Option Investor

Daily Newsletter, Wednesday, 8/5/2015

Table of Contents

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

Market Wrap

Big Price Swings, No Follow Through

by Keene Little

Click here to email Keene Little
We're getting decent price swings (with relatively low VIX readings for all the price volatility) but we're stuck waiting for something. We're all here and ready to trade but the market is making us wait to see if there will be any follow through either up or down. So far there's been no answer from the market.

Today's Market Stats

The market started off strong this morning after an overnight rally in equity futures due to encouraging economic news out of Europe and Asia and then the pre-market ADP report that was weaker than expected -- yes, weak is good since it keeps the Fed off the raise-rates button. The DOW was relatively weak, thanks to Disney, while the others were doing well. SPX was the middle of the road, while techs were strong, but after being up nearly 20 points this morning, the sellers took over, driving SPX back down about 13 points to close +6 in the green. The DOW finished -10 points in the red. We continue to wait for direction.

Before this morning's open we received the ADP Employment report, which came in at 185K, weaker than the expected 220K and a drop from June's 229K (which had been revised lower from the originally reported 237K). After more worry about the Fed kicking off its rate-raising campaign (one of the reasons for yesterday's rally), the weak ADP report, and what it might mean for this Friday's NFP report, had traders feeling more bullish about the Fed being forced to back away.

After this morning's open we received the ISM Services report and it was strong than expected. At 60.3 it was better than the 56.3 the market expected and a big jump up from June's 56.0. It's also the highest it's been since August 2005. Hmm, maybe the Fed will pick up on that as a reason to justify a rate increase. I'll believe a rate increase when I see one.

Other than the two economic reports and some earnings reports, which knocked indexes around but left them bifurcated, there apparently wasn't much to keep the buyers coming in. That suggests the rally may have been more short covering than real buying and any weakness tomorrow would suggest the market is weaker than it is strong. But Thursday could continue to chop sideways as it waits to get through Friday morning's NFP report

With the choppy sideways move this year it's been difficult getting a sense of direction, other than sideways, and putting trend lines around it has been challenging to say the least. What typically works in a sideways market is price-level S/R but even that hasn't worked very well. One of the trend lines that appears to be in play is the longer-term uptrend line from October 2011 - October 2014, currently near 17735. The DOW poked above this line last week but was unable to close above it with the important weekly closing price. On a weekly chart, intraweek breaks of S/R are not as important as the week's closing price (same as intraday breaks not being as important as the daily close). If the DOW drops back down near last week's low at 17553 it would be a test of the bottom of a parallel up-channel from February and a trend line along the lows from March 26 - July 7. A little lower, near 17270 is the trend line along the highs from 2000-2007, which it broke above in October 2014 and back-tested in February. There is still the potential for that trend line (purple on the weekly chart below) to hold as support but below that level and then its February 2nd low at 17037 would be confirmation we've seen THE high. Until that happens, especially in this choppy market, it could go either way, or should I see one of 3 ways -- up, down or sideways (or any combination of those possibilities). I've highlighted the MACD break below the zero line, which is bearish since bullish consolidations generally see MACD hold above the zero line (coming back to the zero line and turning back up is typically a good buy signal).

Dow Industrials, INDU, Weekly chart

Thanks to Disney (DIS) and its disappointing earnings report after the bell yesterday, it held the DOW back today, which made it one of the weaker indexes in today's rally attempt. DIS finished down -11 (-9%) and single-handily had the DOW finishing in the red today while the others stayed in the green. Last week the DOW tried 3 times to get through its broken 200-dma, only to be rejected each time. Friday's red candle followed a bearish dragonfly doji on Thursday and that gave us a 3-candle reversal pattern at resistance. Monday followed with a down day and a confirmed failure to climb back above its uptrend line from 2011-2014. This morning's high was a back-test of its broken uptrend line from October 2014 through the July 7th low, currently near 17660. Of all the indexes, the DOW best supports a very bearish wave count, which is a series of 1st and 2nd waves to the downside off the May high. The series of 1st and 2nd waves could be just a corrective pullback, which in this case would mean a correction to the longer-term rally that will be followed another rally. But keep in mind that market crashes come out of bearish wave counts like this, as well as oversold condition, and therefore the potential for a huge downside move needs to be respected.

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- bullish above 17,784
- bearish below 17,399

Those who trade the Dow Industrial index, such as through the Diamonds (DIA), were likely watching the downtrend line from July 20-31 and maybe even the uptrend line from October 2014 through the July 7th low, both of which crossed today near 17660. The first thing the bulls need to do is rally the DOW above that level. But in the land of chop we wouldn't know if that would lead to a bigger bullish move or just more of the same 3-wave moves that lead to reversals.

Dow Industrials, INDU, 60-min chart

Unlike the DOW, SPX has been chopping more sideways than in a choppy downtrend. This morning's rally had it popping above its downtrend line from July 20th, near 2108, but it was unable to hold above, which left a bearish failure. The large tail above today's candle body is a clear sign of a failure to rally and is bearish. It also closed below both its 20-dma (near 2100) and its 50-dma (near 2098), also not bullish. If it does drop lower from here we could see a decline to about 2073-2076, where it would meet its uptrend line from July 7th and its 200-dma. The last time it touched the 200-dma, on July 27th, it led to a 50-point rally in 4 trading days. But it would be the 3rd test of that support in about a month and might not stand up to another test. However, the bottom line right now is that we do not have enough clues to help determine which way this is going to break. But whichever way it does break it's likely going to be a big move.

S&P 500, SPX, Daily chart

The techs were the stronger sectors today, thanks to a few high-flyers, but they too failed to hold their rallies. As can be seen on the Nasdaq's chart below, today's candle is a shooting star. The good news is that it closed 7 points above price-level resistance at 5132. The bad news is that the bearish candlestick is basically still at resistance. If the Nasdaq continues to rally this week I'd watch for the possibility that it will close the July 22nd gap down, near 52.08. Two equal legs up, for just an a-b-c bounce off its July 28th low, points to about 5210 so we've got an upside target at 5208-5210 and it would be bullish above that level. But a drop back below its 50-dma, near 5082, would be a bearish move.

Nasdaq Composite index, COMPQ, Daily chart

Key Levels for COMPQ:
- bullish above 5132
- bearish below 5025

Looking at the RUT's daily chart reminded me of the children's way of picking between something -- Eeny meeny miny mo, pick an animal by the toe, if he hollers let him go ... If the animal whose toe you pick is either a bull or a bear I think your chances of getting mauled are quite high. The same could be said for picking a direction on the RUT. Price has been oscillating the past 4 days around its H&S neckline (uptrend line from May-July) and today it closed on the line with a doji (albeit a slightly bearish one). The 20-dma is about 12 points above the line and the 200-dma is about 13 points below the line. Flip a coin since a trade has a 50/50 chance of going your way here, which of course means you should take a pass and not enter a new trade here. Entering a trade here is gambling, not trading. However, if it continues to chop sideways for a couple more days then I would see that as a bullish consolidation. Friday's NFP report could prevent any consolidation beyond Friday morning.

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- bullish above 1263
- bearish below 1205

I've been watching Treasuries because they've been showing strength (yields dropping) while the stock market has been holding up (other than the DOW with its shallow choppy decline). This could be a message from the bond market that says the Fed will not be raising rates anytime soon, which has helped the stock market at least stay afloat. But yields and stock prices follow each more than they do not and the decline in yields since the high at the end of June suggests stock prices could be on borrowed time here. As the TYX (30-year yield) daily chart below shows, the decline from last week broke the uptrend line from January-April, near 2.94% at the time, and today's rally has brought it back up to the broken trend line, near 2.96%. It's also testing its downtrend line from July 13th. A rally above the July 29th high at 3.025 would be a bullish move but at the moment we could see a bearish kiss goodbye at resistance, in which case a test of its 200-dma, near 2.82, would likely be next. The further yields drop I think the more pressure we'll see on stock prices.

30-year Yield, TYX, Daily chart

The banking index, BKX, has been struggling to hold near its high since the latter part of June. The June highs and the July 23rd high were tests of the top of a parallel up-channel for price action since October 2013, which is currently near 80.60. Next week the top of the channel will cross the broken uptrend line from March 2009 - October 2011 at the 61.8% retracement of the 2007-2009 decline, at 80.87. The July 23rd high tagged this retracement level to the penny. On an intraday chart it looks like an impulsive decline from the July 23rd high and so far a corrective bounce that has retraced 62% of the July 23-28 decline and therefore it could be ready to start the next leg down. It could achieve at least a minor new high but with bearish divergence I would expect nothing more than a 3-drives-to-a-high topping pattern.

KBW Bank index, BKX, Weekly chart

The TRAN got a strong rally off its July 27th low but after two days it stopped. It was still looking bullish with the sideways consolidation following the rally and it looked like today we'd get the follow through. But a 113-point rally was given back and it closed only about 10 points in the green. The resulting shooting star (or a more bearish version called a gravestone doji) at resistance does not look promising for the bulls. The line of resistance is price-level S/R near 8515 and today's high was 8530. Today's strong rejection at resistance looks like a back-test followed by a bearish kiss goodbye and a short position with a stop just above today's high looks like a good setup.

Transportation Index, TRAN, Daily chart

The U.S. dollar has made it up to a downtrend line off the two highs in March-April, currently near 98.20 (today's high was 98.33) and is showing some bearish divergence against its July 20th high. Not shown on the weekly chart below, it's also back up for another back-test of its broken uptrend line from June 18th and therefore it's possible the dollar's bounce off its May low will end here and we'll see the start of another pullback inside what I believe will become a large sideways triangle consolidation pattern through the rest of this year. I see the potential for a little higher for the dollar, perhaps near 99, but at this point I think the long side for the dollar is the riskier side.

U.S. Dollar contract, DX, Weekly chart

Since gold dropped to Fib support at 1090, on July 20th, it's been consolidating in more or less a sideways triangle pattern, which is a bearish continuation pattern. It suggests support at 1090, which is the 50% retracement of its 2001-2011 rally, will soon break. It would be short-term bullish above the July 31st high at 1103 but the bulls need to see gold back above price-level resistance at 1141, which was a shelf of support from November 2014 through July. In the meantime, the next downside target for gold is near 1000.

Gold continuous contract, GC, Weekly chart

Watching silver for some clues, especially since it's currently showing bullish divergence on its weekly chart, I'm not yet seeing anything that says I should be looking for a rally. It's consolidating like gold and a weekly close below 14.65, which is price-level S/R from back in 2006-2010, would likely indicate the next leg down has started. Until I see evidence to the contrary I continue to look for silver to drop down to the $12 area before potentially setting up a very good buying opportunity.

Silver continuous contract, SI, Weekly chart

In the beginning of the year I started showing an idea for sideways triangle consolidations for the dollar and oil. Oil I'm a little less sure about since it looks like we get a minor new low (no lower than 40) to finish a 5-wave decline from August 2013, which could set up a big bounce or a big sideways choppy consolidation. For now I'm leaning toward a sideways triangle similar to the dollar and the projection I've had for it since the May high has been back down to near 44 and it's now nearing that level (today's low was 44.83). The bullish divergence shown on the weekly chart suggests caution by those who are short oil. I wouldn't try catching falling knives here but nor would I be looking to short it this close to possible support. If oil consolidates near support for a few weeks then I'd be looking for another leg down to finish the decline, probably above 40. But if it just keeps selling off below 44 then we could be looking for a test of the January 2009 low at 33.20.

Oil continuous contract, CL, Weekly chart

Tomorrow's economic reports include the Challenger Job Cuts, which could add to the angst about what Friday's NFP report might look like. Just keep in mind that the reaction to the NFP report will likely be backwards -- what's bad is good and good is bad. Any confirmation of weakness in the jobs market will force the Fed to sit on their hands.

Economic reports and Summary


Know when to trade and when to sit on the sidelines. I've been seeing that recommendation from more trading analysts and I think it's good advice (the secret to Jesse Livermore's success, when he was successful). We have a choppy and whippy market and there continues to be lack of follow through in both directions. Active traders, which most of you are, hate sitting on the sidelines since you feel like you're wasting your time. Time is money and when money is not on the line it's not making any. The trouble is most traders lose money in this kind of environment so if you're one of those then you need to stand up, take a big breath of clean air, grab both of your butt cheeks and sit down while holding them. It's the best way to keep your hand off the mouse and it helps keep you out of trouble. Boring, yes, but right now capital preservation is more important than capital appreciation.

If you can't help yourself and you must trade, try paper trading some new ideas. Trade light and trade quick and see how quickly base hits can compound into big gains. Making $100 on a trade might not be as satisfying (from an instant gratification perspective) as making $1000 or $5000 but losing $100 sure feels a lot safer than losing $1000. Read and research your next trading ideas so that you're ready for the next big move. The market has been chopping sideways and many are expecting an upside breakout, which is a typical expectation when the consolidation follows a rally leg. The rally will likely be big if it breaks out to the upside (always be careful about a head-fake breakout) since the spring is getting wound tight. But if the market breaks down instead, which I think it will, a failed bullish pattern typically leads to a strong bearish move. In other words, we'll have plenty of opportunities to make some good money in a big move. But that will only happen if you've still got some capital to trade. So if you're bored and feeling like you need to trade, just keep the bigger move that's coming in mind and "save yourself" for that special move.

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

Raising Guidance In Spite Of Tough Environment

by James Brown

Click here to email James Brown


AGCO Corp. - AGCO - close: 55.74 change: +1.27

Stop Loss: 52.85
Target(s): To Be Determined
Current Gain/Loss: Unopened
Entry on August -- at $---.--
Listed on August 05, 2015
Time Frame: Exit PRIOR to earnings
Average Daily Volume = 1.1 million
New Positions: Yes, see below

Company Description

Trade Description:
Wall Street has been very forgiving when it comes to AGCO's sales outlook. The company expects sales to drop -20% in 2015 from the last year. Yet investors continue to buy the dips. Even more impressive is the fact that AGCO is up +23% year to date, outperforming all of the major indices.

AGCO is in the industrial goods sector. According to the company, "AGCO is a global leader in the design, manufacture and distribution of agricultural equipment. AGCO supports more productive farming through a full line of tractors, combines, hay tools, sprayers, forage equipment, grain storage and protein production systems, seeding and tillage implements and replacement parts. AGCO products are sold through five core equipment brands, Challenger©, Fendt©, GSI©, Massey Ferguson© and Valtra© and are distributed globally through a combination of approximately 3,100 independent dealers and distributors in more than 140 countries. Founded in 1990, AGCO is headquartered in Duluth, GA, USA. In 2014, AGCO had net sales of $9.7 billion."

Looking at AGCO's recent earnings reports the company has reported sales declines the last three quarters in a row. Yet thanks to cost-cutting management has beaten analysts bottom-line earnings estimates each quarter. Management started raising their full-year 2015 earnings guidance in April with their Q1 report and boosted their earnings forecast above analysts' estimates.

They did it again when they reported their Q2 results on July 28th. Wall Street expected Q2 earnings of $1.01 per share. AGCO delivered $1.25 per share. Revenues were down -24.8% to $2.07 billion, which was in-line with expectations. The company said sales were down in every geographical region.

Martin Richenhagen, AGCO's Chairman, President and Chief Executive Officer, commented on their quarter, "Our second quarter results reflect the significant challenges caused by weaker global industry demand and currency headwinds." Yet management raised their 2015 earnings outlook again. They now expect $3.10 per share versus estimates of $2.90. They're forecasting 2015 sales in the $7.7 to $7.9 billion range.

The most recent data listed short interest at more than 18% of the 70.7 million share float. That's plenty of fuel for a short squeeze. The recent breakout past short-term resistance near $55.00 is bullish. Tonight we are suggesting a trigger to launch small bullish positions at $56.15.

Trigger @ $56.15 *small positions to limit risk*

- Suggested Positions -

Buy AGCO stock @ $56.15

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

Buy the NOV $60 CALL (AGCO151120C60) current ask $1.35
option price is a current quote and not a suggested entry price.

Entry disclaimer: To avoid an unfavorable entry point, we will not launch a new play if the stock gaps open more than $1.00 past our suggested entry point.

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

Daily Chart:

Weekly Chart:

In Play Updates and Reviews

Wednesday's Morning Gain Fades

by James Brown

Click here to email James Brown

Editor's Note:
The U.S. market produced a relatively widespread bounce on Wednesday morning. Unfortunately the rally began to fade by lunchtime. Another weak session for crude oil weighed on energy stocks.

Current Portfolio:

BULLISH Play Updates

ConAgra Foods, Inc. - CAG - close: 44.75 change: +0.58

Stop Loss: 43.25
Target(s): To Be Determined
Current Gain/Loss: Unopened
Entry on July -- at $---.--
Listed on July 30, 2015
Time Frame: Exit PRIOR to earnings on September 22nd,
Average Daily Volume = 3.3 million
New Positions: Yes, see below

08/05/15: CAG displayed relative strength today with a +1.3% gain. Unfortunately the rally failed right at the $45.00 mark this morning. If this rally continues tomorrow we could see CAG hit our suggested entry point at $45.25.

Trade Description: July 30, 2015:
Two years ago CAG spent $5 billion to buy private-label food maker Ralcorp. At the time, CAG called it a "transformational" deal. Unfortunately their private-label business has been nothing but a money pit.

CAG is in the consumer goods sector. According to the company, "ConAgra Foods, Inc., (CAG), is one of North America's leading food companies, with brands in 99 percent of America’s households. Consumers find Banquet, Chef Boyardee, Egg Beaters, Hebrew National, Hunt's, Marie Callender's, Orville Redenbacher's, PAM, Peter Pan, Reddi-wip, Slim Jim, Snack Pack and many other ConAgra Foods brands in grocery, convenience, mass merchandise and club stores. ConAgra Foods also has a strong business-to-business presence, supplying frozen potato and sweet potato products as well as other vegetable, spice and grain products to a variety of well-known restaurants, foodservice operators and commercial customers."

In spite of CAG's troubles with its private-label business the stock was trading at multi-year highs in mid June this year. Then on June 19th the stock soared more than +10%. Shares were already flirting with its all-time highs from the late 1990s in the $38-39 area. They vaulted higher when activist hedge fund JANA Partners announced they had amassed a 7.2% stake in CAG. JANA argued that CAG was undervalued and not doing enough to build shareholder value.

It would appear that CAG's management has embraced JANA's involvement and direction. They have already appointed two of JANA's nominees to the Board of Directors. When CAG reported its Q4 earnings on June 30th they announced they would exit the private-label business.

The private-label business, Ralcorp, makes stuff like cereal, pasta, crackers, jams, jellies, syrups, and frozen waffles. They currently account for about 25% of CAG's sales but they're also the only business segment that lost money last quarter.

Multiple companies, including TreeHouse Foods (THS) and Post Holdings (POST), are said to be bidding for the private-label business. Estimates suggest it could sell for $3.5 billion. That's a big drop from the $5 billion price tag CAG paid.

Shares of CAG saw a two-week correction from its early July highs but traders have started to buy the stock again and recently broke the short-term trend of lower highs. We suspect this activist-investor fueled rally in CAG has further to run. Often activist investors urge companies to break up to unlock shareholder value or push for a company to sell itself. We'll have to see what the next move is. Today's high was $44.51. We are suggesting a trigger to launch bullish positions at $45.25.

Trigger @ $45.25

- Suggested Positions -

Buy CAG stock @ $45.25

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

Buy the SEP $45 CALL (CAG150918C45)

Entry disclaimer: To avoid an unfavorable entry point, we will not launch a new play if the stock gaps open more than $1.00 past our suggested entry point.

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

Guidewire Software, Inc. - GWRE - close: 58.88 change: +0.56

Stop Loss: 57.75
Target(s): To Be Determined
Current Gain/Loss: +1.1%
Entry on July 23 at $58.25
Listed on July 21, 2015
Time Frame: Exit PRIOR to earnings on Sept. 1st
Average Daily Volume = 368 thousand
New Positions: see below

08/05/15: We're not giving up on GWRE yet and today's bounce snapped a three-day losing streak. The stock remains inside its $58-60 trading range.

No new positions at this time!

Trade Description: July 21, 2015:
The NASDAQ composite is up +10% year to date. GWRE is outperforming with a +13.3% gain. Shares spent three months, March-May, consolidating lower after the rally failed at resistance near $55.00. GWRE's direction changed after its latest earnings report.

GWRE is in the technology sector. According to the company, "Guidewire builds software products that help Property/Casualty insurers replace their legacy core systems and transform their business. Designed to be flexible and scalable, Guidewire products enable insurers to deliver excellent service, increase market share and lower operating costs. Guidewire InsuranceSuite provides the core systems used by insurers as operational systems of record. Additional products provide support for data management, business intelligence, anytime/anywhere access and guidance and monitoring. More than 180 Property/Casualty insurers around the world have selected Guidewire."

Last December GWRE reported its fiscal Q1 results that beat Wall Street estimates on both the top and bottom line. Management raised their Q2 guidance. On March 2nd GWRE reported earnings and revenues that beat analysts' estimates again. GWRE management then raised their fiscal year 2015 estimates. This earnings beat was not enough to lift the stock higher. Shares drifted lower for three months.

Shares of GWRE came alive again following its Q3 report on June 2nd. Earnings actually missed estimates by a penny with a profit of $0.04 per share. Revenues were only up +4% to $85.4 million, although that did beat expectations. The company provided lackluster Q4 guidance but guided for +20% revenue growth in fiscal 2016. The stock soared.

The rally off its June lows has pushed GWRE through multiple layers of resistance. Now the stock is setting new all-time closing highs. The point & figure chart is bullish and forecasting a long-term target of $80.00.

On a very short-term basis the $58.00 level appears to be resistance. We are suggesting a trigger to launch bullish positions at $58.25.

- Suggested Positions -

Long GWRE stock @ $58.25

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

Long OCT $60 CALL (GWRE151016C60) $2.80

08/04/15 Readers may want to exit early now
08/01/15 new stop @ 57.75
07/25/15 new stop @ 56.90
07/23/15 new stop @ 56.40
07/23/15 triggered @ $58.25
Option Format: symbol-year-month-day-call-strike

The Hartford Financial Services Group - HIG - close: 47.47 chg: -0.30

Stop Loss: 46.40
Target(s): To Be Determined
Current Gain/Loss: Unopened
Entry on August -- at $---.--
Listed on August 03, 2015
Time Frame: Exit PRIOR to September option expiration
Average Daily Volume = 3.0 million
New Positions: Yes, see below

08/05/15: Hmm.... HIG has failed at $48.32 two days in a row. Shares underperformed the major indices with a -0.6% decline. If HIG sinks again tomorrow we may drop it. Currently our suggested entry point is $48.35.

Trade Description: August 3, 2015:
HIG had been hovering near multi-year highs from March through June this year. Then in July the stock began to accelerate higher. The catalyst was merger and acquisition news in its industry.

On July 1st ACE Limited (ACE) announced it would buy Chubb Corp. (CB) for $28.3 billion. This lit a fire under the property and casualty insurance stocks and HIG surged to new highs for the year.

If you're familiar with HIG they are in the financial sector. According to the company, "With more than 200 years of expertise, The Hartford (HIG) is a leader in property and casualty insurance, group benefits and mutual funds. The company is widely recognized for its service excellence, sustainability practices, trust and integrity."

The last couple of earnings reports for HIG have been mixed. They have been beating Wall Street's bottom line estimate but have missed the revenue numbers. Their most recent report was July 27th. Analysts were expecting a profit of $0.77 per share. HIG crushed the number with a profit of $0.91 per share. That is a +193% improvement from the $0.31 profit a year ago. Revenues were up +1.5% to $4.68 billion.

In addition to beating the estimate HIG raised its dividend and boosted its stock buyback program by an additional $1.6 billion. The current repurchase program stands at $2 billion through December 31, 2016.

Shares have garnered a couple of price target upgrades since its earnings report. The new targets are $53 and $55. There has been more chatter and speculation that HIG is a potential takeover target, which is probably why shares are outperforming its peers. The S&P SPDR Insurance ETF is up +7.8% year to date while HIG is up +15.6%.

Tonight we are suggesting small bullish positions if HIG can trade at $48.35 or higher.

Trigger @ $48.35 *small positions to limit risk*

- Suggested Positions -

Buy HIG stock @ $48.35

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

Buy the SEP $50 CALL (HIG150918C50)

Entry disclaimer: To avoid an unfavorable entry point, we will not launch a new play if the stock gaps open more than $1.00 past our suggested entry point.

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

The Kroger Co. - KR - close: 39.08 change: +0.52

Stop Loss: 36.95
Target(s): To Be Determined
Current Gain/Loss: +0.1%
Entry on July 30 at $39.05
Listed on July 28, 2015
Time Frame: Exit PRIOR to earnings on Sept. 11th
Average Daily Volume = 3.9 million
New Positions: see below

08/05/15: KR recovered over half of yesterday's losses with a +1.3% bounce today. However, today's move is an inside day (inside yesterday's range) and suggests indecision by traders.

I am not suggesting new positions at this time.

Trade Description: July 28, 2015:
If you're looking for a company with consistent growth then look no further. KR appears to be the king of same-store sales and recently announced 46 quarters of consecutive same-store sales growth.

KR is in the services sector. According to the company, "Kroger, one of the world's largest retailers, employs nearly 400,000 associates who serve customers in 2,626 supermarkets and multi-department stores in 34 states and the District of Columbia under two dozen local banner names including Kroger, City Market, Dillons, Food 4 Less, Fred Meyer, Fry's, Harris Teeter, Jay C, King Soopers, QFC, Ralphs and Smith's. The company also operates 780 convenience stores, 327 fine jewelry stores, 1,342 supermarket fuel centers and 37 food processing plants in the U.S."

BusinessInsider ran an interesting article on KR that suggested the grocery chain is shaping up to be growing competition for the fast-food industry. A recent poll showed that 1 out of 4 consumers would choose Kroger instead of McDonald's. KR has become more attractive because they have been expanding their prepared-food selection.

Another interesting tidbit came from CNBC Mad Money's Jim Cramer who said KR has twice the growth of rival Whole Foods Market (WFM). KR's most recent quarterly results showed same-store sales growth of +5.7%, which easily outpaces its rivals.

Speaking of Whole Foods, KR is quickly catching up. WFM built its brand on organic and natural foods, which also happen to have better margins than traditional grocery items. Rivals took notice and KR jumped into organics with both feet. According to JPMorgan, KR is on track to surpass WFM as the biggest seller of organic foods within the next two years. (FYI: Costco actually sells more organic food than anyone else in the U.S. but they are not a traditional grocery story).

KR's most recent earnings report was June 18th. It was their 2016 Q1 report with earnings of $1.25 per share. That beat estimates of $1.22. Revenues were $33.05 billion, which actually missed estimates. The stock rallied anyway. KR management reaffirmed their fiscal year 2016 earnings forecast for $3.80-3.90 per share (essentially +10% growth).

Traders should like this stock since KR is very shareholder friendly. According to a company press release they have returned more than $1.1 billion to shareholders through share buybacks and dividends in the last four quarters. Management recently announced a new $500 million stock buy back program to replace their previous repurchase program, which had been exhausted. They also raised their dividend. On a post-split basis will pay 10.5 cents on per share on September 1st, 2015. KR should begin trading ex-dividend August 12th Speaking of splits, the stock just split 2-for-1 on July 13th. It was their fifth stock split since 1979.

Last week the U.S. stock market was plunging. KR managed to evade most of the damage and essentially traded down from $39.30 to $38.30. Shares did see a spike down on Monday this week but traders bought the dip . We think KR is poised to breakout to new all-time highs soon. Tonight we're suggesting a trigger to open bullish positions at $39.05. More conservative investors might want to actually wait for a new high and use a trigger at $39.40 instead.

- Suggested Positions -

Long KR stock @ $39.05

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

Long SEP $40 CALL (KR150918C40) entry $0.74

07/30/15 triggered @ $39.05
Option Format: symbol-year-month-day-call-strike

21Vianet Group, Inc. - VNET - close: 20.29 change: +0.02

Stop Loss: 19.20
Target(s): To Be Determined
Current Gain/Loss: -2.2%
Entry on July 23 at $20.75
Listed on July 22, 2015
Time Frame: Exit PRIOR to earnings on August 25th
Average Daily Volume = 996 thousand
New Positions: see below

08/05/15: The Chinese Shanghai market was down sharply again but VNET seems unaffected. The stock churned sideways inside a relatively narrow range.

No new positions at this time.

Trade Description: July 22, 2015:
Buckle your seatbelt. We are adding a fast-moving Chinese Internet stock to the play list tonight. This trade is not for the faint of heart. The Chinese market has been very volatile in recent weeks. This has been exacerbated by merger and acquisition news.

VNET is in the technology sector. According to the company, "21Vianet Group, Inc. is a leading carrier-neutral internet data center services provider in China. 21Vianet provides hosting and related services, managed network services, cloud services, content delivery network services, last-mile wired broadband services and business VPN services, improving the reliability, security and speed of its customers' internet infrastructure. Customers may locate their servers and networking equipment in 21Vianet's data centers and connect to China's internet backbone through 21Vianet's extensive fiber optic network. In addition, 21Vianet's proprietary smart routing technology enables customers' data to be delivered across the internet in a faster and more reliable manner. 21Vianet operates in more than 30 cities throughout China, servicing a diversified and loyal base of more than 2,000 customers that span numerous industries ranging from internet companies to government entities and blue-chip enterprises to small- to mid-sized enterprises."

The Wall Street Journal recently noted in June that seven U.S.-listed Chinese companies had been approached with offers to go private. That's a big spike in buyout offers. From January through May this year there had only been five such offers. One of the companies recently approached is VNET.

On June 10th VNET was approached with a preliminary non-binding proposal by Kingsoft Corp. and Tsinghua Unigroup International to go private for $23.00 per American depositary share ("ADSs"). That's the stock we can trade on the NASDAQ. Naturally the stock surged on this announcement. On June 16th VNET announced they had formed a special committee to review this proposal.

Unfortunately for shares of VNET and most Chinese stocks the Shanghai market in China had peaked in mid June and began to crash. The next three weeks saw a -30% plunge in the Shanghai market. The sell-off really accelerated in the first week of July. We can see the impact this market plunge was having on VNET with the big declines in early July.

Shares of VNET produced a huge bounce on July 9th when they announced the company had hired financial advisors and legal counsel to help them review the proposal to go private. In their press release they warned investors that "no decision has been made" nor is there any assurance that any "definitive offer will be made". This warning didn't stop the rally in VNET's stock which has continued to rise.

The Chinese government has thrown billions of dollars at their market to stop the crash and it seems to be working. The fever seems to have broken and this should provide a less dangerous environment for shares of VNET to trade in. We suspect VNET will continue to rally as the M&A talk heats up. However, this is an aggressive, higher-risk trade. There is no guarantee of a deal. Shares of VNET are clearly very volatile. I suggest small positions to limit risk.

NOTE: VNET does have options but the spreads are too wide to trade them.

*small positions to limit risk* - Suggested Positions -

Long VNET stock @ $20.75

08/01/15 new stop @ 19.20
07/27/15 The Chinese Shanghai index plunged -8.48%
07/23/15 triggered @ $20.75

BEARISH Play Updates

Allegheny Technologies - ATI - close: 21.04 change: +0.47

Stop Loss: 22.10
Target(s): To Be Determined
Current Gain/Loss: Unopened
Entry on August -- at $---.--
Listed on August 04, 2015
Time Frame: Exit PRIOR to September option expiration
Average Daily Volume = 1.5 million
New Positions: Yes, see below

08/05/15: Shares of ATI popped higher this morning. I don't see any specific news to explain the gap open higher and surge to $22.25 (a +8% move). The rally faded and shares closed near their open with a +2.2% gain.

At the moment our plan is unchanged. We want to launch bearish positions if ATI trades at $19.85. Keep in mind we want to use small positions to limit risk.

Trade Description: August 4, 2015:
Weak demand and cheaper competition from China has steamrolled shares of ATI down to five-year lows.

ATI is part of the industrial goods sector. According to the company, "Allegheny Technologies Incorporated is one of the largest and most diversified specialty materials and components producers in the world with revenues of approximately $4.3 billion for the twelve months ended June 30, 2015. ATI has approximately 9,600 full-time employees world-wide who use innovative technologies to offer global markets a wide range of specialty materials solutions. Our major markets are aerospace and defense, oil and gas/chemical process industry, electrical energy, medical, automotive, food equipment and appliance, and construction and mining."

ATI was already underperforming the broader market when the company issued an earnings warning on July 14th. Wall Street was estimating a profit of $0.17 per share for ATI's Q2 results. Management said they would post a loss and adjusted their Q2 guidance for a loss of (0.15) to (0.17) per share.

A few days later, on July 21st, ATI reported a Q2 loss of ($0.15) per share and the stock crashed again. Revenues fell -8.6% to $1.02 billion, which was below estimates.

ATI has two main business segments - their High Performance Materials and Components business and their Flat-rolled products business. The company said demand in Q2 was lower for both business segments with sales declines almost across the board. A slowdown in demand from the U.S. oil and gas industry hurt their high-performance unit. Meanwhile a flood of cheap imported steel from China hurt their flat-rolled product business.

Rich Harshman, Chairman, President and CEO of ATI, commented on their quarter, "This was a challenging quarter due to business conditions in the Flat Rolled Products segment and further weakening in demand from the oil & gas market in the High Performance Materials and Components segment."

These results have sparked some downgrades for ATI. The point & figure chart is very bearish and forecasting a $5.00 target. The stock's P/E has soared to 171 so it's not cheap even after a $17 drop in the last three months.

Currently ATI is hovering above major round-number support at $20.00. A breakdown here would be bad news and could signal a drop toward $15.00. Tonight we are suggesting a trigger to launch bearish positions at $19.85. I am suggesting we keep our position size small to limit risk.

Trigger @ $19.85 *small positions to limit risk*

- Suggested Positions -

Short ATI stock @ $19.85

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

Buy the SEP $20 PUT (ATI150918P20)

Entry disclaimer: To avoid an unfavorable entry point, we will not launch a new play if the stock gaps open more than $1.00 past our suggested entry point.

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

Best Buy Co., Inc. - BBY - close: 32.00 change: +0.04

Stop Loss: 33.05
Target(s): To Be Determined
Current Gain/Loss: +0.3%
Entry on July 27 at $32.10
Listed on July 25, 2015
Time Frame: Exit PRIOR to earnings in late August
Average Daily Volume = 4.3 million
New Positions: see below

08/05/15: BBY tried to rally but failed near the top of its current $31.70-32.40 trading range. Shares closed virtually unchanged.

I am amending yesterday's suggestion. Wait for a decline under $31.50 before considering new positions.

Trade Description: July 25, 2015:
Tonight's candidate is almost 50 years old. They were founded under the name "Sound of Music" but changed their name to "Best Buy" in 1983. Today they have over 1,400 locations, employ more than 125,000 people, and generate more than $40 billion in sales annually.

BBY is part of the services sector. According to the company, "Best Buy is a leading provider of technology products, services and solutions. The company offers expert service at an unbeatable price more than 1.5 billion times a year to the consumers, small business owners and educators who visit our stores, engage with Geek Squad Agents or use BestBuy.com or the Best Buy app. The company has operations in the U.S. where more than 70 percent of the population lives within 15 minutes of a Best Buy store, as well as in Canada and Mexico, where Best Buy has a physical and online presence."

The company launched a massive turnaround campaign almost three years ago as they struggled with extremely tough competition from companies like Amazon.com. The biggest problem for BBY is something called "showrooming". This is when customers come into a Best Buy store, they look around at products, ask questions from Best Buy staff, and they compare quality and price. Then they go home and buy what they want online for a cheaper price and have it delivered to their door.

BBY is acutely aware of the showrooming phenomenon. It's hard to compete with someone like Amazon who doesn't have the big overhead for large retail locations. BBY has been trying to compete on service plus they have redesigned their own online e-commerce offerings and they are seeing growth in their own online sales. BBY management has also been slashing expenses.

The turnaround has worked to a point. BBY's focus on cutting expenses is obviously good for profits. Yet sales remain slow. Looking at BBY's last couple of earnings reports their bottom line results have beaten Wall Street estimates (thanks to slashing costs) but revenues have been disappointing.

BBY reported their Q4 results on March 3rd, 2015 and revenues were only up +1.3% to $14.2 billion, which missed expectations. Comparable store sales were only up +1.3%.

BBY's Q1 result was worse. This report was announced on May 21st. They beat the bottom line EPS estimate again but revenues fell -0.9% to $8.56 billion. On the plus side their comparable store sales improved from -1.3% a year ago to +0.6% but this too was disappointing.

Shares of BBY have been in a down trend since they peaked near $42.00 in March this year. The stock has been in a bearish pattern of lower highs and lower lows. It looked like BBY might break this trend and then the stock was downgraded on July 17th.

Bank of America analyst Denise Chai reduced her rating on BBY to the equivalent of a "sell". She believes the company will see a tough second half to 2015. There is no must have product or upgrade cycle to drive customers into the store later this year. Chai expects BBY's sales to turn negative (-1%) in the second half.

BBY's stock collapsed on this downgrade and has been unable to recover. Today shares are poised to breakdown to new 2015 lows. Tonight we are suggesting a trigger to launch bearish positions at $32.15.

FYI: I am listing the October put options. BBY does have September options but the option strikes are at odd prices thanks to a $0.51 special dividend BBY paid in March and the option markets haven't caught up with new (normal) strikes yet.

I also want to point out that the point & figure chart is currently bullish for BBY. If shares traded below $32.00 it should generate a new sell signal.

- Suggested Positions -

Short BBY stock @ $32.15

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

Long OCT $30 PUT (BBY151016P30) entry $1.28

08/01/15 new stop @ 33.05
07/27/15 triggered on gap down at $32.10, trigger was $32.15
Option Format: symbol-year-month-day-call-strike

The Michaels Companies, Inc. - MIK - close: 25.54 change: +0.49

Stop Loss: 26.05
Target(s): To Be Determined
Current Gain/Loss: -3.2%
Entry on July 28 at $24.75
Listed on July 27, 2015
Time Frame: Exit PRIOR to earnings in late August
Average Daily Volume = 729 thousand
New Positions: see below

08/05/15: MIK's move today is a bit of a mystery. Shares displayed relative strength with a +1.95% gain. The stock crept higher all day long so it does not appear to be a reaction to one specific event. The close above its 200-dma is potentially bullish.

The level to watch is $25.80. This was previously support and now broken it should be new resistance. I am not suggesting new positions at this time.

Trade Description: July 27, 2015:
It looks like investor sentiment on MIK has turned bearish. The stock produced big gains from its post-IPO lows near $15 in August 2014. The rally peaked in March this year near $30.00 after the company reported earnings.

If you're not familiar with MIK they are in the services sector. They're considered part of the specialty retail industry. According to the company, "The Michaels Companies, Inc. is North America's largest specialty retailer of arts and crafts (based on store count). As of May 2, 2015, the Company owns and operates 1,177 Michaels stores in 49 states and Canada and 118 Aaron Brothers stores, and produces 12 exclusive private brands including Recollections(R), Studio Decor(R), Bead Landing(R), Creatology(R), Ashland(R), Celebrate It(R), ArtMinds(R), Artist's Loft(R), Craft Smart(R), Loops & Threads(R), Imagin8(R) and Make Market(tm)."

The last couple of earnings reports have not been that exciting. MIK reported its 2015 Q4 results on March 19th. They beat estimates by a penny while revenues rose +3.4% to $1.6 billion, which was in-line with estimates. Unfortunately, MIK management lowered their guidance for Q1 and fiscal year 2016.

Even after lowering guidance MIK still missed estimates when they reported their Q1 results on June 4th. Earnings of $0.32 a share missed by a penny. Revenues were up +2.9% to $1.08 billion, which was in-line with estimates. Comparable store sales were up only +0.3%.

Looking at MIK's daily chart you can see that traders have been selling the rallies. Now MIK has a bearish pattern of lower highs. It recently broke down under support in the $26.00 area. Now MIK is testing round-number psychological support at $25.00 and technical support at its simple 200-dma. A breakdown here would definitely look bearish. Tonight we are suggesting a trigger to launch bearish positions at $24.75.

- Suggested Positions -

Short MIK stock @ $24.75

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

Long SEP $25 PUT (MIK150918P25) entry $1.45

08/01/15 new stop @ 26.05
07/28/15 triggered @ $24.75
Option Format: symbol-year-month-day-call-strike

Whiting Petroleum - WLL - close: 17.70 change: -1.28

Stop Loss: 21.25
Target(s): To Be Determined
Current Gain/Loss: +10.8%
Entry on August 03 at $19.85
Listed on August 01, 2015
Time Frame: Exit PRIOR to earnings
Average Daily Volume = 7.1 million
New Positions: see below

08/05/15: Another day of weakness for crude oil and natural gas weighed heavily on shares of WLL. The stock plunged another -6.74% with volume of almost 13 million shares (WLL normally trades about 7 million a day).

Tonight we are adjusting the stop loss to $21.25. More conservative traders may want to lower it even further. No new positions at this time.

Trade Description: August 1st, 2015:
The price of crude oil has fallen more than 50% in the last year. It's wreaking havoc on energy company earnings and revenues. Unfortunately the outlook is not very bullish. The global economy is stalling. China, the biggest buyer of commodities, is growing at multi-year lows. The U.S. is creeping along at +2% GDP growth while oil inventories in the U.S are near 80-year highs.

The Middle East OPEC cartel is pumping a high-volume of oil, regardless of price declines, to maintain market share. A recent report showed that OPEC boosted production by +140,000 barrels a day in July from its June production. OPEC is hoping to pressure the U.S. fracking industry out of business but it's not working. U.S. production remains resilient and near record highs.

If that wasn't enough the Federal Reserve is desperate to raise interest rates and would like to raise in September. Rising interest rates usually boost a country's currency. If the Fed does raise rates the U.S. dollar should rally even further. A rising dollar puts downward pressure on commodity prices. This paints a bearish picture for crude oil prices.

Given this outlook for crude we're adding a bearish play in the energy industry. Some view WLL as a barometer of the U.S. shale oil and gas industry. If that's the case the stock price is suggesting a dire forecast.

WLL is in the basic materials sector. According to the company, "Whiting Petroleum Corporation, a Delaware corporation, is an independent oil and gas company that explores for, develops, acquires and produces crude oil, natural gas and natural gas liquids primarily in the Rocky Mountain and Permian Basin regions of the United States. The Company’s largest projects are in the Bakken and Three Forks plays in North Dakota, the Niobrara play in northeast Colorado and its Enhanced Oil Recovery field in Texas."

WLL just reported its Q2 earnings on July 29th. Analysts were only expecting a profit of $0.02 per share. WLL delivered $0.04. However, that's a -97% drop from a year ago. Revenues plunged -29.4% to $590 million, which was significantly below analysts' estimates of $677 million.

We have to give the company credit for cutting costs dramatically during a tough time in the oil industry. Otherwise they would not have managed a profit for the quarter. WLL also managed to set a new company record for production of 170,000 barrels a day in the second quarter. Unfortunately, these positives are not enough to outweigh the overall bearish impact of plunging oil prices.

Plus, investors and analysts might shun WLL as the company is sending mixed messages. The company claimed that based on strong results during the second quarter they were raising their capex budget from $2 billion to $2.3 billion. That was two weeks ago. This past week WLL has already cut its capex budget. Now they're forecasting $2.15 billion. They only plan on running eight drilling rigs in the second half of 2015 instead of their previous guidance of 11 rigs.

Wall Street is turning more cautious on WLL. The stock has seen several downgrades and lowered price targets recently. The stock has been very weak. Momentum is bearish. The oversold bounce last week just failed under technical resistance at its simple 10-dma. Now WLL is testing round-number resistance at $20.00. We are suggesting a trigger to launch bearish positions at $19.85.

- Suggested Positions -

Short WLL stock @ $19.85

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

Long SEP $20 PUT (WLL150918P20) entry $2.05

08/05/15 new stop @ 21.25
08/03/15 triggered @ $19.85
Option Format: symbol-year-month-day-call-strike