Option Investor

Daily Newsletter, Monday, 10/6/2014

Table of Contents

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

Market Wrap

Timid Bulls Retreat

by Thomas Hughes

Click here to email Thomas Hughes
The market opened strong today but timid buyers soon retreated to support.


The market opened strong today, following last week's bounce from support and surprisingly strong non farm payrolls numbers. The bounce that began last Thursday carried through into Friday, over the weekend and into the start of this week. Asian and European market were both higher this morning when I got up although Asian markets were stronger. Asian markets opened, moved higher and closed higher. European markets opened higher but fell throughout the day as did our own.

Futures trading was positive from the earliest part of the day here as well. The SPX was indicated about 5 points higher before 8:30 and then strengthened into the open and the other majors followed suit. At the bell market action was firmly positive with advancers leading decliners by more than 4:1. The market surged higher for the first 15 minutes and then hit resistance. Resistance held and soon the indices were moving lower, testing break even levels and lower. By lunchtime the indices were in the red across the board.

Market Statistics

Aside from last week's positive data there just wasn't much to hold the market up today. There was very little news over the weekend; Geopolitical concerns did not erupt, there was no official economic data, there was very little earnings news and very little business news. Once the initial pop of buyers petered out the market just sank back to break even and lower. Once early support was broken the indices fell further and into the red at which time the Dow Jones Industrials were down as much as 80 points. Afternoon trading remained mixed but the indices were able to regain most of the losses before the close.

Today's action was light and without real direction. There were some bulls eager to get into the market following last week's data but I think most are waiting for the FOMC minutes and Alcoa on Wednesday.

Economic Calendar

The Economy

There was no economic data today. Last week's NFP was enough to keep people talking but surprisingly did not get a lot of mention in the news. We did of course get Moody's weekly Survey Of Business Confidence presented by Mark Zandi. This week's report is unchanged from previous weeks except in that it may be even more positive. Mr. Zandi begins by saying that business confidence is “rock solid”. This is of course a highly subjective term but nonetheless conveys his interpretation that business confidence is strong. According to his summary business sentiment is near record highs in the US, layoffs are notably low, hiring intentions are high and outlook into next year is positive. South American and Europe are less optimistic.

There is not a lot of economic data this week. Tuesday is consumer credit and JOLTS job openings. Consumer credit is expected to decline by 20%. Wednesday is the FOMC minutes, the biggest potential market mover of the week I think. Thursday is the weekly jobless claims and monthly whole sale inventories. Both are expected to rise mildly. Friday is the Treasury Budget and import/export prices.

The Oil Index

Oil traded in a volatile range today. Prices fell after opening near flat to last week's closing prices only to rise into the close. Rising supply levels are still in control although reported tensions between OPEC nations are creeping into the news. On one hand some OPEC nations want to curb supply to boost prices while others are seemingly opposed to such a move. The Saudis are central to this story. They cut output a month or so ago, on their own, and are now part of a group of Arab nations saying it will be months until that decision needs to be made. OPEC is scheduled to hold its final meeting of the year next month. WTI fell by nearly -1% in early trading but moderated to about -0.30% by mid day. Brent fell by more than -0.75%, narrowing the spread between the two, to trade around $91.75. After lunch and going into the close of the US session WTI climbed into positive territory gaining about 0.75% with a comparable gain in Brent Crude.

The Oil Index traded with as much conviction, first down, then up, then flat, creating the third doji candle in a row after testing support at 1,500. The indicators are weak and pointing to further testing of support in the near to short term. MACD momentum is convergent with the recent drop in prices, an indication of market strength, while stochastic remains oversold. The big oil companies report near the middle of the season and are scheduled at the end of October and into the first week of November.

The Gold Index

Gold bounced today after hitting long term lows below $1200 on Friday. The much better than expected Non Farm Payrolls number along with the ADP, Challenger and initial claims report pushed the price back down to levels where it was way back at the beginning of the year,around $1200, before Russia invaded the Crimea and began the flight to safety trade. Today's action added $15, taking gold back above $1200 and my target for possible long term support.

Now that gold prices are more or less back in line with the fundamental picture the current levels are potential levels for support. Of course, there is also the possibility that prices will break through but I think that the data, the Fed, the taper and higher interest rates could be priced in. Gold bounced from $1200 twice in the last 18 months and could do it again. The mover this week in my view will be Fed the minutes on Wednesday.

5 Year Spot Gold:Kitco

The Gold Index also bounced today, moving close to 2% higher and back above $80. Today's action created a Harami candle pattern with last Friday's long black candle; this pattern is one that can sometimes mean reversal. The index has been moving down at a rapid pace over the past month and is now trading at new long term lows. It is extended from the short term moving average and in position for a snap back. The index is divergent from MACD, a divergence that has persisted the entire move and one that I have noted time and again. At the same time stochastic is extremely oversold, flat-lining across the bottom of the range for three weeks, leaving the index ripe for buying. By no means am I saying this is a bottom just pointing out a highly speculative possibility. The indicators are weak and could remain weak, especially if gold prices remain low and hopes of future gold prices remain low. If a bounce were to ensue it would find resistance just above the current level at the Jan '14 low and then at $85, and in the range from $85 to $90 in the near to short term. My caveat is of course that the gold index is tied very tightly to gold prices, if gold prices fall again the index will surely fall as well.

In The News, Story Stocks and Earnings

The big story of the day was the split of Hewlett Packard into two smaller companies. Relatively small that is, the two new companies will both still have a market cap over $30 billion. The move however, is another one not seen coming and a surprise to the market. CEO Meg Whitman has said time and again they were committed to the 5 year plan and not looking to split. Today she said the split was only possible because of the improvements and current strength of the business. The split is scheduled to be complete by the end of next year. The market seems to think it is a good idea because the stock moved up by 5% on more than 5 times average daily volume. It is trading just below long term support with earnings scheduled 11/25.

There were reports this morning that FaceBook had created its own payments app. The app is supposedly for the mobile version and would, I guess, be similar to Apple's Pay. Upon investigation the source is very dubious and a possible set up. Some hacker, using a jailbrake iPhone, somehow came up on some pictures while accessing some other information on Facebook and then blogged it. The story was then picked up by MarketWatch and others. In any event the stock was unmoved by the news and traded near flat to last weeks close.

Hilton International announced today the sale of the landmark Waldorf-Astoria hotel. The deal includes them operating the property for next century but moves ownership to a Chinese Insurance company. The hotel was valued at nearly $2 billion dollars. Shares of Hilton fell in today's session, dropping -0.45% from the short term moving average. The stock has been trending sideways all year and looks like it is set to test support near the mid point of the range at $24.

The Indices

The indices moved higher at the open but could not hold the gains. Despite the NFP the market is still playing the waiting game, apparently. Today's action created a variety of different sized candles among the indices but all basically traded between long term support and near term resistance following last weeks long term trend/support bounce. Losses ranged from -0.10% down to -1.15% with the Dow Transports leading the losses. The transports fell from resistance at 8,500, the July all-time high, breaking the short term moving average but remaining above the long term trend line. The indicators remain weak but are beginning to rollover. The MACD peak is in decline and stochastic is giving the early trend following signal. It looks like the index is finding support and beginning to move in line with the trend.

The NASDAQ Composite was runner up, losing -0.47%. The tech heavy index fell from resistance, also consistent with the July highs, breaking the short term 30 day moving average. While below near term resistance, the index is still above long term support with about 60 points between today's close and that support. The indicators are bearish and convergent with a test of support but also indicative of the underlying trend, MACD has peaked and stochastic has fired the early trend following signal. Caution is still due as we await more concrete signs of direction but it still looks like the long term trend is intact.

The S&P 500 fell a more modest -0.16% in today's action. The broad market shed only 3 points after trading in a range of nearly 20 points. The index is trapped between near term support and resistance, above the long term trend line, in a range coincident with the congestion band of July. The indicators are bearish but like the others, in line with a trend following bounce. MACD is peaking and stochastic is giving the early signal. There are reasons for caution but with earnings eve upon us I see no reason to doubt the bounce at this time.

The Dow Jones Industrial Average lost the least today. The blue chips fell only a tenth. Despite the small loss the index traded in a large range, like the others. Today's action had the index up by 90 and down by 80 at different times of the day. In the end buyers and sellers balanced out to create a doji just below resistance consistent with the July high, no surprise there. The indicators are likewise bearish in the near term and consistent with support in the long term suggesting that the bounce is good but resistance is persistant. In the near term the index faces resistance at 16,900 and 17,000 but provided earnings aren't surprisingly negative this should fall.

Here we are once again on the brink of earnings season. The indices look set to move higher and I don't see any reason why they shouldn't. Geopolitical fear is still present but diminished and earnings growth is still expected. Present fears I see include several things. Ebola is a growing fear but still far from creating panic and global weakness is still present in Europe, Asia and the emerging market.

We are still strong. There are risks, and our partners aren't as strong as they could be but the US economy is firmly growing without them. Economic trends are up and based on last week's labor data maybe gaining strength into the end of the year. With that in mind third quarter earnings could easily beat expectations that have fallen from over 6.5% average earnings growth among S&P companies to down near 4.5%. Wednesday we'll get earnings from Alcoa and maybe a sign of how things are going to be this time around. As always, earnings are important but future out look is more important. Don't forget, Wednesday is also the release of FOMC minutes. FOMC minutes are released at 2PM, Alcoa reports after the bell.

Until then, remember the trend!

Thomas Hughes

New Option Plays

Buffett News Rally Fading

by James Brown

Click here to email James Brown


Lithia Motors Inc. - LAD - close: 81.86 change: -2.24

Stop Loss: 85.25
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 384 thousand
Entry on October -- at $---.--
Listed on October 06, 2014
Time Frame: 8 to 12 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
LAD is part of the services sector. They run one of the largest auto dealerships in the U.S. with 28 brands and over 100 stores. That was before their recent merger news.

Back in June shares of LAD soared on news they were buying DCH Auto Group USA in a deal valued near $360 million. Purchasing DCH will add 27 more locations including some on the East Coast. Earnings are expected to rise about $0.70 a share (a year).

Car sales in the U.S. have been soaring. Consumers have been buying cars at the fastest pace since 2006. So why have auto-related stocks rolled over? It could be multiple factors.

CarMax (KMX), the one of the largest dealer in the U.S. recently saw its stock crash on a disappointing earnings report. The company said they were seeing consumers hit by tougher financing standards, which was impacting sales. If banks are getting tougher on car loans it's going to impact the whole industry.

LAD has had pretty strong revenue growth but now it's starting to face tougher year over year comparisons.

The group did see a bounce last week on news that Warren Buffett's Berkshire Hathaway was getting into the car business. Berkshire is buying the Van Tuyl Group of auto dealers, which is the country's biggest privately owned dealership. Van Tuyl has 75 dealerships, so it's smaller than LAD. What made the auto dealer stocks rally was Buffett's comments that he sees long-term value in the industry and plans to buy more over time. Berkshire certainly has the money to buy someone like LAD (current market cap about $2 billion) but that doesn't mean it's an immediate acquisition target.

Shares of LAD were breaking key support near $75.00 and its 200-dma before the Buffett-inspire bounce. Now the rebound is failing under resistance near $85.00.

Tonight we're suggesting investors buy puts immediately on Tuesday morning with a stop at $85.25.

*Buy puts tomorrow morning*

- Suggested Positions -

Buy the NOV $80 PUT (LAD141122P80) current ask $3.90

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

Daily Chart:

In Play Updates and Reviews

An Ominous Performance

by James Brown

Click here to email James Brown

Editor's Note:

Lack of follow through on Friday's bounce does not bode well for the stock market.

FLS and OII hit our bearish entry triggers.

HOG was stopped out thanks to an upgrade this morning.

Current Portfolio:

CALL Play Updates

Centene Corp. - CNC - close: 80.64 change: -1.55

Stop Loss: 79.90
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 1.2 million
Entry on September -- at $---.--
Listed on September 29, 2014
Time Frame: 8 to 12 weeks
New Positions: see below

10/06/14: Our CNC candidate is not looking that healthy. Shares completely erased Friday's bounce with today's decline. If this stock closes under $80 we'll likely remove it as a candidate. Our suggested entry point is still at $84.05 for now.

Earlier Comments: September 29, 2014:
Managed healthcare companies are finally starting to reap the benefits of the Affordable Care Act. Shares of CNC have soared +40% in 2014 and ended today's session at another record high.

Who is CNC? According to a company press release, "Centene Corporation, a Fortune 500 company, is a leading multi-line healthcare enterprise that provides programs and services to government sponsored healthcare programs, focusing on under-insured and uninsured individuals. Many receive benefits provided under Medicaid, including the State Children's Health Insurance Program (CHIP), as well as Aged, Blind or Disabled (ABD), Foster Care and Long Term Care (LTC), in addition to other state-sponsored/hybrid programs, and Medicare (Special Needs Plans). The Company operates local health plans and offers a range of health insurance solutions. It also contracts with other healthcare and commercial organizations to provide specialty services including behavioral health, care management software, correctional systems healthcare, in-home health services, life and health management, managed vision, pharmacy benefits management, specialty pharmacy and telehealth services.

The Affordable Care Act could add up to seven million new healthcare clients to the system. That number is expected to surge to nearly 25 million new healthcare clients in the next decade.

At the same time there are 26 states expanding their Medicaid coverage. Right now companies like CNC are in the sweet spot as more and more states turn over their Medicaid patients over to managed-care firms like CNC. The IBD reports that CNC could see increased business from Texas, Michigan, South Carolina.

CNC has been consistently beating Wall Street's earnings estimates (at least the last four quarters). Their earnings report in April beat estimates on both the top and bottom line. They did it again in July with earnings and revenues coming above expectations. Management then raised their 2014 guidance. Since that report FBR Capital has raised their price target on shares of CNC to $90 and Oppenheimer has raised their price target to $93. The point & figure chart is even more bullish and forecasting a long-term $108 target.

We like the relative strength and the healthcare market trends certainly favor CNC. We're suggesting a trigger to buy calls at $84.05.

Trigger @ $84.05

- Suggested Positions -

Buy the NOV $85 call (CNC141122c85)

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

iShares Russell 2000 ETF - IWM - close: 108.71 change: -0.94

Stop Loss: 106.35
Target(s): To Be Determined
Current Option Gain/Loss: - 1.2%
Average Daily Volume = 36.8 million
Entry on October 02 at $108.35
Listed on October 01, 2014
Time Frame: 8 to 12 weeks
New Positions: see below

10/06/14: Uh-oh! IWM also erased Friday's bounce. This ETF appears to be reversing at short-term resistance near $110 and its simple 10-dma. That doesn't bode well for a bullish reversal. I'm not suggesting new positions at this time.

Earlier Comments: October 1, 2014:
Buy low, sell high. That's the traditional form of investing boiled down to its essence. The challenge can be the buy low part. Market pundits like to say buy when everyone else is selling. That was definitely the case today with the entire market in sell mode. All the major U.S. indices were down more than -1.3%. The only bright spot seemed to be utilities, which investors were using as a safe haven trade.

People were blaming a parade of negative headlines behind the market weakness. The day started off okay with a better than expected showing in the monthly ADP Employment change report came in at +213,000 new private-sector jobs in September. That was above estimates for +205K. Unfortunately the U.S. ISM manufacturing gauge dropped to 56.6 when economists were expecting 58.2. Germany's PMI slipped into negative territory (below 50.0) for the first time since June 2013. Then there were all the headlines about the first official case of the Ebola virus in the U.S. and how many people the infected person may have exposed before being quarantined in the hospital in Dallas. The market is made up of people and people tend to be irrational. A widespread outbreak of Ebola in the U.S. is extremely unlikely but it makes for great headlines on your TV screen.

The small cap index and ETF are in correction territory. IWM is only down -5.2% year to date but down -10% from its June closing high near $120. Make no mistake - the daily and weekly charts for the IWM look bearish. If this sell-off continues it would paint a very ugly technical picture. However, the IWM is short-term oversold and due for a bounce. If you were going to bet on a rebound then buying at support is the place to do it. That's why we are proposing tonight's trade.

I do consider this a more aggressive trade since normally when you try to catch a falling knife you get hurt. We're suggesting a trigger to buy calls on the IWM at $108.35 with a stop loss at $106.35.

- Suggested Positions -

Long DEC $110 call (IWM141220c110) entry $3.11

10/02/14 triggered @ 108.35
Option Format: symbol-year-month-day-call-strike

Cheniere Energy, Inc. - LNG - close: 76.55 change: -0.78

Stop Loss: 76.35
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 2.5 million
Entry on October -- at $---.--
Listed on October 01, 2014
Time Frame: 8 to 12 weeks
New Positions: Yes, see below

10/06/14: Traders did buy the dip in LNG midday but shares still underperformed the broader market with a -1.0% decline.

We are currently on the sidelines with a suggested entry point at $80.35.

Earlier Comments: October 1, 2014:
According to LNG's website, Cheniere Energy, Inc. is a Houston-based energy company primarily engaged in LNG-related businesses, and owns and operates the Sabine Pass LNG terminal and Creole Trail Pipeline in Louisiana. Cheniere is pursuing related business opportunities both upstream and downstream of the Sabine Pass LNG terminal. Through its subsidiary, Cheniere Energy Partners, L.P., Cheniere is developing a liquefaction project at the Sabine Pass LNG terminal adjacent to the existing regasification facilities for up to six LNG trains, each of which will have a design production capacity of approximately 4.5 mtpa ("Sabine Pass Liquefaction Project"). Cheniere has also initiated a project to develop liquefaction facilities near Corpus Christi, Texas. The Corpus Christi Liquefaction Project is being designed and permitted for up to three LNG trains, with aggregate design production capacity of up to 13.5 mtpa of LNG and which would include three LNG storage tanks with capacity of approximately 10.1 Bcfe and two berths.

Why is Cheniere's ability to turn natural gas into liquefied natural gas (LNG) important? Natural gas has to be turned into LNG to be transported. The oil and natural gas boom in the United States, thanks to technology and hydraulic fracturing rigs that access tight oil in shale rock formations, has generated a huge supply. Right now the price of natural gas in the U.S. is less than $5.00 per million British thermal units (BTUs) or mmbtu. In Europe the cost per mmbtu is over $10.00 and in Japan the cost is almost $16 per mmbtu. There is a huge opportunity if producers can export natural gas to these markets. Unfortunately, building an LNG terminal that can export natural gas is a massive undertaking. It takes years to build them and there is a very long permit process from the government. Cheniere is quickly becoming the major player in this space in the U.S.

Cheniere recently moved one step closer to a FERC approval on the Corpus Christi LNG facility. The Federal Energy Regulatory Commission draft review said the project will result in the permanent loss of more than 25 acres of wetlands, but measures Cheniere plans to take will minimize any further disturbance. FERC will take public comments until August 4th and then issue a final review by Oct 8th.

They are building the largest LNG facility in the U.S. and it takes time. They are building six trains with annual production of 4.5 million tons per annum each (MTPA). Trains 1&2 began in August 2012 and are 63% complete. First production is expected in late 2015. Trains 3&4 began construction in May 2013 and are 27% complete. First production is expected in late 2016, early 2017. Purchase orders for 7.7 MTPA have been received for trains 1&2 and another 8.3 MTPA for trains 3&4. Trains 5&6 are still in permit mode with 3.75 MTPA of purchase agreements already being approved to Free Trade Agreement (FTA) countries and the non FTA authorization is pending. Trains 1-4 already have that authorization.

The three trains to be constructed in Corpus Christi for 13.5 MTPA are nearing the end of the permit approval process. Full approvals are expected not later than January 6th 2015. Purchase agreements for 5.53 MTPA have already been signed and the DOE has approved 767 Bcf per year for export to FTA countries with the authorization for non FTA countries still pending.

You might be wondering, "what is an LNG train?" According to Cheinere, The LNG industry has adopted the analogy of a "train" meaning the series of processes and equipment units that individually remove elements from raw inlet natural gas that would otherwise plug or freeze the small passages in the downstream heat exchangers that in a cascade fashion reduces the temperature from ambient to -260 F. Each of these processes and equipment units are sequentially arranged, similar to cars of a railroad train.

A couple of months ago the House of representatives voted to fast track more LNG export projects, which if signed into law, should be beneficial for Cheniere's current projects under review.

Technically shares of LNG have been stair-stepping higher with a rally to new record highs and then a correction and then do it again. Investors have been consistently buying the pullbacks near LNG's rising 50-dma. Shares just tested their 50-dma again today and naturally bounced. We want to hop on board the LNG natural gas train if this rebound continues.

Tonight we're suggesting a trigger to buy calls at $80.35. We'll start this trade with a stop loss at $76.35.

Trigger @ $80.35

- Suggested Positions -

Buy the DEC $85 call (LNG141220c85)

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

Mallinckrodt Public Limited Co. - MNK - close: 93.29 change: +0.36

Stop Loss: 87.70
Target(s): To Be Determined
Current Option Gain/Loss: +26.6%
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

10/06/14: Bullish analyst comments on MNK this morning may have helped buoy the stock. Shares held up and managed to post another gain in spite of the market's widespread weakness.

If MNK does pullback the $90.00 level should be short-term support.

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*

10/04/14 new stop @ 87.70
09/25/14 new stop @ 86.45
09/22/14 new stop @ 85.65
09/20/14 new stop @ 84.65
09/17/14 triggered @ 87.25
Option Format: symbol-year-month-day-call-strike

PUT Play Updates

Flowserve Corp. - FLS - close: 68.18 change: -0.59

Stop Loss: 71.55
Target(s): To Be Determined
Current Option Gain/Loss: + 0.0%
Average Daily Volume = 813 thousand
Entry on October 06 at $68.45
Listed on October 04, 2014
Time Frame: 8 to 12 weeks
New Positions: see below

10/06/14: The weakness in FLS continued this morning and shares hit our suggested entry point at $68.45. This is a new 2014 low. I don't see any changes from the weekend newsletter's new play description below.

Earlier Comments: October 4, 2014:
FLS is part of the industrial goods sector. The company is headquartered in Texas and has grown to 16,000 employees in over 50 countries. The company makes pumps, valves, seals, and provides services to the power generation, oil & gas, chemicals, and general industries.

FLS' rally from its 2011 low peaked back in early 2014. A slowdown in the global economy is impacting sales. The last couple of quarters have seen FLS miss revenue estimates and report declining sales. Now after six months of lower highs shares of FLS has broken down from a huge consolidation pattern. Goldman Sachs may have seen this coming when they put a "sell" rating on the stock back in June.

FLS is currently down four weeks in a row and the last few days have seen the stock break down under support near $70.00. More importantly it has broken support at its long-term trend line of support dating back to its 2011 low.

FLS was also showing relative weakness on Friday. Instead of bouncing with the market shares underperformed with a -1.5% decline on almost double its average volume. The point & figure chart has turned bearish and is forecasting at $60 target.

Tonight we are suggesting a trigger to buy puts at $68.45.

- Suggested Positions -

Long NOV $70 PUT (FLS141122P70) entry $3.20

10/06/14 triggered @ 68.45
Option Format: symbol-year-month-day-call-strike

Lennox Intl. - LII - close: 76.80 change: -0.42

Stop Loss: 78.25
Target(s): To Be Determined
Current Option Gain/Loss: +12.8%
Average Daily Volume = 391 thousand
Entry on September 22 at $79.25
Listed on September 20, 2014
Time Frame: 8 to 12 weeks
New Positions: see below

10/06/14: It looks like the bounce in LII is failing at its simple 10-dma. I don't see any changes from my prior comments.

Earlier Comments: September 20, 2014:
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.

- Suggested Positions -

Long DEC $80 PUT (LII141220P80) entry $3.90

10/01/14 new stop @ 78.25
09/30/14 new stop @ 79.55
09/23/14 new stop @ 80.25
09/22/14 triggered @ 79.25
Option Format: symbol-year-month-day-call-strike

Oceaneering Intl. Inc. - OII - close: 62.63 change: +0.05

Stop Loss: 65.10
Target(s): To Be Determined
Current Option Gain/Loss: -22.2%
Average Daily Volume = 1.6 million
Entry on October 06 at $62.35
Listed on October 04, 2014
Time Frame: We will likely exit prior to earnings on Oct. 29th
New Positions: see below

10/06/14: Our new bearish play on OII is now open. The early morning bounce faded and shares were hitting new lows by lunchtime. Our suggested entry point was hit at $62.35. I would consider new positions now or you could wait for a new relative low under $62.25.

Earlier Comments: October 4, 2014:
The price of crude oil hits its 2014 peak in late June. The steady decline in crude oil has pressure nearly all of the energy-related stocks lower including oil services names. As a matter of fact the oil service names have fared even worse with the OSX oil service index down -9.4% for the year.

OII is underperforming its peers with a -20% decline this year. The company provides an array of oil services with hundreds of remotely operated vehicles (ROVs). A company press release describes OII as "a global oilfield provider of engineered services and products, primarily to the offshore oil and gas industry, with a focus on deepwater applications. Through the use of its applied technology expertise, Oceaneering also serves the defense, entertainment, and aerospace industries."

The weakness in oil is expected to get worse, which should keep the pressure on oil and oil service stocks like OII. Shares of OII recently broke support near $65.00. The oversold bounce has already rolled over and shares are hitting 18-month lows. The point & figure chart is bearish and forecasting at $47.00 target.

Friday's intraday low was $62.47. We're suggesting a trigger to buy puts at $62.35.

- Suggested Positions -

Long NOV $60 PUT (OII141122P60) entry $1.48

10/06/14 triggered @ 62.35
Option Format: symbol-year-month-day-call-strike

Pentair Plc - PNR - close: 65.34 change: +0.20

Stop Loss: 67.05
Target(s): To Be Determined
Current Option Gain/Loss: +41.6%
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

10/06/14: The bounce in PNR continued today but shares should rollover under resistance near $66.00.

I'm not suggesting new positions at this time. Earnings are coming up on October 21st.

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*

10/01/14 new stop @ 67.05
09/06/14 new stop @ 68.65
08/26/14 triggered @ 68.90
Option Format: symbol-year-month-day-call-strike

Starbucks Corp. - SBUX - close: 75.15 change: -0.75

Stop Loss: 76.51
Target(s): To Be Determined
Current Option Gain/Loss: -28.1%
Average Daily Volume = 3.6 million
Entry on September 23 at $74.25
Listed on September 22, 2014
Time Frame: 8 to 12 weeks
New Positions: see below

10/06/14: SBUX tried to rally this morning but shares failed near the top of its trading range. I don't see any changes from my prior comments.

Earlier Comments: September 22, 2014:
Summer is over and fall is officially here. That has many consumers thinking of hot coffee and seasonal fare like SBUX's pumpkin spice lattes. Unfortunately Wall Street doesn't appear too keen on SBUX, if you're looking at the share price action.

This company is in the services sector. They are a global power house as a specialty retailer of what some might consider overpriced coffee and sugary drinks with too many calories. After 30 years in business they have grown to more than 20,000 stores and over 180,000 full time employees.

The stock peaked in late 2013. It looked like the correction was over back in April this year and SBUX did rally from $68 to $79 by July. Yet the stock has been dead money the last several weeks and now it's starting to underperform the market.

That spike you see on the daily chart was a reaction to its Q2 earnings results. The recent breakdown under $76 is bearish and the oversold bounce just failed near this level. Today's intraday low was $74.33. We're suggesting a trigger to buy puts at $74.25.

- Suggested Positions -

Long NOV $72.50 PUT (SBUX141122P72.5) entry $1.60*

09/23/14 triggered @ 74.25
*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

Tupperware Brands Corp. - TUP - close: 69.92 change: -0.19

Stop Loss: 72.25
Target(s): To Be Determined
Current Option Gain/Loss: +23.5%
Average Daily Volume = 399 thousand
Entry on September 22 at $71.75
Listed on September 20, 2014
Time Frame: 8 to 12 weeks
New Positions: see below

10/06/14: TUP churned sideways on either side of the $70.00 level. I don't see any changes from my prior update.

Earlier Comments: September 20, 2014:
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.

- Suggested Positions -

Long 2015 Jan $70 PUT (TUP150117P70) entry $2.59

09/23/14 new stop @ 72.25
09/22/14 new stop @ 72.80
09/22/14 triggered @ 71.75
Option Format: symbol-year-month-day-call-strike

WESCO Intl. - WCC - close: 79.04 change: +0.61

Stop Loss: 80.55
Target(s): To Be Determined
Current Option Gain/Loss: -33.3%
Average Daily Volume = 306 thousand
Entry on October 01 at $77.75
Listed on September 30, 2014
Time Frame: 8 to 12 weeks
New Positions: see below

10/06/14: WCC's oversold bounce is now three days old. Shares managed to pierce short-term resistance at its 10-dma before paring its gains. A reversal from current levels can be used as a new entry point for bearish positions.

Earlier Comments: September 30, 2014:
WCC is part of the services sector. They distribute industrial equipment. Their website describes WCC as "WESCO Distribution is a leader in industrial supply with an extensive offering of electrical, data communications, general maintenance, repair, and operating (MRO) and electrical OEM products. We are more than just an electrical distributor; we are a company of procurement specialists, helping customers lower supply chain costs, increase efficiency through WESCO Value Creation and save energy with green and sustainability initiatives. Our network of branches delivers industrial supply products fast, and our vast catalog of supplier partners enables WESCO to be your one-stop shop for electrical and MRO products."

Unfortunately for shareholders the stock peaked back in January this year. WCC produced a lower high in June. After a two-month drop WCC bounced but the bounce failed early September under resistance near $86.00, resistance at its simple 200-dma and resistance at the 50% retracement of the decline.

This trade isn't just about the technical picture. WCC has missed Wall Street's earnings estimates every quarter this year starting with its quarterly report announced in January, then April, and most recently in July. When WCC reported its July results management also lowered their 2014 guidance.

We are not the only ones who think WCC is bearish. The most recent data listed short interest at 13% of the 44.1 million share float. The point & figure chart is bearish too and forecasting at $64.00 target.

Today's drop was fueled by strong volume and shares are poised to break down under its late July low. Tonight we are suggesting a trigger to buy puts at $77.75.

- Suggested Positions -

Long NOV $75 PUT (WCC141122P75) entry $1.95*

10/01/14 triggered @ 77.75
*option entry price is an estimate since the option did not trade at the time our play was opened.
Option Format: symbol-year-month-day-call-strike


Harley-Davidson, Inc. - HOG - close: 59.85 change: +0.46

Stop Loss: 60.05
Target(s): Exit when HOG hits $55.50
Current Option Gain/Loss: -21.0%
Average Daily Volume = 1.6 million
Entry on September 29 at $59.75
Listed on September 27, 2014
Time Frame: 8 to 12 weeks
New Positions: see below

10/06/14: A bullish analyst report out on HOG this morning and a new "outperform" rating helped shares of HOG rally. The stock actually gapped open higher at $60.62 before gains faded. Our suggested stop loss was $60.05 so the gap open closed our trade. Overall the technical picture on HOG remains bearish and the analyst report admitted that HOG is facing competition from the likes of Polaris (PII).

- Suggested Positions -

Long NOV $60 PUT (HOG141122P60) entry $2.33 exit $1.84 (-21.0%)

10/06/14 stopped out gap open at $60.62 (on an upgrade)
10/01/14 new stop @ 60.05
09/30/14 plan to exit puts when HOG hits $55.50
09/30/14 new stop @ 60.55
09/29/14 triggered @ $59.75
Option Format: symbol-year-month-day-call-strike