Option Investor

Daily Newsletter, Wednesday, 9/7/2016

Table of Contents

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

Market Wrap

Another Dip and Recovery

by Keene Little

Click here to email Keene Little
We have a little more trading volume following the Labor Day weekend with the return of more traders to their desks but it hasn't helped move the market much. Market internals favor the bulls this week so they get the nod but there are enough warning signs to suggest caution about the upside.

Today's Market Stats

Traders are a little more active than we saw in August, thanks to the end of summer vacations, but they haven't been able to move the indexes much. Money is rotating, such as out of biotechs and into semiconductors (although that has switched in the past three days), and small caps have been getting a little boost. But the big-cap blue chips have not been able to break out of their sideways consolidations since July. The tech indexes and RUT look relatively strong but now they're also looking vulnerable to rally completions at any time. It's a tough time to pick a direction to trade.

There was very little in the way of economic reports to move the market today and even the Fed's Beige Book report at 14:00 managed only a small positive reaction but not much in the way of follow through. This morning's little rally was reversed and the indexes dropped into the red. The midday low was then followed by renewed buying, which reversed most of the morning's losses. The end result was a relatively flat day and mixed results across the indexes. The RUT had a relatively strong day and finished up +0.6%. Yesterday was mixed as well but the past two days saw market internals favor the bulls and with opex around the corner we could see some additional support enter the market.

It's not a good time for the bears (yet) but neither is it a good time to even think about being complacent about the upside. With opex next week and then a possible rally into end-of-month/quarter it's not a good time to be thinking aggressively about the short side. But the rally from February is looking tired (bearish divergences) and that suggest caution by the bulls. Both sides have to watch carefully and think hard before entering new trades.

There have been plenty of warning signs about this bull market rally that has extended further than most imagined it would so the chart below is hardly a reason to run out and short the heck out of this market. But it does make you wonder when, if ever, the market will again pay attention to anything other than what the Fed and other central banks are doing.

Typically the stock market "sees" about six months down the road and leads what the economy does. But that has been broken since the Fed became an activist and insists on a stock market rally. Since 2015 the GDP expectations have dropped precipitously from about 2.8% to 1.5% this month. That's not good for corporate earnings and typically the stock market leads this kind of information with a decline but not this time. The stock market has continued to make new highs while GDP drops closer to zero (and soon negative) so there's clearly a disconnect here. That gap between GDP expectations and SPX is an air pocket that will likely get filled and I don't think it will be by GDP growth.

GDP Expectations vs. S&P 500

As far as the current market condition, the price consolidation since mid-July continues to support the bulls since the consolidation is following a rally. The flip side is a rolling top formation, which could lead to a fast breakdown. Since the consolidation is typically bullish, a failed bullish pattern would typically lead to a fast breakdown, which is what usually follows a rolling top. So I point to the bullish pattern as a typical one but continue to stay aware of the potential for a fast breakdown. I'll start tonight's chart review with a look at the SPX weekly pattern.

S&P 500, SPX, Weekly chart

At the moment it's looking like we could see a large rising wedge pattern complete with another leg up in the rally off the February low. But that might mean a choppy pullback/consolidation into mid-October (to meet a cycle low projection) where SPX would hit its uptrend line from February-June near price-level S/R at 2135 (its May 2015 high). From there we could see an end-of-year rally to about 2270-2290 to reach the top of its rising wedge. That's the bullish view for the rest of this year.

The bearish view calls the 3-wave move up from February as just a correction within a larger A-B-C move down from the May 2015 high. The 2223 projection on the chart is where the b-wave (the 3-wave move up from February) would achieve the 127% extension of the a-wave (the 3-wave move down from May 2015 to the February 2016 low), which is typical for this kind of corrective pattern (expanded flat correction). The c-wave would likely achieve 162% of the a-wave, which projects down to about 1670 if it drops from here. It would like be a fast and strong decline, possibly hitting it before the end of the year. It's too early to tell whether the bulls or the bears will come out ahead here but as long as price continues to chop sideways/down it will keep the bullish pattern as the preferred wave count.

S&P 500, SPX, Daily chart

The daily chart shows a sideways triangle idea for the consolidation since mid-July. It's a bullish pattern but only for one more leg up to complete the rising wedge shown on the weekly chart above. The triangle would be potentially complete with one more leg down to the bottom, near 2160 by mid-September, and then a rally into the end of the month, possibly into October. The top of the rising wedge will be near 2230 by the end of September. A drop below 2160 would be a bearish warning sign and below 2147 (the August 2nd low) would negate the triangle pattern and make it look even more bearish. The next support level would be the May 2015 high near 2135 and then the last line of defense for the bulls would be the uptrend line from February-June, which will be near the April high at 2111 by mid-September. How the pattern develops in the next week should provide enough clues for how the rest of the month will likely go. Next week is opex so that could provide a bullish undertone for the market.

Key Levels for SPX:
- bullish above 2194
- bearish below 2147

S&P 500, SPX, 60-min chart

The 60-min chart shows just how choppy and whippy it's been while consolidating sideways. I see upside potential to the top of an ascending triangle (if it's not a sideways triangle as shown on the daily chart above), which is near 2194. It would be a bullish break above that level. Watch for the potential for a turn back down to the bottom of the channel, either from here or from 2194. It wouldn't turn more bearish until it drops below the channel and confirmed with a drop below the September 1st low at 2157.

Dow Industrials, INDU, Daily chart

The Dow's pattern is the same as SPX and currently looks like it could be consolidating in a sideways triangle, which would look complete with one more leg down to the bottom of it, near 18300, before launching the final leg of the rally from February. The upside potential shown on the chart is near 19K by the end of the month. A drop below the August 2nd low at 18247 would negate the bullish triangle pattern, in which case I'd look for a drop to at least its uptrend line from February, which will be near 18090 by the end of next week.

Key Levels for DOW:
- bullish above 18,632
- bearish below 18,247

Nasdaq-100, NDX, Daily chart

For the 3rd time in as many weeks NDX is trying to get through resistance at its March 2000 high at 4816. The bearish divergence since July is not encouraging for bulls but at least for the short term, yesterday's rally above 4816 was followed by only a small pullback to that level before bouncing back up this afternoon. A 3rd day, tomorrow, closing above 4816 would leave a better confirmation that resistance has been broken. Otherwise this could be a triple top in the making. The problem for bulls though is that there might not be much more upside potential if the trend line along the highs from July-November 2015 stops the rally, which is currently near 4865. It would be more bullish above that level and bearish if it drops below its December 2015 high near 4740.

Key Levels for NDX:
- bullish above 4865
- bearish below 4740

Semiconductor index, SOX, Daily chart

Helping the tech indexes this year has been the semiconductor sector, as many investors have played the idea that self-driving cars and trucks and other innovative products will consume a larger number of computer chips. We've seen a rotation out of the hot biotech sector, where BTK is down about -12% this year, and into the semis, with the SOX being up about +21% this year. But the SOX rally could be coming to an end, at least short term, and that might mean a rotation back into the biotechs (or some other as yet identified tech sector). Last week I showed the SOX weekly chart and how it has pressed up against the top of a parallel up-channel for this year's rally and a price projection near 808. The highs for the past 3 weeks have been near 807, 811 and 809 and the weekly oscillators are curling over from overbought with the decline over the past 3 trading days. The daily chart shows bearish divergence since the July 27th high and the pattern for the leg up from June 27th counts complete. I think a long position in this sector is a risky position.

SOX relative strength to SPX, Monthly chart

Another way to judge sectors is by looking at its relative strength (RS) vs. the broader market. The chart below compares the SOX to SPX and as you can see it has "rallied" above horizontal resistance near 0.35 that has held back the RS of the SOX since 2007. It can certainly go higher, as it did in 1995 (1.01) and March 2000 (0.88) but those relative highs since 2000 continued to decline into 2008 and have been stalled at 0.35 on subsequent rallies in this sector. Are we seeing resurgence in the importance of semiconductor stocks? Again, that's quite possible, but with overbought conditions from monthly, weekly and daily chart and bearish divergence vs. the 2015 lower price high, this is a risky time for the semis. The short-term pattern for August shows a choppy move higher which has it looking like an ending pattern, which means the 3-day decline could be just the start of a larger correction and maybe something more bearish.

Biotechnology index, BTK, Daily chart

If money is getting ready to rotate out of the semis and back into the biotechs we should see a price pattern for BTK that supports that idea, along with the supporting pattern for the SOX that suggests it's ready for at least a pullback, and currently BTK's chart does support the idea that it will head higher. The daily chart of BTK shows a 3-wave pullback from August 1st that achieved two equal legs down and it held support at its 50- and 200-dma's. Yesterday it rallied back above its 20-dma and pushed higher today (SOX down, BTK up) and it's looking like we could see a rally at least up to the top of a parallel up-channel for its rally from February, currently near 3600. But the rally pattern from February looks corrective, which means the entire rally should be retraced and possibly after just one more new high for the bounce pattern. So I wouldn't get excited about this sector other than perhaps a short-term bullish move. Not shown on the daily chart, there is a broken uptrend line from November 2011 - April 2014 that is currently near 3550 when viewed with an arithmetic price scale, which puts it close to the top of the parallel up-channel for the bounce off the February low. That broken uptrend line is where the rally stopped on August 1st.

Russell-2000, RUT, Daily chart

The RUT had a pretty good day today, up +0.60% while the other indexes were basically flat. It is now again approaching the trend line along the highs since July 12th, currently near 1268. This line has repeatedly stopped rallies since July and with the bearish divergence since then it's hard to believe the current rally will have any better luck. A longer-term trend line along the highs since April-July is now only slightly higher, near 1270, so there's double resistance at 1268-1270. The choppy rally since August 3rd looks like an ending pattern and we could be near the final high for the rally from June. It would be more bullish above 1272 but at the moment I think that's a low-probability event (but we're only talking about probabilities).

Key Levels for RUT:
- bullish above 1272
- bearish below 1215

30-year Yield, TYX, Daily chart

Bonds have barely moved since July 21st when yields peaked following the July 8th lows (highs for bond prices). As can be seen on the chart of the 30-year yield, the consolidation off the July 21st high has created a sideways triangle and the tight coil should be ready to break soon. The typical move from here should be up (prices down) and another equal leg up from here targets 2.463%. It might make it up to resistance near 2.5% but once the 3-wave bounce off the July 8th low completes (assuming we'll get the 3-wave bounce pattern) it should then lead to another decline. It's possible it will simply collapse from here and a drop below the July 29th low at 2.18% would negate the short-term bullish triangle.

Transportation Index, TRAN, Daily chart

The transports got a good boost today and as you can see on its daily chart, it looks like a clean break of its downtrend line from August-November 2015. The upside target is the April high near 8150 and the 62% retracement of its November 2014 - January 2016 decline, near 8200. The only thing the bulls need here is for the oscillators to catch up since MACD is showing a significant bearish divergence against its July high.

U.S. Dollar contract, DX, Weekly chart

The US$ is struggling to get through its 50-week MA at 96.45 and last week's high was 96.25. It should proceed higher but the choppy price pattern makes it difficult to figure out the short-term pattern. Not much to say about it as long as it stays trapped inside its 92-100 trading range.

Gold continuous contract, GC, Weekly chart

The short-term pattern for gold continues to support the idea for another high and its downtrend line from September 2011 - October 2012, near 1400, and a price projection at 1417.50 remain good upside targets. Gold would be more bullish above 14718 but at this time I'm not expecting it to rally higher. A drop below the September 1st low at 1305.50 would signal the start of a larger pullback/decline sooner rather than later.

Oil continuous contract, CL, Weekly chart

Short term it's looking like oil could get another leg up to create a larger bounce pattern off its September 1st low. Two equal legs up points to 47.37 but it might find trouble at its downtrend line from June 2014 - June 2016, currently near 47. It poked above this downtrend line on August 18-19 but then dropped back down, leaving a failed breakout attempt. Obviously it would be more bullish if it can break the downtrend line and stay above it for at least 3 days. If that happens we can then look for another test of price-level resistance near 51 to see if oil really can break out to the upside. Otherwise the larger pattern supports the idea for lower lows in the coming year.

Economic reports

There's not much in the way of economic reports for the rest of the week to move the market. We should instead see the influence of opex week start to more of an effect.


The RUT is chopping its way higher, which looks like an ending pattern, and the tech indexes look like they could soon put in the final touches to their rallies. In the meantime the blue chips look like they could consolidate for another week or two before pressing higher into the end of the month so we have enough differences to suggest caution by both sides. Either the blue chips will end up dragging the techs and small caps higher or the sideways consolidation patterns for the blue chips are instead rolling tops, in which case we can expect a fast breakdown and it could start at any time.

At this time, unless the blue chips look to be holding their bullish continuation patterns, I don't feel confident enough about the upside vs. the downside risk. But if the consolidation patterns continue through next week I'll start to feel a little more bullish about the idea for an end-of-month/quarter rally to get the funds their closing highs (as they chase performance). We might see money rotate into the safety of the big caps, which is why we could see the blue chips drag the other indexes higher but with weaker relative strength.

The choppy pattern leaves us guessing what could follow and it's a risky time for both sides to trade. There are good times to trade and not so good times and I think this is the latter. Stay safe and wait for a good pitch before taking a swing.

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

New Highs Predict Higher Highs

by Jim Brown

Click here to email Jim Brown

Editors Note:

When stocks are making new highs they normally continue making new highs. While this is not true in all cases it is on quite a few occasions. When stocks breakout to new highs they attract attention and they cause shorts to cover. Normally a stock making new highs is doing so because the fundamentals are strong and the company is growing.


IDCC - Interdigital - Company Profile

InterDigital, Inc. designs and develops technologies that enable and enhance wireless communications in the United States and internationally. It offers technology solutions for use in digital cellular and wireless products and networks, such as 2G, 3G, 4G, and IEEE 802-related products and networks. The company develops cellular technologies comprising technologies related to CDMA, TDMA, OFDM/OFDMA, and MIMO for use in 2G, 3G, and 4G wireless networks and mobile terminal devices; and other wireless technologies related to Wi-Fi, WLAN, WMAN, and WRAN. Its patented technologies are used in various products, including mobile devices, such as cellular phones, tablets, notebook computers, and wireless personal digital assistants; wireless infrastructure equipment comprising base stations; and components, dongles, and modules for wireless devices. As of December 31, 2015, it had a portfolio of approximately 20,400 patents and patent applications related to the fundamental technologies that enable wireless communications. Company description from FinViz.com.

IDCC does not make the equipment that uses its designs and patents. They lease those patents to other companies for annual royalty payments based on the volume of devices sold. This is a very lucrative business because they do not have the cost of production or the risk any specific product will not sell in the marketplace.

For Q2 they reported earnings of 48 cents that beat estimates for 26 cents. Revenue of $75.9 million was $300,000 short of estimates. They received an arbitration award of roughly $150 million from Huawei in the quarter that will be reported as income in Q3. They also announced a new multi-year patent agreement with Huawei for 3G and 4G units. They ended Q2 with $814 million in cash.

Earnings Oct 27th.

IDCC is a member of the S&P-400 MidCap index.

IDCC shares are moving slowly higher with very little volatility. They closed at a new high on Wednesday. I know the daily chart looks scary but the 90-min chart below shows the three weeks of consolidation after their Q2 earnings jump. That consolidation is breaking to the upside and given their guidance, I believe it has room to run. I am using an inexpensive option in case disaster strikes.

With a IDCC trade at $73.25

Buy Oct $75 call, currently $1.65. Initial stop loss $69.65.


No New Bearish Plays

In Play Updates and Reviews

Small Caps Back In Charge

by Jim Brown

Click here to email Jim Brown

Editors Note:

The big cap rally lasted only one day and the small caps rebounded to new highs. The Dow, S&P-500, S&P-100 and the NYSE Composite posted declines while the S&P-400 and S&P-600 made new historic highs. The Russell 2000 gained +8 points but the Russell 1000 only gained a third of a point. The R1K is the 1,000 largest cap stocks in the market.

The Dow was just weak enough to convince me to keep the put position on the DIA for another couple of days. I am starting to see some random selling where individual stocks drop sharply on no news after weeks of gains. This appears to be portfolio managers locking in profits on winners so they can go shopping for new positions.

Volume of 6.3 billion shares was slightly below the average for the last week. As more managers begin to implement their year-end plans we should see volatility rise. That is a keyword for some stocks will be sold.

Current Portfolio

Stop Loss Updates

Check the graphic below for any new stop losses in bright yellow. We need to always be prepared for an unexpected decline.

Profit Targets

Check the graphic below for any profit stops in green. We need to always be prepared for a profit exit at resistance.

Current Position Changes

ITW - Illinois Tool Works

The long call position was entered at the open.

AMP - Ameriprise Financial

The long call position remains unopened until a trade at $102.75.

FTNT - Fortinet

The long call position remains unopened until a trade at $37.50.

HSY - Hershey

The long put position remains unopened until a trade at $98.75.

MKC - McCormick

The long call position was stopped out with a trade at $100.35.

If you are looking for a different type of option strategy, try these newsletters:

Credit spreads and naked puts = OptionWriter

Long term option investments = LEAPS Investor

3-6 month Option Trades = Ultimate Investor

Iron Condors = Couch Potato Trader

Long and short equity trades = Premier Investor

BULLISH Play Updates

AKAM - Akamai Technologies - Company Profile


Six-week high close on Tuesday saw some profit taking today. Akamai said it streamed more than 3.3 billion minutes of NBC video from the Olympics with 2.71 billion live minutes. NBC used Akamai's online video streaming, website, video delivery and security solutions to support the record digital offering

Original Trade Description: August 13th.

Akamai Technologies, Inc. provides cloud services for delivering, optimizing, and securing content and business applications over the Internet in the United States and internationally. The company offers performance and security solutions designed to help Websites and business applications operate while offering protection against security threats. It also provides media content delivery solutions that are designed to deliver movies, television shows, live events, games, social media, software downloads, and other content on the Internet in fixed line and mobile networks; adaptive delivery solutions for streaming video content; and download delivery solution that offers accelerated distribution for large file downloads, including games, progressive media files, documents, and other file-based content.

If you have a large amount of content on the web that is routinely downloaded by thousands or even millions of people around the world, Akamai has the solution. Assume you are a streaming media company with 20,000 downloadable movies. If all those downloads were streamed out of one location to thousands of customers around the world, the bandwidth and server horsepower required at the host location would be enormous. Delays would result when everyone started downloading movies after dinner in the evening.

Akamai solves this problem by cloning your download library and spreading copies around in multiple locations around the world. When a customer clicks on a movie to download, that movie is sent from the location closest to him. In the Internet world, distance is time. The farther you are from the website location the longer the downloads will take because they have to pass through dozens of "pipes" and "routers" as they make their way to your. By putting heavily used content in major geographic locations, Akamai shortens the distance for those in that area. Akamai also provides security and redundancy for the companies providing the source data.

In the Q2 report, Akamai reported earnings of 64 cents on a 6% rise in revenue of $572 million. Analysts were expecting 64 cents and $575 million. The cloud security solutions unit saw revenue rise +42% to an annualized rate of $360 million. International revenue rose 25% to $177 million.

The problem came from the USA where revenue declined -1%. Two of the company's largest customers, Facebook and Amazon, began remotely hosting more of their own content and that reduced revenue. Those two companies were previously 12% of Akami revenue and they declined to 5%. The company guided for Q3 earnings of 59-62 cents on revenue of $566-$578 million. Analysts were expecting 66 cents on revenue of $590 million.

The key point here is that overall revenues rose 6% despite the sharp decline in revenue from Facebook and Amazon. The second point is that now they are only 5% of total revenue and they cannot decline much farther. Akamai said those two customers were building their own "content distribution network" or CDN, which is a very expensive undertaking and the vast majority of Akamai customers could not afford to do that. Obviously Amazon has AWS with massive datacenters all around the world so it only makes sense for them to clone their own content into multiple locations. That is the same with Facebook. They have hundreds of thousands of servers in secure locations all around the world and no longer need Akamai to handle the bulk of their data delivery.

With Akamai continuing to grow even when 7% of their prior revenue base went away, it shows how strong the business really is today. The rapidly growing cloud security solutions business and the international growth will continue to accelerate.

Akamai shares fell from $58 to $48 on the lowered guidance. After trading sideways for two weeks with no further declines, Wells Fargo upgraded them from neutral to buy on Thursday. I believe they will recover their pre earnings level of $58, which just happened to be an eight month high.

Earnings are October 25th.

Position 8/15/16:

Long Nov $55 Call @ $2.46, see portfolio graphic for stop loss.

AMP - Ameriprise Financial - Company Profile


No specific news. Support at $100 is holding.

The position remains unopened until a trade at $102.75.

Original Trade Description: September 3rd.

Ameriprise Financial, Inc., provides various financial products and services to individual and institutional clients in the United States and internationally. The company's Advice & Wealth Management segment provides financial planning and advice, as well as full-service brokerage services primarily to retail clients through its advisors. Its Asset Management segment offers investment management and advice, and investment products to retail, high net worth, and institutional clients through unaffiliated third party financial institutions and institutional sales force. They offer U.S. mutual funds and their non-U.S. equivalents, exchange-traded funds, variable product funds underlying insurance, and annuity separate accounts; and institutional asset management products, such as traditional asset classes, separately managed accounts, individually managed accounts, collateralized loan obligations, hedge funds, collective funds, and property funds. They also offer annuities and various insurance products including disability, property, casualty and life insurance. The company was originally known as American Express Financial Corporation. They were founded in 1894 and employ more than 10,000 financial advisors.

In late July the company reported earnings of $2.23 and analysts were expecting $2.27. Revenue was $2.87 billion which missed estimates for $2.91 billion. The company has assets under management of $776.6 billion. The revenue and earnings miss was caused by exchange rate problems enhanced by Brexit and outflows of investor funds. The entire industry is struggling because investors are afraid of the market after a 7-year run and they are pulling funds out of investments in advance of the next recession. The current expansion is the third longest in history so investors are expecting it to end. It may be two quarters from now or two years from now but they expect it to end. Because this is an industry problem rather than a company problem, I believe the minor miss on earnings and revenue was actually positive. They also declared a quarterly dividend of 75 cents.

The company repurchased $444 million in stock in the quarter. They also closed an acquisition of Emerging Global Advisors in an effort to accelerate their Smart Beta efforts. This expands the Ameriprise foothold in the ETF marketplace. They recently filed for multiple new ETFs under the Smart Beta name. They first began offering ETFs of their own in 2011.

Earnings Oct 26th.

Shares fell sharply on the earnings miss from $101 to $85. Over the last month, they have recovered that loss and are back at the $101 level with resistance at $102.50. A break over that level targets $110 and then $115. Because of the potential for market volatility I am going to recommend an entry trigger.

With an AMP trade at $102.75

Buy Dec $105 Call, currently $3.10, initial stop loss $97.65.

CAVM - Cavium Inc - Company Profile


No specific news. Entire sector was down today. Cavium was upgraded to hold at TheStreet.

Original Trade Description: August 27th.

Cavium, Inc. designs, develops, and markets semiconductor processors for intelligent and secure networks. It offers integrated semiconductor processors for wired and wireless networking, communications, storage, cloud, wireless, security, video, and connected home and office applications. The company's products also include a suite of embedded security protocols that enable unified threat management, secure connectivity, network perimeter protection, and deep packet inspection. In addition, it provides commercial grade embedded Linux operating systems, development tools, application software stacks, and support and services.

On August 17th, Cavium completes the $1.36 billion acquisition of QLogic. The acquired company has been around a long time and is a leading name in the Ethernet market. As of 2015, QLogic had a double digit market share lead over its peers. Pacific Crest believes Cavium will be able to reduce QLogic's manufacturing costs by 50% and this would help capture further market share gains on cost while expanding into congerged NIC and onboard LAN markets. That could produce another $1 billion in revenue.

Analysts raised estimates for Cavium revenue from $526 million to $957 million and earnings rose from $1.87 to $2.60.

Earnings Oct 26th.

Shares have been moving up since late June when the acquisition was announced. They plateaued at $55 over the last week but could be poised to move higher with resistance at $64.

Position 8/30/16 with a CAVM trade at $56.40

Long Nov $60 call @ $3.70. See portfolio graphic for stop loss.

Short Nov $70 call @ 85 cents. See portfolio graphic for stop loss.

Net debit $2.85

FTNT - Fortinet Inc - Company Profile


No specific news. Almost ready to break out.

This position remains unopened until a trade at $37.50.

Original Trade Description: September 3rd.

Fortinet, Inc. provides cyber security solutions for enterprises, service providers, and government organizations worldwide. The company offers FortiGate physical and virtual appliances products that provide various security and networking functions, including firewall, intrusion prevention, anti-malware, virtual private network, application control, Web filtering, anti-spam, and wide area network acceleration; FortiManager product family to provide a central management solution for FortiGate products comprising software updates, configuration, policy settings, and security updates; and the FortiAnalyzer product family, which provides a single point of network log data collection. It also offers FortiAP secure wireless access points; FortiWeb, a Web application firewall; FortiMail email security; FortiDB database security appliances; FortiClient, an endpoint security software; and FortiSwitch secure switch connectivity products. In addition, the company provides FortiSandbox advanced threat protection solutions; and FortiDDos and FortiDB database security appliances. The company also offers security subscription, technical support, training, and professional services. Company description from FinViz.com.

They reported earnings of 3 cents that beat estimates for 2 cents. Revenues rose 29.9% to $311.4 million and beat estimates for $304 million. Product revenues jumped 19% and services revenues surged 40%. During the quarter they added 9,000 customers to bring their total to more than 280,000. The number of transactions over $100,000 increased by 36% and deals over $250,000 rose 35% with deals over $500,000 rising 19%. Total billings rose 26% to $373.8 million. Gross profits rose 33.2%. They ended the quarter with $985 million in cash.

They guided for Q3 to earnings of 17-18 cents and revenue of $319-$324 million. Consensus estimates were expecting 7 cents and $318.9 million. They also raised full year revenue guidance to $1.28 billion which was also above prior estimates.

Earnings Oct 20th.

The company is growing rapidly and the future is bright. There is resistance at $37.25 from a gap down last October and it has failed at that level twice. I expect it to break through on the next attempt. That breakout will target $43-$45 and then the prior highs at $50.

With a FTNT trade at $37.50

Buy Dec $39 call, currently $1.80, initial stop loss $35.25

GRUB - GrubHub - Company Profile


No specific news. Minor decline from Tuesday's 52-week high close.

Original Trade Description: August 29th.

GrubHub Inc., together with its subsidiaries, provides an online and mobile platform for restaurant pick-up and delivery orders in the United States. The company connects approximately 44,000 local restaurants with diners in approximately 1,000 cities. It operates GrubHub and Seamless Websites through grubhub.com and seamless.com. The company also offers GrubHub and Seamless mobile applications and mobile Websites for iPhone, iPad, Android, iWatch, and Apple TV devices; and Seamless Corporate program that helps businesses address inefficiencies in food ordering and associated billing. In addition, it provides Allmenus.com and MenuPages, which provide an aggregated database of approximately 380,000 menus from restaurants in 50 states.

GrubHub is a concept that is catching fire and the bigger they get the more restaurants want to sign on to the service. They now serve 44,000 restaurants. They do not markup prices. Whatever the restaurant charges is what you pay. Diners can customize any order to their own taste specifications and dietary needs.

Restaurants benefit because the service drives more orders. Many people cannot take 2 hours out of their day to go to the restaurant to eat. GrubHub brings the restaurant to them. Restaurants typically see about 30% more takeout orders during their first year when they sign up for the Grubhub service. Delivery fees range from free to $3.99.

In Q2 net revenue rose +37% to $120.2 million topping estimates for $114 million. Earnings rose 35% to 23 cents and also beating estimates for 19 cents. They guided for the current quarter for revenue in the range of $116-$119 million and analysts expected $113 million. At the midpoint that would be another 37% rise.

GrubHub active diners rose 24% to more than 7.35 million. They added 382,000 in Q2. Ordering through the GrubHub online menu is 50% faster than ordering from the restaurant on the phone.

The company recently announced participation with national chain restaurants including Boston Market, Johnny Rocket's, California Pizza Kitchen, Veggie Grill, On the Border and Panda Express. This is a natural for fast food chains. They prepare the food fast and it gets to the diner fast.

An analyst at Moness Crespi Hardt upgraded them to buy from neutral saying the fundamentals are rapidly improving with the addition of the chain restaurants. Secondly, they completely overhauled their tech platform in 2015 and the benefits are rising quickly. They are also integrating POS features including Apple Pay. He also believes they are a potential acquisition target by companies like Amazon, Uber and Postmates. His biggest point is the addition of the chain restaurants. Adding companies with hundreds or even thousands of restaurants will catapult them to the next level.

Earnings Oct 27th.

Shares spiked to $39 on the earnings and then spent a month in post earnings depression, dropping back below $36 in mid August. The rebound has begun and Monday's close was a new 14-month high. Initial resistance is $41 and our best-case target is $47.

I am using the December option so there will be some expectation value when we close the position ahead of earnings.

Position 8/30/16:

Long Dec $42.50 call @ $2.71, see portfolio graphic for stop loss.

ITW - Illinois Tool Works - Company Profile


No specific news. Shares declined only 16 cents in a mixed market.

Original Trade Description: September 6th.

Illinois Tool Works Inc. manufactures and sells industrial products and equipment worldwide. It operates through seven segments: Automotive OEM; Test & Measurement and Electronics; Food Equipment; Polymers & Fluids; Welding; Construction Products; and Specialty Products. The company distributes its products directly to industrial manufacturers, as well as through independent distributors. Illinois Tool Works Inc. was founded in 1912.

In late July, ITW reported earnings of $1.46 that rose 12.3% and beat estimates for $1.40. Revenue of $3.43 billion beat estimates for $3.40 billion. ITW guided for Q3 earnings of $1.42-$1.52 compared to analyst estimates for $1.46. The company raised full year guidance for earnings by 10 cents to the $5.50-$5.70 range. Analysts were expecting $5.51 per share.

Earnings Oct 19th.

The stock jumped from $111 to $115 on the news and then traded sideways for two weeks on post earnings consolidation. In early August, the shares started a slow climb to hit $119 and a new high. Every day I thought about recommending ITW but I kept waiting for a pullback.

After we were in the prior position the stock continued sideways with only a slightly positive bias. This consolidation was fin but we were stopped out on 9/1 when I raised the stop to close thinking the market was about to weaken.

On Friday shares spiked to $123.50 on no news. That spike was erased and shares drifted back down to the prior consolidation range of $119. If the market is going to rally, ITW is a strong growth stock that managers should want to own.

I am choosing an inexpensive strike to allow us to ride out any volatility.

Position 9/7/16:

Long Dec $125 call @ $2.00. See portfolio graphic for stop loss.

JACK - Jack in the Box - Company Profile


No specific news. Still holding the gains after the big surge on Friday.

Original Trade Description: August 30th.

Jack in the Box Inc. operates and franchises Jack in the Box quick-service restaurants and Qdoba Mexican Eats fast-casual restaurants primarily in the United States. As of August 10, 2016, it operated and franchised approximately 2,250 Jack in the Box restaurants in 21 states and Guam; and approximately 600 Qdoba Mexican Eats restaurants in 47 states, the District of Columbia, and Canada. The company was founded in 1951.

Jack shares are up 29% year to date after the company reported Q2 earnings of $1.07 that beat estimates by 20 cents. Revenue rose +2.6% to $368.9 million. Same store sales rose 1.1% and the average check rose 3.5%.

They will end 2016 with an additional 20 Jack in the Box stores and 50-60 new Qdoba locations. The company is refranchising many of its stores and believes it can raise earnings by 65-78 cents through cost reductions achieved by shifting company owned stored to new franchisees. Management expects same store sales o rise 2.5% to 3.5% for Jack stores and 4% to 5% for Qdoba stores.

Earnings Nov 21st.

Shares rallied to $99 and the 2015 high on the Q2 earnings. They have held at that level and closed at a historic high on Monday. Today's decline was minimal given the weak market. The next time the market strings together several days of gains I expect JACK shares to break over $100 and start a new leg higher.

Because the market appears "toppy" and we are due for a dip, I am putting an entry trigger on the position. I am using the December options so there is some expectation premium when we exit before earnings.

With a JACK trade at $100.25

Buy DEC $105 Call, currently $4.00, initial stop loss $95.85
Optional: Sell short DEC $115 call, currently $1.10, initial stop loss $95.85
Net debit $2.90

MKC - McCormick & Co - Company Profile


No specific news. Dropped below support intraday to stop us out.

Original Trade Description: August 20th.

McCormick & Company manufactures, markets, and distributes spices, seasoning mixes, condiments, and other flavorful products to the food industry. It operates through two segments, Consumer and Industrial. The consumer segment offers spices, herbs, seasonings, and dessert items. It provides its products under the McCormick, Lawry's, Stubb's, and Club House brands in the Americas; Ducros, Schwartz, Kamis, and Drogheria & Alimentari brands, as well as Vahine brand in Europe, the Middle East, and Africa; McCormick and DaQiao brands in China; McCormick and Aeroplane brands in Australia; and Kohinoor brand in India, as well as through regional and ethnic brands, such as Zatarain's, Thai Kitchen, and Simply Asia. This also supplies its products under the private labels. This segment serves retailers, including grocery, mass merchandise, warehouse clubs, discount and drug stores, and e-commerce retailers directly and indirectly through distributors or wholesalers. The Industrial segment offers seasoning blends, spices and herbs, condiments, coating systems, and compound and other flavors to multinational food manufacturers and foodservice customers.

They reported Q2 earnings of 75 cents that beat by a penny. Revenue rose 3.8% to $1.06 billion and matched estimates. Consumer sales rose 7% to $641.8 million while industrial sales declined -0.7% to $421.5 million. For the full year they guided for earnings on a constant currency basis of $3.68 to $3.75 and analysts were expecting $3.74. Revenues are expected to be $4.34 to $4.43 billion but that was on the low side of estimates for $4.41 billion. They expect sales growth of 5% and EPS growth of 10%. They said they had more confidence they would come in at the high end of their revenue and sales guidance. However, that only matched expectations on earnings and was still light on revenue.

Earnings Sept 29th.

They have several challenges. The quit selling a low cost economy product in India and that reduced revenue. Indians have a very low standard of living and try to find the lowest cost products. The company also warned on currency issues. Total sales growth in Q2 was 3.8% but adjusted for constant currency that would rise to 6%.

They also had an issue with private label customers lowering prices for their products. That means a $2 box of private label pepper is competing with a $2.50 box of McCormick pepper. The company is actually fine with that and encourages private label distributors to adjust prices to whatever price point generates the most sales. Apparently, McCormick is perfectly happy growing market share at a reduced revenue rate. They are still making money on private label products and those products are capturing market share.

Shares sold off from $107 to $100 in the month following the earnings report. After putting in a double bottom at $100 the stock is moving higher and a break over $102 could see the gains accelerate. This is a good stable company paying a $1.72 annual dividend without a lot of drama along the way. I expect it to return to the highs, market willing.

position 8/22/16 with a MKC trade at $102.15

Closed 9/7/16: Long Dec $105 call @ $2.40. Exit $1.00, -1.40 loss.

OC - Owens Corning - Company Profile


No specific news. Back below resistance again.

Original Trade Description: August 24th.

Owens Corning produces and sells glass fiber reinforcements and other materials for composites; and residential and commercial building materials worldwide. It operates in three segments: Composites, Insulation, and Roofing. The Composites segment manufactures, fabricates, and sells glass reinforcements in the form of fiber; and manufactures and sells glass fiber products in the form of fabric and other specialized products. Its products are used in pipe, roofing shingles, sporting goods, consumer electronics, telecommunications cables, boats, aviation, defense, automotive, industrial containers, and wind-energy applications in the building and construction, transportation, consumer, industrial, and power and energy markets. The Insulation segment manufactures and sells fiberglass insulation into residential, commercial, industrial, and other markets for thermal and acoustical applications; and manufactures and sells glass fiber pipe insulation, flexible duct media, bonded and granulated mineral fiber insulation, and foam insulation used in above- and below-grade construction applications. The Roofing segment manufactures and sells residential roofing shingles, oxidized asphalt materials, and roofing accessories used in residential and commercial construction, and specialty applications.

For Q2 they reported earnings of $1.29 that beat estimates for 85 cents. Revenue of $1.55 billion also beat estimates for $1.47 billion. They repurchased one million shares in the quarter with 2.8 million left on the current authorization. They projected second half shipments of roofing to be flat after a 20% surge in the first six months of 2016. This is a seasonal business. Hail storms that cause roof replacements are heaviest in April-July.

Earnings Oct 26th.

Shares were very volatile after the earnings with a range of $50.88 to $58.69. After the volatility passed the stock found support at $53 and moved sideways for four weeks. This week shares have started to climb out of the consolidation and the stock closed at $54.81 on Wednesday and actually posted a gain in a weak market. That was a four-week high.

This is a low volatility stock and could be a safe location to wait out any market volatility over the next six weeks.

Position 8/25/16

Long Nov $55 call @ $2.35, see portfolio graphic for stop loss.

PAG - Penske Automotive Group - Company Profile


No specific news but Roger must be buying again with an 80 cent gain. Shares hit a new 8-month high.

Original Trade Description: August 10th.

Penske Automotive Group, Inc. operates as a transportation services company. The company operates through three segments: Retail Automotive, Retail Commercial Truck, and Other. It operates retail automotive and commercial vehicle dealerships principally in the United States and Western Europe; and distributes commercial vehicles, diesel engines, gas engines, power systems, and related parts and services primarily in Australia and New Zealand. The company engages in the sale of new and used motor vehicles; and related products and services, such as vehicle service and collision repair services, as well as placement of finance and lease contracts, third-party insurance products, and other aftermarket products. The company also operates 14 dealerships locations of heavy and medium duty trucks primarily under Freightliner and Western Star brand names, as well as offers a range of used trucks, and service and parts. Further, the company distributes commercial vehicles and parts to a network of more than 70 dealership locations, including 3 company-owned retail commercial vehicle dealerships. At the end of 2015 they operated 355 automotive retail franchises with 181 in the USA, and 174 outside the US, primarily in the UK.

For Q2 they reported earnings of $1.11 and beat estimates for $1.08. Revenue rose 6.8% to $5.3 billion and also beating estimates for $5.1 billion. On a constant currency basis revenue rose 9.2%. They sold 115,106 vehicles in Q2. Gross profits rose 5.5% to $771.3 million. Cash on hand rose from $62 million to $97 million.

On July 27th Penske Automotive acquired an additional 14.4% interest in Penske Truck Leasing from GE Capital for $498.7 million. That raised their ownership to 23.4%. They expect this to add 25 cents to earnings on annual basis. In April a Penske subsidiary, Premier Truck Group acquired Harper Truck Centers, a commercial truck dealership in Ontario Canada. The acquisition will add $130 million in annual revenue.

On August 2nd Chairman and CEO, Roger Penske, acquired 710,121 shares for an averge price of $39.10 for a total value of $27,765,730. Since 2010 Roger had sold 501,326 shares in three transactions. That makes his recent buy even more important because if marks a change in sentiment.

Update: On August 10th CEO Roger Penske bought another 151,412 shares for $6 million. Roger Penske acquired another 50,000 shares on August 11th at an average price of $41.40. He is on a buying binge with new positions every 2-3 days. Just in August he has purchased nearly one million shares for roughly $40 million. That brings his total ownership to 31,066,574 shares. There are only 85 million outstanding. It looks like he may be taking the company private, one bite at a time.

Update: On August 22nd, Roger Penske bought another 300,000 shares at $42.55 for $12.8 million. No other news and the stock spiked 4%. That raises his holdings to roughly 31.5 million shares and there are only 85 million outstanding. His ownership is now over 37%. He has purchased more than 1.5 million shares in the last month.

Update: On August 29th, Roger Penske bought another 478,000 shares for $21,132,400. That lifts his ownership to roughly 32 million shares.

Update: On September 1st, Roger Penske bought another 187,764 shares worth $8.5 million.

Earnings Oct 27th.

PAG shares are about to break over long-term resistance at $40. Shares closed at $40.20 and that complicates the trade. If we buy the $45 call, which is only $1, the stock has to move $5 to really make a difference in the option price. If we buy the ITM call at $40, which is $2.95 we are paying an ATM premium that will decline as it moves farther into the money. However, for every $1 the stock raises the option will appreciate significantly. Currently the $35 call is $6.30. That is what we could expect the $40 call to be worth if the stock rises to $45. At the same time, the $45 call would rise from the current $1 to $2.95. Do we invest $3 to make $3 or do we invest $1 to make $2? I am going to recommend the $45 call because of the lower cost, lower risk and higher percentage return if PAG rises to $45. The risk is that it stalls somewhere between $40 and $45 and we never reach the ITM premium level before the Oct earnings. I believe this chart is worth the risk. I am going to put a $41 trigger on it to make sure it breaks through that resistance.

Position 8/11/16 with a PAG trade at $41.00

Long Nov $45 call @ $1.35, no initial stop loss.

SMG - Scotts Miracle-Gro - Company Profile


No specific news. Minor decline after Tuesday's intraday spike.

Original Trade Description: August 31st.

The Scotts Miracle-Gro Company manufactures, markets, and sells consumer lawn and garden products worldwide. The company's Global Consumer segment offers lawn fertilizers, grass seed products, spreaders, other durable products, and outdoor cleaners, as well as lawn-related weed, pest, and disease control products; water soluble and continuous-release plant foods, potting mixes, garden soils, mulch and decorative groundcover products, landscape weed prevention products, plant-related pest and disease control products, organic garden products, live goods and seeding solutions, and hydroponic gardening products; and insect and rodent control products, and selective and non-selective weed control products to protect homes and maintain external home areas.

For Q2 they reported earnings of $2.16 compared to estimates for $2.08. Revenue of $994.1 million missed estimates for $1.04 billion. The company said miserable weather in April/May caused a significant decline in sales as gardeners and homeowners put off buying until June. The continuous rain turned everything green and that depressed fertilizer sales. Going into early April sales for the year were up +14% but after May they had declined -2%. There was also a shift of six days in the company's fiscal calendar.

The company raised earnings estimates for the full year to $3.75-$3.95 but reduced full year revenue forecast as a result of the spring slump. Shares soared on the guidance as the company was very bullish on the business.

They acquired a 75% stake in Gavita, a hydroponic products distributor. They also signed a definitive agreement to acquire Botanicare, a producer of fertilizer and hydroponic systems. They entered into a third transaction that has not yet been announced. They also increased their relationship with AeroGrow International, a consumer direct indoor gardening and hydroponic supplies business.

SMG is rapidly beefing up its lighting division, expanding on hydroponics and adding new products that will help indoor growers. They expect sales of hydroponics equipment to reach $250 million for the year. During the year, they also completed the sale of the Scotts LawnService business into a joint venture with Truegreen and received a $196 million cash distribution from the venture.

Along with earnings, they announced a $500 million share buyback in addition to the $400 million remaining on a prior authorization. "Our priorities for uses of cash are beginning to shift and we expect to begin a more aggressive share repurchase plan in the upcoming quarters."

Earnings Nov 3rd.

Shares spiked to $83 after earnings and moved sideways for the last month. After dipping back to $81 last week it looks like shares are preparing to move higher. A breakout over $83.25 would be a new high.

Position 9/6/15 with a SMG trade at $83.25

Long Dec $85 call @ $2.25, sese portfolio graphic for stop loss.

BEARISH Play Updates (Alpha by Symbol)

DIA - Dow Jones ETF - ETF Profile


There is just enough indecision that I am going to keep the position open another couple days. I was going to close it today if there was no decline but the Dow was just weak enough to suggest there may be volatility ahead. The Russell 1000 and 3000 both gained less than 1 point and the Dow, S&P-500, S&P-100 and NYSE Composite were all negative. Futures are slightly negative after the close.

The six weeks after August option expiration are the most volatile of the entire year.

Original Trade Description: August 1st.

The Dow posted another lower low as it fades from the 18,622 intraday high set back on July 20th. The last three days the Dow has traded under support at 18,400 only to rebound back over that level at the close. The 18,350 level is secondary support and today's low was 18,355.

All but six Dow components have reported earnings and there are only two reporting this week. Those are PG and PFE on Tuesday. The Dow is experiencing post earnings depression. After a stock reports earnings there is typically a period where it declines as traders leave that stock in search of something else to trade that has not yet reported.

PG 8/2
PFE 8/2
DIS 8/9
HD 8/16
CSCO 8/17
WMT 8/18

The Dow is very over extended, suffering post earnings depression and heading into the two weakest months of the year, which are seasonal decliners.

Bank of America expects a 10-15% decline over the next two months.

Goldman Sachs said this morning they expect a 5-10% decline. Goldman said, rising uncertainty in the U.S. and globally, negative earnings revisions, decelerating buybacks and overly dovish Fed expectations would send the market lower over the next several months.

Jeffrey Gundlach of DoubleLine with $100 billion under management, said "sell everything" most asset classes are "frothy and nothing here looks good." "Stock investors have entered a world of uber complacency." "Investors seem to have been hypnotized that nothing can go wrong." He expects the next big money to be made on the short side.

Peter Boockcar, chief market analyst at the Lindsey Group, said, "Take off the beer goggles, the markets are dangerous. To me, the U.S. stock market is the most expensive in the world."

According to Bespoke, over the last 20 years the Dow has performed the worst in August of any other month.

However, just because some big names and big banks turn negative on the market, it does not mean it is guaranteed to move lower. Markets tend to move in the direction that will confound the most people at any given time.

I believe we should accept the risk and launch another index short using the Dow ETF (DIA) since it is the weakest in August. The Dow has risk to 18,000 and a breakdown there could take it back to 17,400.

I am going to recommend an October put spread so we can capitalize on any decline that lasts into September. Typically market bottoms are in October. If you do not want to use a spread, I would buy the September $182 puts, currently $2.55. Just remember, once we are into September the premiums will decline sharply.

Position 8/2/16:

Long Oct $182 put @ $3.98, no initial stop loss.
Short Oct $172 put @ $1.73, no initial stop loss.
Net debit $2.25

HSY - Hershey Co - Company Profile


After being rejected by Hershey, Mondelez announced a new push into chocolate candy sales. They are going to compete head to head with Hershey, which is already seeing weak sales declines. Mondelez is going to announce a complete new range of chocolate candy products using the Oreo brand name. Mondelez is already the second largest seller of chocolate in the world.

The position remains unopened until a trade at $98.75. Low today was $98.86.

Original Trade Description: September 3rd.

The Hershey Company manufactures, imports, markets, distributes, and sells confectionery products. It offers chocolate and non-chocolate confectionery products; gum and mint refreshment products comprising chewing gums and bubble gums; pantry items, such as baking ingredients, toppings, beverages, and sundae syrups; and snack items, including spreads, meat snacks, bars and snack bites, and mixes. The company provides its products primarily under the Hershey's, Reese's, Kisses, Jolly Rancher, Almond Joy, Brookside, Cadbury, Good & Plenty, Heath, Kit Kat, Lancaster, Payday, Rolo, Twizzlers, Whoppers, York, Scharffen Berger, Dagoba, Ice Breakers, Breathsavers, and Bubble Yum brands, as well as under the Golden Monkey, Pelon Pelo Rico, IO-IO, Nutrine, Maha Lacto, Jumpin, and Sofit brands. It markets and sells its products to wholesale distributors, chain grocery stores, mass merchandisers, chain drug stores, vending companies, wholesale clubs, convenience stores, dollar stores, concessionaires, and department stores. The Hershey Company was founded in 1894 and is headquartered in Hershey, Pennsylvania. Company description from FinViz.com.

Mondelez offered $107 per share for Hershey in June. Shares spiked to $110-$115 in anticipation of an upgraded offer. After two months of discussions they finally got around to price. The Hershey board said it would need a lot higher price to get the deal approved. Mondelez thought about it and came back saying "maybe they could go to $115" if some conditions were met. Hershey replied that was not high enough and it would take at least $125 to continue the discussion. Mondelez immediately broke off negotiations saying there was no "actionable path" to a conclusion.

Hershey is struggling. Sales have been slowing as new competition slowly erodes market share. The Hershey Trust owns 80% of the voting stock so even if the Hershey board decided to consider an offer the trust would have to approve it along with the Pennsylvania Attorney General, which has power over the trust. There will not be another deal and the trust board is being reconstituted in 2017 as demanded by the AG so no major actions will be approved.

Hershey is going to have to deal with its own market share losses and slowing sales. This means the outlook for Hershey shares is negative. Last week Bank America reiterated an underperform rating with a price target of $100 and shares closed the week at $99. The outlook is underwhelming and the stock should decline back to the $90 range where it was stuck before the Mondelez offer.

Earnings Nov 1st.

With a HSY trade at $98.75

Buy Nov $95 put, currently $1.60. Initial stop loss $101.25.

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