Option Investor

Daily Newsletter, Monday, 10/27/2014

Table of Contents

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

Market Wrap

Ahead Of The Fed

by Thomas Hughes

Click here to email Thomas Hughes
Once again we're waiting on the Fed.


Once again the market is waiting on the Fed. The October FOMC meeting begins tomorrow and is expected to result in the end of QE. Although generally accepted as being the end, this does not mean the Fed will do as expected, giving the market plenty of reason to pause.

Monday trading began in Asia, where indices were mixed. There was little news out of the sector today leaving last week's US rally and poor economic data from the EU to dominate trading. In the EU an early rally quickly lost steam as the aforementioned poor economic data overpowered positive results from the recent EU bank stress tests. The stress test results; most of the banks revealed to be under-capitalized last year have corrected the issue. The data; weak manufacturing data from Germany and a new report showing German business sentiment near a two year low.

Early trading here was muted. The futures trade was negative across the board, indicating a slightly lower open for the major indices. Earnings released this morning failed to stimulate the rally, leaving early trading weak into the opening bell. After the open volume remained weak and trading lack luster. The SPX opened down about 3 points and quickly sank to the daily low, about 13 points below Friday's close. The market hit bottom about 10AM and then bounced back to test break even. The SPX was never able to move into positive territory but other indices like the Dow Jones Industrials, Dow Transports and NASDAQ Composite were. Afternoon trading was primarily sideways and ended with the indices flat to positive from last week's closing price.

Market Statistics

Additional factors affecting today's trade include the elections in Brazil and new Ebola news. In Brazil the leftist, anti-business incumbent was reelected. This is a negative for Brazil but only peripherally important to us. Ebola hits much closer to home; there was some good news as well as bad. The good news is that more people are being cleared from risk. The bad is that a young boy is the next possible victim. Fingers crossed he's clear. While traders took note, the market did not spin wildly out of control on the news.

Economic Calendar

The Economy

Moody's weekly Survey of Business Confidence remains very positive. Although there is still weakness in Europe and South America US business are still optimistic about the future. Mr. Zandi reports that there is still no sign of an impact on confidence due to Ebola or market volatility. The outlook into next year remains strong and over half of those surveyed report they are hiring. According to his take the survey reveals that US business confidence “reflects an economy growing above its potential”.

Pending home sales rose but not as much as expected. The number of contracts signed, not actual sales, rose by only by 0.3%. Although weaker than expected pending sales are now in positive territory for the first time in 11 months, rising 1% for the year. The index is above the 100 level for the fifth month and at the second highest level since last September. While this shows that there is not robust demand at this time the long term trend in pending sales is steady to up. Credit conditions were listed as a headwind to buyers unable to find financing.

There is a lot of data left to come out this week. Aside from the FOMC announcement Wednesday there are 12 others reports this week. Tomorrow is Durable Goods Orders, Consumer Confidence and the Case-Shiller 20 City Index. Wednesday is Mortgage Index. Thursday is weekly jobless claims along with the first estimate for 3rd quarter GDP. Friday is Personal Income and Spending, Employment Cost Index, Michigan Sentiment and Chicago PMI. GDP is likely the most important piece after the FOMC but all data points tie together for the big picture. Next week will also be a big data week as this Friday is the end of the month.

The Oil Index

Oil prices fell today, breaking $80 early this morning. The latest development is a downgrade of 2015 price targets for WTI and Brent from Goldman Sachs. Their new target for WTI is $75 in the first quarter of 2015. The downgrade caused WTI to drop below $80 but was unable to keep it there. Buyers stepped in to drive prices back above $80 by mid morning. At settlement WTI was only down a single penny from Friday's close, trading at $81.00. Goldman thinks oil is going lower on supply/demand issue and prices may be heading that direction but OPEC is still an unknown factor. They hold their meeting in about 2 weeks and could curb production as many of the members have been calling for.

The Oil Index dropped 2% at the open and traded lower during the day. By the close it had recovered some of the loss but did not move past opening price. Today's drop took the index back down to a potential support and today's price action suggests it was found. The index is retracing the bounce begun two weeks ago and is approaching a good target for support at 1,400. The indicator are bullish but weak, in line with the recent bounce and support in the 1,350-1,400 range. I've been looking for a retest of the longer term support based on the convergence with bearish MACD during the pullback. It looks like it may have started to test it but I don't think it is over yet. The big oil companies report this week and they will likely be market moving.

The Gold Index

Gold prices were basically flat today, trading just below $1230. Prices are hovering in the middle of a potential range between $1200 and $1250 on rising economics, stronger dollar, the end of QE and the uncertain onset of higher interest rates. Today's trade was of course affected by anticipation of the Fed and could foreshadow price action up until the release at 2:15PM Wednesday. At that time the only thing that I can see that would send gold prices lower for a sustained period would be if QE didn't end, or if it increased. Every other line of thinking leads me eventually to normalizing rates, inflation and higher gold prices.

The Gold Index traded lower today as well. The index lost about -1.5% on an intraday basis but closed off of the low. The index is still drifting lower and below near term support at $75. If this persists my downside target remains near $65 but there is a serious divergence from the indicators if it is moving lower. If not there will be resistance possible at $75, and then between $80 and $82.50. Aside from the Fed meeting and gold prices earnings are due from the senior minors towards the end of the week. I expect earnings will be down, but also for cost to be lower as well.

In The News, Story Stocks and Earnings

Earnings season is in full force. According to FactSet 208, just over 40%, of S&P 500 companies have reported so far. Of those 75% have reported EPS growth above the average estimate with 60% above the average for sales. The current projection for 3rd quarter earnings is an average 5.6% among all S&P 500 companies, up from last week's 5.1% and the second week of increase. This is due to strong performances from 6 out 10 of the S&P sectors. So far only two sectors are posting negative earnings growth.

Twitter was the big name in earnings today, although there were others. Shares of the stock lost nearly -3% today, trading down from an apparent support/resistance level at $50. There was heavy option volume on out of the money puts and calls, expecting a fairy large move after the bell. The heavily criticized social media giant was expected to report EPS of $0.01 and met that expectation. The company reported earnings of $361 million, ahead of projections, and more than 100% above last year at this time. The results were not enough for the bulls and shares sank more than -10% in after hours trading.

Merck&Company reported before the bell but did not inspire much action. The pharma giant reported earnings that were slightly above expectations on a 4% drop in sales. The sales drop is due, according to the report, on divestiture of assets earlier in the year. Current results allowed execs to narrow guidance within the previously given range. Current full year non-GAAP EPS is now $3.46-$3.50. Shares of the stock fell more than -2% on the news, dropping from the short term moving average. The indicators are bullish but weak. Current support is indicated at $52.50 with resistance at $57.50.

The Indices

After the initial dip the market recovered and was basically flat the rest of the day. The major indices hovered around break even most of the afternoon with a final push at the end of the day that took most of them into the green. The SPX was the only index to close in the red and then only by a small margin. The broad market lost -0.15% in a very light session of wait and see what happens.

Today's action took the index down to test the 1950 level and just above the long term trend line where it met support. By the close the index moved higher and above 1960, another near term bullish support level. The indicators are bullish and pointing to higher prices in the near term but I am still anticipating a retest of support. This is based on the convergence between bearish MACD and the recent near 10% correction. Current upside target is 2000 with long term support between 1850 and 1900.

The NASDAQ Composite poked its head into positive territory twice today. The tech sector moved up and found resistance at 4,490 both times but was able to close in the green. Today's action took the index to a new short term high with bullish indicators. MACD is moving higher into the near term as well, in line with underlying long term trends, while stochastic is moving higher following a bullish crossover. The bounce has been strong, but looking at price action may be losing some steam or is pausing for breath. Either scenario I think hinges on the FOMC meeting which I see as pivotal with or without the technicals. The index is trading at resistance coincident with the July highs and could easily move lower from here if given a reason. My first target for support is along the long term trend line near 4,400.

The Dow Jones Industrial Average gained 0.07% today after testing a long term support at 16,750. The blue chips are now above the July high and a potentially strong area of support. Support is aided by the short term 30 day moving average and accompanied by bullish indicators. The index appears to be moving up in the near term with a target of 17,200 in the near term. The longer term outlook is the same as the first two; I'm bullish near and long term but still expecting some kind of retest of support before the real rally begins.

The Dow Jones Transportation Average led today's move, as it has been doing all year. Strong earnings and positive guidance for next year from several big names last week is most likely why. The trannies gained 0.67% in today's session and are approaching the current all time high. This is quite significant in light of the recent correction and suggests that the others will move up to test long term resistance as well. The all-time high has emerged as a potential point for profit taking and/or other selling activities as it is the most obvious target now. Today's move confirmed support at 8,500 with strong bullish indicators so I would not start placing bearish trades just yet, however, caution is warranted so I bring it up. If resistance fails a break to new highs would be very bullish and I will have to rethink my retest-of-support theory.

While looking over the DJT I skimmed a few transportation names I know. One that stood out today is CSX. The rail carrier recently reported double digit profit growth and guided the same for next year. The stock has been trending up steadily since then and is indicated higher on both the long term weekly charts and short term daily charts. The move over the last two weeks tested support along the 150 day moving average and moved higher on more than twice average daily volume.

The market looks like it is in rally mode and waiting for the Fed. The transportation average, the market leader, is moving higher and about to retest the all-time high. With economics and earnings pushing it the index could easily break right above and lead the entire market higher. Only the Fed and the data stands in the way. So far the data remains steady to positive, in the sweet spot the market likes, and I don't think the Fed will do anything too surprising this meeting. So long as the earnings are good the market should be happy.

Until then, remember the trend!

Thomas Hughes

New Option Plays

Looking Brighter!

by James Brown

Click here to email James Brown


Acuity Brands, Inc. - AYI - close: 135.63 change: +1.07

Stop Loss: 131.25
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 485 thousand
Entry on October -- at $---.--
Listed on October 27, 2014
Time Frame: 8 to 12 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
AYI is part of the technology sector. The company considers itself the North American market leader and one of the world's biggest providers of lighting solutions. Headquartered in Atlanta, Georgia, AYI does business in North America, Europe, and Asia. Their fiscal 2014 sales hit $2.4 billion.

It has been a rocky year for AYI's stock price but the August low definitely looks like a bottom. Shares have rebounded sharply and investors have been buying the dips. As of today's close AYI is up +23% in 2014.

The last few weeks have been volatile. The early October rally was a reaction to AYI's earnings results. The company reported on October 1st with a profit of $1.26 per share on revenues of $668.7 million. That beat Wall Street's estimates on both the top and bottom line. Sales were up +15% from a year ago and profits were up +22%. The company said they are seeing strong adoption of their LED lighting solutions, which saw sales almost double from a year ago.

AYI said their Q4 and full year 2014 results were both records. AYI's Chairman, President, and CEO, Vernon Nagel, was very optimistic in his outlook. Mr. Nagel said,

"We remain very bullish about our prospects for future profitable growth. Third-party forecasts as well as key leading indicators suggest that the growth rate for the North American lighting market, which includes renovation and retrofit activity, will be in the mid-to-upper single digit range for fiscal 2015 with expectations that overall demand in our end markets will continue to experience solid growth over the next several years.

We believe the lighting and lighting-related industry will experience solid growth over the next decade, particularly as energy and environmental concerns come to the forefront along with emerging opportunities for digital lighting to play a key role in the Internet of Things. We believe we are well positioned to fully participate in this exciting industry."

Since the report Goldman Sachs has added AYI to their conviction buy list and Oppenheimer has raised their price target on AYI to $160. The point & figure chart is bullish and forecasting at $162 target. Zacks is bullish on the account they are seeing analysts revising their earnings estimates for AYI higher.

Currently shares of AYI have been hovering near resistance in the $135.00 area. Today's move is starting to look like a bullish breakout. We are suggesting a trigger to buy calls at $136.25.

Trigger @ $136.25

- Suggested Positions -

Buy the DEC $140 call (AYI141220c140) current ask $3.50

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

Daily Chart:

Weekly Chart:

In Play Updates and Reviews

Stocks Little Changed On Monday

by James Brown

Click here to email James Brown

Editor's Note:

The market did not move much on Monday. Equities digested gains from last week's big rally. Investors are looking ahead toward Wednesday's FOMC decision.

AMBA and PANW hit our stop loss today. HAIN was closed this morning.

Current Portfolio:

CALL Play Updates

FedEx Corp. - FDX - close: 165.22 change: +1.34

Stop Loss: 157.85
Target(s): To Be Determined
Current Option Gain/Loss: +75.4%
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

10/27/14: The rally in FDX continues with a +0.8% gain and a close above potential resistance at $165.00. I'm still worried FDX is looking a little short-term overbought here. More conservative investors may want to take some profits now.

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

Keurig Green Mountain, Inc. - GMCR - close: 143.28 change: -1.96

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

10/27/14: GMCR delivered a disappointing performance on Monday. The stock almost hit our suggested entry point this morning before rolling over. The stock settled with a -1.3% decline. Our suggested entry trigger is $145.75.

Earlier Comments: October 25, 2014:
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)

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

iShares Transportation ETF - IYT - close: 154.49 change: +1.05

Stop Loss: 148.65
Target(s): To Be Determined
Current Option Gain/Loss: +191.1%
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

10/27/14: More weakness in crude oil helped boost the transports. The IYT added another +0.6% and is getting closer to potential resistance near $155 and its September highs near $156.

More conservative investors may want to take profits now.

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: 91.97 change: -0.77

Stop Loss: 89.40
Target(s): To Be Determined
Current Option Gain/Loss: -14.2%
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

10/27/14: NTES is still consolidating sideways in the $91-92 area.

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

Semiconductor ETF - SMH - close: 50.10 change: +0.83

Stop Loss: 47.85
Target(s): To Be Determined
Current Option Gain/Loss: +18.8%
Average Daily Volume = 2.4 million
Entry on October 17 at $47.15
Listed on October 16, 2014
Time Frame: 8 to 12 weeks
New Positions: see below

10/27/14: Semiconductor stocks continued to show relative strength today. The SMH soared +1.68% and is challenging resistance near $50.00 and its 50-dma. I'm not suggesting new positions at the moment.

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: 112.82 change: -0.46

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

10/27/14: MON briefly traded below technical support at its 40-dma and its 300-dma before bouncing. Shares did not break the $112.00 level so we are still on the sidelines. 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)

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

Sanderson Farms, Inc. - SAFM - close: 79.31 change: +0.36

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

10/27/14: SAFM spent Monday's session consolidating sideways in a narrow range. There is no change from the weekend newsletter's new play description below.

Earlier Comments: October 25, 2014:
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)

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

Sohu.com Inc. - SOHU - close: 43.03 change: -0.99

Stop Loss: 44.75
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

10/27/14: Good news! SOHU did not see any follow through on Friday's mini breakout above its simple 10-dma. Instead shares displayed relative weakness today with a -2.2% decline.

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


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

Stop Loss: $39.65
Target(s): To Be Determined
Current Option Gain/Loss: +16.6%
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

10/27/14: AMBA garnered some bullish analyst comments today but that didn't stop shares from seeing some profit taking. AMBA gapped open lower at $40.38 and hit our stop loss at $39.65 before settling with a -4.0% decline.

- Suggested Positions -

NOV $40 call (AMBA141122C40) entry $1.80* exit $2.10** (+16.6%)

10/27/14 stopped out
**option exit price is an estimate since the option did not trade at the time our play was closed.
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


The Hain Celestial Group, Inc. - HAIN - close: 102.76 change: +0.26

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

10/27/14: HAIN appeared to be failing at resistance near $104. In the prior newsletter we decided to just close this trade early on Monday morning. Shares opened at $102.50.

- Suggested Positions -

NOV $105 call (HAIN141122c105) entry $2.05* exit $2.30 (+12.1%)

10/27/14 planned exit
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


Palo Alto Networks, Inc. - PANW - close: 103.67 change: -4.39

Stop Loss: 103.65
Target(s): To Be Determined
Current Option Gain/Loss: - 37.2%
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

10/27/14: Our aggressive trade on PANW has been stopped out thanks to some volatility on Monday. Shares collapsed this morning and opened at $101.00. The intraday low was $100.10, a nearly $8.00 drop or -7.37%, before PANW started to bounce. Our stop was at $103.65 but the gap down immediately closed this trade.

The strange thing is I couldn't find any specific news to account for the sharp sell-off this morning.

- Suggested Positions -

DEC $110 call (PANW141220C110) entry $5.90* exit $3.70 (-37.2%)

10/27/14 stopped out on gap down at $101.00
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