Option Investor

Daily Newsletter, Saturday, 10/11/2014

Table of Contents

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

Market Wrap

Estimate Recall

by Jim Brown

Click here to email Jim Brown

Those bullish analysts that were upgrading their S&P yearend estimates a month ago are probably wishing they could have their old estimates back.

Market Statistics

A sure sign of a market top is a flurry of previously bearish analysts suddenly upgrading their forecasts to higher and higher numbers. Add in the bullishness surrounding the irrationally exuberant Alibaba IPO and a market top was born.

Alibaba IPOed on September 19th and that was the exact market top with the S&P hitting 2,019 intraday. We speculated in these pages before that event that the bullishness surrounding the IPO was extreme and events like that tended to occur at market tops.

In the week just prior to the IPO multiple analysts upgraded their bearish S&P targets to bullish targets well over 2,000. Stifel Nicolaus went from 1,850 to 2,300, Wells Fargo from 1,850 to 2,100, S&P Capital from 1,985 to 2,100. The best call was Mr Belski at BMO Capital on Sept 9th when he affirmed his 1,900 estimate saying the bullish outlooks were overrated.

Obviously there are still 2.5 months left in 2014 and anything can happen but you have to think the majority of those analysts with recent bullish upgrades would love to have their old estimates back.

Shaded entries are recent upgrades.

The market is crashing for four reasons. The first is the need for some profit taking after the huge gains over the last two years. Second is a surge in earnings warnings. Third is the end of QE in three weeks. Fourth is the economic implosion in Europe with Mario Draghi talking a big game but then a no show when it comes time for him to bat.

Markets don't need a reason to correct. They operate on the herd concept. When the big guys start taking profits and restructuring their portfolios the herd sees the declines and a stampede begins. Sometimes there is an event that triggers the profit taking but once the snowball begins rolling down hill it is hard to stop.

Once that stampede begins to pick up speed every news headline adds more urgency to the selling. The correction becomes a self perpetuating event. Eventually somebody will either call a bottom OR we will get the much hoped for washout event on high volume where decliners are 10:1 over advancers and a capitulation event is formed.

We are not there yet. Everyone is pointing to the 200-day average on the S&P at 1,905 as the potential bottom. Unfortunately unless the news headlines improve it may only be a temporary pause.

Traders were trying to go home flat on Friday until S&P lowered its rating on France from stable to negative saying the economic outlook is weakening. They left the credit rating at AA but the negative rating means it could be lowered in the future. S&P said that government deficits will take up a larger portion of the country's GDP, which is only expected to grow at +2%. That is a downgrade from their prior forecast of 2.5%. When the news broke late Friday afternoon the selling accelerated into the close. The downgrade simply confirmed the negative economic headlines out of Europe that weighed on the markets all week.

China was starting to creep back into the headlines after a series of weaker than expected economic numbers. It is almost a certainty that they will be forced to lower their growth forecasts for 2015 if the weakness continues.

With Europe sinking fast, China worsening, the truce in Ukraine failing, the Persian Gulf in a war and western Africa consumed with Ebola there is little to really be bullish about. Q3 earnings are expected to grow about 6% but Q4 guidance is fading fast.

The only economic report on Friday was the Import and Export prices for September. Import prices fell for the third consecutive month with a -0.5% drop. Weakness in imported oil and gasoline prices were responsible for the majority of the decline. Ex-petroleum prices only declined -0.2%. The higher dollar is also weighing on import prices and this will force consumer prices lower in the coming months. Inflation will probably come in below the Fed's target and push their decision timeframe for rate hikes farther into 2015.

The economic calendar for next week is weighted towards the end of the week. Monday is a government holiday and there are no reports. Tuesday is also light but Wednesday and Thursday pick up the pace.

The most important reports are the Fed Beige Book on Wednesday and the Philly Fed Manufacturing Survey on Thursday.

One new split announcement this week with SYNT added to the list.

The story for next week is the beginning of the Q3 earnings cycle. This is a big week for financials with dozens reporting led by JPM, WFC, C, BAC, GS, AXP, PNC, COF, SCHW, BK, CMA, HBAN and MS. This is our best hope for a market rebound. If the financials beat the street and have positive guidance we should see the indexes recover.

Tech stocks are also prominent. INTC, EBAY, NFLX, GOOG, SNDK and IBM will report. After Friday's chip warnings by MHCP the sector was decimated. If Intel, IBM and Sandisk post positive results it could produce some dip buyers.

Microchip Technology (MCHP) warned that sales for Q3 would be in the range of $546 million compared to July 31st guidance of $560-$576 million. They blamed weakness in demand from China. September is normally a strong month overall and especially from China. This year the CEO said those sales in China did not appear. Since China is where the majority of electronic consumer goods are manufactured the decline in chip orders suggests a drop in the global demand for consumer goods.

MCHP did not just warn about its slowing sales. They issued a much stronger warning that the industry was moving into a correction. Here is the text from their press release.

Microchip often sees the turn of the industry ahead of others in the semiconductor industry. First, in contrast to many others in the industry, we report sales from distribution on a sell-through basis worldwide. We built a significant amount of inventory in the distribution channel in the September quarter. If, like many others in the industry, we recognized sales on a sell-in basis to our distributors, our sales would have been significantly higher for the September quarter. Second, Microchip does business with over 80,000 customers worldwide, most of whom are small and nimble and are able to adjust their demand in real time. We believe that another industry correction has begun and that this correction will be seen more broadly across the industry in the near future.”

Citigroup translated the warning like this. "In semiconductor speak, an inventory correction occurs whenever demand drops off for a moderate period of time and can occur during economic expansion or contraction. Inventory corrections typically last 2-3 quarters with a step-down in demand and reduced visibility. The economic impacts are lower sales and margins."

MCHP declined -12% to $40 but the impact of the warning was felt all across the sector. The Semiconductor Index ($SOX) fell -7% to levels not seen since April.

Chip stocks not related to China were also hit. High flyer Ambarella (AMBA) a major producer of video chips for things like the GoPro camera was knocked for a -13% loss even though their demand is very strong. This MCHP warning in a bearish market produced a flush reaction to everything chip related. When the smoke clears there will be plenty of bargains.

Bucking the market trend was Exact Sciences (EXAS) after Medicare said it would cover the Cologuard diagnostic test effective immediately. The test uses DNA from stool samples to spot potentially deadly tumors and growths. Medicare coverage is key since the majority of patients in need of the test are elderly and on Medicare. Colon cancer is the second leading cause of death in the USA with 50,000 expected this year.

Also in the biotech sector Gilead Sciences (GILD) said the FDA had approved its new Hep-C pill called Harvoni with a $94,500 price tag for a 12-week treatment to cure Hep-C. The pill combines the drug Sovaldi with another drug, Ledipasvir that eliminates the need for two older side-effect-laden treatments that needed to be taken along with Sovaldi. Hepatitis C is a viral disease that infects 3.2 million Americans and up to 100 million globally and leads to liver failure. If you don't take the drug you either die or have a liver transplant. Both of those outcomes are more expensive than the $94,500 price tag. Another treatment produced by Johnson & Johnson combines the drug Olysio with Sovaldi costs $130,000 for 12 weeks. Gilead is expected to sell $12 billion in Hep-C drugs in 2015 and that will go up in 2015. It is the highest first year sales ever for any drug. Shares of GILD declined slightly on price backlash and the weak market.

Darden Restaurants (DRI) found out what happens when they go against shareholder wishes. Activist investor Starboard Value won all 12 seats on the board in a shareholder vote. A board sweep is extremely rare especially when there were incumbents in the company recommended slate. However, there have been two other occasions recently with the ALCO board and the Morgan Hotel's board.

Darden operates Olive Garden, LongHorn Steakhouse and several other chains. The company said it was going to sell its Red Lobster chain last year and it produced an immediate shareholder backlash. Darden went ahead and quickly sold the Red Lobster chain at a bargain price despite the uproar from shareholders demanding they hold off on the sale until other alternatives were considered. The quick sale including thousands of prime real estate parcels caused a shareholder revolt that was completed when Starboard gained all 12 seats to replace the entire board. The Darden CEO that forced the sale of Red Lobster is clearly on his way out. The CEO of Starboard showed up at the shareholder meeting and introduced himself saying there would be a seamless transition in management. Starboard has an 8.8% stake in Darden. They are planning on spinning off the Capital Grille and Yard House chains.

Darden shares were slightly lower on the news but it was a bad market.

Earnings guidance has not been good. Since October 1st twice as many companies have given negative guidance (26) than positive guidance (13). In the same period 23 companies have guided in line with prior estimates. In the month of September there were 32 companies with positive guidance, 80 with inline guidance and 41 companies issued negative guidance. We are just now starting the real earnings parade and it will be interesting to see how many warn on Q4. The initial results have not been good.

October Guidance


There is definitely a lot to analyze this weekend. The return of volatility has been huge. Since the September 19th high the Dow has had 11 directional moves totaling 3,559 points. The total loss for that period has only been -805 points from the high. That is a -4.5% decline and hardly a significant correction. It is the back to back 200+ point moves that make it seem like a really ugly market.

Everybody is focused on the 200-day average on the S&P-500 but the Dow closed -48 points below its 200-day at 16,544. There was not even a blip in the direction when it passed the 200-day at 16,592. The Dow is not really sensitive to moving averages but it is still important to watch from a sentiment perspective.

The next support point on the Dow is 16,368. The Dow has gone negative for the year with a -0.2% decline.

The S&P crashed right at the close with $800 million in stocks for sale on the NYSE and it settled at 1,906 and the low for the day. That is a two month low and below the 1,909 low from August but above the 1,904 intraday low. The 200-day is 1,905 and the convergence of all these numbers should at least slow the decline temporarily. However, it has been 685 days since the S&P tested the 200-day average. We were well overdue. The 125 day average has been good support since late 2012 and it was broken last week.

The advance-decline line on the S&P is in free fall and approaching the August and June lows. This is confirmation of an increasingly oversold condition.

Only 24% of the S&P-500 stocks are currently trading over their 50-day average. This is also approaching the 2014 lows at 23% and the November 2012 low at 21.8%. Over the last three years the S&P rarely remained this oversold for more than a few days at most. While it is entirely possible we could become more oversold we are testing the recent support levels on the A/D. Nothing prevents us from becoming significantly more oversold. In August 2011 when the debt ceiling battle was underway the number of stocks trading over their 50-day average fell to only 2 out of 500.

The Nasdaq suffered its first 2% back to back losses in 3 years to put it at a four month low. The tech index has given back all its gains for the year and is in danger of going negative for the year with only a +2.39% YTD gain as of Friday's close.

All the near term support levels have been broken and the next material support is 4,250 followed by 4,040. Only 16.4% of the stocks on the Nasdaq are above their 50-day average. That is the smallest amount since the August 2011 debt ceiling decline when only 5% were over their 50-day.

The Nasdaq is in crash mode. The warning from Microchip Technology on Friday that "We believe that another industry correction has begun and that this correction will be seen more broadly across the industry in the near future" crushed the tech sector and has the potential for further significant damage. It is one thing to say your sales were down but to say an industry correction has begun is a much more drastic warning. For this reason I believe the Nasdaq has more weakness ahead.

The Nasdaq A/D line is in free fall and at the lowest point in 2014.

The Russell 3000 broad market index ($RUA) has broken below the 200-day and rapidly approaching its last level of major support at 1,110. If this level breaks we could easily see a drop to 1,050 or below. This is the 3,000 largest stocks in the market so in reality it IS the market.

The Russell 2000 has imploded. It broke below multiple prior support levels and is now in uncharted wilderness. It is -12.8% below its 1,208 high in July. It has passed correction levels and appears headed for bear market levels at 966. There is no material support between Friday's close at 1,053 and that level other than possible round number support at 1,000. This is as bearish as it gets for the small caps. They continue to lead the broader market lower.

As I wrote this commentary I vacillated back and forth from expecting a rebound to expecting further declines. The indexes are very oversold on a relative perspective. With the Dow and S&P down -4.5% from their highs it is hard to say they are very oversold but relatively speaking they are on a short term basis. On a long term basis they could be just getting started. The Russell 2000 appears to be headed for bear market territory and there is no reason to believe the big cap indexes will not follow the Russell at least to correction territory.

Volume has been increasing over the last week from a low of 6.3 billion shares on Monday to a high of 9.1 billion on Friday. The A/D ratio was 6:1 decliners over advancers on Thursday but only a little over 3:1 on Friday. That would seem to suggest we are starting to see some dip buyers in the market. However, light buying on a Friday after a big drop could only be shorts covering positions before the weekend. There is also the matter of the $800 million in order on close orders to be sold on Friday. It is very unusual to have large block sell orders of that size on a Friday close. Where they afraid of the weekend events? I doubt it. I would bet they are afraid of the market overall and they were hoping to sell into the normal short covering that occurs on Friday afternoons.

For the market to close at multi month lows and on its lows for the week on a Friday is very bearish. There is nothing to prevent a rebound next week and we are oversold enough that any positive headline could cause a bounce. I believe that bounce would be sold.

The odds of the 200-day average on the S&P being broken next week are very high but that is not the end of the world. It would be positive for us to have a break below that 1,905 level by just a few points for a couple days and then rebound back over it. However, a major breakdown by 20 points or so would probably mean a retest of 1,850-1,865. We don't want to go there but we are not in control.

Keep those stop losses in place and be very picky about buying this dip. The end of every QE to this point has caused significant declines and this time we have Europe, China, Russia and the Middle East all in economic decline. The U.S. may still be the best house on the block but the other houses are on fire.

Random Thoughts

More than 200 years ago the United States declared war on Muslims after more than one million Americans and Europeans were captured by the Barbary states led by Tripoli and sold into slavery. Tripoli, the largest city in Libya, along with Algiers, Tunis and Morocco, commonly called the Barbary Coast, were the scourge of the Mediterranean. Capturing merchant ships and enslaving or ransoming their crews provided the Muslim rulers of those cities with wealth and naval power. The scourge was so bad that many nations and powers were forced to make annual payments to those countries to ensure the safety of their ships.

When the U.S. became independent they no longer fell under the protection of Spain or England. U.S. merchant ships immediately fell prey to the Muslim pirates and their crews held for ransom. In 1785 each of the four coastal states demanded $660,000 each as ransom and for protection against future attacks. In 1795 Algiers was paid over $1 million for the release of 115 American sailors. That amounted to one-sixth of the entire U.S. budget. They demanded annual tribute to prevent any future attacks.

The number of attacks and ship seizures were so bad that the U.S. was forced to form the U.S. Navy in 1798 to prevent future attacks and end the demand for tribute from the Muslim states.

In 1785 Thomas Jefferson and John Adams went to London to negotiate with Tripoli's envoy, Ambassador Sidi Haji Abdrahaman. When they asked the ambassador from the Barbary States why they made war on nations that had done them no injury and the ambassador replied:

It was written in their Koran, that all nations which had not acknowledged the Prophet were sinners, whom it was the right and duty of the faithful to plunder and enslave; and that every mussulman (Muslim) who was slain in this warfare was sure to go to paradise."

Jefferson and Adams returned to the U.S. and after conferring with congress decided to continue paying more than $1 million a year for the next 15 years for the safe passage of American ships and the return of American hostages. During this period the U.S. Navy rapidly increased its shipbuilding, training and provisioning with the intent of taking the war to the Muslims in the Barbary States. When Jefferson was inaugurated as president in 1801 the Pasha of Tripoli demanded an additional payment of $225,000 per year from the new administration. Jefferson refused and sent the new navy to wage war against the Barbary States.

One of the many battles around Tripoli in 1805 caused the phrase "From the shores of Tripoli" to be memorialized in the Marine Hymn. Marines aboard the navy ships wore heavy leather collars when they went into battle to prevent the Muslim pirates from beheading them with their scimitars when they boarded their ships. Thus the term "leathernecks" would be applied to the Marines.

The U.S. Navy along with the Swiss Navy blockaded Tripoli and eventually forced them to surrender in June 1805. After they withdrew from the region Algiers immediately began taking American ships and seamen hostage again under the same pretense given by the Tripoli Ambassador in 1785 and demanding annual tribute to the Muslim nation. The Navy went back to Algiers in 1815 and ended the practice with multiple naval victories that decimated the Algiers fleet.

Link to Description of the First Barbary War

I included this bit of history to show that the ISIS problem is not new. We have been fighting their religious intolerance for hundreds of years. It is a death by a thousand cuts. In America the Muslims have brought about women-only classes and swimming times at taxpayer-funded universities and public pools; that Christians, Jews, and Hindus have been banned from serving on juries where Muslim defendants are being judged, Piggy banks and Porky Pig tissue dispensers have been banned from workplaces because they offend Islamist sensibilities. Ice cream has been discontinued at certain Burger King locations because the picture on the wrapper looks similar to the Arabic script for Allah, public schools are pulling pork from their menus, and on and on. I firmly believe that every Muslim has the right to live in peace wherever he chooses. However, I believe everyone else has a right to live in peace as well and free from the constant onslaught of complaints.

America has freedom of religion. Every person is free to worship as they choose. This freedom should not be seen as the right to force your views on everyone else around you. This political correctness in every form has got to stop.

U.S. Southern Command warns about the potential for Ebola in Central and South America. The commander of the U.S. Southern Command warned last week that if the disease gets into Central American countries like Haiti, Guatemala, Honduras or El Salvador the results will be dramatic. They will not know what it is or how to combat it and they will not have the resources to prevent its spread.

Once it begins spreading and people are dying "they will run away from Ebola, or if they suspect they are infected, they will try to get into the United States for treatment" according to General John Kelly. "There will be a mass migration to the United States."

He warned about transnational criminal networks that smuggle people and those people can be carrying Ebola. Kelly spoke of visiting the border of Costa Rica and Nicaragua with U.S. embassy personnel. At that time there were groups of men "waiting in line to pass into Nicaragua and then on their way north" he recalled. "The embassy personnel asked who they were and they told him they were from Liberia and they had been in transit for about a week. They met up with the network in Trinidad and now they were on their way to the USA," illegally of course. Kelly said "those men could have made it to New York in another week and still be in the incubation period for Ebola."

This is an even bigger reason for securing the southern border. Not only are the border patrol agents catching ISIS travelers according to California Representative Duncan Hunter, a member of the House Armed Services Committee, but a mass migration of people fleeing Ebola will easily overwhelm existing border agents. Hunter said at least ten ISIS fighters have been apprehended by border patrols but that agents have been prohibited from discussing it publically. The Dept of Homeland Defense issued a statement on Thursday saying that claim was "categorically false" but Hunter is sticking by his claims.

The Ebola patient in Dallas died but it appears to be spreading to other cities. In Spain 7 more people turned themselves in to an Ebola isolation unit in Madrid after coming down with the symptoms to bring the total to 14. A French national has contracted the disease from travel in Africa. Brazil has its first case with a 47-year old man originally from Guinea.

Germany will need a miracle to avoid a recession after exports fell by 5.8% and the largest decline since January 2009. The German economy posted a -0.2% decline in GDP in Q2 and the odds are very good the Q3 numbers will be dramatically worse. Imports also declined by -1.3%. Germany is the strongest economy in the euro zone and this is a bad omen for the future of the EU.

IMF director Christine Lagarde warned that Europe is in danger of a Japan-style "lost decade" unless EU members pull together to fend off the threat of recession. The IMF said there was a 40% chance of an EU recession, the third since 2008.

Global shipping rates on the world's busiest route from Asia to Europe fell -10.2% to $738 per container. This is the fourth weekly drop and the lowest level since October 2013. The Baltic Dry Index of shipping rates declined to $963 and well below the $2250 high for the year. This is a period when holiday shipping should be in full swing but demand is very light.

China has its own epidemic of Dengue Fever, which is transmitted by mosquitoes. The unseasonably warm weather has pushed the mosquito population to five times the normal level. More than 27,200 people have been infected thanks to hot humid weather and the dense population. The disease thrives in the tropical mega cities and it may only be getting started with more than 1,000 new infections per day. This is the worst outbreak in more than two decades and it is spreading. Japan reported its first outbreak in 70 years with most people catching it at the popular Yoyogi Park in Tokyo.

According to Bloomberg and Dow Jones the S&P-500 companies are poised to spend $914 billion on share buybacks and dividends in 2014. That is roughly 95% of earnings. Money distributed to shareholders exceeded profits in Q1 and are poised to do it again in Q3. Share buybacks have doubled over the last decade while capital investments have shrunk. Eventually these companies are going to be forced to increase profits because you can only buyback so many shares to improve earnings per share.

The market rallied last Wednesday after the FOMC minutes contained the following statement. "a number of participants noted that economic growth over the medium term might be slower than they expected if foreign economic growth came in weaker than anticipated, structural productivity continued to increase only slowly, or the recovery in residential construction continued to lag.

Traders immediately thought that meant it would be a very long time before the Fed raised rates. There was even talk of QE4. By the next day with economic data coming out of Europe continuing to be negative, that Fed worry suddenly turned into fear of a European recession dragging the USA back into recession and stocks plunged. You can't have it both ways. Either the economy is improving and rates will rise or the economy is starting to weaken and stocks may crash.

The Defense Dept is going to request up to $40 billion a year to fight ISIS. This is after they spent $4-$6 trillion for the Iraq and Afghan wars. Currently the DoD is spending about $10 million a day but rapidly increasing. The Afghan war totals will continue to rise after Joe Biden's pledge to get out of Afghanistan "come hell or high water by 2014" died when President Obama signed a deal last week to leave troops in the country until "at least" 2024. The DoD has spent more than $100 billion more than expected in 2014 so far.

Tyrel Oates, an employee at Wells Fargo, emailed the CEO John Stumpf asking for a raise. He copied more than 200,000 other employees on the email. Tyrel said Wells Fargo should give every employee a $10,000 raise to show they care about their employees. In his email he said employees should not ask for a raise but demand the raise. Tyrel has been with WFC for 7 years and makes $15 an hour. As of Friday afternoon he was still employed.

For the number junkies out there here is a good article that explains all the bad economic news from around the world last week. Gloom Spreads Over Markets

The U.S. Forest Service is finalizing plans on requiring permits to take pictures on public lands. Permits would cost up to $1,500 even if you are only using your smartphone. Fines for taking a picture without a permit would be as high as $1,000. I am not kidding. Forest Service $1,500 Picture Permits

Mutual fund performance is going to be lousy for Q3. Expect a disappointment when you get your fund statements. Expect Disappointment

Kim Jong-un failed to show up for a key celebration last week and further triggered speculation he may no longer be in power. He failed to show up for the 69th anniversary of the founding of the Korean Workers Party. He was last seen in public on Sept 3rd. The government now says he injured his leg doing a military drill with his troops. That has the majority of reporters rolling on the floor laughing. Severely overweight, chain smoking, Kim, doing combat field exercises with the troops? Not hardly.

The State Dept upgraded their warning over a possible ISIS attack.

The Department of State remains concerned about the continued threat of terrorist attacks, demonstrations, and other violent actions against U.S. citizens and interests overseas. On September 22, 2014, the United States and regional partners commenced military action against the Islamic State of Iraq and the Levant (ISIL), a designated terrorist organization in Syria and Iraq. In response to the airstrikes, ISIL called on supporters to attack foreigners wherever they are. Authorities believe there is an increased likelihood of reprisal attacks against U.S., Western and coalition partner interests throughout the world, especially in the Middle East, North Africa, Europe, and Asia.

Extremists may elect to use conventional or non-conventional weapons, and target both official and private interests. Examples of such targets include high-profile sporting events, residential areas, business offices, hotels, clubs, restaurants, places of worship, schools, public areas, shopping malls, and other tourist destinations both in the United States and abroad where U.S. citizens gather in large numbers, including during holidays.

U.S. citizens are reminded of the potential for terrorists to attack public transportation systems and other tourist infrastructure. Extremists have targeted and attempted attacks on subway and rail systems, aviation, and maritime services. In the past, these types of attacks have occurred in cities such as Moscow, London, Madrid, Glasgow, and New York City.

Canadian authorities recently broke up plans to attack a crowded shopping mall. The terrorists had done walkthroughs and planned on how they were going to mow down shoppers on escalators and in the food courts.

I would plan my holiday shopping in the off hours if you have to go to a mall and try to do most of it online.

Only 74 shopping days until Christmas.

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

"There are no secrets to success. Don't waste your time looking for them. Success is the result of perfection, hard work, learning from failure, loyalty to those for whom you work, and persistence."

General Colin Powell


Index Wrap

Low Volatility/Complacency Reigned Until Bear Bit Hard

by Leigh Stevens

Click here to email Leigh Stevens

Panic selling and extreme volatility gripped the Market this past week and the VIX (21.2) and VXN (22.6) volatility indexes are now at levels previously seen at bottoms. The Russell 2000 (RUT) falling below its 200-day moving average in mid-Sept (9/19) has turned out to be a harbinger of the overall Market decline to come; RUT's 50-day average also crossed below the 200-day at the same time.

What a difference a week makes! I was last week mostly convinced that the major indices (not RUT!), holding at or near trendline supports, would lead to another rally. This view was, how can I say it, WRONG!

One wrinkle of the 'whippy' price action of the past week is that my usual best guage of oversold on the daily charts, the 13-day Relative Strength Index or RSI isn't yet showing a 'fully' oversold reading in some of the major indices. There was enough volatility on the upside to stave that off so far in the S&P (both) and the Dow but not in the Nasdaq Composite and the big cap Nas 100. On a weekly chart basis, an 8-week oversold reading (beside RUT) was reached in COMP. SPX and INDU are closing in on a 'fully' oversold condition in the RSI.

My shorter-term Indices outlook contrasted with my last month-end Trader's Corner technical review (9/30/14) of the very long-term trend via monthly index charts. Multiyear monthly charts made it harder to think that the relentless years-long major push higher in the Nasdaq wasn't going to result in a major pullback at some point, possibly soon, considering the continued move higher in COMP but on declining 'relative strength' as highlighted by the higher price trend in recent months, with the RSI not matching. 9/30 monthly COMP chart:

This past week, in a telling study of trader psychology, it wasn't until the bear had completely rampaged through Friday that my daily equities call to put volume ratio (CPRATIO) finally showed a SHARP increase in put volume and by inference a sharp increase in bearishness. Using another animal metaphor, this is closing the barn door after the horse is gone! And may suggest that the Market could be at or near a bottom. We'll see on that.

There's a possible retest coming up of chart support in the 1900-1905 area in the S&P 500 (SPX), the 850-845 in the S&P 100 (OEX), 16400 in the Dow 30 (INDU) and its early-August bottom.

In the Nasdaq Composite, next chart/retracement support looks like 4200 with major support in the 4000 area; in the big cap Nasdaq 100 (NDX), potential support now looks to come in at the early-August NDX lows in the 3850 area with support extending to 3800. The Russell 2000 chart finally may find some support/buying interest in the 1020-1000 area.(Friday Close: 1137).

Last week I thought it was 'cleaver' or savvy of options traders NOT to be overly bearish and big put buyers coming into this past week; high bearishness only finally showed up in my daily call to put volume ratio (CPRATIO) this past Friday. In retrospect us short-term trader types were not looking hard enough at the bigger picture of a potential global slowdown.

An important milestone moving average that is widely followed is the 200-day average and not just RUT has closed below it now: following suit with a Friday Close below this key average is INDU and COMP. SPX closed AT the 200-day; OEX and NDX closed the week above it, as seen on their charts.



Last week SPX looked like the Index could have been bottoming in the area of its up trendline. It looked like a V-bottom, but that didn't last long as renewed fears set in this past week. VIX volatility level at 21.2 is suggestive of a potential bottom. Stay tuned on that. Market has sure been spooked. Friday's decline stopped right AT the key 200-day moving average and this area will be watched for signs of buying interest in the coming week, especially by 'reversal Tuesday' I would think.

Resistance first comes in at the broken trendline at 1925 although not highlighted on the daily chart. I noted key chart resistance at 1970, then back at 2000.

Support is strongly suggested in the 1900-1905 area, then around 1882, representing a 2/3rds retracement of the advance from the March low into the September high at 2020. Lowermost support then highlighted at 1860.

Traders finally jumped into substantial put activity by week's end, pulling my 1-day CPRATIO down to the oversold-extreme bearishness area. RSI is almost at a 'fully' oversold level on a 13-day basis but only is not all the way there given intermittent rallies. 8-week RSI (not shown) is within a hair's breath of an 'oversold' reading.

This corrective pullback/reaction seems quite overdone, but so was the upside for some time. A bottom might take a while to form. Europe moves far slower to take investor-pacifying actions.


OEX knifed through key support at 880 with few buyers to stem the tide. The Index now looks like it would 'logically' re-test the early-August lows in the 850 area. We'll see if the bears will remain in the driver's seat into next week. Next support below the important 850 level comes in around 845-843.

A Close or two below the 200-day moving average would attract more selling potentially as even fundamentally oriented money managers do pay attention to this key investment-relative average and either see it as place to pick up some stock(s) OR, on a break of it, as a trigger to do more selling.

Resistance comes in at the 'breakdown' point at 860, then at 877-880. A Close or better, two such Closes, above 880 is needed to generate some feeling of confidence that the big cap S&P has regained some stability.

I thought last week that dips to 870 or lower would be well supported but the buyers stepped aside!! We'll see what happens if OEX gets to the prior lows and stops or breaks further. The sellers may let up some in that area or not. Stay tuned.


INDU broke under 16600 support and Closed below the key 200-day moving average. This is not a good omen to money managers. A bullish omen would be for it to rebound quickly as the Dow did the last time when it just went TO the 200-day.

Support is highlighted now at 16400, which is a key level, at the prior (early-August) lows. Next support, also key technically is the up trendline intersection of my latest and last version of INDU's up trendline which intersects currently in the 16230 area. 16000 is major support.

I didn't highlight this level, but initial resistance may come in at INDU's recent 'breakdown point' at 16650. Resistance points that are highlighted; first, at the key 17000 level, then at 17200.

The Dow is STILL not 'fully' oversold on a 13-day time frame but is also like SPX, within a hair's breath of being so based on an 8-week Relative Strength Index (not shown here). Being oversold AND holding at or around the 200-day moving average would help the Index stabilize. Absent that, more downside looks possible.


COMP is bearish in its pattern with the decisive break below 4400, which is now initial resistance. The Index also Closed below its 200-day moving average which is bearish; certainly a different pattern for the long-standing bullish trend! This shorter-term pattern should be viewed within the context of the Composite still being within a broad uptrend channel.

Key support in my estimation comes in at 4200, both as the intersection of the support/up trendline and a representing a Fibonacci 62% retracement of the March-September advance. If COMP starts trading below 4200, the chart begins looking increasingly bearish.

Resistance at noted is at 4400, then up at 4500 and the 50-day moving average.

Unlike some of the other major indices, COMP is now at a 'fully' oversold extreme on both a 13-day RSI reading (per my daily chart seen below) and on a 8-week basis per the weekly chart and not shown here. An 'oversold' condition simply means that the Index has a propensity to rally IF there is an absence of negative shocks; and of course, some bullish news would help!

Bearish sentiment finally took hold on Friday but traders are still not all that bearish per my read of them. A more substantial build up of bearishness may be needed to set the stage for a sustained rally.


NDX has held up the best until recently, as it resisted the decline due to willing buyers. They went away on Friday! Out to lunch, to the nearest bar, wherever!! The Index may hold at its up trendline, currently intersecting in the 3850 area. Next chart support looks like 3800. Fairly major support may be found in the 3700 area.

Meanwhile NDX is finally, the first time in a long time, at an oversold extreme on both a daily AND weekly chart basis. Moreover, as the S&P's VIX volatility index, NDX's VXN index, as seen at the bottom of the NDX price chart below, has climbed to levels previously associated with bottoms. Stay tuned on that effect!

I'll be watching the up trendline (3850) for potential support and below that, the 200-day moving average currently intersecting in the 3760 area. Not good for the bulls for the prime mover to have such momentum slippage that it can't hold this key average!


QQQ has a bearish pattern although still within its broad uptrend price channel as highlighted on my chart below. The down leg or sharp decline once 96 support gave way is just the latest bearish chart aspect showing panic type selling. Heavy volume came out on Friday with that break.

Now to be seen or not is what happens in the 94 area, if reached, at the Q's up trendline. I've highlight next support at 92, at the 200-day moving average. [92.9 bears watching as a potential support as it represents a 50% retracement of the March-September advance. 90.5 - 91.2 is another Fibonacci retracement area of interest and is seen on chart also.]

First resistance is now down to 96 with next resistance at 98, extending to 98.8.

Daily trading volume shot up on the last break and is so typical of this ETF as the break of key price points sets off a wave of concerted and panic selling. The On Balance Volume (OBV) line now longer looks anything but showing a bearish down trend.


So much for RUT's potential to rebound due to an oversold RSI extreme as I mused last week. That has worked when RUT was performing more consistently as the laggard WITHIN a bull market. Now, I don't what this bearish chart portends for the overall market; I don't see an bear market around the corner. Maybe there's something coming that can't be guessed at currently.

RUT's price channel has flipped to a bearish downtrend, going from right (high side) to left (low side). Technical/chart support may come in around 1025. Definite support in the 1000-982 zone shows up as potential support on longer-term charts (not shown here).

Resistance is highlighted at 1120, then 1140. Trendline resistance intersects in the 1169 area currently.

As I write in my initial bottom line comments above, the occasional rebounds on the way down have kept RUT from showing an RSI oversold extreme on a 13-day basis. Such an oversold extreme WILL be seen if you look at the Relative Strength Index 'applied' to a weekly chart (length = 8) at a 22 reading.

Note the downside acceleration when the 50-day moving average crossed below the 200-day.

Just as 'overbought' situation in a bull market trend may not lead to much of a correction/pullback for long periods, an oversold 'extreme' in a bear trend might not 'set up' a good sized rebound for a lengthily period.


New Option Plays

Watch the Transports

by James Brown

Click here to email James Brown


The Greenbrier Companies - GBX - close: 54.08 change: -2.32

Stop Loss: 49.65
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 711 thousand
Entry on October -- at $---.--
Listed on October 11, 2014
Time Frame: 3 to 6 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
GBX is in the services sector. The company manufacturers railroad freight cars and ocean-going barges. They also refurbish freight railroad cars. New rules by the White House on railroad tanker cars that carry crude oil should mean strong business for GBX as companies are forced to either buy new cars or refurbish old ones to meet the new requirements. The problem is that these rules have not been approved yet.

The White House has delayed the construction of the Keystone Pipeline for years and it is still in limbo. This has helped fuel a huge surge in oil transport by rail. The number of rail cars used to transport crude oil in the U.S. was 9,500 back in 2008. That number had soared to more than 415,000 rail carloads by 2013 and continues to climb.

Naturally it comes down to money. Oil firms paying to transport this oil want to delay these safety updates because it will be expensive. Yet the massive increase in oil transported by rail has led to a rash of train derailments with potentially deadly consequences. A couple of years ago there was a derailment in Canada and the oil inside ignited and wiped out a small town.

Believe it or not but train derailments seem to happen a lot more than you or I would think possible. Just last week a Canadian National Railway train derailed in Saskatchewan and two rail cars with petroleum distillate inside caught fire.

The new rules for rail car safety are coming. The question will be how tough will the new rules be and what time frame will the government make this happen. Recent comments suggesting the government might delay this process has sparked some serious profit taking in railcar makers like GBX. Combine that with the market's recent weakness and shares of GBX have collapsed. The stock is down -30% from its closing high near $77.50 in just the last four weeks.

We think the sell-off is way overdone. The profit taking in GBX stalled at its 200-dma on Friday. We suspect GBX might see one last spike into the $50.00-52.50 zone before bouncing. Tonight we are suggesting a trigger to buy calls at $52.50 with a stop at $49.65.

Make no mistake - this is an aggressive, higher-risk trade. Trying to catch the falling knife can be near impossible but with GBX near significant support this could be a great spot to speculate on a trading bottom.

Trigger @ $52.50 *higher-risk trade*

- Suggested Positions -

Buy the NOV $55 call (GBX141122C55) current ask $4.20

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

Daily Chart:

Weekly Chart:

iShares Transportation ETF - IYT - close: 140.90 change: -2.81

Stop Loss: 134.45
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 320 thousand
Entry on October -- at $---.--
Listed on October 11, 2014
Time Frame: 3 to 6 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
The IYT is an exchange traded fund (ETF) that tries to mimic the performance of the Dow Jones Transportation Average index.

Stocks have been sinking as investors worry about a global slowdown, especially in Europe. Yet the U.S. economy is still growing. Plunging oil prices should be great news for both business and consumers. Lower fuel costs means more money to spend elsewhere. Lower fuel prices also mean better margins for transportation companies.

The IYT has hit correction territory with a -10% pullback from its September highs about four weeks ago. When the market finally bounces the transports should lead the market higher thanks to the U.S. economy and low oil prices.

It looks like IYT's current drop could be near a bottom. Volume was almost three times the norm on Friday and shares settled near technical support at its simple 200-dma. We suspect the market will see another push lower before bouncing. That could see the IYT pierce the $140 level.

Tonight we're suggesting a trigger to buy calls at $138.75 with a stop loss at $134.45. This should be considered a higher-risk, more aggressive trade. You've heard the term "catching a falling knife" and that's what we're trying to do. You may want to wait for the IYT to pierce $140.00 and then buy the rebound back above this level as an alternative strategy.

Trigger @ $138.75 *Higher-risk, more aggressive trade*

- Suggested Positions -

Buy the NOV $143 call (IYT141122c143) current ask $4.10

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

Daily Chart:

In Play Updates and Reviews

Stocks End Week On A Sour Note

by James Brown

Click here to email James Brown

Editor's Note:

The U.S. market ended a volatile week on a down note. The selling intensified heading into the weekend.

MBLY and MNK hit our stop loss. We've adjusted the entry point on AMBA.

Prepare to exit LAD on Monday.

We have updated several stop losses tonight.

Current Portfolio:

CALL Play Updates

Ambarella, Inc. - AMBA - close: 36.42 change: -5.46

Stop Loss: $31.90
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 2.4 million
Entry on October -- at $---.--
Listed on October 08, 2014
Time Frame: 8 to 12 weeks
New Positions: Yes, see below

10/11/14: AMBA held up reasonably last week during the market's choppy action. At least that was the case until Friday. Shares of AMBA were crushed on Friday with a -13% drop on no news. There's no reason for this relative weakness and we think the sell-off is overdone.

AMBA is nearing what should be support at $35.00 and its simple 50-dma near $35.65. We suspect AMBA will test $35.00 before bouncing. Tonight we're adjusting our entry point strategy. Move the trigger to buy calls down to $35.25 and we'll move the stop loss to $31.90. Adjust the option strike down to the November $40 call.

Earlier Comments: October 8, 2014:
AMBA is in the technology sector. They're considered part of the semiconductor and semiconductor equipment makers. The company was founded in 2004 and went public in October 2012 at $6.00 a share. That price was significantly below where AMBA was expected to price in the $9-11 range.

The company has grown from making broadcast-class encoders to making consumer and sports cameras, security cameras, and now automotive cameras. Their high-definition chips are being integrated into security IP cameras and wearable cameras. AMBA is also capturing part of a new market - cameras on consumer-level remote control drones.

The last two plus years have seen a strong performance in AMBA with the stock up +633% from its IPO price. AMBA has GoPro, Inc. (GPRO) to thank for part of that rally. GPRO came to market in June this year and the stock has been in rally mode since mid August with a rally in GPRO from less than $40 to $90 a share. AMBA happens to make the HD camera sensors in many of GPRO's products. As GPRO rallies it could be giving AMBA a boost and GPRO expects record sales this holiday season.

It's also worth noting that AMBA's rally has been helped by consistent earnings growth. The company has beat Wall Street's estimates on both the top and bottom line for the last four quarters in a row. Their most recent earnings report in September saw AMBA's management raise their revenue guidance.

Shorts are getting killed. As the rally continues AMBA could see more short covering. The most recent data listed short interest at 21.7% of the small 28.0 million share float.

We think the bullish momentum continues. Tonight we're suggesting a trigger to buy calls at $44.65.

Trigger @ $35.25

- Suggested Positions -

Buy the NOV $40 call (AMBA141122C40) current ask $1.85

10/11/14 new entry strategy: move the entry trigger from $44.65 to $35.25 and move the stop loss from $40.45 to $31.90.
We will adjust the option strike from the NOV $46 call to the NOV $40 call
Option Format: symbol-year-month-day-call-strike


PUT Play Updates

Flowserve Corp. - FLS - close: 64.09 change: -0.89

Stop Loss: 66.55
Target(s): To Be Determined
Current Option Gain/Loss: +75.0%
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

10/11/14: FLS just marked its fifth weekly loss in a row. Shares look oversold with a drop from $77 to $64 during that time frame. Traders may want to start taking some money off the table.

We are moving the stop loss down to $66.55. I am not suggesting new positions at this time.

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

10/11/14 new stop @ 66.55, traders may want to take profits early
10/07/14 new stop @ 70.10
10/06/14 triggered @ 68.45
Option Format: symbol-year-month-day-call-strike


Lithia Motors Inc. - LAD - close: 80.86 change: +1.12

Stop Loss: 85.25
Target(s): To Be Determined
Current Option Gain/Loss: -18.1%
Average Daily Volume = 384 thousand
Entry on October 07 at $81.40
Listed on October 06, 2014
Time Frame: 8 to 12 weeks
New Positions: see below

10/11/14: As a bear on LAD it was disappointing to see the stock showing relative strength on Friday. Shares managed to add +1.4% in spite of the market's weakness. After Friday's bounce we're choosing to exit this trade immediately on Monday morning.

- Suggested Positions -

Long NOV $80 PUT (LAD141122P80) entry $4.40*

10/11/14 prepare to exit on Monday morning
10/07/14 trade begins. LAD gaps down at $81.40
*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


Lennox Intl. - LII - close: 74.64 change: -0.74

Stop Loss: 77.15
Target(s): To Be Determined
Current Option Gain/Loss: +38.4%
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

10/11/14: LII's midday bounce on Friday failed near the $76.00 level, which is good news if you're bearish. The next support level looks like $70.00 but LII is oversold and could bounce at any time. We are moving our stop loss down to $77.15.

Please note that LII has earnings coming up on October 20th. We will likely exit prior to the announcement.

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

10/11/14 new stop @ 77.15
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: 60.81 change: -0.32

Stop Loss: 62.75
Target(s): To Be Determined
Current Option Gain/Loss: +38.5%
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

10/11/14: Hmm... traders bought the decline in OII near round-number support at $60.00 on Friday. Shares ended the session down -0.5% versus the -1.1% drop in the S&P 500. We're turning more defensive here and lowering the stop loss down to $62.75, just above Thursday's intraday high. I'm not suggesting new positions at this time.

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

10/11/14 new stop @ 62.75
10/06/14 triggered @ 62.35
Option Format: symbol-year-month-day-call-strike


Pentair Plc - PNR - close: 62.15 change: -0.57

Stop Loss: 64.75
Target(s): To Be Determined
Current Option Gain/Loss: +108.3%
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

10/11/14: PNR ended the week at a new 2014 low. The breakdown under its early August low is bearish but the $60.00 level could be round-number support. We will adjust the stop loss down to $64.75, just above the simple 10-dma. More conservative investors may want to start taking money off the table now.

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*

10/11/14 new stop @ 64.75, traders may want to take profits now
10/09/14 new stop @ 66.15
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: 74.46 change: -0.02

Stop Loss: 76.51
Target(s): To Be Determined
Current Option Gain/Loss: + 0.0%
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

10/11/14: The midday rally attempt in SBUX on Friday failed near its 30-dma. Shares look poised to test support at the bottom of its $73.75-76.25 trading range. The fact that SBUX did not see bigger losses on Friday is a bit worrisome.

I am not suggesting new positions at this time.

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: 68.26 change: -0.22

Stop Loss: 71.05
Target(s): To Be Determined
Current Option Gain/Loss: +54.4%
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

10/11/14: TUP tried to bounce on Friday morning but rolled over near $69.00 and closed near its lows for the session. The stock is ready to breakdown to new 52-week lows.

Tonight we are adjusting the stop loss to $71.05.

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

10/11/14 new stop @ 71.05
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


Vulcan Materials Co. - VMC - close: 56.52 change: -0.81

Stop Loss: 60.15
Target(s): To Be Determined
Current Option Gain/Loss: -10.1%
Average Daily Volume = 976 thousand
Entry on October 08 at $56.90
Listed on October 07, 2014
Time Frame: 8 to 12 weeks
New Positions: see below

10/11/14: VMC's reversal at the 10-dma on Thursday continued on Friday with another -1.4% decline. I don't see any changes from my prior comments and would still consider new positions at current levels.

Earlier Comments: October 7, 2014:
VMC is in the industrial goods sector. The are the largest producer of construction aggregates in the United States. They are also a major producer of aggregate-based construction materials. Put it altogether and VMC produces crushed stone, sand, gravel, asphalt and ready-mix concrete.

The stock has languished for years after peaking near $125 a share back in 2007. It looked like the stock has turned a corner back in 2011 but that rally now appears to be in trouble. More recently VMC peaked under $70 back in March this year. It's been slowly chopping sideways since then in the $60-70 zone. The recent weakness might suggest a trend change for the worse.

The selling pressure has pushed VMC stock under multiple layers of support. It could get a lot worse. The market's recent weakness has been stoked by fears of a global growth slowdown. Bulls could argue that nearly all of VMC's sales are inside the U.S. and the U.S. economy is still growing. That's true. Evidently investors don't care.

Today's display of relative weakness (-2.1%) left shares of VMC testing its long-term trend line of higher lows dating back to 2011. A breakdown here could mean a much longer and larger correction lower. Tonight we're suggesting a trigger to buy puts at $56.90.

- Suggested Positions -

Long NOV $55 PUT (VMC141122P55) entry $1.67*

10/08/14 triggered @ 56.90
*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


WESCO Intl. - WCC - close: 72.92 change: -2.07

Stop Loss: 76.25
Target(s): To Be Determined
Current Option Gain/Loss: +89.7%
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

10/11/14: It was a really ugly week for shares of WCC with a drop from $79.50 near Monday's highs down to $72.41 at Friday's lows. The stock is probably due for an oversold bounce. We are going to try and reduce our risk by moving the stop loss to $76.25.

WCC is testing a potential trend line of support. Investors may want to take some money off the table here.

Please note that WCC is scheduled to report earnings on October 23rd and we will most likely exit prior to the announcement.

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*

10/11/14 new stop @ 76.25, traders may want to take some money off the table here.
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



Mobileye N.V - MBLY - close: 48.20 change: -5.99

Stop Loss: 51.25
Target(s): To Be Determined
Current Option Gain/Loss: -44.4%
Average Daily Volume = 9.0 million
Entry on October 08 at $57.15
Listed on October 07, 2014
Time Frame: 8 to 12 weeks
New Positions: see below

10/11/14: The stock market's widespread sell-off on Friday sent shares of MBLY crashing. The stock gapped down under its trend line of higher lows (support) and then plunged to a -11% decline. Our stop was hit pretty early at $51.25.

I labeled this an aggressive trade due to the volatility and sadly the volatility stung us.

- Suggested Positions -

Long NOV $60 call (MBLY141122c60) entry $4.50* exit $2.50** (-44.4%)

10/10/14 stopped out
**option exit price is an estimate since the option did not trade at the time our play was closed.
10/08/14 triggered on gap higher at $57.15, suggested entry was $56.55
*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: 87.97 change: -2.53

Stop Loss: 89.45
Target(s): To Be Determined
Current Option Gain/Loss: -40.0%
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

10/11/14: MNK had been hold up above support near $90.00 but shares finally caved in with the market dropping to new relative lows on Friday. MNK hit our stop at $89.45.

*consider smaller positions* - Suggested Positions -

OCT $90 call (MNK141018C90) entry $3.00* exit $1.80** (-40.0%)

10/10/14 stopped out
**option exit price is an estimate since the option did not trade at the time our play was closed.
10/07/14 new stop @ 89.45, potential bearish reversal pattern
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