Option Investor
Newsletter

Daily Newsletter, Wednesday, 12/7/2016

Table of Contents

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

Market Wrap

To The Moon

by Keene Little

Click here to email Keene Little
The bulls are on a stampede and the bears have screamed "run away, run away" as the indexes rip to the upside following a steady rally that was looking tired. The rally into FOMC next week looks to be underway but with bearish divergences in a stretched market it's now getting a little dangerous to chase this higher.

Today's Market Stats

The rally off the November 4th lows has stretched most indicators into extreme overbought values but that sure didn't stop the bulls from stampeding the bears flat today. I think many bears tried to short what was looking like a top as the indexes struggled higher over the past week. They were shoved out of the market today and the short covering, along with some who are forced to chase the market higher this month (fund managers), and the result was a strong rally across the board and with strong advance-decline numbers.

Closing near the highs today has it looking like the market has further to go. A rally into next Wednesday's FOMC could be what we'll see but that would be particularly dangerous since it would be a buy the rumor, sell the news kind of setup. While there's clearly more upside potential after a day like today we do have to be concerned about the possibility of a blow-off top where the shorts are squeezed out and the last wannabe bulls were forced to chase the market higher. The vulnerability here is that the market could simply run out of buying power and then a pullback starts the covering of long positions and the selling triggers more stops and all of a sudden the talking heads on CNBC are looking for answers as to why the market is suddenly selling off hard. That's not a prediction from here but it is a risk for those chasing it higher and then not honoring your stops in a decline.

So why did the market rally so strong today after appearing to be tiring in the past week? Actually the more important question is does it matter why? Answering the why is like asking the market to be logical. But the rally clearly did catch more than a few leaning the wrong way and it could prompt more to chase it higher into next week. Many resistance levels and price targets were blown through today and we saw barely a dip today. That's actually one indication much of the rally was likely due to short covering.

Another warning sign came from the VIX, which had gapped down this morning but then started rallying even as the stock market continued its rally. The VIX finished the day above yesterday's close with a +3.6% rally. That's usually seen just before a market turn and while it's not a guarantee a top is just around the corner it does tell us there are likely some big players starting to buy some cheap insurance against the downside. It's wise not to be part of the retail crowd (which includes most fund managers) in a blow-off top (if that's what this is).

There was very little news today and regardless, the market is pretty much ignoring it all anyway. So I'm just going to jump into a review of the charts. Following the weekly and daily charts of SPX I'll explain a little about the Gann Square of 9 chart to show how the relationship between it and what's on the charts could provide some important clues here.


S&P 500, SPX, Weekly chart

Today's rally took SPX up through an important price level at 2223, which is the 127% of its previous decline (2015-2016). This is often a resistance/reversal level so the bulls would like to see a weekly close above this price. It's still within "throw-over" territory and with today's rally right up to its broken uptrend line from February there is the potential for the back-test to be followed by a bearish kiss goodbye. This follows an "almost" back-test on November 25th, which resulted in last week's pullback, and now we're getting another better back-test. The bulls and the bears each know what they need to see happen from here. A continued rally has upside potential to the middle of its up-channel from October 2011, which was last tested in April and again July-August. The line is currently near 2285, which is no longer that far away.


S&P 500, SPX, Daily chart

The SPX daily chart below shows the back-test of the broken uptrend line from February-June, currently near today's high at 2241. The bulls now need an overnight rally in the futures to get SPX to gap up over this resistance line. As mentioned above, a weekly close below 2223 would be potentially bearish but as long as SPX can stay above 2225 it will stay bullish.

Key Levels for SPX:
- Stay bullish above 2225
- bearish below 2194


Gann Square of 9 chart, middle top portion

A tool that I use and have shown periodically is the Gann Square of 9 chart, which I reproduced in Excel but is unfortunately too large to show here except in parts. In case it's useful, I show the middle top half and middle bottom half of the chart below. If this is getting too much into the weeds for you, just skip this section and pick it up with the Dow's chart that follows.

What I'm attempting to show is the relationship between time and price with the dates of the year around the outside of the chart (360 degrees almost equals the number of days in a year). The dates run counter-clockwise starting from March 21st at the 9:00 position (spring equinox, which was Gann's way of starting the new year). The prices in the boxes start at zero in the middle and then spiral out clockwise. The first circle around zero finishes with '9', hence the Square of 9 chart.

When prices line up with dates, or are 90 degrees or 180 degrees from each other, Gann believed they "vibrated" off one another and are important relationships to observe. The blue and green vectors are the ones potentially important at the moment since the blue one goes through the 666 low in March 2009 and the green one is 90 degrees from the date of March 6 (2009 low), which is off to the right side of the chart but not visible. Note the prices in the top row -- 2271 at the blue vector and 2273 at the green vector -- those are prices that "vibrate" off the March 2009 low and could be the upside target zone for SPX.

Another vector that I'm watching is the red one, which goes through 2261-2262 at the top. This goes through previous important levels, such as October 2007 price high, the April 2012 price high and the October 2002 price low. It's also square (90 degrees) to the April 2, 2012 high, which is off to the right side, as well as square to the October dates of the 2002 low, the 2007 high, the 2011 low and the 2012 high, which points off to the left side.


Gann Square of 9 chart, middle bottom portion

The blue vector that is 90 degrees to the right is also shown below (I couldn't get the whole chart in because I'd have to squish it too much and make it non-readable). It points to the October 2012 price high while to the left it points to the date of September 14, which was an important high in 2012. The blue vector to the left points to 2224. The blue vector pointing to the bottom is 180 degrees from the 666 low (in 2009) and it points to December 12th, which is this coming Monday. The green vector to the right (off the chart) points to March 6 (2009 low), which is 90 degrees from 667 (the actual low in March 2009 was 666.79, and off to the left it points to 2226. This is a reason I thought 2224-2226 would be an important level to watch if reached. It was not only reached but the rally blew through those levels so it remains to be seen if they were important. A drop back below them on Thursday would leave a one-day throw-over.

The green vector pointing at the bottom, which is 90 degrees from March 6 and 180 degrees from 667, points to December 8. That gives us a possible turn window between tomorrow and next Monday. If SPX rallies to 2271-2273 within this turn window it would be important to watch for a possible top within a potentially important price/time window. But SPX has already hit a potentially important price zone (2224-2226) and therefore a top inside the December 8-12 time window is possible.

For those who stuck with me through the above explanation of the potentially important time and price relationships, thanks for trying to understand it. It's not easy without a chart in front of you. If you'd like a copy of my Excel spreadsheet with the above chart, just email me to let me know. The bottom line from the above explanation, for those who skipped it, is that 2224-2226 is an important price/time window but an even more important price/time window is December 8-12 at SPX 2271-2273.


Dow Industrials, INDU, Daily chart

The Dow outshined them all today with its 300-point rally (+1.5%) but I can't help wondering if that was a defensive move by many -- better to be in the bluest of the blue chips in case a market decline is right around the corner. Many are going to start worrying about a sell-the-rumor reaction to the FOMC next week. There's no also a helluva profit for the year to protect. As a fund manager do you hold out for another 5% or do you protect against a 10% decline? The rise in the VIX today says some are thinking about the latter and could have been moving money into the relative safety of the Dow. Bonds also rallied and that's another potential safe-haven play.

The Dow's weekly chart shows RSI more overbought than it's been since May 2013. Going back before 2000 I can't find a time the daily RSI has been this overbought. This is a dangerous time for the market, especially with the bullish complacency that has come roaring back. The VIX dropped to 11.33 this morning, which is lower than it's been since August. Below 12 is a dangerous time to be long the market. But if this rally is going to continue at least into next week there are two levels to keep an eye on. The first is at 19670, which is where the rally from January would equal 162% of the August-November 2015 rally (as part of a larger 3-wave bounce off the August 2015 low). The second level to watch, if reached, is 19904, which is a projection for the leg up from November 18th. This leg followed the sideways triangle consolidation pattern off the November 14th high and might have marked the half-way point for the rally from November 4th). The Dow stays bullish above 19370 but be very careful if you're long and put in some stop protection.

Key Levels for DOW:
- bullish above 19,370
- bearish below 18,185


Nasdaq-100, NDX, Daily chart

The techs have struggled this week to keep up with the rally in the other indexes but they did some catching up today and beat out the RUT's weaker performance today. NDX now has a 3-wave bounce off last Friday's low and achieved two equal legs up with today's rally. That sets it up for a reversal back down but in reality its price pattern is a mess. It's been a choppy mess since August and it could continue to stay in a choppy sideways move for the rest of the year. It needs to get above 4900 to prove it's ready to break out otherwise we should be prepared for another reversal at any time.

Key Levels for NDX:
- bullish above 4900
- bearish below 4721


Russell-2000, RUT, Daily chart

The RUT appears to be heading for the top of a parallel up-channel for the rally from February, near 1372 on Thursday. Considering the bearish divergence at the current high vs. the November 25th high I think it would be risky to push your luck on the long side. There's no clear sign of an impending reversal yet but when it does start a pullback, considering the level of complacency in the market right now, we could see a fast drop back down. Adding to the bearish potential is a rising wedge pattern for the leg up from last Thursday, which suggests when it breaks it will likely quickly retrace this week's rally. Today's rally took it right up to the top of the rising wedge in what can be considered a completed 5-wave move. It could easily extend higher but again, its looks risky from here. But if the buyers keep this going, there's a large megaphone pattern that I've shown previously on the weekly chart and the top of the pattern is the trend line along the highs from 2014-2015, which is currently near 1397. That's the upside potential if the market is in a blow-off top heading into the FOMC announcement.

Key Levels for RUT:
- stay bullish above 1347
- bearish below 1308


KBW Bank index, BKX, Weekly chart

The banks have been on a tear to the upside and bullishly BKX made it above a trend line along the highs from April 2010 - July 2015, near 88. Further upside potential is to 97.07, which is where the 5th wave of the rally from March 2009 would equal the 1st wave. But at the moment BKX is now up near the top of a parallel up-channel from February, the top of which is the broken uptrend line from February-April-May. The weekly RSI and MACD are now more overbought than they've been since 1996. The rally is a wee bit stretched but of course that could continue at least into next week and potentially into the end of the month. It's just not a rally I'd chase higher from here.


Transportation Index, TRAN, Daily chart

Today's big deal is the TRAN getting above its November 2014 high at 9310, with today's high at 9383. The reason this is a big deal is because it finally matches the Dow's new all-time highs since 2014 and up until now we've had a bearish divergence between the two. With the TRAN's new all-time high we now have a DOW Theory bullish signal. In this environment of massively manipulated markets one could be excused for thinking the DOW Theory is no longer valid. The TRAN's rapid rise (in the face of slowing transportation numbers) might have been part of the manipulation so it's hard to judge whether or not this is meaningful anymore. But many still trust this theory buy signal and will be bullish based on it. That could add more bullish fervor to this market. The other bullish move today is the break above two parallel up-channels, one from January and the other from June, and if it pulls back to the top of the channels and holds as support it will keep the TRAN bullish. Now all the bulls need to do is prevent a one-day breakout whereas the bears want to see a drop from here back below the November 30th low at 8906.


U.S. Dollar contract, DX, Weekly chart

The US$ has pulled back from its November 25th high but it's trying to hold support at its March and November 2015 highs, near 100.60, and a shallow downtrend line from those highs, near 100.30. A failure to hold above 100 would tell us to expect at least a larger pullback correction, which could lead to a complete retracement of the rally from May and a drop to the bottom of a megaphone pattern, which will be near 91 in March.


Gold continuous contract, GC, Weekly chart

Gold has been struggling the past three weeks to hold price-level support near 1180 and I've been expecting a higher bounce, perhaps up to its broken 50-week and 200-week MAs, near 1260, before heading lower. But the longer it chops around 1180 the more bearish it will become and we could see another leg down sooner rather later.


Silver continuous contract, SI, Weekly chart

As many of you know, I like to keep an eye on silver to see if it's in agreement with gold. When they give me similar signals it adds confidence to my interpretation. On November 23rd and 25th silver bounced off price-level support near 16 and should be able to make it up to at least its broken 50-dma, near 17.54, and maybe its 200-dma near 17.69. Today's rally had silver popping above its broken 50-week MA at 17.17 and if the bounce has some life left (it's short-term overbought) we could see silver make it up to its downtrend line from July, currently near 18. It needs to break its longer-term downtrend line from 2013-2014, near 19.50, before it can be declared bullish so for now silver's pattern backs my belief that we're going to get just a bounce correction before dropping lower.


Oil continuous contract, CL, Daily chart

Oil's choppy move up from August has me leaning bearish, especially as it struggles with its previous highs in June and October. A parallel up-channel from August, the top of which is currently near 53.60, could be reached but the move up from November 14th achieved two equal legs up at 51.82 and it's looking like it could turn back down from here. It might stay trapped inside the bear flag pattern but would turn more immediately bearish below the November 14th low at 42.20.


Economic reports

There are essentially no economic reports for the rest of the week that will move the market, not that it's paying attention anyway.


Conclusion

The rally from November 4th is now going parabolic and it fits as the 5th wave of the rally from February. Both are reason enough to remain cautious about the long side. The rally in the VIX today offers another reason to be careful. A parabolic rally is often a sign of a blow-off top as the last of the shorts throw in the towel and the wannabe longs finally capitulate and buy into the last part of the rally. That's not to say this rally is toast here or in the next day or two but that's the risk for those chasing it higher and for those who remain complacent about it. Parabolic rallies never end well, never.

It's possible we'll see the rally continue into next week in front of the FOMC meeting. Whether the Fed will surprise us with something (such as nothing or a 1/2% increase instead of the expected +1/4%) or if it will simply be a sell-the-news reaction is hard to say. I see plenty of reasons to expect at least a little higher, especially if all we see are choppy consolidations near the highs. But if we see a sharp reversal back down it could be the start of a reversal of this week's rally and potentially the rally from November 4th and then much more. The longer-term pattern suggests we could be putting in a long-term top but that obviously is something we can only see in hindsight. There will be clues along the way but for now, while shorting this market is dangerous, buying this market now could be just as dangerous.

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


 

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New Option Plays

Amazon Health

by Jim Brown

Click here to email Jim Brown

Editors Note:

If the Anthem/Cigna merger is approved, it will displace UnitedHealth as the largest by number of insured individuals but UnitedHealth will still be the largest by revenue.



NEW DIRECTIONAL CALL PLAYS

UNH - UnitedHealth - Company Profile

UnitedHealth Group Incorporated operates as a diversified health and well-being company in the United States. The company's UnitedHealthcare segment offers consumer-oriented health benefit plans and services for national employers, public sector employers, mid-sized employers, small businesses, individuals, and military service members; and health care coverage, and health and well-being services to individuals aged 50 and older addressing their needs for preventive and acute health care services. It also provides services dealing with chronic disease and other specialized issues for older individuals; Medicaid plans, Children's Health Insurance Program, and health care programs; and health services, including commercial health and dental benefits. This segment serves through a network of 1 million physicians and other health care professionals, as well as approximately 6,000 hospitals and other facilities. Its OptumHealth segment offers health management services, including care delivery and management, wellness and consumer engagement, distribution, and health financial services. This segment serves individuals through programs offered by employers, payers, government entities, and directly with the care delivery systems. The company's OptumInsight segment provides software and information products, advisory consulting services, and business process outsourcing and support services to hospitals, physicians, commercial health plans, government agencies, life sciences companies, and other organizations. Its OptumRx segment offers pharmacy care services and programs, including retail pharmacy network management, home delivery and specialty pharmacy, manufacturer rebate contracting and administration, benefit plan design and consultation, claims processing, and clinical program services, such as formulary management and compliance, drug utilization review, and disease and drug therapy management. Company description from FinViz.com.

UNH will have about $184 billion in revenue in 2016 to put it at number six on the Fortune 500 list. With its broadening of scope using its various Optum programs it is maximizing profits by widening the service component of its business. Here is an excellent article on why UNH will be the most profitable. Amazon of Healthcare

I am not going to go into an in depth explanation of UNH. That article I referenced has plenty of information why UNH should be a long term holding of any investor.

Earnings January 17th.

I wanted to play UNH last week when it was at $152 but it had resistance at $153 and I decided to wait another day to see if that resistance was broken. Shares gapped up to $158 at the open the next day and ran to $162.50 over the next four days. Now that big gain has been digested and shares pulled back to $156 before adding a couple dollars on Wednesday. I believe the UNH rally will continue for the reasons listed in that article above. I am willing to take a shot here that the market rally also continues even if Wednesday's futures related spike fades in the days ahead. We have 16 trading days until 2017 and we should close the year at higher levels.

With a UNH trade at $160.25

Buy Jan $165 call, currently $2.45, initial stop loss $155.85.


NEW DIRECTIONAL PUT PLAYS

No New Bearish Plays



In Play Updates and Reviews

Blowout!

by Jim Brown

Click here to email Jim Brown

Editors Note:

The S&P sprinted for a 29-point gain and a close that was 28 points over the prior high. This was not retail buying. Somebody placed an order to buy 50,000 S&P Emini futures contracts at 1:PM and the market exploded higher. That order roughly represented about $6 billion of buying. There was significant follow on buying with more than 111,000 contracts trading at 10 min before the close. After the initial order, there was a steady flow of buy programs of which some were probably short covering programs as the S&P exploded higher.

Now the market is really off balance. There was also a surge in put buying in the afternoon that caused the VIX/VXX to actually close positive despite the huge market gains. Apparently, there are a lot of investors who do not feel this spike will last.

That makes it very difficult to add new positions since the overbought conditions just turned into extremely overbought.



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


FFIV - F5 Networks

The long call position remain unopened until a trade at $142.25.



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Long and short equity trades = Premier Investor



BULLISH Play Updates


ADP - Automatic Data Processing - Company Profile

Comments:

No specific news. Major short squeeze in a bullish market. New high close.

Original Trade Description: December 5th.

Automatic Data Processing, Inc., together with its subsidiaries, provides business process outsourcing services worldwide. The company operates through two segments, Employer Services and Professional Employer Organization (PEO) Services. The Employer Services segment offers a range of business outsourcing and technology-enabled human capital management (HCM) solutions, including payroll services, benefits administration services, talent management, human resources management solutions, time and attendance management solutions, insurance services, retirement services, and tax and compliance solutions. This segment's integrated HCM solutions include RUN Powered by ADP, ADP Workforce Now, ADP Vantage HCM, and ADP GlobalView, which assist employers of all sizes in all stages of the employment cycle from recruitment to retirement; and ADP SmartCompliance and ADP Health Compliance. The PEO Services segment provides a human resources (HR) outsourcing solution through a co-employment model to small and mid-sized businesses. This segment offers ADP TotalSource that provides various HR management services and employee benefits functions, such as HR administration, employee benefits, and employer liability management into a single-source solution. Company description from FinViz.com.

ADP reported a 26.5% rise in earnings to 86 cents that beat estimates by 9 cents. Revenues rose 7.5% to $2.92 billion and beat estimates for $1.91 billion. The number of employees on client payrolls rose 2.7%. They ended the quarter with $2.82 billion in cash and long-term debt of $2 billion. The announced the sale of their CHSA and COBRA business to WageWorks for $235 million. The sale will be completed in Q2 2017.

The company guided for 2017 revenue growth of 7% to 8% and 15% to 17% earnings growth. The PEO Services segment revenues are expected to rise 14% to 16%.

The company just declared a 57-cent quarterly dividend to raise the annual dividend to $2.28.

Earnings Feb 1st.

ADP holds a dominant position in the payroll processing sector. With employment expected to rise again in 2017 this could be an attractive investment for funds that are tired of chasing industrials and bank stocks in the current rally.

Shares took profits last week from a very nice climb and could be ready to try for a new high.

There is resistance at $97 but given the time of year and the overbought conditions in the rest of the market, we could see a breakout. Options are relatively cheap.

Position 12/6/16:

Long Feb $97.50 call @ $2.10, see portfolio graphic for stop loss.


FFIV - F5Networks - Company Profile

Comments:

No specific news. Dropped at the open, rallied in afternoon. I know if I drop this recommendation it will explode to a new high within days. It does not hurt us to wait for the move.

The position remains unopened until a trade at $142.25.

Original Trade Description: November 21st.

F5 Networks, Inc. develops, markets, and sells application delivery networking products that optimize the security, performance, and availability of network applications, servers, and storage systems. It offers Local Traffic Manager, which provides intelligent load-balancing, traffic management, and application health checking; BIG-IP DNS that automatically directs users to the closest or best-performing physical, virtual, or cloud environment; Link Controller, which monitors the health and availability of each connection in organizations with more than one Internet service provider; Advanced Firewall Manager, a network firewall; and Application Security Manager, an Web application firewall that provides comprehensive, proactive, and application-layer protection against generalized and targeted attacks. The company also provides Access Policy Manager, which provides secure, granular, and context-aware access to networks and applications; Carrier-Grade Network Address Translation, which offers a set of tools that enables service providers to migrate to IPv6 while continuing to support and interoperate with existing IPv4 devices and content; and Policy Enforcement Manager that offers traffic classification capabilities to identify the specific applications and services to service providers. In addition, it offers cloud-based and other subscription services; BIG-IP appliances; VIPRION chassis-based systems; and Traffix Signaling Delivery Controller for diameter signaling and routing. Company description from FinViz.com.

The big attack on the Internet several weeks ago was driven by malware that had been placed on IoT devices including security cameras, cable boxes, burglar alarms and dozens of other device types. These devices are typically delivered without any material malware defenses. It is up to each manufacturer to overcome this in the future with some kind of defense.

However, FFIV provides software and hardware to prevent denial of service attacks from these devices as well as the more robust attacks from computers and servers. With more and more servers in the cloud it is harder to protect them from attack like you would dedicated physical servers in a dedicated data center. This is where FFIV excels.

The company's Silverline service places a sophisticated cloud based filter around critical infrastructure that stops attacks instantly. Aided by hardware based firewalls in dedicated data centers they protect data and equipment from all outside attacks.

For Q3 they reported earnings of $2.11 compared to estimates for $1.94. revenue ot $525 million beat estimates for $520 million.

Earnings Jan 21st.

FFIV shares spiked on earnings in late October and have been moving steadily higher. They are about to break over resistance at $144 and we could see another leg higher when that happens.

With a FFIV trade at $142.25

Buy Jan $145 call, currently $3.15, initial stop loss $137.25.


FLOW - SPX Flow Inc - Company Profile

Comments:

No specific news. New 52-week high close.

Original Trade Description: November 30th.

SPX FLOW, Inc. provides various engineered solutions worldwide. The company engineers, designs, manufactures, and markets products and solutions used to process, blend, filter, dry, meter, and transport fluids with a focus on original equipment installation, including turn-key systems, modular systems, and components, as well as aftermarket components and support services. It operates through three segments: Food and Beverage, Power and Energy, and Industrial. The Food and Beverage segment offers mixing, drying, evaporation, and separation systems and components, as well as heat exchangers, and reciprocating and centrifugal pump technologies primarily under the Anhydro, APV, Bran+Luebbe, Gerstenberg Schroeder, LIGHTNIN, Seital, and Waukesha Cherry-Burrell brands. The Power and Energy segment provides pumps, valves, and related accessories, principally for use in oil extraction, production, and transportation at wells, as well as for pipeline applications under the APV, Bran+Luebbe, ClydeUnion Pumps, Copes-Vulcan, Dollinger Filtration, LIGHTNIN, M&J Valve, Plenty, and Vokes brands. This segment primarily serves customers in the oil and gas industry, as well as in nuclear and other conventional power industries. The Industrial segment offers air dryers, filtration equipment, mixers, pumps, hydraulic technologies, and heat exchangers under the Airpel, APV, Bolting Systems, Delair, Deltech, Hankison, Jemaco, Johnson Pump, LIGHTNIN, Power Team, and Stone brands. This segment principally serves customers in the chemical, air treatment, mining, pharmaceutical, marine, shipbuilding, infrastructure construction, and general industrial and water treatment industries. Company description from FinViz.com.

SPX Flow was spun off from SPX Corp (SPXC) in September 2013. Shares sold off from the $40+ opening to $15 over the next six months. After a quick rebound to $31 in May the stock has moved sideways for the rest of the year.

They reported earnings of 34 cents that beat estimates for 33 cents. Revenue of $466.8 million narrowly missed estimates for $467.7 million. They guided for full year earnings of $1.27-$1.47 with revenue of $2.0 billion.

The CEO said the company had made good progress in its restructuring efforts post split. Revenue was light in Q3 because of a delay in shipping some orders in the energy sector. They are looking forward to a rebound in the energy sector and manufacturing in general.

Earnings Feb 1st.

Shares closed right at 52-week resistance at $31.50 and are poised for a breakout, market permitting. The stock gained $1 today in a weak market.

Position 12/1/16:

Long March $35 call @ $1.51, see portfolio graphic for stop loss.


NVDA - Nvidia Corp - Company Profile

Comments:

No specific news. Nice sprint to a new historic high.

Original Trade Description: December 3rd.

NVIDIA Corporation operates as a visual computing company worldwide. It operates in two segments, GPU and Tegra Processor. The GPU segment offers processors, which include GeForce for PC gaming; Quadro for design professionals working in computer-aided design, video editing, special effects, and other creative applications; Tesla for deep learning, accelerated computing, and general purpose computing; and GRID for cloud-based streaming on gaming devices. The Tegra Processor segment provides processors that integrate a computer onto a single chip under the Tegra brand name; DRIVE automotive computers, which offer supercomputing capabilities; and tablet and portable devices for mobile gaming under the SHIELD name. The company's products are used in gaming, professional visualization, datacenter, and automotive markets. It sells its products primarily to original equipment manufacturers, original design manufacturers, system builders, motherboard manufacturers, add-in board manufacturers, and retailers/distributors. Company description from FinViz.com.

Nvidia is taking market share from every chipmaker in the market. Their graphics cards are the hottest things going and every model sells out and are resold for higher prices in the secondary market. Their GPU products are the fastest processors available for extreme computing environments, monster applications, data mining, machine learning and artificial intelligence. One recent benchmark showed an Intel server would take over 2,000 hours to process one massive computation program. A Nvidia GPU server only took 30 hours. Amazon and other cloud providers are buying 1000s of GPU equipped servers to handle massive cloud applications.

They are also moving into a stronger position in the self driving vehicle sector with superfast visual and logic chipsets that can 1000s of inputs in a second to help the car navigate and avoid collisions.

Every time Nvidia announces a new product they are years ahead of the competition.

Earnings Feb 9th.

Shares are up +165% in 2016 alone but they are far from done. They spiked 10% after earnings in early November and held the highs for two weeks despite market volatility in tech stocks. On Thursday, Nvidia shares finally cracked when the Nasdaq fell -77 points for the second consecutive decline of more than 1%. On Friday, shares posted a gain and showed no signs of further weakness. Over the last two weeks, MKM Partners upgraded them to a $106 price target and Needham raised their target to $100. The problem is that most analysts do not understand the technological revolution underway at Nvidia.

Options are not cheap but you sometimes get what you pay for. You can spread it to reduce the cost but I am not going to recommend that today. As the stock moves higher we can spread later once the distant strikes become more valuable.

Position 12/5/16:

Long Feb $95 call @ $5.03, see portfolio graphic for stop loss.



SMG - Scotts Miracle Grow - Company Profile

Comments:

No specific news. New high close!

Original Trade Description: November 12th.

The Scotts Miracle-Gro Company manufactures, markets, and sells consumer lawn and garden products worldwide.

Nine states had legalization of marijuana on the ballot in some form and eight approved the measures. California, Massachusetts, Maine and Nevada approved it for recreational use. Arkansas, Florida and North Dakota approved it for medical use, which is a first step towards eventual recreational use. Montana approved a measure for commercial growing and distribution. Arizona was the only state where a recreational use measure failed.

Scotts has already said the legalization of pot was good for their business since growers want to grow it fast and grow it indoors. Over the last two years, Scotts has acquired two hydroponic acquisitions. One of them was a marijuana nutrient and growing products maker. They are branching out into the equipment and lighting required for indoor plant cultivation with the acquisition of Gavita, a grow light and hardware producer. They recognize pot as an "emerging high-growth opportunity" under their Hawthorne Gardening Company brand. They want to invest $500 million in the marijuana industry.

Scotts recently spun off its Scotts LawnService yard fertilizer business into a partnership with TruGreen so that low margin business is gone. The partnership pays distributions back to Scotts.

In the last quarter, sales rose 7% with consumer purchases rising 10%. This compares to the full year revenue growth of 2%. This shows how fast the business is growing with the new focus. They are projecting 6% to 7% revenue growth in 2017 and adjusted earnings of $4.10-$4.30. They called those numbers conservative.

Earnings Feb 2nd.

Position 11/14/16:

Long March $90 call @ $3.90, see portfolio graphic for stop loss.


WDC - Western Digital - Company Profile

Comments:

Shares spiked $5 higher after the company raised guidance at Tuesday's analyst meeting. The company said Q4 earnings would be in the range of $2.10-$2.15 compared to prior guidance of $1.85-$1.95.

Original Trade Description: November 12th

Western Digital Corporation, together with its subsidiaries, engages in the development, manufacture, sale, and provision of data storage solutions that enable consumers, businesses, governments, and other organizations to create, manage, experience, and preserve digital content worldwide. The company's product portfolio includes hard disk drives (HDDs), solid-state drives (SSDs), direct attached storage solutions, personal cloud network attached storage solutions, and public and private cloud data center storage solutions. It provides HDDs and solid-state drives for performance enterprise and capacity enterprise markets desktop, and notebook personal computers (PCs).

Western Digital bought flash memory maker SanDisk in October 2015 and this is going to supercharge their product offerings. They have already raised guidance after a couple quarters of integration. Revenue in Q3 rose 38% to $4.7 billion.

Last week WDC announced a 50-cent quarterly dividend payable Jan 17th to holders on Dec 30th.

The consensus rating of 27 analysts is a buy with a price target of $69.64. Shares closed at $58.89 on Friday.

They reported earnings on Oct 27th and spiked to $62. Post earnings depression saw them fade back to $55 and now they are moving up again. I believe they will exceed that $62 earnings high. They traded at $115 in 2015.

Earnings Jan 25th.

Position 11/14/16:

Long Jan $62.50 call @ $2.20, see portfolio graphic for stop loss.



BEARISH Play Updates (Alpha by Symbol)

VXX - VIX Futures ETF - Company Profile

Comments:

A new historic low intraday but a sharp burst of put buying at the close caused a spike in the VIX/VXX.

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.

Position 12/6/16:

Long March $24 put @ $2.36, see portfolio graphic for stop loss.




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