What’s Brewing at Starbucks (SBUX)

We’ve profiled and suggested trades in SBUX in July and just last week. We’ve stressed that this is a turnaround play with poor sales growth.

We normally avoid situations like this. Accelerating sales growth normally makes the difference between “a trade” and a worthwhile investment.

But the stock has done quite well for itself in spite of the lack of turnaround in sales. We think the market has been forgiving for two main reasons: clearly we are in a very bullish environment and founder Howard Schultz has returned to the helm. Under his previous stewardship the price of the stock soared into the stratosphere as SBUX became a household name.

But SBUX might just have a new trick up its sleeve to keep profits accelerating long after cost cuts can no longer propel earnings. Today the company is introducing their instant coffee product, Via.

We haven’t tasted Via. And frankly if we didn’t own the stock we wouldn’t be much interested. But that’s the point. Instant coffee is a product that a number of years ago left us, and we’re sure many others, with an impression of an inferior product best avoided. But according to an article in today’s Wall St Journal this is a $21B market. Given our push button, disposable world there clearly is a huge opportunity for a company that gets it right.

The company wouldn’t comment on the results of their test marketing, saying only that sales “exceeded expectations” according to The Journal. But this is the sort of thing we look for in any company whose stock we choose to invest in; the “new” that could drive sales, profits and the stock price. Even an old dog like SBUX can reinvent itself, like Apple (AAPL) with its iPod.

The company is introducing the product in time to encompass the entire fourth quarter thus there won’t be anything tangible in the third quarter earnings report. But should Via gain traction look for enthusiasm over it to drive the stock.

Randgold Resources Ltd (GOLD)

We're still believers in this stock. See our latest comment.

CREE (CREE)

Earlier this week CREE was one of the few stocks we suggested to watch for an intermediate term long. We feel this is a stock that could move to fresh 52 week highs in a continuing market uptrend.

In spite of our cautious stance toward the market at this juncture we like the early volume in the stock today and are taking a long as price passes resistance around $36.75 with a stop under the low of the day.

Be Vigilant

Today we've opined on our sister blog that we expect the recent correction could well deepen into September before being rescued by earnings season.

We could be wrong.

As such it behooves traders to be ready to capitalize on long opportunities should the coming bounce in the markets be more robust than we expect.

We have discussed a number of long possibilities of late. The ones we think are currently the most compelling are GOLD and GMCR.

Randgold Resources Ltd (GOLD)

We took a position in gold via the GLD ETF when it broke out but we neglected the miners, which had the better move. We suggested taking a position in the miners ETF GDX on the first pullback after the break out. We did this because we were unable to discern which miner would have the most favorable move.

Today it's clear that Randgold Resources (GOLD) has been the star performer amongst liquid, institutional quality mining stocks. As the price of gold has corrected the stock prices of miners have come in all the more.

This morning GOLD has gapped down to its 20 MA in what has thus far been a constructive pullback. It is attempting to turn there. We would buy the stock on a move over the high of the day at $69.57 and swap out of the GDX. Our stop will be a break of the low of the day.

50 MA Bounce Candidates (SBUX) (CREE)

If the market scores another ugly session we’re not interested in buying anything and will simply continue to manage, and likely prune, our portfolio of longs.

But if the market rebounds there are two stocks in particular that are on our watch list for long entry, both off their 50 MA’s.

Starbucks (SBUX) is a stock we previously profiled coming out of a pseudo “short stroke.” While not the world’s greatest trade it yielded 19% over two months. We feel it can do even better on another leg higher given the turnaround in progress at the company. Sales growth has lagged but a recovering economy should help that problem.

SBUX is pulling into its 50 MA for the first time since its break out move. Provided the market stays in an uptrend this is almost always a buyable event. We don’t like the volume in the stock yesterday, which smacked of distribution, but in a market that’s acting correctly we’d take entry on a reversal at or near the 50 MA. We’d like to see a robust volume bounce to justify holding the position.

Another stock in the exact same position as SBUX is CREE (CREE). Here’s a stock we haven’t profiled before. It gained over 25% after breaking out of a first stage base in July. CREE’s focus these days is on its commercial LED lighting products, which require far less power than traditional lighting and are thus well suited for our age. While earnings and sales have been spotty that’s changing as CREE hits the “sweet spot” of their product cycle.

CREE looks a bit better technically than SBUX, having already bounced off its 50 MA on volume.

Again, these are purchases for a healthy market. Odds of success are sharply reduced in a market that has lost its ballast.

Profit Taking Possibilities in FUQI and PWRD

In the column on our sister blog this AM we suggested lightening up on sluggish performers in your portfolio ahead of today’s Fed announcement. We’re looking at a couple of stocks of ours for trimming that we had entered earlier this month just as the current phase of the rally began: FUQI and PWRD.

The reason for our caution is that they are making limited headway on unappealing volume and have already touched their 50 MA’s twice during their uptrends. While the first two touches of the line are often buyable a third can be more problematic.

And the third is just what we’ve gotten with FUQI this week after the stock sold off in ugly fashion last Friday. The market’s ballast has lifted this stock substantially since then but done so on much lighter and declining volume. FUQI has more than sextupled during the market rally and not formed an interim base. Given the history of how stocks move and FUQI’s recent downside escapades in a rising market, we feel it is an excellent example of a candidate for your “lighten your load” list.

PWRD has yet to decline toward its 50 MA for the third time. But the break out to new highs earlier this month was on above average but unexceptional volume. Since that time the stock has traded lightly with several failed attempts at new highs. Unless the stock can firmly advance we’d consider taking profits.

Green Mountain Coffee Roasters (GMCR)

Read why we'd consider re-entry in the comments section of our latest write up on the stock.

Coinstar (CSTR)

We’ve previously profiled this stock and missed a superb trade in it. We do not like the way it has set up but it might shortly present entry. Given the fundamental outlook for the company we will buy it should the proper conditions present themselves.

What don’t we like? The stock’s Relative Strength is a laughable 55. And the line itself is sinking. Also, while there actually seems to be more accumulation than distribution in the base we can’t say we’re in love with the volume profile. Finally, it’s at least a few days away from the full seven weeks you’d like to see a pattern like this encompass.

But we’ve spoken about how CSTR has delivered on their estimates. And they have forward projections over the next two quarters that would score year over year EPS gains of 56% and 100% on year over year sales gains over 35%. And now this morning an analyst has published even higher estimates for the balance of this year and next. That could well serve as an immediate catalyst for the stock.

And we like how no one is following this stock. It barely gets any notice. The sector favorite seems to be Netflix (NFLX), which has decelerating earnings and sales.

CSTR’s pattern is a double bottom. The earliest buy point we would consider would be on O’Neil’s “Shake Out Plus Three” rule that states to buy a stock emerging from this kind of a base if it passes on volume about $3 higher than the first leg of the base. That would be about $33.20. As the stock trades about 840,000 shares a day we’d like to see daily volume at no less than 1.2MM shares on this move. A secondary buy point would be the more traditional break over the mid-point of the W pattern at $34.80.

As always we’d look to employ a 5% stop.

Warner Chilcott (WCRX)

On August 24th Proctor & Gamble (PG) agreed to sell their pharma division to WCRX. This is a terrific move for both companies.

PG’s pharma unit was too small for this giant company and the ongoing political tantrums in the healthcare sector make it a problematic division that could take PG’s focus off of more important areas.

For Ireland based WCRX, however, this is a unique opportunity to greatly expand the footprint of the company by expanding into new markets and acquiring new products.

We’re bullish because this looks like a terrific deal and private lenders are stepping up for the first time in over a year to help finance an acquisition.

WCRX is paying PG $3.1B and will borrow the entire amount. But the cash flow from PG’s pharma unit should pay down the loan by itself within about five years.

And the price tag represents only about half the PE of WCRX itself. Investment bank Jefferies feels that the deal will be accretive to FY 10’s earnings by at least $1.55 per share. WCRX’s estimates are currently at $1.82 per share for next year. Jefferies therefore sees at least $3.37.

Technically we wish price had traded in a tighter range these last few weeks. The stock had moved over 17% off its highs at one point, a bit steep for out taste given this setup. But we like that price is turning off the 20 MA and would buy over Friday’s high with a stop below $18.50.

Fuqi International (FUQI) followup and buy or sell setup

When the current market move began one of the stocks we recommended taking a position in was FUQI.

Price was bouncing off its 50 MA for the second time during its uptrend. That's usually a buyable event.

The stock made progress but stalled this week. Today it has endured high volume selling although it's trying to find support at its 20 MA.

We wouldn't want to be long FUQI should it correct further from here. And if price closes at the $28.30 level where it stands in late trading it would represent an ugly week and portend a correction. Also, after a second bounce off the 50 MA a stock tends to get tired and less reliable. Even a rocket ship like FUQI. It could well enter another base, especially given how elevated its been above its 200 MA.

But there's another possibility for FUQI this afternoon. It could bounce back and that would be a buying opportunity.

Price has bounced off its bottom and formed a perfect cup with handle on the 5 min chart. A look at the 15 min is interesting. When a stock's rebound attempt is going to fail it is usually turned back at the 20MA, but FUQI has "slipped" past it and the 20 MA is starting to turn higher.

Anything can happen on an options expiration Friday, so we urge some caution. But a break out of this range on the 5 minute chart could be rewarding.

Is STEC Inc (STEC) a Buying Opportunity?

STEC Inc (STEC) is a classic winning stock. It has everything you look for in an investment that can make you a boat load of money, the most important of which is a new idea and a competitive advantage built around that idea.

But sooner or later the stock exhausts itself. It reaches the limits of its opportunity or someone comes along to build the mousetrap a better way or perhaps builds a completely different mousetrap that displaces it.

But before that happens the price of the stock will factor in every possible prospect for the company’s product at the highest attainable multiple. Investors will pay up for growth and will pay up well beyond what is reasonable. This is the way the market works and astute investors use it to their advantage.

Today STEC got hit on a downgrade questioning the sustainability of its competitive advantage. Sooner or later STEC will lose its technological lead. The prospect raised today is that it will happen much sooner than the market has priced in.

The stock is suffering severely. Many investors who have massive profits are cashing out. And then there are the latecomers: people that don’t understand the rhythm of the market and bought wrong. They are scurrying for cover, selling to stronger hands, begging to be relieved of their pain.

Should you oblige them?

History says yes.

While Mark Twain told us that history doesn't repeat but it often rhymes, what does repeat and is unchangeable is human nature. People didn’t have any different tolerance for risk and yearn for reward than they did 20 years ago or 2000. And for that reason we can consult charts of winning stocks from earlier times for clues about how STEC might act from here.

First, we have to define what the market is doing. It is in a clear uptrend. Based on its behavior the last few weeks that is unlikely to change soon. It could well go through a consolidative phase but the odds of the uptrend ending quickly at this point are low. That’s important to understand because if the market were peaking we would view STEC as a short, kicked off by a hideous downside gap through the 50 MA on massive volume.

With the market in a continuing uptrend we view STEC differently. The company has not reported any news that is adverse to its earnings or competitive position. And the downgrade itself specifically says that earnings are not threatened and indeed likely to continue accelerating in the short term.

Charts of past winning stocks tell us that stocks that look like STEC, with their blend of fundamentals and technicals, often peak in a "supernova" move higher O'Neil calls a climax run. That occurs after a longer time than STEC has been on the move and we haven't seen action resembling that yet in the stock.

We don’t dismiss the possibility that the stock could bounce back reasonably quickly from here. This is only the second time the stock has come anywhere near its 10 MA weekly and O’Neil's studies indicate stocks are often buyable for snap backs on their first two revisits to this line.

But the power of the downside move, the stock’s inability to rally back and the breadth of its gain since its May break out just above $10 a share suggests to us that the stock is likely to form a base here; a period of consolidation lasting perhaps six weeks or longer.

So should you open a position today? We would and did. Because the stock could well move lower during its correction and might be “dead money” for longer than we would like we took only a one-third share. We would use a 5% stop enabling us to reassess the validity of our thesis without the pressure of being long should price continue to move against us.

Should we not be stopped out we’ll look to build the position as price recovers. That could mean we’ll add tomorrow or weeks from now. Even should we be stopped out we will be following this stock closely. It's been the market's true leader and, history argues, will continue its run. Stay tuned.

Netease.com ADR (NTES)

We're no longer so enamored of this stock. We reentered earlier this month and exited in deference to PWRD, which appears to have taken over leadership in the space. We didn't like how NTES moved back above resistance on such light volume.

But yesterday NTES bounced with authoritative volume off its 50 MA and so we came into today's session intrigued. After all, NTES has been a leading stock. It's major technical problem is that it has come a very long way without stopping to form a proper base to recharge. Even now the formation it is trying to break out of is only in the midst of its seventh week. And its relative strength line is lagging.

Despite all of this we are unwilling to ignore what has been a powerful stock at a key resistance point. We are thus taking reentry in this stock this AM north of $45.50 as price moves back above a downtrend line that connects the August and September highs. We suggest using a stop below $44.

An Assessment of Our GMCR Trade

We've got a gain in this suggestion from late last week but we're not certain it's a continued hold.

Check out the comments section underneath the original post for our suggestion on how to manage this position.

Entry Set Up for ARST

We previously profiled this stock, but were a bit late to the game and couldn't recommend entry.

Now we can. Check out the comment below our original write up from last week.

Dendreon Corp (DNDN)

We’ve previously profiled this stock.

We attempted an early “Shakeout Plus 3” entry from the double bottom base and got, well, shaken out!

But the pattern has held up and only become more compelling. The argument can be made that there isn’t any aggressive accumulation in the base, but neither is there distribution. Bear in mind the stock ran from under $3 and has seen the number of mutual funds holding it vault from 43 to 106 in just one calendar quarter. The orderly low volume move sideways is bullish enough for us.

And the daily shows a high volume bounce off the second bottom and a close that day in the upper half of its range. Clearly the break of support only brought in those on the sidelines hoping to get in at any kind of a discount.

The base is now a 14 week double bottom with handle, and the handle is bullishly three weeks tight, meaning that it has closed virtually unchanged on the weekly chart for three consecutive weeks. O’Neil argues that handles should trend lower, insuring a shake out of weak holders. He claims that handles that go sideways or wedge higher are faulty. By definition a three weeks tight handle would seem to violate O’Neil’s rule. But the daily shows the handle trending lower, indicating that it provided the required shake out.

The trend line connecting the June and August highs will be somewhere below $25 during Monday’s trading. We’d be buyers of any high volume move over this line, enabling slightly earlier entry than a break over the highs of the handle at $25.10.

Green Mountain Coffee Roasters (GMCR)

We’re taking a half position in this stock into the close as it crosses back over its 50 MA on a surge in volume. We’ll require a close above the 50 MA ($62.07) to justify holding the position.

Why the renewed interest in this stock? We previously profiled it and entered a long position expecting big things but were disappointed. The last earnings report met a mixed market reaction and the company’s offering of new shares threw the stock into a correction.

A stock with this kind of volatility is not a good hold, no matter its prior accomplishments.

But GMCR has now put in a six week consolidation in what is a developing second stage base on base and this afternoon’s performance could indicate that it is prepared to resume its uptrend.

GMCR’s consolidation has so far been constructive. What most strikes us is that the two weeks of high volume in the base consist of one week where price closed virtually unchanged and another where price ended in the upper half of its weekly range, both signs of support. Trading along the bottom of the base tightened up over the last two plus weeks. And this afternoon price is mounting a move on expanding volume back over its 50 MA.

We are taking a half position because we view this as only an early action point. We want to see price build the right side of the base on volume and hold those gains. If it does that over the next week or longer only then we will be interested in adding to our position.

A Rotten Apple (AAPL)?

When the market rebounded in mid-July AAPL began a healthy move higher. The week of July 24th saw the stock trade on high volume, a sign the rally had legs.

Last week marked AAPL’s 8th straight up week in a row, but gains had slowed to a crawl for a number of weeks and volume had been evaporating. Until yesterday.

Yesterday AAPL traded significantly above its 50 day volume average for the first time in about 7 weeks. Volume was almost double average in fact, and the stock was down about 1% on an up day for the market, although the stock finished well off its lows.

Now this morning the stock has already traded more than half its daily volume average and price is making little progress. Going nowhere on suddenly elevated volume is a sign of churning and smart money selling under cover of retail demand for a popular stock.

Unless AAPL can move definitively higher in the very near future we’d venture to say the stock might be topping.

We don't advocate shorting in a bull market. It is generally an unrewarding affair and there are usually better gains if one is well positioned long in the correct stocks. But AAPL is a significant enough leader in the current rally that we believe it should be monitored as part of your overall market evaluation.

Should AAPL indeed top it doesn’t have to be a bad sign for the market. In fact if interpreted a certain way it could be a good one. AAPL has had slowing growth for some time yet has made a shocking move off its March low. That could be because money managers wanted to participate in the rally and not seeing growth elsewhere might have viewed AAPL as a safe haven. With signs of recovering growth abounding there are suddenly far more investment choices. Money might be pouring out of AAPL as the taste for risk intensifies.

Whatever the reason, if we were long AAPL we’d have our caution antennae out.

Market Vectors Gold Miners (GDX)

We are taking a position this morning in GDX, the broad ETF that covers the gold mining industry.

Let us be clear: we HATE equity ETF’s. It is far better to invest in the underlying stock that is the best performer. ETF’s are dragged down by the laggards in their sector.

But we will admit to having a poor performance in picking gold mining stocks. Fundamentals often don’t work and relative strength can be an after thought. Thus we are admitting defeat and surrendering to the ETF craze in this instance.

We are pleased that we did so well entering our gold position (GLD). And we do not regret not entering a trade in gold miners. The two do not always advance together.

But as gold made a 5% move the respective miners soared 22%. Over the last two days both sectors have corrected hard, as you would expect from a hot sector whose outperformance is known by cab drivers and waitresses. Both GLD and GDX have corrected about 3/8 of their move, a perfect bullish Fibonacci retracement.

This morning with GDX dancing around its 5EMA we are taking a position at the market (stock trading around $44.25 as of this posting.) The 5EMA often serves as a “support” level for stocks with strong break outs like this one. Our stop will be the low of the day. Simply stated if price cannot hold this area gold and the miners might be in for a more severe correction and we will seek reentry at another point.

But given the move we have seen we believe the aggressive approach is the correct one. We are thus adding gold miners to our gold holding.

Solarwinds (SWI) threatening to break loose

We previously profile this stock. Today volume is mounting as it creeps upward. For those with an eye on the stock (it's a bit too thin for us) this would be the place to take an initial position, around $19.50 with a stop below the 50 MA. We'd look to add should a high volume move towards the highs ensue.

We're exiting NTES

The clear leader in the Chinese gaming space these days is PWRD. NTES' bounce has been low volume and uninspired. In a continuing market uptrend NTES no doubt sees new highs. But PWRD is already there, with the volume trail to prove its leadership. We'll divert these funds into another leading stock.

Intuitive Surgical (ISRG)

Here's another position we are entering this AM as it breaks through the downtrend line connecting the August and September highs. We're taking a half position at the market and will add should price pass the mid-point of the W. Our stop is below $230. More details on the play to follow.

Arcsight (ARST)

This company is a niche provider of security software. With cybersecurity a major concern it’s been a very profitable one at that.

We discussed ARST in one of our recent Market Commentary blogs. We provide the link so that you might review our comments. Suffice it to say our instincts on the break out have thus far been wrong. The market is ignoring the projected slowing growth and sending the stock smartly higher. That’s important because a new upleg in the market could be starting. As a stock that launched prior to the new upleg ARST stands to be a significant gainer if the market uptrend has legs.

ARST is a bit too thin for us but we discuss it here because of the pattern. It’s breaking out of an Ascending Base, which is a powerful formation.

An Ascending Base forms when the market is choppy, like it’s been the last few months. Rather than succumb to a wholesale correction the stock has the strength to march higher in spurts. Ascending Bases last nine to 16 weeks (ARST’s lasted exactly 16) and are notable for their three brief cup shaped bases. You can see them on a daily chart of ARST, from May 6th through June 1st, June 4th through June 15th and July 20th through September 3rd.

Traders often give up on these patterns because they are choppy and thus trigger stops maddeningly frequently.

But charts of previous Ascending Bases show that the break out from the third cup can be the charm. If a stock that moves an average of only $14MM a day is not too thin for you, ARST could be a buy on a constructive pullback nearer its $20.80 buy point.

Entering New Positions

We are entering a number of positions this morning as the Shanghai Composite appears to have followed through and a number of stocks are breaking out of constructive formations, giving us the confidence to pursue them for intermediate term holds.

BIDU is breaking above a trend line.

AAPL is breaking from a three weeks tight pattern.

FUQI is bouncing off its 50 MA.

GS is breaking out of a stunning weekly chart base.

PWRD looks set for a break to new highs.

NTES is reversing its downside reversal from mid-August.

We might have others later but the above are all buys with 5% stops.

We intend to profile each stock when time warrants.

Solarwinds Inc (SWI) added to our universe of potential longs should the rally resume

There are a number of reasons for us to shy away from this stock.

It is extremely thin with a 50 day trading average of only of $9MM a day. We normally look for at least $30MM before we get involved.

The float is only 5MM shares in a universe of 65MM shares. This small float is likely to make for volatile trading. And the large number of shares locked up is likely to only increase the size of a secondary offering on a significant rally after the lockup expiration on November 20th.

But SWI is a new issue that is not yet a well known story. Over time these technical objections can be overcome with increased interest in the company if it proves itself as a growth vehicle.

Another objection we have is that the company is very small and singly focused in a sea of larger and more diverse competitors. Thus far it has made its name by selling a less expensive and more nimble platform than its competitors, but it’s not as if SWI has a sustainable competitive advantage.

Of course the flip side of this is the company could well be a takeover candidate. We saw what can happen when big fish in an industry compete over a desirable niche player recently when EMC (EMC) and Netapp (NTAP) drove up the price of Data Domain (formerly DDUP) in an effort to keep it out of each other’s grasps.

But all of this begs the point. SWI garnered our attention Tuesday because of the way it acted in a horrible market. It traded lower early but bounced off its 50 day MA on very high relative volume, ending nearly unclosed on the day.

A look at the weekly shows constructive trading. While the weekly ranges are bit wider than we’d like to see, likely a reflection of the small float, note how the closes the last four weeks are tight. That indicates demand and support for the stock.

SWI beat and raised at their first report as a public company. They have year over year projections for 36% and 77% EPS increases on 12% and 32% sales increases, respectively.

SWI is not a buy during a market correction. But we’ll be watching to see if it continues to trade constructively as the correction continues. For now it’s in our universe of possible future investments.

Vistaprint (VPRT)

We previously looked at this stock as a long. It never panned out. Given that the market is in a correction this stock, which has carved out a price top over the last few months, is a swing short candidate.

Yesterday price broke down from its formation on huge volume and closed at its lows. This is a sign of likely lower prices ahead.

This morning price is bouncing reflexively with the market on much lower volume.

We would enter a swing sort on this rally with a stop at $41.50.

Should the market correction intensify we believe price could have a rendezvous with its 200 MA.

Trades Update

If you follow the market commentary in our companion blog then you know we have suggested not entering fresh long trades and been urging nailing down profits in stocks given increased distribution on the indices.

Today’s market action is hideous and confirms that a correction is underway. That means you should exit all long positions except for perhaps very big winners that continue to hold up. Just bear in mind that should we be in for a significant correction even stocks with outsized gains in robust uptrends will come under pressure at some point.

The only long trade we would consider at present is in gold, which we posted as a watch last week. Gold is a commodity as opposed to an equity and could very well trade higher even in a market correction. We are somewhat doubtful that it will given that gold and the US Dollar tend to trade in opposite directions and during a correction we would expect the dollar to rally on a “flight to safety” trade.

Depending upon the caliber of the correction we might have swing short suggestions on this page in the coming days. And of course we will regularly post market commentary on our companion blog.