Option Investor

Daily Newsletter, Saturday, 8/16/2014

Table of Contents

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

Market Wrap

Headline Deja vu

by Jim Brown

Click here to email Jim Brown

If it is Friday it must mean major Russian headlines. Last Friday it was the "We are ending our military exercises and withdrawing our troops from the border." Watch what Putin does, not what he says.

Market Statistics

Last Friday saw a major short squeeze as the world took the Russian comments seriously that the military exercise was over and troops and equipment would be moving away from the border with Ukraine. Early this week Putin said Russia was sending 275 trucks filled with humanitarian supplies to the battle worn areas of the Ukraine. Those Russian army trucks were quickly painted an innocent white to appear nonthreatening and the convoy headed for a slow motion trek to the border. With frequent stops at military bases out of the prying eyes of reporters the convoy was supposed to arrive on Friday. Surprise, surprise. Thursday night a convoy of 30 armored personnel carriers (APC), also freshly painted white to appear as part of the aid shipment, crossed the border into the Ukraine where they were immediately fired upon by the Ukrainian military. The Ukrainian president "Petro Poroshenko said the military destroyed a "significant number" of the APCs. Russian spokesmen said "Proshenko's comments were fantasies and should not be the subject of serious discussion." The statements amount to "provocation" and are part of an "information war." "The government in Kiev is trying to drag Russian into a war."

Russia immediately denied the claim and warned the Ukraine about attacking the convoy with the humanitarian aid. Apparently the highly publicized white truck aid convoy was a misdirection play in hopes of sneaking in the armored column disguised with the white paint as part of the humanitarian convoy.

Here is where it gets crazy. The Russian military convoy did not begin crossing the border until the reporters imbedded with the aid convoy were within range and could easily see the border crossing. Two western reporters immediately tweeted out that they saw the Russian military convoy crossing into the Ukraine. In other words it appeared that Putin wanted to see how the international community would react if he actually invaded Ukraine. This may have been a "test invasion." There were several other crossing points held by the separatists that would have been out of view of the international reporters. Instead they used the one where the reporters were watching. This was no accident.

Of course Russia denied having or sending any military equipment into the Ukraine so the international bluff for the common person is still working. Anyone with any access to the facts understands that Russia has been sending in equipment for months and they have been firing rockets across the border for weeks. The invasion is proceeding step by deniable step.

NATO Secretary General Anders Fogh Rasmussen told reporters that Russia made an "incursion" into Ukraine and that NATO sees a continuous flow of Russian weapons into Ukraine. Late Friday multiple stories on Bloomberg reported another large column of armored vehicles 40km from the border and headed for Ukraine. Meanwhile the 275 white trucks are parked in a field a short distance from the border. Russian Defense Minister Sergei Shoigu told Chuck Hagel "there were no Russian military personnel involved in the humanitarian convoy, nor was the convoy to be used as a pretext to further intervene in Ukraine." We still don't know if there are weapons hidden in those trucks.

The volley of conflicting headlines early in the day managed to knock the markets back into negative territory at 10:45 with the Dow coming off a +60 point gain to decline to a -137 point loss before noon. The Dow never made it back to positive territory but the Nasdaq managed to gain +12 points and the S&P closed only fractionally lower.

I think once the market realized it was a "test" invasion the dip buyers appeared. Those that bailed on the initial headlines probably were protecting profits from the week's gains.

There were plenty of economic reports but none of them really moved the market. The NY Empire Manufacturing Survey was a serious disappointment but it was ignored. The headline number declined from 25.6 in July to 14.7 in August. July was the highest reading in four years so a normalization decline was to be expected but this was huge. While the majority of the components declined the six-month general business conditions index soared from 28.5 to 46.8. That is the highest level since January 2012. There was no indication why businesses were so optimistic in the face of declining conditions. The new orders component declined from 18.8 to 14.1 and the backorders component fell even further into contraction from -6.8 to -8.0. Employment fell from 17.1 to 13.6 and inventories fell from -3.4 to -14.8. Manufacturing in New York is thought to be expanding but there are some companies closing up shop and moving to less expensive locations.

The Producer Price Index (PPI) for July rose +0.1% compared to +0.4% in June. The core rate, excluding food and energy, rose +0.2% compared to +0.1% in June. There was nothing in this report to move the market. Energy prices declined for the fifth time in six months and should continue falling. Food prices rose +0.4% after declining the prior two months. There was nothing in this report to worry the Fed. The consumer version will be released next week and that has more relevance to the Fed.

Industrial Production for July rose +0.4% compared to +0.2% in June. Manufacturing rose +1.0% and the most since February. Motor vehicles and parts jumped +10.1% to power the gain. Motor vehicle assemblies rose to 13.2 million and the most since 2002. That was a spike of 1.5 million over the June levels. Business equipment rose +1.3%.

Consumer Sentiment for August fell from 81.18 to 79.2 and the lowest level since November. Economic expectations for 2015 fell from 71.8 to 66.2 and the lowest level since October when the partial government shutdown was in the headlines. The present conditions component rose from 97.4 to 99.6. Consumers must be drinking the same kool-aid as the purchasing managers in the New York report above. To have the two main components diverge so significantly is probably worry over the coming election cycle. However, the backlash over Obamacare is growing as more and more people realize how little coverage they got, how much they have to pay up front before getting coverage and how much that coverage is costing them. The "disapproval" rating is rising about 1% per week and it is coming from both democrat and republican consumers. This is not going to go away anytime soon.

Also weighing on consumers is the geopolitical headlines from Ukraine, Israel, Liberia and Nigeria. People are worried we are going to get drawn into some overseas conflict and they are worried the Ebola epidemic will spread to America.

E-Commerce Sales for Q2 rose from $71.2 billion to $75 billion for a gain of +4.9%. As companies ramp up their websites to compete with Amazon the online totals are going to continue to rise. Sales are up +15.7% from Q2-2013. Internet retailers now account for 6.4% of all retail sales. There is plenty of room to grow. Amazon could double its sales and only increase that number to 8.1%. There is roughly $1.171 trillion in U.S. retail sales per year.

U.S. International Capital Flows were negative at -$18.7 billion in June. Foreigners were net sellers of Treasuries and Notes with a record -$40.8 billion in outflows that were only offset by foreign central banks that bought $20 billion in treasuries. Net foreign purchases of U.S. equities was only $2.6 billion compared to $11 billion in the prior month. The total net outflows of long and short term investments was -$153.6 billion and a record. China sold $2.5 billion in Treasuries to lower their balance to $1.27 trillion. Japanese holdings declined -$600 million to $1.22 trillion.

Despite all that selling in treasuries the yield on the ten-year declined to 2.3% intraday on the Ukraine news before rebounding to close at 2.345% and a new 13 month low. It amazes me that investors keep buying treasuries at this level when they know the Fed is on track to start raising rates in Q1. Once the final QE announcement appears in October we should see investors get the message and selling should begin. However, with the worst range of geopolitical headlines in years there is no better place to park your money for the next couple of months. Just don't expect to get much in yield return.

Next week is the housing week with three major housing reports. The sector is in a swoon despite the low interest rates because the number of cheap homes as a result of foreclosures has declined and the wholesale buying of hundreds of homes by hedge funds has also slowed. The bargains have disappeared and it is very difficult to get a loan. I don't expect any big surge in sales despite July being a good month in normal cycles.

The FOMC minutes will be the stumbling block for the week. The hawks and doves are trading jabs in their speeches and there was probably a heated discussion over policy and the coming end of QE when they met in July. Analysts will be waiting with baited breath for the minutes and the rest of us will simply be watch the impact on the market from the various sound bites.

We have reached that point in the earnings cycle where there is barely enough companies reporting to keep the talking heads active for an entire day. They will have to find some new topics soon. Hewlett Packard (HPQ) is the big dog on the block next week with Home Depot (HD) and Lowe's (LOW) the next in line. Sears Holding (SHLD) will be interesting on Thursday if only to see what they have decided to spin off to raise money this time. Target (TGT) on Wednesday could also be interesting because of the ongoing charges for their credit card breach.

Gilead Sciences (GILD) was in the news on Friday after it won a patent arbitration on its blockbuster Hep C drug Sovaldi. Roche Holdings AG had a 2004 collaboration agreement with Pharmassist Inc. Gilead bought Pharmassist in 2012. Roche claimed it had exclusive rights to Sovaldi under that partnership. The arbitration panel ruled that Roche failed to establish ANY of its claims and was not entitled to any damages or other relief. That is a heck of a smack down for a drug that sells for $84,000 for 12 weeks of treatment. Sovaldi had sales of $3.5 billion in the second quarter alone and they have only scratched the surface of the infected population. Shares of Gilead rallied strongly for the third day. Without that patent litigation hanging over their head and projected sales of $12 billion a year on that drug alone I think there are many gains ahead. The chart is nearly vertical but a major roadblock has been removed. If you see a dip in the near future I would jump on it.

Monster Beverage (MNST) had a monster gain on Friday after Coke (KO) announced it was taking a 16.7% stake in the company and they were swapping brands. Coke will give Monster $2.15 billion in cash and transfer all its energy drink brands like NOS, Full Throttle and Burn to Monster. In exchange Monster will give Coke its non-energy brands like Hansen's Natural Sodas and Hubert's Lemonade to Coke. Monster will also give Coke two seats on its board.

This is a win-win for Monster. They are no longer competing with Coke in the energy drink market and Coke will use their international distribution channel to market Monster beverages. This was a major boost for Monster and catapults them years ahead of what they could have done on their own.

News of the deal leaked out and option volume rocketed higher starting last Monday. Option volume was more than 10 times normal and all on the call side. Somebody is going to get some unwelcome news from the SEC. The sheer volume of the calls bought all week will probably mean only the initial purchasers will be confronted. The rest can easily claim they were just following the volume.

It was a decent week in the markets so any volatility just before the weekend only accentuated the profit taking. The major indexes all posted gains with the Nasdaq Composite leading the pack with a +2.1% gain and the Nasdaq 100 a +2.56% gain. The NDX is now up +11% for the year and the Transports +11.7% and Semiconductors +16.7%. The Russell 2000 remains down -1.9% for the year.

The S&P flirted with resistance all week. The initial resistance at 1945 held on Wednesday but was broken on Thursday with a sprint to 1955. The open on Friday saw another spike to 1965 before declining on the Ukrainian news to close at 1955.

In theory the S&P is in rebound mode and headed back to new highs. However, there is significant resistance at 1955 and again at 1985. We may get there but I doubt it will be in a straight line. If there was going to be a failure at resistance the 1960-1965 level would be it. This is uptrend resistance from December.

I have two thoughts here. El-Arian warned that geopolitical news was "cumulative" and eventually there would be one headline too many that would crash the market. That is one view. My view is that the market rallied on really bad news from multiple countries. The more likely a Putin invasion of Ukraine the more traders will price that into the market and when it arrives it may be much ado about nothing. How many times do journalists have to warn about an impending invasion before investors glaze over and no longer care?

Watch the market, not the headlines.

The Dow has honored support and resistance like somebody was pulling the strings behind the scenes. The decline to 16,368 was almost to the point and the rebound and stall at 16,728 was also picture perfect. For a narrow index with only 30 stocks it is rarely this precise. The slow volume was one reason for the textbook moves. Without an abundance of volume the buyers and sellers tend to all have similar ideas about what to buy and sell and when. This "orderly" market reduces volatility and sets investors up for a surprise when it ends.

Despite the headlines Visa was the only Dow component to post a loss higher than $1 with most of the moves less than 50 cents. Other than the sharp index declines the day was really pretty boring.

Resistance 16,728 and support 16,368.

The index that could cause trouble next week is the Nasdaq. The index closed about 18 points off its opening high (4482) and only about 20 points below is 14 year high at 4485. If the Nasdaq breaks out to a new high next week we could have a stampede on our hands. The tech stocks should be vulnerable after the earnings misses and lowered guidance but investors keep piling into the tech sector.

Even more important the Nasdaq 100 ($NDX) closed only -3 points below its recent high. This is very bullish and a breakout here could trigger significant short covering.

The Russell 2000 remained the weak link with a very lackluster rebound and a +.9% rebound for the week. That is less than half the Nasdaq gain. In theory the small caps are telling us not to trust the bog cap gains. Typically fund managers invest in big caps when they scared of the market and small caps when they are confident of the market.

Normally I would recommend watching the small caps for market direction. This week I am recommending you watch the Nasdaq. A breakout will drive the market higher and maybe pull the small caps along for the rise.

I have mixed emotions about next week. The geopolitical headlines are being mostly ignored. Earnings showed 10.1% growth and the highest since 2011. The tech stocks are about to break out to new highs or potentially fail at those new high levels. I recommend watching the Nasdaq for a break out. If that occurs I would add to long positions in the expectation of the Russell 2000 accelerating to catch up. If the Nasdaq fails at resistance it may be only temporary. With two weeks left in summer the volume is going to be very light and the bulls appear to have the ball.

Random Thoughts

Chinese power consumption in Shanghai and Jiangsu fell by more than 10% in July compared to double digit growth in July 2013. Other provinces including Zhejiang, Anhui, Hubei, Hunan and Guizhou reported consumption declines of up to -22%. This suggests China's real GDP before the government adjusts it to what they want to show the world is going to be much, much less than the 7.5% target for 2014. You can't have a booming economy without power consumption.

China's National Energy Administration said power consumption rose +3.0% in July, down from June's +5.9% rise. This highly manipulated number was still the slowest growth in 16 months. You know it is really bad when even the fictitious numbers have been lowered to 16 month lows.

If investors are expecting a rebound in the Chinese economy to float the global economic boat they are sadly out of luck.

Add in multiple countries in the EU already in recession or even worse in a depression that will be made worse by the Russian sanctions and the global economic outlook for the next two years is pretty dim. The U.S. may be the cleanest shirt in the dirty close hamper but it can't resurrect the global economy by itself.

U.S. industrial production has been rising at crawl speed for the last several years but compared to Europe we are in a manufacturing boom.

Europe posted economic growth of zero in Q2 but declining. Unemployment is 12% or roughly 19,130,000 people out of work. The Eurozone has been in a depression since the financial crisis and has not yet risen to its pre crisis economic levels. Many analysts believe Europe is turning into Japan with its lost decade. The ECB is on the verge of massive QE after a couple years of promising to do "whatever it takes" and never following through. Time has expired and analysts believe this time is different. Mario Draghi is going to be forced to follow through with his promise. When coupled with an imminent stimulus flood from China the overseas economies are going to be floating on an ocean of stimulus.

The Russian sanctions are only going to compound the economic problems for Europe and force the ECB to apply even more stimulus. It is a downward spiral that may not reverse for several years.

Japan's economy sank -6.8% in Q2 and the worst contraction since 2011 as consumer spending slowed dramatically after the government raised the consumption tax to 8% in April. Spending declined -18.7% on an annualized rate. The government has the option to raise it to 10% by 2015 if needed to raise money. Housing investment declined -35.5% and the largest drop in five years. Japanese debt topped one-quadrillion yen. That is 1,008,628,100,000,000 yen or 230% of GDP. However, in U.S. dollars that is only $10.5 trillion and about half what the U.S. debt will be in three years.

Mohamed El-Arian, Allianz chief economic advisor and formerly with Pimco, said on Friday that stocks are still reflecting sentiment on easy monetary policies. "It is impressive. And it is a bet on the fed, and it is a bet on central banks in the rest of the world." He said this week's data has been "shockingly poor, both out of the U.S. and out of Europe." This suggests that central banks will be dovish for longer. "That means that investors will still believe the central banks are the markets best friend." He said valuation matters and the stock and bond markets are trying to tell us something. They are telling us different things about the destination. He said "I am getting more and more nervous about this bet on bad-news-is-good-news. There is a limit on how high valuations go." He said rising equities climbing on the back of monetary policy is a "suckers bet."

He warned the geopolitical troubles were beginning to appear "cumulative." Also, "Central banks cannot fight geopolitical headwinds for a long time." Eventually there will be one headline too many and the market will react negatively.

On August 14th, 1935 President Franklin Roosevelt signed the Social security Act, which guaranteed income for the unemployed and retired. At the time the poverty rate for senior citizens was over 50%. In 1937 53,236 people received a total of $1.28 million. In 2013 more than 53 million received more than $730 billion. The average life expectancy in 1035 was 62. Today it is 78.7.

On August 14th, 1945 President Harry Truman announced the surrender of Japan and ending World War II. Despite the bombing of Hiroshima and Nagasaki some Japanese wanted to keep on fighting. Emperor Hirohito intervened in a radio address called the "Jewel Voice Broadcast" where he announced Japan would surrender.

August 15th, 1971 Richard Nixon took the U.S. off the gold standard and ended the convertibility of dollars into gold. He also froze ages, prices and rents for 90 days because of rapidly rising inflation. This was later called the "Nixon Shock" because it was such of a blow to the nation.

Remarks from Defense Secretary Hagel last week. The world is exploding all over. And so is the United States going to continue to have the resources, the capabilities, the leadership, the bandwidth to continue with the rebalance toward the Asia Pacific? And the answer is yes. Hagel went on say that, despite the rebalancing towards the Pacific, the US will not be "retreating" from any threats elsewhere in the world. Now, that said, as I've said, with that rebalance, which will continue, and we are committed to do that, we're not retreating from any other part of the world. Great powers can't pick and choose which challenges and threats they're going to deal with. There is no power on Earth like the United States of America.

No country is great enough, powerful enough to deal with all these threats and challenges alone in the world today. They're too big, too complex. The world is too complicated. Whether they're cyber threats, which are relatively new, but are just as real and deadly and lethal as anything we've ever dealt with, obviously, what's going on in North Korea, China's behavior in the South China Sea, East China Sea, you mentioned Russia's actions in Ukraine, North Africa, the Middle East today, every part of that world is troubled under great stress. Sounds like Hagel and Obama are reading out of different play books.

The first nine days of August are typically volatile with the market rallying into expiration Friday. Over the last 9 years if the first nine days were positive the rest of August was positive 7 of those 9 years. However the bulk of the month's gains came in those first nine days. The last two weeks of August are typically rocky according to the Stock Trader's almanac.

The current bull market is now the second longest in the last 85 years. The current bull market is 283 weeks old and the average length is 165 weeks. What is going to keep it moving higher?

Beware Ebola. The World health Organization (WHO) claims the outbreak of Ebola has been "vastly underestimated" and will require "extraordinary measures, on a massive scale" if it is to be contained. The Medecins Sans Frontieres (MSF) said the disease was spreading "faster than we can respond to" and accused WHO of being too slow to react. "Staff at the outbreak sites see evidence that the number of reported deaths vastly underestimate the magnitude of the outbreak." MSF said, "It is like wartime. The wakeup call was too late." It may take "six months to get the upper hand on this outbreak."

Plan International's head of disaster preparedness said "Time is running out and millions of lives are at stake." One of the major problems is the poor people it is affecting. They don't have medical care. When they get sick they stay home and family members take care of them. This assures that the family members also get sick and by the time there is a request for help dozens of friends and relatives may have been infected. Since a lot of sick people stay home there is no way of telling exactly how many people have been exposed or already have the illness. "By the time we find out about a sick family it is too late."

More than 80 healthcare workers have already died but we don't hear about them. We only hear about the two Americans that were flown back to the USA. Healthcare workers are fleeing the stricken areas. In Liberia the population of 4 million had about 200 clinical care doctors before the outbreak. Now there are only about 50 after the others fled or died. Non Ebola care has disappeared. Women are dying from unassisted labor and delivery. Auto accident patients are dying for lack of trama care doctors. Ken Isaacs VP of Samaritan's Purse told Congress "this Ebola outbreak is uncontained and out of control in West Africa." Officials warn that once the disease makes it to a high traffic country like Lagos (22 million) or Johannesburg it will quickly spread internationally.

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

"We can never insure 100 percent of the population against 100 percent of the hazards and vicissitudes of life"

Franklin Roosevelt


Index Wrap

Major Indexes Hold Support

by Leigh Stevens

Click here to email Leigh Stevens

The S&P Indices and Dow Jones Average held support at key weekly chart up trendlines. The Nasdaq pullback didn't even get close to trendline support on its recent pullback before rebounding. Advantage Bulls!

A chart picture is worth a thousand words and the S&P 500 (SPX) weekly chart is seen next, with its (lower) up trendline highlighted, as well as the corresponding upper channel line. It was true in the prior week that SPX dipped below its trendline, but by the end of the week was above it.

Charles Dow in his time wouldn't have considered anything but the Close at the END of the day, END of the week. I look at intraday and intraweek lows and highs to help measure support and resistance areas and for use in drawing trendlines. But, I also always put most weight on where an Index or Stock CLOSES for the hour, day, week or month.

So far I consider the recent pullback a correction only, not the start of a reversal in the intermediate or long-term uptrends.

To date the key big cap Nasdaq 100 Index (NDX) didn't have more than a 25 percent retracement of its last major upswing an stayed well above its weekly up trendline. Corrections of between 25 and 33 percent are considered very 'minimal' and shallow pullbacks. NDX's weekly chart is also seen here.

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 mixed on a short-term basis, bullish on a longer-term (intermediate) basis. I say 'mixed' short-term in that, while SPX rebounded after a 50% retracement of its last major up leg, the Index hasn't yet Closed above key overhead resistance at 1960. Back to back daily Closes above 1960 would suggest that SPX was regaining its bullish mo-jo.

Near SPX resistance is at 1960, with next pivotal chart resistance at 1980, extending to the prior 1991 intraday high. Near support is highlighted at 1940, extending to 1930-1927. The Index closed above its 21-day moving average, which is a bullish aspect as long as its stays above this key trading average.

The S&P has 'throw off' its prior overbought condition both as suggested by the Relative Strength Index (RSI) on a 13-day basis (below) and also as seen above (in my 'bottom line' comments) on an 8-week time frame.

Bullish sentiment is now more mildly bullish and more or less 'neutral' as measured by my CBOE equities call to put daily volume ration (CPRATIO) seen at the bottom of the SPX chart.


The S&P 100 (OEX) is mixed on a short-term horizon and remains bullish on an intermediate (and long-term) basis. OEX presents the same pattern as with the broader S&P 500. OEX did manage a Close above both its 21 AND 50-day averages. Stay tuned on this continuing.

A second (and third) Close above 870 is bullish; ditto resistance highlighted at 875. Next resistance is seen at the prior 886 intraday high.

Near support is at 860-857, then in the 850 area, at the steeper up trendline.

At the point where OEX got 'fully' oversold (see the RSI), a relatively low risk entry point for calls occurred. In a bull market, favoring big cap stocks, such low readings, along with price action first and foremost, aid in a bullish trade entry decision.


The Dow 30 Average (INDU) is mixed in that the recovery rebound hasn't yet taken INDU back above key overhead resistance at 16800. Next pivotal resistance is seen at 17000.

In retracement terms, INDU didn't fall as much as the S&P relative to its last major upswing, although that is figured a bit differently than the S&P by looking at the INDU Feb-July advance versus the April-July upswing in SPX. These two indexes traced out somewhat different patterns over the prior months.

The individual 30 Dow stocks are all over the place and I can't assess the bullish/bearish mix of the 30 as well as has often been the case.

Support begins at 16550, at the up trendline, extending to 16515-16500 with fairly major support suggested in the 16400-16375 zone.

2-3 consecutive closes above 16800 would suggest renewed upside momentum in the Dow.


The Nasdaq Composite Index (COMP) is bullish in its pattern although a key test is ahead. COMP didn't fall as far as its up trendline before it rebounded from a cluster of lows that formed around 4325.

The subsequent rally shouldn't have been too surprising as COMP got down to near an oversold extreme in terms of the 13-day Relative Strength Index; in this bull market its been rare for the tech-heavy Nasdaq to fall to a 'fully' oversold reading; e.g., at or below the 35-30 zone.

COMP is now very close to a line of resistance at 4485 and so is nearly at its pivotal 'breakout' (or 'breakdown') point. Assuming a breakout move, next resistance is projected for the 4550 area.

Near support is at 4400, extending to COMP's up trendline currently intersecting in the 4330 area.

Bullish/bearish sentiment among traders is more or less neutral in my CPRATIO indicator. Bullishness among Investment Advisors is another story as a strong majority is bullish. However, from a trading perspective, high bullishness among Advisors is not usually relevant in 'timing' potential trading swings.


The Nasdaq 100 (NDX) chart is bullish, but like the broader Composite, the big cap NDX is near a key prior high. In terms of the big cap Nasdaq 100 that's at 4000. 4000 is a relatively big deal level as are prior 1000 increments in the Index. The law of big round 'milestone' numbers so to speak.

A couple of back to back closes above 4000 and importantly, the ability to hold 4000 on subsequent pullbacks, will be key for the bulls. Next overhead resistance then is projected for the 4050 area.

Support is highlighted in the 3900 area, extending to 3850. Fairly major support then comes at NDX's up trendline currently intersecting around 3800.

The prolonged and major advance may be getting 'old' in the Nasdaq and there's fear that the big tech/internet stocks are overvalued and all that. However, I can't evaluate the trend except to base it on the current price and momentum trajectory.

The 3850 area 'basing' action was key to the last juncture where the risk to reward outlook was favorable for a trade as a stop-out point could be set just below 3850. From there it was almost a given that 4000 would be re-tested, and probably exceeded, once traders were not so overwhelmingly bullish. Stay tuned on the part about exceeding 4000!


The Nasdaq 100 tracking stock (QQQ) is bullish an I find it extremely telling that on this spurt higher, daily trading volume spiked up as well, a pattern rarely seen in the Q's.

Typically, spikes in trading volume, unlike company stocks, occur on breaks below perceived key support(s). I take Friday's jump above prior average daily volume as a good omen for a move to new highs.

97.5 is pivotal near resistance and 98.5 as next projected resistance.

Near support is highlighted in the 95.8 area, at the up trendline, a line that got pierced but which still looks like the predominate line measuring upside momentum. Trendlines do merely measure the current rate of change in up or down trends. The fact that this rate-of-change wobbles a bit at key junctures is not as important as the dominate trend. Fairly major support comes in at 94 even.


The Russell 2000 (RUT) chart which still looks bearish and capable of challenging its prior lows in the 1100-1080 area. RUT is the odd man out so to speak in the major indices as small cap stocks are out of favor currently. Well, for now anyway and RUT has had a sizable gain over the past 3 years; from the 635 area.

Key relative to upside possibilities and for the bullish/bearish near-term outlook is the ability (or not) for RUT to climb back above its 200-day moving average. There's resistance in the 1140-1150 zone, then at 1160.

Support is highlighted at 1130, extending to 1120. If this area gives way, there may be a re-test of prior lows in the 1100-1080 area.


New Option Plays

Technology & Travel

by James Brown

Click here to email James Brown


Concur Technologies - CNQR - close: 98.51 change: +0.08

Stop Loss: 96.90
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 576 thousand
Entry on August -- at $---.--
Listed on August 16, 2014
Time Frame: 8 to 12 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
CNQR is in the technology sector. The company provides travel and expensive management solutions. The company was founded back in 1993. Their focus is helping companies control travel costs. The business has been growing over 23,000 customers and over 25 million users.

The company press release describes Concur as "the leading provider of spend management solutions and services in the world, helping companies of all sizes transform the way they manage spend so they can focus on what matters most. Through Concur's open platform, the entire travel and expense ecosystem of customers, suppliers, and developers can access and extend Concur's T&E cloud. Concur's systems adapt to individual employee preferences and scale to meet the needs of companies from small to large."

There is no denying that it has been a rocky year for CNQR investors. The stock struggled with resistance near $130.00 for over a month earlier this year. When the momentum names corrected lower in March shares of CNQR were crushed. The stock produced a two-month retreat down to $75.00.

Meanwhile earnings continued to improve. When CNQR reported earnings on April 29th they beat estimates by six cents and guided higher for the second quarter. Their most recent earnings report was August 4th. Wall Street expected a profit of $0.16 on revenues of $175.1 million. CNQR delivered a profit of $0.25 with revenues rising +28.6% to $178.4 million. Management also raised their 2014 guidance.

Stocks analysts are starting to notice and a few of them have upgraded their price targets on CNQR into the $110-115 region. If shares of CNQR can breakout past resistance near $100 and its 200-dma then it might sprint towards $110. That's because the stock has a significant chunk of short interest.

The most recent data listed short interest at 12.2% of the relatively small 55.5 million share float. Since the $100 mark is significant resistance a breakout could definitely spark some short covering. The point & figure chart is already bullish and projecting at $108 target.

Tonight we are suggesting a trigger to buy calls at $100.50.

Trigger @ $100.50

- Suggested Positions -

Buy the NOV $105 call (CNQR141122C105) current ask $4.40

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

Annotated Chart:

Expedia Inc. - EXPE - close: 85.37 change: +0.44

Stop Loss: 81.80
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 2.3 million
Entry on August -- at $---.--
Listed on August 16, 2014
Time Frame: 8 to 12 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
EXPE is in the services sector. The company is in the super competitive online travel industry with rivals like Priceline.com (PCLN) and Orbitz Worldwide (OWW).

EXPE is developing a serious trend of beating analysts' estimates with strong profit and revenue growth. EXPE last reported earnings on July 31st. Analysts were expecting a profit of $0.75 a share on revenues of $1.44 billion. EXPE blew those numbers away with a profit of $1.03 a share. Revenues soared +24.0% to $1.49 billion. That's up from $1.2 billion the prior quarter. EXPE has now delivered double-digit year over year revenue growth for six quarters in a row.

EXPE's bookings continue to soar. Gross bookings were up +29%. Domestic gross bookings were up +35% and international gross bookings rose +21%. Both hotel revenues and air travel revenues were up more than +20% each.

Last time we traded EXPE we noted that Billionaire hedge fund manager David Tepper's Appaloosa Management is also bullish on EXPE. The latest 13F filing showed that Appaloosa had initiated a new stake in EXPE in the first quarter of 2014. In the second quarter Appaloosa added another 201,000 shares of EXPE.

The stock popped on its earnings results but have since spent the last two weeks digesting gains in a sideways consolidation. Now it looks like EXPE is poised to breakout and could make a run towards the $95-$100 area. The point & figure chart is bullish and forecasting at $105 target.

Tonight we are suggesting a trigger to buy calls at $86.25.

Trigger @ $86.25

- Suggested Positions -

Buy the NOV $90 call (EXPE141122C90) current ask $4.20

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

Annotated Chart:

In Play Updates and Reviews

Rally Stalls On Russia

by James Brown

Click here to email James Brown

Editor's Note:

Uncertainty and confusion surrounding the Ukraine-Russian conflict stalled the market's rally on Friday.

We are removing CMI as a candidate.

Current Portfolio:

CALL Play Updates

BioMarin Pharmaceutical Inc. - BMRN - close: 67.24 change: -0.43

Stop Loss: 61.95
Target(s): To Be Determined
Current Option Gain/Loss: + 1.9%
Average Daily Volume = 1.26 million
Entry on August 14 at $66.55
Listed on August 11, 2014
Time Frame: 8 to 12 weeks
New Positions: see below

08/16/14: The rally in BMRN paused a bit on Friday but shares marked their fourth weekly gain in a row. Traders bought the dip on Friday near short-term support at the $66.00 level. I would still consider new positions now assuming the market doesn't gap down on Monday morning due to geopolitical headlines.

Earlier Comments: August 11, 2014:
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.

- Suggested Positions -

Long Oct $70 call (BMRN141018C70) entry $2.55*

08/14/14 triggered @ 66.55
*option entry price is an estimate since the option did not trade at the time our play was opened.
Option Format: symbol-year-month-day-call-strike


Gilead Sciences, Inc. - GILD - close: 99.49 change: +3.13

Stop Loss: 93.45
Target(s): To Be Determined
Current Option Gain/Loss: +89.1%
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

08/16/14: Biotech stocks were some of the market's best performers last week. GILD was one of them with shares up six days in a row. The rally in GILD has been accelerating with the stock adding another +3.2% on Friday.

Please note that GILD is now testing potential resistance at the $100.00 mark. Investors will want to seriously consider taking some money off the table right now or exiting completely to lock in a gain.

We believe GILD can go higher but on a short-term basis I would expect a pullback, potentially back toward the $95 area. Tonight we're moving the stop loss up to $93.45.

I am not suggesting new positions at this time.

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*

08/16/14 new stop @ 93.45
Investors will want to seriously consider taking profits now with GILD testing potential resistance at the $100.00 mark.
08/14/14 new stop @ 89.95
Investors may want to consider taking money off the table as GILD nears the $99-100 zone.
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


Isis Pharmaceuticals - ISIS - close: 36.13 change: -0.45

Stop Loss: 31.85
Target(s): To Be Determined
Current Option Gain/Loss: +4.8%
Average Daily Volume = 1.5 million
Entry on August 13 at $35.25
Listed on August 12, 2014
Time Frame: 12 to 15 weeks
New Positions: see below

08/16/14: On Friday ISIS announced it had earned another $2 million milestone payment from Biogen Idec on its children's treatment for spinal muscular atrophy (SMA). This news didn't have much effect on ISIS' stock price. Shares retreated -1.2%.

The stock could be stalling under resistance near $37.50 after a four-week rally. Patient traders may want to wait for a pullback before jumping in.

Earlier Comments: August 12, 2014:
Science has discovered that some diseases are caused by certain proteins. Some biotech firms are using RNA-targeted technology to focus on those proteins and find a treatment. ISIS is one such company.

According to their website, ISIS is "the leading company in antisense drug discovery and development, exploiting a novel drug discovery platform we created to generate a broad pipeline of first-in-class drugs. Antisense technology provides a direct route from genomics to drugs. With our highly efficient and prolific drug discovery platform we can expand our pipeline and our partners' pipelines with antisense drugs that address significant medical needs. Our strategy is to do what we do best—to discover unique antisense drugs and develop these drugs to key clinical value inflection points."

The company has a significant number of drugs in development. You can see a list of ISIS' pipeline on this webpage. They currently have over 30 drugs in progress. The depth and scale of their pipeline makes ISIS a potential takeover target from bigger drug or biotech firms. Gilead Sciences and Biogen Idec have been rumored as potential suitors.

Lately the headlines have been full of the world's worst Ebola outbreak in history. Biotech stocks are grabbing investor attention as companies search for a treatment. Whenever one biotech firm makes positive headlines it tends to create a halo effect that buoys the rest of the group.

The stock peaked back in February this year after ISIS reported positive results on a treatment for children with spinal muscular atrophy. After soaring from $8.00 in the prior 18 months traders sold this news near $60.00. A few days later in March all the high-growth and momentum names were crushed. The correction was exceptionally tough on ISIS. The stock plunged from $60 in February to $23 in May. Their Q1 results in early May didn't help. Results were in-line but revenues were down 35% from a year ago to $28.2 million. Their most recent earnings report on August 4th was much better. ISIS missed Wall Street's estimate for a loss of 10 cents a share by 1 cent. However, revenues soared +49.8% to $57.1 million, which was significantly above expectations.

ISIS explained that the big swings in their revenues are normal. According to their press release, "Isis' revenue fluctuates based on the nature and timing of payments under agreements with its partners and consists primarily of revenue from the amortization of upfront fees, milestone payments and license fees. Isis' revenue from the amortization of payments from its partners was $31.4 million in the first half of 2014, compared to $19.2 million for the same period in 2013." You can see they made significant improvement from 2013 to 2014.

ISIS is getting closer to several drugs completing their final Phase 3 clinical trials before being approved for market. The company said,

We have initiated the Phase 3 program for ISIS-SMNRx to treat patients with spinal muscular atrophy. Our Phase 3 clinical study of ISIS-TTRRx in patients with the polyneuropathy form of transthyretin amyloidosis is enrolling well and patients who have completed the controlled portion of the study can continue to receive treatment in our open-label extension study. Also this year, we plan to initiate the Phase 3 program for ISIS-APOCIIIRx to treat patients with severely elevated triglyceride levels with the first study starting very shortly," said B. Lynne Parshall, chief operating officer of Isis. "By the end of the year, we plan to be conducting Phase 3 programs on a number of different drugs to treat important genetically driven diseases for which antisense may offer a unique therapeutic approach."

It looks like the stock has made a bottom in July. Shares have pushed through several key moving averages in the last couple of weeks. If this continues ISIS could see some short covering. The most recent data listed short interest at 10% of the 117.9 million share float. The Point & Figure chart is bullish and forecasting at $46.00 target.

Tonight we are suggesting a trigger to open bullish positions at $35.25. If triggered we'll try and limit our risk with a stop loss at $31.85. I will point out that ISIS does have resistance in the $37.50 area including its simple 200-dma. We're expecting the stock to break through it. More conservative investors might want to wait for ISIS to close above $38.00 before considering new positions.

- Suggested Positions -

Long 2015 Jan $40 call (ISIS150117C40) entry $4.10

08/13/14 triggered @ 35.25
Option Format: symbol-year-month-day-call-strike


Transportation ETF - IYT - close: 148.14 change: -0.07

Stop Loss: 141.90
Target(s): To Be Determined
Current Option Gain/Loss: -4.3%
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

08/16/14: The transports followed the market's rocky performance on Friday but still managed its fifth gain in the last six sessions. The ETF looks poised to run towards its July highs if the market cooperates.

I am not suggesting new positions at this time.

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: 110.60 change: +0.81

Stop Loss: 107.40
Target(s): To Be Determined
Current Option Gain/Loss: -6.0%
Average Daily Volume = 2.5 million
Entry on August 15 at $110.50
Listed on August 04, 2014
Time Frame: 8 to 12 weeks
New Positions: see below

08/16/14: LYB broke out to new highs and hit our suggested entry point at $110.50 on Friday morning before the market's midday plunge. Shares dipped to short-term technical support at the 10-dma before bouncing all the way back into positive territory and closing at a new high.

I would still consider new positions now at current levels as long as the market doesn't gap down on Monday.

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.

- Suggested Positions -

Long DEC $115 call (LYB141220C115) entry $2.50*

08/15/14 triggered @ 110.50
*option entry price is an estimate since the option did not trade at the time our play was opened.
08/14/14 adjust the stop loss to $107.40 (trade not open yet)
08/14/14 LYB almost hit our trigger but failed at $110.49
Option Format: symbol-year-month-day-call-strike


Palo Alto Networks, Inc. - PANW - close: 84.63 change: -0.86

Stop Loss: 79.90
Target(s): To Be Determined
Current Option Gain/Loss: +37.5%
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

08/16/14: PANW rallied almost $5 for the week thanks to a couple of analysts putting a $100 price target on the stock. Unfortunately the action on Friday is a little worrisome. Friday's move has generated a bearish engulfing candlestick reversal pattern. We'll have to wait and see if Monday's session confirms the reversal.

I am not suggesting new positions at this time.

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*

08/13/14 new stop @ 79.90
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


U.S. Silica Holdings, Inc. - SLCA - close: 60.56 change: +0.56

Stop Loss: 57.95
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 1.42 million
Entry on August -- at $---.--
Listed on August 13, 2014
Time Frame: 8 to 12 weeks
New Positions: Yes, see below

08/16/14: SLCA rebounded off short-term support from its simple 10-dma on Friday and managed to outperform the market with a +0.9% gain. Shares are still hovering just below resistance in the $61.50-62.00 area.

We are suggesting a trigger to buy calls at $62.05.

Earlier Comments: August 13, 2014:
We are bringing SLCA back after some post-earnings volatility.

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

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

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

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

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

SLCA's most recent earnings report was July 29th. Wall Street expected a profit of $0.47 a shares on revenues of $189.7 million. SLCA beat estimates with a profit of $0.55 and revenues soaring +58.5% from a year ago to $205.8 million.

The company said sales were up sharply both from a year ago and from the first quarter. Management raised its 2014 earnings guidance.

Currently shares of SLCA are hovering just below resistance in the $61.75 area. Tonight we're suggesting a trigger to buy calls at $62.05. We are not setting an exit target tonight but Point & Figure chart for SLCA is bullish with a $69 target.

Trigger @ 62.05

- Suggested Positions -

Buy the DEC $65 call (SLCA141220C65)

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


PUT Play Updates

Currently we do not have any active put trades.


Cummins Inc. - CMI - close: 140.93 change: -1.02

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: see below

08/16/14: CMI is just not cooperating with us. The stock failed to participate in the market's bounce this past week. Instead shares struggled with overhead resistance its simple 200-dma. Friday's move is actually a bearish engulfing candlestick reversal pattern.

Our trade has not opened yet and given CMI's recent performance we are removing it from our play list.

Trade did not open.

08/16/14 removed from the newsletter. suggested trigger was $144.25