Option Investor
Newsletter

Daily Newsletter, Wednesday, 1/25/2017

Table of Contents

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

Market Wrap

Dow 20K Party Hats Are Out!

by Keene Little

Click here to email Keene Little
It seemed to take forever to climb those last 100 points to 20K for the Dow but it finally did it today. Helped with an overnight rally (the best way this market knows how to deal with resistance), the bulls added buying pressure to the short covering and kept the Dow above 20K. Do I hear 30K?

Today's Market Stats

Today's accomplishment by the Dow, in reaching 20K, is seen as a big deal by many, even though it's just a number. But considering the Dow has rallied more than 2000 points since Donald Trump was elected it's hard not to be impressed, even if you have some doubts as to the sustainability of the rally. Following the month-long consolidation from mid-December we appear to be into the next rally leg and the bulls have some room to run.

While there remains further upside potential, especially if sidelined buyers decide to jump back in, we have some warning signs flashing, such as VIX at only 10.81 (when the VIX is low it's time to go). Bullish sentiment has actually backed off a bit and oftentimes that coincides with a top as the rally finds it difficult to find more buyers. Short covering probably powered much of today's rally, especially considering it started with a big gap up after the futures rallied last night to help get the indexes up and over some strong resistance levels. The market has been giddy before and there's lots of upside potential if that giddiness turns into real buying but it can also get bulls into trouble if they stop looking for signs of trouble. Breathing at high altitude can make your thinking very foggy and confused.

The Donald weighed in this morning about the Dow's achievement with a tweet saying "Great!" But this is from someone who called the stock market a bubble when the Dow was at 18K so I wonder how he feels about the stock market today. He of course can't come out and say "Wow, 20K! This is a bubble looking for a pin!" He has a lot to live up to after all the talk about how bullish his administration will be for the stock market. Based on time cycles and price patterns I see at least a little more upside potential but I also believe the hope-filled rally over the past three months is in fact a bubble looking for a pin.

The financial markets tend to swing in a cyclical pattern, matching the mood swings in investors. These can be long-term cycles (54-year Kondratieff) and down to intraday cycles. Finding those cycles can sometimes be a challenge but since the 2009 low we've had a 23-week cycle that has done a good job finding the highs in the market (for at least a decent pullback) and a few lows. These are never precise but it does provide a reason to look for the price pattern to support a possible turn date that's coming due.

The last turn week by this 23-week cycle was the week of September 11, 2016 whereas the actual high was about 3 weeks prior to that. The next turn week is the week of February 19 but if we see a high about 3 weeks prior to that week it would put us into next week. Based on this weekly turn cycle I think we should be looking for a possible high between sometime next week and right after February's opex week.

One thing to take note of on the weekly chart below is the ROC (Rate of Change), another momentum indicator. Note how dangerous it is for bulls when it reaches 10, as it now has. Buyers should be very careful from here when thinking about adding to long positions. I thinking sitting tight and pulling stops up closer is probably a smarter thing to do, especially since SPX is also close to the top of a rising wedge for the rally from February 2016.

SPX 23-week cycle

Another cycle to consider is the 50-day, which is shown on the daily chart below. I created a gap at the double bottom in January-February 2016 since the 50-day cycle seems to be working better off the February low rather than the January low. Before February 2016 the cycle starts at the March 2009 low, like the weekly cycle above. The next turn date is February 8, two weeks from today.

The 50-day cycle and the 23-week cycle coincide closely and are a reason to consider a top will be made in this period. But we need to keep in mind that the cycles are not precise and +/- a week or two needs to be considered. What we need to do is tie in the price pattern to see if and when we'll have both coming together for a possible reversal. The message from the turn cycles is to be watchful but still early for a turn.

One interesting thing to note from the chart below is where the green vertical line at February 8th crosses the top of a rising wedge pattern for the rally from February 2016, which is near 2320. As I'll show on the weekly and daily charts of SPX further below, there's another reason to consider 2320 as a good upside target.

SPX 50-day cycle


S&P 500, SPX, Weekly chart

The price pattern is not as clear as I'd like, which makes price projections more difficult but at the moment I one wave count idea that shows a projection to almost 2321. This is where an extended 1st wave for the rally from February 2016 is followed by the 3rd through 5th waves equal to 62% of the 1st wave. That projection crosses the trend line along the highs from April-July-August 2016 on February 1st, which makes a little earlier than the weekly and daily turn dates discussed above but well within the window.

The big question, assuming it will turn back down from near 2321, is whether it will lead to just a pullback before heading higher or something more bearish. We'll have to see what kind of pattern we get in the pullback/decline to help determine what it will mean in the bigger picture. SPX would be more bullish above 2321, in which case the bears would probably have to go back into hibernation.


S&P 500, SPX, Daily chart

In addition to the trend line along the highs from April-July-August 2016, which was almost tested with the December 13th high, there's another trend line along the highs from August-December 2016 (gray line) that's slightly lower. Currently near 2307, that trend line and the one slightly higher provide a resistance zone to watch carefully if reached. Today's rally took SPX up to a broken uptrend line from November-December 2016 (gray line) and one thing to watch for is a back-test followed by a bearish kiss goodbye.

A failure to hold above 2280 on a pullback, especially if that pullback is a sharp reversal back down (impulsive), would be reason to doubt further upside but it takes a drop below Monday's low at 2257 to tell us a high is in place. Keep looking higher, even if only to 2321, but hold the exit door open just in case you need to be the first one out.

Key Levels for SPX:
- bullish above 2282
- bearish below 2257


Dow Industrials, INDU, Daily chart

Today's rally had the Dow breaking out of its sideways expanding triangle, the top of which is now near 20,015. That should act as support on a pullback so we'll see if this is just a 1-day wonder rally or something more bullish. As I'll point out on the 60-min chart further below, there is a short-term projection at roughly 20,180-20,200 for an upside target for the leg up from January 19th. Keep a close eye on that level if reached in the next few days (we're due a pullback and then another leg up to get there).

Higher upside potential is to about 20,350 where the Dow would run into a trend line along the highs from April-December 2016 by the beginning of February and not shown is a trend line along the highs from August-December 2016, which will be near 20,500 by the first week of February. So there's clearly more upside potential if the Dow can get through 20,200 and only if it drops below Monday's low at 19732 would the bulls be in trouble.

Key Levels for DOW:
- bullish above 20,010
- bearish below 19,650


Dow Industrials, INDU, 60-min chart

The January 19th low fits well as the completion of the choppy consolidation off the December 13th high. Today's rally looks like it completed the 3rd wave of the rally from January 19th and ideally we'll see a choppy consolidation/pullback on Thursday before heading higher into what could be the final high early next week (end-of-month run up). Depending on where the 5th wave of the rally from January 19th starts will determine the upside projection but for now I'm showing a pullback to the top of the expanding triangle pattern, near 20,013, and then the 5th wave would equal the 1st wave at 20,183.


Nasdaq-100, NDX, Daily chart

Since the November 4th low for NDX its rally is occurring with steepening uptrend lines, which defines a parabolic rally. There's a good chance this will not end well but until the completion of the rally it's obvious bears don't want to step in front of this train. There's a trend line along the highs from April-September 2016 that's currently near 5165, only 12 points above today's high. I show a down-up sequence to finish its rally to the trend line along the highs, which will be near 5180 on February 1st. At the moment it's just speculation but for there are three points from this chart to consider -- trendline resistance is close, it's overbought and a breakdown from a parabolic rally could happen quickly.

Key Levels for NDX:
- bullish above 5100
- bearish below 5035


Russell-2000, RUT, Daily chart

The RUT is the last one to break out of its consolidation pattern off its December 9th high. The top of the down-channel from that high is currently near 1385, less than 2 points from this afternoon's high. The bulls need another gap up to get the RUT free and clear of resistance otherwise we could see a pullback before heading higher. Since December I've been looking for the RUT to make it up to its trend line along the highs from 2007-2015, currently near 1407. It would be even more bullish above that trend line but watch it carefully, if reached, to see how it reacts.

Key Levels for RUT:
- bullish above 1385
- bearish below 38


Volatility index, VIX, Weekly chart

It's time to watch the VIX closely. As mentioned in the beginning of tonight's report, it close at 10.81 today, which is the lowest closing price since July 3, 2014. It's getting close to the lows seen in 2005-2007-2014 and while it doesn't provide us a timing signal it does provide a warning sign.

There are a couple of things to watch on the chart. First is a large descending wedge since 2015, the bottom of which is just below 10. There's a 5-wave count for the move down inside this wedge, which means it's in the final move of the wedge. Second, a shorter-term descending wedge is from November and the bottom of it is currently near 10 and next week will intersect the bottom of the larger wedge near 9.90.

If the VIX drops below 10 next week I think it would be a MOAP setup (Mother of All Puts), especially if the indexes shown above are hitting their upside targets/resistance levels at the same time. Put options will be the cheapest you'll see for years. The third thing to note is the bullish divergence since April 2016, indicating waning momentum at the new VIX lows and this supports the idea that we're getting ready for a big turn.


10-year Yield, TNX, Weekly chart

With the renewed buying in the stock market it has created selling pressure in the bond market, which in turn has driven yields back up. By mid-January TNX had pulled back to its broken downtrend line from 2007-2013, as can be seen on its weekly chart below, and the bounce back up leaves a bullish kiss goodbye. This should be good for at least a minor new high and potentially up to the projection at 2.687 where the 2nd leg of the bounce correction off the January 2015 low would achieve 162% of the 1st leg. Some bond gurus say the 10-year above 2.6% would signify the end of the bond's bull market. I'd suggest a better number would be above 2.69%

The bearish interpretation for bond yields assumes the bounce is just a correction and not something more bullish. The sharp rally off the July 2016 low supports the idea that it's the c-wave of an a-b-c bounce off the January 2015 low and not the start of something more bullish. That interpretation means once this rally completes we'll then see a resumption of the decline in yields (rally in bonds) to a low below the July 2016 low at 1.336. I have long believed that deflationary pressures will drive the 10-year below 1% and until I see evidence to the contrary I'll continue to believe it.


KBW Bank index, BKX, Daily chart

Like the RUT, the banking index has not yet broken above the top of its consolidation range that it's been in since December 8th, which is near 94. Assuming it will join the race to the upside there is upside potential to a price projection at 99.47. The projection crosses the top of a parallel up-channel for the rally from February 2016 on February 6th, which is very close to the 50-day turn date discussed for SPX (on February 8th). BKX stays bearish above its January 18th low at 89.17 but questionable below that level.


U.S. Dollar contract, DX, Daily chart

With both Janet Yellen and Donald Trump beating up on the US$ (something they both happen to agree on), it's not a surprise to see the dollar losing some of its luster after peaking on January 3rd. It has now dropped below the bottom of an up-channel for the portion of its rally from August 2016 and a broken trend line along the highs from July-October 2016. It has also dropped back below the broken downtrend line from March-December 2015.

These trend lines all coincided near 100.30 and provided a little support for a bounce off the January 17th low at 100.23. But this week's decline now has it below the multiple trend lines and even though the dollar is oversold it's not showing much in the way of bullish divergence, suggesting we could see lower prices before setting up a bigger bounce. Maybe we'll see a bounce off the December 8th low at 99.49 to create a H&S top (left shoulder in November 2016, right shoulder to be created with the next bounce to a lower high).


Gold continuous contract, GC, Daily chart

Gold should have bounced about as far as it's going to go if the larger bearish pattern is going to remain the preferred wave count. If gold gets above its October 7 2016 low near 1243 it would negate the impulsive wave count for the decline from July. It could be in what will become a larger corrective move down (commodities are typically more corrective than impulsive) and that would simply make it more difficult to figure out its next move. But for now, assuming it's going to roll back over, the downside target is near 1386, which is where the 5th wave of the move down from July 2016 would equal the 1st wave. That projection crosses the midline of a down-channel on February 23rd. Perhaps a blow-off rally in the stock market would coincide with a strong drop in gold in the next month.


Oil continuous contract, CL, Daily chart

Oil is stubbornly holding onto the 51-54 area but it's looking vulnerable to another leg down, one which should drop it to at least the $49 area (two equal legs down from January 3rd. I think oil remains in a longer-term decline but it could be a slow choppy move. If oil bulls do manage to drive it back up, keep an eye on the top of its up-channel, which will be near 56.30 in early February.


Economic reports

A big jump in the MBA Mortgage Applications index this week helped spike the home builders today. We'll see if that good news is followed by an unexpected climb in new home sales in tomorrow's report. On Friday we'll get some GDP numbers, Durable Goods orders and Michigan Sentiment.


Conclusion

For what seems like forever, the market traded sideways since mid-December and that's what had me believing we'd see higher prices. That and the fact that too many pundits had turned bearish the market, saying the Trump rally was due a big correction. The market rarely accommodates the majority and today's relatively strong rally could have been more short covering than real buying but at least it broke most of the indexes out of their consolidation patterns.

The RUT and BKX have yet to break out and for a sustained rally we'll need to see them join the party. For the others, such as the blue chips, we'll want to see nothing more than a pullback to support (at the top of the consolidation ranges) and then a continuation higher. The bears obviously want to see a failure of support on a pullback and leave a failed breakout attempt. That's certainly a possibility but at this moment I think it's a lower probability. I think this rally has a little more room to run.

I need to emphasize "a little more room to run" because I don't think there's a lot of upside potential. This is likely to be the last leg of the rally from November and then the "Trump correction" will begin. Keep in mind that the rally has dropped the VIX down into dangerous territory and while I think it can drop lower, such as from today's 10.8 down to maybe 9.8, it's now lower than it's been since July 2014. It wasn't long after that when SPX bobbled a bit, made a minor new high in September and then dropped about 200 points (-10%) into October. The market doesn't repeat exactly but at the very least we have a warning sign.

The rally looks good for at least a little higher (SPX 2321 target) but when I consider the upside potential (+20 points) and the downside risk (-200 points) I know that I should be getting defensive and ready for a reversal, even if that reversal could be weeks away (or maybe next week after we close out a positive January). Trade carefully and pull up your stops on long positions. Bears need to continue exercising patience. I know you're hungry but sometimes that makes you stronger (wink).

Good luck and I'll be back with you next Wednesday.

Keene H. Little, CMT


New Option Plays

Shortage Ahead

by Jim Brown

Click here to email Jim Brown

Editors Note:

As the commodity cycle restarts there will be shortages of some materials. In the case of the energy industry, that shortage may be sand. One company is well ahead of everyone else in supplying this commodity.


NEW DIRECTIONAL CALL PLAYS

SLCA - U.S. Silica - Company Profile

U.S. Silica Holdings, Inc. produces and sells commercial silica in the United States. The company operates through two segments, Oil & Gas Proppants, and Industrial & Specialty Products. It offers whole grain commercial silica products to be used as fracturing sand in connection with oil and natural gas recovery; and resin coated proppants, as well as sells its whole grain silica products in various size distributions, grain shapes, and chemical purity levels for manufacturing glass products. The company also provides ground commercial silica products for use in plastics, rubber, polishes, cleansers, paints, glazes, textile fiberglass, and precision castings; and fine ground silica for use in premium paints, specialty coatings, sealants, silicone rubber, and epoxies. In addition, it offers other industrial mineral products, such as aplite, a mineral used to produce container glass and insulation fiberglass; and adsorbent made from a mixture of silica and magnesium for preparative and analytical chromatography applications. The company serves oil and gas recovery markets; and industrial end markets with customers involved in the production of glass, building products, foundry products, chemicals, and fillers and extenders. As of December 31, 2015, it had approximately 400 million tons of proven and probable recoverable mineral reserves. Company description from FinViz.com.

In the gold rush in the 1800's it was not the miners that got rich but it was the companies that sold them the picks, shovels and wheelbarrows. In the energy sector every shale well has to be fractured and that required mountains of sand. We are not talking regular beach sand. The primary frac sand is mined in Wisconsin and other northern states. There are various grades of sand depending on the geology of the well and what the drillers are trying to accomplish.

In 2014 it took an average of 4.2 million pounds of frac sand per well. However, in 2015 and 2016 there was a significant increase in fracking intensity that began to use much larger quantities per well. In late 2015 the amount of sand rose from 9% of the fracking fluid to 20%. In early 2016 Simmons & Co reported two wells in the Permian that used 60 million pounds of sand each while two in the Haynesville Basin used 35 million pounds each.

Houston based oilfield logistics company Twin Eagle reproted receiving "historic shipments" of frac sand at its facility outside the Eagle Ford. They reported receiving one 130-car train of sand a week. One car carries 100 tons so that is 13,000 tons per week. That is 26 million pounds of sand per week. If wells are now using 20 to 25 million pounds per well that is one train per well.

Last week the active rig count rose by 29 oil wells to 551 active oil wells. Each rig drills a minimum of two wells per month. If each well used 25 million pounds that would be more than 1,100 trains of sand per month.

There are rumors making the rounds that because of the increased intensity of sand in fracking there could be a sand shortage as the number of active rigs increase and producers began to rapidly complete the 3,000 or so wells that have been drilled over the last 18 months but never completed because of low oil prices. There is going to be a surge in the demand for sand.

U.S. Silica is one of the major sand suppliers with multiple facilities. They have used the downturn in the drilling industry to buy multiple competitors in order to bulk up for the future demand.

Earnings Feb 2nd.

SLCA has earnings on Feb 2nd but almost every company trading today has earnings over the next three weeks so that is just something we have to deal with. I am recommending we buy a longer-term option to get past any potential volatility around earnings. Their guidance should be good.

Buy June $65 call, currently $4.20, no stop loss until after earnings.


NEW DIRECTIONAL PUT PLAYS

No New Bearish Plays



In Play Updates and Reviews

Short Squeeze Continues

by Jim Brown

Click here to email Jim Brown

Editors Note:

The two-day short squeeze finally broke through Dow 20,000 with the S&P and Nasdaq setting new highs as well. The S&P and Nasdaq are clearly in breakout mode with major gains to new highs for the second day. The Dow did break through 20,000 but the high was made at 11:AM and it moved sideways the rest of the day. That is a textbook short squeeze pattern.

Short squeezes rarely last more than two days but sometimes they do trigger follow on buying. Once resistance is broken significantly, especially at big round numbers, there is a tendency by retail investors to jump on the train thinking it is about to leave the station for an express run to the next round number.

There is no way to tell if that is going to happen this week but market sentiment is very strong. It will be difficult to find new positions that have not already surged too much over the last couple days. Many stocks were up 3% to 5% today as shorts raced to cover.



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


SPY - S&P-500 ETF

Long call position was opened with a trade at $228.25.



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

PANW - Palo Alto Networks - Company Profile

Comments:

No specific news. The breakout continued with a $2 gain.

Original Trade Description: Jan 23rd

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. In addition, the company provides support and maintenance services; and professional services, including application traffic management, solution design and planning, configuration, and firewall migration, as well as provides online and classroom-style education training services. Palo Alto Networks, Inc. primarily sells its products and services through its channel partners, as well as directly to medium to large enterprises, service providers, and government entities operating in various industries comprising education, energy, financial services, government entities, healthcare, Internet and media, manufacturing, public sector, and telecommunications. Company description from FinViz.com.

In November, PANW posted earnings that beat the street but revenue, which rose 34% missed estimates by a fraction. Revenue was $398.1 million and analysts were expecting $400.1 million. PANW had guided for revenue growth of 33% to 35% so they were right in the middle of their guidance range. Earnings of 55 cents beat estimates for 53 cents. Shares were crushed because the company said the market was "lumpy" and customers were taking longer to make purchase decisions.

In Q3 they added more than 1,500 new customers to hit 35,500 globally. Subscription revenue has risen to 60% of total revenue as they move to a cloud model.

In early January, noted short seller Andrew Left of Citron Research, put out a bullish note on PANW saying they had a fantastic moat, which would be a barrier to entry for other companies trying to duplicate their type of firewall. His price target is $170. Shares rallied $14 over the next three weeks on the call. At the same time Bernstein put out a very positive note on the company saying nobody serious about protecting their web environment should be without PANW as their security solution.

Shares have rebounded to their November gap down level of $144 and have found resistance. They are not giving back their gains but there was a slight retracement on Monday in a weak market. I believe they will overcome this resistance level and move higher, market permitting.

There is a persistent rumor in the market that Microsoft and Cisco Systems are both looking for a cybersecurity company to acquire. Given Palo Alto's position in the sector, they would be a good target.

Earnings February 20th.

Because of the price of the options I am forced to turn this into a spread. If you want to go with a naked call, I would probably use the $150 strike.

Position 1/24/17:

Long March $145 call @ $6.00, see portfolio graphic for stop loss.
Short March $155 call @ $3.15, see portfolio graphic for stop loss.
Net debit $2.85


RHT - Red Hat Inc - Company Profile

Comments:

No specific news. Big spike at the open to $77 but faded with the rest of the market.

Original Trade Description: Jan 21st

Red Hat, Inc. provides open source software solutions to develop and offer operating system, virtualization, management, middleware, cloud, mobile, and storage technologies to various enterprises worldwide. It offers infrastructure-related solutions, such as Red Hat Enterprise Linux, an operating system platform that runs on hardware for use in physical, virtual, container, and cloud environments; Red Hat Satellite, a system management offering that helps to deploy and manage Red Hat infrastructure across physical and virtual servers, and cloud environments; and Red Hat Enterprise Virtualization, a software solution that allows customers to utilize and manage a common hardware infrastructure to run multiple operating systems and applications. The company offers application development-related and other technology solutions, such as Red Hat JBoss Middleware, a solution for developing, deploying, and managing applications, as well as integrating applications, data, and devices along with business processes automation; Red Hat cloud offerings, a software solution that enables customers to build and manage various cloud computing environments; Red Hat Mobile, a software development platform that enables customers to develop, integrate, deploy, and manage mobile applications for enterprises; and Red Hat Storage, a software solution that enables customers to treat physical server storage as a scalable, shared, centrally-managed pool of virtual storage and to manage large, unstructured, or semi-structured data in physical, virtual, and cloud environments. It also provides consulting, support, and training services; and real-time operating system, distributed computing, directory services, and user authentication. Company description from FinViz.com.

On December 21st, the company reported earnings of 61 cents that beat estimates by 3 cents. However, the beat came mostly from a lower tax rate. Revenue rose 17.5% to $615.3 million compared to estimates for $618.4 million so a slight miss there. Billings rose 8.7% to $679 million but misses estimates for $713 million. Subscription revenue rose 19% to $543 million and 88% of total revenue. That is recurring and will help smooth out future earnings.

The CEO explained that two large government deals worth $20 million slipped into Q4. Also, two large customers chose to be billed rather than pay up front and that took another $27 million out of billings. If those deals were included the billings would have been up +16% instead of 8.7%. The good news is that all of those deals are now in Q4 and that will give Q4 an earnings boost.

Earnings March 22nd.

Shares have rebounded to $74 and appear poised to break over that level and move back to the $80 range. I am using the March options, which expire 4 days before the earnings and they are half price the next cycle in June.

Position 1/23/17:

Long March $75 call @ $2.35, see portfolio graphic for stop loss.


SPY - S&P-500 ETF - ETF Profile

Comments:

The SPY gapped open to $228.70 so the position was entered at the open. The secondary recommendation to buy a dip at $223 has been cancelled.

Original Trade Description: Jan 12th

The SPDR S&P 500 ETF Trust seeks to provide investment results that, before expenses, correspond generally to the price and yield performance of the S&P 500 Index.

The SPY dipped to $225 intraday before the dip buyers rushed into the market. Initial support is $223 and I believe we have a chance to test that level before the inauguration. There are only four trading days left. If the bank earnings disappoint on Friday we could see a decline in low volume. With the three-day weekend ahead we could see traders move to the sidelines to avoid weekend event risk while the U.S. markets are closed.

We could also see a pre inauguration decline as traders worry about event risk surrounding the event.

Whatever the reason we could see the ETF test that level over the next four days. Assuming there is no disaster surrounding the inauguration, we could see a real rally begin afterwards.

This is a short-term position using March options just in case any potential dip turns into a crash. The estimated option premium should be less than $3.

Position 1/25/17 with a SPY trade at $228.25

Long MAR $232 call @ $1.69, no initial stop loss.



BEARISH Play Updates (Alpha by Symbol)

DIA Dow ETF - ETF Profile

Comments:

Big rally at the open to $200.55 but traded sideways the rest of the day. Our stop loss was at $201 but I am removing it today. The option is only worth 50 cents and I would bet 50 cents there may be a decline over the next 4 weeks. If you want to close the position that is up to you.

Original Trade Description: December 7th

The SPDR Dow Jones Industrial Average ETF Trust seeks to provide investment results that, before expenses, correspond generally to the price and yield performance of the Dow Jones Industrial Average.

Remember Dow 10,000? Traders talked about it for weeks. When it was finally hit, they were passing out Dow 10,000 hats on the floor of the NYSE for a week. That was December 11th 2003. It was a big milestone for the market.

Now 13 years later, we are about to double that with Dow 20,000. Given the place on the calendar, the massive post election rally and the potential for normal profit taking in January, the Dow 20,000 touch could be a massive sell on the news event.

However, we are only 386 points way and it could happen as soon as next week. The Fed rate announcement on Wednesday could either cripple that potential or accelerate it if the Fed maintains a dovish posture on future rate hikes. I believe we will hit Dow 20K before the end of December. When that happens I want to be short the DIA ETF and plan on holding it through January.

I am choosing the Dow because it is the most overbought and could produce the biggest percentage move. Just look at Goldman's chart and the profit that needs to be removed there.

Because there will be plenty of other traders thinking along the same lines I want to enter the put position at 19,900 or $199 on the DIA ETF. I know I am jumping in front of a speeding train to enter a short position on a runaway market but the potential is very high for a good trade.

Position 12/12/16:

12/12 - 1/2 position: Long Feb $195 put @ $3.40, no initial stop loss.

12/13 - 1/2 position: Long Feb $195 put @ $3.15, no initial stop loss.


FINL - Finish Line - Company Profile

Comments:

No specific news. Very bullish market but only a 19 cent gain. With resistance at $18 we could still see a decline.

Original Trade Description: January 11th.

The Finish Line, Inc., together with its subsidiaries, operates as a specialty retailer of athletic shoes, apparel, and accessories in the United States. It operates in two divisions, the Finish Line and JackRabbit. The company's Finish Line division engages in the in-store and online retail of athletic shoes for Macy's Retail Holdings, Inc.; Macy's Puerto Rico, Inc.; and Macys.com, Inc., as well as online at macys.com. This division offers men's, women's, and kids' athletic shoes, as well as an assortment of accessories of Nike, Skechers, Converse, Puma, New Balance, Adidas, and other brands. As of April 2, 2016, the company operated Finish Line shops in 392 Macy's department stores in 37 states in the United States, the District of Columbia, and Puerto Rico. Its JackRabbit division retails lifestyle products, such as running shoes, apparel, and accessories of Brooks, Asics, Nike, Saucony, New Balance, and other brands. It also operates the e-commerce sites jackrabbit.com and boulderrunningcompany.com. The company operated 72 JackRabbit stores in 17 states in the United States and the District of Columbia. Company description from FinViz.com.

In late December Finish Line reported a loss of 24 cents compared to estimates for a loss of 18 cents. Revenue was $371.7 million, down -2.7% from the year ago period. Analysts were expecting $412.4 million. They guided for Q4 earnings of 68-73 cents compared to analyst expectations for 96 cents. Shares fell from $23 to $19 on the news and have continued to decline.

Finish Line does not report earnings again until March 22nd. That means every other retailer will post their disappointing quarters and with each earnings miss the weight should increase on FINL shares.

Finish Line operates mall stores and stores inside Macy's stores. Macy's already reported declining traffic and missed on same store sales. This should also impact FINL since lower Macy's traffic means lower traffic in the shoe section.

Shares are currently $17.50 and could easily break below the June lows before the next earnings reports. I am reaching out to May so there will be some earnings expectation in the premium when we exit before the earnings. We can buy time but we do not have to use it.

Position 1/12/17:

Long May $17 put @ $1.55, see portfolio graphic for stop loss.


LB - L Brands - ETF Profile

Comments:

No specific news. Only a minor gain and resistance is firm at $62.15.

Original Trade Description: January 14th

L Brands, Inc. operates as a specialty retailer of women's intimate and other apparel, beauty and personal care products, and accessories. The company operates in three segments: Victoria's Secret, Bath & Body Works, and Victoria's Secret and Bath & Body Works International. Its products include loungewear, bras, panties, swimwear, athletic attire, fragrances, shower gels and lotions, aromatherapy, soaps and sanitizers, home fragrances, handbags, jewelry, and personal care accessories. The company offers its products under the Victoria's Secret, Pink, Bath & Body Works, La Senza, Henri Bendel, C.O. Bigelow, White Barn Candle Company, and other brand names. L Brands, Inc. sells its merchandise through company-owned specialty retail stores in the United States, Canada, and the United Kingdom, which are primarily mall-based; through its Websites; and through franchises, licenses, and wholesale partners. As of January 31, 2016, the company operated 2,721 retail stores in the United States; 270 retail stores in Canada; and 14 retail stores in the United Kingdom. It also operated 221 La Senza stores in 29 countries; 125 Bath & Body Works stores in 30 countries; 19 Victoria's Secret stores in 7 Middle Eastern countries; and 373 Victoria's Secret Beauty and Accessories stores, and various small-format locations in approximately 75 countries. Company description from FinViz.com.

The holidays were not good for L Brands. The warned on January 5th that net sales rose 1% for the five week shopping period BUT same store sales fell -1% and sales for Victoria's Secret fell -4%. That was a major blow because the holiday shopping season is normally the best five weeks of the year for the lingerie business. They even tried to combat the falling sales by advertising some of their bras at only $10 and even the deep discount did not work.

L Brands is also suffering because they maintain a mall store format. With the malls dying in favor of online shopping, they are losing sales. More than 80% of L Brands sales come from mall traffic and that traffic is rapidly declining. Hermand-Waiche believes that online sales will be over 30% of the market in 2017 and that means Victoria's Secret is becoming obsolete to 30% of the market.

The company warned on the 5th that earnings would be at the low end of prior guidance or $1.85. Shares fell -6% on the earnings warning. With Macy's and Kohl's warning in the same week it was a bloodbath for retailers in the market. Of 11 stores reporting same store sales 8 saw sales decline.

Earnings are February 15th.

Shares are hugging the $60 level but ticking slightly lower every day. If we do get a market meltdown, they could be a target of sellers wanting to exit a nonperforming stock.

Position 1/17/17:

Long Feb $60 put @ $1.85, see portfolio graphic for stop loss.




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