Option Investor

Daily Newsletter, Wednesday, 10/15/2014

Table of Contents

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

Market Wrap

Increasing Volatility

by Keene Little

Click here to email Keene Little
The trading volume has been picking up in the past week and the selling has been getting stronger. The market is either in the middle of a crash lower or is showing signs of a capitulation bottom. We'll know which by the end of the week.

Wednesday's Market Stats

The wild ride continues in the markets and it seems to be getting exacerbated by opex this week. Trading volume is spiking to highs we haven't seen for two years. And the price swings are getting wilder, especially when you include the overnight action in the futures, which accounts for some of the activity in overseas markets. SPX dropped 78 points between yesterday's high and today's low before recovering 48 of those points this afternoon (and before giving back 6 of those points into the close). We're getting moves that we haven't seen in the past 3 years so it's clearly a more volatile market than most participants are used to seeing (they certainly got lulled into believing the nice smooth rally would just continue forever, hence all the bullish upgrades at the September high).

Things were not looking good for the bulls by midday today. The DOW was down -460 points (more than 600 points from yesterday's high) and the decline looked like it was accelerating (waterfalling). But someone said "enough!" and started buying and the DOW erased 330 points of its loss just before the close and before dropping back down about 40 points in the final few minutes. With the high volume and v-bottom reversal we're now left to wonder if today marked a turning point.

At today's lows the broader averages, except NDX, were in the red for the year. The afternoon recovery leaves just the DOW Industrials, NYSE, W5000 and the RUT in the red for the year. Each had lost at least -10% by the afternoon lows and that might have helped trigger some buy programs that then started some short covering.

There was some serious trading volume today, as highlighted in the table above. I get my numbers out of yahoo's finance section and the total volume that I typically see is in the low 5000M range. It's been spiking up in the past week and it's indicative of either a market crash in progress or it could be part of a capitulation bottom. The market is certainly oversold but we have to keep in mind that market crashes come out of oversold conditions. So it's risky to go bottom fishing.

Interestingly though, take a look at the down volume vs. up volume and declining issues vs. advancing issues -- there was a little more down volume but a virtual tie between the advancing and declining issues. A lot of today's volume was going into buying, which looks like smart money might be buying inventory from the retail crowd that's puking up their stock in this selloff. I have no other evidence of that happening but I was surprised to see the numbers so close.

A visual perspective of volume is shown on the SPY daily chart below. When we've had volume spikes in the past it's usually been a good indication we had capitulation into a low that was then followed by the resumption of the rally. The caution here is that these capitulation (high-volume) days were in a bull market trend and if we're no longer in a bull market then the stronger selling could be just getting started. A lot of today's volume no doubt came from opex plays, specifically hedging long positions (such as shorting SPY to hedge short puts). These hedging plays are one reason why we often see a reversal of direction at least on the following Monday after opex week.

SPY daily chart with volume

Note on the daily chart of SPY above that price broke the uptrend line from March 2009 - October 2011. The bulls will see a close above price-level support at 185 and at support at its long-term uptrend line, near 186.40 (intraday breaks don't count). The bears will see a break of the uptrend line followed by a bounce back up to it for what is a back-test to be followed by a bearish kiss goodbye with more selling on Thursday. Is the market going to pick Door #1, Door #2 or Door #3 (consolidate and keep both sides guessing)?

I'm going to start tonight's chart review with the DOW's monthly chart because the decline from September has now reached an important level and what happens from here is going to provide us with some longer-term clues. I've shown the monthly chart before and as you can see below, the DOW has rolled over from the trend line along the highs from 2000-2007 and it has dropped out of its large rising wedge pattern for the 3-wave rally off the 2009 low. The break of the rising wedge is what is bearish since rising wedges tend to be completely retraced faster than it took to build them. I show a projection down to about 5600 by mid-2017 (there are other timing cycles that point to mid-2016 as the end of the bear, including retracing the rising wedge in half the time it took to build it).

Dow Industrials, INDU, Monthly chart

The DOW has now dropped back down to a long-term trend line along the highs from 1971-1972-1987, currently near 15860 (today's low was 15855), which is where the decline into the 2002 low found support. It was broken in 2008, became resistance at the April-May 2011 highs, was recovered in March 2013 and then became support when back-tested in August 2013. This is the first time since then that the DOW is back down to the line. From a bullish perspective this is another back-test that will lead to new market highs. I don't believe that will happen because of the breakdown from the rising wedge but it could certainly be good enough for a big bounce.

The weekly chart below shows a shorter-term rising wedge following the December 2013 high, with the bottom of the wedge being the uptrend line from October 2011 - November 2012. Last week's selloff was also a strong break back below the trend line along the highs from 2000-2007, near 16850. You can see the multiple bounces off the longer-term uptrend line from 1971-1972-1987 back in 2013 so it's a trend line that's getting attention, including at today's low.

Dow Industrials, INDU, Weekly chart

On the weekly chart above, which is using the log price scale (generally better to use on a longer-term chart, especially when using trend lines/channels), the uptrend line from October 2011 was broken last week. Switching to the arithmetic price scale on the daily chart below, switching places with the uptrend line from October 2011 is the one from November 2012 - February 2014 (both are near the same 17K level, depending on price scale used). Price oscillated around it (with violent price swings October 1 to October 9) but then let go with a bang on October 9th. It then sliced through price-level support lines and its 200-dma with minor speed bumps along the way. Today it dropped down to the uptrend line from October 2011 when viewed with the arithmetic scale, near 15993. It was broken intraday but the recovery back above it leaves a possible bullish reversal in progress.

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- bullish above 16,330
- bearish below 16,000

The little squiggles in the leg down from October 8th makes it a little difficult to figure out whether it's more likely we'll see lower prices immediately or after a slightly larger bounce/consolidation. It's possible we'll see price consolidate around its uptrend line from October 2011 before dropping lower. It's also possible this afternoon's bounce will be followed by more selling as it stair-steps lower toward the February low at 15340, another 800 points below today's close. This afternoon's rally got the DOW back above a trend line along the lows since September 24th so that's potentially bullish for the short term. If today's low was an important one we might see the start of another rally leg. But if the selling continues tomorrow I see the potential for the DOW to keep working its way lower into the end of the month.

Dow Industrials, INDU, 60-min chart

The daily chart for SPX shows the sharp reversal off today's low, which has left a bullish hammer near price-level support at 1813. But it broke below its uptrend line from March 2009 - October 2011, which clearly defines the bull market we've been in since the 2009 low. A break of that uptrend line is a break of the bull market. Currently near 1880, SPX tried to hold the line on Monday and Tuesday but snapped today. Unless the bulls can get SPX back above 1880 the uptrend line is now resistance. Watch for a back-test and kiss goodbye for a short play for another leg down. The short term pattern suggests a few days of consolidation before heading lower so be careful you don't get caught in the chop.

S&P 500, SPX, Daily chart

Key Levels for SPX:
- bullish above 1906
- bearish below 1813

A slight modification of the wave count is shown with the 60-min chart below, which calls today's low the completion of the 3rd wave down in the decline from September 19th. It could be the completion of an a-b-c pullback as well, which would be a more bullish setup that calls for the resumption of the longer-term rally. While I have trouble believing in that bullish scenario, I also had the same belief at the February low. Fair warning. But if we've got a 1-2-3 down then we're due a 4th wave correction the rest of this week before finishing a 5-wave move down next week, depicted in red, and completing near 1785. Once a 5-wave move down completes, assuming it will, we'll be due a large 2nd wave correction and it could be a high bounce in November, one which would convince the majority that new highs are coming. We'll worry about how that might play out once we know a tradeable bottom is in place.

S&P 500, SPX, 60-min chart

Today NDX dropped below its 200-dma, near 3765, and its uptrend line from November 2012 - June 2013, near 3726, but recovered back above both this afternoon. As with the others, we potentially have the completion of a 3-wave pullback that sets it up for the start of a new rally or we'll get a bounce correction followed by a new low next week to complete a 5-wave move down before starting a larger bounce into November (not to a new high in this case).

Nasdaq-100, NDX, Daily chart

Key Levels for NDX:
- bullish above 3935
- bearish below 3725

Netflix (NFLX) got body slammed after the close today after announcing its earnings, which were good but they added fewer subscribers than had been expected and lowered forward guidance. Growth? Oops. SELL MORTIMER, SELL! The stock is down about $170 (-38%) from today's high near 451. Wow. Not sure what that will do to NDX tomorrow but it's certainly not going to help. NQ dropped about 20 points after the close but is holding about the 50% retracement of this afternoon's rally so it's not too bad.

The semiconductor index, SOX, got crushed last week after Microchip (MCHP) announced they see an industry correction ahead. They were referring to the semiconductor market but as I've mentioned many times before that means the economy as well. Semiconductors are ubiquitous in manufactured products today and a slowdown in this industry means a slowdown in the economy. Before last week the SOX was hanging onto its uptrend line from November 2012 but when it let go of that it let go with a bang. This morning's low at 547.59 is now only 6 points away from a 38% retracement of the rally from November 2012 and at the moment it's looking like that could set up at least a bounce correction.

Semiconductor index, SOX, Weekly chart

Intel reported earnings after the bell yesterday and it didn't support the more cautious warning from MCHP. It got a positive response with a pop up in after-hours but it didn't help its stock today -- it spiked down with the rest of the market and by the end of the day it was down another -2.7%. At the end of August I was looking at its monthly chart, which I've updated below, to show traders why I thought INTC was a short back then. The monthly candle for September was a star doji at resistance and the big red candle, so far, for October confirms a reversal signal. The September 8th high was a slight poke above the trend line along the highs from April 2010 - May 2012 and at the top of a shallow down-channel off its 2002 low. The consolidation since 2002 looks to have completed at the September high and now another leg down to finish a large A-B-C pullback from 2000 should have started, one that should drop INTC below 10 by the time the bear is dead.

Intel Corp, INTC, Monthly chart

The RUT was again relatively strong today, continuing its relative strength that we've seen for the past few days. It did make a minor new low today as it dropped down to its uptrend line from October 2011 - November 2012, near 1040. It also tagged the bottom of its down-channel for its September-October decline and closed its October 9 2013 gap. It was a good setup for a bounce and it was the only index to close in the green today, by a wide margin, finishing up +1%. It would be more bearish below 1038 but for the moment I'm looking for a larger bounce to get started, especially if it can back above the bottom of its down-channel from July, which is where it closed today.

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- bullish above 1080
- bearish below 1038

The weekly chart of the banking index, BKX, shows today's low was a test of price-level support, near 66, and its uptrend line from March 2009 - October 2011. This is a very important trend line since it defines the cyclical bull market it's been in since the 2009 low. It would be surprising to see this line break on the first test on a weekly basis so we'll see what kind of bounce the bulls can put together here. The double top (March and September) with bearish divergence at the price projection at 73.64 (for two equal legs up from 2009) is a very good indication the rally is over. A break of the uptrend line from 2009 is needed to confirm it.

KBW Bank index, BKX, Weekly chart

Last week the TRAN broke down through two uptrend lines, one from June 2013 and the other from March 2009 - October 2011, and following a completed wave count at its 8591 price projection it's looking like confirmation of THE high. As can be seen on its weekly chart below, it has dropped down to its 50-week MA, near 7779, with a short-term double-bottom test so far on Monday and again today near 7700. If the TRAN bounces back up to its broken uptrend line from 2009, near 8200, it would be an opportunity to see if we get a back-test and bearish kiss goodbye.

Transportation Index, TRAN, Weekly chart

I've been hearing more market pundits lately recommending diversifying your investment portfolio by investing in foreign countries. The emerging market is considered a better value by some and one of the recommendations that I've been hearing is to invest in the Emerging Market ETF, EEM. Probably not surprisingly, I have a different opinion about doing that. The weekly chart of EEM is shown below and back at the end of August I was suggesting it was a good setup for a short play as it rallied up to its downtrend line from 2007-2011 and completing a corrective wave count calling for another leg down. It seems to be on its way and should drop well below its October 2011 low at 33.42.

iShares Emerging Markets ETF, EEM, Weekly chart

In a bear market there are very few places to hide. Cash is the best place and then use some of your capital to play the short side when appropriate. There will of course be bounce opportunities to play the long side but we're very likely entering the next phase of the secular bear that requires trading, not buy and hold.

I thought I'd show a monthly view of the U.S. dollar and the euro to show what the big picture looks like for these currencies. So far the U.S. dollar ran into resistance at its downtrend line from March 2009, which from a bearish perspective is the top of a sideways triangle playing out since the April 2008 low. Without a bias about the dollar I could easily argue the dollar is heading for a breakdown. But I think the dollar is going to break out of this triangle pattern but not before pulling back a little. Dollar bulls need to see the dollar above 87 to confirm the more bullish pattern that calls for a rally up to at least 110, if not 120, which is where I think it's heading. In between these two diametrically opposed possibilities is for the sideways triangle to continue for another few years before it breaks down (light red dashed line).

U.S. Dollar contract, DX, Monthly chart

When the Euro topped out in March and May with a double top at its downtrend line from April 2008 it looked like a good setup for a reversal. The rising wedge pattern for the bounce off the July 2012 low broke in July and price has been "pouring" out of the rising wedge since then. The pattern suggests a return trip to the bottom of a down-channel that it's been in since 2008, which will be near 1.07 by the end of the year. This chart suggests the U.S. dollar is going to break out the top of the sideways triangle on its chart, perhaps after a multi-week pullback.

Euro Currency contract, EC, Monthly chart

For the past several weeks I've been showing the weekly chart of gold to keep the moves in perspective. My interpretation of its pattern is that the sideways consolidation since the June 2013 low is a bearish continuation pattern. But the sideways triangle needs one more pop up to the top of it to complete the wave count (a-b-c-d-e) and the bounce off the October 6th low looks like a good start to the expected leg up to the top of the triangle, which is the downtrend line from April 2013 - March 2014 and is currently near 1350. On the daily chart below I'm showing a projection for a 3-wave move up to the top of the triangle by December and assuming we'll get that rally it will then be a very good setup for a short position in gold, which should then drop below 1000 in early 2015.

Gold continuous contract, GC, Daily chart

Oil has now broken its uptrend line from October 2011 and looks to be in the 3rd wave of the decline from August 2013. This calls for a choppy bounce/consolidation for a few months before heading lower early next year. But if the decline from August 2013 is an a-b-c pullback inside a larger sideways consolidation since 2011 then we could see it head back up. A rally back above the broken uptrend line, near 85.25, would be a bullish heads up and then above 95 would point to a move back up to the 110 area. If the selling continues a little longer we could see oil drop to 74.60 where the 3rd wave down would be 162% of the 1st wave down.

Oil continuous contract, CL, Weekly chart

Thursday morning will be busy with economic reports but no big swings are expected that could move the market one way or the other. The Philly Fed report at 10:00 AM is expected to show a slowing economy in the region but that's been evident in other reports.

Economic reports and Summary

The selling has been more intense than we've seen since mid-2011 when the market dropped sharply in July-August. It took a QE announcement to rescue the market but this time around the Fed doesn't really have the ability to do that again. Even they must recognize that their programs haven't worked and the only thing they've accomplished is to acquire a huge balance sheet of debt. If they try another QE announcement the market would likely react positively at first (the Fed has our backs!) but then the realization of how bad things must be would likely cause more problems than it solves.

Recognizing that the Fed is powerless and in fact that they have only created more problems than they've solved is the recognition point I believe will cause the worst of the bear market. Loss of faith in government, in the Fed and finally financial institutions is going to take the props out from under the market. It's a necessary cleansing step so that we can get to the point where we'll have a generational buying opportunity, created from real growth opportunities, not Fed-sponsored credit expansion.

It will be painful to get through it for most people but for us traders there will be plenty of opportunities to make some lemonade out of the lemons thrown at us. But that will only be true if you have cash to use for trading. Don't stay locked up in buy-and-hold and ride the next wave down. It will be years (decades) before you'll see these prices again. All asset classes will suffer as we get into the heart of a deflationary cycle, one which the Fed is powerless to stop, and cash is the only asset to do well in times of deflation. Don't worry about earning so little in cash -- we're entering another period where preservation of capital will be so much more important than return on capital.

NFLX is still down in after-hours but futures have held after dropping right after the close. ES is down about 10 points from where the cash market closed but is holding near the 38% retracement of this afternoon's rally. It's a volatile time so 10-point moves look like peanuts but it just means we need to be careful about the volatility right now, which gets exacerbated during opex. Trade 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

Oversold Energy Stocks

by James Brown

Click here to email James Brown


Marathon Oil - MRO - close: 32.73 change: +0.18

Stop Loss: 31.30
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Entry on October -- at $---.--
Listed on October 15, 2014
Time Frame: Exit prior to earnings on Nov. 3rd
Average Daily Volume = 5.5 million
New Positions: Yes, see below

Company Description

Why We Like It:
Oil and energy stocks have been crushed in the last several weeks thanks to plummeting crude oil prices. Oil recently hit new four-year lows. Investors are worried this collapse in oil prices will impact margins for the producers. We won't know until earnings results come out but right now the sell-off in shares of MRO look extremely overdone. The stock has collapsed from multi-year highs near $41.50 to new 2014 lows near $31 in less than two months. That's a 25% correction (and technically a bear market).

MRO is a global energy company. They explore for, produce, and market oil and natural gas. They are also involved in the oil sands mining in Canada and the big shale oil and gas basins in the United States. The company has operations in Angola, Equatorial Guinea, Ethiopia, Gabon, Kenya, Libya, Norway, the United Kingdom, and the Kurdistan region of Iraq.

Today shares of MRO briefly traded below their 2014 lows set in February this year around $31.60. The double bottom intraday in the $31.35-31.40 area looks like a potential bottom. We want to speculate on an oversold bounce. I do consider this a more aggressive, higher-risk trade so keep position size small.

We are suggesting an entry trigger at $33.15. Plan to exit prior to MRO's earnings report in early November.

Trigger @ $33.15

- Suggested Positions -

Buy MRO stock @ (trigger)

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

Buy the NOV $33 call (MRO141122c33) current ask $1.48

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

Annotated Chart:

Weekly Chart:

In Play Updates and Reviews

Stocks Pare Their Losses

by James Brown

Click here to email James Brown

Editor's Note:
It was another volatile day for stocks but market watchers were commenting on the big intraday bounce from Wednesday's lows.

NDLS and JEC both hit our entry triggers today.

Current Portfolio:

BULLISH Play Updates

Noodles & Co. - NDLS - close: $21.71 change: +0.78

Stop Loss: 19.90
Target(s): To Be Determined
Current Option Gain/Loss: +2.4%
Entry on October 15 at $21.21
Listed on October 14, 2014
Time Frame: 3 to 5 weeks
Average Daily Volume = 444 thousand
New Positions: see below

10/15/14: Our new play on NDLS is off to a strong start. Shares initially gapped down but quickly recovered. Our trigger was hit at $21.21. NDLS outperformed the major indices with a +3.7% gain.

Earlier Comments: October 14, 2014:
NDLS stock has had a rough start. The company held its IPO in mid 2013. The initial surge send shares of NDLS from the low $30s to over $50. Once the newness left the stock was left to churn water.

NDLS spent most of 2013 struggling and failing to breakout past $50.00 again. The last twelve months have been bearish with a trend of lower highs and lower lows. The company has disappointing results to blame for the sell-off in its stock price.

Currently NDLS has 410 locations in 31 states in the U.S. Management has suggested their long-term goal is 2,500 restaurants. That could be a challenge considering the recent sales slowdown. Their most recent earnings report was in August. You can see the big drop on the daily chart. NDLS missed estimates and lowered its 2014 guidance. Investors were not too keen on falling same-store sales growth either.

Bears have been right on this stock for months. The biggest critique is that shares of NDLS are expensive at over 50 times the trailing 12 month earnings. While the bears may be right, NDLS is expensive, the stock's bearish momentum has stalled.

It is possible that all the bad news is priced in after a -42.5% drop this year. NDLS has seen a higher low and more recently a bullish breakout above its simple 50-dma. You'll also notice that NDLS has completely ignored the market's recent weakness. The major indices have been crashing but NDLS has been slowly marching higher.

If this strength continues NDLS could see some short covering. The most recent data listed short interest at 12.6% of the very small 21.3 million share float. The point & figure chart is already bullish and suggesting a long-term target at $27.00.

Tonight we are suggesting small positions if NDLS can trade at $21.21 or higher. If triggered I'm suggesting a target in the $24.50-25.00 zone but we will plan on exiting prior to the company's earnings report in mid November.

- Suggested Positions -

Long NDLS stock @ $21.21

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

Long NOV $22.50 call (NDLS141122c22.5) entry $1.20*

10/15/14 triggered @ 21.21
*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

CBS Corp. - CBS - close: 50.75 change: +0.82

Stop Loss: 51.05
Target(s): To Be Determined
Current Option Gain/Loss: + 7.3%
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

10/15/14: Shares of CBS were upgraded to a "buy" this morning. The stock bounced near Monday's low. This is starting to look like a short-term bottom for the stock.

The intraday high today was $51.03. Our stop is at $51.05. Investors may want to take profits now. Odds are good we could get stopped out tomorrow.

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*

10/13/14 new stop @ 51.05
10/11/14 new stop @ 52.55
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

Geospace Technologies - GEOS - close: 29.70 change: +1.82

Stop Loss: 30.05
Target(s): To Be Determined
Current Option Gain/Loss: - 1.2%
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

10/15/14: Ouch! GEOS saw a really big bounce today. The stock did not follow the market's major indices to new lows this morning. Instead GEOS spiked higher. The stock is now testing round-number resistance at $30.00. The intraday high was $30.04. Our stop is at $30.05. Odds are good we could get stopped out tomorrow.

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*

10/13/14 new stop @ 30.05
10/11/14 new stop @ 30.55
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: 39.90 change: -0.44

Stop Loss: 40.65
Target(s): To Be Determined
Current Option Gain/Loss: +12.1%
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

10/15/14: JCI continues to show relative weakness. The stock hit new 2014 lows before paring its losses. Yesterday afternoon JCI found resistance near $40.60. We'll move our stop down to $40.65.

Investors may want to take profits now. I'm not suggesting new positions.

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

10/15/14 new stop @ 40.65
10/13/14 new stop @ 41.25, traders may want to take profits near $40.00
10/11/14 new stop @ 43.25
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

Jacobs Engineering Group - JEC - close: 46.72 change: +0.02

Stop Loss: 48.25
Target(s): To Be Determined
Current Option Gain/Loss: - 1.8%
Entry on October 15 at $45.88
Listed on October 13, 2014
Time Frame: 3 to 6 weeks
Average Daily Volume = 1.0 million
New Positions: , see below

10/15/14: We were planning to launch bearish positions at $46.15 but JEC gapped open lower at $45.88 thanks to the widespread market weakness this morning. JEC almost hit $45.00 before bouncing. The rebound stalled at its 10-dma. I would wait for a new drop under $46.00 before initiating new positions.

Earlier Comments: October 13, 2014:
JEC is part of the services sector. Although you might consider it an industrial considering what they do. JEC provides technical services and construction services around the world. They were founded in 1947 and now have about 200 offices around the world.

Unfortunately for JEC most of the world is seeing an economic slowdown. That is pressuring sales. JEC is developing a trend of missing earnings and has missed Wall Street's EPS estimate four quarters in a row.

The stock started to see an oversold bounce in early October but that bounce has stalled under its 10-dma and the $48.00 area. Now JEC is down -25.8% this year and poised to continue its underperformance.

I do want to note that the timing of this trade might be a little aggressive. Momentum is clearly lower but the major market indices are starting to look a little oversold and could bounce. Traders may want to start this trade with small positions to limit their risk.

We are suggesting a trigger to open bearish positions on JEC at $46.15.

*consider small positions to limit risk*

- Suggested Positions -

Short JEC stock @ $45.88

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

Long NOV $47.50 PUT (JEC141122P47.50) entry $2.65*

10/15/14 triggered on gap down at $45.88, suggested entry was $46.15
*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

Knowles Corp. - KN - close: 19.10 change: -1.16

Stop Loss: 20.65
Target(s): To Be Determined
Current Option Gain/Loss: +25.8%
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

10/15/14: The sell-off in KN continued today with a -5.7% decline and new record lows. We will adjust our stop loss down to $20.65.

I'm 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*

10/15/14 new stop @ 20.65
10/13/14 new stop @ 21.75
10/11/14 new stop @ 25.05
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

Transocean Ltd. - RIG - close: 29.44 change: +0.47

Stop Loss: 30.35
Target(s): To Be Determined
Current Option Gain/Loss: +22.9%
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

10/15/14: Energy stocks were some of the market's best performers today. A large number of the energy-related stocks delivered a big bounce from their morning lows. RIG's bounce was not that big but shares did produce a bullish engulfing candlestick reversal pattern. Of course these patterns need to see confirmation. RIG still has overhead resistance near $30.00 and its simple 10-dma.

I am inching our stop loss down to $30.35.

NOTE: It was our plan to exit the October puts this morning. The gap down in shares of RIG was a bonus.

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) -

OCT $35 PUT (RIG141018P35) entry $0.27* exit $6.57 (+2,333.3%)

10/15/14 new stop @ 30.35
10/15/14 planned exit for the October puts
10/14/14 prepare to exit our option trade tomorrow morning
10/13/14 new stop @ 30.55
10/11/14 new stop @ 31.05
10/09/14 new stop @ 32.25
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

Rock-Tenn Co. - RKT - close: 45.14 change: +1.12

Stop Loss: 46.10
Target(s): To Be Determined
Current Option Gain/Loss: -0.9%
Entry on October 13 at $44.75
Listed on October 11, 2014
Time Frame: Exit prior to earnings on November 3rd
Average Daily Volume = 809 thousand
New Positions: see below

10/15/14: Hmm... RKT was showing a bit too much relative strength today. Shares opened lower and then rebounded to close up on the session. The bounce was strong enough to lift RKT +2.5%. More importantly RKT has now created a bullish engulfing candlestick reversal pattern. We saw a lot of these reversals today. They do need to see confirmation.

Monday's intraday high was $46.07. We will move our stop loss down to $46.10.

Earlier Comments: October 11, 2014:
RKT is in the consumer goods sector. You probably see their products every day since RKT makes corrugated and consumer packaging. The company is based in Georgia but they operate in the U.S., Canada, Mexico, Chile, Argentina and China. Unfortunately, unlike the U.S., most of those countries are seeing their economies slow down.

RKT's earnings performances have been all over the map this past year with big swings between beats and misses. Investors have been confused and the stock has been consolidating sideways for over a year. It looks like the end of the consolidation is at hand with a breakdown to new 52-week lows.

The market's recent weakness is pushing RKT out of a massive bearish wedge pattern (seen on the weekly chart below). Investors could launch bearish positions now. We're suggesting a trigger to launch positions at $44.75 instead just in case the $45.00 level is support.

We are not setting an exit target tonight but the point & figure chart is bearish with a quadruple-bottom breakdown sell signal that is currently forecasting at $40.00 target.

- Suggested Positions -

Short RKT stock @ $44.75

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

Long NOV $45 PUT (RKT141122P45) entry $2.35*

10/15/14 new stop @ 46.10, caution, RKT has produced a potential bullish reversal pattern
10/14/14 new stop @ 46.55
10/13/14 triggered @ 44.75
*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

SodaStream Intl. Ltd. - SODA - close: 21.21 change: +0.26

Stop Loss: 21.75
Target(s): To Be Determined
Current Option Gain/Loss: +4.9%
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

10/15/14: SODA managed its second up day in a row with a +1.2% bounce. If this rebound continues there is a good chance we'll see SODA hit our stop loss at $21.75.

Traders may want to take profits early now. I am not suggesting new positions at this time.

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

10/13/14 new stop @ 21.75
10/11/14 new stop @ 22.75
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