The Dow gapped open to 16,100 and +433 at the open then gave back -314 points before surging at the close to 16,285 and a +619 point gain for the day. After Monday's -1,089 point drop and Tuesday's -650 point negative reversal you have to wonder what Thursday will bring.
Since highly desirable "V" bottoms are very rare and multi-week corrections are normal we have to consider the potential for Wednesday's rally to fail. While I am hoping that is not the case we have to be realistic.
For three days we have wandered around the 1,900 level on the S&P with Monday's low at 1,867 and Monday's high at 1,954. That is a huge range and the last two days have been inside that range. The dual rebounds on Tue/Wed failed to move back over that Monday high. That is a problem because it suggests there is significant resistance in the form of institutions selling the rebounds.
Conversely, if the S&P does move back over 1,950 on decent volume it suggests the sellers have exhausted their supply of stocks and the bottom may be behind us.
This extreme volatility is going to be very difficult to choose "low volatility" plays for the next couple of weeks. When markets rebound the stocks beaten up the worst tend to suddenly rebound as fund managers go shopping for bargains. Those with big gains today would tend to be volatile again should we suffer another triple digit decline.
Extreme volatility is a sign of market tops and bottoms. Unfortunately, this bottom may be temporary since corrections in late August and early September tend to linger into October.
As I said last week, "There are no low volatility positions in the current market." That has never been more true. You have to go back to 2008 to find a period of equal volatility.
I am recommending plays today but you are always free to abstain until next week in hopes of a calmer market.
We squeezed out a small gain in the August cycle. The reentry in the ZOES position allowed us to recover a lot of premium. The gap open in the Netflix position was our biggest loss on the short side plays.
In the September cycle, we were hurt early by the gap up in the Qorvo position that cost us $1.10. We have several weeks left to overcome that deficit. I looked at both QRVO and YUM to reenter the plays but conditions are not right. Both are rebounding from the recent lows.
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Items shaded in blue were previously closed.
August Play Summary
Current Position Changes
Stop Loss Updates
Check the graphic above for any new stop losses in bright yellow. We need to always be prepared for an unexpected decline.
WLL - Whiting Petroleum (Bear Call Spread)
Whiting is an oil producer in the Bakken shale. They tried to sell assets several months ago and were unsuccessful. They could not get any offers that were reasonable. Instead they did a secondary offering to raise cash. Two months ago they said they were increasing the number of active rigs. A week later they said they were reducing rigs. Life is tough for Bakken producers with oil prices sometimes $10 lower than WTI because of shipping costs and the high gas content. Bank of America cut them from buy to neutral on Monday. They lost ground today despite the market rebound. I believe their shares are going lower.
Earnings Oct 28th.
Sell short Sept $17 call, currently .80, stop loss $16.15
Buy long Sept $22 call, currently .25, no stop loss
Net credit 55 cents.
WYNN - Wynn Resorts (Bear Call Spread)
Wynn Resorts is in continual decline mode because of the carnage in China. Macau casino revenue was down -34% last month and with the stock market crashing and the yuan worth significantly less this is going to be a continuing problem for Wynn. The casino operator gets a large portion of its revenue from Macau.
WYNN is a volatile stock but the events in China should keep the pressure on for at least the next three weeks. The Shanghai Composite Index declined -1.3% yesterday despite the interest rate and reserve rate cut. That was expected to produce a big short squeeze and it did not happen. The index is down -16.6% for the week so far.
Earnings Oct 27th.
Sell short Sept $85 Call, currently $1.15, stop loss $81.55
Buy long Sept $90 call, currently .68, no stop loss
Net credit 47 cents.
SWKS - Skyworks Solutions (Bull Put Spread)
Skyworks is a chip supplier for mobile phones, cellular networks, government agencies, etc. Their biggest customer is Apple. Shares appear to have found a bottom at $80 after the panic crash on Monday that touched $70. Shares traded at the high of the week at the close today. With Apple rumored to be announcing the new iPhone upgrade on Sept 9th there should be buyers for SWKS as long as the market cooperates.
The strike I am recommending is $11 OTM. I am not expecting any additional flash crashes like we saw on Monday.
Earnings November 5th.
Sell short Sept $75 put, currently $1.30, stop loss $78.25
Buy long Sept $65 put, currently .55, no stop loss
Net credit 75 cents.
Existing Play Recommendations
Links to original play recommendation
TIF - Tiffany (Bear Call Spread)
LULU - LuluLemon Athletica (Bear Call Spread)
XOP - Oil Exploration ETF (Bear Call Spread)
YUM - YUM Brands (Bear Call Spread)
NFLX - Netflix (Bull Put Spread)
ZOES - Zoes Kitchen (Bull Put Spread)
GLD - Gold ETF (Bear Call Spread)
ESRX - Express Scripts (Bear Call Spread)
HOT - Starwood Hotels (Bear Call Spread)
QRVO - Qorvo Inc (Bear Call Spread)
GPRO - GoPro Inc (Bear Call Spread)
YUM - YUM Brands (Bear Call Spread)
BABA - Alibaba (Bear Call Spread)
BITA - Bitauto Holdings (Bear Call Spread)
Prices Quoted in Newsletter
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When discussing fills or stops the prices quoted are the bid/ask at the time the entry trigger or exit stop is hit. This is NOT a price that someone on staff actually got using a live order.
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