Option Investor

Daily Newsletter, Tuesday, 11/3/2015

Table of Contents

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

Market Wrap

No Sellers in Sight

by Jim Brown

Click here to email Jim Brown

Despite a minor dip at the open this morning, the buyers are still in control. The major indexes are creeping ever closer to the May highs with the Nasdaq 100 leading the charge with a breakout on Monday.

Market Statistics

Mixed economic reports failed to weigh on the markets for more than a few minutes at the open and a high profile call by Evercore to buy energy stocks helped power the indexes higher. David Terreson at Evercore said BP, Chevron and Exxon were buys today because the bottom was behind us and the large integrated oil companies would continue to benefit from their refining capacity. Dow components Chevron rallied over $3 and Exxon $2 to add a combined +35 Dow points. Visa rebounded from Monday's drop to gain +$3 and add more than 20 Dow points.

The New York ISM for October exploded higher to 65.8, up from 44.5 and the largest single month increase in more than a decade and the fourth biggest increase ever. That is a three-month high after a sharp dip in Aug/Sep. The six-month outlook rose from 62.8 to 74.0 and the second highest level in 2015.

However, all the internal components remain in contraction territory suggesting the bullish outlook is not justified. Employment rose just over a point from 44.9 to 46.3. The quantity of purchases component rose slightly from 43.8 to 46.2. Prices paid fell sharply from 58.8 to 46.2 while prices received declined from 50.0 to 40.9.

Factory Orders for September declined -1.0% after falling -2.1% in August. The consensus forecast was for a drop of -0.8%. Nondurable orders declined -0.8% and -1.2% for durable goods. Backorders declined -0.5% for both categories. Total orders are now -7.2% over year ago levels with durable goods down over -5%.

The best news of the day came from the Vehicle Sales for October. Reported sales came in at a pace of 18.2 million per year. That was the second consecutive month at that level. Analysts were expecting a decline to 17.5 million. Auto sales rose from 7.9 million to 8.0 million. Light truck sales declined for the first time in four months from 10.3 to 10.2 million. General Motors sales rose +12.4%, Chrysler +11.8% and Ford +11.7%. Low gasoline prices are helping to fuel sales of larger cars and SUVs.

The economic calendar heats up on Wednesday with the ADP Employment, ISM Services and Yellen's testimony to the House. While the ADP Employment is important, it is just a preview of what to expect on Friday when the Nonfarm Payrolls are released. That report can remove the threat of a Fed hike in December if the report is weak or cement a hike if the report is strong. If the report is strong, it will be interesting to see how the market reacts to the potential Fed action.

Tuesday was light on high profile earnings reports with the bigger names coming after the close. Starting the day was Washington based logistics company Expeditors International (EXPD). The company reported earnings of 62 cents compared to estimates for 59 cents. However, revenue of $1.65 billion missed estimates for $1.81 million. Airfreight revenues rose +3.9% to $659.6 million. Ocean freight revenues declined -6.7% to $560 million. Shares declined -2% on the news.

Specialty chemicals company Cabot Corporation (CBT) reported earnings of 78 cents compared to estimates for 66 cents. However, revenue of $672 million missed estimates for $707.8 million. They repurchased 460,000 shares to bring the full year total to 2.3 million. They announced a restructuring to reduce costs by $50 million in 2016. Shares rallied +14% on the results.

Amag Pharmaceuticals (AMAG) reported earnings of $1.02 but that was a huge miss of estimates for $1.18. Revenue of $96.2 million also missed estimates for $112.4 million. Shares declined -23% to knock off $240 million in market cap. Amag has acquired two companies in the last 18 months for more than $1.3 billion and today AMAG has a market cap of less than $1 billion. It has not been a good summer for AMAG with shares declining from $78 to $31.

Sprint (S) reported a loss of 15 cents that was worse than analyst expectations for a loss of 8 cents. Revenue declined -6% to $7.98 billion and missed estimates for $8.14 billion. The company said heavy price cuts on promotions helped increase customers but reduced profits. Sprint said Q4 revenue would be at the bottom of its prior forecast of $7.2-$7.6 billion. Sprint added 1.1 million new customers and +237,000 prepaid users. That is the first increase in the subscriber base in two years. If you sell something cheap enough the customers will come. Sprint shares fell -7% on the news.

Mosaic (MOS) warned on fertilizer sales for the rest of the year but investors ignored the warning. The company reported earnings of 62 cents compared to estimates for 53 cents. However, revenue fell -6.5% to $2.11 billion and missed estimates for $2.33 billion. The CEO said cost cutting and share buybacks powered the earnings. Mosaic is on a five-year program to cut $500 million in costs and 550 jobs. Shares spiked +6% on the news.

Mobileye (MBLY) reported earnings of 15 cents compared to estimates for 13 cents. Revenue of $70.6 million also beat estimates for $64.5 million. The company makes automation software and vision technologies for automobiles. Their systems are either in the majority of new cars made or are being designed and implemented for future versions of those cars. More than 20 manufacturers are including Mobileye systems in their new cars. Shares rallied 3% on the news.

Red Robin Gourmet Burgers (RRGB) fell -8% after reporting earnings of 58 cents that beat estimates for 53 cents. Revenue of $283.4 million missed estimates for $286 million. Same store sales rose +3.5%. However, it lowered same store sales guidance for Q4 and the full year.

After the bell, Tesla (TSLA) reported a loss of 58-cents but said it expected to deliver more cars than previously forecast. Analysts expected a loss of 53-cents. The company said it delivered 11,603 vehicles in Q3, up from 7,785 in Q3-2014. Tesla expects to deliver between 15,000-17,000 cars this quarter. Revenue rose +10% to $11.24 billion and beat estimates for $1.21 billion. Operating expenses rose +43% and included $52 million in stock based compensation. The company said it was on track to unveil the lower priced Model 3 in March. Much of the increase in expenses was the ramp up to production for the Model X.

The company said that although the Gigafactory was still under construction they were already making batteries there. Those batteries are for the recently announced grid system. Previously these were made at the Fremont California factory but in early Q4 they relocated production to an "automated assembly line at the Gigafactory." That is more than a full quarter ahead of schedule. Elon Musk said they already had more than $1 billion in orders for the grid batteries and all the anticipated 2016 production is already sold out. Battery sales are expected to be $45 million in Q4 but accelerate to $400-$450 million per quarter in 2016. By 2017, he expects it to be "a few billion a year." Shares of TSLA spiked +$20 in afterhours to $229.

Etsy (ETSY) reported a loss of 6 cents that was in line with estimates. Revenue of $65.7 missed estimates for $66.4 million. Gross merchandise sales rose +21.7% to $568.8 million. The company blamed the revenue miss on the strong dollar saying it removed 3-4% of revenue. Marketing expenses rose a whopping 97.8%. Shares fell to an all time low at $10 after the report.

Zillow Group (ZG) reported a loss of 7 cents on revenue of $176.8 million. Analysts were expecting a 3-cent loss but there is some confusion on what was included in the 7-cent number so it may not be apples to apples. The combined network of Zillow, Trulia, StreetEasy and HotPads saw peak users of 150 million in July and during Q3 had monthly active users of 142 million. Shares fell -10% in afterhours.

The earnings out tomorrow will be led by Facebook, Fireeye, Wholefoods Market, Time Warner, Sodastream and Michael Kors.

Candy Crush video game maker King Digital (KING) agreed to be bought by Activision Blizzard (ATVI) for $5.9 billion. Activision is the maker of Call of Duty and World of Warcraft. Activision said Warcraft subscribers fell -100,000 in Q3 to 5.5 million and they will no longer report subscriber data for that individual game. More than 100 million individual accounts have been created for that game that started in 2004. It holds the record for the most revenue generated of more than $15 billion.

King Digital said it agreed to be acquired by Activision because ATVI needed more games that were not Warcraft or military battle like Call of Duty. Activision believes they can attract more women and kids. Also, the combination of ATVI/KING will allow the company to spread its games over more devices from mobile, PC, game stations and online.

The combined company will have more than half a billion monthly active users in 196 countries and generate more than $36 billion in revenue in 2015. They are expected to grow by 50% by 2019.

Chip maker Ambarella (AMBA) rallied +10% after a +5% gain on Monday. FBN securities initiated coverage with an outperform (buy) rating and a $70 price target. Ambarella sank in September after a shipping cycle change by GoPro moved revenue from one quarter to another. Shares appear to have bottomed at $49. I would be a buyer here on any dip from today's highs.

Ambarella customer GoPro (GPRO) is lingering near its IPO price of $24 after the owner of Polaroid patents sued GoPro for patent infringement. C&A Marketing alleged that the Hero4 Session infringes patents on shape and functionality of the Polaroid Cube. C&A is asking for an injunction to halt marketing of the Hero4 and a turnover of all the profits. In the picture below the Cube is on the left and the Hero4 on the right.

Crude oil rallied +$1.65 today or +3.5% on no news. Typically crude prices rally on Tuesday afternoon as shorts cover ahead of the API inventory reports at 4:30 and the EIA report on Wednesday morning. After last week's dip to $42.58 there were plenty of shorts that needed to cover. The API inventory showed a gain of +2.8 million barrels but the real numbers come from the EIA in the morning. There can be vast differences between the two reports because of reporting deadlines and issues. The EIA report also shows production numbers and refinery utilization and those numbers move the market. WTI is down slightly overnight but just fractionally.

I feel like I am standing on the wrong side of the fence on oil prices. The fundamentals do not support the rise in WTI or the rise in energy stocks. Unfortunately, sometimes fundamentals do not matter in the short-term if the investing public is determined to buy something. Fundamentals did not matter in the dot.com bubble when stocks like Qualcomm reached $1,000. Eventually fundamentals did matter and QCOM traded back down to $11. Eventually oil fundamentals will matter and we could see another dip back towards $40.


November marks the start of the best three and six month periods of the year. The first week of November is typically the best week in the fourth quarter. There has been no window undressing yet and with the market going up daily I would expect everyone to play the cards they are currently holding. There is no reason to change positions until the market runs out of steam.

The S&P battled with resistance at 2,105 all morning and then moved up to 2,116 late in the day before a few sellers appeared at the close. The S&P only gained +5 points for the day but I think we would all be happy if that continued all the way to Thanksgiving.

The range from 2,105 to 2,135 is solid congestive resistance and includes several tops from May, June and July. While everyone is concentrating on new market highs by Thanksgiving, I think we should be concentrating on that solid resistance and how the S&P reacts with every touch higher.

I am not going to try and predict a failure point because the entire range is resistance. While I would like nothing better than to see a breakout and surge over 2,150 we need to trade what the market gives us rather than what we want to see. I would be cautious about adding to longs unless you buy a dip.

The Dow came very close to 18,000 with a high at 17,977. Dow components Chevron, Visa and Exxon were the main drivers but IBM, Apple, Home Depot and Goldman Sachs were strong support. Apple and Home Depot could climb higher but Goldman Sachs is facing some very strong resistance at $192. IBM's gains were out of character for its chart and could reverse tomorrow.

The two energy stocks were up on short covering after an upgrade by Evercore and it remains to be seen if they can continue higher if oil prices decline after the inventory report on Wednesday.

The Dow's major resistance begins at 18,100, a couple more days of decent gains should take us to that level but then we will be lacking a catalyst to move higher. Disney earnings on Thursday could help but it is only one stock.

Initial support is 17,650 and initial resistance is psychological at 18,000.

The Nasdaq 100 ($NDX) continues to make new highs and those big cap tech stocks are dragging the market higher. Eventually the six horsemen powering the index will become over extended and the surge will lose traction.

The Nasdaq Composite touched the electric fence at 5,160 today and the recoil was nearly instant but it was not dramatic. The index dropped back -18 points from the highs but still ended with an 18-point gain. No complaints here.

Nasdaq advancing volume was 2:1 over declining while advancers were 3:2 over advancers.

The Nasdaq Composite has to launch itself over that 5,160 level with enough force to make the move stick and it has 15 points of runway to develop speed to do it. All we need is a catalyst and all the major Nasdaq earnings on Wednesday are after the close.

When the calendar flipped to November the Russell 2000 took off. The index has gained 30 points in the last two days. That moved the critical resistance level from 1,165 to 1,194 and a level that held twice in the last three months. If the Russell can continue its gains, it could power the broader market higher on positive sentiment.

I would be cautious about buying the top of this rally after a nearly 11% gain by the S&P. With the first week of November typically the best week of the quarter that suggests next week could produce a dip. I would be a buyer of dips rather than a buyer of the highs. Nothing prevents us from moving higher but big multi-week gains tend to be followed by decent bouts of profit taking.

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Enter passively, exit aggressively!

Jim Brown

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New Plays

New 15-year Highs

by James Brown

Click here to email James Brown


Microsoft Inc. - MSFT - close: 54.15 change: +0.91

Stop Loss: 52.15
Target(s): To Be Determined
Current Gain/Loss: Unopened
Entry on November -- at $---.--
Listed on November 03, 2015
Time Frame: 6 to 8 weeks.
Average Daily Volume = 35.4 million
New Positions: Yes, see below

Company Description

Trade Description:
MSFT is more than just a software company. MSFT is in the technology sector. It is considered part of the business software industry. According to the company, "Microsoft is the leading platform and productivity company for the mobile-first, cloud-first world, and its mission is to empower every person and every organization on the planet to achieve more."

The company is run under three segments. They have their productivity and business processes segment. This includes commercial office software, personal office software, and more. One of their fastest growing segments is MSFT's Intelligent Cloud business, which includes their server software and enterprise services. Then they have their "More Personal Computing" segment. This includes their Windows operating software, MSN display advertising, Windows phones, smartphones, tablets, PC accessories, Internet search, and their Xbox platform.

The stock has been dead money for almost a year. MSFT peaked near round-number resistance at $50.00 back in November 2014. Shares channeled sideways between support at $40 and resistance at $50 for months. That changed last month.

MSFT reported its 2016 Q1 results on October 22nd. Analysts were expecting a profit of $0.59 a share on revenues of $21.04 billion. MSFT beat both estimates with a profit of $0.67 a share. Revenues came in at $21.66 billion. Their Intelligent Cloud segment saw sales rise +8% but it was actually +14% on a constant currency basis.

Shares of MSFT soared the next day with a surge to 15-year highs. The big rally is based on investors' belief that MSFT and its relatively new management is successfully transitioning away from declining PC sales and moving quickly towards the cloud (and mobile).

Normally I would hesitate to buy a stock like MSFT after a big gap higher. Too often stocks tend to fill the gap. However, shares of MSFT have been able to levitate sideways in the $52.50-54.50 zone as traders keep buying the dips. Odds are growing we could see MSFT rally toward its all-time highs near $60.00 a share from December 1999. The big gain in October produced a buy signal on the point & figure chart, which is now forecasting a long-term target of $82.00. Tonight we are suggesting a trigger to launch bullish positions at $54.60.

Trigger @ $54.60

- Suggested Positions -

Buy MSFT stock @ $54.60

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

Buy the 2016 JAN $55 CALL (MSFT160115C55) current ask $1.35
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 Extend November Gains

by James Brown

Click here to email James Brown

Editor's Note:
The U.S. market extended its November gains with another widespread rally on Tuesday. Energy stocks were leading the charge thanks to another bounce in crude oil.

GMCR has been removed. The trade did not open.

Current Portfolio:

BULLISH Play Updates

Carnival Corp. - CCL - close: 52.98 change: -0.57

Stop Loss: 51.75
Target(s): To Be Determined
Current Gain/Loss: -2.3%
Entry on October 30 at $54.25
Listed on October 29, 2015
Time Frame: Exit prior to earnings in mid December
Average Daily Volume = 4.0 million
New Positions: see below

11/03/15: CCL had a rough morning. Rival cruise liner NCLH reported earnings this morning. NCLH's revenues soared +41% and earnings beat expectations. Yet NCLH's guidance was just mediocre. Shares of NCLH plunged -5% today and that weighed on shares of CCL.

Fortunately CCL bounced near its 20-dma (intraday low was $51.83). CCL managed to pare its loss to -1.0%. Tonight we are raising our stop loss on CCL to $51.75.

Trade Description: October 29, 2015:
Cruise lines appear to be doing a great business this year. CCL, RCL, and NCLH are all trading near their 52-week highs. CCL looks interesting as shares push through resistance this week.

CCL is in the services sector. According to the company, "Carnival Corporation & plc is a global cruise company and one of the largest vacation companies in the world. Our portfolio of leading cruise brands includes Carnival Cruise Line, Holland America Line, Princess Cruises, Seabourn, and Fathom in North America; P&O Cruises and Cunard in the United Kingdom; AIDA Cruises in Germany; Costa Cruises in Southern Europe; and P&O Cruises in Australia.

These brands, which comprise the most recognized cruise brands in North America, the United Kingdom, Germany and Italy, offer a wide range of holiday and vacation products to a customer base that is broadly varied in terms of cultures, languages and leisure-time preferences. We also own a tour company that complements our cruise operations: Holland America Princess Alaska Tours in Alaska and the Canadian Yukon. Combined, our vacation companies attract 10 million guests annually.

Headquartered in Miami, Florida, U.S.A., and Southampton, England, Carnival Corporation & plc operates a fleet of more than 100 ships, with another seven ships scheduled for delivery between January 2015 and March 2017. With approximately 200,000 guests and 77,000 shipboard employees, there are more than 277,000 people sailing aboard the Carnival fleet at any given time."

CCL has been a consistent winner on the earnings front. The company has beaten Wall Street's bottom line earnings estimates the last four quarters in a row. Their most recent report was September 22nd. Analysts were looking for a profit of $1.63 a share on revenues of $4.81 billion. CCL delivered a profit of $1.75 a share. Revenues fell -1.3% to $4.88 billion, above estimates. The company enjoyed a -33% drop in fuel expenses last quarter.

CCL's President and CEO is Arnold Donald. He commented on their quarter, "We have just enjoyed a record quarter and are on track to achieve a nearly 35% annual non-GAAP earnings improvement. That's over $0.5 billion of year-over-year profit improvement on top of the 25% annual earnings improvement we achieved in 2014... This year is clearly trending ahead of pace with constant currency yield now forecasted to be up 4%. We overcame numerous headwinds including ongoing macroeconomic malaise in Europe, global geopolitical disruptions, public health scares like MERS, and even ship construction delays."

CCL is also seeing growth in China. According to Mr. Donald, "China has clearly made world news in recent weeks but continues to be an aggressive growth region for us. In fact, we will grow to a six ship fleet next year from a base of four, strengthening our position as industry leader, yet still representing only 5% of our global capacity next year. Given the low penetration levels for cruise and the pent-up demand for travel, we remain very confident in the long-term potential for this expansive market." CCL isn't stopping there. They are adding two more ships dedicated to the Chinese market with one coming online in 2017 and another in 2018.

Technically shares of CCL have rallied off support in early October. Now it's starting to break through resistance in the $54.00 area and ended today's session at a new multi-year high. The point & figure chart is very bullish and forecasting a long-term $72.00 target. Tonight we are suggesting a trigger to launch bullish positions at $54.25. We will plan on exiting prior to CCL's earnings report in mid December.

- Suggested Positions -

Long CCL stock @ $54.25

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

Long 2016 JAN $55 CALL (CCL160115C55) entry $1.95

11/03/15 new stop @ 51.75
11/02/15 Caution - CCL has produced a bearish engulfing candlestick reversal pattern (it needs to see confirmation).
10/30/15 triggered @ $54.25
Option Format: symbol-year-month-day-call-strike

Delta Air Lines - DAL - close: 51.00 change: +0.30

Stop Loss: 47.75
Target(s): To Be Determined
Current Gain/Loss: -0.4%
Entry on October 23 at $51.23
Listed on October 22, 2015
Time Frame: Exit prior to earnings in early January
Average Daily Volume = 9.8 million
New Positions: see below

11/03/15: A rally in crude oil weighed on the transportation stocks today. DAL managed to buck that trend and post a gain.

This morning before the opening bell DAL reported their October numbers. The company said their passenger revenue per mile (PRASM) fell -1.0% in October. That included a -2% drop due to negative foreign currency headwinds. October was the smallest decline in months. Part of the improvement was DAL's decision to cut its international capacity by -4% in October, which slowed the decline.

Shares of DAL spiked higher at the open and tagged $52.00 before paring its gains.

No new positions at this time. More conservative investors may want to start raising their stop loss.

Trade Description: October 22, 2015:
Depressed crude oil prices have kept jet fuel prices low. This has provided a big cushion for the major airlines. The recent strength in DAL has boosted shares to an all-time closing high.

DAL is in the services sector. According to the company, "Delta Air Lines serves more than 170 million customers each year. Delta was named to FORTUNE magazine's top 50 World's Most Admired Companies in addition to being named the most admired airline for the fourth time in five years. Additionally, Delta has ranked No.1 in the Business Travel News Annual Airline survey for four consecutive years, a first for any airline. With an industry-leading global network, Delta and the Delta Connection carriers offer service to 318 destinations in 58 countries on six continents.

Headquartered in Atlanta, Delta employs nearly 80,000 employees worldwide and operates a mainline fleet of more than 700 aircraft. The airline is a founding member of the SkyTeam global alliance and participates in the industry's leading trans-Atlantic joint venture with Air France-KLM and Alitalia as well as a joint venture with Virgin Atlantic. Including its worldwide alliance partners, Delta offers customers more than 15,000 daily flights, with key hubs and markets including Amsterdam, Atlanta, Boston, Detroit, Los Angeles, Minneapolis/St. Paul, New York-JFK, New York-LaGuardia, Paris-Charles de Gaulle, Salt Lake City, Seattle and Tokyo-Narita. Delta has invested billions of dollars in airport facilities, global products and services, and technology to enhance the customer experience in the air and on the ground."

DAL's most recent earnings report was October 14th. Wall Street was expecting a profit of $1.72 per share on revenues of $11.1 billion. DAL beat estimates with a profit of $1.74 a share. Revenues fell -0.6% to $11.11 billion, essentially in-line with estimates. At $1.74 a share DAL's earnings were up +45% from a year ago. That's thanks to the low cost of jet fuel.

Oil prices have been depressed long enough that airlines have started lowering air fares. This drop in air fares is hurting PRASM (passenger revenue per available seat mile). Fortunately DAL's fuel expense, plunged -40% from a year ago.

DAL management is forecasting Q4 PRASM to fall -2.5% to -4.5% but they are still guiding for strong operating margins (16-18%). Plus they see Q4 earnings growth of +40% or more. Think about that. How many other companies are forecasting +40% profit growth for Q4?

DAL's CEO made headlines following their Q3 earnings when he said there is a bubble in wide-body jets. What does he mean? There are a lot of wide-body jets that are being leased by other airlines. Once their lease expires there could be a flood of used jets for sale. DAL believes the price of wide-body jets (and possibly narrow-body jets) will decline and allow the company to purchase additional planes at a discount.

Oil prices are expected to remain low for the foreseeable future. Meanwhile we are approaching the busy holiday season, which means more travel by consumers. Technically shares of DAL appear to be breaking out from a multi-month consolidation pattern. The point & figure chart is bullish and forecasting at $62.00 target.

The January 2015 highs are in the $50.80-51.06 area. Tonight we are suggesting a trigger to launch bullish positions at $51.15. This is a multi-week trade.

- Suggested Positions -

Long DAL stock @ $51.23

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

Long 2016 JAN $55 CALL (DAL160115C55) entry $1.25

10/23/15 triggered on gap open at $51.23, suggested entry was $51.15
Option Format: symbol-year-month-day-call-strike

Eaton Corp. - ETN - close: 56.74 change: +0.02

Stop Loss: 53.45
Target(s): To Be Determined
Current Gain/Loss: -0.7%
Entry on November 03 at $57.15
Listed on November 02, 2015
Time Frame: 6 to 8 weeks.
Average Daily Volume = 3.4 million
New Positions: see below

11/03/15: Our new play on ETN is open. Shares rallied this morning and tagged our suggested entry point at $57.15. Unfortunately shares saw their gains fade by the closing bell. After reviewing today's performance in ETN I would alter plans to launch new positions, if you are looking for a new entry point. Consider waiting for a dip in the $55.50-55.75 region.

Trade Description: November 2, 2015:
When a company reports bad news but the stock doesn't sink it could indicate shares have found a bottom. That appears to be the case for ETN.

ETN is in the industrial goods sector. According to the company, "Eaton is a power management company with 2014 sales of $22.6 billion. Eaton provides energy-efficient solutions that help our customers effectively manage electrical, hydraulic and mechanical power more efficiently, safely and sustainably. Eaton has approximately 99,000 employees and sells products to customers in more than 175 countries."

On October 19th ETN issued an earnings warning for their Q3 results. Surprisingly the stock rallied the next day. When ETN reported earnings on October 30th they still missed analysts' lowered estimates. Earnings were $0.97 a share, a -25% drop from a year ago. Revenues were down -9.2% to $5.2 billion, also under expectations. Negative currency headwinds account for -6% of its revenue decline.

The funny thing is ETN's stock rallied. The company said their business environment remains soft and the plan to boost their current restricting efforts. The rally has produced a bullish breakout in the stock above technical resistance at the 50-dma and above price resistance near $55.00. The point & figure chart has produced a triple-top breakout buy signal that is forecasting at $64 target.

Tonight we are suggesting a trigger to launch bullish positions at $57.15.

- Suggested Positions -

Long ETN stock @ $57.15

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

Long 2016 JAN $60 CALL (ETN160115C60) entry $0.75

11/03/15 triggered @ $57.15
Option Format: symbol-year-month-day-call-strike

Wayfair Inc. - W - close: 45.14 change: +1.54

Stop Loss: 39.85
Target(s): To Be Determined
Current Gain/Loss: +9.7%
Entry on October 16 at $41.15
Listed on October 15, 2015
Time Frame: Exit PRIOR to earnings on November 10th
Average Daily Volume = 1.1 million
New Positions: see below

11/03/15: Upward momentum from yesterday's bounce off support carried over into Tuesday's sessions. Shares of W surged +7.6% intraday and settled with a +3.5% gain on the session.

I am not suggesting new positions at this time.

Do not forget that W has earnings coming up on November 10th. We plan to exit prior to the announcement.

Trade Description: October 15, 2015
W displayed relative strength today and just closed above resistance. Shares could be poised for some serious short covering.

According to the company, "Wayfair Inc. offers an extensive selection of home furnishings and decor across all styles and price points. The Wayfair family of brands includes:

Wayfair.com, an online destination for all things home
Joss & Main, an online flash sales site offering inspiring home design daily
AllModern, a go-to online source for modern design
DwellStudio, a design house for fashion-forward modern furnishings
Birch Lane, a collection of classic furnishings and timeless home decor
Wayfair is headquartered in Boston, Massachusetts, with additional locations in New York, Ogden, Utah, Hebron, Kentucky, Galway, Ireland, London, Berlin and Sydney."

Shares of W came to market with an IPO in October 2014 and priced at $29.00. They opened at $36.00 and spiked up to $39.43 on the first day of trading. The IPO excitement faded and shares didn't find a bottom until about $17.00 in December 2014.

Revenue Growth

The company seems to be growing at a tremendous pace. Their first earnings report as a public company was November 10th, 2014. Revenues soared +41.7% to $336.2 million. Their direct retail business surged +57%. W said their gross profit was $79.0 million versus $58.6 million a year ago.

Additional 2014 Q3 highlights included the number of active customers for their direct retail business rose +61% to $2.9 million year over year. Their LTM Net revenue per active customer increase $342 or +8.6% year over year and +3.0% from the second quarter of 2014.

W reported their Q4 results on March 4, 2015. The company delivered a loss of ($0.18) per share, which was 10 cents better than expected. Revenues were up +38.4% to $408.6 million, above expectations. Management raised their Q1 guidance significantly above Wall Street estimates.

The company beat expectations again with their Q1 report on May 11th. Results were a loss of ($0.23) per share. Revenues accelerated with a +52% gain to $424.4 million.

The earnings beats kept coming when W reported its Q2 results on August 12th. Analysts were forecasting a loss of ($0.29) per share on revenues of $438.4 million. Wayfair delivered a loss of ($0.15) per share. Revenues roared +66.5% to $491.8 million. Management said their number of active customers was up +53.5% from a year ago to four million. Repeat customer orders hit 56%. Orders delivered shot up +80%.

Big Potential

Following their Q1 results back in May the company's CEO talked about their future. On their Q1 conference call the CEO noted that their potential markets are huge. Estimates suggest that spending in their industry will hit $264 billion in the U.S. and $308 billion in Europe by 2018 (a combined total of $572 billion market).

Bears will argue that W's valuations are outrageous. They're probably right. The recent rally in the stock has bumped the company's market cap to $3.6 billion. At the same time analysts are expecting W to operate at a loss for the next two fiscal years. On a short-term basis the market doesn't seem to care about W's valuation. If this rally continues W could see a short squeeze.

A few months ago in an interview one of the co-founders said that together the two co-founders own between 40% and 50% of the stock. The current float is only 30.2 million shares, which is relatively small. The most recent data listed short interest at 79% of the float.

Shares of W have been consolidating sideways beneath resistance at the $40.00 level for about two weeks. Today shares displayed relative strength with a +3.0% gain and a close above resistance. Tonight we are suggesting a trigger to launch bullish positions at $41.15 (hopefully W does not gap too far past our trigger tomorrow). We will plan on exiting prior to W's earnings report on November 10th.

- Suggested Positions -

Long W stock @ $41.15

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

Long NOV $45 CALL (W151120C45) entry $2.80

10/20/15 new stop @ 39.85
10/16/15 triggered @ $41.15
Option Format: symbol-year-month-day-call-strike

BEARISH Play Updates

DSW Inc. - DSW - close: 24.51 change: +0.07

Stop Loss: 25.75
Target(s): To Be Determined
Current Gain/Loss: -2.6%
Entry on October 27 at $23.90
Listed on October 26, 2015
Time Frame: Exit prior to earnings in late November
Average Daily Volume = 1.5 million
New Positions: see below

11/03/15: The rally in DSW this morning failed just below round-number resistance at the $25.00 mark. Shares saw their gains dip to just seven cents.

After hours the company announced major news. They are changing CEOs. Their Chief Innovation Officer Roger Rawlins will become the new CEO on January 1st. Management also slashed their full year earnings guidance down to $1.40-1.50 a share. The stock fell -16% after hours and is currently trading around $21.50 a share.

No new positions at this time.

Trade Description: October 26, 2015:
Investor sentiment regarding footwear retailers has soured dramatically. Recent earnings reports have not helped. Skechers (SKX) reported earnings last Wednesday (night). They missed estimates on both the top and bottom line. This report from SKX sent shockwaves through the footwear industry. Nike (NKE) seems to be the only one that was unaffected. The rest of the group has turned bearish.

DSW falls in that category. Officially DSW is in the services sector. According to the company, "DSW Inc. is a leading branded footwear and accessories retailer that offers a wide selection of brand name and designer dress, casual and athletic footwear and accessories for women, men and kids. DSW operates 469 stores in 42 states, the District of Columbia and Puerto Rico, as well as 370 leased departments for other retailers in the United States under the Affiliated Business Group. We also operate an e-commerce site, http://www.dsw.com, and a mobile site, http://m.dsw.com. Through its partnership with Town Shoes of Canada, the company operates two stores in Canada as well as the e-commerce site http://www.dswcanada.ca."

DSW's most recent earnings report was August 25th. Their earnings of $0.42 a share was in-line with estimates. Unfortunately revenues missed expectations. DSW's management provided soft guidance that was below Wall Street estimates. Traders sold the stock and DSW fell to new 2015 lows at the time. Since then shares have continued to melt.

Today DSW underperformed the market with a -1.9% drop. Shares got some help with a downgrade by Canaccord Genuity. Canaccord reduced DSW from a "buy" to a "hold" and slashed their price target. The analyst is concerned that DSW will not be able to maintain their comparable store sales. Traditional retailers do face a challenge this year. Foot traffic during the holiday season is expected to decline as more consumers shop online.

Technically DSW has broken down to new 18-month lows with today's drop. The point & figure chart is bearish and forecasting a very bearish $11.00 price target. There is a chance that DSW bounces near the 2014 low near $23.50 but we think its momentum will carry it past this level. I am suggesting investors start with small positions to limit risk. Yesterday's intraday low was $24.11. We'll use a trigger at $23.90.

*small positions to limit risk* - Suggested Positions -

Short DSW stock at $23.90

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

Long DEC $22.50 PUT (DSW151218P22.5) entry $0.90

11/03/15 After hours DSW announced a management change and reduced their guidance
Shares plunge after hours and will likely gap down tomorrow
10/27/15 triggered @ $23.90
10/27/15 DSW downgraded a 2nd time in as many days
Option Format: symbol-year-month-day-call-strike

iPath S&P500 VIX Futures ETN - VXX - close: 18.24 change: +0.36

Stop Loss: None, no stop at this time.
Target(s): $16.50
Current Gain/Loss: +16.4%
2nd position Gain/Loss: +37.1%
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

11/03/15: Stocks continued to rally today but there must have been a flurry of put buying. The volatility index bounced and the VXX along with it.

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

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

Short the VXX @ $29.01

11/02/15 adjust exit target to $16.50
10/19/15 add an exit target at $16.25
10/15/15 planned exit for the October puts
10/14/15 if you own the options, prepare to exit tomorrow at the close
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


Keurig Green Mountain, Inc. - GMCR - close: 54.84 change: +3.23

Stop Loss: 54.25
Target(s): To Be Determined
Current Gain/Loss: Unopened
Entry on November -- at $---.--
Listed on October 31, 2015
Time Frame: Exit PRIOR to earnings on November 18th
Average Daily Volume = 2.5 million
New Positions: see below

11/03/15: GMCR is not cooperating. The stock bounced off round-number support near $50.00 yesterday. That rally accelerated today with a +6.25% gain. GMCR could fail right here with shares closing near their trend line of lower highs. We are choosing to remove GMCR as a candidate. It seems unlikely that GMCR will hit our suggested entry point at $49.40 any time soon.

Trade did not open.

11/03/15 removed from the newsletter, suggested entry was $49.40