Option Investor

Daily Newsletter, Wednesday, 8/26/2015

Table of Contents

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

Market Wrap

Bulls Get Some Traction

by Keene Little

Click here to email Keene Little
Following the spike down into Monday morning's low we've seen quick short-covering rallies (inspired by overnight rallies in the futures market) but then sellers quickly took over. That almost happened again today but the selling has been decreasing in intensity and we could be looking at least a short-term bottom.

Today's Market Stats

Today started out like Tuesday with a large gap up following an overnight rally in the futures, which ostensibly was due to more "good" news about China pulling out the stops to get their stock market to rally. So far their efforts have failed miserably and in fact have had the opposite effect by scaring investors out of the market. But it had a positive effect on our market today as traders did some more buying following the pullback from this morning's gap up. A larger price pattern suggests we'll get at least another leg down before setting up a larger bounce correction and it's possible we'll see the market work its way lower over the next couple of weeks but it could be a very choppy affair but at the moment it's looking like we might get at least a slightly larger bounce (in time if not price) before heading back down.

These are wild times in the market as multiple-hundred point swings in the DOW create excitement and fear, all at the same time. We haven't seen price swings like this since 2008 and it does make you wonder if we've entered a similar phase for the market. Bulls will contend it was just a scary pullback into what will be just another v-bottom reversal. Bears argue the technical damage to the charts says this time it's different and is finally reflecting some reality in the global climate (a different kind of climate change). I'm siding with the bears here but as always, we'll let the price pattern develop a little more and make some judgments based on what price tells us, not what CNBC and others (your humble analyst-writer included) tell us.

The trading in the past week has highlighted a problem that has been plaguing the market for some time -- liquidity and its evaporation when it's needed most. A fellow trader, Bob, asked the following questions:

"In Monday's trading there were many large-cap stocks and ETFs that cratered between 9:29 and 9:31 (I watched QQQ trade at ~ $97 at 9:29 and then trade UNDER $85 at 9:30!!), which to me indicates that many, if not most, of the 'liquidity providers' pulled their bids faster than in the blink of an eye and created the resulting price 'vacuums.' How exactly can HFT [high frequency trader] shops claim, without laughing hysterically, that they provide liquidity when they can and do remove their bids, resulting in that 'liquidity' vaporizing in nanoseconds? Is it really liquidity if it's gone in nanoseconds and isn't there when it is needed most?"

To me this is more than an academic question because it highlights the problem with our current computer-traded market. The specialists and market makers are pretty much gone now, replaced by computers matching our orders. In front of our orders are the HFTs and they're typically in and out so quickly that they do provide liquidity for us "normal" traders. But when they step aside and take their orders with them it can present a sudden liquidity problem for the market.

As Bob highlighted above, are the HFTs really providing a service to the market or have they instead made it more dangerous? The answer is both -- during normal times the bid-ask spread is very narrow as orders are firing away on both sides. But when a big move happens the HFT algorithms take the computers off line until the market settles down (their split-penny trading suddenly goes to dimes and quarters and that's not how they trade). Poof, there goes the liquidity in a nanosecond and everyone else is left scrambling to find someone on the other side of their trade.

The "someone" who gets matched up with your order might have stuck an order in that's dollars away from the current price. He might have placed a buy order in months ago, figuring if SPY ever gets down to last October's low (near 182) he'd gladly be a buyer down there. But if decline in SPY hits your market stop order at 185 and liquidity goes poof at the same time, that 182 price could be the nearest matching price to your sell order. Hence the "vacuum" left below the last price as soon as the HFTs pull out. This is part of the explanation for the flash crashes we've seen and will likely see many more, some a lot worse than what we've seen so far.

There was an article in the Wall Street Journal and at Bloomberg Market Flaws that also discussed this problem with lack of liquidity, especially in ETFs. Could the cracks in the dam now finally be getting highlighted? What to do about it is the bigger problem. Shut down HFT houses? Demand market makers make a market at all costs? Perhaps the next real crisis will have the Fed announcing a program to back all banks who make a market (they've done similar things in the past when we've had market disconnects).

As mentioned in the article, there is now so much trading in ETFs, instead of stock picking, that when someone wants to sell (or many someones) they now sell ALL stocks at once. SPY is one of the most heavily traded ETFs and when one buys or sells the SPY they're effectively buying or selling all 500 stocks in the S&P 500. But that balancing between the ETF and the component stocks typically happens during the day whereas a sudden move often leaves the ETF disconnected from its component stocks. As reported in the article, "dozens of ETFs traded at sharp discounts to their net asset value (NAV) -- or their components' worth -- leading to outsize losses for investors who entered sell orders at the depth of the panic." Equity futures trading was halted shortly before the cash market opened Monday morning. The value of the VIX wasn't published until 10:00, by which point the DOW had already traded through the vacuum and lost nearly 1100 points. That's the kind of risk we see when liquidity vanishes in a nanosecond.

The article highlights a couple of ETFs and the general problem with circuit breakers hitting stocks and halting trading on them. The ETF market makers were unable to figure out the true value of the ETF and therefore started underpricing their sell orders and overpricing their buy orders so that they didn't take on too much risk. That's what created the low prices relative to their NAV and ETF sellers took it on the chin. Examples included the Vanguard Consumer Staples index ETF and the Vanguard Health Care index ETF both collapsing 32% in the opening minutes. During that time the value of the component stocks in the Consumer Staples ETF dropped only 9%.

All of this is only scaring more investors out of the market, which merely exacerbates the liquidity problem. This problem is not going to go away anytime soon and it sure is a caveat-emptor market. Keep this in mind when we're looking at the potential for a strong decline, what I often refer to as a disconnect to the downside.

Since Monday's low we've seen bounce attempts, helped by the overnight rallies. Today was the first day that sellers did not overwhelm buyers into the close, which could have bullish potential. The selling in the market could be close to drying up as margin selling finishes. Today's strong rally certainly helps in that regard. The market is showing short-term bullish divergences as the selling pressure wanes and tests of Monday's lows has it looking like we might be setting up for at least a bigger bounce. But a short-term pattern suggests we should get at least one more test of this week's lows, if not new lows, so it's not a time to get aggressive on the long side (or short side for that matter). If we get something stronger and impulsive to the upside I'll reevaluate what's happening but right now I would not trust the upside for anything more than a bounce. If we get the test/new low I would then be more inclined to try the long side.

Getting to the charts, with major uptrend lines broken when viewed with the log price scale, I've switched to the arithmetic price scale on the SPX weekly chart below to show where traders might react to them. For now it's looking like we have price-level S/R to watch for price influence. A retest of this week's lows, near 1867, is probable (until I see something more bullish) and we could see a drop down to the October 2014 intraday low near 1820. So far the March 2014 high and October 2014 weekly closing low near 1885 has been acting as support as price consolidates the sharp decline into Monday morning's low. If the consolidation is followed by another leg down (again, it could be for just another retest of this week's lows) we could have a good setup for a strong bounce to a high in mid-September. I think THE high is now in place and therefore a high bounce in September would make for a very good trade setup on the short side for the next, and stronger, leg down.

S&P 500, SPX, Weekly chart

Looking at the ES (S&P emini futures) and cash index patterns I've been thinking about the potential for a sideways triangle (descending for SPX, ascending for ES) to play out this week and then the retest/new low early next week. If SPX rallies above 1954 that would be a little more bullish, in which case I'd look for Monday's gap to be closed, near 1972, and potentially up to 2008, for a higher a-b-c bounce off Monday's low. Assuming we'll get another leg down by early next week I'll then be looking for a setup to get long for a big bounce into September. Upside projections for the bounce are anywhere from 1980 to 2040 (I'll get a tighter projection as the bounce pattern (assuming we'll get it) develops.

S&P 500, SPX, Daily chart

Key Levels for SPX:
- Cautiously bullish above 2010
- bearish below 1885

The 30-min chart below shows a couple of ideas for a correction pattern off Monday's low. Sorry for the crowded ideas but there are multiple possibilities and I've narrowed it down to "only" three. The descending triangle calls for another down-up sequence into next Monday (maybe finishing this Friday) and then another leg down to complete a 5-wave move down. There are potentially a couple more stair-steps lower for the market over the next couple of weeks, perhaps putting in a tradeable bottom in mid-September instead of a top, but I can only evaluate that once we get more price action. For now the bullish divergences suggest the bears be cautious here. If the sideways triangle drawn on the chart doesn't hold price down, watch for a possible high for the bounce at gap closure, near 1972 and then a projection up to 2008, which is where the c-wave of a larger a-b-c bounce would be 162% of the a-wave (the first leg up from Monday morning's low). Above 2010 would be more bullish but again, potentially only for a higher bounce before turning back down.

S&P 500, SPX, 30-min chart

It's a battle of the trend lines when I look at the DOW's weekly and daily charts. The weekly chart below shows the DOW has created a strongly bullish hammer at support following Monday's low at 15370. Support includes its February 2014 low at 15340, the 38% retracement of its October 2011 - May 2015 rally at 15315 and its 200-week MA at 15290. On Monday it broke its uptrend line from March 2009 - October 2011, arguably THE uptrend line defining the bull market since 2009. The line is currently near 16300 so for all intents and purposes it has now recovered the line with today's rally. Now all it has to do is hold it or climb higher for the important weekly close. A weekly close above 16300 with that bullish hammer (similar but larger than the one at the October 2014 low) would get a lot of traders interested in buying, with the expectation of a new rally leg to new highs. Who's to argue they're wrong?

Dow Industrials, INDU, Weekly chart

The daily chart also shows the bounce off Monday's low but now it looks like it could be a back-test of support-turned-resistance near 16300. A selloff from here would create a bearish kiss goodbye and a strong sell signal. Different from what I'm showing on SPX, for the DOW I'm tracking the idea that the decline into Monday's low was only the completion of one of the nested 3rd waves in the wave count. It says we'll see the DOW stair-step lower into mid-September before making a good tradeable bottom, perhaps down near 14380 for a 50% retracement of its 2011-2015 rally. Note that the decline from here, if it follows something like I've depicted, would be a whippy affair and difficult to trade. Only after hitting the bottom would we have a very good setup for a trade on the long side into November and then a monster decline into the new year.

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- bullish above 17,100
- bearish below 15,300

NDX has had one of the stronger bounces off Monday's low and if it can close above 4250 (today's high was near 4228) it will close back above its broken uptrend line from November 2012. This is again using the arithmetic price scale because all of its uptrend lines have been broken when viewed with the log scale price, including the one from March 2009 - November 2012. If the bulls can accomplish that with a Friday close I'll have more respect for the upside but for now I'm not so sure the bears are done. A stair-step move lower could see NDX down to the 3600 area by mid-September before it will be ready for a higher bounce.

Nasdaq-100, NDX, Daily chart

Key Levels for NDX:
- bullish above 4385
- stay bearish below 4250

The semiconductor index is always a good one to keep an eye on, not just for the techs but for a sense about the broader economy. With chips in just about all consumer products these days, how the semis are doing is a good reflection of how the economy is doing. While the stock market has been disconnected from reality (the economy) for a long time, eventually it will prove itself to be a good indicator. At the moment, as the weekly chart of the SOX shows, Monday it gapped down and opened at price-level support near 545, breaking its uptrend line from November 2008 - November 2012, near 583 in the process. That's a major bull-market trend line and breaking it is bad news for the bull trend. But as with the others, it will be the weekly closing price that matters and the trend line will be near 585 on Friday. Today's bounce brought it back up to the line (closing slightly above it with the little spurt higher into the close. Each day this week it has bounced back up to the trend line and while today's bounce looks more bullish, it will need follow through on Thursday or Friday. A break, and hold, above 585 would be bullish (leaving a failed breakdown) while a drop back below 545 could result in at least a test of its 200-week MA near 518 next week.

Semiconductor index, SOX, Weekly chart

I'm showing a downside pattern for the RUT that is similar to the DOW's -- both show the market will continue to stair-step lower into mid-September before setting up a much larger bounce correction. The RUT could drop down to its October 2014 low at 1040 or perhaps a little lower.

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- bullish above 1156
- bearish below 1080

Bonds have had a wild ride in the past week as well and it's been a choppy ride since Treasuries bottomed in June. The rally in bond prices has forced yields back down and as can be seen on the TNX (10-year yield) weekly chart below, it broke its uptrend line from February-April (on August 11th), made repeated attempts to get back above the line and then dropped sharply last week, firmly breaking below its 50- and 200-week MAs in the process. This week's rally has now brought it back up to the MAs as well as its downtrend line from December 2013 - September 2014, all crossing near 2.18%. Up near 2.4% is its broken uptrend line from February. A turn back down here would be bearish for yields and bullish for bond prices, which could coincide with another selloff in the stock market. Keep an eye on the bonds. TNX needs to get above 2.4% to at least lend a helping hand to the stock market.

10-year Yield, TNX, Weekly chart

The U.S. dollar spiked down on Monday, with all the turmoil going on in China and other currency issues, and dropped below the top of its parallel up-channel from 2008-2011, which it broke above in January and has been using as support since then. It had also dropped below its 50-week MA at 93.41 but has had a strong recovery the past two days. Based on Monday's low I've modified the expected consolidation pattern from a sideways triangle to more of a shallow descending wedge for a consolidation pattern that should continue through the rest of this year before rallying early next year.

U.S. Dollar contract, DX, Weekly chart

Much of the blame for the diver lower in commodity prices is placed on the rallying U.S. dollar (most commodities are priced in dollars). But as the dollar has traded sideways since March, and trades lower than where it was in March, you can see commodity prices, as reflected in the Bloomberg Commodity index, have continued to sink lower. It's the ol' supply-demand equation and clearly demand has dropped and prices are chasing it lower in hopes of sparking more buying. I don't think we've seen the lows yet but prices are probably near or at a level that will create a multi-month bounce/consolidation before heading lower. Between the bottom of a parallel down-channel for the leg down from April 2014 and the December 2001 low at 85.38 we could see the start of a bigger bounce (in time if not price). I do see a short-term pattern suggesting only a small bounce and then a low near 82 by October before the bigger bounce gets started but I think at this point it could be risky chasing commodity prices lower.

Bloomberg Commodity index, DJUBS, Weekly chart

Gold's rally into Monday's high achieved a projection at 1162.50 (with a high at 1169.80) for two equal legs up from July 24th for an a-b-c bounce correction to its decline. Last week's rally saw gold break above its price-level S/R near 1142, which it had broken below in mid-July, and that was looking bullish. But at Monday's high it tagged its downtrend line from January-May and has done a quick turnaround this week and back below 1142. As I'll show further below with the silver chart, it was not confirming gold's rally and gave traders a heads up that gold's rally might not last. My expectation is that gold will work its way lower toward 1000, if not 900, this year and so far I'm not seeing anything to change my opinion about that. We could see a higher bounce before heading lower, but only if silver participates.

Gold continuous contract, GC, Weekly chart

As mentioned above, while gold was breaking above its shelf of support, near 1142, silver was not doing the same thing. There's a slight uptrend to the line of support from November 2014, near 15.50, that was holding silver down and today it firmly broke longer-term price-level S/R near 14.65, which started back in 2006. If it's not quickly recovered we'll probably see silver drop down to the price projections (based on previous consolidation patterns, as noted on the chart) in the $12 area. A drop down to the bottom of a parallel down-channel from the April 2011 high could see silver trading closer to 11 before the end of the year.

Silver continuous contract, SI, Weekly chart

I've been watching the 127% Fib price extension of oil's previous rally (3-wave bounce from January to May), which is at 38.41. This is a common reversal level if the prior trend is not still in force. I've believed the leg down into the January low would be followed by a sideways consolidation and therefore the 127% extension should hold as support if the downtrend is not still in progress. On Monday it did a minor break below that level but then recovered the next day. If the consolidation pattern is going to hold, perhaps something like what I've depicted on its weekly chart, we should see oil start to rally. But as shown with the light red dashed line, if we get a small bounce and then a minor new low we could then see the start of a larger bounce/rally. As for the downside, there's still the potential for a drop down to its January 2009 low at 33.20. The commodity index has already broken well below its equivalent 2009 level and is testing its December 2001 low. The equivalent low for oil is just above 17, more than a 50% haircut from here (gulp). That would likely not be at all helpful to stock market bulls.

Oil continuous contract, CL, Weekly chart

The market is not paying much attention to economic reports, although there was a slight bump higher after this morning's 8:30 Durable Goods reports. They were better than expected although at +2.0% it was less than half of June's +4.1%, which was revised higher from the originally reported +3.4%. Ex-transportation the number was only marginally better than expected, +0.6% vs. +0.4%. The big number before the bell Thursday morning will be the GDP 2nd estimate, which is expected to improve to 3.1% for Q2 vs. 2.3% in Q1. We'll see...

Economic reports and Summary


The strong decline into Monday's low hasn't been followed by the typical v-bottom reversal we've seen so often in the past. On the weekly chart it looks the same but on the daily charts you can see the difference and it could be a key difference. The technical damage to the charts is significant. The oversold readings (and extreme move in the VIX) could be worked off in a sideways consolidation and then prices head lower again. There is of course the potential for the weekly v-bottom reversal to carry the day for bulls but at the moment there's a caution flag on the track.

Severe spikes to the downside in a bear market (yet to proven we've entered one but I believe we have) are often followed by strong spikes to the upside, usually on news about some kind of action that will save the market. Once it's realized the save isn't going to work (and short covering stops) the bear mauls all those who dared to try to catch falling knives. I don't know if we're there yet but the risk is high for either direction at the moment with all the violent price swings we're seeing, much of which is occurring during the overnight sessions and creating large gap openings for us. Holding a position overnight is dangerous for your health, especially if you find yourself not sleeping well -- lighten up your position and try not to be involved in the market every second of the day. When we see price action like this the best trade is often cash. It's a position, even if you don't like that one.

If prices continue to chop up and down then I would expect another leg lower. I show a stair-step pattern lower for several indexes into mid-September, or we might see only minor new lows before setting up a stronger bounce into mid-September. We should get a better sense of which it will be by the end of the week. But the crash flag is still flying and that means huge risk to the downside is still with us. Stay safe.

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

Huge Revenue Growth

by James Brown

Click here to email James Brown


Wayfair Inc. - W - close: 43.05 change: +0.73

Stop Loss: None. No stop at this time.
Target(s): To Be Determined
Current Gain/Loss: Unopened
Entry on August -- at $---.--
Listed on August 26, 2015
Time Frame: Exit
Average Daily Volume = 1.0 million
New Positions: Yes, see below

Company Description

Trade Description:
Tonight's new candidate has been outperforming the market and could see a short squeeze. Year to date W is up +116% and shows no signs of slowing down.

According to the company, "Wayfair Inc. offers an extensive selection of home furnishings and decor across all styles and price points. The Wayfair family of brands includes:

Wayfair.com, an online destination for all things home
Joss & Main, an online flash sales site offering inspiring home design daily
AllModern, a go-to online source for modern design
DwellStudio, a design house for fashion-forward modern furnishings
Birch Lane, a collection of classic furnishings and timeless home decor
Wayfair is headquartered in Boston, Massachusetts, with additional locations in New York, Ogden, Utah, Hebron, Kentucky, Galway, Ireland, London, Berlin and Sydney."

Shares of W came to market with an IPO in October 2014 and priced at $29.00. They opened at $36.00 and spiked up to $39.43 on the first day of trading. The IPO excitement faded and shares didn't find a bottom until about $17.00 in December 2014.

Revenue Growth

The company seems to be growing at a tremendous pace. Their first earnings report as a public company was November 10th, 2014. Revenues soared +41.7% to $336.2 million. Their direct retail business surged +57%. W said their gross profit was $79.0 million versus $58.6 million a year ago.

Additional 2014 Q3 highlights included the number of active customers for their direct retail business rose +61% to $2.9 million year over year. Their LTM Net revenue per active customer increase $342 or +8.6% year over year and +3.0% from the second quarter of 2014.

W reported their Q4 results on March 4, 2015. The company delivered a loss of ($0.18) per share, which was 10 cents better than expected. Revenues were up +38.4% to $408.6 million, above expectations. Management raised their Q1 guidance significantly above Wall Street estimates.

The company beat expectations again with their Q1 report on May 11th. Results were a loss of ($0.23) per share. Revenues accelerated with a +52% gain to $424.4 million.

The earnings beats kept coming when W reported its Q2 results on August 12th. Analysts were forecasting a loss of ($0.29) per share on revenues of $438.4 million. Wayfair delivered a loss of ($0.15) per share. Revenues roared +66.5% to $491.8 million. Management said their number of active customers was up +53.5% from a year ago to four million. Repeat customer orders hit 56%. Orders delivered shot up +80%.

Big Potential

Following their Q1 results back in May the company's CEO talked about their future. On their Q1 conference call the CEO noted that their potential markets are huge. Estimates suggest that spending in their industry will hit $264 billion in the U.S. and $308 billion in Europe by 2018 (a combined total of $572 billion market).

Bears will argue that W's valuations are outrageous. They're probably right. The recent rally in the stock has bumped the company's market cap to $3.6 billion. At the same time analysts are expecting W to operate at a loss for the next two fiscal years. On a short-term basis the market doesn't seem to care. If this rally continues W could see a short squeeze.

A few months ago in an interview one of the co-founders said that together the two co-founders own between 40% and 50% of the stock. The current float is only 30.1 million shares, which is relatively small. The most recent data listed short interest at 57% of the float.

Recent Strength

Shares of W soared to all-time highs in mid-August following its better than expected earnings and revenues. The stock market's recent crash bought the stock back to earth but investors bought the dip near support in the $40 area and its rising 50-dma. The recent bounce near $40.00 looks like a bullish entry point. However, the market remains volatile. We would like to see some follow through higher in shares of Wayfair. Therefore tonight we are listing a trigger to open bullish positions at $45.15. I do consider this a more aggressive, higher-risk trade due to W's volatility.

Trigger @ $45.15

- Suggested Positions -

Buy shares of W @ $45.15

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

Buy the NOV $50 CALL (W151120C50) current ask $4.10
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

Relief Rally Produces Best Day Since 2011

by James Brown

Click here to email James Brown

Editor's Note:
Traders were holding their breath this afternoon for fear the bounce would rollover like Tuesday's session. Fortunately for the bulls the rebound actually accelerated higher. Stocks delivered their best one-day gain since 2011.

We have added another entry point to the SBUX trade.

Current Portfolio:

BULLISH Play Updates

Starbucks - SBUX - close: 53.96 change: +2.87

Stop Loss: None. No stop loss at this time.
Target(s): To Be Determined
Current Gain/Loss: Unopened
Entry on August -- at $---.--
Listed on August 25, 2015
Time Frame: Exit prior to earnings in October
Average Daily Volume = 8.0 million
New Positions: Yes, see below

08/26/15: Investors rushed back into big cap stocks like SBUX. The stock bounced near yesterday's lows and rallied to an impressive +5.6% gain on the session.

Tonight we are adjusting our entry point strategy. Stocks remain volatile so there is still a chance for another drop. However, we will move our buy-the-dip entry trigger from $48.00 to $50.00. Just in case SBUX does not see a dip then we are adding a secondary trigger to launch bullish positions if shares hit $55.15. Please see below for the new triggers and option strikes (if you trade options).

Trade Description: August 25, 2015:
The sell-off in shares of SBUX is a bit ridiculous. The Thursday-Friday-Monday sell-off in the market saw SBUX fall from $57.59 to $42.05. That was a -27% drop in less than three days. The company's fundamentals didn't deteriorate -27%. The recent market turmoil presents an opportunity to buy SBUX. Jump to the bottom of this play description for details.

Here's a little bit about SBUX and the company's performance:

The world seems to have an insatiable appetite for coffee. Starbucks is more than happy to help fill that need. The first Starbucks opened in Seattle back in 1971. Today they are a global brand with locations in 66 countries. SBUX operates more than 21,000 retail stores with more than 300,000 workers.

A few years ago Business Insider published some facts on SBUX. The average SBUX customer stops by six times a month. The really loyal, top 20% of customers, come in 16 times a month. There are nearly 90,000 potential drink combinations at your local Starbucks. The company spends more money on healthcare for its employees than it does on coffee beans.

The company's earnings results were only mediocre most of 2014 year. You can see the results in SBUX's long-term chart below. After incredible gains in 2013 SBUX has essentially consolidated sideways in 2014. SBUX broke out of that sideways funk after it reported earnings in January 2015.

Five-Year Plan

In late 2014 SBUX announced their five-year plan to increase profitability. Here's an excerpt from a company press release:

"The seismic shift in consumer behavior underway presents tremendous opportunity for businesses the world over that are prepared and positioned to seize it," Schultz said (Howard Schultz is the Founder, Chairman, President, and CEO of Starbucks). "Over the next five years, Starbucks will continue to lean into this new era by innovating in transformational ways across coffee, tea and retail, elevating our customer and partner experiences, continuing to extend our leadership position in digital and mobile technologies, and unlocking new markets, channels and formats around the world. Investing in our coffee, our people and the communities we serve will remain at our core as we continue to redefine the role and responsibility of a public company in today's disruptive global consumer, economic and retail environments."

"Starbucks business, operations and growth trajectory around the world have never been stronger, and we are more confident than ever in our ability to continue to drive significant growth and meet our long term financial targets," said Troy Alstead, Starbucks chief operating officer. "We have more customers visiting more stores more frequently, both in the U.S. and around the world, than at any time in our history. And we expect both the number of customers visiting our stores and the amount they spend with us to accelerate in the years ahead. With a robust pipeline of mobile commerce innovations that will drive transactions and unprecedented speed of service, Starbucks is ushering in a new era of customer convenience. We believe the runway of opportunity for Starbucks inside and outside of our stores is both vast and unmatched by any other retailer on the planet."

The company believes they can grow revenues from $16 billion in FY2014 to almost $30 billion by FY2019. To do that they will expand deeper into regions like China, Japan, India, and Brazil. SBUX expects to nearly double its stores in China to over 3,000 locations in the next five years

They're also working hard on their mobile ordering technology to speed up the experience so customers don't have to wait in line so long at their busiest locations. This will also include a delivery service.

Part of the five-year plan is a new marketing campaign called Starbucks Evening experience. The company wants to be the "third place" between home and work. After 4:00 p.m. they will start offering alcohol, mainly wine and beer, in addition to new tapas-like smaller plates.

The company recently launched its first ever Starbucks Reserve Roastery and Tasting Room in Seattle, near their iconic first retail store. The new roastery is supposed to be the ultimate coffee lovers experience. CEO Schultz said they will eventually open up about 100 of these Starbucks Reserve locations.

Earnings results:

It was a very strong holiday period for SBUX thanks in part to astonishing gift card sales. The amount of money loaded onto SBUX gift cards during the holidays surged +17% to a record $1.6 billion. One out of every seven Americans received a SBUX gift card. The company also saw significant growth overseas with its China and Asia-Pacific business soaring +85% to sales of $495 million. Their mobile transactions have reached seven million transactions a week.

SBUX reported its Q2 (2015) on April 23rd. Earnings of $0.33 a share were in-line with estimates. Revenues were up +17.8% to $4.56 billion, slightly above expectations. It was their strongest growth in four years. Customers are responding well to new drink options and an updated food menu. They're also developing new delivery options, mobile pay options, and alcoholic drinks available at select locations.

Worldwide same-store sales grew +7%. This was significantly above estimates. It also marked the 21st consecutive quarter where SBUX's comparable store sales were +5% or more.

The company issued mixed guidance. The stronger dollar is having an impact. They see fiscal 2015 results in the $1.55-1.57 range. That compares to Wall Street estimates for $1.57 per share. However, the company's revenue estimates are more optimistic. They're forecasting +16-18% sales growth into the $19.1-19.4 billion zone compares to analysts' estimates of $19.1 billion.

The trend of earnings pops continued in July with shares gapping up to new all-time highs following its Q2 report on July 23rd. Earnings were $0.42 per share, a penny above estimates. Revenues were up +17.5% to $4.88 billion, just a hair above expectations. Global same-store sales were up +7% and their non-GAAP operating margin improved 100 basis points to 19.5%. Management is still guiding 2015 revenues to rise +17% in the $19.1-19.4 billion range.

Recent Sell-off & Entry Point

The recent stock market bloodletting saw SBUX breakdown below a multitude of support levels. The weakness on Monday morning was just ridiculous. SBUX opened on Monday, August 24th near technical support at its 200-dma and then it plunged to $42.05. The stock bounced back to $50 by the closing bell. The rebound struggled today but SBUX displayed relative strength with a +1.48% gain versus a -1.35% drop in the S&P 500 and a -0.4% decline in the NASDAQ.

If the stock market continues to sink we want to take advantage of the weakness in SBUX and launch bullish positions on a dip near its 200-dma. Today the simple 200-dma is at $48.04. We will set our entry trigger at $48.00. We are starting this play without a stop loss. More conservative investors might want to wait on launching positions since the next few days could be volatile for the broader market (SBUX included).


#1) Buy-the-dip trigger: If SBUX hits $50.00

- Suggested Positions -

Buy shares of SBUX @ $50.00

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

Buy the NOV $50 CALL (SBUX151120C50)

- or -

#2) Breakout trigger: If SBUX hits $55.15

- Suggested Positions -

Buy shares of SBUX @ $55.15

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

Buy the NOV $57.50 CALL (SBUX151120C57.5)

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.

08/26/15 Entry point adjustment - move the buy-the-dip trigger from $48.00 to $50.00. Plus, add a secondary trigger to open bullish positions at $55.15.
Option Format: symbol-year-month-day-call-strike

BEARISH Play Updates

Continental Resources - CLR - close: 27.10 change: +0.71

Stop Loss: 29.65
Target(s): To Be Determined
Current Gain/Loss: +9.2%
Entry on August 21 at $29.85
Listed on August 20, 2015
Time Frame: Exit 6 to 9 weeks
Average Daily Volume = 3.4 million
New Positions: see below

08/26/15: A drop in weekly oil inventories didn't do much for energy stocks today. CLR bounced but it underperformed the broader market. Shares only managed a +2.69% gain versus almost +4% in the rest of the market.

More conservative traders may want to move their stop closer to yesterday's high ($28.99).

No new positions at this time.

Trade Description: August 20, 2015:
Unless you have been living under a rock for the last year then you already know crude oil is getting crushed. Oil is down nearly -60% from its 2014 highs. Today oil closed at $40.94 a barrel. More and more we are hearing analysts forecasting oil in the low $30s. A few outliers are suggesting oil in the $20s or even lower. That's because so far none of the oil producers have been willing to cut production.

OPEC is producing as much oil as they can. Russia is producing as much as they can. Iraq is boosting its production. If the Iran nuclear deal gets approved then they will start unloading more oil on the market. The problem is that all of these producers are desperate. They need the cash flow. OPEC has been trying to price U.S. producers out of the market but American energy companies have been resilient and U.S. production remains near all-time highs.

Put it all together and we have high oil production as demand stalls. The global economy, especially China, is slowing down. That means less demand for oil. Add to that a rising dollar and you have a very bearish recipe for commodities. Today oil is trading at levels not seen since 2009. The market is worried that crude oil won't bottom until we see a number of bankruptcies in the U.S. energy sector. Anyone with a high debt load is being seen as a risk.

CLR is in the basic materials sector. According to the company, "Continental Resources (CLR) is a Top 10 independent oil producer in the United States and a leader in America's energy renaissance. Based in Oklahoma City, Continental is the largest leaseholder and one of the largest producers in the nation's premier oil field, the Bakken play of North Dakota and Montana. The Company also has significant positions in Oklahoma, including its SCOOP Woodford and SCOOP Springer discoveries and the Northwest Cana play. With a focus on the exploration and production of oil, Continental has unlocked the technology and resources vital to American energy independence and is a strong free market advocate in favor of lifting of the domestic crude oil export ban. In 2015, the Company will celebrate 48 years of operations."

The plunge in oil prices is very evident in CLR's revenues. Their 2014 Q4 results saw revenues down -0.1% to $902.3 million. 2015 Q1 revenues were down -41% to $592.8 million. 2015 Q2 revenues were down -30% to $790 million.

The trend is lower. While we are short-term bearish on the stock I have to give credit to CLR for their ability to manage costs. The company has been doing a great job cutting expenses and boosting efficiencies. Through the first half of 2015 CLR has managed to reduce their costs by -20%. They see further efficiencies throughout 2015 and just lowered their estimated cost per barrel of oil by another $1.00.

When oil finally finds a bottom CLR should be a winner. Unfortunately, in the meantime, investors are selling everything in the oil business. CLR's high debt load, about $7 billion, is a negative. Bulls can argue that yes, CLR has high debt, but none of it is due until 2019. Hopefully by then crude oil will have recovered.

The challenge is that crude oil may not recover any time soon. There is a growing camp of analysts forecasting oil in the $30s for much of 2016. That's bad news for CLR. The company's CEO Harold Hamm said if crude oil is under $50 a barrel they will have cash flow issues (outspending their cash inflow).

Technically the trend for CLR's stock is down. Shares of CLR have declined toward major support near $30.00. A breakdown here would be very bearish. A drop under $30.00 would also generate a new sell signal on the point & figure chart.

My biggest concern is volatility in the stock. There are already a lot of investors who are bearish on CLR. The company has 370 million shares outstanding but only 82 million shares in their float. The most recent data listed short interest at 18% of the float. Traders may want to use options to limit their risk. Tonight I am suggesting a trigger to open bearish positions at $29.85.

- Suggested Positions -

Short CLR @ $29.85

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

Long DEC $28 PUT (CLR151218P28) entry $3.40

08/24/15 new stop @ 29.65
08/21/15 triggered @ $29.85
Option Format: symbol-year-month-day-call-strike

Marathon Oil Corp. - MRO - close: 14.65 change: +0.61

Stop Loss: 15.55
Target(s): To Be Determined
Current Gain/Loss: +17.7%
Entry on August 14 at $17.80
Listed on August 13, 2015
Time Frame: Exit
Average Daily Volume = 7.8 million
New Positions: see below

08/26/15: MRO delivered a big +4.3% bounce but shares still look oversold. The rebound may not be over yet. The nearest resistance could be the 10-dma near $16.00.

Readers may want to take some money off the table before MRO rebounds any farther.

No new positions at this time.

Trade Description: August 13, 2015:
Falling crude oil prices are crushing oil-sector stocks. A -50% drop in crude oil that began in the second half of 2014 was horrendous for the U.S. and global oil industry. Oil managed a bounce off its March 2015 lows but that rebound has failed.

Since late June the price of oil has fallen about -30%. Today saw crude oil close near $42.00 a barrel, the lowest since March 2009 (during the bear market in stocks).

Shares of MRO are getting hammered on this oil slide. According to the company, MRO is a global energy company. They explore for, produce, and market oil and natural gas. They are also involved in the oil sands mining in Canada and the big shale oil and gas basins in the United States. The company has operations in Angola, Equatorial Guinea, Ethiopia, Gabon, Kenya, Libya, Norway, the United Kingdom, and the Kurdistan region of Iraq.

There are a ton of factors impacting crude oil and the energy sector. OPEC's largest producer, Saudi Arabia, has decided keep production high. They would rather suffer low oil prices than lose market share to rival producers.

According to CNBC today, "OPEC's second-largest producer, Iraq, plans to export near-record volumes of Basra crude in September, adding to an already oversupplied market." Plus, "The U.S. Energy Information Administration also said on Thursday that Iran's release of oil held in storage could boost global supplies by 100,000 barrels per day this year, and that it had the 'technical capability' to boost output by 600,000 bpd by the end of next year."

If that wasn't enough the recent focus on China is undermining oil prices. China is one of the largest, if not the largest, consumer of commodities on the planet. Their economy has been slowing down for years. The central bank of China's decision to devalue their currency this week stokes fears that China's economy is falling even faster than previously expected. That doesn't bode well for China's future oil demand.

Meanwhile back at home in the U.S. we see crude oil inventories building. Wall Street is worried that domestic oil companies have not cut their spending budgets enough. There is growing concern that MRO may have to slash its dividend. The plunge in MRO's stock price has boosted its dividend yield to more than 4%.

A quick look at MRO's last few earnings reports shows the trend in revenues. Their Q3 2014 results saw revenues fall -5%. Q4 results saw revenues drop -16% from the prior year. Their Q1 2015 report said revenues plunged -46%. Their most recent report, their Q2 report on August 5th, said MRO's revenues dropped -47.9% to $1.53 billion. The company reported a loss of ($0.23) per share. Management has been slashing their budgets and cutting expenses but it wasn't enough.

The last few days have seen MRO's stock hovering above short-term support at $18.00. Unfortunately today's drop (-5.45%) left shares poised for a breakdown. Tonight we are suggesting a trigger to launch bearish positions at $17.80. We're not setting a target tonight but I will point out that the point & figure chart is bearish and forecasting at $5.00 target.

FYI: MRO does have a 21-cent dividend coming up. The stock will trade ex-dividend in the August 17-19th time frame.

- Suggested Positions -

Short MRO stock @ $17.80

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

Long OCT $17 PUT (MRO151016P17) entry $1.03

08/24/15 new stop @ 15.55
08/22/15 new stop @ 17.05
08/19/15 new stop @ 18.15
08/17/15 began trading ex-dividend today ($0.21)
08/14/15 triggered @ $17.80
Option Format: symbol-year-month-day-call-strike

Micron Technology - MU - close: 14.42 change: +0.15

Stop Loss: 15.65
Target(s): To Be Determined
Current Gain/Loss: +6.1%
Entry on August 20 at $15.35
Listed on August 18, 2015
Time Frame: Exit prior to earnings in late September.
Average Daily Volume = 28.4 million
New Positions: see below

08/26/15: Ouch! MU underperformed the rest of the market today. Shares only gained +1.0% versus a huge rally in the major indices. MU didn't even recoup yesterday's losses.

No new positions at this time.

Trade Description: August 18, 2015:
The tech-heavy NASDAQ composite index is up +6.8% in 2015. Yet a key technology industry the semiconductor stocks are underperforming. The SMH semiconductor ETF is down -8.2% and the SOX semiconductor index is off -9.1% The group is suffering from what one analyst says is an uncertain macroeconomic environment, currency headwinds, and rising competition. One semiconductor stock significantly underperforming its peers is MU, which is down -53% year to date.

If you're not familiar with the company, here's a bit from their press release, "Micron Technology, Inc., is a global leader in advanced semiconductor systems. Micron's broad portfolio of high-performance memory technologies - including DRAM, NAND and NOR Flash - is the basis for solid state drives, modules, multichip packages and other system solutions. Backed by more than 35 years of technology leadership, Micron's memory solutions enable the world's most innovative computing, consumer, enterprise storage, networking, mobile, embedded and automotive applications."

MU sparked new concerns after their recent analysts day. The company announced plans to boost their 2016 capex budget by +45% more than 2015's. The company is forecasting a 2016 budget of $5.3-to-$5.8 billion and analysts are worried it's going to hurt their financial results.

Wedbush Securities analyst Betsy Van Hees said, "While we believe [Micron] is laying the right ground work with capex spend for long-term success, until we see signs that DRAM industry supply/demand environment is stabilizing, shares will likely continue to struggle." Van Hees downgraded shares of MU from outperform to a neutral.

Bank of America Merrill Lynch analyst Simon Dong-Je Woo was also cautious on the memory chip sector. Woo is worried that rising capex spending will be a short-term negative. He downgraded MU from a buy to a neutral.

Not everyone agrees. The research team at Wells Fargo actually upgraded MU from an underperform to a market perform. Bulls could argue that MU's stock looks cheap with a P/E ration around 5. However, even CNBC's Jim Cramer warned that cheap stocks tend to stay cheap for a while.

Momentum is bearish and MU underperformed the market today with a -4.8% drop to new multi-year lows. We are suggesting a trigger to launch bearish positions at $15.85.

- Suggested Positions -

Short MU stock @ $15.35

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

Long OCT $15 PUT (MU151016P15) entry $1.26

08/24/15 new stop @ 15.65
08/22/15 new stop @ 16.15
08/20/15 Triggered on gap down at $15.35, suggested entry was $15.85

iPath S&P500 VIX Futures ETN - VXX - close: 24.12 change: -2.46

Stop Loss: None, no stop at this time.
Target(s): To Be Determined
Current Gain/Loss: -10.5%
Entry on August 25 at $21.82
Listed on August 24, 2015
Time Frame: 2 or 3 weeks
Average Daily Volume = 50 million
New Positions: see below

08/26/15: When traders bought the dip in stocks midday the VIX and the VXX reversed lower. The VXX ended the session with a -9.25% decline and looks poised to keep falling tomorrow. Of course that will depend on if stocks can build on today's gains.

Trade Description: August 24, 2015
The U.S. stock market's sell-off in the last three days has been extreme. Most of the major indices have collapsed into correction territory (-10% from their highs). The volatile moves in the market have investors panicking for protection. This drives up demand for put options and this fuels a rally in the CBOE volatility index (the VIX).

You can see on this long-term weekly chart that the VIX spiked up to levels not seen since the 2008 bear market during the financial crisis. Moves like this do not happen very often. The VIX rarely stays this high very long.

(see VIX chart from the August 24th play description)

How do we trade the VIX? One way is the VXX, which is an ETN but trades like a stock.

Here is an explanation from the product website:

The iPath® S&P 500 VIX Short-Term Futures® ETNs (the "ETNs") are designed to provide exposure to the S&P 500 VIX Short-Term FuturesTM Index Total Return (the "Index"). The ETNs are riskier than ordinary unsecured debt securities and have no principal protection. The ETNs are unsecured debt obligations of the issuer, Barclays Bank PLC, and are not, either directly or indirectly, an obligation of or guaranteed by any third party. Any payment to be made on the ETNs, including any payment at maturity or upon redemption, depends on the ability of Barclays Bank PLC to satisfy its obligations as they come due. An investment in the ETNs involves significant risks, including possible loss of principal and may not be suitable for all investors.

The Index is designed to provide access to equity market volatility through CBOE Volatility Index® (the "VIX Index") futures. The Index offers exposure to a daily rolling long position in the first and second month VIX futures contracts and reflects market participants' views of the future direction of the VIX index at the time of expiration of the VIX futures contracts comprising the Index. Owning the ETNs is not the same as owning interests in the index components included in the Index or a security directly linked to the performance of the Index.

I encourage readers to check out a long-term chart of the VXX. This thing has been a consistent loser. One market pundit said the VXX is where money goes to die - if you're buying it. We do not want to buy it. We want to short it. Shorting rallies seems to be a winning strategy on the VXX with a constant trend of lower highs.

Today the VXX spiked up to four-month highs near $28.00 before fading. We are suggesting bearish positions at the opening bell tomorrow. The market volatility is probably not done yet so we are not listing a stop loss yet. Our time frame is two or three weeks (or less).

- Suggested Positions -

Short the VXX @ $21.82

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

Long OCT $20 PUT (VXX151016P20) entry $2.93

08/25/15 trade begins. VXX gaps down at $21.82
Option Format: symbol-year-month-day-call-strike

Whiting Petroleum - WLL - close: 14.70 change: -0.02

Stop Loss: 16.25
Target(s): To Be Determined
Current Gain/Loss: +25.9%
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

08/26/15: You have to be frustrated if you're bullish on WLL. Shares did not participate in the market's huge rally today. Thankfully we are not bullish on WLL and the relative weakness is encouraging but I would not launch new positions.

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

08/24/15 new stop @ 16.25
08/22/15 new stop @ 18.05
08/05/15 new stop @ 20.35
08/05/15 new stop @ 21.25
08/03/15 triggered @ $19.85
Option Format: symbol-year-month-day-call-strike