Option Investor
Newsletter

Daily Newsletter, Thursday, 7/13/2017

Table of Contents

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

Market Wrap

Bulls Maintain Control

by Keene Little

Click here to email Keene Little
We are seeing more chop and whipsaws than any strong move in either direction but for now the bulls maintain control of the tape. The short-term pattern looks like we could see at least a positive start to opex week next week but after opex week it's looking doubtful that the bulls will be able to do more.

Today's Market Stats

It was another quiet day in the markets and the bears could be forgiven for thinking the rally is simply running on fumes and is about to tip over at any time. But the price pattern remains more bullish than bearish and as we get ready to head into opex week it's looking like we should see higher prices.

But the bears could soon have their turn. Depending on the index and projected price targets I see the potential for a market top in the coming week and therefore it's not a good time for bulls to be complacent, which is what the VIX is currently showing us (it closed below 10 again).

There wasn't much news, geopolitical or otherwise, today and the market was left on its own. This morning's economic reports included some inflation data with the PPI reports before the bell. That caused a minor pullback in the equity futures and a small pop up in bond futures when the numbers were released at 08:30, but it was only a small reaction. The reaction may have been because the numbers came in a little higher than expected and that might have had some thinking that the Fed has a greener light to raise rates again.

PPI came in at +0.1% vs. expectations for a -0.1% decline and a tick up from 0.0% in May. The Core PPI was weaker than expected, coming in also at +0.1% but less than the +0.2% expected and a drop from +0.3% in May. The drop in the core rate, which excludes food and energy, is what the Fed uses to judge what's happening with inflation. The picture shows a taming of inflation, with hints of deflation, I mean disinflation, and that's likely to keep the Fed on watch rather than thinking aggressively about raising rates.

The chart below shows the past 3 years of inflation data and you can see how it has turned down this year from highs near 2.5% (Total) and about 2.1% (Core). Uptrend lines for both are converging near 1.5% and a drop below that in the future would indicate "disinflationary" pressures were increasing. I suspect the Fed would become increasingly worried if PPI drops below 1.5% (Core PPI is currently near 1.9%), especially since they're doing everything they can to get it above +2%.

PPI, July 2014 - June 2017, chart courtesy briefing.com

As already mentioned, today's quiet consolidation keeps things looking bullish for the stock market but there will be some important upside levels to watch carefully (assuming the indexes will press higher into next week). I'll kick off tonight's chart review with a look at SPX.


S&P 500, SPX, Weekly chart

I apologize for the busy weekly chart of SPX below but there are a few things that are important to highlight and it's difficult to cram it all onto one chart. From a trendline/channel perspective, ever since the February 2016 low SPX has not been able to climb above the midline of the up-channel for price action following the October 2011 low. This is typical price behavior for a 5th wave, which is how I'm interpreting the wave count for the rally from 2009 -- the rally from February (actually January) 2016 fits well as the 5th wave of the rally and that's the terminal part of the wave pattern.

For the rally from January 2016 I believe we're in the 5th wave. In other words we're into the 5th of the 5th wave and once it's complete we'll start a much more serious "correction" of the rally from 2009, potentially retracing it over the next couple of years. There are several Fib projections based on the wave count that suggest SPX could make it up to the 2475-2516 area and for now I'm depicting a rally to the 2516 projection before mid-August.

The 5th wave of the rally from 2009 would equal the 1st wave (very common) at 2516. In the 5-wave move up from January 2016, the 5th wave would equal 62% of the 1st wave near 2507. This is a common projection for a move that is simply running out of momentum, which can be seen on the oscillators -- bearish divergence against the March 1st high. This also helps confirm a 5th wave. Another common price projection for a 5-wave move is where the 3rd through 5th waves equals 162% of the 1st wave and for the move up from January 2016 that projects to 2475.

The midline of the up-channel from October 2011 is currently near 2485 and this adds to the importance of the 2475-2516 zone of resistance that the bulls will have to power through in order to make it up to the trend line along the highs from April 2016 - March 2017, currently near 2540, which will be near 2580 by mid-August. That would be about the most I would expect out of this rally leg from March 27th. Again, once this leg completes we should get a much larger pullback/decline started. I think we're close to a major high but not there yet.


S&P 500, SPX, Daily chart

Wednesday's rally had SPX breaking its downtrend line from June 19th as well as its broken 20-dma, both near 2432. Either should now hold as support, if back-tested, in order for the bulls to maintain control. Without getting bogged down in the gritty details of a corrective wave pattern (corrective because we're inside a rising wedge pattern from January 2016), I have two projection areas for the completion of the final leg of the rally from March 27th. The first projection is at 2470-2475 and the second projection is near 2509. Note how these coincide nicely with the projections on the weekly chart.

The rally doesn't have to make it up to either of those upside projections; nor does it have to stop at either one. It could fail at any time or simply blast higher toward 2550-2600. But for now we simply have price projections to watch for a possible high, especially since the subsequent move is likely to be at least a deeper retracement than we've seen all year.

Key Levels for SPX:
- bullish above 2454
- bearish below 2405


S&P 500, SPX, 60-min chart

It's looking like SPX could reach for its June 19th high near 2454 before potentially consolidating and then heading higher. For the rally from July 6th it's looking like we're in the 3rd wave, which would achieve 162% of the 1st wave (common) at 2452 and that gives us another reason to expect the rally to stall in the 2452-2454 area, if not right here.

A day of consolidation leads to a pullback to about 2440 we could then see another rally early next week to the 2464 projection shown on the 60-min chart. That's where the 5th wave of the rally from July 6th would equal the 1st wave. This is a little lower than the projections discussed on the weekly and daily charts so for now it's simply a level of interest if reached.

These are all of course speculative projections but they would fit the wave pattern and provide a pattern and prices to watch to see if it plays out as depicted. Once the leg up from July 6th completes, whether it's at 2454 or above 2500, it should be a good setup for the bears to take their turn at the feeding trough. The completion of a 5-wave move up from July 6th followed by an impulsive move back down would be the first clue that a top is in place. We could be close but not yet.


Dow Industrials, INDU, Daily chart

The Dow's rally from April 19th appears to be in its 5th wave, which has become choppy and looking more like an ending pattern than something more bullish. It's a fitting pattern for the final 5th wave and it's showing the expected bearish divergence for it. I show a projection to about 21830, which is based on trend lines (using log and arithmetic price scales) but I would not be surprised to see it struggle in a choppy rising wedge off the June 29th low and finish around 21630 by the end of next week. It stays bullish until it's not and it would no longer be bullish below 21169 (price-level support and below its 50-dma).

Key Levels for DOW:
- bullish above 21,830
- bearish below 21,169


Nasdaq Composite index, COMPQ, Daily chart

On June 27th the Nasdaq broke down below its uptrend line from November 2016 - April 2017, near 6200 at the time. At the same time it broke below its 20-dma and then proceeded to break support at its 50-dma a couple days later. Things were not looking good for the bulls. But they bounded back into the pasture to gorge themselves once again and quickly recaptured the 20- and 50-dmas with Wednesday's big gap up. The Naz is now approaching its broken uptrend line from November-April, currently near 6300 (log price scale), about 19 points above today's high.

The bulls would be in stronger shape with the recapture of the broken uptrend line but until that happens they'll have to be careful about a possible back-test followed by a bearish kiss goodbye. I show a rally up to the trend line along the highs from April 2016 March 2017, which will be near 6400 by the end of next week, to complete its 5th wave of the rally from February 2016. There is of course higher potential (some weekly price projections to 6550-6650) or the rally could complete at any time. But for now, I like the 6400 area for a possible top by the end of opex week.

Key Levels for COMPQ:
- bullish above 6342
- bearish below 6081


Russell-2000, RUT, Daily chart

For those of you who have ever gotten your car stuck in a rut, be it a muddy or snowy one, you can appreciate the fact that the RUT's name is appropriate. It has been stuck in a rut since last December and now it's been chopping sideways in a tighter range since June 9th. The good news for the bulls is that the consolidation since the June 9th high looks like a bullish continuation pattern. The pattern would look more complete with one more pullback to the bottom of the triangle, near 1400 before setting up the next rally.

I'm showing a projection to 1452 for a final high for the RUT by the end of the month. This is clearly speculation but it's based on the wave pattern and a typical price projection for the final wave in a rising wedge pattern. The trend line along the highs from 2007-2015 is currently near 1441 and therefore we have a 1441-1452 target zone to watch for. The RUT would turn much more bullish with a sustained move above 1453 but would turn more immediately bearish if it drops below the June 22nd low near 1397.

Key Levels for RUT:
- bullish above 1453
- bearish below 1396


Russell-2000, RUT, Weekly chart

It's important to keep the big picture in mind with the RUT since I think it's especially bearish, especially if the big megaphone pattern built over the past 3+ years is the correct interpretation. As can be seen on the RUT's weekly chart below, the consolidation off the December 2016 high has been followed by a choppy climb higher and that has it looking like an ending pattern to the upside, especially with the bearish divergence since December.

Notice also the importance of the uptrend line from February-November 2016, currently near 1400. When the RUT breaks down I suspect it will happen quickly. The bulls need to see a sustained break above 1460 and then drag the oscillators up with price in order to negate the bearish divergence. At least tighten your stops if long this index (such as IWM).


Volatility index, VIX, Weekly chart

As mentioned earlier, the VIX again closed below 10 today (9.90) and it's again nearing the bottom of its large descending wedge pattern that's it's built since August 2015. One of these days this descending wedge, with the corresponding bullish divergence, is going to mean something and when it breaks out of this we'll likely see a very fast move back above 30.

It's hard to say what the stock market will be doing at the same time the VIX is spiking to 30 but I think it's safe to say the bulls will be running around with their fur on fire. Maybe we'll first see a little throw-under below the bottom of the wedge, currently near 9.46, next week to complete the pattern. Bears will be cleared in hot if we get a throw-under and then a bounce back up inside the wedge.


10-year Yield, TNX, Daily chart

Since the June 14th high for bond prices (low for yields) we've seen a fairly strong selloff and the 10-year yield jumped from 2.1% to 2.35% (a +12% rise) by July 7th. In the process TNX rallied back above price-level S/R at 2.30-2.31 and has now pulled back to that support level for what appears to be a back-test of support.

The wave pattern for the rally off the June 14th low would look best as a 5-wave move and that means another push higher following the current back-test of support. A new high could be good for just a test of the May high at 2.423 or it could make it up to 2.50 and result in a back-test of the broken uptrend line from July-September 2016 next week. A selloff in the bond market could help give the stock market a boost into opex next week.

Following the completion of the leg up from June 14th, hopefully after another push higher, it could then be the completion of an a-b-c bounce pattern off the April 18th low. That would be a setup for the resumption of the decline in Treasury yields (depicted with the bold red arrow). I am still part of the minority that believes we'll see lower yields into next year but I'll change my mind if we get a decent pullback from the current rally that is then followed by another rally to new highs, especially if it gets above 2.50%.


Transportation Index, TRAN, Weekly chart

The TRAN has pressed to new highs this week with the Dow, keeping alive the Dow Theory buy signal. But the TRAN could be close to finishing its rally if it will only be able to make it up to 9823 (today's high was 9742), which is where the 5th wave of the rally from January 2016 would be 62% of the 1st wave.

There's higher potential to 10499, where the 5th wave would equal the 1st wave. That's also where the TRAN would hit the top of its rising wedge pattern (10499 crosses the top of the wedge in the first week of September) but I'd want to see the negation of the bearish divergence that's currently on the chart.


U.S. Dollar contract, DX, Daily chart

Not much has changed over the past week for the US$. It's been consolidating off its June 30th low and while it could make a minor new low I continue to believe we'll see a larger choppy bounce/consolidation over the next couple of months. The descending wedge from March suggests we could get a stronger bounce and possibly a quick return to the top of its down-channel from last December, currently near 98.65, but the larger wave count suggests more of a choppy sideways/up correction into August/September before heading lower.


Gold continuous contract, GC, Daily chart

Since gold's low on Monday its bounce looks more corrective than impulsive, which continues to point lower once the bounce correction has finished. The first sign of strength for gold bulls would be a rally above its broken MAs, the highest one being the 50-dma at 1247. A continuation lower following the current bounce could see gold drop to its uptrend line from December 2015 - December 2016, near price-level support at 1180.


Oil continuous contract, CL, Daily chart

Off Monday's low oil made it up to a downtrend line from May 25th through its July 5th bounce high as well as its broken 50-dma again, currently at 46.55 (today's high was 46.28). If it's able to break above its 50-dma it could then target its broken 200-dma, currently at 49.49. Two equal legs up from its July 5th low is at 48.92 so we'd have a target zone for the bounce, if that's all it will be, at 48.92-49.49. But a turn back down from resistance here would likely lead to a decline to price-level support at 39-40.


Economic reports

Friday morning we'll get some more inflation data with the CPI reports, which are expected to have ticked up slightly from May. The PPI numbers ticked down instead so we'll see if the CPI numbers are telling the same story. We'll also get the Retail Sales report, Industrial Production and Capacity Utilization, all of which are expected to show some improvement. The Michigan Sentiment report, at 10:00, is not expected to have changed much.


Conclusion

The choppy pullback between the June 19th high and July 6th low was a strong indication that we would get another rally leg and that's what's currently underway. The rally should continue into next week (opex) and potentially finish next week. The wave count for the rally from January/February 2016 is setting up for completion with the leg up from March. That leg is setting up for completion with the leg up from July 6th, which makes a possible high next week an important one.

With an expected new high for SPX next week we should see the VIX drop to new lows and in so doing it would likely drop below the bottom of its bullish descending wedge built over the past 2-1/2 to 3 years. That followed by a bounce back up inside the wedge would give us a buy signal for VIX and a sell signal for the stock market. Watch to see if we get that setup next week.

The bulls remain in control of the tape and as long as that remains true it means bears need to stay away until it's their turn. We have a coming setup for the bears but that's all it will be until we see some price evidence suggesting a turn back down in something other than just another pullback correction. There remains the possibility we'll see much higher prices in a melt-up phase (like the late-1990's) and while I don't see that happening I know never to say never with this market. Liquidity coming into this market is still supportive of a rally continuation.

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

Keene H. Little, CMT


New Plays

No Conviction

by Jim Brown

Click here to email Jim Brown
Editor's Note

The major indexes are creeping higher but there is no conviction. The major indexes traded in and out of negative territory multiple times on Thursday with low volume. Tomorrow is a summer Friday, which would normally have even lower volume except for the earnings from the big banks at the open. If they are good we could see another market gain. However, there is a risk of a sell the news event because expectations are high and shares have been rising. There is no reason to add positions on a weekend Friday, especially with the current lack of bullish conviction.



NEW BULLISH Plays

No New Bullish Plays


NEW BEARISH Plays

No New Bearish Plays



In Play Updates and Reviews

Russell Sneaking Higher

by Jim Brown

Click here to email Jim Brown

Editors Note:

The Russell 2000 index closed only 1 point below a new high. It was a minor gain of 1.3 points but still a gain. The entire market was choppy today with the major indexes trading in and out of negative territory on low volume. It was definitely not awe inspiring and the lack of conviction was clear.

The Russell was up on the strength in the financials ahead of the earnings from the big banks on Friday. There is a real potential for a sell the news event because expectations are high.





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


FRGI - Fiesta Restaurant Group
The short position was entered at the open.

SHLD - Sears Holdings
The short position was stopped at $7.95.



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

ACOR - Acordia Therapeutics - Company Profile

Comments:

No specific news. Excellent rebound to recover its two days of losses.

Original Trade Description: June 21st.

Acorda Therapeutics, Inc., a biopharmaceutical company, identifies, develops, and commercializes therapies for neurological disorders in the United States. The company markets Ampyra (dalfampridine), an oral drug to improve walking in patients with multiple sclerosis (MS); Zanaflex capsules and tablets for the management of spasticity; and Qutenza, a dermal patch for the management of neuropathic pain associated with post-herpetic neuralgia. It also markets Ampyra as Fampyra in Europe, Asia, and the Americas. In addition, the company develops CVT-301 that has completed a Phase III clinical trial for the treatment of OFF periods in Parkinson's disease; CVT-427, which has completed a Phase I clinical trial to treat migraine; Tozadenant that is in Phase III clinical trial for reduction of OFF time in Parkinson's disease; SYN120, which is in Phase II clinical trial to treat Parkinson's disease-related dementia; and BTT1023 (timolumab) that is in Phase II clinical trial for primary sclerosing cholangitis. Further, it develops rHIgM22, which is in Phase I clinical trial for the treatment of MS; Cimaglermin alfa that has completed a Phase I clinical trial in heart failure patients; and Chondroitinase Program that is in research stage for the treatment of spinal cord injury. The company has collaborations and license agreements with Biogen International GmbH; Alkermes plc; Rush-Presbyterian St. Luke's Medical Center; Alkermes, Inc.; SK Biopharmaceuticals Co., Ltd.; Astellas Pharma Europe Ltd.; Canadian Spinal Research Organization; Cambridge Enterprise Limited and King's College London; Mayo Foundation for Education and Research; Paion AG; Medarex, Inc.; and Brigham and Women's Hospital, Inc. Company description from FinViz.com.

Acordia took a fall at the end of March when two Multiple Sclerosis patents were invalidated by a court. This is normal stuff and happens all the time to biotech companies when competitors want to introduce a generic. Shares crashed but the outlook for Acordia did not.

They fell another 5% in late April when revenue of $112 million missed estimates for $121 million. The company did reaffirm guidance for ful lyear Ampyra sales in the range of $525-$545 million.

Recently, their experimental Parkinsons drug CVT-301 was named Inbrija. In early June they presented Phase III data which met its primary endpoint of improvement in motor function compared to a placebo. Multiple secondary endpoints were also met. The company plans to file a new drug application with the FDA by the end of this quarter.

Expected earnings July 27th.

Shares have been rebounding sharply and cleared resistance from the April/May decline. They have a long way to go to recover their highs and that is a potential for profit.

Position 6/22/17:

Long ACOR shares @ $18.80, see portfolio graphic for stop loss.



KTOS - Kratos Defense - Company Profile

Comments:

Kratos annlunced the acceptance of an advanced space radio monitoring system by the Sultanate of Oman. The project began in 2014 and includes 10 years of long-term support services. Shares closed at a new high.

Original Trade Description: May 24th.

Kratos Defense & Security Solutions, Inc. provides mission critical products, solutions, and services in the United States. The company operates through three segments: Kratos Government Solutions, Unmanned Systems, and Public Safety & Security. The Kratos Government Solutions segment offers microwave electronic products; satellite communications; technical and training solutions; modular systems; and defense and rocket support services. The Unmanned Systems segment provides unmanned aerial, ground, and seaborne, as well as command, control, and communications systems. The Public Safety & Security segment designs, engineers, deploys, operates, integrates, maintains, and operates security and surveillance solutions for homeland security, public safety, critical infrastructure, government, and commercial customers. The company serves national security related agencies, the department of defense, intelligence agencies, and classified agencies, as well as international government agencies and domestic and international commercial customers; and critical infrastructure, power generation, power transport, nuclear energy, financial, IT, healthcare, education, transportation, and petro-chemical industries, as well as government and military customers. Kratos Defense & Security Solutions, Inc. was founded in 1994 and is headquartered in San Diego, California. Company description from FinViz.com.

Kratos builds drones for target practice for the U.S. military. They are also building drones for combat for air to air and air to land. They also provide communication systems for missiles, satellites and various other platforms.

China and Russia are rapidly militarizing space and Kratos is working with the U.S. military to improve satellite communication to defend against attacks. The DoD is currently spending a lot of money to prepare for war in space. Kratos owns and operates a global satellite demonitoring business with revenues rising 61% in Q1.

Kratos expects to build $30 to $40 million in unmanned target drones for the Navy in the 2017 budget. That is per batch of BQM-177 drones and there is the potential for multiple batches.

Kratos has so many new programs in operation it would be impossible to list them here and several of them are secret programs for unnamed clients.

Kratos guided for a return to profitability in Q2 and sharply rising revenue for the full year. Shares spiked 30% in the four weeks after Q1 earnings. Their next report is August 3rd. I am recommending we buy an option and hold over the report. If the earnings are as positive as they teased in the Q1 report we could see another sharp reaction. This company is in all the right places for the increase in defense depart spending.

I am not recommending a stock position given the sharp gains already.

Update 6/13/17: Kratos said it was going to unveil its newest high performance class of military unmanned aerial system technology at the Paris Air Show next week. The XQ-222 Valkyrie and UTAP-22 Mako drones provide fighter like performance and are designed to function as wingmen to manned aircraft in contested airspace. The Valkyrie can carry various weapons and intelligence systems and has a range of 3,000 miles. The Mako is designed to carry sensors and stealthily infiltrate hostile airspace to gather intelligence. Both are designed to operate with or without manned flights. The Air Force recently pitched the functions of the Valkyrie saying a F-35 with a group of fighter/bomber drones could maximize control of airspace and ground attack operations. The F-35 can select targets and pass information to specific drones while maintaining situational awareness from a stealthy and relatively safe position.

Update 6/27/17: KTOS received $16 million in radar and system contract awards from a national security systems provider. Due to the classified nature of the program, on additional information was given.

Update 6/28/17: KTOS announced the award of a $37 million initial production contract for subsonic target drones from the U.S. Navy. This is the initial annual order in a long term acquisition program so this represents a major win for KTOS. The company said the anticipated annual order for 2018 was expected to be 25% larger. The aircraft can carry electronic counter measures, active and passive radar augmentation, infrared, identification friend of foe, internal chaff and flare dispensing, threat emitter simulators, smoke and scoring devices. In addition, separate contracts for Peculiar Support Equipment, Initial Systems Spares, External Payload Systems and Flight Consumables will follow shortly.

Update 7/11/17: Kratos was awarded a contract from the U.S. Government to help define the next generation ground architecture for wideband communications for the Dept of Defense. The project is to come up with solutions to maintain satellite contact in a wartime environment. No dollar amount was given.

Position 5/30/17:

Long August $12.50 call @ 59 cents, see portfolio graphic for stop loss.




BEARISH Play Updates

CARA - Cara Therapeutics - Company Profile

Comments:

No specific news but a decent rebound. This is two days of gains. I am lowering the stop loss again after their drug news on Wednesday.

Original Trade Description: July 8th.

Cara Therapeutics, Inc., a clinical-stage biopharmaceutical company, focuses on developing and commercializing chemical entities designed to alleviate pain and pruritus by selectively targeting kappa opioid receptors in the United States. It is developing product candidates that target the body's peripheral nervous system. The company's lead product candidate comprises I.V. CR845, which is in Phase III clinical trials for the treatment of patients with acute postoperative pain in adult patients, as well as in Phase II/III clinical trial for the treatment of uremic pruritus disease. It is also developing Oral CR845 that is in Phase IIb clinical trial to treat moderate-to-severe acute and chronic pain, as well as in Phase I clinical trial to treat uremic pruritus; and CR701, which is in preclinical trial for the treatment of neuropathic and inflammatory pain. The company has license agreements with Maruishi Pharmaceutical Co., Ltd to develop, manufacture, and commercialize drug products containing CR845 for acute pain and uremic pruritus in Japan; and Chong Kun Dang Pharmaceutical Corporation to develop, manufacture, and commercialize drug products containing CR845 in South Korea. Company description from FinViz.com.

Cara had two drugs in the pipeline. CR701 is a cannabis derivative for pain management that is not an opiod. It would seem to be a promising drug but the company is not pushing it towards acceptance.

Their hot new drug CR845 is a kappa-opioid receptor that is being studied for severe itching caused by chronic kidney disease and for various types of pain.

Last week they reported results for a phase 2b study on CR845 that were not statistically significant. The three levels of medication included 1.0 mg, 2.5 mg and 5.0 mg. The 1.0 and 2.5 failed to show any results. The 5.0 mg showed only a minute improvement in pain that could have been related to the placebo effect or simply random chance. The trial was a failure.

CARA had run up significantly on the hopes for the drug. Shares imploded over five days to give back half their value. I would not normally recommend a position with such a large decline but the six day rally before the results was roughly $9 so an $11 drop just erased that last bit of irrational exuberance. With CR845 in limbo until new trials and new uses can be developed and CR701 apparently on hold for some unknown reason, the company suddenly has no appeal for investors. If light support at $13.40 fails we could see $8.50 very quickly. Investors are suddenly fleeing this sinking ship.

Update 7/12/17: Cara spiked at the open on positive results on an early-stage trial of a treatment for chronic kidney disease-associated pruritus or CKD-aP. The company is expecting to begin a later stage test before the end of the year.

Expected earnings August 3rd.

Position 7/10/17:

Short CARA shares @ $13.50, see portfolio graphic for stop loss.
Alternate position: Long Aug $12.50 put @ 1.05, see portfolio graphic for stop loss.



FRGI - Fiesta Restaurant Group - Company Profile

Comments:

No specific news. Shares closed at a new 4-year low.

Original Trade Description: July 12th.

Fiesta Restaurant Group, Inc., through its subsidiaries, owns, operates, and franchises fast-casual restaurants. It operates its fast-casual restaurants under the Pollo Tropical and Taco Cabana brand names. The company's Pollo Tropical restaurants offer various Caribbean inspired food, and Taco Cabana restaurants offer a selection of Mexican food. As of January 1, 2017, it had 177 company-owned Pollo Tropical restaurants, 166 company-owned Taco Cabana restaurants, and 29 franchised Pollo Tropical restaurants in the United States, Puerto Rico, Panama, Trinidad & Tobago, Guatemala, the Bahamas, Venezuela, and Guyana, as well as 5 franchised Taco Cabana restaurants located in New Mexico, 2 non-traditional Taco Cabana licensed locations on college campuses in Texas, and 1 location in a hospital in Florida. Company description from FinViz.com.

Expected earnings August 7th.

On May 8th, Fiesta reported earnings of 25 cents compared to estimates for 30 cents. Revenue of $175.6 million missed estimates for $178.2 million. Same store sales declined -6.7% at Pollo Tropical and transactions declined -8.9%. Sales at Taco Cabana decreased 4.5% and sales transactions fell -4.0%. The company closed 30 stores that were losing money.

The company is under attack by JCP Investment Management, which has a 3% stake. JCP had lobied for changes to be voted at the June shareholder meeting. The company and JCP have been trading hostile press releases. The shareholder meeting went in favor of Fiesta but JCP is not giving up. Shares began to decline further when JCP did not gain control of the board.

Shares closed at a 4-year low on Wednesday at $18.80 and the IPO price in 2012 was $11. Shares had traded as high as $69. With the chain closing stores at a rapid pace, their long term future is in doubt.

Position 7/13/17:

Short FRGI shares @ $18.75, see portfolio graphic for stop loss.
Alternate position: Long September $17.50 put @ $1.05, see portfolio graphic for stop loss.



FTR - Frontier Communications - Company Profile

Comments:

No specific news. Shares rebounded 50 cents on no news.

Original Trade Description: July 10th.

Frontier Communications Corporation provides communications services to residential, business, and wholesale customers in the United States. It offers broadband, video, voice, and other services and products through a combination of fiber and copper based networks to residential customers. The company also provides broadband, Ethernet, traditional circuit-based, data and optical transport, and voice services, as well as Multiprotocol Label Switching and Time Division Multiplexing services to small business, medium business, and larger enterprises, as well as sells customer premise equipment. In addition, it offers 24/7 technical support; wireless broadband services in selected markets; and frontier secure suite of products, including computer security, cloud backup and sharing, identity protection, and equipment insurance. Further, the company provides satellite TV video services; voice services, including data-based VoIP, and long distance and voice messaging services; and a package of communications services. Additionally, it offers a range of access services that allow other carriers to use facilities to originate and terminate their local and long distance voice traffic. As of December 31, 2016, it served approximately 5.4 million customers and 4.3 million broadband subscribers in 29 states. The company was formerly known as Citizens Communications Company and changed its name to Frontier Communications Corporation in July 2008. Frontier Communications Corporation was founded in 1927. Company description from FinViz.com.

Earnings August 1st.

When a company's stock enters the terminal decline mode and reaches penny stock status, many will do a reverse split to avoid being delisted. The hope is that lifting the stock from $1 to $15 will entice funds to come back to your shares. Many funds are prohibited from holding stocks under $5 so they would have left the stock when that $5 level was broken. The problem with this strategy is that the stock is normally in a terminal decline and just bumping up the stock price does nothing to change the fundamentals.

Also, when a declining stock suddenly jumps back to $15 as is the case with Frontier, that encourages the shorting community to double down at the higher prices. Shorts that rode it down the first time, see the news and jump back in for another ride. FTR shares closed at $1.06 on Friday.

You cannot use options this soon after a reverse split. The premiums are crazy. After several days they will mellow and I will look at adding them to the recommendation.

Position 7/11/17:

Short FTR shares @ $14.68, see portfolio graphic for stop loss.



SHLD - Sears Holdings - Company Profile

Comments:

No specific news. Target's guidance upgrade lifted the entire retail sector and Sears spikes 7% on short covering. We were stopped out for a minor gain.

Original Trade Description: July 5th.

Sears Holdings Corporation operates as an integrated 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, Craftsman, and Joe Boxer labels; Sears brand products, such as Kenmore and DieHard; and Kenmore-branded products. As of January 28, 2017, this segment operated approximately 735 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 merchandise, and parts and services to commercial customers; parts and repair services for appliances, lawn and garden equipment, consumer electronics, floor care products, and heating and cooling systems; home improvement services, such as siding, windows, cabinet refacing, kitchen remodeling, roofing, carpet and upholstery cleaning, air duct cleaning, and garage door installation and repair; and protection agreements and product installation services. This segment provides merchandise under the Kenmore, DieHard, Bongo, Covington, Canyon River Blues, Simply Styled, Everlast, Metaphor, Roebuck & Co., Outdoor Life, and Structure brands, as well as under the Roadhandler, Levi's, Craftsman, and WallyHome brands. As of January 28, 2017, this segment operated 670 full-line stores and 25 specialty stores. Company description from FinViz.com.

Hardly a week goes by that some aspiring writer/researcher does not post a scathing article on the retail prospects of Sears and/or Kmart after a surprise visit to an actual location. The outlook for Sears to survive as a retailer is very dim. Sears Canada just filed bankruptcy and that should be a clue for the outlook in the U.S. as well. With a cash burn rate of as much as $2 billion a year, it is only a matter of time.

Expected earnings August 24th.

In the last week of June, the stock rose as board member Bruce Berkowitz began trying to pump up the shares by proclaiming Sears was worth $90 to $100 a share just because of their real estate. They do have a lot of real estate but they are mall anchors and the malls are dying. They have already spun off a large portion of their holdings to Seritage Growth Properties (SRG). Those were the locations without debt. They have recently done some sale leaseback transactions to raise cash but now they have to pay lease rentals and that increases their cash burn.

Most analysts do not believe the Berkowitz story and assume he is trying to rescue a drowning stock price, which is one of his largest holdings.

Shares rebounded from $6.20 to $9.20 on the Berkowitz claims. Short sellers ran for cover. Now that the stock has returned to resistance, the rebound should be over and reality will return.

I am writing this as a stock short. The options are expensive. The August $8 put is $1.30. I am not recommending it.

Update 7/7/17: CEO Eddie Lampert announced on Friday they were closing 43 additional stores. That would be 8 Sears stores and 35 Kmart stores. He said Sears is still working to cut costs while trying to respond to the needs of a changing consumer. He also warned of reduced support from some vendors. That would mean they are not giving Sears credit terms on purchases.

Well after the close on Friday, the company announced a new "Line of Credit Facility" for $500 million with a maturity of not more than 179 days. The facility will be secured by a second lien on inventory, receivables and related assets. The announcement of the loan facility said Lampert's ESL Investments was considering participating in the loan but was under no obligation to do so. This is known as a tease to incentivize lenders.

The company also said it sold and closed on more than $200 million in real estate transactions and reduced the balance of the April 2016 $500 million real estate loan to $347 million. The announcements were made at 5:30 after the extended hours session ended so there was no stock movement.

Position 7/6/17:

Closed 7/13/17: Short SHLD shares @ $8.60, exit $7.95, +.65 gain.



VXX - Volatility Index Futures - ETF Description

Comments:

New closing low despite the lackluster market gains.

We are nearing the point where the ETF will do a 1:4 reverse split. That will be an excellent opportunity for us to get short again at a higher level.

Barron's is reporting current short interest at 59 million shares out of 66 million outstanding.

Original Trade Description: April 12th.

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 done 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.

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 market 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 know from experience that the VXX always declines. The last time we shorted this ETF we had a $7.23 gain.

Position 4/13/17:

Short the VXX @ $17.98, no stop loss because it always declines eventually.





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