Option Investor

Daily Newsletter, Wednesday, 11/19/2014

Table of Contents

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

Market Wrap

SPX and A New Record

by Keene Little

Click here to email Keene Little
Since the October low SPX has now made a new record for the number of days in a row it has closed above its 5-dma, now at 24, beating out the old record of 23 set back in July 1998. It's a sign of a very strong rally. But too strong perhaps? Things didn't go well for the market after the previous record.

Wednesday's Market Stats

Even though SPX closed marginally in the red today, it still closed above its 5-dma, which is at 2043.77 and SPX closed at 2048.72. That makes it 24 straight days above its 5-dma, which is a very fast moving average and to close above it for one day shy of 5 weeks of trading is a phenomenal achievement (it has closed above its 5-dma for 18 or more straight days only 8 times, including the current streak, in the past two decades). It's a rare event and the two previous times ended with 18 days on September 3rd and 19 days on July 24, 2013.

The two previous occurrences of this kind of strength were followed by a brief dip before making a marginal new high (September 19th this year) but then gave up ground over the next 4 weeks. This isn't hard to understand when you think about a market that has gone too far too fast -- the profit taking can easily retrace a good chunk of the rally since there wasn't much building going on underneath the market. It's essentially an air pocket below us.

The previous record number of straight days above its 5-dma was 23 days back in July 1998, which occurred the day following the market peak and was then followed by a loss of near -15%, taking back the gains of the year in the following 6 weeks. It would take "only" at -10% decline to accomplish the same thing for this year (200-point decline to the December 2013 close at 1850). Going for a record number of days above its 5-dma is probably not a good idea for the bulls. A -15% decline would lop off about 300 points and knock SPX back down to about 1750. That's not a projection but it is the kind of risk the market is facing here.

Today was only an inside day (price action remained inside yesterday's price range) and that could mean it was just an indecision day. Part of that indecision was the market waiting for the FOMC minutes to be released this afternoon and the after the minutes the market chopped up and down but closed virtually where it was before the minutes were released. In other words, not much of a reaction to the minutes.

The minutes from the Fed's October meeting were interpreted as slight dovish, which was a good thing since the market is not going to be a happy camper if there's any hint of tightening. The Fed said it was concerned about signs of slowing in the global economy since it could affect the U.S. The main worry is disinflation (love that word - they can't seem to get de- in place of dis- since in order to become a Fed head you must be brain-washed into thinking deflation is a complete and total economic disaster and therefore the word has been removed from their vocabulary).

The most important thing for the market is that the phrase "considerable time" was still there (in reference to accommodation). Removing those two words would have an immediate negative effect on the market since it would essentially mean the Fed is getting ready to tighten. But that's highly unlikely in the next year since the Fed is more worried about "disinflation" and another recession, which the rest of the world is back in or is heading there quickly.

Tonight we'll get reports from several countries, including China and Japan, that report on their manufacturing strength. There's a lot of worry about China right now, especially since their housing prices have been dropping and as with Japan and the U.S., that's a precursor to much tougher times for the stock market. The U.S. market will not be immune to bad news coming out of China and Japan. Before the bell we'll get PMI data from Germany.

It's important how strong the economies are doing because the stock market is now going to become more dependent on that, and the financial performance of companies, and less on the Fed's money. There is still plenty of money coming from Japan and Europe but that money is going to be split between different world markets. This comes at a time when the U.S. market is overbought and overloved and has a big air pocket below it.

Of the many market analysts I read, some technical, others fundamental (and the best ones use both), I like John Hussman's work. He uses unemotional analysis to make his points and often reminds his readers that he's not out to convince anyone of anything but instead offers his observations and opinions for what it's worth. He has a very good track record for identifying the reasons why a market's direction is likely to continue or reverse. He is currently describing a market that is "extremely overvalued, overbought and overbullish."

As Hussman notes, currently we have the most lopsided bullish sentiment, according to Investor's Intelligence data, since 1987. Bearish sentiment is now down to 14.8%, which is back down near the 13.3% seen at the September high. Prior to this year, the two previous occurrences of readings this lopsided were at the April 2011 peak, which was followed by a -20% decline, and the October 2007 high, which of course led to the market crash into 2008 and a -58% decline. With a record like that, I think it's prudent to at least be cautious about the upside potential vs. the downside risk.

The market has been overbought for quite a while and we know these conditions, including wildly bullish sentiment and low VIX readings (although the VIX has started to climb even as prices press higher), can continue far longer than expected. But this time we're seeing a widening of credit spreads between Treasuries and other bonds. This is indicative of risk-off trading and when combined with the deterioration of market internals it could be different this time. There's still a lot of faith in the Fed protecting our backs but I think that's misplaced faith.

Further highlighting the bullish sentiment, the most recent Investors' Intelligence poll of newsletter writers shows the biggest shift of bears to bulls in more than 40 years (since back in the 1970s). The most recent AAII numbers show the number of ordinary investors who are bearish is less than half of what it was at the October low, and it's the lowest reading in nine years (2005). It would appear everyone has literally bought into the idea that we're going to have a Thanksgiving rally, a Santa Claus rally and an end-of-year rally. Nothing but rally and not a care in the world, which is of course a major warning that now is the time for bulls to be afraid. Be very afraid.

From a sentiment perspective, this is a very dangerous time to be complacent about the upside, or to even harbor thoughts about holding through the next "pullback" since the pullback could turn into something much more significant. We have seasonality behind the bulls but statistics showing the recent rally could be setting up more than just a pullback before heading higher. As a trader, the best course of action is to at least protect what you've got, get to cash and be ready to buy back in at cheaper prices. Playing the short side is likely to be a winning strategy soon.

OK, to the charts. Looking at the SPX weekly chart below, there is no indication yet that the bulls are in trouble. I would say they look like they're in potential trouble as price has reached up and tagged the trend line across the highs from April 2010 - May 2011. This trend line stopped the rallies since December 2013 and until proven otherwise I think it's a good bet that the rally will again be stopped by it. But there's certainly the possibility we'll see a throw-over finish as a way to nail the stops just above the trend line, near 2059 by the end of the week, before finishing the rally. And of course it would turn more bullish if it rallies above 2060 and holds above.

S&P 500, SPX, Weekly chart

The importance of the trend line along the highs from April 2010 - May 2011 is that it fits as the top of a rising wedge pattern, which is an ending pattern, and it fits for the c-wave of a big A-B-C rally off the 2009 low. This can be seen clearly on the weekly chart below. In other words, the rising wedge pattern, unless price can break out the top of it, near 2060, is a sign that the 5-1/2 year rally is not the start of a secular bull market but instead it's been a large cyclical bull within a continuing secular bear. The continuing degradation of rate-of-change (ROC) is not a healthy sign for the rally either.

SPX vs. XLY/XLP ratio, Weekly chart

The blue line on the above chart is the ratio of XLY to XLP, which shows the relative strength of consumer discretionary stocks vs. consumer staples. Purchasing the former is done by consumers when they feel good about their purchasing power (income vs. expenses) whereas they tend to buy fewer discretionary stocks and stick with the staples (toilet paper, toothpaste, etc.) when their financial times are tougher. And how the consumer behaves has a lot to do with our economic wellbeing and right now, since the peak in March, the consumer hasn't been feeling so well (regardless of improving consumer sentiment, their purchases speaks louder than their words). The divergence between the stock market and consumer spending will not likely continue much longer, which makes the recent streak of days above its 5-dma feel more like a blow-off top than something more bullish.

Updating another chart comparison I've shown before, shown below, highlights the kinds of divergences we're seeing between the Wall Street and Main Street. This comparison is between the stock market and the commodity index. Just as consumer spending can be used as an economic gauge, so too can the commodity price index (which reflects demand more than what the U.S. dollar is doing). These are more affected by the global economy but we're all so inextricably linked now that any strength in the U.S. will only be relative and similar to all boats in a rising or receding tide.

As can be seen with the weekly chart below, the decline in prices for commodities, especially the sharp decline this year, says our economy is not as strong as one might guess by looking at the stock market. That gator's mouth could snap shut at any time and a -15% decline might seem like child's play compared to what could actually happen. One thing to note on the chart below is the uptrend line on RSI from 2011, which was broken in September and is now being back-tested. This is a common occurrence with a new price high while RSI back-tests its broken uptrend line (or the opposite in a decline) with a lower high -- it's bearish divergence and often provides a very good heads up that the rally is about to complete.

SPX vs. DJUBS Commodity index, Weekly chart

On the daily chart of SPX, shown below, you can see the trend line along the highs from April 2010 - May 2011 (bold green), as well as the broken uptrend line from November 2012 - February 2014 (blue) intersected yesterday near 2056, which was yesterday's high. Yesterday's rally carried SPX over its trend line along the highs from July-September, currently near 2048.70, and basically closed on it today. A successful back-test of this line could lead to at least another minor new high before topping out. But the setup here looks good for a top so we'll soon find out if the market agrees with that. A rally above 2063 that holds above that level will clear the field for the bulls to dash higher, in which case I've got a Fib projection near 2073 (127% extension of the September-October decline) for the next upside target.

S&P 500, SPX, Daily chart

Key Levels for SPX:
- bullish above 2063
- bearish below 2030

The 60-min chart below shows two upside projections I've been tracking since the end of October. The 5-wave move up from October 15th shows the 1st wave up to the October 22nd high and a wave-ii pullback on the same day. Wave-iii is shorter than wave-I, which means wave-v needs to be shorter than wave-iii and in this case is typically 62%. Wave-i is considered an extended wave and typically the 3rd through 5th waves then become equal to the 1st wave. All that said, it gives us two projections for the completion of the 5th wave -- at 2055.31 and 2061.35. Yesterday's high at 2056.08 is in the target zone and it's what has me watching carefully for confirmation of a high (don't have it yet). You can see the rolling top that's also getting put in as price levels off. We could find the rolling top continue with minor ups and downs for the next week. The risk is that once the rally is finished we could get a flush to the downside as all those who recently turned bullish are suddenly scared out of their positions. In fact a break below today's low would be a breakdown from a narrowing price arc that it's been in.

S&P 500, SPX, 60-min chart

If the buyers can keep up the pressure, to at least block the sellers, I see the potential for the DOW to make it up to its trend line along the highs from May 2011 - May 2013, which will be near 17900 by the end of the month (currently near 17845). But a drop below the November 12th low, at 17536, would also be a drop back below its trend line across the highs from December 2013 - July 2014, as well as its uptrend line from November 2012 -February 2014.

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- bullish up to 17,900
- bearish below 17,536

NDX has been crowding up near its trend line along the highs from April 2010 - April 2012, as well as its Fib projection near 4233. This projection is the 127% extension of its September-October decline, which is a common reversal Fib to watch. A drop below Monday's low at 4194 would be a good indication the final high is in place. As with the other indexes, what we don't know yet is whether we'll get just a pullback before heading higher (much higher) into the new year or if instead the decline will be the start of the next bear market. The longer-term pattern suggests the latter but we'll have to wait to see what kind of pullback/decline pattern we get in order to help answer that question.

Nasdaq-100, NDX, Daily chart

Key Levels for NDX:
- bullish above 4235
- bearish below 4194

There are two other charts I'm watching to help me get a better sense for what NDX might do in the next couple of weeks -- the SOX and AAPL. The SOX is a very good indicator of economic health since chips are most every electrical product we buy today. AAPL is a very good sentiment indicator. The chart below of the SOX shows it has reached a very important level and what it does from here will tell us plenty about the health of the current rally.

The rally from October has brought the SOX back up to its previous highs in July and September, which were 652 and 659, resp. Yesterday's high was 656 and while testing its previous highs, with significant bearish divergence, it is also back-testing its broken uptrend line from November 2012. While it could certainly head higher, and that's what stops are for, this is one of those setups that I take every time (short in this case) and then let the market tell me whether or not the trade is going to work. And if the SOX does roll back over from here I think it's going to be tough for NDX to make much more headway to the upside.

Semiconductor index, SOX, Weekly chart

AAPL has also been strong since its October 15th low but it too could be completing its longer-term rally. As noted on its weekly chart below, the move up from January is now a 5-wave move and can be considered complete at any time. At a minimum we should see a pullback correction before heading higher (green dashed line). The more bearish interpretation says the 3-wave move up from April 2013 is a corrective move in what will become a larger pullback correction off the September 2012 high. AAPL has met two price objectives shown on the chart -- the first is the 127% extension of its previous decline (2012-2013), at 113.15, and the a-b-c move up from January has two equal legs up at 114.43. This morning's spike up was to 115.74, which was followed by a selloff to 113.80 before bouncing back up to close at 114.67. This week's doji candle, if it stays that way, could be interpreted as a reversal candle so it bears watching here.

Apple Inc., AAPL, Weekly chart

The RUT has been the weaker index since last week's high, which is another check in the bear's column and more evidence of risk-off trading. The daily chart shows last week's high was another test of its broken uptrend line from March 2009 - October 2011. This is a major trend line which identifies the trend since 2009. Breaking that uptrend line in September, as well as its uptrend line from October 2011 - November 2012, was a big deal. Coming back up to it for a back test on November 3rd and another one last week, with bearish divergence on MACD, followed by a bearish kiss goodbye is another big deal and the chart basically has "SELL!" written all over it. It tried to hold its 20-dma today, at 1160.66, but lost the battle into today's close, finishing at 1157.68. The next support level will be near 1148 where its 200-dma and broken downtrend line from July-September are both located. If that support level holds I'll be watching the bounce pattern to help identify whether it could lead to yet another new high or just a correction to the decline before heading lower.

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- bullish above 1185
- bearish below 1160

Since achieving a price target at 87.98, where the 5th wave in the leg up from May is 162% of the 1st wave, on November 6th, the U.S. dollar has chopped sideways. Consolidating on top of its downtrend line from March 2009 - June 2010, currently near 86.92, looks bullish. I show a pullback for the rest of the year, possibly something more bearish for next year, but the current bullish consolidation says dollar bulls might have different ideas.

U.S. Dollar contract, DX, Weekly chart

Gold's bounce off the November 7th low is looking more corrective than impulsive, which keeps the larger pattern bearish. It's not clear what the short-term direction will be but until I see evidence to the contrary I see gold bounces as shorting opportunities and that's likely to continue into the new year.

Gold continuous contract, GC, Weekly chart

Silver continues to support the idea for a larger bounce into January before heading lower again. It's been a struggle, like that for gold, with only two strong up days since the low on November 7th so it could be a choppy ride higher but a bounce up to the 18.60 area in the next couple of months is my expectation until proven otherwise.

Silver continuous contract, SI, Weekly chart

Oil is struggling to get off support at 74.60-74.95. It's oversold on a weekly basis and showing bullish divergence on the daily chart so it looks like it's getting ready for at least a larger bounce into early next year. Depending on the bounce pattern, assuming we'll get it, it should then help determine whether or not it will be just a 4th wave correction in the decline from August 2013, to be followed by another new low next year, or if instead we'll get a more bullish bounce. For now, just waiting to see if support holds.

Oil continuous contract, CL, Daily chart

Thursday will see a few economic reports that could move the market. As mentioned earlier, overnight we've got some PMI manufacturing so the combination of economic reports could shove the futures around before the open. Following the housing starts and permits data this morning (neutral for the market) we'll get existing home sales data tomorrow morning. Core CPI data (good for the Fed's "data-dependency"), the Philly Fed index and Leading Indicators will present more data on how the economy is doing. One of these days that data will be more important than what the Fed is doing, which is likely right around the corner.

Economic reports and Summary

We've got good setups on the charts for market highs yesterday. At most I was looking for just a small pullback in the blue chips and then one more new high on Thursday/Friday, which a bullish opex week supports. But today's pullback negated some of the short-term bullish patterns I was watching and that turns the market bearish short term unless there's a recovery on Thursday.

Time is coming together with the price pattern to suggest this week is potentially very important for the market. There are some Fib time cycles, Lindsay cycles (George Lindsay) and a Bradley turn date pointing to this week as an important turn window. Since we've rallied into the turn window the expectation is for a reversal to the downside. The EW counts suggest the final 5th waves completed, especially on NDX. The RUT has already made its turn and being out in front to the downside is another notch in the bear's gun.

In addition to time/price coming together for a high we've got extreme bullish sentiment and virtually no more bears in the market. Everyone's in the theater waiting for the movie to start and it's a bit crowded. Hopefully no one will yell "FIRE!" since the stampede out the door is likely to hurt some people. The huge amount of money that has flowed into ETFs, especially leveraged ones, could leave the market extremely vulnerable if they get hit with a lot of selling. It's not something that's been tested before and many are suggesting it will be the next reason for a downside disconnect in the market (where buyers simply vanish).

The bottom line is that I see this market as far more vulnerable than I have since October 2007, and actually more vulnerable than in 2007. If you're long the market, keep your stops tight (and hope that a limit-down morning isn't a jump over your stop, which is why market orders are needed for your stops). If you're an anxious bear, get ready to rumble.

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

A Record Third Quarter

by James Brown

Click here to email James Brown


CSX Corp. - CSX - close: 36.87 change: +0.20

Stop Loss: 36.25
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Entry on November -- at $---.--
Listed on November 19, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 7.2 million
New Positions: Yes, see below

Company Description

Why We Like It:
CSX is in the services sector. They run a railroad and intermodal transport business that covers much of the U.S. and Canada. According to the company website, "CSX Corporation, together with its subsidiaries based in Jacksonville, Fla., is one of the nation's leading transportation suppliers. The company's rail and intermodal businesses provide rail-based transportation services including traditional rail service and the transport of intermodal containers and trailers.

Overall, the CSX Transportation network encompasses about 21,000 route miles of track in 23 states, the District of Columbia and the Canadian provinces of Ontario and Quebec. Our transportation network serves some of the largest population centers in the nation. Nearly two-thirds of Americans live within CSX's service territory.

CSX serves major markets in the eastern United States and has access to over 70 ocean, river and lake port terminals along the Atlantic and Gulf Coasts, the Mississippi River, the Great Lakes and the St. Lawrence Seaway. The company also has access to Pacific ports through alliances with western railroads."

The railroad stocks have been showing relative strength as the broader U.S. economy slowly improves. Weekly average carloads have hit levels not seen in years. CSX's most recent earnings report was October 14th and it was a record breaker with record revenue, operating income, net earnings and EPS.

Wall Street was expecting a profit of $0.48 per share on revenues of $3.18 billion. CSX reported $0.51 a share, which is a +13% increase from $0.45 a year ago. Revenues were up +7.9% to $3.22 billion. Management said that "This performance was supported by volume increases of 7 percent, with broad-based growth across nearly all markets CSX serves." It was CSX's third earnings beat in a row.

CSX's Executive Vice President of Sales and Marketing and Chief Commercial Officer, Mr. Clarence Gooden, said, "The underlying macro-economy remains strong and the data and our experience suggest a positive outlook for growth." CSX is expecting steady growth in the fourth quarter and they see growth improving to double-digit earnings growth and margin strength in 2015.

When asked about the drop in oil prices CSX does not think the drop in oil will impact their business. CSX management said they have already signed more than 50% of their 2015 contracts. There has been some speculation that coal could impact the rail business but CSX believes domestic coal volumes will remain strong as utilities continue to rebuild their inventories.

Investors might like to know that CSX saw some big gains in October over M&A speculation. Evidently Canadian Pacific (CP) had approached CSX about a merger but CSX rejected the offer. That has revived the idea that the railroad industry could see more M&A.

Shares of CSX have spent the last few days consolidating sideways in the $36.40-37.00 zone. A breakout could be a new entry point. I'm suggesting a trigger to open bullish positions at $37.10.

Trigger @ $37.10

- Suggested Positions -

Buy CSX stock @ $37.10

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

Buy the 2015 Jan $37 call (CSX150117c37) current ask $1.20

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

Annotated Chart:

Intraday Chart:

In Play Updates and Reviews

Stocks Bounce Intraday But Still Close Lower

by James Brown

Click here to email James Brown

Editor's Note:
The major U.S. indices were down across the board on Wednesday. Oil stocks appeared to be the exception. Traders continued to buy the dips but the intraday bounce failed to produce gains.

BURL was closed this morning.

Current Portfolio:

BULLISH Play Updates

Ambarella, Inc. - AMBA - close: 49.71 change: +0.04

Stop Loss: 46.75
Target(s): To Be Determined
Current Option Gain/Loss: + 6.9%
Entry on November 07 at $46.50
Listed on November 06, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 1.6 million
New Positions: see below

11/19/14: AMBA tried to rally a couple of times today but both times momentum faded. Shares closed virtually unchanged. After yesterday's pullback from its intraday high we could be witnessing some distribution days as AMBA tries to get past resistance near $50.00.

I am not suggesting new positions at this time.

Earlier Comments: November 6, 2014:
AMBA is in the technology sector. They're considered part of the semiconductor and semiconductor equipment makers. The company was founded in 2004 and went public in October 2012 at $6.00 a share. That price was significantly below where AMBA was expected to price in the $9-11 range. Investor sentiment has definitely changed since then.

The company has grown from making broadcast-class encoders to making consumer and sports cameras, security cameras, and now automotive cameras. Their high-definition chips are being integrated into security IP cameras and wearable cameras. AMBA is also capturing part of a new market - cameras on consumer-level remote control drones.

The last two plus years have seen a strong performance in AMBA with the stock up more than +600% from its IPO price. AMBA has GoPro, Inc. (GPRO) to thank for part of that rally. GPRO came to market in June this year and the stock has been in rally mode since mid August with a rally in GPRO from less than $40 to $90 a share. I mention GPRO because AMBA happens to make the HD camera sensors in many of GPRO's products. As GPRO rallies it could be giving AMBA a boost and GPRO expects record sales this holiday season. I find it interesting that GPRO has been chopping sideways the last few weeks while AMBA has hit new highs.

Another note on GPRO, the company reported earnings on October 30th and beat estimates on both the top and bottom line. GPRO management then raised their earnings guidance significantly above Wall Street's estimates. That should spell good news for AMBA's business with GPRO.

GPRO isn't the only one with strong earnings. AMBA's rally has been helped by consistent earnings growth. The company has beat Wall Street's estimates on both the top and bottom line for the last four quarters in a row. Their most recent earnings report in September saw AMBA's management raise their revenue guidance.

Shorts are getting killed. As the rally continues AMBA could see more short covering. The most recent data listed short interest at 26.7% of the small 28.0 million share float.

Currently AMBA is bouncing from the $44.00 level after a two-day pullback. If this rebound continues we want to hop on board. The company will likely report earnings in early December so our time frame is the next four to six weeks.

- Suggested Positions -

Long AMBA stock @ $46.50

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

Long DEC $50 call (AMBA141220C50) entry $2.15

11/13/14 Warning! Today's move is a potential bearish reversal
11/12/14 new stop @ 46.75
11/07/14 triggered @ $46.50
Option Format: symbol-year-month-day-call-strike

Columbia Sportswear Co. - COLM - close: 43.67 change: +2.02

Stop Loss: 41.45
Target(s): To Be Determined
Current Option Gain/Loss: + 8.5%
Entry on November 06 at $40.25
Listed on November 04, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 138 thousand
New Positions: see below

11/19/14: COLM has extended its current string of gains to 11 days in a row. And what a day it was! Shares soared +4.8% to a new all-time closing high. The big move was fueled by an upgrade from Citigroup who adjusted their rating from "neutral" to a "buy" and raised their price target from $42 to $48.

COLM does have potential resistance in the $44-45 zone as shares have seen some intraday peaks that reversed in this range. Thus more conservative investors will want to seriously consider taking some money off the table right here.

I am not suggesting new positions. We will raise our stop loss to $41.45.

Earlier Comments: November 5, 2014:
COLM has been consistently beating earnings expectations all year long. The company is part of the consumer goods sector.

According to a company press release, "Columbia Sportswear Company is a leader in the global outdoor and active lifestyle apparel, footwear, accessories and equipment industry. Founded in 1938 in Portland, Oregon, the company has assembled a portfolio of global brands whose products are sold in approximately 100 countries. In addition to the Columbia brand, Columbia Sportswear Company also owns the Mountain Hardwear, Sorel, prAna, Montrail and OutDry brands."

The trend of earnings in 2014 has been strong with COLM beating Wall Street's earnings estimates four quarters in a row and raising guidance three out of four quarters. Their most recent earnings report was October 30th. Analysts were looking for a profit of $0.87 per share on revenues of $632.29 million. COLM delivered earnings growth of +20% to $0.93 a share. Revenues soared +29% to $675.3 million.

Management then raised their full year 2014 earnings and revenue guidance above analysts' estimates. COLM expects 2014 sales to hit $2.06 billion, which is +22% improvement above 2013. They also expect gross margins to rise 130 basis points from a year ago. COLM is guiding 2014 net income to rise +35% to $1.80 per share.

COLM's president and chief executive office, Tim Boyle, said they expect 2015 net sales to grow at a double-digit rate above their new 2014 estimate of $2.06 billion. They plan to hit mid-teen operating margins.

COLM appears to have strong sales momentum as we head into the crucial holiday shopping season. Retail analysts are expecting industry wide sales to be above average this year. Low gasoline prices provide a great tailwind for all the consumer goods companies.

Technically shares of COLM found support near $34-35 dating back to their prior highs (see the long-term chart below). The rebound has accelerated thanks to the company's earnings report and bullish guidance. Now COLMN is breaking out past resistance at $40.00 and its simple 200-dma. We are suggesting a trigger to open bullish positions at $40.25.

- Suggested Positions -

Long COLM stock @ $40.25

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

Long 2015 Jan $40 call (COLM150117C40) entry $1.75

11/19/14 new stop @ 41.45, readers may want to take some money off the table right here.
11/12/14 new stop @ 39.25
11/06/14 triggered @ $40.25
Option Format: symbol-year-month-day-call-strike

Barracuda Networks - CUDA - close: 35.49 change: -0.53

Stop Loss: 32.95
Target(s): To Be Determined
Current Option Gain/Loss: -0.4%
Entry on November 18 at $35.65
Listed on November 12, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 247 thousand
New Positions: see below

11/19/14: CUDA experienced some profit taking and gave back a good chunk of yesterday's rally with a -1.4% decline. I would still consider new positions here but if you're worried the market is going to dip then consider waiting for a pullback toward CUDA's 10-dma.

Earlier Comments: November 15, 2014:
CUDA is part of the technology sector. This is a small cap company in the cloud computing space. According to the website, "Barracuda provides cloud-connected security and storage solutions that simplify IT. These powerful, easy-to-use and affordable solutions are trusted by more than 150,000 organizations worldwide and are delivered in appliance, virtual appliance, cloud and hybrid deployments. Barracuda's customer-centric business model focuses on delivering high-value, subscription-based IT solutions that provide end-to-end network and data security."

CUDA has only been a public company for little more than a year. Lately they have been on a roll with their earnings reports. CUDA has beaten Wall Street's estimates on both the top and bottom line four quarters in a row. The last two reports also included bullish guidance.

CUDA's most recent report was October 9th when they reported their Q2 results. Analysts were expecting a profit of $0.04 a share on revenues of $66.7 million. CUDA delivered a big beat with a profit of $0.8 on revenue growth of +18.9% to $68.7 million.

Management said their active subscribers grew +18% and their renewal rate was 96.5%. Their Next Generation Firewall solutions saw sales up +50% in the quarter. CUDA said sales were up across all geographically regions. Plus their gross margins were strong with an improvement to 81.7%. That's above the prior quarter's 80.4% and the year ago period 79.8%.

CUDA's guidance was bullish. Their Q3 estimates are for revenues in the $69-70 million range versus Wall Street's $69 million estimate. They expect a profit in the $0.04-0.05 zone compared to estimates of only $0.03. They raised their 2015 revenue guidance above their prior estimates but this was slightly below Wall Street's estimate. They also raised their 2015 earnings growth into the $0.22-0.24 range compared to analysts' consensus estimates of only $0.17.

Technically the stock has been soaring from its double bottom in the $24.00 area. The point & figure chart is bullish and forecasting a long-term target of $56.00. Right now CUDA is testing resistance in the $35.00 area. A breakout here could spark some short covering. The most recent data listed short interest at 9.7% of the very, very small 9.9 million share float.

We are suggesting a trigger to open bullish positions at $35.65.

- Suggested Positions -

Long CUDA stock @ $35.65

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

Long 2015 Jan $35 call (CUDA150117c35) entry $3.15

11/18/14 triggered @ $35.65
Option Format: symbol-year-month-day-call-strike

Cynosure, Inc. - CYNO - close: 26.48 change: -0.42

Stop Loss: 25.90
Target(s): To Be Determined
Current Option Gain/Loss: +0.9%
Entry on November 12 at $26.25
Listed on November 11, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 201 thousand
New Positions: see below

11/19/14: Caution! Today's drop in CYNO (-1.5%) not only underperformed the major indices but it technically confirms yesterday's bearish reversal pattern. Traders will want to seriously consider an early exit right here.

I am not suggesting new positions. Tonight we'll move the stop loss to $25.90.

Earlier Comments: November 11, 2014:
CYNO is in the healthcare sector. The company is part of the medical equipment industry. According to a company press release, "Cynosure designs, manufactures and markets medical devices for aesthetic procedures and precision surgical applications worldwide that enable plastic surgeons, dermatologists and other medical practitioners to perform non-invasive and minimally invasive procedures to remove hair, treat vascular and benign pigmented lesions, remove multi-colored tattoos, revitalize the skin, liquefy and remove unwanted fat through laser lipolysis, reduce cellulite, clear nails infected by toe fungus and ablate sweat glands."

Their flagship product is the PicoSure laser workstation, designed to remove tattoos. This laser technology produces ultra-short bursts of energy to the skin in trillionths of a second. The company recently gained FDA approval to use their PicoSure system to treat acne scars and wrinkles.

CYNO's earnings results have been mixed. Their Q1 report back in May missed estimates by four cents even though revenues were up +52% from a year ago. The stock sold off on this report. They followed that with a Q2 report in July that beat estimates as revenues soared +45% from a year ago. Growth slowed a bit in their latest report in October.

Analysts were expecting 25 cents a share on revenues of $70 million. CYNO met expectations on the bottom line while the top line grew +18% to $71.5 million.

CYNO's Chairman and CEO Michael Davin commented on the quarter saying, "Cynosure delivered record third-quarter revenue of $71.5 million, up 18 percent year-over-year as revenue in each of our direct sales channels improved from the same period in 2013. North American laser revenue increased 17 percent, revenue from our Asia Pacific subsidiaries rose 46 percent, while our European direct sales channel was up 7 percent. Product and technology innovation, expanded indications and new international marketing clearances continue to drive favorable results for the Company."

Discussing his company's outlook Davin said, "We are on schedule to launch our next flagship platform in 2015 for non-invasive fat removal, and we believe this large addressable market represents a significant growth opportunity for the Company."

Technically shares have broken out from a six-month consolidation in the $19-24 range. The rally following its October earnings report lifted CYNO above key resistance at $24.00 and its 200-dma. Shares have already retested this level as support and now the stock is breaking out to multi-month highs. The point & figure chart is bullish with a $31.50 target.

Tonight I am suggesting small bullish positions if CYNO can trade at $26.25. We want to keep our position size small to limit our risk.

*small positions* - Suggested Positions -

Long CYNO stock @ $26.25

11/19/14 new stop @ 25.90
11/18/14 caution: potential bearish reversal today
11/15/14 new stop @ $25.35
11/12/14 triggered @ 26.25

Electronic Arts - EA - close: 43.45 change: +0.58

Stop Loss: 39.75
Target(s): To Be Determined
Current Option Gain/Loss: + 4.1%
Entry on November 17 at $41.75
Listed on November 12, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 3.7 million
New Positions: see below

11/19/14: The rally in EA hit new highs again today with shares outperforming the market thanks to a +1.3% gain. Traders may want to start raising their stop loss. NOTE: Retail video game store, Gamestop (GME), is scheduled to report earnings tomorrow, November 20th, after the closing bell. GME's results could influence trading in EA on Friday morning.

Earlier Comments: November 13, 2014:
EA is considered part of the technology sector. More broadly they are part of the entertainment industry. Previously EA was the biggest video game company on the planet but when Activision merged with Blizzard they stole the top spot. It remains a fight. EA has annual revenues of $4.1 billion while AVTI has annual revenues around $4.35 billion.

According to a company press release, "Electronic Arts (EA) is a global leader in digital interactive entertainment. The Company delivers games, content and online services for Internet-connected consoles, personal computers, mobile phones and tablets. EA has more than 300 million registered players around the world. Headquartered in Redwood City, California, EA is recognized for a portfolio of critically acclaimed, high-quality blockbuster brands such as The Sims, Madden NFL, EA SPORTS, FIFA, Battlefield, Dragon Age, and Plants vs. Zombies."

Video games are big business. Microsoft (MSFT) has sold more than 83 million Xbox 360s. Rival Sony (SNE) has sold more than 80 million PlayStation 3s. Meanwhile, another company, Steam, is the biggest online retailer for downloadable PC games and has over 75 million users. Back in 2012 the global video game market was $78 billion. That grew to $93 billion in 2013. Research firm Gartner estimates that global video game sales (all formats) could hit $111 billion by 2015. In comparison the global movie box office is only about $38 billion in 2014.

EA continues to fight for market share and dominance in the gaming industry and they've seen success in 2014. The company has beaten Wall Street's earnings estimates on both the top and bottom line three quarters in a row. Their most recent quarterly report was October 28th. Analysts were expecting a profit of $0.53 a share on revenues of $1.16 billion. EA blew those numbers away with a profit of $0.73 and revenues up +17% to $1.22 billion. Gross margins surged thanks to rising digital sales. Mobile sales were also up strongly and in-game purchases soared.

EA offered bullish guidance for both their December quarter (EA's Q3) and their fiscal year 2015. The company raised their Q3 guidance to $0.90, which was above analysts' estimates. They also raised their 2015 guidance to $2.05, which is above Wall Street's estimate.

The stock reacted by soaring to new highs in late October. Since then shares of EA have been consolidating sideways in the $40-41 zone. It looks like that consolidation could be over with EA breaking out to new highs today. The Point & Figure chart is bullish and forecasting a long-term target of $60.00.

Analysts are expecting a strong holiday shopping season this year. The big drop in oil and thus gasoline prices is giving consumers a little extra spending money. The National Retail Federation is forecasting sales growth of +4.1% versus the normal 10-year average of +2.9%. That's a very broad retail outlook. It could be even stronger for video games this year.

Tonight we are suggesting a trigger to open bullish positions at $41.75.

- Suggested Positions -

Long EA stock @ $41.75

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

Long 2015 Jan $45 call (EA150117c45) entry $0.71

11/17/14 triggered @ 41.75
Option Format: symbol-year-month-day-call-strike

International Paper Co. - IP - close: 54.32 change: -0.66

Stop Loss: 52.35
Target(s): To Be Determined
Current Option Gain/Loss: +1.9%
Entry on November 10 at $53.30
Listed on November 08, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 3.8 million
New Positions: see below

11/19/14: I warned readers last night to expect a pullback and IP hit some profit taking today. The stock gave up -1.2% but it's still above its simple 10-dma.

Currently our stop loss is at $52.35. You may want to move yours higher. I'm not suggesting new positions at this time.

Earlier Comments: November 8, 2014:
IP is part of the consumer goods sector. According to a company press release "International Paper (IP) is a global leader in packaging and paper with manufacturing operations in North America, Europe, Latin America, Russia, Asia and North Africa. Its businesses include industrial and consumer packaging and uncoated papers. Headquartered in Memphis, Tenn., the company employs approximately 65,000 people and is strategically located in more than 24 countries serving customers worldwide. International Paper net sales for 2013 were $29 billion (which included our now divested xpedx business)."

The company has been facing a lot of headwinds this year but they still managed to beat Wall Street's earnings estimates three quarters in a row. Their most recent earnings report was November 4th. Analysts were expecting a profit of $0.89 per share on revenues of $6.0 billion. IP reported a profit of $0.95 with revenues beating estimates at $6.05 billion.

The company saw significant improvements in its operating profits in all three categories: industrial packaging, printing papers, and consumer packaging. Management expects a surge in packaging orders in the fourth quarter.

Wall Street loves the company's focus on delivering value to shareholders. IP is almost done with their $1.5 billion stock buyback program they announced in September 2013. They also raised their dividend 14% from $1.40 to $1.60. This is IP's third consecutive fourth quarter double-digit dividend increase. The stock now sports a 3.0% yield.

IP's CEO said they were looking seriously at converting part of their business into a master-limited partnership (MLP). This would be another shareholder friendly step as MLPs do not pay federal tax if the return most of their cash to shareholders.

The stock's current rally has produced a buy signal on the point & figure chart with a long-term target at $70.00. This last week has seen shares of IP break out to new multi-year highs. It is also on the verge of breaking out from a major channeling pattern on its weekly chart (see below).

Tonight we are suggesting a trigger to open bullish positions at $53.30.

- Suggested Positions -

Long IP stock @ $53.30

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

Long 2015 Jan $55 call (IP150117c55) entry $1.21

11/12/14 new stop @ 52.35
11/10/14 triggered @ 53.30
Option Format: symbol-year-month-day-call-strike

Take-Two Interactive - TTWO - close: 26.84 change: -0.19

Stop Loss: 25.45
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Entry on November -- at $---.--
Listed on November 18, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 1.6 million
New Positions: Yes, see below

11/19/14: TTWO did not see any follow through on yesterday's rally. Instead shares retreated. Yet traders bought the dip right where they should have as prior resistance near $26.40 acted as new support. We could see TTWO hit our suggested entry point at $27.30 tomorrow.

NOTE: Retail video game store, Gamestop (GME), is scheduled to report earnings tomorrow, November 20th, after the closing bell. GME's results could influence trading in TTWO on Friday morning.

Earlier Comments: November 18, 2014:
TTWO is considered part of the technology sector. The company makes video games. They're probably best known for their Grand Theft Auto franchise, L.A. Noire, and Red Dead Redemption.

According to the corporate website, "Headquartered in New York City, Take-Two Interactive Software, Inc. is a leading developer, publisher and marketer of interactive entertainment for consumers around the globe. The Company develops and publishes products through its two wholly-owned labels Rockstar Games and 2K. Our products are designed for console systems and personal computers, including smartphones and tablets, and are delivered through physical retail, digital download, online platforms and cloud streaming services."

If you read the Electronic Arts (EA) trade in the Premier Investor newsletter than you already know how big the video game market is and how fast it's growing. Unfortunately the earnings cycle for most video game companies has a lot of peaks and valleys. TTWO's latest earnings report on October 29th is a good example.

The company's Q3 2013 quarter was strong thanks to their record-breaking launch of the Grand Theft Auto V game. One year later revenues plunged -89% to $134.5 million in Q3 2014. That was still above Wall Street's estimate of only $111 million. TTWO said they lost $0.44 a share, which was 15 cents better than analyst expectations.

TTWO management then issued mixed guidance but most of it was bullish. The company expects their current quarter to see a profit in the $1.34-1.45 range compared to Wall Street's estimates of $1.20. Yet TTWO guided revenues below consensus estimates.

They also raised their 2015 guidance and expect profits in the $1.05-1.30 range compared to prior guidance in the $0.80-1.05 zone. TTWO also raised their revenue guidance but was less than Wall Street expected.

TTWO's results and guidance was good enough to spark a big rally in the stock. Likely due to the high amount of short interest. The most recent data listed short interest in TTWO at almost 20% of the 73.8 million share float. The fact that TTWO has not seen any correction following its post-earnings rally probably has bears in a panic.

TTWO has spent the last two weeks consolidating its gains in a sideways manner. Now it's breaking out from this trading range and hitting new 2014 highs. This move could spark more short covering.

Today's high was $27.19. I am suggesting a trigger to open bullish positions at $27.30.

Trigger @ $27.30

- Suggested Positions -

Buy TTWO stock @ $27.30

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

Buy the 2015 Jan $28 call (TTWO150117C28)

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

BEARISH Play Updates

Nu Skin Enterprises - NUS - close: 39.97 change: +1.04

Stop Loss: 41.55
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Entry on November -- at $---.--
Listed on November 17, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 1.78 million
New Positions: Yes, see below

11/19/14: The oversold bounce in NUS continued for a second day in a row. If we see NUS close higher again tomorrow we might drop it as a bearish candidate. Currently our suggested entry point for bearish positions is $37.90.

Earlier Comments: November 17, 2014:
NUS is in the consumer goods sector. They make and sell personal care products. What makes NUS an interesting story is that they're part of the multi-level marketing industry.

Multi-level companies have come under fire in recent years. Herbalife (HLF) gets a lot of headlines with some big investors calling HLF a pyramid scheme. NUS was under investigation in China but seemed to get off the hook with only a minor fine a few months ago. Whatever your opinion of multi-level companies the business outlook for NUS is challenging.

NUS has guided lower (a.k.a. earnings warning) four quarters in a row. Their most recent quarterly report was November 5th. They beat Wall Street earnings estimates of $0.93 a share with a profit of $1.12 but that is still down -37% from a year ago period.

Revenues were down -29.7% to $638.8 million. The company reported that sales slowed in all geographical regions. They had lower revenues, lower margins, and struggled with currency fluctuations.

NUS management then guided lower for the fourth quarter. They expect a profit in the $0.72-0.77 range versus analysts' estimates in the $1.01 range. NUS lowered their Q4 revenue guidance into the $590-610 million versus consensus estimates of $659 million.

There was also a story that came out a few hours before NUS' Q3 results that NUS has confirmed an undisclosed SEC probe into the company. That's never good news.

There are also rumors that NUS is suffering serious cash flow issues and has years worth of inventory.

All of this bad news sparked a big drop in NUS' stock. The oversold bounce has failed. Now shares are breaking down under key support near $40.00. The next level of support could be in the $32-30 zone. The point & figure chart is bearish with a $25.00 target.

Tonight we are suggesting a trigger to open bearish positions at $37.90 with a stop loss at $41.55. NUS can be a volatile stock so I am suggesting we limit our position size to reduce risk. You may want to use put options to limit risk to the cost of your option.

Trigger @ $37.90 *small positions to limit risk*

- Suggested Positions -

Short NUS stock @ $37.90

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

Buy the 2015 Jan $35 PUT (NUS150117p35)

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


Burlington Stores, Inc. - BURL - close: 41.11 change: -0.22

Stop Loss: 40.65
Target(s): To Be Determined
Current Option Gain/Loss: + 0.9%
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

11/19/14: BURL has not been performing as expected. In last night's newsletter we decided to exit this trade today at the opening bell. Shares opened at $41.42.

- Suggested Positions -

closed BURL stock @ $41.05 exit $41.42 (+0.9%)

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

DEC $40 call (BURL141220c40) entry $3.10 exit $2.80 (-9.6%)

11/19/14 planned exit
11/18/14 prepare to exit tomorrow morning.
11/10/14 new stop @ 40.65
11/01/14 new stop @ 39.85
10/30/14 triggered @ 41.05
Option Format: symbol-year-month-day-call-strike