Option Investor

Daily Newsletter, Wednesday, 12/24/2014

Table of Contents

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

Market Wrap

A Quiet Market On a Christmas Eve

by Keene Little

Click here to email Keene Little
Today's half-day session produced no surprises and was quiet as expected. The bears are using the holiday period to rest while the bulls enjoy thoughts of more sugar plums.

Wednesday's Market Stats

It was a half-day session today and not a whole lot happened in the market. Considering we've all got Christmas songs in our heads and family things to tend to, I'll keep tonight's wrap a little shorter than usual and dive right into the charts for a quick review of how things look to me. The rest of this month tends to be bullish if only because sellers go away and people's positive mood puts them into a buying mood. I see downside risks, especially with everyone expecting the market to rally, but we'd have to see some key levels broken to the downside before the bears can start claiming some successes.

Economic reports for today were light and there will be none on Friday. We got the unemployment claims data a day early and the numbers were little changed from last week and roughly in line with expectations. Crude inventories bumped up while natural gas inventories fell, and the large increase in crude inventories caused some selling in oil today but as I'll review later, it remains inside a small trading range since its December 16th low. It does look like it will be heading at least a little lower.

Economic reports and Summary

I'll start out with the RUT tonight since it's presenting an interesting setup here that the bulls are going to need to break before the bears get wind of it. The RUT is also one of the better sentiment indexes, especially at this time of year when many traders play the seasonal pattern of strength in the small caps in December and into the early part of January. That wasn't looking so good for the first half of December but that's been more than made up for with the +6% rally (about 70 points) into today and traders continue to look for the Santa Claus rally to continue. But it has now rallied up to resistance and what happens from here is going to set the tone for January.

The weekly chart shows the bearish setup, but only if the bears can get past the bulls. The current rally has again brought the RUT up to its previous highs in March and July, near 1213. Only marginally higher, near 1220 by the end of the month, is the broken uptrend line from March 2009 - October 2011. This trend line was back-tested on November 3, 12 and 13 and each time it held as resistance and therefore it's obvious traders think it's an important trend line. As I've noted on the chart, this is the 3rd attempt to get through 1213 and another failure would leave a very bearish triple top. At the moment the bearish setup is a 3-drives-to-a-high topping pattern and the bearish divergence shown on MACD is not encouraging for the bulls.

Russell-2000, RUT, Weekly chart

The daily chart of the RUT shows a closer view of the triple top and now in addition to the bearish divergence on the weekly chart we also have bearish divergence at the current high vs. the November 25th high. The leg up from December 16th fits as the 5th wave in the rally from October and the bearish divergence against the 3rd wave high in November supports the wave count. One thing I don't like about it is how large the 4th wave is compared to the 2nd wave but it doesn't violate any EW rules. Also, the 4th wave in the move up from October (the November-December choppy pullback) is a fractal of the larger 4th wave in the move up from June 2012. As can be seen on the weekly chart above, the larger 4th wave is also much larger than the 2nd wave (the September-November 2012 pullback). So from a fractal perspective, which is what EW patterns measure, it's a good fit for a final high, or at least one that should lead to a much larger pullback before starting another rally next year. This is what makes the triple top all the more interesting for the bears.

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- bullish above 1220
- bearish below 1135

Zooming in closer to look at the 5th wave rally (from December 16th) we have another bearish divergence at this week's high vs. last week's. The RUT achieved the 127% Fib extension of the previous decline (November 25 - December 16), at 1207.34, which is a common "reversal" Fib. At this point all the pieces are in place for a major reversal for the RUT and now all we need is confirmation, starting with a drop below yesterday's low near 1200.

Russell-2000, RUT, 60-min chart

Referring to the SPX weekly chart below, you can see that the rally from December 16th is now approaching the top of its parallel up-channel from October 2011. The top of this channel has repeatedly held back all rallies for the past year and it's currently near 2100. That's the upside potential I see for SPX if the buyers can keep at it for the rest of this month. As with the RUT, the bearish divergence at the December 5th high, and further divergence at the current high, suggest buyers here could get stuck holding the bag with no chair to sit down on when the music stops (like my mixed metaphors?).

S&P 500, SPX, Weekly chart

The weekly chart above is using the arithmetic price scale and the daily chart below is using the log price scale. That shifts up the trend line along the highs from April 2010 - May 2011, currently near 2081. You can see how SPX poked through that trend line in late November and early December but couldn't hold above it (that's also where it banged into the top of its parallel up-channel shown on the weekly chart above). It's now doing the same thing and the last two days have been little shooting stars, indicating a failure to rally. The bearish divergence against the November-December highs is another warning sign. But if the buyers can keep the sellers away for at least another week we could see SPX close out the month at a higher high, perhaps near the trend line along the highs from July-December, currently near 2095, which is basically the same line as the top of the parallel up-channel on the weekly chart. I'd be a nervous long here, especially if SPX drops below Tuesday's gap closure, at 2078.52, which would also put it back below its December 5th high at 2079.47.

S&P 500, SPX, Daily chart

Key Levels for SPX:
- bullish above 2100
- bearish below 2019

The DOW ran into trouble back in November-early December when it hit the trend line along the highs from May 2011 - May 2013, shown on its daily chart below (purple line). I'm using the same wave count for the rally from October as I showed earlier for the RUT, which calls the rally from December 16th the final 5th of the larger 5th wave of the rally from October 2011. It's showing the bearish divergence I would expect to see for a 5th wave. Keep in mind the bullish potential (for all indexes) is that the current rally is the start of a MUCH more bullish rally to come (3rd wave in the rally from October). But the bearish divergence suggests that is not the correct wave interpretation so it's an alternate count for now. Today's candle, as a result of the selling in the last half hour of trading (profit taking or something more?), is a gravestone doji at trendline resistance, which is a possible reversal candle but it needs a red candle on Friday to confirm. The hard part with interpreting this stuff this week is the light volume -- it's easy to push the indexes around with a couple of large buy/sell programs. But for now it's a bearish heads up.

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- bullish above 18,050
- bearish below 17,067

Different index, same story -- NDX is banging against resistance at its trend line along the highs from April 2010 - March 2012, currently near 4318. It hit it last Friday, pulled back, and then gapped up to it yesterday morning, which was followed by an immediate selloff (leaving a gap n crap). Since yesterday's low it's had a choppy bounce attempt to a lower high so far and it looks like a correction before heading lower. It's possible NDX will complete its rally with a truncated high (below its November 28th low), which would be another bearish sign since it means the 5th wave (the rally from December 16th) is especially weak. The sideways chop since last Friday could be a bullish consolidation but at the moment I think that's a lower probability than topping action here.

Nasdaq-100, NDX, Daily chart

Key Levels for NDX:
- bullish above 4347
- bearish below 4089

A quick review of the dollar and commodities shows no change in trend yet. They're getting extended, like the stock market so pressing bets to the downside in commodities doesn't appear to have a good risk:reward ratio (considering the short-covering potential for a blast back up) but I also see the trend continuing for at least a little longer.

I had thought the U.S. Dollar would be ready for a stronger pullback once it reached the top of its parallel up from April 2011, near 89, but following a relatively small pullback to 87.83 on December 16th it rallied strong to a high at 90.40 yesterday. As can be seen on its daily chart below, that was good enough for a poke above a potential rising wedge pattern for its rally from October, which I have labeled as the 5th wave in the rally from May. The weekly chart continues to show bearish divergence against its October high (labeled wave-(iii) on the chart) and that supports the currently rally as the 5th wave. Once complete, which would be confirmed with a drop below the December 16th low at 87.83, we should see a multi-month pullback for the dollar. Interestingly, I see the same setup for the dollar as I do for the stock market and I suspect they'll pull back together once each has finished their highs.

U.S. Dollar contract, DX, Daily chart

For a long time I've been suggesting gold would likely drop below 1000 before putting in a good tradeable bottom and so far I haven't seen anything to change my mind. Since gold's low on November 7th we've had very choppy price action and the bounce into the December 10th high tagged the top of its down-channel from 2011, which was then followed by more selling. The bounce is corrective and price remains in the down-channel, both of which support further downside. Even RSI can't get back above its broken uptrend line from June 2013. For holders of gold I know this is painful but for an opportunity to add gold to your portfolio (or for your TEOTWAWKI cache), the more it drops the more we'll be able to buy. Just not yet.

Gold continuous contract, GC, Daily chart

Silver's 3-wave bounce off its December 1st low had it back-testing its broken uptrend line from 2003-2008, near 17.10, but sold off from there, leaving a bearish kiss goodbye. I show the potential for a larger bounce up to the 18.60 price-level S/R but I'm starting to wonder if that's too optimistic here. It's just as likely for silver to decline to the bottom of its down-channel from 2011, currently near 13.15.

Silver continuous contract, SI, Daily chart

While many wonder where and when we'll see a top to the stock market's rally, there are many wondering where the bottom is for commodities, especially oil. I'm constantly reading why this is a good place to buy a bottom. OK, that didn't work but here's a good place. As opposed to the stock market, which has most believing in a continuation of the rally, it seems most oil traders believe oil is bottoming here. And as long as traders keep looking for a bottom, and keep trying to catch falling knives by buying the bottom, there's probably more downside to come. From a pattern perspective I also see at least a little bit more to the downside before oil puts in a tradeable bottom.

The daily chart of oil shows a wave count that would look best with one more drop lower to complete a 5-wave move down from June. The 5th wave, which is the decline from November 21st, needs one more leg down to complete the 5th of the 5th wave and I've got Fib price projections lining up just below $50 for what should be a tradeable bottom. The choppy consolidation since the December 16th low looks like a small 4th wave correction, which supports the idea for at least one more new low. Many are looking at the recent consolidation as basing in preparation for a rally but I don't see that yet. The idea for another leg down would be negated though with a rally above the December 1st low at 63.72. In that case we would likely already be into a multi-month bounce/consolidation.

Oil continuous contract, CL, Daily chart

Near the $50 downside projection is the 78.6% retracement of the 2009-2011 rally, at 50.67, as shown on the weekly chart below. As I've shown on its weekly chart in the past, the Fib price projection at 54.14 was achieved on December 16th and it's been consolidating since then. This price projection is where the 2nd leg of the decline from August 2013 is 261.8% of the 1st leg down, a common projection for an extended move, especially for commodities. If the leg down from June is a 3rd wave we'll see a multi-month choppy bounce/consolidation through the first half of 2015 before dropping lower later next year.

Oil continuous contract, CL, Weekly chart

From a trading perspective, a choppy bounce/consolidation for six months could mean dead money. But if the decline from June is completing the c-wave of an A-B-C pullback from August 2013 we'll get a stronger rally so buying a bottom, when we have a better setup for one than we do here, could result in a nice trade. Only after the bounce is underway would we get some clues as to how strong/weak it's likely to be, which would then be used for stop management. The first bullish sign would be a rally back above the 1998-2008 uptrend line, currently near 65.

From a fundamental perspective it makes sense to me to see oil in decline. Many believe low oil prices, and therefore gas prices, will spur demand. The chart for gasoline looks just like oil's chart so evaluating one is like evaluating the other. Gasoline demand is inelastic, meaning demand doesn't change much because of price changes. The data fully supports this view and it makes a lot of sense. Commuters still commute and people still need to get out to the grocery store. What probably changes a little is how many trips you'll take to see Grandma or the grandkids. There's been a significant drop in gasoline demand over the past couple of years, along with demand for oil (but why? Our economy is doing soooo well, said with tongue firmly planted in cheek). The drop in demand combined with the rise in supply has the demand/supply curve working like it's supposed to.

The Fed's easy money policy, especially with abnormally low interest rates, had many drillers borrowing cheap money to do their drilling. Much of the high-yield debt is energy related. That probably won't end well for the banks (again). All the new-found oil is coming into a market that is showing declining demand and that's putting the higher-cost drillers at risk of defaulting on their loans. But why the reduced demand? There are two things that come to mind -- first, fewer people in the work force (labor participation rate has been dropping), which reduces gas demand from commuters. More and more employers are also allowing employees to work some from home, further reducing commuter costs. Second, baby boomers are retiring, perhaps many of them earlier than they had originally planned. There's been a spike in early retirees collecting social security before they turn 66-67. So there are even fewer commuters on the road.

Just these two things are cutting demand for gasoline and as yesterday's economic numbers indicate (forget the bogus GDP report), the economy is not that healthy, which further reduces demand for oil products. I think we'll find a tradeable bottom soon for oil but I think the bounce/consolidation will be a period where traders downsize their expectations for where price should be. The fundamentals and the technical (wave pattern) support each other in this view but we'll obviously have to wait for Ms. Market to tell us whether or not she agrees with my analysis.

It's not just the metals and oil getting the smackdown; it's commodities in general, as shown on the Bloomberg Commodities index (DJUBS) weekly chart below. Some of this is obviously U.S. dollar related since the dollar has rallied strong since May. But some of it has to do with demand so how much of a bounce correction we can expect, once a tradeable bottom is in place, remains to be seen.

In October-November DJUBS tried to hold support at its long-term uptrend line from 1999-2009, near 117, but broke down with a gap down on November 28th. And then in mid-December it briefly held support at the bottom of a parallel down-channel from September 2012 (with the parallel line attached to the August 2013 low) but then broke down further on December 15th and appears to be heading toward 101-104 support.

Bloomberg Commodity index, DJUBS, Weekly chart

The commodity index could be heading to the bottom of a larger down-channel from September 2012 (with the parallel line attached to the June 2012 low), currently near 104, which is not much above the February 2009 low at 101.48. Nice round trip for commodities if it tests that low. In the meantime the stock market is in lala land thinking everything is fine with the economy. Just keep listening to the man behind the curtain and everything will be fine. Once the leg down from November completes I think we'll see a tradeable bottom in commodities but keep in mind it could still be a month away.

The commodities have been warning us that the economy is not as healthy as stock market analysts (and the Fed) would like us to believe. It hasn't meant squat to buyers of the stock market but my concern about a real scary downside disconnect remains, and I get more concerned about it the longer the upside disconnect continues. Practically no one believes we'll have a down year in 2015. No one (except perma bears). Once we get through December and into January, if it doesn't remain bullish, we'll have a better idea about whether or not the bulls can hang on.

We're in a seasonally bullish period but nothing is guaranteed, especially a rally that everyone believes will continue from here. I'm seeing enough evidence to suggest we will not see a continuation of the rally into early January but this market's strength has fooled me too many times before to ignore the upside. We're in an uptrend and that keeps the bulls in control until proven otherwise. I've provided some key levels to watch in the coming week and we'll see how well the bulls can hold the indexes above them.

Good luck and I'll be back with you next Wednesday. In the meantime I hope you all have a very Merry Christmas. Happy Hanukkah as well and enjoy whatever faith you practice during this holy period. Remember the market will always be here but your friends and family will not. Keep your priorities straight as you think about what you'll focus on in the coming year. Work to live, not the other way around, but mostly have fun with whatever you do, starting with a joyous time with friends and family tonight and tomorrow.

Keene H. Little, CMT

In the end everything works out and if it doesn't work out, it is not the end. Old Indian Saying

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New Option Plays

I Heard Him Exclaim

by James Brown

Click here to email James Brown

Editor's Note:

The stock market's half day on Christmas Eve proved to be rather uneventful.

The big cap Dow Jones Industrial Average and the S&P 500 both briefly tagged new record highs. Gains faded sharply near the closing bell. Odds are investors were more focused on last minute shopping or beating the traffic than where equities were headed today.

We are not adding any new trades tonight.

I hope everyone has a merry Christmas.

We'll be back for the normal weekend newsletter!


But I heard him exclaim, ere he drove out of sight—
"Happy Christmas to all, and to all a good night!"
(from the poem: A Visit from St. Nicholas, by Clement Moore)

In Play Updates and Reviews

Wednesday's Gain Fades

by James Brown

Click here to email James Brown

Editor's Note:

Bids disappeared this afternoon and Wednesday's earlier gains faded by the closing bell.

We did see both RCL and RRGB hit our bullish entry triggers.

Current Portfolio:

CALL Play Updates

Packaging Corp of America - PKG - close: 78.90 change: -0.11

Stop Loss: 77.85
Target(s): To Be Determined
Current Option Gain/Loss: -20.0%
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

12/24/14: Christmas Eve proved to be a very quiet session for shares of PKG. The stock drifted sideways in a narrow range. I'm still worried about Tuesday's bearish looking candlestick.

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: 82.36 change: +0.16

Stop Loss: 78.40
Target(s): To Be Determined
Current Option Gain/Loss: - 3.6%
Average Daily Volume = 2.9 million
Entry on December 24 at $82.30
Listed on December 22, 2014
Time Frame: We will likely exit prior to earnings in very late January
New Positions: see below

12/24/14: RCL displayed relative strength this morning and hit new highs. Unfortunately as the market reversed back toward unchanged so did RCL. Shares did hit our suggested entry point at $82.30 this morning.

If you're still looking for an entry point I'd suggest waiting for a new rise past $82.50.

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.

- Suggested Positions -

Long MAR $85 CALL (RCL150320C85) entry $3.37

12/24/14 triggered @ 82.30
Option Format: symbol-year-month-day-call-strike

Red Robin Gourmet Burgers Inc. - RRGB - close: 76.51 change: +0.13

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

12/24/14: We see a similar story with RRGB. This week's upward momentum carried RRGB higher and shares hit our suggested entry point to buy calls but then gains faded by the closing bell. Our entry point was $76.65. I would still use a rise to $76.65 as an entry point.

Earlier Comments: December 22, 2014:
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.

- Suggested Positions -

Long MAR $80 CALL (RRGB150320C80) entry $3.87

12/24/14 triggered @ 76.65
Option Format: symbol-year-month-day-call-strike

Skyworks Solutions - SWKS - close: 74.32 change: +0.92

Stop Loss: 71.35
Target(s): To Be Determined
Current Option Gain/Loss: +12.7%
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

12/24/14: The relative strength in SWKS returned for Christmas eve. Shares outperformed the market with a +1.25% gain. The stock looks poised to breakout past the $75.00 level soon. 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: 65.00 change: +0.30

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

12/24/14: ANET quietly drifted sideways near the $65.00 level most of the day. 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