Option Investor
Newsletter

Daily Newsletter, Wednesday, 10/12/2016

Table of Contents

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

Market Wrap

A Day of Rest

by Keene Little

Click here to email Keene Little
Tuesday's strong decline took many traders by surprise and it looks like the aftereffects were felt today as traders stood around waiting to see what will follow. It turned into a doji day as the market absorbed Tuesday's loss while waiting to see if the selling will continue or if instead we'll get another sharp reversal back up.

Today's Market Stats

It's common to see a doji day follow a big day and it's basically an indecision day. Traders aren't sure if Tuesday's selling will continue or if instead it will get reversed as we continue the alternating up and down days. The bears will argue some support levels were broken and today's consolidation/bounce will be followed by more selling. The bulls will argue there's been no real harm done as the trading ranges continue to hold, which can be considered bullish continuation patterns. It will take more price action to settle the argument.

The market might also have been on hold as it waits to get through Yellen's speech on Thursday. The FOMC minutes that were released this afternoon caused a little bit of gyrating price action this afternoon and a bit of a pullback but nothing much. The minutes showed the Fed heads acknowledged there's sufficient reason for a rate hike and those who wanted to wait acknowledged that it was a close call. The language was changed enough to indicate the Fed believes it has the right conditions to start raising rates but wanted to wait for "further evidence" in the employment and inflation numbers. Therefore what Yellen others say in the coming days could have an impact on the market as it tries to compare their language with what was in the minutes.

Fed futures have only a 9% chance for a rate increase at the Fed's November 1-2 meeting but that jumps significantly to 64% at the December 13-14 meeting. It will certainly be an interesting meeting since the latest minutes reflected concern about any effort to tighten their policy accommodation could shorten the economic expansion and perhaps shove the economy into a recession earlier. The Fed has successfully painted itself into a corner and they're now at the point where they'll be damned if they do and damned if they don't.

Many Fed heads are worrying that the market is losing faith in the Fed, which is what I've been talking about for years -- part of the correction process in the secular bear market (which needs one more cyclical bear to complete it) will be a complete loss of faith in the Fed and central banks in general. What follows might not be better but the Fed will be blamed no matter what happens.

Other than the FOMC minutes this afternoon there were no significant economic reports and there were no other surprises to move the market much. Earnings announcements continue to mostly disappoint and equity futures dropped further after the closing bell today so there were likely more disappointing earnings announcements. Earnings have been in decline for 1-1/2 years now and revenue is in decline as well. This is going to make it much more difficult for corporations to continue their stock buyback spree, which is the one thing that's been holding the market up.

Without corporate buyback support, which I think is quickly waning, there's not going to be much to take its place as the Fed also has removed itself (for now) from propping up the market. There could be some continuing government interference for the sake of the elections but that's all conspiracy theorist stuff and we know the government would never directly interfere with the free market (cough). While I certainly see upside potential for the market, which I've been showing on my charts, I think we have once again reached the point where upside potential is dwarfed by downside risk.

For the rest of this week and into next we're looking to see what could move the market since we could be nearing the point where we'll see a much bigger move. The next day or so could set the tone for how the rest of the month goes. We have opex week coming up and that's generally more bullish than bearish but not a guarantee. We've entered a turn window (mid-October) and the market has been basically flat coming into the window, which makes a turn prediction much more difficult. We'll let the charts do the talking but so far they've been button-lipped about what we should expect next.


S&P 500, SPX, Weekly chart

The weekly chart of SPX shows this week's low was a test of its uptrend line from February-June, currently near 2138 (log price scale), and the pattern continues to support the idea for another leg up to complete the 5th wave of a rising wedge. But the bearish interpretation is that a 3-wave bounce off the February low topped out on August 15th and we've been a slowly developing rolling top. Along with the uptrend line from February there is price-level S/R at its May 2015 high near 2135 and therefore a weekly close below 2135 would be bearish, especially if it drops below the September 12th low at 2119.


S&P 500, SPX, Daily chart

The daily chart shows the sideways triangle that most technical analysts were following for the past several weeks. Most looked at as a bullish continuation pattern (consolidating off the August highs) and one of the concerns here is that if SPX breaks down it will leave a failed bullish pattern in its wake and that could result in a strong decline. Again, below 2135 is bearish and below 2119 would be confirmed bearish, but in the meantime the bulls still have a shot at a new high into November.

Key Levels for SPX:
- bullish above 2180
- bearish below 2119


S&P 500, SPX, 60-min chart

The choppy pattern since the August 15th high has led to several different interpretations, some bullish and some bearish. It's still not clear which it is and that's a big reason to watch the uptrend line from February-June. The strong decline from Monday looks bearish since it's an impulsive decline and could be the 1st wave of what will become a strong 5-wave move down. That means the bounce off yesterday's low is a 2nd wave correction and could be finished or it could make it a little higher but once complete it will be followed by a strong decline in a 3rd wave.

But considering the support near 2135 is holding and the possibility that the pullback from September 22nd is a completed a-b-c into yesterday's low as a correction to the rally we have to consider the potential for a new rally to kick off from here.

So far the bounce off yesterday's low is choppy and that favors a bearish resolution. The bulls need a strong impulsive move higher and then break the downtrend line from September 22nd (near 2166) and then Monday's high near 2170.


Dow Industrials, INDU, Daily chart

The Dow dropped out of its sideways triangle yesterday and today's bounce attempt was held down by the bottom of the triangle, now near 18160. That has it looking like a back-test that could be followed by a selloff to leave a bearish kiss goodbye, which of course would be bearish. Confirmation of a breakdown would be a drop below the September 14th low at 17992. But a recovery back inside the triangle, with a close above 18160, would leave a head-fake break and that would be bullish since it would leave a throw-under finish to the triangle. However, the Dow remains inside its trading range between 17992 and 18450 and as long as that remains true there is the potential for the choppy whippy price action to continue into the elections as the market is held steady.

Key Levels for DOW:
- bullish above 18,450
- bearish below 17,992


Nasdaq-100, NDX, Daily chart

Since August 15th NDX has been dancing around its March 2000 high near 4816. That's two months and NDX has gone nowhere with a close today at 4819. It spiked back below that level in early September, made it back above it on September 21st and stayed above it until yesterday and is now back to that level. For two weeks it tried to get through the trend line along the highs from July-November 2015, currently near 4875, and was able to close above it on Monday. But Tuesday's strong decline gave it all back and also broke support at its uptrend line from June-September, now near the same 4875, as well as its 20-dma, now near 4850. It's holding support at 4816 as well as its 50-dma at 4811 so it remains potentially bullish to a price projection at 4930. But with the bearish divergence since July and Tuesday's breakdown we could be looking at the start of a much more significant decline. It's at least a risky time to bet on the long side.

Key Levels for NDX:
- bullish above 4931
- bearish below 4800


Semiconductor index, SOX, Weekly chart

The biotech sector gets much of the blame for this week's decline in the tech indexes, and it should get the blame with its -5.8% decline this week. But the semiconductor stocks are not helping either, down -2.9% this week. A few weeks ago I showed the SOX weekly chart to point out it parallel up-channel from February and the fact that it was pushing against the top of the channel with a new price high but a bearish divergence on the oscillators. Last week it produced a small hanging man doji at the top of the channel and this week's big red candle leaves us with a 3-candle evening star pattern at resistance. This is a reliable reversal signal and says we should now be looking to play the short side.


Russell-2000, RUT, Daily chart

Last Friday the RUT broke down below its uptrend line from June-September and then on Monday it bounced back up to the broken trend line. That was a bearish setup with a back-test that was followed by the kiss goodbye with the big breakdown on Tuesday. It's very hard to look at the RUT with anything other than bearish-colored glasses. I can see a way to call the pullback from September 22nd as just a correction within its rally and the upside projection for another leg up is to 1280 (for two equal legs up from September 13th). That could result in another back-test of its broken uptrend line from June by the end of the month. So while I don't discount the bullish possibility, its chart pattern has "SELL" written all over it. But it goes without saying that bears need to stay on their toes and watch for yet another whippy reversal back up.

Key Levels for RUT:
- bullish above 1254
- bearish below 1215


10-year Yield, TNX, Daily chart

The bond market has sold off for the past two weeks as the bond market speculates on a rate increase from the Fed. This has driven yields higher and the 10-year (TNX) is now near the apex of a previous triangle pattern (shown on its daily chart below, which ran from March through May). The apex of a previous triangle, after price breaks out of it, is often resistance/support in the next correction. The apex is near 1.76, which TNX climbed above yesterday but for the past two days it gapped up and then pulled back, indicating possible topping action. There's a price projection at 1.811, a broken uptrend line from July 2012 - January 2015 near 1.825 and the top of an up-channel from July that crosses 1.825 early next week. So anywhere between today's high at 1.801 and 1.825 we could find TNX topping out and then a resumption of the decline. That would happen if the chances for a rate increase from the Fed start to fade.


DJ US Home Construction index, DJUSHB, Monthly chart

It's been a while since I've discussed the home builders and as a reflection of our economic health there are some things happening to the home construction index that are not bullish. As can be seen on the monthly chart below, the series of higher highs since January 2013 has been accompanied by lower highs on the oscillators. This is a perfect example of why you can't use bearish divergence as a timing tool but it's a very good indicator to show the rally's momentum is weakening and therefore subject to a reversal at any time. Following the August 2015 high the decline into the February 2016 low was a break of its uptrend line from October 2011 - October 2014. It has spent its time since February trying to climb back above the broken uptrend line but then fell firmly away last month. The September decline then broke a shorter-term uptrend line from February-June, which the broader market indexes are now starting to do. This week it also lost support, so far, at its August 2015 high at 553. Putting this all together gives us another chart with "SELL" written all over it and I think it's a good indicator for our economy and the broader market. We could get another bounce attempt and new highs in some of the indexes in the coming weeks but this is a chart that tells us to fade the rally if it happens.


U.S. Dollar contract, DX, Weekly chart

This week's rally popped the US$ above its downtrend line from December 2015 - July 2016, near 96.60, and it hasn't even looked back for a retest of the line. Two equal legs up from May points to 99.79 and the top of a parallel channel for its pullback/consolidation since March 2015 is now near 100.50 so that gives us an upside target for this move. Ideally we'll then see one more pullback for the dollar into the end of the year before setting up for a big rally next year. It would be more immediately bullish above 100.50, which could happen if the Fed raises rates in December. Or a drop back down could result from the Fed saying "not yet."


Gold continuous contract, GC, Weekly chart

Last week gold broke its uptrend line from December 2015 - May 2016, near 1319 at the time, and then broke price-level support at 1308 (January 2015 high and S/R since then). That led to stops getting hit and gold plunged nearly $105 (-7.8%) from the September 22nd high at 1347.80 to last Friday's low at 1243.20. It's been consolidating this week and it could get a little higher bounce but it's looking like it will head at least a little lower before getting a bigger bounce. It could be heading for support at its May 31st low at 1199 or possibly down to price-level support near 1180 before setting up a bigger bounce. The longer-term pattern for gold suggests the 3-wave bounce off the December 2015 low into the July 2016 high was only a correction to the decline and that it will be completely retraced as gold heads below 1000. We have plenty of time to evaluate the pullback to help determine whether or not gold is that vulnerable but it's something to think about if you're a gold trader (vs. hoarder) and also if you're looking to buy gold -- you might get some very good prices next year.


Oil continuous contract, CL, Weekly chart

Oil's weekly chart shows a potential double top in the making as Monday's high at 51.60 tested the June 9th high at 51.67 and showing bearish divergence with the test. There's also price-level resistance at 50.92, going back to the October 2015 high. Not shown on the chart, there's a price projection at 51.97 for two equal legs up from the August 3rd low and based on this 50.92-51.97 resistance zone it would be bullish above 52, especially since it would also be a break of downtrend lines from June 2014 and from May 2015, which have been broken in the past two weeks. A drop back below the pullback into the September 20th low at 42.55 would be confirmation a top is in place. The bulls are looking at this pattern as an inverse H&S pattern with the neckline at 50.92. A break above that level with volume and momentum would be a bullish move.


Economic reports

There are no market-moving economic reports on Thursday but Friday has some important reports, including PPI numbers, retail sales and Michigan Sentiment.


Conclusion

Tuesday's breakdown looks bearish and it could have been the firing gun to start the race downhill. Today would be a bearish consolidation in that case and the selling should resume, possibly after a higher bounce on Thursday. But we've seen plenty of sharp declines that get reversed quickly, which remains a possibility. If Tuesday's sharp decline was the completion of an a-b-c pullback pattern from September 22nd we should have seen a stronger bounce than we've seen so far.

Today's bounce looks like a correction to Tuesday's decline (choppy overlapping highs and lows in a bear flag kind of pattern), which is one reason why I'm looking for the selling to continue. Bears need to be ready for another strong reversal back up but at this point I think the bulls will need to take the ball away from the bears. That hasn't been difficult for the bulls to do and this is a market where bears need to be more cautious than bulls. However, if the bearish wave pattern is correct, the bears will have at least a little time at the feeding trough to fatten up a bit.

Neither side can take anything for granted here since indexes remain inside the trading ranges in place since the September highs and lows. Until that changes we have to be ready for anything. Trade carefully and stay disciplined.

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

Buying Opportunity?

by Jim Brown

Click here to email Jim Brown
Editor's Note

Clovis is a cancer drug researcher with multiple drugs in the pipeline. One recent trial disappointed and the stock was punished. This could be a buying opportunity.



NEW BULLISH Plays

CLVS - Clovis Oncology - Company Profile

Clovis Oncology, Inc., a biopharmaceutical company, focuses on acquiring, developing, and commercializing anti-cancer agents in the United States, Europe, and internationally. It is developing three product candidates, which include Rociletinib, an oral epidermal growth factor receptor and mutant-selective covalent inhibitor that is under review with the U.S. and E.U. regulatory authorities for the treatment of non-small cell lung cancer; Rucaparib, an oral inhibitor of poly polymerase, which is in advanced clinical development for the treatment of ovarian cancer; and Lucitanib, an oral inhibitor of the tyrosine kinase that is in Phase II development for the treatment of breast cancers. Company description from FinViz.com.

Clovis has been rising on the prospects for the drug Rucaparib. They reported in September the FDA was not planning on holding an advisory committee meeting to discuss the new NDA application. The FDA has accepted the company's NDA for accelerated approval and granted it a priority review. The FDA response is expected to be positive and is expected by Feb 23rd.

However, on October 7th the company released data on a Rucaparib trial that appeared to show it was less effective than a competing drug already on the market from AstraZeneca. Shares were crushed for a $10 drop at the open. Analysts were quick to come to their defense saying there are many trials and making a decision by just one trial with a very narrow patient subset was comparing apple to oranges. Shares immediately rebounded.

Clovis has several anti cancer drugs in final stages and the outlook is very positive. Just seeing that CLVS shares have not declined with the sector over the last couple of days is a very strong indication that portfolio managers are buying and holding.

Earnings Nov 3rd.

Buy CLVS shares, currently $32.69, initial stop loss $31.65

No options recommended because of price.



NEW BEARISH Plays

No New Bearish Plays



In Play Updates and Reviews

Small Caps Still Weak

by Jim Brown

Click here to email Jim Brown

Editors Note:

The small cap indexes failed to rebound after Tuesday's big drop and that suggests more trouble ahead. The Russell 2000 tried to rebound but stalled at prior support, now resistance at 1,232. This pattern suggests a retest of support before a rebound back over that resistance level. The lackluster rebound is a drag on market sentiment.

The entire market was weak with the high point for the day at 2:Pm when the FOMC minutes were released. Immediately after the market began to decline to close on the lows for the afternoon.

S&P futures are down -4 in the afterhours so the outlook tonight is weak.




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.





Current Position Changes


ZOES - Zoes Kitchens
The short stock position was stopped at $21.95.



If you are looking for a different type of trading strategy, try these newsletters:

Short term Calls and Puts on equities = Option Investor Newsletter

Credit spreads and naked puts = OptionWriter

Long term option investments = LEAPS Investor

3-6 month Option Trades = Ultimate Investor

Iron Condors = Couch Potato Trader



BULLISH Play Updates

ALRM - Alarm.com - Company Profile

Comments:

No specific news. Shares still holding over support with a minor gain today.

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.



FNSR - Finisar Corp - Company Profile

Comments:

No specific news. Minor gain to hold over support.

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.



NLNK - Newlink Genetics - Company Profile

Comments:

No specific news. Only a minor decline despite a -3% decline in the biotech sector.

This position remains unopened until a trade at $16.55.

Original Trade Description: October 10th.

NewLink Genetics Corporation, a biopharmaceutical company, focuses on discovering, developing, and commercializing immunotherapeutic products to enhance treatment options for patients with cancer. Its portfolio includes biologic product candidates based on its HyperAcute cellular immunotherapy technology, which is designed to stimulate the human immune system; and small-molecule product candidates that are focused on breaking the immune system's tolerance to cancer by inhibiting the indoleamine-2, 3-dioxygenase pathway and the tryptophan-2, 3-dioxygenase pathway. The company's lead product candidate, algenpantucel-L, an investigational immunotherapy, is being studied in Phase III clinical trials for patients with pancreatic cancer; tergenpumatucel-L, is being investigated in Phase IIb clinical trial for patients with advanced non-small cell lung cancer(NSCLC), as well as Phase I/II clinical trial is evaluating the combination of indoximod and docetaxel for patients with advanced NSCLC; and dorgenmeltucel-L, is being investigated in a Phase II clinical trial for patients with advanced melanoma. It is also developing HyperAcute cellular immunotherapies for renal, prostate, and breast cancers. In addition, the company is developing IDO pathway inhibitors comprising indoximod and GDC-0919 for patients with advanced NSCLC, advanced melanoma, metastatic prostate cancer, and other cancers; NLG2101 for patients with metastatic breast cancer; NLG2102 for treating refractory malignant brain tumors; NLG2103 for patients with advanced melanoma; NLG2014 for patients with metastatic pancreatic cancer; and NLG2105 for pediatric patients with refractory malignant brain tumors. Company description from FinViz.com.

Newlink shares have been improving rapidly since late September for multiple reasons. They have an Analyst Day coming up on October 25th and they are expected to present a rosy picture.

Last Tuesday after the bell they announced a $25 million award from the U.S. Dept of Health and Human services to support advanced development of the V920 Ebola Zaire vaccine candidate. The award has an additional $51 million of additional contract options as results stages are met. DHHS has already funded $76.8 million for developing the manufacturing facility and manufacturing process activities along with additional clinical trials.

The FDA has already designated V920 as a breakthrough therapy and the European Medicines Agency (EMA) has given it PRIME (PRIority MEdicines) status.

The new contract will enable accelerated full-scale production of V920, once it is approved. Merck (MRK) has already licensed the drug from Newlink in order to help Newlink accelerate development using Merck's vaccine expertise. Merck will be responsible for distribution and regulatory approvals.

Having a big sugar daddy with deep pockets backing your efforts along with the Dept of HHS is a real plus. This vaccine is going to be produced and could save thousands of lives. In the last outbreak alone more than 9,200 patients died.

Earnings Nov 3rd.

Shares spiked again on the Ebola news and will likely continue rising. Shares closed at $16.41 with resistance at $20, which will be our target in this position.

With a NLNK trade at $16.55

Buy NLNK shares, initial stop loss $14.45

No options recommended due to wide spreads.




BEARISH Play Updates

TASR - Taser Intl Inc - Company Profile

Comments:

No specific news. Still waiting for a support break.

Original Trade Description: October 8th.

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.

Position 10/11/16 with a TASR trade at $22.25

Short TASR shares @ $22.25, see portfolio graphic for stop loss.

Optional:
Long Nov $22 put @ $1.25. 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. Shares rebounded +3.5% to stop us out with a nice gain.

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:

Closed 10/12/16: Short ZOES shares @ $23.95, exit $21.95, +$2.00 gain.





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