Option Investor
Newsletter

Daily Newsletter, Wednesday, 3/22/2017

Table of Contents

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

Market Wrap

Consolidating Tuesday's Decline

by Keene Little

Click here to email Keene Little
The tech indexes had a good day today while the others consolidated yesterday's losses. There are some important support levels that are holding, giving bulls hope that the 1-day selloff is finished, but that will depend on how the consolidation/correction plays out in the next day or two.

Today's Market Stats

Tuesday's decline saw high volume heavily skewed toward selling while today's volume was lower and the internals were only mildly bullish. A bounce attempt was made but on lower volume and relatively flat internals, suggesting the bounce attempt is a correction to the decline and not something more bullish. But we'll know more after another day or two.

There are many concerns that more investors are now talking about and most of them are market negative. The level of bullishness was doused with cold water after Tuesday's decline as the Trump trade starts to fizzle with the reports of difficulty that the Trump administration is having with the health care reform, which is the first major package they're trying to get through Congress.

The CNN Fear & Greed index has dropped from Extreme Greed (78) a month ago to the present Fear reading (32). The index was already pulling back from a month ago, indicating investors were starting to feel more and more nervous about the market. When it started to become apparent that the Trump administration wasn't going to be able to reinvent the Federal government the worries about his programs started to show up in investors' attitudes.

The health care reform is the first major package that Congress is trying to get through and with a Republican-led Congress the inability to push through reform has many wondering what other programs are going to be difficult to get through the sausage-making process. The rally from November was built on hope, not substance. It was the hope that health care reform, new spending programs, tax reform and other incentives for businesses (such as removal of excess regulations) would get done quickly and help the economy, jobs and business profits.

Now it's starting to look like many of those programs will get pushed out and may not even see the light of day if Congress remains locked in debate about everything. Interestingly, a log-jammed Congress is actually better for the economy since they seem only able to screw things up rather than fix them. But it's that expectations thing -- many have been expecting great things out of the Trump administration, hence the "Trump trade" and now that things are looking less hopeful we're starting to see some air let out of the hope-filled balloon.

Hope-filled rallies tend to be the weakest because they're not built on fundamentals. They might be considered fundamentally-supported rallies but they're based on the hope that the fundamentals will improve (with Trump's policies). When the reality hits that those changes will take longer to achieve, if ever, hope can turn to despair and bullish sentiment can evaporate in a heartbeat.

Many were wondering what sparked Tuesday's selloff, especially since the day started with a gap up. When a market is overbought and running on fumes it's a tinder box looking for a match. The catalyst is often something small that would normally not affect the market. But when investors start getting nervous and they pull their stops up tighter it usually doesn't take much to trigger enough selling, which then triggers more selling as stops get hit.

Late-to-the-party buyers also panic quickly and run for the doors at the first sign of trouble. This is why a market that's gone for a long period with practically no corrections is a more dangerous market. A good analogy would be a forest that has grown thick with underbrush because of the years of firefighting control. When the fire does finally get out of control and all that underbrush lights off it becomes a vicious fire.

Controlling the selling has left the market with a lot of underbrush that should have been burned away with regular and deeper corrections than we've seen for the past 4 months. It will only be known in hindsight if we're at the start of that process or if hope will live a little longer and drive the market back up. We still have many looking at this "dip" as a buying opportunity.

I consider the RUT one of the more important indexes to watch currently because of its leadership. It's a more volatile index, which can throw traders off the trail, but at the beginning of what could turn into a more significant decline I think it's important to watch what the RUT does since it's a good reflection of the bullish/bearish mood of the market. So I'll start tonight's review with the RUT.


Russell-2000, RUT, Weekly chart

Just as the RUT did at its June 2015 high when it banged into the trend line along the highs from 2007-2014, it has started a more significant pullback than we've seen since the November 4th low. It's too early to tell if we'll get a stronger pullback, like what happened following the June 2015 high, or if instead we'll see another attempt to get through the 2007-2014-2015 trend line, which will be near 1422 by the first week of April.

The first thing the bears need to do is get the RUT below price-level support at 1296 (it June 2015 high) and its uptrend line from February-November 2016, near the same level. In the meantime the larger trend is still to the upside.


Russell-2000, RUT, Daily chart

The daily chart shows the rejection at the 2007-2015 trend line following the March 1st high. Interestingly, when the chart is viewed with the arithmetic price scale the trend line is lower and acted as resistance to the bounce into the high near 1394 last Friday.

On Tuesday the RUT dropped down to price-level support at 1342-1347, shown with the horizontal red line on the daily chart below. Today it dropped below support but then rallied back up to it this afternoon and the day finished with a bullish hammer candlestick at support. This is generally a good reversal signal so watch for follow through to the upside on Thursday.

I show the potential for a bounce into Friday before heading lower but we'll have to wait to see if the bulls have different plans. If the sellers continue to pressure the market and the RUT drops below this morning's low at 1335 we could see a move down to the uptrend line from February-November 2016 and its 200-dma, maybe near 1290 next week.

Key Levels for RUT:
- bullish above 1394
- bearish below 1347


Russell-2000, RUT, 60-min chart

In addition to the bullish hammer for the daily candlestick, there's another reason why the bulls could get another rally leg. The move down from March 1st is a 3-wave move and the RUT achieved two equal legs down near 1335 today. It could be just an a-b-c pullback correction that's now ready for the next leg of the rally.

It's going to be tough to tell in the short term what it's going to be but if we get an impulsive rally, and certainly if it breaks the downtrend line from March 1st, we'll have a better clue about a new high coming. The bearish setup calls for a higher bounce and then a much stronger decline to follow.


S&P 500, SPX, Daily chart

There are multiple possible paths for the market from here, which is of course no different than any other time. But the challenge at the moment is trying to figure out whether Tuesday's strong decline (strong relative to what we've seen in the past 4 months) was meaningful as far as a trend change or just the completion of a pullback correction.

We've seen multiple times in the past where a strong down day ends up being the completion of a correction instead of something more bearish and that remains possible here. It's why I mentioned the 3-wave pullback on the RUT's 60-min chart -- it's the same pattern for the blue chips as well and it could now lead to another rally to new all-time highs.

But if we've started a more significant pullback/decline, and we're certainly due for one, we should see only corrective (choppy) bounce attempts and then lower. For now watch to see if SPX can make it back above its trend line along the highs from April-August 2016, currently near 2360. If it continues lower, watch for possible support at a short-term uptrend line from December 30 - January 31, near 2330, which coincides with its 50-dma.

Key Levels for SPX:
- bullish above 2390
- bearish below 2330


Dow Industrials, INDU, Daily chart

As mentioned above, the blue chips have the same pattern and at the moment that means a 3-wave pullback from March 1st could now be followed by a new rally to a new high, potentially up to about 21,275 where it would hit an intersection of trend lines shown on the daily chart below. If the sellers continue to apply pressure, maybe after a higher bounce into Thursday or Friday, we should see the Dow drop down to its 50-dma, currently at 20420. Below that there's not much support until price-level S/R near 20K.

Key Levels for DOW:
- bullish above 21,000
- bearish below 20,579


Nasdaq-100, NDX, Daily chart, Arithmetic price scale

Today NDX used its trend line along the highs from April-August 2016 as both support and resistance at its low and high, which sounds a bit strange until you look at the chart with both the log and arithmetic price scales. The first chart below is using the arithmetic price scale and you can see this morning's low at 5327 touched the trend line and then bounced. Near the same level is a potential price-level support zone at 5330-5338, where it closed its March 1st gap up and tested the lows on March 6th and 9th. This looks like a bullish back-test and if support holds we could see the start of another rally leg to new highs. But a close below 5330 would suggest another leg down for the pullback/decline.

Key Levels for NDX:
- bullish above 5440
- bearish below 5330


Nasdaq-100, NDX, Daily chart, Log price scale

Now we look at the same NDX chart but with the log price scale, which shifts the trend line along the highs from April-August 2016 up a little bit. This trend line was broken with Tuesday's decline and today's bounce made it back up to the line, near 5368 (where it closed). Now we have a bearish back-test of the trend line and only slightly higher is its broken 20-dma, near 5371. Following the bearish back-test we could see another leg down for a larger pullback/decline. We are left wondering if this trend line is now support or resistance and it depends on how you view the chart.

We could get a little larger bounce off this morning's low where it would achieve two equal legs up near 5387, which is between a 50% and 62% retracement of its decline (5383 and 5396, resp.). Unless Tuesday's decline completed a sideways correction off the March 1st high we should see the decline continue following this bounce.


10-year Yield, TNX, Weekly chart

Treasury yields peaked on March 10th, a few days before the FOMC announcement to raise rates. Since the announcement on the 15th yields have declined, which leaves us wondering if it's been simply a sell-the-news reaction or something more. The bond market is considered smarter than the stock market and the rally in bonds (decline in yields) could be indicating the start of a more significant shift.

One reason why I suspect we could be starting a more significant shift is because the wave count for the rally from July 2016 looks complete following the triangle consolidation from December into February and then the minor new high into the March 10th high. TNX has since dropped back into the triangle, which is typically a good indication the high is in place.

At a minimum we should expect a larger pullback to at least correct the rally from last July. More bearishly, the larger wave pattern suggests we still have another leg down to new lows coming in 2017-2018. Lower yields would reflect the idea that worries of inflation will shift back to worries about deflation. We have a huge credit bubble (personal, corporate and government) waiting to be popped and a credit collapse is a cause for deflation. I firmly believe we still have that in front of us.


KBW Bank index, BKX, 60-min chart

A rate increase from the Fed is supposed to help banks but like the bond market we've seen the opposite reaction than what was expected. The banks were pulling back marginally since March 1st but then started to accelerate lower after last week's FOMC announcement

What's instructive, from a price pattern perspective, is how price played out this week, which is shown on the BKX 60-min chart below. On Monday I had noted the brief break below the bottom of a bullish descending wedge, which had developed since the March 1st high. The recovery back inside the wedge during the day had it looking like a throw-under finish that would lead to a rally.

As I noted to readers, the one non-confirming signal was the lack of bullish divergence at the lows inside the descending wedge. This suggested the bullish descending wedge was going to fail and that a drop below Monday morning's low at 94.39 would likely see acceleration of the selling. The sudden drop into Monday's close below Monday morning's low was the warning sign that we should expect strong selling on Tuesday, which is exactly what happened.

When a price pattern fails it tends to fail hard and this is a perfect example of it. The drop below 94.39 Monday afternoon resulted in a strong selloff, which was predicted by the failed bullish pattern. BKX then dropped below its uptrend line from June-September 2016, currently near 91.10, and is struggling to bounce back up to it. If it remains resistance on a back-test look for additional selling to follow. A rally back above the trend line would be potentially bullish but only if we see an impulsive move back up.


Transportation Index, TRAN, Daily chart

The TRAN has been another leader to the downside, reflecting concerns that the economy is not doing as well as we've been hearing from economists. The small rising wedge for the last part of its rally from January into the March 1st high was met with significant bearish divergence and once it dropped out of the wedge on March 7th it began to sell off harder.

The TRAN has now made it down to support at its uptrend line from June-October 2016, tagging it with this morning's low at 8903, and could get at least a decent bounce correction. But with a lack of bullish divergence at this morning's low it's looking like trendline support will break.


U.S. Dollar contract, DX, Daily chart

The US$ made a closing low at 99.51 on January 31st (and a lower intraday low at 99.19 on February 2nd) and the dollar is trying to hold at its January 31st closing low, finishing today at 99.48. There are some hints of short-term bullish divergence suggesting a bounce is coming but for now there's downside potential to the uptrend line from May-August 2016, near 98.45, which is coincident with its 200-dma. Below that is a price projection at 97.65 for two equal legs down from its January 3rd high.


Gold continuous contract, GC, Daily chart

Gold rallied fairly strongly on Tuesday as the stock market tumbled. It looked like a safe-haven play. It added a little more today but after a morning pop up (with the stock market's quick decline) it's now looking like the bounce could be topping (bearish divergence last week). If the bounce has a little more life to it we could see gold challenge its broken 200-dma, near 1262.70 (today's high was 1251.50), and its downtrend line from August-September 2016, currently near 1266. Above 1270 would be more bullish but until that happens I'm thinking we have a strong selloff coming.


Silver continuous contract, SI, Daily chart

Silver has a very similar pattern as gold but it didn't quite as strong a rally on Tuesday. Its bounce off the March 15th low is not as strong as gold's rally as it battles its broken 20- and 50-dmas, which are currently at 17.59 and 17.52, resp. Today it closed at 17.55. Only slightly higher is its downtrend line from July 2016, currently near 17.73, and silver would be more bullish above that level, but maybe only for a trip up to its broken 200-dma, near 18.06, before heading back down.


Oil continuous contract, CL, Daily chart

Oil is now nearing its uptrend line from August-November 2016, currently near 46.30, about 70 cents below this morning's low. It's starting to show bullish divergence so I suspect support will hold and it might even get a bounce from here. The moves for oil, like most commodities, are mostly 3-wave and right now we have a 3-wave pullback from its January 3rd high. We could therefore start a bounce back up, a multi-week consolidation on top of its uptrend line from August-November. If it can get back above price-level S/R near 50.90 it would be more bullish but the larger pattern suggests we'll only get a bounce correction before dropping lower.


Economic reports

Thursday will be another quiet day for economic reports. New home sales will be reported, which are expected to have ticked higher in February as compared to January. That wasn't true for existing home sales that were reported this morning so we'll see if new homes are doing a little better than existing. Friday we'll get the durable goods report, which is expected to show improvement in February.


Conclusion

Today started with a little more selling, probably by those who received a few margin calls following Tuesday's strong selling. Margin debt is at record highs and there are a lot of traders using margin to max out their bullish accounts. Any decline is going to hit them with margin calls and that's one of the risks for the current market.

But the morning selling was followed by a bounce and now we need to figure out whether it's going to lead to something more bullish or just one of the dead cat varieties before heading lower. If we see the market consolidate near the lows for a day or two it's going to look more bearish. But if the bounce develops into a sharp move back up we'll then have to think about the possibility for new highs following the corrective pullback off the March 1st highs.

The pattern for the tech indexes suggests we'll get at most a high bounce before dropping back down. How the price pattern develops for the next two days will provide clues for how next week is likely to go.

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

Keene H. Little, CMT


New Plays

Grilled Steak Burgers

by Jim Brown

Click here to email Jim Brown
Editor's Note

The fast casual space is fiercely competitive but Habit Restaurants is succeeding. They posted blowout earnings and guided for 19.8% revenue growth.


NEW BULLISH Plays

HABT - Habit Restaurants - Company Profile

The Habit Restaurants, Inc., a holding company, operates fast casual restaurants under The Habit Burger Grill name. It specializes in offering fresh made-to-order char-grilled burgers and sandwiches featuring choice tri-tip steak, grilled chicken, and sushi-grade albacore tuna cooked over an open flame; and salads, as well as sides, shakes, and malts. As of March 2, 2017, the company operated approximately 170 restaurants in 15 locations in California, Arizona, Utah, New Jersey, Florida, Idaho, Virginia, Nevada, Washington, and Maryland, the United States; and the United Arab Emirates. The Habit Restaurants, Inc. was founded in 1969 and is headquartered in Irvine, California. Company description from FinViz.com.

Habit reported earnings of 7 cents that beat estimates for 3 cents. Revenue rose 21.8% to $73.9 million. Same store sales rose 1.7%. This was the 52nd consecutive quarter of positive same store sales. They opened 11 company stores and 2 franchises in Q4. The CEO said they were proud of their strong beat considering it is a fiercely competitive environment.

For full year 2017, they guided to revenue of $338 to $342 million, which represents 19.8% growth at the midpoint. The guided for 2% same store sales and the opening of 31 to 33 new company stores alony with 5 to 7 franchised stores. Analysts were expecting $339.2 million.

Earnings June 1st.

Shares spiked from $14 to $16 on the news and then pulled back for two weeks on post earnings depression. They have since recovered that $16 level and are about to break out to a new three month high. Shares dipped on Tuesday but very little and the rebound today erased the dip completely.

Buy HABT shares, currently $15.90, initial stop loss $14.75
Optional: Buy June $17 call, currently 80 cents, no initial stop loss.



NEW BEARISH Plays

No New Bearish Plays



In Play Updates and Reviews

Lackluster Rebound

by Jim Brown

Click here to email Jim Brown

Editors Note:

The S&P-600 closed at a four-month low again and the Russell 2000 posted a small loss. Both indexes posted sharp intraday declines with equal rebounds but they both failed to return to positive territory. There was no conviction in the small cap rebound.

The Nasdaq large caps were the only stocks to recover a significant portion of Tuesday's losses but that was only about a third of the drop. All the other indexes closed near the flat line with the S&P the only index posting a gain.

The futures are up sharply on Wednesday night but that is no guarantee the market will rally on Thursday. Until the small caps can sustain a multiday rally, there is a risk of lower lows.





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


NLNK - Newlink Genetics
The long stock position remains unopened until 21.60.



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

BCRX - Biocryst Pharmaceuticals - Company Profile

Comments:

No specific news. Short term support held and there was a decent bounce but only about a third of the prior day's loss.

Original Trade Description: March 18th

BioCryst Pharmaceuticals, Inc., a biotechnology company, designs, optimizes, and develops small molecule drugs that block key enzymes involved in the pathogenesis of diseases. The company markets peramivir, an intravenous neuraminidase inhibitor, which is approved for uncomplicated seasonal and acute influenza in the United States and Canada under the name RAPIVAB, in Japan and Taiwan as RAPIACTA, and in Korea as PERAMIFLU. It also has various ongoing development programs, including BCX7353 and second generation oral inhibitors of plasma kallikrein for hereditary angioedema; and galidesivir, a broad spectrum viral RNA polymerase inhibitor that is indicated to treat filoviruses, as well as forodesine, an oral purine nucleoside phosphorylase inhibitor for use in oncology. It has collaborative relationships with Mundipharma International Holdings Limited for the development and commercialization of forodesine; Shionogi & Co., Ltd. and Green Cross Corporation for the development and commercialization of peramivir in Japan, Taiwan, and South Korea; Seqirus UK Limited for the development and commercialization of RAPIVAB worldwide, except Japan, Taiwan, Korea, and Israel; and the University of Alabama at Birmingham for the development of influenza neuraminidase and complement inhibitors. Company description from FinViz.com.

BioCryst produces drugs and vaccines that treat or prevent the flu. They have a novel new drug called Rapivab that is used to treat viruses. They also have a new broad-spectrum antiviral for use against Ebola, Zika and the Marburg virus, among others. Whenever bird flu or swine flu headlines appear, BioCryst shares tend to rise because of their vaccines and treatments.

The current bird flu is H7N9 and a new version just appeared called the Yangtze River Delta lineage. This particular strain is highly contagious and jumps human to human. The virus has changed into a "high path" virus as opposed to a "low path" virus. That means it spreads faster inside the body and causes more damage. More than 41% of people infected eventually die.

The number of cases per year dating back to 2013 were in the 100-200 range and mostly in China. In the last several months with the outbreak of this new strain more than 460 cases have been confirmed. Remember, more than 41% die. This is the worst bird flu season on record.

Normally the bird flu is confined to mainland China. However, because there are open air fowl markets in China, the flu can be picked up by any migratory bird and spread around the world.

In early March, a form of H7N9 was discovered at a Tyson chicken farm in Tennessee. This was the high-path form. The farm was quarantined and the entire flock of 55,000 chickens was destroyed. The problem is that the infection was caused by a wild bird that contaminated the flock. Since the virus does not impact the birds, nobody knows if the flock is contaminated except they are constantly checked with blood tests. Once they find one chicken is infected it is too late.

In the U.S. bird farms are supposedly "bio-secure" to isolate the chickens from wild birds. Normally that works in most cases. However, the virus still makes it into the population unless extreme measures are taken.

The key to this position is that there will likely be more H7N9 headlines in the U.S. because the possibility of further farm contamination is too great. This is not one bird that flew from China and contaminated one farm. Birds carrying it fly north across Russia to Alaska infecting other birds as they go. Once in Alaska they are pushed south by the winter weather and everywhere they stop, other birds are infected. There is no telling how many thousands or even millions of wild birds are infected in the U.S. already because it does not affect their health. They are passive carriers.

When new headlines appear, it will boost stocks that have vaccines and treatments against exotic viruses like Ebola, Zika, etc. Those treatments will not specifically work against the bird flu other than as a broad-spectrum antiviral. However, the stocks will rise on the expectations.

BCRX spiked to $9 on the news of the farm in Tennessee and should move higher on their own even if there are no further headlines. The potential for the H7N9 contamination to be limited to just one farm is highly doubtful.

Earnings May 29th.

We have to buy the stock because the option premiums are inflated due to the expectations of another significant spike. I looked at buying a longer strike out in June but the spreads are too wide. If you buy that call you have to hold it or lose half your premiums if stopped out.

Position 3/20/17:

Long BCRX shares @ $8.82, see portfolio graphic for stop loss.
No options due to price and spreads.



ECA - Encana Corporation - Company Profile

Comments:

No specific news. Continued drop intraday on the spike in crude inventories and drop in prices but recovered in the afternoon to close flat.

Original Trade Description: March 13th

Encana Corporation, together with its subsidiaries, engages in the exploration, development, production, and marketing of natural gas, oil, and natural gas liquids in Canada and the United States. The company owns interests in various assets, such as the Montney in northern British Columbia and northwest Alberta; Duvernay in west central Alberta; and other upstream operations, including Wheatland in southern Alberta, Horn River in northeast British Columbia, and Deep Panuke located offshore Nova Scotia. It also holds interests in assets that comprise the Eagle Ford in south Texas; Permian in west Texas; San Juan in northwest New Mexico; Piceance in northwest Colorado; and Tuscaloosa Marine Shale in east Louisiana and west Mississippi. Company description from FinViz.com.

Encana reported earnings of 9 cents compares to estimates for 3 cents. Revenue of $822 million also beat estimates for $771.9 million. Production averages 237,100 Boepd. Drilling and completion costs declined by 30%. They reduced long term debt by $1.1 billion and net debt by 50%. They replaced 326% of production.

They currently have more than 10,000 premium drilling locations and expect to grow that number in 2017. Since December 31st, they have added more than 50 premium locations in the Eagle Ford alone. They ended 2016 with a whopping $5.3 billion in liquidity and cash of nearly $1 billion. They expect to spend $1.6 to $1.8 billion on capex in 2017 and grow liquids production by 35%. Capex willbe funded by cash on hand. Proved reserves were 920 million barrels and 3P reserves were 2.372 billion barrels.

With the cash, production rates, reserves and drilling inventory listed above they are definitely an acquisition candidate with only a $10 billion market cap.

JP Morgan initiated coverage with an overweight rating and $16 price target.

Earnings May 18th.

Over the last couple of weeks an investor built up 7,000 July $11 calls at $1 each and 7,000 October $11 calls at $1.50 each. That is a $1.7 million investment in call options. I am suggesting we follow them in that trade as well as buy the stock. They may know something that is not public information or they just believe that the company is too good to pass up. With the drop in crude prices ECA has fallen to a 5-month low and is resting on the 200-day average.

Position 3/14/17:

Long ECA shares @ $10.43, see portfolio graphic for stop loss.

Optional: Long October $11 call @ $1.40, no stop loss.



ETSY - ETSY Inc - Company Profile

Comments:

No specific news. Minor rebound from support, exactly where it should have bounced.

Original Trade Description: March 15th

Etsy, Inc. operates as a commerce platform to make, sell, and buy goods online and offline worldwide. Its platform includes its markets, services, and technology, which enables to engage a community of sellers and buyers. The company offers approximately 45 million items across approximately 50 retail categories to buyers. It also provides various seller services, including direct checkouts, promoted listings, and shipping labels, as well as Pattern by Etsy to create custom Websites; and seller tool and education resources to start, manage, and scale businesses to entrepreneurs primarily through Etsy.com. In addition, the company operates A Little Market, a handmade and supplies market for sellers and buyers. Company description from FinViz.com.

Etsy reported earnings of 3 cents that beat estimates for a penny. Revenue of $110.2 million also beat estimates for $106.9 million. Merchandise sold rose 16.7% to $865.2 million. The stock was crushed because the company guided for higher costs. However, there was a good reason and shares are starting to rise again.

Etsy is an ecommerce website where crafters can post and sell their wares. So far, so good. The company has come up with the great idea to sell craft supplies on the website so other existing crafters plus all the people shopping the website can buy their supplies there as well. Not only will the company provide supplies but they are adding tutorials and other craft ideas. That will make the site even more "sticky." This is scheduled to launch in April.

In addition, they introduced Google Shopping on the website and launched their first ever global brand campaign. They have changed the backend of the seller website to provide a new seller dashboard and new application called Shop Manager.

I think this expansion is a great idea. Where other retail websites are stagnant, Etsy is growing rapidly and these new features will increase viewers, buyers and sellers. The knee jerk decline in the stock price on the rise in expenses was a buying opportunity.

Earnings May 30th.

Position 3/16/17:

Long ETSY shares @ $10.25, see portfolio graphic for stop loss.

Optional: Long June $12.50 call @ 36 cents, no stop loss.



ITCI - Intercellular Therapies - Company Profile

Comments:

No specific news. Shares bounced 2% from support.

Original Trade Description: March 16th

Intra-Cellular Therapies is developing novel drugs for the treatment of neuropsychiatric and neurodegenerative diseases and diseases of the elderly, including Parkinson's and Alzheimer's disease. The Company is developing its lead drug candidate, lumateperone (also known as ITI-007), for the treatment of schizophrenia, bipolar disorder, behavioral disturbances in patients with dementia, including Alzheimer's disease, depression and other neuropsychiatric and neurological disorders. Lumateperone, a first-in-class molecule, is in Phase 3 clinical development for the treatment of schizophrenia, bipolar depression and agitation associated with dementia, including Alzheimer's disease. The Company is also utilizing its phosphodiesterase platform and other proprietary chemistry platforms to develop drugs for the treatment of CNS and other disorders. Company description from company website.

ITCI is meeting with the FDA in late March to discuss the filing of their newest drug for schizophrena and they have already contracted with a manufacturer to supply commercial quantities. The drug is lumateperone and it has already successfully navigated all the required studies and the results were presented at the annual meeting of the American College of Neuropsychopharmacology (ACNP) and the CNS Summit. For company information on their other drugs Click Here

They reported a smaller than expected Q4 loss of 64 cents compared to estimates for 77 cents. The company has averaged a 14.6% positive earnings surprise over the last four quarters. They are not a big company and deal mostly in research so they have a permanent loss until their new drugs hit the market. They have $10 per share in cash.

Shares were very volatile the day the earnings were released and shares settled at $13.50 several days later. Now a new uptrend has begun with a close at $15.75 today. The prior high was the mid $40 range. Shares crashed in September when a trial of drug ITI-007 for schizophrena failed a stage three trial for one specific test. The drug has 7 other uses.

Earnings May 31st.

There is an uptrend forming with resistance at $17. If the stock breaks above that resistance level it could run because of the recent memory of the $45 highs.

Position 3/17/17:

Long ITCI shares @ $15.72, initial stop loss $13.75,
No options recommended because of high prices and wide spreads.



NLNK - Newlink Genetics - Company Profile

Comments:

No specific news. We were stopped out of the prior trade on Tuesday when the biotech sector fell -4.08%. We are looking to reenter a long position with a trade at $21.60.

Original Trade Description: March 20th.

NewLink Genetics Corporation, a biopharmaceutical company, focuses on discovering, developing, and commercializing immunotherapeutic products for the treatment of cancer. Its portfolio includes biologic product candidates based on its HyperAcute cellular immunotherapy technology, which is designed to stimulate the human immune system to attack cancer cells; 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 is developing IDO pathway inhibitors comprising indoximod that is in multiple Phase I and Phase II clinical trials for patients with melanoma, pancreatic cancer, malignant brain tumors, metastatic breast cancer, acute myeloid leukemia, prostate cancer, and non-small cell lung cancer (NSCLC); and GDC-0919 and atezolizumab (MPDL3280A) that is in Phase Ib clinical trials for patients with locally advanced or metastatic solid tumors. Its clinical development products include NLG2101 for metastatic breast cancer; NLG2102 for refractory malignant brain tumors; NLG2103 for advanced melanoma; NLG2104 for metastatic pancreatic cancer; NLG2105 for pediatric patients with refractory malignant brain tumors; and NLG2106 for acute myelogenous leukemia. The company's HyperAcute cellular immunotherapy product candidates under clinical development include tergenpumatucel-L, is being investigated in Phase Ib/II clinical trial for patients with advanced NSCLC; and dorgenmeltucel-L, is being investigated in a Phase II clinical trial for patients with advanced melanoma. Its infectious disease program includes replication-competent recombinant vesicular stomatitis virus, a vaccine technology to treat Ebola and Marburg viruses. The company has license and collaboration agreements with Genentech, Inc. and Merck, Sharpe and Dohme Corp. Company description from FinViz.com.

NewLink reported a loss of 46 cents in Q4 and that beat analyst estimates for 66 cents. Revenue of $12.7 million significantly beat estimates for $4.3 million. They ended the quarter with $131.5 million in cash.

Earnings May 30th.

Newlink has multiple drugs in the pipeline targeting cancer and it has been mentioned multiple times as a possible acquisition target by Gilead Sciences. In addition to the IDO pathway drugs they partnered with Merck to develop an Ebola vaccine. The drug received breakthrough therapy designation from the FDA and PRIME status from the EU Medicines Agency. In December, the final results of a trial in Guinea were published in the Lancet confirming the efficacy of the vaccine.

In early April the company will present two abstracts at the American Association for Cancer Research (AACR) annual meeting. Presenters accepted to deliver their abstracts normally rise into the meeting. They present on April 4th. The abstracts being presented are chosen by an AACR committee as the best and most promising. This is an honor to be chosen.

This is a stock only play because option prices are out of sight. Shares hit a new 52-week high on Monday.

With a NLNK trade at $21.60

Buy NLNK shares, initial stop loss $19.65.

Previously closed 3/21/17: Long NLNK shares @ $22.56, exit $20.65, -1.91 loss



VIPS - Vipshop Holdings - Company Profile

Comments:

No specific news. Shares rebounded and recovered about a third of the Tuesday loss.

Original Trade Description: February 27th

Vipshop Holdings Limited, through its subsidiaries, operates as an online discount retailer for various brands in the People's Republic of China. It offers a range of branded products, including women's apparel, such as casual wear, jeans, dresses, outerwear, swimsuits, lingerie, pajamas, and maternity clothes; men's apparel comprising casual and smart-casual T-shirts, polo shirts, jackets, pants, and underwear; women and men shoes for casual and formal occasions; and accessories consisting of belts, fashionable jewelry, watches, and glasses for women and men, cosmetics, toys and games, sports equipment and hundreds of other categories. Company description from FinViz.com.

In Q4 revenue rose 36.5% to $2.73 billion. Full year revenue rose 40.8% to $8.15 billion. The number of active customers in Q4 rose 39% to 27.5 million. The number of total customers rose 42% to 52.1 million. Total orders for Q4 rose by 26% to 82.0 million. Total orders for the full year rose 40% to 269.8 million. Gross profits for Q4 rose 33.4% to $643.4 million. Gross profits for the full year rose 37.4% to $1.96 billion. They added five local distribution centers to further improve speed and efficiency of order processing. They have more than 20,000 staff and 2,000 self-operated delivery stations.

Earnings May 22nd.

Vipshop is tiny compared to Alibaba but they are growing rapidly and the three main rating agencies recently gave them favorable ratings. Fitch rated them BBB+, Moody's Baa1 and S&P BBB. The company is not a flash in the pan and those ratings indicate they are solid.

Shares spiked to $13 on the earnings news and moved sideways for a week. They posted a minor gain today in a weak market to close at a five-day high.

Update 3/7/17: The company announced a new credit facility for $632,500,000 for the purpose of repurchasing outstanding 1.5% convertible notes due 2019.

Position 3/3/17:

Long VIPS shares, currently $13.15, see portfolio graphic for stop loss.
Position 3/6/17: Long April $14 call @ 30 cents, no stop loss.




BEARISH Play Updates

FOSL - Fossil Group - Company Profile

Comments:

No specific news. Shares closed at a new 8-year low.

Original Trade Description: March 5th

Fossil Group, Inc., together with its subsidiaries, designs, develops, markets, and distributes consumer fashion accessories. The company's principal products include a line of men's and women's fashion watches and jewelry, handbags, small leather goods, belts, sunglasses, and soft accessories. It offers its products under its proprietary brands, such as FOSSIL, MICHELE, RELIC, SKAGEN, and ZODIAC, as well as under the licensed brands, including ADIDAS, ARMANI EXCHANGE, BURBERRY, DIESEL, DKNY, EMPORIO ARMANI, KARL LAGERFELD, KATE SPADE NEW YORK, MARC BY MARC JACOBS, MICHAEL KORS, and TORY BURCH. The company sells its products through department stores, specialty retail stores, specialty watch and jewelry stores, company-owned retail and outlet stores, mass market stores, e-commerce sites, licensed and franchised FOSSIL retail stores, and retail concessions, as well as sells its products on airlines and cruise ships. As of January 2, 2016, it owned and operated 99 retail stores and 139 outlet stores located in the United States, as well as 250 retail stores and 131 outlet stores internationally. Company description from FinViz.com.

Fossil reported adjusted earnings of $1.36 that beat estimates for $1.21. Unfortunately, that was a decline of 23.2% over the year ago quarter. Revenue of $959.2 million declined -3% and missed estimates for $971.7 million. For the current quarter, the company expects to lose 10 to 25 cents compared to earnings of 11 cents a year ago. They guided for a wide range for earnings of $1.00 to $1.70 for the full year. They guided for Q1 revenue to decline 8% to 11.5%.

Traditional watch sales declined -2%. Sales of jewelry and leathers declined -5%. Global same store sales fell -7% with declines in all product categories. Gross margin declined 200 basis points and operating margins fell from 9.0% to 6.9%. Cash on hand at the end of the quarter declined -$64 million to $236 million.

Over the last 30 days consensus earnings estimates for the ful lyear have declined from $1.94 to $1.19. All revisions have been negative.

Earnings May 16th.

Shares dropped sharply on Friday after the consensus earnings revisions were released. The $17.42 close was an 8 year low and the very negative comments above suggest shares could go a lot lower.

Update 3/15/17: Fossil said it entered into a loan modification agreement with its lenders that appears to be bearish. The amendment reduces the credit available to $850 million but the press release did not say what level it was reduced from. The amendment also removed an incremental term loan that was previously available. It also extends the maturity date until May 17th, 2019 BUT removes the company's ability to ask for an extension.

Basically, their credit limit was lowered, one facility was cancelled and they cannot ask for an extension of the maturity date, meaning the loan has to either be paid or a new loan with new lenders has to be acquired.

Position 3/6/17:

Short FOSL shares @ $17.48, see portfolio graphic for stop loss.

Optional: Long April $17 put @ $1.00, see portfolio graphic for stop loss.



SHLD - Sears Holdings - Company Profile

Comments:

Sears declined 12% on the news they did not know if they would be in business at the end of 2017. That should be the kiss of death since vendors are not going to finance inventory if they fear Sears will file bankruptcy. The key sentence from the annual report reads, "substantial doubt exists related to the company's ability to continue as a going concern." Sears lost $2.2 billion in the year ended on January 28th. They ended the year with $286 million in cash but they received some money from the sale of the Craftsman brand to Stanley Black & Decker. Suppliers are now demanding either cash up front or payment upon delivery and shipping smaller orders according to several sources. Insurers that previously insured suppliers against a Sears default are no longer writing those policies. Sears inventory levels are "pathetically badly inventoried today and they will become worse" according to Mark Cohen a former CEO of Sears Canada.

Original Trade Description: March 11th

Sears Holdings Corporation operates as a retailer in the United States. It operates in two segments, Kmart and Sears Domestic. The Kmart segment operates retail stores that offer a range of products, including consumer electronics, seasonal merchandise, outdoor living, toys, lawn and garden equipment, food and consumables, and apparel; and in-store pharmacies. It provides merchandise under the Jaclyn Smith, Joe Boxer, and Alphaline labels; Sears brand products, such as Kenmore, Craftsman, and DieHard; and Kenmore-branded products. As of October 31, 2015, this segment operated approximately 952 Kmart stores. The Sears Domestic segment operates stores that provide appliances, consumer electronics/connected solutions, tools, sporting goods, outdoor living, lawn and garden equipment, apparel, footwear, jewelry, and accessories, as well as automotive services and products, such as tires, batteries, and home fashion products. It also offers appliances and services to commercial customers in the single-family residential construction/remodel, property management, multi-family new construction, and government/military sectors; appliance and plumbing fixtures to architects, designers, and new construction or remodeling customers; parts and repair services for appliances, lawn and garden equipment, consumer electronics, floor care products, and heating and cooling systems; and home improvement services, as well as protection agreements and product installation services. This segment provides merchandise under the Kenmore, Craftsman, DieHard, Covington, Canyon River Blues, Metaphor, Outdoor Life, Structure, and Apostrophe brands, as well as under the Roadhandler, Ty Pennington Style, and Alphaline brands. As of October 31, 2015, this segment operated 735 Sears stores. Company description from FinViz.com.

We played Sears as a short several times before. Sears is eventually expected to file bankruptcy. It is only a matter of time.

Fitch warned Sears will burn through $1.5-$1.8 billion in cash this year and even selling off the Craftsman brand will only gain them an additional 12 months of life.

Sears closed at a new 14-year low on Feb-9th before spiking the next day on misplaced optimism to stop us out of a short position for a decent gain.

In early January, they announced they were closing 150 stores. There are 109 Kmarts and 41 Sears stores. Last week they announced the completion of the sale of the Craftsman brand to Stanley Black & Decker for $525 million in cash and payments over the next 3-5 years to total $900 million. That shows how desperate they are for cash since they originally expected to raise $1.5 to $2.0 billion on the sale. Now they are looking to sell the Kenmore and Diehard brands.

Sears reported an adjusted Q4 loss of $1.28 that was better than expectations for a loss of $2.85 per share. That still represented a loss of $607 million and they are burning cash at an alarming rate. Analysts now believe they need $2 billion to make it through 2017. Revenue was $6.1 billion, down from $7.3 billion but beat estimates for $5.9 billion.

Earnings June 8th.

Susquehanna said Sears is struggling just to exist and the results were terrible. They do believe the chain will continue to exist through 2017 thanks to sales of real estate and brands, and then the outlook becomes increasingly worse once there are no longer any assets to sell. By selling their real estate and leasing it back, they raise immediate cash but they take on a new debt on every store. Outstanding debt and capital lease obligations rose from $2.2 billion to $4.2 billion in 2016. That means their cash burn in 2017 will actually increase significantly.

Shares spiked on short covering after the earnings but came to a dead stop at $9.50 and exactly where resistance held back in January. I think the shorts will load up again now that earnings are over and no further headlines are expected.

Update 3/13/17: Sears lenders hired Kramer Levin to represent them in expected debt talks. The lenders are expecting trouble so they already hired a bankruptcy firm. That is not a good sign for Sears.

Update 3/15/17: Sears lost the third top executive in the last three months. Kmart president Alasdair James is no longer with the company. Sears does not announce departures because there has been so many. The name just disappears from the website. James was removed on Wednesday. Sears will not comment on departures even when asked.

Update 3/21/17: After the evening session had ended, Sears filed its annual report saying there was "substantial doubt" that the company could continue to exist as a "going concern" which is the legal term for remaining in business. This along with the fact that lenders for Sears hired a bankruptcy attorney a couple weeks ago should be the death knell for Sears shares.

Position 3/13/17:

Short SHLD shares @ $9.10, see portfolio graphic for stop loss.

No options recommended because of price.

The $9 put is $2.05 and 22% of the stock price.





If you like the trade setups 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.

subscribe now