Option Investor
Newsletter

Daily Newsletter, Wednesday, 9/14/2016

Table of Contents

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

Market Wrap

Fighting To Hold Support

by Keene Little

Click here to email Keene Little
This week we've seen the indexes pounding on support (the techs have been stronger in that regard) and it's getting to the point where the bulls need to step back in and rally this market. Otherwise the bears are smelling blood and ready to take no prisoners.

Today's Market Stats

We've had some whippy moves since last Friday's decline but today was relatively tame with the Dow swinging less than 200 points, the first day since last Friday. One could argue the dampening volatility since Friday is a good sign for the bulls as support levels hold. Others will argue that support levels are being pounded into submission and will soon break, opening the flood gates to more selling as stop levels get hit. We're in opex week and so far SPX has been holding near 2125, which could hold into Friday morning's settlement for opex and what it does after that will be telling. That's if it holds for one more day.

The market is concerned about what the Fed will say next week in their FOMC announcement on Wednesday. The stock market is worried about the removal of accommodation, which is the only thing a 0.25% rate increase would accomplish. With the Fed's new self-imposed mandate of protecting the stock market they've been threatening to raise rates, which I think has been a test of the market's reaction. The hard selloff and inability to recover (unlike the spike down in June on the Brexit worries) will likely convince the Fed the market won't tolerate a rate increase. Neither will the economy but that seems to be beside the point for the Fed.

Other than the Fed we haven't had much news, economic or geopolitical, to affect the market. Some say the loss of the lead by Clinton over Trump is upsetting the market (since Trump is such a wild card and supposedly not part of the political-financial establishment) but I think people are grasping for straws in an attempt to explain the selling. The market has been overbought and overloved and people came back from their summer vacations and decided to take profits off the table. Selling begets selling and pretty soon you have a real decline. But that explanation doesn't sound sexy enough to financial media makes up reasons for it. Some big players though seem to be worried about this market.

I saw an interesting chart from Tom McClellan that showed the open interest for VIX futures vs. SPX and how spikes in open interest often correlate with SPX price highs. All this year the open interest has been climbing and is now historically high and it spiked much higher in the past month. As McClellan stated, "These big spikes in open interest are usually followed by meaningful price declines. The Sep and Oct futures contracts each have just seen huge increases in open interest." It's looking like there are some big players out there betting on a big market decline, which of course spikes the VIX higher and those long the VIX can make a lot of money.

VIX Futures Open Interest vs. SPX, chart courtesy mcoscillator.com


Dow Industrials, INDU, Weekly chart

This week the Dow is testing support at its uptrend line from February-June, currently near 18045(using log price scale, whereas it's near today's low at 17992 when using the arithmetic price scale). The line was tested Monday before the big rally back up and then again on Tuesday. Depending on the price scale the uptrend line is either holding or was slightly broken today and the new low (1 point below Monday's) suggests we could see lower prices directly ahead, which is what I'm depicting with the bold red arrow vs. the light-green dashed line heading back up. One of the things favoring the bulls is the lack of bearish divergence at the July-August highs vs. the April high, which is not required before a significant decline but the lack of a negative divergence is reason for caution if you're a bear. However, price is king and a break of the uptrend line would be a bearish development, which would likely lead to a drop down to the 50-week MA (it supported the decline into the June low), currently at 17556, and potentially down to price-level S/R at 17140.


Dow Industrials, INDU, Daily chart

The Dow's daily chart shows the struggle to hold onto its uptrend line from February, which was broken today when looking at this with the log price scale. The price pattern for the decline from last week, with the sharp declines on greater volume and bearish market internals, supports the idea for lower prices. If we get another leg down it should be a strong decline, one that could take the Dow down to its 200-dma, currently near 17571 (slightly above the 50-week MA) very quickly. The risk in this whippy market, especially this week, is for a head-fake break (to hit the stops) to then be followed by a strong reversal and into a new rally (or another leg up to create a larger a-b-c bounce pattern off Monday's low).

Key Levels for DOW:
- bullish above 18,351
- bearish below 17,994


S&P 500, SPX, Daily chart

SPX has been bouncing between support at 2120 (the June 8th high) and resistance at 2135 (the May 2015 high and the July 2015 high was near 2133) and hanging close to 2125, which is where it might settle Friday morning for opex (it's common to see a 25-point multiple act as a magnet). Yesterday it closed near 2127 and today is closed near 2125. It just needs one more day to close near this level and not move much into Friday morning. If it drops below support at 2120 we could see it test its uptrend line from February-June, currently near 2100 (log price scale, 2108 with arithmetic price scale). A break of its uptrend line, which would follow the Dow breaking first, would be bearish confirmation that a significant high is already in place. A drop below 2100 would likely lead to a drop to the 200-dma, currently at 2058. But until 2100 is broken there is still the potential for the bullish price pattern, which calls for one more leg up in a rising wedge pattern for the rally off the February low. The bearish pattern calls the August high the completion of a 3-wave bounce correction off the February low and now we'll see a breakdown that will take SPX below the February low at 1810. Neither side can get aggressive yet since we don't have enough clues yet for either side.

Key Levels for SPX:
- bullish above 2170
- bearish below 2120


S&P 500, SPX, 60-min chart

The sharp decline into Monday's low was followed by a sharp bounce and then another sharp decline, leaving traders guessing which direction will be next. The bounce pattern off Tuesday's low looks like a corrective pattern and that swings the odds over to the bears and another leg down would likely break support near 2120 (tested for the 3rd time in 3 days today) and head for 2100. With the increased volatility and spiky price moves it's hard for traders to pick a direction without getting stopped out but at the moment I think it's better to pick the short side for trading. With cycles pointing down into mid-October it's another reason to stay defensive if you're a bull.


Nasdaq-100, NDX, Daily chart

The techs have held up relatively well this week by holding onto most of Monday's big rally. But NDX has been struggling to stay above price-level S/R at its December 2015 high near 4740, which it managed to do today with a late-day bounce up to 4746. Last Friday it closed below its 50-dma, near 4701 on that day, but it's been holding above it since then, currently near 4721. The 20-dma is slightly above today's high at 4770, currently near 4784, so there could be struggle between roughly 4720 and 4780. I'm not seeing anything on its chart that suggests which way this is going to break but it remains just as vulnerable as the others to another leg down in a strong decline. If on the other hand it does make it back up we could see it reach the trend line along the highs from July-November 2015, which will be near 4870 by the end of the month. And a rally in techs would likely drag the others up with them, although not necessarily to new highs.

Key Levels for NDX:
- bullish above 4870
- bearish below 4656


Russell-2000, RUT, Daily chart

Like the other indexes, the RUT has been struggling between two price-level S/R lines, one near 1215 (price-level S/R since March 2014) and the other at 1205 (the December 2015 high). Its broken 50-dma, now near 1222, was almost tested with today's high near 1220. The RUT was the only one to make a new low Tuesday morning below Monday's and that set a bearish tone to the pattern and the bounce since then looks corrective. If the bounce gets another leg up to give us a larger a-b-c bounce with two equal legs up we could see 1224, which would also be a 62% retracement of Tuesday's decline. But whether it will be from that level, if reached, or from here, it's looking like the decline will continue. Assuming we'll see support at 1205 break, the next downside target would be 1187 where the decline from September 7th would achieve two equal legs down. That could then lead to the start of another rally leg but I think the higher-odds pattern points to a strong decline to the next price-level S/R near 1160 before consolidating. A drop down to its 200-dma, near 1130, before the end of the month is a reasonable possibility if the bearish wave pattern is correct.

Key Levels for RUT:
- bullish above 1236
- bearish below 1205


30-year Yield, TYX, Daily chart

Last week I had shown a chart of TYX (30-year yield) to point out a pattern that called for a rally (selling in bonds) to create an a-b-c bounce pattern off the July 8th low. Two equal legs up for that pattern called for a rally to 2.463%, which was achieved yesterday (with a high at 2.488%), and is only slightly below its December 2008 and May-July 2012 lows near 2.5%. It gapped back down this morning and then tested the 2.463 projection with a high at 2.469 before dropping back down. This pattern calls for the start of the next leg down in yields, one which should take TYX below 2% (and TNX below 1%). If this pattern is the correct interpretation it's saying the Fed will not be raising rates next week. But if TYX makes it above 2.5% we could then see it rally up to its 200-dma, currently at 2.58%. The 200-dma hasn't been tested since TYX dropped below it in January.


20+ Year Treasury ETF, TLT, Daily chart

As far as a trading opportunity in bonds, you can use TLT, the 20+year Treasury Bond ETF. It's of course a mirror image of yields and the setup here is for a rally after completing an a-b-c pullback from July with two equal legs down at 133.78 (yesterday's low was 133.36 and it closed at 134.05). It gapped back up this morning and I'd consider a long play here with a stop just below 133.36.


KBW Bank index, BKX, Daily chart

Back in August BKX broke above its downtrend line from July-December 2015 and then broke its uptrend line from June (more like dribbled through it). After a brief consolidation it then pushed higher and back-tested its broken uptrend line on August 30 - September 1 before falling away, leaving a bearish kiss goodbye. The decline since September 1st is corrective enough to suggest caution by the bears since we could get another leg up and potentially up to 75.41 to achieve two equal legs up from February. At the moment it's looking like we could see a drop at least back down to its broken downtrend line where its 50-dma is getting ready to cross it near 69. Below 69 would be more bearish but until that happens we need to watch for the possibility of another rally. Follow the money by watching the banks carefully.


U.S. Dollar contract, DX, Daily chart

The US$ is holding its uptrend line from May 3rd and my expectation for the dollar is higher, back up to the top of its parallel down-channel near 100. The way it's been chopping its way higher since May it could take a while. At the moment, even for the bullish pattern, I can't rule out a decline back down to the bottom of its parallel channel and a price projection at 92.68 for two equal legs down from July 25th. Not until it breaks below that level would I turn bearish the dollar. We should get a clearer picture after the FOMC announcement next week.


Gold continuous contract, GC, Daily chart

Since its high on July 6th gold has traded sideways in what looks like a descending triangle. It now has the requisite 5-wave move inside the triangle and the bullish interpretation of this pattern is for another rally leg out of it to complete the 5th wave of the rally from December. If we get another rally leg it could make it up to only the downtrend line from September 2011 - October 2012, near 1403 by the end of the month. But if it climbs up to the top of a rising wedge pattern (the trend line along the highs from February-July) we could see gold hit 1470 sometime later in October. However, if gold drops below 1305 it could start a more significant decline, especially since a bullish consolidation pattern will have failed. I don't see anything here to signal one outcome over the other, except the COT report shown further below.


Gold futures Commitment of Traders (COT) report, chart courtesy tradingster.com

I mentioned above that the price pattern is a 50/50 setup but based on the triangle consolidation pattern since July I'd bet on the long side. I and a few other non-commercial traders. And we'd be betting against the commercials, who are considered the "smart" money. The chart below is squished from its original but the gold price is at the top and the commercial (black) vs. non-commercial (retail, fund managers and the like, shown in blue) is shown at the bottom. The dates run from July 2013 to the present and if you draw vertical lines when the commercials increase their net short positions the non-commercials increase their net long positions and the commercials almost always win this bet. The current spread is wider than it's been since before 2007 and this is telling us the commercials are massively short vs. the non-commercials being massively long. I would not bet against the commercials here, which means flat or short the shiny metal.


Oil continuous contract, CL, Daily chart

Oil has twice been rejected by its downtrend line from June 2014 - June 2016, in August and again on September 8th. Oil would turn bullish above its September 8th high at 47.75 but in the meantime a double rejection should lead to a continuation lower. If oil gets just a 3-wave pullback from August it will achieve two equal legs down at 36.27 so that's the first downside target. Over the longer term I think oil will continue to sink lower and at least test its February low and quite possibly break it. The fundamentals for oil are not good and the chart patter supports a complete retracement of the 3-wave rally off the January low at 26.19.


Economic reports

While today was a quiet day for economic reports, Thursday will be busy, as can be seen in the table below. Most of the numbers look like expected small improvements but if they're too strong then there will be additional worries about the Fed raising rates. The Fed is doing a good job scaring the market by talking about raising rates and while I know they desperately want to raise rates (so they have the ability to lower them again when we hit a recession) they have successfully painted themselves into a corner. It took a lot longer than I thought it would but they've finally succeeded. If they raise rates now they'll kill the stock market (one of their self-mandated jobs is to rally the stock market) and put the economy into a recession, which will then require they immediately lower the rates again. I think they'll be playing with negative rates before they raise them again because they're effectively trapped now. Good job Fed, you've screwed the savers, rewarded the bankers and now can't figure out a way out of your dilemma. But I digress...we'll see what reaction we get in the futures from all the economic reports and then back to our regularly scheduled market.


Conclusion

The stock market is starting to reflect fear and it's hard to tell if the decline will continue from here or if instead it will start another rally that takes the indexes to new highs into the election (conspiracy theory anyone?). From a pattern perspective I could argue either case and it's reason enough for caution by both sides. But the downside pattern is particularly bearish and there are some market cycles (long-term and short-term) that argue for a decline into mid-October. The downside potential by mid-October is well below the June lows and that makes bets on the long side particularly risky since we could see several gap-down mornings along the way. As always, the FOMC is the wild card and how the market reacts to the FOMC statement next Wednesday. The market is trying to hold support near here but if it's unable and it drops much lower we could see a fast disconnect to the downside. On the other hand, if support does hold we could see a stronger bounce into next week. How it sets up before next Wednesday and the reaction after the Fed announcement will be key for what happens into October. Trade safe.

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

Uncommon Strength

by Jim Brown

Click here to email Jim Brown

Editors Note:

Alexion specializes in rare diseases and orphan drugs. They established a website (www.UncommonStrength.com) to serve as a platform to unite and celebrate the courage and resilience of individuals living with rare diseases. This headline brought them back into my daily scans.


NEW DIRECTIONAL CALL PLAYS

ALXN - Alexion Pharmaceuticals - Company Profile

Alexion Pharmaceuticals, Inc., a biopharmaceutical company, develops and commercializes life-transforming therapeutic products. The company offers Soliris (eculizumab), a monoclonal antibody for the treatment of paroxysmal nocturnal hemoglobinuria (PNH), a genetic blood disorder; and atypical hemolytic uremic syndrome (aHUS), a genetic disease. It provides Strensiq (asfotase alfa), a targeted enzyme replacement therapy for patients with hypophosphatasia (HPP); and Kanuma (sebelipase alfa) for the treatment of patients with lysosomal acid lipase deficiency. The company also conducts Phase IV clinical trials on Soliris for the treatment of PNH registry; Phase III clinical trials for the treatment of myasthenia gravis, neuromyelitis optica spectrum disorder, and delayed kidney transplant graft function; and Phase II clinical trials for antibody mediated rejection in presensitized renal transplant patients. It develops cPMP (ALXN 1101) that is in Phase II/III trial for treating metabolic disorders; and ALXN 1007, a novel humanized antibody in Phase II clinical trial for the treatment of anti-phospholipid syndrome and graft versus host disease. Company description from FinViz.com.

The Uncommon Strength campaign supports building global communities for patients with rare diseases, which include atypical hemolytic uremic syndrome (aHUS), hypophosphatasia (HPP), lysosomal acid lipase deficiency (LAL-D) and paroxysmal nocturnal hemoglobinuria (PNH). While the platform aims to provide key information about the diseases to educate the patients and their families, it also offers interactive connection through social media components to unite the global community.

Last week Alexion was awarded orphan drug status by the EU on the ALXN1007 drug for the treatment of graft-versus-host disease (GVHD). This is an anti-inflammatory monoclonal antibody targeting complement protein C5a, currently in a phase II study in patients with newly diagnosed acute GVHD of the lower gastrointestinal tract (GI-GVHD). This disease has a 30-40% mortality rate. The orphan drug status provides certain incentives for the company to proceed with marketing including a longer period of market exclusivity. They have several other drugs similar to ALXN1007.

In Q2 they reported adjusted earnings of $1.25 compared to estimates for $1.17. Revenue of $753.1 million also beat estimates for $742.5 million.

Earnings Oct 27th.

Shares dipped in late August and traded sideways for two weeks. They have been trying to rebound despite the volatile market. Options are expensive so I am recommending a November call spread to reduce the expense.

With a ALXN trade at $130.50

Buy Nov $135 call, currently $5.70, initial stop loss $123.50
Sell Nov $145 call, currently $2.00, initial stop loss $123.50
Net debit $3.70.


NEW DIRECTIONAL PUT PLAYS

No New Bearish Plays



In Play Updates and Reviews

Mixed Market

by Jim Brown

Click here to email Jim Brown

Editors Note:

The big cap indexes declined again but Apple kept the Nasdaq out of negative territory. The Dow closed down for the 5th time in six days and just above critical support. The index declined under 18,000 late in the day but managed to rebound back over that support level in the final minutes.

Apple gained nearly $4 and all of the chip stocks in Apple's supply chain were also up strongly after news broke on Monday that iPhone 7 sales were nearly four times the rate of iPhone 6 sales when it was announced.

The Dow's decline to close just over 18,000 means any negative overnight news could cause the index to drop far enough below support to trigger additional selling and possibly a cascade decline on the way to 17,000.



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


CLVS - Clovis Oncology

The long call position was opened with a trade at $29.42.


AMP - Ameriprise Financial

The long call recommendation has been cancelled.



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


AMP - Ameriprise Financial - Company Profile

Comments:

No specific news. AMP refuses to move higher and I am cancelling this recommendation.

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.

Recommendation cancelled.


CLVS - Clovis Oncology - Company Profile

Comments:

No specific news. Minor gain in a mixed market. We received a gift at the open with the long call premium falling and the short call premium rising. The net debit became $2.69 and very reasonable.

Original Trade Description: September 13th.

Clovis Oncology, Inc., a biopharmaceutical company, focuses on acquiring, developing, and commercializing anti-cancer agents in the United States, Europe, and internationally. It is developing three product candidates, which include Rociletinib, an oral epidermal growth factor receptor and mutant-selective covalent inhibitor that is under review with the U.S. and E.U. regulatory authorities for the treatment of non-small cell lung cancer; Rucaparib, an oral inhibitor of poly polymerase, which is in advanced clinical development for the treatment of ovarian cancer; and Lucitanib, an oral inhibitor of the tyrosine kinase that is in Phase II development for the treatment of breast cancers. Company description from FinViz.com.

Clovis has been rising on the prospects for the drug Rucaparib. They reported last week the FDA was not planning on holding an advisory committee meeting to discuss the new NDA application. The FDA has accepted the company's NDA for accelerated approval and granted it a priority review. The FDA response is expected to be positive and is expected by Feb 23rd.

Clovis has several anti cancer drugs in final stages and the outlook is very positive. Just seeing that CLVS shares have not declined in the recent market drops is a very strong indication that portfolio managers are buying and holding.

Earnings Nov 3rd.

We have to use a January call spread because October is the only other series available and with Friday the expiration for September, the October premiums will collapse next week. The net cost is the same but with the January options, we have more flexibility in the weeks ahead.

Position 9/14/16

Long JAN $30 call @ $6.00, no initial stop loss.
Short JAN $40 call @ $3.31, no initial stop loss.
Net debit $2.69


IDCC - Interdigital - Company Profile

Comments:

No specific news. Shares closed at a new high in a mixed market. IDCC will present at the Credit Suisse Small and Mid Cap conference at 10:AM on the 15th. Shares up today in a bad market.

Original Trade Description: September 7th.

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.

Update 9/8/16: The company issued revenue guidance for Q3 of $220-$225 million. This compares to Q2 revenue of $75.9 million. Quarterly revenues are volatile because they receive royalties on new products when shipped. For instance, a royalty on the iPhone 7 would show a monster jump in Q4 compared to minimal revenue in Q3.

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.

Position 9/8/16 with a IDCC trade at $73.25

Long Oct $75 call @ $1.60. See portfolio graphic for stop loss.


ITW - Illinois Tool Works - Company Profile

Comments:

No specific news. Decent gain in a mixed market and support at $115 is still holding.

Original Trade Description: September 12th.

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. Company description from FinViz.com.

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.

On Sept 2nd shares spiked to $123.50 on no news. That spike was erased and shares drifted back down to the prior consolidation range of $119 and held there for two days. The 9/9 crash knocked us out of our prior position and shares dipped to $114.91 on Monday the 12th. Real support is $114.50. I am going to recommend this position for a reentry on a dip to $115.50 on any further market weakness.

Position 9/13/16 with an ITW trade at $115.50

Long Dec $120 call @ $2.50. No initial stop loss.


LITE - Lumentum Holdings - Company Profile

Comments:

No specific news. Excellent gain to close at a new high.

Original Trade Description: September 12th.

Lumentum Holdings Inc. manufactures and sells optical and photonic products for optical networking and commercial laser customers worldwide. It operates in two segments, Optical Communications and Commercial Lasers. The Optical Communications segment offers components, modules, and subsystems that enable the transmission and transport of video, audio, and text data over high-capacity fiber optic cables. It offers optical communication products, including optical transceivers, optical transponders, and supporting components, such as modulators and source lasers; modules or sub-systems containing optical amplifiers, reconfigurable optical add/drop multiplexers or wavelength selective switches, optical channel monitors, and supporting components; and products for 3-D sensing applications, including a light source product. This segment serves customers in telecom and datacom markets. The Commercial Lasers segment offers diode, direct-diode, diode-pumped solid-state, fiber, and gas lasers; and photonic power products, such as fiber optic-based systems for delivering and measuring electrical power. This segment serves customers in markets and applications, such as manufacturing, biotechnology, graphics and imaging, remote sensing, and precision machining such as drilling in printed circuit boards, wafer singulation, and solar cell scribing. Company description from FinViz.com.

In Q2 LITE reported adjusted earnings of 41 cents compared to estimates for 35 cents. Revenue of $241.7 million beat estimates for $238.4 million. The company guided to earnings of 40-46 in Q3 and revenue in the range of $245-$255 million. Both were slightly ahead of analyst estimates.

Raymond James upgraded the stock saying strong demand from new datacenter build outs and from China was pushing sales higher. The company only has two competitors, Finsar and Nistica, and they only compete in certain products. Raymond James believes LITE can increase sales in that category by 50% by year-end. Verizon's network upgrades are expected to supply $900 million to LITE over the next several years. Zacks also joined the upgrade club with a strong buy.

The stock is also getting a boost from the strong performance of Acacia (ACIA), which sells some similar products. The winning is rubbing off on LITE.

Shares made a new high at $37.82 on Friday morning and then dipped to $35.37 this morning before rebounding to close just under the prior high.

Position 9/13/16 with a LITE trade at $37.75

Long DEC $40 call @ $2.65, no initial stop loss.



BEARISH Play Updates (Alpha by Symbol)

DIA - Dow Jones ETF - ETF Profile

Comments:

The Dow traded under support at 18,000 just before the close but managed to recover that level in the final minutes. The 18,00 level is decent support and a break there could turn into a cascade selling event.

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

Comments:

No specific news. Only a minor declne. I am tempted to close the position while it is profitable. With the Sow & S&P weak, I am going to give it another day. I would like to see one more big decline.

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.

Position 9/8/16 with a HSY trade at $98.75

Long Nov $95 put @ $1.60. See portfolio graphic for stop loss.




If you like the trade setups you have been receiving and you are on a free trial then now is the time to subscribe. Don't wait until you miss a newsletter to decide you want to take the plunge.

subscribe now