Option Investor

Daily Newsletter, Wednesday, 10/7/2015

Table of Contents

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

Market Wrap

Strong Run for the Bulls

by Keene Little

Click here to email Keene Little
The stock market has had a strong run for the past seven days, with the DOW rallying just over 1000 points from low to high. By any measure we now have an overbought market, which makes bets on the long side a bit risky.

Today's Market Stats

With the DOW rallying 1000 points in seven days (SPX 127 points) we have an overbought market but that didn't bother the bulls today. A gap up to start the day was followed by more buying in the first 45 minutes but then the sellers hit hard. The selling had the indexes back in the red but then the buying started again and it lifted the indexes back up to near their morning highs (the RUT made new daily highs this afternoon). It looked like a bullish day but we're starting to see weakening momentum at the time when the leg up from September 29th looks close to completion. What follows this rally leg will provide an important clue for what the rest of the year might be like.

There were no major economic reports today to move the market and the morning floundered a bit before finding its legs and climbed back up. Other than the usual concerns about China it's been quiet overseas. The market is ignoring news about Syria and other problems that are having more of a negative impact on Europe than the U.S., which left the bulls with little interference in moving the ball. The DOW has now had its best winning streak since July (SPX missed the same accomplishment with a minor down day on Tuesday). I think most would agree that we're now looking for at least a pullback correction before continuing higher. Unless of course we're at the beginning of a blow-off move to a final top this year. I don't see that happening but this market has fooled me a time or two before (wink).

On the SPX weekly chart below you can see the double bottom with the August and September lows, both near price-level support at 1885, and a turn up in the oscillators (with MACD crossing to the upside). From a bullish perspective there's a lot to like on this chart since a double bottom with bullish divergence (on RSI) is a good reason to buy the "dip" in an uptrend. But are we in an uptrend? The correct answer to that question determines whether we should be looking to buy the dip or sell the rip. In my opinion we've already seen the final high and the sharp decline from July will be followed by another one, which makes the price consolidation since August a bearish continuation pattern. The more immediate question is how high the bounce might get before turning back down. From a weekly perspective I see upside potential in the 2040-2060 area, which would be a back-test of price-level S/R near 2040, the bottom of the up-channel from October 2011, near 2055, and a test of the broken 50-week MA, currently near 2059. As for downside potential, two equal legs down from July, if it drops from here, points to 1733, which would also be a test of the February 2014 low and the uptrend line from March 2009 - October 2011 (arithmetic price scale).

S&P 500, SPX, Weekly chart

In addition to the upside targets mentioned with the weekly chart above, the daily chart below shows the 200-dma currently near 2062 but coming down, so the upper target mentioned above, at 2060, would likely be very strong resistance. But there are some lower targets that could mean SPX will not even come close to the 2040-2060 target zone. I'm looking at the bounce off the August low as an a-b-c bounce correction to the July-August decline, which will be followed by another leg down. Two equal legs up from August, counting the leg up into the August 28th high as the 1st leg, points to 1998, which was achieved today. SPX also back-tested its 50-dma today, near 1996, and the bearish setup is for the start of the next leg down from here. But there is one other higher target for the 2nd leg of the bounce off the August low -- if I look at the move up from August into the September 17th high as the 1st leg of the bounce then the 2nd leg up projects to almost 2026 for equality. That remains upside potential until and unless SPX first drops below Tuesday's low at 1972, which would indicate the bounce has likely finished. Keeping it simple, I'd say bullish above the 50-dma, near 1996, bearish below.

S&P 500, SPX, Daily chart

Key Levels for SPX:
- bullish above 2000
- bearish below 1871

Assuming we're only looking for an a-b-c bounce correction off the August low, the c-wave is the move up from September 29th and it needs to be a 5-wave move. On the 60-min chart below I've labeled the moves and I'm counting the 5th wave as the leg up from Tuesday's low. It projects to 2027 where it would equal the 1st wave. Note the correlation with the projection near 2026 for two equal legs up from August. The one caution about the upside projection for the 5th wave is that it's untrustworthy because many times it truncates and finishes early. In other words the rally could complete at any time and trap bulls who are buying into the expectation that the rally is breaking out to the upside.

S&P 500, SPX, 60-min chart

The DOW has the same pattern as SPX and the comments for SPX apply to the DOW. The pattern for the a-b-c bounce off the August low can be considered complete at any time and therefore betting on further upside is risky. But there is some additional upside potential to make it at least short-term risky for bears as well. There's price-level S/R near 17050 (December 2014 low at 17067 and Feb 2015 low at 17037) and then the top of a parallel up-channel for the bounce from August, currently near 17320.

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- bullish above 17,100
- bearish below 15,942

NDX has been struggling just beneath its price-level S/R line near 4345, as well as its broken uptrend line from 2012-2013-2014, currently near 4325 (arithmetic price scale). Only slightly higher and coming down is its broken 50-dma, currently near 4350. Yesterday and today it bounced off its 20-dma, currently near 4278 and climbing. It's looking like it will be a battle between the 20- and 50-dma's before we see which direction will be chosen. However, as with the discussion about SPX, it's looking like we should expect at most one more small rally before turning back down. A rally above the 50-dma could make it up to its 200-dma, near 4385, but probably not much, if any, higher.

Nasdaq-100, NDX, Daily chart

Key Levels for NDX:
- bullish above 4345
- bearish below 4119

Unlike the other indexes, the RUT had made new lows into its September 29th low, which was a test of price-level S/R near 1080, and therefore two equal legs up for its bounce off the August low, which points to 1168, would have it stopping short of its September 17th high at 1194. Near the projection for two equal legs up is its broken 50-dma, now near 1166 but coming down, and its downtrend line from June, near 1167. It's bullish above 1152 but I wouldn't press my luck if it gets up near 1168.

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- bullish above 1152
- bearish below 1080

Looking to the bigger stock index, the NYSE Composite index, it's relatively easy to see the 3-wave bounce off the August low. Two equal legs for the a-b-c bounce points to 10312, only 28 points above today's high. But as you can see on its chart below, it has now run into its broken 50-dma, near 10266 (probably down near 10260 tomorrow), and the bears could set up an attack here. Not much above the 10312 projection is price-level resistance at 10387 (the 2007 high) so there's some upside potential but this is a risky spot to try a long play. The bigger pattern calls for a strong decline to follow the completion of the a-b-c bounce.

NYSE Composite index, NYA, Daily chart

Looking to the bond market for clues, it hasn't been much help lately. If the stock market is rallying I like to see the bond market selling (to help provide liquidity for the stock market). When the stock market sells off we often see that money rotating into the relative safety of bonds. The August 24th low for stocks was a high for bond prices, as can be seen on the TLT daily chart below. The September 17th high for stocks was a low for TLT. But since the September 29th low for stocks and the strong rally since then, TLT has essentially chopped sideways. In other words we're not seeing the typical support from a selloff in the bond market. In fact I think TLT has a good chance of continuing higher here after pulling back to its 50-dma for support yesterday and today. A continuation of the rally in bonds would likely put some pressure on the stock market, right at a time when I see the stock market bounce coming to an end.

20+ Year Treasury ETF, TLT, Daily chart

I usually show the weekly chart for the U.S. dollar since it gives a better longer-term perspective but tonight I'm using the daily chart to show the shorter-term picture and what to watch for. Since its March high I've been looking for the dollar to consolidate this year before heading higher next year. The large consolidation pattern looks like a shallow descending wedge, the top of which is currently near 97.30. There is a small rising wedge pattern for the bounce off the August 24th low, the top of which will cross the top of the descending wedge near 97.15 around October 20th. A rally up to that level and a reversal back down would be a good setup to see the dollar drop back down to the bottom of the descending wedge, near 91.75 in early December. That would then be a good setup for the start of a stronger rally in the dollar.

U.S. Dollar contract, DX, Daily chart

While the dollar has been consolidating in a shallow descending wedge, gold has also been working its way slowly lower, showing it doesn't trade counter to the dollar. Gold's decline has been reflecting the deflationary environment we've been in (and will continue to be in as the huge debt bubble is deflated) and I don't think we've seen the bottom for gold yet. We could see a larger bounce, perhaps up to 1195 for two equal legs up from the July 24th low, but at the moment gold is fighting its downtrend line from January, where it closed today at 1145. This is also only 3 points above price-level resistance near 1142. If it manages to push higher from here it will then run into resistance near 1180 where it would hit its 50-week MA and its longer-term downtrend line from October 2012. MACD has worked its way back up to the zero line from the low in July and a rollover from there would be a sell signal.

Gold continuous contract, GC, Weekly chart

Silver has been a little more bullish than gold this week and unlike gold it has popped above its August 21st high and made it up to its 50-week MA at 16.05 (today's high was 16.09 and it closed at 16.06). As can be seen on its daily chart below, it also reached its 200-dma at 15.97 and the trend line along the highs from September 3rd (it has formed an expanding triangle off its August 26th low). A price projection at 15.88, for two equal legs up from August, was also achieved. A downtrend line from July 2014 - May 2015 crosses the top of its expanding triangle pattern on Monday near 16.15 so it would be more bullish above that level but for now it's facing what could be stiff resistance to any further gains.

Silver continuous contract, SI, Daily chart

As with the dollar, I've been discussing the idea for a long sideways consolidation for oil before heading lower. A big sideways triangle is the pattern I'm thinking we'll see, which calls for 3-wave moves up and down for many months to come, but it's too early in the pattern to be sure how that will play out. For now it looks like oil should head higher following its month-long consolidation following its August 31st high. The triangle consolidation pattern fits well as the b-wave in an a-b-c move up from August 24th. Two equal legs up from that low points to 55.55 although it could run into trouble at its 200-dma, near 51, which would also be where the 2nd leg of its bounce would achieve 62% of the 1st leg up (a minimum expectation). It would turn more immediately bearish if it drops back below last Friday's low at 43.97.

Oil continuous contract, CL, Daily chart

Thursday and Friday continue the slow economic reports for this week. We'll get the FOMC minutes tomorrow afternoon but there should be no surprises for the market.

Economic reports and Summary


The price pattern got a little funky today but it's looking like we should expect only a little more upside before heading back down in a strong decline. I'm waiting for the completion of the 5th wave in the move up from September 29th, which would then complete an a-b-c bounce off the August low. That bounce fits best as a correction to the July-August decline and therefore should be setting up a very good opportunity to get short for another leg down. As mentioned for SPX, we could be looking at a 260-point drop, which would obviously be a nice trade. That's also the risk if you decide you want to hold onto a long position so be careful with your risk management.

Some cycle studies and comparisons of the price pattern since July to previous market crashes, including 1929 and 1987, suggest the market is vulnerable here. There's no guarantee of a strong decline to follow the bounce off the August low but I would say the odds favor the bears here and the coming decline, if we get it, could make the July-August decline look small. I mention this only to make you aware of the vulnerability. Upside potential is dwarfed by downside risk and I just don't see the value in holding long positions, such as in your 401(k). Go to cash, stay safe for the rest of the year or at least into November/December when we'll see if the coast is clear.

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

Is All The Bad News Priced In?

by James Brown

Click here to email James Brown


Bitauto Holdings - BITA - close: 32.98 change: +0.11

Stop Loss: 29.90
Target(s): To Be Determined
Current Gain/Loss: Unopened
Entry on October -- at $---.--
Listed on October 07, 2015
Time Frame: Exit prior to earnings in mid November
Average Daily Volume = 946 thousand
New Positions: Yes, see below

Company Description

Trade Description:
After a -75% plunge in BITA's stock price is all the bad news baked in? The stock hit a high of $95.00 in January 2015. When the U.S. stock market corrected in late August and spiked lower on August 24th, shares of BITA hit a low of $22.00. That's a -76% drop. Since then BITA appears to have found a bottom.

If you're not familiar with BITA they are a Chinese company. BITA is considered part of the technology sector. According to the company, "Bitauto Holdings Limited (BITA) is a leading provider of internet content and marketing services for China's fast-growing automotive industry. Bitauto manages its businesses in three segments: its advertising business, EP platform business, and digital marketing solutions business.

The Company's bitauto.com advertising business offers automakers and dealers a variety of advertising services through its bitauto.com website, which provides consumers with up-to-date new automobile pricing and promotional information, specifications, reviews and consumer feedback.

The Company's EP platform business provides web-based integrated digital marketing and customer relationship management (CRM) applications to new automobile dealers in China. The platform enables dealer subscribers to create their own online showrooms, list pricing and promotional information, provide dealer contact information, place advertisements and manage customer relationships to help them effectively market their automobiles to consumers.

The Company's taoche.com business provides listing services to used automobile dealers that enable them to display used automobile inventory information on the taoche.com website and partner websites. The Company provides advertising services to used automobile dealers and automakers with certified pre-owned automobile programs on its taoche.com website. The Company's digital marketing solutions business provides automakers with one-stop digital marketing solutions, including website creation and maintenance, online public relations, online marketing campaigns and advertising agent services."

The economic slowdown in China is major news and has been a market-moving headline for months. What investors might forget is that China is still growing. It's just the pace of growth is slowing down. That slowdown is very evident in the auto market. According to McKinsey & Company the Chinese auto market grew +24% between 2005 and 2011. Last year (2014) Chinese consumers bought 19.7 million cars. That looks like a short-term peak. After years of consistent growth the Chinese auto market will be lucky to hit low single-digit growth and might actually post a decline in sales.

Through August 2015 the Chinese auto market has only sold 12.78 million vehicles. September's numbers continued to sink with sales down -3.4% from a year ago. The full-year 2015 sales are on pace for a -2.6% decline. However, analysts are expecting growth in the Chinese auto market to slow down to +8% annually between now and 2020. That's still healthy, just slower than previous years.

Consumers are feeling the pinch with China's slowdown. Unfortunately an extremely volatile Chinese stock market this year has not helped consumer confidence. The good news is that the Chinese government is trying to stimulate their economy. Last month the government slashed their purchase tax on cars by 50% down to 5%. This new discount applies to cars with engines 1.6 liters or smaller. According to Bank of America that accounts for almost 70% of cars sold in China. Credit Suisse analysts believe this tax cut by the government could boost sales by three million units a year. The tax cut started on October 1st and lasts through the end of 2016.

Bearish investors on BITA could argue the stock is expensive. BITA does have a trailing P/E of 40. Yet bullish investors could argue that BITA is cheap with a forward P/E of 2.6. The company continues to see strong revenue growth.

BITA's last couple of quarters saw revenues surge +99.5% in Q1 and +92.5% in Q2. Management has been beating estimates on both the top and bottom line the last three quarters. The company is growing but they are trying to adjust to the economic slowdown. Management has lowered their guidance in two out of the last three quarters. Part of the problem is that last year was so good for the auto market the company faces really tough comparisons.

Their most recent earnings report was August 6th and BITA management lowered their earnings and revenue guidance. The company expects earnings per share to decline -25% to -32% from a year ago. They also expect sales growth to slow from the +92-95% range down to the +64-73% range. Yes, that's a big drop but it's still strong growth. Shares have already been punished for the lowered guidance. BITA fell -18% the very next day (August 7th).

The question I asked earlier was if all the bad news had already been priced into BITA's stock price? After spiking down to $22 in late August shares spent weeks consolidating sideways in the $25.00-28.00 region. This appears to have built a base which the stock is now bouncing from. The last several days has seen a change in the tone of trading with traders buying the dips. The point & figure chart is now bullish and forecasting at $49.00 target.

Today's intraday high was $33.59. Tonight we are suggesting a trigger to launch bullish positions at $33.75. Make no mistake, this is a higher-risk, more aggressive trade. Chinese stocks can be volatile. If this rally continues BITA could see some short covering. The most recent data listed short interest at nearly 10% of the small 20.3 million share float. I am suggesting small positions to limit risk or use the call option to limit risk.

Trigger @ $33.75 *small positions to limit risk*

- Suggested Positions -

Buy BITA stock @ $33.75

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

Buy the NOV $35 CALL (BITA151120C35) current ask $2.50
option price is a current quote and not a suggested entry price.

Entry disclaimer: To avoid an unfavorable entry point, we will not launch a new play if the stock gaps open more than $1.00 past our suggested entry point.

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

Daily Chart:

Weekly Chart:

In Play Updates and Reviews

Stocks Rally Around The Globe

by James Brown

Click here to email James Brown

Editor's Note:
Bulls were in control of the markets on Wednesday. Stocks were up in Asia, Europe, and the U.S. although gains were relatively mild for most indices. The S&P 500 gained less than one percent. Small caps outperformed with the Russell 2000 up +1.6%.

We might see a new entry point on the MBLY trade soon. Plus SBUX looks ready to breakout to new highs.

Current Portfolio:

BULLISH Play Updates

Ingram Micro Inc. - IM - close: 29.00 change: +0.69

Stop Loss: 27.45
Target(s): To Be Determined
Current Gain/Loss: +4.1%
Entry on September 09 at $27.85
Listed on September 8, 2015
Time Frame: Exit prior to earnings in late October
Average Daily Volume = 1.0 million
New Positions: see below

10/07/15: IM continues to surge higher. The stock is above resistance at $28.00 and looks like it's headed for $30.00. Shares outperformed the market today with a +2.4% gain.

Tonight we are raising the stop loss up to $27.45. No new positions at this time.

Trade Description: September 8, 2015:
IM looks like it is about to break out from a huge consolidation pattern.

The company operates in the services sector. According to the company, "Ingram Micro helps businesses fully realize the promise of technology® - helping them maximize the value of the technology that they make, sell or use. With its vast global infrastructure and focus on cloud, mobility, supply chain and technology solutions, Ingram Micro enables business partners to operate more efficiently and successfully in the markets they serve.

No other company delivers as broad and deep a spectrum of technology and supply chain services to businesses around the world. Founded in 1979, Ingram Micro's role as a leader and innovator in technology and supply chain services has fueled its rise to the 69th ranked corporation in the FORTUNE 500.

Ingram Micro amplifies the value of its position at the intersection of thousands of vendor, reseller and retailer partners by customizing and delivering highly targeted applications for industry verticals, business to business customers and commercial needs. From provisioning solutions for system integrators working at the heart of the network to offerings through the full lifecycle of mobile devices, SMB to global enterprise software and computing, point of sale to cloud services, professional AV to physical security-Ingram Micro is trusted by customers to have the expertise and resources to help them define and push the boundaries of what's possible.

The company supports global operations by way of an extensive sales and distribution network throughout North America, Europe, Middle East and Africa, Latin America and Asia Pacific."

The company's most recent earnings report was July 30th. Wall Street was expecting a profit of $0.54 per share on revenues of $10.9 billion. IM delivered $0.55 cents. Revenues were down -3.3% to $10.55 billion. However, if you back out the impact of currency headwinds then IM's results look a lot better. Negative currency translations shaved off -8% from their revenues.

IM management's guidance was a little soft but they announced the initiation of a $0.10 per share dividend and that they were boosting their stock buyback program by $300 million. The stock soared on this news. Shares rallied from $24.50 to $27.25 the next day.

IM was not immune to the market's late-August crash but investors bought the dip at support near its July lows. Shares have since erased the sell-off. Now IM is poised to breakout past resistance and what looks like a consolidation that started in early 2014.

A rally past $28.00 would generate a new buy signal on the point & figure chart. We want to jump in a little earlier. Tonight we are suggesting a trigger to open bullish positions at $27.85.

NOTE: I want to caution readers about the options. The spreads on most of IM's options are a little bit wide. Actually some of them are probably too wide. Be careful with the options.

- Suggested Positions -

Long IM stock @ $27.85

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

Long DEC $30 CALL (IM151218C30) entry $1.15

10/07/15 new stop @ 27.45
09/15/15 Caution - IM did not participate in the market's rally today
09/09/15 triggered @ $27.85
Option Format: symbol-year-month-day-call-strike

Mobileye N.V. - MBLY - close: 49.52 change: +1.16

Stop Loss: None. No stop at this time.
Target(s): To Be Determined
Current Gain/Loss: -0.5%
Entry on October 05 at $49.75
Listed on October 03, 2015
Time Frame: Exit prior to earnings in mid November
Average Daily Volume = 4.6 million
New Positions: see below

10/07/15: Good news! Traders were in a buy-the-dip mood with MBLY today. The stock rallied +2.39% and looks poised to breakout past resistance at $50.00 soon. I am suggesting a rally above $50.00 as our next bullish entry point.

Trade Description: October 3, 2015:
The future of hands free driving is a lot closer than you might think. MBLY is leading the charge. Their technology is already in more than three million cars made by companies like BMW, General Motors, and Tesla.

What exactly does this technology do? DAS stands for driver assistance systems. Sometimes you might see it called ADAS for advanced driver assistance systems. This new technology helps drivers avoid collisions with other vehicles, pedestrians, bicyclists, and more while also alerting the driver to road signs and traffic lights.

The company website describes Mobileye as "a technological leader in the area of software algorithms, system-on-chips and customer applications that are based on processing visual information for the market of driver assistance systems (DAS). Mobileye's technology keeps passengers safer on the roads, reduces the risks of traffic accidents, saves lives and has the potential to revolutionize the driving experience by enabling autonomous driving."

MBLY said their technology will be available in 160 car models from 18 car manufacturers (OEMs). Further, Mobileye's technology has been selected for implementation in serial production of 237 car models from 20 OEMs by 2016.

The company is already developing a system for autonomous driving or hands free driving. They currently plan to launch an autonomous system in 2016 that will work at highway speeds and in congested traffic situations.

MBLY stock came to market in August 2014. Demand was strong enough that they upped the number of shares available from around 27 million to 35.6 million shares. They raised the IPO price from the $22 range to $25. This valued MBLY at $5.3 billion. The first day of trading saw MBLY opened at $36.00. Two months later MBLY traded at $60.00.

It's easy to see why investors are optimistic on MBLY. Annual revenues have soared from $19.2 million in 2011 to $143.6 million in 2014. Their revenues last year rose +77% from 2013. Currently a poll of analysts by Thomson Reuters is forecasting sales to rise +50% in 2015 to $218.3 million. Earnings are forecasted to surge +95%.

MBLY's Q1 report was announced in May. Their Q1 earnings were $0.08 per share, which was a penny above estimates. Revenues were up +28% to $45.6 million, also above estimates.

Q2 results, announced August 6th, were better. Earnings were $0.10 a share, which was two cents better than expected. Revenues were up +56.7% to $52.8 million, above expectations.

Last year the New York Post ran an article discussing how the White House might generate a bullish tailwind for MBLY. The National Highway Traffic Safety Administration issued a research report that estimated ADAS type of technology could eliminate almost 600,000 left-turn and intersection crashes a year. They report also suggested that adding FCAM and lane departure technology on big vehicles like over the road trucks could reduce accidents with these huge vehicles by up to 25%. Following this report the White House said they would draft new rules that required this sort of tech in new vehicles.

A couple of weeks ago the U.S. Department of Transportation and IIHS announced that ten auto manufacturers had agreed to add autonomous emergency breaking to all new U.S. models as a standard feature. This should be a huge bonus for MBLY. The basic autonomous breaking system ranges from $120 to $350 per vehicle (FYI: the U.S. auto market is on pace to sell more than 18 million vehicles this year). MBLY has a history of winning 80 to 90 percent of ADAS contracts so this new push by the government and the auto industry's acceptance could mean billions to MBLY's bottom line going forward.

Naturally, with a high-profile, high-growth stock like MBLY there are critics. Bears point out that MBLY's valuations are sky high and they would be right. MBLY's trailing P/E is over 1,000 while it's forward P/E is about 65. Most of Wall Street seems bullish on MBLY as they can see the long-term growth outlook for MBLY. If this rally continues some of those shorts could panic and fuel a short squeeze. The most recent data listed short interest at 18% of the 163 million share float.

The stock looks ready to sprint higher after a healthy bounce off support. Tonight we are suggesting a trigger to launch bullish positions at $49.75. If triggered I would target a run into the $58-62 region. I am suggesting small positions as this is an aggressive, higher-risk trade. MBLY is a volatile stock. You may want to use the call options to limit your risk. More conservative traders may want to wait for MBLY to rally past $50.00 before initiating positions. Normally the $50.00 level would be round-number, psychological resistance. We're suggesting a trigger just below it since MBLY could move fast once it breaks out. It's worth noting that a rally past $50.00 will generate a new buy signal on the point & figure chart.

*small positions to limit risk* - Suggested Positions -

Long MBLY stock @ $49.75

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

Long NOV $55 CALL (MBLY151120C55) entry $2.30

10/05/15 triggered @ $49.75
Option Format: symbol-year-month-day-call-strike

Starbucks Corp. - SBUX - close: 58.78 change: +0.09

Stop Loss: 54.75
Target(s): To Be Determined
Current Gain/Loss: Unopened
Entry on October -- at $---.--
Listed on October 05, 2015
Time Frame: Exit prior to earnings in very late October
Average Daily Volume = 8.5 million
New Positions: Yes, see below

10/07/15: SBUX eked out a very small gain on Wednesday. Traders did buy the dip intraday at $57.90. Shares look poised to breakout to new highs soon.

Our suggested entry point is $59.55.

Trade Description: October 5, 2015:
SBUX has delivered a strong rebound off last week's lows. Once again the stock looks like a bullish candidate.

We recently traded SBUX as a bullish candidate. What follows is an updated play description:

The world seems to have an insatiable appetite for coffee. Starbucks is more than happy to help fill that need. The first Starbucks opened in Seattle back in 1971. Today they are a global brand with locations in 66 countries. SBUX operates more than 21,000 retail stores with more than 300,000 workers.

A few years ago Business Insider published some facts on SBUX. The average SBUX customer stops by six times a month. The really loyal, top 20% of customers, come in 16 times a month. There are nearly 90,000 potential drink combinations at your local Starbucks. The company spends more money on healthcare for its employees than it does on coffee beans.

The company's earnings results were only mediocre most of 2014 year. You can see the results in SBUX's long-term chart below. After incredible gains in 2013 SBUX has essentially consolidated sideways in 2014. SBUX broke out of that sideways funk after it reported earnings in January 2015.

Five-Year Plan

In late 2014 SBUX announced their five-year plan to increase profitability. Here's an excerpt from a company press release:

"The seismic shift in consumer behavior underway presents tremendous opportunity for businesses the world over that are prepared and positioned to seize it," Schultz said (Howard Schultz is the Founder, Chairman, President, and CEO of Starbucks). "Over the next five years, Starbucks will continue to lean into this new era by innovating in transformational ways across coffee, tea and retail, elevating our customer and partner experiences, continuing to extend our leadership position in digital and mobile technologies, and unlocking new markets, channels and formats around the world. Investing in our coffee, our people and the communities we serve will remain at our core as we continue to redefine the role and responsibility of a public company in today's disruptive global consumer, economic and retail environments."

"Starbucks business, operations and growth trajectory around the world have never been stronger, and we are more confident than ever in our ability to continue to drive significant growth and meet our long term financial targets," said Troy Alstead, Starbucks chief operating officer. "We have more customers visiting more stores more frequently, both in the U.S. and around the world, than at any time in our history. And we expect both the number of customers visiting our stores and the amount they spend with us to accelerate in the years ahead. With a robust pipeline of mobile commerce innovations that will drive transactions and unprecedented speed of service, Starbucks is ushering in a new era of customer convenience. We believe the runway of opportunity for Starbucks inside and outside of our stores is both vast and unmatched by any other retailer on the planet."

The company believes they can grow revenues from $16 billion in FY2014 to almost $30 billion by FY2019. To do that they will expand deeper into regions like China, Japan, India, and Brazil. SBUX expects to nearly double its stores in China to over 3,000 locations in the next five years

They're also working hard on their mobile ordering technology to speed up the experience so customers don't have to wait in line so long at their busiest locations. This will also include a delivery service.

Part of the five-year plan is a new marketing campaign called Starbucks Evening experience. The company wants to be the "third place" between home and work. After 4:00 p.m. they will start offering alcohol, mainly wine and beer, in addition to new tapas-like smaller plates.

The company recently launched its first ever Starbucks Reserve Roastery and Tasting Room in Seattle, near their iconic first retail store. The new roastery is supposed to be the ultimate coffee lovers experience. CEO Schultz said they will eventually open up about 100 of these Starbucks Reserve locations.

Earnings results:

It was a very strong holiday period for SBUX thanks in part to astonishing gift card sales. The amount of money loaded onto SBUX gift cards during the holidays surged +17% to a record $1.6 billion. One out of every seven Americans received a SBUX gift card. The company also saw significant growth overseas with its China and Asia-Pacific business soaring +85% to sales of $495 million. Their mobile transactions have reached seven million transactions a week.

SBUX reported its Q2 (2015) on April 23rd. Earnings of $0.33 a share were in-line with estimates. Revenues were up +17.8% to $4.56 billion, slightly above expectations. It was their strongest growth in four years. Customers are responding well to new drink options and an updated food menu. They're also developing new delivery options, mobile pay options, and alcoholic drinks available at select locations.

Worldwide same-store sales grew +7%. This was significantly above estimates. It also marked the 21st consecutive quarter where SBUX's comparable store sales were +5% or more.

The company issued mixed guidance. The stronger dollar is having an impact. They see fiscal 2015 results in the $1.55-1.57 range. That compares to Wall Street estimates for $1.57 per share. However, the company's revenue estimates are more optimistic. They're forecasting +16-18% sales growth into the $19.1-19.4 billion zone compares to analysts' estimates of $19.1 billion.

The trend of earnings pops continued in July with shares gapping up to new all-time highs following its Q2 report on July 23rd. Earnings were $0.42 per share, a penny above estimates. Revenues were up +17.5% to $4.88 billion, just a hair above expectations. Global same-store sales were up +7% and their non-GAAP operating margin improved 100 basis points to 19.5%. Management is still guiding 2015 revenues to rise +17% in the $19.1-19.4 billion range.

Technical Set Up

Traders bought the dip in SBUX at its rising 100-dma last week. The rebound has lifted SBUX to major resistance in the $59.00-59.30 area. A breakout here would mark new all-time highs. Tonight we are suggesting a trigger to launch bullish positions at $59.55. It is possible that the $60.00 level is round-number resistance so more conservative traders may want to wait for SBUX to close above $60.00 before initiating bullish positions.

We plan to exit prior to SBUX's earnings report in very late October. More aggressive investors might want to consider holding over the announcement.

Trigger @ $59.55

- Suggested Positions -

Buy SBUX stock @ $59.55

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

Buy the NOV $60 CALL (SBUX151120C60)

Entry disclaimer: To avoid an unfavorable entry point, we will not launch a new play if the stock gaps open more than $1.00 past our suggested entry point.

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

BEARISH Play Updates

AMAG Pharmaceuticals - AMAG - close: 39.88 change: +1.04

Stop Loss: 43.05
Target(s): To Be Determined
Current Gain/Loss: Unopened
Entry on October -- at $---.--
Listed on October 06, 2015
Time Frame: Exit PRIOR to earnings in late October
Average Daily Volume = 946 thousand
New Positions: Yes, see below

10/07/15: Biotech stocks bounced on Wednesday and AMAG added +2.6%. Shares did struggle with resistance in the $40.00-40.50 region. We are still on the sidelines. If this bounce continues we'll probably drop AMAG as a candidate. Right now the plan is to wait for a new relative low with our bearish entry trigger at $37.40.

Trade Description: October 6, 2015:
If you're looking for excitement then check out the biotech stocks. It has been a rough few months for the group. The IBB biotech ETF is down -25% from its July 2015 highs. AMAG has sprinted past its peers with a -49% plunge from its July peak. It is worth noting that the prior year (July 2014-July 2015) the stock was up more than +300%.

Here's a brief description of the company, "As a high-growth specialty pharmaceuticals company, AMAG Pharmaceuticals uses its business and clinical expertise to bring therapeutics to market that provide clear benefits and improve people's lives. Based in Waltham, Mass., AMAG has a diverse portfolio of products in the areas of maternal health, anemia management and cancer supportive care. AMAG continues to work to expand the impact of these and future products for patients by delivering on its aggressive growth strategy, which includes organic growth, as well as the pursuit of products and companies that align with AMAG's existing therapeutic areas or those that could benefit from its proven core competencies."

What makes AMAG different from most small biotech firms is that the company actually has sales. AMAG has seen strong revenue and margin growth. At the moment traders don't seem to care. Investors might be worried about competition. The FDA recently approved a generic version of AMAG's Makena treatment. Previously Makena (hydroxyprogesterone caproate) was the only drug approved by the FDA to reduce the risk of pre-term birth. This is bad news for AMAG since Makena represents 75% of its Q2 sales.

Now add more bad news with the biotech sell-off thanks to presidential hopeful Hillary Clinton tweeting about controlling drug prices to prevent price gouging. Plus there are new headlines about the Transpacific partnership (TPP) which is potentially bearish since it limits the exclusivity for new drugs on the market.

The biotech industry is under a lot of pressure and AMAG is underperforming its peers as investors sell the group. Technically AMAG has found short-term support in the $37.50-38.00 region the last few days. It looks like the stock is about to break down to new lows. Tonight we are suggesting a trigger to launch bearish positions at $37.40.

Please note that we want to use small positions to limit our risk. Trading biotech stocks is a risky business. The right or wrong headline can send an individual biotech stock gapping higher or lower. AMAG is definitely a higher-risk, more aggressive trade. There are already a lot of bears in the name. The most recent data listed short interest a 24.4% of the small 28.7 million share float. Investors could use AMAG options but the spreads are so wide the options are untradeable.

Trigger @ $37.40 *small positions to limit risk*

- Suggested Positions -

Short AMAG stock @ $37.40

Entry disclaimer: To avoid an unfavorable entry point, we will not launch a new play if the stock gaps open more than $1.00 past our suggested entry point.

Synchronoss Technologies - SNCR - close: 34.25 change: +0.70

Stop Loss: 35.75
Target(s): To Be Determined
Current Gain/Loss: -5.7%
Entry on October 01 at $32.40
Listed on September 30, 2015
Time Frame: Exit PRIOR to earnings in late October
Average Daily Volume = 603 thousand
New Positions: see below

10/07/15: The oversold bounce in SNCR continued for a third day as shares added +2.0%. The close above its simple 10-dma is short-term bullish. More conservative investors may want to lower their stop loss. I am not suggesting new positions at this time.

Trade Description: September 30, 2015:
SNCR is a technology company with strong revenue growth and yet investors have been selling the stock anyway.

SNCR is considered part of the application software industry. According to the company, "Synchronoss Technologies, Inc., is the mobile innovation leader that provides cloud solutions and software-based activation for connected devices across the globe. The company's proven and scalable technology solutions allow customers to connect, synchronize and activate connected devices and services that empower enterprises and consumers to live in a connected world."

SNCR has been consistently beating Wall Street's earnings expectations. The last three quarters in a row SNCR has delivered bottom line and top line growth above expectations. 2014's Q4 revenues were up +34.7%. 2015 Q1 sales rose +34.9% and Q2 sales rose +33.2%. Yet with strong results like these the stock is down -21.6% year to date and down -36% from its 2015 high.

Technically SNCR had been churning sideways in a wide consolidation pattern for months. It broke down from this consolidation in August when the broader market corrected lower. When the market produced a big bounce off its August lows SNCR did not participate.

Several days ago shares of SNCR collapsed on worries that they might lose their cloud-storage contract with Verizon (VZ). Several analysts defended SNCR and said the drop was a buying opportunity. Both SNCR and VZ said their contract has not changed and was good until 2018. Yet the oversold bounce from this story only lasted one day. Traders have been selling SNCR on every rally.

There is a risk that SNCR is a takeover target. Back in June and July there were rumors that SNCR was exploring a sale of the company. There were also stories that private equity might be interested in taking SNCR private. Yet this acquisition risk has not generated any new buying interest in the stock. Investors are bearish and the most recent data listed short interest at 17.7% of the 38.0 million share float. That's enough to raise the risk of a short squeeze.

Tonight I am suggesting small bearish positions if SNCR trades at $32.40 or lower. We want to use small positions to limit our risk. Investors might want to stick to put options to really limit risk.

- Suggested Positions - small positions to limit risk.

Short SNCR stock @ $32.40

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

Long NOV $30 PUT (SNCR151120P30) entry $1.90

10/07/15 SNCR is not cooperating. Investors may want to adjust their stop loss lower
10/01/15 triggered @ $32.40
Option Format: symbol-year-month-day-call-strike

iPath S&P500 VIX Futures ETN - VXX - close: 22.34 change: -0.56

Stop Loss: None, no stop at this time.
Target(s): To Be Determined
Current Gain/Loss: -2.4%
2nd position Gain/Loss: +23.0%
Entry on August 25 at $21.82
2nd position: September 2nd at $29.01
Listed on August 24, 2015
Time Frame: Exit prior to October option expiration
Average Daily Volume = 50 million
New Positions: see below

10/07/15: Another relatively widespread gain for the stock market pushed the VIX index to a -5.1% decline. The VXX fell -2.44%.

We have less than two weeks left on our October options.

No new positions at this time.

Trade Description: August 24, 2015
The U.S. stock market's sell-off in the last three days has been extreme. Most of the major indices have collapsed into correction territory (-10% from their highs). The volatile moves in the market have investors panicking for protection. This drives up demand for put options and this fuels a rally in the CBOE volatility index (the VIX).

You can see on this long-term weekly chart that the VIX spiked up to levels not seen since the 2008 bear market during the financial crisis. Moves like this do not happen very often. The VIX rarely stays this high very long.

(see VIX chart from the August 24th play description)

How do we trade the VIX? One way is the VXX, which is an ETN but trades like a stock.

Here is an explanation from the product website:

The iPath® S&P 500 VIX Short-Term Futures® ETNs (the "ETNs") are designed to provide exposure to the S&P 500 VIX Short-Term FuturesTM Index Total Return (the "Index"). The ETNs are riskier than ordinary unsecured debt securities and have no principal protection. The ETNs are unsecured debt obligations of the issuer, Barclays Bank PLC, and are not, either directly or indirectly, an obligation of or guaranteed by any third party. Any payment to be made on the ETNs, including any payment at maturity or upon redemption, depends on the ability of Barclays Bank PLC to satisfy its obligations as they come due. An investment in the ETNs involves significant risks, including possible loss of principal and may not be suitable for all investors.

The Index is designed to provide access to equity market volatility through CBOE Volatility Index® (the "VIX Index") futures. The Index offers exposure to a daily rolling long position in the first and second month VIX futures contracts and reflects market participants' views of the future direction of the VIX index at the time of expiration of the VIX futures contracts comprising the Index. Owning the ETNs is not the same as owning interests in the index components included in the Index or a security directly linked to the performance of the Index.

I encourage readers to check out a long-term chart of the VXX. This thing has been a consistent loser. One market pundit said the VXX is where money goes to die - if you're buying it. We do not want to buy it. We want to short it. Shorting rallies seems to be a winning strategy on the VXX with a constant trend of lower highs.

Today the VXX spiked up to four-month highs near $28.00 before fading. We are suggesting bearish positions at the opening bell tomorrow. The market volatility is probably not done yet so we are not listing a stop loss yet. Our time frame is two or three weeks (or less).

- Suggested Positions -

Short the VXX @ $21.82

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

Long OCT $20 PUT (VXX151016P20) entry $2.93

Sept. 2nd - 2nd position (Double Down On The September 1st Spike)

Short the VXX @ $29.01

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

Long OCT $20 PUT (VXX151016P20) entry $0.78

09/02/15 2nd position begins. VXX gapped down at $29.01
09/01/15 Double down on this trade with the VXX's spike to 6-month highs
08/25/15 trade begins. VXX gaps down at $21.82
Option Format: symbol-year-month-day-call-strike