Option Investor

Daily Newsletter, Monday, 12/29/2014

Table of Contents

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

Market Wrap

Riding High In 2014

by Thomas Hughes

Click here to email Thomas Hughes
The major indices make another round of new highs as 2014 rapidly approaches its end.


The year is fast approaching its end and the market is still making new highs. Most of the major indices set new highs today, closing if not intraday. Volume was light, characteristic of the holiday season, resulting in tight daily ranges.

Despite low volume those trading seemed to shrug off early news that sent some ripples through the international markets. Asian indices were mixed as traders attention was split between the missing AirAsia flight and fear of a possible Ebola case in Japan. At last report a Japanese man was being tested for Ebola after visiting Sierra Leone earlier this month. Markets in Europe were also mixed, but more focused on the Greece and the ongoing political situation and state of its bail out. The most recent news is that the vote held over the weekend did not come to a satisfactory conclusion and another vote will be held in January. The fear is that a new coalition that is not in favor of bail-out terms will come to power.

Market Statistics

Futures trading was negative in earliest part of the day. The S&P 500 was indicated to open about 4 points lower, the Dow about -30 but these levels moderated going into the open, firming to levels closer to break even. There was not really much news, aside from the international headlines, to affect the early market. There were no economic announcements and only 3 earnings reports.

The major indices were flat to slightly negative when the opening bell sounded but began to drift higher within the first five minutes. The morning high was reached just after 10:30 at which time the market began a near perfect sideways drift that lasted until early afternoon. Mid afternoon the indices dipped down to test today's opening levels before moving back higher, all except one. The Dow Jones Industrial Average dipped into negative territory, where it remained into the close, while the S&P 500, NASDAQ and Dow Tranpsortation Average all ended the day with a gain if slightly below the daily high.

Economic Calendar

The Economy

There was no economic data released today and there are only a handful due out this week. It's the end of the month, which means a big round of monthly macroeconomic data is due, but it is also the end of the year which means the week is shortened by one day. It also means that the big data such as ADP, NFP and Unemployment Rate will come out next week. This week we get a look at the Case-Shiller Index, Consumer Confidence, Mortgage Index, Jobless Claims, Chicago PMI and Pending Home Sales over the next two days and then ISM and Construction Spending on Friday.

This is the last Moody's Survey Of Business Confidence for the year, and according to Mark Zandi is ending the year at all time highs. The survey, and the four week moving average, are at the highest levels in the 12 years of the survey's run. According to the report sales, hiring and investment spending are all strong, credit availability is improving “notably” and expectations for next year are “especially strong”.

The Oil Index

Oil prices tried to stage a rebound today as renewed violence in Libya is threatening production. The current violence is reported to have destroyed two days supply and is threatening to curb production to around 300-400,000 barrels per day. This is well below the peak reached this fall near 1 million BPD but still at levels contributing to global over supply. The news initially sent WTI and Brent up by more than 1% each, but the gains did not hold long. By mid-morning both were in the red and more than 2% lower; WTI near $53.50 and Brent near $58.

The chart of the USO, oil tracking ETF, is pretty bearish. The ETF has been in a downtrend and it appears to be gaining momentum. The ETF had been consolidating in a flag/pennant pattern over the past two weeks and today broke to a new low. Stochastic is confirming with a bearish trend following crossover occurring below the lower signal line but MACD has yet to follow. Momentum is bullish in the near term but very weak and not showing signs of reversing the short term trend. If momentum shifts back in line with the trend it could carry prices significantly lower.

The Oil Index traded to the downside but is holding up rather well considering that the underlying commodity is reaching new lows. The thing to keep in mind here is that low oil is bad for producer profits, but good for downstream profits from refiners, distributors and retailers which means that the integrated oil companies may not be hurting as much as feared. The index is currently above the short term 30 day moving average and above long term support but in light of the four month downtrend and today's drop in oil prices looks better set to test support rather than continue a bounce. The indicators are bullish, but cresting a peak, while the index itself is trading just above the down trend line and set up for a drop in line with the down trend. If the index does move down potential support exists along the down trend line and just below that along the 23.6% retracement level near 1,335. A break below this level could take the index all the way down to retest long term support near 1,212.

The Gold Index

Gold lost a little over 1% today as firming dollar values pressured it lower. While rising dollar value is keeping gold prices from rising to much, the longer term outlook for interest rates is keeping it from falling too far. Even though the Fed has indicated it will be at least two meetings before they raise rates last week's reading on 3rd quarter GDP indicates that we should expect them to come sooner rather than later. Support may be found just below the current levels, near $1175, with longer term support below that near $1150. Resistance is near $1200 and the $1215-$1225.

Unfortunately the CBOE Gold Index (GOX) that I normally follow is no longer disseminating. Good thing there are other symbols with which to view the gold miners such as the GDX, Market Vectors Gold Miners ETF. This ETF is a broader gauge of the sector, includes twice the number of companies, tracks gold prices like the CBOE index, is a little less volatile and easy to trade.

The ETF traded to the downside today, but like with the CBOE Gold Index and gold itself, is exhibiting signs of a potential bottom near the full retracement of the 2008-2011 bull market in gold. Over the past two months the ETF has bounced from a potential long term support just above the full retracement level, in line with the potential FOMC/Interest rate bottom that is forming in gold. The ETF looks a little stronger than the CBOE index as it found support above the retracement level while the the Gold Index is/was bouncing from support that is below the comparable level on its chart. The indicators are in line with support at this level but have yet to confirm; stochastic is making a weak bullish cross, MACD has yet to crossover. Support is between $16.50 and $17.00 and could be tested in the near term. Resistance and upside targets are along the short term 30 day moving average and then above that near $20 and the top of the two month range.

GoldCorp is the name I like to follow within the sector. It is a senior miner, operates in North America, is not hedged and pays a dividend over 3.3% at current levels. The stock has been trending sideways for the past 12 months, at the tail end of a long term downtrend, and is now at the low end of that range. The stock is currently trading near the bottom of that range and testing support while gold prices are also testing support levels. The indicators are consistent with support at this level and mildly bullish. MACD has retreated from a bearish peak and about to cross the zero line with stochastic showing an almost strong bullish crossover. I say almost strong because both %K and %D are pointing up but %D is still below the lower signal line and MACD has not confirmed. Support is near $16.75 with upside target should it hold near $20.

In The News, Story Stocks and Earnings

Earnings season starts in just two weeks on Monday, January 12th 2015 with Alcoa. The company is expected to earn slightly less than the previous quarter, due in part to declining aluminum prices. Aluminum has fallen more than 10% in the last month and is now trading below the 6 month range. Today Alcoa traded in a tight range, just below the short term 30 day moving average. The stock has been consolidating below this level since just before Christmas week and a test of support earlier this month. The stock has been range bound near long term resistance the past 6 months, following a near 1 year up trend that lasted part of 2013 and most of 2014. The indicators are bullish in the short to near term and in line with support in the longer term, together suggesting that the stock could move up to test the December high near the top of the range. This could happen ahead of earnings but the short term moving average, near $16, needs to be broken. A failure could bring the stock back down to test support along the $14.50 level.

Manitowoc got a nice little boost from Carl Icahn today. Mr. Icahn now owns over 8% of the industrial crane and restaurant refrigerator maker. Icahn thinks, and many analysts agree with him, that the company should split its two halves to better serve shareholders. It makes sense, what do cranes and reach-in refrigerators have in common with each other and how do you manage a business like that? Regardless, the move was enough to spark a rally in shares of the company that carried it nearly 10% higher. Today's move broke above resistance and closed a gap opened earlier this year.

The Indices

The indices drifted today, mostly to the upside, but drift is what they did. Volumes were light and catalysts were not to be had but even still some of the indices were able to set new highs. Today's action was led by the Dow Jones Transportation Average which set a new closing high. The transports moved 0.19% higher in today's session and are approaching the all time intra day high set at the end of November. The index is moving higher following the trend following bounce earlier this month and supported by the indicators. Stochastic is moving higher following a bullish cross but momentum is still weak and there could be resistance just above the current level, near 9,250. The trend is up and it looks like the index is moving in line with trend, but with possible resistance so close and this a holiday week I am cautious. There could be a pull back to support, which is about 200 points lower along the short term moving average, that would present a much more attractive entry point.

The S&P 500 also made a gain today, and set a new high. The broad market set a new all time closing and intraday high in today's session, creating a small bodied white candle. Price action is without real direction, although it is drifting higher in line with the underlying trend. Today's action is most likely a spinning top, although a bullish spinning top, consistent with my expectations for the week. The indicators are bullish but momentum is very weak and stochastic is overbought near term. The trend is up and I remain bullish long term but I am not rushing into any new positions right now and stops on open trades remain tight. First target for support on a pullback is at the previous all time high near 2,075 and then below that along the short term moving average near 2,050.

Both the Dow Jones Industrial Average and the NASDAQ Composite traded as near to break even as makes no difference. Although the Comp did trade a hair to the plus side while the blue chips were a hair in the negative. The tech heavy index gained 0.0011% today, creating a very small bodied candle and setting, barely, a new closing high. The index is moving higher, in line with the underlying trend following a bounce from the long term trend line. The indicators are bullish and consistent with higher prices although momentum is weak and there is a possible divergence showing. If not for the holiday I would say that this index is in rally mode and about to move higher but until volume returns and it is officially 2015 I remain cautious. Support, on a pull back, is about 100 points lower along the short term moving average and then another 100 below that between the long term trend line and the September high near 4,600.

The Dow Jones Industrial Average brings up the rear today with a slight loss, only -15.48 points or -0.09%. The index had been leading today's gains until falling back late in the day. The blue chip index created the third of three small spinning tops today, just above the all time high set earlier this month. The indicators are bullish and in line with higher prices but there is a chance a pull back or test of support could happen. First support is the December high, just a few points below today's close, with next target about 300 points below that along the short term moving average. The past three days looks a little like it could be a bullish continuation/consolidation pattern but as with the others, the holiday and light volume environment give me reason to sit back and wait-n-see.

The indices are drifting higher in line with the trend, accompanied by bullish indicators and assisted by economic tail wind. In normal trading circumstances that is a good thing but this is the holiday's, not normal conditions. Today's move is not a bad thing, just not as good as it would be if the market were fully present. Because we have drifted higher on light volume I see a real possibility the market could move lower before moving higher, once the New Year has begun. The trend is up, I am bullish long term and looking to buy on the dips and right now I think a dip could happen. It might not happen but I'd rather err on the side of caution. Next week the rally will get another dose of big data and another chance to move on, or correct, if that is what its going to do.

Until then, remember the trend!

Thomas Hughes

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New Option Plays

Santa Rally Still Going, Albeit Slowly

by James Brown

Click here to email James Brown

Editor's Note:

Monday delivered a relatively lackluster session.

The seasonal trend (a.k.a. Santa Claus rally) is still playing out for the bulls. Volume was super light due to another holiday week.

We are not adding any new trades tonight.

In Play Updates and Reviews

Stocks Ignore The Decline In Crude Oil

by James Brown

Click here to email James Brown

Editor's Note:

Another breakdown in crude oil failed to stop the rally in U.S. stocks. Gains were pretty limited with a mostly flat session. The S&P 500 did manage another record close.

SWKS hit our stop loss while DOV hit our entry point.

Current Portfolio:

CALL Play Updates

Apple Inc. - AAPL - close: 113.91 change: -0.08

Stop Loss: 109.85
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 56 million
Entry on December -- at $---.--
Listed on December 27, 2014
Time Frame: 4 to 6 weeks, exit ahead of Q4 earnings
New Positions: Yes, see below

12/29/14: Monday ended up a relatively quiet session for shares of AAPL. The stock traded to a high of $114.77 before fading lower. Our suggested entry point to buy calls is at $115.25.

Earlier Comments: December 27, 2014:
There are a lot of Apple fan boys and girls out there, especially on Wall Street. The stock has been a big performer this year with a +42.2% gain in 2014. This has pushed AAPL to new highs and the stock is now the biggest of the big cap names with a valuation of almost $670 billion.

The company is involved in multiple industries from hardware, software, and media but it's best known for its consumer electronics. The iPod helped perpetuate the digital music revolution. The iPhone, according to AAPL, is the best smartphone in the world. The iPad helped bring the tablet PC to the mass market. The company makes waves in every industry they touch with a very distinctive brand (iOS, iWork, iLife, iMessage, iCloud, iTunes, etc.) and they've done an amazing job at building an Apple-branded ecosystem. Now they're getting into the electronic payments business with Apple Pay.

The company's latest earnings report was super strong. AAPL reported its Q4 (calendar Q3) results on October 20th. Wall Street was expecting a profit of $1.31 a share on revenues of $39.84 billion. The company delivered a profit f $1.42 a share with revenues up +12.4% to $42.12 billion. The EPS number was a +20% improvement from a year ago. Gross margins were up +1% from a year ago to 38%. International sales were 60% of the company's revenues.

AAPL's iPhone sales exceeded estimates at 39.27 million in the quarter and up nearly 16% from a year ago. The only soft spot in their ecosystem seems to be iPad sales, which have declined several quarters in a row. The company hopes to rejuvenate its tablet sales with a refresh of the iPad models. More importantly AAPL management raised their Q1 (calendar Q4) guidance as they expect revenues in the $63.5-66.5 billion in the quarter. Recent news would suggest that AAPL might deliver an incredible 50 million iPhone 6s in 2014. That's not counting their new iPhone 6+.

It looks like bearish investors are giving up on AAPL seeing a correction. There was a new report out Christmas week saying short positions in AAPL had collapsed 31% to 53.7 million shares. AAPL currently has a float of 5.86 billion shares.

Right now all the focus is on AAPL's iPhone sales. They're expected to be huge. If they miss estimates the stock could see a significant sell-off. That's why we do not want to hold over the earnings report expected in late January.

The three-week pullback from the late November (Black Friday) highs has provided a new entry point for bullish investors. AAPL did see its rebound pause for a few days but traders bought the dip on Friday and AAPL displayed relative strength with a +1.7% gain and a breakout above its 20-dma and 30-dma.

Tonight we are suggesting a trigger to buy calls if AAPL trades at $115.25. We are not setting an exit target tonight but I will point out that the point & figure chart is forecasting a long-term target of $165.00. I anticipate an exit for us in the $120-125 area given our time frame.

Trigger @ 115.25

- Suggested Positions -

Buy the FEB $120 CALL (AAPL150220C120)

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

Packaging Corp of America - PKG - close: 79.11 change: -0.04

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

12/29/14: PKG also delivered a very quiet session with shares continuing to churn sideways near $79.00. Investors may want to wait for a new close above $80.00 before considering new bullish positions.

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: 83.56 change: +1.29

Stop Loss: 78.40
Target(s): To Be Determined
Current Option Gain/Loss: + 9.8%
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

12/29/14: RCL continues to cruise to new highs and outperformed the broader market with a +1.5% gain on Monday. More conservative investors may want to move their stop loss closer to the $80.00 level.

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: 78.39 change: +1.97

Stop Loss: 72.45
Target(s): To Be Determined
Current Option Gain/Loss: +16.2%
Average Daily Volume = 276 thousand
Entry on December 24 at $76.71
Listed on December 22, 2014
Time Frame: 8 to 12 weeks
New Positions: see below

12/29/14: After a weekend of holiday food it looks like Wall Street was in the mood for hamburgers. Shares of RRGB soared +2.58% to close at new relative highs. The next hurdle is probably round-number resistance at $80.00.

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

PUT Play Updates

Arista Networks, Inc. - ANET - close: 61.57 change: -3.68

Stop Loss: 70.25
Target(s): To Be Determined
Current Option Gain/Loss: + 8.3%
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

12/29/14: The prevailing down trend in shares of ANET reasserted itself today. The stock significantly underperformed the market with a –5.6% decline. It may be time to start lowering our stop loss on ANET.

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

Dover Corp. - DOV - close: 73.25 change: -0.58

Stop Loss: 75.25
Target(s): To Be Determined
Current Option Gain/Loss: -2.1%
Average Daily Volume = 1.7 million
Entry on December 29 at $73.40
Listed on December 27, 2014
Time Frame: 4 to 8 weeks, exit ahead of Q1 earnings
New Positions: see below

12/29/14: Our brand new put play on DOV is off to a good start. Shares continued to sink and hit our suggested entry point at $73.40. I would still consider new bearish positions at current levels.

Earlier Comments: December 27, 2014:
DOV is part of the industrial goods sector. They make an array of equipment and parts for multiple industries. According to the company, "Dover is a diversified global manufacturer with annual revenues of $8 billion. We deliver innovative equipment and components, specialty systems and support services through four major operating segments: Energy, Engineered Systems, Fluids, and Refrigeration & Food Equipment. Dover combines global scale with operational agility to lead the markets we serve."

Unfortunately for DOV investors the company's earnings picture has soured. Back in October they reported their Q3 results that beat Wall Street estimates on both the top and bottom line. Yet management issued relatively bearish guidance. It would appear that the outlook is worse than previously thought. On December 8th DOV issued an earnings warning and lowered their 2014 guidance. They're blaming restructuring costs and downsizing expenses.

The very next day (Dec. 9th) an analyst at Deutsche Bank downgraded DOV to a "sell" and lowered their price target from $83 to $65. Deutsche Bank's concern is DOV's exposure to the U.S. oil and gas industry. More than 33% of DOV's profits come from sales to the U.S. oil and energy sector. Given the plunge in crude oil prices this year (to five-year lows) the United States is already seeing a slowdown in oil rig use. A lot of the shale oil is expensive to drill and oil needs to be above $75 to be truly profitable. Right now oil is closer to $55 a barrel. That's going to significantly encumber capital spending for the oil industry and DOV could suffer as a result.

Technically shares of DOV broke their long-term up trend in 2014. Shares have developed a bearish trend of lower highs and lower lows. It looks like the most recent oversold bounce has just started to stall. We want to catch the next wave lower. Tonight I'm suggesting a trigger to buy puts at $73.40.

- Suggested Positions -

Long MAR $70 PUT (DOV150320P70) entry $2.30

12/29/14 triggered @ 73.40
Option Format: symbol-year-month-day-call-strike


Skyworks Solutions - SWKS - close: 74.49 change: +0.17

Stop Loss: 71.35
Target(s): To Be Determined
Current Option Gain/Loss: -18.8%
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

12/29/14: Shares of SWKS were downgraded this morning. The stock reacted by gapping down at $72.84 and falling to $71.06 intraday before paring its losses. Our stop loss was hit at $71.35.

- Suggested Positions -

FEB $75 CALL (SWKS150220C75) entry $4.08 exit $3.31 (-18.8%)

12/29/14 stopped out
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