The company’s earnings and revenue results over the last year have been what I would consider “lumpy”, missing estimates the last 2 quarters and besting them the prior 2 quarters. Perhaps due to this inconsistent performance, bearish traders have accumulated a large short position in the stock. Short interest ratio, indicating how many days it would take for shorts to cover the entire short interest, got as high as 44 in Mid December.

But as you can see from the chart of Short interest ratio I have included below, shows that Shorts have been covering their positions since December and the ratio now stands at 14 S of mid February. This tells us that bears are becoming less bearish and they are anticipating some bullish news in the future.

Also taking a look at IPGPs chart, price is at the lower end of an uptrending channel making this a good time to get long

Applying that analogy to stocks, the price performance of a stock around important levels can mark the threshold between investors being bearish or bullish on it. These levels are ones that the stock has traded around in the past and represent “swing areas”.

i believe Monsanto is nearing an area of support at $108 that makes it a swing long.

As you can see from the 30min interval chart provided below, $108 was a resistance zone from Jan 27-29, then bulls bought up the stock on Feb 7 helping it to break above $108. A few sessions later on Feb 13, price came back to $108 and bulls eagerly bought at that level showing that what was once resistance is now support.

Now we are seeing price coming back down to 108, just as CCI price momentum starts showing a bullish divergence. Bullish divergences that occur as a stock falls to support are my favorite trade setup and we are probably one day away from it happening as i expect MON to fall just short of 108 tomorrow.

The trade:
Long MON @ 108.50
Target 111.50
Stop 107.50

I made a similar trade in MON a few weeks ago:

http://www.learningmarkets.com/cci-indicator-identifies-a-buy-for-monsanto-mon/

However, there seem to be signs that WDAY’s sales growth is starting to slow as the most recent YOY quarterly sales growth came in at 76% compared to previous growth of 108%, 99%, 89%. WS analysts are expecting YOY growth of 77% so they expect to see growth grow by 1 tick. considering earnings momentum has been to the downside i think WDAY could miss that estimate.

Add to that competition from industry rivals (ORCL just announced a move to the cloud and so did IBM) and its hard to expect WDAY to continue stealing market share from traditional service providers.

From a valuation standpoint, WDAY is trading at an extreme premium to its peers and could fall hard if it relinquishes its market leading sales growth.

Although we are still cautious, the market does seem to be on a roll again. This is the right time to be evaluating firms that have pulled back but have solid fundamentals, positive long-term trends, and a defensible position in their industry. Much like our trade on Tupperware Brands (TUP) (recommended two weeks ago) Bed Bath and Beyond (BBBY) represents that kind of opportunity.

A specialty retailer of household linens, décor and small furnishings, BBBY saw its stock rise 300% since 2009 from $20/share to around $80/share by the end of 2013. BBBY had a disappointing January when the share price dropped from $80.00 to a low of $62.00, a 22.5% decline in a single month. Bearish pressure across retail combined with an earnings report that missed top and bottom line forecasts drove the stock below its 2013 trading range to where it is now. The question at this point is whether BBBY will be able to turn expectations around in 2014?

The Risks

The drop in BBBY should have been seen well in advance. Over the last several months, housing data has been looking worse as interest rates began to rise in May 2013. Most recently, the National Association of Home Builders reported in their sentiment index that order flow and the future outlook has dipped back into contraction territory. This is a problem because stocks like BBBY, HD, WHR and others do better in economic conditions when housing is booming.

Labor data has also been dipping recently according to the Bureau of Labor Statistics at the Department of Labor. Job growth, consumer spending, and retail success are closely correlated and unless job growth picks back up in 2014, retailers in general may be in trouble. This factor should have also warned investors that BBBY’s January report was a potential disappointment.

Catalysts

Unsurprisingly, stock-prices for retailers mirror operating performance, which is affected by the macroeconomic environment and company-specific factors. Despite fears to the contrary, the recent volatility in the market has not been driven by underlying economic weakness. Yes, there has been some slowing in the housing market but its not anything like what we experienced in 2006-2007. The most recent correction is relatively minor compared to other bearish moves over the last 5 years. In general economic growth looks strong enough to offset the risks we are watching in the economy and housing.

Despite the ‘poor’ performance in this last earnings report, BBBY is still wildly profitable and is in a better cash position than its peers. Growth is still expected to be more than 5% this year. When compared to its 5-year average (over 10%) that seems pretty low but we consider this contrast to be a sign that the company is “sandbagging” its forecasts to avoid another disappointment.

Past performance is the best predictor of future performance because it’s the only data we have. Historically speaking a company that has been growing at the rate BBBY has over the last 5 years is more likely to re-accelerate their growth in the near term than they are to settle into contraction or flat performance. Price and fundamental trends tend to be persistent.

This will allow BBBY to continue its share buyback program and should continue to motivate underlying support from value investors. Price shocks like this are not uncommon in the market and fundamentally sound stocks are the most likely to later ‘fill the gap’.

Share buybacks can be a mixed bag. Companies tend to do them at exactly the wrong time because they have cash to execute a buyback when their shares are at historical highs. However, expanding the buyback program (or merely continuing at the current pace) would make this exactly the right time to buy shares while they are at a low.

From a technical perspective BBBY is a little tricky. The recent decline stopped at $63 where we would expect support. This is a level equal to previous downside gaps (circles) and prior resistance in late 2011 (box). Those inflection points can now be considered support because the stock has been above them for almost a year and is currently bouncing up off that level in February.





Bed Bath and Beyond (BBBY): Chart Courtesy of MetaStock Professional

However, as you can see in the chart above, the top of the gap that opened up in January lines up very well with a potential resistance level based on 2012’s highs and prior support in 2013. That price could prove to be very difficult to beat. We would suggest that this is most likely to be a short term buying opportunity. If prices can get above $72, then new highs are possible but that will likely depend on general market conditions. We recommend entries at current prices with stop losses placed 2-3% below support. Traders should also consider covering at $72 if the stock stops and begins to consolidate at that level in the near term.

This pattern has happened 4 times since November and it is setting up again today. On each occassion, if you entered the trade at the right time you would have profited from a $20 price rise in the shares. Take a look at the chart I’ve included in the post below. Here is the setup that I’m calling an Oversold Bollinger Bounce.

Trade Setup (using 4 hour interval charts):

1. Wait for the CCI indicator (bottom frame of the picture) to develop a bullish divergence while price is rubbing against the lower bollinger band.
2. Buy when the CCI indicator rises above the Zero line
3. Exit when price reaches the upper bollinger band

Today we see that we already have a CCI bullish divergence that’s formed from Feb 12 – 14. So criteria 1 has been met. Next we need to see the CCI indicator rise above the Zero line to give us our buy signal. I am expecting that to occur today or tomorrow, so I am entering a long trade in this column for LNKD @ $195, targeting $215+ to the upside.

For aggressive traders you can opt for the March $190 calls @ $11. If price rallies $20 points by expiration, these same calls would be worth $25, yielding a ~110% return.

I have been positioning bearishly over the past week expecting for the market to pullback as it reaches the January high of $185. Each one of my attempts to get short has been greeted with eager buying on the dip by bulls, so it’s been tough sledding for Bears like me.

But, I am seeing something very different occurring today that shows a change in character in this rally that hints that the pullback is here.

Here’s my theory:

When the SPY gaps up or down, we can use VIX futures to confirm or reject the SPY trade direction.

So for example,

Confirmation of the SPY trade direction:

1. If the SPY gaps up, a confirmation that SPY is likely to continue rising is if we see VIX futures decline after the 1st bar (1st hour of trade). This would be an indication that VIX traders are stepping out of the way and letting the SPY bullishly rise.
2. And vice versa, if we see SPY gap down, and VIX futures rise after the first bar, then it shows VIX traders are leaning into the trade.

Rejection of SPY trade direction evidenced by VIX Divergence:

1. If the SPY gaps up, a rejection that SPY is likely to continue rising is if we see VIX futures rise after the 1st bar (1st hour of trade). This would be an indication that VIX traders are doubting the SPY gap up, and are positioning for a decline in SPY.
2. And vice versa, if we see SPY gap down, and VIX futures drop after the first bar, then it shows VIX traders would expect for SPY to rise from the gap and the SPY is likely to head up.

Now, with that knowledge in hand, take another look at the chart I’ve included below. It shows 1 hour intervals going back to the start of the January market correction. The top frame is a chart of VIX futures and the bottom frame shows the S&P500 viewed through the prism of the SPY ETF.

I’ve pointed out on the chart that the January correction shows what we would expect to see during a market pullback. A pattern of SPY gap downs occurred, and each gap down happened in parallel with VIX futures rising from the 1st to the 2nd bar.

Then starting on Feb 5, we saw SPY gap up, and VIX decline during the 2nd bar, telling us that SPY was likely heading higher. Subsequent to that, we saw a new uptrend start as a change of character began to occur = SPY gap up, and VIX declines. Again, we’d expect to see this during a healthy uptrend. We also saw some bullishly divergent behavior going on; whenever the SPY gapped down the VIX would decline, and traders bought the dip. This bullish pattern has been going on for 11 sessions.

But today, on Feb 19th, I see a bearish change in character. This time a bearishly divergent change took place. Today we saw a gap down, but this time VIX rose from the 1st to the 2nd bar. VIX traders were saying, “not this time”. It could also have been somewhat due to today being Feb VIX expiration, which is a time when traders typically load up on the new front month futures (March VIX futures). But, I also believe that market participants had reason to increase risk protection through VIX calls heading into the FOMC meetings at 2pm today.

As we can see, the market pulled back today, and I expect for more action to the downside for SPY and action to the upside in VIX.

The Trade:
Long VIX March $16 Calls at 1.10
Targeting $17 as an upside target to take profits on the Calls.

Some psychologists explain that the reason behind this phenomenon is that, as humans, we value simplicity; we think in whole numbers – and often, when placing stops or limits, we use these prices. These stops and limits can massively alter order flow and price changes. So you can imagine that as a stock is rising up to a targeted Round number, there may be a number of limit orders placed to exit long positions at price or a few points above/below it. As market markers attempt to fill orders, those limit orders will create excess overhead supply on the stock. At the same time, there may be new buyers who are initiating orders to enter the stock at the round number so that creates some demand. So a magnet type affect goes on that keeps prices around that level for a little while before a new direction is set.

We find ourselves in that situation with Google today. It just hit the psychological $1200 level, and I am expecting a pause at this level over the next week as traders take profits. I am also expecting for the S&P 500 (SPY) to pause or drop. See the 3 year weekly chart below showing a comparison of GOOG and SPY.

Notice how each time that GOOG hits a round number, it pauses for a week or more before reversing back down and continuing higher where buyers bid the stock up as it becomes more of a value. Notice as well that the S&P 500 (SPY) has paused or reversed briefly whenever GOOG hits a round number. GOOG represents 2% of the SPY ETF so when it stops going up, the SPY gets affected. Considering how big cap tech is pulling the SPY higher in recent weeks, it’s my opinion that GOOG probably consolidates and the SPY drops without the help of GOOG to lift the index, leaving that burden to other stocks in the index that do not have the same relative strength as GOOG.

So let’s take a 2 week trade with a neutral direction, expecting for GOOG to PAUSE.

The Trade:
STO Feb4 14 $1210 Call @ 10.85
STO Feb4 14 $1150 Put @ 2.48
Credit = $12.79

We will profit the entire credit amount if GOOG closes between the 2 strikes at expiration. Break/even points would be $1137.21 to the downside and $1222.79 to the upside.

Critics of this move still have valid concerns from a financial perspective. Drug stores have a very small percentage of national tobacco sales, but those customers are still important for overall performance. If a customer buys tobacco at CVS, they are also likely buying other products at the same time and those additional sales may not come back. However, we like the move because it puts CVS on the moral high ground compared to RAD or WAG. Is this move worth $2Billion in PR and publicity? We think it is and it looks like most investors agree.

In the next chart you can see that CVS dropped on February 5th (the date of the tobacco announcement) only to stop at support and rally through the earnings report on Tuesday the 11th. The technical pattern formed last week is similar to a morning star, which is quite bullish. It looks like investors are willing to buy the dips and give this radical strategy the benefit of the doubt.




CVS Caremark (CVS): Chart Courtesy of MetaStock Professional

We have been following the pharmacy group for a while as they prepared to take advantage of the windfall from the Affordable Care Act (AKA Obamacare). Regardless of your political leanings, it should seem reasonable to expect that consumption of healthcare products will rise as healthcare insurance becomes more widely used and available. We have already written about this several times but we still feel strongly that the full impact of the ACA in the healthcare sector has yet to materialize.

CVS is up over 39% since the beginning of 2013 and, based on the company’s earnings report on Tuesday, we expect that trend to continue in 2014. The company reported both top and bottom line numbers above analysts’ expectations, increased guidance for the first quarter, and re-affirmed full-year guidance for 2014. As a result the stock popped up more than 3%.

What we like about CVS is not only their position to take advantage of an expected ‘lift’ in healthcare consumption but how they are positioning themselves as a healthcare provider. CVS operates small clinics, usually staffed by nurse practitioners who can assist patients with routine medical visits on site. They currently operate nearly 800 clinics and expect to double that over the next few years.

If CVS can control more of the value-chain, profitability, customer loyalty and operating margins should continue to improve. Its not a secret that medical care in the U.S. is incredibly inefficient from an operational standpoint. However, that should change (for the patients’ benefit) if companies like CVS (who are operationally skilled) are able to expand into that part of the market successfully.

From a technical perspective, CVS is in an uptrend but has been pulling back in a narrow channel since the beginning of the year. This pattern is called a bull-flag and a breakout above the channel is a buying opportunity. Our short term target is the top of the flag at $72 per share. However, if this breakout follows the same pattern it did in 2013 and 2012, the longer term target is a measured move to $80 based on the run up to the consolidation in January.




CVS Caremark (CVS): Chart Courtesy of MetaStock Professional

As an alternative to an outright long position, call options on CVS are particularly attractive right now. Longer dated options have deflated in value as the earnings report was released and may offer a more attractive risk/reward profile for investors willing to make a leveraged trade.

Some of you, like myself, may want some exposure to Gold in your 401k savings accounts to gain from the potential rise in the asset class, but don’t have any Gold stocks or Gold commodity funds to select from in your company’s 401k plan. One thing that I do have access to invest in though, is Inflation protected Treasury bonds (TIPS). As it turns out, Gold and TIPS are very closely correlated assets.

See the chart below showing the 1 year performance of GLD vs. TIP

Notice that their movements are very closely tied. From a fundamental perspective, this tight correlation makes sense because they both rise when inflation is on the rise, and fall when inflation is dropping.

The Trade:
Go Long TIP @ 111.97
Targets = 114.30, 117.15, 121.77

Boeing’s stock price furthered it’s decline as the broader market endured a broad sell-off. Boeing eventually bottomed out at $119 per share, and as the market’s rallied off the lows, so have Boeing shares as the stock closed today at 130.16, higher than the day of its earnings disappointment.

Yet in news today (Feb 11), rumors out of Boeing had employees voicing doubts that the company can deliver on the expectations set by the company to deliver between 715 and 725 planes in 2014, including about 110 deliveries of 787 planes. A slower production rate of the 787 would imply even lower sales in 2014 than the company predicted back on Jan 28.

So let me get this straight, Boeing’s shares are higher today than they were on the day that Boeing announced there would be 110 deliveries of the 787 dreamliner in 2014, but we now know that it’s unlikely those 110 deliveries will materialize. Sounds to me like shares are mis-priced up here and that shares should be lower as the company’s sales and profits will probably miss the guidance the just gave us 2 weeks ago.

Technically, the stock’s chart sets up beautifully for a bearish put spread trade. With resistance to the upside between $132-$135, and support down at $120, we can set up a 130/120 long put spread that will help us profit if price drops to $120, yet buffer us from losses if the stock gets away from us to the upside. The CCI indicator has been trying to reach above the zero line surface, but I expect it to fall back below that level as price encounters resistance, and this would turn into a Bearish CCI Zero line rejection that would support a Bearish directional trade. Sell this rip in the shares by getting long this put spread.

The Trade:
Long the BA MAR $130 PUT @ 4.03
Short the BA MAR $120 PUT @ 1.04
Total Debit = $2.99

Take profits when the stock price drops to the short strike price