Option Investor
Newsletter

Daily Newsletter, Wednesday, 4/13/2016

Table of Contents

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

Market Wrap

Another Opex Rally

by Keene Little

Click here to email Keene Little
The typically bullish week for opex got a slow start this time but Tuesday's and Wednesday's rallies have pushed many of the indexes to new highs for the rally from February. There's still some upside potential but there are some reasons for caution about the long side.

Today's Market Stats

The stronger sectors today were the risk-on ones, such as the biotechs, while risk-off (defensive) sectors were down, such utilities and consumer staples. The financials were also strong, helped by JPMorgan's earnings report before the bell this morning. The RUT was also up strong, +2.2% for the day, and risk-on appears to be the trade du jour this week. As I'll get into later, we have some strong bullish indications for this market but we also have reasons to be cautious dead ahead. Stock indexes could soon struggle with significant lines of resistance but if they're pushed aside in the coming days we'll have all the evidence we need to get long and enjoy the ride.

Banks were up strong today (BKX +2.5%), which helped both the Dow and SPX. JPM was up +4.2% after announcing earnings in the pre-market session. Earnings and profits were down from a year ago but better than lowered expectations (it's all in how you manage expectations). Interestingly, JPM did not offer guidance for Q2. The result was shorts got scared out of their positions and helped the stock GS was not far behind, up +3.6% and after the banks were held down more than the broader indexes it's obvious that short covering helped lift the banking index back up, although BKX is still down considerably compared to the broader averages.

Helping the stock market today were the economic numbers, which included the PPI numbers. They came in lower than expected and were negative, meaning "disinflation." Retail sales were also negative for March and the combination keeps the Fed from being able to raise rates, which of course the market likes.

I did a lot of chart reviews tonight before starting to write so I got a little behind. Therefore I'm just going to jump right into the review of the charts.

I'll start tonight's chart review with the RUT because I see an interesting setup that should tell us whether or not we want to get more bullish or instead start looking for a reversal back down. It's looking like the RUT is either going to break out in a strong bull run or break down in a strong bear decline. I lean short here but above 1135 would have me backing off and above 1150 would have me much more bullish.


Russell-2000, RUT, Weekly chart

The RUT's weekly chart shows it has made it up to its downtrend line from June-December 2015, currently at 1131-1136 (depending on whether the chart is with the arithmetic or log price scale, resp.). As can be seen on the daily chart further below, the 200-dma is currently near 1133 but the 50-week MA is nearing 1152. There's a strong reason why the 1131-1136 area is going to be tough resistance, at least on the first attempt to break through, but above that range I would expect a run up to 1150. Above 1150 would be much more bullish but at the moment we need to watch carefully for possible trouble for the bulls. The RUT is one of our canaries in the coal mine so following this week's opex rally we'll get a clearer picture for what's next.


Russell-2000, RUT, Daily chart

The RUT's daily chart below shows how closely aligned the 200-dma is to the downtrend line from June-December 2015. Kudos to the bulls if they can break through both of those on the first attempt, especially since it's showing waning momentum. If price consolidates sideways while MACD "resets" with a pullback to (but stays above) the zero line we'd have a bullish setup. But the RUT has been chopping its way higher in what looks like a bearish rising wedge pattern since the March 7th high with bearish divergence supporting the bearish interpretation of this pattern. This in combination with price reaching potentially very strong resistance is what has me leaning bearish into resistance until (if) we see a strong break through resistance with a rally above 1136.

Key Levels for RUT:
- bullish above 1136
- bearish below 1088


Russell-2000, RUT, 60-min chart

Getting in closer to recent price action, the RUT's 60-min chart below shows the rising wedge pattern, the top of which was reached today with the close near 1129. A small pullback and then minor new high would do a nice job completing the pattern, potentially near 1132 where the downtrend line from June-December 2015 crosses the top of the rising wedge Friday morning. That would be a low-risk setup to try to short a reversal back down and use a stop no higher than just above 1136 (end-of-day stop instead of intraday is preferred since we see a lot of intraday stop runs, but obviously that increases your risk so trade size is important).


S&P 500 vs. NYSE stocks above 200-dma, chart courtesy Mark Ungewitter

Before I get into the SPX charts, which has it looking like SPX could top out below 2100, I want to show a reason to stay bullish. AT the bottom of the chart it shows the percentage of NYSE stocks above their 200-dmas vs. the SPX above. The idea here is to monitor when the percentage of stocks above their 200-dmas drops below 20%, indicating deeply oversold. The buy trigger occurs when the percentage of stocks above their 200-dma rises above 50%. This trading model, shown to me by a fellow trader, Mark Ungewitter, shows the buy signals with the little red dots on the SPX line and we just got another buy signal following the January-February drop below 20%. As noted on the chart, this has worked 7 out of 8 times in the past 30 years (the one failure was December 2001). Those are tough odds for a bear to fight against. Market breadth, using the cumulative advance-decline line has broken out to new highs before price and that's another reason for bears to be cautious -- there could be stronger buying than what appears by other technical indicators, such as waning momentum.


Gann Square of 9 chart

Countering the chart above, or at least a reason for caution about the upside, is an obscure tool called the Gann Square of Nine (Sof9) chart, something I haven't shown in a long time. A portion of the chart is shown below and for those who are not familiar with this, it's essentially a Fib spiral of numbers (that I built in Excel and therefore looks square-ish). It starts with '1' in the center and then the first "ring" around the center starts with '2' at the 9:00 position and spirals clockwise from there, finishing with '9' below '2' and then continues spiraling from there, hence the name Square of Nine. It's uncanny how levels (and time, which I won't discuss much at this time) relate to each other on this chart and highlighted on the chart are some examples and why we're approaching a potentially important level for SPX -- 2088-2089.

I squished the chart as much as I could and yet keep it readable so I apologize for the small numbers. Highlighted are some important lows -- on the red vector there's 768 (October 2002 low) and on the blue vector there's 666-667 (March 2009 low). The vectors through those two levels help identify important levels that "vibrate" off each other and on the red vector you can see 1422 (April 2012 high), 1576 (October 2007 high) and now 2088-2089 are related to each other. On the blue vector, through 666-667, the next important level above us is 2098-2099. As you'll see on my SPX charts below, the area between 2083 and 2100 is important and the Gann Square of Nine chart is one more reason why the current rally could finish at any time. But above 2100, as I'll point out on the charts, it would be much more bullish. I think it's particularly important to note that the October high at 1576 was 6 spirals around from the October 2002 low at 768. Each 360-degree move is important and 6 levels is particularly important. Half that is 3 spirals and that's the distance between the October 2007 high and 2088-2089.

Without getting too much into time relationships with this chart, I will add that today is "square," as in 90 degrees, to 2084-2085 and today's high was 2083 and therefore we're at a potentially important price/time point on the chart. Lastly, 2088 is square to 2134, which was the May 2015 high. All of this doesn't mean we're topping here or will top out near 2088-2089 (or 2098-2099) but these Gann relationships should be paid attention to until they're proven OBE (overcome by events).


S&P 500, SPX, Daily chart

The short-term pattern for SPX would look best with a small pullback/consolidation on Thursday and then another minor new high to complete a 5-wave move up from April 7th, which in turn would do a nice job completing the 5th wave of the leg up from February. The pattern for the rally from February is a bit sloppy so it's hard to hang my hat on a wave count but today's high, and then presumably higher into Friday, looks like it will leave a bearish divergence against the April 1st high, which is fitting for a 5th wave. There's a price projection for a corrective pattern (instead of an impulsive 5-wave move up from February) near 2092 and that overlaps the downtrend line from July-November 2015, which makes it a level of interest to watch carefully for a possible top to this move. But a rally that gets above 2100, and stays above (not just an intraday break), would be a stronger bullish statement and it would point to at least a test of the November high at 2116 and potentially the May 2015 high at 2134. This is where the daily chart and the Gann Sof9 chart above are in agreement.

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


S&P 500, SPX, 30-min chart

A short-term perspective is shown with the 30-min chart below to point how it will ideally play out the rest of this week. I say ideally because I'd like to see a 5-wave move up from April 7th to give us a good ending pattern. A pullback/consolidation on Thursday would "reset" the overbought oscillators and then a new high, presumably up to the downtrend line from July-November 2015, near 2092 by next Monday, would likely leave a bearish divergence. But with price projections, including the 127% extension of the previous decline (April 1-7), coinciding at 2083-2087, as well as the Gann Sof9 2088-2089, it warrants caution by bulls here -- we could see a top form at any time (not a reason to short it here without appropriate risk management, but certainly a good time for bulls to be more cautious).


Dow Industrials, INDU, Daily chart

The Dow struggled with its downtrend line from May-November 2015 since first testing it on March 22nd and oscillated around it for nearly two weeks after climbing above it on March 30th. Today's rally gave it a clean break above the line and now the next level of resistance it will have to deal with is its November 2015 high at 17977. It remains inside a bullish up-channel for its rally from February but note how it used the midline of the channel for support following the initial rally off the February low. It broke below the midline while it struggled with its May-November downtrend line and now appears to be heading back up to the midline, which often acts as resistance in this scenario. By the end of the day Friday the midline will be near 18110 and for this reason I have a key level to the upside at 18150, above which would be more bullish and it would be a reason to look for at least a test of its May 2015 high, at 18351.

Key Levels for DOW:
- bullish above 18,150
- bearish below 17,484


Nasdaq-100, NDX, Daily chart

NDX is now within a few points of retracing 78.6% of its December 2015 - February 2016 decline, near 4557. This has been a common retracement in this market and oftentimes the end of a bounce correction. The minor new high above its April 1st and 6th highs is showing bearish divergence, which is not a rally killer but a reason for caution. It fits as the completion of the rally leg from February but I see at least a little more upside potential to test price-level S/R near 4600 and maybe up to the top of arising wedge, near 4625 by Friday, above which would be more bullish.

Key Levels for NDX:
- bullish above 4625
- bearish below 4435


10-year Yield, TNX, Daily chart

Treasury prices pulled back from their highs on April 7th and that gave yields a little bounce. But looking at TNX, it bounced in a 3-wave pattern, with two equal legs, up to its broken uptrend line from July 2012 - January 2015, near 1.79. Today's reversal back down from a small gap up fits as the start of the next leg down and a drop to price-level support at 1.65 could be next. That would give us a 5-wave move down from March 16th and set up a little larger bounce correction but it would keep the downtrend intact. Buying in Treasuries would put downward pressure on stocks so keep an eye on the bonds to see if this plays out.


KBW Bank index, BKX, Weekly chart

On March 21st BKX made it up to price-level resistance near 66.50 and then pulled back into the April 7th low. You can see on the weekly chart how important that support level was since breaking above it in November 2013. It's not surprising to see it act as resistance now and today's high at 66.57 is another test. On both the daily and weekly charts the oscillators certainly have room to run and a break above 66.50 that holds above that level would keep it bullish. Look for a run up to the 50-week MA, nearing 71, if the rally continues. The 200-dma is coming down towards 70 so 70-71 is an upside target. But if the banks are simply enjoying a bit of short covering it could flame out at any time. The relative weakness of the banks, as compared to the broader market, is reason for concern if you're feeling bullish about the market.


U.S. Dollar contract, DX, Daily chart

The US$'s strong bounce off support near 93.80 yesterday looks good for a reversal of its decline. I'm not looking for anything more than a return to the top of its trading range, near 100, and then back down to the bottom of the 94-100 trading range by the fall before it will be ready for the next leg of its longer-term rally off its April 2008 low. If it does drop a little lower it would not turn more bearish until it gets below 92.50.


Gold continuous contract, GC, Weekly chart

Gold has bounced back up to the top of its parallel down-channel that it's been in since 2013, currently near 1250. If it can hold above that level, which it was unable to do after poking back above it on Monday, we should see it reach for its January 2015 high near 1308. A rally up to that level would likely be followed by a deeper pullback correction but I think it would be bullish. As of right now I think we could see gold head back down to the bottom of its channel, which will be near 1000 in August. If the dollar is getting ready to rally it could put pressure on gold and other commodities.


Oil continuous contract, CL, Weekly chart

Oil is once again challenging the top of its down-channel that it's been in since the January 2015 low, currently near 41.40. A little higher, at 43.88, is its 50-week MA and that's an upside target if the buyers keep at it. It's looking like a rally into an expected announcement next week by Russia and Saudi Arabia that they plan to freeze production. That will probably happen when hell freezes over and this rally could come to a fast conclusion if the rally is based on the rumor (buy the rumor, sell the news).


Economic reports

Tomorrow's economic reports include the CPI numbers and unemployment claims. Friday will be more economic numbers and the Michigan Sentiment reading. No big changes are expected


Conclusion

When I look at the charts, using typical technical indicators such as trend lines/channels, oscillators and even EW counts, I'm seeing the market vulnerable to topping at any time. If it holds up through this week I wonder if the bears will exact some revenge next week. But as mentioned above with the percentage of stocks above their 200-dma and the strong cumulative advance-decline line, it's hard to be bearish. I think the bottom line is that bulls should be very cautious about the potential for at least a deeper pullback (and possibly something more bearish).

In the meantime, bears don't have anything yet to support a reason to get short here (no reversals). We have some potentially strong resistance levels that offer a reason to try shorting with relatively low risk but preferably after making it a little higher and maybe by Friday. That of course would subject bears to a rally on Monday after a Sunday night rally in the futures so risk management is very important. Have well-defined stop levels and honor them (on a closing basis since intraday stop runs are common). More conservative traders can simply follow the trend and keep trailing your stops higher. Once support levels are broken look for bounces to short and then trail stops lower to prevent a big spike back up putting you underwater.

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

Not Amazon

by Jim Brown

Click here to email Jim Brown

Editors Note:

With Amazon killing all the traditional retailers the brands that cannot be sold on Amazon should be doing fine. Unfortunately, that is not helping L Brands, the parent of Victoria Secret. Shares touched a seven-month low this week on a downgrade from Goldman Sachs.


NEW DIRECTIONAL CALL PLAYS


No New Bullish Plays



NEW DIRECTIONAL PUT PLAYS


LB - L Brands -
Company Description

L Brands operates as a specialty retailer of women's intimate and other apparel, beauty and personal care products, and accessories. Everybody knows of Victoria Secret. They are the premier lingerie retailer in the country. They offer products under the Victoria's Secret, Pink, Bath & Body Works, La Senza, Henri Bendel, CO Bigelow, White Barn Candle Company and many other brand names. They have 2,721 stores in the USA, 270 in Canada and more than 700 international stores in 70 countries.

Last week the company said it was cutting 200 jobs and restructuring into three divisions. Those will be lingerie, beauty and the teen brand PINK. The company said it was getting rid of multiple merchandise categories but they did not say which ones. The online business will be revamped and integrated into the main business rather than operating as a separate entity. They plan on reducing promotions and eliminating the catalog. Citigroup said eliminating the catalog could be a nightmare that could have serious repercussions. JC Penny's revived its catalog last year after seeing sales decline after it was discontinued. There is a rumor they are eliminating swimwear, a $500 million a year category. They plan on utilizing the retail space for sports clothing.

The company reported March sales growth of 5% to $1.027 billion. Same store sales rose +3%.

Goldman Sachs downgraded the stock from buy to neutral saying the restructuring and elimination of multiple merchandise lines would impact sales in the short term. Two weeks earlier Credit Suisse cut them from buy to neutral and JP Morgan made the same downgrade last quarter.

Earnings May 18th.

Shares fell off rather steeply ahead of the sales reporting and Goldman downgrade and then hit a seven-month low on the downgrade. Many traders thought it was a buying opportunity and shares rebounded promptly in Tuesday's short squeeze. However, on Wednesday the rebound fizzled to gain only 74 cents. This suggests the rebound may have run its course.

I am recommending we buy a put on a trade under today's low of $79.04. If the stock rolls over it will trigger the position, otherwise we are just watching. If shares fall below that $76 print from Tuesday there is a lot of air before the next support at $65.

With a LB trade at $78.85

Buy May $78 put, currently $1.95. Initial stop loss $81.35.




In Play Updates and Reviews

Just another Short Squeeze

by Jim Brown

Click here to email Jim Brown

Editors Note:

I know everyone is excited about the spike into the resistance band on the Dow and S&P but it was just another short squeeze. The explosive rally overnight in Asia after some better than expected economic numbers carried over into the U.S. markets. Then JP Morgan (JPM) reported better than expected earnings and had positive things to say about the economy and the futures spiked as little higher.

However, it was just a short squeeze. I have a watch list of more than 800 stocks. More than half of them rallied 3% or more in a single day. The key is that most of the stocks that exploded higher were the ones that had been beaten down the worst and were the most shorted.

In the Twitter chart below the stock spiked 5% at the open and came to a dead stop on resistance where it held the rest of the day. There were hundreds of stocks with the same pattern.

Fortunately, a monster short squeeze can lead to a long-term rally. Investors are caught off guard and they think the stocks will roll over again tomorrow. When the don't the price chasing begins. That is part of what happened today. There was a short squeeze driven by oil prices on Tuesday. Traders holding shorts thought the stocks would roll over from that 2,062 resistance this morning. When the rally in Asia spiked our futures that caused another short squeeze by those still holding shorts. I can assure you there are still traders holding painful shorts tonight that expect the market to roll over on Thursday. This scenario can be repeated for several days in a row and that is how we could break through those critical resistance levels.

The Dow made it almost through the first band of resistance from 17,750 to 17,925. This was a very strong move of +187 points and it is entirely possible we could break out of that band on Thursday. That would bring an even stronger resistance band from 18,125 to 18,165 into play.

With Bank of America and Wells Fargo reporting earnings before the bell on Thursday we could either have another surge of positive sentiment or they could spoil the party. Obviously, what happens in China tonight is also critical.

Monster Percentage Gains

Spiked to resistance and stalled



Current Portfolio




Current Position Changes


USO - US Oil Fund

The long put position was opened at $10.59.


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:

Adobe announced some new Adobe Primetime software updates to enhance real time video editing for TV and video. Adobe will be in focus at the NAB show next week.

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. Citigroup downgraded from buy to neutral. Shares rose 12 cents.

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. Another six-month high.

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.


SWHC - Smith & Wesson - Company Description

Comments:

The $22.35 level has appeared as support over the last two days. No specific news.

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:

Nice 2.4% bounce and back to resistance at $56.60. Support at $54 held.

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)


BBBY - Bed, Bath & Beyond - Company Description

Comments:

The market short squeeze lifted all oversold stocks. We need to wait and see what happens on Thursday.

Original Trade Description: April 11th.

BBBY operates a chain of retail stores selling a range of domestics merchandise for bedrooms, bathrooms, kitchens and home furnishings. They also offer health and beauty aids, giftware and infant and toddler merchandise. The currently operate 1,530 stores.

In the age of Amazon can a retail store still exist and be expected to grow their profits? The company posted earnings of $1.91 compared to estimates for $1.80. Revenue of $3.42 billion also beat estimates for $3.38 billion. For the full year they reported earnings of $5.10 and revenue of $12.1 billion.

On the surface that would appear to be a great operation. Revenue increased 2.4%. In the year ago quarter they reported earnings of $1.80. However, same store sales at 1.7% were below the 3.7% increase in the comparison quarter. Online sales increased 25%. They repurchased $1.1 billion in stock in 2015 and declared their first ever dividend of 12.5 cents along with the earnings report. This would seem like a recipe for a rising stock price.

Unfortunately, the post earnings spike of 6% lasted about 2 hours and shares closed negative. BBBY has been in a long-term decline and the February rebound was already fading when the earnings were announced. Analysts believe Amazon will eventually spell the end of profits for large retail chains like BBBY.

Earnings are July 6th.

Shares closed at a six-week low on Monday, only two days after the earnings beat. The chart suggests the stock is going back to the January lows at $41 with today's close at $46.

With the retail sales report on Wednesday likely to disappoint we could see an acceleration in the downward trend.

Position 4/12/16:

Long May $45 put @ $.98, no initial stop loss.


ENDP - Endo Intl Plc - Company Description

Comments:

Another market driven rebound after a big drop to a new 3-year low on Monday. The trend is still down.

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:

Today was a trend change of sorts. The major short squeeze prompted by the rally in the overseas markets and positive earnings from JPM catapulted the SPY right into the first resistance band. Thursday's market action will be interesting.

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.


TWTR - Twitter - Company Description

Comments:

Excellent 5% gain. Let's hope the short squeeze continues. We do not care which way it moves, just as long as it moves a lot.

Original Trade Description: April 9th.

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.

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

Position 3/11/16

Long June $17 call @ $2.07, no stop loss.
Long June $16 put @ $1.45, no stop loss.
Net debit $3.52.


USO - US Oil Fund - Company Description

Comments:

Crude oil gapped down so we were filed near the high of the day on the option price. Next week will be the big move up or down.

Original Trade Description: April 12th.

The U.S. Oil Fund is designed to track the daily price movement of WTI crude oil. This is the simplest method to speculate on the direction of crude oil on a short-term basis.

The USO, or any futures ETF, should not be held long-term because it bleeds value when the futures roll over once a month. On a short term basis it works great for speculation.

Crude oil has spiked 15% over the last several days with a 4% rise today alone. This is speculation over a production freeze agreement in Doha, Qatar on Sunday between OPEC and major crude producing countries. On Tuesday Russia's Interfax news service quoted some diplomat in Qatar saying Russia and Saudi Arabia had agreed to freeze production even if Iran decided not to participate.

This is contrary to what the Saudi deputy crown prince has said over the last couple weeks. The prince said Saudi would not participate unless Iran and the other major producers all agreed to freeze production. Obviously, he could change his mind but after making those statements more than once a change of heart could make him look weak.

There is significant potential for a Doha disaster where the meeting deteriorates into a brawl and nothing is accomplished. Even if they do agree to a freeze that would still maintain 1.45 mbpd of excess production at current levels. Iran, Libya, Kuwait, Iraq, Nigeria and the UAE all have plans to increase production so it would be a major change of plans to agree to a freeze. Most have said they would not support a freeze but when it comes down to the meeting, anything is possible.

Lastly, OPEC members are notorious about saying one thing and doing another. They could all agree to the freeze, wink wink, in order to lift prices and then continue on doing what they are already doing and pumping every barrel they can produce.

I believe there is a good probability we will see oil prices significantly lower in the days/weeks following the meeting. I am recommending we buy an inexpensive put on the USO and see what happens. If you are aggressive you could also buy a call just in case a miracle does occur and prices spike higher. I view that as nearly impossible since Saudi Arabia has said they do not want to see prices much over $40 because that would allow U.S. shale drillers to increase production.

Position 4/13/16:

Long May $10.50 put @ 58 cents. No stop loss.




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