Option Investor
Newsletter

Daily Newsletter, Thursday, 1/14/2016

Table of Contents

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

Market Wrap

Could This Be The Bottom?

by Thomas Hughes

Click here to email Thomas Hughes
The indices made a nice bounce from support as earnings season gets underway.

Introduction

The indices made a nice bounce from support levels as earnings season gets underway. Global fears, while present, are taking a back burner while traders focus on what is starting out as a better than expected reporting season. Today, JP Morgan beat on the top and bottom lines, tomorrow Wells Fargo and Citigroup may do the same.

Early market action was to the upside despite continued volatility abroad. Asian indices were mixed; the Nikkei shed -2.5%, Shanghai gained nearly 2% in the wake of China's recent actions and a terrorist attack in Jakarta involving at least 6 separate explosions. The news caused indices in Europe to fall, the DAX led with a daily low more than -2.5% but closed with a loss of -1.67%.

Market Statistics

Futures trading were positive all morning, indicating a gain of less than 0.25% for most of the indices. The bombing in Jakarta and sell-off in Europe caused the market to wobble a bit but did not overcome hopes and expectations for a decent earnings season. The market continued to wobble after the opening bell; the indices were up, the down, then up, then down and then up again several time before 10:30AM. After that the bulls took charge and drove them up by nearly 1.5%, many of them from potential support levels. Buying lasted all day, intraday high was hit in late afternoon, with the indices closing near those highs.

Economic Calendar

The Economy

Today was light on data, except for weekly claims the only other release was import/export prices. Both fell. Export prices led with a drop of -1%, import prices followed with -0.6%. This is following declines in both for the previous month as well.

Initial claims for unemployment rose by 7,000 from last week not revised figure. This weeks total, 287,000 is slightly above expectations but remains low and consistent with ongoing labor market health. The four week moving average of claims rose by 3,000 to 278,750 and is also consistent with labor market health. On a not adjusted basis claims rose by 24.3% versus an expected +21.1%. Year over year not adjusted claims are -5%. On a state by state basis NY and GA lead with increases in claims of +15,090 and +12,139 while IL and CA lead with declines of -3,633 and -2,191.


Continuing claims rose by 29,000 from last weeks upward revision of 4,000 to reach 2.263 million and approach a 2 month high. The four week moving average also rose, by 5,250, but is holding steady near 2.200 as it has been the past several months. The rise is expected due to seasonal strength in job losses yet remains low and consistent with over labor market health.

The total number of claims for unemployment 313,000 to reach 2.549 for the first time in 9 months. This jump is also not unexpected due to seasonal factors. Based on the historic data we can expect this number to rise again over the next few weeks before topping out and then falling off going into the spring and summer. So far, the total number of claims remains about 10% below levels seen last year and consistent with a healthy labor market.


The KC Fed's Index of Labor Market Conditions was released yesterday. The index shows gains in both activity and momentum. Activity crossed above 0 for the first time since 2008, an event that is historically associated with the onset of economic boom.


The Fed's Bullard spoke in an interview today. He says another rate hike, in the near term, may be hard to justify due to plunging oil prices. This news no doubt had some effect on today's action, it definitely relieves some fear the FOMC would act again in January. Now it looks like March may be the soonest, possibly further out than that.

The Oil Index

Oil prices bounced back today by nearly 3% but remain at low levels near $31. Today's move may be a sign of profit taking or short covering because the fundamental picture remains bearish. Add to that the Iranian supply which is about to be unleashed on the market and outlook for oil prices remains poor.

The Oil Index climbed more than 4% today in a move that confirms support at the 950 level, at least in the near term. Today's action produced a longish white candle and a bullish attack pattern that may lead to a test of resistance at 1,000. The indicators remain bearish but have begun to rollover, consistent with a bounce from support. Longer term, the indicators are divergent from the latest low, another sign of potential support. This level may hold but it will depend on oil prices, a further fall could take the index to new lows. Even if oil prices bounce earnings expectations for the sector will remain low and may keep the index capped at resistance.


The Gold Index

The flight-to-safety trade may have fled out of gold today. The metal fell more than -1.25%, -$14.50, to hit levels near $1,075 and the lowest levels since the end of last year. Today's action may also be driven by the data; labor markets appear to be resilient with low inflation pointing to a stronger dollar. Add in expectations for additional FOMC rate hikes in 2016 and the outlook for gold remains bearish. Down side target is near $1,050 and the most recent lows so long as global tensions don't rise again.

The gold miners reacted as expected, falling more than -4% to reach previously set support target at $13.00. The ETF is falling hard on gold prices and could easily break below $13 but remains range bound for now. The indicators are pointing lower and suggest further testing of support but are also consistent with a range bound asset. This rang may hold for another week or two, the ECB meets next week and the FOMC the week and either could disrupt dollar/gold valuations.


In The News, Story Stocks and Earnings

The Dollar Index made gains today as risk-on appetite comes back to the market. Today's data, early earnings reports and expectations for the season helped to lift the index by roughly 0.5% intraday but left if below the most recent high near $99.50. Today's move may be short lived, the ECB meets next week and the FOMC the week, either of which could devalue the dollar. The ECB is not expected to increase QE or even allude to further QE and the FOMC is not expected to raise rates again so a chance for the euro to appreciate exists. The index remains range bound at this time with support near $98.25 and resistance just above $100; the indicators are consistent with a range but look a little suspicious to me. A fall below support could take this index down to $97 or lower and back to levels seen last summer.


JP Morgan reported earnings before the bell. The banking giant reported a mild beat on the revenue side that resulted in $1.32 in EPS, 5 cents above expectations. Quarterly profits rose 9% from last quarter, 12% from the same quarter last year, driven on strong core loan growth and consumer banking. Shares of the stock rose 1% in premarket trading and added to that after the opening bell. Today's action confirms support at the $57.50 level with mixed indicators. In the near term the indicators are rolling over, consistent with support, but longer term are weak and consistent with a retest of current lows or a new low. Signs of weakness include convergence in the bearish MACD peak and a bearish crossover of stochastic's lower signal line.


Tomorrow Wells Fargo, Citigroup, US Bancorp and a couple of small, regional banks will report. The general expectation is for growth in the sector and if today's report from JPM is a sign of what's to come this expectation will be met or exceeded. Today the Financial Sector SPDR gained more than 1.25% but remains near the bottom of a 15 month range with bearish indicators. The indicators may be peaking, beginning to rollover, but remain weak relative to the past 3-4 months. The ETF is trading below a potential resistance level near $21 that will likely hold if earnings do meet expectations and/or outlook is not good. A move above this level could take the index up to $23 in the near term.


Intel reported after the bell. The worlds largest computer chip maker reported better than expected earnings, revenue and guidance for the 1 st quarter and yet fell -3% in after hours trading. The move reverses gains made during the day and leaves the stock near the bottom of the three month range. This move is surprising, I'm interested to see how it trades tomorrow.


The Indices

Earnings season has begun and many of the reason to be fearful seem to have evaporated. Most of them are still lurking in the back ground but in light of what looks to be the actual end of a three quarter earnings recession. Today's action began a little shaky, but like any new born bull, after a few false starts got off to a ripping start. The indices all made substantial gains, led by the NASDAQ Composite. The tech heavy index advanced more than 2.5% and confirmed support at 4,550. Today's candle is a strong white candle and piercing pattern that could precede a bounce or reversal. The indicators have crested their bearish peak and are now rolling over, consistent with a bounce from support, but remain weak so caution is due. Upside targets for resistance are near 4,700 and then 4,800 with a retest of support within the near to short term due to to convergences in both MACD and stochastic.


The S&P 500 made the next largest gain in today's session, about 1.75%. The broad market index also created a large white candle with bullish overtones but the upper shadow reveals there are still sellers in the market. Today's action confirms support at 1,900 and the indicators confirm, both MACD and stochastic are both cresting a peak coincident with today's bounce from support. While confirming today's bounce, they are also weak and could easily lead to another test of support regardless of how high said bounce will move. Support target is 1,900, upside target is 1,950-2,000 with a chance for more should earnings season unfold favorably.


The Dow Jones Industrial Average posted a gain just over 1.50% in a move just below resistance. Today's action indicates potential support near 16,000, above target levels near 15,750 and a bullish sign if confirmed. The candle is long bodied and white, nearly engulfing the previous long black candle and in this situation suggestive the market has reached an extreme of bearishness. The indicators remain bearish and weak but also show early signs of reversal and consistent with such an extreme. If a rally continues, perhaps driven on positive earnings reports and diminishing market fear, the index could easily pop back above the long term trend line with a target near 17,250.


The Dow Jones Transportation Average was today's laggard with a gain of only 1.15%. Today's candle is not overly strong but does carry bullish overtones, as well as confirming near term support at the 6,600 level. The strength of this support is yet to be seen but the indicators are also suggestive of support. The MACD for one is showing an obvious divergence, stochastic is too but less obvious. This may signal nothing more than pause in the down trend or switch to range bound trading so it's still a little too soon to get bullish on this one. First target for resistance is 7,700, support is 6,600.


Today could be the day. The day the market revealed the bottom and the first best earliest chance to get into the next up trend. If it is, it is still too soon tell, and if the indicators can be trusted, another chance to get in at these levels will present itself, maybe toward the end of the earnings season.

No matter what else is going on the world earnings drive the stock market. We've had a correction driven on three quarters of weak/negative earnings growth, aided by global turmoil, and now the market is oversold and at support with brighter days on the horizon.

This season is likely to be better than expected, the last quarter of negative earnings growth and the lead-in to a year of expanding earnings growth; three reasons for me to remain bullish and optimistic of the future. Even so I remain ever so cautious.

Near term risks include earnings season, the ECB next week and then the FOMC the week after that.

Until then, remember the trend!

Thomas Hughes

 

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New Plays

Short Squeeze Candidate

by James Brown

Click here to email James Brown


NEW BULLISH Plays

Chuy's Holdings, Inc. - CHUY - close: 35.76 change: -0.23

Stop Loss: 33.90
Target(s): To Be Determined
Current Gain/Loss: Unopened
Entry on January -- at $---.--
Listed on January 14, 2016
Time Frame: Exit PRIOR to earnings in late February
Average Daily Volume = 286 thousand
New Positions: Yes, see below

Company Description

Trade Description:
Small cap stocks underperformed last year with the small cap Russell 2000 index falling -5.9% in 2015. CHUY is one small cap that bucked the trend with shares surging +59% in 2015. That relative strength continues in 2016. The Russell 2000 index is already down -9.7% this year. Meanwhile CHUY is up +14% year to date and looks poised to hit new highs.

CHUY is in the services sector. According to the company, "Founded in Austin, Texas in 1982, Chuy's owns and operates 69 full-service restaurants across fourteen states serving a distinct menu of authentic, made from scratch Tex Mex inspired dishes. Chuy's highly flavorful and freshly prepared fare is served in a fun, eclectic and irreverent atmosphere, while each location offers a unique, 'unchained' look and feel, as expressed by the concept's motto 'If you've seen one Chuy's, you've seen one Chuy's!'."

CHUY's earnings and revenues have been hotter than a jalapeno. The company has beaten Wall Street's earnings estimates the last four quarters in a row. They have beaten analysts' revenue estimates in three of the last four quarters. Management has raised guidance three quarters in a row. Check out their revenue growth: Q4 2014 revenues +21.7%, Q1 2015 +19%, Q2 2015 +19%, and Q3 2015 saw revenues +15%. That's on top of a tough comparison to Q3 2014 where revenues rose +20%.

Technically shares appear to be in breakout mode. The surge on January 12th lifted CHUY out of a five-month consolidation and on big volume. Traders bought the dip today exactly where they should have near $34.00, which as prior resistance is now new support. If this rally continues CHUY could see a short squeeze. The most recent data listed short interest at 21% of its small 16.0 million share float. The point & figure chart is bullish and forecasting at $44.00 target.

Today's intraday rebound lifted CHUY back to the $36.00 level. Tonight we are suggesting a trigger to launch bullish positions at $36.65.

Trigger @ $36.65

- Suggested Positions -

Buy CHUY stock @ $36.65

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

Buy the APR $37.50 CALL (CHUY160415C37.5) current ask $2.90
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

Markets See Relief Rally On Thursday

by James Brown

Click here to email James Brown

Editor's Note:
Better than expected earnings and revenues from banking giant JPMorgan Chase (JPM) and a rebound in crude oil helped fuel a widespread market bounce on Thursday. Stocks were very oversold after Wednesday's plunge.

We have removed PF as a candidate.


Current Portfolio:


BULLISH Play Updates

SPDR S&P Regional Banking ETF - KRE - close: 37.36 change: +0.31

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

Comments:
01/14/16: KRE delivered a +0.8% gain today but that failed to keep pace with the broader market's bounce. Odds are still good we will see the KRE dip toward major support near $35.00.

Please note we are adjusting our suggested option strike from the March $35 calls to the March $39 calls.

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 $39 CALL (KRE160318C39)
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.

01/14/16 adjusted the option strike from March $35 calls to the March $39 calls
Option Format: symbol-year-month-day-call-strike




BEARISH Play Updates

CF Industries - CF - close: 32.62 change: +0.86

Stop Loss: 33.60
Target(s): To Be Determined
Current Gain/Loss: +15.6%
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:
01/14/16: The market's oversold bounce today fueled a hefty rebound in CF. Shares gained +2.7% on the session.

More conservative investors might want to tighten their stop loss again (or just take some money off the table).

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: 48.32 change: -0.11

Stop Loss: 50.75
Target(s): To Be Determined
Current Gain/Loss: +1.1%
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:
01/14/16: It is encouraging to see ETN underperform the market today. Shares spiked down to new lows at $47.15 and then bounced back into positive territory before fading back into the red.

No new positions at the moment. If the market bounces again we might see ETN try to rise toward $50.00.

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: 41.97 change: +0.17

Stop Loss: 44.15
Target(s): To Be Determined
Current Gain/Loss: +8.3%
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:
01/14/16: Shares of HOG also fell to new multi-year lows this morning. The market's big rebound today lifted HOG back into the green for the session but shares underperformed the broader market.

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: 24.29 change: -0.91

Stop Loss: None, no stop at this time.
Target(s): $16.65
Current Gain/Loss: -11.3%
2nd position Gain/Loss: +16.3%
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:
01/14/16: Investors are still cautious. The market delivered a very big bounce today but the volatility indices did not retreat as much as you might think they would.

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

Pinnacle Foods Inc. - PF - close: 42.13 change: -0.88

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: see below

Comments:
01/14/16: Shares of PF are not cooperating. The stock underperformed the market yesterday with a -3.2% decline. The relative weakness continued today with a -2.0% drop. The long-term trend of higher lows remains intact but we are removing PF from the newsletter given the recent weakness.

Trade did not open.

01/14/16 removed from the newsletter. Suggested entry was $45.15

chart: