Option Investor

Daily Newsletter, Wednesday, 1/14/2015

Table of Contents

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

Market Wrap

Bearish Opex Week

by Keene Little

Click here to email Keene Little
Opex weeks have been bullish for so long that it's hard to remember a bearish one but so far that's what we've got. There's still a chance the bulls could rescue this week but they'll need to continue today's late-day bounce to make it happen.

Wednesday's Market Stats

This morning the stock market started off in a big hole that was created after the futures declined significantly during the overnight session, especially after 5:00 AM. What made this odd was that this followed an interim ruling from the European Court of Justice that said the ECB would not be blocked from using their Outright Monetary Transactions (OMT) program. It should actually be called the "OMG, they can just create money out of thin air" program.

With Mario Draghi given the green light to do "whatever it takes" I was surprised we weren't looking at a +25 gap up for SPX instead of a -25. The ECB said the ruling is "an important milestone" and that their program is "ready and available." The next meeting for the ECB is January 22nd and Draghi could finally launch a more significant QE effort. But surprisingly, with more jawboning and a court decision providing a green light for QE, the stock market tanked. Instead of rallying strong, as has been the normal reaction to such news, it leaves us wondering if good news is already baked into the cake. Selling good news is clearly a change in character for the market, which joins several changing signals now.

Following this news the value of the euro initially spiked down early this morning and dropped to 1.1726 and is now very close to testing its November 2005 low at 1.1642. When the euro first started trading against the U.S. dollar it traded at 1.1747 so this is a psychologically important level for the euro, which closed today at . From a technical perspective there is strong price-level S/R near 1.20 so this month's breakdown is potentially very important.

The U.S. dollar initially spiked back up during the overnight session but then tanked at 8:30 AM, as did equity futures. The retail sales report at 8:30 was the culprit since it came in weaker than expected and was negative. Sales dropped -0.9% in December and November's sales was revised lower to +0.4% from the previously reported +0.7%. Expectations for December were +0.1% but even small-growth expectations were not met and instead it was negative growth.

One of the causes for weaker sales was poor income growth. As reported last week, average hourly earnings for December declined -0.2% vs. November's +0.2%, which had been revised lower from the initially reported +0.4%. So the slower-than-expected earnings growth is now showing up in weaker retail sales. Who woulda thunk?

Lower gasoline sales gets the credit/blame for lower retail sales but many economists assumed the lower costs at the pump would prompt more buying elsewhere. Apparently consumers didn't get the memo and they're not doing their patriotic duty by spending more. Many thought consumers would dip into savings and/or increase their use of credit during December, neither of which happened.

Another area that saw a big dip in spending was building materials, down -1.9%, an indication the housing market is slowing down. This follows yesterday's earnings report from KB Homes (KBH) and CEO Jeffrey Mezger's warning in the conference call that their margins are shrinking. Gross margins dropped 30 basis points to 18.7% in their 4th quarter and they're expected to shrink further. Apparently higher sales incentives to compensate for weaker demand, combined with higher material and labor costs, are eating into their profits. The stock lost -16% yesterday, which pulled the home builder index lower as other home builders tanked in reaction to KBH's report.

Not helping the European or U.S. markets was a forecast from the World Bank that predicted slower global growth rates. They lowered their growth forecast from +3.4% down to 3.0%. The high stock valuations are coming under increased pressure as investors start to get more and more data showing the economies are slowing. Deflation fears are also depressing stock prices (asset prices decline in a deflationary period).

Another change in character for the market is what's happening this opex week, a typically bullish time for the market. One common pattern in the past was for the Thursday prior to opex to be down, especially in the morning, and then start the buying with some buy programs that triggers short covering and the buying continues through opex. That didn't happen this time. Another recent pattern, which was seen at the October and December v-bottom reversals, is for a selloff on Monday and Tuesday and a low Wednesday morning. The lows set a bear trap that was then followed by a strong rally into Friday. We even had the same VIX and TRIN setups seen in October and December but it didn't work today. It's another sign that the market has changed.

But first the bears have to fight the Trader's Almanac, which has some very bullish statistics for the coming year, including:

-- the 3rd year in a presidential cycle has produced zero losers in past 76 years
-- the year ending in '5' has been down only one time in the past 130 years
-- there have been only 3 prior times SPX has been up double digits 3 years in a row and each time the 4th year was up more than +20%

Oftentimes this becomes a self-fulfilling prophecy with traders believing, and buying, into the idea that it's a can't-lose market, especially with a Fed that's backstopping the market. We've got a long way to go before we'll know if the bullish records will hold but there is one record that the market might find difficult to break.

The chart below is from BusinessInsider.com and it was put together by Robert Shiller. It shows the period from 1874 to 2014 and the number of consecutive years the S&P 500 was positive. The only time it hit 6 years running was back in 1898-1903, whereas all other previous bull markets maxed out at 5 years except currently. The rally from 2009 will be 6 years old in March (some indexes hit their 6th year in November from their November 2008 lows, such as the SOX and NDX) so another positive year would break the record. It's not that it can't be done but what are the odds? A 6-year rally is by definition from this chart very overbought and that helps explain the -18% decline following the last time the market was up 6 years in a row.

SPX consecutive positive years, 1874-2014, chart courtesy Robert Shiller

Some recent warning signs for the market include:

-- The VIX has climbed more than 50% in the last month
-- There was no Santa Claus rally for the first time since 2008
-- The financial sector is acting especially weak and is typically a good canary sector
-- as goes the first 4 trading days of January so goes the month and as goes January so goes the year

But there's one relatively strong sector, the small caps, which hints of more bullishness and that means the bears cannot get complacent here just because there's been no Santa Claus rally and January is looking so weak. The U.S. has been outperforming most of the rest of the global economies and we could see a relatively strong earnings season that gets traders excited enough to reenter the market and drive the indexes to new highs. Unfortunately the charts are at one of those inflection points and could go either way but one good thing for traders is that the next move (one that lasts for at least a couple of weeks) will likely be a strong one.

Our job is to try to figure out early which way the market's next big move is likely to be so that we can get in front of it (or at least in front of most of it). For that we naturally go to the charts. Starting with the SPX weekly chart, you can see that this week's decline has SPX again breaking its uptrend line from October-December, currently near 2047 and near its 50-day MA. Monday's break below that level was the 2nd break, which increases the odds that the breakdown will hold. At the moment it's trying to hold price-level support near 2010 but if that doesn't hold then the 50-week MA, down near 1949, or its trend line along the highs from April 2010 - May 2011 (bold green line), near 1920, could be the downside targets in the coming days.

S&P 500, SPX, Weekly chart

Because the market is at an inflection point there are several paths the market could take from here and none of them jump out yelling "pick me, pick me!" Consequently my daily chart below is a little busy with the multiple possible paths from here. The more immediately bearish path says the market will continue lower into the end of the month an possibly bottom out near 1870 before setting up a larger bounce correction. Or we could get a sharp rally back up to just above last Friday's high at 2064, followed by a strong decline. Or we could get another rally leg up to new all-time highs. So it's a case of "it could go up or it might go down and if it does neither of those then it will go sideways." The sideways chop and whipsaws has been either a great trading opportunity or a nightmare for traders, depending on how you played it. Many smart traders simply stayed on the sidelines while waiting for the next direction to establish itself.

S&P 500, SPX, Daily chart

Key Levels for SPX:
- bullish above 2072
- bearish below 1963

The 60-min chart below shows a bullish sideways triangle that I had been following but it was negated with today's low that broke below the January 6th low. There's one more bullish wave count that calls for one more new high but it's a real stretch. At this point I do not believe we'll see any more new highs but we could certainly get a high bounce, which is what I'm showing for the coming week. It would finish a 2nd wave correction to the 1st wave decline from December 29th to January 6th and a new high for the bounce would likely get a lot of traders feeling bullish. But the bearish potential with the pattern is that a new bounce high could turn into a bull trap and lead to a strong 3rd wave decline. If this afternoon's small bounce is followed by a drop lower on Thursday we could see SPX drop down to its December low, near 1972, or its uptrend line from March 2009 - October 2011, near 1965 (log price scale). That's also where the 200-dma is currently located.

S&P 500, SPX, 60-min chart

It's the same picture for the DOW as for SPX. The sideways triangle technically was broken today but with only a throw-under it could still be a viable pattern, in which case we're looking for a new rally leg to a new high. Upside targets would be to the trend line along the highs in 2014, near 18300 by the end of the month, or up to the top of a parallel up-channel for the rally from October 2011, near 18600 by early February. The short-term bullish pattern calls for a sharp rally but only marginally higher than the December 26th high at 18103 before dropping sharply lower. The bears would be in better shape with the DOW below 17075, which is where the decline from December 26th would have two equal legs down, and then below its 200-dma, which is nearing 17000.

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- bullish above 18,000
- bearish below 17,075

NDX has also been chopping sideways in a descending triangle and is still inside it. As a bullish continuation pattern in this location (following the October-December rally) it's very possible we'll get a new rally leg out of the pattern. An a-b-c bounce off the January 6th low that achieves two equal legs up points to 4272, which would also be a 78.6% retracement of the December 26 - January 6 decline so it would be more bullish above that level but still potentially bearish if the December 26th high was THE high.

Nasdaq-100, NDX, Daily chart

Key Levels for NDX:
- bullish above 4272
- bearish below 4089

The RUT has been a different pattern than the others and has been relatively strong, which is bullish. But today was bearish because it again closed below its 50-dma, which it held on a closing basis on Monday and Tuesday, and it closed below its uptrend line from October-December. Worse, it bounced back up near the broken uptrend line today and could leave a bearish kiss goodbye if it sells off tomorrow. The uptrend line will be near 1181 Thursday morning and the 50-dma will be near 1179 so that's resistance until proven otherwise. If, like the other indexes, the market ramps back up to finish a larger 3-wave bounce off the January 6th lows we could see the RUT reach at least 1207 for two equal legs up. That level is also the 78.6% retracement of the December 31 - January 6 decline so it would be more bullish above that level and especially above the trend line along the highs from March-July, currently near 1216.

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- bullish above 1217
- bearish below 1150

I mentioned earlier that a bearish signal for the market is the big jump up in the VIX in the past month. With more traders looking to protect their portfolios and/or speculate on the short side of the market, it says traders are not feeling as bullish about the market as they were. But the VIX has now made it up to a downtrend line from October-December, poking above it and then closing on it (mirroring what SPX did with its uptrend line from October-December today, except SPX was able to close above its line). The setup here is for a pullback in the VIX, which would be supportive of a market bounce.

Volatility index, VIX, Daily chart

Bonds continued their rally today, although they started to pull back after this morning's spike up. This week's decline in yields has TYX (30-year) testing a trend line along the lows from December 2008 - July 2012. It is marginally below both those lows but the trend line could offer support. Bearishly, TYX has dropped out the bottom of a parallel down-channel for its decline from December 2013 and that could lead to an acceleration lower. The bottom of the channel is near 2.53 so a rally back above that level would at least negate the short-term bearish picture based on this down-channel. A drop below today's low at 2.395 would continue to support the idea that TYX will be heading for 2% this year.

30-year Yield, TYX, Weekly chart

With Treasury yields declining there seems to be an interest in going for the yield on junk bonds, reflected in the price of HYG holding up better than the stock market. As a measure of risk-on/risk-off this is one thing that's not bearish at the moment. The divergence between HYG and the stock market could be a bullish heads up for the stock market so bears should watch this one carefully.

On the other side of the bull/bear coin is the banking sector. Bank stocks have been much weaker than the broader indexes and BKX was one of the first to break below the January 6th low, giving us a heads up that the others would follow. Back in October it had broken its uptrend line from March 2009 - October 2011 but only on an intraday basis (October 15 and 16). This time the break has been followed by lower lows and 3 days below the trend line, which makes it an official break. This is obviously an important trend line, one that defines the 2009-2014 bull market, and this says it's now over. But BKX has now dropped down to price-level support at about 66-67, with today's low at 66.48. It could be good for a bounce and maybe even back up to its broken uptrend line, near 70.50. That would be a good setup for a reversal back down but will need to be evaluated if and when it gets there. A drop below 66 would be more immediately bearish.

KBW Bank index, BKX, Weekly chart

The TRAN is presenting us with a bearish picture. It left a bearish non-confirmation at the December highs when the DOW made a new high but not matched by the TRAN. The TRAN then dropped sharply below its 20- and 50-dma's, currently near 8959 and 8994, resp., bounced back up to them last Friday and then sold off, leaving a back-test followed by a bearish kiss goodbye. This chart has SELL written all over it.

Transportation Index, TRAN, Daily chart

There's not much of a change to the U.S. dollar's weekly chart shown last week. It has stalled at 92.46 (last week's high was 92.76 and this week's high so far is 92.63), which is the projection for where the extended 5th wave in the rally from last May is equal to the 1st through 3rd waves. Only slightly higher is the top of its parallel up-channel for its rally from April 2008, currently near 93.30. It continues to be a good setup for at least a pullback and as I'll show later, the commodity index looks ready for at least a decent bounce.

U.S. Dollar contract, DX, Weekly chart

There's a lot of clamoring for a gold bottom as multiple market pundits pound the table about what a great buying opportunity we have for gold. When they start pounding the table that gold is worthless piece of shiny metal then I'll be interested in listening to them and doing the opposite. I still don't see a buying opportunity in gold. A trading opportunity maybe but I think we've got lower prices still coming.

If gold can break its downtrend line from October 2012 - July 2014, currently near 1238 (it's trying), I can see the potential for a rally up to a price projection at 1275.90 (two equal legs for the bounce off the November low). A little below that level, near 1271 by the end of the month, it would run into a downtrend line from March-July 2014, which would coincide with the top of an up-channel for the bounce from November. But the bounce has been very choppy and therefore I'm interpreting it as a correction to the decline and not something more bullish. As shown on the weekly chart below, a downside projection near 1000 by mid-year would be a better setup for the first opportunity to evaluate a longer-term buy setup. But we could see gold continue to work its way lower all year and finish near 890 (62% retracement of its 2001-2011 rally).

Gold continuous contract, GC, Weekly chart

Yesterday oil reached the support zone I've been looking for, near 44, and got a nice bounce off the low at 44.20. For the big move down from 2008, the 2nd leg of the decline started from the May 2011 high and it is 62% of the 1st leg down at 44.43, which I've noted on the weekly chart below. There's also the uptrend line from 1998-2008 offering support near 47.25, which was broken intraweek last week and this week but is holding so far. The setup is for a bounce off support but what's not clear yet is whether it will be a strong bounce, following a 3-wave move down from May 2011, or just a sideways choppy mess for several month as it hammers out a 4th wave correction in the decline from August 2013. I lean toward the latter interpretation so I'm expecting a bounce but I think it will be an ugly trading environment. Maybe sell some puts on USO.

Oil continuous contract, CL, Weekly chart

Last week I showed oil's daily chart to show why I liked the $44 area. In addition to the Fib and trendline support mentioned above, the shorter-term pattern for the wave count pointed to 43.63-44.42 for a downside target. This was based on the 5th wave in the move down from last June being equal to the 1st through 3rd waves (at 43.63) and for that 5th wave, which is the leg down from November, its 5th wave equals the 1st wave at 44.42. So there was nice correlation on the daily chart and weekly chart to suggest the $44 area should be strong support and now the size of the bounce suggests we could have a tradeable bottom.

Oil continuous contract, CL, Daily chart

Looking at the commodity index (DJUBS), today saw a relatively strong reversal off this morning's gap down, leaving an outside day for a key reversal. This came at the same time it was testing price-level support at 101.48 (the February 2009 low), with a low at 99.95 and a close at 102.35. The leg down from last April can be viewed as a completed 5-wave move and therefore sets it up for a larger bounce correction (if not something more bullish). One repeating pattern I've noticed with this index since its 2008-2009 decline is that each leg down was followed by approximately a 50% retracement of the decline before starting back down, which is shown on the weekly chart below. A similar 50% retracement, if all we're going to get is a bounce correction, points to 119.19 for a target. That level coincides with a back-test of its broken uptrend line from February 1999 - February 2009 and a trend line along the lows from 2012-2013. A rally above that level would therefore be considered more bullish but at least in the short term (the next few months) this is looking like a bullish setup for commodities, especially if it can back up inside the down-channel from September 2012, the bottom of which is currently near 103.30 (to leave a head-fake break below it).

Bloomberg Commodity index, DJUBS, Weekly chart

Tomorrow's economic reports include the unemployment claims and more importantly, the PPI data, which is expected to show a decline of -0.4% (deflation?) while the core PPI is expected to show +0.1%. The Empire Manufacturing index at 8:30 AM and then the Philly Fed at 10:00 AM will shed more light on how our economy is doing.

Economic reports and Summary

Using the January barometer, the weak start to the month is not good news for bulls. But we still have 11 trading days before the month will finish and with this wild market that could mean anything. The volatile price swings since the early-December highs has hammered out a sideways consolidation and it will likely lead to a strong move one way or the other. Which way is a bit of a coin toss at the moment but it should be noted that major tops have been put in with this kind of price action in the past.

Because so many expect a strong year this year (many past patterns point to a bullish 2015) we're seeing strong buying of the dips (helped with short covering) but we're also seeing many selling into rallies, such as yesterday's gap up that was immediately sold into. So there's a real battle going on and whichever side ends up being on the wrong side will help propel the winning side in a strong move. While I see the potential for a strong bounce to a minor new high above last Friday's highs, I'll be viewing it as a shorting opportunity (using relatively tight stop management) but there is the risk that the big bounces are over and we'll see a strong decline in the coming week. It's a risky time for swing traders and only the nimble who can watch the market during the day should be in there trying to trade this thing. Wait for a direction to become clearer to lessen the risk of a bad entry. This time next week should provide more answers.

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

Lacking A Catalyst

by James Brown

Click here to email James Brown


Lions Gate Entertainment - LGF - close: 29.37 change: -0.98

Stop Loss: 31.05
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Entry on January -- at $---.--
Listed on January 14, 2015
Time Frame: Exit prior to earnings in early February
Average Daily Volume = 1.2 million
New Positions: Yes, see below

Company Description

Why We Like It:
Everyone loves the movies. While 2014 had some pretty big hits total box office receipts for the industry were $10.3 billion. That's a -5% drop from the 2013. "The Hunger Games: Mockingjay - Part 1" was one of the most successful films last year with a gross of $309 million.

LGF is the studio that makes the Hunger Games movies. According to the company, "Lionsgate is a premier next generation global content leader with a strong and diversified presence in motion picture production and distribution, television programming and syndication, home entertainment, digital distribution, channel platforms and international distribution and sales. The Company currently has more than 30 television shows on over 20 different networks spanning its primetime production, distribution and syndication businesses."

In addition to The Hunger Games, LGF also makes the new Divergent films, which could be a big hit although probably not as big as Games. The company has also seen success in television with hits like Mad Men, Nurse Jackie, and Orange is the New Black. However, the stock tend to trade around its movie releases. That could prove challenging.

The last Hunger Games move is now last year's news. Shares of LGF could lack any serious catalyst to move the stock until the next round of movies come out. The next Divergent movie ("Insurgent") is expected to come out in March this year. Meanwhile the Mockingjay - Part 2 doesn't hit theaters until November 2015. If the stock's action is any indication then Wall Street is not very enthusiastic over the next Divergent movie.

Shares failed multiple times in the $35.50 area from mid November through December 1st. This is now a new lower high on the weekly chart (see below). While the broader market rallied in December, shares of LGF were under performing. That underperformance has continued into 2015.

Investors have taken notice of LGF's weakness. The most recent data listed short interest at 18% of the 84 million share float. The point & figure chart has turned bearish and is currently forecasting at $24 target but that could get worse.

Today LGF is about to test support at $29.00. A breakdown there could be our entry point. Tonight we're suggesting a trigger at $28.85.

Trigger @ $28.85

- Suggested Positions -

Short LGF stock @ (trigger)

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

Buy the FEB $30 PUT (LGF150220P30) current ask $1.80

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

Daily Chart:

Weekly Chart:

In Play Updates and Reviews

Another Day Of Widespread Declines

by James Brown

Click here to email James Brown

Editor's Note:
The stock market delivered its fourth decline in a row as investors fret over growth concerns.

Our new DISCA trade was triggered.

Current Portfolio:

BULLISH Play Updates

Covenant Transportation Group - CVTI - close: 27.68 change: +0.37

Stop Loss: 25.45
Target(s): To Be Determined
Current Option Gain/Loss: -1.3%
Entry on January 05 at $28.05
Listed on January 03, 2015
Time Frame: Exit prior to earnings in late January or early February
Average Daily Volume = 203 thousand
New Positions: see below

01/14/15: CVTI was showing relative strength again with a +1.35% gain. That's encouraging after yesterday's drop. However, I am suggesting patience. No new positions at this time. More conservative traders may want to raise their stop loss.

Earlier Comments: January 3, 2015:
Last year the S&P 500 added +11.3%. The Dow Jones Transportation Average doubled that with a gain of +23%. Yet CVTI's performance is light years ahead of the major indices with a +230% gain in 2014.

According to the company, "Covenant Transportation Group, Inc. is the holding company for several transportation providers that offer premium transportation services for customers throughout the United States. The consolidated group includes operations from Covenant Transport and Covenant Transport Solutions of Chattanooga, Tennessee; Southern Refrigerated Transport of Texarkana, Arkansas; and Star Transportation of Nashville, Tennessee. In addition, Transport Enterprise Leasing, of Chattanooga, Tennessee is an integral affiliated company providing revenue equipment sales and leasing services to the trucking industry."

Why are shares of CVTI surging? The simple answer seems to be business is booming. The company has raised its guidance twice in the last four months. The most recent time was December 11th. Now you might think the stronger profit picture is due to falling gasoline prices. CVTI confessed they hedge some of their fuel costs so the drop in gas prices actually has little impact on its current outlook. They're raising guidance because demand is so strong. Anecdotally this is a pretty optimistic sign on the strength of the U.S. economy.

Technically shares of CVTI have been consistently rising with a bullish trend of higher lows and higher highs. Shares are just starting to bounce from support again. This is our chance to jump on board. Friday's high was $27.80. I'm suggesting a trigger to open bullish positions at $28.05. Earnings are expected in late January or early February. We will most likely exit prior to their announcement. I will note that the point & figure chart is bullish and forecasting at $34.50 target.

- Suggested Positions -

Long CVTI stock @ $28.05

01/05/15 triggered @ 28.05

Sprouts Farmers Market - SFM - close: 34.39 change: -0.08

Stop Loss: 31.85
Target(s): To Be Determined
Current Option Gain/Loss: + 4.1%
Entry on December 29 at $33.05
Listed on December 23, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 1.0 million
New Positions: see below

01/14/15: SFM dipped toward short-term support near $34 and its rising 10-dma before paring its losses today. If the market is positive tomorrow SFM should bounce from this level.

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.

- Suggested Positions -

Long SFM stock @ $33.05

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

Long MAR $35 CALL (SFM150320C35) entry $1.10

12/29/14 triggered @ 33.05
Option Format: symbol-year-month-day-call-strike

TASER Intl. - TASR - close: 25.91 change: +0.19

Stop Loss: 24.70
Target(s): To Be Determined
Current Option Gain/Loss: - 2.2%
Entry on January 08 at $26.50
Listed on January 07, 2015
Time Frame: Exit PRIOR to earnings in late February
Average Daily Volume = 3.4 million
New Positions: see below

01/14/15: Shares of TASR bounced near round-number support at $25.00 today. The stock probably got a boost from news that 15 police departments from eight states have ordered more than 1,200 of its Axon body camera systems in the fourth quarter. These are the sort of headlines we've been expecting as more and more police departments add body cameras, which many are hoping will reduce violence.

Technically TASR looks vulnerable in spite of today's +0.7% gain. The stock is in the verge of breaking its bullish channel. I am still suggesting traders wait for a rally above $26.84 before initiating new positions.

Earlier Comments: January 7, 2015:
50,000 volts. That's what a Taser electro-muscular disruption (EMD) device shoots through your body to override the central nervous system. Your body freezes as all the muscles contract.

Their website describes the company as "TASER International makes communities safer with innovative public safety technologies. Founded in 1993, TASER first transformed law enforcement with its electrical weapons. TASER continues to define smarter policing with its growing suite of technology solutions, including AXON body-worn video cameras and EVIDENCE.com, a secure digital evidence management platform."

They may have started with electrical weapons but now the company is expanding to mobile video cameras worn on a law enforcement officer's gear. The company has been in the news lately thanks to President Obama. On Monday this week Obama wants to spent $75 million over the next three years to outfit the nation's police force with body-worn cameras.

The White House believes that body-worn cameras on police will help reduce violence and avoid another event like the one in Ferguson, MO. Current estimates suggest there are only 70,000 police wearing cameras now. Obama's plan would almost double that. Industry analysts are forecasting significant growth if the federal government approves Obama's plan. There are nearly 800,000 policemen in the U.S. There's plenty of room to grow. Plus TASR is expanding internationally.

The bears will argue that TASR's stock is expensive with a P/E near 63. There is no denying that. However, the body-camera business could soar. Currently it's less than 8% of their annual sales. The real winner could be TASR's Evidence.com ecosystem. This is a subscription service for law enforcement to back up and manage all the data from TASER electric weapons, body-worn cameras, and more.

The stock hit multi-year highs on back in December following President Obama's comments suggesting the federal government endorsing body cameras for cops.

I will caution investors that TASR can be a volatile stock. You may want to limit your position size. I will point out that the latest data lists short interest at almost 30% of the 51.3 million share float. If the rally continues TASR could see some short covering.

Technically shares of TASR just bounced near the bottom of its bullish channel. We think TASR will outperform if the rally resumes. The simple 10-dma is at $26.36. Tonight we are suggesting a trigger to open bullish positions at $26.50. We will plan on exiting prior to TASR's earnings announcement due in late February.

- Suggested Positions -

Long TASR stock @ $26.50

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

Long MAR $27 CALL (TASR150320C27) entry $2.50

01/08/15 triggered @ 26.50
Option Format: symbol-year-month-day-call-strike

BEARISH Play Updates

Altisource Portfolio Solutions - ASPS - close: 18.06 change: + 1.57

Stop Loss: 19.25
Target(s): To Be Determined
Current Option Gain/Loss: +31.7%
Entry on January 13 at $26.45
Listed on January 12, 2015
Time Frame: exit prior to earnings in mid February
Average Daily Volume = 473 thousand
New Positions: see below

01/14/15: After such a huge drop yesterday it's not surprising to see an oversold bounce in ASPS. The stock added +9.5% and tagged an intraday high of $18.36. I'm not suggesting new positions at this time.

Earlier Comments: January 12, 2015:
ASPS is part of the services sector. They provide a host of services to the mortgage, real estate, and financial industries; including collections, payments and servicing non-performing residential mortgage loans. According to a company press release, "Altisource Portfolio Solutions S.A. is a premier marketplace and transaction solutions provider for the real estate, mortgage and consumer debt industries offering both distribution and content. Altisource leverages proprietary business process, vendor and electronic payment management software and behavioral science based analytics to improve outcomes for marketplace participants."

The stock saw tremendous rise from its beginning back in 2009 near $6.00 a share. By December 2013 ASPS was trading above $170.00. That proved to be a peak. It's been a long and painful decline. ASPS is associated with Ocwen Financial (OCN). It looks like ASPS was spun off from OCN years ago. They are both financial services companies. Both are probably affected by government investigations. OCN was hit with an investigation by the U.S. Consumer Financial Protection Bureau (CFPB) and was handed a $2.1 billion fine from the government. Meanwhile ASPS has been dealing with an investigation from regulators in New York. At the same time earnings for ASPS have been volatile. After big beats earlier in 2014 their most recent earnings report, on October 23rd, was a big miss. Analysts have started downgrading the stock.

Investors are bearish too. The most recent data listed short interest at 23% of the very small 10.6 million share float. With that much short interest it does raise the risk of a short squeeze.

Technically ASPS looks terrible. The recent sideways consolidation has failed and ASPS just broke down to new multi-year lows. Tonight we're suggesting a trigger to open bearish positions at $26.45.

- Suggested Positions -

Short ASPS stock @ $26.45

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

Long FEB $25 PUT (ASPS150220P25) entry $3.80

01/13/15 new stop @ 19.25
01/13/15 triggered @ 26.45
Option Format: symbol-year-month-day-call-strike

Discovery Communications - DISCA - close: 30.00 change: -1.21

Stop Loss: 32.85
Target(s): To Be Determined
Current Option Gain/Loss: +1.9%
Entry on January 14 at $30.57
Listed on January 13, 2015
Time Frame: Exit PRIOR to earnings on Feb. 19th
Average Daily Volume = 3.8 million
New Positions: see below

01/14/15: Our new DISC trade is moving the right direction. We wanted to open bearish positions at $30.90 but the gap down this morning triggered our play at $30.57. The relative weakness with today's -3.8% decline is encouraging if you're bearish on DISCA. I don't see any changes from last night's new play description.

Earlier Comments: January 13, 2015:
We have heard for a long time that content is king. Discovery has some great content. So why is the stock suffering so poorly? The stock market posted double-digit gains last year and yet shares of DISCA was one of the market's worst performers with a -23.8% decline.

According to company marketing materials, "Discovery Communications (Nasdaq: DISCA, DISCB, DISCK) is the world's #1 pay-TV programmer reaching nearly 3 billion cumulative subscribers in more than 220 countries and territories. Discovery is dedicated to satisfying curiosity, engaging and entertaining viewers with high-quality content on worldwide television networks, led by Discovery Channel, TLC, Animal Planet, Investigation Discovery and Science, as well as U.S. joint venture network OWN: Oprah Winfrey Network. Discovery also controls Eurosport International, a premier sports entertainment group, including six pay-TV network brands across Europe and Asia. Discovery also is a leading provider of educational products and services to schools, including an award-winning series of K-12 digital textbooks, through Discovery Education, and a digital leader with a diversified online portfolio, including Discovery Digital Networks."

It looks like the revenue picture has soured for DISCA. Back in February 2014 the company reported earnings and raised their revenue guidance. One quarter later, when they reported in July, they lowered the top end of their guidance. Then in November, when they reported earnings, DISCA missed Wall Street's revenue estimate and management lowered their revenue guidance.

In a recent interview Discovery's CEO said they are having trouble monetizing all of their content. The advertising environment has gone soft and they haven't figured out why there is a lull in ad spending.

Research is forecasting that online video watching will more than double by 2020. A USB analyst believes online will eventually pose a significant threat to more traditional TV watching trends and companies. Another analyst, this time with Sanford Bernstein, believes the huge declines in TV viewership will continue. Analyst Todd Juenger said, "We believe ad-supported TV is in the early stages of a structural decline." That's long-term bearish for TV. DISCA needs to do a better job of monetizing their content online.

Technically DISCA looks very bearish. The oversold bounce from November stalled in the $36 area several time. The point & figure chart is bearish and forecasting at $23.00 price target. Today DISCA is breaking down to new 52-week lows.

We are suggesting a trigger to open bearish positions at $30.90. Plan on exiting ahead of DISCA's earnings report in mid February.

- Suggested Positions -

Short DISCA stock @ $30.57

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

Long FEB $30 PUT (DISCA150220P30) entry $1.20

01/14/15 triggered on gap down at $30.57, trigger was $30.90
Option Format: symbol-year-month-day-call-strike

SodaStream Intl. - SODA - close: 18.63 change: -0.15

Stop Loss: 20.25
Target(s): To Be Determined
Current Option Gain/Loss: + 4.1%
Entry on January 05 at $19.42
Listed on January 03, 2015
Time Frame: Exit PRIOR to earnings in late February
Average Daily Volume = 946 thousand
New Positions: see below

01/14/15: SODA continues to drift lower and tagged another record at $18.22. More conservative traders may want to move their stop loss closer to the simple 10-dma (currently $19.25). I am not suggesting new positions at this time.

Earlier Comments: January 3, 2015:
The excitement over shares of SODA has definitely fizzled out over the last couple of years. The stock peaked just below $80 a share back in 2011. Then in early 2013 the stock was soaring and looked like it might reach $80 again. The rally lost its buzz and SODA peaked near $78 in mid 2013. Since then shares have reversed and stuck in a bear market decline.

Who is SODA? According to the company's marketing material "SodaStream is the world's leading manufacturer and distributor of home beverage carbonation systems which enable consumers to easily transform ordinary tap water instantly into carbonated soft drinks and sparkling water. Soda makers offer a highly differentiated and innovative solution to consumers of bottled and canned carbonated soft drinks and sparkling water. Our products are environmentally friendly, cost effective, promote health and wellness, and are customizable and fun to use. In addition, our products offer convenience by eliminating the need to carry bottles home from the supermarket, to store bottles at home or to regularly dispose of empty bottles. Our products are available at more than 65,000 retail stores in 45 countries around the world, including 17,000 retail stores in the United States."

2014 was tough for SODA investors as the stock collapsed from about $50 to $20. The company guided lower when they reported earnings in July 2014. Then SODA shares gapped down sharply on October 7th when they issued another earnings warning. That big spike on October 24th was a story from Bloomberg that SODA was testing some Pepsi products. The rally was probably short covering as investors worried a partnership with Pepsi could turn things around. The rally quickly faded. Pepsi has already partnered with in-home beverage company Bevyz in Europe so any deal with SODA might be limited.

SODA's most recent earnings report was October 29th. Their EPS came in at $0.45, which beat estimates of $0.35. Yet revenues fell -12.9% in the third quarter to $125.9 million, which was significant below Wall Street's estimate. Gross margins are also sinking and fell 380 basis points to 50.5% in the third quarter. Management lowered their guidance again and announced they would stop providing annual guidance in 2015. That's never a good sign.

Like rats jumping off a sinking ship there have been stories that hedge fund managers are bailing out of their SODA positions. Plenty of investors are already bearish on SODA and short interest at about 17% of the small 20.8 million share float.

Friday's drop was significant because it's a bearish breakdown under major psychological support at $20.00. Tonight we are suggesting bearish positions immediately with a stop loss at $21.05. More conservative traders may want to wait for a new relative low under $19.33 before initiating positions.

NOTE: SODA has been rumored to be a takeover target for a long time. That hasn't stopped the stock from crashing over the last 18 months. You may want to limit your position or use the options to limit your risk just in case some M&A news happens to appear out of nowhere and send SODA higher.

- Suggested Positions -

Short SODA stock @ $19.42

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

Long FEB $20 PUT (SODA150220P20) entry $2.05

01/08/15 new stop @ 20.25
01/05/15 trade begins. SODA gaps down 30 cents to $19.42
Option Format: symbol-year-month-day-call-strike

Zulily, Inc. - ZU - close: 21.38 change: +0.16

Stop Loss: 23.55
Target(s): To Be Determined
Current Option Gain/Loss: +17.5%
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

01/14/15: ZU briefly traded below last week's low near $20.80 before bouncing. I would not be surprised to see another rebound back toward short-term resistance at its 10-dma currently near $22.00. 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

01/08/15 new stop @ 23.55
01/03/15 new stop @ 24.10
12/29/14 new stop @ 24.45
12/27/14 new stop @ 25.15
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