Option Investor
Newsletter

Daily Newsletter, Wednesday, 1/6/2016

Table of Contents

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

Market Wrap

If Santa Should Fail to Call...

by Keene Little

Click here to email Keene Little
The Santa Claus rally typically occurs between Christmas and New Year's and into the first couple of days in January but Santa's abductors did not release him and he was therefore a no-show. Now we're facing the rest of the statement "...Bears May Come To Broad and Wall." Today the bears pounced again after Tuesday's consolidation and now we're left to wonder about the January barometer.

Today's Market Stats

More weak economic data out of China and reports of another nuclear test by Korea (this time supposedly a hydrogen bomb) sent overnight traders packing and the selloff in the futures, like Sunday night, resulted in a gap down to start our trading day. A bounce recovery failed and an afternoon decline dropped the indexes below the morning lows. It looks bearish but we have some short-term bullish divergences and a price pattern suggesting a bounce into the end of the week could be next.

The Santa Claus rally was a complete no-show and that bodes ill for the market. The other thing that's not looking good at the moment is how the first week of January will go. The bulls have some work to do to erase the decline from the December 31st close. For SPX that means we need a rally above 2044 to get back into the green for the year before Friday's close. It could happen (54 points in the next two days) but at the moment it's not looking good. The first week of January typically sets the tone for the rest of the month and as goes January so goes the year, both of which are looking more favorable for the bears than the bulls at the moment. But the year is young and we all know how quickly things can change. Just look at the volatility since November's high.

Affecting the market this morning was more bad news out of Asia. Following Monday's report about China's weakening manufacturing sector (as the world buys less stuff from them) this morning's report on China's purchasing-manager's index showed a drop to a 17-month low in December, which only adds to the angst about how much China's economy is slowing (and all the debt involved that could affect the global financial system). It's getting harder and harder to avoid the fact that China's slowing is a reflection of a slowing global economy, which then makes it harder to justify why the U.S. will be able to avoid a slowdown as well. We are all inexorably linked together.

Factory orders in the U.S. were revised lower for October, from +1.5% to +1.3%, and declined -0.2% in November. The market expected this number so there was very little reaction in the pre-market futures. Durable goods orders were unchanged following October's +2.8% but removing defense-related orders it was down -1.0%. Nondurable goods shipments declined -0.4%, which continues a string of monthly declines this past year.

Economic forecasts for the U.S. continue to get ratcheted lower and about the only thing the Fed can hang its hat on is employment data. This morning's ADP report showed employers added 257K jobs in December, which was much stronger than the 215K expected by economists. November was revised slightly lower from 217K to 211K. The majority of the added jobs were in the service sector by a factor of 10-to-1 (234K in service sector vs. 23K in goods-producing sector). How much of those jobs were temporary holiday-related jobs can't be known but we'll find out next month.

The minutes for the last FOMC meeting were released this afternoon and they showed a nervous Fed. While the vote to raise rates +0.25% was unanimous, it was by no means without a lot of doubt. Some FOMC members said the vote was a close call for several because of their concern about inflation data. While they publicly say they're "reasonably confident" that inflation will rise towards the Fed's 2% target rate (although most want to see higher inflation), they are secretly worried about deflationary pressures knocking inflation down. Some are worried that tightening at this time could be a mistake since they believe risks that inflation could stay low "remained considerable."

The consensus view of Fed members is that the continuation of the decline in oil prices in the 4th quarter "was likely to exert some additional transitory downward pressure on inflation in the near term." Gotta love their language. And by "transitory" I guess we need to understand how long transitory is -- oil has been declining for more than two years but I guess it's still a "transitory" phenomenon. Some members are starting to question this by noting the persistent weakness in energy prices is "imposing important downside risks to the inflation outlook." Ya think? Bottom line is that an uncertain Fed makes for an uncertain market because it makes it harder to judge what the Fed will do in the future and the market hates uncertainty.

That uncertainty, whether it be Asia or Europe related, or simply worry about what the Fed will or won't do to help the market, I mean economy, has registered this week in the selling we're seeing. It's becoming more difficult to justify the high price valuations when we see so many signs of slowing in the economy and in corporate earnings. It's still arguable about whether or not we've seen THE top of the bull market from 2009 but certainly it's getting harder to justify why the market should start another rally leg to new highs this year. Never say never and we'll use the charts to tell us when "never" should be wiped off the mouths of the bears.

I'll continue to use the SPX weekly chart to show the bullish potential for a choppy rally higher into April/May of this year and potentially make it up the 2200 area. I don't have a lot of faith in this possibility since it's hard to justify why the market should be able to rally this year but from a pattern perspective I have to acknowledge the possibility. In other words, my opinion of the fundamental reasons why the market should or should not do something takes a back seat to what price action tells us. And the choppy pullback from November can easily be interpreted as a bull flag and as such we have to respect the upside potential out of this pattern. I believe a continuation of the rally would be inside a rising wedge pattern based on how the rally progressed off the August low but it's still too early to tell. For the bullish scenario the bulls need to do something here and break out of the bull flag. The bearish interpretation of the choppy decline off the November high is a very bearish wave count that calls for a strong decline (another flash crash kind of move). A drop much lower, such as below 1970, could usher in much stronger selling.

S&P 500, SPX, Weekly chart

The bull flag pattern is shown more clearly on the daily chart below, the bottom of which is currently near 1972. That remains a downside target for the current leg down from the December 29th high but a short-term pattern for the leg down suggests we could get at least a bounce correction at any time. I show a bounce back up to close Monday's gap down (at 2043.94), possibly completing by Monday, but that's a lot of points to cover in 3 days. However, we all know how fast a short-covering rally can move and until SPX breaks below 1970 I'd be careful about being short here.

S&P 500, SPX, Daily chart

Key Levels for SPX:
- bullish above 2082
- bearish below 1970

The 60-min chart shows the expectation for a 3-wave bounce correction off this afternoon's low. It's possible we'll see a quick spike down to 1972 to tag the trend line along the lows from November-December but with the bullish divergence against Monday's low I think it's better to be thinking about buying support rather than chasing it lower here. Assuming we'll get a bigger bounce I'll then be looking for the potential to reach the 2040 area where it would test price-level S/R (2040), back-test its broken uptrend line from September-December (2037), retrace 62% of the decline from December 29th (2042) and close Monday's gap (near 2044). That's a lot of resistance and a good reason to short it there if reached. If it bounces up to that area and rolls over there's a good chance the next decline will be very powerful (and therefore a good ride for the bears). Just keep in mind the upside potential...

S&P 500, SPX, 60-min chart

The DOW has broken below its trend line along the lows from November-December, currently near 17070, but it's holding support at the bottom of a parallel down-channel for its pullback from November, as well as price-level S/R near 16900. Like SPX, it's a good setup for at least a bounce correction and a rally up to 17425 would close Monday's gap and back-test its broken uptrend line from August-December. Slightly lower, near 17394, is where it would retrace 62% of its decline from December 29th. Other than a brief poke below this afternoon's low we should not see much lower before a bounce correction but if this afternoon's low at 16817 is broken and not quickly recovered it could turn into a much stronger decline right from here. For the bulls, it takes a rally above the December 29th high at 17750 to turn things bullish (in which case I'd be looking for something similar to the rising wedge pattern shown on the SPX weekly chart above).

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- bullish above 17,750
- bearish below 16,900

Yesterday I was looking at the Nasdaq and thinking bearish for today, which turned out to be correct. On Monday it gapped down below its uptrend line from October 2011 - November 2012 and on Tuesday it jumped up in the morning to back-test the line. The selling following the back-test looked like a bearish kiss goodbye and suggested more selling today. Now that we got a new low for the NAZ it's looking like a bullish setup if the buyers jump back in here. The pullback from December 2nd is a 3-wave move with two equal legs down at 4811.81, which was achieved today. It's possible we have an a-b-c pullback correction that will now be followed by a new rally, one which will take us to a new high. A rally above 5010, above Monday's gap close at 5007, would have me leaning more bullish but for now I think the downside risk is greater than upside potential. The triple top/H&S pattern formed since November's high has a downside objective near 4610, close to its uptrend line from April-October 2014.

Nasdaq-100, NDX, Daily chart

Key Levels for NDX:
- bullish above 5010
- bearish below 4811

The RUT's pattern for the decline from December 29th is what had me thinking we'd get another leg down today and now it's looking like a completed 5-wave move (maybe with one more quick low Thursday morning). That sets it up for at least a bounce correction. It's been a weaker index so the first warning sign for bears would be if the RUT starts leading to the upside. But if the bounce (assuming we'll get one) remains weaker than the others I'll be looking for the 1120-1125 area for a reversal back down, which will hopefully set up by next Monday. A rally above 1140 would have it looking more bullish.

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- bullish above 1161
- bearish below 1080

Bonds rallied strong today, which of course dropped yields and the 10-year yield declined -3.1% to 2.177%. Below 2% is when the market will realize the Fed has lost the battle over rates. But for that to happen we'll need to see TLT (20+ year Treasury bond ETF) rally out of its sideways triangle that it's been in since the June 2015 low and August high. Today it ran up to its downtrend line from January-August and if it can break that downtrend line and climb above its December 11th high at 124.10 it would be a bullish statement. But bond bulls have their work cut out for them to get through several layers of resistance, which shouldn't be hard if the stock market is declining and traders rush to the perceived safety of Treasury bonds.

20+ Year Treasury ETF, TLT, Daily chart

The BKX weekly chart below gives a big-picture view of its pattern since its October 2011 low. There's a trend line along the highs from April 2010 - March 2014 and it's where the rally into June-July highs was stopped (with just a minor poke above the line). A parallel line was then attached to the October 2013 low and you can see how it supported pullbacks since then (with a minor poke below the line in August and September. Today's decline has BKX back down to this uptrend line, near 70, and if it breaks on a weekly closing basis it would tell us THE top is in place. In the meantime we'll see if 70 holds as support for at least a bounce.

KBW Bank index, BKX, Weekly chart

The Transports have been providing a clear warning sign for the bulls since the index topped out in November 2014. Each minor new high in the first half of 2015 for the DOW was not matched by the TRAN, which was a reflection of the deteriorating economy. It was one of the first indexes to drop below its August low, a feat not yet accomplished by the other indexes. Care to wager a bet about whether or not the DOW will follow? But the TRAN could be nearing stronger support at its 200-week MA, near 7110 this week. A little lower, near 7000, is its uptrend line from March 2009 - October 2011. A break below 7000 would obviously be more bearish but watch for support if tested. This week's decline has it below the bottom of a parallel down-channel for last year's decline, near 7300 on Friday (today's close was 7217). The bottom of the down-channel supported the decline into the December 18th low so this week's break is potentially important.

Transportation Index, TRAN, Weekly chart

The U.S. dollar's bounce off the December 9th low would achieve two equal legs up at 99.97 and this morning's high at 99.75 is only 22 cents away from that projection. Above that is another price projection for its rally from August, at 101.32, but I'll be looking for that to be achieved only if the dollar can get above 100. The larger consolidation pattern following the high last March is still a big question mark but until I see evidence to the contrary I'll continue to look for a large sideways consolidation through the first half of 2016 before starting the next rally (102-105 target zone before completing the rally off the 2011 low and then start a more serious decline).

U.S. Dollar contract, DX, Weekly chart

I continue to see at least a little more upside for gold but it achieved a projection at 1089.70 for two equal legs up in a 3-wave bounce off the December 17th low and could turn back down from here. If the sellers stay away I see additional upside potential to 1116-1118 and then further upside potential to 1135-1142. Above 1142 would be more bullish but for now I'm only looking for a bounce correction before heading lower again.

Gold continuous contract, GC, Daily chart

Oil continues to struggle to get off the mat as each time it lifts its head it gets knocked down again. But with a bullish descending wedge pattern, and the bullish divergence helping confirm the likely bullish pattern, it's looking like we should expect a rally soon. The bottom of the wedge is currently near 33.80, which is only 60 cents above its January 2009 low at 33.20, and the COT (Commitment of Traders) report shows short interest down where we've seen previous tradeable lows for oil. I would expect to see a bottom soon and a rally at least back up to the top of the descending wedge, currently near 41.60, and obviously it would be more bullish with a breakout from the wedge. But as depicted on its weekly chart below, I think the higher-probability pattern is for it to get only a bounce in the descending wedge and then make one more new low later this spring before starting a more serious rally.

Oil continuous contract, CL, Weekly chart

There is nothing market moving in tomorrow's economic reports so we'll once again be reacting to whatever news comes in from overseas. If it's a relatively quiet overnight session we could see the market start at least a larger bounce.

Economic reports

Conclusion

The market has been weak since the December 29th high but the only thing that has happened is a move back down within a possible bullish continuation pattern (an a-b-c pullback for the techs and a bull flag for the blue chips). It's not a good time to get aggressive on the short side since the setup is looking good for at least a bounce into early next week. If we get the bounce it will then provide a good setup to get short for a stronger decline but we'll still need to acknowledge the potentially bullish setup for a new rally to get started and run higher over the next few months.

It doesn't matter whether we believe the fundamentals call for a market decline or rally since this market has ignored fundamentals for a long time. But worry over the Fed's lack of "care and nurturing" of this market has many concerned and it's likely part of the reason for some of the selling. The fundamentals do support the bears better than the bulls and without a super-accommodative Fed the bulls should be playing defense. While I don't recommend getting aggressively short yet I do prefer the short side over the long side. I'd get more aggressive on the downside with breaks below the key levels on the charts. But for the short term (into next week) I'm looking for a bounce to set up a better short play.

 

TIME IS RUNNING OUT!
LOCK IN YOUR SAVINGS
BEFORE THE EOY SPECIAL ENDS!


Don't trade alone in 2016 the 2015 End-of-Year Annual Subscription Sale is Expiring!  You’ll save $1,147 when you renew now.

The options market isn’t waiting for you.  And you shouldn’t wait to keep Option Investor coming at the lowest prices you’ll see for at least a year! There isn’t a minute to spare. 
Order now.

Renew for as little as $495,
ONLY $1.35 per day


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

Keene H. Little, CMT

In the end everything works out and if it doesn't work out, it is not the end. Old Indian Saying


New Plays

Q4 Guidance Fuels Bear-Market Declines

by James Brown

Click here to email James Brown

Editor's Note:

Additional Trading Ideas:

In addition to tonight's new candidate(s), consider these stocks as possible trading ideas and watch list candidates. Some of these may need to see a break past key support or resistance:

Bearish ideas: STJ, CTSH, OXM, VFC, WRK, FLS

Bullish ideas: TMUS, SERV, KSS, WMT, CONE, CSAL, SO, NI




NEW BEARISH Plays

Akamai Technologies - AKAM - close: 50.48 change: -1.54

Stop Loss: 52.75
Target(s): To Be Determined
Current Gain/Loss: Unopened
Entry on January -- at $---.--
Listed on January 06, 2016
Time Frame: Exit PRIOR to earnings in early February
Average Daily Volume = 2.1 million
New Positions: Yes, see below

Company Description

Trade Description:
Right now the market's momentum is lower so we are adding a bearish momentum play. The long-term up trend in shares of AKAM appear broken after disappointing Q4 guidance. Shares underperformed the market last year with a -16% decline for 2015. That is thanks to a -33% plunge from its October peak (just before its Q3 earnings report).

AKAM is in the technology sector. According to the company, "As the global leader in Content Delivery Network (CDN) services, Akamai makes the Internet fast, reliable and secure for its customers. The company's advanced web performance, mobile performance, cloud security and media delivery solutions are revolutionizing how businesses optimize consumer, enterprise and entertainment experiences for any device, anywhere."

Shares were killed on October 28th with a -16.7% plunge following its Q3 earnings report. AKAM had reported earnings the night before. Analysts were expecting a profit of $0.58 a share on revenues of $550 million. The company said earnings grew +0% from a year ago to $0.62 a share. That beat estimates. Revenues were up +10% to $551 million, just a hair above expectations. The issue was AKAM's guidance. They guided Q4 revenues into the $557-577 million zone and Q4 earnings into the $0.60-0.64 range. Wall Street was forecasting Q4 revenues closer to $596 million and earnings near $0.65 a share.

Several analyst firms downgraded AKAM shares following its disappointing Q4 guidance. The stock has continued to underperform since this pivotal announcement with investors selling every rally. AKAM's stock tried to bounce off round-number support near $50 in mid December. Unfortunately the bounce has been failing at the $54.00 level. Now the broader market is in sell-off mode and AKAM is testing major support at $50.00 again. A breakdown here could signal a drop toward the $44-45 area. Tonight we are suggesting a trigger to launch small bearish positions at $49.75. I am suggesting smaller positions to limit risk since AKAM can be somewhat volatile.

Trigger @ $49.75 *small positions to limit risk*

- Suggested Positions -

Short AKAM stock @ $49.75

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

Buy the FEB $50 PUT (AKAM160219P50) current ask $2.75
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

Stocks Plunge To New Relative Lows

by James Brown

Click here to email James Brown

Editor's Note:
Thus far 2016 has been rough on the bulls. Today a parade of disappointing economic data from China and the U.S. combined with headlines about North Korea testing nuclear weapons. The results were not positive. All of the major U.S. indices and most of the world's stock market's posted losses today.

CSIQ was stopped out.


Current Portfolio:


BULLISH Play Updates

The Kroger Co. - KR - close: 42.05 change: -0.04

Stop Loss: 40.45
Target(s): To Be Determined
Current Gain/Loss: -1.6%
Entry on December 30 at $42.75
Listed on December 26, 2015
Time Frame: Exit PRIOR to earnings in early March
Average Daily Volume = 726 thousand
New Positions: see below

Comments:
01/06/16: KR held up pretty well during the market's drop at the opening bell. Shares traded in positive territory most of the session but eventually faded back toward unchanged on the day.

No new positions at the moment.

Trade Description: December 26, 2015:
If you're looking for a company with consistent growth then look no further. KR appears to be the king of same-store sales and recently announced 48 quarters of consecutive same-store sales growth.

KR is in the services sector. According to the company, "Kroger, one of the world's largest retailers, employs nearly 400,000 associates who serve customers in 2,626 supermarkets and multi-department stores in 34 states and the District of Columbia under two dozen local banner names including Kroger, City Market, Dillons, Food 4 Less, Fred Meyer, Fry's, Harris Teeter, Jay C, King Soopers, QFC, Ralphs and Smith's. The company also operates 780 convenience stores, 327 fine jewelry stores, 1,342 supermarket fuel centers and 37 food processing plants in the U.S."

A few months ago BusinessInsider ran an interesting article on KR that suggested the grocery chain is shaping up to be growing competition for the fast-food industry. A recent poll showed that 1 out of 4 consumers would choose Kroger instead of McDonald's to grab a quick bite to eat. KR has become more attractive because they have been expanding their prepared-food selection.

Another interesting tidbit came from CNBC Mad Money's Jim Cramer who said KR has twice the growth of rival Whole Foods Market (WFM). KR's most recent quarterly results showed same-store sales growth of +5.4%, which easily outpaces its rivals.

Speaking of Whole Foods, KR is quickly catching up. WFM built its brand on organic and natural foods, which also happen to have better margins than traditional grocery items. Rivals took notice and KR jumped into organics with both feet. According to JPMorgan, KR is on track to surpass WFM as the biggest seller of organic foods within the next two years. (FYI: Costco actually sells more organic food than anyone else in the U.S. but they are not a traditional grocery story).

Looking at the company's results they continue to beat estimates. KR announced their fiscal 2015 Q1 results on June 18th with earnings of $1.25 per share. That beat estimates of $1.22. Revenues were $33.05 billion, which actually missed estimates. The stock rallied anyway. KR management reaffirmed their fiscal year 2016 earnings forecast for $3.80-3.90 per share (essentially +10% growth).

Their 2015 Q2 results were announced on Sept. 11th. Earnings were $0.44 a share, beating estimates by five cents. Revenues were relatively flat at $25.44 billion. Same-store sales were up +5.3%. Management raised their full-year same-store sales guidance from +3.5%-4.5% to 4.0-5.0%

Q3 earnings came out on December 3rd. Earnings of $0.43 a share beat expectations by four cents. Revenues were still relatively flat at $25.07 billion (from a year ago). Same-store sales were up +5.4%. Management then raised their fiscal 2016 earnings guidance above Wall Street estimates. The stock soared on this report and bullish outlook.

Traders have been reluctant to let go of KR's stock. When the market dipped sharply a couple of weeks ago investors jumped in to buy the dip. Now KR has rebounded back toward its all-time highs. The point & figure chart is very bullish with a long-term target of $62.00. Thursday's intraday high was $42.67. Tonight we are suggesting a trigger to launch bullish positions at $42.75.

- Suggested Positions -

Long KR stock @ $42.75

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

Long APR $45 CALL (KR160415C45) entry $1.15

12/30/15 triggered @ $42.75
Option Format: symbol-year-month-day-call-strike


SolarCity Corp. - SCTY - close: 50.20 change: -0.24

Stop Loss: 47.95
Target(s): To Be Determined
Current Gain/Loss: -6.4%
Entry on January 05 at $53.61
Listed on January 04, 2016
Time Frame: Exit PRIOR to earnings (late January or early February)
Average Daily Volume = 3.8 million
New Positions: see below

Comments:
01/06/16: Most of the solar-energy names can be volatile stocks. It was surprising to see SCTY only trade in a $1.00 range this morning. Shares managed to limit their losses to -0.47% versus the NASDAQ's -1.1% loss.

I don't see any changes from yesterday's comments. No new positions at this time.

Trade Description: January 4, 2016:
We recently traded SCTY and caught a good chunk of its December rally. It looks like the stock is poised for round two and about to sprint higher again. Here is an updated play description:

December 2015 saw major headlines with 195 countries signing the Cop21 agreement at a U.N. climate change conference in Paris. Their pledge to fight global warming and cut greenhouse gas emissions could mean major developments for the solar-energy industry.

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.

If the Cop21 agreement wasn't enough there was also big news out of Washington in December. Both Congress and the Senate agreed to a budget deal that included a five-year extension on solar-energy tax credits. This is a BIG deal for the industry and really fueled the rally behind solar stocks.

After a rally from $25 to almost $59 in just a few weeks SCTY finally encountered some profit taking in the last half of December. You'll notice that shares founds support near $48.35, just below its simple 200-dma. Now after basing there for a couple of days the stock displayed relative strength with a big bounce today (+3.4%).

SCTY still has a lot of short interest and further gains could fuel another short-covering rally. I want to remind investors that SCTY is a volatile stock and we should consider this a higher-risk, more aggressive trade. We will try and limit risk with a stop loss at $47.95. Tonight we are listing a trigger to open small bullish positions at $53.15.

NOTE: This could be a short-term play. Normally we like to exit prior to a company's earnings announcement. There is no set date yet but SCTY will likely report earnings in very late January to mid February. We will update our time frame once the company announces its earnings date.

- Suggested Positions -

Long SCTY stock @ $53.61

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

Long FEB $55 CALL (SCTY160219C55) entry $3.85

01/05/16 triggered on gap open at $53.61, suggested entry was $53.15
Option Format: symbol-year-month-day-call-strike




BEARISH Play Updates

CF Industries - CF - close: 35.84 change: -3.39

Stop Loss: 38.75
Target(s): To Be Determined
Current Gain/Loss: +7.3%
Entry on January 06 at $38.65
Listed on January 05, 2016
Time Frame: Exit PRIOR to earnings in mid February
Average Daily Volume = 2.7 million
New Positions: see below

Comments:
01/06/16: Our new bearish play on CF is off to a great start. We were triggered on the gap down this morning at $38.65. Shares then plunged to an -8.6% decline on the session.

I would not chase it here. No new positions at this time. Tonight we are adjusting the stop loss down to $38.75.

Trade Description: January 5, 2016:
CF underperformed the broader market and its sector in 2015. The S&P 500 lost -0.7% for the year while the IYM basic materials ETF lost -14.4%. Shares of CF returned a -25% loss last year. Momentum remains to the downside.

According to the company, "CF Industries Holdings, Inc., headquartered in Deerfield, Illinois, through its subsidiaries is a global leader in the manufacturing and distribution of nitrogen products, serving both agricultural and industrial customers. CF Industries operates world-class nitrogen manufacturing complexes in Canada, the United Kingdom and the United States, and distributes plant nutrients through a system of terminals, warehouses, and associated transportation equipment located primarily in the Midwestern United States. The company also owns a 50 percent interest in an ammonia facility in The Republic of Trinidad and Tobago."

It is important to note that CF is currently in the process of merging with OCI. Here's a brief description, "OCI N.V. is a global producer and distributor of natural gas-based fertilizers and industrial chemicals based in the Netherlands. The company produces nitrogen fertilizers, methanol and other natural gas based products, serving agricultural and industrial customers from the Americas to Asia. The company ranks among the world's largest nitrogen fertilizer producers, and can produce more than 8.4 million metric tons of nitrogen fertilizers and industrial chemicals at production facilities in the Netherlands, the United States, Egypt and Algeria."

Once the merger is completed they plan to move the new company's headquarters to the Netherlands to reduce their tax burden. Last year some U.S. government officials voiced their displeasure at these tax-inversion mergers to avoid paying U.S. taxes. There is a chance (albeit a small one) that the U.S. tries to stop this merger before it's completed.

Meanwhile the company continues to struggle with weak prices for nitrogen fertilizer. Looking at CF's last four quarterly earnings reports they have missed Wall Street's earnings estimates three of the last four quarters (and two quarters in a row). Revenues were down -8.3%, -15.8%, -10.9%, and -0.7% in the most recently reported quarter.

CF faces tough competition from fertilizer producers in China and in Russia and the Ukraine. It is worth noting that Bank of America just recently came out with a bullish call on CF. The BoA analyst suggested that fertilizer prices are too low and will bounce and CF's stock price should bounce with it. CF claims demand remains strong but that doesn't help if prices keep falling (obviously demand isn't strong enough or prices would rise).

Technically the path of least resistance is down and CF just broke support near $40.00. These are new two-year lows. Tonight we are suggesting a trigger to launch bearish positions at $38.85. Plan on exiting prior to CF's earnings report in mid February.

- Suggested Positions -

Short CF stock @ $38.65

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

Long FEB $35 PUT (CF160219P35) entry $1.20

01/06/16: new stop loss @ 38.75
01/06/16: triggered on gap down at $38.65, suggested entry was $38.85
Option Format: symbol-year-month-day-call-strike


GameStop Corp. - GME - close: 28.37 change: -0.40

Stop Loss: 29.35
Target(s): To Be Determined
Current Gain/Loss: +6.1%
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:
01/06/16: It was a volatile morning for GME with shares falling -4.6% at the open. The stock did see a rather quick rebound and eventually pared its loss to -1.39%.

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

01/04/16 Caution - GME sank to new lows and reversed higher.
12/30/15 new stop @ 29.35
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: 43.40 change: -1.89

Stop Loss: 44.55
Target(s): To Be Determined
Current Gain/Loss: +5.1%
Entry on December 11 at $45.75
Listed on December 09, 2015
Time Frame: Exit prior to earnings in late January
Average Daily Volume = 3.15 million
New Positions: see below

Comments:
01/06/16: The bearish trend in HOG finally resumed today. Shares plunged -4.1% and ended the session at new multi-year lows. Tonight we are adjusting our stop loss down to $44.55 in an effort to try and protect a potential gain.

No new positions at this time.

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

01/06/16 new stop @ 44.55
12/16/15 new stop @ 47.35
12/11/15 triggered @ $45.75
Option Format: symbol-year-month-day-call-strike


iPath S&P500 VIX Futures ETN - VXX - close: 21.29 change: +0.62

Stop Loss: None, no stop at this time.
Target(s): $16.65
Current Gain/Loss: + 2.4%
2nd position Gain/Loss: +26.6%
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:
01/06/16: 2016 has not been kind to the bulls. Stocks plunged again this morning. This fueled another bounce in the VIX, which gained +6.4%. The VXX added +2.99%.

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



CLOSED BULLISH PLAYS

Canadian Solar Inc. - CSIQ - close: 27.28 change: -0.22

Stop Loss: 26.95
Target(s): To Be Determined
Current Gain/Loss: -5.9%
Entry on January 05 at $28.46
Listed on January 02, 2016
Time Frame: 6 to 8 weeks
Option traders: exit PRIOR to February expiration
Average Daily Volume = 2.2 million
New Positions: see below

Comments:
01/06/16: It was another volatile morning in the stock market. Yesterday we were triggered with CSIQ gap higher on Tuesday morning. Today we were stopped out on its gap down at $26.77 thanks to the market's plunge at the open. CSIQ did pared its gains by the close. I would be tempted to keep CSIQ on your watch list. The story hasn't changed for CSIQ.

- Suggested Positions -

Long CSIQ stock @ $28.46 exit $26.77 (-5.9%)

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

FEB $30 CALL (CSIQ160219C30) entry $1.60 exit $0.80 (-50.0%)

01/06/16 stopped out on gap down at $26.77
01/05/16 triggered on gap open at $28.46, entry trigger was $28.25
01/04/16 adjust entry strategy - move the entry trigger lower from $29.25 down to $28.25 and adjust the stop loss down to $26.95
Option Format: symbol-year-month-day-call-strike

chart: