Option Investor

Daily Newsletter, Wednesday, 5/28/2014

Table of Contents

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

Market Wrap

Low-Volume Consolidation As Bond Market Makes A Move

by Keene Little

Click here to email Keene Little
The stock market trading has been accompanied by slowing volume, especially during rallies, and today's consolidation was also slow. After hitting price targets/trend lines we're left to wonder if the consolidation will lead to higher or lower prices from here but the bond market might be pointing the way.

Wednesday's Market Stats

The market's slower-than-normal volume today was a mixed bag for both sides. As you can see in the table above, up volume equaled down volume while declining issues marginally outpaced advancing issues. This fits with the indexes being lower today but with slow volume and choppy price action the market could be simply resting before heading higher again. The one fly in the ointment for stock bulls is what's happening in the bond market.

I'll cover some bond charts tonight but the -3.2% drop in the 10-year yield was a big move for a normally slow market and when yields drop it's been common to see stocks drop as well. The buying in the bonds drops the yields and is usually a result of money rotating out of stocks and into bonds. That's not always the case but it's been often enough to pay attention to. The bond market is made up of smarter traders than the stock market and the message is they see the economy slowing and a deflationary risk, both hazardous to stock bulls.

It was a quiet day for economic reports and geopolitical events. Perhaps the lack of a catalyst for either side had both sides sitting on the sidelines while waiting for the next big move. In any case, I'll just jump into the charts and show what we're looking at for setups.

Last week at this time we had chart patterns that were looking bearish for another leg down. The bulls had different ideas and when those bearish patterns failed they failed hard. The rally since last Wednesday has been strong, helped by thin holiday trading. Tuesday's big gap up, thanks to the futures market being pushed higher during the holiday hours, led to a strong day, especially for the techs and small caps. Today it looked like the market was simply consolidating the gains since last Wednesday but now the question is whether or not the bulls will get some follow through or if instead the rally was just a little bear fry surrounding the holiday weekend.

Equity futures made new highs in the overnight session but then sold off in this morning's pre-market session. Those highs were not tested during the day's trading hours and we've seen this at other important market turns. For now it's a heads up, especially since price patterns and some cycle studies (as well as the new moon today) has had me looking for evidence of an important high. It's too early to determine with any sense of high probability but today's choppy climb slightly higher, before selling off into the close, had the look of an ending pattern. Price action on Thursday will be important (choppy consolidation vs. impulsive decline).

Since I mentioned the new moon I'll show the SPX MPTS chart to show how the series of highs since December has been very close to new moons. I have no idea why a new moon would have this effect (I can understand full moons) but it's a pattern to respect. Will today's new moon market another top?

SPX MPTS, Daily chart

Kicking off tonight's chart review I'm showing the S&P 100 (OEX) since I've found it often trades well technically and we could be at/near an important high for the market. Starting with the weekly chart, it's no different than the others when trying to figure out the wave count for the entire rally from 2009 but the overall look is the same -- a large 3-wave move up from 2009 with the 2nd leg of the rally starting from October 2011. It's this leg up from October 2011 that's been a challenge to figure out but using price relationships between the waves as well as trend lines and channels helps identify the higher-probability wave count. This then helps identify price targets for where the rally might complete.

The OEX weekly chart below shows a corrective wave structure that consists of two a-b-c moves up from October 2011. The 2nd a-b-c is the rally from November 2012 and it would have two equal legs at 849.75. Perhaps more than coincidentally, this is close to the 127% extension of the 2007-2009 decline, a common reversal Fib. The close correlation is a strong reason to watch carefully for topping signals in this area.

S&P 100, OEX, Weekly chart

I'm counting the rally from June 2013 (wave-b on the chart above) as a 5-wave move to complete the final rally leg and the 5th wave is the tightly bunched group of candles since the February 2014 low. This is shown in more detail with the daily chart below. It's been a very choppy rally, which fits as an ending pattern for the 5th wave. There are some additional wave relationships in the pattern that also correlate closely to the 127% extension of the 2007-2009 decline, near 848. This cluster of Fib projections line up at roughly 846-847, which the top of a small rising wedge for the rally from April 11th is currently crossing through.

S&P 100, OEX, Daily chart

Today's high for OEX was 848.77 and there was a small throw-over above the top of its small rising wedge that was followed by a drop back inside the wedge this afternoon. That created a sell signal so any impulsive decline on Thursday would add to the reversal signal. That's the risk for those looking for more upside. The risk for the shorts right here is that there's at least a little more upside potential to the top of a larger rising wedge, which is the trend line along the highs from March 7 - April 4, which will be near 857 by Friday.

SPX has a very similar pattern as OEX's but I'm looking at a different wave count. Both point to the same conclusion -- once the leg up from May 15th has completed there's a very good chance the larger rally will also be complete. The top of the smaller rising wedge for SPX is near 1915 and will be near 1918 by the end of the day Friday. The top of the larger rising wedge, which is the trend line along the highs since December will be near 1930 by Friday. Wherever this tops out (assuming it doesn't break out the top of these rising wedges), keep in mind that rising wedges are retraced quickly and the nested rising wedges could mean double trouble for the bulls when this starts back down. The rally has been choppy and with low volume, which leaves somewhat of a vacuum underneath the market. Just like nature, the market abhors a vacuum and tends to fill it quickly.

S&P 500, SPX, Daily chart

Key Levels for SPX:
- bullish above 1917
- bearish below 1886

Getting in closer, the SPX 60-min chart below shows how yesterday's rally nearly tagged the top of its smaller rising wedge, which is the trend line along the highs from April 22 - May 13, and today it chopped marginally higher, tagging the trend line twice before selling off a little into the close. If it consolidates for another day we should see one more leg up to complete a 5-wave move up from May 15th, potentially up to 1930. But the larger pattern supports the idea that the leg up from May 15th should be a 3-wave move, which is why an impulsive decline from here would be a sell signal, especially if it drops below 1900, and confirmed bearish with a drop below 1886.

S&P 500, SPX, 60-min chart

We've discussed ad nauseum the bearish non-confirmation with waning market breadth as the indexes continue to make it higher. Making higher prices on the backs of fewer stocks is not the sign of health for a rally. It is instead the sign of an ending rally. It's not a trade signal, especially since these divergences can continue for a long time, but it's a warning sign and a reason to keep tight stops on long positions. You might get whipped out of a long position but I'd rather that than get trapped in a stronger-than-expected decline because I thought it would come back and I didn't want to get shaken out of my trade (too many traders find it much easier to get into a trade than out of it).

The chart below shows the number of stocks in the S&P 500 that are above their respective 50-day moving averages. SPX itself is well above its 50-dma, currently near 1872, but you can see the steady decline of its component stocks that can say the same thing. This measure last peaked with the index back in May 2013. It's just a matter of time before SPX doesn't have enough participation to push it higher.

S&P 500 component stocks above their 50-day moving averages

Another divergence I've shown before compares the NYSE index to the number of new 52-week highs for its component stocks. NYA made another of a series of new 52-week (all-time) highs on Tuesday (not today) but there's been a serious lack of participation by the number of stocks doing the same thing. The rally from October 2011 was being well supported until May 2013 and there's been a degradation of the strength since then. Again, this is obviously not a market timing tool but it is another sign of the end for the rally, especially since price is chopping marginally higher in its own ending pattern. When it breaks down it's likely to go fast.

NYA vs. New 52-week highs

The DOW has been weak compared to the other indexes since it has not been able to climb above its May 13th high. Money has been chasing the hot techs and small caps but when the reversal comes we could see the DOW outperform by at least holding up better. The 2000-2007 trend line, which stopped the December and May rallies, is currently near 16760. There's higher potential but at the moment it's looking vulnerable to the downside as well.

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- bullish above 16,760
- bearish below 16,340

Last week I showed the Nasdaq's sideways triangle and mentioned it's a bullish pattern following the rally leg from April 15th. The top of the triangle and its 50-dma were due to cross last Thursday and the rally above both confirmed the bullish breakout. There's at least a little more upside potential to 4267, where the rally from April 15th would have two equal legs up. It doesn't have to get there, or stop there, but it would be a good setup for what I believe will be the completion of an a-b-c bounce correction to the March-April decline. The top of a parallel up-channel from April 15th will be near 4290 by the end of the week.

Nasdaq Composite index, COMPQ, Daily chart

Key Levels for COMPQ:
- bullish above 4300
- bearish below 4128

Yesterday's rally in the techs had the COMPQ breaking its downtrend line from March 7th but I don't give that downtrend line too much credence since it's off two points close to each other and it's an untested trend line. But the break of it, followed by the consolidation above the line today, gives the bulls the nod here. The 60-min chart below looks more closely at the a-b-c bounce off the April 15th low and shows upside potential to the top of its parallel up-channel, near 4290 by the end of the week. For now I'm favoring the a-b-c bounce pattern instead of a more bullish 1-2-3 because of the sideways triangle following the April 24th high -- this is typically found in a 4th wave or b-wave position, not a 2nd wave. Once the leg up from May 15th completes, ideally with just one more new high, another decline at least matching the March-April decline, should follow (that would be down to about 3865 if the bounce tops out near 4290).

Nasdaq Composite index, COMPQ, 60-min chart

The RUT's pattern continues to be a mess so it's very difficult making projections off it. At the moment it's struggling with its 50-dma, near 1139, which it climbed above yesterday but closed back below it today. Bullish above, bearish below -- doesn't get much simpler than that.

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- bullish above 1139
- bearish below 1116

Treasury bond yields dropped strong today and have reached an important inflection point, which I'll show on the weekly charts for both TNX (10-year) and TYX (30-year). Stocks and bond yields have traded in synch more often than not and if yields break down here (from bond buying) it's going to put more downward pressure on the stock market, right at a point where the stock chart patterns suggest an important turn may be coming.

Today TNX dropped below its May 15th low and price-level support near 2.46%. A 1-day break can quickly get reversed but if the break holds it will be a bearish signal for yields (bullish for bond prices). A breakdown would be a message from the bond market that says the bond bull market is still alive and all those who have been declaring the death of the bull in bonds might have to modify their position. TNX has created a potential H&S topping pattern since the left shoulder was formed in September 2013, with the neckline near 2.46%. The downside price objective out of this pattern is to 1.866%, last seen in May 2013.

10-year Yield, TNX, Weekly chart

As noted on the chart, without bullish divergence at the 2.46% neckline I don't have a lot of faith it will hold. Declining yields reflects the bond market's opinion the economy is slowing and deflation, not inflation, is the main worry. While the Fed and government want low rates, it's the "threat" of deflation that is the Fed's worst nightmare, something they don't realize they're powerless to stop (and it's a necessary event to clear out the wastefulness from an overextended credit bubble).

TYX also broke below its May 15th low, which was a test of its uptrend line from July 2012. This confirms the break of the uptrend line and that means the 3-wave bounce correction off July 2012 low has likely finished. A 3-wave correction to the long-term decline in yields means we should see new lows (below 2.45%). For years I've been looking for TNX to hit 1% by 2015, and TYX to hit 2%, and those projections still remain on the table.

30-year Yield, TYX, Weekly chart

So how can you play the bond market if you'd rather not trade the futures (ZN for 10-year, ZB for 30-year)? TLT is a good ETF (or the inverse fund, TBT) and it represents a mix of bond maturities around the 20-year point. Its weekly chart is shown below and as you can see, it's in the process of breaking its downtrend line from July 2012 (the opposite of what TYX is doing). It has also exceeded the level for two equal legs up from December 31, 2013, both of which are bullish signals. It's a strange pattern for the leg up from March 7th (choppy) and it's overbought on the daily and weekly charts so I'm feeling a little leery about further upside but TLT remains bullish above its May 22nd low at 111.79.

20+ Year Treasury ETF, TLT, Weekly chart

The Trannies were outperforming the market today and TRAN was up more than +1% before giving back some of its rally into the close. There was further bearish non-confirmation between the DOW and TRAN so it's a heads up that the rally might not last. Today's high was good enough to tag the trend line along the highs from May 2013 - January 2014 and a throw-over above its rising wedge for the rally from April 14th. The wave count, if today's high holds and it drops back below this morning's low at 8010, looks good for the completion of its rally. If it drops below 8010 you can use IYT to play the short side.

Transportation Index, TRAN, Daily chart

The U.S. dollar has continued its rally after bouncing off support the first week of May and has now broken its downtrend line from January-April (broke it last Friday, back-tested it yesterday and continued higher today) so that's bullish. It should be early in the start of the next rally leg but in reality it's still within its sideways trading range since October 2013, between 79 and 81.50. It's now approaching the midpoint of that range and its 50-week MA at 80.87.

U.S. Dollar contract, DX, Weekly chart

Gold had been building up pressure for a move after tracking sideways in a narrowing range for two months and when it broke (down) yesterday it broke hard. Today it added a little to the decline and it should be early in the next leg down that should drop gold to at least 1194 (two equal legs down from March 17th) and potentially below 1150. There was no explanation yesterday for why gold got hammered (silver did also but it's still holding above its May 1st low) so the risk for gold bears is an out-of-nowhere big bounce back up.

Gold continuous contract, GC, Daily chart

Oil has been consolidating since March 3rd in what appears to be a sideways triangle. This is a bullish continuation pattern following the January-February rally and only needs one more leg down inside the triangle to finish it. A break the May 1st low at 98.74 would negate the bullish pattern, which would in turn be followed by a strong decline. The larger pattern shows a choppy bounce off the January 9th low, following the strong August-November 2013 decline and if the bounces to lower highs since February could be a prelude to much stronger selling oil. I have no strong opinion about its direction following a pullback to the bottom of its triangle, currently near 99.70. If it gets there we can then watch closely for the next move.

Oil continuous contract, CL, Daily chart

Tomorrow will be a little busier for economic reports than what we had this morning. The usual unemployment claims data will be followed by the 2nd estimate for GDP, which is expected to drop into negative territory (-0.5%) from the 1st estimate that was +0.1%. The 3rd and final estimate will probably drop even lower. Can you say recession? We'll also get some more housing data with pending home sales numbers.

Economic reports and Summary

There's an important cycle turn date centered on May 27th and we have a new-moon day today, both of which have me alert to the potential for an important market turn. The price pattern, while supporting the idea for a consolidation day on Thursday and a final new high into Friday (maybe next Monday), I'm not holding my breath for it. The risk is high for a breakdown from here. Fibs, EW counts, trend lines, market breadth, cycle turn date, new moon -- there's just too much lined up against the bulls right now for me to even suggest looking at the long side. It could rally some more but the risk is high for those carrying long positions overnight (that goes without saying for shorts). Get your selections for short plays ready since I think you'll have an opportunity very soon.

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 Plays

Self Storage

by James Brown

Click here to email James Brown


Extra Space Storage Inc. - EXR - close: 52.26 change: -0.45

Stop Loss: 49.90
Target(s): To Be Determined
Current Gain/Loss: unopened

Entry on May -- at $--.--
Listed on May 28, 2014
Time Frame: Exit PRIOR to June 13th
Average Daily Volume = 583 thousand
New Positions: Yes, see below

Company Description

Why We Like It:
EXR is a REIT. The company is in the self-storage business. They currently own and/or operate 1,000 self-storage properties in 38 states with over 59 million square feet of rentable space.

Americans do love their stuff and they have a hard time letting go of it. Their love affair with holding on to more stuff could be a good reason EXR's stock has soared from its 2009 lows. Oh and the company has been consistently performing over and over again. The latest results were in-line with analysts' estimates but it was also their 14th quarter in a row of double-digit growth.

EXR just raised their dividend +17.5% to 47 cents a share. This new dividend is payable on June 30th to shareholders of record on June 13th (the ex-dividend date). We want to exit prior to the ex-dividend date.

Technically EXR is hovering at all-time highs. Traders just bought the dip today near $52 and its simple 10-dma. We are suggesting a trigger to open bullish positions at $53.05 (more aggressive traders can just buy it now). If we are triggered at $53.05 we'll start with a stop loss at $49.90.

Longer-term investors may want to hold on to this stock. The point & figure chart is bullish with a $67 target.

Trigger @ 53.05

Suggested Position: buy EXR stock @ (trigger)

Annotated chart:

Weekly chart:

In Play Updates and Reviews

Market Rally Pauses

by James Brown

Click here to email James Brown

Editor's Note:
The stock market's rally paused on Wednesday. The major indices spent most of the day drifting sideways.

Our AAL trade hit our bullish entry trigger.

Current Portfolio:

BULLISH Play Updates

American Airlines Group Inc. - AAL - close $39.80 change: +0.45

Stop Loss: 37.25
Target(s): to be determined
Current Gain/Loss: -1.1%

Entry on May 28 at $40.25
Listed on May 17, 2014
Time Frame: 9 to 12 weeks
Average Daily Volume = 10.3 million
New Positions: see below

05/28/14: Airline stocks continued to show relative strength today. The XAL index was up +1.3%. AAL spiked past resistance at $40.00 and hit our suggested entry point at $40.25 before paring its gains. Our trade is open. However, investors may want to wait for a close above $40.00 before initiating positions.

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%.

current Position: Long AAL stock @ $40.25

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

Long Aug $40 call (AAL140816C40) entry $2.65*

05/28/14 triggered @ 40.25
*option entry price is an estimate since the option did not trade at the time our play was opened.
option format: symbol-year-month-day-call-strike

Arrowhead Research - ARWR - close: 13.33 change: +0.48

Stop Loss: 10.75
Target(s): to be determined
Current Gain/Loss: +10.6%

Entry on May 27 at $12.05
Listed on May 19, 2014
Time Frame: 6 to 8 weeks
Average Daily Volume = 1.3 million
New Positions: see below

05/28/14: The rally in biotechs paused today but not for ARWR. Shares added another +3.7% and closed above their 40-dma and 150-dma.

Shares could find new resistance near $14.00 and its simple 50-dma so do not be surprised to see it tag that level and pullback a bit.

Earlier Comments:
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.

Current Position: Long ARWR stock @ $12.05

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

Long Sep $12.50 call (ARWR140920C12.5) entry $3.40*

05/27/14 triggered @ 12.05
*option entry price is an estimate since the option did not trade at the time our play was opened.
Option Format: symbol-year-month-day-call-strike

Delta Air Lines - DAL - close: 40.27 change: +0.81

Stop Loss: 36.45
Target(s): to be determined
Current Gain/Loss: + 7.0%

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

05/28/14: DAL was leading the charge for the airline stocks. Shares outperformed with a +2.0% gain and new all-time highs. The close above potential round-number resistance at $40.00 is encouraging. However, I want to caution traders that DAL is nearing its trend line of higher highs, where shares have failed multiple times. DAL looks like it might hit that trend line (resistance) in the $41.00-41.25 area.

More conservative traders may want to take profits near $41.00.

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*

05/28/14 DAL is nearing potential resistance at its trend line of higher highs.
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.

The Dow Chemical Co. - DOW - close: 51.77 change: +0.84

Stop Loss: 47.90
Target(s): To Be Determined
Current Gain/Loss: + 1.0%

Entry on May 27 at $51.25
Listed on May 24, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 9.5 million
New Positions: see below

05/28/14: Chemical companies continue to perform well and DOW displayed relative strength with a +1.6% gain today.

Earlier Comments:
DOW is in the basic materials sector. The company supplies chemical products as raw materials. As Wall Street searches for returns and yield DOW will likely continue to show up on their radar screen.

The company has been doing a good jog on maintaining cost controls and returning capital to shareholders. The Q1 2014 earnings report showed net profits surged +75% from a year ago. The first quarter was their sixth consecutive quarter of year-over-year earnings growth.

Dow has raised their dividend by 15% and now sports a 3.0% yield. They plan to complete a $4.5 billion stock buyback program in 2014.

In spite of higher feedstock and energy costs DOW still managed to see margins grow. They expect 2014 to see this margin growth gain further momentum.

Wall Street has been upgrading the stock and raising earnings forecasts.

Shares of DOW are in a long-term up trend (see weekly chart below). Yet the last couple of months have seen shares consolidating gains in a sideways move near $50. This consolidation looks like it's about over. DOW is poised for a breakout higher.

Current Position: Long DOW stock @ $51.25

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

Long Sep $50 call (DOW140920C50) entry $2.88*

05/27/14 triggered @ 51.25
*option entry price is an estimate since the option did not trade at the time our play was opened.
Option Format: symbol-year-month-day-call-strike

BEARISH Play Updates

Aegerion Pharma. - AEGR - close: 32.33 change: -0.02

Stop Loss: 32.55
Target(s): to be determined
Current Gain/Loss: unopened

Entry on May -- at $--.--
Listed on May 20, 2014
Time Frame: 6 to 8 weeks
Average Daily Volume = 1.4 million
New Positions: Yes, see below

05/28/14: It looks like the bounce in AEGR might be stalling. Yesterday produced a potential bullish reversal pattern but today does not count as any sort of follow through higher.

We are still on the sidelines and waiting for a new low.

Earlier Comments:
AEGR is in the healthcare sector. The company is a biotech firm that develops treatments for rare diseases. This stock delivered a tremendous rally from October 2012 to October 2013. That's when shares revered at the $100 level and it's been downhill ever since. Exacerbating AEGR's decline has been the company's earnings warning. They lowered guidance back in January and they lowered guidance again when they reported earnings on May 7th.

The stock gapped down sharply following the May 7th report and there has been no oversold bounce. Wall Street was expecting revenues of $33.6 million for the quarter. The company only reported $27 million.

AEGR seems to be facing challenges with its only marketed product, Juxtapid. This is an oral treatment for homozygous familial hypercholesterolemia. This is a genetic disorder characterized by extremely high levels of cholesterol, especially the LDL (bad) cholesterol.

Most of the company's sales are in the U.S. Last quarter a large chunk of its sales in Brazil evaporated with a -70% decline due to an investigation into anticorruption laws in Brazil.

There are concerns that AEGR may have to lower the price for its Juxtapid treatments, which currently cost in the $250,000-$300,000 a year range. There are competing treatments for a lot less money. There is also a worry that there may be fewer customers than previously believed. There were some claims that Juxtapid might have the potential to treat 3,000 patients in the U.S. Yet homozygous familial hypercholesterolemia only affects one in a million people. That means there are closer to 300 potential patients in the U.S.

The company is also facing an investigation from the U.S. Department of Justice for comments made by AEGR's CEO when he appeared on CNBC's Fast Money program last year.

The company seems to be facing a lot of negatives and is clearly in a bear market with lower as the path of least resistance. Currently shares of AEGR are testing round-number support at $30.00. We want to wait for a breakdown below $30.00 and launch bearish positions at $29.50. If triggered we will try and limit our risk with a stop loss at $32.55.

Traders should consider this an aggressive, higher-risk trade. Not only can AEGR see big intraday swings but there is a risk of a short squeeze. The most recent data listed short interest at 30% of the small 28.39 million share float. So far the shorts have been right.

We're not setting an exit target tonight but the $20.00 level looks like it could be significant support.

Trigger @ $29.50

Suggested Position: short AEGR stock @ (trigger)

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

Buy the Sep $30 PUT (AEGR140920P30)

The Fresh Market, Inc. - TFM - close: 29.92 change: +0.07

Stop Loss: 31.55
Target(s): To Be Determined
Current Gain/Loss: unopened

Entry on May -- at $--.--
Listed on May 24, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 995 million
New Positions: Yes, see below

05/28/14: The rally in TFM peaked by lunchtime and shares faded back toward unchanged on the session. I do not see any changes from the weekend newsletter's new play description.

Earlier Comments:
TFM is in the services sector. The company is considered a specialty retailer in the grocery industry. It's been a rocky, painful road for TFM investors as the stock has produced a roller coaster ride lower from its 2012 highs. This past week saw TFM shares fall to new all-time lows and breakdown below round-number support at the $30.00 level. Shares did pop more than +10% higher on Friday morning as investors reacted to the company's earnings report out Thursday night.

TFM reported Q1 earnings of 43 cents a share. That was down -6.5% from a year ago but was in-line with analysts' estimates. Traders were likely expecting a miss and when TFM met estimates it sparked some short covering. The stock does have a high amount of short interest. Unfortunately for the bulls the rally didn't last and TFM's +10% gains faded to just +1.5% on Friday.

TFM's Q1 revenues did come in better than expected and management reaffirmed their 2014 guidance (near the low end of Wall Street's estimates). Investors were not happy with the big drop in TFM's margins. Q1 gross margins fell from 35.3% a year ago to 34.4%.

TFM is facing the same pressures that its larger rival Whole Foods Market (WFM) is facing. More and more grocers are getting into the fresh and organic food market. Sprouts Farmers Market, Kroger, Wal-mart, and regional competitors like HEB and Trader Joe's are all hopping on the natural food bandwagon. All this competition is going to continue to squeeze TFM's margins.

At least one analyst firm thinks TFM's 2014 outlook is too optimistic and does not take into account tougher competition and the impact that rising food inflation will have on margins.

The trend is down but this could be a volatile short to play. There are already a lot of bears in the name. The most recent data listed short interest at 19% of the small 44.3 million share float. That raises the risk of a short squeeze. TFM can see these sharp three or four day rallies that lift shares more than 10% before they run out of steam again.

Tonight we are suggesting a trigger to open bearish positions at $28.45. That's just below Thursday's all-time low. If triggered we'll use a stop loss at $31.55, above Friday's high. We're not setting an exit target tonight. It's worth noting that the point & figure chart is bearish and forecasting at $20.00 target.

Consider using small positions or use the put option to limit your risk. I want to remind you that this could be a volatile trade.

Trigger @ $28.45 *small positions*

Suggested Position: short TFM stock @ (trigger)

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

Buy the Sep $30 PUT (TFM140920P30)

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

The TJX Companies, Inc. - TJX - close: 54.30 change: -0.36

Stop Loss: 57.10
Target(s): To Be Determined
Current Gain/Loss: +0.6%

Entry on May 28 at $56.41
Listed on May 27, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 4.5 million
New Positions: see below

05/28/14: Our plan was to launch bearish positions at the opening bell. TJX opened at $54.61 and then dropped toward $54.00 thanks to some disappointing earnings news in the sector. DSW, not a direct competitor with TJX, but still in the retail space, plunged -27% on a terrible earnings report. This pressured a lot of retailers.

We would still consider new bearish positions in TJX now at current levels but more conservative traders may want to wait for a drop under last week's low at $53.87 before initiating positions.

Earlier Comments:
TJX is in the services sector. The company runs off-price apparel and home fashion retail outlets with brand names under T.J.Maxx, Marshalls, HomeGoods, and more. TJX has over 1,000 locations.

Retail has had a tough time this year. Disappointing Q4 Christmas shopping season results were then followed by one of the worst winter seasons in years. TJX has not been immune to the issue. The company reported Q4 earnings results and missed estimates and then lowered guidance for Q1 and full year 2015. They did it again just a few days ago when they reported their Q1 results. TJX missed estimates on both the top and bottom line and then management lowered their guidance for 2015 again.

Shares collapsed last week following the new earnings earning and the oversold bounce has already failed. TJX has also broken down through some long-term bullish trend lines (see weekly chart below).

There are a few analysts saying the sell-off is overdone and traders should buy this weakness but no one seems to be listening. There could be more analysts coming out and trying to call a bottom on TJX, which might spark some short-term rallies but the path of least resistance is down.

Currently the point & figure chart is bearish and forecasting at $45 target.

current Position: short TJX stock @ $54.61

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

Long Oct $52.50 PUT (TJX141018P52.50) entry $1.70*

05/28/14 trade begins. TJX opened at $54.61
*option entry price is an estimate since the option did not trade at the time our play was opened.
Option Format: symbol-year-month-day-call-strike