Option Investor
Newsletter

Daily Newsletter, Wednesday, 3/9/2016

Table of Contents

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

Market Wrap

Market Waiting for More of Whatever It Takes

by Keene Little

Click here to email Keene Little
The stock market consolidated today as it waits for word from the ECB (pre-market Thursday morning for U.S. markets) and its decision about what to do in its continuing effort to help boost the European economy and stave off deflation (a losing battle so far).

Today's Market Stats

Happy Anniversary! Today marks the 7th year since the March 9, 2009 low, a low that had many predicting at the time that the stock market had much further to fall as bank failures mounted. How far we've come since then! We've had two scary selloffs since last August but the market continues to struggle to hold onto the enormous gains off that low and there remains the possibility that the market will push higher this year and stretch the 7-year bull market into its 8th year. Certainly the central banks are pulling out all the stops in an attempt to keep the economy humming along and in turn keep the stock market afloat. Thursday morning (for the U.S., afternoon for Europe) we'll get to hear the latest plan from the ECB about how they intend to keep the party going.

The pullback from last Friday into Tuesday's low was followed by a consolidation today as the market waits to hear what the ECB is going to do next in their attempt to stimulate the moribund European economy. ZIRP worked so well (cough) that they're moving more and more into NIRP territory with more countries adopting negative interest rates. Many are hoping for less NIRP and more outright bond purchases, especially since NIRP has been hurting stock markets and especially banks. Mario Draghi has already promised to do more by expanding the amount of debt they'll purchase in an effort to free up capital for the banks to lend.

What the central bankers fail to understand is that people and businesses are not clamoring for more loans and therefore making more money available for loans is not the answer. More of the same is not going to help and the only thing it accomplishes is more stealing from savers and passing it along to the bankers. No matter what they try, and many will argue that it's because of central bank policies, deflation continues to gain momentum around the world.

The last global deflationary period was in the 1930s and as hard as central bankers fight it, the problem is not so much monetary as it is structural, as it was back then. There's too much debt and the credit explosion is what is responsible for much of the 7-year stock market rally (instead of it being based more on fundamental reasons). The distortion by central bankers makes the problem worse, not better, and the eventual correction will also be worse.

But a "cleansing" is exactly what our financial system and economy need so that we can get back to a healthier environment for growth. It will be a painful period but anyone who has had to go through painful physical therapy for an injury knows how important it is to ensure you get back to health. Go without the PT and you'll likely suffer ongoing and sometime debilitating symptoms. Our economy and financial system are no different and yet the Fed and other central bankers believe they can cure things with more of the same that caused the problems in the first place. The only way a drug or alcohol addict can free himself of addiction is to go through the pains of withdrawal and then stay disciplined about changing your life. The central banks are deathly afraid of the withdrawal effects.

There were no significant economic reports today (or on Friday) and the market has been left on its own to figure out what it wants to do. It's one reason why the market is reacting to overseas news, such as China's slowdown and tomorrow it will be the ECB decision on what their next move will be to goose their stock market, I mean economy. Mario Draghi has again been promising to do even more of whatever it takes and the market will be disappointed if he doesn't do something creative. The problem is that positive reactions to any action by central governments around the world are having less and less of a positive effect and any positive effect is lasting for a shorter period of time. That means a positive reaction to an ECB announcement tomorrow would likely set up a very good shorting opportunity, which is supported by what I see in the charts.


Dow Industrials, INDU, Weekly chart

The weekly chart of the Dow shows the recovery back above the bottom of its parallel up-channel for the rally from 2009, which it had broken below in January and tried to get back above it in early February. Now it's back up near price-level S/R near 17140 (with this week's high so far at 17099). The bullish pattern calls for a continuation higher to its downtrend line form May-December 2015, currently near 17700, but that would only become a higher probability if it can get above 17140 and then its 50-week MA, currently at 17287.

The bearish wave count is what suggests investors should use this bounce to significantly reduce your exposure to the stock market. A 1st wave down from last May into the August low was followed by a 2nd wave bounce correction into the December high. The decline into February would then be the 1st wave of the 3rd wave down and the bounce into the current high is the second 2nd wave correction. This sets up a very bearish 3rd of a 3rd wave down, which is typically a very powerful move and would make the first two legs down look like child's play. There's no confirmation yet that the bearish wave count is correct but I think it's very important to see the downside risk since it will basically look like a market crash.


Dow Industrials, INDU, Daily chart

From a little shorter-term perspective I see further upside potential for the DOW to reach its downtrend line from December, near 17300, by the end of the week or on Monday. But price-level S/R near 17140 and its 200-dma at 17163 are the resistance levels the bulls will need to power through. A Draghi-induced rally could do it but with an overbought market I think it could be tough resistance, especially the downtrend line from December.

Key Levels for DOW:
- bullish above 17,350
- bearish below 16,500


Dow Industrials, INDU, 60-min chart

The 60-min chart below shows the price consolidation off last Friday's high and it has formed a sideways triangle, which fits well as a 4th wave correction in the leg up from February 24th. This is a bullish continuation pattern which typically points to the last move of the trend (up in this case). The 5th wave projects to 17347, where it would equal 62% of the 1st wave (in the leg up from February 24th), which is a common projection when the 3rd wave is shorter than the 1st wave (as in this case). For an a-b-c bounce pattern off the February 11th low, it would achieve two equal legs up at 17327 and that gives us close correlation in the 17327-17347 area for a high if it rallies the rest of this week. Above 17350 would be more bullish but interestingly, the bearish setup here is for a negative opex week (next week).


S&P 500, SPX, Daily chart

SPX has the same pattern as the Dow and if we get another leg up to complete the a-b-c bounce off the February 11th low I see upside potential to 2020-2027, where it would hit its downtrend line from December (2020), its 200-dma (2021) and price projections similar to those I discussed for the Dow's 60-min chart (2022 and 2027). It would be more bullish above 2028 and especially above its 78.6% retracement of its December-February decline, at 2041, but I strongly suspect it will have trouble getting through the 2020-2027 resistance zone. If it drops immediately from here it would indicate the top is likely already in place.

Key Levels for SPX:
- bullish above 2042
- bearish below 1935


Nasdaq-100, NDX, Daily chart

On March 1st NDX had rallied strong and got back above its dual uptrend lines, from June 2010- November 2012 and March 2009 - August 2015, which are currently near 4250 and 4225, resp. Its 50-dma is currently near 4245 so NDX has plenty of support in the 4225-4250 area and the pullback from last Friday has so far held above this support zone. Bullishly this can be viewed as a back-test of S/R (yesterday's low was near 4259) and as long as that support zone holds there is additional upside potential to the 4420 area where it would retrace 62% of its December-February decline and test its 200-dma. A Mario Draghi rally could make that happen. Because I think the market is vulnerable to at least a deeper pullback before possibly heading higher I think it's risky to bet on the upside even though I see the potential for another leg up.

Key Levels for NDX:
- bullish above 4420
- bearish below 4200


Russell-2000, RUT, Daily chart

The RUT was the stronger index in the rally off the February 11th low but has also now had the strongest reversal off last Friday's high. The intraday pattern looks impulsive to the downside, which has me leaning bearish sooner rather than later. The bounce off yesterday's late-day low looks corrective (overlapping highs and lows, creating a bear flag pattern) as it fights to hold onto its uptrend line from February 11th, which is where it closed today, thanks to a final little spurt back up into today's close. I see a small bounce potential but if it can't get back above price-level S/R near 1080, which it back-tested after breaking on Tuesday, and then drops below Tuesday's low at 1067 it would indicate a top is likely in place. Friday's high stopped only about 3 points from its uptrend line from October 2014 - September 2015, which fits as the neckline of a H&S top that ran from the left shoulder in March 2014. The downside objective from this pattern is 860, although the bearish wave count suggests that would only be a speed bump on the way to lower prices. If the RUT does bounce back up, keep an eye on that neckline near 1097 for a possible high.

Key Levels for RUT:
- bullish above 1150
- bearish below 1040


Volatility index, VIX, Daily chart

With Friday's low for the VIX, at 16.05, it hits horizontal S/R and the bottom of a parallel down-channel for its pullback from its January 20th high. It also achieved two equal legs down at 17.28 and is now back above that level. It has bounced back up to its 200-dma at 18.60 so we'll see if that holds as resistance. The "bullish" setup here is for the 3-wave pullback from January 20th to be followed by another rally, which of course would mean the stock market is selling off.


KBW Bank index, BKX, Daily chart

Banks have been hurt by the central banks' efforts to keep driving rates down and now into negative territory. The central banks are trying to force banks to lend out their money instead of parking it in the Federal Reserve system. But most of the money that's borrowed is for non-productive purposes (e.g., stock buybacks) and the resulting credit boom has created a massive debt problem. It has not helped the economy and that's why the central banks are losing credibility. Most are now seeing the central banks as out of ammo and the ones who are now hurting are savers and the banks themselves.

Compounding the problem for banks is the fact that default rates are rising. Loan covenants are being ignored (there are certain requirements that a company must meet in order to stay healthy enough in the banks' eyes in order to keep their loans safe from default) and the banks are now doing what they did before the last financial collapse, such as making large mortgage loans with very little or no down payment and to people with poor or no credit. No problem -- the taxpayers will just bail them out again.

Corporate default rates are now higher than when Lehman Brothers went bankrupt in 2008. Let that fact sink in a little. Banks are being forced to place more money in reserves to account for the higher default rates, which in turn reduces their earnings. This is happening worldwide. I recently read that Australian banks are being forced to raise their reserves by more than 40%, which is a tall order at a time when they are bringing in less income. But it's an indication how worried their central bank is and they're not alone. In the meantime we're told not to worry because everything is just fine. Their message is the economy is doing fine and to just keep buying stocks and borrow more so you can keep buying cars and houses.

As for the chart pattern for BKX, you can see the a-b-c bounce off its February 11th low, which at the moment is a correction to its decline. It could develop into something more bullish, especially if it's able to rally above resistance near 66.50 (2013-2015 price-level S/R and the 50% retracement of its November-February decline).


U.S. Dollar contract, DX, Weekly chart

The US$ dropped sharply this morning after trying a brief rally in the morning and traders are showing a little bit of the jitters while waiting for Thursday's ECB announcement. I could easily argue a move in either direction so that's not very helpful. The bigger pattern suggests we'll see a continuation of the pullback off its December 2nd high and potentially down to the 93 area by the end of April before bouncing back up to the top of its consolidation range mid-year.


Gold continuous contract, GC, Weekly chart

Gold bugs have turned uber bullish on the metal following its strong rally off the December 2015 low and while they could be right I think they're going to be disappointed once again. Way too many people have turned bullish gold and the amount of money flowing into GLD has been very strong (too strong). At the very least I would expect a scary shakeout of gold bulls before continuing higher. But I think the strong rally from December is the c-wave of an a-b-c bounce correction off the July 2015 low (the strong spike is very common in this type of a-b-c bounce pattern where the b-wave pulls back to a new low before springing up in a c-wave). It could press a little higher, maybe 1285-1300 (last Friday's high was 1280.70) but it's struggling at the top of a parallel down-channel, in place since the August 2013 high, and could turn back down from here. A return to the bottom of the down-channel later this year could see gold down to 2008-2009 price-level S/R near 1000. That would get me interested in a long position on gold for the longer term but before jumping in with the rest of the gold bulls I want to see what form a pullback takes.


Silver continuous contract, SI, Weekly chart

Silver has bounced up to its downtrend line from April 2011 - October 2012, which was tested at its February 11th high and again last Friday. I see the potential for another push slightly higher but I think it's vulnerable to a turn back down. You can see how silver has consolidated in a three descending triangles since 2011 and I think the current one, since the December 2014 low, will result in another leg down. If silver drops down to the trend line along the lows from June 2013 - December 2014 we could see it down to about 10.50-11.00 later this year and then maybe a good opportunity to get into a longer-term long position.


Oil continuous contract, CL, Daily chart

Oil had another nice rally today, finishing up +4.6%. It was a little surprising that the stock market did not have a better day since the two have been pretty well connected at the hip for a while now. I see a little more upside potential for oil if it's to test its downtrend line from June-October 2015, currently near 39. Slightly higher is a price projection at 40.01 where the leg up from February 11th would be 162% of the leg up from January 20th. Currently I'm looking at the 3-wave move up from January as an a-b-c correction within its longer-term decline and that longer-term pattern calls for one more leg down into April-May, which means another leg down to a new low once the bounce completes. This is the same pattern I see for gold and silver and other commodities. Ideally we'll see a drop down to its trend line along the lows from January 2015 - January 2015, which will be near 22.40 by the beginning of May. That would be a very good setup for a longer-term trade on the long side.


Economic reports

The rest of the week is very quiet for economic reports and obviously tomorrow will be more of a reaction to the ECB announcement than anything going on in the U.S.


Conclusion

The market quickly turned from strongly oversold in February to overbought now. While I see additional upside potential I don't think the upside potential is good enough to counter the downside risk. If the bearish wave count for the indexes is correct it's very bearish, which means we could see a very strong decline in the next month or two (stronger than anything we've seen since last year's highs. We might get just a deep pullback before heading back up, to create a larger a-b-c bounce pattern but that can only be guessed right now.

If we get a positive reaction to the ECB announcement on Thursday I'd look at it as a gift to lighten up your exposure to the long side and/or get into some short positions for a directional/hedge position. Opex week will likely be negative if we see another rally leg into Friday. But if we get a negative reaction to the ECB announcement there's a possibility we'll see a sharp decline and then a bounce correction into opex, making it a volatile week. In either case it could make for an interesting week. But first we need to get through Thursday to get a better idea about what next week might be like.

Good luck 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


New Option Plays

Betting on a Breakout

by Jim Brown

Click here to email Jim Brown

Editors Note:

If the ECB does what is expected the U.S. markets could break above recent resistance. However, these pivotal events have a way of coming back to haunt us. Just when everyone thinks the market should rally on good news, the actual event turns into a sell the news headline and the expected rally turns into a loss.

The ECB decision is expected to contain some new stimulus but Mario Draghi has failed to follow through in the past and the markets reacted badly. Given his history there has been some doubt about the ECB decision but his letdown in the past actually suggests he will do something just to keep from disappointing the markets again. However, will that something be enough?

I hesitated adding a position today but there is a decent chance the markets will move higher after the event. If you are not just dying to make a trade I would wait to see what the market impact was before making any trading decisions.

There is always another day to trade if you have money left to invest.


NEW DIRECTIONAL CALL PLAYS


AON - AON Plc -
Company Description

AON offers risk management services, insurance and reinsurance brokerage, human resource consulting and outsourcing services globally with operations in more than 120 countries.

Q4 earnings of $2.09 were up +34%. Revenues of $3.28 billion narrowly missed estimates for $3.33 billion due to the impact of the strong dollar. The dollar reduced earnings by 10 cents. They repurchased 4.2 million shares for $400 million. For the ful lyear free cash flow increased 10% to a record $1.7 billion.

The CEO said in the earnings release "In a year of substantial earnings volatility driven by macroeconomic factors and industry headwinds, investments in our industry leading platform contributed to our strongest rate of organic growth in Risk Solutions since 2007."

Earnings April 29th.

I have wanted to add AON as a position since their post earnings spike in early February but the stock just kept climbing. The last three days provided some consolidation and allowed the call premiums to shrink. I believe AON will continue higher out of this consolidation period to test resistance at $102.50, which would be my exit target.

I want to see a trade at $99.50 to insure we do not enter a new play just as the market rolls over. That is closer to the preferred strike price so the option is going to cost a little more than the price listed below.

With an AON trade at $99.50

Buy April $100 call, currently $1.70, initial stop loss $97.75


NEW DIRECTIONAL PUT PLAYS


No New Bearish Plays




In Play Updates and Reviews

No Conviction, No Direction

by Jim Brown

Click here to email Jim Brown

Editors Note:

The Dow wandered up and down in a 100-point range multiple times to finish nearly flat after being negative just before the close. I warned yesterday that the Dow may not have any conviction on Wednesday after only one day of significant declines after three weeks of gains.

On Tuesday the Dow wandered in a 150 point range and closed near the lows. Today the Dow changed direction 9 times in a 100 point range to close barely in the green thanks to a flurry of buy on close orders ahead of the ECB decision. That was probably shorts covering ahead of the event.

For the last 4 days the Dow has been very choppy and is showing absolutely no conviction in either direction ahead of the ECB decision.

Would you buy this chart?



Current Portfolio




Current Position Changes


DLPH - Delphi Automotive

This position remains unopened until DLPH trades at $72.50.


QSR - Restaurant Brands

This position was opened when QSR traded at $38.15.


QCOM - Qualcomm

This position was stopped out when QCOM traded at $51.80.


Profit Targets

Check the graphic above for any profit stops in green. We need to always be prepared for a profit exit at resistance.


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


AKAM - Akamai Technologies -
Company Description

Comments:

Akamai recovered their losses from Tuesday and continues to base at resistance at $55.50. They are still holding their recent gains.

Original Trade Description: February 26th.

Akamai Technologies provides cloud services for delivering, optimizing and securing online content for business applications on the internet. They are best known for their download delivery solutions for games, videos and audio files.

One of the things Akamai is famous for is archiving web content in centralized data centers geographically located to reduce the time and bandwidth needed to view those files. If you have a website that is visited by millions of viewers, Akamai can continuously monitor that website for changes and then replicate those changes in multiple locations so that viewers near those locations experience fast load times. For instance, a company in Kansas may have a high volume website viewed by people around the world. Akamai can replicate that website in cloud data centers in Los Angeles, New York, Miami, Dallas, London, etc, so a viewer close to one of those locations can get an immediate response time rather than having to pull the content from Kansas where bandwidth and server limitations could slow the response. If you have a million viewers a day all hitting the Kansas server from all over the world the lag time is going to be terrible.

Akamai also offers security solutions for web-hosted content thereby reducing infrastructure costs and increasing productivity.

Akamai reported Q4 earnings of 72 cents that easily beat estimates for 62 cents. Revenue of $579 million also beat estimates for $567 million. They announced a $1 billion buyback of 12.5% of their outstanding shares. CEO Thom Leighton said he was purchasing $10 million personally. The company guided to Q1 earnings of 61-64 cents and analysts were expecting 62 cents. Revenue is expected to rise +8%.

Performance and security revenues rose +16.4% to $286 million as demand for the cloud security products increased. Service and support revenues rose +17.8% to $46 million. Cash flow from operations was $218 million or 38% of revenue. Cash at the end of the quarter was $1.5 billion.

Akamai shares rallied 17% after the earnings on February 10th and reversed a four-month decline. Share barely consolidated after the spike and are continuing higher. Shares inched over resistance at $54.85 on Friday and could be poised to make a new leg higher.

Earnings are April 26th.

I am recommending an entry if AKAM traded at $55.75 and just over the Friday high of $55.55. Shares appear to be consolidating that post earnings run and the intraday ranges have been shrinking, which suggests the buyers are gaining ground.

Position 3/2/16 after an AKAM trade at $55.75

Long April $57.50 call @ $1.63, See portfolio graphic for stop loss.


AOS - AO Smith - Company Description

Comments:

AOS spiked to $73.35 this morning but rolled over to close at the lows for the day. This is not a good sign and suggests it may be about ready to roll over. The Dow was weak this afternoon and that caused a lot of stocks to give back early day gains. The stop loss is $71.50 and only $1 below the close today.

Target $77.65 for an exit.

Original Trade Description: February 18th.

A.O. Smith manufacturers water heaters and boilers for distribution around the world. They also sell water treatment systems that are in high demand in emerging market economies.

They reported earnings last week of 90 cents that beat estimates for 85 cents. Revenue rose +2% to $639.4 million but missed estimates because of weakness in the housing sector in the USA. North American sales declined -3.9% to $413.7 million.

However, operating earnings rose +37.2% to $92.2 million because of higher pricing, higher overall demand and lower steel costs. Overall segment revenue of $1.7 billion rose +5%. This was due to higher commercial demand for boilers.

Sales in the rest of the world rose +14% to $232 million. That was powered by a 15% increase inwater heater demand, water treatment and air purification products in China. That is definitely a country that needs water treatment and air purification.

Very few companies are successful in selling to China but AO Smith is one of them.

The company bought back 329,000 shares in Q4 leaving 2.59 million to buy under the current buyback program. The company had $324 million in cash at the end of the quarter.

They guided for 2016 to earnings of $3.40-$3.55, which would be a 10% growth rate in earnings. They kept the 15% growth rate target for China in 2016.

Earnings are April 29th.

The stock bottomed on the January 19th market crash and had been moving steadily higher. The market took it lower again to retest that bottom on February 9th. Resistance is currently $70 followed by $79 from the December highs. I am recommending we enter a long call position with a trade at $70.45.

Position 2/23/16 with an AOS trade at $70.45

Long April $75 call @ $1.88. See portfolio graphic for stop loss.


CAB - Cabellas - Company Description

Comments:

Cabelas is still holding its rebound gains but faded at the close along with the Dow. Support is $47.50 and I lowered the stop loss to $46.85 just to give it a chance to touch support without stopping us out.

Original Trade Description: February 17th.

Cabelas is a specialty retailer and direct marketer of hunting, fishing, campiny and related outdoor merchandise. They operate more than 77 retail stores and a large e-commerce website along with direct mail catalogs. They also have a very profitable financial services segment offering a Cabelas Club Visa credit card.

The company has expanded profitability by moving most of its merchandise to its private label brand. Instead of being North Face, Coleman, Redwing, etc, everything is manufactured and sold using the Cabelas label.

Cabelas reported Q4 adjusted earnings of $1.26 that beat estimates for $1.22 per share. Revenue of $1.41 billion also beat estimates for $1.36 billion. Full year revenue was $4 billion and earnings of $2.67.

Merchandise sales rose +10.1% and retail store revenues rose +14.3%. same store sales comps rose only 4.9% because of the unusually warm weather that depressed the sale of cold weather clothing. Financial services revenue rose +15.7% with a 21.3% increase in interest collected. The number of active Visa accounts rose +14.4%.

The company guided for revenues to rise at a high single digit rate with earnings per share to grow in low double digits.

Cabelas shares from a low of $39 in the February dip to close at $48.40 today. I know that is a 25% jump in three weeks but I believe there is more to come. Shares are facing resistance at $48.75 but a breakout there could return to the March 2015 highs around $58. I recommend we position ourselves for the potential breakout.

Earnings are May 21st.

Position 3/3/16 after a CAB trade at $49.05

Long April $50 call, entry $2.07, see portfolio graphic for stop loss.


DLPH - Delphi Automotive - Company Description

Comments:

Delphi still holding on support at $69. The next couple of days will be key for direction.

The position remains unopened until DLPH trades at $72.50.

Original Trade Description: March 5th.

Delphi manufacturers vehicles components and provides electrical and electronic, powertrain and safety technology solutions to the automotive and commercial vehicle markets worldwide. Whether you are buying a new car or repairing an old one the odds are very good you are using Delphi parts.

Vehicle sales in February were 17.54 million units on an annualized basis. As we move farther into spring and summer those numbers are going to rise sharply. Cheap gas means consumers are going to buy more new cars and upgrade their rides to the SUV category when possible.

Delphi reported earnings of $1.39 and beat consensus estimates for $1.37. Revenue of $3.88 billion rose +11% and also beat estimates for $3.79 billion. The company guided for full year earnings of $5.80-$6.10 and revenue of $16.6 to $17.0 billion.

Shares rallied after earnings and broke through resistance at $68 last week to close at $71.53. The next significant resistance is $77.25. Earnings are April 28th.

I am recommending we buy the May $75 calls at $2.40 so there will still be some earnings expectation premium in them when we exit before earnings. April options expire on the 15th so premiums will deflate significantly before we ever get to the earnings event. I am recommending an entry point at $72.50 and just over Friday's high. If the market does take profits early in the week we can lower the strike price and entry target depending on what happens to Delphi shares.

With a DLPH trade at $72.50

Buy May $75 call, currently $2.40, initial stop loss $65.85.


EA - Electronic Arts - Company Description

Comments:

Decent rebound by EA after 3 days of declines. We escaped being stopped at $62.45 and hopefully the rebound will continue.

Target $70.35 for an exit.

Original Trade Description: February 29th.

Electronic Arts develops, markets and distributes game software for online games, game consoles, internet connected devices, PCs, mobile phones and tablets worldwide.

Some of their major game brands are Madden NFL, The Sims, Battlefield, Dragon Age and Plants vs Zombies. In Q4 the company sold more than 13 million copies of Star Wars: Battlefront. That quantity was three months ahead of what they anticipated.

Piper Jaffray said last week that the current generation of game consoles has a long way to go to catch up with the prior generation. They view that as a positive for EA.

The current console cycle is in its third year and Piper said the uptake rate has been 40% to 50% faster than in prior cycles. However, only about 40% as many Xbox One and PS4 consoles have been shipped as the prior generation of Xbox 360 and PS3s. Sales of the older models reached 162 million units and the current generation has only sold about 60 million. Considering the newer versions have many more features the analyst believes the trade up rate will continue to grow for several years. At the end of 2015 EA had 8,400 employees.

The analyst also believes the shift towards digital delivery will also drive margins higher. Piper has an $87 price target on EA.

At the end of January EA reported earnings that beat estimates but revenue of $1.8 billion narrowly missed estimates for $1.81 billion. They raised their full year guidance to $4.52 billion and $3.04 per share. Analysts were expecting $3.10 and $4.56 billion. EA has a history of issuing very conservative guidance. They also said because they sold so many of the star Wars game in Q4 that sales estimates for Q1 were lower. Shares crashed on the news from $71 to $53. Shares rebounded quickly from that crash and closed at $64 on Monday.

Last week EA announced the sale of $600 million in notes and a $500 million stock buyback program that will be completed by the end of May. Rarely do companies announce buyback programs with only a 90-day window. This should continue to lift the shares in the weeks ahead.

EA will present at the Morgan Stanley Media conference at 6:25 PM ET on Tuesday.

I believe EA shares will recapture that $70 level if the market cooperates. I am recommending a short term April $67.50 call, currently $1.62. If the current rebound fades we will not have much at risk.

I am using an entry trigger just in case the afternoon fade today was the start of something bigger. The entry point will be $65.45 and just over the intraday high at $65.25.

Earnings may 5th.

With EA trade at $65.45

Buy April $67.50 call, currently $1.62, no initial stop loss.


EMR - Emerson Electric - Company Description

Comments:

Emerson lost ground again with support at $49.75 and our stop loss at $49.45. There was no news and no reason for the decline other than the roll over in the Dow.

Original Trade Description: March 3rd.

While you may not have heard about Emerson Electric they have 110,800 employees and are involved in many different aspects of the economy. They design and manufacture products and deliver services to industrial, commercial and consumer markets worldwide. They specialize in process management valves, meters, switches, regulators and digital plant applications.

A major segment is providing infrastructure, power, uninterruptible power systems, thermal management equipment and integrated solutions for large datacenters and cloud computing installations. They handle climate control, heating and cooling, electrical control monitoring and management.

They reported earnings for Q4 of 56 cents that beat estimates for 51 cents. Revenue of $4.713 billion beat estimates for $4.642 billion. However, revenue was down -16% because of the recession in the energy sector. The CEO said, "Lower oil prices continued to apply downward pressure on oil and gas spending, particularly upstream projects, as well as power generating alternators used in upstream applications."

Shares declined sharply but began to rebound almost immediately. The company plans to spin off its network power business later this year, which will downsize revenue by about $8 billion. They are restructuring to lower costs until the energy sector recovers and are selling noncore assets to reduce complexity. Investors liked the plans that were presented.

The company also declared a 47.5 cent quarterly dividend which produced a 4% yield at the time it was announced.

Their next earnings are May 3rd.

Emerson has resistance at $50.50 and it broke through that level on Thrusday. The next material resistance would be well above in the $60 range with a speedbump at $52.50. I am recommending we buy the June $52.50 call and plan to exit well before earnings. By purchasing the June call it will still have earnings expectations in the premium when we exit before earnings.

Emerson is somewhat of a slow mover so the options are cheap thereby limiting our risk.

Position 3/4/16

Long June $52.50 call, entry $1.60, see portfolio graphic for stop loss.


HPQ - Hewlett Packard - Company Description

Comments:

HPQ recovered all the losses from Tuesday to close at a 2 month high.

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.



IWM - Russell 2000 ETF - ETF Description

Comments:

We were not stopped out. That is about the best thing I can say about the move in the Russell today. Oil prices rallied but the biotech sector did not. The Russell only gains 5 points after a -26 point drop on Tuesday. Everything hinges on the ECB decision overnight.

Original Trade Description: February 25th

The Russell 2000 has come alive. Over the last two weeks the small cap index has been surging with bigger daily gains than the big cap indexes. The final resistance hurdle is 1,035 with another speed bump at 1,050 then it is clear sailing until 1,150. That is better than 100 points from today's close.

While we cannot guarantee it will happen the green shoots are appearing Today's gains was confirmation that the Wednesday rebound could be the start of a major move to the upside.

I am recommending we buy calls on the IWM in hopes of capturing the gains on a breakout that could run to the 115 level. The IWM is actually a little ahead of the Russell and was testing that local resistance today.

Position 2/26/16 with an IWM trade at $103.25

Long April $105 call @ $1.91, see portfolio graphic for stop loss.


JNJ - Johnson & Johnson - Company Description

Comments:

JNJ recovered Tuesday's losses to stop at the $107 resistance from last week. Still holding the gains from the prior three weeks. No news.

I am recommending an exit target at $108.75.

Original Trade Description: February 24th

JNJ is broadly diversified with more than 250 subsidiaries. If you need a Band-Aid, mouthwash, cold capsule, cancer drug or artificial joint, they make it. They spent about $10 billion on research in 2015. Seven of the 15 new drugs they brought to market since 2009 have annual sales in excess of $1 billion.

They have increased their dividend for 53 consecutive years. The yield today is about 3%. They have a rare AAA credit rating and produce more than $11 billion in free cash flow annually. At the end of 2015 they had $38.5 billion in cash.

JNJ is recession resistant because their products are not bought on a whim. If you need a Band-Aid you buy it. If you have arthritis, you buy Motrin. If you have acid indigestion you take Pepcid. If you are sick you get a prescription for their drugs. This makes them relatively safe in times of economic weakness. With worries over a potential recession in the near future this has powered their shares to a 52-week high.

I do not need to explain JNJ to everyone because we have grown up with their brands. The company was founded in 1886 and is older than anyone reading this newsletter.

The close on Wednesday at $104.94 is right at resistance and a breakthrough here should retest the historic highs at $109 where a breakout to a new high is entirely possible. They have based at the $100 level for the last two years with the exception of the flash crash last August.

Earnings are April 12th.

Position 2/25/16:

Long May $110 call @ $1.30, see portfolio graphic for stop loss.


KORS - Michael Kors - Company Description

Comments:

Finally a decent move by KORS after more than a week of consolidation. No news.

Target $59.85 for an exit.

Original Trade Description: February 22nd

Michael Kors designs, markets and distributes branded women's apparel and accessories and men's apparel. They operate more than 350 stores in the USA and 200 stores internationally. They also license their brands.

Kors shares crashed from $100 in early 2014 to $35 at the end of January on declining sales in the expensive categories that impacted all the major retailers. Inventory levels rose and margins dropped. Kors went from being the premier brand to just another high priced name.

Fast forward to Q4 earnings and everything changed. The company reported a solid holiday quarter when everyone else was just getting by. Kors reported a 6.3% increase in revenue to $1.6 billion that beat estimates for $1.4 billion. Earnings rose to $1.59 and also beat estimates for $1.46. Same store sales rose +2%. Sales overseas boomed +14% with Japan leading with a 68% rise. U.S. same store sales declined -0.9% but that was significantly better than the -8.5% drop in the prior quarter.

Kors heard what customers wanted and shifted to fill that demand. Kors introduced a new line of smaller leather handbags that cost less and customers snapped them up in volume. The company said they were selling so good they were going to raise prices and increase margin. The trend is away from the larger bags that made Kors famous but they adapted and sales are rising again.

Kors also suffered from the strong dollar and weak currencies overseas but overcame the headwinds to easily beat on earnings.

Shares spiked $12 on the news from $40 to $52. After trading sideways for the last three weeks the shares have broken out to a new 52-week high at $55 and appear to be headed for $60 or higher. Investors remember Kors as the leading fashion merchandiser and they believe the company is back on top again.

I want to take that ride to $60 and then see what happens when we reach that level.

Earnings are May 26th.

Position 2/23/16 with a KORS trade at $55.25

Long May $57.50 call @ $2.48, see portfolio graphic for stop loss.

Target $59.85 for an exit.


N - NetSuite - Company Description

Comments:

No material decline as we wait for a rebound in the tech sector. Good relative strength considering the gains from the last two weeks.

Target $68.85 for an exit.

Original Trade Description: February 19th.

NetSuite provides cloud based financials/enterprise resource planning (ERP) and omnichannel commerce suites in the U.S. and internationally. They also offer customer relationship management (CRM) and professional services automation (PSA). NetSuite OneWorld manages various companies or legal entities across multiple countries with different currencies, taxation rules and reporting requirements.

NetSuite reported adjusted earnings on January 28th of 5 cents compared to expectations for 4 cents. Revenue of $206.2 million rose +33% and beat estimates for $205 million. They reported several new accounts including Snapchat, American Express Global Business Travel and Lucky Brand to name a few. They added 616 new customers in the quarter and replaced SAP in 17 accounts. Recurring revenues rose +30% and now make up 80% of revenue. Nonrecurring revenue of $41.7 million rose +34%. They ended the quarter with $379 million in cash.

Revenue for 2016 is expected to rise 28-31% with earnings growing 80% to 100% to a range of 40-45 cents.

NetSuite was upgraded by Canaccord Genuity from hold to buy after earnings.

Not many companies are growing annual revenue by 30% and earnings by 100%. This is NOT Tableau software but it was punished for Tableau's weakness.

Earnings are April 21st.

Position 2/22/16 with a trade at $56.50

Long April $60 call @ $2.40, see portfolio graphic for stop loss


PII - Polaris Industries - Company Description

Comments:

The acquisition of Taylor-Dunn on Tuesday caused a big spike that was sold in a weak market. That good news carried over today with a $1.41 gain.

Original Trade Description: February 25th.

Polaris makes off road vehicles, snowmobiles and motorcycles. They compete with Arctic Cat and have 8,100 employees. They are about four times larger than ACAT. They had some earnings issues from the lack of snow but their motorcycle business helped smooth out the rough spots. The company reduced guidance in December and shares declined from $96 to $68 by late January.

In Q4 sales declined -20% because of the lack of snow but also because of the oil recession. They sell a lot of off road equipment to oil field workers and they are not buying today. When oil field workers are employed they make a lot of money with starting wages in the $70-$80K range when times are good so there is a lot of extra cash floating around. Retail sales in oil regions were down -10% in Q4.

However, despite the lack of snow and a rough Q4 the company still managed to increase sales for 2015. That is impressive when snowmobile sales declined -25%. We have had some significant snowstorms in 2016 so that snowmobile inventory is probably shrinking in Q1.

Motorcycle sales rose +43% in Q4 so there is a bright side to warm weather and no snow. Sales in that division were up +74% for the full year.

Polaris is the number one off road vehicle manufacturer in the U.S. and are expecting a better 2016 with most of the growth in the second half.

Earnings are April 26th.

Shares are about to break over resistance at $89, market permitting. I am recommending the April $95 calls currently $2.00 on a breakout.

Position 2/26/16 with a PII trade at $89.50

Long April $95 call @ $2.15, see portfolio graphic for stop loss.


QCOM - Qualcomm Company Description

Comments:

QCOM declined again today on the ZTE news and we were stopped out for a minimum loss at $51.80. We lost 8 cents on the position thanks to the raised stop loss.

Original Trade Description: February 24th.

Qualcomm holds the major patents on the 3G/4G wireless technology and their chips are showing up in more and more phones every month. Several days ago they signed a new licensing agreement with Lenovo for 3G and 4G technology for use in China. The devices will be marketed under the Motorola and Lenovo brands. Under the agreement Qualcomm will receive royalties on 3G (WCDMA and CDMA2000) and 4G (LTE-TDD, TD-SCDMA and GSM) devices. Lenovo will design, produce and market lower priced phones for the Chinese market.

A couple days later NXP Semiconductors (NXPI) and Qualcomm announced the integration of an industry-leading near field communication (NFC) and embedded secure element (ESE) solutions for Qualcomm's Snapdragon 800, 600, 400 and 200 processor platforms. This provides Qualcomm an end-to-end solution for mobile transactions and payment processing.

A day later Qualcomm announced the Snapdragon 820 processor with integrated Snapdragon X12 LTE modem for 33% faster 4G+ LTE download speeds and 200% faster LTE upload speeds, would power the new Samsung Galaxy S7 and S7 Edge phones. When coupled with the Samsung TruSignal multi-antenna boost technology, these will be the fastest phones currently in production.

A day later Qualcomm announced its collaboration with Ericsson (ERIC) on the new 5G technology, which is expected to be in production in 2018. The companies are doing the development work necessary on the 3GPP platform to insure rapid adoption of the new ultra high speed wireless technology. This puts Qualcomm at the forefront once again.

According to ABI Research, Qualcomm held a 65% market share of the 4G LTE baseband chipsets in 2015. The 4G LTE market is expected to grow at a 78.6% CAGR through 2019 when the 5G phones will begin to be plentiful. ABI said the Snapdragon 820 chip would probably increase Qualcomm's market share in 2016. Because of their dominance ABI believes Qualcomm will be able to increase the average selling price as the demand for the high end phones increases.

All the buzz about the new partnerships and deals has lifted QCOM shares out of a two-year decline. Shares fell while Qualcomm was fighting various companies about royalty payments in China. The new agreements with Chinese companies clearly show those problems are behind Qualcomm. All the analyst ratings changes in 2016 have been upgrades. Bernstein upgraded them to a buy last week.

I believe the long term downtrend is being reversed and although Qualcomm is up $10 over the last two weeks the positive rebound can continue. Normally I would not touch a company with a 25% rally in progress but the news is so strong I believe it is worth a chance. The most recent analyst price target is $70.

Earnings April 27th.

Position 2/25/16:

Stopped 3/9/16: Long April $52.50 call @ $1.58, exit $1.50, -.08 loss.


QSR - Restaurant Brands Inc - Company Description

Comments:

QSR spiked to nearly $38.50 at the open but faded slightly with the Dow. We entered the position with a trade at $38.15.

Original Trade Description: March 7th.

QSR is the new name for the Burger King and Tim Hortons brands. Both have been serving customers for more than 50 years. QSR currently operates more than 19,000 restaurants in 100 countries with more than $23 billion in sales. The name change and rebranding came a year ago when Burger King bought the Tim Hortons chain.

QSR has been flying under the radar for the last year with all the news about McDonalds all day breakfast and Starbucks expanded menu. They reported earnings of 35 cents that beat estimates of 31 cents.

Same store sales rose +5.6% at Tim Hortons and 5.4% at Burger King.

Burger King sales are accelerating because of a flood of new menu items. They have Chicken Fries, which are fries dipped in fried chicken batter and fried. They have Jalapeno Chicken Fries. On February 23rd they introduced the Whopper Hot Dog. This is a foot long hotdog flame grilled and served with whatever you want on them.

Burger King received tons of free press when the new hot dog was delivered. Some food aficionados are calling the hot dog a "culinary calamity." Others called is a "disgusting disgrace" but customers are waiting in line to order them.

Franchisees claim the demand has been "overwhelming" and while only a couple weeks old they are selling over 100 a day and rising rapidly as more customers realize they are available. Americans eat more than 20 billion hotdogs a year.

QSR will present at the UBS Global Consumer Conference on March 9th at 2:30 ET.

Earnings are May 27th.

QSR shares are currently $37.85 and a breakout over resistance at $37.65 is in progress. I am recommending we buy the April $39 call, currently $1.10, and plan on exiting at $41 if that higher level of resistance slows the rally.

With a QSR trade at $38.15

Buy April $39 call, currently $1.10, no initial stop loss.



BEARISH Play Updates (Alpha by Symbol)


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

Comments:

The VXX would have been lower but the Dow gave up most of its early gains and traded negative just before the close. The ECB decision on Thursday will be the pivotal moment for the market.

Because we are running out of time on the March put, I have an exit target at $20. That should give us a small gain. The volatility rebound in mid February sidetracked the original play and we need to take a gain if one is offered.

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 do not 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






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