Option Investor
Newsletter

Daily Newsletter, Wednesday, 10/12/2016

Table of Contents

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

Market Wrap

A Day of Rest

by Keene Little

Click here to email Keene Little
Tuesday's strong decline took many traders by surprise and it looks like the aftereffects were felt today as traders stood around waiting to see what will follow. It turned into a doji day as the market absorbed Tuesday's loss while waiting to see if the selling will continue or if instead we'll get another sharp reversal back up.

Today's Market Stats

It's common to see a doji day follow a big day and it's basically an indecision day. Traders aren't sure if Tuesday's selling will continue or if instead it will get reversed as we continue the alternating up and down days. The bears will argue some support levels were broken and today's consolidation/bounce will be followed by more selling. The bulls will argue there's been no real harm done as the trading ranges continue to hold, which can be considered bullish continuation patterns. It will take more price action to settle the argument.

The market might also have been on hold as it waits to get through Yellen's speech on Thursday. The FOMC minutes that were released this afternoon caused a little bit of gyrating price action this afternoon and a bit of a pullback but nothing much. The minutes showed the Fed heads acknowledged there's sufficient reason for a rate hike and those who wanted to wait acknowledged that it was a close call. The language was changed enough to indicate the Fed believes it has the right conditions to start raising rates but wanted to wait for "further evidence" in the employment and inflation numbers. Therefore what Yellen others say in the coming days could have an impact on the market as it tries to compare their language with what was in the minutes.

Fed futures have only a 9% chance for a rate increase at the Fed's November 1-2 meeting but that jumps significantly to 64% at the December 13-14 meeting. It will certainly be an interesting meeting since the latest minutes reflected concern about any effort to tighten their policy accommodation could shorten the economic expansion and perhaps shove the economy into a recession earlier. The Fed has successfully painted itself into a corner and they're now at the point where they'll be damned if they do and damned if they don't.

Many Fed heads are worrying that the market is losing faith in the Fed, which is what I've been talking about for years -- part of the correction process in the secular bear market (which needs one more cyclical bear to complete it) will be a complete loss of faith in the Fed and central banks in general. What follows might not be better but the Fed will be blamed no matter what happens.

Other than the FOMC minutes this afternoon there were no significant economic reports and there were no other surprises to move the market much. Earnings announcements continue to mostly disappoint and equity futures dropped further after the closing bell today so there were likely more disappointing earnings announcements. Earnings have been in decline for 1-1/2 years now and revenue is in decline as well. This is going to make it much more difficult for corporations to continue their stock buyback spree, which is the one thing that's been holding the market up.

Without corporate buyback support, which I think is quickly waning, there's not going to be much to take its place as the Fed also has removed itself (for now) from propping up the market. There could be some continuing government interference for the sake of the elections but that's all conspiracy theorist stuff and we know the government would never directly interfere with the free market (cough). While I certainly see upside potential for the market, which I've been showing on my charts, I think we have once again reached the point where upside potential is dwarfed by downside risk.

For the rest of this week and into next we're looking to see what could move the market since we could be nearing the point where we'll see a much bigger move. The next day or so could set the tone for how the rest of the month goes. We have opex week coming up and that's generally more bullish than bearish but not a guarantee. We've entered a turn window (mid-October) and the market has been basically flat coming into the window, which makes a turn prediction much more difficult. We'll let the charts do the talking but so far they've been button-lipped about what we should expect next.


S&P 500, SPX, Weekly chart

The weekly chart of SPX shows this week's low was a test of its uptrend line from February-June, currently near 2138 (log price scale), and the pattern continues to support the idea for another leg up to complete the 5th wave of a rising wedge. But the bearish interpretation is that a 3-wave bounce off the February low topped out on August 15th and we've been a slowly developing rolling top. Along with the uptrend line from February there is price-level S/R at its May 2015 high near 2135 and therefore a weekly close below 2135 would be bearish, especially if it drops below the September 12th low at 2119.


S&P 500, SPX, Daily chart

The daily chart shows the sideways triangle that most technical analysts were following for the past several weeks. Most looked at as a bullish continuation pattern (consolidating off the August highs) and one of the concerns here is that if SPX breaks down it will leave a failed bullish pattern in its wake and that could result in a strong decline. Again, below 2135 is bearish and below 2119 would be confirmed bearish, but in the meantime the bulls still have a shot at a new high into November.

Key Levels for SPX:
- bullish above 2180
- bearish below 2119


S&P 500, SPX, 60-min chart

The choppy pattern since the August 15th high has led to several different interpretations, some bullish and some bearish. It's still not clear which it is and that's a big reason to watch the uptrend line from February-June. The strong decline from Monday looks bearish since it's an impulsive decline and could be the 1st wave of what will become a strong 5-wave move down. That means the bounce off yesterday's low is a 2nd wave correction and could be finished or it could make it a little higher but once complete it will be followed by a strong decline in a 3rd wave.

But considering the support near 2135 is holding and the possibility that the pullback from September 22nd is a completed a-b-c into yesterday's low as a correction to the rally we have to consider the potential for a new rally to kick off from here.

So far the bounce off yesterday's low is choppy and that favors a bearish resolution. The bulls need a strong impulsive move higher and then break the downtrend line from September 22nd (near 2166) and then Monday's high near 2170.


Dow Industrials, INDU, Daily chart

The Dow dropped out of its sideways triangle yesterday and today's bounce attempt was held down by the bottom of the triangle, now near 18160. That has it looking like a back-test that could be followed by a selloff to leave a bearish kiss goodbye, which of course would be bearish. Confirmation of a breakdown would be a drop below the September 14th low at 17992. But a recovery back inside the triangle, with a close above 18160, would leave a head-fake break and that would be bullish since it would leave a throw-under finish to the triangle. However, the Dow remains inside its trading range between 17992 and 18450 and as long as that remains true there is the potential for the choppy whippy price action to continue into the elections as the market is held steady.

Key Levels for DOW:
- bullish above 18,450
- bearish below 17,992


Nasdaq-100, NDX, Daily chart

Since August 15th NDX has been dancing around its March 2000 high near 4816. That's two months and NDX has gone nowhere with a close today at 4819. It spiked back below that level in early September, made it back above it on September 21st and stayed above it until yesterday and is now back to that level. For two weeks it tried to get through the trend line along the highs from July-November 2015, currently near 4875, and was able to close above it on Monday. But Tuesday's strong decline gave it all back and also broke support at its uptrend line from June-September, now near the same 4875, as well as its 20-dma, now near 4850. It's holding support at 4816 as well as its 50-dma at 4811 so it remains potentially bullish to a price projection at 4930. But with the bearish divergence since July and Tuesday's breakdown we could be looking at the start of a much more significant decline. It's at least a risky time to bet on the long side.

Key Levels for NDX:
- bullish above 4931
- bearish below 4800


Semiconductor index, SOX, Weekly chart

The biotech sector gets much of the blame for this week's decline in the tech indexes, and it should get the blame with its -5.8% decline this week. But the semiconductor stocks are not helping either, down -2.9% this week. A few weeks ago I showed the SOX weekly chart to point out it parallel up-channel from February and the fact that it was pushing against the top of the channel with a new price high but a bearish divergence on the oscillators. Last week it produced a small hanging man doji at the top of the channel and this week's big red candle leaves us with a 3-candle evening star pattern at resistance. This is a reliable reversal signal and says we should now be looking to play the short side.


Russell-2000, RUT, Daily chart

Last Friday the RUT broke down below its uptrend line from June-September and then on Monday it bounced back up to the broken trend line. That was a bearish setup with a back-test that was followed by the kiss goodbye with the big breakdown on Tuesday. It's very hard to look at the RUT with anything other than bearish-colored glasses. I can see a way to call the pullback from September 22nd as just a correction within its rally and the upside projection for another leg up is to 1280 (for two equal legs up from September 13th). That could result in another back-test of its broken uptrend line from June by the end of the month. So while I don't discount the bullish possibility, its chart pattern has "SELL" written all over it. But it goes without saying that bears need to stay on their toes and watch for yet another whippy reversal back up.

Key Levels for RUT:
- bullish above 1254
- bearish below 1215


10-year Yield, TNX, Daily chart

The bond market has sold off for the past two weeks as the bond market speculates on a rate increase from the Fed. This has driven yields higher and the 10-year (TNX) is now near the apex of a previous triangle pattern (shown on its daily chart below, which ran from March through May). The apex of a previous triangle, after price breaks out of it, is often resistance/support in the next correction. The apex is near 1.76, which TNX climbed above yesterday but for the past two days it gapped up and then pulled back, indicating possible topping action. There's a price projection at 1.811, a broken uptrend line from July 2012 - January 2015 near 1.825 and the top of an up-channel from July that crosses 1.825 early next week. So anywhere between today's high at 1.801 and 1.825 we could find TNX topping out and then a resumption of the decline. That would happen if the chances for a rate increase from the Fed start to fade.


DJ US Home Construction index, DJUSHB, Monthly chart

It's been a while since I've discussed the home builders and as a reflection of our economic health there are some things happening to the home construction index that are not bullish. As can be seen on the monthly chart below, the series of higher highs since January 2013 has been accompanied by lower highs on the oscillators. This is a perfect example of why you can't use bearish divergence as a timing tool but it's a very good indicator to show the rally's momentum is weakening and therefore subject to a reversal at any time. Following the August 2015 high the decline into the February 2016 low was a break of its uptrend line from October 2011 - October 2014. It has spent its time since February trying to climb back above the broken uptrend line but then fell firmly away last month. The September decline then broke a shorter-term uptrend line from February-June, which the broader market indexes are now starting to do. This week it also lost support, so far, at its August 2015 high at 553. Putting this all together gives us another chart with "SELL" written all over it and I think it's a good indicator for our economy and the broader market. We could get another bounce attempt and new highs in some of the indexes in the coming weeks but this is a chart that tells us to fade the rally if it happens.


U.S. Dollar contract, DX, Weekly chart

This week's rally popped the US$ above its downtrend line from December 2015 - July 2016, near 96.60, and it hasn't even looked back for a retest of the line. Two equal legs up from May points to 99.79 and the top of a parallel channel for its pullback/consolidation since March 2015 is now near 100.50 so that gives us an upside target for this move. Ideally we'll then see one more pullback for the dollar into the end of the year before setting up for a big rally next year. It would be more immediately bullish above 100.50, which could happen if the Fed raises rates in December. Or a drop back down could result from the Fed saying "not yet."


Gold continuous contract, GC, Weekly chart

Last week gold broke its uptrend line from December 2015 - May 2016, near 1319 at the time, and then broke price-level support at 1308 (January 2015 high and S/R since then). That led to stops getting hit and gold plunged nearly $105 (-7.8%) from the September 22nd high at 1347.80 to last Friday's low at 1243.20. It's been consolidating this week and it could get a little higher bounce but it's looking like it will head at least a little lower before getting a bigger bounce. It could be heading for support at its May 31st low at 1199 or possibly down to price-level support near 1180 before setting up a bigger bounce. The longer-term pattern for gold suggests the 3-wave bounce off the December 2015 low into the July 2016 high was only a correction to the decline and that it will be completely retraced as gold heads below 1000. We have plenty of time to evaluate the pullback to help determine whether or not gold is that vulnerable but it's something to think about if you're a gold trader (vs. hoarder) and also if you're looking to buy gold -- you might get some very good prices next year.


Oil continuous contract, CL, Weekly chart

Oil's weekly chart shows a potential double top in the making as Monday's high at 51.60 tested the June 9th high at 51.67 and showing bearish divergence with the test. There's also price-level resistance at 50.92, going back to the October 2015 high. Not shown on the chart, there's a price projection at 51.97 for two equal legs up from the August 3rd low and based on this 50.92-51.97 resistance zone it would be bullish above 52, especially since it would also be a break of downtrend lines from June 2014 and from May 2015, which have been broken in the past two weeks. A drop back below the pullback into the September 20th low at 42.55 would be confirmation a top is in place. The bulls are looking at this pattern as an inverse H&S pattern with the neckline at 50.92. A break above that level with volume and momentum would be a bullish move.


Economic reports

There are no market-moving economic reports on Thursday but Friday has some important reports, including PPI numbers, retail sales and Michigan Sentiment.


Conclusion

Tuesday's breakdown looks bearish and it could have been the firing gun to start the race downhill. Today would be a bearish consolidation in that case and the selling should resume, possibly after a higher bounce on Thursday. But we've seen plenty of sharp declines that get reversed quickly, which remains a possibility. If Tuesday's sharp decline was the completion of an a-b-c pullback pattern from September 22nd we should have seen a stronger bounce than we've seen so far.

Today's bounce looks like a correction to Tuesday's decline (choppy overlapping highs and lows in a bear flag kind of pattern), which is one reason why I'm looking for the selling to continue. Bears need to be ready for another strong reversal back up but at this point I think the bulls will need to take the ball away from the bears. That hasn't been difficult for the bulls to do and this is a market where bears need to be more cautious than bulls. However, if the bearish wave pattern is correct, the bears will have at least a little time at the feeding trough to fatten up a bit.

Neither side can take anything for granted here since indexes remain inside the trading ranges in place since the September highs and lows. Until that changes we have to be ready for anything. Trade carefully and stay disciplined.

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

Steel is not a Bad Word.

by Jim Brown

Click here to email Jim Brown

Editors Note:

There are steel stocks that are moving higher in a weak global market. Worthington Industries is a steel stock that is beating earnings and posting revenue growth. That is rare in today's economy.



NEW DIRECTIONAL CALL PLAYS

- Company Profile

Worthington Industries is a leading global diversified metals manufacturing company with 2016 fiscal year sales of $2.8 billion. Headquartered in Columbus, Ohio, Worthington is North America's premier value-added steel processor providing customers with wide ranging capabilities, products and services for a variety of markets including automotive, construction and agriculture; a global leader in manufacturing pressure cylinders for industrial gas and cryogenic applications, CNG and LNG storage, Cryogenic transportation and storage and alternative fuel tanks, oil and gas equipment, and consumer products for camping, grilling, hand torch solutions and helium balloon kits; and a manufacturer of operator cabs for heavy mobile industrial equipment; laser welded blanks for light weighting applications; automotive racking solutions; and through joint ventures, complete ceiling grid solutions; automotive tooling and stampings; and steel framing for commercial construction. Worthington employs approximately 10,000 people and operates 80 facilities in 11 countries.

Worthington is a "value added" steel processing company. To put that into english it means they take steel and form it into products they can sell. They do not make the steel, they just turn it into something useful. Between 2009 and 2015 they acquired 18 companies, each with a special niche in the market, in order to broaden their product offerings and increase the size of their customer base.

As steel prices strengthen, the products Worthington makes will become more valuable and their product margins will increase. In a commodity market where the raw material is cheap, every product made from that material is also under price pressures. The growth in global auto sales is good for Worthington as is the growth in the aircraft industry, ship building, energy, construction and manufacturing of all types that requires steel parts.

In their recent quarterly earnings they reported $1.03 per share and easily beating estimates for 77 cents. Revenue declined -3% to $737.5 million and missed estimates for $742.8 million. They blamed the weaker revenue on the weak oil and gas sector. Shares spiked 8% on the news despite the revenue miss.

Earnings Dec 28th.

Shares have moved sideways with a minor uptrend bias since the Sept 28th earnings spike. After two weeks of consolidation, they should be ready to start a new leg higher, market permitting.

Buy Dec $50 call, currently $2.45, initial stop loss $46.25.


NEW DIRECTIONAL PUT PLAYS

No New Bearish Plays



In Play Updates and Reviews

Weak Market

by Jim Brown

Click here to email Jim Brown

Editors Note:

The lack of a material rebound after Tuesday's big loss and the afternoon fade suggests the market is setting up for another decline. The Dow dipped slightly at the open followed by a lackluster rebound ahead of the FOMC minutes. After the minutes there was a slight bump higher than a decline into the close where it barely managed to remain positive.

The other indexes had similar charts only the Nasdaq and the Russell 2000 failed to remain positive. Given the magnitude of Tuesday's decline, the recent trend for alternating triple digit gains and losses on the Dow and no rebound today, we could be going to test lower levels.

The VIX bottomed at 2:PM as the FOMC minutes were released and then rose steadily into the close. This means investors were buying puts on the S&P and contrary to recent days where the VIX actually declined with the market. This time investors appear to be concerned about the potential for a larger dip.



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


No Changes




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


COST - Costco - Company Profile

Comments:

Costco announced a quarterly dividend of 45 cents payable Nov 18th to holders on Nov 4th. Shares were up all day until the last hour when the market faded.

Original Trade Description: October 4th.

Costco Wholesale Corporation, together with its subsidiaries, operates membership warehouses. The company offers branded and private-label products in a range of merchandise categories. It provides dry and institutionally packaged foods; snack foods, candy, tobacco, alcoholic and nonalcoholic beverages, and cleaning and institutional supplies; appliances, electronics, health and beauty aids, hardware, and garden and patio; meat, bakery, deli, and produce; and apparel and small appliances. The company also operates gas stations, pharmacies, food courts, optical dispensing centers, photo processing centers, and hearing-aid centers; and engages in the travel business. In addition, it provides gold star (individual) and business membership services. As of October 29, 2015, it operated 690 warehouses. Company description from FinViz.com.

Costco reported earnings last week of $1.77 compared to estimates for $1.73. Revenue of $36.56 billion barely missed estimates for $36.81 billion. Same store sales, excluding gasoline, rose 2% in the USA, +5% in Canada and +1% internationally. Overall sales rose +3%.

For the full year same store sales were up +4%. Membership fees rose from $785 million to $832 million. The company said some of its increased profitability came from the lower fees it was paying to Visa compared to the prior payments to American Express. There were initial problems in the conversion and some customers were angered leading to weaker sales in the prior two quarters. That is now over and customers are coming back.

The earnings were Friday and shares spiked to $154 on the news. Post earnings depression appeared along with a weak market over the last two days. I believe Costco will rebound into Black Friday because this is the strongest quarter. They typically sink into the September earnings and then rally into December.

The plan is to buy calls now and exit around Black Friday. The December calls are cheap and any rally should lift the stock back to $160-$165. I am not putting a stop loss on this position because of the potential for market volatility over the next two weeks.

Position 10/5/16:

Long Dec $155 call @ $2.76, no stop loss.


DISH - Dish networks - Company Profile

Comments:

No specific news. Major spike at the open to test resistance at $56.75 but faded with the market at the close.

Original Trade Description: October 3rd.

DISH Network Corporation provides pay-TV services in the United States. The company operates through two segments, DISH and Wireless. The company provides video services under the DISH brand. It also offers programming packages that include programming through national broadcast networks, local broadcast networks, and national and regional cable networks, as well as regional and specialty sports channels, premium movie channels, and Latino and international programming. In addition, the company provides access to movies and TV shows via TV or Internet-connected tablets, smartphones, and computers; and dishanywhere.com and mobile applications for smartphones and tablets to view authorized content, search program listings, and remotely control certain features. Further, it offers Sling TV services that require an Internet connection and are available on streaming-capable devices, including TVs, tablets, computers, game consoles, and smart phones primarily to consumers who do not subscribe to traditional satellite and cable pay-TV services. Additionally, the company operates Sling International that offers over 200 channels in 18 languages; and Sling domestic package that consists over 20 channels and tiers of programming, including sports, kids, movies, world news, lifestyle and Spanish language, and premium content, such as HBO. Further, it offers Sling Latino service; and satellite broadband services, wireline voice, and broadband services under the dishNET brand. Additionally, the company has wireless spectrum licenses and related assets. As of December 31, 2015, it had 13.897 million Pay-TV subscribers. Company description from FinViz.com.

Dish is gaining a significant number of views in the millennial generation that either have never had a cable subscription or cannot stand paying the monthly cable bills for what they believe should be free TV. They are also developing a large audience of Latino viewers with their various Spanish language channels. They also offer 18 other languages and more than 200 channels.

In early September, they gained the rights to about 800 sporting events offered by the six PAC 12 networks. Millennial's love to watch sports, especially when it is free or nearly free.

The online Sling TV offering is gaining market share with its skinny bundles including channel packages like HBO and Starz.

Over the last month the consensus earnings estimates for the current quarter have risen from 63 cents to 68 cents. Full year estimates have risen from $2.92 to $3.05.

Earnings Nov 7th.

Since they signed the sports deal on September 12th the stock has been in rally mode. Shares are closing in on resistance from June at $56.50 and should easily break through. The next resistance is in the $65 range.

Position 10/4/16

Long Nov $57.50 call @ $2.43, see portfolio graphic for stop loss.


IDCC - Interdigital - Company Profile

Comments:

No specific news. Nice gain in a mixed market and fought off the market drop at the close.

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.

Update 9/28/16: In a study done by the EU Commission and IDCC they found the cost of rolling out 5G in all 28 EU member states could reach 56 bullion euros by 2020 and 141.8 billion annually by 2025. That is a huge amount of money that will be flowing into a hand full of companies including IDCC. The 5G standard is seen as 50 Mbps everywhere compared to the current 5-20 Mbps.

Earnings Oct 27th.

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

Position 9/27/16 with an IDCC trade at $78.65

Long Nov $80 call @ $2.90, see portfolio graphic for stop loss.


PANW - Palo Alto Networks - Company Profile

Comments:

Removing the stop loss was the right move. Shares fell -$8 at the open but rebounded back to end the day with a loss of only -$1.26. We would have been stopped out at the low for the day for a major loss. No specific news on PANW today.

Original Trade Description: October 8th.

Palo Alto Networks, Inc. provides security platform solutions to enterprises, service providers, and government entities worldwide. Its platform includes Next-Generation Firewall that delivers application, user, and content visibility and control, as well as protection against network-based cyber threats; Advanced Endpoint Protection, which prevents cyber attacks that exploit software vulnerabilities on various fixed and virtual endpoints and servers; and Threat Intelligence Cloud, which offers central intelligence capabilities, security for software as a service applications, and automated delivery of preventative measures against cyber attacks. The company provides firewall appliances; Panorama, a security management solution for the control of appliances deployed on an end-customer's network as a virtual or a physical appliance; and Virtual System Upgrades, which are available as an extensions to the virtual system capacity that ships with the physical appliances. It also offers subscription services covering the areas of threat prevention, uniform resource filtering, malware and persistent threat, laptop and mobile device, and firewall protection services, as well as cyber attack, threat intelligence, and content control services. Company description from FinViz.com.

The headlines are full of news about cyber attacks and hacking of personal computers. Just last week there were more than a dozen high profile hacks and Guccifer 2.0, a name taken by a Russian state sponsored team, published data claimed to be from the DNC, Clinton foundation and the Olympic doping committee. Not only are they hacking these agencies but the data they are releasing now contains fake data mixed in with the real data. Wikileaks just published thousands of additional emails stolen from democratic campaign officials.

These kinds of attacks and data dumps are very damaging and now that they have started modifying the actual data it could be even worse. Companies will have to admit to some things so they can disprove other claims. This goes beyond just stealing credit card info.

Every time there is a successful attack it emboldens others to increase their efforts. Years ago a company could successfully stop these attacks on their own because the technology was more primitive. Now, even successful enterprise size companies can no longer devote the time, effort, personnel and resources to protecting their data because the attack methods change almost daily. It requires a dedicated company like Palo Alto Networks and others to stop the attacks.

Palo Alto's dictionary of attack profiles is updated constantly in real time and a new attack on a server in New York can be cataloged and immediately used to stop a similar attack in Los Angeles.

State sponsored attacks from Russia, China, Iran and North Korea are just the tip of the iceberg. I am sure there are other attack teams from other countries already probing companies for their technology secrets and agencies for their political secrets. The information gained is very valuable and can be sold to other countries that were not successful in their attacks.

In their recent earnings, Palo Alto posted a 41% increase in revenue and earnings for the current quarter are expected to rise 35%. Of the 27 analysts that follow Palo Alto, 21 of them have a strong buy rating, 3 have a buy and 3 have a hold rating.

Earnings Nov 23rd.

Because the options are so expensive I have to recommend a spread. Resistance is $163 but since I doubt cyber attacks are going to suddenly stop, I expect that resistance to be broken.

Position 10/10/16:

Long Dec $165 call @ $7.30, see portfolio graphic for stop loss.
Short Dec $180 call @ $2.40, see portfolio graphic for stop loss.
Net debit $4.90.



BEARISH Play Updates (Alpha by Symbol)

MBLY - Mobileye - Company Profile

Comments:

No specific news. New 3-month low.

Original Trade Description: September 27th.

Mobileye N.V., together with its subsidiaries, develops computer vision and machine learning, data analysis, and localization and mapping for advanced driver assistance systems and autonomous driving technologies primarily in Israel. It operates through two segments, Original Equipment Manufacturing and After Market. The company offers Roadbook, a localized drivable paths and visual landmarks using its proprietary REM technology through crowd sourcing; and proprietary software algorithms and EyeQ chips that perform detailed interpretations of the visual field to anticipate possible collisions with other vehicles, pedestrians, cyclists, animals, debris, and other obstacles. Its products also detect roadway markings, such as lanes and road boundaries, as well as barriers and related items; and identify and read traffic signs, directional signs, and traffic lights. In addition, the company provides enhanced cruise control, pre-lighting of brake lights, and Bluetooth connectivity, as well as related smartphone application. It serves original equipment manufacturers, tier 1 system integrators, fleets and fleet management systems providers, insurance companies, leasing companies, and others through distributors and resellers. Mobileye N.V. was founded in 1999. Company description from FinViz.com.

Mobileye was kicked to the curb by Tesla because their camera technology was not precise enough and was subject to errors from things like lightning flash, rain storms, fog and oncoming headlights. Analysts claim the location accuracy needs to be within 1.5 centimeters or about 0.6 inches. While I do not understand the need to be precise to within half an inch I would expect that to be on near objects with the size miss widening if the objects are farther away. For instance, a rifle bullet that misses the target by half an inch at 10 feet would be 15 inches off target at 100 yards. When your car is traveling at 60 mph any miss of that size could be an immediate challenge as in a car coming towards you in two-way traffic.

Tesla also said they were hard to work with because the company demanded all the sensor data received from their cameras could only be used by Mobileye. That would be like Intel claiming all the data on your PC belonged to them because the PC had an Intel processor.

Multiple car manufacturers including Tesla, Ford and Volvo have now moved away from Mobileye technology. The company replacing them is Nvidia with their Drive PX2 technology. Uber is now using an off the shelf camera that costs only $1 and image processing is done in the onboard computer.

Trip Chowdhry of Global Equities Research said the stock is worth $10 today but remains hyper inflated because it was an early leader in the mobile technology. He expects the stock to collapse within 6-8 months as more investors realize the company is being left behind.

Earnings Nov 3rd.

Shares have been falling from their high of $50 as the heated words between Tesla and Mobileye increase. When Mobileye learned it was being replaced they tried to stop Tesla from developing their own system and immediately halted any support for previously installed systems.

Position 9/28/16:

Long Nov $40 put @ $2.08, see portfolio graphic for stop loss.


NKE - Nike Inc - Company Profile

Comments:

No specific news. I considered adding a stop loss at $53.25 but we only paid $1.05 for the option and we have more than two months to go. I favor letting it ride despite the decent gain today.

Original Trade Description: October 10th.

NIKE, Inc., designs, develops, markets, and sells athletic footwear, apparel, equipment, and accessories worldwide. It offers products in nine categories, including running, NIKE basketball, the Jordan brand, football, men's training, women's training, action sports, sportswear, and golf. The company also markets products designed for kids, as well as for other athletic and recreational uses, such as cricket, lacrosse, tennis, volleyball, wrestling, walking, and outdoor activities. In addition, it sells sports apparel; and markets apparel with licensed college and professional team and league logos. Further, the company sells a line of performance equipment, including bags, socks, sport balls, eyewear, timepieces, digital devices, bats, gloves, protective equipment, golf clubs, and other equipment under the NIKE brand name for sports activities; various plastic products to other manufacturers; athletic and casual footwear, apparel, and accessories under the Jumpman trademark; action sports and youth lifestyle apparel and accessories under the Hurley trademark; and casual sneakers, apparel, and accessories under the Converse, Chuck Taylor, All Star, One Star, Star Chevron, and Jack Purcell trademarks. Additionally, it licenses agreements that permit unaffiliated parties to manufacture and sell apparel, digital devices, and applications and other equipment for sports activities under NIKE-owned trademarks. The company sells its products to footwear stores, sporting goods stores, athletic specialty stores, department stores, skate, tennis and golf shops, and other retail accounts through NIKE-owned retail stores and Internet Websites (direct to consumer operations), as well as independent distributors and licensees. Company description from FinViz.com.

Nike is fading fast as revenue growth slows. Previously growth had been over constantly over 10% but that has not happened in the last few quarters. Revenue growth in Q1 was 5%, Q2 4%, Q3 8%, Q4 6% and Q1 is estimated to be 8%. Another challenge is currency issues. Only 42.5% of revenue comes from the U.S. meaning 57.5% comes from overseas where currency fluctuations are costing Nike 6-8% per quarter.

Nike had been targeting $50 billion in annual revenue but quarterly numbers are not growing that fast. In the last quarter Nike had revenue of $8.4 billion. With five quarters of revenue well under $10 billion each they are going to have to push their $50 billion target well out into the future to somewhere in the 2020 range.

Under Armour, Skechers and Adidas are stealing market share with Adidas on a fast track with recent market share gains.

When Sports Authority went out of business, it was a big problem for Nike. They lost money on receivables and had to take back a lot of inventory. In addition they lost 450 retail locations that were heavily subsidized by Nike.

I expect Nike shares to continue declining until sales begin to grow again.

Earnings December 27th.

Position 10/11/16:

Long Dec $50 put @ $1.05, no initial stop loss.


VXX - VIX Futures ETF - Company Profile

Comments:

Minor gain in a positive market. This means investors are worried about future market dips.

This is a long-term position and I will not be commenting on it on a daily basis. There is no news on the VXX since it is not a company.

Original Trade Description: September 21st.

The VXX is a short-term volatility product based on the VIX futures. As a futures product it has the rollover curse. Every time they roll to a new futures contract they have to pay a premium and that lowers the price of the ETF. It is a flawed product with a perpetual decline built in from the monthly roll over in the futures contracts.

As evidence of this flaw, they have now down four 1:4 reverse stock splits. The last four reverse splits occurred at $13.11 (11/2010), $8.77 (10/2012), $12.84 (11/2013), $9.52 (8/8/16). The prospectus says it can reverse split anytime it trades under $25 for a prolonged period and the splits will always be 1:4.

After the August split the ETF moved sideways for four weeks at $36. The volatility event on Sept 9th with the Dow falling -2.5% spiked the VXX from $33 to $42 in three days. That bounce has faded and it is almost back at $33. You are probably thinking, the $40 level would have been a good entry point and you are right in hindsight. However, with the market in danger of breaking down if the Fed had hiked rates, it was better to wait. Now there is nothing on the horizon to cause a spike other than normal market movement.

This is going to be a long-term position. I am not putting a stop loss on the position because long term the VXX always goes down. If we get another volatility spike we will buy another position at a higher level and then ride them both back down.

The market typically rises in late October and into the Thanksgiving weekend. A rising market reduces volatility.

I thought about using a spread to reduce the out of pocket costs. However, that means the strikes have to be relatively close together for the short strike to have any premium. Since the VXX could decline 10 points or more before December, that would limit our potential return to 3-4 points in a spread. However, if we do get a big decline we can spread out at much lower level to further increase our gains.

Position 9/22/16:

Long Dec $33 Put @ $4.20. No stop loss.




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