Option Investor

Daily Newsletter, Tuesday, 11/10/2015

Table of Contents

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

Market Wrap

Apple Crash

by Jim Brown

Click here to email Jim Brown

An implied downgrade to Apple based on production cuts at Asian suppliers knocked the Dow to a lower low at the open but it was purely an Apple related drop.

Market Statistics

Apple (AAPL) shares declined -$3.80 to knock about 28 points off the Dow and poison market sentiment at the open. Once it became evident that the rest of the Dow components were not going along for the ride the Dow clawed its way back to positive territory in the afternoon.

The overall market traded like it was sedated with no material movement and low volume after the economic reports failed to provide any boost. The NFIB Small Business Survey for October came in at 96.1 and exactly the same level as September. The internal components were mostly unchanged with an equal number rising 1 point as those that lost 1 point. The earnings trend component was the biggest change falling from -13 to -16 and suggesting business conditions were softening. This was a lagging report for October and was ignored.

The Intuit Small Business Employment Index for October rose +0.1% compared to the -0.1% decline in September. The internal components were also mostly unchanged and the report was ignored.

Import prices for October declined for the fourth consecutive month. Prices fell by -0.5% after a -0.6% drop in September and -1.8% decline in August. I guess you could say prices were stabilizing at a slower decline rate but they are still dropping. This will negatively impact inflation in the months ahead.

The main driver was a -2% decline in fuel imports following a -5.4% decline in September. Fuel import prices are now down -46.6% for the year. Nonfuel prices declined -0.3% and they have increased only 1 month in all of 2015. The rising dollar will continue to pressure prices in the months ahead.

Wholesale inventories in September rose +0.5% after a +0.3% rise in August. Durable inventories fell -0.4% with nondurables rising +1.9%. Durable sales rose +0.7% with nondurable sales rising +0.3%. This report was also ignored.

Friday remains the most important day of the economic calendar with the retail sales report for October. With retailers singing the blues, the report could easily be disappointing. The consensus estimate is for a +0.3% rise. The Producer Price Index could also disappoint to the downside and estimates are for a +0.2% gain.

Credit Suisse was the blame for Apple's nearly $4 decline today. The broker said Apple cut its November orders by about 10% for iPhone components. The reason given was to account for slowing iPhone demand in Asia where the cheaper Android phones are the hottest sellers. The analyst consensus was for only a -5% cut in orders after projections fell over the last two weeks.

CS analyst Kulbinder Garcha cut his 2016 earnings estimate for Apple by 6% to $9.81 but kept his outperform rating and a price target of $140. The problem is the lack of "must have" features in the current upgrade version of the 6 and 6+. This is slowing sales growth and will make tough comparisons against the Q4/Q1 sales from last year when the 6 was new.

Garcha is still predicting iPhone sales of 80 million for the holiday quarter and that is about 4 million over the year ago quarter. Sales are expected to decline to 45-50 million for Q1 and that is normal. He said Apple is still a buy because even at a slowing growth rate the installed base grows 20-25% per year and more than 70% of existing iPhones in use are 5C or older. That means there is a large number of people that will eventually upgrade and iPhone users typically upgrade to new iPhones. Garcha expects a -5.5% decline in sales in the current fiscal year to 222 million from 242 million. In 2017 he sees a 6% rise in unit sales to 235 million because of the new model.

If Apple announces the iPhone 7 in September with some new features, Garcha expects the cycle to repeat with even higher sales in Q4-2016. FBR analyst Daniel Ives said Apple has a bull's-eye on its back with analysts firing their typical bearish bullets and worry over tough comparisons. Apple will probably prove them wrong again this cycle but eventually the bears will be right.

Apple suppliers saw their shares hit hard on the news of production cuts. Cirrus Logic (CRUS) shares dropped -9%, Qorvo (QRVO), Broadcom (BRCM) and Invensense (INVN) lost -3%. NXP Semiconductors was the least damaged with a -1% drop.

Avago (AVGO) lost -5% despite an upgrade to buy from Drexel Hamilton. Skyworks Solutions (SWKS) declined -5% but there was an extra push after news broke that PMC Sierra (PMCS) was favoring Microsemi's improved acquisition bid of $11.88.

There was a lack of positive market sentiment at the open because there was a lack of any material earnings reports. There were plenty of reports but none were high profile.

Canadian Solar (CSIQ) posted adjusted earnings of 79 cents compared to estimates for 28 cents. Revenue was $849.8 million compared to estimates for $733.9 million. In theory, you would have expected this to cause a monster short squeeze in the stock. However, shares fell as did most of the solar sector. Analysts claimed the good results were expected.

It is more likely that Canadian Solar's results were tarnished by the drop in SunEdison (SUNE). SunEdison lost 92 cents compared to expectations for a 60-cent loss. Revenue was a beat at $476 million compared to estimates for $452 million. The problem with SunEdison is that their spinoffs, called yieldcos, reported results that disappointed. The solar companies are spinning off their installed projects into a high yield vehicle where the parent company can get paid for the project and the yieldco investors get a high yield over time.

Yieldco TeraForm Power (TERP) reported a loss of 3 cents compared to expectations for a gain of 28 cents. TeraForm Global (GLBL) also reported a loss and missed on revenue. SunEdison pioneered the yieldco model.

DR Horton (DHI) reported earnings of 64 cents that beat estimates for 62 cents and it was a 42% increase over the comparison quarter at 45 cents. Revenues rose +28% to $3.09 billion and a slight beat over $3.06 billion estimate. Sales orders rose +19% to 8,477 homes. That is huge by any standard. Closings rose +23% to 10,576 homes. The sales backlog at the end of the quarter rose +7.8% to 10,662 homes with the value rising +10% to $3.15 billion. Horton raised its cash dividend +28% to 8 cents. Shares rallied +8%.

Rockwell Automation (ROK) reported earnings of $1.57 compared to estimates for $1.78. Revenue of $1.61 billion was below estimates for $1.69 billion. The earnings were not the big problem. The company said 2016 earnings could decline to $5.90-$6.40 on revenue of about $6 billion. Analysts were expecting $6.71 and revenue of $6.41 billion. Rockwell said industrial markets including oil and gas have not yet stabilized and the strong dollar is making a significant impact on overseas business. Rockwell said they do not expect to see sales growth until later in fiscal 2016. Shares fell -3%.

Wayfair (W) reported a loss of 13 cents compared to estimates for a loss of 24 cents. Revenue of $594 million easily beat estimates for $522 million. Direct retail revenue rose +91% to $545 million and that was well over guidance at $475 million. The stock imploded after management warned that Q4 would have to measure up to an "extremely strong" 2014 holiday quarter and he wanted to provide a "thoughtful" forecast. That forecast failed to impress analysts and projected 70% growth, down significantly from year ago levels. While 70% growth is still an amazing achievement no investor ever wants to hear that growth is slowing and comps are going to be tough to beat.

Zebra Technologies (ZBRA) reported adjusted earnings of $1.39 compared to estimates for $1.22. Revenue of $916.3 million narrowly missed estimates for $917.6 million. Guidance for the current quarter of $1.38 to $1.63 per share disappointed because of the wide range with the midpoint below analyst expectations. Shares fell -9% on the news.

The Gap (GPS) reported earnings on Monday after the close and slowing sales caused shares to decline today. Same store sales fell -3% overall with Gap stores falling -4% and Banana Republic sales falling -15%. Only the Old Navy brand posted a gain of +2%. Gross sales fell from $1.26 billion to $1.20 billion in October and $3.86 billion in Q3. Analysts were expecting $3.94 billion. Gap blamed part of the decline on the strong dollar. The company guided to earnings of 62-63 cents in Q4 but analysts were expecting 67 cents.

We have another weak earnings calendar for Wednesday with Macy's (M) the highlight ahead of the monthly retail sales numbers on Friday. Thursday has several retailers along with Dow component Cisco. Thursday will be the last major earnings day for this cycle.

Oil service company Flotek Industries (FTK) lost 50% of its value this week after an article claimed there were errors in the company's FracMax fracking software. The company did review the article and their software and admitted the reviewer had found a minor bug that affected the reporting of post fracking production. The bug was only a reporting error not an error in the actual fracking process. I believe the sell off was seriously overdone and the stock fell back to support from 2012. I would be a buyer here once it appears a bottom has formed. I do not want to catch a falling knife but once that knife hits bottom I would pick it up. Flotek is a quality company that is taking advantage of the tough economic times in the oil patch to add customers at the expense of others.

Valeant Pharma (VRX) may have found a bottom at $80. The stock has moved sideways for four days and the company held another conference call today to calm investors. The biggest news was that short seller Citron Research had covered a significant portion of their short. The firm had predicted a $50 price target but when questioned today they dodged the answer and said maybe a few months from now. That sounds like they are done with this project and are moving on.

That new project is Mallinckrodt (MNK). Citron said the problems at MNK could be even worse than the ones at Valeant. However, when questioned repeatedly the Citron rep could not really pin the tail on the donkey with a material reason. Shares had declined to $53 ahead of the interview and then rebounded to $63 when there was no smoking gun.

Citron also called out Wayfair (W) as a failed business model and the weak guidance today as a preview of things to come.

A report out today claims it was Anadarko Petroleum (APC) that approached Apache (APA) with a buyout offer that Apache rejected. The buyout offer was more than likely a self-defense ploy. Anadarko has been rumored for months to be a potential takeover candidate by Exxon.

Secondly, Apache has 3 million acres in the Permian Basin that Anadarko would really like to acquire. Anadarko had previously mentioned to analysts that it was looking to acquire more Permian acreage. The Anadarko CEO said a couple of weeks ago that they had bid on numerous assets but have been continually outbid by private equity buyers that seem to think the land is worth more than it actually is. Anadarko has a market cap of $35 billion and Apache $20 billion. Apache has a lot of gas assets, which are not highly desirable in the current market. Their offices are about 30 minutes apart in Houston.

While the offer for Apache may have put the company in play by others, I would not be a buyer of Apache today. I think the company is close to fair value given their gas weighting. However, the drop in Anadarko makes them a decent buy today. If they are running from Exxon that drop in price could force Exxon to go public. Even if they are not acquired, they have about 2.86 billion barrels of oil equivalent reserves making them a prime target for appreciation when oil prices eventually recover.

Alibaba (BABA) is in the middle of the biggest shopping day of the year called Singles Day in Asia. Analysts expect their single day sales to reach as high as $11 billion this year. Last year Alibaba did $9.3 billion in sales in 278 million orders over the 24-hour period. Sales on Singles Day this year will exceed both Black Friday and Cyber Monday sales combined.

The original 11/11 singles day celebration (the date chosen because it is a group of 1s) started in the 1990s, which morphed into buying stuff for yourself, is called a "24-hour orgy of consumption." Alibaba hijacked the day and turned it into a monster promotion. More than 6 million products are for sale from 40,000 vendors. In the first 90 minutes of the sale, which started at midnight in Beijing, the gross sales exceeded $5 billion with 72% of sales from mobile phones. Singles Day was started by Alibaba six years ago and it has spread to other retailers such as JD.com, which has about 25% of the Chinese ecommerce market.


The short description for today's market is that nothing happened. It was as though everyone was on valium or suffering through a giant hangover. On the positive side the big decline from Monday did not continue. The early morning weakness was minimal and the Dow and S&P shook off the streak of five consecutive declines.

Only five stocks accounted for the majority of the decline on the Nasdaq, the only index that closed in negative territory. The S&P found support at 2,068 on Monday and 2,069 today before rebounding back over 2,080. The rebound ended the day with a gain of only +3 points but that was +13 points off the lows.

While the market weakness may not be over at least we have a new range to watch from 2,068 to 2,115. Those are the key levels for the rest of the week.

Resistance remains 2,090, 2,105, 2,115 and 2,128.

The early Dow weakness was solely Apple with the $4 drop knocking roughly 30 points off the Dow. The late day rebounds in those top gainers below suggest the selling may be fading.

The Dow is not far from the highs from last week despite the -180 point decline on Monday. It would only take one good day of short covering to put it back near that 18,000 level. Only one Dow component reports this week and that is Cisco on Thursday after the close. That means any impact will be on Friday.

I am expecting the Dow to recover from its dip and finish higher for November. The banks should continue to provide upward lift as we move closer to the December FOMC meeting.

Without any Dow components reporting on Wednesday, we do not have any risk of disappointment. Support is 17,650 and resistance 18,000.

The biggest impact to the Nasdaq came from MSFT, AAPL, AVGO, TSLA and QCOM, which knocked a combined 12 points off the Nasdaq 100 ($NDX), which was only down -14 for the day with the Nasdaq Composite down -12.

With so many of the solar and semiconductor stocks declining it is a wonder the Nasdaq did not fare worse. The Biotech sector is in rally mode again and the $BTK gained almost 1% for the day.

There are no major Nasdaq stocks reporting on Wednesday and there were none after the close today. The Nasdaq futures are down -4 at 8:PM and the S&P futures are down -1.50. Neither decline is material.

The Nasdaq big caps led the S&P and Nasdaq 100 to their recent highs. With Apple shares crashing on the production cuts it may be difficult for the Nasdaq to lead us higher but as long as the broader market is positive the Nasdaq should be able to keep pace. Today was an outlier with Apple down -4 and weighing on the index.

Support at 5,050 was tested with a dip to 5,051 today and the rebound was almost immediate. Resistance remains 5,092 and 5,160.

The Russell 2000 rebounded +10 points from the morning low to end with a +3 point gain at 1,187. The battle line at 1,200 remains solid but within reach. The farther we move into November the stronger the small caps normally become. Let us hope this year follows the trend.

In the weekend newsletter I said I was in buy the dip mode and we got a great dip to buy on Monday. While we cannot be sure that Monday low was the bottom of the profit taking and window undressing process, it did make a good entry point. If we get another dip with a lower low, I would buy that one also.

The historical trend is our friend even if November turns out to be a weak gainer after the strong October. There is no investment alternative. Nobody wants to buy bonds ahead of a Fed rate hike five weeks from now. That makes stocks the preferred investment vehicle and we are in the best two-month period of the year. There are plenty of reasons to be bullish despite the weak Q3 earnings and the projections for Q4. Buy the dip.

Enter passively, exit aggressively!

Jim Brown

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New Plays

New Two-Year Lows

by James Brown

Click here to email James Brown


Seagate Technology - STX - close: 36.54 change: -1.74

Stop Loss: 40.05
Target(s): To Be Determined
Current Gain/Loss: Unopened
Entry on November -- at $---.--
Listed on November 10, 2015
Time Frame: 6 to 8 weeks
Average Daily Volume = 4.9 million
New Positions: Yes, see below

Company Description

Trade Description:
A slowdown in PC sales is killing STX's performance. Share are significantly underperforming the broader market. The company's stock is down -45% year to date.

STX is part of the technology sector. According to the company, "Seagate creates space for the human experience by innovating how data is stored, shared and used." That doesn't tell us much. Visiting their website you can learn that "Seagate is the global leader in data storage solutions, developing amazing products that enable people and businesses around the world to create, share and preserve their most critical memories and business data." Essentially STX makes hard drives and data storage for both personal and business use. This includes desktop storage, laptop storage, back up solutions, data recovery, cloud computing storage, and a lot more.

Unfortunately for investors the earnings picture has been disappointing. STX management issued an earnings warning on October 15th as they reduced their guidance for Q1 earnings and revenues. You can see the drop in their stock price on the 15th.

STX reported their 2016 Q1 earnings on October 30th. Net income fell -63.6% from a year ago. Earnings came in at $0.54 a share, which was three cents below estimates. Revenues plunged -22.7% to $2.92 billion, which matches the levels they warned about two weeks prior. STX said their gross margins contracted from 28.1% to 24.2%.

Management knew the quarter was going to be bad so they tried to soften the bad news by announcing a +17% jump in their dividend just prior to their earnings announcement. The news didn't seem to help. Their 2016 Q2 guidance did not help either as management lowered their revenue forecast below analysts' estimates. Wall Street has been reducing their ratings and their price target on the stock in reaction to the company's lowered forecast.

I could see dividend investors looking a STX as a potential buy. The plunge in the stock price has driven the dividend yield up to 6.9%. Yet who wants to buy a stock for their dividend and watch your capital evaporate?

Technically STX is in a bear market. Shares displayed relative weakness today with a -4.5% decline and a drop to new multi-year lows. The point & figure chart is already bearish and forecasting at $26.00 target. If STX trades below $36.00 it will produce a new triple-bottom breakdown sell signal on its P&F chart. Tonight we are suggesting a trigger to launch bearish positions at $35.85.

Trigger @ $35.85

- Suggested Positions -

Short STX stock @ $35.85

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

Buy the JAN $35 PUT (STX160115P35) current ask $1.69
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

S&P 500 Snaps 4-Day Losing Streak

by James Brown

Click here to email James Brown

Editor's Note:
Traders bought the dip on Tuesday and the S&P 500 eked out a very minor gain. It was enough to snap a four-day losing streak for the big cap index. The small cap Russell 2000 index managed to outperform its large-cap rivals.

BBBY has been removed. Trade did not open.

DENN hit our bearish entry trigger.

Current Portfolio:

BULLISH Play Updates

Eaton Corp. - ETN - close: 56.23 change: -0.13

Stop Loss: 53.45
Target(s): To Be Determined
Current Gain/Loss: -1.6%
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

11/10/15: The market's drop this morning pushed ETN below short-term support at its simple 10-dma. Shares managed to pare their loss to -0.2% by the closing bell.

No new positions at this time.

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: 53.51 change: -0.65

Stop Loss: 52.15
Target(s): To Be Determined
Current Gain/Loss: -2.0%
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

11/10/15: MSFT displayed relative weakness today. Shares fell -1.2% in spite of the stock garnering bullish analyst comments this morning and a new, higher price target at $64.

MSFT's weakness may have been a reaction to comments from Apple (AAPL) CEO Tim Cook who declared the PC dead (again). For many investors MSFT is synonymous with PC sales due to the ubiquity of its Windows operating software. Yet the company has been expanding into other areas for years.

On the plus side MSFT's stock did find support near $53.25 today. I would wait for a new rally above $54.25 before initiating 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

Paychex, Inc. - PAYX - close: 53.11 change: +0.38

Stop Loss: 51.25
Target(s): To Be Determined
Current Gain/Loss: Unopened
Entry on November -- at $---.--
Listed on November 09, 2015
Time Frame: Exit PRIOR to earnings in mid December
Average Daily Volume = 2.3 million
New Positions: Yes, see below

11/10/15: PAYX displayed relative strength with a +0.7% gain and a new 52-week high. Shares missed our suggested entry point by $0.01. Odds are good PAYX will hit our entry trigger at $53.15 tomorrow.

Trade Description: November 9, 2015:
Last week the Bureau of Labor Statistics announced that the nonfarm payroll (jobs) report for October showed a gain of +271,000. That was way above expectations. The separate household survey showed a gain of +320,000 jobs. This pushed the unemployment rate down to 5.0%, the lowest reading since early 2008. Many believe that the U.S. has now reached full employment. Do you know what that means? It means more Americans working. That means more paychecks to be delivered and more HR services to be handled.

PAYX is in the services sector. According to the company, "Paychex, Inc. (PAYX) is a leading provider of integrated human capital management solutions for payroll, HR, retirement, and insurance services. By combining its innovative software-as-a-service technology and mobility platform with dedicated, personal service, Paychex empowers small- and medium-sized business owners to focus on the growth and management of their business. Backed by more than 40 years of industry expertise, Paychex serves approximately 590,000 payroll clients across 100 locations and pays one out of every 15 American private sector employees."

PAYX earnings have been slowly and consistently creeping higher. Revenues have been rising about 8% the last couple of quarters. This company's most recent earnings report was September 30th. They beat estimates on both the top and bottom line, which helped fuel another rally in the stock.

PAYX management has been very consistent about paying a dividend. PAYX now sports a dividend yield of 3.7%. That could draw more and more income investors looking for a safe company to buy.

A recent article on Forbes.com, by Brett Owens, noted that "demand for payroll outsourcing (60% of Paychex's latest quarterly revenue) will grow at a 3.9% compound annual rate between 2013 and 2018. HR outsourcing (40% of revenue) is on a stronger tear, with a projected 12.3% yearly gain in the same period" (source)

We like PAYX's relative strength. Shares are up +14.2% year to date. That compares to a +1.0% gain in the S&P 500 and a +7.6% rally in the NASDAQ. The NASDAQ composite is up +18% from its August low but PAYX is up +26.7%. The rally in PAYX has produced a buy signal on the point & figure chart, which is also forecasting a long-term target at $72.00.

On Friday PAYX found short-term support near $53.00. Tonight we are suggesting a trigger to launch bullish positions at $53.15.

Trigger @ $53.15

- Suggested Positions -

Buy PAYX stock @ $53.15

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

Buy the JAN $55 CALL (PAYX160115C55)

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

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

BEARISH Play Updates

Denny's Corp. - DENN - close: 10.05 change: -0.09

Stop Loss: 10.85
Target(s): To Be Determined
Current Gain/Loss: -1.5%
Entry on November 10 at $9.90
Listed on November 05, 2015
Time Frame: 4 to 8 weeks
Average Daily Volume = 527 thousand
New Positions: see below

11/10/15: Our DENN trade is now open. Shares continued to sink throughout much of the session. By early afternoon DENN tagged our suggested entry trigger at $9.90. Unfortunately that proved to be the bottom for the day. DENN pared its loss to -0.88%.

At this time I would wait for DENN to trade below today's low ($9.90) before initiating new bearish positions.

Trade Description: November 5, 2015:
Wall Street seems to have soured on restaurant stocks. The group has been underperforming and this stock is accelerating lower.

DENN is in the services sector. According to the company, "Denny's is the franchisor and operator of one of America's largest franchised full-service restaurant chains, based on the number of restaurants. As of July 1, 2015, Denny's had 1,696 franchised, licensed, and company restaurants around the world with combined sales of $2.7 billion including 108 restaurants in Canada, Costa Rica, Mexico, Honduras, Guam, Curacao, Puerto Rico, Dominican Republic, El Salvador, Chile and New Zealand, and 160 company operated restaurants in the United States."

The stock rallied in early August on its earnings report but that proved to be a bull-trap. The breakout past resistance near $12.00 didn't last. When the market corrected lower in August, shares of DENN plunged toward its 200-dma and the $11.00 level. Shares spent the next eight weeks churning sideways with investors selling the rallies near resistance.

This week DENN reported their Q3 earnings report. The company delivered a profit of $0.11 a share. Revenues were up +5.8% to $123.8 million. These were in-line with estimates. Actually revenues were just slightly above expectations. The company's guidance was in-line with analysts' estimates. Evidently these results were not good enough as shares of DENN plunged on the news.

The stock has broken down below multiple layers of support. Now shares are on the verge of breaking through round-number support at $10.00. If shares to trade below $10.00 it should generate a new sell signal on the point & figure chart. Tonight we are suggesting a trigger to launch bearish positions at $9.90.

- Suggested Positions -

Short DENN stock @ $9.90

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

Long DEC $10 PUT (DENN151218P10) entry $0.55

11/10/15 triggered @ $9.90
Option Format: symbol-year-month-day-call-strike

Skechers U.S.A. Inc. - SKX - close: 28.13 change: -0.24

Stop Loss: 32.05
Target(s): To Be Determined
Current Gain/Loss: +4.3%
Entry on November 05 at $29.40
Listed on November 04, 2015
Time Frame: 6 to 8 weeks
Average Daily Volume = 2.1 million
New Positions: see below

11/10/15: Another day, another decline for SKX. The stock is down five days in a row. Shares displayed weakness with a -0.84% loss on Tuesday (versus the S&P 500's +0.15% gain).

More conservative traders may want to start lowering their stop loss.

Trade Description: November 4, 2015:
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.

- Suggested Positions -

Short SKX @ $29.40

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

Long 2016 JAN $25 PUT (SKX160115P25) entry $1.00

11/05/15 triggered @ $29.40
Option Format: symbol-year-month-day-call-strike

iPath S&P500 VIX Futures ETN - VXX - close: 18.49 change: -0.54

Stop Loss: None, no stop at this time.
Target(s): $16.65
Current Gain/Loss: +15.3%
2nd position Gain/Loss: +36.3%
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

11/10/15: Neither the VIX or the VXX saw any follow through higher today. The VIX index lost -7.4%. The VXX ETN fell -2.8%.

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

11/07/15 adjust exit target to $16.65
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


Bed Bath & Beyond - BBBY - close: 59.55 change: -0.56

Stop Loss: 59.35
Target(s): To Be Determined
Current Gain/Loss: Unopened
Entry on November -- at $---.--
Listed on November 07, 2015
Time Frame: 6 to 8 weeks.
Average Daily Volume = 1.9 million
New Positions: see below

11/10/15: Shares of BBBY are not cooperating. The stock dropped again and pierced multiple moving averages. Shares underperformed the market with a -0.9% decline and a close under what should have been support near $60.00.

We are removing BBBY as a candidate.

Trade did not open.

11/10/15 removed from the newsletter, suggested entry was $61.55