Option Investor
Newsletter

Daily Newsletter, Wednesday, 10/1/2014

Table of Contents

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

Market Wrap

The Growling Bears

by Keene Little

Click here to email Keene Little
The recent volatility warned of a big move coming and the likely move was to be down. Today's decline did some technical damage as support levels snapped like little twigs, but the bulls can't be discounted yet.

Wednesday's Market Stats

Following a period of very low volatility in price movements we started to get much greater price swings in the past week and that's usually a sign of instability. At market lows we usually find v-bottom reversals but at tops there's more of a battle and that battle shows up in more violent price swings. For this reason it's usually a good sign that a more serious decline is right around the corner. It doesn't tell you how long the decline will last but it's at least a short-term warning.

We now have a stronger decline and many are wondering if this is the start of the "big" one. It's too early to tell but the break of solid support levels certainly has raised the fear level (and put buying). The VIX is shooting back up and short-term we could have a setup for at least a bounce. Only by watching what kind of bounce we get (if we get one) will we then get a better idea for what might follow. As I'll get into with the charts, there are some interesting patterns that point both ways, which doesn't help us in the short term but the evidence from the price action in the coming days should give us some very good clues to tie in with what I'm seeing currently.

Today's economic reports started off with the ADP Employment change before the market opened, which was slightly better than expected for September and slightly better than the August number. Equity futures got a little bounce out of the report but it was short-lived as the sellers hit the tape as soon as the opening bell rang. With very little geopolitical or economic news to discuss I'm just going to jump into the chart review.

I'll start tonight's review with the RUT since it's at an interesting level with today's decline. Since first reaching 1080 in September 2013 that level has acted as support -- in November 2013 and then in February and May this year (near 1082.50). It's now back down for another test with this afternoon's low at 1083 and if I were bullish the stock market I could make the argument that we're seeing the completion of a 3-wave pullback from July, which is setting up the next rally. A strike against the bulls here is the fact that the test of 1980-1983 is not showing bullish divergence, as noted on the weekly chart below, which I would expect to see if a new rally leg was setting up. The bearish wave count says the July high has been followed by a 1st and 2nd wave and we're into the 3rd wave down. I show a bearish wave count (in bold red) down to the 200-week MA by December, perhaps near 930 by then, and then a strong bounce back up into the new year before the larger 3rd wave down sets up in the first quarter.

Russell-2000, RUT, Weekly chart

As for the bullish potential for just an a-b-c pullback from July, the leg down from September 3rd would be the c-wave (instead of the start of the 3rd wave). The start of the decline from September 3rd is ugly (corrective) but I could argue the move down from that high completed its 5th wave today (or will consolidate for a few days before making a 5th wave low). One thing supporting the a-b-c pullback idea, if the RUT is able to hold above 1077, is the fact that two equal legs down points to 1077.61, which is very close to the price-level support near 1080. This projection crosses the bottom of a parallel down-channel from July tomorrow, which can be seen on the daily chart below, and with the daily oscillators oversold it's not hard to see this as a bullish setup.

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- bullish above 1164
- bearish below 1077

If the 3-wave pullback from July is a bullish pattern we're now close to starting a large rally into the end of the year. If it's a bearish pattern we'll get a relatively high bounce in the next couple of weeks to complete another smaller-degree 2nd wave correction (shown in red on the above chart) before starting a more serious decline. The other indexes do not match the bearish pattern but they do support the potential for at least a high bounce, if not the start of a major rally, so bears need to be cautious here.

There's an interesting fractal pattern that deserves the attention of bears as well (as a warning sign here). As can be seen on the S&P e-mini futures (ES) daily chart below, since the December 2013 high we've had 4 times where the high was exceeded with a minor new high with bearish divergence (lower highs on RSI). Each of those cases led to a break of the 50-dma and a test of the uptrend line from November 2012 - February 2014 (obviously the first instance, with the February low, created the uptrend line). The test of the uptrend line then led to the start of the next rally back above the 50-dma and to a new high. Will we get another rally out of this setup?

S&P 500 e-mini futures, ES, Daily chart

The fractal pattern noted above suggests we should buy support here for another rally into the end of the year. The bearish pattern is a 3-drives-to-a-high following the initial December-January high, which is a setup for a major reversal. The test is on here -- the bulls want support to hold and a strong rally to follow. If we get several days with white candles, like the previous 3 times, get ready for new highs. But if we get a bounce followed by new lows, get ready to rumble to the downside.

On the daily SPX chart below you can see the same fractal pattern at the July and September highs as noted on the ES chart. Not shown on the chart are the Fib projections for the 2nd leg of the pullbacks from the initial highs (wave-c of an expanded flat correction off the initial high). Following the July highs the c-wave was 262% of the a-wave. The same projection for the leg down from September 19th points to 1934 so a decline below that level would be further proof that this time it's different but until then we have to consider the bullish potential here. Obviously what's bearish today is the break of the uptrend line from November 2012 - February 2014, near 1953. But a 1-day break could easily be a head-fake break.

S&P 500, SPX, Daily chart

Key Levels for SPX:
- bullish above 2000
- bearish below 1950

The 60-min chart below shows some idea for what might follow, all of which assume today's low (or a minor new low Thursday morning) will hold for at least a few days. The very bearish wave count (nested 1st and 2nd waves, shown with the light red dashed line) calls for a relatively sharp bounce back up to perhaps price-level resistance near 1966, completing by Thursday afternoon, and then a very sharp and strong selloff to follow (to unwind a series of 3rd waves). The next bearish count (bold red) says we'll get a choppy sideways correction that could stay below the broken uptrend line from November 2012 and then another leg down to complete a 5-wave move down from September 24th (to complete wave-3). The bullish pattern (green wave count) would look best with a bounce and then another new low before setting up the end-of-year rally but that one's a challenge because of the corrective wave count. Each suggests a bounce from here and then lower before potentially setting up something more bullish but it will be the bounce pattern (assuming we'll get the bounce) that will provide more clues about what should follow.

S&P 500, SPX, 60-min chart

The DOW fought to hold price-level support and its 50-dma, at about 16930-16950, since first testing it on September 25th. That support level snapped quickly this morning and there was no real effort to bounce back above it. A minor bounce off this morning's low gave us a back-test of the 50-dma but that was followed by a bearish kiss goodbye or another 150-point drop. Not a good day for the bulls but the bears are feeling pretty good. Other than the break of its uptrend line from October 2011 - November 2012 (log scale whereas using the arithmetic scale the uptrend line from November 2012 - February 2014 is near the same level), the other bearish thing I see on the daily chart below is MACD has now dropped below zero. For a few days I was wondering if support would hold and MACD turn back up from the zero line, which would have given us a buy signal. Hasn't happened.

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- bullish above 15,860
- bearish below 15,530

Resistance to a bounce for the DOW is now the broken uptrend line (lines, depending on scale used) and price-level S/R at 16930-16950. Watch for a back-test/bearish kiss goodbye if tested. I show how a 5-wave move down might play out this month for a drop down to price-level support near 16330. This is obviously speculation at this time but I wanted to show downside potential for those sitting in bullish October options positions. The bearish wave count is in a position where bounces from here to there could be only small ones.

Not shown on the daily chart is the longer-term trend line along the highs from 2000-2007, which is near 16835. Both support lines were broken into the August lows, by a wide margin, and yet the index came roaring back and went on to new highs anyway. Whether that will happen again is anyone's guess but usually a 2nd break of support is the real deal (the 2nd mouse gets the cheese).

Patient and prepared mouse:

NDX broke price-level support near 4050 and its uptrend line from April-August on September 25th but held above its 50-dma near 4015 for four days before breaking it today. On the bounce back up it back-tested the price-level S/R, its broken uptrend line and its broken 20-dma (yesterday) and then left a bearish kiss goodbye with today's selloff. It stays bearish below 4010 and it won't turn bullish until it gets back above Tuesday's high at 4070.

Nasdaq-100, NDX, Daily chart

Key Levels for NDX:
- bullish above 4070
- bearish below 4010

Keep an eye on the semiconductor index here. We know it has a large influence on the tech indexes but it's also an important barometer for how traders are feeling about the market in general since it's a very good indicator for the health of the economy. Many weeks ago I had pointed out a price target for the SOX at 656.57, which was based on an A-B-C bounce pattern off its November 2008 low where the two rally legs (wave-A and wave-C) would be equal. The July high was near 652 (not quite there) and the September high was near 659, which rang the bell. The bounce correction off the 2008 low can be considered complete at any time but better proof would first come with a break below 620 -- it would get back below the 38% retracement of the 2000-2002 decline, near 624 (you did realize that's all the bounce amounted to, right?), and its uptrend line from November 2012, which would help identify the conclusion to the c-wave. So watch carefully what it does since it's still inside its up-channel and therefore still potentially bullish.

Semiconductor index, SOX, weekly chart

A few weeks ago I thought bond yields were ready for a rally to correct the decline from January into the August low. We got a strong bounce into the September 17th high but bonds rallied again and yields have dropped back down toward their August lows. The setup looks good for another leg up to complete a larger a-b-c bounce correction, as shown on the TYX weekly chart below, before heading lower into next year. If TYX instead drops from here and makes it down to the bottom of its down-channel from January, currently near 2.92%, it would create a setup for a much higher rally in yields but as long as a test of the low, or even a minor new low, is with bullish divergence I'll be looking for a relatively quick bounce into early November before we'll get a stronger decline in bond yields (flight to safety as the market does the real work without the Fed's "help").

30-year Yield, TYX, Weekly chart

Last week I showed the weekly chart of TRAN to point out the setup for a top of significance. It has wedged itself up into the top of a rising wedge for price action since 2010 and had achieved a price projection at 8591 for an a-b-c move up from October 2011 (the c-wave is 262% of the a-wave). Today it got slammed to the downside right out of the gate this morning (I haven't taken the time to find the guilty stock that caused the selloff in the sector) and it broke its uptrend line from June 2013 - February 2014, near 8334. It had been holding up at its 50-dma, near 8390, but that was one of the support levels that were snapped like little twigs this morning. The move down from Tuesday looks like completed 5-wave move and we should therefore get a bounce on Thursday but watch for a back-test of support-turned-resistance. It takes a rally back above 8400 to tell the bears to back off.

Transportation Index, TRAN, Daily chart

The screaming eagle, otherwise known as the U.S. dollar, is showing no signs yet of letting up on its rally. While each white candle on the weekly chart below is not that large, this has been a very long streak of steady weekly gains since July, the longest since March 1967 according to Bloomberg It is poking above the trend line along the highs from July 2012 - July 2013, near 85.91, and if it holds above it we'll likely see a rally up to the downtrend line from March 2009 - June 2010, currently near 86.90. This puppy is due for a rest.

U.S. Dollar contract, DX, Weekly chart

The screaming dollar has had the opposite effect on commodities, including the metals, although gold hasn't reacted as negatively as one might expect. A lot of the strength in the dollar has to do with relative value. All countries are in a race for the bottom as each takes care of its own needs and each is attempting to devalue their currency to make their own goods more competitively priced in the global market. But the U.S. is currently one of the best of the weak with a fairly stable economy and very little social strife. The U.S. is safe.

Gold's price is negatively affected by the rising dollar but it's more or less an emotional metal (other than hard needs for jewelry and electronics) and those who fear inflation (with the debasement of fiat currencies) buy gold. The trouble for gold is that more and more investors are starting to talk seriously about deflation, which is bad for things like gold (and most other asset classes). Silver, because of it industrial value as well as currency value, has really taken it on the chin but gold still has a chance for a relatively large bounce before heading lower.

As I've been showing for gold, and there's been very little change in the past week, two equal legs down from March is at 1194.40, which coincides with the bottom of a potential sideways triangle off June 2013 low. If it drops below 1194 there will be immediate downside risk for gold bulls. But I continue to see the potential for a rally up to about 1325 this year before heading lower next year.

Gold continuous contract, GC, Weekly chart

Silver has already broken down from its equivalent sideways triangle (a descending triangle with a flatter bottom) and has downside potential to 12.18 (height of triangle, projected from the bottom of the triangle) and certainly to price-level support near 14.65. But it could be due for a bounce now that it has tagged, and held, its uptrend line from 2003-2008 with Tuesday's low at 16.85. The bottom of the triangle, near 18.60, should now be resistance if back-tested.

Silver continuous contract, SI, Weekly chart

Oil has been chopping sideways for the past few weeks, which has it looking like it could drop at least a little further before attempting a bounce. Two equal legs down from August points to 86.73, close to an uptrend line form October 2011 - June 2012, which could be the bottom of a bullish sideways triangle off the May 2011 high. But I think oil's picture is bearish and until proven otherwise I'm thinking bounces are to be sold.

Oil continuous contract, CL, Weekly chart

Thursday's economic report include Factory Orders after the opening bell and the report is expected to show a sharp reversal off July's +10.5% into a -9.3%. If it's not worse than that it might be enough to spark a relief rally.

Economic reports and Summary

One more chart to highlight the reason I think bears need to be careful since we have another reason for the dipsters to ply their trade here. Since June 2012 each time the VIX has hit its 200-week MA it has pulled right back down, with a rally in the stock market of course. You can see on the VIX weekly chart below it has happened 7 times since June 2012, this being the 7th time. Whether this will result in the same kind of pullback, with a new market high to follow, or if instead it will be different this time, we'll only know the answer in hindsight. But just as the fractal pattern that I showed on the ES and SPX charts point to the potential for a new rally, so too does the VIX chart. Bears need to watch carefully and don't get complacent thinking "this is finally it!"

Volatility index, VIX, Weekly chart

There are several technical pieces in place to strongly suggest an important top is in place, and there's significant downside risk (hear that bulls?) as market crashes come out of oversold and we've had the requisite warnings from things like the Hindenburg Omen (last week). But the fat lady hasn't sung her song yet and therefore both sides need to exercise caution here. In the past week especially, each day the next higher-probability move has changed and the market could flip the bears on their heads again now that many longs have been stopped out of their positions. Important support levels were broken today but 1-day breaks don't count. It's better for the bears if we see 2-day and 3-day breaks to confirm it's real, which would be especially helped with back-tests followed by bearish kiss goodbyes.

There was heavy put buying today as investors started to fear what kind of pullback we'll get. The market is on the edge here and could easily fall off, leading to a much stronger decline than most market participants are expecting. But the price pattern still supports the idea that we've had just another pullback that will lead to the start of yet another rally, one that will take us to new highs in November-December. Keep trades short-term, take profits (losses) early and quickly while we wait for the larger direction to identify itself. The bull-bear battle is heating up. Trade 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 Option Plays

Testing Support

by James Brown

Click here to email James Brown


NEW DIRECTIONAL CALL PLAYS

iShares Russell 2000 ETF - IWM - close: 107.80 change: -1.55

Stop Loss: 106.35
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 36.8 million
Entry on October -- at $---.--
Listed on October 01, 2014
Time Frame: 8 to 12 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
Buy low, sell high. That's the traditional form of investing boiled down to its essence. The challenge can be the buy low part. Market pundits like to say buy when everyone else is selling. That was definitely the case today with the entire market in sell mode. All the major U.S. indices were down more than -1.3%. The only bright spot seemed to be utilities, which investors were using as a safe haven trade.

People were blaming a parade of negative headlines behind the market weakness. The day started off okay with a better than expected showing in the monthly ADP Employment change report came in at +213,000 new private-sector jobs in September. That was above estimates for +205K. Unfortunately the U.S. ISM manufacturing gauge dropped to 56.6 when economists were expecting 58.2. Germany's PMI slipped into negative territory (below 50.0) for the first time since June 2013. Then there were all the headlines about the first official case of the Ebola virus in the U.S. and how many people the infected person may have exposed before being quarantined in the hospital in Dallas. The market is made up of people and people tend to be irrational. A widespread outbreak of Ebola in the U.S. is extremely unlikely but it makes for great headlines on your TV screen.

The small cap index and ETF are in correction territory. IWM is only down -5.2% year to date but down -10% from its June closing high near $120. Make no mistake - the daily and weekly charts for the IWM look bearish. If this sell-off continues it would paint a very ugly technical picture. However, the IWM is short-term oversold and due for a bounce. If you were going to bet on a rebound then buying at support is the place to do it. That's why we are proposing tonight's trade.

I do consider this a more aggressive trade since normally when you try to catch a falling knife you get hurt. We're suggesting a trigger to buy calls on the IWM at $108.35 with a stop loss at $106.35.

Trigger @ $108.35

- Suggested Positions -

Buy the DEC $110 call (IWM141220c110) current ask $3.02

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

Daily Chart:

Weekly Chart:


Cheniere Energy, Inc. - LNG - close: 78.05 change: -1.98

Stop Loss: 76.35
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 2.5 million
Entry on October -- at $---.--
Listed on October 01, 2014
Time Frame: 8 to 12 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
According to LNG's website, Cheniere Energy, Inc. is a Houston-based energy company primarily engaged in LNG-related businesses, and owns and operates the Sabine Pass LNG terminal and Creole Trail Pipeline in Louisiana. Cheniere is pursuing related business opportunities both upstream and downstream of the Sabine Pass LNG terminal. Through its subsidiary, Cheniere Energy Partners, L.P., Cheniere is developing a liquefaction project at the Sabine Pass LNG terminal adjacent to the existing regasification facilities for up to six LNG trains, each of which will have a design production capacity of approximately 4.5 mtpa ("Sabine Pass Liquefaction Project"). Cheniere has also initiated a project to develop liquefaction facilities near Corpus Christi, Texas. The Corpus Christi Liquefaction Project is being designed and permitted for up to three LNG trains, with aggregate design production capacity of up to 13.5 mtpa of LNG and which would include three LNG storage tanks with capacity of approximately 10.1 Bcfe and two berths.

Why is Cheniere's ability to turn natural gas into liquefied natural gas (LNG) important? Natural gas has to be turned into LNG to be transported. The oil and natural gas boom in the United States, thanks to technology and hydraulic fracturing rigs that access tight oil in shale rock formations, has generated a huge supply. Right now the price of natural gas in the U.S. is less than $5.00 per million British thermal units (BTUs) or mmbtu. In Europe the cost per mmbtu is over $10.00 and in Japan the cost is almost $16 per mmbtu. There is a huge opportunity if producers can export natural gas to these markets. Unfortunately, building an LNG terminal that can export natural gas is a massive undertaking. It takes years to build them and there is a very long permit process from the government. Cheniere is quickly becoming the major player in this space in the U.S.

Cheniere recently moved one step closer to a FERC approval on the Corpus Christi LNG facility. The Federal Energy Regulatory Commission draft review said the project will result in the permanent loss of more than 25 acres of wetlands, but measures Cheniere plans to take will minimize any further disturbance. FERC will take public comments until August 4th and then issue a final review by Oct 8th.

They are building the largest LNG facility in the U.S. and it takes time. They are building six trains with annual production of 4.5 million tons per annum each (MTPA). Trains 1&2 began in August 2012 and are 63% complete. First production is expected in late 2015. Trains 3&4 began construction in May 2013 and are 27% complete. First production is expected in late 2016, early 2017. Purchase orders for 7.7 MTPA have been received for trains 1&2 and another 8.3 MTPA for trains 3&4. Trains 5&6 are still in permit mode with 3.75 MTPA of purchase agreements already being approved to Free Trade Agreement (FTA) countries and the non FTA authorization is pending. Trains 1-4 already have that authorization.

The three trains to be constructed in Corpus Christi for 13.5 MTPA are nearing the end of the permit approval process. Full approvals are expected not later than January 6th 2015. Purchase agreements for 5.53 MTPA have already been signed and the DOE has approved 767 Bcf per year for export to FTA countries with the authorization for non FTA countries still pending.

You might be wondering, "what is an LNG train?" According to Cheinere, The LNG industry has adopted the analogy of a "train" meaning the series of processes and equipment units that individually remove elements from raw inlet natural gas that would otherwise plug or freeze the small passages in the downstream heat exchangers that in a cascade fashion reduces the temperature from ambient to -260 F. Each of these processes and equipment units are sequentially arranged, similar to cars of a railroad train.

A couple of months ago the House of representatives voted to fast track more LNG export projects, which if signed into law, should be beneficial for Cheniere's current projects under review.

Technically shares of LNG have been stair-stepping higher with a rally to new record highs and then a correction and then do it again. Investors have been consistently buying the pullbacks near LNG's rising 50-dma. Shares just tested their 50-dma again today and naturally bounced. We want to hop on board the LNG natural gas train if this rebound continues.

Tonight we're suggesting a trigger to buy calls at $80.35. We'll start this trade with a stop loss at $76.35.

Trigger @ $80.35

- Suggested Positions -

Buy the DEC $85 call (LNG141220c85) current ask $3.10

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

Daily Chart:

Weekly Chart:



In Play Updates and Reviews

Small Cap ETF (IWM) Hits Our Target

by James Brown

Click here to email James Brown

Editor's Note:

The small caps continue to lead the market lower and the IWM hit our bearish exit target today.

We have removed DECK. UNP was stopped out. WCC hit our entry trigger.

Please note that we have updated several stop losses tonight.


Current Portfolio:


CALL Play Updates

Centene Corp. - CNC - close: 81.45 change: -1.26

Stop Loss: 79.90
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 1.2 million
Entry on September -- at $---.--
Listed on September 29, 2014
Time Frame: 8 to 12 weeks
New Positions: Yes, see below

Comments:
10/01/14: CNC followed the market lower and broke below its 10-dma. Shares might test support near $80.00 soon. Currently we are on the sidelines with a trigger at $84.05 but we might reconsider our entry point if CNC holds $80.

Earlier Comments: September 29, 2014:
Managed healthcare companies are finally starting to reap the benefits of the Affordable Care Act. Shares of CNC have soared +40% in 2014 and ended today's session at another record high.

Who is CNC? According to a company press release, "Centene Corporation, a Fortune 500 company, is a leading multi-line healthcare enterprise that provides programs and services to government sponsored healthcare programs, focusing on under-insured and uninsured individuals. Many receive benefits provided under Medicaid, including the State Children's Health Insurance Program (CHIP), as well as Aged, Blind or Disabled (ABD), Foster Care and Long Term Care (LTC), in addition to other state-sponsored/hybrid programs, and Medicare (Special Needs Plans). The Company operates local health plans and offers a range of health insurance solutions. It also contracts with other healthcare and commercial organizations to provide specialty services including behavioral health, care management software, correctional systems healthcare, in-home health services, life and health management, managed vision, pharmacy benefits management, specialty pharmacy and telehealth services.

The Affordable Care Act could add up to seven million new healthcare clients to the system. That number is expected to surge to nearly 25 million new healthcare clients in the next decade.

At the same time there are 26 states expanding their Medicaid coverage. Right now companies like CNC are in the sweet spot as more and more states turn over their Medicaid patients over to managed-care firms like CNC. The IBD reports that CNC could see increased business from Texas, Michigan, South Carolina.

CNC has been consistently beating Wall Street's earnings estimates (at least the last four quarters). Their earnings report in April beat estimates on both the top and bottom line. They did it again in July with earnings and revenues coming above expectations. Management then raised their 2014 guidance. Since that report FBR Capital has raised their price target on shares of CNC to $90 and Oppenheimer has raised their price target to $93. The point & figure chart is even more bullish and forecasting a long-term $108 target.

We like the relative strength and the healthcare market trends certainly favor CNC. We're suggesting a trigger to buy calls at $84.05.

Trigger @ $84.05

- Suggested Positions -

Buy the NOV $85 call (CNC141122c85)

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


Facebook, Inc. - FB - close: 76.55 change: -2.49

Stop Loss: 75.75
Target(s): To Be Determined
Current Option Gain/Loss: -17.5%
Average Daily Volume = 33 million
Entry on September 25 at $78.75
Listed on September 23, 2014
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
10/01/14: High-profile momentum names were hammered today and FB lost -3.1%. Shares almost hit our stop loss at $75.75 before bouncing. I'm not suggesting new positions at the moment. Let's see if there is a rebound tomorrow.

Earlier Comments: September 23, 2014:
Facebook is the dominant social media company on the planet. Their social networking platform has 1.23 billion monthly active users and hundreds of millions of daily active users.

The stock was showing relative strength today and appears to be ignoring the market's three-day decline. Helping fuel the rally today (+1.9%) was news of a new ad platform. The Wall Street Journal broke the story and CNBC followed up with news on FB's new ad platform called Atlas. This new program will provide marketers with more tools on measuring the impact of their advertisements' success and helping them better target the right audience. The Atlas program will also tracks users across the web.

Google is the king of online advertising and its sales are about five times what FB's are currently. Yet FB has a huge advantage because they have so many details about each of its users. Plus, FB can track users across multiple devices from desktop PCs to mobile devices like your smartphone.

Yesterday FB was making headlines with news on its virtual reality system. Many pundits harpooned FB for spending $2 billion to buy Oculus, a leading VR design firm, back in March. Proponents say FB is planning ahead for the long-term future were VR could be huge. FB did unveil a new prototype VR headset called "Crescent Bay" and the company plans to launch a new full-scale consumer device in 2015.

This is a new all-time closing high for FB. If this rally continues we want to hop on board. Tonight I'm suggesting a trigger to buy calls at $78.75. We're not setting an exit target yet but I will note the point & figure chart is bullish and forecasting at $91.00 target.

- Suggested Positions -

Long 2015 Jan $85 call (FB150117c85) entry $3.07

09/25/14 triggered @78.75
Option Format: symbol-year-month-day-call-strike


Mallinckrodt Public Limited Co. - MNK - close: 89.06 change: -1.09

Stop Loss: 86.45
Target(s): To Be Determined
Current Option Gain/Loss: -30.0%
Average Daily Volume = 4.85 million
Entry on September 17 at $87.25
Listed on September 11, 2014
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
10/01/14: MNK held up reasonably well. Shares flirted with a breakdown under short-term technical support at its 10-dma. The stock eventually closed with a -1.2% decline. More conservative traders may want to raise their stop loss. I am not suggesting new positions at the moment.

Earlier Comments: September 11, 2014:
MNK is considered a drug maker but the stock is outperforming its peers in both the drug industry and the biotech industry. The S&P 500 is up about +8% in 2014. The pharmaceutical index (DRG) is up +13.1%. The biotech index is up +34.8% thus far in 2014. Yet MNK is up +64.4%.

The company describes itself as "a global specialty pharmaceutical and medical imaging business that develops, manufactures, markets and distributes specialty pharmaceutical products and medical imaging agents."

"Areas of focus include analgesics and central nervous system drugs for prescribing by office- and hospital-based physicians, and autoimmune and rare disease specialty areas like neurology, rheumatology, nephrology and pulmonology. The company's core strengths include the acquisition and management of highly regulated raw materials; deep regulatory expertise; and specialized chemistry, formulation and manufacturing capabilities."

"The company's Specialty Pharmaceuticals segment includes branded and specialty generic drugs and active pharmaceutical ingredients, and the Global Medical Imaging segment includes contrast media and nuclear imaging agents. Mallinckrodt has more than 5,500 employees worldwide and a commercial presence in roughly 65 countries. The company's fiscal 2013 revenue totaled $2.2 billion."

The company had seen a few key milestones this year. They recently finished their $5.6 billion acquisition of Questcor. In August the stock was added to the S&P 500 index. MNK's earnings report in May was better than expected and management raised their guidance. Their latest earnings report was August 7th. Wall Street expected a profit of $0.85 a share on revenues of $610 million. MNK delivered a profit of $1.20 a share with revenues up +14.6% to $653 million. Management raised their guidance again for both their 2014 EPS and revenue estimates.

MNK's Chief Executive Officer and President, Mark Trudeau, commented on their quarterly results saying,

"This has been another exceptionally strong quarter in what is shaping up to be a very promising year for Mallinckrodt. This performance is being driven by the strength of our Specialty Pharmaceuticals segment in both Brands and Specialty Controlled Substance Generics, as well as streamlined costs from our on-going restructuring initiatives, leading to meaningful top-line and bottom-line growth. We continue to be pleased with the performance of our base business and recently added OFIRMEV, and look forward to closing the acquisition of Questcor in the coming weeks."

The current rally in MNK stock has lifted shares to all-time highs. The September 5th move looked like a potential bearish reversal yet there was no follow through lower. Instead MNK has been consolidating sideways. If shares continue to march higher it could spark some short covering. The most recent data listed short interest at 29.3% of the small 53.9 million share float.

We are not setting a target tonight but the point & figure chart is forecasting at $90.00 target. We are suggesting a trigger to buy calls at $87.25.

*consider smaller positions* - Suggested Positions -

Long OCT $90 call (MNK141018C90) entry $3.00*

09/25/14 new stop @ 86.45
09/22/14 new stop @ 85.65
09/20/14 new stop @ 84.65
09/17/14 triggered @ 87.25
Option Format: symbol-year-month-day-call-strike




PUT Play Updates

Autoliv, Inc. - ALV - close: 92.01 change: +0.09

Stop Loss: 94.05
Target(s): exit when ALV hits $90.25
Current Option Gain/Loss: +100.0%
Average Daily Volume = 392 thousand
Entry on September 16 at $98.45
Listed on September 15, 2014
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
10/01/14: ALV did not participate in the market's widespread decline today. That is a warning signal for the bears. I'm concerned that ALV might be too oversold and due for a bounce.

Tonight we're adjusting the stop loss down to $94.05. More conservative investors may want to just take profits now.

Earlier Comments: September 15, 2014:
The auto part makers have been a bright spot in the market over the past year and a half or so. It looks like the group is starting to diverge. Stocks like DLPH, TRW, and LEA still look relatively strong. Yet BWA and ALV have broken down.

Who is ALV? According to their website, "For over 60 years, Autoliv has focused on one very important issue: saving lives. Our innovative products save 30,000 lives every year and prevent 10 times as many injuries. We are first and foremost a safety technology company. In the world of automotive occupant safety, we were the first to introduce the two- and three-point seat belt system and airbags for front and side impacts. We were also the first to launch pyrotechnic belt pretensioners and pedestrian protection systems. We develop, manufacture and market airbags, seatbelts, steering wheels, passive safety electronics and active safety systems such as radar, night vision and camera vision systems. We also produce anti-whiplash systems, pedestrian protection systems and integrated child seats. Autoliv Inc. is the result of a merger in 1997 of the Swedish company Autoliv AB, and the U.S. company Morton ASP."

Earnings momentum may have peaked. The company's most recent earnings report back in July was a miss. Wall Street expected a profit of $1.55 a share but ALV only delivered $1.45 with profits falling -2% from a year ago. Revenues did come in above expectations at $2.38 billion. Yet the sell-off on earnings may have started the current correction in ALV stock.

Technically shares look bearish. ALV produced a double top with the peaks in June and July. The bullish breakout past resistance near $104 in early September proved to be a bull trap. Now ALV is breaking support at its simple 200-dma and its long-term bullish trend (see weekly chart below).

Tonight we're suggesting a trigger to buy puts at $98.45.

- Suggested Positions -

Long OCT $95 PUT (ALV141018P95) entry $1.65*

10/01/14 new stop @ 94.05
09/30/14 plan to exit our put when ALV hits $90.25
09/30/14 new stop @ 95.05
09/22/14 new stop @ 98.25
09/16/14 triggered @ 98.45
Option Format: symbol-year-month-day-call-strike


Cummins Inc. - CMI - close: 131.06 change: -0.92

Stop Loss: 134.05
Target(s): To Be Determined
Current Option Gain/Loss: +30.5%
Average Daily Volume = 1.26 million
Entry on September 23 at $134.65
Listed on September 22, 2014
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
10/01/14: Warning! CMI posted another loss but shares bounced near round-number support at $130.00. I would expect a rebound higher tomorrow. We will adjust our stop loss down to $134.05. I am not suggesting new positions at current levels.

Earlier Comments: September 22, 2014:
CMI is in the industrial goods sector. The stock has been in a long-term albeit choppy up trend since mid 2012.

Company describes itself as, CMI, "a global power leader, is a corporation of complementary business units that design, manufacture, distribute and service diesel and natural gas engines and related technologies, including fuel systems, controls, air handling, filtration, emission solutions and electrical power generation systems. Headquartered in Columbus, Indiana, (USA) Cummins currently employs approximately 48,000 people worldwide and serves customers in approximately 190 countries and territories through a network of approximately 600 company-owned and independent distributor locations and approximately 6,800 dealer locations. Cummins earned $1.48 billion on sales of $17.3 billion in 2013."

CMI is actually developing a bullish trend of beating Wall Street's estimates and raising guidance. Unfortunately investors seem to have forgotten about this growth. Shares have been underperforming since CMI peaked in June. It's been a steady trend of lower highs.

It does not help that Dow-component Caterpillar (CAT), considered a competitors for CMI, recently warned of slowing sales around the world.

Technically CMI's recent oversold bounce just failed at the $140.00 level. The stock has also broken down below a long-term trend line of support (see the weekly chart below).

Last week's low was $134.77. Tonight we're suggesting a trigger to buy puts at $134.65. We are not setting an exit target yet but the point & figure chart is bearish with a $114.00 target.

- Suggested Positions -

Long DEC $135 PUT (CMI141220P135) entry $5.90*

10/01/14 new stop @ 134.05
09/30/14 new stop @ 135.05
09/23/14 new stop @ 138.25
09/23/14 triggered @ 134.65
*option entry price is an estimate since the option did not trade at the time our play was opened.
Option Format: symbol-year-month-day-call-strike


Harley-Davidson, Inc. - HOG - close: 57.64 change: -0.56

Stop Loss: 60.05
Target(s): Exit when HOG hits $55.50
Current Option Gain/Loss: +54.5%
Average Daily Volume = 1.6 million
Entry on September 29 at $59.75
Listed on September 27, 2014
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
10/01/14: Falling momentum in HOG continues with shares down another -0.9%. Tonight we'll adjust our stop loss to $60.05. I am not suggesting new positions at this time. Our exit target is $55.50.

Earlier Comments: September 27, 2014:
It looks like shares of HOG have run out of gas. The company is an American icon. Their website describes themselves as "Harley-Davidson Motor Company produces custom, cruiser and touring motorcycles and offers a complete line of Harley-Davidson motorcycle parts, accessories, riding gear and apparel, and general merchandise." The made in America label still resonates with many consumers, especially overseas. Unfortunately sales appear to have hit a pothole.

HOG's Q1 results were reported back in April and the numbers were better than expected. The stock gapped higher and hit new multi-year highs. Yet a week later HOG had peaked. Shares have been building a trend of lower highs ever since its late April high.

The latest earnings report was in July. While earnings were above expectations HOG's revenues were a hair below estimates. Management said that market share fell 260 basis points to 50.3%. More importantly management lowered their 2014 full year shipping guidance from a range of 279K-284K down to 270K-275K. This has resulted in some analysts lowering estimates and their ratings on the stock. Shares have also struggled.

HOG is now trading new 2014 lows. It's also testing significant support in the $60.00 level. A breakdown under $60 could send HOG toward $55 or even $50. The point & figure chart is bearish and currently suggesting at $49.00 target.

Technically shares of HOG have built a bearish head-and-shoulders pattern (easily seen on the weekly chart). The $60 level support is the neckline for this bearish sell signal. Tonight we're suggesting a trigger to buy puts at $59.75.

- Suggested Positions -

Long NOV $60 PUT (HOG141122P60) entry $2.33

10/01/14 new stop @ 60.05
09/30/14 plan to exit puts when HOG hits $55.50
09/30/14 new stop @ 60.55
09/29/14 triggered @ $59.75
Option Format: symbol-year-month-day-call-strike


Lennox Intl. - LII - close: 75.69 change: -1.18

Stop Loss: 78.25
Target(s): To Be Determined
Current Option Gain/Loss: +25.6%
Average Daily Volume = 391 thousand
Entry on September 22 at $79.25
Listed on September 20, 2014
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
10/01/14: LII sank another -1.5%. Shares are nearing what might be potential support in the $75.00 area. We will adjust the stop loss down to $78.25.

Earlier Comments: September 20, 2014:
LII is in the industrial goods sector. Unfortunately for shareholders the stock is significantly underperforming with a -6.1% decline in 2014. That compares to a +4.1% gain in the XLI industrials ETF and a +4.2% gain in the Dow Industrials.

This is a simple momentum trade. After a three-year rally from its 2011 lows near $25 the stock traded near $95.00 in early 2014. Shares have since been struggling. Traders started selling the rallies. Now LII has broken down below its simple 200-dma and its long-term up trend (see weekly chart below). The last few days have seen LII create a "death cross" with the 50-dma crossing under the 200-dma.

This past week saw the oversold bounce in LII fail near prior support near $82.00 and its 300-dma. Friday's low was $79.33. I'm suggesting a trigger for bearish positions at $79.25. Potential support looks like $75.00 and $70.00. Currently the Point & Figure chart is suggesting at $68.00 target.

- Suggested Positions -

Long DEC $80 PUT (LII141220P80) entry $3.90

10/01/14 new stop @ 78.25
09/30/14 new stop @ 79.55
09/23/14 new stop @ 80.25
09/22/14 triggered @ 79.25
Option Format: symbol-year-month-day-call-strike


Pentair Plc - PNR - close: 64.61 change: -0.88

Stop Loss: 67.05
Target(s): To Be Determined
Current Option Gain/Loss: +41.6%
Average Daily Volume = 2.0 million
Entry on August 26 at $68.90
Listed on August 23, 2014
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
10/01/14: It's been a good week for our PNR put play. Shares are finally starting to see some bearish momentum. Tonight we'll adjust the stop loss to $67.05.

Earlier Comments: August 23, 2014:
Pentair is considered part of the industrial goods sector. They manufacture industrial equipment across the globe. According to the company website, "Pentair is a global water, fluid, thermal management, and equipment protection partner with industry leading products, services, and solutions. Pentair reports the performance of its business within four reporting segments that focus on five primary verticals."

Long-term the stock has had a strong 2012 and 2013 performance. The rally appears to have peaked in 2014 when the market started pulling back in March this year. If you recall many of the momentum names and higher-growth stocks were hammered lower starting in March. PNR doesn't really qualify as a big momentum name or a high-growth name but shares have been unable to recover anyway. Shares have trended lower from the March peak, currently down -16% from its 2014 highs and down -10.6% year to date.

PNR's earnings results have not helped the stock's performance. Back in April they beat estimates but missed the revenue number and then guided lower for the second quarter. Their most recent earnings report was July 31st. Depending whose estimate you use PNR either reported in-line profits or managed to just beat by a penny. Revenues disappointed again. PNR missed the revenue estimate with a -2.7% decline from a year ago to $1.91 billion. Management lowered guidance again but they also announced they were exiting their struggling water transport business.

PNR collapsed on this late July earnings news and lowered guidance with a drop toward $64. Shares have spent three weeks with an oversold bounce that is just now starting to roll over under resistance. PNR appears to have resistance near $70-71 and its 50-dma and 300-dma (see daily chart below). The point & figure chart is bearish and currently forecasting at $61 target.

Tonight we are suggesting a trigger to buy puts at $68.90.

- Suggested Positions -

Long Nov $70 PUT (PNR141122P70) entry $3.60*

10/01/14 new stop @ 67.05
09/06/14 new stop @ 68.65
08/26/14 triggered @ 68.90
Option Format: symbol-year-month-day-call-strike


Starbucks Corp. - SBUX - close: 74.61 change: -0.85

Stop Loss: 76.51
Target(s): To Be Determined
Current Option Gain/Loss: -10.0%
Average Daily Volume = 3.6 million
Entry on September 23 at $74.25
Listed on September 22, 2014
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
10/01/14: The bounce in SBUX has reversed under resistance near $76.00. This move could be used as a new bearish entry point.

Earlier Comments: September 22, 2014:
Summer is over and fall is officially here. That has many consumers thinking of hot coffee and seasonal fare like SBUX's pumpkin spice lattes. Unfortunately Wall Street doesn't appear too keen on SBUX, if you're looking at the share price action.

This company is in the services sector. They are a global power house as a specialty retailer of what some might consider overpriced coffee and sugary drinks with too many calories. After 30 years in business they have grown to more than 20,000 stores and over 180,000 full time employees.

The stock peaked in late 2013. It looked like the correction was over back in April this year and SBUX did rally from $68 to $79 by July. Yet the stock has been dead money the last several weeks and now it's starting to underperform the market.

That spike you see on the daily chart was a reaction to its Q2 earnings results. The recent breakdown under $76 is bearish and the oversold bounce just failed near this level. Today's intraday low was $74.33. We're suggesting a trigger to buy puts at $74.25.

- Suggested Positions -

Long NOV $72.50 PUT (SBUX141122P72.5) entry $1.60*

09/23/14 triggered @ 74.25
*option entry price is an estimate since the option did not trade at the time our play was opened.
Option Format: symbol-year-month-day-call-strike


Tupperware Brands Corp. - TUP - close: 69.47 change: +0.43

Stop Loss: 72.25
Target(s): To Be Determined
Current Option Gain/Loss: +35.1%
Average Daily Volume = 399 thousand
Entry on September 22 at $71.75
Listed on September 20, 2014
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
10/01/14: TUP display of relative strength today (+0.6%) was unexpected but shares were short-term oversold and due for a bounce. The $72.00 level should be overhead resistance.

Earlier Comments: September 20, 2014:
TUP was founded back in 1946 and over the last 60 years the company has grown from their plastic food prep and storage line into multiple brands.

According to the company website, "Tupperware Brands Corporation is the leading global marketer of innovative, premium products across multiple brands utilizing a relationship based selling method through an independent sales force of 2.9 million. Product brands and categories include design-centric preparation, storage and serving solutions for the kitchen and home through the Tupperware brand and beauty and personal care products through the Armand Dupree, Avroy Shlain, BeautiControl, Fuller Cosmetics, NaturCare, Nutrimetics, and Nuvo brands."

Unfortunately this year has not been the best for TUP's stock price. The company missed earnings expectations and lowered guidance back in January. You can see the market's reaction with the big drop in late January on the chart.

It took three months but TUP slowly clawed its way back toward resistance near $85 and its simple 200-dma. That area proved to be a lid on the stock price. Then in July the company disappointed again. It's Q2 earnings report disclosed that profits fell -38% to $47.6 million, down from $76.3 million a year ago. Management then lowered its full year guidance when they reported earnings and shares plunged again.

The weekly chart has produced a bearish head-and-shoulders pattern. The daily chart doesn't look healthy either. The Point & Figure chart is bearish and suggesting at $58.00 price target.

There is short-term support near $72.00. I'm suggesting a trigger to buy puts at $71.75.

- Suggested Positions -

Long 2015 Jan $70 PUT (TUP150117P70) entry $2.59

09/23/14 new stop @ 72.25
09/22/14 new stop @ 72.80
09/22/14 triggered @ 71.75
Option Format: symbol-year-month-day-call-strike


WESCO Intl. - WCC - close: 77.19 change: -1.07

Stop Loss: 80.55
Target(s): To Be Determined
Current Option Gain/Loss: -2.5%
Average Daily Volume = 306 thousand
Entry on October 01 at $77.75
Listed on September 30, 2014
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
10/01/14: Our new trade on WCC is now open. Shares rushed past the late summer low and hit our entry trigger at $77.75. I don't see any changes from my earlier comments.

Earlier Comments: September 30, 2014:
WCC is part of the services sector. They distribute industrial equipment. Their website describes WCC as "WESCO Distribution is a leader in industrial supply with an extensive offering of electrical, data communications, general maintenance, repair, and operating (MRO) and electrical OEM products. We are more than just an electrical distributor; we are a company of procurement specialists, helping customers lower supply chain costs, increase efficiency through WESCO Value Creation and save energy with green and sustainability initiatives. Our network of branches delivers industrial supply products fast, and our vast catalog of supplier partners enables WESCO to be your one-stop shop for electrical and MRO products."

Unfortunately for shareholders the stock peaked back in January this year. WCC produced a lower high in June. After a two-month drop WCC bounced but the bounce failed early September under resistance near $86.00, resistance at its simple 200-dma and resistance at the 50% retracement of the decline.

This trade isn't just about the technical picture. WCC has missed Wall Street's earnings estimates every quarter this year starting with its quarterly report announced in January, then April, and most recently in July. When WCC reported its July results management also lowered their 2014 guidance.

We are not the only ones who think WCC is bearish. The most recent data listed short interest at 13% of the 44.1 million share float. The point & figure chart is bearish too and forecasting at $64.00 target.

Today's drop was fueled by strong volume and shares are poised to break down under its late July low. Tonight we are suggesting a trigger to buy puts at $77.75.

- Suggested Positions -

Long NOV $75 PUT (WCC141122P75) entry $1.95*

10/01/14 triggered @ 77.75
*option entry price is an estimate since the option did not trade at the time our play was opened.
Option Format: symbol-year-month-day-call-strike



CLOSED BULLISH PLAYS

Deckers Outdoor - DECK - close: 97.18 change: -1.33

Stop Loss: 95.90
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 665 thousand
Entry on September -- at $---.--
Listed on September 27, 2014
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
10/01/14: Shares of DECK were decked with a painful -6.3% plunge on Wednesday. The relative weakness is a surprise since shares were upgraded with a $121 price target this morning.

Our plan was to buy calls at $100.25 but that seems unlikely in the near future so we are removing DECK as an active candidate.

I would keep an eye on the $85 area and its 200-dma, which should also coincide with DECK's long-term trend line of higher lows. A dip near $85 could be a great entry point.

Trade did not open.

10/01/14 removed from the newsletter, suggested entry was $100.25

chart:


Union Pacific Corp. - UNP - close: 105.80 change: -2.62

Stop Loss: 106.90
Target(s): To Be Determined
Current Option Gain/Loss: -25.5%
Average Daily Volume = 2.5 million
Entry on September 17 at $108.25
Listed on September 16, 2014
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
10/01/14: Transportation stocks were just hammered lower today. The Dow Jones Transportation average lost -2.5%. UNP followed with a -2.4% decline. Our stop was hit at $106.90.

Consider keeping UNP on your watch list for a pullback toward technical support at its rising 100-dma.

- Suggested Positions -

NOV $110 call (UNP141122C110) entry $2.15* exit $1.60** (-25.5%)

10/01/14 stopped @ 106.90
09/20/14 new stop @ 106.90
09/17/14 triggered @ 108.35, gap higher. Trigger was $108.25
*option entry price is an estimate since the option did not trade at the time our play was opened.
Option Format: symbol-year-month-day-call-strike

chart:


CLOSED BEARISH PLAYS

iShares Russell 2000 ETF - IWM - close: 107.80 change: -1.55

Stop Loss: 112.10
Target(s): exit when IWM hits $108.50
Current Option Gain/Loss: +144.4%
Average Daily Volume = 29.0 million
Entry on September 10 at $114.85
Listed on September 08, 2014
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
10/01/14: Target achieved.

The small caps continue to lead the market lower. The IWM fell -1.4% and dipped toward its May 2014 lows. Our exit target was hit at $108.50.

The $108 area should be decent support. We're adding a potential reversal (bullish) play on the IWM in tonight's new plays.

- Suggested Positions -

OCT $115 PUT (IWM141018P115) entry $2.70 exit $6.60 (+144.4%)

10/01/14 target hit
09/30/14 plan to exit when IWM hits $108.50
09/30/14 new stop @ $112.10
09/23/14 new stop @ 113.05
09/22/14 new stop @ 114.35
09/10/14 triggered @ 114.85
Option Format: symbol-year-month-day-call-strike

chart: