Option Investor

Daily Newsletter, Saturday, 10/25/2014

Table of Contents

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

Market Wrap

Rally Bought to You by the Letter "E"

by Jim Brown

Click here to email Jim Brown

The markets had their best week in months as a result of several E-vents.

Market Statistics

I have to thank David Darst for giving me the idea for the title this week. His list of positives for the market caused me to consider what really moved the market other than the normal oversold reasons.

Over the last week the market was moved by Ebola. While the news headlines had faded going into Thursday a new case in New York caused the bullish rally on Thursday afternoon to crater right at the close and the futures to go seriously negative Thursday night. The idea of an infected person walking around New York, visiting restaurants, riding cabs and subways and even going bowling put a sudden fear into New Yorkers and the market. Fast forward to Friday and the string of press conferences assuring there was no risk allowed the headlines to fade again and everyone go back to their personal lives.

Nina Pham, the first Dallas nurse to be hospitalized with Ebola, has now been discharged from the hospital and is Ebola free. This news was all over the headlines on Friday and that helped to reduce the worry over the New York case.

The ECB is going to release this weekend the results of the enhanced stress tests on European banks. A report leaked on Friday said 25 of them will fail with 105 passing the enhanced test. However, 15 of the banks that failed have already raised additional capital and the other 10 are in the process according to the leaked report. This "there were problems but they have been corrected" implication in the leaked report was somewhat positive for the market. It removed some of the worry that the European banking sector was worsening.

European economic data did not worsen last week. You know analysts are grasping at straws when a positive headline is that economic conditions did not worsen. The European manufacturing PMI rose unexpectedly to a two-month high of 50.7 for October. HSBC analysts had expected a drop below 50 into contraction territory. German PMI also moved unexpectedly back over 50 to a three month high of 51.8, up from 49.9 in September. Spanish unemployment fell to the lowest level since 2011 to 23.7% in Q3, down from 24.5% in Q2. France was the laggard in the group with a drop in their manufacturing PMI from 48.8 to 47.3 in October and a two month low. Still European economics improved slightly from the market crushing worry from the prior week.

Energy prices in the U.S. continued to fall and this is very positive for consumers and holiday shopping. With oil prices at $80 this represents a $1.1 trillion annual tax cut for consumers according to Citigroup. While it is not likely to last a year we can safely say that the amount spent on gasoline will decline about $100 billion a month and that money goes straight into consumer's pockets and right back out again in consumer spending elsewhere. Of course if oil prices were do decline under $80 it would set off a round of cutbacks in exploration in the energy sector and that means significant layoffs until prices pick up again. Cutbacks would not happen until 2015 so the Q4 quarter should benefit from continued employment and lower gasoline prices. The average price in the U.S. this weekend is $2.99 and dropping about a penny a day.

Natural gas prices collapsed to an 11-month low on Friday as oil moved closer to $80. The fall weather has been mild and gas demand for home heating has not yet arrived. Weekly injections into storage are running just under 100 Bcf with only one more week before the traditional start of the heating season on Nov 1st. Gas inventories in storage are still about 400 Bcf below year ago levels and we almost ran out of gas last year. Consumers are getting a break on their gas bills in October but once the injections turn into withdrawals we can expect prices to rocket higher.

Continuing the "E" themed reasons, the market rallied because the U.S. Economy continues to muddle along. Existing home sales rose unexpectedly from 5.05 million to 5.17 million. The Consumer Price Index for September came in at only +0.1% and well below the level that would worry the Fed. The trailing 12 month inflation rate is only +1.7%. Several analysts, including myself, thought it would be flat or negative after the -0.2% decline in August. The collapse in energy prices was evident but higher prices for food kept it barely positive.

Lastly Earnings have been mostly positive despite quite a few high profile disappointments. We sometimes forget that the market is made up of roughly 4,500 stocks and we focus on the 100 or so mega-caps as our reading on the market. While stocks like IBM, KO, MCD, AMZN and NFLX led a flock of earnings misses there are dozens of S&P stocks that were beating estimates. So far more than 300 S&P companies have reported and 64.9% have beaten estimates with an earnings growth rate of roughly +5.1% compared to early estimates of +4.1%. Only 49.3% have beaten on revenue.

I believe guidance is more important than earnings and I have been capturing guidance news for October. Currently there have been 73 companies with positive guidance, 111 with negative guidance and 180 that provided guidance in line with prior forecasts. Since negative guidance normally runs 2:1 over positive guidance this has been a slightly positive month at 3:2 negative over positive. Unfortunately we are seeing a higher number of companies post in line guidance, which does not say much about the current quarter. Companies typically lowball their guidance to some extent. If they can't improve on it now that we are in Q4 it suggests they are struggling just to maintain the status quo. Next weekend will be my last update on the guidance front because October has the most earnings and there is nothing to be gained by dragging it out until the last company reports.

I touched on Ebola, Energy, ECB, Europe, Earnings and the Economy. It was definitely an "E" week and there is no reason to think that these same six Es will not impact us in the week ahead. With the exception of Ebola it is the same Es that we have been dealing with for quite a while. I could have added Extremists with the Canadian shooting and New York hatchet attack but I think those perpetrators were more likely mentally incompetent than extremists. The real extremists have yet to appear and once we get to Black Friday I am going to be breathing a sigh of relief for every day that passes without a mall attack.

The economic report for Friday was New Home Sales, which rose slightly from the revised August number of 466,000 to 467,000 in September. However, the preliminary August number was 504,000 so it was a big decline from the initially reported levels. We can take comfort in the knowledge that September sales were still up +17% from year ago levels at 399,000. Sales in the Midwest surged +12%, South +2%, Northeast was flat at zero and the West declined -8%. The average sales price fell from $286,900 to $256,600. That is the lowest average sale price since August 2013. You have to wonder if builders were discounting homes to get them sold before winter. No builder wants to have homes sitting vacant over the winter where pipes can freeze and heaters have to be kept running.

The calendar for next week is dominated by the FOMC announcement on Wednesday and the GDP for Q3 on Thursday. The speculation about the FOMC and the assumed end of QE has gotten a lot of press over the last two weeks. When Bullard suggested the Fed could hold off on ending QE last Thursday he generated a firestorm of conflicting views.

Personally I don't believe the fed will change their plans. They have been moving towards ending QE at the October meeting for over a year and the Fed does not make spur of the moment changes in policy. They are like a huge oil tanker that takes miles to turnaround. Once they get moving in one direction they rarely change that direction without a lot of hand wringing and the appropriate number of trial balloons to gauge the wind direction and political impact of the potential change.

The real question for next week is whether they keep the "considerable period" language that supposedly implies the Fed will not raise rates for six-months after the end of QE. That implication has been debated for most of 2014 but once QE is over it will take on a new significance. If they take it out it would imply a potential rate change in less than six months. Since the current projection by independent analysts is moving closer to September 2015 than June 2015 I would expect them to leave the language in the announcement. However, the Fed is trying to come up with new language that enforces their "data dependent" stance and that change, if it happens at this meeting, would negate the considerable period terminology.

This is a pivotal meeting for the Fed and therefore for the markets. The Fed has appeared to be slightly more dovish in recent weeks since they disclosed their fear about a European meltdown. Whatever action they decide to take would probably be of a more dovish nature than hawkish.

Interesting article from Mohamed El-Erian on What Will the Fed Do?

The Q3 GDP is expected to decline from the snapback of 4.59% in Q2 to +3.1% growth. I think most investors would be happy with that number because it represents continued growth. If you take the -2.11% decline in Q1 and the +4.59% rebound in Q2 and combine them you get +2.48% growth for the first half. Getting +3.1% for Q3 would be slightly higher and put us back closer to the +4% average rate of Q3/Q4 of 2013.

A new split was announced by Jarden (JAH) I also added some reverse splits on ETFs.

Stock news was pretty quiet on Friday with the Amazon crash the biggest news. Amazon (AMZN) dropped -$26 (-8.3%) on Friday after reporting disappointing earnings Thursday night. Amazon lost -$417 million for the quarter while sales rose +20% to $20.6 billion. At the same time they invested $21.1 billion into operations and capital expenditures a +23% rise. Amazon is building out a series of warehouses and shipping centers that will enable it to ship products to customers from the closest warehouse and cut down on the $5 billion a year they spend on shipping. The company said it was hiring 80,000 holiday workers to handle the expected increase in volume. They hired 70,000 last year and they have 149,500 normal workers. For the full year Amazon said it was on track to lose $40 million on what is expected to be more than $80 billion in revenue.

Amazon admitted the Fire phone was an initial failure in a crowded market and wrote down their remaining inventory. They took a $170 million charge for inventory write downs. They slashed the price of the remaining phones from $199 to 99 cents. They are not discontinuing the phone and they just started shipping current models in Europe. Amazon also played down estimates for Q4 saying the rising dollar was causing sales slowdowns in Europe.

The Ebola fears may actually help Q4 sales as fewer shoppers will want to brave the malls looking for bargains. The National Retail Federation survey found that 41% of shoppers said they will spend more online this year than last.

Shares of Amazon declined to close at $287 and right on critical support. Various analysts were calling for a decline to $200 and at least one thought it could trade down to $100. Investors need to realize that Amazon is trading at 15 times EBITDA, which is very cheap for Amazon. Also, once Bezos gets the infrastructure built out he can turn on the profits almost instantly. All he has to do is quit spending at $20+ billion a quarter. I would not write off Amazon but I also would not buy it until we see what the next week brings in terms of the stock price.

Bad news for Amazon is good news for Alibaba if you believe the stock price is telling us a story. The two biggest online retailers are the opposite in results. Alibaba makes a profit. Shares of BABA are reaching a breakout point at $98 after falling to $68 post IPO. BABA reports earnings on Nov 4th.

Another stock falling to critical support was GoPro (GPRO). Oppenheimer initiated coverage on GpPro with a sell rating and a $45 price target. The analyst said the early adopters have already purchased a camera and sales in 2015-2016 will be tougher to produce. He said there would also be new competitors in the coming months that would eat into GoPro's market share. He warned that cell phone video was also a challenge as the camera quality and resolution improves. There are four ratings I could find on GoPro. Barclays at neutral, Robert W. Baird at neutral, Stifel at hold and Oppenheimer at sell. That is not a very encouraging list but that may not be everyone.

Shares retreated to support at $70 with a -9% drop. This is a critical level with $65 the last material support before $40.

Procter & Gamble (PG) said it planned to spin off its Duracell battery brand and use the money to buy back shares. The company is considering offering existing shareholders a share-swap for shares of the new company. This would give those that want a stake in Duracell the opportunity and also reduce the outstanding share count of PG shares. They are also considering a straight sale, spin off and other options. The split would happen in the second half of 2015. Duracell sales are between $2.0-$2.5 billion. PG did $83 billion in sales last year but they don't breakout the sales by brand.

PG also reported adjusted earnings of $1.07 that missed estimates by a penny. They lost 7 cents due to currency conversion issues during the quarter. More than 60% of PG sales come from overseas. Revenue was $20.79 billion.

UPS (UPS) reported earnings of $1.32 that beat estimates of $1.28. Revenue rose +6% to $14.29 billion. The company affirmed its full year guidance of $4.90-$5.00 compared to analyst estimates of $4.95. The company has spent $500 million in capex and will spend $175 million more for operations to get ready for this holiday season. They are hiring between 90,000-95,000 holiday employees. They expect shipment volume to rise +11% over last year's record volume. They are raising rates by +4.9% for 2015. UPS said they were experiencing currency conversion issues but lower fuel prices were offsetting some of that drag.

Pfizer (PFE) surprised everyone when they announced a Viagra sized stock buyback of $11 billion on Thursday. This is in addition to the $1.3 billion remaining on its current authorization. Shares rallied slightly but the announcement was quickly seen as the end of Pfizer's bid to acquire AstraZeneca (AZN). Pfizer, with a market cap of $180 billion tried to buy AZN with a bid of $118 billion earlier this year. Under British rules they could make another bid in late November. If they are going to spend $11 billion on buying back shares it would seem to suck up a lot of cash they could use in another acquisition attempt and therefore suggest there will not be another attempt.

Shares of Pfizer have been declining since March so it would be a little harder to use their shares as currency for the entire transaction. I view Pfizer shares as dead money. If Pfizer has that much cash on hand they should be using it to make acquisitions or develop new drugs to improve the share price rather than simply buying back shares. The only good thing is that they announced the buyback near their 52-week lows rather than at the top. It is always better to buy when shares are cheap regardless of who you are.


The S&P has rebounded +144 points in eight days without any material pauses for profit taking. To say it was now overbought would be an understatement. The beauty of the markets is that it can remain overbought, or oversold, for far longer than investors expect.

Most traders believe the Oct 15th panic dip was capitulation and this rebound is the start of the end of year rally that will power us to new highs. Let's hope "most traders" are right. However, there are critical resistance levels ahead. I pointed out on Tuesday that the 50-day average at 1,966 could be trouble that that was almost exactly where the S&P stalled on Friday.

If it gets through that level the next hurdle is 1,970 and the strong resistance from the first week of October. The good news would be a push through those levels because the next stop would be 1,985 and then the resistance highs from 2,000-2,012.

For an index that has rebounded +144 pints in 8 days only another +50 points would have it closing at a new high. How many traders thought that would happen when it was bouncing off 1,820 just over a week ago? I am pretty sure the bulls were scarce on October 15th.

The small dip on Wednesday afternoon created minor support at 1,930 so that is the target we don't want to test again. With good news breaking out all over the stage may be set for a continued rally next week.

The week before a midterm election has been up 75% of the time since 1982. While history is a guide and not a guarantee it does provide some level of assurance to those who want to be bullish anyway.

Watch 1,966-1,970 for a breakthrough early next week.

The Dow is still well under the 50/100 day averages with the 50 day the most troublesome at 16,895. The Dow overcame some serious dead weight in the form of IBM, KO, MCD, BA, T and others earlier in the week. The post earnings gains by MSFT, MMM, PG, CAT, etc helped pull the index out of the slump to gain nearly 1,000 points in 8 days. If IBM was not in the index it would be +160 points higher today. The $20 drop in IBM is worth about 160 Dow points.

Fortunately the majority of the Dow components have reported so there should not be any more negative surprises.

If the Dow can push through the 50-day at 16,895 the next test is 17,000. Without any positive earnings surprises we could have a lack of catalysts to produce the momentum needed to break through those levels. This will be a pivotal week for the markets and the Fed is going to be either the pothole in the rally road or the fuel for the boost higher.

Wharton School professor Jeremy Siegel made news earlier this year when he predicted Dow 18,000 by the end of the year. When interviewed on Friday he said the chances were only 50:50 today with the Dow -7% from that level. With the Dow closing at 16,800 that is only 1,200 points from his 18,000 target. The Dow has rallied almost that much in the last 8 days and the best two months of the year are still in front of us.

Thud! That sound you heard on Friday afternoon was the Nasdaq slamming into resistance at 4,485. A breakthrough here targets 4,545 and then 4,600 and the 14-year highs. The Nasdaq gained +31 points on Friday despite the -23 point loss by Amazon.

Here is the most interesting statistic. Since the low at 4,116 on the 15th the Nasdaq has rallied +367 points or a whopping +8.9%. That is a huge move in a short period of time and it is showing no signs of fading. All the big tech names have already reported earnings so there should not be any monumental disasters like Amazon or Netflix in the near future.

The Nasdaq needs to rest. It would not hurt to have a couple days of minor profit taking before the Fed announcement on Wednesday. This is a marathon, not a sprint and we need to develop a sustainable pace rather than spike to resistance and then collapse.

Initial support should be around 4,445 with resistance right at the closing level of 4,485.

The Russell 2000 rested on Friday. It was down fractionally all day only to squeeze out a minor gain at the close. The Russell ran into minor resistance at 1,120 and it paused to refresh. It still posted a +3.7% gain for the week. The Russell is critical to the overall market and we definitely do not want to see it start falling behind and lagging the big cap indexes. We need the Russell to continue surging ahead to give buyers confidence the bottom is behind us.

The Dow Transports surged over resistance at 8,500 and appears headed for a retest of the closing high at 8,676. The transports are positive confirmation for the Dow and a new high would trigger additional buying in the industrials. In theory the transports move the goods the industrials produce and better earnings expectations for the transports suggests a better economy. In reality the transports are surging more on the lower fuel costs than a surge in the economy. However, a 3% GDP is not bad and we heard from the railroads and the airlines that demand is strong. Cheap fuel and strong demand should mean higher profits and a new high soon.

Monday and Tuesday could be consolidation days. Everyone thinks they know what the Fed will say on Wednesday but nobody knows for sure. This could cause some profit taking and positioning for a negative news event but I don't know what they could say that is not already priced into the market.

The real wildcards are another Ebola case or another terrorist attack by sane individuals. We know it is coming. It is only a matter of time. However, for the last 13 years we have expected it and nothing appeared. We can't live our lives in constant fear of attack or the terrorists will have won. We should invest and follow the trend but keep our stops tight just in case the unexpected happens.

Random Thoughts

A +4% rally in the S&P and +5% in the Nasdaq caused the Volatility Index (VIX) to decline more than -10% per day for three consecutive days. That is the first time that has ever happened. There are 50 puts for every 100 calls on the VIX. That is the highest percentage of bearish bets in 10 months. The open interest in VIX puts surged to a record 3.54 million contracts last week. The VIX closed at 16 and half of its value on the 15th.

Beware the end of QE3. Just take a moment to reflect on QE3 now that it is ending. When it started 27 months ago at $85 billion a month it was injecting roughly $1 trillion into the markets on an annual basis. With the taper nearly a year old the QE3 program has injected $1.7 trillion into the markets but buying up the majority of marketable securities in the market for several durations. The fed has never successfully unwound a stimulus program without creating a market crash. This, along with QE1 and QE2 and their subsets has pushed the Fed's balance sheet to more than $4.48 trillion. Why would anyone actually believe that the Fed can unwind a balance sheet that size without rocking the market even if they take a long time to do it? Yellen said it could take until the end of the decade to reduce the balance sheet. Since recessions normally come on a 5-7 year cycle and we are already 5 years into this cycle the odds of another recession in the next couple of years is very strong.

When stocks rise on stimulus it is only rational that they will decline as stimulus is removed. Since the Fed is probably not going to make any changes to their balance sheet until late in 2015 you would think the market would be safe until then. Unfortunately by NOT supplying additional stimulus they are actually tightening monetary policy even though they are taking no action. All of this is going to come to a head probably in Q1. The end of year rally will be over and investors will be planning for the inevitable rate hikes later in the year. Investors have had several years of above average returns. We should be planning for a year of change as the market resets its expectations.

The Conference Board published a new report last week suggesting the Chinese economy is about to fall off a cliff. They are projecting a drop in GDP growth to around 4% compared to the 7.3% today and 10% average from 1993-2011. They cite numerous factors including a sharp rise in private sector debt. Since 2009 when private sector debt was 117% of GDP it has risen to almost 200% today and it growing at 15% per year. This is a level that has typically caused serious crashes in other economies. This is an interesting report and worth a quick read. Is China Falling Off a Cliff?

Chinese home prices fell for a fifth straight month wiping out gains for the year and could force the government to add more stimulus to slow the decline. Prices fall in 69 of 70 cities

There was a new revelation last week that workers at the Census Bureau falsify data. Wow! That is like saying, news flash -- the Pope is catholic. This has been almost common knowledge in the investment community for years. This latest revelation came from yet another whistleblower in the Los Angeles region claiming workers have been manipulating data for years. "Everybody knows falsification is going on" according to the whistleblower. His data has been turned over to congressional investigators who are also looking into falsification in other parts of the country. Workers in Denver and Philadelphia have recently blown the whistle on coworkers and turned their evidence over to investigators. So far workers in 4 of the 6 regions have now turned over data to investigators. Only the New York and Atlanta regions have failed to produce any whistleblowers but the investigation is still young.

There were multiple claims of the unemployment rate being manipulated for two months before the 2012 elections. Of course the Census Bureau denied it but when investigators started breathing down their back more than 120 personal computers with 11 belonging to supervisors suddenly went missing never to be found. It is amazing to me how many emails, hard drives and even computers suddenly disappear once investigators begin to focus on the wrongdoing in government.

If the government can't disappear the documents they can always claim they are protected by executive privilege. President Obama initially claimed he did not know about the Fast and Furious gun running scheme being handled by the Eric Holder and the Justice Department. This is where guns were sold to questionable buyers in Arizona and New Mexico and allowed to be smuggled into Mexico. In theory they were going to track the serial numbers and figure out how they got from the U.S. into Mexico. Unfortunately people started dying after these guns got into the wrong hands. The president was outraged and promised to get to the bottom of it. Eric Holder refused to supply records requested by Congress investigators. They finally held him in contempt of Congress but still no records.

The watchdog group Judicial Watch sued and a federal judge demanded the Justice Dept turn over all relevant documents. On Friday the Justice Dept released a list of 15,662 documents related to Fast and Furious that President Obama refused to release because he claimed "executive privilege." Twenty-eight of those were emails from Holder to his wife, Sharon Malone and 11 were from Holder to his mother. If you are like me you are probably wondering why President Obama could claim executive privilege on emails to Holders wife and mother. This just shows how corrupt Holder and the Justice Dept really are. They will do anything to prevent being held accountable for wrongdoings.

The Eurozone is moving ever closer to its third recession since the financial crisis and eventually deflation. The inflation rate in the zone has declined to +0.3% and could go into decline in 2015 if the price slide continues at the present rate. This region makes up almost a fifth of the world's output and it is sinking fast. The Eurozone is heading for a Japanese style deflation and the U.S. is not going to escape contamination once it begins. Populist politicians will seize control after years of imposed austerity and the eurozone is likely to self destruct. Globally 46 countries have central banks that target inflation and 30 are currently fighting a losing battle with inflation below the target rate and slipping. The Pendulum Swings to the Pit also Barron's Stock Market blemishes

In the last five years the percentage of household financial assets invested in the stock market has increased by 25% to a total of 35%. That means 35% of individual investors net wealth is at risk. This is now higher than the 34% in 2007 just before the financial crisis. The two prior peaks were 43% in Q1-2000 and 31% in 1968. Bear markets occurred from 1966 to 1982, 2000-2002 and 2007-2009. Amazing how that peak in invested assets corresponds to the beginning of bear markets. Welcome back to the Market

$70 oil? Jeffery Gundlach is predicting oil prices will plunge further to $70 and that will seriously impact the amount of drilling and fracking and dramatically slow future production. If the oil bloom withers it will take the economy with it along with rising unemployment and a falling stock market. Oil Will Tumble to $70

Venezuela defaults on deal with China to supply 330,000 bpd of oil in repayment for billions in prior loans. China loaned Hugo Chavez billions to bail out his socialist state and the repayment for those loans was 330,000 bpd in crude oil. Last week Venezuela's national gazette made it official that Caracas no longer needed to export that oil to China. Instead it can send as much or as little oil to China as it wants. Furthermore the terms of the loans have been extended beyond the initial three year term, perhaps indefinitely. China's Ministry of Commerce confirmed the changes "at Venezuela's request."

The problem is one of cash flow. Venezuela has none. They spent the Chinese billions years ago and now they get nothing for the 330,000 bpd of exported oil. By defaulting on the agreement with China they can now sell that 330,000 bpd of oil to someone else for real money. China loses, Venezuela wins. Unfortunately they just burned an economic friend. I doubt they will be going back to the bank of China for future loans but the new cash flow from oil sales will probably keep them afloat for a couple more years.

In the "you can't make this up" department Vladimir Putin is blaming the U.S. for the war in the Ukraine and for many of the current global problems. He said the U.S. is causing growing chaos for sovereign states and support for neo-Nazis and Islamic extremists. Putin Blames U.S. for Islamic Terrorism

Need a house? A mystery bidder offered $3.2 million for 6,000 of Detroit's worst homes. These homes could be unhabitable, inhabited, have mold, have recently burned and have been condemned. The treasurer of Wayne County said someone tendered a $3.2 million bid for all the foreclosed properties up for auction. Some come with the demand that they be demolished within 6 months at an estimated cost of $24 million. Only about 1,000 of the homes are thought to have any value. New Slum Lord Born?

Warren Buffett had a bad week. Between IBM and Coca Cola the investor lost $2.3 billion for the week. Both companies missed earnings and dropped hard. Berkshire Hathaway has been a long time investor in Coke and a fairly recent investor in IBM. On tops of those problems were GM, down -24% in recent months and Chicago Bridge & Iron (CBI) down -38%. Sometimes stuff happens and you have to deal with the disaster, pick up the pieces and move forward.

Only 60 shopping days until Christmas.

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

"When you personalize the market, you fall into the trap of trying to be right rather than trying to make money."

Ben Carlson


Index Wrap

Rally Continues: Damn the Torpedos, Full Speed Ahead!

by Leigh Stevens

Click here to email Leigh Stevens

I wrote last week about my first chart, the S&P 500 (SPX) weekly, in terms of discussing why it's hard, or at least harder, to time (ascertain) Market tops. I used and use again the highlighted 4 times that SPX bumped into projected resistance at the top end of its broad uptrend price channel. Channel lines like this are very good at pinpointed resistance areas but not whether a pullback from resistance will be minor or MAJOR per our most recent correction.

It's hard to figure WHICH peak will be the one ahead of a good shorting opportunity. There was the 'divergence' of prices going up versus the 8-week Relative Strength Index (RSI) trending down, showing by this pattern a potential downside trend reversal ahead. However, such divergences happened at the time of some of the prior peaks and they didn't lead to the trading opportunity we just had in buying index calls, covering index puts.

The SPX weekly chart above is also shown here to illustrate the intermediate oversold condition suggested by the 8-week RSI being in the 'oversold extreme' zone. ALL the other indices, including the Russell 2000 have the EXACT same pattern; i.e., all dipped to this same low RSI reading then are rebounding in a carbon copy overall pattern for the major indexes.


I'll be using what my Trader's Corner articles at key Market junctures to amplify and carry on DURING THE WEEK with analyzing trend reversals and areas of likely support or resistance. Examples are provided in the following two areas of interest that came up in suggesting how chart/trend analysis could have identified or help identify this last very tradable low.


In my second most recent (Tues 10/14, a day before the recent bottom) Trader's Corner I covered the whys and wherefores of using percentage retracement levels relative to a prior major price swing, (up or down) to hone in on possible stopping places in a decline and especially in a STEEP 'waterfall' type decline where panic grips the market. This prior Trader's Corner will make for better understanding of what retracement levels are important in what type of market. High volatility downswings in oversold markets will sometimes if not often retrace 2/3rds to 3/4ths of the prior advance.


In my most recent Trader's Corner e-mail/web posting written the day of the 10/15 bottom, I describe the use of the 21-day moving average and related moving average envelope lines to predict potential bottoming areas.

For example, in high volatility downswings after a prior overbought EXTREME has been reached, the S&P 500 (SPX), S&P 100 (OEX), the Dow 30 (INDU) and even the Russell 2000 (RUT) Index would typically be at an EXTREME oversold condition if their intraday and/or Closing Lows reached the level of lower envelope line that 'floats' at 5-percent BELOW its 21-day moving average. With the Nasdaq, in its common drive high-beta condition, the Composite (COMP) and big cap Nas 100 (NDX) Indexes can fall to 7-precent BELOW its 21-day moving average.

Knowing the above will help make sense of the moving average envelope highlights on my charts below, which I've kept intact, especially now for noting the level of the UPPER moving average envelope which now may well indicate potential resistance(s).

Once a BOTTOM has been established or it’s a pretty good guess that it is, the next important milestone is what happens on a recovery move TO the 21-day moving average. If the index rebound stops there, it will pull back and do some more 'backing and filling'. If instead the Index advances fairly rapidly ABOVE the 21-day average, it is likely headed to the UPPER envelope line where the rally might stall.

The 21-day moving average therefore should be watched as potential resistance on rebound rallies or as support on pullbacks once the Index is back ABOVE this key average.



The chart shows an intermediate bottom and turnaround since the 10/15 Wednesday intraday low. SPX retraced 2/3rds/66% of the February to September advance, which is a common stopping point for a DEEP correction. This assumes that the Index is NOT going to retrace ALL of its prior advance; and retest its prior (Feb.) low which would be a 100% retracement. Moreover the recent SPX low fell to 5 percent BELOW the 21-day moving average. For the S&P 500, 100 and Dow, 5 percent below this key trading average is about as volatile on the downside as we'll see in a bull market and we remain in a long-term primary uptrend.

Clearing the 21-day moving average resistance suggests next potential in this move is to the 2000 area at the upper (2.5%) envelope line and possible resistance there; next resistance is around 2019 and the area of the prior intraday high. Support is highlighted at 1930, then in the low-1900 area.

The RSI is now at a mid-level 'neutral' zone so still far from an 'overbought' extreme. Bullish sentiment (CPRATIO indicator, bottom of the chart) has rebounded some but (also) is far from an extreme. The last oversold daily reading per the green arrow highlight was 2 days prior to the bottom, consistent with this indicator seeing bearish sentiment readings 1 to 5 trading session PRIOR to prices bottoming.


I said previously that the S&P 100 (OEX) had put in a bottom and that this was suggested in the 820-815 area. The foregoing estimate of a potential low was based on the clues provided by the move to the lower (green) 5 percent envelope line AND the retracement made by OEX being in the 62-66 percent range. A Fibonacci retracement is 61.8%, rounded to 62%. WD Gann made use of the 1/3 and 2/3rds retracements and I've found that a 66 percent retracement is often hit on the deeper Index corrections in overall bull markets.

The move in OEX to back above its 200-day moving average is important from an investment perspective and clearing the 21-day moving average is important from a trading perspective.

Key support is highlighted at 860 now, extending down to the 850-848 area. Near resistance is this week projected at 880-885, with 900 a key 'milestone' level after that.


The Dow finally got 'fully' oversold which is kind of a big deal in technical analysis with INDU as in very STEEP declines we will tend to see the Dow stock Average 'fully' oversold as measured by the 13-day Relative Strength Index (RSI); and, in our recent market low, as shown (exactly) in the same pattern seen in my first chart ('bottom line' comments) of the weekly S&P 500.

The Dow in prior week rebounded from the area of a lower envelope set to a value of 5 percent BELOW the 'centered' 21-day moving average; use of these envelope lines are explained in my initial 'bottom line' comments above) and after INDU fell to a 75 percent retracement. 75 percent is another Gann related input: the 1/4th and 3/4ths retracement points(in addition to 1/3, 2/3rds). If retracements' exceed 3/4ths of the prior move, the next target to look for is a 'round-turn' 100% retracement to retest the prior bottom.

Near INDU resistance is highlighted at 17000, with next resistance then projected for the 17200 area at the upper envelope line.

Support is seen at 16600 currently in the Dow, with fairly major support now suggested around 16400.


The chart shows that the Nasdaq Composite (COMP) has regained its mojo and recovered from its recent sharp recovery which is as expected in a bull market. My work suggested that our recent panic sell off was no more than an intermediate-term correction within a primary bull market. I assess continued upside progress, maybe at a slowed down rate of climb in the November-May period. Opps, I'm getting way ahead of myself.

4350 is a key near support. 4300 was noted LAST WEEK as a "key near resistance at the 200-day moving average." This same area is now a highlighted next support; i.e., resistance once penetrated can become subsequent support on pullbacks. A very KEY resistance in COMP is at the line of prior highs at 4600 in COMP.

Near resistance is suggested for the 4500 area, extending to 4550 at the upper (red) envelope line. KEY chart resistance then comes at the line of prior highs at 4600.


The NDX chart has regained its bullish momentum and chart pattern but will need to retest its prior high at some point to 'confirm' NDX in a renewed intermediate uptrend.

I previously have written about the Nasdaq big cap 100 (NDX) halting it's slide at a level just shy of a Fibonacci 62% retracement (for two days running) then also touching in the process the lower 7 percent envelope line. 7 percent as a lower envelope value in a 21-day moving average envelope study (applied to the more volatile Nasdaq) often represents an EXTREME low on the downside. A strong rebound followed and this wasn't surprising for pullbacks as deep as what we had recently in the Composite and in the big cap Nas 100.

It's important in relationship to using the 21-day moving average, with related 'envelope' lines, to measure likely upswing AND downswing extremes, to observe what happens on a initial recovery rebound TO the area of the 21-day moving average. This average may initially 'act as' resistance. Once it (the 21-day average) is decisively pierced, the Average then often flips to 'act as' support relative to a further advance.

Near support then as no surprise is suggested in the area of the 21-day average, with next anticipated chart support at the low end of the upside price gap area around 3875.

Near resistance is seen at 4050, then at 4100, extending to the 4120 area.


The QQQ tracking stock has regained its bullish chart pattern with the recovery from the extreme lows as measured with the help of where the lows fell in terms of retracements of the prior major run up and especially in terms of hitting the lower envelope line at the 10/15 bottom.

Last week I suggested resistance would next come in at 96, then at 94. Now those same levels, once they were penetrated exceeded, are expected layers of support ahead as seen with my green arrow chart highlights.

Next resistance is anticipated at 99, then at 100-100.5.

On Balance Volume (OBV) is finally pointed higher but upside potential may be limited if the current rally continues; i.e., to the 100-100.5 area in the near-term. QQQ may need some time to sustain a rally above 100-100.5. Stay tuned on that!


Even the dogs of the Dow have a tendency to get pulled up in a powerful bull move and I suppose that same axiom could be applied to the 'dogs' of the Market in terms of a major capitalization Market segment (small to medium cap companies) that has fallen out of favor currently.

Last week I talked about the importance of RUT having "a sustained move above the 21-day average". And, well a few days seems like pretty 'sustained' move for the Russell these days.

It's bullish having RUT above 1100-1080 but exceeded 1140 resistance may be tough; tougher still and more telling as to breaking out of its bearish downtrend channel would be for RUT to clear its down trendline in the 1160 area. Stay tuned!


New Option Plays

Coffee & Chickens

by James Brown

Click here to email James Brown


Keurig Green Mountain, Inc. - GMCR - close: 145.24 change: +1.24

Stop Loss: 141.90
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 1.68 million
Entry on October -- at $---.--
Listed on October 25, 2014
Time Frame: Exit PRIOR to earnings on November 19th
New Positions: Yes, see below

Company Description

Why We Like It:
GMCR is labeled as part of the consumer goods business. GMCR describes their company as "a leader in specialty coffee, coffee makers, teas and other beverages, Keurig Green Mountain (Keurig), is recognized for its award-winning beverages, innovative brewing technology, and socially responsible business practices. The Company has inspired consumer passion for its products by revolutionizing beverage preparation at home and in the workplace." GMCR makes almost 300 varieties of coffee, hot cocoa, teas, and other beverages in K-cup and Vue portion packs.

The company's latest earnings report back in August were better than expected but revenues were a disappointment and management guided lower. Yet the stock did see much follow through on the initial post-earnings drop. Then a couple of weeks later shares of GMCR soared to new highs on news it had finally signed a licensing deal with Kraft Foods, the second largest food and beverage company in the world. GMCR already had licensing deals with all the major coffee brands but Kraft was the lone holdout.

Several weeks later shares of GMCR soared again after Goldman Sachs slapped a buy rating on the stock and gave it a 12-month $166 price target. The Goldman analyst believes GMCR will see sales rise at a compounded annual growth rate of almost 30% and profits will soared at 23% per year through 2017.

On a short-term basis the middle of last week was starting to look like a top, especially with Thursday's bearish engulfing candlestick reversal pattern. Yet there was no confirmation on Friday.

Friday's intraday high was $145.54. We are suggesting a trigger to buy calls at $145.75. We'll try and limit our risk with a stop loss at $141.90. We are not setting an exit target yet but I will note the point & figure chart is suggesting a $182.00 target.

Earnings are coming up on November 19th. We will plan on exiting prior to the announcement. More aggressive traders may want to take a longer-term approach and hold over the announcement (and use longer-dated calls).

Trigger @ $145.75

- Suggested Positions -

Buy the NOV $150 call (GMCR141122C160) current ask $6.30

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

Daily Chart:

Weekly Chart:


Sanderson Farms, Inc. - SAFM - close: 78.95 change: -1.12

Stop Loss: 80.25
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 483 thousand
Entry on October -- at $---.--
Listed on October 25, 2014
Time Frame: 8 to 12 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
SAFM is part of the consumer goods sector. They raise chickens - a lot of chickens. The company will process more than 3.0 billion pounds of chicken meat in 2014. At almost 9.4 million chickens a week that makes SAFM the third largest poultry farmer in the United States.

Earlier this year the stocks of chicken producers were soaring. The price of beef and pork were rising fast and consumers were buying more chicken. Now it would appear the price of chicken is catching up and consumers might be buying less.

SAFM's most recent earnings report was in August. Even though the retail price of chicken was near record highs the company still missed Wall Street's estimates by a mile. Management blamed the earnings miss on chickens that didn't reach their target weights fast enough, a lower hatch rate for new chicks, and a rise in employee bonus programs.

Nearly all the poultry producers have had a rough October thanks to a big drop on October 16th. It would appear that drop was sparked by SAFM's comments at an investor conference. SAFM said casual dining traffic was down and thus people were eating less chicken at restaurants. SAFM blamed the weak job market and weakness in the broader economy, which seems a little out of sync with the rest of the country since the U.S. economy is still growing and the labor market has been slowly improving.

The S&P 500 put in a short-term bottom in the October 15-16 time frame and is up sharply since then. SAFM has not participated in the market's bounce. Instead the oversold bounce is rolling over. The point & figure chart looks ugly and suggests a $63 price target.

More aggressive traders may want to buy puts now. We are suggesting a trigger to buy puts at $78.20. More conservative investors might want to see a breakdown under the October low (77.25) before initiating positions.

NOTE: I am listing the 2015 February puts. I would prefer to use Decembers or Januarys but I didn't see any decent option strikes to trade. Earnings are not due until December.

Trigger @ 78.20

- Suggested Positions -

Buy the 2015 FEB $75 PUT (SAFM150220P75) current ask $2.45

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

Daily Chart:

Weekly Chart:

In Play Updates and Reviews

Big Caps Continue To Bounce

by James Brown

Click here to email James Brown

Editor's Note:

The big cap market indices continued to bounce on Friday in spite of headlines that Ebola has reached New York.

We want to exit our HAIN trade on Monday morning. LAD has been removed. Several plays have new stop losses tonight.

Current Portfolio:

CALL Play Updates

Ambarella, Inc. - AMBA - close: 41.20 change: -0.18

Stop Loss: $39.65
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

10/25/14: The last couple of days have been quiet for AMBA. That's a potential warning sign as shares have not followed the market higher on Thursday and Friday. We are raising our stop loss to $39.65.

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*

10/25/14 new stop @ 39.65
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: 163.88 change: +1.38

Stop Loss: 157.85
Target(s): To Be Determined
Current Option Gain/Loss: +61.3%
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

10/25/14: Transportation stocks continued to rally on Friday and FDX added another +0.8% to set a new closing higher. Shares are poised to breakout past its intraday peak near $165.00 soon. It is worth noting that FDX is arguably short-term overbought with the bounce from $150. More conservative investors may want to take some profits now. We are raising our stop loss to $157.85.

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*

10/25/14 new stop @ 157.85
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: 102.50 change: -0.10

Stop Loss: 101.75
Target(s): To Be Determined
Current Option Gain/Loss: +12.1%
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

10/25/14: HAIN has been struggling with resistance near $104.00 the last few days. This level has been resistance the last several weeks. If HAIN can't breakout with the market in rally mode then we are going to exit this trade early. We're suggesting an immediate exit on Monday morning.

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*

10/25/14 prepare to exit on Monday morning
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: 153.44 change: +1.51

Stop Loss: 148.65
Target(s): To Be Determined
Current Option Gain/Loss: +176.4%
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

10/25/14: Transportation stocks have been some of the market's best performers. The IYT is up more than +10% from its recent lows near $138.

More conservative investors may want to take profits now. We are moving our stop loss up to $148.65.

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*

10/25/14 new stop @ 148.65, traders may want to take some money off the table now
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: 92.74 change: +0.64

Stop Loss: 89.40
Target(s): To Be Determined
Current Option Gain/Loss: +4.0%
Average Daily Volume = 430 thousand
Entry on October 21 at $91.59
Listed on Exit PRIOR to earnings on November 12th
Time Frame: 8 to 12 weeks
New Positions: see below

10/25/14: NTES has spent the last few days digesting its gains with a sideways consolidation. The intraday low on Friday might be enough to fill the gap from Tuesday morning, which would be a good thing.

More aggressive traders might want to consider a rally past $93.50 as an alternative entry point for new positions.

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: 108.06 change: +0.61

Stop Loss: 103.65
Target(s): To Be Determined
Current Option Gain/Loss: + 13.5%
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

10/25/14: PANW is another stock that has come screaming back from its October lows. The stock is up 20 points in the last nine days. I would not launch new positions at the moment. If we see PANW retest $105 as support then we might consider new positions.

Tonight we are moving the stop loss to $103.65.

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*

10/25/14 new stop @ 103.65
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: 49.27 change: +0.41

Stop Loss: 47.85
Target(s): To Be Determined
Current Option Gain/Loss: +13.6%
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

10/25/14: The rebound in the semiconductor stocks continued on Friday with the SMH up +0.8%. This ETF is up seven out of the last nine sessions.

The $50.00 area and the 50-dma and 100-dma, all directly overhead, could be resistance. I'm not suggesting new positions at the moment.

We will move the stop loss to $47.85.

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

10/25/14 new stop @ 47.85
10/21/14 new stop @ 46.35
10/17/14 triggered @ 47.15
Option Format: symbol-year-month-day-call-strike


PUT Play Updates

Monsanto Co. - MON - close: 113.28 change: +0.47

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

10/25/14: MON managed to bounce near its simple 40-dma on Friday morning. Even with the bounce MON did underperform the major indices with a +0.4% gain. I don't see any changes from Thursday night's new play description. Our suggested entry point is $111.90.

Earlier Comments: October 23, 2014:
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 $2.53

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


Sohu.com Inc. - SOHU - close: 44.02 change: +0.51

Stop Loss: 44.75
Target(s): To Be Determined
Current Option Gain/Loss: -37.5%
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

10/25/14: Caution! SOHU managed a +1.1% gain on Friday. More importantly this stock has closed above short-term resistance at its simple 10-dma for the first time since mid August. That is a potential warning signal for the bears! We are moving our stop loss down to $44.75.

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

10/25/14 new stop @ 44.75, caution! SOHU closed above its 10-dma
10/22/14 triggered @ 43.25
Option Format: symbol-year-month-day-call-strike



Lithia Motors Inc. - LAD - close: 73.77 change: +1.78

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: see below

10/25/14: Shares of LAD are not cooperating. The stock has broken out past short-term resistance near $72.00. It seems unlikely that shares will hit our suggested entry point at $68.25 any time soon. We are removing LAD as an active candidate.

The stock does have a bearish trend of lower highs. A failed rally in the $77-80 zone might be a new entry point for bearish positions.

Trade did not open.

10/25/14 removed from the newsletter, suggested entry was $68.25