Option Investor
Newsletter

Daily Newsletter, Saturday, 2/13/2016

Table of Contents

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

Market Wrap

Retest of the Lows

by Keene Little

Click here to email Keene Little
The stock indexes made it back down to their January lows (some with higher, some with lower lows) for what looks like might be a successful retest. The week finished negative (again) but the setup looks good for some bullish follow through in the coming week, which would be typical for opex.

Week's Market Stats

Friday's Market Stats

As you can see in the tables above, Friday finished strong but for the most part it wasn't enough to erase the losses for the week. For the week the banks were weak and the semiconductors were also weaker, both of which are not helpful for the bulls. There's certainly the possibility Friday's bounce will get turned around and the indexes could break lower. But at the moment it's looking like we should get a reprieve from the selling.

For the first six weeks of this year we've seen four of them down. The bounce off the January 20th low gave us two positive weeks but the bounce failed and prices dropped back down to the January lows. If the bulls can follow through on Friday's buying with some more buying in the coming week we'll see some nice bullish divergences against the January 20th lows. The market is clearly oversold and the setup looks good for at least a little larger bounce correction before the bears return.

Part of this past week's volatility was due to Janet Yellen's testimony before Congress and she was grilled a little more sharply than we've seen in the past. Typically softballs are tossed the Fed Chairperson's way so that they're easier to return. But apparently lawmakers, like people in general, are starting to lose faith in the Fed and what they can do. Many are now blaming the Fed's December rate increase for the stock market decline and it's likely it was a catalyst but of course we know the market is all ready for a move before the catalyst arrives. We just never know what the catalyst will be.

In her testimony Yellen started preparing the market for negative interest rates (NIRP), which many European countries already have and Japan has now started. In the race for the bottom in fiat currency devaluations the U.S. will be forced to follow in order to remain competitive with our exports and so as not to import deflation (import prices were down another -0.2% in January, following December's -0.3%). The Fed is talking about the possibility of NIRP, even if they say it's not likely, is a way for them to prepare the market (and the banks since it would hurt their earnings) for the likelihood. It's a move that would drive Treasury yields even lower and that will obviously have a huge negative impact on savers and retirees looking to earn income from their savings. Get ready for it to happen and possibly before the end of this year.

One of the hopes from going nuclear with NIRP is that it will force banks to lend, savers to spend and entice borrowers to borrow more. Companies would borrow more and buy back more stock in hopes of improving their earnings per share and drive stock prices higher. But when Japan announced their implementation of NIRP it generated only a brief rally before dropping nearly -8%. The Nikkei index just closed one of its worst weeks in years. So much for NIRP helping the market's psychology. The media, and Congress, are rightfully beginning to question NIRP and all the other failed policies of the central banks. They are out of ammo but you can bet they're not done trying more of the same failed policies on us.

The only thing that has worked to boost the stock market is liquidity and that comes from QE. I think therefore we can expect QE4 from the Fed before they go NIRP on us. The problem for the Fed, and by extension us taxpayers, is that the Fed is already deep in the hole and essentially insolvent now (especially if they use mark-to-market valuations instead of their make-believe valuations). Adding trillions more to their debt will only significantly weaken the entire financial system. The only one to bail out the Fed is the government but I have to wonder if another bailout would be the final straw for people who are already frustrated and angry with the government and bankers.

But that's something in the future to worry about. As traders we just want to know what's going to happen next week and try to get a piece of the move. I want to kick off the chart review with a look at the RUT's weekly chart but before I do that I want to show a chart I've shown relatively recently to highlight the downside risk over the next few years and then compare that to the RUT's pattern, which suggests we might actually be looking for something more bullish this year before the big bad bear snaps his jaws shut.

The big expanding triangle for the Dow shows the throw-over above the top of the triangle in 2015 and the subsequent decline from there. First thing to note is how small the pullback is so far. All the wringing of hands and gnashing of teeth for such a relatively small decline. If the decline really gets going I can only imagine the angst, especially since the 2007-2009 decline is relatively fresh in everyone's mind. But take note of the expanding triangle because I'm going to show a similar one for the RUT. Following the 2000 high we have an a-b-c-d-e wave count, which is why the 2015 high fits as THE high.

Dow Industrials, INDU, Monthly chart

Now look at the RUT's expanding triangle pattern on its weekly chart. The move down from the June 2015 high is a 3-wave move, as it should be inside a triangle pattern. The bullish interpretation of this pattern suggests we're going to get another rally to a new high this year and back up to the top of the expanding triangle before it then drops back down to the bottom of the triangle, perhaps in 2018. While I don't believe this will play out I think it's important to always try to see how the market could do what I don't expect. The same pattern for the DOW, in a larger-degree pattern, called for another rally leg up to the top of the triangle following the 2009 low. We couldn't know then, just as we can't know now, if a large rally for the RUT will happen but it's a possibility (even if that possibility is not a high probability, imho).

Russell-2000, RUT, Weekly chart

Instead of expecting another rally to a new high for the RUT this year, I think the higher-probability pattern is the bearish one (bold red depiction), which suggests a bounce correction and then a continuation lower. Assuming we'll get the bounce (wave-iv on the chart), maybe into April, we should then get another new low to complete a 5-wave move down from last June. The H&S top points to about 860 for a downside objective, which would be a test of price-level S/R at 868. Since I'm expecting a 4th wave correction, it can't overlap the wave-i low (the September 2015 low near 1079), so if did then I'd turn more bullish.

The daily chart shows what I think are the two higher-probability moves in the next few weeks, both bullish so at a minimum I think we should be looking to play the long side into March. If the RUT breaks below 940 I would turn short-term bearish but until that happens I believe we have some oversold conditions that need some relief. The 5-wave move down from December 2nd, with the 5th wave nearly achieving equality with the 1st wave (at 941 with Thursday's low at 943), gives us a very good setup to play a reversal to correct the 5-wave move down. How the correction will play out is the big question. We could see a quick high bounce up to price-level S/R near 1080 (light-red dashed line), which would also be a 50% retracement of the decline from December, or we could see a slower choppy sideways/up kind of consolidation into April that maybe back-tests the broken uptrend line from March 2009 - October 2011 and retraces 38% of the decline from December (a typical retracement for a 4th wave correction), which is near price-level S/R at 1040. It could get whippy so trade carefully (4th wave corrections are difficult to trade).

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- bullish above 990
- bearish below 940

SPX also has what looks like a completed 5-wave move down from December 2nd and while the larger pattern since last year's highs is subject to different interpretations between the indexes, it's the 5-wave move down into Thursday's low that has me looking for a bounce correction. It's too early to tell if it will be a sharp bounce above 1950 are a flatter correction but the expectation is for the market to continue lower once the bounce correction has finished. I think bullish through the rest of this month (or at least not bearish) is the way to work your trades but again, 4th wave corrections have a tendency to whip traders around. It's the reason I call these corrections "feed your broker" corrections. Traders tend to trade too actively and get stopped out a lot. The first thing the bulls need to accomplish, to confirm the leg down from December 29th has completed, is break the downtrend line from that high, currently near its 20-dma at 1885.

S&P 500, SPX, Daily chart

Key Levels for SPX:
- bullish above 1885
- bearish below 1800

From a shorter-term perspective the bulls have confirmed the leg down from February 1st has completed by breaking out of the down-channel from that high, which it did on Friday. After a little back-test midday it then pushed higher and finished just under price-level S/R at 1867 (its August 2015 low). We now wait to see if that resistance level will result in a pullback Tuesday morning or if instead we'll see it gap up over resistance, in which case look for 1885 next.

S&P 500, SPX, 60-min chart

Thursday's low for the Dow was a little higher than its January 20th low, leaving a slight truncation for its 5th wave in the decline from December 2nd. This assumes the leg down has completed, which still requires of a break of its downtrend line from December 29th, near 16200, to help confirm the completion. I show the possibility for a choppy sideways triangle consolidation into March before heading lower but obviously that's just a guess (it's a common pattern for 4th wave corrections). The other possibility is for a sharper a-b-c bounce into the end of the month before heading back down. As with the prior 4th wave correction (January 20 - February 1), it's nearly impossible to know what form the correction will take, which is all the more reason to trade carefully (or watch) until we see how it's setting up for the next leg down.

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- bullish above 16,200
- bearish below 15,500

The tech indexes are a little different than the other indexes in that their December 2nd highs were slightly higher than their November highs and that makes it possible we're looking at the completion of a 1st wave down from December (with the 5-wave move down into Thursday's truncated low). This calls for a sharper bounce correction in the coming weeks, not a sideways choppy one. This is one of the primary reasons why I think playing the long side could work nicely. Rather than get chopped to pieces in a sideways consolidation we could have a couple of very nice opportunities to trade long. It's still only a trade because the correction should be followed by a sharp decline (as a 3rd wave down) but at least for now I'd look to buy the dips rather than sell the rips. We could see NDX retrace at least 50% of its decline, which would have it back up to 4321, and potentially back up to its 200-dma and 62% retracement at 4420. It won't be a straight-up trade but that's a 400-point potential into March. The first thing the bulls need to do is break out of the down-channel, the top of which is currently near 4100. It might not stay above 4100 but it would be the first confirmation that the leg down from December 2nd has completed.

Nasdaq-100, NDX, Daily chart

Key Levels for NDX:
- bullish above 4100
- bearish below 3787

Treasury bonds rallied strong this past week but then sold off hard after gapping up Thursday morning. Yields of course did the opposite and as you can see on the TNX weekly chart below, the intraweek reversal left a bullish hammer at support (its May 2013 and January 2015 lows near 1.65%) and it almost it almost recovered its broken uptrend line from July 2012 - January 2015, near Friday's high at 1.76%. The descending triangle idea is still valid although weakened with this week's break below the January 2015 low. Instead of a bounce back up to the top of the triangle, which is the downtrend line from June 2007 - December 2013, currently near 2.28%, we might see only a sideways choppy consolidation before dropping back below 1.65% and then lower. But at least at the moment the bullish weekly candlestick suggests this week's low should hold for a while and rising yields would mean selling in bonds and that money should rotate into stocks.

10-year Yield, TNX, Weekly chart

The banking index is showing how well it trades technically. Thursday's low at 55.99 achieved the 162% projection for the 2nd leg of the 3-wave move down from July 2015 at exactly 55.99 and the sharp reversal back up off its uptrend line from March 2009 - October 2011 looks bullish. Friday's big white candle also has back above the 38% retracement of its 2007-2009 decline, at 57.25, and its April 2010 high at 58.83. There was a lot of support at 55.99-58.83 and all three support levels were broken/tested on Thursday but recovered with Friday's rally. It's the weekly close that matters. It looks like we should see only a correction to the decline before another leg down for perhaps just a minor new low but we'll have to see what develops in the next week. In the meantime it looks more bullish than bearish.

KBW Bank index, BKX, Daily chart

Since the low on January 20th for the TRAN it has been in a very choppy bounce back up and it's been struggling with its broken uptrend line from March 2009 - October 2011 for the past two weeks. It's likely to make it higher if the broader market can put a higher bounce together but the pattern for its bounce looks like a correction to the decline that could fail at any time. Maybe it will make it up to its 50-dma, which will be near 7180 on Tuesday. It would look at least short-term bullish above 7200, probably with a rally with the broader market.

Transportation Index, TRAN, Daily chart

On Tuesday the US$ dropped below its uptrend line from August-October 2015 and the bottom of a parallel down-channel from December. Friday's bounce took it back up to the bottom of the down-channel and it then pulled back, leaving it looking more bearish than bullish at the moment. There's a downside price projection at 94.46 where the 2nd leg of its decline from December would be 162% of the 1st leg down and that could set up another bounce within its large sideways consolidation pattern that I've been showing on its weekly chart. Because it's a corrective pattern it's hard to know what the next move will be but for now I see it continuing to trade inside a 94-100 price range before breaking out to the upside later this year.

U.S. Dollar contract, DX, Daily chart

What else can you say about gold this week other than "Wow!" Can you say parabolic? The rounding bottom off the December low led to a huge spike up in the past two weeks (up nearly $150) and it's either in an honest-to-goodness breakout to the upside or it's a parabolic spike that will end in tears for gold bulls. What happens following the spike will provide some clues -- a stair-step move higher over the next couple of weeks would have it looking more bullish whereas a spike back down will have it looking like just another overzealous spike in gold prices with no follow through. Thursday's high tagged the top of a parallel down-channel for price action since its 2013 low and from a longer-term pattern perspective it's not hard for me to argue the need for another leg down to the bottom of the channel and price-level support near 1000 by this summer. But if it can rally above Thursday's high near 1264 and hold above the top of the down-channel on a back-test it should then be able to test 1285, which is the 38% retracement of its 2001-2011 rally and its January 2015 high near 1308.

Gold continuous contract, GC, Weekly chart

Interestingly, Mark Cuban was on CNBC on Thursday and said he has bought "a lot" of call options in gold. Apparently that caused a rush into GLD call options on Thursday, which outnumbered put options 4-to-1. One trader bought 20,000 GLD 140 call options for $0.30 each, betting $600,000 that GLD will be above $140.30 by March expiration. Thursday's high might have been partly a result of all these traders running into bullish plays and now the buying might have been exhausted. GLD's weekly chart looks just like the gold contract chart above and it stopped right at the top of its parallel down-channel. I hope the trader who bought the 140 calls was a way to create a bear call spread instead of making a bullish directional play. That long call position is down -$140,000 as of Friday. But hey, I guess a rally to 1400 for gold in the next 5 weeks is a possibility.

Silver spiked up with gold and it too slammed into resistance and stopped. We now wait to see if it can stair-step higher or quickly retrace its parabolic spike. Thursday's high was at its downtrend line from May 2011 - December 2012 and a back-test of its broken uptrend line from August-October 2015. A break above these two lines, with a rally above 16.15, would be more bullish but at the moment I have to wonder if silver's rally is the real deal or just an overreaction with gold. Silver is associated more with industrial uses and we know industry is slowing. But price is king and we now wait to see what the next move will be.

Silver continuous contract, SI, Daily chart

On Friday oil got a nice bounce and it continues to track closely with the stock market. The tight relationship between the two will disconnect at some point but for now they seem to be connected at the hip. I see the potential for oil to continue lower to the bottom of a descending wedge, near 24, but with the stock market looking like it's ready for a larger bounce there's a good chance oil will also. Thursday's low was a good test of the January 20th low with lots of bullish divergence at the moment. An a-b-c bounce off the January low could see the c-wave head up to price-level S/R near 38 and its downtrend line from June-October 2015, currently near 40. So at the moment I see downside potential to about 24 and upside potential to 38-40.

Oil continuous contract, CL, Daily chart

Last week was relatively quiet as far as economic reports and the coming week will be a little busier. Monday is closed so the first reports will be Tuesday and the Empire Manufacturing index is expected to be "less bad" with a jump up to -9.9 from January's -19.4. Wednesday will be a busy day with PPI numbers, housing starts/permits (no big changes expected) and industrial production, which is also expected to improve slightly from December. The FOMC minutes will be out Wednesday afternoon. The Philly Fed on Thursday and CPI numbers on Friday will finish the week. With the Fed in data-dependent mode and market expectations that the Fed has been put on hold by the market, these numbers will be evaluated carefully to try to figure out how the Fed might react.

Economic reports

Conclusion

The week finished down again (4th down week in the 6 weeks of the new year) but the big recovery off Thursday's lows, which were a test of the January 20th lows, left a weekly bullish hammer candlestick at support and bullish divergence on the daily charts. It looks like a good setup for a rally in the coming week, which of course is opex and we might get the typically bullish opex. Thursday's decline fits as the head-fake move in front of opex (pull the market down, get the shorts in and longs out and then flip it around to spark short covering and longs wanting back in). This has been a well-engineered move in the past and has made the big trading houses a lot of money by selling puts and buying calls on the pull-down.

Assuming we'll get a bounce in the coming week it's not clear how it will develop. The larger pattern suggests we should be looking for just a bounce correction, which could last several weeks and through March, and then head lower again. But whether the bounce will be a sideways multi-week choppy consolidation or instead a sharp short-lived a-b-c bounce can't be known yet. Like the previous bounce off the January 20th low, we have to let it develop in order to see how it might play out and then look for a setup to play the next leg down. But for now, look to buy dips since I think that will be the direction of least resistance. Just keep your trades short term so you avoid the whipsaws.

I hope you have a good 3-day weekend away and recharge your batteries. Good luck in the coming week and I'll be back with you next Wednesday.

Keene H. Little, CMT

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


New Plays

Coming Into Alignment

by Thomas Hughes

Click here to email Thomas Hughes
Editor's Note

It's amazing how one day can change everything. On Thursday it seemed as if the sky were falling and then one day later the situation is completely changed. Without doubt the currents are still swirling but it looks as if they might be coming into alignment.

It took some time but maybe now good news will be good news again, even with an expectation for more rate hikes this year. This week we saw a continuation of health in the labor market, health supported by retail sales, and since our economy is driven by labor and consumer spending it looks like we're doing OK.

Friday's market action was really nice to end the week. The S&P extended its bounce from long term support, the technicals look pretty good, and things are shaping up for the economy. Labore is good, spending is OK and improving, the dollar is moving off its highs, oil prices are low and possibly bottoming, earnings are generally better than expected except where oil is concerned, EU GDP is bouncing back . . . what more could the market want?


NEW BULLISH Plays

Western Union is one of the more recognizable names in the market. Although the mode of transport has changed from stagecoach to digital the basic business model has remained the same for 165 years, the transfer of wealth. Western union is money transfer and payment solutions provider operating in 34 countries with 3 business segments; person to person, person to business and business solutions.

Why We Like It

The company reported earnings earlier this week and results were good. Despite the negative impact of currency conversion the company was able to meet expectations and provide forward guidance in line with expectations. Merely meeting expectations isn't really enough to get the market excited but the inclusion of a -$0.15 impact into the forward guidance and the recent decline in dollar value is reason enough to think guidance could be low.

Speaking of the dollar. I don't mean to completely discount the impact of currency conversion. Merly to point out that the projected impact for 2016 may be too high. Looking at the chart of the DXY it is clear that the dollar is declining in value and trending in the average range we saw in 2014. If it continues to fall back to the bottom of the range negative impact in 2016 should be no worse than 2015.

Results for the 4th quarter and full year 2015 were good. The company reported earnings of $0.42 on revenue of $1.38 billion; earnings were in line with estimates, revenue was short by 0.02 billion. In constant currency this a 3% gain in revenue for the fourth quarter and a 4% gain for the full year. There were a couple of other red flags in the report but all related to currency conversion. One was margin. Margin improved from 20% to 20.9% in 2015 but is expected to fall back to 20% in the coming year.

Any reduction in earnings due to narrowing margin should be more than overcome by increased revenue. Economies in North America and Europe, the two largest segments by region totaling more than 40% revenue, are both strong and growing. Speaking solely of the US labor trends and earnings point to strength and should fuel person to person transactions, 80% of total business.

Another reason to expect revenue expansion is the expanding footprint. The company operates in over 200 countries, 34 added in the past year, including 100,000 kiosks and ATM's and is planning to continue expanding into 2016. At the same time the company is expanding its services and has recently added a 3rd payment solution, the WU Connect, which enables users to offer Western Union services on their platforms.

On a technical basis the stock looks like it is in reversal and heading higher. The stock is moving up off of a double bottom with increasing volume. Volume has been on the rise for the last month, the last week has been more than 2X average daily. Today the stock jumped 4% to break above the short term moving average. MACD momentum is bullish and on the rise, confirming the break. Stochastic is still weak but consistent with a signal early within a bullish movement. Today's action saw prices hover around $0.85 with a Delta of 0.48. The average analyst estimate for the stock is just over $18.79, not high, but the data pool is skewed to the upside with low outliers dragging down the mear. The high target is $24.

Our play is to buy a May $18 call with an $18 price trigger. The option is cheap so I chose the May expiry to give the stock time to move.




NEW BEARISH Plays


No New Bearish Plays



In Play Updates and Reviews

Elevator Going Up?

by Thomas Hughes

Click here to email Thomas Hughes

Editors Note:

With so much to support it is there anywhere for the market to go but up?

It seems as if the stars are coming into alignment. The market looks ready to bounce of support and it has a lot to be thankful for.

Growth in the EU is not as bad as feared with many countries in the region posting robust growth over 4%; Earnings here at home ex-energy are not that bad; dividends and buyback are on the rise; labor data continues to show health; retail spending was stronger than expected; oil bounced back more than 11% and appears to be bottoming and earnings expectations are at least positive going into the end of the year.

There are still worries, many things can go wrong and at this point the bull case is not as strong as I would like it to be. China is still doing its thing, whatever that is, the FOMC is still in play and global financial market turmoil is likely not over.

This bounce may be short lived, something could jump out and scare it back to the low, but at least for now it looks like we're heading higher.


Current Portfolio





Current Position Changes


WU - Western Union

New Play, not yet triggered.


JBHT - JBHunt Transportation

Play triggered, option price $2.10, stop set at $70.


KRE - Regional Bank ETF

KRE was stopped out with a profit.


Stop Loss Updates

Check the graphic above for any new stop losses in bright yellow. We need to always be prepared for an unexpected decline.



BULLISH Play Updates


GPRO - GoPro - Company Profile

Comments:

GoPro is still hanging just above $10 with downtrending moving average. No change.

Original Trade Description: February 8th

GoPro is the number one action camera maker and created the current market. They moved from a simple camera maker to a content creator over the last couple years. At least that is what they wanted people to believe so that their sky high PE would be based on something other than simply a hardware company.

Fast forward to 2015 and 5-6 companies began to compete with action cameras of their own. GoPro's market share began to dwindle. A botched roll out of a new model in Q3 and two prices cuts in Q4 has knocked their share price down from $65 in August to $9 on Thursday.

One of the problems that GoPro has been unable to conquer is the relatively hard method to recover, edit and publish videos produced by the cameras. They have promised new software for a couple years and it never seems to arrive or fails to satisfy when the updates appear. This is a drag on future camera sales because you have to be a geek to produce any quality videos.

News broke today that GoPro had licensed its video technology, certain file storage and other system technologies. While the details are still unclear this could be a Hail Mary pass to Microsoft for help with their software problems. If it is not related to that then there is something else going on that could provide a boost for GoPro in the future.

Lastly, the drop in market cap from $8 billion to $1 billion makes them a very attractive acquisition target for somebody like Sony or even Under Armour. Microsoft could buy them with their pocket change.

Shares appear to have bottomed at $10 but just in case we can buy a March $10 put as protection for 97 cents. This means we have unlimited upside and almost zero downside risk. If somebody makes an offer for GoPro I would expect it to be $15 or more simply because the company is not in financial trouble. They currently has no debt and $474 million in cash. They just need to get over this technical problem and they will be fine.

Buy GPRO shares, currently $10.99, no stop loss.

Buy March $10 put, currently 97 cents.

Net debit $11.96.



SWHC - Smith & Wesson - Company Description

Comments:

Smith&Wesson

Smith and Wesson is bouncing off of support at the short term moving average and near term up trend line. It has broken above potential resistance at the $22.50 level and has strengthening indicators. No change at this time.

Original Trade Description: January 21st.

Smith & Wesson is a gun manufacturer. Business has been very good but they announced this week they are looking for some acquisitions in other outdoor areas so their business is not so tied to the cycles in gun sales. Whenever an administration begins talking about more gun control measures their sales soar. When there are no politicians trying to ban guns we see sales decline.

The current administration has been the best for gun sales since the Clinton assault weapons ban. The FBI said the increase in the number of background checks for gun purchases has been so strong that their system is overloaded and they have had to halt appeals for denials until they can add some more personnel.

December saw a record of 3.3 million background checks, which was more than 500,000 above the prior record for December in 2012. On Black Friday alone there was a record 185,345 checks and a new single day record.

While this surge in gun sales has powered Smith & Wesson to record profits the company realizes that the election of a pro gun administration will slow those sales. For this reason S&W announced this week they were looking into getting into the $60 billion outdoor sporting goods market. They will likely be trying to acquire brands that they can add to their lineup that are not directly related to guns.

S&W said they were on the hunt for candidates but did not have any announcements at the current time.

This is a good move for S&W for obvious reasons. By branching out into other products, it will also help widen the S&W brand even if those new products have their own brand names.

Shares spiked to record highs over $26 when they reported earnings in early January. The post earnings depression appears to be over and shares dropped back to support at the 100-day average. This is a good spot for people to launch new long positions and once the current market weakness is over the small cap stocks like S&W with strong growth will be in demand.

Earnings March 8th.

Position 1/25/16:

Long SWHC shares @ $21.35, see portfolio graphic for stop loss.

Optional:

Long June $23 call @ $1.75, see portfolio graphic for stop loss.



USO - US Oil Fund ETF - ETF Description

Comments:

Oil might be bottoming, USO bounced from support levels. No changes.

This is a long term position so be prepared to see lots of volatility before the final long-term rally begins.

Original Trade Description: January 27th

The USO ETF attempts to reflect the performance of West Texas Intermediate crude oil. The ETF invests in futures contracts for oil, diesel, heating oil, gasoline, natural gas and other fuels traded on the Nymex in an effort to track WTI and avoid futures roll over bleed.

Typically, a futures oriented ETF buys forward contracts. As those contracts expire, the funds are rolled over into the next series of futures contracts at higher prices. This causes a disconnect between the actual price of the underlying commodity.

The USO attempts to reduce that as much as possible by spreading the terms and types of futures contracts it holds.

If you are still reading this you are probably wondering why I am recommending a somewhat perishable ETF on oil when we all expect oil prices to go lower. Good question!

Yes, oil prices "should" go lower as inventories build over the next two months. However, the entire world of professional investors understands this but prices have spiked twice in the last week on rumors of a Russian - OPEC agreement to cut production. If such an agreement was actually reached, we could see prices back over $50 very quickly.

I am proposing we try to buy the USO on the next dip on the chance that an agreement will eventually be reached. Last week it traded down to $7.92. When oil was $38 in December the USO was $11. If we can buy it in the $8.50 range we could see a 30% gain on any deal announcement and even more once oil prices reacted to the change in production dynamics.

Obviously, we cannot predict that a deal will happen. Saudi Arabia and Russia are enemies. However, they both have the same problem and that is they are hemorrhaging cash. In July 2014 when oil prices were $105, Saudi Arabia was taking in about $1.06 billion a day in revenue. Today at $30, they are receiving $303 million. That is a loss of $757 million a day, every day, and the kingdom is suffering from it. Russia is losing about $650 million a day. They both have millions of reasons to put their differences aside and reach an agreement.

While we cannot guarantee this will happen the headline chatter is growing daily. They may not be ready to call a truce just yet but together they are losing more than $1.4 billion a day. That is a huge incentive to do something. The next regular OPEC production meeting is early June. I am recommending we buy the USO on the next dip and hold it until July. I cannot imagine OPEC continuing the madness past the June meeting and they are likely to hold an emergency meeting earlier if crude drops back into the $20s again.

Typically, prices rise when inventories begin to decline in late April as refiners ramp up production for the summer driving season. Even if Russia and OPEC do not reach an agreement, we should see a rise in prices starting in May or earlier.

I am not going to try to buy the bottom because we may not see it again. I am recommending we buy the USO at $8.50 and hold it with no stop loss because it could go lower. I believe we will be rewarded over the next few months and with the right set of circumstances, we could be very well rewarded.

2/1/16: Position entered with a USO trade at $9.00:

Long USO shares @ $9.00, no stop loss.

Optional:

Long USO July $10.00 calls @ $.85. No stop loss.



JBHT - JBHunt Transportation - Company Profile

Comments:

JBHunt was triggered today in the early AM, option price $2.10. Today's action saw prices move above the trigger point and close there. The candles is small but white and opened with a small gap indicators are bullish but off of their peaks. Price may consolidate between the moving average and my resistance line, near $76.50, before moving higher. No changes today.

Original Trade Description: February 10th

While the majority of the transportation sector has been in decline in response to lower energy costs trucker JBHunt has been expanding its fleet, hiring new drivers and increasing load volumes across the country. In its most recent earnings report the company produced EPS in line with estimates but it is the internal data that is most promising.

JBHunt Transport services and its wholly owned subsidiaries is a diversified transportation and logistics company operating throughout North American. Operations are centered in the United States with some portions operating in Canada and Mexico. The company operates in the intermodal space using its own fleet and to some extent third party operators in 4 sub-segments.

Why We Like It

Fourth quarter results were good. Earnings were in line with expectations on flat revenue but as mentioned, it is the internals that are most interesting. Q4 operating income was up 5% over the previous year with a 9% increase in EPS. Full year results include a 13% increase in operating income with a 16% increase in EPS. Full year revenue was flat, not something we necessarily want to see, but when taken in light of lower fuel surcharges is not the red flag it would seem to be. Remember, in recent years revenues among the entire transportation sector have been inflated due to surcharges related to what were then record fuel prices.

Three of the four business segments showed notable increases. The Integrated Capacity Solutions segment, management of third party transportation services, showed a 4% decline in revenue due to decreased spot market activity and lower revenue per load. The other three segments; Intermodal, Dedicated Contract Services and Trucking all showed notable increases in revenue of 1%, 2%, and 3% respectively for a total operating revenue increase of 9%.

Drivers of the gains, no pun intended, include increases in new customers, revenue realizations from previous rate increases, improved fuel economy, lower maintenance costs attributed to newer equipment, less reliance on third party shippers, increased fleet size and improving margins. These were offset by higher wages and increased costs of recruitment and retaining employees but those cost are ultimately a sign of ongoing improvement in the labor market and the consumer that will eventuall spill over into this and other segments of the economy.

Earnings results are all well and good but the reason why we really like this stock is two-fold; a recent dividend increase and a couple of analyst upgrades. The board of directors approved and announced a 5% increase to the dividend on January 28th. According to the board earnings and free cash flow warrant the increase. As for upgrades there were two; one in early January and another just after the earnings report was released. The stock was upgraded from hold to buy at BB&T and from peer perform to outperform by Wolfe Research. Based on the average analyst target of $87.14 there is still a minimum upside potential of 16%.

Our play; buy the May $80 call with a trigger price of $76.00.


WU - Western Union- Company Profile

Comments:

New play, not yet triggered.

Original Trade Description: February 13th

Western Union is one of the more recognizable names in the market. Although the mode of transport has changed from stagecoach to digital the basic business model has remained the same for 165 years, the transfer of wealth. Western union is money transfer and payment solutions provider operating in 34 countries with 3 business segments; person to person, person to business and business solutions.

Why We Like It

The company reported earnings earlier this week and results were good. Despite the negative impact of currency conversion the company was able to meet expectations and provide forward guidance in line with expectations. Merely meeting expectations isn't really enough to get the market excited but the inclusion of a -$0.15 impact into the forward guidance and the recent decline in dollar value is reason enough to think guidance could be low.

Speaking of the dollar. I don't mean to completely discount the impact of currency conversion. Merly to point out that the projected impact for 2016 may be too high. Looking at the chart of the DXY it is clear that the dollar is declining in value and trending in the average range we saw in 2014. If it continues to fall back to the bottom of the range negative impact in 2016 should be no worse than 2015.

Results for the 4th quarter and full year 2015 were good. The company reported earnings of $0.42 on revenue of $1.38 billion; earnings were in line with estimates, revenue was short by 0.02 billion. In constant currency this a 3% gain in revenue for the fourth quarter and a 4% gain for the full year. There were a couple of other red flags in the report but all related to currency conversion. One was margin. Margin improved from 20% to 20.9% in 2015 but is expected to fall back to 20% in the coming year.

Any reduction in earnings due to narrowing margin should be more than overcome by increased revenue. Economies in North America and Europe, the two largest segments by region totaling more than 40% revenue, are both strong and growing. Speaking solely of the US labor trends and earnings point to strength and should fuel person to person transactions, 80% of total business.

Another reason to expect revenue expansion is the expanding footprint. The company operates in over 200 countries, 34 added in the past year, including 100,000 kiosks and ATM's and is planning to continue expanding into 2016. At the same time the company is expanding its services and has recently added a 3rd payment solution, the WU Connect, which enables users to offer Western Union services on their platforms.

On a technical basis the stock looks like it is in reversal and heading higher. The stock is moving up off of a double bottom with increasing volume. Volume has been on the rise for the last month, the last week has been more than 2X average daily. Today the stock jumped 4% to break above the short term moving average. MACD momentum is bullish and on the rise, confirming the break. Stochastic is still weak but consistent with a signal early within a bullish movement. Today's action saw prices hover around $0.85 with a Delta of 0.48. The average analyst estimate for the stock is just over $18.79, not high, but the data pool is skewed to the upside with low outliers dragging down the mear. The high target is $24. p> Our play is to buy a May $18 call with an $18 price trigger. The option is cheap so I chose the May expiry to give the stock time to move.




BEARISH Play Updates


INSY - Insys Therapeutics - Company Profile

Comments:

INSY made a bounce but it looks like a dead cat bounce. No change to position.

Original Trade Description: February 1st.

Insys Therapeutics develops and commercializes supportive care products. This includes pain killers for the types of severe pain that can come from cancer and cancer treatments. Their main product is Subsys, a proprietary sublingual fentanyl spray for treatment of cancer pain. They have other products but this is the one taking the heat today.

Roddy Boyd is the "journalist" that took on Valeant (VRX) a couple months ago and crashed the stock from $250 to $80. He has released a new report called "The Brotherhood of Thieves" that takes Insys to task for its methods in getting double the insurance reimbursements than its older competitors.

His point is that Insys "executives pressure employees to develop new ways to mislead insurance companies in to granting coverage to patients prescribed the drug Subsys." He claims he has an audio recording of a meeting where Jeff Kobos, an executive with the company, admitted the company's dishonesty. The tape reportedly highlights "conversational gambits" to deflect pharmacy benefit managers questions.

Insys responded with a press release claiming the report was misleading and unreliable "especially in the light of the biased agenda held by the individuals who made these representations."

I am sure Insys is right to some degree since these short sellers and their supporters do their best to trash the company so they can benefit from the drop in the stock price. However, there has to be some truth to the report or Boyd would be opening himself up to a massive suit for his claims.

For our purposes we want to capitalize on this headline war and make a couple bucks while investors are fleeing the stock.

Earnings are Feb 23rd.

Shares are at a 52-week low and support is about $12.50. I am proposing we short the stock at $16.25, under today's low and target $13.25 for an exit. For this move and timing option prices are too high to recommend an options position.

Position 2/2/16, with a INSY trade at $16.25

Short INSY shares @ $16.25, target $13.25 for exit. See portfolio graphic for stop loss.



KRE - SPDR S&P Regional Banking ETF - ETF Description

Comments:

The regional banks bounced back today, position was stopped out with a profit. < p>

Original Trade Description: January 25th

We were knocked out of the long position on this ETF with the drop below support this morning. The keywords in that sentence were "drop below support." Typically, when long-term support breaks we are looking at a continued decline that could be material.

Regional banks are tanking because of their loans to energy companies and to firms that service those energy companies. That includes restaurants, service stations, apparel stores, mom and pop businesses of all types that catered to the families of the 150,000 energy workers that have been laid off.

In addition, the U.S. manufacturing sector is in recession. With energy, manufacturing, transportation already in recession the odds are increasing that the country is going to be headed in that path as well.

Today, the Texas Manufacturing Outlook Survey for January fell from -20.1 to -34.6 and the lowest level since 2008. The outlook for the U.S. economy is not good and that means regional banks could be facing rising defaults.

I hate to go straight from a long position to a short position but in this case, the situation appears to be right. We entered the long position on a dip to support at $35. There was an immediate rebound but then that support failed today based on economic news.

Position 3/2/16 with a KRE trade at $35.35.

Short KRE @ $35.35, see portfolio graphic for stop loss.

Optional:

Long March $33 put, @ .80, no stop loss.



OIH - Oil service Index - ETF Description

Comments:

OIH is holding support along with oil but an 8th week of rig count decline points to weak earnings in this sector. No change today.

Original Trade Description: January 20th

The OIH ETF represents 25 oil service stocks including Schlumberger, Halliburton and Baker Hughes. Once you get past those three largest holdings the rest of the pack has little balance sheet strength and we could easily see multiple bankruptcies or credit defaults. The bottom of the list contains Tidewater (TDW), Carbo Ceramics (CRR), Seadrill (SDRL), etc. The risk of default is high for the bottom half of the list. View Full List

The "perceived" bounce in oil prices by shifting to a new contract at $28.81 instead of the $26.55 close may cause some investors to buy energy stocks in a knee jerk reaction. Do not be fooled. The bottom in oil prices is still ahead.

The API Inventory report tonight after the close showed a larger than expected gain of 4.6 million barrels of oil and 4.7 million barrels of gasoline. The more accurate EIA inventory report comes out at 10:30 on Thursday.

The inventory build season runs from January 6th to the end of April. Last year inventories rose a whopping +106 million barrels to record levels during that period. There is not likely to be another rise like that because there is very little available storage capacity in the USA. Canadian oil is now selling for $15 below WTI because all the Midwest storage locations are virtually full. Bakken oil is selling for $8-$10 below WTI prices for the same reason plus transportation is expensive to other locations.

I believe we will see WTI at $25 or below over the next two months and possibly even $20 because of the price pressure from the Iranian oil sales. They have about 50 million barrels stored on tankers and that oil is now available for sale. Prices are going lower.

This will probably drag the equity market lower as well but eventually there will be a disconnect between equities and oil prices at some level. The constant headlines about lower oil prices will eventually become old news. Of course, key levels like $25, $22, $20 could cause some additional market weakness.

Energy stocks will continue to react to the low oil prices because every dollar of decline is very painful and impacts their ability to service debt and keep the doors open. Analysts claim as many as 50% of the U.S. producers could default or worse if prices remain low for very long.

I am recommending we short the OIH and expect to hold the position until April. The plan will be to close it about the time inventories top out in early April. We could see a minor uptick at the open on Thursday because of the new front month contract. When inventories are announced at 10:30 we should see a decline in WTI if they are high as expected.

Position 1/21/16:

Closed 1/29/16: Short OIH shares, entry $21.26, exit $24.25, -2.99 loss

Optional:

Still long July $20 put @ $1.92, no stop loss.



VXX - VIX Futures ETF ETF - ETF Description

Comments:

The shooting star may is confirmed, volatility appears to be in decline. How far is yet to be seen. No changes to position.

Original Trade Description: August 24, 2015

The U.S. stock market's sell-off 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 a 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.

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.

Position 8/25/15:
Short VXX @ $21.82, no stop loss.

Second Position 9/2/15:

Short VXX @ $29.01, no stop loss.

Trade History
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





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