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Newsletter

Daily Newsletter, Wednesday, 10/22/2014

Table of Contents

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

Market Wrap

Pullback From Resistance

by Keene Little

Click here to email Keene Little
The strong rally off the October 15th low quickly shot indexes up to potentially strong resistance levels and today's pullback will lead to an important test for the market. Who wins the test will dictate the market's direction into December.

Wednesday's Market Stats

The strong rally off the October 15th low has all the hallmarks of short covering. When the indexes started to break important support levels last week there was panic in the streets, as evidenced by the spike up in the VIX. Many traders started piling into puts and hedging their long positions with some short positions. When buy programs were initiated on Wednesday (it can be argued who initiated them) the shorts ran for cover and it didn't stop until today. Overnight rallies in the futures ensured the indexes jumped over solid resistance as a way to keep the short-covering rally going.

The rally had the indexes up to important resistance levels, as I'll cover in tonight's charts, and this time there was no overnight rally to provide a gap up and poke the bears some more in their eyes. Mission accomplished by the PPT and now they'll sit back and see how the market does on its own? We saw the strongest buying of the year in the previous 4 days and it certainly makes one wonder what could have prompted such a strong rally. Maybe I'm just being paranoid (wink).

Without another gap up to keep things going this morning there was little to no short covering at the open and while some more buyers tried to keep the rally going it became obvious early that the buying was exhausted for now. The market rolled over and the end result was the indexes were held down at important lines of resistance. What we don't know yet is whether last week's low was just another v-bottom reversal in a long string of them over the past few years, which led to new market highs, or if the strong rally was the first of many sharp spikes to the upside (short covering) that are more common in bear markets than bull markets. Some of the strongest rallies occur in bear markets but they tend to reverse just as quickly once the short covering finishes. We don't know if that's what we have here and we need more evidence in a pullback/decline that will provide more hints to tell us what the past week was all about.

It was a quiet morning for traders, which started out with a quiet pre-market session and very little in the way of economic news. The only economic report of note was the consumer price index, which was up +0.1% in September. This was largely a result from lower prices paid for energy products but they were offset by increases in food, shelter and health care. The year-over-year increase is currently running +1.7%.

What's interesting about that number is that it's only off by 0.3% from the Fed's target rate of 2%. But the way the Fed is talking about the need for more stimulus, to ensure we don't suffer from "disinflation" (as if to say we would suffer from lower prices), one would think the CPI rate was closer to zero. The Fed of course wants something north of 2% so that it will help debtors (think government) pay off their debts with cheaper dollars over time. And deflation would be bad for stocks (lower earnings for companies) and since the majority of Fed heads and Congress don't want to see a decline in their portfolios they have a vested interest in seeing the stimulus continue, regardless of the risks to the financial system

With the CPI rate (as the government currently calculates it) running at +1.7%, care to guess how much Social Security checks will be raised next year for their cost-of-living-adjustment (COLA)? Yep, 1.7%. Of course the real cost of living has risen considerably more and it's one reason why consumer spending continues to decline -- wages declining, costs rising and social security checks not keeping up with real cost increases. John Williams, who runs Shadow Government Statistics says the real CPI, when measured the way it was back in the late 1970s, is currently running about +9.4%.

The chart below shows the CPI and PCE (Personal Consumption Expenditures) rates since 2005 and following the bounce off the 2009 low (a 3-wave bounce correction I might add) the rates have been in decline. The PCE is more important to the Fed than CPI since it's a better measurement of what the consumer is doing. Considering how much the GDP numbers are dependent on a spending consumer it's understandable why the Fed is concerned about the lack of results from their massive stimulus program (or at least they should be concerned that it's not working, unlike all their textbooks tell them it should work). This is a reason why the Fed might decide to halt QE taper and it wouldn't surprise me in the least to see QE5 if the CPI and PCE numbers drop closer to zero. Of course more stimulus would just be more evidence of insanity from the Fed (doing the same thing and hoping for a different result). Expect the Fed to become even more creative in their next QE program (and expect an instant Pavlovian response from the market).

CPI and PCE, 2005-September 2014

Starting off tonight's chart review with a weekly view of SPX, you can see last week's bullish hammer on support. The tail was the intra-week break below the uptrend line from March 2009 - October 2011. This is a major trend line that identifies the 5-1/2-year bull market. The break of the uptrend line, as well as the 50-week MA, is one of the reasons the VIX spiked so high. Traders were rushing into put protection and entering short positions (for hedging and/or speculation). The strong rebound off last Wednesday's low was a result of a quick unwinding of all those short positions. The close at support was a very important accomplishment on Friday and I'm sure it was purely coincidental (wink) that Friday Fed President James Bullard came out with his opinion that the Fed should delay the end of QE. We've been hearing similar rumors about the ECB doing "something soon" and these statements are of course designed to support the market.

S&P 500, SPX, Weekly chart

The bullish wave count on the chart above is based on nested 1st and 2nd waves up from the October 2011 low. That low is the b-wave in a large A-B-C rally off the March 2009 low and the c-wave is the rally from October 2011. There are a couple of different ways to count the move and there is an easy way to consider the September top as the completion of the c-wave. But so far the decline from September 19th leaves open the potential for one more new high to complete the final 5th wave, which is shown in green. A rally up to the trend line along the highs from April 2010 - May 2011 by the end of November would have SPX up to about 2070. Based on wave relationships, there's an upside projection at 2038 so we've got a wide upside target zone but if we get the rally in November I'll be able to start zeroing in on a higher-probability target.

Another rally leg is by no means a given. A larger bear-market decline from September might not be an impulsive decline and the small a-b-c decline so far could simply be the first leg down in what will become a corrective (choppy) decline. This is one reason why the uptrend line from March 2009 is so important. Currently near 1891 (the 50-week MA), this level needs to be defended by the bulls on a weekly closing basis. Back below price-level support near 1850 would be a strong statement by the bears.

The rally from last Wednesday has been very strong and for a final 5th wave to a new high it's possible we're going to see somewhat of a blow-off top. That's just speculation but it would be a typical move and the daily chart below shows how a quick rally to a new high could finish by mid-November. A rally up to crossing trend lines could see SPX up near 2050 by November's opex. But if a pullback from here starts to show impulsive qualities and breaks below 1877 I think it would be strong evidence supporting the more bearish price path, which suggests another 3-wave move down to equal the September-October decline (so down to 1750).

S&P 500, SPX, Daily chart

Key Levels for SPX:
- bullish above 1930
- bearish below 1877

Yesterday SPX broke its downtrend line from September 19th. It was a marginal break but the close above it was a good sign for the bulls. Today the bears ripped down that sign and stomped on it. Granted, the price action around the downtrend line, as can be seen on the 60-min chart below, looks like noise but so far the inability to hold above the line has it looking like a head-fake break yesterday. It points to a larger pullback and potentially the start of the next leg down. A 50% retracement of the rally from last Wednesday is at 1885, which would be another test of the uptrend line from March 2009. That kind of test, if it happens, would then create a major decision point for the market. But if today's pullback is followed by another push higher we would then have a better-looking 5-wave move up from October 15th, which would be a strong bullish statement to expect new highs into November-December.

S&P 500, SPX, 60-min chart

The DOW has the same pattern as SPX and therefore there's not much to add. It had closed marginally above its 200-dma yesterday, near 16586, but it was not able to hold above it today. They were going for the stops just above the 200-dma and once hit there was no more buying power. The significance here is that the DOW bounced off the 200-dma back in early August but after breaking it on October 10th it's now back up for what could be a back-test. A bearish kiss goodbye could lead to a resumption of the selling so if we get anything other than a 3-wave pullback correction it could turn the rally attempt into just a quick bear-market short-covering rally. The jury is still out and we might not know what direction it will be for the next big move.

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- bullish above 16,720
- bearish below 16,000

Last week's bounce for the DOW off its uptrend line from October 2011 - November 2012 was a good setup for another rally leg to new all-time highs in November-December, and that's still the bullish potential. But with so many traders conditioned to believe dips, even scary ones, are to be bought, we could get a lot of traders chasing this move higher and today's dip could be just what they're looking for. But until the DOW can get back above price-level S/R near 16720 I'd say the bears still have the chance to show they're not done yet.

The NDX also has the same pattern as the DOW and SPX. It has had a stronger bounce and is not far from its 50-dma, near 4011, and its downtrend line from September, near 3997 (today's high was 3988). If we get just a pullback as part of what will be a larger rally, look for support near 3870 where it would close Tuesday's gap up and test its uptrend line from March 2009 - June 2013. A drop much below 3800 would start to look more bearish, especially if it's a strong decline rather than a 3-wave pullback.

Nasdaq-100, NDX, Daily chart

Key Levels for NDX:
- bullish above 4011
- bearish below 3800

The RUT has been in a different pattern since its July high, which was a near-perfect test of its March high (the double top). With the lower high in September and then the lower low in October we've got the definition of a downtrend. But the 3-wave pullback from July could be an a-b-c pullback correction that will be followed by new market highs into the end of the year, similar to the other indexes. In that case a pullback to support near 1080 would be an excellent opportunity to get long for a strong rally into November. But if the series of lower lows and lower highs is a nested 1-2, 1-2 wave count to the downside then the next leg down is going to be a whopper. A 3rd of a 3rd wave down is what the bearish wave calls for and that would essentially be a crash leg down. That's the risk for longs here, or if you try to buy the next pullback -- be sure to honor your stops because there will be no getting out of jail in the next decline. As has been true for a while now, watching the RUT for clues is going to be very important because whatever the next move is going to be, it's going to be big.

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- bullish above 1130
- bearish below 1078

From a timing perspective, there was one tool that warned of a market reversal last week. The Bradley turn model predicts market reversals that are based on the change in behavior of us humans, which is based on astrology. Whether you believe in an astrological effect on us or not, the market seems to follow the model predictions fairly well (but not all the time). The October 15th low happened a day before an important turn date on this model, as shown on the chart below. And considering the next turn date isn't until November 22nd it says the current reversal to the upside could see some follow through. Keep in mind the direction of the turn on the model is not a predictor of the direction of the market; it only provides turn dates so you need to figure out from the direction into the turn date what kind of reversal you're looking for.

Bradley Siderograph for 2014, chart courtesy bradleysiderograph.com

Information about the Bradley turn model can be found at bradleysiderograph.com and the chart above is from their site, with SPX prices updated just before the October 15th low. As you can see, the model called for a market turn on October 16th so it was only off by a day. According to some who follow this model, the October 16 turn date was expected to be one of the sharpest of the year and that's exactly what we've had. The expectation was for an increase in volatility around this time and the spike in VIX to a high of 31 on October 15th was certainly affirmation of that.

If the market does rally into the November 22nd turn date, which would likely mean new highs for the indexes, we could then see a turn back down into December. The three turn dates from November 22nd through December 26th warns us to expect some whipsaw moves at the end of the year. If the market continues to decline from here, the October 16 turn date, and its expected increased volatility, will have been a warning for the strong reversal followed by another one.

The banking index, BKX, got a bounce where it needed to last week. Other than the intraday break of support near 66 last Wednesday it is holding above price-level support and its uptrend line from March 2009. Between the shelf of support and the uptrend line, the bulls really need to defend this level. Another break below it might not be met with the same buying enthusiasm (unless it's the PPT behind saving the banks here).

KBW Bank index, BKX, Weekly chart

On October 1st the TRAN broke its uptrend line from June 2013 - February 2014, a trend line that held the April and August declines. It was quickly recovered with the big up day on October 3rd but when it broke again on October 7th it was every bull for himself as traders bailed en masse. The sharp decline into the October 13th low, which was retested on the 15th was a break of its 200-dma and things were looking nasty. But then strong buying propelled the index back up to, and slightly above, its broken uptrend line from June 2013. Looks like a perfect back-test followed by a bearish kiss goodbye today, no? That's the bearish setup on this index and we'll see if it becomes one of the leaders to the downside (along with the RUT). But if a pullback is followed by a push above this morning's high at 3490 there will be nothing to stop new highs from coming. At that point the bulls would only need the DOW to also make new highs to get a bullish Dow Theory confirmation.

Transportation Index, TRAN, Daily chart

After peaking at 86.87 on October 3rd the U.S. dollar has pulled back from its downtrend line from March 2009 - June 2010. I wonder if the trend line will be broken if the stock market indexes confirm a breakdown from their uptrend lines from March 2009. The pullback from the high is only a 3-wave move so far and there's the potential for at least a minor new high to complete a 5-wave move up from May. The dollar could continue to consolidate in a large sideways triangle that it's been in since the 2008-2009 highs and lows, which means we could see the dollar trapped between 75 and 87 for another couple of years before breaking down. Only if we get a decent pullback followed by new highs (light green dashed line) will we have something more immediately bullish for the dollar.

U.S. Dollar contract, DX, Weekly chart

A stronger pullback in the dollar would help gold rise up to at least the top of its sideways triangle that it's been in since June 2013. As I've been showing for months now, my expectation is for one more leg up inside the triangle, up to about 1325, and then the resumption of its decline. The e-wave of a triangle is often a throw-over (above the top of the triangle in this case) but with commodities in particular I've seen many "stunted" e-waves, which means traders have to be alert to the possibility the bounce off the October 6th low could fail at any time. A drop below 1194 would be more immediately bearish. Note RSI has bounced back up to its broken uptrend line so a turn back down would be a sell signal from this indicator.

Gold continuous contract, GC, Weekly chart

This morning's report on crude inventories showed a higher level than had been expected and that prompted another selloff. Oil futures dropped -2.6% today and CL made a new closing low, at 80.32, for the current decline. There's a Fib projection for the 2nd leg of the decline from August 2013, at 74.60, where it would equal 162% of the 1st leg down. So that remains a downside target until we see a stronger bounce. Until CL can get back above its broken uptrend line from October 2011, near 85.40, it remains bearish.

Oil continuous contract, CL, Daily chart

Tonight and tomorrow morning the market will get to digest a lot of global manufacturing data with PMI reports out of China, Germany, the EU and then the U.S. All eyes will be watching for evidence of further slowing in the global economy, which is especially concerning for Europe. If Germany continues to slow it's going to be hard for Europe to evade a deeper recession. But hey, that could prompt Mario Draghi into promises of more "whatever it takes."

Economic reports and Summary

The stock market suffered some serious technical damage last week. For the first time since the March 2009 and/or the October 2011 lows we've seen a break of uptrend lines, 200-dma's and some strong price-level support lines. Many of the indexes did a quick recovery by last Friday and the weekly closing prices "saved" the indexes from suffering a weekly sell signal. Amazing how that happened.

The indexes are now at a point where the bulls have to keep up the buying pressure and not allow even a retest of last week's lows. Another break of strong support would not likely see the same kind of bullish response. But there is the potential for a pullback to higher lows in the next day or two and then push higher, in which case the short-term pattern (into November) would be bullish. And that would mean we'd very likely see new highs for the indexes. The pattern of the pullback/decline will provide some clues about what to expect into November.

Continue to keep an eye on what the RUT is doing. Today's bearish engulfing candlestick (gap up, new high, lower close than yesterday) could be signaling the start of the next decline, which could get really ugly for the bulls if the bearish wave count is correct. But with the higher volatility we can't yet know whether or not today's pullback is bearish or just a correction to a new rally leg that will take us to new highs in November. As shown with the Bradley turn model, it supports a continuation of the rally following a pullback correction. It's a tough spot for traders and quick trades are a must until the bigger pattern clears up since there's significant risk if you hold a position and the market moves against you. Trade safe.

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

Keene H. Little, CMT

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


New Plays

Earnings Could Generate More Volatility

by James Brown

Click here to email James Brown

Editor's Note:

We are not adding any new trades tonight.

If you're market bias is bearish then today's failure in the S&P 500 near 1950 and the small cap Russell 2000 index under 1120 looks like a potential entry point for bearish trades.

We also saw a widespread outbreak of bearish engulfing candlestick reversal patterns. Yet these patterns need to see confirmation. A lot of the bearish reversals we witnessed today are in the energy stocks. Yet with crude oil at four-year lows near potential support at $80.00 a barrel it could be dangerous to launch new bearish positions in oil stocks.

If stocks continue lower tomorrow it will cast serious doubt on the rebound from the October lows and might suggest a retest of the low is needed.

Expected more volatility this week. Thursday will see a big number of high-profile earnings reports announced.




In Play Updates and Reviews

Big Caps Snap Multi-Day Bounce

by James Brown

Click here to email James Brown

Editor's Note:
The S&P 500 index snapped a three-day bounce with today's widespread pullback.


Current Portfolio:


BULLISH Play Updates

INSYS Therapeutics, Inc. - INSY - close: 38.69 change: -0.12

Stop Loss: 36.95
Target(s): To Be Determined
Current Option Gain/Loss: -3.9%
Entry on October 21 at $40.25
Listed on October 20, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 540 thousand
New Positions: see below

Comments:
10/22/14: The pullback in INSY today was pretty minor. Yet the failed rally near $40 this morning is a bit discouraging.

I am not suggesting new positions with INSY below $40.00.

Earlier Comments: October 20, 2014
INSY is a short squeeze candidate. The company is part of the healthcare sector, more specifically biotechnology. They currently market two drugs. One is their Subsys, which is a sublingual fentanyl spray to quickly treat pain for cancer patients. Thus far the product seems to be off to a strong start. INSY also markets a generic Dronabinol product to help treat chemotherapy induced nausea as well as anorexia related to patients with AIDS.

INSY is also developing treatments with cannabidiol, which has made headlines in the past. Cannabidiol is a component of marijuana that does not provide patients with a high. INSY has been working with cannabidiol to develop a treatment for Dravet Syndrome, a form of childhood epilepsy.

INSYS was recently granted orphan drug designation for its cannabidiol treatment for glioblastoma multiforme, which is the most aggressive version of malignant brain tumors in humans. Yet this good news has been offset by bad news that the FDA rejected the company's application for a new Dronabinol oral solution. The feds claim INSY submitted an incomplete study plan on the treatment's safety.

There is also the spectre of a federal investigation. Shares of INSY collapsed back in May after it was unveiled that one doctor in Michigan was fraudulently prescribing hundreds of INSY's Subsys painkiller treatment. This has sparked an investigation into INSY' marketing practices.

Technically shares of INSYS have been trending higher with a pattern of higher highs and higher lows. The most recent low happened to be on the day investors reacted to the FDA rejection on its dronabinol oral treatment. INSY was down about -10% intraday and then rebounded to a huge gain (Oct. 15th).

If this rally continues INSY could see a short squeeze. The most recent data listed short interest at 68.6% of the extremely small 10.19 million share float.

Tonight we are suggesting a trigger to open bullish positions at $40.25. More aggressive traders might want to consider a trigger just above $39.50 instead.

Please note that I am labeling this a higher-risk, more aggressive trade. Biotechs are already dangerous do to headline risk. INSY could be volatile with all the short interest.

*Small positions to limit risk* - Suggested Positions -

Long INSY stock @ $40.25

- (or for more adventurous traders, try this option) -

Long NOV $45 call (INSY141122c45) entry $1.60*

10/21/14 triggered @ 40.25
*option entry price is an estimate since the option did not trade at the time our play was opened.
Option Format: symbol-year-month-day-call-strike


Lowe's Companies - LOW - close: 53.94 change: -0.65

Stop Loss: 52.40
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Entry on October -- at $---.--
Listed on October 21, 2014
Time Frame: Exit PRIOR to earnings on November 19th
Average Daily Volume = 5.5 million
New Positions: Yes, see below

Comments:
10/22/14: LOW snapped a four-day winning streak with today's decline. I don't see any changes from last night's new play description.

Earlier Comments: October 21, 2014:
LOW is in the services sector. They run the second biggest chain of home improvement stores in the country. Their 1,837 stores offer more than 200 million square feet of retail space through the U.S., Canada, and Mexico.

The company's most recent earnings report was back in August. LOW beat Wall Street's top and bottom line estimates. Revenues were up +18.2% from a year ago. Gross margins saw some improvement. Same-store sales were up +4.4%, which was impressive. Management provided a small reduction in their full year revenue guidance but this failed to have much impact on the stock. Shares of LOW gapped down on its earnings news and investors bought the dip at support near $50.00.

Since this August earnings report we've seen homebuilder confidence hit nine-year highs while shares of LOW were hitting all-time highs in the $54-55 zone. Investors keep track of the housing market because LOW's business seems to rise and fall with real estate.

The stock market's recent volatility drug LOW back to support near $50.00 and once again traders bought the dip. There was a recent analyst note that was cautious on LOW and its rival Home Depot. The analyst noted that a slow down in sales for building materials would suggest the slowdown should hit retailers too. We may have to wait for LOW's earnings report to see if the analyst is right. In the mean time shares of LOW just ended at an all-time closing high.

If you believe the U.S. economy will continue to improve and the labor market will continue to see job growth then home improvement retailers like LOW and HD should see steady improvement as well.

We are not setting an exit target tonight but I will point out that the point & figure chart is bullish and forecasting a long-term $75.00 target for LOW.

Use a trigger at $55.05 to open bullish positions. We will most likely exit ahead of LOW's earnings report on November 19th.

Trigger @ $55.05

- Suggested Positions -

Buy LOW stock @ (trigger)

- (or for more adventurous traders, try this option) -

Buy the NOV $55 call (LOW141122c55)

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


Marathon Oil - MRO - close: 34.03 change: -0.85

Stop Loss: 32.45
Target(s): To Be Determined
Current Option Gain/Loss: +2.7%
Entry on October 16 at $33.15
Listed on October 15, 2014
Time Frame: Exit prior to earnings on Nov. 3rd
Average Daily Volume = 5.5 million
New Positions: see below

Comments:
10/22/14: Warning! Energy stocks were big underperformers today. Another drop in crude oil prices weighed heavily on the energy group. Nearly every energy stock I saw today was reversing lower.

Shares of MRO fell -2.4% and today's session has created a bearish engulfing candlestick pattern. This is a potential bearish reversal. More conservative traders may want to raise their stop loss.

I am not suggesting new positions.

Earlier Comments: October 15, 2014:
Oil and energy stocks have been crushed in the last several weeks thanks to plummeting crude oil prices. Oil recently hit new four-year lows. Investors are worried this collapse in oil prices will impact margins for the producers. We won't know until earnings results come out but right now the sell-off in shares of MRO look extremely overdone. The stock has collapsed from multi-year highs near $41.50 to new 2014 lows near $31 in less than two months. That's a 25% correction (and technically a bear market).

MRO is a global energy company. They explore for, produce, and market oil and natural gas. They are also involved in the oil sands mining in Canada and the big shale oil and gas basins in the United States. The company has operations in Angola, Equatorial Guinea, Ethiopia, Gabon, Kenya, Libya, Norway, the United Kingdom, and the Kurdistan region of Iraq.

Today shares of MRO briefly traded below their 2014 lows set in February this year around $31.60. The double bottom intraday in the $31.35-31.40 area looks like a potential bottom. We want to speculate on an oversold bounce. I do consider this a more aggressive, higher-risk trade so keep position size small.

We are suggesting an entry trigger at $33.15. Plan to exit prior to MRO's earnings report in early November.

- Suggested Positions -

Long MRO stock @ $33.15

- (or for more adventurous traders, try this option) -

Long NOV $33 call (MRO141122c33) entry $1.90*

10/21/14 new stop @ 32.45
10/16/14 triggered @ 33.15
*option entry price is an estimate since the option did not trade at the time our play was opened.
Option Format: symbol-year-month-day-call-strike


Noodles & Co. - NDLS - close: $22.43 change: -0.44

Stop Loss: 20.95
Target(s): To Be Determined
Current Option Gain/Loss: +5.8%
Entry on October 15 at $21.21
Listed on October 14, 2014
Time Frame: 3 to 5 weeks
Average Daily Volume = 444 thousand
New Positions: see below

Comments:
10/22/14: NDLS is starting to see a little profit taking. The stock slipped -1.9%. The pullback may not be over yet and the nearest support could be the 10-dma near $21.50.

I am not suggesting new positions at this time.

Earlier Comments: October 14, 2014:
NDLS stock has had a rough start. The company held its IPO in mid 2013. The initial surge send shares of NDLS from the low $30s to over $50. Once the newness left the stock was left to churn water.

NDLS spent most of 2013 struggling and failing to breakout past $50.00 again. The last twelve months have been bearish with a trend of lower highs and lower lows. The company has disappointing results to blame for the sell-off in its stock price.

Currently NDLS has 410 locations in 31 states in the U.S. Management has suggested their long-term goal is 2,500 restaurants. That could be a challenge considering the recent sales slowdown. Their most recent earnings report was in August. You can see the big drop on the daily chart. NDLS missed estimates and lowered its 2014 guidance. Investors were not too keen on falling same-store sales growth either.

Bears have been right on this stock for months. The biggest critique is that shares of NDLS are expensive at over 50 times the trailing 12 month earnings. While the bears may be right, NDLS is expensive, the stock's bearish momentum has stalled.

It is possible that all the bad news is priced in after a -42.5% drop this year. NDLS has seen a higher low and more recently a bullish breakout above its simple 50-dma. You'll also notice that NDLS has completely ignored the market's recent weakness. The major indices have been crashing but NDLS has been slowly marching higher.

If this strength continues NDLS could see some short covering. The most recent data listed short interest at 12.6% of the very small 21.3 million share float. The point & figure chart is already bullish and suggesting a long-term target at $27.00.

Tonight we are suggesting small positions if NDLS can trade at $21.21 or higher. If triggered I'm suggesting a target in the $24.50-25.00 zone but we will plan on exiting prior to the company's earnings report in mid November.

- Suggested Positions -

Long NDLS stock @ $21.21

- (or for more adventurous traders, try this option) -

Long NOV $22.50 call (NDLS141122c22.5) entry $1.20*

10/21/14 new stop @ 20.95
10/20/14 new stop @ 20.75
10/15/14 triggered @ 21.21
*option entry price is an estimate since the option did not trade at the time our play was opened.
Option Format: symbol-year-month-day-call-strike


The Pantry, Inc. - PTRY - close: 23.94 change: -0.23

Stop Loss: 22.90
Target(s): To Be Determined
Current Option Gain/Loss: -2.3%
Entry on October 17 at $24.50
Listed on October 15, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 190 thousand
New Positions: see below

Comments:
10/22/14: PTRY broke out to multi-year highs this morning. Sadly the rally didn't last and shares reversed into a -0.9% decline. This doesn't bode well. Traders may want to raise their stop loss.

I am not suggesting new positions.

Earlier Comments: October 16, 2014:
This is a simple relative strength trade. PTRY has been almost bullet proof against the market's recent weakness. Instead of following the major indices lower PTRY has soared to new four-year highs.

The company website says, "Headquartered in Cary, North Carolina, The Pantry, Inc. is a leading independently operated convenience store chain in the southeastern United States and one of the largest independently operated convenience store chains in the country. As of September 25, 2014, the Company operated 1,518 stores in thirteen states under select banners, including Kangaroo Express, its primary operating banner. The Pantry's stores offer a broad selection of merchandise, as well as fuel and other ancillary services designed to appeal to the convenience needs of its customers."

PTRY is a small cap stock that has been dead money for years. That seemed to change with their last earnings report. When PTRY delivered earnings on July 30th they beat estimates on both the top and bottom line. The stock soared and broke out past key resistance. Several analysts have raised their earnings estimates on PTRY since that report.

Shares are currently hovering just under short-term resistance at $24.40. We are suggesting a trigger to launch small bullish positions at $24.50. I am suggesting small positions to limit our risk. Looking at a long-term weekly chart of PTRY you could argue that the $25.00 level might be resistance. We will try and limit our risk with a stop loss at $22.90, just under today's low.

*small positions to limit risk* Suggested Positions -

Long PTRY stock @ $24.50

- (or for more adventurous traders, try this option) -

Long DEC $25 call (PTRY141220c25) entry $1.60*

10/17/14 triggered @ $24.50
*option entry price is an estimate since the option did not trade at the time our play was opened.
Option Format: symbol-year-month-day-call-strike




BEARISH Play Updates

Jacobs Engineering Group - JEC - close: 45.71 change: -0.93

Stop Loss: 48.25
Target(s): To Be Determined
Current Option Gain/Loss: + 0.4%
Entry on October 15 at $45.88
Listed on October 13, 2014
Time Frame: 3 to 6 weeks
Average Daily Volume = 1.0 million
New Positions: , see below

Comments:
10/22/14: JEC did not see any follow through on yesterday's rally. The stock reversed into a -2.0% decline. Today's move could be used as a new bearish entry point.

Earlier Comments: October 13, 2014:
JEC is part of the services sector. Although you might consider it an industrial considering what they do. JEC provides technical services and construction services around the world. They were founded in 1947 and now have about 200 offices around the world.

Unfortunately for JEC most of the world is seeing an economic slowdown. That is pressuring sales. JEC is developing a trend of missing earnings and has missed Wall Street's EPS estimate four quarters in a row.

The stock started to see an oversold bounce in early October but that bounce has stalled under its 10-dma and the $48.00 area. Now JEC is down -25.8% this year and poised to continue its underperformance.

I do want to note that the timing of this trade might be a little aggressive. Momentum is clearly lower but the major market indices are starting to look a little oversold and could bounce. Traders may want to start this trade with small positions to limit their risk.

We are suggesting a trigger to open bearish positions on JEC at $46.15.

*consider small positions to limit risk*

- Suggested Positions -

Short JEC stock @ $45.88

- (or for more adventurous traders, try this option) -

Long NOV $47.50 PUT (JEC141122P47.50) entry $2.65*

10/21/14 Caution! Today could be a bullish reversal in JEC
10/15/14 triggered on gap down at $45.88, suggested entry was $46.15
*option entry price is an estimate since the option did not trade at the time our play was opened.
Option Format: symbol-year-month-day-call-strike


Knowles Corp. - KN - close: 18.13 change: -0.19

Stop Loss: 20.05
Target(s): To Be Determined
Current Option Gain/Loss: +29.6%
Entry on September 30 at $25.75
Listed on September 29, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 1.5 million
New Positions: see below

Comments:
10/22/14: KN plunged to new lows and hit $17.23 before bouncing. Investors may want to take some money off the table and/or lower their stop loss.

I'm not suggesting new positions.

Earlier Comments: September 29, 2014:
Knowles Corp. has been around since 1946 but until recently was part of Dover Corp. (DOV). Knowles (KN) was spun off early this year.

What exactly does KN do? According to a company press release "Knowles Corporation is a market leader and global supplier of advanced micro-acoustic solutions and specialty components serving the mobile communications, consumer electronics, medical technology, military, aerospace and industrial markets. Knowles has a leading position in micro-electro-mechanical systems microphones, speakers and receivers which are used in smartphones, tablets and mobile handsets. Knowles is also a leading manufacturer of transducers used in hearing aids and other medical devices and has a strong position in oscillators (timing devices) and capacitor components which enable various types of communication."

KN has sales of more than $1 billion a year. Yet revenues have been falling. It seems to be getting worse. Back in April they reported a -1% drop in revenues. Their last quarterly report showed a -5.3% decline in revenues.

Technically the stock has been stuck in a $28.00-34.00 trading range for months. That changed in the last few days. KN has broken down below the bottom of the range. Its recent attempt at an oversold bounce already appears to be failing.

Tonight we're suggesting a trigger to open bearish positions at $25.75, which would be a new low. We are not setting an exit target tonight but I will note the point & figure chart is bearish and forecasting an $18 target.

Bear in mind that KN does have slightly elevated short interest at more than 10% of the 85 million share float. You may want to consider put options instead of shorting the stock.

- Suggested Positions -

Short KN stock @ $25.75

- (or for more adventurous traders, try this option) -

Long NOV $25 PUT (KN141122P25) entry $1.20*

10/21/14 new stop @ 20.05
10/16/14 new stop @ 20.30
10/15/14 new stop @ 20.65
10/13/14 new stop @ 21.75
10/11/14 new stop @ 25.05
10/07/14 new stop @ 26.75
09/30/14 triggered @ 25.75
*option entry price is an estimate since the option did not trade at the time our play was opened.
Option Format: symbol-year-month-day-call-strike


Mistras Group - MG - close: 15.98 change: -0.12

Stop Loss: 17.05
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Entry on October -- at $---.--
Listed on October 18, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 81.5 thousand
New Positions: Yes, see below

Comments:
10/22/14: This is a new 52-week closing low for MG. If the market weakness continues tomorrow we could see MG finally breakdown.

Earlier Comments: October 18, 2014:
MG is in the services sector. The company evaluates the structural integrity of infrastructure. A company press release describes MG as "a leading 'one source' global provider of technology-enabled asset protection solutions used to evaluate the structural integrity of critical energy, industrial and public infrastructure. Mission critical services and solutions are delivered globally and provide customers with asset life extension, improved productivity and profitability, compliance with government safety and environmental regulations, and enhanced risk management operational decisions."

Unfortunately, for MG investors the company is developing a habit of missing Wall Street's earnings estimates. They've missed three quarters in a row. Their most recent report was October 7th. Wall Street expected a profit of 12 cents a share. MG only delivered 4 cents.

This big earnings miss produced the spike down you see on the daily chart. There has been almost zero bounce and now MG has drifted lower to major support at the $16.00 level. A breakdown here would be very bearish. The Point & Figure chart is already forecasting a long-term bearish target of $6.00.

Tonight we are suggesting a trigger to launch bearish positions at $15.85. I am suggesting caution. This stock does not trade very much. Average volume is very low. That should make traders cautious. I'm suggesting very small positions or try and put options to limit risk.

Trigger @ $15.85 *Very small positions to limit risk*

- Suggested Positions -

Short MG stock @ (trigger)

- (or for more adventurous traders, try this option) -

Buy the NOV $17.50 PUT (MG141122P17.50)

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