Option Investor

Daily Newsletter, Saturday, 1/16/2016

Table of Contents

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

Market Wrap

Major Support

by Jim Brown

Click here to email Jim Brown

The major indexes declined to major support levels from the August/September decline and held at those levels into the close ahead of the three-day weekend. Assuming China does not implode over the weekend this could be a potential rebound point.

Market Statistics

Friday Statistics

The market had multiple major headwinds on Friday. First, the Asian and European markets closed down again with the Shanghai Composite losing -3.5% for the day and -8.96% for the week for a -22.6% decline from the December high of 3,684 to put it back into a bear market. The SSEC is now -44% off its June 2015 high at 5,166. The chart suggests the decline will continue.

The European markets were down more than -2% and that was also a negative for the U.S. open.

Also weighing on the U.S. markets was falling oil prices. WTI collapsed and lost more than 10% for the week to close at $29.44 and the lowest close since November 2003. The market typically trades in tandem with oil prices but twice in the last year, the S&P resisted the downward pull for several weeks but eventually caught up when the decline in crude prices accelerated.

Last week I elaborated on why crude prices were going to continue lower and I will not go through it again but I do expect to see $25 tested, if not lower. That should have a negative impact on the S&P. However, when crude prices begin to firm in April/May it will have a huge impact to the upside on the S&P.

Adding to the downdraft was an implosion in the financial stocks. JPM, Citi and Wells Fargo all beat earnings but their shares crashed. Morgan Stanley (MS) lost -4.3%, Citi -6.4%, Wells Fargo -3.6% and JP Morgan -2% to name a few. The financial ETF (XLF) declined -2.2%. The financial sector now has twice the weighting in the S&P than the energy sector.

Financials were falling on weak economic reports and the potential for the next rate hike to be postponed to July or later. According to the CME futures the chance of a March rate hike have fallen from 50% to 35% with June the first month with a better than 50% chance at 54%. The chances of a hike had been pushed out to July or later until NY Fed President, William Dudley said in a speech that he still sees rates on a steady trajectory higher. This was contrary to St Louis Fed President James Bullard on Thursday when he said the fall in oil prices were messing up the inflation expectations and could delay the rate hike decision process.

Hampering the Fed's decision process was the unexpected decline in retail sales for December. Sales fell -0.1% with holiday buying of apparel, electronics and general merchandise showing declines. Restaurants showed a gain thanks to the falling gasoline prices. Building material stores and furniture also posted minor gains.

Retail sales have risen only once in the last five months despite the very low gasoline prices. Consumers are keeping the money in their pocket or using it to pay down debt. There has only been one instance of two consecutive months of decent gains since late 2014.

The NY Empire State Manufacturing Survey for January fell from -4.6 to -19.4 and the biggest decline since 2009. The internal components were terrible. New orders fell from -6.2 to -23.5 while backorders improved only slightly from -16.2 to -11.0. Employment also improved slightly from -16.2 to -13. The gap between new orders and production fell from +5.9 to -17.5. There is no way to interpret this chart in a bullish manner.

Industrial Production for December declined -0.4% compared to -0.6% in November. Analysts were expecting only a -0.1% decline. Capacity utilization fell from 76.9 to 76.5% and the lowest level in more than a year.

Business inventories for November declined -0.2% after zero gain in October. Total business sales declined -0.2%, wholesalers fell -0.3% and manufacturers dropped -0.2%.

The Producer Price Index (PPI) for December declined -0.2% after a +0.3% gain in November. Analysts had expected a -0.1% decline. Goods prices fell -0.7% with core unprocessed goods falling -6.5%. On a year over year basis prices are down -1.1% with goods prices down -3.9%. That is the biggest decline in more than five years.

Consumer Sentiment for January rose slightly from 92.6 to 93.3. This is probably due to the falling fuel prices and the left over holiday cheer. Apparently, the people interviewed for the sentiment survey were not investors in the equity market.

The present conditions component declined from 108.1 to 105.1 and the expectations component rose from 82.7 to 85.7.

The surplus of negative economic numbers caused the Atlanta Fed to lower their real time GDPNow forecast from 0.8% to 0.6% GDP growth in Q4. That forecast is moving ever closer to zero or even negative growth for the quarter. There are only two more updates before the government releases its first estimate of the Q4-GDP on Jan 29th. You can see in the table below how the forecast has declined as each economic report showed progressively more negative numbers.

The yield on the ten-year treasury fell under 2% at the open on Friday but recovered slightly by the close. The buying in treasuries is definitely not projecting another rate hike in the near future. This is a flight to quality because of the falling economics and weakness in the Asian markets.

The economic calendar for next week is weighted to the housing sector with three major reports. Unless there is a major miss of expectations, I do not expect them to move the market. The Philly Fed Manufacturing Survey on Wednesday is the most important report for the week. The report has been in contraction for four consecutive months with December the worst reading at -10.2. To expect the report to suddenly show expansion at +2.0 is delusional.

The big news for the week may be the grouping of Chinese economics on Monday evening. This is like winning the Chinese lottery to have all of these reports on a day when our markets are closed. This is a major reason for the sharp selloff in equities on Friday. Nobody wanted to be long over a three-day weekend when Chinese data is likely to be negative and the possibility of their markets going into free fall.

There were no new splits announced last week.

For the full split calendar click here.

Sarepta Therapeutics (SRPT) saw its stock cut in half by the FDA without the benefit of a stock split. The FDA regulators posted a negative review of the company's experimental muscular dystrophy treatment ahead of a high profile meeting next week. Sarepta has been seeking approval of the drug eteplirsen to treat the debilitating disease. The agency posted a negative review ahead of next week's meeting suggesting the approval is not going to be forthcoming. Shares fell from $31.63 to $14.25 a -55% decline.

Chipotle Mexican Grill (CMG) rose +12% for the week after the company's presentation at the ICR Conference in Orlando. Analysts met with the company and received the details on how they are planning to avoid future occurrences of food borne illnesses and win back customers. The FDA is expected to pronounce the company free of E.coli soon since there have not been any new outbreaks since late November. The company said it was going to close all 1,900 stores on February 8th for a companywide training session via satellite. CEO and founder Steve Ells will "thank and encourage" employees and discuss upcoming changes to the food processing methods. Shares hit $402 on Tuesday and closed at $475 on Friday. That is a lot of fire in those burritos.

Electronic Arts (EA) was upgraded by Bank of America to buy from neutral. The analyst said EA was attractive again after a 15% pullback. They reiterated their $81 price target and the stock closed at $66. The bank sees strong potential in the video game lineup for 2016. The NPD group said Call of Duty: Black Ops 3 was the top-selling video game at U.S. retailers in December. Unit sales have surpassed 20.5 million in 2015 and more than the 18 million in the prior version "CoD: Advanced Warfare." December sales also saw the EA hit "Star Wars Battlefront" and "Fallout 4" was in third place.

Wynn Resorts (WYNN) shares spiked +13% on a bad tape after Wynn reported preliminary results for Q4 that beat analyst estimates. Adjusted earnings will be $156-$164 million for Macau and in line with estimates. However, earnings from Las Vegas will be in the range of $123-$131 million and analysts were expecting $111 million.

Disney (DIS) was downgraded to underperform or the equivalent of a sell rating by Barclays. The analyst said Netflix is becoming increasingly competitive and Disney will be fighting the cord cutting at ESPN for another quarter until we get closer to the Olympics. Analysts have really been raining on the Disney parade for the last quarter and shares are nearly $30 off the November high of $120. There is strong support at $90 and I would expect the decline to end there. The company has too much happening in 2016 to ignore it. Earnings are Feb 9th.

After six years of construction, Shanghai Disney will open in June. It will be the second largest Disney park and have six themed lands. The park will cover nearly 1,000 acres or 3 times the size of the Hong Kong Disneyland Park and cost $5.5 billion. They are expecting millions of visitors. More than 330 million people live within 3 hours of the park. That is equal to the population of the entre USA. Annual visitations are expected to be 60-75 million people. Disney World in the USA has 45 million visitors annually.

Walmart (WMT) announced it was closing 269 stores (3%) with 154 of those in the USA. More than 10,000 U.S. workers will be eliminated. In 2011, they started the Walmart Express concept of smaller stores and they never caught on. One of the big draws for Walmart is the "everything under one roof" concept and consumers were disappointed with the small store concept. They are closing all 102 of the Express stores and 23 neighborhood markets. They will also close 12 supercenters, 6 discount stores, 4 Sam's Clubs and 7 stores in Puerto Rico. They are also closing 60 stores in Brazil because of economic conditions in that country. This is a good move for Walmart and shares would have been higher except for the negative market.

They are closing the Walmart closest to me. They will close forever at 7:PM on Sunday. I asked the manager on Saturday when she was notified and she said Friday morning. That is some seriously fast movement to come in on Friday morning and find out the store is closing in two days. They discounted all the perishable items by up to 50% but everything else is going back to the warehouse.

Intel reported earnings on Thursday after the bell and the stock was crushed on Friday. Intel reported earnings of 74 cents compared to estimates for 63 cents. Revenue of $14.91 billion posted a minor beat. Operating income was $4.3 billion. That would appear to be a good report. However, analysts and investors found multiple reasons to complain. Revenue only rose +1%. Earnings declined -$200 million from the year ago quarter. The datacenter segment had revenue of $4.3 billion that missed estimates for 4.4 billion. The PC division saw revenue of $8.8 billion that beat estimates but grew only 1%. Gross margins declined -1.1%.

Intel posted great earnings and the CEO was very positive but investors wanted more growth not just more earnings. Shares declined -9% on the news.

Citigroup (C) reported adjusted earnings of $1.06 compared to estimates for $1.05. Lower legal and regulatory costs helped fuel the earnings. They earned $3.34 billion for the quarter compared to $344 million in the year ago quarter when they suffered $3.6 billion in legal costs. Citi was also able to sell $32 billion in assets from Citi Holdings. That is the "bad bank" entity that was formed to hold all the toxic assets from the financial crisis. Total revenues were $18.46 billion, up from $17.9 billion. Expenses declined -23% but most of that was a reduction in legal costs.

Citi had to set aside $250 million to cover potential losses from its energy portfolio. If oil declined to $25, they will have to more than double the reserve to $600 million for the first half of 2016. Citi has more than $58 billion in energy loans. Shares declined because of the energy exposure.

US Bank (USB) reported earnings of 79 cents that were in line with analyst estimates. Revenue of $5.16 billion exceeded estimates for $5.11 billion. Provisions for loan losses rose +5.9% to $305 million due to concerns over energy defaults. Total allowance for doubtful loans was $4.3 billion. Nonperforming loans declined -16.7% to $1.5 billion. Total loans increased 4.2% to $256.7 billion. Deposits rose +6.9% to $294.5 billion. The earnings were solid but unexciting.

Wells Fargo (WFC) reported earnings of $1.03 compared to estimates for $1.02. Revenue was $21.59 billion and slightly less than the $21.7 billion estimate. Wells earned $5.71 billion for the quarter. The bank reported losses of $118 million on loans to energy companies and has $114 million in existing commercial loans that are more than 90 days past due. That compares to $47 million in the year ago quarter. Mortgage originations slowed to $47 billion but that was mostly a seasonal slowdown. Total loans rose +7% to $912.3 billion. Total deposits rose +6% to $1.2 trillion. The CEO said there was no recession in sight, yet.

Earnings will increase next week with the calendar starting to fill up. However, the number of high profile companies is still small. Netflix, Starbucks, Goldman Sachs, IBM and GE will be the most watched next week. The Nasdaq is not going to get much help from the hand full of tech companies reporting. The Dow will have the most to gain or lose with UNH, GS, AXP, TRV, VZ, IBM and GE reporting.

The two stocks I will be watching the most will be Netflix and Starbucks.

Crude oil declined to $29.13 intraday on expectations for the Iranian sanctions to be lifted any day now. The IAEA was expected to issue its report this weekend on Iran's compliance with the rules of the agreement. That happened on Saturday and sanctions are being removed. Iran's exports were on pace to hit a nine-month high in January at 1.10 mbpd even before the sanctions are lifted. They have 30.0 million barrels in tankers anchored in the Persian Gulf and they claim they are going to increases production by 500,000 bpd immediately and by another 500,000 bpd by the end of March and 500,000 bpd more by the end of 2016. This tsunami of oil flowing into a market that is already dealing with a 1.2 mbpd surplus is going to push prices lower.

Brent prices fell to $28.82 intraday on the worries over Iran's oil. The Brent contract represents "water borne" crude in Europe and that is where Iran's volumes will be going in addition to India and China. That is the lowest price since February 2004.

Most analysts believe we will see $25 per barrel for WTI in the days ahead. However, the pendulum always over swings on both the upside and downside so there is no way we can accurately predict the bottom. We could see prices under $25 but only briefly. At least that is my opinion.

Active rigs declined -14 last week but only one of those was an oil rig. The rest were gas rigs. U.S. production rose to a new four-month high at 9.227 mbpd despite the rapid decline in active rigs. The lack of a decline in the U.S. is going to pressure prices even more.

As long as oil prices continue to decline, the equity market is likely to follow.

The Baltic Dry Shipping Index ($BDI) sank to another record low at 373. For the period January 8-9th there were ZERO ships moving between the U.S. and Europe. All ships in the Atlantic were parked in harbors or moored offshore. I cannot remember when that has happened before.

The Commodity Index ($CRB) hit another 44 year low on Friday. This only happens in periods of global recession.

The Bureau of Transportation Statistics said "Freight volumes in the U.S. have fallen year on year for the first time since 2012 and before that the recession of 2009." Also, "The total volume of freight moved by road, rail, pipeline, inland waterways and air cargo in November was 1.1% lower than the corresponding month a year earlier." Commodity prices are so low that farmers have delayed shipping some grains, especially corn and soybeans, in hopes the prices will rise.

The Dow Delivery Index and Dow Railroad Index are at two-year lows and dropping fast. If you want to know what the economy looks like when it is heading into a recession this is it.


There is very little I can say positive about the markets last week. Multiple support levels were broken and the average index decline was about -2.5%. That puts the Dow down about -8.25% for the year and -9.9% from the high at 17,750 on December 29th. That is a 10% correction in only 13 trading days.

The S&P collapsed back to the August lows at 1,867 and then dipped another ten points to 1,857 before rebounding on Friday afternoon. In theory, 1,867 should have been a good retest point that triggers a rebound. There was no material rebound.

However, with a flood of Chinese economic data coming out on Monday and the U.S. markets closed there were very few traders that wanted to be long ahead of that event. Discretion is the better part of valor. Translated that means it is good to be brave but it is also good to be careful. Investors were careful on Friday and exited positions rather than risk being caught in a market meltdown on Tuesday.

It was also option expiration Friday. Volume was huge at 10.8 billion shares and 9:1 declining volume over advancing volume. Declining stocks were 6:1 over advancers. The most telling statistic was the 2,127 new 52-week lows. That is the most I can remember since the financial crisis.

Note in the graphic below the steady increase in the number of new 52-week lows and the number of declining stocks. The market is getting worse, not better, but we should be getting close to an oversold capitulation day.

The percentage of S&P stocks still above their short-term 50-day average has fallen to 11.4%. Only 21.4% are still above their long-term 200-day average. We are clearly extremely oversold although not yet at the same levels we saw in August.

The worry over the energy sector and the potential for up to 30% of the producers and service companies to file bankruptcy has caused the High Yield market to continue its decline. The chart below shows the correlation between the HYG bond fund in red and the S&P in black. Note that the high yield ETF ALWAYS leads the SPX and it is currently leading it down. Add to that the correlation between oil prices and the SPX and they are also leading it down. It is tough to argue market direction when there are major factors leading the S&P lower.

The S&P "should" attempt to hold the support at 1,867 but it will likely lose the battle because of all the factors I listed above.

Since 1995 if you had exited/shorted the markets whenever the 10-month moving average crossed under the 21-month on the S&P and gone long the markets when the average crossed back over the 21-month line you would have profited from nearly all of the big moves both up and down. This is a VERY long-term indicator and it has not failed in more than 20 years.

The 10-month average is now 2,033 and the 21-month is 2,020. They are right on the verge of a bearish cross. These are monthly averages so it may take another month for them to actually cross even though the S&P is already down to 1,880. That is the beauty of this indicator. It smoothes out all the week-to-week volatility. The big money funds and investors do follow these long-term strategies. This appears to be warning of a long-term decline ahead if those averages cross. However, NO indicator or strategy is foolproof.

The Dow broke below support at 16,000 and slowed when it reached the October 2014 support low at 15,855. However, unless those Dow components reporting next week all have blowout earnings there is a good chance we will retest the August low at 15,370. There is also the January 2014 support low at 15,350. If we return to that level, we will have erased two years of gains.

The July 2015 closing high was 18,312. A dip to 15,350 would be a -16.2% decline. The financial stocks are crashing with Goldman at a two-year low, Citi at a three-year low and Wells Fargo on the verge of a two-year low. Exxon is only about $7 above a five-year low with Chevron only $10 above a similar level. If oil prices continue to decline as expected to $25 or even lower, those stocks are going to make those new lows and drag the Dow lower.

For most of last year, we continually warned that the market was being supported by the ten largest tech stocks and once those stocks failed the market would quickly correct. Those stocks have failed.

The chart of the Nasdaq advance/decline line for the last three years supports the fact that breadth was very slim. For most of 2015, the A/D line declined rather than rose as fewer stocks took part in the rise to the July market top. The A/D line is approaching the lows seen in October 2012. On the positive side, that was the low point just ahead of a strong 15-month rally in the tech sector. We can expect the Nasdaq to continue declining until the A/D line reverses to the upside.

Friday was a bad day for the Nasdaq with a -126 point, -2.74% loss. All the prior momentum favorites are still in the losing column as funds continue to take profits in very high volume. Eventually they are going to run out of stock but the market can still move lower while we wait. Many of the tech stocks have reached what most analysts call bargain levels but nobody is bargain shopping just yet. Netflix at $102, Facebook at $93, Starbucks at $57, Amazon $565, Priceline under $1,100, etc.

The Nasdaq dipped under the September low of 4,487 and nearly reached 4,400. This is still well above the August flash crash low of 4,292. The index has erased all the gains from 2015 and is now down -10.4% for the year. Any further declines would probably target the 4,300 level.

Resistance is well above at 4,700 where it failed three times in the last six days.

The Nasdaq 100 ($NDX) came to a dead stop right on support at 4,085 from Jan 2015. That would be the perfect rebound point in a perfect world. A breakdown there could test the August flash crash low at 3,787.

The Russell 2000 small caps are down -11.28% for the year but -22% from their June highs at 1,295. The drop has been dramatic and the index dipped under 1,000 intraday on Friday.

The small cap A/D line is crashing and the normal strength in December/January was nonexistent.

The Russell is our fund manager sentiment indicator and clearly, sentiment is ugly. I am not expecting the Russell to rebound as long as there is any weakness in China. The low volume small caps are dangerous for funds because they cannot exit positions in a hurry without taking large losses.

Real support on the Russell is well below at 800. Let's hope the 1,000 level tries to hold.

The NYSE Composite is still in free fall because of all the financials and energy stocks listed on the NYSE. The index has declined -17.3% from the May closing high of 11,239.

To recap, falling oil prices, the potential for bankruptcies of up to 30% of the energy sector causing higher loan loss reserves at banks, the declining high yield sector, weakness in China, a projected decline of 5.5% in S&P earnings and weakening economics in the U.S. are all contributing to the market decline.

As an offshoot of those items above, there are numerous rumors of massive liquidation by sovereign wealth funds. With oil revenues down -70% from two years ago and those revenues responsible for the budgets of most oil producing countries, those countries are being forced to liquidate their sovereign wealth funds to pay the bills and fund the governments. Saudi Arabia has enough excess production capacity and more than $500 billion in currency reserves and they are still in serious trouble. They are losing more than $600 million a day in oil revenues at the current prices. The short-term solution is to sell the stocks in your funds.

At some point, something will change and provide a pause point for the markets. Friday's Dow drop at -537 points intraday was due to those factors above plus option expiration and the worry over the Chinese economic numbers due out on Monday while the U.S. markets are closed.

Assuming those numbers are not a disaster and the Chinese markets do not implode on Sunday/Monday nights, we could see a relief rally next week. However, we had a huge up day on Thursday and it was erased in a matter of minutes on Friday. That volatility may have convinced traders to wait on the sidelines until events calm.

Remember, in every prolonged decline we will always get sporadic rebounds fueled by dip buyers and short squeezes. Until those rebounds become progressively higher and longer lasting, we should be careful about plunging our hard-earned money into a lottery ticket on the market.

I would continue to be a watcher not a trader. Be patient. Be cautious. There is always another day to trade as long as you have capital to invest.


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Random Thoughts

The global equity markets added $30 trillion in market cap since the low in 2011. Since June, they have lost $14 trillion. In the U.S., index ETFs like the SPY, DIA and QQQ have seen more than $1 billion in outflows every day in 2016.

Market Volatility Makes Us Nervous
By Mohamed A. El-Erian

Stock market swings do not matter to most investors, precipitous drops in prices are acceptable if they are followed by sharp rises, and this remains true no matter how long the phase of heightened volatility.

If the above is your investing credo, you can ignore another roller-coaster week in markets, in which the major indices fluctuated wildly, including intraday. On Thursday, for example, the Dow closed 227 points higher after falling more than 360 points on Wednesday. And the sessions were wild on both days.

But volatility does matter to investor positioning, risk appetite and the formation of price expectations. And the longer it lasts, and especially if it is the "volatile volatility" of recent weeks, the more likely it is to be accompanied by a durable decline in markets overall.

Consider this thought exercise: You are driving on a road that has an increasing number of potholes, resulting in quite a bumpy ride. Wouldn't you start worrying about the increasing probability of damage to the car, and slow down?

A similar process is likely to unfold in markets. Some of the greater risk aversion occurs automatically, including among traders and investors who pursue approaches that condition portfolio construction on measures of overall market risk based on volatility (such as VAR, or value at risk). Some of the slowdown will be due to unfavorable revisions in the "risk-adjusted returns" that are critical inputs for asset allocation models. In addition, investors, even though they enjoy the up days, are likely to increasingly worry that the downward phase increases the probability of a more damaging air pocket.

The recent volatility also has undermined the conventional wisdom that investors should "buy on dips" and this week, at least one brokerage house advised clients to "sell the rallies" in this period of heightened market volatility.

Partial indicators suggest that portfolio risk already has been reduced, notably among hedge funds and broker-dealers. There has been some reduction by longer-term institutional and retail investors as well, but it has been limited so far.

This period of heightened volatility is likely to persist given that investors can no longer rely as much on monetary measures to calm the markets, especially now that the systemically important central banks now are pursuing divergent policies. That makes it more likely there will be more durable declines in asset prices as a whole. And, if a comprehensive policy response continues to be delayed, the declines could be quite large given the extent to which market prices have been decoupled from fundamentals.

Bloomberg Article

Iran's nuclear agreement was implemented on Saturday and the process to remove sanctions has begun. Iran will receive more than $100 billion in frozen assets that have been held for years by western nations.

In preparation for the removal of sanctions, Iran has been drilling as fast as possible in an effort to convert some of their 167 billion barrels of proven reserves into production. They have the fourth largest reserves on the planet. Oil minister Bijan Zanganeh said the drilling has been successful and they are prepared to put even more oil on the market than previously thought. As soon as the sanctions are lifted they plan on upping exports by 500,000 bpd. By the end of March, they plan to add another 500,000 bpd. By the end of 2016, they plan on adding another 500,000 bpd. That is 1.5 million barrels per day in an already flooded market. They expect to ramp production to 6.0 mbpd by 2020. They currently sell about 1.0 mbpd. Plus they have more than 30 million barrels stored in tankers in the Persian Gulf. That oil will be for sale immediately.

Iran is preparing to unveil 50 oil and gas projects worth more than $185 billion next week. They will be accepting bids from outside energy companies to develop those projects. Contracts will be up to 25 years and include generous production sharing provisions. The first of these contracts is expected to be signed by the middle of 2016.

Shares of Tyson Foods, Pilgrim's Pride and Cal-Maine Foods fell on Friday after a highly contagious form of bird flu was found in a flock of 60,000 birds in Dubois County, Indiana. The Dept of Agriculture said the H7N8 strain is different from the one that caused the destruction of 50 million birds in 2015. The prior outbreak cost the industry $3.3 billion. Last year the USDA stockpiled millions of doses of vaccine designed to fight the 2015 strain. They will be ineffective against the current outbreak. More than 65 egg and turkey farms are within 6 miles of the affected flock. The area is home to more than 4.5 million egg layers and up to 2 million turkeys. Bird Flu Returns

Earnings are fading fast. Last week analyst downgrades to earnings expectations outnumbered upgrades by the most since 2009 according to Citigroup. Jeffery Gundlach said global growth would slow to 1.9% in 2016 and the weakest since 2009. S&P Capital IQ is predicting a -5.5% decline in S&P earnings. JP Morgan is predicting a -6.7% drop. Bloomberg Article

The bears are gaining. Both bullish and neutral sentiment declined for the week with bearish sentiment approaching 50%. This survey closes on Wednesday so the results do not include the Thursday rebound or the Friday crash.

It just dawned on me why Mayberry was so peaceful and quiet...nobody was married. The single people included Andy, Aunt Bea, Barney, Floyd, Howard, Goober, Sam, Ernest T Bass, the Darling family, Helen, Thelma Lou and Clara. In fact the only one married was Otis and he stayed drunk and in jail.


Enter passively and exit aggressively!

Jim Brown

Send Jim an email


"No one can go back and make a brand new start but anyone can start from now and make a brand new ending."

Carl Bard


Index Wrap

Who Let the Bears Out?

by Keene Little

Click here to email Keene Little
The bears escaped at the turn of the new year and they've been mauling the bulls non-stop. They seem to be exacting revenge for being held hostage for so long and now the bulls are wondering how to get them back in the cage. Their only hope at this time is that the bears have feasted enough to now rest and digest.

Week's Indexes

Review of Major Stock Indexes

There's been some real damage done to the charts over the past two weeks and to say the market is now oversold would be an understatement. It's been a horrid start to the new year, unless you're a bear and you were positioned for the big move down, and the selling might not be done yet. But a dead cat bounce is probably not far away and there's nothing like a short-covering rally in a bear market to get the bears screaming as if their fur caught on fire.

As you can see in the table above, several indexes have now entered "correction" territory, defined as a decline of -10% or more. It's important to remember that many stocks have been in their own bear market (using the -20% definition, which of course is a bit arbitrary) for months while the indexes were held up by only a few stocks. The value line geometric index, which weights all stocks the same, is already down -24%. We have been in a stealth bear market for months and only now are we seeing the major indexes "catching down." We've seen poor market internals while the major indexes held up and it was warning us of the coming decline. The only question before the decline was how long it was going to take to arrive, not if it would happen. Now we look for signs for when and where we might find a tradeable bottom, but as of Friday it did not look like a good time to step in and try your hand at catching falling knives, except that some important support levels are now being tested.

The blue chips are testing their September, if not August, lows while the techs are a little stronger in that respect and the small caps weaker. The semiconductors are weaker than the tech indexes and that's another bearish warning since it's a reflection of the fact that the indexes are not yet reflecting the weakness in important stocks. The semiconductor stocks, like the transportation stocks, are good canaries to watch -- when they fall off their perch it means the rest of the group is in trouble. The TRAN has now dropped down to a level not seen since 2013, as has the RUT. Both the transportation stocks and small caps have been hurt by the drastic slowdown in the energy field and that doesn't look like it will get better any time soon. Both reflect a slowdown in the global economy.

A global economic slowdown has significantly reduced the need for oil, coal and natural gas and all the industries which supply this industry. The strong decline in commodity prices since mid-2014 (really since the 2011 high) has been another warning sign that things are not well in the economies and we knew the stock market was ignoring these signs for a long time (I showed several times in the past the widening gap between the commodities index and the stock market). The strong price decline in the stock market the past two weeks now has us wondering if this is a real breakdown or just another scary one like the August decline. I believe the August decline was the shot across the bow of the USS Bullship and the rally back up into the November/December highs was the retest that offered bulls their free get-out-of-jail card. I know most did not take the opportunity offered by the market.

Unfortunately for most investors they've been conditioned to just sit tight because "the market always comes back." Depending on your age that's advice that has generally worked well but it of course depends on when you bought in and when you need to sell. In a secular bear market, which we've been in since 1999, market timing has worked much better than buy and hold. Even if you use just a long-term moving average, such as a 21-month, you would have good timing signals to avoid most of a bear market decline and capture most of a bull market rally, as I'll point out below with the chart.

A Look At the Charts

I'm going to take a top-down look at the DOW Industrials to show where we've been and show a longer-term projection that is my expectation based on the large correction pattern following the 2000 high. I'll start with the monthly chart of the INDU.

Dow Industrials, INDU, Monthly chart

The first thing to note on the DOW's monthly chart below is the expanding triangle, which is obviously the opposite of a contracting triangle and both are continuation patterns. This one follows the strong secular bull market from 1982 into the 2000 high and we've been in a secular bear since then. People look at the new highs in the stock market as a reason why we're not in a secular bear but a review of most economic indicators, including employment data (declining earnings, et.al.) and it's clear we have not broken out of the recession/depression that started in 1999.

For the expanding triangle, as in all triangles, I'm looking for the completion of a 5-wave count, labeled A-B-C-D-E on the chart. Expanding triangles obviously have a lot more price volatility than a contracting triangle and that's exactly what we're seeing. The next, and last, leg of the triangle, which appears to have started, could finish short of the bottom of the triangle (like it did in the smaller-degree expanding triangle 4th wave correction during the 1970s into the 1982 higher low) but I think it's important to see the downside risk. It's not a guaranteed move but there is risk for the DOW to drop below 6000 in the next couple of years.

As I mentioned above, the 21-month moving average for the DOW offers investors a relatively simple way of knowing when to be long and when to be in cash/short. It's like those expensive trading systems offering green up arrows and red down arrows to tell you when to buy and when to sell. There would have been a couple of whipsaws but you can see it would have worked to avoid most of the 2000-2002 and 2008-2009 bear markets and captured the majority of the 2002-2007 and 2009-2015 bull markets. If the DOW closes below the 21-mo. ema this month, currently at 16951, it will be a signal for longer-term investors to get into cash and perhaps a few short positions. Most of us are much more active traders and the signals from this are way too slow but maybe for your retirement account with mutual funds that you don't want to actively manage.

On the monthly chart above I show a rising wedge for the c-wave of the a-b-c move up from 2009, which broke in August (providing an important sell signal). One thing to note is RSI -- it can't be seen on the squished chart but it broke its uptrend line from October 2011 in January 2015, which was the first warning sign of trouble for the bulls. It then bounced back up to the broken uptrend line in February 2015 before falling away (back-test followed by a bearish kiss goodbye) and showed us strong bearish divergence all year before price finally let go. This is an excellent example of how to use a trend line on RSI -- it's one of the better forecasting tools that's simple to use. It's common for RSI to break its uptrend line (and downtrend line in a decline) before price does. And the back-test of the line is usually a good indication price will soon follow the break.

Dow Industrials, INDU, Weekly chart

If I draw a parallel up-channel for the rally leg from October 2011, as opposed to the rising wedge on the monthly chart above, the bottom of the channel is currently near 15530, almost 500 points below Friday's close, and is shown on the weekly chart below. I think that's where the DOW could head in February if we get a bounce into the end of January and then a continuation lower. We could see the DOW stair-step lower to the February 2014 and August 2015 lows at 15340 and 15370, resp., by March (maybe a lot faster) before setting up a stronger bounce into mid-year and then lower into the end of the year. From a pattern perspective I can't yet rule out the possibility for another rally leg (light green dashed line) but at the moment I consider that a lower-odds probability, and this game we play is all about probabilities, not guarantees. At the moment the DOW is finding support at 16K, which has acted as support several times in the past so it's an important level for the bulls to hold.

Dow Industrials, INDU, Weekly chart

A simpler way to look at the DOW's weekly chart is shown below. An uptrend line from October 2011 was broken in August and we had an important back-test into the November 3rd high. The selloff from there was a big "SELL ME!" signal and while the market continued to jerk up and down into January, we saw a succession of lower highs and lower lows before it let go with a bang the past two weeks. That was a classic setup for the bears (always so easy to see in hindsight, no?). The other bearish signal here is the rolling top pattern. The combination of this topping pattern and the trendline break is bad news for bulls. Use rallies to sell into.

Dow Industrials, INDU, Daily chart

The daily chart below shows an idea for what to expect in the next couple of weeks, which assumes we'll see the market stair-step lower into March as it works its way down to the 15340 area. The pattern for this past week's decline, with a hint of bullish divergence, suggests we might see a choppy move lower to a minor new low before bouncing but the bearish risk is that the sharp up and down moves will lead to another strong breakdown, in which case we could see DOW 15340 in a matter of days, not weeks. But if support at 16K holds I see upside risk for bears with at least a strong short-covering rally and therefore shorts should be playing more defense here.

Key Levels for INDU:
-- bullish above 16,900
-- bearish below 16,000

S&P 500, SPX, Daily chart

SPX dropped down to price-level S/R near 1885 on Wednesday, held it for a day with Thursday's rally but then gave up that support and dropped down to the August low at 1867. The August low was broken intraday, hitting a low near 1858, but then closed above 1867 for the weekly close. However, it wasn't able to close above 1885 or back above its broken uptrend line from October 2014, near 1888. This is a trend line that lines up the spikes to the downside in October 2014 and the August/September 2015 lows. It held the line on Wednesday but Friday's break is showing us the current decline could be a lot more significant than the flash crashes back then. I show a little lower and then a bounce/consolidation into early February before it stair-steps lower into March. Below 1867 the next support level is 1820 (the October 2014 low) and then 1738 (the February 2014 low), which is where I think we'll see SPX by March before it sets up a larger bounce correction into mid-year. However, as stated above, there is still the risk for a new rally, or at least a strong short-covering bounce, and therefore a sell-and-hold strategy could be just as dangerous as buy-and-hold.

Key Levels for SPX:
-- bullish above 1963
-- bearish below 1885

S&P 100, OEX, Daily chart

OEX almost made it down to price-level S/R at 825-830 and I suspect that level will be tested in the coming days if we do not get a short-covering rally on Tuesday. I'm looking for that level to hold as support but only for a bounce correction into early February before heading lower into a mid-February low around 800. Another bounce and then lower into March is the way the bearish pattern should play out. If we get a strong rally in the coming week I'll be watching to see if the bottom of its previous down-channel from November, near 880, will be reached. It would be more bullish above that level but until that happens I would look at bounces as shorting opportunities.

Key Levels for OEX:
-- bullish above 880
-- bearish below 825

Nasdaq Composite, COMPQ, Daily chart

The Nasdaq almost made it down to its uptrend line from October 2014 - August 2015, which again are the spike lows. The current selloff could be just another one of those and the market will resume its march higher. For the reasons I showed with the DOW's monthly and weekly charts, I strongly believe the bull has been put out to pasture and we will not see last year's highs for many years (decades?) to come. It doesn't prevent some very strong counter-trend rallies but the bears would be in a stronger position once the uptrend line from October 2014, near 4380, is taken out. I show a drop to that level in the coming days and then a bounce/consolidation before heading lower but obviously we'll know more after Tuesday's price action.

Key Levels for COMPQ:
-- bullish above 4715
-- bearish below 4270

Nasdaq-100, NDX, Daily chart

On Friday NDX dropped below its uptrend line from June 2010 - November 2012, which is the bottom of a parallel up-channel from 2010, currently near 4150. It broke below this uptrend line back in August but it was only an intraday break, which was followed by the strong v-bottom reversal and big white candle seen on its chart below. This time it closed below the line but it did hold above its uptrend line from March 2009 - August 2015, near 4100. If the market drops a little lower on Tuesday I'll be looking for support at its September low, at 4053, to hold and launch a bigger bounce/consolidation into the end of the month. Another drop in February for perhaps a retest of the low would then set the pattern up for a bigger bounce. If the bulls can get NDX back above Wednesday's high near 4360 it would at least be short-term bullish.

Key Levels for NDX:
-- bullish above 4360
-- bearish below 4050

Russell-2000, RUT, Daily chart

On Wednesday the RUT dropped below the bottom of a parallel down-channel for its decline from last June. It was back-tested on Thursday and that was followed by another selloff on Friday, leaving it with a bearish kiss goodbye against support-turned-resistance. But Friday's low was a test of the price projection at 987 for two equal legs down from June and often these measured moves result in strong support. The long tail below Friday's candle body says bears should be careful here and if the RUT can get at least a decent bounce going it's likely to lead the broader market. But if the RUT heads lower on Tuesday keep an eye on the trend line along the lows from February-October 2014, near 967, especially since there's a Fib support level near 971 (not shown on the chart, it's the 127% extension of the previous rally, which was October 2014 - June 2015). It would be much more bearish below 967 whereas the bulls could have a fighting chance back above the bottom of its down-channel, near 1027. It would be more bullish above 1040 and then above Wednesday's high near 1057 would be reason enough to back away from the short side and maybe play the long side for at least a larger bounce.

Key Levels for RUT:
-- bullish above 1057
-- bearish below 967

SPDR S&P 500 Trust, SPY, Daily chart

The SPY chart below shows the increasing volume this past week, spiking into the highest volume for the week on Friday, which raises the question as to whether or not we saw some capitulation selling. The volume is not as heavy as it was in August and price can always continue to push the lower BB lower but it's looking like bears would be better not to press their bets here. It might be early to try to catch falling knives but it's also late to chase it lower. There is the possibility we'll see a sharp v-reversal with strong short covering, even if it's only for a day or two.

Powershares QQQ Trust, QQQ, Daily chart

The QQQ looks like SPY except that it hasn't yet broken its September low and is nowhere close to testing its August low. But the selling might not be over yet so the bears still have a chance. Volume is spiking but it hasn't yet doubled its normally-high reading of 50M shares, which it did in August. But we're seeing some bullish divergence on the Williams %R since January 7th and while it doesn't mean we'll see a rally from here it is hinting of bottoming for at least a bounce correction.


The strong selling over the past two weeks has buried many indicators into deeply oversold and bullish sentiment has quickly reversed into bearish sentiment. All of this warns bears not to press their bets to the downside since anything could spark a short-covering rally and we know how strong those can be. In fact the strongest rallies, albeit short-lived, are found in bear markets. Wannabe bulls jump on a rally and shorts cover -- all that buying can create 500-point rallies for the DOW before lunch time. But one thing to keep in mind is that a strong short-covering rally, especially on dying volume, is the kind of rally you want to sell into rather than pile into long.

The bearish pattern calls for the market to stair-step lower into March but that means we'll see intervening bounces and the first one should be arriving within days if it doesn't start on Tuesday. I'm expecting a 2-week bounce/consolidation before heading lower into mid-February but that's if we don't crash lower in the coming days. Crashes come out of oversold and we certainly have that condition right now. If enough investors panic after seeing how much their accounts are down this month we could see a low-liquidity event where lots of sell orders are met with no buy orders. I don't see that as a high-probability event but it's certainly a risk if Tuesday's selling becomes strong. Otherwise the market is looking like it's setting up at least a bounce correction and counter-trend trades on the long side could work nicely. Just keep them short-term oriented (day trades) and on a short leash (tight stops).

Trade safe, have a good week and good luck with your trading. I'll be back with you next weekend.

Keene H. Little, CMT

Technicians look ahead. Fundamentalists look backward. The true language of the market is technical. - Joe Granville

New Option Plays

Two New Trades Tonight

by James Brown

Click here to email James Brown


Pacira Pharmaceuticals - PCRX - close: 67.32 change: +1.82

Stop Loss: 61.45
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 1.0 million
Entry on January -- at $---.--
Listed on January 16, 2016
Time Frame: Exit PRIOR to February option expiration
New Positions: Yes, see below

Company Description

Trade Description:
PCRX delivered a very bumpy ride for investors in 2015. The stock outperformed the year before with +54% gain in 2014. Then sentiment changed last year and by October 2015 shares of PCRX were down -58% for the year and down -70% from its February 2015 highs. Fortunately some strong earnings news and a legal win helped PCRX pare its 2015 loss to -13%. Today PCRX is bouncing from support and looks poised to continue its late 2015 rebound.

PCRX is in the healthcare sector. According to the company, "Pacira Pharmaceuticals, Inc. is a specialty pharmaceutical company focused on the clinical and commercial development of new products that meet the needs of acute care practitioners and their patients. The company's flagship product, EXPAREL® (bupivacaine liposome injectable suspension), indicated for single-dose infiltration into the surgical site to produce postsurgical analgesia, was commercially launched in the United States in April 2012. EXPAREL and two other products have successfully utilized DepoFoam®, a unique and proprietary product delivery technology that encapsulates drugs without altering their molecular structure, and releases them over a desired period of time."

The legal win I mentioned above was a fight between PCRX and the F.D.A. There was a disagreement over how PCRX was marketing its Exparel drug. The FDA argued the treatment was only approved for a couple different types of surgery. The company filed a lawsuit against the FDA in September last year. On December 15th they announced a resolution with the FDA. The lawsuit was dropped and the FDA officially rescinded its warning letter about how PCRX was marketing Exparel. Shares of PCRX soared about 15% on the news.

Some of the volatility last year was likely due to PCRX earnings. The company has beaten Wall Street's earnings estimates in three of the last four quarters. Yet they have missed the revenue estimate twice. At the same time Revenue growth has slowed from +84% to +59% to +25% to +19.6% in the most recent quarterly report.

PCRX did offer some good news this year. On January 7th they pre-warned that Q4 revenues would be better than expected. Wall Street was estimating $67.4 million for the quarter. PCRX is now forecasting +12.2% improvement from a year ago to $69.4 million. They also raised their full-year 2015 guidance.

The stock market's sell-off in 2016 pulled PCRX down toward support in the $60 area but traders started buying the dip in a big way on Thursday. PCRX has outperformed the market the last two days in a row. If this bounce continues it could spark some short covering. The most recent data listed short interest at 23% of the relatively small 33.7 million share float. Another positive is PCRX's point & figure chart shows the bounce off support and is currently forecasting an $83.00 target.

Trigger @ $68.75

- Suggested Positions -

Buy the FEB $75 CALL (PCRX160219C75) current ask $2.75
option price is a current quote and not a suggested entry price.

Entry disclaimer: To avoid an unfavorable entry point, we will not launch a new play if the stock gaps open more than $1.00 past our suggested entry point.

Option Format: symbol-year-month-day-call-strike

Daily Chart:

Point & Figure Chart:


iPath S&P 500 VIX Futures ETN - VXX - close: 26.70 change: +2.41

Stop Loss: none
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 69 million
Entry on January -- at $---.--
Listed on January 16, 2016
Time Frame: To Be Determined, option expiration is March 18th
New Positions: Yes, see below

Company Description

Trade Description:
At the risk of stating the obvious, the last two weeks in stocks have been brutal. Investors have taken a risk-off attitude and sold just about everything. The small cap Russell 2000 index is already down -11% in the first ten trading days of 2016. The NASDAQ composite is off -10%. The S&P 500 has declined -8%.

The new year has suffered a parade of negative headlines from disappointing economic data both in the U.S. and China. China devaluating its currency. N. Korea claiming to have hydrogen bombs (several times worse than normal nukes). Crude oil crashing into multi-year lows. Plus falling sentiment for corporate earnings, which are expected to be negative two quarters in a row.

No one wanted to be long over the three-day weekend, which helped drive stocks even lower on Friday. The S&P 500 dipped to 15-month lows before paring its losses on Friday. The fact that Friday was also options expiration just added to the volatility.

Stocks normally don't move that fast in a straight line for very long. Markets a very oversold and way overdue for a bounce. The rebound could show up this week. One way to play it is the volatility indices. The VXX follows the iPath S&P 500 VIX Short-Term Futures Index. When investors panic volatility spikes but these are almost always short-term events. You can see on the long-term weekly chart below these spikes always fade.

Tonight we are suggesting put options on the VXX to capture the decline as volatility fades again and it will sooner or later. We are betting on sooner. We want to buy the March $23 puts at the opening bell on Tuesday (U.S. markets are closed on Monday). No stop loss just in case there is another spike on Tuesday.

Buy puts at the opening bell on Tuesday, Jan. 19th.

- Suggested Positions -

Buy the MAR $23 PUT (VXX160318P23) current ask $2.22
option price is a current quote and not a suggested entry price.

Option Format: symbol-year-month-day-call-strike

Daily Chart:

Weekly Chart:

In Play Updates and Reviews

Stocks Plunge Again On Friday

by James Brown

Click here to email James Brown

Editor's Note:

The market declined to 15-month lows on a parade of worries. Another multi-year low in crude oil weighed on stocks as did another sell-off in Chinese equities. The combination of options expiration and fear of a long, three-day weekend all worked together to fuel the drop.

SSS was stopped out. QQQ hit our entry trigger.

We have added new entry triggers to both the SPY and STZ trades.

Current Portfolio:

CALL Play Updates

Digital Realty Trust Inc. - DLR - close: 76.32 change: -2.04

Stop Loss: 74.80
Target(s): To Be Determined
Current Option Gain/Loss: +0.0%
Average Daily Volume = 1.5 million
Entry on January 11 at $77.75
Listed on January 09, 2016
Time Frame: Exit PRIOR to February option expiration
New Positions: see below

01/16/16: A lot of REIT stocks have been crushed in the market's two-week plunge. DLR is an exception. Shares were hitting new three-year highs on Tuesday. Unfortunately, Friday's market sell-off was ugly enough that even DLR was effected. Shares lost -2.6% and closed below short-term technical support at the 10-dma.

The $75-76 zone should be support. Let's watch for a bounce before considering new positions.

Trade Description: January 9, 2016:
The last several days have been tough on investors. Stocks experienced a global market sell-off. This volatility and uncertainty could push investors into safer, high-dividend paying stocks. Currently the 10-year U.S. bond only yields 2.1%. That makes a stock like DLR, with a dividend yield above 4%, a lot more attractive. The company has a history of consistently raising its dividend over the last nine years in a row. The stock's relative strength doesn't hurt either.

DLR is in the financial sector. According to the company, "Digital Realty Trust, Inc. supports the data center and colocation strategies of more than 1,000 firms across its secure, network-rich portfolio of data centers located throughout North America, Europe, Asia and Australia. Digital Realty's clients include domestic and international companies of all sizes, ranging from financial services, cloud and information technology services, to manufacturing, energy, gaming, life sciences and consumer products."

DLR has consistently beat Wall Street earnings expectations the last four quarters in a row. The last two quarters the company has also beat analysts' revenue estimates.

Earlier this week DLR provided their 2016 outlook and the company's forecast was slightly above expectations, which helped shares resist the market's sell-off.

Here is an excerpt from DLR's press release on their 2016 outlook:

Digital Realty expects 2016 core FFO (Funds from Operations) per share to be within a range of $5.45-$5.60, which represents a 7% increase at the midpoint from the midpoint of 2015 core FFO per share guidance. Foreign currency translation is expected to represent a headwind to core FFO per share of 1%-2% in 2016.

"We are seeing solid demand for Digital Realty's comprehensive set of data center solutions, which gives us confidence in our ability to achieve accelerating core FFO per share growth in 2016," commented Andrew P. Power, Digital Realty's Chief Financial Officer. "We also expect to generate double-digit AFFO per share growth (Adjusted Funds from Operations), driven by greater cash flow contribution from our core business, accretion from the Telx acquisition and the continued burn-off of straight-line rent. In short, the quality of earnings is improving, the growth in cash flow is accelerating, and we are optimistic about the prospects for our business in 2016 and beyond."

The recent relative strength in shares of DLR over the last few weeks has lifted shares above key resistance near the $75.00 level. It has also produced a buy signal on the point & figure chart, which is now forecasting a longer-term target of $102.00.

Friday saw DLR shares tag new all-time highs (@ 77.67). Tonight we are suggesting a trigger to buy calls at $77.75. Plan on exiting prior to February option expiration.

- Suggested Positions -

Long FEB $80 CALL (DLR160219C80) entry $1.10

01/11/16 triggered @ $77.75
Option Format: symbol-year-month-day-call-strike


PowerShares QQQ ETF - QQQ - close: 100.84 change: -3.23

Stop Loss: 97.45
Target(s): To Be Determined
Current Option Gain/Loss: +3.7%
Average Daily Volume = 35 million
Entry on January 15 at $100.50
Listed on January 07, 2016
Time Frame: Exit PRIOR to February option expiration
New Positions: see below

01/16/16: Our QQQ trade is finally open. The market's big drop on Friday pushed the QQQ toward round-number support at $100.00 pretty early in the session. The ETF bounced at $99.51 and eventually pared its loss to -3.1% on the day. We had a buy-the-dip trigger to buy calls at $100.50.

If you missed our entry point I would still consider new positions at current levels. More conservative investors might want to wait for a little bounce first so a rally past $101.40 or $102.00 could be alternative entry points.

Currently our stop loss is $97.45.

Trade Description: January 7, 2016:
The stock market moves on emotion. Most of the time it is a tug-of-war between fear and greed. Occasionally one emotion takes control of the market and stocks move too fast one direction. That is where we are at today.

Fears of a global slowdown thanks to disappointing economic data out of China have increased. China has devalued their currency again, which does not generate confidence. Yesterday we had the nuclear weapon testing headlines from North Korea, which generates fear. We have plunging oil prices, which is fueling worries about deflation.

Odds of a snap back rally are growing and we want to be ready to catch it. One way to play it is the NASDAQ-100 ETF or the QQQ. These are very liquid, big cap names that fund managers can move in and out of more easily.

Thus far 2016 has been ruled by fear. We are only four trading days into the year and the NASDAQ composite is already down -6.4% completely erasing its +5.7% gain from 2015. The QQQ is down -6.2% in the last four days and it's down -8.25% from its December 29th peak just six trading days ago. That's too far too fast.

Tonight we are suggesting a short-term bullish trade when stocks bounce. They will bounce (eventually). Today's intraday high on the QQQ was $107.29. We are suggesting a trigger to buy calls at $107.35. We'll use an initial stop loss at $103.85. More conservative traders may want to use a stop loss closer to today's intraday low instead ($104.81).

- Suggested Positions -

Long FEB $105 CALL (QQQ160219C105) entry $1.34

01/15/16 triggered at lower entry point $100.50, initial stop $97.45
01/09/16 Entry Strategy Update - Use TWO different entry triggers
One is a buy-the-dip trigger at $100.50 with a stop at $97.45 and the Feb $105 calls
The other is a trigger at $106.50 with a stop at $103.45 and the Feb $110 calls
Option Format: symbol-year-month-day-call-strike


SPDR S&P 500 ETF - SPY - close: 187.81 change: -4.12

Stop Loss: (see below)
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 128 million
Entry on January -- at $---.--
Listed on January 13, 2016
Time Frame: 4 to 6 weeks
New Positions: Yes, see below

01/16/16: The stock market correction continues. The S&P 500 index is now down -8.0% in the first two weeks of 2016. The SPY ETF is off -7.8%. Both are down more than -10% from their early November highs, which puts them in correction territory.

We currently have a buy-the-dip trigger to buy calls if the SPY hits $183.00 as the $182.00 area should be significant support. However, there is a decent chance that the market actually bounces now. Just in case stocks do rebound in the week ahead we are adding a second entry trigger to buy calls if the SPY rallies and trades at $189.35. I've added a new option strike below.

Trade Description: January 13, 2016:
The stock market's sell-off seems to be getting worse. Constant worries about a slowing global economy and the potential for another currency devaluation in China have spooked investors. The nearly non-stop plunge in crude oil hasn't helped although at the moment it looks like the $30.00 a barrel level is offering some short-term support for oil. I wouldn't count on oil holding above $30 though.

In the U.S. we have the Federal Reserve that has begun a rate-hiking cycle seemingly at the wrong time as the U.S. economy slows down. The Atlanta Fed's Q4 GDP growth estimates have fallen to +0.8%. Meanwhile corporate earnings are forecasted to be negative for the second quarter in a row, which would be an "earnings recession" in the U.S.

All of these ingredients have come together in a bearish recipe to send stocks lower. Eventually stocks will bounce. The tone on Wall Street today felt "a little panicky" according to some market watchers. We could be getting close to a bottom (at least a short-term bottom). Tonight we are going to try and pick a trade to catch the bottom. This is typically called "catching a falling knife" and can be hazardous to your trading account. Consider this an aggressive, higher-risk trade. I suggest small positions to limit risk.

The SPY has potential support in the $187.00 area and again in the $182 region. I'm looking at a buy-the-dip trade near the lower level. The October 2014 low in the SPY was $181.92. The August intraday low was $182.40. Tonight I am listing a buy-the-dip trigger to buy calls on the SPY at $183.00. We'll start with a stop loss at $179.65.

*small positions to limit risk*

Trigger #1. Buy calls @ $189.35, initial stop at $184.90

- Suggested Option -

Buy the MAR $195 CALL (SPY160318C195)

. . . . . . . . . . . . . . . . . . . . . . . . . .

Trigger #2. Buy-the-dip @ $183.00, initial stop at $179.65

- Suggested Positions -

Buy the MAR $190 CALL (SPY160318C190)

Entry disclaimer: To avoid an unfavorable entry point, we will not launch a new play if the stock gaps open more than $1.00 past our suggested entry point.

Option Format: symbol-year-month-day-call-strike


Constellation Brands Inc. - STZ - close: 142.75 change: -0.50

Stop Loss: 138.25
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 1.2 million
Entry on January -- at $---.--
Listed on January 14, 2016
Time Frame: 6 to 8 weeks
New Positions: Yes, see below

01/16/16: It's always great to see relative strength in our bullish candidates but STZ surprised us on Friday. The plan was to buy calls on a dip at $140.50. The market's widespread drop on Friday should have driven STZ toward short-term support and triggered our play. To our surprise that did not happen.

STZ did gap down on Friday but traders bought the dip at $141.20, which is near Thursday's intraday low. STZ almost immediately rallied and tried to break through resistance at $145.00 midday. Shares eventually settled with a 50-cent loss.

We are keeping our buy-the-dip trigger at $140.50. However, if STZ displays relative strength again we do not want to miss it. Tonight we are adding a second entry trigger to buy calls on a breakout at $145.05.

Trade Description: January 14, 2016:
STZ was one of last year's best performing stocks with +45% gains in 2015. Consistently raising earnings and revenue guidance can do that for a stock. The company is seeing so much demand for their beer products that STZ just announced they're building a huge new brewery in Mexico. Meanwhile their wine and spirits business is seeing stronger margins due to recent acquisitions. Overall STZ is moving into 2016 with the wind at its back.

STZ is in the consumer goods sector. According to the company, "Constellation Brands is a leading international producer and marketer of beer, wine and spirits with operations in the U.S., Canada, Mexico, New Zealand and Italy. In 2014, Constellation was one of the top performing stocks in the S&P 500 Consumer Staples Index. Constellation is the number three beer company in the U.S. with high-end, iconic imported brands including Corona Extra, Corona Light, Modelo Especial, Negra Modelo and Pacifico. Constellation is also the world's leader in premium wine, selling great brands that people love including Robert Mondavi, Clos du Bois, Kim Crawford, Rex Goliath, Mark West, Franciscan Estate, Ruffino and Jackson-Triggs. The company's premium spirits brands include SVEDKA Vodka and Black Velvet Canadian Whisky... Based in Victor, N.Y., the company believes that industry leadership involves a commitment to brand-building, our trade partners, the environment, our investors and to consumers around the world who choose our products when celebrating big moments or enjoying quiet ones. Founded in 1945, Constellation has grown to become a significant player in the beverage alcohol industry with more than 100 brands in its portfolio, sales in approximately 100 countries, about 40 facilities and approximately 7,700 talented employees."

STZ has been killing it on the earnings front. They have beaten earnings the last three quarters in a row. Management has raised their guidance the last three quarters in a row. Their most recent earnings report was last week on January 7th. Analysts were expecting a profit of $1.30 a share on revenues of $1.62 billion. STZ beat estimates with a profit of $1.42 a shares. Revenues were up +6.4% to $1.64 billion. Strong beer sales has helped fuel double-digit shipment increases. The company announced they were building another brewery and raised their guidance again.

This bullish outlook sparked a couple of new price target upgrades ($172, $174 and $185). The stock soared to new highs and broke through key resistance near the $145.00 level on its earnings news and guidance. Shares have seen some profit taking since its spike to new highs. Now STZ is near support at one of its long-term trend lines of higher lows. The simple 50-dma should offer technical support at $140.40. Meanwhile the $140.00 level could offer some round-number, psychological support. Both of these are converging near its trend line of higher highs.

STZ underperformed the market today, which may mean more profit taking ahead. We want to buy calls on STZ as it nears support in the $140.00-140.50 area. Tonight we are listing a buy-the-dip trigger at $140.50 with a stop loss $138.25, just under its early January low.

Trigger #1. Buy calls @ $140.50, initial stop loss @ 138.25

- Suggested Positions -

Buy the APR $150 CALL (STZ160415C150) current ask $4.30

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Trigger #2. Buy calls @ $145.05, initial stop loss @ 141.15

- Suggested Positions -

Buy the APR $150 CALL (STZ160415C150)

Entry disclaimer: To avoid an unfavorable entry point, we will not launch a new play if the stock gaps open more than $1.00 past our suggested entry point.

01/16/16 added a second trigger to buy calls at $145.05, initial stop @ 141.15
Option Format: symbol-year-month-day-call-strike


PUT Play Updates

Currently we do not have any active put trades.


Sovran Self Storage Inc. - SSS - close: 108.92 change: +0.39

Stop Loss: 107.40
Target(s): To Be Determined
Current Option Gain/Loss: -80.9%
Average Daily Volume = 257 thousand
Entry on January 13 at $110.75
Listed on January 11, 2016
Time Frame: Exit PRIOR to earnings in mid February
New Positions: see below

01/16/16: I cautioned readers in the original SSS play description that the stock would begin trading ex-dividend on Friday morning. The dividend was $0.85. The combination of trading ex-dividend and the market's sharp plunge on Friday morning produced a big gap down in shares of SSS. The stock dropped from $109.38 at Thursday's close to $106.65 at the open on Friday, immediately stopping us out.

Believe it or not but SSS ended Friday's session with a gain and ended the week with a gain. The stock is now up five weeks in a row in spite of the market's weakness.

- Suggested Positions -

FEB $110 CALL (SSS160219C110) entry $3.40 exit $0.65 (-80.9%)

01/15/16 stopped out on gap down at $106.65
01/13/16 triggered @ $110.75
Option Format: symbol-year-month-day-call-strike