Option Investor
Newsletter

Daily Newsletter, Saturday, 4/2/2016

Table of Contents

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

Market Wrap

The Resistance Battle Begins

by Jim Brown

Click here to email Jim Brown

The Dow moved into its resistance band and the S&P pulled a little bit closer as positive economics and end of quarter retirement funds offset a sharp decline in oil prices.

Market Statistics

Friday Statistics

The Dow closed just slightly over initial resistance at 17,750 as a late day surge of short covering pushed the index higher. On the NYSE, there was $1.5 billion in buy on close orders that kept the index from rolling over at that resistance level as it had in the prior two sessions.

Friday's close at 17,792 was the first close in that resistance range but the S&P has yet to reach the strong resistance at 2,075.



The economic reports were mixed but traders took the good news and ignored the bad news. The good news came from the Nonfarm Payrolls and ISM Manufacturing. The bad news was a decline in construction spending and a sharp drop in March auto sales.

The March Nonfarm Payroll report showed a gain of +215,000 jobs, down from 242,000 in February. This was slightly above consensus estimates for 205,000 and could be considered a Goldilocks number. It was not too hot and not too cold. Revisions to the prior two months were minimal and totaled a loss of only -1,000 jobs.

The unemployment rate rose from 4.9% to 5.0% as more people entered the workforce. The labor force participation rate rose 0.1% to 63.0 and the highest since March 2014. New or returning workers added 396,000 people to the labor force. That means returning workers began looking for work again. However, the more accurate U6 unemployment/underemployment rate rose slightly to 9.8%.

The average hourly earnings rose +0.3% and erased the -0.1% decline for February. The services sector added 219,000 workers while manufacturing saw a decline of -29,000 jobs. That is the largest decline since December 2009.

Energy and mining lost another 12,000 jobs after losing -17,000 in February. The construction industry added 37,000 jobs thanks to the continued warmer than normal weather. The government sector added 20,000 jobs. Retailers added 48,000 jobs despite a constant stream of negativity regarding weakness in consumer activity. Healthcare added 44,000 jobs, leisure/hospitality 40,000 and professional/business adding 33,000.

Those taking part time jobs because they were unable to find full time work rose +135,000 to 6.12 million and the highest level since August. The number should be in the 4.5 million range in a healthy economy.


The manufacturing sector may be returning from the dead despite the loss of 29,000 jobs in March. The ISM Manufacturing Index rebounded from four months in contraction territory to post a solid 51.8 for March. New orders surged from 51.5 to 51.8 and backorders rose from contraction at 48.5 to expansion at 51.0. While only four components are still in contraction, compared to 9 in February, three of them improved for the month with only employment declining from 48.5 to 48.1.

Analysts believe the worst is over for the manufacturing sector as we move into spring and summer, which are normally positive as inventories build ahead of the holiday buying season.

One handicap was the sharp rise in prices paid from 38.5 to 51.5 indicating the cost of raw materials is rising. Another term for that is inflation. However, a lot of that was related to the $26 low for oil in February.



On the down side, the vehicle sales for March fell sharply from an annual run rate of 17.5 million to 16.57 million. This was well below expectations for 17.5 million and 3% below year ago levels. Analysts suggested part of the problem could be GM moving away from their heavily discounted fleet programs. Others said the early Easter might have shifted buying patterns. I think they are grasping at straws. With warmer than normal weather across the country there were plenty of shopping days but consumers were not shopping. The rapidly rising gasoline prices were more likely to blame. Gasoline prices were up 40% from the February lows. That is enough to scare consumers into keeping their existing cars. Another factor is the shrinkage of the subprime auto loans. After a year of pushing those loans, the banks are starting to pull back because of rising repossessions. Without financing the marginal buyer is only a dreamer.

GM sales rose only 0.6% compared to estimates for 6.0%. Ford sales rose 7.8% compared to estimates for 9.4%. Fiat Chrysler sales rose +8.1% compared to estimates for 14%. Honda saw a 9.4% increase compared to estimates of 16%. Volkswagen sales fell -10.4%. Toyota sales fell -2.7% compared to estimates for a 5.6% rise.

JD Power said there were "worrisome trends below the surface" with rising inventories at levels they have only seen once in the last 24 years. Used car prices were falling sharply. The company also said incentive spending on new vehicles has risen rapidly and is trending towards recession-era levels industry wide and has already exceeded recession-era levels on cars. Q1 sales incentives averaged 9.6% of MSRP. The increased incentives reduce future resale values and drives down trade-in values for the current transaction.

February construction spending declined -0.5% to $1.144 trillion compared to estimates for -0.1%. However, January was revised higher from 1.5% to 2.1%. The -0.5% decline was led by a -1.7% drop in public construction. Residential spending rose +0.9% to $448 billion. That jumps to 1.2% if you remove home improvement spending.

Consumer sentiment rose slightly from the first release but was down for the month. March sentiment rose from 90.0 to 91.0 compared to 91.7 in February. The present conditions component declined from 106.8 to 105.6 and the expectations component declined from 81.9 to 81.5. This is the third consecutive monthly decline in sentiment. You can blame this on gasoline as well. A 40% hike in gasoline prices produces a direct link to the consumer attitudes. Gasoline may be below $2 in most areas but that $1.50 we saw in many states in February was a powerful stimulant. Consumers are facing withdrawal symptoms as prices rise. In California, prices rose 10.1 cents per gallon over the last week to average $2.78 per gallon but prices are nearing $4 in some areas. No wonder California has more than 21% of all registered Tesla cars.


The various economic reports on Friday caused a 0.1% increase in the Atlanta Fed real time GDPNow forecast. They are now predicting 0.7% GDP growth for Q1. The construction spending report showing a rise in residential construction was responsible for the increase in the GDP forecast.

Despite the increase, this is still well below the 2.7% growth forecast in the middle of February. The outlook has decreased significantly. This is the main reason Janet Yellen was so dovish in her rate forecasts last week. They are not going to hike rates with the GDP so close to zero growth.


Overseas the Chinese PMI for March came in at 50.2 and well above the forecast for 49.3 from a Reuters poll. February's PMI was 49.0 and the lowest reading since 2011. All categories of the index showed improvement. New orders rose above 50 suggesting the government's stimulus measures have started to work. However, one month is not a trend. Analysts also said the stabilization of the yuan may have helped calm nerves and stimulate growth.

The economic calendar for next week is highlighted by the FOMC minutes on Wednesday and another appearance by Janet Yellen on Thursday. The Yellen event is actually an unprecedented round table discussion with Yellen, Bernanke, Greenspan and Volcker. I cannot imagine a discussion with four Fed Chairmen all at the same table. Their outlooks are dramatically different and there could be some fireworks to roil the market.

The other reports highlighted in green are important but not normally market movers.

Analysts will be scouring the FOMC minutes for clues about the next rate hike. A total of 6 Fed heads were talking about accelerating the hikes last week with the implication that April is a live meeting with rate hike potential. However, after Yellen's dovish comments there is almost zero chance of an April rate hike. The CME FedWatch Tool is showing only a 4.6% chance of a rate hike. June jumps up to 25%, July 40%, September 52%, November 55% and December 65%.



In stock news, BlackBerry (BBRY) reported an adjusted loss of 6 cents that beat estimates for a loss of 8 cents. However, revenue of $464 million declined -29.7% and missed estimates for $560 million. Hardware revenues contributed 39%, service fees 29% and 32% from software and licensing, which was up +106% in the quarter. BlackBerry said it won 3,600 enterprise clients in the quarter.

They generated $225 million in free cash flow and ended the quarter with $2.377 billion in cash. Long-term debt decreased from $1.707 billion to $1.277 billion. While they are not setting the world on fire they are reducing their debt and growing their software and licensing business, which the company has said will be their future business. They expect to grow that revenue by 30% for the full year. Shares declined -7.5% on the news.


Tesla's Model 3 debut event was a huge success with more than 232,000 orders received in the first 48 hours according to an Elon Musk tweet. That represents $232 million in deposits at $1,000 per car. Musk said the average selling price with options would be around $42,000 so that amounts to nearly $10 billion in sales. He said, even if you only bought the base model at $35,000 you would still have the finest car on the road for that price. The car features 0-60 in six seconds, 215 mile range, semi-autonomous driving, touch screen dashboard and seats 5 adults. Unfortunately, they will not begin to ship until late in 2017.

GM will begin selling the Bolt electric car with a 200-mile range later this year. Hyundai's Ioniq will have a 110-mile range and will match Tesla on price and goes on sale this fall. Unfortunately, for those companies, buyers are not lining up around the block at local dealers to buy them.

Shares were up +$17 intraday but fell back to prior resistance at the close. Short interest in Tesla shares is currently 25% or 32 million shares and an all time high. Tesla has 132 million shares outstanding. Apparently, a lot of people were expecting a sell the news event.


Regeneron Pharmaceuticals (REGN) shares spiked $45 after the company and its partner Sanofi (SNY) reported results from two Phase 3 trials using their experimental drug dupilumab for moderate to severe dermatitus. The trials showed that roughly 37% of the patients were able to clear up their skin lesions compared to only 10% that took the placebo. Using the Eczema Area and Severity Index, patients on the drug showed a 67-72% improvement in their rating. The number of adverse events for both trials were minimal suggesting the treatment was easily tolerated. The drug has already received a "breakthrough-therapy" designation by the FDA so the final approval should be favorable. The companies are going to submit the findings to the FDA in Q3.


Netflix shares gained +$3.47 after the FCC said it was not going to investigate the company for slowing download speeds to mobile subscribers on AT&T and Verizon. The FCC chairman said Netflix did not violate any laws because that was outside the net neutrality rules. Netflix admitted degrading picture quality to reduce download sizes because of data caps at those carriers. The company said it had been doing this for five years to "protect customers from exceeding their data limits." Netflix said last week they would soon introduce an app that would let users pick their video quality based on their current data limits.


Chipotle Mexican Grill (CMG) was not finding any love on Friday. Goldman Sachs (GS) cut them from buy to neutral and Wedbush went from hold to sell. A week earlier Jefferies, The Maxim Group and Deutsche Bank cut them from hold to sell. CMG said in March they expect to lose $1 a share because of declining comps and additional costs from the food contamination issues. Shares declined -$6 to $464.

The company applied to trademark the name "Better Burger" in what analysts believe is an effort to branch out in the fast food burger market to compete with Shake Shack, Five Guys and others. Chipotle already operates 13 Asian Kitchen restaurants and three Pizzeria Locale locations in a joint venture to test the concept.


Yahoo (YHOO) lost another executive ahead of their sale. Senior VP of Talent Acquisition and Development, Sandy Gould, resigned saying "leaving Yahoo is the hardest thing I have ever done." It was probably not as hard as recruiting new talent into a company that is about to be sold and dissected. In a statement she said, "It is time to take a break and decide my next adventure." She had only been at Yahoo for 3 years after working at Disney and RealNetworks. She is only one more in a long line of executives to flee the sinking ship.

Yahoo has reportedly received interest from as many as 40 groups interested in buying the core business. The company has given them until April 11th to submit preliminary bids. That is next Monday. It is hard to believe there may actually be a bidding war for Yahoo. I am guessing my $1,000 offer may be too low.


The equity markets disconnected from oil after a huge drop at the open. The Dow fell -119 points at the open and the S&P dropped -17 after oil prices collapsed 4.5% on events in the Middle East. The Saudi Arabian deputy crown prince said the kingdom would not freeze production unless Iran and all the other major producers freeze as well. That is contrary to what was implied a few days back when some producers said they would cap production even if Iran were not part of the agreement.

I have said for weeks that the agreement would never work and even if they agreed, it would not reduce the current glut and future production. The entire exercise was simply to lift prices by deceiving the uninformed public.

In other headlines, Saudi said they were planning on increasing production annually through 2020. The UAE said they were planning on increasing production from 3.1 mbpd to 3.5 mbpd by the end of 2017. Iran, Iraq, Libya, Nigeria and the UAE were always questionable about agreeing to a production freeze. Any OPEC producer with excess capacity coming online in the near future needs to sell that production to offset the loss of revenue from the low prices. The only producers that are really pushing for a freeze are the ones with declining production.

A UAE official said OPEC does not want oil prices to rebound to $50 because that would allow much of the shale drilling to be restarted. That is exactly what U.S. producers have been saying that a $45-$50 oil price would allow them to go back to work. It would appear that $40 could be a top for a long time unless U.S. inventories decline dramatically.

Crude prices fell to $36.63 at the close and I would seriously doubt that they will rise significantly in the near future. We are more than likely going back to the low $30s based on the fracture in the freeze coalition. Inventories and production are still rising. With 1-2 mbpd going into storage somewhere on the planet there is a point where a limit will be reached.

Inventories in the U.S. rose 2.3 million barrels last week to 534.8 million and a new historic high. Production declined 16,000 bpd to 9.022 mbpd and -588,000 bpd off the peak from last June.


Baker Hughes said the active rig count in the U.S. declined -14 to 450 with oil rigs falling -10 to 362 and gas rigs -4 to 88. Those are historic lows since records were started in 1949.


Markets

Since I have been saying the same thing for several weeks I will try not to bore you and repeat myself too much today. The Dow and S&P are over extended. The S&P is approaching major resistance that begins at roughly 2,075 and continues to the 2,132 level from the high last May. While it is entirely possible for the indexes to fight through this resistance and make a new high, it will not be an easy task.

With the big gains out of the February low, the Dow is up +14.7% over 7 weeks. The S&P has rebounded +15%. By any metric you care to use this is grossly over extended. Continuing to press through another 60 points on the S&P "should" be very difficult.

I reported on Thursday night that FundStrat guru Tom Lee is looking for better than expected earnings because the bar is set so low. With traders holding more than $1 trillion in existing short positions and the most since 2009, he believes the earnings beats will cause a short squeeze that takes us to new highs. I would love for that to happen but we need to be aware that it could be a tough battle to move higher.

The Williams %R indicator I added to these charts is a momentum indicator for determining overbought/oversold conditions. A number under 20 indicates overbought and a number over 80 indicates oversold. This indicator is used for determining entry and exit points for traders. For the S&P and Dow the indicator has been over 20 since late February. The last time the S&P was this overbought for this long was the rebound out of the October 2014 dip. The S&P topped out at 2,079 from that rebound, pretty close to where we are today, and then fell back to 1,972 over the next two weeks. The chart pattern for the rebound from October 2014 looked almost identical to the rebound from the September lows in 2015 where the S&P reached 2,116 before falling nearly 100 points back to 2,020.

Past performance is no guarantee of future results but patterns like this do tend to repeat. The longer the S&P remains overbought the bigger the correction when it finally happens.


The Dow chart is similar to the S&P chart with the same overbought conditions. The next 400 points on the Dow to return to a new high should be very tough to win. Consider it a Super Bowl equivalent of a goal line defense every 50 points. It is not just one resistance level but a series of resistance levels every 50 points.

Lately we have seen some rebounds from the dogs of the Dow like American Express, IBM and others that have been remarkable. The key question is will they continue higher after such big gains already. IBM has rallied 31% since the February low and American Express +21% in only 7 weeks. While they are short term overbought, they are both still well below their highs. Can they continue the sprint higher?

Because the Dow is only a 30 stock index the performance of only a handful of stocks can materially impact the index. If 6-7 stocks continued posting those strong gains the index would be dragged slowly higher.

I will be the first to admit that the Dow internals look very bullish. I went through the charts for each of the Dow stocks and 22 of the 30 were either bullish or extremely bullish. Only 8 stocks, JPM, GS, DD, PFE, NKE, DIS, XOM and CVX were not showing a bullish pattern. GS and JPM were on the verge of turning bullish.

Based on the individual analysis the odds of the Dow continuing higher are very good but remember, the Dow is only 30 stocks and the S&P is 500. The Dow could drag the other indexes higher if the individual performances continue.

That does not mean the index is just going to plow through those major resistance levels. It should be a fight and prior winners could see profit taking at any time.



The Nasdaq has a much easier road ahead. There is significant resistance at 4,926 and psychological resistance at 5,000 but those are just stepping stones on the way to major resistance at 5,165. The major Nasdaq challenge is the biotech sector and that is showing signs of recovery. The biotechs have keep the Nasdaq from rebounding as strongly as the Dow and S&P but should that anchor turn positive we could see the Nasdaq sprint to catch up with its big cap brothers.



All of the indicators on the biotech index are turning positive. The $BTK closed over 3,000 on Friday after making two higher lows in March. The biotech struggle is not over with the political candidates bashing them on a weekly basis but the damage to Valeant (VRX) is fading and it will no longer have a material impact to the sector. There were some positive drug trials announced last week and that caused investors to reevaluate their risk profile to see if it was safe for them to go back into the sector. It may not be clear sailing for the sector yet but the worst may be over and a choppy rebound could begin.


The Russell 2000 was the second best gainer for the week with a 3.5% move. However, the last three days saw minimal moves with the index locked under the strong resistance at 1,120. If the biotech recovery continues, the Russell could move higher but declining oil prices could blunt that move. There are a lot of energy stocks in the Russell and they could act as a brake on the gains. The Russell is far from the same overbought levels of the big cap indexes and could really energize the broader market if the rally continues over 1,120.


This could be a pivotal week for the markets. This is the only week between now and the start of earnings the following week. If traders want to position themselves for a potential earnings rally, they need to do it this week. If they want to capture some profits from the seven-week rally and then move into some earnings positions then this is the week. There could be a positive bias early in the week from funds putting end of quarter retirement contributions to work. That could be offset from any window undressing that could occur later in the week.

The economic calendar is devoid of market movers other than the FOMC minutes on Wednesday and Yellen's roundtable on Thursday. To summarize this could be a volatile week with a slight upward bias. The direction the next week will depend on how the earnings play out.

Friday was April Fool's Day. Hegeye released this cartoon of an April Fool in the form a bullish trader. Do you think there is a message here?



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

subscribe now

Random Thoughts


Saudi Arabia is fed up with being dependent on oil revenues for their future. The Saudi deputy crown prince wants to establish a $2 trillion sovereign wealth fund to generate income for the kingdom for the next century. This could greatly exceed the $880 billion fund held by Norway, which is currently the largest.

In order to kickstart this fund the prince wants to take Saudi Aramco public in 2017 in what would be the largest IPO ever. Since Aramco is owned by the government and shrouded in secrecy, it would mean an extremely high volume of public disclosures including reliable third party estimates on the amount of oil reserves in each field, actual production and depletion and remaining expected life of the field. These numbers are as classified as the exact specifications for making a hydrogen bomb. No OPEC nation has released this data in more than 40 years. In OPEC, size does matter and everyone can claim they have reserves of any size in a fight for position amongst themselves but going public with an IPO requires opening the accounting tent for the world to scrutinize. They may find out that the level of pain and embarrassment is simply too high and cancel this plan before it ever gets to the IPO stage.

Several of their largest fields are thought to be nearly exhausted and disclosing that to the world in official documents could be detrimental to their standing inside OPEC. Saudi Arabia is operating 128 rigs today, compared to the 104 in July 2014 when the oil crash began.


As many as 1 million Americans will stop receiving food stamps this year as a 20 yr old law goes back into force. The 1996 law required able-bodied adults without dependent children to work a minimum of 20 hours a week to qualify for food stamps. Some states suspended the law during the financial crisis but it went back into effect on January 1st with a 90-day grace period for recipients to find a job. That grace period expired on April 1st. Some analysts are blaming that law on the surge of new part time jobs over the last three months. The number of food stamp recipients without children and without a disability has increased from 1.7 million in 2007 to 4.7 million in 2014. Thousands Losing Food Stamps


The AAII Investor Sentiment Survey was a real surprise this week. Bullish sentiment declined -6.6% despite the rally. Neutral sentiment rose +4.6% to more than 47% while bearish sentiment actually went up. Apparently, some investors are actually looking at the charts.



Professional April Fool's jokes.

Election Insurance from ESurance

Quilted Northern Rustic Weave

Donald Trump Campaign Announcement

Spray on TV Screens

Kars for Kids, Get your Kid Today

Google Reality Headset

Google Self Driving Bicycle

OpenTable Lickable Food Photos

Velcro car seats from Lexus


NBC, a unit of Comcast, said it has sold more than $1 billion in ads for the Summer Olympics in Rio de Janerio. With most games occurring in prime time for the USA the audiences should be huge. The games start August 5th and last for 17 days. The EVP of advertising said we still have four months of sales ahead of us and advertisers will become more focused as the event draws near. NBC agreed to pay $7.65 billion for the rights to air six additional games between 2022-2032 and no other companies got to bid.


I wrote about the Carlucci Indicator several weeks ago. In theory the combination of indicators on a weekly basis represent a market timing tool that some claim was the best ever invented.

Only one thing needs to happen for this indicator to give a buy signal. The percentage of S&P-100 stocks trading over their 200-day average has to exceed 65% and it closed at 63% on Friday.

The other requirements have already been met. According to Carlucci only two of the following three have to be met but as of Friday all three were positive.

The weekly RSI is over 50.
The weekly Slow STO black line is over the red line.
The weekly MACD black line is over the red line.


The problem with hard coded technical indicators is they do not take into account the calendar, resistance levels, external events, fundamentals like earnings, economics, etc. While the setup suggests entering long positions today there is no relationship to external events. Market technicians will tell you that the market has already factored in all the external events to get to this level. Time will tell.


 

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

 

"The Budget should be balanced, the Treasury should be refilled, public debt should be reduced, the arrogance of officialdom should be tempered and controlled, and the assistance to foreign lands should be curtailed, lest Rome will become bankrupt. People must again learn to work instead of living on public assistance."

Cicero , 55 BC

Apparently, we have learned NOTHING over the past 2,069 years.
 


Index Wrap

Bullish Week To Finish the Month/Quarter

by Keene Little

Click here to email Keene Little
We had another bullish week, making it six out of the past seven weeks as bullish. The sharp recovery off the February low gave us a positive quarter and the S&P and Dow indexes recovered their losses to finish positive for the year. Now the question is whether the push to get the quarter positive will hold in the coming weeks.

Week's Indexes


Review of Major Stock Indexes

Give bulls credit where credit is due and last week's rally was a bullish punctuation mark on an already very bullish 7-week run up from the February lows. Regardless of whether it was a quarter-end push or help from the Fed that spiked the shorts out of the market, from a price perspective it's been a very bullish run. It would be nice to see some more volume behind the rally (the lower volume is one indicator of short covering rather than solid buying) but at this point that's nitpicking -- price is king and price says the bears need to be careful.

As you can see in the table above, those indexes that are still in the red for the year include the RUT and tech indexes. The SOX got back in the green with its +8.8% rally in March but the banks (BKX) are still down -11.5% for the year. I like to see the SOX and BKX in synch to support the current trend in the broader indexes. When they're not in synch it's usually a good clue that the current trend could be in trouble.

Oil had a big recovery in May, up +13.6%, and with the tight linkage between stocks and oil it's not surprising to see most of the stock indexes higher as well. Oil's pattern is looking toppy and between that and the mixed message from the SOX-BKX pair I'm thinking it's a good time for stock bulls to be cautious.

The utility sector also remains strong, up +8.0% in March and +15.7% for the year. This is another question mark when thinking about a bull market since the utility sector is a defensive sector. Investors move into dividend paying utilities (these are not growth stocks) when they're worried about the stock market in general. It's like parking your money in big dividend-paying blue chips. When I look at mixed pairs (SOX-BKX), lower trading volume (lower than in previous selloffs), a toppy oil pattern and strong defensive sectors it has me wondering about the current rally. For now it's another caution flag.

The trend is clearly up so bears don't have anything here but the bulls can't get complacent. We've had too many large whippy moves in both directions since last fall and we don't know if that will change. This is a trader's market and we are likely soon facing at least a larger pullback before (if) heading higher.


A Look At the Charts


Dow Industrials, INDU, Weekly chart

The Dow's weekly chart shows why bears should be very nervous here -- a weekly close above its downtrend line from May-November 2015, currently near 17630. It could turn into a head-fake break, and a close back below the line for the coming week would be a sell signal, but at the moment it's clearly a bullish break. The next test for the bulls is the November high at 17978 (possibly only the December 29th high at 17895). As long as the broken downtrend line holds as support on a back-test we should see higher prices but as depicted with the light green dashed line, a run up to the May high at 18351 is likely all we'd see before starting at least a larger pullback. If last week's bullish break turns into a head-fake break we'll see at least a larger pullback, potential back down to the bottom of a sideways triangle (near 16600 by July). The sign of the bear for at least the short term would be a drop below price-level S/R at 17140, which would also be a drop back below its 50-week MA, currently at 17277.


Dow Industrials, INDU, Daily chart

Last Wednesday's rally, helped by dovish comments from Janet Yellen on Tuesday, pushed the Dow over its May-November 2015 downtrend line and it was then back-tested with Friday's quick pullback and support held, which keeps it bullish. The big question in my mind is how much of the rally was quarter-end driven (hedge funds creating the rally in order to maximize AUM, assets under management, as a way to maximize their management fees). If that was one of the primary motives for the rally, followed by new-month money on the first of the month, there might not be much left to support the market in the coming week. This is one reason why it's now important for the broken downtrend line to hold -- the bullish break cannot be reversed otherwise it will become a failed break and they typically reverse hard (creating a bull trap). The coming days will be important.

Key Levels for INDU:
-- bullish above 17,670
-- bearish below 17,399


S&P 500, SPX, Daily chart

SPX also finished last week with a bullish break of its downtrend line from November-December, currently near 2050, which makes it an important level to hold in the coming week. The Friday-morning spike down to 2043.98 was a brief break of trendline support but it held price-level support at its 2015 closing price at 2043.62. I'm thinking there were more than a few buy programs set to buy the pullback to that level in order to make sure the S&P stayed in the green for the weekly close. The rally back up to a high at 2075 was good for a new high for the rally from February and I see additional upside potential to the 2090 area where it would test its downtrend line from July-November 2015, but only if we see it hold above 2050. SPX would be even more bullish if it can rally above 2100 but with an overbought market on all time frames the jam into the end of the quarter might have been the completion of the rally. It certainly has me wondering if there will be any juice left to continue higher and once the leg up from February completes, which would be confirmed with a drop below the March 24th low near 2022, we should see at least a deeper pullback correction before heading higher (bold green depiction) but we could see something more bearish (bold red depiction).

Key Levels for SPX:
-- bullish above 2050
(more bullish above 2100)
-- bearish below 2022


S&P 500, SPX, 60-min chart

The SPX 60-min chart below provides some short-term things to watch on Monday and Tuesday, which should in turn provide clues for what the rest of the week will be like. You can see the rally up to the downtrend line from November-December 2015 on March 22nd and then the break above it Tuesday afternoon (courtesy Yellen's dovish comments). SPX then pulled back slightly into Thursday and then the spike down Friday morning, for the test of the 2015 close, which was followed by Friday's rally back up to the broken uptrend line from February 24 - March 10. The price pattern is a little unclear but with SPX making up near the 2076.44 projection shown on the chart (for the c-wave of the 5th wave of a possible ending diagonal) I'm alert to the possibility that Friday's jam up into the close might have been the final hurrah for the rally. An immediate drop down on Monday and a drop below 2050 would be bearish (don't buy the first pullback) but unless that happens I'd look for a run up to the top of the rising wedge, near 2090 by the end of the day Monday.


S&P 100, OEX, Daily chart

OEX broke above its downtrend line from November-December 2015 last week, near 913, and it stays bullish above that level. A broken uptrend line from February 11 - March 10 was broken on March 23rd, back-tested on Thursday and if it's to be back-tested again we could see the OEX up to about 930 by the end of the day Monday. That would also be good for a test of the mid- to late-December highs and then higher potential is to its December 2nd high, near 938, and its November 3rd high, near 944. But MACD is showing some bearish divergence and to expect much higher, if any, might be pressing your luck.

Key Levels for OEX:
-- bullish above 885
-- bearish below 850


Nasdaq-100, NDX, Daily chart

NDX finished Friday with a bullish engulfing candlestick, which would be a very bullish reversal pattern at the bottom of a decline but has less of a bullish meaning near the highs. One could even argue it's the result of a blowoff move. But if the bulls can keep up the buying pressure on Monday we could see it challenge the top of a rising wedge pattern, near 4557 by the end of the day Monday, which would also have it tagging its 78.6% retracement of its December-February decline. The first sign of trouble for the bulls would be a drop below Friday's low at 4452.

Key Levels for NDX:
-- bullish above 4558
-- bearish below 4374


Nasdaq Composite, COMPQ, Daily chart

The Nasdaq has the same bullish, potentially bearish, candlestick on Friday and it made it up to within 3 points of potentially strong price-level S/R at 4920. This was the shelf of support that held in November and December 2015 until it broke on January 4th. A quick back-test on January 5th was followed by a strong breakdown and therefore a return to the scene of the crime could result in many traders getting out of positions after they had ignored their stops back in January when the market broke down. The promised God that they will never do that again if they can just get out even. But if the bulls can break above 4920 I see upside potential to about 4550 and then maybe up to 4970 where it would retrace 78.6% of its December-February decline. As with the NDX, the first sign of trouble for the bulls would be a drop below Friday morning's low at 4832.

Key Levels for COMPQ:
-- bullish above 4920
-- bearish below 4734


Russell-2000, RUT, Daily chart

Tuesday's rally spiked the RUT up and over resistance at 1100-1105, which had held back previous rallies in March, and then Friday morning's quick pullback held support on a back-test of its uptrend line from October 2014 - September 2015 (H&S neckline that has so far been negated but only if it holds above 1100 this coming week). But the bulls need to keep the buying going because Friday's recovery off the low left a hanging man doji for the day's candlestick, which could turn into a reversal pattern if Monday finishes with a red candle. If last week wasn't a blowoff move and the rally continues we could see the RUT make it up to its downtrend line from June-December 2015, currently near 1140, which is also the current level for its 200-dma. But with the bearish divergence we're seeing at the new highs this past month I would be careful about pressing upside bets.

Key Levels for RUT:
-- bullish above 1105
-- bearish below 1065


SPDR S&P 500 Trust, SPY, Daily chart

This past week, with Wednesday's and Friday's rallies, SPY is pushing up against the top of its BB, as can be seen on its daily chart below. It can push the BB higher but it's not a good time to be aggressive on the long side. MFI shows a clear bearish divergence against the mid-March highs and the trading volume has remained on the light side. These are not all rally killers but it's a good setup for a reversal that the bears should be watching for.


Powershares QQQ Trust, QQQ, Daily chart

QQQ is also pushing up against the top of its BB, currently at 110.41 and only 5 cents above Friday's close. Trading volume is tailing off but Williams %R continues to support the bullish trend by flattening out in overbought. Trend followers should pull stops up tight since a drop back down from the top of the BB could lead to at least another return to the 20-dma, currently at 107.09.


S&P 500, SPX, Weekly chart with 23-week cycles

There's one other chart to show this weekend to highlight another reason for caution following the strong rally off the February low. Other than a rally that has gone too far too fast, which is the hallmark of a bear market rally, there's a cycle study that says the rally could come to an end this week. Since the October 2011 low we've seen important highs occur on a 23.2-week cycle and the next period completion is this coming week. These are typically plus or minus a week or two but you can see how well this cycle study has worked for the past 4-1/2 years on the SPX weekly chart below. It's not a foolproof way to trade the market (it did not reverse at the February 2013 cycle turn date and oftentimes it's good for only a small pullback correction) but added to the other reasons to be cautious about this rally, bulls have plenty to worry about even if it's too early for bears.


Summary

It's been a great run for the bulls and stronger than I thought we'd see when the indexes lifted off the February lows (I had expected a big bounce correction but not this big). Indicators have once again turned very bullish and sentiment hit extreme bullishness, although the sentiment had backed off in the past week and then spiked back up into extreme greed on Thursday and Friday. Both price and sentiment are in nosebleed territory and the bulls are going to need oxygen tanks if they want to climb higher. Waning momentum in the momentum oscillators suggests they're getting tired and had it not been for the end-of-quarter run into the first day of the new month it might have been a different kind of week. That different story might play out in the coming week and therefore it's a good time for bulls to suck those stops up tighter.

If the indexes push higher on Monday keep an eye on the upside projection levels noted on the charts. Respect the trend (up) but don't get complacent about it. Bears have nothing to go with here since there's no evidence of a reversal, only warnings we could be close to one. We could get some important price signals on Monday or Tuesday and by Wednesday we should have a good idea about whether or not a top is being made or if instead we could see a rally last at least another week or two and take us into opex (April 15th).

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

Betting on a Breakout

by Jim Brown

Click here to email Jim Brown

Editors Note:

After languishing for two months at the lows this ETF may be ready to sprint higher. I wrote this weekend about the rising strength in the biotech sector and I think it is time to bet on that strength. The Biotech Index closed at a two-month high after two higher lows in March.


NEW DIRECTIONAL CALL PLAYS


XBI - SPDR Biotech ETF -
ETF Description

The S&P Biotech ETF attempts to match the performance of the Biotech Select Industry Index. The ETF holds 90 stocks in the biotechnology and pharmaceutical sector.

The biotech sector has been in free fall since its high last July at 4,400 on the $BTK Index. The index hit 2,575 in early February and rebounded to trade in a narrow range between 2700-3000 for the last two months. On Friday, the index closed at 3,037 and a two month high. The rebound over 3,000 could be the beginning of a major breakout.

Biotech and pharma stocks have beenunder pressure because of attacks by political candidates claiming they would lower the prices on drugs if they are elected. This caused the sector to collapse most notably in January from 3,900 to that 2,575 level.

If a candidate is elected and did choose to follow through on a promise to lower drug prices it would take a long time, assuming they had the votes in the House and Senate to get a bill passed. I believe the selloff in the biotech sector has been overdone and I have been waiting for a sign there may be a rally in our future. The close over 3,000 on the $BTK could be that sign. The $BTK gained 5.7% last week suggesting buyers are returning.

The XBI gained 2.9% on Friday to cap off a week of gains. The ETF has resistance at $54 and again at $56.50. However, short interest in biotech stocks is so high that any further move higher in the $BTK could cause significant short covering.

I am recommending we buy the June $55 call, currently $3.40. If we get a breakout over $56, it could easily run to $70, which is significant resistance. Obviously that assumes a positive market as well.

A rebound in the biotech sector would lift the Russell 2000 and the S&P and that would help support a positive market.

Buy June $55 call, currently $3.40, initial stop loss $45.85.



NEW DIRECTIONAL PUT PLAYS


No New Bearish Plays




In Play Updates and Reviews

Green Shoots in April

by Jim Brown

Click here to email Jim Brown

Editors Note:

The first day of April is up 62% of the time and economic green shoots on Friday caused a repeat of that trend. The Goldilocks payroll number and recovery in the ISM Manufacturing plus a decent number out of China all combined to give stocks a lift. Add in the buying from end of quarter retirement contributions and another short squeeze was born.

The S&P gapped down -17 points and stopped us out of Autodesk and gave us a bad fill on the Netsuite and AO Smith exits but the index rebounded to trigger our second tranche of SPY puts. The S&P hit the 2,075 resistance level in the slowing spurt to print 2,075.07. That is how strong that resistance is. It was a brick wall.

I tightened up a lot of the stop losses again just in case the rally does not continue.



Current Portfolio




Current Position Changes


SRCL - Stericycle

The long call position was opened at $126.75.


AOS - AO Smith

The long call position hit our exit target at $77.65 and was closed.


N - Netsuite

The long call position was closed at the open.


SPY - S&P-500 ETF

The long put position was increased with a SPY trade at $207.


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


ADSK - Autodesk -
Company Description

Comments:

ADSK dipped below support on the opening market drop to stop us out at $55.75 for a -1.18 loss. No specific news.

Original Trade Description: March 22nd.

Autodesk operates as a design software and services company worldwide. Their software is used to design buildings, design equipment, machines, products, etc. The software is licensed directly and through a network of resellers. Autodesk goes beyond 3D imaging and allows 3D printing of the design using the Moldflow process in the software.

Autodesk is the premier software of this type in the market today. There are competitors but Autodesk is the largest by far. Competitors are Adobe, Ansys Inc and Dassault Systems. Mattel announced in February it was introducing 3D toy printing at home with the "Thingmaker" in cooperation with Autodesk.

In February the company said it was going to lay off 10% of its workforce or about 925 jobs as it transitioned to the cloud.

Shares collapsed with the market in January but began to rebound in February after the cloud announcement. The company said revenue will increase long term because the cloud model is subscription based. In Q4 they added 190,000 subscribers to the cloud product.

They reported adjusted Q4 earnings of 21 cents compared to estimates for 10 cents. Revenue of $648 million beat estimates for $636 million. They guided for a loss of 12-17 cents for Q1 on revenue of $500-$520 million because of their restructuring process. They are taking an $85 million charge for the layoffs. As part of the movement to the cloud they are going to end sales of their software suite that was previously sold direct by Autodesk and by resellers. That willdepress revenue in the short term but increase it significantly in the long term.

By the end of 2017 they are going to terminate all the existing "perpetual licenses" and force current users into the cloud model. Apparently "perpetual" means different things to different people.

Autodesk had been under fire from two activist shareholders and they resolved that last week when they added three directors to the board. Sachem Head and Eminence Capital agreed to certain standstill and voting provisions to get the board seats. Joining the board are Scott Ferguson from Sachem, Rick Hill, chairman at Tessera Technologies and Jeff Clark, CEO at Kodak.

Shares rallied on the news of the new board members are appear ready to break over current resistance at $58 to retest the December highs at $65.

Position 3/29/16 with an ADSK trade at $58.05

Closed 4/1/16: Long May $60 call @ $2.45, exit $1.27, -1.18 loss


AKAM - Akamai Technologies - Company Description

Comments:

No specific news. Shares are still flat but I believe we will see a breakout in the near future. The key is whether it will make the move before out April option expires.

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 rallied to hit our exit target at $77.65 but we were killed by a wide bid ask spread on the exit. The ask was $3.40 but the bid was only $2.60. The market maker was not making a reasonable market.

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

Closed 4/1/16: Long April $75 call @ $1.88, exit $2.60, +.72 gain.


DLPH - Delphi Automotive - Company Description

Comments:

No specific news. Delphi lost -1.33 on the weakness in March auto sales. Sales for March declined from 17.5 million annual rate to 16.57 million.

Target $76.75 to exit.

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.

Position 3/17/16 with a DLPH trade at $72.50

Long May $75 call @ $2.50. See portfolio graphic for stop loss.


HCA - HCA Holdings - Company Description

Comments:

Nice gain of $1.15 to move over resistance. No news.

Original Trade Description: March 29th.

HCA provides health care services in the USA. They offer general, acute care, intensive care, cardiac care, diagnostic, emergency and outpatient services. They operate 164 general and acute care hospitals with 43,275 licensed beds. They also operate 3 psychiatric hospitals and 116 freestanding surgery centers. They were founded in 1968.

In their Q4 earnings they reported $1.69 per share compared to estimates for $1.39. Revenue rose 6.4% to $10.25 billion also beating estimates for $10.14 billion. They guided for the full year to earnings of $6.00-$6.45 and revenue in the range of $42 billion.

In October, the company had warned on Q3 for the first time since 2013. The entire health care market was shaken by the warning because everyone assumed the revenue and profits would always continue to grow. This is the largest company in the healthcare space and is seen as a bellwether for the sector. HCA rectified the problems by Q4 and the CEO assured everyone on the call that all was well and HCA was "well-positioned for continued success."

One of the problems in Q3 was retaining qualified staff. There is an extreme shortage of nurses and the company has to pay premium wages to keep nurses from being lured away to other hospitals. The CEO said they have a plan in place and they view it as an opportunity for 2016.

Shares sank from the October warning through the market washout in January. After they reported earnings the shares rebounded but were hit again in the February decline. Since the February market lows the stock has risen steadily and has reached initial resistance at $78. Once through this level it could be clear sailing to $86-$88 depending on the market.

Earnings are April 28th.

I am recommending an inexpensive $80 strike for May that should still have some expectation premium left when we exit ahead of earnings. The risk is the resistance at $78.50.

Position 3/30/16

Long May $80 call @ $2.50, see portfolio graphic for stop loss.


N - NetSuite - Company Description

Comments:

I recommended we close the position at the open on Friday. Unfortunately, the market gapped down at the open and we lost a huge chunk of premium in the exit. We still posted a $4.71 gain with our $7.11 exit at the low of the day but the option went out at $8.90 at the close after Netsuite rebounded from the opening dip.

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

Closed 4/1/16: Long April $60 call @ $2.40, exit $7.11, +$4.71 gain.


NTAP - NetApp - Company Description

Comments:

No specific news. Trading at the top of its recent congestive resistance range.

Original Trade Description: March 11th.

NetApp provides software, systems and services to manage and store computer data worldwide. They provide data protection and data management for virtualized, shares infrastructures, cloud computing and business applications. Their hot product is a storage area network (SAN) that is all flash memory and not spinning disk drives. This delivers super high performance without the mechanical delays and hardware problems associated with disk drives.

JP Morgan is going to host a moderated "Tech Talk" at 10:AM ET on Tuesday regarding the new SolidFire all-flash array architecture. NetApp acquired SolidFire for $870 million in cash in December in order to increase penetration into the high speed storage market. SolidFire was named the "All-Flash Systems Product of the Year" by Storage Magazine in late February.

NetApp reported Q4 earnings of 70 cents that beat estimates by 2 cents. However, that was down slightly from the year ago quarter. They announced a restructuring program to reduce costs as they focus development on the new SolidFire products. NetApp said they were cutting about 1,500 of their 12,810 employees. They guided for current quarter earnings of 55-66 cents that was below estimates for 72 cents. They expect to take some significant charges on their restructuring effort.

Shares crashed on the earnigns news to $21 but the press has been kind to NetApp and share have rebounded to $27 over the last four weeks. I expect shares to continue to rise to initial resistance at $31 and possibly a new high at $35. The momentum is increasing on the NTAP rebound.

Earnings May 25th.

Position 3/14/16:

Long May $28 call @ 99 cents, no initial stop loss.


OA - Orbital ATK - Company Description

Comments:

Minor decline. Still no complaints here. No news.

Target $88.85 to exit.

Original Trade Description: March 19th.

Orbital ATK was created in 2015 by the merger of Orbital Sciences and Alliant Techsystems. The company develops and produces aerospace, defense and aviation related products for the U.S. Government, allied nations, prime contractors and other customers in the U.S. and internationally.

The currently have a contract to convert the four segment Space Shuttle Solid Rocket Booster into a five segment booster for the new Space Launch System that will carry astronauts back into space. They are working on a new rocket booster to replace the boosters the U.S. is currently buying from Russia. They also develop satellites for commercial, scientific and security applications. They also produce the Cygnus spacecraft that delivers cargo to the International Space Station and returns with completed experiments.

The Defense Systems Group provides tactical missiles, defense electronics and medium to large caliber ammunition, fuzed warheads, etc. The Flight Systems Group produces the Pegasus, Minotaur and Antares launch vehicles.

One of their newest projects is the Mission Extension Vehicle or "space tug." When an existing satellite develops a problem and engineers believe it can be repaired, the space tug would go get the satellite and push it towards the International Space Station where it can be repaired and the tug would then push it back into orbit where it belongs. Since these satellites cost from hundreds of millions to billions of dollars each, having the capability to repair them would save a lot of money.

Sometimes the satellite has simply been active for so long that its orbit has degraded. The space tug would attach itself to the satellite and then lift it back into an orbit that would give the old satellite several more years of useful life. Then the tug would disconnect and repeat the process with a different satellite. The tug could also push dead satellites into a descending orbit where they will burn up reentering the atmosphere. That would essentially remove the trash from what is becoming an increasingly crowded orbital space. The first space tug is expected to have enough fuel to keep it active for up to 15 years. They plan to launch 5 by 2020 and with dozens of very expensive communication satellites running low on fuel every year, it will be a very profitable venture. Clients are already entering into discussions on how the tug can help their satellites.

These are just some of the hundreds of thing Orbital ATK has in the works. They were also named a subcontractor on Northrop's new $120 billion B-21 stealth bomber program.

In early March Orbital reported earnings of $1.45 that beat estimates for $1.09. Revenue of $1.137 billion beat estimates for $1.11 billion. Order backlogs were over $13.5 billion. They guided for the full year to earnings of $5.25-$5.50. Shares crashed from $87 to $74 the next day after they filed a statement with the SEC saying the financial statements covering the Q2-Q3 in 2015 were not accurate due to an accounting error that occurred when the two companies merged. It was a non-cash error covering long-term contracts that were accounted for using different accounting methods in each company. There was no material impact from the restatement but shares always crash when an "accounting error" is disclosed.

After two weeks, shares began to rise again one the smoke cleared. Shares hit resistance at $82.60 on Friday and pulled back only slightly. I am recommending we buy a breakout over that resistance with a target at $90.

Earnings May 30th.

Position 3/21/16 with an AO trade at $82.80

Long May $85 call @ $2.80, see portfolio graphic for stop loss.


PKG - Packaging Corporation of America - Company Description

Comments:

New two-month high close. No news.

Target $64.25 for an exit.

Original Trade Description: March 7th.

PKG manufactures and sells containerboard and corrugated packaging products in the US, Europe, Mexico and Canada. They produce shipping boxes, display packaging and protective packaging. They also produce packages for meat, fresh fruit, processed food, beverages and other industrial and consumer products. They also produce papers for the office environment and for specialty printing. They are the fourth largest producer of containerboard and corrugated packaging in the USA.

They reported earnings of $1.08 that beat estimates for $1.03. However, revenue of $1.39 billion missed estimates for $1.42 billion because of the strong dollar. For the full year profit was $4.47 to give them a current PE of 12.

The company announced an additional $200 million stock buyback program at the end of February. They bought back 1.7 million shares in the last 5 months of 2015 and 1.9 million shares YTD in 2016. The company said its "substantial operating cash flow" gave it an "excellent opportunity" to continue buying back its stock and return value to shareholders.

They also announced a 55-cent quarterly dividend payable April 15th to holders on March 15th which equates to a 4% yield.

Next earnings are April 25th.

After reporting earnings the shares rebounded from a sector downgrade on IP in January. PKG has rebounded from $45 to $54 and could continue higher to as much as $65 before hitting significant resistance.

With recent economic reports suggesting the economy is improving slightly this might be the right time to speculate in companies that will profit from a summer recovery.

Shares dipped slightly on Thursday after hitting as 6-week high on Wednesday. This gives us an opportunity to buy a close to the money option relatively cheaply. There is no entry trigger.

Position 3/11/16:

Long April $55 call @ $2.20, no initial stop loss.


QSR - Restaurant Brands Inc - Company Description

Comments:

Back to the top of the congestion range. Still waiting on a breakout. No news.

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.

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.

Position 3/9/16 with a QSR trade at $38.15

Long April $39 call @ $1.15. See portfolio graphic for stop loss.


SRCL - Stericycle - Company Description

Comments:

No specific news. Finally saw a breakout over resistance at $126. Nice move!

This position was opened with a SRCL trade at $126.75.

Original Trade Description: March 30th.

Stericycle provides regulated and compliance solutions to the healthcare, retail and commercial businesses in the U.S. and internationally. They collect and process regulated and specialized waste for disposal as well as personal and confidential records for destruction.

Everyone knows that doctors and hospitals produce tons of medical waste every month and that waste can be infected with all kinds of bacteria and viruses that can be contagious. You cannot just throw those bloody surgical gowns and blankets in the trash. They have to be disposed of in an environmentally safe way.

We also hear all the time about some food company recalling hundreds of tons of a particular food product because it was contaminated with ecoli or some other bad bacteria or foreign substance. Where does that food go? It goes to Stericycle and they dispose of it safely.

In Q4 they acquired Shred-It for $2.3 billion in order to expand into the confidential records destruction business. Stericycle sees Shred-It as an excellent opportunity for cross selling. Less than 20% of Stericycle's current customers use a document shredding service.

In their recent Q4 earnings they reported $1.11 per share that beat estimates for $1.08. However, revenue of $888.3 million missed estimates slightly of $889.1 million. Revenue was hampered by a $26.9 million hit from the strong dollar. Gross margins were 42.9%.

In 2016 earnings are expected to grow +20.3% to $5.26-$5.33 with revenue up +21% to $3.6-$3.67 billion.

Earnings are April 28th.

Shares have crept up to resistance from November at $126 and a breakout here could run to $140 or higher.

Position 4/1/16 with a SRCL trade at $126.75

Long May $130 call @ $2.70, initial stop loss $122.65.


SWHC - Smith & Wesson - Company Description

Comments:

No specific news. Finally a decent rebound after four days of weakness. Let's hope it continues.

Original Trade Description: March 26th.

Smith & Wesson was founded in 1852 and manufacturers firearms in the U.S. and internationally under many different brands but primarily Smith & Wesson.

Gun sales are booming. Sportsman's Warehouse said gun sales rose +34% in Q4 alone. With every terrorist attack or mass shooting more consumers rush out to buy guns for self defense. With the potential for additional attacks in the U.S. this trend is not going to slow. However, sales are cyclical. They surge after attacks like San Bernardino or after speeches by politicians about gun control. President Obama has been the best gun salesman we have ever had. Every push by the administration to get more laws passed results in millions of new gun sales.

The New York public advocate, Letitia James created an excellent buying opportunity in a stock that normally refuses to go down. James sent a letter to the SEC demanding they investigate Sturm Ruger (RGR) because their guns are used in crimes. She did the same thing to Smith & Wesson back on December 15th. Seriously? Guns are used in crimes? Who does not know that?

James believes investors in these companies could suffer "reputational risk" if people find out they own shares of SWHC or RGR. She also urged Toronto Dominion Bank (TD) to stop financing the firearms manufacturer. She threatened the bank with the possibly loss of "millions of dollars in contracts" from New York City if they continue to finance gun manufacturers. I wonder if she is going to attack auto manufacturers next for people injured in accidents?

In their Q4 earnings where there was a surge in gun sales after San Bernardino, the company reported earnings of 59 cents that beat estimates for 41 cents. Revenue rose +61% to $210.8 million and easily beat estimates for $182.3 million. The company guided significantly higher for the current quarter to revenue of $210-$215 million compared to estimates for $196 million. Earnings are expected to be 51-53 cents. That is a 13.7% increase in revenue and 20% increase in earnings. For the full year they guided to earnings for $1.68-$1.70 and analysts were expecting $1.42. This was also higher than the company's prior forecasts for $1.36-$1.41 from January.

The company said inventories were depleted because of the high demand and they were focused on increasing production rates to keep up with demand.

Earnings are June 16th.

Shares rocketed higher after the earnings in early March and they were already up strongly since December. I hesitated to buy the top since it was making new highs every week. The hatchet job by James has given us a buying opportunity.

I am recommending a June call because it expires after earnings and should retain some expectation premium when we exit before earnings. Buying a May option would be subject to accelerated premium decay.

Position 3/28/16:

Long June $28 call @ $1.95, no initial stop loss.



BEARISH Play Updates (Alpha by Symbol)


ENDP - Endo Intl Plc - Company Description

Comments:

Minor gain after biotech sector rallied another 2.65% on short covering.

Original Trade Description: March 28th.

Endo develops, manufactures and distributes pharmaceutical products and devices worldwide. The market well known brands including Percocet, Lidoderm, Voltaren and a wide range of pain medications and testosterone replacement therapies.

Shares have declined from $96 last April to $28 today. The acceleration of the decline over the last several weeks has been in reaction to some generic competitors expected to receive approvals from the FDA soon.

The company also lowered guidance at the Barclay's Healthcare Conference on March 15th. The company lowered guidance to revenue of $928-$972 million for Q1 and analysts were expecting $1.03 billion. Earnings guidance was $1.02 to $1.08 and analysts were expecting $1.19.

Endo is also under pressure as a result of the Valeant Pharmaceutical disaster and the overall decline in the biotech sector.

Earnings are May 9th.

Shares have flat lined at the $28.50 level for more than a week and I believe we are about to see another leg lower. Today was the lowest close since January 2013.

Position 3/29/16:

Long May $25 put @ $2.10. See portfolio graphic for stop loss.


SPY - S&P 500 ETF - ETF Description

Comments:

The SPY rallied to $207.14 and triggered our next tranche of puts on the ETF. We entered the second tranche at $3.29.

I am recommending we add to this position when/if the SPY trades up to $210.

Original Trade Description: March 16th.

All good things must come to an end. The market appears poised to rally and produce a new leg higher. However, there is serious resistance starting at 2,075 on the S&P and continuing through 2,100. The odds are very slim that a rally will make it through that resistance ahead of the earnings cycle and assuming earnings for Q1 are as bad as the guidance we have been getting then it is even more likely the market rolls over into the "Sell in May" cycle.

Nobody can accurately pick turning points in the market on a routine basis. There are far too many things that can push and pull the indexes but at critical resistance levels we can normally anticipate at least a little reaction to those levels.

The S&P has strong resistance beginning at 2,078, which equates to $208 on the SPY. That resistance runs from 2,078 to 2,105 or roughly $211 on the SPY. I am proposing we buy puts on the SPY starting at $207 with a stop loss at $213.

The S&P may never hit those levels or it could hit them next week. The close after the Fed decision was 2,027, which means it would still have to rally 50 points to hit our initial entry point. Once it reaches that level it will have rebounded for +268 points and would be extremely overbought when it reached that 2,078 level. That makes it even more likely it will fail when it gets there.

I am going to recommend the June $200 puts. They should cost about $4 when the SPY reaches the $207 level. I want to use June because we may not reach that resistance for a couple weeks, if at all, and once we do hit that level I want to be able to profit from any sell in May decline.

This position could go for several weeks without being triggered and there is a good chance we will not get to play it with numerous analysts calling for a failure at 2,040 and 2,050 along the way. There are analysts calling for a retest of the 1,900 level this summer with some projecting significantly lower levels. If you look hard enough you can probably find someone projecting targets a couple hundred points higher or lower than the ones discussed.

Morgan Stanley's Adam Parker slashed his price target for the S&P from 2,175 to 2,050 yesterday. Most of the major banks are in the 2,050 to 2,100 range so the expectations for a major rally from here are pretty slim.

Position 3/23/16 with SPY trade at $204.11

3/23/16: Long June $200 put @ $4.77 with SPY trade at $204.11
4/01/16: Long June $200 put @ $3.26 when SPY traded at $207.

If the market continues higher add to that position again at $210.
See portfolio graphic for 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