Option Investor
Newsletter

Daily Newsletter, Monday, 12/21/2015

Table of Contents

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

Market Wrap

Santa Rally

by Thomas Hughes

Click here to email Thomas Hughes
Only three days left till Christmas; Holiday conditions are in effect, low volume and big swings are two things we might expect this week.

Introduction

The Santa Rally got off to a shaky start today. Price action was largely to the upside but low volume and big swings point to Holiday trading conditions so I wouldn't read to much into it just yet. There are only two full days of trading left this week, and a half day on Thursday, so I expect to see volume remain low.

Market Statistics

The morning got off to a relatively quiet start. There was little in the way of international news, Asian and European indices were mostly higher, and our indices were indicated to open with gains as well. The most closely watched headline of the morning was oil prices, with a lot of chatter focused on Star Wars and Disney. I saw it on Saturday, Star Wars, liked it and will probably go see it again further entrenching it as the largest opening weekend box-office take of all time.

An early rally in futures led to a higher open for the indices and an initial gain for the broad market of 0.75%. Today's high was hit within the first 3 minutes of trading and held for the first hour of the day. At 10:35 a test of the high was met by sellers, or maybe just a complete lack of buyers, which were able to drive the indices back down to break even. Break even levels were able to hold going into the lunch hour, after which the indices tried to stage another rally. This time resistance set in at a lower level and the indices fell once again to break even. By 3:30PM bottom had once more been hit, slightly higher than the first time, resulting in another attempt at rally. The last half hour of trading saw the indices move up off the low and close near the high of the day.

Economic Calendar

The Economy

No economic data was released today but there is quite a bit due out this week. On top of that the holiday week means the market is closed on Friday, half day on Thursday, and all the data will be squeezed into the next three days. Tomorrow is the 3rd revision to 3rd quarter GDP, expectations are for it to hold steady at 2.1%, along with existing home sales. Wednesday is personal income and spending, durable goods, new home sales and Michigan Sentiment. Thursday is jobless claims.

Moody's Survey of Business Confidence by -1.3% to 32.5, an historically high number but well off the highs we saw earlier this year. Based on this survey global confidence has hit a new low and is being driven lower by declines in all nine questions of the survey. Pricing power is the biggest contributor to falling sentiment while demand for office space remains the strongest. In this week's summary Mr. Zandi mentions terrorism as another cause of declining sentiment which led me to some tangental research. I began looking up terror attacks and discovered a data base at the University of Chicago and other information on suicide bombings. There has been an average 1.8 suicide bombing per DAY in 2015, up nearly 50% from last year at this time.


According to FactSet 12 S&P 500 companies have reported for the fourth quarter. Of those 8 have beaten earnings expectations and only 5 have beaten on revenue. There are 4 due out this week including 1 Dow Component. The expected rate of earnings growth for the entire index is now -4.5%, down -0.2% from last week. The blended rate continues to move lower and will likely remain negative until the end of the reporting season. Things to look out for this time around include currency exchange/strong dollar, lower energy cost and rising wages. Energy s expected to be the laggard in terms of growth at -66.01%, down -6% from last week. Ex-energy 4th quarter projections are near 1.1%.


Earnings growth is expected to return in the 1st quarter of next year but projections are still falling. First quarter and full projections both fell by -0.2% this week. First quarter earnings are projected to grow by 1.5%, full year 2016 by 7.7%. The estimates are being hurt by energy which is now expected to see earnings decline by -9% in 2016. Energy had been estimated to see earnings growth as high as 50% earlier this year.


The Oil Index

Oil prices dragged on the market again today. WTI fell more than -1% to trade below $34.50 early in the day, with Brent falling more than -1.5% to trade below $36.50, all on bearish supply/production/demand fundamentals. Later in the day prices rebound to close a penny above break even. Outlook for 2016 demand growth remains tepid with no indication of declining supply so I think oil could go lower.

The Oil Index fell -0.75% in today's session and set a new nearly 3 month low. Today's action brings the index closer to support targets near 1,000 - 1,025 with bearish indicators. Both MACD and stochastic are pointing to lower prices although there is some sign that support will hold. MACD is diverging from prices, a sign that the sell-off is losing momentum and ripe for reversal, while stochastic is in oversold territory. The caveat is oil prices, if oil prices continue to fall support could be broken and lead the index lower.


The Gold Index

Gold prices continued to bounce today after advancing more than 1% on Friday. Today spot prices rose another +1.25% to $1080 but remains below resistance targets. The move is in response to a softening of the dollar and some weaker than expected data last week. Now that the FOMC has raised rates the first time speculation has shifted to when the next hike will come and how many basis points we'll see in total for 2016. Weak data will mean a slower rate of pace, fewer basis points and softer dollar values versus strong data and strong dollar. At the same time the ECB will need to be watched for signs of additional QE, or that economic recovery is taking hold. For now, FOMC and ECB policy remains divergent so I see the dollar getting stronger and gold moving lower. My current resistance target for gold is near $1090, and then $1100. A break above these levels could take it up to $1125.

The gold miners got a lift from gold's rally but remain near the long term low and indicated lower. Today's action produced a gain greater than 1.25% but also a spinning top candle below the short term moving average. Adding to this, stochastic has been moving lower for over a week and today was confirmed by a bearish MACD crossover. This in line with the underlying long term down trend but may be a false signal in the near to short term, while gold prices are bouncing. If gold prices keep moving higher this ETF will likely follow it. The near to short term trend is sideways/range bound so we could easily see this continue over the next few weeks.


In The News, Story Stocks and Earnings

The Dollar Index lost about -0.25 to trade near $98.50 and a possible support level. The index appears to be testing support after breaking above the short term moving average and $98.50 in response to the FOMC rate hike last week. Stochastic is pointing to higher prices in the near and short term with MACD on the cusp of confirming. A bounce from here could take the index back to test its highs again.


Shares of Disney got hammered again today as investors weigh the negatives inherent in ESPN with the positives of Star Wars. The analysts can't agree. On the one side bearish analysts are saying Star Wars won't off-set weakness in the media branch of the business while on the other bullish analysts think Star Wars is going to do even better than previously expected with upside targets for stock price near $130. Today the stock lost about -1%, after an initial push higher, to trade at a +2 month low near $106.75. The indicators are bearish and pointing to lower prices but divergence suggests support is near $105.


Cintas, supplier of rental uniforms, first aid supplies and other services for employers reported earnings after the bell on top of another announcement this morning detailing an acquisition. The company reported better than expected with nice gains in margin, operating income and organic growth. Net income was up $12 million with EPS of $1.03, up 19.75% from last year. Shares of the stock opened the day with a gain near 1% and then traded mixed throughout the day. There was little movement following the release.


In terms of earnings growth consumer discretionary is expected to lead the market in 2016. Full year growth is expected to be in the range of 14.8%, outpacing materials and healthcare. Revenue is expected to grow at a slower pace, 6.1%, but still top three for the year. For the upcoming reporting season, calendar 4th quarter 2015, earnings growth is 5.8%, 3rd behind telecom and financials, on revenue growth of 3.8%. Today the sector gained 0.5% but looks like it might be heading lower. Support is currently indicated along the $77.50 level with bearish indicators. A break below here could take it down to $75 or lower.


The Indices

Today's action was typical holiday trading. Volume was incredibly low which led to some wild swings in the market. First up, then down, then back up, led by the NASDAQ Composite. The tech heavy index made a gain of 0.93% in a move that confirms support just below the long term up trend line. The indicators are mixed in their strength but both pointing lower so this support, near 4,925, could be tested again. A break below this level could take the index down to the 4,800 level. Resistance is the up trend line near the 4,990 level, about 25 points above today's close.


The next largest move in today's session was the S&P 500. The broad market gained 0.78% in a move that bounced off support just above 2,000 and closed above y 2,020 support/resistance line. The index appears to be confirming support at 2,000 but with the low volume the strength of the support is questionable. The indicators remain bearish and pointing lower so support could be tested again, divergences in MACD suggest it will hold, at least for now. The index appears to be consolidating along the long term trend line so any test of support is a likely buying opportunity.


The Dow Jones Industrial Average made today's third largest gain. The blue chips closed with a gain of 0.72% and regained the 17,250 level. Despite the gain the indicators remain bearish with a slight uptick in momentum so another dip below 17,250 is likely with a possible target as low as the long term uptrend line. The trend line is in the range of 16,750 and the top of the September bottoming pattern so support here could be strong. If the bounce continues next resistance is near 17,500.


The days smallest gain was made by the Dow Jones Transportation Average. The transports gained 0.70% but remain below last weeks broken support target of 7,500. The index has made a new low and indicators are bearish so today's bounce looks like it will be short lived. Down side target is near 7,250 with the danger that the transports could lead the whole market lower.


The bulls tried to get a Santa Rally in gear today but just couldn't do it. Regardless, Holiday trading rules apply as we have definitely entered a period of low volume. Today's action, while bullish, left the indices looking rather poorly but this should be taken in the context of holiday trading. The next two weeks, until after the first of the year, will likely see range bound trading driven by news, economic data releases and expectations for earnings and next year. Support and resistance targets will be important to watch and there could be some big swings in direction.

Economic trends remain positive, as does expectation for next year, so I remain a bull in the long term. In the near and short term I remain cautious. The upcoming earnings season is not going to be pretty, it will most likely turn out better than currently expected, but not pretty, so there is risk of additional consolidation and/or correction in the indices once it begins.

Tomorrow's focus will be the data, and a few earnings reports. GDP makes a big headline, even if it is the third estimate, consensus is for it to hold steady with the last estimate. Along with that, and maybe more important, is existing home sales data, more important because it is a lot more current than a twice revised estimate for last quarter. Earnings reports are light in number but make up for it with names like Micron and Nike.

Until then, remember the trend!

Thomas Hughes

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New Plays

Ready To Break Out!

by James Brown

Click here to email James Brown


NEW BULLISH Plays

Strayer Education Inc. - STRA - close: 60.63 change: +1.69

Stop Loss: 57.45
Target(s): To Be Determined
Current Gain/Loss: Unopened
Entry on December -- at $---.--
Listed on December 21, 2015
Time Frame: Exit PRIOR to earnings in February
Average Daily Volume = 118 thousand
New Positions: Yes, see below

Company Description

Trade Description:
STRA has been outperforming the market since its bottomed in the low $40s in July this year. The stock is currently up about +45% from its 2015 lows.

STRA is in the services sector. According to the company, "Strayer Education, Inc. is an education services holding company that owns Strayer University. Strayer's mission is to make higher education achievable for working adults in today's economy. Strayer University is a proprietary institution of higher learning that offers undergraduate and graduate degree programs in business administration, accounting, information technology, education, health services administration, public administration, and criminal justice to working adult students. The University includes Strayer@Work, which serves corporate clients by delivering the next generation of performance improvement and workforce development. Strayer University also offers an executive MBA online and corporate training program through its Jack Welch Management Institute. The University is committed to providing an education that prepares working adult students for advancement in their careers and professional lives."

The for-profit education stocks have had a hard time in recent years. Accusations of predatory practices and misleading advertising has prompted tougher government oversight, new regulations, and fueled investor concerns (and lots of selling). Last year (July 2014) rival Corinthian Colleges unexpectedly shut their doors without warning and left students without a diploma and lots of student debt. Then several weeks ago, in early October, Apollo Education (APOL), the group that runs University of Phoenix, disclosed it was on probation with the Department of Defense and no longer allowed to recruit students on U.S. military installations. Shares of APOL plunged -10% on the headlines and it pressured the rest of the group lower.

STRA has managed to rally past these concerns, albeit after a very rough start to 2015. Looking at the last couple of years STRA soared in 2014 with a rally from the $33 area up to $80 by November 2014. That was the peak. STRA plunged from November 2014 until July 2015. Then suddenly shares reversed sharply higher following a better than expected earnings report.

It was July 29th when STRA announced their Q2 earnings results. Wall Street was expecting a profit of $0.99 a share on revenues of $108.1 million. STRA beat estimates with a profit of $1.11 a share. Revenues were down -2.6% but better than expected at $109.8 million. The company beat estimates again in October. STRA's Q3 results were $0.32 a share on revenues of $99.1 million, both above expectations.

The stock displayed relative strength last week. That relative strength continued today with a +2.8% gain and a breakout above round-number resistance at $60.00. If STRA can breakout past its recent intraday highs I wouldn't be surprised to see it rally toward $70. At the moment the point & figure chart is bearish but a rise above $62.00 will produce a new triple-top breakout buy signal.

Today's intraday high was $61.12. The November 30th intraday high was $61.62. Tonight we are suggesting a trigger to launch small positions at $62.05. We want to keep positions small to limit risk. STRA have proven over and over again that it can be a volatile stock. That's probably why the option spreads are so wide (and makes the options a little less appetizing).

A note on student debt - ballooning student debt has been a major financial concern for the U.S. over the last few years. Today student debt is about $1.2 trillion. That's more than auto loans or credit card debt and is only second to mortgage debt. Prognosticators have been warning about the bubble bursting in student debt for a while. It hasn't happened yet. I doubt it will happen in the next few weeks but investors should be aware that shares of STRA might be sensitive to any negative headlines regarding the subject.

Trigger @ $62.05 *small positions to limit risk!*

- Suggested Positions -

Buy STRA stock @ $62.05

- (or for more adventurous traders, try this option) -

Buy the APR $65 CALL (STRA160415C65) current ask $4.40
option price is a current quote and not a suggested entry price.

Entry disclaimer: To avoid an unfavorable entry point, we will not launch a new play if the stock gaps open more than $1.00 past our suggested entry point.

Option Format: symbol-year-month-day-call-strike

Daily Chart:

Weekly Chart:



In Play Updates and Reviews

Traders Buy The Dip

by James Brown

Click here to email James Brown

Editor's Note:
Stocks churned sideways on Monday as traders bought the dip intraday. The major indices reversed higher this afternoon into relatively widespread gains.

EXP hit our bearish entry trigger.

Plan on exiting our COLM trade tomorrow morning.


Current Portfolio:


BULLISH Play Updates

Activision Blizzard, Inc. - ATVI - close: 38.74 change: +0.27

Stop Loss: 36.40
Target(s): To Be Determined
Current Gain/Loss: +1.5%
Entry on December 04 at $38.15
Listed on December 03, 2015
Time Frame: Exit prior to ATVI earnings in early February
Average Daily Volume = 10.0 million
New Positions: Yes, see below

Comments:
12/21/15: ATVI shares dipped to their 20-dma before bouncing back. The stock ended the session up +0.7% and looks poised to kept climbing tomorrow morning. The next challenge for the bulls is round-number resistance at $40.00.

No new positions at this time.

Trade Description: December 3, 2015
The movie industry gets a lot of press but the video game market is much bigger. One of the biggest companies in this arena is ATVI and they're about to get a lot bigger.

ATVI is part of the technology sector. According to the company, "Activision Blizzard, Inc. is the largest and most profitable western interactive entertainment publishing company. It develops and publishes some of the most successful and beloved entertainment franchises in any medium, including Call of Duty, Call of Duty Online, Destiny, Skylanders, World of Warcraft, StarCraft®, Diablo®, and Hearthstone. Headquartered in Santa Monica, California, it maintains operations throughout the United States, Europe, and Asia. Activision Blizzard develops and publishes games on all leading interactive platforms and its games are available in most countries around the world."

Revenues for a video game company like ATVI tend to be lumpy based on new releases throughout the year. The company has managed to beat Wall Street's estimates on the bottom line the last four quarters in a row.

On November 2nd, 2015, ATVI announced they had signed a $5.9 billion deal to buy King Digital Entertainment (symbol: KING). This deal should give ATVI a huge boost in its mobile gaming footprint and could add a significant chunk to earnings in 2016. A Wedbush analyst believes the mobile gaming market is about $24 billion and growing at up to 20% a year for the next five years. They see the KING acquisition as a great fit for ATVI.

Several days later, on November 11th, ATVI announced that their new Call of Duty: Black Ops III game was the biggest entertainment launch of the year with a three-day opening weekend sales above $550 million. That surpassed any other entertainment launch of the year including books, music, or movies (surpassing the movie Jurassic World's massive opening weekend).

Recently a Cowen analyst said videogames are going to be another hot seller this year and they listed ATVI as their top pick in the industry. Multiple analysts have upgraded their stock price on ATVI following the KING acquisition news. Shares of ATVI have shown significant strength this year. The stock is trading at all-time highs and up +86% year to date. The point & figure chart is bullish and forecasting at $49.50 target.

Today's widespread market decline sparked some profit taking in ATVI. The stock found support at its rising 10-dma. If shares bounce from here we want to jump on board. Tonight we are suggesting a trigger to launch bullish positions at $38.15.

- Suggested Positions -

Long ATVI stock @ $38.15

- (or for more adventurous traders, try this option) -

Long FEB $40 CALL (ATVI160219C40) entry $1.47

12/04/15 triggered @ $38.15
Option Format: symbol-year-month-day-call-strike


iShares Russell 2000 ETF - IWM - close: 111.48 change: -1.73

Stop Loss: 111.45
Target(s): To Be Determined
Current Gain/Loss: -0.3%
Entry on December 15 at $112.65
Listed on December 12, 2015
Time Frame: 4 to 8 weeks
Option traders: exit prior to January option expiration
Average Daily Volume = 36 million
New Positions: see below

Comments:
12/21/15: It's alive! The IWM looked determined to hit our stop at $111.45 on Friday. Today the ETF found support near $111.50 and managed a +0.75% gain by the close.

No new positions at this time.

Trade Description: December 12, 2015:
Stocks were hammered last week. The small caps really underperformed with the Russell 2000 small cap index plunging 60 points or -5%. The last two weeks have seen an 80-point drop (-6.7%) in the $RUT.

Last week's sell-off looks pretty ugly especially with Friday's breakdown below short-term support near 1,140 on the $RUT index. We think the weakness is overdone.

Normally the middle of December sees some tax-loss selling ahead of yearend. Last week the tax-loss selling was exacerbated by serious weakness in crude oil. Oil's plunge to new seven-year lows crushed the energy sector. There is also some general uneasiness about the Fed's likely decision to raise rates in the week ahead.

Historically the mid-December dip is a buying opportunity. The next two or three weeks is typically bullish and small caps often outperform. We want to be ready if that happens. One way to play the small caps is the Russell 2000 ETF, the IWM.

Friday saw the IWM sink -2.2% to close at $111.91. Tonight we are suggesting a trigger to launch bullish positions at $112.65. If triggered we'll try and limit our risk with a tight stop loss at $111.45, just under Friday's low.

- Suggested Positions -

Long the IWM @ $112.65

- (or for more adventurous traders, try this option) -

Long JAN $115 CALL (IWM160115C115) entry $1.18

12/15/15 triggered @ 112.65
Option Format: symbol-year-month-day-call-strike


Microsoft Inc. - MSFT - close: 54.83 change: +0.70

Stop Loss: 53.20
Target(s): To Be Determined
Current Gain/Loss: +0.4%
Entry on November 04 at $54.60
Listed on November 03, 2015
Time Frame: 6 to 8 weeks.
Average Daily Volume = 35.4 million
New Positions: see below

Comments:
12/21/15: MSFT gapped higher but the rally faded. Fortunately traders bought the dip midday around $54.25. The stock managed to outperform the major indices with a +1.29% gain on the session.

No new positions at this time.

Trade Description: November 3, 2015:
MSFT is more than just a software company. MSFT is in the technology sector. It is considered part of the business software industry. According to the company, "Microsoft is the leading platform and productivity company for the mobile-first, cloud-first world, and its mission is to empower every person and every organization on the planet to achieve more."

The company is run under three segments. They have their productivity and business processes segment. This includes commercial office software, personal office software, and more. One of their fastest growing segments is MSFT's Intelligent Cloud business, which includes their server software and enterprise services. Then they have their "More Personal Computing" segment. This includes their Windows operating software, MSN display advertising, Windows phones, smartphones, tablets, PC accessories, Internet search, and their Xbox platform.

The stock has been dead money for almost a year. MSFT peaked near round-number resistance at $50.00 back in November 2014. Shares channeled sideways between support at $40 and resistance at $50 for months. That changed last month.

MSFT reported its 2016 Q1 results on October 22nd. Analysts were expecting a profit of $0.59 a share on revenues of $21.04 billion. MSFT beat both estimates with a profit of $0.67 a share. Revenues came in at $21.66 billion. Their Intelligent Cloud segment saw sales rise +8% but it was actually +14% on a constant currency basis.

Shares of MSFT soared the next day with a surge to 15-year highs. The big rally is based on investors' belief that MSFT and its relatively new management is successfully transitioning away from declining PC sales and moving quickly towards the cloud (and mobile).

Normally I would hesitate to buy a stock like MSFT after a big gap higher. Too often stocks tend to fill the gap. However, shares of MSFT have been able to levitate sideways in the $52.50-54.50 zone as traders keep buying the dips. Odds are growing we could see MSFT rally toward its all-time highs near $60.00 a share from December 1999. The big gain in October produced a buy signal on the point & figure chart, which is now forecasting a long-term target of $82.00. Tonight we are suggesting a trigger to launch bullish positions at $54.60.

- Suggested Positions -

Long MSFT stock @ $54.60

- (or for more adventurous traders, try this option) -

Long 2016 JAN $55 CALL (MSFT160115C55) entry $1.54

12/01/15 new stop @ $53.20
11/04/15 triggered @ $54.60
Option Format: symbol-year-month-day-call-strike


SolarCity Corp. - SCTY - close: 55.09 change: -1.82

Stop Loss: 52.30
Target(s): To Be Determined
Current Gain/Loss: +44.4%
Entry on December 14 at $38.15
Listed on December 12, 2015
Time Frame: 6 to 8 weeks
Option traders: Exit prior to January option expiration
Average Daily Volume = 3.7 million
New Positions: see below

Comments:
12/21/15: SCTY tried to rally again this morning but failed at short-term resistance in the $58.50-59.00 region. Shares slipped -3.19% by the close.

Tonight we are adjusting the stop loss up to $52.30, just under Friday's low. More conservative traders may want to raise their stop higher (or just take some money off the table now).

No new positions at this time.

Trade Description: December 12, 2015:
If you looked at the news this weekend then you probably noticed the headlines regarding the COP 21 UN climate change conference in Paris. Almost 200 countries signed the pledge to help fight global warming. It's a long road from promises to implementation and enforcement but it does signal a big step away from burning fossil fuels in the future. That should bode well for solar power stocks.

SCTY is in the technology sector. Officially it's part of the semiconductor industry. They bill themselves as "America's #1 full-service solar provider." According to the company, "SolarCity® provides clean energy. The company has disrupted the century-old energy industry by providing renewable electricity directly to homeowners, businesses and government organizations for less than they spend on utility bills. SolarCity gives customers control of their energy costs to protect them from rising rates. The company makes solar energy easy by taking care of everything from design and permitting to monitoring and maintenance. SolarCity currently serves 19 states."

The earnings picture is improving. Their most recent earnings report was October 29th. SCTY reported their Q3 results. Wall Street was expecting a loss of ($1.94) a share on revenues of $111.4 million. SCTY blew away the EPS estimate with a loss of just ($0.20) a share. Revenues were up +95% to $113.85 million.

The company provided bullish guidance. They see Q4 installations up +58-69% over a year ago. They introduced 2016 guidance of +40% growth for full-year installations. They have also driven their cost per watt to a new low of $2.84. The company is focused on reducing overall costs even more.

The stock initially sold off on this news but shares bottomed in mid November near $25.00. That looks like a bottom with shares of SCTY up four weeks in a row now. Currently SCTY is hovering near its 50-dma and just below resistance near $38.00. A rally above $38.00 will produce a new buy signal on the point & figure chart. It could also spark some short covering.

The most recent data listed short interest at 54% of the 50 million share float. That's plenty of fuel for a short squeeze. I wouldn't be surprised to see SCTY rally into the $45-50 zone. Tonight we are suggesting a trigger to launch small bullish positions at $38.15. We want to keep positions small to limit risk because SCTY is a volatile stock. This should be considered a higher-risk, more aggressive trade.

*small positions to limit risk* - Suggested Positions -

Long SCTY stock @ $38.15

- (or for more adventurous traders, try this option) -

Long JAN $40 CALL (SCTY160115C40) entry $2.78

12/21/15 new stop @ 52.30
12/17/15 new stop @ 51.85
12/16/15 new stop @ 50.85
12/14/15 new stop @ 35.85
12/14/15 triggered @ $38.15
Option Format: symbol-year-month-day-call-strike


SolarEdge Technologies - SEDG - close: 27.85 change: +0.90

Stop Loss: 24.95
Target(s): To Be Determined
Current Gain/Loss: +29.8%
Entry on December 15 at $21.45
Listed on December 14, 2015
Time Frame: 6 to 8 weeks
Average Daily Volume = 790 thousand
New Positions: see below

Comments:
12/21/15: SEDG surged back toward last week's highs and added +3.3% in the process. The stock remains just below short-term resistance in the $28.30-28.35 region.

Tonight we are adjusting our stop loss up to $25.85. More conservative investors may want to just take some money off the table here. No new positions at this time.

Trade Description: December 14, 2015:
The world is changing. Over the weekend 195 countries signed a pledge to help cut greenhouse gas emissions and stall global warming. It doesn't matter if you're a climate change skeptic or a diehard supporter, governments are going to implement policies that change how we consume energy. It should be bullish for solar energy companies.

SEDG is in the technology sector. They're considered part of the semiconductor industry. According to the company, "SolarEdge provides an intelligent inverter solution that has changed the way power is harvested and managed in solar photovoltaic systems. The SolarEdge DC optimized inverter system maximizes power generation at the individual PV module-level while lowering the cost of energy produced by the solar PV system. The SolarEdge system consists of power optimizers, inverters and a cloud-based monitoring platform and addresses a broad range of solar market segments, from residential solar installations to commercial and small utility-scale solar installations."

The company is growing fast. Their Q2 results, announced on August 12th, beat estimates on both the top and bottom line. Revenues were up +120% from the prior year and management raised their Q3 guidance.

Q3 results were announced on November 4th. Analysts were expecting a profit of $0.29 a share on revenues of $110 million. SEDG beat both estimates. Earnings were $0.36 a share. Revenues were up +16.9% from the prior quarter and up +71.8% from a year ago to $115.1 million. Gross margins improved from 28.7% in Q2 to 29.1% in Q3.

Guy Sella, the founder, Chairman, and CEO of SolarEdge, commented on their quarter, "We are very satisfied with another strong quarter of record revenues and improved gross margins. In addition to our very positive financial results, this quarter we introduced our new HD Wave inverter topology, demonstrating our technological leadership in the market. We are confident that our global presence and expanded product offering position us well for continued growth." Management then raised their full-year 2015 revenue guidance.

The stock appears to have bottomed with the lows in the $15-16 area. The last few weeks have seen the trend reverse higher with a pattern of higher lows and higher highs. Shares recently broke through significant resistance at $20.00, at its 50-dma, and its trend line of lower highs. The point & figure chart is bullish and forecasting at $27.00 target.

The stock displayed relative strength today. We are suggesting a trigger to launch small bullish positions at $21.20. SEDG has been volatile in the past. I consider this a more aggressive, higher-risk trade.

- Suggested Positions -

Long SEDG stock @ $21.45

- (or for more adventurous traders, try this option) -

Long MAR $25 CALL (SEDG160318C25) entry $2.10

12/21/15 new stop @ 25.85
12/16/15 new stop @ 24.95
12/15/15 new stop @ 19.25
12/15/15 triggered on gap open at $21.45, trigger was $21.20
Option Format: symbol-year-month-day-call-strike




BEARISH Play Updates

Columbia Sportswear - COLM - close: 45.59 change: +0.21

Stop Loss: 46.25
Target(s): To Be Determined
Current Gain/Loss: -1.9%
Entry on December 08 at $44.75
Listed on December 07, 2015
Time Frame: Exit prior to earnings in February
Option traders exit prior to January expiration
Average Daily Volume = 284 thousand
New Positions: see below

Comments:
12/21/15: We are giving up on COLM as a bearish candidate. The long-term trend is still bearish but short-term the stock is acting like shares have found a bottom.

Tonight we are suggesting an immediate exit tomorrow morning.

- Suggested Positions -

Short COLM stock @ $44.75

- (or for more adventurous traders, try this option) -

Long JAN $45 PUT (COLM160115P45) entry $2.80

12/21/15 plan on exiting tomorrow morning
12/18/15 COLM rallies on an upgrade
12/16/15 new stop @ 46.25
12/08/15 triggered @ $44.75
Option Format: symbol-year-month-day-call-strike


Ctrip.com International - CTRP - close: 48.70 change: +0.11

Stop Loss: 50.55
Target(s): To Be Determined
Current Gain/Loss: Unopened
Entry on December -- at $---.--
Listed on December 15, 2015
Time Frame: 6 to 8 weeks
Average Daily Volume = 3.7 million
New Positions: Yes, see below

Comments:
12/21/15: CTRP is still hovering just above short-term support near $48.00. We are waiting on a breakdown.

Our entry point to launch bearish positions is currently at $47.65.

Trade Description: December 15, 2015:
Occasionally stocks can get ahead of themselves. Investor enthusiasm can become too frothy that drives a stock too high and shares eventually fall back to earth. That could be the case with CTRP.

CTRP is part of the services sector. According to the company, "Ctrip.com International, Ltd. is a leading travel service provider of accommodation reservation, transportation ticketing, packaged tours, and corporate travel management in China. It is the largest online consolidator of accommodations and transportation tickets in China in terms of transaction volume. Ctrip enables business and leisure travelers to make informed and cost-effective bookings by aggregating comprehensive travel related information and offering its services through an advanced transaction and service platform consisting of its mobile apps, Internet websites and centralized, toll-free, 24-hour customer service center. Ctrip also helps customers book vacation packages and guided tours. In addition, through its corporate travel management services, Ctrip helps corporate clients effectively manage their travel requirements."

First the good news, CTRP is in a growing business. According to a Goldman Sachs analyst, the online travel market in China could triple to $200 billion by 2020. In October this year CTRP made a deal with rival online Chinese travel company Qunar, which was owned by Baidu.com (BIDU). The two companies merged and together will control 70% to 80% of the hotel and air ticket market in China. BIDU now owns 25% of CTRP. Larger rival Priceline.com (PCLN) is also investing in CTRP. PCLN recently invested $500 million in a convertible bond deal with CTRP, which could eventually lead to PCLN owning about 15% of CTRP.

CTRP is also seeing strong business results. Their Q3 earnings, which came out on November 18th, were way above expectations. Management then raised their Q4 guidance above Wall Street estimates. The stock also had a 2-for-1 split, which occurred on December 1st. If that wasn't enough good news the stock is also being added to the NASDAQ-100 on Monday, December 21st.

The merger news with Qunar produced the gap higher in October. The strong Q3 earnings and bullish guidance produced the big gap higher in November. With a rally from $30 in late September to $57 in mid November it appears CTRP just ran too far too fast. The stock has started to correct lower.

The stock split has taken place and it is common for stocks to see a post-split depression. They can also see a post-earnings depression after a big rally on the news. One could argue that all the good news has been priced into CTRP. What's the next catalyst to buy it?

Technically shares are breaking down. The bounce today failed at round-number resistance at $50.00. Shares did not participate in the market's rally yesterday or today. It looks like the pullback in CTRP is not over yet. The point & figure chart is bearish and forecasting at $41.00 target.

Now eventually CTRP will find support and shares will rebound again but support could be all the way down in the $37-40 zone. Yesterday's intraday low was $47.74. We are suggesting a trigger to launch bearish positions at $47.65. Please note this is an aggressive, higher-risk trade. The stock can be very volatile. Use small positions to limit risk.

Trigger @ $47.65 *small positions to limit risk*

- Suggested Positions -

Short CTRP stock @ $47.65

- (or for more adventurous traders, try this option) -

Buy the MAR $45 PUT (CTRP160318P45)

Entry disclaimer: To avoid an unfavorable entry point, we will not launch a new play if the stock gaps open more than $1.00 past our suggested entry point.

Option Format: symbol-year-month-day-call-strike


Eagle Materials Inc. - EXP - close: $58.95 change: +0.07

Stop Loss: 61.65
Target(s): To Be Determined
Current Gain/Loss: -0.5%
Entry on December 21 at $58.65
Listed on December 19, 2015
Time Frame: Exit PRIOR to earnings in February
Average Daily Volume = 800 thousand
New Positions: see below

Comments:
12/21/15: Our new bearish play on EXP is open. The stock traded down to new multi-year lows and hit our trigger in the process at $58.65. Shares managed to erased their losses by the closing bell.

At this time I would wait for a drop below today's intraday low ($58.55) before initiating new positions.

Trade Description: December 19, 2015:
The outlook for homebuilders has soured and the XHB homebuilders ETF has sunk toward multi-month lows. Meanwhile the energy sector is getting crushed as crude oil falls to six-year lows. Together they make a tough environment for EXP who serves both homebuilders and the energy industry.

EXP is in the industrial goods sector. According to the company, "Eagle Materials Inc. manufactures and distributes Cement, Gypsum Wallboard, Recycled Paperboard, Concrete and Aggregates, and Oil and Gas Proppants from 40 facilities across the US. Eagle is headquartered in Dallas, Texas."

The company has struggled to meet Wall Street earnings estimates all year long. The last three quarters in a row have seen EXP miss both the earnings estimate and the revenue estimates. Their most recent report was October 26th. Analysts were looking for a profit of $1.18 per shares on revenues of $336.6 million. EXP only delivered $1.11 a share, which was a -40% drop from a year ago. Revenues were up +15.5% from a year ago to $329.0 million, below expectations.

Technically the stock is in a bear market. The market's bounce on Tuesday and Wednesday produced an oversold bounce in shares of EXP but this has failed with the market's reversal lower in the last two sessions. The point & figure chart is bearish and forecasting at $47.00 target. EXP has broken down below what should have been round-number support at $60.00. The next support level could be the $50.00 region. Tonight we are suggesting a trigger to launch bearish positions at $58.65.

- Suggested Positions -

Short EXP stock @ $58.65

- (or for more adventurous traders, try this option) -

Long FEB $55 PUT (EXP160219P55) entry $2.18

12/21/15 triggered @ $58.65
Option Format: symbol-year-month-day-call-strike


GameStop Corp. - GME - close: 28.75 change: -0.01

Stop Loss: 31.25
Target(s): To Be Determined
Current Gain/Loss: +4.9%
Entry on December 11 at $30.22
Listed on December 10, 2015
Time Frame: 6 to 8 weeks
Option traders exit prior to January expiration
Average Daily Volume = 2.1 million
New Positions: see below

Comments:
12/21/15: Hmm... GME has found support near $28.00 two days in a row now. That could be a warning signal for bearish investors. However, at the same time GME definitely underperformed the market today (flat versus the market's widespread bounce). So I wouldn't be too worried yet. Traders may want to lower their stop loss anyway. The $30.00 level should be round-number resistance.

No new positions at this time.

Trade Description: December 10, 2015:
The future of video game purchases is digital downloads. That is why shares of GME have struggled the last couple of years. Their retail business model is in serious jeopardy.

GME is in the services sector. According to the company, "GameStop Corp., a Fortune 500 and S&P 500 company headquartered in Grapevine, Texas, is a global, multichannel video game, consumer electronics and wireless services retailer. GameStop operates more than 6,800 stores across 14 countries. The company's consumer product network also includes www.gamestop.com; www.Kongregate.com, a leading browser-based game site; Game Informer® magazine, the world's leading print and digital video game publication and the recently acquired Geeknet, Inc., parent company of ThinkGeek, www.thinkgeek.com, the premier retailer for the global geek community featuring exclusive and unique video game and pop culture products. In addition, our Technology Brands segment includes Simply Mac and Spring Mobile stores. Simply Mac, www.simplymac.com, operates 72 stores, selling the full line of Apple products, including laptops, tablets, and smartphones and offering Apple certified warranty and repair services. Spring Mobile, http://springmobile.com, sells post-paid AT&T services and wireless products through its 590 AT&T branded stores and offers pre-paid wireless services, devices and related accessories through its 69 Cricket branded stores in select markets in the U.S."

The company's earnings results have been mixed. Their Q2 report, announced on August 27th, came in better than expected. GME beat analysts' estimates on both the top and bottom line. Management raised their 2016 guidance. Guess what? Traders sold the news anyway.

Fast-forward to November. The stock has already reversed under major resistance near $48 again. Shares plunge on November 13th following an analyst downgrade. Ten days later GME reports their Q3 earnings results. Their profit was $0.54 a share. Not only is that 5% decline from a year ago but it's five cents below estimates. Revenues were down -3.6% to $2.02 billion, another miss. Hardware sales plunged -20% in the third quarter. Software sales were down -9%. GME's comparable store sales fell -1.1%, which was below guidance. If that wasn't enough management lowered their Q4 guidance below Wall Street estimates. Following this Q3 report the stock garnered several analyst downgrades.

One of GME's biggest challenges is digital downloads where customers do not have to leave their home (or dorm room) to purchase new games. They can just purchase it online over the Internet and have it immediately downloaded and start gaming. Not only does this jeopardize GME's new game sales but it also hurts a major portion of their business, which is reselling used games. If fewer people are buying hard copy discs of their video games then that means fewer people selling their used games back to GME, which the company resells at a healthy margin.

The trend of digital downloads started years ago but they are growing in popularity. The bearish story on GME is not a secret. That's probably the biggest risk. There are already a lot of bears in the name. The most recent data listed short interest at 53% of the 103 million share float. That much short interest can make the stock volatile to any potentially positive headlines. I think the bears are right and GME is headed lower as their business continues to struggle.

Another risk is valuation. The stock has fallen -33% in the last few weeks. Most of the analyst action in GME has been bearish with several downgrades. The stock currently trades with a P/E around 8.6. Eventually some analyst firm might decide to upgrade it on a valuation basis and the stock could see a short-term rally on this sort of headline. Fortunately traders usually sell the rallies in GME.

Currently GME is flirting with a breakdown below major support in the $31.50-32.00 area. A breakdown here could see the current downtrend accelerate. The point & figure chart is bearish and forecasting at $19.00 target. Tonight we are suggesting a trigger to open bearish positions at $31.40. Please note that this is an aggressive, higher-risk trade. GME can be a volatile stock. I am removing our normal entry point disclaimer regarding gap downs. Due to potential volatility traders may want to use the options instead of trying to short the stock. I am listing the January puts. You might want to consider the April puts (next available month).

- Suggested Positions -

Short GME stock @ $30.22

- (or for more adventurous traders, try this option) -

Long JAN $30 PUT (GME160115P30) entry $2.44

12/17/15 new stop @ 31.25
12/11/15 triggered on gap down at $30.22, suggested entry was $31.40
Option Format: symbol-year-month-day-call-strike


Harley-Davidson, Inc. - HOG - close: 45.22 change: +0.10

Stop Loss: 47.35
Target(s): To Be Determined
Current Gain/Loss: +1.2%
Entry on December 11 at $45.75
Listed on December 09, 2015
Time Frame: Exit prior to earnings in January
Average Daily Volume = 3.15 million
New Positions: see below

Comments:
12/21/15: HOG tried to rally this morning but traders sold the pop. Shares spent most of the day clinging to round-number support at $45.00. If you're looking for an entry point consider waiting for a drop under $45.00.

Trade Description: December 9, 2015:
HOG was a big winner during the market's rally off the 2009 bear-market low. Shares surged from about $8 in early 2009 to over $74.00 in 2014. Unfortunately that bullish momentum is long gone.

HOG is in the consumer goods sector. According to the company, "Harley-Davidson, Inc. is the parent company of Harley-Davidson Motor Company and Harley-Davidson Financial Services. Since 1903, Harley-Davidson Motor Company has fulfilled dreams of personal freedom with custom, cruiser and touring motorcycles, riding experiences and events and a complete line of Harley-Davidson motorcycle parts, accessories, general merchandise, riding gear and apparel. Harley-Davidson Financial Services provides wholesale and retail financing, insurance, extended service and other protection plans and credit card programs to Harley-Davidson dealers and riders in the U.S., Canada and other select international markets."

The company has seen sales slow down. Their most recent earnings report was October 20th. Q3 earnings growth was flat (+0%) from a year ago at $0.69 a share. That missed estimates by 8 cents. Revenues only rose +0.9% to $1.14 billion, which also missed estimates. The company said their dealer new motorcycle sales were down -1.4% worldwide from a year ago. Their U.S. sales fell -2.5%. Shipments came in below guidance.

Matt Levatich, President and Chief Executive Officer, said, "We expect a heightened competitive environment to continue for the foreseeable future." The company lowered their shipment guidance for 2015. They also lowered their margin guidance. The stock reacted with a big drop on the earnings miss and lowered guidance. Multiple analyst firms downgraded the stock in response to the news.

Technically HOG is in a bear market. Shares have a bearish trend of lower highs and lower lows. HOG spent most of November struggling with resistance at $50.00. The recent weakness has pushed shares to new two-year lows. The next drop could push HOG toward $40 or lower. Tonight we are suggesting a trigger to launch bearish positions at $45.75.

My biggest concern is some analyst deciding that HOG looks "cheap" on valuation. At this point HOG could be a value trap. Cheap stocks can always get cheaper.

- Suggested Positions -

Short HOG stock @ $45.75

- (or for more adventurous traders, try this option) -

Long FEB $45 PUT (HOG160219P45) entry $2.59

12/16/15 new stop @ 47.35
12/11/15 triggered @ $45.75
Option Format: symbol-year-month-day-call-strike


Leucadia National Corp. - LUK - close: 16.61 change: +0.15

Stop Loss: 16.85
Target(s): To Be Determined
Current Gain/Loss: +6.2%
Entry on November 30 at $17.70
Listed on November 28, 2015
Time Frame: 6 to 9 weeks
Average Daily Volume = 2.1 million
New Positions: see below

Comments:
12/21/15: LUK briefly traded above short-term technical resistance at its 10-dma before paring its gains. The stock settled with a +0.9% gain on the session. We are taking a much more defensive stance on the trade tonight by moving our stop loss down to $16.85. If the stock sees another big bounce we want to exit.

No new positions at this time.

Trade Description: November 28, 2015:
Investors appear to have soured on shares of LUK. The stock is down -20% year to date but it's off -29% from its July 2015 highs. LUK just ended the week at new five-year lows.

LUK is considered part of the financial sector. One of their biggest businesses is their Jefferies Group investment brokerage. Jefferies is only one in a long list of companies that LUK owns. You could argue LUK is more of a holding company or a conglomerate and a very diverse one at that.

Here's a list of some of LUK's businesses:
Berkadia, a full-service mortgage bank
FXCM, an online foreign exchange trading platform (NYSE:FXCM)
HomeFed, a real estate developer (65% owned by LUK)
Foursight Capital, an Auto loan originator and servicer
Leucadia Asset Management, a diversified alternative asset management platform
Folger Hill, a multi-manager discretionary long/short equity hedge fund platform
Topwater Capital, a highly-scalable multi-manager and multi-strategy liquid securities fund
Jefferies, a leading, client-focused global investment banking firm
Jefferies LoanCore, a joint venture between Jefferies and GIC Private Ltd (f.k.a. Government of Singapore Investment Corporation), is a finance company focused on originating and securitizing commercial mortgage loans
National Beef, a beef processing company that processes ~3 million fed cattle per year representing ~12.5% market share
HRG Group, a diversifed holiday company (NYSE: HRG) that operates in four business segments: consumer products - Spectrum Brands (NYSE: SPB, ~58% ownership); insurance - Fidelity & Guaranty Life (NYSE: FGL, ~81% ownership (1)); FrontStreet Re (100% ownership); Energy - Compass Production (~100% ownership); Asset Management (de minimis net book value).
Garcadia, 26 auto dealerships
Vitesse Energy
Juneau Energy
Linkem, a fixed wireless broadband internet provider in Italy
Conwed, a leading manufacturer of extruded, oriented and knitted plastic netting
Idaho Timber
Golden Queen (gold and silver mine)
(more details about LUK
company .pdf
The earnings picture for LUK has taken a drastic turn for the worse. Their Q1 report, announced March 17th, showed earnings of $11.7 million versus $112 million a year ago. Q1 revenues were down -34%. LUK delivered similar results with their Q2 earnings, announced August 5th. Earnings per share were $0.11 compared to $1.12 a year ago. Revenues were flat at $2.84 billion. Their most recent earnings report was November 5th, 2015. LUK reported their Q3 results, which was a loss of ($0.47) a share versus a profit of $0.14 a year ago. Revenues plunged -21% to $2.36 billion. You can see why investors might be selling the stock.

Management has been trying to take advantage of their low stock price with an aggressive stock buyback program but it's not making much difference. Technically shares of LUK are in a bear market and showing significant relative weakness.

The point & figure chart is very bearish and forecasting an $11.00 target. The last few days LUK has been trying to hold short-term support near $18.00 but that appears to have failed. Tonight we are suggesting a trigger to launch bearish positions at $17.70.

- Suggested Positions -

Short LUK stock @ $17.70

- (or for more adventurous traders, try this option) -

Long MAR $18 PUT (LUK160318P18) entry $1.20

12/21/15 new stop @ 16.85
12/14/15 new stop @ 17.16
12/12/15 new stop @ 17.55
11/30/15 triggered @ $17.70
Option Format: symbol-year-month-day-call-strike


iPath S&P500 VIX Futures ETN - VXX - close: 20.76 change: -1.01

Stop Loss: None, no stop at this time.
Target(s): $16.65
Current Gain/Loss: + 4.9%
2nd position Gain/Loss: +28.4%
Entry on August 25 at $21.82
2nd position: September 2nd at $29.01
Listed on August 24, 2015
Time Frame: to be determined
Average Daily Volume = 50 million
New Positions: see below

Comments:
12/21/15: The VXX chopped sideways before settling with a -4.6% decline.

No new positions at this time.

Trade Description: August 24, 2015
The U.S. stock market's sell-off in the last three days has been extreme. Most of the major indices have collapsed into correction territory (-10% from their highs). The volatile moves in the market have investors panicking for protection. This drives up demand for put options and this fuels a rally in the CBOE volatility index (the VIX).

You can see on this long-term weekly chart that the VIX spiked up to levels not seen since the 2008 bear market during the financial crisis. Moves like this do not happen very often. The VIX rarely stays this high very long.

(see VIX chart from the August 24th play description)

How do we trade the VIX? One way is the VXX, which is an ETN but trades like a stock.

Here is an explanation from the product website:

The iPath® S&P 500 VIX Short-Term Futures® ETNs (the "ETNs") are designed to provide exposure to the S&P 500 VIX Short-Term FuturesTM Index Total Return (the "Index"). The ETNs are riskier than ordinary unsecured debt securities and have no principal protection. The ETNs are unsecured debt obligations of the issuer, Barclays Bank PLC, and are not, either directly or indirectly, an obligation of or guaranteed by any third party. Any payment to be made on the ETNs, including any payment at maturity or upon redemption, depends on the ability of Barclays Bank PLC to satisfy its obligations as they come due. An investment in the ETNs involves significant risks, including possible loss of principal and may not be suitable for all investors.

The Index is designed to provide access to equity market volatility through CBOE Volatility Index® (the "VIX Index") futures. The Index offers exposure to a daily rolling long position in the first and second month VIX futures contracts and reflects market participants' views of the future direction of the VIX index at the time of expiration of the VIX futures contracts comprising the Index. Owning the ETNs is not the same as owning interests in the index components included in the Index or a security directly linked to the performance of the Index.

I encourage readers to check out a long-term chart of the VXX. This thing has been a consistent loser. One market pundit said the VXX is where money goes to die - if you're buying it. We do not want to buy it. We want to short it. Shorting rallies seems to be a winning strategy on the VXX with a constant trend of lower highs.

Today the VXX spiked up to four-month highs near $28.00 before fading. We are suggesting bearish positions at the opening bell tomorrow. The market volatility is probably not done yet so we are not listing a stop loss yet. Our time frame is two or three weeks (or less).

- Suggested Positions -

Short the VXX @ $21.82

Sept. 2nd - 2nd position (Double Down On The September 1st Spike)

Short the VXX @ $29.01

11/07/15 adjust exit target to $16.65
11/02/15 adjust exit target to $16.50
10/19/15 add an exit target at $16.25
10/15/15 planned exit for the October puts
10/14/15 if you own the options, prepare to exit tomorrow at the close
09/02/15 2nd position begins. VXX gapped down at $29.01
09/01/15 Double down on this trade with the VXX's spike to 6-month highs
08/25/15 trade begins. VXX gaps down at $21.82
Option Format: symbol-year-month-day-call-strike


Western Digital Corp. - WDC - close: 59.06 change: +0.20

Stop Loss: 62.35
Target(s): To Be Determined
Current Gain/Loss: -0.4%
Entry on December 18 at $58.85
Listed on December 17, 2015
Time Frame: Exit PRIOR to earnings in late January
Average Daily Volume = 3.5 million
New Positions: see below

Comments:
12/21/15: The S&P 500 index added +0.77% and the NASDAQ rallied +0.9%. Shares of WDC only gained +0.33% and remains below the $60.00 level, which should be round-number resistance. I would consider new positions at current levels but readers might want to wait for a drop below today's intraday low ($58.64) to initiate trades.

Trade Description: December 17, 2015:
Increased competition has turned hard drives into a commodity business. Prices for drives are falling. WDC is trying to move into higher-margin business with its acquisition of SanDisk (SNDK) but the action in the stock suggest Wall Street is concerned.

WDC is in the technology sector. According to the company, "Founded in 1970, Western Digital Corp., Irvine, Calif., is an industry-leading developer and manufacturer of storage solutions that enable people to create, manage, experience and preserve digital content. It is a long-time innovator in the storage industry. Western Digital Corporation is responding to changing market needs by providing a full portfolio of compelling, high-quality storage products with effective technology deployment, high efficiency, flexibility and speed. Its products are marketed under the HGST and WD brands to OEMs, distributors, resellers, cloud infrastructure providers and consumers."

WDC, and its rivals, face an industry wide challenge. Consumer demand for personal computers (PCs) has been slowing down for years. PCs were replaced by laptops. Now laptop demand is in jeopardy because they are being replaced by tablet PCs. At the same time growth in technology and disk drive creation has generated the ability to produce huge disk drives with massive amounts of storage. That means consumers and businesses need to buy fewer drives for the storage they need.

Another issue has been the trend in solid state drives (SSD). Buyers prefer SSD drives because normally they are faster, thinner, and use less power than traditional spinning hard drives. Selling hard drives to PC and laptop makers is the majority of WDC's business (more than 40%). WDC recently announced plans to buy SanDisk (SNDK) who has a strong SSD business. That makes sense because demand for SSDs are replacing demand for normal hard drives. One problem is just like all computer hardware, it becomes cheaper to make as technology improves. The price of SSD drives has fallen sharply and the spread between SSD and normal hard drives will continue to narrow.

WDC's deal to buy SNDK is valued around $19 billion. The company is planning to borrow $17-to-$18 billion for the deal. The surge in debt has some analysts concerned about WDC. Another potential challenge is that WDC is also in the process of a deal with Unisplendour, which is a China-based company trying to make a $3.8 billion investment into WDC. At the time this Unisplendor investment was valued at $92.50 per share (for about 15% of WDC). You may have noticed that shares of WDC are now trading near $60.

WDC announced the SNDK deal on October 21st. Shares declined on the news. Actually shares of WDC were already in decline on speculation they might buy SNDK (for the record, the NASDAQ was in rally mode). There are concerns that WDC may have paid too much for SNDK.

Shares of WDC have been trying to find support in the $60-65 zone for the last few weeks. Now it looks like WDC is breaking down from this trading range and the next support level could be $50.00. Shares underperformed the market today with a -2.5% decline. Any further weakness could be an entry point for bearish trades. The point & figure chart is bearish and forecasting at $36.00 target. Monday's intraday low (Dec. 14th) was $59.06. Tonight we are suggesting a trigger to launch bearish positions at $58.85.

- Suggested Positions -

Short WDC stock @ $58.85

- (or for more adventurous traders, try this option) -

Long FEB $55 PUT (WDC160219P55) entry $2.62

12/18/15 triggered @ $58.85
Option Format: symbol-year-month-day-call-strike