Option Investor

Daily Newsletter, Saturday, 1/23/2016

Table of Contents

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

Market Wrap

Finally a Real Short Squeeze

by Jim Brown

Click here to email Jim Brown

Overseas markets rallied strongly on Friday on expectations for the ECB to add more stimulus to Europe. Whether additional QE would have any impact remains to be seen but the possibility spiked European markets.

Market Statistics

Friday Statistics

The rise in the overseas market and spiking oil prices caused an old-fashioned short squeeze in the U.S. markets. The Dow opened up +254 and declined to +100 intraday as sellers hit the open one more time. They were unable to push the Dow back below 16,000 for more than a few minutes and with the weekend looming the shorts began to cover.

The rally was helped by a short squeeze in crude oil. The prospect of stimulus in Europe that would increase demand, an ISIS attack on an oil facility in Saudi Arabia and the switch to the March contract as the front month all added up to a rebound in oil prices and once shorts began to get squeezed the move higher was very strong to close at $32.

The selling was extremely overdone on Wednesday when the expiring February contract saw traders panic at the close with the price at $26.55. The March contract became the front month on Thursday at $29 and some uninformed traders saw that as a rally and the short covering began.

Nothing changed in the fundamentals for oil and this short covering bounce will not last.

You can also credit the U.S. economic reports for part of the gain. However, the main report was bogus. The existing home sales for December spiked +14.7%. Do you really think consumers rushed out in mass to buy a home in December? Some did but if you look under the hood you will see a -10.5% drop in November compared to an average of 4% in the prior four months. The major difference in the months was a change in the documentation requirements in November that delayed a large number of closings into December.

In November the TILA-RESPA Integrated Disclosure document, nicknamed TRID, became the law. This is also called the "Know before you owe" disclosure. Lenders now have to provide borrowers with this document showing all their fees and costs three days before closing so they can ask questions and get answers before signing the loan documents. The new requirements caused delays as mortgagers reprogrammed their computers to produce the documents. These delays pushed many closings into December and that caused the biggest one-month rise on record. In reality if you average the two months together you get a 2.2% rise in December.

Uninformed traders celebrated the economic strength and the market received another push higher.

The headline number showed home sales rising from November's pace of 4.76 million homes per year to 5.46 million, which just happens to be almost the same 5.43 million average pace in the four months prior to November.

The Chicago Fed National Activity Index rose slightly from -0.30 to -0.22 but it was still the fifth consecutive month in decline and 10 out of the last 12 months in decline. The three-month moving average is at the lowest level since March at -0.24. Manufacturing is the biggest drag on U.S. economic activity followed by the energy sector. The chart below does not paint an encouraging picture about U.S. economic health.

Moody's Chart

The Atlanta Fed forecast for Q4-GDP ticked up slightly after the Consumer Price Index on Wednesday suggested consumer spending might be slightly higher than expected. The forecast rose from +0.6% to +0.7% but remains significantly below the average of the analyst community. If the Atlanta Fed forecast comes true the GDP for all of 2015 would be 1.78% and significantly under trend.

The calendar for next week is headlined by the Fed meeting announcement on Wednesday. Absolutely nobody expects the Fed to hike rates at this meeting. The current forecast is for a hike in June with the March and April meetings being ignored because of the market rout, economic weakness, Asian decline and Mario Draghi's promise to add stimulus in the coming months.

Friday's GDP will be important for reasons I stated above. However, the market will probably ignore any weakness because it would push the Fed hikes farther into the future.

The following week we will get the employment reports and nearly everyone expects a sharply lower jobs number for January. The weekly jobless claims are ticking up with a 293,000 print last week and the highest week since July.

There were no new splits announced last week.

For the full split calendar click here.

If you enjoyed Friday's rally you can thank Apple (AAPL). Piper Jaffray analyst Gene Munster said investors should buy the stock ahead of earnings on Tuesday saying the stock could rally 50% over the next year. Munster has a $179 price target on Apple. That is 86% higher than Friday's close.

Munster said the bad news for slowing iPhone sales was already priced into the stock. Typically, Apple shares rise into a new launch, which is expected in September. Stock buybacks will drive single digit earnings growth "regardless of revenues" if Apple continues to buy $20-$30 billion a year in stock. Apple should report margins at the high end of guidance around 40%. Munster believes Apple upside exists despite macro risks, China issues and EU "instability."

Aaron Rakers at Stifel Nicolaus also weighed in saying the pessimism over falling iPhone sales is way overdone.

A recent survey showed analysts expect sales of 76.6 million phones in Q4, up from 74.5 million in Q4-2014. Verizon already warned that iPhone sales were weaker in Q4 than in prior years so there is plenty of disagreement in the space.

With earnings Tuesday after the bell, we will quickly get a chance to see if Munster's comments are true. Apple shares rallied +$5.12 to add about 40 points to the Dow.

News also broke that Google (GOOGL) is paying Apple $1 billion a year or more to retain its search position on the iPhone. Plus Apple gets a percentage of the search revenue Google receives.

On the opposite side of the ledger Dow component American Express (AXP) fell -$7.58 (-12%) after reporting disappointing earnings. That removed about 56 points from the Dow. Shares were already down about -25% in 2015 after losing Costco (COST) as a dedicated account after 16 years. That will impact 10% of American Express customers. Earnings for Q4 declined -38% to $899 million with the strong dollar a big driver of the decline. AXP also lost its deal with Fidelity, which is moving to offer Visa cards issued by U.S. Bank (USB).

AXP outlined its plans to cut $1 billion in costs but also warned on revenue for the current year. Revenue declined -7.6% to $8.39 billion. Earnings were $1.23 per share. Analysts were expecting $1.12 and $8.34 billion.

General Electric (GE) reported earnings of 52-cents compared to estimates for 49-cents. Revenue of $33.9 billion was a big miss compared to estimates for $35.91 billion. The challenge came from delays in shipping some turbines in Q4 that will now be delivered in Q1. Also, sales of equipment to the oil and gas sector declined -16%. GE is planning on cutting $800 million in expenses from that segment after a $600 million cut in 2015. Their manufacturing backlog rose to a whopping $315 billion after the $11 billion acquisition of Alstrom in November. GE shares are currently yielding 3.22%. Shares declined fractionally on Friday.

Starbucks (SBUX) reported earnings of 45 cents that beat estimates of 44 cents. Revenue rose +12% to $5.37 billion but missed estimates of $5.39 billion because of terror headlines and the strong dollar.

The company said the Paris terror attacks hurt sales because of changes in consumer behavior. Revenues in Europe, the Middle East and Africa declined -6% immediately after the Paris attacks. Same store sales in those regions rose +1% and well under estimates. CEO Schultz said they were on track for a record quarter in Europe until the attacks and everything came to a screeching halt. We are now "seeing business gradually return to normal." A Morningstar analyst said they were seeing similar things from other retailers in the area.

Analysts were concerned about the muted sales in China given the rapid expansion rate. Starbucks said it would open 500 stores a year for the next five years. Same store sales in the Asia-Pacific region rose +5% compared to expectations for +6.1%. Starbucks does not breakout sales by country. Schultz believes China sales will eventually overtake U.S. sales.

Starbucks guided for earnings in the range of 38-39 cents and analysts were expecting 39 cents. Foreign exchange rates are expected to reduce revenue by -3%. Starbucks is still producing 8% overall comps and 15% earnings growth in a tough economy. That was the 24th consecutive quarter of same store sales growth over 5%. U.S. same store sales rose +9%.

Starbucks K-cups are the number one brand in the USA. More than $1.9 billion was loaded onto gift cards over the holiday season. One in six American adults received Starbucks gift cards for the holidays. Online ordering is soaring. Customers know they can order and pay online and it is ready when they walk in the door. No other coffee shop can compete with that.

Schlumberger (SLB) reported earnings of 65 cents compared to estimates for 63 cents. Revenue of $7.7 billion missed estimates for $7.8 billion. Earnings for the full year fell -39% to $3.37 because of the weakness in the energy sector. They said they cut 10,000 workers in Q4 and took a $530 million charge. In addition, the company took a $1.6 billion charge for asset impairment, which was mostly for underused pressure pumping (fracking) equipment. The CEO said they expected continued weakness in the first half of 2016. He said customer budgets were plunging and most were exhausted early in the quarter. This led to unscheduled and abrupt activity cancellations. The company announced a new $10 billion share buyback program. They will complete the acquisition of Cameron Intl (CAM) in Q1 once the regulatory approvals are received. Shares rose +3.75 on the earnings and the spike in oil prices.

Golar LNG (GLNG) soared 50% on Friday after they signed a deal with Schlumberger to "cooperate" on development of greenfield, brownfield and stranded gas reserves. The goal of the joint venture is to accelerate the time it takes to bring proven gas reserves into production. They will jointly market gas monetization solutions to owners, investors and governments. Golar will contribute floating LNG assets and technology while Schlumberger will provide upstream development knowledge, resources and capital. The object is to gain access to a wide range of currently uneconomic gas reserves by delivering LNG production solutions.

Kansas City Southern (KSU) reported earnings of $1.23 compared to estimates for $1.10. Considering railroads have been in the dumps lately that was a good report. However, revenue of $598 million missed estimates for $609 million. The miss was attributed to an 11% decline in energy related shipping. Falling frac-sand and coal volumes were to blame. Carload volumes declined -2%. Intermodal volumes declined -9%. Full year earnings reached $4.49 and beat estimates for $4.37 but that was down -7% on a year ago basis. Shares rallied $3 with the market from severely oversold conditions.

Earnings kick into high gear next week with the busiest week of the quarter. Apple, Facebook, Amazon and Microsoft will be the companies most watched.

The Dow has 12 components that will report next week with Tuesday the busiest day. Four report before the open on Tuesday with Apple reporting after the close. That means several misses in the morning could tank the Dow on Tuesday and Apple could pressure it on Wednesday.

Winter storm Jonas is wreaking havoc with the Northeast this weekend with nearly 7,000 flights cancelled as of Friday evening. Those 7,000 flights would have burned a lot of jet fuel so we should expect to see a rise in distillate inventories over the next couple of weeks as the fuel backs up in the system. This will negatively impact airline earnings for Q1.

The Dow Transports ($TRAN) rebounded +1.3% on Friday but I would not start celebrating just yet. All the fundamentals are still negative. This was just an oversold bounce and we should see lower lows ahead.

The rebound from the Wednesday crash helped to turn around some of the internals. The percentage of S&P stocks over their 200-day average improved from 19.2% to 24.8%. That is still low but a definite improvement.

The percentage over the 50-day average improved from 9% to 17.8% or almost double. That is still very oversold.

The percentage of stocks over their 200-day on the NYSE Composite Index dipped to 15.1% and the lowest level since July 2011 at 9.79%. The NYSE Composite is likely to test 8,815 as energy stocks decline with oil and earnings.

The Baltic Dry Index ($BDI) set a new record low at 354 showing that ocean shipping is almost nonexistent at the present time. Goods are not flowing and that means the global economy is stagnating.

DryShips (DRYS) rallied 40% on Friday on no news. It was definitely not because the Baltic Index rallied. That 40% spike lifted shares to 15 cents. That is significantly lower than their $125 high back in 2008 when shipping was at a premium. The dry shipping business is almost out of business thanks to the global slowdown in shipping.

The CRB Commodity index set a new 40 year low on Wednesday at 156 and recovered slightly to close at 163.8 late in the week as oil rebounded.

Only 28% of the S&P-500 stocks have a buy signal on the point & figure charts. I wish I could find them. I looked at more than 1,000 charts on Friday and other than the Friday short squeeze the charts were very bleak.

The High Yield sector (HYG) is still leading the markets lower although we did see a minor bounce last week. Like everything else, this was short covering and the weakness is likely to continue once oil prices roll over.


The markets suffered a perfect storm last week with Asia and oil prices crashing at the same time. I mentioned two weeks ago that sovereign wealth funds were probably liquidating equities to cover losses in the oil market. The top ten sovereign wealth funds excluding Canada have about $6 trillion in assets according to Jack Bouroudjian from Index Financial Partners. Much of those assets are tied up in investments that are not liquid like real estate. With oil prices crashing under $40 at the beginning of January that gave them added incentive to sell what they could rather than what they wanted to sell. That means equities were kicked to the curb.

It is no coincidence that most global markets were down almost equal amounts over the first three weeks of January. China was its own problem but the rest of the world was in the same sinking ship as funds liquidated global equities. JP Morgan estimates that sovereign wealth funds have liquidated more than $75 billion in assets in recent weeks. Others, including Jack, believe that is a very conservative estimate.

The oil producing nations are in severe pain because their budgets are built on $75 oil or higher. Oil at $30 means they are running huge deficits and only Saudi Arabia has the assets and credit to go to the debt markets to offset the shortage of petrodollars.

Dollars run the world. When oil prices were high these oil producers were awash with dollars and they poured the money into social programs and investments. Now that the petrodollar flows have shrunk about 75%, they have nowhere to turn except to liquidate those investments.

If oil prices do not rebound sharply and soon, which is highly doubtful, these countries will be forced to sell more assets. That will further depress our markets.

The rebound in the S&P from the October 2014 Ebola lows at 1,820 was a textbook recovery. However, it will only remain a textbook recovery if it continues. If the S&P rolls over next week, that rebound will have been just another bear market bounce and we are likely to see lower lows. Nobody wants that to happen but we have to be prepared just in case.

The S&P closed just over the 1,900 level at 1,905 on short covering at the close. Whether that level holds probably depends on the Asian markets on Sunday night and the return of saner minds to the oil trade. Fundamentals have not changed on crude. Inventories are going to continue rising until March and prices should continue falling thanks to Iran's contribution to the global glut.

Various agencies like the IEA now expect the glut will rise from 1.2 mbpd to 2.0 mbpd over the next six months. It is going to get worse instead of better.

Baker Hughes (BHI) reported another decline of -13 active rigs to 637 with oil rigs declining -5 to 510 and gas rigs falling -8 to 127 and another 18 year low. U.S. production rose again for the seventh consecutive week to 9.235 mbpd and a three-month high. Eventually the rapidly declining rig count will force lower production but it has not happened yet.

For next week we need to watch the 1,950 resistance level on the S&P and initial support at 1,867. If that support fails a retest of the lows is likely and the potential for an even lower low. The S&P dipped to 1,812 intraday on Wednesday.

The Dow has had a wild ride since the 17,750 high on December 29th. The index declined -2,300 points in 14 trading days to touch 15,450 on Wednesday. That is extremely oversold in anybody's terminology. We were due for a bounce even if only temporary. Markets do not go straight up or down without a temporary reversal every 5-7 days. Since 1940, there have been 50 bear markets. Thirty-one of those saw 5% rebounds in the middle of the decline. The pressures have to equalize and give traders a chance to reload.

A 2,300 point drop in 14 days was severely oversold and begging for a major rebound. We got that on Thr/Fri and now next week will be a new beginning.

The Dow came within 100 points of the February 2014 lows and the August 2015 lows at 15,370. In theory, that was a textbook rebound point. Back in August we spiked for two days and about +1,300 points off the lows but then rolled over for a nearly -700 point drop back to 16,000 where the index rested for over a month. I seriously hope we are not in for a repeat of that experience. I would much rather see a repeat of the October 2014 Ebola rebound that took 40 days and recovered 2,136 points from 15,855 back to 17,991 with only about 5 days of weakness across those 40 days of trading.

Unfortunately, we rarely get what we wish for and we will have to play the cards we are dealt. Next week begins a new hand. We do have an FOMC meeting on Wednesday and typically, the market is up the day before the meeting. Whether that trend will overcome the swirling market currents is of course unknown.

The Nasdaq Composite also came very close to the August lows and the rebound was strong with a recovery of +277 points from the Wednesday low of 4,313. The Nasdaq stopped at 4,600 on Friday and that should be psychological resistance with real resistance at 4,700 from two failures back on the 12th and 13th.

If you look at the winners list below the top few stocks are the favorites from last year. I said repeatedly we were not going higher until those few stocks returned to the winning side.

The exception was Netflix. The company reported earnings earlier in the week and while I thought they were good and the outlook strong, I was in the minority. Shares have declined back to $100 with strong support at $97. Netflix was one of the biggest gainers in 2015 and it may need time to rest now that earnings expectations are in the past. We call this the "post earnings depression" period. Traders that owned the stock hoping for an earnings boost are now leaving to find other trades and repeat the process.

The Nasdaq has a few high profile earnings reporters due out next week with Amazon, Facebook, Apple, Microsoft, Alibaba, Amgen, Ebay, Qualcomm, Juniper and Skyworks leading the list. This could provide some volatility in both directions depending on the reports.

Initial support is 4,435 and real resistance at 4,700. I am rooting for the high number but a lot of factors have to fall in our favor for that to happen.

The Russell 2000 rebounded +62 points or roughly 6.5% from its lows at 958. That put it well over 1,000 to close at 1,020. The 1,000 level is mostly psychological but there is some minimal support at 1,007 from early 2014.

The 1,050 and 1,082 levels were support on the way down, although both were just momentary pauses in the crash. They may be resistance if the index decides to move higher.

I would love to see the small caps come back to life because that would provide positive sentiment for the broader market. It would mean fund managers were no longer afraid of a larger dip.

I am encouraged about the rebound and the decent short squeeze on Friday. I am not confident that the gains will stick because the fundamentals have not changed.

I seriously doubt oil will continue to rise. When oil begins to dip back below $30 that is going to be market negative. I did read one commentary this weekend that suggested $30 oil was a very big plus for Europe. They import the majority of their oil and $30 is a lot better than $100. That is the equivalent of QE for consumers and Mario Draghi does not have to do anything for the economy to benefit. Unfortunately, it has a long fuse. It will take a year or more for the benefits to be seen.

Tony Dwyer, chief market strategist at Canaccord Genuity, said the market moved enough into oversold territory that it has become a buying opportunity. His metrics had only been this oversold twice before in 25 years. That was in 2008 and June 1994. He believes that any further declines will be limited. He has a 2,350 end of year target for the S&P-500.

The AAII Investor Sentiment Survey hit 17.9% bullish last week and that was the lowest reading since April 2005. The bullish reading rebounded slightly this week but even the 21.5% is the lowest since the market crash last August. On a contrarian basis, this extremely low reading on bullish sentiment is actually bullish. The long-term average is 38.7%. The bearish sentiment at 48.7% has not been this high since August 2011 when the market dropped on the government shutdown. That is also bullish from a contrarian perspective.

We just need to be ready for whatever the market gives us. I would continue to keep positions small and be prepared for moves in both directions. A continued rebound would be against the historical odds that suggest there are multiple bounces in a longer-term decline. I am sure none of us would complain if that trend was broken and the market moved higher.

My comments from last weekend. "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."

The advertising for the EOY subscription special is over. However, we still have a limited number of mouse pads and books left over so I will leave the link open for a few days in case anyone decides to take advantage of the savings.

If you like the market commentary 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.

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Random Thoughts

Venezuela Circling the Drain

Inflation is soaring in Venezuela with the central bank now admitting it rose +141.5% in 2015. In reality it was probably worse but that is the first time since December 2014 that the bank has published its monthly report. Yes, over a year since the bank last updated the official numbers.

In a recent Bloomberg survey of 12 economists, they expected inflation to rise +184% in 2016. Nomura securities was the highest forecast at 700%.

However, the IMF updated their forecast last week and they are expecting 720% inflation in 2016, up from their prior forecast of "only 204%." To put that in perspective it means the price of an average product will go up 7 times over the next 12 months.

Inflation is already so bad that there are no products to buy. People in Venezuela cannot afford to buy products from neighboring countries because the Venezuelan currency is worthless. All transactions now take place in the black market.

Economists believe the economy will shrink by more than 8% in 2016 following a 10% decline in GDP in 2015. Barclay's said a country bankruptcy in 2016 will be "difficult to avoid."

On the positive side, a country collapse will probably take its oil production off the market at least temporarily. In 2008, Venezuela produced 2,394,020 bpd and was the tenth largest producer. According to some analysts, production has declined to less than 2.0 mbpd as a result of nationalization of everything by Hugo Chavez. In order to keep the peace the government has subsidized gasoline to citizens at 2 cents per liter (not a misprint) so they are losing money on every transaction. The country consumes 900,000 bpd and exports the rest. Some 95% of export revenue comes from oil. If the oil industry was shuttered because of the looming financial crisis the country would collapse. The loss of those exports would help temporarily balance the global supply.

Venezuela's oil is heavy crude and it was trading at $20.20 on Friday. They need $125 to balance their budget.

Venezuela has 298 billion barrels of proven oil reserves. That is the largest in the world with Saudi Arabia second at 268 billion barrels and Canada third at 173 billion.

Creditors are learning an expensive lesson about the oil cycle. When crude prices are at 13-year lows the assets of bankrupt companies are nearly worthless.

Quicksilver, the third largest energy company bankruptcy in 2015 had $2.35 billion in debt. The assets sold at auction for $245 million. Endeavour International had debts of $1.63 billion and its assets sold for $9 million with creditors seizing the rest. American Eagle Energy had debts of $215 million and its properties sold for $45 million in October. Dune Energy had debts of $144 million and the assets sold for $20 million.

There are plenty more auctions ahead as the pace of bankruptcies increases.

Partial list of U.S. energy companies filing bankruptcy in 2015:

Ivanhoe Energy $77 million in debt.
BPZ Resources $238 million
Larcina Energy $133 million
Shoreline Energy $17 million
ERG Resources $401 million
Duer Wagner Oil & Gas $122 million
Sun River Energy $11 million
Primera Energy $7 million
Saratoga Resources $206 million
Arabella Petroleum $18 million
Sabine Oil & Gas $2.8 billion
American Standard $38 million
Black Elk Energy $144 million
Sable Operating $16 million
American Natural energy $22 million
Armada Oil $3.1 million
Samson Resources $4.3 billion
Miller Energy Resources $215 million
AIX Energy $35 million
RAAM Global Energy $304 million
Escalera Resources $42 million
Parallel Energy $168 million
Energy & Exploration Partners $1.2 billion
Transcoastal $22 million
Cubic Energy $126 million
Magnum Hunter Res $1.0 billion
New Gulf Resources $575 million
Swift Energy $1.285 billion
Rough total for all is $17.2 billion

Goldman Sachs compiled a list of reasons given by their clients for not buying stocks. These are the top five reasons given.

Not brave enough to catch a falling knife.

U.S. industrial activity is contracting. Consumers will follow and drag the economy into a recession.

Falling crude prices will cause additional capex cuts and lead to profit declines across many industries.

China's economy is slowing and they will be forced to dramatically devalue the yuan, exporting deflation and causing the Fed to cancel its rate hike program, causing investors to become confused.

Share prices need to fall further to offer an attractive risk-adjusted return given heightened economic and market risk.

Moody's just put half a trillion dollars in energy debt on review for a possible downgrade. On Friday Moody's put 175 energy and mining companies on review for a downgrade due to the prolonged decline in commodity prices.

Moody's said they now expect crude oil to "average" $33 for all of 2016, a $10 drop from their prior forecast. Of the 120 energy companies with 69 public and private, the agency said there was "substantial risk" of a slow recovery in oil that could compound the stress in oil and gas firms. Total SA and Shell were on the list for downgrades but Exxon and Chevron were not.

Read full story here

New York Mayor Michael Bloomberg is taking early steps to join the presidential race as an independent candidate. Saying he was disappointed with the prospects of an eventual race between Bernie Sanders and Donald Trump, he believes now is the time for a third party candidate. Bloomberg said he will definitely run if it appears Sanders is going to win the Democratic nomination and if Trump or Cruz appear to be the victors on the Republican side.

Bloomberg said he would spend up to $1 billion of his own money to fund his campaign. He said Clinton is a "flawed politician" but if she is ahead in the race she is mainstream enough that Bloomberg would not have a chance as a third party candidate. His advisors believe he can wait until March to declare and still get on the ticket in all 50 states.

If you thought the presidential race was a hectic up to this point, it is really going to get crazy if Bloomberg throws his hat into the race and makes it a three-ring circus. This would be a good thing for the republicans because as a liberal democrat he would take votes away from Clinton and Sanders.


Enter passively and exit aggressively!

Jim Brown

Send Jim an email


"Be humble. Be hungry, and always be the hardest worker in the room! "

Dwayne "The Rock" Johnson


Index Wrap

Another V-Bottom

by Keene Little

Click here to email Keene Little
The strong selloff into Wednesday's low followed by an equally strong reversal back up into Friday gave us another v-bottom reversal off some important support levels. Strong follow through to the upside in the coming week, vs. a consolidation pattern, will be important for the bullish pattern. The jury is still out as to whether or not this week's low will be an important one.

Week's Indexes

Review of Major Stock Indexes

By early this past week there were several measures that showed the market was more oversold than any time since the 2008/2009 lows. The rubber band had been pulled back hard and now the rally off Wednesday's low has many thinking the correction to the rally is complete and we're now ready for the next leg up to new highs this year. As I'll review in the charts, there is bullish potential for the start of another rally but I think the higher-odds scenario calls for lower prices as the market works its way lower over the next few months before setting up a larger bounce correction. We'll have some price levels to watch to help guide our trading.

Helping the stock market was a strong bounce in oil, which also found a bottom on Wednesday. Cheap oil is great for those of us who buy gasoline for our cars, heating oil and other energy-related products. But weak oil prices are playing havoc with the earnings and finances of most energy-related companies. Because of the abnormally low interest rates over the years we had an abnormally large amount of debt taken on by oil drillers, especially the frackers. Now with lower earnings we're finding many drillers heading for bankruptcy, which means loans are going unpaid. That of course negatively affects those banks who were heavy lenders. It also negatively affects the bonds created out of packaged loans (as was done with subprime mortgage loans) and the decline in the junk bond index, such as HYG, especially the steep decline since April 2015, has been warning us for a long time that not all is well.

The borrowing problem is much worse than just the oil industry. Many corporations also borrowed heavily over the years to use it for non-productive purposes, such as stock buybacks and M&A activity. Instead of investing money in productive uses, such as capital equipment, most companies preferred to buy back stocks to help improve "earnings." The problem is this has been hiding the fact that the companies have actually been producing lower earnings while earnings per share increased.

Many analysts used the improved P/E ratios, as a result of these financial machinations, as justification for the higher stock prices, completely ignoring how and why those P/E ratios were improving (or at least not declining). But with declining earnings we're finding companies faced with less money to service their significantly larger loans so the result is going to be a double whammy from declining earnings and higher debt. The enormous amount of debt that has been accumulated far surpasses what we had in 2007 and the result is a far more leveraged financial market, which makes it much more vulnerable to a downside disconnect. The sharp decline last August might have been the shot across the bow and January's decline could very well be a small taste of what's to come.

But with oil's recovery this week, +23.5% off Wednesday's low at 26.19 to Friday's high at 32.35, it has many believing the worst is behind us and it was a reason for strong short covering. Short covering in a bear market can produce more powerful rallies than you'll see during bull markets. But they also tend to fail with v-reversals as the buying can quickly stop. If oil can get above 33.50, to climb back above strong support-turned-resistance, it would likely help lift the broader stock market and therefore it will be important to watch oil in the coming week.

As of the end of the past week we do not yet know if the market is at the start of a strong reversal that will take us to new highs. If we follow the multiple instances of strong v-bottom reversals that we've seen since 2009 then we're headed for new highs. But if the market topped out then January is merely the start of what will become a much more significant decline. We can't know for sure which scenario will play out and therefore simply need to let price lead the way, using some price levels and the price pattern to help identify the higher-odds scenario as early as possible so that we can get in on the move or at least avoid being on the wrong side. For this coming week I think it's important to stay more cautious than aggressive to either side.

A Look At the Charts

Because of the big moves in the stock market indexes this month (actually since last August), I think it's important to keep the big picture in mind. With that in mind I'll start this weekend's review of the indexes with a look at the Wilshire 5000 index (the granddaddy of the indexes) and a top-down view, starting with the monthly chart. As I've stated more forcefully in the past month, I think the market has topped and we've now started the next cyclical bear that should complete the secular bear.

Last week I showed a monthly chart of the DOW to point out the large expanding triangle and explained why I think a 3-wave move up from 2009 did a nice job completing the rally and now we're looking for a big decline back to the bottom of the triangle (so below the 2009 low). But I think it's also important to consider a more bullish option (at least for this year) and then test the price pattern along the way to see if it continues to be supported or gets negated. I'll use the W5000 index to highlight the bullish possibility and what to watch for as the price pattern develops further.

Wilshire 5000 index, W5000, Monthly chart

The monthly chart of the W5000 shows parallel up-channels based off the trend line along the highs from 2010 through 2014, with the parallel lines attached to the 2009 low (green) and 2011 low (blue). Using up- (or down-) channels like this are an excellent way to see when a trend has broken. You can see how often the bottom of the channel from 2009 (green) was tested during the multi-year rally -- it was broken only once in October 2011 but there were no monthly closes below that line. If January closes below 20300 (about 700 points above Friday's high), which is the current location of this line, it will be the first monthly close below the line. The blue line, attached to the October 2011 low, was also broken this month and the bounce off Wednesday's low is currently back up to the line, near 19600 (Friday's high was 19605).

The up-channel(s) could be important because it could be pointing to another rally leg this year that will take the indexes to new highs. If the pullback from last May is a correction to the bull market rally (green 4th wave correction) then we're due a 5th wave to new highs (green arrow). That would mean a rally leg could get started from here and it's a good enough reason to not get married to a short position. The bearish interpretation says the 3-wave move up from 2009 into the May 2015 high was the completion of an A-B-C rally that will now be followed by the next bear market decline (red arrow). And the bearish interpretation makes the downside risk MUCH greater than the upside potential.

Wilshire 5000 index, W5000, Weekly chart

By studying the weekly chart of the W5000 below, shown below, you can see how well price traded technically. Following the high last May price broke down in August and dropped below an uptrend line from October 2011 - October 2014. That uptrend line then became resistance when it was back-tested in November, along with price-level support/resistance near 22200. The bearish kiss goodbye from there led to the strong decline into this month, which has broken through the bottoms of the up-channels described above.

Wednesday's low at 18550 came very close to tagging its uptrend line from March 2009 - October 2011 (bold green line), currently near 18475, and the rally into Friday's high brought price back up to the bottom of its broken up-channel from the 2011 low (blue line), which is also its previous low at 19619 on September 29th.

From a bearish perspective this week's bounce is just a back-test of resistance that will be followed by a continuation lower, possibly after a week of consolidation between this past week's high and low and into the end of the month. The bullish interpretation is the bounce off the longer-term uptrend line from March 2009 - October 2011 with bullish hammer candlestick at support. You can see a bullish hammer at the October 2014 low and how it led to another rally to new highs. The bulls are clearly hoping for a repeat performance. A strong rally next week would be reason enough to think more bullishly for at least the next couple of months.

Wilshire 5000 index, W5000, Daily chart

From an EW perspective the bears have a lot more work to do before we'll see a tradeable bottom for something more than just a week or two. Starting from the May high we have a series of 1st and 2nd waves to the downside, which is what set us up for the strong decline off the December 29th high. That means we need to see the index stair-step lower to complete the wave count, which is why I'm showing a projection down to 16547 by June in the chart above (a typical wave pattern and down to the 38% retracement of the 2009-2015 rally). As depicted on the daily chart below, this stair-step pattern could mean a lot of whippy price action over the coming months. Strong short-covering rallies could be followed by steep declines and then back up again. You'll need to be a short-term trader in this scenario. The bulls need to see a rally above the December 14th low, labeled wave-i on the chart, at 20603 in order to negate the bearish wave count, in which case I'd turn bullish for a move back up to at least the downtrend line from July-October, near 21700.

Key Levels for W5000:
-- bullish above 20,603
-- bearish below 18,300

S&P 500, SPX, Daily chart

The pattern for SPX is the same as the W5000 (as is true for the other indexes as well, except the RUT). There were several layers of support that was broken this past week, starting with an uptrend line from August-September near 1888 and price-level S/R levels near 1885, 1867 and 1820. But those levels were recovered with the rally off Wednesday's low, leaving only an intraweek break of support. We could see price chop up and down in this area before finishing with a higher bounce but in reality it's next to impossible to reliably guess where price is going in the coming week. The bearish wave count calls for a 4th wave correction and those are very difficult to figure out in real time. Only with more price will the pattern clear up enough to then make a projection for the next move. Compounding the difficulty is the question about whether or not we're going to see the start of the next rally (above 1950 would better support that idea) or instead a continuation lower (below 1820 would be more bearish). There are some timing models that suggest February 1 will be a high for a bounce before heading lower again.

Key Levels for SPX:
-- bullish above 1950
-- bearish below 1820

S&P 500, SPX, 60-min chart

Thursday's rally stopped at the downtrend line from December 29th and Friday's rally was a break above the line, confirming the leg down from December 29th completed on Wednesday. So far the rally off Wednesday's low appears more corrective than impulsive and that supports the idea that we will get only a bounce correction to the decline and it will be followed by another drop lower. But it doesn't prevent the bounce from getting higher, such as up to the 50% retracement of the decline from December 29th, near 1947, and the bottom of a previous down-channel from November, near 1950. This is why I think it would be more bullish above 1950 but until then I would not get complacent about the long side.

S&P 100, OEX, Daily chart

As with many other indexes, OEX dropped down to its August 2015 low (809.57) on Wednesday with a low at 809.96, which was another intraday break below price-level S/R at 825-830. But like in August, support held on a weekly closing basis. The bearish wave pattern says that support level will eventually break for good but it might not be easy for the bears to achieve. The bulls would look stronger above 880.

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

Dow Industrials, INDU, Daily chart

Last week the Dow broke below price-level support at 16K (August and September lows) and 15666 (August closing low) and almost made it down to its February 2014 and August 2015 lows at 15340 and 15370, resp. The rebound off Wednesday's low had the Dow recovering back above those support levels and like the other indexes, it left a bullish hammer on its weekly chart. If the 3-wave move sideways since May is a bullish consolidation we could see a rally back up to the downtrend line from May-November, near 17750, before dropping back down in a continuing sideways consolidation. But that's a lower probability pattern and for now I'm looking for a consolidation through the coming week before heading lower again, which should result in at least a test of support at 15340-15370 before consolidating again.

Key Levels for INDU:
-- bullish above 16,900
-- bearish below 15,300

Nasdaq Composite, COMPQ, Daily chart

The Nasdaq dropped below its uptrend line from October 2014 - August 2015 and almost made it down to its August low at 4292 (Wednesday's low was 4313) before rallying back up and closing well above support by Friday. It's no different from the other indexes -- it could continue rallying but if we get something like depicted in bold red (a 3-wave bounce up to the 20-dma by the end of this coming week) I think it would be a good setup to get short. Watch for potential chop and whipsaw in the meantime.

Key Levels for COMPQ:
-- bullish above 4872
-- bearish below 4270

Nasdaq-100, NDX, Daily chart

NDX was relatively stronger than the Nasdaq in that it made only an intraday break of its September low on Wednesday and then recovered. On Monday and Tuesday it had been trying to hold its uptrend lines from June 2010 - November 2012 and March 2009 - August 2015, currently near 4160 and 4120, resp. (log price scale). These values are using the log price scale, shown on the chart below. Using the arithmetic scale, the uptrend line from March 2009 - August 2015 is currently near 3970, about 23 points below Wednesday's low. A 3-wave bounce up to its 20-dma, perhaps near 4325 by Friday, would be a good setup for a short play but as with the other indexes, keep the bullish potential in mind as we wait for further price action to provide more clues.

Key Levels for NDX:
-- bullish above 4478
-- bearish below 4050

Russell-2000, RUT, Daily chart

On Wednesday, January 13th, the RUT broke support at roughly 1030-1040, which included price-level S/R at 1040 (October 2014 low), the bottom of a parallel down-channel from June's high and its uptrend line from March 2009 - October 2011, the latter being an important break by the bears. In my mind this was a very important support zone that the bulls needed to defend. The next day, January 14th, it was only able to back-test broken support with a high at 1033.57 before dropping lower. Of all the indexes I think it's the RUT that deserves the most attention right now. If the bulls can get the RUT back above 1040 I would at least be more neutral the market and watch to see if it can continue to rally in a sharp impulsive pattern. If it did that I would then look for pullbacks as a buying opportunity. But if the RUT continues to chop around in the coming week and stalls in the 1030-1040 area I'll be looking to short it. The RUT is likely to lead the way from here and following it like a lost puppy could make it easier to stay on the right side of the market from here.

Key Levels for RUT:
-- bullish above 1109
-- bearish below 967

SPDR S&P 500 Trust, SPY, Daily chart

The SPY chart below shows a bullish reversal from the penetration below the lower BB, similar to what was seen off the August low. It was another good example of why you can't be looking to get long just because price pokes below the bottom of the band -- it can continue to press lower and trying to find a bottom is like catching falling knives. The volume spike on Friday, January 15th was followed by a further price drop into Wednesday's low but on a lower spike in volume, which set up a bullish divergence. But there is one message from MFI here -- notice the difference in behavior at the current low vs. the v-reversal back in August and even in November and December. At the moment it's a reason for caution while we wait to see if price can make it back up to the midline, which is the 20-dma and currently at 196.33 but coming down fast.

Powershares QQQ Trust, QQQ, Daily chart

We have a similar picture for the QQQ as for SPY -- the reversal up from the lower BB makes it probable we'll see a bounce at least back up to the midline of the BB, at 106.81 but coming down. The volume spike on Friday, January 15th, was followed by a lower price low on Wednesday but on slightly lower volume. Williams %R also showed bullish divergence following its low on January 7th and this was telling traders not to press their bets to the downside. Now we watch to see if the 20-dma holds as resistance if it's tested in the coming days.


While there are some minor differences between the indexes, the price patterns since the November highs are remarkably similar. There is a way to consider the setup into Wednesday's lows as bullish, for at least a return trip back to the December highs, but I believe it's a lower probability scenario. It would become a higher probability if prices can above the December lows, which I marked as key bullish levels on my charts. The higher-probability pattern calls for a continuation lower but probably not until after another week of consolidation or a higher bounce. Watch the 20-dmas, if reached, for shorting opportunities (turn more neutral above the 20-dmas).

The RUT has been a good canary index and I think it deserves special attention in the coming week. Stay bearish below 1040, neutral above, and then cautiously bullish above its September low near 1079 and more bullish above its December 14th low near 1109.

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

Trade Both Directions

by Jim Brown

Click here to email Jim Brown

Editors Note:

Since we do not know which direction the market will take next week, we should be prepared for a trade in each direction.

This is probably the hardest week of the quarter for picking stocks. More than 80% of the stocks that have not already reported Q4 earnings, do so in the next three weeks. Since we do not want to hold over an earnings report that makes it tough to find candidates.

Add in the three-week market crash and the short squeeze rebound and indecision is everywhere. Will the rally continue? Will the lows be retested? Will we see lower lows? Will Apple crush the market with an earnings miss on Tuesday? Will the Fed raise rates on Wednesday? When you start adding up all the possibilities it will make you crazy.

What we cannot do is let the indecision paralyze us into not trading or putting all our money into a lottery ticket on the market. Maintain a rational position size so you can sleep at night and let the market do its thing.


LULU - LuluLemon

LuluLemon designs, manufactures and sells athletic apparel and accessories for women, men and female youth. They operate through corporate owned stores and sell direct to the consumer online. They are best known for their yoga style clothing. Full Company Description

LuluLemon surprised everyone when they raised their guidance for Q4 sales saying they had a great holiday season. The company preannounced strong sales when most other retailers were posting losses or mediocre gains. The company now expects Q4 revenues in the range of $690-$695 million compared to prior guidance for $670-$685 million. This represents nearly 19% year over year growth on a constant currency basis.

Earnings guidance was raised to a range of 78-80 cents, up from 75-78 cents. Analysts were expecting 77 cents. The company said it entered 2016 with a bang thanks to a better than expected holiday season and continued increases in store traffic.

Cowen raised the target price from $52 to $66. Wells Fargo ungraded them from neutral to outperform with a target of $65. Jefferies upgraded it from hold to buy and gave it a $70 price target. Credit Suisse maintained its outperform rating but raised the target to $60. Suntrust Robinson reiterated a buy with a $66 target. Morgan Stanley reiterated an overweight with a target of $68. Morgan called it their favorite "turnaround" stock for 2016. Barclays issued an overweight rating with a target of $85.

It is amazing what a little positive guidance can do for Street ratings.

Earnings are March 9th.

With a trade at $59.05:

Buy March $60 calls, currently $2.81, initial stop loss $54.65


JUNO - Juno Therapeutics

Juno is a biopharmaceutical company that develops cell based cancer immunotherapies. Full Company Description

Juno has been very active in buying up its competitors. On January 11th the company announced the acquisition of AbVitro for $125 million. That is their third acquisition in 12 months. However, Illumina (ILMN), ten times larger than Juno, is also on the same track and announced a similar acquisition on the same day.

Juno claims there is more than enough room in the space for both Juno, Illumina and Celgene (CELG) another competitor in the space. Apparently investors are not convinced. Shares of Juno have been in decline since early December and they hit a post IPO low last week. The rebound was lackluster and in a good market on Friday, they only gained 8 cents.

I expect to see a lower low in the weeks ahead.

Earnings are March 17th.

I am putting a downside entry trigger of $31.50 and upside stop just over the highs of last week at $35.15.

With a trade at $31.50

Buy March $27.50 put, currently $1.65, stop loss $35.15

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In Play Updates and Reviews

Trend Change?

by Jim Brown

Click here to email Jim Brown

Editors Note:

Another gap open on sharply rising oil prices but is this a change in trend or a temporary rebound?

A major short squeeze in WTI plus sharply positive markets overseas pushed the futures higher before the open. The markets gapped up and then faded slightly until noon. Traders decided they were not going lower and began covering their positions ahead of the weekend. In recent markets holding profits over a weekend have proven dangerous.

Typically in down trending markets we will see a decent rebound about every 5-7 days. We were over due for a decent bounce. Now that we had one the focus will be on earnings and economics for next week.

We don't need a +200 point rally every day to create bullish sentiment. We just need the markets to be positive more often than negative. That would be a trend change for 2016.

The markets opened strong after Draghi talked about QE but the +271 point Dow rebound faded to only +115 at the close. Where is that real rally?

There was volatility in the market today but nowhere near the volume we had on Wednesday. Crude prices rallied as the front month contract moved to March and that boosted the energy sector and the Dow stocks Exxon and Chevron. The big gainer was Home Depot (HD) as traders bought the stock ahead of the blizzard in the Northeast.

The Dow dipped to only +40 in late afternoon but buyers appeared to lift it back to +115 at the close. The Nasdaq and S&P traded in negative territory midday but rebounded back into the green at the close.

The Russell posted a miraculous rebound yesterday but was flat for most of the day today. The one spike at noon was quickly sold.

The biotech sector was a big driver for the market rebound on Wednesday but the $BTK gave back -92 points today.

I am not excited about the market outlook. The fade in the afternoon suggests there are still some sellers and this may have been just a bear trap rebound from severely oversold conditions.

Current Portfolio

We are changing the format slightly this week. The entry date, earnings date, current price, change for the day and stop loss are all in the portfolio graphic. They will no longer be listed in the individual play descriptions. Everything you need is now available in a single location.

Current Position Changes

Stop Loss Updates

Check the graphic above for any new stop losses in bright yellow. We need to always be prepared for an unexpected decline.

DVN - Devon Energy

I raised the entry trigger and changed the option strike on Devon. See the play description for details.

Original Call Recommendations (Alpha by Symbol)

IWM - Russell 2000 ETF

ETF Description


Nice market bounce added +2.42 to the IWM but we really need the rally to continue to actually make any money here. I would love to see the small caps begin to outperform because that would lead the broader market higher.

Original Trade Description: January 20th

The IWM is the Russell 2000 ETF and the Russell was the only major index to close positive for the day other than the Biotech sector index. The Russell is in a bear market with a -24% drop from its highs. The Russell declined -47 points intraday and rebounded to gain +4.4 at the end of the day. The 960 level where it bounced was support from early 2013 and it was the 300-week average.

Typically, the small caps are the strongest index in December and January. That was not the case this year and there is a good possibility fund managers will bargain hunt there first when the buying begins.

Resistance from Tuesday's gap higher open is $101.20. I was going to recommend an entry trigger at $101.50 to get us past that level. The IWM closed at $99.18. However, by waiting to get past that resistance the option premiums could rise by more than $1. I would rather just buy the open and we will take what the market gives us.

Position 1/21/16:

Long March $102 call @ $2.76, no initial stop loss.

PCRX - Pacira Pharmaceuticals

Company Description


Pacira shook off the loss from Thursday and posted a gain but we need to see it recover the $70 level. I never complain about a gain but it could have been better with the market rebound.

Original Trade Description: January 16th

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.

Earnings: Feb 26th, before the open.

Position 1/19/16:
Long Feb $75 Call @ $2.75, initial stop loss $61.45

QQQ - Nasdaq 100 ETF

ETF Description


The Nasdaq 100 gained +117 points causing the QQQ to rise nearly $3 to $103.66. The next resistance is $106 and I would love to see that broken next week on strong moves by Apple and Amazon. Unfortunately, Apple is not likely to move sharply higher if they report slowing iPhone sales. There is a lot of bad news already priced into Apple shares so there is hope for a better than expected report.

Original Trade Description: January 20th

The Nasdaq fell -163 points intraday and rebounded to positive territory just before the close. Some late selling in the last few minutes knocked it back to -5 for the day. From -163 to -5 is a monster rebound. The biotech stocks led the way but solar stocks, semiconductors and even Apple and Netflix got into the act and rebounded strongly.

Netflix declined from its afterhours high of $123 to a low of $97 intraday before rebounding to close at $108. I would have loved to buy Netflix at $97. What a bargain.

Obviously, a lot of that rebound was short covering and we do not know if it will last. However, the intraday low on the Nasdaq Composite was 4,319 and very close to the flash crash low of 4,292 from August. While it was not a perfect retest, it was close enough that a lot of traders closed shorts and bought stocks.

The Nasdaq 100 ($NDX) and the index the QQQ tracks, failed to decline anywhere close to the same distance as the Composite. The NDX dropped to 3,992 with major support at 4,000. The rebound there was very strong and from the right support level.

After the bell FireEye (FEYE) raised guidance and F5 networks (FFIV) beat on earnings. That could help with sentiment on Thursday. Nasdaq futures are up +6 in afterhours.

I am recommending the March $104 call with no entry trigger. If the market is going to open up I want to be there on the opening bell. These short squeezes can run for days and most lasting rallies begin with short squeezes.

Position 1/21/16:

Long March $104 call @ $2.63, no initial stop loss.

STZ - Constellation Brands

Company Description


Outstanding gain by STZ and nearing the prior highs. We could actually see a breakout if the market cooperates.

Original 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.

Position 1/19/16:
Long April $150 Call @ $4.70, initial stop loss $138.25

Original Put Recommendations (Alpha by Symbol)

DVN - Devon Energy


Devon was not triggered because the sharp spike in oil prices caused all the energy shares to move higher. This is great for us because it will give us an opportunity to get short with the put from a higher level.

I raised the entry trigger to $24.75 and raised the strike to the March $23 put.

Original Trade Description: January 21st

Devon Energy primarily engages in the exploration and production of oil and gas. The majority of their production is natural gas from more than 19,000 wells but they are making a concentrated effort to expand oil production. At year-end they had 689 million barrels of oil equivalent reserves. Company Description

In Q3 they produced 282,000 barrels of oil per day. That was a 31% increase over Q3-2014. That was the 5th quarter they exceeded guidance on oil production growth. That compares to their 680,000 Boepd of total gas and liquids production showing that oil was only about 41% of their total production. However, in Q3 oil accounted for 74% of total upstream revenue.

Devon is a well run company and highly regarded but the price of oil is killing them. They do have significant midstream assets including pipelines and processing facilities in the EnLink Midstream business. They own 70% of ENLC and 29% in ENLK. Those midstream companies generated $270 million in cash distributions in 2015.

The EnLink revenue is supporting Devon through this down cycle in the energy sector. Devon is also acquiring Access Pipeline in the first half of 2016 and that will add to their midstream assets.

If crude prices were to rally long term Devon would be a great company to own. However, in this period of falling oil prices from now until April the company is at the mercy of the declining sector.

On Thursday Devon shares rebounded with oil prices to resistance at $24.50 and then faded. When the switch to the March contract fades and crude prices begin to fall again I expect Devon to revisit the lows under $20 from Wednesday.

Earnings are February 16th so this will be a short-term play.

With a trade at $24.75:

NEW STRIKE!! Buy March $23 put, currently $1.95, stop loss $26.65

VXX - iPath S&P 500 VIX Futures ETN

Company Description


Big market rally knocked -8% off the VXX pushing it back to $25 from the early $30 high on Wednesday. We do not need 200-point rallies every day for the VXX to drop. Several days of simply positive markets would do wonders.

Original Trade Description: January 16th

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.

Position 1/19/16:
Long March $23 Put @ $2.41, no stop loss

XLE - Energy Select SPDR ETF

Company Description


The shift to the March crude contract caused two days of short covering that pushed WTI and the XLE right to resistance. Fundamentals did not change. There is still a glut of oil that is rising every day. This short squeeze will pass.

Original Trade Description: January 19, 2016

The XLE is an ETF that represents the majority of the stocks in the energy sector. With the price of crude oil plunging and analysts predicting bankruptcy for 30-50% of the U.S. producers there is nothing to provide support for this ETF.

The few stocks that have dividends including Exxon, Chevron, Conoco and a few others, cannot support the sector. There are 45 stocks in the ETF with Exxon, Chevron and Schlumberger the largest weightings. That leaves about 40 stocks to drag the sector down as oil prices continue to fall.

This play does not need a lot of explanation. We are betting the energy sector will continue to decline as oil prices head for the low $20s.

This is the period of the year when oil inventories build. Demand is low and refineries will begin to shut down for spring maintenance in February and that will continue into March. Last year from the second week in January to the fourth week in April, U.S. inventories rose nearly 112 million barrels to record levels. They cannot repeat that this year because there is not enough available storage. This will drive prices even lower when producers run out of locations to store the oil.

We will plan on exiting this position the first week of March. I am not putting a stop loss on it initially because we could see some volatility whenever the shorts get squeezed. Once we are in the position for 3-4 days I will assign a stop loss

Position 1/20/16:

Long March $50 Put @ $2.62, no initial stop loss.

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