Option Investor
Newsletter

Daily Newsletter, Wednesday, 8/30/2017

Table of Contents

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

Market Wrap

Stock Market Continues to Thwart the Bears

by Keene Little

Click here to email Keene Little
Sell in May didn't work for the bears and now the seasonally weak period of August-September might disappoint them as well. The pullback from the August highs for the major indexes looks more like a correction to the rally than something more bearish and the bulls continue to hold the reins to this market.

Today's Market Stats

The strong rally off Tuesday's gap-down start to the day, followed by more rally today suggests the bulls couldn't stand it any longer and decided to jump in with both feet and buy the dip. It's a little too early to tell whether or not the 2-day rally is going to lead to something more bullish or is instead just another bounce in what has been a choppy price pattern this month. But the failure of the bears to push the market below some strong support levels leaves the bulls in charge until proven otherwise.

August is on track to decline less than -1% for August (the Dow is on track to close near the July closing price at 21891) and it's hardly the kind of correction bears were hoping to see. Following the nervousness about what N. Korea is up to, or more accurately, nervousness about how the U.S. will react, geopolitical concerns have died back down and the stock market has experienced a relief rally the past two days.

But while the major indexes are showing resilience, there are several indicators that tell us not all is well under the surface of the market. Whether it's the number of stocks trading above their 200-dma (bearish divergence there) or the number of advancing vs. declining stocks or how much money is flowing into and out of stock funds, the resilience in the major averages looks to be more of an effort to hold the indexes up for show (for public consumption) than real strength.

The chart below (sorry for the black background for those who still like to print out these reports) shows the fund flows over the past three weeks for Government Bonds, Gold, High Yield (junk) Bonds and U.S. Equities. Basically the message is that investors are taking risk off the table by moving some money into government bonds and gold while withdrawing money from junk bonds and equities.

The move out of equities (probably a lot of money has simply been moved to cash) is significant and yet the major indexes are holding up reasonably well. That probably won't be true for September if outflows from equities continues once most people are back from vacation next week.

Flow of Money To/From Funds, chart courtesy Bloomberg.com

Trading volume has been especially slow and this could be factor in the whippy price action we've seen this month. This week we might be seeing more of an effort to simply hold the market up into the end of the month, which is easier to do when the volume is light. Once most traders return to their desks next week (after Monday's Labor Day holiday) we should get a better idea as to whether or not the past 2-day rally has more meaning than just a bounce correction.

Helping the bulls today were some positive economic reports, although there was actually a brief selloff in the futures following the reports in the pre-market session and the market actually opened down. But at least the reports didn't hurt the bulls' efforts to continue yesterday's rally. The ADP report showed stronger employment growth in August (237K) than was expected (180K) and an improvement over the 201K for July. The other pre-market report was the 2nd GDP estimate, which came in at +3.0% and better than the expected +2.7% and an improvement from the previous estimate of +2.6%.

The market hasn't moved much this month and therefore not much has changed on the charts. As far as determining the next big move following this month, we're left with confusing and diverging signals and since price is king we're simply going to have to let the market show us the way. We can get some more hints from the charts but even they're not helping much at the moment. Flip a coin for direction from here, which means traders need to stay cautious and recognize that this is not the best time to trade (knowing when not to trade can "make" you more money than what you trade).

I'll start off tonight's chart review with one of the best market proxies we have, the S&P 500 index.


S&P 500, SPX, Weekly chart

SPX started August at 2470 and closed today at 2457, down -13 (-0.5%), which means not a whole lot has happened on the weekly chart. But still holding as support is the uptrend line from February-November 2016 and this is an important trend line for the bulls to defend. If the bulls can continue to put pressure on the bears we could see another rally leg to the trend line along the highs from November 2015 - February 2017. SPX had nuzzled up to just below this trend line multiple times since May and it currently sits near 2525.

Also near 2525 is the location of the mid-line of the up-channel for price action since 2010-2011, which has been acting as resistance since March. Another trend line along the highs since April 2016 (excluding the March 1, 2017 high) is also near the same 2525 level. It makes for a good upside target area as well as strong resistance if reached.


S&P 500, SPX, Daily chart

The leg up from March 27th, labeled green wave-4 on the weekly chart above, is shown in more detail on the daily chart below. It has created a parallel up-channel for the move, the top of which will be near 2525 on September 19th, just after opex Friday on the 15th. The top of the channel is currently near 2510 so depending on how long it takes to reach it (if it does) we'll be able to see how it's setting up for a possible high.

The bearish pattern calls for the resumption of selling as soon as the leg up from Tuesday completes since it will be a 3-wave bounce pattern off the August 21st low and potentially lead to a stronger decline as part of a larger pullback pattern. The lack of impulsivity in the moves up and down since the August 8th high unfortunately leaves us guessing which direction will be the next big move (50-100 points).

Key Levels for SPX:
- bullish above 2470
- bearish below 2428


S&P 500, SPX, 60-min chart

Dialing in closer to the price action since the August 8th high shows the 3-wave decline to the August 21st low and the 3-wave bounce to the current high. Two equal legs up from August 21st points to 2465.62, which could be the extent of the rally from Tuesday and then back down for a larger pullback from August 8th. But for now it's bullish with SPX breaking its downtrend line from August 8-16 and getting back above price-level S/R near 2454 (it did a quick little back-test just before today's close so a continuation higher on Thursday would be bullish, especially if it can get above 2466.


Dow Industrials, INDU, Daily chart

The Dow was a little weaker than the other indexes today but it has the same pattern as SPX. It was unable to get through its broken 20-dma, which SPX managed to do, and a turn back down from here would leave a bearish kiss goodbye following the back-test. But if the bulls keep up the pressure into the weekend we could see the Dow make it up to its broken uptrend line form November 2016 - May 2017, which will be near 22040 on Friday. A drop back below price-level S/R near 21680 would be the first sign of trouble for the bulls since it would also be a break of its 50-dma, currently near 21695, and the bottom of an up-channel for price action since April.

Key Levels for DOW:
- bullish above 21,000
- bearish below 21,000


Nasdaq-100, NDX, Daily chart

Strength in the semiconductors and biotechs, along with the FAANG stocks (especially NFLX, +3.5%), helped the tech indexes outperform the other indexes today. NDX made it slightly above its downtrend line from July 27 - August 8, near 5925, and unless that break turns into a head-fake break with a strong decline back down on Thursday it's looking like the tech indexes could push to new highs in the coming weeks.

I show a rally back up to its trend line along the highs from November 2014 - July 2015, which will be near 6100 by mid-September. This is the trend line that stopped the rallies in June and July and another attempt would create a 3-drives-to-a-high topping pattern. The bulls need to hold NDX above the downtrend line from July and then get RSI to break its downtrend line from May. The first sign of trouble for the bulls would be price below Tuesday's low at 5785.

Key Levels for NDX:
- bullish above 5945
- bearish below 5750


Russell-2000, RUT, Daily chart

The RUT also broke its downtrend line today, this one from July-August, which had stopped the RUT's rally on Tuesday. It has also climbed firmly back above its broken uptrend line from March-May, currently near today's open at 1383. With today's high near 1393 it came within about 4 points of price-level S/R near 1397. There's higher potential to the 50% retracement of its decline, near 1401, and then a neckline at the lows in June-July and then August 3rd, which is nearing its broken 50-dma at 1407.

Back above its 50-dma would be a more bullish move but at the moment the bounce off the August 18th low fits as just a correction to an impulsive decline, which suggests lower prices once the bounce correction completes. This is obviously different from the projection I show above for NDX so we'll have to let the market tell us which one is correct. The short-term patterns over the next week should help resolve the difference.

Key Levels for RUT:
- bullish above 1413
- bearish below 1347


10-year Yield, TNX, Daily chart

For the past several updates on TNX I've been showing a bullish descending wedge for the pullback from July. But the bullish pattern was missing the bullish divergence, which suggested it would break down instead and that's what it did on Tuesday. Today it bounced back up to the bottom of the wedge and if it makes it back inside the wedge, with a close above today's close at 2.143, it would leave a head-fake break and that could lead to a rally.

If TNX continues lower from here (with a rally in bond prices) we would likely see TNX drop down to the bottom of a larger descending wedge pattern for the pullback from December 2016, which will be near 2.00 in the first week of September. I would expect to see this happen if the stock market declines.


KBW Bank index, BKX, Daily chart

BKX has pulled back from its August 8th high in what could be interpreted as a bullish descending wedge with maybe a hint of a bullish divergence. It successfully held its 200-dma yesterday after dropping below it at the open. Today's rally got it further away from support but it hasn't been able to test the top of its wedge yet (downtrend line from August 8-25, currently near 93.86).

A drop back below support at its trend line along the highs from April 2010 - July 2015, near 91.90, would be more bearish and then we'd have to watch for the possibility of bullish divergence at a new low for the pullback, especially if it holds inside its descending wedge. The bottom of wedge will be near 90.30 after the first week of September.


Transportation Index, TRAN, Daily chart

The Transports have had a nice bounce off the August 24th low and I see additional upside potential to price-level resistance near 9490. But first it has to deal with potentially tough resistance where it closed today near 9309. The November 2014 high at 9310 has been price-level S/R since then. The downtrend line from July-August crosses the 9310 level today and its broken uptrend line from June 2016 - May 2017 is also now near 9310.

The 9310 area is tough resistance to break through but obviously it would be more bullish if it does. The next line of resistance is its broken 50-dma, currently near 9374, and then above that is its August 16th high near 9448. After getting through those levels it would then be looking at 9490. Failure of the current rally could happen at any time.


Relative Strength of TRAN vs. INDU, Daily chart

The TRAN has been doing a little better than the Dow this month, as can be seen on the relative strength (RS) chart below. This chart shows the relative weakness since last December and as with many RS charts we can use technical analysis to help determine when weakness will continue or reverse. There's a nice EW pattern playing out and it looks like we could see the TRAN outperform the Dow for at least a little longer.

When one index outperforms another it's not always because it's rallying. It could be that it sells off slower than the other so it's important to note that this is only RS we're looking at. But if you're a pairs traders (long one, short the other), this tool can be helpful. The longer-term EW pattern for this looks bearish for the TRAN, which means the TRAN will could rally slower than the Dow or decline faster. Once the bounce correction off the August 2nd low completes I expect it to continue lower (as depicted).


Relative Strength of RUT, TRAN and BKX vs. SPX, Daily chart

I track a few indexes against SPX to look for warning signs and the chart below compares the RUT, TRAN and BKX against SPX. All have been underperforming SPX since last December and that's not a healthy sign for the market. Clearly it hasn't mattered to the market's rally but eventually it will catch up and right now it's just a warning sign.

I have the starting point for this chart in December 2016 when they all peaked together. You can then see the TRAN has more significantly underperformed SPX and I think this is important since it's a sign of economic slowing, which the broader market hasn't shown any concern about yet. The weakness in the RUT is also a concern because it shows weakness in the bullish spirit that drives markets higher.

If I showed a chart of HYG (junk bond index) against TNX you'd see the same thing. Again, weakness in an index like the RUT is the canary that's fallen off its perch but the coal miners haven't noticed yet. Soon they too will run out of oxygen. Lastly, the weakness in the banks is always a concern since following the money is usually the right way to go. It will all matter at some point but this market remains extremely distorted by easy credit.


U.S. Dollar contract, DX, Weekly chart

Keeping the big picture in mind for the US$, the weekly chart below shows the big expanding triangle that has formed since the March 2015 high. The bottom of the triangle is near 90 and it's the reason I've been looking for a drop to that level before it will be ready to bounce back up. The next rally should take the dollar back up to the 106 area by mid-year next year.


Gold continuous contract, GC, Weekly chart

Gold's weekly chart below shows the bullish break of its downtrend line from September 2011 - July 2016, which happened August 9th. I have some upside price projections to watch carefully and the first ones have now been met. Looking at the bounce pattern off the December 2015 low, the 2nd leg up (the rally from December 2016) is 62% of the 1st leg at 1329.54, which was met with Tuesday's high at 1331.90. If the bounce off the December 2015 low is to achieve two equal legs up then we're looking for a rally to 1456.40.

The leg up from December 2016 is also a 3-wave move and the 2nd leg (the rally from July 10th) is 62% of the 1st leg near 1311, which has also been met. Two equal legs up from December 2016 points to 1377.10. There's also price-level resistance at 1308 and 1347. Therefore there are multiple levels of potential resistance to a further rally between 1308 and 1377 and the rally could fail at any time.

I don't show the daily chart but the leg up from July 10th has formed a rising wedge and Tuesday rally created a potential reversal pattern with the pop above the wedge, near 1322, and then a close back below it, leaving a shooting star candlestick at resistance. With the minimum price projections having been met and a daily pattern that's warning of a reversal back down, it's going to be important for gold bulls to hold the line if we see a drop back down to the broken downtrend line from September 2011 - July 2016, currently near 1274.


Oil continuous contract, CL, Daily chart

Oil's pattern has been nothing but a bunch of overlapping choppy corrective moves all year and that makes projections very difficult. Using trend lines, which are often excellent trading guides in this environment, the nearest support level is the uptrend line from February 2016 - June 2017 (untested), currently near 44.50. Only slightly higher is a price projection for two equal legs down from August 1st, which points to 4478. Oil looks weak after breaking its 50-dma, currently near 47, and that follows the bounce off this support on August 17th. The oscillators also support further downside for now. It takes a drop below 44.50 to turn oil more bearish.


Economic reports

Thursday morning will be busy for economic reports, some of which could sway the market. Personal income and spending are both expected to show an increase while the PCE prices are expected to stay at the same +0.1% The Chicago PMI is expected to stay about the same as July while pending home sales are expected to decline. Kind of a mixed bag of numbers that probably won't move the market.


Conclusion

Whether or not there's an "agenda" this week to rally the market and close August with a minimal decline, or maybe a slight gain, the end result for the month is rather neutral. The whippy price action could resolve either way and while the bulls remain firmly in control of this market we still need to consider the seasonally weak period that we're in.

Once most traders are back at their desks next week (Tuesday) we'll have stronger trading volume and with volume we should get a stronger conviction for whatever move happens. We're heading into a holiday weekend, which is typically bullish and the bulls therefore have that tailwind to work with. Just keep in mind that the bounce pattern off the August 21st lows could be just that, a bounce that will be followed by another drop lower.

There's a lot of weakness under the surface of this market so be careful and don't get complacent about the upside. There's still plenty of upside potential for this market but I remain unconvinced we'll see it head higher from here. September has a reputation for being cruel to bulls but we do have to wonder if it will be just another seasonal pattern that gets ignored by the bulls. The tough thing to ignore will be the budget/debt ceiling debate. Congress has proven themselves incapable of getting anything done (not that that's a bad thing) and the headlines could be depressing. It's that "uncertainty" thing.

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

Keene H. Little, CMT


New Option Plays

Breakout

by Jim Brown

Click here to email Jim Brown

Editors Note:

Shares broke over six weeks of resistance on Wednesday. Teradyne broke out of a nearly two-month consolidation pattern that started on July 27th.



NEW DIRECTIONAL CALL PLAYS

TER - Teradyne - Company Profile

Teradyne is a leading supplier of automation equipment for test and industrial applications. Teradyne Automatic Test Equipment (ATE) is used to test semiconductors, wireless products, data storage and complex electronic systems which serve consumer, communications, industrial and government customers. Our Industrial Automation products include collaborative robots used by global manufacturing and light industrial customers to improve quality and increase manufacturing efficiency. In 2016, Teradyne had revenue of $1.75 billion and currently employs approximately 4,400 people worldwide. Company description from Teradyne.

For Q2 they reported earnings of 90 cents compared to estimates for 86 cents. Revenue of $696.9 million beat estimates for $684.2 million. They raised revenue guidance to $455-$485 million and analysts were expecting $445 million.

In just the last 30 days analyst estimates for Q3 have risen from 38 cents to 43 cents. Full year estimates have risen from $1.88 t $1.97 per share. Zacks rates the Electronics Testing Equipment sector as #6 out of 250 industry sectors. Every new electronic device manufactured needs a new set of testing equipment.

Earnings October 26th.

Shares have been stuck under resistance at $35 for six weeks and broke out today. Analysts believe they will continue higher and make new highs. The $36 level is the next resistance.

Buy Oct $37 call, currently $2.30, initial stop loss $33.85.


NEW DIRECTIONAL PUT PLAYS

No New Bearish Plays



In Play Updates and Reviews

Trend Change?

by Jim Brown

Click here to email Jim Brown

Editors Note:

The Nasdaq and S&P broke above resistance in what could be a trend change. The Dow did not participate but the Nasdaq and S&P added to gains from Tuesday and broke solidly above resistance. This could be a trend change for the market after Tuesday's opening drop was bought so strongly.



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


CAT - Caterpillar
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

AAPL - Apple Inc - Company Profile

Comments:

Apple is rumored to be partnering with Bain Capital on a new bid to acquire the Toshiba chip business for $18.2 billion. It is still unknown if Western Digital, currently in the leadership position in the auction, will be able to close the deal. Toshiba is mad at WDC for sinking their initial deal through legal action.

I am going to tighten the stop loss again. The Nasdaq was up big today and Apple was negative much of the day. The stock normally fades a couple days before the announcement and maybe that fade is starting early this year.

Original Trade Description: Aug 12th.

Apple Inc. designs, manufactures, and markets mobile communication and media devices, personal computers, and portable digital music players to consumers, small and mid-sized businesses, and education, enterprise, and government customers worldwide. The company also sells related software, services, accessories, networking solutions, and third-party digital content and applications. It offers iPhone, a line of smartphones; iPad, a line of multi-purpose tablets; and Mac, a line of desktop and portable personal computers. The company also provides iLife, a consumer-oriented digital lifestyle software application suite; iWork, an integrated productivity suite that helps users create, present, and publish documents, presentations, and spreadsheets; and other application software, such as Final Cut Pro, Logic Pro X, and FileMaker Pro. In addition, it offers Apple TV that connects to consumers' TV and enables them to access digital content directly for streaming high definition video, playing music and games, and viewing photos; Apple Watch, a personal electronic device; and iPod, a line of portable digital music and media players. Further, the company sells Apple-branded and third-party Mac-compatible, and iOS-compatible accessories, such as headphones, displays, storage devices, Beats products, and other connectivity and computing products and supplies. Additionally, it offers iCloud, a cloud service; AppleCare that offers support options for its customers; and Apple Pay, a mobile payment service. Company description from FinViz.com.

Earnings Oct 31st.

We exited a position on Apple just prior to earnings. The report was strong and shares spiked $9 at the open the following day. After 9 days of trading they have been higher and lower but they refuse to give up their gains. Shares were up $2 on Friday when the rest of the big cap market was flat.

The reason Apple may have less risk than the rest of the market is the expected production announcement in September. They are expected to announce 2 new iPhone 7s and the iPhone 8/Pro plus some other upgrades. This is going to be a major product announcement that could propel Apple to $200 over the next six months. We know Apple shares normally ramp into an announcement and then decline shortly thereafter on a sell the news event. We will decide a couple days ahead of the announcement if we want to hold over.

I am using the November strikes because that is after earnings and the options should hold their value more in case of market volatility than an option that expires before earnings. Just because we buy more time does not mean we have to use it. I am recommending a spread because of high option premiums.

Update 8/14/17: BlueFin Research, as reported in Barrons, claims the production ramp for iPhones in Q3 is at record levels with 53 million phones expected. They will be split between the 7s, 7s Plus and the iPhone 8/Pro with the iPhone 8 only 5-6 million of that total. That will change in Q4 to 44 million of the model 8 with 30 million a quarter for the rest of 2018. They did not disclose sources but it is believed they are basing their estimates on the component quantities being shipped to manufacturers.

Aetna (AET) and Apple held talks last week with Aetna wanting to offer the Apple Watch either free or discounted to all 23 million of its members. They currently offer the watch to their 50,000 employees as part of a fitness program.

Another news story said that Google is paying Apple a license fee of up to $3 billion for 2017 to remain the default search engine on Apple devices. That would equate to 5% of Apple's total annual profit and 25% of their earnings growth. That is the largest contributor to the growth in service revenues. Bernstein said Google pays a fee to Apple of 34% of whatever it earns from ads delivered to Apple users. That is huge!

Update 8/24: Apple announced it was building a $1.3 billion data center in Iowa that would create 10,000 jobs during construction and 550 permanent jobs when completed. They received $208 million in tax breaks from the State of Iowa. The center will be in Waukee, which is close to Des Moines. The center will be powered entirely by renewable energy. Apple users better hope for lots of sun if they are using Siri, iMessage, Apple Music and other Apple services that will operate from this center. Construction will begin in 2018 and the center will open in 2020.

Update 8/28: Apple said it was holding a new product launch event on Tuesday September 12th. The company is expected to announce three new phones. They will be the iPhone 7, 7s and iPhone 8/Pro. They could also announce a new watch and a 4K Apple TV.

Position 8/14:

Long Nov $160 call @ $8.05, see portfolio graphic for stop loss.
Short Nov $175 call @ $2.72, see portfolio graphic for stop loss.
Net debit $5.33.


ALB - Albermarle - Company Profile

Comments:

No specific news. Nice rebound but still fighting resistance at $116.

Original Trade Description: Aug 21st.

Albemarle Corporation develops, manufactures, and markets engineered specialty chemicals worldwide. The company offers lithium compounds, including lithium carbonate, lithium hydroxide, lithium chloride, and lithium specialties and reagents for applications in lithium batteries, high performance greases, thermoplastic elastomers for car tires, rubber soles and plastic bottles, catalysts for chemical reactions, organic synthesis processes, life science, pharmaceutical, and other markets; cesium products for the chemical and pharmaceutical industries; and zirconium, barium, and titanium products for pyrotechnical applications. It also manufactures cesium products for the chemical and pharmaceutical industries; and zirconium, barium, and titanium products for various pyrotechnical applications, including airbag igniters; and performance catalyst solutions, such as polymer catalysts, curatives, organometallics, and electronic materials for polyolefin polymers, packaging, non-packaging, films, injection molding, alpha-olefins, electronic materials, solar cells, polyurethanes, epoxies, and other engineered resins markets. In addition, the company offers bromine and bromine-based solutions for fire safety, chemical synthesis, mercury control, water purification, beef and poultry processing, and various other industrial applications, as well as for the oil and gas well drilling, and completion fluids applications. Further, Albemarle Corporation provides clean fuels technologies, which is primarily composed of hydroprocessing catalysts; and heavy oil upgrading, which is primarily composed of fluidized catalytic cracking catalysts and additives for application in the refining industry. It serves petroleum refining, consumer electronics, energy storage, construction, automotive, lubricants, pharmaceuticals, crop protection, food safety, and custom chemistry services markets. Company description from FinViz.com.

With production of electric cars exploding with more than 1 million expected to be manufactured in 2018, the demand for Lithium-ion (Li-ion) rechargeable batteries is also exploding. When Tesla's Gigafactory reaches full production in 2020 of 35 gigawatt-hours, that will be more battery capacity than the entire world produced in 2014. Tesla has blamed the battery shortage for misses in auto production and they are already planning on building a second Gigafactory. The demand for lithium is suddenly huge and Albemarle is already responsible for 35% of global production.

They reported Q2 earnings of $1.13, up 22%, that beat estimates for $1.11. However, revenue of $737.3 million missed estimates for $740.6 million. They guided for full year earnings of $4.20-$4.40, a 21% rise and revenue of $2.90-$3.05 billion. The revenue miss was due to a divestiture of a specialty chemicals business and currency exchange issues. They repurchased $250 million in stock in the first 6-months of 2017 and paid dividends of $69.8 million.

Next earnings Nov 6th.

Shares declined after the revenue miss but rebounded exactly from long-term uptrend support.

Position 8/22:

Long Oct $120 call @ $1.75, see portfolio graphic for stop loss.


CAT - Caterpillar - Company Profile

Comments:

Off to a good start with CAT making a new high. The company announced a $663 million deal with the Pentagon to provide equipment and maintenance for the next five years for the Army, Navy, Air Force, Marine Corps and federal agencies.

Original Trade Description: Aug 29th.

Caterpillar Inc. manufactures and sells construction and mining equipment, diesel and natural gas engines, industrial gas turbines, and diesel-electric locomotives for heavy and general construction, rental, quarry, aggregate, mining, waste, material handling, oil and gas, power generation, marine, rail, and industrial markets. Its Construction Industries segment offers backhoe, compact, track-type, small and medium wheel, knuckleboom, and skid steer loaders; small and medium track-type, and site prep tractors; mini, wheel, forestry, small, medium, and large track excavators; and motorgraders, pipelayers, telehandlers, cold planers, asphalt pavers, compactors, road reclaimers, and wheel and track skidders and feller bunchers. The company's Resource Industries segment provides electric rope and hydraulic shovel, landfill and soil compactor, dragline, large wheel loader, machinery component, track and rotary drill, electronics and control system, work tool, hard rock vehicle and continuous mining system, scoop and hauler, wheel tractor scraper, large track-type tractor, and wheel dozer products; longwall, highwall, and continuous miners; and mining, off-highway, and articulated trucks. Its Energy & Transportation segment offers reciprocating engine powered generator set and engine, integrated system, turbine, centrifugal gas compressor, diesel-electric locomotive and component, and other rail-related products and services. The company's Financial Products segment offers finance for Caterpillar equipment, machinery, and engines, as well as dealers; property, casualty, life, accident, and health insurance; and insurance brokerage services, as well as purchases short-term trade receivables. Its All Other operating segments provides parts distribution and digital investments services. Company description from FinViz.com.

CAT has been alternately ignored or talked down for the last couple years but the shares keep rising. Part of the recent gains came from the guidance. The company has been bitten by the global slowdown in construction since the financial crisis. Then it was hit by the slowdown in the energy sector. Every expected rebound falied to appear and CAT continued to give cautious guidance. That changed over the last several months.

The global economy is rebounding. There are massive construction projects now underway in China and Asia. The Eurozone is also seeing a resurgence in consrtuction. Commodity metals are booming and mines are reopening shuttered capacity and opening new mines. Everything is suddenly positive for CAT.

In December they guided for full year 2017 revenues of $38 billion "as a reasonable midpoint expectation." Analyst estimates for earnings of $3.25 were "too optimistic" according to CAT.

In January they guided for $36-$39 billion in revenue and $2.90 in earnings.

In April they guided for $38-$41 billion in revenue and $3.75 in earnings.

In July they guided for $42-$44 billion in revenue and $5 in earnings.

In April they guided for revenue from construction at flat to 5%. In July they guided for 10% to 15% growth.

In April they guided for revenue from mining at 10% to 15%. In July they guided for 20% to 25% growth.

In April they guided for energy revenue at flat to 5%. In July they raised it to 5% to 10%.

After the devastation in Houston, there were new estimates from analysts today for 17% or higher revenue growth in construction equipment.

Shares spiked at the open to a new high before fading slightly with the market. I believe revenue estimates will continue to rise because they are running out of year and their conservative guidance will have to become more accurate.

Earnings October 24th.

CAT is reactive to Dow movement but shares have ignored the recent Dow weakness. Today's close at $116.01 is a record high.

Position 8/30/17:

Long Nov $120 call @ $2.75, see portfolio graphic for stop loss.


HD - Home Depot - Company Profile

Comments:

Only a minor gain in a bullish market. Home Depot settled a claim with the government for $5.7 million alleging it sold equipment in the 2012-2016 period that had been recalled by the manufacturers. HD settled to end the inquiry and did not admit guilt. The headline weighed on shares today.

Original Trade Description: Aug 26th.

The Home Depot, Inc. operates as a home improvement retailer. It operates The Home Depot stores that sell various building materials, home improvement products, and lawn and garden products, as well as provide installation, home maintenance, and professional service programs to do-it-yourself, do-it-for-me (DIFM), and professional customers. The company offers installation programs that include flooring, cabinets, countertops, water heaters, and sheds; and professional installation in various categories sold through its in-home sales programs, such as roofing, siding, windows, cabinet refacing, furnaces, and central air systems, as well as acts as a contractor to provide installation services to its DIFM customers through third-party installers. It primarily serves home owners; and professional renovators/remodelers, general contractors, handymen, property managers, building service contractors, and specialty tradesmen, such as installers. The company also sells its products through online. It operates through approximately 2,278 stores, including 1,977 in the United States, including the Commonwealth of Puerto Rico, and the territories of the U.S. Virgin Islands and Guam; 182 in Canada; and 119 in Mexico. Company description from FinViz.com.

Home Depot and Wal-Mart have two of the best responses to national disasters. When a storm is named and the track is posted, both companies immediately begin to route truckloads of supplies to the affected areas.

Home Depot activated its Hurricane Response center in reaction to Harvey and truck loads of buliding supplies, generators, roofing materials, etc were already headed to Texas before the storm ever made landfall. Home Depot has been responding to storms for more than 30 years and they know exactly what products will be in high demand.

Home Depot has four distribution centers that support hurricane response. Once a storm forms they rush trucks to the areas likely to be hit to prestock stores with disaster supplies. When people come to the stores to buy plywood, nails and supplies, it is already there in surplus quantities. As the storm nears landfall, the center guages severity, potential impact and they pre stage a number of preloaded trucks just out of the danger areas ready to rush in once the storm passes.

On a moderately strong hurricane, Home Depot can see a boost in revenue from $150 to $350 million over a three month period.

HD shares were hit with a post earnings decline not because the earnings were bad but because analysts were worried the home building boom would end soon. Home Depot beat on earnings, revenue and issued higher guidance.

If there is a port in the coming volatility storm, it should be Home Depot as they provide the supplies to rebuild the Texas coast.

Position 8/28/17:

Long Nov $155 call @ $2.87, see portfolio graphic for stop loss.


VAR - Varian Medical Systems - Company Profile

Comments:

No specific news. Nice gain as it moves towards a new high.

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 25th.

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:

4% decline with the Nasdaq in rally mode. September is just ahead.

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 $20 to exit.



BEARISH Play Updates (Alpha by Symbol)

DIA - Dow ETF - ETF Profile

Comments:

Minor gain over resistance but the Dow remains stuck under 21,900.

I am recommending we target 213.25 for an exit.

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.


DRQ - Dril-Quip - Company Profile

Comments:

No specific news. Decent rebound. I lowered the stop loss.

Original Trade Description: August 19th.

Dril-Quip, Inc., together with its subsidiaries, designs, manufactures, sells, and services offshore drilling and production equipment for use in deepwater, harsh environment, and severe service applications worldwide. It operates through three segments: Western Hemisphere, Eastern Hemisphere, and Asia-Pacific. The company's principal products include subsea and surface wellheads, subsea and surface production trees, subsea control systems and manifolds, mudline hanger systems, specialty connectors and associated pipes, drilling and production riser systems, liner hangers, wellhead connectors, and diverters, as well as consumable downhole products. It also provides technical advisory services, and rework and reconditioning services, as well as rental and purchase of running tools for use in the installation and retrieval of the its products. The company's products are used to explore for oil and gas from offshore drilling rigs, such as floating rigs and jack-up rigs; and for drilling and production of oil and gas wells on offshore platforms, tension leg platforms, and Spars, as well as moored vessels, such as floating production, storage, and offloading monohull moored vessels. Company description from FinViz.com.

The company reported earnings of 9 cents compared to estimates for 1 cent. On the surface, that is a huge beat. Unfortunately it was down from a 64 cent profit in the year ago quarter. Revenue of $127.9 million declined from $142.2 million but still beat estimates for $102 million. So far, so good.

Selling, G&A expenses rose from $5.8 million to a whopping $31.2 million. Total expenses rose from $97.2 million to $129 million. On an operating basis they lost $1.1 million compared to net income of $45.2 million in the year ago quarter. Order backlogs fell from $296 million to $235 million.

While earnings and revenue beat significantly lowered estimates, they were dramatically below year ago levels. Everything is working against Dril-Quip because offshore drilling is rapidly shrinking because of the low cost of oil. It is not profitable to produce oil at $75-$85 a barrel when it is selling for less than $50. Offshore oil rigs in the U.S. have fallen from more than 50 to only 16.

Dril-Quip is actually a good company but the offshore sector is in serious pain. Their benefitting from the various gas wells being drilled overseas where multiple giant gas fields have been discovered. It will be enough to keep the bills paid but long-term, oil prices will have to rebound before DRQ can return to hero status.

With the summer driving season almost over, crude prices are likely to move lower than higher over the next couple of months.

Expected earnings Oct 26th.

Position 8/21/17:

Long Dec $35 put @ $1.65, see portfolio graphic for stop loss.


SPY - S&P-500 ETF - ETF Profile

Comments:

Strong breakout over resistance. This could be a trend change.

I am recommending we target $241 for an exit.

August has been down 5 of the last 7 years and up only 5 of the last 20 years.

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