Option Investor

Daily Newsletter, Saturday, 9/20/2014

Table of Contents

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

Market Wrap


by Jim Brown

Click here to email Jim Brown

Alibaba is finally a public company for the second time and the hype surrounding the IPO was extreme.

Market Statistics

Alibaba (BABA) shares opened about 2 hours late at $92.70 per share compared to the IPO price of $68. The 15% greenshoe option was executed meaning Alibaba sold 368,122,000 shares. That the Alibaba IPO was worth just over $25 billion making it the biggest IPO ever and beating out the Agricultural Bank of China for that title.

Alibaba's market cap at the close was $242 billion putting it just below Walmart at $245 billion and the 11th largest company based on S&P weightings. Of course BABA is not in the S&P because it is a foreign company. The graphic below shows how BABA ranks with the top 20 S&P-500 companies.

Shares spiked in early trading to $99.70 and then declined to 89.95 about 1:30 before rebounding to close at $93.31. When shares briefly dipped below $90 more than 5.7 million shares traded in just one minute. This was probably the underwriters and Goldman Sachs, the stabilization agent, making sure the price did not decline under $90 to spoil the IPO. It was a successful IPO for the NYSE and showed that their pricing and order matching process was superior to the Nasdaq process. More than 400,000 orders traded at the open and more than 100 million shares traded in the first ten minutes.

It was pointed out that Jack Ma and his team was intimately engaged in actually picking out who would get Alibaba shares on Thursday. The team spent 9.5 hours with the underwriters deciding who would get shares out of the more than 1,800 orders from institutions and funds. We were told that the process was weighted towards those institutions the underwriters thought would keep the shares and not trade them on the first day. The IPO was ten times oversubscribed resulting in allocations of around 10% of the requested quantity. A few entities received up to 25% of their request and hundreds got no shares at all. One hedge fund that had requested $200 million in shares received less than $1 million or one-half of 1% of their request. Another fund that requested several million dollars worth received only 1,000 shares worth $68,000. The Alibaba friends and family allotment was $1.5 billion and retail investors received only $1 billion worth of shares. This was purely an institutional IPO.

With 368 million shares sold the volume traded on Friday was more than 271 million. Apparently quite a few institutions could not pass up the lure of a $25 first day profit and sold their shares.

Jack Ma was a rock star for the day appearing on various interview programs including CNBC. More than 130 Chinese reporters were at the NYSE to record the process for the folks at home. As one of his goals for the day Jack Ma asked to have his picture taken with Art Cashin. Congratulations to Arthur. Arthur has only been working there for 50 years.

Plenty of analysts are already questioning Alibaba's valuations with a forward 2015 PE of 34 based on Friday's share price. They have 279 million active buyers. They have 8.5 million active sellers. They processed 14.5 billion transactions in the last 12 months and had $2.4 billion in revenue last quarter. Since inception they have sold more than four times as much as EBay. They have 27,000 employees compared to Amazon's 88,400. Amazon is the world's 9th most visited website and TaoBao, a shopping portal owned by Alibaba is the 10th most visited.

Alibaba has an 85% market share in China and a growth rate of 45%. That should make you think twice. If they already have 85% of the market how are they going to keep growing at a 45% rate? Ma says he is going after the world market but I suspect that will not be as easy to conquer as China.

After selling the 368 million shares on Friday the remaining company ownership looks like this. Softbank 34%, Yahoo 23%, Jack Ma 8.8%, Joseph Tsai 3.6% and everyone else 31%.

Jack Ma was making $20 a month when he started the business in his apartment. He and 16 friends pooled their resources and raised $60,000 and that is what funded the startup. Not a bad investment although most of those friends exited a long time ago.

Investors buying shares on Friday did not actually buy a piece of Alibaba. They bought a holding company that has contracted with multiple Variable Interest Entities (VIE) and that holding company is incorporated in the Cayman Islands. The holding company has a contractual claim on Alibaba's earnings. This structure is necessary because China does not allow the majority ownership of a company by foreigners. Inside Alibaba Group Holdings Ltd (BABA) there are contracts with multiple VIEs that hold the licenses to operate various websites and businesses in China. These VIEs are 100% owned by Chinese citizens. Those licenses give the Alibaba the authority to operate in China. Alibaba contracts with the VIEs and the VIEs are contractually liable to the holding company.

China has not ruled on the legality of VIEs. The SEC warns that the actual business like Alibaba in this case could decide to sever relations with the VIEs and the holding company would be left with no assets. This has happened in the past in 2011, 2012 and 2014. However, other Chinese companies including SINA, SOHU, BIDU, CTRP and CNET also use the VIE structure to get around the Chinese restriction on foreign ownership.

Yahoo (YHOO) shares declined -3% on a sell the news event. I warned about this last week. Yahoo got $8.3 billion from the sale and will net about $6 billion after taxes. Meyer has said she will return $3 billion to shareholders and use the other $3 billion on acquisitions. Reportedly funds that did receive some Alibaba shares were shorting Yahoo to hedge the BABA shares. Yahoo still has more than 400 million Alibaba shares but they can't sell them for at least a year. That is roughly another $37 billion at Friday's closing price. Yahoo received $8 billion in cash from the IPO and has another $37 billion in future income but Yahoo's market cap is only $41 billion. This is a serious lack of confidence vote by Yahoo investors. One analyst said this would be a prime opportunity for an activist investor to appear and force Yahoo to make some changes.

Yahoo shares hit a 14 year high earlier in the week but expectations are for a continued decline in the days ahead. Volume was 10 times normal.

The story is similar at Softbank except that they did not sell any shares in the IPO. They own 34% of Alibaba, now worth about $82 billion. The CEO has said he has confidence BABA shares will continue to move higher and they are willing to wait for the future. Shares of Softbank sold off on Friday as well.

There was no economic news of note on Friday and it would have been ignored with all the Alibabble in progress.

Next week the biggest economic report is the GDP revision for Q2 on Friday. The numbers are off the wall crazy. The official consensus is for a 4.3% revision but there are numerous whisper numbers in the 4.8% to 5.0% range. While I realize there will be some bounce back from the -2.9% number in Q1 I have a hard time rationalizing a 4.8% print. I suppose it is possible but it would definitely be a surprise. The rough guess on the Q3 number is in the 3.5% to 3.8% range.

Second in importance is the Richmond Fed Manufacturing Survey on Tuesday followed by the Kansas Fed report on Thursday. We also get new and existing home sales and after the Lennar (LEN) earnings last week I would expect some positive numbers.

There is a flurry of Fed speakers next week and I am sure they will all be trying to paint a different picture of the future for Fed policy. With the market so jittery over the Fed's future direction any of these could be market movers.

We are very close to the start of the Q3 earnings cycle. The number of reporters is increasing even though we are still three weeks away from the official start when Alcoa (AA) reports.

Oracle (ORCL) reported an earnings miss on Thursday night and Larry Ellison said he was stepping down from the CEO role and would remain the Executive Chairman and Chief Technology Officer. Ellison is a 70 year old college dropout who founded Oracle and has powered it since 1977. He has accumulated a personal wealth of $46 billion along the way. The CEO position will be shared by Mark Hurd and Safra Catz.

Oracle posted earnings of 62 cents compared to estimates of 64 cents. Shares fell -4% on the dual news items.

Red Hat (RHT) declined -4.5% after beating earnings and revenue Thursday evening. Adjusted earnings of 41 cents beat estimates of 38 cents. Revenue of $446 million beat estimates of $435 million thanks to a 19% increase in subscription revenue. Shares hit a historic high in mid August and moved sideways into this report.

Dresser Rand (DRC) rallied +9% after the company said it was getting competing acquisition offers. The agreed bid by Sulzer AG may be in trouble if Siemens AG votes to submit a formal bid of $85 according to the rumors. Siemens has coveted Dresser for several years but could never agree on a merger. If the board votes to offer $85 it may have to go hostile to get around Sulzer. Prior to the Siemens rumor DRC was trading at $68 and it spiked to $82.50 ON Friday before pulling back slightly. That is going to give Sulzer management a sleepless weekend. The buyout talks began back in July when DRC spiked to $70.

Concur Technologies (CNQR) agreed to be acquired by German software company SAP in a deal valued at $8.3 billion. This equates to $129 per share and the largest in SAP history. Shares of CNQR rallied to $127.50 on Friday.

CAT said dealer sales fell -10% in 3 months ending in August due to weaker results outside North America. The company said dealer sales of construction equipment declined -1% in August and resource-industry equipment declined -33%. Energy and transportation equipment sales rose +4%. In North America overall sales rose +8%, down from 11% in July and 14% in June, but fell in other regions. Sales in Asia declined -24%. Mining equipment declined -40% in Europe. This is a clear indication that the global economy is weakening. You need heavy equipment to build stuff so a decline in demand suggests slowing economies.

Apple's initial release of the iPhone 6 was somewhat overshadowed in the headlines by the Alibaba IPO but for the Apple faithful it was the only thing on their minds. In New York more than 1,880 people were in line to buy an iPhone when the doors opened at the Apple store Friday morning. That was 33% more than he 5s and 5c and 240% higher than the iPhone 5. Some had been in line for days. Lines in the Midwest were up 39%. The iPhone 6 Plus was feeling the love with line surveys showing that 67% were going to buy the plus. Also, the big memory models were clearly the hot skews with 33% planning on getting the 128gb model. That is up from 22% and 17% in the prior two models. Of those surveyed 47% were also interested in buying the Apple Watch when it comes out next year. The carrier breakdown was 39% AT&T, 16% Verizon, 10% T-Mobile and 4% Sprint. The rest were planning on buying unlocked phones or use an international carrier. Apple price targets are moving higher with $120 to $135 the new levels being quoted.

Apple is now rumored to announce two new iPads on Oct 20th according to the Daily Dot.

The Nonfarm Payroll numbers are likely to take a significant jump in the coming months as various companies announce their hiring plans for the holidays. UPS is adding 95,000. Fedex (FDX) is adding 50,000. Walmart (WMT) is hiring 60,000, up +10% from last year. The retail sector has not really begun to advertise their hiring plans but sales are expected to rise sharply this year. Ecommerce sales are now expected to rise +17% this season and the highest growth since 2011. Holiday ecommerce spending is expected to account for 8.4% of all retail sales. That is the most growth since 2008.

Fedex posted earnings of $2.10 compares to estimates of $1.96 earlier in the week.

Remember last week when Ebay spiked higher on a rumored deal with Google? No deal ever appeared but on Friday somebody bought 29,000 November $55 calls at $1.40 with Ebay at $52. That equates to a $4 million position. Open interest was only 3,721. Nearly 20,000 October $52.50 calls traded against an open interest of 36,852. The Google rumor may not have been true but somebody expects Ebay to soar very soon. That could be somebody like Carl Icahn preparing to announce a new activist agenda and taking a position before they announce the move.


The Dow closed at a new high near 17,300 and the S&P rallied intraday to 2,019 and a new high. In theory that should be bullish and be the result of traders not allocated any BABA shares putting their money back into the market. However, the S&P slid back into negative territory along with the Nasdaq.

The worst chart is the Russell 2000. I mentioned on Tuesday that the price action on the Russell was bearish and then it rallied the next two days. However, it gapped higher to 1164 at Friday's open and then collapsed to lose -12 points for the day and close at 1146. This is very bearish.

James and I independently look through hundreds of charts every Friday and he and I both remarked at the number of bearish candles on Friday. In the past there have been numerous occasions where a major market event caused a market spike that immediately turned into a reversal point for the market. The hype leading up to the event works traders into a frenzy and the event becomes climactic. It becomes a reason to sell the news rather than continue pushing the market to new highs.

Obviously nobody knows what caused the end of day sell off on the major averages and the all day sell off on the Russell but selling happened. The death cross on the Russell is going to happen on Monday regardless of how the market opens next week.

The Russell 2000 tends to lead the market up and down. At this point it is leading down. The RSI is negative. The MACD is negative and moving average cross is negative. The trend of lower highs is negative.

Everyone wants to seize the gains from Wednesday and Thursday and proclaim a rebound in progress. Unfortunately Friday's decline completely erased those gains and the index is on the verge of setting a new five-week closing low if it moves under 1146.51. Intraday it was 1141.54 on the 16th.

Nobody knows why fund managers were selling the Russell. While it came on the same day as the Alibaba IPO there may have been some correlation but nobody knows. What we do know is that any continued selling next week suggests we are moving back into correction mode.

I could not find an advance-decline chart on the Russell so I used the S&P Small Cap as the closest alternative. The Small Cap A-D line is about to make a six-week low. The midcaps are also in decline mode.

S&P Small Cap A/D Line

S&P Mid Cap A/D Line

It is hard to talk correction in one paragraph and new highs in the next but that is what we have this weekend. The S&P is in breakout mode despite the fractional loss at the close on Friday. The S&P is less than one point from new high territory and it is hard to call that bearish.

With 368 million BABA shares selling on Friday that means $25 billion left the market. Add in the 272 million shares that traded intraday and that is another $20 billion that did not flow into anything else. I believe the cash from those BABA shares that were sold intraday will come back into the market next week. Funds that were allocated shares had to have the cash on hand and when they flipped them they freed up that cash again and will be investing it elsewhere next week. It is possible the selling on Friday was just another cash raise process related to the IPO but there is no way to confirm it.

Any cash flow speculation surrounding the IPO is just educated speculation and we can't count on it for next week. We can hope it comes back into the market but we can't bet on it. Hopefully the Alibaba headlines will fade over the weekend and we can get back to business as usual next week.

Support on the S&P is now 2000 followed by 1980. I would not mind retesting 2000 but I sure don't want to test 1980 again. The bottom chart shows the advance-decline has stopped rising and could be about to decline as evidenced by the MACD.

The Dow punched through the various levels of converging resistance on Thursday and added to those gains on Friday despite closing -71 points off its high of 17,350. The good news is that prior resistance should now be support at 17,150-17,125. The Dow candle for the last four days looks very unsupported. The long wick on Friday's shooting-star candle is typically associated with market tops when it comes on top of a strong gain. This means we need to be especially vigilant next week in watching the market action before jumping into new positions.

The advance-decline line on the Dow is where it should be with the Dow making new highs.

The Nasdaq also gapped higher and then sold off hard but it did rebound slightly at the end of the day. However, support at 4550 was never in danger with the low at 4563. While I wish the Nasdaq had confirmed the Dow gains instead of the Russell decline we don't always get our wishes. The -13 point drop was minimal and the Nasdaq is still holding at the highs. If this was the only chart you looked at you would probably be bullish. The resistance at 4600 is still solid and that was probably a factor in the morning decline. The gap higher was immediately sold and the index fell back into neutral territory -21 points under resistance.

Sellers were 2:1 over advancers on the Nasdaq but the average share only declined -0.3%. You can hardly call that a rout. Unfortunately in the bottom chart of the advance-decline line for the Nasdaq the trend is down with decliners growing.

The Dow Transports broke out to a new intraday high but for the second time this week they recoiled from long term uptrend resistance. Support is 8500 and resistance is 8715 and exactly where I had my resistance line from three weeks ago.

The NYSE Composite is made up of about 2,000 stocks on the NYSE. About 1,600 of them are U.S. stocks and 350 are foreign stocks listed through ADRs. Note that the NYSE posted a lower high and then rolled over to close under 11,000. The A/D line suggests the index is going lower.

Big caps are still showing relative strength and small caps are weak. Normally small caps lead so we need to watch this development very closely next week. Volume on the quadruple witching expiration was high at 9.24 billion shares. That was obviously helped by the 272 million BABA shares but it was still high even if you ignore BABA.

This was an option expiration Friday and that could have had a lot to do with the gap and cr@p we saw on the indexes. Monday is a key day. Option settlement day is normally neutral to slightly weak and then we are off into a new option month and investors begin adding new positions. Let's hope those new positions are not all puts.

As you can tell from the small and midcap A/D charts there is considerable weakness is everything but the biggest of the large caps. This is a warning that the market internals are worsening. It does not mean a market crash is imminent but it does deserve some caution until the internals either improve or worsen.

Random Thoughts

Two U.S. F-22 fighters intercepted six Russian planes off the coast of Alaska and two Canadian CF-18 fighters intercepted two Russian Bear bombers that approached Canadian airspace on Wednesday.

The American fighters intercepted two Bear bombers, two Mig-31 fighters and two IL-78 refueling tankers. Two weeks ago fighters intercepted 2 Bear bombers making a cruise missile attack practice run just outside Canadian waters. Russian bomber launched cruise missiles have a range of 1,800 miles. More than 16 U.S. interceptions of Russian planes were made in a ten day period in August.

Dutch fighter jets intercepted 2 Russian Bear bombers in their airspace on Wednesday. On Thursday two RAF fighter jets out of Scotland intercepted 2 Russian Bear bombers nearing UK airspace.

Sweden summoned the Russian ambassador to complain after 2 Russian SU24 fighter-bombers violated Swedish airspace on Wednesday.

Clearly Putin is sending the world a message that he is not afraid of anyone. Over the last month he has repeatedly bragged that Russia was upgrading their nuclear arsenal to be ready for all future options. On September 10th Russia tested a new submarine launched ballistic missile. Russia is also expanding its fleet of attack submarines and will soon field a new long range bomber.

British Typhoon fighter shadowing Russian Bear bomber off the coast of Scotland.

Putin is also making plans to turn off the Internet for Russian citizens in the event of an emergency. What is an emergency in Russia? That could be a big anti-government protest or a military confrontation that Russia lost. Part of the proposal is to bring all .RU domains under state control in order to "strengthen Russia's sovereignty in cyberspace." The next step would be to force all .RU domains to be hosted in Russia. The majority are now hosted outside Russia for security purposes. Newspapers, TV and radio are already under Russian state control. The Internet has been relatively unfettered but content has been largely dominated by state sponsored bloggers and Putin fans. He currently has an 86% approval rating thanks to all of the bloggers touting his praises.

Russian channels have portrayed the events in Ukraine as Russia's heroic fight against the "fascists in Kiev." Russia continues to deny any involvement by Russian soldiers or Russian military equipment. Russia claims it is only providing humanitarian supplies to the pro Russian separatists battling the fascists.

Putin has warned that Internet communications are vulnerable to U.S. spying and he has suggested building a "Russian Internet" which would be basically a "Russian Intranet" with no access to international websites. If Putin does decide to enact these changes it would be spun as an effort to rescue the Internet from U.S. sanctions.

Putin was quoted as having said to the Ukrainian president, "Russia could be in Kiev in two days and also in Riga, Vilnius, Tallinn, Warsaw and Bucarest." All are former USSR or Soviet Union countries and are now NATO and EU members.

OPEC is preparing to take action to halt the decline in oil prices. The secretary-general of OPEC said the group may cut production targets for 2015 because of an abundance of supply. OPEC produces about 40% of the world's oil supply and even though U.S. shale production has disrupted global export patterns OPEC can still impact prices. They currently produce about 30 million barrels per day. El-Badri said 2015 production could be 29.5 million barrels per day, and 500,000 barrels below their current quotas.

Analysts believe the price of gasoline is going to fall to the lowest level in four years this fall thanks to the low oil prices. Average prices are expected to be in the $3.15 range but more than 30 states are expecting prices under $3.00. Brent crude prices are now $15 lower than they were in June. U.S. crude prices range from $2 to $17 under Brent prices. Oil from shale fields like the Bakken is sometimes $12 to $15 under WTI prices because of transportation discounts.

The Fed is one month away from ending QE. Their balance sheet is now over $4 trillion as a result. Instead of buying trillions of dollars in treasuries they could have given every family in America $56,000. This would have sent the U.S. economy into a super growth mode as consumers spent their new found wealth. Unfortunately, the Fed would never have gotten the money back. In the case of buying treasuries they will eventually mature and the Fed will get all its money back including interest.

The price of ground beef hit an all time high of $4.013 per pound in August. Prices in July hit $3.884 per pound and that was also a new record. Just five years ago in August 2009 it was $2.134 per pound. I can remember when it used to be 59 cents a pound and whole chickens were 29 cents a pound and bananas were 10 cents a pound and a loaf of bread was 29 cents. (1965) Of course the Fed keeps telling us that there is no inflation because they don't count food and energy prices in the official number because they are so volatile. Beef prices rose +4.2% in August and the largest increase since November 2003.

The IMF warned that equity prices in "virtually all major asset classes" look stretched. Those elevated prices along with extremely low implied volatility has elevated leverage in the markets. A build-up of "excessive leverage" could be "abruptly corrected" according to the IMF. This came a week after the OECD warned that current bullishness in markets appeared "at odds" with the "intensification of several significant risks." Apparently everybody is a market expert now.

Forty-six percent of doctors now give Obamacare a "D" or an "F" rating according to a new survey from the Physicians Foundation. Only 25% gave the new law an "A" or "B." This survey was mailed to "virtually every doctor in the American Medical Association." They received more than 20,000 responses.

Janet Yellen is becoming Allan Greenspan, who was known for his confusing Fedspeak. Take this rambling comment from Yellen in her recent press conference. "Well, you know, we stayed low for a very long time. We have been at zero for a very long time and below the levels that some common policy rules would now be suggesting, given the level of unemployment and inflation. So the recovery has been very slow. We've also been doing unconventional policies, of course, buying assets. And in the general sense, I think we have been lower for longer than–if you complete that sentence–then many standard policy rules would suggest. So in a sense, that is a policy that we have had." Clearly trying to qualify every statement you make in every way possible has ruined her command of the English language. At least she did not use Greenspan's big words that required a dictionary to decipher.

The UN said the Ebola virus has infected nearly 6,000 people and the infection rate is doubling every three weeks. The CDC warned that as many as "half a million" may be infected by the end of January. The UN said the chances of Ebola coming to America by the end of 2014 are now over 18%. Because of the long incubation period many people can be infected without knowing it. The potential for these infected persons boarding an airline and spreading the disease around the world is growing every day. People in the infected areas in Guinea, Liberia and Sierra Leone are no longer going to the doctor when they get sick because they are afraid of the outcome. Many believe they can just fight it at home. This causes the family to become infected and spread it to their contacts. The CDC said an "uncontrolled cross-border transmission could fuel a major epidemic to take off in new geographical areas."

Sierra Leone citizens were told to stay indoors for three days in an effort to slow the progression of the disease. The lockdown program was accompanied by a door to door effort by 30,000 health workers to try and locate those homes with infected people. The six million residents are supposed to stay indoors through Sunday night.

In southern Guinea an Ebola education team of two administrators, two medical officers, a preacher and three journalists was attacked while trying to educate people on the risks of Ebola. All 8 were killed. Despite the deaths from the disease the population continues to not believe it will happen to them. Fears, misinformation and stigmas among residents are complicating efforts to contain the disease.

The Wall street Journal said the air campaign against ISIS in Iraq and Syria is being designed to allow President Obama to exert a high degree of personal control over the individual air strikes. The plan would require presidential approval for individual strikes. With the president picking individual targets from the Oval Office this would be unprecedented control. Clearly he does not trust the military to make tactical decisions. Since they don't trust him to make tactical decisions either the outcome of this war is in serious doubt. Officials have warned that half hearted pin-prick air strikes are going to only embolden ISIS and aid in their recruitment efforts. Former defense secretary Robert Gates warned that the "absolutely no boots on the ground" promise by the president was likely to have the same effect as "If you like your medical plan you can keep it."

Apple's long iPhone lines have spawned a new business opportunity. Professional line sitters are growing in number and they are having no trouble getting clients. One individual in New York started a new company called S.O.L.D Inc and advertises his line sitters. They get $25 for the first hour and $10 for each additional hour. He now has 25 people working for him and they also sit in lines not related to iPhones. A sitter typically earns $125-$185 waiting in line for Saturday Night Live tickets. Reality TV competitions create super long lines and his sitters are front and center. They also wait in line for sample sales at places like Gucci and Escada. Independent line sitters wait in lines and buy the products themselves and then resell them online. Premiums for iPhones typically run $300 over cost. iPhone 6s are going for double their cost.

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

"But how do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions as they have in Japan over the past decade?"

Alan Greenspan

Only 93 shopping days until Christmas


Index Wrap

From 'Marking Time' to Marking Up

by Leigh Stevens

Click here to email Leigh Stevens

The S&P and Dow put in a strong performance for the week. The Nasdaq Composite (COMP) and Nas 100 (NDX) also but they didn't clear their prior highs to the convincing degree of the big cap S&P and Dow 30.

COMP and NDX need to clear resistance at their prior highs in a manner to convince that tech still has the best upside potential.

Bullish sentiment didn't keep up and keep pace with the weekly rally. That's somewhat of a bullish plus to me in a 'perverse' contrarian sense.

I don't have any major overarching comments and will go next to the individual charts and commentaries.



The S&P 500 (SPX) Index has resumed its bullish march with the close above its prior Closing high. SPX's chart resumes it bullish pattern; it never lost that pattern to any significant degree much given the minor pullback to the 1980 area just above support implied by its 50-day moving average. Bullishness went up a bit into Friday, just in time for some profit taking. Oh yeah.

There's a shot here for SPX to move up toward the upper end of its longstanding and broad uptrend channel. I've noted initial resistance at 2020, then up in the 2060 area.

Support is suggested around 2000, extending to 1980. Fairly major support should be found at SPX's up trendline, currently intersecting in the 1942 area.

At the recent lows the 13-day Relative Strength Index got down to a 'neutral' mid-range 50 reading. Significant sign of a bull market trend: the major indexes rarely get 'fully' oversold.


The big cap S&P 100 (OEX) bottomed nicely by tracing out repeated intraday support at 880 (and you were still bearish why?), then rallied convincingly to above the line of prior highs in the 890 area and did manage to touch 900 before profit taking pushed back.

900 is a milestone level (an even 100 figure). I still have some feeling that 1000 could be seen by the end of Q1 next year, but that puts me way ahead of the short to intermediate term!

900 is near resistance and then 910 next. Near support is at 890, then back in the 880 area. A decisive downside penetration of 880, without a rebound back above this level that day or the next is bearish; we might then be looking at perhaps 865 as a possible downside target.


The Dow 30 Average (INDU) rebounding nicely from key support at 17000. No mystery there as it was pretty 'clear' from the charts that 17k was key support. Strong moves in DD, GS, HD (a bull flag pattern in its weekly chart suggests more upside to come), JNJ and MSFT were helpful. MSFT was kind of a dog in 2010-2012; Bill Gates stay away?

A little bit here, a little there and INDU had a decent week. Profit taking selling at the end of the week wasn't surprising.

Resistance is highlighted at 17400, and next up near the upper end of the Dow's broad uptrend channel, or around 17600 currently. A solid move from the low that formed at INDU's up trendline to now! Trendlines remain a major chart tool. I don't think Charles Dow used them. Doubtful.

Support is seen in the 17130-17100 area, with strong support at 17000. A Close below 17000 would be bearish; more so than I'm anticipating or can foresee currently.


The Nasdaq Composite Index (COMP) had a good-sized rebound from support in the 4500 area and has resumed its short-term uptrend. Intermediate and long-term trends have been steadily bullish since late-March 2009. One charting rule of thumb is to anticipate technical support in the area of prior highs which was the case with COMP this past week.

We can measure immediate overhead resistance in the 4600 area, but I don't have a next good target for resistance before about 4700-4720. However, 4680 might be a next stopping point if COMP continues to work higher above 4600.

Near support is highlighted in the 4550 area, then at 4500. 4450 is trendline support currently.

There wasn't much of a jump in bullish sentiment, which is a decent ancillary indicator or more upside potential. Trader 'sentiment' doesn't turn around on a dime; e.g., market watchers get worried about Fed tightening sooner than expected and they don't just give up such worries quickly!


The Nasdaq 100 (NDX) chart is bullish as the past week saw an important Close above a prior line of resistance at and just under 4100. This level (4100) will be a key area to watch; see if it's a springboard to 4160 resistance. 4200 looks like next resistance above 4160.

Near support is seen in the 4050 area and next at 4000. 3900 is fairly major support.

On balance I look for a modest further rally but technical resistance at the upper channel line on both daily and weekly charts (weekly, not shown here) has me wondering if NDX can break out into a new up leg anytime soon.


The Nasdaq 100 tracking stock (QQQ) is bullish and upside potential looks to be to the 102 area. Immediate overhead resistance comes in at 100.6.

Near support is highlighted at 98, then in the 96.4 area.

The strong advance is thought to be 'old' by some but downside corrections/pullbacks have come along occasionally and then prices snap back.

A jump in Friday volume on the pullback suggests some holders of long positions may be getting nervous. Risk to reward on buying the stock looks about even: downside 'risk' to 98, upside potential to 102.


The Russell 2000 (RUT) is the chart that really MIXED as the Index looks like it could go up, could go down. I'm watching for any sustained move below the current up trendline; conversely, for any sustained advance above the down trendline intersecting at 1172 currently. Near resistance is seen in the 1160 area.

Near support, again using the trendline as a measure comes in at 1144 but consider 1144-1140 as technical support. Next lower support comes in at 1130.

RUT, unlike my other featured indices, is getting near to an oversold reading in terms of the RSI. 'Oversold' in RUT starts at 40 on the 13-day Relative Strength Index and extends to 30.


New Option Plays

Industrial Goods & Consumer Goods

by James Brown

Click here to email James Brown


Lennox Intl. - LII - close: 79.83 change: -0.55

Stop Loss: 82.51
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 391 thousand
Entry on September -- at $---.--
Listed on September 20, 2014
Time Frame: 8 to 12 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
LII is in the industrial goods sector. Unfortunately for shareholders the stock is significantly underperforming with a -6.1% decline in 2014. That compares to a +4.1% gain in the XLI industrials ETF and a +4.2% gain in the Dow Industrials.

This is a simple momentum trade. After a three-year rally from its 2011 lows near $25 the stock traded near $95.00 in early 2014. Shares have since been struggling. Traders started selling the rallies. Now LII has broken down below its simple 200-dma and its long-term up trend (see weekly chart below). The last few days have seen LII create a "death cross" with the 50-dma crossing under the 200-dma.

This past week saw the oversold bounce in LII fail near prior support near $82.00 and its 300-dma. Friday's low was $79.33. I'm suggesting a trigger for bearish positions at $79.25. Potential support looks like $75.00 and $70.00. Currently the Point & Figure chart is suggesting at $68.00 target.

Trigger @ $79.25

- Suggested Positions -

Buy the DEC $80 PUT (LII141220P80) current ask $3.60

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

Daily Chart:

Weekly Chart:

Tupperware Brands Corp. - TUP - close: 72.55 change: -0.69

Stop Loss: 74.35
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 399 thousand
Entry on September -- at $---.--
Listed on September 20, 2014
Time Frame: 8 to 12 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
TUP was founded back in 1946 and over the last 60 years the company has grown from their plastic food prep and storage line into multiple brands.

According to the company website, "Tupperware Brands Corporation is the leading global marketer of innovative, premium products across multiple brands utilizing a relationship based selling method through an independent sales force of 2.9 million. Product brands and categories include design-centric preparation, storage and serving solutions for the kitchen and home through the Tupperware brand and beauty and personal care products through the Armand Dupree, Avroy Shlain, BeautiControl, Fuller Cosmetics, NaturCare, Nutrimetics, and Nuvo brands."

Unfortunately this year has not been the best for TUP's stock price. The company missed earnings expectations and lowered guidance back in January. You can see the market's reaction with the big drop in late January on the chart.

It took three months but TUP slowly clawed its way back toward resistance near $85 and its simple 200-dma. That area proved to be a lid on the stock price. Then in July the company disappointed again. It's Q2 earnings report disclosed that profits fell -38% to $47.6 million, down from $76.3 million a year ago. Management then lowered its full year guidance when they reported earnings and shares plunged again.

The weekly chart has produced a bearish head-and-shoulders pattern. The daily chart doesn't look healthy either. The Point & Figure chart is bearish and suggesting at $58.00 price target.

There is short-term support near $72.00. I'm suggesting a trigger to buy puts at $71.75.

Trigger @ $71.75

- Suggested Positions -

Buy the 2015 Jan $70 PUT (TUP150117P70) current ask $2.30

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

Daily Chart:

Weekly Chart:

In Play Updates and Reviews

Seeing A Few Reversals

by James Brown

Click here to email James Brown

Editor's Note:

Alibaba may have been the big story on Friday but a number of stocks were seeing some profit taking. We noticed a number of potential bearish reversals on Friday.

Plan on exiting our CNQR trade immediately on Monday morning. Our CW trade was triggered on Friday.

Current Portfolio:

CALL Play Updates

Amgen Inc. - AMGN - close: 144.01 change: +1.99

Stop Loss: 138.25
Target(s): To Be Determined
Current Option Gain/Loss: +28.7%
Average Daily Volume = 3.0 million
Entry on September 17 at $140.25
Listed on September 08, 2014
Time Frame: 8 to 12 weeks
New Positions: see below

09/20/14: AMGN outperformed its peers in the BTK biotech index. Shares broke through resistance near $140.00 and ended the week at record highs. If you're looking for a new entry point consider waiting for a dip back toward $140-141. The $140 level should be new support.

The simple 20-dma has risen to $138.50. We'll move our stop to $138.25.

Earlier Comments: September 8, 2014:
Biotech stocks have been leading the market higher this year. The BTK biotech index is up +32.5% year to date. The IBB biotech ETF is up +19.1%. AMGN is up +20.8% versus the S&P 500's +8% gain in 2014.

The company describes itself as focusing "on areas of high unmet medical need and leverages its biologics manufacturing expertise to strive for solutions that improve health outcomes and dramatically improve people's lives. A biotechnology pioneer since 1980, Amgen has grown to be the world's largest independent biotechnology company, has reached millions of patients around the world and is developing a pipeline of medicines with breakaway potential."

They are one of the first major biotech firms to go public. Today the California-based company has grown to 20,000 employees with a presense in more than 75 countries. Annual revenues are set to hit $19.5 billion this year. The company invests near $4 billion in R&D every year. AMGN has is a combination of mature drugs and a new stable of treatments working through their pipeline.

The company recently received good news after the FDA granted priority review to AMGN's Ivabradine treatment for chronic heart failure. Wall Street is also eager for AMGN's new cholesterol drug, which could be its next multi-billion blockbuster. This new cholesterol drug, Evolocumab, is a PCSK9 inhibitor to lower LDL cholesterol for patients that can't use statin drugs. AMGN recently filed some key regulatory paperwork with the FDA as it races against rival Regeneron to be the first mover in this new field of cholesterol treatments.

Enthusiasm for AMGN's new pipeline should continue. In addition to Evolocumab and Ivabradine, AMGN should see progress on Kyprolis, Talimogene laherparepvec, Blinatumomab, Trebananib, Brodalumab, and AMG 416 in the next six months.

The company's last earnings report was better than expected. AMGN reported on July 29th. Wall Street was looking for earnings of $2.07 a share on revenues of $4.9 billion. The company reported $2.37 a share with revenues up +10.7% to $5.18 billion. Management also guided higher and raised estimates for 2014 earnings growth and revenue growth. Several analysts have raised their price targets and the point & figure chart is bullish and currently forecasting at $152 target.

Tonight we're suggesting a trigger to buy calls at $140.25.

- Suggested Positions -

Buy the 2015 Jan $150 call (AMGN150117C150) entry $3.30*

09/20/14 new stop @ 138.25
09/17/14 triggered @ 140.25
*option entry price is an estimate since the option did not trade at the time our play was opened.
Option Format: symbol-year-month-day-call-strike


Concur Technologies - CNQR - close: 126.82 change: +19.02

Stop Loss: 104.90
Target(s): To Be Determined
Current Option Gain/Loss: +325.7%
Average Daily Volume = 576 thousand
Entry on August 19 at $100.50
Listed on August 16, 2014
Time Frame: 8 to 12 weeks
New Positions: see below

09/20/14: I am extremely surprised our CNQR trade did not close on Friday. Thursday night it was announced that SAP would buy CNQR for $129.00 a share. That lifted CNQR stock above $129.00 after hours on Thursday. We were expecting CNQR to gap open higher near $129.00 on Friday morning.

I suggested we immediately exit our CNQR calls on Friday but only if the stock traded above $128.00. Surprisingly CNQR never traded that high. It opened at $127.53 and the high for the day was $127.55. Shares ended Friday +$19.02 or +17.6%.

We are suggesting an immediate exit on Monday morning with no conditions. The current bid/ask spread is $21.50/22.70.

- Suggested Positions -

Long NOV $105 call (CNQR141122C105) entry $5.05*

09/20/14 prepare to exit our CNQR calls on Monday morning
09/18/14 CNQR to be acquired by SAP for $129 a share. Stock should gap open near $129.00 on Friday morning.
Prepare to exit on Friday (see details above)
09/17/14 CNQR looks vulnerable here. Traders may want to take profits
09/03/14 new stop @ 104.90
08/27/14 CNQR is not moving. Investors may want to exit now. We are moving the stop loss up to $98.40
08/19/14 triggered @ 100.50
*option entry price is an estimate since the option did not trade at the time our play was opened.
Option Format: symbol-year-month-day-call-strike


Curtiss-Wright Corp. - CW - close: 71.03 change: -2.13

Stop Loss: 69.25
Target(s): To Be Determined
Current Option Gain/Loss: -35.4%
Average Daily Volume = 187 thousand
Entry on September 19 at $73.55
Listed on September 18, 2014
Time Frame: 8 to 12 weeks
New Positions: see below

09/20/14: A common trend I saw on Friday was early morning gains failing and stocks reversing sharply lower. CW is one example of this trend. The stock managed to hit a new all-time high before reversing. The rally was enough to hit our suggested entry point at $73.55. Unfortunately CW underperformed the rest of the market with a sharp -2.9% drop.

I am not suggesting new positions at this time. The relative weakness is a potential warning signal for the bears and suddenly Friday's peak looks like a possible bearish double top in combination with the early September peak.

Earlier Comments: September 18, 2014:
CW is part of the industrial goods sector. They cover a lot of ground within that label. Their history dates back to Orville and Wilbur Wright's first flight back in 1903. CW was founded back in 1929 with the Wright brothers joined Glenn Curtiss, the father of naval aviation. The Curtiss Aeroplane and Motor Company merged with Wright Aeronautical Corporation to create Curtiss-Wright.

The company describes itself as "a global innovative company that delivers highly engineered, critical function products and services to the commercial, industrial, defense and energy markets." CW supports the full spectrum of aircraft from passenger planes, business jets, and helicopters in the commercial aviation industry. They're also heavily involved in the defense industry with products for naval defense, ground defense, and aerospace defense.

The company is involved in the construction, maintenance, and improving nuclear power plants and has been since the first U.S. nuclear power plant was built in 1957. They have also been a part of the oil and gas industry from the 1950s. CW has recently expanded from focusing on downstream refining operations and now provides equipment and services for midstream and upstream operations. Every single one of these markets is growing and shares of CW just closed at all-time highs.

CW's latest earnings report was July 30th. They missed Wall Street's EPS estimate by four cents with a profit of 74 cents a share. Yet revenues came in above expectations with a +9.1% improvement to $652 million. Their net earnings were up +31% from a year ago. Their backlog is growing. CW's operating margins increased from 10.1% to 11.7%. Management then raised their 2014 EPS guidance above analysts' estimates. The only fly in the ointment was CW's soft revenue guidance. Yet the stock has not suffered for it.

Technically shares of CW are in breakout mode. The $70.00 level was major resistance. Shares had been consolidating sideways under $70 for months. The breakout past this resistance in August is bullish. CW has already retested this area as new support and renewed its up trend.

The intraday highs are in the $73.45 area. Tonight we're suggesting a trigger to buy calls at $73.55. I'm not listing a target tonight but I will note the point & figure chart is suggesting a long-term target of $98.00.

- Suggested Positions -

Long DEC $75 call (CW141220C75) entry $3.10

09/19/14 triggered @ 73.55
Option Format: symbol-year-month-day-call-strike


Tableau Software, Inc. - DATA - close: 73.26 change: +1.22

Stop Loss: 69.75
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 1.5 million
Entry on September -- at $---.--
Listed on September 16, 2014
Time Frame: 4 to 12 weeks
New Positions: Yes, see below

09/20/14: On Thursday I suggested nimble traders consider buying a dip near $70.00. On Friday DATA was kind enough to provide a dip to $70.02 and its simple 200-dma midday before bouncing back. Officially our newsletter entry point is still at $74.25.

Earlier Comments: September 16, 2014:
"Put together an Academy Award-winning professor, a brilliant computer scientist at the world's most prestigious university, and a savvy business leader with a passion for data. Add in one of the most challenging problems in software - making databases and spreadsheets understandable to ordinary people. You have just recreated the fundamental ingredients for Tableau's products." That's how DATA introduces itself on the company website.

"Tableau Software helps people see and understand data. Tableau helps anyone quickly analyze, visualize and share information. More than 21,000 customer accounts get rapid results with Tableau in the office and on-the-go. And tens of thousands of people use Tableau Public to share data in their blogs and websites."

The company's business is growing. Back in May this year the company reported earnings that beat estimates on both the top and bottom line. Management then raised their guidance. They did it again in July. DATA reported its Q2 results on July 31st. Analysts were expecting a loss of $0.04 a share on revenues of $79.4 million. DATA delivered a profit of $0.05 with revenues soaring +81.8% to $90.7 million.

According to the company's earnings release they saw license revenues up +80% year over year to $60.4 million. They added over 2,200 new customers, which surpassed their four-quarter average of 1,650. They also closed 157 deals worth more than $100,00 each, which is a +96% increase from a year ago. Management then raised their 2014 revenue guidance well above Wall Street's estimates.

On September 16th a Credit Suisse analyst adjusted their rating from "neutral" to "outperform" and bumped their DATA price target from $87.50 to $100 thanks to the company's technology advantage and strong international sales. The point & figure chart is eve more positive with a $119.00 target.

Bears should be worried, The recent breakout past technical resistance at its simple 200-dma is bullish. Traders just bought the dip near this moving average today. The most recent data listed short interest at 11% of the small 41.1 million share float. That might be enough to spark some short squeezes.

Tonight we're suggesting a trigger to buy calls at $74.25. I'm listing both the October calls and the 2015 January calls. Which one depends on your time frame.

Trigger @ $74.25

- Suggested Positions -

Buy the OCT $75 call (DATA141018C75)

- or -

Buy the 2015 Jan $80 call (DATA150117C80)

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


F5 Networks, Inc. - FFIV - close: 124.84 change: -2.80

Stop Loss: 121.95
Target(s): To Be Determined
Current Option Gain/Loss: -39.9%
Average Daily Volume = 855 thousand
Entry on September 11 at $126.25
Listed on September 10, 2014
Time Frame: 8 to 12 weeks
New Positions: see below

09/20/14: In the CW update above I mentioned a trend on Friday was early morning gains reversing. FFIV is another example except the gap higher on Friday morning and then subsequent sell-off has produced a bearish engulfing candlestick reversal pattern on FFIV's daily chart. More conservative investors may want to raise their stop loss. I am not suggesting new positions at this time.

More conservative investors may want to use a stop closer to $123.00 instead.

Earlier Comments: September 10, 2014:
Shares of FFIV did not enjoy the same rally the rest of the market did back in 2013. This year they're playing catch up with their stock up +35.4% versus the +8% rally in the S&P 500. Who is FFIV? According to a company press release:

"F5 provides solutions for an application world. F5 helps organizations seamlessly scale cloud, data center, and software defined networking (SDN) deployments to successfully deliver applications to anyone, anywhere, at any time. F5 solutions broaden the reach of IT through an open, extensible framework and a rich partner ecosystem of leading technology and data center orchestration vendors. This approach lets customers pursue the infrastructure model that best fits their needs over time. The world's largest businesses, service providers, government entities, and consumer brands rely on F5 to stay ahead of cloud, security, and mobility trends."

Just a few months ago FFIV strengthened their security services by buying Defense.net Inc. "a privately-held provider of cloud-based security services for protecting data centers and Internet applications from distributed denial-of-service (DDoS) attacks. The advanced technologies and operational experience shared between the two companies will expand F5's portfolio of security solutions for defense against Internet-based DDoS attacks on networks, data centers, and applications."

One reason the stock has been performing better this year is the earnings picture. Back in April when FFIV reported its Q2 numbers the company beat analysts expectations with revenues rising almost 20% from the year before. Management raised their EPS and revenue guidance.

They did it again in their last report. FFIV reported its Q3 results on July 23rd. Analysts were expecting a profit of $1.35 a share on revenues of $435 million. FFIV delivered a profit of $1.39 with revenues up +18.9% to $440.3 million. FFIV management raised their 2014 EPS and revenue estimates again.

John McAdam, F5 president and chief executive office, commented on their Q3 results. McAdam said,

"F5's solid gains in Q3 were driven by strong growth in product revenue, up 5 percent sequentially and 20 percent year-over-year... Growing demand for our expanding array of systems and application services was fueled by increasing awareness and uptake of our security offerings and the appeal of our Good, Better, Best pricing options. During the quarter, sales of Good, Better, Best bundles grew 49 percent from the prior quarter and contributed to a significant increase in sales of software products and of security solutions in particular. Sales were generally solid across all geographic regions and vertical market segments, with the exception of Japan."

These results sparked new upgrades from the analyst community. The Point & Figure chart is bullish and forecasting at $144 target.

The recent high is near $126.00. We are suggesting a trigger to buy calls at $126.25. We are listing the October calls. Investors may want to consider the 2015 January calls instead.

- Suggested Positions -

Long OCT $130 call (FFIV141018C130) entry $2.68*

09/11/14 triggered @ 126.25
Option Format: symbol-year-month-day-call-strike


FleetCor Technologies - FLT - close: 142.05 change: -2.49

Stop Loss: 139.75
Target(s): To Be Determined
Current Option Gain/Loss: -29.2%
Average Daily Volume = 564 thousand
Entry on September 18 at $145.55
Listed on September 17, 2014
Time Frame: 8 to 12 weeks
New Positions: see below

09/20/14: FLT also reversed lower on Friday with a show of relative weakness in a -1.7% decline. I am not suggesting new positions at this time.

Earlier Comments: September 18, 2014:
Tonight's candidate is in the business services industry. They have over 5,000 employees. They do business in 43 countries. The annual revenue is $1.0 billion. Who are they? It's FLEETCOR (FLT).

According to the company website, "FLEETCOR serves over 500,000 commercial accounts with millions of cardholders across the United States, Canada, Mexico, Europe, Africa and Asia. FLEETCOR manages relationships with more than 800 partners, ranging in size from major oil companies to small petroleum marketers with a single fueling location. We provide services ranging from transaction processing to full program management. Our platforms, programs and infrastructure are both adaptable and scalable, allowing us to fulfill the requirements of a broad range of partners."

The stock has been a winner for investors with shares up from $25 at their 2011 lows to almost $150 last month. Their most recent earnings report was July 31st. Wall Street was expecting a profit of $1.25 a share on revenues of $273.8 million. FLT delivered $1.27 a share with revenues up +23.8% to $273.5 million. More importantly management raised their 2014 EPS and revenue guidance.

As a matter of fact, according to The Street we have seen FLT beat Wall Street estimates and raise guidance 14 quarters in a row!

Another interesting headline is FLT's recent announcement to buy Comdata for $3.45 billion. Comdata is a payments processing company. One analyst at The Street.com pointed out that FLT has an excellent track record with its acquisitions. According to the analyst, FLT acquires companies, strips out inefficiencies, then doubles their profitability within two years. If that wasn't impressive enough FLT has done this with all 60 acquisitions to date ( credit to Jack Mohr for the research).

Technically the trend is up. The recent pullback from its August highs is an entry point. FLT has found support in the $140 area and now investors have started to buy the dip.

Today's intraday high was $145.35. I'm suggesting a trigger to buy calls at $145.55. We are not setting a target tonight but I will point out that the point & figure chart is bullish and forecasting at long-term $190 target.

- Suggested Positions -

Long NOV $150 call (FLT141122C150) entry $4.95*

09/18/14 triggered @ 145.55
*option entry price is an estimate since the option did not trade at the time our play was opened.
Option Format: symbol-year-month-day-call-strike


Lockheed Martin - LMT - close: 180.74 change: +1.17

Stop Loss: 173.75
Target(s): To Be Determined
Current Option Gain/Loss: +53.6%
Average Daily Volume = 1.1 million
Entry on September 08 at $175.55
Listed on September 06, 2014
Time Frame: 10 to 14 weeks
New Positions: see below

09/20/14: Shares of LMT were up everyday last week. The stock closed at new all-time highs. Shares are probably short-term overbought here and could see a dip. We can look for short-term support in the $176-177 area.

Tonight we're moving the stop to $173.75.

Earlier Comments: September 6, 2014:
A few years ago the word "sequestration" was a buzzword in politics and the defense industry. The defense cuts were supposed to be so bad that it would force the democrats and republicans to work together and prevent the Budget Control Act of 2011 from becoming law. Well we all know how that worked out. Politics won and the budget cuts were enacted. The U.S. is supposed to be cutting $500 billion in defense spending from 2012-2021.

Yet these drastic cuts have not slowed the defense stock's performances. The group had a banner year in 2013 with big stock market gains. They continue to show leadership in 2014. Shares of LMT are up +17.4% in 2014 versus a +8.6% gain for the S&P 500.

According to a company press release LMT describes itself as, "Headquartered in Bethesda, Maryland, Lockheed Martin is a global security and aerospace company that employs approximately 113,000 people worldwide and is principally engaged in the research, design, development, manufacture, integration and sustainment of advanced technology systems, products and services. The Corporation’s net sales for 2013 were $45.4 billion."

The company has continued to capture a number of big government contracts including a $915 million deal to build a "space fence" for the U.S. Air Force.

It is worth noting that LMT is the U.S. government biggest defense contractor and just over 80% of LMT's revenues come from the U.S. government. The company is being proactive in trying to broaden their customer base and hope to achieve 20% of sales from outside the U.S. At the moment LMT already has sales in 70 different countries. The plan seems to be working with 25% of the company's backlog coming from international orders.

Many believe that LMT's F-35 joint strike fighter program will be a key revenue driver in the future. The F-35 Joint Strike Fighter (JSF) is already the world's most expensive weapons system with a price tag near $400 billion. Earlier this year the JSF program suffered a setback after its engines, built by a subcontractor, caught fire. LMT believes they have solved the engine problem and the JSF program is getting closer to completion with over 19,500 hours of flight time. LMT already has 11 countries planning to purchase the new F-35 JSF planes.

LMT's earnings have been strong in spite of the sequestration. Back in April they report their Q1 results that beat estimates. Wall Street expected a profit of $2.53 a share on revenues of $10.89 billion. LMT beat the bottom line estimate with $2.87 per share but missed the revenue estimate at $10.65 billion for the quarter. However, management gave an optimistic outlook and raised their 2014 guidance on both net profits and revenues. When LMT reported earnings again in July they deliver a profit of $2.76 a share on revenues of $11.31 billion. That beat Wall Street's estimate of $2.66 and revenues of $11.15 billion. Management raised their EPS guidance again. The company has beaten analysts estimates four quarters in a row.

The company is shareholder friendly with a strong stock buyback program and a dividend yield of 3.2%. The point & figure chart is bullish and forecasting at $200 price target. Tonight we're suggesting a trigger to buy calls at $175.55.

- Suggested Positions -

Long DEC $180 call (LMT141220C180) entry $3.45*

09/20/14 new stop @ 173.75
09/08/14 triggered @ 175.55
*option entry price is an estimate since the option did not trade at the time our play was opened.
Option Format: symbol-year-month-day-call-strike


Mallinckrodt Public Limited Co. - MNK - close: 88.82 change: +1.12

Stop Loss: 84.65
Target(s): To Be Determined
Current Option Gain/Loss: + 6.6%
Average Daily Volume = 4.85 million
Entry on September 17 at $87.25
Listed on September 11, 2014
Time Frame: 8 to 12 weeks
New Positions: see below

09/20/14: MNK also ended the week at record highs thanks to Friday's +1.2% gain. The $90.00 level could be potential round-number resistance. If MNK does see a pullback the $87.00 level might offer some short-term support.

MNK has extended its gains to six up weeks in a row.

Tonight we are moving the stop loss to $84.65.

Earlier Comments: September 11, 2014:
MNK is considered a drug maker but the stock is outperforming its peers in both the drug industry and the biotech industry. The S&P 500 is up about +8% in 2014. The pharmaceutical index (DRG) is up +13.1%. The biotech index is up +34.8% thus far in 2014. Yet MNK is up +64.4%.

The company describes itself as "a global specialty pharmaceutical and medical imaging business that develops, manufactures, markets and distributes specialty pharmaceutical products and medical imaging agents."

"Areas of focus include analgesics and central nervous system drugs for prescribing by office- and hospital-based physicians, and autoimmune and rare disease specialty areas like neurology, rheumatology, nephrology and pulmonology. The company's core strengths include the acquisition and management of highly regulated raw materials; deep regulatory expertise; and specialized chemistry, formulation and manufacturing capabilities."

"The company's Specialty Pharmaceuticals segment includes branded and specialty generic drugs and active pharmaceutical ingredients, and the Global Medical Imaging segment includes contrast media and nuclear imaging agents. Mallinckrodt has more than 5,500 employees worldwide and a commercial presence in roughly 65 countries. The company's fiscal 2013 revenue totaled $2.2 billion."

The company had seen a few key milestones this year. They recently finished their $5.6 billion acquisition of Questcor. In August the stock was added to the S&P 500 index. MNK's earnings report in May was better than expected and management raised their guidance. Their latest earnings report was August 7th. Wall Street expected a profit of $0.85 a share on revenues of $610 million. MNK delivered a profit of $1.20 a share with revenues up +14.6% to $653 million. Management raised their guidance again for both their 2014 EPS and revenue estimates.

MNK's Chief Executive Officer and President, Mark Trudeau, commented on their quarterly results saying,

"This has been another exceptionally strong quarter in what is shaping up to be a very promising year for Mallinckrodt. This performance is being driven by the strength of our Specialty Pharmaceuticals segment in both Brands and Specialty Controlled Substance Generics, as well as streamlined costs from our on-going restructuring initiatives, leading to meaningful top-line and bottom-line growth. We continue to be pleased with the performance of our base business and recently added OFIRMEV, and look forward to closing the acquisition of Questcor in the coming weeks."

The current rally in MNK stock has lifted shares to all-time highs. The September 5th move looked like a potential bearish reversal yet there was no follow through lower. Instead MNK has been consolidating sideways. If shares continue to march higher it could spark some short covering. The most recent data listed short interest at 29.3% of the small 53.9 million share float.

We are not setting a target tonight but the point & figure chart is forecasting at $90.00 target. We are suggesting a trigger to buy calls at $87.25.

*consider smaller positions* - Suggested Positions -

Long OCT $90 call (MNK141018C90) entry $3.00*

09/20/14 new stop @ 84.65
09/17/14 triggered @ 87.25
Option Format: symbol-year-month-day-call-strike


Nike, Inc. - NKE - close: 81.81 change: -0.16

Stop Loss: 79.85
Target(s): To Be Determined
Current Option Gain/Loss: +16.9%
Average Daily Volume = 2.8 million
Entry on September 05 at $80.50
Listed on September 04, 2014
Time Frame: 8 to 12 weeks
New Positions: see below

09/20/14: NKE's early morning gains on Friday failed near prior resistance at its September highs. The long-term trend looks bullish with the recent breakout past $80.00. However, NKE is scheduled to report earnings on September 25th.

Investors have a decision to make. Do you hold over the earnings report on Thursday, September 25th, after the closing bell, and risk NKE disappointing the street and shares gapping down on Friday morning? Or do you hold on and see what happens? The defensive trade would be to exit before the announcement. We have not decided yet but I would not launch new positions at this time.

We are moving the stop loss up to $79.85.

Earlier Comments: September 4, 2014:
Nike made headlines earlier this week when there was a bit of a bidding war for NBA star Kevin Durant. Durant's endorsement contract with NKE was coming to an end and rival Under Armour (UA) was trying to steal Durant away from NKE with a $200 million deal. In the end NKE outbid its rival and offered the 25-year old Durant a $300 million deal over the next ten years. Some of suggested that it could be worth a total of $350 million over the next 20 years. While I personally find numbers like these outrageous it's pocket change for NKE, which is sitting on $5.14 billion in cash and brings in a net profit of $2.7 billion a year on revenues of almost $28 billion annually.

Meanwhile the winds of fashion seem to be blowing in NKE's favor. There's a new trend being called "athleisure" where activewear and fashion intersect. Last year apparel sales fell -1%. Yet sales of activewear rose +7%. The activewear market now accounts for 16% of the U.S. market and has grown to almost $34 billion.

NKE's most recent earnings report was better than expected. Wall Street was looking for a profit of $0.75 on revenues of $7.34 billion. The company beat estimates with $0.78 on revenues of $7.42 billion. Gross margins improved 170 basis points to 45.6 percent. Management reported that they spent $912 million on buying back 12.3 million shares of stock last quarter as part of their $8 billion stock buyback program.

Technically shares of NKE have been stuck under major resistance at the $80.00 level since December 2013. Investors have been slowing buying the dips and now the stock looks poised to breakout past resistance. The point & figure chart is bullish and currently forecasting at $98 target.

Tonight I'm suggesting a trigger to buy calls at $80.50. Shares of NKE do not move super fast so we'll use the 2015 January calls.

- Suggested Positions -

Long 2015 Jan $85 call (NKE150117C85) entry $1.95*

09/20/14 new stop @ 79.85
09/20/14 FYI: NKE earnings are coming up on Sept. 25th.
09/16/14 new stop @ 79.40
09/05/14 triggered @ 80.50
Option Format: symbol-year-month-day-call-strike


Northrop Gruman - NOC - close: 133.66 change: +1.22

Stop Loss: 128.95
Target(s): To Be Determined
Current Option Gain/Loss: +53.8%
Average Daily Volume = 870 thousand
Entry on September 15 at $130.55
Listed on September 13, 2014
Time Frame: 8 to 12 weeks
New Positions: see below

09/20/14: Defense contractors continued to show strength on Friday and NOC hit another high and outpaced the market with a +0.9% gain. Shares are arguably short-term overbought and could see a dip soon.

I am not suggesting new positions at this time.

Tonight we're adjusting the stop loss to $128.95.

Earlier Comments: September 13, 2014:
One might have assumed that when Washington politics cut $500 billion from the U.S. defense budget over the 2012-2021 time frame it would have been bearish for defense sector stocks. Yet the group has been an outperformer in the stock market and delivered amazing gains last year. The defense-related juggernauts like NOC continue to perform well in 2014.

According to their company website, "Northrop Grumman is a leading global security company providing innovative systems, products and solutions in unmanned systems, cyber, C4ISR, and logistics and modernization to government and commercial customers worldwide." What does that mean? It means NOC makes bombers, unmanned drones, cyber security solutions, and logistics. If you're curious, C4ISR stands for command, control, communications, computers, intelligence, surveillance, and reconnaissance.

The fact that the world seems to be growing more dangerous, not less dangerous, should be a bullish undercurrent that lifts the defense sector. NOC should benefit because the American public does not have the stomach for another war. That means the U.S. will use more and more unmanned technology like NOC's drones.

The company has been performing well this year and NOC has raised guidance the last three quarters in a row. NOC's most recent earnings report was July 23rd. Wall Street was looking for a profit of $2.22 a share on revenues of $5.97 billion. NOC delivered $2.37 a share with revenues hitting $6.04 billion. Management then raised their EPS guidance and revenue guidance for 2014. NOC's backlog is currently at $35.6 billion.

Technically shares have a bullish trend of higher lows that just recently blossomed into a breakout to new all-time highs. NOC is testing the $130.00 level. At the moment the point & figure chart is bullish with a $158.00 target.

Tonight we're suggesting a trigger to buy calls at $130.55.

- Suggested Positions -

Long NOV $135 call (NOC141122C135) entry $1.82*

09/20/14 new stop @ 128.95
09/15/14 triggered @ 130.55
*option entry price is an estimate since the option did not trade at the time our play was opened.
Option Format: symbol-year-month-day-call-strike


Splunk, Inc. - SPLK - close: 56.21 change: -0.04

Stop Loss: 53.95
Target(s): To Be Determined
Current Option Gain/Loss: -27.0%
Average Daily Volume = 4.3 million
Entry on September 17 at $57.25
Listed on September 13, 2014
Time Frame: 8 to 12 weeks
New Positions: see below

09/20/14: Traders bought the dip in SPLK around lunchtime on Friday. Shares were accelerating higher in the last hour of trading. Yet I am still not suggesting new positions at current levels.

Earlier Comments: September 13, 2014:
Based in San Francisco, SPLK is cashing in on corporations' desire to analyze the massive amounts of "big data" out there. The last several months have been a bumpy ride for SPLI shareholders. If you recall back in March this year all the big growth and momentum stocks were hit hard with widespread selling. The correction in SPLK lasted longer than the broader market. Shares were cut in half with a drop from $93 to $40 by its June lows. Now shares have started to recover, up nearly 50% from its 2014 lows.

Who is SPLK? According to the company website, "Splunk was founded to pursue a disruptive new vision: make machine data accessible, usable and valuable to everyone. Machine data is one of the fastest growing and most pervasive segments of 'big data'—generated by websites, applications, servers, networks, mobile devices and all the sensors and RFID assets that produce data every second of every day. By monitoring and analyzing everything from customer clickstreams and transactions to network activity and call records—and more—Splunk turns machine data into valuable insights no matter what business you're in. It's what we call Operational Intelligence. Since first shipping its software in 2006, Splunk now has over 7,900 customers in 100 countries."

Earnings have been improving. Their earnings report in May saw SPLK beat estimates on both the top and bottom line. SPLK management guided higher for the second quarter. They did it again in their latest earnings report. The company added more than 500 new customers in the latest quarter. SPLK reported earnings on August 28th. Wall Street expected a loss of $0.02 a share on revenues of $93.82 million. SPLK delivered a profit of $0.01 a share with revenues soaring +51.7% to $101.5 million. Management then raised their guidance for the third quarter and fiscal year 2015.

The stock soared following its late August earnings news with a rally from $45 to $60 in a couple of days. Since then SPLK has been digesting its gains and consolidating sideways just below resistance near $60.00 and its simple 300-dma. The big reversal higher has created a buy signal on the point & figure chart that is forecasting a long-term $99.00 target.

This stock can be volatile so I do consider it a higher-risk, more aggressive trade. The high last week was $61.36. We are suggesting a trigger to buy calls at $61.55. More conservative investors may want to wait for shares of SPLK to close above potential technical resistance at its simple 200-dma (currently at $62.38) before initiating bullish positions.

*smaller positions, higher risk* Suggested Positions -

Long NOV $60 call (SPLK141122C60) entry $4.25*

09/17/14 triggered @ 57.25
*option entry price is an estimate since the option did not trade at the time our play was opened.
09/15/14 Strategy update: Change the entry point trigger from $61.55 to $57.25 and change the stop loss from $57.90 to $53.95
Adjust the strike price from Nov. $65 to Nov $60 call
Option Format: symbol-year-month-day-call-strike


Union Pacific Corp. - UNP - close: 109.36 change: -0.04

Stop Loss: 106.90
Target(s): To Be Determined
Current Option Gain/Loss: +14.8%
Average Daily Volume = 2.5 million
Entry on September 17 at $108.25
Listed on September 16, 2014
Time Frame: 8 to 12 weeks
New Positions: see below

09/20/14: UNP delivered another quiet session on Friday. I suspect we could see this stock retest what should be support near $108.00 soon. Wait for the dip before launching new positions.

I am raising the stop loss to $106.90.

Earlier Comments: September 16, 2014:
If you believe the U.S. economy is getting better then transports should perform well. Dow Theory suggests we can't have a significant rally without the transports. Thus far the group has shown leadership this year with the Dow Jones Transportation average up +15.1% in 2014. The railroads have been a strong part of that leadership.

UNP is one of the biggest. The company has been around for 150 plus years. They have over 46,000 employees, more than 8,200 locomotives, and pull nine million carloads a year.

According to the company website, "Union Pacific operates North America's premier railroad franchise, covering 23 states in the western two-thirds of the United States. Union Pacific serves many of the fastest-growing U.S. population centers, operates from all major West Coast and Gulf Coast ports to eastern gateways, connects with Canada's rail systems and is the only railroad serving all six major Mexico gateways. Union Pacific provides value to its roughly 10,000 customers by delivering products in a safe, reliable, fuel-efficient and environmentally responsible manner."

Believe it or not but the shale gas and shale oil energy boom in the U.S. has played a part in the railroad strength. U.S. energy production has soared with the Energy Information Administration reporting U.S. crude oil production at 8.5 million barrels a day in June. That's the highest production since July 1986. A lot of that crude oil gets moved by train.

Back in 2008 only 9,500 carloads a year were crude oil. Today that has surged to over 407,000 railcars of crude oil a year.

The railroad group continues to see strong traffic in 2014. The upcoming harvest will also put more demand on the railroads. American farmers are looking at a record-breaking crop this year.

Currently shares of UNP Have been consolidating sideways at all-time highs just under the $108.00 level. Tonight we're suggesting a trigger to buy calls at $108.25.

- Suggested Positions -

Long NOV $110 call (UNP141122C110) entry $2.15*

09/20/14 new stop @ 106.90
09/17/14 triggered @ 108.35, gap higher. Trigger was $108.25
*option entry price is an estimate since the option did not trade at the time our play was opened.
Option Format: symbol-year-month-day-call-strike


PUT Play Updates

Autoliv, Inc. - ALV - close: 97.55 change: -2.04

Stop Loss: 101.55
Target(s): To Be Determined
Current Option Gain/Loss: -15.1%
Average Daily Volume = 392 thousand
Entry on September 16 at $98.45
Listed on September 15, 2014
Time Frame: 4 to 6 weeks
New Positions: see below

09/20/14: Shares of ALV failed near resistance at $100.00 for the third day in a row on Friday morning. However, this time the selling continued and ALV plunged to new relative lows with Friday's -2.0% decline. This move looks like a new bearish entry point to buy puts.

Earlier Comments: September 15, 2014:
The auto part makers have been a bright spot in the market over the past year and a half or so. It looks like the group is starting to diverge. Stocks like DLPH, TRW, and LEA still look relatively strong. Yet BWA and ALV have broken down.

Who is ALV? According to their website, "For over 60 years, Autoliv has focused on one very important issue: saving lives. Our innovative products save 30,000 lives every year and prevent 10 times as many injuries. We are first and foremost a safety technology company. In the world of automotive occupant safety, we were the first to introduce the two- and three-point seat belt system and airbags for front and side impacts. We were also the first to launch pyrotechnic belt pretensioners and pedestrian protection systems. We develop, manufacture and market airbags, seatbelts, steering wheels, passive safety electronics and active safety systems such as radar, night vision and camera vision systems. We also produce anti-whiplash systems, pedestrian protection systems and integrated child seats. Autoliv Inc. is the result of a merger in 1997 of the Swedish company Autoliv AB, and the U.S. company Morton ASP."

Earnings momentum may have peaked. The company's most recent earnings report back in July was a miss. Wall Street expected a profit of $1.55 a share but ALV only delivered $1.45 with profits falling -2% from a year ago. Revenues did come in above expectations at $2.38 billion. Yet the sell-off on earnings may have started the current correction in ALV stock.

Technically shares look bearish. ALV produced a double top with the peaks in June and July. The bullish breakout past resistance near $104 in early September proved to be a bull trap. Now ALV is breaking support at its simple 200-dma and its long-term bullish trend (see weekly chart below).

Tonight we're suggesting a trigger to buy puts at $98.45.

- Suggested Positions -

Long OCT $95 PUT (ALV141018P95) entry $1.65*

09/16/14 triggered @ 98.45
Option Format: symbol-year-month-day-call-strike


Chart Industries - GTLS - close: 62.38 change: -2.30

Stop Loss: 67.25
Target(s): To Be Determined
Current Option Gain/Loss: +36.0%
Average Daily Volume = 617 thousand
Entry on August 29 at $65.60
Listed on August 28, 2014
Time Frame: 8 to 12 weeks
New Positions: see below

09/20/14: Shares of GTLS also saw its down trend resume with a -3.5% plunge on Friday. I am adjusting our stop loss down to $67.25. More conservative investors may want to lower their stop loss even lower.

Earlier Comments: August 28, 2014:
If you have seen the 1986 movie Top Gun then you know that Tom Cruise's character "Maverick" and his RIO "Goose" fly through the jet wash of another aircraft and their plane enters a flat spin that Maverick is unable to pull out of. Spoiler - their plane crashes.

Both the stock price and the earnings results for GTLS appear to be in a flat spin that they cannot pull out of. According to the company website, "Chart Industries, Inc. is a leading independent global manufacturer of standard and custom engineered products and systems for a wide variety of cryogenic and gas processing applications. Our equipment is used in the production, storage, distribution and end-use of atmospheric and industrial gases as well as natural gas itself."

A growing portion of their business is natural gas. "Major equipment designed and manufactured by Chart is used in the liquefaction, distribution and storage of LNG, plus we also supply LNG fueling stations and vehicle fueling systems." Considering the huge surge of natural gas demand you might think GTLS business would be booming. Yet the company seems to be struggling.

Shares of GTLS delivered an amazing rally in 2013. That is until late October. GTLS reported earnings in late October 2013 that missed profits estimates, missed the revenue estimate and management lowered guidance. When GTLS reported earnings in February 2014 they missed estimates, missed the revenue number and lowered guidance. In April 2014 they missed estimates, missed the revenue number and lowered guidance. Are you seeing a trend here? Their latest earnings report was July 31st, 2014 and guess what? GTLS missed the EPS estimate, missed the revenue estimate, and lowered guidance.

Technically the oversold bounce from its August lows has completely reversed. Today is worth noting since GTLS has broken down to a new closing low for 2014. This trend will likely continue.

Today's intraday low was $65.70. I am suggesting a trigger to buy puts at $65.60.

- Suggested Positions -

Long OCT $65 PUT (GTLS141018P65) entry $2.50*

08/29/14 triggered @ 65.60
*option entry price is an estimate since the option did not trade at the time our play was opened.
Option Format: symbol-year-month-day-call-strike


Herbalife Ltd. - HLF - close: 44.83 change: -0.83

Stop Loss: 48.55
Target(s): To Be Determined
Current Option Gain/Loss: + 2.1%
Average Daily Volume = 1.5 million
Entry on September 09 at $47.90
Listed on September 08, 2014
Time Frame: 8 to 12 weeks
New Positions: see below

09/20/14: It looks like HLF's attempt at an oversold bounce is reversing at its 10-dma. Shares lost -1.8% on Friday.

We will adjust our stop loss to $48.55. More conservative traders may want to lower their stop more.

Earlier Comments: September 8, 2014:
HLF calls itself a nutrition company. Most see it as a multi-level marketing firm. Its detractors would call HLF a pyramid scheme.

According to the company's website, "Herbalife is a global nutrition company that has been changing people’s lives with great products since 1980. Our nutrition, weight-management, energy and fitness and personal care products are available exclusively to and through dedicated Independent Herbalife Members in more than 90 countries. We are committed to addressing the global obesity epidemic by offering high-quality products, one-on-one coaching with an Herbalife Member and a community that inspires customers to live a healthy, active life. The company has over 7,400 employees worldwide, and its shares are traded on the New York Stock Exchange (NYSE: HLF) with net sales of $4.8 billion in 2013."

HLF's biggest opponent is influential hedge fund manager Bill Ackman. Ackman's Pershing Square Capital Management has famously bet $1 billion that HLF is an illegal pyramid scheme and once the facts come to light the government will shut it down. Unfortunately for Bill this is a fight he has been waging since late 2012. It has definitely generated a roller coaster ride in HLF's stock price.

Back in July Ackman promised to deliver a death blow to HLF in an over hyped presentation. Unfortunately, Wall Street failed to see the smoking gun and shares of HLF surged about 25% in one day. Yet there hasn't been any follow through. In fact shares of HLF have reversed and are trading near their 2014 lows.

The latest earnings report did not help. HLF reported earnings in late July and missed both the top and bottom line estimates. Management lowered their 2014 guidance. The company seems to be having trouble retaining their independent salesmen. At the same time there is a growing scrutiny of MLMs overseas, especially in big markets like China and India.

The stock is hovering above support near $48.00. A breakdown would look very bearish for HLF. The Point & Figure chart is already bearish and forecasting a $28.00 target. A drop under $48.00 would generate a new triple-bottom breakdown sell signal on the P&F chart.

I do want to caution investors that this should be considered a more aggressive, higher-risk trade due to the high amount of short interest. The most recent data listed short interest at 44% of the 60.0 million share float. I suggest limiting your position size to reduce risk.

(small positions) Suggested Positions -

Long Oct $45 PUT (HLF141018P45) entry $2.37

09/09/14 triggered @ $47.90
Option Format: symbol-year-month-day-call-strike


iShares Russell 2000 ETF - IWM - close: 113.97 change: -1.46

Stop Loss: 118.15
Target(s): To Be Determined
Current Option Gain/Loss: - 2.2%
Average Daily Volume = 29.0 million
Entry on September 10 at $114.85
Listed on September 08, 2014
Time Frame: 8 to 12 weeks
New Positions: see below

09/20/14: The IWM underperformed the major indices with a -1.26% decline on Friday. This loss has erased the previous two and a half days worth of gains. Traders may want to start adjusting their stop loss lower.

Earlier Comments: September 9, 2014:
The S&P 500 made it 14 days in a row without a move of more than 0.5% on a closing basis. Jonathan Krinsky at MKM Partners noted this occurrence yesterday. Krinsky said the last time we saw a streak this long was 1995. To find a streak longer than 14 days you have to go back to 1969, which saw a run of 20 days in a row. Today would have been the 15th day but stocks started to move and the direction was down. Small cap stocks were leading the way with the Russell 2000 falling -1.1% versus the -0.6% drop in the S&P 500.

Market watchers were blaming the rising dollar and new fears that the Federal Reserve might raise rates sooner than expected. There is speculation that the Fed might drop its "considerable time" guidance for low rates in its policy statement at the Fed meeting scheduled for next week.

Whatever the reason small caps look vulnerable and underperformed on above average volume today. We want to hedge our bullish bets with a put position on the IWM just in case the market does start to correct lower. Investors might be growing nervous about the 9/11 anniversary on Thursday. You could call this put a little 9/11 market insurance.

Tonight we are suggesting a trigger to buy puts at $114.85.

- Suggested Positions -

Long OCT $115 PUT (IWM141018P115) entry $2.70

09/10/14 triggered @ 114.85
Option Format: symbol-year-month-day-call-strike


Las Vegas Sands - LVS - close: 62.33 change: -1.62

Stop Loss: 64.65
Target(s): To Be Determined
Current Option Gain/Loss: +123.3%
Average Daily Volume = 4.6 million
Entry on August 27 at $67.40
Listed on August 26, 2014
Time Frame: 8 to 12 weeks
New Positions: see below

09/20/14: It would appear that the oversold bounce in LVS has just failed near technical resistance at its 20-dma. While this looks like good news for the bears I am not suggesting new positions.

Earlier Comments: August 26, 2014:
The high-speed growth in the world's biggest gambling hub is slowing down. Investors are taking notice. It used to be that when the world wanted to gamble the came to Las Vegas. Today the biggest gambling center in the world is Macau, a city in southern China.

LVS describes itself as "the world's leading developer and operator of Integrated Resorts. Our collection of Integrated Resorts in Asia and the United States feature state-of-the-art convention and exhibition facilities, premium accommodations, world-class gaming and entertainment, destination retail and dining including celebrity chef restaurants, and many other amenities." LVS has properties in Vegas, Pennsylvania, Singapore, and Macau.

Macau has been the major focus for casino companies the last few years. The coastal strip of Macau is the only place in China where gambling is legal. Forbes described Macau as "Vegas on steroids." Macau overtook Vegas as the world's biggest gambling center back in 2006 with Chinese tourists accounting for nearly 66% of its traffic.

After years of booming growth in Macau the area is facing a few hurdles. One of them is rising wage costs. Current laws force casino operators to hire locals. This has driven unemployment in Macau down to 1.7%. Employees are unhappy. They make less than half that their counterparts in Vegas make. There has been a number of demonstrations as casino workers demand higher wages. There is currently the threat of a labor strike on August 28th this year.

Macau is also suffering from an economic slowdown in China. The country has been slowing grinding down for years. China is still expected to grow more than +7% this year but that's a multi-year low. Another issue has been China's crackdown on corruption this year. This new pressure from Beijing has thrown a wet blanket on VIP traffic to Macau. Yet another challenge for Macau is growing competition from foreign destinations. Other countries are starting to add gambling resorts, which could pressure traffic to Macau.

Analysts have been adjusting their earnings and revenues estimates lower for the casino stocks. That's not surprising given the recent reports of slowing revenue numbers. Macau's gambling regulators said gross gaming revenues dropped -3.7% in June and -3.6% in July. Morgan Stanley just slashed their 2014 Macau estimates from +12% to +6%.

Technically shares of LVS are bearish. The stock has broken significant support near $70.00. The oversold bounce is starting to roll over under resistance. The point & figure chart is bearish and forecasting at $56.00 target.

Tonight we are suggesting a trigger to buy puts at $67.40.

- Suggested Positions -

Long OCT $65 PUT (LVS141018P65) entry $1.50*

09/06/14 new stop @ 64.65
09/02/14 new stop @ 68.25
08/27/14 triggered @ 67.40
*option entry price is an estimate since the option did not trade at the time our play was opened.
Option Format: symbol-year-month-day-call-strike


Pentair Plc - PNR - close: 67.90 change: +0.21

Stop Loss: 68.65
Target(s): To Be Determined
Current Option Gain/Loss: + 0.0%
Average Daily Volume = 2.0 million
Entry on August 26 at $68.90
Listed on August 23, 2014
Time Frame: 8 to 12 weeks
New Positions: see below

09/20/14: We are growing concerned about our PNR trade. This stock has spent about two weeks slowly consolidating sideways with a slightly bullish bias of higher lows. The $68.00 area is still short-term resistance but PNR looks ready to break higher.

More conservative traders may want to exit immediately! I am not suggesting new positions at this time.

Earlier Comments: August 23, 2014:
Pentair is considered part of the industrial goods sector. They manufacture industrial equipment across the globe. According to the company website, "Pentair is a global water, fluid, thermal management, and equipment protection partner with industry leading products, services, and solutions. Pentair reports the performance of its business within four reporting segments that focus on five primary verticals."

Long-term the stock has had a strong 2012 and 2013 performance. The rally appears to have peaked in 2014 when the market started pulling back in March this year. If you recall many of the momentum names and higher-growth stocks were hammered lower starting in March. PNR doesn't really qualify as a big momentum name or a high-growth name but shares have been unable to recover anyway. Shares have trended lower from the March peak, currently down -16% from its 2014 highs and down -10.6% year to date.

PNR's earnings results have not helped the stock's performance. Back in April they beat estimates but missed the revenue number and then guided lower for the second quarter. Their most recent earnings report was July 31st. Depending whose estimate you use PNR either reported in-line profits or managed to just beat by a penny. Revenues disappointed again. PNR missed the revenue estimate with a -2.7% decline from a year ago to $1.91 billion. Management lowered guidance again but they also announced they were exiting their struggling water transport business.

PNR collapsed on this late July earnings news and lowered guidance with a drop toward $64. Shares have spent three weeks with an oversold bounce that is just now starting to roll over under resistance. PNR appears to have resistance near $70-71 and its 50-dma and 300-dma (see daily chart below). The point & figure chart is bearish and currently forecasting at $61 target.

Tonight we are suggesting a trigger to buy puts at $68.90.

- Suggested Positions -

Long Nov $70 PUT (PNR141122P70) entry $3.60*

09/06/14 new stop @ 68.65
08/26/14 triggered @ 68.90
Option Format: symbol-year-month-day-call-strike