Option Investor

Daily Newsletter, Wednesday, 11/11/2015

Table of Contents

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

Market Wrap

Bulls Fighting to Hold On

by Keene Little

Click here to email Keene Little
Following last week's highs the market has been in a steady downtrend (lower highs and lower lows) and it could develop into a stronger downtrend. But the choppy move lower shows the bulls fighting the decline and there's still strong support that the bulls could use to launch another rally leg. We're nearing a decision point about which side is going to win.

Today's Market Stats

Happy Veteran's Day and to all our veterans and thank you for your service to our country and your willingness to defend against our enemies, both foreign and domestic. Now if we could only get rid of the politicians who refuse to defend our Constitution. Oops, sorry for the political jab, it just flew out of my mouth (I hate it when that happens).

The day started with a small pop to the upside, thanks to an overnight rally in equity futures. It could have been a stronger gap up had the overnight rally held but following the pre-market high at 8:00am, where ES hit a high at 2087.25 (+9.25), futures started to sell off and ES had given up half the overnight gain at the open (+4.50) and immediately sold off from there, which of course dragged SPX back down following its small gap up.

This morning's selloff was smaller than the previous five mornings but it did continue the pattern of morning declines (this morning being the 6th straight day) followed by bounce attempts. This pattern looks like a distribution pattern and unless we get some stronger upside signals, this could be building a much stronger decline to come. The bulls need to negate the downtrend by stopping the series of lower high, starting with a rally above last Friday's close.

Following this morning's initial decline there was another bounce to minor new highs for the day but not anywhere close to last Friday's lower highs. The indexes then rolled over into and tested or broke (RUT) the morning lows. It was a sideways consolidation day but as part of the sideways/up choppy consolidation since Monday morning's low it's looking like a bearish continuation pattern.

There was nothing exciting in economic reports and overseas news was quiet, which might have had something to do with today's relatively quiet market. I'll just jump into the charts and see what they have to say and what we should be watching for in the coming week.

Starting with the SPX weekly chart, I see a couple of bearish and bullish things. One bullish thing is the climb above the 50-week MA on October 23rd (when it also climbed above its 200-dma) and now it's pulling back for what could be a bullish back-test, at 2062-2064, before pressing higher. But at the moment it's fighting to hold onto price-level S/R at 2075 (where it closed today) and a drop below that level could be more trouble for the bulls. Resistance at the cross of the broken uptrend line from October 2011 - October 2014 and the top of a parallel up-channel from 2009, near 2087, is also holding after last week's break above them. Assuming the market is ready for at least a larger pullback correction, if not a strong decline, the jury is still out about which one to expect.

S&P 500, SPX, Weekly chart

The daily chart below shows today's back-test of the broken uptrend line from October 2011 - October 2014, which SPX had climbed above on October 28th but then dropped back below it on Monday, which left a failed breakout attempt. Today's back-test is what could be followed by a stronger decline if multiple support levels between 2064 and 2075 are broken. As for what the decline could turn into (just a pullback correction or something stronger) we'll have to see how the pattern develops. So far it is a choppy pullback, which supports the idea for just a larger multi-week pullback correction before heading higher again (green) in December. It might chop its way down to the 2045 area this month before starting another rally into the end of the year. Do you think there is someone who would love to see the market close at its high for the year, someone with lots of (free) money to throw into the market? The Fed is not bigger than the market but all they need is to keep bullish sentiment alive for a little longer. Verbally backing away from a rate increase this year would do it.

S&P 500, SPX, Daily chart

Key Levels for SPX:
- bullish above 2135
- bearish below 2064

The 60-min chart below shows an expanding triangle for the move down from the November 3rd high, a pattern that can be considered a correction to the rally. At this point last Friday's high near 2099 is the key level to the upside. Stay short below it and long above it. In the meantime, the bears have a lot of work to do to plough through multiple support levels at about every 20 points. A break below 2020 would open up things to the downside for them.

S&P 500, SPX, 60-min chart

On November 2nd the DOW was also able to climb back above its broken uptrend line from October 2011 - October 2014 but then lost it again on Monday. It's finding support this week at its broken downtrend line from May-July, near where it closed today at 17702. This followed today's back-test of its broken downtrend line with today's morning and midday highs. So it's a battle between the trend lines but as with SPX, this week's consolidation looks bearish and we should see another leg down in the pullback from last week's high. The bigger question for me at the moment is what kind of pullback/decline we should expect in the coming weeks, a question we might not have a clear answer to for at least another few days of trading.

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- bullish above 17,978
- bearish below 17,540

With NDX's gap up on October 23rd it had climbed back above its broken uptrend line from 2012-2013-2014, near 4578 at the time, and this week it has dropped back down to it, currently near where NDX closed today at 4637. The bulls want to see this back-test followed by a bullish kiss goodbye whereas the bears want to see the bottom of the gap, near 4600, broken since that would also be a drop below its 20-dma. It would be especially bearish if NDX gaps down below 4600 because it would leave an island reversal, which would tell us the decline is likely to be sharper instead of a multi-week choppy pullback. At the moment it's a bit of coin toss as to which way it's going to break and that means traders need to be short-term oriented.

Nasdaq-100, NDX, Daily chart

Key Levels for NDX:
- bullish above 4738
- bearish below 4600

The RUT continues to be the index to watch for bullish clues. Right now it's testing its uptrend line from October 2nd, near 1179, which fits as the bottom of a rising wedge pattern for the leg up from September. It would not surprise me to see another leg up inside the rising wedge, although that's not the way I'd be betting here. A rising wedge tends to break down quickly when it goes and therefore playing the long side has a poor reward:risk ratio. But if the bulls are able to drive the RUT above 1216 it would become more bullish.

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- bullish above 1216
- bearish below 1177

Another index with a bullish setup is the NYSE, which can be seen on its daily chart below. On October 28th it broke its downtrend line from June but then ran into trouble at its trend line along the highs from August 28 - September 17 on November 3rd. A pullback from there was expected but now it's at rice-level S/R at its 2007 high, at 10387, and its broken downtrend line, also at 10387. A rally above this morning's high at 10460 would be a bullish heads up and then above last Friday's close at 10513 would confirm the bullish setup here. For those who like the long side, buying support here could work, especially with a tight stop at 10350. Just be sure to honor your stop if hit since the downside risk is significant and a failed bullish setup here could fail hard.

NYSE Composite index, NYA, Daily chart

The bond market was closed today for Veteran's Day (how come they get all the holidays off?) but I wanted to show where the 10-year yield is currently trading. Last Friday there was a strong reaction to the NFP report (selling in bonds in anticipation that the Fed has more rope to hang itself, I mean raise rates) and then Monday's minor new high above Friday's had TNX tagging its downtrend line from 2007-2013, near 2.38%, with a high at 2.377%. If it can break above the downtrend line and rally above 2.4% I think it could then test its June high near 2.49%. But if this week's candle turns into a reversal, such as a shooting star, we might see the "big correction" coming with a sharp decline. That would be an indication the bond market over-reacted and cooler heads are thinking that the Fed has no wiggle room to raise rates. That's my guess what will happen and we should soon find out.

10-year Yield, TNX, Weekly chart

I'm not getting much from the banking index chart at the moment since I could make an argument either way as what we should expect next. But the broker index (XBD) is showing us an interesting setup here. In July it had achieved a projection at 202.04 (with a high at 202.88) where the c-wave of the big A-B-C bounce off its 2008 low was 162% of the a-wave. Prior to that high, the December 2014 high at 187.52 achieved the 62% retracement of the 2007-2008 decline, at 185.68. Then in August it fell below its up-channel for the leg up from April 2014. Now the bounce off its October 2nd low has made it back up to resistance at its December 2014 high, the bottom of its up-channel, the 62% retracement of the 2007-2008 decline and its 50-week MA, all in the 185-188 area. This week's high so far is 188.15 and there's a lot of resistance for the bulls to climb over. Can they do it after the strong spike up from its October 2nd low? I would guess not and that makes it a good shorting opportunity. Another leg down equal to its July-October decline targets 144, where it would also test its 200-week MA.

AMEX Securities Broker/Dealer index, XBD, Weekly chart

The U.S. dollar blasted off last week, adding to its strong rally off the October 15th low, and it made it up to the top of a parallel down-channel off the March 2015 high. I see a little more upside potential to a price projection at 100.16 (this week's high so far is 99.60) and maybe a retest of the March high at 100.78. The dollar could surprise me to the upside but I think we'll see another leg back down before setting up a larger rally (maybe another down-up-down sequence before setting up the rally early next year).

U.S. Dollar contract, DX, Weekly chart

On November 4th gold broke its uptrend line for the bounce off its June low and is now approaching that low near 1072, a break of which would point to 1000 as the next downside target. But I think gold should be ready for a bounce correction and possibly back up to price-level S/R at 1142 and/or its broken uptrend line from June, near 1132 by the beginning of December.

Gold continuous contract, GC, Weekly chart

Silver has broken price-level S/R at 14.65, which it has done repeatedly since July, and one of these times the break is going to stick and silver will drop down to a projection near 12. Like gold it could be ready for a bounce correction, perhaps back up to price-level S/R at 15.25, but I think it's ready to break lower.

Silver continuous contract, SI, Weekly chart

I had been thinking oil was going to give us another leg up for its bounce off the August low but it's looking like we'll first get a test of the $40 level before potentially starting back up. I show a projection on its daily chart below at 40.02, which is where the pullback from October 9th (note the perfect bearish back-test of its 200-dma on that day) would have two equal legs down. From there the larger a-b-c bounce expectation off the August low would achieve two equal legs up at 53.15. All of this assumes oil will continue to march sideways in a large consolidation pattern into 2016 before heading lower but it's possible oil will head lower sooner rather than later.

Oil continuous contract, CL, Daily chart

Tomorrow morning we'll get the usual unemployment data as well as the JOLTS Job Openings report, none of which will be a market mover, so the market will be left to react to whatever is happening overseas. Friday will be busy with more inflation data, retail sales and Michigan Sentiment. The first two will be part of the Fed's "data dependency" as relates to their December decision about whether to raise rates or not (they won't but that's obviously just my opinion).

Economic reports and Summary


The pullback from last week's highs remains choppy enough to suggest it's going to be just a correction to the rally and that it will be followed by another rally leg once the pullback correction completes. We could see the month of November spent in a correction phase (no fun to trade except for perhaps selling options/spreads) so be careful of whipsaw moves. But the more bearish potential is for the distribution pattern we've seen since last week suddenly let go to the downside once fund managers realize they can't hold it up while carefully selling into rallies.

The short side looks better than the long side at the moment, although as shown on the RUT and NYA charts, today's lows provide a good setup for the bulls if we're to see another leg up, or at least a higher bounce in what will become a larger sideways/down correction. The bears need to see a strong decline to show the breakdown is real and not just a pullback correction. A breakdown has the potential to quickly drop below the August lows, which is why caution is urged on the long side (I know I don't need to urge caution for the bears).

I'm hoping the pattern will be a little clearer this time next week so that we have more solid setups for some good trades. In the meantime, keep your trading short-term oriented and good luck. I'll be back with you next Wednesday.

Keene H. Little, CMT

In the end everything works out and if it doesn't work out, it is not the end. Old Indian Saying

New Plays

Growing Competition Spooking Investors

by James Brown

Click here to email James Brown


Lululemon Athletica - LULU - close: 47.57 change: -2.51

Stop Loss: 50.05
Target(s): To Be Determined
Current Gain/Loss: Unopened
Entry on November -- at $---.--
Listed on November 11, 2015
Time Frame: Exit PRIOR to earnings in mid December
Average Daily Volume = 2.9 million
New Positions: Yes, see below

Company Description

Trade Description:
Disappointing earnings guidance and rising competition have been tough on shares of LULU. It doesn't help that expectations for this holiday season are falling.

LULU is in the consumer goods sector. According to the company, "lululemon athletica inc. (LULU) is a yoga-inspired athletic apparel company with products that create transformational experiences for people to live happy, healthy, fun lives. Setting the bar in technical fabrics and functional designs, lululemon works with yogis and athletes in local communities for continuous research and product feedback."

LULU's most recent earnings report was September 10, 2015. The company beat the bottom line estimate by a penny. Revenues were up +16% from a year ago and came in above estimates. Comps showed strength with a +11% improvement on a constant dollar basis. However, management spoiled the news by drastically lowering their Q3 estimates below Wall Street expectations. The stock was crushed on this outlook.

LULU is facing a few challenges. The biggest challenge is rising competition. The athleisure trend in apparel has been around for a while now but everyone is trying to cash in on it. That includes heavyweights like Under Armour and Nike. Nike plans to almost double its sales in women's apparel by 2020. You can bet they plan on stealing some market share from its smaller rivals like LULU. LULU also has competition from other apparel stores like the Gap (with all of its various labels) and Victoria's Secret. If rising competition wasn't enough LULU has also raised their prices, which could further drive consumers toward lower cost alternatives.

Bigger picture the outlook for holiday spending this year is wilting. In the last couple of weeks multiple analyst firms have released reports that consumers will spend less time in stores (lower traffic). Plus, retail sales growth is expected to fall from last year, especially on apparel.

Technically LULU is in another bear market. The stock is down -32% from its 2015 highs. Shares have a bearish trend of lower highs as investors keep selling the rallies. Now LULU has fallen to short-term support in the $47.40-47.50 area.

My biggest concern is the elevated short interest. The most recent data listed short interest at 27% of the 110 million share float. That many shorts can make this stock volatile as weak hands could panic on any bounce. Of course longer-term the bears are probably right on LULU until the story changes. Readers may want to trade the put options to limit their risk. Tonight we are suggesting a trigger to launch bearish positions at $47.25. Plan on exiting prior to LULU's earnings report in mid December.

Trigger @ $47.25

- Suggested Positions -

Short LULU stock @ $47.25

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

Buy the DEC $45 PUT (LULU151218P45) current ask $2.28
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 Retreat On Retail & Oil Weakness

by James Brown

Click here to email James Brown

Editor's Note:
The U.S. market delivered a relatively widespread decline on Wednesday. Retail stocks soured after Macy's missed estimates and lowered guidance. Meanwhile another drop in crude oil sank the energy sector.

PAYX and STX both hit our entry triggers today.

Current Portfolio:

BULLISH Play Updates

Eaton Corp. - ETN - close: 55.52 change: -0.71

Stop Loss: 54.75
Target(s): To Be Determined
Current Gain/Loss: -2.9%
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

11/11/15: Shares of ETN were downgraded this morning. That helps explain the spike down at the open. Fortunately ETN didn't see much follow through lower and spent most of the day drifting sideways. If this weakness continues we want to exit. Tonight we are raising the stop loss to $54.75.

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

11/11/15 new stop @ 54.75
11/03/15 triggered @ $57.15
Option Format: symbol-year-month-day-call-strike

Microsoft Inc. - MSFT - close: 53.65 change: +0.14

Stop Loss: 52.15
Target(s): To Be Determined
Current Gain/Loss: -1.7%
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

11/11/15: Bullish analyst comments and a new $60 price target helped buoy MSFT's stock price today. Shares managed to eke out a small gain while most of the market closed in the red.

The intraday high today was $54.20. Yesterday I suggested waiting for a rally past $54.25 before initiating new positions. That plan still works.

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: 53.17 change: +0.06

Stop Loss: 51.25
Target(s): To Be Determined
Current Gain/Loss: +0.0%
Entry on November 11 at $53.15
Listed on November 09, 2015
Time Frame: Exit PRIOR to earnings in mid December
Average Daily Volume = 2.3 million
New Positions: see below

11/11/15: Right on cue PAYX hit new relative highs this morning and tagged our entry trigger at $53.15. Shares rallied to $53.59 intraday before eventually giving back nearly all of its gains.

I would still consider new bullish positions here. However, if you suspect the market will dip again tomorrow then consider waiting for a dip in PAYX. The $52.50 area could work as a buy-the-dip entry point.

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.

- Suggested Positions -

Long PAYX stock @ $53.15

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

Long JAN $55 CALL (PAYX160115C55) entry $0.80

11/11/15 triggered @ $53.15
Option Format: symbol-year-month-day-call-strike

BEARISH Play Updates

Denny's Corp. - DENN - close: 9.96 change: -0.09

Stop Loss: 10.85
Target(s): To Be Determined
Current Gain/Loss: -0.6%
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

11/11/15: DENN tried to rally twice today. Both times traders sold the rally in the $10.14-10.16 region. The stock reversed into a -0.89% decline. Today marks the first close below round-number support at $10.00 since early January 2015.

Today's move looks like a new bearish entry point although traders may want to wait for a drop below $9.90 to initiate 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: 26.36 change: -1.77

Stop Loss: 29.05
Target(s): To Be Determined
Current Gain/Loss: +10.3%
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

11/11/15: Macy's reported earnings today. The company missed estimates and lowered their guidance. This crushed the retail-related names. SKX, which was already weak, plunged -6.29% on the session.

Tonight we are moving our stop loss down to $29.05. More conservative traders may want to tighten their stop even lower.

No new positions at this time.

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

11/11/15 new stop @ 29.05
11/05/15 triggered @ $29.40
Option Format: symbol-year-month-day-call-strike

Seagate Technology - STX - close: 36.12 change: -0.42

Stop Loss: 37.25
Target(s): To Be Determined
Current Gain/Loss: -0.8%
Entry on November 11 at $35.85
Listed on November 10, 2015
Time Frame: 6 to 8 weeks
Average Daily Volume = 4.9 million
New Positions: see below

11/11/15: STX continued to sink this morning. Bears got some help after one analyst firm reiterated their "sell" rating on the stock this morning. STX spiked down to $35.02 before paring its losses. Our trigger to launch bearish positions was hit at $35.85.

Tonight we are adjusting our stop loss down to $37.25.

Trade Description: November 10, 2015:
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, backup 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.

- Suggested Positions -

Short STX stock @ $35.85

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

Long JAN $35 PUT (STX160115P35) entry $1.93

11/11/15 new stop @ 37.25
11/11/15 triggered @ $35.85
Option Format: symbol-year-month-day-call-strike

iPath S&P500 VIX Futures ETN - VXX - close: 18.90 change: +0.41

Stop Loss: None, no stop at this time.
Target(s): $16.65
Current Gain/Loss: +13.4%
2nd position Gain/Loss: +34.9%
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

11/11/15: Wednesday delivered a widespread decline for stocks. Yet the intensity of the decline was pretty mild. The VXX only rose +2.2%.

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