Option Investor

Daily Newsletter, Wednesday, 1/21/2015

Table of Contents

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

Market Wrap

Market On Hold for ECB

by Keene Little

Click here to email Keene Little
With the Fed mostly out of the QE picture (for now) all eyes and ears are on the ECB to see how much QE they'll launch. A leak of information this morning about what the ECB will do may have been a test of the market's reaction.

Wednesday's Market Stats

Equity futures had declined during the overnight session and the cash market gapped down to start the trading day. And then 5 minutes after the open there was a "leak" of information that supposedly came from two ECB officials that outlined some of the ECB's purchase program. The reaction from the market was immediate, blasting SPX 17 points higher in the next 5 minutes before pulling back and then continuing higher later in the morning. Was the leak intentional to gauge the reaction of the market? Will the somewhat subdued reaction give the ECB a reason to make the program bigger and better (to juice the market higher)?

There were many questions following the leaked information and one was "why so small?" Expectations have been for the ECB to launch a "shock and awe" program to purchase at least 1.0-1.2 trillion Euros in the coming year. This would mean about 100 billion per month but the leaked information was half that -- about 50 billion per month. Many traders are already feeling the actions of the central banks are not doing enough and if the ECB does in fact announce a program that buys "only" 50 billion Euros a month we could see a sell-the-news reaction. But if the ECB got the information they were looking from this morning's subdued response perhaps they'll bump up that number in their announcement (just a guess on my part).

In addition to the quantity of purchases by the ECB there is great interest to hear what kinds of purchases will be made. Many expect the ECB to announce their intention to start buying sovereign debt so if they instead announce an intention to continue buying only corporate bonds and asset-backed securities (ABS) the market would likely react negatively. The market wants (needs) to hear 100 billion Euros per month for at least a year and that the program will include purchasing sovereign debt as well.

As I'll review with the charts, it's looking like the market is set up to react positively to tomorrow morning's ECB announcement but that it will not hold and the spike up could be quickly followed by a strong selloff.

We only had a couple of economic reports this morning, which included Housing Starts and Building Permits. The numbers were mixed, showing strength in the number of homes that were started but weakness in the number of new building permits, especially for multi-family units. Home builders are not feeling as confident about the future and that's been reflected in the stock prices of the builders. The report from the Mortgage Bankers Association showed applications for mortgages declined by 3% last week but that follows a +24% increase in the week before that.

One negative that the housing market is fighting is household formations. Between lower earnings and higher debt there are many people, especially young college grads, who have not been able to qualify for loans. Household formation is currently running about 500K per year, which is about half the number of homes being built. That's a recipe for excess inventory so the number of new building permits as we head into the spring will be an important metric to watch. In order to show a healthy and sustainable housing market, to help the broader economy, we need to see closer to 1 million household formations per year.

Overall it was a relatively quiet day as the market continues to consolidate. Prices have been more volatile this month but the price swings have been dampening out as the market traded essentially sideways since November. On the first trading day of November SPX was trading near 2020 and today it closed at 2032. It's been a wild ride from then to now but all it's done is churn traders' accounts. I think once we get through the ECB announcement we should get a move out of the recent trading range.

Starting tonight's chart review with a look at the SPX weekly chart, there is the potential for a bullish breakout following the whippy sideways consolidation since the December 5th high. The upside target in that case would be the top of its parallel up-channel from October 2011, which will be near 2130 by mid-February. If we get a euphoric reaction to the ECB announcement that gets some follow through it would push this bullish possibility to the top of the list. But at the moment I see a lower probability for the bullish scenario. The consolidation also fits as topping action, something we've seen many times before at important highs (even if only trading highs). This can be seen at the previous highs on the chart. A drop below last Friday's low near 1988 could usher in stronger selling.

S&P 500, SPX, Weekly chart

There is one bullish pattern that suggests a breakdown below last Friday's low near 1988 could be a bear trap. The daily chart below shows a possible descending wedge pattern off the December 29th high and it only needs one more leg down to complete it. To turn SPX more bearing I think we need to see a drop below the 200-dma, near 1968, to confirm the decline is real. Otherwise we could stay trapped for a little longer in a choppy and whippy consolidation pattern. The bulls need to see a rally above the 20- and 50-dma's, at 2045-2046, which would be confirmed bullish above 2072. Mind the chop inside the triangle/wedge.

S&P 500, SPX, Daily chart

Key Levels for SPX:
- bullish above 2072
- bearish below 1963

Supporting the idea that SPX would be more bullish above 2045 is a rising wedge pattern off last Friday's low, as shown on the 30-min chart below. This pattern assumes we will get a positive reaction to the ECB announcement but then disappointment will follow. The rising wedge pattern needs another push higher to complete the 5-wave move up from last Friday and 2045-2050 is the upside target, which surrounds the 20- and 50-dma's on the daily chart. If this bearish pattern is the correct interpretation we're going to see a fast retracement back down to last Friday's low (1988), bounce and then continue lower (unless the bullish descending wedge on the daily chart is the overriding pattern). What these multiple patterns tell me is that Thursday's move (if not Thursday morning's move) could be a head fake and therefore a review of the charts Thursday night is going to be very important.

S&P 500, SPX, 30-min chart

It's no different for the DOW, which remains inside a possible descending triangle, having bounced off the bottom of it last week, near 17260. The top of the triangle, which is the downtrend line from December 26th, will be near 17800 Thursday morning. It could remain a choppy whippy mess inside this pattern so traders might do better by waiting for a break. The one caution about the upside is that we could get a head-fake break that finishes a flat a-b-c correction off the January 6th low with a test of the January 13th high at 17923 and then a strong decline to follow that. I think a breakdown would have a better chance of follow through for a trader to participate in.

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- bullish above 18,000
- bearish below 17,000

On the NDX chart below I'm showing the same descending triangle as the DOW's. We have consistent patterns across many of the indexes and as the consolidation patterns tighten we can expect a strong move out of them. These triangle consolidation patterns that follow a rally are typically bullish so bears need to watch this carefully for any signs of bullishness. You don't want to be on the short side if this is getting ready to blow out the top. The flip side of the coin is that the consolidation pattern also fits as a topping pattern and a breakdown could catch a lot of traders leaning to the long side. That's a reason why a failed bullish pattern tends to fail hard and that's the outcome I expect to see here. Just keep control of risk management either way.

Nasdaq-100, NDX, Daily chart

Key Levels for NDX:
- bullish above 4230
- bearish below 4089

The RUT was the weaker index today and one of the few to close in the red. It could be in the same kind of descending triangle as the others but it's a bit sloppier. Multiple 3-wave moves since December make it difficult to figure out the next higher-probability move. I don't see the RUT leading in either direction yet but when these consolidation patterns break I suspect the RUT will be out in front of the next move.

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- bullish above 1217
- bearish below 1150

Last week I showed the VIX chart to point out the rally up to its downtrend line from October-December 2014. I thought it could turn back down from resistance and help warn the bears to back off on the short side. Sure enough, the VIX has pulled back as the stock market bounced but now it's approaching its uptrend line from December, which crosses its 20-dma near 18.20 on Thursday. This trend line held on the pullback into the January 9th low (bounce high for the stock market) and now it's a warning sign for bulls while we wait to see if the VIX holds support here.

Volatility index, VIX, Daily chart

The banking index, BKX, could soon provide an important clue if the bounce off last Friday's low is followed by another new low. As shown on its daily chart below, a new low would give us a clean impulsive 5-wave move down from December 29th. The small bounce off last Friday's low looks corrective and fits as the 4th wave, which should be followed by another new low for the 5th wave. A good downside projection for it is the trend line along the lows from May-October 2014, which will be near 64.25 by the end of the month. At that point it would be a good setup for at least a larger bounce correction, maybe something more. If the 5-wave move down is a larger-degree 1st wave in what will become a much larger decline, we'll get just a 2nd wave bounce correction in February and then strongly down after that. But if the 5-wave decline is the completion of a larger a-b-c pullback from September (as an expanded flat correction with the higher high in December) then we'll get a stronger rally to follow the new low. How the bounce plays out (assuming of course we'll get one after a new low) will provide further clues as to what the larger pattern will likely be.

KBW Bank index, BKX, Daily chart

This week's new high for the U.S. dollar is showing some bearish divergence against the highs earlier in the month, hinting of at least a pullback coming. I continue to like the reversal setup for the dollar after it hit the top of its parallel up-channel from 2008-2011, near 93.30 (with last Friday's brief high at 93.56 and Tuesday's closing high at 93.38). The dollar would be more bullish above 94, with 97 as an upside target, but at the moment I think there's a good chance we'll see the dollar start at least a multi-month pullback/correction before pressing higher.

U.S. Dollar contract, DX, Weekly chart

Gold bounced back up to important Fibs yesterday and today -- shown on the daily chart below is the 50% retracement of its 2008-2011, at 1302.35. Not shown on the chart is the 38% retracement of its 2001-2011 rally, near 1287, and the 78.6% retracement of the previous decline from July, which is near 1300. Gold tends to trade well around its Fibs and with a Fib resistance zone at 1287-1302 it's tough resistance. This morning's brief high at 1307 was followed by a sharp (impulsive) decline, closing near 1293, and that left a shooting star for today's candle. If the gold bulls can push it a little higher there's a downtrend line from August 2013 near 1330.

Gold continuous contract, GC, Daily chart

Gold's rally off the January 2nd low has been strong and sharp, which fits well as the c-wave of an a-b-c bounce correction off the November low and while it has turned just about everyone bullish on gold I think it will be another bull trap (similar to the one following the "breakout" back in August 2012). If we get a multi-week consolidation and then another press higher I'll turn more bullish but right now this looks more like the completion of a bounce correction than something more bullish. I continue to believe gold will drop to the 1000 area before potentially putting in a longer-term bottom.

Gold's strong rally the past three days was likely in response to an expectation the ECB is going to join the crowd of central banks that are racing each other to the bottom by printing more and more money and seeing who can debase their currency the fastest. That's what makes gold more valuable. In fact when gold is priced in Euros it looks stronger than when priced in U.S. dollars. This morning's leak about what the ECB will do seems to have deflated the gold bugs' expectations and that could be hinting that both gold and the stock market might not be all that happy with the ECB's less-than-expected purchase program. That can only be guessed but that's the hint I see from the chart.

With this morning's brief high at 18.50, silver's bounce off the December 1st low came close to achieving two equal legs up at 18.71, to complete an a-b-c bounce correction off the December 1st low. The morning high was good enough to tag its 200-dma at 18.47 but it stopped 10 cents shy of price-level resistance at 18.60, a level I have been expecting silver to retest after it was broken in September 2014. As can be seen on its weekly chart below, 18.60 was a shelf of support since June 2013 and now it's back for a back-test and I'm waiting for the slap following a kiss goodbye. If the bulls can avoid getting slapped there's still upside potential to its downtrend line from April 2011, currently near 20.70, but the higher-odds setup here is for a reversal back down from support-turned-resistance.

Silver continuous contract, SI, Weekly chart

After hitting what I thought would be strong support near 44 oil has been trying to bounce but so far it's not very impressive. We could see a relatively small consolidation and then lower prices, in which case the January 2009 low at 33.20 would be the next downside target. But the bigger pattern calls for a multi-month choppy bounce/consolidation if we're to get a 4th wave correction in the decline from August 2013. The way the bounce has started (choppy overlapping highs and lows) it supports the larger corrective bounce idea, which is why I've been saying it's probably not a good trading environment other than maybe some sold puts below the lows (traders selling premium don't care if the market goes nowhere while the premium decays into their account).

Oil continuous contract, CL, Weekly chart

Thursday morning we'll get the usual unemployment claims data but nothing market moving. All eyes and ears will be on what the ECB announces in our pre-market session. The futures will be leading the way for the cash market. Whether the cash market will hold the initial direction is what's not clear.

Economic reports and Summary

"What's obvious in the market is obviously wrong." This is the quote that always bothers me when I see an "obvious" setup and right now that setup is a rising wedge pattern for the bounce off last Friday's low. It looks like a good setup for a new high for the bounce Thursday morning, where SPX will break its downtrend line from December and have it looking like a bullish breakout. But it will turn into a head-fake break (bull trap) that's then followed by a strong selloff (sell the news following the ECB announcement). This looks like an obvious setup to me and I'm looking at it as a good shorting opportunity. Now all I worry about is the setup being obviously wrong.

Trading is a game of probabilities, which is what differentiates traders from gamblers (although many traders are in fact gamblers). Put the probabilities in your favor, use appropriate risk management (stops and/or position sizing) and then let the market determine whether or not the trade will work. Most of us use charts for the trade setups and pick price levels that help define entries and exits and then let the trade either work or not. There is no right or wrong about the trade but the market is of course always right. We set up the trade, we execute and then let the market tell us when it's time to leave.

And the setup at the moment, for me, is to look for a morning bounce in the stock market and then short a rollover. Using the SPX setup as an example, the rising wedge and the 20- and 50-dma's coincide for a high in the 2045-2050 area, preferably at the lower end of that range. If the short trade works I'd ride it down to last Friday's low and then manage it closely from there. A review of Thursday's price action should help define how the next week will proceed.

Good luck and I'll be back with you next Wednesday.

Keene H. Little, CMT

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

New Option Plays

All Eyes On the ECB

by James Brown

Click here to email James Brown

Editor's Note:

Tomorrow could be a big day for the markets.

Speculation has been building that the European Central Bank (ECB) will announce some form of asset purchases, a.k.a. quantitative easing (QE), at the end of its meeting tomorrow.

Expectations are running pretty high and that is dangerous since ECB President Mario Draghi has disappointed the market several times over the last two years.

Right now the question does not seem to be if the ECB will announce a QE program tomorrow but how much and for how long. Currently, after leaks from people inside the ECB, the best estimate is a QE program of €50 billion a month (about $58 billion a month) for two years. That's about €1.2 trillion. Another estimate we heard today was €1 trillion over two years.

If we see numbers less than the estimates above it could spark a market sell-off. Adding to the market's uneasiness about the ECB meeting tomorrow were comments today from ECB Governing Council member Ewald Nowotny who said investors "should not get overexcited about it" (referring to the ECB meeting).

We are not adding any new trades tonight as the market could move sharply either direction depending on the ECB decision.

In Play Updates and Reviews

Stocks Bounce For Third Day In A Row

by James Brown

Click here to email James Brown

Editor's Note:

The market recovered from its early morning weakness and managed to push the bounce to three up days in a row.

EXP has been removed. SSYS was opened this morning and then stopped out on a reversal. We want to exit our WCC trade tomorrow morning.

Current Portfolio:

CALL Play Updates

Alkermes plc. - ALKS - close: 68.74 change: -2.05

Stop Loss: 63.65
Target(s): To Be Determined
Current Option Gain/Loss: + 61.3%
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

01/21/15: ALKS ran into some profit taking today with a -2.89% decline following yesterday's rally to new highs. I didn't see any specific news behind today's relative weakness. More conservative investors may want to raise their stop again.

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: 44.53 change: +0.39

Stop Loss: 43.40
Target(s): To Be Determined
Current Option Gain/Loss: -38.6%
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

01/21/15: BIG bounced today with a +0.88% gain following yesterday's pullback to some key moving averages. I'm concerned that yesterday's drop is a potential bearish reversal. I'm not suggesting new positions at this time.

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

Monster Beverage Corp. - MNST - close: 118.54 change: +1.10

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

01/21/15: Traders bought the dip in MNST at $116.25 this morning. The stock outperformed the major indices with a +0.9% gain. MNST looks poised to breakout past round-number resistance at $120 soon. Our suggested entry point to buy calls is $120.25.

Earlier Comments: January 17, 2015:
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)

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

Royal Caribbean Cruises - RCL - close: 83.21 change: +0.21

Stop Loss: 79.65
Target(s): To Be Determined
Current Option Gain/Loss: -13.4%
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

01/21/15: RCL spent today's session churning sideways and only managed a minor gain by the close. It almost looks like the sideways consolidation is narrowing between higher lows and lower highs.

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: 110.53 change: -0.47

Stop Loss: 104.85
Target(s): To Be Determined
Current Option Gain/Loss: +9.3%
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

01/21/15: STZ found short-term support near $110.00 intraday. Traders bought the dip in this area several times today. I'd wait to see how the market reacts to the ECB meeting tomorrow before launching new positions on STZ. 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: 52.73 change: +1.42

Stop Loss: 48.75
Target(s): To Be Determined
Current Option Gain/Loss: +67.4%
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

01/21/15: Bullish analyst comments helped drive the rally in WFM today with shares up +2.7% and hitting multi-month highs. One firm upgraded WFM to a "buy" this morning. While Jim Cramer said WFM could hit $60 a share.

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: 82.73 change: +0.58

Stop Loss: 78.75
Target(s): To Be Determined
Current Option Gain/Loss: -17.6%
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

01/21/15: ZBRA dipped to its simple 10-dma before bouncing. The stock's +0.7% gain outperformed the NASDAQ's +0.27% advance. Shares appears to be building on a bullish trend of higher lows but 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

Starwood Hotels & Resorts - HOT - close: 73.52 change: +0.74

Stop Loss: 76.55
Target(s): To Be Determined
Current Option Gain/Loss: -29.4%
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

01/21/15: HOT rebounded up to test resistance near $74.50 and its simple 10-dma today. The rally failed at this level but shares still gained +1.0%. The afternoon low was $73.20. I'd wait for a drop below $73.20 before initiating new bearish put positions.

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: 68.52 change: +2.03

Stop Loss: 68.65
Target(s): To Be Determined
Current Option Gain/Loss: -41.7%
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

01/21/15: Our WCC trade is not working out. The stock displayed significant relative strength with a +3.0% gain. The intraday high was $68.57. Currently our stop loss is at $68.65. However, after today's big rally we are suggesting an immediate exit tomorrow morning to cut our losses.

- Suggested Positions -

Long FEB $65 PUT (WCC150220P65) entry $1.80

01/21/15 prepare to exit tomorrow morning
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


Eagle Materials - EXP - close: 73.74 change: +1.63

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: see below

01/21/15: The oversold bounce in EXP continued on Wednesday. Shares displayed significant relative strength with a +2.2% gain. Our trade has not opened yet. Seeing how EXP is not cooperating we are removing it as a candidate.

Trade did not open.

01/21/15 removed from the newsletter, suggested trigger was $69.45


Stratasys Ltd. - SSYS - close: 75.19 change: +3.57

Stop Loss: 74.25
Target(s): To Be Determined
Current Option Gain/Loss: -29.0%
Average Daily Volume = 1.3 million
Entry on January 21 at $71.33
Listed on January 20, 2015
Time Frame: 6 to 8 weeks
New Positions: , see below

01/21/15: Sometimes the market's moves seems spiteful. The trading in SSYS today is an example. We wanted to launch bearish positions in SSYS on a new decline with a trigger at $71.40. The stock gapped open lower at $71.33 triggering our play. SSYS then spent the next 60 seconds in the $71.33-71.39 range. Then stock immediately shot higher and soared to a +4.97% gain on the session. Our stop loss was hit at $74.25.

I warned readers that that SSYS could be volatile!

*consider small positions* - Suggested Positions -

Long MAR $65 PUT (SSYS150320P65) entry $3.10 exit $2.20 (-29.0%)

01/21/15 stopped out at $74.25
01/21/15 triggered on gap down at $71.33, suggested entry was $71.40
Option Format: symbol-year-month-day-call-strike