Option Investor

Daily Newsletter, Monday, 10/20/2014

Table of Contents

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

Market Wrap

To Bounce Or Not

by Thomas Hughes

Click here to email Thomas Hughes
Poor results from IBM failed to curb today's rally.


Trading today was mixed, right from the start. Asian markets were up on the US bounce last week, Europe was down on economic woe and US markets were just plain mixed. The early futures trade was positive, then terrible earnings from IBM sent them sharply lower. Before the bell traders figured out IBM was probably an isolated event and the futures moderated but did not indicate a positive open. IBM dropped more than 10% in the early morning session and helped to send the Dow down by more than 100 points. The Dow struggled to fully regain the loss attributable to IBM but the broader market was able to move into the green early on. The indices all moved steadily higher all day, knocking out a few near term resistance levels along the way.

The Ebola factor has retreated quite a bit since Friday. There were no negative developments over the weekend and the new czar has been met with mixed response. I have heard opinions ranging from one end of the spectrum to the other but no real news that I can find about what he has or is doing. What I can find is centered on the potential for political controversy, which is why I think he was hired in the first place. Regardless, no new patients have popped up and no new centers of possible contagion.

Market Statistics

There are quite a few things on the horizon that could affect the market this week. First, China will release 3rd quarter GDP numbers overnight tonight. Next, earnings are coming in full force. IBM reported a big miss this morning, shrugged off as an outlier event, but nonetheless damaging to the market. Next is economics. There is a little bit of data this week, some housing numbers, weekly jobless claims, CPI and leading indicators.

Next week is a much bigger week and one that may overshadow trading this week. Next Tuesday is the October FOMC meeting and Friday is the first estimate for 3rd quarter GDP. The Fed is expected to end the taper as planned, an idea supported by Fed president Rosengreen this morning. He says, counter to Bullard last week, that the Fed should end the taper on time, which is by all accounts this month, next week.

Economic Calendar

The Economy

There were no economic reports today, as is common on Monday. We did get the weekly Survey Of Business Confidence from Moody's and Mark Zandi. The weekly report is as it has been all year. He says that business sentiment in the US remains strong. South America is a little weak due to Brazilian elections, the EU due to poor economic conditions. In the US hiring intentions are strong and sentiment into the end of the year and 2015 remains high. The addition to take note of is that there is no evidence of Ebola, the recent market weakness or overseas economies affecting outlook in the US.

The Oil Index

Oil prices fell today during the early part of the session only to bounce back late in the day. WTI fell more than a dollar while Brent fell nearly two dollars from Friday's closing prices. Plenty of global supply combined with news of increases to infrastructure in places like Kurdistan and Iran helped to keep prices low. There weren't any new developments in the Saudi/OPEC story although a small field shared by Saudi Arabia and Kuwait was shut down due to environmental reasons. OPEC meets next month and is being closely watched for signs of production cuts and/or division among the members. Until then supply, data and the FOMC could have an impact on oil prices.

The Oil Index climbed today, after opening lower. The index gained about a half percent but fell short of resistance near 1425. The indicators are mixed but in line with support in the near to short term. Stochastic is making a weak bullish crossover, reflecting the bounce seen last week. MACD has made an extreme peak, coincident with the recent low, pointing to a likely retest of support. Bearish momentum is in decline at this time so I would expect it to hit resistance before testing support. In the near term there is support at 1400 with short to longer support below that around 1350. Resistance is currently at 1425.

The Gold Index

Gold prices extended their rally today, climbing about $5. Gold is now trading above $1240 and closing in on $1250. $1250 has provided both support and resistance in the past, most recently resistance just last week. Near term momentum is still to the upside and without a catalyst in sight could continue testing $1250. China GDP could spark a move in gold, as could US data this week, but I am looking to the FOMC next week and then 3rd quarter GDP as potential movers of the metal.

The Gold Index traded to the upside today as well, but is still trading near long term lows. The index has become dissociated with gold prices and is not bouncing higher off of its lows as is the underlying commodity. This is likely due to uncertainty over long term gold prices as well as upcoming earnings among the gold miners. The reports aren't going to be great but I think they won't be as bad as some may fear. Gold prices hit a low but the average realized price is likely to be in-line or below the previous quarter and costs should come down due to lower oil prices.

Poor earnings from the miners could send the Gold Index down to long term lows around $65. The current long term trend is down, the index is consolidating below resistance and is accompanied by indicators consistent with a trend following sell signal. Current support is around the $75 level and may hold until earnings begin to come out.

In The News, Story Stocks and Earnings

Earnings are the story of the week; there are at least 500 companies scheduled to report. So far, 82 of the 500 S&P 500 companies have reported. 68% of them have beaten the average estimate for earnings growth and 63% have beaten sales growth projections. This is slightly below average for EPS growth and slightly above average for sales growth. The current projections for Q3 earnings is growth of 5.1%., 0.6% above the projections last week, due largely to upside surprises in the financial sector. To date only 4 out of 10 sectors are above estimates but we are still early in the season. This week we can expect 118 reports from S&P companies, more than 10%, bringing the total up to 20% for the season. The next two weeks will bring an additional +50% of S&P companies so will be quite busy.

IBM was the top earnings name, at least before the closing bell. Big Blue reported top and bottom line earnings that were well below the average estimate, well below, very low. The news was not expected and cast many doubts on the turn-around plans for the company. One of the headwinds faced by IBM is the impact of cloud-based computing on its core business, in effect it is hurting itself. Shares of the stock were sold off during the pre-open session, sending prices down about 15%. Buyers stepped in throughout the day, driving prices off the lows but only recovering a few percentage points on more than four times average daily volume.

Valeant reported before the bell too. The pharma giant missed on revenues but beat on earnings by a fair margin. The company reported total revenue grew by over 30% from the previous comparable quarter, impressive nonetheless. They also reported organic sales growth of 19% with notable increases in some of its key brands. Company executives were also able to raise full year guidance to a range above previous guidance and Wall Street estimates. Shares of the stock rose nearly 2% in today's trading, moving up from the short term moving average.

Chipotle Mexican Grill and Apple both reported after the bell, and both beat the street, Apple soundly. Chipotle reported EPS of $4.18 versus an estimated $3.84 with an smaller beat on the top line. The fast casual chain reported comp sales up over 20% on a build in traffic, but also on an increase in prices that helped to maintain margins. Outlook for next year remains in line with current consensus. Shares of the stock traded all day ahead of the report and then fell in after hours trading on 2015 growth prospects.

Apple also beat the street, but by a much nicer margin. The gadgets company reported revenue and earnings above estimates as well as providing strong revenue guidance for the next quarter and full year. The results are driven, of course, by sales of the iPhone 6 and 6+ but also by strong performance across the entire suite of products. Shares of Apple traded higher all day and surged after hours, breaking above resistance, the $100 level and the short term 30 day moving average.

The Indices

The market took a big hit this morning when IBM reported earnings. The good news is that the market was able to shake it off in favor of other, more favorable reports. The initial drop in IBM caused a near 100 point decline in Dow futures, resulting in an 80 point drop at the open. Although it took the entire day, the Dow Jones was able to push its way off of the low and back into the green. The blue chips finished the day up by 0.12%.

Today's range was much smaller than it has been over the past week or so, and created a small bodied candle. Price action was not able to move above the intraday high set on Friday, which could become near term resistance for this index. The indicators are once again in line for a trend following entry, but it is still early and unconfirmed while at the same time the short term analysis suggest a retest of support. Bearish MACD is in retreat but also convergent with the recent correction and indicative of such a test of support. Support is indicated at 16,000 with a weaker support level just above that around 16,250. Stochastic is consistent with this analysis and showing the early, and weak, trend following bullish crossover. A retest of support could set the index and the indicators up for the stronger signal sometime the next week or two.

The NASDAQ Composite made the largest move today, gaining 1.35%. The tech heavy index was not impacted by IBM and created a long white candle. Price action in this index was able to break Friday's high but is still under, and approaching, potential resistance. The index has about 60 points to go before hitting the 14-year high set this past March. Indicators are identical to the Dow Jones; momentum remains bearish but is retreating from an extreme peak while stochastic is showing a bullish crossover and confirming longer term support.

The Dow Jones Transportation Average and the S&P 500 closed within a few hundredths of a percent from each other. The transports edging out the broader market by only 0.07% with a gain of 0.98%. The trannies were also unaffected by IBM's poor results, moving up 80 points from Friday's close. The index has now moved up 5 days in a row and is trading just beneath resistance. Unlike the first two, which have a little room to move higher before hitting resistance, this index closed just beneath the 30 day moving average and the June all-time high just below 8,225. The index appears to be leading the others higher on this bounce and that is evident in the indicators as well. The bearish MACD peak is in retreat and very nearly at the zero line, much closer than the others, and stochastic is showing the early signal with a small bounce off the lower signal line by %D. I don't think this is just a dead-cat bounce but I am expecting a retest of support in some form or another. Current resistance is 8,225 as mentioned with support at 8,000 and 7,750.

The S&P 500 made the smallest advance today, only 0.91%. Today's candle is a long white, but not overly strong, although it does break a potential resistance line at 1,900. While a good sign, I won't be convinced without a move past 1,925. In the meantime the index is moving upward, on the bounce, with indicators in line with an early trend following signal. This leads me to think the index will move up to resistance in the near term. However, like the others, the indicators are convergent with the correction and highly suggestive of a retest of support.

The bounce looks like it could be good, or at least like it wants to be good. The correction took us down to 10% in some cases and has presented many market participants with the entry they have been looking for many years. The FOMC or the GDP could be the catalyst but until then there has been some damage done to the market that will take some time to fix. The good news is that we are building a pretty good base. The economic trends are still up and earnings season, x-IBM, has been pretty good. There are still some near term headwinds and reasons to wait but I think at worst those will provide another entry. Don't forget, China GDP is tonight which will likely set the tone for early trading tomorrow.

Until then, remember the trend!

Thomas Hughes

New Option Plays

Outperforming Its Peers

by James Brown

Click here to email James Brown


NetEase, Inc. - NTES - close: 90.20 change: +2.14

Stop Loss: 87.45
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 430 thousand
Entry on October -- at $---.--
Listed on October 20, 2014
Time Frame: 8 to 12 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
NTES is in the technology sector. They are part of the Chinese Internet space. The company operates online video games, an Internet portal and email services in China. Technically the stock has been outperforming most of its peers in the Chinese Internet industry (compare to the performance of the KWEB ETF of which NTES is a component).

Their most recent earnings report was healthy. NTES' quarterly profit was in-line but revenues were up +21% to $475.8 million, beating Wall Street's estimates. NTES' Chief Executive Officer Mr. Ding said, "This quarter we have achieved in three business areas MoM and YoY increase revenue total revenue growth of 17.2%, an increase of 22.3 percent compared with the same period last year, gaming revenues grew 13.1%, advertising services revenue grew 42.9%, mailboxes, electricity suppliers and other business income increased 201.5 percent."

After an initial rally on these results NTES share price stalled out at resistance near $90-91. Here we are more than two months later and NTES is testing resistance near $90-91 again. This time the point & figure chart is suggesting at $102 price target.

We are suggesting a trigger to buy calls at $91.15.

Trigger @ $91.15

- Suggested Positions -

Buy the NOV $95 call (NTES141122C95) current ask $2.05

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

Daily Chart:

Weekly Chart:

In Play Updates and Reviews

Large Caps Continue To Bounce

by James Brown

Click here to email James Brown

Editor's Note:

The S&P 500 index delivered its third gain in a row but remains under the 200-dma.

Current Portfolio:

CALL Play Updates

Ambarella, Inc. - AMBA - close: 39.18 change: +0.74

Stop Loss: $34.90
Target(s): To Be Determined
Current Option Gain/Loss: +19.4%
Average Daily Volume = 2.4 million
Entry on October 13 at $35.25
Listed on October 08, 2014
Time Frame: 8 to 12 weeks
New Positions: see below

10/20/14: AMBA bounced off the $38.00 level this morning and outperformed the broader market with a +1.9% gain. The $40 level remains short-term resistance.

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.

- Suggested Positions -

Long NOV $40 call (AMBA141122C40) entry $1.80*

10/18/14 new stop @ 34.90
10/15/14 new stop @ 34.25
10/13/14 triggered at $35.25
*option entry price is an estimate since the option did not trade at the time our play was opened.
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

FedEx Corp. - FDX - close: 155.87 change: -0.25

Stop Loss: 148.75
Target(s): To Be Determined
Current Option Gain/Loss: -5.6%
Average Daily Volume = 1.5 million
Entry on October 17 at $155.50
Listed on October 15, 2014
Time Frame: 8 to 12 weeks
New Positions: see below

10/20/14: Traders bought the dip in FDX midday around $154.00 and its 50-dma. I would still consider new positions now or you could wait for a rise past Friday's high of $156.65.

Earlier Comments: October 15, 2014:
Last year a last minute surge of online shoppers overwhelmed the system and thousands of Christmas presents were delivered late. Part of the problem was terrible weather. The other challenge was the growth in online shopping. Amazon.com (AMZN) blamed UPS for the mass of delayed deliveries last year. You can bet that UPS' rival FDX has taken notice and plans to be ready this year.

Market research firm EMarketer is estimating that retail online shopping will surge +17% in 2014 to $72.4 billion. That might be under estimating the growth, especially this year as many consumers might opt to shop online instead of face the crowds and risk being a target for terrorism or catching Ebola. Granted neither a terrorist event inside the U.S. and a widespread outbreak of Ebola in the states has happened yet but people are already afraid with the daily headlines about the virus.

UPS and FDX hope to be ready. UPS is hiring up to 95,000 seasonal workers and FDX is hiring 50,000 holiday workers this year. That's 10K more than last year for FDX.

In addition to the surge in online shopping FDX should also benefit from the multi-year lows in oil prices. Low oil prices means lower fuel costs, one of FDX's biggest expenses.

It would appear that FDX has fine tuned its earnings machine as well. Their latest earnings report was September 17th. Wall Street was expecting a profit of $1.95 a share on revenues of $11.46 billion. FDX delivered a profit of $2.10 a share with revenues up to $11.7 billion. That's a +24% increase in earnings from a year ago and the second quarter in a row that FDX beat EPS estimates.

FDX chairman, president, and CEO Frederick Smith said, "FedEx Corp. is off to an outstanding start in fiscal 2015, thanks to very strong performance at FedEx Ground, solid volume and revenue increases at FedEx Freight and healthy growth in U.S. domestic volume at FedEx Express." Business has been strong enough that a few weeks ago FDX started raising prices on some services.

Since that September earnings report Wall Street analysts have been raising price targets. Some of the new price targets for FDX stock are $175, $180 and $183 a share.

The recent sell-off in the market and FDX could be an opportunity. FDX has already seen a -10% correction from its intraday high near $165 to today's low near $149. Right now FDX sits just below resistance near $155.

We're suggesting a trigger to buy calls at $155.50.

- Suggested Positions -

Long 2015 Jan $160 call (FDX150117c160) entry $5.30*

10/17/14 triggered @ 155.50
*option entry price is an estimate since the option did not trade at the time our play was opened.
Option Format: symbol-year-month-day-call-strike

The Hain Celestial Group, Inc. - HAIN - close: 102.06 change: +1.83

Stop Loss: 96.75
Target(s): To Be Determined
Current Option Gain/Loss: +9.7%
Average Daily Volume = 632 thousand
Entry on October 17 at $100.25
Listed on October 14, 2014
Time Frame: 8 to 12 weeks
New Positions: see below

10/20/14: HAIN displayed relative strength with a +1.8% gain. Today's rally also pushed the stock through potential short-term resistance at its 20 and 30-dma.

Earlier Comments: October 14, 2014:
Looking at the world economies the U.S. is the cleanest shirt in the dirty clothes hamper. Every economy needs to see improvement but the U.S. is looking the healthiest. If U.S. growth continues to improve it should bode well for consumer spending. That should lead to strength in organic food sales.

There has been a strong trend of consumers moving more and more toward natural and organic foods. That's where HAIN is a major player. The company website describes HAIN as, "The Hain Celestial Group, headquartered in Lake Success, NY, is a leading natural and organic food and personal care products company in North America and Europe. Hain Celestial participates in almost all natural food categories with well-known brands that include Celestial Seasonings, Terra, Garden of Eatin', Health Valley, WestSoy, Earth's Best, Arrowhead Mills, DeBoles, Hain Pure Foods, FreeBird, Hollywood, Spectrum Naturals, Spectrum Essentials, Walnut Acres Organic, Imagine Foods, Rice Dream, Soy Dream, Rosetto, Ethnic Gourmet, Yves Veggie Cuisine, Linda McCartney, Realeat, Lima, Grains Noirs, Natumi, JASON, Zia Natural Skincare, Avalon Organics, Alba Botanica and Queen Helene."

HAIN's results have definitely confirmed the trend in consumer spending. They have beaten Wall Street's estimates and guided higher in three out of the last four earnings reports. Their most recent report was August 20th. You can see the big move in the stock after HAIN reported a profit of 90 cents a share on revenues that rose +26% to $583.8 million. Analysts were only expecting $0.89 cents a share on revenues of $577 million.

HAIN's management then raised their guidance again. They expect 2015 earnings to be in the $3.72-3.90 range compared to analysts' estimates around $3.73. HAIN is anticipating sales growth of +27% to +30% in 2015.

The bullish outlook for 2015 did not completely HAIN from the market's recent sell-off. Shares broke support near $100 and dipped to their 50-dma before bouncing. Altogether the stock has weathered the market's correction pretty well. The point & figure chart is still bullish and forecasting a long-term target at $131.00.

We want to be ready to buy calls if HAIN can rally back above the $100 level. Tonight we're suggesting a trigger to buy calls at $100.25. Earnings are expected in November so this might only be a 2-to-4 week trade.

- Suggested Positions -

Long NOV $105 call (HAIN141122c105) entry $2.05*

10/17/14 triggered @ 100.25
*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

iShares Transportation ETF - IYT - close: 147.29 change: +1.41

Stop Loss: 141.75
Target(s): To Be Determined
Current Option Gain/Loss: +67.6%
Average Daily Volume = 320 thousand
Entry on October 13 at $138.75
Listed on October 11, 2014
Time Frame: 3 to 6 weeks
New Positions: see below

10/20/14: The IYT continues to lead the market higher. This ETF is up five days in a row. The 147.50 is potential short-term resistance. The 50-dma near $150.00 is also potential short-term resistance.

More conservative traders may want to consider taking profits early as the IYT near the $149.00-150.00 zone.

I am not suggesting new positions at this time.

Earlier Comments: October 11, 2014:
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.

*Higher-risk, more aggressive trade* - Suggested Positions -

Long NOV $143 call (IYT141122c143) entry $3.40*

10/18/14 new stop @ 141.75
10/13/14 triggered @ 138.75
*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

Semiconductor ETF - SMH - close: 47.36 change: +0.45

Stop Loss: 44.90
Target(s): To Be Determined
Current Option Gain/Loss: -31.8%
Average Daily Volume = 2.4 million
Entry on October 17 at $47.15
Listed on October 16, 2014
Time Frame: 8 to 12 weeks
New Positions: see below

10/20/14: Traders bought the dip in the SMH this morning and shares ended above their 10-dma with a +0.9% gain on the session.

After the closing bell tonight chip maker Texas Instruments (TXN) reported better than expected earnings results and raised guidance. That should be bullish for the semiconductor stocks tomorrow.

Earlier Comments: October 16, 2014:
It looks like the correction in the semiconductor stocks might be done.

The SMH is the Market Vectors Semiconductor Exchange Traded Fund (ETF) that tries to mimic the performance of the Market Vectors Semiconductor 25 index. Semiconductors as a group had been strong performers with the SMH up +73% from its late 2012 lows.

A few weeks ago the industry started to see some profit taking. MCHP issued an earnings warning last week that that sparked the massive plunge in the SMH. The SMH has witnessed a -15% correction from its 2014 closing high to the closing low on Monday this week. Now it has started to bounce. It's possible all the panic selling is over.

Intel (INTC), a much bigger company than MCHP, just reported earnings on October 14th and the results were better than Wall Street expected. More importantly INTC offered slightly bullish guidance.

Bloomberg noted that INTC said its PC-processor business rose +8.9% last quarter. Sales for INTC's chips for notebook computers soared +21%. Even chips for desktop PCs rose +6% in the third quarter.

The strong results from INTC have helped buoy the SMH, which is starting to rebound after testing (and piercing) long-term support on its weekly chart (shown below).

We suspect the worst might be over. However, this could be a volatile trade. There are a lot of semiconductor companies who have yet to report their results.

The SMH saw its rally stall under $47 and near its 200-dma. Tonight we are suggesting a trigger to buy calls at $47.15.

- Suggested Positions -

Long 2015 Jan $50 call (SMH150117c50) entry $1.10

10/17/14 triggered @ 47.15
Option Format: symbol-year-month-day-call-strike

PUT Play Updates

Apple Inc. - AAPL - close: 99.76 change: +2.09

Stop Loss: n/a
Target(s): To Be Determined
Current Option Gain/Loss: -21.4%
Average Daily Volume = 54 million
Entry on October 20 at $98.32
Listed on October 18, 2014
Time Frame: 8 to 12 weeks
New Positions: see below

10/20/14: A disappointing earnings report from IBM failed to stymie investor enthusiasm for tech stocks. Shares of AAPL gapped open higher and rallied toward resistance near $100 and its 50-dma by the closing bell. Our plan was to buy short-term (two-week) puts this morning.

After the closing bell AAPL reported earnings and beat estimates by 11 cents. They also beat the revenue estimate with revenues up +12.4% to $42.12 billion for the quarter.

AAPL said iPhone sales surged to 39.27 million last quarter. That was up from 33.8 million a year ago and above the 38 million estimate. Mac computer sales also beat estimates with AAPL selling 5.52 million in the quarter. That's up from 4.6 million a year ago and above the 4.75 million estimate. As expected iPad sales continued to disappoint with the company only selling 12.32 million iPads. That is down from 14.1 million a year ago and below the 13 million estimate. Management then raised their guidance for the current quarter (Q1-2015).

In the new play description we expected iPhone sales to soar. Last quarter included nine days where the new iPhone 6 and 6+ was available. Tim Cook said demand for their new iPhone was off the charts. Mr. Cook blamed better than expected Mac sales on a strong back-to-school season.

Here's the interesting part about AAPL's earnings report. They beat estimates on both the top and bottom line and raised guidance. Yet the stock is up maybe $1.50 after hours in the $101.30 area. That does not show a lot of excitement by traders. All of the commentators looking at AAPL's report and the action in the stock thought the price movement was rather muted (a.k.a. disappointing).

If AAPL fails to rally past $102.00 it would be a new lower high within the six-week trend of lower highs.

Earlier Comments: October 18, 2014:
Apple is probably the highest profile big cap stock for investors around the world. The company has a market cap of $585 billion. Google's value is around $345 billion. Microsoft is near $359 billion. Exxon Mobil is about $389 billion. As a consumers goods electronic equipment maker AAPL is subject to the whims of the consumer. There are plenty of AAPL fanboys and girls out there but there is a risk that expectations for AAPL are too high.

The companies recent launch of the iPhone 6 has been a huge success. Yet this success has failed to really power the stock higher. AAPL's stock struggled to get past its prior all-time high near $100-101 from late 2012 (pre-split that was about $700 a share). The new all-time high is $103.74 set on September 2nd this year. Since that peak AAPL has been consolidating sideways with a bearish trend of lower highs. The action this past week looks like a bearish breakdown.

Everything will depend on earnings results and AAPL's guidance. The company is scheduled to report earnings on Monday, October 20th, after the closing bell. Analysts are expecting a profit of $1.30 a share.

The company could beat estimates and still see their stock sell-off if their guidance is too soft. Everyone expects super strong iPhone 6 sales but AAPL's iPad sales have been struggling.

A recent Forbes article noted that over 80% of analysts they polled expected AAPL's iPad sales to fall again. That would be the third quarter in a row they have fallen. AAPL is hoping to reverse this trend and just announced a new iPad Air 2 and an iPad mini 3. We'll have to see if these can sell against a much bigger screen on the iPhone 6. AAPL could be cannibalizing their own sales.

Technically the daily chart on AAPL does look fragile. The Point & Figure chart is already bearish and suggesting an $88 target. I'll say it again - everything depends on Monday night's earnings report and management's guidance.

We suspect that AAPL will disappoint and likely see some profit taking. That is why we are suggesting some short-term puts. I would consider this a higher-risk trade. You could treat it like a binary trade. If we're right, then we could win big. If we're wrong then this option could evaporate in a heartbeat. You win or you lose.

Tonight we are suggesting traders buy the AAPL $96 put that expires after October 31st. These are the weekly puts that expire in two weeks. If you choose this trade you need to buy the puts before AAPL's earnings report on Monday. We're expecting a gap down on Tuesday morning.

WEEKLY AAPL puts (that expire after Oct. 31st)

- Suggested Positions -

Long AAPL Oct 31st $96 PUT (AAPL141031P96) entry $1.40

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

PowerShares QQQ (NASDQ-100 ETF) - QQQ - close: 94.39 chg: +1.39

Stop Loss: n/a
Target(s): To Be Determined
Current Option Gain/Loss: -55.3%
Average Daily Volume = 36.6 million
Entry on October 20 at $92.96
Listed on October 18, 2014
Time Frame: 8 to 12 weeks
New Positions: see below

10/20/14: Our plan was to buy the weekly (two-weeks till expiration) put options on the QQQ this morning. The Qs opened at $92.96 and rallied +1.49% thanks to strength in big cap tech stocks in spite of IBM's results this morning.

Earlier Comments: October 18, 2014
The QQQ is the ETF that mimics the performance of the NASDAQ-100 index. Some of its biggest components report earnings this week.

AAPL is the biggest component in the QQQ at 13.8% of the ETF. MSFT is the second biggest at 8.5%. AMZN is 3.38%. CELG is 1.67%. All four of this big cap names report earnings this week. All of them could see some serious profit taking. We want to speculate on further weakness with the weekly puts on the QQQ.

The options we are choosing expire in two weeks, after October 31st. AAPL reports earnings on Monday night (October 20th) therefore we are suggesting an immediate entry. Microsoft, Celgene, and Amazon.com all report on October 23rd.

- Suggested Positions -

Long QQQ Oct.31st $92 PUT (QQQ141031P92) entry $1.32

10/20/14 play begins. QQQ opens at $92.96
Option Format: symbol-year-month-day-call-strike

Sohu.com Inc. - SOHU - close: 43.54 change: +0.03

Stop Loss: 45.65
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 393 thousand
Entry on October -- at $---.--
Listed on October 18, 2014
Time Frame: 2 to 3 weeks
New Positions: Yes, see below

10/20/14: SOHU closed virtually unchanged on the session. The fact that shares did not participate in the market's relatively widespread rally today is good news for the bears.

Earlier Comments: October 18, 2014:
This is a simple momentum trade on a struggling Chinese Internet name.

Sohu.com is an online media, Internet search, and video gaming company. Unfortunately gaming revenues are becoming a smaller chunk of the overall pie for SOHU. At the same time, while they have seen significant growth in ad revenues from streaming TV shows and movies, the company is facing pressures on this front. The cost of content is rising while the Chinese government is becoming more strict about what shows, especially which American shows, they will allow to be aired (or streamed over the Internet). This is pressuring SOHU's margins.

Bulls can argue that SOHU has already corrected and is now oversold. That's possible. SOHU is down eight weeks in a row. It seems to be slicing through support. The 2014 low didn't hold it. Support near $50.00 didn't hold it. The $45 level has failed. The next stop could be $40.00. SOHU's recent bounce just failed at short-term resistance at the 10-dma.

I do consider this a more aggressive, higher-risk trade because SOHU is so oversold. We'll try and limit our risk with a stop above Friday's high.

Trigger @ $43.25 *Smaller positions to limit risk*

- Suggested Positions -

Buy the NOV $40 PUT (SOHU141122P40) current ask $1.10

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