Option Investor

Daily Newsletter, Monday, 10/12/2015

Table of Contents

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

Market Wrap

Waiting On Earnings

by Thomas Hughes

Click here to email Thomas Hughes
The market held steady while we wait on earnings season to really start.


The market held steady today while we wait on earnings season to really get started; the first report of the season was several weeks ago, the unofficial start was last week with Alcoa but this week is when it really begin to get started. For one, the big banks report en masse, for another the quality of companies reporting goes way up. Today there was only one name on the list I saw, tomorrow there are a few dozen led by names like CSX, Johnson & Johnson, Intel and JP Morgan Chase.

The morning started off on a positive note. Asian markets got a lift from the PBOC which said the correction in Chinese stock markets was nearly over. The mainland Shang Hai index gained 3.2% on the news followed by a 1.6% rise in the Nikkei and a 1.2% rise in the Hang Seng. The positive vibe helped support European indices as well but just enough to keep them above break even.

Market Statistics

Futures trading indicated a flat to slightly positive open in the early hours of trading. There were no economic or earnings releases to move the market and trading was fairly calm. The indices opened just above break even and then traded around that level the rest of the day. Action was a little choppy but the range was very narrow and volume was light all day and into the close. With so much on the calendar for the week, and nothing really happening today, it is not surprising to see the market hold steady like this. Tomorrow we will start to get a deeper insight into actual earnings for the season so action could be a little different.

Economic Calendar

The Economy

No economic data today but there is a bit coming out later this week with most coming out Wednesday, Thursday and Friday. Tomorrow is only Treasury Budget information. Wednesday is the Fed's Beige Book. Also, PPI, Retail Sales and Business Inventories. Thursday is Jobless Claims, CPI, Empire Manufacturing and Philly Fed. Friday wraps it up with TIC Flows, Industrial Production, Capacity Utilization, JOLTs and Michigan Sentiment. Out of them all CPI, PPI and the Beige Book top my list of things to watch. They are all important but these have the most direct impact on outlook, inflation and FOMC rate hike speculation. Both inflation gauges are expected to show slight declines, in the range of -0.1% to -0.2%. JOLTs is also a good one to watch. It shows the number of job openings. In light of the recently weak NFP report a strong JOLTs would be reassuring.

Moody's Survey of Business Confidence declined for the 6th week in a row. This week it fell -0.1% to 39.6 and the lowest level since March 6th. Despite the decline it is still trending near all time highs and above levels seen before 2008. According to Mark Zandi, Moody's Chief Economist, global businesses remain upbeat, led by those in the US. He says that in the US hiring remains strong, as do sales and pricing.

According to FactSet the blended rate for S&P earnings for the third quarter is now -5.5%. This is -0.1% lower than last week and -4.4% lower than at the beginning of the quarter. The energy sector is still leading in expected declines, near -65%. The ex-energy blended rate is now 1.8%. If the 4 year average hold true we can expect to see these number improve by up to 4% or more, leaving the final rate near -1.4% for the full index and 5.25% ex-enegy. So far 24 companies have reported, 19 beat earnings expectations, 14 beat on the revenue side.

Looking forward things are not shaping up quite as rosy as expected. The projected Q4 earnings growth rate for the S&P 500 is now negative at -0.4%. This is due largely to downward revisions in the energy sector. Ex-energy the rate is near 5%. Taking into account the 4 year averages we can expect both those numbers to rise by up to 4% by the end of the 4th quarter reporting season leaving full index growth near 3.5%, and ex-energy growth near 9%.

2016 is still positive but full index growth now stands at 9.7% for the year. All quarters are expected to see earnings growth, starting in the first quarter with 4.9% and moving up from there. Q2 growth is expected to be near 7.0%, Q3 doubles that to 14.3% and Q4 stands at 14.1%.

The Oil Index

Oil prices took a dive today, from recent highs, with both WTI and Brent shedding nearly -5%. A report that frackers had upped their hedges on oil at $50 may have been the trigger. Mixed news from OPEC may have also helped to depress prices. On the one side Kuwait oil ministers and others within the cartel are sounding bullish on prices into next year. On the other Saudi production is up 7% from this time last year. On the domestic front rig counts are still falling but supply and production remain high. Prices fell from a three month high and could be retreating back to the $45 support level.

The Oil Index fell a little more than -1.25% in today's session, closing with a loss near -0.85%. The index appears to be retreating to support at the recently broken 1175 level. This could lead to a retest of support or break through with next support target near 1125 and the short term moving average. The indicators are bullish and strong, upside momentum just made an extreme peak convergent with a new high, so a retest of this high is likely.

The Gold Index

Gold extended its rally, driven by a dovish Fed, Fed minutes and reduced inflation expectations. The metal gained an additional $5 in today's trading and crossed above $1160 for the first time since early August. At this level gold is trading near the top of its 4 month range and at resistance with a rate hike still expected to come, perhaps this year. If data continue to be weak, particularly inflation, gold could break above this range. If so next resistance is in the $1180 range, if not support is down near $1130.

The gold miners got a lift early in the day, on gold's strength, but bears were lurking. The Gold Miners ETF GDX gapped up at the open to begin trading at resistance levels and sold off from there. The ETF ended the day with a loss near -3.7% and creating a long black candle. The ETF has confirmed resistance above the top of its range and appears set to return to support, possible as low as $12.50. Stochastic and MACD are both still bullish but indicating near term decline and consistent with a trading range. Divergence is also present between the current high, a three month high, and peaks in both indicators. Today's candle is also a Dark Cloud Cover candle pattern, and accompanied by divergence in the indicators, both suggestive of lower prices. This is of course dependent on gold prices, if gold continues to strengthen or consolidate at today's levels the miners are likely to find support. In the meantime profit taking may continue.

In The News, Story Stocks and Earnings

Eli Lilly reported an end to a trial of one of its heart drugs this morning. The drug was in the final stages of trials of up til now expected to pass. The news was a surprise and comes on the recommendation the drug would not meet approval as a therapy for heart disease. Shares of the stock took a hit in the early pre-market session and lost more than -8% at the open. There were some buyers during the day, price was able to rise from the early low, but the losses were not recovered. Shares are now trading at the bottom of a 5 month range.

Many of the big banks report this week. The financial sector is only expected to produce earnings growth in the range of 4.5% this quarter but Bank of America is expected to be one of the top producers of growth for the entire S&P 500. Tomorrow JP Morgan reports, Wednesday it's Wells Fargo, Thursday is BB&T, Bank of America and Goldman Sachs. Many smaller regional banks will also be reporting, and the onslaught will continue next week. This week, today, the Financial Sector Spyder XLF gained 0.26% in a quiet day of trading. The ETF is sitting just above support levels and the short term moving average with bullish indicators. The ETF is near the bottom of a 12 month trading range and looks like it is going to move up to the top of the range, driven on a combination of earnings and earnings outlook. Support is near $23 with upside target near $25.50.

Rail carrier CSX reports tomorrow. The company is expected to report $0.50 per share, down from $0.56 in the last quarter. Shares of the stock have been on the rise but took a hit today after comments from a JP Morgan analyst. He says not to chase prices in the sector, that the bottom is not in, specifically pointing to Norfolk Southern but impacting the entire sector. The stock lost -2.44% and is now trading just above the short term moving average.

Intel is also reporting tomorrow. The chip making giant is expected to earn $0.59 per share, better than last quarters $0.55. The decline in PC shipments has been hurting the company but the release of Windows 10 is expected to have helped. Today the stock gained 0.25% and appears to be making a flag pattern within a rally. Upside target, providing earnings are not disappointing, is near $35.

The Indices

It was a quiet session today, waiting on earnings, waiting on economic data. No major news reports were out, and the credit markets were closed for Columbus Day. A quiet day indeed. The indices bobbed along throughout the day, briefly breaking below last week's closing prices only to bob back above. By end of day the indices were all in the green, led by the Dow Jones Industrial Average. The blue chips gained 0.28% and extended its march towards resistance. The indicators remain bullish and indicative of higher prices although momentum may have peaked. Upside target is near 17,250 with a possible break to the upside should earnings season unfold better than expected.

Today's runner up is the NASDAQ Composite. The tech heavy index gained only 0.17% in today's session and created a very small spinning top doji. The index is drifting higher on momentum, with rising indicators, and upside target near 4,950. Although the indicators are bullish, they remain weak so a break above resistance targets is questionable at this time.

The S&P 500 is next up on the list today. The broad market gained 0.13% in a move that barely keeps it above break even levels. Today's candle is a very small spinning top type doji just below resistance targets near 2,020. The indicators are bullish but showing signs of peaking so resistance could indicate a near term top. However, momentum is strong and convergent with this new high so a retest of it would be expected should/when a pull back occurs. Earnings could renew momentum and break the index above this resistance, with upside targets near 2,050 and 2,100.

The Dow Jones Transportation Average made the smallest gain in today's session, only 0.09%. The transports may have been affected by the comments from JPM about the rail carriers but was able to hold support above 8,250. The indicators are bullish and rising, with some indications of strength, particularly in the MACD, with upside targets near 8,500 should the index break resistance.


The market has been in rally mode since confirming bottom two weeks ago. The rally is strong and looks like it could go higher, perhaps all the way to the current all time highs for all the major indices. In the near term, as in tomorrow and this week, it looks like earnings is the only thing standing in the way. Tomorrow is going to be a big day, no doubt, but is still only a handful of reports so I don't really expect a break out then. By the end of the week we should have a pretty good idea of what to expect for the quarter, and if it's not decisive then maybe the next week. I am bullish but remain cautious, and eagerly awaiting all the reports.

Until then, remember the trend!

Thomas Hughes

New Plays

Poised To Run In Q4

by James Brown

Click here to email James Brown


Kate Spade & Co. - KATE - close: 21.82 change: +0.33

Stop Loss: $19.85
Target(s): To Be Determined
Current Gain/Loss: Unopened
Entry on October -- at $---.--
Listed on October 12, 2015
Time Frame: Exit prior to earnings on November 5th
Average Daily Volume = 2.2 million
New Positions: Yes, see below

Company Description

Trade Description:
The luxury goods and accessories industry has been crushed this year. Look at charts for Coach (COH), Michael Kors (KORS), and Kate Spade (KATE). The good news is that the group may have found a bottom. KATE looks poised to leave its rivals in the dust.

KATE is in the consumer goods sector. According to the company, "Kate Spade & Company (KATE) designs and markets accessories and apparel principally under two global, multichannel lifestyle brands: kate spade new york and Jack Spade. With collections spanning demographics, genders and geographies, the brands are intended to accent customers' interesting lives and inspire adventure at each turn. The Company also owns the Adelington Design Group, a private brand jewelry design and development group that markets brands through department stores and serves jcpenney via exclusive supplier agreements for the Liz Claiborne and Monet jewelry lines. The Company has a license for the Liz Claiborne New York brand, available at QVC, and Lizwear, which is distributed through the club store channel."

KATE's most recent earnings report was August 5th. The company announced its Q2 results were $0.08 a share. That missed estimates by three cents. Revenues were only up +5.6% at $281 million. That also missed estimates. The company pointed out their Q2 results still represents several businesses they are winding down. Their core sales of the KATE brand actually rose +20%. Management bumped their guidance and the stock popped on the news.

Traditionally the fourth quarter is the time to own retail-related stocks as investors key in on the holiday shopping season. After shares of KATE were almost cut in half from their 2015 highs near $35.00, Wall Street analysts have turned bullish on the stock. Stephens upped their rating to an overweight and put a $31 price target on the stock. Wunderlich offered a bullish perspective and has a $39 target for KATE. Citigroup named KATE one of their top picks for the rest of the year and issued a $33 price target.

If this rally continues KATE could see more short covering. The most recent data listed short interest at 10% of the 127 million share float. Technically KATE has been consolidating sideways below resistance at its 100-dma and the $22.00 level. Today's display of relative strength (+1.5%) also produced a close above the 100-dma. We want to hop on board if shares breakthrough the $22.00 level. Tonight we are suggesting an entry trigger at $22.05.

Trigger @ $22.05

- Suggested Positions -

Buy KATE stock @ $22.05

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

Buy the NOV $23 CALL (KATE151120C23) current ask $1.10
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:

In Play Updates and Reviews

Stocks Pause Ahead Of Q3 Earnings Deluge

by James Brown

Click here to email James Brown

Editor's Note:
After big gains last week the market paused on Monday. Investors are preparing for the first full week of Q3 earnings announcements, which picks up speed tomorrow.

ITCI hit our entry trigger.

Current Portfolio:

BULLISH Play Updates

Bitauto Holdings - BITA - close: 32.86 change: -0.03

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

10/12/15: The Chinese markets delivered a pretty strong rally today. I'm surprised that BITA didn't react to it. If BITA does not show some improvement tomorrow then we'll likely remove it as a candidate. Currently our suggested entry point is $33.75.

Trade Description: October 7, 2015:
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)

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

Ingram Micro Inc. - IM - close: 28.93 change: -0.31

Stop Loss: 27.45
Target(s): To Be Determined
Current Gain/Loss: +3.9%
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

10/12/15: IM encountered some profit taking today. Shares slipped -1.0%. If this dip continues I'd watch for potential support near $28.45 and near $28.00.

More conservative investors may want to raise their stop loss again. 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

Intra-Cellular Therapies, Inc. - ITCI - close: 44.65 change: +0.80

Stop Loss: None, no stop at this time.
Target(s): To Be Determined
Current Gain/Loss: -1.0%
Entry on October 12 at $45.10
Listed on October 10, 2015
Time Frame: Exit prior to earnings in November
Average Daily Volume = 850 thousand
New Positions: see below

10/12/15: Our aggressive, bullish trade on ITCI is open. The stock rallied +4.7% intraday and hit our suggested entry point at $45.10. ITCI pared its gains by the closing bell and settled up +1.8%. I would wait for another rally above $45.00 before initiating positions.

Trade Description: October 10, 2015:
Biotech stocks had a terrible third quarter with the group down almost -18%. ITCI was an exception with shares up +25% and that's after some serious profit taking from its mid-September highs. The story for ITCI might be strong enough that shares could ignore further weakness in the group.

You may not be familiar with ITCI since they have been a public company for less than two years. Here's a brief description of the company, "Intra-Cellular Therapies is developing novel drugs for the treatment of neuropsychiatric and neurodegenerative diseases and diseases of the elderly, including Parkinson's and Alzheimer's disease. The Company is developing its lead drug candidate, ITI-007, for the treatment of schizophrenia, bipolar disorder, behavioral disturbances in dementia, depression, and other neuropsychiatric and neurological disorders. ITI-007, a first-in-class molecule, is in Phase 3 clinical development for the treatment of schizophrenia. The Company is also utilizing its phosphodiesterase platform and other proprietary chemistry platforms to develop drugs for the treatment of Central Nervous System (CNS) disorders and other disorders."

It is their lead drug candidate, ITI-007, that fueled huge gains in the stock last month. Here's an excerpt from ITCI's website, "ITI-007 is in Phase 3 clinical trials as a first-in-class treatment for schizophrenia. Current medications available for the treatment of schizophrenia do not adequately address the broad array of symptoms associated with this CNS disorder. In addition, use of these current medications is limited by their substantial side effects. ITI-007 is designed to be effective across a wider range of symptoms, treating both the acute and residual phases of schizophrenia, with improved safety and tolerability." (If you would like more details check out their press release here.

Schizophrenia is a serious mental illness that affects more than 70 million people worldwide. The stock more than doubled on news of its successful Phase 3 clinical trial with shares surging from $26 to almost $60 in two days. That's because ITI-007 would be the first treatment for schizophrenia without significant side effects. Analysts are estimating that potential sales for ITI-007 could reach $6 billion a year in the U.S. and EU if approved by the FDA (and its European counterpart).

ITCI is also investigating if the treatment could help other mental illnesses like dementia, depression, and bipolar disorders.

The company's management was quick to capitalize on the good news. They issued a secondary offering of 6.9 million shares at $43.50 a share (about $300 million). Demand was strong enough that they sold 7.93 million shares and raised $345 million. They already had $204 million in cash. Together that bumps their war chest up to more than $500 million.

Gravity eventually took over and shares of ITCI retreated from $60 to $35 but investors have started buying the dips. Now ITCI is building on a bullish trend of higher lows. Shares appear to have short-term resistance at the $45.00 level. A breakout above $45.00 could be our entry point to hop on board the next leg higher.

Regular readers know that we consider biotech stocks aggressive, higher-risk trades. The right or wrong headline can send a stock soaring. ITCI is a great example with shares exploding higher on positive headlines in September. Tonight we are suggesting small bullish positions if ITCI can trade at $45.10. We will tentatively plan on exiting prior to ITCI's earnings report in early November.

(small positions to limit risk) - Suggested Positions -

Long ITCI stock @ $45.10

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

Long NOV $50 CALL (ITCI151120C50) entry $3.80

10/12/15 triggered @ $45.10
Option Format: symbol-year-month-day-call-strike

Mobileye N.V. - MBLY - close: 48.30 change: -0.97

Stop Loss: $46.45
Target(s): To Be Determined
Current Gain/Loss: -2.9%
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

10/12/15: MBLY continues to struggle with resistance at $50.00. The stock reversed again and underperformed the market with a -1.9% decline.

Tonight we are adding a stop loss at $46.45. Wait for a rally above $50.00 before considering new bullish positions. More conservative traders may want to wait for a close above $50.00 before launching positions.

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

10/12/15 new stop @ 46.45
10/05/15 triggered @ $49.75
Option Format: symbol-year-month-day-call-strike

Matrix Service Company - MTRX - close: 24.02 change: -1.91

Stop Loss: 22.45
Target(s): To Be Determined
Current Gain/Loss: -4.3%
Entry on October 09 at $25.10
Listed on October 08, 2015
Time Frame: Exit PRIOR to earnings in early November
Average Daily Volume = 272 thousand
New Positions: see below

10/12/15: Ouch! What happened to MTRX today? I don't see any news to account for today's -7.3% plunge. If there's any good news with today's drop it's where MTRX closed, near support at the $24.00 level.

Considering today's volatility I would hesitate to launch new positions. More conservative traders may want to raise their stop loss. If you are looking for an entry point consider waiting for a bounce back above $24.75.

Trade Description: October 8, 2015:
After years of double-digit earnings and revenue growth MTRX ran into trouble last year. The stock peaked in June 2014 and plunged from $38 down to $17. It looks like MTRX's earnings trouble and stock price declines may have turned the corner.

MTRX is in the basic materials sector. According to the company, "Ranked as a Top 100 Contractor by Engineering News-Record, Matrix Service Company provides sophisticated design, engineering, and construction services to a diverse client base throughout North America. We offer a comprehensive EPC solution to a variety of end-markets with a focus on safety and superior service and quality." They service the "Electrical Infrastructure, Oil Gas & Chemical, Storage Solutions and Industrial markets." The Company is headquartered in Tulsa, Oklahoma, with regional operating facilities in the United States and Canada.

MTRX's earnings results have struggled. They missed Wall Street estimates with their Q2 results (announced April 4th) and their Q3 results (May 7th). Management lowered their guidance with both reports. Fortunately the outlook improved in July.

On July 13th MTRX updated their guidance with numbers slightly above expectations. The stock soared on this news. Yet the stock did not see a lot of follow through higher. It wasn't until MTRX reported earnings on August 31st that the stock began to see any serious improvement.

MTRX's Q4 2015 results, announced August 31st, were $0.40 a share. That was 13 cents above estimates. Revenues were up +7.6% to $370.5 million. Guidance was good enough that the stock rallied past resistance. Shares spent the rest of September consolidating these gains.

Today it looks like the consolidation is over. After months of building a base in the $16-23 range MTRX is finally breaking out. Technically shares look better with the 50-dma and 200-dma beginning to curve upward as well. The point & figure chart is bullish and forecasting at $36.00 target.

MTRX just broke through resistance at the $24.00 level this week on above average volume. The $25.00 level is potential round-number resistance. Therefore we are suggesting a trigger to launch bullish positions at $25.10. Plan on exiting prior to MTRX earnings report in early November.

- Suggested Positions -

Long MTRX stock @ $25.10

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

Long NOV $25 CALL (MTRX151120C25) entry $2.05

10/12/15 MTRX plunges -7% on no news
10/09/15 triggered @ $25.10
Option Format: symbol-year-month-day-call-strike

Starbucks Corp. - SBUX - close: 60.54 change: +0.47

Stop Loss: 54.75
Target(s): To Be Determined
Current Gain/Loss: +1.7%
Entry on October 08 at $59.55
Listed on October 05, 2015
Time Frame: Exit prior to earnings in very late October
Average Daily Volume = 8.5 million
New Positions: see below

10/12/15: SBUX bubbled higher today with shares adding another +0.7%. I don't see any changes from my recent comments. I would be tempted to launch positions here but nimble traders may want to try and catch a dip near $59.30 or near the $60.00 level as alternative entry points.

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.

- Suggested Positions -

Long SBUX stock @ $59.55

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

Long NOV $60 CALL (SBUX151120C60) entry $1.96

10/08/15 triggered @ $59.55
Option Format: symbol-year-month-day-call-strike

BEARISH Play Updates

AMAG Pharmaceuticals - AMAG - close: 38.41 change: -1.65

Stop Loss: 42.05
Target(s): To Be Determined
Current Gain/Loss: -2.7%
Entry on October 08 at $37.40
Listed on October 06, 2015
Time Frame: Exit PRIOR to earnings in late October
Average Daily Volume = 946 thousand
New Positions: see below

10/12/15: Good news! AMAG underperformed the market and its peers today with a -4.1% drop. This erased Friday's bounce. Shares look poised to breakdown from their short-term consolidation near $38.

I am suggesting investors wait for a decline below $37.50 before considering new positions.

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.

*small positions to limit risk* - Suggested Positions -

Short AMAG stock @ $37.40

10/10/15 new stop @ 42.05
10/08/15 triggered @ $37.40

iPath S&P500 VIX Futures ETN - VXX - close: 20.00 change: -1.27

Stop Loss: None, no stop at this time.
Target(s): To Be Determined
Current Gain/Loss: +8.3%
2nd position Gain/Loss: +31.1%
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

10/12/15: The major market indices didn't move much today but the volatility indices plunged anyway. The VIX lost -5.3%. The VXX ETN fell -5.9%.

If you're trading the options we are almost out of time. We are down to our last four trading days for the 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