Option Investor

Daily Newsletter, Monday, 8/11/2014

Table of Contents

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

Market Wrap

Market Regains Footing

by Thomas Hughes

Click here to email Thomas Hughes
An apparent reduction in tensions between Russia and the west have helped the market regain some confidence.


Today the market got off on a good foot. The reports of Russian troops leaving the region bordering the Ukraine sent a wave of relief around the globe that started last week and carried around the world and into today. Asian markets, particularly the Japanese Nikkei, had their best day in months. The Nikkei gained 2.38% with other Asian indices doing about half that well. In Europe the relief was equally euphoric and sent those indices higher led by the German DAX 1.9% increase. Early trading here at home was equally positive with the major indices indicated about a half percent higher as the trading day began. The mood was aided by a round of semi positive earnings from some big names like Priceline and AngloGold.

Market Statistics

Although the bulk of earnings season is behind us this week is still relatively full with some high profile names on the list. Today was dominated by Priceline but there are others such as Wal Mart on Thursday. The earnings week is important for the consumer products sector of the economy as many big names are reporting. One reporting today was Sysco, beating on the top line and coming in line with expectations on the bottom. As for economic data there was none to be had today and the rest of the week is fairly light to. At the open the SPX moved steadily upward until hitting the early high at 11:20 just a hair shy of 1945. From there the index drifted back down to find support around 1937, about 4.5 points above last weeks close. Afternoon trading saw the indices tread water between the daily low and near term resistance.

Economic Calendar

The Economy

As per usual on Monday's there was not much in the way of economic data. In fact, there is not a whole lot for the week. Eyes are focused on Treasury Budget and the JOLTs report released on Tuesday. Wednesday US retail sales and business inventories will be followed by jobless claims and import/export prices on Thursday. Friday the week will wrap up with PPI, long term TIC flows, Empire Manufacturing and Michigan Sentiment. Friday being the most important day for data in my view.

Also as usual is the weekly Survey of Business confidence conducted by Mark Zandi and Moody's. This week's summary is much as it has been over the past few months, very upbeat. Again poking its head up is a small note of caution from European and South American businesses but US business remain “upbeat” with a positive view going into next year. Hiring also remains “robust” according to the report and is in line with recent NFP reports.

The Oil Index

Global oil prices were mixed in today's session. WTI gained about a half percent while Brent lost about -0.25%. Both traded in tight ranges as traders await this weeks inventory and economic data as well as how geopolitical events will play out. The Oil Index was mixed as well, first trading higher than last weeks close and then later in the day moving down into the red. The index was up about a half percent or more before meeting resistance at the 1650 level. This is the previous all time intraday high and long term resistance that has been in play for the last two months. Support is just below the current levels at the previous all time closing high. The indicators are bearish at this time but consistent with a test of support along the current levels. A break below 1625 could take the index down to the long term trend line along the 1575 region while a break above could go to 1700 or 1725 in the near term. The long term trend is still up and the index is still consolidating above long term support.

The Gold Index

Gold prices fell slightly today as Russian troops reportedly move away from the regions bordering the Ukraine. Prices fell about -$2 and traded in a very tight range as traders weigh the chances of this development leading to a reduction in tension or deteriorating into a new standoff as has happened before. Today's price action was just under the $1310 level and a previous area of resistance but the tight range shows that the market does not quite believe the news.

The Gold Index traded to the upside, in line with equities, and aided in part by earnings from AngloGold. The index gained more than 1% to trade in the middle of a long term resistance zone formed last year as the index broke out of the long term pennant formation. This formation and resistance level was later confirmed this year on a retest. The zone is between the $100 and $105 levels. The indicators are bullish in the long but declining and divergent while short term daily charts are indicating a weak buy. The long term trend is down but the near to short term is less clear. There are some signs of support over the last year, along the $85 level, but with the index 15% above that level there are also signs of weakness that indicate the index could retest that support. I think in the end it will come down to gold prices.

AngloGold Ashanti LTD reported earnings today. This is the largest gold producer operations on three continents and ten countries. The company reported a 17% increase in output based on improved operation and lower-cost production in two of its newer mines. Earnings, while reversing a loss from the previous comparable quarter, were still below expectations and largely driven by reduction in marketing and exploration expenses. On an all-in basis costs dropped -19% to $836/oz while average realized price fell roughly half that amount. Total production in the quarter totaled 1.098 million ounces and the company says it is on track to deliver the same results this quarter. All in costs for this quarter are expected in a range just above currently reported cost.

Basically, the company was able to increase production, primarily because of two new mines, and reduce costs, mainly through non-gold producing activities while expecting the average cost of gold recovery to remain at or slightly above current levels. My take, if gold prices remain at or near current levels AU should meet or fall slightly short of revenue and earnings expectations for the current quarter. Today the stock rose more than 1% in intraday trading but met resistance at the $18 level. The stock has been trading sideways for at least 12 months with indicators that support the same. A break above $18 could go to $19 before meeting resistance while a drop below the short term moving average could find support at $17. Obviously, an increase or decrease in gold prices would have an affect on earnings projections and remains a driver for the miners.

In The News, Story Stocks and Earnings

Priceline reported earnings today that beat expectations but revealed that plans for investment would impact earnings going forward. The market at first did not like this news but soon found reason to reverse the early sentiment. The company reported earnings of $12.51 per share versus an expected $12.09. This is on the back of an increase in bookings, a good sign for Priceline and the economy in general. The stock opened lower, traded lower, and then found support sending it back up to make a new five month high. The stock is above a potential support area with weak but bullish indicators. Longer term resistance is about 4% higher than the current levels near $1375.

Sysco, the largest food purveyor on the market, reported earnings in line with estimates on revenue that was slightly above the expectations. The company reported sales increases on a full year and quarterly basis with adjusted earnings per share of $0.50. In the report CEO is cited saying "While business conditions remained challenging for our customers, we experienced improving trends in year-over-year sales and gross profit growth in the last four months of our fiscal year.” The stock responded by trading 3.5% higher today, halting at a long term resistance line set by an interesting candle formation last year.

Sector Watch

Since there are so many consumer products companies reporting this week I thought the Consumer Staples ETF XLP would be a good choice to look at today. The ETF tracks companies ranging from Proctor&Gamble and Colgate to Coca-Cola, Phillip Morris, Wal Mart and CVS. The ETF has been active during the recent pull back and was active today as well. Today's action carried the ETF just over 1% higher to test the short term moving average before falling back from resistance. The indicators are just showing a strong trend following signal as MACD momentum is crossing zero with today's candle. Current resistance is at the moving average and above around $45 on a break. Earnings will be important for direction this week with Thursday as a potential focal point, the day Wal Mart reports.

The Indices

The Dow Transports led the rally today with a gain of 0.79% at the close. The index is bouncing from a recently regained support level but was halted by the short term 30 day EMA. The index is in mid bounce, from a long term trend line, and indicated higher in the near term. Momentum is still bearish but in sharp decline while stochastic is showing a weak bullish crossover. The index has been a leader of the market for some time and may be back. The index still faces resistance but it appears as the long term trend is taking over. It is at least offering some near term support.

The tech heavy NASDAQ Composite was runner up in today's rally. The index gained 0.70% in today's action, regaining the short term moving average and a long term support level. This is a good sign for the bulls and could lead to some follow through buying provided new events don't throw the market off track. The indicators are still bearish at this time but also still consistent with a test of support. There may be more sidewise trading but the long term trend is still up. Now that earnings are more or less over with the longer term risks include economic data with geopolitics still a concern in the near to short term.

The SPX and Dow Jones Industrials brought up the rear in today's race for gains. The SPX leading with 0.29% versus the Dow's 0.09% increase. The broad market S&P 500 gained a little over 5 points, at the close, with intraday highs 8 points above that. The index is continuing a bounce begun at long term support just above a long term trend line but was met by resistance along the 30 day EMA. The indicators are similar to the other major indices in that stochastic is showing an early, weak, trend following crossover while MACD is in in sharp decline from bearish peaks. This set up is stronger than other "weak" signals because price action is so close to the trend line but still needs a confirmation and secondary strong signal to get really bullish. It'll be three weeks before the next round of macroeconomic data unfolds, ending with the NFP. There is room on my chart for the index to move comfortably sideways until then. This is plenty of time for such a signal to occur should the market and the data warrant it. Near term risk is of course Putin, who could cause a drop or a pop depending on what he decides to do tomorrow or the next day.

Today's laggard was the blue chip Dow Jones Industrial Average. The safe haven of dividends was not enough to attract buyers looking for deals in more aggressive investments. The blue chips gained a mere 16 points in today's action, and like the other major indices, met near term resistance at mid day. The index fell from resistance at the previous all time high but I don't think this will prove too strong a level as it was broken down pretty thoroughly before. The indicators are in line with a trend line bounce with stochastic firing off the early and weaker trend following signal. On a longer term basis, the index is back above the long term moving average but still hampered by resistance. A break above 16570 could see the index retest recent all time highs.

Today the market rose on reduced fear. Reduced fear leaves the market open to focus on long term trends. Long term trends are still up with no sign of them diminishing. In fact, if the Moody's Survey of Business Confidence is any indication not only are trends good, they are strengthening and look good to continue on until the end of this year and into next. If this is true then the current trend line bounce is another great entry for short to long term positions. There are some concerns for the near term but for now they are just concerns. They could build into real threats for the technical state of the market but for now I don't see it happening. This week does not have much in the way of long term catalysts but you never know what bit information the market will grab onto. Be on the lookout for retail sales, PPI, Empire Manufacturing, Michigan Sentiment and on Thursday, earnings from Wal Mart.

Until then, remember the trend!

Thomas Hughes

New Option Plays

Biotech Strength

by James Brown

Click here to email James Brown


BioMarin Pharmaceutical Inc. - BMRN - close: 64.93 change: +0.94

Stop Loss: 61.95
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 1.26 million
Entry on August -- at $---.--
Listed on August 11, 2014
Time Frame: 8 to 12 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
BMRN is in the healthcare sector, specifically the biotech industry. According to the company's press release they "develop and commercialize innovative biopharmaceuticals for serious diseases and medical conditions. The company's product portfolio comprises five approved products and multiple clinical and pre-clinical product candidates."

The company's strategy is "providing first-in-class or best-in-class treatments for patients with serious unmet medical needs, optimizing powerful biology with demonstrated potential and development clarity, accelerating approval process, strategic pipeline development."

BMRN's current product portfolio looks like this: VIMIZIM™ for Morquio A syndrome (MPS IVA), Naglazyme® for MPS VI, Aldurazyme® for MPS I, Firdapse™ (currently approved in the EU only) for LEMS, KUVAN® Tablets for PKU.

BMRN lists their current clinical pipeline as follows: PEG PAL for PKU, BMN 673 for genetically defined cancers, BMN 701 for Pompe disease, BMN 111 for achondroplasia, BMN 190 for late-infantile neuronal ceroid lipofuscinosis (CLN2), a form of Batten Disease, BMN 270 for hemophilia A and BMN 250 for Sanfilippo Syndrome or MPS IIIB.

The company is developing a trend of beating Wall Street's earnings estimates. Back in February they reported results that bested analysts' estimates by a wide margin. They did it again in May. Wall Street was looking for a loss of 44 cents on revenues of $145.1 million. BMRN reported a loss of just 1 cent with revenues rising +18.5% to $151.6 million. Their most recent earnings report was July 30th. Analysts were expecting a loss of 41 cents on revenues of $159.2 million. BMRN announced a loss of 23 cents with revenues soaring +40.1% to $191.7 million. Furthermore BMRN management raised their 2014 guidance following the July 30th report.

The stock peaked back in February this year. When the market corrected in March most of the high-growth and momentum names were crushed. BMRN was in that group that saw their stock hammered lower. Shares fell from almost $85 to $55.00. Fortunately the $55.00 level has been solid support. Shares have been building a significant base in the $55-65 zone for over three months.

Currently the rebound from its July lows is pushing the stock up against major resistance in the $65.00-66.00 area. This is where BMRN has resistance with its simple 200-dma and its trend line of lower highs. If the stock breaks out it could spark a significant move higher.

Tonight we're suggesting a trigger to buy calls at $66.55. We're not listing an exit target tonight but I will share that the point & figure chart is bullish with a $77.00 target.

Trigger @ $66.55

- Suggested Positions -

buy the Oct $70 call (BMRN141018C70) current ask $2.50

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

Annotated Chart:

In Play Updates and Reviews

Stocks Pare Back Widespread Gains

by James Brown

Click here to email James Brown

Editor's Note:

The U.S. market delivered widespread gains but the stocks retreated from their intraday highs.

Current Portfolio:

CALL Play Updates

Cummins Inc. - CMI - close: 141.80 change: +0.41

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

08/11/14: CMI shot higher at the open but the rally struggled with technical resistance at the simple 200-dma. I do not see any changes from our weekend newsletter's new play description below.

Earlier Comments: August 9, 2014:
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)

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

Gilead Sciences, Inc. - GILD - close: 92.92 change: +0.47

Stop Loss: 87.99
Target(s): To Be Determined
Current Option Gain/Loss: - 4.0%
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

08/11/14: This morning GILD garnered some bullish analyst comments and a new $110 price target. That helped the stock rally at the open but shares spent the rest of the day drifting sideways, which is a bit worrisome.

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

Transportation ETF - IYT - close: 146.08 change: +1.15

Stop Loss: 141.90
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 276 thousand
Entry on August 11 at $146.03
Listed on August 09, 2014
Time Frame: 8 to 12 weeks
New Positions: , see below

08/11/14: The IYT continued to bounce as we expected. Unfortunately shares actually gapped open higher this morning, which negatively impacts our entry point. The IYT opened at $146.03 and rallied up to technical resistance at its simple 50-dma before paring its gains. Readers might want to wait for the IYT to fill the gap and retest $145.00 before initiating new positions.

Earlier Comments: August 9, 2014:
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.

- Suggested Positions -

Long 2015 Jan $150 call (IYT150117C150) entry $4.60

08/11/14 trade begins. IYT gaps higher at $146.03
Option Format: symbol-year-month-day-call-strike

LyondellBasell Industries - LYB - close: 108.28 change: -0.09

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

08/11/14: Once again LYB rallied toward resistance only to reverse near the $110.00 level. 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: 81.92 change: +1.73

Stop Loss: 76.75
Target(s): To Be Determined
Current Option Gain/Loss: +9.3%
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

08/11/14: PANW displayed relative strength today with a +2.15% gain and a close above short-term resistance at the 10-dma. The next obstacle for the bulls is resistance near $84.00.

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: 100.94 change: -0.36

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

08/11/14: WDC did not participate in the market's widespread rally today. Shares appear stuck in the $98-103 zone. 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: 79.35 change; +0.59

Stop Loss: 80.35
Target(s): To Be Determined
Current Option Gain/Loss: -11.5%
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

08/11/14: PLL's oversold bounce continued on Monday and now the stock is testing resistance near $80.00 and its 300-dma. Our stop loss is at $80.35. Any follow through higher tomorrow could stop us out.

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.

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