Option Investor

Daily Newsletter, Wednesday, 12/24/2014

Table of Contents

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

Market Wrap

A Quiet Market On a Christmas Eve

by Keene Little

Click here to email Keene Little
Today's half-day session produced no surprises and was quiet as expected. The bears are using the holiday period to rest while the bulls enjoy thoughts of more sugar plums.

Wednesday's Market Stats

It was a half-day session today and not a whole lot happened in the market. Considering we've all got Christmas songs in our heads and family things to tend to, I'll keep tonight's wrap a little shorter than usual and dive right into the charts for a quick review of how things look to me. The rest of this month tends to be bullish if only because sellers go away and people's positive mood puts them into a buying mood. I see downside risks, especially with everyone expecting the market to rally, but we'd have to see some key levels broken to the downside before the bears can start claiming some successes.

Economic reports for today were light and there will be none on Friday. We got the unemployment claims data a day early and the numbers were little changed from last week and roughly in line with expectations. Crude inventories bumped up while natural gas inventories fell, and the large increase in crude inventories caused some selling in oil today but as I'll review later, it remains inside a small trading range since its December 16th low. It does look like it will be heading at least a little lower.

Economic reports and Summary

I'll start out with the RUT tonight since it's presenting an interesting setup here that the bulls are going to need to break before the bears get wind of it. The RUT is also one of the better sentiment indexes, especially at this time of year when many traders play the seasonal pattern of strength in the small caps in December and into the early part of January. That wasn't looking so good for the first half of December but that's been more than made up for with the +6% rally (about 70 points) into today and traders continue to look for the Santa Claus rally to continue. But it has now rallied up to resistance and what happens from here is going to set the tone for January.

The weekly chart shows the bearish setup, but only if the bears can get past the bulls. The current rally has again brought the RUT up to its previous highs in March and July, near 1213. Only marginally higher, near 1220 by the end of the month, is the broken uptrend line from March 2009 - October 2011. This trend line was back-tested on November 3, 12 and 13 and each time it held as resistance and therefore it's obvious traders think it's an important trend line. As I've noted on the chart, this is the 3rd attempt to get through 1213 and another failure would leave a very bearish triple top. At the moment the bearish setup is a 3-drives-to-a-high topping pattern and the bearish divergence shown on MACD is not encouraging for the bulls.

Russell-2000, RUT, Weekly chart

The daily chart of the RUT shows a closer view of the triple top and now in addition to the bearish divergence on the weekly chart we also have bearish divergence at the current high vs. the November 25th high. The leg up from December 16th fits as the 5th wave in the rally from October and the bearish divergence against the 3rd wave high in November supports the wave count. One thing I don't like about it is how large the 4th wave is compared to the 2nd wave but it doesn't violate any EW rules. Also, the 4th wave in the move up from October (the November-December choppy pullback) is a fractal of the larger 4th wave in the move up from June 2012. As can be seen on the weekly chart above, the larger 4th wave is also much larger than the 2nd wave (the September-November 2012 pullback). So from a fractal perspective, which is what EW patterns measure, it's a good fit for a final high, or at least one that should lead to a much larger pullback before starting another rally next year. This is what makes the triple top all the more interesting for the bears.

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- bullish above 1220
- bearish below 1135

Zooming in closer to look at the 5th wave rally (from December 16th) we have another bearish divergence at this week's high vs. last week's. The RUT achieved the 127% Fib extension of the previous decline (November 25 - December 16), at 1207.34, which is a common "reversal" Fib. At this point all the pieces are in place for a major reversal for the RUT and now all we need is confirmation, starting with a drop below yesterday's low near 1200.

Russell-2000, RUT, 60-min chart

Referring to the SPX weekly chart below, you can see that the rally from December 16th is now approaching the top of its parallel up-channel from October 2011. The top of this channel has repeatedly held back all rallies for the past year and it's currently near 2100. That's the upside potential I see for SPX if the buyers can keep at it for the rest of this month. As with the RUT, the bearish divergence at the December 5th high, and further divergence at the current high, suggest buyers here could get stuck holding the bag with no chair to sit down on when the music stops (like my mixed metaphors?).

S&P 500, SPX, Weekly chart

The weekly chart above is using the arithmetic price scale and the daily chart below is using the log price scale. That shifts up the trend line along the highs from April 2010 - May 2011, currently near 2081. You can see how SPX poked through that trend line in late November and early December but couldn't hold above it (that's also where it banged into the top of its parallel up-channel shown on the weekly chart above). It's now doing the same thing and the last two days have been little shooting stars, indicating a failure to rally. The bearish divergence against the November-December highs is another warning sign. But if the buyers can keep the sellers away for at least another week we could see SPX close out the month at a higher high, perhaps near the trend line along the highs from July-December, currently near 2095, which is basically the same line as the top of the parallel up-channel on the weekly chart. I'd be a nervous long here, especially if SPX drops below Tuesday's gap closure, at 2078.52, which would also put it back below its December 5th high at 2079.47.

S&P 500, SPX, Daily chart

Key Levels for SPX:
- bullish above 2100
- bearish below 2019

The DOW ran into trouble back in November-early December when it hit the trend line along the highs from May 2011 - May 2013, shown on its daily chart below (purple line). I'm using the same wave count for the rally from October as I showed earlier for the RUT, which calls the rally from December 16th the final 5th of the larger 5th wave of the rally from October 2011. It's showing the bearish divergence I would expect to see for a 5th wave. Keep in mind the bullish potential (for all indexes) is that the current rally is the start of a MUCH more bullish rally to come (3rd wave in the rally from October). But the bearish divergence suggests that is not the correct wave interpretation so it's an alternate count for now. Today's candle, as a result of the selling in the last half hour of trading (profit taking or something more?), is a gravestone doji at trendline resistance, which is a possible reversal candle but it needs a red candle on Friday to confirm. The hard part with interpreting this stuff this week is the light volume -- it's easy to push the indexes around with a couple of large buy/sell programs. But for now it's a bearish heads up.

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- bullish above 18,050
- bearish below 17,067

Different index, same story -- NDX is banging against resistance at its trend line along the highs from April 2010 - March 2012, currently near 4318. It hit it last Friday, pulled back, and then gapped up to it yesterday morning, which was followed by an immediate selloff (leaving a gap n crap). Since yesterday's low it's had a choppy bounce attempt to a lower high so far and it looks like a correction before heading lower. It's possible NDX will complete its rally with a truncated high (below its November 28th low), which would be another bearish sign since it means the 5th wave (the rally from December 16th) is especially weak. The sideways chop since last Friday could be a bullish consolidation but at the moment I think that's a lower probability than topping action here.

Nasdaq-100, NDX, Daily chart

Key Levels for NDX:
- bullish above 4347
- bearish below 4089

A quick review of the dollar and commodities shows no change in trend yet. They're getting extended, like the stock market so pressing bets to the downside in commodities doesn't appear to have a good risk:reward ratio (considering the short-covering potential for a blast back up) but I also see the trend continuing for at least a little longer.

I had thought the U.S. Dollar would be ready for a stronger pullback once it reached the top of its parallel up from April 2011, near 89, but following a relatively small pullback to 87.83 on December 16th it rallied strong to a high at 90.40 yesterday. As can be seen on its daily chart below, that was good enough for a poke above a potential rising wedge pattern for its rally from October, which I have labeled as the 5th wave in the rally from May. The weekly chart continues to show bearish divergence against its October high (labeled wave-(iii) on the chart) and that supports the currently rally as the 5th wave. Once complete, which would be confirmed with a drop below the December 16th low at 87.83, we should see a multi-month pullback for the dollar. Interestingly, I see the same setup for the dollar as I do for the stock market and I suspect they'll pull back together once each has finished their highs.

U.S. Dollar contract, DX, Daily chart

For a long time I've been suggesting gold would likely drop below 1000 before putting in a good tradeable bottom and so far I haven't seen anything to change my mind. Since gold's low on November 7th we've had very choppy price action and the bounce into the December 10th high tagged the top of its down-channel from 2011, which was then followed by more selling. The bounce is corrective and price remains in the down-channel, both of which support further downside. Even RSI can't get back above its broken uptrend line from June 2013. For holders of gold I know this is painful but for an opportunity to add gold to your portfolio (or for your TEOTWAWKI cache), the more it drops the more we'll be able to buy. Just not yet.

Gold continuous contract, GC, Daily chart

Silver's 3-wave bounce off its December 1st low had it back-testing its broken uptrend line from 2003-2008, near 17.10, but sold off from there, leaving a bearish kiss goodbye. I show the potential for a larger bounce up to the 18.60 price-level S/R but I'm starting to wonder if that's too optimistic here. It's just as likely for silver to decline to the bottom of its down-channel from 2011, currently near 13.15.

Silver continuous contract, SI, Daily chart

While many wonder where and when we'll see a top to the stock market's rally, there are many wondering where the bottom is for commodities, especially oil. I'm constantly reading why this is a good place to buy a bottom. OK, that didn't work but here's a good place. As opposed to the stock market, which has most believing in a continuation of the rally, it seems most oil traders believe oil is bottoming here. And as long as traders keep looking for a bottom, and keep trying to catch falling knives by buying the bottom, there's probably more downside to come. From a pattern perspective I also see at least a little bit more to the downside before oil puts in a tradeable bottom.

The daily chart of oil shows a wave count that would look best with one more drop lower to complete a 5-wave move down from June. The 5th wave, which is the decline from November 21st, needs one more leg down to complete the 5th of the 5th wave and I've got Fib price projections lining up just below $50 for what should be a tradeable bottom. The choppy consolidation since the December 16th low looks like a small 4th wave correction, which supports the idea for at least one more new low. Many are looking at the recent consolidation as basing in preparation for a rally but I don't see that yet. The idea for another leg down would be negated though with a rally above the December 1st low at 63.72. In that case we would likely already be into a multi-month bounce/consolidation.

Oil continuous contract, CL, Daily chart

Near the $50 downside projection is the 78.6% retracement of the 2009-2011 rally, at 50.67, as shown on the weekly chart below. As I've shown on its weekly chart in the past, the Fib price projection at 54.14 was achieved on December 16th and it's been consolidating since then. This price projection is where the 2nd leg of the decline from August 2013 is 261.8% of the 1st leg down, a common projection for an extended move, especially for commodities. If the leg down from June is a 3rd wave we'll see a multi-month choppy bounce/consolidation through the first half of 2015 before dropping lower later next year.

Oil continuous contract, CL, Weekly chart

From a trading perspective, a choppy bounce/consolidation for six months could mean dead money. But if the decline from June is completing the c-wave of an A-B-C pullback from August 2013 we'll get a stronger rally so buying a bottom, when we have a better setup for one than we do here, could result in a nice trade. Only after the bounce is underway would we get some clues as to how strong/weak it's likely to be, which would then be used for stop management. The first bullish sign would be a rally back above the 1998-2008 uptrend line, currently near 65.

From a fundamental perspective it makes sense to me to see oil in decline. Many believe low oil prices, and therefore gas prices, will spur demand. The chart for gasoline looks just like oil's chart so evaluating one is like evaluating the other. Gasoline demand is inelastic, meaning demand doesn't change much because of price changes. The data fully supports this view and it makes a lot of sense. Commuters still commute and people still need to get out to the grocery store. What probably changes a little is how many trips you'll take to see Grandma or the grandkids. There's been a significant drop in gasoline demand over the past couple of years, along with demand for oil (but why? Our economy is doing soooo well, said with tongue firmly planted in cheek). The drop in demand combined with the rise in supply has the demand/supply curve working like it's supposed to.

The Fed's easy money policy, especially with abnormally low interest rates, had many drillers borrowing cheap money to do their drilling. Much of the high-yield debt is energy related. That probably won't end well for the banks (again). All the new-found oil is coming into a market that is showing declining demand and that's putting the higher-cost drillers at risk of defaulting on their loans. But why the reduced demand? There are two things that come to mind -- first, fewer people in the work force (labor participation rate has been dropping), which reduces gas demand from commuters. More and more employers are also allowing employees to work some from home, further reducing commuter costs. Second, baby boomers are retiring, perhaps many of them earlier than they had originally planned. There's been a spike in early retirees collecting social security before they turn 66-67. So there are even fewer commuters on the road.

Just these two things are cutting demand for gasoline and as yesterday's economic numbers indicate (forget the bogus GDP report), the economy is not that healthy, which further reduces demand for oil products. I think we'll find a tradeable bottom soon for oil but I think the bounce/consolidation will be a period where traders downsize their expectations for where price should be. The fundamentals and the technical (wave pattern) support each other in this view but we'll obviously have to wait for Ms. Market to tell us whether or not she agrees with my analysis.

It's not just the metals and oil getting the smackdown; it's commodities in general, as shown on the Bloomberg Commodities index (DJUBS) weekly chart below. Some of this is obviously U.S. dollar related since the dollar has rallied strong since May. But some of it has to do with demand so how much of a bounce correction we can expect, once a tradeable bottom is in place, remains to be seen.

In October-November DJUBS tried to hold support at its long-term uptrend line from 1999-2009, near 117, but broke down with a gap down on November 28th. And then in mid-December it briefly held support at the bottom of a parallel down-channel from September 2012 (with the parallel line attached to the August 2013 low) but then broke down further on December 15th and appears to be heading toward 101-104 support.

Bloomberg Commodity index, DJUBS, Weekly chart

The commodity index could be heading to the bottom of a larger down-channel from September 2012 (with the parallel line attached to the June 2012 low), currently near 104, which is not much above the February 2009 low at 101.48. Nice round trip for commodities if it tests that low. In the meantime the stock market is in lala land thinking everything is fine with the economy. Just keep listening to the man behind the curtain and everything will be fine. Once the leg down from November completes I think we'll see a tradeable bottom in commodities but keep in mind it could still be a month away.

The commodities have been warning us that the economy is not as healthy as stock market analysts (and the Fed) would like us to believe. It hasn't meant squat to buyers of the stock market but my concern about a real scary downside disconnect remains, and I get more concerned about it the longer the upside disconnect continues. Practically no one believes we'll have a down year in 2015. No one (except perma bears). Once we get through December and into January, if it doesn't remain bullish, we'll have a better idea about whether or not the bulls can hang on.

We're in a seasonally bullish period but nothing is guaranteed, especially a rally that everyone believes will continue from here. I'm seeing enough evidence to suggest we will not see a continuation of the rally into early January but this market's strength has fooled me too many times before to ignore the upside. We're in an uptrend and that keeps the bulls in control until proven otherwise. I've provided some key levels to watch in the coming week and we'll see how well the bulls can hold the indexes above them.

Good luck and I'll be back with you next Wednesday. In the meantime I hope you all have a very Merry Christmas. Happy Hanukkah as well and enjoy whatever faith you practice during this holy period. Remember the market will always be here but your friends and family will not. Keep your priorities straight as you think about what you'll focus on in the coming year. Work to live, not the other way around, but mostly have fun with whatever you do, starting with a joyous time with friends and family tonight and tomorrow.

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

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New Plays

Santa Claus Is Coming To Town

by James Brown

Click here to email James Brown

Editor's Note:

The stock market's half day on Christmas Eve proved to be rather uneventful.

The big cap Dow Jones Industrial Average and the S&P 500 both briefly tagged new record highs. Gains faded sharply near the closing bell. Odds are investors were more focused on last minute shopping or beating the traffic than where equities were headed today.

We are not adding any new trades tonight.

I hope everyone has a merry Christmas.

We'll be back for the normal weekend newsletter!


But I heard him exclaim, ere he drove out of sight—
"Happy Christmas to all, and to all a good night!"
(from the poem: A Visit from St. Nicholas, by Clement Moore)

In Play Updates and Reviews

All Quiet Ahead of Christmas

by James Brown

Click here to email James Brown

Editor's Note:
Wednesday's session was relatively quiet. Biotechs bounced. The small cap index managed to outperform its larger cap rivals but not by much.

The equity market's early gains faded as bids disappeared heading into the closing bell.

Current Portfolio:

BULLISH Play Updates

Barracuda Networks - CUDA - close: 37.96 change: +0.29

Stop Loss: 36.35
Target(s): To Be Determined
Current Option Gain/Loss: + 6.5%
Entry on November 18 at $35.65
Listed on November 12, 2014
Time Frame: Exit PRIOR to earnings on January 8th
Average Daily Volume = 247 thousand
New Positions: see below

12/24/14: CUDA did not see any follow through on yesterday's profit taking. The stock bounced and managed to outperform the major indices with a +0.76% gain.

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

12/22/14 new stop @ 36.35
12/11/14 new stop @ 34.85
12/06/14 new stop @ 33.85
11/22/14 new stop @ 33.65
11/18/14 triggered @ $35.65
Option Format: symbol-year-month-day-call-strike

Sealed Air Corp. - SEE - close: 43.40 change: +0.42

Stop Loss: 40.85
Target(s): To Be Determined
Current Option Gain/Loss: +5.7%
Entry on December 09 at $41.05
Listed on December 08, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 2.1 million
New Positions: see below

12/24/14: Shares of SEE continued their march higher on Christmas Eve. Shares outperformed the S&P 500 with a +0.97% gain.

More conservative investors may want to move their stop loss closer to the $42.00 level. I am not suggesting new positions at this time.

Earlier Comments: December 8, 2014:
SEE is part of the consumer goods sector. They're in the packaging and containers industry. The company describes itself as "Sealed Air is a global leader in food safety and security, facility hygiene and product protection. With widely recognized and inventive brands such as Bubble Wrap brand cushioning, Cryovac brand food packaging solutions and Diversey brand cleaning and hygiene solutions, Sealed Air offers efficient and sustainable solutions that create business value for customers, enhance the quality of life for consumers and provide a cleaner and healthier environment for future generations. On a pro forma basis, Sealed Air generated revenue of $8.1 billion in 2011 and has approximately 26,300 employees who serve customers in 175 countries."

The U.S. economy is improving and that should mean a strong tailwind for SEE. The company has seen earnings growth improve. The last two quarters in a row SEE has beaten Wall Street's estimates on both the top and bottom. If that wasn't good enough they also raised their guidance two quarters in a row.

SEE's most recent earnings report was October 29th. Analysts were expecting a profit of $0.45 a share on revenues of $1.94 billion. SEE said earnings were up +24% from a year ago to $0.52 a share. Revenues rose +3.3% to $1.98 billion.

Jerome A. Peribere, President and Chief Executive Officer of SEE commented on their quarterly performance. He said, "Our financial and operational performance in the third quarter exceeded our expectations across all key metrics. Net sales increased 3.6% on a constant dollar basis, Adjusted EBITDA margin surpassed 15%, and Adjusted EPS increased 24%. Adjusted gross profit margin increased 120 basis points as a result of our continued disciplines and value-added selling approach across all regions and divisions. Despite macro-economic uncertainties, currency headwinds and volume declines in the North American protein market, we are increasing our 2014 outlook for Adjusted EBITDA and Adjusted EPS and expect to generate approximately $540 million in free cash flow."

SEE's new 2014 guidance is $1.70-1.75 a share versus Wall Street's $1.65-1.70 estimate. The stock has been strong following this report. Instead of correcting lower in mid November SEE merely consolidated sideways. Now it's rested and ready to run. Shares are up five days in a row and ignored the market-wide weakness today.

Today's intraday high was $40.87. I am suggesting a trigger at $41.05 to open bullish positions. We're not setting a target tonight but I will note the point & figure chart is forecasting a long-term target of $61.00.

- Suggested Positions -

Long SEE stock @ $41.05

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

Long Jan $40 CALL (SEE150117C40) entry $1.90

12/22/14 new stop @ 40.85
12/11/14 new stop @ 39.95
12/09/14 triggered @ 41.05
Option Format: symbol-year-month-day-call-strike

Sprouts Farmers Market - SFM - close: 32.70 change: +0.02

Stop Loss: 30.85
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Entry on December -- at $---.--
Listed on December 23, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 1.0 million
New Positions: Yes, see below

12/24/14: Shares of SFM saw a little bit of volatility this morning but it quickly faded and shares merely drifted sideways. I don't see any changes from the Tuesday night new play description. Our suggested entry point is $33.05.

Earlier Comments: December 23, 2014:
SFM is in the services sector. They operate in the grocery store industry. According to the company, "Sprouts Farmers Market, Inc. is a healthy grocery store offering fresh, natural and organic foods at great prices. The Company offers a complete shopping experience that includes fresh produce, bulk foods, vitamins and supplements, packaged groceries, meat and seafood, baked goods, dairy products, frozen foods, natural body care and household items catering to consumers' growing interest in health and wellness. Headquartered in Phoenix, Arizona, the Company employs more than 17,000 team members and operates more than 190 stores in ten states."

Back in the fourth quarter of 2013 the health food and natural grocery stores saw their stocks peak and begin a multi-month decline. The market was worried about growing competition. The organic and "natural" trend had allowed companies like SFM and WFM to enjoy wider margins than traditional grocery stores. Now everyone seems to be trying to cash in on the organic trend.

Shares of SFM were almost cut in half with their drop from its 2013 peak to the 2013 low this past spring. Since then it appears that SFM has found a bottom. That might be thanks to steady earnings growth. SFM has beaten Wall Street's bottom line earnings estimates the last four quarters in a row. Back in May they guided higher but since then their guidance has only been in-line with consensus estimates.

The recent strength in the stock is encouraging. Shares are now challenging resistance in the $32-33 area. Should SFM breakout it could see some short covering. The most recent data listed short interest at 12.9% of the 124 million share float.

Tonight we are listing a trigger to launch bullish positions at $33.05.

Trigger @ $33.05

- Suggested Positions -

Buy SFM stock @ (trigger)

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

Buy the MAR $35 CALL (SFM150320C35)

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

Market Vectors Semiconductor ETF - SMH - close: 55.39 change: +0.14

Stop Loss: 52.85
Target(s): To Be Determined
Current Option Gain/Loss: - 0.6%
Entry on December 23 at $55.75
Listed on December 22, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 2.9 million
New Positions: see below

12/24/14: SMH bounced off its morning low of $55.20 but intraday gains faded into the closing bell. Readers may want to wait for a new relative high (above $55.76) before considering new bullish positions.

Earlier Comments: December 22, 2014:
The SMH is the Market Vectors Semiconductor Exchange Traded Fund (ETF) that tries to mimic the performance of the Market Vectors Semiconductor 25 index.

The top ten holdings in the ETF are Intel (INTC), Taiwan Semiconductor (TSM), Texas Instruments (TXN), Micron Technology (MU), ASML Holding (ASML), Applied Materials (AMAT), Broadcom Corp. (BRCM), NXP Semiconductor (NXPI), ARM Holdings (ARMH), and Analog Devices, Inc. (ADI).

The semiconductor industry has been outperforming the market most of the year. The NASDAQ composite is up +14% in 2014. The NASDAQ 100 index is up +19%. Yet the SMH is soaring with a +29.8% gain this year. Now after a week and a half correction the up trend looks ready to resume.

Traders bought the dip today near short-term technical support at the 10-dma. The SMH outperformed again with a +1.65% gain on Monday versus the NASDAQ's +0.33% gain. Tonight we are suggesting a trigger to open bullish positions at $55.75.

- Suggested Positions -

Long SMH stock (ETF) @ $55.75

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

Long MAR $57 CALL (SMH150320C57) entry $1.60

12/23/14 triggered @ 55.75
Option Format: symbol-year-month-day-call-strike

Sierra Wireless Inc. - SWIR - close: 47.29 change: +0.13

Stop Loss: 41.35
Target(s): To Be Determined
Current Option Gain/Loss: +10.4%
Entry on December 22 at $42.85
Listed on December 20, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 861 thousand
New Positions: see below

12/24/14: SWIR also bounced off its early morning lows. Shares managed to rebound back into positive territory. The lack of profit taking is encouraging but SWIR remains short-term overbought here.

I am not suggesting new positions at this time.

Earlier Comments: December 20, 2014:
The Internet of Things (IoT) is going to be huge. Depending on who is making the forecast the size of just how huge it can become is staggering. Last year (2013) there were an estimated 300 million embedded connected devices in the IoT. IDC is estimating that could reach 15 billion connected devices by 2015. Cisco Systems (CSCO) is forecasting 25 billion devices connected to the Internet of Things by 2015 and 50 billion by 2020. Intel is forecasting up to 200 billion connected devices by 2020.

The backbone of the IoT is M2M communication. That's machine-to-machine communication. SWIR is the market leader with 34% of the market for cellular M2M embedded module market. According to the company marketing material, " Sierra Wireless is the global leader in machine-to-machine (M2M) devices and cloud services, delivering intelligent wireless solutions that simplify the connected world. We offer the industry's most comprehensive portfolio of 2G, 3G and 4G embedded modules and gateways, seamlessly integrated with our secure M2M cloud services. Customers worldwide, including OEMs, enterprises, and mobile network operators, trust our innovative solutions to get their connected products and services to market faster. Sierra Wireless has more than 900 employees globally and has R&D centers in North America, Europe and Asia." They make products for a wide array of industries including: automotive, transportation, industrial and infrastructure, security, field service, healthcare, consumer, energy, sales and payments, and networking.

Earnings have been improving. Back in July they reported their Q2 results that beat Wall Street's estimates on both the top and bottom line and management guided higher. SWIR announced their Q3 results on November 5th. Even after guiding higher the prior quarter they still beat estimates. Analysts were expecting a profit of $0.13 per share on revenues of $138.7 million. SWIR delivered $0.24 with revenues up +27.6% from a year ago to $143.3 million. That's a record quarter for revenue and up +6% from the prior quarter. Organic revenue growth was up +18.8%. Looking at the details of the quarter SWIR said their non-GAAP earnings were up +249% from a year ago.

SWIR raised their guidance again for the fourth quarter of 2014. They now expect EPS in the $0.25-0.28 range with revenues in the $145-148 million area. That's about +23% growth from a year ago. Analysts were only forecasting $0.17 per share on revenues of $142 million.

With this big surge in earnings and revenue growth it's not a surprise to see the stock outperforming. SWIR is up +74.5% in 2014 versus the NASDAQ's +14% gain. The point & figure chart for SWIR is forecasting a target near $53.

With a market cap around $1 billion I wouldn't be surprised if someone acquires SWIR, but that's pure speculation on my part. They have about $200 million in cash and no debt.

This past week saw shares of SWIR rally past resistance near $42.00 and close at multi-year highs. Tonight we are suggesting a trigger to open bullish positions at $42.85.

- Suggested Positions -

Long SWIR stock @ $42.85

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

Long MAR $45 CALL (SWIR150320C45) entry $3.60

12/22/14 new stop @ 41.35
12/22/14 triggered on gap higher at $42.85, trigger was $42.85
Option Format: symbol-year-month-day-call-strike

BEARISH Play Updates

Voxeljet AG - VJET - close: 7.29 change: -0.15

Stop Loss: 8.15
Target(s): To Be Determined
Current Gain/Loss: +26.4%
Entry on December 04 at $ 9.90
Listed on December 01, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 372 thousand
New Positions: see below

12/24/14: The path of least resistance is still down for shares of VJET. The stock underperformed the market again with a -2.0% decline on Wednesday. This is a new all-time closing low for VJET. We will likely see this stock test its intraday low from December 15th at $7.13 soon.

I am not suggesting new positions at the moment.

Earlier Comments: December 2, 2014:
VJET is in the technology sector. The company is part of the 3D printer industry. A company press release describes VJET as "a leading provider of high-speed, large-format 3D printers and on-demand parts services to industrial and commercial customers. The Company's 3D printers employ a powder binding, additive manufacturing technology to produce parts using various material sets, which consist of particulate materials and proprietary chemical binding agents. The Company provides its 3D printers and on-demand parts services to industrial and commercial customers serving the automotive, aerospace, film and entertainment, art and architecture, engineering and consumer product end markets."

Unfortunately this industry has been struggling. Q3 earnings results were disappointing almost across the board with 3D printing companies either posting earnings misses, lowering guidance, or both. VJET happens to fall in the both category.

VJET reported its Q3 results on November 13th. Analysts were expecting a loss of €0.03 for the quarter. The actual results were significantly worse with VJET reporting a loss of €0.41. That compares to a profit of €0.11 in Q3 2013. Management lowered their guidance following the Q3 earnings report.

The industry is facing a new competition in printer giant Hewlett-Packard (HPQ). Everyone knew that HPQ would eventually jump into the 3D printer market and HPQ has finally announced they will next year. HPQ recently gave a presentation saying their 3D printer technology will use "multi-jet fusion" which will generate speeds 10 times faster than current 3D printers.

Shares of VJET have been underperforming the market with a bearish trend of lower highs and lower lows. The point & figure chart is bearish and forecasting at $6.00 target.

Today VJET is setting at all-time lows and poised to break what should be round-number, psychological support at the $10.00 mark. Tonight we are suggesting a trigger to open bearish positions at $9.90.

Please note I do consider this a more aggressive, higher-risk trade. There is already a lot of short interest in this name. The most recent data listed short interest at 22% of the very small 12.4 million share float. That poses the risk of a short squeeze should VJET ever bounce. You may want to use put options to limit your risk to the cost of the option.

*higher-risk, more aggressive trade* - Suggested Positions -

Short VJET stock @ $9.90

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

Long 2015 Jan $10 PUT (VJET150117P10) entry $1.05

12/18/14 new stop @ 8.15
12/11/14 new stop @ 8.65
12/08/14 new stop @ 9.65
12/04/14 triggered @ $9.90
Option Format: symbol-year-month-day-call-strike

58.com Inc. - WUBA - close: 41.54 change: +0.85

Stop Loss: 41.55
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Entry on December -- at $---.--
Listed on December 18, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 1.2 million
New Positions: Yes, see below

12/24/14: WUBA is not cooperating. I warned readers that shares could be volatile and that seems to be all we are getting is mindless volatility. Shares added +2.0% today although this is inside yesterday's trading range so it really doesn't mean that much.

Wait for a new relative low. Our suggested entry point for bearish positions is at $38.85.

Earlier Comments: December 18, 2014:
WUBA is part of the technology sector. They are one of several Chinese Internet stocks that see a lot of action in the market with big moves both directions. If you can catch one of WUBA's big moves it can be profitable.

The company has been compared to a Chinese version of Craiglist. They operate an online market for merchants and consumers in China. Growth has been significant. Their most recent earnings report was November 12th. WUBA reported their Q3 results with a profit of $0.09 per share when Wall Street was actually expecting a loss of 0.04 per share. Revenues in the third quarter soared +73% to $72 million. Gross margins improved +0.8% to 95.3%. WUBA management then raised their Q4 guidance.

It was a bullish earnings report and the stock soared. You can see the big move in mid November. Yet something happened a couple of weeks ago. Nearly all of the Chinese Internet stocks were crushed on December 8th. WUBA has struggled to recover. The recent bounce stalled at the 200-dma. Today's rebound attempt failed at the 50-dma. Shares have not participated with the big two-day rally in the U.S. market.

I consider this a technical trade. The company's sales growth and earnings results look bullish. Yet the stock is clearly not acting bullish. Plus, the bears do have some ammunition to build a case. If you tried to build a bearish story you could easily argue the stock is expensive with a P/E of 107. In their latest earnings report nearly all of WUBA's major expenses, including research and development, sales and marketing, and their operating expenses, all more than doubled from a year ago. While growth has been huge their growth is slowing. This year revenues are up +77% but they're expected to slow down to +54% in 2015.

WUBA has found recent support in the $38.90-39.00 area. Tonight I'm suggesting small bearish positions if WUBA can trade at $38.85. We want to limit our position size because the stock can be so volatile. You may want to use the options instead to help limit your risk. I would aim for the September and October lows in the $34.65-34.75 zone.

NOTE: I'm listing the April options only because the February or March options are not available yet. We should see new options available soon.

Trigger @ $38.85 *small positions to limit risk*

- Suggested Positions -

Short WUBA @ (trigger)

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

Buy the APR $35 PUT (WUBA150417P35)

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

Zulily, Inc. - ZU - close: 23.81 change: +0.25

Stop Loss: 26.05
Target(s): To Be Determined
Current Option Gain/Loss: + 8.1%
Entry on December 08 at $25.90
Listed on December 06, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 1.3 million
New Positions: see below

12/24/14: ZU managed a bounce after yesterday's big drop. Shares appeared to find new resistance near the $24.00 level today.

I am not suggesting new positions at this time.

Earlier Comments: December 6, 2014:
ZU is in the services sector. They're considered part of the discount variety store industry. Yet the company doesn't have any retail locations. Instead they operate online. ZU focuses on the "flash sales" model with 72 hour sales (and occasionally 24 hour sales).

The website describes the company as follows, "zulily (http://www.zulily.com) is a retailer obsessed with bringing moms special finds every day—all at incredible prices. We feature an always-fresh curated collection for the whole family, including clothing, home decor, toys, gifts and more. Unique products from up-and-coming brands are featured alongside favorites from top brands, giving customers something new to discover each morning. zulily was launched in 2010 and is headquartered in Seattle with offices in Reno, Columbus and London."

If you do any research on ZU you'll hear a lot about the business model. It makes sense. The company doesn't suffering from all the hassles and expenses of normal retail locations. The constantly rotating nature of their flash sales model generates a sense of urgency for the buyer. It seems like a great idea. The last couple of earnings reports have been better than Wall Street expected. Yet the stock is getting crushed.

ZU's most recent report was their Q3 results on November 4th. Wall Street was expecting ZU to lose between 3 to 4 cents per share on revenues of $285.4 million. ZU reported a profit of $0.02, which is up from $0.00 a year ago. Revenues soared +71.5% to $285.8 million.

Management said it was a good quarter for ZU. Darrell Cavens, CEO of zulily, said, "This was a strong quarter where we hit several key milestones— the business reached a billion dollars in revenue on a trailing 12 month basis and the majority of our North American orders now come from mobile." They also saw their active customers surge +72% from a year ago to 4.5 million. Their average purchase was up +4%. In spite of all the good news the stock plunged -20% the next day.

The reason appears to be guidance and valuations. ZU issued Q4 guidance, the critical holiday shopping season, that was below analysts' estimates. Another major issue is valuation. At current prices ZU is still valued at $2 billion for a company with a net income of only $11.5 million. Their current P/E is about 202. They do seem to be growing rapidly but evidently not enough to justify current valuations.

Eventually shares will get cheap enough that the selling stops. Where that bottom is no one knows yet. The point & figure chart is bearish and forecasting at $14.00 target. There are a lot of investors betting on new lows. The latest data listed short interest at 31% of the 41.7 million share float.

We think ZU heads lower but I consider this a more aggressive, higher-risk trade. The big short interest could make ZU volatile. Tonight we're suggesting small bearish positions if ZU can trade at $25.90. You may want to use the put options to limit your risk.

NOTE: ZU's IPO priced at $22.00. It's possible that $22 could be potential support.

*small positions to limit risk* - Suggested Positions -

Short ZU stock @ $25.90

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

Long Jan $25 PUT (ZU150117P25) entry $1.15

12/18/14 new stop @ 26.05
12/10/14 Caution! The recent action in shares of ZU could spell trouble.
12/08/14 triggered @ 25.90
Option Format: symbol-year-month-day-call-strike