Option Investor

Daily Newsletter, Wednesday, 7/20/2011

Table of Contents

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

Market Wrap

The Market Rested As It Digested Tuesday's Big Gain

by Keene Little

Click here to email Keene Little
Market Stats

Following AAPL's blowout earnings after yesterday's close, equity futures took off to the upside for most of the overnight session and the day started with a gap up. But profit taking started immediately in AAPL and the gaps in the major averages were immediately closed. The market then traded sideways for the rest of the day, finishing essentially flat on the day. The techs, which started out the strongest in the morning, finished the weakest.

AAPL finished the day at 386.90, up +10.02 (+2.7%) but down from its opening high at 396.27 and its overnight high as 405, which tagged the top of its parallel up-channel from March 2009 and a level I had mentioned on the Market Monitor as a no-questions-asked shorting opportunity. It didn't make it up there during regular trading hours so there's still that possibility but the pattern for its rally can be considered complete now, which calls for a very large downside correction now (which goes completely against every single stock analyst out there).

This morning's economic reports were not market movers. The Existing Home Sales report was a disappointment following yesterday's strong new home construction and permits. Sales for June were 4.44M, down from May's 4.81M and less than the 4.93M that the market expected. This follows the +8.2% improvement in May and is concerning since there's been no follow through. Cancellations of contracts (many of which are due to an inability for the buyer to get a mortgage) jumped from 4% in May to 16% in June. This backs up the idea that much of the home activity is happening in rentals. The good news is that the median home price increased by +0.8% to $184,300.

It's time to beat up on Tim Geithner a little more (he makes it so easy) and discuss the banking system, especially since the global debt problems are rearing their ugly heads. Geithner wrote an article for the Wall Street Journal today, patting himself, the Obama administration and the Dodd-Frank bill (Wall Street Reform and Consumer Protection Act) while blasting Republicans for being uncooperative. For those who do not subscribe to the WSJ, if you'd like to read it, I found it at the UK's Morningstar at Stronger Banks.

Geithner asks and then answers his own question: "Where are we today, a year since the Wall Street Reform and Consumer Protection Act was signed into law? By almost any measure, the U.S. financial system is in much stronger shape, not just relative to the depth of the crisis but also relative to conditions that prevailed before it hit." I would say the market does not agree with his assessment as banking indexes have remained below their highs in April 2010 and the lower highs in February and May 2011, in spite of a continuing rally in the broader stock market.

Geithner goes on to say how much the government has made from its "investments" that were done to "put out the fires and avert disaster." He also believes the government will continue to make a profit on its other financial ventures such as GM (whose IPO price was 35 and is currently trading below 30). He firmly believes that by bailing out the banks the government was able to "prevent a second Great Depression." He acknowledges the fact that the financial crisis was caused by too much leverage and that the government's efforts have reduced this leverage, thereby making the financial system more secure. I'll come back to this point in a bit.

In the we-don't-want-to-rush-things department, three years following the financial crisis he states the SEC, CFTC (Commodity Futures Trading Commission) and banking regulators have "outlined" the major elements of reform. Three years to come up with an outline! He acknowledges the fact that the derivatives market, which he states is a $600T market, is in need of "oversight, transparency and greater stability." A $600T unregulated market needs some oversight. Wow, and he gets paid big bucks to make that assessment.

Back to the bit about leverage and the derivatives market. A big reason for the financial crisis, which went well beyond the failure of a couple of banks, was the entire credit market. Interbank liquidity dried up as banks distrusted one another, afraid of what was on the other banks' books, which were hidden from the rest of the world. The unregulated and non-transparent CDS (Credit Default Swaps) market at the time was about $50-60T which was an enormous risk to the system. The system was "fixed" through the Federal Reserve's rule change that allowed the banks to value their CDS and other derivatives at full value (mark-to-make-believe instead of mark-to-market).

Through the various bailout programs, including the multiple QE (Quantitative Easing) programs, the Fed has relieved those banks with the greatest derivative exposure (JPM, GS, BAC, C, etc.) by enabling them to shift the toxic debt to the U.S. balance sheet in exchange for pristine, newly created, dollars. This was done without any negative consequences to the heads of these banks, thereby proving to them that the risks taken were well worth it (especially to them personally). Do we think that bad behavior has therefore been stopped?

Not only has the bad behavior not been stopped but it has become even worse. The derivative exposure is now measured in the hundreds of trillions of dollars. The Fed has relieved the banks of their burden and has now put the U.S.'s credit rating at risk and made the debt situation even worse. The Fed's balance sheet went from about $800B in Treasuries to about $2800B in Treasuries and toxic assets that are not worth that much. With only $51B in capital the Fed is now using a leverage ratio of 54:1. When Lehman Brothers collapsed they were using a leverage ratio of 30:1.

For Geithner to come out today and say the banking system is more secure and stronger today, thanks to the Fed (which is a private banking system made up of the same bailed out banks) and government actions is basically him showing the world that he has his head, um, in the sand.

The only reason why our Treasuries aren't already paying very high interest rates, considering the risk, is because most of the rest of the world is in worse shape than the U.S. As an investor do you want to invest in European bonds? European banks are one step away from disaster. How about in other countries that are doing better but have governments that are not exactly stable? China is now rapidly heading towards its own subprime crisis. Japan is more indebted than the U.S.

So the point of all this is that there are very few places to invest your money right now. Fear is returning about a slowing global economy and that won't be good for stocks and commodities. There's a reason why Soros and other large investors have 75% of their money in cash and I don't expect they'll be anxious to invest that money any time soon. There's a reason they're on the sidelines and that of course begs the question whether we should be doing the same.

Without sounding the scare alarm but at the same time offering what I think is a sound recommendation, I think it's important to have some cash at home, locked up in a secure place. If we do experience another financial crisis, one which has the potential to be far worse than the one in 2008, we could see bank holidays, market closures, civil unrest (see what's happening in Greece?) and disruptions in normal daily lives. Having some cash around could be useful in a time of emergency. Consider it as part of your normal emergency preparedness.

For your retirement accounts and the bulk of your invested money I would say it's a time of concern and a time to be in cash. For OIN readers, we are traders and there are always trading opportunities, both long and short. The beauty of being a trader is that we don't have to get hung up on the woes of the economy and how it's going to hurt the stock, bond or commodity markets. For our investments we worry but for trading we just want to ride the direction the market is heading, then exit and look for the next bus to ride. Where it goes we don't care; it just needs to offer a comfortable ride (a bus with air conditioning for those of you sweltering in the heat and a bus with heat for those of us still freezing in the NW). We determine where we get on and where we get off.

So with that, let's see where the next bus is headed and whether or not we want to ride it. Looking at the SPX weekly chart below and the bold green uptrend line from March 2009 through the July 2010 low (which is where it found support at the June low as well as at its 200-dma at the same level) it's obvious what the trend still is. As long as that uptrend line holds we remain in a bullish trend. The big question is where and when the up move will finish. I'm showing a couple of possibilities that I consider the most probable and the highest-probability (imo) being the one pointing lower from here (bold red arrow). Showing the various possibilities makes the chart a little messy but it's important to understand we're in a period of time when both sides can't make up their minds which way to go and consequently we're in a whippy and choppy period. If you've been trying to trade this market for the past six months I now I don't have to tell you that. For now, the uptrend line is currently near 1290 so that's a key level for the bulls to defend.

S&P 500, SPX, Weekly chart

The red dashed line points to an immediate move higher and the cross of the broken uptrend line from August 2010 and the trend line across the highs since April 2010, near 1415 in mid August, is the more immediate bullish upside potential. The other possibility is for another leg down to complete a large 4th wave sideways triangle pattern from February. That pattern points to another rally (dashed green) into September/October (perhaps finishing on the 4th year anniversary of the October 2007 high). A break below the 50-week MA at 1254 and the March low near 1249 would negate the triangle pattern. So below 1290 would be bearish but in reality the bears need to break SPX below 1250 to get something more serious to the downside.

Looking at the daily chart below, on Monday SPX quickly dropped below its broken downtrend line from May 2nd but just as quickly it recovered back above it and closed marginally above it. On Tuesday it took off to the upside, leaving a bullish kiss goodbye on the successful back test. MACD is turning up from the zero line, a bullish signal. Today's candle is a small spinning top doji and is either indecision (consolidation) before pressing higher or it's a reversal in the making. I think the market will turn back down tomorrow and then the question is whether we'll get just a pullback before pressing higher again or if SPX will break below 1295. Dropping below 1310 would start to have me leaning more bearish. The more bearish scenario calls for a selloff below the June low as we head into August. But there will be plenty of support levels to turn it around, including the uptrend lines from March 2009 through both the July and August 2010 lows (currently near 1287 and 1267, resp.) and the 200-dma near 1280. Two equal legs down from July 7th targets 1270.

S&P 500, SPX, Daily chart

Key Levels for SPX:
- bullish above 1333
- bearish below 1295 and more bearish below 1270

There is the possibility for a continuation higher, even after a small pullback/consolidation, into early August. Perhaps the settlement of the debt ceiling issue or a field goal in Europe (instead of just kicking the can a little further down the road on the way towards solving the sovereign debt crises) will spark the big rally. The European finance heads meet tomorrow to figure out how to handle Greece and what they come with, or not, could spark a big move in the European markets and then ours. For a bullish move, I'm showing the projection for two equal legs up to 1394 and the trend line along the highs from February is near 1406 in early August. A continuation above 1333 opens the door to a higher rally.

The 60-min chart below is not much help in determining where we are in the price pattern so we'll just need to let price play out a little longer so that we get some more clues. The most immediate risk is for the stock market to drop lower right from here and a break below 1295 would trigger that scenario (and then watch for possible support near 1287, 1280, 1270 and 1250). If we get a pullback that finds support at or above 1310 then another leg up for the bounce off Monday's low to an upside target at 1348 would be a likely scenario. Above 1350 is the move that would point to 1400. In between 1295 and 1333 is a potential chop zone.

S&P 500, SPX, 120-min chart

Sticking with SPX for one more chart, there is a similar pattern playing out this year as we saw in 2007 and it bears watching since a break back below the downtrend line from May, confirmed with a break below 1295, could be a critical move. The top chart below shows the 2007 top, which was a H&S topping pattern, the neckline of which was an uptrend line from a previous high in May 2006 through the first significant pullback March 2007 low. An initial downtrend line from the head, the October high, was penetrated on the bounce in December which turned out to be a head-fake break and the market proceeded to sell off sharply from there.

SPX daily chart, 2007 top vs. 2011 top

Comparing the 2007 topping pattern with what's happening in 2011 shows a potential fractal pattern playing out. The neckline of the H&S top is the uptrend line from the previous high in April 2010 through the first significant pullback in March 2011. A downtrend line from the head (May high) has been penetrated (this time to much larger degree but we also know the Fed injected $76B to "help" the rally). So far the downtrend line has been retested and acted as support so it remains bullish above it. But if SPX drops back below the line (again, below 1295 would confirm the break) it could usher in the same kind of selling as we saw in December 2007/January 2008.

It's the same picture for the DOW. It found support on Monday at its 50-dma and is stronger than SPX in that regard. There is upside potential to the broken uptrend line from March 2009 through the August 2010 low which crosses a price projection at 12968 at the end of the month. The trend line stopped the rally to the July 7th high so we know its resistance. The price projection is where the 5th wave of the rally from July 2010 would equal the 1st wave. A break back below its 50-dma at 12342 and then Monday's low near 12296 would be bearish for a move down to at least its 200-dma near 11927.

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- bullish above 12,660
- bearish below 12,296

NDX is once again testing its highs made in February, April, May and July. The current test is showing a bearish divergence against its July 7th high. I see a little more upside potential to the trend line along the highs from February, near 2435, but its pattern supports the idea that the market is very close to topping out. Back below 2355 would suggest we may have seen the final high.

Nasdaq-100, NDX, Daily chart

Key Levels for NDX:
- bullish to 2435
- bearish below 2355

INTC and YHOO reported earnings after the bell and both sold off, taking futures down with them. Beyond that does it matter what they reported? Only the reaction matters and it was not good. Each is down in the after-hours session and how that translates to tomorrow's trading can only be guessed but so far it doesn't look bullish.

But then INTC said some good things in their 5:30 PM conference call (forecasting sales to exceed expectations) and equity futures took off to the north side, especially the blue chips. But INTC itself barely moved. ES (S&P 500 emini) was down about -6 points in after hours and then rallied almost 10 points to +4 following the low at 6:00 PM. NQ (NDX emini) was not nearly as strong in its bounce off the after-hours low. It could be someone's playing games with ES and YM (DOW emini) -- I know, that's hard to believe. Where futures will be in the morning is anyone's guess.

The RUT found support at both its broken downtrend line from May and its 50-dma, making Monday's low near 812 important for the bulls to defend. The short-term pattern looks ready for a little more pullback than we saw today and then possibly another leg up for its bounce, with an upside target near 846. Above that would turn it more bullish for an expected run up to new highs.

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- bullish above 846
- bearish below 811

As mentioned last week, I expected TNX to consolidate near support at 2.88% before breaking a little lower. That expectation has not changed and a drop down to about 2.8% still looks good. That should be followed by a bigger bounce to correct the decline from July 1st. Depending on how the bounce progresses into August (assuming we'll get it) I'm hoping to get some clues as to whether we'll see a new rally leg or just a correction before heading lower again. Expect some choppiness in the bond market for the next couple of weeks if I've got the pattern correct.

10-year Yield, TNX, Daily chart

The banks have been strong the past two days and relatively stronger today than the broader market. They were also more oversold and due a bounce. Whether or not the bounce can develop some legs is the question. BKX tagged its downtrend line from April, which it broke above on July 1st and then dropped back below on July 11th. It became resistance again on the 13th and today. A break above today's high should target the 50-dma at 48.05 and its downtrend line from February, near 48.30. Above 48.70 would be a bullish move but in the meantime the pattern remains bearish, and firmly in a down-channel.

KBW Bank index, BKX, Daily chart

Monday's low in the Transports tagged the 62% retracement of the June-July rally so it's possible that's all the pullback we'll see. But the pattern looks more bearish than that and I'm projecting a further decline to its uptrend line from March 2009 through the August 2010 low, near 5200, before we see a bigger bounce. How it does here around its 50-dma will tell us whether a bigger bounce is going to come sooner rather than later.

Transportation Index, TRAN, Daily chart

The dollar remains stuck and for the time being most of the market is ignoring it. There is a bearish sideways triangle pattern that continues to point to a breakdown in the dollar, and soon. A drop below 74.70 would put that expectation at the top of the list of possibilities. The bullish possibility demands a rally from right here and it must happen now. We should know soon.

U.S. Dollar contract, DX, Daily chart

Gold's bounce pattern since the early May low continues to look like it's in the middle of a larger pullback correction, even though it has made a new high above its May high. I've labeled the bounce an a-b-c correction with the sharp rally from July 1st the c-wave, which fits as the completion of the correction. A correction, if it exceeds above the previous high (the May 2nd high in this case) will oftentimes find the 127% extension of the previous decline (early May) to be a reversal level and so far that's what we have at 1608.85 (yesterday's overnight high was 1610.70). It also looks like a back test of its broken uptrend line from January. If the gold bulls are not quite finished I see upside potential to the trend line along the highs from March 2008 near 1635. Otherwise we should see gold start another decline, one that should take it below its May 5th low at 1462.50.

Gold continuous contract, GC, Daily chart

Silver also may have completed an a-b-c correction of its early May decline. Monday's rally might have created a throw-over finish above a price projection at 39.92 and the top of its flag pattern from the May low, which coincides with the longer-term trend line along the highs from 2006-2008. Yesterday's candle created a bearish engulfing candlestick, normally a good reversal signal at resistance. But today's strong bounce back up calls the reversal into question and we'll need another day to see what silver is up to. A rally above 41 would target an upside target zone at 43-44. If the a-b-c correction is finished we should see a strong decline kick off from here.

Silver continuous contract, SI, Daily chart

Oil has been consolidating between 95 and 99 for 9 trading days now and there's no evidence yet of when it will break out. At the moment there's some bullish potential for oil to get another leg up to match the one off the June 27th low. If a sideways triangle is playing out from the July 7th high it should finish with another small pullback, perhaps to the support line near 96, to be followed by another rally. Two equal legs up from June 27th projects to 105.85 and is shown on the chart below. That would also be close to a 62% retracement of the May-June decline and set up a reversal for another leg down (to perhaps equal the May-June decline). The risk that I see is for oil to start the next leg of its decline at any time.

Oil has been consolidating sideways since its July 7th high and currently looks like a bullish ascending triangle might be playing out. One more pullback inside the triangle, perhaps down to the 96 area one more time could set up the next rally leg. If it gets above 99.42 and stays above then the next rally leg will likely have already started. The upside projection, for two equal legs up from June 27th, would target the 106 area, also the 62% retracement of the May-June decline. Notice some similarities between oil and the stock market. If oil rallies I suspect the stock market will be also, and vice versa. A drop back below 93.50 would suggest the consolidation is over and another leg down is in progress.

Oil continuous contract, CL, Daily chart

Tomorrow's economic reports should not be big market movers unless there are any big surprises. We could see unemployment claims drop below 400K and that would be at least somewhat bullish and then the Philly Fed index and LEI reports at 10:00 AM are not expected to show any big changes.

Economic reports, summary and Key Trading Levels

For our chart of the week I had trouble picking one since I'm getting potential topping signals from more than a few. But I picked AMZN because of its strength this year and its clear pattern. It has been in a nice parallel up-channel from November 2008 and for the past three weeks has been banging its head at the top of the channel and has achieved a price projection at 217.24 for two equal legs up from the November 2008 low. Bearish divergences are present on the weekly and daily charts. This is as good a spot as any for a top to AMZN's rally and is a good time to try shorting the stock, which is obviously risky so use proper risk management.

Amazon.com, AMZN, Weekly chart

Tomorrow the European heads of finance will be meeting to discuss how to solve all the sovereign debt issues. They'll also be tackling the issue about Greece's refusal to do more. Greece has pulled the nuclear card by threatening to leave the EU and go back to their drachma if they don't get the loans they need. In other words, they're willing to watch the EU blow up as they head off on their own, defaulting on all their loans and starting over (which they have experience doing). This would of course start the dominoes falling and the other indebted countries (PIIGS) could follow right behind. You want to see the credit market freeze up like we haven't seen before? This would do it. So remain aware of this risk and be careful -- depending on the decision we could see the market tank on fear or rally on relief.

The ISEE call/put reading finished the day at 202, twice the average reading, indicating a lot of bullish enthusiasm and a high expectation for a continuation of the rally. From a contrarian perspective that's a bearish sign but at this point it's simply a caution flag on the field. August SPX puts below the current price far outnumber the calls above us so that creates some upward pressure for the market. Mixed signals in a choppy market. Need I say more?

Good luck and I'll be back with you next Wednesday (from my eastern Canadian trading office).

Key Levels for SPX:
- bullish above 1333
- bearish below 1295 and more bearish below 1270

Key Levels for DOW:
- bullish above 12,660
- bearish below 12,296

Key Levels for NDX:
- bullish to 2435
- bearish below 2355

Key Levels for RUT:
- bullish above 846
- bearish below 811

Keene H. Little, CMT

New Plays

Earnings Aren't Enough

by James Brown

Click here to email James Brown

Editor's Note:

The U.S. market was mired in indecision today. Lack of follow through on yesterday's big rally was disappointing. Earnings results are generally much better than expected but investors are focused on the debt ceiling talks in Washington and the debt bailout talks in Europe.

I am not adding any new plays tonight.

Here's a list of stocks on my radar screen:

IPI, MSFT, DELL, CSCO, HAL, WCG, TGI, BEAV, LVS, plus MXIM and AYI looks bearish.

Some of my favorites are:

IPI - Shares of this fertilizer stock are trying to breakout past their 200-dma. You could buy a dip near $32.50 or wait for a close over $34.00.

MSFT - This tech titan spent more than a week consolidating under resistance at $27.00. Today's pull back retested $27 as support. You could buy this dip or wait for a bounce since today's move is an "inside day" (inside yesterday's range). Keep in mind that earnings are tomorrow night. I would suggest readers wait until Friday to see the post-earnings move before initiating positions.

HAL - This is one of the better performing oil service stocks. A dip back toward $54.00 could be a bullish entry point.

LVS - Shares of this casino stock are coiling for a breakout past major resistance near $46.00, which is both price resistance and marks a significant trendline of lower highs. A rally past $46 would be an entry point but I have to warn you that earnings are due on July 26th.

- James

In Play Updates and Reviews

Merger News Closes Play Early

by James Brown

Click here to email James Brown

Editor's Note:
The U.S. markets did not see a lot of follow through on yesterday's big rally. Meanwhile merger news with ECL ended our play early. Our CROX trade is open. Our CAKE trade is closed as planned. Traders need to be careful with our aggressive short on VIT.


Current Portfolio:

BULLISH Play Updates

CROCS Inc. - CROX - close: 27.39 change: +0.25

Stop Loss: 25.85
Target(s): 29.90, 31.75
Current Gain/Loss: + 0.2%
Time Frame: up to its earnings report
New Positions: see below

07/20 update: Our new play on CROX has been opened. The S&P 500 and the stock both opened higher this morning. CROX opened at $27.31 and then spent the rest of the day consolidating sideways. I don't see any changes from my earlier comments. I would still consider new positions here.

Earlier Comments:
There is a chance CROX could see a lot more short covering with shares nearing new multi-year highs. The most recent data listed short interest at 12.6% of the 83.9 million-share float. FYI: The Point & Figure chart for CROX is bullish with a $52.50 target.

Suggested Position: Long CROX stock @ $27.31

- or -

Long AUG $28 call (CROX1120H28) Entry @ $1.15

Entry on July 20 at $27.31
Earnings Date 08/04/11 (unconfirmed)
Average Daily Volume = 2.1 million
Listed on July 19, 2011

Globe Specialty Metals, Inc. - GSM - close: 24.39 change: -0.37

Stop Loss: 23.80
Target(s): 27.25, 29.50
Current Gain/Loss: - 3.1%
Time Frame: 6 to 8 weeks
New Positions: see below

07/20 update: I think readers may want to start looking for the exits in our GSM trade. For the second day in a row the stock has failed at resistance near $25.00. This is actually the third time in four trading days. I am moving our stop loss up to $23.80. I am not suggesting new positions at this time. The plan was to keep our positions small to limit our risk.

Earlier Comments:
We should consider this an aggressive, higher-risk trade so let's keep our position size small to limit risk. We can always add to positions down the road. FYI: The Point & Figure chart for GSM is bullish with a $28.50 target.

- SMALL positions -

Current Position: Long GMS stock @ $25.18

- or -

Long AUG $25 call (GSM1120H25) Entry @ $1.60

07/20 New stop loss @ 23.80

Entry on July 14 at $25.18
Earnings Date 09/15/11 (unconfirmed)
Average Daily Volume = 874 thousand
Listed on July 13, 2011

Kaiser Aluminum - KALU - close: 55.89 change: +0.24

Stop Loss: 52.49
Target(s): 59.75
Current Gain/Loss: + 4.3%
Time Frame: 3 to 5 weeks
New Positions: see below

07/20 update: KALU extended its gains and closed at new two-year highs. Readers may want to wait for a dip near $55.00 before initiating new positions. We are planning to exit ahead of the July 27th earnings report. Please note our new stop loss at $52.49.

Earlier Comments:
Our target is the $59.75 mark since the $60 level looks like resistance. Investors could certainly aim higher. KALU has a high amount of short interest and the stock could experience a short squeeze. FYI: Investors should note that the most recent data listed short interest at 9.9% of the very small 18.5 million share float.

- Small Positions -

Current Position: Long KALU @ $53.56

- or -

Long AUG $55 call (KALU1120H55) Entry @ $1.30

07/20 New stop loss @ 52.49

Entry on July 11 at $53.56
Earnings Date 08/01/11 (unconfirmed)
Average Daily Volume = 183 thousand
Listed on July 9, 2011

Kennametal Inc. - KMT - close: 44.67 change: -0.69

Stop Loss: 42.30
Target(s): 49.00
Current Gain/Loss: + 1.2%
Time Frame: up to its earnings report 7/28
New Positions: see below

07/20 update: After hitting new record highs yesterday at $45.66, KMT pulled back a bit today. I would still consider new positions now or on a dip near $44.00.

Earlier Comments:
I do consider this a somewhat aggressive, higher-risk trade. More than one of KMT's technical indicators on the daily chart are at or nearing a bearish signal. Plus, the stock has resistance near the $45 level, which is where KMT failed two weeks ago. I suspect the stock will breakout to new highs if the market cooperates but we do not want to hold this position over the July 28th earnings report. We'll just plan on exiting in front of the earnings report. FYI: The Point & Figure chart for KMT is very bullish with an $80 target.

Current Position: Long KMT stock @ $44.13

Entry on July 19 at $44.13
Earnings Date 07/28/11 (confirmed)
Average Daily Volume = 826 thousand
Listed on July 18, 2011

Macy's Inc. - M - close: 29.60 change: -0.54

Stop Loss: 28.90
Target(s): 29.90, 32.25
Current Gain/Loss: + 4.5%
2nd Position Gain/Loss: - 0.8% Time Frame: 6 to 8 weeks
New Positions: see below

07/20 update: Warning! The action in Macy's today was bearish. The early morning rally attempt quickly failed. Shares closed near the bottom of its recent trading range. The move looks like a bearish engulfing candlestick pattern. I am not suggesting new positions at this time. Our final target is $32.25 but we might consider adjusting this target higher.

Earlier Comments:
Our plan was to keep positions small to limit our risk.

- small positions -

Current Position: Long M stock @ $28.30

- or -

Long Aug. $30 call (M1120H30) Entry @ $0.85

- 2nd Position, entry 7/11/11 -

suggested position: Long M stock @ $29.86

Long Aug. $32 call (M1120H32) Entry @ $0.63

07/16 new stop loss @ 28.90
07/09 new stop loss @ 28.49
07/09 Add 2nd position, buy stock/calls now
07/08 Planned exit. July $29 call @ $1.50 (+167.8%)
07/07 plan on exiting July calls tomorrow at the close
07/02 new stop loss @ 27.90
07/01 1st Target Hit @ 29.90 (+5.6%), options @ +107.1% (July) & +52.9% (Aug)

Entry on June 28 at $28.30
Earnings Date 08/10/11 (unconfirmed)
Average Daily Volume: 8.6 million
Listed on June 27, 2011

Vanguard Natural Resources - VNR - cls: 30.40 chg: -0.07

Stop Loss: 28.99
Target(s): 33.25
Current Gain/Loss: - 0.6%
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

07/20 update: VNR consolidated sideways near its 100-dma most of the session. Readers can choose to buy this late day bounce or wait for a dip closer to the $29.50 area instead. Cautious traders might want to consider an alternative stop in the $29.30-29.40 area instead. Our target is $33.25.

Current Position: Long VNR stock @ $30.61

- or -

Long AUG $30 call (VNR1120H30) Entry @ $1.20

07/19 Play is opened @ 30.61
07/18 The requirements to launch positions was not met. Try again. Both VNR and the S&P 500 need to open higher tomorrow.

Entry on July 19 at $30.61
Earnings Date 08/04/11 (unconfirmed)
Average Daily Volume = 193 thousand
Listed on July 16, 2011

Western Refining Inc. - WNR - close: 21.04 change: -0.16

Stop Loss: 18.90
Target(s): 22.00, 24.50
Current Gain/Loss: + 7.9%
Time Frame: 6 to 8 weeks
New Positions: see below

07/20 update: WNR has been losing momentum the last couple of sessions. Cautious traders may want to take profits now. I am not suggesting new positions at this time. There is a good chance we'll see shares dip toward $20.35 or the $20.00 area.

Earlier Comments:
FYI: The Point & Figure chart for WNR is bullish with a $28.50 target. Plus, the most recent data listed short interest at 38% of the 54.2 million-share float. That's plenty of fuel for a short squeeze.

Current Position: Long WNR stock @ 19.50

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Long AUG. $22 call (WNR1120H22) Entry @ $0.65

07/20 expect a dip toward the $20.35 area.
07/19 New stop loss @ 18.90. New targets @ 22.00 and $24.50

Entry on July 11 at $19.50
Earnings Date 08/04/11 (unconfirmed)
Average Daily Volume = 4.0 million
Listed on July 9, 2011

BEARISH Play Updates

OptionsXpress Holdings - OXPS - close: 15.40 change: +0.02

Stop Loss: 16.05
Target(s): 14.05, 13.65
Current Gain/Loss: - 1.0%
Time Frame: about 2 weeks
New Positions: see below

07/20 update: OXPS rallied to its simple 200-dma and reversed. This failure at technical resistance is a new bearish entry point.

Earlier Comments:
Our first target is $14.05 as the $14.00 level is likely support.

Current Position: short OXPS stock @ $15.24

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Long AUG $15 PUT (OXPS1120T15) Entry @ $0.45

07/20 Failure at the 200-dma is a new bearish entry point.

Entry on July 18 at $15.24
Earnings Date 07/27/11 (unconfirmed)
Average Daily Volume = 696 thousand
Listed on July 16, 2011

VanceInfo Technologies - VIT - close: 19.27 change: +1.16

Stop Loss: 20.15
Target(s): 15.15, 12.75
Current Gain/Loss: - 6.7%
Time Frame: 4 to 6 weeks
New Positions: see below

07/20 update: The oversold bounce in VIT continues. Shares surged +6.4% probably due to the better than expected earnings from technology stocks last night and this morning. Of course any bounce in VIT gets a little boost from panicked shorts trying to cover. VIT is now testing overhead resistance in the $19.50-20.00 zone. I would wait for the rally to stall or reverse before initiating new bearish positions.

Earlier Comments:
The most recent data listed short interest at more than 30% of the very small 23.6 million-share float. There is definitely reason to worry over a potential short squeeze, which explains the sharp oversold bounces. Thus readers may want to buy the puts to limit your risk instead of shorting the stock. FYI: The Point & Figure chart for VIT is bearish with a $6.00 target.

Current Position: short VIT stock @ $18.06

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Long AUG $17.50 PUT (VIT1120T17.5) Entry @ $2.15

Entry on July 18 at $18.06
Earnings Date 08/15/11 (unconfirmed)
Average Daily Volume = 1.0 million
Listed on July 16, 2011


Cheesecake Factory Inc. - CAKE - close: 32.69 change: -0.92

Stop Loss: 31.90
Target(s): 33.60, 37.00
Current Gain/Loss: + 3.6%
Time Frame: 8 to 10 weeks
New Positions: see below

07/20 update: CAKE gave back all of yesterday's gains with a -2.7% sell-off. Volume was pretty strong today too. It was our plan to exit at the close to avoid holding over earnings tonight. The company reported profits and revenues that were in-line with estimates and the stock is now trading lower in after hours near $31.

closed Position: Long CAKE stock @ $31.53, exit $32.69 (+3.6%)

07/20 planned exit (+3.6%)
07/16 plan on exiting July 20th at the close
07/09 new stop loss @ 31.90
07/07 Target hit @ 33.60. CAKE +6.5%, option @ $0.80 (+6.6%)
07/05 adjusted 1st target to $33.60
07/02 new stop loss @ 30.75
06/30 consider the opportunity cost of staying in CAKE. maybe you should exit early
06/28 New stop loss @ 29.65
06/09 CAKE is bouncing from the 200-dma as expected.
06/04 More conservative traders may want to exit early. We are expecting a drop to the 200-dma.


Entry on May 20 at $31.53
Earnings Date 07/20/11 (confirmed)
Average Daily Volume: 1.0 million
Listed on May 19th, 2011

Ecolab Inc. - ECL - close: 51.31 change: -4.08

Stop Loss: 53.90
Target(s): --.--, 59.90
Current Gain/Loss: - 0.3%
Time Frame: 6 to 8 weeks
New Positions: see below

07/20 update: Choose your favorite curse word and use it at will. This morning, before the opening bell, ECL announced plans to merge/acquire Nalco for $5.4 billion. The actual value of the deal is about $8 billion after ECL assumes NLC's debt. ECL gains a water treatment business. Unfortunately, the acquirer usually sees its stock move lower on the news and that's exactly what happened today. ECL gapped open lower at $53.19 and then plunged to $50.03 intraday. Our stop loss was at $53.90 so the gap open immediately closed our trade.

closed Position: Long ECL stock @ 53.35, exit $53.19 (-0.3%)

07/20 Gap down on merger news. Exit @ 53.19 (-0.3%)
07/19 Plan on exiting July 26th at the closing bell
07/09 new stop loss @ 53.90
07/08 planned exit. July $55 call @ $1.45 (+141.6%)
07/07 Plan on exiting our July calls tomorrow at the close
07/02 Sell half. ECL @ 56.76 (+6.3%), Option @ $1.75 (+191.6%)
06/30 new stop loss @ 53.45
06/18 new stop loss @ 52.45
06/04 new stop loss @ 51.90


Entry on May 26 at $53.35
Earnings Date 07/27/11 (confirmed)
Average Daily Volume: 1.5 million
Listed on May 18th, 2011