Option Investor
Newsletter

Daily Newsletter, Wednesday, 4/6/2016

Table of Contents

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

Market Wrap

FOMC Bounce

by Keene Little

Click here to email Keene Little
Either shorts were covering or bulls were buying the market today in anticipation of a positive response to the FOMC minutes, which were released at 14:00. The initial reaction following the release of the minutes was selling but as we've seen so often, buy programs kicked in and kicked the bears to the side again. Now we wait to see if there will be follow through to what might have been just an FOMC-inspired rally (again).

Today's Market Stats

The market got a nice bounce off yesterday's low and it continued higher right into the FOMC minutes, released at 14:00, but then sold off some. The rally might have been more short covering than real buying since the shorts have learned you can't hang around long in short positions in this market. But following the release of the minutes the bears were satisfied that they're right and they jumped back into short positions, driving the indexes back down in the afternoon. However, they were forced out again once buy programs kicked in to drive the indexes back up in what appears to be a "Fed save" as we've seen many times before. These post-FOMC saves often get reversed the next day so we'll see if that pattern holds true on Thursday. Today's trading volume was less than what we've seen during the days of selling.

There was very little to distract the market today since economic reports were minimal and had no impact. Overseas news reports were also benign and oil's rally following this morning's crude inventory report (an unexpected drawdown) helped the stock market rally. Following the decline from last Friday it appeared there was profit taking today as the shorts covered (bought back) their positions and that lifted the market up. But the FOMC minutes did not shed any new light on what we already know and it's not exactly market friendly.

While the market likes the idea that the Fed has backed away from raising interest rates there is concern now about why the Fed is backing away. The minutes showed the Fed heads debated whether or not to raise rates in April but it was clear that the consensus opinion was that the global economic slowdown warranted a cautious approach to rate increases. They recognized that there were too many downside risks to the growth expectations. Combining the Fed's cautious approach, reflected in the minutes, with the continuing reports of a slowing economy, including downgrades to GDP growth, investors are starting to get more nervous about what that might mean for the stock market (although today certainly did not reflect any concern).

While the FOMC minutes reflect the desire to raise rates at least twice more in 2016 (down from an expected 4 times that we were told back in December), and we're hearing from Fed heads since the last meeting saying we should expect more rate increases, most are starting to believe the Fed will not have the wiggle room needed to raise rates again. Many are now saying it won't be until 2017 before they'll be able to raise rates further (I think it will be well beyond 2017 since they'll be into negative rates and beaucoup QE by then). There's been a shift in Fed opinion about the state of the market and it's not good.

Adding to the Fed's worries, there are more signs of an economic slowdown, which in turn has created a less desirable stock market in which to take companies public. In the continuing drumbeat of downbeat economic news (it really is more fun to talk about growth but reality is the opposite), the U.S. IPO market is not looking so good at the moment. Bringing IPOs to market is a reflection of how well the companies (including the big banks behind the IPOs) believe they can do in the market.

When the companies and the banks behind them are not feeling good enough about the market support they will simply pull back and wait for better times before going public. Nervous investors tend not to support new IPOs and that's what makes these a leading market indicator. It tells us whether the current bull market is healthy or if instead it's finishing its run. At the moment the IPO market is saying the bull is dying of old age.

The chart below shows the number of IPOs that came to market each year since 2006. The significant decline in 2008 was of course followed by a very bad year for the stock market. The bounce into May 2008 was accompanied by a significant slowdown in the IPO market and that high led to the market crash into the end of the year. The number of IPOs topped in 2014 and it's been dropping since then. The lower number in 2015 was accompanied by a choppy flat year for the stock market. The number has been dropping steadily since last October and so far this year, as reported by VentureBeat, only 24 companies have filed for IPOs this year. The data for 2016 is obviously only the first quarter but only 8 IPOs shows us the rate has significantly decreased and is on par with 2008.

We know the market has ignored fundamental reasons to be cautious and the above information is just another one to throw into the pile of "warnings" that could be ignored for a long time. However, with a tired bull market and many signs of an economic slowdown (recognized by the Fed as well), it's difficult to make an argument for higher prices. The market could certainly continue higher but I think it's a much riskier bet today to bet on the long side. Upside potential is dwarfed by downside risk and once we get through what might be a bullish April it's going to be hard not to agree with the sell-in-May crowd. The more immediate question is whether or not April will be bullish.

The price pattern for the indexes is not clear enough to argue strongly for either side. I could make the argument that we've only seen another corrective pullback from last Friday's highs, which points to a continuation higher. But with plenty of bearish divergences at the last high and daily oscillators rolled over it's hard to argue for higher prices. It looks like it would be safer to bet on the short side but we know how well that's been working for the bears (wink). Let's see what the charts are telling us.


S&P 500, SPX, Weekly chart

Last week SPX broke its downtrend line from November-December 2015 and appears to have its sights set on the downtrend line from July-November 2015, near 2092. This week it pulled back to its 2015 closing high near 2043 and today's rally keeps it in the green for the year. If SPX does make it up to its downtrend line from last year, it will be important to see how price behaves there. At the moment the weekly candle is a hanging man doji, which could be a reversal in the making but would only be confirmed with a red candle for next week. It's opex next week, which is typically bullish (but also typically very bearish if it's not bullish) so there could be some volatility between here and 2092. It would be more bullish above 2100.


S&P 500, SPX, Daily chart

The SPX daily chart below shows the price action around the downtrend line from November-December after breaking above it on March 30th. Yesterday it broke its uptrend line from February 24 - March 24, as well as back below its broken downtrend line, but bounced back up today to the broken uptrend line. It could result in a bearish kiss goodbye if it sells off on Thursday. But if the buyers can keep the bears away, we could see a rally at least up to the downtrend line from July-November 2015, near 2092.

Key Levels for SPX:
- bullish above 2100
- bearish below 2022


S&P 500, SPX, 60-min chart

The 60-min chart below shows how well SPX has been holding price-level support near 2043 so that it stays in the green for the year. Clearly some computer programs are set to buy that support level. As a possible pattern that I'm watching, two equal legs up from March 24th points to 2092.28, which is right on top of the downtrend line from July-November 2015. That's another reason to watch price action carefully if that level is reached.


S&P 500, SPX, Weekly cycles chart

The SPX weekly chart below is to show a cycle study, which points to another reason bulls should be careful this week. A 23-week cycle has identified multiple tops, even if they're followed by only a small pullback. This cycle study says we're due for a top this week (+/- a week or two so last week's high could have been it or we might see a final high next week).


Dow Industrials, INDU, Daily chart

The Dow has been fighting to stay above its May-November 2015 downtrend line, which it had broken above on March 30th. It closed below it yesterday and above it today and there's upside potential to the 18K area if it's to test its November high (17978). If it does make it up there I suspect it will show further bearish divergences on the oscillators, which are already showing a reversal (and MACD has broken a shelf of support it's been holding for the past month). I see upside potential but it's not something I'd be comfortable betting on.

Key Levels for DOW:
- bullish above 18,000
- bearish below 17,399


Nasdaq Composite index, COMPQ, Daily chart

Last Friday's rally for the Nasdaq stopped at its downtrend line from December as well as price-level S/R at 4920. This S/R level goes back to July 2015 and on January 4th it gapped down below this support level. How many traders are now thankful just to get out of positions they felt they were stuck in since January? It's for this reason why support often turns into resistance so we'll see if resistance still holds. A little higher, near 4955 is the top of a rising wedge, which will be near 4970 by next Monday. That level is where the Naz would also retrace 78.6% of its December-February decline so it could be tough resistance. By the same token, a rally above 4970 would be more bullish. The bears need to see a break below Tuesday's low near 4839 to suggest a top is in place, which would be better confirmed with a drop below the March 24th low near 4735.

Key Levels for NDX:
- bullish above 4970
- bearish below 4734


Russell-2000, RUT, Daily chart

The RUT's struggle has been around its H&S neckline (uptrend line from October 2014 - September 2015), near 1100. It first tried to break above the line on March 7th, pulled back and then tried again on March 18th, pulled back and then climbed above the line on March 29th. It has pulled back to the line (closing slightly below it yesterday) and from a bullish perspective it's a bullish back-test of the line now that it's been recovered. It's also back-testing its 20-dma, currently near 1093. If support holds we could see another leg up to its downtrend line from June-December 2015 and its 200-dma, near 1137. Above 1140 would be a bullish breakout but with oscillators showing bearish divergence it's hard to bet on the upside here. A drop below 1090 would be bearish and below 1065 would confirm the leg up from February completed.

Key Levels for RUT:
- bullish above 1140
- bearish below 1065


10-year Yield, TNX, Daily chart

Treasury yields look like they'll be heading lower (bond prices rally), which supports the idea that the Fed will not be raising rates. If yields do continue lower it will likely reflect a rotation out of stocks and into the perceived safety of bonds so keep an eye on the 10-year yield (TNX) here. It dropped below its uptrend line from July 2012 - January 2015, near 1.77 and as long as it stays below that level it will remain bearish (bullish for bond prices). I haven't changed my opinion, held for the past several years, that we'll see TNX below 1% (and TYX, the 30-year, below 2%) before yields bottom.


Transportation Index, TRAN, Daily chart

The Trannies topped out on March 21st and while the other indexes continued to press higher they did it without the TRAN following, which at the moment is bearish non-confirmation. The TRAN was able to break its downtrend line from March-November 2015 on March 18th but held above it for only two more days before dropping back below the line on March 23rd. It tried again by poking above the line on an intraday basis on March 30th but it was rejected and has sold off since then. All of that is bearish price action around this key trend line. Dropping below its March 4th today, at 7726, should be an indication the leg up from January completed and now we're looking for at least a larger pullback before heading higher. The bearish wave count calls for the start of a stronger decline than the November 2014 - January 2016 decline.


U.S. Dollar contract, DX, Daily chart

The US$ has made it down to support at the top of a broken up-channel from 2008-2011, which supported previous pullbacks during the past year and is currently near 94.25. A little lower is the top of a broken up-channel from May 2011, near 93, which is where the bottom of its down-channel from last December will be located at the end of this month. So the dollar could find support here or about a dollar lower if it continues to chop its way lower this month. It's now very oversold on the weekly chart and showing bullish divergence on the daily chart so it's certainly setting up for a bounce back up to the top of its trading range (near 100).


Bloomberg Commodity index, DJUBS, Daily chart

It can be reasonably argued that much of the stock market rally off the February low had a lot to do with the rally in commodities. There was no real fundamental reason for the rally other than it came off a very oversold market and more buying simply ignited more short covering. Oil and the stock market have been more in synch than not since May 2015. Looking at the DJUBS daily chart below you can see the rally started off the January 20th low, the same as the stock market. It made a higher low on February 10th, one day before the stock market, and it peaked on March 18th, which is two weeks prior to the stock market high on April 1st. Did anything fundamentally change to support the big stock market rally? Not really and in fact it looked like it was rolling over with commodities following its March 22nd high. But then Janet Yellen promised to take care of the stock market, I mean economy, with fewer rate increases and that boosted the stock market to a new high.

The commodity chart shows a down-channel for the decline from April 2014 and the January-March rally stopped at the top of the down-channel. I could easily make the argument that the 3-wave a-b-c bounce off the January low will now be followed by another leg down to complete a larger 5-wave move down from April 2014. The bottom of the down-channel will be near 65 by mid-May. But there's still a bullish possibility here if it rallies from here. It needed to stay above the January 29th high at 77.25 to better support the idea that we'll get a 5-wave move up from January but the pullback hit a low of 76.80 yesterday and today and following EW (Elliott Wave) rules, that's a violation of the bullish impulsive wave count.

Turning a blind eye to the brief EW rule violation for the bullish wave count, if it rallies from here we could see a new high for the move (bold green depiction). The new high would likely be followed by a deeper pullback correction before continuing to rally into the summer so be careful chasing a new high. However, if the bounce into the March high completed a correction to the decline then we'll see a new low follow (bold red depiction). What commodities do from here should provide the clues we need for what the stock market will do and if DJUBS drops below today's low at 76.80 I would not look to be on the long side of the stock market of either commodities or the stock market.


Gold continuous contract, GC, Weekly chart

After gold reached the top of its down-channel from 2013 it has been pulling back but in a choppy fashion. Gold's moves tend to be choppy so I can't read anything into the short-term pattern but as long as it stays below 1250 I would stay bearish gold. Between 1250 and its March 11th high near 1288 would be no-man's land and above 1287 would be bullish (but watch for resistance at 1308).


Oil continuous contract, CL, Daily chart

There was a surprise crude inventory drawdown that was reported this morning at 10:30 (-4.937M barrels as compared to a +2.299M barrels buildup last week) and that gave oil a boost higher and it finished +5.2% today. Oil's rally helped the stock market rally as well. But follow through to today's rally will be key for oil bulls since today's high was 37.90, which at the moment is a back-test of price-level S/R near 38. You can see on its daily chart below how the $38 level has acted as support/resistance since the August 2015 low. It had broken above this level in mid-March, as well as its downtrend line from June-October 2015 (log price scale) and then hit the top of its parallel down-channel for the 2015 decline. It then dropped back below 38 last Friday so today could be the back-test. If it rolls back over following today's bounce it will confirm a sell signal with a bearish kiss goodbye. That's the setup so we'll see if oil bulls can thwart the bears here.


Economic reports

In a continuation of a slow week for economic reports this week, Thursday will only be the unemployment numbers in the pre-market session followed by natural gas inventories following the open and then consumer credit in the afternoon. Friday's report will only be wholesale inventories so the market will have to look overseas for trouble.


Conclusion

The short-term price pattern for the indexes supports the idea that we could see another push higher for what would likely be the completion of the leg up from February. Whether or not the market will hold up into opex week next week (typically a bullish week) is a big question mark at the moment. Last Friday's high might have been it for the blue chips but the tech indexes made new highs today and that has it looking like we should expect new highs for the other indexes. If they don't make new highs then we'd have bearish non-confirmation if the indexes drop back below Tuesday's lows.

We're seeing bearish divergences on the charts and with an overbought market showing waning momentum it's a risky time to bet on the long side. It might be early to try shorting this rally (for at least a deeper pullback) but I think the bear's turn is now very close.

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

Slow and Steady

by Jim Brown

Click here to email Jim Brown

Editors Note:

Sometimes slow and steady with inexpensive options wins the race. CSC is a tech giant that is normally overlooked. They are a Fortune 500 company and have been around a long time. The recent trend has been a nice steady rebound from a post earnings crash.


NEW DIRECTIONAL CALL PLAYS


CSC Computer Sciences Corp -
Company Description

CSC is an information technology and profesional services Fortune 500 firm that provides solutions in North America, Europe, Asia and Australia.

On February 11th the Supreme Court of Victoria, Australia, approved the acquisition of WXC Limited for (AU)$427.6 million. CSC believes the acquisition of UXC will strengthen their global commercial business by adding the UXC platform to the CSC cloud, cyber and big data offerings. Back in August CSC acquired two other companies, Fruition Partners, a service-management technology provider and London-based Fixnetix, a provider of front-office managed trading software for capital markets.

They are also acquiring Xchanging, a UK company that provides software and outsourcing services for the insurance industry for $697 million. That deal is currently going through the regulatory approval process.

The point here is that CSC is a leading provider of information technology and they are growing rapidly through acquisitions. They are moving towards a mix of cloud based higher margin products that will be beneficial over the long term. They are also buying back stock with a new authorization in January. They paid a special dividend of $10.50 when they spun off the public sector business in Q4. That accounts for the $10 drop in the stock price at the end of November.

Earnings for last quarter were 71 cents that beat estimates for 69 cents. However, revenue declined -10.2% to $1.75 billion missing estimates for $1.859 billion. Shares fell to $24 on the news. However, the reduced revenue came from a switch to cloud products, which have a long term subscription revenue rather than a short term one time sale. Adobe had the same problem when they went from software sales to software as a service. There is always a drop in revenue during the switch but long-term revenue rises and is more stable.

Total company bookings rose +21% to $2.7 billion. Operating income rose +9.2% to $190 million.

Earnings are May 17th.

Shares rebounded from that post earnings low in February to pass resistance at $33 last week. The market decline this week took some of the bloom off the stock and deflated the option premiums. Prior resistance became support and shares started to tick higher on Wednesday afternoon. This is a relatively slow mover but it has been steady since the rebound began.

I am recommending a June option but we will exit before earnings in May. Using a June option the premium will still have some earnings expectations premium when we exit.

Buy June $24 call, currently $1.50, initial stop loss $32.15



NEW DIRECTIONAL PUT PLAYS


No New Bearish Plays




In Play Updates and Reviews

Biotech Breakout

by Jim Brown

Click here to email Jim Brown

Editors Note:

Rising oil prices, a lack of negative data and several biotech stories helped power a new short squeeze in the biotech sector. This powered the S&P to a 21-point gain. The S&P rebounded from 2,045 to 2,066 and closed 9 points under the start of its strong resistance band. This was just a short squeeze and not a fundamental reversal.

The rebound was caused by a short squeeze in the biotech sector. The $BTK rallied 6% and the XBI ETF rallied 7%. We entered that play just in time at the open on Monday. The XBI is up $4 since w started the position and has room to run.

The Allergan/Pfizer deal was cancelled and Bill Ackman was bullish about Valeant on his earnings call this morning. These news items helped power the biotech squeeze as analysts kept talking about who would be the next takeover target.

Unfortunately the biotech short squeeze was also felt in our put position on Endo Pharma. After setting a new 3-year low on Tuesday, it was up 9% today in a short squeeze.

Everyone loves a short squeeze in the market but typically they do not last. While every major market rally normally starts with a squeeze, every squeeze does not produce a rally.

The S&P and Dow failed to return to their resistance levels at 2,075 and 17,750 but the Nasdaq closed at 4,920 and well over resistance at 4,900 thanks to the biotech explosion. The Russell gained 1% but remains trapped in the 1100-1110 range and did not recover its recent high.

The biotech rally should fade slightly after the index closed exactly on the 100-day average and strong resistance. However, I believe it will eventually break through and retest 3,800.



Current Portfolio




Current Position Changes


SWHC - Smith & Wesson

The long call position was opened at $23.55.


NTAP - NetApp

The long call position should be closed at the open on Thursday.


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


ADBE - Adobe Systems -
Company Description

Comments:

Nice rebound from Tuesday's selling. Back up testing new high resistance. No news.

Original Trade Description: April 4th.

Adobe Systems Incorporated operates as a diversified software company worldwide. Its Digital Media segment provides tools and solutions that enable individuals, small and medium businesses, and enterprises to create, publish, promote, and monetize their digital content.

For years they sold their Photoshop software and assorted tools as boxed software on a CD with a license key. Once you bought it you own it and Adobe never received any further revenue unless you upgraded to a newer version at some later date.

All that has changed with the move to the cloud. The new product is called the Creative Cloud and is a subscription based product where you pay and pay and pay for as long as you continue to use it.

Moving to the cloud model has a lot of inherent problems. Once you quit selling your boxed software that big chunk of retail revenue goes away. In the case of Adobe their software sold for many hundreds, if not thousands of dollars. That meant the one time revenue disappeared in exchange for a $19 to 49 a month subscription fee. Over the long term the revenue is stable and eliminates the volatility of the single sale model.

Earnings for the quarter reported in March were 66 cents that beat estimates for 61 cents. Revenue rose 25% to $1.38 billion also beating estimates for $1.34 billion. They signed up a whopping 798,000 new subscribers to the Creative Cloud suite service. They guided for earnings of 64-70 cents for the current quarter and above analyst estimates for 65 cents.

Earnings are June 21st.

Shares spiked to $98 on the news before pulling back to consolidate at $92 for over a week. Over the last several days they crept up to $96 and then sold off in the weak market on Monday. I believe this market weakness is a buying opportunity for Adobe.

I would like an entry point closer to $92 but there is no guarantee we are going to get it. The S&P futures are down hard tonight at -6.50 and the market is likely to open lower on Tuesday. I am suggesting we buy the option 5 min after the open. That will give the prices time to evaporate in a falling market. Hopefully ADBE will gap down a couple dollars.

Position 4/5/16

Long May $95 call @ $2.48. No initial stop loss.


HCA - HCA Holdings - Company Description

Comments:

Back over recent resistance. We need to get over $80 to trigger short covering. 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.


NTAP - NetApp - Company Description

Comments:

No specific news but only a minor rebound. I considered closing the play but this is a cheap option and we still have a month to go. Maintain the stop loss at $25.85.

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, see portfolio graphic for stop loss.


OA - Orbital ATK - Company Description

Comments:

Decent rebound. No news. Still not back to resistance but headed in the right direction.

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:

Nice rebound from Tuesday's drop. Let's hope the trend returns. 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 20th.

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.


SRCL - Stericycle - Company Description

Comments:

No specific news. Minor rebound but holding over prior resistance at $126. We need a catalyst to break the deadlock.

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. See portfolio graphic for stop loss.


SWHC - Smith & Wesson - Company Description

Comments:

Minor gain but this was a tech/biotech rally day and S&W was not invited to the party.

Original Trade Description: April 5th.

I am reloading the prior play on Smith & Wesson. Shares failed to decline any further today after being crushed on Monday. The triple downgrade by Cowen, CL King and BB&T Capital markets after the March NCIS background check data declined slightly was unreasonable. March checks declined -3% from February but they were sill up 25% over March 2015. The 3% decline was just noise in the greater outlook.

S&W shares declined to exactly the 100-day average on Monday and that has been support for a long time. I believe we should take advantage of this decline and the shrinkage of the option premiums.

Prior play description: 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.

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.

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 4/6/16:

Long June $24 call @ $1.80, no initial stop loss.


XBI - SPDR Biotech ETF - ETF Description

Comments:

Outstanding day for the biotech sector. The ETF gained 7% and the biotech index 6%. The breakout came just like we expected.

Original Trade Description: April 2nd.

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.

Position 4/4/16

Long June $55 call @ $3.50, see portfolio graphic for stop loss.



BEARISH Play Updates (Alpha by Symbol)


ENDP - Endo Intl Plc - Company Description

Comments:

The biotech rebound erased the big decline from Tuesday with a $2.32 gain. The sector rebound did not solve Endo's problems. It just created a short squeeze and Endo was heavily shorted.

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:

One short squeeze does not make a trend and the S&P failed to return to the prior highs.

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.




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