Option Investor
Newsletter

Daily Newsletter, Saturday, 1/30/2016

Table of Contents

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

Market Wrap

Fed Off the Table

by Jim Brown

Click here to email Jim Brown

Declining economics and a move to negative interest rates by the Bank of Japan has removed the potential for a rate hike until February 2017 according to the CME futures.

Market Statistics

Friday Statistics

The Bank of Japan introduced a negative interest rate policy targeting banks that park money at the BOJ. The bank will charge commercial banks a 0.1% fee on current deposits. This will encourage the banks to make more loans and put their cash to work. The Japanese economy is expected to grow a miniscule 1.1% in 2015 and 1.7% in 2016. This is just the first shot and the rate was kept low to begin the process but the BOJ said they would increase the rate until and as long as needed until the inflation rate reaches 2.0%.

This is a new process for Japan but not new in the world of central banks. The ECB rate is now -0.3%, Sweden -0.35%, Denmark -0.65% and Switzerland -0.75%. The Japanese market spiked +2.8% and China's Shanghai Composite rallied +3.1%.

In the U.S. the first GDP reading for Q4 fell to +0.7%, down from +2.0% in Q3. We knew this was coming because the Atlanta Fed GDPNow had been declining for the last month. Inventories reduced the GDP by -0.45%, exports -0.47% and fixed nonresidential investment by -0.24%. Consumer spending added +1.46% and residential investment +0.27%.

The headline number was still below most forecasts with the consensus estimates falling to -0.8% growth but the average of the blue chip forecasters tracked by the Atlanta Fed was still +1.8%, down from +2.7% forecasted in September.

The outlook is going to get worse before it gets better. Q1 has been weak for the last couple years and this year could be worse. Q1-2015 initially came in negative at -.75% but was revised up to +0.6%. Q1-2014 ended at -2.11%. However, the BEA changed their formula in the middle of 2015 to "compensate" for the trend in Q1 weakness. This is why you can never compare current data with old data in any economic report. The government continually adjusts they way they account for it to make it look better.



It is widely believed that Mario Draghi and the ECB are going to increase stimulus again in March. When combined with the move by the BOJ and the declining economics in the U.S. the potential for more Fed rate hikes has dwindled to nearly zero. According to the CME's FedWatchTool using the Fed funds futures, the chance for a rate hike in March are less than 16%. April has fallen to 21%, June 33%, July 35%, September 43% and November 46%. December is the only month in 2016 that currently has better than a 50% chance of a rate hike, currently 53%. February 2017 jumps up to 56% and not very convincing.

The Fed will try to talk those chances higher in order to maintain control over treasury prices but a continued drop in U.S. economics and another move by the ECB will make it tough.

Yields on the ten-year Treasury closed at a nine-month low of 1.93% on Friday. The Dollar Index jumped more than 1% on the Japanese news despite the drop in our GDP. The dollar index is nearing the critical 100 level. It has not been above that level since April 2003. This means more pain for U.S. manufacturers and international retailers.



Consumer Sentiment for January declined from 93.3 to 92.0 for January. The present conditions component declined from 108.1 to 106.4 and the expectations component was flat at 82.7. The expectations component has been roughly flat for the last four months at that 82.7 level. Analysts blamed the three-week decline in the equity markets for the decline in sentiment. Even falling gasoline prices could not provide a gain.


There are a lot of reports on the calendar for next week but only three really matter. The national ISM Manufacturing Index on Monday will update on the health of the sector. Manufacturing has been in a recession for two months and that is expected to continue.

The ADP Employment on Wednesday is expected to show 220,000 job gains and that would be a Goldilocks number. The Nonfarm Payrolls on Friday are also expected to show more than 210,000 new jobs and that is right at the threshold that the Fed needs to see to remain positive on future rate hikes.

However, the weekly jobless claims are at six-month highs and while this is a seasonal event that does suggest employment could be weaker than expected.


The only splits announced last week were reverse splits in order for companies to maintain their listings.

For the full split calendar click here.


The markets overcame some serious headwinds to post major gains on Friday. The biggest headwind on the Nasdaq was Amazon (AMZN). Shares had been down as much as -$95 on Thursday evening after they reported a major earnings miss.

Amazon reported earnings of $1.00 compared to estimates for $1.56. Revenue rose +22% to $35.75 billion. That was slightly below the $35.93 billion analysts expected. Amazon has now posted a profit for three consecutive quarters.

Amazon Web Services saw revenue rise +69% to $2.41 billion and above estimates for $2.38 billion. Profits rose +187% to $687 million in that division and operating margins rose to 28.5%.

North American retail revenue rose +24% to $21.5 billion and international revenue rose +12% to $11.84 billion. The strong dollar knocked $1.2 billion off international revenue. Overall operating income rose 88% to $1.1 billion.

Full year net revenue rose +20% to $107 billion. Prime memberships rose 51% but the company still will not say how many Prime members there are. Amazon guided to a range of $26.5 to $29 billion for revenue in Q1 compared to analyst estimates for $27.8 billion. The company gave a wide range for profits from $100 to $700 million, compared to analyst estimates for $665 million.

Analysts said the monster afterhours drop to long-term support was a buying opportunity and shares rallied off the $540 lows to close at $587.


Facebook (FB) shares continued their post earnings sprint with an additional gain of +$3. Analysts cannot say enough good things about Facebook's earnings. The company reported earnings of 79 cents that beat estimates by 11 cents. Revenue spiked 54% to $5.84 billion compared to estimates for $5.37 billion. Some analysts believe the Oculus Rift virtual reality headset will be the most popular retail product hitting shelves in 2017 and could easily outsell PlayStation. Everything Facebook is doing is working and they have a lot more inventory of potential advertising on Facebook owned sites including Instagram and WhatsApp.


Chevron (CVX) reported a loss of 31 cents on Friday that was well below consensus estimates for a profit of 47 cents. The low oil prices were the biggest blow to earnings. The company said it was cutting capex spending by 24% in 2016 to about $25 billion. If prices do not recover, they will cut it even more to the $20 billion range in 2017.

That was the first quarterly loss since 2002. To put things in perspective that -31 cents equates to about a $588 million loss on $28 billion in revenue despite a 50% decline in oil prices. For the full year, Chevron earned $4.6 billion so the minor loss is a drop in a very big bucket. That was down from $19.2 billion in 2014 and Chevron had $11.3 billion in cash at year-end. Chevron is handling the downturn very well. The CEO has said multiple times that maintaining the dividend, currently over 5%, as Chevron's top priority. Everyone knows that oil prices will go back up and Chevron is just passing time until they do.

Chevron added 1.2 billion barrels of proved reserves in 2015. Production rose to 2.67 million barrels of oil equivalent per day in December. Chevron has multiple major projects that will come online over the next two years that will increase production significantly. Chevron is a leader in the energy sector and with their commitment to maintain the dividend while they increase production. Even if crude goes lower in the short term as expected, I doubt Chevron will retest its lows.


MasterCard (MA) reported earnings of 79 cents compared to estimates for 69 cents. Revenue rose +4.4% to $2.5 billion but missing estimates for $2.6 billion. Gross dollar volume of transactions rose +12% to $1.2 trillion and a 12% increase in the number of transactions processed to 12.3 billion. The number of MasterCards in circulation rose +100 million to 2.3 billion.

The earnings beat and rise in revenue is not following the economic forecasts for a global slowdown and the weak retail sales for Q4. With transactions and dollar volume both up +12% it would seem like the consumer is alive and well. However, some analysts were expecting revenue growth of +6% and were disappointed by the results. On a constant currency basis, revenue growth would have been 5% higher and earnings 8% higher. Shares rose +7% on the news.


American Airlines (AAL) reported adjusted earnings of $2.00 compared to estimates for $1.97. The airline benefitted from a 40% decline in fuel prices over the year ago quarter. American earned $1.3 billion for the quarter and $6.3 billion for the year. That represents a lot of bag fees. The company bought back $1.1 billion in shares in Q4 and about 10% of its stock in the last two quarters.

Rising competition from low cost rivals and the rapidly spreading Zika virus put a cloud over future expectations. Weak demand from Latin America saw revenue from the area decline -17% and that was before the Zika virus scare. Overall passenger unit revenue declined -6% in Q4. American will take delivery of more than 100 new planes in 2016.


Honeywell (HON) reported earnings of $1.58 on revenue of $9.98 billion. Both matched analyst estimates. That was 24.9% growth in earnings for the quarter. They made $6 billion in acquisitions in 2015 that will bolster their positions in various sectors in 2016. They increased the dividend by 15% and returned $3.5 billion to shareholders. Costs declined -8.6%. Honeywell is one of those companies that most investors overlook. They are not a sexy tech stock and they are rarely in the headlines but they continue to deliver. They just need to figure out how to make their stock price rise again after consolidating for a year.


Xerox (XRX) reversed course from last year and said they were going to split into two companies. The CEO said they were going to split the business process business out from the document technology business. Basically, hardware will go into one company and the service businesses in the other with each as a public company. Activists had pressured them for the last couple years and about a year ago the company made a strong case for why they should stay together. Activists finally got their point across and the split is now on the table.

The company reported earnings of 32 cents compared to estimates for 29 cents. Revenue of $4.653 billion missed estimates for $4.729 billion. That was also down from the $5.033 billion in the year-ago quarter. The company guided conservatively for 2016. Shares rose +6% on the split news.


Colgate (CL) posted better than expected earnings but revenue declined for the 11th consecutive quarter. Earnings of 73 cents beat by a penny but revenue declined -7.5% to $3.899 billion and under estimates for $3.95 billion. The problem was the dollar, which reduced revenue by a whopping -11.5%. North American sales rose +1% but elsewhere it was dismal. Latin American sales fell -12%, Europe/South Pacific fell -14.5%, Asia declined -5% and Africa/Eurasia fell -16.5%. Much of those declines were related to the currency problem. Shares rallied +4% on strength in North America.


As of Friday 40% of the S&P-500 companies have reported. Of those 72% have beaten on earnings and 50% have beaten on revenue. Those beats come on a set of significantly lowered expectations. The average earnings beat has been 1.7% compared to the five-year average of 4.7%. To date the earnings have declined -5.8% and is on track for the third consecutive quarter of earnings declines. The last time that happened was in 2009. Revenue has declined -3.5%.

Thirty-three companies have issued negative guidance and only six have issued positive guidance. Next week 118 S&P companies will report earnings.

The last of the FANG stocks reports earnings on Monday. Google (Alphabet) is expected to report $8.10 per share. UPS reports on Tuesday with the results of their holiday shipping season. GoPro reports on Wednesday and it could be ugly. Linkedin is the highlight on Thursday and Berkshire Hathaway on Friday.


The energy sector was up a lot last week and it was all due to headlines by people that have a lot to gain by oil prices rising. The rumor began the prior week that Russia and Saudi Arabia were discussing a deal where OPEC and Russia would cut production by 5%. Comments from multiple officials in Russia, OPEC and Saudi Arabia made headlines all week but everyone in Saudi Arabia and officials in OPEC said there was no truth to the rumor. As the week progressed, various officials in Russia made offhand comments about "meeting with oil officials to discuss a production cut" and Saudi officials said they were always willing to discuss global production cuts to rebalance the market. However, once every comment was traced back to its source it turned out to be far less than what the press was claiming.

After Saudi Arabia denied making the 5% proposal for about the 5th time, they said this was an old proposal made by Venezuela months ago.

The key here is that Russia produces about 10.6 million barrels per day and Saudi Arabia about 10.2 mbpd. Russia exports about 8 mbpd of crude and refined products and Saudi Arabia exports about 8 mbpd of crude. At $100 oil, they were both bringing in about $1 billion a day in revenue. At $30 oil, they are losing more than $600 million a day.

Russian officials figured out that by floating these headlines in the press they could spike oil prices significantly. A $5 increase per barrel at 8 million barrels per day is a lot of money.

It started with Russian energy minister Alexander Novak. He is the one that first commented on the months old proposal from Venezuela as through it was new and from Saudi Arabia. A day later Russian Deputy Prime Minister Arkady Dvorkovich said Russia would not intervene to balance the market. "We take the position that our oil sector is, to a significant extent, private, and is commercially minded. It is not under the direct control of the state. Our market is governed by the decisions of individual companies, and that is how it will continue," Dvorkovich said. His comments over shadowed Novak's.

Just a few hours later Russia's foreign ministry said veteran minister Sergei Lavrov, who almost never comments on oil policies, would visit the UAE and Oman to discuss the oil market. Even Putin got into the act when he was quoted as saying he was open to discussions. That is about as vague as you can get.

This weekend a headline is claiming the Venezuelan oil minister is headed to Russia to talk about production cuts. Whether he actually goes or not is immaterial. It is the headline that will probably spike prices on Monday.

As long as the Russians are going to continue spamming the headlines with random comments the price of oil may remain firm. However, on Friday Iran jumped into the act and said they would not cut production. Iraq bragged they were producing a record amount at 4.1 mbpd and expected to increase that in the months ahead. That kills the idea of a deal with OPEC for an across the board cut.

Most analysts claim there are only two chances for a Russia/OPEC deal. Those are slim and none.

Prices dipped intraday on Friday to $32.65 but shorts covered at the close and prices rebounded to $33.67.

In theory, we should see these rumors fade away and the buildup in inventory levels weigh on prices. Inventories rose by 8 million barrels last week to a record high at 494.9 million barrels. Record inventory levels and rising prices do not match. We should see another build this week and for the next eight weeks.

Baker Hughes said active rigs declined by -18 last week to 619. Oil rigs fell -12 to 498 and gas rigs declined -6 to 121. Both of those are 18-year lows. However, U.S. production declined only 14,000 bpd to 9.221 mbpd. Eventually production is going to decline significantly and that will be the start of the end game for this oil cycle.



Markets

The Dow rallied nearly 400 points on Friday in what would appear on the surface as a major market event. Volume was strong at 10 billion shares. Advancing volume was 9:1 over declining and advancers were 6:1 over decliners. However, there was some index shuffling at the close and some reallocation by funds. The ratios between equities and treasuries became skewed over the last several months and the end of January is when those ratios are rebalanced. With treasuries at nine-month highs and equities at two-year lows, there was a lot to rebalance. The move by Japan overnight triggered another short squeeze with futures up +20 before the open and it was a perfect storm for equities. Longer-term shorts were suddenly caught off balance when the S&P moved over 1,915 at the open.

Another factor juicing the market on Friday was the completion of the Precision cast Parts (PCP) acquisition by Berkshire Hathaway. This was an all cash acquisition for $37.2 billion. This had been widely anticipated to complete on Friday and that was a major injection of cash into the market. Anyone holding those shares had a week to decide what they were going to buy to put that money back to work. The notices went out on Monday and investors spent the money on Friday. Art Cashin reported there was $4 billion in market on close orders to buy on the NYSE at the close.


As if that was not enough surplus cash flowing through the market the $36 billion acquisition of Broadcom (BRCM) by Avago (AVGO) was also completed at the close on Friday. The new shares of the merged company, Broadcom Limited, will begin trading on Monday. Approximately 315 million shares elected to receive cash at $54.50 per share ($17.167 billion). That means there was an additional $17 billion in cash looking for a new home Friday and Monday.

Nothing really changed in the fundamentals. The market had been basing for the last two weeks at the 1,900 level on the S&P with alternating days of triple digit gains and losses on the Dow. However, we did have a decent run of high profile companies beating on earnings. Amazon was the exception. I am sure some investors decided to throw in the towel on the sell side and not risk the Asian markets exploding higher on Sunday night. Their decision was aided by the surge in buying from the PCP/BRCM cash.

The Chinese markets could be volatile next week because they are closed the following week for the Lunar New Year. They will be closed from the 8th through the 12th. That means traders will be squaring positions ahead of the closures. Given the recent volatility, it will be interesting to see how their markets react. It was not a good week for the Chinese markets with a decline of -5.14% on the Shanghai Composite. Would you leave your long positions intact ahead of a week long holiday after weeks of market declines?


Oil prices were up for the week but depending on the headline spam, they are not expected to be up next week. The correlation between oil and the S&P is currently the highest in 26 years. That suggests a return to falling oil prices next week could derail any continued market rally.


The S&P surged +47 points on Friday and closed +126 points off last week's lows at 1,812. Friday's close at 1,938 is just below decent resistance at 1,950 and a potential trouble spot for next week. I am sure there is still some PCP/BRCM cash that remains unspent and that could give the market a pop on Monday. That 1,950 level will be the key number to watch.


The Dow gained +372 points for the week after a +397 gain on Friday. That alone should give you an idea of how volatile the week had been. Only three Dow components report earnings next week so the impact to the Dow should be minimal. Exxon and Pfizer report on Tuesday and Merck on Wednesday.

The upside level to watch on the Dow is 16,590, call it 16,600 as the closest round number. Near term support is 15,885 followed by 15,450 from the prior Wednesday's low.

All 30 Dow stocks were positive on Friday with a lot of strong gainers. A lot of the big gainers were stocks that were near their lows on Thursday. This was short covering hell for many traders.



The Nasdaq added a very minor +23 points for the week. The reason was the implosion in the biotech sector. The Biotech Index ($BTK) declined a whopping -9.5% or -306 points for the week. The sector is in retreat and there does not seem to be any relief in sight. Support at 3,000 failed and now we are testing 2,880. If that fails, we could be looking at 2,700 very quickly. Helping to push biotech stocks lower was comments from Trump about high drug prices. He joined Hillary and Sanders in complaining about excess profits.


Google is the big Nasdaq reporter on Monday and expectations are high. If they miss, I would not expect as big a decline as we saw in Amazon but it could be painful. The last two earnings reports saw significant upside spikes and that is where the expectation was created for this report. Google is going to breakout all their businesses in this report so we will be able to see who is a drag and who is contributing to their success.


The Nasdaq eased over resistance at 4,605 on Friday with the next material level at 4,715. If the biotechs are still weak and the PCP/BRCM buyout cash dries up we could see that 4,600 level come back into play.



The Russell 2000 gapped open to 1,020 and moved sideways until after lunch they surged another 14 points at the close to 1,034. This was a major move and clearly short covering at the open and then a short squeeze at the close as the buyout cash was put back to work.

The next material resistance would be in the 1,050 range followed by 1,082. We cannot make any determination on market direction from the Russell since they were threatening to break support on Thursday at 1,001 and then suddenly spiked 32 points on short covering. This was not investors suddenly deciding to buy small caps. This was heavily shorted small caps in a short covering frenzy.



I wish I could tell you the Friday rally was the start of a new bull market but we cannot make that determination from a cash infused short squeeze. One day does not make a trend. We did see a week of uncertainty and consolidation at the bottom and that is how lasting bottoms are formed. It is just too early to tell if this one is going to stick.

If oil prices roll over next week and head back to $30 the equity market is going to follow oil lower. We need several days of gains that are not stimulated by some news headline. We just want to see investors buying stock because they want to own it at this level. We need to see the sellers either run out of stock or decide it is no longer safe to be short.

Friday's +397 point spike and the likely gain at the open on Monday should put some fear into sellers and maybe we will see some balance return to the market. A lot of analysts are calling for a retest of the lows in February once the earnings cycle is over. I really hope they are wrong but we need to be prepared just in case. Trade what the market give us rather than what we want to see.


If you like the market commentary you have been receiving and you are on a free trial then now is the time to subscribe. Do not wait until you miss a newsletter to decide you want to take the plunge.

subscribe now

Random Thoughts


With Donald Trump out of the Apprentice TV shows they needed some new blood or in this case some old blood. Warren Buffett has agreed to be an advisor on the next Celebrity Apprentice. Along with Warren will be Steve Ballmer, former CEO of Microsoft, Tyra Banks, Jessica Alba and Patrick Schwarzenegger, nephew of Arnold Schwarzenegger. Arnold will take over as the new head of the boardroom. That gives "your fired" an entirely new meaning.


For the week ended on Wednesday, which was a -227 point day for the Dow, the AAII investor sentiment poll showed a big jump of +8.2% in the bullish category and -8.7% decline in bearish sentiment. Apparently, the bulls were right.



Sweden said it was sending home 80,000 refugee immigrants after law and order collapsed and violence and crime escalated. German Chancellor Angela Merkel said on Saturday that the 1.1 million immigrants in Germany would need to go home once the war is over. Violence in Germany has reached multi-decade highs. The right wing Alternative for Germany party said new immigrants trying to cross the border into Germany should be shot by border police. Europe expects more than 1 million additional immigrants in the spring.


Remember Greece? The international lenders will meet in Greece this week to review the progress Greece has made in implementing the required reforms agreed to in the last bailout program last year. Needless to say the group is not expecting wide ranging progress.


Facebook has now banned gun sales on the social network. That shows you how uninformed I am. I did not know there was a thriving person-to-person private gun sale network on Facebook. The company said licensed retailers will still be able to promote their websites but no sales can be made online. Online sales by dealers are already illegal so nothing changed there.


At the end of September Sanmaay Ved saw Google.com on the list of domains available for sale at his registrar. He thought there was some mistake but he bought the name anyway for $12 and charged it on his Discover card. When Google discovered their error in not renewing the domain name they tried to cancel the transaction. He was never able to actually change the landing page on the domain because Google realized their mistake almost immediately when the transaction went through. Initially Google offered him $6006.13, which they claimed was the numerical version of the word google. He declined and said he was going to donate the domain to charity. Google immediately doubled their offer to $12,000. Ved directed that the money be donated to the Art of Living India Foundation and gave the domain back to Google. He had previously been a Google employee for 5 years. Ved is now a MBA student at Boston College. I would say he let them off cheap.


Tesla Ceo Elon Musk picked up a few more shares of Tesla last week for the bargain price of $6.63 each. He exercised an option that allowed him to buy 532,000 shares of Tesla at the December 4th, 2009 price when he was given the option. Unfortunately, he had to pay $50 million in taxes on that exercise plus the $3.5 million as the exercise price. The shares are worth $101 million today. That big tax bill is part of living in California. He paid that tax bill out of his personal funds and did not sell any Tesla shares to raise the $50 million. Musk now owns slightly more than 28.9 million shares in Tesla worth more than $5.5 billion at Friday's close.


Forbes published a list of interesting factoids about the Super Bowl next weekend.

Did you know:

Over ONE BILLION chicken wings will be consumed.

Ten million pounds of ribs will be eaten. The 4th biggest day of the year.

12.5 million pounds of bacon will be put on the table.

11.2 million pounds of potato chips.

8.2 million pounds of tortilla chips.

3.8 million pounds of popcorn. That is a lot of popcorn!

3 million pounds of nuts.

The Super Bowl is the 5th busiest day of the year for pizza delivery.

The average viewer will consume 2,400 calories in the four-hour event.


 

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

 

"The one fact pertaining to all conditions is that they will change."

Charles Dow, 1900


 


Index Wrap

Friday Saves the Week But Not the Month

by Keene Little

Click here to email Keene Little
The past week, following last week's bullish reversal, was looking like it was going to finish flat but Friday's rally gave us a strong weekly candle to give the bulls a bullish candlestick pattern. But while the week finished strong it wasn't enough to keep the month from being the worst January since 2009, which of sparks discussion about the January barometer.

Week's Indexes


Review of Major Stock Indexes

Helping to spark the rally on Friday was a global equity rally that started in Asia following Japan's decision to drop their key interest rate in negative territory. The feeling is that this could get the Fed to at least back off on its desire to raise rates and it might force them to think more seriously about lowering rates as the race to the bottom in currency devaluations continues.

At the moment the Fed's actions have only helped the U.S. dollar stay stronger while others devalue their currencies (the dollar rose to a 5-month high vs. the yen on Friday), which in turn causes the importation of deflation as imported products are cheaper. By raising interest rates, and just talking about raising rates, the Fed is actually helping deflation take hold, which is exactly the opposite of what they want to achieve. It's just one more example of how flawed their economic models are.

The blue chip indexes finished the week with about a +2% gain but unfortunately that wasn't enough to prevent January's loss of more than -5% from being the worst month since last August and the worst January since 2009. The Nasdaq finished down nearly -8% and the RUT finished down -8.8%. The banks got hit harder, down -12.6%, and the biotechs, which have been the star performers the past few years, got taken out behind the woodshed and were shown little mercy, down -24%. January was also the most volatile January since 2008 but that January led to a choppy rally into May before the bottom fell out. Many traders are hoping we'll see at least something similar (without the bottom falling out).

Friday's advance-decline line and volume were very strong, almost capitulation kind of strong (10:1 up vs. down), such as was seen on August 27th. The next day saw only a minor intraday high and then started the choppy pullback into the September 29th lows. It appeared to be an end-of-month run and that leaves a question market as to whether it was real buying interest or more of a manipulated rally. While advancing volume strongly exceeded down volume, the total volume was only slightly stronger than average. The bulls need to see follow through with strong volume and daily closes near the top of the day's range. If we see that in the next few days then we'll have a much stronger signal that new highs are likely coming, which would have us looking at pullbacks as buying opportunities. But at the moment the bearish pattern is the more likely one, which says the bounce will be reversed and prices will drop lower.

As far as Friday's rally, most of the large hedge funds, the ones with the ability to move the stock market around, especially during the overnight session, receive much of their fees based on assets under management (AUM). Isn't it interesting that one of the biggest rally days of the month was the last day of the month. Purely coincidental I'm sure. If the funds were doing some buying just to boost the prices as much as possible for month-end close they might not be willing to hold onto that inventory next week, which is another reason follow-through buying is important for the bulls at this point.


A Look At the Charts

In last weekend's wrap, following the sharp reversal off the January 20th low, I had shown a depiction for a pullback from Friday's high and then another leg up into the end of this past week to create a larger a-b-c bounce correction to the decline. We got more of a choppy sideways consolidation instead of a deeper pullback and then Friday gave us the next leg up. Now it's time to figure out where the bounce could be headed.

I want to look at upside targets because the trade setup (the higher-probability one) is for a reversal back down and to new lows and the setup for the reversal is looking like it could happen on Monday. This fits both a price and time window for a reversal (February 1) and I like the setup for what should be a nice trade. I'm not looking for much lower than the January 20th lows before we're set up for another bounce correction so we're definitely looking at trading, not sell and hold (and certainly buy and hold should be banished from your dictionary).

I'll start the weekend review with the Dow's weekly chart and then zoom in to see how it should set up on Monday and what our next downside target will be (to help evaluate risk vs. reward).


Dow Industrials, INDU, Weekly chart

Because the January low for the Dow did not drop below last August's low, I can still consider a potentially bullish pattern, shown with the light green dashed lines on the chart below. This pattern calls for a large-range sideways consolidation into the summer before starting another rally that will take us to new highs. I believe the higher-probability pattern calls for a stair-step move lower into the fall, something like what I have depicted in bold red. Assuming we'll get another leg down from the current bounce, I see the potential for a drop to price-level support at 15340-15370 (February 2014 and August 2015 lows). From there another bounce correction before heading lower into April, followed by another larger bounce correction and then lower into the fall (this is the stair-step pattern lower I keep mentioning). From the low in the fall, assuming it plays out as depicted, we'd have a good setup for a large corrective rally into early 2017 before the bears really attack this market.


Dow Industrials, INDU, Daily chart

Friday's rally had the Dow closing above its 20-dma at 16361, which is a bullish sign. There is upside potential to the bottom of a previously broken down-channel for the initial decline from December, near 16800, maybe even up to price-level S/R near 16900. But there is a price projection and Fib retracement pointing to 16550-16600 as a good target zone to watch for the top to its bounce. If reached and rolls over from there I think it would be a very good setup to trade the short side.

Key Levels for INDU:
-- bullish above 16,900
-- bearish below 15,863


Dow Industrials, INDU, 60-min chart

The 16550-16600 target zone for the Dow is shown on the 60-min chart below. Two equal legs up for an a-b-c bounce correction off the January 20th low points to 16550. A 50% retracement of the leg down from December 29th is at 16600. If the Dow rallies above that target zone then I'd watch for a rally to 16800-16900. But for now the setup looks good for the completion of the bounce correction on Monday and then down for the rest of the week and into the next.


S&P 500, SPX, Daily chart

As you'll see for all the indexes, the patterns look the same and the expectation for the coming week is the same. SPX is now close to back-testing the bottom of its previously broken parallel down-channel for the initial decline from November-December. It's currently near 1950 and the 50% retracement of its decline from December 29th is near 1949. But two equal legs for its bounce off the January 20th low points to 1969 so that's a higher potential than for the Dow. Either the Dow will hold back SPX or SPX will drag the Dow higher so keep an eye on both to help gauge where resistance will be. Look for intraday bearish divergences to help identify where the top could occur. But if SPX can rally above 1970 I'd look for a move up to price-level S/R near 1992. Above 1993 would change the price pattern from bearish to bullish since it would be an overlap of the December 14th low (a rule violation for the bearish EW count).

Key Levels for SPX:
-- bullish above 1993
-- bearish below 1867


S&P 100, OEX, Daily chart

Take the titles and price scales off these charts and it would be hard to identify which one was which. The OEX chart below is a spitting image of the SPX chart above. A 50% retracement of its decline from December 29th is near 870 and two equal legs up for its bounce off the January 20th low is near 878 so that's our upside target zone. The bottom of its previously broken down-channel is near 881 and therefore 878-881 is clearly a possibility before the sellers return. Above 890 (the December 14th low) would change the pattern to bullish.

Key Levels for OEX:
-- bullish above 890
-- bearish below 835


Nasdaq Composite, COMPQ, Daily chart

The techs have been relatively weaker than the blue chips (a somewhat defensive posture) and for the Nasdaq the 2nd leg of the a-b-c bounce off the January 20th low might only make it up to 62% of the 1st leg, a common projection in a weak move. That projection is near 4619, not much above Friday's high near 4614, which is also about where the 20-dma will be located on Monday. So there might not be much left to the upside for the techs. However, if the blue chips do rally some more on Monday we'll likely see the techs head higher as well. If they continue to lag the blue chips then they'll likely lead the market to the downside following the reversal.

Key Levels for COMPQ:
-- bullish above 4872
-- bearish below 4450


Nasdaq-100, NDX, Daily chart

NDX finished on Friday slightly above its 20-dma so it's slightly stronger than the Nasdaq in this regard. The 62% projection for its 2nd leg of the bounce off the January 29th low is at 4282, only slightly above Friday's high at 4279 and a 50% retracement is near 4348. That gives us a couple of levels to watch on Monday to see where the rally might top out. The pattern does not turn bullish until it can rally above its December 14th low near 4478 so there's a lot of work for the bulls to do to make that happen.

Key Levels for NDX:
-- bullish above 4478
-- bearish below 4112


Russell-2000, RUT, Daily chart

The RUT was the stronger index on Friday, up +3.2%, and it took price up near potentially strong resistance at 1036-1040 by closing at its high near 1035. On January 13th it sold off sharply and broke its uptrend line from March 2009 - October 2011 (you can see the big red candle when it happened). On Friday the big white candle brought the RUT back up to the broken trend line and it's a setup for a back-test to be followed by a bearish kiss goodbye. Only slightly higher, near 1037, is the top of a parallel down-channel for the decline from December. This channel is an EW channel created by drawing a trend line from the 1st wave through the 3rd wave and then attaching a parallel line to the 2nd wave -- it often acts as a good guide for where the 4th wave (the bounce off the January 20th low) will stop. And then above 1037 is price-level S/R (its October 2014 low) at 1040, which could also be a back-test to be followed by a selloff. We have a bearish setup here but if the buyers keep going on Monday then I see upside potential to 1062 (two equal legs up from January 20th) and then price-level S/R near 1080. An intraday break above 1040 followed by a close below Friday's high (1035.38) would be a sell signal.

Key Levels for RUT:
-- bullish above 1040
-- bearish below 996


SPDR S&P 500 Trust, SPY, Daily chart

The SPY daily chart below shows the strong spike back up after pushing the lower BB lower, like it did in August, and how it has now reached the middle of the band (the 20-dma). Upside potential by the BB is the top of the band, currently near 202 and coming down fast, but you can see in the past how many times a rebound off the lower band resulted in just a poke above the 20-dma before rolling back over and I suspect we'll see the same thing. You can also see that the MFI is back up near the 50 line and how often it reversed from that level. Bulls would obviously like to see the MFI climb above 50, which would support seeing SPY rise up to the top of its BB. Otherwise the short-term relief of oversold conditions should lead to a continuation lower.


Powershares QQQ Trust, QQQ, Daily chart

The picture is the same for QQQ -- it rebounded off the lower BB and has made it up to the middle of the band. The Williams %R has a little more upside potential before hitting the upper line (-10) before reaching overbought but there's no guarantee it will get there. At the moment it at least has some bullish potential for follow-through buying on Monday. You can see the volume on both the SPY above and QQQ below that neither could be considered especially strong volume even though we had a 90% up day.


Summary

All the price patterns look the same and from an EW perspective it's a clear setup for another leg down if we're to get a 5-wave move down from the December 2nd highs. The bounce off the January 20th lows fits well as an a-b-c 4th wave correction and Monday is looking good for a reversal back down. It's looking like we could see the indexes work their way a little higher on Monday but it could fail at any time and therefore I consider the long side the riskier side. There's still more work for the bulls to do before they can negate the bearish pattern.

Assuming we'll get another leg down to complete a 5-wave move down from December 2nd, it might result in only a minor new low, or a test of the January 20th lows, and then start another bounce correction. So I'm only looking for a trade on the short side, which could take us into mid-February. That would be a setup for a bounce into opex week but obviously that potential will have to be evaluated if and when we get the low into mid-month. That's the setup and now we'll see if the market has something different in mind.

Trade safe, have a good week and good luck with your trading. 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

Hitting the Open Road

by Jim Brown

Click here to email Jim Brown

Editors Note:

One segment of the retail sector is growing rapidly and it is not the one you would think. With regular retailers reporting lagging sales and personal motor sports sales like Harley Davidson also in decline you would expect high dollar vehicle sales to also be soft. You would be wrong.

RV sales are actually booming with towed trailers hitting sales records in 2015. People are just choosing different ways to spend their money than in the past. Low gasoline prices are also a contributing factor.


NEW DIRECTIONAL CALL PLAYS


THO - Thor Industries - Company Description

Thor designs and manufacturers recreational vehicles for the U.S. and Canada. Some of its brands include Airstream International, Flying Cloud, Land Yacht, Eddie Bauer, Interstate and AutoBahn class B motorhomes. They have dozens of other brands in the conventional travel trailers and fifth wheels.

You would think that motorhomes would be a tough sell in the current economy. We know that Harley Davidson (HOG), Polaris (PII) and Arctic Cat (ACAT) have been having some challenges. That is not the case for Thor. Towable RV sales in the U.S. hit a record high in 2015.

In the last quarter, Thor reported earnings of 97 cents, up from 73 cents. Revenue rose +11.7% to $1.03 billion. Profit margins rose from 12.8% to 14.8%. They have $180 million in cash and no debt. They pay nearly a 3% dividend.

At the end of October Thor's backlog in orders for towable RV units was $710 million. The order backlog for motorized RVs was $341 million. With total backlogs of more than $1 billion and headed into the RV selling season, Thor is positioned to capitalize on price increases, margin expansion and even more sales.

Earnings are March 3rd.

Shares collapsed with the market in early January and bottomed the prior week at $48. Despite market volatility last week, they have been moving steadily higher. I am recommending the March options and we will exit before earnings.

With a THO trade at $52.75

Buy March $55 call, currently $1.15, no stop loss because of the cheap option.


NEW DIRECTIONAL PUT PLAYS


BABA - Alibaba - Company Description

This Chinese retailer reported earnings of 73 cents that beat estimates for 70 cents. Revenue of $5.33 billion also beat estimates for $5.08 billion. However, gross merchandise volume rose only 23% to $149 billion and the slowest growth in more than three years. Alibaba has 80% market share in China and they are starting to see the impact of the economic slowdown.

Shares declined after the earnings on Thursday and then declined again on Friday. If it were not for a burst of short covering at the close, they would have ended in the red in a very strong market. They gained only 11 cents on the short covering.

Shares have been declining since mid December when the Chinese economics and equity markets began to weaken further. Investor sentiment is fading as continued questions over accounting issues cloud their results.

It is not that investors are terribly disappointed in Alibaba. They are worried more about China's economic direction with multiple CEOs including Howard Schultz at Starbucks saying China sales are slowing. Add in the constant accounting rumors and investors are leaving the stock.

Shares bumped up against a solid top in Nov/Dec and then faded in January. The stock is about to experience a death cross of the 50-day below the 200-day average. I am looking for a retest of support at $57 from September.

The low last week was $65.34. I am recommending a put position with a trade at $64.85.

With a BABA trade at $64.85:

Buy March $65 put, currently $3.15, initial stop loss $71.65.



If you like the trade setups you have been receiving and you are on a free trial then now is the time to subscribe. Don't wait until you miss a newsletter to decide you want to take the plunge.

subscribe now


In Play Updates and Reviews

Cash Wins!

by Jim Brown

Click here to email Jim Brown

Editors Note:

A sudden flood of $54 billion in cash from closed acquisitions did wonders for a lackluster market. Berkshire Hathaway closed the $37 billion cash buyout of Precision Cast Parts (PCP) on Friday and Avago completed the acquisition of Broadcom (BRCM) with another $17 billion in cash. All that money needed to be reinvested and the Dow soared +396 points. It was a short covering frenzy as that cash started to push prices higher.

We could see some spill over into Monday because I am sure not all $54 billion was reinvested on Friday.

The Dow and S&P are approaching significant resistance at 16,600 and 1,950. That is where I would expect sellers to appear in the equivalent of a goal line stand.



Current Portfolio




Current Position Changes


STZ - Constellation Brands

New stop loss.


LULU - LuluLemon

New stop loss.


AMBA - Ambarella

The Ambarella put remains unopened.


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.



Original Call Recommendations (Alpha by Symbol)


IWM - Russell 2000 ETF - ETF Description

Comments:

I made a mistake in the Thursday newsletter. I mentioned that I had changed my mind multiple times about closing this position. In these comments, I said I finally decided to close it but I did not follow through on the notations in the portfolio graphic. It should have been closed at the open on Friday.

In retrospect I should have left it open but the chart was pointing to a breakdown on Thursday. The headlines on Friday caused a monster short squeeze and I am hoping at least a few subscribers ignored my recommendation when they saw the big gap higher.

Original Trade Description: January 20th

The IWM is the Russell 2000 ETF and the Russell was the only major index to close positive for the day other than the Biotech sector index. The Russell is in a bear market with a -24% drop from its highs. The Russell declined -47 points intraday and rebounded to gain +4.4 at the end of the day. The 960 level where it bounced was support from early 2013 and it was the 300-week average.

Typically, the small caps are the strongest index in December and January. That was not the case this year and there is a good possibility fund managers will bargain hunt there first when the buying begins.

Resistance from Tuesday's gap higher open is $101.20. I was going to recommend an entry trigger at $101.50 to get us past that level. The IWM closed at $99.18. However, by waiting to get past that resistance the option premiums could rise by more than $1. I would rather just buy the open and we will take what the market gives us.

Position 1/21/16, closed 1/29/16:

CLOSED: Long March $102 call @ $2.76, exit $2.46, -.30 loss.




KR - Kroger - Company Description

Comments:

Kroger exploded out of the starting gate on Friday and put its basing pattern behind. Let's hope this trend continues.

Original Trade Description: January 28th

Kroger is a retail grocery chain with $108 billion in sales in 2014. In Q3, 2015 their same store sales comps rose +5.4% without factoring in gasoline. They have recently been adding service stations to their offerings. They operate 2,774 supermarkets, 148 with in store clinics, 786 convenience stores, 1,330 fuel centers and 326 Fred Meyer jewelry stores in the USA. In all they have more than 161.3 million square feet of operated retail space. They have 37 food-processing plants, 27 dairies, 6 bakeries and 36 distribution centers.

While most people know them as a grocery store they are much more. They operate those grocery stores under many name brands, more than two dozen, as a result of the acquisition of regional chains. They also operate multi-department stores like a small Walmart or Target.

They have more than 422,000 employees and operate in 34 states. They filled 175 million prescriptions in 2014 worth over $9 billion. Kroger earned $3.223 billion in profits in 2014.

Where Kroger is kicking butt is their new organic product lines. They are significantly cheaper than Whole Foods Markets (WFM), Fresh Market (TFM) and Sprouts Farmers Markets (SFM). They are able to compete with Walmart on organics and private label brands because they own their own food processing and distribution centers. They have dozens of store brands than encompass nearly every isle in the stores from frozen pizzas, vegetables, fruit, toilet paper, snack chips and salsa to a complete customer deli in their larger stores. Their private label organic produce covers 60% of their produce department. Their Simple Truth Organic brand is now the largest natural food brand in the USA.

While Kroger has been outperforming the other grocery and fresh food stores their shares took a hit in early January when a division president, Lynn Gust, president of the Fred Meyer division retired after 45 years. He started out as a package clerk in 1970 and rose up through the ranks to be named president and then led the division to more than $10 billion in annual sales.

At the same time Credit Suisse lowered their rating on Kroger because of deflation risks. The deflation risk means prices for products are going to continue lower. However, I view that as a positive. Kroger's costs are going down but the price of their products do not have to go down in lock step. This is a profit opportunity for Kroger. The analyst also said fuel prices will eventually rise and that will take money out of consumer's pockets. Since that will happen across the board to all grocery stores it makes sense to own the one that is making money on gasoline with their 786 convenience stores regardless of the prices.

Shares declined from $43 in early January to $36 on the Wednesday crash. This is long term support and shares are very oversold. Earnings are March 3rd and I expect the stock to rebound, assuming the market cooperates. With support at $36.50 and the stock at $37.81 I view this position as very limited risk unless the overall market crashes.

Shares have consolidates over the last year after a monster rally from $17.50 in early 2014.

Earnings March 3rd. We will exit before earnings.

Position 1/29/16:

Long April $40 call, entry $1.05. No stop loss because of the cheap option.


LULU - LuluLemon

LuluLemon designs, manufactures and sells athletic apparel and accessories for women, men and female youth. They operate through corporate owned stores and sell direct to the consumer online. They are best known for their yoga style clothing. Full Company Description

Comments:

LULU finally sprinted over the resistance at $60 thanks to the positive market. No specific news. I raised the stop loss tp $57.85.

Original Trade Description: January 22nd

LuluLemon surprised everyone when they raised their guidance for Q4 sales saying they had a great holiday season. The company preannounced strong sales when most other retailers were posting losses or mediocre gains. The company now expects Q4 revenues in the range of $690-$695 million compared to prior guidance for $670-$685 million. This represents nearly 19% year over year growth on a constant currency basis.

Earnings guidance was raised to a range of 78-80 cents, up from 75-78 cents. Analysts were expecting 77 cents. The company said it entered 2016 with a bang thanks to a better than expected holiday season and continued increases in store traffic.

Cowen raised the target price from $52 to $66. Wells Fargo ungraded them from neutral to outperform with a target of $65. Jefferies upgraded it from hold to buy and gave it a $70 price target. Credit Suisse maintained its outperform rating but raised the target to $60. Suntrust Robinson reiterated a buy with a $66 target. Morgan Stanley reiterated an overweight with a target of $68. Morgan called it their favorite "turnaround" stock for 2016. Barclays issued an overweight rating with a target of $85.

It is amazing what a little positive guidance can do for Street ratings.

Earnings are March 9th.

Position 1/26/16:

Long March $60 calls @ $2.90, see portfolio graphic for stop loss.




STZ - Constellation Brands - Company Description

Comments:

Another new high for STZ but we have now reached uptrend resistance at $153. I raised the stop loss to $144.45 and will probably raise it again next week.

Original Trade Description: January 14, 2016:

STZ was one of last year's best performing stocks with +45% gains in 2015. Consistently raising earnings and revenue guidance can do that for a stock. The company is seeing so much demand for their beer products that STZ just announced they're building a huge new brewery in Mexico. Meanwhile their wine and spirits business is seeing stronger margins due to recent acquisitions. Overall STZ is moving into 2016 with the wind at its back.

STZ is in the consumer goods sector. According to the company, "Constellation Brands is a leading international producer and marketer of beer, wine and spirits with operations in the U.S., Canada, Mexico, New Zealand and Italy. In 2014, Constellation was one of the top performing stocks in the S&P 500 Consumer Staples Index. Constellation is the number three beer company in the U.S. with high-end, iconic imported brands including Corona Extra, Corona Light, Modelo Especial, Negra Modelo and Pacifico. Constellation is also the world's leader in premium wine, selling great brands that people love including Robert Mondavi, Clos du Bois, Kim Crawford, Rex Goliath, Mark West, Franciscan Estate, Ruffino and Jackson-Triggs. The company's premium spirits brands include SVEDKA Vodka and Black Velvet Canadian Whisky... Based in Victor, N.Y., the company believes that industry leadership involves a commitment to brand-building, our trade partners, the environment, our investors and to consumers around the world who choose our products when celebrating big moments or enjoying quiet ones. Founded in 1945, Constellation has grown to become a significant player in the beverage alcohol industry with more than 100 brands in its portfolio, sales in approximately 100 countries, about 40 facilities and approximately 7,700 talented employees."

STZ has been killing it on the earnings front. They have beaten earnings the last three quarters in a row. Management has raised their guidance the last three quarters in a row. Their most recent earnings report was last week on January 7th. Analysts were expecting a profit of $1.30 a share on revenues of $1.62 billion. STZ beat estimates with a profit of $1.42 a shares. Revenues were up +6.4% to $1.64 billion. Strong beer sales has helped fuel double-digit shipment increases. The company announced they were building another brewery and raised their guidance again.

This bullish outlook sparked a couple of new price target upgrades ($172, $174 and $185). The stock soared to new highs and broke through key resistance near the $145.00 level on its earnings news and guidance. Shares have seen some profit taking since its spike to new highs. Now STZ is near support at one of its long-term trend lines of higher lows. The simple 50-dma should offer technical support at $140.40. Meanwhile the $140.00 level could offer some round-number, psychological support. Both of these are converging near its trend line of higher highs.

STZ underperformed the market today, which may mean more profit taking ahead. We want to buy calls on STZ as it nears support in the $140.00-140.50 area. Tonight we are listing a buy-the-dip trigger at $140.50 with a stop loss $138.25, just under its early January low.

Position 1/19/16:
Long April $150 Call @ $4.70, see portfolio graphic for stop loss.




Original Put Recommendations (Alpha by Symbol)


AMBA - Ambarella - Company Description

Comments:

The Ambarella trade remains unopened with an entry trigger at $35.75. Shares rebounded again with short covering and the hot market. Resistance is $40 so this week will be the long term key. A move over $40 suggests the selling is over.

Original Trade Description: January 27th

Ambarella develops full motion HD video chips for video capture, sharing and display worldwide. The system on a chip handles HD video, audio, image processing and system functions on one chip. Their largest customer is GoPro.

GoPro (GPRO) reported two weeks ago that holiday sales have been dismal and would report Q4 revenue of $435 million, down -31% from the year ago quarter. Analysts were expecting $512 million and that number had already been lowered by analysts fearing sales were declining.

GoPro said it was cutting 7% of its workers and would incur up to $10 million of restructuring expenses in 2016.

Ambarella shares tanked along with GoPro despite having numerous other customers that also buy their chips. Unfortunately, GoPro is their biggest customer by far. In the prior quarter, Ambarella missed estimates for "near-term headwinds" which translates to "GoPro cameras are not selling." This means the current quarter that they will report on March 3rd is not likely to be any better. There is probably an earnings warning lurking in the near future.

GoPro is being hampered by a flurry of new competitors at cheaper prices. This means competition is only going to get worse and GoPro has already cut its prices twice in the last 3 months. All of this means GoPro is losing market share and that means fewer Ambarella chips will be needed.

With Apple shares crashing and estimates for Q1 iPhone sales declining by about 20%, this is going to put a cloud over the entire personal electronics market.

Ambarella is not overpriced with a PE of 13. They are just too reliant on GoPro for the majority of their revenue. If Ambarella could accelerate some purchases by their other customers, the stock would recover quickly. Apparently that is not yet happening and shares are about to decline to an 18-month low under $35.

Earnings March 3rd.

With AMBA trade at $35.75

Buy March $32.50 put, currently $2.45, initial stop loss $40.55




HPQ - Hewlett Packard - Company Description

Comments:

No specific news. This is a long-term play to hold over the Feb 24th earnings. Earnings news by other companies will be the driver over the next several weeks.

Original Trade Description: January 25th

Back in October Hewlett Packard spun off its enterprise server business into Hewlett Packard Enterprise (HPE) and the old Hewlett Packard that sells PCs and printers remained (HPQ). The problem with this spinoff is that the enterprise company is where the profits are. The PC business has been declining for years and that is why HP split the two entities.

Since the spinoff at $14.75 in October the HPQ shares have been in decline. They closed at a new low on Monday. I see no reason where HPQ should rally in the near future. PC sales are still expected to decline in 2016 only at a slower pace. There is nothing to produce excitement in the PC company.

In theory we could probably just buy a cheap put and sit on it but HPQ has earnings on February 24th. I expect those earnings to be disappointing. However, you never know if they will pull a rabbit out of the hat and announce something that powers the stock higher. This is why I am recommending a strangle rather than just a straight put play.

HPQ shares closed at $9.49 on Monday and halfway between the $9 put and $10 call. I am recommending the April strangle so we can benefit from the long-term trend if HPQ continues to decline. If earnings disappoint we could see HPQ at $5 by then.

Earnings are February 24th.

Position 1/26/16:

Long April $9 put @ 41 cents, no stop loss.
Long April $10 call @ 50 cents, no stop loss.



JUNO - Juno Therapeutics

Juno is a biopharmaceutical company that develops cell based cancer immunotherapies. Full Company Description

Comments:

Juno barely posted a gain on Friday in a red hot market filled with short covering. Apparently the JUNO shorts were not interested in covering with expectations of lower lows ahead.

Original Trade Description: January 22nd

Juno has been very active in buying up its competitors. On January 11th the company announced the acquisition of AbVitro for $125 million. That is their third acquisition in 12 months. However, Illumina (ILMN), ten times larger than Juno, is also on the same track and announced a similar acquisition on the same day.

Juno claims there is more than enough room in the space for both Juno, Illumina and Celgene (CELG) another competitor in the space. Apparently investors are not convinced. Shares of Juno have been in decline since early December and they hit a post IPO low last week. The rebound was lackluster and in a good market on Friday, they only gained 8 cents.

Update 1/26/16: The National Institute of Health (NIH) researchers published a study showing off-the-shelf T-cell therapy could induce remissions in patients with advanced blood cancers. This new "allogenic" T-cell therapy study represents a competitive threat to therapies from Juno, Kite and Novartis.

Earnings are March 17th.

Position 1/26/16:

Long March $27.50 put @ $1.75, see portfolio graphic for stop loss.



VXX - iPath S&P 500 VIX Futures ETN - ETF Description

Comments:

Finally broke below support and approaching our strike price at $23. Eventually the volatility will ease. It is only a matter of time.

Original Trade Description: January 16th

At the risk of stating the obvious, the last two weeks in stocks have been brutal. Investors have taken a risk-off attitude and sold just about everything. The small cap Russell 2000 index is already down -11% in the first ten trading days of 2016. The NASDAQ composite is off -10%. The S&P 500 has declined -8%.

The New Year has suffered a parade of negative headlines from disappointing economic data both in the U.S. and China. China devaluating its currency. N. Korea claiming to have hydrogen bombs (several times worse than normal nukes). Crude oil crashing into multi-year lows. Plus falling sentiment for corporate earnings, which are expected to be negative two quarters in a row.

No one wanted to be long over the three-day weekend, which helped drive stocks even lower on Friday. The S&P 500 dipped to 15-month lows before paring its losses on Friday. The fact that Friday was also options expiration just added to the volatility.

Stocks normally don't move that fast in a straight line for very long. Markets a very oversold and way overdue for a bounce. The rebound could show up this week. One way to play it is the volatility indices. The VXX follows the iPath S&P 500 VIX Short-Term Futures Index. When investors panic volatility spikes but these are almost always short-term events. You can see on the long-term weekly chart below these spikes always fade.

Tonight we are suggesting put options on the VXX to capture the decline as volatility fades again and it will sooner or later. We are betting on sooner. We want to buy the March $23 puts at the opening bell on Tuesday.

Position 1/19/16:
Long March $23 Put @ $2.41, no stop loss






If you like the trade setups you have been receiving and you are on a free trial then now is the time to subscribe. Don't wait until you miss a newsletter to decide you want to take the plunge.

subscribe now