Option Investor
Newsletter

Daily Newsletter, Thursday, 5/5/2016

Table of Contents

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

Market Wrap

Doji Day In Front of Nonfarm Payrolls Report

by Keene Little

Click here to email Keene Little
The stock market struggled to put together a rally today but the sellers were not aggressive either. The market essentially went on hold while waiting to get through the Nonfarm Payrolls report Friday morning.

Today's Market Stats

For this week I am in a location that has spotty internet service (less than had been anticipated when I reserved the rental house in Costa Rica) and therefore tonight's wrap will be a little shorter than my usual diatribe. Some of you might think that's a good thing since I do tend to get a little verbose (wink). I tried to get charts updated during the day and a quick comment about each to ensure I get the report uploaded before possibly losing my connection. Next week (Thursday again for me as Tom and I will switch one more week) I'll be back to a stronger and more reliable connection. Like most everything, you don't realize how important these technological marvels are until you lose them.

The market sank further today but each new low over the past couple of days is showing less strength -- bullish divergences are showing on the charts. That could be traders were simply pulling away from the market as we approach Friday morning's Payrolls report or it could be an ending pattern that's setting up at least a bounce correction and the Payrolls report could be the catalyst, even if it's because it's not a bad report (OK report could be good).

Oftentimes we'll see chart patterns that point to an expected move and the price pattern for the indexes looked to me like ending patterns for the decline rather than something more immediately bearish. As I'll cover for the charts, there is one particularly strong bearish pattern that calls for an acceleration of the selling so I wouldn't say a bounce on Friday is guaranteed but as a game of odds that we play I will say the odds favor a bullish reaction to the NFP report. We'll certainly know soon enough.

There were no economic reports of interest today and in light of what I mentioned about my internet, I'm just going to jump right in and review the charts to see what they're telling us. I'll start with the SPX top-down review.


S&P 500, SPX, Weekly chart

Following the intraweek poke above its downtrend line from July-November, into its April 20th high, SPX rolled over and it's bringing MACD with it, which is about to cross back down. It could jump back up to a new high and leave a lower MACD high but that would be just a guess right now. The real test, if reached, will be the 50-week MA, currently near 2026. If it instead jumps back up and reaches its downtrend line, now near 2088, we'd get to see if it will continue to hold as resistance.


S&P 500, SPX, Daily chart

Over the past week SPX has broken a few layers of support once it broke free of its July-November 2015 downtrend line on April 28th. It broke its 20-dma, bounced back up to it the next day, broke an uptrend line from March 24th (the bottom of a now-negated expanding triangle top) yesterday and bounced back up to it today for a back-test. So far all of this price action is bearish but it hasn't yet tested its 50-dma, currently near 2043. Interestingly, this is also near its 2015 closing price at 2043.62 and obviously it would be more bearish below 2043. There are hints of weakness in the selling and that could be setting the market up for a bounce after we get through the NFP report Friday morning.

Key Levels for SPX:
- bullish above 2100
- bearish below 2033


S&P 500, SPX, 60-min chart

The hints of waning selling pressure can be seen in the bullish divergence on the 60-min chart below. Forgetting about the NFP report in the morning I look at this chart as a warning to bears since it looks like it's setting up for a bigger bounce and the NFP report could be the catalyst (even if it's going to be just a relief rally). The short-term pattern suggests a quick low in the morning followed by the start of the bigger bounce and if that happens we'll see a quick bear trap set in the morning. But if we get a strong break below 2043 and no immediate bounce back up, there is a bearish wave count (a series of 1st and 2nd waves to the downside) that calls for an acceleration lower, which is reason enough to be cautious about thinking of immediately buying a morning dip.


Nikkei 225 index vs. S&P 500 index, 2013-present

Keeping an eye on the Nikkei 225 index for clues about the bigger pattern shows the NIKK now nearing potential support at an uptrend line from February-April and obviously the bulls want to see support hold and then a continuation higher. But if trendline support fails to hold and especially if it drops below its April low near 15700 (today's close was 16147) there's little question in my mind that SPX would follow and close the unusual gap that's present after SPX rallied hard off the February low (for what? Certainly not for fundamental reasons).


Dow Industrials, INDU, Daily chart

The Dow is also looking like it could test its 50-dma, currently near 17524, before setting up a stronger bounce (it might not reach its 50-dma if we get just a quick minor new low Friday morning). If the Dow drops below its 50-dma and its April 7th low near 17484 it would open an air pocket below that down to price-level support at 17140 and its 200-dma at 17117. If we do get a decent bounce keep an eye on possible resistance at its downtrend line from November through the April 1st high, currently near 17770, and then its 20-dma, near 17865.

Key Levels for DOW:
- bullish above 18,120
- bearish below 17,484


Nasdaq-100, NDX, Daily chart

This week NDX broke support at its uptrend lines (June 2010 - November 2012 and March 2009 - August 2015. A second break of these uptrend lines, following the breaks in January and February, is bearish if not recovered quickly. As with the other indexes, the short-term pattern supports the idea that we're going to see a bigger bounce into next week before continuing lower. But if it drops sharply lower on Friday I don't think it will find some support until the 4200 area.

Key Levels for NDX:
- bullish above 4525
- bearish below 4213


Russell-2000, RUT, Daily chart

Since the March 7th high for the RUT it had risen inside a parallel up-channel, the bottom of which was broken slightly yesterday and more so today. Like the other indexes it also seems to be heading for potential support at its 50-dma, near 1102. A sharp break below 1100 could lead to a fast drop to the next support area near 1070. But if the 50-dma holds on a weekly closing basis I think there's a good chance for a bounce correction into next week.

Key Levels for RUT:
- bullish above 1162
- bearish below 1100


10-year Yield, TNX, Daily chart

Treasury yields have been in decline since the previous bounce peaked on April 26th and today it closed on its uptrend line from February-April. As drawn on the TNX (10-year) chart below, this uptrend line could be the bottom of a sideways triangle, which calls for one more bounce back up to the top it before heading lower in June. A more immediately bearish wave count calls for a sharp decline in yields where TNX will drop well below its February low. A drop below price-level S/R at 1.65% would confirm the more bearish pattern. But if it does head back up, presumably in reaction to Friday morning's NFP report, look for 1.90% to complete the bearish triangle pattern.


KBW Bank index, BKX, Weekly chart

The banking index is at an interesting point as it has dropped back down to potential support near 66.50. From a bearish perspective the bounce off the February low into the April 27th high was a near-perfect back-test of its broken 50-week MA, at 71.20 with a high at 71.09, and that's been followed by a strong move back down, which has it looking like a bearish kiss goodbye. Now it's back down to potentially strong support and obviously the bulls want to see this back-test result in a bullish kiss goodbye. We'd then have to wait to see which side blinks first and allows either a break above the 50-dma, currently near 71, or below S/R near 66.50. A drop below 66.50 would also leave a confirmed 3-wave bounce correction off the February low so the bulls really do need a bounce on Friday to keep their hopes alive.


U.S. Dollar contract, DX, Weekly chart

The US$ was in real danger of breaking down last week when it dropped below 93. But as the dollar often does, it dropped below support and then created a bear trap on Tuesday with its strong reversal back up. Tuesday's low at 91.88 is now the key level for dollar bulls to hold otherwise we'd likely see the dollar work its way down toward its 200-week MA, currently near 87. However, if this week's reversal is the real thing we should now see a return to the top of its trading range, near 100 by August and then one more trip back down before setting up the next rally leg later this year.


Gold continuous contract, GC, Weekly chart

Gold rallied up to 1302 on Monday, 2 points (so far) shy of the 1308 target I've been watching for. This is a test of its January 2015 high and if it rallies above that level we could see the rally make it up to at least its 200-week MA, currently near 1324. Gold hasn't been anywhere near this MA since it dropped below it in early 2013. But so far the new high is showing bearish divergence against the March high and the risk from here is the start of at least a larger pullback if not the another leg down to a new low, such as to the 1000 support level.


Oil continuous contract, CL, Weekly chart

Oil is pulling back a little but it could be for just a back-test of its broken down-channel, the top of which is near its 50-week MA at 42.95. If that holds as support and oil makes it higher than its April 29th high at 46.78 we'd likely see a test of price-level resistance at 50.92 (its October 2015 high) before we'll get a decent pullback. But a drop back below support near 42.95 would open the door to at least a larger pullback if not back down to the bottom of its down-channel, which will be near 20 in August. Gold and oil down together?


Economic reports

Following a quiet day for economic reports we'll get the anticipated Payrolls numbers before the bell Friday morning. The numbers for total Nonfarm Payroll and Nonfarm Private Payroll are expected to be lower than March, as was the ADP number on Wednesday. As long as it comes in around a Goldilocks 190-200K we probably won't see much of a market reaction since it won't move the meter for the Fed.


Conclusion

Some important support levels have been broken this week and the market is looking vulnerable to more selling. But this week's selling pressure has been waning and that sets up the possibility for at least a larger bounce correction of the decline. We have an important NFP report before the bell tomorrow and it's likely to be the catalyst for a bigger move. However, I see the potential for a head-fake move out of the gate tomorrow and then a reversal so be careful of getting caught in that.

If we get a snap to the downside and it doesn't reverse quickly, such as after only 30 minutes of selling, the bears could take over in a big way and I'd look to short bounces for a little longer. But if a quick spike down is followed by a reversal back up I think that should set up at least a multi-day bounce correction, maybe something more bullish.

The opposite scenario is also true -- a quick pop up, if it stays below Tuesday afternoon's highs, could lead to a reversal back down. In that case I'd watch for a minor new low with bullish divergence before thinking about looking for a buying opportunity (for at least a trade). A rally above Tuesday afternoon's highs, such as SPX 2069, would be a good signal that the bottom is in for now and then look for at least a higher bounce into next week.

So Friday morning has the potential to be whippy and the initial direction has a good chance of being reversed in the first 30 minutes. Trade carefully by letting the dust settle before trying to determine which direction the market really wants to go.

Good luck and I'll be back with you next Thursday (due to my travel schedule, Tom and I are switching).

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

iPhone Components

by Jim Brown

Click here to email Jim Brown

Editors Note:

Apple's earnings and guidance cratered Apple shares but it also contaminated all the Apple suppliers. When Apple cut its guidance for Q2 production that started a big decline in all the stocks that live off the Apple ecosystem.


NEW DIRECTIONAL CALL PLAYS


No New Bullish Plays



NEW DIRECTIONAL PUT PLAYS


CAVM - Cavium Ind -
Company Description

Cavium designs, develops and markets semiconductor processors for intelligent and secure networks in the U.S. and internationally. They offer wired and wireless networking, communications, storage, cloud, wireless, security, video and connected home and office applications. What that company description does not say is that Cavium designs chips for Apple iPhones and iPads.

Cavium recently reported earnings of 25 cents on revenue of $101.9 million. Analysts were expecting 25 cents and $102 million. That is about as "in line" as you can get. However, they warned that the current quarter would see revenue in the $105-$108 million range and earnings of 28-30 cents. Analysts were expecting $110.6 million and 32 cents.

On the call management said, "We expect the access and service provider markets to be flat to down due to some delays in volume infrastructure and Asia. We expect the enterprise and datacenter markets to be up despite a soft enterprise macro." Investors were not impressed with the lackluster guidance and the stock tanked.

Add in Apple guidance warning and Cavium began a long decline. I kept thinking we would see rebound but shares just keep sliding. I now believe we will see a new low as tech stocks weaken into summer.

Earnings July 27th.

I realize the stock looks oversold but I believe the Apple guidance warning is the gift that keeps on giving. The warning from multiple tech vendors on slowing enterprise buying is also a long-term warning.

With a CAVM trade at $46.40

Buy June $45 put, currently $2.15. Initial stop loss $50.25




In Play Updates and Reviews

Holding Their Breath

by Jim Brown

Click here to email Jim Brown

Editors Note:

Traders appear to be holding their breath ahead of Friday's Nonfarm Payroll report. The ADP Employment on Wednesday came in significantly lower than expected at +156,000 jobs compared to estimates for 195,000. The U.S. weekly Jobless Claims this morning came in at 274,000 and the highest level in more than a year. The Challenger Employment report showed layoffs accelerated in April to 65,141 announced layoffs. The period from January through April has seen 250,061 announced layoffs and that is the highest for that period since the financial crisis.

This suggests the Nonfarm Payroll number will miss the +200,000 consensus forecast and be well below the +215,000 number for March. A sharp decline in new jobs would be seen as fed positive since they are not going to raise rates with falling jobs and a 0.5% GDP. However, bad news could actually be seen as bad news that the economy is suddenly slowing and that could be negative for the market.

The Dow declined to 17,615 this morning and just narrowly avoided making a new three week low after the 17,609 low on Wednesday. The midday rebound faded in the afternoon and only a small bout of short covering at the close kept it from closing on the lows.

The market is in a precarious position where a Dow drop under 17,500 could set off some cascade selling. However, it appears there are still buyers around, just not in any volume.

We were blown out of the PVH position today after L Brands (LB) warned that same store sales were much weaker than expected citing weak traffic in April. When coupled with the other weak economic numbers in recent days it caused investors to dump all the retail stocks. LB shares fell -12% and the entire sector imploded. Our prospective play on Skechers was not triggered because SKX fell with the sector. If I see a bottom form in the stock over the next couple days I will lower the entry point and strike price.



Current Portfolio




Current Position Changes


PVH - PVH Inc

The long call position was stopped out at $93.85 after L Brands warned on declining sales.


SKH - Skechers

The long call position remains unopened until a trade at $34.35.


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


ACN - Accenture PLC -
Company Description

Comments:

No specific news. Up in a weak market again.

Original Trade Description: April 20th.

Accenture provided management consulting, technology and outsourcing services worldwide. It operates in multiple segments including Communications, Media & Technology, Financial Services, Health & Public Services, Product support including supply chain management, Resources including chemicals, energy, commodities and utilities. The company was founded in 1989 and has risen to a $73 billion market cap. Accenture employs about 373,000 people in 120 countries.

Basically, Accenture helps other companies become more profitable. When Mondelez (MDLZ) wanted to improve its margins they called Accenture and implemented their suggestions. The new systems saved $350 million in the first year and is expected to save Mondelez more than $1 billion over the next three years. Accenture does this worldwide for almost any business in any sector.

This week they sold a 60% stake in their Duck Creek Technologies division to private equity firm Apax Partners. The joint venture will accelerate the innovation of claims, billing and policy administration software for the insurance industry leveraging advanced digital and cloud technology. They will invest in Duck Creek On-Demand, a native Software as a Service capability delivered through the cloud. Approximately 1,000 insurance and insurance software specialists will join the new venture. Accenture acquired Duck creek Technologies in 2011.

The key for Accenture is not specifically the Duck Creek venture but the rapidly expanding scope of the company. Nearly every day there is some new press release where they are expanding into new markets and new endeavors. This is what IBM and Hewlett Packard wish they were.

Earnings are June 23rd.

Accenture rallied to a new high in early April at $116.35. Shares paused with the market and consolidated their gains. Since April 8th shares have begun to move back to that high and could breakout at any time. I am recommending we buy that breakout over $116.35 because shares could begin a new leg higher, market permitting. Options are cheap!

Position 5/2/16 with an ACN trade at $113.25

Long June $115 call @ $2.13, see portfolio graphic for stop loss.


PVH - PVH Corp - Company Description

Comments:

PVH and all the retailers crashed after L Brands (LB) warned on a slowdown in sales. Same store sales rose only 1% in April compared to estimates for 4.7%. L Brands shares crashed -12% and all the other retailers followed suit. It was guilty by association. We were stopped out at $93.85.

Original Trade Description: April 21st.

PVH is an international apparel company. They operate in six segments including Calvin Klein North America, Calvin Klein International, Tommy Hilfiger North America, Tommy Hilfiger International, Heritage Brands Wholesale and Heritage Brands Retail.

Some of the brands marketed by PVH in addition to those above include Van Heusen, iZod, Arrow, Warners, Olga, Eagle, Speedo, Geoffrey Beene, Kenneth Cole, Sean John, Michael Kors, Chaps, etc.

They sell through company operated stores, wholesale outlets, department stores, chain stoes, specialty stores, mass market stores, club stores, off-price and independent stores and distributors and through e-commerce. The company was founded in 1881.

Last week PVH announce it had closed on a deal to acquire the remaining 55% stake in TH Asia, the joint venture for Tommy Hilfiger in China. The deal will increase revenue by $100 million a year.

In February PVH inked a deal with G-III Apparel to allow G-III to design, manufacture and distribute Tommy Hilfiger women's wear in the U.S. and Canada. This not only includes PVH’s existing women's wear operations, but also new categories like suit separates, denim and performance. Long term I would not be surprised to see PVH buy G-III (GIII).

In January, PVH licensed MagnaReady, a shirt system without buttons, from MagnaReady Technology LLC. Men's sport and dress shirts with MagnaReady technology will be available in stores in 2016.

In their earnings reported in late March, they had earnings of $1.52 that beat estimates for $1.45 and exceeded PVH guidance for $1.37-$1.47. On a currency neutral basis earnings rose 7%. Revenue rose 2.1% to $2.112 billion also beating estimates.

Shares spiked on earnings in late March and then drifted lower as the gains were consolidated. They are starting to move higher again with resistance at $100. It may take a few days but I believe they will break that resistance, market permitting. Shares gained 78 cents today in a down market.

Earnings are late June.

Position 4/22/16

Closed 5/5/16: Long June $100 call @ $3.41, exit $2.60, -.81 loss.


SKX - Skechers - Company Description

Comments:

Skechers fell sharply when all the retailers crashed after L Brands (LB) warned on a slowdown in sales. Same store sales rose only 1% in April compared to estimates for 4.7%. L Brands shares crashed -12% and all the other retailers followed suit. It was guilty by association. If a bottom forms I will lower the entry point.

Original Trade Description: May 4th.

Skechers designs, develops, markets and distributes foorwear for men, women and children, and performance footwear for men and women under the Skechers GO brand. The company owns, operates of has franchised more than 872 stores internationally. They opened 78 stores in Q1 and plan on opening 160-165 more throughout the rest of 2016.

The company reported record earnings that rose from 37 cents to 63 cents for Q1 and easily beat the 43-cent estimate. Operating income rose 57.1%. Revenue surged 27.4% to $978.8 million and easily beat the estimates for $890 million. The company raised guidance for the current quarter to $875-$900 million.

Wholesale revenues rose 47.1% with an 8.5% increase in distributor sales and 23.2% increase in retail sales. Comparable same store sales rose 9.8%. Domestic retail sales rose 15.3% and international sales +59%. International same store sales rose 17.7%. To say that the company is doing everything right would be an understatement.

Earnings July 21st.

Shares split 3:1 in October just as a revenue miss for Q3 knocked the shares down 35% from $46 to $31. The stock went sideways for the last six months but has recently rebounded to resistance at $35. The strong earnings spiked the stock to that level and it has traded sideways for the last week as it consolidated those gains. In the last two days of market weakness shares lost $1 and were actually positive on Wednesday. I believe we are going to see a breakout to a six-month high.

I know it is strange to recommend a bullish position in a negative market but the lack of a market related decline in SKX suggests they will surge higher if the market were to turn positive.

I am going to recommend a slightly longer option on this position so the premium will not decay as fast if the market continues to be weak.

Also, because we are in a negative market I am going to put an entry trigger on the position. I do not want to recommend a bullish position and have the market gap down -100 points on Thursday. If SKX does not rebound to hit the entry point we lose nothing.

With a SKX trade at $34.35

Buy July $35 call, currently $1.30. No initial stop loss.



BEARISH Play Updates (Alpha by Symbol)


FSLR - First Solar - Company Description

Comments:

SunPower did report a larger loss than expected and both SPWR and FSLR declined in afterhours trading. Shares of FSLR tried to rebound in the regular session but there was a firm top at $52.30.

Original Trade Description: May 2nd.

First Solar provided solar energy solutions worldwide through two segments. Those are components and systems. The component segment produces the actual solar modules that convert sunlight into energy. The systems segment produces the infrastructure to combine those panels into working systems that are sold to corporations, governments and utility companies.

The company reported earnings of $1.06 that beat estimates for 93 cents. Revenue of $848 million rose 3% but missed estimates for $958 million by a mile. The company blamed the shift to a lower priced module for the decline in revenue. Another factor was the decision by the government to extend the Investment Tax Credit (ITC) another five-years on solar installations. This caused some companies to postpone plans that were being rushed to take advantage of the ITC. Now they have time to think the plans through and make calm decisions. The number of urgent sales declined.

The company refined its guidance positively to revenue in the range of $3.8-$4.0 billion and earnings up from $4.00-$4.50 to $4.10-$4.50. The minor increase in guidance did not excite investors.

With the earnings the company also announced CEO Jim Hughes had resigned and CFO Alexander Bradley would be his interim replacement. Hughes had successfully rescued First Solar from a crisis in 2012 when polysilicon prices were crashing Today the company's panels are close to multi-crystalline. The sudden departure of a hero caused some investors to flee the stock.

Earnings August 2nd.

Shares have fallen significantly since the Thursday earnings but show no indications the drop is slowing. The entire solar sector is in distress since the SunEdison (SUNE) filed bankruptcy a couple weeks ago.

I expect the decline to continue with initial support at $52.50 but longer term support well below at $40. The transformational issues of the ITC extension and the CEO resignation could linger for several weeks.

Position 5/3/16

Long June $52.50 put @ $1.67, see portfolio graphic for stop loss.


MLNX - Mellanox Technologies - Company Description

Comments:

No specific news. The trend continued lower and is now targeting $37.

Original Trade Description: April 30th.

Mellanox is a fabless semiconductor company that designs, manufactures and sells interconnect products and solutions. Their solutions are used in storage, datacenters and clouds. Their Internet communications products handle communications up to 100Gbps. They are also an Apple supplier.

The reported an 11% rise in revenue to $196.8 million and earnings of 81 cents. Both beat analyst estimates for $192.5 million and 75 cents. However, guidance was not so good. They expect Q2 revenue in the range of $210-$215 million and missing estimates for $216.8 million.

The company just acquired EZchip Semiconductor and the CEO believes the deal will translate into "compelling value to current and future customers." However, increasing expenses, expected to rise 8-10% could put a crimp into profits.

With Apple iPhone sales in a slump any supplier is guilty by association. Shares have declined -$10 since earnings and are falling fast. Support is in the $38 range. With tech stocks suddenly in the dog house there is no reason for shares to rebound.

Position 5/2/16

Long June $43 put @ $1.45, see portfolio graphic for stop loss.


QQQ - Nasdaq 100 ETF Description

Comments:

The Nasdaq declined slightly but the big cap index only posted a -2 point loss. The QQQ did trade down another 20 cents after the close to $104.95 on earnings misses.

Original Trade Description: April 28th.

The Powershares QQQ is an index tracking stock for the Nasdaq 100 Index ($NDX). The QQQ represents the 100 largest domestic and international nonfinancial companies listed on the Nasdaq Stock market based on market capitulation.

The Nasdaq 100 is expected to gap higher at the open on Friday. As with most opening gaps based on some post earnings activity there is a good chance the opening print is the high for the day. The shorts in those stocks that are gapping higher will cover and the buying interest will wane.

Amazon was up $75 in the afterhours session. Linkedin gained +8. Expedia gained +11 and Baidu +8. This should produce a decent opening bounce in the index.

However, the Nasdaq 100 close at 4,363 was the lowest close since March 11th. This is below support at 4,378 and suggests the index is breaking down.

I am recommending we buy puts on the QQQ at the open when the market gaps higher in anticipation of a drop in the $NDX back to 4,200.

Since I expect the index to gap higher I am recommending the at the money put. It should be a little cheaper at the open.

Position 4/19/16

Long June $106 put @ $2.63, see portfolio graphic for stop loss.


SPY - S&P 500 ETF - ETF Description

Comments:

The S&P ended the day flat after being down -6 points intraday. Traders are holding their breath ahead of the Nonfarm Payroll report on Friday.

Resistance has held and it may be a choppy week or two before a longer-term decline appears. Be patient.

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.
4/19/16: Long June $200 put @ $1.95 when SPY traded at $210.
See portfolio graphic for stop loss.


TWTR - Twitter - Company Description

Comments:

Twitter fell back -5% after a 6% short squeeze on Wednesday caused by comments by an analyst at the Sohn Conference. This is a good omen for future declines. After the bell Square (SQ), the other company headed by Tome Dorsey, fell -15% on an earnings miss. This should weigh on Twitter on Friday.

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, see portfolio graphic for stop loss.
Long June $16 put @ $1.45, see portfolio graphic for stop loss.
Net debit $3.52.




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