Option Investor

Daily Newsletter, Thursday, 10/30/2014

Table of Contents

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

Market Wrap

What Happens Now

by Thomas Hughes

Click here to email Thomas Hughes
The FOMC ended QE and the market moved higher.


The FOMC ended QE and the market moved higher. It took a moment of pause early in the day for the bulls to get it togehter but then they were able to timidly extended the rally. The strongest move was in the Dow Jones Industrial Average, due largely to Visa, but nearly all the indices were able to claw their above yesterday's close.

Market Statistics

Asian and European markets were mixed today. Both regions closed largely in the green with isolated areas of weakness following the Fed decision yesterday. Our own indices were indicated lower this morning as well. Traders were pondering the meaning of the hawkish changes to the Fed statement and waiting for the release of 3rd quarter GDP numbers.

The SPX and the Dow Jones Industrials were both indicated to open lower by nearly a full percent ahead of the GDP release. Then, a combination of strong economic data and positive earnings helped to halve the loss and more going into the open. By 9:30AM the indices were indicated to open flat. After the opening bell the market was a little volatile for the first half hour. Trading wasn't out of control but there was a quick test of resistance and support that resulted in a slow march higher into the early afternoon.

Economic Calendar

The Economy

The first estimate for 3rd quarter GDP was the focal point for the market today. The estimate is 3.5%, stronger than the 3.1% projected by analysts. This is the second quarter of strong growth since the first quarter of this year and the second quarter of growth above expectations. The economic activity leading to this number is likely a prime cause for the shift in stance taken by the Fed.

There is some speculation that the strong number this quarter may be taking away from 4th quarter GDP but there is equal talk of acceleration into the end of the year. I am in the acceleration camp due largely to improvements in labor. The price index, a measure of prices paid by US residents, only increased by 1.3%, less than the 2.0% expected and a sign low inflation. The report lists personal consumption expenditures, exports, fixed investments and government spending as the primary drivers of GDP growth this time around.

The jobless data remains steady at long term lows. Initial claims for unemployment rose, but by only 3,000, from an upward revision of 1,000. This weeks headline is 287,000, the third week of gains, but remains below 300,000 and in line with long term trends. The four week moving average fell to a new low this week. On an not adjusted basis claims rose by 5.5%, slightly ahead of the expected 4.5%. Even with the slight rise over the past few weeks claims are still at long term lows and holding steady. These levels are contributing to the decline in long term unemployment and should do so as long they continue to decline and/or hold steady. On a state by state basis CA and MI led with gains in claims of 2,754 and 1,609. Pennsylvania and New York led with declines of -3.459 and -2,965. Still no mention of layoffs, or hiring, due to the oil, fracking or shale business.

Continuing claims also rose slightly this week, reported at 2.384 million, a gain of 29,000. Last week's number was revised higher by 4,000 for a net gain of 33,000. The four week moving average fell however, reflecting the low set last week dating back to January of 2001. Continuing claims is still trending lower and in line with an improving labor market.

Total claims for unemployment fell by 12,366. This is another new low in this figure and a continuation of the downtrend in total claims that has been going on all year. Based on this, and the initial and continuing claims figures, I am expecting to see steady to good numbers next week when the NFP and unemployment figures are released. The Fed statement may in fact be foreshadowing it. The new tone, especially the parts about slack in the labor force, are especially leading.

The Oil Index

The Fed move helped to strengthen the dollar and put some pressure on commodities. Oil prices fell about 1% during the day but were able to hold steady around $81. Afternoon trading lifted prices off of the lows but the close was still down from yesterday. The direction oil prices will take in the future is still in question however because several factors are in play. One of the reasons why prices are low, high production levels, may be alleviating as several oil companies have issued lowered production guidance for next year. At the same time there were several headlines detailing the financial pain being felt among oil producing nations. Both are reasons to suspect prices will go up but when is the question. The combination may not be enough to lift prices now, but they are enough to think twice about how low prices may go.

The Oil Index fell today, losing about a half percent, but was able to regain most of the loss before the close of trading. A mix of earnings and the hazy outlook for oil prices contributed to today's action. Earnings from the sector have so far not been as bad as some may have feared but low oil prices are hurting projections for next quarter and next year. The index is now trading below below resistance with bullish indicators but isn't looking very strong. Additionally, I am still anticipating a retest of support down to a possible range between 1,350-1,400.

Earnings from Conoco Phillips were better than expected on increased production, particularly in the Eagle Ford and Bakken Shale. The integrated oil company reported revenue and earnings that beat estimates along with reaffirming the companies projections for growth in 2015. The downside is that revenue and earnings are both down from last year due to lower realized prices for oil. Shares of the stock opened about a half percent lower but quickly regained the loss and moved into the green. By the end of the day COP Was up about 0.75% with rising indicators. Today's move was halted at $72.50, coincident with a long term support/resistance line and the short term moving average.

The Gold Index

Gold fell 2% after the Fed announcement. The end of QE is helping to boost dollar value and pressuring gold prices. Gold lost over $20 today and dipped briefly below $1200 where some buyers stepped in, enough to keep prices just at $1200. The approaching end of QE has pressured gold to the long term low, a move that has been developing for a long time. Now that it is here where can gold go now?

The Gold Index fell today as well. Losing a little of -6.0%, dropping down to $66.59 and a full 100% retracement of the 2008-2011 bull market in gold. I have to say I almost can't believe it actually happened. I have been watching this trade for a couple of years with this retracement as the long term target and I was beginning to think it wasn't going to happen. In any event it did, today's action brought the index down exactly to the 100% retracement level where it proceeded to bounce. The bounce was about as light as it could be but it was there before the index moved lower. The move however is looking very weak and extended and could possibly be a capitulation in the market. The MACD has just crossed below the zero line and stochastic is pointing lower with significant divergences in both. Current support is along the retracement level at $66.59.

GoldCorp reported earnings today and did not inspire much confidence. The company reported earnings that are about half what the street was expecting, due in part to low gold prices but also to one-off items that occurred during the quarter. Additional factors were a surprise increase in all-in costs that are more than 10% above the 1st half average. On the positive side production levels were up from last year despite some problems at currently operational mines. The street was expecting $0.18, the actual was $0.09. Shares of the stock fell more than 12% to a 5 year low.

In The News, Story Stocks and Earnings

Visa reported earnings yesterday after the bell and beat the expectations. The credit card and payment processor reported earnings of $2.18 per share, about ten cents above estimates, with a comparably small beat on the revenue side as well. The really good news was the outlook for earnings which resulted in several upgrades today. Analysts see Visa as well positioned to benefit from the shift to electronic payment from traditional forms and the growing amount of cross-border transactions. Shares of the stock jumped in the after hours and carried that momentum into today's trading, climbing more than 10%. Today's move carried the stock above resistance at the all-time high set earlier this year. The indicators were already bullish and are now showing some strength. MACD has jumped significantly and stochastic is crossing the upper signal line. $235 will be an import price level for this stock into the future and could provide support on a pull back.

Starbucks reported earnings after the bell and will likely affect trading tomorrow. Probably not as much as Visa did today though. The coffee maker extraordinaire reported earnings inline with expectations on a slight shortfall in revenue. One thing hurting profits was a rise in costs that is expected to hurt profits going into the next quarter and year. Along with the miss the company lowered guidance and sent shares of the stock sinking in the after hours trade.

The Indices

The morning started off at a low that we never saw again. This move was led by the Dow Jones Industrial Average and in turn Visa, which is credited for at least 150 points of the Dow move today. The blue chip index gained over 220 points, 1.30%, and broke above potential resistance. Today's move brings the index back above 17,000 but is still short of the current all time high. Resistance broken today is consistent with the all-time set in July which I think is fairly significant. Near term momentum is still to the upside with next target for resistance at the current all time high about 75 points above today's closing price. I am still expecting some kind of a retest of support but it is looking less and less like it will be a major event if and when it does come.

The S&P 500 made the next largest gain today, climbing 0.62%. The broad market moved up by just over 12 points at the close after briefly touching resistance at 2000. Today's move also carried the index above the July all-time highs and was able to stay there. The indicators are bullish and gaining strength although I still see a possibility for a retest of support in the near future. That being said near term momentum is to the upside, in line with the long term trend and economic data, and heading higher. Potential resistance is just above today's close at 2000 and needs to be broken to continue the rally. Support on a pullback will be found around 1950 and 1900.

The NASDAQ Composite made the smallest gains today, only 0.37%. The tech heavy index gained about 17 points and is looking strong into the near term. When I first looked at this chart today I thought to myself, something is happening here and it looks bullish to me. The index is gaining momentum with about 40 points of room before hitting resistance. Earnings could provide the catalyst to take it there. Price action is bullish but has been trading sideways over the past three days, possibly consolidating around the Fed decision. Earnings released after the bell today were positive and could help lift the index tomorrow. Resistance is the current all-time high and could prove to be strong so I would like to see it move above this level. If not broken a pull back could find support around 4,500 or just below that along the long term trend line.

The Dow Jones Transportation Average did not make a gain today. The trannies lost nearly a full percent today as they retreat from the new all time high set earlier this week. Today's move shows there is some resistance to new highs but based on the extent of the move over the last three weeks could simply be profit taking. Momentum is still bullish and stochastic is indicating strength although both are confirming the peak. 8,500 looks good for support at this time. The long term trend is up and I think it is still intact, a pull back to support would be a potential entry.

The Fed gave the all-clear but I think maybe we already knew that. Economic data has been steadily improving and today's GDP confirmed it. The market responded by moving higher but doing so with a couple of quick tag-backs to support.

Now that QE is over market participants can actually begin to look at the economy and earnings. The economy is growing and by all accounts gaining momentum. We'll get a real good look at how the 4th quarter is shaping up next week with the first round of monthly data. If there is reason to be think things are changing we'll find out next week. So far earnings are pretty good on average and the projections for next quarter are shaping up OK as well.

Until then, remember the trend!

Thomas Hughes

New Plays

Relative Strength In Healthcare

by James Brown

Click here to email James Brown


Natus Medical Inc. - BABY - close: 33.87 change: +0.23

Stop Loss: 32.45
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Entry on October -- at $---.--
Listed on October 30, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 282 thousand
New Positions: Yes, see below

Company Description

Why We Like It:
BABY is in the healthcare sector. The company makes medical equipment to treat newborns. The company's online profile describes NATUS as "a leading manufacturer of medical devices and software and a service provider for the Newborn Care, Neurology, Sleep, Hearing and Balance markets. Natus products are used in hospitals, clinics and laboratories worldwide. Our mission is to improve outcomes and patient care in target markets through innovative screening, diagnostic and treatment solutions."

If you like companies with consistent growth then BABY might work for you. The company has beaten Wall Street's top and bottom line estimates for the last five quarters in a row!

BABY's most recent earnings report was October 22nd. Wall Street was looking for a profit of $0.31 a share on revenues of $87.7 million. BABY delivered $0.33 with revenues rising more than 5% to $89.9 million.

Management then raised their guidance. They expect EPS in-line with analysts' estimates but they offered slightly bullish guidance on Q4 revenues, which should come in above consensus estimates.

Jim Hawkins is BABY's President and CEO. Mr. Hawkins commented on his company's third quarter results saying:

"I am very pleased with our third quarter results as we achieved record revenues and earnings. Both revenue and earnings exceeded the top end of guidance. I am most satisfied with our 63% gross profit margin as well as recording over 5% organic revenue growth. Consistent organic revenue growth and improving margins have been major goals for Natus in 2014 and our results demonstrate significant progress to the achievement of these goals.

I remain excited about our Peloton Hearing Screening Service business as we added 17 hospitals during the quarter and we ended the quarter with 39 hospitals under contact. Including contracts already signed during October, we have exceeded our 2014 goal of 40 hospitals under contract by the end of the year."

Technically shares have been showing relative strength and held up very well during the market's correction between mid-September through mid-October. The stock's recent performance has pushed shares to new all-time highs. Today's intraday high was $34.24. I am suggesting a trigger to open bullish positions at $34.35.

- Suggested Positions -

Buy BABY stock @ $34.35

Annotated Chart:

Weekly Chart:

In Play Updates and Reviews

Small Caps Lead The Rally

by James Brown

Click here to email James Brown

Editor's Note:
The small cap Russell 2000 index managed to outperform the big cap indices in today's rally.

BURL hit our bullish entry point. DOW and MG were closed this morning.

Current Portfolio:

BULLISH Play Updates

Burlington Stores, Inc. - BURL - close: 41.57 change: +1.12

Stop Loss: 38.85
Target(s): To Be Determined
Current Option Gain/Loss: + 1.3%
Entry on October 30 at $41.05
Listed on October 27, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 663 thousand
New Positions: see below

10/30/14: BURL is back in rally mode. Shares outperformed the market's major indices with a +2.76% gain. The stock broke out past its 2014 highs and hit our suggested entry point at $41.05.

Earlier Comments: October 27, 2014:
Christmas is less than 60 days away. This year retail spending is expected to surge. The National Retail Federation is forecasting sales during the holiday shopping season to rise +4.1%. Analyst firm Deloitte LLP is expecting a +4.5% improvement. Last year we only saw +2.8% growth and the 10-year average is +2.9%.

If we take into account the positive impact low gasoline prices will have then the estimates above might be too low. Fuel prices are down nearly 20% from their early 2014 highs. That is a huge boost for consumer spending. Oil looks like it will continue to sink so the trend should continue.

The off-price retailers have been outperforming their regular price peers. BURL is part of the off-price group. According to their company website, "Burlington is a national off price retailer offering style for less for the entire family and the home with up to 65 percent off department store prices every day. Departments include ladies' dresses, suits and sportswear, juniors, accessories, menswear, family footwear, children's clothing, furniture and accessories for baby at Baby Depot, home décor and gifts, along with the largest selection of coats in the nation for the entire family. Burlington has 520 stores in 44 States and Puerto Rico."

Credit Suisse recently noted that BURL has delivered three years in a row of strong same-store sales growth. They did it again when the company reported earnings in early September. BURL said their same-store sales grew +4.7% in their second quarter, compared to estimates for +2-3% growth. Management also noted that their gross margins improved by 50 basis points to 38.2%.

Wall Street was expecting a loss of 8 cents per share on revenues of $1.03 billion. BURL delivered a loss of only one cent and revenues were up +8.2% to $1.05 billion. It was a big improvement from a loss of 19 cents a year ago. More importantly management raised their 2015 guidance for both their earnings and revenue estimates.

The bears will argue that BURL is expensive. It's hard to argue with them since BURL currently sports a P/E near 58. However, investors continue to buy the stock and now shares are poised for another bullish breakout. New highs could spark some short covering. The most recent data listed short interest at 13% of the very small 29.3 million share float.

Tonight we are suggesting a trigger to open bullish positions at $41.05.

- Suggested Positions -

Long BURL stock @ $41.05

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

Long DEC $40 call (BURL141220c40) entry $3.10

10/30/14 triggered @ 41.05
Option Format: symbol-year-month-day-call-strike

INSYS Therapeutics, Inc. - INSY - close: 41.99 change: +0.29

Stop Loss: 37.75
Target(s): To Be Determined
Current Option Gain/Loss: +4.3%
Entry on October 21 at $40.25
Listed on October 20, 2014
Time Frame: Probably exit prior to earnings on Nov. 11th
Average Daily Volume = 540 thousand
New Positions: see below

10/30/14: Traders bought the dip in INSY today and shares ended the session with a +0.7% gain.

NOTE: Earnings are coming up on November 11th. We will likely exit prior to the announcement.

Earlier Comments: October 20, 2014
INSY is a short squeeze candidate. The company is part of the healthcare sector, more specifically biotechnology. They currently market two drugs. One is their Subsys, which is a sublingual fentanyl spray to quickly treat pain for cancer patients. Thus far the product seems to be off to a strong start. INSY also markets a generic Dronabinol product to help treat chemotherapy induced nausea as well as anorexia related to patients with AIDS.

INSY is also developing treatments with cannabidiol, which has made headlines in the past. Cannabidiol is a component of marijuana that does not provide patients with a high. INSY has been working with cannabidiol to develop a treatment for Dravet Syndrome, a form of childhood epilepsy.

INSYS was recently granted orphan drug designation for its cannabidiol treatment for glioblastoma multiforme, which is the most aggressive version of malignant brain tumors in humans. Yet this good news has been offset by bad news that the FDA rejected the company's application for a new Dronabinol oral solution. The feds claim INSY submitted an incomplete study plan on the treatment's safety.

There is also the spectre of a federal investigation. Shares of INSY collapsed back in May after it was unveiled that one doctor in Michigan was fraudulently prescribing hundreds of INSY's Subsys painkiller treatment. This has sparked an investigation into INSY' marketing practices.

Technically shares of INSYS have been trending higher with a pattern of higher highs and higher lows. The most recent low happened to be on the day investors reacted to the FDA rejection on its dronabinol oral treatment. INSY was down about -10% intraday and then rebounded to a huge gain (Oct. 15th).

If this rally continues INSY could see a short squeeze. The most recent data listed short interest at 68.6% of the extremely small 10.19 million share float.

Tonight we are suggesting a trigger to open bullish positions at $40.25. More aggressive traders might want to consider a trigger just above $39.50 instead.

Please note that I am labeling this a higher-risk, more aggressive trade. Biotechs are already dangerous do to headline risk. INSY could be volatile with all the short interest.

*Small positions to limit risk* - Suggested Positions -

Long INSY stock @ $40.25

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

Long NOV $45 call (INSY141122c45) entry $1.60*

10/29/14 New analyst upgrade and price target send INSY higher
10/28/14 new stop @ 37.75, Investors will want to consider an early exit now!
10/23/14 new stop @ 37.45
10/23/14 INSY is not cooperating. Investors may want to exit early now.
10/21/14 triggered @ 40.25
Option Format: symbol-year-month-day-call-strike

Lowe's Companies - LOW - close: 56.27 change: +0.46

Stop Loss: 53.65
Target(s): To Be Determined
Current Option Gain/Loss: +2.2%
Entry on October 23 at $55.05
Listed on October 21, 2014
Time Frame: Exit PRIOR to earnings on November 19th
Average Daily Volume = 5.5 million
New Positions: see below

10/30/14: LOW ended the session at a new high thanks to an upgrade from Goldman Sachs. LOW is now up 9 out of the last 11 sessions. I am not suggesting new positions at this time.

Earlier Comments: October 21, 2014:
LOW is in the services sector. They run the second biggest chain of home improvement stores in the country. Their 1,837 stores offer more than 200 million square feet of retail space through the U.S., Canada, and Mexico.

The company's most recent earnings report was back in August. LOW beat Wall Street's top and bottom line estimates. Revenues were up +18.2% from a year ago. Gross margins saw some improvement. Same-store sales were up +4.4%, which was impressive. Management provided a small reduction in their full year revenue guidance but this failed to have much impact on the stock. Shares of LOW gapped down on its earnings news and investors bought the dip at support near $50.00.

Since this August earnings report we've seen homebuilder confidence hit nine-year highs while shares of LOW were hitting all-time highs in the $54-55 zone. Investors keep track of the housing market because LOW's business seems to rise and fall with real estate.

The stock market's recent volatility drug LOW back to support near $50.00 and once again traders bought the dip. There was a recent analyst note that was cautious on LOW and its rival Home Depot. The analyst noted that a slow down in sales for building materials would suggest the slowdown should hit retailers too. We may have to wait for LOW's earnings report to see if the analyst is right. In the mean time shares of LOW just ended at an all-time closing high.

If you believe the U.S. economy will continue to improve and the labor market will continue to see job growth then home improvement retailers like LOW and HD should see steady improvement as well.

We are not setting an exit target tonight but I will point out that the point & figure chart is bullish and forecasting a long-term $75.00 target for LOW.

Use a trigger at $55.05 to open bullish positions. We will most likely exit ahead of LOW's earnings report on November 19th.

- Suggested Positions -

Long LOW stock @ $55.05

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

Long NOV $55 call (LOW141122c55) entry $1.45*

10/23/14 triggered @ 55.05
Option Format: symbol-year-month-day-call-strike

The Pantry, Inc. - PTRY - close: 25.94 change: +0.41

Stop Loss: 23.80
Target(s): To Be Determined
Current Option Gain/Loss: +5.9%
Entry on October 17 at $24.50
Listed on October 15, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 190 thousand
New Positions: see below

10/30/14: PTRY continues to show relative strength and added another +1.6% today. We will raise the stop loss to $23.80.

I am not suggesting new positions at this time.

Earlier Comments: October 16, 2014:
This is a simple relative strength trade. PTRY has been almost bullet proof against the market's recent weakness. Instead of following the major indices lower PTRY has soared to new four-year highs.

The company website says, "Headquartered in Cary, North Carolina, The Pantry, Inc. is a leading independently operated convenience store chain in the southeastern United States and one of the largest independently operated convenience store chains in the country. As of September 25, 2014, the Company operated 1,518 stores in thirteen states under select banners, including Kangaroo Express, its primary operating banner. The Pantry's stores offer a broad selection of merchandise, as well as fuel and other ancillary services designed to appeal to the convenience needs of its customers."

PTRY is a small cap stock that has been dead money for years. That seemed to change with their last earnings report. When PTRY delivered earnings on July 30th they beat estimates on both the top and bottom line. The stock soared and broke out past key resistance. Several analysts have raised their earnings estimates on PTRY since that report.

Shares are currently hovering just under short-term resistance at $24.40. We are suggesting a trigger to launch small bullish positions at $24.50. I am suggesting small positions to limit our risk. Looking at a long-term weekly chart of PTRY you could argue that the $25.00 level might be resistance. We will try and limit our risk with a stop loss at $22.90, just under today's low.

*small positions to limit risk* Suggested Positions -

Long PTRY stock @ $24.50

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

Long DEC $25 call (PTRY141220c25) entry $1.60*

10/30/14 new stop @ 23.80
10/23/14 new stop @ 23.30
10/17/14 triggered @ $24.50
Option Format: symbol-year-month-day-call-strike

Sonic Corp. - SONC - close: 24.89 change: -0.30

Stop Loss: 23.75
Target(s): To Be Determined
Current Option Gain/Loss: -1.0%
Entry on October 29 at $25.15
Listed on October 25, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 738 thousand
New Positions: see below

10/30/14: SONC briefly tagged a new 52-week high and then reversed. If this profit taking continues the nearest support could be the simple 10-dma near $24.40.

Earlier Comments: October 25, 2014:
"Service at the speed of sound." That was SONIC's original slogan after the company was rebranded from a chain of Top Hat root beer stands decades ago. Today the company has over 3,500 locations in 44 states. That makes SONIC the largest chain of drive-in restaurants in the United States.

Shares of SONC saw big gains in 2013. The rally continues in 2014 but it has been a much more volatile year for the share price. Yet in spite of all the ups and downs SONC is still respecting the long-term bullish trend of higher lows. Now with strong earnings numbers the stock it hitting multi-year highs.

SONC recently reported its Q4 results on October 21st. Same-store sales in the quarter were up +4.6% and margins improved 150 basis points. Net profits came in at 34 cents a share, which is a 62% improvement from the same period a year ago. Revenues were up +3.1%, which beat Wall Street's estimates.

Management guided in-line and SONC expects profit growth of 18-20% in 2015. Multiple analyst firms raised their price target on SONC stock follow these results. The stock's rally has produced a buy signal on the point & figure chart that is forecasting a long-term target near $35.00.

Friday's high was $25.07. Tonight we are suggesting a trigger to open bullish positions at $25.15. We will start with a stop loss at $23.75. I will point out that the 2007 highs in the $25.30-26.20 area is potential resistance so this might be considered a more aggressive entry point.

- Suggested Positions -

Long SONC stock @ $25.15

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

Long DEC $25 call (SONC141220C25) entry $0.95

10/29/14 triggered @ 25.15
Option Format: symbol-year-month-day-call-strike

Zumiez Inc. - ZUMZ - close: $33.87 change: +0.81

Stop Loss: 31.45
Target(s): To Be Determined
Current Option Gain/Loss: - 0.8%
Entry on October 29 at $34.15
Listed on October 28, 2014
Time Frame: Exit prior to earnings in early December
Average Daily Volume = 296 thousand
New Positions: see below

10/30/14: ZUMZ did not see any follow through on yesterday's pullback. Shares bounced near their 10-dma and outperformed the market with a +2.4% gain.

Yesterday's intraday high was $34.17. Investors may want to wait for a rally to $34.20 before initiating positions.

Earlier Comments: October 28, 2014:
ZUMZ is in the services sector. The company is considered a specialty retailer. The website describes the company as "a leading multi-channel specialty retailer of action sports related apparel, footwear, equipment and accessories, focusing on skateboarding, snowboarding, surfing, motocross and BMX for young men and women. As of October 4, 2014 we operated 594 stores, included 545 in the United States, 34 in Canada, and 15 in Europe. We operate under the name Zumiez and Blue Tomato. Additionally, we operate ecommerce web sites at www.zumiez.com and www.blue-tomato.com."

Apparel retailers as a group have been pretty hit or miss this year. Yet the sports-related names have been doing okay. ZUMZ's focus on sports-related clothing and equipment might insulate it from the normally finicky teen crowd.

ZUMZ's latest earnings report was back in September. You can see the gap down on the daily chart. ZUMZ beat EPS estimates by 4 cents as earnings grew +35%. Yet revenues only rose +11.9% and missed analysts' estimates. More importantly management issued somewhat soft EPS guidance. The good news for investors is that the post-earnings sell-off did not see any follow through. Instead ZUMZ continues to build on its multi-month trend of higher lows.

I suspect investors might be willing to over look guidance that was a couple of cents below Wall Street's estimates in favor of a company that continues to grow same-store sales. ZUMZ has a pretty good track record with the retailer reporting same-store sales growth that beat analysts' estimates several months in a row. Their latest sales data was very impressive. On October 8th ZUMZ said their net sales in September rose +12.5% while their comparable store sales soared +6.6% compared to estimates for only +2.7% growth.

The current rally has lifted ZUMZ stock to new 2014 highs and the point & figure chart is bullish and forecasting a long-term target of $46.00. Tonight we are suggesting a trigger to open bullish positions at $34.15. We will plan on exiting prior to ZUMZ's next earnings report in early December.

- Suggested Positions -

Long ZUMZ stock @ $34.15

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

Long DEC $35 call (ZUMZ141220C35) entry $1.60

10/29/14 triggered @ 34.15
Option Format: symbol-year-month-day-call-strike

BEARISH Play Updates

Pandora Media, Inc. - P - close: 18.74 change: -0.49

Stop Loss: 20.55
Target(s): To Be Determined
Current Option Gain/Loss: + 1.6%
Entry on October 30 at $19.04
Listed on October 29, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 7.1 million
New Positions: see below

10/30/14: Our new bearish play on Pandora is off to a good start. The stock opened at $19.04 and then fell to a -2.5% decline. These are new 2014 lows.

Earlier Comments: October 29, 2014:
Pandora is in the services sector. The company provides streaming music over the Internet and through your mobile device. They have over 200 million registered users and over 76 million active users.

It has been a really rough year for shares of Pandora. The stock is down over 50% from its all-time high of $40.44 set in March this year. Traders have been selling the rallies for months. If you only looked at the profit numbers you might be surprised by Pandora's performance.

Pandora's most recent earnings report was October 23rd. They beat analysts' estimates with a profit of 9 cents per share. That's a +50% improvement from a year ago. Revenues were up +41.5% from a year ago to $239.6 million, which also surpassed analysts' estimates. Pandora said listener hours soared +25% to almost 5 billion hours in the third quarter versus a year ago. The company's guidance was actually somewhat bullish with Pandora guiding slightly above consensus estimates on both the top and bottom line.

Given this impressive growth from 2013 you might think the stock would be soaring. Unfortunately for Pandora shareholders the company is seeing growth actually slow down and that's due to significant competition.

The 4.99 billion listener hours last quarter may have been up from a year ago but it's down -1% from the second quarter. The company's active users came in at 76.5 million users in the third quarter. That's up +5.2% from a year ago but it's virtually flat versus the 76.4 million from the prior quarter.

The slowdown is likely a result of too much competition. There are a ton of streaming music services like Rdio, Deezer, Grooveshark, Xbox Music, Sony Music Unlimited, and Songza. Yet the major competitors for Pandora are probably Spotify, Amazon.com's Prime Music, Apple's iTunes radio, which will soon merge with Beats Music, and finally Google has their Google Play Music All Access service. If all the competition wasn't enough Pandora also has to contend with music labels constantly fighting to raise the royalties that Pandora has to pay.

There are plenty of bears in this name. The most recent data listed short interest at 13.2% of the 197.2 million share float. Given the stock's recent performance, the slowing growth, and rising competition, the bears should have the upper hand. The stock's performance has produced a bearish signal on the point & figure chart, which is forecasting a long-term target of $11.00.

Tonight we are suggesting bearish positions at the opening bell tomorrow morning. More conservative traders could wait for a new relative low under $18.90 instead. The next support level might be the $15.00 area.

- Suggested Positions -

Short P stock @ $19.04

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

Long 2015 Jan $19 PUT (P150117p19) entry $1.71

10/30/14 trade begins. P opens @ $19.04
Option Format: symbol-year-month-day-call-strike


The Dow Chemical Co. - DOW - close: 48.25 change: +0.87

Stop Loss: 50.25
Target(s): To Be Determined
Current Option Gain/Loss: -0.4%
Entry on October 24 at $47.25
Listed on October 22, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 8.4 million
New Positions: see below

10/30/14: In last night's newsletter we decided to close our DOW trade early and exit this morning. Shares opened at $47.42 and then rallied to a +1.8% gain.

- Suggested Positions -

Short DOW stock @ $47.25 exit $47.42 (-0.4%)

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

Dec $45 put (DOW141220P45) entry $1.20 exit $1.00 (-16.6%)

10/30/14 planned exit this morning
10/29/14 prepare to exit tomorrow morning
10/24/14 triggered @ 47.25
Option Format: symbol-year-month-day-call-strike


Mistras Group - MG - close: 16.25 change: +0.01

Stop Loss: 17.05
Target(s): To Be Determined
Current Option Gain/Loss: - 1.9%
Entry on October 27 at $15.85
Listed on October 18, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 81.5 thousand
New Positions: see below

10/30/14: We also decided to close our MG trade in last night's newsletter. Shares gapped open lower at $16.15.

*Very small positions to limit risk* - Suggested Positions -

Short MG stock @ $15.85 exit $16.15 (-1.9%)

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

NOV $17.50 PUT (MG141122P17.50) entry $1.85 exit $1.30 (-29.7%)

10/30/14 planned exit this morning.
10/29/14 prepare to exit tomorrow morning
10/27/14 triggered @ $15.85
Option Format: symbol-year-month-day-call-strike