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Daily Newsletter, Wednesday, 1/13/2016

Table of Contents

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

Market Wrap

Gap It Up, Sell Into It, Rinse and Repeat

by Keene Little

Click here to email Keene Little
The pattern for this week has been repetitive with overnight rallies to create a gap-up start for the stock market but then the rallies are sold into by those wanting to reduce their inventory and opex exposure. Today differed a little bit though by not rallying in the afternoon.

Today's Market Stats

The pattern of morning rallies that are then sold into was repeated again this morning. But on Monday and Tuesday we saw afternoon turnarounds to get the indexes back up to flat or in the green. That did not happen today as the selling continued this afternoon. There was a bounce attempt in the afternoon but it was again sold into and the indexes closed near their lows for the day. That looks bearish but there are now signs that we could soon put in a tradeable bottom (or at least stop the selling).

There's little question the market is oversold but we all know oversold can continue to get more oversold. We saw bullish divergences forming last week at the new price lows but that was negated with today's decline. There are no bullish divergences yet on the daily charts and the weekly oscillators are in full dive mode. Things are certainly looking a little ugly for the bulls and knowing market crashes come out of oversold we certainly have to acknowledge the possibility of another flash crash event. But that's a low-odds scenario and not a good bet if trading, except for perhaps holding a JIC position (Just in Case).

Investor sentiment is getting bearish enough to be a cause for concern for the bears (from a contrarian perspective). Investors Intelligence shows the bears are now 35.7%, which is a little more than we saw at the September 2015 low. However, like oversold conditions, it can always get more bearish -- at the 2009 low the percentage of bears was 55% and at the October 2011 low it was 47%. At the moment it's simply a warning sign.

The AAII (American Association of Individual Investors) survey showed 51.7% of investors were bullish at the beginning of the year but only 25.1% consider themselves bullish today. This is one reason why I wonder what Friday's Michigan Sentiment for January will look like. The market expects it to stay the same as November at 92. The AAII sentiment survey shows the bulk of investors (51.3%) are neutral, not quite ready to believe the bear has taken hold so that's actually a bearish sign -- there's lots of room to accommodate more bears. While 22.3% of investors considered themselves bearish at the beginning of the year, that number has jumped only marginally higher to 25.1% today. I wonder what it will take to turn more investors bearish, especially since there's still too much faith in "the market always comes back."

There were no important economic reports this morning and about the only thing the market seemed concerned about was whether or not the Chinese market was selling off. Another small gap up started the Chinese day and the morning rally helped lift our futures in overnight trading. But the Shanghai composite index then sold off in the afternoon and closed at new lows for January and is now near its August low at 2927 (today's close was 2949). Some of our indexes are also closing in on the August lows. The RUT is well below its August and September lows and the Wilshire 5000 closed below both lows today. SPX is close and I expect the Shanghai composite index to follow/lead lower as well.

There was very little news to move the market and the only thing a little surprising is the lack of even a decent bounce during opex week, which is typically a bullish week. But as I've often said, when opex is not bullish it tends to be very bearish as all those big financial firms are forced to buy back their short puts and sell their long calls, both of which put downward pressure on the market. I wouldn't be surprised that's what's causing the selling into rallies. Once this selling pressure is relieved, possibly tomorrow and certainly next week, we'll see a bigger bounce. So let's see what the charts are telling us.

I want to start with a top-down look at the Nasdaq-100 (NDX) in tonight's chart review to review where we've been and where we could be going. Going back in time, the first monthly chart below shows the period from 1985 through 2006 and I show a rising wedge pattern following the October 1987 high and the stock market crash that month (it looks so small now but it was a -40% crash). When I zoom in closer (not shown below) I can see a monthly bearish divergence on MACD at the March 1994 high compared to the previous high in January 1992 so it certainly looked at the time like an ending pattern to the upside.

But instead of turning into a bearish rising wedge we can see price broke out to the upside in June 1995. A failed pattern tends to fail hard and that's certainly what happened -- it led to a very strong 5-year rally. I note the start of the parabolic portion of the rally as the breakout above the wedge, using 500 as a close approximation. The start of the parabolic portion of the rally could be argued as starting in 1994, from the June 1994 low at 350, especially when the chart is viewed with the arithmetic price scale, but to stay conservative I'll use the 1995 break out from the rising wedge, near 500, as the starting point.

Nasdaq-100, NDX, Monthly chart, 1985-2006

The second monthly chart below takes us to the current time frame and a projection for what could happen in the future. This is when the start of the parabolic rally could be important since parabolic rallies typically retrace back to the start of the move, hence the potential for the NDX to return to 500 (350?). The 3-wave a-b-c bounce off the October 2002 low is very clear and while it could be a more bullish 1-2-3 in a new bull market, the secular cycle tells us we have another leg down for the bear and therefore the completion of the a-b-c bounce should now be followed by a decline at least equal to the 2000-2002 decline, probably more.

As noted on the chart below, the 2000-2002 decline was -83.5% and another equal decline in percentage terms would be a loss of 3955 points off the November high at 4737, for a downside target at 782 (the October 2002 low was at 795). A decline to 500 would be a loss of nearly -90%. As for the end of the 2009-2015 rally, the 2015 highs were up against a trend line along the highs from January 2004 - October 2007 and at the top of a parallel up-channel for the leg of the rally from 2010. Now it's close to testing the bottom of the up-channel, near 4145, and an uptrend line from March 2009 - August 2015, a little lower near 4100. Today's low was 4177 and I believe NDX will break below 4100 but possibly not until a couple of months from now.

Nasdaq-100, NDX, Monthly chart, 1999-2020

The uptrend line from 2009-2015 and the bottom of the parallel up-channel from 2010 are shown more clearly on the weekly chart below. A weekly close below 4100 would signify more bearish trouble for the market but a drop to support at 4100-4150 should hold and lead to a higher bounce in February in a correction to the decline from the December 2nd high. Following the February bounce the bearish pattern then calls for a stronger decline into March-April. From a weekly perspective the bulls don't get the ball back until they can get the NDX back above the December 29th high at 4702.

Nasdaq-100, NDX, Weekly chart

Following the completion of the leg down from this morning's high, either here or a little lower on Thursday, the pattern for the decline from December 2nd would then look best with a bounce correction into the end of the month and then another leg down to complete a 5-wave move down. That would then be a good setup for a larger bounce into February before setting up a larger decline in March. The first early sign of bullish strength would be a rally above this morning's high near 4360 but for now the short-term pattern remains bearish.

Nasdaq-100, NDX, Daily chart

Key Levels for NDX:
- bullish above 4475
- bearish below 4100

SPX dropped to support today at its uptrend line from August-September and price-level S/R from its March 2014 high and October 2014 closing low, both at 1885-1888, with today's low at 1886. A very small bounce off that support level late this afternoon got no traction and the decline back down into the close has it looking like it will press at least a little lower. The next support level is the August low at 1867. Following the completion of the leg down from this morning's high, which does a good job completing the leg down from December 2nd, we should see a bounce correction into early February before heading lower again. The bulls need to get SPX above 1965 before I'd start feeling a little more bullish, although an impulsive rally off the low would have me looking for at least a higher bounce.

S&P 500, SPX, Daily chart

Key Levels for SPX:
- bullish above 1965
- bearish below 1885

The SPX 30-min chart below shows the leg down from December 29th shows why I think this leg down is close to completion. We could be in the middle of a much larger crash leg lower but that's a low-odds bet. The 5th wave of the move down from December 29th is the leg down from this morning's high and it has so far achieved 62% of the 1st wave, at 1893.55. Other than the August low at 1867 there is also a projection near 1858 where the 5th wave would equal the 1st wave. I think there's a good chance the 5th wave is either complete or will complete on Thursday and that makes a good setup to trade the long side (just keep in mind that it would be a counter-trend trade and it could be very choppy and whippy).

S&P 500, SPX, 30-min chart

To help keep all this in perspective, the SPX weekly chart below shows what I believe to be the two higher-odds probabilities for the coming year. The bearish wave pattern calls for price to stair-step lower into a low just below 1800 by April where it would test its uptrend line from March 2009 - October 2011 (arithmetic price scale) and its 200-week MA. That would lead to a larger (in time if not price) bounce correction into June/July before heading lower to 1576 (the 2007 high) by September. From there we could expect a very large bounce correction into early 2017 before the bottom falls out from under the market. The bullish potential is shown with the light green dashed line, which calls for a rally back up to the downtrend line from July - November 2015 highs as part of a large sideways triangle consolidation pattern, which would be expected to complete later this year and then start a strong rally. That would be a continuation of the choppy consolidation that we had in 2015. Ugh.

S&P 500, SPX, Weekly chart

We have the same pattern for the DOW -- it could start a bounce from here or drop a little lower to firmer support near 16K before starting a larger bounce into the end of the month. After the larger bounce I see the potential for the DOW to drop down to its August 25th closing low at 15666, if not its August 24th low at 15370 and its February 2014 low at 15340. The lower-probability scenario, like SPX, is for a larger sideways triangle and we could see the DOW start back up to the top of the triangle, which is the downtrend line from May-November, near 17800. The bulls have some short-term work to do before I'll look at that possibility more seriously.

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- bullish above 16,900
- bearish below 16,000

A downside target that I've been eyeing for the RUT, at 1005.10, was achieved today (almost, with a low at 1005.68), which is the 162% projection for the 3rd wave of the decline from December 2nd. There is another downside projection near 996, which is based on the pattern for the leg down from December 29th. And then, as shown on the daily chart below, two equal legs down from June points to 987.71. It would be more bearish below 987. In the meantime, assuming we'll get a 5-wave move down from June, we need to see a bounce/consolidation into the end of the month before starting another leg down in February.

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- bullish above 1065
- bearish below 987

As the stock market sells off we're seeing money rotate in the relative safety of Treasuries and it's looking like the bonds are finally breaking out of the sideways consolidation that I've been showing for months. Using TLT, the weekly chart below shows this week's break of the downtrend line from January 2015, although better confirmation of the breakout will be when it climbs above its October high at 126.21. In case it's just an a-b-c bounce off the November 9th low, where it would have two equal legs up at 125.77, that's another level that bond bulls will need to break. But assuming the leg rally leg is underway, I show a rally up to the trend line along the highs from December 2008 - July 2012, by the end of June. There's a price projection there at 142.38, which is where the leg up from December 30th would be 162% of the June-August 2015 rally. This projection will of course be modified as price dictates.

20+ Year Treasury ETF, TLT, Weekly chart

We're getting plenty of warning signs about the 2009-2015 bull market having ended and one big warning sign is coming from the banks. As they say, follow the money and you'll find your answer. Last week BKX dropped to a longer-term price-level support near 66.50, which goes back to mid-2013 and held 5 previous pullbacks, the last being the September 2015 low. This week's break of support is significant and the only way to save this is a rally into Friday for a weekly close at/above 66.50. Now we watch to see if at least the 200-week MA, at 64.20 will hold as support for a bounce (today's low was 64.53).

KBW Bank index, BKX, Weekly chart

Another way to look at the banks is with a Relative Strength (RS) chart, comparing it to a broader index, such as SPX. The monthly chart below shows BKX first started breaking down in mid-2003 and dropped sharply into the low in 2009 (the banks led the way lower). The EW count for the decline is a clean 5-wave move and that's important -- a 5-wave move will not stand by itself. It will be followed by another leg down following a correction and that correction appears to be a nice b-wave sideways triangle off the 2009 low. The a-b-c-d-e count for the triangle looks complete at the July 2015 high and we should be at the beginning of the next leg down. Currently the RS value is at the bottom of its sideways triangle and we could see a bounce before breaking down (which would mean the banks could outperform in a February bounce) but I expect the banks will continue to lead to the downside in the next bear market leg down. The banks might not be bailed out in the same way during the next crisis and more bankruptcies/mergers will probably occur.

Relative Strength of BKX vs. SPX, Monthly chart

The TRAN has been in trouble for a while and this week's decline has it breaking its uptrend line from March 2009 - October 2011 (arithmetic price scale), which is where it was trying to hold support on Monday and Tuesday. Today's close was also below the trend line along the lows from December 2014 - August 2015, near 6795. I see the potential for at least a small bounce before continuing lower but in any case, watch 6500 for possible support if reached. That's where the decline from December 2014 would achieve two equal legs down.

Transportation Index, TRAN, Daily chart

The U.S. dollar has been mostly consolidating since December and there's not much in the way of bullishness that I see. My expectation continues to be for a pullback to the bottom of its trading range, near 94, and then another up-down sequence this year before rallying later this year and into 2017. Not much to see here folks, move along.

U.S. Dollar contract, DX, Weekly chart

The financial newsletters have been out strong recently about why we should own gold and why now is an excellent time. There is still too much interest in gold and from a contrarian perspective it's still too early to think about accumulating more gold (a monthly purchase plan is a great idea though -- add a little bit each month and if it gets cheaper you'll simply buy more with the same monthly allotment). The price pattern continues to suggest lower prices, maybe after a higher bounce to 1142 resistance but after a 3-wave bounce off the December 3rd low we could see gold head lower from here.

Gold continuous contract, GC, Daily chart

It's tough to call a bottom for oil but it's looking like it could form one here for at least a little larger bounce before heading lower. Ideally, the wave count for the move down from June 2015 will be a 5-wave move to complete the decline and right now it's a 3-wave move down. So a bounce correction and then new low would set it up for a longer-term bounce/rally. Tuesday's low, at 29.93, came close to the 29.80 projection shown on the weekly chart below, which is the 162% extension of the previous rally (March-June 2015). A choppy consolidation that stays below the January 2009 low (support-turned-resistance) could then lead to a drop to 26, which is price-level S/R since 1984 (last touched in 2003). As noted on the chart, a 77% decline from May 2011, to equal the 2008-2009 decline, points to 26.40 so there's good correlation at that level for a low around April.

Oil continuous contract, CL, Weekly chart

Thursday's economic reports will not be market moving but Friday morning will be a little busier and could jostle the market a little. There are some Fed-watched numbers in there, namely PPI and we'll get some more information about the economy with the Empire Manufacturing index (expected to slow further) and Industrial Production (expected to stay in negative territory). It will be interesting to see if the Michigan Sentiment report comes in as expected -- flat at 92.

Economic reports

Conclusion

The month of January has been a very painful one so far for bulls (-1600 DOW points so far). The first week was the worst start to a new year and the second week hasn't been much better, although not nearly as many points have been lost (yet). We could see some lower prices Thursday morning but it's starting to look like a good setup for at least a bounce, one that could take us into the end of the month and give us a bigger bounce than we've seen since December.

The trouble with the expected bounce is that it's likely to be choppy and whippy and that means traders could have a tough time making money. In the pattern for the decline from November a 2-week bounce/consolidation would be a 4th wave correction and I call these "feed your broker" corrections. Traders get stopped out in both directions and the only ones who tend to make money consistently during these corrections are the brokers with their commissions. So be careful with your trading the next couple of weeks since long plays are now considered counter-trend but short plays might not work any better. Small base hits will be the right way to trade it. Once the correction finishes, which could be around the end of the month, we should have another good shorting opportunity.

Pressing bets to the downside is now a risky bet. We could see the market crash lower but that's a low-odds bet. While I see a little more downside potential, such as SPX 1867 (maybe 1858), it's a risky time since a short-covering spike back up could nail shorts quickly. If anything, look for some opportunities to nibble on the long side but be quick about taking profits -- run out, grab your little piece of cheese and then scoot back into your hole before the cat sees you.

 

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Good luck in the coming week and I'll be back with you next Wednesday (Saturday for the Index Wrap).

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

Nearing Major Support

by James Brown

Click here to email James Brown


NEW BULLISH Plays

SPDR S&P Regional Banking ETF - KRE - close: 37.05 change: -1.39

Stop Loss: 34.40
Target(s): To Be Determined
Current Gain/Loss: Unopened
Entry on January -- at $---.--
Listed on January 13, 2016
Time Frame: 3 or 4 weeks
Average Daily Volume = 4.9 million
New Positions: Yes, see below

Company Description

Trade Description:
Many people thought banks would be winners after the Federal Reserve hiked rates in December. While the Fed did raise rates (barely) the financial stocks didn't see much progress.

The Fed is still talking about raising rates multiple times in 2016. There is a growing camp of market watchers who believe the Fed will be forced to back track. Deteriorating economic conditions both in the U.S. and abroad may force the Fed to pause their rate hike plans or even cut rates again.

Even if the Fed does try to raise rates the yield curve, where many banks make their money, could struggle. If the stock market remains sour throughout 2016 it will drive money into the perceived safety of U.S. bonds and that will keep yields on the 10-year low. So now that I have painted a rather unappetizing picture for the banks I'm adding a new bullish play.

All of the issues above are long-term troubles that could plague financials throughout 2016. On a short-term basis the banks are oversold and due for a bounce. Tonight's trade is a short-term technical one. The KRE is nearing major support and should rebound.

If you are not familiar with the KRE it is an ETF that tracks the S&P regional banks select industry index. The top ten holdings in this ETF are: PNC, BBT, KEY, STI, HBAN, CIWV, RF, FITB, MTB, ZION,

You can see on the daily chart below the KRE is plunging. On the weekly chart I have highlighted long-term support at the $35.00 level. Odds are good that if the KRE is going to bounce that is the spot to watch. Tonight I am listing a buy-the-dip trigger at $35.50. We will start this trade, if triggered, with a stop loss at $34.40. Remember, this is a short-term trade. We want to get in, catch a bounce, and get out.

Buy-the-dip Trigger @ $35.50

- Suggested Positions -

Buy the KRE (etf) @ $35.50

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

Buy the MAR $35 CALL (KRE160318C35) current ask $3.00
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 Enter Correction Territory

by James Brown

Click here to email James Brown

Editor's Note:
The stock market resumed its sell-off today leaving the big cap U.S. indices in correction territory (down more than -10% from their highs). Stocks closed near their lows for the session, which doesn't bode well for tomorrow morning.

KR and TMH were stopped out.


Current Portfolio:


BULLISH Play Updates

Pinnacle Foods Inc. - PF - close: 43.01 change: -1.43

Stop Loss: 42.45
Target(s): To Be Determined
Current Gain/Loss: Unopened
Entry on January -- at $---.--
Listed on January 12, 2016
Time Frame: Exit PRIOR to earnings in late February
Average Daily Volume = 885 thousand
New Positions: Yes, see below

Comments:
01/13/16: The stock market's big drop today fueled a -3.2% plunge in PF. Shares dropped back toward its 50-dma before starting to bounce. I would be tempted to launch new bullish positions on a bounce back above its simple 200-dma (near $43.40). However, we will keep our suggested entry point at $45.15 for the moment.

Trade Description: January 12, 2016:
2016 is off to a rough start and investors could turn more defensive as they look at an uncertain future. That could be behind the rally in shares of PF these last several days.

PF is in the consumer goods sector. According to the company, "In more than 85% of American households, consumers reach for Pinnacle Foods brands. Pinnacle Foods is ranked on Fortune Magazine's 2015 Top 1000 companies list. We are a leading producer, marketer and distributor of high-quality branded food products, which have been trusted household names for decades. Headquartered in Parsippany, NJ, our business employs an average of 4,500 employees. We are a leader in the shelf-stable and frozen foods segments and our brands hold the #1 or #2 market position in 10 of the 14 major categories in which they compete.

Our Birds Eye Frozen segment manages brands such as Birds Eye®, gardein®, Birds Eye Steamfresh®, C&W®, McKenzie's®, and Freshlike® frozen vegetables, Birds Eye Voila! ® complete bagged frozen meals, Van de Kamp's® and Mrs. Paul's® frozen prepared seafood, Hungry-Man® frozen dinners and entrees, Aunt Jemima® frozen breakfasts, Lender's® frozen and refrigerated bagels, and Celeste® frozen pizza. Our Duncan Hines Grocery segment manages brands such as Duncan Hines® baking mixes and frostings, Vlasic® and Vlasic Farmer's Garden® shelf-stable pickles, Wish-Bone® and Western® salad dressings, Mrs. Butterworth's® and Log Cabin® table syrups, Armour® canned meats, Brooks® and Nalley® chili and chili ingredients, Duncan Hines® Comstock® and Wilderness® pie and pastry fruit fillings and Open Pit® barbecue sauces. Our Specialty Foods segment manages Tim's Cascade Snacks®, Hawaiian® kettle style potato chips, Erin's® popcorn, Snyder of Berlin® and Husman's® snacks in addition to our food service and private label businesses."

PF has been actively pursuing strategic acquisitions. Last year they bought Canadian-based Garden Protein International Inc., the maker of a plant-based protein brand Gardein. In the first quarter of 2016 PF is about to close on its acquisition of Boulder Brands Inc. (BDBD).

Here's a brief description of BDBD from the company, "Boulder Brands, Inc. is committed to offering food solutions that give consumers opportunities to improve their lives - one product at a time. The company's health and wellness platform consists of brands that target specific health trends: the Glutino® and Udi's Gluten Free® brands for gluten-free diets; the Earth Balance® brand for plant-based diets; EVOL foods for consumers seeking simple and pure ingredients; and the Smart Balance® brand for heart healthier diets."

The BDBD acquisition is expected to add about $0.20 5o PF's earnings in 2016. There has been some investor concern that PF may have paid too much for BDBD but the company feels the acquisition gives them a good position in the growing gluten-free market. Independent research firms forecast gluten-free sales to see a +6% compound annual growth rate (CAGR) between now and 2019. Meanwhile PF is forecasting their total sales to grow +22% CAGR from 2016-2018.

At least one Wall Street firm is bullish on PF. Yesterday BMO Capital Markets upgraded their outlook on PF to "outperform" and gave it a $50 price target. BMO feels that PF is their "top pick" for 2016.

Technically shares of PF have been consolidating sideways in a huge pennant-shaped consolidation for months (see weekly chart). At the same time shares have respected the long-term bullish trend of higher lows. The action this week has produced what looks like a bullish breakout from its major consolidation pattern. We want to see some follow through since the $45.00 region has been resistance in the past. Tonight we are listing a trigger to launch bullish positions at $45.15.

Trigger @ $45.15

- Suggested Positions -

Buy PF stock @ $45.15

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

Buy the MAR $45 CALL (PF160318C45)

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




BEARISH Play Updates

CF Industries - CF - close: 31.76 change: -0.78

Stop Loss: 33.60
Target(s): To Be Determined
Current Gain/Loss: +17.8%
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:
01/13/16: The S&P 500 lost -2.5% today. CF almost kept pace with a -2.4% drop of its own. I would not chase it here. Tonight we are adjusting our stop loss down to $33.60.

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

01/13/16 new stop @ 33.60
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: 48.43 change: -1.52

Stop Loss: 50.75
Target(s): To Be Determined
Current Gain/Loss: +0.9%
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:
01/13/16: ETN rallied up to tag technical resistance at its 10-dma this morning and then promptly reversed lower. Shares fell -3.0% on the session and closed at new lows. This looks like a new entry point for bearish positions. Tonight we will adjust our stop loss down to $50.75.

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

01/13/16 new stop @ 50.75
01/11/16 triggered @ $48.85
Option Format: symbol-year-month-day-call-strike


Harley-Davidson, Inc. - HOG - close: 41.80 change: -0.55

Stop Loss: 44.15
Target(s): To Be Determined
Current Gain/Loss: +8.6%
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:
01/13/16: The bounce attempt in HOG failed near $43.00 this morning. Shares reversed into a -1.29% decline and a new closing low.

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: 25.20 change: +2.29

Stop Loss: None, no stop at this time.
Target(s): $16.65
Current Gain/Loss: -15.5%
2nd position Gain/Loss: +13.1%
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:
01/13/16: The market's plunge to new three-month lows fueled a big surge in the volatility index. The VIX gained +12.2%. Meanwhile the VXX added +10%.

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

The Kroger Co. - KR - close: 39.20 change: -2.04

Stop Loss: 40.45
Target(s): To Be Determined
Current Gain/Loss: -5.4%
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:
01/13/16: The combination of a disappointing earnings report from rival grocery store operator SUPERVALU Inc. (SVU) and the broader market's sell-off today was too much for shares of Kroger. KR plunged through support near $40.60 and $40.00 and its 50-dma. Our stop loss was hit at $40.45.

- Suggested Positions -

Long KR stock @ $42.75 exit $40.45 (-5.4%)

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

APR $45 CALL (KR160415C45) entry $1.15 exit $0.50 (-56.5%)

01/13/16 stopped out @ 40.45
12/30/15 triggered @ $42.75
Option Format: symbol-year-month-day-call-strike

chart:


Team Health Holdings - TMH - close: 40.55 change: -3.48

Stop Loss: 42.90
Target(s): To Be Determined
Current Gain/Loss: -5.8%
Entry on January 12 at $45.55
Listed on January 11, 2016
Time Frame: Exit PRIOR to earnings in early February
Average Daily Volume = 875 thousand
New Positions: see below

Comments:
01/13/16: TMH has been a terrible performer for us. We were triggered yesterday morning on a brief rally higher and shares immediately reversed lower and underperformed the market with a -2.4% drop. Today the relative weakness continued. TMH collapsed with a -12.6% plunge to an intraday low of $38.45. Shares managed to pare their losses to -7.9% by the closing bell. Our stop loss was hit at $42.90.

- Suggested Positions -

Long TMH stock @ $45.55 exit $42.90 (-5.8%)

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

FEB $50 CALL (TMH160219C50) entry $1.65 exit $0.65 (-60.6%)

01/13/16 stopped out @ 42.90
01/12/16 triggered @ $45.55
Option Format: symbol-year-month-day-call-strike

chart: