Option Investor
Newsletter

Daily Newsletter, Saturday, 2/13/2016

Table of Contents

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

Market Wrap

Retest of the Lows

by Keene Little

Click here to email Keene Little
The stock indexes made it back down to their January lows (some with higher, some with lower lows) for what looks like might be a successful retest. The week finished negative (again) but the setup looks good for some bullish follow through in the coming week, which would be typical for opex.

Week's Market Stats

Friday's Market Stats

As you can see in the tables above, Friday finished strong but for the most part it wasn't enough to erase the losses for the week. For the week the banks were weak and the semiconductors were also weaker, both of which are not helpful for the bulls. There's certainly the possibility Friday's bounce will get turned around and the indexes could break lower. But at the moment it's looking like we should get a reprieve from the selling.

For the first six weeks of this year we've seen four of them down. The bounce off the January 20th low gave us two positive weeks but the bounce failed and prices dropped back down to the January lows. If the bulls can follow through on Friday's buying with some more buying in the coming week we'll see some nice bullish divergences against the January 20th lows. The market is clearly oversold and the setup looks good for at least a little larger bounce correction before the bears return.

Part of this past week's volatility was due to Janet Yellen's testimony before Congress and she was grilled a little more sharply than we've seen in the past. Typically softballs are tossed the Fed Chairperson's way so that they're easier to return. But apparently lawmakers, like people in general, are starting to lose faith in the Fed and what they can do. Many are now blaming the Fed's December rate increase for the stock market decline and it's likely it was a catalyst but of course we know the market is all ready for a move before the catalyst arrives. We just never know what the catalyst will be.

In her testimony Yellen started preparing the market for negative interest rates (NIRP), which many European countries already have and Japan has now started. In the race for the bottom in fiat currency devaluations the U.S. will be forced to follow in order to remain competitive with our exports and so as not to import deflation (import prices were down another -0.2% in January, following December's -0.3%). The Fed is talking about the possibility of NIRP, even if they say it's not likely, is a way for them to prepare the market (and the banks since it would hurt their earnings) for the likelihood. It's a move that would drive Treasury yields even lower and that will obviously have a huge negative impact on savers and retirees looking to earn income from their savings. Get ready for it to happen and possibly before the end of this year.

One of the hopes from going nuclear with NIRP is that it will force banks to lend, savers to spend and entice borrowers to borrow more. Companies would borrow more and buy back more stock in hopes of improving their earnings per share and drive stock prices higher. But when Japan announced their implementation of NIRP it generated only a brief rally before dropping nearly -8%. The Nikkei index just closed one of its worst weeks in years. So much for NIRP helping the market's psychology. The media, and Congress, are rightfully beginning to question NIRP and all the other failed policies of the central banks. They are out of ammo but you can bet they're not done trying more of the same failed policies on us.

The only thing that has worked to boost the stock market is liquidity and that comes from QE. I think therefore we can expect QE4 from the Fed before they go NIRP on us. The problem for the Fed, and by extension us taxpayers, is that the Fed is already deep in the hole and essentially insolvent now (especially if they use mark-to-market valuations instead of their make-believe valuations). Adding trillions more to their debt will only significantly weaken the entire financial system. The only one to bail out the Fed is the government but I have to wonder if another bailout would be the final straw for people who are already frustrated and angry with the government and bankers.

But that's something in the future to worry about. As traders we just want to know what's going to happen next week and try to get a piece of the move. I want to kick off the chart review with a look at the RUT's weekly chart but before I do that I want to show a chart I've shown relatively recently to highlight the downside risk over the next few years and then compare that to the RUT's pattern, which suggests we might actually be looking for something more bullish this year before the big bad bear snaps his jaws shut.

The big expanding triangle for the Dow shows the throw-over above the top of the triangle in 2015 and the subsequent decline from there. First thing to note is how small the pullback is so far. All the wringing of hands and gnashing of teeth for such a relatively small decline. If the decline really gets going I can only imagine the angst, especially since the 2007-2009 decline is relatively fresh in everyone's mind. But take note of the expanding triangle because I'm going to show a similar one for the RUT. Following the 2000 high we have an a-b-c-d-e wave count, which is why the 2015 high fits as THE high.

Dow Industrials, INDU, Monthly chart

Now look at the RUT's expanding triangle pattern on its weekly chart. The move down from the June 2015 high is a 3-wave move, as it should be inside a triangle pattern. The bullish interpretation of this pattern suggests we're going to get another rally to a new high this year and back up to the top of the expanding triangle before it then drops back down to the bottom of the triangle, perhaps in 2018. While I don't believe this will play out I think it's important to always try to see how the market could do what I don't expect. The same pattern for the DOW, in a larger-degree pattern, called for another rally leg up to the top of the triangle following the 2009 low. We couldn't know then, just as we can't know now, if a large rally for the RUT will happen but it's a possibility (even if that possibility is not a high probability, imho).

Russell-2000, RUT, Weekly chart

Instead of expecting another rally to a new high for the RUT this year, I think the higher-probability pattern is the bearish one (bold red depiction), which suggests a bounce correction and then a continuation lower. Assuming we'll get the bounce (wave-iv on the chart), maybe into April, we should then get another new low to complete a 5-wave move down from last June. The H&S top points to about 860 for a downside objective, which would be a test of price-level S/R at 868. Since I'm expecting a 4th wave correction, it can't overlap the wave-i low (the September 2015 low near 1079), so if did then I'd turn more bullish.

The daily chart shows what I think are the two higher-probability moves in the next few weeks, both bullish so at a minimum I think we should be looking to play the long side into March. If the RUT breaks below 940 I would turn short-term bearish but until that happens I believe we have some oversold conditions that need some relief. The 5-wave move down from December 2nd, with the 5th wave nearly achieving equality with the 1st wave (at 941 with Thursday's low at 943), gives us a very good setup to play a reversal to correct the 5-wave move down. How the correction will play out is the big question. We could see a quick high bounce up to price-level S/R near 1080 (light-red dashed line), which would also be a 50% retracement of the decline from December, or we could see a slower choppy sideways/up kind of consolidation into April that maybe back-tests the broken uptrend line from March 2009 - October 2011 and retraces 38% of the decline from December (a typical retracement for a 4th wave correction), which is near price-level S/R at 1040. It could get whippy so trade carefully (4th wave corrections are difficult to trade).

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- bullish above 990
- bearish below 940

SPX also has what looks like a completed 5-wave move down from December 2nd and while the larger pattern since last year's highs is subject to different interpretations between the indexes, it's the 5-wave move down into Thursday's low that has me looking for a bounce correction. It's too early to tell if it will be a sharp bounce above 1950 are a flatter correction but the expectation is for the market to continue lower once the bounce correction has finished. I think bullish through the rest of this month (or at least not bearish) is the way to work your trades but again, 4th wave corrections have a tendency to whip traders around. It's the reason I call these corrections "feed your broker" corrections. Traders tend to trade too actively and get stopped out a lot. The first thing the bulls need to accomplish, to confirm the leg down from December 29th has completed, is break the downtrend line from that high, currently near its 20-dma at 1885.

S&P 500, SPX, Daily chart

Key Levels for SPX:
- bullish above 1885
- bearish below 1800

From a shorter-term perspective the bulls have confirmed the leg down from February 1st has completed by breaking out of the down-channel from that high, which it did on Friday. After a little back-test midday it then pushed higher and finished just under price-level S/R at 1867 (its August 2015 low). We now wait to see if that resistance level will result in a pullback Tuesday morning or if instead we'll see it gap up over resistance, in which case look for 1885 next.

S&P 500, SPX, 60-min chart

Thursday's low for the Dow was a little higher than its January 20th low, leaving a slight truncation for its 5th wave in the decline from December 2nd. This assumes the leg down has completed, which still requires of a break of its downtrend line from December 29th, near 16200, to help confirm the completion. I show the possibility for a choppy sideways triangle consolidation into March before heading lower but obviously that's just a guess (it's a common pattern for 4th wave corrections). The other possibility is for a sharper a-b-c bounce into the end of the month before heading back down. As with the prior 4th wave correction (January 20 - February 1), it's nearly impossible to know what form the correction will take, which is all the more reason to trade carefully (or watch) until we see how it's setting up for the next leg down.

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- bullish above 16,200
- bearish below 15,500

The tech indexes are a little different than the other indexes in that their December 2nd highs were slightly higher than their November highs and that makes it possible we're looking at the completion of a 1st wave down from December (with the 5-wave move down into Thursday's truncated low). This calls for a sharper bounce correction in the coming weeks, not a sideways choppy one. This is one of the primary reasons why I think playing the long side could work nicely. Rather than get chopped to pieces in a sideways consolidation we could have a couple of very nice opportunities to trade long. It's still only a trade because the correction should be followed by a sharp decline (as a 3rd wave down) but at least for now I'd look to buy the dips rather than sell the rips. We could see NDX retrace at least 50% of its decline, which would have it back up to 4321, and potentially back up to its 200-dma and 62% retracement at 4420. It won't be a straight-up trade but that's a 400-point potential into March. The first thing the bulls need to do is break out of the down-channel, the top of which is currently near 4100. It might not stay above 4100 but it would be the first confirmation that the leg down from December 2nd has completed.

Nasdaq-100, NDX, Daily chart

Key Levels for NDX:
- bullish above 4100
- bearish below 3787

Treasury bonds rallied strong this past week but then sold off hard after gapping up Thursday morning. Yields of course did the opposite and as you can see on the TNX weekly chart below, the intraweek reversal left a bullish hammer at support (its May 2013 and January 2015 lows near 1.65%) and it almost it almost recovered its broken uptrend line from July 2012 - January 2015, near Friday's high at 1.76%. The descending triangle idea is still valid although weakened with this week's break below the January 2015 low. Instead of a bounce back up to the top of the triangle, which is the downtrend line from June 2007 - December 2013, currently near 2.28%, we might see only a sideways choppy consolidation before dropping back below 1.65% and then lower. But at least at the moment the bullish weekly candlestick suggests this week's low should hold for a while and rising yields would mean selling in bonds and that money should rotate into stocks.

10-year Yield, TNX, Weekly chart

The banking index is showing how well it trades technically. Thursday's low at 55.99 achieved the 162% projection for the 2nd leg of the 3-wave move down from July 2015 at exactly 55.99 and the sharp reversal back up off its uptrend line from March 2009 - October 2011 looks bullish. Friday's big white candle also has back above the 38% retracement of its 2007-2009 decline, at 57.25, and its April 2010 high at 58.83. There was a lot of support at 55.99-58.83 and all three support levels were broken/tested on Thursday but recovered with Friday's rally. It's the weekly close that matters. It looks like we should see only a correction to the decline before another leg down for perhaps just a minor new low but we'll have to see what develops in the next week. In the meantime it looks more bullish than bearish.

KBW Bank index, BKX, Daily chart

Since the low on January 20th for the TRAN it has been in a very choppy bounce back up and it's been struggling with its broken uptrend line from March 2009 - October 2011 for the past two weeks. It's likely to make it higher if the broader market can put a higher bounce together but the pattern for its bounce looks like a correction to the decline that could fail at any time. Maybe it will make it up to its 50-dma, which will be near 7180 on Tuesday. It would look at least short-term bullish above 7200, probably with a rally with the broader market.

Transportation Index, TRAN, Daily chart

On Tuesday the US$ dropped below its uptrend line from August-October 2015 and the bottom of a parallel down-channel from December. Friday's bounce took it back up to the bottom of the down-channel and it then pulled back, leaving it looking more bearish than bullish at the moment. There's a downside price projection at 94.46 where the 2nd leg of its decline from December would be 162% of the 1st leg down and that could set up another bounce within its large sideways consolidation pattern that I've been showing on its weekly chart. Because it's a corrective pattern it's hard to know what the next move will be but for now I see it continuing to trade inside a 94-100 price range before breaking out to the upside later this year.

U.S. Dollar contract, DX, Daily chart

What else can you say about gold this week other than "Wow!" Can you say parabolic? The rounding bottom off the December low led to a huge spike up in the past two weeks (up nearly $150) and it's either in an honest-to-goodness breakout to the upside or it's a parabolic spike that will end in tears for gold bulls. What happens following the spike will provide some clues -- a stair-step move higher over the next couple of weeks would have it looking more bullish whereas a spike back down will have it looking like just another overzealous spike in gold prices with no follow through. Thursday's high tagged the top of a parallel down-channel for price action since its 2013 low and from a longer-term pattern perspective it's not hard for me to argue the need for another leg down to the bottom of the channel and price-level support near 1000 by this summer. But if it can rally above Thursday's high near 1264 and hold above the top of the down-channel on a back-test it should then be able to test 1285, which is the 38% retracement of its 2001-2011 rally and its January 2015 high near 1308.

Gold continuous contract, GC, Weekly chart

Interestingly, Mark Cuban was on CNBC on Thursday and said he has bought "a lot" of call options in gold. Apparently that caused a rush into GLD call options on Thursday, which outnumbered put options 4-to-1. One trader bought 20,000 GLD 140 call options for $0.30 each, betting $600,000 that GLD will be above $140.30 by March expiration. Thursday's high might have been partly a result of all these traders running into bullish plays and now the buying might have been exhausted. GLD's weekly chart looks just like the gold contract chart above and it stopped right at the top of its parallel down-channel. I hope the trader who bought the 140 calls was a way to create a bear call spread instead of making a bullish directional play. That long call position is down -$140,000 as of Friday. But hey, I guess a rally to 1400 for gold in the next 5 weeks is a possibility.

Silver spiked up with gold and it too slammed into resistance and stopped. We now wait to see if it can stair-step higher or quickly retrace its parabolic spike. Thursday's high was at its downtrend line from May 2011 - December 2012 and a back-test of its broken uptrend line from August-October 2015. A break above these two lines, with a rally above 16.15, would be more bullish but at the moment I have to wonder if silver's rally is the real deal or just an overreaction with gold. Silver is associated more with industrial uses and we know industry is slowing. But price is king and we now wait to see what the next move will be.

Silver continuous contract, SI, Daily chart

On Friday oil got a nice bounce and it continues to track closely with the stock market. The tight relationship between the two will disconnect at some point but for now they seem to be connected at the hip. I see the potential for oil to continue lower to the bottom of a descending wedge, near 24, but with the stock market looking like it's ready for a larger bounce there's a good chance oil will also. Thursday's low was a good test of the January 20th low with lots of bullish divergence at the moment. An a-b-c bounce off the January low could see the c-wave head up to price-level S/R near 38 and its downtrend line from June-October 2015, currently near 40. So at the moment I see downside potential to about 24 and upside potential to 38-40.

Oil continuous contract, CL, Daily chart

Last week was relatively quiet as far as economic reports and the coming week will be a little busier. Monday is closed so the first reports will be Tuesday and the Empire Manufacturing index is expected to be "less bad" with a jump up to -9.9 from January's -19.4. Wednesday will be a busy day with PPI numbers, housing starts/permits (no big changes expected) and industrial production, which is also expected to improve slightly from December. The FOMC minutes will be out Wednesday afternoon. The Philly Fed on Thursday and CPI numbers on Friday will finish the week. With the Fed in data-dependent mode and market expectations that the Fed has been put on hold by the market, these numbers will be evaluated carefully to try to figure out how the Fed might react.

Economic reports

Conclusion

The week finished down again (4th down week in the 6 weeks of the new year) but the big recovery off Thursday's lows, which were a test of the January 20th lows, left a weekly bullish hammer candlestick at support and bullish divergence on the daily charts. It looks like a good setup for a rally in the coming week, which of course is opex and we might get the typically bullish opex. Thursday's decline fits as the head-fake move in front of opex (pull the market down, get the shorts in and longs out and then flip it around to spark short covering and longs wanting back in). This has been a well-engineered move in the past and has made the big trading houses a lot of money by selling puts and buying calls on the pull-down.

Assuming we'll get a bounce in the coming week it's not clear how it will develop. The larger pattern suggests we should be looking for just a bounce correction, which could last several weeks and through March, and then head lower again. But whether the bounce will be a sideways multi-week choppy consolidation or instead a sharp short-lived a-b-c bounce can't be known yet. Like the previous bounce off the January 20th low, we have to let it develop in order to see how it might play out and then look for a setup to play the next leg down. But for now, look to buy dips since I think that will be the direction of least resistance. Just keep your trades short term so you avoid the whipsaws.

I hope you have a good 3-day weekend away and recharge your batteries. Good luck in the coming week and I'll be back with you next Wednesday.

Keene H. Little, CMT

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


Index Wrap

Oil and Stock Market Look Ready for Rebound

by Keene Little

Click here to email Keene Little
Oil bounced sharply on Friday (+10.7%) and with the stock market still locked at the hip to oil it too rallied (about +2%) and the recovery has it looking like we should get some bullish follow through in the coming week(s).

Week's Indexes


Review of Major Stock Indexes

The table above shows the week finished in the red for most of the indexes, the 4th week out of 6 in the new year, but it could have been a lot worse. There was a strong recovery off Thursday's lows and it cut the losses for the week from about -70 for SPX to -15. That left a bullish hammer candlestick for the week following a test of the January low. It looks good for the bulls in the coming week so hopefully they won't fumble the ball.

The biggest thing to note on the charts is the retest of the January lows. Some indexes dropped a little lower (the techs) while some made higher lows (the Dow) but by Friday's close they all were above their January 20th lows. The test of the lows is also showing bullish divergence on the momentum oscillators, showing the selling into this week's lows was on weaker momentum and that's a bullish sign for the coming week(s).

Some indexes obviously look stronger than others, especially when relating recent lows to previous lows in 2014 and 2015. For example, the Dow has not broken its August 2015 low yet while SPX has. But at its August low the Dow had broken below its October 2014 low and made it down to its February 2014 low. At its August 2015 low SPX was still above its October 2014 low, but that low was tested in January and again this week. It has not yet made it down to its February 2014 low. NDX has a series of higher lows since its February 2014 low. The Nasdaq was looking the same as NDX until this week when it broke below its January low and its August 2015 low but recovered above both into Friday's close.

The RUT is the weak index and has been making lower lows since February 2014. In fact its January low and this past week's low were both tests of a trend line along the lows from February 2014 and its weekly bullish hammer candlestick at this trend line suggests we could get a bigger bounce of trendline support.

The big argument among analysts is whether the large pullback from 2015 highs is the start of something more bearish or instead just a correction within the longer-term bull market. One could make an argument for either case based on fundamentals and technical and the only way we'll know the answer is in hindsight (still working on my hindsight trading model). But the price pattern will provide clues in the weeks ahead and I'll discuss what to watch for.


A Look At the Charts


Fear & Greed index, chart courtesy CNN Money

The first chart I want to show is the Fear & Greed index, which you can find at CNN Money (Fear&Greed), which describes the 7 measurements they use to measure this sentiment gauge. You can see how much fear spiked into the August 2015 low and then the January low. This week's low is showing bullish divergence against the January low and while that could indicate complacency (bearish) I think it's a bullish sign that traders have done the selling the plan to do for now. Whenever the fear index reaches the horizontal red line that I added (near 15) it's a sign for the bears to be cautious since the market is likely oversold and too much fear is bullish from a contrarian perspective.


5-day Average Put/Call Ratio, chart courtesy CNN Money

One of the measures used in the Fear & Greed index is the put/call ratio, shown below (the 5-day moving average of it). As you can see, when the ratio gets up to 1.0 it indicates a lot of put buying, as happened at the August 2015 low and January low. The small pullback this week shows traders are starting to make bullish bets and that's probably a bullish sign coming off the 1.0 reading earlier in the week. You can also see how the late-December low, at 0.7, was a good indication that traders were feeling too bullish and from a contrarian perspective that set up the January decline. The low around 0.76 on February 1st wasn't helpful in seeing the decline that followed into this week's low so it's not always helpful as a timing tool but it does give you sense of when things have become extreme.


Dow Industrials, INDU, Daily chart

On Thursday, the Dow dropped below price-level S/R at 15666 (its August 2015 closing low) but recovered almost back up to the line by the close. Friday's rally had it closing only about 26 points shy of its price-level S/R at 16K. The retest of the January 20th low shows bullish divergence on the oscillators and another rally day will have MACD crossing back up. If it can get above the zero line it will be more bullish. A rally above 16K would also be more bullish, especially if it can break its downtrend line from December 29th, near last Wednesday's high at 16201. If we see the Dow chop sideways for several weeks it will point down sooner rather than later. Bullish above 16200, bearish below 15500.

Key Levels for INDU:
-- bullish above 16,200
-- bearish below 15,500


S&P 500, SPX, Daily chart

For a second time SPX tested its October 2014 low at 1820 and Friday's rally has it looking like support will hold. Now if the bulls can break above its 20-dma and downtrend line from December 29th, both near 1885, we'd have a stronger indication that we're looking for at least a larger bounce. But like the Dow, if price chops sideways into the end of the month I would get more defensive and look for another leg down next month. For now it would be bullish above 1885 but bearish below 1800 (although its uptrend line from March 2009 - October 2011, currently near 1761, would likely be strong support).

Key Levels for SPX:
-- bullish above 1885
-- bearish below 1800


S&P 100, OEX, Daily chart

Thursday's low for OEX was another test of support near 810 (with a low at 811.61), which is its October 2014 low. It was tested in August 2015 and then again in January and again on Thursday. The more support gets beat on the weaker it gets as it consumes buyers (real buying as well as short covering). You can visualize a H&S top between the left shoulder following the August 2015 low and the right shoulder following the January low. The downside objective for this pattern would be about 675, which would be a test of the September 2012 high and close to a 62% retracement of the 2011-2015 rally. That's just something to think about if OEX breaks down, especially if it drops below its uptrend line from March 2009 - October 2011, currently near 780. The bulls need to see OEX above resistance at its downtrend line from December 29th and its 20-dma, both near 843, and then get back above its broken uptrend line from October 2011 - August 2015, near 850. The pattern would turn much more bullish above 872.

Key Levels for OEX:
-- bullish above 872
-- bearish below 810


Nasdaq Composite, COMPQ, Daily chart

Last Monday the Nasdaq gapped down to and closed on its uptrend line from October 2011 - November 2012, which is where it chopped around all week and then closed above on Friday. It's the weekly close that counts and the bulls saved the Nasdaq. It might continue to struggle between this uptrend line and the broken uptrend line from October 2014 - August 2015, near 4395, which is where its downtrend line from December 29th is also located. So a break above 4395 would be a bullish sign but continue to stay aware of the potential for a whippy bounce pattern. Further upside looks like the higher-probability direction from here but it might not be smooth ride for traders playing the long side.

Key Levels for COMPQ:
-- bullish above 4395
-- bearish below 4099


Nasdaq-100, NDX, Daily chart

The NDX pattern looks very similar to the Nasdaq, especially with Friday's close back above its uptrend line from March 2009 - August 2015, near its January low near 3993. The next hurdle for bulls is its September low at 4053 and then its downtrend line from December 29th and 20-dma, both nearing 4125. If the bears step back in we could see NDX drop down to its August 2015 low, at 3787, but at this point I don't see it going lower than that before giving us a larger bounce correction (in time if not price).

Key Levels for NDX:
-- bullish above 4125
-- bearish below 3787


Russell-2000, RUT, Daily chart

At its January low the RUT had tested its trend line along the lows from February-October 2014 and it did so again this past week. The line was broken intraweek but it held on a closing basis with Friday's rally. The rally stopped at the top of its parallel down-channel for the decline from December, near 972. A downtrend line from December 29th is slightly higher, near 984, above which the bulls would be in stronger shape. Other than its declining 20-dma, currently near 997, it could make it back up to its broken uptrend line form March 2009 - October 2011, near 1043, for a 38% retracement of its December-February decline. As long as the RUT stays above 940 we should see a multi-week bounce/correction. There is one longer-term bullish pattern that is on my radar screen so if the bounce pattern becomes sharp to the upside it would be all the more reason to look to buy dips instead of selling rips.

Key Levels for RUT:
-- bullish above 984
-- bearish below 940


SPDR S&P 500 Trust, SPY, Daily chart

Now we bring in some volume studies and I've added the Volume At Price (VAP) indicator, which shows how much volume was traded at specific prices. The idea here is that the more volume at a particular price the more likely there is to be support/resistance there and the potential for choppy price action as traders battle it out for control. In price areas where there is little volume there's not likely going to be much in the way of support or resistance (not as many traders traded in that area and therefore might not have a dog in that hunt).

The SPY chart below shows why there should be a little bit of concern about the upside potential. The trading volume on Friday was light and this past week was spent below 187 where there is little volume at this price area. Friday's close stopped at resistance near 187 and the combination of resistance with volume says the bulls better get up and go on Monday to avoid sinking further. Above 187 would have the bulls in better position, especially if they can rally above the 20-dma (midline of the Bollinger Band), near 188, and then the upside potential is to 194.50 where it would hit price-level S/R and the top of its BB. As for the MFI, the last time it stalled at 50 (the red horizontal line for this indicator) was at the end of December, which led to the January decline. MFI is again stalled at 50 so it's another reason the bulls need to keep the buying going this coming week.


Powershares QQQ Trust, QQQ, Daily chart

The QQQ presents the same picture as SPY but if anything it looks weaker. The bullish divergence on the Williams %R is bullish but the lower volume on Friday and price below 99.50, where there is significantly less VAP, does not yet support the bulls. Monday needs to see stronger volume in the buying that gets the QQQ up above 99.50. Then the bulls can worry about the declining 20-dma, now at 100.58, and then try to get to the top of the BB, currently at 15.85. It looks vulnerable here to more downside so let's see what the bulls can put together.


Summary

Assuming we'll get a bounce in the coming week it's not clear how it will develop. The larger pattern suggests we should be looking for just a bounce correction, which could last several weeks and through March, and then head lower again. But whether the bounce will be a sideways multi-week choppy consolidation or instead a sharp short-lived a-b-c bounce can't be known yet. When I look at the SPY and QQQ charts I don't feel quite as bullish as I do when I look at the other charts. Volume is the pressure behind a move and obviously bulls want to see some more pressure behind the buying. This could simply be an indication that we're going to chop around near the lows but for now look to buy dips since I think that will be the direction of least resistance. Just keep your trades short term so you avoid the whipsaws.

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

A Shift In The Wind

by Thomas Hughes

Click here to email Thomas Hughes

Editors Note:

It's amazing how one day and few bits of good news can cause a shift in the wind.

Well, it looks like the bounce we've all been waiting for has started. Friday's market action started off strong, moved higher from support, moved higher all day and closed at the high of the day. Why? Because we got some good news.

Starting off, GDP in the Eurozone came in better than expected. This, along with a confirmation that DeutcheBank would indeed be buying back up to $5.4 billion worth of its bonds helped to send EU banks and the entire EU market place up by 2.5% with many of the EU banks seeing double digit gains to wipe out the previous days losses.

Oil prices also played a part. The rumor which hit the market on Thursday, that the UAE and OPEC were ready to cut production, turned out to be another in a long line of iffy statements to that affect but did not phase buyers. Oil prices surged more than 11%.

Data in the US also played a role. Retail sales were better than expected and, along with revisions, show mounting improvement in the sector.

Whether or not the market is at a bottom, or that oil has bottomed, is still yet to be seen but like it or not the overall picture is beginning to brighten.


NEW DIRECTIONAL CALL PLAYS


Royal Gold - RGLD
Company Description

Gold just had its best week in over four years. As of the Friday settlement prices have risen nearly 15% from their lows set during the last fiscal quarter. In the first 6 weeks of this year alone spot prices have averaged near $1150, higher than the $1105 average price for the 4th quarter of 2015. Looking back at the entire past year, Friday's close is the highest price paid for gold since the first two weeks of 2015. All reasons to expect improved earnings among the gold miners. Now, factor in the low low price of fuel and the possibilities for earnings improvements only gets better.

Royal Gold, Inc. is engaged in the acquisition and management of precious metals royalties. They also seek to acquire existing royalties and to finance projects that are in or near production in exchange for royalty interests. Through subsidiaries they also explore and develop properties thought to contain precious metals in order to sell them to existing mining operations in return for royalty payments.

Why We Like Them

Even without the massive surge in gold prices Royal Gold is delivering results. The company has spent the past few quarters prior to the most recently reported ( Fiscal Q2 reported on 2/3/2016) investing heavily in new and current projects. This investment has begun to pay off in spades and is going to be supercharged by higher realized sales prices for the underlying commodity.

On an EPS basis RGLD missed by a penny, primarily due to the low prices of gold realized in the 4th quarter (the low for gold in the period was $1045 with an average reported sales price of $1094). Despite the low prices in gold revenues were much better than expected, 15% better, driven on increased production. Fourth quarter EPS also reversed a loss experienced in the comparable quarter of the previous year. Revenue was a company record, up 60% year over year. On a cash flow basis available free cash improved by 75% and all on the back of a 74% increase in gold volumes.

The end result is a company with a much stronger balance sheet, strong production and a positive forward impact related to higher gold prices. Looking at the current report one of the things that stands out to me is the 27,500 ounces of gold being held in reserve. Based on the 4th quarter average realized price this is worth about $30.085 million dollars. Factoring in the Friday price brings this total up to near $34 million, a 10% increase in value simply due to the price of gold.

From the RGLD earnings report;

"Increased production from Mount Milligan and contributions from our recently acquired streams at Pueblo Viejo, Andacollo, Wassa and Prestea drove our record performance in the second quarter as expected," says Tony Jensen, President and CEO. "Impressive volume growth at these properties and stability within the rest of the portfolio are yielding solid financial results and generating strong free cash flow."

Looking forward there are a couple of things I think we can expect from this sector and company. For one, upgrades in the sector. Ever gold miner will benefit from higher prices, all will increase cash flow and all will be better positioned for future gains. Another is upgrades specifically for this company driven by the strong performance delivered in the last quarter. Additionally, stronger cash flow and improved balance sheet could lead easily lead to stock buy backs, special dividends and increased dividends in upcoming quarters.

Because this play is based on rising gold prices as much as it is on the performance of the company we need to be ready for some volatility. That being said, unless gold prices fall back below $1100 per ounce this company stands to do very well in terms of cash flow and cash available to share holders.

Central bank activity is the real risk here. If the FOMC continues to raise rates and strengthen the dollar gold could fall back to $1100 or lower. The mitigating factor is that EU GDP came in much stronger than expected last week and is not supportive of additional QE from the ECB. Without ECB QE, and with diminished expectations for aggressive FOMC rate hiking policy between the two banks is no longer diverging as it was in the 4th quarter of last year and should help keep dollar values low, if not moving lower.

Our play, buy the April $42.50 call with a trigger price of $43.50.


NEW DIRECTIONAL PUT PLAYS


No New Bearish Plays


In Play Updates and Reviews

Dudley Calms Market

by Thomas Hughes

Click here to email Thomas Hughes

Editors Note:

FOMC member Dudley says negative rates should not be part of the conversation.

The FOMC's Dudley made some comments on Friday that helped to soothe market worries. According to him negative interest rates should not be part of the conversation and the US economy has positive momentum.

His comments alone may not have been the spark to drive the market higher but they were a big help. Other positives occurring on Friday include an 11% rebound in oil prices, better than expected retail sales and better than expected EU GDP.

In the past, good news only seemed to fuel fear of rate hikes and Fed rate hikes to derail the economy. This week good news was good news again.



Current Portfolio




Current Position Changes


Royal Gold - GLD

New Play, Trigger Price $43.50


Cisco Systems - CSCO

Entry Triggered , Cheap Option, No Stop Set


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.



BULLISH Play Updates


FL - Foot Locker - Company Description

Comments:

Strong retail sales lifted the entire retail sector. Footlocker gained nearly 5%, no change at this time.

Original Trade Description: February 3rd.

Foot Locker is a specialty athletic retailer with more than 3,400 stores in 23 countries and it a leading provider of athletic shoes. February is kickoff month for Foot Locker and they run a series of new ads on TV ahead of the March Madness.

This year the ads will feature comedian Kevin Hart in both Foot Locker and Kids Foot Locker promotions. In Q3 same store sales rose +8% and retailers for sports apparel reported a good holiday season. Foot Locker reports earnings on March 4th.

Nike and UnderArmour already reported strong earnings. UnderArmour reported a record quarter claiming accelerating sales of athletic footwear were growing market share and profitability. Nike reported earnings that increased 21.6% at 90 cents that were 5.1% above consensus. That was the 14th consecutive quarter that Nike has beaten estimates.

The country is currently undergoing a "social fitness" phenomenon with sales of sports watches and fitness training products exploding. Millennials, those born between 1980-2000, have changed the landscape of retail. They now represent 25% of the population. Millennials are far more health conscious than boomers and tend to try lots of different activities unlike boomers that stuck to 1 or 2 sports. Boomers played golf or tennis. Millennials are cyclists, runners, basketball players and any number of other active sports. They are not golfers. Each of these sports requires different shoes. This is where Foot Locker shines in providing a wide range of affordable shoes and athletic apparel.

Foot Locker should have a good quarter when they release earnings next month. With the Foot Locker commercials in February plus the Super Bowl and the build up to March Madness, investors will think of Foot Locker and shares should rise.

With a FL trade at $64.75:

Buy March $70 call, currently $2.65, initial stop loss $66.45


IYT - Dow Transports ETF - Company Description

Comments:

The transports continue to exhibit upward pressure and may be about to break above January resistance levels. No change at this time.

Original Trade Description: February 8th

The Dow Transports typically lead the Dow industrials. The transports have been weak because of the slowdown in the manufacturing sector, competition in the airline sector and slowing rail traffic due to the weak shipments of coal and oil field equipment.

For some reason the transports quit declining about three weeks ago about the time oil prices appeared to have bottomed. Now with analysts extending their estimates for low oil prices into 2017 the transports are starting to rise again. Summer is a very busy time for airlines and with low oil prices, their profits should be much stronger even with the added competition.

The transports are very oversold. In Monday's market drop the IYT shares barely moved and ended the day down -38 cents. If we are looking at a potential rebound in the market the transports could lead because of their severely oversold position. The individual stocks have been crushed since early December. The Dow Transports declined -31% off their highs to the January lows.

This is a play on a rebound in the transportation sector. While I admit the fundamentals are still weak the IYT has refused to dip below support for three weeks and set a new high for 2016 last Thursday. This relative strength in a very negative market suggests investors are making their bets there is a rally in the future.

Buy March $130 call, currently $2.15, initial stop loss $118.75


RGLD - Royal Gold Company Description

Comments:

This is a new play, not yet triggered.

Original Trade Description: February 5th

Gold just had its best week in over four years. As of the Friday settlement prices have risen nearly 15% from their lows set during the last fiscal quarter. In the first 6 weeks of this year alone spot prices have averaged near $1150, higher than the $1105 average price for the 4th quarter of 2015. Looking back at the entire past year, Friday's close is the highest price paid for gold since the first two weeks of 2015. All reasons to expect improved earnings among the gold miners. Now, factor in the low low price of fuel and the possibilities for earnings improvements only gets better.

Royal Gold, Inc. is engaged in the acquisition and management of precious metals royalties. They also seek to acquire existing royalties and to finance projects that are in or near production in exchange for royalty interests. Through subsidiaries they also explore and develop properties thought to contain precious metals in order to sell them to existing mining operations in return for royalty payments.

Why We Like Them

Even without the massive surge in gold prices Royal Gold is delivering results. The company has spent the past few quarters prior to the most recently reported ( Fiscal Q2 reported on 2/3/2016) investing heavily in new and current projects. This investment has begun to pay off in spades and is going to be supercharged by higher realized sales prices for the underlying commodity.

On an EPS basis RGLD missed by a penny, primarily due to the low prices of gold realized in the 4th quarter (the low for gold in the period was $1045 with an average reported sales price of $1094). Despite the low prices in gold revenues were much better than expected, 15% better, driven on increased production. Fourth quarter EPS also reversed a loss experienced in the comparable quarter of the previous year. Revenue was a company record, up 60% year over year. On a cash flow basis available free cash improved by 75% and all on the back of a 74% increase in gold volumes.

The end result is a company with a much stronger balance sheet, strong production and a positive forward impact related to higher gold prices. Looking at the current report one of the things that stands out to me is the 27,500 ounces of gold being held in reserve. Based on the 4th quarter average realized price this is worth about $30.085 million dollars. Factoring in the Friday price brings this total up to near $34 million, a 10% increase in value simply due to the price of gold.

From the RGLD earnings report;

"Increased production from Mount Milligan and contributions from our recently acquired streams at Pueblo Viejo, Andacollo, Wassa and Prestea drove our record performance in the second quarter as expected," says Tony Jensen, President and CEO. "Impressive volume growth at these properties and stability within the rest of the portfolio are yielding solid financial results and generating strong free cash flow."

Looking forward there are a couple of things I think we can expect from this sector and company. For one, upgrades in the sector. Ever gold miner will benefit from higher prices, all will increase cash flow and all will be better positioned for future gains. Another is upgrades specifically for this company driven by the strong performance delivered in the last quarter. Additionally, stronger cash flow and improved balance sheet could lead easily lead to stock buy backs, special dividends and increased dividends in upcoming quarters.

Because this play is based on rising gold prices as much as it is on the performance of the company we need to be ready for some volatility. That being said, unless gold prices fall back below $1100 per ounce this company stands to do very well in terms of cash flow and cash available to share holders.

Central bank activity is the real risk here. If the FOMC continues to raise rates and strengthen the dollar gold could fall back to $1100 or lower. The mitigating factor is that EU GDP came in much stronger than expected last week and is not supportive of additional QE from the ECB. Without ECB QE, and with diminished expectations for aggressive FOMC rate hiking policy between the two banks is no longer diverging as it was in the 4th quarter of last year and should help keep dollar values low, if not moving lower.

Our play, buy the April $42.50 call with a trigger price of $43.50.


KR - Kroger - Company Description

Comments:

Kroger moved higher on bid talks. The company is looking to buy The Fresh Market, such purchase would vastly increase the companies foot print and forward earings. No changes today.

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.


QQQ - Nasdaq 100 ETF - Company Description

Comments:

The Q's are trying to bounce and moved higher in the Friday session. However, they still are in consolidation and below potential resistance in the $99 to $100 range. No changes at this time.

Original Trade Description: February 8th.

This is purely a rebound play and not based on fundamentals. The major large cap stocks in the Nasdaq 100 have been crushed and the $NDX had declined -411 points at today's lows, down from 4,300 the prior Monday. This is a -9.5% drop and represents a severely oversold market.

I warned in my weekend Option Investor commentary that we we could expect some follow through on Monday as portfolio managers who missed the Friday reaction drop hit the sell button today. I also mentioned the potential for those managers that did raise cash on Friday to come back to today with a calmer mind and start bargain hunting.

The afternoon rebound suggests those bargain hunters appeared and once the smoke clears we could see a major short squeeze.

Buy March $100 call, currently $2.02, stop loss $94.25, just under today's lows.


THO - Thor Industries - Company Description

Comments:

Thor bounced today but more because the entire market bounced than anything else. No news, still waiting on earnings, no changes to position.

Original Trade Description: January 29th, 2016:

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.

Position 2/1/16 after a THO trade at $52.75

Long March $55 call @ $1.15, no stop loss because of the cheap option.


CSCO - Cisco Systems - Company Description

Comments:

The trade on Cisco Systems was triggered Friday in the early morning, option prices $1.05. The stock made a nice move higher in the Friday session with a close above the trigger price of $25. Volume was above average but down from the peak seen on Thursday. Stock price is above a potential resistance line, broken today, where it may consolidate before moving higher. The market will have three to days to think about though so the open on Tuesday could be a good one.

Original Trade Description: February, 11th

Cisco reported after the bell yesterday and did more than please investors. The results, plus forward guidance, an increase to the dividend and an increase to the share buy back plan drove shares higher in today's session. The stock gained nearly 10%, broke above the previous resistance, moved up off the short term moving average after gapping higher and all on 2.35X average daily volume.

Cisco Systems, Inc. supplies data networking products for the Internet. The Company's Internet Protocol-based networking solutions are installed at corporations, public institutions and telecommunication companies worldwide. The Company's solutions transport data, voice, and video within buildings, across campuses, and around the world.

Why We Like It

Cisco reported earnings after the bell and did more than stun the market with its results. In the face of weak global growth and poor earnings results for the broader tech sector this company has been able to grow revenue, grow earnings and all on the back of increased demand.

Quarterly earnings rose to $3.1 billion or $0.62 per share, up 29.1% and 34% respectively from last year in the same period. Revenue rose 2% year over year due to a 2% increase in product revenue and a 3% increase in service revenue. All geographic segments saw growth, led by the Asia/Pacific region with an 11% increase. In terms of business segments product revenue was led by an 11% increase in security revenue, evidence of the ongoing need for business around the globe to bolster their online security. Margins are also on the rise driven by productivity improvement and a 7% decline in GAAP operating expenses.

The board of directors approved an increase to dividend, in line with the companies pledge to return 50% of free cash to investors. The new dividend is $0.26 per share, up $0.05 or 24% from the previous quarter.

The board also approved an increase to the current share repurchase program. The previously approved program totaled near $97 billion of which about $1.9 billion is left. The new addition is for another $15 billion, with no time limitation, making the total available for repurchase $16.9 billion.

The company also reaffirmed guidance for the 3rd quarter of fiscal 2016. Management is expecting earnings of $0.54 to $0.56, bracketing the consensus estimate, on revenue of $12.26 to $12.62 billion. Consensus revenue estimates are only $12.03 billion. High end estimates are closer to $13 billion, leaving plenty of room for Cisco to beat estimates yet again and if they continue to grow their customer base as they did this quarter it is sure to happen. Additionally, with the dollar falling to new lows and the strength shown in the Asia/Pacific region it is likely that current estimates are low.

There has already been one upgrade in the wake of the report and more are sure to come. Jeffries upped their rating to buy from hold. The consensus estimate if for share prices to rise to $31.61 with a high target of $37.00. Simply based on the consensus estimate there is a potential upside of 30%.

Our play, buy the April $25 call with a price trigger of $25 per share. As of today's action these options were going for $0.95 per share. Next earnings is in mid May so this position will be closed before then.



BEARISH Play Updates (Alpha by Symbol)


BABA - Alibaba - Company Description

Comments:

Still consolidating at the lows of the move, no change to position.

Original Trade Description: January 29th.

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.

Position 2/2/16 with a BABA trade at $64.85:

Long March $65 put @ $3.90, see portfolio graphic for stop loss.


BABY - Natus Medical - Company Description

Comments:

BABY is in downtrend and under pressure. The stock opened with a gain, but closed with loss despite strong action in the broad market. No change.

Original Trade Description: February 4th.

Shares of BABY spiked higher on the 27th when they posted a 27% increase in earnings but revenue only rose +6.4% and failed to meet their projections. They guided for $100 million and came close at $99.951 million so rounded up they did hit their target. However, investors sold the stock almost immediately and the stock has continued slowly lower.

There is nothing wrong with the company. They are transitioning away from selling devices and systems as their primary revenue and more to supplies and services as a continuing revenue source. Once you sell a hospital a bunch of devices it will be years before they buy again. By moving into the supplies area they will develop a constant revenue stream as those supplies are consumed.

One of their products is called NicView that allows families and friends to view the babies over the Internet while they are in the neonatal intensive care units. More than 80 hospitals now have that installed.

They guided for Q1 to revenue of $86.5-$97.5 million, down slightly from Q4 and earnings of 34-35 cents. Full year revenue guidance was $445-$455 million and also down from the Q4 run rate. Earnings are good but that slowing revenue is a challenge.

Earnings are April 27th.

I like Natus as a company. I wish their stock was rising so I could play it on the upside. However, shares are struggling to hold over $34. If this level breaks the next support is in the $25 to $28 level.

With the biotech sector very weak and expected to get weaker I am afraid it is going to rub off on Natus and we will see that breakdown.

Position 2/5/16 with a BABY trade at $33.50

Long April $30 put @ $1.15. No stop loss because of the cheap option.


HPQ - Hewlett Packard - Company Description

Comments:

Small bounce today but basically trending lower, No changes at this time.

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.



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

Comments:

Volatility fell, the shooting star looks confirmed. Volatility may remain elevated relative to the past few years but appears to be falling in the near term with a target near $25. No changes yet.

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