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Newsletter

Daily Newsletter, Wednesday, 10/8/2014

Table of Contents

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

Market Wrap

Volatility Reigns

by Keene Little

Click here to email Keene Little
One look at the DOW's daily chart and you have to wonder if traders have any conviction. They react strongly one day but then give it back the next day. This has created a very whippy market with a direction that's unclear and the volatility is likely to be with us for at least a little longer.

Wednesday's Market Stats

The DOW rallied 331 points off this morning's low to close up +274 points. This follows multiple days of 200+ points in both directions as each side battle the other and the HFTs weasel their way in between and just trade the volatility. Traders love the volatility while investors are starting to get motion sickness. At least there was strong volume behind today's rally, which was not true for last Friday's rally, which had started with a big gap up but didn't have much follow through and the volume was lighter. Today's big-volume up day finally had what the bulls want to see.

In the 13 trading days since the September 19th high the DOW has seen more than half of them with 200+ points between the highs and lows of the day and today's 331 point swing was the largest move. In those 13 days the DOW has only lost 285 points from the September 19th closing price to today's closing price, which is basically one trading day's worth of points. That's a lot of volatility with not much actual price movement and usually an increase in the volatility like this is at the top of a rally is an indication of a trend change in progress. But the choppy pullback from the September high says the bulls can't be ruled out yet.

This morning was devoid of any market-moving economic reports and it wasn't until the FOMC minutes from the last meeting were released this afternoon that the market had something to spur the buyers into action. It was just a catalyst since the bounce off this morning's low was already in progress but it needed the excuse of the FOMC minutes to launch some buy programs, which then ignited short covering, which then launched the HFTs into the action as they tried to front-run all the buy orders coming in. Before the bears could ask "what happened?" the indexes were in strong rally mode, finishing at their highs for the day. The daily reversal of reversals, with strong moves, continues.

In the FOMC minutes there were two points that the market interpreted as bullish. One, the FOMC members expressed concern that their inflation outlook is in jeopardy (read between the lines and what they're afraid of is deflation). Two, the members believe it's important to err on the side of caution when it comes to removing any further accommodation, such as interest rates. The market reads this as evidence the Fed will not be in any hurry to raise rates as early as next spring, which some have been worried would happen. There's very little else the Fed can do to help the market, I mean economy, that it hasn't already done, all of which hasn't helped. But we can expect the Fed to "threaten" the use of "many tools available to them" to help stimulate the economy. Each promise of more will of course be met with a jubilant response from the market. At least until the market has lost confidence in the Fed.

The indexes closed at/near their highs of the day, which has it looking like the market will continue higher tomorrow. But this market should have taught everyone by now that the following day is not always a follow through to the previous day. In fact one could argue it's typically the opposite as the mini-capitulations into the close leave the market vulnerable to immediate reversals the following morning. I see that as a possibility again, especially since the rally off this morning's lows looks like a completed 5-wave move for the indexes. That suggests at least a pullback to correct the rally before heading higher.

The Thursday prior to opex week (next week) has typically been the head-fake day, pulling the market back and then letting it slingshot into opex with the help of short covering. Was that move done today instead of tomorrow? It's certainly possible since more traders are trying to game that pattern and it might be shifting a little. But a deep pullback tomorrow, to pull the shorts back in, is also a possibility, especially since the setup for a pullback looks good.

Back in June and again in early September I had used the NYSE (NYA) chart to show an upside target zone that I thought would cap off the bull market. I consider the NYA a very good index to evaluate for the "total market." The Wilshire 5000 is another good one but almost always looks just like SPX. At any rate, the upside target zone for NYA was fairly wide but not so much in relative terms and it was based on projections for extended 5th waves in the rally from June 2012. The idea for extended 5th waves is important because it shows how the rally literally extended beyond what is a typical move, which I think is a fitting description for the stock market.

In an EW pattern extended 5th waves often achieve 162% of the 1st waves and the two projections shown on the weekly chart below, at 10906 and 11148, are based on the 5-wave move up from June 2012 and then the 5th of the 5th wave, which is the leg up from February 2014. The pattern is a clean count and the relatively close correlation provided a good target zone to complete the rally. The July 3rd high was 11105 and the September 4th high was 11108.

NYSE Composite index, NYA, Weekly chart

As you can see on the chart above, the bearish divergence at the September high vs. the July high was glaring. The double top has been followed by breaks of uptrend lines from 2011 and 2012 and now it's struggling to hold above the long-term uptrend line from 2009-2011, which coincides with the 50-week MA at 10538. Last week was an intraday break and again another one today but so far the uptrend line from 2009 is holding and the weekly closing price is the important one. It also came close to touching support at the 2007 high, at 10387, with today's low at 10421 and even if we're going to get just a correction to the decline from September 4th we could see it take up the rest of the month before setting up for the next leg down.

The NYA daily chart below shows a closer view of the price action around the uptrend line from 2009 as well as its 200-dma, at 10622, which it closed slightly above today. The bears see this as consolidation at support, which will break once it's finished consolidating. The bulls see this as support, including the 2007 high, holding and the next big move will be up to a new high. One EW pattern supporting the bulls is a large a-b-c pullback correction from July, which sets it up for another rally to a new high into November. The fight is on and it could go either way here.

NYSE Composite index, NYA, Daily chart

SPX swung 45 points from this morning's low to this afternoon's high, the largest range since December 18, 2013 when the Fed first announced their plan to reduce their asset purchases. Now the market positively reacts to just the thought that the Fed might delay raising interest rates. Talk about a desperate market! For the past two weeks SPX has been whipping around underneath its 50-dma after first breaking below it on September 25th. It's been in a downtrend since the September 19th high, defined by lower highs and lower lows. Today's rally brought it up to just below its 50-dma near 1974 and still below its last high on Monday near 1978. If the bulls can drive this above 1978 it would be a strong bullish statement, recovering back above both its broken uptrend line from November 2012 as well as its broken 50-dma (and just above that is its 20-dma). But if the bears smack the market back down again we could see a drop down to the 200-dma near 1904.

S&P 500, SPX, Daily chart

Key Levels for SPX:
- bullish above 1978
- bearish below 1925

Because of the choppy pattern in the pullback from September 19th it's not at all clear what the next big move will be. From an EW perspective I'm looking at it as a corrective pullback and not something more bearish. We could still get another new low out of this but the corrective structure suggests we're going to get a new high in the coming weeks. That's why a rally above 1978 would be at least short-term bearish if not an indication the new highs are coming. Next week is opex and we all know how bullish they tend to be. Will it be different this time? If the bears show up in force tomorrow, I show another leg down to a price projection at 1917.77 for two equal legs down from Monday morning (and potentially down to the 200-dma near 1904. There's still bearish potential but at this point I'd be surprised to see SPX below 1900 (I'll turn more bearish if that happens).

S&P 500, SPX, 60-min chart

The DOW has been the wild one -- as can be seen on its daily chart below it's been whipsaw city for that index. Who would have thought the DOW would be the more volatile index. Above 17100 would be bullish while a close below 16720 would be bearish, although support might be found at its 200-dma near 16590. As with SPX, it's hard for me to turn longer-term bearish yet because of the choppy move down; it looks like a correction to the larger uptrend and therefore my expectation, for now, is for a rally to new highs in the coming weeks.

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- bullish above 17,100
- bearish below 16,720

NDX has the same overlapping choppy pullback from September 19th and looks like a bull flag consolidation. The overbought oscillators in late August have been relieved and are now in oversold while price chopped sideways/down. I might be bearish this stock market but I can't ignore a bullish pattern (hint: the market always wins when you try to fight it). It doesn't mean it can't go down from here and in fact a choppy move down that lets go to the downside is often followed by a powerful move. But if the bulls can get NDX above resistance near 4050 (price-level resistance and its 20-dma) it will be the market telling us new highs are coming.

Nasdaq-100, NDX, Daily chart

Key Levels for NDX:
- bullish above 4050
- bearish below 3938

The RUT has been a very good canary stock for us and when it's relatively weak or strong it's been important to follow its lead. Today's candle is a bullish engulfing pattern at support (the bottom of a parallel down-channel for its decline from July, price-level support near 1080 and a price projection near 1077 for two equal legs down from July. Today's rally should get some follow through to the upside although it's not clear yet whether it will be just a bounce to a lower high and then down hard (red) or if instead we've got an a-b-c pullback from July that will lead to new highs into the end of the year. For now it stays bullish above 1074 and then I'll be watching the price pattern for the bounce/rally (assuming we'll get it) to help determine whether it will be a bounce to short or dips to buy.

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- bullish above 1140
- bearish below 1074

It's been a long while since I last discussed the TIPS market (Treasury Inflation-Protected Securities) and considering what the market thinks the Fed will do I thought it would be a good time to review what the bond market is thinking (it being a market that is much larger than the stock market and arguably much smarter). Yesterday I saw a chart posted by BusinessInsider.com, shown below (article here: More Fed Easing, where the author, Priya Misra at the Bank of America Merrill Lynch, suggested the Fed will have to come up with another round of easing according to the TIPS breakevens chart that's shown below.

The values charted are calculated by subtracting the yield on TIPS from Treasury bonds of the same duration, which for the chart below are the 5-year bonds. The higher the spread between the yields the more investors are worried about protecting against inflation. The author of the report, suggested the chart shows why the Fed will have to figure out soon what their next easing program will be (and forget about raising interest rates) in order to fight "disinflation." I believe this is how most market participants interpret this chart.

5-year TIPS Breakevens, chart courtesy businessinsider.com

I interpret this chart differently. I think it's a glaring example of how the Fed's programs are failing. As you can see from the chart, when it dropped below 2.2 in the past it prompted the Fed to start up another QE program. The QE3 program seems to have jumped the gun in this regard but interestingly, the declining highs following each QE program demonstrates how each program is having less of an effect on inflation worries by TIPS traders. A weekly chart of the TIPS bond ETF, TIP, is shown below and it's telling me to look for much lower prices, which means much lower inflation. The Fed's battle with deflation has been a losing one and the TIPS chart is confirming it.

Treasury Inflation-Protected Securities ETF, TIPS, Weekly chart

Off the December 2012 high there was an impulsive 5-wave move down into the September 2013 low. That identified the new trend – down. That decline was followed by an a-b-c bounce into the August high for a 2nd wave correction and we’re now in the early stages of a 3rd wave decline, one which should take it back down toward 90 and the 2008 lows fairly quickly before consolidating and then lower again, probably bottoming with stocks in 2016-2017.

Another strong indication of deflation is money velocity, which can loosely be defined as how many times a dollar bill is circulated, which in turn tells us how active people are in spending their money vs. saving it and taking it out of circulation. The more the same dollar is circulated and spent the higher the money velocity will be. Each dollar does work multiple times and that's an indication of a strong economy. But if someone along the line saves the money instead, essentially taking it out of circulation, money velocity declines. This will happen when consumers and businesses become more cautious and decide to save for a rainy day -- good for them, bad for the economy. The chart below shows how money velocity has done over the years, starting in 1960.

Money Velocity, 1960-present, chart courtesy St. Louis Fed

What's fascinating, and probably keeping the Fed heads up at night, is the fact that the massive amounts of money that's been printed in the last several years ($4+ trillion just in the U.S.) hasn't stopped the slide in money velocity. It's instead being horded by the banks (even Bernanke was turned down for a remortgage). As you can see in the chart above, money velocity has been declining since about 1996 and even with the massive printing (see chart below) the Fed has not been able to stop the slide. In fact the chart below shows the huge spike in dollars printed starting in 2009 and now compare that to the tiny little bounce in the chart above followed by a steep decline into the present. Money velocity is now well below where it was in 1960 into the 1980s. What's a Fed chairperson to do? Jawbone the market higher by telling it interest rates will remain low for a "considerable period of time."

Adjusted Monetary Base, 1960-present, chart courtesy St. Louis Fed

And here's the culprit: the American consumer is saving more and spending less. Up through 2007 it was close, with saving slightly ahead of spending. But since the market crash in 2008 we've seen the consumer go into hiding and saving much more (62%) than they're spending (34%). The Fed has tried as hard as they could to get the consumer to come out and play but he/she just isn't interested.

Saving vs. Spending by the Consumer, chart courtesy creditcards.com

It's not just the U.S. that's trying to deflate their currency (failing at the moment). Japan has been hard at work for decades and now Draghi is saying he wants to deflate the value of the euro. Last night South Korea made comments about deflating the value of their currency so that they can be more competitive with Japan. Their finance minister said the government "will begin introducing new measures to improve its stock market [emphasis mine] and support large exporters that have sizable amounts of exposure to Japan." Ah, the race for the bottom continues unabated...

Why all this discussion about inflation and efforts to devalue currencies? Because in a deflationary environment almost all asset classes decline in value -- stocks, commodities, metals, real estate, you name it, a stronger dollar and declining asset values is the result. Cash is king in a deflationary time; debt is bad (because the value of the debt increases relative to the asset). The stock market has been ignoring these signs for a long time but when ill winds blow and the market starts to get it, look out below.

The U.S. dollar has had a strong reversal from last week's high and this week's candle, so far, has produced a bearish engulfing candlestick reversal pattern with last weeks' big white candle followed by this week's larger red candle. Last Friday's high was only pennies away from its downtrend line from March 2009 – June 2010, which fits as the top of a large sideways triangle since the 2008-2009 highs. The triangle pattern suggests the dollar is going to be range bound between 76 and 87 through the rest of this decade before finally crashing and burning. We might see another pop back up for a test of last week's high but I'd be surprised to see it break its downtrend line. The parabolic rally off the July low could get quickly retraced if it follows the pattern of typical post-parabolic moves.

U.S. Dollar contract, DX, Weekly chart

Gold is also looking good for a reversal of its decline. The downside targets for gold were 1194.40, for two equal legs down from March, and about 1185 where it would reach the bottom of a sideways triangle that's been playing out since the June 2013 low. Monday's low was 1183.30, which is close enough to the lower target to call the decline finished. The triangle pattern calls for a rally back up to the top of it, perhaps back up to about 1325 by the end of January 2015 where it would also back-test its broken uptrend line from 2001-2005. That would then be a setup for a stronger decline into 2015, which fits the deflationary cycle we'd be into at that point.

Gold continuous contract, GC, Weekly chart

Oil dropped down to 86.83 today, 10 cents above the projection at 86.73 for two equal legs down from August 2013. A little lower is its uptrend line from 2011-2012, currently near 85.25. If oil is going to be heading lower sooner rather than later it's first due a bounce to correct a portion of the decline from June before heading strongly lower later this year and into next. But if the larger sideways triangle is the correct pattern we could soon be setting up for a rally leg out of the triangle. In either case oil is due at least a bounce and I think the short side for oil is the riskier side. It would turn more immediate bearish with a weekly close below 85 but at the moment it's a setup for a bounce/rally.

Oil continuous contract, CL, Weekly chart

Thursday will be another quiet day for economic reports. But there will be several speeches by Fed members so the market will be listening carefully for the hidden messages (you know, did the sentence have the correct punctuation, did he/she have a twitch when something was said, that sort of thing). As discussed earlier, the Fed is fighting a losing battle against deflation and there's really very little else they can try. But it won't stop them from trying to jawbone the market higher with promises of "whatever it takes." The big question is when the market will stop believing it but until then we can expect large price swings in reaction to what the Fed heads say or don't say. Today was just one more example.

Economic reports and Summary

Violent price swings at the top of a long-term rally is usually a good sign of instability and instability usually leads to market reversals. This suggests we'll soon some strong down days that see very little relief in the way of bounces. Unfortunately I currently don't see enough evidence in the price pattern to support that expectation. It's simply something to be aware of and don't get complacent about the upside.

At the moment I'm leaning into the bull's camp with an expectation we'll see another rally to new highs in the weeks ahead. I'm betting small in that direction but not willing to carry much if any risk overnight. For Thursday I can see the potential for a reversal of today's rally and at least a minor new low, such as one to test the 200-dma's for the DOW and SPX. But in reality, as of tonight, it's flip a coin for direction and I don't trade coin flips. There are times to trade and more importantly there are times to sit in cash. That's the 3rd position that most traders hate but oftentimes the best position.

Opex is typically a bullish weak and we got a strong reversal on a full moon. As can be seen on my MPTS chart below, important lows were made in April and August on full moons. Play it again Sam?

SPX MPTS daily chart

Trade carefully if you must but realize risk has increased significantly with the volatility. Catch the direction right (each day) and there's good money to be made. Catch it wrong and don't stop out and you'll feel some pain.

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

High Definition Momentum

by James Brown

Click here to email James Brown

Editor's Note:

In addition to tonight's new candidate(s), consider these stocks as possible trading ideas and watch list candidates. Some of these stocks may need to see a break past key support or resistance:

(bullish ideas) AAP, PANW, TAP



NEW DIRECTIONAL CALL PLAYS

Ambarella, Inc. - AMBA - close: 43.78 change: +1.99

Stop Loss: $40.45
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 2.4 million
Entry on October -- at $---.--
Listed on October 08, 2014
Time Frame: 8 to 12 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
AMBA is in the technology sector. They're considered part of the semiconductor and semiconductor equipment makers. The company was founded in 2004 and went public in October 2012 at $6.00 a share. That price was significantly below where AMBA was expected to price in the $9-11 range.

The company has grown from making broadcast-class encoders to making consumer and sports cameras, security cameras, and now automotive cameras. Their high-definition chips are being integrated into security IP cameras and wearable cameras. AMBA is also capturing part of a new market - cameras on consumer-level remote control drones.

The last two plus years have seen a strong performance in AMBA with the stock up +633% from its IPO price. AMBA has GoPro, Inc. (GPRO) to thank for part of that rally. GPRO came to market in June this year and the stock has been in rally mode since mid August with a rally in GPRO from less than $40 to $90 a share. AMBA happens to make the HD camera sensors in many of GPRO's products. As GPRO rallies it could be giving AMBA a boost and GPRO expects record sales this holiday season.

It's also worth noting that AMBA's rally has been helped by consistent earnings growth. The company has beat Wall Street's estimates on both the top and bottom line for the last four quarters in a row. Their most recent earnings report in September saw AMBA's management raise their revenue guidance.

Shorts are getting killed. As the rally continues AMBA could see more short covering. The most recent data listed short interest at 21.7% of the small 28.0 million share float.

We think the bullish momentum continues. Tonight we're suggesting a trigger to buy calls at $44.65.

Trigger @ $44.65

- Suggested Positions -

Buy the NOV $46 call (AMBA141122C46) current ask $2.60

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

Daily Chart:



In Play Updates and Reviews

Stocks Reverse On Fed Minutes

by James Brown

Click here to email James Brown

Editor's Note:

IWM hit our stop loss. MBLY and VMC hit our entry triggers.

Just about everything bounced today. Stocks were languishing until the FOMC minutes hit around 1:30 this afternoon. Investors chose to interpret the minutes to mean the Fed will stay dovish and likely keep rates low for longer than previously expected. That sent stocks soaring and shorts started to panic with lots of short covering. We'll have to wait and see if this is just a one-day event or if there will be any follow through.


Current Portfolio:


CALL Play Updates

Mobileye N.V - MBLY - close: 56.07 change: +0.60

Stop Loss: 51.25
Target(s): To Be Determined
Current Option Gain/Loss: -8.8%
Average Daily Volume = 9.0 million
Entry on October 08 at $57.15
Listed on October 07, 2014
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
10/08/14: Our new play on MBLY is now open. We were planning to buy calls at $56.55 but MBLY was showing a lot more strength this morning than expected. The stock gapped open higher at $57.15. I warned you that MBLY was volatile and shares retested the $54.00 level before lunchtime and then spent the rest of the day bouncing.

Earlier Comments: October 7, 2014:
The future of hands free driving is a lot closer than you might think. MBLY is leading the charge. Its technology is already in more than three million cars made by companies like BMW, General Motors, and Tesla.

What exactly does this technology due? DAS stands for driver assistance systems. Sometimes you might see it called ADAS for advanced driver assistance systems. This new technology helps drivers avoid collisions with other vehicles, pedestrians, bicyclists, and more while also alerting the driver to road signs and traffic lights.

The company website describe Mobileye as "a technological leader in the area of software algorithms, system-on-chips and customer applications that are based on processing visual information for the market of driver assistance systems (DAS). Mobileye's technology keeps passengers safer on the roads, reduces the risks of traffic accidents, saves lives and has the potential to revolutionize the driving experience by enabling autonomous driving."

MBLY said their technology will be available in 160 car models from 18 car manufacturers (OEMs). Further, Mobileye's technology has been selected for implementation in serial production of 237 car models from 20 OEMs by 2016.

The company is already developing a system for autonomous driving or hands free driving. They currently plan to launch an autonomous system in 2016 that will work at highway speeds and in congested traffic situations.

MBLY stock came to market in August this year. Demand was strong enough that they upped the number of shares available from around 27 million to 35.6 million shares. They raised the IPO price from the $22 range to $25. This valued MBLY at $5.3 billion. The first day of trading saw MBLY opened at $36.00. Today shares are up more than 50% from their first day of trading and up about +120% from its IPO price of $25. On a side note the float is now 151.7 million shares with outstanding shares at 212 million.

It's easy to see why investors are optimistic on MBLY. Annual revenues have soared from $19.2 million in 2011 to about $120 million a year today. The stock's rally has soared past Wall Street's initial round of price targets in the $42-49 range. There have been a couple of firms raising their targets.

Bears have been arguing that the valuations on MBLY are insane. As of today MBLY's market cap is about $12 billion. Bulls would argue that MBLY has first-mover advantage in this field. That's true. MBLY has a near monopoly on the ADAS market. However, the bearish case here would mean any new competitors could quickly take market share.

The New York Post recently ran an article discussing how the White House might be a bullish tailwind for MBLY. The National Highway Traffic Safety Administration issued a research report that estimated ADAS type of technology could eliminate almost 600,000 left-turn and intersection crashes a year. Following this report the White House said they would draft new rules that required this sort of tech in new vehicles.

The momentum certainly favors the bulls. Traders bought the dip today in spite of the market's weakness. The stock can be volatile and the option spreads are a little wide. I would consider this a more aggressive trade.

We are suggesting a trigger to buy calls at $56.55.

- Suggested Positions -

Long NOV $60 call (MBLY141122c60) entry $4.50*

10/08/14 triggered on gap higher at $57.15, suggested entry was $56.55
*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


Mallinckrodt Public Limited Co. - MNK - close: 92.51 change: +1.19

Stop Loss: 89.45
Target(s): To Be Determined
Current Option Gain/Loss: +13.3%
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:
10/08/14: MNK pierced its 10-dma but bounce near the $90.00 level. This rebound hopefully short circuits the three-day bearish reversal pattern the stock had built.

FYI: We have less than two weeks left on our October calls.

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*

10/07/14 new stop @ 89.45, potential bearish reversal pattern
10/04/14 new stop @ 87.70
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

Flowserve Corp. - FLS - close: 67.35 change: +1.01

Stop Loss: 70.10
Target(s): To Be Determined
Current Option Gain/Loss: +15.6%
Average Daily Volume = 813 thousand
Entry on October 06 at $68.45
Listed on October 04, 2014
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
10/08/14: The late afternoon market-wide short squeeze helped lift FLS from new lows into a +1.5% gain. The bounce might rise toward resistance near $70 and its 10-dma. I am not suggesting new positions at this time.

Earlier Comments: October 4, 2014:
FLS is part of the industrial goods sector. The company is headquartered in Texas and has grown to 16,000 employees in over 50 countries. The company makes pumps, valves, seals, and provides services to the power generation, oil & gas, chemicals, and general industries.

FLS' rally from its 2011 low peaked back in early 2014. A slowdown in the global economy is impacting sales. The last couple of quarters have seen FLS miss revenue estimates and report declining sales. Now after six months of lower highs shares of FLS has broken down from a huge consolidation pattern. Goldman Sachs may have seen this coming when they put a "sell" rating on the stock back in June.

FLS is currently down four weeks in a row and the last few days have seen the stock break down under support near $70.00. More importantly it has broken support at its long-term trend line of support dating back to its 2011 low.

FLS was also showing relative weakness on Friday. Instead of bouncing with the market shares underperformed with a -1.5% decline on almost double its average volume. The point & figure chart has turned bearish and is forecasting at $60 target.

Tonight we are suggesting a trigger to buy puts at $68.45.

- Suggested Positions -

Long NOV $70 PUT (FLS141122P70) entry $3.20

10/07/14 new stop @ 70.10
10/06/14 triggered @ 68.45
Option Format: symbol-year-month-day-call-strike


Lithia Motors Inc. - LAD - close: 81.68 change: +2.70

Stop Loss: 85.25
Target(s): To Be Determined
Current Option Gain/Loss: -15.9%
Average Daily Volume = 384 thousand
Entry on October 07 at $81.40
Listed on October 06, 2014
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
10/08/14: LAD produced an impressive bounce but it was not enough to erase yesterday's drop. If this rebound continues we can look for resistance near $85.00 or the 40-dma (84.40). I would hesitate to launch new positions. Let's see where the bounce stalls.

Earlier Comments: October 6, 2014:
LAD is part of the services sector. They run one of the largest auto dealerships in the U.S. with 28 brands and over 100 stores. That was before their recent merger news.

Back in June shares of LAD soared on news they were buying DCH Auto Group USA in a deal valued near $360 million. Purchasing DCH will add 27 more locations including some on the East Coast. Earnings are expected to rise about $0.70 a share (a year).

Car sales in the U.S. have been soaring. Consumers have been buying cars at the fastest pace since 2006. So why have auto-related stocks rolled over? It could be multiple factors.

CarMax (KMX), the one of the largest dealer in the U.S. recently saw its stock crash on a disappointing earnings report. The company said they were seeing consumers hit by tougher financing standards, which was impacting sales. If banks are getting tougher on car loans it's going to impact the whole industry.

LAD has had pretty strong revenue growth but now it's starting to face tougher year over year comparisons.

The group did see a bounce last week on news that Warren Buffett's Berkshire Hathaway was getting into the car business. Berkshire is buying the Van Tuyl Group of auto dealers, which is the country's biggest privately owned dealership. Van Tuyl has 75 dealerships, so it's smaller than LAD. What made the auto dealer stocks rally was Buffett's comments that he sees long-term value in the industry and plans to buy more over time. Berkshire certainly has the money to buy someone like LAD (current market cap about $2 billion) but that doesn't mean it's an immediate acquisition target.

Shares of LAD were breaking key support near $75.00 and its 200-dma before the Buffett-inspire bounce. Now the rebound is failing under resistance near $85.00.

Tonight we're suggesting investors buy puts immediately on Tuesday morning with a stop at $85.25.

- Suggested Positions -

Long NOV $80 PUT (LAD141122P80) entry $4.40*

10/07/14 trade begins. LAD gaps down at $81.40
*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


Lennox Intl. - LII - close: 77.07 change: +0.70

Stop Loss: 78.25
Target(s): To Be Determined
Current Option Gain/Loss: +15.3%
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:
10/08/14: The bounce in LII stalled at short-term resistance near its simple 10-dma. If the rally continues the next level to watch should be $78.00. I'm not suggesting new positions at this time.

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


Oceaneering Intl. Inc. - OII - close: 62.78 change: +0.53

Stop Loss: 65.10
Target(s): To Be Determined
Current Option Gain/Loss: -15.5%
Average Daily Volume = 1.6 million
Entry on October 06 at $62.35
Listed on October 04, 2014
Time Frame: We will likely exit prior to earnings on Oct. 29th
New Positions: see below

Comments:
10/08/14: Crude oil plunged to new multi-month lows this morning. That pushed the oil stocks lower and shares of OII fell to $60.50 before the afternoon bounce began. If this bounce continues we can look for short-term resistance near the 20-dma (64.65).

Earlier Comments: October 4, 2014:
The price of crude oil hits its 2014 peak in late June. The steady decline in crude oil has pressure nearly all of the energy-related stocks lower including oil services names. As a matter of fact the oil service names have fared even worse with the OSX oil service index down -9.4% for the year.

OII is underperforming its peers with a -20% decline this year. The company provides an array of oil services with hundreds of remotely operated vehicles (ROVs). A company press release describes OII as "a global oilfield provider of engineered services and products, primarily to the offshore oil and gas industry, with a focus on deepwater applications. Through the use of its applied technology expertise, Oceaneering also serves the defense, entertainment, and aerospace industries."

The weakness in oil is expected to get worse, which should keep the pressure on oil and oil service stocks like OII. Shares of OII recently broke support near $65.00. The oversold bounce has already rolled over and shares are hitting 18-month lows. The point & figure chart is bearish and forecasting at $47.00 target.

Friday's intraday low was $62.47. We're suggesting a trigger to buy puts at $62.35.

- Suggested Positions -

Long NOV $60 PUT (OII141122P60) entry $1.48

10/06/14 triggered @ 62.35
Option Format: symbol-year-month-day-call-strike


Pentair Plc - PNR - close: 64.88 change: +1.03

Stop Loss: 67.05
Target(s): To Be Determined
Current Option Gain/Loss: +61.1%
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:
10/08/14: PNR almost kept pace with the bounce in the S&P 500 with a +1.6% gain today. Broken support near $66.00 should be new resistance.

I'm not suggesting new positions at this time. Earnings are coming up on October 21st.

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: 75.26 change: +1.21

Stop Loss: 76.51
Target(s): To Be Determined
Current Option Gain/Loss: -27.5%
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:
10/08/14: SBUX flirted with a breakdown under the bottom of its trading range. Then when the market-wide rebound began shares soared to its 30-dma.

I am not suggesting new positions at this time.

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: +1.07

Stop Loss: 72.25
Target(s): To Be Determined
Current Option Gain/Loss: +31.2%
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:
10/08/14: TUP tagged a new relative low before bouncing. Today's move looks like a bullish engulfing candlestick reversal pattern but it needs to see confirmation. I am not suggesting new positions. More conservative investors might want to move their stop closer to the $71.00 level.

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


Vulcan Materials Co. - VMC - close: 57.99 change: +0.71

Stop Loss: 60.15
Target(s): To Be Determined
Current Option Gain/Loss: -28.1%
Average Daily Volume = 976 thousand
Entry on October 08 at $56.90
Listed on October 07, 2014
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
10/08/14: VMC continued to sink this morning as expected. The stock hit our suggested entry point at $56.90. Shares eventually pierced the $56.00 level. Then the rebound started midday, before the rest of the market began to bounce, and VMC rallied back toward short-term resistance, prior support, near $58.00. I'd like to see this bounce stall or reverse before launching new plays.

Earlier Comments: October 7, 2014:
VMC is in the industrial goods sector. The are the largest producer of construction aggregates in the United States. They are also a major producer of aggregate-based construction materials. Put it altogether and VMC produces crushed stone, sand, gravel, asphalt and ready-mix concrete.

The stock has languished for years after peaking near $125 a share back in 2007. It looked like the stock has turned a corner back in 2011 but that rally now appears to be in trouble. More recently VMC peaked under $70 back in March this year. It's been slowly chopping sideways since then in the $60-70 zone. The recent weakness might suggest a trend change for the worse.

The selling pressure has pushed VMC stock under multiple layers of support. It could get a lot worse. The market's recent weakness has been stoked by fears of a global growth slowdown. Bulls could argue that nearly all of VMC's sales are inside the U.S. and the U.S. economy is still growing. That's true. Evidently investors don't care.

Today's display of relative weakness (-2.1%) left shares of VMC testing its long-term trend line of higher lows dating back to 2011. A breakdown here could mean a much longer and larger correction lower. Tonight we're suggesting a trigger to buy puts at $56.90.

- Suggested Positions -

Long NOV $55 PUT (VMC141122P55) entry $1.67*

10/08/14 triggered @ 56.90
*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


WESCO Intl. - WCC - close: 78.19 change: +1.22

Stop Loss: 80.55
Target(s): To Be Determined
Current Option Gain/Loss: -23.0%
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:
10/08/14: WCC, like just about every other stock today, slipped to new relative lows this morning and then bounced sharply this afternoon. The rebound in WCC did stall near its 10-dma. If this rally continues the $80.00 level should be 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

iShares Russell 2000 ETF - IWM - close: 106.92 change: -1.79

Stop Loss: 106.35
Target(s): To Be Determined
Current Option Gain/Loss: -30.2%
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:
10/08/14: I cautioned readers yesterday that the IWM would likely hit our stop loss today. As expected small caps continued to sink this morning we were stopped out at $106.35.

Then this afternoon the FOMC minutes sparked a widespread market rally (lots of short covering). The big bounce in the IWM (+1.9%) has created a bullish engulfing candlestick reversal pattern but it needs to see confirmation.

- Suggested Positions -

DEC $110 call (IWM141220c110) entry $3.11 exit $2.17 (-30.2%)

10/08/14 stopped out
10/07/14 Readers may want to exit now, the IWM looks poised to hit our stop soon
10/02/14 triggered @ 108.35
Option Format: symbol-year-month-day-call-strike

chart: