Option Investor
Newsletter

Daily Newsletter, Wednesday, 1/28/2015

Table of Contents

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

Market Wrap

More Disappointment from Central Banks

by Keene Little

Click here to email Keene Little
It turns out the stock market wasn't happy with the ECB's QE plan and then showed more disappointment this afternoon with the FOMC announcement. Are the central banks losing their mojo?

Wednesday's Market Stats

The euphoria that followed last Thursday's announcement by the ECB lasted that one day. The market sold off a little on Friday (more of a consolidation) and then sold off some more on Monday. The afternoon bounce on Monday was followed by a large gap down Tuesday morning. Thanks to AAPL's blowout earnings report after the bell on Tuesday the market got a lift this morning but that was immediately sold into. NDX was strong, thanks to AAPL, but it did a nearly 100 -point reversal off today's high by the time the market closed. The bulls have been having a tough time in the last few days but in reality the only thing we have is more of the same choppy whippy price action that has kept the indexes inside a tightening price range.

One of the reasons why the ECB-inspired rally last Thursday didn't last for more than a day is because investors began to realize how little it actually meant. The lack of response in the bond market (the smarter market) last Thursday was a strong hint that the stock market experienced a bullish emotional reaction that was not warranted. The ECB announced a plan to buy 60 billion Euros per month, which is of course a lot of newly-created money. But it was likely just more jawboning by the ECB since it might end up being only about a quarter (15B) of that amount. All of these games the central banks continue to play only makes the air pocket beneath the stock markets that much more vulnerable to collapse when the recognition phase hits.

The problem with the ECB plan to buy 60B euros each month is that the responsibility for most of the buying of sovereign debt will be with each individual country. In other words the ECB will very likely not be buying much of Spain's or Italy's or France's or anyone else's government bonds (and Greece was specifically excluded from this agreement). Each country will be provided money to buy their own bonds to fund their debt but they will be responsible for the debt, not the EU's central bank. This is primarily in deference to Germany, which does not want to be responsible for the debt of other nations that it sees as "lacking industriousness."

The reason for the ECB's approach is due to the way the Articles of the ECB were written. Referencing Article 16, John Hussman wrote recently:

"Under Article 16 of the Protocol that established the European System of Central Banks (ESCB), the ECB Governing Council has the exclusive right to authorize [emphasis mine] the creation of euros, but either the ECB or the individual national central banks can issue those euros. The ECB will authorize a large QE program this week, but my impression is that the details will leave the ECB itself responsible for executing only a fraction of the announced program, with the remaining majority of the program (perhaps 60-75%) being nothing more than the option for each national central bank to purchase its own country's government bonds, at its own discretion, and its own risk. Moreover, that option is likely to be limited to something on the order of 25% of the outstanding government debt of each respective country."

From George Friedman at Stratfor.com (before the ECB announcement):

"The European strategy is vitally different [from the U.S.], however. The Federal Reserve printed the money and bought the cash. The European Central Bank will also print the money, but each Eurozone country's individual national bank will do the purchasing, and each will be allowed only to buy the debt of its own government."

Friedman went on to explain that many Eurozone governments are unable to pay for more of their own debt and other European countries do not want the responsibility of another country's debts, either directly or by exposing the ECB to the debts. This is why Germany has resisted so hard any effort for the ECB to launch a QE program that could cripple the EU, and in turn Germany, if other countries are unable to pay off their debts. It would be as if the Fed were to purchase all the states' debts and saddling all states with the burden of the debt if it's not paid off. If California then went belly up do you think Texas would be OK with having to pay off California's debt?

Germany's incentive in this case is that it needs a strong Europe to take its exports. Fully 50% of Germany's production is exported and needless to say, its economy would crumble if the EU crumbles. So the compromise between Mario Draghi and Angela Merkel was to allow the ECB to authorize the creation of money but give the money to each country's national bank based on some agreed-upon formula and make each individual country responsible for purchasing their own debt and be individually responsible for paying it down. This sounds like another pushing-on-a-rope scheme that the Fed has tried for so long. "You can lead a horse to water but you can't make it drink." The end result is a program that sounds good in theory (print lots of money) but probably will fail as a stimulus tool.

In this afternoon's FOMC announcement the Fed upgraded its assessment of the economy because of the recent strength in the GDP reports and the improved employment picture. That likely spooked traders into believing the Fed could soon start talking about rate increases, which would further increase the value of the U.S. dollar and that would further hurt international companies and their export business. Some recent earnings warnings by big international companies, such as CAT, have already spooked the market.

But interestingly, for the first time the Fed announced part of their "formula" would include international financial developments in their policy decisions. This should have calmed fears of a rate increase since foreign developments have been getting weaker and that should help the Fed avoid talk of a rate increase for the rest of this year at least. But the market sold off anyway and now we wait to see if we'll get the typical reversal the day after the FOMC announcement.

The end result of all this is what we're currently seeing in the market -- a selloff following the ECB announcement and a further selloff following this afternoon's FOMC announcement. What the market is finally beginning to realize is the inability of the central banks to really do much more and than what they've done so far hasn't worked. We kept getting assurances from the central bankers but in reality it's been one grand experiment by people who don't know what they're doing and in the process they've created an enormous stock market bubble (that has surpassed the dot com bubble in the 1990s) and a huge debt bubble. It can always get bigger, such as it has in Japan, and it very likely will, but like Japan we could remain mired in a very long recession/depression as a result of all the debt.

Now, having said all that, I still see the potential for another rally into February to make a new high. No one ever accused the stock market of being the sharpest knife in the drawer and there's still a lot of hope out there. Even if it's just because this year ends in '5' and it's the 3rd year of a presidential term, which have been historically bullish, many are pinning their hopes and dreams on another successful year. I think this time will be different but many money managers are betting their portfolios on the expectation for a bullish year and dips continue to be bought. As I'll review with the charts, we have bullish continuation patterns that have not been negated and they point higher. Now all the bulls need to do is prevent those bullish patterns from being negated, which could be close to happening, especially for the DOW.

Kicking off a review of tonight's charts, the SPX weekly chart shows how price remains stuck in a tightening trading range (sideways triangle) since December. Typically a sideways triangle leads to one more leg in the direction that preceded it (up in this case) but I've been leaning toward the bearish side since the December high based on the longer-term pattern. Many previous important highs for the market have seen similar high-level consolidations which looked bullish at the time but failed to get follow through. If it does break down we'd then have a failed bullish pattern and that would likely lead to a hard failure. But bears need to see the upside potential here -- at least up to the trend line along the highs from April 2010 - May 2011, perhaps up to about 2130 by mid-February. If you're feeling bullish the market, we're very close to solid support and the upside potential is about 130 points.

S&P 500, SPX, Weekly chart

The daily chart below shows a closer view of the sideways triangle pattern but I'm also showing the bearish wave count (red) that's calling the decline from December a 1st and 2nd wave and we're into the 3rd wave down (or it will be an a-b-c). There are 3 support levels the bears need to break before they can claim victory over the bulls. There were 4 levels but the one at 2019 (price-level S/R starting from the September high) was broken today. The next is the bottom of the sideways triangle, near 1995, followed by the uptrend line from March 2009 - October 2011, near 1978, and then the 200-dma, near 1973, and finally a price projection for two equal legs down from December 29th, which is near 1963. Once below 1963 it would be more apparent that the decline is a 1-2-3 instead of an a-b-c.

S&P 500, SPX, Daily chart

Key Levels for SPX:
- bullish above 2065
- bearish below 1963

If the bears can't get a stronger decline going and if the sideways triangle is a bullish continuation pattern we should be close to starting the next rally leg. It's been typical for this market to reverse the post-FOMC afternoon move, which would mean a rally tomorrow morning, so it's a bullish setup here. Whether it will lead to another rally leg can only be guessed here and after so many choppy and whippy reversals since the end of November we have to continue to be careful.

The 60-min chart below shows a downside price projection at 1998.42, which is where the move down from last Thursday would have two equal legs. A triangle pattern is filled with corrective price action and that's what we've had, including the decline from last Thursday. This is one of the reasons why I continue to respect the idea that we'll get a rally out of this pattern. A rally above Tuesday afternoon's high near 2043 would be a bullish heads up but the bulls need to see a break above last Thursday's high near 2065. A drop below 1998 would be a bearish heads up but the bears would be in much better shape below 1980 since it's hard to call the decline impulsive yet.

S&P 500, SPX, 60-min chart

As mentioned earlier, it's the DOW that needs an immediate reversal of today's selloff if the bulls are to have any hope of another rally from here. Following the December 5th high I can count the triangle as complete (5 waves, labeled a-b-c-d-e) and today's close can be viewed as a throw-under below the bottom of the triangle, which is a common finish to these patterns (head-fake break). But that requires an immediate reversal Thursday morning, in which case the bullish hopes would remain alive. A drop below the 200-dma near 17050 would confirm a bearish breakdown and it could get ugly (failed bullish pattern). If the bulls do get another rally leg started we could see the DOW up near 18700 in February. That would make it more than a bit painful for bears so if you're short don't get complacent here.

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- bullish above 17,840
- bearish below 17,050

NDX is stuck. Since its November 28th high it has created a wide descending triangle, similar to the others, and is more or less in the middle of the pattern but closing today closer to the bottom of it. The bottom of the descending triangle is the horizontal price support near 4090 while the top of the triangle is the downtrend line from November-December, currently near 4300. Near the bottom of the triangle is also its uptrend line from March 2009 - June 2013 so a drop below 4090 would be bearish while a rally above 4300 would be bullish. Mind the chop in between.

Nasdaq-100, NDX, Daily chart

Key Levels for NDX:
- bullish above 4300
- bearish below 4090

When you take a quick look at the RUT's daily chart below and then look away, what's your first impression (bullish or bearish)? That probably depends on your bias and right now it's really just a mess that could go either way. How about a bearish H&S top starting with the left shoulder in November? Or maybe it's an inverse H&S continuation pattern starting with the January 6th low? I see multiple trend lines causing price to act like a ping pong ball. This week's rally attempt was stopped by the broken uptrend line from October-December (followed by a selloff, creating a bearish kiss goodbye). Today it dropped back down to its broken downtrend line from December 31 - January 13. A successful back-test followed by a bullish kiss goodbye tomorrow could lead to another rally. Depending on how you're leaning you'll see what you want to see and trade accordingly but know where your stop should be and honor it because I think the next move out of this congestion could be a big one.

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- bullish above 1217
- bearish below 1150

I've often discussed the idea that the risk-on vs. risk-off evaluation for the market can be derived from how well HYG is doing vs. TLT. HYG is the bond fund made up of high-yield (junk) bonds while TLT is the 20+ year Treasury bond fund. If HYG is outperforming TLT then you know investors are feeling bullish and will to take on the risk of being in the higher-yielding junk bonds. If investors are feeling nervous about the market they'll move into the safety of Treasuries instead. This often provides a heads up for where the stock market will head and like most of these "indicators" they're not a timing tool but instead a warning tool.

It's a little tough to see on the chart below but back in 2007 when the stock market (green line for SPX) made a higher high in October vs. July you can see the lower highs following the June high for HYG/TLT. HYG started weakening relative to TLT and the new stock market high in October was met with a lower high for HYG/TLT. And then at the March 2009 low for the stock market you can see the bullish divergence with the higher low in HYG/TLT vs. its December 2008 low. What's also obvious is how closely the HYG/TLT ratio tracks the stock market (at least back then).

HYG relative strength to TLT, Weekly chart, 2007 and 2009 divergences

Now look at the same chart up through today (below). The divergence between the two has been widening for a long time (since the end of 2013), which clearly shows why this is not a good timing tool. But I believe the widening divergence is something that's not going to end well for the stock market. While the HYG/TLT line could start turning up, it is instead accelerating lower, as evidenced by the breakdown out of the parallel down-channels, which are steepening. This is a classic waterfall decline that's likely to get steeper before finding a low. It's much more likely that the stock market will soon follow and it's very possible the December high will stand for a very long time. But if we do get a new high for the stock market in the next month I'd certainly want to see HYG/TLT pick up in response otherwise one more new high for the stock market could very well be its last.

HYG relative strength to TLT, Weekly chart, current divergences

A lot of today's decline in the HYG/TLT line had more to do with strong buying in TLT than selling in HYG. But that's another sign of risk-off as investors rush into the relative safety of Treasuries vs. the stock market. The heavy buying today knocked the 30-year yield down -4.5% today, to 2.294% (the 10-year dropped -5.5% to 1.724%) and it's looking like my expectation for 2% for the 30-year could happen sooner rather than later this year. The weekly chart of TYX shows two lower trend lines crossing near 2.09% next week so it would interesting to see what happens if that's reached by then.

30-year Yield, TYX, Weekly chart

Last week the U.S. dollar had stalled at the top of its parallel up-channel from 2008-2011 but then broke above it last Thursday. I had mentioned that a break much above 93.30 would open the door to two price projections at 97.33-97.35. As noted on the weekly chart below, the 2nd leg of the move up from April 2011 would be 162% of the 1st leg up at 97.35. The 2nd leg is the rally from May 2014 and it has an extended 5th wave, which oftentimes will reach a projection where it is 162% of the 1st through 3rd waves (especially for commodities and currencies). That level is at 97.33 and the tight Fib correlation makes it more important so if that level is reached there's a good chance that's where the rally will stop and we'll see a multi-month pullback/consolidation. But the rally can be considered complete at any time and therefore I think it's a risky time to be a dollar bull.

U.S. Dollar contract, DX, Weekly chart

After hitting Fib resistance near 1302 last week, gold has pulled back a little. The daily chart looks like it's ready to roll over and the thing to keep in mind about gold is that the bounce off the November low looks corrective. An a-b-c bounce from November to last week's high at important Fib resistance should now be followed by another decline that will take gold to a new low. That's what the larger pattern is telling me, which is supported by the corrective nature of the bounce. It has everyone feeling bullish about gold but I'm thinking it will turn into another head fake like it did back in August-September 2012. I circled that bounce to show how it had broken its downtrend line from August 2011 and it turned everyone bullish at the time. But it instead turned into a head-fake break and continued its decline. The current bounce has broken out of its down-channel from 2012, which clearly looks bullish, as well as a downtrend line March-July 2014. But if it now drops below its December 9th high at 1239 it would confirm a 3-wave bounce correction and likely new lows. In the meantime there's still the potential for a higher bounce to at least back-test its broken uptrend line from 2001-2005, currently near 1327.

Gold continuous contract, GC, Weekly chart

As expected, silver's rally stalled at price-level S/R near 18.60 (last week's high was 18.50) as well as its downtrend line from November 2012 - July 2014. If it drops below its December 10th high at 16.95 it will leave a 3-wave bounce correction off the December 1st low and likely point lower from there. There's higher potential to the downtrend line from 2011, near 20.70, but at the moment it looks ready to turn back down from here. It could be just one more new low we're looking for, maybe down to about $12, before setting up a longer-term buying opportunity (like gold).

Silver continuous contract, SI, Weekly chart

Oil has dropped back down to its January 13th low at 44.20, breaking it slightly with this afternoon's low at 44.08. It has bounced back up in the after-hours session, currently trading above 44.50, and at the moment it's looking like a retest. As you can see on the daily chart below, the bullish divergence at the lows is telling us the selling momentum is waning. It's probably a good retest to try the long side on oil, such as USO. The only warning is that oil could go into a choppy consolidation pattern and not make a lot of headway back to the upside. In that case buying calls might not work that well (time decay).

Oil continuous contract, CL, Daily chart

Other than this afternoon's FOMC announcement it was a quiet day for economic reports and that will continue on Thursday. Pending home sales might move the market a little but probably not. Friday's Chicago PMI and Michigan Sentiment are not expected to change much and will also probably not affect the market much. We're into month end and portfolio balancing will likely have more of an effect.

Economic reports and Summary

For the DOW in particular I mentioned the bulls need to see an immediate rally Thursday morning in order to keep the bullish triangle pattern alive. There are two things in favor of that happening, the first being a common pattern that sees a reversal of the post-FOMC afternoon move the next day. The afternoon sold off and the historical pattern says Thursday should rally. The second thing is that today saw some capitulatory kinds of market breadth readings. It's either the kickoff to a serious decline or the capitulation will lead to a strong reversal back up.

Closing TRIN today reached 3.47 which is the highest closing TRIN reading since the strong market decline into the August 2011 low. A high TRIN means lots of selling volume going into declining stocks. It's the highest TRIN reading since 3.58 on February 3, 2014, which ended the January decline with capitulation selling on that day. It was then followed by a new rally into early March and then higher after consolidating a bit. It's somewhat rare to see TRIN this high and it indicates extreme selling and extremely and is typically an indication of being oversold on a short-term basis. Combined with a +19% jump in the VIX it suggests we could be setting up for a strong rally, possibly as early as tomorrow.

As can be seen on the table at the top of tonight's report, new 52-week highs were double the new lows, 403 vs. 193 for a net of +210. Considering the strength of the selloff I would have expected the opposite. We also have a net new high for 2015 so the index prices might be looking worse than what we see under the hood and that's another warning sign that tells bears not to get cocky here -- the market might be setting a bear trap. In any case we should find out quickly Thursday morning since the bullish case, especially for the DOW, needs an immediate rally.

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

Another Victim Of Oil's Decline

by James Brown

Click here to email James Brown


NEW BEARISH Plays

Canadian Solar Inc. - CSIQ - close: 19.77 change: -0.59

Stop Loss: 21.05
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Entry on January -- at $---.--
Listed on January 28, 2015
Time Frame: 8 to 12 weeks
Average Daily Volume = 3.5 million
New Positions: Yes, see below

Company Description

Why We Like It:
Solar stocks have been hammered over the last few months. CSIQ has been underperforming its peers. Currently year to date in 2015 CSIQ is already down -2.89%.

According to a company press release, "Founded in 2001 in Ontario, Canada, Canadian Solar is one of the world's largest and foremost solar power companies. As a leading manufacturer of solar photovoltaic modules and provider of solar energy solutions, Canadian Solar has an industry leading and geographically diversified pipeline of utility-scale solar power projects as well as a track record of successful solar deployment boasting over 8 GW of premium quality modules installed in over 70 countries during the past decade. Canadian Solar is committed to providing high-quality solar products and solar energy solutions to customers around the world."

Oil's plunge has been labeled the main reason for solar stock declines. On Wall Street there is some weird relationship between lower oil prices and falling solar stocks. Crude oil is mainly used for transportation, after it has been refined. While solar energy is used to generate electricity. There does not seem to be a direct relationship but solar stocks continue to sink as oil prices fall. Inside the U.S. oil is used for maybe 1% of electricity consumption. We would be better off comparing solar to coal. Coal still accounts for about 30% of U.S. energy production and coal prices have been falling the last three years.

Technically CSIQ looks pretty ugly. Shares are in a bearish trend of lower highs and lower lows. They just recently broke through what should have been support at their 2014 lows. Now CSIQ is flirting with a breakdown under round-number support at the $20.00 level. The last few days appear to have formed a bear-flag consolidation pattern (counter-trend rally). The point & figure chart is very bearish and forecasting an $11 target.

Tonight I am suggesting a trigger to open bearish positions at $19.45. We'll try and limit our risk with a stop loss at $21.05. More conservative traders could use a stop closer to today's high instead (20.68). You might want to keep your position size small. CSIQ has been volatile in the past. The most recent data listed short interest at 13% of the small 37.9 million share float. You may want to use put options to limit your risk.

Trigger @ $19.45

- Suggested Positions -

Short CSIQ stock @ (trigger)

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

Buy the MAR $20 PUT (CSIQ150320P20) current ask $2.30

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

Daily Chart:

Weekly Chart:



In Play Updates and Reviews

Oil's Siren Call Lures Stocks Lower

by James Brown

Click here to email James Brown

Editor's Note:
A number of better than expected earnings reports were not enough to overpower the siren call of oil's plunge. Even a dovish statement from the Federal Reserve could not save the market from oil's decline weighing in the broader market.


Current Portfolio:


BULLISH Play Updates

Burlington Stores, Inc. - BURL - close: 50.90 change: -0.69

Stop Loss: 48.25
Target(s): To Be Determined
Current Option Gain/Loss: -0.4%
Entry on January 23 at $51.10
Listed on January 22, 2015
Time Frame: Exit PRIOR to earnings in mid March
Average Daily Volume = 830 thousand
New Positions: see below

Comments:
01/28/15: BURL encountered some profit taking today. The stock tagged new highs this morning but quickly reversed. The stock was starting to recover but then the broader market accelerated lower this afternoon and BURL followed suit.

Today's performance has generated a bearish engulfing candlestick reversal pattern but it needs to see confirmation. The nearest support is probably the $50.00 mark.

I am not suggesting new positions at this time.

Earlier Comments: January 22, 2015
One of the best performing stocks last year was BURL. The stock gained +47% in 2014 versus the S&P 500's +11% gain.

According to the company website, "Burlington is a national off-price apparel, home and baby products retailer, operating in the United States and Puerto Rico. We offer great value to our customers by featuring high-quality, primarily branded apparel, home and baby products at "Every Day Low Prices", to deliver savings of up to 60-70% off department and specialty store regular prices. We operate more than 500 stores under the Burlington Coat Factory, Cohoes Fashions, Super Baby Depot, MJM Designer Shoes and Burlington Shoes nameplates."

The company has been on a roll and is poised to see earnings grow +100% in its current fiscal year. Management has been consistently raising estimates. Back in September they reported earnings that beat estimates on both the top and bottom line and raised their full year guidance. They beat again with their earnings report in December and raised guidance. Then on January 9th they raised guidance again. We are starting to see Wall Street analysts raise their price targets for BURL into the $58-60 zone.

Investors have been consistently buying the dips. Now shares are in the process of breaking out past round-number, psychological resistance at the $50.00 level. Tuesday's high was $50.90. Tonight I am suggesting a trigger to open bullish positions at $51.10.

- Suggested Positions -

Long BURL stock @ $51.10

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

Long MAR $55 CALL (BURL150320C55) entry $1.87

01/23/15 triggered @ 51.10
Option Format: symbol-year-month-day-call-strike


Sprouts Farmers Market - SFM - close: 36.32 change: -0.43

Stop Loss: 34.85
Target(s): To Be Determined
Current Option Gain/Loss: +9.9%
Entry on December 29 at $33.05
Listed on December 23, 2014
Time Frame: exit PRIOR to earnings on February 25th
Average Daily Volume = 1.0 million
New Positions: see below

Comments:
01/28/15: SFM saw its rally this morning stall at resistance near $37.00. Shares followed the market lower into a -1.1% decline. What makes today's move potentially significant is the bearish engulfing candlestick reversal pattern. This should be a warning signal for the bulls.

I am not suggesting new positions at this time.

Earlier Comments: December 23, 2014:
SFM is in the services sector. They operate in the grocery store industry. According to the company, "Sprouts Farmers Market, Inc. is a healthy grocery store offering fresh, natural and organic foods at great prices. The Company offers a complete shopping experience that includes fresh produce, bulk foods, vitamins and supplements, packaged groceries, meat and seafood, baked goods, dairy products, frozen foods, natural body care and household items catering to consumers' growing interest in health and wellness. Headquartered in Phoenix, Arizona, the Company employs more than 17,000 team members and operates more than 190 stores in ten states."

Back in the fourth quarter of 2013 the health food and natural grocery stores saw their stocks peak and begin a multi-month decline. The market was worried about growing competition. The organic and "natural" trend had allowed companies like SFM and WFM to enjoy wider margins than traditional grocery stores. Now everyone seems to be trying to cash in on the organic trend.

Shares of SFM were almost cut in half with their drop from its 2013 peak to the 2013 low this past spring. Since then it appears that SFM has found a bottom. That might be thanks to steady earnings growth. SFM has beaten Wall Street's bottom line earnings estimates the last four quarters in a row. Back in May they guided higher but since then their guidance has only been in-line with consensus estimates.

The recent strength in the stock is encouraging. Shares are now challenging resistance in the $32-33 area. Should SFM breakout it could see some short covering. The most recent data listed short interest at 12.9% of the 124 million share float.

Tonight we are listing a trigger to launch bullish positions at $33.05.

- Suggested Positions -

Long SFM stock @ $33.05

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

Long MAR $35 CALL (SFM150320C35) entry $1.10

01/24/15 new stop @ 34.85
01/15/15 new stop @ 33.45
12/29/14 triggered @ 33.05
Option Format: symbol-year-month-day-call-strike


Tekmira Pharmaceuticals - TKMR - close: 25.60 change: -0.66

Stop Loss: 22.25
Target(s): To Be Determined
Current Option Gain/Loss: -1.9%
Entry on January 27 at $26.10
Listed on January 26, 2015
Time Frame: 4 to 6 weeks
Average Daily Volume = 2.7 million
New Positions: see below

Comments:
01/28/15: Biotech stocks were not immune to the market's weakness today. The major biotech indices and ETFs were down more than -2% (or worse) and TKMR lost -2.5%. I am not suggesting new positions at current levels.

Earlier Comments: January 26, 2015:
Biotech stocks were strong performers last year. They have continued to rally in 2015. One biotech that is outpacing its peers this year is TKMR.

The company made a lot of headlines last year with its experimental treatments for Ebola. According to the company, "Tekmira Pharmaceuticals Corporation is a biopharmaceutical company focused on advancing novel RNAi therapeutics and providing its leading lipid nanoparticle (LNP) delivery technology to pharmaceutical and biotechnology partners. Tekmira has been working in the field of nucleic acid delivery for over a decade, and has broad intellectual property covering its delivery technology."

The Ebola panic has faded but TKMR is still working on a treatment. The company's TKM-Ebola treatment is in phase-one clinical trials thanks to a $140 million deal with the U.S. Defense Department.

Ebola is not driving the rally in TKMR this year. TKMR's recent strength is thanks to M&A news. On Sunday, January 11th the company announced they were merging with OnCore Biopharma. According to the press release, TKMR "and OnCore Biopharma, Inc., a biopharmaceutical company dedicated to discovering, developing and commercializing an all-oral cure for patients suffering from chronic hepatitis B virus (HBV) infection, announced today that they have agreed to merge to create a new leading global HBV company focused on developing a curative regimen for hepatitis B patients by combining multiple therapeutic approaches."

Why is this significant? Hepatitis B affects a lot of people. TKMR's press release discussed the disease saying, "Hepatitis B is a serious infection of the liver caused by the hepatitis B virus (HBV) and is considered a major global health problem. Hepatitis B infection can cause chronic liver disease, which increases a patient's risk of death from liver cirrhosis and liver cancer. Estimates from the Centers for Disease Control and Prevention (CDC) indicate that up to 350 million people globally may be chronically infected with hepatitis B and, according to the World Health Organization (WHO), more than 780,000 people die every year due to hepatitis B. Most currently available therapies aim to suppress this viral infection but do not lead to a cure in the overwhelming majority of patients."

The stock market applauded the merger news and shares of TKMR soared +57% on Monday, January 12th. I'm sure a lot of that was short covering. The most recent data listed short interest at almost 10% of the 21.1 million share float. I suspect that data is out of date today.

It is interest how TKMR has not seen that much profit taking after such a big move. Traders have been buying the dips the last several days. Now TKMR is hitting new three-month highs. Shares look poised to rally toward resistance near $30.00.

Tonight we are suggesting a trigger to launch bullish positions at $26.10. I want to caution readers that biotech stocks are always a higher-risk, more aggressive trade. The right or wrong headline can send a biotech stock crashing or soaring overnight and TKMR is a perfect example with the move on January 12th. I am suggesting small positions to limit risk. You may want to consider call options as another way to limit your risk.

*small positions* - Suggested Positions -

Long TKMR stock @ $26.10

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

Long MAR $27.50 CALL (TKMR150320C27.50) entry $1.60

01/27/15 triggered @ 26.10
Option Format: symbol-year-month-day-call-strike




BEARISH Play Updates

Discovery Communications - DISCA - close: 29.78 change: -0.28

Stop Loss: 30.85
Target(s): To Be Determined
Current Option Gain/Loss: +2.6%
Entry on January 14 at $30.57
Listed on January 13, 2015
Time Frame: Exit PRIOR to earnings on Feb. 19th
Average Daily Volume = 3.8 million
New Positions: see below

Comments:
01/28/15: DISCA tried to rally twice today and both times the rally failed under the $30.30 level. I'd like to see a new decline under $29.50 before considering new bearish positions.

More conservative investors might want to tighten their stop loss.

Earlier Comments: January 13, 2015:
We have heard for a long time that content is king. Discovery has some great content. So why is the stock suffering so poorly? The stock market posted double-digit gains last year and yet shares of DISCA was one of the market's worst performers with a -23.8% decline.

According to company marketing materials, "Discovery Communications (Nasdaq: DISCA, DISCB, DISCK) is the world's #1 pay-TV programmer reaching nearly 3 billion cumulative subscribers in more than 220 countries and territories. Discovery is dedicated to satisfying curiosity, engaging and entertaining viewers with high-quality content on worldwide television networks, led by Discovery Channel, TLC, Animal Planet, Investigation Discovery and Science, as well as U.S. joint venture network OWN: Oprah Winfrey Network. Discovery also controls Eurosport International, a premier sports entertainment group, including six pay-TV network brands across Europe and Asia. Discovery also is a leading provider of educational products and services to schools, including an award-winning series of K-12 digital textbooks, through Discovery Education, and a digital leader with a diversified online portfolio, including Discovery Digital Networks."

It looks like the revenue picture has soured for DISCA. Back in February 2014 the company reported earnings and raised their revenue guidance. One quarter later, when they reported in July, they lowered the top end of their guidance. Then in November, when they reported earnings, DISCA missed Wall Street's revenue estimate and management lowered their revenue guidance.

In a recent interview Discovery's CEO said they are having trouble monetizing all of their content. The advertising environment has gone soft and they haven't figured out why there is a lull in ad spending.

Research is forecasting that online video watching will more than double by 2020. A USB analyst believes online will eventually pose a significant threat to more traditional TV watching trends and companies. Another analyst, this time with Sanford Bernstein, believes the huge declines in TV viewership will continue. Analyst Todd Juenger said, "We believe ad-supported TV is in the early stages of a structural decline." That's long-term bearish for TV. DISCA needs to do a better job of monetizing their content online.

Technically DISCA looks very bearish. The oversold bounce from November stalled in the $36 area several time. The point & figure chart is bearish and forecasting at $23.00 price target. Today DISCA is breaking down to new 52-week lows.

We are suggesting a trigger to open bearish positions at $30.90. Plan on exiting ahead of DISCA's earnings report in mid February.

- Suggested Positions -

Short DISCA stock @ $30.57

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

Long FEB $30 PUT (DISCA150220P30) entry $1.20

01/15/15 new stop @ 30.85
01/14/15 triggered on gap down at $30.57, trigger was $30.90
Option Format: symbol-year-month-day-call-strike


Greif, Inc. - GEF - close: 39.93 change: -0.04

Stop Loss: 41.60
Target(s): To Be Determined
Current Option Gain/Loss: -0.0%
Entry on January 26 at $39.94
Listed on January 24, 2015
Time Frame: Exit PRIOR to earnings in late February
Average Daily Volume = 177 thousand
New Positions: see below

Comments:
01/28/15: GEF spent today's session drifting sideways. The fact that shares did not follow the market lower is a bit of a caution signal for bearish traders. Readers may want to wait for a new drop under $39.70 before considering new positions.

Earlier Comments: January 24, 2015:
Shares of GEF are crumbling like wet cardboard. The company operates in the consumer goods sector. They make packaging and container products. According to a company press release, "Greif is a world leader in industrial packaging products and services. The company produces steel, plastic, fibre, flexible, corrugated and reconditioned containers, intermediate bulk containers, containerboard and packaging accessories, and provides blending, filling, packaging and industrial packaging reconditioning services for a wide range of industries. Greif also manages timber properties in North America. The company is strategically positioned in more than 50 countries to serve global as well as regional customers."

Unfortunately for investors GEF did not have a good 2014 on the earnings front. They missed analysts estimates the last four earnings reports in a row. In August 2014 GEF's management guided earnings lower. In December they lowered guidance again.

GEF's most recent earnings report was January 14th and Q4 earnings plunged -90% to $8.7 million. Revenues dropped -4% to $1.05 billion, below Wall Street estimates. For all of 2014 GEF said profits declined -38% and revenue slipped -3%. Once again management guided earnings lower. They now expected 2015 earnings in the $2.25-2.35 range compared to Wall Street estimates of $2.78 a share.

The company's earnings report provided an outlook where management issued this statement:

The company anticipates the overall global economy to reflect a modest recovery in fiscal 2015, with positive aspects of the improving economy in the United States being offset by the negative trends in other regions, particularly in Europe and Latin America. We anticipate that foreign currency matters will continue to present challenges for the company, as the strengthening of the United States dollar against other currencies will continue to impact the company’s revenues and net income.

Following GEF's Q4 results several analyst downgraded their rating on the stock. The point & figure chart is bearish and currently forecasting at $31.00 target.

Technically Friday's display of relative weakness (-2.7%) broke down through significant support near $40.00. We are suggesting bearish positions immediately on Monday morning. More conservative traders may want to wait for a little confirmation (perhaps a decline below $39.25). The nearest support looks like the $35 and $30 regions.

NOTE: GEF does have options but the spreads are too wide to trade.

- Suggested Positions -

Short GEF stock @ $39.94

01/26/15 trade began this morning. GEF opened at $39.94


Virgin America Inc. - VA - close: 34.99 change: -2.04

Stop Loss: 38.85
Target(s): To Be Determined
Current Option Gain/Loss: +4.0%
Entry on January 28 at $36.45
Listed on January 27, 2015
Time Frame: 2 to 4 weeks
Average Daily Volume = 2.5 million
New Positions: see below

Comments:
01/28/15: Our new bearish play on VA is off to a great start. VA actually gapped open higher this morning but the rally failed under its simple 10-dma. Shares spent the rest of the day falling and hit our entry point to launch bearish positions at $36.45. The sell-off continued until VA settled with a -5.5% decline.

Earlier Comments: January 27, 2015:
The IPO honeymoon period for shares of VA might be ending soon. The company's stock hit the market on November 13th with about 13.3 million shares priced at $23.00 each. VA opened at $27.00 and rallied to $30.00 on its first day of trading. Six weeks later VA was testing the $40.00 level.

According to the company's marketing material, "Virgin America is a California-based airline that is on a mission to make flying good again, with brand new planes, attractive fares, top-notch service, and a host of fun, innovative amenities that are reinventing domestic air travel. The Virgin America experience is unlike any other in the skies, featuring mood-lit cabins with fleetwide WiFi, custom-designed leather seats, power outlets, and a video touch-screen at every seatback offering guests on-demand menus and countless entertainment options." VA currently has a fleet of more than 50 Airbus single-aisle planes.

Airline stocks have been big winners the last year and a half. The rally in airline stocks off the group's 2014 October low has been exacerbated by plunging oil prices. Jet fuel is a huge expense for this industry so falling oil is a significant tailwind toward company profits.

Many airlines to try reduce their risk of jet fuel price volatility with fuel hedges. The use of hedges can be a two-edged sword and that appears to be cutting into VA's profits. The company confessed last week that its fuel hedges are killing its margins. Today the spot price for jet fuel is around $1.60 a gallon. VA is locked into prices in the $2.48-2.75 for 66 percent of its fuel needs for the current quarter.

VA also announced they raised their employee pay, which will likely hurt margins as well.

Shares are down sharply on this news although VA managed a bounce today. The point & figure chart has already turned bearish and is forecasting at $32 target.

The intraday low today was $36.76. We are suggesting a trigger to open bearish positions at $36.45. However, more conservative traders may want to wait for VA to break the trend line of higher lows (see chart) before initiating positions.

Please note that this could be a short-term trade. VA has not confirmed its earnings date yet but I suspect they will announce in February. We'll try to avoid holding over their earnings announcement. When that information becomes available we'll adjust our time frame.

- Suggested Positions -

Short VA stock @ $36.45

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

Long FEB $35 PUT (VA150320P35) entry $1.40

01/28/15 triggered @ 36.45
Option Format: symbol-year-month-day-call-strike


Zulily, Inc. - ZU - close: 18.60 change: -1.26

Stop Loss: 20.15
Target(s): To Be Determined
Current Option Gain/Loss: +28.2%
Entry on December 08 at $25.90
Listed on December 06, 2014
Time Frame: Exit PRIOR to earnings on February 11th
Average Daily Volume = 1.3 million
New Positions: see below

Comments:
01/28/15: ZU plunged to new lows with a -6.3% decline after one analyst issued cautious comments and lowered their revenue estimate for the company.

Overhead resistance at its simple 10-dma has fallen to $20.01. We will adjust our stop loss down to $20.15.

I am not suggesting new positions at this time.

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) -

(option trade was closed on Jan. 16th, 2015)
Jan $25 PUT (ZU150117P25) entry $1.15 exit $4.40 (+282.6%)

01/28/15 new stop @ 20.15
01/16/15 planned exit for the January $25 puts
01/15/15 new stop @ 21.65
Prepare to exit the January put option tomorrow morning
01/08/15 new stop @ 23.55
01/03/15 new stop @ 24.10
12/29/14 new stop @ 24.45
12/27/14 new stop @ 25.15
12/18/14 new stop @ 26.05
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


CLOSED BEARISH PLAYS

Lions Gate Entertainment - LGF - close: 28.75 change: -0.57

Stop Loss: 29.65
Target(s): To Be Determined
Current Option Gain/Loss: -2.8%
Entry on January 15 at $28.85
Listed on January 14, 2015
Time Frame: Exit prior to earnings on February 5th
Average Daily Volume = 1.2 million
New Positions: see below

Comments:
01/28/15: LGF lost -1.9% today, underperforming the major indices. The stock's oversold bounce appears to be rolling over. I suspect LGF is poised to hit new relative lows.

Unfortunately, something happened midday that sent LGF soaring. I don't see any specific headlines to account for the midday rally. At 11:47 a.m. this morning LGF was quietly trading lower around $28.88. The next minute LGF rallied up to $29.99 before the rally peaked and shares plunged lower and actually hit its low for the day at $28.68 before bouncing. All of this happened in the space of two or three minutes.

Our stop loss was hit at $29.65.

- Suggested Positions -

Short LGF stock @ $28.85 exit $29.65 (-2.8%)

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

FEB $30 PUT (LGF150220P30) entry $2.10 exit $1.60 (-23.8%)

01/28/15 stopped out
01/26/15 new stop @ 29.65
01/15/15 triggered @ 28.85
Option Format: symbol-year-month-day-call-strike

chart: