Option Investor

Daily Newsletter, Tuesday, 12/23/2014

Table of Contents

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

Market Wrap

Santa Rewards Investors

by Jim Brown

Click here to email Jim Brown

The Dow and the S&P both closed at new highs with the S&P marking its 51st high of the year and the Dow closing over 18,000. Santa definitely came early for investors.

Market Statistics

Of course I am not referring to jolly old Saint Nick. While he may get the credit for a lot of things this week the Santa blessing the markets is still the Federal Reserve. They have been so dovish in their recent statements that we actually saw a rare occurrence today. The GDP was very high and the market did not go down. Good news was really good news today and that is unusual.

The Fed has lulled investors to sleep with their comments about being patient and methodical once they do begin to raise rates. Some analysts are only expecting 2-3 rate hikes in 2015 to end the year at a miniscule .50% to .75% while a lot still believe despite the Fed's cautions that they will not hike until 2016. Investors are on cruise control and the Dow did not even hesitate on the GDP number and gapped over 18,000 at the open.

This cartoon from Hedgeye says it all.

The final revision of U.S. GDP for Q3 rose from 3.9% to 4.97% and the first time the U.S. has had back to back 4% growth quarters since 2003. This was the fastest single quarter of growth since Q3-2003. There is some discussion about the validity of the number, which normally appears after an unexpected print.

Corporate profits rose +3.06%, down from +8.4% in Q2. Consumption rose from 1.75% to 2.21% while inflation declined from 2.15% to 1.38% thanks to falling energy prices. Higher consumer spending revisions were due to more spent on healthcare and recreational services. I though healthcare costs were supposed to go down with Obamacare?

Final sales rose to +5.0%, up from 3.2% in Q2 and the fastest growth since early 2006. The PCE inflation component fell from +2.3% in Q2 to 1.2% in Q3. This is the Fed's primary inflation indicator.

For Q4 the estimates are for 2.6% to 3.0% growth. The drop in oil prices will improve consumer spending but exports will be hurt by the sharply higher dollar. If growth did come in at the high end of estimates at 3.0% for Q4 that would produce 2.62% growth for the entire year. Q1 was -2.1%, Q2 4.59% and Q3 4.93%.

The Durable Goods report for November was a drag on Q4 GDP expectations. New orders fell -0.7% compared to October +0.3% and expectations for +1.3%. Falling orders for transportation goods (-1.2%) were the reason for the decline. Durable goods orders fell off a cliff in August with a -18.3% decline, followed by -0.7% in September, +0.3% in October and November's -0.7%. The trend is not our friend.

Orders for computers and electronics declined -1.8%. Orders for defense capital goods fell -8.1%. The weakness in orders will be a drag on Q4 GDP.

The Richmond Fed Manufacturing Survey posted a small gain from 4.0 to 7.0 in the headline number. You may remember this is down from the +20.0 in October. Manufacturing activity slowed dramatically in the Richmond region.

The new orders component rose slightly from 1.0 to 4.0 also down from 22 in October. Backorders declined further from -2 to -5, down from 15 in August. The good news came from the capital expenditure plans component, which rose from 17 to 28. That suggests manufacturers are confident enough in the business conditions to begin committing new money for expansion projects. The capacity utilization component rose from 21 to 31 so there is activity in progress.

The corresponding Services Survey was VERY negative. The headline number declined from 25 to 3 after four consecutive months over 20. This is a very bad reading and when coupled with the manufacturing survey it is telegraphing significant weakness in the Richmond region.

The employment component fell from 24 to 16 and the expected demand component fell from 28 to 13. The retail demand component crashed from 39 to -9 which is surprising given the decline in gasoline prices. Retail inventories declined from -3 to -34, which is very negative for the outlook.

New Home sales for November came in at 438,000 annualized compared to estimates for a rise from October's 445,000 to 472,000. This was another shocker of an economic report. Three of the four regions declined. Northeast -12%, Midwest -6.3%, South -6.4% while the West rose +14.8% after declining in the prior two months. The months of supply rose to 5.8 while the median home price fell -2.4% from $292,500 to $285,500. This was somewhat expected after mortgage purchase applications fell to a multi-decade low last week. Mortgage credit is still a significant hurdle for home buyers.

The final Consumer Sentiment revision for December declined only slightly from 93.8 to 93.6. The analyst consensus was for a drop to 89.5 so they were way off. The present conditions component rose from 102.7 to 104.8 and the expectations component rose from 79.9 to 86.4.

You would think with sentiment at a 7 year high that home sales would be doing better. However, lower gasoline prices are the main component here and saving $10 on a tank of gas is a long way from buying a $285,000 home.

The rest of the week is lacking in the report department. The major reports were crammed into the last two days so everyone could go home for the holidays.

The market closes early on Wednesday and will be closed on Thursday. Friday will be a full day but volume will be extremely weak. On years like this where the holidays fall on Thursday they should close Friday. Overseas markets tend to take a lot more liberal view of holiday closings.

Gasoline prices declined for the 89th consecutive day to $2.38 and a five-year low. That is the longest streak on record according to AAA. Prices are now down -36% from the highs. I saw the filing station in my area advertising $2.01 this afternoon. I almost wanted to honk my horn and wave as I drove by.

Our lucky streak may be about to end because gasoline futures appear to have found a bottom at $1.53 per gallon. Likewise oil prices are showing a pattern of higher lows with a close tonight at $57.29. That $60 level is going to be a critical test. Going back to a 6 handle on crude could signal the worst is over and entire investors back into the market.

Sony (SNE) shares were fractionally higher after they said they were releasing the movie to anyone that wanted to show it. Several independent chains have now said they will show the movie starting on Christmas Day but the 5 big chains have not yet signed on to the release. Sony is also reportedly working on a Video on Demand showing, also slated to be available on Thursday but the company has not officially announced it.

North Korea lost its Internet connection to the world for 9 hours on Monday but the U.S. denied it was responsible. Internet security specialists said the fact it only lasted 9 hours was pretty good proof it was not a state sponsored attack. If the U.S. wanted them offline they would still be offline.

Sony is opening itself up to further disclosures of data stolen in the cyber attack. The group claiming responsibility for the attack said no more data would be released unless Sony released the movie. Get ready for the next upload of embarrassing emails.

Countries around the world are beefing up security ahead of the holidays. France is deploying extra troops to towns and cities after a series of three attacks over the last week. Hundreds of troops have been seen deploying all around the capital with soldiers at popular landmarks and tourist attractions. French Prime Minister Manuel Walls said "We have never experienced such a great danger from terrorism."

Germany is on the highest terror alert in 40 years. "The terror threat in Germany hasn't been so great since the time of the Red Army Faction and Baader-Meinhof gang at the end of the 1970s" according to a high ranking security official. More than 500 people have left Germany to fight for ISIS. German authorities said there could be more than 7,000 Muslim extremists in the country by the end of December, up from 6,300 just a month ago. More than 1,000 are of serious concern, 230 are being monitored and 130 are under 24 hour surveillance.

U.S. cities have also increased patrols with New York breaking out in full riot gear after the assassination of two officers over the weekend.

The U.S. government has issued a flash warning for all citizens planning to be out of the country over the next week saying an increase in chatter and the potential for attacks on public places has prompted them to issue the warning.

I always worry for the Times Square New Years Eve party but so far it has not been a terrorist target. If terrorists really wanted to make a big splash that would be the venue to attack. However, they would have to get through the cordon of 35,000 New York police surrounding the event.

Be safe, have a merry Christmas at home and watch your football games on TV.

Google shares (GOOGL) rallied this week after they announced their new self-drive car would hit the streets in early 2015. The car has no steering wheel, brake or gas pedals. The first 100 prototypes only have two buttons, stop and go. I think they need one more, a "let me out now!" button. The company said it will fully test the 100 cars in all driving conditions before moving to actual production.

Google better start deciding how it is going to defend a $1 billion lawsuit over YouTube music piracy. A group called "Global Music Rights" is demanding YouTube remove thousands of songs and videos because it does not have the rights. More than 20,000 tracks will be listed in the suit. The group represents heavyweights like Pharrell Williams, the Eagles, John Lennon, Chris Cornell, Smokey Robinson and dozens of others. Google is refusing to remove the music saying it does have the rights. A $1 billion suit should get Google's attention.

The Biotech Index ($BTK) lost more than -4% as the upset from Monday's Express Scripts announcement filtered through the sector. Express Scripts negotiated a deal with AbbVie (ABBV) for a cheaper price on their Hep-C drugs and to only sell that drug. This means market share for the leader in the group Gilead Sciences could decline in 2015 from 80% to 70%. The reason this is impacting the entire sector is because of the precedent. If the pharmacy benefit managers (PBM) like Express Scripts can pick what drugs it wants to carry based on price then companies spending billions to develop drugs will be at the mercy of those PBMs when it comes time to market them. The ABBV drug has several things against it that Gilead's Harvoni does not have but ESRX went with ABBV because of price. That should worry us as patients because we want to know that we are getting the best drug for our illness not the one the PBMs can buy the cheapest.


Today was a strange market. The Dow surged ahead thanks to gains in Exxon, Chevron, Boeing, Caterpillar and Goldman Sachs while the drug stocks JNJ, PFE and MRK all finished with losses. The Dow gapped open over 18,000 and remained there all day.

The S&P gapped up to 2,081 at the open and edged as high as 2,086 but drifted back to close at 2,082 and a gain of only +3 points. There was no excitement on the S&P but advancers did outpace decliners by about 3:1.

The big drag on the market was the biotechs and that kept the Nasdaq in negative territory all day and it finished on its lows. The opening spike did reach to 4,798 but within 15 minutes it was back in negative territory.

This biotech problem could last several days because of the future implications. That could keep the Nasdaq from moving higher and act as an anchor on the broader market.

The S&P did close over prior resistance and close at a new high. While a 3 point gain is not much I would be happy with that every day for the rest of the year. In 2013 the high for the year was on December 31st with a close at 1,848. If we could tack on a few more points every day we have the potential for closing near 2,100 by the end of the year. Support is well back at 2,070 so any decline to that level could take the S&P out of contention too end the year at its high.

The Dow also closed at a new high and above uptrend resistance. If oil stays positive the Dow could extend its gains and begin a new leg higher. Conversely if oil rolls over we could see the Dow dragged lower by Exxon and Chevron. However, I think the bulls are all in for the holidays and we should creep higher on Wednesday.

The 4,800 level on the Nasdaq is going to be a challenge. Each time the index has pulled close it was immediately sold. This appears to be where the bears have decided to do battle. To break over this level it will take all sectors participating and some decent volume. Unfortunately volume the last two days has been 5.65 billion shares and not really enough buyers to push the index higher.

Advancers totaled 1,322 and decliners 1,302 so the market was actually dead even despite the -16 point decline. There were 178 new highs and 58 new lows.

Watch that 4,800 level as critical resistance the rest of the year.

The little engine that thought it could is trying its best. The Russell 2000 managed to post a gain but it was only fractional. The real resistance is 1,208 and the high today was 1,207. We need the small caps to break over this five month high to incite a buying riot. Right now traders are watching that 1,208 level along with the Nasdaq 4,800 and not seeing any real reason to put extra cash to work. There is a worry that the market will simply pass time under these levels until January 1st and then correct. That is a valid worry.

I believe bullish sentiment will win out over the next couple days but I don't expect any giant gains. However, large funds have been known to launch buy programs on days with low volume in an attempt to cause a giant short squeeze. Never say never and don't short a dull market. The next couple days could be dull since almost everyone will be doing something else other than watching their charts.

Every year just before Christmas Art Cashin pens a holiday poem. I received it today and he granted me permission to print it in the newsletter. Good job Arthur!

'Tis two days before Christmas
and at each brokerage house
The only thing stirring
was the click of a mouse

Down on the Exchange
the tape inches along
Brokers bargained and traded
as they hummed an old song

The Fed says they're "patient"
but some folks still fear
That rates they'll start hiking
too early next year

Frisco took the series
and Seattle the Bowl
But Tiger still struggles
to get the ball in the hole

Ellen D. took a group selfie
at the Oscar awards
The darn thing got retweeted
till it pulled down some boards

Putin scooped up Crimea
and some parts of Ukraine
But an oil plunge and sanctions
are causing him pain

In Europe a song contest
was won by a nun
And the song that she sang was -
Girls just want to have fun

In Portland a kid offered
a hug to anyone near
A cop took advantage
for the pic of the year

But with Cosby and Kim K.
there was little to cheer
Yet it's Christmastime, Alice
And Santa is near

So stop looking backwards
have a cup of good cheer
And kiss you a loved one
raise your hopes for next year

And amidst all the trading
Christmas themes we will heed
And share our good fortune
with families in need

And tomorrow they'll pause
as we wait on the bell
To sing a tradition
a song for old "Nell"

Don't let this year's problems
impede Christmas Cheer
Resolve to be happy
throughout the New Year

And resist ye Grinch feelings
let joy never stop
Put the bad at the bottom
keep the good on the top

So count up your blessings
along with your worth
You're still living here
in the best place on earth

And think ye of wonders
that light children's eyes
And hope Santa will bring you
that Christmas surprise

So play ye a carol
by Mario Lanza
Unless you are waiting
to celebrate Kwanzaa

Hanukkah's ending
And Ramadan's long gone
Different folks, different holidays
yet each spirit lives on

Whatever your feast is
we hope you all still
Find yourself just surrounded
by folks of goodwill

Wednesday, as the bell rings
hark to your heart's call
And as Santa would shout
Merry Christmas to All!


Annual End of Year Renewal Special

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Please follow the link below to see for yourself the EOY subscription special for 2015. You will not be disappointed!

Enter passively, exit aggressively!

Jim Brown

Send Jim an email


New Option Plays

Who Benefits From Weak Oil And Low Gasoline Prices?

by James Brown

Click here to email James Brown


Red Robin Gourmet Burgers Inc. - RRGB - close: 76.38 change: +1.40

Stop Loss: 72.45
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 276 thousand
Entry on December -- at $---.--
Listed on December 22, 2014
Time Frame: 8 to 12 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
The price of gasoline in the United States has fallen for 89 days in a row as of today. That's the longest streak on record. The current national average is down to $2.376 a gallon. That's more than $1.00 off the recent peak. Who stands to benefit from this major correction in fuel prices? Restaurants.

Americans love to dine out. Paying less at the pump means a lot more disposable income to blow on casual dining. One firm that should benefit is RRGB. The company press describes RRGB as "Red Robin Gourmet Burgers, Inc. (www.redrobin.com), a casual dining restaurant chain founded in 1969 that operates through its wholly-owned subsidiary, Red Robin International, Inc. There are more than 500 Red Robin restaurants across the United States and Canada, including Red Robin Burger Works® locations and those operating under franchise agreements."

A couple of weeks ago Wunderlich Securities commented on the restaurant industry. They believe that industry sales could see some of their strongest monthly gains in years and restaurants are poised to do well in 2015. The combination of strong consumer confidence, improving labor trends, and falling gasoline prices is a great recipe for stronger sales at restaurants. The major restaurant chains have been reporting positive same-store sales for the fifth month in a row. That hasn't happened since early 2012.

Technically shares of RRGB have been showing some relative strength the last few days. The stock spent the first half of December consolidating sideways above support near $70.00. Now it's breaking out to new multi-month highs. If this rally continues RRGB could see some short covering. The most recent data listed short interest at 10% of the very small 13.8 million share float. The Point & Figure chart is very bullish and forecasting a long-term price target at $115.00.

Tonight we are suggesting a trigger to buy calls at $76.65. I do see potential resistance at $80.00 (round-number resistance) but we suspect RRGB could run for a while.

Trigger @ $76.65

- Suggested Positions -

Buy the MAR $80 CALL (RRGB150320C80) current ask $4.10

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

Daily Chart:

Weekly Chart:

In Play Updates and Reviews

Uncooperative Candidates

by James Brown

Click here to email James Brown

Editor's Note:

We are trimming a couple of uncooperative candidates tonight. Overall stocks were mostly higher on Tuesday but there were a few pockets of weakness.

We have removed BABA and CTXS. Neither trade was open yet.

Current Portfolio:

CALL Play Updates

Packaging Corp of America - PKG - close: 79.01 change: -0.68

Stop Loss: 77.85
Target(s): To Be Determined
Current Option Gain/Loss: -15.0%
Average Daily Volume = 1.0 million
Entry on December 18 at $78.94
Listed on December 17, 2014
Time Frame: 8 to 12 weeks
New Positions: see below

12/23/14: Uh-oh! The early morning rally in PKG failed. Shares briefly broke out above resistance at $80.00 and then reversed. The stock did manage a bounce near last Thursday's low but PKG still underperformed with a -0.85% decline. More importantly today's session has created a bearish engulfing candlestick reversal pattern. These patterns need to see confirmation but it's still a warning signal.

I am not suggesting new positions at this time.

Earlier Comments: December 17, 2014:
PKG is in the consumer goods sector. The company operates eight paper mills and 100 corrugated products plants and related facilities. Put it all together and PKG makes packaging products around the world.

According to company materials, "PCA is the fourth largest producer of containerboard in the United States, based on production capacity, and the third largest producer of uncoated freesheet in North America. We have approximately 13,600 employees, with operations primarily in the United States and some converting operations in Europe, Mexico and Canada."

It's been a pretty decent year for PKG earnings. Back in February they beat Wall Street estimates and guided higher. They beat estimates again in April and July. Their most recent report was October 20th. Earnings per share were only in-line with estimates at $1.26 but that is a +37% improvement from a year ago and a +8.6% improvement from the prior quarter. Revenues soared a whopping +79% to $1.52 billion, slightly above estimates. Management then raised their Q4 EPS guidance above Wall Street's estimates.

Mark W. Kowlzan, Chief Executive Officer, said, "This was our 8th consecutive quarter of record earnings driven by strong sales volume, record mill productivity, and mill cost reductions. The integration of Boise packaging continues to generate significant synergies, and operational improvements in White Papers have resulted in lower costs and higher margins."

Technically PKG looks bullish. The early 2014 high near $75.00 was resistance but the stock broke through this level in early December. Traders have since bought the dip at this level so $75 is now new support. The stock is near all-time highs. The point & figure chart is forecasting a very long-term target of $121.00.

The December 4th intraday high was $78.50. Tonight I'm suggesting a trigger to buy calls at $78.55. We are listing the April calls. More nimble traders may want to trade the January calls instead but they only have about four weeks left. There are no February or March calls available yet. After option expiration this coming Friday (December 19th) we should see more options listed.

- Suggested Positions -

Long APR $80 CALL (PKG150417C80) entry $4.00

12/23/14 Caution: PKG has created a potential reversal pattern
12/22/14 new stop @ $77.85
12/18/14 triggered on gap open at $78.94, trigger was $78.55
Option Format: symbol-year-month-day-call-strike

Royal Caribbean Cruises - RCL - close: 82.20 change: +0.60

Stop Loss: 78.40
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 2.9 million
Entry on December -- at $---.--
Listed on December 22, 2014
Time Frame: We will likely exit prior to earnings in very late January
New Positions: Yes, see below

12/23/14: RCL continued sailing higher on Tuesday and managed to outperform the major indices with a +0.73% gain. Yet the intraday high was only $82.27. Our suggested entry point to buy calls is at $82.30. Odds are good we will see RCL hit our entry point tomorrow.

Earlier Comments: December 22, 2014:
The cruise line stocks have been pretty strong this year. Carnival Cruise (CCL) has been the weakest of the big three with a +11.5% gain in 2014. That compares to the S&P 500's +12.0% gain. Norwegian Cruise Line (NCLH) is up +32% this year. Meanwhile RCL has outpaced them all with a +69.9% gain in 2014 as of today.

According to a company press release, "Royal Caribbean Cruises Ltd. is a global cruise vacation company that owns Royal Caribbean International, Celebrity Cruises, Pullmantur, Azamara Club Cruises and CDF Croisieres de France, as well as TUI Cruises through a 50 percent joint venture. Together, these six brands operate a combined total of 42 ships with an additional seven under construction contracts, and two on firm order. They operate diverse itineraries around the world that call on approximately 490 destinations on all seven continents."

CCL has suffered a series of mishaps, bad decisions, and just poor luck in recent years and RCL has managed to capitalize on its rivals misfortune, especially in Europe. Earnings growth for RCL has kind of mediocre. Their most recent report was October 23rd. RCL beat estimates by a penny while revenues were only in-line with Wall Street estimates. Management then guided lower for Q4. So why has the stock performed so well? Normally when a company lowers their earnings forecast the stock gets hammered!

A big part of the stock's rally has been weakness in crude oil. These are massive ships. They burn between 140 to 150 tons of fuel every single day. That's about 30 to 50 gallons a mile. Falling oil prices mean that fuel costs for these companies has plunged dramatically and should boost their profit margins.

Tigress Financial Partners recently shared their opinion that the cruise liner industry has "benefited from strong demand trends both domestically and globally and more recently the swoon in oil prices has helped to reduce one of their largest costs - fuel. We think long-term demand trends are bullish for the sector and lower oil prices not only mean lower fuel costs but more discretionary cash in consumers' pockets that can be used for additional expenditures on leisure time." Their point about consumers having more cash to spend on leisure is a big one.

The month of December has brought more good news for shares of RCL. On December 1st the S&P Dow Jones Indices announced they would replace Bemis (BMS) with RCL in the big cap S&P 500 index. That means all the mutual funds that track RCL have to buy it eventually. That went into effect on December 4th.

On December 8th analyst firm Jefferies said "The cornerstone of our view on RCL has been that it offers a superior product, this is based on the following: it has a younger fleet, more new ships being built, more impressive features available (e.g. high-speed internet), a better strategy with respect to distribution of cabins (more Balcony berths available) and better brand perception." Jefferies then raised their price target on RCL from $73 to $87.

The analyst love continued on December 22nd when Stifel analyst Steven Wieczynski said, "you have a stock that is trading at 14x forward earnings (2016) for average EPS growth of 28 percent/year for the next three years. When we look back at where Carnival Corp. has traded (15x-17x) on average on a forward EPS basis and then apply the same multiple to RCL, there is clearly a significant amount of upside from current levels" for RCL. Stifel raised their price target on RCL from $88 to $96.

Technically the stock has been showing strength with a bullish trend of higher lows and higher highs. The breakout past resistance at $80.00 is bullish. Today's intraday high was $82.20. Tonight we're suggesting a trigger to buy calls at $82.30.

Trigger @ $82.30

- Suggested Positions -

Buy the MAR $85 CALL (RCL150320C85) current ask $3.35

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

Skyworks Solutions - SWKS - close: 73.40 change: -1.02

Stop Loss: 71.35
Target(s): To Be Determined
Current Option Gain/Loss: + 0.5%
Average Daily Volume = 3.9 million
Entry on December 18 at $73.00
Listed on December 17, 2014
Time Frame: 3 to 6 weeks
New Positions: see below

12/23/14: SWKS gave up about two-thirds of yesterday's gain. Today's move looks like a failed rally at round-number resistance at the $75.00 mark. The nearest support levels are $71.50 and $70.00 while our stop is currently at $71.35. I'm not suggesting new positions at the moment.

Earlier Comments: December 17, 2014:
SWKS is part of the semiconductor industry. The SOX semiconductor index has been a strong performer this year with a +23.5% gain in 2014. Yet SWKS has outshined its peers with a +138% gain year to date.

Who is SWKS? According to the company website, "Skyworks Solutions, Inc. is an innovator of high performance analog semiconductors. Leveraging core technologies, Skyworks supports automotive, broadband, wireless infrastructure, energy management, GPS, industrial, medical, military, wireless networking, smartphone and tablet applications. The Company's portfolio includes amplifiers, attenuators, circulators, demodulators, detectors, diodes, directional couplers, front-end modules, hybrids, infrastructure RF subsystems, isolators, lighting and display solutions, mixers, modulators, optocouplers, optoisolators, phase shifters, PLLs/synthesizers/VCOs, power dividers/combiners, power management devices, receivers, switches and technical ceramics. Headquartered in Woburn, Mass., Skyworks is worldwide with engineering, manufacturing, sales and service facilities throughout Asia, Europe and North America."

SWKS is probably best known for being a component supplier for Apple's iPhones. SWKS is also supplying components to Amazon.com for that company's new Fire Phone.

SWKS soared in mid July following a better than expected earnings report. Wall Street was looking for a profit of 80 cents after SWKS guided higher to 80 cents in June. They still managed to surprise with a bottom line profit of 83 cents a share. Revenues soared almost 35% to $587 million, which was better than the $570 million estimate, up from $535 before SWKS's June guidance. SWKS management also raised their guidance going forward.

The earnings parade continued when SWKS delivered their Q4 report on November 6th. Analysts were expecting a profit of $1.08 per share. SWKS delivered $1.12. The company had already preannounced strong sales and quarterly revenues soared +50% to $718.2 million. Management then raised their guidance again (company's Q1 2015) and SWKS is forecasting earnings above Wall Street's estimates with revenues significant above prior expectations.

Since SWKS' last earnings report the stock has had a number of analysts reaffirm their bullish outlook and a few have upgraded their price targets.

Technically shares of SWKS have been building on a bullish trend of higher lows. However, the stock has been consolidating sideways the last two weeks under short-term resistance in the $71.00-71.25 area. After today's display of relative strength SWKS is setting up for a bullish breakout higher. The point & figure chart is already bullish and forecasting at $102 target.

I will warn investors that SWKS' all-time high going all the way back to February 2000 is the $78.25 area and could prove to be overhead resistance. Tonight we are suggesting a trigger to open bullish trades at $71.55.

- Suggested Positions -

Long FEB $75 CALL (SWKS150220C75) entry $4.08

12/22/14 new stop @ $71.35
12/18/14 triggered on gap open at $73.00, listed trigger was $71.55
Option Format: symbol-year-month-day-call-strike

PUT Play Updates

Arista Networks, Inc. - ANET - close: 64.70 change: -0.57

Stop Loss: 70.25
Target(s): To Be Determined
Current Option Gain/Loss: -10.4%
Average Daily Volume = 534 thousand
Entry on December 22 at $65.90
Listed on December 18, 2014
Time Frame: 8 to 12 weeks
New Positions: see below

12/23/14: ANET continued to drift lower with a -0.8% decline versus the NASDAQ's -0.33% decline. I do not see any changes from my recent comments and would still consider new bearish positions at current levels.

Earlier Comments: December 18, 2014:
ANET is in the technology sector. The company makes networking applications and cloud technology. According to company marketing materials, "Arista Networks was founded to deliver software-driven cloud networking solutions for large data center and computing environments. Arista's award-winning 10/40/100GbE switches redefine scalability, robustness, and price-performance, with over 3,000 customers and more than three million cloud networking ports deployed worldwide. At the core of Arista's platform is EOS, an advanced network operating system. Arista Networks products are available worldwide through distribution partners, systems integrators and resellers."

Shares of ANET held their IPO in June 2014 with 5.3 million shares priced at $43.00. The first trade was $55.25. The stock has been volatile but almost doubled with highs in the low $90s by September. Unfortunately for the bulls the rally has reversed.

ANET produced bearish double top near $94 in September. The stock did see a sharp pre-earnings rally before they reported results on November 6th. ANET beat estimates by 12 cents and beat the revenue estimate as well. Yet guidance was only in-line with Wall Street's estimates and traders sold the post-earnings pop. That has proved to be a new lower high.

Following its post-earnings reversal lower the company and the stock has been plagued with trouble. The stock has suffered thanks to two different lock ups expiring. November 11th was a lock up that allowed some ANET employees to sell about 50% of their stock. Then December 2nd was the 180-day lock up that allowed insiders to sell their shares (up to 53 million shares).

ANET was struggling with all of this additional supply coming to market. Then the company was hit with a massive lawsuit by networking giant Cisco Systems (CSCO) on December 5th. CSCO is a much larger rival and claims that ANET has violated patent and copyright infringement on several technologies. CSCO might have a case. ANET's CEO, Jayshree Ullal, spent fifteen years working for CSCO in its enterprise business. ANET claims that CSCO is merely trying to use the legal system to slow down a competitor.

It could take a couple of years for the legal battle to be resolved but Wall Street is turning more cautious. Since December 5th a few analysts have been lowering their price targets on ANET. Meanwhile bears are arguing that ANET is still too expensive with a P/E of 60 at current levels.

The U.S. stock market just produced its best two-day rally since 2008 and yet ANET did not participate. Instead shares faded lower. This relative weakness looks like a clear signal that the path of least resistance is lower.

Today's intraday low was $66.00. I'm suggesting a trigger to buy puts at $65.90. The $60.00 level could be round-number, psychological support but I suspect ANET could decline toward the $55 area. I want to reiterate that shares of ANET have been volatile so I'm suggesting smaller positions to limit risk.

*small positions to limit risk*- Suggested Positions -

Long MAR $60 PUT (ANET150320P60) entry $4.80

12/22/14 triggered @ $65.90
Option Format: symbol-year-month-day-call-strike


Alibaba Group - BABA - close: 105.52 change: -3.25

Stop Loss: 107.90
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 30 million
Entry on December -- at $---.--
Listed on December 20, 2014
Time Frame: 8 to 12 weeks
New Positions: see below

12/23/14: BABA continued to underperform the market today with a -2.98% decline. Shares briefly traded below technical support at the 50-dma before paring their losses.

There was some concern that BABA's Tmall business might not be meeting expectations but some analysts were defending the stock today. We are giving up on BABA as a bullish candidate tonight. The stock has underperformed two days in a row. If this weakness continues we could see BABA testing what should be support near $100.00.

Trade did not open.

12/23/14 trade did not open. Suggested entry was $111.25



Citrix Systems, Inc. - CTXS - close: 64.67 change: +1.07

Stop Loss: 65.05
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 1.9 million
Entry on December -- at $---.--
Listed on December 20, 2014
Time Frame: Exit prior to January option expiration
New Positions: see below

12/23/14: CTXS just does not want to cooperate with us. Shares displayed relative strength today with a +1.6% gain. More importantly the stock has broken out above potential technical resistance at both its 50-dma and the 200-dma. The stock does still have a bearish trend of lower highs but today's breakout is a potential warning signal for the bears.

Our trade has not opened yet. Tonight we are removing CTXS as a candidate.

Trade did not open.

12/23/14 removed from the newsletter, suggested entry was $62.40