Option Investor
Newsletter

Daily Newsletter, Tuesday, 10/21/2014

Table of Contents

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

Market Wrap

Rumor Rally

by Jim Brown

Click here to email Jim Brown

A report out of Europe claimed the ECB was planning on buying corporate bonds as part of their coming QE program and the markets rocketed higher.

Market Statistics

While the rumor was unconfirmed and flatly denied by other sources it did manage to lift the S&P futures out of a -15 point decline overnight and move them solidly positive before the open. China's GDP came in at 7.3% and the lowest level since the financial crisis and with the exception of the crisis the lowest level in decades. However, it was slightly above the 7.2% consensus so the Asian markets were mixed rather than in crash mode.

The Dow suffered from two more earnings misses from Dow components and IBM was down hard again but once the short covering began at the open those three components were unable to drag the index down.

On the economic front the Existing Home Sales for September came in stronger than expected at an annualized rate of 5.17 million compared to estimates for 5.10 million. Sales rose in 3 of the 4 regions. The Midwest declined -5.6% with the Northeast up +1.5%, South +5.0% and West +7.1%. Those are very strong numbers for this time of year. Normally people want to be moved in before Labor Day so the kids can start the year at their new school.

Inventories of single-family homes declined -1.3% to 2.3 million but still up +6% from the prior September. This equates to a 5.3 month supply. Home prices were up +5.6% over year ago levels with the average sales price of $209,700. The biggest negative in the data was the lack of first time homebuyers, which is at lows dating back to 2010. People can't pass the credit check and come up with enough down payment to overcome objections.


The Regional and State Employment for September was a non-event. Employment rates rose only marginally in 38 states and declined in 10 states. This report was ignored.

The calendar for tomorrow is equally uninspiring with only the Consumer Price Index as a headline. Consensus estimates are for a rise of +0.1% but I would not be surprised to see it flat or negative because of the drop in commodity prices.

The reports for the rest of the week are not normally market movers. All eyes are on the FOMC meeting next week and the potential end of QE.


Dow component McDonalds (MCD) reported earnings that declined -30% to $1.09 per share, down from $1.52 in the year ago quarter. Revenue declined -5% to $6.9 billion with U.S. same store sales falling -3.3%. The company blamed a lack of participation by millennials in the USA, store closures in Russia in retaliation for the sanctions and the meat supplier in China for the weak performance. Still, operating income in the U.S. fell -10% as new marketing initiatives failed. During the quarter it was found that Shanghai Husi Food Co, a supplier to McDonalds and others, was mixing fresh meat with expired meat and selling it as fresh. The discovery prompted yet another round of fast food avoidance in China. Shares declined -$1.85 at the open but recovered to end with a -0.58 loss.


Coca Cola (KO) shares declined -6% after reporting slower sales of soda. Overall global sales rose +1% thanks to noncarbonated beverages. In the U.S. sales of both soda and non-carbonated beverages declined. Recently Pepsi also reported a -1.5% decline in soda volume. Apparently taking the soda machines out of all the schools is actually having an impact. Adult Americans have been cutting back on soft drinks for the last decade.

Coke said it was focusing on smaller cans to boost profits. Unfortunately those profits fell -14% to 53 cents, which beat estimates by a penny but revenue of $11.98 billion missed forecasts of $12.15 billion.


Dow component IBM continued its decline with another -$6 drop to make it a loss of -$19 for the week. The -6 points is the equivalent of -48 Dow points but you could not tell it from the +215 gain on the Dow today. IBM was forced to cancel its forecast for $20 in profits in 2015 because of a rapidly changing technology environment from what they had been used to for the last decade. IBM is also being hampered by slowing hardware sales to Asia as a result of Snowden's NSA admissions. China is afraid IBM hardware has built in NSA entry points for future snooping.


Harley Davidson (HOG) shares rallied +7% after reporting earnings of 69 cents that beat estimates of 59 cents. Retail sales at dealers rose +3.4% in the USA. Globally they sold 73,217 motorcycles compared to 70,517 in the year ago quarter. Sales in Q3 rebounded somewhat after the cold weather in Q2 depressed spring sales.

Harley is introducing new models including an electric version that seems to be going over well enough for them to expand production. Management reaffirmed full year guidance and that helped boost the stock price.


Despite the increased orders for Hellfire missiles and other military equipment for use in Iraq and Syria, Lockheed Martin (LMT) guided for a decline in 2015 sales and reported lower than expected revenue for the second time this year. The company said 2015 revenues would decline by low single digits compared to 2014. In Q3 revenue declined -2% to $11.1 billion and below estimates for $11.31 billion. Earnings rose +5% to $2.76 compared to consensus estimates of $2.71. Despite the lowered 2015 guidance the company raised full year 2014 guidance to the higher end of the prior range. Revenue is expected to decline slightly from $45.4 billion to $45.0 billion but earnings are expected to rise from $9.58 to $11.15. Shares declined -$3 on the news but held above recent support.


After the bell VMware (VMW) reported adjusted earnings of 87 cents that beat estimates of 83 cents. Revenue rose +18% to $1.52 billion and also beating estimates of $1.50 billion. License revenue rose +13% with long term agreements including maintenance and support accounting for more than 40% of their revenue. EMC owns 80% of VMW and activist investor Elliott Management has been urging them to sell the unit. EMC is balking and claims it will continue to maintain its ownership. Shares were down $1 in afterhours. EMC reports earnings on Wednesday.


Yahoo (YHOO) reported earnings after the close of $6.70 per share or $6.77 billion. However, if you strip out the sale of their Alibaba shares the earnings declined to 52 cents or $543 million. Revenue from display ads declined -6% to $396 million. Overall ad sales rose +1% to $1.1 billion. The problem with these earnings is that they can no longer hide behind the Alibaba sale and future earnings will be based on their declining business model. CEO Marissa Mayer is going to have to do something dramatic with the $6 billion they got from the Alibaba sale or she is going to be looking for another job very soon.

The activist investors are starting to circle like hungry sharks and if Yahoo continues to flounder in its business model there will be plenty of investors lobbying to break up the company.

Yahoo shares rose $1 in afterhours.


On the earnings calendar for tomorrow two more Dow components will report. Those are Boeing and AT&T. The big events will be on Thursday with AMZN, CAT, GM, MSFT and MMM.


Earnings guidance is still slightly better than normal with negative guidance 3:2 over positive guidance. Normal is 2:1 negative over positive. However, inline guidance is growing rapidly. Apparently many companies are electing to stick with their prior estimates in hopes of closing out the year with a surge.


Amgen (AMGN) shares have risen +$16 since the lows at $128 last Thursday. The force behind the move is activist investor Dan Loeb and his fund Third Point. Loeb wants Amgen to break into two businesses. One would be the cash generating mature business and the other a fast-growing R&D focused business. Loeb sees Amgen shares worth $249 if the breakup were to occur. Shares of AMGN gained +5% today to close at $144.


Markets

There were multiple reasons the market rallied today. The Ebola fears are fading as expected now that the various U.S. groups in isolation are being released with no additional infections. This is calming consumer fears and removing another brick from the wall of worry.

Oil prices have stabilized at $83 and a level that should continue to hold. Energy stocks, a significant portion of the S&P, are all in rally mode. Last week they were in crash mode with the energy sector down -25% and firmly in a bear market. This week the dip buyers are viewing the sector as a buying opportunity.

The recent comments from various Fed heads has turned decidedly more dovish and there is even a chance for the FOMC to postpone ending QE at the October meeting. This would have been an unheard of topic just a month ago. There is even talk of a QE4 if Europe does fall into a deep recession. That is music to the market's ears.

China reported a Q3 GDP of 7.3% and slightly better than the 7.2% analysts expected. We don't know how much of that number was "managed" by Chinese bureaucrats but we have to take it on face value. Much has been made about the decline in China's economy. However, an astute reader pointed out that China's GDP output is actually rising, not falling. In constant 2005 dollars China's GDP output is actually expanding. To put this into perspective China's GDP is expected to rise to more than $10 trillion by 2020. I would hardly call this a material slowdown.

World Bank data. Annual amounts in trillions.

Year, Output, Growth, Rise in Output

2009 $3.476, +8.70%, +$258 billion
2010 $3.829, +10.4%, +$363 billion
2011 $4.196, +9.30%, +$357 billion
2012 $4.517, +7.65%, +$321 billion
2013 $4.864, +7.68%, +$347 billion
2014 $5.219, +7.30%, +$355 billion

Hat tip to JM for the info.

Lastly, the markets normally rebound from the October lows in the week after expiration. With only nine weeks left in 2014 fund managers are under the gun to do something quick to recover from lackluster performance year to date. More than 80% of funds are trailing their benchmarks and they have to chase performance or they are going to lose investors when the yearend statements are mailed.

I could go on with several other geopolitical events but you get the idea. We had a decent dip to correction territory and now the dip is being bought. Earnings are coming in slightly better than expected despite several high profile misses.

With the Fed turning dovish, earnings improving and geopolitical headlines fading it would appear to be a perfect recipe for a yearend rally. It is almost scary that I actually typed those words. I hope I did not jinx the markets.

The S&P soared +1.95% to 1,940 and blew right past the resistance of the 200-day average at 1,906. The move started with a monster burst of short covering that sent the S&P up +20 points at the open. From there it was a case of solid buying the rest of the day.

As usual the close left us with a bit of uncertainty with the S&P stalling right at downtrend resistance. With the S&P up +120 points from the low five days ago there are plenty of stocks that have gone from oversold to overbought in a very short period of time. A +120 point move normally takes several months in a normal market. However, the velocity of a sharp decline is quite often matched by the velocity in the rebound at least in the early days of the move.

If we continue higher the next challenge will be in the 1,960-1,966 range where the 50 and 100 day average converge along with some horizontal resistance. Support is so far in the rear view mirror that it is not worth mentioning.



The Dow rebounded +215 points but it is still below the downtrend resistance line around 16,800 from the September highs. It also has the convergence of the 50/100 day averages at 16,894. Once it gets to that roughly 16,900 level the resistance will increase substantially. From 16,900 to 17,150 there is a lot of congestion from the September and we will start running into the "I am finally back to where I should have sold" crowd that will be exiting with a sigh of relief.

I am not as bullish on the Dow as I am on the other indexes because of the earnings problems from the individual stocks. IBM is going to be a drag on the index for weeks to come and there are still 15 Dow stocks left to report.




The Nasdaq shifted into rocket mode when the expected post earnings depression did not hit Apple shares. Quite a few analysts thought Apple would report a good quarter but then experience a sell the news event. Fortunately the guidance was so good that eager buyers were waiting for any dip.

The Nasdaq rallied +2.39% or +103 points in just one day. This blew right by prior resistance levels of 4,344 and 4,371. It has gained +300 points in the last five days from the 4,116 low. The next material resistance is 4,485. Obviously a +300 point gain in five days is extreme and I would be cautious about trying to jump on this rocket ride. There is nothing to prevent it from continuing but remember how extreme the negative sentiment was just five days ago. That can come back in a heartbeat on a negative headline. While I am encouraged with the speed of the rebound I simply urge caution.



The Russell 2000 raced past prior resistance at 1,100 and gained +1.63%. That is a +72 point rebound from last Wednesday's low at 1,040. I am glad to see the small caps performing because that means fund managers are no longer afraid of another dip. They are chasing performance and small cap stocks are the way to get it.

The Russell has little in the way of resistance until the 1,150 level and then it repeats about every 10 points until 1,180.


The real index performer is the Dow Transports. After dropping to 7,700 last Wednesday they have sprinted to 8,485 today and a +3.14% gain today alone. This is absolutely amazing. They are right back at prior resistance of 8,500 and they could easily hit a new high before the week is out if the market remains positive. The lower fuel prices are going to be very positive for Q4 earnings.


It would appear that bullish sentiment has staged a remarkable comeback but too much of a good thing can always lead to trouble. The market is setting up for a very strong week and I just hope nothing appears to derail this rally train.

There are no economics of note that could upset the markets and the geopolitical events are all fading. The dip buyers are back and shorts are running for their lives. Let's hope this is all not just a huge bear trap but there are no signs of that today.

Enter passively, exit aggressively!

Jim Brown

Send Jim an email

Click the advertisement below for a free trial to the Couch Potato Trader newsletter.

 


New Option Plays

Cyber Security Surge

by James Brown

Click here to email James Brown


NEW DIRECTIONAL CALL PLAYS

Palo Alto Networks, Inc. - PANW - close: 104.68 change: +3.80

Stop Loss: 99.75
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 2.1 million
Entry on October -- at $---.--
Listed on October 21, 2014
Time Frame: 4 to 5 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
Customer data mining is big business. It doesn't matter of the company is online or a bricks and mortar store they want to know all they can about you. Who are you? How old are you? What zip code do you live? They track your purchases and store your credit card data.

Last year retail giant Target (TGT) disclosed a cyber breach that affected up to 110 million customers to potentially having their credit card data stolen. Months later, Target's president and CEO resigned over the fiasco. Target isn't the only one being targeted.

Several weeks ago banking titan J.P.Morgan Chase (JPM) disclosed that 76 million personal accounts were at risk and seven million small businesses were exposed in a recent cyber security attack.

The list continues with recent cyber security hacking victims including Neiman Marcus, Michaels, P.F.Chang's, Albertons, Supervalu, Home Depot, Kmart, Dairy Queen, and the University of Maryland. Meanwhile, the number of cyber attacks on small business doubled last year.

According to USA Today the U.S. government just warned corporate America that cyber thieves have stolen more than 500 million financial records in the last 12 months.

Sadly it's only getting worse. The Justice Department called the online landscape for cyber threats and hacking extremely dangerous. They used the term "pre-9/11 moment" suggesting that any day now someone could launch a massive cyber attack. The government is worried about protecting our infrastructure and electrical grid. Corporate America wants to protect their data (and your data). That's why cyber security is big business and getting bigger.

PANW is making a splash in the security world. The stock IPO'd in 2012 and while it has been a rocky ride so far the company seems to have found its groove. Founded in 2005 and headquartered in Santa Clara, California, PANW describes their company as, "leading a new era in cybersecurity by protecting thousands of enterprise, government, and service provider networks from cyber threats. Unlike fragmented legacy products, our security platform safely enables business operations and delivers protection based on what matters most in today's dynamic computing environments: applications, users, and content."

More than 70 of the Fortune 100 companies use PANW's products and services. In 2013 PANW saw revenues grow +55% year over year, outpacing their rivals. They have added more than 1,000 customers per quarter for the last ten quarters in a row. PANW most recently reported earnings on May 28th and said it was their "highest rate of new customer acquisition in our history and now serve more than 17,000 customers."

Another important event last quarter was the settlement of a three-year patent lawsuit with rival Juniper Networks (JNPR). Resolving this issue has removed a significant black cloud over PANW.

The market's recent volatility has generated some big swings in PANW. Yet there was no follow through after PANW broke down under its 50-dma. Right now PANW is soaring with a six-day bounce back toward its all-time highs. The relative strength is encouraging.

Today saw shares of PANW spend over half the session consolidating sideways in the $104.00-105.00 zone. A breakout past $105.00 could be our next entry point. We're suggesting a trigger to buy calls at $105.25.

Please note I do consider this a more aggressive trade since PANW is already up more than 10% from its October lows and shares can see some big intraday moves. PANW is expected to report earnings in late November so we'll most likely exit prior to their announcement.

Trigger @ $105.25

- Suggested Positions -

Buy the DEC $110 call (PANW141220C110) current ask $5.70

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

Daily Chart:



In Play Updates and Reviews

The Widespread Rally Continues

by James Brown

Click here to email James Brown

Editor's Note:

Traders applauded strong earnings results from Apple (AAPL), Texas Instruments (TXN), and United Technologies (UTX).

The S&P 500 and the NASDAQ composite delivered their best day of the year!

All of our bullish plays with the exception of NTES have new stop losses tonight.

Prepare to exit our short-term AAPL and QQQ puts, see play update for details.


Current Portfolio:


CALL Play Updates

Ambarella, Inc. - AMBA - close: 41.46 change: +2.28

Stop Loss: $37.85
Target(s): To Be Determined
Current Option Gain/Loss: +77.7%
Average Daily Volume = 2.4 million
Entry on October 13 at $35.25
Listed on October 08, 2014
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
10/21/14: The stock market's widespread gains on Tuesday helped fuel a +5.8% surge in shares of AMBA. The stock is nearing potential resistance in the $42.00 area. More conservative traders may want to take some money off the table now.

We are raising the stop loss to $37.85.

Earlier Comments: October 8, 2014:
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.

- Suggested Positions -

Long NOV $40 call (AMBA141122C40) entry $1.80*

10/21/14 new stop @ 37.85. Traders may want to take profits now!
10/18/14 new stop @ 34.90
10/15/14 new stop @ 34.25
10/13/14 triggered at $35.25
*option entry price is an estimate since the option did not trade at the time our play was opened.
10/11/14 new entry strategy: move the entry trigger from $44.65 to $35.25 and move the stop loss from $40.45 to $31.90.
We will adjust the option strike from the NOV $46 call to the NOV $40 call
Option Format: symbol-year-month-day-call-strike


FedEx Corp. - FDX - close: 159.88 change: +4.01

Stop Loss: 153.45
Target(s): To Be Determined
Current Option Gain/Loss: +21.6%
Average Daily Volume = 1.5 million
Entry on October 17 at $155.50
Listed on October 15, 2014
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
10/21/14: Transport stocks continue to be some of the best performing stocks in the market. FDX soared +2.5% and is testing potential resistance in the $160.00 area.

Tonight we're moving the stop loss to $153.45.

Earlier Comments: October 15, 2014:
Last year a last minute surge of online shoppers overwhelmed the system and thousands of Christmas presents were delivered late. Part of the problem was terrible weather. The other challenge was the growth in online shopping. Amazon.com (AMZN) blamed UPS for the mass of delayed deliveries last year. You can bet that UPS' rival FDX has taken notice and plans to be ready this year.

Market research firm EMarketer is estimating that retail online shopping will surge +17% in 2014 to $72.4 billion. That might be under estimating the growth, especially this year as many consumers might opt to shop online instead of face the crowds and risk being a target for terrorism or catching Ebola. Granted neither a terrorist event inside the U.S. and a widespread outbreak of Ebola in the states has happened yet but people are already afraid with the daily headlines about the virus.

UPS and FDX hope to be ready. UPS is hiring up to 95,000 seasonal workers and FDX is hiring 50,000 holiday workers this year. That's 10K more than last year for FDX.

In addition to the surge in online shopping FDX should also benefit from the multi-year lows in oil prices. Low oil prices means lower fuel costs, one of FDX's biggest expenses.

It would appear that FDX has fine tuned its earnings machine as well. Their latest earnings report was September 17th. Wall Street was expecting a profit of $1.95 a share on revenues of $11.46 billion. FDX delivered a profit of $2.10 a share with revenues up to $11.7 billion. That's a +24% increase in earnings from a year ago and the second quarter in a row that FDX beat EPS estimates.

FDX chairman, president, and CEO Frederick Smith said, "FedEx Corp. is off to an outstanding start in fiscal 2015, thanks to very strong performance at FedEx Ground, solid volume and revenue increases at FedEx Freight and healthy growth in U.S. domestic volume at FedEx Express." Business has been strong enough that a few weeks ago FDX started raising prices on some services.

Since that September earnings report Wall Street analysts have been raising price targets. Some of the new price targets for FDX stock are $175, $180 and $183 a share.

The recent sell-off in the market and FDX could be an opportunity. FDX has already seen a -10% correction from its intraday high near $165 to today's low near $149. Right now FDX sits just below resistance near $155.

We're suggesting a trigger to buy calls at $155.50.

- Suggested Positions -

Long 2015 Jan $160 call (FDX150117c160) entry $5.30*

10/21/14 new stop @ 153.45
10/17/14 triggered @ 155.50
*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


The Hain Celestial Group, Inc. - HAIN - close: 103.52 change: +1.46

Stop Loss: 100.65
Target(s): To Be Determined
Current Option Gain/Loss: +36.5%
Average Daily Volume = 632 thousand
Entry on October 17 at $100.25
Listed on October 14, 2014
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
10/21/14: The rally in HAIN continues with shares up six days in a row. The stock is nearing what could be serious resistance in the $104.00 area. More conservative traders might want to take profits now.

We are raising the stop loss to $100.65.

Earlier Comments: October 14, 2014:
Looking at the world economies the U.S. is the cleanest shirt in the dirty clothes hamper. Every economy needs to see improvement but the U.S. is looking the healthiest. If U.S. growth continues to improve it should bode well for consumer spending. That should lead to strength in organic food sales.

There has been a strong trend of consumers moving more and more toward natural and organic foods. That's where HAIN is a major player. The company website describes HAIN as, "The Hain Celestial Group, headquartered in Lake Success, NY, is a leading natural and organic food and personal care products company in North America and Europe. Hain Celestial participates in almost all natural food categories with well-known brands that include Celestial Seasonings, Terra, Garden of Eatin', Health Valley, WestSoy, Earth's Best, Arrowhead Mills, DeBoles, Hain Pure Foods, FreeBird, Hollywood, Spectrum Naturals, Spectrum Essentials, Walnut Acres Organic, Imagine Foods, Rice Dream, Soy Dream, Rosetto, Ethnic Gourmet, Yves Veggie Cuisine, Linda McCartney, Realeat, Lima, Grains Noirs, Natumi, JASON, Zia Natural Skincare, Avalon Organics, Alba Botanica and Queen Helene."

HAIN's results have definitely confirmed the trend in consumer spending. They have beaten Wall Street's estimates and guided higher in three out of the last four earnings reports. Their most recent report was August 20th. You can see the big move in the stock after HAIN reported a profit of 90 cents a share on revenues that rose +26% to $583.8 million. Analysts were only expecting $0.89 cents a share on revenues of $577 million.

HAIN's management then raised their guidance again. They expect 2015 earnings to be in the $3.72-3.90 range compared to analysts' estimates around $3.73. HAIN is anticipating sales growth of +27% to +30% in 2015.

The bullish outlook for 2015 did not completely HAIN from the market's recent sell-off. Shares broke support near $100 and dipped to their 50-dma before bouncing. Altogether the stock has weathered the market's correction pretty well. The point & figure chart is still bullish and forecasting a long-term target at $131.00.

We want to be ready to buy calls if HAIN can rally back above the $100 level. Tonight we're suggesting a trigger to buy calls at $100.25. Earnings are expected in November so this might only be a 2-to-4 week trade.

- Suggested Positions -

Long NOV $105 call (HAIN141122c105) entry $2.05*

10/21/14 new stop @ 100.65
10/17/14 triggered @ 100.25
*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


iShares Transportation ETF - IYT - close: 151.91 change: +4.62

Stop Loss: 144.65
Target(s): To Be Determined
Current Option Gain/Loss: +123.5%
Average Daily Volume = 320 thousand
Entry on October 13 at $138.75
Listed on October 11, 2014
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
10/21/14: The transportation stocks are helping lead the market higher. The IYT is up six days in a row with a +10% bounce in that time. The rally past resistance at $150 and its 50-dma is bullish but now the IYT is starting to look overbought.

Investors may want to take some money off the table now, especially since our option has more than doubled in value. We are raising our stop loss to $144.65.

Earlier Comments: October 11, 2014:
The IYT is an exchange traded fund (ETF) that tries to mimic the performance of the Dow Jones Transportation Average index.

Stocks have been sinking as investors worry about a global slowdown, especially in Europe. Yet the U.S. economy is still growing. Plunging oil prices should be great news for both business and consumers. Lower fuel costs means more money to spend elsewhere. Lower fuel prices also mean better margins for transportation companies.

The IYT has hit correction territory with a -10% pullback from its September highs about four weeks ago. When the market finally bounces the transports should lead the market higher thanks to the U.S. economy and low oil prices.

It looks like IYT's current drop could be near a bottom. Volume was almost three times the norm on Friday and shares settled near technical support at its simple 200-dma. We suspect the market will see another push lower before bouncing. That could see the IYT pierce the $140 level.

Tonight we're suggesting a trigger to buy calls at $138.75 with a stop loss at $134.45. This should be considered a higher-risk, more aggressive trade. You've heard the term "catching a falling knife" and that's what we're trying to do. You may want to wait for the IYT to pierce $140.00 and then buy the rebound back above this level as an alternative strategy.

*Higher-risk, more aggressive trade* - Suggested Positions -

Long NOV $143 call (IYT141122c143) entry $3.40*

10/21/14 new stop @ 144.65
10/18/14 new stop @ 141.75
10/13/14 triggered @ 138.75
*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


NetEase, Inc. - NTES - close: 92.22 change: +2.02

Stop Loss: 87.45
Target(s): To Be Determined
Current Option Gain/Loss: +2.0%
Average Daily Volume = 430 thousand
Entry on October 21 at $91.59
Listed on October 20, 2014
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
10/21/14: We were expecting NTES to breakout past resistance and hit new highs. Our plan was to buy calls at $91.15. Shares surprised us with a gap open higher at $91.59 this morning, immediately triggering our play. NTES rallied up toward $95.00 before trimming its gains.

If the market sees a dip there is a good chance NTES could fill the gap. That could mean a dip back toward $90.50. Nimble traders could use such a dip as a new entry point.

Earlier Comments: October 20, 2014:
NTES is in the technology sector. They are part of the Chinese Internet space. The company operates online video games, an Internet portal and email services in China. Technically the stock has been outperforming most of its peers in the Chinese Internet industry (compare to the performance of the KWEB ETF of which NTES is a component).

Their most recent earnings report was healthy. NTES' quarterly profit was in-line but revenues were up +21% to $475.8 million, beating Wall Street's estimates. NTES' Chief Executive Officer Mr. Ding said, "This quarter we have achieved in three business areas MoM and YoY increase revenue total revenue growth of 17.2%, an increase of 22.3 percent compared with the same period last year, gaming revenues grew 13.1%, advertising services revenue grew 42.9%, mailboxes, electricity suppliers and other business income increased 201.5 percent."

After an initial rally on these results NTES share price stalled out at resistance near $90-91. Here we are more than two months later and NTES is testing resistance near $90-91 again. This time the point & figure chart is suggesting at $102 price target.

We are suggesting a trigger to buy calls at $91.15.

- Suggested Positions -

Long NOV $95 call (NTES141122C95) entry $2.45

10/21/14 triggered on gap higher at $91.59, trigger was $91.15
Option Format: symbol-year-month-day-call-strike


Semiconductor ETF - SMH - close: 48.82 change: +1.46

Stop Loss: 46.35
Target(s): To Be Determined
Current Option Gain/Loss: - 4.5%
Average Daily Volume = 2.4 million
Entry on October 17 at $47.15
Listed on October 16, 2014
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
10/21/14: Semiconductor stocks were some of the market's best performers today with the SOX index up +3.6%. The SMH followed with a +3.0% gain. The breakout past resistance near $48.00 is bullish but shares are now testing the top of the gap down near $49.00, which could also be resistance.

Tonight we are moving the stop loss to $46.35.

Earlier Comments: October 16, 2014:
It looks like the correction in the semiconductor stocks might be done.

The SMH is the Market Vectors Semiconductor Exchange Traded Fund (ETF) that tries to mimic the performance of the Market Vectors Semiconductor 25 index. Semiconductors as a group had been strong performers with the SMH up +73% from its late 2012 lows.

A few weeks ago the industry started to see some profit taking. MCHP issued an earnings warning last week that that sparked the massive plunge in the SMH. The SMH has witnessed a -15% correction from its 2014 closing high to the closing low on Monday this week. Now it has started to bounce. It's possible all the panic selling is over.

Intel (INTC), a much bigger company than MCHP, just reported earnings on October 14th and the results were better than Wall Street expected. More importantly INTC offered slightly bullish guidance.

Bloomberg noted that INTC said its PC-processor business rose +8.9% last quarter. Sales for INTC's chips for notebook computers soared +21%. Even chips for desktop PCs rose +6% in the third quarter.

The strong results from INTC have helped buoy the SMH, which is starting to rebound after testing (and piercing) long-term support on its weekly chart (shown below).

We suspect the worst might be over. However, this could be a volatile trade. There are a lot of semiconductor companies who have yet to report their results.

The SMH saw its rally stall under $47 and near its 200-dma. Tonight we are suggesting a trigger to buy calls at $47.15.

- Suggested Positions -

Long 2015 Jan $50 call (SMH150117c50) entry $1.10

10/21/14 new stop @ 46.35
10/17/14 triggered @ 47.15
Option Format: symbol-year-month-day-call-strike




PUT Play Updates

Apple Inc. - AAPL - close: 102.47 change: +2.71

Stop Loss: n/a
Target(s): To Be Determined
Current Option Gain/Loss: -92.8%
Average Daily Volume = 54 million
Entry on October 20 at $98.32
Listed on October 18, 2014
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
10/21/14: Market reaction to AAPL's earnings has been bullish. Shares closed today up +2.7%. This has broken the six-week trend of lower highs but shares have yet to breakout past the early September peak.

This trade was based on a post-earnings sell-the-news move which has not appeared. More aggressive traders may want to put a stop just above the September all-time high ($103.74). We are suggesting an immediate exit tomorrow morning. However you may want to consider just leaving this play open with no stop since the damage has already been done and the current bid on the put is 10 cents.

WEEKLY AAPL puts (that expire after Oct. 31st)

- Suggested Positions -

Long AAPL Oct 31st $96 PUT (AAPL141031P96) entry $1.40

10/21/14 prepare to exit tomorrow morning,
Option Format: symbol-year-month-day-call-strike


PowerShares QQQ (NASDQ-100 ETF) - QQQ - close: 96.87 chg: +2.48

Stop Loss: n/a
Target(s): To Be Determined
Current Option Gain/Loss: -89.3%
Average Daily Volume = 36.6 million
Entry on October 20 at $92.96
Listed on October 18, 2014
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
10/21/14: The market's rebound is accelerating and the NASDAQ composite delivered its best day of the year with a +2.39% gain. The QQQ's outperformed the broader index with a +2.6% gain.

We were expecting the Qs to sell-off on earnings from AAPL and AMZN. With the market in rally mode it's not working out for us. Tonight we are suggesting an early exit tomorrow morning. However, traders may want to just leave this trade open. The damage is done with the bid on our put at 14 cents. There is a still a chance that stocks retreat before the end of October. Several big name NASDAQ-100 stocks are due to report in the next two weeks. Any disappointing results could spark some profit taking.

- Suggested Positions -

Long QQQ Oct.31st $92 PUT (QQQ141031P92) entry $1.32

10/20/14 play begins. QQQ opens at $92.96
Option Format: symbol-year-month-day-call-strike


Sohu.com Inc. - SOHU - close: 43.72 change: +0.18

Stop Loss: 45.65
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 393 thousand
Entry on October -- at $---.--
Listed on October 18, 2014
Time Frame: 2 to 3 weeks
New Positions: Yes, see below

Comments:
10/21/14: SOHU is still not participating in the market's rally, which is a good sign for the bears.

Earlier Comments: October 18, 2014:
This is a simple momentum trade on a struggling Chinese Internet name.

Sohu.com is an online media, Internet search, and video gaming company. Unfortunately gaming revenues are becoming a smaller chunk of the overall pie for SOHU. At the same time, while they have seen significant growth in ad revenues from streaming TV shows and movies, the company is facing pressures on this front. The cost of content is rising while the Chinese government is becoming more strict about what shows, especially which American shows, they will allow to be aired (or streamed over the Internet). This is pressuring SOHU's margins.

Bulls can argue that SOHU has already corrected and is now oversold. That's possible. SOHU is down eight weeks in a row. It seems to be slicing through support. The 2014 low didn't hold it. Support near $50.00 didn't hold it. The $45 level has failed. The next stop could be $40.00. SOHU's recent bounce just failed at short-term resistance at the 10-dma.

I do consider this a more aggressive, higher-risk trade because SOHU is so oversold. We'll try and limit our risk with a stop above Friday's high.

Trigger @ $43.25 *Smaller positions to limit risk*

- Suggested Positions -

Buy the NOV $40 PUT (SOHU141122P40) current ask $1.00

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