Option Investor
Newsletter

Daily Newsletter, Thursday, 10/2/2014

Table of Contents

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

Market Wrap

A Tough Day Turns Brighter

by Thomas Hughes

Click here to email Thomas Hughes
The markets fell today as growing global fears continue to weigh on the market, and then bounced from support.

Introduction

The market began today hovering around break even. Soon after the open mounting global fears sent the indices into near free fall. Unrest in China along with the recent weak data, a lack of detail from the ECB and ongoing issues with ISIS, Russia and the spreading Ebola crisis overwhelmed today's positive labor data during the early part of today's trading to sent the indices more than 1% lower.

The good news is that the markets hit support near mid-day, a level on the SPX coincident with my long term trend line, and bounced back. This doesn't mean the selling is over, just that bargain hunters and buy-on-the-dippers are still in the market. The SPX fell more than 20 points today but regained nearly 100% of that by 1:30PM. The mid-day bounce held and was improved upon during the afternoon, taking most of the indices into the green by the close of trading.

Market Statistics

Asian and EU indices were both in the red this morning following yesterday's massive sell off in equities. Asian indices closed lower while EU indices initially tried to rally back from their early lows. Expectations for the ECB to up the ante in terms of QE and stimulus had the DAX and other EU indices trading into the green until those expectations were dashed. The ECB made no moves today and provided very little in the way of details concerning any hopes for QE or what “additional measures” might mean. The bank will be making some purchases along the lines of previously announced actions but nothing new was revealed. According to the release the ECB sees a “moderate recovery still in place” although risks to the downside are present.

The protests in Hong Kong are heating up a little but the impact on overall Chinese economics and the US are slim. Protester's are calling for the current leadership to step down, a demand that has not been accepted. Expect to hear more about this in the coming days.

Economic Calendar

The Economy

Futures trading was flat this morning but turned slightly negative moving into the open. The data released today, good in my view, was not enough to hold up the market in the face of all the negative global headlines. First up on the list was the Challenger, Grey&Christmas report on planned lay offs. The number of lay off's planned in September fell -24% on a month to month basis to the lowest level in 14 years. This is following last month's drop that was also a long term low. This month's number of 30,477 puts us on pace for the lowest number of layoffs on an annual basis since 1997. This drop brings the year-to-date decline down to -6.2% and -24% compared to the same month last year. Entertainment and Leisure topped the list this month with significant losses associated with the gaming industry and Atlantic City. Year-to-date computer/technology still tops the list due to major lay offs by Microsoft and Hewlett Packard. This is great news for the labor market as it means that even less jobs are being lost, so long as jobs creation remains steady overall unemployment should go down.

Jobless claims also fell this week, across the board. Initial claims fell -8,000 to 287,000 on a revised and adjusted basis. This is just off of the long term lows set in the early part of September. Last weeks figure was revised higher by 2,000 but remained below the heavily watched 300K line. The four week moving average also fell, from a mild upward revision, by -4,250 to 294,750. The decline is above expectations and keeps first time claims near historic low levels. This also jibes with the low Challenger numbers as a sign of decreasing job turnover and an increasingly stable labor market. On a not-adjusted basis claims fell by -5.4%, seasonal factors had expected a decline of only -2.9%.


Longer term gauges of labor trends, continuing and total claims, both fell as well. Continuing claims fell by -45,000 to 2.398 million and a new 8 year low, total claims fell by -49,493, also a new long term low. Total claims is nearly 50% lower than at this same time last year, mostly due to the unemployment benefits extension which expired at the start of the year. Regardless, both continuing and total claims are in long term down trends and moving lower. This supports the idea that jobs creation is at least steady while at the same time job losses are in decline.

The ADP report yesterday also supports a steady if not strong-ish labor market. Tomorrow's NFP will put the speculation to rest, at last for this month. The vast majority of economists and analysts are looking for the number to be above 200,000 with a significant revision to last month.


Factory Orders was the one negative report in today's bundle of data. Orders fell more than expected, -10.1%, posting the largest drop on record. This is of course following last month's largest increase on record, also over 10%. The swing in month to month factory orders is due primarily to the $100 billion contract announced by Boeing in late August. The orders for 100 jetliners accounts for nearly the entire 10% swing and was largely expected with the consensus estimated for September orders around -9.5%. Stripping the volatile transportation sector factory orders fell a more modest -0.1%.

Tomorrow is of course a big day for data. The NFP, unemployment rate, hourly earnings, average work week and ISM services index are all on tap. Next week things are a lot quieter on the economic front with only the FOMC meeting minutes standing out at this time.

The Oil Index

Oil prices were volatile once again. Today prices for WTI dropped more than -1.25% in early trading only to reverse and move into the green by the close of the session. Brent crude remained under pressure, primarily on news from the Saudis, losing more than a half percent. According to reports the Saudis may begin to discount oil prices for China in order to maintain market share, a move that could cause oil prices to fall further. This is counter to the idea they would restrict production in order to raise prices. When Art Cashin was talking about it on TV he suggested there may be an element of “James Bond” about it, referencing ISIS and Russia's use of oil to finance their respective agendas and how low oil prices would hurt their plans.

The Oil Index fell along with WTI in the early part of the day, and along with WTI and the rest of the market bounced from long term support. The index fell over 1.5% in early trading, touching the 1,500 long term support line, and then bouncing back to regain most of the day's losses. The index has been in decline for over a month now and has broken the long term trend. Today's action is suggestive of a bottom but one that is untested or confirmed. The indicators are bearish and convergent with lower prices so I would expect to see the index trade lower and at least retest support in the near to short term.


The Gold Index

Gold traded flat today, hovering around the $1215 level, as economics, central banks, global unrest and flight to safety competed for dominance. The rising number of global hot spots, all small and near term in and of themselves, are beginning to add up and are helping to support gold prices. Gold has been trading between $1200 and $1220 for two weeks now and may be at a pivotal juncture. Falling below $1200 could lead to more selling and another significant drop. The fundamental picture of economic improvement and upcoming rising interest rates are behind golds fall to the current levels and unless there is some sign that rates will rise much sooner than expected the move may already be priced in. The labor data tomorrow and the FOMC minutes next week are the biggest potential movers of gold on my radar at this time and may provide some more clues. Until then I think caution is due and a tightening of stops on bearish plays in this sector wise.

The Gold Index fell today, inline with equities but not so much with gold, and then bounced from a long term support line. The index fell below support at $82.35 before hitting intra day bottom and bouncing into the green. The index was able to move higher by nearly 1% but was unable to move above the long term support line. It is however above near term support with indicators that lead me to believe a snap back is possible. Not only is the index trading along long term support levels it is oversold in the near and short terms with increasingly divergent momentum. The index has bounced from this level under these conditions twice in the last 12 months with significant gains.


The $82.35 level will be very important over the next few days while data is being released and up until the FOMC meeting. Gold prices are the number one driving influence on the gold sector and how they react to the data, the minutes and the global headlines will indicative of longer term direction. Should the index fall below this level and confirm it could be headed down to next lower support around $66 and full retracement of the 2008-2012 bull market in gold.

In The News, Story Stocks and Earnings

Warren Buffet made two headlines today. The first was that Berkshire Hathaway was buying The Van Tuyl Group, the nations 5th largest operator of car dealerships spanning the country. The deal was not discussed in detail but he did say he saw value in the highly fragmented market. This could be telling in light of yesterday's better than expected car/truck sales data. The other headline was that he bought stocks during yesterday's sell off, a positive sign for the bulls.

The IMF lowered it's growth forecast for the fourth quarter and 2014 citing “clouds on the horizon”. They say the global economy is not where they thought it would be 6 months ago. On top of geopolitical concerns there is the specter of normalizing monetary to be concerned with along with the threat of Ebola.

Today Tesla announced the upcoming release of “D”. They didn't say what “D” is, just that it would be here next week. The announcement sparked a lot of conjecture, much of it humorous, and a 4% spike in shares of the stock. This announcement is a bit of grandstanding by Elon Musk and could lead to a drop in share price next week once “D” is unveiled. Of course, it is Tesla and Elon Musk so I have a little faith in whatever it is. Shares of Tesla are still below the long term trend line and in danger of reversing, at least into a sideways pattern. If “D” doesn't do it for investors shares of TSLA could retreat to $225.


Exxon Mobil announced that Ebola is affecting their business in West Africa. It is impacting current operations as well as plans for drilling off-shore of Liberia. The company is banning travel to affected areas by its employees while the epidemic is still unchecked. This is in the wake of the first US case, confirmed yesterday. The man in question is reported to have helped a woman who later died from the disease. Liberian officials are reportedly in the process of bringing charges against the man for lying on his exit questionnaire. Shares of Exxon fell on the news but bounced from a long term support line.


A report from the New York times said there were reports that JP Morgan had experienced another data breach but the reports were unconfirmed. An unnamed source was cited in the article but follow up paragraphs suggested it may have merely been fall out from the first breach. A JPM spokesperson was quoted denying the charge in the article and then later the company issued a statement denying as well. Shares of the stock fell in today's session and were not able to regain the loss, as was the broader market. JPM closed with a loss around -0.75% with bearish indicators. The stock is below resistance and indicated lower to support near $57.50.


Earnings seasons starts next week, officially, with the release from Alcoa on Wednesday. The company is expected to improve earnings by 16% over the previous quarter, largely driven by the deal with Boeing announced over the summer. The company has been on a tear over the last year as the economy slowly regained its footing, more than doubling in value. The uptrend ended this summer when the stock hit long term resistance and subsequently broke the long term trend line. Today Alcoa fell another 2% below trend on fear of global slow down and bounced from short term support. This support is right around $15 and confirmed by the indicators with a wicked MACD divergence and bullish stochastic crossover. Alcoa may trade sideways into next week until earnings at which time EPS and future projections will play an important role.


The Indices

After making a big move to the downside the markets were able to bounce back. All the major indices were able to power into positive territory and most were able to stay there into the close. The leader today was the Dow Jones Transportation Average. The trannies closed with a gain of 0.81% after falling more than 1% this morning. Today's action brought the index down below the long term trend line and support coincident before the bounce began. By the close the index was back above trend but still looking a little bearish in the near term. The index appears to bouncing from the trend line, in line with expectations, but is yet to be confirmed by the indicators. Momentum and stochastic are still moving lower in the near term but also still consistent with support in the short term. Based on market action over the past two years I expect this to follow through but would still like to see the NFP report, and maybe even the FOMC minutes next week before committing to that stance.


The NASDAQ Composite also finished in the green, posting a gain of 0.18%. The tech heavy index also fell to support and then bounced, although it did not break its trend line. Today's candle formed a long legged doji/hammer that helps support the idea of support and an end to the current correction.The long term trend is up and this is looking like a correction to trend. The indicators are still bearish and convergent with lower prices so I would expect at least a test of support that may take the index below 4,400 in the near term. The last correction to this trend line, during the April-May period this year, the index bounced along the line in consolidation for 4-5 weeks, a time span would put us well into earnings season now and a reasonable target for a bounce providing the market holds to trend.


The S&P 500 and Dow Jones Industrial Average both ended the day flat. The SPX up by a hundredth, the DJI down by two. Both forming hammer dojis on support after falling more than 1% on an intraday basis. The broad market S&P 500 bouncing precisely from the long term trend line with indications similar to the NASDAQ and transports. The indicators are bearish in the near term, pointing to a test of support, but also indicative of support over the short term.

The SPX is now trading along long term, secular support, and under near to short term resistance based on global events, not local ones. If the trend holds and the bulls come back, as it looks like they want to, the SPX could get squeezed between support and resistance until it pops out in one direction or another. Based on the data and my own long term view I think the bulls will win.


The Dow Jones Industrial Average is well above its trend line but long term support was tested none the less. The index broke below 16,800, the top of the range I have described as strong support in earlier wraps, and then bounced back. The indicators are still bearish here as well, but are also still the weakest and indicative of short to long term support. 16,800 will likely be important tomorrow, and maybe into next week, but it looks like support is still there.


I am a long term bull and I can't help it. I have this view of changing demographics that I can't shake and can only see the economy improving into the long term. That being said there have been a lot, a copious amount if you will, of reason to be fearful in the near and short term. I could list them all here but why beat a dead horse, or pick apart the wall of worry, and that's what I think this has been. A correction built on a wall of worry and today the indices touched long term trend lines and bounced. I don't know if this means the market will reverse tomorrow but I do take it as a sign that I am not 100% wrong in my analysis and that the long term trend is intact.

Tomorrow the NFP may be the trigger to spark another rally and it may not but I do expect to see it confirm the labor trends we have been witnessing. It doesn't have to be strong, it just has to be steady. Steady is what we have had and that is what we need. If the economy gets too hot then the Fed will have to act, if it stalls they will have to act, but if it stays steady they can hold off on interest rate hikes until …..

Until then, remember the trend!

Thomas Hughes


New Option Plays

Jobs In Focus Tomorrow

by James Brown

Click here to email James Brown

Editor's Note:

Investors were disappointed with the European Central Bank and Mario Draghi today. The tone from regulators in Europe definitely turned bearish. Markets in Europe were down sharply across the board.

Meanwhile the U.S. economy is still slowly improving. The world economy is very interconnected. How long can we grow while Europe continues to sink deeper and deeper into a widespread recession?

U.S. stocks bounced off their midday lows but that could have been short covering ahead of the weekend and ahead of the Friday morning nonfarm payroll jobs report.

The jobs report will come out before the opening bell and stocks will likely gap open (up or down) on the news. We are not adding any new trades tonight.

I will share on trade idea. The weakness in oil should be bullish for transports and analysts are forecasting more lows for crude oil. Currently the Transportation sector ETF (symbol: IYT) is testing support at the bottom of its long-term bullish channel. A bounce from current levels might be an entry point in the IYT but I'd like to see it above short-term resistance at $150.00 and its simple 50-dma.




In Play Updates and Reviews

U.S. Endures Global Market Weakness

by James Brown

Click here to email James Brown

Editor's Note:

Sharp declines in Europe and weakness in Asia pressured U.S. stocks this morning. Yet the U.S. market managed an intraday rebound off its lows.

FB, ALV, and CMI all hit our stop loss today.

The IWM hit our new bullish trigger.


Current Portfolio:


CALL Play Updates

Centene Corp. - CNC - close: 80.69 change: -0.76

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:
10/02/14: CNC traded below what should have been support near $80.00 before trimming its losses. The late day rollover doesn't bode well. If shares do not improve tomorrow we might drop CNC as a candidate. Currently we are suggesting a trigger at $84.05 although we might reconsider our entry point on a rebound back above the 10-dma.

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


iShares Russell 2000 ETF - IWM - close: 108.83 change: +1.03

Stop Loss: 106.35
Target(s): To Be Determined
Current Option Gain/Loss: +9.3%
Average Daily Volume = 36.8 million
Entry on October 02 at $108.35
Listed on October 01, 2014
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
10/02/14: It was a choppy day for the IWM. The ETF initially bounced only to see the rally peak before 10:00 a.m. The IWM dropped to new relative lows near $107 by lunchtime only to rebound again and close up on the session and outperform the major indices.

Our suggested trigger to buy calls was hit at $108.35 multiple times.

Earlier Comments: October 1, 2014:
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.

- Suggested Positions -

Long DEC $110 call (IWM141220c110) entry $3.11

10/02/14 triggered @ 108.35
Option Format: symbol-year-month-day-call-strike


Cheniere Energy, Inc. - LNG - close: 76.02 change: -2.03

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

Comments:
10/02/14: Ouch! It was a rough day for energy stocks. The group just collapsed this morning as oil started the session at a new relative low. Oil managed an intraday bounce and LNG did too but not before shares of LNG plunged to their 100-dma. We are currently on the sidelines with a suggested entry point at $80.35.

Earlier Comments: October 1, 2014:
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)

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


Mallinckrodt Public Limited Co. - MNK - close: 90.92 change: +1.86

Stop Loss: 86.45
Target(s): To Be Determined
Current Option Gain/Loss: -15.0%
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:
10/02/14: Sometimes slow and steady wins the race and shares of MNK continue to drift higher. Shares erased yesterday's loss with a +2.0% gain and a new closing high.

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

Harley-Davidson, Inc. - HOG - close: 58.11 change: +0.47

Stop Loss: 60.05
Target(s): Exit when HOG hits $55.50
Current Option Gain/Loss: +39.4%
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:
10/02/14: After a multi-day decline shares of HOG managed a little bit of an oversold bounce today. I am not suggesting new positions at this time.

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: 76.77 change: +1.08

Stop Loss: 78.25
Target(s): To Be Determined
Current Option Gain/Loss: +17.9%
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:
10/02/14: LII also produced an oversold bounce today. I want to caution readers because today's session actually produced a bullish engulfing candlestick reversal pattern. These patterns need to see confirmation but it's still a warning signal. The simple 10-dma near $78.00 should be overhead resistance.

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: 64.66 change: +0.05

Stop Loss: 67.05
Target(s): To Be Determined
Current Option Gain/Loss: +58.3%
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:
10/02/14: PNR eked out a very meager bounce. Our put option actually improved. Look for the $66.00 level to be new overhead resistance.

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: 74.45 change: -0.16

Stop Loss: 76.51
Target(s): To Be Determined
Current Option Gain/Loss: - 5.6%
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:
10/02/14: SBUX dipped toward last week's low near $73.80 and bounced. Shares failed to make it back into positive territory. If you're looking for a new entry point consider waiting for a drop under $73.70.

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: 69.87 change: +0.40

Stop Loss: 72.25
Target(s): To Be Determined
Current Option Gain/Loss: +27.4%
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:
10/02/14: The oversold bounce in TUP continued for a second session but shares are testing the $70.00 level, which might be new resistance. The $72.00 level should be stronger 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: 77.70 change: +0.51

Stop Loss: 80.55
Target(s): To Be Determined
Current Option Gain/Loss: -10.2%
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:
10/02/14: WCC snapped a three-day losing streak with today's +0.6% gain. The August low and the simple 10-dma are potential overhead resistance.

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

Facebook, Inc. - FB - close: 77.08 change: +0.53

Stop Loss: 75.75
Target(s): To Be Determined
Current Option Gain/Loss: -26.7%
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:
10/02/14: FB's late morning lows saw a dip under the $76.00 level and shares hit our stop at $75.75. It's worth noting that FB did bounce near its rising 50-dma and that's the third time in about four months that FB has rebounded from its 50-dma.

- Suggested Positions -

2015 Jan $85 call (FB150117c85) entry $3.07 exit $2.25 (-26.7%)

10/02/14 stopped out
09/25/14 triggered @78.75
Option Format: symbol-year-month-day-call-strike

chart:


CLOSED BEARISH PLAYS

Autoliv, Inc. - ALV - close: 94.39 change: +2.38

Stop Loss: 94.05
Target(s): exit when ALV hits $90.25
Current Option Gain/Loss: + 45.4%
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:
10/02/14: We were worried about an oversold bounce so yesterday we adjusted the stop loss to $94.05. This morning ALV gapped open higher at $93.30 and soared toward its 10-dma with a +2.5% gain. Our stop was hit at $94.05. I don't see any headlines to account for today's relative strength.

- Suggested Positions -

OCT $95 PUT (ALV141018P95) entry $1.65* exit $2.40** (+45.4%)

10/02/14 stopped out
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

chart:


Cummins Inc. - CMI - close: 132.98 change: +1.92

Stop Loss: 134.05
Target(s): To Be Determined
Current Option Gain/Loss: + 5.0%
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:
10/02/14: We also lowered our stop loss on CMI yesterday. Shares of CMI spiked higher this morning, actually gapping open at $134.76. Our stop was $134.05 so the gap open immediately closed our trade. The oversold bounce failed at short-term resistance near $135.00 (for now).

- Suggested Positions -

DEC $135 PUT (CMI141220P135) entry $5.90* exit $6.20 (+5.0%)

10/02/14 stopped out on gap open at $134.76
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

chart: