Option Investor

Daily Newsletter, Saturday, 1/17/2015

Table of Contents

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

Market Wrap

Pause to Refresh

by Jim Brown

Click here to email Jim Brown

After an extremely volatile week traders closed out short positions ahead of the long three-day weekend and will enjoy the break in trading with a much needed rest. The volatility has been extreme with 30 point intraday swings on the S&P-500 instead of the normal 10 point ranges.

Market Statistics

Other than aftershocks from the 30% move in the Swiss franc the market was relatively calm on Friday. After an ugly week of triple digit moves to the downside the calm trading on Friday gave traders an easy exit from their shorts. Dip buyers were ready to buy any bounce and a short squeeze was born. Rising oil prices helped support the market with high profile energy companies rising sharply.

Fake tweets from hacked accounts tried to move the market with headlines saying Chinese warships fired on a U.S. ship and the Fed convened an emergency meeting because of the Swiss franc debacle. Neither was true.

Crude prices traded as low as $44.21 last week before rebounding to close at $48.48 on Friday. The black gold traded in an average range of $3.25 per day all week. That is basically a 7% range every day and extreme volatility. Positive crude prices were a calming influence on Friday's market. The +4.8% gain was due mostly to short covering ahead of the long weekend. The strong close pushed oil into positive territory for the week to end seven consecutive weeks of declines. The $50 level is now resistance.

On the economic front the Consumer Price Index (CPI) fell -0.4% in December and the biggest monthly decline since 2008. The biggest contributor to the decline was of course gasoline prices with a -9.2% drop. Overall the energy component declined -10.8%. The core rate, which does not include food and energy, was flat at zero compared to the average of +0.013% for the prior seven months.

The trailing 12-month number for headline inflation declined to +0.7% and down from +2.0% just last summer. Headline prices should continue lower in the months ahead as the impact of low energy prices work their way through the system into consumer prices. The Fed is really facing a challenge if they are planning a June rate hike we Yellen suggested. With inflation declining further and the dollar still rising the deck is stacked against a Fed rate hike.

The Industrial Production report for December showed a -0.1% drop after a +1.3% rise in November. However, the headline number is deceiving. The warmer weather in December caused a -7.3% decline in utility output and skewed the entire index. Manufacturing production rose +0.3% and mining output rose +2.2%. Because of the utility component the report was ignored.

Consumer Sentiment for January rose +4.6 points to 98.2 and an 11 year high. The present conditions component rose from 104.8 to 108.3 and the strongest since May 2007. The expectations component rose from 86.4 to 91.6 and the highest since January 2004. More than 66% of respondents say it is a good time to buy a major household item and more than 82% say it is a good time to buy a home.

Falling gasoline prices are a major part of this sharp gain in the sentiment index. The average driver is saving $750 a year in gas and the average household $2,125 a year. That is a huge raise and that money goes straight into other retail spending.

The calendar for next week only has one critical event and that is the ECB QE decision on Thursday. The ECB is expected to announce up to 500 billion euros of sovereign QE. Unfortunately Mario Draghi has failed to deliver so many times in the past that there is likely to be some extreme market volatility surrounding the event.

The Greek elections are next Sunday. If the ultra left Syriza party captures enough votes they could disrupt the bailout process, defy the EU over Greece's debt and possibly leave the eurozone. The anti-austerity movement is picking up speed and there could be an upset next week. This would be a major blow to the eurozone although everyone is trying to downplay the implications. Stay tuned as the headlines increase this week.

The following week the U.S. Fed will meet and we will hear their interpretation of the economic tea leaves and the fallout from the Swiss franc debacle.

In case you live in a cave without Internet or TV I will recount the news on Switzerland. On Wednesday morning the Swiss central bank broke the peg on the Swiss franc to the euro. The Swiss central bank had pegged the franc at 1.20 to the euro for the last several years. As recently as 10 days ago they affirmed that stance saying they had no plans to change it. On Wednesday they cancelled that peg to let the franc float to its own level. Immediately the franc soared 30% against the euro and 25% against the dollar. It was the largest single day movement by any currency since World War I. These are mind numbing moves since currencies normally moved in tenths of basis points not full percentage points anyone in the currency market surrounding the franc was wiped out.

The global currency markets were thrown into disarray with multiple FX companies being crushed. The most visible in the U.S. was FXCM Inc (FXCM), which is a currency trading firm for individual investors. The company disclosed it was owed more than $225 million by customers that had positions that were wiped out.

In the U.S. currency trading margin is 50:1. That means a $1,000 account can control $50,000 in currencies. Leverage is wonderful because a move to the upside can be huge because of the 50:1 ratio. However, in the currency markets they leverage works both ways. A -2% move against you would zero your account. A 30% move in the example above means you are suddenly -$15,000 overdrawn and that ringing phone is your broker telling you to deposit money immediately.

FXCM said blown up accounts now owed the company more than $225 million. This happened instantly when the Swiss bank announced the peg break. Since the broker is responsible to the exchanges for the user accounts FXCM was suddenly out that $225 million and in violation or regulatory capital requirements.

Shares of FXCM declined from $16.70 to $12.64 by Thursday's close. On Friday they were halted for trading all day as they negotiated with lenders for a loan to keep them solvent. Leucadia National (LUK) parent of Jefferies Group, agreed to lend them $300 million in two-year senior notes with a 10% coupon. However, if FXCM is sold to anyone else in that two year period LUK will receive 75% of the proceeds. Apparently Leucadia was concerned FXCM may not be able to recover that $225 million in margin shortfalls and would have to sell itself or liquidate to end the pain. FXCM has the right to sue the individual account holders for the margin shortfalls but individual investors with marginal accounts probably are not going to be able to come up with 15-20 times their original investment just to cover their overdrafts.

I remember back in the early 1980s when you had to trade through a real live person my Shearson Lehman broker called me four days in a row telling me I had to wire another $25,000 that day to cover a currency position that moved against me overnight. I know exactly how those investors feel this weekend.

Shares of FXCM opened late Friday and traded at a low of $1.50 before rebounding on the news of the LUK loan to close at $4.70. The company said it will resume business as usual next week.

Citigroup (C) said it lost up to $200 million on forex because of the Swiss move. Barclays said it lost $100-$150 million. More problems are sure to surface next week. European currency broker Alpari closed its UK arm saying "exceptional volatility and extreme lack of liquidity" resulted in the majority of their customers sustaining losses. "When a client cannot cover a margin loss, it is passed on to us. This has forced Alpari (UK) to enter into insolvency."

New Zealand foreign exchange dealer Global Brokers NZ was also forced to close its doors because of losses incurred in customer accounts.

This was a major story and it is going to be a major story for months to come. Many Europeans had secured mortgages in francs because the interest rates were very low and the currency stable. Today it will take 20% more to pay off those mortgages. Swiss watch makers are warning they could go out of business because their watches just spiked 20% in price because of currency translation issues. All exports from Switzerland will suddenly cost 20-25% more for Europeans and westerners.

Here is the problem for next week. The Swiss Miss as the franc event is being called has put even more expectations on Draghi to launch a major QE program to bail out Europe from the currency maelstrom and theoretically stimulate the economy. The more the expectations build for Draghi to do something big the better chance he will disappoint. Even if he does launch a big program the market may not be satisfied. If he tries to push the decision off to the next meeting or launches some complicated program of just a few billion then the market is going to be VERY disappointed. The big fear today is that Europe is sliding into deflation and it will drag the U.S. with it. Therefore, if Draghi does not halt that deflationary view the U.S. markets could sour.

The treasury markets are telling us two things. First, the U.S. is a flight to safety and all that European money is flooding into the USA. Second, there is real fear that bankers may not be able to keep the deflation monster away and the next year could be very volatile. Some fringe analysts are still expecting the Fed to be forced to launch another round of QE. While I think that is out of the realm of possibilities I could be wrong.

The 30-year treasury traded down to a 64-year low yield of 2.53% on Friday before profit taking began. It takes a lot of money to push yields lower at this level. It takes a lot of really scared money since the odds of yields dropping further are getting smaller every day.

The dollar is at an 11-year high and still rising. If Draghi launches QE the dollar will continue to rise and the euro decline. That means commodities will continue to go down and add to deflation worries.

Oil prices are also declining because the dollar it at the highest level since 2003. Since oil is priced in dollars it takes fewer dollars to buy a barrel than it did as recently as May. The dollar index hit a low of 78.90 in May. It hit a high of 93.00 on Friday. That is a 18% rise in 8 months. Crude oil was $107 in June and the rise in the dollar equates to a -$19.26 decline in oil prices even without the current surplus. That means one third of the -$59 decline was due to the rise in the dollar not the surplus production.

The dollar strength is going to be a serious headwind to international companies. With the earnings cycle heating up next week we should be watching for the impact of the dollar and the decline in the energy sector as factors in Q4 earnings. Companies not in the energy sector but making products and services that are used by companies in the sector can be impacted. This is a rare opportunity to see how the sector interactions impact the economy.

The earnings activity picks up next week and companies facing currency issues could include IBM, McDonalds, GE and Starbucks to name a few. The brokers should be watch for comments about losses related to the Swiss franc. Those include Interactive Brokers, Ameritrade and E*Trade. Numerous banks report next week but I won't list them here. There were easily 50+ smaller banks that I did not put on the list. With the financial sector reeling from the low rates and weak earnings we could a continued drag on the market.

The airlines including Alaska Air, United Continental, Delta and Southwest should post decent results as a result of the low fuel prices unless their hedges turned against them.

In an unusual move Cowen upgraded Netflix to outperform before their earnings on Tuesday citing strong user survey results, increasing original content and attractive valuation. Netflix is releasing 20 new original shows in 2015, twice the 2014 rate. Cowen raised the price target from $360 to $382. If Netflix trips over earnings and crashes the analyst will look pretty silly. If they beat and soar he will be a hero.

Goldman Sachs (GS) posted earnings of $4.38 compared to estimates of $4.32 but that was lower than the year ago quarter of $4.60. Net revenue declined -12% to $7.69 billion but that still beat estimates of $7.64 billion. Revenue from fixed income, currencies and commodities trading fell -29% to $1.22 billion. Investment banking revenue declined -12%. Shares declined slightly on the news.

Oil services firm Schlumberger (SLB) said it was laying off 9,000 workers roughly 7% of its workforce and taking a $296 million charge in order to slim down after the oil price crash. The company reported adjusted earnings of $1.50 that beat estimates of $1.47. Revenue of $12.6 billion was less than expected by -$100 million. During the quarter they repurchased $1.1 billion in stock (12.1 million shares) and that helped them post better than expected earnings per share. The company said it was reducing capex spending in 2015 by 25% from $4 billion to $3 billion. The company surprised investors with a +20% increase in its dividend from 40 cents to 50 cents. Shares rose on the combination of events.

Charles Schwab (SCHW) reported adjusted earnings of 25 cents that beat estimates by a penny. Revenue of $1.55 billion beat estimates of $1.53 billion. They ended the quarter with $2.46 trillion in client assets. If interest rates ever rise this will be a huge cash generator. Active brokerage accounts rose +3% to 9.4 million.

Shares rebounded slightly after crashing with the sector over the last two weeks.

When companies make announcements late on Friday night it is normally something they don't want you to see. AT&T announced late Friday evening a total of $10 billion in charges but they claim it won't impact earnings. More than $7.9 billion is related to actuarial gains and losses on pensions and post employment benefit plans. Another $2.1 billion is a charge for abandoning some copper lines it felt it no longer needed. AT&T plans to turn off its entire copper line network by the end of the decade. Both of the charges are non-cash and will not impact their adjusted earnings but they still announced it late on Friday so they were expecting some negative publicity. Shares dropped about 50 cents in afterhours.

Precision Cast Parts (PCP) warned it was facing weaker demand from the oil and gas industry. No surprise there. The company also pre-released its Q4 earnings estimate between $3.05-$3.10 but analysts were expecting $3.34. Revenue estimates of $2.42-$2.47 billion were also below analyst forecasts for $2.54 billion. The company said demand in its aerospace business continued to grow. Shares fell -9% on the warning.


I warned last weekend that the Nasdaq 100 ($NDX) was the one to watch for market direction for the week as it was leading the broader market. That was true all week with the NDX closing at a three-month low on Thursday and the biggest percentage loss of all the major indexes for the week. On Friday the index gapped down to 4,078 before rebounding +61 points to close at 4,140. It was still the biggest loser for the week but that was a decent rebound from critical support.

The 4,090 level has been support on the last three declines but even with the decent rebound on Friday the chart is still ugly. If selling resumes next week I would not expect that level to hold on the fourth retest. The Nasdaq big caps are eroding and unless this situation reverses immediately we are likely to retest 4,000.

Google is being downgraded almost every week. Apple is declining ahead of what could be fantastic earnings but expectations are too great. The tech earnings we have seen already were not exciting and that is weighing on expectations for future tech reports.

The Nasdaq composite is not much better. However, the low for the week of 4,563 was still above the December low of 4,547. Unlike the NDX it did not make a lower low. The Composite index did retest the January 6th lows of 4,567 almost to the penny on Thursday before rebounding on Friday.

The Composite chart is still bearish but not quite as bad as the NDX. Resistance is now 4,650 and support is that 4,547 level from December.

The S&P-500 dipped below 2,000 twice last week to hit 1,988 each time before rebounding. The average range on the S&P for the week was nearly 30 points per day. That is huge and shows how much indecision there was in the market. The 31 point rebound from Friday's low was probably a combination of dip buying and short covering. I am sure very few traders wanted to be short over a three-day weekend. Historically Friday's before a long weekend are positive 73% of the time. With the recent volatility and 300 point moves in the Dow nobody wanted to be faced with the potential for a triple digit gap open on Tuesday because of some European event on Monday.

Even with the decent rebound it is too early to call it the beginning of a rally. I did like the dead stop on 1,988 on Wed/Fri but it is not enough to call a bottom. We need a couple more days of gains on decent volume before we can say the January decline is over.

We did see some strong volume last week. Tuesday was 7.8 billion shares. Wednesday 8.1 B, Thursday 7.9 B and Friday 7.7 B. Since it was option expiration week we should have seen decent volume. I am just concerned that there was strong volume on the downside and weaker volume on the rebounds.

The line in the sand for next week is 1,985. That has been in play multiple times since June and I fear it will come back to haunt us again.

The Dow did something it rarely does and that is respect a moving average. In this case it was the 100-day at 17,309. It was more than likely coincidence rather than support but we will take the rebound regardless of the reason. The Dow did set a five-week low on Friday at 17,243. That was -19 points below the Jan 6th and 14th lows at 17,262. In Dow terms the three lows in January were close enough to be identical. In theory we could call is support but the real test will be next week. If those lows are broken we could easily test the December low at 17,067.

Several Dow components report next week and the European curse could exact a toll on their earnings. The strong dollar, weak European economy is going to weigh on the international blue chip companies in the Dow.

Support 17,262, resistance 17,915.

The Dow Transports fell below the 100-day average for only the second time in 16 months but rebounded back above that level at the close on Friday. I expect this average to be broken again and for the Transports to break below 8,500 in the near future UNLESS the airline earnings next week are blowouts.

The NYSE Composite is still very weak. The trend of lower highs is continuing with the threat of a lower low if the index drops below 10,360. This is already a very negative chart but that would be the kiss of death.

The Russell 2000 was the hero by far on Friday with a +1.9% gain of +22 points. The recent support at 1,150 held but the rebound stalled at resistance at 1,180. Even more surprising was the +2.0% gain in the Russell Microcap Index. I can't decide if this was purely a short squeeze or the dip buyers were flooding into the micros. Given the sentiment in the market last week it was probably a short squeeze.

With the market closed on Monday we will get our direction from whatever happens in Europe on Monday. I would love to believe Friday's rebound had legs but I think it was just short covering. This week is going to be very volatile with the ECB QE decision and the ramp into the Greek election next Sunday. I would recommend a continued cautious approach until we see what Draghi pulls out of his hat and how the earnings shape up on Tue/Wed. The market should have a direction by Thursday.

Random Thoughts

Mario Draghi is facing a daunting task in trying to keep the eurozone from falling into deflation. There are three things making his task harder and the ECB can only control one of them and then only marginally. The first challenge is an output gap across the single currency region. That means production is higher than consumption and there is considerable excess capacity. The ECB only has limited control over this problem and a QE program may not help.

The second factor causing deflation in Europe is the crash in commodity prices. This is good disinflation in some respects because it lowers the price on everyday items and may induce consumers to spend some of their hoarded cash. The last item is the change in economic direction in China. Previously China was consuming 50% of the world's commodities building highways, housing and huge cities that were never inhabited. China has more than 64 million vacant homes and apartments. The cost of the new housing built over the last decade is more than the average consumer can pay. Now China is moving to a consumer focused economy rather than an export economy. This is a long term change. It will take a decade or more to complete. China is no longer building ghost cities so the demand for commodities has fallen dramatically.

Draghi and the ECB have no power over China and their commodity demand and the drop in commodity prices are dragging Europe's inflation rate ever lower. Draghi has to announce a monster QE program, not because it will help the rag-tag collection of countries to rebound from the brink but because not announcing it will push Europe over the economic cliff.

The Goldman Sachs Commodity Index has fallen -42% since June. This compares to the -65% decline during the financial crisis. These are once a decade moves. Commodities are trading today at the same level as 2002 when the global GDP was $30 trillion. The global GDP today is $72 trillion. This appears to be extremely oversold to me and I would suggest long term long entries in a non leveraged commodity ETF. Commodities prices at this level are unsustainable in the long term but they could remain low for several more months. We are currently at or below cash production costs for oil and various metals. If prices don't rise production will decline sharply and will require a couple years to restart.

The World Bank cut its global growth forecast for 2015 from 3.4% to 3.0% and also lowered 2016 estimates. The U.S. may be the best house on a bad block but the other houses are on fire and the flames are getting closer.

In the U.S. hardly a day goes by without somebody getting hacked. On Friday the NY Post tweeted "Federal Reserve head Yellen announces bail-in in emergency meeting rumored negative rate to be set at 4pm EST today." The account had been hacked. That tweet was followed by "The Fed will peg the dollar to the Swiss franc" and "Chinese anti-ship missile fired at USS George Washington." The same tweets were seen on the UPI twitter account.

Active drilling rigs in the U.S. declined by -74 rigs to 1,676 for the week ended on Friday. This came after a -61 rig cut the prior week and brought the total to -255 since the peak of 1,931 on September 26th. That is a -13% decline and the biggest drop since the financial crisis. Oil production is going to slow dramatically if this rig decline continues. Some analysts are saying a minimum of 500 rigs must be stacked and others are looking for a 50% drop in active rigs to something in the 1,000 range by year end if oil prices remain this low.

Schlumberger announced 9,000 layoffs. Halliburton 1,000, Suncor -1,000, Shell -300, Apache -250. I am sure there are many more but the headlines are flying so fast it is hard to keep up. The real cuts will be announced with the energy earnings over the next four weeks.

The Dallas Fed expects Texas alone to lose more than 140,000 jobs from the oil crash. We are hearing from all over the country of layoffs of drillers, drivers for sand and water trucks, service contracts cancelled, vacancies in the oil worker housing in places like the Bakken. It is going to be increasingly depressing as the capex cuts for 2015 begin to take effect.

The world will consume 92.0 million barrels of oil per day in 2015. That is up from 89 mbpd in 2012 and will continue to rise about 1.0 mbpd for the foreseeable future. There may be an oil glut today but it will go away by 2016.

Venezuela may only be weeks away from a collapse. The food shortages are becoming worse. With nearly empty food stores guarded by the military a new plan was put in place last week. Consumers can now shop only two days a week and they can only buy two bags of groceries. That is almost laughable since they can rarely fill up even one bag. Opposition forces are working the population into some serious anger about the current state of affairs. The official inflation rate is 64% but the unofficial rate is well over 150%. The government is running out of money to acquire and distribute needed supplies. When the government can no longer pay the military it is going to turn ugly. Default is inevitable and will be followed by hyper inflation. Consumers are going to bear the brunt of this tragedy and will require massive relief supplies from outside the country once the government fails.

The Swiss stock market fell -13% for the week after the Swiss central bank dropped the peg on the Franc to the Euro. Instead of dropping from 1.2 to the euro to 1.10 to 1.15 as analysts expected it fell to parity at 1:1 to the euro. At one point the franc surged 41% against the euro. At the same time the bank cut the deposit rate to a negative -0.75% in hopes of slowing the influx of money into the country. The head of the Swiss bank said "markets tend to strongly overreact" to surprises. He expects the situation to correct itself once the panic has left the market. He may be surprised. I am sure there will be a lot of headlines next week regarding losses at other currency trading firms and the impact of the currency move on Swiss businesses. I suspect SNB President Thomas Jordan may be looking for a new job in the near future.

For instance the John Hancock $1.9 billion Absolute Return Currency Fund lost -8.7% on Friday. That is a huge decline and the most among more than 2,000 funds tracked by Bloomberg. The AMG FQ Global Alternatives Fund lost -8.3%. This story has a long way to go before it ends and the impacts may show up where we least expect it.

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

"We always overestimate the change that will occur in the next two years and underestimate the change that will occur in the next ten."

Bill Gates


Index Wrap

Bottoming Action Continues On Balance

by Leigh Stevens

Click here to email Leigh Stevens

Bull markets don't die of 'age", unlike us!, but do with expectations of a recession. And a drop in oil prices isn't a reason to bring one on (a recession). All the major stock indices broke below previously drawn up trendlines but have held various lines of support relative to recent lows and may have formed bottoms. I'm focusing next on some fundamental commentary, as opposed to mostly technical analysis.

I have noted in prior commentaries that the current bull market is rather 'long in the tooth' at nearly 6 years, implying that maybe the odds of it (the bull market) ending could be increasing. However, I've studied bear markets cycles further and almost always find the same thing: bear markets result from recessionary periods. Overall corporate earnings in recessions start sliding, until we get negative (earnings) growth rates. It is true that very strong earnings GROWTH can be hard to maintain at the same clip year in and year out but in that case stocks will typically slow their rate of gain, not reverse it.

Ok, so if bear markets come about due to recessions on the horizon, where is the evidence of that? We don't yet see global growth slowing so much that it would put the U.S. into recession, at least at U.S. and global current growth rates. And, unlike comparable G-7 countries like Germany, (or the Swiss) or Japan, our (U.S.) economy is not driven by exports in the same way as these countries.

Lower oil prices might be a shock as we've seen, relative to the sharp increase in stock market volatility but looking out, lower energy prices are good for much of our economy. Short-term yes, it has an impact on slowing capital expenditures, on energy sector layoffs, on lower earnings for big energy companies, etc. Longer-term it's more of a boon for a consumer driven economy like ours than not.

Enough said on that but I wanted to address the fear and loathing that has been felt by investors and traders. Trader types, as seen in my (CPRATIO) sentiment indicator lean slightly more bearish than bullish but not extremely so. 'Extreme' bearishness is seen when equities' options put volume equals or exceeds total daily equities' options volume. That hasn't been seen, at least in this past week.

What we have seen is a sharp increase in volatility measures like the S&P 500 (SPX) Volatility Index VIX. Speaking of the VIX, the growth in options trading in the VIX Index has grown to a point where many individual traders are speculating on VIX's direction. Portfolio managers or institutional money is going to be the biggest users of this portfolio management tool.

I wrote my most recent Trader's Corner article (1/15) on the tremendous growth in daily options trading volume in VIX as 2014 saw average daily volume hit 632,000 contracts. Thursday saw 734,000 contracts traded (rounded to the nearest 1000) on the CBOE. VIX can largely be analyzed technically like a stock index or individual stocks and I show some examples. Moreover, I've included the contract specifications like strike prices, the multiplier ($100), how premiums are quoted, expirations, etc. Check it out if you haven't via this LINK.

I'm going to start more regular commentary on what the daily and/or hourly charts and related technical indicators might be suggesting as to the short and intermediate trends in the S&P 500 VIX volatility index.

Analyzing VIX; a most recent example:

The most recent advance in VIX, from the 17 area up to a peak Closing hourly reading at 23, advanced on less 'relative strength' on a 21-hour basis; i.e., the 21-hour RSI did not get as high as the prior rally, suggesting a bearish price/RSI divergence. These aspects are seen on my first chart below, that of the hourly VIX. Sure enough VIX retreated Friday from its recent peak around 23, as the Market rallied. It's often the case that rallies develops after VIX hits extremes around 22-23 and above; e.g., to peaks at 25-26.

I almost always use Close-only 'line' charts on weekly, daily and hourly VIX charts; ditto with VXN, the Nasdaq 100 Volatility Index. On daily charts for example the fluctuations intraday can be wide-swinging in the extreme. I'm interested in where VIX Closes for the day; the 'moment of truth' so to speak. There's less 'noise' to use Close-only charting as intraday price swings can be extreme; and often exacerbated by computerized trading models as these firms buy, sell, buy, sell, adinfinitum.

Potential near 'support' in VIX comes in around the Friday Close (21), with next support suggested in the 18 area, then at 16. [The VIX Index is quoted in percentage points, just like the standard deviation of a rate of return, e.g. 19.] My technical take on the current VIX pattern is that because the major indexes look to be establishing a bottom, VIX may decline accordingly; i.e., due to a common inverse relationship between VIX and stock index levels.

Use of Trendlines with VIX: Sure, just like any other instrument. As seen above, VIX has fallen to an up trendline intersecting in the 21 area. I think VIX is going to fall under that line of potential support and head to the next indicated support point noted by the green up arrow around 18; over time the Index may fall further.

Reminder: ahead is a holiday shortened week, with MLK day on Monday, the 19th.



SPX continues to find support, at least since early-January, on dips to the 2000 area, specifically to 1193-1188. 2000 is a 'must hold' support for the bulls in terms of daily and weekly Closes, although there was one Close under this key level. As always, the absence of downside follow through the following day to this suggested bottoming potential remained intact. SPX is also at an oversold RSI reading again.

The pivotal low from mid-December comes in at 1973 and prices could retest this level again certainly. I assess good potential for prices rebounding ahead to test resistance at the 21-day moving average at 2050 and then potentially on up to 2060 resistance or even extending gains to the 2080 top over time.

Per my comments above on the VIX volatility index, which tends to move inversely to prices when VIX it gets to higher extremes, this aspect also shows potential toward a bottom having formed or forming.

Bullish sentiment isn't at rock bottom but isn't showing much bullishness either. I like it. Traders tend to be 'trend followers' and don't get overly bullish on pullbacks and in potential base-building patterns. This pattern keeps me somewhat bullish on a contrarian-opinion basis.


The S&P 100 (OEX) is mixed like all the indices but bottoming potential is seen as support/buying interest has been seen in the 880-877 area. Next support, just above 870 at the mid-December lows.

Overhead resistance comes in starting at 900-903, extending to 910.

I'd rate the potential for a mild to moderate rebound as favorable. A Close below 870, that didn't reverse back to the upside the following day would be bearish. Stay tuned for Tuesday!


The Dow 30 (INDU) Average is also hanging in at a line of support that's recently formed in the 17275 area. Next, and pivotal, support is seen at the mid-December lows in the 17100-17075 area. A decline to this area followed by an upside reversal would set up a potential double bottom. I'd rate the Dow as having better potential for at least a modest rebound than for the Dow to see another down leg.

There are not a sizable number of Dow stocks that presently seem to have enough upside potential to lead INDU out of the bearish funk the Market is in but there's 12 stocks that have further upside possibilities; i.e., DD, DIS, INTC, MMM, MRK, MSFT, PFE, PG, TRV, UNH, V and WMT. Stay tuned on others turning around that have been dragging the Dow lower.

Resistance/selling interest may come in next at 17600-17725 and next in the 17900 area.

The Dow doesn't often get to an oversold extreme in terms of the Relative Strength Index (RSI) on a 13-day basis. If and when it does again, it's been a sure-fire buy in Dow Index calls. I'd like to see 17075-17500 tested to set up a potential double bottom. Hard to say if this will happen but it would be a place to bottom fish.


The Nasdaq Composite (COMP) has established a line of support in the 4548-4566 area that's been traced out over the past month. COMP is also back into oversold territory again in terms of the RSI. The combination of potential price bottoming action and an oversold condition suggests that COMP could be at or near a bottom. Friday's rebound looks encouraging for the bulls.

On the upside what's needed is for a move back above 4700 and the 21-day moving average to get upside momentum going again. Next resistance then comes in what has been a lengthily period of resistance that's turned prices lower multiple times from the 4800 area.

Price action and the RSI suggest potential for a bottom to have formed or to be in process. A decisive downside penetration of recent lows would say otherwise however.


The NDX 100 (NDX) has traced out a potential double bottom in the 4100-4090 area. A couple of back to back Closes below 4100 would suggest otherwise. Next lower support or a potential low 'extreme' is suggested at my lower trading 'band' or moving average envelope line, currently intersecting at 4045.

Fairly major support comes in at 4000. A weekly Close below 4000 tips the chart to bearish from a mixed sideways trading range.

Overhead resistance begins at 4200 and extends to 4255 and on up to 4300. A weekly Close above 4300 sets up potential for a next upside leg such as to 4400.

NDX is oversold again in terms of the RSI and the Nasdaq 100 volatility Index, VXN, has again climbed to the 22 area where prior bottoms have set up. Perhaps this time a more sustained rally could occur given the inverse relationship often seen with a high VIX and a possible bottom, followed by a sustained upside rebound. Stay tuned.


The QQQ chart is mixed but lows have repeatedly formed on dips to and just under 100. I've highlighted support at 99.6, extending to 98.5

Best bullish bottoming potential is seen ahead if the Q's stay above 100 going forward.

Resistance begins in the 102 area, extending to 102.6 and the 21-day moving average. Resistance at 103.6 is also apparent.

I tend to see upside possibilities if prices climb above and 'hold' the 21-day moving average. Conversely, continued defensive action and further downside potential come into play with prices below the 21-day average. This key average tends to be a definite 'trading' bullish/bearish dividing line in terms of upside/downside momentum.

On Balance Volume (OBV) continues to trend mostly lower. Watch for 2-3 days where the OBV line trends higher to suggest a bullish turnaround.


The Russell 2000 (RUT) is mixed in its pattern as RUT has trended sideways in an 1140-1220 trading range since mid-December. Of late the Index appears to be forming a potential bottom in the 1155 area, but could dip again to support around 1140, possible forming a double bottom. I'm mildly, not wildly, bullish on the prospects for RUT to work higher from recent lows.

I've highlighted key near support around 1155, extending to the 1140 area when RUT formed its last pivotal low. The Index is again at an oversold reading in the 13-day Relative Strength Index (RSI).

Resistance levels in the Russell are fairly well-defined, at 1180, 1200 and at 1220 at the top end of the aforementioned trading range or the late-December peak.


New Option Plays

A Beastly Outperformance

by James Brown

Click here to email James Brown


Monster Beverage Corp. - MNST - close: 118.89 change: +2.63

Stop Loss: 115.75
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 1.1 million
Entry on January -- at $---.--
Listed on January 17, 2015
Time Frame: Exit PRIOR to earnings in late February
New Positions: Yes, see below

Company Description

Why We Like It:
Shares of MNST have been extremely effervescent. Last year the NASDAQ composite rallied +13.4%. Yet MNST soared +59% in 2014. Thus far in 2015 the NASDAQ is down -2.1% while MNST is up +9.7%. The stock looks poised for more gains.

The company's market material describes MNST as, "Based in Corona, California, Monster Beverage Corporation is a holding company and conducts no operating business except through its consolidated subsidiaries. The Company's subsidiaries market and distribute energy drinks and alternative beverages including Monster Energy® brand energy drinks, Monster Energy Extra Strength Nitrous Technology® brand energy drinks, Java Monster® brand non-carbonated coffee + energy drinks, M3® Monster Energy® Super Concentrate energy drinks, Monster Rehab® non-carbonated energy drinks with electrolytes, Muscle Monster® Energy Shakes, Übermonster® energy drinks, and Peace Tea® iced teas, as well as Hansen's® natural sodas, apple juice and juice blends, multi-vitamin juices, Junior Juice® beverages, Blue Sky® beverages, Hubert's® Lemonades and PRE® Probiotic drinks."

A big part of last year's gains in MNST came in August. On August 15th, 2014 it was announced that Coca-Cola (KO) was buying a 16.7% stake in MNST. This is part of a long-term strategic partnership to conquer the energy drink category. This generated a +20% pop in shares of MNST and the stock has been in rally mode ever since.

Earnings have been mediocre. MNST has beaten Wall Street's bottom line earnings estimate the last three quarters in a row. Yet they also missed analysts' revenue estimates those same three quarters. Revenue growth has actually been slowing down. Their Q4 2013 revenues grew +14.7% while their Q3 2014 revenue growth was down to +7.7%. Investors don't seem to care.

There has been a lot of analyst action on this name with both upgrades and downgrades in the last several weeks. So far the upgrades are outnumbering the downgrades. This past week saw Cowen upgrade MNST and give it a $140 price target.

The bears are that MNST will suffer from stronger competition from Red Bull, their main rival. They've been rival for years, so what's going to change? There is the valuation argument that MNST is too expensive with the stock trading at 36 times earnings.

Bulls can argue that MNST will see stronger growth when they make the switch to KO's global distribution system. Right now international sales only make up 22% of MNST's total revenues and MNST only has 5% of the international energy drink market. That compares to 37% of the energy drink market in the U.S. By joining KO's distribution platform it's going to give MNST a lot more exposure overseas, especially in Latin America and China. Currently MNST has zero exposure in China. There is speculation that MNST could double its market shares internationally pretty quickly.

Another bonus for MNST is the consumer spending situation in the United States. About 70% of MNST's sales come from convenience stores and gas stations. The massive drop in gasoline prices is very bullish for MNST since consumers will have more money in their pocket after filling up.

At a recent investor meeting MNST said that sales growth in the energy drink category had "re-accelerated" after three consecutive quarters of slowing sales growth (not declines, just slower growth).

There is speculation that MNST might be able to raise prices in the U.S. since their rival, Red Bull, recently raised their prices. There is also the relationship with KO as the company could up its stake in MNST to 25%. Of course they could outright buy MNST too.

The point & figure chart for MNST is bullish and forecasting a long-term $155.00 target. We are not setting a target tonight. The plan will be to exit prior to earnings in late February. The $120.00 level might be round-number resistance so we are suggesting a trigger to buy calls at $120.25.

Trigger @ $120.25

- Suggested Positions -

Buy the MAR $125 CALL (MNST150320C125) current ask $4.20

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

Daily Chart:

Weekly Chart:

In Play Updates and Reviews

Stocks Finally Bounce

by James Brown

Click here to email James Brown

Editor's Note:

The first two full trading weeks of 2015 have been volatile. After a multi-day drop the U.S. market finally bounced on Friday.

There is a good chance that bearish traders were taking profits and covering some shorts on Friday ahead of the long weekend.

The U.S. market will be closed on Monday, January 19th.

Current Portfolio:

CALL Play Updates

Alkermes plc. - ALKS - close: 70.00 change: +4.35

Stop Loss: 63.65
Target(s): To Be Determined
Current Option Gain/Loss: +109.7%
Average Daily Volume = 833 thousand
Entry on January 07 at $63.01
Listed on January 06, 2015
Time Frame: Exit PRIOR to February option expiration
New Positions: see below

01/17/15: The stock market finally bounced and ALKS responded with a huge rebound from the $65 area up toward $70.00. This is a multi-year closing high for the stock but shares still need to get past $70.00, which remains round-number resistance.

I am not suggesting new positions at this time.

Earlier Comments: January 6, 2015:
Biotech stocks were not immune to the market's widespread sell-off today. Yet one stock was bucking the trend. That's biotech stock ALKS.

According to the company's marketing material, "Alkermes plc is a fully integrated, global biopharmaceutical company that applies its scientific expertise and proprietary technologies to develop innovative medicines that improve patient outcomes. The company has a diversified portfolio of more than 20 commercial drug products and a substantial clinical pipeline of product candidates that address central nervous system (CNS) disorders such as addiction, schizophrenia and depression. Headquartered in Dublin, Ireland, Alkermes plc has an R&D center in Waltham, Massachusetts; a research and manufacturing facility in Athlone, Ireland; and manufacturing facilities in Gainesville, Georgia and Wilmington, Ohio."

Investors want to see companies with a growing pipeline of drugs and ALKS certainly qualifies. Here is a list of treatments in various stages of clinical trials at ALKS current pipeline .

The stock's jump today was thanks to a press release issued this morning. Here's an excerpt from ALKS' press release:

[ALKS] today announced topline results from FORWARD-1, one of a series of supportive clinical studies in the comprehensive FORWARD phase 3 pivotal program for ALKS 5461, a once-daily, oral investigational medicine with a novel mechanism of action for the adjunctive treatment of major depressive disorder (MDD). The FORWARD-1 study was designed to evaluate the safety and tolerability of two titration schedules of ALKS 5461. In addition, the study assessed the efficacy of ALKS 5461 over an eight-week period, compared to baseline, in patients with MDD.

...significantly reduced depressive symptoms from baseline starting at Week One and continued to the end of the treatment period at Week Eight...

If this treatment gets approved by the FDA it could be huge. According to a Thomson-Reuters article, depression is a massive opportunity going forward. Almost 350 million people worldwide suffer with depression and it's the leading cause of disability in the world. As more and more healthcare systems around the world get better at diagnosing depression it's going to drive demand for treatment.

Jim Cramer, on CNBC, mentioned ALKS this morning and commented on the company's press release about this new depression drug.

Technically shares have been showing relative strength the last few days and ignoring the market's sell-off. Today's breakout past resistance at $60.00 has also produced a new point & figure chart triple-top breakout buy signal with a $100 price target.

I am cautioning readers that biotech stocks are volatile. ALKS is no different. This is another higher-risk, more aggressive trade. The option spreads are pretty wide, which puts us at a disadvantage.

Tonight we are suggesting small bullish positions if ALKS can trade at $61.75. I would prefer to buy March calls since ALKS reports earnings in late February but March options are not available yet.

- Suggested Positions -

Long Feb $65 CALL (ALKS150220C65) entry $3.10

01/10/15 new stop @ 59.25
01/07/15 triggered on gap higher at $63.01, suggested entry was $61.75.
Stock rallied on positive Phase 2 trial data for schizophrenia drug.
Option Format: symbol-year-month-day-call-strike


Big Lots Inc. - BIG - close: 45.55 change: +0.82

Stop Loss: 43.40
Target(s): To Be Determined
Current Option Gain/Loss: -22.8%
Average Daily Volume = 1.26 million
Entry on January 15 at $45.75
Listed on January 14, 2015
Time Frame: 8 to 12 weeks
New Positions: see below

01/17/15: Shares of BIG also displayed some relative strength on Friday. BIG managed to erase Thursday's loss and rally +1.8% to post another gain for the week. BIG is now up four weeks in a row.

If this rally continues I'd keep an eye on the $48 area, which could be potential resistance.

Earlier Comments: January 14, 2015:
It would appear that investors have a pretty short memory when it comes to BIG. This company is in the services sector. They're part of the discount store industry.

According to company marketing materials, "Big Lots Inc. (BIG) is a unique, non-traditional, discount retailer operating 1,495 BIG LOTS stores in 48 states with product assortments in the merchandise categories of Food, Consumables, Furniture & Home Decor, Seasonal, Soft Home, Hard Home, and Electronics & Accessories."

The stock saw big gains in 2014 at least until they reported their Q3 earnings in December. That big drop on the daily chart was a reaction to BIG's earnings results. Analysts were expecting a loss of $0.05 a share on revenues of $1.12 billion. BIG reported a loss of $0.06 with revenues virtually flat at $1.11 billion. Guidance was only in-line with Wall Street's estimates.

The good news is that BIG does expect to see a profit again in the fourth quarter. They also reported +1.4% comparable store sales growth in the third quarter, which not only beat the -2.5% comp sales from a year ago but was the first positive growth in three years. None of that mattered. BIG plunged -17% on its Q3 report and didn't find support until the $38.00 area.

Since then shares have seen something of a turnaround. After consolidating sideways for a couple of weeks BIG has shot higher in January while most of the broader market has been sinking. The breakout above technical resistance at its 50-dma and its 200-dma is encouraging.

This morning the U.S. retail sales data came in below expectations and yet BIG managed to shrug off this headline. Traders bought the dip near the 50-dma (around $44) this morning. By the closing bell BIG was outperforming with a +1.6% gain.

It looks like this relative strength may continue. Further gains could spark some short covering. The most recent data listed short interest at 17% of the relatively small 52 million share float. Today's intraday high was $45.65. We are suggesting a trigger to buy calls at $45.75. The 200-dma is at $43.50. We'll start this trade with a stop at $43.40.

- Suggested Positions -

Long Apr $47.50 CALL (BIG150417C47.5) entry $2.85

01/15/15 triggered @ 45.75
Option Format: symbol-year-month-day-call-strike


Royal Caribbean Cruises - RCL - close: 82.99 change: +1.49

Stop Loss: 79.65
Target(s): To Be Determined
Current Option Gain/Loss: - 9.5%
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

01/17/15: RCL outperformed the major U.S. indices on Friday with a +1.8% gain. The rally back above its simple 10-dma is encouraging but shares did post a loss for the week. This loss breaks a four-week win streak. The next hurdle for the bulls is short-term resistance in the $84.60 area.

I am not suggesting new positions.

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

01/14/15 new stop @ 79.65
12/24/14 triggered @ 82.30
Option Format: symbol-year-month-day-call-strike


Constellation Brands - STZ - close: 111.60 change: +3.42

Stop Loss: 104.85
Target(s): To Be Determined
Current Option Gain/Loss: +45.7%
Average Daily Volume = 1.25 million
Entry on January 15 at $109.36
Listed on January 14, 2015
Time Frame: Exit prior to February expiration
New Positions: see below

01/17/15: STZ was another big winner on Friday with shares soaring +3.1% on strong volume. This is a new all-time high for the stock. The breakout past resistance is encouraging. I would not chase it here. Wait for a dip. Broken resistance in the $109 area should be new support. More conservative traders may want to start raising their stop loss.

Earlier Comments: January 15, 2015:
Today the big players in the beer industry like Anheuser-Busch InBev (BUD) and Molson Coors (TAP) are losing market share to smaller craft beer brewers. Yet STZ actually seeing momentum in its beer portfolio.

STZ is part of the consumer goods sector. According to the company's website, "Constellation Brands, Inc. is a leading wine, beer and spirits company with a broad portfolio of premium brands. Constellation is the world leader in premium wine, the leading multi-category beverage alcohol company in the U.S. and the number three beer company in the U.S. Headquartered in Victor, New York, Constellation Brands is an S&P 500 Index and Fortune 1000® company with more than 100 brands in our portfolio, sales in approximately 100 countries and operations in approximately 40 facilities."

Last year the stock was a strong performer. The S&P 500 rallied about +11% in 2014 while STZ surged +39%. Investors have been consistently buying dips. The relative strength from last year has carried into 2015.

The company recently reported earnings on January 8th. Wall Street was expecting a profit of $1.14 per share on revenues of $1.51 billion. STZ said their earnings rose +11.8% to $1.23 a share. Revenues were up +7% to $1.54 billion, beating estimates on both counts. Management then raised their 2015 guidance from $4.10-to-$4.25 to $4.25-to-$4.35. That compares to Wall Street's 2015 estimate of $4.24.

STZ's CEO Rob Sands commented on their latest results saying, "We achieved outstanding results for the third quarter driven by the exceptional ongoing momentum for our beer business." Their beer sales rose +16% and gained market share.

The stock has seen multiple upgrades in January and currently trading at all-time highs. Today traders bought the dip near $105.00. The stock looks poised to breakout past short-term resistance at $108.50. The point & figure chart is bullish and forecasting a long-term target of $127.00.

We are suggesting a trigger to buy calls at $108.65. We'll start this trade with a stop at $104.85.

- Suggested Positions -

Long FEB $110 CALL (STZ150220C110) entry $2.47

01/15/15 triggered on gap open at $109.36, trigger was $108.65
Option Format: symbol-year-month-day-call-strike


Whole Foods Market, Inc. - WFM - close: 51.46 change: +0.87

Stop Loss: 48.75
Target(s): To Be Determined
Current Option Gain/Loss: +34.8%
Average Daily Volume = 4.9 million
Entry on January 08 at $50.35
Listed on January 07, 2015
Time Frame: 8 to 12 weeks
New Positions: see below

01/17/15: Traders bought the dip in WFM near $50 again and the stock rebounded with a +1.7% gain. The last few days have been volatile for WFM as the stock ricocheted between support near $50 and resistance near $52.

I am not suggesting new positions at this time.

Earlier Comments: January 7, 2015:
WFM is in the services sector. As of November 2014 the company had 401 stores in the U.S., Canada, and the United Kingdom. Founded in 1978, WFM has become synonymous with healthy, organic food, at least for a growing portion of the population.

In early May 2014 the stock was crushed when the company missed Wall Street's earnings estimates and lowered its 2014 guidance. Investors were very unhappy with WFM's same-store sales growth as well. The organic food space has been growing more competitive in recent years as other retail groceries seek to boost their profits with wider margin "organic" fare.

WFM spent months languishing in the $36-40 zone before finally surging in early November. The big rally was sparked by better than expected earnings results and management raising their 2015 guidance. Shorts panicked and the stock exploded higher.

WFM has been slowly working its way higher since then but now WFM looks poised to breakout past key resistance at the $50.00 level.

The huge drop in gasoline prices is very bullish for the U.S. consumer. They now have more money in their pocket that they can spend on other items, like high priced organic foods at WFM.

Traders have started buying the dip and shares hit an intraday high of $50.18 today. Tonight we are suggesting a trigger to buy calls at $50.30. We will plan on exiting prior to WFM's earnings results in mid February.

- Suggested Positions -

Long FEB $50 CALL (WFM150220C50) entry $2.30

01/08/15 triggered on gap open at $50.35, suggested entry was $50.30
Option Format: symbol-year-month-day-call-strike


Zebra Technology - ZBRA - close: 82.91 change: +1.63

Stop Loss: 78.75
Target(s): To Be Determined
Current Option Gain/Loss: +41.2%
Average Daily Volume = 494 thousand
Entry on January 12 at $80.85
Listed on January 10, 2015
Time Frame: Exit prior to earnings in February
New Positions: see below

01/17/15: ZBRA ended the week on an up note with a +2.0% gain. The stock is sitting just below short-term resistance in the $83.00-83.20 zone. I am not suggesting new positions at the moment.

Earlier Comments: January 10, 2015:
ZBRA is considered part of the industrial goods sector but they sound more like a technology company. The company website describes them as "Zebra Technologies is a global leader in enterprise asset intelligence, designing and marketing specialty printers, mobile computing, data capture, radio frequency identification products and real-time locating systems. Incorporated in 1969, the company has over 7,000 employees worldwide and provides visibility into valued assets, transactions and people."

Their goods are used by 90% of the Fortune 500 companies. They have almost no debt. Last year they spent almost $3.5 billion buying Motorola Solutions (symbol was MSI). ZBRA's CEO believes that the MSI acquisition will help them capitalize on three big trends: mobility, the Internet of things, and cloud computing.

In February 2014 ZBRA raised their earnings guidance. They did it again two months later in April. Their most recent earnings report was above expectations. ZBRA announced record revenues with sales up +19% in Middle East and Africa, +16% in North America, +11% in Latin America, and +9% in Asia Pacific.

Technically the stock has been stair-stepping higher with a bullish trend of higher lows and higher highs. This past week ZBRA displayed relative strength and broke out to new multi-month highs. The point & figure chart is bullish with a $92.00 target.

Tonight we are suggesting a trigger to buy calls at $80.85. We will plan on exiting positions before ZBRA reports earnings in mid February.

- Suggested Positions -

Long FEB $85 CALL (ZBRA150220C85) entry $1.70

01/12/15 triggered @ 80.85
Option Format: symbol-year-month-day-call-strike


PUT Play Updates

Dover Corp. - DOV - close: 69.57 change: +0.98

Stop Loss: 70.35
Target(s): To Be Determined
Current Option Gain/Loss: +43.5%
Average Daily Volume = 1.7 million
Entry on December 29 at $73.40
Listed on December 27, 2014
Time Frame: Exit PRIOR to earnings on January 27th.
New Positions: see below

01/17/15: DOV also participated in the market's bounce on Friday. Shares gained +1.4% and closed above short-term technical resistance at the 10-dma. The stock spent last week churning sideways in the $68-70 zone. If DOV sees any follow through higher it will likely hit our stop loss at $70.35.

I am not suggesting new positions at this time.

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

01/15/15 new stop @ 70.35
01/09/15 DOV's BoD approves a 15 million share stock buyback program over the next three years
01/08/15 new stop @ 72.25
01/03/15 new stop @ 74.25
12/29/14 triggered @ 73.40
Option Format: symbol-year-month-day-call-strike


Eagle Materials - EXP - close: 73.30 change: +3.10

Stop Loss: 73.05
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 933 thousand
Entry on January -- at $---.--
Listed on January 15, 2015
Time Frame: Exit PRIOR to earnings on Feb. 3rd
New Positions: Yes, see below

01/17/15: The stock market's widespread bounce on Friday fueled some buying in EXP. The stock rebounded from support near $70.00 and gained +4.4%. If this rebound continues we'll likely drop EXP as a candidate. Keep an eye on the trend of lower highs. Currently our suggested entry point to buy puts is at $69.45.

Earlier Comments: January 15, 2015:
EXP is in the industrial goods sector. The company describes itself as, "Eagle Materials Inc. manufactures and distributes Cement, Gypsum Wallboard, Recycled Paperboard, Concrete and Aggregates, and Oil and Gas Proppants from 40 facilities across the US."

The crashing price of oil could have consequences for EXP. Energy companies will cut spending that includes cutting jobs. As they cut jobs, demand for housing will fall. That will hurt the builders and demand for wallboard will go down. Major U.S. homebuilders are already sounding the alarm with executives at both Lennar (LEN) and KB Home (KBH) warning about margins this week.

Another challenge for EXP will be their proppants business. As energy companies drill fewer wells there will be less demand for proppants.

Earnings were already struggling last year with EXP missing Wall Street's estimates three out of the last four reports. The one report they beat estimates they only beat by a penny and missed revenues at the same time.

Technically EXP has broken down into a bear market. The point & figure chart is bearish and forecasting at $63 target. Currently EXP is poised to break support near $70.00. The January 14th low was $69.57. We are suggesting a trigger to buy puts at $69.45. Plan on exiting prior to EXP's earnings report in February.

Trigger @ $69.45

- Suggested Positions -

Buy the Feb $65 PUT (EXP150220P65)

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


Starwood Hotels & Resorts - HOT - close: 72.48 change: -0.66

Stop Loss: 76.55
Target(s): To Be Determined
Current Option Gain/Loss: +3.1%
Average Daily Volume = 2.3 million
Entry on January 14 at $73.90
Listed on January 12, 2014
Time Frame: Exit prior to earnings in mid February
New Positions: see below

01/17/15: HOT had a tough time on Friday, underperforming the broader market. Shares gapped down on Friday morning after the stock was downgraded by an analyst at Bank of America/Merrill Lynch.

HOT is now down six days in a row. I am not suggesting new positions at the moment.

Earlier Comments: January 12, 2015:
HOT is in the services sector. According to a company press release, "Starwood Hotels & Resorts Worldwide, Inc. is one of the leading hotel and leisure companies in the world with more than 1,200 properties in 100 countries, and 181,400 employees at its owned and managed properties. Starwood is a fully integrated owner, operator and franchisor of hotels, resorts and residences with the following internationally renowned brands: St. Regis®, The Luxury Collection®, W®, Westin®, Le Meridien®, Sheraton®, Four Points® by Sheraton, Aloft®, and Element®. Starwood also owns Starwood Vacation Ownership, Inc., a premier provider of world-class vacation experiences through villa-style resorts and privileged access to Starwood brands."

The company's most recent earnings report was October 28th. The company beat the bottom line estimate by a penny but missed the revenue number. Management then guided lower. Since then at least two analyst firms (UBS and JP Morgan) have downgraded shares of HOT. JPM said their downgrade was on valuation concerns. Other analysts have issued worries about how the strong dollar might hurt HOT's financials.

There are also concerns that Airbnb could be hurting the hotel business. Airbnb's growth has surged since it was founded back in 2008. Just four year later Airbnb announced their 10 millionth night booked. It may not be fair to say all 10 million of those would have gone to the hotel industry but certainly a good chunk of Airbnb's business has been stolen from more traditional lodging services.

Technically shares of HOT look weak. The point & figure chart is bearish and forecasting at $68 target (which could get worse). Today's breakdown under support near $75.00 looks ominous. The intraday low today was $74.06. Tonight I am suggesting a trigger to buy puts at $73.90. We will plan on exiting prior to HOT's earnings report in mid February.

- Suggested Positions -

Long FEB $70 PUT (HOT150220P70) entry $1.60

01/14/15 triggered @ 73.90
Option Format: symbol-year-month-day-call-strike


WESCO Intl. - WCC - close: 66.57 change: +0.77

Stop Loss: 68.65
Target(s): To Be Determined
Current Option Gain/Loss: + 0.0%
Average Daily Volume = 619 thousand
Entry on January 14 at $67.76
Listed on January 13, 2014
Time Frame: Exit PRIOR to earnings on January 29th
New Positions: see below

01/17/15: After five losses in a row WCC finally bounced on Friday thanks to the broader market rebound. The stock does look a little short-term oversold. I would not be surprised to see a bounce back toward the $68.00-68.50 area. We're keeping our stop at $68.65 for now. I'm not suggesting new positions at this time.

Earlier Comments: January 13, 2015:
Last year the S&P 500 gained +11% as the U.S. economy slowly started to gain some momentum. That was not the case for WCC. This stock underperformed the market in 2014 with a -16% decline.

According to the company's marketing materials, "WESCO International, Inc. (WCC), a Fortune 500 company headquartered in Pittsburgh, Pennsylvania, is a leading provider of electrical, industrial, and communications maintenance, repair and operating (MRO) and original equipment manufacturers (OEM) products, construction materials, and advanced supply chain management and logistic services. 2013 annual sales were approximately $7.5 billion. The company employs approximately 9,200 people, maintains relationships with over 25,000 suppliers, and serves over 75,000 active customers worldwide.

Customers include commercial and industrial businesses, contractors, government agencies, institutions, telecommunications providers, and utilities. WESCO operates nine fully automated distribution centers and approximately 475 full-service branches in North America and around the world, providing a local presence for customers and a global network to serve multi-location businesses and multi-national corporations."

Last year was challenging for WCC's earnings results. They missed Wall Street's earnings estimates three quarters in a row. The only reason they beat estimates back in October was because management had lowered their guidance back in July. So WCC managed to beat Wall Street's lowered estimates. On December 17th WCC lowered their guidance again, this time for fiscal year 2015. Management tried to soften the blow by announcing a $300 million stock buyback program over the next two years.

Technically WCC looks terrible. It formed a bearish double top with the peak in January and June in 2014. Shares have developed a bearish trend of lower highs. The point & figure chart is bearish and forecasting at $55.00 target. Now it appears to be breaking down under key support near $70.00. The intraday low today was $68.82. We are suggesting a trigger to buy puts at $68.75.

This is going to be a short-term trade. We will plan on exiting prior to WCC's earnings report on January 29th.

- Suggested Positions -

Long FEB $65 PUT (WCC150220P65) entry $1.80

01/15/15 new stop @ 68.65
01/14/15 triggered on gap down at $67.76, trigger was $68.75
Option Format: symbol-year-month-day-call-strike