Option Investor
Newsletter

Daily Newsletter, Wednesday, 10/28/2015

Table of Contents

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

Market Wrap

Whipsaw Around FOMC Announcement Turns Bullish

by Keene Little

Click here to email Keene Little
The market consolidated since last Friday and essentially went on hold until the FOMC announcement today. Following the usual volatility around the announcement the market then continued higher. The rally doesn't look finished yet but it's looking tired.

Today's Market Stats

The market's consolidation following last Friday's high was a bullish continuation pattern and it appeared the market was simply waiting to get through the FOMC announcement before continuing higher. A negative reaction following the announcement turned into a bear trap and a strong spike up into the close created new highs for the indexes. The rally is likely running on fumes but higher highs look to be in the cards.

There weren't any significant economic reports today, except a bullish crude oil inventory report (which sent oil prices higher), and the market started the day with a dip but that was met with some big buy programs to keep the sellers away. The same thing happened following the negative reaction to the FOMC announcement, which has it looking like someone is waiting for dips to hit the market with big buy programs. The bears are totally frustrated with the market's inability to pull back and the bulls are at risk of getting complacent about their expectation for new all-time highs from here.

We could be seeing an effort to get the indexes as high as possible for October month-end. This could continue into Friday and if it does then I'd be concerned about what next week will bring. We'll look at some upside projections to see if they get hit before the end of the week but it's important to understand that the price pattern can be considered complete to the upside at any time, which makes trading the long side riskier than usual. At this point entering new long trades can be considered chasing the market higher and this late in rally means you run the risk of a sudden reversal (after setting a bull trap).

The FOMC announcement held no surprises and in fact I'm not sure why the market even cares at this point. A surprising move was the U.S. dollar's rally this afternoon, which tanked the metals. What was the surprise? The Fed said they still want to raise rates in December, to which I say yea, good luck with that. The Fed doesn't have an economy that can handle a rate increase and it would only further strengthen the dollar, which would crush the emerging economies and make our international corporations even less profitable. The Fed is in a corner and as much as they want to get a rate increase started they simply don't have the room to do it. The last thing they'll want to do is embarrass themselves with a rate increase that needs to get reversed in the next 3-6 months.

With a weak economy the Fed is forced to leave rates alone and in fact might be forced to follow the ECB in establish a negative rate (depositors would have to pay banks to park their money for them). The Fed is crossing its collective fingers in hopes the asset bubble they've created doesn't pop before the economy recovers. I don't believe they'll be successful but they are apparently either delusional or eternally optimistic. More than likely, instead of raising rates they'll soon be forced to modify their language to say something like they're "data dependent" and will "exercise patience" before deciding to raise rates. When that happens that would be our clue that another QE is not far behind.

In fact the Fed changed their language slightly, hinting of the coming change. The Fed said it would determine "whether it will appropriate to raise the target range at its next meeting." Hint, hint, we don't see the ability to raise rates but we'll wait for December before we'll start hinting in the other direction. What a silly game they play with the market (and the market eats it up, which is even sillier).

Since this time last week, following Wednesday's decline, I had thought we had a good setup where the 5th wave of the leg up from September 29th had finished near resistance (price-level S/R near 2040 for SPX). But last Thursday's strong spike up, starting with a big gap up following an overnight rally in equity futures (a favorite way to trap the bears from the day before), has seen follow through and the 5th wave extended into a larger 5-wave move (the leg up from last Wednesday). Today's rally has done a nice job giving us the 5th of the 5th wave and while there is additional upside potential, this is a very risky time to trade the long side.

What is bullish at the moment for SPX is the fact that it has pushed through what I thought would strong resistance at 2075-2085 (it closed at 2090 today). Price-level S/R near 2075, its broken uptrend line from October 2011 - October 2014 and the top of a parallel up-channel for the rally from 2009 all coincided in this resistance band. Unless this afternoon's rally was just a final short-covering burst higher (very possible), in which case a close back below 2075 would be a sell signal (after setting a bull trap this afternoon), there is now additional upside potential to at least 2100-2110.

S&P 500, SPX, Weekly chart

Once the leg up from September 29th completes, which should be soon if it didn't finish this afternoon, we'll need to see what kind of pullback/decline follows next. A choppy sideways/down correction would look like a 4th wave in the rally from August, which would mean another rally into the end of the year (bold green depiction on the chart above) and potentially up to 2170. But if the 3-wave bounce off the August low is an a-b-c correction to the July-August decline then the next leg down will be strong and likely make it down to at least the October 2014 low at 1820.

The daily chart below shows a rising wedge shape for the rally from September 29th, the top of which is currently near 2100. By the end of the day Friday it will be near 2109. A drop below 2075 would be a bearish heads up since it would leave a failed breakout attempt. A drop below Tuesday's low near 2059 would tell us the top is in place for now.

S&P 500, SPX, Daily chart

Key Levels for SPX:
- bullish above 2077
- bearish below 2058

The 60-min chart below shows the rising wedge and the potential path to higher highs. If it pulls back from a test of the top of the wedge, near 2100, watch to see if it holds support above 2075. If support holds we could then see another leg up to new all-time highs in November. You can see how price-level S/R lines acted as support after they were broken to the upside. The bulls want to see 2075 act the same way.

S&P 500, SPX, 60-min chart

The S&P 100 index (OEX) shows an interesting setup on its weekly chart as it approaches its July high at 947.85. That high was within 3 points of the price projection at 950.45, which is where the 2nd leg of the 3-wave rally off the 2009 low is 162% of the 1st leg up (a common reversal Fib projection). Maybe we'll see another attempt at achieving that projection but at the moment it's about to back test its broken uptrend line from October 2011, currently near 937. The break of the uptrend line in August tells us the leg up from October 2011 finished and a back-test of it is a setup for a short play.

S&P 100 index, OEX, Weekly chart

The DOW has the same setup as shown for SPX. The top of a rising wedge for the rally from September 29th is currently near 17860 so that's the upside potential if the rally continues on Thursday. If it consolidates a little on Thursday and then pushes higher for a closing high for month-end on Friday we could see it make it up to just shy of 18K. Wouldn't that be something for the weekend papers? But the DOW closed only slightly above resistance today -- its broken uptrend line from October 2011 - October 2014 (17740) and at its downtrend line from May-July (17760). The bulls need to avoid leaving a failed breakout attempt, which it would be if the drops back below today's low at 17556.

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- bullish above 17,780
- bearish below 17,489

Last Friday's gap up for the tech indexes had NDX jumping over multiple lines of resistance and has held above its broken/recovered uptrend line from 2012-2013-2014, currently near last Friday's low near 4599. A drop below that level would leave a failed attempt to recover its broken uptrend line and it would be a drop into last Friday's gap. It remains bullish above 4600 but watch the price projection at 4716.55, if reached, since that's where the bounce off the August low would have achieved two equal legs up for an a-b-c bounce correction. A rollover from the July high at 4694 would also leave a bearish double top.

Nasdaq-100, NDX, Daily chart

Key Levels for NDX:
- bullish above 4720
- bearish below 4600

I've been watching the RUT's consolidation since its October 13th high and thinking it's bullish. The RUT has been relatively weak for months and yet it was the one suggesting we'd see a bullish move. Today's big rally (+2.9%) is a bullish breakout and it looks like it caught a few traders short. Upside potential is to 1192-1196 where it would back-test its broken uptrend line from October 2011 - October 2014 (1192) and where the 2nd leg of the bounce off the September low would be 62% of the 1st leg up. Above that it could make it up to its 200-dma, near 1215, and 1231, where the 2nd leg of the rally from September 29th would equal the 1st leg up. But if the RUT drops below Tuesday's low near 1140 it would leave a failed breakout attempt (bull trap).

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- bullish above 1170
- bearish below 1140

One reason to be careful about chasing this market higher, and a reason to keep stops on long positions tight now, is that it's overbought by several measures. One is the percentage of stocks above their 50-dma (some by a large margin) and as you can see on the chart below, the percentage is approaching 70%, a level that is associated with prior reversals. It can go higher but it's a warning sign not to get complacent. Notice how it's been chopping higher following the spike up in early October. New price highs are getting fewer stocks participating, always a sign of topping, even if for only a larger pullback.

NYSE Stocks above 50-dma

The banks got a big shot in the arm (short covering?) and I guess it was on the Fed's continued jaw-boning about raising rates, which makes banks more profitable. It's not going to happen and today's rally runs the risk of an immediate reversal. But there is some more upside potential -- a 62% retracement of the July-August decline is at 75.87 and only pennies below that, at 75.74, is the 162% projection for the 2nd leg of the 3-wave bounce off the August low.

KBW Bank index, BKX, Daily chart

The Transports got hit hard yesterday and the decline left a failed breakout attempt over its downtrend line from March, currently near 8125. It bounced off its 50-dma today but is below its 20-dma, also near 8125, and therefore as long as it remains below 8125 it will remain bearish. But a climb back above 8125 would leave a whippy consolidation off its October 9th high and point to a rally up to its 200-dma, currently at 8467, if not price-level S/R at 8515.

Transportation Index, TRAN, Daily chart

The U.S. dollar also got a strong boost this afternoon following the FOMC announcement. Again, hints of raising rates looks like it caught a few traders short the dollar. The rally broke above its downtrend line from March-August, near 97.10, and it could be a bullish breakout. But I'll want to see how it closes for the week since this afternoon's rally might have been nothing more than short covering, which could quickly flame out and reverse back down. I'm expecting a strong dollar rally but I've been thinking not until another leg down into the end of the year. We'll soon find out whether or not that will happen.

U.S. Dollar contract, DX, Weekly chart

Following gold's high on October 15th it's looking like it could be rolling back over. The high was just shy of the projection near 1195 for two equal legs up from July and the larger pattern suggests gold will see lower lows (at least down to 1000 if not a little lower). But a rally above this morning's high at 1183.10 would suggest we could see at least 1200 to the upside, if not higher, before turning back down later this year or early next year. Bulls want to see support near 1142 hold if it pulls back further.

Gold continuous contract, GC, Daily chart

Watching silver for confirmation of gold's move, it's not clear here which way silver is going to go. It's consolidating at its downtrend line from July 2014, which is also where its 50-week MA is currently located, at 16.03. A weekly close above that level would be bullish but it's possible this morning's high concluded its bounce off the August low.

Silver continuous contract, SI, Weekly chart

This morning's crude inventory report (less than expected) prompted some short covering and it could be the kickoff to the next rally leg. I've been expecting another leg up to give us a 3-wave bounce off the August low and if it heads higher from here the projection for another equal leg up is at 55.75. If the large sideways triangle pattern, as depicted on its weekly chart, is correct, we'll continue to see oil trade between 38 and 58 (probably narrower) before dropping lower next year. I'll continue to watch for evidence that changes this expectation.

Oil continuous contract, CL, Daily chart

Tomorrow's economic reports include the advance GDP number and expectations are all over the map. But most believe it will show slowing from Q2's 3.9%, which is one of the metrics keeping the Fed from raising rates. We'll also see how pending home sales are looking.

Economic reports and Summary

Conclusion

The rally continues and there's still some upside potential. That's enough to suggest to bears to hold their fire and sit in cash while waiting for the bulls to tire. The market is overbought, overloved and starting to fade in its strength (short-term bearish divergence at this afternoon's new high). It's not a rally I'd chase higher from here but would instead pulls stops up tight and let the market tell you when the rally is over (a drop below Tuesday's low would be good confirmation). We should be days, if not hours, away from putting in a high for the leg up from September 29th and following the high should be at least a larger pullback than we've seen since then.

The larger price pattern is not clear as far as what we should expect into the end of the year. It won't be until we get a pullback/decline that we'll get some clues for the next move. A sharp (impulsive) decline will tell us to short the subsequent bounce but a choppy (corrective) pullback (over a few weeks) will tell us to look to buy the dip for a year-end rally. In the meantime trading should be short-term until the bigger picture clears up.

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

Biotechs On The Move

by James Brown

Click here to email James Brown


NEW BULLISH Plays

Advaxis, Inc. - ADXS - close: 12.73 change: +0.84

Stop Loss: 10.75
Target(s): To Be Determined
Current Gain/Loss: Unopened
Entry on October -- at $---.--
Listed on October 28, 2015
Time Frame: Exit PRIOR to earnings in mid December
Average Daily Volume = 1.4 million
New Positions: Yes, see below

Company Description

Trade Description:
Biotech stocks are starting to rally again after weeks of consolidating sideways. ADXS is also on the move after building what looks like a significant bottom over the last month.

ADXS is in the healthcare sector and part of the biotech industry. According to the company, "Located in Princeton, N.J., Advaxis, Inc. is a clinical-stage biotechnology company developing multiple cancer immunotherapies based on its proprietary Lm Technology(TM). The Lm Technology(TM), using bioengineered live attenuated Listeria monocytogenes (Lm) bacteria, is the only known cancer immunotherapy agent shown in preclinical studies to both generate cancer fighting T-cells directed against a cancer antigen and neutralize Tregs and myeloid-derived suppressor cells (MDSCs) that protect the tumor microenvironment from immunologic attack and contribute to tumor growth."

"Advaxis's lead Lm Technology(TM) immunotherapy, axalimogene filolisbac (ADXS-HPV), targets human papillomavirus (HPV)-associated cancers and is in clinical trials for three potential indications: Phase 2 in invasive cervical cancer, Phase 1/2 in head and neck cancer, and Phase 1/2 in anal cancer. The U.S. Food and Drug Administration (FDA) has granted axalimogene filolisbac orphan drug designation for each of these three clinical settings. For additional information on Advaxis, visit www.advaxis.com."

Shares of ADXS peaked in June 2015 near $30.00 a share. That capped an incredible run from about $3.00 in late 2014. When biotech stocks collapsed in August and September ADXS was not spared. Shares eventually found support in the $10.00 region. If you look closely ADXS spent most of October consolidating sideways in the $9.50-12.00 range.

A few weeks ago there was an important development. The U.S. FDA issued a verbal hold on ADXS's leading treatment due to complications from one patient.

What ADXS does sounds like science fiction. They used modified Listeria bacteria to trick the body into attacking and killing cancer cells. One patient in their clinical study used ADXS' as a treatment for her cervical cancer back in 2013. This past summer (July 2015) she entered the hospital with complications and died of her cervical cancer. The FDA issued a hold on ADXS' trial because the hospital found strains of listeria in her system (two years later). Now this particular case may be unique since the patient had some orthopedic implants from a car accident that may have provided a spot for the listeria to hide without producing an infection.

This FDA hold sparked some serious selling in after hours trading with ADXS down more than -20% on this news. The next day (October 7, 2015) shares of ADXS gapped down at $8.10 and rallied back to $10.51 by the closing bell. Since this headline investors have been buying the dips in the $9.50 area. It's starting to look like all the bad news may be baked in. Meanwhile ADXS believes the FDA hold is a temporary setback.

Shares of ADXS have been showing relative strength the last few days as biotech stocks move higher. If this market rally continues ADXS could be a significant outperformer.

Veteran Premier Investor Newsletter readers already know that we consider trading biotech stocks to be higher-risk, more aggressive traders. They are high-risk, high-reward opportunities. The right or wrong headline can send a biotech stock crashing or soaring overnight. The fact that ADXS recovered so quickly following this bad news is encouraging and might suggest the "weak hands" in the stock have already exited.

Today's intraday high was $12.81. Tonight we are suggesting a trigger to launch small bullish positions at $13.05. I suspect the $16.00 level might be resistance but the point & figure chart is forecasting an $18.00 target. Remember, this is an aggressive trade.

Trigger @ $13.05 (use small positions to limit risk)

- Suggested Positions -

Buy ADXS stock @ $13.05

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

Buy the DEC $15 CALL (ADXS151218C15) current ask $1.00
option price is a current quote and not a suggested entry price.

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

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

Daily Chart:

Weekly Chart:



In Play Updates and Reviews

Stocks Endure A Volatile Afternoon

by James Brown

Click here to email James Brown

Editor's Note:
FOMC announcements almost always generate market volatility. Today was no exception. Stocks were in rally mode until the FOMC announcement where they promptly plunged. Fortunately investors bought the dip and markets came roaring back into the closing bell.


Current Portfolio:


BULLISH Play Updates

Delta Air Lines - DAL - close: 50.14 change: -0.73

Stop Loss: 47.75
Target(s): To Be Determined
Current Gain/Loss: -2.1%
Entry on October 23 at $51.23
Listed on October 22, 2015
Time Frame: Exit prior to earnings in early January
Average Daily Volume = 9.8 million
New Positions: see below

Comments:
10/28/15: Airline stocks suffered a second day of profit taking. DAL underperformed its peers with a -1.4% decline that left shares struggling to hold their 10-dma. Fortunately if you look at the intraday chart DAL appears to have formed a mini-bullish double bottom today.

I would wait for a new rally above $50.75 before considering new bullish positions. More conservative investors may want to start raising their stop loss.

Trade Description: October 22, 2015:
Depressed crude oil prices have kept jet fuel prices low. This has provided a big cushion for the major airlines. The recent strength in DAL has boosted shares to an all-time closing high.

DAL is in the services sector. According to the company, "Delta Air Lines serves more than 170 million customers each year. Delta was named to FORTUNE magazine's top 50 World's Most Admired Companies in addition to being named the most admired airline for the fourth time in five years. Additionally, Delta has ranked No.1 in the Business Travel News Annual Airline survey for four consecutive years, a first for any airline. With an industry-leading global network, Delta and the Delta Connection carriers offer service to 318 destinations in 58 countries on six continents.

Headquartered in Atlanta, Delta employs nearly 80,000 employees worldwide and operates a mainline fleet of more than 700 aircraft. The airline is a founding member of the SkyTeam global alliance and participates in the industry's leading trans-Atlantic joint venture with Air France-KLM and Alitalia as well as a joint venture with Virgin Atlantic. Including its worldwide alliance partners, Delta offers customers more than 15,000 daily flights, with key hubs and markets including Amsterdam, Atlanta, Boston, Detroit, Los Angeles, Minneapolis/St. Paul, New York-JFK, New York-LaGuardia, Paris-Charles de Gaulle, Salt Lake City, Seattle and Tokyo-Narita. Delta has invested billions of dollars in airport facilities, global products and services, and technology to enhance the customer experience in the air and on the ground."

DAL's most recent earnings report was October 14th. Wall Street was expecting a profit of $1.72 per share on revenues of $11.1 billion. DAL beat estimates with a profit of $1.74 a share. Revenues fell -0.6% to $11.11 billion, essentially in-line with estimates. At $1.74 a share DAL's earnings were up +45% from a year ago. That's thanks to the low cost of jet fuel.

Oil prices have been depressed long enough that airlines have started lowering air fares. This drop in air fares is hurting PRASM (passenger revenue per available seat mile). Fortunately DAL's fuel expense, plunged -40% from a year ago.

DAL management is forecasting Q4 PRASM to fall -2.5% to -4.5% but they are still guiding for strong operating margins (16-18%). Plus they see Q4 earnings growth of +40% or more. Think about that. How many other companies are forecasting +40% profit growth for Q4?

DAL's CEO made headlines following their Q3 earnings when he said there is a bubble in wide-body jets. What does he mean? There are a lot of wide-body jets that are being leased by other airlines. Once their lease expires there could be a flood of used jets for sale. DAL believes the price of wide-body jets (and possibly narrow-body jets) will decline and allow the company to purchase additional planes at a discount.

Oil prices are expected to remain low for the foreseeable future. Meanwhile we are approaching the busy holiday season, which means more travel by consumers. Technically shares of DAL appear to be breaking out from a multi-month consolidation pattern. The point & figure chart is bullish and forecasting at $62.00 target.

The January 2015 highs are in the $50.80-51.06 area. Tonight we are suggesting a trigger to launch bullish positions at $51.15. This is a multi-week trade.

- Suggested Positions -

Long DAL stock @ $51.23

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

Long 2016 JAN $55 CALL (DAL160115C55) entry $1.25

10/23/15 triggered on gap open at $51.23, suggested entry was $51.15
Option Format: symbol-year-month-day-call-strike


Lennar Corp. - LEN - close: 51.19 change: +0.65

Stop Loss: 49.75
Target(s): To Be Determined
Current Gain/Loss: -2.0%
Entry on October 21 at $52.25
Listed on October 20, 2015
Time Frame: Exit prior to earnings in January
Average Daily Volume = 2.8 million
New Positions: see below

Comments:
10/28/15: As we suspected LEN did not see any follow through on yesterday's decline. There was a minor dip this morning and again when the market sank this afternoon following the FOMC meeting. Yet both times investors bought the dip near $50.30.

More aggressive traders may want to buy this bounce. Otherwise I would wait for a rally past $52.50 as our next entry point.

Trade Description: October 20, 2015:
Rents are soaring. Mortgage rates are low. The labor market is relatively healthy. This has been fueling a stable environment for the homebuilders. The latest National Association of Homebuilders sentiment index hit ten-year highs. The September reading for the NAHB index was 64. That was above the 62 estimate and a level not seen since October 2005.

David Crowe is the NAHB Chief Economist. According to Crowe, "This upward momentum shows that our industry is strengthening at a gradual but consistent pace. With firm job creation, economic growth and the release of pent-up demand, we expect housing to keep moving forward as we start to close out 2015."

LEN is in the industrial goods sector. According to the company, "Lennar Corporation, founded in 1954, is one of the nation's largest builders of quality homes for all generations. The Company builds affordable, move-up and retirement homes primarily under the Lennar brand name. Lennar's Financial Services segment provides mortgage financing, title insurance and closing services for both buyers of the Company's homes and others. Lennar's Rialto segment is a vertically integrated asset management platform focused on investing throughout the commercial real estate capital structure. Lennar's Multifamily segment is a nationwide developer of high-quality multifamily rental properties."

Earnings have been improving. LEN reported their Q2 results on June 24th. Results were $0.79 a share, which was 15 above estimates. Revenues soared +31.6% to $2.39 billion, above estimates. Home deliveries were up +21%. New orders were up +18%. Their backlog of homes rose +18%.

These bullish trends continued in LEN's fiscal third quarter. The company reported on September 21st. Earnings were $0.96 per share, which was 17 cents above estimates. Revenues were up +23.7% to $2.49 billion, also better than expected. Deliveries rose +16%. New orders were up +10%. The number of homes in the backlog rose +13% (to 8,250) while the value of their backlog surged +22%.

The stock has been consolidating sideways the last few months but LEN appears to be bouncing off its long-term up trend. The current bounce is testing short-term resistance at $52.00. Tonight we are suggesting a trigger to open bullish positions at $52.25. This is a multi-week trade that could last the rest of the year.

- Suggested Positions -

Long LEN stock @ $52.25

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

Long 2016 JAN $55 CALL (LEN160115C55) entry $1.88

10/27/15 new stop @ 49.75
10/21/15 triggered @ $52.25
Option Format: symbol-year-month-day-call-strike


Wayfair Inc. - W - close: 43.13 change: +1.48

Stop Loss: 39.85
Target(s): To Be Determined
Current Gain/Loss: +4.8%
Entry on October 16 at $41.15
Listed on October 15, 2015
Time Frame: Exit PRIOR to earnings on November 10th
Average Daily Volume = 1.1 million
New Positions: see below

Comments:
10/28/15: W's bounce from support accelerated today. Shares outperformed the market with a +3.5% gain and a close above its 10-dma.

Do not forget that W has earnings coming up on November 10th. We plan to exit prior to the announcement.

Trade Description: October 15, 2015
W displayed relative strength today and just closed above resistance. Shares could be poised for some serious short covering.

According to the company, "Wayfair Inc. offers an extensive selection of home furnishings and decor across all styles and price points. The Wayfair family of brands includes:

Wayfair.com, an online destination for all things home
Joss & Main, an online flash sales site offering inspiring home design daily
AllModern, a go-to online source for modern design
DwellStudio, a design house for fashion-forward modern furnishings
Birch Lane, a collection of classic furnishings and timeless home decor
Wayfair is headquartered in Boston, Massachusetts, with additional locations in New York, Ogden, Utah, Hebron, Kentucky, Galway, Ireland, London, Berlin and Sydney."

Shares of W came to market with an IPO in October 2014 and priced at $29.00. They opened at $36.00 and spiked up to $39.43 on the first day of trading. The IPO excitement faded and shares didn't find a bottom until about $17.00 in December 2014.

Revenue Growth

The company seems to be growing at a tremendous pace. Their first earnings report as a public company was November 10th, 2014. Revenues soared +41.7% to $336.2 million. Their direct retail business surged +57%. W said their gross profit was $79.0 million versus $58.6 million a year ago.

Additional 2014 Q3 highlights included the number of active customers for their direct retail business rose +61% to $2.9 million year over year. Their LTM Net revenue per active customer increase $342 or +8.6% year over year and +3.0% from the second quarter of 2014.

W reported their Q4 results on March 4, 2015. The company delivered a loss of ($0.18) per share, which was 10 cents better than expected. Revenues were up +38.4% to $408.6 million, above expectations. Management raised their Q1 guidance significantly above Wall Street estimates.

The company beat expectations again with their Q1 report on May 11th. Results were a loss of ($0.23) per share. Revenues accelerated with a +52% gain to $424.4 million.

The earnings beats kept coming when W reported its Q2 results on August 12th. Analysts were forecasting a loss of ($0.29) per share on revenues of $438.4 million. Wayfair delivered a loss of ($0.15) per share. Revenues roared +66.5% to $491.8 million. Management said their number of active customers was up +53.5% from a year ago to four million. Repeat customer orders hit 56%. Orders delivered shot up +80%.

Big Potential

Following their Q1 results back in May the company's CEO talked about their future. On their Q1 conference call the CEO noted that their potential markets are huge. Estimates suggest that spending in their industry will hit $264 billion in the U.S. and $308 billion in Europe by 2018 (a combined total of $572 billion market).

Bears will argue that W's valuations are outrageous. They're probably right. The recent rally in the stock has bumped the company's market cap to $3.6 billion. At the same time analysts are expecting W to operate at a loss for the next two fiscal years. On a short-term basis the market doesn't seem to care about W's valuation. If this rally continues W could see a short squeeze.

A few months ago in an interview one of the co-founders said that together the two co-founders own between 40% and 50% of the stock. The current float is only 30.2 million shares, which is relatively small. The most recent data listed short interest at 79% of the float.

Shares of W have been consolidating sideways beneath resistance at the $40.00 level for about two weeks. Today shares displayed relative strength with a +3.0% gain and a close above resistance. Tonight we are suggesting a trigger to launch bullish positions at $41.15 (hopefully W does not gap too far past our trigger tomorrow). We will plan on exiting prior to W's earnings report on November 10th.

- Suggested Positions -

Long W stock @ $41.15

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

Long NOV $45 CALL (W151120C45) entry $2.80

10/20/15 new stop @ 39.85
10/16/15 triggered @ $41.15
Option Format: symbol-year-month-day-call-strike




BEARISH Play Updates

Dunkin' Brands Group - DNKN - close: 41.73 change: +1.19

Stop Loss: 41.55
Target(s): To Be Determined
Current Gain/Loss: Unopened
Entry on October -- at $---.--
Listed on October 27, 2015
Time Frame: 6 to 8 weeks.
Average Daily Volume = 1.6 million
New Positions: Yes, see below

Comments:
10/28/15: Shares of DNKN were upgraded to a "buy" this morning. This may have sparked some short covering. DNKN shot higher at the open before the rally failed near its 20-dma. DNKN managed to outperform the broader market by closing with a +2.9% gain today.

Currently we are waiting for a new relative low. Our suggested entry point is $39.25.

Trade Description: October 27, 2015:
Many of the restaurant stocks have been struggling in recent months. DNKN is a good example. Shares are down -4.9% year to date but DNKN is down -28% from its July 2015 highs.

DNKN is part of the services sector. According to the company, "With more than 19,000 points of distribution in nearly 60 countries worldwide, Dunkin' Brands Group, Inc. (DNKN) is one of the world's leading franchisors of quick service restaurants (QSR) serving hot and cold coffee and baked goods, as well as hard-serve ice cream. At the end of the third quarter 2015, Dunkin' Brands' nearly 100 percent franchised business model included more than 11,500 Dunkin' Donuts restaurants and more than 7,600 Baskin-Robbins restaurants. Dunkin' Brands Group, Inc. is headquartered in Canton, Mass."

With DNKN down almost -30% from its 52-week highs you might think earnings are terrible. However, the company has been beating estimates. Their last three quarterly reports all came in above expectations with DNKN beating on both the top and bottom line. I will point out that their most recent report, announced October 22nd, was after the company had lowered their guidance.

That big drop on the daily chart was the market's reaction to DNKN's analyst day, when the company lowered their full-year guidance. Earnings definitely seemed to slow down. Their Q3 earnings rose +6% from a year ago while revenues rose +9%. The company is struggling with slowing same-store sales. System wide DNKN said their comparable store sales rose +2.8% in Q3. That's down from +5.7% a year ago and from +5.2% the prior quarter.

Their domestic Baskin-Robbins business has been healthy but internationally their ice-cream sales have slowed. Meanwhile most of their business is the donut-based Dunkin franchise. DNKN is facing a very crowded field of intense competition in the breakfast category. It doesn't help that consumer trends are changing toward healthier options.

Technically DNKN is in a bear market. Adding to the down trend has been a couple of analyst downgrades in recent weeks. The oversold bounce from last week's lows just failed under a new trend of lower highs. More aggressive investors may want to launch bearish positions right here at current levels. We are suggesting a trigger at $39.25 as an entry point.

Trigger @ $39.25

- Suggested Positions -

Short DNKN stock @ $39.25

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

Buy the JAN $40 PUT (DNKN160115P40)

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

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


DSW Inc. - DSW - close: 24.89 change: +0.69

Stop Loss: 25.75
Target(s): To Be Determined
Current Gain/Loss: -4.1%
Entry on October 27 at $23.90
Listed on October 26, 2015
Time Frame: Exit prior to earnings in late November
Average Daily Volume = 1.5 million
New Positions: see below

Comments:
10/28/15: DSW delivered an oversold bounce this morning. Shares sprinted higher with a +4.4% gain. Fortunately the rally failed at its converging 10-dma and 20-dma near $25.30. DSW trimmed its gain to +2.85% by the closing bell.

DSW found support near $24.60 intraday. I would wait for a drop below $24.50 before initiating new bearish positions.

Trade Description: October 26, 2015:
Investor sentiment regarding footwear retailers has soured dramatically. Recent earnings reports have not helped. Skechers (SKX) reported earnings last Wednesday (night). They missed estimates on both the top and bottom line. This report from SKX sent shockwaves through the footwear industry. Nike (NKE) seems to be the only one that was unaffected. The rest of the group has turned bearish.

DSW falls in that category. Officially DSW is in the services sector. According to the company, "DSW Inc. is a leading branded footwear and accessories retailer that offers a wide selection of brand name and designer dress, casual and athletic footwear and accessories for women, men and kids. DSW operates 469 stores in 42 states, the District of Columbia and Puerto Rico, as well as 370 leased departments for other retailers in the United States under the Affiliated Business Group. We also operate an e-commerce site, http://www.dsw.com, and a mobile site, http://m.dsw.com. Through its partnership with Town Shoes of Canada, the company operates two stores in Canada as well as the e-commerce site http://www.dswcanada.ca."

DSW's most recent earnings report was August 25th. Their earnings of $0.42 a share was in-line with estimates. Unfortunately revenues missed expectations. DSW's management provided soft guidance that was below Wall Street estimates. Traders sold the stock and DSW fell to new 2015 lows at the time. Since then shares have continued to melt.

Today DSW underperformed the market with a -1.9% drop. Shares got some help with a downgrade by Canaccord Genuity. Canaccord reduced DSW from a "buy" to a "hold" and slashed their price target. The analyst is concerned that DSW will not be able to maintain their comparable store sales. Traditional retailers do face a challenge this year. Foot traffic during the holiday season is expected to decline as more consumers shop online.

Technically DSW has broken down to new 18-month lows with today's drop. The point & figure chart is bearish and forecasting a very bearish $11.00 price target. There is a chance that DSW bounces near the 2014 low near $23.50 but we think its momentum will carry it past this level. I am suggesting investors start with small positions to limit risk. Yesterday's intraday low was $24.11. We'll use a trigger at $23.90.

*small positions to limit risk* - Suggested Positions -

Short DSW stock at $23.90

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

Long DEC $22.50 PUT (DSW151218P22.5) entry $0.90

10/27/15 triggered @ $23.90
10/27/15 DSW downgraded a 2nd time in as many days
Option Format: symbol-year-month-day-call-strike


iPath S&P500 VIX Futures ETN - VXX - close: 18.34 change: -0.54

Stop Loss: None, no stop at this time.
Target(s): $16.25
Current Gain/Loss: +15.9%
2nd position Gain/Loss: +36.8%
Entry on August 25 at $21.82
2nd position: September 2nd at $29.01
Listed on August 24, 2015
Time Frame: Exit prior to October option expiration
Average Daily Volume = 50 million
New Positions: see below

Comments:
10/28/15: The stock market's widespread rally pushed the VIX to a -7.1% decline and the VXX slipped -2.8%.

No new positions at this time.

Trade Description: August 24, 2015
The U.S. stock market's sell-off in the last three days has been extreme. Most of the major indices have collapsed into correction territory (-10% from their highs). The volatile moves in the market have investors panicking for protection. This drives up demand for put options and this fuels a rally in the CBOE volatility index (the VIX).

You can see on this long-term weekly chart that the VIX spiked up to levels not seen since the 2008 bear market during the financial crisis. Moves like this do not happen very often. The VIX rarely stays this high very long.

(see VIX chart from the August 24th play description)

How do we trade the VIX? One way is the VXX, which is an ETN but trades like a stock.

Here is an explanation from the product website:

The iPath® S&P 500 VIX Short-Term Futures® ETNs (the "ETNs") are designed to provide exposure to the S&P 500 VIX Short-Term FuturesTM Index Total Return (the "Index"). The ETNs are riskier than ordinary unsecured debt securities and have no principal protection. The ETNs are unsecured debt obligations of the issuer, Barclays Bank PLC, and are not, either directly or indirectly, an obligation of or guaranteed by any third party. Any payment to be made on the ETNs, including any payment at maturity or upon redemption, depends on the ability of Barclays Bank PLC to satisfy its obligations as they come due. An investment in the ETNs involves significant risks, including possible loss of principal and may not be suitable for all investors.

The Index is designed to provide access to equity market volatility through CBOE Volatility Index® (the "VIX Index") futures. The Index offers exposure to a daily rolling long position in the first and second month VIX futures contracts and reflects market participants' views of the future direction of the VIX index at the time of expiration of the VIX futures contracts comprising the Index. Owning the ETNs is not the same as owning interests in the index components included in the Index or a security directly linked to the performance of the Index.

I encourage readers to check out a long-term chart of the VXX. This thing has been a consistent loser. One market pundit said the VXX is where money goes to die - if you're buying it. We do not want to buy it. We want to short it. Shorting rallies seems to be a winning strategy on the VXX with a constant trend of lower highs.

Today the VXX spiked up to four-month highs near $28.00 before fading. We are suggesting bearish positions at the opening bell tomorrow. The market volatility is probably not done yet so we are not listing a stop loss yet. Our time frame is two or three weeks (or less).

- Suggested Positions -

Short the VXX @ $21.82

Sept. 2nd - 2nd position (Double Down On The September 1st Spike)

Short the VXX @ $29.01

10/19/15 add an exit target at $16.25
10/15/15 planned exit for the October puts
10/14/15 if you own the options, prepare to exit tomorrow at the close
09/02/15 2nd position begins. VXX gapped down at $29.01
09/01/15 Double down on this trade with the VXX's spike to 6-month highs
08/25/15 trade begins. VXX gaps down at $21.82
Option Format: symbol-year-month-day-call-strike