Option Investor
Newsletter

Daily Newsletter, Monday, 6/26/2017

Table of Contents

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

Market Wrap

Pop, Drop and Recovery

by Keene Little

Click here to email Keene Little
Today's price action was a little volatile following this morning's pop n drop but it's become part of the choppy price action we've seen for the past two weeks. Bulls are trying to hold onto gains into month-end while bears are trying to take that away from them.

Today's Market Stats

The daily battle between the bulls and bears continues as overnight futures gap the market up in the morning and then sellers take advantage of the early-morning liquidity rush to sell into the rally. Rinse and repeat. The Dow swung back to positive while the techs swung to negative, which is a continuation of the sloshing back and forth between sectors while the market in general stagnates. We continue to wait for a move in one direction or the other.

Equity futures had rallied fairly hard last night and ES (SPX emini futures contract) was up +8 by the time the cash market opened this morning and then quickly spiked another +5 points before the sellers smacked the indexes back down. SPX spiked up about 12 points before quickly dropping back down to close this morning's gap. It then proceeded to trade in a 7-point range the rest of the day.

As has been typical with this market, all the excitement was over in the first 90 minutes of trading (30 minutes longer than usual) and the rest of the day was spent going sideways. The net result is a short-term pattern that supports the opinions of both sides as to where this market will head next. Further confusing things, the different indexes are not in agreement with their different price patterns and we need to consider both possibilities for this week.

This week is generally bullish since we could see an attempt to mark up the indexes into month/quarter-end. We also tend to see a rally into a holiday weekend, which is what we have next weekend. Therefore the bulls have all that going for them and the bears are hardly in a strong position as the indexes hang up around their highs. But as I'll show on the charts, the threat of a breakdown is real and Tuesday's trading could set the tone for the rest of the week.

There was very little to drive the market this morning and even though the pre-market Durable Goods orders report was more negative than expected it was basically ignored. The number came in at -1.1% for May, down from -0.9% in April, which had been revised lower from the previously reported -0.7%. Ex-transportation, durable goods was a little better, coming in at +0.1%, which was an improvement from -0.5% in April but still not as good as the +0.3% that was expected. Further signs of a slowing economy and eventually, if the trend continues, the market will start to recognize it.

Kicking off tonight's chart review, the Dow has been one of the indexes that keeps me thinking a new high is possible, although I'm starting to lose faith in its ability to do it.


Dow Industrials, INDU, Weekly chart

The Dow's weekly chart keeps me looking higher while the shorter-term charts suggest it might not be able to get another leg higher. A trend line along the highs from December 2014 - May 2017, which may or may not be important (it hasn't been tested yet), is currently near 21675 and it looks like a good upside target on the weekly chart. The problem for the bulls is that the buying momentum has slowed significantly (bearish divergence against the March high) and the market could simply be running out of buyers to propel the market higher.


Dow Industrials, INDU, Daily chart

Back on May 17th the Dow spiked down below its uptrend line from November-April but then climbed back above the line 3 days later. Since May 23rd it had used the trend line for support as it slowly marched its way higher into the June 20th high. It wasn't a strong break back below the line but last week's decline into Friday had the Dow closing below the line for the first time in a month.

Today the Dow climbed back up above the line, currently near 21435 (using the arithmetic price scale), and it's looking like the bulls could get another save if today's close on the line is followed by a rally on Tuesday. As long as this trend line holds as support we should see the Dow work its way higher, in which case the upside potential is to at least the price projection at 21618, where it would also run into two trend lines along the highs from 2011-2014 and April-June.

Key Levels for DOW:
- bullish above 21,535
- bearish below 21,169


S&P 500, SPX, Daily chart

SPX has been in a choppy pattern since its June 2nd high at 2440 and today's close at 2339 shows it hasn't made much progress in either direction this month. The price action looks "toppy" but until it breaks down below the June 15th low at 2418 I'll give the bulls the benefit of the doubt and look for the possibility of a rally up to a price projection at 2465 (to coincide with the Dow's 21618).

However, the short-term pattern following the June 19th high near 2454 suggests the top might already be in and short against that high is the better position. For that to be true we should see selling on Tuesday and a break below the 20-dma, currently near 2434. Tuesday is turning into a potentially key day -- its direction could set the tone for the rest of the week/month/quarter.

Key Levels for SPX:
- bullish above 2454
- bearish below 2418


Nasdaq Composite index, COMPQ, Daily chart

Drawing a trend line along the highs from April 2016 to March 2017 for the Nasdaq shows the rallies in May were repeatedly stopped by the trend line. Then the Naz made a bullish move June 1st and 2nd and climbed above the trend line. But that accomplishment was short-lived as the June 9th hard selloff dropped the Naz back below the line. Today it finally made it back up to the line, now near 6317, and we're watching to see if it remains resistance.

As the Nasdaq did in May, it could continue to work its way higher by nuzzling up underneath the trend line but if the bearish divergence continues to hold while working its way higher it would be a signal that longs are not long for the world and bears should get ready. That includes right here -- tight stops on long positions and get ready to play the short side if today's back-test is followed by a bigger red candle.

Key Levels for COMPQ:
- bullish above 6342
- bearish below 6107


Nasdaq-100, NDX, 30-min chart

From a short-term perspective there was a pattern that I was watching on NDX that pointed to the need for just one more new high today to complete a rising wedge pattern for the leg up from June 15th. This was to complete the c-wave of an a-b-c bounce off the June 12th low and this morning's new high at 5845, which tagged the 78.6% retracement of its June 9-12 decline, was a good setup for a high.

The pop up in the morning was a throw-over above the top of the wedge and the collapse back down inside the pattern created the sell signal. The bounce off this morning's low could get a little larger (to mimic the big bounce off the June 12th low) but short against this morning's high is the recommended play based on this bearish setup. It would of course be negated with a rally above this morning's 5845 high.


Russell-2000, RUT, Daily chart

As long as the RUT continues to chop up and down between its uptrend line from February-November 2016, now near 1381, and its trend line along the highs from 2007-2015, near 1437, there are very few clues as to where it's going next. I could easily argue for another test of its 2007-2015 trend line, maybe a little higher, and I could just as easily argue the case for at least another leg down from here, one that could break its uptrend line. In other words, the RUT is about as useful as teats on a bull as far as trying to figure out its next move. I lean bearish but the short-term pattern keeps the upside potential alive.

Key Levels for RUT:
- bullish above 1440
- bearish below 1386


10-year Yield, TNX, Daily chart

Treasury yields dropped back down today, supposedly on more concerns about a slowing economy (following this morning's durable goods report). This morning's low for TNX was another test of support at its November 10, 2016 close at 2.117, which was last tested on June 14th (it's the week's closing price and the bottom of the November 14th gap up). A break of that support level would be more bearish (bullish for bond prices) but at the moment it's hinting it could break out of a bullish descending wedge from the May 11th high, currently near today's high at 2.147.

A rally above price-level S/R at 2.19 would turn things a least short-term bullish but a continued decline to the bottom of the wedge, near 2.05, can't be ruled out. And there's still the downside projection near 2.00 based on the double-top pattern. The longer-dated bonds, the 30-year (TYX) is looking more bearish and that's the market that suggests inflation is not a concern and that the economy is not improving.


KBW Bank index, BKX, Daily chart

Follow the money. The banks don't always show the way but it's always a good idea to keep an eye on them to see if they're in synch or not with the broader market. They've been weaker than the broader market since March and that's been a warning sign but if they can rally from here it would support at least another new high for the broader averages.

BKX has been trying to hold support on a pullback to its 20- and 50-dma's, near 92 and 91.60, resp. The uptrend line from June 2016 - May 2017 and the trend line along the highs from April 2010 - July 2015 cross on Tuesday near 90.90 and therefore a break of support at its MAs and the trend lines would obviously be more bearish. But MACD could be getting ready to turn back up from the zero line, which would be bullish.


U.S. Dollar contract, DX, Daily chart

Since the low for the US$ on May 22nd it has been chopping sideways and that has it looking like a bearish continuation pattern. A weaker dollar is further evidence that the currency market doesn't think the Fed will be able to raise rates like they want because the economy is cooling off. Assuming we're going to get another leg down for the dollar, the price projection at 94.79 remains a good target.

The 94.79 projection crosses the bottom of a parallel down-channel, starting from January, around mid-July. A short-term bounce can't be ruled out but it wouldn't be more bullish unless it can get above it descending 50-dma and a broken trend line along the lows from last December through March (gray line), both currently near 97.98.


Gold continuous contract, GC, Daily chart

Early this morning, around 4:00, gold dropped sharply after finishing a 3-wave bounce correction off its June 21st low. It pierced its 200-dma but held it as support, as it did last week, and it's possible it will get at least a larger bounce before heading lower. But it closed today below its uptrend line from December-May, currently near 1248, and today's consolidation following the morning low looks like a bearish continuation pattern. A continuation lower from here would clearly be more bearish since it will have broken below multiple layers of support (MAs and trend lines). Gold bulls need to step back in right now if they want to save their "precious" metal.


Oil continuous contract, CL, Daily chart

Off last Wednesday's low oil made it back up to the top of its narrow down-channel for its decline from May 25th. Eventually it's going to break of this narrow down-channel and start at least a bigger bounce correction, possibly something more bullish. But the bulls will have to wrestle the ball away from the bears since they own it after oil dropped below its uptrend line from August 2016 - May 2017, which is currently near 44.75. If oil makes it back up to that trend line, for what could turn into a bearish back-test, it would likely meet up with its quickly descending 20-dma. Above 45 would be the first bullish sign but for the moment there is downside potential to the $40 area.


Economic reports

Tuesday is light on economic reports with only the Shiller Home Price index and Consumer Confidence and no significant changes expected. Wednesday we'll see if the housing sector continues to improve after we get the Pending Home sales number. Thursday's GDP 3rd estimate and Friday's Personal Income/Spending numbers for May will shed more light on the balance between the two. PCE prices (a measure of inflation) will be an indication of what the Fed will use for the data-dependent decision making. The Chicago PMI and Michigan Sentiment will finish Friday's reports. All in all, nothing earth shattering is expected and that could help the bulls at least keep the sellers away this week.


Conclusion

The price patterns for the blue chips had been keeping me on the bullish side of things the past several weeks but after last week I'm not so sure about new highs. The techs had set up a pattern for the bounce off the June 12th lows that suggested it was going to be just a bounce correction to a lower high and then a turn back down into harder selling. That remains the greater likelihood in my opinion, which further weakens the idea that we'll get new highs for the blue chips. The RUT is just flopping around like a fish pulled out of the water.

This is a week that is typically bullish since it's the end of the month/quarter and it's common for fund managers to mark up the prices as much as possible to show what good investment managers they are. Then puke the positions next week. But it's been a good quarter and many fund managers might be more interested in protecting gains if they see the market weaken at all.

We also often see the market rally into a holiday weekend, which is this coming weekend, and the combination of a mark-up effort with the holiday could be too much for the bears to overpower. The price patterns are favoring the bears at the moment but that could be turned around in a hurry, especially if we get a rally on Tuesday that holds up (no selling of rallies like this morning). Any further selling on Tuesday would likely get those fund managers starting to protect their gains.

Good luck and I'll be back with you next week on my normally scheduled Wednesday. See below for a good deal on an OIN subscription.

Keene H. Little, CMT


 

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New Option Plays

Back from the Dead

by Jim Brown

Click here to email Jim Brown

Editors Note:

This company was written off in 2016 but format changes have turned them around. RH is moving from a highly promotional retail model to the Costco membership model.



NEW DIRECTIONAL CALL PLAYS

RH - RH Inc - Company Profile

RH, together with its subsidiaries, operates as a retailer in the home furnishings market. The company offers products in various categories, including furniture, lighting, textiles, bathware, decor, outdoor and garden, tableware, and child and teen furnishings. It provides its products through its retail galleries and Source Books, as well as online through rh.com, rhmodern.com, restorationhardware.com, rhbabyandchild.com, rhteen.com, and waterworks.com Websites. As of January 28, 2017, the company operated 85 retail galleries, including 50 legacy galleries, 6 larger format design galleries, 8 next generation design galleries, 1 RH modern gallery, and 5 RH baby and child galleries in the United States and Canada; 15 Waterworks showrooms in the United States and the United Kingdom; and 28 outlet stores. The company was formerly known as Restoration Hardware Holdings, Inc. and changed its name to RH in January 2017. Company description from FinViz.com

RH reported earnings of 5 cents that beat estimates for 4 cents. Revenue of $562.1 million beat estimates for $560.4 million. However, they guided for Q2 earnings of 38-43 cents and analysts were expecting 53-75 cents. That is not a misprint.

The company said it was ditching its prior merchandising model and switching to a membership model in order to make the company Amazon proof and enhance the customer experience. They are moving away from the highly promotional retail experience with constant sales and discounts and moving to a membership model where the focus will be on the customer experience. "Members" will pay $100 a year for the ability to shop in a high quality store where they will find only high quality merchandise.

The Costco CEO once told Jeff Bezos at an event that once people buy a membership they no longer price shop. Bezos went on to create Amazon Prime where customers pay $99 a year for a membership and the rest is history. RH is trying to duplicate that experience.

Shares crashed 26% to $42 on the guidance but the rebound has been amazing. Apparently, investors like the concept and the idea of a "Costco" model but in high quality products.

Earnings August 31st.

Shares closed at a 52-week high on Monday as shorts are being forced to cover. There are a lot of shorts! The surge over the May highs should be a trigger for an entirely new round of short covering.

Options are expensive because of the rapid gain since they changed the retail model. I am using September to retain that earnings expectation premium. We can buy time but we do not have to use it.

Buy Sep $65 call, currently $5.20, initial stop loss $51.35.
Sell short Sep $75 call, currently $1.95, initial stop loss $51.35.
Net debit $3.25.


NEW DIRECTIONAL PUT PLAYS

No New Bearish Plays



In Play Updates and Reviews

Chip Wreck

by Jim Brown

Click here to email Jim Brown

Editors Note:

The semiconductor sector lost 1% to drag the Nasdaq lower after a strong open. Everything was looking good for the first hour of trading but the Nasdaq went into free fall after chip stocks led by Nvidia suddenly declined. The chip stocks recovered some of their losses but the Nasdaq did not fully recover from early morning drop.

The big cap tech stocks were supposed to be the leaders this week as end of quarter window dressing lifts the markets higher. Apparently, somebody was counting on that rally as an entry point for a large amount of selling. The speed of the decline suggests a program trade was the culprit.



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


THO - Thor Industries
The long call position was entered at the open.



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

ADSK - Autodesk Inc - Company Profile

Comments:

No specific news. Friday's gain erased in a mixed market.

Original Trade Description: June 19th.

Autodesk, Inc. operates as a design software and services company worldwide. The company's Architecture, Engineering and Construction segment offers Autodesk Building Design Suites to manage various phases of design and construction; Autodesk Revit products that offer model-based design and documentation systems; Autodesk Infrastructure Design Suites; AutoCAD Civil 3D, a surveying, design, analysis, and documentation solution; and AutoCAD Map 3D software for infrastructure planning, design, and management. Its Platform Solutions and Emerging Business segment offers AutoCAD software, a professional design, drafting, detailing, and visualization software; and AutoCAD LT, a professional drafting and detailing software. The company's Manufacturing segment provides Autodesk Product Design Suites for digital prototyping; Autodesk Inventor to go beyond 3D design to digital prototyping; AutoCAD Mechanical software to accelerate the mechanical design process; Autodesk Moldflow, an injection molding simulation software; Autodesk Delcam, a CAD and computer-aided manufacturing software; Autodesk PLM 360, a product lifecycle management application; and Autodesk Fusion 360, a product development environment. Its Media and Entertainment segment offers Autodesk Maya and Autodesk 3ds Max software products that offer 3D modeling, animation, effects, rendering, and compositing solutions; and Autodesk Flame and Autodesk Lustre software applications that offer editing, finishing, and visual effects design and color grading solutions. Autodesk, Inc. sells consumer products for digital art, personal design and creativity, and home design in digital storefronts and over the Internet. It licenses or sells its products to customers in the architecture, engineering, and construction; manufacturing; and digital media, consumer, and entertainment industries directly, as well as through resellers and distributors. Company description from FinViz.com.

Autodesk (ADSK) reported a loss of 28 cents that beat estimates for a loss of 33 cents. Revenue of $478.8 million beat estimates for $474.1 million. The company is losing money because they are converting from a software sales model to a subscription model and that always causes a short fall in the first 12-24 months of the process but results in larger profits in the future. New subscriptions rose 26% to 1.09 million, up 227,000 from the same period in 2015.

The company guided for the current quarter for a loss of 21-27 cents on revenue of $460-$480 million. Analysts were expecting $503 million and a 13-cent loss. Shares declined $2 on the news.

Earnings Aug 17th.

The stock spiked to $114.50 on the earnings in May and then faded on colsolidation until the Nasdaq flash crash the prior week. Being a tech stock it imploded with the rest of the tech sector. The rebound followed the pattern of the rest of the large cap tech stocks. A couple days higher and then a retest of the decline. Shares rebounded today on short covering with the rest of the market. I believe, market permitting, we will see shares break back above resistance at $108 and move on to new highs.

Shares could get a bounce when Adobe reports earnings on Tuesday.

Update 6/20/17: The CEO said today the global building boom is a big boost for Autodesk revenue. You have to have a program to build a building today and that program has to be linked to dozens or even hundreds of smartphones. All of that is a positive for Autodesk.

Position 6/20/17:

Long Aug $110 call @ $3.85, see portfolio graphic for stop loss.


ATVI - Activision Blizzard - Company Profile

Comments:

No specific news. Minor decline with the Nasdaq.

Original Trade Description: May 22nd.

Activision Blizzard, Inc. develops and publishes games for video game consoles, personal computers (PC), mobile devices, and online social platforms. The company operates through three segments: Activision Publishing, Inc., Blizzard Entertainment, Inc., and King Digital Entertainment. The company develops, publishes, and sells interactive software products and entertainment content through retail channels or digital downloads; and downloadable content. It also publishes subscription-based massive multiplayer online role-playing games; and strategy and role-playing games. In addition, the company maintains a proprietary online gaming service, Battle.net that facilitates the creation of user generated content, digital distribution, and online social connectivity in its games. Further, it engages in creating original film and television content; and provides warehousing, logistics, and sales distribution services to third-party publishers of interactive entertainment software, as well as manufacturers of interactive entertainment hardware products. The company serves retailers and distributors, including mass-market retailers, consumer electronics stores, discount warehouses, game specialty stores, and consumers through third-party distribution and licensing arrangements in the United States, Australia, Brazil, Canada, China, France, Germany, Ireland, Italy, Japan, Malta, Mexico, the Netherlands, Romania, Singapore, South Korea, Spain, Sweden, Taiwan, and the United Kingdom. Activision Blizzard, Inc. was incorporated in 1979 and is headquartered in Santa Monica, California. Company description from FinViz.com.

Activision reported Q1 earnings of 56 cents, up 17%. Sales rose 19% to $1.73 billion. Activision had originally guided for 25 cents and $1.55 billion. Analysts were expecting 22 cents and $1.1 billion so it was a major blowout. For the full year, they raised guidance to 88 cents and $6.1 billion, up from 72 cents and $6.0 billion.

Blizzards's monthly active users rose to 431 million. King Digital has 342 million active users. The new Overwatch game was the fastest Blizzard title to hit 25 million registered players and now has more than 30 million. Revenues from in game purchases rose 25% driven by World of Warcraft and Overwatch customization features.

Activision is a powerhouse with rapidly rising revenue and multiple game titles arriving in the coming months.

Earnings August 3rd.

Shares dropped sharply with the market last Wednesday and have already rebounded to close at a new high today.

Position 5/23/17 with an ATVI trade at $57.75:

Long August $60 calls @ $2.24, see portfolio graphic for stop loss.

Previously closed 6/9/17: Long August $60 calls @ $2.66, exit $2.02, -.64 loss.


BABA - Alibaba - Company Profile

Comments:

Alibaba backed logistics company, Best Inc, filed for an IPO to raise $750 million. Alibaba owns 23.4% of the company. Alibaba accounts for 70% of Best deliveries in Q1.

Original Trade Description: June 10th.

Alibaba Group Holding Limited, through its subsidiaries, operates as an online and mobile commerce company in the People's Republic of China and internationally. It operates Taobao Marketplace, an online shopping destination; Tmall, a third-party platform for brands and retailers; Juhuasuan, a sales and marketing platform for flash sales; Alibaba.com, an online wholesale marketplace; Alitrip, an online travel booking platform; 1688.com, an online wholesale marketplace; and AliExpress, a consumer marketplace. The company also provides pay-for-performance and display marketing services through its Alimama marketing technology platform; Taobao Ad Network and Exchange (TANX), a real-time bidding online marketing exchange in China; and data management platform through TANX for marketers to execute their campaigns with proprietary and tailored data. In addition, it offers cloud computing services, including elastic computing, database, storage and content delivery network, large scale computing, security, and management and application services through its Alibaba Cloud Computing platform; Web hosting and domain name registration services; payment and escrow services; and develops and operates mobile Web browsers. The company provides its solutions primarily for businesses. Company description from FinViz.com

Alibaba is the poor investor's Amazon. With shares at $135, the options are at least reasonable but not cheap. Alibaba is growing as fast or faster than Amazon and tries to copy everything Amazon does.

When the company reported earnings for the last quarter at 63 cents, they missed estimates for 68 cents. Revenue of $5.6 billion easily beat estimates for $5.2 billion. Other than the earnings miss it was a solid quarter with ecommerce up 47% and cloud computing up 102%. Digital media growth was up 234%. Mobile MAUs rose from 493 to 507 million. That is important because 90% of China's ecommerce occurs on a mobile device.

The company announced plans to buy back $6 billion in stock over a two-year period.

Earnings August 18th.

Shares dipped on the earnings miss then spiked on the guidance to $125.50, which was a new high. After a little more than two weeks of post earnings consolidation, shares returned to that $125.50 level and closed at a new high.

There was an analyst day last week and that kicked the stock up to another level with a $10 gain. The company guided for 45% to 49% revenue growth in this year and analysts were only expecting 37%. MKM partners raised the price target to $177. Pacific Crest raised their price target to $160 from $137. Needham raised their target to $155. The Benchmark Company is targeting $175.

Shares declined on Tuesday on no news. With the stock overbought after the analyst meeting we could be seeing some simple profit taking. I am going to put an entry trigger on the position. If shares continue lower I will revise the entry.

Update 6/20/17: Alibaba is hosting a forum for 3,000 entrepreneurs in Detroit to explain how easy it is for them to begin selling products on Alibaba's websites. CEO Jack Ma said in another interview he expects to employ 1 million workers in the USA.

Position 6/19/17 with a BABA trade at $139.50

Long Aug $145 call @ $5.95, see portfolio graphic for stop loss.
Short Aug $155 call @ $2.92, see portfolio graphic for stop loss.
Net debit $3.03.


FB - Facebook - Company Profile

Comments:

Facebook is reportedly willing to spend up to $3 million an episode for 30 min scripted content in a TV show format. That would put it just below what Netflix spends for original content. Since FB does not have a subscription service, they will have to support these shows with advertising in some form. Add in Apple trying to get into the video streaming business and the options for viewers are going to expand.

Original Trade Description: May 17th.

Facebook, Inc. provides various products to connect and share through mobile devices, personal computers, and other surfaces worldwide. Its solutions include Facebook Website and mobile application that enables people to connect, share, discover, and communicate each other on mobile devices and personal computers; Instagram, a mobile application that enables people to take photos or videos, customize them with filter effects, and share them with friends and followers in a photo feed or send them directly to friends; Messenger, a messaging application to communicate with people and businesses across platforms and devices; and WhatsApp Messenger, a mobile messaging application. The company also offers Oculus virtual reality technology and content platform, which allow people to enter an immersive and interactive environment to play games, consume content, and connect with others. Company description from FinViz.com.

Facebook also blew away earnings estimates and they are growing earnings at the fastest rate of any of the FAANG stocks. They have multiple revenue streams and sites like Instagram and WhatsApp that are just starting to accelerate earnings. They said Instagram had reached 50,000 advertisers. Facebook's problem is they do not have enough page views to monetize despite the 1.9 billion users. They have more advertisers than they have space.

Facebook said the new Instagram Stories product has reached 250 million daily users compared to Snap's 160 million for the same function.

Earnings August 2nd.

Facebook had been moving sideways since hitting the $153 high post earnings. Volatility was low and investors were just waiting for a market dip so they could get a better entry point. Share fell to uptrend support at $145 and even if they due decline further there is strong support around $140.

Update 5/18/27: Facebook was fined $122.4 million by EU regulators for giving them false information in the WhatsApp acquisition process. The EU asked how many WhatsApp users were also Facebook users and the company said it did not know and did not have way of matching the usernames. A year after the acquisition Facebook launched a service that did match users and the EU said they had the capability all the time.

The company also announced a new effort to reduce "clickbait" headlines and punish websites that continually publish fake news. I hope they are successful.

Update 5/19/17: Facebook is going to live stream 20 Major League Baseball Friday night games. The company also said it was adding an "Order Food" option to let some users order, pay and have food delivered or be available for pickup. The service works with restaurants that use Delivery.com or Slice.

Update 5/22/17: Facebook shares were weak after the BROWSER bill was introduced in the House. Websites and browsers must get explicit permission from users in order to collect and use personal data including browser history, search terms, cookies, etc. They also cannot deny you the use of their program if you decline to give them permission to use your data. While the bill has little chance of passing it was a wet blanket on Facebook today.

Update 5/24/17: Reuters reported that Facebook has signed content deals with Vox Media, Buzzfeed, ATTN, Group Nine Media and others to begin creating shows for its upcoming video service. They are going to develop both short and long form content with ad breaks included. The first scripted shows will be up to 30 min which Facebook will own. The second tier will be shorter scripted and unscripted shows with episodes lasting 5-10 minutes.

Update 6/14/17: Facebook has built an AI that learned how to lie to get what it wants. Can Skynet be much farther into the future? Facebook fed the AI computer the text messages from 5,808 human conversations where they negotiated for some specific outcome either an item, event or decision. Then they tried to negotiate with the computer over some items each were given. The key was for the computer to end up with a specific item. During the testing they found that the computer had learned to lie to misdirect the opponent from the item the computer actually wanted. This is scary. Extrapolate this into a much larger environment with millions of conversations to learn from and the outcome could be an entirely new level of computer consciousness.

Update 6/16/17: Facebook said it was using artificial intelligence (AI) to search out terrorist accounts and propaganda in its pages. The company has already deleted hundreds of thousands of accounts and it making it harder for users to reopen new accounts under different names. Fortunately, Facebook has years of history from those deleted accounts and has developed algorithms to compare new account activity against those old posts and automatically discover and delete new terrorist accounts.

Position 6/12/17:

Long Aug $150 call @ $4.75, see portfolio graphic for stop loss.

Previously closed 6/9/17: Long Aug $150 call @ $4.90, exit $6.80, +$1.90 gain.


IWM - Russell 2000 ETF - ETF Profile

Comments:

The markets rose sharply at the open but were quickly sold. The Russell battled it way back from negative territory to close slightly positive. Hopefully the morning dip was a onetime event.

Original Trade Description: June 22nd.

The Russell 2000 represents the 2,000 smallest stocks in the Russell 3,000, which is the largest 3,000 stocks in the market. They are routinely called the small cap stocks but the index contains a lot of midcap stocks as well. There is a smaller index called the Russell Microcap index for even smaller stocks.

On the Friday in June after quadruple witching expiration, Russell rebalances their indexes. Some stocks move up from the R2K to the Russell 1000 and some move down from the 1000 to the 2000. Other stocks are added like IPOs or stocks that have grown to the point where they qualify for insertion. Others that are in a downtrend, have seen their market cap shrink and they no longer qualify for inclusion.

Russell put out their updated list of additions and deletions last week. All the fund managers that index to the Russell indexes have to buy the additions and sell the deletions at the close on Friday. A lot will actually do it at the close but some have been making changes for the last several days. A lot will begin selling earlier in the day to avoid the rush.

Since selling a stock that is technically still in the index until the close will make index decline, the Russell 2000 "should" close at the low for the day. Buying additions to the indexes on Friday has no impact on the indexes since they are not technically index components until Monday. Since fund managers will be adding positions and adjusting most of next week, the index should rise.

In theory, the Russell should decline into the close on Friday. I am recommending a short-term call on the Russell IWM ETF. We only want to hold it a week or maybe two.

Position 6/23/17:

Long July $141 call @ $1.60, see portfolio graphic for stop loss.


JCOM - J2 Global Inc - Company Profile

Comments:

No specific news. Nice spike at the open but faded with the Nasdaq.

Original Trade Description: June 17th.

j2 Global, Inc., together with its subsidiaries, engages in the provision of Internet services worldwide. It operates through two segments, Business Cloud Services and Digital Media. The Business Cloud Services segment offers cloud services to sole proprietors, small to medium-sized businesses and enterprises, and government organizations. This segment provides online fax services under the eFax, MyFax, eFax Plus, eFax Pro, eFax Secure, eFax Corporate, and eFax Developer names; on-demand voice and unified communications services under the eVoice and Onebox names; online backup and disaster recovery solutions under the KeepItSafe, LiveDrive, LiveVault, and SugarSync names; hosted email security, email encryption, and email filtering and archival services under the FuseMail name; email marketing services under the Campaigner name; and cloud-based customer relationship management solutions under the CampaignerCRM name. The Digital Media segment operates a portfolio of Web properties, including PCMag.com, IGN.com, Speedtest.net, AskMen.com, TechBargains.com, Offers.com, and Everydayhealth.com that offer technology products, gaming and lifestyle products and services, news and commentary related products, speed testing for Internet and network connections, and online deals and discounts for consumers, as well as professional networking tools, targeted emails, and white papers for IT professionals. This segment also sells display and video advertising solutions, as well as targets advertising across the Internet; sells business-to-business leads for IT vendors; promotes deals and discounts on its Web properties for consumers; and licenses the right to use PCMag's Editors' Choice logo and other copyrighted editorial content to businesses. Company description from FinViz.com.

Very few business people would not recognize some of their brands including eFax.com, PCMag.com, TechBargains.com, etc.

The reported earnings of $1.14 that rose 12% but missed estimates by 7 cents. Revenue rose 27% to $254.7 million and also missed estimates for $258.5 million. However, they raised full year guidance to $5.60-$6.00 and $1.13-$1.17 billion. Analysts were expecting $5.59 and $1.15 billion. They also announced a dividend increase to 37.5 cents. Digital media revenues rose 81.5% to $113.1 million.

Estimates earnings August 7th.

Shares declined from $91.50 to $80.50 on the May 9th earnings and have recovered to $87.50. They are about to break out to a six week high. They have been relatively stable in the recent market weakness.

Position 6/19/17:

Long Sept $90 call @ $3.80, see portfolio graphic for stop loss.


NFLX - Netflix - Company Profile

Comments:

Vimeo said it has cancelled plans to create a Netflix like subscription streaming service for 2018. Last year the company said it was planning on spending "tens of millions of dollars" on the future service.

Original Trade Description: May 17th.

Netflix, Inc., an Internet television network, engages in the Internet delivery of television (TV) shows and movies on various Internet-connected screens. The company operates in three segments: Domestic Streaming, International Streaming, and Domestic DVD. It offers members with the ability to receive streaming content through a host of Internet-connected screens, including TVs, digital video players, television set-top boxes, and mobile devices. The company also provides DVDs-by-mail membership services. It serves approximately 100 million streaming members in 190 countries. Netflix, Inc. was founded in 1997 and is headquartered in Los Gatos, California. Company description from FinViz.com.

Netflix posted blowout earnings and shares rocketed higher to hit $161 on Monday. I have been waiting for three weeks for a pullback. Analysts are projecting higher highs with the high price targets at $175. There have been continuous rumors that either Disney or Apple will try to buy them not only to acquire the platform but to keep the other company from acquiring it. Both have said they want to have a big presence in streaming. Tim Cook just said it last week. Both have the cash and Disney has billions of dollars in content it can immediately add to the platform.

Netflix is expected to add 3 million subscribers in Q2. They are testing higher prices in Australia to see what price levels will cause subscriber flight. Once they figure it out you can bet they will apply it to the rest of their 100 million customers. That is instant profit. Bumping rates by $5 gets them another $500 million a month in revenue.

They announced with earnings they were finally entering China through a partnership with the largest existing streamer in China. This is one more step to a full release in the future.

Update 5/18/17: The FCC voted 2-1 to roll back the 2015 net neutrality order from President Obama. Some say this will impact major internet users like Netflix. However, the company said last month that elimination of the order would not have any impact on their business because they were big enough and had a broad enough customer base that ISPs would not try to slow down their streaming traffic. The order prevented ISPs from charging for faster bandwidth for heavy users. Netflix is responsible for 40% of the internet traffic in peak hours.

Update 5/22/17: Netflix expects to have 102 million subscribers by the end of Q2 with 51.45 million in the U.S. and 50.49 million internationally. Three years ago the company only had 11 million international subscribers. They expect international numbers to exceed U.S. subscribers by the end of the third quarter. With international subscribers growing roughly 3 million per quarter they should reach 100 million in 2020 as acceptance continues to grow. That puts them on track for 200 million total subscribers by 2025.

Update 5/27/17: Piper Jaffray reiterated an overweight rating this morning but raised the price target from $166 to $190. The analyst said Netflix probably low-balled the company's 2020 earnings expectations by as much as half. The analyst said it the international viewers grow as well over the next 10 quarters as the last 10 then expectations could be 100% too low. They believe Netflix could have 180 million international subscribers by 2020. Jaffray said the total addressable market of broadband viewers could be more than 765 million by 2020.

MKM Partners also raised their price target from $175 to $195.

Update 6/2/17: Tom Lee of Fundstrat said "stick with the FANG stocks in 2H-2017 for 20% to 40% additional gains." Netflix added $2 to a new high close.

Update 6/6/17: Cantor Fitzgerald raised their price target from $165 to $190 saying international subscriptions are set to surge. The analyst said Netflix has 50% penetration in the US households with broadband access but only 5.7% internationally. He expects that international number to rise dramatically as advertising and acceptance grows.

Update 6/13/17: Netflix partnered with telecom giant Altice and will begin rolling out pay services in France, Portugal, Israel and the Dominican Republic in the coming months.

Update 6/20/17: Guggenheim raised their price target from $175 to $180 and reiterated a buy rating. Netflix has started releasing interactive shows where the viewer gets to choose the path the hero takes. Whenever the hero reaches the proverbial fork in the script, the viewer can decide which option the character takes. The first one is an animated cartoon with 13 direction options throughout the show. There are more already in production.

Earnings July 17th.

We have to use a spread because options are still expensive.

Position 6/12/17:

Long July $160 call @ $4.96, see portfolio graphic for stop loss.
Short July $175 call @ $1.65, see portfolio graphic for stop loss.
Net debit $3.31.

Previously closed 6/9/17:
Long July $160 call @ $6.45, exit $7.50, +1.05 gain.
Short July $175 call @ $2.16, exit $2.41, -.25 loss.
Net gain 80 cents.


PYPL - PayPal - Company Profile

Comments:

BTIG raised their price target from $53 to $63 and reiterated a buy rating. The analyst said recent deals with MasterCard and Visa will produce upside while worries over Apple Pay are overblown.

Original Trade Description: June 21st.

PayPal Holdings, Inc. operates as a technology platform company that enables digital and mobile payments on behalf of consumers and merchants worldwide. It enables businesses of various sizes to accept payments from merchant Websites, mobile devices, and applications, as well as at offline retail locations through a range of payment solutions, including PayPal, PayPal Credit, Braintree, Venmo, Xoom, and Paydiant products. The company's platform allows consumers to shop by sending payments, withdraw funds to their bank accounts, and hold balances in their PayPal accounts in various currencies. Company description from FinViz.com.

PayPal started out as a payment system for Ebay. Since then they have moved into dozens of areas including credit cards, peer to peer payments. Instead of being locked into one business model, they are rapidly expanding to multiple business models. Recently they partnered with MasterCard and Visa to have their digital payments processed on their systems. The company is expanding the scope of its Venmo payment platform, which handled $6.8 billion in Q1, up 114%. This peer to peer app will now allow you to pay for goods at any merchant that accepts the app, just like Apple pay.

In Q1 PayPal revenue rose 17% to $2.975 million and earnings rose 5%. Total accounts rose 23% to 203 million. As a comparison, Mastercard's revenue was less at $2.7 billion. That is a shocker to most people.

With their Q1 earnings, PayPal committed to buy back $5 billion in stock.

Expected earnings July 26th.

Shares dipped with the Nasdaq tech crash but are recovering. Their recent high was $55 and shares closed at $53.50 today. Options are inexpensive.

Position 6/22/17:

Long August $55 call @ $1.58, see portfolio graphic for stop loss.


SHOP - Shopify - Company Profile

Comments:

No specific news. Nice gain at the open but big drop in the afternoon as the Nasdaq rolled over.

Original Trade Description: May 31st.

Shopify Inc. provides a cloud-based multi-channel commerce platform for small and medium-sized businesses in Canada, the United States, the United Kingdom, Australia, and internationally. Its platform provides merchants with a single view of their business and customers in various sales channels, including Web and mobile storefronts, physical retail locations, social media storefronts, and marketplaces; and enables them to manage products and inventory, process orders and payments, ship orders, build customer relationships, and leverage analytics and reporting. The company was formerly known as Jaded Pixel Technologies Inc. and changed its name to Shopify Inc. in November 2011. Company description from FinViz.com.

The company reported a Q1 loss of 4 cents compared to estimates for a loss of 11 cents. Revenue rose 75% to $127.4 million and beat estimates for $122.1 million. Merchant solution revenue rose 92% to $65.3 million and subscription revenue rose 60% to $62.1 million. They guided for Q2 to revenues of $142-$144 million and the full year for $615-$630 million. That is above their prior guidance of $580-$600 million.

Expected earnings August 1st.

The company was very positive about the future outlook. On May 18th they announced a secondary offering for $500 million at $91 per share. The stock dropped from $91 to $81 on the news but immediately recovered. Wednesday's close was a two-week high after that announcement.

SHOP has been discussed multiple times as takeover bait for Ebay or Amazon. Neither company will comment but Amazon would be the likely player. They could gobble up Shopify at $7 billion like a late night snack.

I believe shares are going to resume their upward momentum now that the secondary offering has been consumed by the market.

Update 6/5/17: The S&P/TSX index is considering whether to add SHOP to the Canadian index. That would equate to about 5.4 million shares of additional buying from index funds. The rule change that would allow SHOP to benefit is out for comment until June 9th.

I wanted to buy calls that expire after earnings but there are no August strikes yet. The next strike in October is too expensive. Even the short-term strikes are expensive so I am going with a July spread to reduce the risk.

Position 6/19/17 with a SHOP trade at $89.25:

Long July $95 call @ $3.20, see portfolio graphic for stop loss.
Short July $105 call @ $1.26, see portfolio graphic for stop loss.
Net debit $1.94

Previously closed 6/9/17:
Long July $95 call @ $5.25, exit $5.00, -.25 loss.
Short July $105 call @ $2.35, exit 2.50, -.15 loss.
Net loss 40 cents.


THO - Thor Industries - Company Profile

Comments:

No specific news. Thor was one of the few stocks that posted gains.

Original Trade Description: June 24th.

Thor Industries, Inc., through its subsidiaries, designs, manufactures, and sells recreational vehicles, and related parts and accessories primarily in the United States and Canada. It operates through Towable Recreational Vehicles and Motorized Recreational Vehicles segments. The company offers travel trailers under the Airstream International, Classic Limited, Sport, Flying Cloud, Land Yacht, and Eddie Bauer trade names, as well as Interstate and Autobahn Class B motorhomes; gasoline and diesel Class A and Class C motorhomes under the Four Winds, Hurricane, Chateau, Challenger, Tuscany, Axis, Vegas, Palazzo, Synergy, Quantum, Compass, Gemini, A.C.E, Alante, Precept, Greyhawk, and Redhawk trade names; and fifth wheels under the Redwood and DRV Mobile Suites trade names. It also provides conventional travel trailers and fifth wheels under the Montana, Springdale, Hideout, Sprinter, Outback, Laredo, Alpine, Bullet, Fuzion, Raptor, Passport, Cougar, Coleman, Kodiak, Aspen Trail, Voltage, Cameo, Cruiser, ReZerve, Sunset Trail, Zinger, Landmark, Bighorn, Sundance, Elkridge, Trail Runner, North Trail, Cyclone, Torque, Prowler, Wilderness, Shadow Cruiser, Fun Finder, Stryker, Sportsmen, Spree, Venom, Durango, SportTrek, Connect, Sportster, Sonic, Jay Flight, Jay Feather, Eagle, Pinnacle, Seismic, AR-One, Launch, Autumn Ridge, Travel Star, Highlander, Roamer, and Open Range trade names. In addition, the company offers equestrian recreational vehicle products with living quarters under the Premiere, Silverado, Ranger, Laredo, Trail Boss, and Trail Hand trade names; lightweight travel trailers and specialty products under the Camplite and Quicksilver trade names; and Class A motorhomes under the Insignia, Aspire, Anthem, and Cornerstone trade names, as well as provides aluminum extrusions and specialized component products. Company description from FinViz.com

In a weak economy, Thor is kicking butt. The company reported earnings of $2.11 which rose 41.6% compared to estimates for $1.87. Revenue of $2.02 billion rose 57% beat estimates for $1.96 billion. Operating cash flow rose 26.2% and gross profits rose 45.5%.

Sales of towable travel trailers rose 52.6% and sales of motorized RVs rose 78.7%. There was no bad news in the Thor report.

Estimated earnings date September 4th.

With the company posting record earnings the stock spiked from $94 to $104 on June 6th. When the market dipped, shares only pulled back to $102. Over the last week they have returned to $108 and Friday's close was a four-month high.

Winnebago (WGO) reported earnings last week of 94 cents and analysts expected 66 cents. These blowout numbers by both companies prove how strong the sector really is. We can thank low oil prices for part of the surge in RV sales.

I believe we will see Thor continue to stretch its gains and head back to the highs at $115. I am using a September spread because of the high option premiums and September earnings date. We will exit well before then but that date will keep the premiums inflated.

Position 6/26/17:

Long Sept $110 call @ $4.55, see portfolio graphic for stop loss.
Short Sept $120 call @ $1.46, see portfolio graphic for stop loss.
Net debit $3.09.



BEARISH Play Updates (Alpha by Symbol)

FL - Foot Locker - Company Profile

Comments:

No specific news. FL posted a minor gain but it is still struggling. Investors cannot make up their mind to buy or sell. I am going to give the position a couple more days unless it suddenly decides to surge.

Original Trade Description: May 15th.

Foot Locker, Inc., through its subsidiaries, operates as an athletic shoes and apparel retailer. The company operates in two segments, Athletic Stores and Direct-to-Customers. The Athletic Stores segment retails athletic footwear, apparel, accessories, and equipment under various formats, including Foot Locker, Kids Foot Locker, Lady Foot Locker, Champs Sports, Footaction, Runners Point, Sidestep, and SIX:02. As of January 28, 2017, it operated approximately 3,363 mall-based stores, as well as stores in urban retail areas and high streets in the United States, Canada, Europe, Australia, and New Zealand. The Direct-to-Customers segment sell athletic footwear, apparel, equipment, team licensed products, and private-label merchandise through Internet and mobile sites, and catalogs. This segment operates sites for eastbay.com, final-score.com, eastbayteamsales.com, and sp24.com, as well as footlocker.com, ladyfootlocker.com, six02.com, kidsfootlocker.com, champssports.com, footaction.com, footlocker.ca, footlocker.eu, runnerspoint.com, and sidestep-shoes.com. The company has agreements with third parties for the operation of 54 Foot Locker franchised stores in the Middle East and 5 franchised stores in the Republic of Korea; and operates 15 stores under the Runners Point banner in Germany. Foot Locker, Inc. was founded in 1879 and is headquartered in New York, New York. Company description from FinViz.com.

Foot Locker reported earnings of $1.36 that missed estimates for $1.38 and lower than the $1.39 reported in the year ago quarter. Revenue of $2.0 billion missed estimates for $2.02 billion.

The company blamed a delay in tax refunds for slow sales. Some refunds for poverty level consumers cannot be issued until after February 15th. I guess if you are on welfare and food stamps you need an "earned-income tax credit" refund to buy an expensive pair of Michael Jordan or Steph Curry shoes.

However, the CEO said the slow start in February was NOT offset by stronger sales in March and April. Doesn't that throw cold water on the tax refund excuse? Add in the rapid decline of the malls and their 3,363 mall based stores and the outlook is not good.

Same store sales rose only 0.5% and analysts were expecting 1.4%. Shares crashed 15% on the news and have not slowed the decline since then.

Estimated earnings date August 18th.

I kept thinking they would find a bottom and rebound. However, Tuesday's close was a three year closing low and the decline is accelerating rather than slowing. Finish Line (FINL) reports earnings on Friday and weak earnings there could be another weight on the sector.

This position was recommended on Tuesday but the stock gapped down $3 at the open on news that Nike might be considering selling its products on Amazon. That would be a killer for Foot Locker.

Since the stock gapped lower at the open the position was not entered. The option price more than doubled at the open to more than $2 and then dropped back to $1.45 at the close. I am recommending we enter the position at the open on Thursday now that the hysteria has passed. Long term, I still expect the stock to move lower.

Position 6/22/17:

Long August $45 put @ $1.75, see portfolio graphic for stop loss.




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