Option Investor

Daily Newsletter, Wednesday, 1/21/2015

Table of Contents

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

Market Wrap

Market On Hold for ECB

by Keene Little

Click here to email Keene Little
With the Fed mostly out of the QE picture (for now) all eyes and ears are on the ECB to see how much QE they'll launch. A leak of information this morning about what the ECB will do may have been a test of the market's reaction.

Wednesday's Market Stats

Equity futures had declined during the overnight session and the cash market gapped down to start the trading day. And then 5 minutes after the open there was a "leak" of information that supposedly came from two ECB officials that outlined some of the ECB's purchase program. The reaction from the market was immediate, blasting SPX 17 points higher in the next 5 minutes before pulling back and then continuing higher later in the morning. Was the leak intentional to gauge the reaction of the market? Will the somewhat subdued reaction give the ECB a reason to make the program bigger and better (to juice the market higher)?

There were many questions following the leaked information and one was "why so small?" Expectations have been for the ECB to launch a "shock and awe" program to purchase at least 1.0-1.2 trillion Euros in the coming year. This would mean about 100 billion per month but the leaked information was half that -- about 50 billion per month. Many traders are already feeling the actions of the central banks are not doing enough and if the ECB does in fact announce a program that buys "only" 50 billion Euros a month we could see a sell-the-news reaction. But if the ECB got the information they were looking from this morning's subdued response perhaps they'll bump up that number in their announcement (just a guess on my part).

In addition to the quantity of purchases by the ECB there is great interest to hear what kinds of purchases will be made. Many expect the ECB to announce their intention to start buying sovereign debt so if they instead announce an intention to continue buying only corporate bonds and asset-backed securities (ABS) the market would likely react negatively. The market wants (needs) to hear 100 billion Euros per month for at least a year and that the program will include purchasing sovereign debt as well.

As I'll review with the charts, it's looking like the market is set up to react positively to tomorrow morning's ECB announcement but that it will not hold and the spike up could be quickly followed by a strong selloff.

We only had a couple of economic reports this morning, which included Housing Starts and Building Permits. The numbers were mixed, showing strength in the number of homes that were started but weakness in the number of new building permits, especially for multi-family units. Home builders are not feeling as confident about the future and that's been reflected in the stock prices of the builders. The report from the Mortgage Bankers Association showed applications for mortgages declined by 3% last week but that follows a +24% increase in the week before that.

One negative that the housing market is fighting is household formations. Between lower earnings and higher debt there are many people, especially young college grads, who have not been able to qualify for loans. Household formation is currently running about 500K per year, which is about half the number of homes being built. That's a recipe for excess inventory so the number of new building permits as we head into the spring will be an important metric to watch. In order to show a healthy and sustainable housing market, to help the broader economy, we need to see closer to 1 million household formations per year.

Overall it was a relatively quiet day as the market continues to consolidate. Prices have been more volatile this month but the price swings have been dampening out as the market traded essentially sideways since November. On the first trading day of November SPX was trading near 2020 and today it closed at 2032. It's been a wild ride from then to now but all it's done is churn traders' accounts. I think once we get through the ECB announcement we should get a move out of the recent trading range.

Starting tonight's chart review with a look at the SPX weekly chart, there is the potential for a bullish breakout following the whippy sideways consolidation since the December 5th high. The upside target in that case would be the top of its parallel up-channel from October 2011, which will be near 2130 by mid-February. If we get a euphoric reaction to the ECB announcement that gets some follow through it would push this bullish possibility to the top of the list. But at the moment I see a lower probability for the bullish scenario. The consolidation also fits as topping action, something we've seen many times before at important highs (even if only trading highs). This can be seen at the previous highs on the chart. A drop below last Friday's low near 1988 could usher in stronger selling.

S&P 500, SPX, Weekly chart

There is one bullish pattern that suggests a breakdown below last Friday's low near 1988 could be a bear trap. The daily chart below shows a possible descending wedge pattern off the December 29th high and it only needs one more leg down to complete it. To turn SPX more bearing I think we need to see a drop below the 200-dma, near 1968, to confirm the decline is real. Otherwise we could stay trapped for a little longer in a choppy and whippy consolidation pattern. The bulls need to see a rally above the 20- and 50-dma's, at 2045-2046, which would be confirmed bullish above 2072. Mind the chop inside the triangle/wedge.

S&P 500, SPX, Daily chart

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

Supporting the idea that SPX would be more bullish above 2045 is a rising wedge pattern off last Friday's low, as shown on the 30-min chart below. This pattern assumes we will get a positive reaction to the ECB announcement but then disappointment will follow. The rising wedge pattern needs another push higher to complete the 5-wave move up from last Friday and 2045-2050 is the upside target, which surrounds the 20- and 50-dma's on the daily chart. If this bearish pattern is the correct interpretation we're going to see a fast retracement back down to last Friday's low (1988), bounce and then continue lower (unless the bullish descending wedge on the daily chart is the overriding pattern). What these multiple patterns tell me is that Thursday's move (if not Thursday morning's move) could be a head fake and therefore a review of the charts Thursday night is going to be very important.

S&P 500, SPX, 30-min chart

It's no different for the DOW, which remains inside a possible descending triangle, having bounced off the bottom of it last week, near 17260. The top of the triangle, which is the downtrend line from December 26th, will be near 17800 Thursday morning. It could remain a choppy whippy mess inside this pattern so traders might do better by waiting for a break. The one caution about the upside is that we could get a head-fake break that finishes a flat a-b-c correction off the January 6th low with a test of the January 13th high at 17923 and then a strong decline to follow that. I think a breakdown would have a better chance of follow through for a trader to participate in.

Dow Industrials, INDU, Daily chart

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

On the NDX chart below I'm showing the same descending triangle as the DOW's. We have consistent patterns across many of the indexes and as the consolidation patterns tighten we can expect a strong move out of them. These triangle consolidation patterns that follow a rally are typically bullish so bears need to watch this carefully for any signs of bullishness. You don't want to be on the short side if this is getting ready to blow out the top. The flip side of the coin is that the consolidation pattern also fits as a topping pattern and a breakdown could catch a lot of traders leaning to the long side. That's a reason why a failed bullish pattern tends to fail hard and that's the outcome I expect to see here. Just keep control of risk management either way.

Nasdaq-100, NDX, Daily chart

Key Levels for NDX:
- bullish above 4230
- bearish below 4089

The RUT was the weaker index today and one of the few to close in the red. It could be in the same kind of descending triangle as the others but it's a bit sloppier. Multiple 3-wave moves since December make it difficult to figure out the next higher-probability move. I don't see the RUT leading in either direction yet but when these consolidation patterns break I suspect the RUT will be out in front of the next move.

Russell-2000, RUT, Daily chart

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

Last week I showed the VIX chart to point out the rally up to its downtrend line from October-December 2014. I thought it could turn back down from resistance and help warn the bears to back off on the short side. Sure enough, the VIX has pulled back as the stock market bounced but now it's approaching its uptrend line from December, which crosses its 20-dma near 18.20 on Thursday. This trend line held on the pullback into the January 9th low (bounce high for the stock market) and now it's a warning sign for bulls while we wait to see if the VIX holds support here.

Volatility index, VIX, Daily chart

The banking index, BKX, could soon provide an important clue if the bounce off last Friday's low is followed by another new low. As shown on its daily chart below, a new low would give us a clean impulsive 5-wave move down from December 29th. The small bounce off last Friday's low looks corrective and fits as the 4th wave, which should be followed by another new low for the 5th wave. A good downside projection for it is the trend line along the lows from May-October 2014, which will be near 64.25 by the end of the month. At that point it would be a good setup for at least a larger bounce correction, maybe something more. If the 5-wave move down is a larger-degree 1st wave in what will become a much larger decline, we'll get just a 2nd wave bounce correction in February and then strongly down after that. But if the 5-wave decline is the completion of a larger a-b-c pullback from September (as an expanded flat correction with the higher high in December) then we'll get a stronger rally to follow the new low. How the bounce plays out (assuming of course we'll get one after a new low) will provide further clues as to what the larger pattern will likely be.

KBW Bank index, BKX, Daily chart

This week's new high for the U.S. dollar is showing some bearish divergence against the highs earlier in the month, hinting of at least a pullback coming. I continue to like the reversal setup for the dollar after it hit the top of its parallel up-channel from 2008-2011, near 93.30 (with last Friday's brief high at 93.56 and Tuesday's closing high at 93.38). The dollar would be more bullish above 94, with 97 as an upside target, but at the moment I think there's a good chance we'll see the dollar start at least a multi-month pullback/correction before pressing higher.

U.S. Dollar contract, DX, Weekly chart

Gold bounced back up to important Fibs yesterday and today -- shown on the daily chart below is the 50% retracement of its 2008-2011, at 1302.35. Not shown on the chart is the 38% retracement of its 2001-2011 rally, near 1287, and the 78.6% retracement of the previous decline from July, which is near 1300. Gold tends to trade well around its Fibs and with a Fib resistance zone at 1287-1302 it's tough resistance. This morning's brief high at 1307 was followed by a sharp (impulsive) decline, closing near 1293, and that left a shooting star for today's candle. If the gold bulls can push it a little higher there's a downtrend line from August 2013 near 1330.

Gold continuous contract, GC, Daily chart

Gold's rally off the January 2nd low has been strong and sharp, which fits well as the c-wave of an a-b-c bounce correction off the November low and while it has turned just about everyone bullish on gold I think it will be another bull trap (similar to the one following the "breakout" back in August 2012). If we get a multi-week consolidation and then another press higher I'll turn more bullish but right now this looks more like the completion of a bounce correction than something more bullish. I continue to believe gold will drop to the 1000 area before potentially putting in a longer-term bottom.

Gold's strong rally the past three days was likely in response to an expectation the ECB is going to join the crowd of central banks that are racing each other to the bottom by printing more and more money and seeing who can debase their currency the fastest. That's what makes gold more valuable. In fact when gold is priced in Euros it looks stronger than when priced in U.S. dollars. This morning's leak about what the ECB will do seems to have deflated the gold bugs' expectations and that could be hinting that both gold and the stock market might not be all that happy with the ECB's less-than-expected purchase program. That can only be guessed but that's the hint I see from the chart.

With this morning's brief high at 18.50, silver's bounce off the December 1st low came close to achieving two equal legs up at 18.71, to complete an a-b-c bounce correction off the December 1st low. The morning high was good enough to tag its 200-dma at 18.47 but it stopped 10 cents shy of price-level resistance at 18.60, a level I have been expecting silver to retest after it was broken in September 2014. As can be seen on its weekly chart below, 18.60 was a shelf of support since June 2013 and now it's back for a back-test and I'm waiting for the slap following a kiss goodbye. If the bulls can avoid getting slapped there's still upside potential to its downtrend line from April 2011, currently near 20.70, but the higher-odds setup here is for a reversal back down from support-turned-resistance.

Silver continuous contract, SI, Weekly chart

After hitting what I thought would be strong support near 44 oil has been trying to bounce but so far it's not very impressive. We could see a relatively small consolidation and then lower prices, in which case the January 2009 low at 33.20 would be the next downside target. But the bigger pattern calls for a multi-month choppy bounce/consolidation if we're to get a 4th wave correction in the decline from August 2013. The way the bounce has started (choppy overlapping highs and lows) it supports the larger corrective bounce idea, which is why I've been saying it's probably not a good trading environment other than maybe some sold puts below the lows (traders selling premium don't care if the market goes nowhere while the premium decays into their account).

Oil continuous contract, CL, Weekly chart

Thursday morning we'll get the usual unemployment claims data but nothing market moving. All eyes and ears will be on what the ECB announces in our pre-market session. The futures will be leading the way for the cash market. Whether the cash market will hold the initial direction is what's not clear.

Economic reports and Summary

"What's obvious in the market is obviously wrong." This is the quote that always bothers me when I see an "obvious" setup and right now that setup is a rising wedge pattern for the bounce off last Friday's low. It looks like a good setup for a new high for the bounce Thursday morning, where SPX will break its downtrend line from December and have it looking like a bullish breakout. But it will turn into a head-fake break (bull trap) that's then followed by a strong selloff (sell the news following the ECB announcement). This looks like an obvious setup to me and I'm looking at it as a good shorting opportunity. Now all I worry about is the setup being obviously wrong.

Trading is a game of probabilities, which is what differentiates traders from gamblers (although many traders are in fact gamblers). Put the probabilities in your favor, use appropriate risk management (stops and/or position sizing) and then let the market determine whether or not the trade will work. Most of us use charts for the trade setups and pick price levels that help define entries and exits and then let the trade either work or not. There is no right or wrong about the trade but the market is of course always right. We set up the trade, we execute and then let the market tell us when it's time to leave.

And the setup at the moment, for me, is to look for a morning bounce in the stock market and then short a rollover. Using the SPX setup as an example, the rising wedge and the 20- and 50-dma's coincide for a high in the 2045-2050 area, preferably at the lower end of that range. If the short trade works I'd ride it down to last Friday's low and then manage it closely from there. A review of Thursday's price action should help define how the next week will proceed.

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

Will Europe Get QE?

by James Brown

Click here to email James Brown

Editor's Note:

Will Mario Draghi disappoint the market again?

Speculation has been building that the European Central Bank (ECB) will announce some form of asset purchases, a.k.a. quantitative easing (QE), at the end of its meeting tomorrow.

Expectations are running pretty high and that is dangerous since ECB President Mario Draghi has disappointed the market several times over the last two years.

Right now the question does not seem to be if the ECB will announce a QE program tomorrow but how much and for how long. Currently, after leaks from people inside the ECB, the best estimate is a QE program of €50 billion a month ($58 billion) for two years. That's about €1.2 trillion. Another estimate we heard from a European market analyst was €1 trillion over two years.

If we see numbers less than the estimates above it could spark a market sell-off. Adding to the market's uneasiness about the ECB meeting tomorrow were comments today from ECB Governing Council member Ewald Nowotny who said investors "should not get overexcited about it" (referring to the ECB meeting).

We are not adding any new trades tonight as the market could move sharply either direction depending on the ECB decision.

In Play Updates and Reviews

Stocks Manage More Gains Ahead of the ECB

by James Brown

Click here to email James Brown

Editor's Note:
The U.S. market rallied for its third day in a row. It's the longest winning streak for 2015 so far.

Current Portfolio:

BULLISH Play Updates

ACADIA Pharmaceuticals - ACAD - close: 32.47 change: -0.64

Stop Loss: 31.25
Target(s): To Be Determined
Current Option Gain/Loss: -1.9%
Entry on January 20 at $33.10
Listed on January 17, 2015
Time Frame: 8 to 12 weeks
Average Daily Volume = 1.24 million
New Positions: see below

01/21/15: Once again traders bought the dip in ACAD. Unfortunately shares underperformed the market with a -1.9% decline on Wednesday. I am not suggesting new positions at the moment. We need to see some follow through on today's intraday rebound.

Earlier Comments: January 17, 2015:
The biotech industry was a big outperformer last year. That outperformance looks like it could continue into 2015.

According to a company press release, "ACADIA is a biopharmaceutical company focused on the development and commercialization of innovative medicines to address unmet medical needs in neurological and related central nervous system disorders. ACADIA has a pipeline of product candidates led by NUPLAZID (pimavanserin), for which we have reported positive Phase III trial results in Parkinson's disease psychosis and which has the potential to be the first drug approved in the United States for this disorder. Pimavanserin is also in Phase II development for Alzheimer's disease psychosis and has successfully completed a Phase II trial in schizophrenia. ACADIA also has clinical-stage programs for chronic pain and glaucoma in collaboration with Allergan, Inc. and two preclinical programs directed at Parkinson's disease and other neurological disorders. All product candidates are small molecules that emanate from internal discoveries."

You can view ACAD's current pipeline of drugs in development on this web page.

Shares of ACAD shot higher in early September after the FDA gave the company a breakthrough therapy designation for its NUPLAZID treatment for Parkinson's. Currently there is an estimated 6.3 million people around the world who suffer with Parkinson's and there is no cure. If ACAD can eventually get this therapy approved then the drug could generate an estimated $1 billion in sales in jut the United States.

There is speculation that ACAD is an acquisition target by a larger biotech or pharmaceutical company. That has got to scare the bears in this name. Believe it or not but there are a lot of bears shorting ACAD. The most recent data listed short interest at about 30% of the 79 million-share float. That's plenty of fuel for a short squeeze.

Technically traders have been buying the dips in ACAD near its rising 40-dma. You can see the bullish trend of higher lows and ACAD just bounced on it Friday. This looks like a good spot to speculate on a follow through higher.

We always consider trading biotech stocks as a higher-risk, more aggressive trade. The right or wrong headline can send biotech stocks crashing or soaring overnight. You might want to use call options to limit your risk. Tonight we are suggesting a trigger to open bullish positions at $33.10.

*small positions to limit risk* - Suggested Positions -

Long ACAD stock @ $33.10

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

Long FEB $35 CALL (ACAD150220C35) entry $1.00

01/20/15 triggered @ 33.10
Option Format: symbol-year-month-day-call-strike

Sprouts Farmers Market - SFM - close: 35.42 change: +1.28

Stop Loss: 33.45
Target(s): To Be Determined
Current Option Gain/Loss: +7.2%
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

01/21/15: SFM rallied +5% intraday after being upgraded to a "buy" this morning. The stock settled with a +3.74% gain and at new eight-month highs. A different analyst firm upgraded SFM's rival WFM this morning as well. Both stocks were showing relative strength today.

I am not suggesting new positions.

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

01/15/15 new stop @ 33.45
12/29/14 triggered @ 33.05
Option Format: symbol-year-month-day-call-strike

BEARISH Play Updates

Discovery Communications - DISCA - close: 29.46 change: +0.21

Stop Loss: 30.85
Target(s): To Be Determined
Current Option Gain/Loss: +3.6%
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

01/21/15: The early morning rally in DISCA peaked by lunchtime below round-number resistance at $30.00. If DISCA does manage to trade above $30.00 keep an eye on the simple 10-dma near $30.70 as potential resistance.

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

01/15/15 new stop @ 30.85
01/14/15 triggered on gap down at $30.57, trigger was $30.90
Option Format: symbol-year-month-day-call-strike

Lions Gate Entertainment - LGF - close: 28.25 change: +0.16

Stop Loss: 31.05
Target(s): To Be Determined
Current Option Gain/Loss: +2.1%
Entry on January 15 at $28.85
Listed on January 14, 2015
Time Frame: Exit prior to earnings on February 5th
Average Daily Volume = 1.2 million
New Positions: see below

01/21/15: LGF managed an oversold bounce after a big decline yesterday. Broken support near $29.00 should be new overhead resistance.

Earlier Comments: January 14, 2015:
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.

- Suggested Positions -

Short LGF stock @ $28.85

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

Long FEB $30 PUT (LGF150220P30) entry $2.10

01/15/15 triggered @ 28.85
Option Format: symbol-year-month-day-call-strike

SodaStream Intl. - SODA - close: 18.53 change: +0.29

Stop Loss: 18.85
Target(s): To Be Determined
Current Option Gain/Loss: +4.6%
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

01/21/15: SODA displayed relative strength today with a +1.5% bounce. The stock is nearing what should be technical resistance at its simple 10-dma near $18.70. Should SODA move much higher it will hit our stop loss at $18.85.

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

01/15/15 new stop @ 18.85
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

Tribune Media Co. - TRCO - close: 54.10 change: -0.45

Stop Loss: 56.65
Target(s): To Be Determined
Current Option Gain/Loss: -0.3%
Entry on January 21 at $53.95
Listed on January 20, 2015
Time Frame: 8 to 12 weeks
Average Daily Volume = 501 thousand
New Positions: see below

01/21/15: Our new trade on TRCO is now open. Shares traded below $54.00 a couple of times on Wednesday and tagged our entry trigger at $53.95. I would still consider new positions now at current levels but it might be best to wait and see how the market reacts to the ECB meeting tomorrow before initiating positions.

Earlier Comments: January 20, 2015:
Traditional television is dead. That's been the story for a long time with falling viewership in traditional television for several years. Yet that didn't stop a big rally in shares of TV companies like CBS and TRCO in 2013.

According to the company's marketing material, "Tribune Media Company (TRCO) is home to a diverse portfolio of television and digital properties driven by quality news, entertainment and sports programming. Tribune Media is comprised of Tribune Broadcasting's 42 owned or operated local television stations reaching over 50 million households, national entertainment network WGN America, available in approximately 71 million households, Tribune Studios, and Tribune Digital Ventures, including Gracenote, one of the world's leading sources of TV and music metadata powering electronic program guides in televisions, automobiles and mobile devices. Tribune Media also includes Chicago's WGN-AM, the national multicast networks Antenna TV and THIS TV. Additionally, the Company owns and manages a significant number of real estate properties across the U.S. and holds other strategic investments in media."

Last year was a rough one for TRCO. The stock peaked about $90 in July. It's now down about -40% from that high. We could argue that it's all about the TV advertising market. The Wall Street Journal ran an article in November last year suggesting that the entire industry is seeing a structural slowdown as more and more ad spending moves to digital outlets. Yet the last couple of earnings reports from TRCO came in significantly above expectations. Revenues are growing year over year. So is TRCO an exception or were the revenue comparisons to a year ago just really, really bad?

If price is truth then investors are bearish on TRCO. The stock's big oversold bounce in October last year turned into a bearish double top near $70.00. More recently shares have been sinking with a steady trend of lower highs. Today the point & figure chart is bearish and forecasting at $42 target.

Shares of TRCO were showing relative weakness again today with a -2.3% drop and a breakdown under support at $55.00. The intraday low was $54.23. Tonight I'm suggesting a trigger to open bearish positions at $53.95.

- Suggested Positions -

Short TRCO stock @ $53.95

01/21/15 triggered @ 53.95

Zulily, Inc. - ZU - close: 19.52 change: -0.25

Stop Loss: 21.65
Target(s): To Be Determined
Current Option Gain/Loss: +24.6%
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

01/21/15: We can't complain with ZU's performance. The rally attempt failed midday about $20.35 and the stock underperformed the broader market with another -1.2% decline.

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) -

(option trade was closed on Jan. 16th, 2015)
Jan $25 PUT (ZU150117P25) entry $1.15 exit $4.40 (+282.6%)

01/16/15 planned exit for the January $25 puts
01/15/15 new stop @ 21.65
Prepare to exit the January put option tomorrow morning
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