Option Investor

Daily Newsletter, Thursday, 10/23/2014

Table of Contents

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

Market Wrap

Earnings Trump All

by Thomas Hughes

Click here to email Thomas Hughes
Once again, a slew of strong earnings trump fear


Although international markets began the day weak, a slew of strong earnings from some major US companies spurred US markets higher. Companies including GM, ComCast, 3M, United Airlines and maybe most importantly Caterpillar all reported strong earnings, top and bottom line. The reports, coupled with the forward looking statements, helped propel today's rally. Economic data also played a part. Jobless claims rose, but only slightly, in the near term but continue to decline in the longer term. Also, the Leading Indicators suggest that the pace of growth increased in October.

Market Statistics

The day started with Asian indices flat to negative on a mixed CPI reading. The headline, 50.4, is expansionary and at a 3 month high but within the data factory orders have fallen to a 5 month low. This data had a mild affect on European markets as well but was eventually shrugged off in favor of other positive factors.

Index futures were indicated higher from the earliest part of the morning aided by a lack of bad news. Once earnings began to come out the indices all began to drift higher, reaching a peak just before the 8:30AM release of data. The SPX was indicated higher by about 17 points and then added to that following the data and going into the open of trading. Market breadth was high, with over 90% of S&P companies trading higher, after the opening bell.

The market was up more than 1% in the first 15 minutes and added to that gain into the first of hour of trading. Rally mode was in full effect today, the market marched higher all day until hitting a peak around 2:30, just before reports a Dr. in New York was being tested for Ebola. This news was shrugged off but could emerge as a headwind if the test is positive. The market retreated from the high on the news but held onto to most of today's gains.

Economic Calendar

The Economy

Today's data was dominated by jobless claims. Initial claims for unemployment rose by 17,000 from a 2,000 claims upward revision to last weeks data. This week initial claims were reported at 283,000, still well below the 300,000 level I have been watching all year. The four week moving average continued to decline, showing the underlying trend in the numbers. This week's average of 281,000 is the lowest level since May,6, 2014. The jump in claims this week is mild and does not break the trend. Overall, initial claims are in decline and have been doing so ever since dropping below 300K. This is evident in the continuing and total claims numbers.

Continuing claims fell by 38,000 from last weeks un-revised number. This is the lowest level of continuing claims since December 23, 2000. The four week moving average also declined, setting a new low. Total claims fell by 15,056 to 2.073 million. This is also a new low and an extension of the down trend in total unemployment claims we have seen all year. Based on these numbers I have to say I think that NFP will be steady to strong when it comes out in two weeks, and that unemployment should fall. I also think this has positive spin for GDP estimates which are due out next Friday.

On a not-adjusted basis claims fell -6.7% this week, about half of the expected decline. On a year over year basis claims are down more than -18%. Pennsylvania, Michigan and Texas led with increases in claims of +4,000, 3,210, and 1,615 respectively. Pennsylvania reported the increase is due to administrative and support positions, waste management and remediation, construction and food service. No mention of oil industry or affiliated jobs. I bring this up because of the drop in oil prices and speculation of the impact on US shale oil businesses. Iowa and Florida had the biggest declines, -781 and -640.

The Conference Board released their reading of the Index of Leading Economic Indicators at 10AM. The index rose by 0.8%, ahead of last month's un-revised reading of 0.0% and July's increase of 1.1%. The Coincident Index rose by 0.4% and the Lagging Index rose by 0.1%. The reading shows an increase in strength and could lead to a stronger than expected GDP number next week. “The outlook for improving employment and further income growth are expected to support the moderate expansion in the U.S economy for the remainder of the year.” said Ataman Ozyildirim, Economist at The Conference Board.

Tomorrow the only release is New Home Sales. This could be a positive surprise, based on the better than expected existing home sales figures. Next week is when things could get really hot, on the economic front at least. The FOMC meeting is on Monday/Tuesday and the 3rd Quarter GDP 1st estimate is Friday. Current estimates are between 2.5% and 3.0%, depending on the source.

The Oil Index

Oil prices moved higher today, climbing by more than 1%. Better than expected economic data and earnings are largely the cause. WTI moved higher but Brent was the star of the day, gaining nearly 2%. Additional factor affecting oil today are new signs of division between OPEC members. The Libya OPEC minister is the latest member calling for cuts to production, counter to the stance apparently being taken by Saudi Arabia. Today's move up confirms near term support but does not represent a long term base just yet. OPEC meets in two weeks, beginning November 6th, and could very well reduce production.

The oil sector got a lift from stabilizing oil prices and then moved higher along with the broader market. Today's move brought the Oil Index up by roughly 1.85% but did not break yesterday's high. The index is moving higher in the near term but the bounce may be losing some steam. It is trading below a potentially strong resistance level near the 1480-1500 level and is ripe for profit taking. I'm still anticipating a retest of support, based on convergence with MACD, which could take it down to 1,425 or 1,400. The big oil companies begin to report next week so there may be sideways trading until then.

The Gold Index

Gold prices fell today. Strong economic data put to rest, I think, any lingering thought that the Fed would extend QE next week. This, along with stronger dollar and a lack of safety-seekers, helped to drag gold down by just over -1.25%. Spot prices finished the session just below $1230, after briefly touching $1250 two days ago. I think gold prices may now hover near this level, perhaps in a range between $1200 and $1250, because of two reasons. First, the end of taper and QE. This will/has been strengthening the dollar and should continue to do so. Stronger dollar typically leads to weaker gold. Second, interest rates are bound to come up soon. Strong data that leads to the end of QE and stronger dollar also leads to inflation and that leads to investment in gold; gold as a hedge against inflation. Unless one side or the other gets a clear indication of future direction prices are likely to remain volatile

The gold sector fell today, along with the underlying commodity, and could be leading the way lower. The Gold Index broke below the lower boundary of its near term triangle consolidation pattern and dropped below $75. The index is moving lower, in line with the long term down trend, with targets around $70 and $65. Both stochastic and MACD are consistent with this signal. Near term risks include the FOMC meeting and how they impact gold prices along with earnings due out next week. I suspect that the reported quarter will not be as bad as feared but outlook for the current quarter and next could be diminished.

In The News, Story Stocks and Earnings

Earnings stoked the rally before and after the bell. At least a dozen important names reported today, including GM, Caterpillar and 3M before the open and Microsoft, Pandora and Amazon after the close. Aside from isolated areas of weakness, earnings continue to be good, if not great. GM, Comcast, 3M, United Airlines, Microsoft and Caterpillar all reported above expectations, Caterpillar probably being the most impressive. The international equipment company reported earnings of $1.72, about 21% above expectations. The company reported strong sales as well as improvements to operations and margins. The gains were made on a large improvement in mining as well as oil service equipment. Shares of the stock jumped in the pre-market session and extended the move to over 5% during the day. The stock is now trading just below potential resistance at $100.

United Airlines also reported a substantial improvement to earnings. The airline earned $2.75 in the quarter, $0.07 above expectations. The gains are due to increases in traffic and revenues along with reduced costs. Ancillary revenue per passenger increased by 10% while cargo revenue increased nearly 20%. The increase in cargo is interesting in light of UPS recent announcement that they expect to see record volumes this holiday season. If so United Airlines could see a similar increase of traffic into the end of the year, further boosting revenues. Shares of the stock fell during the pre-market but regained the loss during the day. Shares moved into the green and gained nearly 2% by the end of trading. Today's move brought the stock up to potential resistance at $50. Near term momentum is still to the upside with a target for more substantial resistance near $52.50.

Microsoft traded higher during the open session but was capped at resistance. The stock tried to move above $45 but was pushed back while traders waited for earnings to be released. Wall Street expected earnings in the range of $0.48, about a dime less than last quarter. Actual results were much better than expected though and helped to boost shares above $45. Revenue of $23.20 billion is more than $1B, roughly 5%, ahead of estimates and expected to remain strong into the end of the year.

Amazon was expected to report a much larger loss than last quarter and yet another quarter without a profit. Amazon did not disappoint, in fact, it did not disappoint too much. The online retail giant fell short on revenue and earnings, earning less and losing more than expected. Forward guidance is also short of expectations, based largely on shortfalls in media revenue.The stock has been under pressure for several months, ever since raising the price on the Prime service, and will likely remain so. Today's action kept share price just above break even until after the release at which time it dropped -5% instantly, then extended that to -10%. I would expect to see more downside in this name tomorrow.

The Indices

The market started higher today, was boosted by earnings and kept on moving. The only thing to stand in the way today was a new Ebola headline. As of yet there is no word if the Dr. has Ebola or not but the important thing is that the market did not go running for the hills. Today's move was led by the Dow Jones Transportation Average. This is not surprising given the strong earnings from UAL today along with other reports so far this season. The outlook for the transportation is good and only getting better. Everything I see, read and hear points to improving traffic flow, revenues and earnings.

The Trannies moved more than 2% today, piercing resistance at 8,500 and creating another long white candle. The index has been marching steadily higher since hitting bottom two weeks ago and is indicated higher. It is beneath resistance at the moment and in possible consolidation but the indicators are strong. I'm gonna be watching the range between 8,250 and 8,500 over the next few days with the thought it could break to the upside. If so, this would be an upside target on the index about 750 points above the current level.

The NASDAQ Composite was another strong index among a day of strong movement. The tech heavy index climbed 1.60% today, moving above one resistance line only to come a little short of the next. Regardless, today's move extends the move above the recently regained long term trend line and is accompanied by bullish indicators. Stochastic is currently moving higher while confirming long term support and MACD momentum is on the rise. Upside target for next potential resistance is around 4,490-4,500 with support expected along the trend line around 4,400. Tomorrow could be volatile as traders move in and out of Microsoft, Amazon and Pandora which all released after the bell.

The Dow Jones Industrial Average powered 1.32% higher today. The blue chip index moved above yesterday's high and met resistance at 16,750. Today's action turned the indicators bullish so it looks likely the index will be testing resistance again. MACD made the bullish zero line crossover and stochastic %D is moving higher following the early signal. It is possible this resistance level could hold tomorrow, going into the weekend ahead of the FOMC meeting, but I think the market is going higher in the short to long term.

The SPX brought up the rear today with a gain of only 1.23%. Despite this shortcoming the broad market was able to move back above the long term trend line before meeting resistance. The index touched my resistance near 1965 and then fell back, but was able to hold above the long term trend line. The indicators are bullish and pointing higher so I am expecting a test of resistance at least. Longer term there is still a chance, even a likelihood, for the index to retest long term support but it just isn't happening yet that I can tell.

The market moved steadily higher today, driven by earnings and economic trends. Earnings are coming in ahead of expectations and labor market trends continue to improve. Tomorrow there will be more earnings and more economic data so the upward trend in equity prices could continue. The only economic data expected is new home sales and there is a chance for positive surprise.

Earnings reports delivered today after the bell will affect early trading tomorrow along with others from names like Bristol Meyers and Ford. Poor reports could stall the rally but there are other hurdles as well. The FOMC is on Tuesday and that may keep short term traders out of the market over the weekend.

Until then, remember the trend!

Thomas Hughes

New Option Plays

Facing Headwinds

by James Brown

Click here to email James Brown


Monsanto Co. - MON - close: 112.81 change: -0.67

Stop Loss: 115.15
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 4.1 million
Entry on October -- at $---.--
Listed on October 22, 2014
Time Frame: 8 to 12 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
Monsanto describes itself as a company "committed to bringing a broad range of solutions to help nourish our growing world. We produce seeds for fruits, vegetables and key crops – such as corn, soybeans, and cotton – that help farmers have better harvests while using water and other important resources more efficiently. We work to find sustainable solutions for soil health, help farmers use data to improve farming practices and conserve natural resources, and provide crop protection products to minimize damage from pests and disease. Through programs and partnerships, we collaborate with farmers, researchers, nonprofit organizations, universities and others to help tackle some of the world’s biggest challenges."

What does that mean in plain English? The company operates two main segments. They have a seeds and genomics business and an agricultural productivity business. The seed and genomics business gets a lot of negative press over its bio-engineered seeds (GMO) to boost production and deter insects and weeds from hampering growth. The productivity business makes herbicides.

About 60% of MON's sales are in North America. They're trying to broaden their market and generate more customers in Europe, Latin America, and Africa. Unfortunately the plunge in grain prices in America has hurt with many grains at four or five year lows. If this doesn't change soon it could hurt future sales as farmers tend to buy less when prices are down.

It's easy to understand the long-term tailwinds for MON. The world needs to see significant growth in grain production to feed the booming population. Yet the company admits they are in a challenging commodity environment. Bears argue that the ethanol-driven boom in corn is over.

MON's most recent earnings report was October 8th and it was a disappointment. Wall Street was expecting a loss of 24 cents a share compared to a loss of 47 cents a year ago. MON reported their Q4 loss at 27 cents. They did see a strong surge in revenues of +19% to $2.63 billion in the quarter, which beat expectations. Here's an interesting factoid that should worry the bulls. What would MON's earnings have looked like if the company did not spend an astonishing $6.1 billion in stock buybacks last quarter?

Management did lower their guidance for fiscal year 2015. They expect their Q1 results to come in about half the same period a year ago. In the conference call MON claims that the weakness in corn will be made up by strength in soybeans. They pointed out that one of their biggest contributors in 2015 will be sales of their Intacta soybean seeds in Latin America. Yet the company is currently facing a legal battle with farmers in Brazil over getting paid royalties for these Intacta soybean seeds. Another challenge in 2015, which they just lowered guidance on, is they expect 4% to 5% of their EPS growth to come from their stock buyback program.

It looks like the next four quarters could be tough for MON. That's why today's bearish reversal at resistance near $115 and its 200-dma could be a bearish entry point. Tonight we are suggesting a trigger to buy puts at $111.90. The point & figure chart is bearish and suggesting a $90 target but the P&F chart also shows potential support in the $102-104 zone.

Trigger @ $111.90

- Suggested Positions -

Buy the 2015 Jan $110 PUT (MON150117P110) current ask $2.71

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

Daily Chart:

Weekly Chart:

In Play Updates and Reviews

A Wave of Positive Earnings Results

by James Brown

Click here to email James Brown

Editor's Note:

Stocks soared thanks to a wave of positive earnings reports and some better than expected economic news out of Europe.

We have updated stop losses on several of our bullish plays tonight.

Current Portfolio:

CALL Play Updates

Ambarella, Inc. - AMBA - close: 41.38 change: +0.79

Stop Loss: $37.85
Target(s): To Be Determined
Current Option Gain/Loss: +66.6%
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

10/23/14: AMBA outperformed the major indices with a +1.9% bounce but shares seem to be struggling with the $42.00 level. More conservative investors might want to move their stop closer to $40.00.

I'm not suggesting new positions at this time.

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*

10/21/14 new stop @ 37.85. Traders may want to take profits now!
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: 162.50 change: +4.03

Stop Loss: 155.90
Target(s): To Be Determined
Current Option Gain/Loss: +52.8%
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

10/23/14: FDX has delivered a tremendous bounce from its October lows. Today's +2.5% gain puts the stock within striking distance of a new all-time high.

More conservative investors may want to take profits now since the prior highs near $164.00 could be resistance. We will move our stop loss to $155.90.

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*

10/23/14 new stop @ 155.90
FDX is nearing resistance at $164.00. Traders may want to take profits now.
10/21/14 new stop @ 153.45
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: 102.60 change: +0.29

Stop Loss: 101.75
Target(s): To Be Determined
Current Option Gain/Loss: +21.9%
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

10/23/14: I'm still concerned about our HAIN trade. The stock reversed near resistance at $104.00 again today. We will move our stop loss up to $101.75.

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*

10/23/14 new stop @ 101.75
10/21/14 new stop @ 100.65
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: 151.93 change: +2.88

Stop Loss: 147.25
Target(s): To Be Determined
Current Option Gain/Loss: +164.7%
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

10/23/14: The IYT managed to hit new four-week highs but the transports were struggling with resistance in the $152.50 area. After such a big bounce readers may want to take some money off the table, especially with our option up +160%.

Tonight we will move the stop loss to $147.25.

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*

10/23/14 new stop @ 147.25
10/21/14 new stop @ 144.65
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

NetEase, Inc. - NTES - close: 92.10 change: +0.13

Stop Loss: 89.40
Target(s): To Be Determined
Current Option Gain/Loss: -6.1%
Average Daily Volume = 430 thousand
Entry on October 21 at $91.59
Listed on October 20, 2014
Time Frame: 8 to 12 weeks
New Positions: see below

10/23/14: NTES is having a hard time building on its recent breakout past resistance near $90.00. The stock has just been consolidating sideways in the $92-94 zone.

I am not suggesting new positions at this time.

We will move the stop loss up to $89.40.

Earlier Comments: October 20, 2014:
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.

- Suggested Positions -

Long NOV $95 call (NTES141122C95) entry $2.45

10/23/14 new stop @ 89.40
10/21/14 triggered on gap higher at $91.59, trigger was $91.15
Option Format: symbol-year-month-day-call-strike

Palo Alto Networks, Inc. - PANW - close: 107.45 change: +4.87

Stop Loss: 101.90
Target(s): To Be Determined
Current Option Gain/Loss: + 6.7%
Average Daily Volume = 2.1 million
Entry on October 22 at $105.25
Listed on October 21, 2014
Time Frame: 4 to 5 weeks
New Positions: see below

10/23/14: PANW shot higher at the opening bell. This stock outperformed the major indices with a +4.74% gain and closed at a record high. We are raising or stop loss to $101.90. That is about 25 cents below yesterday's low.

I am not suggesting new positions at this time.

Earlier Comments: October 21, 2014:
Customer data mining is big business. It doesn't matter of the company is online or a bricks and mortar store they want to know all they can about you. Who are you? How old are you? What zip code do you live? They track your purchases and store your credit card data.

Last year retail giant Target (TGT) disclosed a cyber breach that affected up to 110 million customers to potentially having their credit card data stolen. Months later, Target's president and CEO resigned over the fiasco. Target isn't the only one being targeted.

Several weeks ago banking titan J.P.Morgan Chase (JPM) disclosed that 76 million personal accounts were at risk and seven million small businesses were exposed in a recent cyber security attack.

The list continues with recent cyber security hacking victims including Neiman Marcus, Michaels, P.F.Chang's, Albertons, Supervalu, Home Depot, Kmart, Dairy Queen, and the University of Maryland. Meanwhile, the number of cyber attacks on small business doubled last year.

According to USA Today the U.S. government just warned corporate America that cyber thieves have stolen more than 500 million financial records in the last 12 months.

Sadly it's only getting worse. The Justice Department called the online landscape for cyber threats and hacking extremely dangerous. They used the term "pre-9/11 moment" suggesting that any day now someone could launch a massive cyber attack. The government is worried about protecting our infrastructure and electrical grid. Corporate America wants to protect their data (and your data). That's why cyber security is big business and getting bigger.

PANW is making a splash in the security world. The stock IPO'd in 2012 and while it has been a rocky ride so far the company seems to have found its groove. Founded in 2005 and headquartered in Santa Clara, California, PANW describes their company as, "leading a new era in cybersecurity by protecting thousands of enterprise, government, and service provider networks from cyber threats. Unlike fragmented legacy products, our security platform safely enables business operations and delivers protection based on what matters most in today's dynamic computing environments: applications, users, and content."

More than 70 of the Fortune 100 companies use PANW's products and services. In 2013 PANW saw revenues grow +55% year over year, outpacing their rivals. They have added more than 1,000 customers per quarter for the last ten quarters in a row. PANW most recently reported earnings on May 28th and said it was their "highest rate of new customer acquisition in our history and now serve more than 17,000 customers."

Another important event last quarter was the settlement of a three-year patent lawsuit with rival Juniper Networks (JNPR). Resolving this issue has removed a significant black cloud over PANW.

The market's recent volatility has generated some big swings in PANW. Yet there was no follow through after PANW broke down under its 50-dma. Right now PANW is soaring with a six-day bounce back toward its all-time highs. The relative strength is encouraging.

Today saw shares of PANW spend over half the session consolidating sideways in the $104.00-105.00 zone. A breakout past $105.00 could be our next entry point. We're suggesting a trigger to buy calls at $105.25.

Please note I do consider this a more aggressive trade since PANW is already up more than 10% from its October lows and shares can see some big intraday moves. PANW is expected to report earnings in late November so we'll most likely exit prior to their announcement.

- Suggested Positions -

Long DEC $110 call (PANW141220C110) entry $5.90*

10/23/14 new stop @ 101.90
10/22/14 triggered @ 105.25
*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

Semiconductor ETF - SMH - close: 48.86 change: +0.62

Stop Loss: 46.35
Target(s): To Be Determined
Current Option Gain/Loss: + 4.5%
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

10/23/14: SMHY did not see any follow through on yesterday's intraday pullback. That's good news. Yet shares did lag behind the NASDAQ today. The SMH gapped open higher and spent the rest of the session drifting sideways.

I'm not suggesting new positions.

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

10/21/14 new stop @ 46.35
10/17/14 triggered @ 47.15
Option Format: symbol-year-month-day-call-strike

PUT Play Updates

Lithia Motors Inc. - LAD - close: 68.69 change: -2.08

Stop Loss: 72.25
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 389 thousand
Entry on October -- at $---.--
Listed on October 22, 2014
Time Frame: We will probably exit prior to earnings on October 30th
New Positions: Yes, see below

10/23/14: The widespread surge in stocks this morning may have sparked some short covering in LAD, which has reversed higher with a +4.8% gain. LAD is now flirting with a breakout past resistance near $72.00.

Currently we are on the sidelines. Our suggested entry point for bearish positions is at $68.25.

Earlier Comments: October 22, 2014:
LAD is in the services sector. The company runs a chain of auto dealerships in the U.S. with 28 brands and almost 100 locations.

The stock soared back in June when it was announced LAD was merging with DCH Auto Group. Yet momentum stalled a few weeks later. Even a better than expected earnings report from LAD in July could not keep the rally going. The stock has been slipping and grew into a bearish trend of lower highs and lower lows.

A few days ago LAD collapsed after the company issued an earnings warning. Management expects 2015 earnings in the $5.60-5.80 range when Wall Street was expecting $6.34 per share. They also lowered guidance for the rest of 2014 as well.

LAD did see an oversold bounce but the bounce has failed at resistance (prior lows). Now the stock is rolling over again. The point & figure chart is suggesting a long-term target near $45.00.

Tonight we are suggesting a trigger to buy puts at $68.25 with a stop loss at $72.25.

NOTE: This could be a short-term trade. Investors may want to exit prior to LAD's earnings report on October 30th.

Trigger @ $68.25

- Suggested Positions -

Buy the NOV $65 PUT (LAD141122P65)

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

Sohu.com Inc. - SOHU - close: 43.51 change: +0.65

Stop Loss: 45.65
Target(s): To Be Determined
Current Option Gain/Loss: -23.0%
Average Daily Volume = 393 thousand
Entry on October 22 at $43.25
Listed on October 18, 2014
Time Frame: 2 to 3 weeks
New Positions: see below

10/23/14: SOHU recovered a good chunk of yesterday's decline. Yet the bounce is still failing at its descending 10-dma. Investors may want to see a new drop under $42.75 before initiating new positions.

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.

*Smaller positions to limit risk* - Suggested Positions -

Long NOV $40 PUT (SOHU141122P40) entry $1.04

10/22/14 triggered @ 43.25
Option Format: symbol-year-month-day-call-strike