Option Investor
Newsletter

Daily Newsletter, Wednesday, 12/17/2014

Table of Contents

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

Market Wrap

Another V-Bottom In the Making

by Keene Little

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

Wednesday's Market Stats

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

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

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

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

Consumer Price Index, chart courtesy St. Louis Fed

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

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

Effective Federal Funds Rate, chart courtesy St. Louis Fed

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

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

NYSE Composite index, NYA, Weekly chart

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

NYSE Composite index, NYA, Daily chart

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

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

NYSE Composite index, NYA, 60-min chart

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

S&P 500, SPX, Daily chart

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

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

Dow Industrials, INDU, Daily chart

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

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

Nasdaq-100, NDX, Daily chart

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

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

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

Russell-2000, RUT, Daily chart

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

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

10-year Yield, TNX, Daily chart

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

U.S. Dollar contract, DX, Weekly chart

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

Gold continuous contract, GC, Weekly chart

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

Oil continuous contract, CL, Weekly chart

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

Economic reports and Summary

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

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

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

Keene H. Little, CMT

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

Annual End of Year Renewal Special

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

Please follow the link below to see for yourself the EOY subscription special for 2014. You will not be disappointed!


New Plays

Short Squeeze Candidate

by James Brown

Click here to email James Brown


NEW BULLISH Plays

INSYS Therapeutics - INSY - close: 43.13 change: +1.82

Stop Loss: 39.65
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Entry on December -- at $---.--
Listed on December 17, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 479 thousand
New Positions: Yes, see below

Company Description

Why We Like It:
INSY is in the healthcare sector. They are part of the biotech industry. The company website describes Insys Therapeutics as "a specialty pharmaceutical company that develops and commercializes innovative drugs and novel drug delivery systems of therapeutic molecules that improve the quality of life of patients. Using our proprietary sublingual spray technology and our capability to develop pharmaceutical cannabinoids, Insys addresses the clinical shortcomings of existing commercial products. Insys currently markets two products, Subsys, which is sublingual Fentanyl spray for breakthrough cancer pain, and a generic version of Dronabinol (THC) capsules. Our lead product candidate is Dronabinol Oral Solution, a proprietary orally administered liquid formulation of dronabinol. Insys is also developing a pipeline of sublingual sprays, as well as pharmaceutical cannabidiol."

Biotech stocks can be tough to trade. Normally they are volatile with lots of headline risk. The right headline about a successful test or clinical trial or FDA approval can send shares soaring. The wrong headline could see a biotech stock crash or even gap down several points. Due to the nature of biotech work and how many companies get paid with milestone payments as they develop treatments their earnings are very lumpy.

INSY has managed to consistently beat Wall Street's bottom line estimates this year. The last four quarters in a row they have beaten the EPS estimates and three out of the four quarters they have beaten the revenue estimate as well. Their most recent quarterly results came out on November 11th.

INSY delivered a profit of $0.63 a share versus estimates of only $0.35. Revenues soared +99.7% to $58.3 million, above estimates. Since their report the stock has garnered some bullish analyst comments and multiple firms have price targets in the $51-57 zone.

INSY management is very optimistic and expects to complete four Phase III clinical trials in 2015. If successful it will significantly broaden their product line.

It is important to note that not all the news is good for INSY. A few weeks ago the Wall Street Journal (WSJ) ran a story about some shady marketing practices for INSY's Subsys painkiller. This is an under-the-tongue spray version of the painkiller fentanyl. Subsys has a very high risk of dependency and is currently only approved for cancer patients. Yet strangely enough only 1% of prescriptions were written by oncologists. Several doctors with the biggest number of Subsys prescriptions have also been under review or disciplined. The WSJ noted that the Office of the Inspector General of the U.S. Department of Health and Human Services and the U.S. Attorneys in the Central District of California and Massachusetts are all looking into the matter. This is significant because Subsys accounts for the vast majority of INSY's revenues. Thus far the stock does not seem to be worried about this story.

Shares have been building on the bullish trend of higher lows. The stock looks poised to breakout past resistance in the $43-44 area. The point & figure chart is already bullish and forecasting at $68 target.

If INSY can breakout it could see a short squeeze. The most recent data listed short interest at 65% of the very small 10.34 million share float.

Tonight we are suggesting a trigger to open bullish positions at $43.60. More conservative traders may want to wait for a breakout past the recent high at $44.00 instead.

I do consider this a higher-risk, more aggressive trade. Use small positions to limit your risk.

Trigger @ $43.60 *small positions*

- Suggested Positions -

Buy INSY stock @ (trigger)

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

Buy the FEB $45 CALL (INSY150220C45) current ask $4.00

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

Daily Chart:

Weekly Chart:



In Play Updates and Reviews

Stocks Snap 3-Day Losing Streak

by James Brown

Click here to email James Brown

Editor's Note:
A dovish FOMC statement helped fuel a widespread rally in stocks on Wednesday.


Current Portfolio:


BULLISH Play Updates

Barracuda Networks - CUDA - close: 36.80 change: +0.97

Stop Loss: 34.85
Target(s): To Be Determined
Current Option Gain/Loss: + 3.2%
Entry on November 18 at $35.65
Listed on November 12, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 247 thousand
New Positions: see below

Comments:
12/17/14: CUDA continues to show relative strength. Shares rallied from the $36.00 level this morning and outperformed the market with a +2.7% gain. If CUDA an build on this rally I'd be tempted to consider a new entry point for bullish positions. However, it is important to note that CUDA is scheduled to report earnings on January 8th and we will likely exit prior to the announcement.

Earlier Comments: November 15, 2014:
CUDA is part of the technology sector. This is a small cap company in the cloud computing space. According to the website, "Barracuda provides cloud-connected security and storage solutions that simplify IT. These powerful, easy-to-use and affordable solutions are trusted by more than 150,000 organizations worldwide and are delivered in appliance, virtual appliance, cloud and hybrid deployments. Barracuda's customer-centric business model focuses on delivering high-value, subscription-based IT solutions that provide end-to-end network and data security."

CUDA has only been a public company for little more than a year. Lately they have been on a roll with their earnings reports. CUDA has beaten Wall Street's estimates on both the top and bottom line four quarters in a row. The last two reports also included bullish guidance.

CUDA's most recent report was October 9th when they reported their Q2 results. Analysts were expecting a profit of $0.04 a share on revenues of $66.7 million. CUDA delivered a big beat with a profit of $0.8 on revenue growth of +18.9% to $68.7 million.

Management said their active subscribers grew +18% and their renewal rate was 96.5%. Their Next Generation Firewall solutions saw sales up +50% in the quarter. CUDA said sales were up across all geographically regions. Plus their gross margins were strong with an improvement to 81.7%. That's above the prior quarter's 80.4% and the year ago period 79.8%.

CUDA's guidance was bullish. Their Q3 estimates are for revenues in the $69-70 million range versus Wall Street's $69 million estimate. They expect a profit in the $0.04-0.05 zone compared to estimates of only $0.03. They raised their 2015 revenue guidance above their prior estimates but this was slightly below Wall Street's estimate. They also raised their 2015 earnings growth into the $0.22-0.24 range compared to analysts' consensus estimates of only $0.17.

Technically the stock has been soaring from its double bottom in the $24.00 area. The point & figure chart is bullish and forecasting a long-term target of $56.00. Right now CUDA is testing resistance in the $35.00 area. A breakout here could spark some short covering. The most recent data listed short interest at 9.7% of the very, very small 9.9 million share float.

We are suggesting a trigger to open bullish positions at $35.65.

- Suggested Positions -

Long CUDA stock @ $35.65

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

Long 2015 Jan $35 call (CUDA150117c35) entry $3.15

12/11/14 new stop @ 34.85
12/06/14 new stop @ 33.85
11/22/14 new stop @ 33.65
11/18/14 triggered @ $35.65
Option Format: symbol-year-month-day-call-strike


Cynosure, Inc. - CYNO - close: 29.32 change: +0.32

Stop Loss: 26.75
Target(s): To Be Determined
Current Option Gain/Loss: +11.7%
Entry on November 12 at $26.25
Listed on November 11, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 201 thousand
New Positions: see below

Comments:
12/17/14: CYNO continued to drift higher on Wednesday. Shares only added +1.1% versus the +2.1% gain in the NASDAQ.

More conservative traders may want to move their stop closer to $28.00. I am not suggesting new positions at this time.

Earlier Comments: November 11, 2014:
CYNO is in the healthcare sector. The company is part of the medical equipment industry. According to a company press release, "Cynosure designs, manufactures and markets medical devices for aesthetic procedures and precision surgical applications worldwide that enable plastic surgeons, dermatologists and other medical practitioners to perform non-invasive and minimally invasive procedures to remove hair, treat vascular and benign pigmented lesions, remove multi-colored tattoos, revitalize the skin, liquefy and remove unwanted fat through laser lipolysis, reduce cellulite, clear nails infected by toe fungus and ablate sweat glands."

Their flagship product is the PicoSure laser workstation, designed to remove tattoos. This laser technology produces ultra-short bursts of energy to the skin in trillionths of a second. The company recently gained FDA approval to use their PicoSure system to treat acne scars and wrinkles.

CYNO's earnings results have been mixed. Their Q1 report back in May missed estimates by four cents even though revenues were up +52% from a year ago. The stock sold off on this report. They followed that with a Q2 report in July that beat estimates as revenues soared +45% from a year ago. Growth slowed a bit in their latest report in October.

Analysts were expecting 25 cents a share on revenues of $70 million. CYNO met expectations on the bottom line while the top line grew +18% to $71.5 million.

CYNO's Chairman and CEO Michael Davin commented on the quarter saying, "Cynosure delivered record third-quarter revenue of $71.5 million, up 18 percent year-over-year as revenue in each of our direct sales channels improved from the same period in 2013. North American laser revenue increased 17 percent, revenue from our Asia Pacific subsidiaries rose 46 percent, while our European direct sales channel was up 7 percent. Product and technology innovation, expanded indications and new international marketing clearances continue to drive favorable results for the Company."

Discussing his company's outlook Davin said, "We are on schedule to launch our next flagship platform in 2015 for non-invasive fat removal, and we believe this large addressable market represents a significant growth opportunity for the Company."

Technically shares have broken out from a six-month consolidation in the $19-24 range. The rally following its October earnings report lifted CYNO above key resistance at $24.00 and its 200-dma. Shares have already retested this level as support and now the stock is breaking out to multi-month highs. The point & figure chart is bullish with a $31.50 target.

Tonight I am suggesting small bullish positions if CYNO can trade at $26.25. We want to keep our position size small to limit our risk.

*small positions* - Suggested Positions -

Long CYNO stock @ $26.25

12/13/14 new stop @ 26.75
11/19/14 new stop @ 25.90
11/18/14 caution: potential bearish reversal today
11/15/14 new stop @ $25.35
11/12/14 triggered @ 26.25


Sealed Air Corp. - SEE - close: 41.94 change: +0.71

Stop Loss: 39.95
Target(s): To Be Determined
Current Option Gain/Loss: +2.2%
Entry on December 09 at $41.05
Listed on December 08, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 2.1 million
New Positions: see below

Comments:
12/17/14: The stock market's widespread rally helped power SEE toward its recent highs. Shares gained +1.7% and closed near its all-time highs set last week. A breakout past $42.15 would be bullish.

Earlier Comments: December 8, 2014:
SEE is part of the consumer goods sector. They're in the packaging and containers industry. The company describes itself as "Sealed Air is a global leader in food safety and security, facility hygiene and product protection. With widely recognized and inventive brands such as Bubble Wrap brand cushioning, Cryovac brand food packaging solutions and Diversey brand cleaning and hygiene solutions, Sealed Air offers efficient and sustainable solutions that create business value for customers, enhance the quality of life for consumers and provide a cleaner and healthier environment for future generations. On a pro forma basis, Sealed Air generated revenue of $8.1 billion in 2011 and has approximately 26,300 employees who serve customers in 175 countries."

The U.S. economy is improving and that should mean a strong tailwind for SEE. The company has seen earnings growth improve. The last two quarters in a row SEE has beaten Wall Street's estimates on both the top and bottom. If that wasn't good enough they also raised their guidance two quarters in a row.

SEE's most recent earnings report was October 29th. Analysts were expecting a profit of $0.45 a share on revenues of $1.94 billion. SEE said earnings were up +24% from a year ago to $0.52 a share. Revenues rose +3.3% to $1.98 billion.

Jerome A. Peribere, President and Chief Executive Officer of SEE commented on their quarterly performance. He said, "Our financial and operational performance in the third quarter exceeded our expectations across all key metrics. Net sales increased 3.6% on a constant dollar basis, Adjusted EBITDA margin surpassed 15%, and Adjusted EPS increased 24%. Adjusted gross profit margin increased 120 basis points as a result of our continued disciplines and value-added selling approach across all regions and divisions. Despite macro-economic uncertainties, currency headwinds and volume declines in the North American protein market, we are increasing our 2014 outlook for Adjusted EBITDA and Adjusted EPS and expect to generate approximately $540 million in free cash flow."

SEE's new 2014 guidance is $1.70-1.75 a share versus Wall Street's $1.65-1.70 estimate. The stock has been strong following this report. Instead of correcting lower in mid November SEE merely consolidated sideways. Now it's rested and ready to run. Shares are up five days in a row and ignored the market-wide weakness today.

Today's intraday high was $40.87. I am suggesting a trigger at $41.05 to open bullish positions. We're not setting a target tonight but I will note the point & figure chart is forecasting a long-term target of $61.00.

- Suggested Positions -

Long SEE stock @ $41.05

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

Long Jan $40 CALL (SEE150117C40) entry $1.90

12/11/14 new stop @ 39.95
12/09/14 triggered @ 41.05
Option Format: symbol-year-month-day-call-strike




BEARISH Play Updates

Cabot Corp. - CBT - close: $41.62 change: +1.03

Stop Loss: 42.05
Target(s): To Be Determined
Current Option Gain/Loss: -4.7%
Entry on December 12 at $39.75
Listed on December 11, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 414 thousand
New Positions: see below

Comments:
12/17/14: The widespread market rally today helped fuel a +2.5% bounce in CBT. The close above technical resistance at the 10-dma is a potential warning signal for the bears.

I am not suggesting new positions at this time.

Earlier Comments: December 11, 2014:
CBT got its start over 130 years ago. Today they are a chemical company with a wide range of products and sales of more than $3.6 billion annually. Company literature describes Cabot as "a global specialty chemicals and performance materials company, headquartered in Boston, Massachusetts. The company is a leading provider of rubber and specialty carbons, activated carbon, inkjet colorants and cesium formate drilling fluids and has market-leading positions in fumed silica, aerogel, and elastomer composites."

It is worth noting that CBT does have exposure to the oil and gas drilling industry. CBT makes a number of products involved in the process of drilling and treating oil and gas. Given the weakness in the oil and gas industry it could be accelerating CBT's decline.

Their earnings results have not been very inspiring. Their most recent report was October 28th. CBT managed to beat the bottom line but revenues came in below estimates. Management warned the company is facing "uncertain global macroeconomic conditions." CBT pointed to slowing growth in China, Europe, and South America as potential hazards.

Technically the stock looks like a bearish momentum candidate with a steady stream of lower lows and lower highs. The last half of October and the first half of November formed a pennant consolidation pattern. CBT's breakdown from the consolidation also broke through what should have been significant support in the $41.50-42.00 zone. Now shares of CBT are poised to breakthrough round-number support at the $40.00 level. The stock has also broken down below some very long-term trend lines dating back to 2009 (not shown on the chart below).

Tonight we are suggesting a trigger to launch bearish positions at $39.75. The option spreads are too wide to trade so we'll have to trade the stock.

- Suggested Positions -

Short CBT @ $39.75

12/12/14 triggered @ $39.75


Guess' Inc. - GES - close: 20.08 change: +0.34

Stop Loss: 21.05
Target(s): To Be Determined
Current Option Gain/Loss: - 1.9%
Entry on December 17 at $19.70
Listed on December 15, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 1.0 million
New Positions: see below

Comments:
12/17/14: Our new play on GES is now open. The plan was to open bearish positions on a new relative low at $19.70. Shares opened at $19.84 and rallied as the market moved higher this morning. GES then lost all upward momentum and spiked down to $19.69, triggering our play. Unfortunately for us the sell-off didn't last. GES spent most of the day churning sideways in the $19.85-20.15 zone.

At this time I would wait for a drop to $19.65 before initiating new bearish positions in GES.

Earlier Comments: December 16, 2014:
Retail can be a tough business. Fashion is even worse. Customer tastes and shopping habits have been changing. It looks like GES has not done a very good job navigating the fashion-retail landscape.

The company is part of the services sector. The Guess? Brand covers apparel and accessories for men, women, and children. The company runs 494 retail stores in North America and 346 stores in Europe, Asia, and Latin America.

GES' performance for 2014 can be summed up with two words: guiding lower. When GES reported earnings in March, May, August, and in December the company has lowered guidance every single time. Their most recent report in December (its Q3 results) managed to beat Wall Street's earning estimate and yet diluted earnings per share were down 43% from a year ago. Revenues were also down -3.9%. Margins are contracting as well.

Management lowered their Q4 2014 and 2015 guidance on for earnings, revenues, and margins. Wall Street is starting to turn more cautious with lowered price targets or telling clients to avoid the stock altogether. As usual Wall Street is late to the game with shares of GES trading at five-year lows.

The last few days have seen GES consistently fail at its 10-dma. Today's close below significant round-number support at $20.00 looks like an entry point for bearish positions. We are suggesting a trigger to open bearish trades at $19.70.

- Suggested Positions -

Short GES stock @ $19.70

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

Long MAR $20 PUT (GES150320P20) entry $1.70

12/17/14 triggered @ $19.70
Option Format: symbol-year-month-day-call-strike


NCR Corp. - NCR - close: 26.97 change: +0.22

Stop Loss: 28.55
Target(s): To Be Determined
Current Option Gain/Loss: -0.1%
Entry on December 16 at $26.95
Listed on December 15, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 2.25 million
New Positions: see below

Comments:
12/17/14: Wednesday ended up a relatively quiet day for NCR as shares churned sideways. The stock did manage a +0.8% gain but most of that was due to the gap open higher.

Traders may want to watch for a new failed rally near $27.50 as our next bearish entry point.

Earlier Comments: December 15, 2014:
NCR is part of the technology sector. Company marketing material describes NCR as "the global leader in consumer transaction technologies, turning everyday interactions with businesses into exceptional experiences. With its software, hardware, and portfolio of services, NCR enables more than 485 million transactions daily across retail, financial, travel, hospitality, telecom and technology, and small business. NCR solutions run the everyday transactions that make your life easier. NCR is headquartered in Duluth, Georgia with approximately 29,000 employees and does business in 180 countries."

It has not been a good year for shares of NCR. The stock is down -19% in 2014. NCR's stock was already in a bearish trend of lower highs and lower lows before the company issued an earnings warning on October 20th. You can see the big gap down and plunge toward $23 on that session. Since the stock has seen a technical rebound that was boosted by the market's widespread surge off the October lows. Unfortunately for NCR the rally reversed at resistance near $30.00 while the broader market broke out to new highs.

Management lowered their Q3 and 2014 guidance on the 20th and essentially warned that Q4 would be disappointing as well. Chairman and CEO Bill Nuti commented on their results saying, "Our Retail Solutions business was challenged by customers spending more cautiously than anticipated and further delaying solution rollouts. These trends, along with difficult global macroeconomic conditions and foreign currency headwinds, had significant impacts on our performance in the third quarter, and we expect they will continue to impact our Retail Solutions business in the fourth quarter."

Traders have been selling every bounce with new resistance at the descending 10-dma. The point & figure chart is very bearish with a $20.00 target. The stock closed at new six-week lows today. Tonight I'm suggesting a trigger to open bearish positions at $26.95.

- Suggested Positions -

Short NCR stock @ $26.95

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

Long Jan $27 PUT (NCR150117P27) entry $1.35

12/16/14 triggered @ 26.95
Option Format: symbol-year-month-day-call-strike


TimkenSteel Corp. - TMST - close: 32.06 change: +0.89

Stop Loss: 33.35
Target(s): To Be Determined
Current Option Gain/Loss: - 2.9%
Entry on December 15 at $31.15
Listed on December 13, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 449 thousand
New Positions: see below

Comments:
12/17/14: The market-wide rally sparked some short covering in most of the steel stocks. TMST was actually hitting new lows this morning before reversing to a +2.85% gain. Shares closed right at resistance near $32 and its 10-dma.

Looking at the intraday chart you can see the late afternoon low near $31.20. I suggest waiting for a new drop below this point before initiating new bearish positions.

Earlier Comments: December 13, 2014:
TMST is in the basic materials sector. They were spun off into their own company back in July 2014 and after a +25% rally the stock peaked near round-number resistance at $50 a share in September. Then two things happened. The stock market corrected lower (mid September through mid October) and crude oil prices started dropping in earnest. While the market recovered from its correction the steel industry stocks did not.

According to company marketing materials, "TimkenSteel creates tailored steel products and services for demanding applications, helping customers push the bounds of what's possible within their industries. The company reaches around the world in its customers' products and leads North America in large alloy steel bars (6"+) and seamless mechanical tubing made of its special bar quality steel, as well as supply chain and steel services. Operating from six countries, TimkenSteel posted sales of $1.4 billion in 2013."

U.S. steel companies have been facing pricing pressures from cheaper imported steel. This has been a factor for the industry for a while. This year steel stocks are getting melted by the bear market in crude oil. Why is oil dragging steel stocks lower? That's because for companies like U.S. Steel (X) and Timkensteel (TMST) they do big business making steel products for the energy industry.

The energy exploration, drilling, and production accounts for 10% of the steel used inside the U.S. each year. There's a lot of metal on all of these oil and gas rigs. They put a lot of metal into the ground for drilling, especially fracking rigs with their horizontal drilling. The energy boom in the U.S. has been a boon for steel companies because the steel products they make for the energy sector have been a higher-margin business.

This year the price of oil has been cut in half with Saudi Arabia launching a not so secret war against all rivals in the oil industry including Iran, Russia, and the surging U.S. shale oil industry. If oil prices get too low the Saudis know that that U.S. oil production will fall when it becomes unprofitable. That's bad news for steel companies.

Shale oil and shale gas wells have a high depletion rate. That means drilling companies are constantly drilling new wells to keep up production. Yet if they stop or slow production because oil prices are too low that's going to cut demand for steel products, which is going to hurt companies like TMST in some of their highest margin business.

Shares of TMST just spent the last two weeks consolidating sideways in the $32-33 zone. Friday's move is a bearish breakdown under support at $32.00. Tonight we are suggesting a trigger to launch bearish positions at $31.15.

- Suggested Positions -

Short TMST stock @ $31.15

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

Long FEB $30 PUT (TMST150220P30) entry $2.55

12/15/14 triggered at $31.15
Option Format: symbol-year-month-day-call-strike


Voxeljet AG - VJET - close: 7.37 change: -0.15

Stop Loss: 8.65
Target(s): To Be Determined
Current Gain/Loss: +25.6%
Entry on December 04 at $ 9.90
Listed on December 01, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 372 thousand
New Positions: see below

Comments:
12/17/14: Early morning gains in VJET failed with the stock reversing at $7.80. The stock underperformed the market again with a -1.99% loss.

Investors may want to lower their stop loss again. I am not suggesting new positions at the moment.

Earlier Comments: December 2, 2014:
VJET is in the technology sector. The company is part of the 3D printer industry. A company press release describes VJET as "a leading provider of high-speed, large-format 3D printers and on-demand parts services to industrial and commercial customers. The Company's 3D printers employ a powder binding, additive manufacturing technology to produce parts using various material sets, which consist of particulate materials and proprietary chemical binding agents. The Company provides its 3D printers and on-demand parts services to industrial and commercial customers serving the automotive, aerospace, film and entertainment, art and architecture, engineering and consumer product end markets."

Unfortunately this industry has been struggling. Q3 earnings results were disappointing almost across the board with 3D printing companies either posting earnings misses, lowering guidance, or both. VJET happens to fall in the both category.

VJET reported its Q3 results on November 13th. Analysts were expecting a loss of €0.03 for the quarter. The actual results were significantly worse with VJET reporting a loss of €0.41. That compares to a profit of €0.11 in Q3 2013. Management lowered their guidance following the Q3 earnings report.

The industry is facing a new competition in printer giant Hewlett-Packard (HPQ). Everyone knew that HPQ would eventually jump into the 3D printer market and HPQ has finally announced they will next year. HPQ recently gave a presentation saying their 3D printer technology will use "multi-jet fusion" which will generate speeds 10 times faster than current 3D printers.

Shares of VJET have been underperforming the market with a bearish trend of lower highs and lower lows. The point & figure chart is bearish and forecasting at $6.00 target.

Today VJET is setting at all-time lows and poised to break what should be round-number, psychological support at the $10.00 mark. Tonight we are suggesting a trigger to open bearish positions at $9.90.

Please note I do consider this a more aggressive, higher-risk trade. There is already a lot of short interest in this name. The most recent data listed short interest at 22% of the very small 12.4 million share float. That poses the risk of a short squeeze should VJET ever bounce. You may want to use put options to limit your risk to the cost of the option.

*higher-risk, more aggressive trade* - Suggested Positions -

Short VJET stock @ $9.90

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

Long 2015 Jan $10 PUT (VJET150117P10) entry $1.05

12/11/14 new stop @ 8.65
12/08/14 new stop @ 9.65
12/04/14 triggered @ $9.90
Option Format: symbol-year-month-day-call-strike


Zulily, Inc. - ZU - close: 23.74 change: +0.54

Stop Loss: 27.30
Target(s): To Be Determined
Current Option Gain/Loss: + 8.3%
Entry on December 08 at $25.90
Listed on December 06, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 1.3 million
New Positions: see below

Comments:
12/17/14: The market's rally probably sparked some short covering in ZU and shares gained +2.3%, snapping a four-day losing streak.

Traders may want to start lowering their stop loss. I am not suggesting new positions at current levels.

Earlier Comments: December 6, 2014:
ZU is in the services sector. They're considered part of the discount variety store industry. Yet the company doesn't have any retail locations. Instead they operate online. ZU focuses on the "flash sales" model with 72 hour sales (and occasionally 24 hour sales).

The website describes the company as follows, "zulily (http://www.zulily.com) is a retailer obsessed with bringing moms special finds every day—all at incredible prices. We feature an always-fresh curated collection for the whole family, including clothing, home decor, toys, gifts and more. Unique products from up-and-coming brands are featured alongside favorites from top brands, giving customers something new to discover each morning. zulily was launched in 2010 and is headquartered in Seattle with offices in Reno, Columbus and London."

If you do any research on ZU you'll hear a lot about the business model. It makes sense. The company doesn't suffering from all the hassles and expenses of normal retail locations. The constantly rotating nature of their flash sales model generates a sense of urgency for the buyer. It seems like a great idea. The last couple of earnings reports have been better than Wall Street expected. Yet the stock is getting crushed.

ZU's most recent report was their Q3 results on November 4th. Wall Street was expecting ZU to lose between 3 to 4 cents per share on revenues of $285.4 million. ZU reported a profit of $0.02, which is up from $0.00 a year ago. Revenues soared +71.5% to $285.8 million.

Management said it was a good quarter for ZU. Darrell Cavens, CEO of zulily, said, "This was a strong quarter where we hit several key milestones— the business reached a billion dollars in revenue on a trailing 12 month basis and the majority of our North American orders now come from mobile." They also saw their active customers surge +72% from a year ago to 4.5 million. Their average purchase was up +4%. In spite of all the good news the stock plunged -20% the next day.

The reason appears to be guidance and valuations. ZU issued Q4 guidance, the critical holiday shopping season, that was below analysts' estimates. Another major issue is valuation. At current prices ZU is still valued at $2 billion for a company with a net income of only $11.5 million. Their current P/E is about 202. They do seem to be growing rapidly but evidently not enough to justify current valuations.

Eventually shares will get cheap enough that the selling stops. Where that bottom is no one knows yet. The point & figure chart is bearish and forecasting at $14.00 target. There are a lot of investors betting on new lows. The latest data listed short interest at 31% of the 41.7 million share float.

We think ZU heads lower but I consider this a more aggressive, higher-risk trade. The big short interest could make ZU volatile. Tonight we're suggesting small bearish positions if ZU can trade at $25.90. You may want to use the put options to limit your risk.

NOTE: ZU's IPO priced at $22.00. It's possible that $22 could be potential support.

*small positions to limit risk* - Suggested Positions -

Short ZU stock @ $25.90

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

Long Jan $25 PUT (ZU150117P25) entry $1.15

12/10/14 Caution! The recent action in shares of ZU could spell trouble.
12/08/14 triggered @ 25.90
Option Format: symbol-year-month-day-call-strike