Option Investor
Newsletter

Daily Newsletter, Wednesday, 3/9/2016

Table of Contents

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

Market Wrap

Market Waiting for More of Whatever It Takes

by Keene Little

Click here to email Keene Little
The stock market consolidated today as it waits for word from the ECB (pre-market Thursday morning for U.S. markets) and its decision about what to do in its continuing effort to help boost the European economy and stave off deflation (a losing battle so far).

Today's Market Stats

Happy Anniversary! Today marks the 7th year since the March 9, 2009 low, a low that had many predicting at the time that the stock market had much further to fall as bank failures mounted. How far we've come since then! We've had two scary selloffs since last August but the market continues to struggle to hold onto the enormous gains off that low and there remains the possibility that the market will push higher this year and stretch the 7-year bull market into its 8th year. Certainly the central banks are pulling out all the stops in an attempt to keep the economy humming along and in turn keep the stock market afloat. Thursday morning (for the U.S., afternoon for Europe) we'll get to hear the latest plan from the ECB about how they intend to keep the party going.

The pullback from last Friday into Tuesday's low was followed by a consolidation today as the market waits to hear what the ECB is going to do next in their attempt to stimulate the moribund European economy. ZIRP worked so well (cough) that they're moving more and more into NIRP territory with more countries adopting negative interest rates. Many are hoping for less NIRP and more outright bond purchases, especially since NIRP has been hurting stock markets and especially banks. Mario Draghi has already promised to do more by expanding the amount of debt they'll purchase in an effort to free up capital for the banks to lend.

What the central bankers fail to understand is that people and businesses are not clamoring for more loans and therefore making more money available for loans is not the answer. More of the same is not going to help and the only thing it accomplishes is more stealing from savers and passing it along to the bankers. No matter what they try, and many will argue that it's because of central bank policies, deflation continues to gain momentum around the world.

The last global deflationary period was in the 1930s and as hard as central bankers fight it, the problem is not so much monetary as it is structural, as it was back then. There's too much debt and the credit explosion is what is responsible for much of the 7-year stock market rally (instead of it being based more on fundamental reasons). The distortion by central bankers makes the problem worse, not better, and the eventual correction will also be worse.

But a "cleansing" is exactly what our financial system and economy need so that we can get back to a healthier environment for growth. It will be a painful period but anyone who has had to go through painful physical therapy for an injury knows how important it is to ensure you get back to health. Go without the PT and you'll likely suffer ongoing and sometime debilitating symptoms. Our economy and financial system are no different and yet the Fed and other central bankers believe they can cure things with more of the same that caused the problems in the first place. The only way a drug or alcohol addict can free himself of addiction is to go through the pains of withdrawal and then stay disciplined about changing your life. The central banks are deathly afraid of the withdrawal effects.

There were no significant economic reports today (or on Friday) and the market has been left on its own to figure out what it wants to do. It's one reason why the market is reacting to overseas news, such as China's slowdown and tomorrow it will be the ECB decision on what their next move will be to goose their stock market, I mean economy. Mario Draghi has again been promising to do even more of whatever it takes and the market will be disappointed if he doesn't do something creative. The problem is that positive reactions to any action by central governments around the world are having less and less of a positive effect and any positive effect is lasting for a shorter period of time. That means a positive reaction to an ECB announcement tomorrow would likely set up a very good shorting opportunity, which is supported by what I see in the charts.


Dow Industrials, INDU, Weekly chart

The weekly chart of the Dow shows the recovery back above the bottom of its parallel up-channel for the rally from 2009, which it had broken below in January and tried to get back above it in early February. Now it's back up near price-level S/R near 17140 (with this week's high so far at 17099). The bullish pattern calls for a continuation higher to its downtrend line form May-December 2015, currently near 17700, but that would only become a higher probability if it can get above 17140 and then its 50-week MA, currently at 17287.

The bearish wave count is what suggests investors should use this bounce to significantly reduce your exposure to the stock market. A 1st wave down from last May into the August low was followed by a 2nd wave bounce correction into the December high. The decline into February would then be the 1st wave of the 3rd wave down and the bounce into the current high is the second 2nd wave correction. This sets up a very bearish 3rd of a 3rd wave down, which is typically a very powerful move and would make the first two legs down look like child's play. There's no confirmation yet that the bearish wave count is correct but I think it's very important to see the downside risk since it will basically look like a market crash.


Dow Industrials, INDU, Daily chart

From a little shorter-term perspective I see further upside potential for the DOW to reach its downtrend line from December, near 17300, by the end of the week or on Monday. But price-level S/R near 17140 and its 200-dma at 17163 are the resistance levels the bulls will need to power through. A Draghi-induced rally could do it but with an overbought market I think it could be tough resistance, especially the downtrend line from December.

Key Levels for DOW:
- bullish above 17,350
- bearish below 16,500


Dow Industrials, INDU, 60-min chart

The 60-min chart below shows the price consolidation off last Friday's high and it has formed a sideways triangle, which fits well as a 4th wave correction in the leg up from February 24th. This is a bullish continuation pattern which typically points to the last move of the trend (up in this case). The 5th wave projects to 17347, where it would equal 62% of the 1st wave (in the leg up from February 24th), which is a common projection when the 3rd wave is shorter than the 1st wave (as in this case). For an a-b-c bounce pattern off the February 11th low, it would achieve two equal legs up at 17327 and that gives us close correlation in the 17327-17347 area for a high if it rallies the rest of this week. Above 17350 would be more bullish but interestingly, the bearish setup here is for a negative opex week (next week).


S&P 500, SPX, Daily chart

SPX has the same pattern as the Dow and if we get another leg up to complete the a-b-c bounce off the February 11th low I see upside potential to 2020-2027, where it would hit its downtrend line from December (2020), its 200-dma (2021) and price projections similar to those I discussed for the Dow's 60-min chart (2022 and 2027). It would be more bullish above 2028 and especially above its 78.6% retracement of its December-February decline, at 2041, but I strongly suspect it will have trouble getting through the 2020-2027 resistance zone. If it drops immediately from here it would indicate the top is likely already in place.

Key Levels for SPX:
- bullish above 2042
- bearish below 1935


Nasdaq-100, NDX, Daily chart

On March 1st NDX had rallied strong and got back above its dual uptrend lines, from June 2010- November 2012 and March 2009 - August 2015, which are currently near 4250 and 4225, resp. Its 50-dma is currently near 4245 so NDX has plenty of support in the 4225-4250 area and the pullback from last Friday has so far held above this support zone. Bullishly this can be viewed as a back-test of S/R (yesterday's low was near 4259) and as long as that support zone holds there is additional upside potential to the 4420 area where it would retrace 62% of its December-February decline and test its 200-dma. A Mario Draghi rally could make that happen. Because I think the market is vulnerable to at least a deeper pullback before possibly heading higher I think it's risky to bet on the upside even though I see the potential for another leg up.

Key Levels for NDX:
- bullish above 4420
- bearish below 4200


Russell-2000, RUT, Daily chart

The RUT was the stronger index in the rally off the February 11th low but has also now had the strongest reversal off last Friday's high. The intraday pattern looks impulsive to the downside, which has me leaning bearish sooner rather than later. The bounce off yesterday's late-day low looks corrective (overlapping highs and lows, creating a bear flag pattern) as it fights to hold onto its uptrend line from February 11th, which is where it closed today, thanks to a final little spurt back up into today's close. I see a small bounce potential but if it can't get back above price-level S/R near 1080, which it back-tested after breaking on Tuesday, and then drops below Tuesday's low at 1067 it would indicate a top is likely in place. Friday's high stopped only about 3 points from its uptrend line from October 2014 - September 2015, which fits as the neckline of a H&S top that ran from the left shoulder in March 2014. The downside objective from this pattern is 860, although the bearish wave count suggests that would only be a speed bump on the way to lower prices. If the RUT does bounce back up, keep an eye on that neckline near 1097 for a possible high.

Key Levels for RUT:
- bullish above 1150
- bearish below 1040


Volatility index, VIX, Daily chart

With Friday's low for the VIX, at 16.05, it hits horizontal S/R and the bottom of a parallel down-channel for its pullback from its January 20th high. It also achieved two equal legs down at 17.28 and is now back above that level. It has bounced back up to its 200-dma at 18.60 so we'll see if that holds as resistance. The "bullish" setup here is for the 3-wave pullback from January 20th to be followed by another rally, which of course would mean the stock market is selling off.


KBW Bank index, BKX, Daily chart

Banks have been hurt by the central banks' efforts to keep driving rates down and now into negative territory. The central banks are trying to force banks to lend out their money instead of parking it in the Federal Reserve system. But most of the money that's borrowed is for non-productive purposes (e.g., stock buybacks) and the resulting credit boom has created a massive debt problem. It has not helped the economy and that's why the central banks are losing credibility. Most are now seeing the central banks as out of ammo and the ones who are now hurting are savers and the banks themselves.

Compounding the problem for banks is the fact that default rates are rising. Loan covenants are being ignored (there are certain requirements that a company must meet in order to stay healthy enough in the banks' eyes in order to keep their loans safe from default) and the banks are now doing what they did before the last financial collapse, such as making large mortgage loans with very little or no down payment and to people with poor or no credit. No problem -- the taxpayers will just bail them out again.

Corporate default rates are now higher than when Lehman Brothers went bankrupt in 2008. Let that fact sink in a little. Banks are being forced to place more money in reserves to account for the higher default rates, which in turn reduces their earnings. This is happening worldwide. I recently read that Australian banks are being forced to raise their reserves by more than 40%, which is a tall order at a time when they are bringing in less income. But it's an indication how worried their central bank is and they're not alone. In the meantime we're told not to worry because everything is just fine. Their message is the economy is doing fine and to just keep buying stocks and borrow more so you can keep buying cars and houses.

As for the chart pattern for BKX, you can see the a-b-c bounce off its February 11th low, which at the moment is a correction to its decline. It could develop into something more bullish, especially if it's able to rally above resistance near 66.50 (2013-2015 price-level S/R and the 50% retracement of its November-February decline).


U.S. Dollar contract, DX, Weekly chart

The US$ dropped sharply this morning after trying a brief rally in the morning and traders are showing a little bit of the jitters while waiting for Thursday's ECB announcement. I could easily argue a move in either direction so that's not very helpful. The bigger pattern suggests we'll see a continuation of the pullback off its December 2nd high and potentially down to the 93 area by the end of April before bouncing back up to the top of its consolidation range mid-year.


Gold continuous contract, GC, Weekly chart

Gold bugs have turned uber bullish on the metal following its strong rally off the December 2015 low and while they could be right I think they're going to be disappointed once again. Way too many people have turned bullish gold and the amount of money flowing into GLD has been very strong (too strong). At the very least I would expect a scary shakeout of gold bulls before continuing higher. But I think the strong rally from December is the c-wave of an a-b-c bounce correction off the July 2015 low (the strong spike is very common in this type of a-b-c bounce pattern where the b-wave pulls back to a new low before springing up in a c-wave). It could press a little higher, maybe 1285-1300 (last Friday's high was 1280.70) but it's struggling at the top of a parallel down-channel, in place since the August 2013 high, and could turn back down from here. A return to the bottom of the down-channel later this year could see gold down to 2008-2009 price-level S/R near 1000. That would get me interested in a long position on gold for the longer term but before jumping in with the rest of the gold bulls I want to see what form a pullback takes.


Silver continuous contract, SI, Weekly chart

Silver has bounced up to its downtrend line from April 2011 - October 2012, which was tested at its February 11th high and again last Friday. I see the potential for another push slightly higher but I think it's vulnerable to a turn back down. You can see how silver has consolidated in a three descending triangles since 2011 and I think the current one, since the December 2014 low, will result in another leg down. If silver drops down to the trend line along the lows from June 2013 - December 2014 we could see it down to about 10.50-11.00 later this year and then maybe a good opportunity to get into a longer-term long position.


Oil continuous contract, CL, Daily chart

Oil had another nice rally today, finishing up +4.6%. It was a little surprising that the stock market did not have a better day since the two have been pretty well connected at the hip for a while now. I see a little more upside potential for oil if it's to test its downtrend line from June-October 2015, currently near 39. Slightly higher is a price projection at 40.01 where the leg up from February 11th would be 162% of the leg up from January 20th. Currently I'm looking at the 3-wave move up from January as an a-b-c correction within its longer-term decline and that longer-term pattern calls for one more leg down into April-May, which means another leg down to a new low once the bounce completes. This is the same pattern I see for gold and silver and other commodities. Ideally we'll see a drop down to its trend line along the lows from January 2015 - January 2015, which will be near 22.40 by the beginning of May. That would be a very good setup for a longer-term trade on the long side.


Economic reports

The rest of the week is very quiet for economic reports and obviously tomorrow will be more of a reaction to the ECB announcement than anything going on in the U.S.


Conclusion

The market quickly turned from strongly oversold in February to overbought now. While I see additional upside potential I don't think the upside potential is good enough to counter the downside risk. If the bearish wave count for the indexes is correct it's very bearish, which means we could see a very strong decline in the next month or two (stronger than anything we've seen since last year's highs. We might get just a deep pullback before heading back up, to create a larger a-b-c bounce pattern but that can only be guessed right now.

If we get a positive reaction to the ECB announcement on Thursday I'd look at it as a gift to lighten up your exposure to the long side and/or get into some short positions for a directional/hedge position. Opex week will likely be negative if we see another rally leg into Friday. But if we get a negative reaction to the ECB announcement there's a possibility we'll see a sharp decline and then a bounce correction into opex, making it a volatile week. In either case it could make for an interesting week. But first we need to get through Thursday to get a better idea about what next week might be like.

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

Keene H. Little, CMT

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


New Plays

Waiting on the ECB

by Jim Brown

Click here to email Jim Brown
Editor's Note

Stock fundamentals do not matter today. The market is waiting to see what Mario Draghi pulls out of his hat at the ECB meeting Thursday morning. This could be a boom or bust event and we are simply bystanders.

With China reporting severely negative exports on Monday and cutting the reserve rate for the 5th time there is little chance that Draghi will fail to produce at least a little in the way of additional stimulus. Whether it is enough is the big question.

Fortunately, the news will break at 7:45 ET in the morning and well before the U.S. markets open. If the futures react negatively, I would suggest you not enter any new plays. I am recommending one long play on expectations that we have a positive market. However, just because the market is open it does not mean we have to make a trade.


NEW BULLISH Plays


BBOX - Black Box Corp - Company Profile

Black Box is a leading technology solutions provider dedicated to helping customers build, manage, optimize and secure their IT infrastructure. They operate globally with more than 3,500 team members.

Black Box provides data centers, control rooms, contact centers, networking infrastructure while maintaining the highest security protocols and real time monitoring. With 70% of businesses reporting security breaches over the past 12 months it is critical to have somebody that understands the risk to manage your IT assets in all areas. The average security breach costs $3.5 million to repair and recover.

Shares rallied after they reported earnings on January 26th of 37 cents that rose +9% and beat estimates. They reported revenue of $222.5 million. They guided for the current quarter for earnings in a range of 25-30 cents and revenue of $220 million.

The company declared an 11-cent dividend payable April 14th to holders on March 31st. The company also increased the share buyback program by 1 million shares with $7 million to be purchased in March.

BBOX shares are undervalued to their peers by about 50%. The price to book multiple is .68 compared to the peer average of 2.06. They trade at a negative PE of -1.73.

This is a simple play. BBOX rallied from $8 to $13 in the days following earnings. Shares have plateaued at the $13.50 level with a slight upward trajectory. Recent intraday highs over the last two weeks have been from $13.85 to $14.11. When an eventual breakout occurs we could see a spike to $2-$3 as shorts cover and others add to their positions.

I am recommending we buy BBOX shares with a trade at $14.25 and target $16.25 for an exit.

Earnings are May 5th.

With a BBOX trade at $14.25

Buy BBOX shares, initial stop loss $12.85

No options because of wide spreads.




NEW BEARISH Plays


No New Bearish Plays





In Play Updates and Reviews

Glad We Waited

by Jim Brown

Click here to email Jim Brown

Editors Note:

Yesterday I warned the market could be volatile on Wednesday and the Dow changed direction 9 times today with a 100-point range. Most individual stocks traded in narrow ranges with investors unsure of what to expect from the ECB decision on Thursday morning.

We should only place new trades when we have a general idea which direction the market is headed. After the three weeks of gains it is not unusual for the indexes to be volatile while investors take profits and launch new positions. Eventually a direction will appear and while the ECB decision could produce some short term volatility the market direction may not be apparent until next week unless we blast well over resistance on Thursday.




Current Portfolio





Current Position Changes


CMRX - Chimerix

The long position remains unopened until CMRX trades at $5.75.


Profit Targets

Check the graphic above for any profit stops in green. We need to always be prepared for a profit exit at resistance.


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


ACAT - Arctic Cat - Company Profile

Comments:

ACAT made an inside day with a higher low and lower high than Tuesday. With the stock ending with a minor gain that would suggest the sellers are fading. ACAT is still holding its gains from the last four weeks.

Target $21.45 for an exit.

Original Trade Description: February 24th

Arctic Cat makes snowmobiles, all terrain vehicles (ATVs) and recreational off-road vehicles (ROVs). They reported a bad quarter because of the exceptionally warm weather and lack of snow. Sales declined -14.3%. Of that 4.9% was due to the strong dollar. The brand is one of the most wildly recognized brands of off-road equipment.

Arctic Cat has been in a restructuring program for several quarters to revamp their dealer network, eliminate debt, reduce inventory and produce new cutting edge vehicles.

In Q4, they reduced long-term debt by $15.8 million. They suspended the quarterly dividend to save $6.5 million in cash for the restructuring. Inventory decreased -$25 million sequentially. They generated approximately $27 million in free cash flow.

The company expects to see the benefits of their restructuring in the next two quarters with sales expected to rise +40% in the current quarter. New models and new products coming out this summer are expected to boost sales as well. They are announcing a new "single ski" snow bike at the snow dealer show in March.

While the outlook is far from exciting the company shares have rebounded from the low of $9 on January 28th to $16.45 today. The stock momentum is strong and it reached primary resistance at $16.50 this week. If the stock breaks through this resistance it could trigger additional short covering with the next resistance at $22.25. I am recommending a long position on a resistance break and an exit before we reach that higher resistance at $22.

Earnings are May 12th.

Position 2/26/16 with an ACAT trade at $17.25

Long ACAT shares @$17.25, see portfolio graphic for stop loss.

Optional

Long June $20 call @ $1.70, see portfolio graphic for stop loss.



AMLP - Alerian MLP ETF - ETF Profile

Comments:

AMLP traded positive but just barely after the comments from the bankruptcy judge on Tuesday. Gains in oil helped but we may need a few days for the smoke to clear from the comments.

Tuesday comments: AMLP declined -6.7% after a court verdict appeared to allow bankrupt Sabine Energy to renegotiate contracts with midstream transporters of natural gas. U.S. Bankruptcy judge Shelly Chapman in Manhattan said Sabine should be able to reject the current transmission contracts with HPIP Gonzales Holdings and Nordheim Eagle Ford Gathering LLC, an affiliate of Cheniere Energy. AMLP was not involved in the case.

Despite the judges comments she also said she did not want to decide an underlying legal dispute in a binding way. The problem is that companies contract with the owner of gathering systems for a field that can consist of tens of thousands of acres with production coming from a dozen different producers. Those producers contract for 10 years or more with the gathering system to ship their gas/oil through the gathering pipeline to a larger pipeline, rail car loading facility, refinery, etc.

For Sabine to reject the contract to ship its gas through the gathering system makes no sense. They have no other way to get it to market. Sabine admitted they were having to flare all their gas because HPIP was not accepting it for nonpayment of the agreed fees. Sabine said they were not paying because HPIP never completed construction of the pipelines. HPIP said Sabine never paid them the agreed construction fee.

The pipeline operators claim that once they contract with a group of producers to construct a system of pipelines to gather production that those contract rights and obligations pass from owner to owner if the leases are sold. Sabine wants to void its portion of the gathering agreement.

All the midstream MLPs were down on the judges comments because it has always been understood that once a pipeline is in place in a field that operator has the right to collect and transport the gas/oil from that field regardless of who owns it.

The judges comments are not law. She called the attorneys to her chamber after the court event and told them to "come to a commercial resolution of your issues" because she did not want to be put in a position of having to rule on the legality of the broader issue that could impact the entire pipeline sector in the USA.

While this does not have any immediate impact on AMLP and an adverse ruling may not impact them for years into the future, the stock was down because the sector recoiled in horror at the possibilities. I suspect calmer heads will prevail in the days to come.

Original Trade Description: March 2nd.

The MLP sector has been trashed along with the producers even though they have almost no risk. A pipeline MLP is a toll collector. They get paid a fee for every barrel of oil or cubic foot of gas that travel through their pipelines.

The vast majority of the pipelines in the country are full. They are so full that producers are having to resort to truck and rail shipments to get their oil to market. The pipelines are not in any material danger of a sudden drop in petroleum products flowing through their pipelines. Many contracts are take or pay. Producers commit to ship a certain amount of product and they pay for that commitment.

I am recommending the Alerian MLP ETF. This is an ETF that owns an entire basket of MLP securities and they all pay dividends. The AMLP is currently yielding 11.4%. They have raised their dividend every quarter since Q1-2012. They are not likely to break that string and if they did I suspect it would only be by a small amount. The Q1 dividend they announced on Feb 10th was 29.9 cents, payable on February 18th.

There are analysts that believe the MLP model is at risk. They believe the cost of capital will rise with the Fed rate hikes and the crash in the oil market. That means existing MLPs will have to pay more for new assets. That does not affect existing MLPs that already have their assets in place. They do not have to grow in the current energy environment. They can be content to sit on their assets and continue to pay dividends on their existing pipelines.

AMLP Holdings

I believe the risk at the current price level is minimal. The MLP panic has run its course with several cutting their dividends and causing the sharp drops in the ETFs. Now that oil prices are firming and expected to firm even more beginning in April when inventories begin to decline, the MLP ETF buyers will return. Just a year ago AMLP was trading over $20 and could be there again by this time next year.

There is no scenario where oil prices remain low long term. This is a normal boom/bust cycle and they will recover and will trade significantly higher in the years ahead.

This is a LONG-TERM position. Oil prices should rebound starting this summer and then rise sharply in 2017 and you need to be content to collect the 11.4% while we wait for those prices to move higher.

You do not have to hold long term. My initial target would be $14 and that would be a 40% return and we could see that by July.

Position 3/3/16:

Long AMLP shares @ $10.40. No stop loss.

Optional

Long July $12 call, entry 55 cents. No stop loss.



CDW - CDW Corp - Company Profile

Comments:

Still fighting the moving averages but the short term trend is still intact.

Previous: The interesting factoid is that the stock came to rest almost exactly on the 150-day average at $40.90 for the third consecutive day. There must be a high frequency trading program that is focused on CDW because the almost perfect respect for each of the moving averages is too precise for a day trader to manipulate the stock. Volume is 800,000 a day so it has to be a computer program. I looked at the time & sales and the vast majority of the trades, probably 85% or more are even 100 share lots. There are dozens of sequential trades with only a penny difference and sometimes less than a penny. Then dozens of trades a penny higher. That repeated all day long. That suggests a break over the 150-day average will run to the 100-day at $41.32.

Original Trade Description: February 29th.

CDW distributes IT solutions in the U.S. and Canada through its website CDW.com. They offer hardware and software products to integrated IT solutions including mobile, security, data center optimization, cloud computing, virtualization and collaboration. They offer a full line of IT products of every size, shape, brand, model and configuration. They also offer customization, installation, warranty and repair services as well as infrastructure as a service. This is the IT distributor for the home office, company datacenter or the datacenter as a service for those companies that do not have an extensive IT staff.

CDW has more than 250,000 corporate customers and 1,000 supply partners.

They reported Q4 earnings of 73 cents that rose +23% and matched estimates on revenue that rose +12.1% to $3.42 billion, which beat estimates slightly. For the full year they earned $2.35 on revenue of $12.99 billion.

They also announced a quarterly dividend of 10.75 cents to be paid on March 10th to holders on Feb 25th.

Shares rebounded from the earnings and are trading at $39.50. CDW has a very clear relationship with moving averages, especially the 200-day and the 300-day. Every break of either average has resulted in a significant move. On Monday CDW closed 9 cents above the resistance of the 200-day after trading between the 200-300 for the last two weeks. A breakout over that 200-day should target the $43 level if not higher.

CDW shares posted a 77-cent gain today in a weak market.

The high today was $39.76 and I am going to use an entry trigger at $39.85. That will mean the option price could be a little higher than expected since I am using the $40 strike. The $45 strike is too far away and has no open interest.

Position 3/1/16 with a CDW trade at $39.85

Long CDW shares @ $39.85, initial stop loss $37.85.

Optional

Long Apr $40 call @ $1.50, no initial stop loss.



CMRX - Chimerix - Company Profile

Comments:

Today's drop was a break in the trend. If shares break under support at $5.00 I will cancel the recommendation.

This position remains unopened until CMRX trades at $5.75.

Original Trade Description: March 7th

Chimerix is a pharmaceutical company that discovers, develops and commercializes oral antivirals to address unmet needs in the USA. Their drug farthest along in testing was brincidofovir otherwise known as CMX001, which was planned for adult transplant patients to treat adenovirus infection. The drug did no better than a placebo in state 3 trials and they were cancelled.

However, there are other uses for that drug and they have multiple other drugs under development. This recommendation is not based on some super drug in their pipeline.

This is a technical trade based on the probability of either a sharp rebound or an acquisition.

As of today's close CMRX has a market value of about $250 million. At the end of Q4 they had $221 million in cash and $159 million in investments. The company has an estimated shareholder equity of $8.50 per share with no active drugs. With multiple drugs in the pipeline and continued research underway they represent a cheap acquisition for anyone who believes their drugs have promise. Because of their cash and investments that means any active acquisition would have to command a premium over that intrinsic $8.50 value. They do have a poison pill in place to prevent a hostile takeover but they would be open to a friendly acquisition.

They reported earnings on Feb 29th that were a loss of 82 cents compared to estimates for 68 cents. The company also said they were cutting 20% of the workforce (25 workers) in order to be "prudent with their capital."

Earnings are May 9th.

Shares traded to a low of $4.41 post earnings on the 29th and have risen steadily over the last five days with a 5% gain on Monday alone. I am recommending we buy the shares with a trade at $5.75 with our first exit target around $7.60 if no news appears. That would be a 32% gain if we exited there.

I am not recommending any options but the May $7.50 call is 65 cents.

With a CMRX trade at $5.75 (just over Monday's high)

Buy CMRX shares, initial stop loss $4.75.



CUDA - Barracuda Networks - Company Profile

Comments:

Only a minor rebound of 16 cents with very short-term support at $13.65. If that support breaks we want to exit so I raised the stop loss to $13.50.

Original Trade Description: March 3rd

This is going to be a simple play description because the main objective is to be long CUDA when the buyers begin making offers.

Barracuda Networks designs and delivers security and storage solutions for clouds and corporate data centers. They protect against unwanted intrusions, malicious activities, they provide spam filtering to prevent phishing schemes to gain access to the internal networks. They are especially active in protecting websites from hackers and providing load balancing solutions for high volume websites.

Shares have been declining since June at $40 to trade under $10 in January. The company promised some new initiatives and restructuring that has not worked out to investor satisfaction.

On February 1st, Bloomberg reported that Barracuda had retained Morgan Stanley to "seek potential buyers" citing unnamed sources. While the process is ongoing BWS Financial reported there could be a number of companies interested in the Barracuda brand. BWS also said a complete turnaround if no buyers emerged would take 1-2 more quarters but it would be completed as subscribers transition to a cloud based product. They have a $20 price target on the shares.

Ahmet Okumus, Okumus Fund, reported in a 13G a couple weeks ago they had established a new position in CUDA of 3.73 million shares or 7.03%. Apparently they believe a bidder will appear.

Shares have rallied from $10 to $14 over the last four weeks. With the share price near $20 in early January any acquisition price would likely be in that range. If a bidding war emerges it could be higher. There is always the possibility that no bidder emerges and Barracuda continues on its restructuring path.

Earnings are April 25th and I would plan on exiting before that report. I am not recommending any options because the spreads are too wide.

The high on Thursday was $14.11 and I am putting a $14.25 entry trigger to open the position. If by chance we are late to the party the position will not be opened.

Position 3/4/16 after a CUDA trade at $14.25

Long CUDA shares @ $14.25, see portfolio graphic for stop loss.



DWRE - Demandware - Company Profile

Comments:

Today's decline was troubling because it came on no news and put the uptrend in danger. The stop loss is $35.65 so any further decline will stop us out.

Target $43.25 for an exit.

Original Trade Description: February 22nd

Demandware provides enterprise-class cloud based digital commerce solutions in the U.S., Germany, UK, and internationally. The Demandware Commerce platform enables customers to establish complex digital e-commerce strategies including multi-brands, multi-site, omni-channel and in-store operations.

Everything is integrated including payment systems, email marketing, campaign management, personalization, taxation, ratings, reviews and social commerce.

Demandware shares were caught in the Tableau Software disaster on February 5th when Tableau warned they saw enterprise spending slowing. Shares crashed from $44 to $30 on the Tableau news.

Demandware reported earnings on the 9th of 38 cents that beat street estimates for 23 cents. Revenue of $75.6 million also beat estimates for $72.3 million. They guided for full year revenue in the $295-$305 million range. Shares dropped at the open the next day because the street was expecting $302.26 million. It was a very minor guidance blink but shares dropped $2 the next day. That was the low for the month.

Shares have rebounded from that $26.50 low to $33.50 because they are not Tableau Software. They did not report any weakness in their earnings and revenue but they were punished for the Tableau guidance prior to earnings.

I believe Demandware will return to the $44 level where the close before Tableau dumped on the cloud software sector.

The high today was $33.97. I am putting an entry trigger on this play of $34.15 to get us over that level just in case the market takes a turn for the worse. If we do get some broad based profit taking, I will modify this play to take advantage of any new dips.

Earnings May 5th.

Position 2/26/16 with a DWRE trade at $34.15

Long DWRE shares @ $34.15, see portfolio graphic for stop loss.

Optional

Long April $35 call @ $2.70, see portfolio graphic for stop loss.



LGF - Lions Gate Entertainment - Company Description

Comments:

Minor gain but closed near the highs. No material selling pressure. The movie "Allegiant" begins on March 17th. I want to be out of this position before that opening. LGF is poised for a run to $26 but I recommend we exit early.

Target $25.25 to exit.

Original Trade Description: February 17th.

Lions Gate reported earnings on the 5th and dropped like a rock from $26 to $16 on ten times normal volume. Adjusted earnings of 45 cents missed estimates for 47 cents. Revenue of $670 million missed estimates for $767 million.

Lions Gate earnings are always lumpy. As a film maker with 2-3 major motion pictures a year the quarter with a big release always spikes and the quarters without a release crash. In the latest quarter the Hunger Games Mockingjay Part 2 had a huge audience but it was sandwiched between James Bond's Specter and the Martian. Those big films sucked up the available screens and pushed Mockingjay out of the headlines. Even with the competition the film grossed more than $650 million.

The studio has three movies for the first half of 2016 but none are expected to be blockbusters. Lions Gate also has a sizeable portfolio of TV shows like Orange is the New Black, Nashville, The Royals, The Wendy Williams Show and Casual, with more than 75 others across 40 networks. They have contracted future revenue from those shows of $1.3 billion at the end of December. They have a library of more than 16,000 motion picture and television titles.

One of the reasons the stock fell so sharply was the expectations for LGF to acquire a lot of other "free radicals" as John Malone calls them. Those are smaller studios that could help add to the LGF franchise. However, as a Canadian company they are prohibited from acquiring anyone bigger than themselves. When their market cap dropped from $7 billion to $3 billion after earnings it meant their potential acquisition candidates shrunk significantly. They were also rumored to be considering a merger with the Starz Network. That also played into the stock drop mix because owning their own TV network could present problems for selling their content to the other 40 networks they partner with. STRZA shares dropped from $31 to $20 on the earnings because it suggested there would be no merger.

Update 2/24/16: LGF and MGM have taken an equity position in Asian based Fifth Journey, a company founded by former executives from LucasArts, Universal Pictures and Gameloft. The company develops next-generation Hollywood games and interactive entertainment. The partnership and equity stake will allow LGF and MGM to break into the highly lucrative Asian gaming market with an eventual translation into Asian movies.

Now that the smoke has cleared LGF shares are rising again. They closed just under $21 on Wednesday. They are heavily oversold and heavily shorted. The combination in a positive market could continue to push the shares higher.

The lumpy earnings will be forgotten and the stock will recover. It was trading at $41 back in November before the merger news appeared. If that is no longer an option we could see a swift rebound.

I am putting an entry trigger at $21.25, just over the $21.09 high for today. We will only enter the position on a continued move higher.

Position 2/24/16 with a LGF trade at $21.25

Long LGF shares @ $21.25, see portfolio graphic for stop loss.

Optional

Long June $23 calls @ $1.50, see portfolio graphic for stop loss.



SGI - Silicon Graphics Intl - Company Profile

Comments:

Tuesday's volatility was erased with a six-week high close despite a minor gain.

Original Trade Description: February 19th

Silicon Graphics is a leader in high performance supercomputing. They build server components that handle compute intensive, fast algorithm workloads, such as Computer Assisted Engineering (CAE), genome assembly and scientific simulations. For instance, the SGI UV-3000 scales from 4 to 256 CPU sockets, utilizing multiple CPU cores per socket and up to 64 terabytes of shared memory. UV-3000 Description That description may be jibberish to readers without a tech background. I started working in computers since 1967 and I can assure you this is thousands of times more powerful than the computers NASA used to send men to the moon and 1,000 times more powerful than your desktop computer today.

SGI surged last week after Hewlett Packard Enterprise (HPE) said they were going to utilize the SGI platform in their new HPE Integrity MC990 X Server. This is a large business server that supports heavy workloads. This strategic partnership with SGI will greatly extend the reach of SGI technology. It is also a confirmation of the stability and high performance of the SGI platform and could lead to additional acceptance by other manufacturers.

In late January, SGI reported adjusted earnings of 14 cents compared to estimates for 5 cents. Revenue of $152 million beat estimates for $145 million. However, shares plunged from $7.80 to $5.20 the next day after the company filed a shelf registration for $75 million in new shares. The company market cap is only $200 million.

Shares remained volatile around $5 until the 12th and the full impact of the Hewlett Packard partnership was understood. They closed at $5.85 on Friday and a four-week high.

I believe the worst is over and the shelf registration forgotten in light of the partnership news.

I am recommending we buy SGI shares with a trade at $6.05 and target $7.35 for an exit. That would be a 21% gain. I am not recommending an option on this position but they do exist. The June $6 call is 95 cents and the $7 call is 60 cents. If you buy the option, I would plan on holding it longer than the stock position and hope that shares move over resistance at $7.40.

Earnings are April 27th.

Position 2/26/16 with SGI trade at $6.05

Long SGI shares @ $6.05, see portfolio graphic for stop loss.



USO - US Oil Fund ETF - ETF Description

Comments:

The rise in oil prices lifted the USO to a new two-month high and very close to our exit target. One mor egood day should do it. We will then look for a dip to reenter.

Target $10.50 for an exit.

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.




BEARISH Play Updates


VXX - VIX Futures ETF ETF - ETF Description

Comments:

The Dow was very volatile today with 9 direction changes and ranges as wide as 100 points. I am not surprised the VXX did not decline much. We need a couple consecutive days of decent gains to hit our exit point.

The exit target is 19.50 to close the 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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