Option Investor

Daily Newsletter, Wednesday, 9/24/2014

Table of Contents

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

Market Wrap

Dead Cat Bounce or New Rally

by Keene Little

Click here to email Keene Little
The stock market was short-term oversold heading into this morning and the sharp bounce off the morning low is either a dead cat bounce or it could be the start of the next rally leg. We should find out which in the next couple of days.

Wednesday's Market Stats

Tuesday afternoon's choppy decline, with the indexes finishing at their lows (except NDX), was a good setup for a reversal for at least a bounce to correct the decline from last Friday. The jab lower this morning likely pulled in a few more shorts and then the match was lit with a few buy programs to torch the bears and use the short-covering fuel to propel the market back up. The techs led the way with a +1% rally. Now the question is whether today's rally is just a dead cat bounce or something more. Depending on which index I'm looking at I can easily answer that question differently.

It was a relatively quiet day and there was only one important economic number this morning that had the potential to move the market. It was a positive report on new home sales with July's number revised higher from 412K to 427K and today's number showing a big jump up to 504K, quite a bit higher than the expected small jump up to 435K. Following the small decline in existing home sales the overall increase in home sales for August is a welcome sign. I don't think it will last for the longer term but it's at least good for now.

An improving housing market is needed to help improve the economy since there's so much economic activity around home buying. It's certainly a good sign when people are feeling confident enough to commit to a house although we know that can backfire on people, just as excessive bullishness can backfire on investors in the stock market.

I continue to look for other economic signs for a fundamental feel for the market (not that it has helped since the market has only cared about how much QE the Fed is doing) and then try to tie that in with my technical analysis. One of the indicators I've used is commodity prices since they're largely driven by demand and of course demand tends to increase when the economy is booming. Watching China's economics provides another source of information since they've become the manufacturing house for much of the world. But there have been many signs that China is slowing. One of those is shown below for iron ore prices.

China's Iron Ore Prices, chart courtesy BusinessInsider.com

As you can see above, prices have chopped their way lower since the start of this chart in 2011, with a drop to new lows in the past month. This is not a good sign about their economy and in turn the global economy. China has been encouraged to do more QE kinds of things to help their economy but so far they've resisted doing too much for fear of stoking inflation. That has not been a concern of the Fed or ECB.

The ECB has been threatening to do more QE for a long time and it could be getting close to where Draghi is going to have to stop threatening and actually start doing. BTW, his promise to buy $1T worth of bonds is more of an attempt to blow smoke up, I mean jawbone the market higher. Even if the ECB shoved out all other bond buyers there isn't a trillion available for them to buy. But I digress. The chart below shows the inflation picture for Europe.

European Inflation, 2009-present, chart courtesy BusinessInsider.com

Inflation expectations by bond buyers have dropped back down to or below levels last seen at the beginning of 2009. This is a very scary chart to central bankers and it shows Europe is within spitting distance of dropping into "disinflation" territory (dare I say deflation). The only ones who should be scared by this are those who have huge debt obligations (hmm, who might that be). The U.S. will likely be not far behind Europe and keep in mind that deflation is very bad for stock markets.

In the meantime the stock market continues to ignore all these signs of slowing and "disinflation," in spite of the multiple years the central banks have tried to stop the slide. Even with all of the money pumping by the Fed the money velocity (how much the money is turned over through lending) has continued to slow at a steady pace since 2000. The Fed is the perfect example of the definition of insanity. One of these days even Paul Krugman is going to have to eat his words.

Getting into the stock indexes, the SPX weekly chart below hasn't changed much in the past month as price has chopped up and down in about a 25-point range. This follows a couple of years now where price volatility has been decreasing. I don't show the Bollinger Bands on my charts (too crowded) but we're now at a point where the DOW has the narrowest band width seen since October 1964. That's certainly one for the record books. That doesn't tell us which direction the next big move for the market will be but it does give you sense of how little volatility we've had. It's my opinion that the narrowing price range, creating a long-term rising wedge pattern, is going to be followed by a violent breakdown. For the moment, the weekly chart is not indicating whether it's going to start down or hold up higher into October.

S&P 500, SPX, Weekly chart

The daily chart below shows Monday's break down through the 20-dma and Tuesday's break down through its uptrend line from November 2012 - February 2014 (log scale). Today it recovered back above the trend line near 1992, leaving a head-fake break, but stopped at its 20-dma, near 1998. If this is a back-test of the 20-dma that's followed by a bearish kiss goodbye on Thursday and a drop below this morning's low it could result in a stronger decline to follow. It's possible we'll see a decline to the 1966 area before heading back up. The pattern for this is discussed more thoroughly a little later with the ES chart.

S&P 500, SPX, Daily chart

Key Levels for SPX:
- bullish above 2011
- bearish below 1966

Today's bounce is a sharp 3-wave move up and it would have two equal legs at 2004, only slightly above the 62% retracement of its decline, at 2003.74. A rally to 2004 and a rollover from there would be worthy of a short play but keep your stop tight since we have bullish potential into October. We might get a larger a-b-c bounce (red dashed line on the 60-min chart below) so be careful about shorting a rollover -- don't get complacent about it since it might whip around and spike higher before rolling over for good. A 78.6% retracement, at 2010.57, is also where it would close Monday's gap down at 2010.54. Nice correlation there for a possible reversal if tested and rolls back over.

S&P 500, SPX, 60-min chart

I was looking over the ES chart (continuous contract) without all the wave counts in an attempt to look at just trend lines/channels, MAs and oscillators to see what patterns jump out at me. I noticed that it has testing its 50-dma at 1971.50 (the after-hours low on Tuesday was 1968.25 and this morning's RTH low was 1970.50), whereas the 50-dma for SPX is a little lower, near 1977 and about 2 points below this morning's low. Other than a few breaks this year (Jan-Feb, Apr, Jul-Aug) the 50-dma has held most pullbacks, as can be seen on the ES daily chart below.

S&P 500 e-mini, ES, Daily continuous contract

It was looking at these tests of the 50-dma that I noticed a repeating pattern that led to breaks of the 50-dma, starting with the December 2013 - January 2014 highs. The initial highs (Dec 2013, Mar, Jul and Sep) were followed by marginal new highs (Jan, Apr, Jul and Sep) with bearish divergence. These are shown with the brown lines across the price highs and lower RSI highs. These led to breaks of the 50-dma but then were repeatedly followed by recoveries back above the 50-dma.

For the latest pattern, if it leads to another break of the 50-dma and is an expanded flat a-b-c pullback off the September 3rd high (instead of something more bearish, and one of the options shown as a possibility on the SPX chart), we could see the leg down from September 19th achieve 1945, which is where it would be 162% of the first leg down from September 3rd. Interestingly, that would coincide with a test of the uptrend line from October 2011 - June 2013, which supported the previous decline into the August 8th low. The 1945 projection crosses the uptrend line on October 1st. If this repeating pattern follows through we'd then have another buying opportunity near 1945. It will certainly be something to be thinking about if it plays out.

The DOW's strong bounce today brought it back up to its trend line along the highs from May-November 2013. This is one of those "internal" trend lines and it's not as strong a trend line as others but you can see how price has reacted around it and today it closed on it. If last Friday's high was THE high, this is a good setup for a back-test/bearish kiss goodbye, to be followed by a stronger decline. With today's high at 17226 it was only 3 points shy of achieving a 62% retracement of its decline with a sharp 3-wave bounce. A drop back below this morning's low near 17034 would likely bring in a flood of selling. But the larger trend remains to the upside and therefore bears need to play it cautiously.

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- bullish above 17,150
- bearish below 16,970

I see bullish possibilities for NDX. Looking at the rally from April I've got the 5th wave as the leg up from September 16th and a possible completion of the rally at last Friday's high. But the 5th wave in this case appears too short (possible but not probable until NDX drops below its September 16th low near 4010). I see the potential for NDX to chop its way higher in an ending diagonal (rising wedge) and potentially make it up to the 4209 projection by mid-October where the 5th wave would then equal the 1st wave. While RSI is warning of trouble for the bulls, with the significant bearish divergence at recent highs, if MACD turns back up from the zero line it will have "reset" itself in the sideways chop and now ready for another rally (likely to a lower high if price makes a new high).

Nasdaq-100, NDX, Daily chart

Key Levels for NDX:
- bullish above 4120
- bearish below 4010

I also see bullish potential for the RUT. It's been such a weak index this month and it's hard to start thinking bullish about this one but I want to point out the pattern that supports another rally leg and potentially a strong one (not a choppy one as depicted on the NDX chart above). Since first climbing above 1100 in October 2013 (a year ago) the RUT has been a very whippy pattern, with highs and lows roughly 140 points apart. But since March high we've seen a contraction in price swings and this has created a sideways triangle pattern, the bottom of which is the uptrend line from May. It's a messy daily chart below but so is the price action.

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- bullish above 1164
- bearish below 1124

Yesterday's decline and close dropped the RUT below the bottom of the sideways triangle and it was very important for the bulls to see a recovery back inside the triangle today, which it did and that actually creates a buy signal based on this pattern. The trouble is we have competing patterns. Its broken uptrend line form October 2011 - November 2012 was broken yesterday and today's bounce didn't quite make it back up to the trend line, which is near 1132. It's possible we'll see just a back-test followed by a bearish kiss goodbye and a drop below this morning's low at 1116 would create a sell signal.

A look at the RUT's weekly chart below shows an idea for a larger ascending triangle (flat top, ascending bottom), which would mean choppy price action into the end of the year to complete a larger consolidation pattern before heading higher into early next year. That's enough to give bears some severe agita even thinking about it. But it's important to see the potential, even if it seems unbelievable.

Russell-2000, RUT, Weekly chart

Bonds sold off today, which helped provide some funds to rotate into stocks, and that could continue. The chart of TLT, the 20+ year Treasury ETF, shows the breakdown from its up-channel, on September 11th and yesterday it made it back up to the bottom of the up-channel, which coincided with a back-test of its crossing 20- and 50-dma's as well, all near 115.50. I'm looking for a multi-month correction of the rally we've had this year before bonds head higher next year. How much the selling over the next few months will help the stock market is debatable.

20+ Year Treasury ETF, TLT, Daily chart

With the September highs the TRAN finally rang the bell at its projection to 8590.98, which is where the c-wave in the a-b-c move up from 2011 equals 162% of the a-wave. It doesn't mean it is obligated to drop from here but that's the EW setup. It also poked one more time at the trend line along the highs from April 2010 - July 2011 as well as the shorter-term one from May 2013. The wave count can be considered complete at the test of the trend lines and with weekly bearish divergence I would not want to be long the Trannies now. A drop below its uptrend line from June 2013, currently near 8275, would also be a strong break of its 50-dma and reason enough to believe the top is in place.

Transportation Index, TRAN, Weekly chart

The U.S. dollar has run almost straight up for about 3 months now. One would think it's due a restful pullback. It is currently testing its July 2013 highs near 85 but it appears to be consolidating instead of getting ready for a larger pullback. There could be a lot more short covering if it rallies above 85 and starts heading for its 2009-2010 downtrend line, currently near 86.92. A strongly rallying dollar is another sign of deflation.

U.S. Dollar contract, DX, Weekly chart

Just as I've been waiting for a pullback in the dollar, I've been waiting for a bounce in gold. I'm still waiting for both and they might not happen, especially if gold also drops below 1194. That's where the decline from March would have two equal legs down and it would hit the bottom of a descending triangle, which I've been showing on the gold weekly chart for weeks. If it is a triangle pattern it needs one more leg up to complete it, which is what I'm depicting. A rally back up to the intersection of the top of its triangle and its broken uptrend line form 2001-2005, near 1330 by the end of January, would be a good long trade followed by an even better short trade.

Gold continuous contract, GC, Weekly chart

A big strike against gold's short-term bullish pattern is what's happening in silver. Last week it snapped support near 18.60, which fit as the bottom of its descending triangle. At best I would expect a bounce back up to the 18.60 area for a back-test and then continue lower. A good downside target for now is price-level support near 14.65 but very likely lower prices into 2015 in another A-B-C down from the x-wave high in July.

Silver continuous contract, SI, Weekly chart

Oil's pattern remains a mystery because of the big messy pattern since its May 2011 high. It could be a large bullish sideways consolidation or it could be a much more bearish pattern that's looking for a bounce and then crash lower. If it does bounce in the next month or two, I'll be looking for a rally up to its broken uptrend line from 2012-2014, near 100 by the end of November.

Oil continuous contract, CL, Weekly chart

Tomorrow's economic report of interest will be the Durable Goods, which is expected to show a significant decline of about -16.3% but after the +22.6% in July it evens out a bit. Ex-transportation the number is much less volatile and is expected to be +0.7%, which would negate July's -0.7%.

Economic reports and Summary

Today's bounce will be viewed differently depending on the color of your glasses. Bears see a dead-cat bounce whereas bulls see the start of the next rally. The repeating pattern I showed on the ES chart certainly supports the bulls, although that might mean a further pullback first before the next rally leg gets going. NDX shows the idea for a choppy rally over the next couple of weeks while the indexes make minor new highs in an ending pattern. SPX supports the idea for only a minor new high tomorrow morning followed by the start of a strong decline.

Needless to say, there are too many opposing possibilities, especially with different patterns on different indexes. That means it's a time for caution while we wait for at least a few ducks to get in a row. Right now all we're doing is trying to herd cats and they're not being cooperative. Know when to trade and more importantly when not to trade. Right now I think it's the latter. Stay safe.

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 Plays

Record Revenues, Record Profits

by James Brown

Click here to email James Brown


Super Micro Computer, Inc. - SMCI - close: 28.90 change: +1.10

Stop Loss: 26.90
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Entry on September -- at $---.--
Listed on September 23, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 389 thousand
New Positions: Yes, see below

Company Description

Why We Like It:
A lot of investors are looking for growth and this company has got it!

With a market cap near $1 billion SMCI is still consider a small cap. According to a company press release they describe themselves as "Super Micro Computer, Inc. or Supermicro, a global leader in high-performance, high-efficiency server technology and innovation is a premier provider of end-to-end green computing solutions for HPC, Data Center, Cloud Computing, Enterprise IT, Hadoop/Big Data and Embedded Systems worldwide. Supermicro's advanced server Building Block Solutions offers a vast array of modular, interoperable components for building energy-efficient, application-optimized, computing solutions."

SMCI's last three earnings reports in a row have been better than expected. As a matter of fact the last three quarterly reports have seen SMCI beat analysts' estimates on both the top and bottom line. All three times SMCI has raised guidance.

SMCI's most recent earnings report was August 5th. Wall Street was looking for $0.39 a share on revenues of $396 million. SMCI delivered $0.40 a share. Revenues came in at $428.1 million. That's a +14.5% increase in sales from the prior quarter and a +32.8% increase from the same quarter a year ago. The company's GAAP net income was up +23.5% quarter over quarter and up +114.3% from a year ago. Gross margins improved both quarter over quarter and from a year ago.

SMCI's Chairman and CEO Charles Liang commented on their Q4 results (Aug 5th) saying "In the fourth quarter, we achieved $428.1 million revenue or 32.8% growth over last year which marked the third straight quarter of record revenues and keeps us on a path to reach our goal of achieving $2 billion annual run rate in the coming fiscal year 2015... with this strong revenue growth combined with operating expense leverage, we achieved record profits. We are looking forward to the new fiscal year and we have been preparing to be a strong market leader in the upcoming technology refresh cycle related to the Intel Grantley (Haswell new processor) launch."

Technically SMCI broke out from a three-month consolidation in mid September. The three-day pullback was mild and traders just bought the dip at its rising 10-dma. If this bounce continues we want to hop on board. I'm suggesting a trigger to open bullish positions at $29.15.

Trigger @ $29.15

- Suggested Positions -

Buy SMCI stock @ $29.15

- (or for more adventurous traders, try this option) -

Buy the 2015 Jan $30 call (SMCI150117c30) ask $2.45

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

Annotated Chart:

In Play Updates and Reviews

NASDAQ Leads The Rebound

by James Brown

Click here to email James Brown

Editor's Note:
The NASDAQ composite led the market higher on Wednesday with a +1.0% gain. The major indices ended a three-day losing streak with today's bounce.

MS hit our stop loss.

Current Portfolio:

BULLISH Play Updates

Best Buy Co. - BBY - close: 33.99 change: +0.63

Stop Loss: 32.75
Target(s): To Be Determined
Current Option Gain/Loss: +4.3%
Entry on September 08 at $32.60
Listed on September 06, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 6.3 million
New Positions: see below

09/24/14: BBY erased yesterday's loss with a +1.88% gain. The stock is testing the $34.00 level and its 10-dma again.

I am not suggesting new positions at this time.

Earlier Comments: September 6, 2014:
It's tough to be bearish when investors are buying bad news. The U.S. economy is slowly improving there have been nagging concerns over the U.S. consumer. If that wasn't bad enough Amazon.com has become the dominant player in consumer electronics. So why are investors buying shares of BBY?

First here's a brief description from the company website: "Best Buy Co., Inc. is the world's largest consumer electronics retailer, offering advice, service and convenience – all at competitive prices – to the consumers who visit its websites and stores more than 1.5 billion times each year. In the United States, more than 70 percent of Americans are within 15 minutes of a Best Buy store and BestBuy.com is among the largest ecommerce retailers in the United States. Additionally, the company operates businesses in Canada, China and Mexico. Altogether, Best Buy employs more than 140,000 people and earns annual revenues of more than $40 billion."

The last few years have seen BBY suffer from the online showroom phenomenon. Where customers come in, look at merchandise in BBY's showroom, and then go home and buy it online (usually at Amazon.com). The company has been desperately fighting this issue for a couple of years and they have made progress. However, sales continue to suffer.

BBY reported earnings on August 26th. Wall Street expected a profit of $0.31 on revenues of $8.98 billion. BBY beat the bottom line estimate with $0.44 but revenues only hit $8.9 billion. More importantly management guided lower. They expect same-store sales declines in both the third and fourth quarter. So why are investors buying the stock? It could be a case of all the bad news is already price in. Some consider BBY to be a value play at current levels.

If investors are willing to buy the bad news then it could be tough to be bearish. The shorts could be in trouble. The most recent data listed short interest at 9.5% of the 288.6 million share float. A breakout higher could spark some short covering. The point & figure chart is already bullish and suggesting at $49.00 target.

Traders bought the post-earnings sell-off in August and they bought the dip again this past week. Now BBY is on the verge of hitting new multi-month highs. We're suggesting at trigger to open bullish positions at $32.60.

- Suggested Positions -

Long BBY stock @ $32.60

- (or for more adventurous traders, try this option) -

Long 2015 JAN $35 call (BBY150117c35) entry $1.48*

09/20/14 new stop @ 32.75
09/16/14 new stop @ 31.75
09/08/14 triggered @ 32.60
*option entry price is an estimate since the option did not trade at the time our play was opened.
Option Format: symbol-year-month-day-call-strike

Broadcom Corp. - BRCM - close: 40.18 change: +0.20

Stop Loss: 39.45
Target(s): To Be Determined
Current Option Gain/Loss: - 3.4%
Entry on September 19 at $41.60
Listed on September 18, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 5.1 million
New Positions: see below

09/24/14: BRCM ended a three-day losing streak but today's bounce (+0.5%) underperformed the broader market. More conservative investors might want to wait for a new bounce above its 10-dma (currently $40.55) before initiating new positions.

Earlier Comments: September 18, 2014:
We are quickly approaching a world where everything can and will be connected. Broadcom plans to make it happen by leading the world into the Internet of Things.

Who is Broadcom? The company describes itself as "a global leader and innovator in semiconductor solutions for wired and wireless communications. Broadcom products seamlessly deliver voice, video, data and multimedia connectivity in the home, office and mobile environments. With the industry's broadest portfolio of state-of-the-art system-on-a-chip solutions, Broadcom is changing the world by Connecting everything."

By connecting everything they mean it. From broadband technology to cloud infrastructure to wireless and wearables to home networking, to automotive, appliances, bandwidth to backhaul, GPS to GPON, processors to powerline, set-top box to small cells, wearables to Wi-Fi, Broadcom is designing chips for to connect it.

What is the Internet of Things? It's a hot buzzword right now and one we will hear a lot more often over the next few years. Gartner, the world's leading information technology research company, described the Internet of Things (abbreviated as IoT) as the "network of physical objects that contain embedded technology to communicate and sense or interact with their internal states or the external environment." One concept to help envision this idea is making dumb electronic devices smart. It could be anything from your coffeemaker to your refrigerator.

Gartner estimates that the IoT, "which excludes PCs, tablets and smartphones, will grow to 26 billion units installed in 2020." That is a 30-fold increase from 2009. Cisco Systems (CSCO) believes that the number of connected items could hit 50 billion by 2020. That's six devices for every person on the planet. Gartner is estimating that the products and services for the IoT will generate more than $300 billion in sales by 2020.

The IoT sounds like the next technology revolution. While it's only a few years away that might be too far in the future for some investors to consider. Right now everyone is focused on Apple's (AAPL) new smartphone the iPhone 6. BRCM just happens to be a major supplier for AAPL's new phone.

AAPL revealed their new phone last week. The reviews have been a little over-the-top. Descriptions of the Iphone 6 have been glowing. Some are calling it the "best smartphone on the planet" or the "best smartphone ever made!" One professional reviewer described the new iPhone 6 as the fastest iPhone yet. First-day pre-orders for AAPL's new phone hit a record-breaking four million phones. That is double the number of pre-orders for the iPhone 5 two years ago. There are estimates that AAPL could sell between 60 to 70 million iPhone 6s by the end of 2014. It certainly sounds like they have a hit on their hands and that's good news BRCM.

There was another story out recently that hinted BRCM may have won the contract to supply chips to AAPL's new smart watch as well. AAPL's new watch is expected in 2015.

Meanwhile BRCM continues to see earnings growth. They have beaten analysts' EPS estimates four quarters in a row. Shares of BRCM are currently trading at multi-year highs. The point & figure chart is forecasting a long-term target of $63.00.

Tonight BRCM closed at $41.44 with a high of $41.49. I am suggesting a trigger to open bullish positions at $41.60. The $40.00 level is short-term support so we'll put our stop loss at $39.45.

- Suggested Positions -

Long BRCM stock @ $41.60

- (or for more adventurous traders, try this option) -

Long 2015 Jan $43 call (BRCM150117C43) entry $1.55*

09/19/14 triggered @ $41.60
*option entry price is an estimate since the option did not trade at the time our play was opened.
Option Format: symbol-year-month-day-call-strike

E*TRADE Financial - ETFC - close: 23.49 change: +0.14

Stop Loss: 22.80
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Entry on September -- at $---.--
Listed on September 22, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 2.5 million
New Positions: Yes, see below

09/24/14: Traders bought the dip in ETFC near $23.00 midday. If this bounce continues tomorrow we could see shares hit our suggested entry point at $23.85.

Earlier Comments: September 22, 2014:
ETFC was founded back in 1982. The company really gained steam during the boom of Internet trading in the 1990s. Today they compete with a suite of online brokerage, investing and related banking solutions.

Trading volumes are not what they used to be. As a matter of fact volumes have been pretty anemic but that hasn't slowed the market's rally. Lack of volume does impact the brokers. Daily trading volume for ETFC has consistently been below the prior year's level.

Wall Street might be overlooking the drop in volumes in favor of ETFC's account growth. They have been consistently adding about 30,000 new accounts a month the last several months.

Technically shares of ETFC appear to be breaking out from their April-August consolidation. Traders just bought the dip near its rising 10-dma today. If this bounce continues we want to hop on board.

Tonight we're suggesting a trigger to open bullish positions at $23.85. I'm not suggesting an exit target yet but the point & figure chart is bullish and forecasting a long-term $33 target.

Trigger @ $23.85

- Suggested Positions -

Buy ETFC stock @ (trigger)

- (or for more adventurous traders, try this option) -

Buy the 2015 Jan $25 call (ETFC150117C25)

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

Southwest Airlines - LUV - close: 34.33 change: +1.07

Stop Loss: 32.95
Target(s): To Be Determined
Current Option Gain/Loss: +3.2%
Entry on September 09 at $33.25
Listed on September 06, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 4.9 million
New Positions: see below

09/24/14: LUV had an ugly three-day reversal in progress but today's bounce (+3.2%) lifted shares back above their 10-dma.

I am not suggesting new positions.

Earlier Comments: September 6, 2014:
Airline stocks have been big winners this year. A big drop in the price of crude oil has been a blessing since fuel is the biggest expense for airliners. Year to date the S&P 500 index is up +8.5%. The XAL airline index is up +26.2%. Yet shares of LUV are up an astounding +74.25%.

According to the company's press release, "Dallas-based Southwest Airlines continues to differentiate itself from other carriers with exemplary Customer Service delivered by more than 45,000 Employees to more than 100 million Customers annually. Based on the most recent data available from the U.S. Department of Transportation, Southwest is the nation's largest carrier in terms of originating domestic passengers boarded. The airline also operates the largest fleet of Boeing aircraft in the world to serve 93 destinations in 40 states, the District of Columbia, the Commonwealth of Puerto Rico, and five near-international countries via wholly owned subsidiary, AirTran Airways. Southwest is one of the most honored airlines in the world, known for its triple bottom line approach that takes into account the carrier's performance and productivity, the importance of its People and the communities it serves, and its commitment to efficiency and the planet."

Earnings are coming in better than expected. When LUV reported on July 24th Wall Street was looking for a profit of $0.61 a share on revenues of $4.95 billion. LUV reported a profit of $0.70 with revenues up almost 8% to $5.01 billion. Demand for domestic air travel has been strong. Shares of LUV have been showing significant relative strength.

Traders bought the dip on Friday at short-term technical resistance on the simple 10-dma. That left LUV to end the week near all-time highs. Tonight we are suggesting a trigger to buy calls at $33.25.

- Suggested Positions -

Long LUV stock @ $33.25

- (or for more adventurous traders, try this option) -

Long 2015 Jan $35 call (LUV150117c35) entry $1.25

09/20/14 new stop @ 32.95
09/18/14 new stop @ 32.75
09/16/14 new stop @ 31.95
09/11/14 speculation that oil might have reversed higher today
09/09/14 triggered $ 33.25
Option Format: symbol-year-month-day-call-strike

Microsoft Corp. - MSFT - close: 47.08 change: +0.52

Stop Loss: 45.85
Target(s): To Be Determined
Current Option Gain/Loss: +6.8%
Entry on August 14 at $44.08
Listed on August 13, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 36 million
New Positions: see below

09/24/14: MSFT displayed some relative strength with a +1.1% gain and a close back above recent resistance at $47.00.

I am not suggesting new positions.

Earlier Comments: August 13, 2014:
Microsoft Corp. is a technology behemoth. The company was founded in 1975. They have grown into a massive company with 128,000 employees around the world. Their software is used by billions of people every day. They also offer technology services, tablets, X-box gaming platform, networking and server software, and their Nokia division. MSFT has jumped head first into the cloud computing industry. Altogether MSFT generated almost $87 billion in sales the past 12 months with a net income of $22 billion.

Investors worried about MSFT and how the death of the PC would slowly chip away at its core products - mainly the Windows operating system and Microsoft Office. However, this past summer there has been evidence that the PC market isn't dead. Intel reported stronger than expected chip sales for PCs, especially to enterprise customers. Meanwhile MSFT stopped supporting the Windows XP operating system. MSFT released the XP system back in 2001. Their decision to stop providing updates means the XP system could become less secure to viruses, malware, and hacking. One analyst estimated that 25% of the PCs currently connected to the Internet were still running XP. That's millions and millions of computers that will need to either upgrade their software or likely be scrapped and upgraded to a new computer with a newer version of MSFT's software. The upgrade cycle could last a while.

Investors have been pretty optimistic since Satya Nadella was crowned CEO of MSFT back in February this year. He has been focusing the company on the cloud and it seems to be working. MSFT's commercial cloud revenues soared +147% with sales on track to exceed $4 billion a year. Even Bing, MSFT's search engine rival to Google, is improving. Bing's ad revenues rose +40% last quarter and snatched almost 20% of the search engine market. MSFT expects their Bing division to turn profitable in 2016.

MSFT's most recent earnings report on July 22nd was mixed. They missed the bottom line estimate by 5 cents. Yet revenues came in ahead of expectations. Wall Street was looking for quarterly revenues of $22.99 billion. MSFT reported $23.38 billion. Several analyst firms upgraded their outlook on MSFT following the earnings report. Many of the new price targets are in the $50 area.

Technically shares of MSFT have a bullish trend of higher lows. The stock saw some post-earnings depression in the second half of July but now that's over and investors are buying the dip.

Tonight I am suggesting investors open bullish positions tomorrow morning. We'll try and limit our risk with a stop loss at $41.75.

- Suggested Positions -

Long MSFT stock @ 44.08

- (or for more adventurous traders, try this option) -

Long 2015 Jan $50 call (MSFT150117c50) entry $0.45

09/22/14 new stop @ 45.85
09/20/14 new stop @ 44.75
09/11/14 new stop @ 44.45
08/23/14 new stop @ 42.90
08/14/14 trade begins. MSFT opens at $44.08
Option Format: symbol-year-month-day-call-strike

Pilgrim's Pride - PPC - close: 31.06 change: +0.37

Stop Loss: 30.45
Target(s): To Be Determined
Current Option Gain/Loss: -1.6%
Entry on September 16 at $31.55
Listed on September 15, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 1.0 million
New Positions: see below

09/24/14: PPC managed a bounce off the $30.50 level and outperformed the market with a +1.2% gain. I don't see any changes from yesterday's comments. We have a stop loss at $30.45. More aggressive traders may want to put their stop below $30.00, which could be round-number support.

I am not suggesting new positions at this time.

Earlier Comments: September 15, 2014:
Last year the U.S. stock market was up about +30%. Shares of PPC rallied almost +100%. This year the S&P 500 is up about +7%. Yet shares of PPC are up +90%. One reason is rising demand for protein and another is falling feed costs.

According to the company website, "Pilgrim's Pride Corporation employs approximately 35,700 people and operates chicken processing plants and prepared-foods facilities in 12 states, Puerto Rico and Mexico. The Company's primary distribution is through retailers and foodservice distributors. Pilgrim's is the second-largest chicken producer in the world, with operations in the United States, Mexico and Puerto Rico. Our corporate headquarters is in Greeley, Colorado. We have the capacity to process more than 36 million birds per week for a total of more than 9.5 billion pounds of live chicken annually. The company exports chicken products to customers in approximately 105 countries, including Mexico." (FYI: The company is majority owned, about 75%, by Brazilian meat producer JBS SA, symbol: JBSAY).

The cost to feed millions and millions of chickens is the number one expense for a chicken farmer. The price of corn and soybeans has been falling. Currently both grains are at multi-year lows. That means PPC's margins should improve. The good news is that U.S. farmers are looking at a record-breaking harvest of corn and soybeans again this year. That should continue to push grain prices lower.

Technically shares of PPC are riding their long-term trend of higher lows. Shares got ahead of themselves in July and sold off following its earnings report at the end of the month. Yet investors bought the dip at technical support on the rising 50-dma. Now after consolidating sideways for the last few weeks PPC is starting to rally again.

Today's intraday high was $31.39. We're suggesting a trigger to open bullish positions at $31.55.

- Suggested Positions -

Long PPC stock @ $31.55

- (or for more adventurous traders, try this option) -

Long 2015 Jan $35 call (PPC150117C35) entry $1.40*

09/22/14 new stop @ 30.45
09/20/14 new stop @ 29.85
09/16/14 triggered @ $31.55
*option entry price is an estimate since the option did not trade at the time our play was opened.
Option Format: symbol-year-month-day-call-strike

BEARISH Play Updates

AGCO Corp. - AGCO - close: 45.81 change: +0.05

Stop Loss: 46.35
Target(s): To Be Determined
Current Option Gain/Loss: +1.0%
Entry on September 18 at $46.25
Listed on September 16, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 976 thousand
New Positions: see below

09/24/14: The rebound in AGCO stalled near the $46.00 level. Shares only gained five cents. While this is encouraging I would not be surprised to see it bounce toward the 10-dma near $46.35.

Earlier Comments: September 16, 2014:
Farmers do not like to buy new equipment when the price of their crops is falling.

According to the company website, "AGCO is a global leader focused on the design, manufacture and distribution of agricultural machinery. We support more productive farming through a full line of tractors, combines, hay tools, sprayers, forage equipment, tillage, implements, grain storage and protein production systems, as well as related replacement parts. Our products are available in more than 140 countries worldwide."

AGO management has noted weakness in multiple parts of the world this year. Their most earnings report was July 29th. They managed to beat bottom line estimates by 8 cents with a profit of $1.77 a share. Yet revenues dropped by almost 10% and missed the revenue estimates. To make matters worse AGCO management lowered their 2014 guidance by a significant margin. A few analysts expect the company's earnings to fall over the next 18 months.

Part of the challenge is the business climate for farmers. Falling crop prices affect farmer sentiment and they tend to spend less. Unfortunately for AGCO the U.S. has seen falling commodity prices for a while and it's getting worse. The recent rise in the dollar is forcing grain prices lower. Plus the American farmer is expecting a record-breaking harvest this year. They are expecting so much grain (corn and soybeans) that it will exceed the nation's ability to store it all. That doesn't bode well for farmer sentiment either.

Technically shares of AGCO are bearish. Investors have been selling the rallies since the peak in 2013. Back in July the stock broke down under a long-term, multi-year trend line of support. Now after a four-week consolidation near $48.00 the stock has started to breakdown again.

Tonight we're suggesting a trigger to open bearish positions at $46.25. We are not setting an exit target yet but I will note the point & figure chart is projecting at $40.00 target.

- Suggested Positions -

Short AGCO @ $46.25

- (or for more adventurous traders, try this option) -

Long NOV $45 PUT (AGCO141122P45) entry $1.25*

09/22/14 new stop @ 46.35
09/18/14 triggered @ 46.25
*option entry price is an estimate since the option did not trade at the time our play was opened.
Option Format: symbol-year-month-day-call-strike

CBS Corp. - CBS - close: 54.85 change: -0.18

Stop Loss: 56.35
Target(s): To Be Determined
Current Option Gain/Loss: - 0.2%
Entry on September 22 at $54.75
Listed on September 20, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 6.1 million
New Positions: see below

09/24/14: CBS tagged a new relative low before bouncing today. The fact that shares closed negative is encouraging given the market's widespread rebound. I don't see any changes from my prior comments.

Earlier Comments: September 20, 2014:
Television is a cutthroat business. Companies fight with affiliates, content providers, distribution rights, and more. They need to because traditional TV has been dying for years as more and more consumers forgo television for their computer, tablet, or even smartphone to get their media. Companies like Netflix also steal viewership. Granted the major networks have invested a lot to build up their own "second screen" viewership but it's unclear if the investment is paying off.

Who is CBS? According to the company website, "CBS Corporation (NYSE: CBS.A and CBS) is a mass media company that creates and distributes industry-leading content across a variety of platforms to audiences around the world. The Company has businesses with origins that date back to the dawn of the broadcasting age as well as new ventures that operate on the leading edge of media. CBS owns the most-watched television network in the U.S. and one of the world's largest libraries of entertainment content, making its brand – "the Eye" – one of the most recognized in business. The Company's operations span virtually every field of media and entertainment, including cable, publishing, radio, local TV, film, outdoor advertising, and interactive and socially responsible media. CBS's businesses include CBS Television Network, The CW (a joint venture between CBS Corporation and Warner Bros. Entertainment), Showtime Networks, CBS Sports Network, TVGN (a joint venture between CBS Corporation and Lionsgate), Smithsonian Networks, Simon & Schuster, CBS Television Stations, CBS Radio, CBS Television Studios, CBS Global Distribution Group (CBS Studios International and CBS Television Distribution), CBS Interactive, CBS Consumer Products, CBS Home Entertainment, CBS Films and CBS EcoMedia."

Shares of CBS peaked near $68.00 back in early March 2014, marking what looks like the end of a strong two-year rally from its 2011 lows. The challenge seems to be revenues. The last couple of earnings reports have seen CBS beat Wall Street's EPS estimates. How they are doing that could be cost cutting or financial engineering. CBS has announced significant stock buybacks and accelerated repurchases in 2014. Yet revenues keep falling.

Back in May, when CBS reported its Q1 earnings, revenues for the quarter were down -4.6% from a year ago. When CBS reported its Q2 results in early August this year, revenues were down -5.4%. Management tried to soften the blow with news they were doubling their stock buyback from $3 billion to $6 billion. Yet the stock continues to fall. Investors are probably worried about the falling revenue numbers.

Technically shares of CBS are testing major support at its trend line of higher lows (see the weekly chart) and support near $55.00. It also appears that CBS has created a bearish head-and-shoulders pattern, albeit one with two right shoulders (which is not uncommon). Thus a breakdown under $55.00 would be very negative for the stock price.

The May 2014 intraday low was $55.01. Tonight I am suggesting a trigger to launch bearish positions at $54.75.

- Suggested Positions -

Short CBS stock @ $54.75

- (or for more adventurous traders, try this option) -

Long 2015 Jan $55 put (CBS150117P55) entry $3.40*

09/22/14 new stop @ $56.35
09/22/14 triggered @ 54.75
*option entry price is an estimate since the option did not trade at the time our play was opened.
Option Format: symbol-year-month-day-call-strike

Garmin Ltd. - GRMN - close: 51.24 change: +0.49

Stop Loss: 52.25
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Entry on September -- at $---.--
Listed on September 23, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 2.1 million
New Positions: Yes, see below

09/24/14: GRMN issued a press release today stating they have launched the first ever open platform for Garmin's wearables. This will allow third parties to develop apps for Garmin products.

Meanwhile the market's bounce helped GRMN end a three-day drop. Shares could bounce back toward $52.00 before rolling over again. Currently we are on the sidelines with a suggested entry point at $49.75.

Earlier Comments: September 23, 2014:
Garmin was founded in 1990. They became a big name in the navigation technology business. I'm sure many of us remember buying GRMN automobile PNDs (portable navigation device) that sat on the dashboard or stuck to the windshield. Yet those have been replaced by the ubiquitous smartphone and in-dashboard GPS systems.

GRMN still sales a lot of auto GPS systems, many to OEM clients. They also sell fleet management solutions. GRMN has also see some growth in their systems for aviation (planes) and marine (boats). They seem most excited about getting into the wearables industry with a focus on fitness devices. Although that is going to be a crowded market soon.

Officially the company describes itself as, "Garmin International Inc. is a subsidiary of Garmin Ltd. (GRMN), the global leader in satellite navigation. Since 1989, this group of companies has designed, manufactured, marketed and sold navigation, communication and information devices and applications – most of which are enabled by GPS technology. Garmin’s products serve automotive, mobile, wireless, outdoor recreation, marine, aviation, and OEM applications. Garmin Ltd. is incorporated in Switzerland, and its principal subsidiaries are located in the United States, Taiwan and the United Kingdom."

It's a bit surprising to see GRMN's relative weakness considering their last earnings report back on July 30th. The company has no debt and their last results beat estimates. Management raised their 2014 guidance. Gross margins improved from 55% to 57% and operating margins improved from 24% to 28%. Unfortunately traders sold the news.

You can see the big spike on its earnings report and immediate reversal lower. Since then traders have been selling the rallies. Now GRMN is under its 200-dma and it looks poised to breakdown under support near the $50.00 mark.

We suspect this trend down continues. Tonight we're suggesting a trigger to launch bearish positions at $49.75. I'm not setting an exit target tonight but the point & figure chart is forecasting at $42 target.

NOTE: GRMN does have an elevated amount of short interest (more than 10% of the float). Traders may want to use the options to limit their risk.

Trigger @ $49.75

- Suggested Positions -

Short GRMN stock @ (trigger)

- (or for more adventurous traders, try this option) -

Buy the 2015 Jan $50 PUT (GRMN150117P50)

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

Johnson Controls Inc. - JCI - close: 45.32 change: +0.02

Stop Loss: 47.10
Target(s): To Be Determined
Current Option Gain/Loss: + 0.2%
Entry on September 23 at $45.40
Listed on September 22, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 2.5 million
New Positions: see below

09/24/14: JCI delivered a quiet session with shares churning sideways and closing virtually unchanged. If JCI decides to bounce we can look for potential resistance at the simple 10-dma.

Earlier Comments: September 22, 2014:
The auto part makers were a bright spot in the market for quite a while. Yet JCI has been underperforming its peers for weeks. Now the whole group has reversed sharply lower.

Investors might be growing cautious as earnings growth slows down. Investor's Business Daily noted that the forecast for some of these auto parts makers is getting softer.

Technically the group appears to be rolling over and JCI could be leading the way lower with a bearish breakdown under a long-term trend of higher lows. It doesn't help that JCI now has a "death cross" with the 50-dma falling under its 200-dma, which itself is starting to roll over.

Today's low was $45.66. We are suggesting a trigger for bearish positions at $45.40.

- Suggested Positions -

Short JCI stock @$45.40

- (or for more adventurous traders, try this option) -

Long 2015 Jan $45 PUT (JCI150117P45) entry $2.25

09/23/14 triggered @ $45.40
Option Format: symbol-year-month-day-call-strike

Mobile Mini, Inc. - MINI - close: 36.83 change: +0.33

Stop Loss: 37.85
Target(s): To Be Determined
Current Option Gain/Loss: + 5.1%
Entry on August 28 at $38.80
Listed on August 26, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 265 thousand
New Positions: see below

09/24/14: MINI snapped a five-day losing streak with today's bounce. I don't see any changes from yesterday's comments. We have a stop at $37.85. More aggressive traders may ant to use a stop just above $38.00 instead.

Earlier Comments: August 27, 2014:
The mobile storage space might be facing some headwinds. MINI provides commercial storage, construction storage, residential storage, and mobile offices. According to the company's website, "Mobile Mini, Inc. is the world's leading provider of portable storage solutions through its total lease fleet of over 213,000 portable storage and office units with 135 locations in the United States, United Kingdom and Canada. Mobile Mini, Inc. went public in 1994 and trades on NASDAQ under the symbol MINI. Mobile Mini offers customers a wide range of portable storage and office products in varying lengths and widths with an assortment of differentiated features such as: proprietary security systems, multiple door options and 100 different configuration options."

Sales are growing but MINI is developing a trend of missing earnings or delivering lackluster results. MINI missed Wall Street's EPS estimates back in February and April. The latest earnings report was July 30th. Revenues were almost +10% from a year ago but earnings were down. MINI reported a 23-cent profit, which was in-line with estimates but down from 25 cents a year ago. Investors crushed the stock following the late July earnings report. MINI was already weak through most of July and then got hammered from $43 to under $38 on its earnings news.

The stock's long-term up trend might be in jeopardy. The company is not growing fast enough to justify its P/E above 40. The stock's oversold bounce from the post-earnings sell-off has stalled at technical resistance at the exponential 200-dma. Now it appears that MINI is beginning to roll over.

Today's low was $38.93. I'm suggesting a trigger at $38.80 to open bearish positions.

- Suggested Positions -

Short MINI stock @ $38.80

09/22/14 new stop @ 37.85
09/06/14 new stop @ 40.10
08/28/14 triggered @ 38.80

Transocean Ltd. - RIG - close: 33.02 change: -0.41

Stop Loss: 34.75
Target(s): To Be Determined
Current Option Gain/Loss: +13.6%
Entry on September 03 at $38.20
Listed on August 25, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 6.4 million
New Positions: see below

09/24/14: Another day, another new multi-year low for shares of RIG. It didn't help that the stock was given a new underperform rating by an analyst this morning.

I am not suggesting new positions at this time.

Earlier Comments: August 25, 2014:
The oil drillers could be facing a significant downturn due to lower demand and rising supply. That's a tough combination for any business.

RIG is one of the biggest. According to the company website, "We are a leading international provider of offshore contract drilling services for energy companies, owning and operating among the world's most versatile fleets with a particular focus on deepwater and harsh-environment drilling. Our fleet of 79 mobile offshore drilling units includes the world's largest fleet of high-specification rigs consisting of ultra-deepwater, deepwater and premium jackup rigs. In addition, we have seven ultra-deepwater drillships and five high-specification jackups under construction."

The company's latest earnings report on August 6th looked pretty good. Wall Street was expecting a profit of $1.12 a share. RIG delivered $1.61 - blow out number. Revenues also beat estimates at $2.33 billion versus the $2.29 estimate but revenues were down from a year ago. Investors ignored the better than expected results. That's because the industry is facing a number of headwinds.

Day rates are dropping and more rigs are sitting idle. Analysts are lowering estimates due to rising down time. RIG's latest fleet update showed that out-of-service time for 2014 had risen by 28 days. Their 2015 projected out-of-service time had surged 236 days. That is significant when you consider that these rigs get paid hundreds of thousands of dollars per day they operate. Of course those numbers are coming down.

Angie Sedita, an analyst with UBS, said, "We believe dayrate pressure will persist given limited rig tenders (demand) and fierce competition, with dayrates already down 25%-40% from peak levels."

Raymond James analyst Praveen Narra provided more details on their bearish outlook. According to Narra:

After a decade of good times, the deepwater drilling rig market is facing a multiyear down-cycle. Historically, most offshore drilling cycles have been short-lived as there have usually been sudden demand shocks that tend to self correct relatively quickly. This time, it is more of a new rig supply problem compounded by a moderation in offshore spending from the suddenly “return driven” multinational major oil companies. That means this down-cycle should be more drawn out than usual. Specifically, we think the downturn will take about three years to play out with average floater day-rates falling about 25% with over 60 floating rigs needing to be stacked (either warm stacked or cold stacked). More importantly for investors, we think consensus 2016 floater estimates (on average) are still about 25% too high. Put another way, earnings multiples are not as attractive as some now think, in our view. Obviously, the lower-end, older floating assets will be hit the hardest. While everyone loses in this environment...

If you're curious a "stacked" rig is not in service. They can be warm stacked, which means they are idle but still have a crew and ready for deployment. A cold stacked rig has essentially been mothballed.

The bearish outlook for RIG is evident in the stock's decline. Shares just broke down under support near $38.00. The Point & Figure chart is bearish and forecasting at $30.00 target but this target could fall further. It is worth noting that there are a lot of traders already bearish on RIG. The most recent data listed short interest at 18% of the 327 million share float. That can spark short squeezes like the one back in April and again in June.

- Suggested Positions -

Short RIG @ $38.20

- (or for more adventurous traders, try this option) -

Long OCT $35 PUT (RIG141018P35) entry $0.27*

09/22/14 new stop @ 34.75
09/20/14 new stop @ 37.55
09/17/14 new stop @ 38.05
09/06/14 new stop @ 39.05
09/03/14 trade begins. RIG gaps higher at $38.20
*option entry price is an estimate since the option did not trade at the time our play was opened.
09/02/14 remove the trigger ($37.25) and short RIG now at current levels.
Option Format: symbol-year-month-day-call-strike


Morgan Stanley - MS - close: 34.98 change: -0.04

Stop Loss: 34.65
Target(s): To Be Determined
Current Option Gain/Loss: - 0.3%
Entry on September 03 at $34.75
Listed on September 02, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 6.8 million
New Positions: see below

09/24/14: Shares of MS were downgraded this morning by rival JPMorgan. MS spiked lower at the open and fell to $34.53 before bouncing back toward unchanged by the closing bell. Unfortunately our stop was hit at $34.65.

- Suggested Positions -

Closed MS stock @ $34.75 exit $34.65 (-0.3%)

- (or for more adventurous traders, try this option) -

2015 Jan $35 call (MS150117C25) entry $1.70* exit $1.55 (-8.8%)

09/24/14 stopped out thanks to a downgrade.
09/22/14 new stop @ 34.65
09/20/14 new stop @ 33.90
09/03/14 triggered @ 34.75
*option entry price is an estimate since the option did not trade at the time our play was opened.
Option Format: symbol-year-month-day-call-strike