Option Investor
Newsletter

Daily Newsletter, Monday, 1/11/2016

Table of Contents

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

Market Wrap

Market Drowns In Oil

by Thomas Hughes

Click here to email Thomas Hughes
plunging oil prices drag market to new lows.

Introduction

The market saw some big moves today as China, energy, earnings and data weigh on the minds of traders.

The mainland China Shanghai index fell more than -5% in late day trading after an earlier move by the PBOC to strengthen the yuan. Other indices in the region, while affected, did not suffer near the same losses. European indices were positive for most of the day. The China sell-off may have been responsible for a mid-day test of support but that led to gains of 1% for the DAX, and then another test of support later in the day that left the region flat to negative at the close of the session.

Market Statistics

Futures trading indicated a positive open for US indices all morning. The SPX was indicated to open with a gain of about 3 points in the early electronic session and that strengthened to +4 or 5 by the open; there were no economic releases before or after the bell, and little in the way of market moving earnings reports; Alcoa reported after the closing bell.

Early in the day the indices moved in a 1% range around break even that left them flat going into the lunch time hour. Just before noon things changed, oil prices fell to new lows and the market followed. The SPX fell more than -1% on an intraday basis and is quickly approaching the Sept/Oct 2015 support levels. Late in the day support levels were hit, the market bounced, the market rallied and the indices regained all of the days losses and more.

Economic Calendar

The Economy

There was no economic data released today but there are some big reports due out later this week. Tomorrow is the JOLTs release, important points will be number of job openings and the quits rate. Wednesday the Treasury budget is released in the morning, the Fed's Beige Book later that day. Thursday is weekly jobless claims with import/export prices and then Friday is the big day of the week. Retail Sales, PPI, Empire Manufacturing, Industrial Production, Business Inventory and Michigan Sentiment are all on the schedule.

Moody's Survey Of Business Confidence fell again. The index shows sentiment continues to fall from its high set last year but, according to Mr. Zandi, remains strong relative to historic levels and consistent with an expanding economy. He explains that much of the down turn is due to negative sentiment for present conditions, driven by sluggish global growth and market turmoil. Despite the down turn in sentiment the survey still indicates upbeat sales and good credit availability.


The Federal Reserve transferred $97.7 billion to the Treasury today. Much of the money was reported to be interest earnings from securities purchased through its now concluded open market purchase program.

There was a little bit of Fedspeak today, expect more over the next 2 weeks. Lockhart said in a statement that he did not expect to see enough data to warrant another rate hike at the January meeting. He also said that he was confident December was the right time to initiate the first hike.

According to FactSet the expected growth rate for S&P 500 earnings in the 4th quarter is -5.3%. This is down -0.4% from last week and a new low in the series. If the season goes according to trend we can expect this number to rise over the next few weeks by roughly +4%, leaving us with the third quarter of negative earnings growth. The reason for this week's decline is the financial sector which saw a number of downgrades ahead of some expected earnings reports.


On an ex-energy basis 4th quarter growth is projected to be +0.4%. Adding in the expected 4% increase this may go as high as 4.5% by the end of the reporting season. So far 21 companies have reported. 16 have beat on earnings, about average, while only 7 have beaten on revenue, below average. This week 19 more are expected to report.

Expectations for next quarter and next year continue to fall but remain positive. First quarter projections fell by 2 tenths to 0.5%, full year projections fell nearly a half percent to 5.5%. The declines are driven primarily by lower expectations in the energy sector, driven by low oil prices.


The Oil Index

Oil, WTI, fell close to -6% today as supply and production continue to swamp demand. Today's action has taken oil prices to a new low, dipping below $31 and closing below $32, with the $30 level a short drop away. There is still no sign of demand increase, or the production has equalized with demand, oil is likely to remain at or near these levels in the near to short term.

The energy sector got hit again today as plunging oil prices continue to drag on earnings expectations. The Oil Index fell about -2.5% in response, creating a long black candle and hitting my next support target at 950. The indicators are bearish and gaining strength so this level is likely to be tested again if not broken. If oil falls further it will likely be broken. The caveat is that the indicators are also diverging from the new lows so caution is due.


The Gold Index

Gold prices fell in today's session but only marginally. Spot prices lost about -0.05% but did close below $1,100. Prices are being supported by a flight to safety trade as well as Fed speculation, a move that does not yet appear to be very strong. Prices may hang at or near current levels until the FOMC meeting unless economic data is unusually strong or weak.

The gold miners were not supported by gold prices today. The miners ETF GDX fell more than -4.5% in a move that confirms resistance at the $15 level. The indicators are also rolling over, led by stochastic, consistent with the upper end of a trading range. It looks like the GDX will remain range bound between $13 and $15 for now.


In The News, Story Stocks and Earnings

Arch Coal, the nations 2nd largest coal miner, filed for Chapter 11 bankruptcy and is only the latest casualty in the ailing coal sector. The move is aimed at cutting billions in debt from the balance sheet. Reduced demand and lower prices have been hurting the sector for years and is likely to continue. Rival Consol Energy recently issued an earnings warning to to those very factors. That stock lost more than 10% on the news and is approaching 12 year lows.


There were several up and down grades in the financial sector. The most notable was an upgrade to Wells Fargo at Goldman Sachs citing the companies position in a difficult time. At the same time, Goldman downgraded JP Morgan after a period of outperformance. The sector responded by selling off, the Financial Sector SPDR falling nearly -0.75% in a move that set a new 3 month low. The ETF is now trading at potential support levels with bearish indicators and earnings season at hand. If the banks are able to at least meet expectations with positive outlook support at $22 could hold, if not, a break below could take it down to $21 or $20. JP Morgan reports on Thursday: US Bancorp, Wells Fargo and Citigroup report on Friday.


Alcoa reported after the bell, better than expected. The company reported $0.04 per share, double the expected $0.02, on a slight revenue miss and provided positive outlook for 2016. According to the report the company exceeded its own expectations and is forecasting a 6% increase in aluminum demand next year. The stock closed with a loss but gained more than 2.5% in after hours trading.


Rail carrier CSX is expected to report earnings tomorrow. The company and the sector have been hit hard by declining coal prices, just last month CEO Frank Lonegro lowered full year guidance by a full percent, to about 3% from a previously stated range near 4%. Today the stock fell more than -1% to hit a new 2.5 year low. The indicators are bearish and gaining momentum so this move could continue unless tomorrow's report provides positive outlook.


The Indices

The indices had a wild ride today, first up, then down, then up again to close at or near last week's closing levels. Two of the four major indices closed with a small gain, the Dow Jones Transportation Average closed with a loss. The transports lost about -0.45% in today's action and looks like it might go lower. The indicators are bearish in the near term, suggestive of weakness, but divergent from the new low in the short term, suggestive of support. The candle is also suggestive of support although it is unconfirmed. A drop below this level could take the index down to 6,500, if a bounce takes hold first upside target is 7,250.


The NASDAQ Composite also closed with a loss, -0.12%, and appears to be moving down to test support near the Sept/Oct lows. Today's action almost reached those levels and produced a long lower wick on today's candle, suggestive of support. The caveat is that bearish momentum is on the rise so this support is likely to be tested again, near 4,550.


The biggest gainer in today's action was the Dow Jones Industrial Average. The blue chips gained close to 0.3% in today's session and created a bullish candle. Today's signal could indicate the market has reached an extreme of near term bearishness and level of potential reversal. The indicators are mixed; momentum is bearish and gaining strength while signs of support persist in both the MACD and stochastic, consistent with a bull market sell-off. If a peak has indeed been reached and the market bounces back 16,600 is first target for resistance. If the index continues to move lower next target for support is 16,000.


Today's other gainer was the S&P 500. The broad market gained almost 0.1% and created a very interesting doji candle. This candle may signal a bottom to selling although that bottom is unconfirmed. The indicators are mixed; MACD is pointing to lower prices while stochastic is oversold and consitent with support. The index could continue down to retest support levels, near 1,900, with a move beyond that depending on earnings and data.


Today's action has brought the indices down to the Sept/Oct support levels, driven on geopolitical tensions, sluggish growth, financial market turmoil and an expected quarter of weak earnings. This move could continue but there are signs support is at hand, both on the charts and in the market, .

There are concerns and for sure reasons to be cautious but I just don't see a reason to expect a sustained downtrend. Earnings and GDP outlook for 2016 remain positive, with a labor market tail wind, so I do see a reason to expect a rally when near term fears subside. If Alcoa's earnings are a sign of what's to come I think we could see the start of another long term rally within the greater secular bull market begin to unfold. I remain bullish for 2016, waiting for earnings and data, watching for entries.

Until then, remember the trend!

Thomas Hughes


New Plays

Ignoring The Market's Sell-off

by James Brown

Click here to email James Brown


NEW BULLISH Plays

Team Health Holdings - TMH - close: 45.12 change: +0.92

Stop Loss: 42.90
Target(s): To Be Determined
Current Gain/Loss: Unopened
Entry on January -- at $---.--
Listed on January 09, 2016
Time Frame: Exit PRIOR to earnings in early February
Average Daily Volume = 875 thousand
New Positions: Yes, see below

Company Description

Trade Description:
Tonight we are adding TMH as a relative strength play. Really? A relative strength play for a stock that lost -23.7% in 2015 and is down -35% from its 52-week high? The answer is yes.

TMH is in the services sector. According to the company, "At TeamHealth, our purpose is to perfect our physicians' ability to practice medicine, every day, in everything we do. Through our more than 16,000 affiliated physicians and advanced practice clinicians, TeamHealth offers outsourced emergency medicine, hospital medicine, anesthesia, orthopaedic hospitalist, acute care surgery, obstetrics and gynecology hospitalist, urgent care, post-acute care and medical call center solutions to approximately 3,400 civilian and military hospitals, clinics, and physician groups and post-acute care facilities nationwide. Our philosophy is as simple as our goal is singular: we believe better experiences for physicians lead to better outcomes-for patients, hospital partners and physicians alike."

TMH definitely made some headlines in the last quarter of 2015. On October 20th shares of TMH surged on an unsolicited $5 billion buyout offer from AmSurg (AMSG). TMH management rejected the offer. On November 2nd AMSG tried again and raised the cash portion of the cash and stock offer. TMH said no again. Then on November 23rd TMH announced they had completed their acquisition of IPC Healthcare Inc., a national acute hospitalist and post-acute provider organization.

TMH did not have a good second half in 2015. The stock peaked near $70 in August and the correction accelerated in December. Finally TMH found support in mid December around the $43-45 zone. TMH briefly pierced support at the bottom of this trading range on January 4th when stocks started 2016 with a loss. The U.S. market went on to produce its worst first five days of the year on record. Yet TMH shares did not participate. The stock continued to consolidate sideways, building support (the relative strength I was referring to).

It looks like traders started to notice that TMH was not breaking down any further. The stock started to see stronger volume as it bounced toward the top of its trading range. Today we see shares of TMH breakout past resistance at $45.00 and its 20-dma. If the broader market does bounce TMH could accelerate higher. Today's intraday high was $45.44. We are suggesting a trigger to launch bullish positions at $45.55. We will plan on exiting prior to TMH's earnings report in early February (no firm date yet).

Trigger @ $45.55

- Suggested Positions -

Buy TMH stock @ $45.55

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

Buy the FEB $50 CALL (TMH160219C50) current ask $1.55
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 Tag New 3-Month Lows

by James Brown

Click here to email James Brown

Editor's Note:
The U.S. stock market fell to new three-month lows before paring its losses on the session. The S&P 500 managed to close flat but the NASDAQ notched its eighth loss in a row. Crude oil continues to be a major drag on the market.

The volatility in biotech stocks stopped out the XBI trade. We closed the GME trade at the open this morning.

ETN hit our entry trigger.


Current Portfolio:


BULLISH Play Updates

The Kroger Co. - KR - close: 41.28 change: +0.48

Stop Loss: 40.45
Target(s): To Be Determined
Current Gain/Loss: -3.4%
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:
01/11/16: Our KR trade is still alive. Shares looked poised to break support at Friday's close. Today saw KR consolidate sideways most of the session and then surge higher in the last hour of trading. Shares outperformed the broader market with a +1.1% gain.

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




BEARISH Play Updates

Akamai Technologies - AKAM - close: 45.46 change: -2.64

Stop Loss: 46.85
Target(s): To Be Determined
Current Gain/Loss: +7.9%
Entry on January 07 at $49.34
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

Comments:
01/11/16: This morning, before the bell, one analyst lowered their price target on AKAM from $86 to $75. How did AKAM react? Shares plunged from $48 to $45 and ended the session with a -5.48% loss.

The $45.00 level is potential round-number support so I wouldn't be surprised to see AKAM deliver an oversold bounce here. We are going to try and protect a potential profit by adjusting the stop loss down to $46.85.

No new positions at this time.

Trade Description: January 6, 2016:
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.

*small positions to limit risk* - Suggested Positions -

Short AKAM stock @ $49.34

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

Long FEB $50 PUT (AKAM160219P50) entry $3.43

01/11/16 new stop @ 46.85
01/09/16 new stop @ 50.35
01/07/16 triggered on gap down at $49.34, suggested entry was $49.75
Option Format: symbol-year-month-day-call-strike


CF Industries - CF - close: 32.45 change: -1.37

Stop Loss: 34.15
Target(s): To Be Determined
Current Gain/Loss: +16.0%
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:
01/11/16: Shares of CF continued to sink on Monday and underperformed the market with a -4.0% drop to new multi-year lows. Tonight we are adjusting our stop loss down to $34.15.

No new positions at this time.

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

01/11/16: new stop @ 34.15
01/09/16: new stop @ 35.75
01/07/16: new stop @ 37.05
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


Eaton Corp. - ETN - close: 49.15 change: -0.02

Stop Loss: 51.85
Target(s): To Be Determined
Current Gain/Loss: -0.6%
Entry on January 11 at $48.85
Listed on January 09, 2016
Time Frame: Exit PRIOR to earnings in early February
Average Daily Volume = 3.9 million
New Positions: see below

Comments:
01/11/16: ETN fell to new multi-year lows this morning. Shares also tagged our suggested entry point for bearish positions at $48.85. Unfortunately ETN managed to pare its losses and close virtually unchanged on the session. That is a little bit worrisome. No new positions at current levels. I would wait for a new low (under $48.58) before initiating bearish positions.

Trade Description: January 9, 2016:
Industrial stocks did not have a good 2015. The XLI industrials ETF and the Dow Jones Industrial Average both fell more than -6% last year. ETN significantly underperformed its peers with a -23% decline for 2015. Part of the problem is weak demand overseas compounded by a stronger dollar. Plus, the manufacturing sector in the U.S. is in recession.

ETN is in the industrial goods sector. According to the company, "Eaton is a power management company with 2014 sales of $22.6 billion. Eaton provides energy-efficient solutions that help our customers effectively manage electrical, hydraulic and mechanical power more efficiently, safely and sustainably. Eaton has approximately 99,000 employees and sells products to customers in more than 175 countries."

Earnings and revenue growth for ETN was challenging last year. The company lowered guidance four times in 2015. Their most recent earnings report (Q3 results) from October 30th showed revenues were down -9.2% from a year ago. Earnings were down -25%.

ETN management is trying to be proactive. They plan to expand their restructuring efforts into 2016. Hopefully they will be able to cut costs by another $190 million if all goes as planned. The one positive side of ETN's slide has been the surge in its dividend. The stock just closed at three-year lows, which as boosted the dividend yield to 4.2%. Although I don't know why you'd buy ETN for the dividend if you are in jeopardy of losing more than 4% in the stock. The point & figure chart is forecasting a $42.00 target.

The ISM index measures manufacturing activity in the United States. December's ISM reading was negative for the second month in a row and marked the sixth monthly decline in a row. Numbers under 50.0 on the ISM index represent contraction. November's was 48.6. December's slipped to 48.2. Odds are it will be under the 50.0 again this month.

With the industrial sector in recession, revenues and earnings falling, the bearish momentum in ETN should continue. Last week's market decline has pushed ETN below round-number, psychological support at the $50.00 level. Now shares are poised to accelerate lower. Tonight we are suggesting a trigger to launch bearish positions at $48.85. My only caution is our time frame. ETN has earnings coming up in early February (no confirmed date yet). This could be a short-term three-four week play.

- Suggested Positions -

Short ETN stock @ $48.85

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

Long FEB $47.50 PUT (ETN160219P47.5) entry $1.55

01/11/16: triggered @ $48.85
Option Format: symbol-year-month-day-call-strike


Harley-Davidson, Inc. - HOG - close: 42.90 change: -0.85

Stop Loss: 44.15
Target(s): To Be Determined
Current Gain/Loss: +6.2%
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:
01/11/16: HOG was downgraded this morning. The stock reacted with a -4.2% plunge to new lows. Unfortunately shares started to bounce this afternoon and HOG pared its loss to -1.9%.

Tonight we are adjusting our stop loss down to $44.15.

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

01/11/16 new stop @ 44.15
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: 24.02 change: -0.81

Stop Loss: None, no stop at this time.
Target(s): $16.65
Current Gain/Loss: -10.1%
2nd position Gain/Loss: +17.2%
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:
01/11/16: The VXX spiked up to 26.73 before reversing back into negative territory on the session. If the stock market will bounce the VXX should deflate in a hurry.

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

S&P Biotech ETF - XBI - close: 57.14 change: -3.37

Stop Loss: see below
Target(s): To Be Determined
Current Gain/Loss: -4.35
Entry on January 11 at $60.00
Listed on January 07, 2016
Time Frame: 3 to 4 weeks
Option traders: exit prior to February option expiration
Average Daily Volume = 4.3 million
New Positions: see below

Comments:
01/11/16: Biotech stocks were hammered again today. The group was one of the market's worst performers. The IBB biotech ETF dropped toward its 2015 lows before starting to pare its losses. We were trading the XBI. The plan was to buy a dip at $60.00, which should have been support.

This morning the XBI opened at $60.83 and then plunged to $55.51. Our trigger to open bullish positions was hit at $60.00 and then we were stopped out at $57.45 on the way down. In the original play description we discussed how volatile biotech stocks were and how this was an aggressive play but today's relative weakness was still somewhat surprising.

*small positions to limit risk* - Suggested Positions -

Long XBI @ $60.00 exit $57.45 (-4.3%)

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

FEB $65 CALL (XBI160219C65) entry $1.80 exit $0.75 (-58.3%)

01/11/16 stopped out at $57.45
01/11/16 triggered (buy-the-dip) at $60.00
01/09/16 Entry Strategy Update - We are listing two entry triggers.
One trigger is at $63.55 with a stop loss at $59.75.
The other is a buy-the-dip trigger at $60.00 with a stop at $57.45
(Note: the higher trigger has been adjusted from $63.40)
Option Format: symbol-year-month-day-call-strike

chart:



CLOSED BEARISH PLAYS

GameStop Corp. - GME - close: 29.38 change: +1.01

Stop Loss: 29.05
Target(s): To Be Determined
Current Gain/Loss: +6.3%
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:
01/11/16: GME appeared to bottom last week. We decided in the weekend newsletter to exit this morning. Shares opened at $28.33 before surging to a +3.5% gain and breaking through resistance at $29.00 on Monday.

- Suggested Positions -

Short GME stock @ $30.22 exit $28.33 (+6.3%)

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

JAN $30 PUT (GME160115P30) entry $2.44 exit $2.00 (-18.0%)

01/11/16 planned exit this morning
01/09/16 prepare to exit on Monday morning
01/07/16 new stop @ 29.05, readers may want to take profits now
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

chart: