Option Investor

Daily Newsletter, Wednesday, 6/25/2014

Table of Contents

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

Market Wrap

Bad News Is Good News

by Keene Little

Click here to email Keene Little
In our Bizarro world where bad news is good news, the disappointing economic numbers continue to give traders hope that the Fed will be forced to stop their taper program and support the market.

Wednesday's Market Stats

Equity futures reacted negatively this morning on the release of the GDP and Durable Goods numbers, both of which were very disappointing, but as soon as the cash market opened there were some buy programs to scare the bears away. The bounce then continued through the day as traders started to believe the bad news was actually good news for the stock market. Perhaps it means the Fed will have to back away from their taper program and continue to support the market, OK, economy.

The 3rd estimate for GDP was expected to show a decline to -1.8% from the last estimate of -1.0% (which itself had declined from the 1st estimate) but was in fact -2.9% and much worse than even the most pessimistic of dozens of economists that were polled by Bloomberg. It's also the weakest number since early 2009, which was at the bottom of the stock market crash, and the third-worst quarter in the past 50 years. The reversal from +2.6% for Q4, 2013 to -2.9% for Q1, 2014 is quite significant.

And here we are at the top of a strong rally and the market rallied today on the news! Seems to be a slight disconnect here somewhere (certainly an ignorance of a fast-slowing economy). There's a lot of hope out there that it was weather related and "can only get better from here." There's likely a lot of hope being pinned on the Fed's ability to step in and save the day. Any minute now the Fed is going to tell us they're going to stop their taper program, I just know it...stand by...hellooo, anyone there?

What's significant here is the sentiment. There's a lot of hope that the market will survive these "temporary" negative signals. And since the market is holding up on sentiment, which is the weakest reason for it to hold up (as compared to fundamentals), it's also the most dangerous time for the market since sentiment can turn on a dime from greed to panic. Whether it's a Black Swan event or just selling begetting more selling, it typically doesn't take much to turn sentiment on its heels and all the justifications in the world for a higher stock market will not amount to a hill of beans.

The market has been irrational for quite some time, thanks to the Fed stoking those irrational feelings. The summer and fall of 2013 saw a market rally that was predicated on expected SPX earnings improvements, which did not happen. The market kept rallying anyway. The first estimate for Q1 GDP, back at the end of April, was +0.1% and a drop from +2.6% in Q4. SPX earnings estimates continued to drop. It was all "weather related" (even though the GDP slowdown had more to do with inventory and other non-weather-related activities) so the market rallied.

Today's excuse for the slowing GDP was a downward revision to health-care spending that resulted from the implementation of Obamacare. Hmm, that seems like something we've known was coming. Isn't that what economists are supposed to incorporate into their models? It's simply a continuation of the age-old problem where economists consistently get it wrong in their predictions. Someone really needs to write them a new model for forecasting. The changes in health-care spending should have been expected and incorporated. Let's try another excuse.

Even though many are saying the GDP number is old news, the economists have not been correct for each of their 3 estimates. It's not old news; it's just ignored news. Today's market rally is further evidence that bad news is somehow good and that all the bad numbers will reverse. We just know it; don't ask how we know it but we're confident that it will. The Fed will protect us. OM...

The other disappointing economic news this morning was the Durable Goods number for May, which came in at -1.0%, a drop from +0.8% in April and well below expectations for +0.4%. It's further confirmation that the economy is slowing down and significantly so. The market rallied anyway. It's the Bizarro world where the Fed controls the sentiment dials and hopes no one looks behind the curtain.

What this is all amounting to is a continuation of irrational behavior of fund managers continuing to buy into the rally and looking to buy any and all dips. Despite the reasons for why the market should be dropping the buying continues and prior occasions when we've seen this happening it hasn't ended well for those who stick around when they should have exited.

When you look at how the market has typically reacted to slowing GDP you can see how the market "forecasts" the slowdown by peaking ahead of it. This is why we've heard so many times that the market predicts the economy about 6 months out. Now we have a slowing, and negative, GDP but the stock market completely ignores it. This is highly unusual behavior and can only be attributed to an unhealthy expectation that the Fed can continue to distort reality. When the real reality hits investors it's likely to come as a great shock to the system.

We're also seeing a return to liar loans and auto-loan securitizations, all the same kind of behavior that we saw leading up to the 2007 high. Student loan defaults have now been added to the list. Homeowners are once again tapping their home equity. It's deja-vu all over again and this time the Fed has made it even worse, which is a reason to believe the next leg of the bear market is going to be much worse than the 2007-2009 decline. Are you ready for it?

I'll start tonight's review with a top-down look at SPX again and show a couple of different perspectives of where this rally has taken us to. Some of it is interesting while other parts are warnings. Based on a number of technical signals, along with the over-the-top bullish sentiment and low VIX, I'm leaning to the downside currently but clearly the upside for this market needs to be respected by the bears. Regardless of the reason, this market has shown an amazing ability to rally in the face of many reasons why it shouldn't (both technical and fundamental). We have very early signs of a reversal but what can't be known yet is whether or not it will be just another small pullback before heading higher again. Today's bounce certainly has many bears wondering if this market will ever go down.

The chart below is a monthly view to show how SPX is bumping up against a long-term broken uptrend line from 1990-2002. Following the reactionary price action around the 1987 market crash and recovery, the 1990 low provides the first good pullback and the start of the roaring 90s. I also show an uptrend line from 1994-2002 (grey) since that's also an important trend line. One could easily argue the parabolic portion of the rally in the 1990s started from the 1994 low. In 2011 and 2012, especially with the bearish divergence following the highs in those years, as price bumped up against the 1994-2002 uptrend line, I thought a top of significance was forming. And then from the November 2012 low, thanks to a little help from the Fed, the market shot higher and now price sits just below the 1990-2002 uptrend line. Both of those trend lines were broken in the 2008 market crash and it's taken more than 5 years to get back up to the broken 1990-2002 uptrend line for a possible bearish back test.

S&P 500, SPX, Monthly chart, 1994-present

The price projection at 1966 shown on the above chart is a projection based on a 3-wave move up from the 2002 low (an expanded flat correction where the b-wave pullback drops below the a-wave low). The 2009-2014 rally is 162% projection of the 2002-2007 rally. Tuesday's high was 1968. Close enough for government work, especially with the market overbought on all time frames and a DeMark sell signal on daily, weekly, monthly and soon-to-be quarterly time frames.

The next weekly chart below shows some time relationships between prior highs based off the time between the June 2010 and August 2011 lows. You can see the Fibonacci relationships to the highs along the way to the current one. The 261.8% time projection is next week but as you can see at the previous highs, they were either one week early or right on the money (May 2013). Between the chart above, showing price resistance, and the one below, showing time resistance, it's a time for the bulls to be very careful here (that goes without saying for the bears). Throw in sentiment and there's a lot stacked against the bulls here.

S&P 500, SPX, Weekly chart, time relationships 2010-present

Moving in a little closer, but still with a weekly chart, I'm showing a wave count that calls the rally from April as the final 5th wave of the rally from November 2012 (the Fed-inspired rally that jumped back above the broken uptrend line from 1994-2002 discussed above). This fits as the completion of a larger corrective wave count for the entire rally from 2009. So the wave count supports the longer-term price/time relationship that suggests great caution by the bulls. SPX is also up against the top of the green parallel up-channel from the October 2011 low and showing the kind of bearish divergence I would expect to see for the final 5th wave. All the pieces are in place for a top -- time for the Fed to launch QE4.

S&P 500, SPX, Weekly chart

There are a couple of up-channels at play for SPX, in addition to the longer-term one from October 2011, shown a little closer with the daily chart below. The top of an up-channel from February will be near 2020 by the middle of next week so if the market continues to rally into month/quarter end and then the first two days of the new month (and in front of a holiday weekend, typically bullish) we could see that happen. A little lower, near 1984 on Friday, is the top of an up-channel from April. A rally above Tuesday's high near 1968 would open the door to either of those projections. But in the meantime, the setup for a reversal was a good one on Tuesday and the afternoon decline now has us on a short-term sell signal against that high (1968). We can only know in hindsight how important Tuesday's high will be but it has the potential to be a significant one.

S&P 500, SPX, Daily chart

Key Levels for SPX:
- bullish above 1968
- bearish below 1925

Coming into this morning I thought we'd see a minor new low and then a bounce that would take the whole day and make it up to the 1958-1959 area to correct a portion of Tuesday's decline. That played out and as of the end of the day it was another good setup for the bears to short the bounce. SPX bounced back up to its broken uptrend line from May 20th and the top of its parallel up-channel from October 2011. Those lines crossed near 1958 today and I thought it would hold as resistance. The bounce made it up to almost 1961 so at the moment it's a little overshoot but the bears need to see the market decline immediately out of the gate to support the bearish setup. At most the short-term pattern would tolerate a bounce up to 1962-1963 before dropping but any higher than 1964 would likely mean new highs are coming.

S&P 500, SPX, 60-min chart

The DOW's highs last Friday and yesterday were more tests of the trend lines across the highs from May 2011 - May 2013 and from March 7 - April 4. Both left bearish divergence against its June 9th high and it was a good setup for a reversal. Tuesday's selloff has us on a short-term sell signal but not surprisingly it found support at its 20-dma yesterday, as it did June 12-18 and the bulls certainly hope it will provide support for the start of the next leg up, which might have started today. But the bounce pattern looks corrective and more like a correction to Tuesday's decline instead of something more bullish. As with SPX, it looks like a bounce to short rather than a dip to buy. Confirmation for the bears that a top of significance could be in place will come with a decline below 16700 to get it back below its 2000-2007 trend line and the June 12th low at 16703.

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- bullish above 17,000
- bearish below 16,700

NDX has retraced the greatest portion of Tuesday's decline -- a little more than 78.6%. Tuesday's strong reversal has also been a reversal so will the real reversal please stand up. Into Tuesday's high I had been looking for NDX to potentially get turned around at its 127% extension of the March-April decline, near 3827, which is a common reversal Fib level to watch carefully. It rallied a little higher on Tuesday but the bulls then got kicked to the curb and the lower close produced an outside down day at that Fib level. Today's rally brought it back up to that level for a potential back test but it means the bears need to step back in immediately Thursday morning. This one can't tolerate even a little higher without opening the door to higher highs (at least the 3850 area). Another failure to hold above the trend line along the highs from March 7 - June 9 would also be bearish but the bears need to see NDX below its June 18th low at 3764 to prove a high of significant is in place.

Nasdaq-100, NDX, Daily chart

Key Levels for NDX:
- bullish above 3850
- bearish below 3764

I don't normally show intraday charts below a 30-min time frame in a market wrap because it gets a little too much into the day trader's territory but the NDX pattern that I was watching during the day deserves a mention only because it was a setup for a reversal at the end of the day, with a tight stop just above Tuesday's high. If the setup is correct we'll see an immediate drop lower on Thursday (to at least match Tuesday's decline but potentially much more). The bounce off yesterday's low looks like a double zigzag correction (two a-b-c's separated by an x-wave) and there are two price projections that correlate nicely near 3832, which are shown on the 2-min chart below. NDX stopped just short of the projection and started to roll over into the close. The setup calls for an immediate drop below its uptrend line from the morning, near 3826, and if that happens then the stop on the play can be lowered to 3832 (keeping it tight until we've got a confirmed reversal back down).

Nasdaq-100, NDX, 2-min chart

The RUT came close testing its uptrend line from May 15th and its price-level S/R line near 1165. A drop below 1165 would be bearish and a drop below its June 13th low at 1154 would confirm a top is in place. But its up-channel from May is still holding so it would continue to be bullish with a rally above Tuesday's high at 1194.

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- bullish above 800
- bearish below 778

When the equity futures sold off on this morning's economic news the bond market rallied, which drove yields back down. This has TNX looking like it might roll over at resistance at its downtrend line from December, as well as its longer-term downtrend line from 2007-2011. But it's not a clear short-term pattern and I could also argue it's consolidating beneath resistance and getting ready for the next rally leg that was started off the May 29th low. A break above last 2.66% would be bullish but at the moment it's leaning bearish.

10-year Yield, TNX, Weekly chart

I'm watching the banks carefully here (follow the money) to see what happens now that it's back-testing its broken uptrend line for the leg up from June 2012. BKX broke below the line in early April and is now back up for a back test. All the bears need now is a bearish smooch goodbye. A drop back below its June 16th low at 70 would be the first sign of trouble for the bulls and then below its 50-week MA at 67.53 would be stronger confirmation that an important high is in place.

KBW Bank index, BKX, Weekly chart

Since the end of May I've been looking for the U.S. dollar to pull back to correct its rally off the May 8th low and we're slowly getting the correction. So far it has retraced 38% of the rally and I'm showing a depiction for about a 50% retracement and back test of its broken downtrend line from January, perhaps down to about 79.90 in early July, before starting another rally leg.

U.S. Dollar contract, DX, Daily chart

Gold has been struggling underneath its downtrend line from October 2012 - March 2014, currently near 1323, which was tested again today. A drop back down would continue to support its larger bearish pattern but if it rallies from here we could see a test of the 1350 area before pulling back to retrace a portion of the rally from June 3rd and then continue higher. It could be in a large sideways triangle pattern since the June 2013 low so even a rally up to 1350 would not necessarily be longer-term bullish. I'll review the potential if and when it breaks the current downtrend line.

Gold continuous contract, GC, Daily chart

On June 12th oil broke above the top of a sideways triangle that started from March 3rd, near 105, in a 1-day spurt higher (short covering as stops just above the top of the triangle were hit) and has consolidated for the past 8 trading days. It's bullish that it's hanging above 105 but would turn bearish again if it drops back below 105. There's additional upside potential at least to the shallow downtrend line from May 2011, shown on the weekly chart below. The line is currently near 111 and it would become much more bullish above that level. It's possible it will complete a bounce in a very bearish longer-term pattern but we'll have to see how it looks if and when it reaches 111.

Oil continuous contract, CL, Weekly chart

Tomorrow we'll see how the consumer is doing in this age of "contained inflation" when we get the Personal Spending and Income numbers. As long as the income stays ahead of the spending it keeps things positive. Increasing consumer debt, through greater spending than income, would continue to make the consumer a potential liability for the economy.

Economic reports and Summary

We had a good setup for a downside reversal on Tuesday and by the end of the day many of the indexes were sporting a key outside down day for a reversal pattern. The sharp decline on Tuesday looked impulsive and that was confirming the reversal signal. The expectation for today was for a bounce to correct a portion of Tuesday's decline and today's bounce fits the bill. If the reversal pattern is correct we should see the market head lower on Thursday, ideally right out of the gate.

Today's rally, brought to us courtesy of a slowing economy (don't ask), might have had some "assistance." There have been many stories recently about the central banks of the world looking for yield just like everyone else and they're finding it in the stock market. When we say the central banks are supporting the stock market we mean literally and they're doing it with money printed out of thin air. There's got to be something illegal in that. Be that as it may, the central banks have a personal interest in keeping the market up and the negative futures reaction to this morning's economic news was met with some buy programs out of the gate this morning. A little help from our friends?

But the market is much bigger than the central banks and therefore depending on them to hold the market up in the face of deteriorating economics and nervous investors, it won't take much to run them over. And when that happens (not if), it will likely happen at a very fast pace. As I've been saying for a while now, upside potential is dwarfed by downside risk and I would trade accordingly.

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

400,000 New Users A Day

by James Brown

Click here to email James Brown


Sky-mobi Limited - MOBI - close: 7.75 change: +0.12

Stop Loss: 7.19
Target(s): To Be Determined
Current Gain/Loss: unopened

Entry on June -- at $--.--
Listed on June 25, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 696 thousand
New Positions: Yes, see below

Company Description

Why We Like It:
China is a massive market and continues to see strong growth in mobile phone adoption. That means more application downloads for the smartphone market. MOBI is cashing in on the app download business with their Maopao app store with 147 million users. They've already had over 15 billion apps downloaded from their store since 2005.

MOBI has strategic partnerships with China Mobile and China Unicom plus over 100 Chinese OEMs who pre-install MOBI's Maopao store on their mobile platforms. This allows MOBI to gain 400,000 new users every day.

When the stock market peaked in early March investors sold all of the high-growth and momentum names. MOBI was caught up in that sell-off with a correction from $12.00 to $6.00. Now shares appear to have found a bottom at the $6.00 level. The recent pullback this week looks like and entry point given MOBI's long-term prospects. The mobile gaming market in China is expected to surge +94% in 2014. MOBI's sales will surge as gaming grows.

Technically MOBI is starting to bounce after a 50% retracement of the rally off its June lows. We want to jump on board and buy today's bounce at the opening bell tomorrow morning. More conservative investors might want to consider waiting for a rally past $8.00 as an alternative entry point.

We are not setting a target just yet. I will point out that the point & figure chart is bullish and forecasting at $13.00 target.

This can be a volatile stock. Traders may want to consider limiting their position size to reduce their risk.

Launch positions tomorrow morning

Suggested Position: buy MOBI stock @ (the opening bell)

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

Buy the Oct $10 call (MOBI141018c10) current ask $0.85

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

Annotated chart:

P&F chart :

In Play Updates and Reviews

No Follow Through Lower

by James Brown

Click here to email James Brown

Editor's Note:
The stock market did not see any follow through lower on yesterday's profit taking.

WCN and TJX hit our entry triggers.

Current Portfolio:

BULLISH Play Updates

American Airlines Group Inc. - AAL - close $43.91 change: +0.73

Stop Loss: 38.85
Target(s): to be determined
Current Gain/Loss: + 9.1%

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

06/25/14: AAL dipped to and bounced from short-term technical support at its 10-dma and 20-dma near $42.30 this morning.

I am not suggesting new positions.

Earlier Comments: May 17, 2014:
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*

06/14/14 new stop @ 38.85
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: 13.42 change: -0.77

Stop Loss: 12.75
Target(s): to be determined
Current Gain/Loss: +11.4%

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

06/25/14: Positive analyst comments on ARWR today were not enough to stop more profit taking. Shares underperformed the major indices and underperformed the biotech industry with a -5.4% decline. This is the stock's third down day in a row.

We knew ARWR was going to be volatile but now we're starting to worry. The stock hasn't seen three negative days in a row for a while. Tonight we are updating our stop loss to $12.75.

Earlier Comments: May 19, 2014:
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*

06/25/14 new stop @ 12.75
06/09/14 the intraday pullback today might be a short-term top. Our trade is up +20% and investors may want to take some money off the table
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

The Dow Chemical Co. - DOW - close: 52.61 change: +0.29

Stop Loss: 50.85
Target(s): To Be Determined
Current Gain/Loss: + 2.7%

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

06/25/14: DOW managed to outpace the bounce in the S&P 500 with a +0.55% gain versus a +0.48% gain. I remain somewhat cautious here and would not launch new positions at current levels.

Earlier Comments: May 24, 2014:
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*

06/24/14 new stop @ 50.85
06/14/14 new stop @ 49.75
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

Flextronics Intl. - FLEX - close: 11.07 change: +0.08

Stop Loss: 10.75
Target(s): $11.75
Current Gain/Loss: + 7.5%

Entry on June 00 at
Listed on May 31, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 6.9 million
New Positions: see below

06/25/14: Hopefully the two-week correction in FLEX is over. Shares dipped below their 20-dma and hit $10.86 before bouncing. Technically today's session has created a bullish engulfing candlestick reversal pattern. It needs to see confirmation.

I am not suggesting new positions here.

Earlier Comments: May 31, 2014:
FLEX is in the technology sector. The company is the second largest contract electronics manufacturer. They make electronic components for some of the world's biggest companies like Apple, Samsung, Cisco Systems, Google, IBM, and Microsoft.

FLEX reported earnings on April 30th and results beat Wall Street's estimates on both the top and bottom line. EPS was 24 cents, 4 cents above consensus estimates. Revenues rose 27% from a year ago to $6.72 billion for the quarter, well above analysts' estimates. Operating income surged +72% from a year ago.

Just a few days ago the stock broke out past major resistance in the $9.75 region following its analysts day. FLEX appears to be making improvements that will bring about better margins and earnings growth. The most recent quarter saw gross margins improve 170 basis points.

The company ended the quarter with $1.59 billion in cash and cash equivalents and have continued to deliver on their strong stock buyback program. FLEX has already repurchased 9% of its outstanding shares in fiscal 2014. Value investors also love FLEX's strong free cash flow, which is the highest among its peers at more than 12% FCF. The company looks poised to outperform its peers with EPS growth of +27% by the end of 2016 versus average growth of +20% from its rivals.

current Position: Long FLEX stock @ $10.30

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

Long Oct $10 call (FLEX1018C10) entry $0.80

06/16/14 new stop @ 10.75
06/07/14 set target at $11.75
06/03/14 triggered @ 10.30
Option Format: symbol-year-month-day-call-strike

Ingersoll-Rand Plc - IR - close: 62.50 change: +0.29

Stop Loss: 59.25
Target(s): To Be Determined
Current Gain/Loss: - 2.1%

Entry on June 20 at $63.85
Listed on June 10, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 1.8 million
New Positions: see below

06/25/14: IR rebounded from the $62.00 level with a +0.4% gain today. I would still hesitate to launch positions here. Wait and see if there is any follow through higher.

Earlier Comments: June 10, 2014:
IR is in the industrial goods sector. They operate two business divisions, their Climate and Industrial segments. The climate business accounts for the majority of their sales as they compete in the heating, ventilation, and air conditioning markets. They're best known for their Club Car, Ingersoll Rand, Thermo King, and Trane brand names.

The company has been consistently growing earnings with EPS growth of +28% from 2011 to 2013. They've also seen operating margins improve over the same three-year period. Their most recent earnings report in April beat analysts' estimates by three cents with a profit of 29 cents a share. Revenues were up +3.2% from a year ago to $2.72 billion. Orders were up +5% for the quarter while margins in its climate business rose 210 basis points.

Steady revenue growth and margin growth sound like a pretty good deal if you're bullish on the stock. Management followed up their earnings news by raising their guidance on the second quarter this year.

Weather was a factor in the first quarter but now that we're into summer any increase in construction should be a boon for IR. In yesterday's new play (AOS) we noted that the U.S. real estimate market looks poised for improvement. Housing starts were up 13 percent month over month in April. New permits to build houses hit their highest levels in five years. This should all point to improved sales for IR's HVAC business.

We know that somebody is bullish on IR. The last couple of weeks have seen some pretty big option bets. Thousands of July calls options have been purchased expecting IR's rally to continue over the next few weeks.

Technically we are seeing IR rebound from its long-term up trend. The last four months have also built what appears to be an inverse head-and-shoulders pattern, which forecasts a $69-70 target.

We're not setting an exit target tonight but the Point & Figure chart for IR is bullish with a $71.00 target.

current Position: Long IR stock @ $63.85

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

Long Sept $65 call (IR140920C65) entry $2.36*

06/20/14 triggered on gap higher at $63.85
suggested entry point was $63.75
*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

Microsoft Corp. - MSFT - close: 42.03 change: +0.29

Stop Loss: 39.45
Target(s): To Be Determined
Current Gain/Loss: +0.4%

Entry on June 17 at $41.85
Listed on June 14, 2014
Time Frame: 10 to 12 weeks
Average Daily Volume = 23 million
New Positions: see below

06/25/14: MSFT looks good here. Shares bounced from their 10-dma and closed above recent resistance at $42.00. I would consider today's move a new entry point.

Earlier Comments: June 14, 2014:
It's back to the future with old-tech heavyweights making progress on Friday. Semiconductor giant Intel (INTC) surprised the market with an announcement Thursday night. INTC raised their revenue guidance due to stronger PC sales. That's right, they said stronger PC sales. Intel chips are in about 80% of the world's PCs. Unfortunately the PC has been declared dead for years due to the explosion of laptops, smartphones, and tablets. It is true that PC shipments have been falling for the last eight quarters in a row. IDC expects PC shipments to fall another -6% in 2014. If that's true then what's the story behind Intel's positive guidance? It might be Microsoft.

Microsoft ended support for its Windows XP operating system in April this year. No more support means they would no longer provide patches or virus updates to protect your system from hackers. With credit card data being stolen a constant threat for businesses the lack of support for XP has sparked an upgrade cycle, especially among corporations.

There does seem to be some disagreement on just how long and how big of an effect this upgrade cycle will last. Was it a one quarter bump or will it last throughout the rest of 2014? An FBR analyst estimates that 25% of the PCs connected to the Internet still run Windows XP. That is a very large number so the upgrade cycle for Microsoft could last a while. It could be bigger than expected too.

Not only are consumers and businesses going to upgrade their operating system from Windows XP to Windows 8 but they will most likely buy an upgraded copy of Microsoft Office. MSFT will likely sell a few more copies of SQL server as well.

The MSFT story is not just about software either. The company seems to be making in-roads into the healthcare sector with their Surface Pro 3 tablets. MSFT is also slugging it out with Sony in the game console wars. Consumers bought $3.6 billion in video games in the first quarter of 2014. MSFT's line up of games for its Xbox One looks pretty good following the annual E3 conference last week.

Technically shares of MSFT are in a long-term up trend and hitting 14-year highs. As an investor would you rather buy a 10-year bond with a 2.6% yield or MSFT with a 2.7% yield and good chance for price appreciation?

More conservative investors may want to wait for a rally past $42.00 before initiating positions.

current Position: long MSFT stock @ $41.85

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

Long 2015 Jan $45 call (MSFT150117c45) entry $1.16

06/17/14 triggered @ 41.85
Option Format: symbol-year-month-day-call-strike

SoftBank Corp. - SFTBY - close: 37.32 change: -0.01

Stop Loss: 33.20
Target(s): To Be Determined
Current Gain/Loss: +1.7%

Entry on June 17 at $36.68
Listed on June 16, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 499 thousand
New Positions: see below

06/25/14: The Japanese market had a down day, which helps explain the spike lower in SFTBY this morning. Shares spent most of today's session drifting sideways and made it back to virtually unchanged by the closing bell.

Investors might want to wait for a rally past Friday's high ($38.65) before initiating positions.

Earlier Comments: June 16, 2014:
SoftBank Corp. has been referred to as the Warren Buffet of Technology although a better comparison is probably to Buffet's Berkshire Hathaway. They are a holding company with hundreds of businesses. According to the company website SFTBY has 235 subsidiaries and 108 affiliates (including 150 consolidated subsidiaries and 83 equity method companies). SoftBank Group possesses both advanced infrastructure and diverse services and content, and invests in promising companies working in the Internet field.

SFTBY owns 80.2% of Sprint Corp., 33.3% of eAccess Ltd., 100% of WILLCOM, Inc., 33.3% of Wireless City Planning Inc., 58.5% of GungHo Online Entertainment, and 42.5% of Yahoo Japan Corp. They also own 34% of Renren Inc., which is considered the Chinese version of Facebook. They also own 36.7% of Alibaba Corp., which is a much larger and more profitable version of Amazon.com. That's on top of owning SoftBank Telecom, SoftBank BB Corp. and SoftBank Mobile.

SFTBY's combined telecom assets makes the company one of the largest telecom/wireless players in Japan. In 2013 they added 4.1 million new subscribers and more than double the 1.19 million subscriber gain by NTT DoCoMo and 2.8 million for AU, which is owned by KDDI. Softbank added 47% of the Android phones activated in Japan and 39% of the iPhone 4s and 5c models. Both metrics are the largest in Japan and shows how Softbank is gaining market share.

Their Renren investment could be a big. China already has the largest Internet audience on the planet and it's only going to get bigger. Currently Renren has about 200 million users. This will grow. Like Facebook, Renren is developing its mobile platform. Renren is currently valued at about $8 per user but this seems extremely low considering what Facebook paid for WhatsApp.

SFTBY's majority stake in Sprint is starting to pay off. Sprint has had a rough few years working through its merger with Nextel. Sprint later acquired Clearwire. It looks like Sprint is now in recovery mode after adding +477,000 subscribers in Q4 2013 versus losing -337,000 in Q4 2012. SFTBY wants to acquire T-Mobile and combine it with Sprint. Currently 75% of U.S. customers are on AT&T or Verizon. SFTBY calls them an American duopoly but they believe by combining Sprint, the third largest carrier, with T-Mobile, the fourth largest, the combined company could compete with AT&T and Verizon, which would be good for competition and ultimately consumers.

Today the real allure of SFTBY is its 37% ownership of Alibaba. Amazon.com (AMZN) is an Internet powerhouse with sales of $86 billion in 2013 and a net profit of $274 million. Alibaba dwarfs AMZN with 2013 sales of $160 billion and a profit of $2.16 billion. Right now it looks like Alibaba will IPO this summer. Analysts have been estimating they could be the biggest IPO in history with a value of $160 to 185 billion.

There were new numbers out on Alibaba today with the company stating that its Q4 revenues only rose +39% to $1.9 billion. That's down from 62% growth in Q3. Margins retreated from 51.3% to 45.3% on higher marketing costs. This spooked investors today into thinking that maybe the valuation may not be in the $160-185 billion range.

We believe that SFTBY's shares are very undervalued and when the Alibaba IPO does hit this stock could soar. Tonight we're suggesting investors launch positions tomorrow morning at current levels. Depending on your trading style this could be an aggressive entry point. Technically SFTBY still has resistance in the $38-39 zone. More conservative investors may want to wait for SFTBY to close above $39.00 before initiating new positions. The risk of not launching positions now is that we do not know when Alibaba is going to announce its IPO. It could be any day and likely in the next few weeks. We will plan on exiting after Alibaba's first day of trading.

Current Position: Long SFTBY stock @ $36.68

06/17/14 trade opens. SFTBY gapped down at $36.68
note: SFTBY does not have options.

Super Micro Computer, Inc. - SMCI - close: 25.27 change: -0.07

Stop Loss: 19.90
Target(s): To Be Determined
Current Gain/Loss: +13.6%

Entry on June 09 at $22.25
Listed on June 07, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 467 thousand
New Positions: see below

06/25/14: SMCI pierced short-term support at its 10-dma before rebounding. The stock almost made it back to breakeven by the closing bell.

I am not suggesting new positions at this time.

Earlier Comments:
SMCI is in the technology sector. The company makes high performance servers (computers). The stock has been stuck in the $8.00-18.00 trading range for years. That changed back in January when SMCI reported earnings that beat analysts' estimates on both the top and bottom line. If that wasn't enough SMCI's management also raised their guidance. Shares soared to all-time highs on this news. You can see the spike higher in January.

When investors turned sour on high-growth and momentum names this past spring shares of SMCI corrected sharply but now it's back and poised to challenge its highs. That's because SMCI has delivered another strong quarter of growth.

SMCI reported its Q3 results on April 22nd. Wall Street was expecting a profit of $0.27 per share on revenues of $335.19 million. SMCI bested estimates with a profit of $0.37 per share and revenues soared +34.5% to $373.8 million. Management then guided higher for the current quarter and raised its top and bottom line estimates above Wall Street's estimate. It was their second straight quarter of record highs for revenues and earnings.

Analysts have started revising their numbers on SMCI as the company is growing faster than its rivals. Some might consider SMCI cheap with a P/E at 20.

The point & figure chart is bullish and forecasting at $25 target.

current Position: long SMCI stock @ $22.25

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

Long Oct $22.50 call (SMCI141018C22.50) entry $2.25*

06/16/14 SMCI rallies +10.7%
06/09/14 triggered @ 22.25
*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

Waste Connections, Inc. - WCN - close: 47.72 change: +0.42

Stop Loss: 45.75
Target(s): To Be Determined
Current Gain/Loss: -0.1%

Entry on June 25 at $47.75
Listed on June 21, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 464 thousand
New Positions: see below

06/25/14: Our new trade on WCN is open. Shares bounced off their 10-dma and rallied to new highs. Our trigger was hit at $47.75.

Earlier Comments: June 21, 2014:
According to the company website, Waste Connections is an integrated solid waste services company that provides solid waste collection, transfer, disposal and recycling services in mostly exclusive and secondary markets.

Through its R360 Environmental Solutions subsidiary, the Company also is a leading provider of non-hazardous oilfield waste treatment, recovery, and disposal services in several of the most active natural resource producing areas in the United States, including the Permian, Bakken, and Eagle Ford Basins. Waste Connections serves more than two million residential, commercial, industrial and exploration and production customers from a network of operations across the United States. We also provide intermodal services for the movement of solid waste and cargo containers in the Pacific Northwest.

We seek to avoid highly competitive, large urban markets and instead target markets where we can attain high market share either through exclusive contracts, vertical integration or asset positioning. We also target niche markets, like exploration and production, or E&P, waste treatment and disposal services, with similar characteristics and, we believe, higher comparative growth potential.

Apparently the company's strategy is working. WCN is developing a pattern of beating Wall Street's earnings estimates on both the top and bottom line. WCN's model is generating more profit than its rival with EBITDA margins of 34% compared to its larger rival Waste Management's 24% margins.

WCN is seeing strong growth in its oil field waste business. The company said that its E&P (oil) waste business surged +20% in the first quarter of 2014. It's traditional solid waste business grew +5.5%. Management is optimistic with 2014 off to a strong start. Revenues are up. Free cash flow is up. Margins are improving. They expect to see 12% to 15% growth this year.

Technically shares of WCN just broke out from a two-week consolidation and closed at all-time highs. One could argue that WCN produced a big, inverse head-and-shoulders pattern over the last several months. The point & figure chart is bullish and suggesting a $62 price target.

WCN does have options but the option spreads are too wide to trade.

Current Position: Long WCN stock @ $47.75

06/25/14 triggered @ 47.75

Wells Fargo & Co - WFC - close: 52.60 change: +0.11

Stop Loss: 49.70
Target(s): To Be Determined
Current Gain/Loss: + 3.3%

Entry on June 02 at $50.94
Listed on May 31, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 13.5 million
New Positions: see below

06/25/14: WFC spiked down toward short-term support near $52.00 and bounced.

I am not suggesting new positions at this time.

Earlier Comments: May 31, 2014:
WFC is in the financial sector. They are a major, money center bank, headquarter in San Francisco with annual revenues of $81.72 billion and net income of over $21.5 billion. The financial sector has been a strong performer these last couple of weeks and WFC has helped lead the group higher.

Currently WFC is up +11.8% year to date. Its closest rivals are all negative for the year. Bank of America (BAC) is down -2.75%. JPMorgan Chase (JPM) is off -4.98%. Citigroup (C) is down -8.7% for 2014. WFC says business is good and they expect it to get better. The bank reported that credit quality has been improving. They managed to reduce their loan loss reserves in the first quarter and they expect this trend to continue in 2014.

At WFC's recent analyst day their CFO said they want to raise how much money they return to shareholders. They'd like to pay out 55 percent to 75 percent of net income back to shareholders as dividends and stock buybacks. That's up from 34% in 2013 but the new capital plans are subject to regulatory approval.

The shareholder friendly management at WFC is probably just one reason that Warren Buffet likes this company. WFC is Berkshire Hathaway's largest holding. Some have suggested that WFC is the best way to benefit from any long-term rebound in the U.S. housing market and consumer spending.

In recent news WFC says it is poised to end some of its legal troubles surrounding the robo-signing scandal during the housing crisis. It could final settle this issue for $67 million fine and put this issue behind it.

Technically shares of WFC looks very bullish with a long-term up trend. This past month has seen WFC breakout past key resistance at the $50.00 level. Shares ended the week at a new all-time high.

Current Position: Long WFC stock @ $50.94

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

Long Oct $50 call (WFC141018C50) entry $2.31

06/16/14 new stop @ 49.70
06/09/14 new stop @ 48.75
06/02/14 trade begins. WFC gapped higher at $50.95
Option Format: symbol-year-month-day-call-strike

Xylem Inc. - XYL - close: 39.37 change: +0.14

Stop Loss: 37.75
Target(s): To Be Determined
Current Gain/Loss: unopened

Entry on June -- at $--.--
Listed on June 21, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 1.1 million
New Positions: Yes, see below

06/25/14: XYL spent today's session consolidating sideways inside the $39.00-39.50 zone. I don't see any changes from my earlier comments. Our suggested entry point is $40.25.

Earlier Comments: June 21, 2014:
Xylem is a spinoff from ITT Corp. and became an independent company in October 2011. Now they're a leading global water technology company doing business in more than 150 countries. The company name, Xylem, is from the classical Greek that refers to the supporting tissues that help transport water and nutrients from a plant's roots to its leaves.

Business has been good. The last two quarters in a row XYL has managed to beat Wall Street's earnings estimates on both the top and bottom line. The company has garnered positive analyst comments suggesting XYL could see strong revenue and margin growth over the next two or three years.

After their latest quarterly report XYL's CEO noted they were seeing strong growth in emerging markets. The Q1 2014 results saw earnings growth of more than 25%. Results have been boosted by strong sales of its pumps and technology that disinfects wastewater and kills viruses and parasites. Their backlog has risen $793 million, up six percent.

Long-term the company could see significant growth. Water consumption across the globe is rising at twice the rate of the world's population. This is creating huge demand on water resources. A Citigroup analyst recently pointed at XYL as the best publically traded "pure play" on water and water processing.

XYL expects to see a lot more growth overseas for both its water purification systems, desalination, power generation, and hydraulic fracking.

Technically shares have been showing relative strength with three weeks of gains in a row. Friday is an all-time closing high for the stock. Shares are hovering just below potential round-number resistance at the $40.00 level. Tonight we are suggesting a trigger to open bullish positions at $40.25.

Trigger @ $40.25

Suggested Position: buy XYL stock @ (trigger)

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

Buy the Oct $40 call (XYL141018C40)

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

BEARISH Play Updates

The TJX Companies, Inc. - TJX - close: 53.14 change: -0.70

Stop Loss: 55.10
Target(s): To Be Determined
Current Gain/Loss: +1.0%

Entry on June 25 at $53.65
Listed on June 24, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 4.5 million
New Positions: see below

06/25/14: As expected shares of TJX continued to sink. The stock underperformed the major indices with a -1.3% decline and a new low for 2014. Our suggested entry point was hit at $53.65.

Earlier Comments: June 24, 2014:
According to their website, the TJX Companies, Inc. is the leading off-price retailer of apparel and home fashions in the U.S. and worldwide. With over 3,200 stores in the U.S., Canada and Europe, 3 e-commerce sites and approximately 191,000 Associates at the end of 2013, we see ourselves as a global, off-price, value retailer and our mission is to deliver great value to our customers through the combination of fashion, brand, quality and price.

The stock has been a strong performer on Wall Street for years. Shares of TJX are up 2008 lows near $10 a share to until they peaked near $64.00 late last year. It would appear the long-term momentum is fading.

TJX, along with most retailers, are facing a tough consumer market. Big ticket items like new homes and automobiles are selling well. Smaller purchases like fashion and apparel have been tough unless you're in the luxury market.

The U.S. Commerce Department reported that consumer spending fell -0.1% in April, marking the first decline in a year. It is worth noting that consumer spending was up the prior two months, but that didn't help TJX first quarter sales. TJX reported earnings on May 20th. Their Q1 results (ending April) were 64 cents a share on revenues of $6.49 billion. That was three cents less than Wall Street's estimate of 67 cents a share on revenues of $6.59 billion.

TJX management said their Q1 same-store sales growth was only +1%, which was below guidance. TJX then lowered their 2015 guidance. There has been some speculation that TJX could be losing some market share to the return of JC Penney (JCP).

The issue could be bigger than just one or two stores fighting for market share. The U.S. consumer is facing higher prices. Consumer price inflation is up, especially for everyday items. Over the past twelve months the CPI has risen +2.1%. The price of meat, chicken, eggs, and fish is up +7.7%. The price of fruits and vegetables are up +3.2%.

The consumer is also facing higher gasoline prices. AAA said the national average on gas had risen to $3.68 per gallon. That is the high for this time of year. AAA is currently forecasting a range of $3.55 to $3.70 per gallon. Fortunately, they are hoping that gasoline prices will not hit $4.00 a gallon. However, that could change quickly if the violence in Iraq escalates and terrorist start to impact Iraq's oil exports. Another issue here at home is talk of raising the U.S. federal tax on gasoline from 18.5 cents per gallon to 30.5 cents over the next two years. Call your senator if you do not want that tax to go up.

All of these price increases are weighing on most Americans who are stuck with flat or very low wage gains. Oddly enough consumer confidence just hit a six-year high today. Hope springs eternal but just because consumers are hopeful doesn't mean they're actually spending more money.

Technically shares of TJX are bearish. It has a trend of lower highs and lower lows and just broke down under support near $54.00. We are not setting a bearish target tonight but I will point out that the point and figure chart is bearish and forecasting at $45.00 target.

Current Position: short TJX stock @ $53.65

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

Long Oct $50 put (TJX141018P50) entry $1.05*

06/25/14 triggered @ 53.65
*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