at $---.--
Listed on August 05, 2014
Time Frame: 8 to 12 weeks
New Positions: Yes, see below

08/09/14: WDC is still hovering under resistance in the $103.00 area. We are waiting for a bullish breakout higher. Our suggested entry point is $103.05.

Nimble traders may want to try and buy calls on a dip or a bounce near the $100.00 mark.

Earlier Comments: August 5, 2014:
Hard drives are a critical piece for any computer system. Today hard drives or hard disk drives are not just for computers. They are in tons of consumer products including DVRs, home entertainment centers, game consoles, laptops in addition to your PC. Plus they are a significant portion of the data center business and the cloud computing phenomenon.

A few years ago WDC was neck and neck in a race with its rival Seagate (STX). They were essentially a duopoly in the hard drive business. WDC has slowly stolen market shares from STX thanks to a better product. The outer edge of a normal 7200 RPM hard drive is moving at 67 miles an hour. Eventually something is going to break. Hard drives have a 5% failure rate in the first year. That jumps to almost 12% in the first three years and about a 20% failure rate in four years. Some of you are reading this right now and wondering how long you've had your current hard drive. Whatever the answer is, you'd better back up your data now.

Seagate's drives have a 26.5% failure rate in the first three years. WDC's managed to cut its failure rate to just 5.2% in the first three years. That is significant, especially if you're an enterprise customer with a ton of servers. WDC has been developing a stronger solid-state drive for its big business clients. All the data on the cloud has to sit somewhere. The sea change movement to put more and more data on the cloud will continue to drive need for more storage.

The death of the PC was been a long-term issue for hard drive makers. WDC has developed a strong non-PC related sales that now account for more than 50% of its business. On the plus side earlier this year Intel (INTC) reported a strong surge in PC sales so the death of the PC might be a little premature.

WDC just reported earnings on July 30th and it was a good quarter. For WDC it was their fourth quarter of 2014. Wall Street expected a profit of $1.74 a share on revenues of $3.6 billion. WDC delivered $1.85 a share with revenues of $3.65 billion.

The company said consumer electronics and gaming was a big performer with a +67% surge to 10.9 million units. Their notebook hard drive shipments fell -5% to 22.9 million units but that was better than analysts' expectations. Altogether WDC shipped 63.1 million hard drives with an average selling price of $56 and a gross margin of 28.2 percent.

WDC has also been actively buying back shares. Last quarter the company repurchased 3.2 million shares and for the their fiscal year they bought 10.3 million shares for a total of $816 million.

WDC's guidance was rather lackluster but shares held up well. Barclays raised their outlook for WDC following the earnings report and upped their price target from $98 to $117. The Point & Figure chart is more bullish and currently forecasting at long-term target of $145. A move over $104 would produce a new triple-top breakout buy signal on the P&F chart.

WDC appears to have short-term resistance in the $102.50-102.80 zone. Tonight we're suggesting a trigger to buy calls at $103.05.

Trigger @ $103.05

- Suggested Positions -

Buy the Oct $105 call (WDC141018C105)

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


PUT Play Updates

Pall Corp. - PLL - close: 78.76 change: +1.56

Stop Loss: 80.35
Target(s): To Be Determined
Current Option Gain/Loss: + 9.6%
Average Daily Volume = 437 thousand
Entry on July 30 at $79.45
Listed on July 29, 2014
Time Frame: Exit PRIOR to earnings on August 28th
New Positions: see below

08/09/14: A lot of oversold stocks rallied on Friday and PLL was one of them with a +2.0% gain and a close above short-term resistance at its 10-dma. The next level of what should be overhead resistance is the $80.00 mark.

Please note that our time frame has changed. PLL is scheduled to report earnings on August 28th. We do not want to hold over the announcement.

We're not suggesting new bearish positions at this time.

Earlier Comments: July 29, 2014:
PLL is in the industrial goods sector. It is considered part of the diversified machinery industry. They market to a lot of different customers around the world. PLL operates in the aerospace and defense industry, the animal health, biopharma, food and beverage, fuels and chemicals, graphic arts, laboratories, machinery and equipment, medical, microelectronics, power generation, and water treatment.

The company describes themselves as, "Pall Corporation is a filtration, separation and purification leader providing solutions to meet the critical fluid management needs of customers across the broad spectrum of life sciences and industry. Pall works with customers to advance health, safety and environmentally responsible technologies. The company's engineered products enable process and product innovation and minimize emissions and waste."

PLL's latest earnings report on May 29th was a disappointment. Wall Street was expecting a profit of $0.83 a share. PLL delivered 81 cents. Revenues did come in better than expected. Guidance was only in-line with prior estimates. The results failed to generate any investor excitement for the stock.

Quite the opposite seems to have happened. PLL produced what appears to be a triple-top pattern from late May through June. Then in July the stock has collapsed through several layers of support. Today we are seeing PLL breakdown under significant support at the $80.00 mark, support at its 300-dma, and support at its long-term trend line of higher lows (see weekly chart below).

Today's intraday low was $79.65. Tonight we're suggesting a trigger to buy puts at $79.45. We're not setting an exit target yet but I will point out that the point & figure chart is bearish and forecasting at $72.00 target.

Keep in mind that PLL is scheduled to report earnings again in very late August. There is no confirmed date yet. We will likely exit prior to the announcement.

- Suggested Positions -

Long Sep $80 PUT (PLL140920P80) entry $2.60*

08/09/14 updated time frame. PLL scheduled to report earnings on Aug 28
08/06/14 new stop @ 80.35
07/30/14: triggered @ 79.45
*option entry price is an estimate since the option did not trade at the time our play was opened.
Option Format: symbol-year-month-day-call-strike



PVH Corp. - PVH - close: 114.43 change: +4.89

Stop Loss: 111.55
Target(s): To Be Determined
Current Option Gain/Loss: -36.5%
Average Daily Volume = 821 thousand
Entry on August 04 at $108.00
Listed on August 02, 2014
Time Frame: 4 to 6 weeks, exit ahead of earnings in mid September
New Positions: see below

08/09/14: A lot of stocks that had been underperforming the market suddenly soared on Friday. PVH is one of them. I do not see any company-specific news to account for the rally on Friday. The stock does not have a lot of short interest so it seems unlikely to be a short squeeze. Traders bought the dip about $109.50 about 10-12 minutes into the session and then rallied the rest of the day on Friday. Shares sliced through the 10, 20, 30, and 40-dma. PVH happened to stop at resistance in the $114.50-115.00 zone. Our stop loss was hit Friday morning at $111.55.

- Suggested Positions -

Sep $105 PUT (PVH140920P105) entry $3.20 exit $2.03* (-36.5%)

08/08/14 stopped out @ 111.55
*option exit price is an estimate since the option did not trade at the time our play was closed.
08/06/14 new stop @ 111.55
08/04/14 PVH opened @ 108.00
Option Format: symbol-year-month-day-call-strike