Option Investor

Daily Newsletter, Monday, 5/19/2014

Table of Contents

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

Market Wrap

Bifurcation, with a Twist

by Linda Piazza

Click here to email Linda Piazza
Market Internals


U.S. equity markets have bifurcated lately. Bifurcation occurs when something is divided into two branches or parts. While big caps headed up to new highs last week, small caps weakened and dropped to several-month lows. The bifurcation worried those market experts who expect the small caps to lead the way.

Today we saw a different kind of bifurcation. Asian financial markets turned in weak to flat overnight results, and European markets dropped in their morning sessions although some later erased early losses.

U.S. market participants had other ideas, however. After a RUT decline that lasted all of five minutes, market participants bought (or bought to cover) U.S. small caps. They pushed the RUT almost a standard deviation higher within the first hour of trading, and it was to end the day more than a standard deviation higher. Hampered by a sharp decline in AT&T (T), the big-cap Dow struggled to move up to and then stay in positive territory, however. Volume was thin ahead of the holiday weekend.

For the most part, the bifurcation was in the weaker performance of foreign markets in comparison with those in the U.S. International markets had focused on the implications of slower growth in China's housing market, increased tensions in the South China Sea, and a lack of headway in six-nation talks with Iran. Russian President Vladimir Putin repeated his assertion that he has ordered Russian troops to pull away from the Ukrainian border. NATO also repeated its conclusion that no such pullback has begun. President Putin's spokesperson countered that the 40,000 troops amassed on that border were just engaged in a routine exercise, and that exercise has ended, but that the withdrawal will require some time to complete.

Will such a retreat be likely before the May 25 Ukrainian elections? Just this weekend, a man who has declared himself governor of Luhansk, one of the regions voting last week to rejoin Russia, was detained by Ukrainian security forces and then freed after a firefight that left him wounded. He is reportedly now in Russia for medical treatment.

Amidst all this uncertainty, Greek bonds tumbled last week. Italian government bonds have joined them ahead of an election in Italy. Spain's 10-year treasuries weakened this morning ahead of a May 22 auction of those bonds.

Most U.S. indices turned in positive performances. The SPX gained 0.38 percent; the Dow, 0.12 percent; and the NDX, 0.79 percent. The RUT jumped a bigger 1.04 percent, and the SOX, 1.05 percent. The Dow Jones Transports (DJT) gained 0.77 percent. Utilities, consumer staples and telecom services were the weakest segments as there was rotation out of defensive sectors and back into the riskier ones. Ten-year yields closed at 2.5360 percent, up 0.0180 or 0.71 percent. Thirty-year yields closed at 3.3810 percent, up 0.340 or 1.02 percent. Both closed near their highs of the day.

Gold futures (/GC)for June delivery settled at 1293.8, up 0.4 points. Silver futures (/SI) for July delivery settled at 19.353, up 0.024 points. Copper futures (/HG) for July delivery settled at 3.1670, up 0.0200 points. Light sweet crude futures (/CL) for July delivery settled at 102.11, up 0.53 points.

Monday's Developments

In China, the government's efforts to curb rising house prices kicked in with April's housing prices gaining only 0.1 percent. Japan's economic news was better, with March machinery orders jumping, but the region also dealt with geopolitical turmoil. As Jim Brown mentioned in this weekend's Wrap, tensions over the South China Sea have escalated. That escalating tension led China to begin evacuating its citizens from Vietnam. Some Chinese nationals have been critically injured as a result of anti-Chinese violence in Vietnam. Both businesses and people were attacked. Vietnam claims dominion over the Paracel Islands, where China is drilling. Both countries claim that the others' ships are engaging in aggression against the other country's vessels. Japan has also been at odds with China over similar confrontations in the East China Sea.

Asian bourses turned in mixed performances, with negative or flat-line finishes. The Nikkei 225 lost 0.64 percent; the Hang Seng, 0.04 percent, and the Straits Times, 0.00 percent after a drop of 0.16 points. China's Shanghai Composite dropped 1.05 percent.

Due to Iran's location in Southwestern Asia, both Asian and European countries have an immense stake in what happens with Iran's nuclear enrichment program. This weekend, the six-nation talks with Iran in Vienna failed to make any significant progress.

European bourses also turned in mixed performances. The FTSE 100 lost 0.16 percent; the DAX gained 0.31 percent; and the CAC 40 rose 0.30 percent. All three had been deep in negative territory before the U.S. open. Spain's IBEX 35 lost 0.51 percent, and Italy's FTSE MIB, 1.60 percent. Italy had been down about 3 percent at one point, but its banks recovered off their lows by the close of trading.

In the U.S., Moody's weekly Business Confidence rose to 32.3 from last week's 30.0, the second week in a row that the indicator rose. The summary doesn't change much from week to week, with the analyst mentioning upbeat sentiment, optimism about the future, and strong hiring intentions.

At 12:10 PM ET, San Francisco Federal Reserve President John Williams and Dallas Fed President Richard Fisher participated in a panel with former FOMC Chair Ben Bernanke in Dallas. The panel discussed the role of the Federal Reserve. Fisher is a current voting member of the FOMC, while Williams is an alternate member this year, scheduled to serve as a voting member next year. Fisher might be the hawk, but it was Williams who first mentioned raising rates, just a few minutes into the panel. He said the Fed will probably start raising rates next year. Both Fisher and Williams appeared optimistic about U.S. growth, but both said Congress is not doing its part to enable growth. Fisher claimed that "Congress is the choke point right now."

While Williams mentioned that the FOMC was diligently studying excesses, it was Fisher who said that the U.S. has put deflation risks behind us and must now focus on excess reserves that might create inflation. He asserted that the U.S. is "at key fulcrum." Williams attempted to modify any concerns about the exiting the accommodative policies, but did admit that, while the Federal Reserve was testing tools for exiting, that desired "nice, soft landing . . . never happens."

The Fed presidents were questioned about the Financial Stability Oversight Council (FSOC) and whether asset managers should be designated SIFIs (systematically important financial institution). The two Fed presidents did not want to focus on that discussion. They do not participate in FSOC discussions as regional Fed presidents. However, Williams did believe that firms that aren't directly regulated can still prove dangerous to an interconnected system of the type we have now. Much of the rest of the discussion centered on steps taken during the end of President Bush's term to stabilize the economy. While interesting, we've heard most of it previously.

What may prove more interesting is the reaction in the bond market. Immediately before the panel began, the yield on the ten-year was about 2.511 percent. By the time the panel ended an hour and a half later, that yield had climbed to about 2.527 percent and climbed further before the bond market closed. The yield on the thirty-year moved from 3.345 percent as the panel began and climbed to about 3.365 percent by the time it ended. It, too, climbed further after the panel ended.

Story stocks included AT&T (T, 36.38, down 0.36 or 0.98 percent), announcing last night that it was buying DirecTV (DTV, 84.65, down 1.53 or 1.77 percent) for $48.5 billion. T said the deal, if approved, would "redefine the video entertainment industry." The company said it would be able to deliver content on TVs, laptops, mobile devices, cars and airplanes. The company could offer new bundles to consumers. DTV shareholders will receive $95 per share of DTV in a combination stock and cash offer. DTV closed at $86.18 on Friday. Warren Buffett's Berkshire Hathaway is one of DTV's shareholders that would be receiving that $95 cash-and-stock offer if the deal goes through.

T wants to expand beyond the cellular market, and DTV is the largest satellite TV operator. To obtain regulatory approval, T will divest itself of its approximate eight percent position in America Movile. Some industry experts are already looking at Dish Network (DISH, 59.36, down 0.59 or 0.98 percent), wondering what it will do in the wake of this potential T/DTV deal.

Drug manufacturer Pfizer (PFE, 29.28, up 0.16 or 0.55 percent) made another bid for the U.K.'s AstraZeneca this weekend, raising its offer to $116.6-120.0 billion U.S. or 55 pounds per share, an offer 15 percent higher than the May 2 offer. The offer was also well above a 53.50 pounds-a-share offer apparently made in a May 16 letter, but AstraZeneca had warned that an acceptable offer had to be at least 10 percent above that 53.50 pound-a-share mark. PFE vowed that this was its last offer and said the offer will expire on May 26, at 5:00 p.m. London time. PFE also said that it would not make a hostile offer. That's an assertion that will be put to the test. By this morning's U.S. open, PFE had its answer: AstraZeneca rejected the supposed final bid, saying that the proposal was "a minor improvement."

The deal was controversial, both in the U.K. and here in the U.S. If PFE could close the deal quickly enough to get through regulatory hurdles before the possibility that the U.S. tightened laws banning inversions, the company would go forward. An inversion occurs when the company relocates for tax purposes to a country with a lower tax rate. If AstraZeneca had accepted PFE's offer, PFE planned relocate the company for tax purposes to the U.K. although it would keep a headquarter office in New York. Legislators in the U.S. haven't been happy about the prospect of a large U.S. corporation re-incorporating in another country to lower taxes. Both British and Swedish governments fear that a deal would cut science jobs in their countries. PFE offered a five-year commitment that included some assurances about research jobs and facilities, but that commitment included an out if circumstances change.

Intermune, Inc. (ITMN, 38.93, up 4.61 or 13.44 percent) bounced. The company presented results of its drug to treat idiopathic pulmonary fibrosis at a conference, saying the drug significantly reduced lung function decline by the measures and in the time frame its Phase 3 trial covered. The secondary endpoint to treat dyspnea, shortness of breath or air hunger, was not met, however.

Credit Suisse (CS, 29.10, down 0.27 or 0.92 percent) is expected to admit criminal liability to one charge in the Justice Department's probe of whether CS abetted U.S. citizens' efforts to avoid paying taxes. The firm will also pay a hefty fine estimated to be more than $2.0 billion and perhaps about $2.5 billion. These actions come as a result of the bank's negotiations with the U.S. Department of Justice, the U.S. Federal Reserve, and the New York State Department of Financial Services. As a result of CS admitting wrongdoing, some entities will no longer be allowed to have CS as a bank or client, some experts suggest. Goldman Sachs' CEO mentioned that such pleas could impact CS's relationships with other banks. Some reports speculate that BNP Paribas (BNP) may follow CS in pleading guilty to such charges.

Deutsche Bank AG (DB, 41.66, down 0.51 or 1.21 percent) will raise a further $11 billion in order to put the bank in a better position for passing the ECB's stress tests and managing risks. The money reportedly comes from the Qatari royal family. The bank plans to expand investment banking, especially in the U.S.

Alcoa (AA, 13.51, up 0.06 or 0.45 percent), United States Steel Corp (X, 25.09, down 0.04 or 0.16 percent), Allegheny Technologies (ATI, 41.48, up 0.47 or 1.15 percent), Westinghouse Electric Co, and the U.S. subsidiaries of SolarWorld AG figured among the story stocks. A U.S. grand jury has issued indictments against five Chinese persons who reportedly stole trade secrets from these companies as well as the United Steel, Paper and Forestry, Rubber, Manufacturing, Energy, Allied-Industrial and Service Workers International Union (USW). The five Chinese individuals indicted sought information useful to Chinese competitors in the nuclear power, metals and solar products industries, the U.S. Justice Department charges. Of course, it's unlikely that these five individuals will be brought to the U.S. for trial, but they are now prohibited from traveling to the U.S. or other countries that have an extradition agreement with the U.S. or they will risk arrest and extradition. Some experts called these indictments and others that might unfold in the coming weeks a sign that the U.S. is serious about deterring hacking and sending a strong message to China. Other experts are skeptical of the deterrent effect of this move. In a press conference today, U.S. Attorney Eric Holder denied that the U.S. collects such information to help American companies.

During that press conference, U.S. Attorney Holder detailed some of what was stolen. That stolen data included internal memos from 2008 in which AA discussed a partnership with a Chinese state-owned enterprise. Construction, technical and design specifications and sensitive emails were stolen from Westinghouse in 2010. In 2010, hostnames and descriptions of U.S. Steel computers were stolen. Information about SolarWorld's production, costs, and cash flow were stolen in 2012, along with privileged attorney-client communications. Network credentials for almost all ATI employees were stolen in 2012. In that same year, emails were stolen from United Steelworkers. In all these cases, the companies were involved with or had been involved in transactions with Chinese companies.

Companies reporting earnings today included Campbell Soup Company (CPB, 44.06, down 1.06 or 2.35 percent). The company reported adjusted earnings of $0.62 per share, beating a Zacks consensus of $0.59 per share. Revenues, however, fell short. Net sales measured $1,973 million, below the Zacks consensus estimate of $2,010. The adjusted gross margin for the company was 35.2 percent, down from the year-ago level of 37.0 percent. The company attributed that change to the impact of its acquisitions, increased promotional expenditures, inflation, and higher costs. Higher selling prices and measures intended to enhance productivity offset some of those negatives. When broken down into its different units, sales of U.S. beverages dropped four percent year over year while sales of U.S. simple meals rose seven percent year over year. Soup sales declined, but broth and sauce sales jumped. The company also guided analysts and shareholders to expect full year profit at the low end of the prior guidance.

Urban Outfitters (URBN, 36.17, down 0.04 or 0.11 percent) reported after the close. The stock was last at $34.80, down 1.37 or 3.79 percent. The company reported earnings of $0.26 percent, with the consensus at $0.27 per share, and revenue of $686M, with consensus at $680.18M. However, whisper numbers had been as high as three cents above the consensus, not a single cent above it. Also, net income for the first quarter of fiscal 2015 declined from the comparable quarter in the previous fiscal year, with the decline blamed on higher costs. The company said that comparable retail segment net sales were flat.

Late in the day, GoPro Inc. announced that it would file with the SEC for a $100 million IPO. The company manufactures wearable sports-oriented camcorders.

Let's look at the daily charts.


Those new to my Monday Wraps might find the following paragraphs useful when interpreting my charts. Those who have read the Wraps can skip straight to the charts. I set up nested Keltner channels on my charts. It's a run-of-the-mill channeling system like the more familiar Bollinger Bands. As with those more familiar BB's, channel boundaries are often targets for upside or downside moves. They also mark levels where prices might find support or resistance on closes. When several channel lines converge, that potential resistance or support might appear stronger, just as it would if 20-, 50- and 100-sma's all converge in one spot.

For the benefit of subscribers, I mark potential upside and downside target/support/resistance levels with rectangles, usually green for upside and red for downside. Orange rectangles are sometimes used when the darker-colored ones would not allow for a clear examination of the next target. From now on, I will mention the nearest potential support or resistance level in the discussion on the chart, but not the further-out ones. They can be located on the charts if price breaks through the nearest levels on consistent daily closes. If an interpretation such as "support levels appear stronger than resistance, so up looks more likely than down" is possible, I'll tell you. Often we traders must be able to defend our trade against a move in either direction.

As with any type of potential support or resistance, those with profits should be protective of those profits as support or resistance is tested. If prices find support and climb, look to the next higher rectangle, even one just broken through, as potential resistance. Do the reverse when resistance is breached. Hopefully, this format provides you with the information you need without requiring all night to read as happens when I list each potential support or resistance level individually.

Legend for Keltner Channels and Moving Averages:

This legend references the SPX, but the Keltner and moving average setups are the same across all the charts. This legend serves as a general reference.

Annotated Daily Chart of the SPX:

The SPX's Keltner chart suggests that daily closes between about 1,864-1,886 constitute chop. The SPX needs sustained daily closes above about 1,886 to set a next potential upside target. The Keltner setup suggests that next upside target would currently be about 1,907-1,922, with the SPX likely to encounter considerable resistance on daily closes within that zone. However, sustained daily closes above about 1,922 set the next potential upside target, currently at about 1,940-1,958.

What about the downside? The Keltner setup suggests that sustained daily closes beneath about 1,864 would set a potential downside target of about 1,812-1,834, but there's also a lot of potential historical support a few points either side of 1,847.

The 1,812-1,834 zone is that "must hold" setup that I've mentioned in previous Wraps. The SPX must hold at or above that zone if it's to maintain the same long-term tenor that it's held for more than a year. If the SPX does break that support by sustaining daily closes below about 1,812, another potential downside target is also marked at about 1,700-1,720. However, traders should also be aware of potentially strong historical support near 1,775 and then again near 1,737-1,740.

My take? I don't have one. The SPX has been chopping around, although it's admittedly chopping around in a sideways-up manner. It has not, however, reinstituted its typical rally pattern of skipping along the top of a rising red 9-ema.

Annotated Daily Chart of the Dow:

The Dow's Keltner setup suggests that daily closes between about 16,396-16,552 constitute chop, without giving directional clues. Sustained daily closes above about 16,552 set a potential upside Keltner target of about 16,727-16,860, where resistance on daily closes is likely to be strong. The Keltner setup then suggests that if the Dow can break above about 16,860 on sustained daily closes, it sets an upside target near 17,200. However, round-number resistance near 17,000 could kick in, too. I am sometimes surprised when prices zoom past some known historical or round-number target to go right to the indicated Keltner target. For that reason, I don't discount those Keltner targets even when there's supposedly strong intervening support or resistance. However, the possible historical or round-number support and resistance levels should be acknowledged, too.

Sustained daily closes beneath about 16,396 suggest a next potential downside target of about 16,113-16,215. While this particular target, the green 120-ema, was enough to bounce Dow prices in April, the Dow sometimes breaks through that to hit and even push lower the next target. Sustained daily closes beneath about 16,113 would set that next target, now at about 15,900-16,040. This is the "must hold" target on some other indices, but the Dow's narrower composition means that it has sometimes overrun this target zone on other tests before bouncing. We can't be sure that one or two or even three or four daily closes beneath about 15,900 mean that the long-term tenor has changed. According to the Keltner setup, sustained daily closes beneath about 15,900 set a potential downside target at about 15,100-15,250, but the investors and traders in the Dow's 30 companies don't always pay attention to such setups.

The Dow also has potential historical support at about 15,700-15,800 and then again near the February low of 15,340.60. What's the must-hold level for Dow, then, before it has changed its long-term tenor? In my (very humble) opinion, the Dow would have to violate that 15,900 support on consistent daily closes, accompanied by similar breakdowns on the SPX and RUT. The Dow just doesn't give us a complete enough picture to choose one level if other indices aren't also breaking through support.

Annotated Daily Chart of the NDX:

For a couple of months, the NDX has been churning through the middle of this broadening formation. Because of that churn, daily closes above or below the NDX's converging 9-ema and 45-ema are no predictors of the NDX's ultimate direction. The NDX has been chopping willy-nilly across those flattened moving averages. The definition of the term willy-nilly is "without direction," and that's the way I've used it. For now, the NDX technically has a potential upside target of about 3,625-3,661, where resistance on daily closes might be strong. Sustained daily closes above about 3,661, however, would set a potential upside target of 3,718-3,758, where resistance on daily closes could be presumed to be even stronger. However, in the case of sustained daily closes above about 3,758, another potential upside target is marked on the chart.

What if the NDX rolls down? While the converging 9- and 45-ema's are not particularly predictive of next direction, it's possible that if the NDX is strengthening, it could find support on daily closes at those averages. However, if the NDX drops through them on daily closes, the Keltner setup technically suggests a next potential target of 3,500-3,541.

A violation of the support near 3,500 on daily closes would not only break through potential Keltner support, but also it would break through a rising trendline off the April low as well as the round-number support near 3,500. Such a break of support on sustained daily closes would target 3,400-3,435 according to Keltner evidence. That's one of those "must hold" levels seen on several indices. If the NDX is to sustain its long-term tenor, it will hold that support on daily closes.

If the NDX does not hold that "must hold" support, the Keltner channel setup suggests a next downside target of about 3,191-3,231. Potential round-number support near 3,300 must be considered, too.

Annotated Daily Chart of the RUT:

I don't want to clutter up this chart any more than it already is cluttered, but if you let your charting service automatically draw a regression channel off the RUT's decline from the early March high, the RUT remains within that channel. The upper border of that automatically drawn channel would cross at about the level of the converging peach-colored 45-ema and green 120-ema. Therefore, as far as I (and think-or-swim's automatically drawn regression channel tool) are concerned, the RUT remains in a downtrend. So far. It may be close to telling us whether that downtrend will persist.

Although the RUT has also tended to range from one side to the other of its smallest (grey) Keltner channel, it's been slightly more respectful of the 9-ema as a barometer of next action than the NDX has been. Sustained daily closes above the potential resistance zone surrounding the 9-ema, from about 1,106-1,117, would set up a potential Keltner upside target of about 1,128-1,141, where resistance currently looks strong. Remember that the RUT has some history of chopping out support/resistance levels about 20 points apart, so would-be bulls should also watch for potential resistance near 1,120 if the RUT should head up toward the next Keltner target.

Sustained daily closes above about 1,141 would mark a change in short-term tenor in which the RUT has been finding resistance on daily closes at the peach-colored 45-ema (or the 50-sma) over the last several months. The Keltner setup suggests that such an upside break would set a potential upside target of about 1,180-1,193, although that target may be pushed a bit higher by a strong move. Such a breakout, if sustained, would be an important psychological boost for market participants, too.

In turn, sustained daily closes above about 1,193 would set the next upside target, marked on the chart. However, I would suggest some protectiveness of bullish gains if the RUT approaches its previous 1,212.82 intraday high on its way toward that last Keltner target. There's no guarantee that all targets will be reached.

Let's look at the downside. Sustained RUT daily closes beneath about 1,106 set a next potential Keltner target of about 1,073-1,088. So far, the RUT has been hitting this particular Keltner target whenever it sustains daily closes beneath the descending 9-ema. That history doesn't make it certain that the RUT will do so each time, particularly with potential support lurking at 1,100.

That 1,073 support is a must-hold level for the RUT if the RUT is to maintain its long-term tenor from the last couple of years. Sustained daily closes beneath about 1,073 set a potential next downside target near 1,020, but remember the RUT's propensity to chop out support/resistance levels about every 20 points.

Annotated Daily Chart of the Dow Jones Transports:

Today, the Dow Jones Transports (DJT) rose to challenge last week's high, breaking a few cents higher by the time the morning was done. This chart, following right after the RUT's, displays the bifurcation in our markets. The DJT and RUT are two typically market-leading indices, two "indicator" indices, if you will, but they've been leading different directions. The RUT has been in a downtrend since early March. The DJT obviously has not been in such a downtrend. The DJT has been making and then testing new highs while the RUT has been moving lower in a descending price channel. Bulls would like to see the transports break higher and stay higher and the RUT to break out of its descending regression channel and start making up ground. Bears would like the opposite.

Tomorrow's Economic and Earnings Releases

This week's important economic events are carried forward from Jim Brown's weekend Wrap.

Companies reporting earnings tomorrow include CRM, HD, INTU, SPLS, and TJX, among others.

What about Short-term Moves Tomorrow on the Intraday Charts?

Annotated 30-Minute Chart of the SPX:

The SPX set up a short-term pattern of finding support on 30-minute closes on a rising 9-ema, a short-term rally pattern for the SPX. However, buyers hesitated after the first push higher, and gains slowed. Technically, a short-term upside target of about 1,888-1,892 has been set. However, the SPX couldn't make much progress toward that target after it pushed higher this morning. If the SPX does break higher tomorrow morning, watch for potential resistance to kick in at about 1,888-1,892. If the SPX sustains 30-minute closes above about 1,892, the chart suggests the next upside target will be at about 1,903-1,907, although I would expect some sellers to be waiting at or just below last Tuesday's intraday high of 1,902.17.

The SPX appears to have potentially strong support on 30-minute closes from about 1,878-1,883. However, if the SPX gaps below that zone tomorrow morning or is driven there on a sustained 30-minute closes, it sets a potential short-term downside target at about 1,867-1,870. A sustained breach of about 1,867 on 30-minute closes sets a potential downside target near 1,853-1,856, but would-be buyers might be ready to step in near last Thursday's 1,862.36 intraday low, too.

Annotated 30-Minute Chart of the Dow:

The Dow zipped higher and then churned between potentially strong support on 30-minute closes and potentially strong resistance on 30-minute closes. That zone stretches from about 16,499-16,535. The Dow would have to sustain 30-minute closes outside that zone before we know much about even short-term direction. Sustained 30-minute closes above about 16,535 set a potential upside target at about 16,575-16,608. Sustained 30-minute closes above about 16,608 in turn set a potential upside target near 16,720-16,753, where resistance on 30-minute closes might be presumed to be strong. That zone includes last Tuesday's 16,735.51 intraday high.

If the Dow instead drops tomorrow morning and sustains 30-minute closes beneath about 16,499, it sets a potential short-term downside target of about 16,397-16,430. Since that zone includes last Thursday's 16,397.46 intraday low, that support might be strong. However, sustained 30-minute closes beneath about 16,397 set a potential downside target at about 16,300-16,330.

Annotated 30-Minute Chart of the NDX:

The NDX also jumped higher today and then spent most of the afternoon churning between potential support on 30-minute closes at about 3,609 and potential resistance on 30-minute closes at about 3,622. Sustained 30-minute closes above about 3,622 set a new potential upside target at about 3,654-3,665 although last Tuesday's intraday high of 3,625.77 might be a hurdle to be watched before believing too strongly in that new upside target.

If the NDX drops tomorrow and sustains 30-minute closes below about 3,609, it sets a potential downside target at the bottom of its smallest grey channel. That support is not marked but is likely to be at about 3,600 if it's tested tomorrow morning and would fit with round-number and known historical potential support. The Keltner setup suggests, however, that the eventual short-term target could be as low as 3,580-3,591. Sustained 30-minute closes beneath about 3,580 set a downside target at about 3,550-3,561. In turn, sustained 30-minute closes beneath about 3,550 set a downside target near 3,500-3,509, although last Thursday's 3,542.63 intraday low might provide some incentive for bulls to step in, too.

Annotated 30-Minute Chart of the Russell 2000:

The RUT spent the afternoon producing 30-minute closes at or beneath the presumed resistance at about 1,115 and at or above the presumed support at about 1,108. According to Keltner evidence, sustained 30-minute close above about 1,115 would set a potential upside target of about 1,132-1,138. That would constitute a retest of last Tuesday's 1,136.95 intraday high. If we think back to the daily chart, that would also constitute a move up toward the top of the regression channel formed as the RUT fell off the March high. The resistance could be strong. If the RUT were to sustain 30-minute closes above about 1,138-1,140, look to the daily chart for next upside targets. Since that 1,138-1,140 zone is an important one on the daily chart, too, don't assume that the RUT can break through just because there's only a thin pink line on this 30-minute chart.

If the RUT drops tomorrow morning and sustains 30-minute closes beneath about 1,108, it sets a potential short-term target at about 1,103-1,106, with subsequent potential downside targets below that at about 1,093-1,097 and 1,081-1,085. A test of that lowest target would also constitute a retest of Thursday's 1,082.53 intraday low.

When all is said and done, what have we got? Low volume, for one thing. Several indices produced their gains today within churn zones. The NDX looks close to breaking out to the upside, but it sure did last Monday, too, closing at 3,612.73, less than three points below today's close. We don't know any more about the next direction on many indices than we knew last week.

The RUT made a strong showing today, but it was a strong showing inside a descending regression channel that began forming in early March. It's jumped up through that channel several times now without being able to break out. The transports also made a strong showing, closing at a new closing high, although it's actually an "equalish" high since it's only a few cents off last week's closing high.

Right now, the NDX and transports are the closest to breaking out. They may give us the first look at whether indices have another push in them or are about to roll lower again. Keep them on your radar screen. Be wary of the sustainability of any supposed upside breakout that doesn't soon break the RUT up out of that descending price channel, too. The channel's upper boundary currently crosses at about the same zone as the 45-ema, 50-sma and 120-ema, near 1,138-1,141. For now, all we can say for sure is that the indices gained on low volume ahead of a holiday weekend.

Linda Piazza

New Plays

Post-Bubble Bounce

by James Brown

Click here to email James Brown


Arrowhead Research - ARWR - close: 11.73 change: +0.96

Stop Loss: 10.75
Target(s): to be determined
Current Gain/Loss: unopened

Entry on May -- at $--.--
Listed on May 19, 2014
Time Frame: 6 to 8 weeks
Average Daily Volume = 1.3 million
New Positions: Yes, see below

Company Description

Why We Like It:
ARWR is in the healthcare sector. The company is in the biotech industry. Biotech stocks peaked in early March as investors started selling momentum and high-growth names. ARWR was definitely a target for profit taking after a rally from $2.00 a share back in July 2013 to over $25 in March 2014.

Biotech analysts believe ARWR has a lot of potential. The company is working on a treatment for hepatitis B and should have new data available in the third quarter this year. If successful the hepatitis B treatment could be a multi-billion drug as there are over 300 million patients around the world. ARWR currently has a market cap of about $600 million but a Deutsche bank analysts believes ARWR's market cap could surge to $4-to-$5 billion if its hepatitis B treatment is approved. ARWR is also developing new treatments on its RNAi technology.

Make no mistake, this is an aggressive trade. ARWR is an early stage biotech firm with no revenues. Any investment is a belief they will bring successful clinical data and eventually get FDA approval for its drugs in development.

Technically after a drop from $25 to $10 most of the air has been let out of the prior bubble. As investors return to risk on trades we think ARWR could outperform.

Tonight we're suggesting a trigger to open bullish positions at $12.05. We'll start this trade with a stop loss at $10.75.

Trigger @ $12.05

Suggested Position: buy ARWR stock @ $12.05

- (or for more adventurous traders, try this option) -

buy the Sep $12.50 call (ARWR140920C12.5) current ask $3.20

Annotated chart:

In Play Updates and Reviews

Stocks Drift Higher Again

by James Brown

Click here to email James Brown

Editor's Note:
The stock market continued to drift higher on Monday.

CNMD hit our entry trigger.
MDSO and PEIX were closed this morning.
We want to exit OAS, NDLS, and WBAI tomorrow morning.
Plan on exiting YOKU tomorrow at the close.

Current Portfolio:

BULLISH Play Updates

American Airlines Group Inc. - AAL - close $38.57

Stop Loss: 37.25
Target(s): to be determined
Current Gain/Loss: unopened

Entry on May -- at $--.--
Listed on May 17, 2014
Time Frame: 9 to 12 weeks
Average Daily Volume = 10.3 million
New Positions: Yes, see below

05/19/14: AAL delivered a quiet Monday performance. Shares churned sideways near the $38.50 level. I do not see any changes from our weekend newsletter's new play description.

Earlier Comments:
AAL is in the services sector. AAL is the merger between US Airways and American Airlines (AMR). The new company, American Airlines Group, is the largest carrier with nearly 6,7000 flights a day, over 330 destinations, to more than 50 countries, with over 100,000 employees worldwide.

This $17 billion merger was threatened by the U.S. Justice department last year. Regulators tried to block the merger on fears the new company would be too big, hold too much power, and reduce competitiveness and thus pricing for consumers. A U.S. district judge just recently approved a settlement worked out between AAL and the Justice Department where the new company agreed to sell certain assets to competitors. Getting the legal hurdle for its merger out of the way it's one more worry that investors can forget.

The airlines would also like to forget about winter. The 2014 winter season was brutal for the airline industry. In January and February the Bureau of Transportation Statistics said 6.05% of all domestic flights were cancelled. That number dropped to 4.6% of all flights cancelled in March. Put them all together and you have the worst winter cancellation rate in 20 years. Yet this news has failed to stop the rally in airline stocks. Granted AAL did consolidate sideways for a few weeks but now it is only a couple of points away from new eight year highs.

AAL just recently released data on April. Their revenue passenger miles for April were up 4.7 percent to 18.1 billion in 2014 versus April 2013. Odds are this number is going to improve since summers tend to be more bullish for the airline business.

Wall Street seems keen on shares of AAL. Goldman Sachs recently put a $46 price target on the stock. In the latest 13F filings it was revealed that Paulson & Co had raised their stake in AAL from 8.5 million shares to 12.2 million. Meanwhile David Tepper is the hot fund manager everyone loves and his Appaloosa Management has AAL as its second largest holding. In the last quarter Appaloosa increased their AAL stake by 22.5%.

On a short-term basis shares of AAL are sitting just below resistance at $40.00. I am suggesting a trigger to launch bullish positions at $40.25. We'll start with a stop loss at $37.25, just under this past week's low. I'm not setting an exit target yet but probably somewhere in the $45-50 zone.

Trigger @ $40.25

Suggested Position: buy AAL stock @ (trigger)

- (or for more adventurous traders, try this option) -

Buy the Aug $40 call (AAL140816C40)

option format: symbol-year-month-day-call-strike

CONMED Corp. - CNMD - close: 49.45

Stop Loss: 47.40
Target(s): to be determined
Current Gain/Loss: - 1.6%

Entry on May 19 at $50.25
Listed on May 17, 2014
Time Frame: 6 to 8 weeks
Average Daily Volume = 236 thousand
New Positions: see below

05/19/14: Our brand new play on CNMD is open. The stock shot higher this morning and broke through resistance at the $50.00 level. CNMD hit our suggested entry trigger at $50.25 before reversing lower. The close back below the $50.00 mark is a bit worrisome. CNMD did find some support near $49.20 this afternoon.

I would wait for a new rally above $50.00 before considering new positions.

Earlier Comments:
CNMD is in the healthcare sector. The company provides surgical devices and equipment for minimally invasive procedures. CNMD's most recent earnings report was a bit disappointing. They beat the bottom line estimate by two cents but missed the revenue estimate. Management lowered their Q2 revenue guidance but reaffirmed their full year guidance. Shares plunged on the news but it proved to be a one-day drop as traders have been buying the dips.

The question is why are investors buying the dips in CNMD? The stock soared back on April 15th when Reuters reported that CNMD had asked its advisors to find potential bidders to buy the company. This decision from CNMD might be a response to activist investors pushing the company to do more for shareholders. One analysts firm is estimating the company could go for $59 a share of acquired.

Current Position: Long CNMD stock @ $50.25

05/19/14 triggered @ 50.25

Delta Air Lines - DAL - close: 38.39 change: +0.53

Stop Loss: 36.45
Target(s): to be determined
Current Gain/Loss: + 2.0%

Entry on May 05 at $37.65
Listed on May 03, 2014
Time Frame: 6 to 8 weeks
Average Daily Volume = 13.5 million
New Positions: see below

05/19/14: DAL displayed some relative strength today with a +1.39% gain. The bounce back above its simple 10-dma is a positive sign. More conservative traders may want to adjust their stop higher. I am not suggesting new positions at this time.

Current Position: long DAL stock @ $37.65

- (or for more adventurous traders, try this option) -

Long Sept $40 call (DAL1420i40) entry $2.20*

05/12/14 new stop @ 36.45
05/07/14 new stop @ 35.75
05/05/14 triggered @ 37.65
*option entry price is an estimate since the option did not trade at the time our play was opened.

Oasis Petroleum - OAS - close: 47.60 change: -0.18

Stop Loss: 46.75
Target(s): to be determined
Current Gain/Loss: - 2.7%

Entry on May 13 at $48.91
Listed on May 12, 2014
Time Frame: 6 to 12 weeks
Average Daily Volume = 1.9 million
New Positions: see below

05/19/14: OAS is not working out for us. The stock underperformed the market today with a -0.3% decline. OAS should still have technical support at its rising 20-dma (currently near $47.15). We the lack of participation in the market's rally as a potential warning signal.

We're suggesting an immediate exit tomorrow morning.

Earlier Comments:
More conservative investors may want to wait for a close above the $50.00 level as an alternative entry point.

current Position: Long OAS stock @ $48.91

05/19/14 prepare to exit tomorrow morning
05/17/14 new stop @ 46.75
05/13/14 trade opened on gap higher at $48.91

BEARISH Play Updates

Financial Engines, Inc. - FNGN - close: 39.83 change: +0.54

Stop Loss: 42.25
Target(s): to be determined
Current Gain/Loss: - 2.8%

Entry on May 14 at $38.75
Listed on May 13, 2014
Time Frame: 6 to 8 weeks
Average Daily Volume = 567 thousand
New Positions: see below

05/19/14: Today's widespread market gain helped FNGN bounce +1.3%. Shares are now testing what should be resistance at $40.00 and its 10-dma. A reversal here at current levels could be used as a new bearish entry point.

Earlier Comments:
FYI: The most recent data listed short interest at about 13% of the 50.4 million share float.

current Position: short FNGN stock @ $38.75

05/14/14 triggered @ 38.75

Jacobs Engineering Group - JEC - close: 53.33 change: +0.05

Stop Loss: 56.15
Target(s): to be determined
Current Gain/Loss: + 2.1%

Entry on May 15 at $54.48
Listed on May 14, 2014
Time Frame: 6 to 8 weeks
Average Daily Volume = 1.4 million
New Positions: see below

05/19/14: The sell-off in JEC paused today. The good news is that shares did not participate in the market's widespread rally. I am not suggesting new positions at this time.

current Position: short JEC stock @ $54.48

- (or for more adventurous traders, try this option) -

Long Jun $55 PUT (JEC140621P55) entry $1.65**

05/17/14 new stop @ 56.15
05/15/14 trade opened at $54.48
**option entry price is an estimate since the option did not trade at the time our play was opened.
*I've provided the more standardized option symbol format.

Noodles & Co. - NDLS - close: 32.41 change: +0.78

Stop Loss: 33.25
Target(s): to be determined
Current Gain/Loss: -4.3%

Entry on May 09 at $31.25
Listed on May 08, 2014
Time Frame: 6 to 8 weeks
Average Daily Volume = 288 thousand
New Positions: see below

05/19/14: The bounce in NDLS is accelerating. Shares broke through their 10-dma and closed above the $32.00 level today. That's bad news if you're bearish on the stock. We are suggesting an immediate exit tomorrow morning.

Earlier Comments:
There are already a lot of bears in the name with the most recent data listing short interest at 27% of the 21.2 million share float. That does raise our risk of a short squeeze and investors might want to buy puts instead of shorting the stock.

current Position: short NDLS stock @ $31.08

- (or for more adventurous traders, try this option) -

Long Jun $30 PUT (NDLS14R30) entry $1.55*

05/19/14 prepare to exit tomorrow morning
05/09/14 triggered on gap down at $31.08, suggested entry point was $31.25
*option entry price is an estimate since the option did not trade at the time our play was opened.

500.com Limited - WBAI - close: 33.38 change: +2.24

Stop Loss: 34.05
Target(s): to be determined
Current Gain/Loss: - 7.3%

Entry on May 16 at $31.10
Listed on May 15, 2014
Time Frame: 6 to 8 weeks
Average Daily Volume = 389 thousand
New Positions: see below

05/19/14: Uh-oh! WBAI has been trading inside a bearish channel for weeks. Yet today's big rally (+7.1%) looks like a potential breakout through the top of its bearish channel. We are suggesting an immediate exit tomorrow morning.

*Small positions*

Suggested Position: short WBAI stock @ $31.10

05/19/14 prepare to exit tomorrow morning
05/16/14 trade begins. WBAI opened at $31.10

Youku Tudou Inc. - YOKU - close: 21.05 change: +0.45

Stop Loss: 21.75
Target(s): 18.50 or exit on Tuesday at the close
Current Gain/Loss: +10.2%

Entry on April 28 at $23.45
Listed on April 26, 2014
Time Frame: exit PRIOR to earnings on May 22nd.
Average Daily Volume = 4.1 million
New Positions: see below

05/19/14: The widespread market gains today helped YOKU bounce from support. Our plan is to exit tomorrow at the closing bell but more conservative traders may want to exit tomorrow morning instead.

Earlier Comments:
I would consider this an aggressive trade because YOKU can be a volatile stock and the most recent data listed short interest at 8% of the 80.6 million share float. FYI: The P&F chart is very bearish and forecasting at $10 target.

*small positions*

current Position: short YOKU stock @ $23.45

- (or for more adventurous traders, try this option) -

Long Jun $20 PUT (YOKU1421R20) entry $1.05

05/19/14 prepare to exit tomorrow at the close
05/17/14 new stop @ 21.75, new target @ 18.50, plan on exiting on Tuesday at the closing bell if YOKU does not hit our stop or target first.
05/10/14 new stop @ 22.40
05/08/14 new stop @ 22.60
05/07/14 testing the $20.00 level, readers may want to take profits right here!
05/05/14 new stop @ 23.60
04/28/14 triggered @ 23.45


Medidata Solutions - MDSO - close: 37.11 change: +1.27

Stop Loss: 36.55
Target(s): to be determined
Current Gain/Loss: - 3.9%

Entry on May 15 at $34.45
Listed on May 14, 2014
Time Frame: 6 to 8 weeks
Average Daily Volume = 1.9 million
New Positions: see below

05/19/14: MDSO was not cooperating with us last week. We decided in the weekend newsletter to exit immediately this morning. Shares opened at $35.81 before surging to a +3.5% gain.

closed Position: short MDSO stock @ $34.45 exit $35.81 (-3.9%)

- (or for more adventurous traders, try this option) -

Jul $35 PUT (MDSO140719P35) entry $3.30** exit $2.40*** (-27.2%)

05/19/14 planned exit
***option exit price is an estimate since the option did not trade at the time our play was closed.
05/17/14 prepare to exit on Monday morning
05/15/14 trade opened at $34.45
**option entry price is an estimate since the option did not trade at the time our play was opened.
*I've provided the more standardized option symbol format.


Pacific Ethanol, Inc. - PEIX - close: 12.32 change: +0.67

Stop Loss: 13.05
Target(s): to be determined.
Current Gain/Loss: +13.8%

Entry on May 05 at $13.25
Listed on May 01, 2014
Time Frame: 6 to 8 weeks
Average Daily Volume = 2.2 million
New Positions: see below

05/19/14: It looked like PEIX had found a bottom last week. Our plan was to exit positions this morning. The stock actually gapped down at $11.42 providing us a better exit.

*small positions*

closed Position: short PEIX stock @ $13.25 exit $11.42 (+13.8%)

- (or for more adventurous traders, try this option) -

Jun $12.50 PUT (PEIX1421R12.5) entry $1.15* exit $1.60** (+39.1%)

05/19/14 planned exit this morning
05/17/14 prepare to exit on Monday morning
05/09/14 1st target hit to sell half at $10.50
PEIX exit (1/2) at $10.50 (+20.7%)
PEIX Jun $12.50 PUT exit (1/2) at $10.50, option $2.65 (+130.4%)
option exit price is an estimate since the option did not trade at the time our play was closed.
05/07/14 new stop @ 13.05
We want to exit HALF of our position(s) at $10.50
05/06/14 new stop @ 13.75
05/05/14 triggered @ 13.25
*option entry price is an estimate since the option did not trade at the time our play was opened.