Option Investor

Daily Newsletter, Wednesday, 7/1/2015

Table of Contents

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

Market Wrap

Dead-Cat Bounce or Bullish Reversal?

by Keene Little

Click here to email Keene Little
By several measures the market became quickly oversold on Monday and more so on Tuesday. Some measures were at levels where previous strong rallies have started, which makes today's bounce potentially bullish. But a bounce of the dead-cat variety is what bulls need to worry about.

Wednesday's Market Stats

It's been a bit of a wild ride this week, thanks to what's going on with Greece and the EU. The stock market rallied from June 15th into the June 22/23 highs based on an expectation that a solution to Greece's next bailout would be found and traders were front-running an expected rally. Sunday night, when Alexis Tsipras effectively thumbed his nose at the EU finance heads, indicating a willingness to take a gamble that Greece would default on its loans and get kicked out of the EU, all those who bought into an expected rally suddenly found themselves underwater Monday morning.

The selling continued into Tuesday but today we got an oversold bounce and now we're left wondering if it's just a dead-cat bounce or something more bullish. There's still hope that the Greek tragedy will be resolved in a market-friendly way. We'll find out a lot more after the Greek vote this Sunday. Tsipras has been encouraging voters to vote "no" to the EU demands and accept the risk of leaving the EU and higher inflation due to going back to the drachma currency and printing their way out of their problems (that won't work in the long run either). A "yes" vote to stay in the EU and accept higher taxes and more austerity (reducing pensions, raising retirement ages, etc.) would be market friendly

If Greece ends up leaving the EU, either voluntarily or not, it will open the door to other nations leaving. It could be the first domino to fall and that's what worries the markets. I've read analysis by some very smart people and they couldn't be more diametrically opposed in their opinions, leaving me thinking no one has a clue what might happen, and the market hates uncertainty, which makes for a more volatile market.

Greece owes about $260B (240B euros) and they defaulted on the $1.7B payment that was due yesterday. It is now believed Tsipras overplayed his hand, which was weaker than the EU's, and is now scrambling to make a deal. He might not have thought through the consequences of shutting down the banks (bank "holiday") and essentially shutting down businesses and people's ability to transact business. Even credit card purchases are not being allowed since that's considered withdrawals from banks, which are limited to 60 euros/day. But not much, if anything will be accomplished until the Greek vote and then the two sides will figure out the next move.

Greek citizens have been fearful of a bank closure and that's why so many have been withdrawing money from their accounts. Since November 2014 they've cleared out about $34B euros, about one fifth of total deposits. The ECB had been lending money to the Greek banking system to keep it afloat but they've now cut that off, hence the bank "holiday," which of course is not like your typical bank holiday. In this case the government simply prevents access to bank accounts and is essentially free to do what they want with the money. More bail-ins? Quite possible. How this plays out should be quite instructive for people in other countries facing similar financial problems. Think Portugal, Spain, Italy and Ireland.

If Greece ends up leaving the EU and survives, with lots of pain of course, we could see the other financially weaker countries (owing lots of money to the EU) follow in Greece's footsteps. This would of course unravel the EU as we know it and that's what scare EU leaders. What happens to the people's money in Greek banks will also be instructive. If the people end up losing their accounts, either through forfeiture (government theft) or high inflation, people from other countries will have learned what they need to do to protect themselves. That would of course mean withdrawing their money from bank accounts.

Below is a chart showing the European countries in order of government debt as a percentage of their GDP:

EU country Debt-GDP percentage, chart courtesy CaseyResearch

The U.S. is not immune to such a problem either. The chart below shows our debt climbing steadily since 1980 with only a brief break from about 1997 to 2000. The current rate, updated today, is 101.5%, which places us between Spain and Belgium on the above chart. For reference, the U.K. is currently 89.4 and Japan is a whopping 224 (a bug in search of a windshield).

U.S. government Debt-to-GDP percentage, chart courtesy TradingEconomics.com

Bank "holidays" are always a surprise -- if the government warned of a bank holiday it would alert people to get their money out. Once the "holiday" is announced, usually over the weekend, people find they no longer have access to their money. The government institutes capital controls as it essentially takes over the banking system. For this reason it's important for all of us to be thinking about alternative investments to shield our money. Don't have all your eggs in one basket in case that basket gets stolen.

The U.S. might be in a lot better shape than other countries but we still should be prepared for a sudden and surprise announcement that we can no longer have full access to our money and the possibility of a bail-in to help the government pay its bills. Confiscation of retirement accounts, replaced with Treasury certificates, is a real possibility in the not-too-distant future. If you think this can't happen here then you could be considered as naive as many Greeks who didn't think this could happen to them either.

The common pattern to be aware of over the next few years is: 1) the financial system is in trouble -- too much leverage and not enough capital to protect against losses; 2) the country's leaders deny there's any problem, which is your clue that they're lying; 3) wealth confiscation begins, through tax increases, bail-ins, etc.; 4) additional capital controls to take over the banking system, at which point you are completely at the mercy of the government. As Doug Casey, at Casey Research says, "The diminution of personal and financial freedom looks like a hyperbolic curve, at first with an almost unnoticeable slope, then one that gets steeper and steeper, at an accelerating rate." The trick is to recognize the early part of this pattern.

Ways to protect your investments include precious metals, land (real estate), especially farm land (food will always be needed), and foreign bank accounts (be careful in which country you place your money). We of course hope that these protections will never be needed but there's a reason it's called contingency planning. It's like buying insurance on your house -- you hope you'll never need to use but you're sure glad to have it when some yahoo torches his garage and the flames leap over onto your house and burn it to the ground.

But enough about planning for the future, what the heck does this week's price action mean for next week and this month? Unfortunately, the longer-term picture hasn't cleared up yet. It looks a whole lot more bearish than it did last week but as I'll show on the charts, it's possible we've seen (or are seeing) the completion of an a-b-c pullback off May's highs, which will be followed by another rally to new highs. While that possibility looks less likely than the start of a more serious selloff, it must be considered when making your trading plans (where to place stops).

Starting with the DOW's weekly chart below, you can see how yesterday's low at 17590 came very close to its 50-week MA at 17575. It's also close to its uptrend line from October 2011 - October 2014, currently near 17510. Things would turn more bearish below 17500 but in the meantime it's not hard to see the potential for another rally back up to the trend line running along the highs from last December, near 18500 by the end of July. Obviously that would be a nice trade on the long side if that's what we're looking for. I remain unconvinced we'll see that kind of move but bears need to recognize the potential and why stops need to be managed carefully.

Dow Industrials, INDU, Weekly chart

The bearish picture for the DOW is shown on its daily chart below, which is a H&S topping pattern. The neckline, which is the shallow uptrend line from March 26 - June 15, was broken Monday but recovered today. It was back-tested with yesterday's high at 17714, as well as its 200-dma at 17684, and today it closed back above both. That leaves a possible head-fake break that will be followed by a new rally leg. Another point in the bull's favor is the fact that the 3-wave pullback from May nearly achieved two equal legs down at 17553 with yesterday's low at 17590. That strengthens the idea that it completed an a-b-c pullback from May as a correction to the longer-term uptrend and now the uptrend will resume. Even if we get a new low tomorrow it doesn't negate the bullish potential and if the DOW finds support at roughly 17500-17550 I'll be looking for at least a bigger bounce early next week. Then next week I'd be looking for evidence of something more bullish or instead just a bounce before turning back down. A new low tomorrow that sets up a higher bounce suggests a positive market reaction next Monday following the Greek vote. But it would turn more bearish below 17500.

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- bullish above 18,000
- bearish below 17,500

SPX has the same pattern as the DOW (a little uglier H&S top). It too broke the neckline on Monday, popped above it today but then closed at the line, leaving the potential for just a back-test and bearish kiss goodbye tomorrow. But a new low on Thursday would still be a setup for a larger bounce/consolidation before continuing lower this month. If we do get a new low on Thursday I'll be looking for support in the 2048-2054 area, which includes its 200-dma near 2054.

S&P 500, SPX, Daily chart

Key Levels for SPX:
- bullish above 2109
- bearish below 2048

The 60-min chart below shows the afternoon bounce back up to the H&S neckline near 2078, leaving both sides guessing whether or not the line will hold as resistance. A drop lower would complete the 5th wave of the leg down from June 22nd and it would equal the 1st wave near 2048. Below that level would look more bearish but if it finds support in the 2048-2054 area I'll be looking for a higher bounce and/or larger consolidation pattern through next week before continuing lower. It takes a rally above 2105 to turn things more bullish but a strong impulsive rally (not evident yet) would provide a bullish heads up.

S&P 500, SPX, 60-min chart

The Nasdaq failed to hold its breakout attempt above 5132 (the March 2000 high) last week and it quickly dropped below the little parallel up-channel that it was in since its May 6th low. It bounced back up to the bottom of the channel this morning, near 5035 (with a high at 5038), but then dropped away, leaving a bearish back-test and kiss goodbye. Based on this pattern it should continue lower on Thursday and keep it aligned with what I see for the blue chips. A new low, especially with bullish divergence against Monday's low at 4956, would be a good setup for a higher bounce next week. The bounce, if it plays out, should make it at least back up to its 20- and 50-dma's, which will be near 5050 next week. A higher bounce could make it back up to the trend line along the highs from January 2004 - October 2007, near 5110 next week. Back above 5132 would have me looking for higher highs, potentially up to the 5200 area.

Nasdaq Composite index, COMPQ, Daily chart

Key Levels for NDX:
- bullish above 5132
- bearish below 4888

The RUT was the weaker index today, which is not what the bulls want to see. It only managed to bounce back up to its broken uptrend line from October 2014 - May 2015, which is the line that supported all pullbacks since May 6th. As you can on its daily chart below, traders think this is an important trend line and today's failure to get back above the line leaves a bearish kiss goodbye instead. If it drops lower on Thursday there's good support in the 1240-1243 area to watch for at least a short-term bottom to set up a bounce into next week, perhaps back up for another back-test, near 1270, or up to price-level S/R near 1279. Above 1280 would have me thinking more bullishly about the RUT but not before -- shorting rallies appears to be the better bet until proven otherwise.

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- bullish above 1280
- bearish below 1233

Another index that is more bearish than bullish at the moment is the NYSE. As can be seen on its daily chart below, it has been using its 200-dma as S/R since March. It bounced sharply off it on June 9th but broke below it on Monday. Notice too where it opened on Monday -- just below its uptrend line from last December, which was last tested on June 9th and 15th. The break of that trend line was important, as was the break of the 200-dma. This morning it managed to bounce back up to the 200-dma, at 10885 (with a high at 10890), and then sold off, leaving a bearish kiss goodbye (so far). As with the others, a minor new low on Thursday would be a good setup for a higher bounce next week, one where NYA could make it back up to its broken uptrend line, near 11K next week and maybe even high enough to close Monday's gap at 11040.

NYSE Composite index, NYA, Daily chart

Treasuries have been volatile for the past few weeks as bond traders try to figure out the longer-term impact from Fed policies and global events. The projection at 2.453% (two equal legs up from January) and the uptrend line from July 2012 - May 2013 have been exceeded twice since June 10th but both times have failed to hold. Monday's sharp decline has been followed by another bounce back up toward both, which cross next week. A sustained rally above 2.5% would be bullish but only if it's able to negate the bearish divergence that's been building since May's high. Otherwise I continue to believe Treasury yields will be heading much lower this year (rally in bond prices), especially if the stock market is getting ready for a swan dive.

10-year Yield, TNX, Daily chart

While many of the other indexes are in synch with the big ones reviewed above, it's the TRAN that has been out in front of this decline and I continue to watch it for clues. The pattern remains bearish as it consolidates Monday's loss and it takes a rally above its last shelf of support near 8260 to give us a bullish heads up. Not until it can get above 8515 would it turn bullish and for now there's downside potential to the bottom of a parallel down-channel from March, currently near 7965. It could make it down to a price projection at 7841 after failing to hold at the projection at 8266 (two equal legs down from February 25th). Today's price action produced a long-legged doji at the trend line along the lows from April 6 - May 29 and as long as that line holds as resistance, after breaking on Monday, the bears maintain control.

Transportation Index, TRAN, Daily chart

No change for the U.S. dollar -- I continue to watch to see if it forms a big sideways consolidation this year. As long as it stays between 93 and 100 I don't see any reason to think otherwise.

U.S. Dollar contract, DX, Weekly chart

It's been two weeks since I've updated gold's chart (since I missed last Wednesday) and my last update (June 17) called for a bounce up to about 1202-1205 before heading lower. Near that level was a projection for two equal legs up from June 5th (for an a-b-c bounce correction), near 1202, and the 38% retracement of the February-March decline is at 1205. Not shown on the chart, a 62% retracement of the May-June decline is also near 1205 and that made a tough zone of resistance for gold bugs. Gold topped out at 1205.70 on June 18th and is now back down near its June 5th low at 1162. I expect that to break and see gold sell off toward 1090, if not lower.

Gold continuous contract, GC, Daily chart

Silver's weekly chart below shows it's back down to its shelf of support near 15.25 (Monday's low was 15.42). As noted on the chart, a breakdown, assuming it will, should lead to a drop down to the $12 area, which is where it would meet downside price objectives out of its previous descending triangle (June 2013 - August 2014) and its rectangular consolidation pattern (November 2014 - present). The bottom of a parallel down-channel for its decline from April 2011 will be near 11.50 by the end of August and that remains a potential downside target as well. I show the start of a bullish rally following that kind of move down but that will have to be evaluated when the time comes.

Silver continuous contract, SI, Weekly chart

I continue to believe oil will head back down but it's not clear if it will drop to a new low or just consolidate sideways this year before dropping lower. At the moment it looks like it's ready to roll over and as long as it stays below the June 24th high at 61.57 I'd stay bearish oil for now.

Oil continuous contract, CL, Weekly chart

The market is not paying much attention to economic reports right now but the NFP report tomorrow before the bell could certainly be a market mover. This morning we had the ADP report, which came in at +237K, higher than the expected 220K and better than the 203K in May. Tomorrow's NFP report is expected to show an increase of 250K jobs, which is less than the 280K in May but might come in a little stronger if today's ADP report is a good indication. Of course we still have the problem of trying to figure out if a strong number is bullish or bearish for the market. A strong employment number could embolden the Fed to lean more strongly to a rate hike, which the market doesn't like.

We also received the ISM Index report this morning and that also came in a little stronger than expected, 53.5 vs. 53.2, and better than May's 52.8. Construction spending dropped to +0.8%, from 2.1%, but it was better than the expected +0.3%. Auto sales were expected after the bell but I never saw any numbers.

Other than the employment numbers tomorrow, we'll get the Factory Orders report after the open. It's expected to show a little more deterioration, dropping to -0.5% for May, from -0.4% in April. It's old news so very likely it will have no effect on the market.

Economic reports and Summary


Following the market's reaction to the NFP report before the open tomorrow we could see a relatively quiet market since it's the day before a holiday weekend and traders will likely not want to place any big bets in front of the Greek vote on Sunday. Monday could be another wild day, one way or the other, and there are strong arguments for either way. It's the reason I will be basically flat in front of the weekend (with a small strangle position just in case the market tanks on Monday, in which case it could crash, or in case it takes off on another hopium-induced rally.

The EW pattern calls for one more leg down on Thursday before setting up a long play into next week. Fear of the Greek vote could cause some selling on Thursday and unless the market is going to crash next week I think we'll see a positive reaction on Monday (assuming we first get a new low on Thursday). A new low with bullish divergence tomorrow would provide a decent signal for a long play into next week. A strangle position with OTM puts and calls is a little risky because premiums could deflate quickly without a big move and I could lose on both positions. Hence a small position with known and acceptable risk.

If we do get a new low on Thursday followed by a big bounce next week I'll be looking at it as a shorting opportunity later next week. Hopefully by this time next week we'll have a good opportunity to evaluate a bounce to see if it should be shorted or instead look to buy pullbacks. And if we don't get a bounce on Monday, short will be the place to be and just hang onto your hat for a wild ride down the slope.

Good luck and I'll be back with you next Wednesday.

Keene H. Little, CMT

In the end everything works out and if it doesn't work out, it is not the end. Old Indian Saying

New Option Plays

It Could Be A Ghost Town

by James Brown

Click here to email James Brown

Editor's Note:

The U.S. market could look like a ghost town tomorrow.

There were new rumors that Greece was willing to make a deal with its creditors today. However, European leaders have decided to wait until after the July 5th referendum in Greece. If Greek Prime Minister Tsipras wants a vote then EU leaders will let him have one.

With everyone waiting for the results of the July 5th Greek vote the markets will likely be stuck churning sideways. If that wasn't enough the U.S. market is closed on Friday (July 3rd) in celebration of Independence Day. Many market participants are already on vacation for the rest of the week.

Since most traders will be sitting on the sidelines tomorrow we are electing to not add any new trades tonight.

In Play Updates and Reviews

Early Morning Gains Fade

by James Brown

Click here to email James Brown

Editor's Note:

Early this morning the market rallied on new hopes for a potential deal for Greece. However, the rally faded by the closing bell. The major indices still managed relatively widespread gains on the session.

Better than expected job numbers from the ADP Employment report and a better than expected ISM number helped generate a positive tone for economic growth.

CBRL and INSY both hit our entry triggers today.

Current Portfolio:

CALL Play Updates

Aetna Inc. - AET - close: 128.90 change: +1.44

Stop Loss: 125.85
Target(s): To Be Determined
Current Option Gain/Loss: +125.8%
Average Daily Volume = 2.0 million
Entry on June 15 at $118.75
Listed on June 10, 2015
Time Frame: 8 to 12 weeks
New Positions: see below

07/01/15: The last few days AET has found support in the $127.00-127.25 area. Traders bought the dip there again and AET surged to a +1.1% gain this afternoon.

No new positions at this time.

Trade Description: June 10, 2015:
Healthcare was big business before Obamacare. Now it's even bigger. AET is the third largest health insurer in the U.S. They added over 950,000 clients thanks to the Affordable Care Act. Naturally it doesn't hurt the healthcare business when the ACA forces you to buy health insurance or pay a tax penalty. Big insurers like AET are also benefitting from an expanding Medicaid program.

If you are not familiar with AET the company describes itself this way: "Aetna is one of the nation's leading diversified health care benefits companies, serving an estimated 46 million people with information and resources to help them make better informed decisions about their health care. Aetna offers a broad range of traditional, voluntary and consumer-directed health insurance products and related services, including medical, pharmacy, dental, behavioral health, group life and disability plans, and medical management capabilities, Medicaid health care management services, workers' compensation administrative services and health information technology products and services. Aetna's customers include employer groups, individuals, college students, part-time and hourly workers, health plans, health care providers, governmental units, government-sponsored plans, labor groups and expatriates."

Earnings have been steadily improving for AET. They have a habit of beating estimates. Management has raised their guidance the last three quarters in a row. AET's most recent report was April 28th. The company reported its 2015 Q1 earnings were up +17% from a year ago. Analysts were expecting a profit of $1.94 per share on revenues of $15.5 billion. AET delivered $2.39 per share. Revenues were up +8% to $15.09 billion. The number of medical enrollment members rose +4% to 23.7 million.

AET's management raised their 2015 guidance for the second time in a row. They now expect fiscal 2015 earnings in the $7.20-7.40 range compared to analysts' estimates at $7.17. The stock has been steadily rising thanks to its bullish outlook.

The big insurance stocks surged in late May on M&A rumors. Then on May 29th Humana (HUM) announced they were putting the company up for sale. HUM surged +20% on that one session. AET, Cigna (CI), and Anthem (ANTM) have all been rumored as potential suitors for HUM. Lately Wall Street has been rewarding the acquirer's stock with a rally on any merger news. AET could rally if they turn out to be the buyer.

Shares of AET just recently saw a $5.00 correction from $120 to $115 and bounced. This rebound looks like a potential entry point. Today's intraday high was $118.53. We are suggesting a trigger to buy calls at $118.75.

- Suggested Positions -

Long OCT $125 CALL (AET151016C125) entry $4.34

06/25/15 new stop @ 125.85, healthcare stocks rally on SCOTUS decision
06/20/15 WSJ reporting that AET has made a bid for HUM 06/16/15 new stop @ 119.85
06/15/15 triggered @ $118.75 thanks to M&A speculation
Option Format: symbol-year-month-day-call-strike

Cracker Barrel Old Country Store - CBRL - close: 151.57 change: +2.41

Stop Loss: 144.75
Target(s): To Be Determined
Current Option Gain/Loss: -10.0%
Average Daily Volume = 332 thousand
Entry on July 01 at $150.25
Listed on June 20, 2015
Time Frame: Plan on exiting prior to August 5th
New Positions: see below

07/01/15: Our CBRL trade is finally open. The stock has been showing some relative strength, which continued today with a +1.6% gain. The stock broke through round-number resistance at $150.00 and hit our entry trigger at $150.25.

Trade Description: June 20, 2015:
It's summertime and that means vacations and road trips for a lot of Americans. That's good news for a company like CBRL because most of their 634 restaurants are located along major highways.

CBRL is in the services sector. According to the company, "Cracker Barrel Old Country Store, Inc. provides a friendly home-away-from-home in its old country stores and restaurants. Guests are cared for like family while relaxing and enjoying real home-style food and shopping that’s surprisingly unique, genuinely fun and reminiscent of America's country heritage…all at a fair price. Cracker Barrel Old Country Store, Inc. (CBRL) was established in 1969 in Lebanon, Tenn. and operates 634 company-owned locations in 42 states."

Wall Street loves earnings growth and CBRL continues to deliver. Back in February the company beat earnings and revenue estimates and raised their 2015 guidance. Their most recent report was June 2nd. CBRL reported their fiscal third quarter. Analysts were expecting a profit of $1.37 per share on revenues of $680 million. CBRL beat estimates with a profit of $1.49 per share. This is a +21% rise from a year ago and marks the fifth quarter in a row of double-digit earnings growth. Revenues also beat estimates with a +6.3% rise to $683.7 million. CBRL said their comparable store sales were up +5.2%. Their comparable retail store sales were up +4.5%.

Management raised their normal quarterly dividend +10% to $1.10. They also announced a special one-time dividend of $3.00 per share. Both are payable on August 5th, 2015 to shareholders on record as of July 17th. CBRL offered a bullish outlook for both their fourth quarter and 2015. Management raised their 2015 earnings guidance from $6.40-6.50 to $6.60-6.70 per share. Wall Street was only expecting $6.55.

Technically the stock looks bullish. Shares have been consolidating their post-earnings gains the last couple of weeks but traders are buying the dip. Today CBRL is poised for a breakout past short-term resistance near $148.50. If the stock does breakout it could see some short covering. The latest data listed short interest at 17% of its small 18.9 million share float. Meanwhile the point & figure chart is very bullish and forecasting a long-term target at $231.00.

Tonight we are suggesting a trigger to buy calls at $150.25. More aggressive traders may want to jump in early on a rally past $148.75.

- Suggested Positions -

Long SEP $155 CALL (CBRL150918C155) entry $4.00

07/01/15 triggered @ $150.25
Option Format: symbol-year-month-day-call-strike

The Walt Disney Co. - DIS - close: 115.13 change: +1.65

Stop Loss: 112.25
Target(s): To Be Determined
Current Option Gain/Loss: +37.0%
Average Daily Volume = 5.7 million
Entry on June 18 at $112.25
Listed on June 17, 2015
Time Frame: Exit PRIOR to earnings in August
New Positions: see below

07/01/15: DIS continues to flex its relative strength muscles and the stock rallied +1.45%. Shares look poised to breakout past short-term resistance near $115.25 soon. I would be tempted to launch new positions on a rally past $115.35 .

Trade Description: June 17, 2015:
Disney is an American icon. The company is over 90 years old. They have grown into a massive content generating giant. Today DIS runs five business segments. Their media networks include broadcast, cable, radio, publishing, and digital businesses headlined by their Disney/ABC television group and ESPN Inc. DIS' parks and resort business includes Disneyland, Disneyworld, plus theme parks in Tokyo, Paris, Hong Kong, Shanghai, and a cruise line.

The company's products division licenses the company's horde of names, characters, and intellectual property to a wide range of products. They've also jumped into the online world with their Disney Interactive division. Last but not least is the Walt Disney Studios segment. Disney started making movies 90 years ago. Today their studio business includes Disney animation, Pixar Animation, Disneynature, Disney Studios Motion Pictures, Disney music group, Touchstone Pictures, and Marvel Studios.

Their movie business has been a money maker over the years with huge hits like the Pirates of the Caribbean franchise, Tangled, Wreck-it Ralph. In 2013 they released the animated film "Frozen", which has turned into the largest grossing animated movie of all time. Pixar has a stable of successful movies that have grossed almost $9 billion. DIS is also mining gold in Marvel Entertainment's library of over 8,000 characters of comic book history. Marvel had two big hits in 2014 Captain America: Winter Soldier and Guardians of the Galaxy. Their 2015 Avengers: Age of Ultron was also a big winner at the box office grossing more than $1.3 billion worldwide. Of course not every Disney movie crushes it. Their recent Tomorrowland was a big disappointment and they could lose more than $100 million on the film.

Back in 2012 Disney purchased Lucasfilm and all the Star Wars properties from George Lucas for $4 billion. The company is busy filming the next three episodes of the Star Wars franchise. The next Star Wars film it titled "The Force Awakens." It will be episode seven in the franchise. The movie doesn't hit theaters until December 2015 but analysts are already predicting that "The Force Awakens" will generate $1.2 billion at the global box office.

DIS management loves movie franchises because they can fuel years of sequels, park rides, and merchandise. The approach seems to be working. Revenues and net income have hit all-time highs for five consecutive quarters. Their 2015 Q1 results saw earnings per share up +23% to $1.27. Their Q2 results saw earnings grow +14% to $1.23 per share. Their domestic theme parks showed a strong surge in both attendance and in customer spending. Analysts are forecasting DIS earnings to grow +17% this year.

The stock surged to new all-time highs back in early May after its Q2 earnings report. Shares have since spent the last six weeks digesting gains in a sideways consolidation that has ignored much of the broader market's volatility. More recently DIS has started to rebound and is now at the top of its trading range. A breakout here could signal the next leg higher.

The point & figure chart is bullish and forecasting at long-term target of $154.00. I personally suspect that DIS could rally toward $120-125 before its next earnings report in August. Credit Suisse recently upped their price target to $130. Tonight we are suggesting a trigger at $112.25 to buy calls.

- Suggested Positions -

Long AUG $115 CALL (DIS150821C115) entry $2.30

06/27/15 new stop @ 112.25
06/18/15 triggered @ $112.25
Option Format: symbol-year-month-day-call-strike

Demandware, Inc. - DWRE - close: 70.70 change: -0.38

Stop Loss: 67.75
Target(s): To Be Determined
Current Option Gain/Loss: -20.5%
Average Daily Volume = 417 thousand
Entry on June 22 at $72.35
Listed on June 20, 2015
Time Frame: 6 to 8 weeks, exit prior to earnings in August
New Positions: see below

07/01/15: Shares of DWRE displayed some volatility on Wednesday. The stock surged higher at the open but the rally failed near last week's high. DWRE reversed lower and underperformed the market with a -0.5% decline. Further weakness would make today's move looks like the second half of a bearish double top.

No new positions at this time.

Trade Description: June 20, 2015:
2015 is shaping up to be a lot better than 2014 for DWRE investors. The stock delivered a rocky performance last year and spent much of it churning sideways in a huge consolidation pattern (see the weekly chart below). The stock's momentum has turned bullish this year thanks in part to consistently strong revenue growth. The NASDAQ is up +8.0% year to date. DWRE is currently up +23.9%.

DWRE is in the technology sector. According to the company, "Demandware, the category defining leader of enterprise cloud commerce solutions, empowers the world's leading retailers to continuously innovate in our complex, consumer-driven world. Demandware's open cloud platform provides unique benefits including seamless innovation, the LINK ecosystem of integrated best-of-breed partners, and community insight to optimize customer experiences. These advantages enable Demandware customers to lead their markets and grow faster."

With the exception of its Q4 report on February 19th DWRE has beaten Wall Street's earnings estimates on both the top and bottom line the last four quarters in a row. Revenue growth has been +55.6%, +55.9%, +43.4%, and +54.3% for the last four quarters. The only miss was DWRE's bottom line number for the fourth quarter where it missed by a penny.

DWRE's most recent results were May 7th. The company said their Q2 profit was $0.16 per share. That is a big improvement from a ($0.05) loss a year ago and it was 27 cents better than the ($0.11) loss analysts were expecting. Revenues were $50.27 million compared to estimates for $49.5 million. DWRE said their live customers were up +30% from a year ago to 279. The number of live sites surged 42% to 1,241.

Tim Adams, DWRE's CFO, commented on their quarterly results, "During the first quarter, we continued to invest in growth and innovation. We expanded our operations deeper into Europe and Asia. Our R&D team also made considerable progress on their key initiatives – extending our platform deeper into the store, delivering our intelligence solutions and enriching our core commerce capabilities. As we move through 2015, we remain focused on scaling our organization to support the fast pace of our growth."

Back in April Goldman Sachs added DWRE to their conviction buy list. Yet shares didn't start moving until June. A couple of weeks ago shares broke out from a three-month consolidation pattern. The current rally could be getting a boost from short covering. The most recent data listed short interest at 12% of the relatively small 33.48 million share float. Currently the point & figure chart is bullish and forecasting an $85 target. Tonight we're suggesting a trigger to buy calls at $72.35.

- Suggested Positions -

Long OCT $75 CALL (DWRE151016C75) entry $5.28

06/22/15 triggered @ $72.35
Option Format: symbol-year-month-day-call-strike

Cyber Security ETF - HACK - close: 31.52 change: -0.03

Stop Loss: 29.85
Target(s): To Be Determined
Current Option Gain/Loss: -33.3%
Average Daily Volume = 769 thousand
Entry on June 30 at $31.55
Listed on June 29, 2015
Time Frame: Exit PRIOR to August expiration
New Positions: see below

07/01/15: HACK gapped open higher at $31.89 but the rally stalled near $32.00. Shares faded back toward unchanged on the session.

I would wait to see if shares bounce from current levels before considering new bullish positions.

Trade Description: June 29, 2015:
Cyber security is a huge business because the threat is so large. Criminals and unfriendly foreign countries can wreak havoc and damage anyone. Victims include individuals, small businesses, large businesses, schools, organizations, and governments. The FBI Internet Crimes Complaint Center registered almost 270,000 complaints in 2014. McAfee reported that cyber crime cost the global economy $400 billion last year. Another report, by KPMG, suggests damages by online criminal activity could reach $560 billion in 2015.

We constantly hear about successful hacking attacks against large U.S. companies like Target, Home Depot, and JPMorgan Chase. Just recently there was a massive scandal where Chinese hackers allegedly stole extremely confidential information on tens of millions of U.S. government employees. Cyber crime is a constant threat. It's no surprise that investors have flocked to a relatively new ETF focused on cyber security.

Here's a description of HACK and why it was created:

The World's first Cyber Security ETF, the PureFunds ISE Cyber Security ETF (HACK) was created to provide the market with a transparent vehicle to invest in the increasingly important Cyber Security industry. Anyone that has fallen victim to a cyber attack understands that the fear, consequences and helplessness associated are real. Hundreds of millions of people around the world have suffered from some form of cyber attack. Although a personal cyber attack can seem overwhelming and significant, those that happen on a corporate or government level can be disastrous. In addition to financial losses, cyber attacks have the ability to shut down or manipulate energy infrastructure, weapons defense systems, medical devices, financial markets, transportation networks/vehicles, or harvest highly personal or secret information and a constantly growing amount of other potential threats.

Given the devastating effects cyber attacks can present, it is no coincidence that both corporations and governments around the globe have committed billions of dollars annually in hopes of preventing future attacks. This ongoing digital arms and defense race has vastly grown the size and importance of the Cyber Security industry. This constantly evolving battle will force efforts and capital to focus on this essential space. An increased spending and demand for cyber security solutions may benefit the always morphing Cyber Security Industry.

The Fund seeks to provide investment results that, before fees and expenses, correspond generally to the price and yield performance of the ISE Cyber Security Index.

HACK currently has 32 components. The top ten stocks are: IL, PFPT, SAIC, IMPV, SPLK, VDSI, FTNT, BLOX, AVG, and PANW. You can see all the components
here, scroll to the bottom and select "show all".

This ETF already has more than $1 billion in assets, which is shocking since it just debuted about eight months ago.

The ETF was a strong performer from early May until mid June. Last week shares began to see some profit taking. Today's market-wide sell-off has pushed HACK toward support at its trend line of higher lows (support) and technical support at the 50-dma. After a -8% correction the pullback may be over. We want to be ready if HACK rebounds from here. Tonight we're suggesting a trigger to buy calls at $31.55.

Please note this should be considered a higher-risk trade. The option spreads on HACK's options are wide. The spreads have probably been exaggerated today due to the surge in volatility. We are suggesting the August $33 calls. You may want to use a different strike.

*small positions to limit risk* - Suggested Positions -

Long AUG $33 CALL (HACK150821C33) entry $0.90

06/30/15 triggered @ $31.55
Option Format: symbol-year-month-day-call-strike

INSYS Therapeutics - INSY - close: 35.51 change: -0.41

Stop Loss: 33.85
Target(s): To Be Determined
Current Option Gain/Loss: -54.4%
Average Daily Volume = 607 thousand
Entry on July 01 at $36.30
Listed on June 30, 2015
Time Frame: Exit PRIOR to earnings in August
New Positions: see below

07/01/15: Our new trade on INSY is open. Shares rallied this morning and hit our entry trigger at $36.30. Unfortunately the rally was short lived. INSY underperformed with a -1.1% decline. If shares don't bounce soon we could see INSY dip toward support near $34.00. I'd prefer to see a rally above $36.40 before initiating new positions.

Remember, this is a higher-risk trade. The asking price on our call option surged this morning and it faded just as quickly when INSY declined.

Trade Description: June 30, 2015:
INSY is probably best known for its synthetic cannabinoid drugs that use THC, the same ingredient in marijuana. Yet it is the company's Subsys treatment, a painkiller several times stronger than morphine, that generates the most revenues for INSY. The marketing practices behind Subsys have generated some scandal-worthy headlines but nothing seems to be slowing down the stock's long-term rally.

INSY is in the healthcare sector, more specifically the biotech industry. According to the company, "Insys Therapeutics is a specialty pharmaceutical company that develops and commercializes innovative drugs and novel drug delivery systems of therapeutic molecules that improve the quality of life of patients. Using our proprietary sublingual spray technology and our capability to develop pharmaceutical cannabinoids, Insys addresses the clinical shortcomings of existing commercial products. Insys currently markets two products: Subsys, which is sublingual Fentanyl spray for breakthrough cancer pain, and a generic version of Dronabinol (THC) capsules. The Company's lead product candidate is Dronabinol Oral Solution, a proprietary, orally administered liquid formulation of dronabinol that Insys believes has distinct advantages over the current formulation of dronabinol in soft gel capsule. Insys is developing a pipeline of sublingual sprays, as well as pharmaceutical cannabidiol."

The company's earnings growth has been impressive. They have consistently beaten Wall Street's bottom line earnings estimates the last six quarters in a row. They normally beat the revenue estimate as well. Looking at the last three quarters INSY has seen its revenues jump +99.7%, +65.4%, and +70.2%. Most of that has been on strong Subsys sales, which were up +69% in the fourth quarter and up +74% in the first quarter.

INSY management is very optimistic and expects to complete four Phase III clinical trials in 2015. If successful it will significantly broaden their product line. The company just recently announced a New Drug Application (NDA) for its "proprietary Dronabinol Oral Solution for anorexia associated with weight loss in patients with AIDS; and nausea and vomiting associated with cancer chemotherapy in patients who have failed to respond adequately to conventional antiemetic treatments. Dronabinol Oral Solution is an orally administered liquid formulation of the pharmaceutical cannabinoid dronabinol, a synthetic version of tetrahydrocannabinol (THC)."

INSY's stock has been a strong performer since the company's IPO in 2013. Shares saw a 3-for-2 split in 2014. They just completed a 2-for-1 split on June 5th.

Before I continue I want to remind traders that biotech stocks can be tough to trade. Normally stocks in this group can be volatile with lots of headline risk. The right headline about a successful test or clinical trial or FDA approval can send shares soaring. The wrong headline could see a biotech stock crash or even gap down several points.

It is important to note that not all the news is good for INSY. In late 2014 the Wall Street Journal (WSJ) ran a story about some shady marketing practices for INSY's Subsys painkiller. This is an under-the-tongue spray version of the painkiller fentanyl. Subsys has a very high risk of dependency and is currently only approved for cancer patients. Yet strangely enough only 1% of prescriptions last year were written by oncologists. Several doctors with the biggest number of Subsys prescriptions have also been under review or disciplined. The WSJ noted that the Office of the Inspector General of the U.S. Department of Health and Human Services and the U.S. Attorneys in the Central District of California and Massachusetts are all looking into the matter. This is significant because Subsys accounts for the vast majority of INSY's revenues.

Thus far the stock market has managed to ignore the shadow cast by Subsys and how the drug is prescribed and INSY's financial relationship with the doctors who prescribe it.

Last week saw biotech stocks retreat. The IBB biotech ETF had broken out in mid June and rallied to new record highs. The group reversed lower last week with a sharp correction. INSY followed its peers lower with a painful drop from $42 to $34 in about three days. Currently the $34.00 level is holding up as support. If INSY can bounce from current levels the move could be big.

A rally from here could spark a short squeeze. The most recent data listed short interest at 68% of the small 23.6 million share float. Tonight we are suggesting a trigger to buy calls at $36.30.

*Small positions to limit risk* - Suggested Positions -

Long AUG $40 CALL (INSY150821C40) entry $3.40

07/01/15 triggered @ $36.30
Option Format: symbol-year-month-day-call-strike

Sirona Dental Systems - SIRO - close: 100.72 change: +0.30

Stop Loss: 99.65
Target(s): To Be Determined
Current Option Gain/Loss: -39.7%
Average Daily Volume = 316 thousand
Entry on June 15 at $101.05
Listed on June 11, 2015
Time Frame: 8 to 12 weeks
New Positions: see below

07/01/15: Shares of SIRO are still consolidating sideways inside the $100-102 zone.

No new positions at this time.

Trade Description: June 11, 2015:
Revenue growth in SIRO's business has been disappointing due to foreign currency headwinds thanks to the strong dollar. Yet investors seem to be ignoring this issue. Shares of SIRO have outperformed the broader market with a +15.3% gain this year.

SIRO is in the healthcare sector. They sell dental equipment. According to the company, "Sirona, the dental technology leader, has served dealers and dentists worldwide for more than 130 years. Sirona develops, manufactures, and markets a complete line of dental products, including CAD/CAM restoration systems (CEREC), digital intra-oral, panoramic and 3D imaging systems, dental treatment centers and handpieces."

The last couple of earnings reports for SIRO have only been mediocre. The company has been meeting analysts estimates on the bottom line (earnings). Unfortunately revenues have been seeing declines in U.S. dollar terms. On a local currency basis their sales have grown. One positive that helps the bullish picture for SIRO is margin growth. The company has seen margin growth improve the last two quarters in a row.

Shares of SIRO spiked down on May 8th, its most recent earnings report, but traders immediately bought the dip at technical support on its 50-dma. The stock seems to be stair stepping higher with a rally, then a week or two of consolidation that breaks out into another rally. Shares just broke through major round-number resistance at the $100.00 mark today. Tonight we are suggesting a trigger to buy calls at $101.05. Volume on SIRO's stock and its options is a little light. I would start this trade with small positions to limit risk.

*small positions to limit risk* - Suggested Positions -

Long SEP $105 CALL (SIRO150918C105) entry $2.90

06/23/15 new stop @ 99.65
06/15/15 triggered @ $101.05
Option Format: symbol-year-month-day-call-strike

Under Armour, Inc. - UA - close: 84.26 change: +0.82

Stop Loss: 81.75
Target(s): To Be Determined
Current Option Gain/Loss: -39.1%
Average Daily Volume = 2.0 million
Entry on June 26 at $86.05
Listed on June 23, 2015
Time Frame: Exit prior to August expiration
New Positions: see below

07/01/15: UA gapped open higher this morning but the rally stalled at $84.74. Gains faded by the closing bell but UA still managed to outperform the major market indices. Readers may want to wait for a rally past $85.00 before considering new positions.

Trade Description: June 23, 2015:
UA is in the consumer goods sector. They make shoes and athletic wear. According to the company, "Under Armour (UA), the originator of performance footwear, apparel and equipment, revolutionized how athletes across the world dress. Designed to make all athletes better, the brand's innovative products are sold worldwide to athletes at all levels. The Under Armour Connected Fitnessplatform powers the world's largest digital health and fitness community through a suite of applications: UA Record, MapMyFitness, Endomondo and MyFitnessPal."

The athletic shoe and athletic apparel business is very competitive. Nike (NKE) has dominated the space for years. UA is about 10% the size of NKE but it is actively fighting for market share and recently overtook Adidas as the second biggest athletic wear brand inside the United States. Nike had sales of $27.8 billion in 2014. UA is a fraction of that with 2014 sales of $3.08 billion but UA grew +32%.

UA has been firing on all cylinders with its earnings results. Most of last year saw the company not only beating Wall Street's estimates but also raising guidance.

UA reported their 2014 Q4 results on February 4th. The company reported a profit of $0.40 a share with revenues climbing +31% to $895 million, which was above estimates for $849 million. UA's CEO Kevin Plank, in a recent interview, said his company will grow at 20%-plus in 2015. The company's current estimates are $3.76 billion in sales for the year.

There was a steady stream of analysts raising their price targets on UA after its February earnings report. Many of these new price targets were in the low $90s ($91-94).

The company's most recent earnings report was April 21st when UA announced Q1 results. After raising guidance back in February the company reported earnings of $0.05 per share, which was in-line with Wall Street's new estimates. Revenues were up +25.4% to $804.9 million, which beat expectations. UA management raised their outlook again. They expect 2015 operating income to improve +13-to-15%. UA expects 2015 revenues to rise +23% to $3.78 billion.

The stock has rallied sharply into its earnings report and shares suffered some post-earnings depression with a -$12.00 drop (-13.6%) in the following two weeks. The price target upgrades continued but UA spent most of May consolidating sideways inside a narrow range. Finally on June 5th shares of UA broke out past multiple layers of resistance on another upgrade. The stock was upgraded to a "buy" with a $91 price target.

UA spent about a week digesting its bullish breakout and then took off. The company recently announced a 2-for-1 stock split. However, instead of a normal split the company is creating a new Class C stock which will have no voting rights.

Why a new class of shares? That's because the company's founder and current CEO Kevin Plank does not want to lose control. This way he can maintain control by keeping his voting shares while still selling the new Class C shares. Just in case you were curious, Class A UA stock has one vote per share. Class B stock has ten votes per share, which Plank owns the majority of.

This stock "split" will be disbursed as a dividend. There's no word yet on the new ticker symbol for the class C shares. There is a special meeting of UA shareholders on August 26, 2015 to approve the necessary changes so they can proceed with this stock split. Google did a similar stock split back in 2014 so the founders could maintain control. Both GOOG's and UA's decision has rankled some shareholders. However, normally stock splits tend to be viewed as a bullish move since stocks don't split if they're not rising. Stocks that split tend to outperform the broader market.

Tonight we are suggesting a trigger to buy calls at $86.05. More conservative traders may want to consider waiting for a dip instead. The nearest support is $82.00. We'll start with a stop loss at $81.75.

- Suggested Positions -

Long AUG $90 CALL (UA150821C90) entry $2.30

06/26/15 triggered @ $86.05
Option Format: symbol-year-month-day-call-strike

PUT Play Updates

Entergy Corp. - ETR - close: 71.45 change: +0.95

Stop Loss: 72.55
Target(s): To Be Determined
Current Option Gain/Loss: -47.1%
Average Daily Volume = 1.2 million
Entry on June 26 at $69.25
Listed on June 25, 2015
Time Frame: Exit PRIOR to earnings on August 4th
New Positions: Yes, see below

07/01/15: Yields on the 10-year U.S. bond rallied again. This should have been bearish for ETR but this stock rallied as well with a +1.3% gain today. There was a bullish segment on CNBC today suggesting the beaten down utility stocks might be poised to rebound.

Yesterday I noted that volume in ETR was almost three times the norm. Today volume was about +75% above normal levels.

No new positions at this time.

Trade Description: June 25, 2015:
Dividend lovers and income investors often consider the utility stocks. Many have hefty dividends that are considered safe and reliable. When the bond market peaked in January this year the utility sector reversed as well.

According to the company, "Entergy Corporation is an integrated energy company engaged primarily in electric power production and retail distribution operations. Entergy owns and operates power plants with approximately 30,000 megawatts of electric generating capacity, including nearly 10,000 megawatts of nuclear power, making it one of the nation's leading nuclear generators. Entergy delivers electricity to 2.8 million utility customers in Arkansas, Louisiana, Mississippi and Texas. Entergy has annual revenues of more than $12 billion and approximately 13,000 employees."

Earnings have been mixed. Back in February ETR reported its Q4 results where earnings missed estimates but revenues came in better than expected. That switched in the first quarter. ETR reported its Q1 results on April 28th. Earnings soared past expectations but revenues fell -9.0% and came in below estimates.

Most utility stock investors are not looking at earnings so much as they are looking at yields. ETR still has a dividend yield near 4.8%. That's about twice the U.S. 10-year bond yield, which closed at 2.39%. Investors are selling the utility stocks anyway because expectations are growing for the Federal Reserve to raise rates this year or early next year. History shows that the Fed almost never raises just once. It's always a series of rate hikes. This will boost bond yields and make high-dividend stocks less attractive.

ETR's recent oversold bounce just failed near $72.50 last week. Now the stock has reversed and broken down below round-number support at $70.00. The next support level could be $65.00 or it could be $60.00. We are suggesting a trigger to buy puts at $69.25.

I will issue one caveat. The Greece situation is a wildcard. It looks like Greece is headed for a default. If the world reacts poorly to this long-expected event we could see central banks, including the Fed, remain extraordinarily dovish in their monetary policy to reduce any impact of Greece's implosion. This could push the next Fed rate hike farther into the future and might be interpreted as bullish for utilities. I doubt this is a serious threat to our bearish play over the next two months but it could happen.

- Suggested Positions -

Long AUG $67.50 PUT (ETR150821P67.5) entry $1.70

06/30/15 ETR saw a surge in volume today
06/26/15 triggered @ $69.25
Option Format: symbol-year-month-day-call-strike

iShares Transportation - IYT - close: 145.25 change: +0.27

Stop Loss: 150.25
Target(s): To Be Determined
Current Option Gain/Loss: +5.7%
Average Daily Volume = 397 thousand
Entry on June 29 at $146.90
Listed on June 27, 2015
Time Frame: exit PRIOR to August expiration
New Positions: see below

07/01/15: A sharp decline in crude oil today should have been bullish for the transportation stocks. Yet the transport ETF underperformed the broader market. It did rally this morning but the rally quickly ran out of steam. The IYT plunged mid afternoon, likely on worries about the airlines. The government is investigating the airlines for potential collusion on fares.

No new positions at this time.

Trade Description: June 27, 2015:
The transportation stocks have been a sore spot for the wider bull market. Year to date the Dow Industrials are up +0.7% while the S&P 500 index is up +2.0%. Yet the IYT transportation ETF is down -10% in 2015 and down -12% from its all-time highs set in November 2014.

The IYT is the ETF that tracks the Dow Jones Transportation Average. Both have 20 stocks in them. The biggest components are railroad and trucking companies. Here's the full list of components: FDX, UPS, UNP, KSU, NSC, R, LSTR, JBHT, ALK, CHRW, KEX, UAL, EXPD, CAR, DAL, CNW, MATX, LUV, CSX, and JBLU.

Airlines grabbed a lot of headlines in the last several weeks as their stocks fell sharply. Investors are worried that the airlines will build up too much capacity and oversupply the market forcing them to lower fares and slash their profitability.

Railroad stocks are suffering on multiple fronts. The plunge in crude oil has wiped out demand for drilling new wells. That means less demand to move equipment and less demand for proppants (like fracking sand). Plus coal demand is falling.

Delivery stocks have struggled as well. FedEx (FDX) recently reported earnings that missed expectations on both the top and bottom line. Their previous earnings report the company lowered their 2015 guidance. Back in January UPS lowered their 2015 guidance and their most recent report saw revenues below estimates. The big railroad companies have been missing earnings and lowering estimates as well.

There has been a lot of attention given to the bearish divergence between the transportation stocks and the Dow Industrials. Thus far the broader market has ignored this weakness in transports. Traditionally investors viewed the transports as a thermometer of the market's health. If transports were seeing a healthy business then the economy was healthy. If transports were struggling then the economy was or would struggle. For decades there was a pretty good correlation between the two. These days there has been some doubt over how much this relationship still exists, especially since so much business takes place online.

Tonight we're not arguing if the transports are signaling a decline for the market or the economy. Instead we're looking at the transports themselves and focusing on the IYT. The ETF is clearly underperforming. It looked like it might bottom with support near $148.00. Unfortunately for the bulls the IYT just broke down under this support level. The next support could be down near its October 2014 lows in the $137-138 area. The point & figure chart is suggesting a target of $139.00.

We want to take advantage of this breakdown. Tonight we're suggesting a trigger to buy puts at $146.90. Plan on exiting prior to the August option expiration.

- Suggested Positions -

Long AUG $145 PUT (IYT150821P145) entry $3.50

06/29/15 triggered @ $146.90
Option Format: symbol-year-month-day-call-strike

Southwest Airlines Co. - LUV - close: 32.62 change: -0.47

Stop Loss: 35.45
Target(s): To Be Determined
Current Option Gain/Loss: +17.6%
Average Daily Volume = 7.9 million
Entry on June 16 at $33.85
Listed on June 15, 2015
Time Frame: Exit prior to earnings in late July
New Positions: see below

07/01/15: I just mentioned weakness in airline stocks in the IYT update. The XAL airline index was down -1.5% today. LUV fell -1.4%. The weakness was exacerbated by news that the U.S. Department of Justice is probing the airline industry for potential collusion over keeping ticket prices high. This investigation for "possible unlawful coordination" started two months ago.

This investigation could darken the clouds already hovering over the airlines although some of the analyst commentary I heard today was actually starting to sound bullish on airline stocks.

Shares of LUV plunged to new 2015 lows and hit $31.36 before paring its losses.

Don't forget that next week we'll hear June traffic numbers from most of the industry. Delta's traffic numbers will likely come out tomorrow.

Trade Description: June 15, 2015:
Last year LUV was one of the best performing stocks in the S&P 500 with a +124% gain. Shares are not seeing a repeat this year. In fact the stock is down -19% year to date. Most of the major airline stocks have been suffering as investors fear overcapacity will kill profits.

LUV is in the services sector. They're part of the regional airline industry. According to the company, "In its 44th year of service, Dallas-based Southwest Airlines (LUV) continues to differentiate itself from other air carriers with exemplary Customer Service delivered by more than 46,000 Employees to more than 100 million Customers annually. Southwest operates more than 3,400 flights a day, serving 93 destinations across the United States and five additional countries."

There are plenty of bullish investors rooting for LUV. After years of belt tightening with high oil prices the airline industry finally found some discipline and profits boomed. LUV has been a great example and many consider it the "best-in-breed" among the major airliners. LUV's earnings have surged from $0.43 a share in 2011 to $1.64 per share in 2014.

The big drop in crude oil last year was a major boon for most of the airline companies. Fuel is a huge expense and while oil has bounced off its 2015 lows it is still a lot cheaper than last year's prices. So why are airline stocks getting crushed? The biggest worry is the industry will build into much capacity (over supply) and this will lead to price wars, which could slash profitability.

On May 20th airline stocks were crushed, shares of LUV included, after the American Airlines CEO said they would aggressively compete on price. This is after AAL had already warned that their margins would shrink in 2016 versus 2015. News that LUV was planning to boost capacity by +8% in 2015 also helped spark the plunge lower.

The sell-off in airline stocks has continued as more companies downgrade their outlook. United Airlines (UAL) recently reported that their capacity had outpaced traffic growth. Delta (DAL) warned that their Q2 revenues would decline. Even LUV warned that their May passenger revenue per available seat mile (PRASM) was down -6% from a year ago. They adjusted their 2015 Q2 PRASM estimate to be down -4% to -5% from a year ago.

In spite of all the negativity there are a ton of analysts who are still bullish on the group. If you do any research you'll see a lot of voices shouting that the airline stocks are a buy. You'll hear how the airlines will avoid the mistakes of the past. There are plenty of analysts suggesting the airlines are a buy because their valuations are so cheap. Even the International Air Transport Association (IATA) recently raised their 2015 global estimate on airline profits from $25 billion to 29.3 billion thanks to lower oil prices and record high load factors (near 80%).

On one hand the bullish view point on airline stocks is true. Traffic is still growing. Oil prices remain depressed compared to the last few years. Valuations do look cheap. Eventually this group will get so cheap that they will find a bottom. Unfortunately that could be another -10% to -20% from current levels.

Technically LUV is a sell. The stock produced a bearish double top with its peaks in January and March. It has sliced through multiple layers of support and broken the longer-term up trend. The $34.00 level looks like short-term support. We are suggesting a trigger to launch short-term bearish positions at $33.85. Earnings are coming up in late July and we'll likely exit before LUV reports.

- Suggested Positions -

Long SEP $33 PUT (LUV150918P33) entry $1.87

06/22/15 new stop @ $35.45
06/16/15 triggered @ $33.85
Option Format: symbol-year-month-day-call-strike

SM Energy Company - SM - close: 43.72 change: -2.40

Stop Loss: 48.75
Target(s): To Be Determined
Current Option Gain/Loss: -9.1%
Average Daily Volume = 1.6 million
Entry on June 19 at $44.49
Listed on June 13, 2015
Time Frame: 8 to 12 weeks
New Positions: see below

07/01/15: A big decline in oil prices today weighed on energy stocks. Shares of SM plunged -5.2% to close at new three-month lows.

More conservative traders may want to lower their stop closer to the $47.00 level.

No new positions at this time.

Trade Description: June 13, 2015:
SM has been around a long time. They were founded back in 1908. The company was formerly known as St. Mary Land & Exploration Company but they changed their name to SM Energy Company about five years ago.

SM is in the basic materials sector. According to the company, "SM Energy Company is an independent energy company engaged in the acquisition, exploration, development, and production of crude oil, natural gas, and natural gas liquids in onshore North America."

SM operates in the Rocky Mountain region including the Bakken and Three Forks formations. Further south, they drill in the Haynesville and Woodford shales of Texas and Oklahoma. SM also operates in the Permian region of Texas and New Mexico. Even further south SM drills in the South Texas area with the Eagle Ford shale formation.

Crude oil's plunge in late 2014 crushed the oil sector and shares of SM followed it lower. Yet SM appeared to be having trouble before the big drop in oil prices. The company has missed Wall Street's earnings estimates the last four quarters in a row.

The huge drop in oil sparked significant cutbacks across the oil and gas industry with most major exploration companies reducing their capital spending plans. When SM reported their Q4 earnings in February 2015 they missed the EPS number by five cents and revenues were down -6.4% from a year ago. Management also slashed their 2015 investment plans by -44% from $1.9 billion to $1.0 billion.

SM reported its 2015 Q1 numbers on May 5th. Analysts were expecting a profit of $0.29 per share on revenues of $543.1 million. SM delivered a profit of $0.21 as revenues plunged -42% to $365.9 million.

Citigroup issued a research report last month that suggested U.S. oil producers will still be able to profit with oil at depressed prices. Here's a quote from a Bloomberg article, "belt-tightening across the industry and more strategic drilling in prolific areas would deliver ample profits even at $50 crude. The improvement is driven by costs that are expected to fall by 20 to 30 percent and techniques that allow rigs to wring 30 percent more oil or natural gas from each well compared with a year ago." That definitely seems like ammunition for the bulls to be buying some of the oil producers. Yet the group continues to lag. They are facing some stiff headwinds.

Crude oil has produced a +25% bounce off its March 2015 lows. Yet the rally in oil has stalled the last few weeks with the commodity churning sideways. The recent OPEC meeting showed that the Middle East shows no signs of slowing down their production. The world is temporarily facing a small oil glut.

Meanwhile currencies could play an issue here. It is widely accepted that the long-term trend for the U.S. dollar is now higher. The Federal Reserve will eventually raise rates, either later this year or early next year. When they start raising rates it should boost the dollar. At the same time central banks around the world (like Japan and Europe) are in the middle of huge QE programs that will drive their currencies lower. Naturally this will lift the dollar even higher. A rising dollar pushes commodities lower.

Technically shares of SM have been very weak. The broke down from a bullish channel a couple of weeks ago. The stock has also sliced through some psychological support levels. The point & figure chart is currently forecasting at $40.00 target. You could argue that SM is already oversold. However, the path of least resistance is lower. Tonight we are suggesting a trigger to buy puts at $44.90 with a wide stop loss at $50.25 just in case SM does see a little oversold bounce.

- Suggested Positions -

Long AUG $40 PUT (SM150821P40) entry $1.65

06/23/15 new stop @ 48.75
06/19/15 triggered on gap down at $44.49, suggested entry was $44.90
Option Format: symbol-year-month-day-call-strike