Option Investor

Daily Newsletter, Wednesday, 7/2/2014

Table of Contents

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

Market Wrap

Waiting for Follow Through

by Keene Little

Click here to email Keene Little
July opened strong but today there was no follow through to Tuesday's gains. But at least the bulls stay in charge with the sideways consolidation.

Wednesday's Market Stats

Futures ran flat last night and other than a quick blip up and down following the ADP report at 8:30 this morning there wasn't much for traders to do today. It was a race between the grass growing in my yard and the stock market and my grass won by a mile.

The ADP report showed stronger-than-expected employment gains and that had the market confused. It's a good sign for the economy but it means the Fed will stay on track to remove stimulus. Because Friday is a holiday we'll get the nonfarm Payrolls (NFP) tomorrow and the market seemed to be on hold until we get through that report. Hopefully the market will move after that. With the ADP report showing +281K jobs added in June, vs. +200K that was expected and an improvement over the +179K for May, most economists are now expecting the NFP to show +230K, up from +217K for May.

Factory Orders for May was released at 10:00 this morning and showed a -0.5% decline, which was slightly worse than the expected -0.4%. This was a drop from +0.8% in April and most write it off as old data and the fact that the weather ate our orders. The market didn't even flinch on the report. In fact the market didn't even flinch all day.

The first chart to show tonight is one which tells us all there is to say about how today went. The ES 10-min all-hours chart below shows the rally yesterday followed by the sideways consolidation in the after-hours session followed by the sideways consolidation in the regular-hours session today. We often see a quick move in the morning followed by consolidation for the rest of the day, what I call one-and-done kind of days. So today's mind-numbing flat session has me wondering if yesterday, being the 1st of the month, was a one-and-done day for the month. That's of course said tongue-in-cheek, or is it?

S&P 500 emini futures contract, 10-min all-hours chart

Last week at this time we had a nice setup for the bears but once again they were thwarted with another rally that negated the bearish wave count and left us with just another 3-wave pullback from the June 24th high. That then gave the bulls a bullish wave count that calls for the market to stair-step higher, possibly into next week or perhaps even into opex week (July 14-18). The pattern is short-term bullish and the bears will need to wait until there's better proof that a top of significance is in place. I'm therefore now looking for the next potential top (in time and price).

In last Wednesday's wrap I had shown a weekly chart for SPX with a series of Fibonacci time spans that pointed to this week as a potential turn week. I consider these timing signals to be +/- a week and therefore last week through next week would be considered a turn window. The way yesterday rallied I thought we might see a rally up to an important price level this week and that's still a possibility, especially if the market reacts happy to tomorrow morning's NFP. A price target zone is 1990-1998, which is 12-20 points above Tuesday's high and considering Tuesday's rally was 18 points to the high of the day it's not unreasonable to think it could happen, especially in a blow-off move on news.

The upper target, 1998, comes from the Gann Square of Nine chart. I've copied the middle section of the chart, showing from top to bottom, so that you can see the relationship of 1998 top previous important highs and lows for SPX. The October 2002 low, April 2012 high and October 2007 high are on the red vector at the 11:00 position. At the opposite end, 180 degrees from those important level, is 1998. The next important level on this chart is 2007, which "vibrates" off the March 2009 low at 666. Wouldn't it be interesting if the top following the 2007 high is at 2007.

Gann Square of Nine chart

On the weekly chart below I've added a price projection based on the relationship between the waves in the move up from October 2011, which is a 3-wave A-B-C move. The c-wave would be 162% of the a-wave at 1990. In addition to this projection we've got the top of the parallel up-channel from 2011, which price has been cycling around since June 6th, and the top of a parallel up-channel for the final leg of the rally from April 11th, the top of which is currently near 1993. The market continues to push higher in the face of many reasons why it shouldn't and I see additional upside but the leg up from April continues to fit well as the final leg of the rally and therefore bulls need to be careful about the high level of complacency since a turn, when it comes, could happen fast and furious.

S&P 500, SPX, Weekly chart

The wave count for the rally from April looks to have started with 3 sets of 1st and 2nd waves and that means it needs to stair-step higher following the pullback to June 12th. That's what I'm depicting on the daily chart below and the pattern supports the idea that SPX could rally to about 2015 by the end of opex week (July 14-18). The first sign of trouble for the bulls would be a decline below the June 26th low near 1944 but for now the pattern remains short-term bullish.

S&P 500, SPX, Daily chart

Key Levels for SPX:
- bullish above 1960
- bearish below 1944

The same stair-step pattern higher also looks to be true for the leg up from June 26th, as depicted on the 60-min chart below. This pattern calls for a larger pullback next week and then a final rally into opex week.

S&P 500, SPX, 60-min chart

The choppy pattern on the DOW's daily chart leaves few clues as to what's next so keeping an eye on the bigger picture, with the weekly chart below, it shows price is getting pinched. The trend line along the highs from May 2011 - May 2013 is still controlling the highs for the DOW. Other than the brief poke above the line in December 2013 it has been holding the DOW down since then and is currently near 16986 (today's high). There's higher potential to a trend line along the highs from May 2011 across the December 2013 high, currently near 17300, so that's upside potential if the DOW can break above 17K and hold above. Support is at its uptrend line from February-April, nearing 16850, and its 2000-2007 trend line, now at 16745. A drop below 16700 would be a bearish heads up and below 16340 would tell us a long-term top is in place.

Dow Industrials, INDU, Weekly chart

Key Levels for DOW:
- bullish above 17,000
- bearish below 16,340

I get two different impressions about NDX with its trend lines when using the log scale vs. arithmetic scale. My preference is to use log scale on trend lines when we're dealing with months/years but I've seen traders react around them both ways and therefore it's important to check your charts to see how the trend lines change. The daily chart below is with the log scale and it shows upside potential to 3937 where the trend line along the highs from April 24 - June 9 crosses the trend line along the highs from April 2012 - March 2014. That's also where a 162% extension of its previous decline (March-April) is located and that makes it an important level to watch if reached.

Nasdaq-100, NDX, Daily chart, log scale

Key Levels for NDX:
- bullish above 3870
- bearish below 3791

But NDX could be in trouble here -- the trend line along the highs from April 2012 - March 2014 is now being tagged, near 3900. The trend line along the highs from April 24 - June 9 was hit yesterday and is currently near 3914. There's a short-term price projection for the leg up from June 24th at 3929 so there's a lot going on in the 3900-3937 area to suggest NDX could top out in this zone.

Nasdaq-100, NDX, Daily chart, arithmetic scale

The RUT had been relatively strong the past few days but was the weak sister today. Following yesterday's test of its March 4th high at 1212.82 (exceeding it by less than a point), today's pullback is leaving the potential for a double top to form. Typically double tops separated by a few months can be strong reversal setups and that's what we're facing with the RUT until the bulls can power it above 1213 and keep it above. With a 5-wave count for the rally from April it can be considered complete at any time, making the double-top setup all that more important. Today's candlestick pattern is a bearish harami (inside day) which is a reversal pattern at the end of a run up against resistance it's worth respecting.

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- bullish above 1213
- bearish below 1165

The banks have remained relatively weak since topping in March with the broader market. It has not yet been able to top its high on March 21st at 73.90 as yesterday's high at 72.24 is still 2.3% below its peak. The bounce off the May 15th low is close to a back test of the bottom of its up-channel from June 2012, which is currently near the price projection at 73.64 for two equal legs up for its 3-wave bounce off the 2009 low. The bearish divergence, as can be seen on its weekly chart below, does not bode well for the bulls.

KBW Bank index, BKX, Weekly chart

The TRAN looks like it could press a little higher to an intersection of trend lines near 8350, only slightly higher than yesterday's high at 8295. Its trend line along the highs from April 2010 - July 2011 crosses the trend line along the highs from May 2013 - January 2014 this week and it fits well for the completion of the 5th wave in the move up from November 2012, which in turn should be the completion of the 3-wave move up from 2009.

Transportation Index, TRAN, Weekly chart

The U.S. dollar has pulled back from June 5th high but if it's to remain bullish it should reverse here and start back up. It has dropped down to its uptrend line from May-August 2011 as well as its broken downtrend line from January 19th (grey line on the weekly chart below). The uptrend line and a back test of the top of its previous descending wedge should act as support and launch another rally leg into at least the fall if not the end of the year.

U.S. Dollar contract, DX, Weekly chart

Gold's rally off its June 3rd low is looking bullish. It's not difficult seeing a 5-wave rally and while that calls for a pullback soon (perhaps after one more minor new high to about 1335), the pullback should then lead to higher highs this summer (depicted in green on its daily chart below). The rally from June 3rd could be part of a larger corrective pattern before heading lower so it will be the shape of the next pullback/decline (impulsive or corrective) that will provide clues for what will be next for gold. But in the short term this is not a good place to buy it.

Gold continuous contract, GC, Daily chart

On June 12th oil popped up out of its trading range that it had been in since February, by rallying above 105 and it needed to hold above 105 to stay bullish. But today it closed below 105 and that leaves a failed breakout attempt. It's on a sell signal because of that but there's still support at its uptrend line from January, currently near 103.10 and just below its 50-dma at 103.30. Its sell signal would be negated with another close above 105 so it's too early to tell which way oil will head from here. As depicted on its weekly chart below, I'm looking for higher prices, up to its downtrend line from May 2011 - August 2013, currently near 111. But a drop below 103 would be a pretty solid confirmation of the sell signal.

Oil continuous contract, CL, Weekly chart

Thursday morning will be busy with economic reports because all of Friday's will be reported as well. The big report is the Nonfarm Payrolls report before the bell. Once we get through that report maybe we'll see a little market movement than we saw today. It shouldn't be hard to accomplish that.

Economic reports and Summary

I've got two different short-term perspectives for the market -- the techs look like they could press higher, perhaps even into opex week. The techs and small caps could reverse here and now. What it means is the short-term picture is a little muddy right now but dangerous for complacent bulls. It's also dangerous for eager-beaver bears but at least they've been keeping stops tight. My concern for many bulls is that not only are stops not tight, many don't even bother with them. "The market always comes back; we don't need no stinkin' stops!" The market has conditioned most traders to firmly believe this and that's when the market slaps them silly and reminds them why stops are important.

Most bears are from Missouri now (the Show Me state) and they're waiting for proof of a top before stepping back in. It's another sign that a top is likely here or very close since it could start down in a hurry without the bears on board, in which case they'll end of chasing it lower as some bulls start to bail as well. It's what drives the market back down so quickly. Bears need to stay aware of the additional upside potential but be ready to short bounces if we start to see some impulsive action to the downside. Bulls, as hard as it might be, need to pull stops up tight and take as much profit off the table as you can. It might be tough but if shaken out of a long position and it reverses back up, I continue to believe upside potential is dwarfed by downside risk and I would trade accordingly.

Good luck and I'll be back with you on July 23rd as I'll be taking some time off. Feel free to email me questions in the meantime.

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

Enjoy Your Fourth of July

by James Brown

Click here to email James Brown

Editor's Note:

The U.S. markets will close early tomorrow (July 3rd) at 1:00 p.m. Eastern. They will be closed all day on Friday for Independence Day.

Volume will be super low tomorrow. That could mean another quiet session or it could mean we'll see some sharp moves as lack of volume allows for more erratic trading in individual equities.

We are not adding any new trades tonight. The newsletter's next issue will be the weekend newsletter.

Have a great Fourth of July!

In Play Updates and Reviews

Stocks Drift Sideways

by James Brown

Click here to email James Brown

Editor's Note:
The stock market drifted sideways as traders turned their thoughts to the long weekend.

We closed our DOW trade this morning.

Current Portfolio:

BULLISH Play Updates

American Airlines Group Inc. - AAL - close $41.95 change: -1.91

Stop Loss: 39.85
Target(s): to be determined
Current Gain/Loss: + 4.2%

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

07/02/14: It was a rough day for the airline stocks thanks to Delta (DAL). This morning DAL reported that excess capacity in international markets was forcing fares lower. This follows last month's earnings warning from German airline Lufthansa. Wall Street was not happy to hear DAL report that its revenue from each seat flown one mile rose +4.5% in June. Markets were expecting a number closer to +6%.

Shares of DAL plunged -5.1%. AAL followed it lower with a -4.3% drop even though shares of AAL were upgraded this morning and given a $55 price target.

I am not suggesting new positions at this time.

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*

07/02/14 DAL reported disappointing June traffic figures
06/28/14 new stop @ 39.85
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: 13.02 change: -0.56

Stop Loss: 12.75
Target(s): to be determined
Current Gain/Loss: + 8.0%

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

07/02/14: Profit taking in ARWR continues. The low today was $12.81. If this weakness continues tomorrow we could see ARWR hit our stop loss at $12.75. I am not suggesting new positions at this time.

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

Bitauto Holdings - BITA - close: 47.33 change: -0.35

Stop Loss: 43.45
Target(s): To Be Determined
Current Gain/Loss: - 0.1%

Entry on June 30 at $47.75
Listed on June 28, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 933 thousand
New Positions: see below

07/02/14: It was another quiet day for shares of BITA. I would look for a dip near $46.00 and its 10-dma soon. A bounce from the $46 area could be used as a new bullish entry point.

Earlier Comments: June 28, 2014:
According to BITA's website, Bitauto Holdings Limited is a leading provider of internet content and marketing services for China's fast-growing automotive industry. Bitauto manages its businesses in four segments: the bitauto.com advertising business, the EP platform business, the taoche.com business, and the digital marketing solutions business. They were founded in 2000 and headquartered in Beijing, China.

BITA has partnerships with all the major Chinese Internet portals like Sina, Tencent, Yahoo! China, Alibaba, Netese, Qihoo360, and Tom. They have sales networks in more than 70 cities.

The company is developing a trend of beating analysts' estimates. Their most recent quarterly report was May 8th with their Q1 results. Wall Street expected a profit of 16 cents on revenues of $54.3 million. BITA delivered a profit of 18 cents with revenues climbing +46.6% to $56.9 million. The company has also made significant progress with its gross margins, which jumped to 79.1%.

This trend is likely to continue. Earnings are up +296% from 2010 to last year (2013). Sales are up +246% over the same time frame. Wall Street is expecting BITA's profits to rise 50 percent in 2014.

It's not surprising to see why. Millions of Chinese people are entering the middle class. That means surging demand for automobiles. China is now the biggest auto market on the planet with almost 20 million new cars purchased every year. The U.S. is having a good year for new cars sales too but we are only on track for 16.7 million vehicles this year.

Currently shares of BITA are hovering near their highs and what looks like resistance in the $47.00 area. The stock peaked to $47.00 back in March this year and it's been trying to breakout past this area the last several days.

Please note I do consider a more aggressive, higher-risk trade. BITA has been a volatile stock in the past. Investors may want to use small positions to limit their risk. We are not setting any targets tonight but the point & figure chart is bullish and forecasting at $57.00 target.

*small positions to limit risk*

Current Position: long BITA stock @ $47.75

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

Long Oct $50 call (BITA141018C50) entry $5.40*

06/30/14 triggered @ 47.75
*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

FireEye, Inc. - FEYE - close: 39.22 change: -1.82

Stop Loss: 36.90
Target(s): To Be Determined
Current Gain/Loss: - 4.6%

Entry on July 01 at $41.10
Listed on June 30, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 5.2 million
New Positions: see below

07/02/14: FEYE underperformed the market today with a -4.4% decline. This might have been a reaction to some lackluster analyst comments out this morning and their $37.00 price target.

Technically shares of FEYE have produced what appears to be a three-day bearish reversal pattern but it probably needs to see confirmation. I would hesitate to launch new bullish positions at the moment.

Earlier Comments: June 30, 2014:
FireEye is an advanced cyber-security company. They provide products and services for detecting, preventing and resolving advanced cyber-security threats. This is not the virus protection program you have on your PC. This is industrial strength corporate defense against the thousands of hack attempts that happen every day.

They supply web threat protection for websites that analyzes all inbound and outbound traffic. They offer email threat prevention appliances that detect and stop advanced attacks. And of course they offer file threat appliances that analyze network traffic to and from corporate servers to detect and quarantine malicious software.

I could go on with the dozens of other types of services but the point there is that they offer end to end cutting edge security for corporate networks and websites.

Everyone has heard about the 40 million credit cards lost in the Target attack. If you pay attention to the news almost every week there are a couple more retailers and corporations that have customer data stolen. This is becoming very expensive for corporations. MasterCard and Visa are changing the rules and corporations are now going to be liable for fraudulent charges made from stolen credit card info.

For a company like Target with 40 million lost cards this could run into the billions of dollars if the card data was compromised. Fortunately for Target some of the information was encrypted and not all of those cards were able to be used. Other companies may not be so fortunate in the future. This kind of network intrusion could put companies out of business.

FireEye tracks all traffic on the network so they can not only tell you what was stolen but where it went. In the case of Target it was weeks before they even knew what was stolen and they had no idea who took it. With FireEye they could have tracked it to the source in real time.

The annual Mandiant Trends report showed that advanced attacks go undetected for an average of 229 days and only one-third of organizations identify breaches on their own. Attackers are increasing their technology far faster than corporations managing internal networks.

FireEye made headlines last month when it warned that a sophisticated group of hackers had exploited a buy in Microsoft's Internet Explorer browser and Microsoft immediately went into panic mode to produce a fix for the previously unknown exploit. This company is on the bleeding edge of the cyber-security problem.

FireEye announced with earnings in May 2014 their acquisition of nPulse Technologies, a leader in network forensics. Their network forensics will be married to the Mandiant endpoint forensics to provide the only available end to end solution for visibility into the entire attack life cycle.

The company was actually guided by the CIA in the early days because there was no security against some of the advanced nation state attacks. The CIA gave FireEye a list of specifications and told them if they could block those intrusions they would be a customer. FireEye succeeded and the CIA is not only a customer but an investor in FireEye.

After Google was hacked by Chinese spies the FireEye client list expanded because nobody else could block the sophisticated attacks that Google experienced. Now government agencies all over the world are using FireEye products.

Nawaf Bitar, SVP of Juniper Networks called FireEye the "Gorilla" in the field when it comes to combating advanced attacks. Edward Kiledjian, CISO for Bombardier Aerospace and a user of FireEye products said, "This is a fantastic tool that provides invaluable information."

FireEye rallied from its IPO close at $36 in September to trade at $97 in March. Three insiders took advantage of the high price to sell shares to cover tax liabilities and they announced a secondary at $87.50. They reported earnings that included a recent acquisition. Shares declined from an overheated valuation to $40 over the next two months. The selloff in the Nasdaq momentum stocks also added to the FireEye decline.

Q1 earnings was a 53 cent loss that was right in the middle of prior guidance for a loss of 51-56 cents. Revenue of $74 million tripled was above guidance of $70-$72 million. Deferred revenue (subscriptions) spiked +$25.2 million to $212.7 million.

However, the new format for earnings with multiple reporting segments appeared to confuse investors and the stock was knocked for a -25% loss.

The company raised guidance for a full year loss up from $2.00-$2.20 to $2.10-$2.30 due to higher R&D spending to integrate recent acquisitions into the product line. The CEO told analysts they were spending more on R&D to "disrupt the market and improve their innovative technology." They are going to announce four new products over the next 90 days.

FireEye had a record quarter with revenue growth of +132% year over year. The Core FireEye business grew over 50%. The Mandiant business they acquired just 90 days ago grew by more than 50%. The company raised revenue guidance for the fourth time in six months. William Blair said the pullback in FEYE created an attractive entry point saying the earnings were "very strong" and they kept an outperform rating on the stock.

Technically shares of FEYE have gone from extremely overbought back in February-March to extremely oversold after it dropped following its earnings report in May. Now FEYE Has been slowly climbing higher. The stock has pushed past potential resistance at several key moving averages including its simple 50-dma. Plus FEYE has rallied past resistance at the top of its gap down from May 6th. Today we see FEYE breaking out past round-number, psychological resistance at the $40.00 level.

We are not setting an exit target tonight but I will point out that the point & figure chart is bullish with a $54.00 target.

current Position: long FEYE stock @ $41.10

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

Long Sep $45 call (FEYE140920C45) entry $3.30*

07/01/14 triggered @ 41.10
*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: 11.19 change: -0.04

Stop Loss: 10.75
Target(s): $11.75
Current Gain/Loss: + 8.6%

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

07/02/14: FLEX spent today's session drifting sideways inside a 15-cent range.

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: 62.71 change: -0.16

Stop Loss: 61.65
Target(s): To Be Determined
Current Gain/Loss: - 1.8%

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

07/02/14: IR managed to hit a new six-day high intraday and then gave it all back. The stock is having trouble closing above its 10-dma. Yet it's still holding support at its rising 20-dma. The recent trading activity does not look very bullish.

I'm not suggesting new positions and more conservative traders may want to hit the eject button.

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*

07/02/14 recent activity is not very encouraging. Readers may want to exit early.
06/30/14 new stop @ 61.65
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

Sky-mobi Limited - MOBI - close: 7.96 change: -0.06

Stop Loss: 7.19
Target(s): To Be Determined
Current Gain/Loss: +2.4%

Entry on June 26th $ 7.77
Listed on June 25, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 696 thousand
New Positions: see below

07/02/14: Hmm... MOBI closed down six cents today and closed right on short-term support at its rising 10-dma. Does today's loss confirm yesterday's bearish reversal candlestick pattern? The lack of volume behind the move might cast doubt on that interpretation.

I am not suggesting new positions at this time.

Earlier Comments: June 25, 2014:
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.

Current Position: Long MOBI stock @ $7.77

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

Long Oct $10 call (MOBI141018c10) entry $0.85

06/26/14 trade opens. MOBI opened @ 7.77
Option Format: symbol-year-month-day-call-strike

Microsoft Corp. - MSFT - close: 41.90 change: +0.03

Stop Loss: 39.90
Target(s): To Be Determined
Current Gain/Loss: + 0.1%

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

07/02/14: MSFT bounced off technical support at its 20-dma on Wednesday. Investors might want to see a new relative high (above $42.29) before initiating new positions.

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

06/30/14 new stop @ 39.90
06/17/14 triggered @ 41.85
Option Format: symbol-year-month-day-call-strike

SoftBank Corp. - SFTBY - close: 37.42 change: -0.13

Stop Loss: 35.35
Target(s): To Be Determined
Current Gain/Loss: +2.0%

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

07/02/14: SFTBY continues drifting sideways. Technically today's move has created a bearish engulfing candlestick reversal pattern.

I am not suggesting new positions at this time. Resistance remains overhead near $38.50.

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

06/30/14 new stop $ 35.35
06/17/14 trade opens. SFTBY gapped down at $36.68
note: SFTBY does not have options.

Super Micro Computer, Inc. - SMCI - close: 25.55 change: +0.11

Stop Loss: 24.15
Target(s): To Be Determined
Current Gain/Loss: +14.8%

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

07/02/14: SMCI also delivered a very mild session with shares moving sideways in a very narrow range.

I would not open new positions.

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*

06/28/14 new stop @ 24.15
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: 48.53 change: -0.36

Stop Loss: 45.75
Target(s): To Be Determined
Current Gain/Loss: +1.6%

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

07/02/14: After a five-day rally shares of WCN hit some profit taking with a -0.7% pullback. I would not chase it here.

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: 52.66 change: -0.06

Stop Loss: 50.90
Target(s): To Be Determined
Current Gain/Loss: + 3.4%

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

07/02/14: We see a similar performance in shares of WFC with the stock meandering sideways.

I am not suggesting new positions at this time. WFC has earnings coming up on July 11th. We might choose to exit before the announcement.

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

06/28/14 new stop @ 50.90
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

BEARISH Play Updates

The TJX Companies, Inc. - TJX - close: 53.71 change: +0.20

Stop Loss: 54.25
Target(s): To Be Determined
Current Gain/Loss: -0.1%

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

07/02/14: This is it. The moment of truth for overhead resistance near $54.00. TJX rallied up to $53.96 intraday and started fading lower. It is the fourth gain in a row for this struggling retailer. The bounce should fail here and weakness could be viewed as a new bearish entry point.

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*

06/30/14 new stop @ 54.25
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


The Dow Chemical Co. - DOW - close: 51.52 change: -0.02

Stop Loss: 50.85
Target(s): To Be Determined
Current Gain/Loss: + 0.9%

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

07/02/14: DOW traded up to $52.00 before reversing its gains. Our plan was to exit positions this morning. The stock opened at $51.69.

Current Position: Long DOW stock @ $51.25 exit $51.69 (+0.9%)

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

Sep $50 call (DOW140920C50) entry $2.88* exit $3.00* (+4.1%)

07/02/14 planned exit
*option exit price is an estimate since the option did not trade at the time our play was closed.
07/01/14 prepare to exit tomorrow morning
06/28/14 DOW spiked lower after DuPont issued an earnings warning the night before
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