Option Investor

Daily Newsletter, Wednesday, 8/6/2014

Table of Contents

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

Market Wrap

Bulls Struggling To Get A Bounce

by Keene Little

Click here to email Keene Little
When the market picks a direction it gets relentless about it and it's now the bulls struggling to get this ship turned around. The good news for the bulls is that it looks like a bigger bounce is coming. The bad news for them is that it might be short-lived.

Wednesday's Market Stats

This morning started out in what has become a familiar pattern the past two weeks -- another gap down. But this time the bounce off the gap-down start for the day was not followed by more selling to a new low. While there was a pullback from the morning bounce it's looking like we'll get a larger bounce. There is the potential for the start of another rally leg to a new high but at the moment the reversal off the July highs looks like it could turn into something more significant to the downside.

While price is king, which is the reason we use various technical analysis tools on price, we've had plenty of warning that the selling was coming. Picking a top is always a challenge and this one was no different. It's always in hindsight that you slap yourself on the forehead and utter "Doh"! The minor new highs in July with significant bearish divergences and worsening market breadth told us the market was likely to break down before heading higher. Now we have to figure out if the decline is more significant than just a pullback correction to the longer-term uptrend. In January 2014 we had a sharp selloff and it looked like the end of the uptrend. But the market went on to make new highs over the next six months. Do we have the same opportunity for the bulls here?

All eyes are on the uptrend lines from November 2012 and October 2011, which define the longer-term uptrend. Looking at SPX, the uptrend line from November 2012 is now close and depending on how it's drawn, SPX has either broken it or is close to testing it. As I'll get into, SPX 1900 is a critical level for the bulls to defend and if we get a high bounce into next week (opex week) we'll probably have a lot of bulls breathing a sigh of relief while the bears will feel like they'll have to go back into hibernation. But the setup following the bounce could be very painful for complacent bulls if they don't lighten up their exposure to the stock market. They need to heed the warning with the shot across the bow of the USS Bullship.

While we review price action to see what the patterns are telling us, it's important to keep in mind how weak the current market is. With the 2-week decline it's easier now to see some weakness but it was the weakness leading up to the high that was important and still is. Hayes Martin, a consultant at Market Extremes, identified three indicators that have predicted every bear market. Once the three indicators are present together there has been a bear market that started within about a month and his indicators have occurred so he's recommending his clients get out of the stock market now. These are his indicators:

1. Extreme reading in bullish vs. bearish sentiment. I've discussed the very bullish readings in the past month several times, especially the bullishness by investment advisors.

2. Stocks are overvalued based on a historical average. Starting at the end of last year the RUT's P/E ratio, after excluding negative earnings (which makes the P/E ratio infinity), rose to its highest level ever! It was higher than it was in 2000 and 2007.

3. The percentage of stocks participating in the rally to new highs falls sharply lower, which started to show a quick deterioration in July. I had been showing a couple of measures of this in the decling number of new highs for stocks vs. the indexes that were making new highs. There was a deterioration of the advance-decline line, which again showed fewer stocks participating in the rally. The indexes were making new highs on the backs of fewer and fewer stocks. Another measure is the number of stocks above their average price over the past four weeks. This number declined from 82% at the beginning of July to less than 50% at the July 24th high for SPX.

As Martin noted, the deterioration in the internals was "the sharpest breakdowns in market breadth that I've ever seen in so short a period of time." So the above three indicators were clearly present in July as the market pushed higher and by Martin's analysis this points us to the start of a bear market. While I'll show a price pattern that supports the idea for one more new high by September/October (to mimic the 2007 high in July and then minor new high in October?), I think the higher-odds scenario suggests we should be looking for a bounce to a lower high to correct the decline and then a sharper selloff to follow.

There have been a number of reasons given for the selling, mostly geopolitical news. That makes it so much easier for investors -- "well, I'd still be up in my account if it hadn't been for that damned (fill in the country). I still haven't heard many analysts say the selling simply triggered more selling following an overbought market. Analysts don't make money making simplified comments like that. Today's lackluster performance by the market was blamed on more geopolitical news with Russia beating on the war drums. But in fact the market is due a bounce and this morning's gap down might have been an exhaustion gap to finish the leg down from July 24th. The news has nothing to do with it.

Last night Jim mentioned Rupert Murdoch pulled his $80B offer for Time Warner (TWX) in a surprise announcement, blaming TWX management for not trying to negotiate seriously. But I know the real reason his bid was pulled -- he doesn't want to be blamed for the start of the next bear market. That's of course said tongue-in-cheek but back on July 23rd I showed a chart of stock market peaks that coincided with Rupert Murdoch's previous large purchases, which coincided with the 2000 and 2007 highs. His offer for TWX looks to be pretty well timed with the July 24th high, don't you think? It's too late Rupert, the damage is done (wink). As I had mentioned back on July 23rd, "Batten down the hatches, we're going down." If only trading were as easy as a Rupert Murdoch signal to short.

Rupert Murdoch tops, chart courtesy Financial Insyghts

There were in fact multiple warning signs of a top and major indexes were hitting price projections and resistance lines at a time when the EW (Elliott Wave) count was looking complete. But we've had so many previous tops come and go with yet another rally leg and this left bears with the feeling the market was never going to decline. They were more than justified in not believing we were topping in July. And now with the strong decline in the past two weeks there's still some question about whether the decline is the kickoff to a much larger decline (the next bear market) or if it's just another (scary) pullback, like we had in January 2014.

We're starting to read more reports that describe a strengthening economy, improving earnings, lower unemployment rate (cough), etc. and if the market has peaked we're going to have a lot of bulls baffled why the market would sell off on all this good news. Yes, there are some geopolitical events muddying the waters but don't we always? The news only matters when the market moves and then the news is used as the excuse. Ignore the news. Market tops occur on good news and a stronger economy (it's not strong so I can't use that word but it is relatively stronger). Employment typically peaks when the stock market does. So be careful thinking the market should rally more on all this good economic news. It's already priced in. We'll also starting hearing more worries about the Fed pulling the spiked punch bowl away from us since the improving economy and rising inflation will require them to start tightening.

Moving to the charts, I'll start with SPX and review the setup for the top. Following the attempt by SPX to get through the 1990 price projection that I've been showing on the weekly chart (where the c-wave of the A-B-C move up from October 2011 is 162% of the a-wave), with a high of 1991.39 on July 24th, the rounding top pattern since the beginning of July did in fact lead to a sharp breakdown. What looked like a bullish consolidation pattern broke down instead, which was what I had been expecting to see (a failed pattern usually fails hard). The wave count strongly suggested we should be looking for a high back then. And if it was THE high we should now be looking to sell bounces.

I've got two uptrend lines on the weekly chart, both starting from the November 2012 low and one going through the October 2013 low and the other going through the February 2014 low. The one through the October 2013 low is where the decline in April found support and where it found support last week. This week we've got a little weekly doji candlestick on that uptrend line, currently near 1927, which was broken and today it acted as resistance. If the decline continues I will be watching the next uptrend line from November 2012 - February 2014, currently near 1902. Not shown on this chart (but is on the daily chart further below) are the Fib retracement levels for the rally from April and the 50% retracement is at 1902.88. This is why I have 1900 as a key level to the downside.

S&P 500, SPX, Weekly chart

The uptrend line from November 2012 defines the intermediate trend and therefore a break of the uptrend line would signify at least an intermediate-term trend change. The longer-term trend is defined by the uptrend line from October 2011 - November 2012, currently much lower, near 1765. This is the trend line for the 2nd leg of the rally from 2009. BUT, and this is a big but, that uptrend line when viewed with the log price scale is currently near 1891. So the really important level for the bears to break is 1890. That would be a strong signal that the longer-term uptrend has been broken. For now most are looking to buy this "dip" down to 1900 support. And one thing that makes me wonder what will happen from here is that the market rarely accommodates "most."

S&P 500, SPX, Daily chart

Key Levels for SPX:
- bullish above 1955
- bearish below 1900

The wave count for the decline from July 24th counts well on SPX as a completed 5-wave move, as shown on the 60-min chart below. If the July 24th high was the completion of the rally then the impulsive 5-wave move down signifies a trend change to the downside and that's the reason to look for a higher bounce into next week as a shorting opportunity. But what can't be ruled out yet is the idea that the decline is the completion of a larger a-b-c pullback from July 3rd (expanded flat correction since the b-wave high on July 24th was a higher high). I consider this a lower-probability but as I said, it can't be ruled out yet. A larger bounce as depicted that's followed by a drop below this decline's low would confirm THE top is in place and welcome to the next bear market. There's a lot of money to be made in a bear market so don't frown about that possibility.

S&P 500, SPX, 60-min chart

After getting back into positive territory (above 16577) for the year in May, the DOW struggled for two months to tack on almost 600 points by the time it topped on July 17th at 17151. It then gave up all those points in two weeks. It then proceeded to shed more points and has joined the RUT in negative territory for the year. NDX is still up almost +8% for the year so we've got quite a split between indexes. As can be seen in the first table at the top, SPX is splitting the difference and is up +3.9% for the year. There's still a lot bullish enthusiasm for owning the techs and I suspect it might not be long before the DOW starts to show some relative strength (all in a decline but the DOW declining slower as money rotates into the relative safety of the DOW).

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- bullish above 16,880
- bearish below 16,340

The picture of water pouring out of the pitcher (rising wedge) is a perfect example of why you want to play these rising wedge patterns -- when they break they tend to break hard. While a show an expected bounce into next week, stay aware of the possibility for the DOW to simply head lower through next week to get back to the starting point of the rising wedge (the April low at 16015). Getting down there would very likely set up a strong bounce reaction.

For the DOW I'm tracking an idea for one more new low before we'll see a higher bounce, which I've drawn out on its 60-min chart below. Interestingly, this is a setup for the usual head-fake drop into the end of the week before opex and then reversed into a rally into opex. The wave count shown on the chart supports the idea that this morning's low was the completion of the 3rd wave in the decline from its July 22nd high and that today's bounce, and likely into Thursday morning, will be followed by one more decline to finish the 5th wave. Then start the higher wave-2 bounce into next week.

Dow Industrials, INDU, 60-min chart

NDX sliced through support levels last week as it dropped below its 20-dma, currently at 3927, and its uptrend line from April-May, which will cross the 20-dma by Friday. The 50-dma at 3855 held on the test this morning, the first test since NDX climbed above it in May. It looks like a good setup for a higher bounce into the end of the week at least. But then the larger pattern suggests you'll want to short the bounce for a stronger decline to follow.

Nasdaq-100, NDX, Daily chart

Key Levels for NDX:
- bullish above 3975
- bearish below 3850

The RUT has been the weaker index, topping on July 1st with a picture-perfect double-top pattern with its March high. It was significantly weaker into the July 17th high for the DOW and July 24th high for SPX and was another clear warning to bulls at that time. But now the RUT is warning us that things might get more bullish. This index is actually supporting the idea that we could get another rally leg to new highs in September/October. I'm not ready to buy in to that idea yet but it has me watching very carefully for evidence that it could happen. The decline from July 1st is a 3-wave move and as such could be an a-b-c pullback correction to the longer-term rally. The 2nd leg down, from July 24th barely exceeded the price projection near 1113, where it's 62% of the 1st leg down. Two equal legs down points to 1081, which is also the February low. So that's a possibility but first it has to break two uptrend lines -- the first that's being tested now is from March 2009 - October 2011 and then a little lower, near 1101, is from October 2011 - November 2012. These are the longer-term uptrend lines for the RUT and therefore very important for the bulls to defend, which they're doing at the moment.

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- bullish above 1160
- bearish below 1082

For the RUT, I show a drop down to its uptrend line from October 2011 - November 2012 before a higher bounce/rally but it's not clear enough to make a reliable prediction about that. If it happens then the DOW projection for one more new low before bouncing would also likely happen. If the a-b-c pullback wave count (pointing to new highs in September/October) is not correct then a bounce to a lower high, as depicted in bold red, would be a setup for a very strong decline in a 3rd of a 3rd wave down. That kind of move would likely drop the RUT quickly (in September) to about 1000 and then stair-step lower over the next few weeks. Again, we've got time to figure out which way the pattern is pointing but it would be another reason to lighten up on long positions if we get a higher bounce into next week.

The story is very similar with many of the other index and sector charts so I'll just show the TRAN, which supports the idea we'll get a bounce from here. This morning it dropped down to its uptrend line from June 2013 - April 2014, at 7978, and is just above its June 12th low near 7960. A bounce to retrace 50% of its decline would take it back up near 8250 and perhaps a back-test of its 20-dma by then. Currently near 8284, the 20-dma is coming down. The longer-term wave count strongly suggests THE high is in place for the TRAN and therefore only a bounce to a lower high is expected.

Transportation Index, TRAN, Daily chart

The U.S. dollar continues to do battle with the top of its trading range that it's been in since the October 2013 low and it could pull back to its uptrend line from May 2011, currently near 80.32, but the expectation continues to be for a stronger rally in the dollar once it breaks out of its trading range at 81.50 (on a weekly closing basis).

U.S. Dollar contract, DX, Weekly chart

My expectation has been for another leg up in gold from its June 3rd low. It looks like it might have started today with the break of the downtrend line from the high on July 10th. A rally up to its downtrend line from August 2013 (the top of a sideways triangle that I'm interpreting as a bearish continuation pattern), near 1350-1360, should then set up a stronger decline in the shiny metal.

Gold continuous contract, GC, Daily chart

Oil has dropped to its uptrend line from June 2012, as can be seen on its weekly chart below. Ideally we'll see one more leg up to the top of its rising wedge pattern (the trend line along the highs from March 2012) to complete the large A-B-C bounce off the November 2008 low. The move up from January 2014 fits as the 5th wave of the rising wedge pattern and typically finishes with a small throw-over above the top of the wedge, which is what I depict (finishing with a test of its May 2011 high at 115.76). But there are times when the 5th wave truncates at a lower high, which means the high at 107.73 on June 20th might have been its final high. A break below 96 would be a break of its uptrend line, its 200-week MA (96.04) and a price projection at 96.27 where the move down from June 20th would have two equal legs for just an a-b-c pullback. Therefore a break below 96 would confirm the next bear market for oil has started.

Oil continuous contract, CL, Weekly chart

The rest of the week is very quiet as far as economic reports go so the market will be left to react to global news instead of domestic.

Economic reports and Summary

There will always be different interpretations of chart patterns and it's no different right here. I could argue the current decline will lead to new highs into September/October just as the sharp decline in January led to new highs. It would also mimic 2007 where we had the July high that was followed by a pullback and then minor new highs in October. But that's not the way I'm currently leaning.

The wave count had been suggesting a top of significance in July and now we've got an impulsive 5-wave decline (that looks finished this morning but might need one more leg down to complete it) that signifies a trend change to the downside. The one index that completely disagrees with this is the RUT, which has a 3-wave pullback and suggests we could see higher prices. The TRAN, which often trades similarly to the RUT, does not agree with the RUT and in fact is strongly confirming we've seen the completion of the bull market and have now started the next bear market leg down.

With the odds favoring THE high is in place, and assuming we'll get a decent bounce into next week, it will be a time to short the bounce. There's bearish potential for a continuation lower (the DOW's rising wedge suggests a quick retracement back to its April low near 16K) so that's the risk for trying to catch falling knives here to play at least a bounce up into opex next week. So stay conservative in your trading and by this time next week we'll hopefully have confirmation that we're looking for a bounce to get short for an even stronger selloff than we've seen so far (3rd wave down).

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

Selling Into Strength

by James Brown

Click here to email James Brown


Yandex N.V. - YNDX - close: 28.88 change: -0.69

Stop Loss: 31.10
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Entry on August -- at $---.--
Listed on August 06, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 2.7 million
New Positions: Yes, see below

Company Description

Why We Like It:
Officially registered in Amsterdam, YNDX is actually headquartered in Moscow. They are one of the largest internet companies in Europe. They're also the dominant search engine in Russia with almost 62% of all search traffic.

The company's latest earnings report on July 29th looks bullish. Earnings were 30 cents a share versus the estimate of 29 cents. Revenues soared +32% to 12.2 billion Russian rubles ($361.5 million). That was above estimates for revenues in the $340-358 million range. Their Q2 search queries were up +21% from a year ago. Plus, YNDX reported their number of advertisers was up +25% from a year ago and up +6% from the prior quarter.

In spite of all the bullish numbers investors used the post-earnings rally to sell. The stock action is bearish. The trend of lower highs has now turned into a new pattern of lower lows. Today's drop of -2.3% not only underperformed the market but it broke recent support in the $29.50 area.

The current geopolitical risks between Ukraine and Russia could be pressuring YNDX. The U.S. and Europe have launched multiple sanctions against Russia and Russian companies as a penalty for Russia's support of Ukraine separatists. Yesterday stocks sank sharply on news that Russia was building up troops on the Ukraine border again. It would appear that Russian President Putin will not back down. There is speculation that instead of an actual "invasion" that Russia will send troops across the border as a "humanitarian effort" to protect people. If that does happen the global equity markets are not going to react well and Russian stocks could be hurt the worst.

Tonight we're suggesting bearish positions now at current levels. We will start with a stop loss at $31.10, above the 20-dma and 100-dma.

- Suggested Positions -

Short YNDX stock @ (the opening bell tomorrow)

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

Buy the NOV $28 PUT (YNDX141122P28) current ask $2.45

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

Annotated Chart:

Weekly Chart:

In Play Updates and Reviews

Anemic Dip Buying

by James Brown

Click here to email James Brown

Editor's Note:
Traders bought the dip again this morning but the bounce was pretty lethargic.

SIX hit our entry trigger today.

Current Portfolio:

BULLISH Play Updates

Hewlett-Packard Co. - HPQ - close: 35.04 change: -0.03

Stop Loss: 33.20
Target(s): To Be Determined
Current Option Gain/Loss: -0.9%
Listed on July 19, 2014
Entry on July 23 at $35.35
Time Frame: 8 to 12 weeks
Average Daily Volume = 8.9 million
New Positions: see below

08/06/14: Traders bought the dip in HPQ near last Friday's low and shares bounced back toward unchanged. A rally past $35.50 could be used as a new bullish entry point.

Conservative traders might want to move their stop closer to $34.00.

Earlier Comments: July 22, 2014:
Hewlett-Packard was famously started by two Stanford University students back in 1939 in a rented garage. The business that started inside a one-car garage has grown into a massive $65 billion company. Today the company makes printers, personal computers, software, IT services and infrastructure.

It has been a good year for old school technology companies. Microsoft (MSFT) is up +19.8% this year. Intel (INTC) is up +31.2%. HPQ is currently up +23.3%. All three of them are outperforming the major U.S. indices. What's also noteworthy is that all three appear to be benefitting from MSFT's decision to discontinue technical support for its Windows XP operating system.

In April this year Microsoft announced they would stop providing support for XP after 13 years. Instead of upgrading their software the data suggests that many consumers and business have chosen to upgrade their entire computer. Why is that significant? As of April over 25% of computers connected to the Internet were still using XP.

This upgrade cycle was definitely a boon for Intel (INTC). INTC recently reported significantly better than expected earnings and a lot of that was due to stronger PC sales, especially from business clients. This same story will probably be bullish for HPQ as well.

Shares of HPQ have been slowly marching higher and currently sit at two and a half year highs. The stock looks poised to breakout past its mid-June peak. Today's high was $35.29. We are suggesting a trigger to open bullish positions at $35.35.

The Point & Figure chart is forecasting a long-term target of $47.00. We probably won't hold on to HPQ that long since the company is scheduled to report earnings on August 20th.

- Suggested Positions -

Long HPQ stock @ $35.35

- or -

Long Sep $35 call (HPQ140920C35) entry $1.49*

07/23/14 triggered @ 35.35
*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 Charles Schwab Corp. - SCHW - close: 27.55 change: +0.19

Stop Loss: 26.90
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Entry on July -- at $---.--
Listed on July 30, 2014
Time Frame: 9 to 12 weeks
Average Daily Volume = 5.2 million
New Positions: Yes, see below

08/06/14: SCHW rallied off its morning spike lower but the stock looks like it might be in a new $27.00-28.00 trading range.

Currently we are still on the sidelines waiting for a new relative high. Our suggested entry point is $28.75.

Earlier Comments: July 30, 2014:
The S&P 500 index is hovering at record highs and currently up +6.5% this year. Yet trading volumes have fallen. Trading was down in the first quarter this year and slowed again in the second quarter. The drop in trading activity is pressuring brokers like E*Trade and TD Ameritrade. Yet SCHW seems to be having a great year. Instead of focusing on trading activity SCHW has been focused on wealth management services and it's working.

According to SCHW's press release, "The Charles Schwab Corporation is a leading provider of financial services, with more than 325 offices and 9.3 million active brokerage accounts, 1.3 million corporate retirement plan participants, 950,000 banking accounts. Through its operating subsidiaries, the company provides a full range of securities brokerage, banking, money management and financial advisory services to individual investors and independent investment advisors."

SCHW reported earnings on July 16th and earnings rose +27%. They added $22.7 billion in assets in the second quarter. They're up $351 billion in assets from a year ago. That's a +17% jump from June 2013 and the company ended the second quarter with a record-setting total of $2.40 trillion in client assets. SCHW's quarterly revenues were up +10.5% to $1.48 billion, just enough to beat Wall Street's estimates.

SCHW is not a fast-moving stock but the company is executing on its plan to focus on services instead of trading and it has been a winning formula for them. Today saw SCHW outperform the major indices with a +2.0% gain. This happens to be a multi-year closing high. Tonight we're suggesting a trigger to open bullish positions at $28.75. We're not setting an exit target tonight but our time frame is 9-12 weeks.

Trigger @ $28.75

- Suggested Positions -

buy SCHW stock @ (trigger)

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

Buy the 2015 Jan $30 call (SCHW150117C30)

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

Skyworks Solutions - SWKS - close: 52.15 change: +0.26

Stop Loss: 49.65
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Entry on August -- at $---.--
Listed on August 02, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 4.3 million
New Positions: Yes, see below

08/06/14: SWKS displayed some relative strength today with a +0.5% gain. The stock looks like it's coiling for a bullish breakout higher.

I do not see any changes from the weekend newsletter's new play description.

Earlier Comments: August 2, 2014:
The semiconductor stocks have led the market higher most of the year but the SOX semiconductor index has reversed sharply in the last couple of weeks. This correction in the SOX has shaved its year to date gains to +13.9%. Shares of SWKS have not seen the same pullback and this semiconductor stock is up +82% this year and looks poised to keep the rally going.

Who is SWKS? According to the company website, " Skyworks Solutions, Inc. is an innovator of high performance analog semiconductors. Leveraging core technologies, Skyworks supports automotive, broadband, wireless infrastructure, energy management, GPS, industrial, medical, military, wireless networking, smartphone and tablet applications. The Company's portfolio includes amplifiers, attenuators, circulators, demodulators, detectors, diodes, directional couplers, front-end modules, hybrids, infrastructure RF subsystems, isolators, lighting and display solutions, mixers, modulators, optocouplers, optoisolators, phase shifters, PLLs/synthesizers/VCOs, power dividers/combiners, power management devices, receivers, switches and technical ceramics. Headquartered in Woburn, Mass., Skyworks is worldwide with engineering, manufacturing, sales and service facilities throughout Asia, Europe and North America."

SWKS is probably best known for being a component supplier for Apple's iPhones. SWKS is also supplying components to Amazon.com for that company's new Fire Phone.

SWKS soared in mid July following a better than expected earnings report. Wall Street was looking for a profit of 80 cents after SWKS guided higher to 80 cents in June. They still managed to surprise with a bottom line profit of 83 cents a share. Revenues soared almost 35% to $587 million, which was better than the $570 million estimate, up from $535 before SWKS's June guidance. SWKS management also raised their guidance going forward.

Following SWKS's much better than expected report there was a wave of bullish analyst comments. Several firms raised their SWKS price targets into the $60-65 zone. SWKS's bullish guidance is probably due to Apple's new iPhone 6, which is expected to be unveiled in September. Odds are good that SWKS will rally into Apple's product launch in September.

Shares of SWKS were showing relative strength on Friday with a bounce from support near $50.00 and a bullish engulfing candlestick pattern. We are suggesting a trigger to launch bullish positions at $52.65.

Trigger @ $52.65

- Suggested Positions -

buy SWKS stock @ (trigger)

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

Buy the Nov $55 call (SWKS141122C55)

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

BEARISH Play Updates

Aaron's Inc. - AAN - close: 25.77 change: -0.05

Stop Loss: 28.05
Target(s): To Be Determined
Current Option Gain/Loss: +7.1%
Entry on July 30 at $27.75
Listed on July 29, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 809 thousand
New Positions: see below

08/06/14: The intraday bounce in AAN didn't last and shares closed at a new relative low. This morning before the opening bell the company announced its CEO is retiring effective August 31st, 2014.

Earlier Comments: July 29, 2014:
Shares of AAN are down -3.7% for the year. Honestly, I'm surprised it's not down a lot more. The company is in the lease-to-own space for residential furniture, consumer electronics, home appliances and more. They have over 2,000 locations in the U.S. and Canada.

Back in February this year AAN reported earnings and guided lower. On April 15th AAN issued a new earnings warning and blamed it on the harsh winter weather. AAN reported earnings just a couple of weeks later and lowered guidance again. AAN issued yet another earnings warning on July 15th. Then when the company reported earnings on July 25th they lowered guidance yet again. With this many warnings I'm surprised investors have not left this stock like rats fleeing a sinking ship.

So why in the world were shares of AAN surging in May and June? Management has been battling with its second largest shareholder for months. In May they moved to declassify the board of directors. This means shareholders can remove all of the board members all at once if they choose to, on an annual basis. Naturally board members who want to keep their job tend to produce more shareholder friendly policies in a situation like this. I suspect this was the driving force behind the May-June rally.

Then the latest round of earnings warnings in July have completely erased all of their gains. Today shares of AAN are sitting near support at the $28.00 mark. The $27.85 level appears to be the level to watch. Tonight we're suggesting a trigger to launch bearish positions at $27.75.

I would consider this more aggressive trade. AAN is down significantly this month and could see another oversold bounce. Just because the path of least resistance is now down doesn't mean AAN can't ricochet higher once in a while.

NOTE: AAN does have options, which might be a way to limit your risk instead of shorting the stock. Unfortunately the option spreads look a bit too wide to actually trade them.

- Suggested Positions -

Short AAN @ $27.75

08/05/14 new stop @ 28.05
07/31/14 new stop @ 28.55
07/30/14 triggered @ 27.75

Cepheid - CPHD - close: 38.81 change: -0.42

Stop Loss: 40.51
Target(s): To Be Determined
Current Option Gain/Loss: -1.0%
Entry on July 28 at $39.20
Listed on July 26, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 680 thousand
New Positions: see below

08/06/14: CPHD is retreating from short-term resistance at its simple 10-dma. The stock underperformed the major indices with a -1.0% decline.

If you were looking for an entry point then today's drop could work.

Earlier Comments: July 26, 2014:
CPHD is in the technology sector. If you look deeper the company operates in the scientific and technical instruments industry. According to the company's website, "Cepheid is a leading molecular diagnostics company that is dedicated to improving healthcare by developing, manufacturing, and marketing accurate yet easy-to-use molecular systems and tests. By automating highly complex and time-consuming manual procedures, the company's solutions deliver a better way for institutions of any size to perform sophisticated genetic testing for organisms and genetic-based diseases. Through its strong molecular biology capabilities, the company is focusing on those applications where accurate, rapid, and actionable test results are needed most, such as managing infectious diseases and cancer."

CPHD, like most of the U.S. stock market, had a great 2013. Unfortunately the rally peaked in February-March 2014. This stock set its all-time highs in the $55-56 zone. Market watchers already know that momentum and high-growth names were crushed during the March-April market pullback. CPHD was no exception. The stock corrected from $55 to $40. It looked like CPHD was on the path to recovery but then the stock collapsed again in the last two weeks.

The problem is CPHD's earnings. The company reported earnings on July 17th. Their adjusted results for the second quarter of 2014 was a loss of 10 cents a share. That was better than Wall Street's estimate for a loss of 13 cents a share. CPHD delivered pretty solid revenue growth. Sales in the second quarter surged +21.4% to $116.5 million. That came in better than analysts were expecting. Yet CPHD's net results were down -40% from a year ago.

Listening to the company's management paints an optimistic outlook. CPHD's CEO John Bishop said they sold a record-setting 1,084 of their GeneXpert systems last quarter. That's more than all of 2012. Gross margins improved as well with margins rising from 45% to 49%. So why did the stock fall?

Investors sold the stock on disappointing guidance. CPHD expects 2014 revenues in the 4452-461 million zone. That's relatively close to Wall Street's $459 million estimate. Yet CPHD is forecasting EPS of 10 cents to 13 cents. That is significantly lower than analysts' estimates of 20 cents. You can see the reaction in CPHD stock with the big drop on July 18th.

The post-earnings sell-off continues and now CPHD is breaking down under significant support at the $40.00 level. The next stop could be the $36-35 area or lower. Currently the point & figure chart is bearish and forecasting at $29.00 target.

I would consider this a more aggressive trade. The latest data listed short interest at 16.8% of the 68.9 million share float.

Friday's low was $39.26. We're suggesting a trigger to open bearish positions at $39.00.

- Suggested Positions -

Short CPHD stock @ $39.20

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

Long SEP $40 PUT (CPHD140920P40) entry $2.35

07/31/14 new stop @ 40.51
07/28/14 triggered @ 39.20
Option Format: symbol-year-month-day-call-strike

Deutsche Bank - DB - close: 32.82 change: +0.00

Stop Loss: 36.05
Target(s): To Be Determined
Current Option Gain/Loss: +1.9%
Entry on August 04 at $33.45
Listed on August 02, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 1.9 million
New Positions: see below

08/06/14: The German stock market continued to fall today. Yet financials managed to show a little relative strength, which may have bolstered shares of DB. The stock closed unchanged on the session.

Investors may want to start adjusting their stop loss lower.

Earlier Comments: August 2, 2014:
Banking scandals continue to plague the financials. Most of us are familiar with the mortgage loan scandal that has haunted the major U.S. banks for the last few years and finally seems to be fading away. Then some of the biggest international banks were hit with the Libor rate fixing scandal. Now some of the big banks are suffering with a dark pool trading scandal. Dark pools are essentially institutional trading that is concealed from the public markets.

If that wasn't bad enough Europe's economy is slowing down. The region was already struggling before the Ukraine-Russian conflict arose. Now with a growing list of sanctions against Russia the impact is starting to accelerate the economic slowdown in Europe. Plus the specter of financial stress in the European financial system has risen again with the recent collapse of Portugal's Banco Espirito Santo, which recently filed for creditor protection.

Add all of these factors together and you can see why shares of DB, one of Germany's biggest banks, might be struggling. The stock Broke down back in March this year and it's been sinking every since. The month of July saw shares consolidate sideways but DB has started to break out of this trading range. The Point & Figure chart is pretty ugly and suggesting a long-term $14 target.

Friday's intraday low was $33.69. I am suggesting a trigger to open bearish positions at $33.45.

- Suggested Positions -

Short DB stock @ $33.45

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

Long Oct $33 PUT (DB141018P33) entry $1.45*

08/04/14 triggered @ 33.45
*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

Fifth Third Bancorp - FITB - close: 19.68 change: +0.02

Stop Loss: 20.65
Target(s): To Be Determined
Current Option Gain/Loss: - 0.6%
Entry on August 06 at $19.55
Listed on August 05, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 10.2 million
New Positions: see below

08/06/14: The stock market's widespread spike lower at the open pushed FITB to gap down at $19.55. The stock bounced at $19.47 and rebounded back to virtually unchanged.

Financials as a group were showing some relative strength today mostly due to Bank of America and its news they were close to a settlement with the government and would deliver a 5-cent dividend. Shares of FITB underperformed its peers in the financial sector.

I would still consider new bearish positions in FITB at this time.

Earlier Comments: August 5, 2014:
Fifth Third Bancorp started as the Bank of the Ohio Valley in Cincinnati back in 1858. According to the company's press release FITB is now "a diversified financial services company headquartered in Cincinnati, Ohio. The Company has $133 billion in assets and operates 15 affiliates with 1,309 full-service Banking Centers, including 102 Bank Mart® locations, most open seven days a week, inside select grocery stores and 2,619 ATMs in Ohio, Kentucky, Indiana, Michigan, Illinois, Florida, Tennessee, West Virginia, Pennsylvania, Missouri, Georgia and North Carolina. Fifth Third operates four main businesses: Commercial Banking, Branch Banking, Consumer Lending, and Investment Advisors. Fifth Third also has a 22.8% interest in Vantiv Holding, LLC. Fifth Third is among the largest money managers in the Midwest

The stock market's recent dip has reduced the S&P 500 index's 2014 gains to +4.9%. Yet the financial sector has been underperforming. The XLF financial ETF is only up +2.4%. Many of the banking stocks are weighing on the group. The regional banks have performed even worse with the KRE regional bank ETF down -6.9%. If you look at weekly chart of the KRE you'll notice a big bearish head-and-shoulders pattern that has formed over the last several months. This doesn't bode well for the group.

Banks have been struggling with little to no growth. Most are willing to lend but only to customers with the best credit ratings. Even if they do lend money the interest rates today are so low it's tough to make a profit. Housing prices continue to rise but the number of mortgages is shrinking.

FITB reported earnings on July 17th. Last quarter their mortgage banking revenues collapsed -67% from a year ago. FITB's profits plunged fro $591 million Q2 2013 to $439 million Q2 2014. The company did manage to beat Wall Street's estimates by 4 cents a share. Unfortunately FITB management lowered their revenue guidance.

Technically shares of FITB are bearish. They have broken the long-term bullish trend of higher lows (see the weekly chart). They have also recently broken below key support near $20.00.

Tonight we're suggesting bearish positions at current levels (no trigger). We'll try and limit our risk with a stop loss at $20.65.

- Suggested Positions -

Short FITB stock @ $19.55

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

Long Nov $20 PUT (FITB141122P20) entry $1.20*

08/06/14 trade begins. FITB gaps down at $19.55
*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

Six Flags Entertainment - SIX - close: 36.56 change: -0.71

Stop Loss: 39.15
Target(s): To Be Determined
Current Option Gain/Loss: +0.9%
Entry on August 06 at $36.90
Listed on August 02, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 909 thousand
New Positions: see below

08/06/14: Our bearish trade on SIX is now open. The stock continues to show relative weakness. SIX gapped down at $37.02 and then dropped to a -1.9% decline on the session. The breakdown below its July lows is very bearish and breaks the long-term up trend of higher lows.

Our trigger to open bearish positions was hit at $36.90.

Earlier Comments: August 4, 2014:
Everyone loves to have fun. The trend of stay-cations that started during the financial crisis of 2008-2009 has probably driven a lot of traffic toward domestic amusement parks. Shares of SIX have definitely performed well these last few years with a rally from its 2010 lows near $8.00 to 2014 highs near $43.00. Unfortunately the momentum may be slowing down.

According to the company website, "Six Flags Entertainment Corporation is the world's largest regional theme park company with $1.1 billion in revenue and 18 parks across North America. The company operates 16 parks in the United States, one in Mexico City and one in Montreal, Canada. For more than 50 years, Six Flags has entertained millions of families with world-class coasters, themed rides, thrilling water parks and unique attractions including up-close animal encounters, Fright Fest® and Holiday in the Park®."

The last earnings report was July 21st. SIX managed to beat bottom line estimates but revenues were a miss. Wall Street expected Q2 revenues of $396 million. SIX only reported $376.5 million. On the plus side SIX said that their amusement park guests were spending more once they got into the park. SIX also reported +9% growth in their season pass business. Unfortunately, attendance was down -8% in the second quarter. Oddly enough SIX blamed the harsh winter on slower Q2 attendance and some analysts were questioning that excuse. Goldman Sachs recently removed SIX from their buy list following the revenue miss. SIX is growing but it is not growing fast enough to justify its current valuations. The stock is trading with a P/E ratio near 32 compared to the S&P 500's P/E closer to 16.

Technically shares of SIX appear to have formed a bearish double top with the peaks in March and June. Now SIX is on the verge of breaking a long-term trend line of support (see weekly chart below).

The post-earnings reaction low was $37.12 on July 21st. We are suggesting a trigger to open bearish positions at $36.90.

FYI: SIX does have options but the spreads are so wide they are untradeable.

- Suggested Positions -

Short SIX stock @ $36.90

08/06/14 triggered @ 36.90