Option Investor
Newsletter

Daily Newsletter, Saturday, 4/9/2016

Table of Contents

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

Market Wrap

Momentum Fading

by Jim Brown

Click here to email Jim Brown

The Dow and S&P both made another lower high on Friday as the early morning rally faded almost immediately. They remained in positive territory for the day but lost ground for the week.

Market Statistics

Friday Statistics

The Dow and S&P both failed to return to the highs set last Friday and Monday's open was the high for the week. Both set a lower low on Thursday and barely held above that low on Friday. The indexes are trapped in a congestion range below major resistance levels. Both indexes touched that resistance the prior Friday but it has been downhill ever since. Conviction is fading with volume barely over 6 billion shares on Friday and we are not even in the summer doldrums yet.


Thursday's decline was blamed on the Japanese Yen and the Yen carry trade blowing up. When the Yen is cheap hedge funds can borrow for almost zero interest and then buy U.S. and European stocks that pay hefty dividends or are in growth mode. When the Yen rallies it is like an interest rate hike on those loans and investors are forced to sell the stocks and pay back the loans.

Friday's rally was blamed on rising oil prices except oil gapped open to $39.50 and never declined below $39.25 to post a 6.4% gain for the day and close at $39.75. The equity markets gapped open with oil but then rolled over immediately and closed near the lows for the day. The Dow was up +153 at the open and closed with only a 35-point gain after trading in negative territory late in the session.

The talking heads on TV will blame market movement up or down on something every day. They will pick the easiest excuse and run with it all day. Whether or not that is the right reason is immaterial. It is a headline and gives them something to talk about and sound intelligent. It is better than saying, "the market is down triple digits and we do not know why."

On Friday, they could have blamed economics for the decline because the numbers are worsening nearly every day. The Wholesale Inventory report for February declined -0.5% after a previously reported +0.3% increase in January. However, that January increase was revised down to -0.4%. The February inventory number is the lowest since May 2015. Durable goods sales rose +1.2% but nondurable sales were down -1.6%. Sales declined -0.2% and the inventory to sales ratio declined from 1.37 to 1.36.

Moody's Chart

The sharp drop in inventories caused a sharp drop in GDP forecasts. The Atlanta Fed real time GDPNow forecast declined to only 0.1% growth for Q1. That was a drop of -0.3%. By comparison, Morgan Stanley is now predicting 0.3%, Barclays 0.3% and Moody's 0.1%. Historically the GDPNow forecast has been the most accurate. If the actual number comes in anywhere close to this it will be the fourth consecutive quarter of declining growth. Regardless of what the Fed says they are not going to raise rates with GDP growth at zero.


The Thursday night event with Yellen, Bernanke, Greenspan and Volcker was a bust. It had the potential to be filled with fireworks but came off as a yawner. About the only points worth repeating were Yellen and Bernanke claiming the U.S. economy was strong. Considering the GDP information in the prior paragraphs you have to think they are either delusional or flat out lying for reasons we do not understand. Yellen also said the rate hike in December was the right move. (Never admit you made a mistake)

For Yellen to claim the U.S. economy is strong she has to be comparing it on a relative basis to the rest of the world but even that is a weak comparison. With seven Fed heads now talking about rate hikes sooner rather than later it makes you wonder if they are pumping happy gas into the halls of the Federal Reserve. We do know that the Fed has resorted to Fedspeak in the past to create volatility in the bond market and keep interest rates elevated when they could not actually hike rates for economic reasons. I have to believe this is what we are seeing today in this new era of Fed communications. If the Fed is trying to hype rates they are doing a poor job and losing credibility. The yield on the ten-year treasury declined to 1.685% intraday on Thursday and nearing a three-year low.


This apparent hurry to hike rates is putting a cloud over the market and we have seen the impact over the last two weeks. It will only get worse if the economics continue to decline and the Fedspeak does not lighten up.

The calendar for next week has seven Fed speeches and a deluge of economic data from China. If that data is positive it could lift the U.S. markets but it would accelerate Fed action because Yellen emphasized they were watching China and the global markets as a threat to the U.S. economy. If China appears to be healing then the Fed could check them off the problem list. The Fed speakers could mention that in their appearances.

The Fed Beige Book on Wednesday is expected to show conditions are growing very slowly in the 12 Fed regions. If there is any worsening of those conditions the market could weaken.

Retail sales on Wednesday could also be a challenge after the Gap warned on Friday about rapidly slowing sales in the malls. The business inventories on Wednesday could push GDP estimates to zero or below if the numbers come in below expectations.

The Q1 earnings cycle begins this week with Alcoa on Monday, JP Morgan on Wednesday, Bank America and Wells Fargo on Thursday and Citigroup on Friday. With weakened expectations it will be interesting to see if the financial sector can exceed those low estimates or miss the already lowered bar.

Late Thursday the Fed sent out a notice of an "Advanced Notice of a Meeting Under Expedited Procedures." The meeting is scheduled for 11:AM on Monday and the topic is "discount rates." There was an uptick of alarm in the market but it quickly died. Apparently, these happen routinely but do not make the headlines. John Mauldin said there were five such meetings in March and the topics were, bank supervisory meeting, discount rate, monetary policy issues, bank supervisory matter, and discount rate again. These meetings are closed and not for public information.


Yahoo (YHOO) was in the news on Friday after they extended the deadline for bids from April 11th to April 18th. Verizon, Google and Time Inc are reportedly still planning on making offers. Private equity firms Bain and TPG are also reportedly preparing offers. However, AT&T, Comcast, Microsoft, SoftBank and Alibaba have all decided to pass on the auction. At this point, I would expect Verizon to end up as the winner but you never know if an unknown entity will surface with a surprise bid.

It was revealed on Friday that the financial documents given to the prospective bidders show Yahoo expects revenue to decline -15% and earnings decline by more than 20% in 2016. Apparently, Yahoo has not embraced the move to mobile and they are losing out on revenue from mobile consumers. Analysts said Yahoo has been buying traffic to keep up the popularity of its existing websites and that is costing them nearly as much as they are making on those sites. There is a distinct possibility of a "take under" instead of a takeover with earnings rapidly declining. Yahoo shares were down slightly on the news.


Ruby Tuesday (RT) reported earnings of 3 cents that missed estimates for 5 cents. Revenue fell -5.1% to $271.5 million and missed estimates for $283 million. Same store sales fell -3% and worse than the -0.3% decline in Q4. The company lowered full year guidance from 12-17 cents to 5-8 cents. They also announced the CFO would resign on Monday. It was not a good day for RT.


The Gap (GPS) soured the entire retail sector on Friday. The company said revenue for the five-week period ending on April 2nd fell -6.5% and a bigger drop than the -3.3% in February. Same store sales crashed with Gap stores -3%, Banana Republic -14% and Old Navy falling -6%. This was the 12th consecutive month of sales declines. The company said inventory levels were high and would depress margins. Markdowns would be heavy and earnings would suffer. The company said it suffered from some problems with fabrics that did not work and styles and fit that failed. In one assortment from the Banana Republic the average consumer could not get their arms through the arm hole. Gap said that was easy to fix by just removing the products and replacing with the next seasonal fashion but it will be an expensive mistake. Mall traffic was continuing to be a problem. Shares dropped 14% on the news.


Sometimes you just have to be in the right place at the right time. Ulta Salon (ULTA) was named to replace Tenet Healthcare (THC) in the S&P-500 at the close on April 15th. Tenet is moving to the S&P-400 Midcap where it will replace Jarden Corp (JAH) after it is acquired by Newell Rubbermaid (NWL). Tenet has declined from $6 billion market cap to $3 billion and fits the midcap index better than the large cap according to S&P. ULTA has a $13 billion market cap. ULTA rallied to a new high at $200 on the news.


Linkedin (LNKD) was downgraded from buy to neutral at MKM Partners because online job postings appear to have peaked. MKM said job growth was slowing and that had a direct impact on Linkedin. Online postings had risen since the market bottom in 2009 until 2016. Postings in Q1 declined for the first time in six-years. MKM cut sales and earnings estimates for 2016 and 2017. The broker said expectations are low and the value collapse was overdone but it could take multiple quarters for sentiment to improve.


Valeant Pharmaceuticals (VRX) has a new leader. Bill Ackman is only a board member but he appears to be speaking for the company. He said on Friday Valeant will not sell the Bausch & Lomb brand because it is a core asset and the company is not selling core assets. He said "we" are willing to break up the company but "we" are not willing to sell B&L. Sounds like he has taken control.

Valeant's market cap has fallen to only $10 billion and selling B&L could get them $10 billion to as much as $20 billion in cash. However, B&L has been growing rapidly and has generated up to 40% of the company's revenue. The company does not provide a brand breakdown of revenue but analysts are speculating since the business has grown significantly since Valeant acquired them for $8.7 billion in 2013. Valeant has $30 billion in debt so selling B&L would allow them to pay down a significant portion and improve their outlook.

A Stifel analyst has assigned a $65 breakup value to Valeant but a BMO analyst thinks the company is worth $118 per share using the sum of the parts method.

CEO Michael Pearson was under subpoena to appear before a Senate committee on Friday and he failed to appear to answer questions on drug pricing. Senator Susan Collins and Claire McCaskill said "it is our intent to initiate contempt proceedings against Pearson." Pearson's lawyer said the Friday hearing was unfair and he should not be required to give testimony without being advised in advance, about what topics and documents he will be questioned about. The company said Valeant has supplied "thousands of pages of documents." He is also under subpoena to appear on April 27th for another panel to discuss pricing. Valeant said he would appear at that committee hearing.


Alliance Fiber Optic Products (AFOP) shares spiked 19% to $18.45 after the company CEO sent a letter to employees saying Corning (GLW) intends to acquire all the outstanding shares for $18.50 in cash of $350 million. Corning has not yet made the offer but it is expected within the next 10 days and will be effective for 20 days.


Tesla (TSLA) shares gave back some of their gains on Friday after receiving more than 325,000 orders for the Model 3 in the first week alone. That represents a $325 million no interest loan for Tesla for the next three years. If all those deposits turn into completed sales that would equate to $14 billion in revenue. However, since inception Tesla has only built about 100,000 cars although it is on track to deliver about 85,000 in 2016. How will it produce 325,000 cars when its current pace is only about 85,000 a year? Elon Musk said they were rethinking their production plans and that could mean they will have to build an even larger manufacturing facility.

This also means we should expect another secondary offering in the next few months because ramping up to produce that many vehicles, in addition to the Model S and Model X production, will cost a lot of money. Tesla's current market cap is about $33 billion and Barclays thinks the automaker may need to raise another $3 billion to expand capacity and meet the surge in demand. Since they already have $2.64 billion in long-term debt, the obvious answer would be a secondary offering. They could easily justify going back to the equity market because of the extreme surge in demand for the Model 3.

Tesla bought the final assembly plant in Freemont, California that was initially owned by a joint venture by GM and Toyota. It has the capacity to build 500,000 vehicles annually. Analysts say the real question is whether Tesla buys/builds another assembly plant in order to guarantee production quantities of 500,000 cars a year by 2020. That is the volume Elon Musk is predicting. Making that many cars in multiple models would best be done in multiple facilities in order to have room for growth.

To raise another $3 billion Tesla would have to sell 12 million shares at the current price of $250 a share. Tesla has 132 million shares outstanding so that would be less than a 10% increase.

Top speed on a Model S is 155 mph.


The FactSet earnings estimates dropped again for Q1. The S&P-500 companies are now expected to see earnings decline -9.1% compared to -8.4% a week earlier. This will represent the fourth consecutive quarter of earnings declines and the first time since 2009. However, Citigroup is now claiming the estimates are too low and predicting a 4% beat over the lowered numbers. That is not a stretch of the imagination since the S&P has beaten earnings by 4% on average every quarter for the last four years.

This is the wildcard for this earnings cycle. Will a beat on extremely low estimates be seen as a beat or just "less bad" results. Assume a company reported 95 cents last year and was expected to report $1.00 in Q1 before the estimates were lowered to 85 cents. If they report 90 cents is that worthy of a rebound in the shares or is it still bad earnings? I view it as still a miss but we have seen earnings rallies on this type of cycle before.

Revenue is expected to decline -1.2% compared to estimates on Jan 1st for a 2.7% rise.

Crude prices spiked about 8% for the week to $39.66 on hopes for an agreement at the April 17th Doha meeting. You might as well believe in the tooth fairy. There is little or no hope that an agreement will be reached and zero hope that any potential agreement will have any impact on production. Apparently, traders are a gullible group.

Prices also rebounded this week after there was an unexpected 4.9 million barrel decline in U.S. inventories. The headlines were full of titles like "crude glut shrinking" and "production declines reduce inventories." Nothing could be farther from the truth but the press never lets the truth get in the way of a sensational headline.

The Doha agreement, if it happens, will likely not include Iran, Libya, Iraq or the UAE. All of those countries are raising production from current levels rather than freezing production. The UAE is expanding production from 3.1 mbpd to 3.5 mbpd by the end of 2017. Iraq has been producing an average of 3.494 mbpd so far in April. That is up from 3.286 mbpd on average in March. Iraq is expanding production to 6.0 mbpd by 2018. Libya has very little current production. They are trying to quell the fighting and make deals with the rebels in order to return to the 800,000 bpd they produced in 2014 on the way to the 1.6 mbpd they produced before Gaddafi was overthrown.

Saudi Arabia has 128 active rigs and they are planning on increasing annual production through 2020. Saudi Arabia and Kuwait agreed last week to restart production of 300,000 bpd from the disputed zone that has been halted for the last two years.

Iran is producing between 2.4 and 2.6 mbpd and is targeting 4.0 mbpd by the end of 2017.

Currently there is a minimum of 1.0 million bpd of excess production and probably more. Goldman Sachs said on Wednesday they expect OPEC production to rise 600,000 bpd in 2016 and another 500,000 bpd in 2017.

Given the facts I have outlined above any agreement to freeze production by the countries I did not mention will have zero impact on current production and future increases. A post meeting announcement that claims a production freeze may lift prices temporarily because the headline traders will think the problem is solved. Several days later reality will return and the entire three-month lead up to this event will be forgotten.

U.S. inventories declined for multiple reasons. Imports declined by 500,000 bpd last week after a -630,000 bpd drop the week before. Over the last two weeks total imports declined by -12.3 million barrels. Obviously, there is a reason. I research it and the Houston Ship Channel was closed because of fog for multiple days last week. I am assuming that was the problem the week before as well because there were 26 tankers outside the port waiting for permission to enter and make deliveries. If each only carried 1 million barrels that would be 26 million. Some may be smaller but I am sure there were some VLCC tankers (2.0 mb) in the mix.

That would have been enough to cause a serious drop in inventories but there was another problem last week. TransCanada shutdown the 590,000 bpd Keystone pipeline that moves crude oil to Cushing Oklahoma and Illinois. That was shut down last Saturday and it will be reopened this Saturday once approvals are received. That means another 2 to 3 million barrels did not make it to their destination this week. That suggests more volatility in inventory levels in next Wednesday's report. Canadian select crude was trading as much as $15 below WTI because of the outage and it was instrumental in boosting WTI prices late in the week.


Active rigs declined to another historic low dropping -7 to 443. Oil rigs declined -8 to 354 and gas rigs rose 1 to 89. U.S. production declined 14,000 bpd to 9.008 mbpd. We are likely to get a production number that starts with an 8 this week.


The Investors Intelligence Survey showed a 5% spike in bullish sentiment and -4.3% decline in bearish sentiment. Interesting that the bulls started getting excited just as the market started rolling over.


Markets

The overextended market conditions are starting to ease. Two weeks ago, the percentage of S&P stocks trading over their 50 day averages reached an eye-popping 95%. That has declined to 84.6% and still falling. Obviously, the high number was caused by the sharp decline in February that dragged the averages lower and then the rebound allowed stocks to pass those short-term averages on the way back up. The average is about 55-60% so just returning to the averages would mean 30% of stocks would move lower.


The percentage over the 200-day average rose to 63% and pulled back only slightly. This is the bottom range of what we would call normal as indicated by the first six months of 2015. This percentage has likely run its course and should also decline slightly as the January/February dips equalize.


The percentage of S&P stocks with a buy signal on a Point and Figure chart has also plateaued and should move sideways around the 70% level. This is neither bullish nor bearish but indicates the overbought market is equalizing.


The Wilshire 5000 Index has a troubling pattern on the quarterly chart. It shows 3 consecutively lower quarters with the April quarter starting our lower as well. The relative strength (RSI) is fading and the MACD is about to flash a sell signal. This is a long-term chart so it is not something you should run out and sell on Monday morning. This is just another cautionary indicator of a weak market and this index covers the entire market.


I have shown this monthly chart of the S&P before but I thought I would refresh it. The 10-month average has completed its close under the 21 month and this is a long-term technical sell. Because it is a monthly chart, it moves very slowly but the trending averages are good indicators of market direction. Past performance is no guarantee of future results but it has been flawless for the last 20 years.


What a difference a week makes. When I showed this chart last week the indicators were just starting to roll over and now all three are in decline. The S&P failed at 2,075 and support at 2,020 is now the target followed by 2,000 if the decline continues.

I think it is clearly evident that the weakness is accelerating and we could be looking at some rocky trading next week. However, it does not have to move straight down. It is more than likely going to be choppy with some alternating triple digit days like those that we saw last week.


The Dow chart is similar. The Dow tested resistance at 17,750 and immediately sold off. The indicators have all flashed sell signals and the next support level is 17,400 followed by 17,135.

The Dow will be heavily influenced by the financial sector next week. With all the major banks reporting and having already guided lower they could rebound on a minor beat of the lowered numbers or crash even lower if they miss their revised guidance. Goldman Sachs does not report until the following week but they will react to whatever JP Morgan reports on Wednesday.



The Nasdaq has not fallen as far into the selloff as the Dow and S&P thanks mostly to the rally in the biotech sector. That helped lift the Nasdaq almost to resistance at 4,926 and it traded over 4,900 for a couple days. The oscillators are finally starting to roll over and the target on any real decline is about 4,735.



The Biotech Index ($BTK) is fading from that monster short squeeze to 3,250. After trading there for two days the index has dropped back 100 points to 3,155 and the direction is unclear. Most of the decline came on the open on Friday and it was flat in the afternoon. This may be just a bit of profit taking before the weekend event risk and it could take off again next week. OR, the short squeeze could fade completely and we return to the prior range. There was no fundamental reason for the rebound other than it was severely oversold and several companies reported successful drug trials and the shorts began to get worried. The direction of the BTK should be a big influence on the Nasdaq next week.


The Russell 2000 came to a dead stop at that 50% retracement level of 1,120. After trading there for three days, the index rolled over to close back under 1,100 again. The oscillators are not as bearish as the Dow and S&P but they have turned negative. The key level here is 1,065 and it is not that far away. The 1,120 level should remain strong resistance.


I believe the market is showing a classic topping pattern and after three weeks of sideways movement, we are at risk of retesting support. That would be 17,400 on the Dow and 2020-2025 on the S&P. If earnings are better than expected we could see a bounce but they would have to be much better to push through resistance. Somewhere over the next three weeks there is probably a sell the news event where some key stock or stocks really disappoint and investors get a head start on the sell in May cycle.


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


No Random Thoughts this weekend. Our power was out all day on Friday and I am too far behind today. This section will return next weekend.


 

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

 

"If freedom of speech is taken away, then dumb and silent we may be led, like sheep to the slaughter."

George Washington


 


Index Wrap

Bulls Take a Break

by Keene Little

Click here to email Keene Little
The strong rally off the February low is showing signs of running out of steam as the string of weekly white candles is now showing alternating up and down weeks and forming a possible small rounding top. But we're heading into opex and that's typically a bullish week.

Week's Indexes


Review of Major Stock Indexes

It was a relatively quiet week as far as news and economic reports go and that left the market to deal with just the FOMC minutes released on Wednesday. The market gyrated a bit around FOMC expectations and other than the rally around the FOMC minutes and the meager attempt at a rally on Friday there was more selling than buying and the week finished lower for most indexes.

Biotechs did well for the week, up +3.9%, but they didn't help the tech indexes. Oil did well, up +8.0%, but it did not help the stock market, which is different than we've been seeing. The two have been linked tightly and this week there was a fairly significant disconnect. At the moment oil's rally looks like a bounce correction and could turn right back down in the coming week but if it can be sustained and continue higher in the coming week I see the potential for the stock market to follow. But if oil turns back down and the stock market gets back in synch with it we could see trouble for both.

Part of the volatility around the FOMC minutes is that the market is confused about what the Fed wants and what it can and cannot do. Several Fed heads stated before the minutes and again after the release of the minutes that they feel the Fed needs to raise rates. However, the minutes reflected a consensus about worry that the weakness in the global economy will spill over into the U.S. and that the downside risks are greater than upside potential. The consensus opinion, supposedly, was that there will likely be fewer (two) rates increases for the rest of 2016.

But with some inflation data ticking higher and continuing signs of relatively strong employment, both being data points that the Fed has said would prompt a rate increase, many are now confused about what the Fed is doing. Their "data dependency" seems to be just words in the wind and now that they have the data to support further rate increases they instead now prefer to wing it and abandon their data-dependent mode.

I happen to agree with their reluctance to raise rates because I think the U.S. economy is showing too many signs of slowing (employment is always a lagging indicator) and the huge debt burden will be that much more difficult to service if rates start heading higher. Defaults on loans are already ticking steadily higher and that's deflationary. But with the market so hung up on what the Fed is saying/doing we now have a situation where the Fed can't be believed and it's the loss of faith in the Fed that will be the major problem for the market to deal with in the next few years.

The Atlanta Fed's GDPNow indicator has steadily come down and is currently projecting just +0.1% growth. Only a month ago it was projecting +2.3%. Earnings is the key for the stock market, if it paid attention to it (it seems the Fed is the only thing the market pays attention to anymore), and the current forecast for earnings, from S&P Global Market Intelligence, is for a -7.6% decline y-o-y for the 1st quarter. This makes it the 3rd quarter in a row for a decline and even removing energy we're still looking at a -3.3% decline in earnings.

Despite the evidence of slowing, hope prevails and many economists are predicting this 1st quarter will mark the bottom of the slowdown. The problem is most of these economists have a dismal record in predicting the economy. Actually they have a perfect record -- they're always wrong. But as you can guess, all of this simply confuses market participants and part of the reason for this past week's weakness has to do with the market's uncertainty, which creates less of a desire to buy stocks.

With buyers holding back their purchases the market will simply decline due to selling for any number of reasons. People sell to get money for all kinds of reasons but they have to want to buy and that's why we hear things like "gravity causes the market to fall." From a short-term perspective, the pattern of the selling in the past week is not clear enough to help determine how the coming week will go. We have opex, which is typically bullish, but waning momentum and oscillators turning down. One thing to note about opex is that while it's typically bullish, when it's not bullish it's typically very bearish. Therefore it's going to be important for the bulls to at least provide enough buying power to thwart the efforts by the bears to get something stronger to the downside started.


A Look At the Charts


S&P 500, SPX, Weekly chart

The week prior to last week saw SPX rallying above its downtrend line from November-December, near 2052 at the time, and it was looking like it was going to head for its downtrend line from July-November, near 2093 (the April 1st rally stopped at 2075). This week's selling dropped SPX back below its November-December downtrend line but it was almost able to hold it with Friday's small rally, closing near 2048 and about 2 points below the trend line. It's close enough to call it closing at support but a continued drop below the trend line would leave a failed breakout attempt. There's still upside potential to the July-November downtrend line, now near 2092, and it would be more bullish above 2100, but if it drops below its March 24th low it would confirm it's into at least a larger pullback if not something more bearish.


S&P 500, SPX, Daily chart

The daily chart shows how SPX oscillated around its November-December downtrend line. Friday's recovery attempt failed to hold up and the minor close back below the line, even with a final 30-minutes bounce back up, appears more bearish than bullish, especially in front of opex. How the market goes on Monday could dictate how the rest of the week will go but even if it does rally I think it's going to be hard to break through its 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

For a closer view of this past week, the 60-minute chart shows the gyrations since the end of March. I could easily argue the choppy sideways/down price action is just a correction to the rally and that it supports another rally leg. The more bearish interpretation is that it's building a bearish wave pattern that calls for a sudden and hard breakdown. The bearish pattern supports the idea that the market is typically very bearish during opex week if it's not bullish. But as of Friday's close I continued to see the potential for another leg up and that's why I think Monday's move will be important for direction.


S&P 100, OEX, Daily chart

OEX looks very similar to SPX in that it has been gyrating around its November-December 2015 downtrend line, currently near 910, about a point above Friday's close. Like SPX it was able to hold above its 20-dma, near 908, which is an important intermediate-trend moving average. If we do get a new high in the coming week it will very likely show bearish divergence with the oscillators, which would be one more indication the rally should not be trusted. Nothing goes in a straight line and the market is overdue a correction.

Key Levels for OEX:
-- bullish above 920
-- bearish below 895


Dow Industrials, INDU, Daily chart

The Dow has been oscillating around its May-November 2015 downtrend line since climbing above it on March 30th. For an important trend line it hasn't exactly shown us bullish enthusiasm following the break. This past week spent more time below the line, currently near 17630, than above it and Friday's rally attempt failed to hold above the line. The Dow did manage to hold onto its 20-dma, at 17543, on a closing basis and as with the other indexes the pullback from April 1st is choppy enough to suggest we'll get another rally leg. But a continuation lower on Monday would suggest the top is in for now.

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


Nasdaq-100, NDX, Daily chart

The techs have held traded a little more sideways than the blue chips since March 30th but suffered the same percentage loss this past week. NDX broke below its uptrend line from February 24th after suffering two days of selling following a gap-up start on Thursday and Friday (leaving the double side-by-side red candles). The break could be significant but there's still a chance for another rally leg in the coming week. As with the others, it will be important what price does on Monday.

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


Nasdaq Composite, COMPQ, Daily chart

The Nasdaq looks the same as NDX with the small break of its uptrend line from February 24th. But whereas the NDX is still well above its 200-dma the Nasdaq is trying to hold onto its 200-dma, having tested it repeatedly since rallying above it on March 30th. From a bullish perspective it looks good that it's consolidating mostly above it but at 4850 it closed about 5 points below it for the week. It can still recover back above it in the coming week but the bulls need to stop dilly dallying and get the rally started otherwise it will also show a failure at its downtrend line from December 2015, currently near 4880.

Key Levels for COMPQ:
-- bullish above 4811
-- bearish below 4570


Russell-2000, RUT, Daily chart

While the other indexes have been struggling with their downtrend lines the RUT has been struggling with its H&S neckline near 1100. This is the uptrend line from October 2014 (the bottom of the left shoulder) - September 2015 (the bottom of the right shoulder). It tried repeatedly to get back above the line, which the RUT had dropped below in January, since first trying on March 7th and then made it above the line on March 29th. But it's had a hard time holding the line and dropped back below it on Thursday. It rallied back above the line Friday morning but it was once again unable to hold it into the close. This is weak price action and unless we get an opex save it's looking more vulnerable to the downside here.

Key Levels for RUT:
-- bullish above 1135
-- bearish below 1065


SPDR S&P 500 Trust, SPY, Daily chart

The SPY chart shows the midline of its Bollinger Band, which is the 20-dma, caught up to price since it's been consolidating for the past week. The BB is narrowing significantly and it should result in a big move to expand the band again, although we don't know when or in what direction. You can see how it stayed narrow last year from about this time into August when the market broke down and the BB blew out wider. The MFI is now back down near the 50 line and if it holds there and starts back up we would see price head higher. The problem for the bulls is that price is up inside its previous consolidation zone from last November-December and the high VAP is roughly 205-212 and SPY is struggling at the low end of this range. It could continue to be a tough battle, especially with an overbought market.


Powershares QQQ Trust, QQQ, Daily chart

QQQ has also stalled at the top of its BB and the 20-dma is coming up as it consolidates. The 20-dma has supported pullbacks since February so how it acts around it this time will provide plenty of clues. Williams %R has been choppy with price action but it's rolling over so the bulls will need to do something in the coming week otherwise it's hinting it's going to break its 20-dma this time.


Summary

Thursday's decline followed by the big gap up Friday morning had it looking like the typical Thursday prior to opex week -- pull it back to get the shorts piling in and then flame them with some buy programs and get the rally started into opex week. But Friday's failure to hold onto the rally puts a bearish taste in our mouth (that's a good taste if you're a bear but very sour if you're a bull). Failing to hold onto some important trend lines into Friday's close also looks more bearish than bullish.

But with opex typically being bullish we have to expect another try at routing the bears and sending them back to their caves for at least the coming week. If the bulls are unable to shoo them away Monday morning I think they'll see blood and as mentioned above, when opex is not bullish it tends to be very bearish. There's a bearish wave count that supports that idea as well. Therefore the bulls need to do their thing Monday morning but whichever direction we get on Monday I think that could set the tone for the rest of the week.

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

All Hype, No Action

by Jim Brown

Click here to email Jim Brown

Editors Note:

Twitter is one stock that trades 20 million shares a day and is mentioned daily by analysts but is going nowhere. Shares have been trading just above $16 for a month and every day there are dozens of headlines speculating on Twitter's future. The stock is a coiled spring just waiting for something to happen. The only question is which way that directional move will take.


NEW DIRECTIONAL CALL PLAYS


No New Bullish Plays



NEW DIRECTIONAL PUT PLAYS


TWTR - Twitter -
Company Description

Twitter operates as a global platform for public self expression and conversation in real time. I am pretty sure everyone knows what Twitter is so I am not going into depth in this explanation.

Twitter has become the bet of the year. Analysts either think it is going to single digits or going to the moon. The highest price target is $36 and the lowest is $11 with the average at $20.86 across a total of 27 brokers.

Twitter has trouble keeping users because the learning curve is steep and Twitter spam is increasing daily. Twitter bots can be programmed to spread tweets and make it appear there is a huge volume of interest in a specific subject. Andres Sepulveda, a Latin American political operative used custom software to direct 30,000 Twitter bots to create false enthusiasm for candidates and spread rumors about the opposition. Sepulveda said the tactics gave him "the power to make people believe almost everything." The man responsible for his operations said two American presidential candidates had contact him and one of those was Donald Trump.

Unfortunately, Twitter has been having trouble monetizing all the traffic regardless of whether it is real or fake. Their monthly active users include a lot of churn and barely any growth. While nobody expects Twitter to go out of business they are losing faith in the business model.

CEO Jack Dorsey is also CEO of Square and that carries mixed emotions. Some want him replaced and others want him full time. Almost nobody wants him to continue the dual role.

There are constant rumors that Twitter will be bought by someone like Google or Apple. If that were to occur it would carry a huge premium to the current $16 stock price.

Twitter has been earnings challenged for a long time and the stock has declined from $55 to the current $16 level on a lack of confidence they will turn the company around.

Earnings April 26th.

The stock is either going to single digits or it will be back well over $20 soon. It is not likely to continue moving sideways at $16.

I am recommending we do a strangle on Twitter using the June options. Regardless of the stock or market direction we should be able to profit. Because Twitter is $16 and stagnant the options are relatively cheap. I want to buy them now and hold over earnings because that is likely to be a volatility event. We could also get some market moving news with the earnings release.

I am profiling this as a bearish play but I would rather see an upside breakout because there is more room to run. Unfortunately, the downside is the most likely direction.

Buy June $17 call, currently $1.61, no stop loss.
Buy June $16 put, currently $1.42, no stop loss.
Net debit $3.03.

You could use the $18 call and $15 put for a net debit of $2.22 if you want a cheaper option.




In Play Updates and Reviews

Weekend Event Risk?

by Jim Brown

Click here to email Jim Brown

Editors Note:

The Dow opened up +153 points but faded to close up only +35. Let's hope that was just profit taking ahead of the weekend. The Dow and Nasdaq actually traded negative just before the close but some late day short covering was credited with lifting them back into positive territory.

The loss of 153 points intraday to close near the lows is very disheartening. Conviction is evaporating and this was the worst week for the indexes since February. You know I have been expecting a failure at resistance and that is why we have the SPY short. I hope there is at least one more uptick in the market before it rolls over completely. We are excessively long because there are almost no short candidates. If we can get one more push higher, we can exit some longs and hopefully find some stocks that are not participating in the uptick that we can short.

With earnings starting next week it is possible we could get two weeks of positive gains and maybe another test of resistance before a bigger decline begins.

Unfortunately, that triple digit intraday decline on Friday is troubling. With conviction evaporating along with volume it may be difficult to move too much higher. Volume was only 6.2 billion shares on Friday.



Current Portfolio




Current Position Changes


No changes to existing plays.


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:

Minor gain. The company issued an emergency update to its Flash software in order to prevent "ransomware" attacks that are becoming increasingly common.

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.


CSC Computer Sciences Corp - Company Description

Comments:

No specific news.

Original Trade Description: April 6th.

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.

Position 4/7/16:

Long June $24 call @ $1.50, see portfolio graphic for stop loss.


HCA - HCA Holdings - Company Description

Comments:

No specific 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.


OA - Orbital ATK - Company Description

Comments:

Won another $200 million rocket contract from NASA.

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 ! No specific 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. New 5-month high. Excellent relative strength.

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:

Received a couple more analyst mentions suggesting good things ahead but shares declined slightly in the afternoon.

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:

Another -1.7% decline as the short squeeze fades. I suspect traders were taking profits from that squeeze ahead of the weekend event risk.

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:

No specific news. Shares faded into the close.

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 market is looking more like a top forming every day.

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