Option Investor
Newsletter

Daily Newsletter, Wednesday, 8/9/2017

Table of Contents

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

Market Wrap

War Worries

by Keene Little

Click here to email Keene Little
We all know President Trump likes to be boastful and plays a hard negotiation game. Doing both with North Korean's Kim Jong Un is a game fraught with danger and uncertainty, which of course the market dislikes. It's the excuse du jour for some profit taking and now the question is how much profit taking we'll see.

Today's Market Stats

Starting with Tuesday's comments by President Trump about treating North Korea to "fire and fury," which is similar to the "shock and awe" threats made before attacking Irag, the stock market has reacted negatively to the idea that we could get into a more significant pissing match. Threats of war with a lunatic at the helm (not Trump but Kim Jong Un, wink) is unsettling to the market, especially one with big profits to protect as we enter a typically weak period (August-September). It's that uncertainty factor that the market must now deal with.

Following Tuesday's sharp reversal, which created an outside down day for many indexes and key reversals, equity futures continued to sell off Tuesday night and into Wednesday morning. A gap down started the day but the dipsters are still out there and looking for good deals. While the bounce off this morning's low was weak, it nevertheless stopped a more significant selloff. SPX even managed to get back within a point of closing in the green (after being down -13 in the morning).

Obviously it would be bullish if the bounce off this morning's low get some follow-through buying on Thursday but at the moment it's looking more like a bounce correction. The bounce could get a little higher pop up Thursday morning but the bearish interpretation of the pattern off Tuesday's high suggests shorting the bounce will be the better trade. I'll show the setup on the charts below.

Most analysts recognized the Dow had become significantly overbought, especially after the rally from the small pullback into the July 24th low. That rally produced positive gains for 11 days and new all-time highs for 10 of those 11 days. Monday's positive close had been the 15th one out of the previous 20 days (starting from July 10th), which is another sign of overbought and using the indicator shown below, it pointed to potential exhaustion for the move.

The chart below is from a trading buddy (hat tip to Mark Ungewitter) that shows the Dow in the upper portion of the chart and the number of "up closes out of the past 20 days" at the bottom of the chart. The red dots placed on the Dow's line shows each time the Dow exceeded 14 up closes in the previous 20 days. This indicator doesn't flag every top but it does a decent job of it so Monday's achievement of 15 days was a warning sign and Tuesday's sharp intraday reversal was a sign that a top of some kind was likely in place.

DJIA up closes in previous 20 days, chart courtesy Charter-Trust-Company

Another sign of potential trouble for the market comes from Stan Harley at HarleyMarketLetter, who does very nice cyclical work. He recently shared the chart below, which shows a coincidence of the 93-day and 112-day cycles showing up around August 8th (+/- 4 days). Cycles point to potential turns in the market, not the direction of the turn. The trend into the turn tells you the direction of the turn, if it's to happen, and that means we should be on the lookout for a turn back down.

, chart courtesy harleymarketletter.com

Another reason to expect a possible top for the market, at least for a little longer than a day, comes from Tom McClellan and is shown with his chart below. It shows the difference between the bulls and bears according to the Investors Intelligence report. McClellan then plots that number and places a 50-dma band around it. As he notes on the chart, when the indicator pops out the top of the 1-standard deviation band and then drops back inside the band it tends to offer a good topping signal.

The reasoning behind this warning is that once investors start to become less bullish the market loses the buying power it needs to continue to push the indexes higher (the greater fool theory runs out of greater fools). Selling then begets more selling and the market experiences at least a larger pullback. That's where we are currently according to this chart, or at least that's the bearish potential.

When we combine the message from the three charts above it's hard to be a dipster here. I think it will probably be better to sell bounces for what is likely to be at least a larger pullback before heading higher. The more bearish interpretation of the larger rally pattern is that we have put in a significant high, one which could stand for years to come.

It is this bearish interpretation, which needs a lot more price action to verify/negate, that has me recommending investors play defense and protect profits. If the larger pullback, assuming one's coming, then looks like a correction instead of something more bearish, it would then offer a better buying opportunity than we have here. If you don't want to sell for tax reasons then at least hedge your positions with some shorts and/or puts. Think of it as insurance that hopefully you won't need (like car, house, life insurance).
The RUT has done a good job warning us that the market was likely much closer to a top than most wanted to believe, having topped out July 25th. The shape of the pattern for its decline suggests we should get a stronger decline and I'll therefore kick off tonight's chart review with a top-down look at the RUT to highlight some downside targets to watch for (and where the bulls would likely be back in control).


Russell-2000, RUT, Weekly chart

Since early December 2016 we've been watching the RUT trade up against its trend line along the highs from 2007-2014-2015 but not be able to punch up through it. After repeated attempts every month since February and a small pop above the line on July 25th (for a stop run), the RUT reversed and has now given up about -4% from its high. That doesn't sound like much but when compared to the other indexes, it's a monster decline (wink).

The RUT is currently testing price-level support near 1396 and looks ready for at least a small bounce but I'm not seeing enough in the shorter-term charts to suggest anything more than just a relatively small bounce correction before heading lower. I think better support will be down near 1296 by the end of the month.


Russell-2000, RUT, Daily chart

The RUT's daily chart depicts a bearish pattern for its decline this month but obviously it's just a guess until we see more price action. I'm showing an expectation for a sharp 5-wave decline and for that pattern we're in just the start of the 3rd wave down. This pattern suggests a strong decline back down to the May 18th low at 1351 before the next decent consolidation/bounce and then lower into the end of the month. The first sign of trouble for the bears would be a rally back above Tuesday's high at 1426, which is price-level S/R.

Key Levels for RUT:
- bullish above 1426
- bearish below 1402


Russell-2000, RUT, 60-min chart

The best wave count for the RUT's decline is a 1st wave down into the August 3rd low (it could be wave-a instead of a 1st wave) and then a 2nd wave (or wave-b) bounce correction into Tuesday's high. That puts us into the strongest part of a move -- the 3rd or c-wave and following an expected bounce correction on Thursday we should see the selling accelerate into the meat of the 3rd wave down. Anything less than very strong selling in the coming days would be a clue that something less bearish, and potentially bullish, is playing out.


S&P 500, SPX, Daily chart

SPX has been in a choppy sideways trading range since July 20th. The high-to-low of that range is about 2491 to 2460 and today's low at 2462 remains inside that range. Today's bounce got SPX back above its 20-dma, currently near 2473, which held yesterday's decline as well. Bulls obviously want to see SPX remain above this intermediate moving average since a break of it would have fund managers thinking about profit protection.

It's possible this morning's low completed a consolidation pattern off the July 20th low and an impulsive rally back up would tell us new highs are coming. At the moment we have a 3-wave bounce correction off this morning's low, shown more clearly further below on the 60-min chart, so we should find out quickly Thursday morning whether or not the bulls are going to grab the reins back.

Key Levels for SPX:
- bullish above 2491
- bearish below 2448


S&P 500, SPX, 60-min chart

It's all short-term stuff but the leg down from Tuesday's high is an impulsive 5-wave decline. That's either the completion of a sideways consolidation that it's been in since July 20th or it's the 1st wave of what will become a larger decline. What follows will tell us which it is.

The bounce off this morning's low is a 3-wave move at the moment and two equal legs up points to 2476.05, which is practically on top of the 50% retracement of the decline from Tuesday, at 2476.47. A little pop up Thursday morning would achieve this level and it would also result in a back-test of the short-term uptrend line from July 27th.

For these reasons it's going to be tough resistance near 2476 and worthy of a shorting opportunity. By the same token it would be more bullish above 2477, especially if it stays above 2477 and the bounce turns into an impulsive rally. That would be the signal for the bears to go back into their caves and wait until they're called for supper.


Dow Industrials, INDU, Daily chart

Other than the key reversal on Tuesday, which created a shooting star for the Dow, it doesn't look particularly bearish. The Dow hasn't even made it back down to the broken trend line along the highs from April-June, currently near 21980. Watch for a possible back-test of the trend line and a bullish kiss goodbye to follow. Below 21980, especially if it stays below that level, would look more bearish. It takes a drop below 21770 to prove a significant top is likely in place.

Key Levels for DOW:
- bullish above 22,200
- bearish below 21,770


Nasdaq-100, NDX, Daily chart

The pattern for NDX looks similar to SPX with the sideways consolidation following the spike down on July 27th. This looks like a bearish continuation pattern but that's of course no guarantee. The expectation is for at least another leg down to match the size of the July 27th decline but that expectation would be at least questionable if it rallies above Tuesday's high near 5973.

Key Levels for NDX:
- bullish above 5973
- bearish below 5800


Transportation Index, TRAN, Daily chart

The TRAN was another index providing fair warning to bulls about the health of the stock market rally. Following its high on July 14th it dropped sharply to its uptrend line from June 2016 - May 2017, currently at today's low near 9180 (arithmetic price scale). If the bounce off this support line continues to say below price-level S/R near 9310 it will stay bearish.

Another drop lower would give us an impulsive 5-wave decline from the July 14th high. That would then suggest an important double (triple?) top was made following the December 2016 high. But back above 9310 would start to have things looking a tad more bullish, at least for a larger bounce pattern.


U.S. Dollar contract, DX, Daily chart

Last week the US$ dipped slightly below price-level support near 93 and found support at the bottom of a narrow down-channel for price since May. It has bounced back up to its broken 20-dma, currently near 93.70, tagging it yesterday and today but has been unable to climb back above it.

At the moment it's tough to tell whether the dollar will get a bigger bounce but keep an eye on the bottom of the wider down-channel from January, the bottom of which was broken on July 18th and is currently near 94.10. Since the bottom of a broken down-channel like this should act as resistance if back-tested it will be important to see how the dollar behaves there (if tested). I see the potential for a sideways consolidation over to the bottom of the broken down-channel and the top of the narrow down-channel, near 93.80, in about two weeks before heading lower to stronger support near 90.


Gold continuous contract, GC, Daily chart

Gold is threatening to final break free of its downtrend line from September 2011 - July 2016, currently near 1280. At the same time it's recovering back above its broken uptrend line from December-May, now also near 1280. A continuation of its rally above 1281 would be bullish whereas another failure from this level could ignite stronger selling. The next few days should answer the question for both sides of the argument.


Oil continuous contract, CL, Daily chart

Oil's consolidation following the high on August 1st looks like a bullish continuation pattern, which suggests we'll get another leg up for its rally from June. Based on a couple of price projections from its wave pattern and the downtrend line from May 2015 - January 2017 I think we'll see a rally to about 52.50 (depicted in bold green). From there we'd have to wait to see whether price consolidates or starts an impulsive move back down


Economic reports

Thursday morning's economic reports include PPI and unemployment claims. The PPI data is expected to show some inflation growth from June to July, which would keep the Fed on track to raise rates in September but if there's no increase in inflation there could be another pause by the Fed. How the market would react to such a thought is anyone's guess.


Conclusion

The reversal off Tuesday's high has the makings of something more bearish but it's obviously we don't have much price action to help verify that. As was obvious following this morning's gap down, the dipsters are still active (never let a good little pullback go ignored). But we'll have a better idea after Thursday when we'll get to see whether or not the bounce off this morning's low turns into something more bullish or just a correction to the decline.

If today's bounce is to be just a correction, which is the way I'm leaning, we should not see much higher for the bounce before it turns back down into stronger selling. The bearish pattern calls for a sharp decline into next week, which means we'll have a good risk:reward setup for a short trade Thursday morning (if the bounce rolls over, which for SPX should be from about 2476).

If today's bounce develops some legs and keeps going for most of Thursday we'd then have a bullish signal that new highs are probably coming. Trading Thursday's direction should provide a good trade for the next several days at least. But in the land of chop, trade carefully and with discipline.

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

Keene H. Little, CMT


New Option Plays

Relative Strength

by Jim Brown

Click here to email Jim Brown

Editors Note:

3M did not decline despite being a Dow stock and $10 gain over the last two weeks.

I am trying to avoid the tech sector until we see where this decline will end. The Dow may be the most overbought, but techs do not normally do well in late August.



NEW DIRECTIONAL CALL PLAYS

MMM - 3M Co - Company Profile

3M Company operates as a diversified technology company worldwide. The company's Industrial segment offers tapes; coated, non-woven, and bonded abrasives; adhesives; advanced ceramics; sealants; specialty materials; separation and purification products; closure systems for personal hygiene products; acoustic systems products; automotive components; and abrasion-resistant films, and paint finishing and detailing products. Its Safety and Graphics Business segment provides personal protection products, traffic safety and security products, commercial graphics systems, commercial cleaning and protection products, floor matting, roofing granules for asphalt shingles, and fall protection products. The company's Health Care segment offers medical and surgical supplies, skin health and infection prevention products, inhalation and transdermal drug delivery systems, dental and orthodontic products, health information systems, and food safety products. Its Electronics and Energy segment provides optical films; packaging and interconnection devices; insulating and splicing solutions; touch screens and touch monitors; renewable energy component solutions; and infrastructure protection products. The company's Consumer segment offers sponges, scouring pads, high-performance cloths, repositionable notes, indexing systems, home improvement and care products, protective materials, and consumer and office tapes and adhesives. Company description from FinViz.com.

On July 25th, 3M reported earnings of $2.58 that missed estimates for $2.59. Revenue of $7.81 billion missed estimates for $7.88 billion. The company guided for full-year earnings of $8.80-$9.05. Traders were in knee-jerk mode and the stock fell $14 on the news.

The miss was minimal and the company did increase earnings 22.6% for the quarter. They reported organic growth of 3.5% and reaffirmed their full year estimate for 3-5% organic growth. There is nothing wrong with this company.

Expected earnings Oct 24th.

Shares have recovered half of their post earnings losses and the dip over the last couple of days has weakened the option premiums to allow us to enter. Resistance is $212.

Bear in mind that the market is struggling and it would not be a surprise to see further declines in the Dow. Today's rebound from the opening drop was encouraging enough for me to take a chance on 3M because MMM shares have already been hit. They could look like a safe port in the coming storm.

If the market does extend its rebound, 3M could be a Dow leader again.

Buy Oct $210 call, currently $3.05, initial stop loss $201.65.


NEW DIRECTIONAL PUT PLAYS

No New Bearish Plays



In Play Updates and Reviews

Dip Bought

by Jim Brown

Click here to email Jim Brown

Editors Note:

The S&P fell -13 points intraday but rebounded from support to close flat. The dip buyers are alive and well but they waited until just before the close to jump into the market. The S&P recovered from a 13-point decline to close only fractionally lower. The Dow fell 90 points at its lows, which came at 2:30 but rebounded 54 points to close only modestly lower.

The Nasdaq Composite fell to nearly a four-week low at 6,309 (-61) but rebounded to lose only 18 points. Tomorrow will be decision day. If the markets rally, the decline was just a knee jerk reaction. If they move lower, it means the sentiment was damaged and the August decline may be beginning.



Current Portfolio


Stop Loss Updates

Check the graphic below for any new stop losses in bright yellow. We need to always be prepared for an unexpected decline.


Profit Targets

Check the graphic below for any profit stops in green. We need to always be prepared for a profit exit at resistance.





Current Position Changes


No Changes



If you are looking for a different type of option strategy, try these newsletters:

Credit spreads and naked puts = OptionWriter

Long term option investments = LEAPS Investor

3-6 month Option Trades = Ultimate Investor

Iron Condors = Couch Potato Trader

Long and short equity trades = Premier Investor



BULLISH Play Updates

ITW - Illinois Tool Works - Company Profile

Comments:

No specific news. Shares declined slightly with the market but strong support at $140.

Original Trade Description: Aug 5th.

Illinois Tool Works Inc. manufactures and sells industrial products and equipment worldwide. It operates through seven segments: Automotive OEM; Test & Measurement and Electronics; Food Equipment; Polymers & Fluids; Welding; Construction Products; and Specialty Products. The Automotive OEM segment produces plastic and metal components, fasteners, and assemblies for automotive-related applications. The Test & Measurement and Electronics segment provides equipment, consumables, and related software for testing and measuring of materials and structures. This segment also offers equipment and consumables used in the production of electronic subassemblies and microelectronics. The Food Equipment segment provides commercial food processing, warewashing, cooking, and refrigeration equipment; and kitchen exhaust, ventilation, and pollution control systems, as well as related services. The Polymers & Fluids segment produces adhesives, sealants, lubrication and cutting fluids, and fluids and polymers for auto aftermarket maintenance and appearance. The Welding segment produces arc welding equipment, consumables, and accessories; and metal jacketing and other insulation products for various industrial and commercial applications. The Construction Products segment produces engineered fastening systems and solutions. The Specialty Products segment provides beverage packaging equipment and consumables, product coding and marking equipment and consumables, and appliance components and fasteners. The company distributes its products directly to industrial manufacturers, as well as through independent distributors. Company description from FinViz.com.

ITW reported earnings of $1.69 that beat estimates for $1.63. Revenue of $3.6 billion missed estimates for $3.62 billion. Shares fell from $147 to $139 and traded sideways for two weeks. They guided for Q3 for earnings of $1.57-$1.67 and analysts were expecting $1.68. For the full year, they expect earnings of $6.32 to $6.52. Shares had risen 20% in 2017 and the minor miss caused some profit taking.

The company said on the earnings call that revenue was driven by the automotive sector plus some cyclical areas like welding, test and measurement. Organic revenue rose 2.6%. GAAP earnings rose 16%.

They guided for full year organic growth of 2%-4%, up from 1.5%-3.5% in January. They did guide for slower growth in Q3 because of the slowdown in the automotive sector. Vehicle sales have plateaued the last several months and there is always a pause in August while the manufacturers retool the plants for the next model year vehicles. ITW expects a 6% decline in auto builds in Q3 and a 2% decline in Q4. However, even with that decline, ITW is still predicting the 2% to 4% organic growth rate for the full year with a 1% to 3% growth rate in Q3.

Earnings expected on Oct 23rd.

On Friday, they announced a regular quarterly dividend of 78 cents payable Oct 10th to holders on September 29th. Shares rose $1.45 on the news to close at a two week high.

I am recommending ITW because it has already reported earnings, was punished for the revenue miss and was starting to tick higher before the dividend announcement. This is a good company and even with the auto slowdown, will continue to grow. The dip and the low cost of the option gives us a little insurance against a market decline. Support is $140.

Position 8/7/17:

Long Dec $145 call @ $3.90, see portfolio graphic for stop loss.


VAR - Varian Medical Systems - Company Profile

Comments:

No specific news. Shares posted a minor gain in a weak market.

Original Trade Description: Aug 2nd.

Varian Medical Systems, Inc. designs, manufactures, sells, and services medical devices and software products for treating cancer and other medical conditions worldwide. It operates through two segments, Oncology Systems and Imaging Components. The Oncology Systems segment provides hardware and software products for treating cancer with radiotherapy, fixed field intensity-modulated radiation therapy, image-guided radiation therapy, volumetric modulated arc therapy, stereotactic radiosurgery, stereotactic body radiotherapy, and brachytherapy. Its products include linear accelerators, brachytherapy afterloaders, treatment simulation, verification equipment, and accessories; and information management, treatment planning, image processing, clinical knowledge exchange, patient care management, decision-making support, and practice management software. This segment serves university research and community hospitals, private and governmental institutions, healthcare agencies, physicians' offices, oncology practices, radiotherapy centers, and cancer care clinics. The Imaging Components segment offers X-ray imaging components for use in radiographic or fluoroscopic imaging, mammography, special procedures, computed tomography, computer aided diagnostics, and industrial applications. It also provides Linatron X-ray accelerators, imaging processing software, and image detection products for security and inspection purposes. This segment serves original equipment manufacturers, independent service companies, and end-users. In addition, the company offers products and systems for delivering proton therapy; and develops technologies in the areas of digital X-ray imaging, volumetric and functional imaging, and improved X-ray sources. Company description from FinViz.com.

Expected earnings October 26th.

On July 26th, Varian reported earnings of $1.04 that beat estimates for 95 cents. Revenue of $662.4 million just barely missed estimates for $663.2 million due in part to currency translation issues. They sell their high dollar imaging systems all over the world.

The guided for the current quarter for earnings of $1.15-$1.23 and analysts were expecting $1.18. This should have been positive but the stock fell $6 because of the minor revenue miss.

If the market is going to be historically weak in August, shares that have already been beaten up will fare better than the rest of the market. I am choosing the $105 strike instead of the $100 strike for reduced cost/risk going into August.

Position 8/3/17:

Long Nov $105 call @ $1.75, see portfolio graphic for stop loss.


VIX - Volatility Index - Index Profile

Comments:

The VIX spiked to 12.63 intraday and right to downtrend resistance. The index rolled over when the market rebounded late in the day. Plenty of time with our November option. We still have to get past the budget battle and the debt ceiling fight.

Original Trade Description: July 12th.

The CBOE Volatility Index (VIX Index) is a key measure of market expectations of near-term volatility conveyed by S&P 500 stock index option prices. Since its introduction in 1993, the VIX Index has been considered by many to be the world's premier barometer of investor sentiment and market volatility. Several investors expressed interest in trading instruments related to the market's expectation of future volatility, and so VX futures were introduced in 2004, and VIX options were introduced in 2006.

The VIX closed at a 24-year low on July 14th at 9.51. The index has been spending a lot of time under 10 over the last three months and this is highly abnormal. The VIX typically trades up to 20 or more three times a year or more. That has not happen since the days before the election. This period of abnormal volatility WILL eventually end.

With the Trump administration getting more desperate to achieve some legislative goals there is always the risk they will go to extremes to get them accomplished. Add in the unknown but rapidly expanding Russian probes and anything is possible. We saw the Dow fall triple digits intraday on just the release of 5 emails from Trump Jr. If the probe actually uncovered something material, it could cause a major market meltdown.

The debt ceiling and the budget expire on Sept 31st. If Congress cannot get a budget passed and raise the debt ceiling, the government would shut down on October 1st. We have seen this before. The last time it happened the U.S. lost its AAA credit rating and the market declined sharply for more than a week.

What about North Korea? Military force could be used at any time but North Korea seems dead set on testing another nuke and expanding its ICBM tests. If fighting breaks out between the U.S. and North Korea it would cause a significant market decline because of the geopolitical concerns and the potential loss of life in Seoul, South Korea.

Even if none of those events occurred, there is always the risk of a 10% market decline just because we have not had one in a very long time. With August and September the worst months of the year for the market, the potential for a correction this year could be higher than normal. The Nasdaq is already up 18% and the Dow 9% for the year. The FAANG stocks are at record highs, which many say are unsupported by fundamentals.

There are so many potential opportunities for a market disaster. It only makes sense to take out some protection while the volatility is at record lows. I am recommending a November call to get us past the Aug/Sep period and the potential for a debt ceiling event in early October.

Position 7/20/17:

Long Nov $15 call @ $1.85, no stop loss. Target $22 to exit.



BEARISH Play Updates (Alpha by Symbol)

DIA - Dow ETF - ETF Profile

Comments:

The Dow fell to 22,000, which became support and traders bought the dip at the close. Futures are down again so it will be interesting to see if the decline continues or a rebound appears.

Original Trade Description: July 27th.

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 (the "Index"). The Dow Jones Industrial Average (DJIA) is composed of 30 "blue-chip" U.S. stocks. The DJIA is the oldest continuous barometer of the U.S. stock market, and the most widely quoted indicator of U.S. stock market activity. The DJIA is a price-weighted index of 30 component common stocks.

The Dow closed at a new high in an ugly market solely because of big gains in Boeing, Disney and Verizon. If the rest of the market continues lower, the Dow will eventually crater as well. I am recommending we enter a put position on the Dow ETF at the current high.

Position 7/28/17:

Long Oct $215 put @ $3.33, see portfolio graphic for stop loss.
Short Oct $205 put @ $1.29, see portfolio graphic for stop loss.
Net debit $2.04.


FTNT - Fortinet - ETF Profile

Comments:

No specific news. Big drop at the open. Prior support at $37 is holding and there was a rebound into the close.

Original Trade Description: July 29th.

Fortinet, Inc. provides cybersecurity solutions for enterprises, service providers, and government organizations worldwide. The company offers FortiGate physical and software licenses that provide various security and networking functions, including firewall, intrusion prevention, anti-malware, virtual private network, application control, Web filtering, anti-spam, and wide area network acceleration; FortiManager product family to provide a central management solution for FortiGate products comprising software updates, configuration, policy settings, and security updates; and the FortiAnalyzer product family, which offers a single point of network log data collection. It also provides FortiAP secure wireless access points; FortiWeb, a Web application firewall; FortiMail email security; FortiDB database security appliances; FortiClient, an endpoint security software; and FortiSwitch secure switch connectivity products. In addition, the company provides FortiSandbox advanced threat protection solutions; FortiDDos and FortiDB database security appliances; and FortiSIEM family of products to provide a cloud-ready security information and event management (SIEM) solution for enterprises and service providers. Further, it offers security subscription, technical support, training, and professional services.Company description from FinViz.com.

Expected earnings October 25th.

The company reported Q2 earnings of 14 cents that beat estimates for 8 cents. Revenue of $363.5 million also beat estimates for $361 million. All the normal metrics were good to great but their guidance failed to impress. Full year guidance was higher but Q3 guidance disappointed.

They guided for revenues in the $367-$373 million range and analysts were expecting $372 million. Earnings guidance for 22 cents matched estimates. Investors normally do not want a match, they want a raise. The lower level on the revenues is also a caution. Shares fell $3 over the last three days and are right on the verge of breaking through support.

The entire cybersecurity sector has been weak despite the recent attacks. This is another weight on FTNT.

Position 8/1/17:

Long Sept $36 put @ $.90, see portfolio graphic for stop loss.


IBM - International Business Machines - ETF Profile

Comments:

No specific news. IBM only declined -$.34 today despite the weak market. After two days of $1+ declines, I am still satisfied.

Original Trade Description: July 29th.

International Business Machines Corporation provides information technology (IT) products and services worldwide. Its Cognitive Solutions segment includes Watson, a cognitive computing platform that interacts in natural language, processes big data, and learns from interactions with people and computers. The company's Cognitive Solutions segment also offers data and analytics solutions, including analytics and data management platforms, cloud data services, enterprise social software, talent management solutions, and solutions tailored by industry; and transaction processing software that runs mission-critical systems in banking, airlines, and retail industries. The company's Global Business Services segment offers business consulting services; delivers system integration, application management, maintenance, and support services for packaged software applications; and business process outsourcing services. Its Technology Services & Cloud Platforms segment provides cloud, project-based, outsourcing, and other managed services for enterprise IT infrastructure environments. This segment also offers technical support, and software and solution support; and integration software solutions. The company's Systems segment offers servers for businesses, cloud service providers, and scientific computing organizations; data storage products and solutions; and z/OS, an enterprise operating system for z systems. It has a strategic collaboration with ABB Ltd to develop industrial artificial intelligence solutions. The company was formerly known as Computing-Tabulating-Recording Co. and changed its name to International Business Machines Corporation in 1924. Company description from FinViz.com.

Expected earnings October 17th.

IBM reported revenue of $19.29 billion, down -5% annually and the 21st consecutive quarterly decline. Analysts were expecting $19.49 billion and that was already on the low side. Earnings were $2.97 and beat estimates for $2.74 thanks to a lower tax rate of 9.2%. Full year guidance was reiterated for "at least" $13.80. Several years ago, they made a big deal out of forecasting $20 a year in earnings. That is not likely to happen in this decade. All five of IBM's reporting segments posted revenue declines.

The problem with IBM is the lack of a light at the end of the tunnel. There is no way out of this problem without major changes which could include splitting the company up or going on an acquisition spree. Shares hit $182.50 in February but hopes have now been dashed twice with Q1 and Q2 earnings. The outlook is dim.

If the market were to roll over and the Dow decline materially, IBM would be a leader in that decline. It has been losing ground even when the Dow is setting new highs.

With earnings Oct 17th we can use the Oct options which expire on the 20th. They should hold their premium well.

Update 8/5/17: Wedbush initiated coverage with a neutral rating saying IBM is going to face "structural headwinds" and free cash flow will continue to be consumed by "aggressive M&A." The analyst said the world has moved away from the labor intensive model of IT services with cloud computing and cloud software replacing those IT consultants. Legacy IT services contracts are going to see margins decline due to "pricing resets" and an industry wide "skills mismatch." He said IBM's lack of transparency about its current business models suggests they are lagging the evolution curve.

Update 8/7/17: A judge in Indiana ruled IBM must pay the state $78 million for failing to complete the automation of much of the state's welfare services system. The court case came after the state cancelled the $1.3 billion automation contract because of numerous complaints about long wait times, lost documents and improper rejections. An appeals court found that IBM had committed a material breach of its contract by failing to deliver improvements to the welfare system.

Position 7/31/17:

Long Oct $140 put @ $3.10, see portfolio graphic for stop loss.


PCRX - Pacira Pharmaceuticals - Company Profile

Comments:

No specific news. Minor decline.

Original Trade Description: August 7th.

Pacira Pharmaceuticals, Inc., a specialty pharmaceutical company, develops, manufactures, and commercializes proprietary pharmaceutical products primarily for use in hospitals and ambulatory surgery centers in the United States. It develops pharmaceutical products based on its proprietary DepoFoam drug delivery technology. The company's lead product includes, EXPAREL, a liposome injection of bupivacaine, an amide-type local anesthetic indicated for infiltration into the surgical site to produce postsurgical analgesia. Its development pipeline comprises DepoTranexamic Acid, a long-acting local antifibrinolytic agent, which is in Phase II clinical development for the treatment or prevention of excessive blood loss during surgery by preventing the breakdown of a clot; and DepoMeloxicam, a long-acting non-steroidal anti-inflammatory drug, which is in preclinical development for the treatment of acute postsurgical pain. Company description from FinViz.com.

Pacira reported a loss last week of 29 cents that missed estimates for 28 cents and was well over the 2 cent loss in the year ago period. Revenue of $70.9 million ros eonly 1.9% and misses estimates for $74 million. Rising revenues for their top product, Exparel, were offset by falling revenues elsewhere. Exparel revenues rose 6.1% but DepoCyte and other product revenues declined -81.1%. Research and development costs rose 10`% and G&A costs rose 9.4%. Revenues slowing and expenses rising are never a good combination.

The company reaffirmed their full year revenue guidance for Exparel in the range of $290-$310 million.

Shares declined to a 6 month low after earnings.

Expected earnings November 3rd.

The optimistic outlook faded in late July when a Phase III trial of Exparel did not produce the desired results in treatment of total knee arthoplasty or TKA. Pacira is trying to expand the uses for Exparel as a way of expanding sales. This was a blow for the stock in July and the weak earnings is causing further declines.

Support is well below at $30.

Position 8/8/17:

Long Sept $35 put @ $1.44, see portfolio graphic for stop loss.


SPY - S&P-500 ETF - ETF Profile

Comments:

The S&P dropped 13 points in the morning but held over support at 2,465 and rebounded to the flat line at the close.

August has been down 5 of the last 7 years and up only 5 of the last 20 years. If the historical trend is going to appear, I wish it would hurry.

Original Trade Description: July 24th.

• 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 "Index") The S&P 500 Index is a diversified large cap U.S. index that holds companies across all eleven GICS sectors.

The S&P is marching slowly towards a date with destiny and 2,500. Since the median estimate by the top 16 analysts was a 2,450 yearend price target on the S&P, the arrival at 2,500 could be a tripwire that triggers an August correction. We have not had a 5% drop in a year and it has been 9 months since a 3.5% decline. With earnings rapidly playing out and most of the high profile companies will finish reporting by next Wednesday, I am going to recommend a bearish position for August/September.

I am going to set an entry trigger for a SPY put with the S&P at 2,495. Since aggressive traders normally want to anticipate a particular number, I want to enter the position just before we reach that level.

Update 7/26/17: The Dow was up +100 points, Nasdaq +10, Nasdaq 100 +20 and the S&P only gained 70 cents. The Russell 2000 lost -6 and the S&P-400 lost -15. We may not get to that 2,495 level. I am going to add another trigger/strike in case we get a failure from this level.

Position 7/27/17 with a S&P trade at 2,465:

Long Oct $243 put @ $3.65, see portfolio graphic for stop loss.




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

subscribe now