MorningWord 3/11/15: Cheesy Breakouts $CRM $KRFT

by Dan March 11, 2015 9:23 am • Commentary

You know you are gonna do it. At some point in the next few hours, or next few days, you are going to buy the dip.  And you know why? Because it has worked liked clock work for the last three years with the largest peak to trough draw-down in the S&P 500 only 10%:

SPX 3yr chart from Bloomberg
SPX 3yr chart from Bloomberg

I have no idea whether its gonna work this time or or not. At some point it won’t but the chances that this is that time are low. But there is one technical set up that is catching attention for potential long entries.  Last week I highlighted’s (CRM) massive breakout to new all time highs following better than expected earnings and guidance (Name That Trade – $CRM: Cloud Seeding).  For a quick update, the stock has since negatively filled in the entire earnings gap, and in my mind is setting up for one of two things depending on how deep the correction is in the broad market:

[caption id="attachment_51843" align="aligncenter" width="600"]CRM 1yr chart from Bloomberg CRM 1yr chart from Bloomberg[/caption]

The stock seems to be in the broad market’s hands right now. If we were to see a continuation of the current mini-correction (now 3.5% off of the all time highs) then CRM probably sees the mid point of the one year base it was in prior to the breakout, near $60.  If the market is going to find its footing and make new highs in the weeks/months to come, I would fully expect a re-test of CRM’s post earnings highs above $70.  But at this point, with the earnings news out of the way, the stock is in the market’s hands.

Cheesy Breakout

A similar but different failed breakout that caught my eye yesterday due to some unusual options activity is Kraft Foods (KRFT).  Yesterday, when the stock was $61.45 a trader paid .70 for 10,000 June 67.50 calls to open. These calls break-even on the upside at $68.20, up 11%, which happens to be a tad above the recent all time highs:

[caption id="attachment_51844" align="aligncenter" width="600"]KRFT 1yr chart from Bloomberg KRFT 1yr chart from Bloomberg[/caption]

The big difference here with CRM’s breakout to new highs is obvious. KRFT held and built on the gains for weeks, and has since given up the ghost and nearly round-tripped the 3 month move.  While the longer dated out of the money call buying is interesting from a sentiment standpoint, it is hard to know why any one trade occurred, maybe the trader is short and setting a limit order on the stock to buy on the upside, maybe the trader bought the top earlier in the year and is looking for a trade that would add leverage in the event the stock were to get back the prior highs. Who knows.  But if you are in agreement that $60 looks like a good long entry, buying June calls 11% out of the money is not the way to express a bullish view, the options market is saying there is a little less than a 20% chance the calls are in the money.

Regardless, these failed breakouts, with the stocks now approaching gap levels (no matter what the duration is in between the gap) is interesting to me. And these are the sorts of stocks we will look at for long entries once we feel the market finds its footing. We will be looking to buy near dated calls and selling higher strike calls at the prior highs, defining the range.