Option Investor

Daily Newsletter, Wednesday, 11/4/2015

Table of Contents

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

Market Wrap

Taking A Breather

by Thomas Hughes

Click here to email Thomas Hughes
The bulls took a break today which may be a good thing, two days ahead of the NFP. The ADP jobs number was OK and December rate hikes are on the table.


The market took a breather today, retreating from recently set 3 month highs. This may be a good thing as it will allow the market to consolidate, if only for a day or two, and could lead to new all-time highs later this week. We're all waiting on the NFP number which seems for now to be deciding data point for yes-or-no on the rate hike in the absence of rising inflation; the release could be the trigger that sends the market higher, or spark correction. Today's ADP report indicates jobs creation was steady last month, if the same is true for the NFP then December rate hike expectation could become more firmly entrenched in the mind of the market.

International markets were mixed. Asian indices were cheered by the rally we had yesterday, European indices were weighed down by the widening VW scandal. The mainland Shang Hai index led in Asia with gains near 4.25%. In Europe indices were mostly flat on the day save for the DAX which fell a little more than -0.8%. This, along with early morning data and earnings releases helped to keep US futures trading in the green. Indicated gains were small, only 2-3 points for the SPX, but this strengthened a little after the data and going into the opening bell.

Market Statistics

Bulls were present at the open and pushed the indices higher for gains near 0.25% right out of the gates. These gains did not last, sellers quickly outpaced buyers sending the indices back to break even levels and below. Selling was not wild, there was no rush to get out of the market, merely an orderly drift lower down toward near term support levels. By early afternoon the SPX was down a little over -0.5%, about 12 points, but that proved to be the low of the day. From then on the market bobbed along support levels until the close of the day.

Economic Calendar

The Economy

Economic data started rolling out pretty early today. Mortgage applications started it off at 7AM. Mortgage applications fell last week by -0.8% as higher rates impacted traffic. Last week applications fell by -3.5%. The 30 year fixed rate was 4.01%, up 3 basis points.

ADP employment figures came out at 8:15AM. According to their estimates 182,000 new jobs were created in the private sector last month. This is inline with expections, last months figure was revised lower to 190,000. The sector to drag on job growth was manufacturing. Small business created 92,000 jobs. Good producing sector created 24,000, services combined created 158,000. There were 35,000 new construction jobs which helps to reinforce the housing data and recovery there. Transportation/Trade&Utilities created another 35,000 new jobs. Not an overly strong report but a steady one. The high number of services jobs is a concern but we have been shifting to services for a long time.

Trade balance was released at 8:30AM. The trade deficit shrank in September, to $40.8 billion from the slightly revised $48 billion reported last month. The cause for the decline is an increase in exports, along with a decrease in imports. On a year to date basis the deficit is up 3.9% from this time last year.

The ISM Non-Manufacturing Survey was released at 10AM. The survey came in better than expected at 59.1. Analysts had been predicting 56.5, a small decline from last month's 56.9. Within the report the three main indices all rose. Business activity rose to 63%, new order rose to 59.1% and employment rose to 59.2%, a gain of 0.9%. The survey is a welcome sign after the manufacturing sector survey and shows that this segment of the economy is growing, and growing faster.

Tomorrow Challenger report on planned layoffs and the weekly jobless claims numbers come out before the bell. On Friday look out for the NFP, unemployment rate and average hourly earnings.

The Oil Index

Still no sign declining production or rig counts US is impacting supply US crude oil supply. Today's EIA reports shows that storage levels increased by 2.8 million barrels in the last week, ahead of expectations but down from last week's injection of 3.38 million barrels. WTI had bee trading flat, near yesterday's high above $48, but went ducking back to support when the storage data was released WTI lost more than -3.25% and closed below $46.50. The idea of reduced production/supply in 2016 may be supporting prices above $45 but current productions, supply and storage are keeping them from sustaining any kind of rally.

The Oil Index fell in response to oil's quick turnaround, shedding about -1.2% in today's session. The index fall came to rest on resistance-now-possible support at 1,230 and the 50% retracement line broken yesterday. The indicators are bullish at this time but a wicked divergence is present, one of the deepest I think I've ever seen, so the chance of false break-out is high. A fall below the 50% retracement could take the index back to longer term support near 1,160 and the short term moving average. I remain bearish on oil prices in the near to short term, until storage levels come down and/or production levels are more in line with consumption. Longer term the outlook for prices is bullish, as are earnings expectations, so I would be looking to buy on any dip.

The Gold Index

Gold slid to a new one month low today. Janet Yellen's testimony before congress restated the FOMC's openness to a rate hike in December. According to her December is a "live" meeting, her statement adding momentum to dollar bulls and sending gold prices down to $1106, nearly 7% below prices we saw just last week before the FOMC meeting. Gold prices are now back to long term support levels but could slide another $20 before hitting really firm support, if at all. At this time it is more and more likely the Fed will tighten, inflation remains absent and the ECB and BOJ are still loosening so this move could just be getting started.

The gold miners are not responding well to low gold prices. The miners ETF GDX fell -1.35% in a move that confirmed resistance at the short term moving average. The ETF tried to move higher in ealy trading, counter to gold's fall, but the moving average capped gains and then sent it shooting lower. The indicators are both moving lower, pointing to lower prices in the ETF, with MACD showing increased momentum and stochastic falling sharply toward the lower signal line. Downside targets remain near the long term low around $13.

In The News, Story Stocks and Earnings

The dollar gained a bit of steam from Yellen's testimony. The testimony was fun to watch, she got a thorough grilling on a few topics including the FOMC possibly overstepping its bounds, its assumption of authority under Dodd-Frank and a few complaints coming through the House Financial Services Committee from the banking sector. In terms of rate hikes and the economy, she says the economy is healthy, the banking sector is resilient and that the December meeting was a live one for possibly raising rates. The dollar rose nearly a full percent after the move, setting a new three month high, and creating a long white candle closing at the high of the day. The indicators are on the rise and showing some strength although divergence may be forming. The near term trend is up but resistance is just above today's close near $98.25.

About 350 earnings reports today. The list represented a pretty broad slice of the market, not too many names jumped out at me but one thing I did notice that juast about every other name on the list ended in pharm, pharmaceutical, biopharm, bioscience, therapeutic or some other reference to the health care sector in general. The sector has been lagging the broader market over the past few weeks despite earnings growth more than double projections. Today the XLV Health Care SPDR closed with a loss near -0.25 after reaching lows near twice that on an intra-day basis.

The ETF looks like it might be consolidating in preparation for another move higher, the indicators are bullish and showing a little strength relative to the past 12 months. MACD is retreating from a peak in the nearest term but that peak is convergent with the rally and recent high, suggesting higher prices. Stochastic is also showing some strength but at this time still below the upper signal zone and possible indicating resistance and the top of a range. A break above resistance, near $63.25, would be a bullish sign and could take the ETF as high as $77.50.

Allergan reported before the opening bell. The maker of Botox and target of Pfizers planned tax inversion reported earnings of $13.29 per share, $3.28 on an adjusted basis, verus the adjusted $3.20 consensus estimate. Revenue for the quarter was near double the same period last year with strong sales increases across the range of branded products. Botox sales alone accounted for 11% of revenue. Shares of the stock jumped in pre-market trading and opened with a gain. During the day they sold off, closing with a loss near -0.75%. Despite the losses the stock remains near recent highs and above the $300 level.

Facebook reported after the closing bell. The leadig social media website was expected to report $0.50 per share and blew estimates out of the water with $0.57. Revenue also beat, $4.5 billion versus $4.37 expected, with mobile accounting for 58%. Monthly active users is also up and helped to send the stock 3% higher in after hours trading.

The Indices

Trading was lack luster today. The indices moved lower on low volume but did not break any significant support levels. Action was led by the Dow Jones Transportation Average with a loss of -0.65%. The transports remain the laggard of the group and below resistance levels at 8,250. Today's action may be sign the index will remain range bound in the near term, the indicators are weak and suggest the same. Both stochastic and MACD have weakened in the near term and could be leading prices lower. However, the short term moving average is still supporting prices and pushing them up against said resistance. This could turn out into a test of the two, sooner or later one will break. Support is near 8,125, resistance is near 8,260. A break above resistance could go to 8,600, a break below support could take it down to 7,750.

The next biggest decline was posted by the S&P 500. The broad market lost -0.35% in a move that tested support at 2,000. The indicators remain bullish, despite the drop, so a test of the all time high is still looking pretty likely. Momentum is also still slowing weakening, divergent from the rally, so it is very possible resistance at the all-time could be substantial. Long term outlook remain positive though so any dips will be buying opporutunities.

The Dow Jones Industrial Average made the third largest decline, -0.28%. The blue chip index met resistance at the underside of the long term trend line, broken 2 months ago, as expected. The indicators remain bullish, the index riding a fairly strong wave of buying, so it is still possible it will break above the index, or trade up along the underside of it, to test the all time highs. That being said, momentum is winding down steadily and approaching the zero line so a peak in this rally is fast approaching. This could lead to a sideways consolidation or a pull back to find solid support levels.

The NASDAQ Composite made the smallest decline in today's trading. The tech heavy index fell only -0.05% and remains at the 3 month high. The indicators are bullish, momentum showing a little more strength than on the other indices, but once again are winding down in the near term. Near term trend is up with no real sign of a top yet but it is very possible the index will hit a peak in the very near future. Current target is the underside of the long term trend line, broken this past August, with a chance at the all time high.

The rally is still on although today the bulls took a breather. The market is riding a wave of buying that is now being supported by better than expected earnings, steady economic data and positive forward outlook. It's only natural for there to be periodic pauses in the up trend.

It looks like that the indices will reach and test their current all time highs, if not set new ones, but momentum is declining so caution is due.Tomorrow's trading could be more of the same while we wait for the big data point later this week. The NFP report on Friday could be the catalyst that breaks the market to new highs, or gives excuse for profit taking. Regardless, I remain a bull and will by on the dips, and until then keep my stops tight.

Until then, remember the trend!

Thomas Hughes

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New Plays

Expectations Were Too High

by James Brown

Click here to email James Brown


Skechers U.S.A. Inc. - SKX - close: 30.00 change: -1.55

Stop Loss: 32.05
Target(s): To Be Determined
Current Gain/Loss: Unopened
Entry on November -- at $---.--
Listed on November 04, 2015
Time Frame: Exit
Average Daily Volume = 2.1 million
New Positions: Yes, see below

Company Description

Trade Description:
Sometimes investors can get spoiled when a company is executing really well. When that company suddenly stumbles the reaction can be extremely painful. SKX definitely stumbled when they reported their Q3 results on October 22nd.

SKX is in the consumer goods sector. According to the company, "SKECHERS USA, Inc., based in Manhattan Beach, California, designs, develops and markets a diverse range of lifestyle footwear for men, women and children, as well as performance footwear for men and women. SKECHERS footwear is available in the United States and over 120 countries and territories worldwide via department and specialty stores, more than 1,200 SKECHERS retail stores, and the Company's e-commerce website. The Company manages its international business through a network of global distributors, joint venture partners in Asia, and 13 wholly-owned subsidiaries in Brazil, Canada, Chile, Japan, Latin America and throughout Europe."

SKX has turned in some impressive numbers this year. Back in April they reported their Q1 results, which beat estimates on both the top and bottom line. Revenues were up +40% from a year ago and hit a company record for quarterly sales. Three months later SKX did it again. They reported their Q2 results on July 29th. SKX beat estimates on both the top and bottom line. Revenues were up +36% from a year ago and another new record.

You can imagine the market's surprise when SKX reported their Q3 results on October 22nd and missed estimates on both the top and bottom line. Analysts were expecting a profit of $0.55 a share on revenues of $876 million. SKX only delivered $0.43 a share. Revenues were up +27% to $856 million. It was another record quarter for sales - their highest ever. Yet investors were suddenly worried about a slowdown in growth. There does seem to be a trend developing. Q1 revenues were +40%. Q2 was up +36%. Q3 +27%.

Prior to SKX's Q3 report the stock was up +150% year to date. The stock was up +400% from its 2014 lows. You could say the stock had gotten ahead of itself and suddenly investors hit the expectations reset button. Shares of SKX plunged -31% in one day (Oct. 23rd). Management said that negative foreign currency exchange rates in Brazil, Canada and Chile, combined with a slow domestic retail environment hurt results.

In SKX's Q3 press release they provided more details:

The Company's diluted earnings per share for the third quarter of 2015 was negatively impacted by several factors including foreign currency translation and exchange losses of $13.5 million, and increased deferred rent expenses of $3.5 million related to the new Fifth Avenue Skechers retail store, which opened during the third quarter, and a second Skechers location in Times Square, which just opened. Additionally, during the third quarter of 2015 diluted earnings per share were impacted by increased legal expenses of $5.0 million related to the settlement of personal injury lawsuits from the Company's toning footwear business; and $5.9 million in higher legal fees and associated costs primarily related to intellectual property litigation, which included the matter of Converse, Inc. v. Skechers U.S.A., Inc., which went to trial before the International Trade Commission in August of this year. The Company believes that most, if not all, of these legal matters will come to a conclusion by early next year. During the third quarter of 2015, these additional expenses reduced diluted earnings per share by $0.15.
Technically the big drop in shares of SKX has done a ton of damage. The point & figure chart is now forecasting a long-term target of $11.00 (I doubt SKX will get that low). It is significant that there has been almost no oversold bounce. SKX tried to bounce but it failed at its 200-dma. Now after consolidating sideways the last several days SKX is starting to breakdown again. Shares underperformed the market today with a -4.9% decline.

The intraday low on October 23rd was $29.55. Tonight we are suggesting a trigger to launch bearish positions at $29.40. I suspect the $25.00 level is potential round-number support and could make a good short-term target for the bears.

FYI: SKX had a 3-for-1 stock split on October 15, 2015.

Trigger @ $29.40

- Suggested Positions -

Short SKX @ $29.40

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

Buy the 2016 JAN $25 PUT (SKX160115P25) current ask $0.90
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

Market Rally Pauses Midweek

by James Brown

Click here to email James Brown

Editor's Note:
Investors took a moment to pause and digest Fed Chairman Janet Yellen's more hawkish tone today. Stocks slipped in a relatively widespread pullback. Traders could also be a little nervous ahead of Friday's jobs report.

MSFT hit our bullish entry trigger.

Current Portfolio:

BULLISH Play Updates

Carnival Corp. - CCL - close: 52.80 change: -0.18

Stop Loss: 51.75
Target(s): To Be Determined
Current Gain/Loss: -2.7%
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

11/04/15: CCL spent Wednesday's session churning sideways. Shares eventually settled with a -0.3% decline, which matched the S&P 500's drop today.

No new positions at this time.

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: 50.66 change: -0.21

Stop Loss: 47.75
Target(s): To Be Determined
Current Gain/Loss: -1.1%
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

11/04/15: Airline stocks underperformed the market today. The XAL airline index slipped -1.2%. DAL only fell -0.4%. The stock looks like it will retest the $50.00 level soon.

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: +0.00

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

11/04/15: ETN certainly acts like it wants to rally but shares have had trouble holding on to gains the last couple of days. The last two sessions have seen ETN rally intraday only to fade back toward unchanged by the closing bell.

No new positions at this time. I suspect ETN may have to slip toward the $55.50 area before resuming its up trend again.

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

Microsoft Inc. - MSFT - close: 54.40 change: +0.25

Stop Loss: 52.15
Target(s): To Be Determined
Current Gain/Loss: -0.4%
Entry on November 04 at $54.60
Listed on November 03, 2015
Time Frame: 6 to 8 weeks.
Average Daily Volume = 35.4 million
New Positions: see below

11/04/15: Our new play on MSFT is open. Shares rallied to another new multi-year high and hit our entry trigger at $54.60. Unfortunately the market's widespread decline weighed on MSFT and its rally faded.

Tonight I am suggesting investors wait for MSFT to trade above $54.65 before initiating new bullish positions.

Trade Description: November 3, 2015:
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.

- Suggested Positions -

Long MSFT stock @ $54.60

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

Long 2016 JAN $55 CALL (MSFT160115C55) entry $1.54

11/04/15 triggered @ $54.60
Option Format: symbol-year-month-day-call-strike

Wayfair Inc. - W - close: 44.51 change: -0.63

Stop Loss: 41.85
Target(s): To Be Determined
Current Gain/Loss: +8.2%
Entry on October 16 at $41.15
Listed on October 15, 2015
Time Frame: Exit on Friday, Nov. 6th at the closing bell
Average Daily Volume = 1.1 million
New Positions: see below

11/04/15: After big gains earlier this week W hit some profit taking today with a -1.3% decline.

This company is due to report earnings next week on Tuesday morning, November 10th. Tonight I am suggesting we exit this trade on Friday (Nov. 6th) at the closing bell. Considering how little time we have left tonight we'll adjust the stop loss up to $41.85.

No new positions at this time.

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

11/04/15 new stop @ 41.85, plan on exiting Friday at the closing bell
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: 22.59 change: -1.92

Stop Loss: 23.05
Target(s): To Be Determined
Current Gain/Loss: +5.5%
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

11/04/15: Shares of DSW had a bad day with a -7.8% decline on the session. Last night we noted the company's earnings warning and news they were replacing their CEO. The stock gapped open lower at $21.64 and dipped to $21.23 at its low for the day (a -13% drop). DSW managed to pare its loss by the closing bell.

We are adjusting our stop loss down to $23.05 to help protect any potential gains.

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

11/04/15 new stop @ 23.05
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: 18.82 change: +0.58

Stop Loss: None, no stop at this time.
Target(s): $16.50
Current Gain/Loss: +13.7%
2nd position Gain/Loss: +35.1%
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

11/04/15: A relatively widespread decline for the stock market fueled a bounce in the volatility index. The VIX added +6.6%. The VXX only rose +3.1%.

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