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Newsletter

Daily Newsletter, Monday, 10/17/2016

Table of Contents

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

Market Wrap

October's Weakness Continues

by Keene Little

Click here to email Keene Little
We're into what is typically a bullish time of the month, opex, but so far the bulls have been largely absent. Last Thursday's strong recovery was followed by Friday's weak rally attempt and today continued the weakness. Waiting to see if the opex bulls show up.

Today's Market Stats

Tom and I have switched Market Wraps this week and he'll be with you on Wednesday.

Today was a relatively quiet day with only a small loss to start the day. A quick morning low was followed by a sideways consolidation into midday but then the sellers continued to be a little stronger than the buyers. It looked to be more a lack of buyers than any kind of concerted effort to sell. This is a little surprising since opex is typically bullish. When it's not bullish it can get very bearish so the bulls will need to do something on Tuesday. Last week's lows must be defended by the bulls.

This morning's economic reports were mixed but a little disappointing. The Industrial Production, at +0.1%, was better than August's -0.5% but not as good as had been expected (+0.2%). The Empire Manufacturing index for October was also disappointing, coming in at -6.8, which was much worse than the expected 2.0 and a further decline from -2.0 for September. Capacity Utilization was roughly in line with expectations and no change from August.

The market barely made a ripple following the reports and as I'll show later, the market has been ignoring all kinds of economic and stock earnings reports. That might not change until we at least get through the elections and then December when it's expected the Fed might maybe possibly raise rates. Yellen's last statement was a little bit of back-peddling on that possibility and as long as the market believes the Fed will not have the room to raise rates, which means a weaker economy, it could stay elevated. It should be paying attention to earnings and the economic slowdown but we know the market is ignoring those signals and pinning its hopes on more accommodation and more government spending.

The stock market has been stuck in a rut, again, since the September lows and while we could at least see those lows tested again, there's no strong evidence yet that the month-long trading range is going to break. We could be stuck in this until at least the elections but at least we have some key levels to watch to help us know when it will be time to trade the move.


S&P 500, SPX, Weekly chart

SPX has struggled this week to hold its uptrend line from February-June, currently near 2140 (arithmetic price scale), as well as price-level support near 2135 (its May 2015 high). Losing support at both of these levels is not a good sign for the bulls, especially if it closes below those levels for the week (for what is typically a bullish week). If support is lost we will likely see the next support level tested quickly, which is the 50-week MA at 2167, about 60 points lower. Below that level there isn't much support before price-level S/R at 1992. But as long as last Thursday's low near 2114 holds there is still upside potential to the 2275-2300 area in the rising wedge pattern off the February low.


S&P 500, SPX, Daily chart

I had been watching a sideways triangle pattern for SPX (and the Dow) and the breakdown last Tuesday made it more bearish looking. The breakdown was followed by two attempts to get back above the bottom of the triangle, last Wednesday and again Friday. Each attempt was a back-test of support-turned-resistance and then a bearish kiss goodbye. Friday's kiss goodbye was followed by more selling today and frankly it's hard to see much that's bullish here. MACD rolled back over from the zero line and RSI is back below 50, both of which are bearish as well. It's looking like we could get at least another test of price-level support near 1220 and as long as that holds we could stay stuck inside a sideways trading range into the elections. It's possible we have a larger consolidation pattern with a descending triangle (declining highs, flat bottom), which would be a bullish continuation pattern and suggests a strong rally right after the election (predicting a Clinton win?) if this continues to consolidate into the elections. It would mean a continuation of the choppy whippy price action with a run back up to about 2160, back down to 2120 and then a rally. All the bulls need to do is not let SPX drop below 2114, which would attract bears as though it was honey from heaven.

Key Levels for SPX:
- bullish above 2170
- bearish below 2114


S&P 500, SPX, 60-min chart

The short-term pattern for the leg down from last Friday suggests one more small drop to complete the leg and then a bounce back up. This is what has me wondering if we'll see another test of 2120. But we have had so much choppy corrective price action and that has made it near impossible to come up with higher odds for one particular direction vs. another. For now SPX is stuck between price-level S/R levels at 2135 and 2120 and a break from one before the other could set the tone for the next week at least.


Dow Industrials, INDU, Daily chart

The technical indicators look just as bearish for the Dow as for SPX and the inability to hold above the bottom of its sideways triangle, which it broke below last Thursday and recovered on Friday, also looks bearish. But as with SPX, as long as it holds above the bottom of a possible descending triangle, at 17992, there remains bullish potential out of this pattern (following another up-down sequence). It would turn more immediately bullish above its September 22nd high at 18450 and more immediately bearish below 17992.

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


Nasdaq-100, NDX, Daily chart

Following last Thursday's breakdown for NDX it bounced back above its broken 50-dma, near 4814 on Friday, but was stopped by its 20-dma near 4848. Today's decline took it back below its 50-dma, as well as back below price-level S/R near 4816 (its March 2000 high). The double failure looks bearish, as does the bearish divergence with the oscillators. I continue to see upside potential into the end of the month (or maybe more sideways chop to match the blue chips) but at the moment it's looking more bearish than bullish. Bulls would be in trouble if NDX drops below price-level support near 4740 (the December 2015 high). NFLX reported after the bell and zoom climbed up to about 121 from its close near 100, for a 21% pop in after-hours and well above its April high at 111.85. It pulled back only slightly and if it opens anywhere near 120 Tuesday morning it's going to give the tech sector a nice lift back up.

Key Levels for NDX:
- bullish above 4905
- bearish below 4740


S&P 500 Earnings vs. SPX, 2010 - September 2016, chart courtesy Casey Research

Speaking of earnings reports, which I don't follow much since reactions to them are too unpredictable, no matter what they are, I came across an interesting chart showing the decline in earnings since the end of 2014. While NFLX is apparently reporting great numbers, that hasn't been true for aggregate earnings for the S&P. The decline from the end of 2014 is shown with the blue line on the chart below. The stock market usually responds to future expectations of earnings but in this case it has essentially ignored it in favor of the Fed's help for the stock market. It shows just how distorted this market has become and that distortion is very likely to get corrected. Bulls believe earnings will turn back up in time before the stock market corrects whereas bears believe the wide gap will be closed with a stock market decline. In any case, this is a chart that says something is wrong.


Russell-2000, RUT, Daily chart

The RUT has been trying the past three days to hold support at price-level S/R near 1215 but it's looking like we could see another test of price-level support at 1205 on Tuesday if we see a little more selling. Below that level there's not much support before 1160. Short term it's looking like 1205 should provide support for at least a bounce but there is no bullish divergence against the September 13th low and that should be worrisome for bulls. I don't think you want to be long below 1205. But like the blue chips, there is the possibility for a flat sideways consolidation to continue for at least the rest of this month so bears might want to hold their fire until the RUT drops below 1205 (and then be careful about a head-fake break that hits the stops and pulls in shorts that's then followed by some buy programs to reverse the whole thing).

Key Levels for RUT:
- bullish above 1254
- bearish below 1205


Volatility index, VIX, Daily chart

The VIX had popped up to 17.95 last Thursday and hit a downtrend line from June-September. It has pulled back from the trend line but is holding support at its 200-dma, currently at 16.30. A drop below 16 would be bullish for stocks whereas a rally above last Thursday's high would be bearish for stocks and a stock market selloff could push the VIX up to its downtrend line from January-June, currently near 22.80. As long as the VIX stays below 18 it would mean stocks remain potentially bullish. We're into opex week and that means there could be a little extra volatility in the VIX.


10-year Yield, TNX, Daily chart

Last Wednesday TNX almost reached the projection at 1.811% (with a high at 1.801) but immediately pulled back from its morning high. A little higher now is the top of a parallel up-channel for the bounce off the July 6th low and its broken uptrend line from July 2012 - January 2015, both near 1.84. So there's at least a little more upside potential for TNX, with a little more selling in bonds, but I think there's a good chance TNX could start back down at any time. The bounce pattern off the July low looks corrective and suggests it will be retraced.


High Yield Corporate Bond ETF, HYG, Daily chart

HYG is the go-to bond fund when you want to be in corporate bonds looking for a little extra boost in yield. I should emphasize "little" boost because there's very little difference between the yields in higher-risk securities and the safer Treasuries and that's actually one thing that makes them so dangerous now. Investors are taking on a whole lot more risk vs. the smaller-than-usual yield improvement. But regardless, HYG is a good reflection of investors' willingness to take on that added risk and when fear enters the market we'll see HYG decline as investors rotate into the relative safety of Treasuries and other bonds rated better than BBB. It's a good canary ETF for the stock market and at the moment all is fine. There's bearish divergence since March but at the moment that's just a warning. We'll know something is potentially wrong if HYG drops below the bottom of a small rising wedge pattern (uptrend line from August-September), currently near 85.96, and then confirmed bearish below the September 13th low at 85.27. The next support level below that would be its broken downtrend line from June 2014 - April 2015, near 84.50.


KBW Bank index, BKX, Daily chart

Since the June low for BKX I've been wondering if the bounce off the February low is going to achieve the price projection at 75.41 for two equal legs up. But the October 10th high at 73.58, which was slightly higher than the September 1st high, left a bearish divergence on the chart and now I'm thinking we're going to see a stronger decline instead of any additional upside. BKX is trying to hold its uptrend line from June-September, currently near 71.25, which it closed below today, as well as its 50-dma, currently at 71.05. This morning's high was held down by its broken 20-dma at 71.38 and as long as it stays below Friday's high at 72.17 I think BKX will remain weak.


Transportation Index, TRAN, Daily chart

I've seen reports by several analysts recently that point out the bullish signal coming from the transportation sector. In early September and again in early October the TRAN broke above its downtrend line from August-November 2015, currently near 7880. Last Thursday's low also tested its uptrend line from June-September. Things are looking bullish for the TRAN, especially with the higher price highs since bouncing off the June low. This supports the idea that we'll see the broader market follow, or so goes the argument with Dow Theory.

There are two problems that I see with this bullish thought: the first counterargument is that the TRAN has been significantly underperforming the broader market since it peaked in November 2014; and the second counterargument is that the "breakout" above its downtrend line is on weakening momentum. As shown on the chart, MACD and RSI have been making lower highs since March, which is an indication that the tests of the highs in March and April will lead to a failure. That's not a guarantee but it's a reason to doubt the breakout attempt.


U.S. Dollar contract, DX, Daily chart

The US$ looks ready for a small consolidation before stair-stepping higher into November in order to make it up to the top of its shallow down-channel that it's been in since the March 2015 high, currently near 100.35. Two equal legs up from April points to 99.79 so that gives us an upside target zone for the completion of the leg up from August. The first sign of trouble for the dollar would be a drop back below the broken downtrend line from last December, currently near 96.40, but for now I'm looking for the dollar to continue higher.


Gold continuous contract, GC, Daily chart

Gold's consolidation following the low on October 7th suggests lower prices and in fact its pattern since August is basically a mirror image of the dollar's. I'm looking for gold to stair-step lower into November and potentially down to price-level support at 1180-1200 before it will be ready for a bigger bounce on its way down to lower prices. If gold bulls are to prevail the first thing they need to do in order to negate the bearish wave pattern is rally the shiny metal back above its September 22nd high near 1348.


Oil continuous contract, CL, Daily chart

It's a little hard to see on my squished daily chart for oil but it has formed a possible small sideways triangle off the October 10th high and that suggests one more leg up to complete the leg up from September 20th, which in turn could complete a corrective bounce structure off the August 3rd low and lead to a stronger decline. The upside target zone, if we get a pop higher, is to about 52-55 and there's a short-term price projection right in the middle of that range. A drop below the October 9th low at 49.15 would negate the short-term bullish pattern and suggest a breakdown sooner rather than later.


Economic reports

Tuesday morning's economic reports include CPI data, which is expected to remain essentially unchanged and unless it's very different than expectations it should not move the futures market.


Conclusion

The stock market is acting a little weak and I keep waiting for the buy programs to hit so that they can spark some short covering and get the opex rally started. Last Friday's highs are important -- the bulls need to drive the indexes above those highs (SPX 2149) in order to open the door to higher prices, such as to SPX 2160. If that's achieved we could get another pullback to SPX 2120 before setting up a bigger rally. A rally above the October 10th highs (SPX 2170) would suggest the next rally leg to new all-time highs was underway. But if bears push indexes below last Thursday's lows (SPX 2114) we could see some strong selling kick in.

The market is currently stuck and we're seeing just a bunch of 3-wave corrective moves that get reversed before anything really gets started in one direction or the other. Elections are either holding up the market or "someone" is holding up the market into the elections. In either case it could be a tough time to be a trader with all the whipsaws and lack of follow through. Stay cautious and stay safe since there will be better times to trade.

Good luck and I'll be back with you a week from 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

Climate Agreement Winner

by Jim Brown

Click here to email Jim Brown
Editor's Note

The UN modified the Montreal Protocol to eradicate HFCs. The vast majority of consumers probably could care less about the UN agreement but it impacts several companies directly. Chemours (CC), Honeywell (HON) are already spending hundreds of millions of dollars to come up with new chemicals to replace the hydrofluorocarbons or HFCs currently used in air conditioners and refrigeration units.



NEW BULLISH Plays

CC - Chemours - Company Profile

The Chemours Company helps create a colorful, capable and cleaner world through the power of chemistry. Chemours is a global leader in titanium technologies, fluoroproducts and chemical solutions, providing its customers with solutions in a wide range of industries with market-defining products, application expertise and chemistry-based innovations. Chemours ingredients are found in plastics and coatings, refrigeration and air conditioning, mining and oil refining operations and general industrial manufacturing. Our flagship products include prominent brands such as Teflonâ„¢, Ti-Pureâ„¢, Krytoxâ„¢, Vitonâ„¢, Opteonâ„¢ and Nafionâ„¢. Chemours has approximately 8,000 employees across 35 manufacturing sites serving more than 5,000 customers in North America, Latin America, Asia-Pacific and Europe.

Chemours was spun off from DuPont in 2015. The company spent hundreds of millions of dollars developing hydrofluoroolefin (HFO)-based alternatives and blends with low global warming potential. These replace the hydrofluorocarbons (HFCs) that were used in air conditioners for decades and reportedly responsible for global warming.

The UN's Montreal Protocol calls for HFCs to be phased out and replaced. Chemours has created a replacement and expects more than 24 million vehicles to be on the road in 2016 using their HFO-1234yt (Opteon) product in their air conditioners. By the end of 2017 that number will rise to more than 50 million. They believe by 2025 the HFO-based solutions will have replaced 325 million tons of Co2 equivalents. The Opteon product line has been widely accepted and nearly every refrigeration manufacturer is moving in that direction.

For Q2 they reported adjusted earnings of 27 cents that easily beat estimates for 17 cents. Management delivered more than $100 million in cost reductions in the first six months of 2016.

Earnings Nov 3rd.

CC has been moving up steadily since August as analysts began coverage and the company beat on earnings on August 8th. Over the last 30 days consensus estimates for Q3 have risen from 26 cents to 30 cents. Full year estimates have risen from 77 cents to 84 cents. Rising estimates suggest the stock will continue higher.

After a $7 rally since the earnings, the stock pulled back last week and found support at $14.75. Shares were up today on the UN news since it means even more manufacturers will be forced to switch to the HFO products.

With a CC trade at $15.45

Buy CC shares, currently $15.27, initial stop loss $14.35.

No options recommended.



NEW BEARISH Plays

No New Bearish Plays



In Play Updates and Reviews

Closed on Support

by Jim Brown

Click here to email Jim Brown

Editors Note:

The Russell 2000 closed at the low for the day and right on critical support at 1,210. This is a strong warning with only one more support level at 1,200 before the potential for a very big drop. The indexes did not post big losses but they did close at or near the lows.

Worries over impending big cap earnings and the economic and political events of this week weighed on investors. The debate is going to be a problem as well as the ECB monetary policy announcement on Thursday.

If the Russell dips below 1,210 it could trigger additional selling on the large cap indexes. IBM beat on earnings tonight but fell more than $5 in afterhours trading. Netflix beat on earnings and gained +$20 in afterhours. These reports will influence the market open on Tuesday.




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


FTNT - Fortinet
The long stock position was opened at $30.92.



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BULLISH Play Updates

ALRM - Alarm.com - Company Profile

Comments:

No specific news. Holding at a two-month 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.



CLVS - Clovis Oncology - Company Profile

Comments:

No specific news. Holding at support on biotech weakness.

Original Trade Description: October 12th.

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.

Position 10//13/16:

Long CLVS shares @ $31.97, see portfolio graphic for stop loss.

No options recommended because of price.



FTNT - Fortinet - Company Profile

Comments:

The company announced the opening of the new FortiCloud European data center in Germany. The entire center is protected by the Fortinet Security Fabric. Shares lost a nickel in a weak market.

Original Trade Description: October 15th.

Fortinet, Inc. provides cyber security solutions for enterprises, service providers, and government organizations worldwide. The company offers FortiGate physical and virtual appliances products that provide various security and networking functions, including firewall, intrusion prevention, anti-malware, virtual private network, application control, Web filtering, anti-spam, and wide area network acceleration; FortiManager product family to provide a central management solution for FortiGate products comprising software updates, configuration, policy settings, and security updates; and the FortiAnalyzer product family, which provides a single point of network log data collection. It also offers FortiAP secure wireless access points; FortiWeb, a Web application firewall; FortiMail email security; FortiDB database security appliances; FortiClient, an endpoint security software; and FortiSwitch secure switch connectivity products. In addition, the company provides FortiSandbox advanced threat protection solutions; and FortiDDos and FortiDB database security appliances. Further, it offers security subscription, technical support, training, and professional services. Company description from FinViz.com.

Fortinet released preliminary earnings numbers on the 11th and the stock was crushed in the afterhours market. The company said earnings would be in the range of 15-16 cents compared to prior guidance of 17-18 cents. Revenue would be in the range of $343-$348 million compared to guidance of $372-$376 million.

This is not the end of the world but shares fell from $34 to $29. They blamed the guidance miss on lengthening deal cycles saying enterprises were becoming more strategic in their purchasing decisions and buying with less urgency than last year. They also admitted to "sales execution challenges" in North America as the result of a new sales force in that market. They just recently expanded into North America. There were also "macro" issues in Latin America and the U.K. that they did not explain.

Despite the guidance cut they are still positive about Q4 and 2017 saying the "competitive-differentiating and market-leading security fabric" was intact and they remain confident in the underlying strength of the business. They will release their actual earnings on October 27th. Normally, when a company warns in advance, they report better earnings than their guidance in the warning.

Shares are already rebounding because multiple brokers immediately reiterated their buy ratings. Wunderlich said buy with price target of $42. Doughtery said buy with a price target of $35. RBC Capital reiterated a sector perform rating with a price target of $37.

I believe there is very little risk in taking a position in FTNT at this level. The damage has already been done.

Position 10/17/16:

Long FTNT shares @ $30.92, see portfolio graphic for stop loss.



MENT - Mentor Graphics - Company Profile

Comments:

A headline out on Sunday said MENT was working with Bank of America to explore strategic alternatives including an outright sale. Siemens and Dassault Systems were rumored as potential buyers. Shares were up 85 cents.

Original Trade Description: October 13th.

Mentor Graphics Corporation provides electronic design automation software and hardware solutions to design, analyze, and test electro-mechanical systems, electronic hardware, and embedded systems software worldwide. It offers printed circuit boards; Mentor Graphics Scalable Verification tools; Questa platform to verify systems and integrated circuits (ICs); FastSPICE, Eldo, and ADVance MS analog/mixed signal simulation tools; and Veloce hardware emulation system. Further, the company provides software, tools, and professional engineering services; and methodology development, enterprise integration, and deployment services. It sells and licenses its products through direct sales force, distributors, and sales representatives to the communications, computer, consumer electronics, semiconductor, networking, multimedia, military and aerospace, and transportation industries. Company description from FinViz.com.

Billionaire Paul Singer, head of Elliott Management, announced on Sept 29th his firm was taking an active 8.1% stake in Mentor Graphics. In the SEC filing Elliott said there are "strategic opportunities" available at MENT and he is going to force a sale. Singer is no stranger to activist investing. Since 1994 he has launched 114 campaigns and 14 proxy fights when companies do not take his advice and get the M&A ball rolling. Elliott has $27 billion under management and Mentor only has a $3 billion market cap. If the board does not take action quickly, Elliott could launch a proxy fight to get enough people on the board that will take action. As a relatively small company, Mentor is in the crosshairs and there is very little chance for escape.

Shares spiked in the middle of the day on Thursday after TheStreet posted an article explaining Elliott' s game plan. The close at $27.92 was a 15-year high. Since Elliott announced his position at $24.69 the shares have risen about $3.50 with $2 of that the first day. Elliott is in for the long term and they will not be bailing on a $3 gain. They have a much larger goal in mind.

Earnings Nov 17th.

A lot of investors follow these activist funds and I would expect the stock to continue to rise as the headlines appear. More than 7,000 Jan $30 calls were bought today against an open interest of only 3,944.

Because of the afternoon spike I was going to put an entry trigger on the position just over the afternoon high. However, the S&P futures are down hard again tonight and maybe we will get an opportunity to buy the stock lower so I did not add the trigger. Support is $26.

Position 10/14/16:

Long MENT shares @ $28.54, see portfolio graphic for stop loss.

Optional:

Long Jan $30 call @ $1.35, no stop loss.

We will hold the option as a lottery ticket play is the long stock position is stopped.




BEARISH Play Updates

VXX - Volatility Index Futures - ETF Description

Comments:

No gain despite a negative market.

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.





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