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Newsletter

Daily Newsletter, Saturday, 10/8/2016

Table of Contents

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

Market Wrap

One Down, One to Go

by Jim Brown

Click here to email Jim Brown

The first two weeks of October are typically negative and the first one is over with one more to go.

Weekly Statistics

Friday Statistics

The nonfarm payroll numbers did not produce the market movement most expected. The early Dow decline saw buyers appear when the -119 low held for over an hour and traders gave up on a bearish move. The index rebounded to positive territory in the afternoon but the 18,250 price magnet was too strong and it closed just below that level.

The Dow has not been reactive to moving averages in a long time but the 100-day has returned to act as support.


The economy added 156,000 nonfarm payrolls in September. That was less than the expectations for 170,000 and less than the revised gain in August of 167,000. The August number was revised up from 151,000. The July job gains were revised lower from 275,000 to 252,000.

After the ADP report on Wednesday declined from 177,000 to 154,000 and also missed consensus estimates of 170,000 the first look at the nonfarm headline number suggested the economy was slowing. However, the average hourly earnings rose +0.2% to +2.6% over the same period in 2015 and the average workweek rose slightly to 34.4 from 34.3 hours. Those are minor gains but spread across 149 million workers it makes a difference.

The unemployment rate rose one tenth to 5.0% as more people entered the workforce. More than 444,000 people entered the workforce in September. The labor force participation rate also edged up slightly from 62.8 to 62.9% after a low of 62.6% in May.

Construction payrolls rose by 23,000 to put the goods producing segment back into positive territory at 10,000 after losing -25,000 jobs in August. The firming of energy prices have started to reverse the job losses in the exploration and production sector.

The separate Household Survey showed a gain of 354,000 jobs. The number of workers employed part-time involuntarily declined by 159,000. The median term of unemployment fell to 10.3 weeks. However, the larger U6 unemployment rate was unchanged at 9.7%.

The average monthly job gains in 2016 is +178,000 and slightly less than the 200,000 per month average for 2014 and 2015. We are in the seventh year of an expansion cycle so a slowing of job growth is to be expected. The number of discouraged workers has declined as a tight job market has produced more job advertisements and higher wages.

As an example of the problems people are having finding qualified workers, Axon, a Seattle based producer of body cameras and associated software is offering a Tesla Model 3 car to new hires including engineers and web developers. The company had 31 open positions as of Wednesday.

Amazon has been known to pay significant sums to developers to induce them to sell their homes and move to Seattle. Tableau Software (DATA) is paying employees a $10,000 finder's fee for referring new prospects that are hired. Microsoft posted openings for 500 new jobs just a week ago.

Despite the third consecutive decline in new jobs, this was still a decent report and Fed heads immediately talked about the need to start raising rates.


The odds of a rate hike for the November meeting have declined to only 8.3% but the odds for December have risen to 65.1%. Unless the economic reports show an implosion in the economy over the next two months there will be a rate hike in December. Several Fed heads are trying to talk up a November hike but the futures are ignoring those efforts. The equity market is not ignoring those comments and that is one of the reasons for the volatility over the last week.



Unfortunately for the Fed the economic forecast is not proceeding according to plan. Back at the beginning of August the Atlanta Fed real time GDPNow forecast for Q3 GDP was predicting 3.8% growth. Over the last two months that has declined to 2.1% growth and could easily slip under 2% in the next revision. This compares to the final Q2 reading of 1.41%. That is hardly the kind of growth the Fed wants to see when they are raising rates.

While the Fed claims it is data dependent, it is not. However, the equity market is the most efficient discounting mechanism of future events and the current volatility on Fed headlines suggests investors are afraid the Fed is going to hike regardless of the country's economic strength.



The other economic report on Friday was the Wholesale Inventories for August, which declined -0.2% after a -0.1% decline in July. The report was ignored.

Next week is a light calendar for economic events but there are still plenty of Fed speeches and the start of the Q3 earnings cycle. Monday is Columbus Day and the banks and the bond market will be closed.

Tuesday is the official kickoff for earnings with Alcoa, Fastenal and Barracuda Networks. Friday is the biggest earnings day with Citigroup, Wells Fargo, PNC Financial and JP Morgan Chase reporting.

The FOMC minutes on Wednesday will be the most important event with analysts trying to decipher the minutes to see if there really is a chance for a rate hike in November. Rounding out the week Janet Yellen has a speech on Friday and whenever she speaks there is always the danger of a lightning strike.


One of the problems hitting the market on Friday was the flash crash in the British pound. The pound crashed from 1.26 to the dollar to 1.14 overnight before a rebound appeared. Banks blamed it on very thin liquidity and a sudden abundance of sell orders. Bloomberg reported that eight market makers went offline for more than 30 seconds because of an absence of bids. Traders said a large number of sell stops were hit and there was nobody to buy. That sent the computer programs into a panic and they cancelled orders until normal trading resumed.

Citigroup blamed the crash on "blunt aggression" in a thin market coupled with retail stop losses being hit.

We are never more than one unfortunate series of seemingly unrelated events away from a flash crash in anything. With more than $5 trillion in currencies traded daily, that is normally assumed to be a very liquid market but there has been at least four flash crashes in the currency market this year.

This chart from the CME does not show the low at 1.14 because of program constraints but the magnitude of the drop is apparent. Normal bid/ask is 1-2 pips. That rose to more than 50 pips and at one point was 600 pips. In currencies, that is a nightmare scenario.


Honeywell (HON) rocked the market with an earnings warning ahead of the Q3 report. The company cut guidance from $1.67-$1.72 to $1.60 and the street was expecting $1.67. They blamed the warning on foreign defense order weakness along with a decline in business jet engine orders. They said weakness in the energy sector reduced demand for private jets and maintenance for those jets. They also guided for Q4 for earnings of $1.74-$1.78 and full year for $6.60-$6.64. That was down slightly from $6.60-$6.70. Shares fell -7.5% on the news.


PPG Industries (PPG) warned it expected to post a loss for Q3 of 74 to 77 cents. That will be the first loss in 30 consecutive quarters. The adjusted earnings will be $1.54-$1.57 compared to analyst estimates for $1.71. They posted a $1.52 profit in the comparison quarter. They blamed the loss on a charge related to their pension settlement. Revenue is expected to be $3.8 billion and also below estimates for $3.84 billion. Shares fell -$8.50 on the news.


Tyson Foods (TSN) shares fell -9% after Pivotal Research cut the stock from buy to sell as a result of a price fixing class action suit filed in September. The analyst said the suit has merit and he cut the price target from $100 to $40. Tyson, Pilgrim's Pride (PPC) and Sanderson Farms (SAFM) reportedly colluded starting in 2008 to reduce production in order to keep prices high. The analyst said this suit could cause stronger industry regulation and reduce profits.


Yahoo (YHOO) is said to be resisting efforts by Verizon to reduce the purchase price from $4.8 billion to $3.8 billion as a result of the hacking scandal. Data from more than 500 million accounts was stolen in 2014 and Yahoo management did not disclose the extent of the breach in the negotiations with Verizon. It would appear to me to be a material adverse change or a MAC event that could allow Verizon to walk if it so desired. Yahoo said there had been some breaches in the past but did not disclose that 500 million accounts were stolen.


The Twitter (TWTR) sale is dead. The rumor making the rounds late Friday said the Twitter sale process had failed and all the bidders had walked away. Google, Disney and SalesForce.com had all withdrawn according to an article on Bloomberg. Twitter had hired Goldman Sachs to find a buyer against the wishes of CEO Tom Dorsey. According to the Bloomberg article, the sale process was all but dead because all the interested parties had passed after a quick look at the offering materials. Apparently, the prospective buyers were also getting a lot of pushback from their boards and investors about acquiring a declining business. The SalesForce CEO was especially bombarded at a company conference with a steady stream of people making their feelings known.

Twitter was supposed to have a board meeting late Friday to discuss potential offers with Goldman but the meeting was cancelled. With the news breaking late on Friday we could see Twitter shares decline again on Monday.


Deutsche Bank (DB) was rumored to be working on an investment from Qatar for $5 billion. There is no confirmation on that but DB slipped into the bond market late Friday and sold $3 billion in dollar denominated five-year bonds at 4.25%. Apparently, there are a lot of investors that do not believe DB is going to fail. The stock has rebounded more than 25% from the $11 low on the 29th.


The "Profit's" Marcus Lemonis, went public with his Camping World (CWH) business on Friday and it was far from exciting. The shares priced at $22 and right in the middle of the expected $21-$23 range. After a full day of trading, they closed at $22.43. While the IPO may have been perfectly priced from the Camping World perspective, it had to be a letdown for Lemonis not to see a big post IPO gain.


Shares of The Gap (GPS) rose +15% despite posting lower than expected same store sales. Comparable store sales fell -3% compared to a -1% decline in the year ago quarter. Comps at Gap Global fell -10% and Banana Republic Global fell -9%. Old Navy was positive with a +4% rise.

Shares were rising because management blamed the decline on the fire that destroyed the massive Fishkill warehouse. The company said Gap Global sales were reduced by 5% because of the fire, with another 3% impact to Banana Republic. According to my math, that does not overcome the declines in comps but apparently, investors were satisfied.


Silicon Motion (SIMO) raised revenue guidance from $140.7-$147.7 million to $156.2-$159.0 million. Analyst consensus estimates were $144.2 million. Shares rose 3.5%.


Crude prices continued their headline honeymoon with nearly two months to go before the OPEC countries actually have to agree to something. They played the game perfectly this time and there has been a lack of loose lips to sink the effort.

Normally somebody cannot stand the suspense and says something stupid the next time a microphone appears. So far, that has not happened. With prices at $50, we are at the level where rig activations could accelerate over the next several weeks, if the price holds.

There has been five consecutive weeks of inventory declines in a period where inventories should be rising rapidly. Imports are down about 500,000 bpd and I attribute that to the hurricane blocking the entrance to the Gulf. U.S. production has been flat at 8.47 million bpd and demand has actually slowed from 16.9 mbpd to 16.0 mbpd. If you are good at math that means we have been using about 900,000 bpd less oil for the last several weeks and yet we still have a decline in inventories. Something is not making sense unless we get a deluge of oil over the next three weeks from the tankers parked in the Atlantic waiting for the storm to blow itself out.


Active rigs rose +2 last week to 524 and I was expecting more activity. With oil at $50, it is profitable to drill in several of the shale areas, especially the Permian. Pioneer Resources said the Permian Basin could use another 100 active rigs.

If I could bet on the rig count, I would bet on 575 by year-end if oil prices remain at $50.


 


 

Markets

The major indexes have fallen into a sideways pattern and we cannot seem to find a catalyst to break us out of the current rut. We do need to remember the first two weeks of October are normally negative. We have one week to go. What happens next week could be the result of Sunday's debate more than any economic event on the calendar. The markets do not do well where there is not a clear leader.

Trump's comments from 11 years ago have ignited a firestorm that may not be survivable. Clinton has an opportunity to end the race on Sunday if she can get passed the recent document dumps from Wikileaks and Guccifer 2.0. Both candidates are flawed but in this case, the rational speaking candidate has the best chance. The news on both came out after the market closed on Friday. If Clinton wins the debate by remaining rational in the face of a Trump meltdown, the markets should rally on Monday. The status quo will be continued and investors will know what to expect.

The S&P spent the first week of October stuck in a range between 2144-2164 and closed the week right in the middle at 2,154. The 100-day and 75-day averages have suddenly come back into play on the S&P. The index has not been reactive to averages in a long time until just recently.

Horizontal support has formed at 2,145 but there is still a pattern of lower highs that was broken only briefly on Friday morning. The S&P is not giving any indication of direction but the lack of a material decline in this normally volatile period is positive.


The Dow is using the same averages differently with the 75-day average as resistance and the 100-day as support. The 18,250 price magnet is still active as is the pattern of lower highs. However, there is a miniscule upward bias in the Dow chart with the 100-day average rising and the index respecting that support.

The hurdle for the Dow next week will be on Friday when the major banks report earnings. The banks were up +3% last week on expectations for a rate hike. With that possibility not until December, the banks are probably going to weaken before they move higher. The FOMC minutes on Wednesday could either depress the financials or lift them depending on what the Fed discussed.

Once the Dow components begin reporting earnings on Friday, there is a steady stream of additional companies reporting over the next two weeks. That is our best chance to see an end of October rally. We need the guidance to be positive and the earnings to be decent.



The Nasdaq has been struggling to move higher and repeat the new high from September 22nd but has run into solid resistance at 5,320. Support is 5,250 giving it a range of 70 that has been tested repeatedly. However, the intraday dips are always bought.

There is no conviction on either side but there is a very slight bias to the upside. If we can hold that until some of the tech stocks begin reporting earnings then we have a decent chance of making a new high. That will happen in option expiration week.



The Russell 2000 pattern is troubling. This is the clearest example of lower highs and Friday's intraday dip below support could be suggesting a bearish move ahead. If that support at 1,235 fails, the Russell could sink the entire market with a drop to 1,205. The Russell 2000 is the market sentiment index and it is looking very weak.


On Friday, Bank of America analyst Steven Suttmeier warned of a potential 5% decline in equities over the next two weeks. He believes there is complacency in the market with the VIX holding in the 12-13 range. He said the complacency in the VIX and VXV/VIX ratio, along with a lack of fear in the put/call ratios, limits upside and suggests there is a further decline ahead. A VXV/VIX ratio under 1.0 normally signals a market bottom. The closing ratio on Friday was 1.306 suggesting further selling. He suggested buying a S&P dip back to the 2050-2100 range with expectations the index would eventually rise to 2,300. He said we are nearing the "buy October" point on the calendar in expectations of a 5% rally before April.

This is just one more opinion by a technical analyst based purely on the charts. He may be right or wrong with the daily headlines driving market direction. While I am not convinced we will see a 5% decline, I do believe we will see a decent rally if one candidate pulls well ahead of the other in the polls. Equity fund managers need to put money to work before the end of October and they are holding their breath going into Sunday's debate.


We are approaching the point where the market "should" rally into November. Pick a few stocks on your shopping list and decide where you would like to buy them on a dip. If one appears, it may be brief.

If you like the market commentary you have been receiving and you are on a free trial then now is the time to subscribe. Do not wait until you miss a newsletter to decide you want to take the plunge.

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Random Thoughts


I am shocked by the sudden change in sentiment. Bearish sentiment took a -9 point plunge and bullish sentiment jumped nearly 5%. The survey ends on Wednesday and the markets were positive on Wednesday. I believe this is calendar oriented with experienced investors shifting their mindset towards the normal end of October rebound.



Did you know that hurricanes, typhoons and cyclones spin in different directions depending on where they form. Above the equator, those storms will spin counterclockwise. Below the equator, they will spin clockwise. The reason for the different direction of the spin is called the Coriolis effect, named after the French mathematician Gaspard-Gustave de Coriolis, who discovered the cause and published his findings in the 19th century. The earth is spinning faster at the equator than at the poles. The faster spin imparts a greater force on the side of the storm closest to the equator and pulls the storm on one side to create the spin.


A state run TV channel in Russia warned that a nuclear war with the U.S. could be imminent. Zvezda, a nationwide TV service run by the Ministry of Defence, said "Schizophrenics from America are sharpening nuclear weapons for Moscow." At the same time, the Russian government initiated a civil defense drill and is evacuating 40 million people. "The three day, four stage drill, involves more than 40 million people, more than 200,000 specialists of rescue units, organizations and enterprises as well as some 50,000 units of equipment."

Whenever there is unrest at home, the Russian government gives citizens another enemy to worry about.


The U.S. formerly blamed Russia for the recent political hacking attacks saying they were "intended to interfere with the U.S. election process." U.S. officials said they were "confident" the Russian government directed those attacks on American political organizations. Last month Putin called the hacking of the DNC a "public service" but denied any involvement. "The important thing is the content given to the public."

Kremlin spokesman Dmitry Peskov said the U.S. accusations behind these cyberattacks are "nonsense." The spokesman said "tens of thousands of hackers" attack Russian President Vladimir Putin's site "every day." "Many attacks are traced to U.S. territory but we are not blaming the White House every time."

Personally, I seriously doubt an attempt at public shaming of the Russian government by the U.S. government, will ever accomplish anything. To the Russians it is probably a badge of honor.


 

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

 

"Sometimes people don't want to hear the truth because they don't want their illusions destroyed."

Freidrich Nietzsche


 


New Plays

Competition Has Arrived

by Jim Brown

Click here to email Jim Brown
Editor's Note

The first product to market typically has several years of dominance before competitors with a copy of the original begins weighing on sales. With Taser they had several years where they fought for market acceptance of the product and once it became commonplace the competitors arrived.



NEW BULLISH Plays

No New Bullish Plays


NEW BEARISH Plays

TASR - Taser Intl Inc - Company Profile

TASER International, Inc. develops, manufactures, and sells conducted electrical weapons (CEWs) worldwide. The company operates through two segments, TASER Weapons and Axon. Its CEWs transmit electrical pulses along the wires and into the body affecting the sensory and motor functions of the peripheral nervous system. The company offers TASER X26P and TASER X2 smart weapons for law enforcement; TASER C2 and TASER Pulse CEWs for the consumer market; and replacement cartridges. It also provides Axon Body, a body-worn camera for law enforcement; Axon Body 2 camera system; Axon Flex camera system that records video and audio of critical incidents; TASER Cam HD, a recording device; Axon Fleet, an in-car video system; Axon Interview, a video and audio recording system; Axon Signal, a body-worn camera; and Axon Dock, a camera charging station. In addition, the company offers Evidence.com, a cloud-based digital evidence management system that allows agencies to store data and enables new workflows for managing and sharing that data; Evidence.com for Prosecutors to manage evidence; and Evidence Sync, a desktop-based application that enables evidence to be uploaded to Evidence.com. Further, it provides Axon Capture a mobile application to allow officers to capture digital evidence from the field; Axon View, a mobile application to provide instant playback of unfolding events; Axon Five, a software application to enhance and analyze images and videos; Axon Convert, a software solution to convert unplayable file formats; and Axon Detect, a photo analysis program for tamper detection. The company sells its products to military forces, private security, and consumer personal protection markets, as well as to federal, state, and local law enforcement agencies and corrections through its direct sales force, distribution partners, online store, and third-party resellers. Company description from FinViz.com.

Taser shares were crushed last week when the NYPD chose VieVu instead of Taser for its supplier of more than 1,000 body cameras. The camera has become a larger market for Taser than the actual Taser weapon. When Taser sells a camera they also sell a 3-5 year subscription to Evidence.com, which is their video storage and retrieval application in the cloud. While a Taser sale may be in the hundreds of thousands of dollars per police department and the camera sale also in the hundreds of thousands, the subscription to archive the hundreds of thousands of hours of video footage costs millions of dollars.

The $399 camera is just the camel's nose under the tent. Each camera requires its own subscription to Evidence.com which costs $39 to $79 a month before quantity discounts. The 1,000 camera order for the NYPD would have been a minimum of $39,000 a month for five years or $2.3 million to $5.0 million in revenue.

The Safariland VieVu camera system is now deployed in more than 4,000 agencies in 17 countries. With Safariland the camera is holster activated and turns on when the officer's gun is drawn. This is a major competitor for Taser.

Another blow for Taser last week was a Supreme Court decision not to hear a case involving the death of a person stunned by a Taser. The court let stand a ruling that said Tasers amount to an unconstitutional use of excessive force and officers can only use Tasers if they are in immediate danger. This could negatively impact Taser sales, which is still the largest portion of their international revenue.

If Taser sales slow because of the ruling, then body camera sales could also slow since many times they are packaged together. That means Evidence.com subscriptions would also slow.

Earnings Nov 3rd.

Taser shares are in free fall after the dual blow last week. The Supreme Court decision is the one problem that will last.

With a TASR trade at $22.25

Sell short TASR shares, initial stop loss $24.05.

Optional: Buy Nov $22 put, currently $1.25. No initial stop loss.




In Play Updates and Reviews

Not a Bad Day

by Jim Brown

Click here to email Jim Brown

Editors Note:

Nothing was stopped out and several positions had decent gains. Friday was not a bad day. The biggest decline in the longs was 45 cents on GoPro and on the short side PPC fell 95 cents to take us out of danger of being stopped.

However, despite the uneventful day in the portfolio, the small cap indexes are starting to break to the downside. The recent range on the S&P-600 had support at 749 and the index traded down to 746 before recovering that support. If we do not see a positive gain on Monday it could start a new round of selling that retests lower support levels.

The first two weeks of October are typically negative and one of them is now behind us with only one to go before the typical end of October rally. There is no guarantee but the historical trends are solid.




Current Portfolio


Stop Loss Updates

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


Profit Targets

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




Lottery Ticket Plays


Current Position Changes


No Changes



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BULLISH Play Updates

AAOI - Applied OptoElectric - Company Profile

Comments:

No specific news. Shares declined slightly in a weak market.

Original Trade Description: September 17th.

Applied Optoelectronics, Inc. designs, manufactures, and sells fiber-optic networking products primarily for Internet data center, cable television (CATV), and fiber-to-the-home (FTTH) networking end-markets. It offers optical modules, optical transceivers, lasers, transmitters, and turn-key equipment, as well as headend, node, and distribution equipment. The company sells its products to internet data center operators, CATV and telecommunications equipment manufacturers, and internet service providers through its direct and indirect sales channels worldwide. Company description from FinViz.com.

For Q2, the company reported adjusted earnings of 16 cents that beat estimates for 6 cents. Revenue of $55.3 million beat estimates for $50.8 million. For the current quarter the company guided to earnings of 16-21 cents and revenue of $56-$59 million.

AAOI is in the same optical sector as NPTN and is also experiencing rapid growth. However, the company's products are also used by cable TV providers. Amazon is AAOI's largest customer.

Last week AAOI won an order for 10,000 transceivers worth more than $5 million from a new company.

Zacks said the consensus earnings for AAOI have been rising rapidly as analysts upgrade their forecasts. Over the last month alone the consensus Q3 estimate has risen from 13 cents to 22 cents. Full year estimates have risen from 37 cents to 51 cents.

Earnings Nov 3rd.

Over the last three months, shares have rebounded from $9 to $21 as the earnings and outlook increased. Resistance is currently $22. With the super cycle getting a lot of headlines I believe the stock will break out.

I am putting an entry trigger on it just in case the recently volatile market gaps down.

Position 9/19/16:

Long AAOI shares @ $22.10, initial stop loss $19.25



ALRM - Alarm.com - Company Profile

Comments:

No specific news. New 2-month closing high.

Original Trade Description: October 1st.

Alarm.com Holdings, Inc. provides cloud-based software platform solutions for the connected homes in the United States and internationally. It offers multi-tenant software-as-a-service platform that allows home and business owners to intelligently secure and manage their properties, as well as remotely interact with an array of connected devices through a single intuitive interface. The company provides interactive security solutions, which offer intelligent security and awareness services through a dedicated, cellular, and two-way connection to the home or business; and intelligent automation solutions that connects, integrates, and controls the devices in the home or business, such as security systems, garage doors, lights, door locks, thermostats, electrical appliances, environmental sensors, and other connected devices. It also offers video monitoring solutions, which provide live streaming, smart clip capture, high definition continuous recording, and instant video alerts through its mobile app or on the Web; and energy management solutions that offer enhanced energy monitoring and management services. It has approximately 2.6 million residential and business subscribers. Company description from FinViz.com.

For Q2, the company reported earnings of 15 cents compared to estimates for 11 cents. Revenue rose 24% to $64.4 million and beat estimates for $58.6 million. Software as a Service (SaaS) revenue rose 23% to $42 million. The company guided for the ful lyear for earnings of 49-51 cents and revenue of $242.3-$245.8 million. Analysts were expecting 48 cents on $241.7 million.

Earnings Nov 8th.

Despite the strong beat and strong guidance shares crashed from the historic high close of $33 before the earnings were released. Shares were up +135% since the February low at $14 and traders took profits. The only ratings change was from Raymond James from outperform to market perform based on value because of the strong gains. At the same time Imperial Capital raised their price target from $24.50 to $30. Since shares closed the day before at $30 that was an implied neutral rating.

Shares collapsed back to $28 and here there for three weeks then fell sharply on September 6th on no news to bottom at $25. That bottom was quickly bought and Friday's gain lifted the shares back over resistance at $28.50.

There is no bad press for Alarm.com. Earnings and revenue are growing, subscribers are growing and shares are back over resistance. If the market is going to rally in late October this should be a tech stock that outperforms.

Position 10/3/16 with a ALRM trade at $29.05

Long ALRM shares @ $29.05, see portfolio graphic for stop loss.

No options recommended because of price.



BOX - Box Inc - Company Profile

Comments:

No specific news. Another minor loss after a 14-month high on Tuesday.

Original Trade Description: September 15th.

Box, Inc. provides cloud-based mobile optimized enterprise content collaboration platform that enables organizations of various sizes to manage their enterprise content from anywhere. The company's platform enables users to collaborate on content internally and with external parties, automate content-driven business processes, develop custom applications, and implement data protection, security, and compliance features. Box, Inc. offers its solution in 22 languages. It serves healthcare and life sciences, financial services, legal services, media and entertainment, retail, education, energy, and government industries. Company description from FinViz.com.

In Q2, Box reported an adjusted loss of 14 cents that improved from the 28 cent loss in the comparison quarter. Analysts were expecting a loss of 19 cents. Revenue rose 30% and deferred revenue rose 40%. They had cash on hand of $173.33 million, up from $140 million in the comparison quarter.

The company added 4,000 new corporate customers including Electronic Arts (EA), Pfizer (PFE), AutoDesk (ADSK), Western Union (WU), Uber and the Federal Communications Commission (FCC) to bring their installed base to 66,000.

Box has adopted a neutral strategy. They joined with Microsoft in offering Office 365. They partnered with Alphabet to offer Google's suite of word processing, spreadsheets and other productivity tools known as Google Docs. Box will act as a third party content repository for Google Docs. That may seem odd since they also offer Office 365, which is a competing product suite but that is the key for Box. They are creating a common platform where customers can use the tools they like. One group of people in an office may like Office 365 and another group Google Docs.

Box also partnered with IBM to introduce Box Relay, which is a collaboration platform where outside users, fellow workers, etc, can be invited to participate in documents and worksheets and track changes, alert other users of changes and reduce bottlenecks in the workflow process. You no longer have to email a spreadsheet to other employees and then receive it back by email once they modify it, then add all the changes into the master document. Now it can all be done in the cloud in real time.

Box also partnered with Apple and Amazon in other collaboration projects.

By maintaining a neutral stance in the cloud, Box can take advantage of the current customers of other cloud customers. Everybody benefits because they are not competing but collaborating.

Box shares broke out of a long-term base this week and should be headed back to post IPO levels at $19 or higher now that their technology is receiving widespread acceptance.

Position 9/16/16:

Long BOX shares @ $14.74, see portfolio graphic for stop loss.



FLXN - Flexion Therapeutics - Company Profile

Comments:

No specific news. Shares declined slightly again to close on prior resistance.

Original Trade Description: October 4th.

Flexion Therapeutics, Inc., a specialty pharmaceutical company, focuses on the development and commercialization of anti-inflammatory and analgesic therapies for the treatment of patients with musculoskeletal conditions. It lead product candidate includes Zilretta, a sustained-release intra-articular steroid, which is in clinical trials to treat the patients with moderate to severe osteoarthritis (OA) pain. The company is also developing FX007, a preclinical, small-molecule TrkA receptor antagonist to address post-operative pain; and FX005, a sustained-release intra-articular p38 MAP kinase inhibitor for patients with end-stage OA pain. Company description from FinViz.com.

The FDA has recently said that results from one phase 4 trial can support a FDA application for approval. Recently, Flexion reported positive results of a trial for Zilretta. The drug is a ne wform of treatment for chronic knee pain caused by arthritis. Typically, once a patient can no longer get by on aspirin or Advil, the next solution is quarterly shots of a corticosteroid. As time passes these shots have less of an impact on the pain and patients are suffering significantly before the quarter is over.

Zilretta provided a 50% improvement in pain relief and the lack of pain lasted for the entire trial. With more than five million patients currently on the corticosteroid treatment there is a huge market just waiting to be tapped. This is expected to be a billion dollar a year drug.

Flexion is going to market the drug itself rather than sell it off to some larger partner. They have been storing up cash and currently have $119 million with another $44 million in short term investments. The company only has $16 million in debt so net cash it is debt free. The company's market cap is only $500 million so a billion dollar drug could easily double the stock price.

They plan on filing the FDA application over the next couple months and that will be a major milestone for the company and should lift the stock. The approval will not be until late 2017 but we will be out of the position before the November earnings. We are just playing the buildup to the application.

Earnings Nov 3rd.

The $20 level appears to be resistance and it was tested on Monday. I am putting an entry trigger on the position just over $20.

Position 10/5/16 with a FLXN trade at $20.15

Long FLXN shares, see portfolio graphic for stop loss.

No options recommended because of wide spreads.



FNSR - Finisar Corp - Company Profile

Comments:

No specific news. Sector weakness after ACIA priced a secondary well under the market.

Original Trade Description: October 3rd.

Finisar Corporation provides optical subsystems and components for data communication and telecommunication applications in the United States, Malaysia, China, and internationally. Its optical subsystems primarily consist of transmitters, receivers, transceivers, transponders, and active optical cables that provide the fundamental optical-electrical or optoelectronic interface for interconnecting the electronic equipment used in communication networks. The company also offers wavelength selective switches, which are used to switch network traffic from one optical fiber to multiple other fibers without converting to an electronic signal. In addition, it provides optical components comprising packaged lasers, receivers, and photodetectors for data communication and telecommunication applications; and passive optical components for telecommunication applications. Company description from FinViz.com.

Finisar shares rallied throughout the third quarter. In early September shares spiked after earnings and then leveled off but retaining a positive bias. They reported earnings of 38 cents that beat estimates for 30 cents. Revenue of $341.3 million also beat estimates for $334 million. The company guided for the current quarter for earnings of 44-50 cents on sales of $355-#375 million. Analysts were only expecting 32 cents and $344 million. The CEO blamed the soaring earnings on booming sales of certain transceivers and switches. China is in the middle of their upgrade to a 100 Gb infrastructure and the U.S. carriers like Verizon are just getting started.

Earnings December 8th.

Shares spiked from $23 to $27 on the news even after a big ramp up from $17 at the beginning of the quarter. Shares slowed their ascent but reached $30 last week. That is a five-year high. A move over that psychological resistance at $30 could start a new leg higher. The intraday high last week was $30.19. I am recommending we enter a position with a trade at $30.25.

Position 10/5/16 with a FNSR trade at $30.46

Long FNSR shares @ $30.46, see portfolio graphic for stop loss.



GPRO - GoPro Inc - Company Profile

Comments:

No specific news. Minor decline in a weak market.

Original Trade Description: October 5th.

GoPro, Inc. develops and sells mountable and wearable cameras, and accessories in the United States and internationally. The company offers HERO line of capture devices, such as cameras; and mounts comprising equipment-based mounts consisting of helmet, handlebar, roll bar, and grip and tripod mounts that enable consumers to capture content while engaged in a range of activities, as well as mounts that enable customers to wear the mount on their bodies, such as wrist housings, chest harnesses, and head straps. It also provides LCD Touch BacPac, Battery BacPac, Smart Remote, and Floaty Backdoor accessories, as well as spare batteries, charging accessories, cables to connect its GoPro cameras to television monitors, video transmitters and external microphones, flotation devices, dive filters, and anti-fogging solutions. In addition, the company offers GoPro Studio, a video editing tool that allows users to create professional quality videos from their content; and GoPro App that allows users to control GoPro cameras remotely using a smartphone or tablet. Company description from FinViz.com.

Everybody knows the story of GoPro. They invented the action camera and the company was a smash hit. After they went public at $28 in 2014, shares rallied to more than $98 in the weeks that followed. They were making the talk show circuit almost weekly on CNBC, Bloomberg, etc. CEO Nick Woodman became a celebrity.

Then the problems started. The company's software was hard to use. New camera models did not work as expected. It was the perfect example of hyper growth without the growth of the infrastructure and products to support that growth. Competitors began to appear. Their cameras were cheaper and the software easier to use. The last model of the GoPro camera was flawed and the price was cut repeatedly.

The company promised great things ahead. It has been a long time since they released a product and they were faulted for that. However, rather than release another flawed product they took their time and made sure it was right.

This week they announced the new Hero5 camera and the smaller Hero5 Session camera. The big camera is $399 while the Session is $299. They have already exhibited the new cameras and given crowd demos and the excitement is growing. Both cameras are waterproof to 10 meters, capture 4K video at 30 fps. They have integrated voice control and microphones, with active noise cancellation. The Hero5 has a 12 megapixel camera and the Session has 10 megapixels. They Hero5 includes image stabilization, GPS capture and three stereo microphones.

The biggest news is an automatic upload feature to send content to GoPro's subscription based cloud making it easy to access, edit and share the content. They announced a new edit feature called Quik that allows users to instantly edit content on their phones and create short videos for sites like YouTube, Facebook and Instagram.

They also launched their Karma drone. It has been promised for two years and has finally arrived. When sold with the Hero5 it is $1,099 and $999 with the Session. The drone has received wildly enthusiastic reviews and should be a big seller.

The long time between model releases has nearly eliminated channel inventory and that means all the new production will go directly into revenue.

Earnings Oct 27th.

This will be a short fuse play with earnings co close. Shares are trying to break over resistance at $17.35 and we want to own the shares when that happens. However, the last two days has seen spikes over that level so we cannot use that as an entry trigger. We have to commit at the open tomorrow.

Position 10/6/16:

Long GPRO shares @ $17.06, see portfolio graphic for stop loss.

No options recommended because of price. Expectation premiums are too high.




BEARISH Play Updates

PPC - Pilgrims Pride - Company Profile

Comments:

Big drop to a 10-month low after missing our stop loss by only 10 cents on Thursday. Tyson (TSN), PPC and Sanderson Farms (SAFM) were sued in September over price collusion. Pivotal research analyst Tim Ramey said the complaints behind the class action suit was "convincing" and players in the chicken segment began to share data starting in 2008 and curbed production to keep prices high. The analyst cut his price target on Tyson from $100 to $40 and said this could bring further regulation to the industry. This also suggests we could see a continued decline in PPC.

Original Trade Description: September 26th.

Pilgrim's Pride Corporation engages in the production, processing, marketing, and distribution of fresh, frozen, and value-added chicken products to retailers, distributors, and foodservice operators in the United States, Mexico, and Puerto Rico. It offers fresh chicken products comprising pre-marinated or non-marinated refrigerated (non-frozen) whole chickens, whole cut-up chickens, and selected chicken parts. The company also provides prepared chicken products, including portion-controlled breast fillets, tenderloins and strips, delicatessen products, salads, formed nuggets and patties, and bone-in chicken parts. The company sells its products to foodservice market, including chain restaurants, food processors, broad-line distributors, and other institutions; and retail market customers comprising grocery store chains, wholesale clubs, and other retail distributors. In addition, it exports chicken products to the Middle East, Asia, the Commonwealth of Independent States, and other countries. Pilgrim's Pride Corporation was founded in 1946. Company description from FinViz.com.

The chicken business is becoming a lot more competitive. The consumer movement to free range chickens with no antibiotics and growth hormones is squeezing normal high volume breeders and reducing their market share. When your chickens have been previously grown in one square foot cages the change to free range brings a lot of problems and a decline in volumes. They are also faced with the growing occurrences of various bird flu breakouts.

PPC sells a lot of meat internationally and the prohibitions are growing against antibiotics and growth hormones. When an entire country becomes suddenly off limits because of new restrictions that can be costly.

In order to combat these problems the company spent large sums of money in research and development and now that debt has become a new burden in a shrinking marketplace. Earnings are also sensitive to price movement in the agricultural community with the cost of soybeans, corn and other feed grains continually rising. The fluctuating dollar is also a problem with their international sales.

Earnings Oct 26th.

Shares are about to trade at a 10-month low when they fall under $20.65. That could accelerate the selling as investors give up on the stock.

Position 9/27/16:

Short PPC shares @ $20.94, see portfolio graphic for stop loss.

Optional:

Long Nov $20 put @ 70 cents, see portfolio graphic for stop loss.



VXX - Volatility Index Futures - ETF Description

Comments:

Since this is a long-term play, I am not going to comment on it every day. Just forget it is in your portfolio and hope for a strong market rally in Q4.

Original Trade Description: September 6th.

The VXX is a short term volatility product based on the VIX futures. As a futures product it has the rollover curse. Every time they roll to a new futures contract they have to pay a premium and that lowers the price of the ETF. It is a flawed product with a perpetual decline built in from the monthly roll over in the futures contracts.

As evidence of this flaw, they have now down four 1:4 reverse stock splits. The last four reverse splits occurred at $13.11 (11/2010), $8.77 (10/2012), $12.84 (11/2013), $9.52 (8/8/16). The prospectus says it can reverse split anytime it trades under $25 for a prolonged period and the splits will always be 1:4.

After the August split the ETF moved sideways for four weeks at $36. I think everyone was waiting for the typical August volatility. When it did not show up and the market rallied on Friday that support broke. And the decline has begun.

Because there may be some September volatility, anyone in this position must understand that it may move higher before it moves lower BUT it will always move lower. We just have to wait it out. Volatility never lasts forever.

Unfortunately, put options are expensive with a volatility instrument at this price level. The only recommendation is to short the ETF and forget it. If we do get a prolonged rally as some are expecting we could see strong gains in the next 2-3 months. This will be a long-term position. This is not a 2-3 week play. I can guarantee you, if history holds, we can play this until it splits 1:4 again at $10. Once we are in the position and profitable I will put a trailing stop loss on it. We will take profits and then look for a bounce to get back in. We could keep this play in the portfolio on a trading basis permanently.

Position 9/7/16:

Short VXX shares @ $33.88, no initial stop loss.

No options recommended because of price.



ZOES - Zoes Kitchen - Company Profile

Comments:

No specific news. Minor rebound from Thursday's historic low.

Original Trade Description: September 27th.

Zoe's Kitchen, Inc., through its subsidiaries, develops and operates a chain of fast-casual restaurants. It operates a range of restaurant formats, including in-line, end-cap, and free-standing restaurants. As of August 22, 2016, the company operated 191 owned and franchised restaurants in 20 states of the United States. Zoe's Kitchen, Inc. was founded in 1995 and is based in Plano, Texas. Company description from FinViz.com.

For Q2, ZOES reported earnings of 6 cents that matched estimates. Revenue of $66.3 million missed estimates for $67.3 million The earnings were not the problem.

Same store sales rose only 4% and that was due to a 3.1% increase in prices so the real rise was only +0.9%. This compares to +8.0% in Q1. They also cut their guidance for the full year from 4.5% to 6.0% down to 4.0% to 5.0% and remember that includes a 3.1% price increase so the real comparable numbers are 0.9% to 1.9% sales growth.

The company also cut its revenue guidance from $277 - $281 million to $277 - $280 million, which is not a big drop but analysts were expecting $280 million so the midrange $278 million would be another miss.

Earnings Nov 14th.

The market appears saturated with fast casual restaurants and "earnings were not bad" is not sufficient to propel the stock higher given the decline in same store sales.

ZOES closed at a historic low at $23.80 on Sept 20th. Shares rallied on short covering in the market rebound but are headed back to set a new low.

Position 9/28/16:

Short ZOES shares @ $23.95, see portfolio graphic for stop loss.




Left Over Lottery Tickets

These positions were left over from prior plays where we had an optional option with no stop after the stock position was closed. Rather than close these for a few cents they are left open as a "Lottery Ticket" play. With months before expiration, anything is possible. A strong move in a single stock can be well worth the additional patience.

These positions are only updated on the weekend.


FDC - First Data - Company Profile

Comments:

No specific news. Shares are holding at prior support at $13.

Original Trade Description: August 10th.

First Data provides electronic ecommerce solutions for merchants, financial institutions and card issuers worldwide. The operate in three segments including global business solutions, global financial solutions and network & security solutions. This includes retail point of sale solutions, mobile ecommerce solutions and webstore solutions. They currently process 2,500 financial transactions a second across 118 countries.

First Data was taken private in 2007 for $26 billion by KKR. This debt ended up on the company's books and weighed them down for the last ten years. KKR helped them land a $3.5 billion private placement in 2013. That helped to reduce some of the high interest debt. KKR took them public again in 2015 and raised about $2.8 billion. That was the largest IPO of 2015. The company is still fighting the debt problem with $480 million in interest payments in the first half of 2016. Earlier this year we tried to short FDC because they were strangling under this debt. The situation appears to be improving.

In Q2 they reported adjusted earnings of 35 cents that beat estimates for 34 cents. It also beat the $26 million loss they took in the year ago quarter. Revenue rose 1.9% to $2.93 billion. Revenue in the global financial solutions division rose 12% to $395 million. This is their growth engine. They reduced their net debt by $300 million in the quarter.

Earnings Oct 26th.

Shares spiked from $12 to $13 after earnings and they are about to break over long-term resistance at $13.35. The weakness and volatility from the first six months of 2016 may be coming to an end. If FDC can move over that $13.35 level the next target would be around $16.50.

Position 8/23/16 with a FDC trade at $13.50

Long Oct $14 call @ .50, no stop loss.

Previously closed 9/9/16: Long FDC shares @ $13.50, exit $13.75, +.25 gain.



HOV - Hovnanian Enterprises - Company Profile

Comments:

No specific news.

This is a long-term position on expectations HOV will return to profitability in Q3/Q4 as outlined by the CEO in the Q2 earnings.

Original Trade Description: July 27th.

Hovnanian Enterprises, Inc. is a builder of residential homes. The Company designs, constructs, markets and sells single-family detached homes, attached townhomes and condominiums, urban infill, and active lifestyle homes in planned residential developments. It markets and builds homes for first-time buyers, first-time and second-time move-up buyers, luxury buyers, active adult buyers and empty nesters. The Company has two distinct operations: homebuilding and financial services. The Company, excluding unconsolidated joint ventures, is offering homes for sale in 196 communities in 34 markets in 16 states throughout the United States. The Company's financial services operations provide mortgage loans and title services to the customers of its homebuilding operations.

Prior to the financial crisis HOV was an active buyer of land and had extensive holdings when the crash appeared. The decline in home buying and the change in the mortgage business caused them to be very over extended as a result of the crash. Since 2009 they have liquidated a lot of land holdings, built out and sold a lot of properties and have consolidated their efforts and reduced costs significantly.

For Q2 they reported a loss of 6 cents, which was less than half the 13-cent loss in the year ago quarter. Revenues rose 39.6% to $654.7 million. For the first 6-months of the fiscal year revenues rose 34.5% to $1.23 billion. The $7.9 million loss was well below the $25.2 million loss in the year ago quarter. The number of active contracts rose +0.9% to 1,812 homes with the value of the contracts rising 16% to $1.4 billion. The number of contracts in the first six months of fiscal 2016 rose 7.3% to 3,343. The total contract backlog at the end of the quarter was $1.58 billion, up 27.8% from the $1.23 billion at the end of fiscal Q2 2015. As of April 30th, they controlled 34,997 lots.

They paid off $233.5 million in debt over the prior two quarters and ended the period with $125.6 million in liquidity. Since the end of the quarter liquidity has risen $75.1 million due to closings and joint venture funds received. They also paid off another $86.5 million in debt that matured in May.

CEO Ara Hovnanian said, "While our revenue grew 40% and Adjusted EBITDA increased over 220%, as we said last quarter, we remain focused on deleveraging our balance sheet and maximizing our profitability rather than on additional growth. Since October 15, 2015, we have paid off $320 million of debt. More importantly, we continue to believe that we will have the liquidity to pay off the remaining debt maturities through the end of 2017. We are certain that we are taking the correct steps that will best position our company for future success. While it is discouraging to report a loss for the first half of fiscal 2016, it is nevertheless a significantly reduced loss, and we anticipate our profitability in the second half of the year will more than offset this loss."

With the low mortgage rates and the rising number of home sales, I do expect HOV to return to profitability by the end of the year. It has been a long 7 years but they are finally getting rid of the accumulated debt and are riding the wave of new home buyers.

Stocks typically begin to rise about 6-months before widely predicted events. If HOV expects to post profits in Q3/Q4 now is the time to buy the stock. At $1.87 per share I look at it as a LEAP option that does not expire. This is not going to be a rocket stock. This is a buy it and forget it position until year end. Once we are in the position I will track it in the Lottery Play portfolio each weekend. Shares traded at $7 in 2013-2014 and could easily return to that level once they post those profits.

Update 9/9/16: HOV reported Q2 earnings of zero compared to estimates for 6 cents. Revenue rose +32.6% to $716.9 million. For the full year the company guided to revenue of $2.7 to $2.9 billion and analysts were expecting $2.75 billion. The sold or joint ventured 21 communities to reduce their active selling communities from 214 to 193. This impacted revenue as the older communities were culled from the active business. They sold 1,467 homes in Q2 and slightly less than the 1,658 in the same period in 2015, also the result of selling some communities. Their order backlog rose 7.7% to $1.48 billion. There are 3,232 homes currently contracted to be built. They delivered 1,574 homes in the quarter, a +11.8% rise. After paying off $320 million in debt their cash position was $187.7 million. They acquired about 900 lots in the quarter in 20 different communities. They guided for a solid profit in the current quarter of $32-$42 million before some expenses including land acquisitions.

Do not back up the truck on this position just because the stock is cheap. Unexpected events do happen. Just buy a few hundred shares and we will shoot for a return to $6 or a 400% gain.

Position 7/28/16

Long HOV shares @ $1.86, no stop loss.

Optional:

Long February $2 call @ 20 cents. No stop loss.



HUN - Huntsman Corp - Company Profile

Comments:

Shares continuing to rebound but the progress is slow.

We were stopped out of the long position on HUN shares on Sept 8th. We have a left over November $19 call.

Original Trade Description: August 23rd.

Huntsman Corporation manufactures and sells differentiated organic and inorganic chemical products worldwide. The company operates in five segments: Polyurethanes, Performance Products, Advanced Materials, Textile Effects, and Pigments and Additives. The company's products are used in various applications, including adhesives, aerospace, automotive, construction products, personal care and hygiene, durable and non-durable consumer products, electronics, medical, packaging, paints and coatings, power generation, refining, synthetic fiber, textile chemicals, and dye industries. Huntsman Corporation was founded in 1970.

They reported Q2 earnings of 53 cents that beat estimates for 52 cents. Revenue of $2.54 billion matched estimates. They generated more than $350 million in free cash flow and made an early repayment of $100 million in debt. They also announced they were selling some of its European facilities and would use the proceeds to repay debt. They sold a manufacturing facility to Innospec Inc for $225 million and the transaction is expected to close in Q4. Huntsman will remain a raw materials supplier to the facilities once the transaction is completed.

They are also planning to close their titanium dioxide manufacturing (TiO2) facility in South Africa in addition to spinning off their remaining TiO2 business in early 2017. The closure/spinoff will save $200 million.

The earnings, restructuring and debt repayment plans have given the stock a positive bias. Shares broke over resistance on Tuesday to trade at a 52-week high. The next material resistance is $23.

Earnings Oct 26th.

Position 8/30/16 with a HUN trade at $17.65

Long Nov $19 call @ 54 cents. No stop loss.

Previously Closed 9/8/16: Long HUN shares @ $17.65, exit $16.65, -$1.00 loss.



NAVI - Navient - Company Profile

Comments:

Navient declared a dividend of 16 cents payable on December 16th to holders on December 2nd.

Shares are still stuck at resistance at $14.50 but eventually a breakout will appear and it could be strong.

Original Trade Description: August 6th.

Navient Corporation provides financial products and services in the United States. The company offers Federal Family Education Loan Program (FFELP) Loans, Private Education Loans, and Business Services. It holds the portfolio of education loans insured or guaranteed under the FFELP, as well as the portfolio of private education loans. The company also provides asset recovery services for loans and receivables on behalf of guarantors of FFELP loans, and higher education institutions, as well as federal, state, court, and municipal clients. They also offer business processing services on behalf of municipalities, public authorities, and hospitals. Navient was spun off from Sallie Mae in April 2014.

Adjusted earnings for Q2 rose 17.5% to 47 cents and beat estimates for 45 cents. Helping produce the earnings beat was a 44.4% decline in provisions for credit losses to $110 million.

During the quarter Navient acquired FFELP loans of $623 million bringing their total under management to $92.6 billion.

The private education loan segment reported earnings of $57 million. During the quarter Navient acquired another $23 million to bring their total under management to $24.7 billion. The spread on the private loans was stable at 3.66%. The charge off rate was only 2.2%.

During the quarter they retires $255 million in senior unsecured debt and they completed three ABS placements totaling $2.278 billion to raise liquidity. They repurchased 13.6 million shares for $175 million and had $360 million outstanding under the current authorization.

Earnings Oct 18th.

Although Navient is not a high flying investment like Apple or Netflix it is a good solid business. Friday's close at $14.50 was a 52-week high and a breakout over prior resistance. The next resistance will be a gap fill around $17 from last July.

Position 8/8/16:

Long Oct $15 call @ 50 cents. No initial stop loss.

Previously closed 8/12/16: Long NAVI shares @ 14.57, exit $13.35, -1.22 loss





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