Option Investor

Daily Newsletter, Wednesday, 8/27/2014

Table of Contents

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

Market Wrap

SPX Holds 2000 Again (Another Close One)

by Keene Little

Click here to email Keene Little
The psychological level for SPX, at 2000, was defended on Tuesday with a last-minute bump back up to close at 2000.02. Today's little bump back up into the green at the close added a dime to that and closed at 2000.12. Don't go and spend all that extra profit in one place!

Wednesday's Market Stats

The overnight trading range was very narrow (ES traded in a 2.50-point range until opening it dropped a point lower in the pre-market session) and the day mirrored the overnight session. SPX traded in about a 5-point range before it dropped a point lower in the late afternoon before getting the save into the close. Trading volume was practically non-existent. And the volume will likely decline further as we near the holiday weekend.

There were no geopolitical events to move the market and there were no important economic or central bank reports to move them either. In other words there's not much to report on as far as what might have served as a catalyst for a market move. Consequently the market didn't move.

Before jumping into tonight's charts I wanted to talk a little bit about sentiment. As usual, as the indexes have made new highs we've heard many market pundits come out of the woodwork to proclaim how bullish the market is and how the bull market will continue for another 5 years and why SPX 2500 is practically a foregone conclusion before the end of the year (or whatever number they're arguing about). We heard none of these forecasts when the stock market tanked in July. Looking at the market from an EW (Elliott Wave) perspective it's a little easier to understand this sentiment shift.

As you know, I use EW patterns to help judge where we are in a move. Like all other technical tools it's subject to interpretation but one thing I like about it is that I know when an expected move gets negated and that actually further clarifies the picture. It's nice when price follows an expected pattern, especially when in a trade that's making money because the market is moving as expected, but when the wave count transitions from one wave count to another it's just as helpful. The use of other technical tools, such as trend lines/channels, oscillators and Fibs can help support or call into question wave counts and that's an important part of the analysis. What you see on my charts are always my best guesses at the time but obviously price is king and I have to respond to it and not what I think it should do instead.

One important component of wave analysis is the use of sentiment. Each wave has its own "personality." I'll use a rally as an example. At the conclusion of a decline, the rally starts with the 1st wave (duh) and it's a wave that most traders don't believe in. The decline has most traders believing in a down trend and the 1st wave is thought to be just a correction to the decline. Bears eagerly short it and longs are not buying it because they're sure more lows are coming.

Once the 1st wave completes we get a 2nd wave pullback, which is typically a sharp pullback correction, and the trend followers jump on the decline with full expectation that new lows are coming. The 2nd wave is the one that captures many traders going the wrong way and then when it completes, at a higher low, we'll see the start of the 3rd wave up. Bears keep thinking it's just another bounce correction and they keep shorting it. Longs are fearful of a further decline and they use bounces to exit positions.

When the 2nd wave pullback finishes and the 3rd wave starts back up, especially when we get into the middle of the 3rd wave, traders begin to recognize that the trend has in fact changed. Shorts start aggressively covering and longs start getting back in and the combination produces a strong move (the 3rd wave is typically the strongest of a 5-wave move). The 3rd wave is the most profitable wave to trade and the key is to identify when it's setting up.

At the completion of the 3rd wave we get a 4th wave correction, which is typically a slow choppy sideways pullback, the opposite of a sharp 2nd wave pullback (and is referred to as the "rule of alternation" between 2nd and 4th waves). The 4th wave chop is where a lot of traders give back profits made during the 3rd wave. You want to avoid trading a 4th wave and obviously the key is to identify when it should start and finish.

Finally the 4th wave finishes and we get the 5th wave up to a new high. This is the wave of complacency. This is when trend followers are fully on board -- shorts are out and longs are all in. Market pundits are out in force projecting the continuation of the uptrend forever and much higher. Bullish sentiment goes to new highs while technical indicators show the move to new highs is accompanied by weaker market breadth and waning momentum. Just at a time when everyone believes in the trend they should instead be getting ready for a significant reversal. Care to guess which wave we're currently in? And we've got 5th waves at multiple degrees of the trend, which indicates we've got more than a significant reversal coming. Starting with the SPX weekly chart I'll show you what I mean.

Off to the left of the SPX weekly chart below is the start of a 5-wave rally from October 2011. The chart picks up this wave count with the wave-2 low in June 2012 and the start of the 3rd wave, which itself will be a 5-wave move. The 5-wave move up to December 2013 completed the 3rd wave and that was then followed by the 4th wave pullback into February. From February is the 5th wave, which again needs to be a 5-wave move, and once complete it will complete the larger-degree 5th wave.

S&P 500, SPX, Weekly chart

At the same time SPX looks to be completing the 5th of the 5th wave it's again tagging the trend line along the highs from April 2010 - May 2011, currently near 2002 (today's high). For the wave count on the weekly chart, the completion of the rally from August 7th will be the completion of the rally from October 2011, which in turn will complete the rally from March 2009. It will be an important high and it's occurring just when the most traders and market pundits are turning uber-bullish. Most are turning more bullish at a time when the rally is actually quite weak (see the bearish divergence on MACD and RSI) and this helps interpret the wave count as the 5th wave (both the comparative weakness and the uber-bullishness).

The daily chart below looks closer at the 5-wave move up from February. Again, like the weekly chart, the 1st wave of this move is off the left side of the chart and we pick it up with the 2nd wave pullback in April. The little squiggles in April-May and then again in June-July make it difficult to count but at the time of the July high it was looking good for the final high, especially with the impulsive decline into the August 7th low. But this was another example of a 4th wave "gotcha" and the 4th wave turned out to be a larger correction that started off the July 3rd high and the sharp decline from July 24th was actually the conclusion to the 4th wave.

S&P 500, SPX, Daily chart

Key Levels for SPX:
- bullish above 2007
- bearish below 1960

We've been in the 5th wave since the August 7th low and while the straight-up rally looks very bullish it's actually showing less strength by many internal breadth measures. If it rolls over near here we're also going to see confirming bearish divergence against the July highs (which is typical for a 5th wave compared to the stronger 3rd wave). As you can see more clearly on the daily chart, price has stalled at the trend line from April 2010 - May 2011 with yesterday's small shooting star and today's little doji. I consider it very high risk at this point to be long while recognizing there's a little more upside potential into early next week, as shown on the 60-min chart below.

The 60-min chart below focuses on the 5th of the 5th of the 5th wave. We've got a larger-degree 5th wave up from February (weekly chart), which needs to be a 5-wave move. The 5th wave of the rally from February is the leg up from August 7th, which also needs to be a 5-wave move. Once the final 5th wave finishes we'll then have a completed rally. Simple, no? If only, but it does identify where and when to expect the completion of the rally and even if it does something different from what's expected it actually helps clarify a better wave count.

As I've labeled the move up from August 7th, we should be ready for the final 5th wave. There's a way to consider Tuesday's high the final high but I'm waiting for price to tell me rather than just guess. One early signal from SPX that the final high is already in place would be a drop below 1989 and a break below its parallel up-channel shown on the chart. We could see SPX drop a little lower Thursday morning before heading up or just start up immediately Thursday morning since this week's consolidation continues to support the idea that we'll get another rally leg.

S&P 500, SPX, 60-min chart

If this afternoon's low completed the pullback correction off Tuesday morning's high, the upside projections for the 5th wave are 2021 (62% of the 1st wave) and then 2036 (equal to 1st wave). The higher projection crosses the top of the up-channel at the end of the day September 3rd. If SPX drops to about 1991 Thursday morning and then heads higher in the 5th wave we'll have upside projections near 2016 and 2031. We've now entered an important turn window based on cycle turn dates, the end of which is September 4th but from a time perspective we could see an important high at any time in the coming week. One other price level to keep an eye on, if reached, is 2015, which is the 127% Fib extension of the previous decline and is commonly associated with reversals.

The reason I have the key level to the upside as 2007 on the daily chart has to do with the Gann Square of Nine chart. The chart below shows the middle vertical section of this chart in order to highlight, in yellow, the important price levels. As noted at the top, the October 2002 low at 768, the April 2012 high at 1422 and the October 2007 high were on the same red vector, which shows prices that vibrate off each other (in Gann's language). Gann believed in a strong relationship between time and price, giving time more importance than price. Not seen off the left of the Gann Sof9 chart is the red vector that's 90 degrees to the one through the above price levels -- it points to the dates for the October 2002 low, October 2007 high, October 2011 low and October 2012 high.

Gann Square of Nine chart

Now 180 degrees to the above prices is the highlighted 1998 at the bottom, which I thought had a good chance of being a final high. But since 1998 was exceeded (although only one day on a closing basis so far -- yesterday's) the next highlighted level at 2007 is another possibility. It's 180 degrees from the March 2009 low at 666, which makes it particularly interesting since the 2009-2014 bull market could be capped on both ends on the same vector on the Gann Sof9 chart.

Many see an improving economy as a reason to expect the stock market to continue rallying but in fact we've been getting a lot of misinformation from the government and Fed in hopes of keeping consumers and investors happy and spending. For example, the +288K jobs that were added in June -- that's a strong number and sounds great. Too bad the number came only from a net gain of part-time jobs. Full-time jobs were cut by 523K while part-time jobs increased by 800K. The net result are more jobs but lower paying, which lowers the discretionary spending by consumers, which in turn is a drag on our economy.

And the effort to keep investors bullish is working -- Jim mentioned in last Saturday's market wrap that there's been a huge influx of money into equity funds and into high-yield (junk) bonds (the largest inflow for 2014 so far). Risk-on is back in style, which is backed by the latest AAII Investor Survey, showing 46.1% of retail investors are bullish, the highest level of the year. Keep in mind what I said about sentiment in 5th waves. And it's all coming together with an EW count that suggests trouble directly ahead.

The DOW has been struggling with its July high at 17151 (broken marginally on Tuesday but so far it has been able to close above its July 16th closing high at 17138) and its trend line along the highs from May-November 2013. The DOW played around this trend line for about 6 weeks in June-July but finally broke hard below it in late July. It's now back up to it for what could be a bearish back-test to be followed by a kiss goodbye. That's the potential I show on the chart but if it rallies with SPX into early next week we could see the DOW up to the 17300 area before it tops out (to leave a head-fake break above its July high).

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- bullish above 17,150
- bearish below 16,985

NDX has been trying to get above two intersecting trend lines since early last week and while marginally above them I'd say the price pattern in the past week looks more like an ending pattern than something more bullish. One trend line is along the highs from March-July and is currently near 4065.50. The other is a broken uptrend line from June 2013 - February 2014 and both intersect on Thursday near 4068. Bullishly, the lines are currently acting as support so if we get another rally leg into early next week we'll surely see NDX do the same.

Nasdaq-100, NDX, Daily chart

Key Levels for NDX:
- bullish above 4075
- bearish below 3985

The RUT has been the laggard in this month's rally and it even got a head start by bottoming on August 1st. But so far it's only been able to retrace a little over 62% of its July decline and in fact closed on it today (1172.97, with a closing price at 1172.71). The RUT has seen a few major reversals around the 1st of the month, including the February low, March high, July high and August low. The timing is good for setting up another major reversal on or around September 1st (September 2nd is the first trading day of the month).

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- bullish above 1173
- bearish below 1148

Bond yields continue to fall and not just in the U.S. as many of the European bond prices continue to rise in anticipation of more stimulus (bond purchases) by the ECB. Most feel that Mario Draghi will soon be forced to either eat or back up his words to do "whatever it takes." Europe is a stone's throw away from entering a deflationary cycle and while Central Banks think they can stop the process, and Draghi will certainly try, they're just along for the ride as well. The German 10-year bund fell to a record-low 0.909% today while Spain's 10-year yield dropped to 2.083%. There are certainly no worries about inflation.

The U.S. 10-year yield (TNX) remains relatively strong by comparison (less demand for the bonds, some of which is the Fed's reduced purchases) but it remains below resistance near 2.46%. The potential is for a sharp move lower that breaks down below its parallel down-channel from December 2013, the bottom of which is currently near 2.26% but I suspect once fears of deflation in the U.S., which I believe is coming, starts to become more of a concern we'll see the same interest in bonds, especially if the stock market starts to take a more significant tumble.

10-year Yield, TNX, Weekly chart

What's interesting about the current declining yields is that it's keeping investors feeling bullish about the stock market. Most bear markets have started after yields have been rising in response to an overheating economy. The declining yield scenario is therefore keeping investors complacent about what's happening this time. No matter how hard the Fed and other central banks have tried, they have not been able to stimulate the economy enough to get inflation going. This time, for the first time since WWII, we're facing a deflationary event and that has yields dropping. Deflation is bad for stocks but the stock market doesn't believe in deflation yet because the Fed keeps assuring us that everything is under control (cough).

The current deflationary period has been brought to us by far too much credit expansion and debt. The destruction of debt (paying it down or through bankruptcy), which has been happening in fits and starts since 2000, is deflationary. Interestingly, the Fed is on course to stop their QE stimulus program just at a time when they should be ramping up stimulus. But once again they'll prove to us that they really don't have a clue about what's happening in the real world, which is far different than what their books tell them.

Last week I showed the BKX index and pointed out the sideways triangle pattern that it's been in since its March high. I can view it as a bullish continuation pattern following the rally into it but I want to see BKX exceed its July 3rd high at 72.55 before turning at least short-term bullish the index. I had mentioned the 78.6% retracement and to watch for a small throw-over above it like it did into its July high. At the moment it's looking like we also might have had a brief throw-over above the top of the triangle (downtrend line from March-July) yesterday, which has been followed by a red candle today. If this is a failed breakout attempt and the bullish pattern is going to fail instead, it will likely fail hard and the bearish wave count suggests a very strong 3rd of a 3rd wave down will be next (the "recognition" wave). The next several days for BKX are going to be important.

KBW Bank index, BKX, Daily chart

At its August 21st high, the TRAN made it back up to its trend line along the highs from April 2010 - July 2011, which it had briefly climbed above when it made its high at 8515 on July 23rd. Its August 21st high, at 8482, was only slightly lower and so far fits as a retest of its July high (like the DOW) as well as its trend line along the highs. In the meantime the bearish divergence on the oscillators is glaring and the retest/back-test is a very good time to be thinking short. I see the potential for another pop up to the trend line, near 8530 early next week but I think resistance will hold.

Transportation Index, TRAN, Daily chart

The U.S. Dollar rallied strong while the Euro declined. Mario Draghi mentioned he'd like to see the Euro drop in value so that it will help the European economy. That kind of talk only inspires other countries to devalue their currency as well and it will again be a race for the bottom. Geopolitical (Russia and its satellite countries), economic and currency devaluations -- it's all eerily reminiscent of history (leading up to WWII). At any rate, the dollar spiked up after finally breaking free of the top of its trading range at 81.50 and hit a high of 82.75 last night before pulling back today. It could charge up to its downtrend line from June 2010, currently near 83.40, but if it does pull back we should see support now near 81.50.

U.S. Dollar contract, DX, Weekly chart

Following gold's strong decline last week it's been trying to get a bounce off support, which is its uptrend line from December 2013 - June 2014, currently near 1274. It's taking a while but I'm still looking for gold to bounce up to the top of its sideways triangle, near 1350 next month, before setting up a stronger decline into the end of the year.

Gold continuous contract, GC, Weekly chart

Following oil's steep decline last week it's been consolidating in a choppy sideways/up bounce, which is corrective and points lower once the correction completes. I suspect we'll see stronger support at 91-92 and maybe a bounce back up to its broken uptrend line from June 2012 for a back-test but for now oil looks more bearish than bullish and potentially strongly bearish if we've got a 3rd wave, as labeled on its weekly chart, ahead of us.

Oil continuous contract, CL, Weekly chart

Thursday will be a little busier for economic reports with the 2nd revision for GDP being one of the more influential reports. The number is not expected to change so there could be a jump in the futures if the number is a surprise. One thing helping GDP is inventory builds, which is not necessarily a good thing. China building an inventory of uninhabited cities might keep workers busy but eventually buyers are needed. I consider inventory builds one of the riskier parts of GDP because it can be stopped and reversed quickly if businesses get a whiff of trouble in the sales department.

After the opening bell we'll get Pending Home Sales, which are expected to improve from June's -1.1% to +0.5%. But if sales are down and confirm Monday's report of slowing new home sales there could be more trouble in paradise. New homes are being built almost twice as fast as they're being sold, which has increased inventory to a 6-month supply, the highest it's been since late-2011 (kind of like the inventory build that's considered a good thing for GDP). Build it and they will come might not be working so well right now.

Economic reports and Summary

From an EW perspective I'd like to see one more rally leg into early next week to do a nice job completing the wave count. SPX 2015-2030 would be the upside target zone, which I'll be able to zero in on a little closer as the 5th wave develops (assuming we'll get the final little 5th wave in the move up from August 7th). Look for an important high any time between now and September 4th.

There are some indicators, trend lines and price patterns for some of the indexes that suggest we could see a final high sooner rather than later and therefore I consider the risk to be on the upside. There's very little reward to the upside vs. huge downside risk. The marginal new highs this month vs. last month have actually done a better job in showing a cleaner wave pattern that now strongly suggests an endgame in sight. The trend is still up and therefore bears have to be extremely careful trying to catch rising knives. A conservative method to get short will be to wait for confirmation of a high, such as breaking uptrend lines/up-channels, and then short the subsequent bounce to lower highs. We'll have plenty of opportunities on the short side in the coming year and there's no need to rush entries. Both sides should be very careful in the coming week.

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

Rolling Over

by James Brown

Click here to email James Brown


Mobile Mini, Inc. - MINI - close: 39.04 change: -0.91

Stop Loss: 41.40
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Entry on August -- at $---.--
Listed on August 26, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 265 thousand
New Positions: Yes, see below

Company Description

Why We Like It:
The mobile storage space might be facing some headwinds. MINI provides commercial storage, construction storage, residential storage, and mobile offices. According to the company's website, "Mobile Mini, Inc. is the world's leading provider of portable storage solutions through its total lease fleet of over 213,000 portable storage and office units with 135 locations in the United States, United Kingdom and Canada. Mobile Mini, Inc. went public in 1994 and trades on NASDAQ under the symbol MINI. Mobile Mini offers customers a wide range of portable storage and office products in varying lengths and widths with an assortment of differentiated features such as: proprietary security systems, multiple door options and 100 different configuration options."

Sales are growing but MINI is developing a trend of missing earnings or delivering lackluster results. MINI missed Wall Street's EPS estimates back in February and April. The latest earnings report was July 30th. Revenues were almost +10% from a year ago but earnings were down. MINI reported a 23-cent profit, which was in-line with estimates but down from 25 cents a year ago. Investors crushed the stock following the late July earnings report. MINI was already weak through most of July and then got hammered from $43 to under $38 on its earnings news.

The stock's long-term up trend might be in jeopardy. The company is not growing fast enough to justify its P/E above 40. The stock's oversold bounce from the post-earnings sell-off has stalled at technical resistance at the exponential 200-dma. Now it appears that MINI is beginning to roll over.

Today's low was $38.93. I'm suggesting a trigger at $38.80 to open bearish positions.

Trigger @ $38.80

- Suggested Positions -

Short MINI stock @ ($38.80)

Annotated Chart:

Weekly Chart:

In Play Updates and Reviews

Rally Stalls On Wednesday

by James Brown

Click here to email James Brown

Editor's Note:
The U.S. stock market's rally stalled a bit on Wednesday with the S&P 500 clinging to the 2,000 mark.

CPHD was closed this morning. SFM has been removed.

Current Portfolio:

BULLISH Play Updates

Delta Air Lines - DAL - close: 40.16 change: +0.26

Stop Loss: 37.65
Target(s): To Be Determined
Current Option Gain/Loss: -1.4%
Entry on August 21 at $40.75
Listed on August 19, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 11 million
New Positions: see below

08/27/14: DAL displayed some relative strength today with a +0.6% gain. I remain cautious. Shares are still churning sideways near $40.

If the market rally stalls, I suspect that DAL could dip toward support near $38.00 before bouncing and resuming its up trend.

If you're not willing to give DAL that much room then consider raising your stop loss.

I am not suggesting new positions at the moment.

Earlier Comments: August 20, 2014:
Delta is the world's second biggest passenger airliner on the planet. They serve almost 165 million customers a year. Believe it or not but they started back in 1924 as an aerial crop dusting company called Huff Daland Dusters. Now they have almost 80,000 employees and a fleet of more than 700 planes that fly to 334 destinations in 64 countries on six continents.

A lot of investors look at the airline stocks as value plays. That's easy to see given their cheap multiples. DAL has a P/E of 3.1. Yet the company is seeing growth as well. Last year the airlines were big winners with the market's 2013 rally. This year could be another strong one thanks to falling oil prices. There has been a lot of geopolitical headlines but none of them seem to be pushing oil prices higher. Instead crude oil prices are falling. That's a huge deal for the airline companies because fuel is their largest expense. DAL has the lowest fuel costs in the business because they own their own refinery. The company expects that their fuel hedging and refinery operations should cut their fuel costs by $350 million this year.

More than 60% of DAL's business is in the U.S. The country's slow economic improvement has helped fuel gains for DAL. The airline has beaten Wall Street's bottom line estimates four quarters in a row. Back in June they raised guidance. Their most recent earnings report was July 23rd where they delivered a profit of $1.04 a share, one cent above estimates. DAL management that said their pre-tax profit was $1.4 billion, which is a +70% improvement from a year ago. They ended the second quarter with debt at less than $8 billion, which is a 20-year low. DAL's margins have been improving. Management expects margin improvement to continue and should see a jump from 13.5% to 15-17% in the third quarter.

Technically DAL saw a correction from $42 to $35 (-16%) from its June highs. Investors bought the dip again near $35.00 in early August. Now DAL has built what appears to be a bullish double bottom. The current bounce from its August lows is breaking through resistance.

If this trend continues we want to hop on board. Tonight we're suggesting a trigger at $40.75. The 2014 high near $42.50 could be short-term resistance but longer-term DAL looks poised to breakout.

- Suggested Positions -

Long DAL stock @ $40.75

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

Long 2015 Jan $45 call (DAL150117C45) entry $1.70*

08/21/14 triggered @ 40.75
*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

Green Plains Inc. - GPRE - close: 44.60 change: +0.79

Stop Loss: 41.85
Target(s): To Be Determined
Current Option Gain/Loss: +9.4%
Entry on August 11 at $40.77
Listed on August 09, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 1.4 million
New Positions: see below

08/27/14: GPRE spiked higher this morning. The stock rallied to $45.70 intraday, a +4.3% gain, but GPRE gave back half of its rally to close under $45.00.

Tonight we'll move the stop loss to $41.85. I'm not suggesting new positions at this time.

Earlier Comments: August 09, 2014:
GPRE has been a monster stock for investors over the last couple of years. Summer of 2012 the stock was trading for less than $5.00 a share. Today GPRE is trading at levels not seen since early 2006. The company is considered part of the basic materials sector. They're listed in the specialty chemicals industry. What they do is make ethanol and a lot of it.

According to the company website, "Green Plains is a vertically-integrated ethanol producer based in Omaha, Nebraska. We currently have an ethanol production capacity of approximately 1.0 billion gallons per year with our 12 plants." Another big part of their business is "Distillers grains are an important co-product of Green Plains’ ethanol production. At capacity our plants will produce approximately 2.9 million tons of distillers grains annually that will be used as a high-protein, high-energy animal fodder and feed supplement. Corn oil is also a co-product of ethanol production that is being extracted at all 12 of our plants."

Earlier this year GPRE made headlines when they purchased their own cattle-feed yard. Distiller's grain is a byproduct of the ethanol production process. Previously GPRE would try and sell it to ranchers as cattle feed. Sometimes that proved difficult to sell all of its distiller's grain. GPRE has decided a great way to handle the problem is buy their own cattle yard. They'll be able to raise their own cattle with the byproduct of their main business of ethanol production.

Of course ethanol is their main product and it could be a great year for GPRE. The company's input costs for their main ingredients of corn and natural gas have been falling in 2014. That's going to boost their ethanol margins. Piper Jaffray actually upgraded GBX in July on this dynamic and raised their price target on GPRE to $45.00.

It looks like the ethanol market is pretty healthy. The U.S. saw ethanol exports soar +56% in the first six months of 2014. Most of that went to Canada. Demand for ethanol could go up if some senators have their way. A handful of senators are pushing to boost the EPA's requirement on ethanol in our fuel. If they are successful it would raise the ethanol requirements by +40%.

The stock has displayed significant relative strength. The S&P 500 index is up +4.5% year to date. GPRE is up +108%. More and more mutual funds have been adding GPRE to their portfolio. Yet not everyone agrees with the bullish outlook on GPRE. Short interest is climbing as well. The most recent data listed short interest at 25% of the small 28.6 million share float. If this rally continues it could spark more short covering.

The last few days have seen GPRE consolidating sideways in the $39.50-40.60 zone. Tonight we are suggesting a trigger to open bullish positions at $40.75. We will try and limit our risk with a stop loss at $38.40.

We are not setting an exit target tonight but I will note that the point & figure chart is bullish and suggesting at $69.00 target.

- Suggested Positions -

Long GPRE stock @ $40.77

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

Long Dec $45 call (GPRE141220C45) entry $2.95*

08/27/14 new stop @ 41.85
08/23/14 new stop @ 40.95
08/14/14 GPRE announces $100 million buy back and doubles dividend to 8c.
08/13/14 new stop @ 39.25
08/11/14 trade opens on gap higher at $40.77, trigger was $40.75
*option entry price is an estimate since the option did not trade at the time our play was opened.
Option Format: symbol-year-month-day-call-strike

Microsoft Corp. - MSFT - close: 44.87 change: -0.14

Stop Loss: 42.90
Target(s): To Be Determined
Current Option Gain/Loss: +1.8%
Entry on August 14 at $44.08
Listed on August 13, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 36 million
New Positions: see below

08/27/14: I do not see any changes from my prior comments. MSFT looks poised for a pullback. I'm expecting a dip toward $44.00.

I am not suggesting new positions at this time.

Earlier Comments: August 13, 2014:
Microsoft Corp. is a technology behemoth. The company was founded in 1975. They have grown into a massive company with 128,000 employees around the world. Their software is used by billions of people every day. They also offer technology services, tablets, X-box gaming platform, networking and server software, and their Nokia division. MSFT has jumped head first into the cloud computing industry. Altogether MSFT generated almost $87 billion in sales the past 12 months with a net income of $22 billion.

Investors worried about MSFT and how the death of the PC would slowly chip away at its core products - mainly the Windows operating system and Microsoft Office. However, this past summer there has been evidence that the PC market isn't dead. Intel reported stronger than expected chip sales for PCs, especially to enterprise customers. Meanwhile MSFT stopped supporting the Windows XP operating system. MSFT released the XP system back in 2001. Their decision to stop providing updates means the XP system could become less secure to viruses, malware, and hacking. One analyst estimated that 25% of the PCs currently connected to the Internet were still running XP. That's millions and millions of computers that will need to either upgrade their software or likely be scrapped and upgraded to a new computer with a newer version of MSFT's software. The upgrade cycle could last a while.

Investors have been pretty optimistic since Satya Nadella was crowned CEO of MSFT back in February this year. He has been focusing the company on the cloud and it seems to be working. MSFT's commercial cloud revenues soared +147% with sales on track to exceed $4 billion a year. Even Bing, MSFT's search engine rival to Google, is improving. Bing's ad revenues rose +40% last quarter and snatched almost 20% of the search engine market. MSFT expects their Bing division to turn profitable in 2016.

MSFT's most recent earnings report on July 22nd was mixed. They missed the bottom line estimate by 5 cents. Yet revenues came in ahead of expectations. Wall Street was looking for quarterly revenues of $22.99 billion. MSFT reported $23.38 billion. Several analyst firms upgraded their outlook on MSFT following the earnings report. Many of the new price targets are in the $50 area.

Technically shares of MSFT have a bullish trend of higher lows. The stock saw some post-earnings depression in the second half of July but now that's over and investors are buying the dip.

Tonight I am suggesting investors open bullish positions tomorrow morning. We'll try and limit our risk with a stop loss at $41.75.

- Suggested Positions -

Long MSFT stock @ 44.08

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

Long 2015 Jan $50 call (MSFT150117c50) entry $0.45

08/23/14 new stop @ 42.90
08/14/14 trade begins. MSFT opens at $44.08
Option Format: symbol-year-month-day-call-strike

Skyworks Solutions - SWKS - close: 54.86 change: +0.16

Stop Loss: 49.95
Target(s): To Be Determined
Current Option Gain/Loss: +4.2%
Entry on August 07 at $52.65
Listed on August 02, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 4.3 million
New Positions: see below

08/27/14: SWKS ricocheted back and forth between $54.00 and $55.00 today. I am not suggesting new positions at this time. More conservative investors may want to raise their stop loss closer to $52.00 or $52.50

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.

- Suggested Positions -

Long SWKS stock @ $52.65

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

Long Nov $55 call (SWKS141122C55) entry $2.86

08/13/14 new stop @ 49.95
08/07/14 triggered @ 52.65
Option Format: symbol-year-month-day-call-strike

Ubiquiti Networks - UBNT - close: 45.83 change: -0.20

Stop Loss: 43.90
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Entry on August -- at $---.--
Listed on August 26, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 902 thousand
New Positions: Yes, see below

08/27/14: UBNT spent Wednesday's session consolidating sideways. There is no change from last night's new play description (below).

Earlier Comments: August 26, 2014: UBNT is in the technology sector. The company operates in the wireless technology and networking industry. According to the company press release, "Ubiquiti Networks is closing the digital divide by building network communication platforms for everyone and everywhere. With over 20 million devices deployed in over 180 countries, Ubiquiti is transforming under-networked businesses and communities. Our leading edge platforms, airMAX, airFiber, UniFi, UniFi Video, UniFi VoIP, mFi and EdgeMAX combine innovative technology, disruptive price performance and the support of a global user community to eliminate barriers to connectivity."

The company has been consistently beating earnings estimates. They just wrapped up their fiscal year 2014 with the earnings report on August 7th, 2014. The company managed to beat estimates all four quarters. Their 2014 Q4 numbers showed sales up +54% from a year ago while EPS were up +70%.

It has been a rocky year for the stock price in spite of the company's earnings track record. If you recall the stock market suffered a pullback in March this year. The high-growth stocks and momentum names were hit pretty hard. UBNT was one of those that was punished and shares collapsed from $55 to $30 over the next several weeks. Since then UBNT has been slowly recovering.

Right now the stock is on the verge of breaking through resistance. A new breakout could spark some short covering. The most recent data listed short interest at 32% of the small 26.6 million share float.

We are suggesting a trigger to open bullish positions at $46.75.

Trigger @ $46.75

- Suggested Positions -

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

Buy the OCT $48 call (UBNT141018C48)

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

WhiteWave Foods Co. - WWAV - close: 34.76 change: +0.01

Stop Loss: 31.40
Target(s): To Be Determined
Current Option Gain/Loss: -0.4%
Entry on August 19 at $34.91
Listed on August 16, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 2.1 million
New Positions: see below

08/27/14: WWAV flirted with the $35.00 level this morning and spent the rest of the day churning sideways. I am not suggesting new positions at this time.

Earlier Comments: August 16, 2014:
Consumer tastes and buying habits are changing and more people are opting for more natural and organic foods.

WWAV is in the consumer goods sector. You might not recognize the name but they're behind brands like Silk, Horizon Organic, Land-O-Lakes, International Delight, Alpro, and Earthbound Farm Organic.

WWAV considers themselves "a leading consumer packaged food and beverage company that manufactures, markets, distributes, and sells branded plant-based foods and beverages, coffee creamers and beverages, premium dairy products and organic produce throughout North America and Europe. The Company is focused on providing consumers with innovative, great-tasting food and beverage choices that meet their increasing desires for nutritious, flavorful, convenient, and responsibly-produced products. The Company's widely-recognized, leading brands distributed in North America include Silk plant-based foods and beverages, International Delight and LAND O LAKES* coffee creamers and beverages, Horizon Organic premium dairy products and Earthbound Farm' certified organic salads, fruits and vegetables. Its popular European brands of plant-based foods and beverages include Alpro and Provamel" (The Land-O-Lakes brand is licensed from the owners).

If you're looking for a company that is growing then keep an eye on WWAV. They have beaten Wall Street's estimates on both the top and bottom line at least four quarters in a row. The last three quarters management has been raising their guidance. In Q4 2013 WWAV's revenues were up +11.5%. The first quarter of 2014 saw revenues soared +36.5%.

Their latest report was August 7th. Analysts were looking for a profit of $0.22 on revenues of $815.6 million. WWAV delivered a profit of $0.23 with revenues climbing +39.5% to $837.9 million.

The natural and organic retailers might be facing tougher margins and stronger competition (WFM, SFM, TFM, NGVC) but that doesn't seem to be the case for a producer and distributor like WWAV.

You can see the big surge in the stock price on August 7th as traders reacted to the bullish earnings news and guidance. After consolidating gains the last few days shares of WWAV have started to push higher again. They have been outperforming the major market indices and WWAV closed at a new all-time highs on Friday.

We believe the rally continues but I am labeling this a more aggressive, higher-risk trade due to WWAV's recent volatility. The last several weeks have seen some significant swings.

Friday's intraday high was $34.06. We're suggesting a trigger to open bullish positions at $34.15.

- Suggested Positions -

Long WWAV stock @ $34.91

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

Long OCT $35 call (WWAV141018C35) entry $1.70*

08/19/14 trade opens on gap higher at $34.91, suggested entry point was $34.15.
*option entry price is an estimate since the option did not trade at the time our play was opened.
Option Format: symbol-year-month-day-call-strike

BEARISH Play Updates

Natural Grocers by Vitamin Cottage - NGVC - close: 18.69 change: -0.20

Stop Loss: 20.10
Target(s): To Be Determined
Current Option Gain/Loss: +3.9%
Entry on August 12 at $19.45
Listed on August 11, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 209 thousand
New Positions: see below

08/27/14: NGVC continued its slow descent on Wednesday.

I am not suggesting new positions at this time. More conservative investors might want to lower their stop loss again.

Earlier Comments: August 11, 2014:
The last six to nine months have not been good for the natural food and organic-related retail chains. Whole Foods (WFM), The Fresh Market (TFM), Sprouts Farmers Market (SFM), and Natural Grocers have all underperformed the market by a wide margin.

According to NGVC's press release the company was "founded in Colorado by Margaret & Philip Isely in 1955, Natural Grocers was built on the premise that consumers should have access to affordable, high-quality foods and dietary supplements, along with nutrition knowledge to help them support their own health. The family-run store has since grown into a successful national chain with locations across Colorado, Texas, Utah, Wyoming, Oklahoma, Missouri, New Mexico, Montana, Kansas, Idaho, Nebraska, Arizona and Oregon, and employs over 2000 people. Although the company went public in July 2012, Isely family members continue to manage the company day to day, building on the foundation of their parents' business."

The good news is that the natural food and organic food craze is reaching a wider audience and more and more consumers are making healthier choices. The bad news is that this previously higher-margin business, in a notoriously low-margin industry, has drawn tons of competition. That has been the biggest challenge. Big players like Wal-mart and Target in addition to major regional grocery chains are all starting to offer more natural and organic wares. Meanwhile those already in the space are competing with each other as well. Margins are shrinking as competition heats up.

Shares of NGVC plunged back in May after the company lowered its same-store sales forecast for 2014. The stock dropped again on August 1st following its earnings report. Earnings were in-line with estimates but guidance was soft.

The path of least resistance is down and NGVG looks headed for its all-time lows in the $17.00 area.

The biggest risk with this bearish positions on NGVC is the crowd. There are a lot of investors already bearish on this stock. The most recent data listed short interest at 33.3% of the very, very small 5.1 million share float. That significantly raises the risk of a short squeeze.

We are suggesting bearish positions with a trigger to short NGVC at $19.45 but I am labeling this an aggressive, high-risk trade. NGVG does have options but most of the option spreads are too wide. We will try and limit our risk with a stop loss at $21.05.

*Aggressive Trade* Use small positions. - Suggested Positions -

short NGVC @ $19.45

08/21/14 new stop @ 20.10
08/12/14 triggered @ 19.45

Papa John's Intl. Inc. - PZZA - close: 39.49 change: -0.09

Stop Loss: 41.25
Target(s): To Be Determined
Current Option Gain/Loss: +0.2%
Entry on August 25 at $39.56
Listed on August 23, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 368 thousand
New Positions: see below

08/27/14: PZZA isn't moving. Shares traded in a tight range and closed almost unchanged.

I would still consider new positions now at current levels or if you're nimble look for a failed rally near $40.00.

Earlier Comments: August 23, 2014:
Papa John's was founded back in 1985 and headquarter in Louisville, Kentucky. They have grown into the planet's third largest pizza delivery company. There are over 4,400 Papa John locations in all 50 U.S. states and 35 countries. The good news for PZZA has been their international growth. They're growing in the U.S. as well but international growth has been outperforming.

Last year was a banner year for the stock price. Shares virtually doubled from their 2013 low to their December 31st close. The rally kept going in 2014. However, momentum reversed in March when many of the momentum names were crushed. PZZA suffered a multi-week hammering with a drop from $55 to $40. Since then stock has struggled.

One of the biggest challenges for restaurant stocks has been food inflation. Food prices have been climbing sharply the past several months. In the U.S. food inflation is running about +20%. A lot of that is due to surging prices in meat, eggs, and dairy. Guess who uses a lot of cheese? PZZA does.

PZZA's earning trend has been shaky. They missed earnings last November. February's report was only in-line with estimates. May's announcement missed estimates. Their most recent earnings report was August 5th. Wall Street expected a profit of $0.42 a share on revenues of $384.8 million.

PZZA delivered a profit of $0.40 with revenues up +9.1% to $380.9 million. That's a miss on both counts. The company said same-store sales in North America were up +6% and overseas up +8.6%. That looks healthy. Yet their 40-cent profit lines up with a 39-cent profit a year ago. Sales are up but profits are flat? The biggest culprit is probably rising ingredient costs. Management did raise their 2014 guidance but even after they raised guidance it was still below Wall Street's consensus.

The company is still expecting relatively decent sales growth but it doesn't seem to be fast enough to satisfy Wall Street. The recent breakdown under support near $40.00 is bearish. The point & figure chart is bearish and forecasting a $32 price target.

Tonight we are suggesting bearish positions immediately. We're not setting an exit target yet. I will point out potential support on the weekly chart (see below). The path of least resistance for PZZA definitely looks lower.

FYI: PZZA does have options but the spreads are too wide to trade them.

- Suggested Positions -

Short PZZA stock @ $39.56

08/25/14 trade begins. PZZA gaps higher at $39.56

Transocean Ltd. - RIG - close: 38.59 change: +0.07

Stop Loss: 40.01
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Entry on August -- at $---.--
Listed on August 25, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 6.4 million
New Positions: Yes, see below

08/27/14: There is no change from my prior comments on RIG.

Currently we are on the sidelines with a suggested entry point at $37.25. However, if this bounce continues we might consider a different entry point near resistance in the $39.50 area.

Earlier Comments: August 25, 2014:
The oil drillers could be facing a significant downturn due to lower demand and rising supply. That's a tough combination for any business.

RIG is one of the biggest. According to the company website, "We are a leading international provider of offshore contract drilling services for energy companies, owning and operating among the world's most versatile fleets with a particular focus on deepwater and harsh-environment drilling. Our fleet of 79 mobile offshore drilling units includes the world's largest fleet of high-specification rigs consisting of ultra-deepwater, deepwater and premium jackup rigs. In addition, we have seven ultra-deepwater drillships and five high-specification jackups under construction."

The company's latest earnings report on August 6th looked pretty good. Wall Street was expecting a profit of $1.12 a share. RIG delivered $1.61 - blow out number. Revenues also beat estimates at $2.33 billion versus the $2.29 estimate but revenues were down from a year ago. Investors ignored the better than expected results. That's because the industry is facing a number of headwinds.

Day rates are dropping and more rigs are sitting idle. Analysts are lowering estimates due to rising down time. RIG's latest fleet update showed that out-of-service time for 2014 had risen by 28 days. Their 2015 projected out-of-service time had surged 236 days. That is significant when you consider that these rigs get paid hundreds of thousands of dollars per day they operate. Of course those numbers are coming down.

Angie Sedita, an analyst with UBS, said, "We believe dayrate pressure will persist given limited rig tenders (demand) and fierce competition, with dayrates already down 25%-40% from peak levels."

Raymond James analyst Praveen Narra provided more details on their bearish outlook. According to Narra:

After a decade of good times, the deepwater drilling rig market is facing a multiyear down-cycle. Historically, most offshore drilling cycles have been short-lived as there have usually been sudden demand shocks that tend to self correct relatively quickly. This time, it is more of a new rig supply problem compounded by a moderation in offshore spending from the suddenly “return driven” multinational major oil companies. That means this down-cycle should be more drawn out than usual. Specifically, we think the downturn will take about three years to play out with average floater day-rates falling about 25% with over 60 floating rigs needing to be stacked (either warm stacked or cold stacked). More importantly for investors, we think consensus 2016 floater estimates (on average) are still about 25% too high. Put another way, earnings multiples are not as attractive as some now think, in our view. Obviously, the lower-end, older floating assets will be hit the hardest. While everyone loses in this environment...

If you're curious a "stacked" rig is not in service. They can be warm stacked, which means they are idle but still have a crew and ready for deployment. A cold stacked rig has essentially been mothballed.

The bearish outlook for RIG is evident in the stock's decline. Shares just broke down under support near $38.00. The Point & Figure chart is bearish and forecasting at $30.00 target but this target could fall further. It is worth noting that there are a lot of traders already bearish on RIG. The most recent data listed short interest at 18% of the 327 million share float. That can spark short squeezes like the one back in April and again in June.

Tonight we are suggesting a trigger to launch bearish positions at $37.25.

Trigger @ $37.25

- Suggested Positions -

Short RIG @ (trigger)

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

Buy the OCT $35 PUT (RIG141018P35)

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


Cepheid - CPHD - close: 39.61 change: +0.48

Stop Loss: 40.25
Target(s): To Be Determined
Current Option Gain/Loss: +0.4%
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

08/27/14: CPHD has not been cooperating. In last night's newsletter we opted to exit positions this morning. Shares opened at $39.05.

- Suggested Positions -

Short CPHD stock @ $39.20 exit $39.05 (+0.4%)

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

SEP $40 PUT (CPHD140920P40) entry $2.35 exit $1.60* (-31.9%)

08/27/14 planned exit this morning.
08/26/14 prepare to exit tomorrow morning
08/13/14 new stop @ 40.25
07/31/14 new stop @ 40.51
07/28/14 triggered @ 39.20
Option Format: symbol-year-month-day-call-strike


Sprouts Farmers Market, Inc. - SFM - close: 30.90 change: +0.22

Stop Loss: 30.65
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Entry on August -- at $---.--
Listed on August 18, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 1.8 million
New Positions: see below

08/27/14: The story on SFM remains bearish but the stock is not cooperating. Shares are up four days in a row. It seems unlikely that SFM will hit our suggested entry point at $28.95 any time soon.

Trade did not open.

08/27/14 removed from the newsletter, suggested trigger was $28.95