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Daily Newsletter, Saturday, 1/2/2016

Table of Contents

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

Market Wrap

New Year, New Trend?

by Jim Brown

Click here to email Jim Brown

The year 2015 went out with a thud with the Dow, S&P and Russell ending with a loss for the year. This has prompted many analysts to predict a 2016 rally with some forecasting Dow 20,000.

Market Statistics

Friday Statistics

There were plenty of reasons for a range bound market in 2015. The Fed kept warning they were going to raise rates all year but waited until December to actually do the deed and remove the uncertainty. The U.S. economy rebounded from a very weak 0.6% GDP in Q1 but the rebound faded to a minimal +1.3% growth forecast for Q4. Manufacturing went into contraction in the middle of 2015 and is just now returning to growth.

Earnings declined -4.7% in Q4 with revenue down -3.2%. Crude prices dipped to $33.98 in early December and a post recession low that killed the energy sector and the equity markets. High yield debt crashed to a five year low also dragging the equity markets lower.

The Chinese economy continued to decline with the government manipulating their currency twice and rocking the world currency markets. Terror events, ISIS, the Syrian civil war, Russia moving in to prop up Assad and begin bombing rebels supported by the U.S. coalition. Russia's plane bombed by ISIS, Paris terror attacks followed by San Bernardino and now almost weekly warnings of new threats.

The average gain for the S&P in the 7th year of a presidential cycle is +10.4%. That clearly did not happen with the Dow struggling to a -2.33% loss for the year. The S&P flirted with gains but lost -0.7% for the year after the market plunge over the last two days. This was the first negative year for the Dow and S&P since 2008. On the bright side, there have not been back-to-back consecutive losses since 1981. However, another long-term trend has ended. This was the first loss in a year ending with a 5 in 141 years.

Santa Claus Rally Ran out of Air

The flat market was not worldwide. The French market gained +8.5%, China +9.4% and Japan +7.3%.

The biggest Dow gainers were Nike (NKE) +31%, McDonalds (MCD) +26% and Home depot (HD) +26%. The biggest gainers on the Nasdaq were Netflix (NFLX) +139%, Amazon (AMZN) +122%, Activision (ATVI) +96%, Nvidia (NVDA) +67% and Verisign (VRSN) +55%.

The Nasdaq Composite was the third strongest index with a +5.73% gain. The Nasdaq 100 ($NDX) was second with +8.43% and the Biotech Index was the strongest at +10.9%. The Nasdaq was not without its losers with Micron (MU) losing -59%, Western Digital (WDC) -45%, Viacom (VIAB) -45%, Storage Technology (STX) -44% and Bed Bath & Beyond (BBBY) -36%.

Mutual funds had their worst year since 1998. Goldman Sachs (GS) said 74% of large cap mutual funds are trailing the S&P-500 after 85% trailed in 2014. Warren Buffet posted his worst performance since the recession. Hedge funds closed at the highest rate since the recession.

The good news from 2015 is that despite all the bad news I listed above the markets actually closed flat on the year. They shook off all the bad news and while the Nasdaq finished positive the -0.7% loss on the S&P was a rounding error caused by the low volume plunge on Thursday. Volume for the last three days of trading averaged about 4.8 billion shares.

The seasonal trend for the last two days of December to be weak was the only trend that really came true. All the others were ignored. That same end of December trend is normally followed by a rebound in the first two days of January. Late next week the real trend for January should emerge. The last two January's have been bearish but the prior three were strongly bullish. Let's hope the pendulum swings back in the bulls favor.

Last year was one all the major analysts got wrong. Only one analyst in the graphic below under estimated the year-end print for the S&P. That was David Kostin at Goldman Sachs. Kostin actually revised his target down from 2,100 after the August flash crash so back in January he was also over shooting the mark. In his revision he warned that earnings were declining, oil was continuing to be a major drag as well as the strong dollar. He recommended "buying U.S. stocks with a high percentage of U.S. sales, strong balance sheets, generous dividends and robust share buyback plans."


After missing estimates so bad in 2015, what are analysts calling for in 2016? The good news is that not a single analyst is calling for a bear market. Numerous analysts are calling for more than a 10% rally in 2016 with most expecting it in the first six months.

The average S&P price target for 2016 is 2,215 (+8.4%) with Tony Dwyer at Canaccord the highest at 2,360 or a 15.5% rally from Thursday's close. Dwyer believes the dollar will no longer be a headwind for equities since the Fed expectation has now given way to reality of a measured pace of 3-4 hikes in 2016. Without the strong dollar earnings will rise along with commodities especially oil and copper. He pointed to the performance of commodities in the rate hike cycles in 1994 and 2004 as history likely to repeat.

Other analysts point to the future hikes from the Fed and the continued stimulus from the ECB and Japan as negatives for the dollar. Under those conditions, the dollar should strengthen against the euro and yen. Dwyer believes those factors are already in the market and the slow pace of the Fed hikes will allow the dollar to finds its level at somewhat lower than it is today.

John Stoltzfus at Oppenheimer agrees with Dwyer that the two biggest pressures on the U.S. market in 2015, oil and the dollar will reverse in 2016 and allow earnings to increase and equities to rise. His estimate is for 2,300 at the end of 2016.

Since WWII, the S&P has closed flat within 3% of the prior year close ten times. In the year that followed the index gained an average of 12.8% and rose 80% of the time. Only in 1947-1948 was one flat year followed by another.

In the fourth year of a presidential election cycle the S&P has gained an average of +6.1% since 1948 and has gained 76% of the time. In addition, the Russell 2000 has gained an average of 10.9% and rose 78% of the time since 1980.

Earnings are expected to decline -4% for Q4 and revenue -3%. If that happens full year 2015 earnings will be negative for the first time in 6 years. Full year 2016 estimates are for growth of 8% with revenue up 4.5%. The Q4 earnings cycle will begin in three weeks and most of the year-end volatility should be over before then.

Oil prices are expected to make a low in the March-April timeframe and then rebound slowly to $50-$55 by year-end. However, the worst is over for major earnings declines in the energy sector. Oil prices have been in the $35-$50 range for last quarter and we are now 18 months into the decline cycle. While energy equities may continue to be volatile, the huge earnings declines should be behind them. The bar has been set very low and most companies are in conserve mode today and not spending any more money than they have to in order to keep the doors open. They are just passing time until oil prices begin to firm. Without the constant decline in energy prices, the equity market should firm. The energy sector was 18% of the S&P and now it is only 11% because of the sector decline. When oil does begin to firm around mid-year the sector could lead the market in the last half.

Biotechs were the star performers in 2015 with the index up +10.9%. There is no reason for that trajectory to change. Dozens of novel new drugs are in the pipeline and new discoveries are being made almost weekly. M&A in the sector will continue to be strong. There will be some disasters when a specific drug fails to meet its end point in a trial but they will be limited compared to the gains in the overall sector.

There will probably be some selling in the sector in January as profits from 2015 are captured and investors rotate into different stocks. I would use any January dip to add to positions in the sector.


There were no economic reports of note on Thursday. However, next week is entirely different. The ISM Manufacturing report on Monday is likely to show another month of contraction so that will be a sentiment item for the market. The ADP Employment on Wednesday is expected to show a decline from +217,000 to +190,000 as holiday workers are terminated.

The Nonfarm Payrolls on Friday are also expected to see a minor decline to 200,000. The number of new jobs needs to remain over 200,000 for the Fed's economic theory to remain viable. Last week we saw a spike in weekly jobless claims from 267,000 to 287,000 and the largest weekly number since February. However, this is more than likely related to seasonal workers being laid off again.


The only splits announced last week were reverse splits to keep the companies from being delisted from the exchange. Those were OptimumBank (OPHC) and Mechel Steel (MTL). These are not tradable.

For the full split calendar click here.


Apple (AAPL) lost more than $29 from its April high at $134.50 for a -21.7% decline. It was a major drag on the Dow of about -224 points and a major weight on the Nasdaq. This is not likely to get better over the next several weeks. I recommended on Tuesday that the spike to $109 was a new shorting opportunity. The decline from the highs erased $57 billion in market cap.

On Thursday, Apple was sued for allegedly slowing down the iPhone 4s with the new IOS 9 operating system. The suit claims the software renders the 4s nearly unusable and forces the users to spend hundreds of dollars upgrading to a newer iPhone. I think Microsoft has been doing this with Windows for years. Every update slows the PC even further eventually forcing you to buy a new PC with a new Windows version. I am surprised nobody sued Apple for this in the past.

Analysts continue to slash sales estimates even though Tim Cook said projecting sales based on supplier shipments was flawed. If Q4 sales come in as analysts expect it will be a huge earnings miss for Apple. If sales come in as Tim Cook has led us to believe, at a new record, there will be a lot of disappointed shorts.

The key here is that Apple is likely to continue lower until earnings on January 17th. Since Apple is a big stock in the Nasdaq and Dow it could hold those indexes back. Apple closed at a four-month low on Thursday.


McDonalds (MCD) was the second best performer in the Dow in 2015. Most of those gains came in the last three months after they rolled out the all day breakfast and changed their menu again. They appear to be on a roll and there are new concepts coming.

They closed the largest McDonalds in the world last week. The 12,000 square foot store had a PlayPlace, bowling lanes, an arcade, animated robots and other attractions. This store was in Orlando Florida and was a tourist attraction for families headed for Disney World. The store was open 24 hours a day, 365 days a year. The store was closed to make room for a new 19,000 square foot store that will include several self-serve kiosks so customers will not have to talk to a real person, along with some new attractions.

In Hong Kong, McDonalds is opening a "food bar" styled restaurant with a "Create Your Taste" platform that allows customers to customize their salads and sandwiches. This is similar to a Subway where the food is prepared by workers behind a glass partition and you tell them what you want as your food moves down the preparation table. There will also be touch screen menus. This new type of store is called McDonalds Next.


McDonalds recently opened the "Corner by McCafe" in Sydney Australia. The restaurant serves healthy offerings, including tofu and vegetables. No Big Macs or fries to be seen. Instead, the menu includes salads along with Moroccan roast chicken breast, chipotle pulled pork, brown rice, pumpkin, lentil and eggplant salads and sandwiches.

The times are changing for McDonalds and as these ideas catch on we could see an entirely new McDonalds emerge in the USA.


Crude oil was a significant market driver in 2015. If oil was up the market was up and falling oil meant a falling market. That should work in our favor in 2016 since oil is very near a bottom. When inventories begin to pile up starting in January we should see crude drift lower. The inventory accumulation cycle ends April-May as refiners switch over to summer blend fuels and move to almost 100% utilization as they build gasoline inventories for the summer driving season.

During the inventory build cycle we could see prices dip briefly under $30. This will create so much pain for the producers they will be forced to shut in some production rather than sell it for such a small amount. The discount to WTI in the Bakken was as much as $8 recently so $30 WTI means they are only selling their oil for $22. The $30 level for WTI is the "off switch" level where production should slow significantly as producers hold production for higher prices in the future.

Most of the drilling being done today was committed in 2014 and early 2015. Very few new projects are being funded. The EIA expects U.S. production to decline -570,000 bpd in 2015 as prices continue to fall.

I said oil would be a positive influence on the 2016 equity market. Unfortunately, we have to get past the next three months before that will become a factor. Once it appears oil prices have bottomed, we should see equities rise in advance of the actual rally in oil prices.

Short covering ahead of year-end gave crude a little boost on Thursday but it was negligible. We could have one more EIA report on Wednesday with a decline in inventories for tax purposes but once into January the barrels will begin to flow. The graphic below from OilSlick shows the oil inventory gains and losses for Dec-Jan 2015. Note the decline in the last two weeks of December to avoid taxes but then the huge surge once we moved into January. The 413.1 million was a multi month high at the time but inventories continued to rise to 490 million barrels by April. Once inventories began to decline in May, the pace was fairly rapid.



The wild card here is the recent lifting of the 40-year ban on crude exports. The first tanker of U.S. crude left a Texas port on Thursday headed to Italy on the Theo T tanker. The crude was sold by ConocoPhillips to Vitol which routed it to Italy. Enterprise Product Partners said last week they would load 600,000 barrels in Houston for export next week. We do not know how this new export factor is going impact the inventory picture in the weeks ahead.



Active rigs declined by only 2 rigs last week but given the holidays I am surprised there was any activity at all. Oil rigs declined -2 to 536 and gas rigs were unchanged at 162.

Once we are in 2016 we could see some capex budgets shift and whether that means another drop in rigs or some going back to work is unclear. Nearly all producers have slashed capex for 2016 and with oil at $35, there is no reason to burn cash drilling holes you are not going to complete until 6-12 months from now.


We could get a market boost next week from what is called the January Effect. This is when stocks that were sold off to lock in tax losses in December are bought by investors at lower prices in January. There is also the normal bounce in the small caps as funds put year-end retirement contributions to work.

Ryan Detrick at Kimble Charting Solutions noted that of the 500 S&P components 301 were down -10% from their highs, 175 were down at least -20% as of December 30th. While the overall market has been weak since August the FANG stocks (Facebook, Amazon, Netflix and Google) were up +35% and together they accounted for 5% of the S&P gains.

Jeffery Saut said the individual investor is in hibernation. The S&P moved at least 1% on a daily basis in either direction 72 times in 2015 and that is the most since 2011 according to Standard and Poor's data. Some 48% of our daily volume is from high frequency trading.

The Stock Trader's Almanac says the January direction predicts the direction of the market for the year with a 75% accuracy rate. We need a positive January to give investors some confidence to come back into the market.

Markets

While 2015 finished in the red for the Dow and S&P the indexes were not down much and they are still close to their recent highs. It was not a horrible close for the year.

However, the closing numbers are somewhat deceiving. The S&P may have been down only -0.7% but it is -4.3% or -93 points off the highs. That could easily be recovered in a couple weeks of bullish gains but I would not count on it over the next two weeks. We still need to finish up with the January tax selling where investors held over into the new tax year to take gains.

The S&P chart is showing a series of lower highs and lower lows and without a move over 2,100 it will remain a bearish trend. Actually, we need a move over 2,138 to a new high to convince the hard-core bears.

On the weekly S&P chart the Fibonacci lines from the 2009 low show a 1.618 retracement at 2,137 on the S&P. While everyone was watching to see what happened when the S&P crossed 2,000 the hard-core technical chartists were watching 2,137. The S&P moved right to it multiple times but never crossed it. Some believe this is the market top and we need to have a prolonged period of selling before that top can be broken.

The S&P is up more than 200% since those 2009 lows at 666. There have been three mini corrections along the way but you have to admit the vertical ascent is remarkable. With PE multiples approaching 20 there needs to be a period of price consolidation before the market can move higher according to the chartists.

However, remember the numbers I quoted earlier about the 500 S&P components, 301 were down -10% from their highs, 175 were down at least -20% as of December 30th. We have had a rolling correction since August that was hidden by the performance of the top ten Nasdaq big cap stocks, which lifted the indexes despite the decline in the broader market.


The daily chart has been bearish since the lower high failure on December 1st at 2,104. We have been chopping around between 2000-2080 for most of December. Friday's sharp decline was troubling even though the last couple days of December have a seasonal tendency to be weak. I went back five years and the weak days were only a handful of points compared to Thursday's -19 point decline.

The easy forecast would be a simple look at the chart ignoring all the macro factors. I call this the 5th grader view. If you are ever confused about market direction, ask a 5th grader if the chart is going up or down. They have no preconceived ideas about market direction, earnings, Fed meetings, GDP, the Chinese economy, etc. They will just look at the chart and "Gee Dad, I think it is going ____" without even knowing what symbol you are charting.

As adult investors, we sometimes get hung up with our directional bias without realizing it. That can be expensive because we trade our bias rather than the charts. We trade the hope rather than the facts.

I laid out the analyst thesis earlier in this commentary but that is long-term rather than the next several weeks. We need to put our 5th grader hats on and focus on the charts rather than the forecast.

The 5th grader view is that the S&P chart is bearish. That could change at the open on Monday and the first two days of January typically see big moves. That means we need to let the smoke clear before we start betting on direction for the year.

The S&P closed on light support at 2,043.94 with stronger support down at the 2000-2005 level. Resistance will be the recent intraday high at 2,080 and then 2,105.


The Dow chart is slightly more bearish than the S&P because of the longer series of lower highs dating back to May. The Dow saw a boost over the last two weeks because of the buying in the Dogs of the Dow. That cycle should begin to fade once we are into January. The Dow stocks are international stocks and the earnings worries will begin to weigh on them as we approach the start of the Q4 cycle in three weeks. The dollar was still a factor in Q4 and sales will have been impacted.

GE remains the sleeper stock of the bunch with a positive chart and a pending breakout over $31 to a new high. GE management is making all the right moves and they expect to return $32 billion to shareholders in dividends and buybacks from the sale of assets from GE Capital. This has maintained support under GE shares when the rest of the Dow was falling apart.

Chevron and Exxon could be a continued drag once oil prices begin to sink again. Nike could provide some lift once the post split depression wears off. Apple will of course be a drag until earnings.



The Nasdaq has been supported by the FANG stocks and biotechs. The +10% gain in the biotech index was a major support for the Nasdaq. The index is not that far away from its highs and could see a rebound from year-end retirement contributions.

The 4888-4900 support is still the material level to watch. The close on Thursday at 5,007 was one point below support at 5,008. That is close enough for me but any decline at the open immediately targets that lower level.



The Nasdaq 100 remains the stronger of the tech indexes and is only about 125 points below its closing high. A week of decent daily gains could push it right back to that level pretty quickly.


The Russell chart is probably the most bearish. The big decline in December was not followed by a decent rebound like the one we saw in the other indexes. The Russell began to collapse in late June and only recovered half its losses from the September low. The Russell closed the year with a loss of -5.7%.

The small caps appear to be out of favor because the late December rally never appeared and it is hard to see a normal January rally at this point.

The Russell 2000 is in correction territory after a high close in June at 1,296 and a -161 point (-12.4%) decline from that level. We are not going to make new highs on the big cap indexes with the Russell 2000 in correction.


It will also be hard for the Dow Industrials to surge higher with the Dow Transports deep into correction territory with a 17.8% loss for the year. Slowing truck and rail shipments plus profit worries at the airlines are weighing on the index. It is also hard to see how the U.S. economy is going to avoid recession with the transport sector tanking.


The NYSE Composite Index ($NYA) is also telegraphing a bearish outlook. The index is small cap heavy with plenty of energy stocks to weigh it down. A break below Thursday's close at 10,143 would be another lower high and we could easily see a retest of 9,600.


If we put our 5th grader hats on the charts are telling us the market is weak. While January is typically a strong month, there are never any guarantees. We need to trade what we see rather than what we want to see. If you do not have a desperate need to make a trade this week I would recommend waiting to see what the market gives us before committing to a direction. The first two days can be volatile and the rest of the week tends to be a settling process into new positions.

While nobody can accurately predict market direction, the long-term trend is always up with an 8% annual average. Now that the Fed has started hiking rates, the uncertainty is gone. Europe and Japan are increasing stimulus in an effort to accelerate their recoveries. After a year of dormancy, it would make sense for investors to bet on equities. With the Fed hiking rates, the bond market should be seeing continuous outflows back into equities. We know treasuries are going to be losers in a rate hike cycle so there is no alternative other than investing in equities or holding cash.

With the Nonfarm Payrolls on Friday and the Fed in hike mode, those numbers will be even more important. Be patient. There is always time to trade as long as you have capital to invest. If you miss an entry on the stock you want, be patient. There are 4,500 stocks. Another opportunity will appear.

 

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Random Thoughts


The web is full of all kinds of end of year articles and I listed the best ones I found in the comments below. Some I did not post were really out there and there were some with no basis in fact whatsoever. Enjoy!


Here is the 2015 market in ten points from Mohamed El-Erian. He said saying stocks had "their worst year since 2008" only tells a tiny part of the story. Ten Market Thoughts


MarketWatch posted an article by Matthew Lynn on five black swan events that could rock the market in 2016. Five Black Swans


Business Insider posted an article with 15 events they believe will happen in 2016. Things like "Iran will cheat on the nuclear deal" to "China will become unstable over the South China sea." 15 Probable Events for 2016


According to the Stock Trader's Almanac the 8th year of a presidential term has been down 5 of the last 6 times it has happened with an average loss of -13.9%. Wow! Let's hope that historical trend is broken severely.


"Never make predictions, especially about the future." Yogi Berra.


Investor sentiment surged into the neutral camp at 51.3% as of the close on Wednesday. Bearish sentiment declined -7.9% and bullish sentiment fell -1.3%. Neutral sentiment spiked 9.2% to 51.3%. Clearly, the majority of investors are unsure about what January will bring.



 

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

 

"Trying to catch falling knives always results in lost fingers. Better to let the knife hit the floor, bounce around a little and when it stops moving go pick it up."

Mark Yusko. Morgan Creek Capital Mgmt.


 


Index Wrap

Santa's Abductors

by Keene Little

Click here to email Keene Little
Review of Major Stock Indexes

Happy New Year! Leigh Stevens has "retired" and he wrote his last Index Wrap last weekend. I (Keene Little) will now write these Wraps and I have some big shoes to fill. For those of you who have been reading my Wednesday Market Wraps, the format of my reviews will be familiar. If there are some new/different things you'd like to see in the Index Wraps please be sure to provide some feedback. This weekend's Wrap will be longer than usual as I'll take a little extra digital ink to help explain what I look for on the charts. Future indexes will be shorter since I know your time is important and it's often good to just get a quick review of the charts to see where we are and where we might be going.

The real Santa Claus rally is the week between Christmas and New Year's and into the first week of January. But Santa appears to have been abducted by the bears and it remains to be seen whether or not they'll release him unharmed in the coming week. Negotiations appear to have stalled until we get through the holidays.

The past week was a slow-volume period, as expected between the holiday breaks, and with a low-volume environment it's much easier to push the indexes around with a couple of buy and/or sell programs. For this reason it's typically a little more difficult to evaluate a move in a slow week as it relates to the larger pattern. The question facing us this weekend is whether Santa's no-show this past week is part of a "real" move or instead only a reflection of some strong bears taking advantage of the low volume.

The January barometer is in front of us, which states "As goes January, so goes the year" and it's also typical for the first week of January to set the tone for the rest of the month. Therefore we could say "As goes the first week of January, so goes the year." That turned out to be true for 2015. But it was not true for 2014, which started off with a negative first week but finished as a strong year for the bulls. As with all "typical" or seasonal patterns, they might give you an idea for what to expect from the market but it's the daily/weekly review of the charts that is much more important. The "typical" patterns for the market have typically not worked in the past year and that is more likely than not to continue.

As I'll review in the charts, last week's decline might have been the start to something more bearish, which is the way I thought it was setting up for, but the first week will provide stronger clues. While it has been my opinion 2016 will be one for the bears, which should start with a negative first week in January, it's very important to follow the charts and not a personal opinion (mine or anyone else's). We all trade with a bias but holding a bias too long is what gets traders into trouble. With that let's see what the charts are telling us and what levels should change our opinion.

[My charts will show "key" levels where a price pattern either turns more bullish (above the green target symbol) or more bearish (below the red target symbol). Support and resistance levels will be pointed out on the charts. I like to show one weekly chart, typically for the S&P 500, to give us a broader view of the "market" and to help give us a longer-term sense of market direction.]

A Look At the Charts

S&P 500, SPX, Weekly chart

While I feel there is a good change the market has topped, which makes the market vulnerable to a surprise attack by the bears, I keep looking for evidence for why I'm wrong. At the moment there is insufficient evidence in the price pattern to confirm a top is in place and therefore I'll continue to respect upside potential while warning of downside risk (it is my opinion downside risk dwarfs upside potential).

Because of all the choppy price action since the August low I think there's still a chance we could see the market chop its way higher inside what I believe would be a rising wedge. In EW (Elliott Wave) terminology it would fit as an ending diagonal 5th wave to complete the rally leg from October 2011, which in turn would complete a large A-B-C leg up from 2009 (as part of a larger bear market pattern). This is just an idea to explain how a choppy rally could continue up to about 2200 into April but at the moment there is a potential bearish pattern that says we've already seen the top and that we're due a strong sharp decline from here, one that could take SPX down to the 1970 area in the coming week and then lower later in January. A drop below the December 16th low, near 1993, would trigger the more bearish potential while a rally above the November 3rd high near 2117 is needed to keep the bullish pattern alive.

S&P 500, SPX, Daily chart

The daily chart below shows a decline to SPX 1970 would be a test of the bottom of its parallel down-channel for the decline from the November 3rd high. If that decline happens in the coming week it would be 109 points from last Tuesday's high at 2081. Thursday's close near 2044 was a decline of 37 points, leaving 72 to go. That's not unreasonable considering the large whippy moves we've been seeing. It's also not unreasonable when you realize January 2014 and January 2015 both saw declines of 101 and 110 points, respectively. But in January 2014 it was the last half of the month and in January 2015 it was the first week.

The first bullish sign would be a rally above last Tuesday's high at 2081 and then confirmed more bullish above price-level S/R near 2090. There is a lot of overhead resistance and therefore any long plays will need to be tightly managed. For the short side, the first support level for SPX is its uptrend line from September-December, currently near 2024, and then down near price-level S/R near 1993. Closing back below its 20-, 50- and 200-dmas is another bearish sign for an end-of-week/month/year close so if the bulls are to pull another rabbit out of the hat, they need to do it quickly on Monday.

From an EW perspective it's important to note that the bearish wave count is very bearish -- a series of 1st and 2nd waves to the downside following the November 3rd high, which calls for a powerful move down in a series of 3rd waves. It would be the kind of move that will break below the August low before the end of January. This is the reason why I say downside potential far exceeds upside potential and until I see the bearish pattern negated I would stay more defensive than offensive (unless offensive to you means in bearish plays). If you like playing the short side, which is difficult but has the potential to make more money faster, last week's setup into the top of the parallel down-channel made a nice entry point. Bounces are to be shorted until the bulls prove the bears wrong, starting with a rally above last Tuesday's high at 2081.56.

S&P 100, OEX, Daily chart

OEX has virtually the same pattern as SPX with only minor variations and therefore has the same setup. The choppy pattern for the decline off the November 3rd high is the very definition of a downtrend with its series of lower highs and lower lows (within a down-channel). But because of the overlapping highs and lows it could easily be interpreted as a corrective pullback in a bull flag pattern.

There is a bullish pattern that projects to 958 for the 5th wave in the rally from August but this pattern does not fit well on several indexes, which is a reason to doubt it. But a rally above the December 2nd high at 938 would trigger the more bullish pattern and a rally above last Tuesday's high at 929 would provide a bullish heads up. The high near 929 is also a good stop level for any short positions unless you're using them for hedging your long positions. The pullback on Thursday/Friday had the OEX coming back down to its 200-dma, near 910, and therefore the bullish setup here is for a back-test to be followed by a bullish kiss goodbye.

Price action since November's high has been a choppy whippy mess and traders on both sides have likely felt like they're banging their heads against the walls on both sides of the room. That could continue and it's the reason for caution here. See where support and resistance are and watch for reversals to trade but then get defensive in the position. Let price tell us when a directional trade should have better luck in continuing that direction (starting with a move above or below the key levels).

Dow Industrials, INDU, Daily chart

The DOW has formed a pattern that is between a pennant (sideways triangle) and a bull flag, either of which are bullish continuation patterns when they follow a rally. This is a bullish pattern that bears need to respect. The DOW pulled back last week to its uptrend line from August-September, which had been broken for only a day on December 18th. A second break would be more bearish and it would likely lead to another drop to the bottom of its pennant/flag, near 17060.

As mentioned earlier, the bulls need to step back in immediately if they want to keep this from turning at least short-term bearish. If the DOW does drop down to the bottom of its pattern it would be the next opportunity for bulls to turn this bullish continuation pattern into a new rally leg. But if the bullish pattern is followed by a breakdown instead it would likely lead to a strong decline (failed patterns tend to fail hard). The bearish wave count calls for multiple 3rd waves to the downside, which is a reason why the bullish pattern could fail.

Nasdaq Composite, COMPQ, Daily chart

The pattern off the November high for the Nasdaq can be viewed the same as the blue chips (half pennant, half bull flag) but a slightly different bullish interpretation is shown on its chart below -- it could be finishing the last leg of its rally in a small rising wedge (ending diagonal 5th wave) for the leg up from December 14th. This calls for one more leg up to potentially finish the wave count and it would likely finish near the previous highs in November and December, which would create a bearish triple top if it occurs. But even the short-term bullish pattern would be negated if the Nasdaq drops below its December 18th high near 4921. At the moment the lower highs for the oscillators since November favors the bears.

Nasdaq-100, NDX, Daily chart

NDX has been in a sideways trading range since November and it takes a break out of the relatively wide range between 4475 (which includes the 200-dma) and 4740 before we'll have a better sense of direction. As with the Nasdaq, I see the potential for another leg up to complete a small rising wedge pattern and another test of the top of the trading range. It could drop to the bottom of the range and then start a new rally leg but if it breaks below 4475 I believe we'll see a flush to the downside.

Russell-2000, RUT, Daily chart

The RUT has continued with a different (weaker) pattern than the others and looks more bearish. Following the impulsive December 2-14 decline we've seen a 3-wave corrective bounce into last Tuesday's high. The pullback into Friday's low is sitting on the short-term uptrend line from December 14-21 and once again, the bulls need to immediately step back in before a further drop turns it even more bearish. I see the potential for another leg up at least to price-level S/R near 1170 if the bulls can get some buyers behind their cause. But a drop below the December 18th low near 1120 would suggest a stronger selloff is in progress, in which case I'd expect to see the September low near 1080 broken in the next week or two.

The last two charts, for SPY and QQQ, bring volume studies into the mix. These two ETFs enable us to use volume more accurately than can be done on the indexes, especially since these two funds are among the heavier-volume ETFs and provide some good sentiment indications. In addition to straight volume at the bottom of the charts I also show the Money Flow Index (MFI) on the SPY chart and Williams %R on the QQQ chart. I also have the Bollinger Band (BB) on both charts.

For a review of these indicators, the MFI, also known as volume-weighted RSI, is an oscillator that uses both price and volume to measure buying and selling pressure. As a momentum oscillator that uses volume, the MFI is good at identifying reversals and price extremes. As with other oscillators, divergences between price highs/lows and MFI highs/lows can help identify reversal setups.

Williams %R is a momentum oscillator that looks just like the Fast Stochastic Oscillator but without the smoothing line. Rather than using the cross of the oscillator and its smoothing line, Williams %R is best used to show extremes and divergences. The caution is that, like stochastics, it can remain overbought and oversold in a strong trend. This is particularly true for rallies. Bottoms tend to be more of the v-reversal variety and an oversold Williams %R can be a good warning sign.

The Bollinger Band (BB) shows a 2-standard deviation channel from the 20-moving average. Typically, when price moves two standard deviations away from the 20-dma it shows an extreme move based on recent price action (the channel will narrow during low-volatility periods and expand during high-volatility periods) and a reversal from that extreme often identifies where and when price is likely to move back at least to the 20-dma (center of the band).

As with all technical indicators, they're best used with other indicators in an attempt to get corroboration between the trading signals. The Bollinger Bands on the SPY and QQQ charts help identify price extremes. When price pokes out the top or bottom of the band and then closes back inside the band it's generally a good reversal signal following the momentum spike. Combining that with the signals you get with the oscillators and volume helps better identify the reversals.

SPDR S&P 500 Trust, SPY, Daily chart

On the SPY daily chart below you can see how it poked through the bottom of its BB twice in mid-December. Both times saw higher-than-normal volume and the MFI dropped into oversold territory. The first bounce off the December 18th low made it only slightly above the 20-dma, as did the bounce into last Tuesday's high, before reversing right back down. And before those two bounces was the December 2nd high, which also failed to make it up to the top of the BB, a sign of weakness in the rally (compare the last three rally attempts in December to the rallies off the August and September lows). But the lower price low on December 18th was met with a higher low for MFI, which showed us bullish divergence. If we get another price low with another bullish divergence I would be very careful about the downside and instead look for a buying opportunity, especially if a decline holds at the bottom of the BB and does not penetrate the bottom of its flag pattern, currently near 198.75.

Powershares QQQ Trust, QQQ, Daily chart

Similar to SPY, we saw two jabs below the bottom of the BB for QQQ in mid-December and Williams %R showed bullish divergence on the second penetration. Volume at each low was slightly higher than normal and Williams %R spiked into oversold each time, which provided a warning about a reversal. Last week we saw an attempt to rally back above the 20-dma, again, but it failed to reach its upper BB before Williams %R hit overbought and reversed back down last Wednesday. At the moment it's looking like it will drop back down to the lower BB and the bottom of its sideways trading range, near 109.40. A drop below that level without volume spiking higher and/or Williams %R not dropping into oversold would be reason enough to stay on the short side. But as discussed above, the sideways trading range is a bullish continuation pattern and therefore we could get another buy setup with a drop down to the bottom of its range if we get some corroborating evidence from the indicators.

Good luck with your trading in the coming week and I'll be back with you next weekend.

Keene H. Little, CMT

Technicians look ahead. Fundamentalists look backward. The true language of the market is technical. - Joe Granville


New Option Plays

Poised To Run In 2016

by James Brown

Click here to email James Brown

Editor's Note:

In addition to tonight's new candidate(s), consider these stocks as possible trading ideas and watch list candidates. Some of these stocks may need to see a break past key support or resistance:

Bearish ideas: FDS, MMM, COO, MLM, ECL, ACN, GILD, GPC, TPX, DVA, DDS, GS, FFIV, PII

Bullish ideas: ALKS, AMGN, MNST, TAP, DGX,




NEW DIRECTIONAL CALL PLAYS

Ionis Pharmaceuticals - IONS - close: 61.93 change: +0.61

Stop Loss: 59.65
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 1.6 million
Entry on January -- at $---.--
Listed on January 02, 2016
Time Frame: Exit PRIOR to February option expiration
New Positions: Yes, see below

Company Description

Trade Description:
Biotech stocks had a volatile year, especially after the group peaked in July 2015. The IBB managed to deliver a +11% gain for the year thanks to strength among some of its bigger cap names. IONS closed virtually flat for the year (down -19 cents for all of 2015). The stock has been showing relative strength recently and looks poised to sprint past its peers.

IONS is in the healthcare sector. They are part of the drug and biotech industry. The company was previously known as ISIS pharmaceuticals. Unfortunately the rise of the radical Islamic terrorist group known as ISIS has tarnished the name. A couple of weeks ago ISIS changed its name to Ionis. Here's a bit from the company press release:

"Isis Pharmaceuticals, Inc. today (December 18th) announced that the company has changed its name to Ionis Pharmaceuticals, Inc. Ionis (pronounced "eye-OH-nis") Pharmaceuticals is an original name that the Company has chosen to represent its innovative culture and heritage as both the pioneer and leader in the RNA-targeted therapeutic space for the past 26 years."

Now here is the company's description: "Ionis is the leading company in RNA-targeted drug discovery and development focused on developing drugs for patients who have the highest unmet medical needs, such as those patients with severe and rare diseases. Using its proprietary antisense technology, Ionis has created a large pipeline of first-in-class or best-in-class drugs, with over a dozen drugs in mid- to late-stage development. Drugs currently in Phase 3 development include volanesorsen, a drug Ionis is developing and plans to commercialize through its wholly owned subsidiary, Akcea Therapeutics, to treat patients with familial chylomicronemia syndrome and familial partial lipodystrophy; IONIS-TTRRx, a drug Ionis is developing with GSK to treat patients with all forms of TTR amyloidosis; and nusinersen, a drug Ionis is developing with Biogen to treat infants and children with spinal muscular atrophy. Ionis' patents provide strong and extensive protection for its drugs and technology."

Regular readers know that we feel biotech stocks are aggressive, higher-risk trades. A lot of biotech companies are relatively small and only have one or two treatments in development, which make them binary trades. You can win big or lose big depending on the approval process of their treatment. There is a lot of headline risk. There is still headline risk with IONS but the company's relatively deep pipeline of drugs makes IONS a stronger play. You can view IONS' pipeline here.

Shares of IONS surged through several layers of resistance in early November on a better than expected Q3 earnings report. Since that big rally the stock has been consolidating lower. That changed in mid December when traders bought the dip near its 100-dma. Investors have been buying the dips every since. IONS displayed relative strength on Thursday with a +0.99% gain. The point & figure chart is bullish and forecasting at $74.00 target.

We would like to see some follow through higher. Tonight we are suggesting a trigger to buy calls at $63.20. Plan on exiting prior to February option expiration.

Trigger @ 63.20

- Suggested Positions -

Buy the FEB $65 CALL (IONS160219C65) current ask $3.50
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 End 2015 On A Sour Note

by James Brown

Click here to email James Brown

Editor's Note:

The last trading day of 2015 ended with widespread declines. Most of the major indices all lost -1.0% or more. Traders seemed to be selling their winners before the year ended.

DPS hit our stop loss.


Current Portfolio:


CALL Play Updates

AmerisourceBergen Corp. - ABC - close: 103.71 change: -1.31

Stop Loss: 102.40
Target(s): To Be Determined
Current Option Gain/Loss: -17.7%
Average Daily Volume = 2.2 million
Entry on December 15 at $103.02
Listed on December 12, 2015
Time Frame: Exit PRIOR to earnings in late January
New Positions: see below

Comments:
01/02/16: ABC outpaced the market to the downside on Thursday with a -1.24% decline. Shares dipped toward what should be short-term technical support at the simple 10-dma near $103.60. Also keep an eye on ABC's trend of higher lows for support.

No new positions at this time.

Trade Description: December 12, 2015:
Stocks had a rough week but ABC has been showing relative strength. Shares of ABC are now up three out of the last four weeks and up six sessions in a row. Considering how ugly the stock market was last week, ABC looks pretty attractive.

ABC is in the services sector. According to the company, "AmerisourceBergen is one of the largest global pharmaceutical sourcing and distribution services companies, helping both healthcare providers and pharmaceutical and biotech manufacturers improve patient access to products and enhance patient care. With services ranging from drug distribution and niche premium logistics to reimbursement and pharmaceutical consulting services, AmerisourceBergen delivers innovative programs and solutions across the pharmaceutical supply channel in human and animal health. With over $135 billion in annual revenue, AmerisourceBergen is headquartered in Valley Forge, PA, and employs approximately 18,000 people. AmerisourceBergen is ranked #16 on the Fortune 500 list."

The company reported their 2015 Q3 results on July 23rd. They beat Wall Street estimates on both the top and bottom line. Revenues were up +12.8%. Management forecasted full-year 2015 income growth in the 20-to-22% range.

Fast-forward to late October and ABC reported another strong quarter. The company announced their 2015 Q4 results on Oct. 29th. Wall Street was expecting a profit of $1.18 a share on revenues of $34.5 billion. ABC beat estimates again with a profit of $1.21 a share. Revenues were up +12.3% to $35.47 billion. Management raised their 2016 earnings and revenue guidance above analysts' estimates. They're now forecasting 2016 revenue growth of +8% to +10%.

Last month ABC raised their dividend by 17% to $0.34 a share. Normally raising the dividend is a sign of confidence by management. Meanwhile Citigroup analyst Robert Buckland recently listed ABC as one of his top 28 value stocks in the U.S. market (for 2016).

Technically shares bottomed in October after a three-month plunge from resistance in the $115 area. Now ABC has a bullish trend of higher lows. The last few days have seen ABC produce a technical breakout past round-number resistance at $100 and technical resistance at its 100-dma. The point & figure chart is bullish and forecasting at $122 target. Tonight we are suggesting at trigger to launch bullish positions at $102.85.

- Suggested Positions -

Long FEB $105 CALL (ABC160219C105) entry $3.10

12/29/15 new stop @ 102.40
12/26/15 new stop @ 101.20
12/16/15 new stop @ 99.85
12/15/15 Caution - ABC has produced a bearish engulfing candlestick reversal pattern
12/15/15 triggered on gap higher at $103.02, trigger was $102.85
Option Format: symbol-year-month-day-call-strike

chart:


Avago Technologies - AVGO - close: 145.15 change: -2.22

Stop Loss: 143.85
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 3.6 million
Entry on December -- at $---.--
Listed on December 29, 2015
Time Frame: Exit PRIOR to February option expiration
New Positions: Yes, see below

Comments:
01/02/16: AVGO also dipped toward short-term support at its 10-dma. This happens to be the same spot as its 20-dma and round-number support at $145.00. More aggressive traders may want to buy calls now or buy a bounce from current levels since this should be support. Officially we are suggesting a trigger to buy calls on a breakout higher at $150.25.

Trade Description: December 29, 2015:
AVGO is probably best known for being a chip supplier to Apple Inc. (AAPL). Shares of AAPL have struggled the last half of 2015 on worries about slowing iPhone sales. This worry has not impacted shares of AVGO.

AVGO is in the technology sector. They're part of the semiconductor industry. According to the company, "Avago Technologies Limited is a leading designer, developer and global supplier of a broad range of analog, digital, mixed signal and optoelectronics components and subsystems with a focus in III-V compound and CMOS based semiconductor design and processing. Avago's extensive product portfolio serves four primary target markets: wireless communications, enterprise storage, wired infrastructure, and industrial & other."

We can't mention AVGO without mentioning their $37 billion acquisition of Broadcom (BRCM). Here's a description of BRCM, "Broadcom Corporation, a FORTUNE 500® company, is a global leader and innovator in semiconductor solutions for wired and wireless communications. Broadcom products seamlessly deliver voice, video, data and multimedia connectivity in the home, office and mobile environments. With one of the industry's broadest portfolio of state-of-the-art system-on-a-chip solutions, Broadcom is changing the world by Connecting everything®."

This acquisition of BRCM was announced in May 2015. The combined company was initially valued at $77 billion. Together they will have annual sales of $15 billion with $6-7 billion in free cash flow. The merger is expected to close on February 1, 2016.

Without BRCM, AVGO has been delivering impressive earnings and revenue growth. Last year AVGO saw earnings surge from $1.16 a share to $4.90. This year Wall Street expects AVGO's earnings to hit $9.68 a share. Revenue growth over the last five years has averaged more than +23% a year.

AVGO's most recent earnings report was December 2nd. The company announced their Q4 results with earnings rising +26% from a year ago to $2.51 a share. That beat estimates by 13 cents. Revenues were up +15% to $1.85 billion. Gross margins improved from 51% in Q3 to 54% in Q4. The stock surged toward resistance near $150 following this better than expected earnings report.

Several days ago RBC Capital Markets upgraded AVGO to one of their top picks. RBC analyst Amit Daryanani shared his opinion on the company, saying, "Our bullish bias is predicated on our belief that AVGO will expand EPS from $9.24 in CY15E to [more than] $16.00 by CY18E driven by multiple levers - BRCM integration, asset divestures, RF ramp-up, cost containment and potential deleveraging ... we estimate [less than 30%] of future EPS growth is predicated on organic revenue dynamics and 70%+ is driven by AVGO's ability to curtail costs, optimize the portfolio, and further deleveraging."

Daryanani raised their AVGO price target from $165 to $170. Currently the point & figure chart is very bullish and forecasting a long-term target of $213. Technically shares of AVGO appear to be consolidating sideways beneath major resistance at the $150.00 level. If the stock breaks out we want to be ready. Tonight we are suggesting a trigger to buy calls at $150.25.

Trigger @ $150.25

- Suggested Positions -

Buy the FEB $155 CALL (AVGO160219C155)

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

chart:


Becton, Dickinson and Company - BDX - close: 154.09 change: -1.34

Stop Loss: 152.25
Target(s): To Be Determined
Current Option Gain/Loss: -40.1%
Average Daily Volume = 1.0 million
Entry on December 17 at $156.35
Listed on December 16, 2015
Time Frame: Exit PRIOR to earnings in February
New Positions: see below

Comments:
01/02/16: BDX is following the market lower with shares down two days in a row. The stock closed near support at its trend line of higher lows.

More conservative traders may want to raise their stop loss again. No new positions at this time.

Trade Description: December 16, 2015:
The stock market's big bounce this week has lifted the S&P 500 index back into positive territory for the year (currently up +0.7%). Healthcare stocks have outperformed with the XLV healthcare ETF up +6% year to date. BDX has doubled that with a +12% gain this year.

BDX is part of the healthcare sector. They are in the medical instruments and supply industry. According to the company, "BD is a leading medical technology company that partners with customers and stakeholders to address many of the world's most pressing and evolving health needs. Our innovative solutions are focused on improving medication management and patient safety; supporting infection prevention practices; equipping surgical and interventional procedures; improving drug delivery; aiding anesthesiology and respiratory care; advancing cellular research and applications; enhancing the diagnosis of infectious diseases and cancers; and supporting the management of diabetes. We are more than 45,000 associates in 50 countries who strive to fulfill our purpose of 'Helping all people live healthy lives' by advancing the quality, accessibility, safety and affordability of healthcare around the world. In 2015, BD welcomed CareFusion and its products into the BD family of solutions."

Their acquisition of CareFusion was a big deal. According to JP Morgan, they believe that BDX's purchase of CareFusion should transform the company into one that will "comfortably hit double-digit EPS growth over the next three to four years." The last couple of quarterly earnings report are definitely seeing the impact of the acquisition.

BDX's Q3 report, announced in early August, saw the company beat EPS estimates. Revenues were up +44.6% from a year ago. They raised 2015 guidance above Wall Street estimates into the $7.08-7.12 range. BDX also guided revenue growth in the +21-21.5% range.

The strong results continued in their fourth quarter. BDX announced its Q4 on November 4th. Analysts were looking for a profit of $1.90 a share on revenues of $3.03 billion. BDX beat both estimates. Earnings were $1.94 a share. Revenues were up +38.9% to $3.06 billion. Management guided for 2016 with earnings estimates in the $8.37-8.44 a share range. That's about +18% earnings growth over 2015. They expect revenues to grow +23-23.5% for the year.

The stock soared on its earnings report. BDX then spent the next few weeks consolidating gains. Now it looks like the bullish trend has resumed. The point & figure chart is very bullish and forecasting a long-term target at $209.00. Shares have been building on a bullish pattern of higher lows. Today's rally pushed BDX above resistance at $155.00. We see the breakout as an entry point. Tonight we are suggesting a trigger to buy calls at $156.35. Plan on exiting prior to earnings in February.

- Suggested Positions -

Long MAR $160 CALL (BDX160318C160) entry $3.84

12/26/15 new stop @ 152.25
12/17/15 triggered @ $156.35
Option Format: symbol-year-month-day-call-strike

chart:


Clovis Oncology - CLVS - close: 35.00 change: +0.60

Stop Loss: 32.45
Target(s): To Be Determined
Current Option Gain/Loss: -25.9%
Average Daily Volume = 1.4 million
Entry on December 01 at $32.55
Listed on November 28, 2015
Time Frame: Exit PRIOR to January option expiration
New Positions: see below

Comments:
01/02/16: CLVS outperformed its peers in the biotech industry again. The IBB lost -0.74% on Thursday. CLVS dipped to its 10-dma and bounced. Shares closed up +1.74%. Once again the stock looks poised to challenge resistance at $36.00.

No new positions at this time.

Trade Description: November 28, 2015:
After a -70% plunge all the bad news might be priced in for this biotech stock.

CLVS is in the healthcare sector. According to the company, "Clovis Oncology is a biopharmaceutical company focused on acquiring, developing and commercializing cancer treatments in the United States, Europe and other international markets. Our product development programs target specific subsets of cancer, and we seek to simultaneously develop, with partners, companion diagnostics that direct our product candidates to the patients most likely to benefit from their use. We believe this approach to personalized medicine - to deliver the right drug to the right patient at the right time - represents the future of cancer therapy."

The company has three product candidates in their pipeline. They are rociletinib, rucaparib, and lucitanib. Right now the market is reacting to news on its rociletinib clinical trials, where the drug is being tested on non-small-cell lung cancer.

Several days ago the company issued an update on their Rociletinib NDA filing. CLVS held their regularly scheduled mid-cycle communication meeting with the U.S. Food and Drug Administration (FDA). The current data on the Rociletinib clinical trials was not good enough. The FDA is asking for more data to prove the treatment's efficacy. This will likely push back the time frame on any approval. Investors were expecting a potential approval in the March-April 2016 time frame.

The delay in Rociletinib approval is a serious setback. Rival biotech firm AstraZeneca just got FDA approval for a competing drug, Tagrisso. By the time Rociletinib is approved (if it's approved), it will face serious competition from an already established treatment.

CLVS is a perfect example of why biotech stocks can be high-risk trades. On November 13, 2015 the stock closed at $99.43. The next trading day, Nov. 16th, shares gapped down at $29.27 and closed near $30. The stock traded down to $24.50 on November 23rd and started to reverse higher. CLVS' stock is now up three days in a row.

The current rally could be a combination of short covering and investors bargain hunting. It has been a full two weeks since the sell-off. If investors were going to sell they probably did so already. We think this rebound has a lot further to go but make no mistake CLVS is still a higher-risk trade. Tonight we are suggesting a trigger to buy calls at $32.55.

- Suggested Positions -

Long JAN $35 CALL (CLVS160115C35) entry $2.90

12/29/15 new stop @ 32.45
12/26/15 new stop @ 31.95
12/14/15 new stop @ 30.75
12/05/15 new stop @ 29.65
12/01/15 triggered @ $32.55
Option Format: symbol-year-month-day-call-strike

chart:


Charles River Labs. Intl. - CRL - close: 80.39 change: -0.15

Stop Loss: 77.75
Target(s): To Be Determined
Current Option Gain/Loss: -13.5%
Average Daily Volume = 426 thousand
Entry on December 24 at $80.40
Listed on December 17, 2015
Time Frame: Exit PRIOR to earnings in February
New Positions: see below

Comments:
01/02/16: CRL held up reasonably well on Thursday. The stock tried to rally again but the market's afternoon decline pulled it back into negative territory but only barely.

No new positions at this time.

Trade Description: December 17, 2015:
Non-insurance healthcare stocks have been showing relative strength. CRL is up nearly +33% from its early October low. It's also up +24.7% for the year when the S&P 500 is now down -0.8% for 2015.

According to the company, "Charles River provides essential products and services to help pharmaceutical and biotechnology companies, government agencies and leading academic institutions around the globe accelerate their research and drug development efforts. Our dedicated employees are focused on providing clients with exactly what they need to improve and expedite the discovery, early-stage development and safe manufacture of new therapies for the patients who need them."

The earnings picture has been improving. CRL reported Q2 results on July 30th. They missed estimates by a penny but management raised their 2015 guidance above Wall Street estimates.

Their performance improved in the third quarter. CRL announced their Q3 results on November 4th. Analysts were expecting $0.94 a share on revenues of $340 million. CRL beat on both counts. Earnings were $1.03 a share, a +16% improvement from a year ago. Revenues were up +6.7% to $349.5 million. If you back out negative foreign currency headwinds then CRL's Q3 revenues were up +12.2%. Management raised their full-year guidance above analysts' estimates again.

You can see on the daily chart how shares of CRL rallied on its Q3 report and optimistic outlook. Since then investors have been buying the dips near support. This week the stock has broken out to new eight-month highs. Shares are flirting with a bullish breakout past round-number resistance at $80.00. Tonight we are suggesting a trigger to buy calls at $80.40 with an initial stop loss at $77.75. More nimble traders may want to wait for a possible dip and buy calls in the $78.00-78.50 region instead. Officially our entry trigger is $80.40.

- Suggested Positions -

Long FEB $85 CALL (CRL160219C85) entry $1.85

12/24/15 triggered @ $80.40
Option Format: symbol-year-month-day-call-strike

chart:


Facebook, Inc. - FB - close: 104.66 change: -1.56

Stop Loss: 103.40
Target(s): To Be Determined
Current Option Gain/Loss: -22.5%
Average Daily Volume = 28 million
Entry on December 29 at $106.42
Listed on December 28, 2015
Time Frame: Exit PRIOR to earnings in late January
New Positions: see below

Comments:
01/02/16: Uh-oh! Thursday was not a good day for FB shares. The NASDAQ lost -1.1% but FB fell -1.4% and closed below what should have been support at $105.00 and its simple 50-dma.

Looking at the intraday chart, I would wait for FB to trade above $106.20 again before considering new bullish positions.

Trade Description: December 28, 2015:
It's time to get social.

Facebook needs no introduction. It is the largest social media platform on the planet. Last quarter the company surpassed 1.5 billion monthly active users. They also set a new milestone this year with one billion people logged into Facebook in a single day.

The company continues to grow. In addition to their Facebook social media powerhouse they also own Facebook Messenger, WhatsApp, and Instagram. Their WhatsApp product is the largest messaging service on the planet with over 900 million monthly active users. Meanwhile FB's photo-sharing Instagram property has more than 300 million active users. The company has been ramping up their advertising efforts to monetize Instagram. FYI: FB also owns Occulus Rift, the virtual reality company, but it's probably a few more years before VR goes mainstream. They do expect a big launch for Occulus in 2016 but it will not move the needle for FB's revenues any time soon.

The company's most recent earnings report was November 4th, 2015. FB announced its Q3 earnings of $0.57 a share, which was five cents above estimates. Revenues soared +40% to $4.5 billion, also better than expected. Their daily active users (DAUs) rose +17% from a year ago to 1.01 billion. Their mobile DAUs rose +27% to 894 million people. Monthly active users (MAU) hit another record at 1.55 billion people, up +14% from a year ago.

Following FB's Q3 results there was a parade of analysts reiterating their buy ratings on the stock. Several raised their price targets (a few of the new price targets are $120, $125, $135, and $140). The stock popped to a new all-time high and tagged $110.65 on this report. Since then shares have been slowly sinking in what looks like a long, sideways consolidation.

Here's the good news for bullish investors. Recent action suggest FB is poised to breakout from this multi-week consolidation. The last few days have seen traders buying the dips near its rising 50-dma. Tonight we are suggesting a slightly more aggressive entry point. The plan is to buy calls if FB trades at $106.25 (or higher). More conservative investors may want to wait for a breakout past short-term resistance at $108.00 instead. We will plan to exit prior to FB's next earnings report in late January.

- Suggested Positions -

Long FEB $110 CALL (FB160219C110) entry $3.20

01/02/16 Caution - on 12/31/2014 FB broke some support levels
12/29/15 triggered on gap open at $106.42, suggested entry was $106.25
Option Format: symbol-year-month-day-call-strike

chart:


Northrop Grumman - NOC - close: 188.81 change: -1.27

Stop Loss: 186.85
Target(s): To Be Determined
Current Option Gain/Loss: -32.6%
Average Daily Volume = 1.2 million
Entry on December 29 at $191.25
Listed on December 22, 2015
Time Frame: Exit PRIOR to earnings in late January
New Positions: see below

Comments:
01/02/16: NOC also traded down below some short-term support levels. Furthermore the intraday bounce on Thursday failed near the $190 area, which is worrisome. The low on Thursday was $187.55. Fortunately the stock did seem to bounce off its trend line of higher lows.

No new positions at this time. Let's see if NOC can bounce from this supporting trend line.

Trade Description: December 22, 2015:
A few years ago, back in 2011, politicians in Washington created massive defense spending and entitlement cuts in their sequestration budget cut threats. It was supposed to be a goad to provoke their peers and rivals to getting a budget deal done. It didn't work. The sequestration cuts were put into place in 2013 but instead of crushing the defense industry stocks the group has thrived.

NOC is in the industrial goods sector. According to the company, "Northrop Grumman is a leading global security company providing innovative systems, products and solutions in unmanned systems, cyber, C4ISR, and logistics and modernization to government and commercial customers worldwide." They focus on four business sectors: aerospace systems, electronic systems, information systems, and technical services.

One reason the major defense names have done so well was their focus on gaining new clients overseas. If the U.S. was going to cut back on spending (more like cut back on the pace of spending) then military contractors focused on generating new business with allies overseas and it worked.

NOC has beaten Wall Street's earnings estimates the last four quarters in a row. They've delivered better than expected revenue numbers three of the last four quarters. Plus, NOC management has raised guidance three of the last four quarters. As of their most recent earnings report on October 28th, NOC's backlog was about $36 billion.

NOC has been in a heated battle with rivals Boeing (BA) and Lockheed Martin (LMT) over one of the biggest defense contracts of all time. That is the Air Force's new Long Range Strike Bomber contract. Aerospace giants Boeing and Lockheed had teamed up together to win this deal. Some were calling it a David-versus-Goliath story. NOC was the underdog and surprisingly the U.S. government gave the contract, worth a potential $80 billion, to NOC in late October this year. BA and LMT have since chosen to protest this decision so the ultimate decision has yet to be finalized but it's a bullish development for NOC investors.

The LRSB contract has two parts. The engineering and manufacturing and development portion of the contract is worth more than $21 billion. Once it's finally developed the planes are supposed to cost the government $564 million apiece. Altogether the defense department could spend up to $80 billion on the program.

Another bullish tailwind for defense contractors like NOC is the ongoing global battle with radical Islamic terrorists and ISIS. The U.S. will likely boost its defense spending as it turns up the heat on this threat. Meanwhile after the terrorist attacks in Paris, analysts believe that NATO could generate an additional $100 billion in defense spending as they beef up their military might.

JPMorgan recently upgraded shares of NOC from "neutral" to "overweight" and gave the stock a $212 price target. They like NOC and believe it is a place of "safety and steadiness" in a volatile market.

The stock has shown significant relative strength this year with a +28% gain in 2015. The last few weeks have seen NOC consolidate sideways beneath resistance at $190 but with a bullish trend of higher lows as investors keep buying the dips. The stock looks ready to break out. Tonight we are suggesting a trigger to buy calls at $191.25.

- Suggested Positions -

Long FEB $195 CALL (NOC160219C195) entry $4.30

12/29/15: triggered @ $191.25
Option Format: symbol-year-month-day-call-strike

chart:


Royal Caribbean Cruises - RCL - close: 101.21 change: -1.52

Stop Loss: 95.85
Target(s): To Be Determined
Current Option Gain/Loss: -3.7%
Average Daily Volume = 2.0 million
Entry on December 29 at $100.85
Listed on December 26, 2015
Time Frame: Exit PRIOR to earnings in late January
New Positions: see below

Comments:
01/02/16: RCL retreated from all-time highs with a -1.47% decline on Thursday. Broken resistance near $100.00 should be new support. I would wait for a bounce near $100 as our next entry point.

Trade Description: December 26, 2015:
2015 has been a tough year for fund managers. The market's recent bounce has lifted the S&P 500 to a +0.1% gain for the year. One group that is outperforming the big cap index is the consumer discretionary stocks. The XLY consumer discretionary ETF is up +8.7% year to date. Helping lead the charge is RCL, which is up more than +20% thus far in 2015.

RCL is in the services sector. According to the company, "Royal Caribbean Cruises Ltd. is a global cruise vacation company that owns Royal Caribbean International, Celebrity Cruises, Azamara Club Cruises, Pullmantur and CDF Croisieres de France, as well as TUI Cruises through a 50 percent joint venture. Together, these six brands operate a combined total of 44 ships with an additional eight under construction contracts, and two under conditional agreements. They operate diverse itineraries around the world that call on approximately 480 destinations on all seven continents."

A few weeks ago Barclays just upped their outlook on the cruise liners and believes the group is seeing improved strength in pricing. Meanwhile RCL has been cashing in on the growing trend of Chinese tourism. The recent change in ties between the U.S. and Cuba also represents a new opportunity for the cruise lines.

Crude oil's drop to multi-year lows is another tail wind for RCL. Fuel is a big expense for these massive cruise ships with many burning through 140-150 tons of fuel per day. Fortunately, oil (and fuel) is expected to remain relatively low throughout 2016.

Technically RCL has been able to build on its longer-term trend of higher lows and higher highs. The point & figure chart is bullish and forecasting at $118 target. Last week's widespread market rally lifted shares of RCL toward major resistance at $100. A breakout here could spark the next big leg higher. Tonight we are suggesting a trigger to buy calls at $100.85.

- Suggested Positions -

Long MAR $105 CALL (RCL160318C105) entry $4.10

12/29/15 triggered @ $100.85
Option Format: symbol-year-month-day-call-strike

chart:


Ryanair Holdings - RYAAY - close: 86.46 change: -0.50

Stop Loss: 84.45
Target(s): To Be Determined
Current Option Gain/Loss: -32.3%
Average Daily Volume = 406 thousand
Entry on December 21 at $85.77
Listed on December 19, 2015
Time Frame: Exit PRIOR to earnings in February
New Positions: see below

Comments:
01/02/16: I am urging caution on our RYAAY trade. I warned readers in the prior update that Wednesday's session had produced a bearish engulfing candlestick reversal pattern. Friday's decline should "confirm" the reversal signal but I am hoping it's just the low-volume holiday trading. The $85.00 area should still offer support. More conservative traders may want to inch their stop loss higher (closer to $85.00).

No new positions at this time.

Trade Description: December 19, 2015:
Airline stocks as a group have had a rough year in 2015. The XAL airline index is down -15% year to date and looks poised to accelerate lower. RYAAY is an exception. The stock is up +16% in 2015 and is about to break out to new highs.

The company benefits from several factors. RYAAY is based in Ireland and right now Ireland is the strongest growing economy in the Eurozone. Meanwhile the European Central Bank has embarked on a huge quantitative easing program that should boost the broader economy. If that wasn't enough we have crude oil down to six-year lows and likely headed lower. Jet fuel is a major expense for the airlines to the drop in oil prices is a huge tailwind for profits.

If you're not familiar with RYAAY they are in the services sector. According to the company, "Ryanair is Europe's favorite airline, operating more than 1,800 daily flights from 76 bases, connecting 200 destinations in 31 countries on a fleet of over 300 Boeing 737 aircraft. Ryanair has orders for a further 380 new Boeing 737 aircraft, which will enable Ryanair to lower fares and grow traffic from 105 million this year to 180 million p.a. in FY24. Ryanair has a team of more than 10,000 highly skilled aviation professionals delivering Europe's No.1 on-time performance, and has an industry leading 30-year safety record."

Back in September RYAAY raised their full-year earnings guidance by +25%. The stock reacted with a surge to new highs. The company's October traffic grew +15% from a year ago with their load factor, the percentage of seats sold, up +5% to 94%. The strong trend continued in November with RYAAY announcing traffic was up +21% from a year ago. Again their load factor was up 5% to 93%.

Earlier this month the International Air Transport Association (IATA) issued a press release on industry profits for 2015 and 2016. The IATA raised their estimate on airline industry profits in 2015 from $29.3 billion to $33 billion with a net profit margin of 4.6%. They expect that to improve in 2016 with a forecast for industry profits of $36.3 billion on a net profit margin of 5.1%. Most of this is driven by rising passenger travel in spite of the recent terrorist attack in Paris.

Technically shares of RYAAY have been outperforming both its rivals in the airline industry and the broader market. The stock is up three weeks in a row. It's also poised to breakout from its $76.00-85.00 trading range. A rally above $86.00 will produce a new buy signal on the point & figure chart. Tonight we are suggesting a trigger to buy calls at $85.65.

- Suggested Positions -

Long MAR $90 CALL (RYAAY160318C90) entry $3.10

12/26/15 new stop @ 84.45
12/21/15 triggered on gap open at $85.77, trigger was $85.65
Option Format: symbol-year-month-day-call-strike

chart:


Spectrum Brands Holdings - SPB - close: 101.80 change: -0.40

Stop Loss: 99.85
Target(s): To Be Determined
Current Option Gain/Loss: -8.8%
Average Daily Volume = 257 thousand
Entry on December 22 at $100.57
Listed on December 21, 2015
Time Frame: Exit PRIOR to earnings in February
New Positions: see below

Comments:
01/02/16: I cautioned readers to expect a dip toward the 10-dma. SPB only dropped to $101.39 on Thursday. The 10-dma is currently near $101.10. I still expect a dip toward $101 if the market continues to sink and we could easily see SPB drop toward round-number support at $100.00.

No new positions at this time.

Trade Description: December 21, 2015:
Shares of SPB are on track for their fourth year of gains. The stock is currently up +4.6% year to date versus the S&P 500, which is down -1.8%. More importantly SPB is breaking out from a four-month consolidation.

SPB is in the consumer goods sector. According to the company, "Spectrum Brands Holdings, a member of the Russell 2000 Index, is a global consumer products company offering an expanding portfolio of leading brands providing superior value to consumers and customers every day. The Company is a leading supplier of consumer batteries, residential locksets, residential builders' hardware, plumbing, shaving and grooming products, personal care products, small household appliances, specialty pet supplies, lawn and garden and home pest control products, personal insect repellents, and auto care products. Helping to meet the needs of consumers worldwide, our Company offers a broad portfolio of market-leading, well-known and widely trusted brands including Rayovac®, VARTA®, Kwikset®, Weiser®, Baldwin®, National Hardware®, Pfister®, Remington®, George Foreman®, Russell Hobbs®, Black+Decker®, Farberware®, Tetra®, Marineland®, Nature's Miracle®, Dingo®, 8-in-1®, FURminator®, IAMS®, Eukanuba®, Digesteeze®, Healthy-Hide®, Littermaid®, Spectracide®, Cutter®, Repel®, Hot Shot®, Black Flag®, Liquid Fence®, Armor All®, STP® and A/C PRO®. Spectrum Brands' products are sold by the world's top 25 retailers and are available in more than one million stores in approximately 160 countries. Based in Middleton, Wisconsin, Spectrum Brands Holdings generated net sales of approximately $4.43 billion in fiscal 2014."

SPB has struggled to meet analysts estimates recently, likely due to the impact of the strong U.S. dollar on its foreign sales. They reported their Q3 results on August fifth and missed the EPS by a penny while revenues were up +10.5% to $1.25 billion, just ahead of expectations. Fast-forward three months and SPB reported its Q4 results on November 19th. Earnings of $1.13 a share missed estimates by three cents. Revenues were up +11.0% to $1.31 billion but that came in below estimates.

SPB management pointed out that Q4 2015 saw gross profits rise +13.6% from a year ago while gross margins improved from 34.9% to 35.7%. Management also forecasted 2016 sales in the high-single digit range (compared to mid-single digits for 2015). According to SPB's earnings press release they believe 2016 will be their 7th consecutive year of record performance, including free cash flow rising into the $505-515 million range, up from $454 million in 2015.

The stock rallied sharply on this earnings report. In mid December shares broke through resistance following an analyst upgrade. The stock has now rallied through technical resistance at all of its key moving averages. It has also broken through resistance in the $96-98 region. The point & figure chart is bullish and forecasting at $120 target. Today's intraday high was $100.21. We are suggesting a trigger to buy calls at $100.55.

- Suggested Positions -

Long APR $105 CALL (SPB160415C105) entry $3.40

12/26/15 new stop @ 99.85
Option Format: symbol-year-month-day-call-strike

chart:




PUT Play Updates

Currently we do not have any active put trades.




CLOSED BULLISH PLAYS

Dr Pepper Snapple Group - DPS - close: 93.20 change: -1.45

Stop Loss: 93.25
Target(s): To Be Determined
Current Option Gain/Loss: -32.9%
Average Daily Volume = 1.2 million
Entry on December 16 at $94.05
Listed on December 15, 2015
Time Frame: Exit PRIOR to earnings in February
New Positions: see below

Comments:
01/02/16: Traders seemed to be selling their winners on the last day of the year. DPS lost -1.5%, underperforming the broader market's decline. The trend for DPS is still higher but the stock hit our new stop loss at $93.25.

- Suggested Positions -

FEB $95 CALL (DPS160219C95) entry $2.98 exit $2.00 (-32.9%)

12/31/15 stopped out
12/29/15 new stop @ 93.25
12/26/15 new stop @ 91.35
12/16/15 triggered @ $94.05
Option Format: symbol-year-month-day-call-strike

chart: