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Daily Newsletter, Saturday, 12/20/2014

Table of Contents

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

Market Wrap

Bunge Bounce

by Jim Brown

Click here to email Jim Brown

The Dow declined -924 points in 7 days only to rebound +740 points in 3 days. That was a major bounce for the Jekyll & Hyde market. After trading at 1,972 at Tuesday's close the S&P rallied +106 points to trade in new high territory near 2,078 before fading slightly at the close. Nobody was thinking about new highs at the close on Tuesday.

Market Statistics

The pace of the decline was heartbreaking as many traders had good positions stopped out. Market sentiment was so negative at Tuesday's close that nobody wanted to own stocks. The market was heavily shorted and that is the key point. The Fed threaded the needle on the statement and Yellen's press conference by suggesting that even though the first rate hike may be in mid-2015 they were not going to be "unreasonable" in their pace of hikes and they would be "patient" in determining when those hikes were needed. Yellen essentially convinced investors that the pace of hikes would be slow and the Fed wanted to err on the side of caution and not start them too soon. Yellen lived up to her "Empress of the Doves" label and the market cheered.

Shorts were squeezed hard as a result of the Fed comments and news from China and Europe. There was no place for shorts to hide with energy stocks rebounding 10-20% despite oil prices hovering in the $55 level. There appears to be a bottom forming at that level and energy stocks are surging. The $60 level also appeared as support for Brent crude.


The news out of China helped to spike the market on Thursday. China does an economic census every 4 years. The result of the current census showed that China's economy was $308.8 billion larger than previously thought. The 2004 census provided a +16.8% boost to GDP and the 2008 census added +4.4%. The current census is expected to raise the 2013 GDP by 3-4%. This implies that the 2014 GDP will also rise by 3-5%. These are huge numbers and suggests China's economy may not be as weak as previously thought. Because the revision also showed a greater portion of the economic growth was coming from services instead of manufacturing it suggests the government might feel more comfortable about adding further stimulus. China is trying to move away from a manufacturing economy dependent on world consumption.

The economic news on Friday was uneventful. The Kansas Fed Manufacturing Survey rose one point from 7 to 8 for December. That is the highest reading since July and the 12th consecutive month of expansion for the Kansas district. Any number over zero denotes expansion. The best news was a surge in the new orders component from 1 to 12, also the highest level since July. Backorders rose from 4 to 7 after four months in contraction from July through October. Employment at 9 was the highest level since May.

This was a decent report but it was ignored by the market. The activity in the Kansas district is muddling along in the single digits compared to the teens and 20s in the period after the recession. There is no real economic surge, just slow growth and business as usual.


State personal income in Q3 rose +1.0% and slightly slower than the +1.2% growth in both Q1 and Q2. Weaker rents and slower growth in wages accounted for the decline. The plains region had the slowest growth at +0.6% with the Southwest the highest growth at +1.3%. This report was ignored.

The economic calendar for next week will be highlighted by home sales, GDP and the Richmond surveys. There will be very few traders around to pay attention but probably enough to move the market if some report appears with abnormal numbers.

The Q3 GDP revision is expected to decline slightly from the previously reported 3.9% down to 3.3%. However there are estimates out there as high as 4.9%. This number could be a real surprise if it comes in too hot. That would upset the slow growth assumptions of the Fed and potentially accelerate rate hikes.

The existing home sales and new home sales are expected to be relatively in line with the prior readings. Nobody is likely to get excited over these "winter" sales numbers, which are normally lackluster.

The Richmond Manufacturing survey has the potential to be a disappointment after posting a sharp decline from 20 to 4 in November. New orders fell from 22 to 1 and backorders from 9 to -2. If that kind of decline continued it is going to be a rough report. However, quite often we see snapbacks in the numbers indicating there were timing problems in the collection of data rather than an actual slump in manufacturing.


Split Calendar - No new splits.


We are moving into the Q4 earnings warning cycle and the strong dollar is going to be a challenge for international companies. S&P companies derive about 50% of their earnings from overseas and the dollar is going to be a serious headwind. The Dollar Index soared to an eight year high last week.


The strong dollar is even more troubling given the crash in the ruble and the falling yen. Shinzo Abe's reelection probably means even more stimulus for Japan and a further devaluation of the Yen. With Europe getting closer to real QE and Switzerland moving to negative interest on deposits we are going to see a race to the bottom on foreign currencies. The euro is expected to fall another 6% in the coming months. Those with the cheapest currencies will export more goods but they will import less. This means any dollar based goods are going to be a tough sell.

Switzerland imposed a -0.25% negative interest rate on deposits to halt a surge in inflows as a result of Russia's financial crisis. The negative rates will begin on January 22nd, which is coincidentally the same date as the ECB meeting where they are likely to announce a major increase in the QE program. The central bank also lowered its target range for the three-month Libor in an attempt to push it below zero as well. They were successful with the rate falling to -0.046%.

In stock news Google shares (GOOGL) recovered from their $489 low on Tuesday to close back above $516. Analysts believe this is temporary short covering. Google is expected to miss on Q4 earnings and shares are likely to move lower in the weeks ahead. Google is suffering from too many projects and loss of market share in search. Apparently the right brain does not know what the left brain is doing. In recent days Google has even started flagging its own email as spam and routing it into the spam folder. Email from the Google Play Store was first noticed as starting the spam trend. That should make Google managers take a long hard look at their business and decide if they really want to be investing in classified projects on clandestine barges, sponsoring moon shots and driverless cars. Maybe they should stick to the simple stuff and just do it better than anyone else.


CarMax (KMX) reported Q3 earnings that rose +27.7% to 60 cents compared to analyst estimates for 54 cents. Revenue rose +16% to $3.4 billion also above estimates for $3.2 billion. Used vehicle sales rose +14% to 139,158 units with same store sales up +7.4%. Visitors to the CarMax website rose +17% to 14 million. This was a very good report and Q1 should even be better because of low gasoline prices stimulating the purchase of more trucks and SUVs. Shares rallied +11% to a new high.


Isis Pharmaceuticals (ISIS) spiked after a report on a mid-stage drug trial on FXIRx, an anti-coagulant. Patients in the trial with a 300mg treatment had a 700% less chance of a venous thromboembolic events or VTE. The positive results means ISIS could more easily secure a partnership for the drug. Johnson & Johnson (JNJ) and Bayer (BAYRY) already partner on the established drug for treatment of VTE. Several analysts jumped on the stock and shares spiked +9%. ISIS ranked number one at Fidelity on Friday with 84% buy orders. Several of the high profile biotechs jumped as well. Puma (PBYI) rose +6%, Biogen (BIIB) rose +3%, Intercept Pharma (ICPT) gained +4%, Receptos (RCPT) +4%, Five Prime (FPRX) +7% and Gilead (GILD) +3%.


Corporate uniform provider Cintas (CTAS) reported adjusted earnings of 86 cents compared to estimates of 78 cents and year ago earnings of 69 cents. Revenue of $1.12 billion also beat estimates slightly. The company said faster sales growth let them upgrade 2015 guidance to a range of $3.49-$3.54 per share. Analysts were expecting $3.15 per share. CTAs shares spiked +6% on the news.


FireEye (FEYE) spiked +7% after a similar +8% gain on Thursday because Sony (SNE) hired the firm to clean up after the $200 million cyberhack. Unless you live in a cave you have heard about North Korea hacking into Sony and stealing multiple terabytes of information and posting it on the web in an effort to stop the distribution of the "Interview" comedy about an assassination attempt of a Korean dictator. The event caused a national uproar on Wednesday when Sony cancelled the movie debut and plans for it to open on Christmas Day.

Sony gave in to the cyber terrorists in what is going to be a very bad precedent. Even President Obama criticized Sony for caving into terrorists in what he called foreign censorship. The cyberhack has already caused about $100 million in damages to Sony computers and there are multiple class action suits for allowing private and personal information to be stolen and posted on the Internet. The cost of the movie was another $75 million including marketing costs they have already spent. Some say the total costs for the attack could reach as much as $200 million.

With the pace of cyber attacks growing the stocks like FireEye (FEYE), Palo Alto Networks (PANW), Checkpoint (CHKP) and even consumer stocks like Symantec (SYMC) should see continued buying in the months ahead. Having Sony pick FEYE to clean up the leftovers from the recent attack is a big vote of confidence for the firm. Sony still has thousands of computers they cannot reconnect to the network because of lingering hacker code that has not been removed. Thousands of computers and servers were simply erased and rendered useless.


After the close on Friday Staples (SPLS) disclosed another cyber attack where credit card information was stolen from 1.2 million customers. Staples is going to offer some compensation in the form of credit protection services to customers who were exposed. Malware was installed on card terminals at 115 of its 1,400 stores. The stolen info contained the customer name, card number, expiration date and card verification code. Staples said it has also received reports of fraudulent charges connected with the breach.


Picking stocks to buy next week is going to be tough. I looked at hundreds of charts this weekend and most of them look like the one below or even worse. The October rebound is clearly visible, the rebound into the December highs and then the fade into Tuesday's lows. All of that is normal. The hard part is the three days of rallies of 10% or more in quite a few stocks. I would not buy the chart below on Monday. That short squeeze spike to a new high needs a consolidation period before I would invest my money. In theory new highs are buy signals but not when they come on a 10% gain in 3 days. The market has gone from oversold to overbought in a very short period of time.


I am afraid we are setting up for a decent correction in January. If the market continues higher over the next 7 trading days we could see some serious profit taking sometime in January.

However, with the strong gains it calls into question the potential for a Santa Rally. That is the last five trading days of the year plus the first two of the New Year. Since 1950 those seven days have averaged a gain of +1.5% on the S&P. It is also seen as an omen for the next trading year. "If Santa Claus should fail to call, bears may come to Broad and Wall."

Stock historians claim the Santa Rally is actually a prelude to the January Effect. The January Effect was first observed by Sidney Wachtel in 1942. He noted that since 1925 small cap stocks outperformed the broader market in January with the biggest divergence coming in the first half of the month. The common explanation for the trend is that income tax sensitive investors, who disproportionally hold small stocks, sell stocks for tax reasons at year end and reinvest after the first of the year. Also powering the trend is the yearend bonus cycle. Employees getting large bonuses at the end of December tend to invest those funds in early January.

In recent years funds tended to front run these historical trends by loading up on small cap stocks in mid December and then dumping them in late January.

The two recent dips and rebounds may have complicated their strategy this year. Individual investors may have been forced to sell earlier than normal and put that money back to work already. Of course the rebound last week was led by the small cap Russell 2000 index so this could have been helped by the funds setting up their positions for the trends mentioned above. I am sure there was a lot of window dressing in progress as well. Funds want to show they were smart and own all the winners at the end of December.

Oil prices may have bottomed at $54 but we can't count out some short term tests to see if there is real support. Gasoline has declined from $3.80 on average in June to $2.45 on Friday. I paid $2.21 in Denver on Saturday. Prices have fallen for 85 consecutive days and the second longest streak on record.

The low prices in October fueled the fastest rise in miles driven since 2006 and November is probably even higher. In October drivers logged 264.2 million miles and the most ever for October and a 2.6% increase over October 2013. AAA said 4.2% more Americans would drive over the holidays compared to a 1% increase in air travel.

Gasoline demand was 9.373 million barrels per day last week compared to 9.016 bpd for the same week in 2013. That is 393.67 million gallons of gasoline per day. At the current national average that is $964.5 million a day in fuel spending, down from $1.496 billion a day in early June. That is a whopping $531 million per day in savings. That is a heck of a stimulus boost for the economy.

I believe this is going to continue to increase demand for gasoline and oil and put a floor under prices. These price changes in fuel are not confined to the U.S. but exist the world over. Demand for fuel is going to surge and that will relieve some of the surplus in the oil market.

Add in the sharp drop in active rigs over the last two weeks and we can see what is coming. The prior week active oil rigs fell -29 to 1,546. Last week the active onshore rig count declined -18 with an additional 2 rig decline in offshore and a huge -40 rig drop in Canada. These are the first of what could be a long decline in rig counts and it should be enough to paint a clear picture of what to expect. A drop of 89 total rigs in only two weeks is unprecedented since the crash back in 1998. Since most rigs are contracted for months to years in advance this trend has a long way to go before it is over. Production growth is going to slow in the months ahead.

The market for energy stocks has firmed as well with 10% to 20% gains in various individual stocks. While I appreciate the rebound there will be some potholes in the road ahead. When these stocks begin reporting earnings and guidance in January there are going to be some significant declines. Some analysts are predicting earnings declined of 9% to 23% for Q4 and even more for Q1 if oil prices stay this low. We may be able to buy some of these stocks cheaper after Q4 earnings unless oil prices spike back to the $70s.

Analysts have calculated the potential impact of low oil prices. Over the last six years with the Fed funds rate near zero these oil companies have accumulated more than $3 trillion in debt in order to fund their land acquisitions and drilling programs. That is up from $300 billion in 2006. Some of that debt will end in default. It is simply a matter of adding up the numbers. Profits at $105 oil were strong and profits at $60 oil will be minimal with many small exploration companies burning cash as the price declines.

We are starting to find out that many companies that hedged their oil prices did it with a "three way collar" rather than a straight hedge. Normally a company buys a put at say $85 and sells a call at $105 to offset the cost of the put. They can do this a variety of ways but I am going to keep it simple here. In that example their profits are capped at $105 and they are protected with $85 as their low price. Many banks require oil hedges in order to loan companies money. However, analysts have found that a lot of companies were adding an extra step of selling a lower put, say a $70 put to generate some extra premium. They never expected oil prices to go below $70 so that extra premium received offset the cost of their overall hedging program. Unfortunately that meant they were no longer hedged below $70. As long as oil prices stayed over $70 everything worked as planned. Under $70 and they are at risk. Their hedge only protected them for the $15 spread between $70 and $85. Everything under $70 is a loss of revenue.

This means the companies that used a straight hedging strategy are going to come out of this okay. Those that tried to game the system are going to lose a lot of money. This will force them to further cut back on drilling programs simply because they are hemorrhaging cash.

I see no scenario where oil is not significantly higher a year from now. Boone Pickens said he expects $75-$85 oil 18 months from now. I don't think it will take that long with demand rising sharply and production growth set to slow dramatically over the next 12 months.

Markets

Did you see the Volatility Index spike over 25 on Tuesday morning? Better yet did you see it fluctuating 10% to 20% minute by minute? The VIX is calculated by comparing the bid/ask spreads on the S&P-500 options. The market was dropping so fast on Tuesday morning that spreads went from 50 cents to $2.50 from one minute to the next as the volume of trades increased significantly. This caused the VIX to spike in unison with the volatility on the bid/ask spreads. The CBOE noticed the extreme volatility in the VIX and implemented a software patch to fix the problem. However, they did not cancel any trades in the VIX on Tuesday. If you got a bad fill you are out of luck.


The S&P traded in new high territory late afternoon. If the S&P had closed over 2,075 it would have been the 50th record close for the year. At this point it seems to be a foregone conclusion that we will set a new high before the year is over. Nobody would have expected it on October 15th or at last Tuesday's close. It really shows you the power of a short squeeze and the impact of news headlines.

Sometimes these squeezes take on a life of their own and can run for days as investors in denial wait to close short positions while hoping for a failure. Other investors are chasing prices higher because they did not have the confidence to buy the dip. This time of year there is the normal window dressing and bonus chasing by fund managers.

I do expect higher highs before the end of December but we could have some stutter steps in the process as traders take profits from the rebound. Resistance is now the prior closing high at 2,075 and initial support at 2,040.


Despite a huge rebound the Dow chart is not as bullish as the S&P. The closed about 200 points below its historic high of 17,991. The index would have been higher had it not been for a -2.24 drop in Nike after they disclosed weak future orders when they reported earnings on Thursday. Visa was also a drag on dollar strength and continued worries over Russia.

I am surprised we did not see a bigger gain on the Dow with the +3.90 gain by Chevron and +2.48 gain by Exxon.

Resistance is 17,850 and then 18,000 with support at 17,600.



The Nasdaq closed within 26 points of a new high but this is an area of strong resistance. After a +218 point rebound in only 3 days you would expect the index to weaken at resistance. This is exactly what happened when it reached the 4,750 level. The next 40 points are going to be a challenge. The 4,780 level is now resistance followed by 4,800.

The biotechs were instrumental in Friday's gain but Google helped for a change as did Netflix and Priceline. Nasdaq market breadth over the prior two days was very wide but Friday it was almost dead even at 1,328 advancers to 1,297 decliners.

We are back at the level where 4,725 has returned as support.




Don't look now but the Russell 2000 closed at a five-month high. The Russell is within 12 points of a new high at 1,208. I did not think we would see this level again when we were bouncing off 1,050 in October. The Russell gained +3.8% for the week to break above strong resistance at 1,190. If the Santa Claus Rally and the January Effect are going to appear this year the Russell should make new highs in the days ahead. This will be bullish for the market but the keyword there was "IF." It is hard for me to comprehend the sudden reversal of fortune but I am not going to ignore it.


Volume was off the charts on Friday. This was a quadruple witching plus some indexes were rebalanced. Volume of 11 billion shares was weighted to 6.7 billion advancing and 4.2 billion declining. This entire week had high volume with the first four days averaging about 9.0 billion shares per day. This was easily the highest volume week of the year. That suggests a capitulation event. On Wednesday there were 8.4 billion shares of advancing volume compared to only 894 million shares of declining volume. We normally claim a capitulation event when the volume is reversed at 10:1 declining but that also works on the upside with 10:1 advancing so this rally may have legs. Thursday had roughly 7:1 advancing to declining but Friday faded to 3:2 advancing to declining as the weekend prompted some traders to take profits and resistance levels were reached.

I am neutral for next week. The seasonal trend is for a gain but I am expecting some choppy trading on low volume. That means anything is possible. I do expect the bulls to come back after Christmas to finish out the year.


(Be sure to check the bottom of this commentary for a special offer.)


Random Thoughts

Apple is slowly going private. Actually it would take it about 16 years to go private at the current pace but it did buy back nearly $60 billion in shares in the 12 months ending September 30th. Given their authorization for $90 billion that suggests they probably bought back another $15 billion in Q4 if not more. They bought $17 billion in shares in Q3 and the largest in any one quarter by a S&P company since 2005. Apples $56 billion buy dwarfs IBM as the number two repurchaser with $19.2 billion. Buying back shares not only returns money to shareholders but it reduces the number of outstanding shares and raises the earnings per share. Given the pace of their buybacks the Q4 earnings could beat by an even larger margin.

Suburban home prices are going higher in the spring. If gasoline prices remain low the price of a suburban house will go up. Realtors are already reporting higher buyer traffic as a result of gas prices. People that commute to work try to move close when gas prices are high and that forces them to pay more for a home. When gas prices are low they look farther out from the city in hopes of getting more home for the money. While this is silly it is a fact of life. Since oil prices are always volatile and will eventually rise again these new suburban home buyers will end up paying more for gas in the long run. In the short term it makes sense but in the long run that commute will cost them more. The short term demand for suburban homes will escalate prices so the early birds here will get the best home.

Defectors claim North Korea recruits hackers from outstanding young talent they recruit out of school. They send them to a five year course at a special school in Pyongyang and then send them to study in either Russia, China or both. Each nation has extensive cyberwar divisions. The hackers are rewarded with special status, privileges and housing. They have to shower these hackers with special benefits because they have access to the Internet and realize that the outside world is very different from what is portrayed inside North Korea. There are numerous reports that the hacking division is actually based in China where they have reliable Internet access. There are also rumors of a secretive division called Bureau 121 that operates out of Pyongyang over a subterranean T1 cable connected to Chinese internet infrastructure.

North Korea is investing heavily in the cyberwar division because they can always attack anyone over the Internet while they can't attack them with bombs or missiles. For instance they could attack and disable the American electrical grid without ever launching a missile of sending submarines to U.S. shores. Cyberwar attacks are always deniable and extremely hard to prove. Training hackers is much cheaper than building fighter jets or missiles. Welcome to the 21st century.

President Obama is reportedly planning on putting North Korea back on the state sponsor of terrorism list as punishment for the Sony attack. You can imagine what the Kim regime is thinking about that. "Please Br-er Fox, don't throw me into that briar patch." I am sure Kim could care less about being on the list but it would complicate future negotiations with North Korea.

The problem with the Sony hack is not the hundreds of millions of dollars in damage to Sony. It is in the precedent that was set. Now any hacking group with any guts can break into a U.S. company's computers, steal their secrets and then blackmail them by making a threat of some kind if the company does not bow to the hackers wishes. The U.S. needs to make an example out of North Korea to make state supported hackers the world over think twice before trying to blackmail another U.S. corporation. Unfortunately I don't think the administration is going to take that step. It would be even better if the U.S .could simply explode an EMP over North Korea and knock out their electronic infrastructure. Unfortunately North Korea does not have any infrastructure. They have barely made it into the 20th century and it will be decades before they progress to 21st century technology levels.

Goldman Sachs looked at the cost basis for the top 400 new oil fields and found that less than a third are still profitable with oil at $70. With oil closing at $57 on Friday there are even more projects in the unprofitable status. If the unprofitable projects were halted it would shut down more than 7.25 mbpd by 2025. That equates to 8% of current production. In 2015 alone companies are making final investment decisions on 800 projects worth more than $500 billion. If prices remain around $70 more than $150 billion of those commitments won't be made. At $65 more than 50% of those projects will not be funded. These are projects that won't begin producing until 2020 or even 2025. Energy producers have to take a very long term view because of the upfront expense and the long lead times to complete.

It is all America's fault. That was what Putin told Russian citizens in his news conference last week. It was America's fault he had to invade Crimea and rescue Russian citizens from the clutches of the west. It was America's fault the ruble has dropped 50% in value and everything Russian are trying to buy now costs double. It is America's fault oil prices are so low. There is a political conspiracy between America and OPEC to bankrupt Russia. It is America's fault the Russian economy will likely decline -5% in 2015 because America forced other countries to levy sanctions on Russia. It is always nice to have somebody else to blame for your troubles. It incites nationalism in the population and they more readily endure the economic hardships because they have a common enemy. Hugo Chavez was a master at blaming the USA and his successor Maduro is following in his footsteps. The prior Iranian president blamed his country's economic woes on the U.S. in every speech. Thousands of Iranians would show up in the main plaza in Tehran every Friday to hold anti-American rallies.

Putin may be even more dangerous today. He is wounded. His pride and country are suffering. When you back a wounded animal into a corner it is likely to become even more dangerous. He may need to start another conflict he can blame on NATO in order to take the population's eyes off the economic crisis. He is running almost daily incursions by aircraft into sovereign airspace somewhere in Europe just to provoke a response and remind everyone Russia has a nuclear military and he is not afraid to use it.

Have you ever lost your phone or had it stolen and you wished you could cause it to self destruct? BlackBerry is working with Boeing on an Android phone that does self destruct if it is tampered with. The phone called the Boeing Black device encrypts calls in order to provide a secure communications solution. It will use the latest BlackBerry BES 12 platform. The phone will use dual SIM cards to allow it to access multiple cell networks and can be configured with biometric sensors and connect with satellites. Welcome to the world of James Bond.

The market exists to confuse the most people as much as possible. At the beginning of 2014 72 out of 72 economists were predicting higher interest rates and lower bond prices. That did not work out too well for everyone that shorted bonds. Rates were at 3% on the ten-year on January 2nd and they hit 2.05% on Tuesday. Ask anyone today and they will tell you the same thing about 2015. Rates will be higher and bonds are going to decline.

Nobody predicted a major correction in oil prices in 2014. Of those 72 analysts nobody predicted a crash. Everybody looks at the expert analysts for guidance but in reality they are just guessing. Their expected reality is biased based on what everyone else is predicting. If 45 analysts are predicting a bull market for the coming year then they must be right and the next 45 analysts reading those forecasts become bullish as well. At least this way there will be safety in numbers. If the market goes down they can blame it on unexpected events and point to the rest of the analysts that got it wrong as well.

There were three dissenters to the FOMC statement on Wednesday. Charles Plosser, Richard Fisher and Narayana Kocherlakota all dissented for various reasons. It should also be noted that all three are leaving the Fed and the December vote will be their last vote. That puts a little doubt on their actions. It would appear to me they see trouble coming and they wanted to make sure they were on the record as having disagreed with Fed policy as they walked out the door. That way they can always point back to that dissention if something goes wrong with the FOMC plan.

Bloomberg put together what they are calling a "Pessimist's Guide to the World in 2015." This is a list of all the global flash points that can cause trouble in the coming year. This is a well thought out presentation and worth a look. Pessimist's Guide

Researchers say Dr. Oz's medical advice is usually wrong. Syndicated talk-show host Mehmet Oz, known by some as "America's doctor," has been criticized recently by members of Congress who say his reports on "miracles" and medical breakthroughs have given millions of viewers false hopes. Researchers published a study in the British Medical Journal saying that medical research either didn't support or directly contradicted more than half of Dr. Oz's recommendations. "The public should be skeptical about recommendations made on medical talk shows," the article said. Half of Advice Wrong

Annual End of Year Renewal Special

It is that time of year again when we offer the best prices of the year on a package of our top newsletters. If you have been a subscriber for several years you know this is the best price and best deal of the year.

Please follow the link below to see for yourself the EOY subscription special for 2015. You will not be disappointed!

Only 4 shopping days until Christmas. It is almost time for procrastinators to shop!

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

"The pessimist complains about the wind.
The optimist expects it to change.
The realist adjusts the sails."

William Ward

 


Index Wrap

'V' for Victory and V for "V-Bottom"

by Leigh Stevens

Click here to email Leigh Stevens
THE BOTTOM LINE:

In the 2009 to present bull market, the major indices have traded within price ranges that swing from 3-4% above to 3-4% below a 21-day 'centered' moving average. In occasionally more volatile periods these percentage trading 'bands' or moving average 'envelope' lines might expand into a 4-5% range above/below the 21-day averages; an expansion more likely in the Nasdaq.

No such expanded price range seen at COMP's most recent top and bottom, where the tech-heavy Index didn't Close above a value greater than 4% OVER its 21-day moving average; nor did either the Composite or the big cap Nas 100 fall to a Close greater than 3-3.5% UNDER its 21-day average.

I'm giving some background here on the use of (mostly) 3-4% moving average 'envelope' lines on my DAILY charts that follow my first chart, and where bottoms formed last week. My assumption is that the lows for our last decline are in.

Another key point is that declines often stop in the area of common lower trading 'bands' (i.e., moving average envelope lines) that 'float' 3-4% above/below a centered 21-day moving average and which tends to 'contain' declines. Declines to the lower envelope lines COUPLED with a 13-day oversold Relative Strength Index (RSI) has been a common key 'confirming' indication for a bottom.

Volatility Indexes have also sometimes been a key 'confirming' type indicator in suggesting a bottom has formed; e.g., VIX climbs above 22 and VXN above 21-22 as we saw last week.

The SHORT position I recommended in QQQ should have been covered or exited on the decline into the 102-101 zone per my (trade) objective noted last week.

Most 'oversold' declines in a bull market bottoms tend to be "V" bottoms. NOT a pattern seen at most tops in a bull market. So called V-bottom patterns or formations can be clearly seen on my first chart, that of the hourly S&P 500 (SPX).

I'd also make note of the 21-hour RSI seen above. This indicator was rising during the last part of SPX's hourly decline seen above; i.e., a 'classic' bullish price/indicator divergence.

MAJOR STOCK INDEX TECHNICAL COMMENTARIES

S&P 500 (SPX) DAILY CHART:

An upside reversal developed on the heels of the S&P 500 (SPX) falling to the area of my lower trading envelope 'band' (at 3.5% under the 'centered' 21-day moving average). This suggestion of an 'oversold' market, with prices at the lower band, went hand in hand with a dip to a traditionally oversold Relative Strength Index, RSI. Two days of holding the same intraday low was the tip off to act fast to buy into the lows as is typical of V-bottom lows in bull markets.

VIX, the S&P 500 Volatility Index, went from 11.8 on 12/5 to 24 on the day of the 12/16 low showing again the tendency for S&P bottoms when the VIX Index climbs above 22.

With SPX's rebound back above the 21-day moving average suggests potential to then clear the line of resistance in the 2075 area. Resistance extends to 2100, then to the 2130 area. Support is highlighted at the 21-day Average, currently intersecting at 2050. Next lower support, 2000.

Bullish sentiment jumped with the recent rebound but doesn't indicate any excess of bullishness. I look for the current rally to continue.

S&P 100 (OEX) INDEX; DAILY CHART

The S&P 100 has reversed back to the upside after declining to the lower 'envelope' line at a minus 3.3% BELOW its 21-day moving average. I look for downswings to tend to run their course in an area that's around 3% below OEX's 21-day average; in this case, the UPPER trading band was at 3.3% and there's a tendency for same values on the upper and lower bands to be seen over time.

The RSI reading was in the oversold zone at recent lows and, as seen above with my 'CPRATIO" sentiment indicator, there were spikes in bearishness before this last low.

I anticipated support in the 880 to 870 zone and that's where a 3-day bottom formed. 2-3 days to decide to get bullish is a fortunate long span of time to seize a bullish opportunity.

Near support is now seen at 900, extending to 890. Near resistance comes in around 920, with next resistance projected for the 932 area. 940 now looks doable as an upside objective for an up leg above prior highs.

THE DOW 30 INDUSTRIAL AVERAGE (INDU); DAILY CHART:

The Dow 30 Industrial Average (INDU) snapped out of its losing streak conclusively after hovering at lows at the lower envelope 'line' seen on my SPX chart. This moving average envelope was set to float or reflect values equal to 3% under the 21-day 'centered' moving average.

The upper envelope line intersected at 4% above the 21-day average. In a bull market it's not surprising to see bottoms form in the S&P and Dow if the Indices dip to below the 3% envelope line; i.e. a daily value that's 3% below the 21-day moving average.

I wrote last time that "I see the end of this fall as setting up another buying opportunity, which is appropriate in a long-term bull move." I anticipated strong support/buying interest coming in at 17200-17175 and extending to the 17000 area. INDU fell to no lower than 17067 so pretty much as anticipated there. If you own calls and are otherwise in bullish strategies, hang in for higher prices.

18000 is resistance but not major resistance in the Dow. INDU could make it to 18200 on a next rally and move toward 18500 over time after that.



NASDAQ COMPOSITE (COMP) INDEX; DAILY CHART:

The Nasdaq Composite (COMP) has resumed its short-term bullish trend after dipping to 3% under its 21-day moving average. This way of measuring current price versus a key trading average was suggesting that the Index was 'oversold' in that price area. This is the pattern applicable to a pullback in a Bull Market. The low reading of the Relative Strength Index (RSI) was a related visual reminder of the oversold condition existing at the recent low.

I anticipate a next move can carry COMP over 4800 resistance with the Index then having potential to reach the 4900 area after that.

Near support levels: 4700, extending to 4650. Next support then seen in the 4550 area.

NASDAQ 100 (NDX); DAILY CHART:

The NDX 100 (NDX) has flipped from a short-term downtrend back to the upside with the Index's recent strong rebound from the 4100 area, which was anticipated as fairly major support. The short, intermediate and long-term trends are all again pointed higher. If you want to get chart savvy, it's also true that the key upside price gap from late-October was 'filled in'; the low end of price gaps BELOW the market tend to offer subsequent support.

Near support is seen in the 4200 area, with fairly major support back in at 4100. Near resistance is seen at 4300, extending to 4330, then on up to 4400. I can envision a move to the 4450 area over time.

The Nasdaq 100 Volatility Index (VXN) shot up from a reading of 14.3 on 12/5 up to 24 on the day of the 12/16 low - see the lowermost figure on the NDX chart. This reinforces the view that VXN readings above 21-22 may be associated with a bottom that's at hand of 'near'. The so-called 'fear index' can be highest at bottoms no doubt. Been there, done that!

NASDAQ 100 TRACKING STOCK (QQQ); DAILY CHART:

The QQQ chart has the same upside reversal pattern as the underlying NDX as the short-term trend is back to UP. Key support as I've been saying was found near 100. I suggested last time that my downside objective for a recommended QQQ short position was in the 102-101 zone; i.e. objective reached, exit the trade and you could have bought the dip below 101 even.

Near support is at 102, with fairly major support again anticipated in the low-100 area.

Overhanging resistance and a key one is at 106. I anticipate that QQQ could pierce this pivotal resistance in the 106 area and make a next move toward 108.

RUSSELL 2000 (RUT); DAILY CHART:

The Russell 2000 (RUT) at least has broken out a short way above a line of resistance around 1190-1192. Key near resistance is at 1200, extending to 1220. Next resistance then might come in at 1240. I anticipate that RUT could get to 1240-1250, assuming continued strength in the other major market sectors.

Support should be found on pullbacks to the 1180 area, then at 1160.

I repeat my expectation of RUT having more broad two-sided price swings. You can 'buy' oversold RSI readings more often than not.


GOOD TRADING SUCCESS!




New Option Plays

E-Commerce & Technology

by James Brown

Click here to email James Brown


NEW DIRECTIONAL CALL PLAYS

Alibaba Group - BABA - close: 110.65 change: +1.40

Stop Loss: 107.90
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 30 million
Entry on December -- at $---.--
Listed on December 20, 2014
Time Frame: 8 to 12 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
The biggest IPO in history happened this year. The company was Chinese e-commerce giant Alibaba. They priced at $68 per share, raising $25 billion in capital, and giving the company a market cap of almost $170 billion. The stock opened its first day at $92.70. Six weeks later it was testing $120 per share.

BABA is considered part of the services sector. They're based in Hangzhou, China but they operate globally. The company runs several businesses including: Taobao Marketplace, an online shopping website; Tmall, a third-party platform for companies to retail online; Juhuasuan, a group-buying service; Alibaba.com is a business-to-business marketplace; 1688.com is a wholesale market; AliExpress is a consumer market. BABA runs multiple advertising services. They also offer cloud-computing services (a rival to Amazon's web services). The company also has AliPay, a payments company, but BABA's CEO said they plan to spin that off. According to IDC, BABA is the biggest online and mobile commerce company on the planet by gross merchandise volume.

Many investors see BABA as a way to play the growing Chinese consumer. BABA outlines the opportunity on their website:

We believe our business benefits from the rising spending power of Chinese consumers. China's real consumption is still a low percentage of GDP compared to other countries, including the United States. We believe that growth in consumption will drive higher levels of online and mobile commerce.

China's online shopping population is relatively underpenetrated. China has the largest Internet population in the world, but less than half of the Chinese Internet users have ever shopped online.

BABA's first earnings report as a public company was November 4th. The company delivered a profit of $0.45 a share, which was in-line with analysts' estimates. Revenues soared +53.7% to $2.74 billion, which was above expectations. Their mobile revenues doubled and their mobile active users surged +139%. BABA's gross merchandise volume rose +49% to $90.5 billion.

The company did not provide any guidance for the fourth quarter but many believe it will be the best quarter in BABA's history. Single's Day occurs on November 11th every year. It is a manufactured sales holiday that rivals Black Friday and Cyber Monday in the U.S. Last year (2013) BABA raked in a record $5.7 billion in sales on Single's Day. This year they blew that away with $9.3 billion in sales in 24 hours on Single's Day. BABA said they took in 278 million orders.

The stock peaked a couple of days later (Nov. 13th) and then corrected from the $120 area down to technical support at its new 50-dma (near $101). That is a correction of about -15%. Since then BABA has been consolidating sideways above its 50-dma. Shares held up very well during the U.S. market's painful sell-off a few days ago (that began Dec. 8th).

Shares of BABA appear to have broken the four-week down trend and traders were buying the dips near $108.00 on Friday. A rise past $112.00 would generate a new buy signal on BABA's point & figure chart. I think BABA is headed toward resistance at $120, possibly higher.

Tonight we are suggesting a trigger to buy calls at $111.25. I'm listing the March calls but that's only because the February's are not available yet (they should be soon). BABA is scheduled to report earnings in early February and we'll likely exit prior to their announcement.

Stock Lock Up Expirations

If you're going to trade BABA you need to be aware of the key lock up expiration dates.

December 19th (Friday) was a small lock up expiration where 8.1 million shares were released and available to be sold. This didn't have much impact since there is already 1.0 billion shares in BABA's float. However, BABA does have two more lock up expiration dates in 2015 that could be significant.

On March 19, 2015 the company will see an additional 429 million shares come available to market. Then on September 21, 2015 there is a huge 1.58 billion share lock up expiration.

Trigger @ $111.25

- Suggested Positions -

Buy the MAR $120 CALL (BABA150320C120) current ask $4.90

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

Daily Chart:




NEW DIRECTIONAL PUT PLAYS

Citrix Systems, Inc. - CTXS - close: 63.13 change: -0.16

Stop Loss: 65.05
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 1.9 million
Entry on December -- at $---.--
Listed on December 20, 2014
Time Frame: Exit prior to January option expiration
New Positions: Yes, see below

Company Description

Why We Like It:
We recently tried to trade CTXS as a put candidate. Unfortunately the market's massive rally in the last three sessions hit our stop loss. Yet CTXS still looks bearish. The oversold bounce has failed at resistance near its simple 200-dma and its descending 50-dma. Speaking of these moving averages the 50-dma is about to cross under the 200-dma, which is called a "death cross" by technicians.

We want to take another swing at CTXS. Tonight I'm suggesting a trigger to buy puts on CTXS if shares trade at $62.40 or lower. We'll start with a stop loss above Friday's high at $65.05.

Here's my previous play description on CTXS:

The company press release describes CTXS as "a leader in mobile workspaces, providing virtualization, mobility management, networking and cloud services to enable new ways to work better. Citrix solutions power business mobility through secure, personal workspaces that provide people with instant access to apps, desktops, data and communications on any device, over any network and cloud. This year Citrix is celebrating 25 years of innovation, making IT simpler and people more productive. With annual revenue in 2013 of $2.9 billion, Citrix solutions are in use at more than 330,000 organizations and by over 100 million users globally."

It sounds like they are in the right industry. Cloud services, cloud networking, mobile apps and desktops. Those are all hot areas for business investment. Unfortunately the company might be encountering tough competition.

The company's Q2 earnings report back in July beat Wall Street's estimates on both the top and bottom line but management guided lower for Q3. When CTXS reported their Q3 results on October 22nd (after the close) their bottom line profit beat estimates by two cents. Yet their revenue number missed Wall Street's estimate. Once again management issued a bearish outlook. They guided earnings and revenues below Wall Street estimates. You can see how shares gapped down on October 23rd.

The stock bounced from these late October lows likely thanks to the market's super sharp rally. The stock market's big cap indices broke out to new highs but not so for CTXS. Shares failed at resistance and have been struggling for weeks.

Since their October report the stock has been downgraded and initiated with an underweight rating by two firms. The stock also got a big vote of no confidence when the latest 13F filings came out and it was revealed that some big fund managers have closed their positions in CTXS.

The stock's performance has created a bearish sell signal on the point & figure chart with a $49.00 target.

Trigger @ $62.40

- Suggested Positions -

Buy the Jan $60 PUT (CTXS150117P60) current ask $0.65

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

Daily Chart:

Weekly Chart:



In Play Updates and Reviews

The Fed Rally Continues

by James Brown

Click here to email James Brown

Editor's Note:

The post-FOMC meeting rally in U.S. stocks continued on Friday. The S&P 500 challenged its all-time.

We saw our ARW put play get stopped out.


Current Portfolio:


CALL Play Updates

Packaging Corp of America - PKG - close: 79.45 change: +0.13

Stop Loss: 74.95
Target(s): To Be Determined
Current Option Gain/Loss: - 7.5%
Average Daily Volume = 1.0 million
Entry on December 18 at $78.94
Listed on December 17, 2014
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
12/20/14: Shares of PKG are up four days in a row. Friday's gain was not very big. Shares essentially drifted sideways. I don't see any changes from my Thursday night comments. There is a good chance PKG could dip back into the $78.00-78.50 zone and I would use a decline into that area as a new bullish entry point.

Earlier Comments: December 17, 2014:
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.

- Suggested Positions -

Long APR $80 CALL (PKG150417C80) entry $4.00

12/18/14 triggered on gap open at $78.94, trigger was $78.55
Option Format: symbol-year-month-day-call-strike

chart:


Skyworks Solutions - SWKS - close: 72.70 change: -0.49

Stop Loss: 66.95
Target(s): To Be Determined
Current Option Gain/Loss: + 0.5%
Average Daily Volume = 3.9 million
Entry on December 18 at $73.00
Listed on December 17, 2014
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
12/20/14: Traders were in a buy-the-dip mood with SWKS on Friday. The stock bounced twice near $71.60 intraday. Depending on your trading style you could wait and hope for a dip closer to $71.00 as an entry point or you could buy calls now on Friday's afternoon rebound.

Earlier Comments: December 17, 2014:
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.

- Suggested Positions -

Long FEB $75 CALL (SWKS150220C75) entry $4.08

12/18/14 triggered on gap open at $73.00, listed trigger was $71.55
Option Format: symbol-year-month-day-call-strike

chart:




PUT Play Updates

Arista Networks, Inc. - ANET - close: 66.53 change: -0.24

Stop Loss: 70.25
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 534 thousand
Entry on December -- at $---.--
Listed on December 18, 2014
Time Frame: 8 to 12 weeks
New Positions: Yes, see below

Comments:
12/20/14: ANET continued to underperform the market on Friday with another decline. Yet shares did not trade low enough to hit our entry point. Odds are good we'll see ANET hit our suggested trigger at $65.90 soon.

Earlier Comments: December 18, 2014:
ANET is in the technology sector. The company makes networking applications and cloud technology. According to company marketing materials, "Arista Networks was founded to deliver software-driven cloud networking solutions for large data center and computing environments. Arista's award-winning 10/40/100GbE switches redefine scalability, robustness, and price-performance, with over 3,000 customers and more than three million cloud networking ports deployed worldwide. At the core of Arista's platform is EOS, an advanced network operating system. Arista Networks products are available worldwide through distribution partners, systems integrators and resellers."

Shares of ANET held their IPO in June 2014 with 5.3 million shares priced at $43.00. The first trade was $55.25. The stock has been volatile but almost doubled with highs in the low $90s by September. Unfortunately for the bulls the rally has reversed.

ANET produced bearish double top near $94 in September. The stock did see a sharp pre-earnings rally before they reported results on November 6th. ANET beat estimates by 12 cents and beat the revenue estimate as well. Yet guidance was only in-line with Wall Street's estimates and traders sold the post-earnings pop. That has proved to be a new lower high.

Following its post-earnings reversal lower the company and the stock has been plagued with trouble. The stock has suffered thanks to two different lock ups expiring. November 11th was a lock up that allowed some ANET employees to sell about 50% of their stock. Then December 2nd was the 180-day lock up that allowed insiders to sell their shares (up to 53 million shares).

ANET was struggling with all of this additional supply coming to market. Then the company was hit with a massive lawsuit by networking giant Cisco Systems (CSCO) on December 5th. CSCO is a much larger rival and claims that ANET has violated patent and copyright infringement on several technologies. CSCO might have a case. ANET's CEO, Jayshree Ullal, spent fifteen years working for CSCO in its enterprise business. ANET claims that CSCO is merely trying to use the legal system to slow down a competitor.

It could take a couple of years for the legal battle to be resolved but Wall Street is turning more cautious. Since December 5th a few analysts have been lowering their price targets on ANET. Meanwhile bears are arguing that ANET is still too expensive with a P/E of 60 at current levels.

The U.S. stock market just produced its best two-day rally since 2008 and yet ANET did not participate. Instead shares faded lower. This relative weakness looks like a clear signal that the path of least resistance is lower.

Today's intraday low was $66.00. I'm suggesting a trigger to buy puts at $65.90. The $60.00 level could be round-number, psychological support but I suspect ANET could decline toward the $55 area. I want to reiterate that shares of ANET have been volatile so I'm suggesting smaller positions to limit risk.

Trigger @ $65.90 *small positions to limit risk*

- Suggested Positions -

Buy the MAR $60 PUT (ANET150320P60) current ask $4.60

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

chart:


CLOSED BEARISH PLAYS

Arrow Electronics - ARW - close: 57.52 change: +0.11

Stop Loss: 57.75
Target(s): To Be Determined
Current Option Gain/Loss: -60.0%
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:
12/20/14: The stock market's huge rally in the last three days has been super rough on our bearish candidates. ARW spiked up to $58.11 on Friday, piercing its 200-dma, before reversing back toward unchanged on the session. Our stop loss was hit at $57.75 along the way.

- Suggested Positions -

Jan $55 PUT (ARW150117P55) entry $2.00 exit $0.80 (-60.0%)

12/19/14 stopped out @ 57.75
12/16/14 triggered @ 54.75
Option Format: symbol-year-month-day-call-strike

chart: