Option Investor

Daily Newsletter, Wednesday, 2/4/2015

Table of Contents

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

Market Wrap

Consolidation Patterns Continue to Hold

by Keene Little

Click here to email Keene Little
The major indexes have been stuck in consolidation patterns since November and appear to be stuck. But it's looking like we should soon break out and the only remaining question is the direction of the break. We could get an answer before the end of the week.

Wednesday's Market Stats

Equity futures chopped sideways last night and into this morning and the cash market continued the choppy sideways consolidation today. SPX had a relatively quiet day, trading in a 15-point range until the market got hit with strong selling in the final 25 minutes of the trading day and that opened up the trading range to 18 points. The DOW was the stronger index all day, thanks to Visa's (V) +2% gain and Disney's (DIS) monster gap up and +7.6% gain. It had a 180-point trading range today.

Funny how a 180-point trading range today felt like a slow day. It was mild by comparison to the last several weeks and we're seeing a contraction in the price swings in the large consolidation patterns that we've been in since November. The trading range is tightening and the patterns are at the point where we should soon break out/down and see a strong move. Finger to the wind says we'll see an upside breakout but there are a few more pieces to put in place before that becomes a safer trading bet.

This morning's economic reports of interest were the ADP Employment and ISM Services reports. Because of recent declines in the unemployment numbers there was an expectation for an upside surprise in the ADP report. Unfortunately they were wrong and the report showed fewer jobs were filled. The number for January was +213K vs. expectations for +230K and down significantly from December's +253K, which was revised higher from the originally reported +241K. The report barely caused a ripple in the pre-market futures.

After the open we received the ISM Services report and there was a slight tick up in January vs. December, 56.7 vs. 56.5. The market tends to pay less attention to this report, vs. the ISM manufacturing report (yesterday), which saw a decline in January from December (it dropped from 55.1 to 53.5, which continues the slew of economic reports showing a slowing of our economy). One component of the ISM Services report shows pricing pressure (deflation) continues -- the prices-paid component dropped to 45.5 in January, down from 49.8 in December, which was down from November's 55. The other warning from the report is that most of the gain in production came from chewing through the backlog of orders and unless new orders can pump the backlog back up we're looking at continued slowing in the months to come.

At 10:30 AM we then received the oil inventory report, which showed a further buildup of 6.3M barrels added last week. This wasn't as high as the nearly 8.9M barrels added in the previous week but it's still a large addition to an already saturated market. Oil prices reacted predictably on the news and spiked down and continued to sell off the rest of the day. By this afternoon's low oil had given back almost 62% of the rally off last Thursday's low before closing at 48.53 (-8.5%), slightly above its 47.95 low. Yesterday afternoon's high was 54.24.

The indexes were looking like they were going to close at/near their highs for the session as we rounded the corner into the closing bell. But then some ECB news hit the wire and the market spiked back down, taking all the indexes into the red, including the DOW which had been green all day. A slight bounce back up into the close managed to keep the DOW in the green but the others were unable to do the same. The news from the ECB was that they are rejecting Greek bonds as collateral for their QE program.

I found the market's reaction to the ECB news a little strange considering the ECB had previously announced that Greece would be excluded from the QE program (the only country to be excluded). Then Mario Draghi and Greece's new finance minister, Yanis Varoufakis, had met earlier today and Varoufakis claiming the ECB would do "whatever it takes" to support all EU members, including Greece. But Germany would have none of it and after a meeting between EU central bank chiefs the ECB announced they would not accept Greek bonds as collateral for more loans.

Oops, somebody got their wires crossed or else the first meeting with Varoufakis was an attempt to play nice and Germany put the kibosh on the plan. Cancelling its acceptance of Greek bonds as collateral for loans shifts the burden to Athens' central bank to finance its lenders and the Greek banking system is already teetering on the edge of bankruptcy. This effectively isolates Greece and it's obvious the EU is trying to force Greece into making a new deal for support. This follows the recent Greek election that installed an anti-austerity party and the fear by EU members is that the Syriza party will simply not pay their debt, although they've been backing off on their hardline position recently.

Greece has been close to Russia and all of this could drive them further into Russia's waiting hands. Without Greece's vote the EU cannot institute new sanctions against Russia so there's a lot of political football going on behind the scenes. It's not just a banking issue and between currency wars, the Greek debt issue (first of many countries in the EU that will be dealing with the debt problems), and Russia there are many pieces to the chess game and Putin happens to be a master at geopolitical chess. All of this could really start to spook the market so it pays to keep your ears on the railroad track and listen for the coming train.

In the meantime, while all this plays out on the grand geopolitical stage, which is quite fascinating, we have a stock market that could still rally in the face of all these worries. A slowing economy? It means the Fed will stay accommodative so let's rally! Trouble in other countries and currencies, which could tip more than one bank/country into default and start the dominoes falling in the international banking system? Nah, the collective central banks have our backs. They know what's going on (cough) and will be able to head off all problems before we even hear about them. After all, they've been right on top of all the problems in the past (cough, gag).

I am of course being facetious and all of the things mentioned above, and more, are in fact a big worry. While I want to play the possibility of an upside breakout, I'm very concerned about a significant downside surprise, starting with a lock-limit down morning. Wear protection when playing in this market! Let's start with a review of SPX.

SPX has remained inside a sideways triangle consolidation pattern since December and tested the top of it yesterday and today. Monday's low was a slight break below the bottom of the triangle pattern (the uptrend line from December 16 - January 16) and the recovery back inside the triangle put it on a buy signal. It continues to look like a bullish continuation pattern and a pullback from the current high could finally lead to a breakout to the upside. That's the bullish interpretation, whereas the bearish interpretation is that it's not a triangle pattern but instead it's simply building a bearish topping pattern (something we've seen at previous important highs. Short term it's looking like we should get a pullback from resistance but the bulls want to see only a partial retracement of this week's rally and then a strong break of resistance.

S&P 500, SPX, Weekly chart

I've been playing around with a couple of different wave counts (the squiggles in the stretch between the November 2012 low and the September 2014 high can be counted a few different ways) and a bullish wave count calls this triangle pattern, since the December 5th high, a 4th wave that should lead to the final 5th wave, as depicted in green on the charts. Sideways triangles typically lead to the final move of the trend (up in this case) and that's why 4th waves are typically triangles. Upside potential is to 2150 and possibly 2200. In either case if you're in bearish positions you'll want to stop out above 2065.

The daily chart below shows the whippy price action inside the triangle and the green wave count is an a-b-c-d-e that started from the December 5th high and December 16th low. The rally from Monday looks like a completed 5-wave move and should therefore lead to at least a pullback. If the bullish wave count is correct we'll see just a pullback and then a stronger rally. If the bearish wave count is correct, this week's rally completes another 2nd wave bounce correction, which sets us up for a strong 3rd of a 3rd wave down. In other words, get ready for a big move that will finally break out of this triangle consolidation.

S&P 500, SPX, Daily chart

Key Levels for SPX:
- bullish above 2065
- bearish below 1980

Getting in closer with the 60-min chart below, all of the choppy moves leaves too many possible wave counts and that's why we need to see what happens from here to help identify the larger pattern. If this week's rally completes an a-b-c bounce off last Thursday's low (as an expanded flat correction with the lower low on Monday) we should see the market start to drop hard in an impulsive move. That would be the first clue for the bears. But if we get a corrective pullback from this morning's high it's going to look more bullish. Once the pullback correction finishes in that case, get ready to rock and roll to the upside.

S&P 500, SPX, 60-min chart

The DOW was the stronger index today, thanks to Visa's (V) strong day following its earnings report. Its price (266) has an outsized influence on the index and it rallied +2.5% today. Off its December 26th high the DOW was looking a lot like SPX with a sideways triangle pattern but it had a larger break below the bottom of the triangle pattern into Monday's low. Instead of triangle pattern it's looking more like the choppy pullback formed a bull flag pattern and today's rally had it testing the top of it this morning and then breaking it this afternoon before a strong selloff shortly before the close.

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- bullish above 17,840
- bearish below 17,037

From here I see two higher-probability moves for the DOW and like SPX we're likely to see a strong move either way before the end of this week. The bearish wave count suggests we could see a little higher to complete a large a-b-c bounce off the January 6th low, which will be followed by a strong 3rd wave down (shown in red). The bullish wave count calls for a pullback to retrace a portion of this week's rally and then off to the races to the upside. Perversely, a continuation of the rally from here for another day or two would actually be more bearish, whereas a pullback from here would keep the bullish potential alive, depending on what kind of pullback we get (impulsive vs. corrective).

NDX remains firmly inside its descending triangle pattern off its November 28th high. It would turn bullish above its January 23rd high, near 4293, and bearish below the bottom of the triangle, near 4090. Lots of chop and danger for traders in between.

Nasdaq-100, NDX, Daily chart

Key Levels for NDX:
- bullish above 4300
- bearish below 4090

The RUT briefly broke below the bottom of a potentials sideways triangle on Monday but then quickly recovered, which also put it on a buy signal. Yesterday and today it ran into the top of the triangle, which is the downtrend line from December 31 - January 28, but as with the others it's looking like it's ready for at least a pullback before continuing higher. The bulls would be in trouble below Monday's low and its 200-dma, both near 1153.

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- bullish above 1204
- bearish below 1150

Bonds are looking like they're ready for a pullback (bounce in yields). And selling in bonds could help the stock market rally so it's going to be important to watch how they do from here. Last week TLT (20+ year Treasury bond ETF) had rallied up to its trend line along the highs from December 2008 - July 2012 and popped above its trend line along the highs for its rally from December 2013. This week's selloff has it back below the shorter-term trend line so it could be ready for a larger pullback from resistance. There was bearish divergence at last week's high on the daily chart (not on the weekly chart below) so we could see at least a retest of the high but at this point I think the upside for bonds is the riskier bet.

20+ Year Treasury ETF, TLT, Weekly chart

The banks don't give me a clear sense of direction yet but at the moment I see a higher-odds scenario that calls for another leg down following the current rally off last Thursday's low. That throws a monkey wrench into the idea for a stock market rally so it's going to be important to watch what the banks do. BKX had a 3-wave move down from December 29th to the January 16th low, which leaves us with a corrective pullback (labeled wave-a on its chart below). From that low it would have an a-b-c bounce with two equal legs up at 40.21. That's labeled wave-b and it could lead to another decline in wave-c, potentially finding support at the trend line along the lows from May-October 2014, currently near 64.15. A rally above 70.21 would be more bullish but then the bulls will have to contend with the 200-dma, at 70.68 and its 50-dma, which will soon cross the broken uptrend line from March 2009 - October 2011, near 71.25. I do not feel bullish about the banks and this is the one keeping me cautious about feeling bullish about the major indexes (following a pullback).

KBW Bank index, BKX, Daily chart

Following the U.S. Dollars high on January 26th it has had a 3-wave pullback (more easily seen on the daily chart vs. the weekly chart below). The 3-wave pullback had a projection for two equal legs down, for an a-b-c correction, at 93.36. Yesterday's low missed the projection by 2 cents at 93.38 and got a strong bounce off that low. The low was also a test of the top of its parallel up-channel from 2008-2011, which can be seen (if you squint hard) on the chart. So far this all fits with the idea that the dollar's rally has not finished yet and it could make it up to the Fib projections at 97.35 before it will be ready for a larger multi-month consolidation. It makes me wonder if oil will drop a little lower before finding its bottom.

U.S. Dollar contract, DX, Weekly chart

Gold's bounce off the November low looks corrective and it's one of the things that keeps me bearish gold, along with the larger wave count that suggests we've got lower prices before the downside pattern is complete. But shorter term the pullback from the January 22nd high also looks corrective and suggests we could see gold push a little higher before starting back down. A higher bounce could take it up to its downtrend line from August 2013, currently near 1330, which would also be a back-test of its broken uptrend line from 2001-2005. Above 1330 would therefore be more bullish.

Gold continuous contract, GC, Daily chart

As mentioned earlier, oil inventory rose another 6.3 million barrels last week, to 413.1 million. Storage, including the big terminal in Cushing, OK, is filled and overflowing (which is one reason why so many large oil ships are holding so much, as well as waiting for higher prices). The total inventory is the highest on record going back to 1982. This is of course the result of the new oil-drilling efforts (primarily shale oil) and as can be seen in the chart below, the production of oil is now back to the highs seen in 1973 and 1986. Flip the chart upside down and it's not hard to figure out why oil prices have collapsed.

Oil production, 1973-January 2015, chart courtesy businessinsider.com

The skyrocketing increase in oil production is of course unsustainable, especially with the number of drilling rigs in decline. Once the production from currently installed rigs begins to decline we'll see this chart reverse, potentially from near current levels. This is probably what has the price of oil basing/rallying in the past 3 weeks. After hitting my downside projection at 43.63-44.42, with a final low so far on January 29th at 43.58, I've been looking for oil to consolidate in what could be a multi-month choppy consolidation as traders try to figure out the supply vs. demand equation. With a slowing economy and slowing production (eventually) we could see prices remain relatively steady with a slight rise over the next several months (similar to what oil did following the low in November 2013).

Oil continuous contract, CL, Daily chart

Tomorrow morning should be relatively quiet as far as economic reports go. I think the market will be more interested in more news out of Europe and what's happening with Greece and its debt problem. A war of words on top of the currency wars that are going on could start to escalate and make more than a few people nervous. Europe has the Bear to its east licking its chops as it watches carefully for its next "opportunity" (Ukraine).

Economic reports and Summary

The major indexes have me feeling a little bullish here. A pullback to retrace some portion of this week's rally could lead to another stronger rally leg and eventually drive the indexes to new highs this month. SPX could rally to 2150 or higher and the DOW could make it up to the 18700 area. Just think, only 1300 points above 18700 (another +7%) could have the DOW ringing the bell at 20K. Bring out the party hats!

OK, yes, I'm more than a bit skeptical about seeing DOW 20K and I'm not even sold on the idea yet that we'll see a rally to new highs. The banks have been weak and it's looking like they could get weaker. A stock market rally to new highs without the banks on board would be more justification to look to short the rally. It would at least mean traders must exercise caution since it's best to follow the money. With all the currency wars going on right now and all the sovereign debts issues that could plague emerging markets, we're not that far away from a real nasty news event and another flash crash is right around the corner. Trade the long side very carefully if we get a good setup with a pullback on Thursday/Friday.

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

Activist Investor Rally

by James Brown

Click here to email James Brown


Informatica Corp. - INFA - close: 41.97 change: +0.06

Stop Loss: 40.65
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Entry on February -- at $---.--
Listed on February 04, 2015
Time Frame: 6 to 12 weeks
Average Daily Volume = 1.5 million
New Positions: Yes, see below

Company Description

Why We Like It:
INFA is in the technology sector. The company was getting a lot of attention last week as speculation soared they could be up for sale. The company describes itself as "Informatica Corporation (INFA) is the world's number one independent provider of data integration software. Organizations around the world rely on Informatica to realize their information potential and drive top business imperatives. Informatica Vibe, the industry's first and only embeddable virtual data machine (VDM), powers the unique 'Map Once. Deploy Anywhere.' capabilities of the Informatica Platform. Worldwide, over 5,500 enterprises depend on Informatica to fully leverage their information assets from devices to mobile to social to big data residing on-premise, in the Cloud and across social networks."

The stock had a relatively rough 2014 but appeared to bottom after investors sold the stock following its July earnings report. Things turned interesting last week. On January 26th the stock soared on news an activist investors was getting involved.

Bloomberg news said that hedge fund Elliott Associates was boosting its stake in INFA. This was later confirmed in a 13D filing. Elliott now owns an 8.8% stake in INFA. Elliott's manager, Paul Singer, said he might suggest to INFA management that they sell the company to unlock shareholder value. Shares of INFA soared on this news because Elliott Associates has had previous success pushing other companies to sell themselves.

There are critics. Some analysts believe this story to sell INFA is a fantasy. Wall Street is not a place to let the truth get in the way of a good story. Shares of INFA soared on speculation it could be up for sale (eventually). The very next day INFA reported its Q4 earnings. Results were better than expected.

INFA delivered a profit of $0.56 a share with revenues rising +10% to $303.7 million. That beat analysts' estimates on both the top and bottom line. INFA said their Q4 software revenues hit a record $150.2 million, up +12% from a year ago. They also signed a record-setting 41 deals worth more than $1 million and 145 deals worth more than $300,000. Their subscription revenues rose +53% year over year.

INFA management also announced a $500 million stock buyback program. The Board of Directors approved an additional $337 million to boost their current program. They will spend $300 million in an accelerated share repurchase program.

The combination of the activist investors news and the better than expected earnings results produced a strong one-two punch to the bears. INFA soared. There hasn't been that much profit taking. It looks like traders have started to buy the dip.

Tonight we are suggesting a trigger to open bullish positions at $42.65. We suspect that INFA will be able to breakout past its early 2014 highs in the $43.50 area.

Trigger @ $42.65

- Suggested Positions -

Buy INFA stock @ (trigger)

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

Buy the MAR $42.50 CALL (INFA150320C42.50) current ask $1.50

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

Intraday Chart:

Daily Chart:

In Play Updates and Reviews

Stocks React To Latest Greek News

by James Brown

Click here to email James Brown

Editor's Note:
The stock market essentially churned sideways on Wednesday. Then late in the day stocks dropped sharply as investors reacted to the latest twist in the negotiations between Greece's new government and the ECB. News that the ECB would not allow Greek debt as collateral sparked a quick sell-off in equities.

Meanwhile we closed our VA trade this morning.

Current Portfolio:

BULLISH Play Updates

Cree, Inc. - CREE - close: 35.71 change: -0.55

Stop Loss: 33.90
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Entry on February -- at $---.--
Listed on February 03, 2015
Time Frame: 8 to 12 weeks
Average Daily Volume = 2.8 million
New Positions: Yes, see below

02/04/15: CREE gave back about half of yesterday's gains. The stock spent almost the entire day inside of yesterday's trading range, which suggest indecision on the part of traders. I don't see any changes from last night's new play description.

Earlier Comments: February 3, 2015:
Shares of CREE might be seeing a turnaround. The company is part of the technology sector. According to a press release, "Cree is leading the LED lighting revolution and making energy-wasting traditional lighting technologies obsolete through the use of energy-efficient, mercury-free LED lighting. Cree is a market-leading innovator of lighting-class LEDs, lighting products and semiconductor products for power and radio frequency (RF) applications."

Last year was pretty rough on CREE investors. The trouble started back in 2013. Earnings have been sour. Management had developed a habit of missing earnings estimates and then guiding lower. However, after guiding lower the last two quarters in a row CREE finally offered the market some bullish guidance.

Their most recent earnings report was January 20th. Earnings came in at $0.33 a share. That's significant below the year ago period of $0.46 but their 33-cent profit beat Wall Street estimates by 11 cents. Revenues were essentially flat at $413 million.

CREE offered guidance (currently in their Q3) of $0.21-0.25 a share. That compares to analysts' estimates of $0.21. They're forecasting revenues in the $395-414 million range versus estimates of $405 million.

The last few months have been very volatile for CREE but the rally has created a buy signal on the point & figure chart that is forecasting a long-term $56 target. More importantly CREE appears to be breaking out past its long-term trend line of resistance (see weekly chart below). If this rally continues CREE could see a short squeeze. The most recent data listed short interest at 23% of the 109 million share float.

Tonight I am suggesting a trigger to open bullish positions at $36.55. We'll start this trade with a stop loss at $33.90.

Trigger @ $36.55

- Suggested Positions -

Buy CREE stock @ (trigger)

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

Buy the MAR $35 CALL (CREE150320C35)

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

Interactive Brokers Group - IBKR - close: 31.65 change: +0.61

Stop Loss: 29.80
Target(s): To Be Determined
Current Option Gain/Loss: +1.6%
Entry on February 03 at $31.15
Listed on February 02, 2015
Time Frame: 8 to 12 weeks
Average Daily Volume = 568 thousand
New Positions: see below

02/04/15: It was a good day for IBKR bulls. Shares tested short-term support at the rising 10-dma and then soared to a +1.9% gain. The stock is about to test its old 2008 highs in the $32.00-32.50 area.

Earlier Comments: February 2, 2015
One stock that has been showing some resilience the last few days has been IBKR. The company describes itself as "Interactive Brokers Group, Inc., together with its subsidiaries, is an automated global electronic broker that specializes in catering to financial professionals by offering state-of-the-art trading technology, superior execution capabilities, worldwide electronic access, and sophisticated risk management tools at exceptionally low costs. The brokerage trading platform utilizes the same innovative technology as the Company’s market making business, which executes and processes trades in securities, futures and foreign exchange instruments on more than 100 electronic exchanges and trading venues around the world."

Last month was pretty crazy for many of the brokers, especially if they had any significant forex trading operations. When the Swiss National Bank removed their currency beg it sent shockwaves through the banking, brokerage, and currency world. You can see the big spike down in IBKR on January 16th. Fortunately, IBKR said that while they did have some clients who lost money (their accounts were now negative thanks to the wild currency swings) the total amount of potential losses for IBKR was only $120 million. That is less than 2.5% of their net worth.

The stock quickly recovered. A few days later on January 20th IBKR reported its Q4 earnings results. IBKR's 12 cents per share profit was six cents better than the $0.06 estimates. Investors seemed to ignore that fact that revenues were down -16.7% to $208.1 million and below estimates. That 12-cent profit was a +71% improvement from a year ago. IBKR's average daily trading volume was up +22% from Q4 2013.

It looks like the trading momentum has continued into 2015. IBKR just announced today that their Daily Average Revenue Trades (DARTs) were up +16% from a year ago and +15% from the prior month. Client accounts rose +17% from a year ago to 285 thousand.

Looking at IBKR's performance the last few days is encouraging. The market has been volatile while IBKR has been consolidating sideways in the $30-31 zone. A breakout higher could signal the next leg up. The point & figure chart is bullish and forecasting at long-term target of $48.00.

Friday's intraday high was $31.08. Tonight we are suggesting a trigger to open bullish positions at $31.15. Investors may want to start with small positions. There is a chance that the old 2008 highs in the $32.00-32.50 zone could be overhead resistance.

*start with small positions to limit risk*

- Suggested Positions -

Long IBKR stock @ $31.15

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

Long MAR $30 CALL (IBKR150320C30) entry $1.85

02/03/15 triggered @ 31.15
Option Format: symbol-year-month-day-call-strike

BEARISH Play Updates

Abercrombie & Fitch Co - ANF - close: 25.50 change: -0.28

Stop Loss: 27.05
Target(s): To Be Determined
Current Option Gain/Loss: -2.4%
Entry on February 02 at $24.90
Listed on January 31, 2015
Time Frame: exit PRIOR to earnings in late February
Average Daily Volume = 2.6 million
New Positions: see below

02/04/15: This could be the entry point I mentioned yesterday. The $26.00 area and the 10-dma are short-term resistance. A failure here can be a new entry point for bearish positions.

Tomorrow several major retailers will report their January same-store sales data. This news could definitely influence trading in stocks like ANF.

Earlier Comments: January 31, 2015:
The bear market in shares of ANF continue. ANF used to be one of the hottest brands for the much coveted teenage market. Unfortunately for ANF shareholders the company failed to keep up with the changing tastes of its audience.

For anyone who doesn't know who ANF is here is a bit from the a company press release, "Abercrombie & Fitch Co. is a leading global specialty retailer of high-quality, casual apparel for Men, Women and kids with an active, youthful lifestyle under its Abercrombie & Fitch, abercrombie, Hollister Co. and Gilly Hicks brands. At the end of the third quarter, the Company operated 834 stores in the United States and 166 stores across Canada, Europe, Asia, Australia and the Middle East. The Company also operates e-commerce websites at www.abercrombie.com, www.abercrombiekids.com, www.hollisterco.com and www.gillyhicks.com."

The company has been struggling with weak same-store sales for months, if not years, across all of its brands. Back in November 2014 they company issued an earnings warning (you can see the gap down on the daily chart). They reported earnings on December 3rd that was one cent above analysts' newly lowered estimates. Quarterly revenues were down -11.8%. Management then guided lower yet again.

ANF lowered their 2015 guidance from the $2.15-2.35 range to $1.50-1.65 a share. They continue to expect same-store sales to be negative an in the mid to high single digit percentages.

On December 9th the stock popped from multi-year lows after it was announced that ANF's CEO Michael Jeffries, a man whom many considered to be a terrible CEO, had abruptly retired. The rally from this headline didn't last very long.

It's interesting that consumer sentiment is currently at 11-year highs but we're not seeing that translate into consumer spending. Many have been expecting (hoping) that all the money consumers are saving at the gasoline pump, thanks to oil at six-year lows, would be spent on other items. Thus far we are not seeing any big trends that consumers are spending their savings and it's definitely not going toward teen apparel retailers.

There is a lot of short interest in this stock thanks to the bearish outlook for the company. This time the bears might be right. The most recent data listed short interest at 35% of the 68.1 million share float. That does raise the risk of a short squeeze should ANF suddenly bounce.

Another risk for the bears in ANF is M&A headlines. Now that the old CEO is gone there has been some speculation that ANF is a takeover target. The company also might be a target for a leveraged buy out offer to take ANF private. While this is a risk we can't time it. Any such news, if it ever happens, could be months or years away.

Right now ANF continues to underperform the market and is currently down -10% in 2015. The point & figure chart is forecasting a $17.00 target. Looking at the long-term chart the nearest support might be the $22.50 area or the $17 area.

Tonight I am suggesting a trigger to open bearish positions at $24.90.

- Suggested Positions -

Short ANF stock @ $24.90

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

Long MAR $25 PUT (ANF150320P25) entry $2.20

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

Discovery Communications - DISCA - close: 30.10 change: +0.53

Stop Loss: 30.85
Target(s): To Be Determined
Current Option Gain/Loss: +1.5%
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

02/04/15: Our DISCA could be in trouble. Shares displayed relative strength today with a +1.7% gain. The stock is still inside its $28.75-30.30 trading range although the intraday high today was $30.44.

If DISCA does breakout higher the next area of resistance should be the $31.30-32.00 zone. Our stop loss will likely be hit at $30.85.

I am not suggesting new positions at current levels.

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

Greif, Inc. - GEF - close: 38.85 change: -0.64

Stop Loss: 41.60
Target(s): To Be Determined
Current Option Gain/Loss: +2.7%
Entry on January 26 at $39.94
Listed on January 24, 2015
Time Frame: Exit PRIOR to earnings in late February
Average Daily Volume = 177 thousand
New Positions: see below

02/04/15: The oversold bounce in GEF appears to be over. Shares underperformed the market with a -1.6% loss. I don't see any changes from my recent comments. Traders may want to move their stop loss closer to the $40.00 level.

Earlier Comments: January 24, 2015:
Shares of GEF are crumbling like wet cardboard. The company operates in the consumer goods sector. They make packaging and container products. According to a company press release, "Greif is a world leader in industrial packaging products and services. The company produces steel, plastic, fibre, flexible, corrugated and reconditioned containers, intermediate bulk containers, containerboard and packaging accessories, and provides blending, filling, packaging and industrial packaging reconditioning services for a wide range of industries. Greif also manages timber properties in North America. The company is strategically positioned in more than 50 countries to serve global as well as regional customers."

Unfortunately for investors GEF did not have a good 2014 on the earnings front. They missed analysts estimates the last four earnings reports in a row. In August 2014 GEF's management guided earnings lower. In December they lowered guidance again.

GEF's most recent earnings report was January 14th and Q4 earnings plunged -90% to $8.7 million. Revenues dropped -4% to $1.05 billion, below Wall Street estimates. For all of 2014 GEF said profits declined -38% and revenue slipped -3%. Once again management guided earnings lower. They now expected 2015 earnings in the $2.25-2.35 range compared to Wall Street estimates of $2.78 a share.

The company's earnings report provided an outlook where management issued this statement:

The company anticipates the overall global economy to reflect a modest recovery in fiscal 2015, with positive aspects of the improving economy in the United States being offset by the negative trends in other regions, particularly in Europe and Latin America. We anticipate that foreign currency matters will continue to present challenges for the company, as the strengthening of the United States dollar against other currencies will continue to impact the company’s revenues and net income.

Following GEF's Q4 results several analyst downgraded their rating on the stock. The point & figure chart is bearish and currently forecasting at $31.00 target.

Technically Friday's display of relative weakness (-2.7%) broke down through significant support near $40.00. We are suggesting bearish positions immediately on Monday morning. More conservative traders may want to wait for a little confirmation (perhaps a decline below $39.25). The nearest support looks like the $35 and $30 regions.

NOTE: GEF does have options but the spreads are too wide to trade.

- Suggested Positions -

Short GEF stock @ $39.94

01/26/15 trade began this morning. GEF opened at $39.94


Virgin America Inc. - VA - close: 35.36 change: +0.13

Stop Loss: 36.65
Target(s): To Be Determined
Current Option Gain/Loss: +1.9%
Entry on January 28 at $36.45
Listed on January 27, 2015
Time Frame: 2 to 4 weeks
Average Daily Volume = 2.5 million
New Positions: see below

02/04/15: We decided in yesterday's newsletter to abandon our VA trade and exit early at the open today. Shares gapped open higher at $35.75.

- Suggested Positions -

Short VA stock @ $36.45 exit $35.75 (+1.9%)

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

FEB $35 PUT (VA150320P35) entry $1.40 exit $1.40 (+0.0%)

02/04/15 planned exit this morning
02/03/15 prepare to exit tomorrow morning
01/31/15 new stop @ 36.65
01/28/15 triggered @ 36.45
Option Format: symbol-year-month-day-call-strike