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Daily Newsletter, Wednesday, 12/17/2014

Table of Contents

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

Market Wrap

Another V-Bottom In the Making

by Keene Little

Click here to email Keene Little
We've seen so many v-bottom reversals in the past several years that traders have come to expect them, hence the dip-buying. Today's rally might have been the follow through to the upside the bulls are looking for. But there might be one more surprise for the bulls.

Wednesday's Market Stats

Yesterday morning it was looking like the opex rally was starting, as well as the run up into today's FOMC announcement (and the expectation the would not change their accommodative language). But those bullish hopes were dashed with the afternoon selloff. The effort to rally started again this morning and this time it held near the highs (only a small pullback) into the FOMC announcement which launched another rally leg and the day finished bullishly near the day's highs. Now, will it stick?

I was not able to get good volume numbers today but it looked like another heavier-than-normal day, like yesterday, and supposedly it was a 90% upside day, which is typically bullish for the market. Now the question is whether it's the start of a stronger rally off another long line of v-bottom reversals or just an oversold bounce with strong short covering. Opex week this week will only exacerbate these kinds of moves but in a bull market a 90% upside day is bullish; in a bear market we'll see lots of 90% upside days from short covering that are then followed by a resumption of the selling. So which one is this? Stay tuned since we don't know yet but have some important levels to watch.

This morning we received the CPI numbers and they continue to support the idea that the Fed has more to worry about than when to start raising interest rates. November's CPI was -0.3%, which gives us a year-over-year rate of 1.3%, down from October's 1.7% and less than the expected 1.4%. November's decline was the largest drop since December 2008, which was shortly before the stock market's crash in 2009. As was true back then, a drop in gasoline prices was credited for the recent decline in inflation. The core CPI for November was +0.1%, which was expected and the year-over-year rate dropped to 1.7% from October's 1.8%. Clearly both numbers are going in the wrong direction as far as the Fed is concerned (they have announced several times that they want something north of 2%). Very likely they had this information before making their announcement this afternoon.

The chart below shows the CPI index since 2007 and the steep decline in 2008. But since then it's been a fairly steady climb in inflation as it rose from about 211 in December 2008 to a high near 238 in July 2014. That's a 27-point gain in 5-1/2 years (about 2%). So far so good for the Fed. But since July it has been in decline, even if only marginally and I'm sure it's got the Fed a little worried. On an annualized basis the drop since July is about 2.7%.

Consumer Price Index, chart courtesy St. Louis Fed

Seeing the numbers (economic, inflation, etc.) made it fairly obvious that the Fed is not seeing anything yet (in their data-dependent modus operandi) to move them away from abnormally low interest rates (you know, the ones that have been so effective so far, cough). There is no expectation for the Fed to raise interest rates anytime soon and the only question is whether or not they would change their language and thereby provide a hint that they're thinking about when to raise rates. But in their announcement they added to their wait-and-see posture by saying they can be "patient" and wait for economic data before they need to think about raising rates.

The Fed also lowered its Fed Funds rate projections for 2015-2017 and reduced its unemployment rate forecast. This is what the market wanted to hear and it rallied. But seriously, does the market really think the abnormally low rates are going to help? Why now and not in the past 6 years that the rate has been down in the mud. One look at the chart below tells you how abnormal it is to see rates this low. The chart starts in 1954 and it has essentially flat-lined near zero since 2009 and they're now saying they've lowered their forecast for this rate. I guess they really do plan to go negative soon (to join the ECB), which would mean banks will have to pay the Fed to hold their money (remember, the Federal Reserve is a private consortium of private banks, the biggest commercial banksters, who will be collecting this money).

Effective Federal Funds Rate, chart courtesy St. Louis Fed

OK, enough about the Fed and their huge financial experiment that's not working. They've admitted to not knowing what they're doing (in private conversations) and my only concern from here is that they'll probably double down.

It's been a while since I've used the NYSE for a top-down look at the market so I thought I'd kick off tonight's charts with a weekly-daily-60-min view of the NYA. The weekly chart below shows the tag of support (Monday, Tuesday and again this morning) at the October 2007 high near 10387. Only slightly lower is its uptrend line from October 2011 - June 2012, currently near 10325. The bearish wave count says the top is already in place but as long as the bulls can keep the NYSE above 10325 it stays potentially bullish.

NYSE Composite index, NYA, Weekly chart

On the daily chart below I show the potential for one more drop back down before getting a bigger bounce into the end of the month (the Santa Claus rally). This is the bearish pattern calling the November 25th high the completion of its rally and now we've started the next bear market decline. A 1st wave down (ideally with one more drop down to at least test Tuesday morning's low) followed by a 2nd wave bounce correction, as labeled in red, would then be followed by a stronger decline next month. But at the moment, especially with support holding and a strong v-bottom reversal, that might have completed the pullback correction of the October-November rally and now we'll get another strong rally into next month. A rally above 10860 is needed to give the bulls the nod here.

NYSE Composite index, NYA, Daily chart

Key Levels for NYA:
- bullish above 10,860
- bearish below 10,325

The 60-min chart below shows a parallel down-channel for the decline from November 25th and the slight break out of the top of the channel into today's close could be meaningful if there's upside follow through tomorrow. But if today's rally completed a 4th wave correction in the move down from November 25th, we'll see one more leg down to complete the 5th wave to create a larger-degree 1st wave down. The bounce off Tuesday's low achieved two equal legs up near 10613 (with a high of 10614) and a 38% retracement of the 3rd wave down (at 10603). Stopping near the top of the down-channel is icing on the cake for the bearish setup here and if it starts back down immediately on Wednesday I'll then be looking for a test of Tuesday's low to set up a bigger Santa bounce (like his belly when he laughs).

NYSE Composite index, NYA, 60-min chart

I show the same bearish price path for SPX as for NYA above -- it would look best with on more drop back down, potentially for just a test of Tuesday's low and then a bigger bounce into the early January before setting up a stronger decline. It would start to look a little more bullish above 2025 and confirmed bullish with a rally above 2060.

S&P 500, SPX, Daily chart

Key Levels for SPX:
- bullish above 2060
- bearish below 1950

It's the same picture for the DOW. It tried yesterday and again today to rally back above its uptrend line from November 2012 - February 2014, near 17400 (arithmetic price scale) but it's still holding as resistance. One more drop would set it up nicely for a larger bounce into early January, with an upside target probably in the 17500-17700 area. But if it continues to rally from here and makes it above 17500 it would start to look more bullish and I'd certainly back away from the short side. Getting above about 17650 would be the next hurdle and then finally above 17800 would be good confirmation that the bulls are in charge and we could see significantly higher prices in the new year.

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- bullish above 17,800
- bearish below 17,000

The pattern for NDX is not as clear as the others and because of the choppy start to its pullback it's actually more supportive of today's rally being the start of a new rally leg to new highs. A rally above 4220 would be a bullish statement and then above 4300 would be good confirmation for the bulls. In the meantime, if the indexes have one more minor new low (or test of the low) this week we should see the same for NDX before setting up a bigger bounce for the Santa Claus rally.

Nasdaq-100, NDX, Daily chart

Key Levels for NDX:
- bullish above 4300
- bearish below 4046

Thanks in part to a big rally today in energy stocks (XLE finished +4.1%) the RUT was the stronger index, as it was yesterday. It's unclear whether the rally in the energy stocks off yesterday's low is just an oversold bounce or the start of something more bullish but as long as the energy stocks continue to well we could see the RUT doing well the rest of this month. Conversely, if it's just an oversold bounce we'll probably see both lead to the downside again.

The RUT's pattern since peaking on November 25th has been a choppy mess. That alone keeps it potentially bullish since it looks like just a corrective pullback correction. Today's strong rally drove the RUT back up through three important MA's -- the 20-, 50- and 2000-dma's and that was bullish. A rally above the December 9th high near 1188 would put the bulls firmly in the driver's seat. But the jury is still out since today's rally was another one of those "too much, too fast" kind of moves and it smacks of short covering. If there's no follow through on Thursday we could see the bears pounce again, especially if the energy stocks are not doing well (watch XLE).

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- bullish above 1188
- bearish below 1135

After a 1-day drop below support near 2.08% TNX climbed back above that level today, keeping the potential for a higher bounce off support. I've been watching carefully to see if this support level, which should be strong, will at least give TNX a bounce since the selling in bonds could help the stock market. This support zone is made up of price-level support at the March 2013 high, its uptrend line from July 2012 - May 2013, a trend line along the lows from February-May 2014, a broken downtrend line from June 2007 - February 2011, and a projection at 2.079 where the move down from November 7th achieved two equal legs down. TNX turns more bearish (bullish for bond prices) with a sustained move below 2.08.

10-year Yield, TNX, Daily chart

The U.S. dollar had a strong bounce today, especially after the FOMC announcement. I'm not sure why since I would have thought the dollar would be strengthened by hints of raising the Fed Funds rate. But it looked like a shot of short covering and it might have completed a bounce correction off the December 10th low, in which case it should start back down. At least that's what I'm expecting to see over the next several months (a pullback/consolidation) and so far I haven't seen anything in the short-term pattern (since the December 8th high) to change that.

U.S. Dollar contract, DX, Weekly chart

Gold's choppy bounce off its November 7th low continues to look like just a correction to its decline and not something more bullish. I can't yet rule out a higher bounce, such as up to 1285 or 1325, it's currently being held down, again, at the top of its down-channel from 2011, currently near 1230.

Gold continuous contract, GC, Weekly chart

Did oil find its bottom? The jury is still out since the bounce off yesterday's low is only a 3-wave move so far (a possible a-b-c bounce that could lead to lower prices) but the weekly candlestick (so far) is a bullish hammer at Fib support, which looks promising for the bulls. The Fib projection at 54.13 is where the 2nd leg of the decline from August 2013 is 261.8% of the 1st leg down, which is commonly seen in commodities (sometimes stocks). If Tuesday's low at 53.60 holds (not a given since there's not much of a bullish divergence at the low) we should see oil get at least a larger bounce. The bearish wave count calls for a multi-month bounce/consolidation in a 4th wave correction before heading lower next year. An impulsive rally above 65 would be the first bullish sign for oil.

Oil continuous contract, CL, Weekly chart

The only economic report that might move the market tomorrow, after the market opens, is the Philly Fed report. Other than that it looks to be a relatively quiet day and then no reports on Friday.

Economic reports and Summary

Today was a strong rally for the stock market and so far it's looking like it could another v-bottom reversal like we've seen so many times before in this market. Just since the October 2011 low, and including that low, we've got about a dozen of these reversals off pullbacks. The market doesn't base for a little bit and then rally; it instead shoots out of the hole like a shot out of a cannon and it's what traders have come to expect. The Pavlovian response is to buy these rallies since each leads to a new high. Throw in an expected Santa Claus rally and I can't say I blame traders trying the long side here.

But before we get into the Santa Claus rally, which I think we'll get, we could get one more new low, or a test of the low, before getting the bigger bounce. If we do get another drop back down I would not chase it lower since I think it should put in a tradable bottom. That tradable bottom might already be in place but the short-term pattern doesn't yet support it. Hopefully that will clear up by the end of the week.

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

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New Option Plays

Packaging & Semiconductors

by James Brown

Click here to email James Brown


NEW DIRECTIONAL CALL PLAYS

Packaging Corp of America - PKG - close: 77.95 change: +1.80

Stop Loss: 74.95
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 1.0 million
Entry on December -- at $---.--
Listed on December 17, 2014
Time Frame: 8 to 12 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
PKG is in the consumer goods sector. The company operates eight paper mills and 100 corrugated products plants and related facilities. Put it all together and PKG makes packaging products around the world.

According to company materials, "PCA is the fourth largest producer of containerboard in the United States, based on production capacity, and the third largest producer of uncoated freesheet in North America. We have approximately 13,600 employees, with operations primarily in the United States and some converting operations in Europe, Mexico and Canada."

It's been a pretty decent year for PKG earnings. Back in February they beat Wall Street estimates and guided higher. They beat estimates again in April and July. Their most recent report was October 20th. Earnings per share were only in-line with estimates at $1.26 but that is a +37% improvement from a year ago and a +8.6% improvement from the prior quarter. Revenues soared a whopping +79% to $1.52 billion, slightly above estimates. Management then raised their Q4 EPS guidance above Wall Street's estimates.

Mark W. Kowlzan, Chief Executive Officer, said, "This was our 8th consecutive quarter of record earnings driven by strong sales volume, record mill productivity, and mill cost reductions. The integration of Boise packaging continues to generate significant synergies, and operational improvements in White Papers have resulted in lower costs and higher margins."

Technically PKG looks bullish. The early 2014 high near $75.00 was resistance but the stock broke through this level in early December. Traders have since bought the dip at this level so $75 is now new support. The stock is near all-time highs. The point & figure chart is forecasting a very long-term target of $121.00.

The December 4th intraday high was $78.50. Tonight I'm suggesting a trigger to buy calls at $78.55. We are listing the April calls. More nimble traders may want to trade the January calls instead but they only have about four weeks left. There are no February or March calls available yet. After option expiration this coming Friday (December 19th) we should see more options listed.

Trigger @ $78.55

- Suggested Positions -

Buy the APR $80 CALL (PKG150417C80) current ask $3.50

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

Daily Chart:

Weekly Chart:


Skyworks Solutions - SWKS - close: 70.82 change: +2.70

Stop Loss: 66.95
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 3.9 million
Entry on December -- at $---.--
Listed on December 17, 2014
Time Frame: 3 to 6 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
SWKS is part of the semiconductor industry. The SOX semiconductor index has been a strong performer this year with a +23.5% gain in 2014. Yet SWKS has outshined its peers with a +138% gain year to date.

Who is SWKS? According to the company website, "Skyworks Solutions, Inc. is an innovator of high performance analog semiconductors. Leveraging core technologies, Skyworks supports automotive, broadband, wireless infrastructure, energy management, GPS, industrial, medical, military, wireless networking, smartphone and tablet applications. The Company's portfolio includes amplifiers, attenuators, circulators, demodulators, detectors, diodes, directional couplers, front-end modules, hybrids, infrastructure RF subsystems, isolators, lighting and display solutions, mixers, modulators, optocouplers, optoisolators, phase shifters, PLLs/synthesizers/VCOs, power dividers/combiners, power management devices, receivers, switches and technical ceramics. Headquartered in Woburn, Mass., Skyworks is worldwide with engineering, manufacturing, sales and service facilities throughout Asia, Europe and North America."

SWKS is probably best known for being a component supplier for Apple's iPhones. SWKS is also supplying components to Amazon.com for that company's new Fire Phone.

SWKS soared in mid July following a better than expected earnings report. Wall Street was looking for a profit of 80 cents after SWKS guided higher to 80 cents in June. They still managed to surprise with a bottom line profit of 83 cents a share. Revenues soared almost 35% to $587 million, which was better than the $570 million estimate, up from $535 before SWKS's June guidance. SWKS management also raised their guidance going forward.

The earnings parade continued when SWKS delivered their Q4 report on November 6th. Analysts were expecting a profit of $1.08 per share. SWKS delivered $1.12. The company had already preannounced strong sales and quarterly revenues soared +50% to $718.2 million. Management then raised their guidance again (company's Q1 2015) and SWKS is forecasting earnings above Wall Street's estimates with revenues significant above prior expectations.

Since SWKS' last earnings report the stock has had a number of analysts reaffirm their bullish outlook and a few have upgraded their price targets.

Technically shares of SWKS have been building on a bullish trend of higher lows. However, the stock has been consolidating sideways the last two weeks under short-term resistance in the $71.00-71.25 area. After today's display of relative strength SWKS is setting up for a bullish breakout higher. The point & figure chart is already bullish and forecasting at $102 target.

I will warn investors that SWKS' all-time high going all the way back to February 2000 is the $78.25 area and could prove to be overhead resistance.

Tonight we are suggesting a trigger to open bullish trades at $71.55.

Trigger @ $71.55

- Suggested Positions -

Buy the FEB $75 CALL (SWKS150220C75) current ask $3.50

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

Daily Chart:

Weekly Chart:



In Play Updates and Reviews

Stocks Rally on Fed's Patience

by James Brown

Click here to email James Brown

Editor's Note:

The U.S. Federal Reserve's FOMC promised to be patient on rate hikes and stocks soared.

The widespread rally was rough for the bears. We saw CTXS hit both our entry point and then our stop loss in the same day.


Current Portfolio:


CALL Play Updates


Currently we do not have any active call trades





PUT Play Updates

Arrow Electronics - ARW - close: 55.36 change: +0.72

Stop Loss: 57.75
Target(s): To Be Determined
Current Option Gain/Loss: -25.0%
Average Daily Volume = 585 thousand
Entry on December 16 at $54.75
Listed on December 13, 2014
Time Frame: Exit PRIOR to January option expiration
New Positions: see below

Comments:
12/17/14: The market's widespread bounce on Wednesday lifted ARW to a +1.3% gain. If this bounce continues the nearest resistance looks like the $57.00 level. I'm not suggesting new positions at the moment.

Earlier Comments: December 13, 2014:
ARW is in the services sector. The company sells electronic components at the wholesale level. The company describes itself as "a global provider of products, services and solutions to industrial and commercial users of electronic components and enterprise computing solutions. Arrow serves as a supply channel partner for more than 100,000 original equipment manufacturers, contract manufacturers and commercial customers through a global network of more than 460 locations in 58 countries."

Most of this year ARW has been reporting results that beat Wall Street's bottom line estimates but they kept missing the revenue number. That changed with their Q3 results when ARW reported on October 29th. ARW managed to beat estimates on both the top and bottom line with revenues up +11% from a year ago. Management offered relatively bullish guidance. Yet the stock did not react. That appears to be the mystery.

ARW's share price performance immediately slowed down following its Q3 report. You can see on the daily chart below that ARW plunged with the market's correction in September and October. Yet while the S&P 500 lost about -10% during that pullback shares of ARW lost more than -25%. When the market started to bounce ARW followed but its rally stalled after its Q3 report. The S&P 500 and the NASDAQ continued to rally and broke out to new highs for the year. ARW was unable to follow suit. Now the stock appears to be reversing after a failed rally at round-number resistance near the $60 mark.

With the new lower high there is a good chance the weakness in ARW continues. The stock never reversed its massive sell signal on its P&F chart. Tonight we are suggesting a trigger to open bearish positions at $54.75. More aggressive traders may want to jump in earlier (like a drop under $56.00) but we would like to see ARW trade below its simple 50-dma (currently $55.22).

- Suggested Positions -

Long Jan $55 PUT (ARW150117P55) entry $2.00

12/16/14 triggered @ 54.75
Option Format: symbol-year-month-day-call-strike


The Greenbrier Companies - GBX - close: 46.51 change: +3.45

Stop Loss: 47.05
Target(s): To Be Determined
Current Option Gain/Loss: -60.5%
Average Daily Volume = 940 thousand
Entry on December 16 at $43.25
Listed on December 15, 2014
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
12/17/14: It was a volatile day for shares of GBX. Crude oil spiked higher but pared its gains by the closing bell. The transportation sector rallied but the Dow Jones Transportation average underperformed the S&P 500 with a gain of +0.8% versus +2.0%. Yet something drove big gains for the railroad stocks. The DJUSRR railroad index soared +2.7%. I didn't see any specific news in the railroad industry. Shares of GBX exploded with a +8.0% gain but the rally stalled at short-term technical resistance at the 10-dma.

Today's intraday high was $46.99 and our stop loss is at $47.05. If GBX sees any follow through higher we could see the stock hit our stop loss.

I am not suggesting new positions.

Earlier Comments: December 15, 2014:
Railroad-related stocks have seen a dramatic shift thanks to the sell-off in crude oil.

GBX is in the services sector. The company manufacturers railroad freight cars and ocean-going barges. They also refurbish freight railroad cars. New rules by the White House on railroad tanker cars that carry crude oil should mean strong business for GBX as companies are forced to either buy new cars or refurbish old ones to meet the new requirements.

The last couple of earnings reports from GBX have been bullish. They have strong revenue growth. Management raised their 2015 earnings guidance with their last report back in October. GBX has a huge backlog. Yet none of this seems to matter at the moment. The market is transfixed on the death spiral in crude oil prices.

How does crude oil impact the railroad stocks? The shale oil revolution in the U.S. has been a major boon for the railroads. A lot of the shale oil drilling has taken place in regions with limited or no pipelines available to move the oil to be refined. That has boosted huge demand to transport oil by rail. Forbes noted that back in 2008 there were only 9,500 car loads of oil shipped by train. Yet by 2013 that has blossomed to 407,761 carloads. The first six months of 2014 saw 229,800 carloads of oil shipped by train.

Unfortunate, OPEC, mainly the Saudis, have declared war on all other oil producers, including the U.S. shale oil industry. When OPEC met on Thanksgiving they decided to not cut production knowing full well it would drive the price of oil lower. The very next day shares of GBX plunged.

Analysts have estimated that the average price to produce U.S. shale oil is in the $70-80 per barrel range. Today WTI crude oil is at $55.69 a barrel. E&P companies are not going to produce oil at a loss. That's going to cut back demand to transport oil by rail. However, it's not just oil transports the rail companies are missing out on. If the U.S. energy sector cuts back on shale oil drilling it will also reduce the need to move tons of fracking sand and metal pipes to drill all of those wells. If that wasn't bad enough the depressed oil prices mean cheaper gas and that makes trucking companies more of a competitor to normal transportation of goods.

GBX is not a railroad. They are a derivative trade on the rails and seem to be a lot more volatile. Right now the momentum is lower. GBX has spent the last few days trying to hold support at $45.00 and it has failed. The $40.00 mark might be round-number support but the next support level looks like it's closer to $37.00. The point & figure chart is forecasting at $24.00 target.

Tonight we are suggesting a trigger to open bearish positions at $43.25. We'll try and limit our risk with a stop loss at $47.05, which is just above today's high. That's a relatively wide stop loss. I do consider this a more aggressive, higher-risk trade due to the volatility. The most recent data listed short interest at 27% of the small 23.3 million share float and that raises the risk of a short squeeze (more volatility). Consider using small positions to limit your risk.

Keep in mind that this could be a short-term three or four week trade. GBX will most likely report its Q4 earnings in the early to mid January and we'll plan on exiting prior to the report.

*small positions* - Suggested Positions -

Long JAN $40 PUT (GBX150117P40) entry $2.15

12/16/14 triggered @ 43.25
Option Format: symbol-year-month-day-call-strike


CLOSED BEARISH PLAYS

Citrix Systems - CTXS - close: 61.24 change: +1.58

Stop Loss: 61.15
Target(s): To Be Determined
Current Option Gain/Loss: -17.3%
Average Daily Volume = 1.9 million
Entry on December 17 at $59.45
Listed on December 16, 2014
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
12/17/14: Sometimes stocks do not want to cooperate. We listed a trigger to buy puts on CTXS at $59.45 because we wanted to catch the next move lower and try to avoid launching positions if the market bounced. The market did bounce today. All the major U.S. indices rallied from the opening bell. CTXS initially spiked higher too. Then shares spiked down to a new relative low, hit our trigger at $59.45 and almost immediately rebounded. Shares soared to a +2.6% gain and hit our stop loss at $61.15 in the process.

We were triggered and stopped in the same session.

- Suggested Positions -

MAR $57.50 PUT (CTXS150320P57.50) entry $2.66 exit $2.20 (-17.3%)

12/17/14 Then stopped out at $61.15
12/17/14 triggered @ $59.45
Option Format: symbol-year-month-day-call-strike

chart: