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Newsletter

Daily Newsletter, Wednesday, 10/29/2014

Table of Contents

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

Market Wrap

Buy the Rumor, Sell the News

by Keene Little

Click here to email Keene Little
There were no surprises out of today's FOMC announcement and that was met with disappointment. The hopeful bulls (and/or scared bears) created a strong 2-week rally on expectations for more Fed help. Not so fast was the message from the Fed.

Wednesday's Market Stats

The market had been rallying strong for the past two weeks, ever since some Fed heads started hinting that they might remain more accommodative and for a longer period of time than what had been feared. The strong September-October decline was blamed on worry about the Fed pulling liquidity out of the market. Once there were hints the Fed could remain more accommodative the bears panicked and started some vicious short covering while the bulls rejoiced at the good news (well, an expectation of good news) that QE4 is right around the corner.

The end result was the strongest 2-week rally that we've seen in the past three years. But is it a "real" rally or is it a short-covering rally? Knowing that the strongest rallies actually occur during bear markets we have to question the authenticity of this rally. Bear market rallies tend to be retraced just as quickly as it took for the rally once the reason for hope has been removed.

Bear market rallies are based on hope and the pattern for a bear market decline is often called the "slope of hope" as sharp rallies are followed by stronger declines. What we don't know yet is whether the 2-week rally we've had is just the first in what will become many hope-filled rallies in the next bear market. Or are we into another rally leg to a new high? The answer is not clear yet but with some indexes making new highs (TRAN) it remains a possibility that the bears need to respect.

Today's FOMC announcement was not supportive of the past 2-week rally. The hope for more was not met with assurances from the Fed and the first reaction to the announcement was a selloff in the stock market. Perhaps it was simply a typical "buy the rumor, sell the news" reaction as the market fully priced in what the Fed is going to do. Treasury yields spiked down (bonds were bought), suggesting the Fed will continue to support the bond market, but gold sold off while the dollar spiked up, which suggests less monetary stimulus from the Fed. So we've got mixed signals from the various markets and only with some additional time will we see how this shakes out.

It's hard to believe it's been two years since the Fed announced QE3 with their $85b/month purchases of Treasuries and mortgage debt. The taper program has been whittling the amount down and today they announced the expected completion of the program. Keep in mind though that they're not removing the money they've pumped into the system; they're stopping the purchase of more but they'll continue to roll over expiring debt by purchasing new debt, which may have been the reason Treasury yields spiked down this afternoon -- bond demand will still be there. Still, the removal of the added liquidity that the market has enjoyed for the past two years with this program is now stopping.

Also disappointing the stock market today was their statement, "The Committee judges that there has been a substantial improvement in the outlook for the labor market since the inception of its current asset purchase program. Moreover, the Committee continues to see sufficient underlying strength in the broader economy to support ongoing progress toward maximum employment in a context of price stability. Accordingly, the Committee decided to conclude its asset purchase program this month."

The use of the words "substantial improvement" in the labor market scares bulls. They want to see more evidence the Fed is nervous about the economy and therefore hint that more accommodation may be required. The Fed included the language "considerable time" when it comes to an anticipated change in their federal funds rate (which they refer to as "policy accommodation"), leaving themselves an open door in both directions for further changes. If they find labor employment and inflation change more than expected in the next several months they'll adjust their accommodative policy accordingly. This is of course nothing new but it means the market will be hanging on every word from the Fed heads over the next weeks/months.

The Fed talked about including a lot more data, such as what's happening in the global economy, to help them decide when it will be time to make a change to their policy accommodation. One bone the Fed did throw to the bulls (do bulls chew on bones?) was their statement that the Committee "currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run." The Fed is saying they no longer will use labor conditions or inflation targets to determine their policy accommodation decisions but will now look for much more data to help them decide. In the meantime, savers be damned, debt holders be loved. The message has been clear for a long time -- the Fed wants spenders, not savers.

The bottom line is that there were no surprises out of the FOMC announcement and that's actually what disappointed the bulls. They were really hoping for at least some hints of more accommodation, which is what the past 2-week rally was all about, and not getting it could cause some problems for the rally. Now it's time for some more direct intervention to prevent the bears from getting a toehold (wink).

The 2-week rally that we had obviously looks bullish. New highs appear to be right around the corner. But what makes it a dangerous time to join the bulls is how quickly the market rallied. As mentioned earlier, the sharpest rallies occur during bear markets and this rally was indeed a sharp one. John Hussman, President of the Hussman Investment Trust, has made a lot of noise lately about how dangerous this market is for investors. Based on his bearish opinion he is usually immediately discounted by bullish investors. My mere mention of his name here will likely have many of you immediately skimming the rest of this and looking for more evidence that supports your bullish perspective. It's natural to do that (it's what has made our country so divided as people look for only what supports their views).

Hussman has studies past stock market peaks and believes we're repeating the pattern of past peaks, including the recent 2-week rally. He was out beating the drum about the dangers of this market back in September when he identified it as a time of increased risk from a "severely overvalued, overbought, overbullish syndrome of conditions ... that is then followed by a clear deterioration in market internals." Those were in fact the conditions at the September high. Hussman recently pointed out what typically follows the first breakdown into an oversold short-term low. He refers to the subsequent rallies as "fast, furious, prone-to-failure" advances and believes that's what we just experienced. Off the September highs we had breaks of longer-term uptrend lines and the 50- and 200-dma's that were then followed by a "fast and furious" advance. The only question that remains now is whether it's going to be "prone to failure."

Quoting from Hussman's latest market observations, he notes the following:

My impression is that we are observing a similar dynamic at present. Though we remain open to the potential for market internals to improve convincingly enough to at least defer our immediate concerns about market risk, we should also be mindful of the sequence common to the 1929, 1972, 1987, 2000, and 2007 episodes:
1) an extreme syndrome of overvalued, overbought, overbullish conditions (rich valuations, lopsided bullish sentiment, uncorrected and overextended short-term action);
2) a subtle breakdown in market internals across a broad range of stocks, industries, and security types;
3) an initial 'air pocket' type selloff to an oversold short-term low;
4) a 'fast, furious, prone-to-failure' short squeeze to clear the oversold condition;
5) a continued pairing of rich valuations and dispersion in market internals, resulting in a continuation to a crash or a prolonged bear market decline."

Bullet #5 is of course important here. We don't know if this 2-week rally will result in a further selloff but if it does then the pattern suggest the selloff will be more severe than the preceding rally. In that case bullish positions for the November opex cycle will be at risk. But if we've got at least one more new high left in this market then we need to identify some upside targets to watch for.

I'll start off tonight's chart review with a weekly chart of the DOW to point out some levels of interest. Using the log price scale, you can see the perfect test back on October 15th of the trend line along the highs from 1971-1972-1987. Not seen on the chart, this line was support at the 2002 and 2003 lows but then was broken in 2008. It was then resistance to the rally into the May 2011 high but then recovered in March 2013. It's been tested multiple times since then and continues to act as support. The market obviously thinks this trend line is important so it's an important line for the bulls to defend. A drop below the October 15th low, at 15855, would be a strong sell signal.

Dow Industrials, INDU, Weekly chart

The uptrend line from October 2011 - November 2012 was broken at the beginning of October and is currently nearing 17100 so if there's at least a little more upside on Thursday keep an eye on that level for potential resistance. If the DOW joins the TRAN to new highs we could see a rally up to at least the trend line along the highs from last December-July-September, currently near 17490. The continuation of the bearish divergences doesn't prevent a new high but it makes it a risky bet from here.

The daily chart of the DOW, below, is using the arithmetic price scale, which shifts the positions of the longer-term trend lines. The uptrend line from October 2011 - November 2012, referenced on the weekly chart above, drops down to near the October low, as shown on the daily chart below. The broken November 2012 - February 2014, which is not shown on the weekly chart, was tested today, which sets up a potential bearish kiss goodbye from here if Thursday sees more selling. The bearish wave count calls the 2-week rally just a bear-market rally that will be followed by strong selling. The bullish wave count calls for just a pullback, shown in green, before heading higher into November-December. It could press higher before pulling back but if it simply continues to power higher without a pullback it's going to make it even more vulnerable to a sharp selloff.

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- bullish above 17,100
- bearish below 16,500

I've been trying to figure out the wave pattern of the rally off the October 15th low as a way to help determine whether it's likely just bear-market rally or something more bullish. Unfortunately the pattern leaves the door open for both possibilities. I can't even get a higher-odds probability to peak its head out. The 30-min chart below shows a couple of idea and when the wave count doesn't help enough I resort to trend lines/channels and in this case a rising wedge, which is bearish. Today's pullback broke the bottom of the wedge, near 16985, just before the FOMC announcement. The uptrend line will be near 17035 at tomorrow's open and a bounce up to the line for a back-test followed by a kiss goodbye would be a sell signal.

Dow Industrials, INDU, 30-min chart

If the DOW pushes up to at least a minor new high tomorrow, it could test the broken uptrend line from November 2012, near 17102 tomorrow morning. It would be another potential setup for the start of at least a larger pullback so watch for a setup to play the short side if it breaks down from the 16985-17100 area. But if the DOW makes it much above 17100 and stays above then we'd have a bullish move, especially if it pops out the top of the rising wedge pattern, near 17200 by the end of the day tomorrow.

Yesterday SPX closed slightly above its broken uptrend line from November 2012 - February 2014, currently near 1980. But it's struggling with price-level S/R near 1985 and today's candle is a long-legged doji at resistance. This candlestick is usually a sign that the market has lost its way and that typically means it's lost its momentum. Commonly seen at/near tops, a red candle on Thursday would create a sell signal. We can't know yet whether any selling from here would be just a pullback before pressing higher later in November or if we'll start a more significant decline. The bearish potential suggests the short side would be the better trade and then monitor it for signs of being just a corrective pullback vs. a more impulsive (bearish) decline.

S&P 500, SPX, Daily chart

Key Levels for SPX:
- bullish above 1985
- bearish below 1890

The 60-min chart below shows the oscillation around the broken uptrend line from November 2012, which created the long-legged doji on the daily chart. SPX is also struggling near the 78.6% retracement of its September-October decline, at 1976.76, which is one of this market's favorite retracement levels (for a deep retracement, which often gets both sides leaning in the wrong direction). Because of the trend line and 78.6% retracement, any further rally would be bullish, although the 2010-2020 area would likely be tough resistance, especially with an overbought market.

S&P 500, SPX, 60-min chart

Like SPX, NDX finished with long-legged doji, which was inside yesterday's candle. An inside day and a doji are often interpreted as indecision days, or days of rest, so that's clearly what we could have here. But the setup the short-term pattern shows loss of momentum at the current high and at least a pullback before heading higher (the bullish case) should be expected. The bearish case says the sharp rally off the October 15th low will be completely retraced and quickly. It's not a good place to be pressing bullish bets, especially if it drops back below price-level S/R near 4050. It remains bullish above that level but again, not it's not a place where I'd be adding bullish positions.

Nasdaq-100, NDX, Daily chart

Key Levels for NDX:
- bullish above 4050
- bearish below 3870

The RUT is the index that I've been using for the past few weeks to point out the likelihood for at least a high bounce following the September-October decline. But I thought it would rally some, pull back into the end of October and then rally some more into early- to mid-November. It instead decided it didn't need a pullback and simply rallied up to potential resistance at its downtrend line from July-September and its broken uptrend line from October 2011 - November 2012. The two trend lines cross near 1156 on Thursday so it would be more bullish above that level (on a closing basis since we know intraday breaks of S/R are common). At the moment the RUT is also struggling with its 200-dma, near 1146 (where it closed today), and the 62% retracement of its July-October decline, at 1147.43. It's a good place for at least a rest and we'll find out soon if the bulls feel they need a rest or not.

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- bullish above 1157
- bearish below 1104

Off the October 15th lows, the TRAN had one of the strongest rallies of all the indexes. It's beckoning the other indexes to follow since at the moment we've got bearish non-confirmation of its high but not for the DOW. The TRAN not only retraced its September-October decline but did so in about half the time. It looks like one of those "too much, too fast" kind of moves and frankly looks like a short-covering rally typically seen during bear markets (as discussed earlier with John Hussman's quotes). At this morning's high, at 8793, it came close to its trend line along the highs from 2010-2011-2014, about 40 points higher. The question for bulls is whether or not they think the TRAN will have better luck this time getting through the trend line, especially with volume tapering off as the rally has progressed and now overbought.

Transportation Index, TRAN, Daily chart

It's been a while since I've reviewed the chart of home builders and I thought now's a good time since it looks poised to start the next leg down. A 3-wave bounce off the August 7th low fits well as an expanded flat a-b-c correction (good Fib wave relationships) and the rally up to the top of its down-channel from February looks complete. This is a good setup for a short play on the group (ITB or XHB) and I'd use a stop just above 506 on the DJUSHB index.

DJ U.S. Home Construction index, DJUSHB, Daily chart

The rally into last February's high completed an a-b-c bounce correction to its 2006-2009 decline and retraced a little more than 62%. Notice the rounding top pattern on the monthly chart of the home builders near the 62% retracement level (31.80):

DJ U.S. Home Construction index, DJUSHB, Monthly chart

Traders in the U.S. dollar looked as though they were surprised by the FOMC announcement today. The dollar spiked up, which fits with the larger pattern calling for one more minor new high to complete the 5th wave in the move up from last May. It should be only a minor new high, perhaps near 87, before starting a larger pullback. As depicted on its weekly chart below, the bullish wave count calls for a pullback into early 2015 before starting a stronger rally that will easily break above 87 and head up toward 110, if not 120, into 2016. But if it's going to stay trapped inside a larger sideways triangle that it's been in since 2008-2009 we will see the dollar work its way back down toward 75 later in 2015/2016.

U.S. Dollar contract, DX, Weekly chart

Gold should not have much more to its current pullback before heading higher. I do see the potential for a test of its October 6th low, near 1183, but it would likely be accompanied by bullish divergence and be a good setup to play the long side on gold. For the rest of this year I'm expecting gold to rally, probably coinciding with a larger pullback for the dollar, before starting a stronger decline that will likely take gold below 1000. I continue to look for an end-of-year rally (not straight up) to about 1325 before turning bearish again.

Gold continuous contract, GC, Daily chart

Oversold and showing some daily bullish divergence at its recent low, oil looks ready for a larger bounce/consolidation before heading lower early next year. Oil would look a little more bullish back above its broken uptrend line from 2011-2012, currently near 85.45, but for the moment I think we'll see a multi-month consolidation before it heads lower, eventually making it down to the $70 area in early 2015. If it works its way up to its broken uptrend line from 2011-2012 by next March we'll see it reach maybe 87 before heading down toward 70. That would then set up a large bounce correction in 2015 so I don't think we'll see oil hang around the $70 level for very long, assuming it will eventually make it down to there. For now I see oil holding the low 80's for the rest of this year.

Oil continuous contract, CL, Weekly chart

There will be no market-moving economic reports in the morning so the market will be on its own to face however market participants are going to react to today's FOMC news.

Economic reports and Summary

The combination of a rally that has been, in John Hussman's words, "fast, furious, prone-to-failure" and with indexes up against resistance with short-term bearish divergence, it's not a good time to be pressing bullish bets. We could get another rally leg on Thursday, especially if the pullback this afternoon was designed to suck in some shorts that will be used for short-covering fuel, but I'd be more interested in looking at a new high, with more bearish divergences, as a shorting opportunity. It might be good for just a trade for a larger pullback but it has the potential to turn into a strong decline, reversing the 2-week rally. Either way I'd continue to exercise caution on Thursday since we've seen plenty of times where the market is "helped" the day after a disappointing reaction to the FOMC announcement. We can't have the market acting disappointed since that might scare Mom and Pop investors.

The big question remains -- are we going to get new highs for the indexes out of this rally? The TRAN says yes, since it's already there. But the bounce pattern is far from clear and it's just as easy to argue it's only been a fast and furious bout of short covering, which leaves the market vulnerable to a downside disconnect without the shorts in place. It's usually why bear market rallies are followed by even stronger selling; bulls panic out of their long positions, having thought new highs were assured, while bears chase the move lower, afraid of missing the decline they were sure was coming but got chased away.

If we do get new highs out of this rally there's a turn window around the middle of November, perhaps right after the midterm elections. Because the rally has been so fast I think it's dangerous to chase it to the upside from here. But a new high with bearish divergences would have me looking to short it. As always, timing is everything so trade safe.

Good luck and I'll be back with you next Wednesday.

Keene H. Little, CMT

In the end everything works out and if it doesn't work out, it is not the end. Old Indian Saying


New Option Plays

Holiday Shopping Season Is Almost Here

by James Brown

Click here to email James Brown


NEW DIRECTIONAL CALL PLAYS

Costco Wholesale - COST - close: 131.93 change: +0.87

Stop Loss: 128.90
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 1.9 million
Entry on October -- at $---.--
Listed on October 29, 2014
Time Frame: Exit prior to earnings in December
New Positions: Yes, see below

Company Description

Why We Like It:
COST is part of the services sector. The company runs a discount, membership sales warehouse. The company's latest earnings report said Costco currently operates 664 warehouses, including 469 in the United States and Puerto Rico, 88 in Canada, 33 in Mexico, 26 in the United Kingdom, 20 in Japan, 11 in Korea, 10 in Taiwan, six in Australia and one in Spain.

The company has struggled to hit Wall Street's bottom line estimates for over a year but steady improvement in their same-store sales have helped drive the stock higher. A strong back to school shopping season and higher membership fees fueled a better than expected quarterly report.

COST reported their Q4 numbers on October 8th. After missing estimates for five quarters in a row the company finally beat estimates. Analysts were expecting a profit of $1.52 a share on revenues of $35.3 billion. COST delivered $1.58 a share with revenues up +9.3% to $35.52 billion. The net profit number was up +13% and gross margins improved 15 basis points.

COST also reported that their e-commerce sales continue to grow at a brisk pace and their online sales rose +18% in their fourth quarter. Same-store (comparable store) sales remain a key metric to watch. COST's Q4 same-store sales were up +4% yet if you back out falling gasoline prices and currency effects their comparable store sales were up +6% for the quarter versus +4.5% a year ago. Membership renewal rates remain very strong at 91% in the U.S. and 87% globally. COST plans to open up to eight more locations before the end of the 2014 calendar year.

The company also recently announced their first foray into China. COST has entered the Chinese market with an online store through Alibaba Group's (BABA) Tmall Global platform.

The holiday shopping season is almost upon us with less than 60 days before Christmas. COST is poised to do well since the company caters to the higher-end more affluent customer.

Shares are hovering just below the $132.00 level. Tonight we are suggesting at trigger to buy calls at $132.25. We will plan on exiting positions prior to their December earnings report.

Trigger @ $132.25

- Suggested Positions -

Buy the DEC $135 call (COST141220c135) current ask $1.51

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

Daily Chart:

Weekly Chart:



In Play Updates and Reviews

Market Muddles Sideways

by James Brown

Click here to email James Brown

Editor's Note:

As is normally the case the market saw a surge of volatility following the FOMC announcement this afternoon. Yet after chopping back and forth for a while stocks actually ended with a bounce but still in negative territory for the session.

ULTA and MON hit our entry triggers. SAFM hit our stop loss.


Current Portfolio:


CALL Play Updates

Acuity Brands, Inc. - AYI - close: 137.96 change: -0.45

Stop Loss: 131.25
Target(s): To Be Determined
Current Option Gain/Loss: - 2.6%
Average Daily Volume = 485 thousand
Entry on October 28 at $136.25
Listed on October 27, 2014
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
10/29/14: It was a relatively quiet session for AYI today. Traders did buy the dip intraday. The next obstacle is resistance near the $140 level.

Earlier Comments: October 27, 2014:
AYI is part of the technology sector. The company considers itself the North American market leader and one of the world's biggest providers of lighting solutions. Headquartered in Atlanta, Georgia, AYI does business in North America, Europe, and Asia. Their fiscal 2014 sales hit $2.4 billion.

It has been a rocky year for AYI's stock price but the August low definitely looks like a bottom. Shares have rebounded sharply and investors have been buying the dips. As of today's close AYI is up +23% in 2014.

The last few weeks have been volatile. The early October rally was a reaction to AYI's earnings results. The company reported on October 1st with a profit of $1.26 per share on revenues of $668.7 million. That beat Wall Street's estimates on both the top and bottom line. Sales were up +15% from a year ago and profits were up +22%. The company said they are seeing strong adoption of their LED lighting solutions, which saw sales almost double from a year ago.

AYI said their Q4 and full year 2014 results were both records. AYI's Chairman, President, and CEO, Vernon Nagel, was very optimistic in his outlook. Mr. Nagel said,

"We remain very bullish about our prospects for future profitable growth. Third-party forecasts as well as key leading indicators suggest that the growth rate for the North American lighting market, which includes renovation and retrofit activity, will be in the mid-to-upper single digit range for fiscal 2015 with expectations that overall demand in our end markets will continue to experience solid growth over the next several years.

We believe the lighting and lighting-related industry will experience solid growth over the next decade, particularly as energy and environmental concerns come to the forefront along with emerging opportunities for digital lighting to play a key role in the Internet of Things. We believe we are well positioned to fully participate in this exciting industry."

Since the report Goldman Sachs has added AYI to their conviction buy list and Oppenheimer has raised their price target on AYI to $160. The point & figure chart is bullish and forecasting at $162 target. Zacks is bullish on the account they are seeing analysts revising their earnings estimates for AYI higher.

Currently shares of AYI have been hovering near resistance in the $135.00 area. Today's move is starting to look like a bullish breakout. We are suggesting a trigger to buy calls at $136.25.

- Suggested Positions -

Long DEC $140 call (AYI141220c140) entry $3.80

10/28/14 triggered @ $136.25
Option Format: symbol-year-month-day-call-strike


FedEx Corp. - FDX - close: 165.77 change: -2.43

Stop Loss: 162.65
Target(s): To Be Determined
Current Option Gain/Loss: + 83.0%
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:
10/29/14: I warned readers last night that FDX might pullback today after closing at its trend line of higher highs (a.k.a. resistance). Sure enough FDX retreated -1.4%.

I am not suggesting new positions at this time.

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*

10/28/14 new stop @ 162.65, traders may want to take profits now!
10/25/14 new stop @ 157.85
10/23/14 new stop @ 155.90
FDX is nearing resistance at $164.00. Traders may want to take profits now.
10/21/14 new stop @ 153.45
10/17/14 triggered @ 155.50
Option Format: symbol-year-month-day-call-strike


Keurig Green Mountain, Inc. - GMCR - close: 147.87 change: +1.21

Stop Loss: 141.90
Target(s): To Be Determined
Current Option Gain/Loss: +15.8%
Average Daily Volume = 1.68 million
Entry on October 28 at $145.75
Listed on October 25, 2014
Time Frame: Exit PRIOR to earnings on November 19th
New Positions: see below

Comments:
10/29/14: GMCR held up relatively well. Shares consolidating sideways nearly all day long and then ended on an up note. The stock looks like it might challenge round-number resistance at $150 soon.

Earlier Comments: October 25, 2014:
GMCR is labeled as part of the consumer goods business. GMCR describes their company as "a leader in specialty coffee, coffee makers, teas and other beverages, Keurig Green Mountain (Keurig), is recognized for its award-winning beverages, innovative brewing technology, and socially responsible business practices. The Company has inspired consumer passion for its products by revolutionizing beverage preparation at home and in the workplace." GMCR makes almost 300 varieties of coffee, hot cocoa, teas, and other beverages in K-cup and Vue portion packs.

The company's latest earnings report back in August were better than expected but revenues were a disappointment and management guided lower. Yet the stock did see much follow through on the initial post-earnings drop. Then a couple of weeks later shares of GMCR soared to new highs on news it had finally signed a licensing deal with Kraft Foods, the second largest food and beverage company in the world. GMCR already had licensing deals with all the major coffee brands but Kraft was the lone holdout.

Several weeks later shares of GMCR soared again after Goldman Sachs slapped a buy rating on the stock and gave it a 12-month $166 price target. The Goldman analyst believes GMCR will see sales rise at a compounded annual growth rate of almost 30% and profits will soared at 23% per year through 2017.

On a short-term basis the middle of last week was starting to look like a top, especially with Thursday's bearish engulfing candlestick reversal pattern. Yet there was no confirmation on Friday.

Friday's intraday high was $145.54. We are suggesting a trigger to buy calls at $145.75. We'll try and limit our risk with a stop loss at $141.90. We are not setting an exit target yet but I will note the point & figure chart is suggesting a $182.00 target.

Earnings are coming up on November 19th. We will plan on exiting prior to the announcement. More aggressive traders may want to take a longer-term approach and hold over the announcement (and use longer-dated calls).

- Suggested Positions -

Long NOV $150 call (GMCR141122C160) entry $6.17

10/28/14 triggered @ $145.75
Option Format: symbol-year-month-day-call-strike


iShares Transportation ETF - IYT - close: 156.17 change: -0.71

Stop Loss: 151.85
Target(s): To Be Determined
Current Option Gain/Loss: +235.2% (not including new spread position)
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:
10/29/14: The transportation ETF experienced a little bit of profit taking today that snapped a four-day winning streak.

Last night we decided to try and boost our gains while reducing our risk by selling the November $159 calls against our current position.

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

- plus -

Short NOV $159 call (IYT141122c159) entry $1.80

10/29/14 IYT gapped open higher at $157.44 (+56 cents)
10/28/14 Strategy Update: new stop @ 151.85, Plus, we want to sell the November $159.00 call (current bid is $1.75).
10/25/14 new stop @ 148.65, traders may want to take some money off the table now
10/23/14 new stop @ 147.25
10/21/14 new stop @ 144.65
10/18/14 new stop @ 141.75
10/13/14 triggered @ 138.75
Option Format: symbol-year-month-day-call-strike


NetEase, Inc. - NTES - close: 92.01 change: -0.74

Stop Loss: 89.40
Target(s): To Be Determined
Current Option Gain/Loss: -18.3%
Average Daily Volume = 430 thousand
Entry on October 21 at $91.59
Listed on Exit PRIOR to earnings on November 12th
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
10/29/14: NTES briefly traded over $94.00 and then reversed. The relative weakness is a concern with today's -0.8% pullback. I'm not suggesting new positions.

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

10/23/14 new stop @ 89.40
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: 50.26 change: +0.03

Stop Loss: 47.85
Target(s): To Be Determined
Current Option Gain/Loss: +63.6%
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:
10/29/14: SMH spent Wednesday's session consolidating sideways near resistance at $50 and its 50-dma.

Traders may want to raise their stop again. I'm not suggesting new positions at the moment.

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

10/25/14 new stop @ 47.85
10/21/14 new stop @ 46.35
10/17/14 triggered @ 47.15
Option Format: symbol-year-month-day-call-strike


ULTA Salon - ULTA - close: 121.56 change: +0.59

Stop Loss: 116.90
Target(s): To Be Determined
Current Option Gain/Loss: -9.6%
Average Daily Volume = 925 thousand
Entry on October 29 at $121.75
Listed on October 28, 2014
Time Frame: Exit PRIOR to earnings on December 4th
New Positions: see below

Comments:
10/29/14: Shares of ULTA spiked higher this morning about 10 minutes after the opening bell. The stock surged to new 2014 highs and hit our suggested entry point at $121.75 along the way.

Earlier Comments: October 28, 2014:
ULTA is in the services sector. They're considered a specialty retailer. Founded in 1990 the company is headquartered in Chicago. According to the company website, "ULTA Beauty is the largest beauty retailer that provides one-stop shopping for prestige, mass and salon products and salon services in the United States. Ulta Beauty provides affordable indulgence to its customers by combining unmatched product breadth, value and convenience with the distinctive environment and experience of a specialty retailer. ULTA Beauty, through its stores and ulta.com, offers a unique combination of over 20,000 prestige and mass beauty products across the categories of cosmetics, fragrance, haircare, skincare, bath and body products and salon styling tools, as well as salon haircare products. ULTA Beauty also offers a full-service salon in all of its stores."

The stock had a rough time late last year when ULTA missed earnings estimates and guided lower back in December 2013. Shares collapsed from the $120 area toward the $90-95 zone. They missed and warned again in March. Yet it would appear that ULTA has worked out the kinks as the company's last two earnings reports have been strong. In June and in September ULTA reported quarterly results that were above Wall Street's estimates on both the top and bottom line. More importantly management guided higher for the next quarter both times.

Investors were really impressed with the latest quarterly report in September. You can see the huge gap higher in the stock price. Analysts were expecting a profit of $0.83 a share on revenues of $713.3 million. ULTA delivered $0.94 a share with revenues up +22.2% to $734.2 million. They also reported a very strong +9.6% same-store sales growth versus a tough +8.4% sale growth against the year ago period. Margins also saw improvement in the quarter.

ULTA management also laid out their long-term, five-year estimates. The company is forecasting annual comparable store sales growth in the 5% to 7% range. They expect EPS growth to be in the low 20% area. Their expansion plans include opening 100 stores a year. Jim Cramer lists ULTA as one of his best picks in this industry.

Mary Dillon, ULTA's Chief Executive Office, said, "A significant improvement in traffic, successful new product and brand launches, and rapid e-commerce growth drove better than expected top line performance. As a result, the Ulta team delivered healthy operating margin expansion in the second quarter. We are raising our outlook for the year and now expect to achieve sales and earnings per share growth in the 20% range, reflecting our confidence in continued strong market share gains."

The company is definitely seeing growth in its online sales. Their second quarter saw e-commerce sales soar almost 55%. They plan to grow their e-commerce sales to 10% of total revenues.

Technically shares of ULTA dipped toward support during the market's September-October pullback. Now shares have rebounded back toward resistance in the $120 area. Today saw ULTA showing relative strength and a new 2014 closing high. We want to hop on board if ULTA can breakout past the $120-121 area. We are suggesting a trigger to buy calls at $121.75.

- Suggested Positions -

Long DEC $125 call (ULTA141220C125) entry $6.20

10/29/14 triggered @ 121.75
Option Format: symbol-year-month-day-call-strike




PUT Play Updates

Monsanto Co. - MON - close: 112.18 change: -1.30

Stop Loss: 115.15
Target(s): To Be Determined
Current Option Gain/Loss: -14.0%
Average Daily Volume = 4.1 million
Entry on October 29 at $111.90
Listed on October 22, 2014
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
10/29/14: MON continues to struggle under resistance in the $114-115 zone and its 200-dma. Shares dipped to a new two-week low and slipped to $111.68. Our trigger to buy puts was hit at $111.90.

Earlier Comments: October 23, 2014:
Monsanto describes itself as a company "committed to bringing a broad range of solutions to help nourish our growing world. We produce seeds for fruits, vegetables and key crops – such as corn, soybeans, and cotton – that help farmers have better harvests while using water and other important resources more efficiently. We work to find sustainable solutions for soil health, help farmers use data to improve farming practices and conserve natural resources, and provide crop protection products to minimize damage from pests and disease. Through programs and partnerships, we collaborate with farmers, researchers, nonprofit organizations, universities and others to help tackle some of the world’s biggest challenges."

What does that mean in plain English? The company operates two main segments. They have a seeds and genomics business and an agricultural productivity business. The seed and genomics business gets a lot of negative press over its bio-engineered seeds (GMO) to boost production and deter insects and weeds from hampering growth. The productivity business makes herbicides.

About 60% of MON's sales are in North America. They're trying to broaden their market and generate more customers in Europe, Latin America, and Africa. Unfortunately the plunge in grain prices in America has hurt with many grains at four or five year lows. If this doesn't change soon it could hurt future sales as farmers tend to buy less when prices are down.

It's easy to understand the long-term tailwinds for MON. The world needs to see significant growth in grain production to feed the booming population. Yet the company admits they are in a challenging commodity environment. Bears argue that the ethanol-driven boom in corn is over.

MON's most recent earnings report was October 8th and it was a disappointment. Wall Street was expecting a loss of 24 cents a share compared to a loss of 47 cents a year ago. MON reported their Q4 loss at 27 cents. They did see a strong surge in revenues of +19% to $2.63 billion in the quarter, which beat expectations. Here's an interesting factoid that should worry the bulls. What would MON's earnings have looked like if the company did not spend an astonishing $6.1 billion in stock buybacks last quarter?

Management did lower their guidance for fiscal year 2015. They expect their Q1 results to come in about half the same period a year ago. In the conference call MON claims that the weakness in corn will be made up by strength in soybeans. They pointed out that one of their biggest contributors in 2015 will be sales of their Intacta soybean seeds in Latin America. Yet the company is currently facing a legal battle with farmers in Brazil over getting paid royalties for these Intacta soybean seeds. Another challenge in 2015, which they just lowered guidance on, is they expect 4% to 5% of their EPS growth to come from their stock buyback program.

It looks like the next four quarters could be tough for MON. That's why today's bearish reversal at resistance near $115 and its 200-dma could be a bearish entry point. Tonight we are suggesting a trigger to buy puts at $111.90. The point & figure chart is bearish and suggesting a $90 target but the P&F chart also shows potential support in the $102-104 zone.

- Suggested Positions -

Long 2015 Jan $110 PUT (MON150117P110) entry $3.00

10/29/14 triggered @ 111.90
Option Format: symbol-year-month-day-call-strike


CLOSED BEARISH PLAYS

Sanderson Farms, Inc. - SAFM - close: 80.23 change: +1.16

Stop Loss: 80.25
Target(s): To Be Determined
Current Option Gain/Loss: -42.8%
Average Daily Volume = 483 thousand
Entry on October (see below)
Listed on October 25, 2014
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
10/29/14: SAFM did not want to cooperate with us. Last night we adjusted our option strike and chose to launch positions at the opening bell this morning. SAFM opened at $79.00 and spent the rest of the day trying to bounce higher. The stock managed to hit our stop loss at $80.25.

- Suggested Positions -

2015 DEC $75 PUT (SAFM141220P75) entry $3.50 $3.50 exit $2.00 (-42.8%)

10/29/14 SAFM then hit our stop at $80.25
10/29/14 SAFM opened at $79.00, down 7 cents
10/29/14 Initiate positions at the open with the DEC $75 put
10/28/14 The 2015 February $75.00 put did not trade today. If it had the best estimate would have been about $2.75-3.00 as our entry point based on yesterday's data. I suddenly see a better option strike at the December $75 put, which has a better bid/ask spread (currently $2.85/3.50) and more activity. I am suggesting we use the 2014 December $75.00 SAFM put going forward. We'll use tomorrow morning as the entry point for this trade.
The 2015 Feb $75 put symbol is SAFM150220P75
The 2014 Dec $75 put symbol is SAFM141220P75
10/28/14 Would have been triggered @ 78.20 but the February $75 put did not trade.
Option Format: symbol-year-month-day-call-strike

chart: