Option Investor

Daily Newsletter, Wednesday, 2/25/2015

Table of Contents

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

Market Wrap

Market Ekes Out Minor New Highs

by Keene Little

Click here to email Keene Little
The market has been able to eke out new highs each day to keep the buyers interested but some afternoon selling, which some blame on selling in AAPL, put a minor crimp in the bull's plans. Just a warning shot?

Wednesday's Market Stats

Janet Yellen gave another speech to Congress today but said nothing new and did not retract anything she said yesterday. So the market treated it as a non-news event, which was part of a quiet news day overall and the result was some minor buying in the market (bonds, stocks and some commodities) but the stock market saw very low-volume trading. The rally produced new highs for the indexes but some sell programs hit at 14:00, some of it being blamed on selling AAPL, and the indexes lost some ground (the RUT and DOW held in the green, thanks to an end-of-day push back up).

Isn't it interesting that the stock market is one of the few places people love to buy at top prices. The higher the market goes the more investors want to buy and they'll borrow money to do it. Of course it's like an auction where the excitement grows as the price is auctioned higher. But some will say the emotions during an auction can lead to bad purchases that are later regretted.

But there are two things conspiring against those who want to continue buying the market at the top -- bullish sentiment and margin debt. The Investors Intelligence (II) bull-bear sentiment was released today and the ratio of bulls to bears has now tied the highest previous reading in the last 28 years. The bearish percentage is now below 15%, which follows the 50% reading in October 2011. With each rally off a sharp pullback more and more investors have been shedding their bear fur and growing horns and they're willing to pay top dollar with the expectation that they'll be able to sell even higher. The bullish sentiment is once again at a dangerous (for bulls) extreme.

And not only are more and more investors wanting to pay top dollar, without fear, they're doing it on record amounts of margin. Doug Short, at dshort.com, has some great charts showing margin levels vs. the stock market, two of which I've copied below. The first one below shows the NYSE Margin Debt vs. the S&P 500 since 1995. The red line is margin debt and you can see how it peaked higher in 2007 and 2014. Stock market peaks tend to follow peaks in margin debt.

NYSE Margin Debt vs. SPX, 1995-2014, chart courtesy Doug Short

What's important in the chart above is that margin debt peaks shortly before the stock market peaks, which indicates investors start to get nervous before the final stock prices peak. This results in higher stock prices that are not supported by as many people (this can also be seen in the falling number of new 52-week highs, advancing-declining stocks and several other market internals). The market simply runs out of buyers and the sellers soon become stronger than the buyers. Often a top is put in place for no other reason than that, which then gets the pundits wondering why the market is selling off even on good news.

Another way to look at this NYSE margin debt issue is with a measure of positive and negative credit balances in investors' accounts. Doug Short's chart below inverts the S&P 500 to show the correlation between large negative credit balances and stock market peaks (troughs when viewed inverted). As you can see on the chart, the negative credit balance far exceeds what we had in 2007 and has exceeded what we had during the dot.com period where everyone was a day trader on margin. One can only imagine what the coming "correction" will look like.

NYSE Investor Credit Balance vs. S&P 500, chart courtesy Doug Short

Other than the chart patterns, which I'll get into next, it's information like that presented above that keeps me on the cautious side of this market and playing contrarian. I think we'll soon see a major stock market top that will reward the bears after forcing them into hibernation for the past six years (the bull market will celebrate its 6-year anniversary on March 6th).

I want to take another look at the Nasdaq, starting off with its weekly chart, because it's presenting us a very interesting picture here. It also happens to be one of the better sentiment indexes at the moment because it's so close to the 5000 level that it struggled with in 2000 and not far from its all-time high at 5152, which investors are obviously hoping to exceed (break out your party hats if it happens).

There are two trend lines that the Naz has now run into -- one is along the highs from January 2004 - October 2007 and the other from April 2010. This latter trend line has been repeatedly tested since March 2014 and is obviously an important trend line to traders. The longer-term trend line makes it that much tougher resistance. There's a price projection near 4924 where the c-wave of a large A-B-C bounce pattern off the November 2008 low is 162% of the a-wave, which was achieved on February 29th. The 5th wave of wave-C, which is the rally from October 2011, would equal the 1st wave near 5035. Along with the millennial level at 5000, this is the reason I've been saying an upside target zone for the Naz is 4924-5035 and the high so far is 4984. I've also been thinking 5000 won't get hit because profit taking could overwhelm the buyers before it's reached, which is what this afternoon might have started.

Nasdaq Composite index, COMPQ, Weekly chart

The significance of the wave count, if it's correct, is that following the completion of the large A-B-C bounce off the November 2008 low it will mark the completion of the cyclical bull market and start us down in the final leg of the secular bear (bottoming 2016-2018). The daily chart below shows a closer view of the two trend lines along the highs. From a pattern perspective, the sideways triangle that formed off the November 28th high is very common for a 4th wave that leads to the final 5th wave. So the EW pattern fits very well with an expected completion to the rally and here is as good a place as any I've seen in quite a while.

Nasdaq Composite index, COMPQ, Daily chart

Key Levels for COMPQ:
- Stay bullish above 4900
- bearish below 4719

The final 5th wave is the rally from February 2nd and it's shown more closely with the 60-min chart below. It formed a rising wedge shape, which is an ending pattern and has the bearish divergence supporting the pattern interpretation. We don't have a clean break of the pattern since it kind of dribbled out of it yesterday and then tried to rally back up to the bottom of the wedge today but couldn't make it. There's still upside potential for a back-test of the bottom of the rising wedge, which could get price up to the 5035 projection by Friday (end of month) but this afternoon's quick little selloff might have been the warning shot that bulls need to heed.

Nasdaq Composite index, COMPQ, 60-min chart

As I had mentioned earlier, AAPL was blamed for this afternoon's little selloff. I'm not sure what prompted the selling in AAPL but it could have been nothing more than profit taking. Selling needs to be blamed on something so why not take a bite out of AAPL? Interestingly, option activity in AAPL yesterday and today has been much higher than normal so perhaps someone knew something or started something.

An interesting factoid about AAPL is that it would now qualify as the 14th largest country in the G-20. The table below lists the countries by market size and AAPL would slip in front of South Africa, Mexico, Italy, Indonesia, Saudi Arabia, Turkey and Argentina. Not bad AAPL. And many are predicting AAPL will become the first trillion-dollar market cap company. The only problem with that prediction is that those kinds of predictions often mark the top for the stock.

G-20 Economies Stock Market Caps, data from Stock Market Caps by Country

Along with the trillion dollar market cap prediction for AAPL, possibly killing the stock's rally, the chart says AAPL bulls might want to get defensive here. Suggesting a short on AAPL would be viewed as insanity, which is why it work nicely but it's a little too early to tell. What I like about the reversal setup, like the Nazdaq, is that it met some price projections and hit the top of its rising wedge pattern for the rally off the April 2013 low. A 162% extension of its previous decline (September 2012 - April 2013) is at 128.97 and the 5th wave of its rally from April 2013 equals the 1st wave at 131.78, both of which have now been achieved. So, is all the option activity and afternoon selling telling us something that the chart pointed to? Only time will tell.

Apple Inc., AAPL, Weekly chart

For SPX I've been watching the trend line along its highs from last July-December, which is currently near 2132. I've had that as an upside target for a while and it remains a good target if the buyers can keep the rally going this week. But to hold out for that little bit, considering the downside risk, is simply not a good trade in my book. And when you're holding a long position I think it's important to question each day whether it's a trade you would enter today and if not then suck your stop up close.

S&P 500, SPX, Daily chart

Key Levels for SPX:
- stay bullish above 2085
- bearish below 2064

As with most of the indexes, SPX has formed a rising wedge pattern for its rally off the February 2nd low. An uptrend line from February 2nd through the February 20th pullback low was broken this afternoon but another uptrend line from February 9-20 held, as can be seen on the 30-min chart below. It's not hard for me to argue the February 9-20 uptrend line is the more important one and there the bulls want to defend this afternoon's low. There's still the upside potential to the upper trend lines (the trend line along the highs from July-December and the trend line along the highs from February 6-17), which cross near 2133 tomorrow. In my opinion, bulls are pushing their luck here.

S&P 500, SPX, 30-min chart

Like SPX, the DOW has a little more upside potential before running into its trend line along the highs from December 2013 - December 2014, which is currently near 18350. As long as a pullback can hold above price-level support near 18100 there remains the upside potential. The bears need to see a break below last Friday's low at 17878 in order to have better confirmation that a top is in place.

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- stay bullish above 18,100
- bearish below 17,878

The RUT is getting squeezed in a rising wedge as it approaches its trend line along the highs from September-December 2014 (seeing a common theme here?), which is currently near 1239, as is the top of its rising wedge. Above 1240 would be more bullish (if it can hold above), in which case we could see a rally up to its broken uptrend line from March 2009 - October 2011 for a 3rd test following the back-tests in November and December. That could see the RUT up near 1265 by next week.

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- stay bullish above 1218
- bearish below 1214

A closer view of the rising wedge pattern can be seen on the 30-min chart below. This afternoon's selloff was a break below the bottom of the wedge and the jam back up at the end of the day looks like a back-test (so far). That made it a good setup for a short at the close, with the anticipation of a bearish kiss goodbye first thing in the morning. But if the buyers hold on here, watch to see how the RUT does around the 1239-1240 area.

Russell-2000, RUT, 30-min chart

The home builders index (DJUSHB) was one of the weaker indexes today, down -1%, and this follows a good day yesterday following Toll Brothers (TOL) strong earnings report. Last week I showed a chart of housing starts and building permits to point out the corrective bounce pattern off the 2009 low that has retraced a little less than 38% of the 2006-2009 decline. I also showed a weekly chart of DJUSHB to point out why I thought the index could be topping, especially now that it achieved the upside price projection (583.76) with yesterday's rally. Yesterday's spike up on the TOL news would be a typical way for a rally to end (on news).

The daily chart below shows the 583.76 price projection as well as the top of its parallel up-channel for the rally from August 2013, near 578. Not shown on the daily chart is the top of the parallel up-channel for the bounce off the November 2008 low, which is also near 578. Yesterday's rally had the index poking above the trend line along the highs from November-January but today it dropped back below the line which creates a sell signal following a failed breakout attempt. This is a setup for a reversal to the downside and we'll only know in hindsight whether or not it will work for the bears. It continues to look like a good possibility for a very important long-term top.

DJ Home Construction index, DJUSHB, Daily chart

Another indication of trouble for the home construction market (and by extension, the economy) is the price of lumber. If the expectation is that fewer homes will be built, the traders in lumber contracts are going to see a drop in future demand and trade the price accordingly. The weekly chart of lumber prices below shows this week's break of the uptrend line from March 2009, which is obviously an important trend line. Some have speculated that the drop in price has to do with the slowdown in the shipping ports, which has caused a buildup in the supply of lumber, which in turn drives the price down. That's very possible but if the wave count on the chart is correct then the decline should start to accelerate lower in a 3rd of a 3rd wave down in the decline from March 2013.

Lumber continuous contract, LB, Weekly chart

For weeks I've been showing the dollar's weekly chart to point out the pattern and price projections that overlap at 97.33 and 97.35, not much higher than its January 26th high at 95.85 (the price projections are based on the wave pattern for the 3rd wave in the rally from 2011 and for the 5th wave in the rally from 2014). Since the January 26th high it has been consolidating in a sideways triangle, which fits well as the 4th wave in the leg up from October 2014. That leg is the 5th wave of the rally from May 2014 so I've been looking for the 5th of the 5th wave to complete the rally before it starts a larger pullback correction. Since a sideways triangle often leads to the final move of the trend (up in this case) the little sideways triangle since January 26th is a good setup for the final 5th wave.

The daily chart of the dollar shows the little sideways triangle and if it starts the 5th wave rally from here I have a price projection at 97.28, where it would equal 62% of the 1st wave (in the move up from October 2014). Nice correlation with the other two projections at 97.33 and 97.35. There's higher potential but for now the upside target zone is 97.28-97.35.

U.S. Dollar contract, DX, Daily chart

Along with the dollar consolidating in a relatively tight trading range, the metals haven't moved much either, although they've continued to drop slightly lower while the dollar has gone sideways. If the dollar does get one more pop higher it could drive the metals even lower but I'm seeing an ending pattern for the decline in gold from its January 22nd high and it looks like it's setting up for at least a bounce. What's not clear at the moment is whether we should expect another rally leg similar to the November-January rally or just a bounce before continuing lower. That won't become clearer until the bounce gets underway. As for as upside potential for another rally leg, two equal legs up from the November low points to 1367.40, which is shown on the chart. That would be good for another back-test of its broken uptrend line from 2001-2005 where it crosses the projection at the end of April. But the risk for gold is still lower prices.

Gold continuous contract, GC, Weekly chart

So far oil is doing what I suspected it would do following its January low. The larger pattern for its decline from September 2013 calls for a multi-month consolidation before heading lower and a 4th wave correction will likely be a lot of choppy price action that could stay under price-level S/R near 58.50. It broke this support level last December, did a quick back-test of it and then sold off into the January low. If the bounce gets another leg up, as depicted on the daily chart below, two equal legs up would see oil rally to 58.47, which is "coincidentally" the same as the price-level resistance. That could finish the first leg (wave-A) of a larger consolidation pattern but first we need to see if oil can continue the rally that started off this morning's spike low.

Oil continuous contract, CL, Daily chart

Tomorrow's important economic reports include CPI data and Durable Goods orders. The CPI is expected to show a continuing decline (Oh no, Mr. Bill, it's that dreaded deflation, oh noooo....(Mr. Bill) and the durable goods number is expected to continue to be negative. But not to worry, both mean the Fed will stay in full accommodation mode and help prop the market up so enjoy the bad economy, hold your nose and just buy stock on as much margin you can get your hands on. PLEASE DON'T DO THAT! I am of course saying that with tongue firmly implanted in my cheek since it seems the worse the economic news gets and the more the projected corporate earnings are ratcheted down the more investors want to buy. This will not end well for them.

Economic reports and Summary


I see at least a little more upside potential for the market but at this point I don't believe the risk/reward favors the bulls -- I see downside risk that swamps upside potential. SPX 2132, Nasdaq 5035, DOW 18350 and RUT 1240 -- those are the upside targets that I'm watching to see if they can be achieved. Higher than that and we could be in a much stronger move (blow-off top?) but the risk as I see it is that a stronger move down could start at any time. This afternoon's little selloff might have been the start of it, in which case we should see the market immediately decline Thursday morning. If there's no immediate decline then look for those upside targets. If you can watch the market during the day it could be a good trade on the long side. But if you're holding trades overnight here I think you might be asking for trouble.

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

Strength In Biotech

by James Brown

Click here to email James Brown


Anthera Pharmaceuticals - ANTH - close: 4.93 change: +0.22

Stop Loss: 4.58
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Entry on February -- at $---.--
Listed on February 25, 2015
Time Frame: 8 to 12 weeks
Average Daily Volume = 715 thousand
New Positions: Yes, see below

Company Description

Why We Like It:
Biotech stocks were outperformers last year and they continue to outperform the broader market in 2015. One biotech stock that did not participate in last year's rally was ANTH. The stock was actually on the verge of being delisted from the NASDAQ. That changed with the company' recent press release.

According to the company, "Anthera Pharmaceuticals is a biopharmaceutical company focused on developing and commercializing products to treat serious and life-threatening diseases, including lupus, lupus with glomerulonephritis, IgA nephropathy, and exocrine pancreatic insufficiency due to cystic fibrosis."

The press release that changed the stock's direction came out on February 10th. ANTH announced "successful completion of an interim analysis of its Phase 3 trial (CHABLIS-SC1) of blisibimod in patients with Systemic Lupus Erythematosus and that the study should continue to completion as planned. An independent statistician conducted the interim futility analysis for the CHABLIS-SC1 study, evaluating the SRI-6 response at the 24 week time point. Enrollment in the trial is projected to conclude in mid-2015."

What is blisibimod? In the press release the company states, "Anthera is developing blisibimod, a selective inhibitor of B-cell activating factor (BAFF), to explore its clinical utility in various autoimmune diseases including systemic lupus erythematosus (SLE) and IgA nephropathy. Blisibimod is a novel FC-fusion protein, or peptibody, and is distinct from an antibody. BAFF is a tumor necrosis family member and is critical to the development, maintenance and survival of B-cells. Abnormal elevations of B-cells and BAFF may lead to an overactive immune response, which can damage normal healthy tissues and organ systems. Multiple clinical studies with BAFF antagonists have reported the potential benefit of BAFF inhibitors in treating patients with lupus and IgAN." You can read the entire press release here.

SLE can be hard to diagnose. Current estimates suggest 300,000 and up to 1.5 million people in America suffer with SLE. Most of them are women.

The stock exploded higher on this positive clinical trial data. Shares have essentially doubled. Momentum suggest this rally will continue. Regular readers know that we consider biotech stocks higher-risk and more aggressive trades. The right or wrong headline can send a stock soaring or crashing. We could see shares gap up or down at any time. I definitely consider ANTH a higher-risk, aggressive trade.

Today the stock appears to be coiling for a bullish breakout past round-number resistance in the $5.00 area. I am suggesting small bullish positions if ANTH can trade at $5.05 or higher (although if shares gap open too high you may want to hesitate on launching positions).

Trigger @ $5.05 *small positions*

- Suggested Positions -

Buy ANTH stock @ (trigger)

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

Buy the Apr $5 CALL (ANTH150417C5) current ask $1.10

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

Intraday Chart:

Weekly Chart:

In Play Updates and Reviews

Stocks Pare Midday Gains

by James Brown

Click here to email James Brown

Editor's Note:
The major market indices closed relatively unchanged after stocks retreated from their midday highs. Yellen's second day of testimony did not seem to have much effect on equities.

We are removing LUV as a candidate.

Current Portfolio:

BULLISH Play Updates

Abbott Laboratories - ABT - close: 47.40 change: -0.07

Stop Loss: 44.75
Target(s): To Be Determined
Current Option Gain/Loss: +1.6%
Entry on February 19 at $46.65
Listed on February 17, 2015
Time Frame: 8 to 12 weeks
Average Daily Volume = 5.34 million
New Positions: see below

02/25/15: ABT briefly tagged a new high before edging back toward unchanged on the session. If you're looking to buy a dip I'd rather wait for a dip closer to support near $46.50 as our next entry point.

Earlier Comments: February 17, 2015:
ABT is in the healthcare sector. With a history that starts back in the late 1880s this is one of the oldest publicly traded companies in the U.S. The company has grown to a global giant with sales of more than $20 billion a year. About 70% of sales are outside the United States.

According to the company, "Abbott is a global healthcare company devoted to improving life through the development of products and technologies that span the breadth of healthcare. With a portfolio of leading, science-based offerings in diagnostics, medical devices, nutritionals and branded generic pharmaceuticals, Abbott serves people in more than 150 countries and employs approximately 77,000 people."

The most recent earnings report was January 29th. ABT's earnings rose +22% from a year ago to $0.71 a share. That beat estimates of $0.68. Revenues were up +5.6% to $5.36 billion. Unfortunately that did miss estimates of $5.43 billion. The company did raise its annual dividend from $0.88 to $0.96 and revenues were up +10% for the whole year (2014). ABT also said its adjust net margins grew over 200 basis points for the full year.

Here's the interest part, ABT management issued 2015 guidance of $2.10-2.20 per share. That is growth of about +6% to +11% while facing significant currency challenges due to the strong dollar (near 11-year highs). Wall Street was estimating $2.25 per shares for 2015. The stock rallied in spite of this lowered outlook.

The following day a Bank of America/Merrill Lynch analyst upgraded the stock from "neutral" to a "buy" and raised their price target because they believe that ABT will see strong revenue growth and margin improvement in 2015.

Shares of ABT have definitely been showing relative strength with the stock up four weeks I a row. These are all-time highs for the stock and ABT is in the process of breaking out past its December 2014 highs. Tonight we are suggesting a trigger to open bullish positions at $46.65.

- Suggested Positions -

Long ABT stock @ $46.65

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

Long AUG $50 CALL (ABT150821C50) entry $0.91

02/19/15 triggered @ $46.65
Option Format: symbol-year-month-day-call-strike

The ADT Corp. - ADT - close: 39.81 change: +0.39

Stop Loss: 37.25
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Entry on February -- at $---.--
Listed on February 23, 2015
Time Frame: 8 to 12 weeks
Average Daily Volume = 1.5 million
New Positions: Yes, see below

02/25/15: ADT displayed relative strength with a +0.9% gain. Yet shares remain just below resistance at $40.00. Our suggested entry point is $40.10.

Earlier Comments: February 23, 2015:
ADT is in the alarm and home monitoring business. It has been a very bumpy ride for investors since the company was spun off from Tyco International back in 2012. Shares of ADT plunged from $50 a share in early 2013 down toward $28 by early 2014. The company has been working on a turnaround and the worst seems to be behind it.

The company describes itself as "The ADT Corporation (ADT) is a leading provider of security and automation solutions for homes and businesses in the United States and Canada. ADT's broad and pioneering set of products and services, including ADT Pulse® interactive home and business solutions, and health services, meet a range of customer needs for today’s active and increasingly mobile lifestyles. Headquartered in Boca Raton, Florida, ADT helps provide peace of mind to nearly seven million customers, and it employs approximately 17,500 people at 200 locations."

ADT has been consistently beating Wall Street's earnings expectations the last few quarters. Their most recent earnings report was ADT's 2015 Q1, which was announced on January 28th. Results were 51 cents a share. That's a +18.6% increase from a year ago. Revenues were up +5.7% to $887 million, above estimates.

Management said their recurring subscription revenues, about 93% of total revenues, were up +6.5% from a year ago. The number of client accounts had risen from 6.4 million to 6.7 million in the last two quarters. ADT reported higher average revenue per customer with an increase of +5.3%. That's likely due to their growth in Pulse subscribers. Pulse is a higher-end subscription for ADT, which now accounts for 19% of its subscription base. Pulse customers have a lower dropout rate and higher margins.

Previously Wall Street was worried that cable giants like Comcast, when they jumped into the home alarm monitoring business, would steal customers and hurt ADT's business. Thus far that has not been the case. Now the race is on to see who can cash in on the "connected home" industry, which will be a big part of the Internet of Things.

Technically shares of ADT have been showing relative strength. They recently broke through resistance near $37.00-38.00 and formed an inverse head-and-shoulders pattern (which is bullish). The point & figure chart is also very bullish with a breakout and a $52.00 target (see below). The most recent data listed short interest at 27% of the 170 million share float. That's plenty of fuel for a short squeeze. Tonight we are suggesting a trigger to open bullish positions at $40.10.

Trigger @ $40.10

- Suggested Positions -

Buy ADT stock @ (trigger)

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

Buy the APR $40 CALL (ADT150417C40)

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

Cree, Inc. - CREE - close: 39.40 change: -0.16

Stop Loss: 34.85
Target(s): To Be Determined
Current Option Gain/Loss: +7.8%
Entry on February 05 at $36.55
Listed on February 03, 2015
Time Frame: 8 to 12 weeks
Average Daily Volume = 2.8 million
New Positions: see below

02/25/15: CREE is hovering just below resistance in the $40 area.

Yesterday's comments:
I want to remind investors that this stock is nearing what could be tough resistance. Not only is $40.00 potential resistance but the 200-dma is also near $40.00. Plus, the top of CREE's big gap down from last October is near $40.00. Do not be surprised to see shares struggle in this area.

I am not suggesting new positions at this time.

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.

- Suggested Positions -

Long CREE stock @ $36.55

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

Long MAR $35 CALL (CREE150320C35) entry $2.80

02/12/15 new stop @ 34.85
02/05/15 triggered @ 36.55
Option Format: symbol-year-month-day-call-strike

Linear Technology Corp. - LLTC - close: 48.48 change: -0.10

Stop Loss: 44.90
Target(s): To Be Determined
Current Option Gain/Loss: +2.4%
Entry on February 11 at $47.35
Listed on February 10, 2015
Time Frame: 8 to 12 weeks
Average Daily Volume = 2.7 million
New Positions: see below

02/25/15: It was a quiet day for LLTC. Shares closed virtually unchanged. If you're looking for an entry point consider waiting for another dip near $48.00.

Earlier Comments: February 10, 2015:
LLTC is part of the technology sector. The company makes an array of semiconductor products.

According to the company, "Linear Technology Corporation, a member of the S&P 500, has been designing, manufacturing and marketing a broad line of high performance analog integrated circuits for major companies worldwide for over three decades. The Company’s products provide an essential bridge between our analog world and the digital electronics in communications, networking, industrial, automotive, computer, medical, instrumentation, consumer, and military and aerospace systems. Linear Technology produces power management, data conversion, signal conditioning, RF and interface ICs, µModule® subsystems, and wireless sensor network products."

Back in October 2014 LLTC reported earnings that were in-line with estimates but management guided lower. They tried to soften this disappointing news by announced a 10 million share stock buyback program over the next two years (the company has about 239 million shares outstanding).

The earnings picture improved with their most recent report. LLTC reported Q4 earnings (its fiscal Q2) on January 13th. Earnings were up +16% from a year ago with a profit of $0.51 a share. That was two cents above estimates. Revenues were up +5.4% to $352.5 million, which was just a hair below expectations.

The company has retired its debt and management said they plan to increase the amount of cash they return to shareholders. With their earnings report they also announced the Board of Directors had bumped their quarterly dividend from $0.27 to $0.30. That's the 23rd year in a row LLTC has raised its dividend. Management also offered a bullish outlook on their current quarter. LLTC now expects revenues to improve +4% to +7% sequentially. That's about $366-377 million, which is above the $364 million analyst estimate.

Technically shares of LLTC have been consolidating sideways below resistance in the $47.00-47.25 zone for about eight weeks. If you look closely you can see an inverse head-and-shoulders pattern (a bullish formation). The stock was definitely showing some relative strength today with a +2.7% gain. Now LLTC is poised for a bullish breakout past resistance. We are suggesting a trigger to open bullish positions at $47.35.

- Suggested Positions -

Long LLTC stock @ $47.35

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

Long May $50 CALL (LLTC150515C50) entry $0.85

02/11/15 triggered @ $47.35
Option Format: symbol-year-month-day-call-strike

Luxoft Holding - LXFT - close: 51.45 change: +1.43

Stop Loss: 47.40
Target(s): To Be Determined
Current Option Gain/Loss: +2.4%
Entry on February 24 at $50.25
Listed on February 19, 2015
Time Frame: 8 to 12 weeks
Average Daily Volume = 241 thousand
New Positions: see below

02/25/15: Bullish analyst comments helped propel LXFT to new highs. Shares soared past $52.00 before settling with a +2.85% gain on the day. Hopefully broken resistance at $50.00 will now be new support.

Earlier Comments: February 19, 2015:
LXFT is a technology company with a stock hitting all-time highs. You may not be familiar with LXFT since the company became public in mid 2013. "Luxoft Holding, Inc. is a leading provider of software development services and innovative IT solutions to a global client base consisting primarily of large multinational corporations." The company sells its services around the globe as it "develops its solutions and delivers its services from 18 dedicated delivery centers worldwide. It has over 8,600 employees across 22 offices in 14 countries in the North America, Mexico, Western and Eastern Europe, and Asia Pacific."

Last year shares of LXFT closed virtually unchanged for all of 2014. That surprises me. The company has raised its earnings guidance the last four quarterly reports in a row. They have beaten Wall Street's estimates on both the top and bottom line the last three quarters in a row.

On the daily chart you can see the big rally on February 12th. That was a reaction to LXFT's most recent earnings report. Management said earnings grew +50% to $0.81 a share last quarter. That was 21 cents above analysts' expectations. Revenues rose +31.8% to $145.75 million, also above estimates. LXFT raised their 2015 guidance from $2.00 a share to $2.15.

The stock is up significantly from its late January low near $37.00 so it wasn't a surprise to see shares correct after trading near $50 on February 13th (last Friday). What's interesting is how fast traders bought the dip. LXFT is now challenging round-number, psychological resistance at $50.00 again.

Tonight I am suggesting small bullish if LXFT can breakout higher. We'll start with an entry trigger at $50.25. We're not setting a target tonight but the point & figure chart is very bullish and forecasting a long-term target of $76.00.

Please note I am labeling this a slightly more aggressive trade and thus we want to keep our position size small to limit risk. Not only has LXFT been volatile the last couple of weeks but it might have exposure to geopolitical risk with Russia. LXFT is headquartered in Switzerland and does business around the globe. They are a subsidiary of IBS Group, which is a Russian company. LXFT also does business in Ukraine. Shares dropped sharply last March as the Ukraine situation heated up. Right now the most recent cease-fire attempt in Eastern Ukraine appears to have failed. That could prompt more sanctions from the West against Russia. We can't tell if new sanctions would hurt LXFT or not but it remains a potential risk.

*small positions to limit risk* - Suggested Positions -

Long LXFT stock @ $50.25

02/24/15 triggered @ $50.25

Microchip Technology - MCHP - close: 51.35 change: -0.18

Stop Loss: 49.25
Target(s): To Be Determined
Current Option Gain/Loss: +0.4%
Entry on February 24 at $51.15
Listed on February 21, 2015
Time Frame: 8 to 12 weeks
Average Daily Volume = 2.8 million
New Positions: see below

02/25/15: Today was a non-event for MCHP. Shares traded quietly in a narrow range. Depending on your trading style you could buy another dip near $50.00 or wait or a new high above $51.70.

Earlier Comments: February 21, 2015:
Semiconductor stocks have been big winners for investors over the last couple of years. Last year saw sales for the whole industry hit a record-breaking $335 billion. That's up almost +10% from 2013. While the SOX semiconductor index is currently trading at multi-year highs it did see a sharp sell-off in October 2014. That was thanks to MCHP.

MCHP is considered a bellwether for the industry. According to the company, "Microchip Technology Incorporated is a leading provider of microcontroller, mixed-signal, analog and Flash-IP solutions, providing low-risk product development, lower total system cost and faster time to market for thousands of diverse customer applications worldwide. Headquartered in Chandler, Arizona, Microchip offers outstanding technical support along with dependable delivery and quality."

Last October MCHP shocked the market when they lowered their earnings guidance and warned of an industry wide slowdown. This sparked an industry-wide sell-off. Shares of MCHP plunged. The stock spent the rest of the year trying to climb out of that hole. By the end of 2014 the stock had recovered enough to close essentially breakeven on the year.

Helping shares recover was an update in December. Management provided a slightly better earnings and revenue picture. MCHP said that business had improved significantly from early October. They now believed that the worst of the industry downturn was already behind them. This helped fuel gains for the semiconductor stocks while MCHP shares languished.

Fortunately today MCHP is playing catch up to its peers. The company reported its Q3 2015 results on January 29th. Wall Street was expecting a profit of $0.62 a share on revenues of $525.5 million. MCHP beat estimates with $0.64 a share as revenues grew +11.1% to $535.8 million.

MCHP said that calendar year 2014 was a strong one for their microcontroller business, which was up +13.8% overall. Their 8-bit, 16-bit, and 32-bit microcontroller segments all hit record sales with 16-bit sales up +27.7% and 32-bit sales up +41%. Management said overall they did witness broad-based growth across all their product lines. MCHP then raised their dividend and raised their guidance. They expected Q4 2015 earnings (current quarter) to be in the $0.65-0.67 range and revenues in the $541-551.9 million range. That's above analysts' estimates of $0.65 and $538.8 million.

Steve Sanghi, MCHP's President and CEO, commented on their quarterly results, "We are very pleased with our execution in the December quarter. Our original revenue guidance was to be down 4.5% sequentially and in early December we improved our guidance for revenue to be down only 3.5% at the midpoint. Our actual non-GAAP revenue results were down only 1.9%, which was better than what is seasonally normal. Calendar year 2014 was Microchip's first year above the $2 billion revenue mark and was up 12.8% from calendar year 2013 as a result of very strong performance from our microcontroller and analog product lines."

Investors cheered and the stock has soared from a low near $44 in early February to a new multi-year high above resistance at $50.00. The point & figure chart is forecasting a target at $56.00. Tonight we are suggesting a trigger to open bullish positions at $51.15.

- Suggested Positions -

Long MCHP stock @ $51.15

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

Long Apr $50 CALL (mchp150417C50) entry $2.40

02/24/15 triggered @ 51.15
Option Format: symbol-year-month-day-call-strike

Altria Group Inc. - MO - close: 55.64 change: -0.08

Stop Loss: 53.85
Target(s): To Be Determined
Current Option Gain/Loss: +0.7%
Entry on February 12 at $55.25
Listed on February 11, 2015
Time Frame: 10 to 16 weeks
Average Daily Volume = 7.8 million
New Positions: see below

02/25/15: This morning MO, along with Reynolds American (RAI) and Lorrillard, all agreed to settle 400 Florida lawsuits for $100 million. This news really didn't have much affect on shares of MO. The stock actually tagged another new high before fading back toward unchanged.

I would consider new bullish positions at current levels. Just remember this is a slower-moving trade.

Earlier Comments: February 11, 2015:
The yield on the U.S. 10-year note is trading just below 2%. Two weeks ago the 30-year U.S. note had dropped to multi-decade lows. Yields on sovereign debt from healthy European countries like Germany are trading near all-time lows near zero. Last week saw yields on huge European corporate debt, like Nestle, actually go negative.

Super low or negative yields paints a picture that investors are nervous. Smart money is looking for safety. They would rather park their money in bonds with little to zero yield (or even negative yield in some cases) just to know their money is safe. This is one reason why shares of MO look so attractive. Even at all-time highs, like it is now, MO has a 3.9% dividend yield.

The traditional cigarette industry is slowly dying. That's a good thing since the practice is so poisonous. The cigarette industry saw the volume of cigarettes decline -2.5% in the Q4 2014 and down -3.5% in all of 2014. The drop in volume for MO was not quite that bad. Yet even though the number of cigarettes being sold is falling the company continues to make money and a lot of money at that!

One secret to MO's profitability has been price increases and stealing market share from its rivals. A strong stock buyback program also helped its earnings numbers. Last quarter the company spent $260 million buying about 5.3 million shares of its stock. This helped boost its earnings per share growth to +15.8% in the fourth quarter. Results were $0.66 a share, in-line with estimates. Revenues grew +4.7% to $4.61 billion, which beat analysts' expectations.

Almost 90% of MO's business is still in the smokeable category (i.e. traditional cigarettes). They managed +3.3% revenue growth even though their volumes were down -1.7%. They're also seeing growth in their smokeless products, namely the e-cigarette business. Management offered bullish guidance of +7% to +9% growth in their earnings per share for 2015.

MO is likely to stay a popular investment among yield-conscious traders, especially since their business is so addictive, I mean predictable. The stock has been consolidating sideways in the $53.00-55.00 zone the last couple of weeks. Today shares displayed relative strength with a surge toward the top of this range. We want to be ready if MO breaks out. Tonight I am suggesting a trigger to open bullish positions at $55.25. Keep in mind that MO is something of a slow-moving stock. We will need to be patient for this trade to pay off.

- Suggested Positions -

Long MO stock @ $55.25

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

Long JUN $55 CALL (MO150619C55) entry $2.00

02/14/15 new stop @ 53.85
02/12/15 triggered @ 55.25
Option Format: symbol-year-month-day-call-strike

Neurocrine Biosciences - NBIX - close: 39.59 change: +0.97

Stop Loss: 34.90
Target(s): To Be Determined
Current Option Gain/Loss: +5.2%
Entry on February 17 at $37.65
Listed on February 14, 2015
Time Frame: 8 to 12 weeks
Average Daily Volume = 937 thousand
New Positions: see below

02/25/15: Biotech stocks bounced following yesterday's pullback. Shares of NBIX displayed strength with a +2.5% gain. Traders should consider raising their stop loss.

Earlier Comments: February 14, 2015:
Biotech stocks were big performers last year outpacing the broader market. It looks like that outperformance will continue in 2015 with the major biotech indices and ETFs already up +5% to +7% this year. One biotech that's really outperforming its peers in NBIX, with shares already up more than +60% in 2015.

According to the company's marketing materials, "Neurocrine Biosciences, Inc. discovers and develops innovative and life-changing pharmaceuticals, in diseases with high unmet medical needs, through its novel R&D platform, focused on neurological and endocrine based diseases and disorders. The Company's two lead late-stage clinical programs are elagolix, a gonadotropin-releasing hormone antagonist for women's health that is partnered with AbbVie Inc., and a wholly owned vesicular monoamine transporter 2 inhibitor for the treatment of movement disorders. Neurocrine intends to maintain certain commercial rights to its VMAT2 inhibitor for evolution into a fully-integrated pharmaceutical company."

NBIX has two therapies planned for phase III trials in 2015. You can see NBIX's pipeline on this web page.

The drug making headlines for NBIX this year is Elagolix, a treatment for endometriosis. Shares of NBIX soared on January 8th after the company and its partner on this treatment, AbbVie, announced positive results for their latest Phase 3 trials. Endometriosis could affect up to 10% of all women in their reproductive years. That's a pretty big market. You can see why Wall Street is so excited about this news and sent shares of NBIX soaring.

Make no mistake, this is an aggressive, higher-risk trade. Biotech stocks can be volatile. The right or wrong headline can send the stock soaring or crashing. NBIX is already very, very overbought with a run from $20 to $37 since its early January lows. Yet that doesn't mean it won't keep running. Sometimes biotech stocks have a mind of their own. There is not any clear resistance. You have to go back more than ten years and you might find resistance in the $42.50-45.00 area. Should this rally continue NBIX could see more short covering. The most recent data listed short interest at 12% of the small 66 million share float.

I'm going to repeat myself. This is an aggressive play. NBIX does have options but the spreads are too wide to trade. The intraday bounce on Friday looks like a test of short-term support near $35.00. You can see on the intraday chart that NBIX has a very short-term pattern of lower highs. Therefore, we are suggesting a trigger to open small bullish positions at $37.65. If triggered we'll start with a stop loss at $34.90.

*small positions to limit risk* - Suggested Positions -

Long NBIX stock @ $37.65

02/17/15 after the close, announces a secondary offering
02/17/15 triggered @ 37.65
Option Format: symbol-year-month-day-call-strike

Spirit AeroSystems - SPR - close: 49.68 change: -0.66

Stop Loss: 49.25
Target(s): To Be Determined
Current Option Gain/Loss: -1.2%
Entry on February 19 at $50.30
Listed on February 18, 2015
Time Frame: 8 to 12 weeks
Average Daily Volume = 1.3 million
New Positions: see below

02/25/15: I have been warning readers that the nearest support was probably the $49.50-50.00 range. SPR looks determined to test the bottom of that zone. Shares displayed relative weakness with a -1.3% decline and a breakdown below both $50.00 and the simple 10-dma. Tonight we will try and reduce our risk by raising the stop loss up to $49.25.

Earlier Comments: February 18, 2015:
Aerospace and defense stocks have been very strong performers the past couple of years. The defense cuts from Washington a couple of years ago prompted defense companies to diversify their customer base. Meanwhile airline companies had grown lean and mean to work in a high-priced oil environment. Now with oil near five-year lows their margins are improving. This is the backdrop that SPR operates.

You may not be familiar with SPR but they were spun off from Boeing (BA) back in 2005. SPR went public with their own IPO in November 2006. According to the company, "Spirit AeroSystems, with headquarters in Wichita, Kan., USA, is one of the world's largest non-OEM designers and manufacturers of aerostructures for commercial aircraft. In addition to its Wichita and Chanute facilities in Kansas, Spirit has locations in Tulsa and McAlester, Okla.; Kinston, N.C.; Nashville, Tenn.; Prestwick, Scotland; Preston, England; Subang, Malaysia; and Saint-Nazaire, France. In the U.S., Spirit's core products include fuselages, pylons, nacelles and wing components. Additionally, Spirit provides aftermarket customer support services, including spare parts, maintenance/repair/overhaul, and fleet support services in North America, Europe and Asia. Spirit Europe produces wing components for a host of customers, including Airbus."

Last year was a record-breaker for SPR's sales. Their third quarter earnings report in late October was the third quarter in a row that SPR crushed Wall Street's earnings estimates by a wide margin. Their Q3 earnings were up +79% on revenues up +12.6%. Management then raised their 2014 guidance.

SPR ended the year with a strong quarter as well. Q4 earnings were announced on February 3rd. Earnings grew +39% to $0.87 a share, which beat estimates by 10 cents. Revenues were up +5.4% to $1.57 billion. The revenue number did miss expectations but the stock rallied anyway. That's probably because SPR provided bullish guidance.

The company sees 2015 revenues in the $6.6-6.7 billion zone. That's slightly below analysts' estimates of $6.95 billion. However, SPR is forecasting 2015 earnings in the $3.60-3.80 range compared to Wall Street estimates of $3.63 a share. SPR management said their order backlog jumped 7% to $47 billion. That's about eight years worth of business. Following its Q4 results analysts have started raising their price targets on SPR.

There is a risk that rising oil prices could depress aerospace-related names. However, right now oil is likely headed even lower. Oil inventories inside the U.S. are at record highs and we're quickly running out of room to store crude oil. If we do actually run out of storage the price of oil is going to plummet, which will just be one more tailwind for SPR.

SPR has spent several days following its earnings report in a sideways consolidation. It's bullish to see the lack of profit taking from its late January and early February rally. Now shares are challenging round-number resistance at $50.00. Tonight we are suggesting a trigger to open bullish positions at $50.30.

- Suggested Positions -

Long SPR stock @ $50.30

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

Long APR $50 CALL (SPR150417C50) entry $2.09

02/25/15 new stop @ 49.25
02/19/15 triggered @ $50.30
Option Format: symbol-year-month-day-call-strike

Sensata Technologies - ST - close: 54.22 change: -1.08

Stop Loss: 53.45
Target(s): To Be Determined
Current Option Gain/Loss: +2.6%
Entry on February 10 at $52.85
Listed on February 09, 2015
Time Frame: 8 to 12 weeks
Average Daily Volume = 1.2 million
New Positions: see below

02/25/15: ST also hit some profit taking today with a -1.95% decline. Shares are testing what should be support near $54.00 (a.k.a. the old highs). We are raising the stop loss up to $53.45 just in case support does not hold.

Earlier Comments: February 9, 2015:
ST is a Dutch technology company that makes sensors. According to the company, "Sensata Technologies Holding N.V. is one of the world's leading suppliers of sensing, electrical protection, control and power management solutions with operations and business centers in eleven countries. Sensata's products improve safety, efficiency and comfort for millions of people every day in automotive, appliance, aircraft, industrial, military, heavy vehicle, heating, air-conditioning and ventilation, data, telecommunications, recreational vehicle and marine applications."

ST has been delivering consistently strong revenue growth. Their 2014 Q1 revenues were up +17.3%. Q2 revenues grew +13.7%. Q3 revenues jumped +15.7%. ST reported a significant acceleration in their Q4 revenues with +39.7% growth to $705.3 million, which was above expectations. Management issued relatively cautious guidance for the first quarter and full year 2015 estimates. That did not slow the rally.

Shares of ST were showing relative strength today with a +1.7% gain. The trading in ST over the last few weeks looks like a consolidation and a new base to build its next leg higher on. Tonight I am suggesting a trigger to open bullish positions at $52.85. The $54.00 level is overhead resistance but we are expecting the larger up trend to power ST through this obstacle.

- Suggested Positions -

Long ST stock @ $52.85

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

Long JUN $55 CALL (ST150619C55) entry @ $1.85

02/25/15 new stop @ 53.45
02/17/15 new stop @ 51.35
02/10/15 triggered @ 52.85
Option Format: symbol-year-month-day-call-strike

Total System Services - TSS - close: 38.33 change: +0.29

Stop Loss: 34.90
Target(s): To Be Determined
Current Option Gain/Loss: +3.5%
Entry on February 13 at $37.05
Listed on February 05, 2015
Time Frame: 8 to 12 weeks
Average Daily Volume = 883 thousand
New Positions: see below

02/25/15: TSS ignored the market's lackluster performance on Wednesday and continued to push to new highs. Shares are on track for their seventh weekly gain in a row. I would not chase it here.

Earlier Comments: February 5, 2015:
Financial stocks as a group have struggled this year. The sector is down about -4% in 2015. Yet shares of TSS is up +6.4% and trading near all-time highs.

According to a company press release, "At TSYS® (TSS), we believe payments should revolve around people, not the other way around. We call this belief "People-Centered Payments®." By putting people at the center of every decision we make, TSYS supports financial institutions, businesses and governments in more than 80 countries. Through NetSpend®, A TSYS Company, we empower consumers with the convenience, security, and freedom to be self-banked. TSYS offers issuer services and merchant payment acceptance for credit, debit, prepaid, healthcare and business solutions. TSYS' headquarters are located in Columbus, Ga., U.S.A., with local offices spread across the Americas, EMEA and Asia-Pacific."

The last few earnings reports from TSS have come in better than expected. Their most recent earnings report was January 27th. TSS' CEO said, "We finished 2014 on a high note. Organic revenue grew 5.8%, year over year, with total revenues growing 18.5% and revenues before reimbursable items up 20.2%."

Wall Street was looking for a Q4 profit of $0.53 a share on revenues of $620.4 million. TSS delivered a profit of $0.58 with revenues climbing almost 9% to $635 million. The company's guidance was only in-line with Wall Street estimates but that didn't stop shares from soaring on the news. TSS management also announced a new 20 million share stock buyback program. That's significant since the company only has 183 million shares outstanding.

The stock's up trend has created a buy signal on the point & figure chart pointing to at $40.00 target. The last few days have seen traders buying the dip. TSS looks like it's coiling for a breakout past the $37.00 level.

Given the stock's recent volatility I am labeling this a more aggressive, higher-risk trade. Tonight we are suggesting a trigger at $37.05 to buy the stock.

- Suggested Positions -

Long shares of TSS @ 37.05

02/21/15 Caution: TSS is starting to look short-term overbought.
02/13/15 triggered @ 37.05

BEARISH Play Updates

None. We do not have any active bearish trades.


Southwest Airlines Co. - LUV - close: 44.12 change: -1.23

Stop Loss: 41.95
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Entry on February -- at $---.--
Listed on February 23, 2015
Time Frame: 8 to 12 weeks
Average Daily Volume = 9.2 million
New Positions: see below

02/25/15: We just added LUV to the newsletter last night as a new bullish candidate. Why are we dropping it one day later?

That's a good question. The reason is today's revelation that LUV has 128 aircraft (all Boeing planes) that have missed inspections. The U.S. FAA gave LUV a five-day deadline to get all the planes inspected.

LUV is the one who noticed the planes were behind scheduled and voluntarily reported it to the FAA. This story combined with a minor bounce in oil is the most likely reason behind LUV's relative weakness in the market today (-2.7%).

Personally, I think this is a non-event and will only have a short-term impact on the stock. However, in an abundance of caution we are removing LUV as a candidate. Shares are trading lower after hours (down around $43.80).

I would keep LUV on your watch list. If shares find support near $42.00 again it could be another bullish entry point.

Trade did not open.

02/25/15 removed from the newsletter, suggested entry was $45.50