Option Investor

Daily Newsletter, Wednesday, 10/8/2014

Table of Contents

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

Market Wrap

Volatility Reigns

by Keene Little

Click here to email Keene Little
One look at the DOW's daily chart and you have to wonder if traders have any conviction. They react strongly one day but then give it back the next day. This has created a very whippy market with a direction that's unclear and the volatility is likely to be with us for at least a little longer.

Wednesday's Market Stats

The DOW rallied 331 points off this morning's low to close up +274 points. This follows multiple days of 200+ points in both directions as each side battle the other and the HFTs weasel their way in between and just trade the volatility. Traders love the volatility while investors are starting to get motion sickness. At least there was strong volume behind today's rally, which was not true for last Friday's rally, which had started with a big gap up but didn't have much follow through and the volume was lighter. Today's big-volume up day finally had what the bulls want to see.

In the 13 trading days since the September 19th high the DOW has seen more than half of them with 200+ points between the highs and lows of the day and today's 331 point swing was the largest move. In those 13 days the DOW has only lost 285 points from the September 19th closing price to today's closing price, which is basically one trading day's worth of points. That's a lot of volatility with not much actual price movement and usually an increase in the volatility like this is at the top of a rally is an indication of a trend change in progress. But the choppy pullback from the September high says the bulls can't be ruled out yet.

This morning was devoid of any market-moving economic reports and it wasn't until the FOMC minutes from the last meeting were released this afternoon that the market had something to spur the buyers into action. It was just a catalyst since the bounce off this morning's low was already in progress but it needed the excuse of the FOMC minutes to launch some buy programs, which then ignited short covering, which then launched the HFTs into the action as they tried to front-run all the buy orders coming in. Before the bears could ask "what happened?" the indexes were in strong rally mode, finishing at their highs for the day. The daily reversal of reversals, with strong moves, continues.

In the FOMC minutes there were two points that the market interpreted as bullish. One, the FOMC members expressed concern that their inflation outlook is in jeopardy (read between the lines and what they're afraid of is deflation). Two, the members believe it's important to err on the side of caution when it comes to removing any further accommodation, such as interest rates. The market reads this as evidence the Fed will not be in any hurry to raise rates as early as next spring, which some have been worried would happen. There's very little else the Fed can do to help the market, I mean economy, that it hasn't already done, all of which hasn't helped. But we can expect the Fed to "threaten" the use of "many tools available to them" to help stimulate the economy. Each promise of more will of course be met with a jubilant response from the market. At least until the market has lost confidence in the Fed.

The indexes closed at/near their highs of the day, which has it looking like the market will continue higher tomorrow. But this market should have taught everyone by now that the following day is not always a follow through to the previous day. In fact one could argue it's typically the opposite as the mini-capitulations into the close leave the market vulnerable to immediate reversals the following morning. I see that as a possibility again, especially since the rally off this morning's lows looks like a completed 5-wave move for the indexes. That suggests at least a pullback to correct the rally before heading higher.

The Thursday prior to opex week (next week) has typically been the head-fake day, pulling the market back and then letting it slingshot into opex with the help of short covering. Was that move done today instead of tomorrow? It's certainly possible since more traders are trying to game that pattern and it might be shifting a little. But a deep pullback tomorrow, to pull the shorts back in, is also a possibility, especially since the setup for a pullback looks good.

Back in June and again in early September I had used the NYSE (NYA) chart to show an upside target zone that I thought would cap off the bull market. I consider the NYA a very good index to evaluate for the "total market." The Wilshire 5000 is another good one but almost always looks just like SPX. At any rate, the upside target zone for NYA was fairly wide but not so much in relative terms and it was based on projections for extended 5th waves in the rally from June 2012. The idea for extended 5th waves is important because it shows how the rally literally extended beyond what is a typical move, which I think is a fitting description for the stock market.

In an EW pattern extended 5th waves often achieve 162% of the 1st waves and the two projections shown on the weekly chart below, at 10906 and 11148, are based on the 5-wave move up from June 2012 and then the 5th of the 5th wave, which is the leg up from February 2014. The pattern is a clean count and the relatively close correlation provided a good target zone to complete the rally. The July 3rd high was 11105 and the September 4th high was 11108.

NYSE Composite index, NYA, Weekly chart

As you can see on the chart above, the bearish divergence at the September high vs. the July high was glaring. The double top has been followed by breaks of uptrend lines from 2011 and 2012 and now it's struggling to hold above the long-term uptrend line from 2009-2011, which coincides with the 50-week MA at 10538. Last week was an intraday break and again another one today but so far the uptrend line from 2009 is holding and the weekly closing price is the important one. It also came close to touching support at the 2007 high, at 10387, with today's low at 10421 and even if we're going to get just a correction to the decline from September 4th we could see it take up the rest of the month before setting up for the next leg down.

The NYA daily chart below shows a closer view of the price action around the uptrend line from 2009 as well as its 200-dma, at 10622, which it closed slightly above today. The bears see this as consolidation at support, which will break once it's finished consolidating. The bulls see this as support, including the 2007 high, holding and the next big move will be up to a new high. One EW pattern supporting the bulls is a large a-b-c pullback correction from July, which sets it up for another rally to a new high into November. The fight is on and it could go either way here.

NYSE Composite index, NYA, Daily chart

SPX swung 45 points from this morning's low to this afternoon's high, the largest range since December 18, 2013 when the Fed first announced their plan to reduce their asset purchases. Now the market positively reacts to just the thought that the Fed might delay raising interest rates. Talk about a desperate market! For the past two weeks SPX has been whipping around underneath its 50-dma after first breaking below it on September 25th. It's been in a downtrend since the September 19th high, defined by lower highs and lower lows. Today's rally brought it up to just below its 50-dma near 1974 and still below its last high on Monday near 1978. If the bulls can drive this above 1978 it would be a strong bullish statement, recovering back above both its broken uptrend line from November 2012 as well as its broken 50-dma (and just above that is its 20-dma). But if the bears smack the market back down again we could see a drop down to the 200-dma near 1904.

S&P 500, SPX, Daily chart

Key Levels for SPX:
- bullish above 1978
- bearish below 1925

Because of the choppy pattern in the pullback from September 19th it's not at all clear what the next big move will be. From an EW perspective I'm looking at it as a corrective pullback and not something more bearish. We could still get another new low out of this but the corrective structure suggests we're going to get a new high in the coming weeks. That's why a rally above 1978 would be at least short-term bearish if not an indication the new highs are coming. Next week is opex and we all know how bullish they tend to be. Will it be different this time? If the bears show up in force tomorrow, I show another leg down to a price projection at 1917.77 for two equal legs down from Monday morning (and potentially down to the 200-dma near 1904. There's still bearish potential but at this point I'd be surprised to see SPX below 1900 (I'll turn more bearish if that happens).

S&P 500, SPX, 60-min chart

The DOW has been the wild one -- as can be seen on its daily chart below it's been whipsaw city for that index. Who would have thought the DOW would be the more volatile index. Above 17100 would be bullish while a close below 16720 would be bearish, although support might be found at its 200-dma near 16590. As with SPX, it's hard for me to turn longer-term bearish yet because of the choppy move down; it looks like a correction to the larger uptrend and therefore my expectation, for now, is for a rally to new highs in the coming weeks.

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- bullish above 17,100
- bearish below 16,720

NDX has the same overlapping choppy pullback from September 19th and looks like a bull flag consolidation. The overbought oscillators in late August have been relieved and are now in oversold while price chopped sideways/down. I might be bearish this stock market but I can't ignore a bullish pattern (hint: the market always wins when you try to fight it). It doesn't mean it can't go down from here and in fact a choppy move down that lets go to the downside is often followed by a powerful move. But if the bulls can get NDX above resistance near 4050 (price-level resistance and its 20-dma) it will be the market telling us new highs are coming.

Nasdaq-100, NDX, Daily chart

Key Levels for NDX:
- bullish above 4050
- bearish below 3938

The RUT has been a very good canary stock for us and when it's relatively weak or strong it's been important to follow its lead. Today's candle is a bullish engulfing pattern at support (the bottom of a parallel down-channel for its decline from July, price-level support near 1080 and a price projection near 1077 for two equal legs down from July. Today's rally should get some follow through to the upside although it's not clear yet whether it will be just a bounce to a lower high and then down hard (red) or if instead we've got an a-b-c pullback from July that will lead to new highs into the end of the year. For now it stays bullish above 1074 and then I'll be watching the price pattern for the bounce/rally (assuming we'll get it) to help determine whether it will be a bounce to short or dips to buy.

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- bullish above 1140
- bearish below 1074

It's been a long while since I last discussed the TIPS market (Treasury Inflation-Protected Securities) and considering what the market thinks the Fed will do I thought it would be a good time to review what the bond market is thinking (it being a market that is much larger than the stock market and arguably much smarter). Yesterday I saw a chart posted by BusinessInsider.com, shown below (article here: More Fed Easing, where the author, Priya Misra at the Bank of America Merrill Lynch, suggested the Fed will have to come up with another round of easing according to the TIPS breakevens chart that's shown below.

The values charted are calculated by subtracting the yield on TIPS from Treasury bonds of the same duration, which for the chart below are the 5-year bonds. The higher the spread between the yields the more investors are worried about protecting against inflation. The author of the report, suggested the chart shows why the Fed will have to figure out soon what their next easing program will be (and forget about raising interest rates) in order to fight "disinflation." I believe this is how most market participants interpret this chart.

5-year TIPS Breakevens, chart courtesy businessinsider.com

I interpret this chart differently. I think it's a glaring example of how the Fed's programs are failing. As you can see from the chart, when it dropped below 2.2 in the past it prompted the Fed to start up another QE program. The QE3 program seems to have jumped the gun in this regard but interestingly, the declining highs following each QE program demonstrates how each program is having less of an effect on inflation worries by TIPS traders. A weekly chart of the TIPS bond ETF, TIP, is shown below and it's telling me to look for much lower prices, which means much lower inflation. The Fed's battle with deflation has been a losing one and the TIPS chart is confirming it.

Treasury Inflation-Protected Securities ETF, TIPS, Weekly chart

Off the December 2012 high there was an impulsive 5-wave move down into the September 2013 low. That identified the new trend – down. That decline was followed by an a-b-c bounce into the August high for a 2nd wave correction and we’re now in the early stages of a 3rd wave decline, one which should take it back down toward 90 and the 2008 lows fairly quickly before consolidating and then lower again, probably bottoming with stocks in 2016-2017.

Another strong indication of deflation is money velocity, which can loosely be defined as how many times a dollar bill is circulated, which in turn tells us how active people are in spending their money vs. saving it and taking it out of circulation. The more the same dollar is circulated and spent the higher the money velocity will be. Each dollar does work multiple times and that's an indication of a strong economy. But if someone along the line saves the money instead, essentially taking it out of circulation, money velocity declines. This will happen when consumers and businesses become more cautious and decide to save for a rainy day -- good for them, bad for the economy. The chart below shows how money velocity has done over the years, starting in 1960.

Money Velocity, 1960-present, chart courtesy St. Louis Fed

What's fascinating, and probably keeping the Fed heads up at night, is the fact that the massive amounts of money that's been printed in the last several years ($4+ trillion just in the U.S.) hasn't stopped the slide in money velocity. It's instead being horded by the banks (even Bernanke was turned down for a remortgage). As you can see in the chart above, money velocity has been declining since about 1996 and even with the massive printing (see chart below) the Fed has not been able to stop the slide. In fact the chart below shows the huge spike in dollars printed starting in 2009 and now compare that to the tiny little bounce in the chart above followed by a steep decline into the present. Money velocity is now well below where it was in 1960 into the 1980s. What's a Fed chairperson to do? Jawbone the market higher by telling it interest rates will remain low for a "considerable period of time."

Adjusted Monetary Base, 1960-present, chart courtesy St. Louis Fed

And here's the culprit: the American consumer is saving more and spending less. Up through 2007 it was close, with saving slightly ahead of spending. But since the market crash in 2008 we've seen the consumer go into hiding and saving much more (62%) than they're spending (34%). The Fed has tried as hard as they could to get the consumer to come out and play but he/she just isn't interested.

Saving vs. Spending by the Consumer, chart courtesy creditcards.com

It's not just the U.S. that's trying to deflate their currency (failing at the moment). Japan has been hard at work for decades and now Draghi is saying he wants to deflate the value of the euro. Last night South Korea made comments about deflating the value of their currency so that they can be more competitive with Japan. Their finance minister said the government "will begin introducing new measures to improve its stock market [emphasis mine] and support large exporters that have sizable amounts of exposure to Japan." Ah, the race for the bottom continues unabated...

Why all this discussion about inflation and efforts to devalue currencies? Because in a deflationary environment almost all asset classes decline in value -- stocks, commodities, metals, real estate, you name it, a stronger dollar and declining asset values is the result. Cash is king in a deflationary time; debt is bad (because the value of the debt increases relative to the asset). The stock market has been ignoring these signs for a long time but when ill winds blow and the market starts to get it, look out below.

The U.S. dollar has had a strong reversal from last week's high and this week's candle, so far, has produced a bearish engulfing candlestick reversal pattern with last weeks' big white candle followed by this week's larger red candle. Last Friday's high was only pennies away from its downtrend line from March 2009 – June 2010, which fits as the top of a large sideways triangle since the 2008-2009 highs. The triangle pattern suggests the dollar is going to be range bound between 76 and 87 through the rest of this decade before finally crashing and burning. We might see another pop back up for a test of last week's high but I'd be surprised to see it break its downtrend line. The parabolic rally off the July low could get quickly retraced if it follows the pattern of typical post-parabolic moves.

U.S. Dollar contract, DX, Weekly chart

Gold is also looking good for a reversal of its decline. The downside targets for gold were 1194.40, for two equal legs down from March, and about 1185 where it would reach the bottom of a sideways triangle that's been playing out since the June 2013 low. Monday's low was 1183.30, which is close enough to the lower target to call the decline finished. The triangle pattern calls for a rally back up to the top of it, perhaps back up to about 1325 by the end of January 2015 where it would also back-test its broken uptrend line from 2001-2005. That would then be a setup for a stronger decline into 2015, which fits the deflationary cycle we'd be into at that point.

Gold continuous contract, GC, Weekly chart

Oil dropped down to 86.83 today, 10 cents above the projection at 86.73 for two equal legs down from August 2013. A little lower is its uptrend line from 2011-2012, currently near 85.25. If oil is going to be heading lower sooner rather than later it's first due a bounce to correct a portion of the decline from June before heading strongly lower later this year and into next. But if the larger sideways triangle is the correct pattern we could soon be setting up for a rally leg out of the triangle. In either case oil is due at least a bounce and I think the short side for oil is the riskier side. It would turn more immediate bearish with a weekly close below 85 but at the moment it's a setup for a bounce/rally.

Oil continuous contract, CL, Weekly chart

Thursday will be another quiet day for economic reports. But there will be several speeches by Fed members so the market will be listening carefully for the hidden messages (you know, did the sentence have the correct punctuation, did he/she have a twitch when something was said, that sort of thing). As discussed earlier, the Fed is fighting a losing battle against deflation and there's really very little else they can try. But it won't stop them from trying to jawbone the market higher with promises of "whatever it takes." The big question is when the market will stop believing it but until then we can expect large price swings in reaction to what the Fed heads say or don't say. Today was just one more example.

Economic reports and Summary

Violent price swings at the top of a long-term rally is usually a good sign of instability and instability usually leads to market reversals. This suggests we'll soon some strong down days that see very little relief in the way of bounces. Unfortunately I currently don't see enough evidence in the price pattern to support that expectation. It's simply something to be aware of and don't get complacent about the upside.

At the moment I'm leaning into the bull's camp with an expectation we'll see another rally to new highs in the weeks ahead. I'm betting small in that direction but not willing to carry much if any risk overnight. For Thursday I can see the potential for a reversal of today's rally and at least a minor new low, such as one to test the 200-dma's for the DOW and SPX. But in reality, as of tonight, it's flip a coin for direction and I don't trade coin flips. There are times to trade and more importantly there are times to sit in cash. That's the 3rd position that most traders hate but oftentimes the best position.

Opex is typically a bullish weak and we got a strong reversal on a full moon. As can be seen on my MPTS chart below, important lows were made in April and August on full moons. Play it again Sam?

SPX MPTS daily chart

Trade carefully if you must but realize risk has increased significantly with the volatility. Catch the direction right (each day) and there's good money to be made. Catch it wrong and don't stop out and you'll feel some pain.

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

One Day Pop Or A Reversal?

by James Brown

Click here to email James Brown

Editor's Note:

Stocks soared on Wednesday afternoon following the FOMC minutes. Some were blaming the size of the bounce on oversold conditions. Shorts were rushing to lock in profits. That might be true.

We did see a lot of potential bullish reversals today. They also need to see confirmation. We are reluctant to chase this spike higher tonight. Let's see how the market performs tomorrow.

We are not adding any new trades tonight. I did see a couple of stocks that caught my eye. Dr. Pepper Snapple Group (DPS) has been consistently marching higher for months. Shares are nearing record highs. A rally above $65.50 might be a bullish entry point on DPS. If you like more excitement then consider shares of Twitter Inc. (TWTR). After consolidating sideways the last few weeks shares of TWTR appear to be breaking out. Today's intraday high was $55.67. I'd be tempted to open bullish positions on TWTR if you can handle the volatility.

In Play Updates and Reviews

Best Day of the Year

by James Brown

Click here to email James Brown

Editor's Note:
According to CNBC today was the U.S. stock market's best day of the year. Equities certainly delivered a widespread rally following the FOMC minutes.

Just about everything bounced today. Stocks were languishing until the FOMC minutes hit around 1:30 this afternoon. Investors chose to interpret the minutes to mean the Fed will stay dovish and likely keep rates low for longer than previously expected. That sent stocks soaring and shorts started to panic with lots of short covering. We'll have to wait and see if this is just a one-day event or if there will be any follow through.

IBKR and SNCR were closed this morning. GEOS hit our entry point.

Current Portfolio:

BULLISH Play Updates

None. We do not have any active bullish trades.

BEARISH Play Updates

CBS Corp. - CBS - close: 52.59 change: +0.43

Stop Loss: 54.25
Target(s): To Be Determined
Current Option Gain/Loss: + 3.9%
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

10/08/14: The S&P 500 added +1.7% today but CBS only managed a+0.8% bounce. The 10-dma should still be overhead resistance.

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*

10/02/14 new stop @ 54.25
10/01/14 new stop @ 55.05
09/30/14 new stop @ 55.65
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

Fluidigm Corp. - FLDM - close: 23.32 change: +0.84

Stop Loss: 25.25
Target(s): To Be Determined
Current Option Gain/Loss: +4.2%
Entry on October 01 at $24.35
Listed on September 30, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 290 thousand
New Positions: see below

10/08/14: The short covering in FLDM produced a +3.7% gain. That was enough to outpace all the major indices. We can look for resistance near $24 and near the $25.00 level. I'm not suggesting new positions at this time.

Earlier Comments: September 30, 2014:
FLDM is in the healthcare sector. The company makes microfluidic systems. It's part of the medical laboratories and research industry. The company was founded in 1999.

The website describes the company as "Fluidigm develops, manufactures, and markets life science analytical and preparatory systems for growth markets such as single-cell biology and production genomics. We sell to leading academic institutions, clinical laboratories, and pharmaceutical, biotechnology, and agricultural biotechnology companies worldwide. Our systems are based on proprietary microfluidics and multi-parameter mass cytometry technology, and are designed to significantly simplify experimental workflow, increase throughput, and reduce costs, while providing excellent data quality. Fluidigm products are provided for Research Use Only. Not for use in diagnostic procedures."

The stock looks like a momentum name that has lost its mojo. 2013 was an incredible year for the stock with a rally from the $15 area to almost $40. FLDM continued to push higher in the first quarter of 2014 and almost hit $50. Then someone yanked the rug out from beneath the stock in late March.

If you recall March was rough for high-growth and high-beta names in general. Once FLDM broke down in March the path of least resistance has been down with investors selling every major rally at resistance.

The company had a pretty good earnings report in May. Yet an earnings beat and raised guidance back in May failed to inspire any new buying. Instead shares sold off sharply. Their most recent earnings report in July showed a +57% surge in revenues but that failed to meet Wall Street's estimates. The company is still losing money on a net income basis.

Now FLDM is breaking down under significant support near $25.00. The next major support level is $20.00. The Point & Figure chart is very bearish and forecasting a long-term target near $10.00.

Traders could launch positions now. We are suggesting a trigger to open bearish positions at $24.35. You may want to consider using options. The most recent data listed short interest at 9.5% of the small 26.2 million share float.

- Suggested Positions -

Short FLDM stock @ $24.35

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

Long NOV $25 PUT (FLDM141122P25) entry $2.75*

10/07/14 new stop @ $25.25
10/01/14 triggered @ $24.35
*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

Geospace Technologies - GEOS - close: 29.24 change: -0.28

Stop Loss: 34.05
Target(s): To Be Determined
Current Option Gain/Loss: + 0.4%
Entry on October 08 at $29.35
Listed on October 07, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 273 thousand
New Positions: see below

10/08/14: Before the afternoon bounce today stocks were trending lower. Shares of GEOS hit our suggested entry point at $29.35. The stock was not immune to the market-wide rebound but GEOS failed to make it back into positive territory, which suggest relative weakness.

Earlier Comments: October 7, 2014:
The U.S. is currently experiencing an energy boom with the highest levels of oil and natural gas production in decades. All that production requires a ton of exploration. Using sound waves and seismic technology to find and define trapped oil in the earth's crust has been a growing trend. You might think business would be booming for a company like GEOS but the company seems to be struggling.

Their website defines the company as "Geospace Technologies designs and manufactures scientific instrumentation and equipment used by the global petroleum industry to acquire more seismic data in new and better ways. Geoscientists look for oil and gas with sound. They use our instruments and equipment to collect seismic data that in turn creates images of potential or existing oil-and gas-bearing formations in the earth's subsurface. Seismic is the one of the most reliable and commonly used technologies in the petroleum industry's global quest to find, develop and efficiently produce hydrocarbon resources." GEOS also has a niche business for graphics with their "commercial graphics business segment manufactures and sells thermal imaging solutions and distributes dry thermal film products primarily to an array of graphic display industry sectors (screen print, point-of-sale, signage and textiles)."

GEOS' earnings report in May this year delivered a big earnings miss. You can see the gap down in the chart as traders reacted to it. Their most recent earnings report in August was also a disappointment with GEOS missing Wall Street's top and bottom line estimates. Its quarterly revenues were down -48% from a year ago and their net income was down -78% from a year ago.

Investors have been selling every rally. Bears have caught on too. The most recent data listed short interest at 23% of the very small 12.7 million share float. The point & figure chart is suggesting a long-term $14.00 target.

This is a simple momentum trade where the path of least resistance is down. Tonight we're suggesting a trigger to open bearish positions at $29.35. The high amount of short interest does raise the risk of a short squeeze so you may want to consider the put options.

- Suggested Positions -

Short GEOS stock @ $29.35

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

Long NOV $30 put (GEOS141122P30) entry $2.60*

10/08/14 triggered @ 29.35
*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

Johnson Controls Inc. - JCI - close: 44.22 change: +0.50

Stop Loss: 45.55
Target(s): To Be Determined
Current Option Gain/Loss: + 2.6%
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

10/08/14: Shares of JCI dipped toward their April 2014 low near $43.15 and bounced. Yet the bounce failed to break through resistance at its 10-dma.

I am not suggesting new positions at this time.

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

10/07/14 new stop @ 45.55
09/30/14 new stop @ 46.05
09/23/14 triggered @ $45.40
Option Format: symbol-year-month-day-call-strike

Knowles Corp. - KN - close: 25.25 change: +0.79

Stop Loss: 26.75
Target(s): To Be Determined
Current Option Gain/Loss: +1.9%
Entry on September 30 at $25.75
Listed on September 29, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 1.5 million
New Positions: see below

10/08/14: KN erased a good chunk of our unrealized gains with a +3.2% bounce. Shares dipped toward Monday's low and started to rebound before lunchtime. The $26.00 area should be the first level of resistance. I am not suggesting new positions.

Earlier Comments: September 29, 2014:
Knowles Corp. has been around since 1946 but until recently was part of Dover Corp. (DOV). Knowles (KN) was spun off early this year.

What exactly does KN do? According to a company press release "Knowles Corporation is a market leader and global supplier of advanced micro-acoustic solutions and specialty components serving the mobile communications, consumer electronics, medical technology, military, aerospace and industrial markets. Knowles has a leading position in micro-electro-mechanical systems microphones, speakers and receivers which are used in smartphones, tablets and mobile handsets. Knowles is also a leading manufacturer of transducers used in hearing aids and other medical devices and has a strong position in oscillators (timing devices) and capacitor components which enable various types of communication."

KN has sales of more than $1 billion a year. Yet revenues have been falling. It seems to be getting worse. Back in April they reported a -1% drop in revenues. Their last quarterly report showed a -5.3% decline in revenues.

Technically the stock has been stuck in a $28.00-34.00 trading range for months. That changed in the last few days. KN has broken down below the bottom of the range. Its recent attempt at an oversold bounce already appears to be failing.

Tonight we're suggesting a trigger to open bearish positions at $25.75, which would be a new low. We are not setting an exit target tonight but I will note the point & figure chart is bearish and forecasting an $18 target.

Bear in mind that KN does have slightly elevated short interest at more than 10% of the 85 million share float. You may want to consider put options instead of shorting the stock.

- Suggested Positions -

Short KN stock @ $25.75

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

Long NOV $25 PUT (KN141122P25) entry $1.20*

10/07/14 new stop @ 26.75
09/30/14 triggered @ 25.75
*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

Mobile Mini, Inc. - MINI - close: 36.65 change: +0.97

Stop Loss: 37.30
Target(s): To Be Determined
Current Option Gain/Loss: + 5.5%
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

10/08/14: Hmm... we might be looking at a new higher low in shares of MINI. The stock outperformed the major indices with a +2.7% gain. If this rally continues tomorrow we could see MINI hit our stop at $37.30.

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

09/30/14 new stop @ 37.30
09/25/14 MINI's failure to drop today might be a warning sign.
09/22/14 new stop @ 37.85
09/06/14 new stop @ 40.10
08/28/14 triggered @ 38.80

Raven Industries - RAVN - close: 23.91 change: +0.87

Stop Loss: 25.55
Target(s): To Be Determined
Current Option Gain/Loss: +2.0%
Entry on October 06 at $24.39
Listed on October 04, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 121 thousand
New Positions: see below

10/08/14: RAVN completely erased yesterday's losses with a big bounce on Wednesday. The stock fell to new lows at $22.55 and then soared +6.0% by the closing bell.

Technically today's session has created a bullish engulfing candlestick reversal pattern but this needs to see confirmation. I am not suggesting new positions at this time.

Earlier Comments: October 4, 2014:
RAVN is in the industrial goods sector. It's a small cap that does not get a lot of coverage on Wall Street. The company was founded in Sioux Falls, South Dakota back in 1956. Today they have three main business segments.

Their applied technology segment creates agricultural equipment to boost farm production. Their engineered film business creates high performance plastic films and sheeting. Their Aerostar business uses high-altitude balloons to make "of tethered aerostats, aerospace platforms, Vista radar systems and surveillance solutions, providing complete situational awareness for a multitude of needs." One of the company's more novel products is a line of military decoys that are essentially balloons shaped to look like tanks, jet fighters, and missiles.

Unfortunately business is struggling and the stock has plunged -41% year to date. Falling commodity prices has undermined demand for agricultural equipment. This could be a weak part of the business for the next few quarters. The Aerostar segment is also seeing revenue declines and it's not expected to improve any time soon.

RAVN is actually developing a trend of earnings misses. The company has missed Wall Street's EPS estimates three quarters in a row. They've missed the revenue estimate two of the last three quarters. RAVN management expects the current quarter to see double-digit declines in net income.

The current sell-off has created a sell signal on the point & figure chart that suggests an $18.00 target.

Tonight we are suggesting an immediate entry on Monday morning to open bearish positions. We'll try and limit risk with a stop loss at $26.25. More conservative investors may want to consider a stop closer to $25.00 instead. (NOTE: RAVN does have options but the bid/ask spreads are too wide to trade them.)

- Suggested Positions -

Short RAVN stock @ $24.39

10/07/14 new stop @ 25.55
10/06/14 trade begins. RAVN opens at $24.39

Transocean Ltd. - RIG - close: 31.16 change: +0.23

Stop Loss: 32.55
Target(s): To Be Determined
Current Option Gain/Loss: +18.4%
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

10/08/14: Crude oil sank to new relative lows this morning and that pressured the oil stocks. While RIG did trade below round-number support at $30.00 the selling in RIG did not get very far before it started to bounce. We might be witnessing a short-term bottom in the stock. Readers will want to consider taking profits now. I am not suggesting new positions.

We will inch our stop loss down to $32.55.

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*

10/08/14 new stop @ 32.55
10/02/14 new stop @ 32.75
10/01/14 new stop @ 33.10
09/30/14 new stop @ 33.75
09/27/14 investors may want to take some profits now
09/25/14 new stop @ 34.50
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

SodaStream Intl. Ltd. - SODA - close: 21.12 change: -0.40

Stop Loss: 23.25
Target(s): To Be Determined
Current Option Gain/Loss: +5.3%
Entry on October 07 at $22.30
Listed on October 06, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 897 thousand
New Positions: see below

10/08/14: You know a stock is weak when the market delivers its best day of the year and shares continue to sink. SODA hit new lows and underperformed with a -1.85% decline.

Earlier Comments: October 6, 2014:
SODA is in the consumer goods sector. The company makes in-home beverage machines and the consumable flavor packets and carbonation systems that allow consumers to make their own drinks. The stock IPO'd back in November 2010. They came to market with 5.4 million shares at $20.00 each. SODA's first trade was $24.75 on November 3, 2010. Several months later SODA was testing the $80.00 level. It's been a rocky road for SODA but today the stock is down -41.7% in 2014 and down -64.4% from its 2013 highs near $76.

Why is SODA in decline? The company is facing growing competition. For a long time SODA was a rumored takeover target. Wall Street speculated that companies like Coca-Cola (KO) or PepsiCo (PEP) or Dr. Pepper Snapple Group (DPS) might buy SODA. There was even a rumor that Starbucks (SBUX) might have been interested. None of these rumors panned out.

Now SODA is facing competition from KO who has teamed up with Keurig Green Mountain (GMCR) to make their own in-home soda machine. PEP has teamed up with Bevyz, a European company, who has their own machine, and the two will soon rollout packets with PepsiCo flavors.

The market is worried that against these heavyweights SODA will lose market share. It seems that sales are already disappointing Wall Street. Shares of SODA collapsed in January this year on a big earnings miss. Their most recent earnings report was July 30th and while SODA beat the EPS estimates, management lowed their 2014 guidance.

The path of least resistance is down. We are suggesting a trigger to open bearish positions at $27.35 but I am cautioning investors to consider this a higher-risk, more aggressive trade. There is a still a risk that SODA will be bought. Almost a month ago there was a story overseas that SODA was in talks with a British hedge fund to buy the company near $40 a share. Most recently there have been stories that foreign beer makers like SABMiller and Diageo might be interested in buying the company.

If SODA gets cheap enough someone might try and buy it. Yet that doesn't mean SODA won't sink toward $20.00 a share first. Part of the risk is the rumor mill. If there are any convincing rumors of an impending deal we could see SODA spike higher. The most recent data listed short interest at 31.7% of the small 20.8 million share float. That increases our risk. You may want to buy a put option to limit your risk to the price of the option.

*small positions, higher-risk trade*

- Suggested Positions -

Short SODA stock @ $22.30

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

Long NOV $27.50 PUT (SODA141122P27.5) entry $5.30

10/07/14 new stop @ 23.25
10/07/14 Trigger was $27.35, trade opens on gap down at $22.30
10/07/14 SODA issues an earnings warning before the opening bell
Option Format: symbol-year-month-day-call-strike

The ExOne Company - XONE - close: 17.85 chang6: +0.42

Stop Loss: 20.25
Target(s): To Be Determined
Current Option Gain/Loss: +19.8%
Entry on September 29 at $22.25
Listed on September 27, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 523 thousand
New Positions: see below

10/08/14: XONE tagged a new record low at $16.00 this morning. The stock started to see an oversold bounce that accelerated when the broader market rallied on the Fed minutes.

The $20 level is the nearest resistance. More conservative investors may want to take profits now.

I am not suggesting new positions at this time.

Earlier Comments: September 27, 2014:
Stock prices are supposed to be driven by corporate earnings. It's tough to be bullish when a company continues to miss analyst expectations.

XONE is considered part of the industrial goods sector. They make 3D printers and associated materials. According to a company press release, "ExOne is a global provider of 3D printing machines and printed products, materials and other services to industrial customers. ExOne's business primarily consists of manufacturing and selling 3D printing machines and printing products to specification for its customers using its in-house 3D printing machines"..."ExOne also supplies the associated materials, including consumables and replacement parts, and other services, including training and technical support, necessary for purchasers of its machines to print products."

Unfortunately for the bulls XONE has developed a pattern of missing earnings estimates. They missed estimates back in March, in May, and again in August this year. The most recent report was August 13th. Wall Street expected a loss of 18 cents a share. XONE delivered a loss of 32 cents. Revenues rose +21% to $11.2 million but that failed to meet expectations. XONE's gross profit plunged from $4.2 million a year ago to $2.5 million thanks to crashing gross margins.

Shares of XONE are now at record lows. The company held its IPO back February 2013. The IPO price was $18.00 a share and the first day of trading saw XONE gap open at $23.66 and close up at $26.52. Today XONE is below its opening trade and might be headed for $18.00.

I do consider this an aggressive, higher-risk trade because there is already a lot of short interest. The most recent data listed short interest at 52.8% of the very small 8.7 million share float. That significantly raises the risk of a short squeeze. Therefore traders may want to limit their positions or just choose the put options to limit risk.

Tonight we are suggesting bearish positions on Monday morning (no trigger).

*Higher Risk Trade: consider smaller positions* Suggested Positions -

Short XONE stock @ $22.25

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

Long NOV $20 PUT (XONE141122P20) entry $1.40*

10/07/14 new stop @ 20.25
10/06/14 new stop @ 21.75
10/04/14 new stop @ 22.55
10/01/14 new stop @ 23.05
09/30/14 new stop @ 25.05
09/29/14 trade begins. XONE gaps down at $22.25
*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


Interactive Brokers Group - IBKR - close: 24.83 change: +0.08

Stop Loss: 24.70
Target(s): To Be Determined
Current Option Gain/Loss: - 3.3%
Entry on October 06 at $25.62
Listed on September 27, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 533 thousand
New Positions: see below

10/08/14: The last couple of days were starting to look like a bearish reversal in IBKR. We decided in last night's newsletter to abandon ship and exit this morning. IBKR opened at $24.78, dipped toward its 50-dma and then bounced back to basically unchanged. While the bounce near support is arguably bullish the stock did underperform the broader market in the afternoon bounce.

- Suggested Positions -

Closed IBKR stock @ $25.62 exit $24.78 (-3.3%)

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

2015 Jan $26 call (IBKR150117c26) entry $1.15* exit $0.65** (-43.4%)

10/08/14 planned exit this morning
**option exit price is an estimate since the option did not trade at the time our play was closed.
10/07/14 prepare to exit tomorrow morning
10/06/14 new stop @ $24.70
10/06/14 triggered @ $25.60
IBKR actually gapped up early this morning (not the open) at $25.62
*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


Synchronoss Technologies - SNCR - close: 45.37 change: +1.31

Stop Loss: 42.89
Target(s): To Be Determined
Current Option Gain/Loss: - 4.9%
Entry on October 02 at $46.10
Listed on October 01, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 479 thousand
New Positions: see below

10/08/14: The move in SNCR looks like a potential bullish reversal pattern today. Shares opened lower, dipped toward technical support at the 40-dma and bounced. SNCR actually started to rebound before the rest of the market did. The stock soared to a +2.9% gain. It looks like we may have been too early on hitting the exit button. Our plan was to exit this morning to cut our losses.

- Suggested Positions -

SNCR stock @ $46.10 exit $43.85 (-4.9%)

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

DEC $50 call (SNCR141220c50) entry $2.30* exit $1.35** (-41.3%)

10/08/14 planned exit this morning
**option exit price is an estimate since the option did not trade at the time our play was closed.
10/07/14 prepare to exit tomorrow morning
10/02/14 triggered @ $46.10
*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