Option Investor
Newsletter

Daily Newsletter, Monday, 10/26/2015

Table of Contents

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

Market Wrap

Gearing Up For A Big Week

by Thomas Hughes

Click here to email Thomas Hughes
The market held steady near two month highs at the start of a big week; FOMC, GDP and a massive round of earnings are all on tap.

Introduction

The market held steady today, trading just below the two month highs set last week, in a quiet session. There is a going to be a lot of information to hit the market this week, all with the power to move the market, but little was released today. Top of the list is the FOMC meeting and policy release scheduled for Wednesday afternoon. There is little expectation for a rate hike at this time but once again the market will be hanging on every nuance in the statement in search for clues as to when a rate hike might come. Soft manufacturing data and low-to-no inflation could keep them from hiking for several more meetings.

The first estimates for 3rd quarter GDP come out on Thursday. Consensus is in a range between 1.5% and 2.5% with some estimates as high as 3.5%, down from 3.9% in the 2nd quarter. Full year estimates are still in a tight range around 2.5% as well. Along with the FOMC and the GDP this is also the heaviest week for S&P 500 earnings; 167, more than 33%, of S&P 500 companies report this week.

Market Statistics

International markets were quiet today as well. Most Asian indices closed in the green, although gains were small. The Nikkei led with an increase of 0.65%. In Europe trading was much the same although there was a higher percentage of indices closing with small losses. The euporia caused by Mario Draghi's has either already worn off or traders are waiting to see how the FOMC policy statement affects overall outlook.

Futures trading on US indices was flat throughout the early pre-market session. There were no economic releases before the opening bell, and no headline inducing earnings reports, to drive trading. After the open the market fell to a low near -0.5% from Friday's open and then proceeded to trade sideways in a narrow range the rest of the day and into the close of trading.

Economic Calendar

The Economy

There were no economic releases before the bell but there was one after the bell worth taking note of, New Home Sales. New Home Sales frell -11.5% in September from the previous month to an annualized rate of 468,000. This is well below the expected 550,000 predicted by economists. The previous month was revised lower from the original 552,000 to 529,000. This number is definitely on the weak side, and not consistent with strength in other areas of the housing market. Existing Home Sales, reported last week, was strong and above expectations.

There is a fair amount of data coming out this week aside from the FOMC meeting and the GDP esimate. Tomorrow is Durable Goods, Case-Shiller 20 City Index and Consumer Confidence. Wednesday is of course the FOMC announcement. Thursday is Jobless Claims, GDP and Pending Home Sales. Friday is Personal Income and Spending, Employment Cost Index, Chicago PMI and Michigan Sentiment.

Moody's Survey Of Business Confidence declined another full point to 36.3. This is now the 8th week of decline and a new low for the index. According to Mark Zandi's summary the index shows a notable decline from the summer highs, driven by uncertainty over China and the slump in emerging markets. He notes that expectations for the future have had the largest decline, as well weakening in labor. Despite the decline the index remains at high levels relative to its history so the two month downtrend needs to be taken in perspective.


According to FactSet 173 S&P 500 companies have reported earnings so far this season. Of those 77% have beaten earnings expectations, above average, while only 43% have beaten on the revenue side, below average. The blended rate is now -3.8%, an increase of 0.6% from last week driven by better than expected performance in 8 of the 10 sectors. Energy leads declines and is performing below expectations. Ex-energy earnings growth is now 3.5%. Two negative trends that have developed are the impact of foreign exchange, an impact likely to continue into the coming quarters, and emerging evidence of wage inflation.

Fourth quarter expectations continue to decline. Since last week they have declined to -2%, from -0.9%. This is a negative for forward outlook but remains an improvement from the current quarter with the possibility of positive growth possible, and positive growth expected in the 1st quarter of 2015. Based on the four year average, if the 4th quarte season starts at -2%, we could expect final quarter earnings growth to rise as much as 4%. Ex-energy 4th quarter growth is estimated at 3.97%.

The Oil Index

Oil prices slid again today, dropping another -1.35% to fall below $44 per barrel for WTI. Prices for WTI settled at a two month low and could go lower unless something besides hope of lower production next year materializes to support them. Storage levels are at high levels, along with on-going over production on a global scale, with declining demand growth expectations. Oil prices could easily break down from this level unless a bullish catalyst emerges, with downside target near $40.

The Oil Index fell more than -2.25% in today's session to come slamming down to near term support. The index is now trading at a 3 week low, just above my support line at 1,175. The indicators are consistent with a possible break below this support level so it will need to be closely watched with close stops in place. A break below this level could take the index as low as 1,100 or 1,050. Earnings, as well as earnigns outlook, will be the big driver, the major integrated oil companies report later this week. This quarter could see them come in a little worse than expected, with possible lowered expectations for next quarter due to the recent fall in oil prices.


The Gold Index

Gold prices held steady below $1165 today. Prices were supported by a slight weakening in the dollar but that weakening is small relative to a 2 month high in the Dollar Index and only a two week low in gold. Without inflation present the only thing to support gold prices is anticipated Fed dovishness which might not be enough with QE raging around the world. The dollar is on the rise and likely going higher, supported by the ECB's QE talk last week, possible additional QE in Japan and the FOMC which is supposedly on track to hike rates as soon as this year. Regardless of when the Fed acts, world currencies and the dollar are on diverging paths that should send gold prices lower, possibly as low as $1100.

The gold miners fell in today's session but remain within recent trading ranges. The Gold Miners ETF GDX lost more than -3% but remain within a recent congestion band near the 100% retracement line. The indicators are weak but the index remains above the short term moving average and support so could be setting up for a move higher. The caveat is that gold prices could be driven lower by diverging central bank policy and take the miners with them. A break below the current support levels near $15.50 could take the ETF down to the late summer lows near $13.


In The News, Story Stocks and Earnings

Duke Power hit the news in the early hours, but not for earnings. The large southern based energy supplier announced it's intent to purchase Piedmont Natural Gas for $4.9 billion dollars. The deal would add over 1 million new natural gas customers to Dukes already vast range. The deal is worth $60 per share to shareholders and an assumption of debt by Duke. The per share price is a 40% premium to last week's closing prices for Piedmont. Shares of Duke popped in the ealry pre-market session but sold off during the day, losing a little more than -2%.


Broadcom reported after the bell. The broad band technology leader reported earnings that were above estimates on light revenue. Adjusted eps of %$0.73 is nearly a nickel better than last year at this time but came on light revenue. Shares lost more than -3% during the day but tried to rally in after hours trading. Some gains were made but nowhere near enough to recover the days losses.


Rent A Center reported after the bell as well. The rental company reported light revenue but beat on the bottom line by 2 cents. The problem was with forward guidance which is below consensus. The company guided the fourth quarter to $0.52 to $0.62 per share, with full year earnings of $2.10. Consensus was closer to $0.70 per share with full year earnings near $2.25. Shares of the stock got hit hard on the news and fell more than 20% in after hours trading.


The Cheesecake Factory reported $0.52 per share, in line with expectations. The results come on the back of a 2.2% increase in comp store sales and the opening of 6 new stores so far this year. The restaurant chain also announced the opening of as many as 5 new stores during the present quarter. Shares of the stock responded by falling nearly -5% in after hours trading.


The Indices

The indices held steady in today's trading as the market gears up for what could be the most active week of the earnings season. Not only are there 167 earnings reports the FOMC meeting is on the way, as well as the first read on 3rd quarter GDP. Today's action was led by the NASDAQ Composite, the only index to post a gain in today's trade, 0.06%. The tech heavy index created a very small spinning top candle just below resistance targets at 5,050. The indicators continue to climb, consistent with further testing of resistance and possible break through. MACD momentum is makig a new high relative to the current rally with stochastic confirming with a bullish crossover high in the upper signal zone. A break above this level could take the indes as high as the current all time high, near the bottom of the up trend-line broken in August and the 5,225 level.


The Dow Jones Industrial Average made the smallest decline in today's session, only -0.13%. The blue chips created a small bodied spinning top candle just above resistance targets broken last Friday. The indicators are rising, consistent with the break of resistance, but also divergent relative to the 2 month high, suggestive of a weakening rally. Regardless, the index is indicated higher at this time with potential upside target near 18,000 and the bottom of the previously broken up trend line.


The Dow Jones Transportation Average made the second smallest decline in today's session, -0.16%. The transports created a small spinning top candle, just above last week's broken resistance targets at 8,280, with mixed indicators. Momenutm is bullish, and rising with today's action, but declining relative to the current rally. Stochastic is bullish in the nearest term but consistent with resistance at the current levels. This could lead to further upside but any move above next resistance is highly questionable without positive catalyst.


The S&P 500 is today's laggard. The broad market shed -0.19% in today's session and created a small bodied candle. Today's action was within a tight range, between closely packed support/resistance lines within a long term congestion zone. The indicators are bullish and pointing to continued testing of resistance but have weakenend and could lead to a retest of support. There are weak support targets near 2,060 and 2,050 with a stronger one near 2,020. A break above the current level could take the index up to the all time high near 2,130 with possible resistance levels near 2,090 and 2,125.


The market still looks like it wants to march higher although the indicators show a weakening rally. This could indicate a peak in the market and pull back to support, or it could indicate an consolidation within a greater rally waiting on catalyst for break out. In either event there are plenty of possible catalysts this week, a few tomorrow. Tomorrow the economic calendar is light; Durable Goods, Case-Shiller 20 City index and Consumer Confidence. The earnings calendar is full including names like Apple, Alibaba, Pfizer, Corning and Bristol-Meyers.

I'm still looking to earnings to be the biggest driver of the market. Results for this season are coming in better than expected, not great, but better than expected, with positive forward outlook. The risk at this time is that revenue continues to fall short, and that outlook for next quarter and next year continues to fall. So long as outlook remains positive I remain a bull and will buy on the dips.

As for the FOMC, I do not expect much from them this meeting. They could make a surprise rate hike, but I don't think it likely with inflation as low as it is and the signs of economic slowing we have been seeing since the last meeting. What I do expect is more of the same non-committal in the statement they've been giving all along; the economy is stable and will need a rate hike soon, but it will be data dependent.

One final thought that no one seems to be talking about, Obamacare. It could become a real drag on consumer spending and the economy next year, more so than any affect it is having this year. The White House announced today that rates are going up in many places around the country, my own insurance is going up by nearly 35% and are not conducive to me stimulating the economy.

Until then, remember the trend!

Thomas Hughes


New Option Plays

The Holiday Shopping Season Is Almost Here

by James Brown

Click here to email James Brown


NEW DIRECTIONAL CALL PLAYS

Signet Jewelers Limited - SIG - close: 147.78 change: +3.02

Stop Loss: 144.15
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 889 thousand
Entry on October -- at $---.--
Listed on October 26, 2015
Time Frame: Exit PRIOR to earnings on November 24th
New Positions: Yes, see below

Company Description

Trade Description:
The holiday shopping season is almost here. A lot of retailers launch their holiday sales push in the first week of November. Soon investors are going to be looking for a Santa Claus rally. SIG looks like a tempting candidate since it has a history of outperforming the S&P 500 during the fourth quarter.

SIG is in the services sector. According to the company, "Signet Jewelers Limited is the world's largest retailer of diamond jewelry. Signet operates approximately 3,600 stores primarily under the name brands of Kay Jewelers, Zales, Jared The Galleria Of Jewelry, H.Samuel, Ernest Jones, Peoples and Piercing Pagoda. Further information on Signet is available at www.signetjewelers.com. See also www.kay.com, www.zales.com, www.jared.com, www.hsamuel.co.uk, www.ernestjones.co.uk, www.peoplesjewellers.com and www.pagoda.com."

Kay, Zales, and Jared are the first, third, and fourth biggest brand names in the jewelry business. In spite of having such a dominant position SIG only has about 8% of the $74 billion U.S. jewelry market. That leaves plenty of room to grow.

The company is integrating its recent acquisition of Zales. The results have boosted sales. Their 2016 Q1 and Q2 results (announced in May and August) came in better than expected. Same-store sales have been healthy at more than +4%. They are also seeing strong growth in their online sales.

Wall Street seems positive on SIG. A Nomura analyst recently labeled SIG as one of their best multi-year growth stories in retail. The stock has been showing relative strength too. SIG is up +12% in 2015 versus an S&P 500 that is virtually flat for the year.

Technically shares have a bullish trend of higher lows and higher highs. The point & figure chart is bullish with a quadruple top breakout buy signal and a $187 price target. On a short-term basis SIG has resistance in the $150.00 area. The recent high was $150.65. Tonight we are suggesting a trigger to buy calls at $150.75.

Trigger @ $150.75

- Suggested Positions -

Buy the DEC $155 CALL (SIG151218C155) current ask $3.20
option price is a current quote and not a suggested entry price.

Entry disclaimer: To avoid an unfavorable entry point, we will not launch a new play if the stock gaps open more than $1.00 past our suggested entry point.

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

Daily Chart:

Weekly Chart:



In Play Updates and Reviews

Stocks Tread Water Ahead of Busy Week

by James Brown

Click here to email James Brown

Editor's Note:

The U.S. market treaded water on Monday. There is a lot of news, a lot of earnings, and the potential for big swings in the next few days. Investors seem to be holding their breath to see what will move the market next.

COST was stopped out this morning.

Our plan was to exit the FB, INGR, and BEAV trades this morning.


Current Portfolio:


CALL Play Updates

Salesforce.com, Inc. - CRM - close: 78.22 change: -0.34

Stop Loss: 74.75
Target(s): To Be Determined
Current Option Gain/Loss: +23.0%
Average Daily Volume = 3.6 million
Entry on October 12 at $76.25
Listed on October 07, 2015
Time Frame: Exit PRIOR to earnings in November
New Positions: see below

Comments:
10/26/15: The stock market drifted sideways on Monday and CRM followed suit.

I am not suggesting new positions at current levels. CRM will likely report earnings in the next three weeks (mid November).

Trade Description: October 7, 2015:
Cloud computing and software giant CRM has been churning sideways for almost seven months. In spite of this lack of upward movement CRM is still outperforming the broader market. The NASDAQ composite is up +1.2% year to date. CRM is up +26%. The good news is that CRM looks poised to breakout past major resistance and begin its next leg higher.

CRM is part of the technology sector. According to the company, "Salesforce is the world's #1 CRM company. Our industry-leading Customer Success Platform has become the world's leading enterprise cloud ecosystem. Industries and companies of all sizes can connect to their customers in a whole new way using the latest innovations in cloud, social, mobile and data science technologies with the Customer Success Platform."

CRM's revenues have been consistently growing in the mid +20% range the last few quarters. Their Q4 revenues were up +26%. Q1 revenues were +23%. The company's most recent quarter was announced August 20th. Analysts were expecting Q2 results of $0.17 a share on revenues of $1.6 billion. CRM beat both estimates with a profit of $0.19 as revenues grew +23.5% to $1.63 billion. Management raised their Q3 and full year 2016 revenue guidance.

Technically the stock is in a long-term up trend and the point & figure chart is forecasting an $85.00 target. The $75.00-76.00 area is major resistance with CRM failing in this region multiple times. The recent rally has boosted CRM back to this level and the stock looks poised to breakout soon.

(Side note - CRM did hit an intraday high of $78.46 on April 29th thanks to M&A rumors. The company is still considered a potential acquisition target by larger rivals.)

We like CRM's relative strength and consistently strong earnings and revenue growth. A breakout here could spark a run that lasts until the company's earnings report in November. Tonight we are suggesting a trigger to buy calls if CRM trades at $76.25 (or higher).

- Suggested Positions -

Long DEC $80 CALL (CRM151218C80) entry $3.05

10/17/15 new stop @ 74.75
10/12/15 triggered @ $76.25
Option Format: symbol-year-month-day-call-strike


CVS Health Corp. - CVS - close: 103.47 change: -0.48

Stop Loss: 99.40
Target(s): To Be Determined
Current Option Gain/Loss: -15.0%
Average Daily Volume = 4.7 million
Entry on October 13 at $103.75
Listed on October 12, 2015
Time Frame: Exit PRIOR to earnings on October 30th
New Positions: see below

Comments:
10/26/15: CVS spent most of Monday's session hovering between its 200-dma near $103.00 and the $104.00 level. We only have a couple of days left. Our plan is to exit on Wednesday, at the closing bell.

No new positions at this time.

Trade Description: October 12, 2015:
Healthcare stocks have outperformed the broader market over the last few years. The country's adjustment to the Affordable Care Act (Obamacare) is one reason. There are huge demographic shifts occurring as well. Currently the U.S. sees 10,000 Baby Boomers hit 65 years old every single day. This is a trend that will last for years and highlights the aging population in the U.S. Older consumers have higher healthcare costs and they will likely try to save money by using companies like CVS.

CVS is in the healthcare sector. According to the company, "CVS Health (CVS) is a pharmacy innovation company helping people on their path to better health. Through its more than 7,800 retail drugstores, nearly 1,000 walk-in medical clinics, a leading pharmacy benefits manager with more than 70 million plan members, and expanding specialty pharmacy services, the Company enables people, businesses and communities to manage health in more affordable, effective ways. This unique integrated model increases access to quality care, delivers better health outcomes and lowers overall health care costs."

CVS has been making some key acquisitions lately. They spent $1.9 billion to buy all of Target's (TGT) 1,660 pharmacies across 47 states. CVS will operate them as a store-within-a-store format. CVS also acquired Omnicare for almost $13 billion. Omnicare is the biggest provider of pharmacy services to nursing homes, assisted living facilities, and other healthcare providers. This is a key acquisition to capitalize on the aging of America.

CVS has been consistently beating Wall Street's bottom line earnings estimates. Their most recent report was August 4th. CVS said their Q2 earnings were $1.19 a share, above estimates. Revenues rose +7.4% to $37.17 billion, which was in-line with expectations. Management offered slightly bullish guidance, above analysts' estimates.

Technically healthcare stocks peaked this past summer and began to correct lower in August. CVS was no exception. The trading on August 24th, the market's August-correction low, was more than a little crazy in shares of CVS. If we ignore that one day, then CVS has corrected from $113.45 down to $96.35 by late September. That was a -15% pullback. Fortunately investors finally stepped in to buy the decline and CVS has produced a bullish reversal higher.

The last few days have seen CVS' stock rally through resistance at $100. Today's rally (+1.0%) was significant because CVS closed above technical resistance at both its 50-dma and its 200-dma. The intraday high today was $103.52. I am suggesting a trigger to buy calls at $103.75. We will plan on exiting this trade prior to CVS' earnings report on October 30th.

- Suggested Positions -

Long NOV $105 CALL (CVS151120C105) entry $2.07

10/24/15 prepare to exit by Wednesday.
10/13/15 triggered @ $103.75
Option Format: symbol-year-month-day-call-strike


The Walt Disney Company - DIS - close: 113.52 change: +0.43

Stop Loss: 109.25
Target(s): To Be Determined
Current Option Gain/Loss: +210.2%
Average Daily Volume = 9.9 million
Entry on October 12 at $106.50
Listed on October 10, 2015
Time Frame: Exit PRIOR to earnings on November 5th
New Positions: see below

Comments:
10/26/15: Traders were still in a buy-the-dip mood with DIS this morning. Shares fell to $112.12 and bounced. DIS managed to outperformed the major indices with a +0.38% gain.

More conservative investors will want to seriously consider taking profits right now.

No new positions at this time.

Trade Description: October 10, 2015:
The Force is strong with this one. DIS is poised to reap a galaxy of profits as the company re-launches the Star Wars franchise.

DIS has been a big cap superstar with strong, steady gains off its 2011 lows. That changed in August this year. Shares of DIS plunged into a very sharp and painful correction. The catalyst for the drop was the company's earnings report. Disney reported earnings on August 4th and beat the street with earnings of $1.45 compared to estimates for $1.42. The very next day shares fell -$11.00 to $110. The sell-off accelerated in August thanks to the global market meltdown. Since then shares have recovered.

Disney posted $13.1 billion in revenue compared to estimates for $13.2 billion. That minor miss was not the reason for the huge decline in the stock. Disney said revenues in its cable products rose +5% BUT they had seen some pressure from online streaming. Subscription growth to the ESPN cable bundle had slowed, not declined, just slowed.

There are multiple reasons. There were no major sporting events this summer like the World Cup, Olympics, etc. Some consumers are cutting the cord to cable because they are now getting their TV programming from Netflix, Hulu, etc. Cable is expensive compared to the streaming options. The drop off in ESPN growth is not related specifically to Disney. CEO Bob Iger said subscriptions would pick back up in 2016 and expand sharply in 2017 thanks to a flood of sporting events due to come online next year.

Disney has already purchased the rights to nearly every sporting event available in the next five years but the old contracts with the prior rights holders have yet to expire. As those contracts expire and the new Disney contracts begin the content on ESPN will surge.

(sidenote - The advertising environment for television should also improve in 2016 thanks to the U.S. presidential election.)

This slowdown in ESPN growth should be ignored. This is just a small part of the Disney empire and everything else is growing like crazy. Parks and resorts revenue rose +4%. Consumer products revenue rose +6% thanks to Frozen, Avengers and Star Wars merchandise. The only weak spot was interactive gaming, which declined -$58 million to $208 million. Disney expects that to rebound in Q4 as new games are released and holiday shopping begins.

The real key here is the theme parks, cruises and most of all the movie franchises. They have five Star Wars movies in the pipeline and the one opening this December is expected to gross $2.2 billion and provide Disney with more than $1 billion in profits. This is just one of the blockbusters they have scheduled.

Analysts are claiming Disney shares could add 25% before the end of December because of their strong movie schedule and coming attractions. The Avengers movie in April was a hit and added greatly to their Q2 earnings. However, that will just be a drop in the bucket compared to the money they are going to make on the Star Wars reboot in December. That is the first of five Star Wars movies on the calendar. Remember, Disney now has Marvel, Pixar and Star Wars (Lucasfilm) all under the same roof.

Disney Movie Schedule (partial list)

Dec. 18, 2015 - "Star Wars: Episode VII - The Force Awakens"
2016 - "The Incredibles 2"
2016 - "Frozen" sequel
April 2016 - "Captain America: Civil War"
June 2016 - "Finding Dory"
Dec. 2016 - "Star Wars Anthology: Rogue One"
May 2017 - "Star Wars: Episode VIII"
June 2017 - "Toy Story 4"
Late 2017 - "Thor: Ragnarok"
May 2018 - "Avengers: Infinity War - Part I"
2018 - "Untitled Star Wars Anthology Project"
May 2019 - "Avengers: Infinity War - Part II"
2019 - "Star Wars: Episode IX"

Content is still king and DIS rules. They're going to make a hoard of money off their Star Wars movies but that's just the tip of the iceberg. There will be tons of money made on merchandising from toys, clothing, video games, and just about everything else under the sun they can slap a Star Wars logo on.

The stock's correction from $121 to $90 was abrupt. DIS quickly fell from correction territory to bear-market territory in just a few days. Fortunately DIS produced a pretty good rebound. Yet the oversold bounce stalled under resistance near $105 and its 200-dma.

The breakdown under round-number support at $100 in late September looked ugly but there was no follow through lower. Since the late September low shares have rallied and Friday, October 9th, saw DIS close above resistance at its 50-dma and above resistance at $105.00. Now it just needs to clear technical resistance at the 200-dma currently at $106.21. We are suggesting a trigger to buy calls at $106.50.

We will plan on exiting prior to DIS' earnings report in early November. More aggressive investors might want to hold over the report (if that's you I suggest considering the January 2016 calls).

- Suggested Positions -

Long NOV $110 CALL (DIS151120C110) entry $1.66

10/24/15 Less than two weeks to go on this trade
10/22/15 new stop @ 109.25
Investors may want to take some money off the table with our option up +200%
10/17/15 new stop @ 104.40
10/15/15 new stop @ 101.85
10/12/15 triggered @ $106.50
Option Format: symbol-year-month-day-call-strike


The Home Depot, Inc. - HD - close: 125.01 change: +0.40

Stop Loss: 121.75
Target(s): To Be Determined
Current Option Gain/Loss: +81.8%
Average Daily Volume = 5.3 million
Entry on October 08 at $120.25
Listed on October 05, 2015
Time Frame: Exit PRIOR to earnings on November 17th
New Positions: see below

Comments:
10/26/15: HD bounced off the $124.00 level this morning and managed to eke out +0.3% gain for the session.

There is no change from my recent comments. More aggressive traders may want to keep their stop loss below the $120.00 mark for now.

No new positions at this time.

Trade Description: October 5, 2015:
Home Depot's stock has outperformed the broader market in spite of the fact shares have been stuck in a trading range for the last seven months. That could be about to change.

The big surge in the U.S. housing market this year has been a bullish tailwind for HD's business. The home remodeling and repair industry and consumer spending in this category is expected to hit levels not seen since before the "Great Recession" in 2008-2009. HD is poised to reap the benefits.

HD is in the services sector. According to the company, "The Home Depot is the world's largest home improvement specialty retailer, with 2,270 retail stores in all 50 states, the District of Columbia, Puerto Rico, U.S. Virgin Islands, Guam, 10 Canadian provinces and Mexico. In fiscal 2014, The Home Depot had sales of $83.2 billion and earnings of $6.3 billion. The Company employs more than 370,000 associates. The Home Depot's stock is traded on the New York Stock Exchange (HD) and is included in the Dow Jones industrial average and Standard & Poor's 500 index."

HD has been showing steady earnings and revenue growth. The company has beaten Wall Street estimates on both the top and bottom line the last three quarters in a row. Management has also raised their guidance the last three quarters in a row.

Their most recent report was August 18th. HD announced its Q2 earnings were up +14% from a year ago to $1.71 per share. Revenues were up +4.3% to $24.83 billion. Comparable store sales came in better than expected with a +4.2% improvement.

Wall Street analysts seem bullish with firms like Deutsche Bank and UBS recently raising their price targets on HD. Currently the point & figure chart is bearish but a rally past $120.00 would generate a brand new buy signal.

Earlier I mentioned that HD has been stuck in a long trading range or consolidation for most of 2015. With the exception of a few days, shares of HD have been churning sideways in the $110-120 range. Today HD looks poised to breakout from this channel. The $120.00 level is round-number resistance. Tonight we are suggesting a trigger to buy calls at $120.25. Plan on exiting prior to HD's earnings report in mid November.

- Suggested Positions -

Long NOV $125 CALL (HD151120C125) entry $1.43

10/22/15 new stop @ 121.75
10/10/15 new stop @ 117.45
10/08/15 triggered @ $120.25
Option Format: symbol-year-month-day-call-strike


iShares Russell 2000 ETF - IWM - close: 115.06 change: -0.79

Stop Loss: 113.35
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 36 million
Entry on October -- at $---.--
Listed on October 24, 2015
Time Frame: 6 to 8 weeks
New Positions: Yes, see below

Comments:
10/26/15: After last week's big rally the market took a day off today. Stocks drifted sideways to slightly lower. The IWM fell -0.6%. I don't see any changes from the weekend newsletter's new play description. Our suggested entry point is $116.55.

Trade Description: October 24, 2015:
If you haven't noticed the market is in rally mode. Worries over the Fed raising rates in 2015 are fading while the rest of the world is trying to add stimulus to their economies. Concerns over a terrible Q3 earnings season are also fading. Yes, earnings results have been bad but the bar was set low enough that companies are beating estimates. Now the U.S. market is surging.

One area of the market has lagged behind and that is the small cap stocks. The NASDAQ composite ended the week with a +6.3% gain for 2015. The S&P 500 edged back into positive territory with a +0.8% gain for the year. Yet the small cap Russell 2000 index is still down -3.2%. It's time for the small caps to play catch up with the rest of the market.

A couple of issues have driven this divergence. Right now big caps are outperforming because mutual fund and hedge fund managers are probably window dressing their portfolios for the end of their fiscal year (October 31st). Another factor has been weakness in the biotech stocks. Biotechs reversed sharply in the last three months and they have struggled to keep up with the market's rebound. Currently there are a lot of small biotech companies in the small cap index. Biotechs now account for about 7% of the Russell 2000 index. This group has definitely lagged the rest of the market over the last three weeks.

The good news is that the IWM small cap ETF, which tracks the Russell 2000 index, looks poised to breakout higher. It has been coiling below resistance in the $116 area the last several days. When it finally breaks higher it can move pretty quick.

Tonight we are suggesting a trigger to buy calls at $116.55. If triggered we will start with a stop loss at $113.35. This is a multi-week trade.

Trigger @ $116.55

- Suggested Positions -

Buy the 2016 JAN $120 CALL (IWM160115C120)

Entry disclaimer: To avoid an unfavorable entry point, we will not launch a new play if the stock gaps open more than $1.00 past our suggested entry point.

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


Pepsico, Inc. - PEP - close: 102.54 change: +0.11

Stop Loss: 94.75
Target(s): To Be Determined
Current Option Gain/Loss: +37.0%
Average Daily Volume = 5.0 million
Entry on October 22 at $101.00
Listed on October 19, 2015
Time Frame: Exit prior to expiration in January
New Positions: see below

Comments:
10/26/15: It was a quiet day for the stock market and PEP slid sideways and just happened to end the session in positive territory. I don't see any changes from my previous comments. Consider waiting for a dip in the $101.00-101.50 zone as our next bullish entry point. Broken resistance near $100-101 should be support.

Trade Description: October 19, 2015:
Soda sales remain the biggest chunk of non-alcoholic drinks. Unfortunately for big soda makers like PEP and KO trends are changing. Consumers are become more health conscious. Sugary soda drink sales have fallen ten years in a row. The good news is that more and more consumers are reaching for bottled water and other drinks perceived to be healthier than traditional colas. Bottled water sales are on pace to surpass soda as the beverage of choice for U.S. consumers soon. (FYI: PEP's bottled water brand is Aquafina)

PEP is a consumer goods giant with a global presence. According to the company, "PepsiCo products are enjoyed by consumers one billion times a day in more than 200 countries and territories around the world. PepsiCo generated more than $66 billion in net revenue in 2014, driven by a complementary food and beverage portfolio that includes Frito-Lay, Gatorade, Pepsi-Cola, Quaker and Tropicana. PepsiCo's product portfolio includes a wide range of enjoyable foods and beverages, including 22 brands that generate more than $1 billion each in estimated annual retail sales."

The stock has been stuck consolidating sideways in the $90-100 trading range for almost a year. It looks like that consolidation may be nearing its end.

Earnings have been better than expected. I looked at the last three quarters. PEP has managed to beat Wall Street's estimates on both the top and the bottom line. Revenues have declined year over year but that is due to negative foreign currency exchange rates that is shaving off about -10% from earnings and revenues. The company says their gross margins and operating margins continue to improve.

PEP's Q3 results showed a +7.4% jump in organic revenues. On a constant currency basis their operating profit was up +12%. Earnings were up +14% from a year ago and their core gross margins surged 120 basis points. They have raised their full year 2015 core constant currency EPS guidance twice this year. Thus far PEP has saved $1 billion in productivity savings and returned $9 billion to shareholders in 2015.

The U.S. market is up the last three weeks in a row but it's relatively flat for the year. Investors are confused with all the different global cross currents, exchange fluctuations, central bank moves, and more. Fund managers are probably tempted to park cash in a huge, liquid big cap like PEP and get paid 2.8% a year with dividends. Why not? PEP is still growing with solid single-digit growth.

Technically PEP looks poised to breakout past major resistance in the $100 area. The point & figure chart is already bullish and forecasting at $120.00 target. Tonight we are listing a trigger to buy calls at $101.00.

- Suggested Positions -

Long 2016 JAN $100 CALL (PEP160115C100) entry $2.81

10/22/15 triggered @ $101.00
Option Format: symbol-year-month-day-call-strike


Constellation Brands Inc. - STZ - close: 136.00 change: -0.20

Stop Loss: 133.20
Target(s): To Be Determined
Current Option Gain/Loss: -40.0%
Average Daily Volume = 1.29 million
Entry on October 23 at $138.38
Listed on October 22, 2015
Time Frame: Exit PRIOR to earnings in early January
New Positions: see below

Comments:
10/26/15: Hmm... STZ only lost 20 cents today. Shares bounced off the $135.00 level and pared its loss to almost unchanged. Yet technically today's loss would "confirm" Friday's bearish reversal pattern in STZ. I am suggesting caution today. No new positions at this time. The market didn't do much today and STZ didn't really move much either.

Trade Description: October 22, 2015:
Major beer brands have suffered from the boom in craft beers. Yet STZ's Corona and Modelo have seen significant growth, especially in the U.S. The company's earnings and revenue growth has fueled a rally in the stock that has outpaced the major marker indices.

STZ is in the consumer goods sector. According to the company, "Constellation Brands (NYSE:STZ and STZ.B) is a leading international producer and marketer of beer, wine and spirits with operations in the U.S., Canada, Mexico, New Zealand and Italy. In 2014, Constellation was one of the top performing stocks in the S&P 500 Consumer Staples Index. Constellation is the number three beer company in the U.S. with high-end, iconic imported brands including Corona Extra, Corona Light, Modelo Especial, Negra Modelo and Pacifico. Constellation is also the world`s leader in premium wine, selling great brands that people love including Robert Mondavi, Clos du Bois, Kim Crawford, Rex Goliath, Mark West, Franciscan Estate, Ruffino and Jackson-Triggs. The company`s premium spirits brands include SVEDKA Vodka and Black Velvet Canadian Whisky.

Based in Victor, N.Y., the company believes that industry leadership involves a commitment to brand-building, our trade partners, the environment, our investors and to consumers around the world who choose our products when celebrating big moments or enjoying quiet ones. Founded in 1945, Constellation has grown to become a significant player in the beverage alcohol industry with more than 100 brands in its portfolio, sales in approximately 100 countries, about 40 facilities and approximately 7,200 talented employees."

STZ has been reporting strong earnings numbers. Back in January they reported their Q3 2015 numbers that beat estimates on both the top and bottom line numbers. STZ management raised their 2015 guidance. Their Q4 results were out on April 9th. Earnings were up +37% from a year ago. Gross margins improved. Their fiscal year 2015 sales were up +24%. Management guided 2016 earnings growth in the +12% to +17% range.

Their 2016 Q1 report came out in July. They managed to beat estimates again on both the top and bottom line. STZ management raised their guidance again. Their most recent earnings report was October 7th. STZ said their 2016 Q2 earnings were $1.56 a share. That was 24 cents better than expected. Revenues were up +7.8% to $1.73 billion, which was in-line with estimates. The company remains optimistic and raised their guidance yet again.

This strong track record of earnings growth has fueled a long-term rally in STZ. The stock is also outperforming the broader market. The S&P 500 index is flat for the year (-0.3%) while STZ is up +40% in 2015.

After a big rally off its late September lows (about $122 to almost $139) shares dipped to their 10-dma and bounced (around $133.25). The market's current rally has lifted STZ back toward its all-time highs. Tonight we are suggesting a trigger to buy calls at $138.25.

- Suggested Positions -

Long 2016 JAN $145 CALL (STZ160115C145) entry $2.50

10/23/15 triggered on gap open at $138.38, entry trigger was $138.25
Option Format: symbol-year-month-day-call-strike




PUT Play Updates

Cracker Barrel Old Country - CBRL - close: 142.13 change: +1.06

Stop Loss: 145.05
Target(s): To Be Determined
Current Option Gain/Loss: -48.4%
Average Daily Volume = 395 thousand
Entry on October 22 at $136.90
Listed on October 21, 2015
Time Frame: Exit PRIOR to earnings on Nov. 24th
New Positions: see below

Comments:
10/26/15: The broader market drifted lower today. So naturally CBRL decides to outperform the market with a +0.75% gain.

A failed rally below resistance near $145 and its 200-dma could be a new entry point.

Trade Description: October 21, 2015:
Some of the restaurant stocks are struggling. Disappointing consumer spending, slower foot traffic, and tougher comparisons are weighing on the group.

CBRL is in the services sector. According to the company, "Cracker Barrel Old Country Store restaurants provide a friendly home-away-from-home in its old country stores and restaurants. Guests are cared for like family while relaxing and enjoying real home-style food and shopping that's surprisingly unique, genuinely fun and reminiscent of America's country heritage...all at a fair price. Cracker Barrel Old Country Store, Inc. (Nasdaq:CBRL) was established in 1969 in Lebanon, Tenn. and operates 637 company-owned locations in 42 states."

Earnings have taken a turn for the worse with CBRL. Back in June this year CBRL delivered a very upbeat earnings report. Profit was $1.49 per share, which was 12 cents above estimates. Revenues were up +6.3% to $683.7 million, beating expectations. Comparable store sales were relatively healthy and management raised their guidance.

Fast-forward to September 16th and CBRL reported their fiscal Q4 results of $1.97 a share. That did beat estimates but revenue growth slowed down to +3.8% to $719 million, which missed estimates. Comparable store sales slowed down to +0.6%. Management lowered their fiscal 2016 Q1 guidance.

Technically CBRL has developed a bearish trend of lower highs and now lower lows. This past week has seen the oversold bounce fail at resistance near its 200-dma. The point & figure chart is bearish and forecasting at $124.00 target.

I'm a little bit worried about the elevated short interest. The most recent data listed short interest at 22% of the small 19.0 million share float. That could make CBRL more volatile than normal but the shorts are probably right on this one, at least for a little while.

Tonight we are suggesting a trigger to launch bearish positions at $136.90. We are not setting an exit target tonight but the $130.00 and $120.00 levels are potential support (and thus possible bearish targets).

- Suggested Positions -

Long DEC $130 PUT (CBRL151218P130) entry $3.20

10/22/15 triggered @ $136.90
Option Format: symbol-year-month-day-call-strike


Darden Restaurants - DRI - close: 64.71 change: +0.80

Stop Loss: 66.30
Target(s): To Be Determined
Current Option Gain/Loss: -20.9%
Average Daily Volume = 1.7 million
Entry on October 21 at $63.40
Listed on October 20, 2015
Time Frame: Exit PRIOR to earnings in December
New Positions: see below

Comments:
10/26/15: It looks like some of the restaurant names were bucking the market's weakness today. DRI added +1.25% and closed above its 10-dma for the first time in weeks.

No new positions at this time.

Trade Description: October 20, 2015:
Consumer spending has been disappointing and some of the restaurant names are suffering for it. DRI has actually raised guidance two quarters in a row but investors are ignoring this news and seem to be focusing on the larger macro trends for the industry.

DRI is in the services sector. According to the company, "Darden Restaurants, Inc., (DRI) owns and operates more than 1,500 restaurants that generate $6.8 billion in annual sales. Headquartered in Orlando, Florida, and employing 150,000 people, Darden is recognized for a culture that rewards caring for and responding to people. Our restaurant brands - Olive Garden, LongHorn Steakhouse, Bahama Breeze, Seasons 52, The Capital Grille, Eddie V's and Yard House - reflect the rich diversity of those who dine with us. Our brands are built on deep insights into what our guests want."

DRI reported their Q4 report on June 23rd. They beat Wall Street's EPS estimate and raised their 2016 guidance. Shares popped on the news and the stock continued to rally into late summer. Unfortunately shares produced a bearish double-top pattern in the July-August time frame. DRI began to correct lower.

The company reported its 2016 Q1 results on September 22nd. Earnings of $0.68 per share beat estimates by 10 cents. Revenues were up +5.7% to $1.69 billion, which was above estimates. Same-store sales were up +3.4% for the quarter. Management raised their 2016 earnings guidance again. This looked like a pretty good report. Yet three days later investors sold the rally.

Nationwide the pace of consumer spending has been lower than expected. A few days ago an industry research firm said U.S. restaurant sales were up +1.5% in Q3 but that was slower than Q2's +1.8% growth. A higher tab helped offset slower traffic numbers. The outlook for traffic is worrisome. This firm expects restaurant traffic numbers to be stagnant. This is inline with another research note that expects foot traffic at retailers to fall -8% this holiday season.

The market used to think that consumers would take the money they saved from lower gasoline prices and spend it elsewhere. That doesn't seem to be happening. Now the restaurant industry is facing tough comparisons to last year's relatively healthy Q4 numbers.

Technically DRI is now in a bearish trend of lower highs and lower lows. Shares have broken down below their 200-dma. The oversold bounce just failed at resistance near $66.00. The point & figure chart is bearish and forecasting at $55.00 target. Tonight we are suggesting a trigger to buy puts if DRI trades down to $63.40. This is a multi-week trade. We will plan on exiting prior to earnings in December.

- Suggested Positions -

Long 2016 JAN $60 PUT (DRI160115P60) entry $2.15

10/21/15 triggered @ $63.40
Option Format: symbol-year-month-day-call-strike


Nordstrom Inc. - JWN - close: 65.23 change: +0.24

Stop Loss: 70.05
Target(s): To Be Determined
Current Option Gain/Loss: + 90.3%
Average Daily Volume = 1.4 million
Entry on October 15 at $66.40
Listed on October 14, 2015
Time Frame: Exit PRIOR to earnings on November 12
New Positions: see below

Comments:
10/26/15: JWN plunged to new lows this morning and traded below the $64.00 level. Unfortunately shares bounced and managed to end the session with a +0.3% gain.

No new positions at this time.

Trade Description: October 14, 2015:
Normally Q4 is the time investors think about buying retail-related stocks in anticipation of a strong holiday shopping season. This year the retailers' Q4 is off to a weak start.

JWN is in the services sector. According to the company, "Nordstrom, Inc. is a leading fashion specialty retailer based in the U.S. Founded in 1901 as a shoe store in Seattle, today Nordstrom operates 316 stores in 39 states, including 120 full-line stores in the United States, Canada and Puerto Rico; 188 Nordstrom Rack stores; two Jeffrey boutiques; and one clearance store. Additionally, customers are served online through Nordstrom.com, Nordstromrack.com and HauteLook. The company also owns Trunk Club, a personalized clothing service serving customers online at TrunkClub.com and its five clubhouses. Nordstrom, Inc.'s common stock is publicly traded on the NYSE under the symbol JWN."

JWN's earnings results have struggled this past year. Last November they beat estimates by a penny but guided lower. When JWN reported earnings in February 2015 they missed expectations and guided lower the second quarter in a row. In May this year they missed estimates again. Their most recent earnings report was August 13th. JWN beat Wall Street estimates by three cents with a profit of $0.93 a share. Revenues were up +9% to $3.6 billion, slightly above estimates. Management actually raised their 2016 guidance. The stock popped higher on the earnings beat and bullish guidance. Unfortunately the rally did not last.

Shares of JWN reversed and formed a bearish double top. Since then investors have continued to sell the rallies. The big drop on October 7th was an adjustment for JWN's special cash dividend of $4.85. There has been virtually no bounce.

Today JWN underperformed as the market reacted to Wal-Mart's earnings warning. Suddenly investors are concerned that consumer spending this holiday season may be weaker than expected. That doesn't bode well for JWN. The trend is already down and the point & figure chart is forecasting at $58.00 target.

Shares readers could argue there is potential support near the $65.00 level but we think JWN is headed a lot lower and could drop toward round-number support at $60.00. Tonight we are suggesting a trigger to buy puts at $66.40. Prepare to exit prior to JWN's earnings report in November.

- Suggested Positions -

Long NOV $65.15* PUT (JWN151120P65.15) entry $1.13

10/15/15 triggered @ $66.40
*NOTE: The odd option strike is due to JWN's special cash dividend of $4.85 per share. The ex-distribution date was Wednesday, October 7, 2015. The option market adjusted all the prior option strikes down -4.85.

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



CLOSED BULLISH PLAYS

Costco Wholesale Corp. - COST - close: 156.73 change: +0.99

Stop Loss: 153.25
Target(s): To Be Determined
Current Option Gain/Loss: +55.0%
Average Daily Volume = 1.9 million
Entry on October 05 at $146.25
Listed on October 03, 2015
Time Frame: Exit PRIOR to November option expiration
New Positions: see below

Comments:
10/26/15: It was a volatile morning for COST and it killed the potential gains on this trade. Instead of a +200% gain in the option it's closer to +55%.

Shares gapped down this morning at $152.06. Our stop was at $153.25 so the play was immediately stopped out. COST fell to $151.26 and then bounced all the way back above $156. Shares were upgraded this afternoon. UBS upped them to a "buy" rating and gave COST at $180 price target.

- Suggested Positions -

NOV $150 CALL (COST151120C150) entry $2.00 exit $3.10 (+55.0%)

10/26/15 stopped out on gap down at $152.06
10/22/15 new stop @ 153.25
10/14/15 Wal-Mart warns and retail-related stocks suffer
10/10/15 new stop @ 147.45
10/08/15 COST rises on better than expected September same-store sales
10/07/15 COST could see a short-term dip here.
10/05/15 triggered @ $146.25
Option Format: symbol-year-month-day-call-strike

chart:


Facebook, Inc. - FB - close: 103.77 change: +1.58

Stop Loss: 95.75
Target(s): To Be Determined
Current Option Gain/Loss: +134.3%
Average Daily Volume = 31 million
Entry on October 16 at $96.60
Listed on October 15, 2015
Time Frame: Exit PRIOR to earnings on November 4th
New Positions: see below

Comments:
10/26/15: The rally in FB continued on Monday with shares outperforming the market and adding another +1.5%. Earnings are coming up and we decided in the prior newsletter to exit positions this morning.

- Suggested Positions -

NOV $100 CALL (FB151120C100) entry $2.45 exit $5.74 (+134.3%)

10/26/15 planned exit this morning
10/24/15 prepare to exit on Monday morning
10/22/15 new stop loss at $95.75, FB looks poised to breakout past $100
10/20/15 Caution - FB has generated a technical reversal pattern but it needs to see confirmation
10/16/15 triggered @ $96.60
Option Format: symbol-year-month-day-call-strike

chart:


Ingredion Inc. - INGR - close: 93.09 change: -0.30

Stop Loss: 89.85
Target(s): To Be Determined
Current Option Gain/Loss: -31.4%
Average Daily Volume = 458 thousand
Entry on October 12 at $91.05
Listed on October 08, 2015
Time Frame: Exit PRIOR to earnings on October 29th
New Positions: see below

Comments:
10/26/15: As expected the $94.00 level acted as resistance today. Our plan was to exit INGR positions at the opening bell. Unfortunately shares gapped lower at the open before tagging $94.00 and reversing.

- Suggested Positions -

NOV $95 CALL (INGR151120C95) entry $1.75 exit $1.20 (-31.4%)

10/26/15 planned exit this morning
10/24/15 Prepare to exit on Monday morning
10/22/15 new stop @ 89.85
10/12/15 triggered @ $91.05
Option Format: symbol-year-month-day-call-strike

chart:


CLOSED BEARISH PLAYS

B/E Aerospace Inc. - BEAV - close: 43.22 change: -0.22

Stop Loss: 46.25
Target(s): To Be Determined
Current Option Gain/Loss: +11.8%
Average Daily Volume = 1.3 million
Entry on October 14 at $45.75
Listed on October 13, 2015
Time Frame: Exit PRIOR to earnings on October 27th
New Positions: see below

Comments:
10/26/15: BEAV continued to sink today. Shares lost -0.5%. Our plan was to exit this morning ahead of earnings due out tomorrow. Unfortunately the bid on our option shrank as well, which cut into our potential profits.

- Suggested Positions -

NOV $45 PUT (BEAV151120P45) entry $1.70 exit $1.90 (+11.8%)

10/26/15 planned exit this morning
10/24/15 Prepare to exit on Monday morning
10/22/15 new stop @ 46.25
10/14/15 triggered @ $45.75
Option Format: symbol-year-month-day-call-strike

chart: