Option Investor

Daily Newsletter, Wednesday, 1/27/2016

Table of Contents

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

Market Wrap

Disappointment Follows the FOMC Announcement

by Keene Little

Click here to email Keene Little
The market got hit this morning following yesterday's after-hours earnings report from AAPL but then recovered nicely. Just as it was about to stand up, the market got hit again by the FOMC announcement, which kept rates the same but left the market with a mixed message.

Today's Market Stats

The market tried gallantly to rally today after an initial down opening following the disappointing reaction to AAPL's earning's last night. It actually rallied strongly (about 30 points for SPX) into a midday high but then slowly pulled back into this afternoon's FOMC announcement. Following the usual cha-cha-cha after the announcement the market then sold off sharply. The net result is a sideways market following last Friday's high and a lack of direction at the moment.

Part of the market's concern is whether or not our economy is heading into a recession (it's been my contention that we're already in one but it won't be recognized by economists until we get another quarter or two of data). The stock market typically tops out about six months before it's announced we're officially in a recession so perhaps that will mean we'll see an announcement this summer. But our stock market has been so disconnected from reality and pumped up on extra liquidity from the Fed that the normal economic metrics have had little to do with stock performance.

I also hear many say we won't be in a recession as long as the yield curve has not inverted and they base their decision to stay long the market based on that. But I don't think it's hard to agree on the fact that yields have been grossly distorted by the Fed and that makes this argument more difficult. The bottom line is that there are many arguments about whether or not the economy is weak enough, and getting weaker, that we should be concerned about the end of the bull market. I think January's decline has answered that question for us (actually August did but many believe it was just another flash-crash correction in the ongoing bull market).

Adding to the difficulties in figuring out the economic data is that it's been voodoo economic numbers from organizations that have a desire to "massage" the data. Jim has been regularly posting the chart of GDP growth expectations from the Atlanta branch of the Federal Reserve. It's at least a lot more accurate (not as optimistic as the Fed always is) but it too has been ratcheted down repeatedly over the past year. It's currently showing an expected Q4 growth of just +0.7% but that's still using the government's massaged economic data. At the beginning of the quarter we were told to expect +2.7% growth. Oops. And it's that oops that's causing some concerns by investors. Smart money has been exiting this market stealthily for a while.

The January ISM (Institute of Supply Management) report was the sixth consecutive month of decline for the manufacturing index and the past two months have been below 50 (contraction territory). The response by many has been "so what, the services component is still strong." I think that's turning a blind eye to the problem of a slowing economy that can be tracked by many other measures, such as transportation. Every measure of transportation, whether by truck, rail or ship, is in a strong decline.

As much as the Fed has been trying to fight deflation, they're losing the battle. The PPI (Producer Price Index) has been declining since last summer. The Empire State Manufacturing index, an important gauge for the country, dropped significantly into negative territory. And yet the Fed's economic models told it the economy was strong enough to warrant a rate increase in December. I think history will say the Fed caused the next market crash but in fact it had already started. But I don't mind them getting the blame since they've completely screwed up in so many ways. Maybe it will help to get them abolished before the bear market is dead.

The Fed relies heavily on employment data, one of Janet Yellen's favorite measures of economic strength. The building could be burning down but she sees firemen at work and feels safe. The problem with the employment numbers is that it's only a surface number. Beneath the surface you can see so many problems such as the kinds of jobs (low paying, part time, one person holding two or three of those part time jobs, etc.). A big problem with using employment data is that it's a significant lagging indicator and often peaks the same time as the stock market in front of a recession. The real numbers, such as business sales down -4%, CapEx orders down -6% year-over-year, trading goods volume down -7% y-o-y, exports down -12%...you get the picture and it's not a pretty one.

So with all that, how does the Fed see things? If you read the minutes you'll see they believe the labor market continues to improve even as economic growth slowed. They changed the language of how household spending and business fixed investments are doing, saying spending is increasing at "moderate rates", which is a change from "solid rates." They did acknowledge there's a global drag on the U.S. economy and that they're not as confident that inflation will climb (they're worried about "disinflation). They kept the language that they expect inflation to rise to 2% over the medium term (not defined) as the "transitory effects" of the decline in energy prices dissipate and the labor market strengthens. They dropped the sentence that said they saw an improvement in the labor market and that they're confident that inflation will rise. Their concerns resulted in a decision to pause rate hikes while they remain "data dependent." I continue to believe the Fed will lower again (heading for negative rates, like Europe) before they raise rates further.

The market apparently did not like the fact that the Fed hasn't turned more overtly accommodative, even though their statement says they remain accommodative. The other concern is the Fed's recognition, in their language changes, that the economy is not doing as well as they thought in December. Well, I at least have to credit them for noticing the obvious.

Interestingly, this afternoon's strong selloff, which might not be quite done, could be setting us up for another rally to give us a larger bounce pattern off last Wednesday's low. But once this bounce off last Wednesday's low has completed, which it might have already done, we should see the market continue lower.

I'll start off with the INDU's charts tonight and the chart below is a weekly line chart, which shows the important weekly closing prices. I've drawn an up-channel to show the 2009-2015 rally and how the Dow dropped down to the bottom of the channel last August. The bounce into the November high was at the midline of this up-channel, a common rebound/failure point, and then this month's decline has seen a break below the bottom of the up-channel. This is a significant break and it's a very strong sell signal following the completion of the 2009-2015 bull market. Notice too that the January decline has also dropped price below the trend line along the highs from 2000-2007, which I'm interpreting as the top of a large expanding triangle continuation pattern off the 2000 high (the bottom of the expanding triangle is at the bottom of the chart). The bearish interpretation of the price pattern calls for the Dow to continue lower into the fall, potentially getting down to the 13K area before setting up a rally into the end of early 2017 to a lower high and then hard down next year.

Dow Industrials, INDU, Weekly line chart, 2008-present

The weekly chart of the DOW below zooms in closer to part of another parallel up-channel which is based on a trend line along the highs since May 2011 and a parallel line attached to the October 2011 low. The difference with this chart is that it's drawn on a log scale chart. You can see the August low almost made it down to the bottom of the channel and the January decline did make it down to the bottom. Once the bounce off last week's low is finished (I'm only expecting a bounce, not a new rally but that's yet to be proven) we should see the Dow drop below the bottom of the channel and act as resistance on a subsequent bounce correction. As depicted on the chart, I'm looking for the market to stair-step lower in a pattern similar to what I'm showing. If the Dow gets above 16600 I'd turn at least neutral.

Dow Industrials, INDU, Weekly chart, 2014-present

The daily chart below shows the daily red and white candles, which clearly indicates a confused market. I've been expecting a higher bounce pattern and I'm sticking with that for now but it means the market should rally on Thursday, perhaps after this afternoon's selloff continues a little lower Thursday morning. Watch carefully if the Dow makes it back up to its 20-dma, currently at 16500 but coming down fast, since it could be the limit of its bounce correction.

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- bullish above 16,600
- bearish below 15,300

The SPX daily chart below shows the same expectation as for the Dow -- another leg up for its bounce off last Wednesday's low is what I'm looking for, but the risk for those long the market (and wannabe shorts) is that the bounce completed today and now we'll start the next leg down sooner rather than later. I like a February 1 turn date (Fibonacci cycle) and so far the price pattern is supporting that idea. As with the Dow, we could see the 20-dma, currently at 1940 and dropping, act as resistance, otherwise a bounce up to the bottom of a previous down-channel, near 1950, makes a good upside target. That would also be a test of the bounce high on January 13th (the previous 4th wave in the leg down from December 29th) and a 50% retracement of the December-January decline, at 1947.

S&P 500, SPX, Daily chart

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

Without getting too detailed about the short-term pattern following last Friday's high, it would look good as a completed correction at a price projection at 1864 but might find support at price-level support at 1867 (August 2015 low). That makes 1864-1867 a good downside target, if reached, for an opportunity to trade the long side into Friday (I would not hold long over the weekend). From 1864 we'd have a projection to 1960 to achieve two equal legs up from last Wednesday's low. But a 62% projection for the 2nd leg up would be near 1924 and that's the first upside target I'd look for. The potential for a move up to 1950 would be in the middle of the two projections. But if SPX drops much below 1860 I'd start to think a little more immediately bearish (certainly not bullish).

S&P 500, SPX, 60-min chart

I've been watching the two uptrend lines, from June 2010 - November 2012 and March 2009 - August 2015, since the NDX first tested the upper one (from June 2010) on January 14th. Those lines are currently near 4168 and 4126. The short-term pattern looks like we should see lower prices tomorrow morning but I wouldn't be surprised to see an immediate turn back up in the morning (for a typical reversal of the post-FOMC move). Whether it's right away or after another poke lower in the morning, the short-term bullish pattern calls for another leg up to give us a larger a-b-c bounce off last Wednesday's low and then another leg down, possibly for just a test of the low or perhaps a little lower before setting up another bounce.

Nasdaq-100, NDX, Daily chart

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

The daily chart of the RUT shows the alternating red and white candles since last Friday and in a narrowing trading range. Last week's rally has been followed by a sideways consolidation in what looks like a bullish continuation pattern. This points to another leg up and the first upside target, and potentially strong resistance, is 1040, although two equal legs up from January 20th points to 1060. But I'm looking at price-level S/R at 1040 (October 2014 low) and slightly below that is its broken uptrend line from March 2009 - October 2011, near, 1036, the top of a parallel down-channel for its decline from November 30th, near 1032, and the bottom of a previous down-channel for the initial decline from June, near 1029. In other words, there's a landmine of resistance levels between 1029 and 1040, any one of which could blow up in the bull's face. But it also means the RUT would be more bullish above 1040, in which case I'd look for a run up to 1060, if not price-level S/R near 1080.

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- bullish above 1040
- bearish below 967

Money has rotated into Treasuries as the stock market sold off and that has lowered yields, which should continue if the stock market is to work its way lower. Assuming yields head lower I see the potential for TNX to drop down to a projection at 1.729% for two equal legs down from June 2015, perhaps a little higher at the uptrend line from June 2012 - January 2015, near 1.77% by the end of February. There will time to evaluate the pattern if and when it gets down there but for now I'm expecting that decline to be followed by another bounce up to the top of its sideways triangle before dropping much lower into the end of the year and 2017. This differs slightly from the longer-term projection I'm showing for the stock market, which don't always trade in synch but often enough to pay attention. But that's later and for now they're both in agreement with an expectation for lower into February.

10-year Yield, TNX, Weekly chart

The banks have been relatively weak this month and that's saying a lot. It's actually been very weak since its December 4th high and there's a good chance we'll see it stair-step lower with the broader market. There's a price projection for the leg down from November, at 55.99, where the decline would be 162% of the July-August decline. But above that level are other potential support levels, at 57.25 and 58.83. The higher level is the April 2010 high and the 38% retracement of its 2007-2009 decline is at 57.25. BKX nearly tagged its 62% retracement last July, at 81.65 (with a high at 80.87), tried to hold support in August-October at the 50% retracement, at 69.45, and now appears to be heading back down to the 38% retracement at 57.25. At the same level is its uptrend line from March 2009 - October 2011 and I would expect this level to be a good downside target and strong support. Notice today's rally failed with a back-test of the bottom of its broken down-channel from July.

KBW Bank index, BKX, Daily chart

The U.S. dollar has been slowly chopping its way up from its December 15th low, which has it looking like a corrective bounce and should turn back down at any time. An uptrend line from December 15th was tested today so a drop below today's low at 98.74 would be the first sign that it could head down to at least 96.56 for two equal legs down from its December 3rd high and likely down to the bottom of its trading range since March 2015, near 95.

U.S. Dollar contract, DX, Weekly chart

Gold is working its way closer to an upside target zone I've been watching for, at 1133-1142. The top of its parallel up-channel for the bounce off its December 3rd low intersects its downtrend line from October 2012 - January 2015 near 1133, which is where its 200-dma is currently located. There's price-level S/R near 1142, which would be a test of its 50-week MA. Once this bounce completes I'm expecting another leg down, perhaps only to its trend line along the lows from December 2013 - July 2015, near 1030 by March, but potentially down to 1000 or below.

Gold continuous contract, GC, Weekly chart

Silver got a little higher bounce this week than I expected to see (it was looking like it would stay inside a sideways triangle) but the pattern off the December 14th low continues to look like a correction to the previous decline. The rally has it testing the top of a parallel up-channel for the bounce (bear flag) and looks ready for a turn back down, otherwise the next resistance level is not until its downtrend line from July 2014 - May 2015, which coincides with its 200-dma, currently at 15.16.

Silver continuous contract, SI, Daily chart

Last week oil dropped down to 26.19, 21 cents below the 26.40 price target I have had on my chart for a long time (for two equal legs down from 2008 in percentage terms). It was also good for a test of price-level S/R that's been traded around since 1984 and was last used support in 2003. So is that it, time to get long? Hmm, maybe not but it could also be late in the game to get short. Ideally I'd like to see a 5-wave move down from last June, although I can make the argument that the 3-wave move down was the last of larger 5-wave move down in an ending diagonal. The bottom line is that I'm watching carefully for bullish signs with an impulsive rally off the low (too early to tell). The first thing oil needs to do is get back above the trend line along last year's lows, currently near its January 2009 low at 33.20. If price consolidates for a bit we could see another leg down toward 20. But the bullish divergence since January 2015 is warning oil bears to be careful.

Oil continuous contract, CL, Weekly chart

Tomorrow's pre-market report on Durable Goods Orders is expected to show more signs of a slowing economy but any upside surprise could spark a rally.

Economic reports


The stock market has been mimicking oil and that could continue since the strong decline in commodity prices and energy-related stocks has finally caught the attention of the stock market. If oil can get above resistance at 33.20 I would expect the stock market to also rally. They're not tied at the hip but at the moment they're trading in synch.

A pattern for the stock market, off last Wednesday's low, looks like a good setup for another rally leg, perhaps after a new low Thursday morning (but a new low is not required). Many times we'll see the Thursday after the FOMC announcement reverse the direction of the post-FOMC reaction. That and the pullback pattern from last Friday suggests another rally leg is coming. But SPX below about 1858 would have me thinking more immediately bearish. Assuming we'll get another rally leg into Friday/Monday, to complete a 3-wave bounce off last Wednesday's low, it will be a good setup to look for a short entry since we should get another leg down to new lows into the first or second week of February. I do not see enough evidence yet that suggests we should be looking for a stronger rally. Instead I'm looking for just a correction to the December-January decline and then lower.

AMZN reports after the bell on Thursday and there are rumors that the company is going to disappoint big time. Of course there have always been and probably always will be rumors about the demise of AMZN's stock price but just keep in mind that it's an important sentiment indicator and sentiment is turning sour. A bad reaction to AMZN could have significant ramifications for the broader stock market.

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

Keene H. Little, CMT

In the end everything works out and if it doesn't work out, it is not the end. Old Indian Saying

New Option Plays

Right Decision

by Jim Brown

Click here to email Jim Brown

Editors Note:

Sometimes you make the right decision based on facts and sometimes it is a hunch. The facts told us not to risk a new play entry on Wednesday morning.

The setup ahead of the Fed announcement was simply too risky and I did not recommend any new plays on Tuesday evening. Today the Dow opened down -164, rallied to +65 and then crashed -290 after the Fed announcement and struggled to end at -223. That is the definition of intraday volatility. The Dow has now moved more than 200 points per day, in alternating directions for the last four days.

After the close today Ebay disappointed, Qualcomm disappointed and Facebook knocked the ball out of the park. S&P futures opened at +6 and within an hour had declined to -7 where they are holding.

It would appear we are going to open lower but there is a lot of darkness left before morning. Anything can change and often does.


No New Bullish Plays


AMBA - Ambarella

Ambarella develops full motion HD video chips for video capture, sharing and display worldwide. The system on a chip handles HD video, audio, image processing and system functions on one chip. Their largest customer is GoPro.

GoPro (GPRO) reported two weeks ago that holiday sales have been dismal and would report Q4 revenue of $435 million, down -31% from the year ago quarter. Analysts were expecting $512 million and that number had already been lowered by analysts fearing sales were declining.

GoPro said it was cutting 7% of its workers and would incur up to $10 million of restructuring expenses in 2016.

Ambarella shares tanked along with GoPro despite having numerous other customers that also buy their chips. Unfortunately, GoPro is their biggest customer by far. In the prior quarter, Ambarella missed estimates for "near-term headwinds" which translates to "GoPro cameras are not selling." This means the current quarter that they will report on March 3rd is not likely to be any better. There is probably an earnings warning lurking in the near future.

GoPro is being hampered by a flurry of new competitors at cheaper prices. This means competition is only going to get worse and GoPro has already cut its prices twice in the last 3 months. All of this means GoPro is losing market share and that means fewer Ambarella chips will be needed.

With Apple shares crashing and estimates for Q1 iPhone sales declining by about 20%, this is going to put a cloud over the entire personal electronics market.

Ambarella is not overpriced with a PE of 13. They are just too reliant on GoPro for the majority of their revenue. If Ambarella could accelerate some purchases by their other customers, the stock would recover quickly. Apparently that is not yet happening and shares are about to decline to an 18-month low under $35.

Earnings March 3rd.

With AMBA trade at $35.75

Buy March $32.50 put, currently $2.45, initial stop loss $40.55

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In Play Updates and Reviews

Fed Lifted, Fed Depressed

by Jim Brown

Click here to email Jim Brown

Editors Note:

The normal pre Fed announcement drift lifted the markets off their lows on Wednesday morning and the post Fed depression pushed them back down again.

It is typical for the actual Fed statement to be a wet blanket for the market. If they economy is good the Fed warns about future rate hikes. If the economy has worsened, the admission by the Fed weakens markets.

The Fed left rates unchanged, which was no surprise, but they also admitted the economy had weakened and they were no longer confident that inflation was rising. They also warned somewhat on the global economy saying they would "monitor global conditions closely" and that was something they did not do in the prior statement. They did not reference a future rate hike date but said future hikes would be gradual.

Markets rose briefly immediately after the statement, then declined sharply as the statement was parsed for hidden clues and possibilities. Apparently they found plenty not to like and the Dow closed down -222. That was the fourth consecutive day for the Dow to move more than 200 points in the opposite direction from the day before.

The Nasdaq was down significantly after Apple's earnings with big drops in PCLN -$67, AMZN -18, BIDU -9, GOOGL -16, NFLX -7, ILMN -10 and AAPL -7. The big $14 gain in Biogen (BIIB) helped to offset some of the negativity but it could not lift the biotech sector, which was down again today.

Current Portfolio

Current Position Changes

QQQ - Powershares QQQ ETF

The long call on the QQQ was stopped at the low of the day after the Nasdaq 100 dropped -105 points thanks to declines in Apple and the biotech sector.

PCRX - Pacira Pharma

This position was also stopped at the low of the day after the biotech sector crashed in the afternoon. The $BTK was down -4%.

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.

Original Call Recommendations (Alpha by Symbol)

IWM - Russell 2000 ETF

ETF Description


The IWM rallied at the open but failed right at resistance of $101.50. The post Fed decline knocked it back to support at $99 but there was a little dip buying at the close. We need that support level to hold.

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, see portfolio graphic for stop loss.

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


LULU spiked higher again in the morning but faded into the close. However, the stock showed great relative strength by closing positive in a bad market.

Original Trade Description: January 22nd

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.

Position 1/26/16:

Long March $60 calls @ $2.90, see portfolio graphic for stop loss.

PCRX - Pacira Pharmaceuticals

Company Description


PCRX was stopped out at the close at $63.25 with the low for the day at $63.08. PCRX only lost -2.5% but the downdraft in the biotech sector was too much to overcome with stocks down 7-9%. ISRG -11, ILMN -11, RARE -9, BMRN-6, etc.

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, exit 1/27/16:
Closed: Long Feb $75 Call, entry $2.75, exit .60, -2.15 loss

QQQ - Nasdaq 100 ETF

ETF Description


The Nasdaq 100 crashed and burned with a -105 point decline. The QQQ position was stopped out at $100.45. The decline in Apple and the biotechs were simply too much for the index to overcome.

Original Trade Description: January 20th

The Nasdaq fell -163 points intraday on Wednesday 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, closed 1/27/16:

Closed: Long March $104 call, entry $2.63, exit $2.05, -.58 loss.

STZ - Constellation Brands

Company Description


STZ declined only slightly until 2:30 when the bottom fell out of the market. That flush knocked STZ down another $1.50 in the closing minutes. The stock is still in an uptrend as long as the 50-day average is not broken.

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, see portfolio graphic for stop loss.

Original Put Recommendations (Alpha by Symbol)

DVN - Devon Energy


Devon shares spiked at the open on yet another short squeeze in oil prices. There was more chatter about a possible OPEC deal with Russia even though two Russian officials said there were NO discussions. Shares faded into the close as the market collapsed.

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.

Position 1/25/16:

Long March $23 put @ $1.48, see portfolio graphic for stop loss.

HPQ - Hewlett Packard

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


No specific news. This is a long-term play to hold over the Feb 24th earnings. Earnings news by other companies will be the driver over the next several weeks.

Original Trade Description: January 25th

Back in October Hewlett Packard spun off its enterprise server business into Hewlett Packard Enterprise (HPE) and the old Hewlett Packard that sells PCs and printers remained (HPQ). The problem with this spinoff is that the enterprise company is where the profits are. The PC business has been declining for years and that is why HP split the two entities.

Since the spinoff at $14.75 in October the HPQ shares have been in decline. They closed at a new low on Monday. I see no reason where HPQ should rally in the near future. PC sales are still expected to decline in 2016 only at a slower pace. There is nothing to produce excitement in the PC company.

In theory we could probably just buy a cheap put and sit on it but HPQ has earnings on February 24th. I expect those earnings to be disappointing. However, you never know if they will pull a rabbit out of the hat and announce something that powers the stock higher. This is why I am recommending a strangle rather than just a straight put play.

HPQ shares closed at $9.49 on Monday and halfway between the $9 put and $10 call. I am recommending the April strangle so we can benefit from the long-term trend if HPQ continues to decline. If earnings disappoint we could see HPQ at $5 by then.

Earnings are February 24th.

Position 1/26/16:

Long April $9 put @ 41 cents, no stop loss.
Long April $10 call @ 50 cents, no stop loss.

JUNO - Juno Therapeutics

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


Juno crashed to a new low on the selloff in biotechs. Now that support has broken this should be the start of a longer decline on the heels of the NIH report. I lowered the stop loss on JUNO to $34.25.

Original Trade Description: January 22nd

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.

Update 1/26/16: The National Institute of Health (NIH) researchers published a study showing off-the-shelf T-cell therapy could induce remissions in patients with advanced blood cancers. This new "allogenic" T-cell therapy study represents a competitive threat to therapies from Juno, Kite and Novartis.

Earnings are March 17th.

Position 1/26/16:

Long March $27.50 put @ $1.75, see portfolio graphic for stop loss.

VXX - iPath S&P 500 VIX Futures ETN

Company Description


We cannot catch a break on the VXX with the Dow alternating 200-point days for the last four days. On the positive side, the rebound failed to clear resistance at $26.35. Eventually the volatility will ease. It is only a matter of time.

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 short squeeze in WTI lifted equities again but the market crash knocked them back to the lows of the day. Once energy earnings begin to flow we should see further declines. S&P expects a negative 72% in the energy sector.

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, see portfolio graphic for stop loss.

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